UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One) | |
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the quarterly period ended February 29, 2020
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| For the quarterly period ended February 24, 2018or | | |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | |
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| For the transition period from _________________ to _________________ | | |
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| Commission File Number:001-06403 | 001-06403 | |
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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.) | |
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Iowa | | | 42-0802678 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
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P. O. Box 152 | Forest City Iowa | Iowa | | | 50436 | |
(Address of principal executive offices) | | | | | (Zip Code) | |
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| (641) 585-3535 | 641- | | 585-3535 | | |
(Registrant's telephone number, including area code) | | | | | | |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.50 par value per share | WGO | New York Stock Exchange |
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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filerx
| | Accelerated filero
| | Non-accelerated filero
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Smaller reporting companyo
| | Emerging growth companyo
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Large Accelerated Filer ☒ Accelerated Filer ☐ Non-accelerated filer ☐ Smaller Reporting Company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 on March 21, 201818, 2020 was 31,659,393.33,696,855.
Winnebago Industries, Inc.
Table of Contents
Glossary
The following terms and abbreviations appear in the text of this report and are defined as follows:
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| |
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) |
ASC | Accounting Standards Codification |
ASP | Average Sales Price |
ASU | Accounting Standards Update |
Blocker Corporation | SP GE VIII - B GD RV Blocker Corporation |
Credit Agreement | 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 |
Octavius | Octavius Corporation, a wholly-owned subsidiary of Winnebago Industries, Inc. |
RV | Recreation Vehicle |
RVIA | Recreation Vehicle Industry Association |
SEC | US Securities and Exchange Commission |
Securities Purchase Agreement | Purchase Agreement dated as of November 8, 2016 between Winnebago Industries, Inc. and Grand Design RV, LLC |
SERP | Supplemental Executive Retirement Plan |
SG&A | Selling, General and Administrative Expenses |
Stat Surveys | Statistical Surveys, Inc. |
Tax Act | The Tax Cuts and Jobs Act |
Term Loan | Loan Agreement dated as of November 8, 2016 and as amended on December 8, 2017 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 that are not motorized and are towable by another vehicle |
US | United States of America |
XBRL | eXtensible Business Reporting Language |
PART I. FINANCIAL INFORMATIONINFORMATION.
Item 1. Condensed Consolidated Financial StatementsStatements.
Winnebago Industries, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
| | | | | | | | | | | | Three Months Ended | | | Six Months Ended | |
| | Three Months Ended | | Six Months Ended | |
(In thousands, except per share data) | | February 24, 2018 | | February 25, 2017 | | February 24, 2018 | | February 25, 2017 | |
(in thousands, except per share data) | | (in thousands, except per share data) | February 29, 2020 | | February 23, 2019 | | February 29, 2020 | | February 23, 2019 |
Net revenues | | $ | 468,359 |
| | $ | 370,510 |
| | $ | 918,380 |
| | $ | 615,818 |
| Net revenues | $ | 626,810 | | | $ | 432,690 | | | $ | 1,215,268 | | | $ | 926,338 | |
Cost of goods sold | | 400,698 |
| | 321,194 |
| | 787,888 |
| | 537,627 |
| Cost of goods sold | 547,028 | | | 366,261 | | | 1,056,873 | | | 788,913 | |
Gross profit | | 67,661 |
| | 49,316 |
| | 130,492 |
| | 78,191 |
| Gross profit | 79,782 | | | 66,429 | | | 158,395 | | | 137,425 | |
SG&A: | | | | | | | | | |
Selling | | 12,209 |
| | 9,553 |
| | 24,343 |
| | 15,423 |
| |
General and administrative | | 18,268 |
| | 12,540 |
| | 35,684 |
| | 22,446 |
| |
Postretirement health care benefit income | | — |
| | (11,983 | ) | | — |
| | (24,796 | ) | |
Transaction costs | | — |
| | 463 |
| | 50 |
| | 5,925 |
| |
Selling, general, and administrative expenses | | Selling, general, and administrative expenses | 42,164 | | | 35,259 | | | 93,269 | | | 70,971 | |
Amortization of intangible assets | | 1,933 |
| | 10,367 |
| | 3,988 |
| | 12,418 |
| Amortization of intangible assets | 7,974 | | | 2,267 | | | 11,588 | | | 4,926 | |
Total SG&A | | 32,410 |
| | 20,940 |
| | 64,065 |
| | 31,416 |
| |
Total operating expenses | | Total operating expenses | 50,138 | | | 37,526 | | | 104,857 | | | 75,897 | |
Operating income | | 35,251 |
| | 28,376 |
| | 66,427 |
| | 46,775 |
| Operating income | 29,644 | | | 28,903 | | | 53,538 | | | 61,528 | |
Interest expense | | 4,918 |
| | 5,178 |
| | 9,699 |
| | 6,306 |
| Interest expense | 8,651 | | | 4,346 | | | 14,700 | | | 8,847 | |
Non-operating expense (income) | | 11 |
| | 4 |
| | (112 | ) | | (83 | ) | |
Non-operating income | | Non-operating income | (270) | | | (207) | | | (386) | | | (970) | |
Income before income taxes | | 30,322 |
| | 23,194 |
| | 56,840 |
| | 40,552 |
| Income before income taxes | 21,263 | | | 24,764 | | | 39,224 | | | 53,651 | |
Provision for income taxes | | 8,234 |
| | 7,916 |
| | 16,794 |
| | 13,536 |
| Provision for income taxes | 3,995 | | | 3,166 | | | 7,888 | | | 9,892 | |
Net income | | $ | 22,088 |
| | $ | 15,278 |
| | $ | 40,046 |
| | $ | 27,016 |
| Net income | $ | 17,268 | | | $ | 21,598 | | | $ | 31,336 | | | $ | 43,759 | |
| | | | | | | | | | | | | | | | |
Income per common share: | | | | | | | | | Income per common share: | |
Basic | | $ | 0.70 |
| | $ | 0.48 |
| | $ | 1.27 |
| | $ | 0.91 |
| Basic | $ | 0.51 | | | $ | 0.68 | | | $ | 0.95 | | | $ | 1.39 | |
Diluted | | $ | 0.69 |
| | $ | 0.48 |
| | $ | 1.26 |
| | $ | 0.91 |
| Diluted | $ | 0.51 | | | $ | 0.68 | | | $ | 0.95 | | | $ | 1.38 | |
| | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | Weighted average common shares outstanding: | |
Basic | | 31,654 |
| | 31,577 |
| | 31,634 |
| | 29,707 |
| Basic | 33,614 | | | 31,577 | | | 32,840 | | | 31,572 | |
Diluted | | 31,854 |
| | 31,686 |
| | 31,852 |
| | 29,827 |
| Diluted | 33,918 | | | 31,724 | | | 33,143 | | | 31,755 | |
| | | | | | | | | |
Dividends paid per common share | | $ | 0.20 |
| | $ | 0.10 |
| | $ | 0.20 |
| | $ | 0.20 |
| |
| | | | | | | | | |
Net income | | $ | 22,088 |
| | $ | 15,278 |
| | $ | 40,046 |
| | $ | 27,016 |
| Net income | $ | 17,268 | | | $ | 21,598 | | | $ | 31,336 | | | $ | 43,759 | |
Other comprehensive income (loss): | | | | | | | | | Other comprehensive income (loss): | |
Amortization of prior service credit (net of tax of $0, $7,495, $0 and $15,409) | | — |
| | (12,177 | ) | | — |
| | (25,035 | ) | |
Amortization of net actuarial loss (net of tax of $2, $2,932, $6 and $5,968) | | 7 |
| | 4,764 |
| | 13 |
| | 9,696 |
| |
Plan amendment (net of tax of $0, $0, $0 and $2,402) | | — |
| | — |
| | — |
| | 3,903 |
| |
Change in fair value of interest rate swap (net of tax of $448, $270, $835 and $270) | | 1,283 |
| | (439 | ) | | 1,917 |
| | (439 | ) | |
Amortization of net actuarial loss (net of tax of $3, $2, $5, and $5) | | Amortization of net actuarial loss (net of tax of $3, $2, $5, and $5) | 8 | | | 8 | | | 16 | | | 16 | |
Interest rate swap activity (net of tax of $—, $206, $22, and $213) | | Interest rate swap activity (net of tax of $—, $206, $22, and $213) | — | | | (634) | | | (68) | | | (656) | |
Total other comprehensive income (loss) | | 1,290 |
| | (7,852 | ) | | 1,930 |
| | (11,875 | ) | Total other comprehensive income (loss) | 8 | | | (626) | | | (52) | | | (640) | |
Comprehensive income | | $ | 23,378 |
| | $ | 7,426 |
| | $ | 41,976 |
| | $ | 15,141 |
| Comprehensive income | $ | 17,276 | | | $ | 20,972 | | | $ | 31,284 | | | $ | 43,119 | |
See notesNotes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
Winnebago Industries, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| | (In thousands, except per share data) | February 24, 2018 | | August 26, 2017 | |
(in thousands, except per share data) | | (in thousands, except per share data) | February 29, 2020 | | August 31, 2019 |
Assets | | | | Assets | | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 27,443 |
| | $ | 35,945 |
| Cash and cash equivalents | $ | 122,939 | | | $ | 37,431 | |
Receivables, less allowance for doubtful accounts ($174 and $183) | 157,425 |
| | 124,539 |
| |
Inventories | 178,046 |
| | 142,265 |
| |
Receivables, less allowance for doubtful accounts ($381 and $160, respectively) | | Receivables, less allowance for doubtful accounts ($381 and $160, respectively) | 182,475 | | | 158,049 | |
Inventories, net | | Inventories, net | 237,808 | | | 201,126 | |
Prepaid expenses and other assets | 9,788 |
| | 11,388 |
| Prepaid expenses and other assets | 20,883 | | | 14,051 | |
Total current assets | 372,702 |
| | 314,137 |
| Total current assets | 564,105 | | | 410,657 | |
Property, plant and equipment, net | 78,798 |
| | 71,560 |
| |
Property, plant, and equipment, net | | Property, plant, and equipment, net | 169,840 | | | 127,572 | |
Other assets: | | | | Other assets: | |
Goodwill | 244,684 |
| | 242,728 |
| Goodwill | 348,860 | | | 274,931 | |
Other intangible assets, net | 224,452 |
| | 228,440 |
| Other intangible assets, net | 415,285 | | | 256,082 | |
Investment in life insurance | 27,921 |
| | 27,418 |
| Investment in life insurance | 27,231 | | | 26,846 | |
Deferred income taxes | 9,813 |
| | 12,736 |
| |
Operating lease assets | | Operating lease assets | 30,460 | | | — | |
Other assets | 6,956 |
| | 5,493 |
| Other assets | 16,146 | | | 8,143 | |
Total assets | $ | 965,326 |
| | $ | 902,512 |
| Total assets | $ | 1,571,927 | | | $ | 1,104,231 | |
| | | | | | | |
Liabilities and Stockholders' Equity | | | | Liabilities and Stockholders' Equity | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable | $ | 99,727 |
| | $ | 79,194 |
| Accounts payable | $ | 99,211 | | | $ | 81,635 | |
Current maturities of long-term debt | — |
| | 2,850 |
| |
Income taxes payable | 2,792 |
| | 7,450 |
| |
| Accrued expenses: | | | | Accrued expenses: | |
Accrued compensation | 25,407 |
| | 24,546 |
| Accrued compensation | 28,639 | | | 20,328 | |
Product warranties | 34,988 |
| | 30,805 |
| Product warranties | 60,211 | | | 44,436 | |
Self-insurance | 9,124 |
| | 6,122 |
| Self-insurance | 15,639 | | | 13,820 | |
Promotional | 11,136 |
| | 6,560 |
| Promotional | 13,761 | | | 10,896 | |
Accrued interest | 2,255 |
| | 3,128 |
| Accrued interest | 747 | | | 4,059 | |
Other | 10,161 |
| | 6,503 |
| Other | 18,773 | | | 13,678 | |
Current maturities of long-term debt | | Current maturities of long-term debt | 13,668 | | | 8,892 | |
Total current liabilities | 195,590 |
| | 167,158 |
| Total current liabilities | 250,649 | | | 197,744 | |
Non-current liabilities: | | | | Non-current liabilities: | | | |
Long-term debt, less current maturities | 271,102 |
| | 271,726 |
| Long-term debt, less current maturities | 451,134 | | | 245,402 | |
Deferred income taxes | | Deferred income taxes | 17,057 | | | 12,032 | |
Unrecognized tax benefits | 1,668 |
| | 1,606 |
| Unrecognized tax benefits | 6,253 | | | 3,591 | |
Operating lease liabilities | | Operating lease liabilities | 27,882 | | | — | |
Deferred compensation benefits, net of current portion | 18,907 |
| | 19,270 |
| Deferred compensation benefits, net of current portion | 12,166 | | | 12,878 | |
Other | 250 |
| | 1,078 |
| Other | 5,262 | | | 372 | |
Total non-current liabilities | 291,927 |
| | 293,680 |
| Total non-current liabilities | 519,754 | | | 274,275 | |
Contingent liabilities and commitments (Note 12) | | Contingent liabilities and commitments (Note 12) | | | |
Stockholders' equity: | | | | Stockholders' equity: | |
Capital stock common (par value $0.50; authorized 60,000 shares, issued 51,776 shares) | 25,888 |
| | 25,888 |
| |
Preferred stock, par value $0.01: Authorized-10,000 shares; Issued-0 | | Preferred stock, par value $0.01: Authorized-10,000 shares; Issued-0 | — | | | — | |
Common stock, par value $0.50: Authorized-60,000 shares; Issued-51,776 shares | | Common stock, par value $0.50: Authorized-60,000 shares; Issued-51,776 shares | 25,888 | | | 25,888 | |
Additional paid-in capital | 80,721 |
| | 80,401 |
| Additional paid-in capital | 200,751 | | | 91,185 | |
Retained earnings | 712,809 |
| | 679,138 |
| Retained earnings | 890,994 | | | 866,886 | |
Accumulated other comprehensive income (loss) | 907 |
| | (1,023 | ) | |
Treasury stock, at cost (20,117 and 20,183 shares) | (342,516 | ) | | (342,730 | ) | |
Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (543) | | | (491) | |
Treasury stock, at cost: 18,153 and 20,262 shares, respectively | | Treasury stock, at cost: 18,153 and 20,262 shares, respectively | (315,566) | | | (351,256) | |
Total stockholders' equity | 477,809 |
| | 441,674 |
| Total stockholders' equity | 801,524 | | | 632,212 | |
Total liabilities and stockholders' equity | $ | 965,326 |
| | $ | 902,512 |
| Total liabilities and stockholders' equity | $ | 1,571,927 | | | $ | 1,104,231 | |
See notesNotes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
Winnebago Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended | | |
(in thousands) | February 29, 2020 | | February 23, 2019 |
Operating activities: | | | |
Net income | $ | 31,336 | | | $ | 43,759 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 7,720 | | | 6,268 | |
Amortization of intangible assets | 11,588 | | | 4,926 | |
Non-cash interest expense, net | 4,182 | | | — | |
Amortization of debt issuance costs | 1,457 | | | 790 | |
Last-in, first-out expense | 664 | | | 1,029 | |
Stock-based compensation | 3,640 | | | 4,605 | |
Deferred income taxes | 576 | | | 346 | |
Other, net | 252 | | | (170) | |
Change in assets and liabilities: | | | |
Receivables | 11,734 | | | (15,355) | |
Inventories | 45,275 | | | 4,488 | |
Prepaid expenses and other assets | (4,081) | | | (4,926) | |
Accounts payable | 4,688 | | | 11,992 | |
Income taxes and unrecognized tax benefits | (966) | | | (15,216) | |
Accrued expenses and other liabilities | 1,099 | | | 9,402 | |
Net cash provided by operating activities | 119,164 | | | 51,938 | |
| | | |
Investing activities: | | | |
Purchases of property and equipment | (19,057) | | | (23,366) | |
Acquisition of business, net of cash acquired | (264,280) | | | (702) | |
Other, net | 179 | | | 1,044 | |
Net cash used in investing activities | (283,158) | | | (23,024) | |
| | | |
Financing activities: | | | |
Borrowings on credit agreement | 1,112,294 | | | 218,720 | |
Repayments of credit agreement | (1,112,294) | | | (233,922) | |
Proceeds from issuance of convertible senior notes | 300,000 | | | — | |
Purchase of convertible note hedge | (70,800) | | | — | |
Proceeds from issuance of warrants | 42,210 | | | — | |
Payments on long-term debt | (2,750) | | | — | |
Payments of offering costs | (10,761) | | | — | |
Payments of cash dividends | (7,174) | | | (6,713) | |
Payments for repurchase of common stock | — | | | (6,620) | |
Other, net | (1,223) | | | 296 | |
Net cash provided by (used in) financing activities | 249,502 | | | (28,239) | |
| | | |
Net increase (decrease) in cash and cash equivalents | 85,508 | | | 675 | |
Cash and cash equivalents at beginning of period | 37,431 | | | 2,342 | |
Cash and cash equivalents at end of period | $ | 122,939 | | | $ | 3,017 | |
| | | |
|
| | | | | | | |
| Six Months Ended |
(In thousands) | February 24, 2018 | | February 25, 2017 |
Operating activities: | | | |
Net income | $ | 40,046 |
| | $ | 27,016 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 4,328 |
| | 3,428 |
|
Amortization of intangible assets | 3,988 |
| | 12,418 |
|
Amortization of debt issuance costs | 826 |
| | 485 |
|
LIFO expense | 598 |
| | 598 |
|
Stock-based compensation | 3,553 |
| | 1,539 |
|
Deferred income taxes | 2,080 |
| | 6,857 |
|
Deferred compensation expense and postretirement benefit income | 578 |
| | (24,034 | ) |
Other | (498 | ) | | (452 | ) |
Change in assets and liabilities: | | | |
Inventories | (36,379 | ) | | (11,232 | ) |
Receivables, prepaid and other assets | (31,096 | ) | | (21,551 | ) |
Income taxes and unrecognized tax benefits | (4,510 | ) | | (4,631 | ) |
Accounts payable and accrued expenses | 32,908 |
| | 16,131 |
|
Postretirement and deferred compensation benefits | (1,377 | ) | | (1,430 | ) |
Net cash provided by operating activities | 15,045 |
| | 5,142 |
|
| | | |
Investing activities: | | | |
Purchases of property and equipment | (11,675 | ) | | (6,938 | ) |
Proceeds from the sale of property | 299 |
| | 65 |
|
Acquisition of business, net of cash acquired | — |
| | (394,694 | ) |
Other | (18 | ) | | 620 |
|
Net cash used in investing activities | (11,394 | ) | | (400,947 | ) |
| | | |
Financing activities: | | | |
Payments for repurchases of common stock | (1,478 | ) | | (1,365 | ) |
Payments of cash dividends | (6,375 | ) | | (6,370 | ) |
Payments of debt issuance costs | — |
| | (11,020 | ) |
Borrowings on credit facility | 19,700 |
| | 366,400 |
|
Repayments of credit facility | (24,000 | ) | | (26,400 | ) |
Other | — |
| | (92 | ) |
Net cash (used in) provided by financing activities | (12,153 | ) | | 321,153 |
|
| | | |
Net decrease in cash and cash equivalents | (8,502 | ) | | (74,652 | ) |
Cash and cash equivalents at beginning of period | 35,945 |
| | 85,583 |
|
Cash and cash equivalents at end of period | $ | 27,443 |
| | $ | 10,931 |
|
| | | |
Supplemental cash flow disclosure: | | | |
Income taxes paid, net | $ | 19,290 |
| | $ | 11,692 |
|
Interest paid | $ | 8,906 |
| | $ | 1,731 |
|
Non-cash transactions: | | | |
Issuance of Winnebago common stock for acquisition of business | $ | — |
| | $ | 124,066 |
|
Capital expenditures in accounts payable | $ | 1,012 |
| | $ | 322 |
|
| | | | | | | | | | | |
Supplement cash flow disclosure: | | | |
Income taxes paid, net | $ | 7,652 | | | $ | 30,262 | |
Interest paid | $ | 9,938 | | | $ | 7,469 | |
| | | |
Non-cash transactions: | | | |
Issuance of Winnebago common stock for acquisition of business | $ | 92,572 | | | $ | — | |
Capital expenditures in accounts payable | $ | 118 | | | $ | 259 | |
See notesNotes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
Winnebago Industries, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Statement of Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended February 29, 2020 | | | | | | | |
(in thousands, except per share data) | | Common Shares | | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | | Total Stockholders' Equity | |
| Number | Amount | | | | Number | Amount | |
Balances at November 30, 2019 | 51,776 | | $ | 25,888 | | $ | 198,733 | | $ | 877,469 | | $ | (551) | | (18,177) | | $ | (315,930) | | $ | 785,609 | |
Stock-based compensation, net of forfeitures | — | | — | | 1,830 | | — | | — | | — | | 8 | | 1,838 | |
Issuance of stock, net | — | | — | | 188 | | — | | — | | 25 | | 430 | | 618 | |
Repurchase of common stock | — | | — | | — | | — | | — | | (1) | | (74) | | (74) | |
Common stock dividends; $0.11 per share | — | | — | | — | | (3,743) | | — | | — | | — | | (3,743) | |
Actuarial loss, net of tax | — | | — | | — | | — | | 8 | | — | | — | | 8 | |
Net income | — | | — | | — | | 17,268 | | — | | — | | — | | 17,268 | |
Balances at February 29, 2020 | 51,776 | | $ | 25,888 | | $ | 200,751 | | $ | 890,994 | | $ | (543) | | (18,153) | | $ | (315,566) | | $ | 801,524 | |
| | | | | | | | |
| Six Months Ended February 29, 2020 | | | | | | | |
(in thousands, except per share data) | | Common Shares | | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | | Total Stockholders' Equity | |
| Number | Amount | | | | Number | Amount | |
Balances at August 31, 2019 | 51,776 | | $ | 25,888 | | $ | 91,185 | | $ | 866,886 | | $ | (491) | | (20,262) | | $ | (351,256) | | $ | 632,212 | |
Stock-based compensation, net of forfeitures | — | | — | | 3,624 | | — | | — | | — | | 17 | | 3,641 | |
Issuance of stock, net | — | | — | | (2,031) | | — | | — | | 153 | | 2,649 | | 618 | |
Issuance of stock for acquisition | — | | — | | 57,811 | | — | | — | | 2,000 | | 34,761 | | 92,572 | |
Repurchase of common stock | — | | — | | — | | — | | — | | (44) | | (1,737) | | (1,737) | |
Common stock dividends; $0.22 per share | — | | — | | — | | (7,228) | | — | | — | | — | | (7,228) | |
Actuarial loss, net of tax | — | | — | | — | | — | | 16 | | — | | — | | 16 | |
Interest rate swap activity, net of tax | — | | — | | — | | — | | (68) | | — | | — | | (68) | |
Equity component of convertible senior notes and offering costs, net of tax of $20,840 | — | | — | | 61,335 | | — | | — | | — | | — | | 61,335 | |
Convertible note hedge purchase, net of tax of $17,417 | — | | — | | (53,383) | | — | | — | | — | | — | | (53,383) | |
Warrant transactions | — | | — | | 42,210 | | — | | — | | — | | — | | 42,210 | |
Net income | — | | — | | — | | 31,336 | | — | | — | | — | | 31,336 | |
Balances at February 29, 2020 | 51,776 | | $ | 25,888 | | $ | 200,751 | | $ | 890,994 | | $ | (543) | | (18,153) | | $ | (315,566) | | $ | 801,524 | |
| | | | | | | | |
| Three Months Ended February 23, 2019 | | | | | | | |
(in thousands, except per share data) | | Common Shares | | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | | Total Stockholders' Equity | |
| Number | Amount | | | | Number | Amount | |
Balances at November 24, 2018 | 51,776 | | $ | 25,888 | | $ | 88,288 | | $ | 787,794 | | $ | 878 | | (20,178) | | $ | (346,370) | | $ | 556,478 | |
Stock-based compensation, net of forfeitures | — | | — | | 2,117 | | — | | — | | 1 | | 16 | | 2,133 | |
Issuance of restricted stock | — | | — | | (769) | | — | | — | | 45 | | 769 | | — | |
Issuance of stock under ESPP | — | | — | | 46 | | — | | — | | 15 | | 250 | | 296 | |
Repurchase of common stock | — | | — | | — | | — | | — | | (175) | | (5,672) | | (5,672) | |
Common stock dividends; $0.11 per share | — | | — | | — | | (3,541) | | — | | — | | — | | (3,541) | |
Actuarial loss, net of tax | — | | — | | — | | — | | 8 | | — | | — | | 8 | |
Interest rate swap activity, net of tax | — | | — | | — | | — | | (634) | | — | | — | | (634) | |
Net income | — | | — | | — | | 21,598 | | — | | — | | — | | 21,598 | |
Balances at February 23, 2019 | 51,776 | | $ | 25,888 | | $ | 89,682 | | $ | 805,851 | | $ | 252 | | (20,292) | | $ | (351,007) | | $ | 570,666 | |
|
| | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | February 24, 2018 | | February 25, 2017 | | February 24, 2018 | | February 25, 2017 |
Common stock and paid-in capital | | | | | | | | |
Balance, beginning of period | | $ | 105,928 |
| | $ | 104,829 |
| | 106,289 |
| | 58,605 |
|
Issuance of common stock | | (403 | ) | | (436 | ) | | (1,568 | ) | | 44,983 |
|
Stock-based compensation expense | | 1,084 |
| | 700 |
| | 1,888 |
| | 1,505 |
|
Balance, end of period | | 106,609 |
| | 105,093 |
| | 106,609 |
| | 105,093 |
|
| | | |
|
| | | | |
Retained earnings | | | | | | | | |
Balance, beginning of period | | 693,909 |
| | 629,099 |
| | 679,138 |
| | 620,546 |
|
Net income | | 22,088 |
| | 15,278 |
| | 40,046 |
| | 27,016 |
|
Common stock dividends | | (3,188 | ) | | (3,185 | ) | | (6,375 | ) | | (6,370 | ) |
Balance, end of period | | 712,809 |
| | 641,192 |
| | 712,809 |
| | 641,192 |
|
| | | | | | | | |
Accumulated comprehensive income (loss) | | | | | | | | |
Balance, beginning of period | | (383 | ) | | 6,952 |
| | (1,023 | ) | | 10,975 |
|
Other comprehensive income (loss) | | 1,290 |
| | (7,852 | ) | | 1,930 |
| | (11,875 | ) |
Balance, end of period | | 907 |
| | (900 | ) | | 907 |
| | (900 | ) |
| | | | | | | | |
Treasury stock | | | |
|
| | | | |
Balance, beginning of period | | (342,823 | ) | | (343,421 | ) | | (342,730 | ) | | (421,767 | ) |
Issuance of common stock | | 422 |
| | 698 |
| | 1,692 |
| | 80,362 |
|
Common stock repurchased | | (115 | ) | | (47 | ) | | (1,478 | ) | | (1,365 | ) |
Balance, end of period | | (342,516 | ) | | (342,770 | ) | | (342,516 | ) | | (342,770 | ) |
Total stockholders' equity | | $ | 477,809 |
| | $ | 402,615 |
| | 477,809 |
| | 402,615 |
|
Winnebago Industries, Inc.
