Document
 
 
 

 

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

 
FORM 10-Q
 

(Mark One)
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended May 26, 2018
 
 
or
 
 
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from _________________ to _________________
 
 
 
 
 
Commission File Number: 001-06403
 

image1.jpg
WINNEBAGO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Iowa
 
 
42-0802678
(State or other jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
P. O. Box 152, Forest City, Iowa
 
 
50436
(Address of principal executive offices)
 
 
(Zip Code)
 
 
 
 
 
 
 
(641) 585-3535
 
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer x
 
Accelerated filer  o
 
 Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
 
 
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 June 18, 2018 was 31,529,354.

 



Winnebago Industries, Inc.
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

Glossary


The following terms and abbreviations appear in the text of this report and are defined as follows:
ABL
Credit Agreement dated as of November 8, 2016 and as amended on December 8, 2017 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
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
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
SAB
Staff Accounting Bulletin
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



1

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Winnebago Industries, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
(In thousands, except per share data)
 
May 26,
2018
 
May 27,
2017
 
May 26,
2018
 
May 27,
2017
Net revenues
 
$
562,261

 
$
476,364

 
$
1,480,641

 
$
1,092,183

Cost of goods sold
 
476,747

 
405,560

 
1,264,635

 
943,188

Gross profit
 
85,514

 
70,804

 
216,006

 
148,995

SG&A:
 
 
 
 
 
 
 
 
Selling
 
13,100

 
10,141

 
37,443

 
25,564

General and administrative
 
21,404

 
15,194

 
57,088

 
37,640

Postretirement health care benefit income
 

 

 

 
(24,796
)
Transaction costs
 
800

 
450

 
850

 
6,374

Amortization of intangible assets
 
1,933

 
10,159

 
5,921

 
22,578

Total SG&A
 
37,237

 
35,944

 
101,302

 
67,360

Operating income
 
48,277

 
34,860

 
114,704

 
81,635

Interest expense
 
4,172

 
5,265

 
13,871

 
11,571

Non-operating income
 
(100
)
 
(54
)
 
(212
)
 
(137
)
Income before income taxes
 
44,205

 
29,649

 
101,045

 
70,201

Provision for income taxes
 
11,684

 
10,258

 
28,478

 
23,794

Net income
 
$
32,521

 
$
19,391

 
$
72,567

 
$
46,407

 
 
 
 
 
 
 
 
 
Income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
1.03

 
$
0.61

 
$
2.30

 
$
1.53

Diluted
 
$
1.02

 
$
0.61

 
$
2.28

 
$
1.52

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
31,582

 
31,587

 
31,617

 
30,333

Diluted
 
31,753

 
31,691

 
31,825

 
30,448

 
 
 
 
 
 
 
 
 
Dividends paid per common share
 
$
0.10

 
$
0.10

 
$
0.30

 
$
0.30

 
 
 
 
 
 
 
 
 
Net income
 
$
32,521

 
$
19,391

 
$
72,567

 
$
46,407

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Amortization of prior service credit
  (net of tax of $0, $0, $0 and $15,409)
 

 

 

 
(25,035
)
Amortization of net actuarial loss
  (net of tax of $3, $3, $9 and $5,971)
 
7

 
6

 
20

 
9,702

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 $42, $36, $877 and $306)
 
129

 
(58
)
 
2,046

 
(497
)
Total other comprehensive income (loss)
 
136

 
(52
)
 
2,066

 
(11,927
)
Comprehensive income
 
$
32,657

 
$
19,339

 
$
74,633

 
$
34,480


See notes to condensed consolidated financial statements.


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Table of Contents

Winnebago Industries, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
May 26,
2018
 
August 26,
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
39,029

 
$
35,945

Receivables, less allowance for doubtful accounts ($172 and $183)
148,948

 
124,539

Inventories
177,378

 
142,265

Prepaid expenses and other assets
8,408

 
11,388

Total current assets
373,763

 
314,137

Property, plant and equipment, net
82,481

 
71,560

Other assets:
 
 
 
Goodwill
244,684

 
242,728

Other intangible assets, net
222,519

 
228,440

Investment in life insurance
28,130

 
27,418

Deferred income taxes
7,043

 
12,736

Other assets
7,090

 
5,493

Total assets
$
965,710

 
$
902,512

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
88,397

 
$
79,194

Current maturities of long-term debt

 
2,850

Income taxes payable
6,186

 
7,450

Accrued expenses:
 
 
 
Accrued compensation
27,989

 
24,546

Product warranties
37,444

 
30,805

Self-insurance
9,571

 
6,122

Promotional
6,523

 
6,560

Accrued interest
3,177

 
3,128

Other
11,119

 
6,503

Total current liabilities
190,406

 
167,158

Non-current liabilities:
 
 
 
Long-term debt, less current maturities
251,798

 
271,726

Unrecognized tax benefits
1,703

 
1,606

Deferred compensation benefits, net of current portion
15,732

 
19,270

Other
250

 
1,078

Total non-current liabilities
269,483

 
293,680

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

 
25,888

Additional paid-in capital
84,179

 
80,401

Retained earnings
742,148

 
679,138

Accumulated other comprehensive income (loss)
1,043

 
(1,023
)
Treasury stock, at cost (20,247 and 20,183 shares)
(347,437
)
 
(342,730
)
Total stockholders' equity
505,821

 
441,674

Total liabilities and stockholders' equity
$
965,710

 
$
902,512


See notes to condensed consolidated financial statements.

