10-K 1 wgo201610-k.htm FORM 10-K FOR YEAR ENDED AUGUST 27, 2016 Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended August 27, 2016; 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

winnebagoindredtma07.jpg

WINNEBAGO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Iowa
 
42-0802678
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
 
 
P.O. Box 152, Forest City, Iowa
 
50436
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (641) 585‑3535
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock ($.50 par value)
 
The New York Stock Exchange, Inc.
 
 
Chicago Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x.
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 Act). Yes o No x
Aggregate market value of the common stock held by non-affiliates of the registrant: $499,792,088 (26,684,041 shares at the closing price on the New York Stock Exchange of $18.73 on February 29, 2016).
Common stock outstanding on October 10, 2016: 26,901,146 shares.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the registrant's December 2016 Annual Meeting of Shareholders, scheduled to be held December 13, 2016, are incorporated by reference into Part II and Part III of this Annual Report on Form 10-K where indicated.
 



Winnebago Industries, Inc.
2016 Form 10-K Annual Report
Table of Contents

 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.


ii


Glossary


The following terms and abbreviations appear in the text of this report and are defined as follows:
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 Wells Fargo Capital Finance, as Agent
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 (as amended May 28, 2014)
EPS
Earnings Per Share
ERP
Enterprise Resource Planning
FASB
Financial Accounting Standards Board
FIFO
First In, First Out
GAAP
Generally Accepted Accounting Principles
GECC
General Electric Capital Corporation
Grand Design
Grand Design RV, LLC
IRS
Internal Revenue Service
IT
Information Technology
JPMorgan
JPMorgan Chase Bank, N.A.
LIBOR
London Interbank Offered Rate
LIFO
Last In, First Out
LTIP
Long-Term Incentive Plan
MVA
Motor Vehicle Act
NMF
Non-Meaningful Figure
NOL
Net Operating Loss
NYSE
New York Stock Exchange
OCI
Other Comprehensive Income
Octavius
Octavius Corporation, a wholly-owned subsidiary of Winnebago Industries, Inc.
OEM
Original Equipment Manufacturing
OSHA
Occupational Safety and Health Administration
ROE
Return on Equity
ROIC
Return on Invested Capital
RV
Recreation Vehicle
RVIA
Recreation Vehicle Industry Association
SEC
U.S. Securities and Exchange Commission
SERP
Supplemental Executive Retirement Plan
SIR
Self-Insured Retention
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
YTD
Year to Date



iii


WINNEBAGO INDUSTRIES, INC.
FORM 10‑K
Report for the Fiscal Year Ended August 27, 2016
Forward-Looking Information
Certain of the matters discussed in this Annual Report on Form 10-K 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, availability of labor, 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, business interruptions, any unexpected expenses related to ERP, risks relating to the consummation of our acquisition of Grand Design including, the possibility that the closing conditions to the contemplated transaction may not be satisfied or waived, risks that a governmental entity may prohibit, delay or refuse to grant a necessary regulatory approval; delay in closing the transaction or the possibility of non-consummation of the transaction; the potential for regulatory authorities to require divestitures in connection with the proposed transaction, the failure to consummate the debt transactions contemplated by the transaction with Grand Design, the possibility that we might have to pay a $35 million termination fee to Grand Design or additional damages for failing to close the transaction; the occurrence of any event that could give rise to termination of the agreement; the risk that shareholder litigation in connection with the contemplated transaction may affect the timing or occurrence of the contemplated transaction or result in significant costs of defense, indemnification and liability; risks inherent in the achievement of cost synergies and the timing thereof; risks that the pendency, financing, and efforts to consummate the transaction may be disruptive to Winnebago Industries or Grand Design or their respective management; the effect of announcement of the transaction on Grand Design's ability to retain and hire key personnel and maintain relationships with customers, suppliers and other third parties, risks related to integration of the two companies and other factors which may be disclosed throughout this Annual Report on Form 10-K. Although we believe that the expectations reflected in the "forward-looking statements" are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these "forward-looking statements," which speak only as of the date of this report. We undertake no obligation to publicly update or revise any "forward-looking statements," whether as a result of new information, future events or otherwise, except as required by law or the rules of the NYSE. We advise you, however, to consult any further disclosures made on related subjects in future quarterly reports on Form 10-Q and current reports on Form 8-K that are filed or furnished with the SEC.

PART I

Item 1. Business

General
The "Company," "Winnebago Industries," "we," "our" and "us" are used interchangeably to refer to Winnebago Industries, Inc. and its subsidiary, Winnebago of Indiana, LLC, as appropriate in the context.
Winnebago Industries, Inc., headquartered in Forest City, Iowa, is a leading United States manufacturer of RVs used primarily in leisure travel and outdoor recreation activities.
We own facilities in Middlebury, Indiana, where we manufacture travel trailers and fifth wheel RVs and Junction City, Oregon, where we manufacture motorhomes.
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.
Available Information
Our website, located at www.wgo.net, provides additional information about us. On our website, you can obtain, free of charge, this and prior year Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all of our other filings with the SEC. Our recent press releases are also available on our website. Our website also contains important information regarding our corporate governance practices. Information contained on our website is not incorporated into this Annual Report on Form 10-K. You may also read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website that contains reports, proxy statements and other information that is filed electronically with the SEC. The website can be accessed at www.sec.gov.


1


Principal Products
We have one reportable segment, the RV market. We design, develop, manufacture and market motorized and towable recreation products along with supporting products and services. Net revenues by major product classes were as follows:
 
Year Ended (1)
(In thousands)
August 27, 2016
 
August 29, 2015
 
August 30, 2014
 
August 31, 2013
 
August 25, 2012
Motorhomes (2)
$
875,004

89.7
%
 
$
872,915

89.4
%
 
$
853,488

90.3
%
 
$
718,580

89.5
%
 
$
496,193

85.3
%
Towables (3)
89,412

9.2
%
 
71,684

7.3
%
 
58,123

6.1
%
 
54,683

6.8
%
 
56,784

9.8
%
Other manufactured products
10,810

1.1
%
 
31,906

3.3
%
 
33,552

3.6
%
 
29,902

3.7
%
 
28,702

4.9
%
Total net revenues
$
975,226

100.0
%
 
$
976,505

100.0
%
 
$
945,163

100.0
%
 
$
803,165

100.0
%
 
$
581,679

100.0
%
(1) 
The fiscal year ended August 31, 2013 contained 53 weeks; all other fiscal years contained 52 weeks.
(2) 
Includes motorhome units, parts and services
(3) 
Includes towable units and parts.
 
Motorhomes, parts and service. A motorhome is a self-propelled mobile dwelling used primarily as temporary living quarters during vacation and camping trips, or to support some other active lifestyle. The RVIA classifies motorhomes into three types, all of which we manufacture and sell under the Winnebago brand name, which are defined as follows:
Type
Description
Winnebago products offerings
Class A
Conventional motorhomes constructed directly on medium- and heavy-duty truck chassis, which include the engine and drivetrain components. The living area and driver's compartment are designed and produced by the motorhome manufacturer.
Gas: Adventurer, Sightseer, Suncruiser, Sunova, Sunstar, Sunstar LX, Vista, Vista LX
Diesel: Forza, Grand Tour, Journey, Tour, Via
Class B
(gas and diesel)
Panel-type vans to which sleeping, kitchen, and/or toilet facilities are added. These models may also have a top extension to provide more headroom.

Winnebago Touring Coach (Era, Paseo, Travato)
Class C
(gas and diesel)
Motorhomes built on van-type chassis onto which the motorhome manufacturer constructs a living area with access to the driver's compartment.

Aspect, Cambria, Fuse, Minnie Winnie, Navion, Spirit, Trend, View
Motorhomes generally provide living accommodations for up to seven people and include kitchen, dining, sleeping and bath areas, and in some models, a lounge. Optional equipment accessories include, among other items, generators, home theater systems, king-size beds, and UltraLeatherTM upholstery and a wide selection of interior equipment. With the purchase of any new motorhome, we offer a comprehensive 12-month/15,000-mile warranty on the coach and, for Class A and C motorhomes, a 3-year/36,000-mile structural warranty on sidewalls and floors.
Our Class A, B and C motorhomes are sold by dealers in the retail market with manufacturer's suggested retail prices ranging from approximately $70,000 to $470,000, depending on size and model, plus optional equipment and delivery charges. Our motorhomes range in length from 21 to 44 feet.
Unit sales of our motorhomes for the last five fiscal years were as follows:
 
Year Ended (1)(2)
Units
August 27, 2016
 
August 29, 2015
 
August 30, 2014
 
August 31, 2013
 
August 25, 2012
Class A
2,925

31.4
%
 
3,442

37.8
%
 
4,466

51.0
%
 
3,761

55.1
%
 
2,579

55.6
%
Class B
1,239

13.3
%
 
991

10.9
%
 
751

8.6
%
 
372

5.5
%
 
319

6.9
%
Class C
5,143

55.3
%
 
4,664

51.3
%
 
3,538

40.4
%
 
2,688

39.4
%
 
1,744

37.6
%
Total motorhomes
9,307

100.0
%
 
9,097

100.0
%
 
8,755

100.0
%
 
6,821

100.0
%
 
4,642

100.0
%
(1) 
The fiscal year ended August 31, 2013 contained 53 weeks; all other fiscal years contained 52 weeks.
(2) 
Percentages may not add due to rounding differences.
Motorhome parts and service activities represent revenues generated by service work we perform for retail customers at our Forest City, Iowa and Junction City, Oregon facilities as well as revenues from sales of RV parts. As of August 27, 2016, our parts inventory was approximately $3.5 million and is located in a 450,000-square foot warehouse with what we believe to be among the most sophisticated distribution and tracking systems in the industry. Our competitive strategy is to provide proprietary manufactured parts through our dealer network, which we believe increases customer satisfaction and the value of our motorhomes.



2


Towables. A towable is a non-motorized vehicle that is designed to be towed by passenger automobiles, pickup trucks, SUVs or vans and is used as temporary living quarters for recreational travel. The RVIA classifies towables in four types: conventional travel trailers, fifth wheels, folding camper trailers and truck campers; we manufacture and sell conventional travel trailers and fifth wheels under the Winnebago brand name, which are defined as follows:
Type
Description
Winnebago product offerings
Travel trailer
Conventional travel trailers are towed by means of a hitch attached to the frame of the vehicle.
Winnie Drop, Micro Minnie, Minnie, Ultralite, Instinct, Spyder (Toy Hauler)
Fifth wheel
Fifth wheel trailers are constructed with a raised forward section that is connected to the vehicle with a special fifth wheel hitch.
Destination, Latitude, Voyage, Voyage XLT, Scorpion (Toy Hauler)
Unit sales of our towables for the last five fiscal years were as follows:
 
Year Ended (1)(2)
 
 
 
 
 
 
Units
August 27, 2016
 
August 29, 2015
 
August 30, 2014
 
August 31, 2013
 
August 25, 2012
Travel trailer
3,613

86.0
%
 
2,182

81.7
%
 
2,052

81.8
%
 
2,038

80.4
%
 
1,372

58.7
%
Fifth wheel
586

14.0
%
 
488

18.3
%
 
457

18.2
%
 
497

19.6
%
 
966

41.3
%
Total towables
4,199

100.0
%
 
2,670

100.0
%
 
2,509

100.0
%
 
2,535

100.0
%
 
2,338

100.0
%
(1) 
The fiscal year ended August 31, 2013 contained 53 weeks; all other fiscal years contained 52 weeks.
(2) 
Percentages may not add due to rounding differences.
On October 2, 2016, we entered into a Securities Purchase Agreement pursuant to which we intend to acquire Grand Design, a fast-growing towables manufacturer in Middlebury, Indiana. Grand Design manufactures travel trailers and fifth wheel products.
With this acquisition, we expect to have a broader and more balanced portfolio of motorized and towable products and intend to capitalize on the opportunities across the RV market and to drive improved profitability and long-term value for shareholders.

Other Manufactured Products. As a result of our motorhome manufacturing capabilities, equipment and facilities, we use our incremental capacity to manufacture product for outside customers. To a limited extent, we manufacture other component parts sold to outside manufacturers. We also manufacture commercial vehicles which are motorhome shells, primarily custom designed for the buyer's special needs and requirements, such as law enforcement command centers, mobile medical clinics and mobile office space. These commercial vehicles are sold through our dealer network. In addition, we also provide commercial vehicles as bare shells to third-party upfitters for conversion at their facilities.

