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Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL The primary use of recreation vehicles (RVs) for leisure travel and outdoor recreation has historically led to a peak retail selling season concentrated in the spring and summer months. The Company's sales of RVs are generally influenced by this pattern in retail sales, but can also be affected by the level of dealer inventory. The Company has generally manufactured RVs during the entire year, both for immediate delivery and for inventory to satisfy the peak selling season.
RESULTS OF OPERATIONS Fiscal 1998 Compared to Fiscal 1997 Net revenues for manufactured products were $523,018,000 for fiscal 1998, an increase of $86,306,000, or 19.8 percent, from fiscal 1997. Motor home shipments (Class A and C) during fiscal 1998 were 8,771 units, an increase of 1,213 units, or 16.0 percent, compared to fiscal 1997. Fiscal 1998 results represent the first full year that the Company's strategy of refocusing on its core business of manufacturing quality motor homes has been in place. Product development has been a top priority throughout the past two model years and the Company brought to the market in fiscal 1998 its most extensive new product lineup in its history. Over one half of the Company's 1998 products featured new or significantly redesigned models. The Recreation Vehicle Industry Association (RVIA) reported factory shipments (Class A and C) for the industry increased by 13.1 percent during the Company's 1998 fiscal year. In comparison, the Company's shipments increased by 16.0 percent. The Company continues to have a strong share in the Class C market with shipments at 21.7 percent of the total market during the 1998 fiscal year compared to 20.5 percent in fiscal 1997. Management believes that the Company's long-term prospects remain bright as the Company continues to develop products to meet the increasing demands of the "baby boom" market segment. As of August 29, 1998, the Company's backlog of orders was approximately 1,700 orders compared to approximately 1,300 orders at August 30, 1997. The Company's 1999 products were extremely well received by its dealers at the Company's annual Dealer Days event. As a result of this reception, outstanding orders for the Company's 1999 products have hit an all-time high of approximately 2,500 orders on hand as of November 10, 1998, compared to approximately 1,400 orders on hand at that date last year. Cost of manufactured products, as a percent of manufactured product revenues, was 86.2 percent for fiscal 1998, compared to 88.3 percent for fiscal 1997. The Company's increased volume of production and sales of motor homes resulted in the improved margins as well as lower discount allowances during fiscal 1998. Selling and delivery expenses decreased by $5,934,000 to $21,197,000 comparing fiscal 1998 to fiscal 1997 and decreased as a percentage of net revenues to 4.0 percent from 6.2 percent. The decreases in dollars and percentage can be attributed primarily to significant decreases in promotional costs during fiscal 1998 when compared to fiscal 1997. Increased sales volume during fiscal 1998, also contributed to the decrease in percentage. Due to the closing and sale of WIE in fiscal 1997, this former subsidiary had no impact on the Company's results during fiscal 1998. General and administrative expenses decreased by $327,000 to $19,986,000 comparing fiscal 1998 to fiscal 1997 and decreased as a percentage of net revenues to 3.8 percent from 4.6 percent. Increases in the Company's employee bonus programs and reserves for product liability costs during fiscal 1998 partially offset the WIE effect when comparing the two fiscal years. Increased sales volume, during fiscal 1998, contributed to the decrease in percentage. For fiscal 1998, the Company had net financial income of $2,950,000 compared to net financial income of $1,844,000 during fiscal 1997. During fiscal 1998, the Company recorded $2,892,000 of net interest and dividend income and gains of $58,000 in foreign currency transactions. During fiscal 1997, the Company recorded $2,258,000 of net interest and dividend income, $137,000 of realized and unrealized gains in its trading securities portfolio, and losses of $551,000 in foreign currency transactions, relating to transactions by the Company with WIE and by WIE with dealers located in foreign countries other than Germany. For fiscal 1998, the Company had income from continuing operations before taxes of $35,927,000 compared to $6,992,000 for fiscal 1997. The 1998 effective tax rate was 32.1 percent, consistent with management's expectations. During fiscal 1997, a tax loss from the closing and sale of WIE resulted in a tax credit of approximately $3,700,000. This tax credit reduced the Company's effective tax rate on continuing operations to 5.9 percent for fiscal 1997. During fiscal 1997, the Company completed the sale of its 80 percent owned subsidiary, Cycle-Sat, Inc., for approximately $57,000,000 which resulted in an after-tax gain of $16,472,000 or $.64 per diluted share (See Note 2 to the Company's 1998 Consolidated Financial Statements). For fiscal 1998, the Company had net income of $24,384,000, or $1.00 per diluted share, compared to fiscal 1997's net income of $23,048,000, or $.90 per diluted share.