3

Table of Contents

Winnebago Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
(In thousands)
May 26,
2018
 
May 27,
2017
Operating activities:
 
 
 
Net income
$
72,567

 
$
46,407

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
6,679

 
5,287

Amortization of intangible assets
5,921

 
22,578

Amortization of debt issuance costs
1,222

 
889

LIFO expense
1,238

 
897

Stock-based compensation
4,983

 
2,206

Deferred income taxes
4,807

 
6,396

Deferred compensation expense and postretirement benefit income
852

 
(23,687
)
Other
(658
)
 
(946
)
Change in assets and liabilities:
 
 
 
Inventories
(36,351
)
 
(7,497
)
Receivables, prepaid and other assets
(21,275
)
 
(21,336
)
Income taxes and unrecognized tax benefits
(1,081
)
 
5,806

Accounts payable and accrued expenses
24,506

 
32,778

Postretirement and deferred compensation benefits
(2,398
)
 
(2,428
)
Net cash provided by operating activities
61,012

 
67,350

 
 
 
 
Investing activities:
 
 
 
Purchases of property and equipment
(18,123
)
 
(9,740
)
Proceeds from the sale of property
316

 
219

Acquisition of business, net of cash acquired

 
(394,694
)
Other
(83
)
 
684

Net cash used in investing activities
(17,890
)
 
(403,531
)
 
 
 
 
Financing activities:
 
 
 
Payments for repurchases of common stock
(6,481
)
 
(1,367
)
Payments of cash dividends
(9,557
)
 
(9,554
)
Payments of debt issuance costs

 
(11,020
)
Borrowings on credit agreement
19,700

 
366,400

Repayments of credit agreement
(43,700
)
 
(69,400
)
Other

 
(92
)
Net cash (used in) provided by financing activities
(40,038
)
 
274,967

 
 
 
 
Net increase (decrease) in cash and cash equivalents
3,084

 
(61,214
)
Cash and cash equivalents at beginning of period
35,945

 
85,583

Cash and cash equivalents at end of period
$
39,029

 
$
24,369

 
 
 
 
Supplemental cash flow disclosure:
 
 
 
Income taxes paid, net
$
24,833

 
$
11,811

Interest paid
$
11,935

 
$
7,288

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

 
$
124,066

Capital expenditures in accounts payable
$
607

 
$
279

Accrued dividend
$

 
$
3,184

See notes to condensed consolidated financial statements.

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Table of Contents

Winnebago Industries, Inc.
Condensed Consolidated Stockholders' Statement of Equity
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
May 26,
2018
 
May 27,
2017
 
May 26,
2018
 
May 27,
2017
Common stock and paid-in capital
 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
106,609

 
$
105,093

 
$
106,289

 
$
58,605

Issuance of common stock
 
(57
)
 
(2
)
 
(1,625
)
 
44,981

Stock-based compensation, net of forfeitures
 
3,515

 
641

 
5,403

 
2,146

Balance, end of period
 
110,067

 
105,732

 
110,067

 
105,732

 
 
 
 


 
 
 
 
Retained earnings
 
 
 
 
 
 
 
 
Balance, beginning of period
 
712,809

 
641,192

 
679,138

 
620,546

Net income
 
32,521

 
19,391

 
72,567

 
46,407

Common stock dividends
 
(3,182
)
 
(6,368
)
 
(9,557
)
 
(12,738
)
Balance, end of period
 
742,148

 
654,215

 
742,148

 
654,215

 
 
 
 
 
 
 
 
 
Accumulated comprehensive income (loss)
 
 
 
 
 
 
 
 
Balance, beginning of period
 
907

 
(900
)
 
(1,023
)
 
10,975

Other comprehensive income (loss)
 
136

 
(52
)
 
2,066

 
(11,927
)
Balance, end of period
 
1,043

 
(952
)
 
1,043

 
(952
)
 
 
 
 
 
 
 
 
 
Treasury stock
 
 
 


 
 
 
 
Balance, beginning of period
 
(342,516
)
 
(342,770
)
 
(342,730
)
 
(421,767
)
Issuance of common stock
 
57

 
3

 
1,712

 
80,329

Stock-based compensation, net of forfeitures
 
25

 
24

 
62

 
60

Payments for the purchase of common stock
 
(5,003
)
 
(2
)
 
(6,481
)
 
(1,367
)
Balance, end of period
 
(347,437
)
 
(342,745
)
 
(347,437
)
 
(342,745
)
Total stockholders' equity
 
$
505,821

 
$
416,250

 
$
505,821

 
$
416,250


See notes to condensed consolidated financial statements.


5

Table of Contents

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

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

We were incorporated under the laws of the state of Iowa on February 12, 1958 and adopted our present name on February 28, 1961. Our 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, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation as prescribed by GAAP.