Production
We generally produce motorhomes and towables to order from dealers. We have some ability to increase our capacity by scheduling overtime and/or hiring additional production employees or to decrease our capacity through the use of shortened workweeks and/or reducing head count. We have long been known as an industry leader in innovation as each year we introduce new or redesigned products. These changes generally include new floor plans and sizes as well as design and decor modifications.
Our motorhomes are primarily produced in the state of Iowa at four different campuses. Our Forest City facilities are vertically integrated and provide mechanized assembly line manufacturing for Class A and C motorhomes. We assemble Class B motorhomes in our Lake Mills facilities. Hardwood cabinet, countertop and compartment door products are manufactured at our Charles City campus. Our Waverly facility is used for wire harness fabrication. Beginning in 2016, we also began assembling motorhomes in our Junction City, Oregon facility. Our motorhome bodies are made from various materials and structural components which are typically laminated into rigid, lightweight panels. Body designs are developed with computer aided design and manufacturing and subjected to a variety of tests and evaluations to meet our standards and requirements. We manufacture a number of components utilized in our motorhomes, with the principal exceptions being chassis, engines, generators and appliances that we purchase from reputable manufacturers.
Most of our raw materials such as steel, aluminum, fiberglass and wood products are obtainable from numerous sources. Certain parts, especially motorhome chassis, are available from a small group of suppliers. We are currently purchasing Class A and C chassis from Ford Motor Company, Mercedes-Benz USA (a Daimler company) and Mercedes-Benz Canada (a Daimler company) and Class A chassis from Freightliner Custom Chassis Corporation (a Daimler company). Class B chassis are purchased from Mercedes-Benz USA, Mercedes-Benz Canada, FCA US, LLC and FCA Canada, Inc.. Class C chassis are also purchased from FCA US, LLC and FCA Canada, Inc. In Fiscal 2016, only two vendors, Ford Motor Company and Mercedes-Benz (USA and Canada) individually accounted for more than 10% of our raw material purchases and approximating 35% in the aggregate.

Our towables are produced at an assembly plant located in Middlebury, Indiana. The majority of components are comprised of frames, appliances and furniture and are purchased from suppliers.

3


Backlog
We strive to balance timely order fulfillment to customers with the lead times suppliers require to efficiently source materials and manage costs. Production facility constraints at peak periods also lead to fluctuations in backlogged orders which we manage closely. The approximate revenue of our motorhome backlog was $107.6 million and $156.4 million as of August 27, 2016 and August 29, 2015, respectively. The approximate revenue of our towable backlog was $8.4 million and $6.2 million as of August 27, 2016 and August 29, 2015, respectively. A more detailed description of our motorhome and towable order backlog is included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Distribution and Financing
We market our RVs on a wholesale basis to a diversified independent dealer network located throughout the US and, to a limited extent, in Canada. Foreign sales, including Canada, were 8% or less of net revenues during each of the past three fiscal years. See Note 12 to our Financial Statements of this Annual Report on Form 10-K.
As of August 27, 2016, our RV dealer network in the US and Canada included 295 motorized and 161 towable physical dealer locations, 74 of these locations carried both Winnebago motorized and towable product. One of our dealer organizations, FreedomRoads, LLC, accounted for 16.6% of our net revenue for Fiscal 2016, as this dealer sold our products in 78 of their dealership locations across 28 US states. A second dealer organization, La Mesa RV Center, Inc., accounted for 13.0% of our net revenue for Fiscal 2016, as this dealer sold our products in 11 dealership locations across 4 US states.
We have sales and service agreements with dealers which are subject to annual review. Many of the dealers are also engaged in other areas of business, including the sale of automobiles, trailers or boats, and many dealers carry one or more competitive lines of RVs. We continue to place high emphasis on the capability of our dealers to provide complete service for our RVs. Dealers are obligated to provide full service for owners of our RVs or, in lieu thereof, to secure such service from other authorized providers.
We advertise and promote our products through national RV magazines, the distribution of product brochures, the Go RVing national advertising campaign sponsored by RVIA, direct-mail advertising campaigns, various national promotional opportunities and on a local basis through trade shows, television, radio and newspapers, primarily in connection with area dealers.
RV sales to dealers are made on cash terms. Most dealers 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 merchandise purchased. As is customary in the RV industry, we typically enter into a repurchase agreement with a lending institution financing a dealer's purchase of our product upon the lending institution's request and after completion of a credit check of the dealer involved. Our repurchase agreements provide that for up to 18 months after a unit is financed, in the event of default by the dealer on the agreement to pay the lending institution and repossession of the unit(s) by the lending institution, we will repurchase the financed merchandise from the lender at dealer invoice. Our maximum exposure for repurchases varies significantly from time to time, depending upon general economic conditions, seasonal shipments, competition, demand for RVs, dealer organization, gasoline availability and access to and the cost of financing. See Note 9.

Competition
The RV market is highly competitive with many other manufacturers selling products which compete directly with our products. Some of our competitors are much larger than us, most notably in the towable RV market, which may provide these competitors additional purchasing power. The competition in the RV industry is based upon design, price, quality and service of the products. We believe our principal competitive advantages are our brand strength, product quality and our service after the sale. We also believe that our motorhome products have historically commanded a price premium as a result of these competitive advantages.

Seasonality

The primary use of RVs for leisure travel and outdoor recreation has historically led to a peak retail selling season concentrated in the spring and summer months and lower sales during winter months. Our sales of RVs are generally influenced by this pattern in retail sales, but sales can also be affected by the level of dealer inventory. As a result, RV sales are historically lowest during our second fiscal quarter, which ends in February.

Regulations and Trademarks
We are subject to a variety of federal, state and local laws and regulations, including the MVA, under which the National Highway Traffic Safety Administration may require manufacturers to recall RVs that contain safety-related defects, and numerous state consumer protection laws and regulations relating to the operation of motor vehicles, including so-called "Lemon Laws." We are also subject to regulations established by OSHA. Our facilities are periodically inspected by federal and state agencies, such as OSHA. We are a member of RVIA, a voluntary association of RV manufacturers which promulgates RV safety standards. We place an RVIA seal on each of our RVs to certify that the RVIA standards have been met. We believe that our products and facilities comply in all material respects with the applicable vehicle safety, consumer protection, RVIA and OSHA regulations and standards.

4


Our operations are subject to a variety of federal and state environmental laws and regulations relating to the use, generation, storage, treatment, emission, labeling, and disposal of hazardous materials and wastes and noise pollution. We believe that we currently are in compliance with applicable environmental laws and regulations in all material aspects.
We have several domestic and foreign trademark registrations associated with our motorhome and towable products which include: Winnebago, Aspect, Brave, Cambria, Chalet, Destination, Ellipse, Era, Forza, Fuse, Glide & Dine, Inlounge, Instinct, Intable, Itasca, Journey, Meridian, Micro Minnie, Minnie, Minnie Winnie, Sightseer, Solei, Spirit, Spyder, Suncruiser, Sunova, Sunstar, Travato, Trend, Tribute, View, Vista, Viva!, Voyage, W, Flying W (logo), WIT Club, Winnebago Ind (logo), Winnebago Towables (logo) and Winnebago Touring Coach. We believe that our trademarks and trade names are significant to our business and we have in the past and will in the future vigorously protect them against infringement by third parties. We are not dependent upon any patents or technology licenses of others for the conduct of our business.

Research and Development
Research and development expenditures are expensed as incurred. During Fiscal 2016, 2015 and 2014, we spent approximately $4.0 million, $3.9 million and $4.3 million, respectively on research and development activities.

Human Resources
At the end of Fiscal 2016, 2015 and 2014, we employed approximately 3,050, 2,900 and 2,850 persons, respectively. None of our employees are covered under a collective bargaining agreement. We believe our relations with our employees are good.

Executive Officers of the Registrant
Name
Office (Year First Elected an Officer)
Age
Michael J. Happe
President and Chief Executive Officer (2016)
45
Ashis N. Bhattacharya
Vice President, Strategic Planning and Development (2016)
53
S. Scott Degnan
Vice President and General Manager, Towables Business (2012)
51
Steven R. Dummett
Vice President, Product Development (2015 - September 2016)
61
Scott C. Folkers
Vice President, General Counsel & Secretary (2012)
54
Brian D. Hazelton
Vice President and General Manager, Motorhome Business (August 2016)
51
Daryl W. Krieger
Vice President, Manufacturing (2010 - September 2016)
53
Sarah N. Nielsen
Vice President, Chief Financial Officer (2005)
43
Christopher D. West
Vice President, Operations (September 2016)
44
Bret A. Woodson
Vice President, Administration (2015)
46
Donald L. Heidemann
Treasurer and Director of Finance (2007)
44

Officers are elected annually by the Board of Directors. There are no family relationships between or among any of the Corporate Officers or Directors of the Company.
Mr. Happe joined Winnebago Industries in January 2016 as President and Chief Executive Officer (CEO). Prior to joining Winnebago, he had been employed by Toro Company from 1997 to 2016. He served as Executive Officer and Group Vice President of Toro's Residential and Contractor businesses from March 2012 to December 2015. From August 2010 to March 2012 he served as Vice President, Residential and Landscape Contractor Businesses. Prior to that he held a series of senior leadership positions throughout his career across a variety of Toro's domestic and international divisions.
Mr. Bhattacharya joined Winnebago Industries in May 2016 as Vice President of Strategic Planning and Development. Prior to joining Winnebago, Mr. Bhattacharya served at Honeywell as Vice President, Strategy, Alliances & Internet of Things (IoT) for the Sensing and Productivity Solutions division from 2010 to 2016. Prior to that, he was employed with Moog, Motorola, and Bain & Company in a variety of roles.
Mr. Degnan joined Winnebago Industries in May 2012 as Vice President of Sales and Product Management. He moved into the role of Vice President and General Manager, Towables Business in July 2016. Prior to joining Winnebago, Mr. Degnan served as Vice President of Sales for Riverside, California's MVP RV from 2010 to 2012. He also previously served in management and sales positions with Coachmen RV from 2008 to 2010, with National RV from 2007 to 2008, and Fleetwood Enterprises from 1987 to 2007.
Mr. Dummett has over 30 years of experience with Winnebago Industries. He was elected to the position of Vice President, Product Development in January 2015. Prior to that time, he served as Design Engineering Manager from 2010 to 2015 and as Project Engineering Coordinator and Product Designer. Effective September 16, 2016 Mr. Dummett was named Managing Director of Engineering, reporting to Mr. Hazelton.