Condensed Consolidated Statements of Changes in Stockholders' Equity (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended February 23, 2019 | | | | | | | |
(in thousands, except per share data) | | Common Shares | | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | | Total Stockholders' Equity | |
| Number | Amount | | | | Number | Amount | |
Balances at August 25, 2018 | 51,776 | | $ | 25,888 | | $ | 86,223 | | $ | 768,816 | | $ | 892 | | (20,243) | | $ | (347,374) | | $ | 534,445 | |
Stock-based compensation, net of forfeitures | — | | — | | 4,565 | | — | | — | | 3 | | 57 | | 4,622 | |
Issuance of restricted stock | — | | — | | (1,152) | | — | | — | | 156 | | 2,680 | | 1,528 | |
Issuance of stock under ESPP | — | | — | | 46 | | — | | — | | 15 | | 250 | | 296 | |
Repurchase of common stock | — | | — | | — | | — | | — | | (223) | | (6,620) | | (6,620) | |
Common stock dividends; $0.21 per share | — | | — | | — | | (6,724) | | — | | — | | — | | (6,724) | |
Actuarial loss, net of tax | — | | — | | — | | — | | 16 | | — | | — | | 16 | |
Interest rate swap activity, net of tax | — | | — | | — | | — | | (656) | | — | | — | | (656) | |
Net income | — | | — | | — | | 43,759 | | — | | — | | — | | 43,759 | |
Balances at February 23, 2019 | 51,776 | | $ | 25,888 | | $ | 89,682 | | $ | 805,851 | | $ | 252 | | (20,292) | | $ | (351,007) | | $ | 570,666 | |
See notesNotes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
Winnebago Industries, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: 1: Basis of Presentation
The "Company,
Unless the context otherwise requires, the use of the terms "Winnebago," "WGO," "we," "us," and "our" and "us" are used interchangeablyin these Notes to referCondensed Consolidated Financial Statements refers to Winnebago Industries, Inc. and its wholly-owned subsidiaries, as appropriate insubsidiaries.
In the context.
We were incorporated under the lawsopinion of the state of Iowa on February 12, 1958 and adopted our present name on February 28, 1961. Our primary 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,management, the accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements contain all adjustments consistingnecessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”). All adjustments were comprised of normal recurring accruals, necessaryadjustments, except as noted in these Notes to present fairly our consolidated financial position as of February 24, 2018 and the consolidatedCondensed Consolidated Financial Statements.
Interim results of income and comprehensive income, consolidated cash flows and consolidated statement of equity for the first six months of Fiscal 2018 and 2017. The consolidated statements of income and comprehensive income for the first three months and six months of Fiscal 2018 are not necessarily indicative of the results to be expected for the full year. TheseThe interim financial statementsCondensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto appearingConsolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 26, 2017.31, 2019.
Fiscal Period
We follow a 52-/53-week fiscal year, ending the last Saturday in August. Both Fiscal 20182020 is a 52-week year, while Fiscal 2019 was a 53-week year. The extra (53rd) week in Fiscal 2019 was recognized in our fourth quarter.
Subsequent Events
In preparing the accompanying unaudited Condensed Consolidated Financial Statements, we evaluated subsequent events for potential recognition and Fiscal 2017 are 52-week years.disclosure through the date of this filing. There were no material subsequent events, except for the items described below.
Dividend
On March 17, 2020, our Board of Directors declared a quarterly cash dividend of $0.11 per share payable on April 29, 2020 to common stockholders of record at the close of business on April 15, 2020.
Interest Rate Swap
On March 2, 2020, the Company entered into an interest rate swap agreement for an incremental notional amount of $25 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings. The interest rate swap had a fair value of zero at inception, is effective March 4, 2020 and has been designated as a cash flow hedge. The interest rate swap agreement, with a maturity date of March 4, 2025, converts the Company's interest rate payments on $25 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate of 1.364%.
On March 6, 2020, the Company entered into an additional interest rate swap agreement for an incremental notional amount of $25 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings. The interest rate swap had a fair value of zero at inception, is effective March 10, 2020 and has been designated as a cash flow hedge. The interest rate swap agreement, with a maturity date of March 4, 2025, converts the Company's interest rate payments on an incremental $25 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate of 1.265%.
COVID-19
In March 2020, the World Health Organization declared the outbreak of coronavirus (COVID-19) as a pandemic, which continues to spread throughout the United States. On March 23, 2020, the Company announced that it would temporarily suspend production at its facilities anticipated to last through April 12, 2020. While the Company expects this matter to negatively impact its results of operations, the extent to which the coronavirus may impact its liquidity, financial condition, and results of operations is uncertain.
Recently Adopted Accounting Pronouncements
In March 2016,
We adopted Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842), as of September 1, 2019, using the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies several aspectsmodified retrospective basis as of the accounting for employee share-based payment transactions, includingbeginning of the accounting forperiod of adoption. In addition, we elected the related income taxes, forfeitures, statutory tax withholding requirementspackage of practical expedients permitted under the transition guidance with the new standard, which among other things, allowed us to carry forward the historical lease classification, and classificationwe elected the hindsight practical expedient. Adoption of the new standard resulted in the statementrecording 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. We adopted this ASU in the interim quarterly reporting period ended November 25, 2017. Amendments requiring recognitionnet lease assets and lease liabilities of excess tax benefits$33.8 million and tax deficiencies in the statement$33.4 million, respectively, as of incomeSeptember 1, 2019. The standard did not materially impact our consolidated net earnings and comprehensive income resulted in $0.6 million of excess tax benefits recorded as a reduction of income tax expense upon adoption for the three months ended November 25, 2017. The reduction in income tax expense also reduced the effective tax rate by 2.2% and added $0.02 to income per share for the quarter ended November 25, 2017. Amendments related to the presentation of excess tax benefits and employee taxes paid when an employer withholds shares to meet the minimum statutory withholding requirement requiredhad no change to the statement of cash flows. There were no material impacts on the consolidated financial statements of the Company which adopted a policy of accounting for forfeitures when they occur.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330),which requires inventory measured using any method other than 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 is effective prospectively for fiscal years beginning after December 15, 2016 (our Fiscal 2018), including interim periods within those annual reporting periods. We adopted this ASU on August 27, 2017, and there was no material impact on our consolidated financial statements.cash flows.
New Accounting Pronouncements
In May 2014,The following table details line items impacted by the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which establishes a comprehensive new model for the recognitionadoption 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 have performed an evaluation that included a review of representative contracts with key customers and the performance obligations contained therein, as well as a review of our commercial terms and practices across each of our segments. Based on our preliminary review, we do not expect adoption to have a material impact on our consolidated financial statements but further work to substantiate this preliminary conclusion is underway. We will determine the transition method to apply and the implications of using either the full retrospective or modified retrospective approach after this additional work is concluded.
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.within the Condensed Consolidated Balance Sheets as of September 1, 2019:
In August 2016, | | | | | | | | | | | | | | | | | |
(in thousands) | August 31, 2019 As Reported | | ASU 2016-02 Adjustment on September 1, 2019 | | September 1, 2019 As Adjusted |
Assets | | | | | |
Other intangible assets, net | $ | 256,082 | | | $ | (1,310) | | | $ | 254,772 | |
Operating lease assets | — | | | 33,811 | | | 33,811 | |
Total assets | $ | 1,104,231 | | | $ | 32,501 | | | $ | 1,136,732 | |
| | | | | |
Liabilities and Stockholders' Equity | | | | | |
Accrued expenses: Other | $ | 13,678 | | | $ | 1,258 | | | $ | 14,936 | |
Total current liabilities | 197,744 | | | 1,258 | | | 199,002 | |
Operating lease liabilities | — | | | 31,243 | | | 31,243 | |
Total non-current liabilities | 274,275 | | | 31,243 | | | 305,518 | |
Total liabilities and stockholders' equity | $ | 1,104,231 | | | $ | 32,501 | | | $ | 1,136,732 | |
Also, in the FASB issued ASU 2016-15, Classificationfirst quarter 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 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 2017, the FASB issued2020, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815), which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The adoption of this standard did not materially impact our Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2017-122016-13, Financial Instruments - Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments, and has since issued additional amendments. ASU 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. The standard is effective for annual reporting periods beginning after December 15, 20182019 (our Fiscal 2020)2021), including interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluatingexpect to adopt the impact of adopting this ASU on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220), which allows for a reclassification of stranded tax effects from the Tax Cuts and Job Act from accumulated other comprehensive income to retained earnings. This ASU is effective for fiscal years beginning after December 15, 2018 (our Fiscal 2020). 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.
Reporting Segments
We have two reporting segments: (1) Motorized products and services and (2) Towable products and services. We aggregate two operating segments into the Towable reporting segment based upon their similar products, customers, distribution methods, production processes and economic characteristics. We adopted a new corporate allocation policyguidance in the first quarter of Fiscal 2018 that identifies shared costs2021, and allocates themwe do not expect a material impact to our consolidated financial statements.
In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, Income Taxes (Topic 740):Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the operating segments.general principles of Topic 740. The cost drivers selected asstandard is effective for annual reporting periods beginning after December 15, 2020 (our Fiscal 2022), including interim periods within those annual reporting periods. We expect to adopt the basis for allocation are the most appropriate drivers for the type of cost being allocated. All corporate expenses are allocated to the operating segments. Previous tonew guidance in the first quarter of Fiscal 2018, costs were2022, and we do not allocated and were borne by the segment in which the costs originated. See expect a material impact to our consolidated financial statements.
Note 3:2: Business Segments.Combinations
Subsequent EventNewmar Corporation
On March 14, 2018 our BoardNovember 8, 2019, pursuant to the terms of Directors declaredthe Stock Purchase Agreement dated September 15, 2019 (the "Purchase Agreement"), Winnebago completed the acquisition of 100% of Newmar Corporation, Dutch Real Estate Corp., New-Way Transport, and New-Serv (collectively “Newmar”). Newmar is a leading manufacturer of Class A and Super C motorized recreation vehicles that are sold through an established network of independent authorized dealers throughout North America.
The following table summarizes the total consideration paid for Newmar, noting that it is subject to purchase price adjustments as stipulated in the Purchase Agreement:
| | | | | |
(in thousands) | November 8, 2019 |
Cash | $ | 267,749 | |
Winnebago Industries shares: 2,000,000 at $46.29 | 92,572 | |
Total | $ | 360,321 | |
The cash dividendportion of $0.10 per share asthe purchase price of the acquisition and certain transaction expenses were funded through the private placement of convertible senior notes (as further described in Note 11.
Note 2: Business Combination, Goodwill9, Long-Term Debt) and Other Intangible Assets
We acquired 100%cash on hand. The stock consideration was discounted by 7.0% due to lack of marketability because of the ownership interestsone year lock-up restrictions.
|
| | | | |
(In thousands, except shares and per share data) | | 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 closing 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 DesignNewmar acquired, based on their fair values at the date of the acquisition. TheWe believe that the information provides a reasonable basis for estimating the fair values, but we are waiting for additional information necessary to finalize the working capital adjustment as defined in the purchase agreement and the amounts related 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 was finalized duringno later than one year from the first quarter of Fiscal 2018.acquisition date. The final allocation offollowing table summarizes the purchase pricepreliminary fair values assigned to the Newmar net assets acquired and liabilities assumed is shown in the following table.determination of net assets:
| | | | | |
(in thousands) | November 8, 2019 |
Cash | $ | 3,469 | |
Accounts receivable | 37,147 | |
Inventories | 82,621 | |
Prepaid expenses and other assets | 9,586 | |
Property, plant, and equipment | 31,143 | |
Goodwill | 73,929 | |
Other intangible assets | 172,100 | |
Total assets acquired | 409,995 | |
Accounts payable | 14,023 | |
Accrued compensation | 4,306 | |
Product warranties | 15,147 | |
Promotional | 3,593 | |
Other | 11,637 | |
Deferred tax liabilities | 968 | |
Total liabilities assumed | 49,674 | |
Total purchase price | $ | 360,321 | |
|
| | | | |
(In thousands) | | November 8, 2016 |
Cash | | $ | 1,748 |
|
Accounts receivable | | 32,834 |
|
Inventories | | 15,300 |
|
Prepaid expenses and other assets | | 3,037 |
|
Property, plant and equipment | | 8,998 |
|
Goodwill | | 243,456 |
|
Other intangible assets | | 253,100 |
|
Total assets acquired | | 558,473 |
|
| | |
Accounts payable | | 11,163 |
|
Accrued compensation | | 3,615 |
|
Product warranties | | 12,904 |
|
Promotional | | 3,976 |
|
Other | | 1,496 |
|
Deferred tax liabilities | | 4,811 |
|
Total liabilities assumed | | 37,965 |
|
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 Blocker Corporation, which held the remaining 10.66% of the Grand Design member interests. We agreed to acquire Blocker Corporation 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 certain deferred tax liabilities on the opening balance sheet that relate to Blocker Corporation.
The goodwill, recognized in our Motorhome segment, 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. As of February 24, 2018, goodwill increased $2.0 million as compared to the end of Fiscal 2017. The increase is due to the final purchase price adjustment made for taxes.
The allocationfollowing table summarizes the other intangible assets acquired:
| | | | | | | | | | | |
($ in thousands) | November 8, 2019 | | Useful Life-Years |
Trade name | $ | 98,000 | | | Indefinite |
Dealer network | 64,000 | | | 12.0 |
Backlog | 8,800 | | | 0.5 |
Non-compete agreements | 1,300 | | | 5.0 |
The fair value of the purchase price to the net assets acquiredtrade name 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 24, 2018 as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | February 24, 2018 | | August 26, 2017 |
(In thousands) | | Weighted Average Life-Years | | Cost | | Accumulated Amortization | | Cost | | Accumulated Amortization |
Trade name | | Indefinite | | $ | 148,000 |
| | $ | — |
| | $ | 148,000 |
| | $ | — |
|
Dealer network | | 12.0 | | 80,500 |
| | 8,693 |
| | 80,500 |
| | 5,348 |
|
Backlog | | 0.5 | | 18,000 |
| | 18,000 |
| | 18,000 |
| | 18,000 |
|
Non-compete agreements | | 4.0 | | 4,600 |
| | 1,637 |
| | 4,600 |
| | 1,116 |
|
Leasehold interest-favorable | | 8.1 | | 2,000 |
| | 318 |
| | 2,000 |
| | 196 |
|
Total | | | | 253,100 |
| | $ | 28,648 |
| | 253,100 |
| | $ | 24,660 |
|
Accumulated amortization | | | | (28,648 | ) | | | | (24,660 | ) | | |
Net book value of intangible assets | | | | $ | 224,452 |
| | | | $ | 228,440 |
| | |
We used thedealer network were estimated using an income approach to value certain intangible assets.approach. Under the income approach, an intangible asset’sasset's fair value is equal to the present value of the future economic benefits to be derived from ownership of the asset. We usedThe fair value of the trade name was estimated using an income approach, known asspecifically the relief from royalty method to value the trade name.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 iswas based on expected revenues from such license.revenues. The fair value of the dealer networktrade name was estimated using an income approach, known asspecifically the cost to recreate/cost savingssaving 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 assetsintangibles 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 On the six months ended February 24, 2018 and February 25, 2017, amortization ofacquisition date, amortizable intangible assets charged to operations was $4.0 million and $12.4 million, respectively. The weighted average remaining amortization period for intangible assets ashad a weighted-average useful life of February 24, 2018 was approximately 10.6 years. Remaining estimated aggregate annual amortization expense by fiscal year is as follows:approximately 10.5 years.
|
| | | | |
(In thousands) | | Amount |
Remainder of 2018 | | $ | 3,866 |
|
2019 | | 7,733 |
|
2020 | | 7,733 |
|
2021 | | 7,733 |
|
2022 | | 7,106 |
|
Thereafter | | 42,281 |
|
Within the Towable segment, theThe results of Grand Design'sNewmar's operations have been included in our consolidated financial statementsCondensed Consolidated Financial Statements from the close of the acquisition.acquisition within the Motorhome segment. The following table provides net revenues and operating income (which includes amortization expense) from the Grand Design businessNewmar operating segment included in our consolidated results during the six months ended February 24, 2018 and February 25, 2017 following the November 8, 20162019 closing date:
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in thousands) | | February 29, 2020 | | February 29, 2020 |
Net revenues | $ | 138,416 | | | $ | 174,079 | |
Operating loss | | 2,551 | | | 3,863 | |
|
| | | | | | | | |
| | Six Months Ended |
(In thousands) | | February 24, 2018 | | February 25, 2017 |
Net revenues | | $ | 450,708 |
| | $ | 169,421 |
|
Operating income | | 55,254 |
| | 6,759 |
|
UnauditedThe following unaudited pro forma information has been preparedrepresents our results of operations as if the Fiscal 2020 acquisition of Newmar had taken placeoccurred at the beginning of Fiscal 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
(in thousands, except per share data) | | February 29, 2020 | | February 23, 2019 | | February 29, 2020 | | February 23, 2019 |
Net revenues | $ | 626,810 | | | $ | 579,163 | | | $ | 1,368,527 | | | $ | 1,242,949 | |
Net income | | 23,361 | | | 15,841 | | | 40,561 | | | 26,511 | |
Income per share - basic | $ | 0.69 | | | $ | 0.47 | | | $ | 1.23 | | | $ | 0.79 | |
Income per share - diluted | $ | 0.69 | | | $ | 0.47 | | | $ | 1.21 | | | $ | 0.79 | |
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 Newmar had occurred at the beginning of Fiscal 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
(in thousands) | | February 29, 2020 | | February 23, 2019 | | February 29, 2020 | | February 23, 2019 |
Amortization of intangibles (1 year or less useful life)(1) | $ | 8,023 | | | $ | (4,400) | | | $ | 10,274 | | | $ | (13,610) | |
Amortization of intangibles(2) | (6) | | | (1,394) | | | (1,059) | | | (2,789) | |
Expenses related to business combination (transaction costs)(3) | — | | | (648) | | | 9,950 | | | (11,254) | |
Interest to reflect new debt structure(4) | (304) | | | (4,624) | | | (3,671) | | | (9,170) | |
Taxes related to the adjustments to the pro forma data and to the income of Newmar(5) | (1,619) | | | 1,530 | | | (2,452) | | | 4,585 | |
(1) Includes amortization adjustments for our backlog intangible asset and our fair-value inventory adjustment.
(2) Includes amortization adjustments for our dealer network and non-compete intangible assets.
(3) Pro forma transaction costs include $0.6 million incurred prior to the acquisition.
(4) Includes adjustments for cash and non-cash interest expense as well as deferred financing costs. Refer to Note 9, Long-Term Debt, for additional information on August 30, 2015. the Company's new debt structure as a result of the acquisition.
(5) Calculated using our U.S. federal statutory rate of 21.0%.
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,at the beginning of Fiscal 2019, 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 acquisition. Unaudited pro forma information is as follows:
|
| | | | | | | | |
| | Six Months Ended |
(In thousands, except per share data) | | February 24, 2018 | | February 25, 2017(1) |
Net revenues | | $ | 918,380 |
| | $ | 711,485 |
|
Net income | | 40,155 |
| | 41,153 |
|
Income per share - basic | | 1.27 |
| | 1.30 |
|
Income per share - diluted | | 1.26 |
| | 1.30 |
|
(1) Net income and income per share includeTransaction costs related to the increased benefit of $16.3 million, net of tax, associated with the termination of the postretirement health care plan in Fiscal 2017.
The unaudited pro forma data above includes the following significant non-recurring adjustments made to account for certain costs, which would have changed if theNewmar acquisition of Grand Design had been completed on August 30, 2015:
|
| | | | | | | | |
| | Six Months Ended |
(In thousands) | | February 24, 2018 | | February 25, 2017 |
Amortization of intangibles (1 year or less useful life) | | $ | (122 | ) | | $ | (10,376 | ) |
Increase in amortization of intangibles | | — |
| | 1,551 |
|
Expenses related to business combination (transaction costs) (1) | | (50 | ) | | (5,982 | ) |
Interest to reflect new debt structure | | — |
| | 3,672 |
|
Taxes related to the adjustments to the pro forma data and to the income of Grand Design | | 64 |
| | 8,303 |
|
(1) Pro forma transaction costs include $0.1 million incurred by Grand Design prior to acquisition.
