Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1
:
Basis of Presentation
Unless the context otherwise requires, the use of the terms "Winnebago Industries," "WGO," "we," "us," and "our" in these
Notes to Condensed Consolidated Financial Statements
refers to Winnebago Industries, Inc. and its wholly-owned subsidiaries.
In the opinion of management, the accompanying
Condensed Consolidated Financial Statements
contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”). All adjustments were comprised of normal recurring adjustments, except as noted in these
Notes to Condensed Consolidated Financial Statements
.
Interim results are not necessarily indicative of the results to be expected for the full year. The interim
Condensed Consolidated Financial Statements
included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
August 25, 2018
.
Fiscal Period
We follow a 52-/53-week fiscal year, ending the last Saturday in August. Fiscal
2019
is a
53
-week year, while Fiscal
2018
was a
52
-week year. The extra (53rd) week in Fiscal
2019
will be recognized in our fourth quarter.
Subsequent Events
In preparing the accompanying unaudited
Condensed Consolidated Financial Statements
, we evaluated subsequent events for potential recognition and disclosure through the date of this filing. There were no material subsequent events.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“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. This ASU and the related amendments must be adopted on a modified retrospective basis to either each prior reporting period presented or as of the beginning of the period of adoption. Based on the effective dates, we expect to adopt the new guidance in the first quarter of Fiscal 2020 using the modified retrospective basis as of the beginning of the period of adoption. We have established an implementation plan and have made progress on this plan including surveying our businesses, assessing our lease population, and compiling information on our active leases. In addition, we are determining needed changes to our policies, business processes, internal controls, and disclosures. Based on our analysis, we do not expect a material impact to our consolidated financial statements.
In August 2017, the FASB issued 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. ASU 2017-12 is effective for annual reporting periods beginning after December 15, 2018 (our Fiscal 2020), including interim periods within those annual reporting periods. Early adoption is permitted. We expect to adopt the new guidance in the first quarter of Fiscal 2020, and we do not expect a material impact to our consolidated financial statements.
Recently Adopted Accounting Pronouncements
In the first quarter of Fiscal
2019
, we adopted ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which establishes a comprehensive five-step model for the recognition of revenue from contracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We elected the modified retrospective method of adoption, which we applied to contracts not completed as of the initial date of adoption. Application of the transition requirements had no material impact on operations or beginning retained earnings. While certain control processes and procedures were updated for this adoption, the changes did not have a material impact on our internal control over financial reporting framework.
Also in the first quarter of Fiscal
2019
, we retrospectively adopted ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments (Topic 230)
, which provides guidance for eight specific cash flow issues with the objective of reducing the existing diversity in practice. The adoption of this standard did not materially impact our statements of cash flows, and no cash flow reclassifications were required for the prior period.
Note 2
:
Business Segments
In the fourth quarter of Fiscal 2018, we revised our segment presentation. We have five operating segments: 1) Winnebago motorhomes, 2) Winnebago towables, 3) Grand Design towables, 4) Winnebago specialty vehicles, and 5) Chris-Craft marine. 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) Motorhome (comprised of products that include a motorized chassis as well as other related manufactured products and services) and 2) Towable (comprised of products which are not motorized and are generally towed by another vehicle as well as other related manufactured products and services), which is an aggregation of the Winnebago towables and Grand Design towables operating segments.
The Corporate / All Other category includes the Winnebago specialty vehicles and Chris-Craft marine 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. Previously, these expenses were allocated to each operating segment.
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.
Prior period segment information has been reclassified to conform to the current reportable segment presentation. The reclassifications included removing the corporate administration expenses from both the Motorhome and Towable reportable segments and removing Winnebago specialty vehicles from the Motorhome reportable segment, as we began to dedicate leadership and focus on these operations separately from our Winnebago motorhomes operations.
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 Motorhome segment, and the Towable segment. The operating segments' management have responsibility for operating decisions, allocating resources, and assessing performance within their respective segments. The accounting policies of both reportable segments are the same and are described 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 25, 2018
.
We evaluate the performance of our reportable segments based on 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. Examples of items excluded from Adjusted EBITDA include acquisition-related costs, restructuring expenses, and non-operating income.
