2014 Q3 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 May 31, 2014
 
 
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 June 26, 2014 was 27,054,190.

 


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)
Amended Credit Agreement
Credit Agreement dated as of May 28, 2014 by and between Winnebago Industries, Inc. and Winnebago of Indiana, LLC, as Borrowers, and General Electric Capital Corporation, as Agent
Apollo
Apollo Motorhome Holidays, LLC
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 (was amended May 28, 2014)
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
IT
Information Technology
LIBOR
London Interbank Offered Rate
LIFO
Last In, First Out
NMF
Non-Meaningful Figure
NYSE
New York Stock Exchange
OCI
Other Comprehensive Income
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
 
Nine Months Ended
(In thousands, except per share data)
 
May 31,
2014
 
June 1,
2013
 
May 31,
2014
 
June 1,
2013
Net revenues
 
$
247,747

 
$
218,199

 
$
699,228

 
$
588,919

Cost of goods sold
 
221,266

 
197,002

 
623,940

 
529,784

Gross profit
 
26,481

 
21,197

 
75,288

 
59,135

Operating expenses:
 
 
 
 
 
 
 
 
Selling
 
4,887

 
4,857

 
13,709

 
13,649

General and administrative
 
6,005

 
6,092

 
16,577

 
16,392

(Gain) loss on sale of real estate
 
—

 
—

 
(629
)
 
28

Total operating expenses
 
10,892

 
10,949

 
29,657

 
30,069

Operating income
 
15,589

 
10,248

 
45,631

 
29,066

Non-operating income
 
735

 
144

 
752

 
739

Income before income taxes
 
16,324

 
10,392

 
46,383

 
29,805

Provision for taxes
 
4,939

 
2,731

 
14,259

 
8,468

Net income
 
$
11,385

 
$
7,661

 
$
32,124

 
$
21,337

 
 
 
 
 
 
 
 
 
Income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.42

 
$
0.27

 
$
1.17

 
$
0.76

Diluted
 
$
0.42

 
$
0.27

 
$
1.16

 
$
0.76

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
27,209

 
27,987

 
27,552

 
28,128

Diluted
 
27,319

 
28,087

 
27,666

 
28,218

 
 
 
 
 
 
 
 
 
Net income
 
$
11,385

 
$
7,661

 
$
32,124

 
$
21,337

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Amortization of prior service credit
  (net of tax of $557, $514, $1,567 and $1,430
 
(925
)
 
(853
)
 
(2,601
)
 
(2,373
)
Amortization of net actuarial loss
  (net of tax of $103, $(90), $304 and $206)
 
173

 
503

 
505

 
1,006

Plan amendment
  (net of tax of $0, $0, $1,346 and $1,613)
 
—

 
—

 
2,234

 
2,676

Unrealized appreciation of investments
  (net of tax of $0, $96, $91 and $63)
 
—

 
160

 
151

 
104

Total other comprehensive income
 
(752
)
 
(190
)
 
289

 
1,413

Comprehensive income
 
$
10,633

 
$
7,471

 
$
32,413

 
$
22,750


See notes to consolidated financial statements.



2
Table of Contents

Winnebago Industries, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
May 31,
2014
 
August 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
50,490

 
$
64,277

Receivables, less allowance for doubtful accounts ($150 and $152)
56,333

 
29,145

Inventories
117,735

 
112,541

Net investment in operating leases
16,479

 
—

Prepaid expenses and other assets
7,121

 
8,277

Income taxes receivable and prepaid
385

 
1,868

Deferred income taxes
7,348

 
7,742

Total current assets
255,891

 
223,850

Property, plant and equipment, net
22,665

 
20,266

Long-term investments
—

 
2,108

Investment in life insurance
24,793

 
25,051

Deferred income taxes
24,540

 
25,649

Goodwill
1,228

 
1,228

Other assets
11,217

 
10,993

Total assets
$
340,334

 
$
309,145

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
31,229

 
$
28,142

Accrued expenses:
 
 
 