We incurred approximately $6.9were $10.6 million, of acquisition-related costs to date, of which $0.1 million and $5.9$10.0 million were expensed during the six months ended February 24, 2018first quarter of Fiscal 2020 and February 25, 2017, respectively.$0.6 million were expensed during the fourth quarter of Fiscal 2019. Transaction costs are included in Selling, general, and administrative expenses in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.
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 segments.
We have two6 operating segments: 1) Grand Design towables, 2) Winnebago towables, 3) Winnebago motorhomes, 4) Newmar motorhomes, 5) Chris-Craft marine, and 6) Winnebago specialty vehicles. We evaluate performance based on each operating segment's Adjusted EBITDA, as defined below, which excludes certain corporate administration expenses and non-operating income and expense.
Our 2 reportable segments: (1) Motorizedsegments include: 1) Towable (comprised of products which are not motorized and are generally towed by another vehicle as well as other related manufactured products and servicesservices), which is an aggregation of the Grand Design towables and (2) Towable productsthe Winnebago towables operating segments and services. The Motorized segment includes all2) Motorhome (comprised of products that include a motorized chassis as well as other related manufactured products. products and services), which is an aggregation of the Winnebago motorhomes and Newmar motorhomes operating segments.
The Corporate / All Other category includes the Chris-Craft marine and Winnebago specialty vehicles operating segments as well as expenses related to certain corporate administration expenses for the oversight of the enterprise. These expenses include items such as corporate leadership and administration costs.
Identifiable assets of the reportable segments exclude general corporate assets, which principally consist of cash and cash equivalents and certain deferred tax balances. The general corporate assets are included in the Corporate / All Other category.
Our chief operating decision maker ("CODM") is our Chief Executive Officer. Our CODM relies on internal management reporting that analyzes consolidated results to the net earnings level and operating segment's Adjusted EBITDA. Our CODM has ultimate responsibility for enterprise decisions. Our CODM determines, in particular, resource allocation for, and monitors the performance of, the consolidated enterprise, the Towable segment, includes all products that are not motorized and are generally towed by another vehicle.
We organize our business reporting 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 aggregate twoMotorhome segment. The operating segments into the Towable reporting segment based uponsegments' management have responsibility for operating decisions, allocating resources, and assessing performance within their similar products, customers, distribution methods, production processes and economic characteristics.respective segments. The accounting policies of both reportable segments are the same and are described in Note 1: 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 26, 2017.31, 2019.
Subsequent to the acquisition of Grand Design in Fiscal 2017, management re-evaluated the manner in which corporate expenses were allocated to the reportable segments. A new corporate allocation policy was adopted in the first quarter of Fiscal 2018 that identifies shared costs and allocates them to the operating segments based on a cost driver most appropriate for the type of cost being allocated. For example, certain costs were allocated based on the financial size of the operating segment, while other costs, where appropriate, were allocated based on the headcount in the operating segments since headcount was deemed the appropriate driver for those types of expenses. Prior year segment information has been restated to conform to the current reporting segment presentation. All corporate expenses were allocated to the operating segments. Assets presented by reportable segment exclude certain corporate assets that cannot reasonably be allocated to the reportable segments. These unallocated corporate assets include cash and deferred tax assets.
We evaluate the performance of our reportable segments based on Adjusted EBITDA. EBITDA after corporate allocations.is defined as net income before interest expense, provision for income taxes, and depreciation and amortization expense. Adjusted EBITDA is defined as earningsnet income before interest expense, provision for income taxes, depreciation and amortization expense, and other adjustments made in order to present comparable results from period to period. Examples of items excluded from Adjusted EBITDA include the postretirement health care benefit income resulting from the plan amendments over the past several yearsacquisition-related fair-value inventory step-up, acquisition-related costs, restructuring expenses, and the transaction costs related to our acquisition of Grand Design.
non-operating income.
The following table shows information by reportingreportable segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
(in thousands) | February 29, 2020 | | February 23, 2019 | | February 29, 2020 | | February 23, 2019 |
Net Revenues | | | | | | | |
Towable | $ | 283,463 | | | $ | 250,691 | | | $ | 624,713 | | | $ | 543,524 | |
Motorhome | 325,542 | | | 164,662 | | | 551,433 | | | 345,990 | |
Corporate / All Other | 17,805 | | | 17,337 | | | 39,122 | | | 36,824 | |
Consolidated | $ | 626,810 | | | $ | 432,690 | | | $ | 1,215,268 | | | $ | 926,338 | |
| | | | | | | |
Adjusted EBITDA | | | | | | | |
Towable | $ | 34,746 | | | $ | 33,638 | | | $ | 70,531 | | | $ | 64,466 | |
Motorhome | 14,946 | | | 4,359 | | | 24,277 | | | 16,335 | |
Corporate / All Other | (4,263) | | | (3,509) | | | (7,331) | | | (7,860) | |
Consolidated | $ | 45,429 | | | $ | 34,488 | | | $ | 87,477 | | | $ | 72,941 | |
| | | | | | | |
Capital Expenditures | | | | | | | |
Towable | $ | 5,640 | | | $ | 7,648 | | | $ | 9,666 | | | $ | 16,525 | |
Motorhome | 5,372 | | | 2,198 | | | 7,612 | | | 5,390 | |
Corporate / All Other | 1,421 | | | 749 | | | 1,779 | | | 1,451 | |
Consolidated | $ | 12,433 | | | $ | 10,595 | | | $ | 19,057 | | | $ | 23,366 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | February 24, 2018 | | February 25, 2017 | | February 24, 2018 | | February 25, 2017 |
Net revenues | | | | | | | | |
Motorized | | $ | 202,001 |
| | $ | 198,936 |
| | $ | 392,357 |
| | $ | 394,061 |
|
Towable | | 266,358 |
| | 171,574 |
| | 526,023 |
| | 221,757 |
|
Consolidated | | $ | 468,359 |
| | $ | 370,510 |
| | $ | 918,380 |
| | $ | 615,818 |
|
| | | | | | | | |
Adjusted EBITDA | | | | | | | | |
Motorized | | $ | 4,044 |
| | $ | 10,838 |
| | $ | 7,199 |
| | $ | 21,954 |
|
Towable | | 35,338 |
| | 18,233 |
| | 67,594 |
| | 21,796 |
|
Consolidated | | $ | 39,382 |
| | $ | 29,071 |
| | $ | 74,793 |
| | $ | 43,750 |
|
| | | | | | | | |
Capital expenditures | | | | | | | | |
Motorized | | $ | 1,633 |
| | $ | 1,730 |
| | $ | 4,740 |
| | $ | 4,531 |
|
Towable | | 4,685 |
| | 1,646 |
| | 6,935 |
| | 2,407 |
|
Consolidated | | $ | 6,318 |
| | $ | 3,376 |
| | $ | 11,675 |
| | $ | 6,938 |
|
| | | | | | | | |
Total assets | | | | | | | | |
Motorized | | $ | 304,623 |
| | $ | 283,035 |
| | $ | 304,623 |
| | $ | 283,035 |
|
Towable | | 618,636 |
| | 581,863 |
| | 618,636 |
| | 581,863 |
|
Unallocated corporate assets | | 42,067 |
| | 29,823 |
| | $ | 42,067 |
| | $ | 29,823 |
|
Consolidated | | $ | 965,326 |
| | $ | 894,721 |
| | $ | 965,326 |
| | $ | 894,721 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | February 29, 2020 | | August 31, 2019 |
Total Assets | | | | | | | |
Towable | | | | | $ | 687,718 | | | $ | 628,994 | |
Motorhome | | | | | 653,014 | | | 332,157 | |
Corporate / All Other | | | | | 231,195 | | | 143,080 | |
Consolidated | | | | | $ | 1,571,927 | | | $ | 1,104,231 | |
Reconciliation of net income to consolidated Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
(in thousands) | February 29, 2020 | | February 23, 2019 | | February 29, 2020 | | February 23, 2019 |
Net income | $ | 17,268 | | | $ | 21,598 | | | $ | 31,336 | | | $ | 43,759 | |
Interest expense | 8,651 | | | 4,346 | | | 14,700 | | | 8,847 | |
Provision for income taxes | 3,995 | | | 3,166 | | | 7,888 | | | 9,892 | |
Depreciation | 4,134 | | | 3,099 | | | 7,720 | | | 6,268 | |
Amortization of intangible assets | 7,974 | | | 2,267 | | | 11,588 | | | 4,926 | |
EBITDA | 42,022 | | | 34,476 | | | 73,232 | | | 73,692 | |
Acquisition-related fair-value inventory step-up | 3,634 | | | | | 4,810 | | | — | |
Acquisition-related costs | — | | | — | | | 9,950 | | | — | |
Restructuring expenses | 43 | | | 219 | | | (129) | | | 219 | |
Non-operating income | (270) | | | (207) | | | (386) | | | (970) | |
Adjusted EBITDA | $ | 45,429 | | | $ | 34,488 | | | $ | 87,477 | | | $ | 72,941 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | February 24, 2018 | | February 25, 2017 | | February 24, 2018 | | February 25, 2017 |
Net income | | $ | 22,088 |
| | $ | 15,278 |
| | $ | 40,046 |
| | $ | 27,016 |
|
Interest expense | | 4,918 |
| | 5,178 |
| | 9,699 |
| | 6,306 |
|
Provision for income taxes | | 8,234 |
| | 7,916 |
| | 16,794 |
| | 13,536 |
|
Depreciation | | 2,198 |
| | 1,848 |
| | 4,328 |
| | 3,428 |
|
Amortization of intangible assets | | 1,933 |
| | 10,367 |
| | 3,988 |
| | 12,418 |
|
EBITDA | | 39,371 |
| | 40,587 |
| | 74,855 |
| | 62,704 |
|
Postretirement health care benefit income | | — |
| | (11,983 | ) | | — |
| | (24,796 | ) |
Transaction costs | | — |
| | 463 |
| | 50 |
| | 5,925 |
|
Non-operating expense (income) | | 11 |
| | 4 |
| | (112 | ) | | (83 | ) |
Adjusted EBITDA | | $ | 39,382 |
| | $ | 29,071 |
| | $ | 74,793 |
| | $ | 43,750 |
|
Note 4: Concentration Risk
During the first six months of Fiscal 2018, no dealer organization accounted for 10% or more of our consolidated revenues. One of our dealer organizations, La Mesa RV Center, Inc., accounted for 13.7% of our consolidated net revenues for the first six months of Fiscal 2017. A second dealer organization, FreedomRoads, LLC, accounted for 11.8% of our consolidated net revenues for the first six months of Fiscal 2017. These dealers declined on a relative basis due to the growth of other dealers and a shift in dealer mix attributable to the addition of Grand Design revenue.
Note 5: 4: 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 ASCAccounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measurement, and expands disclosure about fair value measurement. The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:
Level 1 - Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.
Level 2 - Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
•Quoted prices for similar assets or liabilities in active markets;
•Quoted prices for identical or similar assets in nonactive markets;
•Inputs other than quoted prices that are observable for the asset or liability; and
•Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
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 24, 201829, 2020 and August 26, 201731, 2019 according to the valuation techniques we used to determine their fair values: | | | | | | | | | | | | Fair Value at | | | Fair Value Hierarchy | |
| | | | Fair Value Measurements Using Inputs Considered As | |
(In thousands) | | Fair Value at February 24, 2018 | | Level 1 Quoted Prices in Active Markets for Identical Assets | | Level 2 Significant Other Observable Inputs | | Level 3 Significant Unobservable Inputs | |
(in thousands) | | (in thousands) | February 29, 2020 | | Level 1 | | Level 2 | | Level 3 |
Assets that fund deferred compensation: | | | | | | | | | Assets that fund deferred compensation: | | | | | | | |
Domestic equity funds | | $ | 1,580 |
| | $ | 1,546 |
| | $ | 34 |
| | $ | — |
| Domestic equity funds | $ | 435 | | | $ | 343 | | | $ | 92 | | | $ | — | |
International equity funds | | 176 |
| | 157 |
| | 19 |
| | — |
| International equity funds | 100 | | | 34 | | | 66 | | | — | |
Fixed income funds | | 176 |
| | 83 |
| | 93 |
| | — |
| Fixed income funds | 173 | | | 52 | | | 121 | | | — | |
Interest rate swap contract | | 1,924 |
| | — |
| | 1,924 |
| | — |
| |
Total assets at fair value | | $ | 3,856 |
| | $ | 1,786 |
| | $ | 2,070 |
| | $ | — |
| Total assets at fair value | $ | 708 | | | $ | 429 | | | $ | 279 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | | Fair Value Hierarchy | | | | |
(in thousands) | August 31, 2019 | | Level 1 | | Level 2 | | Level 3 |
Assets that fund deferred compensation: | | | | | | | |
Domestic equity funds | $ | 373 | | | $ | 288 | | | $ | 85 | | | $ | — | |
International equity funds | 101 | | | 45 | | | 56 | | | — | |
Fixed income funds | 155 | | | 54 | | | 101 | | | — | |
Interest rate swap contract | 90 | | | — | | | 90 | | | — | |
Total assets at fair value | $ | 719 | | | $ | 387 | | | $ | 332 | | | $ | — | |
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using Inputs Considered As |
(In thousands) | | Fair Value at August 26, 2017 | | Level 1 Quoted Prices in Active Markets for Identical Assets | | Level 2 Significant Other Observable Inputs | | Level 3 Significant Unobservable Inputs |
Assets that fund deferred compensation: | | | | | | | | |
Domestic equity funds | | $ | 1,708 |
| | $ | 1,671 |
| | $ | 37 |
| | $ | — |
|
International equity funds | | 174 |
| | 157 |
| | 17 |
| | — |
|
Fixed income funds | | 259 |
| | 170 |
| | 89 |
| | — |
|
Interest rate swap contract | | (828 | ) | | — |
| | (828 | ) | | — |
|
Total assets (liabilities) at fair value | | $ | 1,313 |
| | $ | 1,998 |
| | $ | (685 | ) | | $ | — |
|
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
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 ofThese securities are primarily 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 Plan. Refer to Note 10,). Employee and Retiree Benefits, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019 for additional information regarding these plans.
The proportion of the assets that will fund options thatwhich expire within a year are included in prepaidPrepaid expenses and other current assets in the accompanying consolidated balance sheets.Condensed Consolidated Balance Sheets. The remaining assets are classified as non-current and are included in otherOther assets.
Interest Rate Swap Contract
Under terms of our Credit Agreement (see Note 9), we were previously required to hedge a portion of the floating interest rate exposure. In accordance with that requirement, on
On January 23, 2017, we entered into an interest rate swap contract, which effectively fixed our interest rate foron our $300.0 million term loan agreement ("Term LoanLoan") for a notional amount that reducesreduced each December during the swap contract. As of February 24, 2018,August 31, 2019, we had $170.0$120.0 million of our Term Loan fixed at an interest rate of 5.32%. AsIn the first quarter of August 26, 2017,Fiscal 2020, we had $200.0 million of our Term Loan fixed at an interest rate of 6.32%.exited the swap contract prior to its expiration on December 8, 2020.
The fair value of the interest rate swap based on a Level 2 valuation was an asset of $1.9 million as of February 24, 2018. The fair value is classified as Level 2 as it is corroboratedwas determined based on observable market data. This amount is classified as non-current andThe asset was included in otherOther assets on the consolidated balance sheets.Condensed Consolidated Balance Sheets. The change in value in the second quarter was predominately recorded to accumulatedAccumulated other comprehensive incomeloss on the consolidated balance sheetsCondensed Consolidated Balance Sheets since the interest rate swap has beenwas 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,has occurred, the asset is required to be recorded at the estimated fair value. During the first six months of Fiscal 2018, noNaN impairments were recorded for non-financial assets.assets in the second quarter of Fiscal 2020 or the second quarter of Fiscal 2019.
Fair Value of Financial Instruments
Our financial instruments, other than those presented in the disclosures above, include cash, receivables, accounts payable, other payables, and long-term debt. The fair values of cash, receivables, accounts payable, and other payables approximated carrying values because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy. See Note 9, Long-Term Debt, for information about the fair value of our debt as of February 24, 2018 approximates fair value as interest is at variable market rates.long-term debt.
Note 6: 5: Inventories
Inventories consist of the following:
| | | | | | | | | | | |
(in thousands) | February 29, 2020 | | August 31, 2019 |
Finished goods | $ | 62,569 | | | $ | 53,417 | |
Work-in-process | 110,058 | | | 82,926 | |
Raw materials | 106,865 | | | 105,804 | |
Total | 279,492 | | | 242,147 | |
Less last-in, first-out ("LIFO") reserve | 41,684 | | | 41,021 | |
Inventories, net | $ | 237,808 | | | $ | 201,126 | |
|
| | | | | | | | |
(In thousands) | | February 24, 2018 | | August 26, 2017 |
Finished goods | | $ | 43,474 |
| | $ | 16,947 |
|
Work-in-process | | 69,876 |
| | 60,818 |
|
Raw materials | | 100,713 |
| | 99,919 |
|
Total | | 214,063 |
| | 177,684 |
|
LIFO reserve | | (36,017 | ) | | (35,419 | ) |
Total inventories | | $ | 178,046 |
| | $ | 142,265 |
|
Inventory valuation methods consist of the following:
| | | | | | | | | | | |
(in thousands) | February 29, 2020 | | August 31, 2019 |
LIFO basis | $ | 135,437 | | | $ | 184,007 | |
First-in, first-out basis | 144,055 | | | 58,140 | |
Total | $ | 279,492 | | | $ | 242,147 | |
The above value of inventories, before reduction for the LIFO reserve, approximates replacement cost at the respective dates. Of the $214.1 million and $177.7 million inventory at February 24, 2018 and August 26, 2017, respectively, $177.3 million and $149.8
million is valued on a LIFO basis. The remaining inventories of $36.8 million and $27.9 million at February 24, 2018 and August 26, 2017, respectively, are valued on a FIFO basis.
Note 7: 6: Property, Plant, and Equipment
Property, plant, and equipment is stated at cost, net of accumulated depreciation, and consists of the following:
| | | | | | | | | | | |
(in thousands) | February 29, 2020 | | August 31, 2019 |
Land | $ | 10,749 | | | $ | 6,799 | |
Buildings and building improvements | 156,865 | | | 119,638 | |
Machinery and equipment | 113,957 | | | 107,701 | |
Software | 29,622 | | | 29,169 | |
Transportation | 4,212 | | | 3,865 | |
Property, plant, and equipment, gross | 315,405 | | | 267,172 | |
Less accumulated depreciation | 145,565 | | | 139,600 | |
Property, plant, and equipment, net | $ | 169,840 | | | $ | 127,572 | |
Depreciation expense was $4.1 million and $3.1 million during the second quarters of Fiscal 2020 and 2019, respectively; and $7.7 million and $6.3 million during the first six months of Fiscal 2020 and 2019, respectively.
|
| | | | | | | | |
(In thousands) | | February 24, 2018 | | August 26, 2017 |
Land | | $ | 3,936 |
| | $ | 3,914 |
|
Buildings and building improvements | | 81,367 |
| | 73,831 |
|
Machinery and equipment | | 99,577 |
| | 99,952 |
|
Software | | 20,601 |
| | 17,844 |
|
Transportation | | 8,358 |
| | 8,993 |
|
Total property, plant and equipment, gross | | 213,839 |
| | 204,534 |
|
Less accumulated depreciation | | (135,041 | ) | | (132,974 | ) |
Total property, plant and equipment, net | | $ | 78,798 |
| | $ | 71,560 |
|
Note 7: Goodwill and Intangible Assets
The changes in the carrying amount of goodwill by segment were as follows for the first six months of Fiscal 2020 and 2019, of which there were no accumulated impairment losses: | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Towable | | Motorhome | | Corporate / All Other | | Total |
Balances at August 25, 2018 | $ | 244,684 | | | $ | — | | | $ | 29,686 | | | $ | 274,370 | |
Chris-Craft purchase price adjustment(1) | — | | | — | | | 702 | | | 702 | |
Balances at February 23, 2019 | $ | 244,684 | | | $ | — | | | $ | 30,388 | | | $ | 275,072 | |
| | | | | | | |
Balances at August 31, 2019 | $ | 244,684 | | | $ | — | | | $ | 30,247 | | | $ | 274,931 | |
Acquisition of Newmar(2) | — | | | 73,929 | | | — | | | 73,929 | |
Balances at February 29, 2020 | $ | 244,684 | | | $ | 73,929 | | | $ | 30,247 | | | $ | 348,860 | |
(1) Refer to Note 8: Warranty2, Business Combinations, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019 for additional information.
(2) Refer to Note 2, Business Combinations, for additional information.
Other intangible assets, net of accumulated amortization, consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | February 29, 2020 | | | | | | August 31, 2019 | | |
($ in thousands) | Weighted Average Life-Years | | Cost | | Accumulated Amortization | | Weighted Average Life-Years | | Cost | | Accumulated Amortization |
Trade names | Indefinite | | $ | 275,250 | | | | | Indefinite | | | $ | 177,250 | | | |
Dealer networks | 12.1 | | 159,581 | | | $ | 25,903 | | | 12.2 | | 95,581 | | | $ | 20,329 | |
Backlog | 0.5 | | 28,327 | | | 24,991 | | | 0.5 | | 19,527 | | | 19,527 | |
Non-compete agreements | 4.3 | | 6,647 | | | 3,626 | | | 4.1 | | 5,347 | | | 3,077 | |
Leasehold interest-favorable | | | — | | | — | | | 8.1 | | 2,000 | | | 690 | |
Other intangible assets, gross | | | 469,805 | | | 54,520 | | | | | 299,705 | | | 43,623 | |
Less accumulated amortization | | | 54,520 | | | | | | | 43,623 | | | |
Other intangible assets, net | | | $ | 415,285 | | | | | | | $ | 256,082 | | | |
The weighted average remaining amortization period for intangible assets as of February 29, 2020 was approximately 10 years.
Remaining estimated aggregate annual amortization expense by fiscal year is as follows:
| | | | | |
(in thousands) | Amount |
Fiscal 2020 | $ | 10,517 | |
Fiscal 2021 | 14,361 | |
Fiscal 2022 | 13,719 | |
Fiscal 2023 | 13,526 | |
Fiscal 2024 | 13,424 | |
Thereafter | 74,488 | |
Total amortization expense remaining | $ | 140,035 | |
Note 8: Product Warranties
We provide certain service and warranty 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.
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.