The following table shows information by reportable segment:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands)
|
May 25,
2019
|
|
May 26,
2018
|
|
May 25,
2019
|
|
May 26,
2018
|
Net Revenues
|
|
|
|
|
|
|
|
Motorhome
|
$
|
160,239
|
|
|
$
|
244,870
|
|
|
$
|
506,229
|
|
|
$
|
632,148
|
|
Towable
|
346,811
|
|
|
313,016
|
|
|
890,335
|
|
|
839,039
|
|
Corporate / All Other
|
21,890
|
|
|
4,375
|
|
|
58,714
|
|
|
9,454
|
|
Consolidated
|
$
|
528,940
|
|
|
$
|
562,261
|
|
|
$
|
1,455,278
|
|
|
$
|
1,480,641
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
Motorhome
|
$
|
381
|
|
|
$
|
11,677
|
|
|
$
|
16,716
|
|
|
$
|
22,264
|
|
Towable
|
57,172
|
|
|
45,378
|
|
|
121,638
|
|
|
115,066
|
|
Corporate / All Other
|
(1,679
|
)
|
|
(3,694
|
)
|
|
(9,539
|
)
|
|
(9,176
|
)
|
Consolidated
|
$
|
55,874
|
|
|
$
|
53,361
|
|
|
$
|
128,815
|
|
|
$
|
128,154
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
Motorhome
|
$
|
2,543
|
|
|
$
|
2,643
|
|
|
$
|
7,933
|
|
|
$
|
7,383
|
|
Towable
|
4,810
|
|
|
3,805
|
|
|
21,335
|
|
|
10,740
|
|
Corporate / All Other
|
962
|
|
|
—
|
|
|
2,413
|
|
|
—
|
|
Consolidated
|
$
|
8,315
|
|
|
$
|
6,448
|
|
|
$
|
31,681
|
|
|
$
|
18,123
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
May 25,
2019
|
|
August 25,
2018
|
Total Assets
|
|
|
|
|
|
|
|
Motorhome
|
|
|
|
|
$
|
336,334
|
|
|
$
|
322,048
|
|
Towable
|
|
|
|
|
637,371
|
|
|
626,588
|
|
Corporate / All Other
|
|
|
|
|
109,498
|
|
|
103,169
|
|
Consolidated
|
|
|
|
|
$
|
1,083,203
|
|
|
$
|
1,051,805
|
|
Reconciliation of net income to consolidated Adjusted EBITDA:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands)
|
May 25, 2019
|
|
May 26, 2018
|
|
May 25, 2019
|
|
May 26, 2018
|
Net income
|
$
|
36,171
|
|
|
$
|
32,521
|
|
|
$
|
79,930
|
|
|
$
|
72,567
|
|
Interest expense
|
4,446
|
|
|
4,172
|
|
|
13,293
|
|
|
13,871
|
|
Provision for income taxes
|
8,717
|
|
|
11,684
|
|
|
18,609
|
|
|
28,478
|
|
Depreciation
|
3,520
|
|
|
2,351
|
|
|
9,788
|
|
|
6,679
|
|
Amortization of intangible assets
|
2,278
|
|
|
1,933
|
|
|
7,204
|
|
|
5,921
|
|
EBITDA
|
55,132
|
|
|
52,661
|
|
|
128,824
|
|
|
127,516
|
|
Acquisition-related costs
|
—
|
|
|
800
|
|
|
—
|
|
|
850
|
|
Restructuring expenses
|
1,102
|
|
|
—
|
|
|
1,321
|
|
|
—
|
|
Non-operating income
|
(360
|
)
|
|
(100
|
)
|
|
(1,330
|
)
|
|
(212
|
)
|
Adjusted EBITDA
|
$
|
55,874
|
|
|
$
|
53,361
|
|
|
$
|
128,815
|
|
|
$
|
128,154
|
|
Note 3
:
Revenue
The following table disaggregates revenue by reportable segment and product category:
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|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands)
|
May 25,
2019
|
|
May 26,
2018
|
|
May 25,
2019
|
|
May 26,
2018
|
Net Revenues
|
|
|
|
|
|
|
|
Motorhome:
|
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|
|
|
|
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|
Class A
|
$
|
45,138
|
|
|
$
|
80,093
|
|
|
$
|
148,816
|
|
|
$
|
241,680
|
|
Class B
|
41,363
|
|
|
49,715
|
|
|
162,343
|
|
|
112,292
|
|
Class C
|
67,674
|
|
|
109,092
|
|
|
176,059
|
|
|
258,552
|
|
Other
(1)
|
6,064
|
|
|
5,970
|
|
|
19,011
|
|
|
19,624
|
|
Total Motorhome
|
160,239
|
|
|
244,870
|
|
|
506,229
|
|
|
632,148
|
|
Towable:
|
|
|
|
|
|
|
|
Fifth Wheel
|
201,561
|
|
|
179,046
|
|
|
519,093
|
|
|
474,075
|
|
Travel Trailer