5


Mr. Folkers joined Winnebago Industries in August 2010 as assistant general counsel. He was elected to the position of Vice President, General Counsel and Secretary in June 2012. Prior to joining Winnebago, Mr. Folkers was employed as in-house counsel for John Morrell & Co., in Sioux Falls, SD from 1998 to 2010. Mr. Folkers is a member of the Iowa Bar Association.
Mr. Hazelton joined Winnebago Industries in August 2016 as Vice President and General Manager, Motorhome Business. He previously was CEO of Schwing America, Inc. from 2009 to 2016. Schwing declared Chapter 11 bankruptcy in 2009 emerging in 2010 with a reorganization plan. Prior to his employment with Schwing, he worked for Terex Corporation and Detroit Diesel Corporation in various executive roles.
Mr. Krieger has over 30 years of experience with Winnebago Industries. He has been Vice President, Manufacturing since May 2010. Prior to that time, he served as Director of Manufacturing from November 2009 to May 2010 and General Manager - Fabrication from February 2002 to November 2009. Effective September 16, 2016 Mr. Krieger was named Managing Director of Iowa Operations, reporting to Mr. West.
Ms. Nielsen has 11 years of experience with Winnebago Industries. She has been Vice President and Chief Financial Officer since November 2005. Ms. Nielsen joined Winnebago in August 2005 as Director of Special Projects and Training. Prior to that time, she was employed as a senior audit manager at Deloitte & Touche LLP, where she worked from 1995 to 2005. Ms. Nielsen is a Certified Public Accountant.
Mr. West joined Winnebago Industries in September 2016 as Vice President, Operations. He previously was Vice President of Global Supply Chain for Joy Global (a worldwide equipment manufacturer) from 2014 to 2016, and Operations Director from 2012 to 2014. Other positions Mr. West has held include Director of Manufacturing for AGCO Corporation (an agricultural equipment manufacturer) from 2008 to 2012 and Director of Operations and other management positions for the Nordam Group (a manufacturer of aircraft interiors) from 1999 to 2009.
Mr. Woodson joined Winnebago Industries in January 2015 as Vice President, Administration. Prior to joining Winnebago, Mr. Woodson was Vice President of Human Resources at Corbion from 2007 to 2014 and Director, Human Resources at Sara Lee from 1999 to 2007 and has over 23 years of business and human resources experience.
Mr. Heidemann has nine years of experience with Winnebago Industries. He was elected to the position of Treasurer in August 2007 and added Director of Finance responsibilities in August 2011.  Prior to joining the Company, Mr. Heidemann served in various treasury positions for Select Comfort Corporation from 2003 to July 2007 and served in various treasury positions for Rent-A-Center Incorporated from 1998 to 2003.
Item 1A. Risk Factors
The following risk factors should be considered carefully in addition to the other information contained in this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones we face, but represent the most significant risk factors that we believe may adversely affect the RV industry and our business, operations or financial position. The risks and uncertainties discussed in this report are not exclusive and other risk factors that we may consider immaterial or do not anticipate may emerge as significant risks and uncertainties.
Competition
The market for RVs is very competitive. Competitive factors in this industry include price, design, value, quality, service, brand awareness and reputation. There can be no assurance that existing or new competitors will not develop products that are superior to our RVs or that achieve better consumer acceptance, thereby adversely affecting our market share, sales volume and profit margins. Some of our competitors are much larger than us, most notably in the towable RV market, which provide these competitors with more financial resources and access to capital as well as additional purchasing power. In addition, competition could increase if new companies enter the market, existing competitors consolidate their operations or if existing competitors expand their product lines or intensify efforts within existing product lines. Our current products, products under development, and our ability to develop new and improved products may be insufficient to enable us to compete effectively with our competitors. These competitive pressures may have a material adverse effect on our results of operations.
Hiring Constraints and Retaining Key Employees
Our ability to meet our strategic objectives and otherwise grow our business will depend to a significant extent on the continued contributions of our leadership team. Our future success will also depend in large part on our ability to identify, attract, and retain other highly qualified managerial, technical, sales and marketing, operations, and customer service personnel. Our main motorhome operation is located in northern Iowa, a largely rural area. Competition for these individuals is intense and supply is limited. We may not succeed in identifying, attracting, or retaining qualified personnel on a cost-effective basis. The loss or interruption of services of any of our key personnel, inability to identify, attract, or retain qualified personnel in the future, delays in hiring qualified personnel, or any employee work slowdowns, strikes, or similar actions could make it difficult for us to conduct and manage our business and meet key objectives, which could harm our business, financial condition, and operating results.
Production Disruptions
We currently manufacture most of our products at two locations in the U.S. One of these locations produces approximately 80% of our products. These facilities may be affected by natural or man-made disasters and other external events. In the event that one of our manufacturing facilities was affected by a disaster or other event, we could be forced to shift production to one of our other manufacturing facilities or to cease operations. Although we maintain insurance for damage to our property and disruption of our

6


business from casualties, such insurance may not be sufficient to cover all of our potential losses. Any disruption in our manufacturing capacity could have an adverse impact on our ability to produce sufficient inventory of our products or may require us to incur additional expenses in order to produce sufficient inventory, and therefore, may adversely affect our net sales and operating results. Any disruption or delay at our manufacturing facilities could impair our ability to meet the demands of our customers, and our customers may cancel orders or purchase products from our competitors, which could adversely affect our business and operating results.
Risks Related to Our Recently Announced Potential Acquisition
In connection with our recently announced agreement to acquire Grand Design, there are significant risks relating to the consummation of our acquisition including, the possibility that the closing conditions to the contemplated transaction may not be satisfied or waived, including that a governmental entity may prohibit, delay or refuse to grant a necessary regulatory approval; delay in closing the transaction or the possibility of non-consummation of the transaction; the potential for regulatory authorities to require divestitures in connection with the proposed transaction, the failure to consummate the debt transactions contemplated by the transaction with Grand Design, the possibility that we might have to pay a $35.0 million termination fee to Grand Design or additional damages for failing to close the transaction; the occurrence of any event that could give rise to termination of the agreement; the risk that shareholder litigation in connection with the contemplated transaction may affect the timing or occurrence of the contemplated transaction or result in significant costs of defense, indemnification and liability; risks inherent in the achievement of cost synergies and the timing thereof; risks that the pendency, financing, and efforts to consummate the transaction may be disruptive to Winnebago Industries or Grand Design RV or their respective management; the effect of announcement of the transaction on Grand Design’s ability to retain and hire key personnel and maintain relationships with customers, suppliers and other third parties, and risks related to integration of the two companies.

The Company’s Stock Price is Subject to Volatility
Our stock price may fluctuate based on many factors.  Our recently announced and pending acquisition of Grand Design, for example, provides important strategic positioning and earnings growth potential and will also result in the issuance of new shares of common stock to partially finance the transaction.  We have agreed to issue $105.0 million worth of common stock to the owners of Grand Design and register these shares for resale after the transaction closes. Stock issuance may cause dilution of earnings per share or put selling pressure on our share price. Changing credit agreements and leverage ratios may also impact stock price. In general, analysts expectations and our ability to meet those expectations quarterly may cause stock price fluctuations. If we fail to meet expectations related to future growth, profitability, debt repayment, dividends, share issuance or repurchase or other market expectations our stock price may decline significantly.

Facility Expansion and Diversification
We are expanding our production capabilities at our site in Junction City, Oregon. The expansion and renovation entails risks that could cause disruption in the operations of our business and unanticipated cost increases. Should we experience production variances, quality or safety issues as we ramp up these operations our business and operating results could be adversely affected.
Adverse Effects of Union Activities
Although none of our employees are currently represented by a labor union, unionization could result in higher employee costs and increased risk of work stoppages. We are, directly or indirectly, dependent upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage occurs, it could delay the manufacture and sale of our recreational vehicles and have a material adverse effect on our business, prospects, operating results or financial condition.
General Economic Conditions and Certain Other External Factors
Companies within the RV industry are subject to volatility in operating results due primarily to general economic conditions because the purchase of an RV is often viewed as a consumer discretionary purchase. Demand for discretionary goods in general can fluctuate with recessionary conditions; slow or negative economic growth rates; negative consumer confidence; reduced consumer spending levels resulting from tax increases or other factors; prolonged high unemployment rates; higher commodity and component costs; fuel prices; inflationary or deflationary pressures; reduced credit availability or unfavorable credit terms for dealers and end-user customers; higher short-term interest rates; and general economic and political conditions and expectations. Specific factors affecting the RV industry include:
overall consumer confidence and the level of discretionary consumer spending;
employment trends;
the adverse impact of global tensions on consumer spending and travel-related activities; and
the adverse impact on margins due to increases in raw material costs which we are unable to pass on to customers without negatively affecting sales.

Dependence on Credit Availability and Interest Rates to Dealers and Retail Purchasers
Our business is affected by the availability and terms of the financing to dealers. Generally, RV dealers finance their purchases of inventory with financing provided by lending institutions. Three financial flooring institutions held 61% of our total financed dealer inventory dollars that were outstanding at August 27, 2016. In the event that any of these lending institutions limit or discontinue dealer financing, we could experience a material adverse effect on our results of operations.

7


Our business is also affected by the availability and terms of financing to retail purchasers. Retail buyers purchasing a motorhome or towable may elect to finance their purchase through the dealership or a financial institution of their choice. Substantial increases in interest rates or decreases in the general availability of credit for our dealers or for the retail purchaser may have an adverse impact upon our business and results of operations.
Cyclicality and Seasonality
The RV industry has been characterized by cycles of growth and contraction in consumer demand, reflecting prevailing economic and demographic conditions, which affect disposable income for leisure-time activities. Consequently, the results for any prior period may not be indicative of results for any future period.
Seasonal factors, over which we have no control, also have an effect on the demand for our products. Demand in the RV industry generally declines over the winter season, while sales are generally highest during the spring and summer months. Also, unusually severe weather conditions in some markets may impact demand. Our business also does well when the US housing market is strong and our business weakens when the US housing market weakens.
Managing Growth Opportunities
One of our growth strategies is to drive growth through targeted acquisitions and alliances, stronger customer relations, and new joint ventures and partnerships that add value while supplementing our existing brands and product portfolio. Our ability to grow through acquisitions will depend, in part, on the availability of suitable candidates at acceptable prices, terms, and conditions, our ability to compete effectively for acquisition candidates, and the availability of capital and personnel to complete such acquisitions and run the acquired business effectively. Any acquisition, alliance, joint venture, or partnership could impair our business, financial condition, reputation, and operating results. The benefits of an acquisition or new alliance, joint venture, or partnership may take more time than expected to develop or integrate into our operations, and we cannot guarantee that previous or future acquisitions, alliances, joint ventures, or partnerships will, in fact, produce any benefits. Such acquisitions, alliances, joint ventures, and partnerships may involve a number of risks, including:
diversion of management’s attention;
disruption to our existing operations and plans;
inability to effectively manage our expanded operations;
difficulties or delays in integrating and assimilating information and financial systems, operations, and products of an acquired business or other business venture or in realizing projected efficiencies, growth prospects, cost savings, and synergies;
inability to successfully integrate or develop a distribution channel for acquired product lines;
potential loss of key employees, customers, distributors, or dealers of the acquired businesses or adverse effects on existing business relationships with suppliers, customers, distributors, and dealers;
adverse impact on overall profitability if our expanded operations do not achieve the financial results projected in our valuation model;
inaccurate assessment of additional post-acquisition or business venture investments, undisclosed, contingent or other liabilities or problems, unanticipated costs associated with an acquisition or other business venture, and an inability to recover or manage such liabilities and costs; and
incorrect estimates made in the accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill or other assets that could adversely affect our operating results.

Credit Arrangements and Leverage
In order to achieve our growth strategies, we plan to establish new credit arrangements and increase our leverage. This capital will allow us to finance targeted acquisitions including the recently announced agreement to acquire Grand Design, as well as fund the working capital requirements of organic growth. In connection with our agreement to acquire Grand Design we executed a customary debt commitment letter with JPMorgan pursuant to which, subject to customary exceptions and conditions, JPMorgan has committed to provide a seven-year $300 million secured term loan B facility, and a five-year $125 million asset-based revolving credit facility (collectively the “Credit Facilities”). We intend to use the proceeds from the term loan and a portion of the revolving credit facility together with $60 million in cash and issue $105 million of common stock to complete the acquisition. The remainder of the revolving credit facility will be used to fund our working capital needs. The Credit Facilities are expected to be secured by all or substantially all of our assets, and will replace our current credit facility with Wells Fargo Bank, N.A.
If we cannot negotiate favorable agreements and related covenants, restrictive provisions may limit our ability to conduct our business, take advantage of business opportunities, and respond to changing business, market, and economic conditions. We must generate sufficient cash to pay our debt service and support our business in an industry that is cyclical. In addition, they may place us at a competitive disadvantage relative to other companies that may be subject to fewer, if any, restrictions or may otherwise adversely affect our business. Transactions that we may view as important opportunities, such as significant acquisitions, may be subject to the consent of the lenders under future credit arrangements, which consent may be withheld or granted subject to conditions specified at the time that may affect the attractiveness or viability of the transaction.
Demand Forecasting and Inventory Management
Our ability to manage our inventory levels to meet our customer's demand for our products is important for our business. For example, certain dealers are focused on the rental market which spikes over the summer vacation period while other dealers are focused on direct sales to the consumer at various price points. Our production levels and inventory management are based on