Changes in our product warranty liability are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
(in thousands) | February 29, 2020 | | February 23, 2019 | | February 29, 2020 | | February 23, 2019 |
Balance at beginning of period | $ | 61,107 | | | $ | 41,303 | | | $ | 44,436 | | | $ | 40,498 | |
Business acquisition(1) | — | | | — | | | 15,147 | | | — | |
Provision | 15,729 | | | 9,194 | | | 31,047 | | | 19,951 | |
Claims paid | (16,625) | | | (10,192) | | | (30,419) | | | (20,144) | |
Balance at end of period | $ | 60,211 | | | $ | 40,305 | | | $ | 60,211 | | | $ | 40,305 | |
(1) Refer to Note 2, Business Combinations, for additional information.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | February 24, 2018 | | February 25, 2017 | | February 24, 2018 | | February 25, 2017 |
Balance at beginning of period | | $ | 32,500 |
| | $ | 24,551 |
| | $ | 30,805 |
| | $ | 12,412 |
|
Provision | | 10,283 |
| | 7,734 |
| | 20,236 |
| | 11,632 |
|
Claims paid | | (7,795 | ) | | (7,255 | ) | | (16,053 | ) | | (11,918 | ) |
Acquisition of Grand Design | | — |
| | — |
| | — |
| | 12,904 |
|
Balance at end of period | | $ | 34,988 |
| | $ | 25,030 |
| | $ | 34,988 |
| | $ | 25,030 |
|
Note 9: Long-Term Debt
The components of long-term debt are as follows:
| | | | | | | | | | | |
(in thousands) | February 29, 2020 | | August 31, 2019 |
ABL Credit Facility | $ | — | | | $ | — | |
Term Loan | 257,250 | | | 260,000 | |
Convertible Notes | 300,000 | | | — | |
Long-term debt, gross | 557,250 | | | 260,000 | |
Convertible Notes unamortized interest discount | (80,839) | | | — | |
Debt issuance costs, net | (11,609) | | | (5,706) | |
Long-term debt | 464,802 | | | 254,294 | |
Less current maturities | 13,668 | | | 8,892 | |
Long-term debt, less current maturities | $ | 451,134 | | | $ | 245,402 | |
|
| | | | | | | | |
(In thousands) | | February 24, 2018 | | August 26, 2017 |
ABL | | $ | 19,700 |
| | $ | — |
|
Term Loan | | 260,000 |
| | 284,000 |
|
Gross long-term debt, excluding issuance costs | | 279,700 |
| | 284,000 |
|
Less: debt issuance cost, net | | (8,598 | ) | | (9,424 | ) |
Long-term debt, net of issuance costs | | 271,102 |
| | 274,576 |
|
Less: current maturities | | — |
| | (2,850 | ) |
Long-term debt, less current maturities | | $ | 271,102 |
| | $ | 271,726 |
|
Credit Agreements
On November 8, 2016, we entered into a $125.0 million credit facility ("ABL Credit Facility") and a $300.0 million loan agreement ("Term LoanLoan") with JPMorgan Chase Bank, N.A. ("(the agreements governing the ABL Credit Agreement"). On December 8, 2017, we amended our Credit Agreement, which decreased the interest rate spread by 1.0% onFacility and the Term Loan, collectively the "Credit Agreements"). On October 22, 2019, our ABL Credit Facility was amended and 0.25% onrestated to, among other things, increase the ABL. Priorcommitments thereunder to this amendment, $19.7 million was drawn on the ABL and used to make a voluntary prepayment on our Term Loan.
Under the ABL, we have a five year credit facility on a revolving basis, subject to availability under a borrowing base consisting of eligible accounts receivable and eligible inventory. The ABL is available for issuance of letters of credit to a specified limit of $10.0$192.5 million. We pay a commitment fee in the range of 0.25% - 0.375% on the amount of facility available, but unused. We can elect to
base the interest rate on various base rates plus specific spreads depending on the amount of borrowings outstanding. We currently pay interest on ABL borrowings at a floating rate based upon LIBOR plus 1.25%.
Under the Term Loan, we can elect to base the interest rate on various base rates plus specific spreads. The interest rate as of February 24, 2018 was based on LIBOR plus 3.5%. The Term Loan agreement currently requires quarterly payments in the amount of $3.75 million with all amounts then outstanding due on November 8, 2023. We have made voluntary prepayments that have extended the opportunity to defer quarterly payments, at our option, until December 31, 2019. There are mandatory prepayments for proceeds of new debt, sale of significant assets or subsidiaries, and excess cash flow as those terms are defined in the Term Loan. Incremental term loans of up to $125.0 million are available if certain financial ratios and other conditions are met.
The Credit Agreement containsAgreements contain certain financial covenants. As of February 24, 2018,29, 2020, we are in compliance with all financial covenants of the Credit Agreement.Agreements.
Convertible Notes
On November 1, 2019, we issued $300.0 million in aggregate principal amount of 1.5% unsecured convertible senior notes due 2025 (“Convertible Notes”). The net proceeds from the issuance of the Convertible Notes, after deducting the initial purchasers' transaction fees and offering expense payable by us, were approximately $290.4 million. The Convertible Notes bear interest at the annual rate of 1.5%, payable on April 1 and October 1 of each year, beginning on April 1, 2020, and will mature on April 1, 2025, unless earlier converted or repurchased by us.
The ABLConvertible Notes will be convertible into cash, shares of our common stock or a combination thereof, at our election, at an initial conversion rate of 15.6906 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $63.73 per share, as adjusted pursuant to the terms of the indenture governing the Convertible Notes (the "Indenture"). The Convertible Notes may be converted at any time on or after October 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date.
The conversion rate of the Convertible Notes may be adjusted in certain circumstances, including in connection with a conversion of the Convertible Notes made following certain fundamental changes and Term Loan are guaranteed by Winnebago Industries, Inc.under other circumstances set forth in the Indenture. It is our current intent to settle all conversions of the Convertible Notes through settlement of cash.
Prior to the close of business on the business day immediately preceding October 1, 2024, the Convertible Notes will be convertible only under the following circumstances:
(1) during any fiscal quarter commencing after December 31, 2019 if the closing sale price of the common stock is more than 130% of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and all material directincluding, the last trading day of the immediately preceding calendar quarter;
(2) during the 5 consecutive business day period after any 5 consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and indirect domestic subsidiaries,the conversion rate for the Convertible Notes on each such trading day; or
(3) upon the occurrence of certain specified corporate events set forth in the indenture.
We may not redeem the Convertible Notes at our option prior to the maturity date, and no sinking fund is provided for the Convertible Notes.
On October 29, 2019 and October 30, 2019, in connection with the offering of the Convertible Notes, we entered into privately negotiated convertible note hedge transactions (collectively, the “Hedge Transactions”) that cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that initially underlie the Convertible Notes, and are secured by a security interestexpected generally to reduce the potential dilution and/or offset any cash payments we are required to make in substantially allexcess of the principal amount due, as the case may be, upon conversion of the Convertible Notes in the event that the market price of our assets, except minor excluded assets.common stock is greater than the strike price of the Hedge Transactions, which was initially $63.73 per share (subject to adjustment under the terms of the Hedge Transactions), corresponding to the initial conversion price of the Convertible Notes.
As
On October 29, 2019 and October 30, 2019, we also entered into privately negotiated warrant transactions (collectively, the “Warrant Transactions” and, together with the Hedge Transactions, the “Call Spread Transactions”), whereby we sold warrants at a higher strike price relating to the same number of February 24, 2018, $8.6shares of our common stock that initially underlie the Convertible Notes, subject to customary anti-dilution adjustments. The initial strike price of the warrants is $96.20 per share (subject to adjustment under the terms of the Warrant Transactions), which is 100% above the last reported sale price of our common stock on October 29, 2019. The Warrant Transactions could have a dilutive effect to our stockholders to the extent that the market price per share of our common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.
We used $28.6 million of the net proceeds from the issuance of the Convertible Notes to pay the cost of the Call Spread Transactions.
The Hedge Transactions and the Warrant Transactions are separate transactions, in each case, and are not part of the terms of the Convertible Notes and will not affect any holder’s rights under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Call Spread Transactions.
Accounting Treatment of the Convertible Notes and Related Hedge Transactions and Warrant Transactions
The Call Spread Transactions were classified as equity. We bifurcated the proceeds from the offering of the Convertible Notes between liability and equity components. On the date of issuance, the liability and equity components were calculated to be approximately $215.0 million and $85.0 million, respectively. The initial $215.0 million liability component was determined based on the fair value of similar debt instruments excluding the conversion feature assuming a hypothetical interest rate of 8%. The initial $85.0 million ($64.1 million net of tax) equity component represents the difference between the fair value of the initial $215.0 million in debt and the $300.0 million of gross proceeds. The related initial debt discount of $85.0 million is being amortized over the life of the Convertible Notes as non-cash interest expense using the effective interest method.
In connection with the above-noted transactions, we incurred approximately $9.6 million of offering-related costs. These offering fees were allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt and equity issuance costs, respectively. We allocated $7.0 million of debt issuance costs netto the liability component, which were capitalized as deferred financing costs within Long-term debt. These costs are being amortized as interest expense over the term of amortization,the debt using the effective interest method. The remaining $2.6 million of transaction costs allocated to the equity component were recorded as a direct deduction fromreduction of the equity component.
Fair Value and Future Maturities
As of February 29, 2020, the fair value of long-term debt. Unamortized debt, issuance costsgross, was $581.3 million. As of $0.6 million related toAugust 31, 2019, the voluntary prepayment onfair value of long-term debt, gross, approximated the Term Loan was expensed in the six months ended February 24, 2018.carrying value.
Aggregate contractual maturities of debt in future fiscal years are as followsfollows:
| | | | | |
(in thousands) | Amount |
Fiscal 2020 | $ | 7,500 | |
Fiscal 2021 | 15,000 | |
Fiscal 2022 | 15,000 | |
Fiscal 2023 | 15,000 | |
Fiscal 2024 | 204,750 | |
Thereafter | 300,000 | |
Total Term Loan and Convertible Notes | $ | 557,250 | |
Note 10: Leases
Our leases primarily include operating leases for office and manufacturing space and equipment. Our finance leases are primarily for real estate.For any lease with an initial term in excess of 12 months, the related lease assets and liabilities are recognized on the Condensed Consolidated Balance Sheets as either operating or finance leases at the inception of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components, and we have elected to combine lease and non-lease components for all classes of assets. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease term. When the terms of multiple lease agreements are materially consistent, we have elected the portfolio approach for our asset and liability calculations.
Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. We generally use a collateralized incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments. Our assumed lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised.
Some of our real estate operating leases require payment of real estate taxes, common area maintenance, and insurance. In addition, certain of our leases are subject to annual changes in the consumer price index. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. Fixed payments may contain predetermined fixed rent escalations. For our operating leases, we recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.
The following table details the supplemental balance sheet information related to our leases:
| | | | | | | | |
(in thousands) | Classification | February 29, 2020 |
Assets | | |
Operating leases | Operating lease assets | $ | 30,460 | |
Finance leases | Other assets | 4,686 | |
Total lease assets | | $ | 35,146 | |
| | |
Liabilities | | |
Current: Operating leases | Accrued expenses: Other | $ | 2,500 | |
Current: Finance leases | Accrued expenses: Other | 522 | |
Non-Current: Operating leases | Operating lease liabilities | 27,882 | |
Non-Current: Finance leases | Non-current liabilities: Other | 5,141 | |
Total lease liabilities | | $ | 36,045 | |
The following table details the operating lease cost incurred:
| | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in thousands) | Classification | February 29, 2020 | | February 29, 2020 |
Operating lease expense(1) | Costs of goods sold and SG&A | | $ | 1,773 | | | $ | 3,536 | |
Finance lease cost: | | | | |
Depreciation of lease assets | Costs of goods sold and SG&A | | 144 | | | 187 | |
Interest on lease liabilities | Interest expense | | 88 | | | 119 | |
Total lease cost | | $ | 2,005 | | | $ | 3,842 | |
(1) Operating lease expense includes short-term leases and variable lease payments, which are immaterial.
Our future lease commitments for future fiscal years as of February 24, 2018:29,2020 included the following related party and non-related party leases:
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating Leases | | | | | | Finance Leases |
(in thousands) | Related Party Amount | | Non-Related Party Amount | | Total | | Non-Related Party Amount |
Fiscal 2020 | $ | 450 | | | $ | 1,724 | | | $ | 2,174 | | | $ | 426 | |
Fiscal 2021 | 900 | | | 3,299 | | | 4,199 | | | 855 | |
Fiscal 2022 | 900 | | | 2,983 | | | 3,883 | | | 851 | |
Fiscal 2023 | 1,500 | | | 2,726 | | | 4,226 | | | 842 | |
Fiscal 2024 | 1,800 | | | 2,556 | | | 4,356 | | | 845 | |
Thereafter | 9,600 | | | 11,893 | | | 21,493 | | | 3,443 | |
Total future undiscounted lease payments | 15,150 | | | 25,181 | | | 40,331 | | | 7,262 | |
Less: Interest | 4,210 | | | 5,739 | | | 9,949 | | | 1,599 | |
Total reported lease liabilities | $ | 10,940 | | | $ | 19,442 | | | $ | 30,382 | | | $ | 5,663 | |
Our future minimum lease payments for future fiscal years as determined prior to the adoption of ASC 842, Leases, and as disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, included the following related party and non-related party leases:
| | | | | | | | | | | | | | | | | |
| Operating Leases | | | | |
(in thousands) | Related Party Amount | | Non-Related Party Amount | | Total |
Fiscal 2020 | $ | 2,864 | | | $ | 1,236 | | | $ | 4,100 | |
Fiscal 2021 | 2,863 | | | 1,068 | | | 3,931 | |
Fiscal 2022 | 2,863 | | | 759 | | | 3,622 | |
Fiscal 2023 | 3,597 | | | 530 | | | 4,127 | |
Fiscal 2024 | 3,963 | | | 361 | | | 4,324 | |
Thereafter | 25,064 | | | 1,359 | | | 26,423 | |
Total future lease commitments | $ | 41,214 | | | $ | 5,313 | | | $ | 46,527 | |
|
| | | | |
(In thousands) | | Amount |
2018 | | $ | — |
|
2019 | | — |
|
2020 | | 10,250 |
|
2021 | | 15,000 |
|
2022 | | 15,000 |
|
Thereafter | | 219,750 |
|
Total debt | | $ | 260,000 |
|
The following table details additional information related to our leases: | | | | | |
| Six Months Ended |
(in thousands) | February 29, 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 1,168 | |
Operating cash flows from finance leases | 119 | |
Financing cash flows from finance leases | 104 | |
Leased assets obtained in exchange for lease liabilities: | |
Operating leases | 1,801 | |
Finance leases(1) | 5,664 | |
| |
| February 29, 2020 |
Weighted average remaining lease term (in years): | |
Operating leases | 9.2 |
Finance leases | 8.2 |
Weighted average discount rate: | |
Operating leases | 6.2 | % |
Finance leases | 6.2 | % |
(1) Represents the lease liability added. Lease assets are offset by a $1.0 million unfavorable lease liability created by the acquisition of Newmar.
Note 10:11: Employee and Retiree Benefits
Deferred compensation liabilities are as follows:
| | | | | | | | | | | |
(in thousands) | February 29, 2020 | | August 31, 2019 |
Non-qualified deferred compensation | $ | 12,259 | | | $ | 13,093 | |
Supplemental executive retirement plan | 2,098 | | | 2,072 | |
Executive share option plan | — | | | 12 | |
Executive deferred compensation plan | 665 | | | 621 | |
Deferred compensation benefits | 15,022 | | | 15,798 | |
Less current portion(1) | 2,856 | | | 2,920 | |
Deferred compensation benefits, net of current portion | $ | 12,166 | | | $ | 12,878 | |
|
| | | | | | | | |
(In thousands) | | February 24, 2018 | | August 26, 2017 |
Non-qualified deferred compensation | | $ | 15,680 |
| | $ | 16,476 |
|
Executive share option plan liability | | 1,356 |
| | 1,498 |
|
SERP benefit liability | | 2,565 |
| | 2,534 |
|
Executive deferred compensation | | 451 |
| | 447 |
|
Officer stock-based compensation | | 3,292 |
| | 1,664 |
|
Total deferred compensation | | 23,344 |
| | 22,619 |
|
Less current portion | | (4,437 | ) | | (3,349 | ) |
Long-term deferred compensation | | $ | 18,907 |
| | $ | 19,270 |
|
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. During the first quarter of Fiscal 2017, we announced the termination of the remaining postretirement health care benefits to all participants. As of January 1, 2017, postretirement health care benefits were discontinued.
Net periodic postretirement benefit income consisted of the following components:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | February 24, 2018 | | February 25, 2017 | | February 24, 2018 | | February 25, 2017 |
Interest cost | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 29 |
|
Service cost | | — |
| | — |
| | — |
| | 16 |
|
Amortization of prior service benefit | | — |
| | (19,672 | ) | | — |
| | (40,444 | ) |
Amortization of net actuarial loss | | — |
| | 7,689 |
| | — |
| | 15,648 |
|
Net periodic postretirement benefit income | | $ | — |
| | $ | (11,983 | ) | | $ | — |
| | $ | (24,751 | ) |
| | | | | | | | |
Payments for postretirement health care | | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | 68 |
|
Note 11: Shareholders' Equity
Stock-Based Compensation
We have a 2014 Omnibus Equity, Performance Award, and Incentive Compensation Plan (as amended, the "Plan")(1) Included in place as approved by shareholders, which allows us to grant or issue non-qualified stock options, incentive stock options, share awards and other equityAccrued compensation to key employees and to non-employee directors.
On October 18, 2017 and October 11, 2016, the Human Resources Committee of the Board of Directors granted an aggregate of 62,660 and 97,600 shares, respectively, of restricted common stock to our key employees and non-employee directors under the Plan. The value of each 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.Condensed Consolidated Balance Sheets.
Stock-based compensation expense was $2.7 million and $0.7 million during the second quarters of Fiscal 2018 and 2017, respectively. Stock-based compensation expense was $3.6 million and $1.5 million during the first six months of Fiscal 2018 and 2017, respectively. Compensation expense is recognized over the requisite service period of the award.
Dividends
On October 18, 2017, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock, which was paid on November 29, 2017 to shareholders of record at the close of business on November 15, 2017.
On December 13, 2017, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock, which was paid on January 24, 2018 to shareholders of record at the close of business on January 10, 2018.
On March 14, 2018, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock, payable on April 25, 2018 to shareholders of record at the close of business on April 11, 2018.
Share Registration
As a result of the acquisition of Grand Design, we 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, we filed a shelf registration statement on January 20, 2017 to register these shares for resale. On April 11, 2017, pursuant to an underwriting agreement dated as of April 5, 2017, by and among the Company, the Summit Sellers and Morgan Stanley & Co., LLC, the Summit Sellers sold 2,293,277 shares of common stock in an underwritten block trade.
Note 12: 12: Contingent Liabilities and Commitments
Repurchase Commitments
Generally, manufacturers in the RV industryour industries enter into repurchase agreements with lending institutions thatwhich have provided wholesale floorplan financing to dealers. Most dealers' RVsdealers 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 RVsunits purchased.
Our repurchase agreements generally 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 1824 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 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. Although laws vary from state to state, some states have laws in place that require manufacturers of RVsrecreational vehicles or boats to repurchase current inventory if a dealership exits the business. Our total contingent liability on all repurchase agreements was approximately $923.2 million$1.4 billion and $713.1$874.9 million at February 24, 201829, 2020 and August 26, 2017, respectively, with31, 2019, respectively.
Repurchased sales are not recorded as a revenue transaction, but the increase attributed primarily duenet 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 growth in the Towable segment.
make assumptions and apply judgment regarding a number of factors. Our risk of loss related to these repurchase commitments is significantly reduced by the potential resale value of any products that are subject to repurchase and is spread over numerous dealers and lenders. The aggregate contingent liability related to our repurchase agreements represents all financed dealer inventory at the period reporting date subject to a repurchase agreement, net of the greater of periodic reductions per the agreement or dealer principal payments. Based on thethese repurchase exposure as previously describedagreements and our historical loss experience, we establishedestablish an associated loss reserve.reserve which is included in Accrued expenses: Other on the Condensed Consolidated Balance Sheets. Our accrued losses on repurchases were $1.3 million and $0.9 million as ofat February 24, 201829, 2020 and $0.7 million as of August 26, 2017 and are included in Accrued expenses - Other on the Consolidated Balance Sheets.31, 2019, respectively. 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.
There was no material activity related to repurchase agreements during the three andfirst six months ended February 24, 201829, 2020 and February 25, 2017.23, 2019.
Litigation
We are involved in various legal proceedings thatwhich are ordinary and routine 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 a 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.
Note 13: Revenue
We generate all of our operating revenue from contracts with customers. Our primary source of revenue is generated through the sale of manufactured motorized units, non-motorized towable units, and marine units to our independent dealer network (our customers). The following table disaggregates revenue by reportable segment and product category:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
(in thousands) | February 29, 2020 | | February 23, 2019 | | February 29, 2020 | | February 23, 2019 |
Net Revenues | | | | | | | |
Towable: | | | | | | | |
Fifth Wheel | $ | 156,748 | | | $ | 154,783 | | | $ | 351,937 | | | $ | 317,532 | |
Travel Trailer | 123,894 | | | 92,162 | | | 264,357 | | | 217,788 | |
Other(1) | 2,821 | | | 3,746 | | | 8,419 | | | 8,204 | |
Total Towable | 283,463 | | | 250,691 | | | 624,713 | | | 543,524 | |
Motorhome: | | | | | | | |
Class A | 179,705 | | | 55,000 | | | 245,349 | | | 103,678 | |
Class B | 81,893 | | | 52,260 | | | 167,349 | | | 120,980 | |
Class C | 55,657 | | | 52,243 | | | 122,533 | | | 108,385 | |
Other(1) | 8,287 | | | 5,159 | | | 16,202 | | | 12,947 | |
Total Motorhome | 325,542 | | | 164,662 | | | 551,433 | | | 345,990 | |
Corporate / All Other: | | | | | | | |
Other(2) | 17,805 | | | 17,337 | | | 39,122 | | | 36,824 | |
Total Corporate / All Other | 17,805 | | | 17,337 | | | 39,122 | | | 36,824 | |
Consolidated | $ | 626,810 | | | $ | 432,690 | | | $ | 1,215,268 | | | $ | 926,338 | |
(1) Relates to parts, accessories, and services.
(2) Relates to marine and specialty vehicle units, parts, accessories, and services.
We do not have material contract assets or liabilities. We establish allowances for uncollectible receivables based on historical collection trends and write-off history.
Concentration of Risk
None of our dealer organizations accounted for more than 10% of our net revenue for the second quarter of Fiscal 2020, while one dealer organization accounted for more than 10% of our net revenue for the second quarter of 2019. In addition, none of our dealer organizations accounted for more than 10% of our net revenue for the first six months of Fiscal 2020 or 2019.
Note 13:14: Stock-Based Compensation
On December 11, 2018, our shareholders approved the Winnebago Industries, Inc. 2019 Omnibus Incentive Plan ("2019 Plan") as detailed in our Proxy Statement for the 2018 Annual Meeting of Shareholders. The 2019 Plan allows us to grant or issue non-qualified stock options, incentive stock options, share awards, and other equity compensation to key employees and to non-employee directors. The 2019 Plan replaces our 2014 Omnibus Equity, Performance Award, and Incentive Compensation Plan (as amended, the "2014 Plan"). The number of shares of our Common Stock that may be the subject of awards and issued under the 2019 Plan is 4.1 million, plus the shares subject to any awards outstanding under the 2014 Plan and our predecessor plan, the 2004 Incentive Compensation Plan (the “2004 Plan”), on December 11, 2018 that subsequently expire, are forfeited or canceled, or are settled for cash. Until such time, however, awards under the 2014 Plan and the 2004 Plan, respectively, that are outstanding on December 11, 2018 will continue to be subject to the terms of the 2014 Plan or 2004 Plan, as applicable. Shares remaining available for future awards under the 2014 Plan were not carried over into the 2019 Plan.
Stock-based compensation expense was $2.0 million and $2.1 million during the second quarters of Fiscal 2020 and 2019, respectively, and $3.6 million and $4.6 million during the first six months of Fiscal 2020 and 2019, respectively. Compensation expense is recognized over the requisite service period of the award.