|
140,709
|
|
|
130,286
|
|
|
358,497
|
|
|
355,681
|
|
Other
(1)
|
4,541
|
|
|
3,684
|
|
|
12,745
|
|
|
9,283
|
|
Total Towable
|
346,811
|
|
|
313,016
|
|
|
890,335
|
|
|
839,039
|
|
Corporate / All Other:
|
|
|
|
|
|
|
|
Other
(2)
|
21,890
|
|
|
4,375
|
|
|
58,714
|
|
|
9,454
|
|
Total Corporate / All Other
|
21,890
|
|
|
4,375
|
|
|
58,714
|
|
|
9,454
|
|
Consolidated
|
$
|
528,940
|
|
|
$
|
562,261
|
|
|
$
|
1,455,278
|
|
|
$
|
1,480,641
|
|
|
|
(1)
|
Relates to parts, accessories, and services.
|
|
|
(2)
|
Relates to marine and specialty vehicle units, parts, accessories, and services.
|
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). We also generate income through the sale of certain parts and services, acting as the principal in these arrangements. We apply the new revenue standard requirements to a portfolio of contracts (or performance obligations) with similar characteristics for transactions where it is expected that the effects on the financial statements of applying the revenue recognition guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the transaction price consideration that we expect to receive in exchange for those goods or services. Control refers to the ability of the customer to direct the use of, and obtain substantially all of, the remaining benefits from the goods or services. Our transaction price consideration is fixed, unless otherwise disclosed below as variable consideration. We made an accounting policy election so that our revenue excludes sales and usage-based taxes collected.
Unit revenue
Unit revenue is recognized at a point-in-time when control passes, which generally occurs when the unit is shipped to or picked-up from our manufacturing facilities by the customer, which is consistent with our past practice. Our payment terms are typically before or on delivery, and do not include a significant financing component. The amount of consideration received and recorded to revenue varies with changes in marketing incentives and offers to our customers. These marketing incentives and offers to our customers are considered variable consideration. We adjust the estimate of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the consideration becomes fixed.
Our contracts include some incidental items that are immaterial in the context of the contract. We have made an accounting policy election to not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. We have made an accounting policy to account for any shipping and handling costs that occur after the transfer of control as a fulfillment cost that is accrued when control is transferred. Warranty obligations associated with the sale of a unit are assurance-type warranties that are a guarantee of the unit’s intended functionality and, therefore, do not represent a distinct performance obligation within the context of the contract. Contract costs incurred related to the sale of manufactured units are expensed at the point-in-time when the related revenue is recognized.
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
third
quarter of Fiscal
2019
or for the
third
quarter of Fiscal
2018
. In addition,
none
of our dealer organizations accounted for more than 10% of our net revenue for the first
nine
months of Fiscal
2019
or the first
nine
months of Fiscal
2018
.