8


demand estimates six to twelve months forward taking into account supply lead times, production capacity, timing of shipments, and dealer inventory levels. If we overestimate or underestimate demand for any of our products during a given season, we may not maintain appropriate inventory levels, which could negatively impact our net sales or working capital, hinder our ability to meet customer demand, or cause us to incur excess and obsolete inventory charges.
Distribution Channel Management
We sell many of our products through distribution channels and are subject to risks relating to their inventory management decisions and operational and sourcing practices. Our distribution channel customers carry inventories of our products as part of their ongoing operations and adjust those inventories based on their assessments of future needs. Such adjustments may impact our inventory management and working capital goals as well as operating results. If the inventory levels of our distribution channel customers are higher than they desire, they may postpone product purchases from us, which could cause our sales to be lower than the end-user demand for our products and negatively impact our inventory management and working capital goals as well as our operating results.
Responsiveness to Market Changes
One of our growth strategies is to develop innovative, customer-valued products to generate revenue growth. We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers, unless we can continue to enhance existing products and develop new innovative products for the markets in which we compete. Product development requires significant financial, technological, and other resources. Product improvements and new product introductions also require significant research, planning, design, development, engineering, and testing at the technological, product, and manufacturing process levels and we may not be able to timely develop and introduce product improvements or new products. Our competitors' new products may beat our products to market, be higher quality or more reliable, be more effective with more features and/or less expensive than our products, obtain better market acceptance, or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful net sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development.
Potential Loss of a Large Dealer Organization
One of our dealer organizations accounted for 16.6% of our net revenue for Fiscal 2016. A second dealer organization, accounted for 13.0% of our net revenue for Fiscal 2016. 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 either or both of these dealers could negatively impact our sales and could trigger repurchase obligations under our repurchase agreements.
Potential Repurchase Liabilities
In accordance with customary practice in the RV industry, upon request we enter into formal repurchase agreements with lending institutions financing a dealer's purchase of our products. In these repurchase agreements we agree, in the event of a default by an independent dealer in its obligation to a lender and repossession of the unit(s) by the lending institution, to repurchase units at declining prices over the term of the agreements, which can last up to 18 months. The difference between the gross repurchase price and the price at which the repurchased product can then be resold, which is typically at a discount to the gross repurchase price, represents a potential expense to us. In certain instances, we also repurchase inventory from our dealers due to state law or regulatory requirements that govern voluntary or involuntary terminations. If we are obligated to repurchase a substantially larger number of RVs in the future, this would increase our costs and could have a material adverse effect on our results of operations, financial condition, and cash flows.
Fuel Availability and Price Volatility
Gasoline or diesel fuel is required for the operation of motorized RVs. There can be no assurance that the supply of these petroleum products will continue uninterrupted or that the price or tax on these petroleum products will not significantly increase in the future. RVs, however, are not generally purchased for fuel efficiency. Fuel shortages and substantial increases in fuel prices have had a material adverse effect on the RV industry as a whole in the past and could have a material adverse effect on us in the future.

Dependence on Suppliers
Most of our RV components are readily available from numerous sources. However, a few of our components are produced by a small group of suppliers. In the case of motorhome chassis, Ford Motor Company, Freightliner Custom Chassis Corporation, Mercedes-Benz (USA and Canada) and FCA (US and Canada) are our major suppliers. Our relationship with our chassis suppliers is similar to our other supplier relationships in that no special contractual commitments are engaged in by either party. This means that we do not have minimum purchase requirements and our chassis suppliers do not have minimum supply requirements. Our chassis suppliers also supply to our competitors. Historically, chassis suppliers resort to an industry-wide allocation system during periods when supply is restricted. These allocations have been based on the volume of chassis previously purchased. Sales of motorhomes rely on chassis supply and are affected by shortages from time to time. Decisions by our suppliers to decrease production, production delays, or work stoppages by the employees of such suppliers, or price increases could have a material adverse effect on our ability to produce motorhomes and ultimately, on our results of operations, financial condition and cash flows.
Raw Material Costs
We purchase raw materials such as steel, aluminum, and other commodities, and components, such as chassis, refrigerators, and televisions, for use in our products. In addition, we are a purchaser of components and parts containing various commodities,

9


including steel, aluminum, copper, lead, rubber, and others that are integrated into our end products. To the extent that commodity prices increase and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, increases in the cost of such raw materials and components and parts may adversely affect our profit margins if we are unable to pass along to our customers these cost increases in the form of price increases or otherwise reduce our cost of goods sold. In addition, increases in other costs of doing business may also adversely affect our profit margins and businesses. For example, an increase in fuel costs may result in an increase in our transportation costs, which also could adversely affect our operating results and businesses. Historically, we have mitigated cost increases, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, engaging in internal cost reduction efforts, and increasing prices on some of our products, all as appropriate. However, we may not be able to fully offset such increased costs in the future. Further, if our price increases are not accepted by our customers and the market, our net sales, profit margins, earnings, and market share could be adversely affected.
Warranty Claims
We receive warranty claims from our dealers in the ordinary course of our business. Although we maintain reserves for such claims, which to date have been adequate, there can be no assurance that warranty expense levels will remain at current levels or that such reserves will continue to be adequate. A significant increase in warranty claims exceeding our current warranty expense levels could have a material adverse effect on our results of operations, financial condition and cash flows.
In addition to the costs associated with the contractual warranty coverage provided on our products, we also occasionally incur costs as a result of additional service actions not covered by our warranties, including product recalls and customer satisfaction actions. Although we estimate and reserve for the cost of these service actions, there can be no assurance that expense levels will remain at current levels or such reserves will continue to be adequate.
Protection of our Brand
We believe that one of the strengths of our business is our brand which is widely known around the world. We vigorously defend our brand and our other intellectual property rights against third parties on a global basis. We have, from time to time, had to bring claims against third parties to protect or prevent unauthorized use of our brand. If we are unable to protect and defend our brand or other intellectual property, it could have a material adverse effect on our results or financial condition.
Product Liability
We are subject, in the ordinary course of business, to litigation including a variety of warranty, "Lemon Law" and product liability claims typical in the RV industry. Although we have an insurance policy with a $35.0 million limit covering product liability, we are self-insured for the first $2.5 million of product liability claims on a per occurrence basis, with a $6.0 million aggregate per policy year. We cannot be certain that our insurance coverage will be sufficient to cover all future claims against us, which may have a material adverse effect on our results of operations and financial condition. Any increase in the frequency and size of these claims, as compared to our experience in prior years, may cause the premium that we are required to pay for insurance to rise significantly. Product liability claims may also cause us to pay punitive damages, not all of which are covered by our insurance. In addition, if product liability claims rise to a level of frequency or size that are significantly higher than similar claims made against our competitors, our reputation and business may be harmed.
Information Systems and Web Applications
We rely on our information systems and web applications to support our business operations, including but not limited to procurement, supply chain, manufacturing, distribution, warranty administration, invoicing and collection of payments. We use information systems to report and audit our operational results. Additionally, we rely upon information systems in our sales, marketing, human resources and communication efforts. Due to our reliance on our information systems, our business processes may be negatively impacted in the event of substantial disruption of service. Further, misuse, leakage or falsification of information could result in a violation of privacy laws and damage our reputation which could, in turn, have a negative impact on our results.
In addition to our general reliance on information systems, we began implementation of a new ERP system at the end of fiscal year 2015. The implementation has been staged in several subprojects and many have been completed. The final phases of the project relate to motorhome products and are planned for late Fiscal 2017. Though we perform planning and testing to reduce risks associated with such a complex, enterprise-wide systems change, failure to meet requirements of the business could disrupt our business and harm our reputation, which may result in decreased sales, increased overhead costs, excess or obsolete inventory, and product shortages, causing our business, reputation, financial condition, and operating results to suffer.
Data Security
We have security systems in place with the intent of maintaining the physical security of our facilities and protecting our customers', clients' and suppliers' confidential information and information related to identifiable individuals against unauthorized access through our information systems or by other electronic transmission or through the misdirection, theft or loss of physical media. These include, for example, the appropriate encryption of information. Despite such efforts, we are subject to breach of security systems which may result in unauthorized access to our facilities or the information we are trying to protect. Because the technologies used to obtain unauthorized access are constantly changing and becoming increasingly more sophisticated and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement sufficient preventative measures. If unauthorized parties gain physical access to one of our facilities or electronic access to our information systems or such information is misdirected, lost or stolen during transmission or transport, any theft or misuse of such information could result in, among other things, unfavorable publicity, governmental inquiry and oversight, difficulty in marketing our services, allegations by our customers and clients that we have not performed our contractual obligations, litigation by affected parties and

10


possible financial obligations for damages related to the theft or misuse of such information, any of which could have a material adverse effect on our business.
Government Regulation
We are subject to numerous federal, state and local regulations and the following summarizes some, but not all, of the laws and regulations that apply to us.
Federal Motor Vehicle Safety Standards govern the design, manufacture and sale of our products, which standards are promulgated by the National Highway Safety Administration (NHTSA).  NHTSA requires manufacturers to recall and repair vehicles which are non-compliant with a Federal Motor Vehicle Safety Standard or contain safety defects.  Any major recalls of our vehicles, voluntary or involuntary, could have a material adverse effect on our results of operations, financial condition and cash flows.  While we believe we are substantially in compliance with the foregoing laws and regulations as they currently exist, amendments to any of these regulations or the implementation of new regulations could significantly increase the cost of testing, manufacturing, purchasing, operating or selling our products and could have a material adverse effect on our results of operations, financial condition, and cash flows.  In addition, our failure to comply with present or future regulations could result in Federal fines being imposed on us, potential civil and criminal liability, suspension of sales or production or cessation of operations
We are also subject to federal and numerous state consumer protection and unfair trade practice laws and regulations relating to the sale, transportation and marketing of motor vehicles, including so-called "Lemon Laws." Federal and state laws and regulations also impose upon vehicle operators various restrictions on the weight, length and width of motor vehicles, including motorhomes that may be operated in certain jurisdictions or on certain roadways. Certain jurisdictions also prohibit the sale of vehicles exceeding length restrictions.
Failure to comply with NYSE and SEC laws or regulations could have an adverse impact on our business. Additionally, amendments to these regulations and the implementation of new regulations could increase the cost of manufacturing, purchasing, operating or selling our products and therefore could have an adverse impact on our business.
The SEC adopted rules pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act setting forth new disclosure requirements concerning the use or potential use of certain minerals, deemed conflict minerals (tantalum, tin, gold and tungsten), that are mined from the Democratic Republic of Congo and adjoining countries. These requirements necessitate due diligence efforts on our part to assess whether such minerals are used in our products in order to make the relevant required disclosures that began in May 2014. We incurred costs and diverted internal resource to comply with these new disclosure requirements, including for diligence to determine the sources of those minerals that may be used or necessary to the production of our products. Compliance costs may increase in future periods. We may face reputational challenges that could impact future sales if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products.
Finally, federal and state authorities also have various environmental control standards relating to air, water, noise pollution and hazardous waste generation and disposal which affect us and our operations. Failure by us to comply with present or future laws and regulations could result in fines being imposed on us, potential civil and criminal liability, suspension of production or operations, alterations to the manufacturing process, or costly cleanup or capital expenditures, any or all of which could have a material adverse effect on our results of operations.
Climate Change and Related Regulation
There is growing concern from members of the scientific community and the general public that an increase in global average temperatures due to emissions of greenhouse gases ("GHG") and other human activities have or will cause significant changes in weather patterns and increase the frequency and severity of natural disasters. We are currently subject to rules limiting emissions and other climate related rules and regulations in certain jurisdictions where we operate. In addition, we may become subject to additional legislation and regulation regarding climate change, and compliance with any new rules could be difficult and costly. Concerned parties, such as legislators, regulators, and non-governmental organizations, are considering ways to reduce GHG emissions. Foreign, federal, state, and local regulatory and legislative bodies have proposed various legislative and regulatory measures relating to climate change, regulating GHG emissions, and energy policies. If such legislation is enacted, we could incur increased energy, environmental, and other costs and capital expenditures to comply with the limitations. Due to uncertainty in the regulatory and legislative processes, as well as the scope of such requirements and initiatives, we cannot currently determine the effect such legislation and regulation may have on our products and operations.
Anti-takeover Effect
Provisions of our articles of incorporation, by-laws, the Iowa Business Corporation Act and provisions in our credit facilities and certain of our compensation programs that we may enter into from time to time could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders. As part of our acquisition of Grand Design, we will issue $105 million of common stock to the owners of Grand Design. As part of the transaction, the owners have agreed to standstill covenants that prohibit these parties from taking certain hostile actions against us for up to one year. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.


11


Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
Our principal manufacturing, maintenance and service operations are conducted in multi-building complexes owned or leased by us. The following sets forth our material facilities as of August 27, 2016:
Location
Facility Type/Use
# of
Buildings
Owned or
Leased
Square
Footage
Forest City, Iowa
Manufacturing, maintenance, service and office
32

Owned
1,546,000

Forest City, Iowa
Warehouse
3

Owned
459,000

Charles City, Iowa
Manufacturing
2

Owned
161,000

Waverly, Iowa
Manufacturing
1

Owned
33,000

Junction City, Oregon
Manufacturing, service and office
10

Owned
305,000

Middlebury, Indiana
Manufacturing and office
4

Owned
277,000

Lake Mills, Iowa (1)
Manufacturing
1

Leased
99,000

Burnsville, Minnesota (2)
Office
1

Leased
2,000

 
 
54

 
2,882,000

(1) In November 2013 we entered into a five-year lease with the city of Lake Mills, Iowa for a manufacturing plant with two options to renew for five years each.
(2) In April, 2016 we entered into a 13-month lease, expiring in April 2017, for an office facility in Burnsville, Minnesota.