Note 15: Restructuring
On February 4, 2019, we announced our intent to move our diesel production from Junction City, OR to Forest City, IA to enable more effective product development and improve our cost structure. The following table details the restructuring charges incurred:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Motorhome | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | | | Cumulative |
(in thousands) | February 29, 2020 | | February 23, 2019 | | February 29, 2020 | | February 23, 2019 | | February 29, 2020 |
Cost of goods sold | $ | 43 | | | $ | — | | | $ | (176) | | | $ | — | | | $ | 1,548 | |
Selling, general, and administrative expenses | — | | | 219 | | | 47 | | | 219 | | | 266 | |
Restructuring expense | $ | 43 | | | $ | 219 | | | $ | (129) | | | $ | 219 | | | $ | 1,814 | |
Expenses in the current period mainly include adjustments for facility closure costs. We expect additional net expenses of approximately $0.3 million in Fiscal 2020.
Note 16: 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.
Our effective tax rate decreased from 33.4%increased to 20.1% for the first six months ended February 25, 2017 to 29.5%29, 2020 from 18.4% for the first six months ended February 24, 201823, 2019 due primarily to the enactment of the Tax Act on December 22, 2017. One of the most significant provisions of this legislation was a reductionfavorable impact in the Federal corporate incomeprior year of research and development tax rate from 35% to 21% effective beginning January 1, 2018.credits .
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 118 to provide guidance for companies that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts under ASC 740. In accordance with SAB 118, a company must reflect the income tax effect of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, the company must record a provisional estimate in the financial statements.
We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of our deferred tax balances and cause us to revise our estimate in future periods in accordance with SAB 118. These impacts may be material, due to, among other things, further refinement of our calculations, changes in interpretations of the Tax Act, or issuance of additional guidance by the relevant tax authorities.
ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Consequently, as of the date of enactment, and during the three months ended February 24, 2018, we revalued all deferred tax assets and liabilities at the newly enacted Federal corporate US income tax rate. This revaluation as of enactment resulted in a non-cash provisional estimate of $1.4 million to income tax expense and a corresponding reduction in the net deferred tax asset.
We file a USU.S. Federal tax return, as well as returns in 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. As of February 24, 2018,29, 2020, our Federalfederal returns from Fiscal 20142016 to present are subject to review by the Internal Revenue Service. With limited exception, state returns from Fiscal 2015 to present continue to be subject to review by the IRS. With few exceptions, the state returns from Fiscal 2013 to present continue to be subject totaxing jurisdictions. We are currently under review by thecertain U.S. state taxing jurisdictions.
As of February 24, 2018,tax authorities for Fiscal 2015 through 2018. We believe we have adequately reserved for our exposure to additional payments for uncertain tax positions in our liability for unrecognized tax benefits were $1.7 million including accrued interest and penaltiesbenefits.
Note 14: Earnings17: Income Per Share
The following table reflects the calculation of basic and diluted income per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
(in thousands, except per share data) | February 29, 2020 | | February 23, 2019 | | February 29, 2020 | | February 23, 2019 |
Numerator | | | | | | | |
Net income | $ | 17,268 | | | $ | 21,598 | | | $ | 31,336 | | | $ | 43,759 | |
| | | | | | | |
Denominator | | | | | | | |
Weighted average common shares outstanding | 33,614 | | | 31,577 | | | 32,840 | | | 31,572 | |
Dilutive impact of stock compensation awards | 304 | | | 147 | | | 303 | | | 183 | |
Weighted average common shares outstanding, assuming dilution | 33,918 | | | 31,724 | | | 33,143 | | | 31,755 | |
| | | | | | | |
Anti-dilutive securities excluded from Weighted average common shares outstanding, assuming dilution | 45 | | | 243 | | | 94 | | | 212 | |
| | | | | | | |
Basic income per common share | $ | 0.51 | | | $ | 0.68 | | | $ | 0.95 | | | $ | 1.39 | |
Diluted income per common share | $ | 0.51 | | | $ | 0.68 | | | $ | 0.95 | | | $ | 1.38 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands, except per share data) | | February 24, 2018 | | February 25, 2017 | | February 24, 2018 | | February 25, 2017 |
Income per share - basic | | | | | | | | |
Net income | | $ | 22,088 |
| | $ | 15,278 |
| | $ | 40,046 |
| | $ | 27,016 |
|
Weighted average shares outstanding | | 31,654 |
| | 31,577 |
| | 31,634 |
| | 29,707 |
|
Net income per share - basic | | $ | 0.70 |
| | $ | 0.48 |
| | $ | 1.27 |
| | $ | 0.91 |
|
| | | | | | | | |
Income per share - diluted | | | | | | | | |
Net income | | $ | 22,088 |
| | $ | 15,278 |
| | $ | 40,046 |
| | $ | 27,016 |
|
Weighted average shares outstanding | | 31,654 |
| | 31,577 |
| | 31,634 |
| | 29,707 |
|
Dilutive impact of awards and options outstanding | | 200 |
| | 109 |
| | 218 |
| | 120 |
|
Weighted average shares and potential dilutive shares outstanding | | 31,854 |
| | 31,686 |
| | 31,852 |
| | 29,827 |
|
Net income per share - diluted | | $ | 0.69 |
| | $ | 0.48 |
| | $ | 1.26 |
| | $ | 0.91 |
|
The computation of weighted average shares and potential dilutive shares outstanding excludes the effect of options to purchase 72,710 and 61,000 shares of common stock for the three months ended February 24, 2018 and February 25, 2017, respectively, and 72,710 and 61,000 shares of common stock for the six months ended February 24, 2018 and February 25, 2017, respectively. These amountsAnti-dilutive securities were not included in the computation of diluted income per common share because they are considered anti-dilutive under the treasury stock method per ASC 260, Earnings Per Share.method.
Note 15:18: Accumulated Other Comprehensive Income (Loss)
Changes in AOCIAccumulated Other Comprehensive Income ("AOCI") by component, net of tax, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | |
| February 29, 2020 | | | | | | February 23, 2019 | | | | |
(in thousands) | Defined Benefit Pension Items | | Interest Rate Swap | | Total | | Defined Benefit Pension Items | | Interest Rate Swap | | Total |
Balance at beginning of period | $ | (551) | | | $ | — | | | $ | (551) | | | $ | (583) | | | $ | 1,461 | | | $ | 878 | |
Other comprehensive income ("OCI") before reclassifications | | | | — | | | — | | | — | | | (634) | | | (634) | |
Amounts reclassified from AOCI | 8 | | | — | | | 8 | | | 8 | | | — | | | 8 | |
Net current-period OCI | 8 | | | — | | | 8 | | | 8 | | | (634) | | | (626) | |
Balance at end of period | $ | (543) | | | $ | — | | | $ | (543) | | | $ | (575) | | | $ | 827 | | | $ | 252 | |
| | | | | | | | | | | |
| Six Months Ended | | | | | | | | | | | |
| February 29, 2020 | | | | | | February 23, 2019 | | | | |
(in thousands) | Defined Benefit Pension Items | | Interest Rate Swap | | Total | | Defined Benefit Pension Items | | Interest Rate Swap | | Total |
Balance at beginning of period | $ | (559) | | | $ | 68 | | | $ | (491) | | | $ | (591) | | | $ | 1,483 | | | $ | 892 | |
OCI before reclassifications | — | | | (68) | | | (68) | | | — | | | (656) | | | (656) | |
Amounts reclassified from AOCI | 16 | | | — | | | 16 | | | 16 | | | — | | | 16 | |
Net current-period OCI | 16 | | | (68) | | | (52) | | | 16 | | | (656) | | | (640) | |
Balance at end of period | $ | (543) | | | $ | — | | | $ | (543) | | | $ | (575) | | | $ | 827 | | | $ | 252 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | February 24, 2018 | | February 25, 2017 |
(In thousands) | | Defined Benefit Pension Items | | Interest Rate Swap | | Total | | Defined Benefit Pension Items | | Interest Rate Swap | | Total |
Balance at beginning of period | | $ | (503 | ) | | $ | 120 |
| | $ | (383 | ) | | $ | 6,952 |
| | $ | — |
| | $ | 6,952 |
|
| | | | | | | | | | | | |
OCI before reclassifications | | — |
| | 1,283 |
| | 1,283 |
| | — |
| | (439 | ) | | (439 | ) |
Amounts reclassified from AOCI | | 7 |
| | — |
| | 7 |
| | (7,413 | ) | | — |
| | (7,413 | ) |
Net current-period OCI | | 7 |
| | 1,283 |
| | 1,290 |
| | (7,413 | ) | | (439 | ) | | (7,852 | ) |
| | | | | | | | | | | | |
Balance at end of period | | $ | (496 | ) | | $ | 1,403 |
| | $ | 907 |
|
| $ | (461 | ) | | $ | (439 | ) | | $ | (900 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended |
| | February 24, 2018 | | February 25, 2017 |
(In thousands) | | Defined Benefit Pension Items | | Interest Rate Swap | | Total | | Defined Benefit Pension Items | | Interest Rate Swap | | Total |
Balance at beginning of period | | $ | (509 | ) | | $ | (514 | ) | | $ | (1,023 | ) | | $ | 10,975 |
| | $ | — |
| | $ | 10,975 |
|
| | | | | | | | | | | | |
OCI before reclassifications | | — |
| | 1,917 |
| | 1,917 |
| | 3,903 |
| | (439 | ) | | 3,464 |
|
Amounts reclassified from AOCI | | 13 |
| | — |
| | 13 |
| | (15,339 | ) | | — |
| | (15,339 | ) |
Net current-period OCI | | 13 |
| | 1,917 |
| | 1,930 |
| | (11,436 | ) | | (439 | ) | | (11,875 | ) |
| | | | | | | | | | | | |
Balance at end of period | | $ | (496 | ) | | $ | 1,403 |
| | $ | 907 |
| | $ | (461 | ) | | $ | (439 | ) | | $ | (900 | ) |
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 29, 2020 | | February 23, 2019 | | February 29, 2020 | | February 23, 2019 |
Amortization of net actuarial loss | SG&A | $ | 8 | | | $ | 8 | | | $ | 16 | | | $ | 16 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | Six Months Ended |
(In thousands) | | Location on Consolidated Statements of Income and Comprehensive Income | | February 24, 2018 | | February 25, 2017 | | February 24, 2018 | | February 25, 2017 |
Amortization of prior service credit | | Cost of goods sold | | $ | — |
| | $ | (12,177 | ) | | $ | — |
| | $ | (25,035 | ) |
Amortization of net actuarial loss | | Cost of goods sold | | 7 |
| | 4,764 |
| | 13 |
| | 9,696 |
|
Total reclassifications | | | | $ | 7 |
| | $ | (7,413 | ) | | $ | 13 |
| | $ | (15,339 | ) |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsOperations.
This section
Unless the context otherwise requires, the use of the terms "Winnebago," "we," "us," and "our" refers to Winnebago Industries, Inc. and its wholly-owned subsidiaries.
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. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations, and liquidity are discussed in order of magnitude.
Our MD&A 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‑K10-K for the fiscal year ended August 26, 201731, 2019 (including the information presented therein under Risk Factors), as well as our reports on Forms 10-Q 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 resources, availability and price of fuel, a slowdown in the economy, increased material and component costs, availability of chassis8-K 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 merger and acquisition activities generally, business interruptions, any unexpected expenses related to ERP, risk related to compliance with debt covenants and leverage ratios, 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 whichpublicly available information. All amounts herein 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.unaudited.
Overview
Winnebago Industries, Inc. is aone of the leading US manufacturer of RVsU.S. manufacturers with a proud historydiversified portfolio of manufacturing RVrecreation vehicles ("RV"s) and marine products for 60 years.used primarily in leisure travel and outdoor recreation activities. We currently produce a large majority of our motorhomes in vertically integrated manufacturing facilitiesmotorhome units in Iowa and we produce all ofIndiana; our travel trailertowable units in Indiana; and fifth wheel trailersour marine units in Indiana. We are in the process of expanding some motorhome manufacturing to Junction City, Oregon.Florida. We distribute our RV and marine products primarily through independent dealers throughout the USU.S. and Canada, who then retail the products to the end consumer. We also distribute our marine products internationally through independent dealers, who then retail the products to the end consumer.
Significant Transaction
Non-GAAP Reconciliation
This MD&A includes financial information prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"), as well as certain adjusted or non-GAAP financial measures such as EBITDA and Adjusted EBITDA. EBITDA is defined as net income before interest expense, provision for income taxes, and depreciation and amortization expense. Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, depreciation and amortization expense, and other adjustments made in order to present comparable results from period to period.
These non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, have been provided as information supplemental and in addition to the financial measures presented in accordance with GAAP. Such non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein. The non-GAAP financial measures presented may differ from similar measures used by other companies.
Refer to the Results of Operations - First Six Months of Fiscal 2020 Compared to the First Six Months of Fiscal 2019 for a detailed reconciliation of items that impacted EBITDA and Adjusted EBITDA. We have included these non-GAAP performance measures as a comparable measure to illustrate the effect of non-recurring transactions occurring during the reported periods and to improve comparability of our results from period to period. We believe Adjusted EBITDA provides meaningful supplemental information about our operating performance because these measures exclude amounts that we do not consider part of our core operating results when assessing our performance. Examples of items excluded from Adjusted EBITDA include acquisition-related fair-value inventory step-up, acquisition-related costs, restructuring expenses, and non-operating income.
Management uses these non-GAAP financial measures (a) to evaluate our historical and prospective financial performance and trends as well as our performance relative to competitors and peers; (b) to measure operational profitability on a consistent basis; (c) in presentations to the members of our board of directors to enable our board of directors to have the same measurement basis of operating performance as is used by management in its assessments of performance and in forecasting and budgeting for our company; (d) to evaluate potential acquisitions; and (e) to ensure compliance with covenants and restricted activities under the terms of our debt agreements. We believe these non-GAAP financial measures are frequently used by securities analysts, investors, and other interested parties to evaluate companies in our industry.
Business Combinations
Newmar Corporation
On November 8, 2016,2019, we acquired allcompleted the acquisition of Newmar Corporation, Dutch Real Estate Corp, New-Way Transport, and New-Serv (collectively "Newmar") for total consideration of $360.3 million, which consisted of $267.7 million in cash, subject to purchase price adjustments as stipulated in the issuedPurchase Agreement, and outstanding capital2.0 million shares of Winnebago common stock that were valued at $92.6 million ($46.29 per share discounted at 7.0% due to lack of towable RV manufacturer Grand Design for an aggregatemarketability because of one year lock-up restrictions). The cash portion of the purchase price of $520.5 million. Thisthe acquisition wasand certain transaction expenses were funded from ourthrough the private placement of $300.0 million in aggregate principal amount of 1.5% convertible senior notes due 2025 ("Convertible Notes") (as further described in Note 9, Long-Term Debt) and cash on hand, $353.0 million from asset-based revolvinghand. Newmar is a leading manufacturer of Class A and term loan credit facilities,Super C motorized recreation vehicles that are sold through an established network of independent authorized dealers throughout North America.
Reportable Segments
We have six operating segments: 1) Grand Design towables, 2) Winnebago towables, 3) Winnebago motorhomes, 4) Newmar motorhomes, 5) Chris-Craft marine, and 6) Winnebago specialty vehicles. We evaluate performance based on each operating segment's Adjusted EBITDA, as defined below, which excludes certain corporate administration expenses and non-operating income and expense.
Our two reportable segments include: 1) Towable (comprised of products which are not motorized and are generally towed by another vehicle as well as stock consideration, asother related manufactured products and services), which is more fully described in Note 2 and Note 9 toan aggregation of the Condensed Consolidated Financial Statements. We purchased Grand Design to significantly expand our existing towable RV product offeringstowables and dealer basethe Winnebago towables operating segments and acquire additional talent in the RV industry.
With the acquisition2) Motorhome (comprised of Grand Design in the first quarter of Fiscal 2017, 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. products and services), which is an aggregation of the Winnebago motorhomes and Newmar motorhomes operating segments.
The Towable segmentCorporate / All Other category includes all products that are not motorizedthe Chris-Craft marine and are generally towed by another vehicle.Winnebago specialty vehicles operating segments as well as expenses related to certain corporate administration expenses for the oversight of the enterprise. These expenses include items such as corporate leadership and administration costs.
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 RVIAthe Recreation Vehicle Industry Association ("RVIA")
•Retail unit registrations: consumer purchases of RVs from dealers, which is reported by Stat Surveys
We track RV industryIndustry conditions using these key statistics to monitor trends and evaluate and understand our performance relative to the overall industry. The following is an analysis of changes in these key statistics for the rolling 12 months through January as of 2020 and 2019:
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| 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 | | | | | | |
| 2020 | | 2019 | | Unit Change | | % Change | | 2020 | | 2019 | | Unit Change | | % Change |
Towable(1) | 357,358 | | | 399,987 | | | (42,629) | | | (10.7) | % | | 391,382 | | | 418,956 | | | (27,574) | | | (6.6) | % |
Motorhome(2) | 46,280 | | | 55,683 | | | (9,403) | | | (16.9) | % | | 51,531 | | | 57,635 | | | (6,104) | | | (10.6) | % |
Combined | 403,638 | | | 455,670 | | | (52,032) | | | (11.4) | % | | 442,913 | | | 476,591 | | | (33,678) | | | (7.1) | % |
(1) Towable: Fifth wheel and travel trailer products.
(2) Motorhome: Class A, B, and C products.
The rolling twelve months shipmentshipments for 2020 and 2019 reflect a contraction in shipments as dealers have rationalized inventory during the last twelve months. The rolling twelve months retail information for 20172020 and 2016, as noted below,2019 illustrates that the RV industry continues to growretail sales remain at the wholesale and retail level.healthy levels. We believe that retail demand is the key driver to continued growth in the industry.
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| | | | | | | | | | | | | | | | | |
| 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 |
| 2018 |
| 2017 |
| Unit Change | % Change | | 2018 |
| 2017 |
| Unit Change | % Change |
Towable (1) | 437,229 |
| 364,642 |
| 72,587 |
| 19.9 | % | | 394,114 |
| 351,769 |
| 42,345 |
| 12.0 | % |
Motorized (2) | 63,529 |
| 55,391 |
| 8,138 |
| 14.7 | % | | 57,506 |
| 50,657 |
| 6,849 |
| 13.5 | % |
Combined | 500,758 |
| 420,033 |
| 80,725 |
| 19.2 | % | | 451,620 |
| 402,426 |
| 49,194 |
| 12.2 | % |
| |
(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 and 2018,2020, as noted in the table below, illustrates continued projected growthindicate that industry shipments are expected to remain relatively flat in 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Calendar Year | | | | | | |
Wholesale Unit Shipment Forecast per RVIA(1) | 2020 Forecast | | 2019 Forecast (Most Likely) | | Unit Change | | % Change |
Aggressive | 420,200 | | | 406,100 | | | 14,100 | | | 3.5 | % |
Most likely | 410,100 | | | 406,100 | | | 4,000 | | | 1.0 | % |
Conservative | 380,300 | | | 406,100 | | | (25,800) | | | (6.4) | % |
(1) Prepared by Dr. Richard Curtin of the industry. The outlookUniversity of Michigan Consumer Survey Research Center for future growthRVIA and reported in the Roadsigns 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 US dollar and continued weakness in energy production and prices.Spring 2020 Industry Forecast Issue.
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| | | | | | | | | |
| | Calendar Year |
Wholesale Unit Shipment Forecast per RVIA(1) | | 2018 | 2017 | Unit Change | % Change |
Towable | | 459,000 |
| 429,500 |
| 29,500 |
| 6.9 | % |
Motorized | | 67,900 |
| 62,700 |
| 5,200 |
| 8.3 | % |
Combined | | 526,900 |
| 492,200 |
| 34,700 |
| 7.0 | % |
| |
(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 2018 Industry Forecast Issue. Unit forecasts exclude folding camper and truck camper categories. |
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.
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| Rolling 12 Months through January | | | | Calendar Year | | | | |
US and Canada | 2020(1) | | 2019 | | 2019 | | 2018 | | 2017 |
Travel trailer and fifth wheels | 9.4 | % | | 7.8 | % | | 9.3 | % | | 7.8 | % | | 6.1 | % |
Motorhome A, B, C | 16.5 | % | | 15.7 | % | | 15.5 | % | | 15.6 | % | | 16.3 | % |
Total market share | 10.2 | % | | 8.8 | % | | 10.0 | % | | 8.7 | % | | 7.4 | % |
|
| | | | | | | | |
| | Rolling 12 Months Through January | | Calendar Year |
| | 2018 | 2017 | | 2017 | 2016 | 2015 |
Motorized A, B, C | | 16.3% | 17.8% | | 16.2% | 18.0% | 20.5 | % |
Travel trailer and fifth wheels | | 6.2% | 1.7%(1) | | 6.1% | 1.7%(1) | 0.9 | % |
| |
(1)
| Includes retail unit market share for Grand Design since acquisition on November 8, 2016. |
(1) Includes retail unit market share for Newmar since its acquisition on November 8, 2019.
Debt Repricing
Effective December 8, 2017, we amended our Credit Agreement to reprice $260.0 million of Term Loan debt. The revised interest rate is LIBOR plus 3.5%, down from the previous rate of LIBOR plus 4.5%. Prior to this repricing, $19.7 million was drawn on our ABL and the proceeds from the ABL borrowing were used to voluntarily pay down our Term Loan. Various other amendments were made to our ABL providing us with reduced borrowing costs and facility fees under the ABL. The requirement to hedge a portion of the Term Loan floating rate interest exposure was also removed from the ABL providing greater flexibility under the Credit Agreement.
Facility Expansion
During Fiscal 2017,Due to the rapid growth in our Board of Directors approved two largeTowable segment, we have implemented facility expansion projects in the fast growing Towable segment.our Grand Design towables and Winnebago towables operating segments. The Grand Design towables expansion project consisted of twothree new production facilities. The firstfacilities--two were completed in Fiscal 2018 and one was completed in January 2018 and we have seen an increase in units produced during the second quarter of Fiscal 2018.2020. The second buildingfacility expansion in the Grand Design expansion project is expected to beWinnebago towables division was completed in the third quarter of Fiscal 2018. The facility expansion in the Winnebago-branded Towable division is expected to be completed in early Fiscal 2019.
ERPEnterprise Resource Planning System
In the second quarter of Fiscal 2015, our Board of Directors approved the strategic initiative of implementing an ERPenterprise resource planning ("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:
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| Six Months Ended | | Fiscal Year | | | | | | | | | | Cumulative Investment | | |
(in thousands) | February 29, 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | | |
Capitalized | $ | 791 | | | $ | 3,875 | | | $ | 5,941 | | | $ | 1,881 | | | $ | 7,798 | | | $ | 3,291 | | | $ | 23,577 | | | 57.4 | % |
Expensed | 599 | | | 3,709 | | | 2,107 | | | 2,601 | | | 5,930 | | | 2,528 | | | 17,474 | | | 42.6 | % |
Total | $ | 1,390 | | | $ | 7,584 | | | $ | 8,048 | | | $ | 4,482 | | | $ | 13,728 | | | $ | 5,819 | | | $ | 41,051 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2018 | | Fiscal | | Fiscal | | Fiscal | | Cumulative |
(In thousands) | | Q2 | | Q1 | | 2017 | | 2016 | | 2015 | | Investment |
Capitalized | | $ | 1,271 |
| | $ | 1,416 |
| | $ | 1,881 |
| | $ | 7,798 |
| | $ | 3,291 |
| | $ | 15,657 |
| | 57 | % |
Expensed | | 420 |
| | 387 |
| | 2,601 |
| | 5,930 |
| | 2,528 |
| | 11,866 |
| | 43 | % |
Total | | $ | 1,691 |
| | $ | 1,803 |
| | $ | 4,482 |
| | $ | 13,728 |
| | $ | 5,819 |
| | $ | 27,523 |
| | 100 | % |
In May of 2017, our Board of Directors approved continued investment in the ERP system and a change in implementation partner. The project is proceeding and the benefits are expected to be realized over the next several years. Total project costs are expected to be approximately $38.0 million.
