WINNEBAGO INDUSTRIES INC - Quarter Report: 2022 February (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | ||||||||
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the quarterly period ended February 26, 2022
| or | |||||||||||
| ☐ | 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 | |||||||||||
| WINNEBAGO INDUSTRIES, INC. | ||||||||||||||
| (Exact name of registrant as specified in its charter) | ||||||||||||||
| Minnesota | 42-0802678 | |||||||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||
| 13200 Pioneer Trail | Eden Prairie | Minnesota | 55347 | |||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||||||||
952-829-8600 | ||||||||||||||||||||
| (Registrant's telephone number, including area code) | ||||||||||||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $0.50 par value per share | WGO | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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 ☒ Accelerated Filer ☐ Non-accelerated filer ☐
Smaller Reporting Company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of March 17, 2022, there were 32,776,455 shares of common stock, par value $0.50 per share, outstanding.
Winnebago Industries, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended February 26, 2022
Table of Contents
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Winnebago Industries, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in thousands, except per share data) | February 26, 2022 | February 27, 2021 | February 26, 2022 | February 27, 2021 | |||||||||||||||||||
| Net revenues | $ | 1,164,731 | $ | 839,886 | $ | 2,320,471 | $ | 1,633,017 | |||||||||||||||
| Cost of goods sold | 948,154 | 683,304 | 1,874,482 | 1,339,431 | |||||||||||||||||||
| Gross profit | 216,577 | 156,582 | 445,989 | 293,586 | |||||||||||||||||||
| Selling, general, and administrative expenses | 71,795 | 53,016 | 146,665 | 101,415 | |||||||||||||||||||
| Amortization | 8,015 | 3,591 | 16,187 | 7,181 | |||||||||||||||||||
| Total operating expenses | 79,810 | 56,607 | 162,852 | 108,596 | |||||||||||||||||||
| Operating income | 136,767 | 99,975 | 283,137 | 184,990 | |||||||||||||||||||
| Interest expense, net | 10,325 | 10,052 | 20,567 | 19,993 | |||||||||||||||||||
| Non-operating loss (income) | 6,507 | (311) | 12,864 | (217) | |||||||||||||||||||
| Income before income taxes | 119,935 | 90,234 | 249,706 | 165,214 | |||||||||||||||||||
| Provision for income taxes | 28,760 | 21,166 | 58,901 | 38,723 | |||||||||||||||||||
| Net income | $ | 91,175 | $ | 69,068 | $ | 190,805 | $ | 126,491 | |||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Basic | $ | 2.75 | $ | 2.06 | $ | 5.75 | $ | 3.77 | |||||||||||||||
| Diluted | $ | 2.69 | $ | 2.04 | $ | 5.58 | $ | 3.74 | |||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | 33,098 | 33,533 | 33,210 | 33,571 | |||||||||||||||||||
| Diluted | 33,934 | 33,910 | 34,168 | 33,821 | |||||||||||||||||||
| Net income | $ | 91,175 | $ | 69,068 | $ | 190,805 | $ | 126,491 | |||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
Amortization of net actuarial loss (net of tax of $3, $3, $6, and $6) | 9 | 8 | 18 | 17 | |||||||||||||||||||
| Comprehensive income | $ | 91,184 | $ | 69,076 | $ | 190,823 | $ | 126,508 | |||||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Winnebago Industries, Inc.
Consolidated Balance Sheets
| (in thousands, except per share data) | February 26, 2022 | August 28, 2021 | |||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 134,832 | $ | 434,563 | |||||||
Receivables, less allowance for doubtful accounts ($294 and $307, respectively) | 380,039 | 253,808 | |||||||||
| Inventories, net | 469,454 | 341,473 | |||||||||
| Prepaid expenses and other current assets | 25,139 | 29,069 | |||||||||
| Total current assets | 1,009,464 | 1,058,913 | |||||||||
| Property, plant, and equipment, net | 239,034 | 191,427 | |||||||||
| Goodwill | 484,176 | 348,058 | |||||||||
| Other intangible assets, net | 485,619 | 390,407 | |||||||||
| Investment in life insurance | 29,306 | 28,821 | |||||||||
| Operating lease assets | 43,473 | 28,379 | |||||||||
| Other long-term assets | 18,361 | 16,562 | |||||||||
| Total assets | $ | 2,309,433 | $ | 2,062,567 | |||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 211,280 | $ | 180,030 | |||||||
| Income taxes payable | — | 8,043 | |||||||||
| Accrued expenses: | |||||||||||
| Accrued compensation | 59,947 | 67,541 | |||||||||
| Product warranties | 113,818 | 91,222 | |||||||||
| Self-insurance | 17,871 | 19,296 | |||||||||
| Promotional | 13,723 | 10,040 | |||||||||
| Accrued interest and dividends | 4,489 | 10,720 | |||||||||
| Other current liabilities | 42,918 | 20,384 | |||||||||
| Total current liabilities | 464,046 | 407,276 | |||||||||
| Long-term debt, net | 536,990 | 528,559 | |||||||||
| Deferred income taxes | 11,458 | 13,429 | |||||||||
| Unrecognized tax benefits | 6,222 | 6,483 | |||||||||
| Long-term operating lease liabilities | 42,420 | 26,745 | |||||||||
| Deferred compensation benefits, net of current portion | 9,425 | 9,550 | |||||||||
| Other long-term liabilities | 29,885 | 13,582 | |||||||||
| Total liabilities | 1,100,446 | 1,005,624 | |||||||||
| Contingent liabilities and commitments (Note 11) | |||||||||||
| Shareholders' equity: | |||||||||||
Preferred stock, par value $0.01: 10,000 shares authorized; Zero shares issued and outstanding | — | — | |||||||||
Common stock, par value $0.50: 120,000 shares authorized; 51,776 shares issued and outstanding | 25,888 | 25,888 | |||||||||
| Additional paid-in capital | 238,159 | 218,490 | |||||||||
| Retained earnings | 1,357,812 | 1,172,996 | |||||||||
| Accumulated other comprehensive loss | (473) | (491) | |||||||||
Treasury stock, at cost: 19,045 and 18,713 shares, respectively | (412,399) | (359,940) | |||||||||
| Total shareholders' equity | 1,208,987 | 1,056,943 | |||||||||
| Total liabilities and shareholders' equity | $ | 2,309,433 | $ | 2,062,567 | |||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Winnebago Industries, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended | |||||||||||
| (in thousands) | February 26, 2022 | February 27, 2021 | |||||||||
| Operating activities | |||||||||||
| Net income | $ | 190,805 | $ | 126,491 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Depreciation | 10,767 | 8,559 | |||||||||
| Amortization | 16,187 | 7,181 | |||||||||
| Non-cash interest expense, net | 7,326 | 6,769 | |||||||||
| Amortization of debt issuance costs | 1,225 | 1,229 | |||||||||
| Last in, first-out expense | 2,772 | 552 | |||||||||
| Stock-based compensation | 6,891 | 6,981 | |||||||||
| Deferred income taxes | (1,977) | 914 | |||||||||
| Contingent consideration fair value adjustment | 12,887 | — | |||||||||
| Other, net | 2,212 | (3,460) | |||||||||
| Change in operating assets and liabilities, net of assets and liabilities acquired | |||||||||||
| Receivables, net | (123,595) | (11,547) | |||||||||
| Inventories, net | (109,304) | (96,079) | |||||||||
| Prepaid expenses and other assets | 5,613 | 2,321 | |||||||||
| Accounts payable | 26,703 | 12,487 | |||||||||
| Income taxes and unrecognized tax benefits | (7,941) | (10,698) | |||||||||
| Accrued expenses and other liabilities | 5,570 | 15,222 | |||||||||
| Net cash provided by operating activities | 46,141 | 66,922 | |||||||||
| Investing activities | |||||||||||
| Purchases of property, plant, and equipment | (43,426) | (14,920) | |||||||||
| Acquisition of business, net of cash acquired | (228,159) | — | |||||||||
| Proceeds from the sale of property, plant, and equipment | 49 | 7,778 | |||||||||
| Other, net | (245) | (223) | |||||||||
| Net cash used in investing activities | (271,781) | (7,365) | |||||||||
| Financing activities | |||||||||||
| Borrowings on long-term debt | 1,943,583 | 1,647,764 | |||||||||
| Repayments on long-term debt | (1,943,583) | (1,647,764) | |||||||||
| Payments of cash dividends | (11,991) | (8,075) | |||||||||
| Payments for repurchases of common stock | (64,218) | (12,109) | |||||||||
| Payments of debt issuance costs | — | (224) | |||||||||
| Other, net | 2,118 | 1,291 | |||||||||
| Net cash used in financing activities | (74,091) | (19,117) | |||||||||
| Net (decrease)/increase in cash and cash equivalents | (299,731) | 40,440 | |||||||||
| Cash and cash equivalents at beginning of period | 434,563 | 292,575 | |||||||||
| Cash and cash equivalents at end of period | $ | 134,832 | $ | 333,015 | |||||||
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| Supplemental Disclosures | |||||||||||
| Income taxes paid, net | $ | 71,344 | $ | 47,804 | |||||||
| Interest paid | 11,891 | 12,244 | |||||||||
| Non-cash investing and financing activities | |||||||||||
| Issuance of common stock for acquisition of business | $ | 22,000 | $ | — | |||||||
| Capital expenditures in accounts payable | 1,126 | 195 | |||||||||
| Increase (decrease) in lease assets in exchange for lease liabilities: | |||||||||||
| Operating leases | 17,164 | (142) | |||||||||
| Finance leases | 1,698 | (10) | |||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Winnebago Industries, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
| Three Months Ended February 26, 2022 | ||||||||||||||||||||||||||
| (in thousands, except per share data) | Common Shares | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||
| Number | Amount | Number | Amount | |||||||||||||||||||||||
Balance at November 27, 2021 | 51,776 | $ | 25,888 | $ | 233,727 | $ | 1,272,697 | $ | (482) | (18,476) | $ | (372,572) | $ | 1,159,258 | ||||||||||||
| Stock-based compensation | — | — | 4,157 | — | — | 1 | 23 | 4,180 | ||||||||||||||||||
| Issuance of stock, net | — | — | 275 | — | — | 31 | 645 | 920 | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (601) | (40,495) | (40,495) | ||||||||||||||||||
Common stock dividends; $0.18 per share | — | — | — | (6,060) | — | — | — | (6,060) | ||||||||||||||||||
| Total comprehensive income | — | — | — | — | 9 | — | — | 9 | ||||||||||||||||||
| Net income | — | — | — | 91,175 | — | — | — | 91,175 | ||||||||||||||||||
Balance at February 26, 2022 | 51,776 | $ | 25,888 | $ | 238,159 | $ | 1,357,812 | $ | (473) | (19,045) | $ | (412,399) | $ | 1,208,987 | ||||||||||||
| Three Months Ended February 27, 2021 | ||||||||||||||||||||||||||
| (in thousands, except per share data) | Common Shares | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||
| Number | Amount | Number | Amount | |||||||||||||||||||||||
Balance at November 28, 2020 | 51,776 | $ | 25,888 | $ | 204,551 | $ | 966,945 | $ | (517) | (18,275) | $ | (325,309) | $ | 871,558 | ||||||||||||
| Stock-based compensation | — | — | 4,622 | — | — | 1 | 5 | 4,627 | ||||||||||||||||||
| Issuance of stock, net | — | — | 554 | — | — | 58 | 1,045 | 1,599 | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (9) | (503) | (503) | ||||||||||||||||||
Common stock dividends; $0.12 per share | — | — | — | (3,993) | — | — | — | (3,993) | ||||||||||||||||||
| Total comprehensive income | — | — | — | — | 8 | — | — | 8 | ||||||||||||||||||
| Net income | — | — | — | 69,068 | — | — | — | 69,068 | ||||||||||||||||||
Balance at February 27, 2021 | 51,776 | $ | 25,888 | $ | 209,727 | $ | 1,032,020 | $ | (509) | (18,225) | $ | (324,762) | $ | 942,364 | ||||||||||||
| Six Months Ended February 26, 2022 | ||||||||||||||||||||||||||