The consolidated statements of income and comprehensive income for the third quarter and first nine months of Fiscal 2018 are not necessarily indicative of the results to be expected for the full year. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the fiscal year ended August 26, 2017.

Fiscal Period
We follow a 52-/53-week fiscal year, ending the last Saturday in August. Both Fiscal 2018 and Fiscal 2017 are 52-week years.

Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for the related income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 (our Fiscal 2018), including interim periods within those annual reporting periods. We adopted this ASU in the interim quarterly reporting period ended November 25, 2017. Amendments requiring recognition of excess tax benefits and tax deficiencies in the statements of income 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 required 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.

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

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 continue to assess the impact of the standard on our disclosures and our internal controls over financial reporting.


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We plan to adopt this standard in the first quarter of our Fiscal 2019. Providing we ultimately conclude that the impacts of adoption are immaterial, we would expect to use the modified retrospective method. Under this method, we would recognize the cumulative effect of the changes in retained earnings at the date of adoption, but would not restate prior periods.

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 must be adopted 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.

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

Subsequent Event
On June 4, 2018, we acquired 100% of the ownership interests of Chris-Craft, a privately-owned company based in Sarasota Florida.  Chris-Craft manufactures and sells premium quality boats in the recreational powerboat industry through an established global network of independent authorized dealers.

Note 2: Business Combination, Goodwill and Other Intangible Assets

We acquired 100% of the ownership interests of Grand Design on November 8, 2016 in accordance with the Securities Purchase Agreement for an aggregate purchase price of $520.5 million, which was paid in cash and Winnebago shares as follows:
(In thousands, except shares 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 tangible and intangible assets of Grand Design acquired, based on their fair values at the date of the acquisition. The purchase price allocation was finalized during the first quarter of Fiscal 2018.


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The final allocation of the purchase price to assets acquired and liabilities assumed was as follows:
(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 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 May 26, 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 in the first quarter of Fiscal 2018.

The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of intangible assets with fair value on the closing date of November 8, 2016 and amortization accumulated from the closing date through May 26, 2018 as follows:
 
 
 
 
May 26, 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

 
10,365

 
80,500

 
5,348

Backlog
 
0.5
 
18,000

 
18,000

 
18,000

 
18,000

Non-compete agreements
 
4.0
 
4,600

 
1,836

 
4,600

 
1,116

Leasehold interest-favorable
 
8.1
 
2,000

 
380

 
2,000

 
196

Total
 
 
 
253,100

 
$
30,581

 
253,100

 
$
24,660

Accumulated amortization
 
 
 
(30,581
)
 
 
 
(24,660
)
 
 
Net book value of intangible assets
 
 
 
$
222,519

 
 
 
$
228,440

 
 

We used the income approach to value certain intangible assets.  Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. We used the income approach known as the relief from royalty method to value the trade name. 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 is based on expected revenues from such license. The fair

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value of the dealer network was estimated using an income approach known as the cost to recreate/cost savings method. This method uses the replacement of the asset as an indicator of the fair value of the asset. The useful life of the intangible assets was determined considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors, including legal, regulatory, contractual, competitive, economic or other factors that may limit the useful life of the intangible assets.
For the three months ended May 26, 2018 and May 27, 2017, amortization of intangible assets charged to operations was $1.9 million and $10.2 million, respectively. For the nine months ended May 26, 2018 and May 27, 2017, amortization of intangible assets charged to operations was $5.9 million and $22.6 million, respectively. The weighted average remaining amortization period for intangible assets as of May 26, 2018 was approximately 10.3 years. Remaining estimated aggregate annual amortization expense by fiscal year is as follows:
(In thousands)
 
Amount
Remainder of 2018
 
$
1,933

2019
 
7,733

2020
 
7,733

2021
 
7,733

2022
 
7,106

Thereafter
 
42,281

Within the Towable segment, the results of Grand Design's operations have been included in our consolidated financial statements from the close of the acquisition. The following table provides net revenues and operating income (which includes amortization expense) from the Grand Design business included in our consolidated results during the nine months ended May 26, 2018 and May 27, 2017 following the November 8, 2016 closing date:
 
 
Nine Months Ended
(In thousands)
 
May 26,
2018
 
May 27,
2017
Net revenues
 
$
719,030

 
$
366,309

Operating income
 
91,452

 
27,083


Unaudited pro forma information has been prepared as if the acquisition had taken place on August 30, 2015. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transaction actually taken place on August 30, 2015, and the unaudited pro forma information does not purport to be indicative of future financial operating results. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition. Unaudited pro forma information is as follows:
 
 
Nine Months Ended
(In thousands, except per share data)
 
May 26,
2018
 
May 27, 2017(1)
Net revenues
 
$
1,480,641

 
$
1,187,849

Net income
 
72,675

 
66,009

Income per share - basic
 
2.30

 
2.09

Income per share - diluted
 
2.28

 
2.08

(1)
Net income and income per share include the increased benefit of $16.3 million, net of tax, associated with the termination of the postretirement health care plan in Fiscal 2017.