Note 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 Accounting 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:
|
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•
|
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
May 25, 2019
and
August 25, 2018
according to the valuation techniques we used to determine their fair values:
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|
|
|
|
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|
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|
|
Fair Value at
|
|
Fair Value Hierarchy
|
(in thousands)
|
May 25,
2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets that fund deferred compensation:
|
|
|
|
|
|
|
|
Domestic equity funds
|
$
|
439
|
|
|
$
|
357
|
|
|
$
|
82
|
|
|
$
|
—
|
|
International equity funds
|
108
|
|
|
52
|
|
|
56
|
|
|
—
|
|
Fixed income funds
|
155
|
|
|
22
|
|
|
133
|
|
|
—
|
|
Interest rate swap contract
|
614
|
|
|
—
|
|
|
614
|
|
|
—
|
|
Total assets at fair value
|
$
|
1,316
|
|
|
$
|
431
|
|
|
$
|
885
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Fair Value Hierarchy
|
(in thousands)
|
August 25,
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets that fund deferred compensation:
|
|
|
|
|
|
|
|
Domestic equity funds
|
$
|
1,143
|
|
|
$
|
1,114
|
|
|
$
|
29
|
|
|
$
|
—
|
|
International equity funds
|
139
|
|
|
120
|
|
|
19
|
|
|
—
|
|
Fixed income funds
|
223
|
|
|
132
|
|
|
91
|
|
|
—
|
|
Interest rate swap contract
|
1,959
|
|
|
—
|
|
|
1,959
|
|
|
—
|
|
Total assets at fair value
|
$
|
3,464
|
|
|
$
|
1,366
|
|
|
$
|
2,098
|
|
|
$
|
—
|
|
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. These 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. 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 25, 2018
for additional information regarding these plans.
The proportion of the assets that will fund options which expire within a year are included in
Prepaid expenses and other assets
in the accompanying
Condensed Consolidated Balance Sheets
. The remaining assets are classified as non-current and are included in
Other assets
.
Interest Rate Swap Contract
On January 23, 2017, we entered into an interest rate swap contract, which effectively fixed our interest rate on our
$300.0 million
term loan agreement ("Term Loan") for a notional amount that reduces each December during the swap contract. As of
May 25, 2019
, we had
$120.0 million
of our Term Loan fixed at an interest rate of
5.32%
. As of
August 25, 2018
, we had
$170.0 million
of our Term Loan fixed at an interest rate of
5.32%
. The swap contract expires on December 8, 2020.
The fair value of the interest rate swap is classified as Level 2 as it is determined based on observable market data. The asset is included in
Other assets
on the
Condensed Consolidated Balance Sheets
. The change in value is recorded to
Accumulated other comprehensive (loss) income
on the
Condensed Consolidated Balance Sheets
since the interest rate swap has been designated for hedge accounting.
Assets and Liabilities that are measured at Fair Value on a Nonrecurring Basis
Our non-financial assets, which include goodwill, intangible assets, and property, plant and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required, we must evaluate the non-financial asset for impairment. If an impairment has occurred, the asset is required to be recorded at the estimated fair value.
No
impairments were recorded for non-financial assets in the
third
quarter of Fiscal
2019
or the
third
quarter of Fiscal
2018
.
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 long-term debt.
Note 5
:
Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
May 25,
2019
|
|
August 25,
2018
|
Finished goods
|
$
|
42,876
|
|
|
$
|
26,513
|
|
Work-in-process
|
93,949
|
|
|
68,339
|
|
Raw materials
|
94,365
|
|
|
139,039
|
|
Total
|
231,190
|
|
|
233,891
|
|
Less last-in, first-out ("LIFO") reserve
|
40,307
|
|
|
38,763
|
|
Inventories, net
|
$
|
190,883
|
|
|
$
|
195,128
|
|
Inventory valuation methods consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
May 25,
2019
|
|
August 25,
2018
|
LIFO basis
|
$
|
184,516
|
|
|
$
|
176,215
|
|
First-in, first-out basis
|
46,674
|
|
|
57,676
|
|
Total
|
$
|
231,190
|
|
|
$
|
233,891
|
|
The above value of inventories, before reduction for the LIFO reserve, approximates replacement cost at the respective dates.