| (in thousands, except per share data) | Common Shares | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||
| Number | Amount | Number | Amount | |||||||||||||||||||||||
| Balances at August 28, 2021 | 51,776 | $ | 25,888 | $ | 218,490 | $ | 1,172,996 | $ | (491) | (18,713) | $ | (359,940) | $ | 1,056,943 | ||||||||||||
| Stock-based compensation | — | — | 6,859 | — | — | 1 | 32 | 6,891 | ||||||||||||||||||
| Issuance of stock for acquisition | — | — | 14,709 | — | — | 379 | 7,291 | 22,000 | ||||||||||||||||||
| Issuance of stock, net | — | — | (1,899) | — | — | 225 | 4,436 | 2,537 | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (937) | (64,218) | (64,218) | ||||||||||||||||||
Common stock dividends; $0.18 per share | — | — | — | (6,060) | — | — | — | (6,060) | ||||||||||||||||||
| Other | — | — | — | 71 | — | — | — | 71 | ||||||||||||||||||
| Total comprehensive income | — | — | — | — | 18 | — | — | 18 | ||||||||||||||||||
| Net income | — | — | — | 190,805 | — | — | — | 190,805 | ||||||||||||||||||
| Balances at February 26, 2022 | 51,776 | $ | 25,888 | $ | 238,159 | $ | 1,357,812 | $ | (473) | (19,045) | $ | (412,399) | $ | 1,208,987 | ||||||||||||
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| Six Months Ended February 27, 2021 | ||||||||||||||||||||||||||
| (in thousands, except per share data) | Common Shares | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||
| Number | Amount | Number | Amount | |||||||||||||||||||||||
| Balances at August 29, 2020 | 51,776 | $ | 25,888 | $ | 203,791 | $ | 913,610 | $ | (526) | (18,133) | $ | (315,297) | $ | 827,466 | ||||||||||||
| Stock-based compensation | — | — | 6,968 | — | — | 1 | 13 | 6,981 | ||||||||||||||||||
| Issuance of stock, net | — | — | (1,032) | — | — | 149 | 2,631 | 1,599 | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (242) | (12,109) | (12,109) | ||||||||||||||||||
Common stock dividends; $0.24 per share | — | — | — | (8,081) | — | — | — | (8,081) | ||||||||||||||||||
| Total comprehensive income | — | — | — | — | 17 | — | — | 17 | ||||||||||||||||||
| Net income | — | — | — | 126,491 | — | — | — | 126,491 | ||||||||||||||||||
| Balances at February 27, 2021 | 51,776 | $ | 25,888 | $ | 209,727 | $ | 1,032,020 | $ | (509) | (18,225) | $ | (324,762) | $ | 942,364 | ||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Winnebago Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(All amounts in tables are in thousands, except share and per share data, unless otherwise designated)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Winnebago Industries, Inc. and its wholly owned subsidiaries. Significant intercompany account balances and transactions have been eliminated.
The use of the terms "Winnebago Industries," "Winnebago," "we," "our," and "us" in this Quarterly Report on Form 10-Q, unless the context otherwise requires, refers to Winnebago Industries, Inc. and its wholly owned subsidiaries.
The interim unaudited consolidated financial statements included herein are prepared pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). The information furnished in these consolidated financial statements includes normal recurring adjustments, unless noted otherwise in the Notes to Consolidated Financial Statements, and reflects all adjustments that are, in management’s opinion, necessary for a fair presentation of such financial statements. The consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). GAAP requires us to make estimates and assumptions that affect amounts reported. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations.
The consolidated financial statements included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended August 28, 2021 filed with the SEC. Interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year ending August 27, 2022.
Subsequent Events
In preparing the accompanying unaudited consolidated financial statements, we have evaluated subsequent events for potential recognition and disclosure through the date of this filing noting no material subsequent events except for the item noted below:
On March 16, 2022, our Board of Directors declared a quarterly cash dividend of $0.18 per share payable on April 27, 2022 to common shareholders of record at the close of business on April 13, 2022.
CARES Act
The Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law on March 27, 2020 to help alleviate the impact of the COVID-19 pandemic in the U.S. We took advantage of the employer payroll tax deferral offered by the CARES Act, which allowed us to defer the payment of employer payroll taxes for the period from March 27, 2020 to December 31, 2020. The deferred employer payroll tax liability paid in the first six months of Fiscal 2022 was $8.0 million and the liability left to pay as of February 26, 2022 was $8.2 million, which will be paid in December 2022. We also took advantage of a tax credit granted to companies under the CARES Act who continued to pay their employees when operations were fully or partially suspended. The refundable tax credit available through the end of the third quarter of Fiscal 2020 reflected in cost of goods sold on the Consolidated Statements of Income and Comprehensive Income was approximately $4.0 million. The entire amount is expected to be received during calendar year 2022. As of February 26, 2022, $2.3 million remains outstanding within other current assets on the Consolidated Balance Sheets.
Recently Adopted Accounting Pronouncements
Accounting Standards Update ("ASU") Topic 740, Income Taxes: Simplifying the Accounting for Income Taxes, was adopted in the first quarter of Fiscal 2022. The new standard eliminates certain exceptions to Topic 740's general principles, improves consistent application and simplifies its application. We adopted the new guidance in the first quarter of Fiscal 2022, and there was not a material impact to our financial condition, results of operations or disclosures.
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) which reduces the number of models used to account for convertible instruments, amends diluted earnings per share ("EPS") calculations for convertible instruments, and amends the requirements for a contract (or embedded derivative) that is potentially settled in an entity's own shares to be classified in equity. Certain disclosure requirements were also added to increase transparency and decision-usefulness regarding a convertible instrument's terms and features. Additionally, the if-converted method for including convertible instruments must be used in diluted EPS as opposed to the treasury stock method. The new guidance is effective for annual reporting periods beginning after December 15, 2021, which is our Fiscal 2023. Early adoption is permitted using either a
9
modified retrospective or full retrospective approach. We expect to adopt the new guidance in the first quarter of Fiscal 2023 and have not yet evaluated the impact the adoption of this guidance will have on our financial condition, results of operations or disclosures; however, the new guidance is expected to change our diluted EPS reporting.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by this guidance apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. This guidance is not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The guidance can be applied immediately through December 31, 2022. We will adopt this standard when LIBOR is discontinued and do not expect a material impact to our financial condition, results of operations or disclosures based on the current debt portfolio and capital structure.
Note 2. Business Combinations
On August 31, 2021, we purchased 100% of the equity interests of Barletta Boat Company, LLC and Three Limes, LLC (collectively, "Barletta"), a manufacturer of high-quality, premium pontoon boats that are sold through a network of independent authorized dealers.
The acquisition of Barletta resulted in a newly created Marine reportable segment that includes the Barletta and Chris-Craft operating segments.
We acquired Barletta for a purchase price of $286.3 million, including cash payments of $240.1 million, $25.0 million in common stock issued to the sellers (subject to a discount noted below), and contingent consideration from earnout provisions. The common stock fair value included in the purchase price reflects a 12% discount, due to the lack of marketability as these are unregistered shares that have a one-year lockup restriction, which reduced the value of the common stock to $22.0 million. The contingent consideration includes both a potential stock payout as well as a potential cash payment based on achievement of certain financial performance metrics over the next few years. The maximum payout under the earnout is $50.0 million in cash and $15.0 million in stock if all metrics are achieved. The fair value of the earnout as of August 31, 2021 was $24.2 million. The fair value of the earnout as of February 26, 2022 was $37.1 million, of which $13.8 million is included in other current liabilities and $23.3 million is included in other long-term liabilities on the Consolidated Balance Sheets.
The total purchase price was allocated to the acquired net tangible and intangible assets of Barletta, based on their preliminary fair values at the date of the acquisition. We expect to finalize the allocation of the purchase price when our valuation of the acquired intangible assets, goodwill, and tax accounts is complete.
The following table summarizes the preliminary fair values assigned to the Barletta net assets acquired as of the date of acquisition:
| (in thousands) | August 31, 2021 | ||||
| Cash | $ | 11,903 | |||
| Other current assets | 24,564 | ||||
| Property, plant, and equipment | 17,250 | ||||
| Goodwill | 136,118 | ||||
| Other intangible assets | 111,400 | ||||
| Total assets acquired | 301,235 | ||||
| Accounts payable | 7,181 | ||||
| Product warranties | 4,656 | ||||
| Other current liabilities | 3,146 | ||||
| Total liabilities assumed | 14,983 | ||||
| Total purchase price | $ | 286,252 | |||
Goodwill from the Barletta acquisition is recognized in our newly created Marine segment. We expect that the full amount of goodwill will be deductible for tax purposes.
The intangible assets acquired include a trade name, dealer network, and backlog. The trade name has an indefinite life, while the backlog and dealer network will be amortized on a straight line basis over 10 months and 12 years, respectively.
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Total transaction costs related to the Barletta acquisition were $3.1 million, of which $2.4 million were expensed during the first quarter of Fiscal 2022 and $0.7 million were expensed during the fourth quarter of Fiscal 2021. Transaction costs are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income and Comprehensive Income.
Pro forma results of operations for this acquisition have not been presented as they were immaterial to the reported results.
Note 3. Business Segments
We have seven operating segments: 1) Grand Design towables, 2) Winnebago towables, 3) Winnebago motorhomes, 4) Newmar motorhomes, 5) Chris-Craft marine, 6) Barletta marine and 7) Winnebago specialty vehicles. Financial performance is evaluated based on each operating segment's Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), as defined below, which excludes certain corporate administration expenses and non-operating income and expense.
