10-Q 1 wgo2017q210q.htm FORM 10-Q FOR PERIOD ENDED FEBRUARY 25, 2017 Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q
 

(Mark One)
 
 
 
 
x 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended February 25, 2017
 
 
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
 

winnebagoindlogor.jpg
WINNEBAGO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Iowa
 
 
42-0802678
(State or other jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
P. O. Box 152, Forest City, Iowa
 
 
50436
(Address of principal executive offices)
 
 
(Zip Code)
 
 
 
 
 
 
 
(641) 585-3535
 
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer  x
 
 Non-accelerated filer o
 
 Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of common stock, par value $0.50 per share, outstanding March 21, 2017 was 31,586,125.

 



Winnebago Industries, Inc.
Table of Contents

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




Glossary


The following terms and abbreviations appear in the text of this report and are defined as follows:
ABL
Credit Agreement dated as of November 8, 2016 among Winnebago Industries, Inc., Winnebago of Indiana, LLC, Grand Design RV, LLC, the Other Loan Parties thereto and JPMorgan Chase Bank, N.A. as Administrative Agent
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; terminated on November 8, 2016
ASC
Accounting Standards Codification
ASP
Average Sales Price
ASU
Accounting Standards Update
Credit Facility
Collective reference to the ABL and Term Loan
EBITDA
Earnings Before Interest, Tax, Depreciation and Amortization
EPS
Earnings Per Share
ERP
Enterprise Resource Planning
FASB
Financial Accounting Standards Board
FIFO
First In, First Out
GAAP
Generally Accepted Accounting Principles
Grand Design
Grand Design RV, LLC
IRS
Internal Revenue Service
LIFO
Last In, First Out
LIBOR
London Interbank Offered Rate
Motorized
Business segment including motorhomes and other related manufactured products
NYFRB
New York Federal Reserve Bank
NYSE
New York Stock Exchange
OCI
Other Comprehensive Income
RV
Recreation Vehicle
RVIA
Recreation Vehicle Industry Association
SEC
U.S. Securities and Exchange Commission
SERP
Supplemental Executive Retirement Plan
Stat Surveys
Statistical Surveys, Inc.
Term Loan
Loan Agreement dated as of November 8, 2016 among Winnebago Industries, Inc., Octavius Corporation, the other loan parties thereto and JPMorgan Chase Bank, N.A. as Administrative Agent
Towable
Business segment including products which are not motorized and are towable by another vehicle
US
United States of America
XBRL
eXtensible Business Reporting Language



1


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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

 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
 
February 25,
2017
 
February 27,
2016
 
February 25,
2017
 
February 27,
2016
Net revenues
 
$
370,510

 
$
225,672

 
$
615,818

 
$
439,895

Cost of goods sold
 
321,194

 
200,396

 
537,627

 
389,370

Gross profit
 
49,316

 
25,276

 
78,191

 
50,525

Operating expenses:
 
 
 
 
 
 
 
 
Selling
 
9,553

 
4,929

 
15,423

 
9,944

General and administrative
 
12,540

 
8,437

 
22,446

 
17,257

Postretirement health care benefit income
 
(11,983
)
 
(1,593
)
 
(24,796
)
 
(2,938
)
Transaction costs
 
463

 

 
5,925

 

Amortization of intangible assets
 
10,367

 

 
12,418

 

Total operating expenses
 
20,940

 
11,773

 
31,416

 
24,263

Operating income
 
28,376

 
13,503

 
46,775

 
26,262

Interest expense
 
5,178

 

 
6,306

 

Non-operating expense (income)
 
4

 
18

 
(83
)
 
(117
)
Income before income taxes
 
23,194

 
13,485

 
40,552

 
26,379

Provision for income taxes
 
7,916

 
4,131

 
13,536

 
8,467

Net income
 
$
15,278

 
$
9,354

 
$
27,016

 
$
17,912

 
 
 
 
 
 
 
 
 
Income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.48

 
$
0.35

 
$
0.91

 
$
0.66

Diluted
 
$
0.48

 
$
0.35

 
$
0.91

 
$
0.66

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
31,577

 
26,936

 
29,707

 
26,956

Diluted
 
31,686

 
27,015

 
29,827

 
27,042

 
 
 
 
 
 
 
 
 
Dividends paid per common share
 
$
0.10

 
$
0.10

 
$
0.20

 
$
0.20

 
 
 
 
 
 
 
 
 
Net income
 
$
15,278

 
$
9,354

 
$
27,016

 
$
17,912

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Amortization of prior service credit
  (net of tax of $7,495, $764, $15,409 and $1,417)
 
(12,177
)
 
(1,242
)
 
(25,035
)
 
(2,302
)
Amortization of net actuarial loss
  (net of tax of $2,932, $160, $5,968 and $302)
 
4,764

 
260

 
9,696

 
491

Plan amendment
  (net of tax of $0, $0, $2,402 and $10,895)
 

 

 
3,903

 
17,701

Change in fair value of interest rate swap
  (net of tax of $270, $0, $270 and $0)
 
(439
)
 

 
(439
)
 

Total other comprehensive (loss) income
 
(7,852
)
 
(982
)
 
(11,875
)
 
15,890

Comprehensive income
 
$
7,426

 
$
8,372

 
$
15,141

 
$
33,802


See notes to condensed consolidated financial statements.


2


Winnebago Industries, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
February 25,
2017
 
August 27,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,931

 
$
85,583

Receivables, less allowance for doubtful accounts ($196 and $278)
120,498

 
66,184

Inventories
148,456

 
122,522

Prepaid expenses and other assets
13,943

 
6,300

Total current assets
293,828

 
280,589

Property, plant and equipment, net
67,858

 
55,931

Other assets:
 
 
 
Goodwill
245,393

 
1,228

Other intangible assets, net
240,682

 

Investment in life insurance
26,862

 
26,492

Deferred income taxes
14,203

 
18,753

Other assets
5,895

 
7,725

Total assets
$
894,721

 
$
390,718

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
66,873

 
$
44,134

Current maturities of long-term debt
11,301

 

Income taxes payable

 
19

Accrued expenses:
 
 
 
Accrued compensation
22,258

 
19,699

Product warranties
25,030

 
12,412

Self-insurance
5,527

 
5,812

Accrued loss on repurchases
1,522

 
881

Promotional
9,512

 
4,756

Other
9,664

 
5,236

Total current liabilities
151,687

 
92,949

Non-current liabilities:
 
 
 
Long-term debt, less current maturities
318,164

 

Unrecognized tax benefits
1,926

 
2,461

Deferred compensation and postretirement health care benefits, net of current
   portion
19,370

 
26,949

Other
959

 

Total non-current liabilities
340,419

 
29,410

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

 
25,888

Additional paid-in capital
79,205

 
32,717

Retained earnings
641,192

 
620,546

Accumulated other comprehensive (loss) income
(900
)
 
10,975

Treasury stock, at cost (20,190 and 24,875 shares)
(342,770
)
 
(421,767
)
Total shareholders' equity
402,615

 
268,359

Total liabilities and shareholders' equity
$
894,721

 
$
390,718


See notes to condensed consolidated financial statements.