Accrued compensation
19,067

 
22,101

Operating lease repurchase obligations
16,050

 
—

Product warranties
8,918

 
8,443

Self-insurance
4,926

 
4,531

Accrued loss on repurchases
1,420

 
1,287

Promotional
3,424

 
1,910

Other
8,363

 
3,940

Total current liabilities
93,397

 
70,354

Long-term liabilities:
 
 
 
Unrecognized tax benefits
3,228

 
3,988

Postretirement health care and deferred compensations benefits
59,219

 
64,074

Total long-term liabilities
62,447

 
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
31,410

 
29,334

Retained earnings
541,567

 
509,443

Accumulated other comprehensive income
1,138

 
849

Treasury stock, at cost (24,644 and 23,917 shares)
(415,513
)
 
(394,785
)
Total stockholders' equity
184,490

 
170,729

Total liabilities and stockholders' equity
$
340,334

 
$
309,145


See notes to consolidated financial statements.

3
Table of Contents

Winnebago Industries, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
(In thousands)
May 31,
2014
 
June 1,
2013
Operating activities:
 
 
 
Net income
$
32,124

 
$
21,337

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,962

 
3,190

LIFO expense
934

 
438

Stock-based compensation
1,694

 
1,258

Deferred income taxes including valuation allowance
464

 
(1,243
)
Postretirement benefit income and deferred compensation expense
(752
)
 
259

Provision for doubtful accounts
1

 
62

Gain on disposal of property
(712
)
 
(34
)
Gain on life insurance
(726
)
 
(536
)
Increase in cash surrender value of life insurance policies
(651
)
 
(853
)
Change in assets and liabilities:
 
 
 
Inventories
(6,128
)
 
(26,295
)
Receivables, prepaid and other assets
(26,349
)
 
(10,819
)
Investment in operating leases, net of repurchase obligations
(429
)
 
—

Income taxes and unrecognized tax benefits
1,986

 
(234
)
Accounts payable and accrued expenses
8,851

 
9,895

Postretirement and deferred compensation benefits
(3,080
)
 
(3,359
)
Net cash provided by (used in) operating activities
10,189

 
(6,934
)
 
 
 
 
Investing activities:
 
 
 
Proceeds from the sale of investments, at par
2,350

 
250

Proceeds from life insurance
1,737

 
1,004

Purchases of property and equipment
(7,005
)
 
(3,322
)
Proceeds from the sale of property
2,403

 
637

Repayments of COLI borrowings
—

 
(1,371
)
Other
(1,123
)
 
692

Net cash used in investing activities
(1,638
)
 
(2,110
)
 
 
 
 
Financing activities:
 
 
 
Payments for purchases of common stock
(24,324
)
 
(11,123
)
Proceeds from exercise of stock options
2,080

 
—

Other
(94
)
 
(94
)
Net cash used in financing activities
(22,338
)
 
(11,217
)
 
 
 
 
Net decrease in cash and cash equivalents
(13,787
)
 
(20,261
)
Cash and cash equivalents at beginning of period
64,277

 
62,683

Cash and cash equivalents at end of period
$
50,490

 
$
42,422

 
 
 
 
Supplement cash flow disclosure:
 
 
 
Income taxes paid, net of refunds
$
11,814

 
$
9,946


See notes to consolidated financial statements.

4
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 May 31, 2014 and the consolidated results of operations and comprehensive income and consolidated cash flows for the first nine months of Fiscal 2014 and 2013. The consolidated statement of operations and comprehensive income for the first nine 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; the first nine months ending May 31, 2014 had 39 weeks. Fiscal 2013 was a 53-week fiscal year; the first quarter ending December 1, 2012 had 14 weeks; the first nine months ending June 1, 2013 had 40 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.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which specifies how and when to recognize revenue as well as providing informative, relevant disclosures. ASU 2014-09 will become effective for fiscal years beginning after December 15, 2016 (our Fiscal 2018). We are currently evaluating the impact on our consolidated financial statements.

Note 2: Concentration Risk

One of our dealer organizations accounted for 18.4% and 26.9% of our consolidated net revenue for the first nine months of Fiscal 2014 and Fiscal 2013, respectively. A second dealer organization accounted for 11.9% and 13.6% of our consolidated net revenue for the first nine months of Fiscal 2014 and Fiscal 2013, respectively. The loss of either or both 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.