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The unaudited pro forma data above includes the following significant non-recurring adjustments made to account for certain costs, which would have changed if the acquisition of Grand Design had been completed on August 30, 2015:
 
 
Nine Months Ended
(In thousands)
 
May 26,
2018
 
May 27, 2017(1)
Amortization of intangibles (1 year or less useful life)
 
$
(122
)
 
$
(18,601
)
Increase in amortization of intangibles
 

 
1,551

Expenses related to business combination (transaction costs)
 
(50
)
 
(6,432
)
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

 
11,513

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

We incurred approximately $6.9 million of acquisition-related costs to date, of which $0.1 million and $6.4 million were expensed during the nine months ended May 26, 2018 and May 27, 2017, respectively.

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 two reportable segments: (1) Motorized products and services and (2) Towable products and services. The Motorized segment includes all products that include a motorized chassis as well as other related manufactured products. The Towable segment includes all products 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 two operating segments into the Towable reporting segment based upon their similar products, customers, distribution methods, production processes and economic characteristics. The accounting policies of both reportable segments are the same and described in Note 1: Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the fiscal year ended August 26, 2017.

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 after corporate allocations. 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. We have included this non-GAAP performance measure as a comparable measure to illustrate the effect of non-recurring transactions occurring during the quarter and improve comparability of our results from period to period.  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. These types of adjustments are also specified in the definition of certain measures required under the terms of our Credit Agreement.

Management uses these non-GAAP financial measures (a) to evaluate our historical and prospective financial performance and trends as well as its 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 Credit Agreement. We believe these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry.

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The following table shows information by reporting segment:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
May 26,
2018
 
May 27,
2017
 
May 26,
2018
 
May 27,
2017
Net revenues
 
 
 
 
 
 
 
 
Motorized
 
$
249,245

 
$
241,670

 
$
641,602

 
$
635,732

Towable
 
313,016

 
234,694

 
839,039

 
456,451

Consolidated
 
$
562,261

 
$
476,364

 
$
1,480,641

 
$
1,092,183

 
 
 
 
 
 
 
 
 
Adjusted EBITDA
 
 
 
 
 
 
 
 
Motorized
 
$
9,319

 
$
14,567

 
$
16,518

 
$
36,521

Towable
 
44,042

 
32,761

 
111,636

 
54,557

Consolidated
 
$
53,361

 
$
47,328

 
$
128,154

 
$
91,078

 
 
 
 
 
 
 
 
 
Capital expenditures
 
 
 
 
 
 
 
 
Motorized
 
$
2,643

 
$
1,527

 
$
7,383

 
$
6,626

Towable
 
3,805

 
1,275

 
10,740

 
3,114

Consolidated
 
$
6,448

 
$
2,802

 
$
18,123

 
$
9,740

 
 
 
 
 
 
 
 
 
Total assets
 
 
 
 
 
 
 
 
Motorized
 
$
301,667

 
$
275,673

 
$
301,667

 
$
275,673

Towable
 
613,162

 
572,977

 
613,162

 
572,977

Unallocated corporate assets
 
50,881

 
41,701

 
50,881

 
41,701

Consolidated
 
$
965,710

 
$
890,351

 
$
965,710

 
$
890,351


Reconciliation of net income to consolidated Adjusted EBITDA:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
May 26,
2018
 
May 27,
2017
 
May 26,
2018
 
May 27,
2017
Net income
 
$
32,521

 
$
19,391

 
$
72,567

 
$
46,407

Interest expense
 
4,172

 
5,265

 
13,871

 
11,571

Provision for income taxes
 
11,684

 
10,258

 
28,478

 
23,794

Depreciation
 
2,351

 
1,859

 
6,679

 
5,287

Amortization of intangible assets
 
1,933

 
10,159

 
5,921

 
22,578

EBITDA
 
52,661

 
46,932

 
127,516

 
109,637

Postretirement health care benefit income
 

 

 

 
(24,796
)
Transaction costs
 
800

 
450

 
850

 
6,374

Non-operating income
 
(100
)
 
(54
)
 
(212
)
 
(137
)
Adjusted EBITDA
 
$
53,361

 
$
47,328

 
$
128,154

 
$
91,078


Note 4: Concentration Risk

During the first nine months of Fiscal 2018, no dealer organization accounted for 10% or more of our consolidated revenues. During the first nine months of Fiscal 2017, La Mesa RV Center, Inc. accounted for 10.9% of our consolidated net revenue and FreedomRoads, LLC accounted for 10.6% of our consolidated net revenues. 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: Derivatives, Investments and Fair Value Measurements
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
We account for fair value measurements in accordance with ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measurement and expands disclosure about fair value measurement. The fair value

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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.