3


Winnebago Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
(In thousands)
February 25,
2017
 
February 27,
2016
Operating activities:
 
 
 
Net income
$
27,016

 
$
17,912

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation
3,428

 
2,763

Amortization of intangible assets
12,418

 

Amortization of debt issuance costs
485

 

LIFO expense
598

 
588

Stock-based compensation
1,539

 
1,266

Deferred income taxes
6,857

 
819

Postretirement benefit income and deferred compensation expense
(24,034
)
 
(1,915
)
Other
(452
)
 
(502
)
Change in assets and liabilities:
 
 
 
Inventories
(11,232
)
 
(22,592
)
Receivables, prepaid and other assets
(21,551
)
 
(8,988
)
Income taxes and unrecognized tax benefits
(4,631
)
 
(1,456
)
Accounts payable and accrued expenses
16,131

 
5,265

Postretirement and deferred compensation benefits
(1,430
)
 
(1,972
)
Net cash provided by (used in) operating activities
5,142

 
(8,812
)
 
 
 
 
Investing activities:
 
 
 
Purchases of property, plant and equipment
(6,938
)
 
(16,357
)
Proceeds from the sale of property
65

 
10

Acquisition of business, net of cash acquired
(394,694
)
 

Proceeds from life insurance

 
295

Other
620

 
(3
)
Net cash used in investing activities
(400,947
)
 
(16,055
)
 
 
 
 
Financing activities:
 
 
 
Payments for repurchases of common stock
(1,365
)
 
(3,054
)
Payments of cash dividends
(6,370
)
 
(5,455
)
Payments of debt issuance costs
(11,020
)
 

Borrowings on credit facility
366,400

 

Repayments of credit facility
(26,400
)
 

Other
(92
)
 
9

Net cash provided by (used in) financing activities
321,153

 
(8,500
)
 
 
 
 
Net decrease in cash and cash equivalents
(74,652
)
 
(33,367
)
Cash and cash equivalents at beginning of period
85,583

 
70,239

Cash and cash equivalents at end of period
$
10,931

 
$
36,872

 
 
 
 
Supplemental cash flow disclosure:
 
 
 
Income taxes paid, net
$
11,692

 
$
12,848

Interest paid
$
1,731

 
$

Non-cash transactions:
 
 
 
Issuance of Winnebago common stock for acquisition of business
$
124,066

 
$

Capital expenditures in accounts payable
$
322

 
$
750

See notes to condensed consolidated financial statements.

4


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

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

We were incorporated under the laws of the state of Iowa on February 12, 1958 and adopted our present name on February 28, 1961. Our executive offices are located at 605 West Crystal Lake Road in Forest City, Iowa. Our telephone number is (641) 585-3535; our website is www.winnebagoind.com. Our common stock trades on the NYSE under the symbol “WGO.”

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly our consolidated financial position as of February 25, 2017 and the consolidated results of income and comprehensive income and consolidated cash flows for the first six months of Fiscal 2017 and 2016. The consolidated statement of income and comprehensive income for the first six months of Fiscal 2017 is not necessarily indicative of the results to be expected for the full year. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the fiscal year ended August 27, 2016.

Fiscal Period
We follow a 52-/53-week fiscal year, ending the last Saturday in August. Both Fiscal 2017 and Fiscal 2016 are 52-week years.

Goodwill and Indefinite-Lived Intangible Asset
Goodwill resulted primarily from the Grand Design business combination and represents the excess of the purchase price over the fair value of tangible assets and identifiable intangible assets and liabilities assumed. Annually in the fourth quarter, or if conditions indicate an interim review is necessary, we assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and if it is necessary to perform the quantitative two-step goodwill impairment test. If we perform the quantitative test, we compare the carrying value of the reporting unit to an estimate of the reporting unit’s fair value to identify potential impairment. The estimate of the reporting unit’s fair value is determined by weighting a discounted cash flow model and a market-related model using current industry information that involve significant unobservable inputs (Level 3 inputs). In determining the estimated future cash flow, we consider and apply certain estimates and judgments, including current and projected future levels of income based on management’s plans, business trends, prospects and market and economic conditions and market-participant considerations. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed to determine the amount of the potential goodwill impairment. If impaired, goodwill is written down to its estimated implied fair value.

As of February 25, 2017, we had an indefinite-lived intangible asset for the trade name of $148.0 million, from the Grand Design acquisition. Annually in the fourth quarter, or if conditions indicate an interim review is necessary, we assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If we perform a quantitative test, projections regarding estimated discounted future cash flows and other factors are made to determine if impairment has occurred. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. If we conclude that there has been impairment, we will write down the carrying value of the asset to its fair value.

Other Intangible and Long-Lived Assets
Long-lived assets, which include property, plant and equipment, and definite-lived intangible assets, primarily the dealer network, are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The impairment testing involves comparing the carrying amount of the asset to the forecasted undiscounted future cash flows generated by that asset. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. In the event the carrying amount of the asset exceeds the undiscounted future cash flows generated by that asset and the carrying amount is not considered recoverable, an impairment exists. An impairment loss is measured as the excess of the asset’s carrying amount over its fair value and is recognized in the statement of income in the period that the impairment occurs. The dealer network is amortized over its estimated useful life of 12 years. The reasonableness of the useful lives of this asset and other long-lived assets is regularly evaluated.

There was no impairment loss for the period ended February 25, 2017 for goodwill, indefinite- or definite-lived intangible assets, or long-lived assets.


5


Debt Issuance Costs
We incurred $0.8 million of costs in the three months ended November 26, 2016 and the six months ended February 25, 2017 related to our revolving credit agreement that are being amortized on a straight-line basis over the five year term of the agreement. We incurred $10.0 million and $10.2 million of costs in the three months ended November 26, 2016 and the six months ended February 25, 2017, respectively, related to the Term Loan that are being amortized on a straight-line basis (which is not materially different from an effective interest method) over the seven year term of the agreement. If early principal payments are made on the Term Loan, a proportional portion of the unamortized issuance costs will be expensed.

Derivative Instruments
We use derivative instruments to hedge our floating interest rate exposure. Derivative instruments are accounted for at fair value in accordance with ASC Topic 815, Derivatives and Hedging. We have designated these derivatives as cash flow hedges for accounting purposes. Changes in fair value, for the effective portion of qualifying hedges, are recorded in OCI. We review the effectiveness of our hedging instruments on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings, and discontinue hedge accounting for any hedge that we no longer consider to be highly effective.