The acquisition of Barletta resulted in a newly created Marine reportable segment effective for the first quarter of Fiscal 2022. The segment consists of Barletta and our existing Chris-Craft operating segment. Prior year amounts for Chris-Craft have been reclassified from Corporate / All Other category to the Marine segment.
Our three reportable segments are: Towable (an aggregation of the Grand Design towables and the Winnebago towables operating segments); Motorhome (an aggregation of the Winnebago motorhomes and Newmar motorhomes operating segments); and Marine (an aggregation of the Chris Craft marine and Barletta marine operating segments). Towable is comprised of non-motorized products that are generally towed by another vehicle, along with other related manufactured products and services. Motorhome is comprised of products that include a motorized chassis, along with other related manufactured products and services. Marine is comprised of products that include boats, along with other manufactured products and services.
The Corporate / All Other category includes the Winnebago specialty vehicles operating segment as well as certain corporate administration expenses related to the oversight of the enterprise, such as corporate leadership and administration costs.
Identifiable assets of the reportable segments exclude general corporate assets, which principally consist of cash and cash equivalents and certain deferred tax balances. The general corporate assets are included in the Corporate / All Other category.
Our Chief Executive Officer (the Chief Operating Decision Maker ("CODM")) regularly reviews consolidated financial results in their entirety and operating segment financial information through Adjusted EBITDA and has ultimate responsibility for enterprise decisions. Our CODM is responsible for allocating resources and assessing performance of the consolidated enterprise, reportable segments and between operating segments. Management of each operating segment has responsibility for operating decisions, allocating resources and assessing performance within their respective operating segment. The accounting policies of all reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 28, 2021.
We monitor and evaluate operating performance of our reportable segments based on Adjusted EBITDA. We believe disclosing Adjusted EBITDA is useful to securities analysts, investors and other interested parties when evaluating companies in our industries. 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 pretax adjustments made in order to present comparable results period over period. Examples of items excluded from Adjusted EBITDA include acquisition-related costs, litigation reserves, restructuring expenses, gain or loss on sale of property, plant and equipment, contingent consideration fair value adjustment, and non-operating income or loss.
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Financial information by reportable segment is as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in thousands) | February 26, 2022 | February 27, 2021 | February 26, 2022 | February 27, 2021 | |||||||||||||||||||
| Net Revenues | |||||||||||||||||||||||
| Towable | $ | 646,601 | $ | 439,284 | $ | 1,297,625 | $ | 894,185 | |||||||||||||||
| Motorhome | 417,565 | 382,575 | 839,044 | 704,964 | |||||||||||||||||||
| Marine | 97,309 | 14,463 | 176,627 | 26,357 | |||||||||||||||||||
| Corporate / All Other | 3,256 | 3,564 | 7,175 | 7,511 | |||||||||||||||||||
| Consolidated | $ | 1,164,731 | $ | 839,886 | $ | 2,320,471 | $ | 1,633,017 | |||||||||||||||
| Adjusted EBITDA | |||||||||||||||||||||||
| Towable | $ | 100,573 | $ | 62,366 | $ | 212,650 | $ | 125,509 | |||||||||||||||
| Motorhome | 46,095 | 50,969 | 96,248 | 81,312 | |||||||||||||||||||
| Marine | 12,953 | 1,024 | 23,523 | 1,878 | |||||||||||||||||||
| Corporate / All Other | (8,892) | (6,394) | (14,460) | (11,441) | |||||||||||||||||||
| Consolidated | $ | 150,729 | $ | 107,965 | $ | 317,961 | $ | 197,258 | |||||||||||||||
| Capital Expenditures | |||||||||||||||||||||||
| Towable | $ | 10,181 | $ | 2,714 | $ | 21,339 | $ | 6,851 | |||||||||||||||
| Motorhome | 7,875 | 3,268 | 15,626 | 7,271 | |||||||||||||||||||
| Marine | 1,912 | 249 | 2,540 | 798 | |||||||||||||||||||
| Corporate / All Other | 243 | — | 3,921 | — | |||||||||||||||||||
| Consolidated | $ | 20,211 | $ | 6,231 | $ | 43,426 | $ | 14,920 | |||||||||||||||
| (in thousands) | February 26, 2022 | August 28, 2021 | |||||||||
| Assets | |||||||||||
| Towable | $ | 850,244 | $ | 790,257 | |||||||
| Motorhome | 910,496 | 728,060 | |||||||||
| Marine | 402,395 | 102,901 | |||||||||
| Corporate / All Other | 146,298 | 441,349 | |||||||||
| Consolidated | $ | 2,309,433 | $ | 2,062,567 | |||||||
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Reconciliation of net income to consolidated Adjusted EBITDA is as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in thousands) | February 26, 2022 | February 27, 2021 | February 26, 2022 | February 27, 2021 | |||||||||||||||||||
| Net income | $ | 91,175 | $ | 69,068 | $ | 190,805 | $ | 126,491 | |||||||||||||||
| Interest expense, net | 10,325 | 10,052 | 20,567 | 19,993 | |||||||||||||||||||
| Provision for income taxes | 28,760 | 21,166 | 58,901 | 38,723 | |||||||||||||||||||
| Depreciation | 5,461 | 4,399 | 10,767 | 8,559 | |||||||||||||||||||
| Amortization | 8,015 | 3,591 | 16,187 | 7,181 | |||||||||||||||||||
| EBITDA | 143,736 | 108,276 | 297,227 | 200,947 | |||||||||||||||||||
| Acquisition-related costs | 486 | — | 3,870 | — | |||||||||||||||||||
| Litigation reserves | — | — | 4,000 | — | |||||||||||||||||||
| Restructuring expenses | — | — | — | 93 | |||||||||||||||||||
| Gain on sale of property, plant and equipment | — | — | — | (3,565) | |||||||||||||||||||
| Contingent consideration fair value adjustment | 6,517 | — | 12,887 | — | |||||||||||||||||||
| Non-operating income | (10) | (311) | (23) | (217) | |||||||||||||||||||
| Adjusted EBITDA | $ | 150,729 | $ | 107,965 | $ | 317,961 | $ | 197,258 | |||||||||||||||
Note 4. Investments and Fair Value Measurements
In determining the fair value of financial assets and liabilities, we utilize market data or other assumptions that we believe market participants would use in pricing the asset or liability in the principal or most advantageous market and adjust for non-performance and/or other risks associated with us as well as counterparties, as appropriate. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
Level 1 — Unadjusted quoted prices which are available in active markets for identical assets or liabilities accessible at the measurement date.
Level 2 — Inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 — Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
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Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis are as follows:
| Fair Value at | Fair Value Hierarchy | ||||||||||||||||||||||
| (in thousands) | February 26, 2022 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets that fund deferred compensation | |||||||||||||||||||||||
| Domestic equity funds | $ | 1,265 | $ | 1,265 | $ | — | $ | — | |||||||||||||||
| International equity funds | 68 | 68 | — | — | |||||||||||||||||||
| Fixed income funds | 184 | 184 | — | — | |||||||||||||||||||
| Total assets at fair value | $ | 1,517 | $ | 1,517 | $ | — | $ | — | |||||||||||||||
| Contingent consideration | |||||||||||||||||||||||
| Earnout liability | $ | 37,078 | $ | — | $ | — | $ | 37,078 | |||||||||||||||
| Total liabilities at fair value | $ | 37,078 | $ | — | $ | — | $ | 37,078 | |||||||||||||||
| Fair Value at | Fair Value Hierarchy | ||||||||||||||||||||||
| (in thousands) | August 28, 2021 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets that fund deferred compensation | |||||||||||||||||||||||
| Domestic equity funds | $ | 940 | $ | 940 | $ | — | $ | — | |||||||||||||||
| International equity funds | 41 | 41 | — | — | |||||||||||||||||||
| Fixed income funds | 46 | 46 | — | — | |||||||||||||||||||
| Total assets at fair value | $ | 1,027 | $ | 1,027 | $ | — | $ | — | |||||||||||||||
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, used to fund the Executive Share Option Plan and the Executive Deferred Compensation Plan, are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available. Refer to Note 11 of the Notes to the Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 28, 2021 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 on the Consolidated Balance Sheets. The remaining assets are classified as non-current and are included in other assets on the Consolidated Balance Sheets.
Contingent Consideration
Contingent consideration represents the earnout liability related to the Barletta acquisition and is valued using a probability-weighted scenario analysis of projected EBITDA and gross profit results and discounted at a risk-free rate. The contingent consideration is classified as Level 3. Actual EBITDA and gross profit results may differ significantly from those used in the estimate above, which may affect future payments. Changes in future payments will be reflected in future operating results as they occur.
The fair value of the earnout liability that will be settled within a year is included in other current liabilities on the Consolidated Balance Sheets. The remaining earnout liability is included in other long-term liabilities on the Consolidated Balance Sheets.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain financial instruments are measured at fair value on a nonrecurring basis. These assets primarily include goodwill, intangible assets, property, plant and equipment, and right-of-use lease assets. These assets were originally recognized at amounts equal to the fair value determined at date of acquisition or purchase. If certain triggering events occur, or if an annual impairment test is required, we will evaluate the non-financial asset for impairment. If an impairment has occurred, the asset will be written down to its current estimated fair value. No impairments were recorded for non-financial assets in the three or six months ended February 26, 2022 or February 27, 2021.
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Assets and Liabilities Not Measured at Fair Value
Certain financial instruments are not measured at fair value but are recorded at carrying amounts approximating fair value based on their short-term nature. These financial instruments include cash and cash equivalents, receivables, accounts payable, other payables, and long-term debt. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy. The fair value of our long-term debt was determined using current quoted prices in active markets for our publicly traded debt obligations, which is classified as Level 1 in the fair value hierarchy. See Note 9 for the fair value of our long-term debt.
Note 5. Inventories
Inventories consist of the following:
| (in thousands) | February 26, 2022 | August 28, 2021 | |||||||||
| Finished goods | $ | 14,438 | $ | 12,243 | |||||||
| Work-in-process | 187,826 | 184,611 | |||||||||
| Raw materials | 308,926 | 183,583 | |||||||||
| Total | 511,190 | 380,437 | |||||||||
| Less: Excess of FIFO over LIFO cost | 41,736 | 38,964 | |||||||||
| Inventories, net | $ | 469,454 | $ | 341,473 | |||||||
Inventory valuation methods consist of the following:
| (in thousands) | February 26, 2022 | August 28, 2021 | |||||||||
| LIFO basis | $ | 202,162 | $ | 139,544 | |||||||
| First-in, first-out basis | 309,028 | 240,893 | |||||||||
| Total | $ | 511,190 | $ | 380,437 | |||||||
The above inventory value, 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) | February 26, 2022 | August 28, 2021 | |||||||||
| Land | $ | 10,697 | $ | 9,111 | |||||||
| Buildings and building improvements | 168,554 | 147,629 | |||||||||
| Machinery and equipment | 128,707 | 121,911 | |||||||||
| Software | 36,259 | 36,815 | |||||||||
| Transportation | 5,977 | 5,335 | |||||||||
| Construction in progress | 58,075 | 31,137 | |||||||||
| Property, plant, and equipment, gross | 408,269 | 351,938 | |||||||||
| Less: Accumulated depreciation | 169,235 | 160,511 | |||||||||
| Property, plant, and equipment, net | $ | 239,034 | $ | 191,427 | |||||||
Depreciation expense was $5.5 million and $4.4 million for the three months ended February 26, 2022 and February 27, 2021, respectively; and $10.8 million and $8.6 million for the six months ended February 26, 2022 and February 27, 2021, respectively.