Consolidated Results of Operations
- Current Quarter Compared to the Comparable Prior Year Quarter Last Year
Consolidated Performance Summary
The following is an analysis of changes in key items included in the consolidated statements of income and comprehensive income for the three months ended February 24, 201829, 2020 compared to the three months ended February 25, 2017:23, 2019:
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| Three Months Ended | | | | | | | | | | |
(in thousands, except percent and per share data) | February 29, 2020 | | % of Revenues(1) | | February 23, 2019 | | % of Revenues(1) | | $ Change | | % Change |
Net revenues | $ | 626,810 | | | 100.0 | % | | $ | 432,690 | | | 100.0 | % | | $ | 194,120 | | | 44.9 | % |
Cost of goods sold | 547,028 | | | 87.3 | % | | 366,261 | | | 84.6 | % | | 180,767 | | | 49.4 | % |
Gross profit | 79,782 | | | 12.7 | % | | 66,429 | | | 15.4 | % | | 13,353 | | | 20.1 | % |
Selling, general, and administrative expenses | 42,164 | | | 6.7 | % | | 35,259 | | | 8.1 | % | | 6,905 | | | 19.6 | % |
Amortization of intangible assets | 7,974 | | | 1.3 | % | | 2,267 | | | 0.5 | % | | 5,707 | | | 251.7 | % |
Total operating expenses | 50,138 | | | 8.0 | % | | 37,526 | | | 8.7 | % | | 12,612 | | | 33.6 | % |
Operating income | 29,644 | | | 4.7 | % | | 28,903 | | | 6.7 | % | | 741 | | | 2.6 | % |
Interest expense | 8,651 | | | 1.4 | % | | 4,346 | | | 1.0 | % | | 4,305 | | | 99.1 | % |
Non-operating income | (270) | | | — | % | | (207) | | | — | % | | 63 | | | 30.4 | % |
Income before income taxes | 21,263 | | | 3.4 | % | | 24,764 | | | 5.7 | % | | (3,501) | | | (14.1) | % |
Provision for income taxes | 3,995 | | | 0.6 | % | | 3,166 | | | 0.7 | % | | 829 | | | 26.2 | % |
Net income | $ | 17,268 | | | 2.8 | % | | $ | 21,598 | | | 5.0 | % | | $ | (4,330) | | | (20.0) | % |
| | | | | | | | | | | |
Diluted income per share | $ | 0.51 | | | | | $ | 0.68 | | | | | $ | (0.17) | | | (25.0) | % |
Diluted average shares outstanding | 33,918 | | | | | 31,724 | | | | | 2,194 | | | 6.9 | % |
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
(In thousands, except percent and per share data) | | February 24, 2018 | % of Revenues(1) | | February 25, 2017 | % of Revenues(1) | | Increase (Decrease) | % Change |
Net revenues | | $ | 468,359 |
| 100.0 | % | | $ | 370,510 |
| 100.0 | % | | $ | 97,849 |
| 26.4 | % |
Cost of goods sold | | 400,698 |
| 85.6 | % | | 321,194 |
| 86.7 | % | | 79,504 |
| 24.8 | % |
Gross profit | | 67,661 |
| 14.4 | % | | 49,316 |
| 13.3 | % | | 18,345 |
| 37.2 | % |
| | | | | | | | | |
Selling | | 12,209 |
| 2.6 | % | | 9,553 |
| 2.6 | % | | 2,656 |
| 27.8 | % |
General and administrative | | 18,268 |
| 3.9 | % | | 12,540 |
| 3.4 | % | | 5,728 |
| 45.7 | % |
Postretirement health care benefit income | | — |
| — | % | | (11,983 | ) | (3.2 | )% | | 11,983 |
| (100.0 | )% |
Transaction costs | | — |
| — | % | | 463 |
| 0.1 | % | | (463 | ) | (100.0 | )% |
Amortization of intangible assets | | 1,933 |
| 0.4 | % | | 10,367 |
| 2.8 | % | | (8,434 | ) | (81.4 | )% |
Total general and administrative | | 20,201 |
| 4.3 | % | | 11,387 |
| 3.1 | % | | 8,814 |
| 77.4 | % |
Total SG&A | | 32,410 |
| 6.9 | % | | 20,940 |
| 5.7 | % | | 11,470 |
| 54.8 | % |
| | | | | | | | | |
Operating income | | 35,251 |
| 7.5 | % | | 28,376 |
| 7.7 | % | | 6,875 |
| 24.2 | % |
Interest expense | | 4,918 |
| 1.1 | % | | 5,178 |
| 1.4 | % | | (260 | ) | (5.0 | )% |
Non-operating expense | | 11 |
| — | % | | 4 |
| — | % | | 7 |
| 175.0 | % |
Income before income taxes | | 30,322 |
| 6.5 | % | | 23,194 |
| 6.3 | % | | 7,128 |
| 30.7 | % |
Provision for income taxes | | 8,234 |
| 1.8 | % | | 7,916 |
| 2.1 | % | | 318 |
| 4.0 | % |
Net income | | $ | 22,088 |
| 4.7 | % | | $ | 15,278 |
| 4.1 | % | | $ | 6,810 |
| 44.6 | % |
| | | | | | | | | |
Diluted income per share | | $ | 0.69 |
| | | $ | 0.48 |
| | | $ | 0.21 |
| 43.8 | % |
Diluted average shares outstanding | | 31,854 |
| | | 31,686 |
| | | 168 |
| 0.5 | % |
(1) Percentages may not add due to rounding differences.
Consolidated net
Net revenues increased $97.8 million or 26.4% in the second quarter of Fiscal 20182020 compared to the second quarter of Fiscal 2017. This increase was2019 primarily due to an increase in volume in our Towable segment.acquisition of Newmar and organic growth.
Gross profit increased $18.3 million in the second quarter of Fiscal 2018 compared to the same period a year ago due to a decrease in manufacturing costs as a percentpercentage of revenue due to our Towable segment volume growth and cost savings initiatives. This was partially offset by margin pressure in the Motorized segment due to ongoing expenses related to the ramp up of our West Coast production facility and costs associated with new product start up.
Selling expenses were $12.2 million and $9.6 million, or 2.6% and 2.6% of net revenues, in the second quarter of Fiscal 2018 and Fiscal 2017, respectively. Selling expenses are largely variable and proportional to revenues.
General and administrative expenses were $20.2 million and $11.4 million, or 4.3% and 3.1% of net revenues in the second quarter of Fiscal 2018 and Fiscal 2017, respectively. Fiscal 2017 results of operations in the second quarter were impacted by the increased benefit of $12.0 million due to the termination of the postretirement health care plan. This benefit was partially offset in the second quarter of Fiscal 2017 by $0.5 million of transaction-related expenses and $10.4 million of expense related to amortization of definite-lived intangible assets. The remainder of the increase from 2017 to 2018 is related to investments in the business.
Interest expense decreased $0.3 million in the second quarter of Fiscal 2018. This decrease is related2020 compared to the amendment to our Credit Agreement that occurred during the second quarter of Fiscal 2018. This amendment resulted2019 primarily due to a change in mix as a decreaseresult of our acquisition of Newmar and the impact of Newmar inventory step-up.
Operating expenses increased in the second quarter of Fiscal 2020 compared to the second quarter of Fiscal 2019 due to incremental amortization related to the purchase accounting for Newmar, normal operating expenses of Newmar and organic growth in the Towable segment.
Interest expense increased in the second three months of Fiscal 2020 compared to the second three months of Fiscal 2019 primarily due to the additional interest rate spread by 1.0% onexpense related to the Term Loan and 0.25% onConvertible Notes issued in connection with the ABL. See Analysisacquisition of Financial Condition, Liquidity, and Resources and Note 9 for further information.Newmar.
The overall effective income tax rate increased to 18.8% for the second quarter of Fiscal 2018 was 27.2%2020 compared to the effective tax rate of 34.1% for the same period in Fiscal 2017. The effective tax rate12.8% for the second quarter of Fiscal 2018 was favorably impacted by the enactment of the Tax Act. This decrease was2019 due primarily due to the decreasefavorable impact in the Federal rate as a resultprior year of the Tax Act, which was partially offset by the associated remeasurement of our deferred tax assetsresearch and an increase in state tax rate. The current year rate also benefited from the adoption of ASU 2016-09 related to share-based compensation as discussed in Note 1 to the Condensed Consolidated Financial Statements.development credits.
Net income and diluted income per share were $22.1 million and $0.69 per share, respectively, for the second quarter of Fiscal 2018. In the second quarter of Fiscal 2017, net income was $15.3 million and diluted income was $0.48 per share. The increase in net income and diluted income per share is due primarily to the Towable segment contribution to net income. In addition, FY2017 results of operationsdecreased in the second quarter was impacted byof Fiscal 2020 compared to the increased benefitsecond quarter of $12.0 millionFiscal 2019 primarily due to incremental non-cash interest expense due to our convertible debt, impact of Newmar inventory step-up and amortization and a favorable credit in the terminationprior year related to research and development credits offset by improved profitability in our organic business.
Non-GAAP Reconciliation
We have provided the following non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as information supplemental and in addition to the financial measures presented in accordance with GAAP. Such non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein. The non-GAAP financial measures presented below may differ from similar measures used by other companies.
The following table reconciles net income to consolidated EBITDA and Adjusted EBITDA for the three months ended February 24, 201829, 2020 and February 25, 2017.23, 2019:
| | | | | | | | | | | |
| Three Months Ended | | |
(in thousands) | February 29, 2020 | | February 23, 2019 |
Net income | $ | 17,268 | | | $ | 21,598 | |
Interest expense | 8,651 | | | 4,346 | |
Provision for income taxes | 3,995 | | | 3,166 | |
Depreciation | 4,134 | | | 3,099 | |
Amortization of intangible assets | 7,974 | | | 2,267 | |
EBITDA | 42,022 | | | 34,476 | |
Acquisition-related fair-value inventory step-up | 3,634 | | | — | |
Acquisition-related costs | — | | | — | |
Restructuring expenses | 43 | | | 219 | |
Non-operating income | (270) | | | (207) | |
Adjusted EBITDA | $ | 45,429 | | | $ | 34,488 | |
|
| | | | | | | | |
| | Three Months Ended |
(In thousands) | | February 24, 2018 | | February 25, 2017 |
Net income | | $ | 22,088 |
| | $ | 15,278 |
|
Interest expense | | 4,918 |
| | 5,178 |
|
Provision for income taxes | | 8,234 |
| | 7,916 |
|
Depreciation | | 2,198 |
| | 1,848 |
|
Amortization of intangible assets | | 1,933 |
| | 10,367 |
|
EBITDA | | 39,371 |
| | 40,587 |
|
Postretirement health care benefit income | | — |
| | (11,983 | ) |
Transaction costs | | — |
| | 463 |
|
Non-operating expense | | 11 |
| | 4 |
|
Adjusted EBITDA | | $ | 39,382 |
| | $ | 29,071 |
|
Reportable Segment Performance Summary
We have provided non-GAAP performance measures of EBITDA and Adjusted EBITDA as a comparable measure to illustrate items impacting current results which are not expected to impact future performance. EBITDA is defined as net income before interest expense, provision for income taxes, and depreciation and amortization expense. We believe EBITDA and Adjusted EBITDA provide meaningful supplemental information about our operating performance because each measure excludes amounts that we do not consider part of our core operating results when assessing our performance. Examples of items excluded from
Towable
Adjusted EBITDA include the postretirement health care benefit income from terminating the plan and transaction costs related to our acquisition of Grand Design.
Management uses these non-GAAP financial measures (a) to evaluate our historical and prospective financial performance and trends as well as our performance relative to competitors and peers that publish similar measures; (b) to measure operational profitability on a consistent basis; (c) in presentations to the members of our Board of Directors to enable our Board of Directors to have the same measurement basis of operating performance as is used by management in its assessments of performance and in forecasting and budgeting for our company; and, (d) to evaluate potential acquisitions. We believe these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry.
Segment Results of Operations
The following is an analysis of key changes in our MotorizedTowable segment for the three months ended February 24, 201829, 2020 compared to the three months ended February 25, 2017:23, 2019:
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Motorized | | | | | | | | | |
(In thousands, except units) | | Three Months Ended |
| | Feb 24, 2018 | % of Revenue | | Feb 25, 2017 | % of Revenue | | Increase (Decrease) | % Change |
Net revenues | | $ | 202,001 |
| | | $ | 198,936 |
| | | $ | 3,065 |
| 1.5 | % |
Adjusted EBITDA | | 4,044 |
| 2.0 | % | | 10,838 |
| 5.4 | % | | (6,794 | ) | (62.7 | )% |
| | | | | | | | | |
Unit deliveries | | Feb 24, 2018 | Product Mix % (1) | | Feb 25, 2017 | Product Mix % (1) | | Increase (Decrease) | % Change |
Class A | | 881 |
| 39.9 | % | | 800 |
| 38.0 | % | | 81 |
| 10.1 | % |
Class B | | 411 |
| 18.6 | % | | 376 |
| 17.8 | % | | 35 |
| 9.3 | % |
Class C | | 918 |
| 41.5 | % | | 931 |
| 44.2 | % | | (13 | ) | (1.4 | )% |
Total motorhomes | | 2,210 |
| 100.0 | % | | 2,107 |
| 100.0 | % | | 103 |
| 4.9 | % |
| | | | | | | | | |
Motorhome ASP | | $ | 90,018 |
| | | $ | 94,379 |
| | | $ | (4,361 | ) | (4.6 | )% |
| | | | | | | | | |
| | | | | As Of | | |
Backlog (2) | | | | | Feb 24, 2018 | Feb 25, 2017 | | Increase (Decrease) | % Change |
Units | | | | | 3,053 |
| 2,143 |
| | 910 |
| 42.5 | % |
Dollars | | | | | $ | 276,231 |
| $ | 191,522 |
| | $ | 84,709 |
| 44.2 | % |
| | | | | | | | | |
Dealer Inventory | | | | | | | | | |
Units | | | | | 4,827 |
| 5,068 |
| | (241 | ) | (4.8 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | |
(in thousands, except ASP) | February 29, 2020 | | % of Revenues | | | February 23, 2019 | | % of Revenues | | | $ Change | | % Change |
Net revenues | $ | 283,463 | | | | | $ | 250,691 | | | | | $ | 32,772 | | | 13.1 | % |
Adjusted EBITDA | 34,746 | | | 12.3 | % | | 33,638 | | | 13.4 | % | | 1,108 | | | 3.3 | % |
| | | | | | | | | | | |
Average Selling Price ("ASP")(1) | 32,638 | | | | | 33,003 | | | | | (365) | | | (1.1) | % |
| | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | |
Unit deliveries | February 29, 2020 | | Product Mix(2) | | February 23, 2019 | | Product Mix(2) | | Unit Change | | % Change |
Travel trailer | 5,446 | | | 62.4 | % | | 4,543 | | | 59.8 | % | | 903 | | | 19.9 | % |
Fifth wheel | 3,287 | | | 37.6 | % | | 3,053 | | | 40.2 | % | | 234 | | | 7.7 | % |
Total towables | 8,733 | | | 100.0 | % | | 7,596 | | | 100.0 | % | | 1,137 | | | 15.0 | % |
(1) Average selling price excludes off-invoice dealer incentives.
(2) Percentages may not add due to rounding differences.
Net revenues increased in the second quarter of Fiscal 2020 compared to the second quarter of Fiscal 2019 due to volume growth in excess of industry trends. Our Towable market share increased from 7.8% to 9.4% when comparing shipments during the twelve-month trailing periods ended January 2019 and January 2020.
Adjusted EBITDA increased in the second quarter of Fiscal 2020 compared to the second quarter of Fiscal 2019 due to organic growth offset slightly by higher costs as a result of the start-up of new capacity.
Motorhome
The following is an analysis of key changes in our Motorhome segment for the three months ended February 29, 2020 compared to the three months ended February 23, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | |
(in thousands, except ASP) | February 29, 2020 | | % of Revenues | | | February 23, 2019 | | % of Revenues | | | $ Change | | % Change |
Net revenues | $ | 325,542 | | | | | $ | 164,662 | | | | | $ | 160,880 | | | 97.7 | % |
Adjusted EBITDA | 14,946 | | | 4.6 | % | | 4,359 | | | 2.6 | % | | 10,587 | | | 242.9 | % |
| | | | | | | | | | | |
ASP(1) | 145,554 | | | | | 92,560 | | | | | 52,994 | | | 57.3 | % |
| | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | |
Unit deliveries | February 29, 2020 | | Product Mix(2) | | February 23, 2019 | | Product Mix(2) | | Unit Change | | % Change |
Class A | 843 | | | 37.7 | % | | 529 | | | 29.0 | % | | 314 | | | 59.4 | % |
Class B | 784 | | | 35.0 | % | | 613 | | | 33.6 | % | | 171 | | | 27.9 | % |
Class C | 612 | | | 27.3 | % | | 683 | | | 37.4 | % | | (71) | | | (10.4) | % |
Total motorhomes | 2,239 | | | 100.0 | % | | 1,825 | | | 100.0 | % | | 414 | | | 22.7 | % |
(1) ASP excludes off-invoice dealer incentives.
(2) Percentages may not add due to rounding differences.
Net revenues increased in the second quarter of Fiscal 2020 compared to the second quarter of Fiscal 2019 due to our acquisition of Newmar and a favorable mix.
Adjusted EBITDA increased in the second quarter of Fiscal 2020 compared to the second quarter of Fiscal 2019 due to an increase from our acquisition of Newmar and a favorable mix.
Results of Operations - First Six Months of Fiscal 2020 Compared to the First Six Months of Fiscal 2019
Consolidated Performance Summary
The following is an analysis of changes in key items included in the consolidated statements of income and comprehensive income for the six months ended February 29, 2020 compared to the six months ended February 23, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | | | | | |
(in thousands, except percent and per share data) | February 29, 2020 | | % of Revenues(1) | | February 23, 2019 | | % of Revenues(1) | | $ Change | | % Change |
Net revenues | $ | 1,215,268 | | | 100.0 | % | | $ | 926,338 | | | 100.0 | % | | $ | 288,930 | | | 31.2 | % |
Cost of goods sold | 1,056,873 | | | 87.0 | % | | 788,913 | | | 85.2 | % | | 267,960 | | | 34.0 | % |
Gross profit | 158,395 | | | 13.0 | % | | 137,425 | | | 14.8 | % | | 20,970 | | | 15.3 | % |
Selling, general, and administrative expenses | 93,269 | | | 7.7 | % | | 70,971 | | | 7.7 | % | | 22,298 | | | 31.4 | % |
Amortization of intangible assets | 11,588 | | | 1.0 | % | | 4,926 | | | 0.5 | % | | 6,662 | | | 135.2 | % |
Total operating expenses | 104,857 | | | 8.6 | % | | 75,897 | | | 8.2 | % | | 28,960 | | | 38.2 | % |
Operating income | 53,538 | | | 4.4 | % | | 61,528 | | | 6.6 | % | | (7,990) | | | (13.0) | % |
Interest expense | 14,700 | | | 1.2 | % | | 8,847 | | | 1.0 | % | | 5,853 | | | 66.2 | % |
Non-operating income | (386) | | | — | % | | (970) | | | (0.1) | % | | (584) | | | (60.2) | % |
Income before income taxes | 39,224 | | | 3.2 | % | | 53,651 | | | 5.8 | % | | (14,427) | | | (26.9) | % |
Provision for income taxes | 7,888 | | | 0.6 | % | | 9,892 | | | 1.1 | % | | (2,004) | | | (20.3) | % |
Net income | $ | 31,336 | | | 2.6 | % | | $ | 43,759 | | | 4.7 | % | | $ | (12,423) | | | (28.4) | % |
| | | | | | | | | | | |
Diluted income per share | $ | 0.95 | | | | | $ | 1.38 | | | | | $ | (0.43) | | | (31.2) | % |
Diluted average shares outstanding | 33,143 | | | | | 31,755 | | | | | 1,388 | | | 4.4 | % |
(1) Percentages may not add due to rounding differences.
Net revenues increased in the first six months of Fiscal 2020 compared to the first six months of Fiscal 2019 primarily due to our acquisition of Newmar and organic growth.
Gross profit as a percentage of revenue decreased in the first six months of Fiscal 2020 compared to the first six months of Fiscal 2019 due primarily to the impact of Newmar inventory step-up and a change in mix as a result our acquisition of Newmar.
Operating expenses increased in the first six months of Fiscal 2020 compared to the first six months of Fiscal 2019 due to acquisition related costs and incremental amortization related to the purchase accounting for Newmar, normal operating expenses of Newmar, and organic growth in the Towable segment.
Interest expense increased in the first six months of Fiscal 2020 compared to the first six months of Fiscal 2019 primarily due to the additional interest expense related to the Convertible Notes issued in connection with the acquisition of Newmar.
Non-operating income decreased in the first six months of Fiscal 2020 compared to the first six months of Fiscal 2019 due to company-owned life insurance benefits in the prior year.
The effective tax rate increased to 20.1% for the first six months of Fiscal 2020 compared to 18.4% for the first six months of Fiscal 2019 due primarily to a favorable credit in the prior year related to research and development credits.
Net income and diluted income per share decreased in the first six months of Fiscal 2020 compared to the first six months of Fiscal 2019 primarily due to the acquisition-related costs for Newmar and the additional interest expense related to our Convertible Notes.
Non-GAAP Reconciliation
The following table reconciles net income to consolidated EBITDA and Adjusted EBITDA for the six months ended February 29, 2020 and February 23, 2019:
| | | | | | | | | | | |
| Six Months Ended | | |
(in thousands) | February 29, 2020 | | February 23, 2019 |
Net income | $ | 31,336 | | | $ | 43,759 | |
Interest expense | 14,700 | | | 8,847 | |
Provision for income taxes | 7,888 | | | 9,892 | |
Depreciation | 7,720 | | | 6,268 | |
Amortization of intangible assets | 11,588 | | | 4,926 | |
EBITDA | 73,232 | | | 73,692 | |
Acquisition-related fair-value inventory step-up | 4,810 | | | — | |
Acquisition-related costs | 9,950 | | | — | |
Restructuring expenses | (129) | | | 219 | |
Non-operating income | (386) | | | (970) | |
Adjusted EBITDA | $ | 87,477 | | | $ | 72,941 | |
Reportable Segment Performance Summary
Towable
The following is an analysis of key changes in our Towable segment for the six months ended February 29, 2020 compared to the six months ended February 23, 2019 and as of February 29, 2020 compared to February 23, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | | | | | |
(in thousands, except ASP) | February 29, 2020 | | % of Revenues | | | February 23, 2019 | | % of Revenues | | | $ Change | | % Change |
Net revenues | $ | 624,713 | | | | | $ | 543,524 | | | | | $ | 81,189 | | | 14.9 | % |
Adjusted EBITDA | 70,531 | | | 11.3 | % | | 64,466 | | | 11.9 | % | | 6,065 | | | 9.4 | % |
| | | | | | | | | | | |
ASP(1) | 32,836 | | | | | 32,008 | | | | | 828 | | | 2.6 | % |
| | | | | | | | | | | |
| Six Months Ended | | | | | | | | | | |
Unit deliveries | February 29, 2020 | | Product Mix(2) | | February 23, 2019 | | Product Mix(2) | | Unit Change | | % Change |
Travel trailer | 11,782 | | | 60.9 | % | | 10,379 | | | 61.1 | % | | 1,403 | | | 13.5 | % |
Fifth wheel | 7,550 | | | 39.1 | % | | 6,602 | | | 38.9 | % | | 948 | | | 14.4 | % |
Total towables | 19,332 | | | 100.0 | % | | 16,981 | | | 100.0 | % | | 2,351 | | | 13.8 | % |
| | | | | | | | | | | |
($ in thousands) | February 29, 2020 | | | | February 23, 2019 | | | | Change | | % Change |
Backlog(3) | | | | | | | | | | | |
Units | 9,790 | | | | | 8,002 | | | | | 1,788 | | | 22.3 | % |
Dollars | $ | 330,738 | | | | | $ | 285,391 | | | | | $ | 45,347 | | | 15.9 | % |
Dealer Inventory | | | | | | | | | | | |
Units | 19,731 | | | | | 19,141 | | | | | 590 | | | 3.1 | % |
(1) ASP excludes off-invoice dealer incentives.