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 26, 2018 and August 26, 2017 according to the valuation techniques we used to determine their fair values:
 
 
 
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
 
Fair Value at
May 26,
2018
 
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
 
$
1,474

 
$
1,436

 
$
38

 
$

International equity funds
 
161

 
142

 
19

 

Fixed income funds
 
150

 
66

 
84

 

Interest rate swap contract
 
2,095

 

 
2,095

 

Total assets at fair value
 
$
3,880

 
$
1,644

 
$
2,236

 
$

 
 
 
 
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 of securities are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available. These securities fund the Executive Share Option Plan and the Executive Deferred Compensation Plan (see Note 10). The proportion of the assets that will fund options that expire within a year are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. The remaining assets are classified as non-current and are included in other 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 January 23, 2017, we entered into an interest swap contract, which effectively fixed our interest rate for our Term Loan for a notional amount that reduces each December during the swap contract. As of May 26, 2018, we had $170.0 million of our Term Loan fixed at an interest rate of 5.32%. As of August 26, 2017, we had $200.0 million of our Term Loan fixed at an interest rate of 6.32%.

The fair value of the interest rate swap based on a Level 2 valuation was an asset of $2.1 million as of May 26, 2018. The fair value is classified as Level 2 as it is corroborated based on observable market data. This amount is classified as non-current and included in other assets on the consolidated balance sheets. The change in value in the third quarter was predominately recorded to accumulated other comprehensive income on the consolidated balance sheets since the interest rate swap has been designated for hedge accounting.


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Assets and Liabilities that are measured at Fair Value on a Non-recurring Basis
Our non-financial assets, which include goodwill, intangible assets, and property, plant and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required, we must evaluate the non-financial asset for impairment. If an impairment did occur, the asset is required to be recorded at the estimated fair value. During the first nine months of Fiscal 2018 and Fiscal 2017, no impairments were recorded for non-financial assets.

The carrying value of our debt as of May 26, 2018 approximates fair value as interest is at variable market rates.

Note 6: Inventories
Inventories consist of the following:
(In thousands)
 
May 26,
2018
 
August 26,
2017
Finished goods
 
$
34,954

 
$
16,947

Work-in-process
 
60,206

 
60,818

Raw materials
 
118,875

 
99,919

Total
 
214,035

 
177,684

LIFO reserve
 
(36,657
)
 
(35,419
)
Total inventories
 
$
177,378

 
$
142,265

The above value of inventories, before reduction for the LIFO reserve, approximates replacement cost at the respective dates. Of the $214.0 million and $177.7 million inventory at May 26, 2018 and August 26, 2017, respectively, $179.1 million and $149.8 million is valued on a LIFO basis. The remaining inventories of $34.9 million and $27.9 million at May 26, 2018 and August 26, 2017, respectively, are valued on a FIFO basis.

Note 7: Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation and consists of the following:
(In thousands)
 
May 26,
2018
 
August 26,
2017
Land
 
$
4,647

 
$
3,914

Buildings and building improvements
 
82,780

 
73,831

Machinery and equipment
 
101,525

 
99,952

Software
 
22,078

 
17,844

Transportation
 
8,543

 
8,993

Total property, plant and equipment, gross
 
219,573

 
204,534

Less accumulated depreciation
 
(137,092
)
 
(132,974
)
Total property, plant and equipment, net
 
$
82,481

 
$
71,560


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. 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.


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Changes in our product warranty liability are as follows:
 
 
Three Months Ended
 
Nine Months Ended
(In thousands)
 
May 26,
2018
 
May 27,
2017
 
May 26,
2018
 
May 27,
2017
Balance at beginning of period
 
$
34,988

 
$
25,030

 
$
30,805

 
$
12,412

Provision
 
11,645

 
10,202

 
31,881

 
21,832

Claims paid
 
(9,189
)
 
(7,176
)
 
(25,242
)
 
(19,092
)
Acquisition of Grand Design
 

 

 

 
12,904

Balance at end of period
 
$
37,444

 
$
28,056

 
$
37,444

 
$
28,056


Note 9: Long-Term Debt

The components of long-term debt are as follows:
(In thousands)
 
May 26,
2018
 
August 26,
2017
ABL
 
$

 
$

Term Loan
 
260,000

 
284,000

Gross long-term debt, excluding issuance costs
 
260,000

 
284,000

Less: debt issuance cost, net
 
(8,202
)
 
(9,424
)
Long-term debt, net of issuance costs
 
251,798

 
274,576

Less: current maturities
 

 
(2,850
)
Long-term debt, less current maturities
 
$
251,798

 
$
271,726


On November 8, 2016, we entered into a $125.0 million 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 by 1.0% on the Term Loan and 0.25% on the ABL. Prior 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 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 May 26, 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 contains certain financial covenants. As of May 26, 2018, we are in compliance with all financial covenants of the Credit Agreement.
The ABL and Term Loan are guaranteed by Winnebago Industries, Inc. and all material direct and indirect domestic subsidiaries, and are secured by a security interest in substantially all of our assets, except minor excluded assets.
Unamortized debt issuance costs of $0.6 million related to the voluntary prepayment on the Term Loan was expensed in the nine months ended May 26, 2018.