The facilities that we own in Forest City, Charles City and Waverly are located on a total of approximately 320 acres of land. The facilities that we own in Middlebury, Indiana are located on approximately 30 acres of land. Most of our buildings are of steel or steel and concrete construction and are protected from fire with high‑pressure sprinkler systems, dust collector systems, automatic fire doors and alarm systems. We believe that our facilities and equipment are well maintained, in excellent condition and suitable for the purposes for which they are intended.

In December 2015, we purchased 6 buildings and approximately 34 acres of land in Junction City, Oregon. The buildings are being utilized to manufacture motorhomes. In January 2016, we purchased an additional 4 buildings and approximately 8 acres of land in Junction City to be utilized as a motorhome parts and services facility.

Under terms of our credit facility, as further described in Note 6, we have encumbered substantially all of our real property for the benefit of the lender under such facility.

Item 3. Legal Proceedings
We are involved in various legal proceedings which are ordinary and routine 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.

Item 4. Mine Safety Disclosure

Not Applicable.

PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the New York and Chicago Stock Exchanges with the ticker symbol of WGO.

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Below are the New York Stock Exchange high, low and closing prices of Winnebago Industries, Inc. common stock for each quarter of Fiscal 2016 and Fiscal 2015:
Fiscal 2016
High
Low
Close
 
Fiscal 2015
High
Low
Close
First Quarter
$
22.59

$
17.80

$
22.23

 
First Quarter
$
25.79

$
20.25

$
25.18

Second Quarter
23.30

15.41

18.80

 
Second Quarter
26.44

18.82

23.21

Third Quarter
23.09

18.68

18.73

 
Third Quarter
24.26

20.00

21.73

Fourth Quarter
24.39

20.32

23.91

 
Fourth Quarter
24.73

18.98

20.42

 
Holders
Shareholders of record as of October 10, 2016: 2,893
Dividends Paid Per Share
Date Paid
 
Amount
November 25, 2015
 
$
0.10

January 27, 2016
 
0.10

April 27, 2016
 
0.10

July 27, 2016
 
0.10

Total
 
$
0.40

On October 12, 2016, our Board of Directors declared a cash dividend of $0.10 per outstanding share of common stock. The Board currently intends to continue to pay quarterly cash dividends payments in the future; however, declaration of future dividends, if any, will be based on several factors including our financial performance, outlook and liquidity.
Our credit facility, as further described in Note 6, contains covenants that limit our ability to pay certain cash dividends without impacting financial ratio covenants.   
Issuer Purchases of Equity Securities
Our credit facility, as further described in Note 6, contains covenants that limits our ability, among other things, except for limited purchases of our common stock from employees, to make distributions or payments with respect to or purchases of our common stock without consent of the lenders.
On December 19, 2007, the Board of Directors authorized the repurchase of outstanding shares of our common stock, depending on market conditions, for an aggregate consideration of up to $60 million. There is no time restriction on this authorization. During Fiscal 2016, 163,237 shares were repurchased under the authorization, at an aggregate cost of approximately $3.1 million, or $18.78 per share. Of these shares, 36,513 were repurchased from employees who vested in Winnebago Industries shares during the fiscal year and elected to pay their payroll tax via delivery of common stock as opposed to cash. As of August 27, 2016, there was approximately $4.0 million remaining under this authorization.
This table provides information with respect to purchases by us of shares of our common stock during each fiscal month of the fourth quarter of Fiscal 2016:
Period
Total Number
of Shares
Purchased
Average Price
Paid per Share
Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Approximate Dollar Value
of Shares That May Yet Be
Purchased Under the
Plans or Programs
05/29/16 - 07/02/16
364

$
21.52

364

 
 
$
3,997,000

 
07/03/16 - 07/30/16

$


 
 
$
3,997,000

 
07/31/16 - 08/27/16

$


 
 
$
3,997,000

 
Total
364

$
21.52

364

 
 
$
3,997,000

 

13


Equity Compensation Plan Information
The following table provides information as of August 27, 2016 with respect to shares of our common stock that may be issued under our existing equity compensation plans:
 
(a)
(b)
 
(c)

Plan Category
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
 Warrants and Rights
Weighted Average
Exercise Price of
Outstanding Options,
 Warrants and Rights
Number of Securities
 Remaining Available for
Future Issuance Under
Equity Compensation Plans
 (Excluding Securities
 Reflected in (a))
Equity compensation plans
  approved by shareholders - 2004 Plan (1)
43,127

(1) 

(3) 

 
Equity compensation plans
  approved by shareholders - 2014 Plan
250,754

(2) 
$
16.67

(3) 
2,599,258

(4) 
Equity compensation plans not
  approved by shareholders (5)
86,506

(6) 

(3) 

(7) 
Total
380,387

 
$
16.67

 
2,599,258

 
(1) 
This number represents unvested share awards granted under the 2004 Plan. No new grants may be made under the 2004 Plan.
(2) This number represents stock options and unvested stock awards granted under the 2014 Omnibus Equity, Performance Award, and Incentive Compensation Plan, as amended ("2014 Plan"). The 2014 Plan replaced the 2004 Plan effective January 1, 2014.
(3) 
This number represents the weighted average exercise price of outstanding stock options only. Restricted share awards do not have an exercise price so weighted average is not applicable.
(4) 
This number represents stock options available for grant under the 2014 Plan as of August 27, 2016.
(5) 
Our sole equity compensation plan not previously submitted to our shareholders for approval is the Directors' Deferred Compensation Plan, as amended ("Directors' Plan"). The Board of Directors may terminate the Directors' Plan at any time. If not terminated earlier, the Directors' Plan will automatically terminate on June 30, 2023. For a description of the key provisions of the Directors' Plan, see the information in our Proxy Statement for the Annual Meeting of Shareholders scheduled to be held December 13, 2016 under the caption "Director Compensation," which information is incorporated by reference herein.
6) 
Represents shares of common stock issued to a trust which underlie stock units, payable on a one-for-one basis, credited to stock unit accounts as of August 27, 2016 under the Directors' Plan.
(7) 
The table does not reflect a specific number of stock units which may be distributed pursuant to the Directors' Plan. The Directors' Plan does not limit the number of stock units issuable thereunder. The number of stock units to be distributed pursuant to the Directors' Plan will be based on the amount of the director's compensation deferred and the per share price of our common stock at the time of deferral.


14


Performance Graph
The following graph compares our five-year cumulative total shareholder return (including reinvestment of dividends) with the cumulative total return on the Standard & Poor's 500 Index and a peer group. The peer group companies consisting of Thor Industries, Inc., Polaris Industries, Inc. and Brunswick Corporation were selected by us as they also manufacture recreation products. It is assumed in the graph that $100 was invested in our common stock, in the Standard & Poor's 500 Index and in the stocks of the peer group companies on August 28, 2010 and that all dividends received within a quarter were reinvested in that quarter. In accordance with the guidelines of the SEC, the shareholder return for each entity in the peer group index has been weighted on the basis of market capitalization as of each annual measurement date set forth in the graph. a201610-k_chartx42913.jpg
 
Base Period
 
Company/Index
8/27/11
8/25/12
 
8/31/13
 
8/30/14
 
8/29/15
 
8/27/16
Winnebago Industries, Inc.
100.00

158.96

 
321.54

 
357.05

 
299.84

 
357.95

S&P 500 Index
100.00

122.47

 
144.97

 
181.57

 
183.96

 
205.06

Peer Group
100.00

151.94

 
234.38

 
294.85

 
294.23

 
267.91


Item 6. Selected Financial Data
 
Fiscal Years Ended
(In thousands, except EPS)
8/27/16
 
8/29/15
 
8/30/14
 
8/31/13 (1)
 
8/25/12 (2)
Income statement data:
 
 
 
 
 
 
 
 
 
Net revenues
$
975,226

 
$
976,505

 
$
945,163

 
$
803,165

 
$
581,679

Net income
45,496

 
41,210

 
45,053

 
31,953

 
44,972

 
 
 
 
 
 
 
 
 
 
Per share data:
 
 
 
 
 
 
 
 
 
Net income - basic
1.69

 
1.53

 
1.64

 
1.14

 
1.54

Net income - diluted
1.68

 
1.52

 
1.64

 
1.13

 
1.54

Dividends declared and paid per common share
0.40

 
0.36

 

 

 

 
 
 
 
 
 
 
 
 
 
Balance sheet data:
 
 
 
 
 
 
 
 
 
Total assets
390,718

 
362,174

 
358,302

 
309,145

 
286,072

(1) The fiscal year ended August 31, 2013 contained 53 weeks; all other fiscal years contained 52 weeks.
(2) In Fiscal 2012, we recorded a non-cash tax benefit of $37.7 million through the reduction of our Fiscal 2009 deferred tax asset valuation allowance.
 

15


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in eight sections:


Our MD&A should be read in conjunction with the Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Executive Overview
Winnebago Industries, Inc. is a leading US manufacturer of RVs with a proud history of manufacturing RV products for more than 55 years. We currently produce a large majority of our motorhomes in vertically integrated manufacturing facilities in Iowa and we produce all of our travel trailer and fifth wheel trailers in Indiana. We are in the process of expanding some motorhome manufacturing to Junction City, Oregon. We distribute our products primarily through independent dealers throughout the US and Canada, who then retail the products to the end consumer.

We recently announced our entry into a Securities Purchase Agreement pursuant to which we intend to acquire Grand Design, a fast-growing towables manufacturer in Middlebury, Indiana for approximately $500 million. Grand Design manufactures travel trailers and fifth wheel products. With this acquisition, we expect to have a broader and more balanced portfolio of motorized and towable products and intend to capitalize on the opportunities across the RV market and to drive improved profitability and long-term value for shareholders.

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.
 
 
Rolling 12 Months Through August
 
Calendar Year
US and Canada
 
2016
2015
 
2015
2014
2013
Motorized A, B, C
 
18.6
%
20.8
%
 
20.4
%
20.7
%
18.6
%
 
 
 
 
 
 
 
 
Travel trailer and fifth wheels
 
1.1
%
0.9
%
 
0.9
%
0.8
%
1.0
%

Highlights of Fiscal 2016:
Consolidated revenues, gross profit, and operating income were comparable for Fiscal 2016 as compared to Fiscal 2015. Quarterly results for the past two fiscal years are illustrated as follows:
(In thousands)
Revenues
 
Gross Profit
 
Gross Margin
 
Operating
Income
 
Operating
Margin
2016
2015
 
2016
2015
 
2016
2015
 
2016
2015
 
2016
2015
Q1
$
214,223

224,403

 
$
25,249

$
24,386

 
11.8
%
10.9
%
 
$
12,759

$
14,442

 
6.0
%
6.4
%
Q2
225,672

234,543

 
25,276

24,258

 
11.2
%
10.3
%
 
13,503

11,948

 
6.0
%
5.1
%
Q3
272,077

266,510

 
30,257

28,183

 
11.1
%
10.6
%
 
20,593

16,118

 
7.6
%
6.0
%
Q4
263,254

251,049

 
31,867

28,053

 
12.1
%
11.2
%
 
18,886

16,911

 
7.2
%
6.7
%
Total
$
975,226

$
976,505

 
$
112,649

$
104,880

 
11.6
%
10.7
%
 
$
65,741

$
59,419

 
6.7
%
6.1
%
  
Operational and financial performance:
Our motorized wholesale deliveries increased by approximately 2.3% in Fiscal 2016 as compared to Fiscal 2015. Strong demand for our Class B and Class C products was partially offset by weaker demand in Class A products. We anticipate continued strong demand in the Class B and C categories.
Our Towables operation generated operating income of $4.6 million in Fiscal 2016 compared to operating income of $2.6 million in Fiscal 2015. Towable net revenue experienced growth of approximately 25%, this was a significant driver in the 77% increase in operating income. Net revenue growth was enhanced in part by the increase in our dealer network. The growth in

16


operating income was also aided by the operating leverage within the business model and a reduction in our raw material costs.
Total revenue declined modestly in 2016 due mainly to other manufactured products revenues which decreased by $21.1 million. This was primarily due to our exit of the aluminum extrusion and bus businesses. Both of these operations provided very low margins. Although total revenues did decline, gross profit and operating income increased in part due to the exit of these low margin operations as well as operating improvement in motorized and towable operations.
The continued strong financial performance of our business has allowed us to make substantial investments in Fiscal 2016 including the implementation of an ERP system and purchase of our Junction City, Oregon plant.
Industry Outlook
Key reported statistics for the North American RV industry are as follows:
Wholesale unit shipments: RV product delivered to the dealers, which is reported monthly by RVIA
Retail unit registrations: consumer purchases of RVs from dealers, which is reported by Stat Surveys

We track RV Industry conditions using these key statistics to monitor trends and evaluate and understand our performance relative to the overall industry. The rolling twelve months shipment and retail information for 2016 and 2015, as noted below, illustrates that the RV industry continues to grow at the wholesale and retail level. We believe retail demand is the key driver to continued growth in the industry.
 