5
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 May 31, 2014 and August 31, 2013 according to the valuation techniques we used to determine their fair values:
 
 
 
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
 
Fair Value at
May 31,
2014
 
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
 
$
5,529

 
$
5,529

 
$
—

 
$
—

  International equity funds
 
741

 
741

 
—

 
—

  Fixed income funds
 
240

 
240

 
—

 
—

Total assets at fair value
 
$
6,510

 
$
6,510

 
$
—

 
$
—


 
 
 
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
 
Fair Value at
August 31,
2013
 
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):
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
May 31,
2014
 
June 1,
2013
 
May 31,
2014
 
June 1,
2013
Balance at beginning of period
 
$
—

 
$
8,735

 
$
2,108

 
$
9,074

Transfer to Level 2
 
—

 
(4,605
)
 
—

 
(4,855
)
Net change included in other comprehensive income
 
—

 
255

 
242

 
166

Sales
 
—

 
—

 
(2,350
)
 
—

Balance at end of period
 
$
—

 
$
4,385

 
$
—

 
$
4,385

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.

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 9), a deferred compensation program, and are presented as other assets in the accompanying balance sheets.

6
Table of Contents


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 nine months of Fiscal 2014, no impairments were recorded for non-financial assets.

Note 4: Inventories
Inventories consist of the following:
(In thousands)
 
May 31,
2014
 
August 31,
2013
Finished goods
 
$
34,458

 
$
43,927

Work-in-process
 
44,993

 
46,257

Raw materials
 
69,063

 
52,201

Total
 
148,514

 
142,385

LIFO reserve
 
(30,779
)
 
(29,844
)
Total inventories
 
$
117,735

 
$
112,541

The above value of inventories, before reduction for the LIFO reserve, approximates replacement cost. Of the $148.5 million and $142.4 million inventory at May 31, 2014 and August 31, 2013, respectively, $142.0 million and $136.1 million is valued on a LIFO basis. Towables inventory of $6.5 million and $6.3 million at May 31, 2014 and August 31, 2013, respectively, is valued on a FIFO basis.

Note 5: Net Investment in Operating Leases and Operating Lease Repurchase Obligation

During the third quarter of Fiscal 2014 we delivered 520 RV rental units to Apollo, a US RV rental company. Under the terms of a sales agreement with Apollo, all units were paid for upon delivery. To secure an order of this magnitude, we contractually agreed to repurchase up to 343 of the units at specified prices after one season of rental use (by no later than December 31, 2014) provided certain conditions are met. As a result, the units subject to repurchase are accounted for as operating leases and are recorded in the balance sheet as net investment in operating leases of $16.5 million at May 31, 2014. The original cost of these units is being depreciated down to the estimated net realizable value of the rental units during the time frame that the units are in rental use. Also, we recorded in the balance sheet operating lease repurchase obligations of $16.1 million at May 31, 2014 which represents our estimated repurchase obligation per the terms of the sales agreement.

Estimated net lease revenue is being recorded ratably over the rental period that Apollo holds the units based upon the difference between the proceeds received and the estimated repurchase obligation less the estimated depreciation expense of the unit. When we sell the repurchased units we will record a gain or loss for the difference, if any, between the estimated residual value of the unit and the actual resale value as a component of net lease revenue. We recorded $100,000 of net lease revenue during the third quarter of Fiscal 2014.

We anticipate repurchasing most of the units subject to repurchase during the first quarter of Fiscal 2015 and for any units subject to repurchase which are not returned we will remove the remaining net investment in lease and repurchase obligation balance for such units and record a net gain or loss for the difference between these two balances.