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Aggregate contractual maturities of debt in future fiscal years are as follows as of May 26, 2018:
(In thousands)
 
Amount
2018
 
$

2019
 

2020
 
10,250

2021
 
15,000

2022
 
15,000

Thereafter
 
219,750

Total debt
 
$
260,000


Note 10: Employee and Retiree Benefits
Deferred compensation liabilities are as follows:
(In thousands)
 
May 26,
2018
 
August 26,
2017
Non-qualified deferred compensation
 
$
15,244

 
$
16,476

Executive share option plan liability
 
1,256

 
1,498

SERP benefit liability
 
2,293

 
2,534

Executive deferred compensation
 
422

 
447

Officer stock-based compensation
 
1,096

 
1,664

Total deferred compensation
 
20,311

 
22,619

Less current portion
 
(4,579
)
 
(3,349
)
Long-term deferred compensation
 
$
15,732

 
$
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
 
Nine Months Ended
(In thousands)
 
May 26,
2018
 
May 27,
2017
 
May 26,
2018
 
May 27,
2017
Interest cost
 
$

 
$

 
$

 
$
29

Service cost
 

 

 

 
16

Amortization of prior service benefit
 

 

 

 
(40,444
)
Amortization of net actuarial loss
 

 

 

 
15,648

Net periodic postretirement benefit income
 
$

 
$

 
$

 
$
(24,751
)
 
 
 
 
 
 
 
 
 
Payments for postretirement health care
 
$

 
$

 
$

 
$
68

 
Note 11: Shareholders' Equity
Stock-Based Compensation
We have a 2014 Omnibus Equity, Performance Award, and Incentive Compensation Plan (as amended, the "Plan") in place as approved by shareholders, which allows us to grant or issue non-qualified stock options, incentive stock options, share awards, and other equity compensation to key employees and to non-employee directors.
On October 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.

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Stock-based compensation expense was $1.4 million and $0.7 million during the third quarters of Fiscal 2018 and 2017, respectively. Stock-based compensation expense was $5.0 million and $2.2 million during the first nine 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, which was paid on April 25, 2018 to shareholders of record at the close of business on April 11, 2018.

On May 23, 2018, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock, payable on July 5, 2018 to shareholders of record at the close of business on June 20, 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: Contingent Liabilities and Commitments
Repurchase Commitments
Generally, manufacturers in the RV industry enter into repurchase agreements with lending institutions that have provided wholesale floorplan financing to dealers. Most dealers' RVs are financed on a "floorplan" basis under which a bank or finance company lends the dealer all, or substantially all, of the purchase price, collateralized by a security interest in the RVs purchased.
Our repurchase agreements provide that, in the event of default by the dealer on the agreement to pay the lending institution, we will repurchase the financed merchandise. The terms of these agreements, which generally can last up to 18 months, provide that our liability will be the lesser of remaining principal owed by the dealer to the lending institution, or dealer invoice less periodic reductions based on the time since the date of the original invoice. 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 RVs to repurchase current inventory if a dealership exits the business. Our total contingent liability on all repurchase agreements was approximately $920.1 million and $713.1 million at May 26, 2018 and August 26, 2017, respectively, with the increase attributed primarily due to growth in the Towable segment.
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 the repurchase exposure as previously described and our historical loss experience, we established an associated loss reserve. Our accrued losses on repurchases were $1.0 million as of May 26, 2018 and $0.7 million as of August 26, 2017 and are included in accrued expenses - other on the condensed consolidated balance sheets. 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 26, 2018 and May 27, 2017.

Litigation
We are involved in various legal proceedings that 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 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.  


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Note 13: Income Taxes
We account for income taxes under ASC 740, Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns.

Our effective tax rate decreased from 33.9% for the nine months ended May 27, 2017 to 28.2% for the nine months ended May 26, 2018 due primarily to the enactment of the Tax Act on December 22, 2017. One of the most significant provisions of this legislation was a reduction in the Federal corporate income tax rate from 35% to 21% effective beginning January 1, 2018. With our fiscal year ending on August 25, 2018, our blended Federal statutory tax rate for Fiscal 2018 is expected to be approximately 26%. Most of the remaining significant provisions of the Tax Act take effect in our Fiscal 2019.

In December 2017, the SEC issued SAB 118, which has since been codified by the release of ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 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 this guidance, 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.

In accordance with ASC 740, as of the date of enactment, and during the three months ended February 24, 2018, we recorded a non-cash provisional estimate of $1.4 million to income tax expense and a corresponding reduction in the net deferred tax asset as a result of revaluing all deferred tax assets and liabilities at the newly enacted Federal corporate income tax rate. For the three months ended May 26, 2018, we recorded an additional non-cash provisional estimate of $0.2 million to income tax expense and a corresponding reduction in the net deferred tax asset based on revisions to the provisional estimate.

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. 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.

We file a US 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 May 26, 2018, our Federal returns from Fiscal 2014 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 to review by the state taxing jurisdictions.

As of May 26, 2018, our unrecognized tax benefits were $1.7 million, including accrued interest and penalties of $0.5 million. If we were to prevail on all unrecognized tax benefits recorded, $1.5 million of the $1.7 million would benefit the overall effective tax rate. It is our policy to recognize interest and penalties accrued relative to unrecognized tax benefits as tax expense. We do not believe that there will be a significant change in the total amount of unrecognized tax benefits within the next twelve months.