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Note 7. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill by reportable segment, with no accumulated impairment losses, for the six months ended February 26, 2022 and February 27, 2021 are as follows:
| (in thousands) | Towable | Motorhome | Marine | Total | |||||||||||||||||||
Balances at August 29, 2020 and February 27, 2021(1) | $ | 244,684 | $ | 73,127 | $ | 30,247 | $ | 348,058 | |||||||||||||||
Balances at August 28, 2021 | $ | 244,684 | $ | 73,127 | $ | 30,247 | $ | 348,058 | |||||||||||||||
Acquisition of Barletta(2) | — | — | 136,118 | 136,118 | |||||||||||||||||||
Balances at February 26, 2022 | $ | 244,684 | $ | 73,127 | $ | 166,365 | $ | 484,176 | |||||||||||||||
(1) There was no activity in the six months ended February 27, 2021.
(2) The change in marine activity is related to the acquisition of Barletta that occurred on August 31, 2021. See Note 2 to the Consolidated Financial Statements included in Item 1 of Part I of this quarterly report on Form 10-Q.
Other intangible assets, net of accumulated amortization, consist of the following:
| February 26, 2022 | |||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||||||
| Trade names | $ | 352,250 | $ | — | $ | 352,250 | |||||||||||
| Dealer networks | 179,981 | $ | 53,084 | 126,897 | |||||||||||||
| Backlog | 42,327 | 36,727 | 5,600 | ||||||||||||||
| Non-compete agreements | 6,647 | 5,775 | 872 | ||||||||||||||
| Other intangible assets | $ | 581,205 | $ | 95,586 | $ | 485,619 | |||||||||||
| August 28, 2021 | |||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||||||
| Trade names | $ | 275,250 | $ | — | $ | 275,250 | |||||||||||
| Dealer networks | 159,581 | 45,652 | 113,929 | ||||||||||||||
| Backlog | 28,327 | 28,327 | — | ||||||||||||||
| Non-compete agreements | 6,647 | 5,419 | 1,228 | ||||||||||||||
| Other intangible assets | $ | 469,805 | $ | 79,398 | $ | 390,407 | |||||||||||
The weighted average remaining amortization period for intangible assets as of February 26, 2022 was approximately 9 years.
Estimated future amortization expense related to finite-lived intangible assets is as follows:
| (in thousands) | Amount | ||||
Remainder of Fiscal 2022 | $ | 13,232 | |||
| Fiscal 2023 | 15,226 | ||||
| Fiscal 2024 | 15,124 | ||||
| Fiscal 2025 | 14,919 | ||||
| Fiscal 2026 | 14,865 | ||||
| Fiscal 2027 | 14,865 | ||||
| Thereafter | 45,138 | ||||
| Total amortization expense remaining | $ | 133,369 | |||
Note 8. Product Warranties
We provide certain service and warranty on our products. From time to time, we also voluntarily incur costs for certain warranty-type expenses occurring after the normal warranty period expires to help protect the reputation of our products and maintain the goodwill of our customers. Estimated costs related to product warranty are accrued at the time of sale and are based upon
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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 products, we also occasionally incur costs as a result of additional service actions not covered by warranties, including product recalls and customer satisfaction actions. Although we estimate and reserve for the cost of these service actions when probable and estimable, there can be no assurance that expense levels will remain at current levels or such reserves will continue to be adequate.
Changes in the product warranty liability are as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in thousands) | February 26, 2022 | February 27, 2021 | February 26, 2022 | February 27, 2021 | |||||||||||||||||||
| Balance at beginning of period | $ | 102,424 | $ | 70,502 | $ | 91,222 | $ | 64,031 | |||||||||||||||
Business acquisition(1) | — | — | 4,656 | — | |||||||||||||||||||
| Provision | 31,163 | 20,227 | 57,222 | 41,930 | |||||||||||||||||||
| Claims paid | (19,769) | (14,689) | (39,282) | (29,921) | |||||||||||||||||||
| Balance at end of period | $ | 113,818 | $ | 76,040 | $ | 113,818 | $ | 76,040 | |||||||||||||||
(1) Relates to the acquisition of Barletta on August 31, 2021. See Note 2 to the Consolidated Financial Statements in Item 1 of Part I of this quarterly report on Form 10-Q for additional acquisition information.
Note 9. Long-Term Debt
Long-term debt consists of the following:
| (in thousands) | February 26, 2022 | August 28, 2021 | |||||||||
| ABL Credit Facility | $ | — | $ | — | |||||||
| Senior Secured Notes | 300,000 | 300,000 | |||||||||
| Convertible Notes | 300,000 | 300,000 | |||||||||
| Long-term debt, gross | 600,000 | 600,000 | |||||||||
| Convertible Notes unamortized interest discount | (53,040) | (60,366) | |||||||||
| Debt issuance costs, net | (9,970) | (11,075) | |||||||||
| Long-term debt, net | $ | 536,990 | $ | 528,559 | |||||||
Credit Agreements
On July 8, 2020, we closed our private offering (the “Senior Secured Notes Offering”) of $300.0 million aggregate principal amount of 6.25% Senior Secured Notes due 2028 (the “Senior Secured Notes”). The Senior Secured Notes were issued in accordance with an Indenture dated as of July 8, 2020 (the “Indenture”). The Senior Secured Notes will mature on July 15, 2028 unless earlier redeemed or repurchased. Interest on the Senior Secured Notes accrues starting July 8, 2020 and is payable semi-annually in arrears on January 15 and July 15 of each year, which began on January 15, 2021.
Debt issuance costs incurred and capitalized are amortized on a straight-line basis over the term of the associated debt agreement. If early principal payments are made on the Senior Secured Notes, a proportional amount of the unamortized debt issuance costs is expensed. As part of the Senior Secured Notes Offering, we capitalized $7.5 million in debt issuance costs that will be amortized over the eight-year term of the agreement.
On November 8, 2016, we entered into an asset-based revolving credit agreement ("ABL") and a loan agreement ("Term Loan") with JPMorgan Chase Bank, N.A. ("JPMorgan Chase"), as administrative agent and certain lenders from time to time party thereto. Under the ABL, we have a $192.5 million credit facility that matures on October 22, 2024 (subject to certain factors which may accelerate the maturity date) 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 $19.3 million. We pay a commitment fee of 0.25% on the average daily amount of the facility available, but unused. We can elect to base the interest rate on various rates plus specific spreads depending on the amount of borrowings outstanding. If drawn, we would pay interest on ABL borrowings at a floating rate based upon a spread between 1.25% and 1.75% plus LIBOR, depending on the usage of the facility during the most recent quarter. Based on current usage, we would pay LIBOR plus 1.25%.
Refer to Note 9 of the Notes to the Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 28, 2021 for additional information regarding these credit agreements.
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Convertible Notes
On November 1, 2019, we issued $300.0 million in aggregate principal amount of 1.5% unsecured convertible senior notes due 2025 (“Convertible Notes”). The net proceeds from the issuance of the Convertible Notes, after deducting the initial purchasers' transaction fees and offering expense payable by us, were approximately $290.2 million. The Convertible Notes bear interest at the annual rate of 1.5%, payable on April 1 and October 1 of each year, beginning on April 1, 2020, and will mature on April 1, 2025, unless earlier converted or repurchased by us.
The Convertible Notes will be convertible into cash, shares of our common stock or a combination thereof, at the election of us, at an initial conversion rate of 15.6906 shares of common stock per $1 thousand principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $63.73 per share, as adjusted pursuant to the terms of the indenture governing the Convertible Notes. The Convertible Notes may be converted at any time on or after October 1, 2024, until the close of business on the second scheduled trading day immediately preceding the maturity date.
It is our current intent to settle all conversions of the Convertible Notes in cash. Our ability to cash settle may be limited depending on the stock price at the time of conversion.
On October 29, 2019 and October 30, 2019, in connection with the offering of the Convertible Notes, we entered into privately negotiated convertible note hedge transactions (collectively, the “Hedge Transactions”) that cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that initially underlie the Convertible Notes.
On October 29, 2019 and October 30, 2019, we also entered into privately negotiated warrant transactions (collectively, the “Warrant Transactions” and, together with the Hedge Transactions, the “Call Spread Transactions”), whereby we sold warrants at a higher strike price relating to the same number of shares of our common stock that initially underlie the Convertible Notes, subject to customary anti-dilution adjustments.
The Hedge Transactions and the Warrant Transactions are separate transactions, in each case, and are not part of the terms of the Convertible Notes and will not affect any holder’s rights under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Call Spread Transactions.
Refer to Note 9 of the Notes to the Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 28, 2021 for additional information regarding the Convertible Notes and the Call Spread Transactions.
Accounting Treatment of the Convertible Notes and Related Hedge Transactions and Warrant Transactions
The Call Spread Transactions were classified as equity. We bifurcated the proceeds from the offering of the Convertible Notes between liability and equity components. On the date of issuance, the liability and equity components were calculated to be approximately $215.0 million and $85.0 million, respectively. The initial $215.0 million liability component was determined based on the fair value of similar debt instruments excluding the conversion feature assuming a hypothetical interest rate of 8%. The initial $85.0 million ($64.1 million net of tax) equity component represents the difference between the fair value of the initial $215.0 million in debt and the $300.0 million of gross proceeds. The related initial debt discount of $85.0 million is being amortized over the life of the Convertible Notes as non-cash interest expense using the effective interest method.
In connection with the above-noted transactions, we incurred approximately $9.8 million of offering-related costs. These offering fees were allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt and equity issuance costs, respectively. We allocated $7.0 million of debt issuance costs to the liability component, which were capitalized as deferred financing costs within long-term debt on the Consolidated Balance Sheets. These costs are being amortized as interest expense over the term of the debt using the effective interest method. The remaining $2.8 million of transaction costs allocated to the equity component were recorded as a reduction of the equity component.
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Fair Value and Future Maturities
As of February 26, 2022 and August 28, 2021, the fair value of long-term debt, gross, was $663.5 million and $726.6 million, respectively.