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)
 
May 31,
2014
 
August 31,
2013
Land
 
$
738

 
$
757

Buildings and building improvements
 
47,132

 
50,297

Machinery and equipment
 
91,412

 
88,280

Software
 
3,554

 
2,944

Transportation
 
9,063

 
9,044

Total property, plant and equipment, gross
 
151,899

 
151,322

Less accumulated depreciation
 
(129,234
)
 
(131,056
)
Total property, plant and equipment, net
 
$
22,665

 
$
20,266



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Table of Contents

In the second quarter of Fiscal 2014, 3M exercised an option to purchase warehouse facilities that they had leased from us since 1980. Net proceeds from the sale were $2.3 million, resulting in a gain of $629,000. We received lease payments of $860,000 and recorded depreciation charges of $148,000 in Fiscal 2013 related to these warehouse facilities.

Note 7: 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 was to expire 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. 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.

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.

On May 28, 2014, we amended this Credit Agreement (the "Amended Credit Agreement"). The Amended Credit Agreement extends the term of the credit facility from October 31, 2015 to May 28, 2019.  In addition, interest on loans made under the Amended Credit Facility will be based on LIBOR plus a margin of 2.0%.  The amendment also revised and added definitions of several terms including an expanded Restricted Payment Basket that now permits up to $15.0 million purchases of company stock or cash dividends to be excluded from the Fixed Charge ratio.  In addition, the definition of Eligible Accounts was expanded to permit certain receivables to be included in the Borrowing Base.  The Amended Credit Agreement also permits us to engage in certain sale lease buyback transactions in the ordinary course of business subject to certain restrictions and increases our ability to incur capital lease obligations.

As of the date of this report, we are in compliance with all terms of the Amended Credit Agreement, and no borrowings have been made thereunder.

Note 8: 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:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
May 31,
2014
 
June 1,
2013
 
May 31,
2014
 
June 1,
2013
Balance at beginning of period
 
$
8,781

 
$
8,065

 
$
8,443

 
$
6,990

Provision
 
2,736

 
2,118

 
7,874

 
7,032

Claims paid
 
(2,599
)
 
(1,742
)
 
(7,399
)
 
(5,581
)
Balance at end of period
 
$
8,918

 
$
8,441

 
$
8,918

 
$
8,441



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Note 9: Employee and Retiree Benefits
Postretirement health care and deferred compensation benefits are as follows:
(In thousands)
 
May 31,
2014
 
August 31,
2013
Postretirement health care benefit cost
 
$
33,342

 
$
36,244

Non-qualified deferred compensation
 
21,338

 
22,366

Executive share option plan liability
 
5,682

 
6,959

SERP benefit liability
 
2,760

 
2,876

Executive deferred compensation
 
199

 
105

Officer stock-based compensation
 
484

 
543

Total postretirement health care and deferred compensation benefits
 
63,805

 
69,093

Less current portion
 
(4,586
)
 
(5,019
)
Long-term postretirement health care and deferred compensation benefits
 
$
59,219

 
$
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 January 2014 the employer-established dollar caps were further reduced by 10%, which reduced our liability for postretirement health care by approximately $3.6 million and is being amortized as prior service credit over 7.3 years.

Net periodic postretirement benefit income consisted of the following components:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
May 31,
2014
 
June 1,
2013
 
May 31,
2014
 
June 1,
2013
Interest cost
 
$
380

 
$
373

 
$
1,160

 
$
1,136

Service cost
 
96

 
140

 
296

 
433

Amortization of prior service benefit
 
(1,482
)
 
(1,366
)
 
(4,168
)
 
(3,803
)
Amortization of net actuarial loss
 
274

 
407

 
803

 
1,195

Net periodic postretirement benefit income
 
$
(732
)
 
$
(446
)
 
$
(1,909
)
 
$
(1,039
)
 
 
 
 
 
 
 
 
 
Payments for postretirement health care
 
$
247

 
$
271

 
$
779

 
$
836

 
Note 10: Stock-Based Compensation Plans
In October 2013, we adopted the 2014 Omnibus Equity, Performance Award, and Incentive Compensation Plan (as amended, the "Plan"). It was approved by shareholders in December 2013 and 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.
The Plan replaced the 2004 Incentive Compensation Plan which had a ten-year term. No new grants may be made from the 2004 Incentive Compensation Plan on or after January 1, 2014. Any stock awards previously granted under the 2004 Incentive Compensation Plan shall continue to vest and /or be exercisable in accordance with their original terms and conditions.
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 under the 2004 Plan. 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 $305,000 and $262,000 during the third quarters of Fiscal 2014 and 2013, respectively. Stock-based compensation expense was $1.7 million and $1.3 million during the nine months of Fiscal 2014 and 2013, respectively. Of the $1.7 million in Fiscal 2014, $1.1 million 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