Note 14: 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 26,
2018
 
May 27,
2017
 
May 26,
2018
 
May 27,
2017
Income per share - basic
 
 
 
 
 
 
 
 
Net income
 
$
32,521

 
$
19,391

 
$
72,567

 
$
46,407

Weighted average shares outstanding
 
31,582

 
31,587

 
31,617

 
30,333

Net income per share - basic
 
$
1.03

 
$
0.61

 
$
2.30

 
$
1.53

 
 
 
 
 
 
 
 
 
Income per share - diluted
 
 
 
 
 
 
 
 
Net income
 
$
32,521

 
$
19,391

 
$
72,567

 
$
46,407

Weighted average shares outstanding
 
31,582

 
31,587

 
31,617

 
30,333

Dilutive impact of awards and options outstanding
 
171

 
104

 
208

 
115

Weighted average shares and potential dilutive shares outstanding
 
31,753

 
31,691

 
31,825

 
30,448

Net income per share - diluted
 
$
1.02

 
$
0.61

 
$
2.28

 
$
1.52


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The computation of weighted average shares and potential dilutive shares outstanding excludes the effect of options to purchase 89,710 and 61,000 shares of common stock for the three months ended May 26, 2018 and May 27, 2017, respectively, and 58,860 and 61,000 shares of common stock for the nine months ended May 26, 2018 and May 27, 2017, respectively. These amounts were not included in the computation of diluted income per share because they are considered anti-dilutive under the treasury stock method per ASC 260, Earnings Per Share.

Note 15: Accumulated Other Comprehensive Income (Loss)

Changes in AOCI by component, net of tax, were:
 
 
Three Months Ended
 
 
May 26, 2018
 
May 27, 2017
(In thousands)
 
Defined
Benefit
Pension
Items
 
Interest
Rate
Swap
 
Total
 
Defined
Benefit
Pension
Items
 
Interest
Rate
Swap
 
Total
Balance at beginning of period
 
$
(496
)
 
$
1,403

 
$
907

 
$
(461
)
 
$
(439
)
 
$
(900
)
 
 
 
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications
 

 
129

 
129

 

 
(58
)
 
(58
)
Amounts reclassified from AOCI
 
7

 

 
7

 
6

 

 
6

Net current-period OCI
 
7

 
129

 
136

 
6

 
(58
)
 
(52
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at end of period
 
$
(489
)
 
$
1,532

 
$
1,043

 
$
(455
)
 
$
(497
)
 
$
(952
)
 
 
Nine Months Ended
 
 
May 26, 2018
 
May 27, 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
 

 
2,046

 
2,046

 
3,903

 
(497
)
 
3,406

Amounts reclassified from AOCI
 
20

 

 
20

 
(15,333
)
 

 
(15,333
)
Net current-period OCI
 
20

 
2,046

 
2,066

 
(11,430
)
 
(497
)
 
(11,927
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at end of period
 
$
(489
)
 
$
1,532

 
$
1,043

 
$
(455
)
 
$
(497
)
 
$
(952
)

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 26,
2018
 
May 27,
2017
 
May 26,
2018
 
May 27,
2017
Amortization of prior service credit
SG&A
 
$

 
$

 
$

 
$
(25,035
)
Amortization of net actuarial loss
SG&A
 
7

 
6

 
20

 
9,702

Total reclassifications
 
 
$
7

 
$
6

 
$
20

 
$
(15,333
)


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Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This section should be read in conjunction with the unaudited consolidated financial statements contained in this Form 10-Q as well as the Management's Discussion and Analysis and Risk Factors included in our Annual Report on Form 10‑K for the fiscal year ended August 26, 2017 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, competition and new product introductions by competitors, our ability to attract and retain qualified personnel, business or production disruptions, sales order cancellations, risk related to compliance with debt covenants and leverage ratios, stock price volatility, availability of labor, a slowdown in the economy, low consumer confidence, the effect of global tensions, increases in interest rates, availability of credit, risk related to cyclicality and seasonality, slower than anticipated sales of new or existing products, integration of operations relating to merger and acquisition activities generally, 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 ERP, risk related to data security, governmental regulation, including for climate change, and risk related to anti-takeover provisions applicable to us and other factors. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested is contained in our filings with the SEC over the last 12 months, copies of which are available from the SEC or from us upon request. We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this release or to reflect any changes in expectations after the date of this release or any change in events, conditions or circumstances on which any statement is based, except as required by law.

Overview
Winnebago Industries, Inc. is a leading US manufacturer of RVs with a proud history of manufacturing RV products for 60 years. We currently produce a large majority of our motorhomes in vertically integrated manufacturing facilities in Iowa, and we produce all of our travel trailer and fifth wheel trailers in Indiana. We are in the process of expanding some motorhome manufacturing to Junction City, Oregon. We distribute our products primarily through independent dealers throughout the US and Canada, who then retail the products to the end consumer.
Non-GAAP Reconciliation

This MD&A includes financial information prepared in accordance with GAAP, as well as certain adjusted or non-GAAP financial measures such as EBITDA and Adjusted EBITDA. 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 Consolidated Results of Operations-Current Quarter Compared to the Comparable Quarter Last Year and Consolidated Results of Operations-First Nine Months of Fiscal 2018 Compared to the Comparable Nine Months of Fiscal 2017 for a detailed reconciliation of items that impacted 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. We have included this non-GAAP performance measure as a comparable measure to illustrate the effect of non-recurring transactions occurring during the quarter and improve comparability of our results from period to period.  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. These types of adjustments are also specified in the definition of certain measures required under the terms of our Credit Agreement.