Aggregate contractual maturities of debt in future fiscal years are as follows:
| (in thousands) | Amount | ||||
Remainder of Fiscal 2022 | $ | — | |||
| Fiscal 2023 | — | ||||
| Fiscal 2024 | — | ||||
| Fiscal 2025 | 300,000 | ||||
| Fiscal 2026 | — | ||||
| Fiscal 2027 | — | ||||
| Thereafter | 300,000 | ||||
| Total Senior Secured Notes and Convertible Notes | $ | 600,000 | |||
Note 10. Employee and Retiree Benefits
Deferred compensation liabilities are as follows:
| (in thousands) | February 26, 2022 | August 28, 2021 | |||||||||
| Non-qualified deferred compensation | $ | 9,015 | $ | 9,731 | |||||||
| Supplemental executive retirement plan | 1,623 | 1,615 | |||||||||
| Executive deferred compensation plan | 1,520 | 1,029 | |||||||||
| Total deferred compensation benefits | 12,158 | 12,375 | |||||||||
Less current portion(1) | 2,733 | 2,825 | |||||||||
| Deferred compensation benefits, net of current portion | $ | 9,425 | $ | 9,550 | |||||||
(1) Included in accrued compensation on the Consolidated Balance Sheets.
Note 11. Contingent Liabilities and Commitments
Repurchase Commitments
Generally, manufacturers in the same industries as us 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 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. The total contingent liability on all of our repurchase agreements was approximately $1,452.6 million and $727.7 million at February 26, 2022 and August 28, 2021, respectively.
Repurchased sales are not recorded as a revenue transaction, rather the net difference between the original repurchase price and the resale price is 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-end 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, an associated loss reserve is established which is included in accrued expenses: other on the Consolidated Balance Sheets. Our repurchase accrual was $1.2 million and $0.9 million at February 26, 2022 and August 28, 2021, respectively. Repurchase risk is affected by the credit worthiness of our dealer network. 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.
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There was no material activity related to repurchase agreements during the six months ended February 26, 2022 and February 27, 2021.
Litigation
We are involved in various legal proceedings which are considered ordinary and routine litigation incidental to the 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, the possibility exists 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 our view of these matters may change in the future.
Note 12. Revenue
All operating revenue is generated from contracts with customers. Our primary revenue source is generated through the sale of manufactured non-motorized towable units, motorized units and marine units to our independent dealer network (our customers). The following table disaggregates revenue by reportable segment and product category:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in thousands) | February 26, 2022 | February 27, 2021 | February 26, 2022 | February 27, 2021 | |||||||||||||||||||
| Net Revenues | |||||||||||||||||||||||
| Towable | |||||||||||||||||||||||
| Fifth Wheel | $ | 281,147 | $ | 226,942 | $ | 606,909 | $ | 467,390 | |||||||||||||||
| Travel Trailer | 356,750 | 207,042 | 672,164 | 415,638 | |||||||||||||||||||
Other(1) | 8,704 | 5,300 | 18,552 | 11,157 | |||||||||||||||||||
| Total Towable | 646,601 | 439,284 | 1,297,625 | 894,185 | |||||||||||||||||||
| Motorhome | — | — | |||||||||||||||||||||
| Class A | 164,999 | 157,744 | 360,296 | 291,910 | |||||||||||||||||||
| Class B | 167,691 | 137,170 | 312,702 | 246,457 | |||||||||||||||||||
Class C and Other(1) | 84,875 | 87,661 | 166,046 | 166,597 | |||||||||||||||||||
| Total Motorhome | 417,565 | 382,575 | 839,044 | 704,964 | |||||||||||||||||||
| Marine | 97,309 | 14,463 | 176,627 | 26,357 | |||||||||||||||||||
Corporate / All Other(2) | 3,256 | 3,564 | 7,175 | 7,511 | |||||||||||||||||||
| Consolidated Net Revenues | $ | 1,164,731 | $ | 839,886 | $ | 2,320,471 | $ | 1,633,017 | |||||||||||||||
(1) Relates to parts, accessories, and services.
(2) Relates to specialty vehicle units, parts, accessories, and services.
We do not have material contract assets or liabilities. Allowances for uncollectible receivables are established based on historical collection trends, write-off history, consideration of current conditions and expectations for future economic conditions.
Concentration of Risk
No single dealer organization accounted for more than 10% of net revenue for the six months ended February 26, 2022 or February 27, 2021.
Note 13. 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, restricted share units, and other equity compensation to key employees and to non-employee directors. The 2019 Plan replaces the 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 awarded and issued under the 2019 Plan is 4.1 million shares, 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, awards under the 2014 Plan and the 2004 Plan, respectively, that were 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.
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Stock-based compensation expense was $4.2 million and $4.6 million during the three months ended February 26, 2022 and February 27, 2021, respectively; and $6.9 million and $7.0 million during the six months ended February 26, 2022 and February 27, 2021, respectively. Compensation expense is recognized over the requisite service or performance period of the award.
Note 14. Income Taxes
Our effective tax rate was 24.0% and 23.5% for the three months ended February 26, 2022 and February 27, 2021, respectively, and 23.6% and 23.4% for the six months ended February 26, 2022 and February 27, 2021, respectively. The increase in tax rate for the three and six months ended February 26, 2022 compared to the three and six months ended February 27, 2021 was driven primarily by the impact of both consistent tax credits year-over-year over increased income in the current year and a net unfavorable expense in the current year related to stock compensation.
We file a U.S. Federal tax return, as well as returns in various international and state jurisdictions. As of February 26, 2022, our Federal returns from Fiscal 2018 to present are subject to review by the Internal Revenue Service. With limited exceptions, state returns from Fiscal 2017 to present continue to be subject to review by state taxing jurisdictions. We are currently under review by certain U.S. state tax authorities for Fiscal 2016 through Fiscal 2019. We believe we have adequately reserved for our exposure to potential additional payments for uncertain tax positions in our liability for unrecognized tax benefits.
Note 15. Earnings Per Share
Basic and diluted earnings per share are calculated as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (in thousands, except per share data) | February 26, 2022 | February 27, 2021 | February 26, 2022 | February 27, 2021 | |||||||||||||||||||
| Net income | $ | 91,175 | $ | 69,068 | $ | 190,805 | $ | 126,491 | |||||||||||||||
| Weighted average common shares outstanding | 33,098 | 33,533 | 33,210 | 33,571 | |||||||||||||||||||
| Dilutive impact of stock compensation awards | 458 | 270 | 511 | 250 | |||||||||||||||||||
| Dilutive impact of convertible notes | 378 | 107 | 447 | — | |||||||||||||||||||
| Weighted average common shares outstanding, assuming dilution | 33,934 | 33,910 | 34,168 | 33,821 | |||||||||||||||||||
| Anti-dilutive securities excluded from weighted average common shares outstanding, assuming dilution | 40 | — | 112 | 53 | |||||||||||||||||||
| Basic earnings per common share | $ | 2.75 | $ | 2.06 | $ | 5.75 | $ | 3.77 | |||||||||||||||
| Diluted earnings per common share | $ | 2.69 | $ | 2.04 | $ | 5.58 | $ | 3.74 | |||||||||||||||
Under the treasury stock method, shares associated with certain anti-dilutive securities have been excluded from the diluted weighted average shares outstanding calculation because the exercise of those options would lead to a net reduction in common shares outstanding or anti-dilution.
Note 16. Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income ("AOCI") by component, net of tax, were:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| February 26, 2022 | February 27, 2021 | February 26, 2022 | February 27, 2021 | ||||||||||||||||||||
| (in thousands) | Defined Benefit Pension Items | Defined Benefit Pension Items | Defined Benefit Pension Items | Defined Benefit Pension Items | |||||||||||||||||||
| Balance at beginning of period | $ | (482) | $ | (517) | $ | (491) | $ | (526) | |||||||||||||||
| Amounts reclassified from AOCI | 9 | 8 | 18 | 17 | |||||||||||||||||||
| Net current-period OCI | 9 | 8 | 18 | 17 | |||||||||||||||||||
| Balance at end of period | $ | (473) | $ | (509) | $ | (473) | $ | (509) | |||||||||||||||
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Reclassifications out of AOCI, net of tax, were:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| (in thousands) | Location on Consolidated Statements of Income and Comprehensive Income | February 26, 2022 | February 27, 2021 | February 26, 2022 | February 27, 2021 | |||||||||||||||||||||
| Amortization of net actuarial loss | SG&A | $ | 9 | $ | 8 | $ | 18 | $ | 17 | |||||||||||||||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The terms "Winnebago," "we," "us," and "our," unless the context otherwise requires, refer to Winnebago Industries, Inc. and its wholly-owned subsidiaries.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude.
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended August 28, 2021 (including the information presented therein under Risk Factors), as well as our reports on Forms 10-Q and 8-K and other publicly available information. All amounts herein are unaudited. All amounts in tables are in thousands, except share and per share data, unless otherwise noted.
Overview
Winnebago Industries, Inc. is one of the leading North American manufacturers of recreation vehicles ("RV"s) and marine products with a diversified portfolio used primarily in leisure travel and outdoor recreational activities. We produce our motorhome units in Iowa and Indiana; our towable units in Indiana; and our marine units in Indiana and Florida. We distribute our RV and marine products primarily through independent dealers throughout the U.S. and Canada, who then retail the products to the end consumer. We also distribute our marine products internationally through independent dealers, who then retail the products to the end consumer.
Macroeconomic Events
In February 2022, the United States announced targeted economic sanctions on Russia in response to the military conflict in Ukraine. As described in Part I, Item 1A — Risk Factors, in the Annual Report on Form 10-K for the fiscal year ended August 28, 2021, our business may be sensitive to economic conditions such as the adverse impact of global tensions, which could impact input costs, consumer spending, and fuel prices. As our operations are primarily in North America, we have no direct exposure to Russia and Ukraine. However, we are actively monitoring the broader economic impact of the crisis, especially the potential impact of rising commodity and fuel prices, and the potential decreased demand for our products.
We continue to monitor guidance from international and domestic authorities, including federal, state and local public health authorities, regarding the COVID-19 pandemic and may take additional actions based on their requirements and recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. Overall, there has been strong retail demand by consumers of RVs as a safe travel option, and of marine products as a safe way to experience the outdoors, during the COVID-19 pandemic. Our production has experienced certain supply shortages and material and component cost inflation. If these disruptions continue, or if there are additional disruptions in our supply chain, it could materially or adversely impact our operating results and financial condition. Despite certain supply shortages and inflationary cost input pressures, we continue to actively manage through these temporary supply chain disruptions. Refer to the COVID-19 related risk factors disclosed in Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year ended August 28, 2021.
Acquisition of Barletta
On August 31, 2021, we completed our acquisition of all the equity interests of Barletta for $286.3 million funded with cash payments of $240.1 million, $25.0 million in common stock issued to the sellers (subject to a 12% discount), and contingent consideration from earnout provisions. For further discussion regarding the acquisition, refer to Note 2 to the Notes to Consolidated Financial Statements, included in Item 1 of Part I in this Quarterly Report on Form 10-Q.