New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a comprehensive new model for the recognition of revenue from contracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities have the option of using either retrospective transition or a modified approach in applying the new standard. The standard is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2017 (our Fiscal 2019). We are currently evaluating the approach we will use to apply the new standard and the impact adopting this ASU will have on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Topic 835), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. We adopted the standard during the first quarter of Fiscal 2017 and, accordingly, have presented unamortized debt issuance costs as a direct reduction allocated between Current maturities of long-term debt and Long-term debt, less current maturities on the Consolidated Balance Sheet as of February 25, 2017.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), which requires inventory measured using any method other than last-in, first-out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Under this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11 will become effective prospectively for fiscal years beginning after December 15, 2016 (our Fiscal 2018). We are currently evaluating the impact of adopting this ASU on our consolidated financial statements and do not expect adoption to have a material impact.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), to simplify the accounting for measurement-period adjustments in a business combination. Under the new standard, an acquirer must recognize adjustments to provisional amounts in a business combination in the reporting period in which the adjustment amounts are determined, rather than retrospectively adjusting the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill as under current guidance. ASU 2015-16 is effective prospectively for fiscal years, and the interim periods within those years, beginning after December 15, 2015 (our Fiscal 2017). We adopted this standard on August 28, 2016 and have accounted for all adjustments to provisional amounts in accordance with this guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new standard is effective retrospectively or on a modified retrospective basis for fiscal years beginning after December 15, 2018 (our Fiscal 2020), including interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the impact of adopting this ASU on our consolidated financial statements and do not expect adoption to have a material impact.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for the related income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 (our Fiscal 2018), including interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the impact of adopting this ASU on our consolidated financial statements and do not expect adoption to have a material impact.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230), which provides guidance for eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective retrospectively for annual reporting periods beginning after December 15, 2017 (our Fiscal 2019), including interim

6


periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the impact of adopting this ASU on our consolidated financial statements and do not expect adoption to have a material impact.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment change. ASU 2017-04 is effective prospectively for fiscal years, and the interim periods within those years, beginning after December 15, 2019 (our Fiscal 2021). We are currently evaluating the impact of adopting this ASU on our consolidated financial statements and do not expect adoption to have a material impact.
 
Note 2: Business Combination, Goodwill and Other Intangible Assets

We acquired 100% of the ownership interests of Grand Design on November 8, 2016 in accordance with the Securities Purchase Agreement for an aggregate purchase price of $520.5 million, which was paid in cash and Winnebago shares as follows:
(In thousands, except shares)
 
November 8,
2016
Cash
 
$
396,442

Winnebago shares: 4,586,555 at $27.05 per share
 
124,066

Total
 
$
520,508

The cash portion was funded from cash on hand and borrowings under our ABL and Term Loan agreements. The stock was valued using our share price on the date of closing.
The acquisition has been accounted for in accordance with ASC 805, Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price was allocated to the net tangible and intangible assets of Grand Design acquired, based on their fair values at the date of the acquisition. The estimated fair values are preliminary and based on the information that was available as of the date of the acquisition. We believe that the information provides a reasonable basis for estimating the fair values, but we are waiting for additional information necessary to finalize these amounts, particularly with respect to income taxes. Thus, the preliminary measurements of fair value reflected are subject to change. We expect to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. The preliminary allocation of the purchase price to assets acquired and liabilities assumed is as follows:
(in thousands)
 
November 8,
2016
Cash
 
$
1,748

Accounts receivable
 
32,834

Inventories
 
15,300

Prepaid expenses and other assets
 
2,593

Property, plant and equipment
 
8,998

Goodwill
 
244,164

Other intangible assets
 
253,100

Total assets acquired
 
558,737

 
 
 
Accounts payable
 
11,163

Accrued compensation
 
3,615

Product warranties
 
12,904

Promotional
 
3,976

Other
 
1,569

Deferred tax liabilities
 
5,002

Total liabilities assumed
 
38,229

 
 
 
Total purchase price
 
$
520,508

The acquisition of 100% of the ownership interests of Grand Design occurred in two steps: (1) direct purchase of 89.34% of Grand Design member interests and (2) simultaneous acquisition of the remaining 10.66% of Grand Design member interests via the purchase of 100% of the shares of SP GE VIII-B GD RV Blocker Corp. (Blocker Corp) which held the remaining 10.66% of the Grand Design member interests.   We agreed to acquire Blocker Corp as part of the Securities Purchase Agreement and we did not receive a step-up in basis for 10.66% of the Grand Design assets.  As a result, we established a deferred tax liability of $8.5 million on the opening balance sheet that relates to intangibles that will not be amortizable for tax purposes.


7


The goodwill recognized is primarily attributable to the value of the workforce, reputation of founders, customer and dealer growth opportunities and expected synergies. Key areas of cost synergies include increased purchasing power for raw materials, and supply chain consolidation. Goodwill is expected to be mostly deductible for tax purposes. The goodwill resulting from the acquisition of Grand Design increased total goodwill to $245.4 million within the Towable segment as of February 25, 2017 from $1.2 million as of August 27, 2016. As permitted under ASC 805, Business Combinations, the change in the carrying amount of goodwill for the three months ended February 25, 2017 was due to purchase accounting adjustments of $5.8 million to tax related acquired balances.

The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of intangible assets with fair value on the closing date of November 8, 2016 and amortization accumulated from the closing date through February 25, 2017 as follows:
(in thousands)
 
Weighted
Average Life-
Years
 
Fair Value
Amount
 
Accumulated
Amortization
Trade name
 
Indefinite
 
$
148,000

 
$

Dealer network
 
12.0
 
80,500

 
2,003

Backlog
 
0.5
 
18,000

 
9,924

Non-compete agreements
 
4.0
 
4,600

 
418

Leasehold interest-favorable
 
8.1
 
2,000

 
73

Total
 
 
 
253,100

 
$
12,418

Accumulated amortization
 
 
 
(12,418
)
 
 
Net book value of intangible assets
 
 
 
$
240,682

 
 

The fair value of the trade name and dealer network were estimated using an income approach.  Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The fair value of the trade name was estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on the hypothetical royalty stream that would be received if we were to license the trade name and was based on expected revenues. The fair value of the dealer network was estimated using an income approach, specifically the cost to recreate/cost savings method. This method uses the replacement of the asset as an indicator of the fair value of the asset. The useful life of the intangible assets was determined considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive, economic or other factors that may limit the useful life of the intangible assets.
For the six months ended February 25, 2017 and February 27, 2016, amortization of intangible assets charged to operations was $12.4 million and $0, respectively. The weighted average remaining amortization period for intangible assets as of February 25, 2017 was approximately 9.6 years. Remaining estimated aggregate annual amortization expense by fiscal year is as follows:
(in thousands)
 
Amount
Remainder of 2017
 
$
12,242

2018
 
7,854

2019
 
7,733

2020
 
7,733

2021
 
7,733

2022
 
7,106

Thereafter
 
42,281

Within the Towable segment, the results of Grand Design's operations have been included in our consolidated financial statements from the close of the acquisition. The following table provides net revenues and operating income (which includes amortization expense) from the Grand Design business included in our consolidated results during the six months ended February 25, 2017 following the November 8, 2016 closing date:
 
 
Six Months Ended
(in thousands)
 
February 25, 2017
Net revenues
 
$
169,421

Operating income
 
8,130



8


Unaudited pro forma information has been prepared as if the acquisition had taken place on August 30, 2015. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transaction actually taken place on August 30, 2015, and the unaudited pro forma information does not purport to be indicative of future financial operating results. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisitions. Unaudited pro forma information is as follows:
 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
 
February 25,
2017
 
February 27,
2016
 
February 25,
2017
 
February 27,
2016
Net revenues
 
$
370,510

 
$
319,355

 
$
711,485

 
$
619,738

Net income
 
20,884

 
6,960

 
41,153

 
8,157

Income per share - basic
 
0.66

 
0.22

 
1.30

 
0.26

Income per share - diluted
 
0.66

 
0.22

 
1.30

 
0.26


The unaudited pro forma data above includes the following significant non-recurring adjustments made to account for certain costs which would have changed if the acquisition of Grand Design had been completed on August 30, 2015:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
February 25,
2017
 
February 27,
2016
 
February 25,
2017
 
February 27,
2016
Amortization of intangibles (1 year or less useful life)
 
$
(8,435
)
 
$
8,435

 
$
(10,376
)
 
$
17,143

Increase in amortization of intangibles
 

 
1,933

 
1,551

 
3,866

Expenses related to business combination (transaction costs) (1)
 
(463
)
 
463

 
(5,982
)
 
6,303

Interest to reflect new debt structure
 

 
4,937

 
3,672

 
9,895

Taxes related to the adjustments to the pro forma data and to the income of Grand Design
 
3,292

 
(1,407
)
 
8,303

 
(5,730
)
(1) Pro forma transaction costs include $0.1 million incurred by Grand Design prior to acquisition.