Note 6
:
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost, net of accumulated depreciation and consists of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
May 25,
2019
|
|
August 25,
2018
|
Land
|
$
|
8,686
|
|
|
$
|
6,747
|
|
Buildings and building improvements
|
112,898
|
|
|
94,622
|
|
Machinery and equipment
|
108,585
|
|
|
105,663
|
|
Software
|
28,152
|
|
|
23,388
|
|
Transportation
|
3,837
|
|
|
8,837
|
|
Property, plant, and equipment, gross
|
262,158
|
|
|
239,257
|
|
Less accumulated depreciation
|
140,181
|
|
|
138,064
|
|
Property, plant, and equipment, net
|
$
|
121,977
|
|
|
$
|
101,193
|
|
Depreciation expense was
$3.5 million
and
$2.4 million
during the
third
quarters of Fiscal
2019
and
2018
, respectively, and
$9.8 million
and
$6.7 million
during the first
nine
months of Fiscal
2019
and
2018
, respectively.
Note 7
:
Goodwill and Intangible Assets
The changes in the carrying amount of goodwill by segment were as follows for the first
nine
months of Fiscal
2019
and
2018
, of which there are no accumulated impairment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Towable
|
|
Corporate / All Other
|
|
Total
|
Balances at August 26, 2017
|
$
|
242,728
|
|
|
$
|
—
|
|
|
$
|
242,728
|
|
Grand Design purchase price adjustment
(1)
|
1,956
|
|
|
—
|
|
|
1,956
|
|
Balances at May 26, 2018
|
$
|
244,684
|
|
|
$
|
—
|
|
|
$
|
244,684
|
|
|
|
|
|
|
|
Balances at August 25, 2018
|
$
|
244,684
|
|
|
$
|
29,686
|
|
|
$
|
274,370
|
|
Chris-Craft purchase price adjustment
(2)
|
—
|
|
|
1,287
|
|
|
1,287
|
|
Balances at May 25, 2019
|
$
|
244,684
|
|
|
$
|
30,973
|
|
|
$
|
275,657
|
|
|
|
(1)
|
Refer to Note 2,
Business Combinations
, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
August 25, 2018
for additional information.
|
|
|
(2)
|
Purchase price adjustments of
$0.7 million
made for a working capital payment made in the first quarter of Fiscal 2019 and of
$0.6 million
for an adjustment to taxes recorded in the third quarter of Fiscal 2019. For additional information related to the acquisition of Chris-Craft USA, Inc., refer to Note 2,
Business Combinations
, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended
August 25, 2018
.
|
Other intangible assets, net of accumulated amortization, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 25, 2019
|
|
August 25, 2018
|
(in thousands)
|
Weighted Average Life-Years
|
|
Cost
|
|
Accumulated Amortization
|
|
Cost
|
|
Accumulated Amortization
|
Trade names
|
Indefinite
|
|
$
|
177,250
|
|
|
|
|
$
|
177,250
|
|
|
|
Dealer networks
|
12.2
|
|
95,581
|
|
|
$
|
18,216
|
|
|
95,581
|
|
|
$
|
12,328
|
|
Backlog
|
0.5
|
|
19,527
|
|
|
19,527
|
|
|
19,527
|
|
|
19,135
|
|
Non-compete agreements
|
4.1
|
|
5,347
|
|
|
2,824
|
|
|
5,347
|
|
|
2,084
|
|
Leasehold interest-favorable
|
8.1
|
|
2,000
|
|
|
625
|
|
|
2,000
|
|
|
441
|
|
Other intangible assets, gross
|
|
|
299,705
|
|
|
41,192
|
|
|
299,705
|
|
|
33,988
|
|
Less accumulated amortization
|
|
|
41,192
|
|
|
|
|
33,988
|
|
|
|
Other intangible assets, net
|
|
|
$
|
258,513
|
|
|
|
|
$
|
265,717
|
|
|
|
The weig
hted average remaining amortization period for intangible assets as of
May 25, 2019
was approximatel
y
11
years.