Management uses these non-GAAP financial measures (a) to evaluate our historical and prospective financial performance and trends as well as its 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 Credit Agreement. We believe these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry.

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Table of Contents


Significant Transaction

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

With the acquisition 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. The Towable segment includes all products that are not motorized and are generally towed by another vehicle.

Subsequent Event

Subsequent to the third quarter of Fiscal 2018, we acquired 100% of the ownership interests of Chris-Craft, a privately-owned company based in Sarasota Florida. Chris-Craft manufactures and sells premium quality boats in the recreational powerboat industry through an established global network of independent authorized dealers.

Industry Trends

Key reported statistics for the North American RV industry are as follows:
Wholesale unit shipments: RV product delivered to the dealers, which is reported monthly by RVIA
Retail unit registrations: consumer purchases of RVs from dealers, which is reported by Stat Surveys

We track RV industry conditions using these key statistics to monitor trends and evaluate and understand our performance relative to the overall industry. The rolling twelve months shipment and retail information for 2018 and 2017, as noted below, illustrates that the RV industry continues to grow at the wholesale and retail level. We believe that retail demand is the key driver to continued growth in the industry.
 
US and Canada Industry
 
Wholesale Unit Shipments per RVIA
 
Retail Unit Registrations per Stat Surveys
 
Rolling 12 Months through April
 
Rolling 12 Months through April
 
2018
2017
Unit Change
% Change
 
2018
2017
Unit Change
% Change
Towable (1)
448,693

376,022

72,671

19.3
%
 
404,225

363,369

40,856

11.2
%
Motorized (2)
64,715

57,133

7,582

13.3
%
 
57,647

52,990

4,657

8.8
%
Combined
513,408

433,155

80,253

18.5
%
 
461,872

416,359

45,513

10.9
%
(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 years 2018 and 2017, as noted in the table below, illustrates continued projected growth of the industry. The outlook for future growth in RV sales is based on continued modest gains in job and disposable income prospects as well as low inflation, and takes into account the impact of slowly rising interest rates, a strong US dollar and continued weakness in energy production and prices.
 
 
Calendar Year
Wholesale Unit Shipment Forecast per RVIA(1)
 
2018
2017
Unit
Change
%
Change
Towable
 
462,600

429,500

33,100

7.7
%
Motorized
 
66,800

62,700

4,100

6.5
%
Combined
 
529,400

492,200

37,200

7.6
%
(1)
Forecast prepared by Dr. Richard Curtin of the University of Michigan Consumer Survey Research Center for RVIA and reported in the Roadsigns RV Summer 2018 Industry Forecast Issue. Unit forecasts exclude folding camper and truck camper categories.


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Table of Contents

Market Share

Our retail unit market share, as reported by Stat Surveys based on state records, is illustrated below. Note that this data is subject to adjustment and is continuously updated.
 
 
Rolling 12 Months
Through April
 
Calendar Year
 
 
2018
2017(1)
 
2017(1)
2016(1)
2015
Motorized A, B, C
 
16.2%
17.0%
 
16.2%
18.0%
20.5
%
Travel trailer and fifth wheels
 
6.7%
3.1%
 
6.1%
1.7%
0.9
%
(1)
Travel trailer and fifth wheels include retail unit market share for Grand Design since acquisition on November 8, 2016.

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, our Board of Directors approved two large facility expansion projects in the fast growing Towable segment. The Grand Design expansion project consisted of two new production facilities. The first was completed in January 2018, and we have seen an increase in units produced beginning in the second quarter of Fiscal 2018. The second building in the Grand Design expansion project 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.

ERP System

In the second quarter of Fiscal 2015, our Board of Directors approved the strategic initiative of implementing an ERP system to replace our legacy business applications. The new ERP platform will provide better support for our changing business needs and plans for future growth. Our initial cost estimates have grown for additional needs of the business, such as the acquisition of the Junction City, Oregon plant and the opportunity to integrate the ERP system with additional manufacturing systems. The project includes software, external implementation assistance and increased internal staffing directly related to this initiative. We anticipate that approximately 40% of the cost will be expensed in the period incurred and 60% will be capitalized and depreciated over its useful life.

The following table illustrates the cumulative project costs:
 
 
Fiscal 2018
 
Fiscal
 
Fiscal
 
Fiscal
 
Cumulative
(In thousands)
 
Q3
 
Q2
 
Q1
 
2017
 
2016
 
2015
 
Investment
Capitalized
 
$
1,549

 
$
1,271

 
$
1,416

 
$
1,881

 
$</