We incurred approximately $6.2 million of acquisition-related costs to date, of which $0.5 million and $5.9 million were expensed during the three and six months ended February 25, 2017 and $0.3 million was expensed in the three months ended August 27, 2016.

Note 3: Business Segments

We report segment information based on the "management" approach defined in ASC 280, Segment Reporting. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable operating segments.

In the first quarter of Fiscal 2017, we revised our reporting segments. Previously we had one reporting segment which included all recreational vehicle products and services. With the acquisition of Grand Design in the first quarter, we expanded the number of reporting segments to two: (1) Motorized products and services and (2) Towable products and services. The Motorized segment includes all products that include a motorized chassis as well as other related manufactured products. The Towable segment includes all products which are not motorized and are generally towed by another vehicle. Prior year segment information has been restated to conform to the current reporting segment presentation.

We organize our business on a product basis. Each reportable segment is managed separately to better align to our customers, distribution partners and the unique market dynamics of the product groups. We have aggregated two operating segments into the Towable reporting segment based upon their similar products, customers, distribution methods, production processes and economic characteristics. The accounting policies of both reportable segments are the same and described in Note 1, "Summary of Significant Accounting Policies" in our annual report on Form 10-K for the year ended August 27, 2016.

We evaluate the performance of our reportable segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization and other adjustments made in order to present comparable results from period to period. These types of adjustments are also specified in the definition of certain measures required under the terms of our Credit Facility. Examples of items excluded from Adjusted EBITDA include the postretirement health care benefit results from terminating the plan and the transaction costs related to our acquisition of Grand Design.



9


The following table shows information by reporting segment:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
February 25,
2017
 
February 27,
2016
 
February 25,
2017
 
February 27,
2016
Net revenues
 
 
 
 
 
 
 
 
Motorized
 
$
198,936

 
$
205,138

 
$
394,061

 
$
402,478

Towable
 
171,574

 
20,534

 
221,757

 
37,417

Consolidated
 
$
370,510

 
$
225,672

 
$
615,818

 
$
439,895

 
 
 
 
 
 
 
 
 
Adjusted EBITDA
 
 
 
 
 
 
 
 
Motorized
 
$
9,117

 
$
11,740

 
$
19,140

 
$
23,464

Towable
 
19,954

 
1,563

 
24,610

 
2,623

Consolidated
 
$
29,071

 
$
13,303

 
$
43,750

 
$
26,087

 
 
 
 
 
 
 
 
 
Capital Expenditures
 
 
 
 
 
 
 
 
Motorized
 
$
1,953

 
$
12,994

 
$
5,099

 
$
15,866

Towable
 
1,423

 
254

 
1,839

 
491

   Consolidated
 
$
3,376

 
$
13,248

 
$
6,938

 
$
16,357

 
 
 
 
 
 
 
 
 
Total Assets
 
 
 
 
 
 
 
 
Motorized
 
$
315,374

 
$
332,698

 
$
315,374

 
$
332,698

Towable
 
579,347

 
27,644

 
579,347

 
27,644

   Consolidated
 
$
894,721

 
$
360,342

 
$
894,721

 
$
360,342


Reconciliation of net income to consolidated Adjusted EBITDA:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
February 25,
2017
 
February 27,
2016
 
February 25,
2017
 
February 27,
2016
Net income
 
$
15,278

 
$
9,354

 
$
27,016

 
$
17,912

Interest expense
 
5,178

 

 
6,306

 

Provision for income taxes
 
7,916

 
4,131

 
13,536

 
8,467

Depreciation
 
1,848

 
1,393

 
3,428

 
2,763

Amortization of intangible assets
 
10,367

 

 
12,418

 

EBITDA
 
40,587

 
14,878

 
62,704

 
29,142

Postretirement health care benefit income
 
(11,983
)
 
(1,593
)
 
(24,796
)
 
(2,938
)
Transaction costs
 
463

 

 
5,925

 

Non-operating expense (income)
 
4

 
18

 
(83
)
 
(117
)
Adjusted EBITDA
 
$
29,071

 
$
13,303

 
$
43,750

 
$
26,087


Note 4: Concentration Risk

One of our dealer organizations, La Mesa RV Center, Inc., accounted for 13.7% and 16.4% of our consolidated net revenues for the first six months of Fiscal 2017 and Fiscal 2016, respectively. A second dealer organization, FreedomRoads, LLC, accounted for 11.8% and 21.2% of our consolidated net revenues for the first six months of Fiscal 2017 and Fiscal 2016, respectively. These dealers declined on a relative basis due to the growth of other dealers and due to the addition of Grand Design revenue in Fiscal 2017. The loss of either or both of these dealer organizations could have a significant adverse effect on our business. In addition, deterioration in the liquidity or creditworthiness of these dealers could negatively impact our sales and could trigger repurchase obligations under our repurchase agreements.

Note 5: Derivatives, Investments and Fair Value Measurements
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
We account for fair value measurements in accordance with ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measurement and expands disclosure about fair value measurement. The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input

10


that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at February 25, 2017 and August 27, 2016 according to the valuation techniques we used to determine their fair values:
 
 
 
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
 
Fair Value at
February 25,
2017
 
Level 1 Quoted Prices in Active Markets for Identical Assets
 
Level 2 Significant Other
Observable Inputs
 
Level 3 Significant
Unobservable Inputs
Cash equivalents (1)
 
$

 
$

 
$

 
$

Assets that fund deferred compensation:
 
 
 
 
 
 
 
 
  Domestic equity funds
 
2,799

 
2,707

 
92

 

  International equity funds
 
193

 
150

 
43

 

  Fixed income funds
 
226

 
151

 
75

 

Interest rate swap contract
 
(709
)
 

 
(709
)
 

Total assets (liabilities) at fair value
 
$
2,509

 
$
3,008

 
$
(499
)
 
$

 
 
 
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
 
Fair Value at
August 27,
2016
 
Level 1 Quoted Prices in Active Markets for Identical Assets
 
Level 2 Significant Other
Observable Inputs
 
Level 3 Significant
Unobservable Inputs
Cash equivalents (1)
 
$
77,234

 
$
77,234

 
$

 
$

Assets that fund deferred compensation:
 
 
 
 
 
 
 
 
  Domestic equity funds
 
3,587

 
3,515

 
72

 

  International equity funds
 
258

 
225

 
33

 

  Fixed income funds
 
265

 
206

 
59

 

Interest rate swap contract
 

 

 

 

Total assets at fair value
 
$
81,344

 
$
81,180

 
$
164

 
$

(1) 
Cash equivalent balances valued using Level 1 inputs include only those accounts that may fluctuate in value. Cash in disbursing accounts and on-demand accounts are not included above.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash Equivalents
The carrying value of cash equivalents approximates fair value as original maturities are less than three months. Our cash equivalents are comprised of money market funds traded in an active market with no restrictions and are included in cash and cash equivalents on the accompanying consolidated balance sheets.