 
US and Canada Industry
 
 
Wholesale Unit Shipments per RVIA
 
Retail Unit Registrations per Stat Surveys
 
 
Rolling 12 Months through August
 
Rolling 12 Months through August
(In units)
 
2016
2015
Increase
Change
 
2016
2015
Increase
Change
Towable (1)
 
342,154

309,039

33,115

10.7
%
 
336,604

306,987

29,617

9.6
%
Motorized (2)
 
52,648

45,248

7,400

16.4
%
 
47,953

43,370

4,583

10.6
%
Combined
 
394,802

354,287

40,515

11.4
%
 
384,557

350,357

34,200

9.8
%
(1) 
Towable: Fifth wheel and travel trailer products
(2) 
Motorized: Class A, B and C products

The most recent towable and motorized RVIA wholesale shipment forecasts for calendar year 2016 and 2017 as noted in the table below illustrates continued projected growth of the industry. The outlook for future growth in RV sales is based on continued modest gains in job and disposable income prospects as well as low inflation, and takes into account the impact of slowly rising interest rates, a strong U.S. dollar and continued weakness in energy production and prices.
 
 
Calendar Year
Wholesale Unit Shipment Forecast per RVIA (1)
 
2017

2016

Unit Change
% Change
Towable
 
344,300

340,600

3,700

1.1
%
Motorized
 
53,900

52,200

1,700

3.3
%
Combined
 
398,200

392,800

5,400

1.4
%
(1) 
Prepared by Dr. Richard Curtin of the University of Michigan Consumer Survey Research Center for RVIA and reported in the Roadsigns RV Fall 2016 Industry Forecast Issue.

Company Outlook
Based on our profitable operating results in recent years, we believe that we have demonstrated our ability to maintain our liquidity, cover operations costs, recover fixed assets, and maintain physical capacity at present levels. Our entrance into the towable market has been successful and we are seeing high growth rates in revenues and earnings in a market significantly larger than the motorized market.

Our motorized production facilities are located in largely rural areas of northern Iowa. In addition, the unemployment rate in these areas is currently low. To the extent that we have been able to increase the production rate, we have also incurred incremental operating expenses associated with overtime and workers compensation expense. To overcome these labor shortages we first expanded within the state of Iowa. In Fiscal 2014, we leased an additional manufacturing facility in Lake Mills, Iowa and in the third quarter of Fiscal 2015 we purchased a separate facility in Waverly, Iowa which is also in production. We also exited our bus and aluminum extrusion operation to better deploy our labor in Forest City, Iowa.

In the second quarter of 2016, we purchased a production facility in Junction City, Oregon from a former motorized RV producer. We are expanding some motorhome manufacturing to Junction City in order to diversify our geographical locations. The site also provides a west coast service option for our customers.


17


We expect to continue investing and building for Winnebago’s future. We anticipate modest motorized deliveries growth, which is in line with RVIA’s projection of 3% growth for the industry. We’ve taken steps to improve motorized labor efficiency and expect to see continued improvement in Fiscal 2017. In Towables, we anticipate continued double digit growth, with further penetration of our new products and further expansion of our distribution base. We believe our acquisition of Grand Design, if consummated, will also help fuel this growth.

Our order backlog was as follows:
 
 
As Of
Backlog(1)
 
August 27,
2016
August 29,
2015
(Decrease)
Increase
%
Change
Motorhomes (in units)
 
1,139

1,754

(615
)
(35.1
)%
Motorhomes (approximate revenue in thousands)
 
$
107,621

$
156,353

$
(48,732
)
(31.2
)%
Towables (in units)
 
492

248

244

98.4
 %
Towables (approximate revenue in thousands)
 
$
8,420

$
6,171

$
2,249

36.4
 %
(1) 
We include in our backlog all accepted purchase orders from dealers to be shipped within the next six months. Orders in backlog can be canceled or postponed at the option of the dealer at any time without penalty and, therefore, backlog may not necessarily be an accurate measure of future sales.

Our unit dealer inventory was as follows:
 
 
As Of
 
 
August 27,
2016
August 29,
2015
Increase
%
Change
Motorhomes
 
4,345

4,072

273

6.7
%
Towables
 
2,156

1,663

493

29.6
%

We believe that the level of our dealer inventory at the end of Fiscal 2016 is reasonable given the improved retail demand and current sales order backlog of our product. A key metric used to evaluate dealer inventory levels is the retail turn rate (12 month retail volume/current deliver inventory). At the end of Fiscal 2016 the retail turn rate was over 2.0 turns for motorized product. Historically, turn rates above 2.0 have been an indication of a balanced dealer inventory and thus we believe motorized dealer inventory levels are in alignment with retail demand.

In order to generate sales growth, we have expanded our towables distribution base and thus dealer inventory was higher throughout the year than in previous years. On a year over year basis, towables dealer inventory increased by 29.6% which is reasonable in anticipation of continued sales growth which increased 57.3% in the last year on a unit basis.

ERP
In the second quarter of Fiscal 2015, the Board of Directors approved the strategic initiative of implementing an ERP system to replace our legacy business applications. The new ERP platform will provide better support for our changing business needs and plans for future growth. Our initial cost estimates have grown for additional needs of the business such as the acquisition of the Junction City, Oregon plant and the opportunity to integrate the ERP system with additional manufacturing systems. The project includes software, external implementation assistance and increased internal staffing directly related to this initiative. We anticipate that approximately 40% of the cost will be immediately expensed over the life of the project and 60% will be capitalized. The following table illustrates the cumulative project costs:
 
 
Fiscal
 
Fiscal 2016
 
Cumulative
(In thousands)
 
2015
 
Q1
Q2
Q3
Q4
Total
 
Investment
Capitalized
 
$
3,291

 
$
1,412

$
1,798

$
1,898

$
2,690

$
7,798

 
$
11,089

Expensed
 
2,528

 
1,363

1,432

1,742

1,393

5,930

 
8,458

Total
 
$
5,819

 
$
2,775

$
3,230

$
3,640

$
4,083

$
13,728

 
$
19,547

(1) 
During Fiscal 2016, we placed in service $6.3 million of our cumulative investment. These capitalized investments are amortized over a 10‑year life.

Impact of Inflation
Materials cost is the primary component in the cost of our products. Historically, the impact of inflation on our operations has not been significantly detrimental, as we have historically been able to adjust our prices to reflect the inflationary impact on the cost of manufacturing our products. While we have historically been able to pass on these increased costs, in the event we are unable to continue to do so due to market conditions, future increases in manufacturing costs could have a material adverse effect on our results of operations.


18


Results of Operations
Fiscal 2016 Compared to Fiscal 2015
The following is an analysis of changes in key items included in the statements of operations for the fiscal year ended August 27, 2016 compared to the fiscal year ended August 29, 2015:
 
Year Ended
(In thousands, except percent and
per share data)
August 27,
2016
% of
Revenues(1)
August 29,
2015
% of
Revenues(1)
(Decrease)
Increase
%
Change
Net revenues
$
975,226

100.0
%
$
976,505

100.0
%
$
(1,279
)
(0.1
)%
Cost of goods sold
862,577

88.4
%
871,625

89.3
%
(9,048
)
(1.0
)%
Gross profit
112,649

11.6
%
104,880

10.7
%
7,769

7.4
 %
 
 
 
 
 
 
 
Selling
19,823

2.0
%
19,161

2.0
%
662

3.5
 %
General and administrative
27,085

2.8
%
25,838

2.6
%
1,247

4.8
 %
Impairment on fixed assets

%
462

%
(462
)
NMF

Operating expenses
46,908

4.8
%
45,461

4.7
%
1,447

3.2
 %
 
 
 
 
 
 
 
Operating income
65,741

6.7
%
59,419

6.1
%
6,322

10.6
 %
Non-operating income
457

%
115

%
342

297.4
 %
Income before income taxes
66,198

6.8
%
59,534

6.1
%
6,664

11.2
 %
Provision for taxes
20,702

2.1
%
18,324

1.9
%
2,378

13.0
 %
Net income
$
45,496

4.7
%
$
41,210

4.2
%
$
4,286

10.4
 %
Diluted income per share
$
1.68

 
$
1.52

 
$
0.16

10.5
 %
Diluted average shares outstanding
27,033

 
27,051

 




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

Motorhome unit deliveries and ASP, net of discounts, consisted of the following:
 
Year Ended
 
August 27,
2016
Product
Mix % (1)
 
August 29,
2015
Product
Mix % (1)
 
(Decrease)
Increase
%
Change
Class A
2,925

31.4
%
 
3,442

37.8
%
 
(517
)
(15.0
)%
Class B
1,239

13.3
%
 
991

10.9
%
 
248

25.0
 %
Class C
5,143

55.3
%
 
4,664

51.3
%
 
479

10.3
 %
Total motorhome deliveries
9,307

100.0
%
 
9,097

100.0
%
 
210

2.3
 %
 
 
 
 
 
 
 
 
 
Motorhome ASP
$
93,116

 
 
$
94,841

 
 
$
(1,725
)
(1.8
)%
(1) Percentages and dollars may not add due to rounding differences.

Towables unit deliveries and ASP, net of discounts, consisted of the following:
 
Year Ended
 
August 27,
2016
Product
Mix % (1)
 
August 29,
2015
Product
Mix % (1)
 
Increase
(Decrease)
%
Change
Travel trailer
3,613

86.0
%
 
2,182

81.7
%
 
1,431

65.6
 %
Fifth wheel
586

14.0
%
 
488

18.3
%
 
98

20.1
 %
Total towable deliveries
4,199

100.0
%
 
2,670

100.0
%
 
1,529

57.3
 %
 
 
 
 
 
 
 
 
 
Towable ASP
$
21,321

 
 
$
27,012

 
 
$
(5,691
)
(21.1
)%
(1) Percentages and dollars may not add due to rounding differences.

19



Net revenues consisted of the following:
 
Year Ended
(In thousands)
August 27, 2016
 
August 29, 2015
 
Increase
(Decrease)
%
Change
Motorhomes (1)
$
875,004

89.7
%
 
$
872,915

89.4
%
 
$
2,089

0.2
 %
Towables (2)
89,412

9.2
%
 
71,684

7.3
%
 
17,728

24.7
 %
Other manufactured products
10,810

1.1
%
 
31,906

3.3
%
 
(21,096
)
(66.1
)%
Total net revenues
$
975,226

100.0
%
 
$
976,505

100.0
%
 
$
(1,279
)
(0.1
)%
(1) 
Includes motorhome units, parts, and services
(2) 
Includes towable units and parts

The increase in motorhome net revenues of $2.1 million or 0.2% was primarily attributed to a 2.3% increase in unit deliveries in Fiscal 2016.
Unit growth was 25.0% for Class B and and 10.3% for Class C products which was partially offset by a decline in demand for higher priced Class A products.
Total motorhome ASP decreased 1.8% in Fiscal 2016 compared to Fiscal 2015 because Fiscal 2016 saw more deliveries of lower priced Class B and C unit sales. ASPs did increase in every motorhome product category during Fiscal 2016, however, this did not offset the decline due to the lower mix of Class A products in Fiscal 2016.

Towables revenues were $89.4 million in Fiscal 2016 compared to revenues of $71.7 million in Fiscal 2015. ASP decreased 21.1% due to the mix of new products while towable unit deliveries increased by 57.3%.