The acquisition of Barletta resulted in a newly created Marine reportable segment effective as of the first quarter of Fiscal 2022. The segment consists of Barletta and our existing Chris-Craft operating segment.
Non-GAAP Financial Measures
This MD&A includes financial information prepared in accordance with generally accepted accounting principles ("GAAP"), as well as certain adjusted or non-GAAP financial measures such as EBITDA and Adjusted EBITDA. EBITDA is defined as net income before interest expense, provision for income taxes, and depreciation and amortization expense. Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, depreciation and amortization expense, and other pretax adjustments made in order to present comparable results from period to period.
These non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, have been provided as information supplemental and in addition to the financial measures presented in accordance with GAAP. Such non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction
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with, the GAAP financial measures presented herein. The non-GAAP financial measures presented may differ from similar measures used by other companies.
Included in "Results of Operations" below for the three and six months ended February 26, 2022 compared to the comparable prior year period is a reconciliation of EBITDA and Adjusted EBITDA from net income, the nearest GAAP measure. We have included these non-GAAP performance measures as a comparable measure to illustrate the effect of non-recurring transactions that occurred during the reported periods and to improve comparability of our results from period to period. We believe Adjusted EBITDA provides meaningful supplemental information about our operating performance as this measure excludes amounts from net income that we do not consider part of our core operating results when assessing our performance. Examples of items excluded from Adjusted EBITDA include acquisition-related costs, litigation reserves, restructuring expenses, gain or loss on sale of property, plant and equipment, contingent consideration fair value adjustment, and non-operating income or loss.
Management uses these non-GAAP financial measures (a) to evaluate our historical and prospective financial performance and trends as well as our performance relative to competitors and peers; (b) to measure operational profitability on a consistent basis; (c) in presentations to the members of our Board of Directors to enable our Board of Directors to have the same measurement basis of operating performance as used by management in their assessment of performance and in forecasting; (d) to evaluate potential acquisitions; and (e) to ensure compliance with covenants and restricted activities under the terms of our ABL Credit Facility and outstanding notes, as further described in Note 9 to the Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q. We believe these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in the industry.
Industry Trends
The RV and marine industries continue to experience supply chain disruptions, including supply shortages, shipping delays, and material and component cost inflation. While we continue to manage through these supply chain disruptions, they have impacted our ability to increase production to meet existing demand in the current fiscal year. If these disruptions worsen, we could experience a negative impact on our sales and earnings in the future.
Results of Operations - Three Months Ended February 26, 2022 Compared to the Three Months Ended February 27, 2021
Consolidated Performance Summary
The following is an analysis of changes in key items included in the Consolidated Statements of Income for the three months ended February 26, 2022 compared to the three months ended February 27, 2021:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| ($ in thousands, except per share data) | February 26, 2022 | % of Revenues(1) | February 27, 2021 | % of Revenues(1) | $ Change | % Change | |||||||||||||||||||||||||||||
| Net revenues | $ | 1,164,731 | 100.0 | % | $ | 839,886 | 100.0 | % | $ | 324,845 | 38.7 | % | |||||||||||||||||||||||
| Cost of goods sold | 948,154 | 81.4 | % | 683,304 | 81.4 | % | 264,850 | 38.8 | % | ||||||||||||||||||||||||||
| Gross profit | 216,577 | 18.6 | % | 156,582 | 18.6 | % | 59,995 | 38.3 | % | ||||||||||||||||||||||||||
| Selling, general, and administrative expenses | 71,795 | 6.2 | % | 53,016 | 6.3 | % | 18,779 | 35.4 | % | ||||||||||||||||||||||||||
| Amortization | 8,015 | 0.7 | % | 3,591 | 0.4 | % | 4,424 | 123.2 | % | ||||||||||||||||||||||||||
| Total operating expenses | 79,810 | 6.9 | % | 56,607 | 6.7 | % | 23,203 | 41.0 | % | ||||||||||||||||||||||||||
| Operating income | 136,767 | 11.7 | % | 99,975 | 11.9 | % | 36,792 | 36.8 | % | ||||||||||||||||||||||||||
| Interest expense, net | 10,325 | 0.9 | % | 10,052 | 1.2 | % | 273 | 2.7 | % | ||||||||||||||||||||||||||
| Non-operating loss (income) | 6,507 | 0.6 | % | (311) | — | % | (6,818) | (2,192.3) | % | ||||||||||||||||||||||||||
| Income before income taxes | 119,935 | 10.3 | % | 90,234 | 10.7 | % | 29,701 | 32.9 | % | ||||||||||||||||||||||||||
| Provision for income taxes | 28,760 | 2.5 | % | 21,166 | 2.5 | % | 7,594 | 35.9 | % | ||||||||||||||||||||||||||
| Net income | $ | 91,175 | 7.8 | % | $ | 69,068 | 8.2 | % | $ | 22,107 | 32.0 | % | |||||||||||||||||||||||
| Diluted earnings per share | $ | 2.69 | $ | 2.04 | $ | 0.65 | 31.9 | % | |||||||||||||||||||||||||||
| Diluted weighted average shares outstanding | 33,934 | 33,910 | 24 | 0.1 | % | ||||||||||||||||||||||||||||||
(1) Percentages may not add due to rounding differences.
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Net revenues increased in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to unit growth, including incremental volume from the acquisition of Barletta, and price increases related to current and anticipated higher material and component costs.
Gross profit as a percentage of revenue was essentially flat in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to price increases ahead of known and anticipated material and component cost inflation, and operating leverage, offset by production inefficiencies related to supply constraints.
Operating expenses increased in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to higher operating expenses to support increasing sales and improved operating performance, and incremental operating expenses and amortization associated with the acquisition of Barletta.
Non-operating loss increased in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 due to the contingent consideration fair value adjustment related to the acquisition of Barletta.
Our effective tax rate was relatively flat in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to the impact of consistent tax credits compared to prior year over increased income in the current year and net unfavorable expense in the current year related to stock compensation.
Net income and diluted earnings per share increased in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to leverage gained on higher revenues, partially offset by increased operating expenses and higher income tax expense.
Non-GAAP Reconciliation
The following table reconciles net income to consolidated EBITDA and Adjusted EBITDA for the three months ended February 26, 2022 and February 27, 2021:
| Three Months Ended | |||||||||||
| (in thousands) | February 26, 2022 | February 27, 2021 | |||||||||
| Net income | $ | 91,175 | $ | 69,068 | |||||||
| Interest expense, net | 10,325 | 10,052 | |||||||||
| Provision for income taxes | 28,760 | 21,166 | |||||||||
| Depreciation | 5,461 | 4,399 | |||||||||
| Amortization | 8,015 | 3,591 | |||||||||
| EBITDA | 143,736 | 108,276 | |||||||||
| Acquisition-related costs | 486 | — | |||||||||
| Contingent consideration fair value adjustment | 6,517 | — | |||||||||
| Non-operating income | (10) | (311) | |||||||||
| Adjusted EBITDA | $ | 150,729 | $ | 107,965 | |||||||
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Reportable Segment Performance Summary
Towable
The following is an analysis of key changes in our Towable segment for the three months ended February 26, 2022 compared to the three months ended February 27, 2021:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in thousands, except ASP and units) | February 26, 2022 | % of Revenues | February 27, 2021 | % of Revenues | $ Change | % Change | |||||||||||||||||||||||||||||
| Net revenues | $ | 646,601 | $ | 439,284 | $ | 207,317 | 47.2 | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 100,573 | 15.6 | % | 62,366 | 14.2 | % | 38,207 | 61.3 | % | ||||||||||||||||||||||||||
Average Selling Price ("ASP")(1) | 41,917 | 32,377 | 9,540 | 29.5 | % | ||||||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | February 26, 2022 | Product Mix(2) | February 27, 2021 | Product Mix(2) | Unit Change | % Change | |||||||||||||||||||||||||||||
| Travel trailer | 10,764 | 70.4 | % | 8,876 | 65.7 | % | 1,888 | 21.3 | % | ||||||||||||||||||||||||||
| Fifth wheel | 4,530 | 29.6 | % | 4,632 | 34.3 | % | (102) | (2.2) | % | ||||||||||||||||||||||||||
| Total towables | 15,294 | 100.0 | % | 13,508 | 100.0 | % | 1,786 | 13.2 | % | ||||||||||||||||||||||||||
(1) Average selling price excludes off-invoice dealer incentives.
(2) Percentages may not add due to rounding differences.
Net revenues increased in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to price increases related to current and anticipated higher material and component costs, and unit growth.
Adjusted EBITDA increased in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to price increases ahead of current and anticipated material and component cost inflation, partially offset by higher operating expenses.
Motorhome
The following is an analysis of key changes in our Motorhome segment for the three months ended February 26, 2022 compared to the three months ended February 27, 2021:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in thousands, except ASP and units) | February 26, 2022 | % of Revenues | February 27, 2021 | % of Revenues | $ Change | % Change | |||||||||||||||||||||||||||||
| Net revenues | $ | 417,565 | $ | 382,575 | $ | 34,990 | 9.1 | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 46,095 | 11.0 | % | 50,969 | 13.3 | % | (4,874) | (9.6) | % | ||||||||||||||||||||||||||
ASP(1) | $ | 146,289 | $ | 130,856 | 15,433 | 11.8 | % | ||||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | February 26, 2022 | Product Mix(2) | February 27, 2021 | Product Mix(2) | Unit Change | % Change | |||||||||||||||||||||||||||||
| Class A | 588 | 20.8 | % | 704 | 24.4 | % | (116) | (16.5) | % | ||||||||||||||||||||||||||
| Class B | 1,641 | 58.0 | % | 1,419 | 49.2 | % | 222 | 15.6 | % | ||||||||||||||||||||||||||
| Class C | 602 | 21.3 | % | 762 | 26.4 | % | (160) | (21.0) | % | ||||||||||||||||||||||||||
| Total motorhomes | 2,831 | 100.0 | % | 2,885 | 100.0 | % | (54) | (1.9) | % | ||||||||||||||||||||||||||
(1) ASP excludes off-invoice dealer incentives.
(2) Percentages may not add due to rounding differences.
Net revenues increased in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to price increases.
Adjusted EBITDA decreased in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to production inefficiencies caused by supply constraints, partially offset by price increases ahead of known and anticipated material
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and component cost inflation.
Marine
The following is an analysis of key changes in our Marine segment for the three months ended February 26, 2022 compared to the three months ended February 27, 2021:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in thousands, except ASP and units) | February 26, 2022 | % of Revenues | February 27, 2021 | % of Revenues | $ Change | % Change | |||||||||||||||||||||||||||||
| Net revenues | $ | 97,309 | $ | 14,463 | $ | 82,846 | 572.8 | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 12,953 | 13.3 | % | 1,024 | 7.1 | % | 11,929 | 1,164.9 | % | ||||||||||||||||||||||||||
ASP(1) | $ | 73,492 | $ | 209,931 | (136,439) | (65.0) | % | ||||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | February 26, 2022 | February 27, 2021 | Unit Change | % Change | |||||||||||||||||||||||||||||||
| Boats | 1,322 | 69 | 1,253 | 1,815.9 | % | ||||||||||||||||||||||||||||||
(1) ASP excludes off-invoice dealer incentives.