(2) Percentages may not add due to rounding differences.
(3) We include in our backlog all accepted orders from dealers to generally be shipped within the next six months. Orders in backlog can be cancelled 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.
Net revenues increased $3.1 million or 1.5% in the second quarterfirst six months of Fiscal 2018 as2020 compared to the second quarterfirst six months of Fiscal 2017. This was primarily2019 due to an increase in the amount of units sold.unit deliveries.
Motorized unit deliveriesAdjusted EBITDA increased by 4.9% in the quarter. The unit growth we have generated has beenfirst six months of Fiscal 2020 compared to the first six months of Fiscal 2019 due to an increase in our Class B and entry-level Class A products, which havenet revenues offset slightly by higher costs as a lower ASP. Additionally, weresult of the start-up of new capacity.
We have seen an increase in the volume and dollar value of backlog volumes by 42.5% in the second quarteras of Fiscal 2018February 29, 2020 compared to February 23, 2019 due largely to the introduction of new products. Dealer inventory declined as a result of theour strong demand for ourmarket share growth and new product introductions as demonstrated by the increase in backlog.introduction.
Motorized segment Adjusted EBITDA decreased $6.8 million or 62.7%. This reduction was due to costs associated with ongoing expenses related to the ramp-up of our West Coast production facility and costs associated with new product start-up.Motorhome
The following is an analysis of key changes in our TowableMotorhome segment for the threesix months ended February 24, 201829, 2020 compared to the threesix months ended February 25, 2017:23, 2019 and as of February 29, 2020 compared to February 23, 2019:
| | | | | | | | | | | | | | | | Six Months Ended | |
Towable | | | | | | | | | |
(In thousands, except units) | | Three Months Ended | |
| | Feb 24, 2018 | % of Revenue | | Feb 25, 2017 | % of Revenue | | Increase | % Change | |
(in thousands, except ASP) | | (in thousands, except ASP) | February 29, 2020 | | % of Revenues | | | February 23, 2019 | | % of Revenues | | | $ Change | | % Change |
Net revenues | | $ | 266,358 |
| | | $ | 171,574 |
| | | $ | 94,784 |
| 55.2 | % | Net revenues | $ | 551,433 | | | | | $ | 345,990 | | | | | $ | 205,443 | | | 59.4 | % |
Adjusted EBITDA | | 35,338 |
| 13.3 | % | | 18,233 |
| 10.6 | % | | 17,105 |
| 93.8 | % | Adjusted EBITDA | 24,277 | | | 4.4 | % | | 16,335 | | | 4.7 | % | | 7,942 | | | 48.6 | % |
| | | | | | | | | |
Unit deliveries | | Feb 24, 2018 | Product Mix % (1) | | Feb 25, 2017 | Product Mix % (1) | | Increase (Decrease) | % Change | |
Travel trailer | | 5,083 |
| 59.9 | % | | 3,046 |
| 56.3 | % | | 2,037 |
| 66.9 | % | |
Fifth wheel | | 3,398 |
| 40.1 | % | | 2,365 |
| 43.7 | % | | 1,033 |
| 43.7 | % | |
Total towables | | 8,481 |
| 100.0 | % | | 5,411 |
| 100.0 | % | | 3,070 |
| 56.7 | % | |
| | | | | | | | | |
Towable ASP | | $ | 31,648 |
| | | $ | 32,310 |
| | | $ | (662 | ) | (2.0 | )% | |
ASP(1) | | ASP(1) | 129,344 | | | 95,620 | | | 33,724 | | | 35.3 | % |
| | | | | | | | | |
| | | | | As Of | | | | Six Months Ended | |
Unit deliveries | | Unit deliveries | February 29, 2020 | | Product Mix(2) | | February 23, 2019 | | Product Mix(2) | | Unit Change | | % Change |
Class A | | Class A | 1,242 | | | 30.1 | % | | 951 | | | 26.1 | % | | 291 | | | 30.6 | % |
Class B | | Class B | 1,593 | | | 38.7 | % | | 1,332 | | | 36.6 | % | | 261 | | | 19.6 | % |
Class C | | Class C | 1,286 | | | 31.2 | % | | 1,361 | | | 37.3 | % | | (75) | | | (5.5) | % |
Total motorhomes | | Total motorhomes | 4,121 | | | 100.0 | % | | 3,644 | | | 100.0 | % | | 477 | | | 13.1 | % |
| ($ in thousands) | | ($ in thousands) | February 29, 2020 | | February 23, 2019 | | Change | | % Change |
Backlog (2)(3) | | | | | Feb 24, 2018 | Feb 25, 2017 | | Increase | % Change | | | | | | | |
Units | | | | | 9,342 |
| 8,490 |
| | 852 |
| 10.0 | % | Units | 2,856 | | | 1,882 | | | 974 | | | 51.8 | % |
Dollars | | | | | $ | 302,630 |
| $ | 261,995 |
| | $ | 40,635 |
| 15.5 | % | Dollars | $ | 394,570 | | | $ | 169,581 | | | $ | 224,989 | | | 132.7 | % |
| | | | | | | | | |
Dealer Inventory | | | | | | | | | Dealer Inventory | |
Units | | | | | 15,728 |
| 9,216 |
| | 6,512 |
| 70.7 | % | Units | 5,507 | | | 4,812 | | | 695 | | | 14.4 | % |
(1) ASP excludes off-invoice dealer incentives.
(2) Percentages may not add due to rounding differences.
(2) (3) We include in our backlog all accepted orders from dealers to generally be shipped within the next six months. Orders in backlog can be cancelled 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.
Towable netNet revenues increased $94.8 million or 55.2% in the second quarter of Fiscal 2018 as compared to the second quarter of Fiscal 2017. This increase was driven by strong organic growth.
Towable unit deliveries grew by 56.7% in the quarter primarily due to volume growth in excess of recent industry trends. Our Towable market share increased from 1.7% to 6.2% when comparing shipments during the twelve-month trailing periods ended January 2017 and January 2018. The decrease in Towable ASP is due to a mix change for the second quarter of Fiscal 2018 compared to the same period in Fiscal 2017. Backlog volumes increased by 10.0% in the second quarter of Fiscal 2018.
Towable segment Adjusted EBITDA increased $17.1 million due primarily to the organic volume growth. Shipments grew faster than the industry as a result of greater penetration of our new products and further expansion of our distribution base. In addition to the growth in the Towable segment, profitability has increased due to the leverage of higher volume on the fixed cost components of our business as well as effective cost-savings initiatives.
Consolidated Results of Operations
First Six Months of Fiscal 2018 Compared to the Comparable Six Months of Fiscal 2017
The following is an analysis of changes in key items included in the statements of income and comprehensive income:
|
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended |
(In thousands, except percent and per share data) | | February 24, 2018 | % of Revenues(1) | | February 25, 2017 | % of Revenues(1) | | Increase (Decrease) | % Change |
Net revenues | | $ | 918,380 |
| 100.0 | % | | $ | 615,818 |
| 100.0 | % | | $ | 302,562 |
| 49.1 | % |
Cost of goods sold | | 787,888 |
| 85.8 | % | | 537,627 |
| 87.3 | % | | 250,261 |
| 46.5 | % |
Gross profit | | 130,492 |
| 14.2 | % | | 78,191 |
| 12.7 | % | | 52,301 |
| 66.9 | % |
| | | | | | | | | |
Selling | | 24,343 |
| 2.7 | % | | 15,423 |
| 2.5 | % | | 8,920 |
| 57.8 | % |
General and administrative | | 35,684 |
| 3.9 | % | | 22,446 |
| 3.6 | % | | 13,238 |
| 59.0 | % |
Postretirement health care benefit income | | — |
| — | % | | (24,796 | ) | (4.0 | )% | | 24,796 |
| (100.0 | )% |
Transaction costs | | 50 |
| — | % | | 5,925 |
| 1.0 | % | | (5,875 | ) | (99.2 | )% |
Amortization of intangible assets | | 3,988 |
| 0.4 | % | | 12,418 |
| 2.0 | % | | (8,430 | ) | (67.9 | )% |
Total general and administrative | | 39,722 |
| 4.3 | % | | 15,993 |
| 2.6 | % | | 23,729 |
| 148.4 | % |
Total SG&A | | 64,065 |
| 7.0 | % | | 31,416 |
| 5.1 | % | | 32,649 |
| 103.9 | % |
| | | | | | | | | |
Operating income | | 66,427 |
| 7.2 | % | | 46,775 |
| 7.6 | % | | 19,652 |
| 42.0 | % |
Interest Expense | | 9,699 |
| 1.1 | % | | 6,306 |
| 1.0 | % | | 3,393 |
| 53.8 | % |
Non-operating income | | (112 | ) | — | % | | (83 | ) | — | % | | (29 | ) | 34.9 | % |
Income before income taxes | | 56,840 |
| 6.2 | % | | 40,552 |
| 6.6 | % | | 16,288 |
| 40.2 | % |
Provision for income taxes | | 16,794 |
| 1.8 | % | | 13,536 |
| 2.2 | % | | 3,258 |
| 24.1 | % |
Net income | | $ | 40,046 |
| 4.4 | % | | $ | 27,016 |
| 4.4 | % | | $ | 13,030 |
| 48.2 | % |
| | | | | | | | | |
Diluted income per share | | $ | 1.26 |
| | | $ | 0.91 |
| | | $ | 0.35 |
| 38.5 | % |
Diluted average shares outstanding | | 31,852 |
| | | 29,827 |
| | | 2,025 |
| 6.8 | % |
(1) Percentages may not add due to rounding differences.
Consolidated net revenues increased $302.6 million or 49.1% in the first six months of Fiscal 2018 over the first six months of Fiscal 2017. This was primarily due to the acquisition of Grand Design and strong volume growth in our Towable segment.
Gross profit increased $52.3 million for the first six months of Fiscal 2018 compared to the first six months of Fiscal 2017 due to the Towable segment, which operates at a higher gross profit, growing faster than the Motorized segment, and also due to effectiveness of cost savings initiatives.
Selling expenses were $24.3 million and $15.4 million, or 2.7% and 2.5% of net revenues, in the first six months of Fiscal 2018 and Fiscal 2017, respectively. The increase was primarily due to a mix change driven by volume growth in our Towable segment.
General and administrative expenses were $39.7 million and $16.0 million, or 4.3% and 2.6% of net revenues, in the first six months of Fiscal 2018 and Fiscal 2017, respectively. This increase was due primarily to additional general and administrative expenses related to the fiscal year 2017 acquisition of Grand Design. Additionally, Fiscal 2017 results of operations were impacted by the increased benefit of $24.8 million associated with the termination of the postretirement health care plan. This benefit was partially offset in Fiscal 2017 by $5.9 million of Grand Design transaction-related expenses and $12.4 million of expense related to amortization of definite-lived intangible assets, also related to the acquisition of Grand Design.
Interest expense increased $3.4 million in the first six months of Fiscal 2018 compared to the first six months of Fiscal 2017. This increase is related to the ABL and Term Loan agreements associated with the acquisition of Grand Design. See Analysis of Financial Condition, Liquidity, and Resources and Note 9 for further information.
The overall effective income tax rate for the first six months of Fiscal 2018 was 29.5% compared to the effective income tax rate of 33.4% for the first six months of Fiscal 2017. The effective rate for the first six months of Fiscal 2018 was favorably impacted by the enactment of the Tax Act. This decrease was primarily due to the decrease in the Federal rate as a result of the Tax Act, which was partially offset by the associated remeasurement of our deferred tax assets and an increase in state tax rate.
Net income and diluted income per share were $40.0 million and $1.26 per share, respectively, for the first six months of Fiscal 2018. In the first six months of Fiscal 2017, net income and diluted net income per share was $27.0 million and $0.91, respectively.
Non-GAAP Reconciliation
We have provided the following non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as information supplemental and in addition to the financial measures presented in accordance with GAAP. Such non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein. The non-GAAP financial measures presented below may differ from similar measures used by other companies.
The following table reconciles net income to consolidated Adjusted EBITDA for the six months ended February 24, 2018 and February 25, 2017.
|
| | | | | | | | |
| | Six Months Ended |
(In thousands) | | February 24, 2018 | | February 25, 2017 |
Net income | | $ | 40,046 |
| | $ | 27,016 |
|
Interest expense | | 9,699 |
| | 6,306 |
|
Provision for income taxes | | 16,794 |
| | 13,536 |
|
Depreciation | | 4,328 |
| | 3,428 |
|
Amortization of intangible assets | | 3,988 |
| | 12,418 |
|
EBITDA | | 74,855 |
| | 62,704 |
|
Postretirement health care benefit income | | — |
| | (24,796 | ) |
Transaction costs | | 50 |
| | 5,925 |
|
Non-operating income | | (112 | ) | | (83 | ) |
Adjusted EBITDA | | $ | 74,793 |
| | $ | 43,750 |
|
We have provided non-GAAP performance measures of EBITDA and Adjusted EBITDA as a comparable measure to illustrate items impacting current results that are not expected to impact future performance. EBITDA is defined as net income before interest expense, provision for income taxes, and depreciation and amortization expense. We believe EBITDA and Adjusted EBITDA provide meaningful supplemental information about our operating performance because each measure excludes amounts that we do not consider part of our core operating results when assessing our performance. Examples of items excluded from Adjusted EBITDA include the postretirement health care benefit income from terminating the plan and transaction costs related to our acquisition of Grand Design.
Management uses these non-GAAP financial measures (a) to evaluate our historical and prospective financial performance and trends as well as our performance relative to competitors and peers that publish similar measures; (b) to measure operational profitability on a consistent basis; (c) in presentations to the members of our Board of Directors to enable our Board of Directors to have the same measurement basis of operating performance as is used by management in its assessments of performance and in forecasting and budgeting for our company; and, (d) to evaluate potential acquisitions. We believe these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry.
Segment Results of Operations
The following is an analysis of key changes in our Motorized segment:
|
| | | | | | | | | | | | | | | | | | | |
Motorized | | | | | | | | | |
(In thousands, except units) | | Six Months Ended |
| | Feb 24, 2018 | % of Revenue | | Feb 25, 2017 | % of Revenue | | Decrease | % Change |
Net revenues | | $ | 392,357 |
| | | $ | 394,061 |
| | | $ | (1,704 | ) | (0.4 | )% |
Adjusted EBITDA | | 7,199 |
| 1.8 | % | | 21,954 |
| 5.6 | % | | (14,755 | ) | (67.2 | )% |
| | | | | | | | | |
Unit deliveries | | Feb 24, 2018 | Product Mix % (1) | | Feb 25, 2017 | Product Mix % (1) | | Increase (Decrease) | % Change |
Class A | | 1,604 |
| 37.9 | % | | 1,466 |
| 35.7 | % | | 138 |
| 9.4 | % |
Class B | | 781 |
| 18.5 | % | | 677 |
| 16.5 | % | | 104 |
| 15.4 | % |
Class C | | 1,844 |
| 43.6 | % | | 1,964 |
| 47.8 | % | | (120 | ) | (6.1 | )% |
Total motorhomes | | 4,229 |
| 100.0 | % | | 4,107 |
| 100.0 | % | | 122 |
| 3.0 | % |
| | | | | | | | | |
Motorhome ASP | | $ | 90,604 |
| | | $ | 94,704 |
| | | $ | (4,100 | ) | (4.3 | )% |
| | | | | | | | | |
| | | | | As Of | | |
Backlog (2) | | | | | Feb 24, 2018 | Feb 25, 2017 | | Increase (Decrease) | % Change |
Units | | | | | 3,053 |
| 2,143 |
| | 910 |
| 42.5 | % |
Dollars | | | | | $ | 276,231 |
| $ | 191,522 |
| | $ | 84,709 |
| 44.2 | % |
| | | | | | | | | |
Dealer Inventory | | | | | | | | | |
Units | | | | | 4,827 |
| 5,068 |
| | (241 | ) | (4.8 | )% |
(1) Percentages may not add due to rounding differences.
(2) We include in our backlog all accepted orders from dealers to generally be shipped within the next six months. Orders in backlog can be cancelled 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.
Motorized net revenues decreased $1.7 million or 0.4% in the first six months of Fiscal 2018 as2020 compared to the first six months of Fiscal 2017. This was primarily2019 due to lower ASP on the mixacquisition of units sold.Newmar and an increase in the organic ASP.
Motorized unit deliveries grew by 3.0%Adjusted EBITDA increased in the first six months which is lower than recent industry growth. Our overall motorized market share moved from 17.8% to 16.3% when comparing shipments during the twelve-month trailing periods ended January 2017 and January 2018 due to a mix change from our Class C products to our Class B and entry-level Class A products.
Motorized segment Adjusted EBITDA decreased $14.8 million or 67.2%. This reduction was due to lower revenues as well as ongoing expenses related to the ramp up of our West Coast production facility and costs associated with new product start-up.
The following is an analysis of key changes in our Towable segment:
|
| | | | | | | | | | | | | | | | | | | |
Towable | | | | | | | | | |
(In thousands, except units) | | Six Months Ended |
| | Feb 24, 2018 | % of Revenue | | Feb 25, 2017 | % of Revenue | | Increase | % Change |
Net revenues | | $ | 526,023 |
| | | $ | 221,757 |
| | | $ | 304,266 |
| 137.2 | % |
Adjusted EBITDA | | 67,594 |
| 12.9 | % | | 21,796 |
| 9.8 | % | | 45,798 |
| 210.1 | % |
| | | | | | | | | |
Unit deliveries | | Feb 24, 2018 | Product Mix % (1) | | Feb 25, 2017 | Product Mix % (1) | | Increase | % Change |
Travel trailer | | 10,432 |
| 60.8 | % | | 4,555 |
| 61.4 | % | | 5,877 |
| 129.0 | % |
Fifth wheel | | 6,725 |
| 39.2 | % | | 2,868 |
| 38.6 | % | | 3,857 |
| 134.5 | % |
Total towables | | 17,157 |
| 100.0 | % | | 7,423 |
| 100.0 | % | | 9,734 |
| 131.1 | % |
| | | | | | | | | |
Towables ASP | | $ | 31,096 |
| | | $ | 30,291 |
| | | $ | 805 |
| 2.7 | % |
| | | | | | | | | |
| | | | | As Of | | |
Backlog (2) | | | | | Feb 24, 2018 | Feb 25, 2017 | | Increase | % Change |
Units | | | | | 9,342 |
| 8,490 |
| | 852 |
| 10.0 | % |
Dollars | | | | | $ | 302,630 |
| $ | 261,995 |
| | $ | 40,635 |
| 15.5 | % |
| | | | | | | | | |
Dealer Inventory | | | | | | | | | |
Units | | | | | 15,728 |
| 9,216 |
| | 6,512 |
| 70.7 | % |
(1) Percentages may not add due to rounding differences.
(2) We include in our backlog all accepted orders from dealers to generally be shipped within the next six months. Orders in backlog can be cancelled 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.
Towable net revenues increased $304.3 million in the first six monthsof Fiscal 2018 as2020 compared to the first six months of Fiscal 2017. This was2019 primarily due to our Newmar acquisition.
We have seen an increase in the fiscal year 2017backlog volumes as of February 29, 2020 compared to February 23, 2019 due to our acquisition of Grand Design in November 2016Newmar and organic volume growth.
Towable unit deliveries grew by 131.1% in the first six months of Fiscal 2018 primarily due to the acquisitionnew product introductions.
Towable segment Adjusted EBITDA increased $45.8 million due to the favorable impact of organic growth. We achieved strong results in our Towable segment, where shipments grew much faster than the industry as a result of greater penetration of our new products and further expansion of our distribution base, as well as higher gross profit from cost savings initiatives.
Analysis of Financial Condition, Liquidity, and Resources
Cash andFlows
The following table summarizes our cash equivalents decreased $8.5 million duringflows from operations for the first six months of Fiscal 2018ended February 29, 2020 and totaled $27.4 million as of February 24, 2018. Significant liquidity events that occurred during23, 2019:
| | | | | | | | | | | |
| Six Months Ended | | |
(in thousands) | February 29, 2020 | | February 23, 2019 |
Total cash provided by (used in): | | | |
Operating activities | $ | 119,164 | | | $ | 51,938 | |
Investing activities | (283,158) | | | (23,024) | |
Financing activities | 249,502 | | | (28,239) | |
Net increase (decrease) in cash and cash equivalents | $ | 85,508 | | | $ | 675 | |
Operating Activities
Cash provided by operating activities increased for the first six months of Fiscal 2018 were:
Generated net income of $40.0 million
Total borrowings atended February 24, 2018 were $279.7 million, and we have an additional $105.3 million available29, 2020 compared to borrow under the revolving credit agreement, subjectsix months ended February 23, 2019 primarily due to sufficient borrowing base
Net repayment of $4.3 million of debt ($24.0 million repayments less $19.7 million borrowings)
Increasefavorable changes in payables of $32.9 millionworking capital, partially offset by increasesNewmar acquisition-related costs.
Investing Activities
Cash used in receivables, prepaidinvesting activities increased for the six months ended February 29, 2020 compared to the six months ended February 23, 2019 primarily due to our acquisition of Newmar.
Financing Activities
Cash provided by financing activities increased for the six months ended February 29, 2020 compared to the six months ended February 23, 2019 primarily due to the issuance of Convertible Notes issued in the first quarter of Fiscal 2020 to finance our acquisition of Newmar.
Debt and other assetsCapital
As of $31.1 million
Increase in inventory of $36.4 million
As described in Note 9, our Credit Agreement at February 24, 2018 consisted29, 2020, we have a debt agreement that consists of a $300.0 million term loan agreement ("Term LoanLoan") and a $125.0$192.5 million asset-based revolving credit facility ("ABL with JPMorgan Chase.
We filed a registration statementCredit Facility") (collectively, the "Credit Agreements"). During the first quarter of Fiscal 2020, we issued the Convertible Notes, which were used to partially fund the Newmar acquisition. Refer to Note 9, Long-Term Debt, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form S-3, which was declared effective by10-Q for additional details. As of February 29, 2020, we had no borrowings against 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 three years from its effective date. We currently have no plans to offer and sell the common stock registered under the registration statement, however, it does provide another potential source of liquidity to raise capital if we need it, in addition to other alternatives already in place.ABL.
Other Financial Measures
Working capital at February 24, 201829, 2020 and August 26, 201731, 2019 was $177.1$313.5 million and $147.0$212.9 million,, respectively, an increase of $30.1 million. respectively. We currently expect cash on hand, funds generated from operations, and the borrowing available under our ABL Credit Agreement toFacility be sufficient to cover both short-term and long-term operating requirements. We will continue to invest in our current motorhome facilities and our ERP system as well as expand our Towable facilities.