Assets that Fund Deferred Compensation
Our assets that fund deferred compensation are marketable equity securities measured at fair value using quoted market prices and primarily consist of equity-based mutual funds. The majority of securities are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available. These securities fund the Executive Share Option Plan and the Executive Deferred Compensation Plan (see Note 10). The proportion of the assets that will fund options which expire within a year are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. The remaining assets are classified as noncurrent and are included in other assets.

Interest Rate Swap Contract
Under terms of our Credit Facility (see Note 9) we are required to hedge a portion of the floating interest rate exposure. In accordance with this requirement, we entered into an interest swap contract on January 23, 2017, which effectively fixed our interest rate on $200.0 million of our Term Loan at 6.32%. The notional amount of the swap decreases to $170.0 million on December 8, 2017, $120.0 million on December 10, 2018, and $60.0 million on December 9, 2019 and expires on December 8, 2020.


11


The fair value of the interest rate swap based on a Level 2 valuation was $0.7 million as of February 25, 2017. The fair value is classified as Level 2 as it is corroborated based on observable market data. This amount is included in other non-current liabilities and accumulated other comprehensive income on the consolidated balance sheet since the interest rate swap has been designated for hedge accounting.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Our non-financial assets, which include goodwill, intangible assets, and property, plant and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required, we must evaluate the non-financial asset for impairment. If an impairment did occur, the asset is required to be recorded at the estimated fair value. During the first six months of Fiscal 2017, no impairments were recorded for non-financial assets.

The carrying value of our debt as of February 25, 2017 approximates fair value as interest is at variable market rates.

Note 6: Inventories
Inventories consist of the following:
(In thousands)
 
February 25,
2017
 
August 27,
2016
Finished goods
 
$
35,070

 
$
19,129

Work-in-process
 
77,346

 
76,350

Raw materials
 
70,335

 
60,740

Total
 
182,751

 
156,219

LIFO reserve
 
(34,295
)
 
(33,697
)
Total inventories
 
$
148,456

 
$
122,522

The above value of inventories, before reduction for the LIFO reserve, approximates replacement cost at the respective dates. Of the $182.8 million and $156.2 million inventory at February 25, 2017 and August 27, 2016, respectively, $158.5 million and $149.4 million is valued on a LIFO basis; the remaining inventories of $24.3 million and $6.8 million at February 25, 2017 and August 27, 2016, respectively, are valued on a FIFO basis.

Note 7: Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation and consists of the following:
(In thousands)
 
February 25,
2017
 
August 27,
2016
Land
 
$
4,047

 
$
3,864

Buildings and building improvements
 
70,424

 
62,073

Machinery and equipment
 
98,883

 
95,087

Software
 
17,965

 
15,878

Transportation
 
9,187

 
8,956

Total property, plant and equipment, gross
 
200,506

 
185,858

Less accumulated depreciation
 
(132,648
)
 
(129,927
)
Total property, plant and equipment, net
 
$
67,858

 
$
55,931


On November 8, 2016, with the acquisition of Grand Design, we acquired $9.0 million of property, plant and equipment.

Note 8: Warranty

We provide service and warranty policies on our products. From time to time, we also voluntarily incur costs for certain warranty-type expenses occurring after the normal warranty period to help protect the reputation of our products and the goodwill of our customers. Warranty expense is affected by dealership labor rates, the cost of parts and the frequency of claims.  Estimated costs related to product warranty are accrued at the time of sale and are based upon historical warranty and service claims experience. Adjustments are made to accruals as claim data and cost experience becomes available.


12


Changes in our product warranty liability are as follows:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
February 25,
2017
 
February 27,
2016
 
February 25,
2017
 
February 27,
2016
Balance at beginning of period
 
$
24,551

 
$
11,585

 
$
12,412

 
$
11,254

Provision
 
7,734

 
3,439

 
11,632

 
7,467

Claims paid
 
(7,255
)
 
(3,297
)
 
(11,918
)
 
(6,994
)
Acquisition of Grand Design
 

 

 
12,904

 

Balance at end of period
 
$
25,030

 
$
11,727

 
$
25,030

 
$
11,727



Note 9: Long-Term Debt

The components of long-term debt are as follows:
(In thousands)
 
February 25,
2017
 
August 27,
2016
ABL
 
$
40,000

 
$

Term Loan
 
300,000

 

 
 
340,000

 

Less: debt issuance cost, net
 
(10,535
)
 

 
 
329,465

 

Less: current maturities
 
(11,301
)
 

Long-term debt, less current maturities
 
$
318,164

 
$


On November 8, 2016, we entered into the ABL and Term Loan agreements with JPMorgan Chase. Under the terms of the Credit Facility, we have a $125.0 million ABL credit facility and a $300.0 million Term Loan.
Under the ABL agreement, we have a five year credit facility available on a revolving basis, subject to availability under a borrowing base consisting of 85% of eligible accounts receivable and generally 75% of eligible inventory. The line is available for issuance of letters of credit to a specified limit of $10.0 million.
Under the ABL agreement, to determine interest due, we can elect to base the rate on the alternate base rate (prime rate, NYFRB rate or adjusted LIBOR for one-month period) plus 0.5% to 1.0%, depending on the amount of borrowings outstanding, or an adjusted LIBOR rate for a period of one, two, three or six months as selected by us plus 1.50% to 2.0%, depending on the amount of borrowings outstanding. The interest rate we paid as of February 25, 2017 was 2.5%. We also pay a commitment fee equal to 0.375% if the average utilized portion is less than or equal to 50%, or 0.25% if the utilized portion is greater than 50% of availability.
Under the Term Loan agreement, we have a seven year credit facility repayable in quarterly installments in an aggregate amount equal to 1.0% of the original amount of the Term Loan on March 31, June 30 and September 30, 2017; 1.25% each calendar quarter end thereafter; with the balance payable at the end of seven years on November 8, 2023. There are mandatory prepayments for proceeds of new debt, sale of significant assets or subsidiaries and annually for 50% of excess cash flow beginning with Fiscal 2017 (the 50% is subject to step-downs to 25% and 0% if the total net leverage ratio, as defined in the Term Loan agreement, is less than 2.5 to 1.0 and 2.0 to 1.0, respectively, as of the last day of the period). Incremental term loans of up to $125.0 million are available if certain financial ratios and other conditions are met.
Under the Term Loan agreement, to determine interest due, we can elect to base the rate on the alternate base rate (prime rate, NYFRB rate or adjusted LIBOR for one-month period with a floor of 2%) plus 3.50% or an adjusted LIBOR rate (with a floor of 1%) for the interest period selected plus 4.50%. The interest rate as of February 25, 2017, before consideration of the hedge, was 5.5%.
Under the Credit Facility, we are required to enter into a hedging arrangement to effectively fix the LIBOR component of interest cost at the prevailing swap rate with a notional amount of at least 50% of the projected outstanding principal amount of the Term Loan. The hedging arrangement needs to be maintained until the later of 3 years from closing date or the date the leverage ratio is less than 2.0 to 1.0. In accordance with this requirement, we entered into an interest rate swap contract in January 2017 (see Note 5).
The Term Loan agreement includes financial covenants requiring that the fixed charge coverage ratio at the end of any four fiscal quarters be not less than 1.0 to 1.0, defined as consolidated EBITDA (as defined) less capital expenditures (as defined), over fixed