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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 11: 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 $361.4 million and $232.9 million at May 31, 2014 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 $7.0 million and $8.0 million at May 31, 2014 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 $1.4 million as of May 31, 2014 and $1.3 million as of August 31, 2013.
A summary of repurchase activity is as follows:
 
 
Three Months Ended
 
Nine Months Ended
(Dollars in thousands)
 
May 31,
2014
 
June 1,
2013
 
May 31,
2014
 
June 1,
2013
Inventory repurchased:
 
 
 
 
 
 
 
 
Units
 
—

 
13

 
14

 
13

Dollars
 
$
—

 
$
260

 
$
325

 
$
260

Inventory resold:
 
 
 
 
 
 
 
 
Units
 
—

 
13

 
14

 
13

Cash collected
 
$
—

 
$
207

 
$
257

 
$
207

Loss recognized
 
$
—

 
$
53

 
$
68

 
$
53

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 May 31, 2014 would have affected net income by approximately $366,000.
  
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 12: 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

10
Table of Contents

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 May 31, 2014 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 May 31, 2014, our unrecognized tax benefits were $1.7 million and accrued interest and penalties of $1.5 million, of which if all were realized $2.3 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. We do not anticipate any significant changes in unrecognized tax benefits within the next twelve months. Actual results may differ materially from this estimate.

Note 13: Earnings Per Share
The following table reflects the calculation of basic and diluted income per share:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share data)
 
May 31,
2014
 
June 1,
2013
 
May 31,
2014
 
June 1,
2013
Income per share - basic
 
 
 
 
 
 
 
 
Net income
 
$
11,385

 
$
7,661

 
$
32,124

 
$
21,337

Weighted average shares outstanding
 
27,209

 
27,987

 
27,552

 
28,128

Net income per share - basic
 
$
0.42

 
$
0.27

 
$
1.17

 
$
0.76

 
 
 
 
 
 
 
 
 
Income per share - assuming dilution
 
 
 
 
 
 
 
 
Net income
 
$
11,385

 
$
7,661

 
$
32,124

 
$
21,337

Weighted average shares outstanding
 
27,209

 
27,987

 
27,552

 
28,128

Dilutive impact of awards and options outstanding
 
110

 
100

 
114

 
90

Weighted average shares and potential dilutive shares outstanding
 
27,319

 
28,087

 
27,666

 
28,218

Net income per share - assuming dilution
 
$
0.42

 
$
0.27

 
$
1.16

 
$
0.76


At the end of the third quarters of Fiscal 2014 and Fiscal 2013, there were options outstanding to purchase 457,421 shares and 669,494 shares, respectively, of common stock at an average price of $30.38 and $29.83, 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.


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Note 14: Comprehensive Income

Changes in AOCI by component, net of tax, were:
 
 
Three Months Ended
 
 
May 31, 2014
 
June 1, 2013
(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
 
$
1,890

$
—

$
1,890

 
$
(1,667
)
$
(416
)
$
(2,083
)
 
 
 
 
 
 
 
 
 
OCI before reclassifications
 
—

—

—

 
—

160

160

Amounts reclassified from AOCI
 
(752
)
—

(752
)
 
(350
)
—

(350
)
Net current-period OCI
 
(752
)
—

(752
)
 
(350
)
160

(190
)
 
 
 
 
 
 
 
 
 
Balance at end of period
 
$
1,138

$
—

$
1,138

 
$
(2,017
)
$
(256
)
$
(2,273
)

 
 
Nine Months Ended
 
 
May 31, 2014
 
June 1, 2013
(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
 
2,234

151

2,385

 
2,676

104

2,780

Amounts reclassified from AOCI
 
(2,096
)
—

(2,096
)
 