Fiscal 1997 Compared to Fiscal 1996 Net revenues for manufactured products were $436,712,000 for fiscal 1997, a decrease of $46,686,000, or 9.7 percent, from fiscal 1996. Motor home shipments (Class A and C) during fiscal 1997 were 7,558 units, a decrease of 1,192 units, or 13.6 percent, compared to fiscal 1996. Fiscal 1997 revenues for manufactured products were negatively impacted by the performance of the Company's Class A motor home products in the marketplace. The Company's Class A motor home product shipments decreased by 18.0 percent during fiscal 1997 when compared to fiscal 1996 whereas the RVIA factory shipment numbers for the comparable period showed an increase of 8.2 percent. The Company's 1997 Class A products were not as well received in the marketplace as had been expected. Therefore, the Company, recognizing its weakness in the Class A market, concentrated on intensive product development. Cost of manufactured products, as a percent of manufactured product revenues, was 88.3 percent for fiscal 1997 compared to 86.3 percent for fiscal 1996. This increase can be attributed primarily to reduced sales volume in Class A motor homes and an increase in sales discounts offered during fiscal 1997. Selling and delivery expenses increased by $1,841,000 to $27,131,000 comparing fiscal 1997 to fiscal 1996 and increased as a percentage of net revenues to 6.2 percent from 5.2 percent. The increases in dollars and percentage were due to increases in product promotional expenses. General and administrative expenses decreased by $1,261,000 to $20,313,000 comparing fiscal 1997 to fiscal 1996 but increased in fiscal 1997, as a percentage of net revenues, to 4.6 percent from 4.5 percent in fiscal 1996. The decrease in dollars was caused primarily by a decrease in the Company's product liability costs and by a reduction in the Company's overall compensation and bonus expenses during fiscal 1997. The increase in percentage was attributed primarily to the reduced sales volume. For fiscal 1997, the Company had net financial income of $1,844,000, due to investment income from higher cash balances maintained by the Company, a result of the Cycle-Sat sale, compared to net financial income of $354,000 during fiscal 1996. During fiscal 1997, the Company recorded $2,258,000 of net interest and dividend income, $137,000 of realized and unrealized gains in its trading securities portfolio, and losses of $551,000 in foreign currency transactions, relating to transactions by the Company with WIE and by WIE with dealers located in foreign countries other than Germany. During fiscal 1996, the Company recorded $930,000 of net interest and dividend income, $350,000 of realized and unrealized losses in its trading securities portfolio, and losses of $226,000 in foreign currency transactions, relating to the Company's investment in European operations caused by the weakening of the U.S. dollar against European currencies. For fiscal 1997, the Company had income from continuing operations before taxes of $6,992,000 compared to $21,063,000 for fiscal 1996. The tax loss from the closing and sale of the Company's European subsidiary, WIE, resulted in a tax credit of approximately $3,700,000. The tax credit reduced the effective tax rate on continuing operations to 5.9 percent for the year. During fiscal 1997, the Company completed the sale of Cycle-Sat for approximately $57,000,000 which resulted in an after-tax gain of $16,472,000 or $.64 per diluted share (See Note 2 to the Company's 1998 Consolidated Financial Statements). For fiscal 1997, the Company had net income of $23,048,000, or $.90 per diluted share, compared to fiscal 1996's net income of $12,385,000, or $.49 per diluted share.
ANALYSIS OF FINANCIAL CONDITION, LIQUIDITY AND RESOURCES The Company meets its working capital requirements, capital equipment requirements and cash requirements of subsidiaries with funds generated internally. At August 29, 1998, working capital was $91,919,000, a decrease of $8,016,000 from the amount at August 30, 1997. Cash provided by operations was $61,962,000, $5,215,000 and $17,258,000 during fiscal years ended August 29, 1998, August 30, 1997 and August 31, 1996, respectively. Operating cash flows were considerably higher in fiscal 1998, due primarily to an increase in income from continuing operations for the fiscal year, reductions in the Company's receivable balances and increases in the Company's current payables. Cash flows used by investing activities was $7,795,000 and $14,950,000 in fiscal 1998 and fiscal 1996, respectively, compared to cash flows provided by investing activities of $46,678,000 during fiscal 1997. Cash flows used by investing activities primarily include investments in dealer receivables, long-term notes receivable and capital expenditures. Capital expenditures were $5,567,000 in fiscal 1998, $4,438,000 in fiscal 1997 and $10,463,000 in fiscal 1996. Cash provided by investing activities for fiscal 1997 was due primarily to the proceeds the Company received from the sale of the Cycle-Sat subsidiary. Net cash used by financing activities was $32,438,000 in fiscal 1998, $20,560,000 in fiscal 1997 and $10,019,000 in fiscal 1996. The increase in cash used by financing activities in fiscal 1998 related to continuing operations was due primarily to the repurchase of shares of the Company's Common Stock at a cost of $28,358,000. (See Consolidated Statements of Cash Flows.) The Company's sources of liquidity consisted principally of cash and cash equivalents in the amount of $53,859,000 at August 29, 1998 compared to $32,130,000 at August 30, 1997. The Company also has available a line of credit for $30,000,000 (or 75 percent of eligible inventory, whatever is less) through a financing and security agreement with Nations Bank Specialty Lending Unit (formerly NationsCredit Corporation). The Company did not borrow under this line of credit during fiscal 1998 or fiscal 1997. (See Note 7 to the Company's 1998 Consolidated Financial Statements.) Principal expected demands at August 29, 1998 on the Company's liquid assets for fiscal 1999 include approximately $8,500,000 of capital expenditures (primarily equipment replace-ments), approximately $8,000,000 (transactions completed in September, 1998) to repurchase outstanding shares of the Company's common stock, which completes the December 29, 1997 Board of Directors' authorization to repurchase up to $36,500,000 of the Company's common stock, and payments of cash dividends. Management currently expects its cash on hand, funds from operations and borrowings available under existing credit facilities to be sufficient to cover both short-term and long-term operating requirements.