13


charges, generally defined as cash interest, cash income taxes, principal payments on loans, and dividends, and that the senior secured net leverage ratio at the end of each fiscal quarter be not greater than 3.5 to 1.0 prior to the fiscal quarter ending November 24, 2018 and 3.25 to 1.0 for each quarter thereafter, defined generally as the ratio of total secured indebtedness minus cash and permitted investments, to consolidated EBITDA (as defined).
The ABL agreement generally contains similar covenants, and includes restrictions on indebtedness, liens, mergers, consolidations, investments, guarantees, acquisitions, sales of assets, and transactions with affiliates. Dividends, redemptions and other payments on equity are generally limited to $20.0 million in any fiscal year; higher amounts may be paid if the total net leverage ratio does not exceed 3.0 to 1.0. Customary events of default (with customary grace periods, notice and cure periods and thresholds) include payment default, breach of representation in any material respect, breach of covenants, default to material indebtedness, bankruptcy, ERISA violations, material judgments, change in control and termination of invalidity of guaranty or security documents. As of February 25, 2017, we are in compliance with the financial covenants of the Credit Facility agreements.
The ABL and Term Loan are guaranteed by Winnebago Industries, Inc. and all material direct and indirect domestic subsidiaries, and are secured by a security interest in all property of ours, except minor excluded assets.
As of February 25, 2017, $10.5 million of debt issuance costs, net of amortization of $0.5 million, were recorded as a direct deduction from long-term debt, $1.4 million from the current portion and $9.1 million from the long-term portion. Unamortized debt issuance costs of $0.1 million related to the prior Amended Credit Agreement were expensed in the three months ended November 26, 2016.
Aggregate contractual maturities of debt in future fiscal years, are as follows:
(In thousands)
 
Amount
Year:
2017
 
$
6,000

 
2018
 
14,250

 
2019
 
15,000

 
2020
 
15,000

 
2021
 
15,000

 
2022
 
55,000

 
2023
 
15,000

 
2024
 
204,750

 
Total debt
 
$
340,000


Note 10: Employee and Retiree Benefits
Postretirement health care and deferred compensation benefits are as follows:
(In thousands)
 
February 25,
2017
 
August 27,
2016
Postretirement health care benefit cost
 
$

 
$
6,346

Non-qualified deferred compensation
 
17,230

 
18,003

Executive share option plan liability
 
2,468

 
3,341

SERP benefit liability
 
2,723

 
2,681

Executive deferred compensation
 
495

 
389

Officer stock-based compensation
 
1,080

 
763

Total deferred compensation and postretirement health care benefits
 
23,996

 
31,523

Less current portion
 
(4,626
)
 
(4,574
)
Long-term deferred compensation and postretirement health care benefits
 
$
19,370

 
$
26,949


Postretirement Health Care Benefits
Historically, we provided certain health care and other benefits for retired employees hired before April 1, 2001, who had fulfilled eligibility requirements at age 55 with 15 years of continuous service. We used a September 1 measurement date for this plan and our postretirement health care plan was not funded.

In Fiscal 2005, through a plan amendment, we established dollar caps on the amount that we paid for postretirement health care benefits per retiree on an annual basis so that we were not exposed to continued medical inflation. Retirees were required to pay a monthly premium in excess of the employer dollar caps for medical coverage based on years of service and age at retirement. Each year from 2012 to 2015, the employer established dollar caps were reduced by 10% through plan amendments. In 2016, postretirement health care benefits were discontinued for retirees age 65 and over.  The plan amendment also included

14


10% reduction in employer paid premiums for retirees under age 65. On October 26, 2016, we announced the termination of the remaining postretirement health care benefits to all participants. Beginning January 1, 2017, postretirement health care benefits were discontinued for retirees under age 65. As a result of these amendments, our liability for postretirement health care was reduced as presented in the following table.
Date
Event
 
Dollar Cap
Reduction
Liability
Reduction
(In thousands)
Amortization
Period(1)
Fiscal 2005
Established employer dollar caps
 
 
$
40,414

11.5
years
January 2012
Reduced employer dollar caps
 
10%
4,598

7.8
years
January 2013
Reduced employer dollar caps
 
10%
4,289

7.5
years
January 2014
Reduced employer dollar caps
 
10%
3,580

7.3
years
January 2015
Reduced employer dollar caps
 
10%
3,960

7.1
years
January 2016
Reduced employer dollar caps for retirees under age 65; discontinued retiree benefits for retirees age 65 and over
 
10%
28,596

6.9
years
January 2017 (2)
Terminated plan
 
 
6,338

0.2
years
(1) Plan amendments were amortized on a straight-line basis over the expected remaining service period of active plan participants.
(2) In accordance with ASC 715, the effects of the plan amendment are accounted for at the date the amendment is adopted and has been communicated to plan participants. The effective date for this plan amendment was October 26, 2016.

Net periodic postretirement benefit income consisted of the following components:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
February 25,
2017
 
February 27,
2016
 
February 25,
2017
 
February 27,
2016
Interest cost
 
$

 
$
58

 
$
29

 
$
211

Service cost
 

 
23

 
16

 
63

Amortization of prior service benefit
 
(19,672
)
 
(2,008
)
 
(40,444
)
 
(3,720
)
Amortization of net actuarial loss
 
7,689

 
415

 
15,648

 
782

Net periodic postretirement benefit income
 
$
(11,983
)
 
$
(1,512
)
 
$
(24,751
)
 
$
(2,664
)
 
 
 
 
 
 
 
 
 
Payments for postretirement health care
 
$
15

 
$
278

 
$
68

 
$
506

 
Note 11: Shareholders' Equity
Stock-Based Compensation
We have a 2014 Omnibus Equity, Performance Award, and Incentive Compensation Plan (as amended, the "Plan") in place as approved by shareholders, which allows us to grant or issue non-qualified stock options, incentive stock options, share awards and other equity compensation to key employees and to non-employee directors.
On October 11, 2016 and October 13, 2015 the Human Resources Committee of the Board of Directors granted an aggregate of 97,600 and 204,200 shares, respectively, of restricted common stock to our key employees and non-employee directors under the Plan. The value of the restricted stock award is determined using the intrinsic value method which, in this case, is based on the number of shares granted and the closing price of our common stock on the date of grant.
Stock-based compensation expense was $0.7 million and $0.6 million during the second quarters of Fiscal 2017 and 2016, respectively. Stock-based compensation expense was $1.5 million and $1.3 million during the first six months of Fiscal 2017 and 2016, respectively. Compensation expense is recognized over the requisite service period of the award.
Dividends
On December 14, 2016, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock, which was paid on January 25, 2017 to shareholders of record at the close of business on January 11, 2017.

On March 15, 2017, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock, payable on April 26, 2017 to shareholders of record at the close of business on April 12, 2017.

Share Registration
As a result of the acquisition of Grand Design, Winnebago agreed to register the 4,586,555 shares of common stock issued to the Summit Sellers and the RDB Sellers pursuant to the terms of a registration rights agreement. Under the registration rights agreement, Winnebago filed a shelf registration statement on January 20, 2017 to register these shares for resale.