(1,367
)
—

(1,367
)
Net current-period OCI
 
138

151

289

 
1,309

104

1,413

 
 
 
 
 
 
 
 
 
Balance at end of period
 
$
1,138

$
—

$
1,138

 
$
(2,017
)
$
(256
)
$
(2,273
)

Reclassifications out of AOCI in net periodic benefit costs, net of tax, were:
 
 
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
Location on Consolidated Statements
of Operations and Comprehensive Income
 
May 31,
2014
 
June 1,
2013
 
May 31,
2014
 
June 1,
2013
Amortization of prior service credit
 
Cost of goods sold
 
$
—

 
$
(741
)
 
$
—

 
$
(2,061
)
 
 
Operating expenses
 
(925
)
 
(112
)
 
(2,601
)
 
(312
)
 
 
 
 
(925
)
 
(853
)
 
(2,601
)
 
(2,373
)
 
 
 
 
 
 
 
 
 
 
 
Amortization of net actuarial loss
 
Cost of goods sold
 
—

 
221

 
—

 
648

 
 
Operating expenses
 
173

 
282

 
505

 
358

 
 
 
 
173

 
503

 
505

 
1,006

 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
$
(752
)
 
$
(350
)
 
$
(2,096
)
 
$
(1,367
)

Note 15: Subsequent Event

We evaluated all events or transactions occurring between the balance sheet date for the quarterly period ended May 31, 2014 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.


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Table of Contents

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 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.

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 availability of chassis and other key component parts, 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, sales order cancellations, slower than anticipated sales of new or existing products, new product introductions by competitors, a breach of our information technology systems, 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.

13
Table of Contents

Our motorized and towable 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.
 
 
Motorized
 
 
Through April 30
 
Calendar Year
US
 
2014
2013
 
2013
2012
2011
Class A gas
 
19.8
%
23.0
%
 
22.4
%
24.2
%
22.2
%
Class A diesel
 
19.5
%
17.5
%
 
18.0
%
19.4
%
17.6
%
Total Class A
 
19.7
%
20.8
%
 
20.7
%
22.2
%
20.2
%
Class C
 
20.1
%
15.2
%
 
17.5
%
18.3
%
17.4
%
Total Class A and C
 
19.9
%
18.1
%
 
19.2
%
20.5
%
19.0
%
 
 
 
 
 
 
 
 
Class B
 
20.4
%
18.7
%
 
17.0
%
17.6
%
7.9
%
 
 
 
 
 
 
 
 
Canadian
 
2014
2013
 
2013
2012
2011
Class A gas
 
16.8
%
12.0
%
 
13.9
%
15.3
%
16.5
%
Class A diesel
 
17.2
%
16.4
%
 
15.6
%
17.3
%
18.0
%
Total Class A
 
16.9
%
13.6
%
 
14.5
%
16.1
%
17.1
%
Class C
 
12.8
%
15.3
%
 
11.9
%
14.9
%
15.9
%
Total Class A and C
 
14.9
%
14.5
%
 
13.1
%
15.5
%
16.5
%
 
 
 
 
 
 
 
 
Class B
 
13.7
%
17.5
%
 
20.1
%
12.7
%
7.1
%
 
 
Towables
 
 
Through April 30
 
Calendar Year
US
 
2014
2013
 
2013
2012
2011
Travel trailer
 
0.9
%
0.9
%
 
1.0
%
0.8
%
0.6
%
Fifth wheel
 
0.6
%
0.8
%
 
0.8
%
1.1
%
0.5
%
Total towables
 
0.8
%
0.9
%
 
0.9
%
0.9
%
0.6
%
 
 
 
 
 
 
 
 
Canadian
 
2014
2013
 
2013
2012
2011
Travel trailer
 
0.6
%
0.8
%
 
0.9
%
0.6
%
0.5
%
Fifth wheel
 
1.1
%
1.3
%
 
1.4
%
1.5
%
0.6
%
Total towables
 
0.7
%
0.9
%
 
1.0
%
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
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