Net revenues increased in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to the acquisition of Barletta at the beginning of the first quarter of Fiscal 2022.
Adjusted EBITDA increased in the second quarter of Fiscal 2022 compared to the second quarter of Fiscal 2021 primarily due to the acquisition of Barletta at the beginning of the first quarter of Fiscal 2022.
Results of Operations - Six Months Ended February 26, 2022 Compared to the Six Months Ended February 27, 2021
Consolidated Performance Summary
The following is an analysis of changes in key items included in the Consolidated Statements of Income for the six months ended February 26, 2022 compared to the six months ended February 27, 2021:
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| ($ in thousands, except per share data) | February 26, 2022 | % of Revenues(1) | February 27, 2021 | % of Revenues(1) | $ Change | % Change | |||||||||||||||||||||||||||||
| Net revenues | $ | 2,320,471 | 100.0 | % | $ | 1,633,017 | 100.0 | % | $ | 687,454 | 42.1 | % | |||||||||||||||||||||||
| Cost of goods sold | 1,874,482 | 80.8 | % | 1,339,431 | 82.0 | % | 535,051 | 39.9 | % | ||||||||||||||||||||||||||
| Gross profit | 445,989 | 19.2 | % | 293,586 | 18.0 | % | 152,403 | 51.9 | % | ||||||||||||||||||||||||||
| Selling, general, and administrative expenses | 146,665 | 6.3 | % | 101,415 | 6.2 | % | 45,250 | 44.6 | % | ||||||||||||||||||||||||||
| Amortization | 16,187 | 0.7 | % | 7,181 | 0.4 | % | 9,006 | 125.4 | % | ||||||||||||||||||||||||||
| Total operating expenses | 162,852 | 7.0 | % | 108,596 | 6.7 | % | 54,256 | 50.0 | % | ||||||||||||||||||||||||||
| Operating income | 283,137 | 12.2 | % | 184,990 | 11.3 | % | 98,147 | 53.1 | % | ||||||||||||||||||||||||||
| Interest expense, net | 20,567 | 0.9 | % | 19,993 | 1.2 | % | 574 | 2.9 | % | ||||||||||||||||||||||||||
| Non-operating loss (income) | 12,864 | 0.6 | % | (217) | — | % | (13,081) | (6,028.1) | % | ||||||||||||||||||||||||||
| Income before income taxes | 249,706 | 10.8 | % | 165,214 | 10.1 | % | 84,492 | 51.1 | % | ||||||||||||||||||||||||||
| Provision for income taxes | 58,901 | 2.5 | % | 38,723 | 2.4 | % | 20,178 | 52.1 | % | ||||||||||||||||||||||||||
| Net income | $ | 190,805 | 8.2 | % | $ | 126,491 | 7.7 | % | $ | 64,314 | 50.8 | % | |||||||||||||||||||||||
| Diluted earnings per share | $ | 5.58 | $ | 3.74 | $ | 1.84 | 49.2 | % | |||||||||||||||||||||||||||
| Diluted average shares outstanding | 34,168 | 33,821 | 347 | 1.0 | % | ||||||||||||||||||||||||||||||
(1) Percentages may not add due to rounding differences.
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Net revenues increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to price increases related to current and anticipated higher material and component costs, and unit growth, including incremental volume from the acquisition of Barletta.
Gross profit as a percentage of revenue increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to improved operating leverage on higher revenues and price increases, partially offset by higher material and component costs.
Operating expenses increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to higher operating expenses to support increasing sales and improved operating performance, acquisition-related costs, and incremental operating expenses and amortization associated with the acquisition of Barletta.
Non-operating loss increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 due to the contingent consideration fair value adjustment related to the acquisition of Barletta.
Our effective tax rate was relatively flat in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to the impact of consistent tax credits compared to prior year over increased income in the current year and a net unfavorable expense in the current year related to stock compensation.
Net income and diluted earnings per share increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to leverage gained on higher revenues, partially offset by increased operating expenses and higher income tax expense.
Non-GAAP Reconciliation
The following table reconciles net income to consolidated EBITDA and Adjusted EBITDA for the six months ended February 26, 2022 and February 27, 2021:
| Six Months Ended | |||||||||||
| (in thousands) | February 26, 2022 | February 27, 2021 | |||||||||
| Net income | $ | 190,805 | $ | 126,491 | |||||||
| Interest expense, net | 20,567 | 19,993 | |||||||||
| Provision for income taxes | 58,901 | 38,723 | |||||||||
| Depreciation | 10,767 | 8,559 | |||||||||
| Amortization | 16,187 | 7,181 | |||||||||
| EBITDA | 297,227 | 200,947 | |||||||||
| Acquisition-related costs | 3,870 | — | |||||||||
| Litigation reserves | 4,000 | — | |||||||||
| Restructuring expenses | — | 93 | |||||||||
| Gain on sale of property, plant and equipment | — | (3,565) | |||||||||
| Contingent consideration fair value adjustment | 12,887 | — | |||||||||
| Non-operating income | (23) | (217) | |||||||||
| Adjusted EBITDA | $ | 317,961 | $ | 197,258 | |||||||
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Reportable Segment Performance Summary
Towable
The following is an analysis of key changes in our Towable segment for the six months ended February 26, 2022 compared to the six months ended February 27, 2021:
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| (in thousands, except ASP and units) | February 26, 2022 | % of Revenues | February 27, 2021 | % of Revenues | $ Change | % Change | |||||||||||||||||||||||||||||
| Net revenues | $ | 1,297,625 | $ | 894,185 | $ | 403,440 | 45.1 | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 212,650 | 16.4 | % | 125,509 | 14.0 | % | 87,141 | 69.4 | % | ||||||||||||||||||||||||||
ASP(1) | 40,529 | 32,229 | 8,300 | 25.8 | % | ||||||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | February 26, 2022 | Product Mix(2) | February 27, 2021 | Product Mix(2) | Unit Change | % Change | |||||||||||||||||||||||||||||
| Travel trailer | 21,907 | 69.1 | % | 18,036 | 65.1 | % | 3,871 | 21.5 | % | ||||||||||||||||||||||||||
| Fifth wheel | 9,818 | 30.9 | % | 9,686 | 34.9 | % | 132 | 1.4 | % | ||||||||||||||||||||||||||
| Total towables | 31,725 | 100.0 | % | 27,722 | 100.0 | % | 4,003 | 14.4 | % | ||||||||||||||||||||||||||
| February 26, 2022 | February 27, 2021 | Change | % Change | ||||||||||||||||||||||||||||||||
Backlog(3) | |||||||||||||||||||||||||||||||||||
| Units | 47,438 | 39,855 | 7,583 | 19.0 | % | ||||||||||||||||||||||||||||||
| Dollars | $ | 1,873,159 | $ | 1,206,695 | $ | 666,464 | 55.2 | % | |||||||||||||||||||||||||||
| Dealer Inventory | |||||||||||||||||||||||||||||||||||
| Units | 21,738 | 15,952 | 5,786 | 36.3 | % | ||||||||||||||||||||||||||||||
(1) Average selling price excludes off-invoice dealer incentives.
(2) Percentages may not add due to rounding differences.
(3) Our backlog includes all accepted orders from dealers which generally have been requested to be shipped within the next six months. Orders in backlog generally can be cancelled or postponed at the option of the dealer at any time without penalty; therefore, backlog may not necessarily be an accurate measure of future sales.
Net revenues increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to price increases related to current and anticipated higher material and component costs, and unit growth.
Adjusted EBITDA increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to an increase in unit sales and price increases ahead of current and anticipated material and component cost inflation, partially offset by higher operating expenses.
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Motorhome
The following is an analysis of key changes in our Motorhome segment for the six months ended February 26, 2022 compared to the six months ended February 27, 2021:
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| (in thousands, except ASP and units) | February 26, 2022 | % of Revenues | February 27, 2021 | % of Revenues | $ Change | % Change | |||||||||||||||||||||||||||||
| Net revenues | $ | 839,044 | $ | 704,964 | $ | 134,080 | 19.0 | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 96,248 | 11.5 | % | 81,312 | 11.5 | % | 14,936 | 18.4 | % | ||||||||||||||||||||||||||
ASP(1) | 149,366 | 133,550 | 15,816 | 11.8 | % | ||||||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | February 26, 2022 | Product Mix(2) | February 27, 2021 | Product Mix(2) | Unit Change | % Change | |||||||||||||||||||||||||||||
| Class A | 1,332 | 23.9 | % | 1,302 | 25.0 | % | 30 | 2.3 | % | ||||||||||||||||||||||||||
| Class B | 3,088 | 55.5 | % | 2,517 | 48.3 | % | 571 | 22.7 | % | ||||||||||||||||||||||||||
| Class C | 1,146 | 20.6 | % | 1,396 | 26.7 | % | (250) | (17.9) | % | ||||||||||||||||||||||||||
| Total motorhomes | 5,566 | 100.0 | % | 5,215 | 100.0 | % | 351 | 6.7 | % | ||||||||||||||||||||||||||
| February 26, 2022 | February 27, 2021 | Change | % Change | ||||||||||||||||||||||||||||||||
Backlog(3) | |||||||||||||||||||||||||||||||||||
| Units | 17,255 | 14,974 | 2,281 | 15.2 | % | ||||||||||||||||||||||||||||||
| Dollars | $ | 2,214,470 | $ | 1,816,503 | $ | 397,967 | 21.9 | % | |||||||||||||||||||||||||||
| Dealer Inventory | |||||||||||||||||||||||||||||||||||
| Units | 3,099 | 2,739 | 360 | 13.1 | % | ||||||||||||||||||||||||||||||
(1) Average selling price excludes off-invoice dealer incentives.
(2) Percentages may not add due to rounding differences.
(3) Our backlog includes all accepted orders from dealers which generally have been requested to be shipped within the next six months. Orders in backlog generally can be cancelled or postponed at the option of the dealer at any time without penalty; therefore, backlog may not necessarily be an accurate measure of future sales.
Net revenues increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to price increases and unit growth.
Adjusted EBITDA increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to an increase in unit sales and pricing, partially offset by higher input costs and operating expenses.