15


Note 12: Contingent Liabilities and Commitments
Repurchase Commitments
Generally, manufacturers in the RV industry enter into repurchase agreements with lending institutions which have provided wholesale floorplan financing to dealers. Most dealers' RVs are financed on a "floorplan" basis under which a bank or finance company lends the dealer all, or substantially all, of the purchase price, collateralized by a security interest in the recreation vehicles purchased.
Our repurchase agreements provide that, in the event of default by the dealer on the agreement to pay the lending institution, we will repurchase the financed merchandise. The terms of these agreements, which generally can last up to 18 months, provide that our liability will be the lesser of remaining principal owed by the dealer to the lending institution, or dealer invoice less periodic reductions based on the time since the date of the original invoice. Our total contingent liability on all repurchase agreements was approximately $640.2 million and $409.3 million at February 25, 2017 and August 27, 2016, respectively, with the increase attributed primarily to Grand Design.
In certain instances, we also repurchase inventory from our dealers due to state law or regulatory requirements that govern voluntary or involuntary relationship terminations. Although laws vary from state to state, some states have laws in place that require manufacturers of recreation vehicles to repurchase current inventory if a dealership exits the business. Incremental repurchase exposure beyond existing repurchase agreements, related to dealer inventory in states that we have had historical experience of repurchasing inventory, totaled $10.9 million and $7.9 million at February 25, 2017 and August 27, 2016, respectively, with the increase attributed primarily to Grand Design.
Our risk of loss related to our repurchase commitments is significantly reduced by the potential resale value of any products that are subject to repurchase and is spread over numerous dealers and lenders although two dealer organizations account for approximately 26% of our revenues in the first six months of Fiscal 2017. The aggregate contingent liability related to our repurchase agreements represents all financed dealer inventory at the period reporting date subject to a repurchase agreement, net of the greater of periodic reductions per the agreement or dealer principal payments. Based on the repurchase exposure as previously described, we established an associated loss reserve. Our accrued losses on repurchases were $1.5 million as of February 25, 2017 and $0.9 million as of August 27, 2016. Repurchase risk is affected by the credit worthiness of our dealer network and we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to establish the loss reserve for repurchase commitments.
A summary of repurchase activity is as follows:
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
February 25,
2017
 
February 27,
2016
 
February 25,
2017
 
February 27,
2016
Inventory repurchased
 
$

 
$

 
$

 
$

Cash collected on resold inventory
 
$
22

 
$

 
$
22

 
$
36

Loss (gain) realized on resold inventory
 
$
6

 
$

 
$
6

 
$
(1
)

Litigation
We are involved in various legal proceedings which are ordinary litigation incidental to our business, some of which are covered in whole or in part by insurance. While we believe the ultimate disposition of litigation will not have material adverse effect on our financial position, results of operations or liquidity, there exists the possibility that such litigation may have an impact on our results for a particular reporting period in which litigation effects become probable and reasonably estimable.  Though we do not believe there is a reasonable likelihood that there will be a material change related to these matters, litigation is subject to inherent uncertainties and management’s view of these matters may change in the future.  
Lease Commitments
As part of our acquisition of Grand Design, we acquired leases to two properties which hold Grand Design’s current principal facilities, and facilities under construction for expansion. The lessor under these leases is an Indiana limited liability company, Three Oaks, LLC, owned by three of Grand Design's selling equity holders. One of the selling equity holders, Mr. Don Clark, has assumed the position of Vice President for Winnebago and is the President of Grand Design. Upon joining our company, Mr. Clark has agreed that as long as he is an employee of Grand Design he has relinquished his voting rights in Three Oaks, LLC while retaining all other economic rights in Three Oaks, LLC.

16


Our future lease commitments included these related party leases as well as a non-related party lease of an office facility as follows:
(In thousands)
 
Related Party Amount
Non-related Party Amount
Total
Year Ended:
2017
 
$
858

$
224

$
1,082

 
2018
 
1,897

477

2,374

 
2019
 
1,800

505

2,305

 
2020
 
1,800

518

2,318

 
2021
 
1,800

523

2,323

 
Thereafter
 
8,374

766

9,140

 
Total
 
$
16,529

$
3,013

$
19,542

No other significant changes have been made to lease commitments disclosed in our Form 10-K for the year ended August 27, 2016.
Note 13: Income Taxes
We account for income taxes under ASC 740, Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns.

We file tax returns in the US federal jurisdiction, as well as various international and state jurisdictions. Although certain years are no longer subject to examination by the IRS and various state taxing authorities, net operating loss carryforwards generated in those years may still be adjusted upon examination by the IRS or state taxing authorities if they have been or will be used in a future period. As of February 25, 2017, our federal returns from Fiscal 2012 to present continue to be subject to review by the IRS. The IRS review of our Fiscal 2014 Federal Return has been finalized with no material adjustment. With few exceptions, the state returns from Fiscal 2009 to present continue to be subject to review by the state taxing jurisdictions. We recently have concluded a state audit covering our Fiscal 2012-14 years with no material adjustment. A number of years may elapse before an uncertain tax position is audited and finally resolved, and it is often very difficult to predict the outcome of such audits.

As of February 25, 2017, our unrecognized tax benefits were $1.9 million including accrued interest and penalties of $0.6 million. If we were to prevail on all unrecognized tax benefits recorded, $1.5 million of the $1.9 million would benefit the overall effective tax rate. It is our policy to recognize interest and penalties accrued relative to unrecognized tax benefits as tax expense. We do not believe that there will be a significant change in the total amount of unrecognized tax benefits within the next twelve months.

Note 14: Earnings Per Share
The following table reflects the calculation of basic and diluted net income per share:
 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
 
February 25,
2017
 
February 27,
2016
 
February 25,
2017
 
February 27,
2016
Income per share - basic
 
 
 
 
 
 
 
 
Net income
 
$
15,278

 
$
9,354

 
$
27,016

 
$
17,912

Weighted average shares outstanding
 
31,577

 
26,936

 
29,707

 
26,956

Net income per share - basic
 
$
0.48

 
$
0.35

 
$
0.91

 
$
0.66

 
 
 
 
 
 
 
 
 
Income per share - assuming dilution
 
 
 
 
 
 
 
 
Net income
 
$
15,278

 
$
9,354

 
$
27,016

 
$
17,912

Weighted average shares outstanding
 
31,577

 
26,936

 
29,707

 
26,956

Dilutive impact of awards and options outstanding
 
109

 
79

 
120

 
86

Weighted average shares and potential dilutive shares outstanding
 
31,686

 
27,015

 
29,827

 
27,042

Net income per share - assuming dilution
 
$
0.48

 
$
0.35

 
$
0.91

 
$
0.66


The computation of weighted average shares and potential dilutive shares outstanding excludes the effects of options to purchase 61,000 and 15,846 shares of common stock at February 25, 2017 and February 27, 2016, respectively. These amounts were not included in the computation of diluted income per share because they are considered anti-dilutive under the treasury stock method per ASC 260, Earnings Per Share.