Share repurchasesRepurchases and Dividends
We repurchase our common stock and pay dividends pursuant to programs approved by our Board of $1.5 millionDirectors. Our long-term capital allocation strategy is to first fund operations and investments in growth, maintain a debt leverage ratio within our targeted zone, maintain reasonable liquidity, and then return excess cash over time to shareholders through dividends and share repurchases.
On October 18, 2017, our Board of Directors authorized a share repurchase program in the first six monthsamount of $70.0 million. There is no time restriction on the authorization. In the second quarter of Fiscal 2018 were to satisfy tax obligations on employee equity awards as they vested.2020, we did not repurchase any shares under this authorization. We continually evaluate if share repurchases reflect a prudent use of our capital and, subject to compliance with our Credit Agreement,Agreements, we may purchase shares in the remainder of Fiscal 2018.future. At February 24, 2018,29, 2020, we have $71.0$58.9 million remaining on our board repurchase authorization. See Part II, Item 2
On March 17, 2020, our Board of Directors approved a quarterly cash dividend of $0.11 per share payable on April 29, 2020, to common stockholders of record at the close of business on April 15, 2020.
Contractual Obligations and Commercial Commitments
There has been no material change in our contractual obligations other than the issuance of the Convertible Notes and in the ordinary course of business since the end of Fiscal 2019. Refer to Note 9, Long-Term Debt, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Operating Activities
Cash provided by operating activities was $15.0 million10-Q for additional details on the Convertible Notes, and see our Annual Report on Form 10-K for the six monthsfiscal year ended February 24, 2018 compared to $5.1 millionAugust 31, 2019 for the six months ended February 25, 2017. The increase in cash flow from operations in Fiscal 2018 was driven by the strong net income of $40.0 million offset by an increase in receivables due to volume growthadditional information regarding our contractual obligations and an increase in inventory due to planned inventory build.commercial commitments.
Investing Activities
Cash used in investing activities of $11.4 million for the six months ended February 24, 2018 was due primarily to capital expenditures of $11.7 million including the capacity expansions taking place in our Towable segment. In the six months ended February 25, 2017, cash used in investing activities of $400.9 million was due primarily to the acquisition of Grand Design for which we paid cash of $394.7 million, net of cash acquired, in addition to issuing Winnebago stock with a value of $124.1 million at closing.
Financing Activities
Cash used in financing activities of $12.2 million for the six months ended February 24, 2018 was primarily due to payments on the Credit Agreement of $24.0 million and $1.5 million for share repurchases and was partially offset by cash proceeds on the Credit Agreement of $19.7 million. Cash provided by financing activities of $321.2 million for the six months ended February 25, 2017 was primarily due to cash proceeds from the Credit Agreement of $366.4 million, partially offset by payments on the Credit Agreement of $26.4 million, $11.0 million for the payment of debt issuance costs, and $6.4 million for the payment of dividends.
Significant Accounting Policies and Estimates
We describe our significant accounting policies in Note 1: Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 26, 2017.31, 2019. We discuss our critical accounting estimates in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended August 26, 2017. We refer31, 2019. In the first quarter of Fiscal 2020, we adopted new lease accounting guidance, as described in Note 1, Basis of Presentation, and Note 10, Leases, of the Notes to these disclosures for a detailed explanation of our significant accounting policies and critical accounting estimates.Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. There hashave been no other significant changechanges in our significant accounting policies or critical accounting estimates since the end of Fiscal 2017, except as disclosed in2019.
New Accounting Pronouncements
For a description of new applicable accounting pronouncements, see Note 1, Basis of Presentation, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Safe Harbor Statement Under the Private Securities Litigation Reform Act
Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements and may be identified by the use of words such as "anticipate," "assume," "believe," "estimate," "expect," "guidance," "intend," "outlook," "plan," "project," and other words and terms of similar meaning. Such statements reflect our current views and estimates with respect to future market conditions, company performance and financial results, operational investments, business prospects, new strategies, the competitive environment, and other events. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the potential results discussed in such forward-looking statements. Readers should review Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, and Item 1A, Risk Factors, in Part II of this Quarterly Report on Form 10-Q, for a description of important factors that could cause our actual results to differ materially from those contemplated by the forward-looking statements made in this Quarterly Report on Form 10-Q. Among the factors that could cause actual results and outcomes to differ materially from those contained in such forward-looking statements are the following: competition and new product introductions by competitors, our ability to attract and retain qualified personnel, increases in market compensation rates, business or production disruptions, sales order cancellations, risk related to the consolidated financial statements.terms of our credit agreements and compliance with debt covenants and leverage ratios, stock price volatility and share dilution, disruptions or unanticipated costs from facility expansions, availability of labor, a slowdown in the economy, low consumer confidence, the effect of global tensions, increases in interest rates, availability of credit, availability of financing for RV and marine dealers, impairment of goodwill, risk related to cyclicality and seasonality of our business, slower than anticipated sales of new or existing products, integration of operations relating to merger and acquisition activities generally, our acquisition of Newmar, the possibility that the Newmar acquisition may not perform as expected or may not result in earnings growth, difficulties and expenses related to integrating Newmar into our business, possible unknown liabilities of Newmar, significant costs related to the Newmar acquisition, increased focus of management attention and resources on the acquisition of Newmar, risks related to the Convertible Notes, including our ability to satisfy our obligations under the Convertible Notes, risks related to our recent Convertible Note hedge and warrant transactions, inadequate liquidity or capital resources, inventory and distribution channel management, our ability to innovate, our reliance on large dealer organizations, significant increase in repurchase obligations, availability and price of fuel, availability of chassis and other key component parts, increased material and component costs, exposure to warranty claims, ability to protect our intellectual property, exposure to product liability claims, dependence on information systems and web applications, any unexpected expenses related to the implementation of our Enterprise Resource Planning system, impacts of public health crises, such as COVID-19, risk related to data security, governmental regulation, including for climate change, risk related to anti-takeover provisions applicable to us, and other factors. We caution that the foregoing list of important factors is not complete. Any forward-looking statements speak only as of the date they are made, and we assume no obligation to update any forward-looking statement that we may make.
Item 3. Quantitative and Qualitative Disclosures About Market RiskRisk.
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.
Interest rate risk
We are exposed to market risks related to fluctuations in interest rates on the outstanding variable rate debt. As of February 24, 2018,29, 2020, we had $260.0$257.3 million outstanding under our Term Loan, subject to variable interest rates. This risk is partially mitigated through an interest rate swap contract as detailed below.
Under terms of the Credit Agreement, we were previously required to maintain interest rate swaps to manageFor our interest rate exposure related to the variable component of interest cost on the Term Loan. In accordance with this requirement, we entered into an interest swap contract on January 23, 2017, to effectively convert $200.0 million of the Term Loan balance toin the second quarter of Fiscal 2020, a fixed rate. The notional amount of the swap reduced to $170.0 million on December 8, 2017 and will be reduced to $120.0 million on December 10, 2018 and $60.0 million on December 9, 2019. The swap contract expires on December 8, 2020. A hypothetical one percentage point1.0% increase in interest rates on the Term Loan would increasehave increased our interest expense (after consideration of the interest rate swap) for 2018 by approximately $0.9 million. Due to the floor of 1.0% on LIBOR for the Term Loan,an estimated $2.6 million, and a 1.0% decrease could only decrease to the floor for the variable rate, resulting in a decrease in interest rates would have decreased our interest expense (after consideration of the interest rate swap) for 2018 of $0.5by an estimated $2.6 million. As discussed inFor additional information, see Note 5: Derivatives, Investments and Fair Value Measurements, the requirement to hedge a portion of the Term Loan floating rate interest exposure was removed through an amendment to the ABL.
9, Long-Term Debt. For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant.
Derivative instruments are accounted for at fair value in accordance with ASC Topic 815, Derivatives and Hedging, and have been designated for hedge accounting. The fair value of the interest rate swap is based on observable market data (Level 2) and was $1.9 million as of February 24, 2018. The interest rate swap requires us to pay interest at a fixed rate of 1.82% through the December 8, 2020 expiration of the swap. A 1.0% increase in the interest rate would have changed the fair value of the swap as of February 24, 2018 by approximately $2.9 million and a 1.0% decrease would have changed the fair value by $3.0 million. These increases and decreases would be recorded in OCI and the hedged value on our consolidated balance sheet (currently recorded within other non-current liabilities). While these are our best estimates of the impact of the specified interest rate scenario, actual results could differ from those projected. The sensitivity analysis presented assumes interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, interest rate changes of this magnitude are rarely instantaneous or parallel.
Item 4. Controls and ProceduresProcedures.
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures", as such term is defined under Securities Exchange Act of 1934, as amended ("Exchange Act") Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SECSecurities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures and believes that such controls and procedures are effective at the reasonable assurance level.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the Evaluation Date.
Changes in Internal Control Over Financial Reporting
We are implementing an ERP system, which is expected to improve the efficiency of certain financial and related transaction processes. The implementation of an ERP system will likely affect the processes that constitute our internal control over financial reporting and will require testing for effectiveness. As we have completed implementation of certain phases of the ERP, internal controls over financial reporting have been tested for effectiveness with respect to the scope of the phase completed. We concluded, as part of our evaluation described in the above paragraphs, that the implementation of ERP in these circumstances has not materially affected our internal control over financial reporting. The implementation is continuing in a phased approach and will continue to be evaluated for effect on our internal control over financial reporting.
During the first quarter of Fiscal 2020, we completed the acquisition of Newmar, which represents a material change in internal control over financial reporting since management's last assessment. Prior to the acquisition, Newmar was a private company and has not been subject to the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC, or other corporate governance requirements to which public reporting companies may be subject. As part of our ongoing integration activities, we are continuing to incorporate our controls and procedures into the acquired Newmar subsidiaries and to augment our company-wide controls to reflect the risks inherent in an acquisition of this type. Our report on our internal control over financial reporting in the Annual Report on Form 10-K for the year ending August 29, 2020 will exclude the acquired Newmar subsidiaries in order for management to have sufficient time to evaluate and implement our internal control over financial reporting.
There were no other changes in our internal control over financial reporting that occurred during the second quarter of Fiscal 20182020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART IIII. OTHER INFORMATIONINFORMATION.
Item 1. Legal ProceedingsProceedings.
We are involved in variousFor a description of our legal proceedings, that are ordinary litigation incidentalsee Note 12, Contingent Liabilities and Commitments, of the Notes to our business, some of which are coveredCondensed Consolidated Financial Statements, included in whole or in part by insurance. While we believe the ultimate disposition of litigation will not have material adverse effectthis Quarterly Report 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.Form 10-Q.
Item 1A. Risk FactorsFactors.
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10K10-K for the fiscal year ended August 26, 2017.31, 2019, except for the risk factors updated below:
Results of operations could be adversely affected by public health crises, in locations in which we, our customers or our suppliers operate.
We have manufacturing and other operations in locations subject to public health crises.Our suppliers and customers also have operations in locations exposed to similar dangers.A public health event could disrupt our operations, or our customers’ or suppliers’ operations and could adversely affect our results of operations and financial condition.
Our global suppliers of raw materials expose us to risks associated with public health crises, such as pandemics and epidemics, which could harm our business and cause operating results to suffer. For example, the ongoing outbreak of coronavirus disease (COVID-19) emanating from China at the beginning of 2020 may impact our suppliers’ ability to provide raw materials. Additionally, the outbreak may have an impact on the demand for large discretionary purchases such as recreation vehicles and boats. An extended plant shut-down or supply chain disruption due to COVID-19 may also impact our ability to fulfill orders.
At this point, the extent to which the coronavirus may impact our liquidity, financial condition, and results of operations is uncertain.
The terms of our Credit Agreements and other debt instruments could adversely affect our operating flexibility and pose risks of default.
We incurred substantial indebtedness to finance the acquisitions of Grand Design and Newmar. Our Credit Agreement is secured by substantially all of our assets, including cash, inventory, accounts receivable, and certain machinery and equipment. The Credit Agreement contains certain requirements, including affirmative and negative financial covenants. If we are unable to comply with these requirements and covenants, we may be restricted in our ability to pay dividends or engage in certain other business transactions, the lender may obtain control of our cash accounts, and we may experience an event of default. If a default occurs, the lenders under the Credit Agreement may elect to declare all of their respective outstanding debt, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. Under such circumstances, we may not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed on our ability to incur additional debt and to take other corporate actions might significantly impair our ability to obtain other financing.
In addition, the Credit Agreement contains certain restrictions on our ability to undertake certain types of transactions. Therefore, we may need to seek permission from our lenders in order to engage in certain corporate actions and any additional indebtedness that we may incur will need to comply with the terms of the Credit Agreement and will have its own restrictions on our ability to undertake certain types of transactions. Likewise, the Indenture related to the Convertible Notes issued to help finance the acquisition of Newmar includes certain limited covenants that could impact our ability to operate our business.
In addition, our indebtedness could:
•Make us more vulnerable to general adverse economic, regulatory, and industry conditions;
•Limit our flexibility in planning for, or reacting to, changes and opportunities in the markets in which we compete;
•Place us at a competitive disadvantage compared to our competitors that have less debt or could require us to dedicate a substantial portion of our cash flow to service our debt; and
•Restrict us from making strategic acquisitions or exploiting other business opportunities.
Various factors, including share dilution, changes to credit terms, and our ability to meet financial performance expectations, could result in a decline in our stock price.
Our stock price may fluctuate based on many factors. To partially finance our acquisition of Grand Design, we issued $124.1 million worth of common stock to the owners of Grand Design and registered these shares for resale after the transaction closed. Similarly, we issued 2.0 million shares of our common stock to the owners of Newmar. In connection with our acquisition of Newmar, we also issued $300.0 million in aggregate principal amount of 1.50% convertible senior notes due 2025. We will settle conversions of the Convertible Notes by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on the applicable conversion rate(s). Any future stock issuance by us or liquidation of stock holding by the former owners of Grand Design or Newmar or holders of the Convertible Notes 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.
Failure to effectively manage strategic acquisitions and alliances, joint ventures, or partnerships could have a negative impact on our business.
One of our growth strategies is to drive growth through targeted acquisitions and alliances, stronger customer relations, and new joint ventures and partnerships that contribute profitable growth while supplementing our existing brands and product portfolio. On November 8, 2019, we acquired Newmar (the "Newmar Acquisition"), a leading manufacturer of Class A and Super C motorized RVs. Our ability to grow through acquisitions depends, 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, including the Newmar 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, occurrence of non-recurring charges, and write-off of significant amounts of goodwill or other assets that could adversely affect our operating results.
We may experience difficulties in integrating the operations of Newmar into our business and in realizing the expected benefits of the Newmar Acquisition.
The success of the Newmar Acquisition will depend in part on our ability to realize the anticipated business opportunities from combining the operations of Newmar with our business in an efficient and effective manner. The integration process could take longer than anticipated and could result in the loss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures, and policies, any of which could adversely affect our ability to maintain relationships with customers, employees or other third parties, or our ability to achieve the anticipated benefits of the Newmar Acquisition, and could harm our financial performance. We cannot assure you that the Newmar business will perform as expected, that integration or other one-time costs will not be greater than expected, that we will not incur unforeseen obligations or liabilities, or that the rate of return from the acquisition will justify our investment. We also incurred significant costs in connection with the Newmar Acquisition, the substantial majority of which are non-recurring expenses. In addition, we expect to incur additional costs in the integration of Newmar's business and may not achieve cost synergies and other benefits sufficient to offset the incremental costs of the Newmar Acquisition. If we are unable to successfully or timely integrate the operations of Newmar with our business, we may incur unanticipated liabilities and be unable to realize the revenue growth, synergies, and other anticipated benefits resulting from the Newmar Acquisition, and our business, results of operations, and financial condition could be materially and adversely affected.
The Newmar Acquisition also involves risks associated with integrating acquired assets into existing operations which could have a material adverse effect on our business, financial condition, results of operations, and cash flows, including, among others:
•failure to implement our business plan for the combined business;
•unanticipated issues in integrating equipment, logistics, information, communications, and other systems;
•possible inconsistencies in standards, controls, contracts, procedures, and policies;
•impacts of change in control provisions in contracts and agreements;
•failure to retain key customers and suppliers;
•unanticipated changes in applicable laws and regulations;
•failure to recruit and retain key employees to operate the combined business;
•increased competition within the industries in which Newmar operates;
•difficulties in managing the expanded operations of a significantly larger and more complex combined company;
•inherent operating risks in the business;
•unanticipated issues, expenses, and liabilities;
•additional reporting requirements pursuant to applicable rules and regulations;
•additional requirements relating to internal control over financial reporting;
•diversion of our senior management’s attention from the management of daily operations to the integration of the Newmar business;
•significant unknown and contingent liabilities we incur for which we have limited or no contractual remedies or insurance coverage;
•the assets to be acquired failing to perform as well as we anticipate; and
•unexpected costs, delays, and challenges arising from integrating the assets acquired in the Newmar Acquisition into our existing operations.
Even if we successfully integrate the assets acquired in the Newmar Acquisition into our operations, it may not be possible to realize the full benefits we anticipate or we may not realize these benefits within the expected time frame. If we fail to realize the benefits we anticipate from the Newmar Acquisition, our business, results of operations, and financial condition may be adversely affected.
Newmar may have liabilities that are not known, probable, or estimable at this time.
Following the acquisition of Newmar, Newmar became our subsidiary and remains subject to all of its liabilities. There could be unasserted claims or assessments that we failed or were unable to discover or identify in the course of performing due diligence investigations of Newmar. In addition, there may be liabilities that are neither probable nor estimable at this time that may become probable or estimable in the future. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our financial results.
Additionally, Newmar is subject to various rules, regulations, laws, and other legal requirements, enforced by governments or other public authorities. Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by any of Newmar’s directors, officers, employees, or agents could have a significant impact on Newmar’s business and reputation and could subject Newmar to fines and penalties and criminal, civil, and administrative legal sanctions, resulting in reduced revenues and profits.
The Newmar Acquisition significantly increases our goodwill and other intangible assets.
We have a significant amount, and the Newmar acquisition increased the amount of goodwill and other intangible assets on our consolidated financial statements, which are subject to impairment based upon future adverse changes in our business or prospects. The impairment of any goodwill and other intangible assets may have a negative impact on our consolidated results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of ProceedsProceeds.
On December 19, 2007, our Board of Directors authorized the repurchase of outstanding shares(c) Stock Repurchases
Purchases of our common stock depending on market conditions, for an aggregate considerationduring each fiscal month of up to $60 million. There is no time restriction on this authorization. During the second quarter of Fiscal 2018, 2,117 shares were repurchased under the authorization, at an aggregate cost2020 were:
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(2) |
12/01/19 - 01/04/20 | 638 | | | $ | 48.14 | | | — | | | $ | 58,870,000 | |
01/05/20 - 02/01/20 | 733 | | | $ | 52.76 | | | — | | | $ | 58,870,000 | |
02/02/20 - 02/29/20 | 71 | | | $ | 59.47 | | | — | | | $ | 58,870,000 | |
Total | 1,442 | | | $ | 51.04 | | | — | | | $ | 58,870,000 | |
(1) Shares not purchased as part of approximately $0.1 million. All of these sharesa publicly announced program were repurchased from employees who vested in Company shares during the second quarter of Fiscal 2018 and elected to pay their payroll tax via the value of shares delivered as opposed to cash.
On October 18, 2017,(2) Pursuant to a $70.0 million share repurchase program authorized by our Board of Directors authorized a share repurchase program in the amount of $70.0 million.on October 18, 2017. There is no time restriction on thisthe authorization. As of February 24, 2018, there was approximately $71.0 million remaining under these authorizations.
Purchases of our common stock during each fiscal month
Our Credit Agreements, as defined in Note 9, Long-Term Debt, of the second quarterNotes to Condensed Consolidated Financial Statements, included in Item 1, Condensed Consolidated Financial Statements, of Fiscal 2018 were:
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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 |
11/26/17 - 12/30/17 | 926 |
| | $ | 56.65 |
| | 926 |
| | $ | 71,051,000 |
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12/31/17 - 01/27/18 | 1,191 |
| | $ | 52.40 |
| | 1,191 |
| | $ | 70,989,000 |
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01/28/18 - 02/24/18 | — |
| | $ | — |
| | — |
| | $ | 70,989,000 |
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Total | 2,117 |
| | $ | 54.26 |
| | 2,117 |
| | $ | 70,989,000 |
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Our Credit Agreementthis Quarterly Report on Form 10-Q, contains restrictions that may limit our ability to make distributions or payments with respect to purchases of our common stock without consent of the lenders, except for limited purchases of our common stock from employees, in the event of a significant reduction in our EBITDA or in the event of a significant borrowing on our ABL.ABL Credit Facility.
Item 6. Exhibits
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| Stock Purchase Agreement dated as of September 15, 2019, by and among the Registrant, Octavius Corporation, Newmar Corporation, Dutch Real Estate Corp., New-Way Transport Corp., New-Serv, Inc., the shareholders of Newmar Corporation, Dutch Real Estate Corp., New-Way Transport Corp. and New-Serv, Inc. and Matthew Miller, as Sellers Agent previously filed as Exhibit 2.1 with the Registrant’s Current Report on Form 8-K dated September 15, 2019. |
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| | October 29, 2019.
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101.INS*101 | | XBRL Instance DocumentThe following financial statements from our Quarterly Report on Form 10-Q for the second quarter of Fiscal 2020 in Inline Extensible Business Reporting Language ("iXBRL"): (i) the Condensed Consolidated Balance Sheets at February 29, 2020, and August 31, 2019, (ii) the Condensed Consolidated Statements of Income and Comprehensive Income for the six months ended February 29, 2020, and February 23, 2019, (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended February 29, 2020, and February 23, 2019, (iv) the Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended February 29, 2020, and February 23, 2019, and (v) the Notes to the Condensed Consolidated Financial Statements. |
104 | | |
101.SCH* | | XBRL Taxonomy Extension Schema Document |
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101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* | | XBRL Taxonomy Extension Definitions Linkbase Document |
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101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase DocumentThe cover page from our Quarterly Report on Form 10-Q for the second quarter of Fiscal 2020 formatted in iXBRL (included as Exhibit 101). |
*Attached as Exhibit 101 to this report are the following financial statements from our Quarterly Report on Form 10-Q for the quarter ended February 24, 2018 formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Income and Comprehensive Income, (ii) the Unaudited Condensed Consolidated Balance Sheets, (iii) the Unaudited Condensed Consolidated Statement of Cash Flows, (iv) the Unaudited Consolidated Stockholders' Statement of Equity and (v) related notes to these financial statements. Such exhibits are deemed furnished and not filed Schedules have been omitted pursuant to Rule 406TItem 601(b)(2) of Regulation S-T.S-K. The Registrant hereby undertakes to furnish copies of any of the omitted schedules upon request of the U.S. Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | WINNEBAGO INDUSTRIES, INC. | | |
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Date: | March 25, 2020 | WINNEBAGO INDUSTRIES, INC.By | |
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Date: | March 22, 2018 | By | /s/ Michael J. Happe | |
| | | Michael J. Happe | |
| | | Chief Executive Officer, President | |
| | | (Principal Executive Officer) | |
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Date: | March 22, 201825, 2020 | By | /s/ Bryan L. Hughes | |
| | | Bryan L. Hughes | |
| | | Vice President, Chief Financial Officer | |
| | | (Principal Financial and Accounting Officer) | |