ACCOUNTING CHANGES Earnings Per Share Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," was issued in February 1997 and was adopted by the Company in fiscal 1998. The adoption of SFAS No. 128 did not have a significant impact on the calculation of earnings per share. (See Note 17 to the Company's 1998 Consolidated Financial Statements.) Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and must be adopted by the Company no later than fiscal 1999. The statement requires companies to disclose comprehensive income and its components in their financial statements. Segment Disclosures SFAS No. 131, "Disclosures about Segments of and Enterprise and Related Information" was issued in June 1997 and must be adopted by the Company no later than fiscal 1999. The statement establishes standards which redefine how operating segments are determined and requires public companies to report financial and descriptive information about reportable operating segments. Pension and Other Postretirement Benefits Disclosure SFAS No. 132, "Employer's Disclosure About Pensions and Other Postretirement Benefits" was issued in February 1998 and must be adopted by the Company no later than fiscal 1999. The statement revises employer's disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. Recognition of Derivative Instruments and Hedging Activities SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998 and must be adopted by the Company no later than fiscal 2000. This statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. The Company has not completed the process of evaluating the effect of SFAS No. 130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of and Enterprise and Related Information," SFAS No. 132, "Employer's Disclosure About Pensions and Other Postretirement Benefits," and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Since all these pronouncements except for SFAS No. 133, relate primarily to changes in disclosure requirements, the Company does not believe the new requirements will significantly affect its financial condition or operating results.
FORWARD LOOKING INFORMATION Except for the historical information contained herein, certain of the matters discussed in this report are "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties, including, but not limited to demand from customers, effects of competition, the general state of the economy, interest rates, consumer confidence, changes in the product or customer mix or revenues and in the level of operating expenses and other factors which may be disclosed throughout this Annual Report. Any forecasts and projections in this report are "forward looking statements," and are based on management's current expectations of the Company's near-term results, based on current information available pertaining to the Company, including the aforementioned risk factors, actual results could differ materially.
IMPACT OF INFLATION Historically, the impact of inflation on the Company's operations has not been significantly detrimental, as the Company has usually been able to adjust its prices to reflect the inflationary impact on the cost of manufacturing its products. The inability of the Company to successfully offset increases in manufacturing costs could have a material adverse effect on the Company's results of operations.
YEAR 2000 (Y2K) COMPLIANCE Introduction The term "year 2000 issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers as the year 2000 is approached and reached. These problems generally arise from the fact that most computer hardware and software have historically used only two digits to identify the year in a date. Y2K Background The Company's overall goal is to be Y2K ready. "Y2K ready" means that critical systems, devices, applications or business relationships have been evaluated and are expected to be suitable for continued use into and beyond the Y2K, or contingency plans are in place. The Company started its Y2K project in 1996. Y2K Project The Company's Y2K project is divided into four major steps: 1) Strategy for compliance; 2) Inventory and assessment; 3) Remediation; and 4) System testing.
The Company's Plant Engineering and Maintenance Department was charged with the assessment and remediation of any Y2K problems in its plant production equipment and in any building infrastructure equipment. Each machine will be checked individually and steps taken at that time to update for Y2K compliance. The completion of this project is scheduled for July 1999. The Company's Purchasing and Information Systems Departments have contacted all of the Company's major suppliers to determine their readiness for their compliance with the Y2K issue. The Company is not aware of any date sensitive chips in the component parts of its products that could cause a problem with the units in the field when the date of January 1, 2000 is reached. Costs The total cost associated with the modifications are not expected to exceed $300,000 of which approximately $250,000 has been expensed as of August 29, 1998. Any remaining costs incurred by the Company for the Y2K project will be absorbed in existing budgets. Risks The failure to correct a material Y2K problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's operations. Due to the general uncertainty inherent in the Y2K problem, resulting in part from the uncertainty of the Y2K readiness of the Company's third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Y2K failures will have a material impact on the Company's operations. The Company's Y2K project is expected to significantly reduce its level of uncertainty about the Y2K problem and in particular, about the Y2K compliance and readiness of its material external agents. The Company believes that, with the completion of its Y2K project as scheduled, the possibility of significant interruptions of normal operations should be reduced. Contingency At this time, the Company believes it has addressed all Y2K issues that may arise, therefore, no contingency plan has been developed. If during the Company's in-house testing or if information is received from an outside source that they would be unable to be Y2K compliant, the Company will then develop an appropriate contingency plan to address Y2K problems that may arise. Readers are cautioned that forward-looking statements contained in the Y2K update should be read in conjunction with the Company's disclosures under the heading: "FORWARD-LOOKING INFORMATION."
Copyright © 1998
Winnebago Industries, Inc.
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