Other manufactured products decreased by $21.1 million due to our exit of the aluminum extrusion and bus operations. Both of these operations provided very low margins while consuming production labor in Forest City, Iowa. Labor has been redirected to higher margin motorhome production.

Cost of goods sold was $862.6 million, or 88.4% of net revenues for Fiscal 2016 compared to $871.6 million, or 89.3% of net revenues for Fiscal 2015 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% from 84.0% primarily due to improved material sourcing, product shift to a more favorable mix, and cessation of bus and virtually all aluminum extrusion operations which were less profitable than the remainder of our RV products.
Fixed overhead (manufacturing support labor, depreciation and facility costs) and research and development-related costs were comparable at 5.2% of net revenues compared to 5.2% in the prior year.
All factors considered, gross profit increased from 10.7% to 11.6% of net revenues.
Selling expenses were 2.0% of net revenues in both Fiscal 2016 and Fiscal 2015, respectively. Selling expenses are largely variable and remained proportional to revenues in Fiscal 2016.
General and administrative expenses were 2.8% and 2.6% of net revenues in Fiscal 2016 and Fiscal 2015, respectively. General and administrative expenses increased $1.2 million, or 4.8%, in Fiscal 2016. This increase was due primarily to an increase in ERP related expenses of $3.4 million, bonuses earned of $2.8 million, and $700,000 in compensation, benefits and recruiting costs associated with strengthening the management team, and $355,000 in transaction related costs pertaining to the pending acquisition of Grand Design. These increases were partially offset by favorable legal settlements of $3.4 million in Fiscal 2016, a reduction in professional fees of $1.6 million incurred in Fiscal 2015 related to the strategic sourcing program, and a reduction of $1.0 million in costs associated with the former CEO retirement agreement in Fiscal 2015.
During Fiscal 2015, we also recorded an asset impairment on our corporate plane of $462,000.
Non-operating income increased $342,000, in Fiscal 2016, primarily due to higher proceeds from COLI policies than we received in Fiscal 2015.

The effective tax rate for Fiscal 2016 was 31.3% compared to 30.8% in Fiscal 2015. The increase in the effective tax rate is due to a reduction in the amount of the Domestic Production Activities Deduction applicable in Fiscal 2016 as compared to Fiscal 2015. The reduction in this deduction was partially offset by other tax credits. See Note 10.

Net income and diluted income per share were $45.5 million and $1.68 per share, respectively, for Fiscal 2016. In Fiscal 2015, net income was $41.2 million and diluted income per share was $1.52.


20


Fiscal 2015 Compared to Fiscal 2014

The following is an analysis of changes in key items included in the statements of operations for the fiscal year ended August 29, 2015 compared to the fiscal year ended August 30, 2014:
 
Year Ended
(In thousands, except percent and per share data)
August 29,
2015
% of
Revenues(1)
August 30,
2014
% of
Revenues(1)
Increase
(Decrease)
%
Change
Net revenues
$
976,505

100.0
%
$
945,163

100.0
 %
$
31,342

3.3
 %
Cost of goods sold
871,625

89.3
%
841,166

89.0
 %
30,459

3.6
 %
Gross profit
104,880

10.7
%
103,997

11.0
 %
883

0.8
 %
 
 
 
 
 
 
 
Selling
19,161

2.0
%
18,293

1.9
 %
868

4.7
 %
General and administrative
25,838

2.6
%
22,424

2.4
 %
3,414

15.2
 %
(Gain) loss on real estate
462

%
(629
)
(0.1
)%
1,091

NMF

Operating expenses
45,461

4.7
%
40,088

4.2
 %
5,373

13.4
 %
 
 
 
 
 
 
 
Operating income
59,419

6.1
%
63,909

6.8
 %
(4,490
)
(7.0
)%
Non-operating income
115

%
768

0.1
 %
(653
)
(85.0
)%
Income before income taxes
59,534

6.1
%
64,677

6.8
 %
(5,143
)
(8.0
)%
Provision for taxes
18,324

1.9
%
19,624

2.1
 %
(1,300
)
(6.6
)%
Net income
$
41,210

4.2
%
$
45,053

4.8
 %
$
(3,843
)
(8.5
)%
Diluted income per share
$
1.52

 
$
1.64

 
$
(0.12
)
(7.3
)%
Diluted average shares outstanding
27,051

 
27,545

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

Motorhome unit deliveries and ASP, net of discounts, consisted of the following:
 
Year Ended
 
August 29,
2015
Product
Mix %(2)
 
August 30,
2014 (1)
Product
Mix %
(2)
 
(Decrease)
Increase
%
Change
Class A
3,442

37.8
%
 
4,466

51.0
%
 
(1,024
)
(22.9
)%
Class B
991

10.9
%
 
751

8.6
%
 
240

32.0
 %
Class C
4,664

51.3
%
 
3,538

40.4
%
 
1,126

31.8
 %
Total motorhome deliveries
9,097

100.0
%
 
8,755

100.0
%
 
342

3.9
 %
 
 
 
 
 
 
 
 
 
Motorhome ASP
$
94,841

 
 
$
96,437

 
 
$
(1,596
)
(1.7
)%
(1) An additional 343 motorhomes were delivered in Fiscal 2014 but not included in wholesale deliveries as presented in the table above as the units were subject to repurchase option.
(2) Percentages and dollars may not add due to rounding differences.

Towables deliveries and ASP, net of discounts, consisted of the following:
 
Year Ended
 
August 29,
2015
Product
Mix %(1)
 
August 30,
2014
Product
Mix %
(1)
 
Increase
%
Change
Travel trailer
2,182

81.7
%
 
2,052

81.8
%
 
130

6.3
%
Fifth wheel
488

18.3
%
 
457

18.2
%
 
31

6.8
%
Total towable unit deliveries
2,670

100.0
%
 
2,509

100.0
%
 
161

6.4
%
 
 
 
 
 
 
 
 
 
Towable ASP
$
27,012

 
 
$
23,312

 
 
$
3,700

15.9
%
(1) 
Percentages and dollars may not add due to rounding differences.


21


Net revenues consisted of the following:
 
Year Ended
(In thousands)
August 29, 2015
 
August 30, 2014
 
Increase
(Decrease)
%
Change
Motorhomes (1)
$
872,915

89.4
%
 
$
853,488

90.3
%
 
$
19,427

2.3
 %
Towables (2)
71,684

7.3
%
 
58,123

6.1
%
 
13,561

23.3
 %
Other manufactured products
31,906

3.3
%
 
33,552

3.6
%
 
(1,646
)
(4.9
)%
Total net revenues
$
976,505

100.0
%
 
$
945,163

100.0
%
 
$
31,342

3.3
 %
(1) 
Includes motorhome units, parts and service
(2) 
Includes towable units and parts

The increase in motorhome net revenues of $19.4 million or 2.3% was primarily attributed to a 3.9% increase in unit deliveries in Fiscal 2015.
The increase in incremental revenues was due to the change in our sales agreement with Apollo, a US RV rental company. During Fiscal 2015 we delivered 535 rental units to Apollo. During Fiscal 2014 we delivered 520 rental units to Apollo, of which only 177 were reported as motorhome sales; the remaining 343 were recorded as operating leases due to a repurchase obligation in Fiscal 2014.
Total motorhome ASP decreased 1.7% in Fiscal 2015 compared to Fiscal 2014 due to a mix shift from higher priced Class A products in Fiscal 2014 to lower priced Class B and C unit sales in Fiscal 2015. ASPs increased in every product category during Fiscal 2015.

Towables revenues were $71.7 million in Fiscal 2015 compared to revenues of $58.1 million in Fiscal 2014. ASP increased 15.9% and towable unit deliveries increased by 6.4%.

Cost of goods sold was $871.6 million, or 89.3% of net revenues for Fiscal 2015 compared to $841.2 million, or 89.0% of net revenues for Fiscal 2014 due to the following:
Total variable costs (materials, direct labor, variable overhead, delivery expense and warranty), as a percent of net revenues, increased to 84.0% from 83.7% primarily due to increased warranty expense and related warranty recall reserve and higher workers compensation expense.
Fixed overhead (manufacturing support labor, depreciation and facility costs) and research and development-related costs decreased to 5.2% of net revenues compared to 5.3%.
All factors considered, gross profit decreased from 11.0% to 10.7% of net revenues.
Selling expenses increased to 2.0% from 1.9% of net revenues in Fiscal 2015 and Fiscal 2014, respectively. The increase was due primarily to increased advertising and compensation expenses in Fiscal 2015.
General and administrative expenses were 2.6% and 2.4% of net revenues in Fiscal 2015 and Fiscal 2014, respectively. General and administrative expenses increased $3.4 million, or 15.2%, in Fiscal 2015. This increase was due primarily to expenses of $3.9 million in ERP and strategic sourcing projects, $1.6 million in increased legal and product liability expenses, $1.0 million in costs associated with the former CEO retirement agreement and was partially offset by $3.3 million in reduced management compensation expenses.
During Fiscal 2015, we recorded an asset impairment on our corporate plane of $462,000. In Fiscal 2014, we sold a warehouse facility in Forest City, Iowa, resulting in a gain of $629,000.
Non-operating income decreased $653,000 or 85.0%, in Fiscal 2015, primarily due to lower proceeds from COLI policies than we received in Fiscal 2014.

The effective tax rate for Fiscal 2015 was 30.8% compared to 30.3% in Fiscal 2014. With a lower level of pre-tax book income being recorded in Fiscal 2015 compared to Fiscal 2014 the effective tax rate from operations was lower. However, this was offset by the lower level of tax planning initiatives recorded in Fiscal 2015 compared to Fiscal 2014 causing a slight increase in the effective tax rate year over year. Legislation for various applicable tax credits expired on December 31, 2014; therefore, similar to our Fiscal 2014, our projected benefits for these tax credits are limited to four months of our fiscal year.

Net income and diluted income per share were $41.2 million and $1.52 per share, respectively, for Fiscal 2015. In Fiscal 2014, net income was $45.1 million and diluted income per share was $1.64.

Analysis of Financial Condition, Liquidity and Resources
Cash and cash equivalents increased $15.3 million during Fiscal 2016 and totaled $85.6 million as of August 27, 2016. The significant liquidity events that occurred during Fiscal 2016 were:
Generated net income of $45.5 million
Capital expenditures of $24.6 million
Dividend payments of $10.9 million

22


Stock repurchases of $3.1 million

As described in Note 6, through our Amended Credit Agreement with Wells Fargo Capital Finance, we have the ability to borrow $35.0 million through a revolving credit facility based on our eligible inventory and certain receivables. In addition, the Amended 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 Credit Agreement's term is through May 28, 2019. We are in compliance with all material terms in the Amended Credit Agreement and have no outstanding borrowings as of the date of this report.

We filed a Registration Statement on Form S-3, which was declared effective by the SEC on April 25, 2016. Subject to market conditions, we have the ability to offer and sell up to $35.0 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 this Registration Statement; however, it does provide another potential source of liquidity to raise capital if we need it, in addition to the alternatives already in place.
Working capital at August 27, 2016 and August 29, 2015 was $187.6 million and $184.6 million, respectively, an increase of $3.0 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 in Fiscal 2017 of approximately $17 - $20 million. In addition to the normal $8 - $10 million of maintenance spend for our current facilities, we will continue to invest in our ERP system and finalize incremental capacity expansion investments in Oregon.
On October 12, 2016, the Board of Directors approved a quarterly cash dividend of $0.10 per share of common stock, payable on November 23, 2016 to shareholders of record at the close of business on November 9, 2016. We expect this cash outflow to be approximately $2.7 million for each quarter that this dividend is paid.
Operating Activities
Cash provided by operating activities was $52.7 million for the fiscal year ended August 27, 2016 compared to $45.2 million for the fiscal year ended August 29, 2015, and $23.2 million for the fiscal year ended August 30, 2014. The combination of net income of $45.5 million in Fiscal 2016 and changes in non-cash charges (e.g., depreciation, LIFO, stock-based compensation, deferred income taxes) provided $52.7 million of operating cash compared to $49.0 million in Fiscal 2015 and $50.6 million in Fiscal 2014. In Fiscal 2016, Fiscal 2015, and Fiscal 2014, changes in assets and liabilities (primarily a decrease in receivables in Fiscal 2016, an increase in receivables in Fiscal 2015 and inventory increases in Fiscal 2014) used $0.1 million, $3.8 million, and $27.4 million, respectively, of operating cash.
Investing Activities
Cash used in investing activities of $23.4 million in Fiscal 2016 was due primarily to capital spending of $24.6 million. In Fiscal 2015, cash used in investing activities of $16.5 million was primarily due to capital spending of $16.6 million. During Fiscal 2014, cash used in investing activities of $5.4 million was primarily due to capital spending of $10.5 million partially offset by proceeds from the sale of property of $2.4 million and ARS redemptions of $2.4 million.
Financing Activities
Cash used in financing activities of $14.0 million in Fiscal 2016 was primarily due to $10.9 million for the payments of dividends and $3.1 million in repurchases of our stock. Cash used in financing for the fiscal year ended August 29, 2015 was primarily due to $9.8 million for the payments of dividends and $6.5 million in repurchases of our stock. In addition, in Fiscal 2015 we borrowed and repaid $22.0 million in our line of credit. Cash used in financing for the fiscal year ended August 30, 2014 was $24.3 million primarily for repurchases of our stock.