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Marine
The following is an analysis of key changes in our Marine segment for the six months ended February 26, 2022 compared to the six months ended February 27, 2021:
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| (in thousands, except ASP and units) | February 26, 2022 | % of Revenues | February 27, 2021 | % of Revenues | $ Change | % Change | |||||||||||||||||||||||||||||
| Net revenues | $ | 176,627 | $ | 26,357 | $ | 150,270 | 570.1 | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 23,523 | 13.3 | % | 1,878 | 7.1 | % | 21,645 | 1,152.6 | % | ||||||||||||||||||||||||||
ASP(1) | 71,849 | 202,973 | (131,124) | (64.6) | % | ||||||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | February 26, 2022 | February 27, 2021 | Unit Change | % Change | |||||||||||||||||||||||||||||||
| Boats | 2,457 | 130 | 2,327 | 1,790.0 | % | ||||||||||||||||||||||||||||||
| February 26, 2022 | February 27, 2021 | Change | % Change | ||||||||||||||||||||||||||||||||
Backlog(2) | |||||||||||||||||||||||||||||||||||
| Units | 3,059 | 339 | 2,720 | 802.4 | % | ||||||||||||||||||||||||||||||
| Dollars | $ | 277,860 | $ | 72,595 | $ | 205,265 | 282.8 | % | |||||||||||||||||||||||||||
| Dealer Inventory | |||||||||||||||||||||||||||||||||||
| Units | 2,062 | 180 | 1,882 | 1,045.6 | % | ||||||||||||||||||||||||||||||
(1) ASP excludes off-invoice dealer incentives.
(2) Our backlog includes all accepted orders from dealers which generally have been requested to be shipped within the next six months. Orders in backlog generally can be cancelled or postponed at the option of the dealer at any time without penalty; therefore, backlog may not necessarily be an accurate measure of future sales.
Net revenues increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to the acquisition of Barletta at the beginning of the first quarter of Fiscal 2022.
Adjusted EBITDA increased in the first six months of Fiscal 2022 compared to the first six months of Fiscal 2021 primarily due to the acquisition of Barletta at the beginning of the first quarter of Fiscal 2022.
Analysis of Financial Condition, Liquidity, and Resources
Cash Flows
The following table summarizes our cash flows from operations:
| Six Months Ended | |||||||||||
| (in thousands) | February 26, 2022 | February 27, 2021 | |||||||||
| Total cash provided by (used in): | |||||||||||
| Operating activities | $ | 46,141 | $ | 66,922 | |||||||
| Investing activities | (271,781) | (7,365) | |||||||||
| Financing activities | (74,091) | (19,117) | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | (299,731) | $ | 40,440 | |||||||
Operating Activities
Cash provided by operating activities decreased for the six months ended February 26, 2022 compared to the six months ended February 27, 2021 due to investments in working capital to support current year revenue growth, partially offset by higher profitability. The investments in working capital included a $123.6 million increase in accounts receivable due to timing of invoicing/collections, a $109.3 million increase in inventory to support customer demand and to support operational activities during a period
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impacted by supply chain disruption, partially offset by a $26.7 million increase in accounts payable due to inventory growth and timing of payments.
Investing Activities
Cash used in investing activities increased in the six months ended February 26, 2022 compared to the six months ended February 27, 2021 primarily due to our acquisition of Barletta during the first quarter of Fiscal 2022.
Financing Activities
Cash used in financing activities increased in the six months ended February 26, 2022 compared to the six months ended February 27, 2021 primarily due to an increase in stock repurchases in the first six months of Fiscal 2022.
Debt and Capital
We maintain a $192.5 million asset-based revolving credit facility ("ABL Credit Facility") with a maturity date of October 22, 2024 subject to certain factors which may accelerate the maturity date. As of February 26, 2022, we had no borrowings against the ABL Credit Facility.
As of February 26, 2022, we had $134.8 million in cash and cash equivalents and $192.5 million in unused ABL Credit Facility. Our cash and cash equivalent balances consist of high quality, short-term money market instruments.
We believe cash flow from operations, existing lines of credit, and access to debt and capital markets will be sufficient to meet our current liquidity needs, and we have committed liquidity and cash reserves in excess of our anticipated funding requirements. We evaluate the financial stability of the counterparties for the Convertible Notes, the Senior Secured Notes, and the ABL Credit Facility, and will continue to monitor counterparty risk on an on-going basis.
Other Financial Measures
Working capital at February 26, 2022 and August 28, 2021 was $545.4 million and $651.6 million, respectively. We currently expect cash on hand, funds generated from operations, and the borrowing available under our ABL Credit Facility to be sufficient to cover both short-term and long-term operating requirements.
Share Repurchases and Dividends
We repurchase our common stock and pay dividends pursuant to programs approved by our Board of Directors. Our long-term capital allocation strategy is to first fund operations and investments in growth, maintain a debt leverage ratio within our targeted zone, maintain reasonable liquidity, and then return excess cash over time to shareholders through dividends and share repurchases.
On October 13, 2021, our Board of Directors authorized a new share repurchase program in the amount of $200.0 million with no time restriction on the authorization, which took effect immediately and replaced the prior program. In the six months ended February 26, 2022, we repurchased 875,000 shares of our own common stock at a cost of $59.6 million under this authorization and the previous authorization, and 62,000 shares at a cost of $4.6 million to satisfy tax obligations on employee equity awards vested. We continually evaluate if share repurchases reflect a prudent use of our capital and, subject to compliance with our ABL Credit Facility and Senior Secured Notes, we may purchase shares in the future. At February 26, 2022, we have $150.0 million remaining on our Board approved repurchase authorization.
On March 16, 2022, our Board of Directors approved a quarterly cash dividend of $0.18 per share payable on April 27, 2022, to common stockholders of record at the close of business on April 13, 2022.
Contractual Obligations and Commercial Commitments
There has been no material change in our contractual obligations since the end of Fiscal 2021. See our Annual Report on Form 10-K for the fiscal year ended August 28, 2021 for additional information regarding our contractual obligations and commercial commitments.
Critical Accounting Policies
We describe our significant accounting policies in Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 28, 2021. We discuss our critical accounting estimates in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 28, 2021. There have been no material changes to our critical accounting policies or critical accounting estimates since the end of Fiscal 2021.
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Recently Issued Accounting Pronouncements
For a summary of recently issued applicable accounting pronouncements, see Note 1 to the Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Safe Harbor Statement Under the Private Securities Litigation Reform Act
Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements and may be identified by the use of words such as "anticipate," "assume," "believe," "estimate," "expect," "guidance," "intend," "outlook," "plan," "project," and other words and terms of similar meaning. Such statements reflect our current views and estimates with respect to future market conditions, company performance and financial results, operational investments, business prospects, new strategies, the competitive environment, and other events. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the potential results discussed in such forward-looking statements. Readers should review Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended August 28, 2021, and Item 1A of Part II of this Quarterly Report on Form 10-Q, for a description of important factors that could cause our actual results to differ materially from those contemplated by the forward-looking statements made in this Quarterly Report on Form 10-Q. Among the factors that could cause actual results and outcomes to differ materially from those contained in such forward-looking statements are the following:
•Uncertainty surrounding the COVID-19 pandemic.
•General economic uncertainty in key markets and a worsening of domestic economic conditions or low levels of economic growth.
•Availability of financing for RV and marine dealers.
•Ability to innovate and commercialize new products.
•Ability to manage our inventory to meet demand.
•Competition and new product introductions by competitors.
•Risk related to cyclicality and seasonality of our business.
•Significant increase in repurchase obligations.
•Business or production disruptions.
•Inadequate inventory and distribution channel management.
•Ability to retain relationships with our suppliers.
•Increased material and component costs, including availability and price of fuel and other raw materials.
•Ability to integrate mergers and acquisitions.
•Ability to attract and retain qualified personnel and changes in market compensation rates.
•Exposure to warranty claims.
•Ability to protect our information technology systems from data security, cyberattacks, and network disruption risks and the ability to successfully upgrade and evolve our information technology systems.
•Ability to retain brand reputation and related exposure to product liability claims.
•Governmental regulation, including for climate change.
•Impairment of goodwill.
•Risks related to our Convertible and Senior Secured Notes, including our ability to satisfy our obligations under these notes.
We caution that the foregoing list of important factors is not complete. Any forward-looking statements speak only as of the date they are made, and we assume no obligation to update any forward-looking statement that we may make.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The assets we maintain to fund deferred compensation have market risk, but we maintain a corresponding liability for these assets. The market risk is therefore borne by the participants in the deferred compensation program.
Interest rate risk
As of February 26, 2022, we have no interest rate swaps outstanding and the Term Loan, that had been subject to variable interest rates, was repaid in the fourth quarter of Fiscal 2020 using the proceeds from the Senior Secured Notes. The ABL Credit Facility is our only floating rate debt instrument which remains undrawn as of February 26, 2022.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the Evaluation Date.
33
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the second quarter of Fiscal 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our legal proceedings, see Note 11 to the Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended August 28, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Stock Repurchases
Purchases of our common stock during each fiscal month of the second quarter of Fiscal 2022 are as follows:
| Period | Total Number of Shares Purchased(1,2) | Average Price Paid per Share | Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1,2) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(3) | |||||||||||||||||||
| 11/28/21 - 01/01/22 | 148,560 | $ | 70.57 | 141,497 | $ | 180,000 | |||||||||||||||||
| 01/02/22 - 01/29/22 | 158,373 | 63.14 | 158,373 | 170,000 | |||||||||||||||||||
| 01/30/22 - 02/26/22 | 294,357 | 67.94 | 294,357 | 150,000 | |||||||||||||||||||
| Total | 601,290 | $ | 67.33 | 594,227 | $ | 150,000 | |||||||||||||||||
(1) Number of shares in the table are shown in whole numbers.
(2) Shares not purchased as part of a publicly announced program were repurchased from employees who vested in Company shares and elected to pay their payroll tax via the value of shares delivered as opposed to cash.
(3) Pursuant to a $200.0 million share repurchase program authorized by our Board of Directors on October 13, 2021. There is no time restriction on the authorization.
Our Senior Secured Notes, as defined in Note 9 to the Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, contains occurrence based restrictions that may limit our ability to make distributions or payments with respect to purchases of our common stock without consent of the lenders, except for limited purchases of our common stock from employees, in the event of a significant reduction in our EBITDA or in the event of a significant borrowing on our ABL Credit Facility.
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Item 6. Exhibits
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (furnished herewith). | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document (furnished herewith). | ||||
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document (furnished herewith). | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith). | ||||
| 101.LAB | Inline XBRL Taxonomy Label Linkbase Document (furnished herewith). | ||||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document (furnished herewith). | ||||
104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) (furnished herewith). | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| WINNEBAGO INDUSTRIES, INC. | ||||||||||||||
| Date: | March 23, 2022 | By: | /s/ Michael J. Happe | |||||||||||
Michael J. Happe | ||||||||||||||
| Chief Executive Officer, President | ||||||||||||||
| (Principal Executive Officer) | ||||||||||||||
| Date: | March 23, 2022 | By: | /s/ Bryan L. Hughes | |||||||||||
| Bryan L. Hughes | ||||||||||||||
| Chief Financial Officer and Senior Vice President | ||||||||||||||
| (Principal Financial and Accounting Officer) | ||||||||||||||
37