Remaining estimated aggregate annual amortization expense by fiscal year is as follows:
|
|
|
|
|
(in thousands)
|
Amount
|
Fiscal 2019
|
$
|
2,283
|
|
Fiscal 2020
|
9,032
|
|
Fiscal 2021
|
9,032
|
|
Fiscal 2022
|
8,405
|
|
Fiscal 2023
|
8,197
|
|
Thereafter
|
44,314
|
|
Total amortization expense remaining
|
$
|
81,263
|
|
Note 8
:
Warranty
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. 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
|
|
Nine Months Ended
|
(in thousands)
|
May 25,
2019
|
|
May 26,
2018
|
|
May 25,
2019
|
|
May 26,
2018
|
Balance at beginning of period
|
$
|
40,305
|
|
|
$
|
34,988
|
|
|
$
|
40,498
|
|
|
$
|
30,805
|
|
Provision
|
14,139
|
|
|
11,645
|
|
|
34,090
|
|
|
31,881
|
|
Claims paid
|
(10,820
|
)
|
|
(9,189
|
)
|
|
(30,964
|
)
|
|
(25,242
|
)
|
Balance at end of period
|
$
|
43,624
|
|
|
$
|
37,444
|
|
|
$
|
43,624
|
|
|
$
|
37,444
|
|
Note 9
:
Long-Term Debt
On
November 8, 2016
, we entered into a
$125.0 million
credit facility ("ABL") and a
$300.0 million
Term Loan with JPMorgan Chase Bank, N.A. ("Credit Agreement"). On December 8, 2017, we amended our Credit Agreement, which decreased the interest rate spread on the Term Loan and the ABL. As of
September 21, 2018
, the amount that may be borrowed under the ABL was increased to
$165.0 million
.
The Credit Agreement contains certain financial covenants. As of
May 25, 2019
, we are in compliance with all financial covenants of the Credit Agreement.
The components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
May 25,
2019
|
|
August 25,
2018
|
ABL
|
$
|
5,643
|
|
|
$
|
38,532
|
|
Term Loan
|
260,000
|
|
|
260,000
|
|
Long-term debt, excluding debt issuance costs
|
265,643
|
|
|
298,532
|
|
Debt issuance cost, net
|
(6,072
|
)
|
|
(7,091
|
)
|
Long-term debt
|
259,571
|
|
|
291,441
|
|
Less current maturities
|
6,500
|
|
|
—
|
|
Long-term debt, less current maturities
|
$
|
253,071
|
|
|
$
|
291,441
|
|
As of
May 25, 2019
, the fair value of long-term debt, excluding debt issuance costs, was
$264.3 million
. As of
August 25, 2018
, the fair value of long-term debt, excluding debt issuance costs, approximated the carrying value.
Aggregate contractual maturities of debt in future fiscal years are as follows:
|
|
|
|
|
(in thousands)
|
Amount
|
Fiscal 2019
|
$
|
—
|
|
Fiscal 2020
|
10,250
|
|
Fiscal 2021
|
15,000
|
|
Fiscal 2022
|
15,000
|
|
Fiscal 2023
|
219,750
|
|
Total Term Loan
|
$
|
260,000
|
|
Note 10
:
Employee and Retiree Benefits
Deferred compensation liabilities are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
May 25,
2019
|
|
August 25,
2018
|
Non-qualified deferred compensation
|
$
|
13,459
|
|
|
$
|
14,831
|
|
Supplemental executive retirement plan
|
2,056
|
|
|
2,309
|
|
Executive share option plan
|
129
|
|
|
935
|
|
Executive deferred compensation plan
|
590
|
|
|
421
|
|
Officer stock-based compensation
|
—
|
|
|
1,528
|
|
Deferred compensation benefits
|
16,234
|
|
|
20,024
|
|
Less current portion
(1)
|
3,073
|
|
|
4,742
|
|
Deferred compensation benefits, net of current portion
|
$
|
13,161
|
|
|
$
|
15,282
|
|
(1) Included in
Accrued compensation
on the
Condensed Consolidated Balance Sheets
.
Note 11
:
Contingent Liabilities and Commitments
Repurchase Commitments
Generally, manufacturers in our industries enter into repurchase agreements with lending institutions which have provided wholesale floorplan financing to dealers. Most dealers are financed on a "floorplan" basis under which a bank or finance company lends the dealer all, or substantially all, of the purchase price, collateralized by a security interest in the units 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
24 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 recreational vehicles or boats to repurchase current inventory if a dealership exits the business. Our total contingent liability on all repurchase agreements was approximately
$1.0 billion
and
$879.0 million
at
May 25, 2019
and
August 25, 2018
, respectively.