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

Rolling 12 months
 
6,252

5,558

 
 
 
2,513

2,241

 
 
Jun 2012-May 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Q2 2014
 
2,055

1,283

3,907

2,900

 
575

394

1,772

206

Q3 2014 (1)
 
2,331

2,783

3,798

2,357

 
727

724

1,775

303

Rolling 12 months
 
8,281

7,460

 


 
2,503

2,370

 
 
Jun 2013-May 2014
 
 
 




 
 
 
 
 
(1) An additional 343 units were delivered but not included in Q3 2014 motorhome wholesale deliveries as presented in the table above as the units are subject to repurchase option. These units were included as retail registrations, not in dealer inventory, as the units were immediately placed into rental service once delivered. See Note 5 to the financial statements.


14
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
(In units)
2013

 
2012

Increase

Change

 
2013

 
2012

Increase

Change

Q1
8,500

 
6,869

1,631

23.7
%
 
7,145

 
5,706

1,439

25.2
%
Q2
10,972

 
7,707

3,265

42.4
%
 
10,898

 
8,206

2,692

32.8
%
Q3
9,469

 
6,678

2,791

41.8
%
 
9,111

 
6,916

2,195

31.7
%
Q4
9,391

 
6,944

2,447

35.2
%
 
6,276

 
4,922

1,354

27.5
%
Total
38,332

 
28,198

10,134

35.9
%
 
33,430

 
25,750

7,680

29.8
%
 
 
 
 
 
 
 
 
 
 
 
 
(In units)
2014

 
2013

Increase

Change

 
2014

 
2013

Increase

Change

Q1
11,125

 
8,500

2,625

30.9
%
 
8,026

 
7,145

881

12.3
%
April
4,092

 
3,780

312

8.3
%
 
4,108

 
3,512

596

17.0
%
May
4,486

 
3,698

788

21.3
%
 
 
(4)
3,787





June
4,391

(3) 
3,494

897

25.7
%
 
 
(4)
3,599





Q2
12,969

(3) 
10,972

1,997

18.2
%
 
 
(4)
10,898





Q3
11,300

(3) 
9,469

1,831

19.3
%
 


(4)
9,111





Q4
10,600

(3) 
9,391

1,209

12.9
%
 
 
(4)
6,276

 
 
Total
45,994

(3) 
38,332

7,662

20.0
%
 

 
33,430




(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 2014 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 Summer 2014 Industry Forecast Issue. The revised RVIA annual 2014 wholesale shipment forecast is 46,500 and the annual forecast for 2015 is 47,300.
(4) 
Stat Surveys has not issued a projection for 2014 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)
2013

 
2012

Increase

Change

 
2013

 
2012

Increase

Change

Q1
66,745

 
60,402

6,343

10.5
%
 
42,987

 
39,093

3,894

10.0
 %
Q2
79,935

 
71,095

8,840

12.4
%
 
94,670

 
83,990

10,680

12.7
 %
Q3
61,251

 
56,601

4,650

8.2
%
 
79,758

 
67,344

12,414

18.4
 %
Q4
60,104

 
54,782

5,322

9.7
%
 
37,011

 
32,469

4,542

14.0
 %
Total
268,035

 
242,880

25,155

10.4
%
 
254,426

 
222,896

31,530

14.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
(In units)
2014

 
2013

Increase

Change

 
2014

 
2013

Increase
(Decrease)

Change

Q1
75,458

 
66,745

8,713

13.1
%
 
45,477

 
42,987

2,490

5.8
 %
April
28,269

 
26,716

1,553

5.8
%
 
27,814

 
28,325

(511
)
(1.8
)%
May
29,467

 
27,179

2,288

8.4
%
 
 
(4)
34,610





June
29,000

(3)
26,040

2,960

11.4
%
 
 
(4)
31,735





Q2
86,736

(3)
79,935

6,801

8.5
%
 
 
(4)
94,670





Q3
66,200

(3)
61,251

4,949

8.1
%
 
 
(4)
79,758





Q4
61,000

(3)
60,104

896

1.5
%
 
 
(4)
37,011

 
 
Total
289,394

(3)
268,035

21,359

8.0
%
 

 
254,426




(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 2014 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 Summer 2014 Industry Forecast Issue. The revised RVIA annual 2014 wholesale shipment forecast is 288,500 and the annual forecast for 2015 is 298,400.
(4)
Stat Surveys has not issued a projection for retail demand for this period.