17


Note 15: Accumulated Other Comprehensive Income (Loss)

Changes in AOCI by component, net of tax, were:
 
 
Three Months Ended
 
 
February 25, 2017
 
February 27, 2016
(In thousands)
 
Defined Benefit Pension Items
 
Interest Rate Swap
 
Total
 
Defined Benefit Pension Items
 
Interest Rate Swap
 
Total
Balance at beginning of period
 
$
6,952

 
$

 
$
6,952

 
$
14,598

 
$

 
$
14,598

 
 
 
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications
 

 
(439
)
 
(439
)
 

 

 

Amounts reclassified from AOCI
 
(7,413
)
 

 
(7,413
)
 
(982
)
 

 
(982
)
Net current-period OCI
 
(7,413
)
 
(439
)
 
(7,852
)
 
(982
)
 

 
(982
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at end of period
 
$
(461
)
 
$
(439
)
 
$
(900
)

$
13,616

 
$

 
$
13,616

 
 
Six Months Ended
 
 
February 25, 2017
 
February 27, 2016
(In thousands)
 
Defined Benefit Pension Items
 
Interest Rate Swap
 
Total
 
Defined Benefit Pension Items
 
Interest Rate Swap
 
Total
Balance at beginning of period
 
$
10,975

 
$

 
$
10,975

 
$
(2,274
)
 
$

 
$
(2,274
)
 
 
 
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications
 
3,903

 
(439
)
 
3,464

 
17,701

 

 
17,701

Amounts reclassified from AOCI
 
(15,339
)
 

 
(15,339
)
 
(1,811
)
 

 
(1,811
)
Net current-period OCI
 
(11,436
)
 
(439
)
 
(11,875
)
 
15,890

 

 
15,890

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at end of period
 
$
(461
)
 
$
(439
)
 
$
(900
)
 
$
13,616

 
$

 
$
13,616



Reclassifications out of AOCI in net periodic benefit costs, net of tax, were:
 
 
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
Location on Consolidated Statements
of Income and Comprehensive Income
 
February 25,
2017
 
February 27,
2016
 
February 25,
2017
 
February 27,
2016
Amortization of prior service credit
 
Operating expenses
 
$
(12,177
)
 
$
(1,242
)
 
(25,035
)
 
(2,302
)
Amortization of net actuarial loss
 
Operating expenses
 
4,764

 
260

 
9,696

 
491

Total reclassifications
 
 
 
$
(7,413
)
 
$
(982
)
 
$
(15,339
)
 
$
(1,811
)

Note 16: Subsequent Event

On March 15, 2017 our Board of Directors declared a cash dividend of $0.10 per share as noted in Note 11.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This management's discussion should be read in conjunction with the Unaudited Consolidated Financial Statements contained in this Form 10-Q as well as the Management's Discussion and Analysis and Risk Factors included in our Annual Report on Form 10‑K for the fiscal year ended August 27, 2016 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Forward-Looking Information

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. 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

18


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, any unexpected expenses related to ERP, risks relating to the integration of our acquisition of Grand Design including: risks inherent in the achievement of cost synergies and the timing thereof, risks related to the disruption of the transaction to Winnebago and Grand Design and its management, the effect of the transaction on Grand Design's ability to retain and hire key personnel and maintain relationships with customers, suppliers and other third parties, risk related to compliance with debt covenants and leverage ratios, risks related to integration of the two companies and other factors. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested is contained in our filings with the SEC over the last 12 months, copies of which are available from the SEC or from us upon request. We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this release or to reflect any changes in expectations after the date of this release or any change in events, conditions or circumstances on which any statement is based, except as required by law.

Overview
Winnebago Industries, Inc. is a leading US manufacturer of RVs with a proud history of manufacturing RV products for more than 50 years. We currently produce the majority of our motorhomes in vertically integrated manufacturing facilities in Iowa and we produce all 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.
Significant Transaction

On November 8, 2016, we closed on the acquisition of all the issued and outstanding capital stock of towable recreational vehicle manufacturer Grand Design for initial consideration of $520.5 million. This acquisition was funded from our cash on hand, $353.0 million from asset-based revolving and term loan credit facilities, as well as stock consideration as is more fully described in Note 2 and Note 9 to the Consolidated Financial Statements. We purchased Grand Design to significantly expand our existing towable RV product offerings and dealer base and acquire executive talent in the RV industry.

In the first quarter of Fiscal 2017, we revised our reporting segments. Previously we had one reporting segment which included all recreational vehicle products and services. With the acquisition of Grand Design in the first quarter, we expanded the number of reporting segments to two: (1) Motorized products and services and (2) Towable products and services. The Motorized segment includes all products that include a motorized chassis as well as other related manufactured products. The Towable segment includes all products which are not motorized and are generally towed by another vehicle. Prior year segment information has been restated to conform to the current reporting segment presentation.

Market Share

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 January
 
Calendar Year
US and Canada
 
2017
2016
 
2016
2015
2014
2013
Motorized A, B, C
 
17.8
%
20.2
%
 
18.0
%
20.5
%
20.7
%
18.6
%
Travel trailer and fifth wheels
 
1.9% (1)

0.9
%
 
1.7% (1)

0.9
%
0.8
%
1.0
%
(1) 
Includes retail unit market share for Grand Design since acquisition on November 8, 2016.

Industry Trends

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 the dealer, which is reported monthly 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 2017 and 2016 as noted in the next table illustrates that the RV industry continues to grow both at the wholesale and retail level. We believe that retail demand is the key driver to continued growth in the RV industry and that annual RV shipments will generally be in line with retail registrations in the future.
 

19


 
US and Canada Industry
 
Wholesale Unit Shipments per RVIA
 
Retail Unit Registrations per Stat Surveys
 
Rolling 12 Months through January
 
Rolling 12 Months through January
 
2017

2016

Unit Change
% Change
 
2017

2016

Unit Change
% Change
Towable (1)
364,642

316,808

47,834

15.1
%
 
344,590

311,026

33,564

10.8
%
Motorized (2)
55,391

47,856

7,535

15.7
%
 
50,262

45,363

4,899

10.8
%
Combined
420,033

364,664

55,369

15.2
%
 
394,852

356,389

38,463

10.8
%
(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 2017 compared to actual 2016 shipments 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 Shipments per RVIA
 
2017 Forecast (1)
2016 Actual
Unit Change
% Change
Towable
 
374,400

362,685

11,715

3.2
%
Motorized
 
57,700

54,741

2,959

5.4
%
Combined
 
432,100

417,426

14,674

3.5
%
(1) 
Forecast prepared by Dr. Richard Curtin of the University of Michigan Consumer Survey Research Center for RVIA and reported in the Roadsigns RV Spring 2017 Industry Forecast Issue.

ERP System

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 expensed in the period incurred and 60% will be capitalized and depreciated over its useful life.

The following table illustrates the cumulative project costs:
 
 
Fiscal
 
Fiscal
 
Fiscal 2017
 
Cumulative
(In thousands)
 
2015
 
2016
 
Q1
 
Q2
 
Investment
Capitalized
 
$
3,291

 
$
7,798

 
$
1,518

 
$
530

 
$
13,137

(1) 
56
%
Expensed
 
2,528

 
5,930

 
1,165

 
517

 
10,140

 
44
%
Total
 
$
5,819

 
$
13,728

 
$
2,683

 
$
1,047

 
$
23,277

 
100
%
(1) $6.4 million of our cumulative capitalized investment has been placed in service and is being amortized over a 10-year life.


20


Consolidated Results of Operations
Current Quarter Compared to the Comparable Quarter Last Year
The following is an analysis of changes in key items included in the consolidated statements of operations:
 
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