In connection with our agreement to acquire Grand Design we executed a customary debt commitment letter with JPMorgan Chase Bank, N.A. (“JPMorgan”) pursuant to which, subject to customary exceptions and conditions, JPMorgan has committed to provide a seven-year $300 million secured term loan B facility, and a five-year $125 million asset-based revolving credit facility (collectively the “Credit Facilities”). We intend to use the proceeds from the term loan and a portion of the revolving credit facility together with $60 million in cash and $105 million of common stock to complete the acquisition of Grand Design. The remainder of the revolving credit facility will be used to fund our working capital needs. The Credit Facilities are expected to be secured by all or substantially all of our assets, and will replace our current credit facility with Wells Fargo Bank, N.A.


23


Contractual Obligations and Commercial Commitments
Our principal contractual obligations and commercial commitments as of August 27, 2016 were as follows:
 
Payments Due By Period
(In thousands)
Total
Fiscal
2017
Fiscal
2018-2019
Fiscal
2020-2021
More than
5 Years
Postretirement health care obligations (1)
$
6,346

$
416

$
664

$
944

$
4,322

Deferred compensation obligations (1)
18,392

2,740

5,322

4,752

5,578

Executive share option obligations (1)
3,341

763

2,032

546


Supplemental executive retirement plan benefit obligations (1)
2,681

347

603

566

1,165

Operating leases (2)
275

128

137

10


Contracted services
157

82

50

25


Unrecognized tax benefits (3)
2,461





Total contractual cash obligations
$
33,653

$
4,476

$
8,808

$
6,843

$
11,065

 
Expiration By Period
(In thousands)
Total
Fiscal
2017
Fiscal
2018-2019
Fiscal
2020-2021
More than
5 Years
Contingent repurchase obligations (2)
$
409,258

$
197,222

$
212,036

$

$

(1) 
See Note 8.
(2) 
See Note 9.
(3) 
We are not able to reasonably estimate in which future periods these amounts will ultimately be settled.

Critical Accounting Policies
Our financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates and such differences could be material.
Our significant accounting policies are discussed in Note 1. We believe that the following accounting estimates and policies are the most critical to aid in fully understanding and evaluating our reported financial results and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.

Revenue Recognition
Generally, revenues for our RVs are recorded and title passes when the following conditions are met:
an order for a product has been received from a dealer
written or verbal approval for payment has been received from the dealer's floorplan financing institution (if applicable)
an independent transportation company has accepted responsibility for the product as agent for the dealer; and
the product is removed from the Company's property for delivery to the dealer.
 
Our shipping terms are FOB shipping point. Products are not sold on consignment, dealers do not have the right to return products, and dealers are typically responsible for interest costs to floor plan lenders.
Repurchase Commitments
It is customary practice for manufacturers in the RV industry to enter into repurchase agreements with financing institutions that provide financing to their dealers. Our repurchase agreements generally provide that, in the event of a default by a dealer in its obligation to these lenders, we will repurchase vehicles sold to the dealer that have not been resold to retail customers. The terms of these agreements, which can last up to 18 months, provide that our liability will be the lesser of remaining principal owed by the dealer or dealer invoice less periodic reductions based on the time since the date of the original invoice. Our liability cannot exceed 100% of the dealer invoice. In certain instances, we also repurchase inventory from our dealers due to state law or regulatory requirements that govern voluntary or involuntary relationship terminations.

Based on these repurchase agreements, we establish an associated loss reserve which is disclosed separately in the consolidated balance sheets. Repurchased sales are not recorded as a revenue transaction, but the net difference between the original repurchase price and the resale price are recorded against the loss reserve, which is a deduction from gross revenue. Our loss reserve for repurchase commitments contains uncertainties because the calculation requires management to make assumptions

24


and apply judgment regarding a number of factors. There are two significant assumptions associated with establishing our loss reserve for repurchase commitments: (1) the percentage of dealer inventory that we will be required to repurchase as a result of defaults by the dealer, and (2) the loss that will be incurred, if any, when repurchased inventory is resold. These key assumptions are affected by a number of factors, such as macro-market conditions, current retail demand for our product, age of product in dealer inventory, physical condition of the product, location of the dealer, and the financing source. To the extent that dealers are increasing or decreasing their inventories, our overall exposure under repurchase agreements is likewise impacted. The percentage of dealer inventory we estimate we will repurchase and the associated estimated loss is based on historical information, current trends and an analysis of dealer inventory aging for all dealers with inventory subject to this obligation. In periods where there is increasing retail demand for our product at our dealerships, the lower end of our estimated range of assumptions will be more appropriate and in periods of decreasing retail demand, the opposite will be true.

Repurchase risk is affected by the credit worthiness of our dealer network and if we are obligated to repurchase a substantially larger number of RVs in the future, this would increase our costs and could have a material adverse effect on our results of operations, financial condition, and cash flows.

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 warranty on Class A and C sidewalls and floors. We provide a comprehensive 12-month warranty on all towable products. Estimated costs related to product warranty are accrued at the time of sale and are based upon past warranty claims and unit sales history. Accruals are adjusted as needed 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.

In addition to the costs associated with the contractual warranty coverage provided on our products, we also occasionally incur costs as a result of additional service actions not covered by our warranties, including product recalls and customer satisfaction actions. Although we estimate and reserve for the cost of these service actions, there can be no assurance that expense levels will remain at current levels or such reserves will continue to be adequate.
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. A hypothetical change of a 10% increase or decrease in our significant warranty commitment assumptions as of August 27, 2016 would have affected net income by approximately $624,000. Further discussion of our warranty costs and associated accruals is included in Note 7.
Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes. In preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. 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. We will continue to assess the likelihood that our deferred tax assets will be realizable at each reporting period and will be adjusted accordingly, which could materially impact our financial position and results of operations. As of August 27, 2016, we have determined that our deferred tax assets are realizable, and therefore, no valuation allowance has been recorded.

New Accounting Pronouncements

See Note 1 for a summary of new accounting pronouncements which are incorporated by reference herein.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The assets we maintain to fund deferred compensation have market risk, but we maintain a corresponding liability for these assets. The market risk is therefore borne by the participants in the deferred compensation program.

We could incur financial market risk in the form of interest rate risk. Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates. At August 27, 2016, we had a $35.0 million credit facility with Wells Fargo Capital Finance. In addition, the agreement includes a framework to expand the size of the facility up to $50.0 million, based on mutually agreeable terms at the time of expansion. The interest rates applicable to this agreement are based on LIBOR plus 2.0%. We currently have no borrowings under this credit facility.


25


Item 8. Financial Statements and Supplementary Data

26


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We, the management of Winnebago Industries, Inc. (the "Company") are responsible for establishing and maintaining effective internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. The Company's internal control over financial reporting is a process designed, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Company's internal control over financial reporting is supported by written policies and procedures that:
1.
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets;
2.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company's management and directors; and
3.
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
In addition, the Audit Committee of the Board of Directors, consisting solely of independent directors, meets periodically with Management, the internal auditors and the independent registered public accounting firm to review internal accounting controls, audit results and accounting principles and practices and annually selects the independent registered public accounting firm.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of the Company's annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company's internal control over financial reporting based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management's assessment included an evaluation of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of the Company's internal control over financial reporting.
Based on this assessment, management has concluded that the Company's internal control over financial reporting was effective as of August 27, 2016.
Deloitte & Touche LLP, the independent registered public accounting firm that audited the Company's financial statements included in this Annual Report on Form 10-K, has issued a report included herein, which expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Michael J. Happe
 
/s/ Sarah N. Nielsen
Michael J. Happe
 
Sarah N. Nielsen
President, Chief Executive Officer
 
Vice President, Chief Financial Officer
 
 
 
October 18, 2016
 
October 18, 2016


27


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Winnebago Industries, Inc.
Forest City, Iowa
We have audited the internal control over financial reporting of Winnebago Industries, Inc. and subsidiaries (the "Company") as of August 27, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 27, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended August 27, 2016 of the Company and our report dated October 18, 2016 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche
Minneapolis, Minnesota
October 18, 2016



28


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Winnebago Industries, Inc.
Forest City, Iowa
We have audited the accompanying consolidated balance sheets of Winnebago Industries, Inc. and subsidiaries (the "Company") as of August 27, 2016 and August 29, 2015, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended August 27, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Winnebago Industries, Inc. and subsidiaries at August 27, 2016 and August 29, 2015, and the results of their operations and their cash flows for each of the three years in the period ended August 27, 2016, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of August 27, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 18, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche
Minneapolis, Minnesota
October 18, 2016



29


Winnebago Industries, Inc.
Consolidated Statements of Income and Comprehensive Income

 
Year Ended
(In thousands, except per share data)
August 27, 2016
 
August 29, 2015
 
August 30, 2014
Net revenues
$
975,226

 
$
976,505

 
$
945,163

Cost of goods sold
862,577

 
871,625

 
841,166

Gross profit
112,649

 
104,880

 
103,997

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
      Selling
19,823

 
19,161

 
18,293

      General and administrative
27,085

 
25,838

 
22,424

      Impairment (gain on sale) of fixed assets

 
462

 
(629
)
       Total operating expenses
46,908

 
45,461

 
40,088

 
 
 
 
 
 
Operating income
65,741

 
59,419

 
63,909

 
 
 
 
 
 
Non-operating income
457

 
115

 
768

Income before income taxes
66,198

 
59,534

 
64,677

 
 
 
 
 
 
Provision for income taxes
20,702

 
18,324

 
19,624

Net income
$
45,496

 
$
41,210

 
$
45,053

 
 
 
 
 
 
Income per common share:
 
 
 
 
 
      Basic
$
1.69

 
$
1.53

 
$
1.64

      Diluted
$
1.68

 
$
1.52

 
$
1.64

 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
      Basic
26,925

 
26,941

 
27,430

      Diluted
27,033

 
27,051

 
27,545

 
 
 
 
 
 
Dividends paid per common share
$
0.40

 
$
0.36

 
$

 
 
 
 
 
 
Net income
$
45,496

 
$
41,210

 
$
45,053

Other comprehensive income (loss):
 
 
 
 
 
Amortization of prior service credit
(net of tax of $2,947, $2,110, and $2,068)
(4,788
)
 
(3,428
)
 
(3,582
)
Amortization of net actuarial loss
(net of tax of $621, $565, and $337)
1,010

 
918

 
749

Increase in actuarial loss
(net of tax of $415, $250, and $1,348)
(674
)
 
(407
)
 
(2,191
)
Plan amendment
(net of tax of $10,895, $1,509, and $1,364)
17,701

 
2,451

 
2,216

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

 

 
151

Total other comprehensive income (loss)
13,249

 
(466
)
 
(2,657
)
Comprehensive income
$
58,745

 
$
40,744

 
$
42,396


See notes to consolidated financial statements.



30


Winnebago Industries, Inc.
Consolidated Balance Sheets
<
(In thousands, except per share data)
August 27, 2016
 
August 29, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
85,583

 
$
70,239

Receivables, less allowance for doubtful accounts ($278 and $120, respectively)
66,184

 
66,936

Inventories
122,522

 
112,165

Prepaid expenses and other assets
6,300

 
6,882

Deferred income taxes

 
9,995

Total current assets
280,589

 
266,217

Property, plant and equipment, net
55,931

 
37,250

Investment in life insurance
26,492

 
26,172

Deferred income taxes
18,753

 
21,994

Goodwill
1,228

 
1,228

Other assets
7,725

 
9,313

Total assets
$
390,718

 
$
362,174