15
Table of Contents

Company Outlook
Our motorized dealer backlog is an indicator of demand for our product in the current marketplace. We believe that the decrease in our backlog (as noted in the table below) is a result of more timely delivery through increased production rates and improved chassis supply. We have been increasing our production rates throughout the fiscal year and leased an additional production facility in which production began late in the second quarter of Fiscal 2014.

Our motorized sales order backlog of 2,357 as of May 31, 2014 represents orders to be shipped in the next two quarters:
 
As Of
(In units)
May 31, 2014
 
June 1, 2013
 
(Decrease)
Increase
%
Change
Class A gas
752

31.9
%
 
1,397

49.1
%
 
(645
)
(46.2
)%
Class A diesel
280

11.9
%
 
499

17.5
%
 
(219
)
(43.9
)%
Total Class A
1,032

43.8
%
 
1,896

66.6
%
 
(864
)
(45.6
)%
Class B
264

11.2
%
 
149

5.2
%
 
115

77.2
 %
Class C
1,061

45.0
%
 
801

28.1
%
 
260

32.5
 %
Total motorhome backlog(1)
2,357

100.0
%
 
2,846

100.0
%
 
(489
)
(17.2
)%
 
 
 
 
 
 
 
 
 
Travel trailer
224

73.9
%
 
359

81.0
%
 
(135
)
(37.6
)%
Fifth wheel
79

26.1
%
 
84

19.0
%
 
(5
)
(6.0
)%
Total towable backlog(1)
303

100.0
%
 
443

100.0
%
 
(140
)
(31.6
)%
 
 
 
 
 
 
 
 
 
Approximate backlog revenue in thousands
 
 
 
 
 
 
 
Motorhome
$
219,676

 
 
$
292,307

 
 
$
(72,631
)
(24.8
)%
Towable
$
6,072

 
 
$
9,562

 
 
$
(3,490
)
(36.5
)%
(1) 
Percentages may not add due to rounding differences.
(2) 
Our backlog includes 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.

Our unit dealer inventory was as follows:
 
May 31,
2014
June 1,
2013
 
Increase
%
Change
Motorhomes
3,798

2,634

 
1,164

44.2
%
Towables
1,775

1,642

 
133

8.1
%

We believe that the increased level of our motorized dealer inventory at the end of the third quarter of Fiscal 2014 is aligned with current market conditions given the improved retail demand and the strong sales order backlog of our product. We have introduced a number of new products in the past nine months (Class B: Travato; Class C: Trend, Viva; Class A diesel: Forza, Solei), many of these products were delivered to the dealers during Fiscal 2014 for their initial stocking. We believe that these innovative products will generate additional retail demand in the coming quarters. We have also expanded our points of distribution for these new product offerings in the past year as our dealer locations have increased 9.5%, which is another factor contributing to our dealer inventory growth.
The recreation vehicle industry has, from time to time, experienced shortages of chassis due to various causes such as component shortages and/or production delays due to quality issues at the chassis manufacturers. In the first half of Fiscal 2014 we have experienced shortages of certain motorized RV chassis which has negatively affected our sales and earnings. Conditions improved during the third quarter of Fiscal 2014 with Ford’s improved Class A chassis supply and resolution of their Class A chassis quality issues which had caused a supply constraint.  We continue to closely monitor our chassis suppliers and work with them to minimize impact to our production. 


16
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:
 
 
Three Months Ended
(In thousands, except percent
and per share data)
 
May 31,
2014
% of
Revenues(1)
 
June 1,
2013
% of
Revenues(1)
 
Increase
(Decrease)
%
Change
Net revenues
 
$
247,747

100.0
%
 
$
218,199

100.0
%
 
$
29,548

13.5