Repurchased sales are not recorded as a revenue transaction, but the net difference between the original repurchase price and the resale price are recorded against the loss reserve, which is a deduction from gross revenue. Our loss reserve for repurchase commitments contains uncertainties because the calculation requires management to make assumptions 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 these repurchase agreements and our historical loss experience, we establish an associated loss reserve which is included in
Accrued expenses:
Other
on the
Condensed Consolidated Balance Sheets
. Our accrued losses on repurchases were
$0.9 million
and
$0.9 million
at
May 25, 2019
and
August 25, 2018
, 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 and
nine
months ended
May 25, 2019
and
May 26, 2018
.
Litigation
We are involved in various legal proceedings which are ordinary and routine litigation incidental to our business, some of which are covered in whole or in part by insurance. 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 12
:
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.
Beginning with our annual grant of restricted stock units in October 2018, we attach dividend equivalents to our restricted stock units equal to dividends payable on the same number of shares of WGO common stock during the applicable period. Dividend equivalents, settled in cash, accrue on restricted stock unit awards during the vesting period. No dividend equivalents are paid on any restricted stock units that are forfeited prior to the vesting date.
Stock-based compensation expense was
$1.1 million
and
$1.4 million
during the
third
quarters of Fiscal
2019
and
2018
, respectively, and
$5.7 million
and
$5.0 million
during the first
nine
months of Fiscal
2019
and
2018
, respectively. Compensation expense is recognized over the requisite service period of the award.
Note 13
:
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
|
|
Nine Months Ended
|
(in thousands)
|
May 25, 2019
|
|
May 25, 2019
|
Cost of goods sold
|
$
|
1,102
|
|
|
$
|
1,102
|
|
Selling, general, and administrative expenses
|
—
|
|
|
219
|
|
Restructuring expense
|
$
|
1,102
|
|
|
$
|
1,321
|
|
These expenses include employee-related costs and accelerated depreciation for assets that will no longer be used. Employee-related costs are expected to be paid in the fourth quarter of Fiscal 2019. We expect additional expenses of approximately
$1.0 million
in the fourth quarter of Fiscal 2019 and
$1.0 million
in Fiscal 2020, primarily related to asset-related charges and facility closure costs. We expect these expenses to be partially offset by the corresponding savings generated by the project.
Note 14
:
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 to
18.9%
for the
nine
months ended
May 25, 2019
from
28.2%
for the
nine
months ended
May 26, 2018
due to the enactment of the 2017 Tax Cuts and Jobs Act ("Tax Act") on December 22, 2017 and net favorable discrete items, primarily attributable to R&D-related tax credits, which totaled
$3.6 million
or
3.7%
.
ASU 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
, provided guidance for companies that allowed 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,
Income Taxes
. In accordance with this guidance, a company was required to 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 was incomplete, but it was able to determine a reasonable estimate, the company was required to record a provisional estimate in the financial statements.
In accordance with ASC 740, we recorded non-cash provisional estimates to income tax expense in Fiscal
2018
as a result of revaluing all deferred tax assets and liabilities at the newly enacted Federal corporate income tax rate. We have not made any measurement period adjustments related to these items during the first
nine
months of Fiscal
2019
and are complete in analyzing and recording all aspects of the enactment of the Tax Act.
We file a U.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 Internal Revenue Service ("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
May 25, 2019
, our Federal returns from Fiscal 2015 to present continue to be subject to review by the IRS. With limited exception, our state returns from Fiscal 2014 to present continue to be subject to review by the state taxing jurisdictions. Several years may lapse before an uncertain tax position is audited and finally resolved, and it is difficult to predict the outcome of such audits.
It is our policy to recognize interest and penalties accrued relative to unrecognized tax benefits in income tax expense. Total reserves for uncertain tax positions were not material.
Note 15
:
Income Per Share
The following table reflects the calculation of basic and diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands, except per share data)
|
May 25,
2019
|
|
May 26,
2018
|
|
May 25,
2019
|
|
May 26,
2018
|
Numerator
|
|
|
|
|
|
|
|
Net income
|
$
|
36,171
|
|
|
$
|
32,521
|
|
|
$
|
79,930
|
|
|
$
|
72,567
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
31,493
|
|
|
31,582
|
|
|
31,546
|
|
|
31,617
|
|
Dilutive impact of stock compensation awards
|
151
|
|
|
171
|
|
|
176
|
|
|
208
|
|
Weighted average common shares outstanding, assuming dilution
|
31,644
|
|
|
31,753
|
|
|
31,722
|
|
|
31,825
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded from Weighted average common shares outstanding, assuming dilution
|
204
|
|
|
90
|
|
|
183
|
|
|
59
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
$
|
1.15
|
|
|
$
|
1.03
|
|
|
$
|
2.53
|
|
|
$
|
2.30
|
|
Diluted income per common share
|
$
|
1.14
|
|
|
$
|
1.02
|
|
|
$
|
2.52
|
|
|
$
|
2.28
|
|
Anti-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.
Note 16
:
Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income ("AOCI") by component, net of tax, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 25, 2019
|
|
May 26, 2018
|
(in thousands)
|
Defined Benefit Pension Items
|
|
Interest Rate Swap
|
|
Total
|
|
Defined Benefit Pension Items
|
|
Interest Rate Swap
|
|
Total
|
Balance at beginning of period
|
$
|
(575
|
)
|
|
$
|
827
|
|
|
$
|
252
|
|
|
$
|
(496
|
)
|
|
$
|
1,403
|
|
|
$
|
907
|
|
Other comprehensive income ("OCI") before reclassifications
|
—
|
|
|
(362
|
)
|
|
(362
|
)
|
|
—
|
|
|
129
|
|
|
129
|
|
Amounts reclassified from AOCI
|
8
|
|
|
—
|
|
|
8
|
|
|
7
|
|
|
—
|
|
|
7
|
|
Net current-period OCI
|
8
|
|
|
(362
|
)
|
|
(354
|
)
|
|
7
|
|
|
129
|
|
|
136
|
|
Balance at end of period
|
$
|
(567
|
)
|
|
$
|
465
|
|
|
$
|
(102
|
)
|
|
$
|
(489
|
)
|
|
$
|
1,532
|
|
|
$
|
1,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
May 25, 2019
|
|
May 26, 2018
|
(in thousands)
|
Defined Benefit Pension Items
|
|
Interest Rate Swap
|
|
Total
|
|
Defined Benefit Pension Items
|
|
Interest Rate Swap
|
|
Total
|
Balance at beginning of period
|
$
|
(591
|
)
|
|
$
|
1,483
|
|
|
$
|
892
|
|
|
$
|
(509
|
)
|
|
$
|
(514
|
)
|
|
$
|
(1,023
|
)
|
OCI before reclassifications
|
—
|
|
|
(1,018
|
)
|
|
(1,018
|
)
|
|
—
|
|
|
2,046
|
|
|
2,046
|
|
Amounts reclassified from AOCI
|
24
|
|
|
—
|
|
|
24
|
|
|
20
|
|
|
—
|
|
|
20
|
|
Net current-period OCI
|
24
|
|
|
(1,018
|
)
|
|
(994
|
)
|
|
20
|
|
|
2,046
|
|
|
2,066
|
|
Balance at end of period
|
$
|
(567
|
)
|
|
$
|
465
|
|
|
$
|
(102
|
)
|
|
$
|
(489
|
)
|
|
$
|
1,532
|
|
|
$
|
1,043
|
|
Reclassifications out of AOCI in net periodic benefit costs, net of tax, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in thousands)
|
Location on Consolidated Statements
of Income and Comprehensive Income
|
May 25,
2019
|
|
May 26,
2018
|
|
May 25,
2019
|
|
May 26,
2018
|
Amortization of net actuarial loss
|
SG&A
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
24
|
|
|
$
|
20
|
|