WINNEBAGO INDUSTRIES INC - Quarter Report: 2023 May (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 May 27, 2023
| 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 June 15, 2023, there were 30,210,602 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 May 27, 2023
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Winnebago Industries, Inc.
Consolidated Statements of Income
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (in millions, except per share data) | May 27, 2023 | May 28, 2022 | May 27, 2023 | May 28, 2022 | |||||||||||||||||||
| Net revenues | $ | 900.8 | $ | 1,458.1 | $ | 2,719.7 | $ | 3,778.6 | |||||||||||||||
| Cost of goods sold | 749.4 | 1,185.1 | 2,261.1 | 3,059.6 | |||||||||||||||||||
| Gross profit | 151.4 | 273.0 | 458.6 | 719.0 | |||||||||||||||||||
| Selling, general, and administrative expenses | 66.5 | 88.3 | 203.4 | 235.0 | |||||||||||||||||||
| Amortization | 4.4 | 8.0 | 12.0 | 24.2 | |||||||||||||||||||
| Total operating expenses | 70.9 | 96.3 | 215.4 | 259.2 | |||||||||||||||||||
| Operating income | 80.5 | 176.7 | 243.2 | 459.8 | |||||||||||||||||||
| Interest expense, net | 5.2 | 10.5 | 16.4 | 31.1 | |||||||||||||||||||
| Non-operating loss | 0.2 | 11.7 | 2.3 | 24.5 | |||||||||||||||||||
| Income before income taxes | 75.1 | 154.5 | 224.5 | 404.2 | |||||||||||||||||||
| Provision for income taxes | 16.0 | 37.3 | 52.4 | 96.2 | |||||||||||||||||||
| Net income | $ | 59.1 | $ | 117.2 | $ | 172.1 | $ | 308.0 | |||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Basic | $ | 1.95 | $ | 3.62 | $ | 5.66 | $ | 9.35 | |||||||||||||||
| Diluted | $ | 1.71 | $ | 3.57 | $ | 4.95 | $ | 9.18 | |||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | 30.4 | 32.4 | 30.4 | 32.9 | |||||||||||||||||||
| Diluted | 35.4 | 32.9 | 35.5 | 33.6 | |||||||||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
3
Winnebago Industries, Inc.
Consolidated Balance Sheets
| (in millions, except per share data) | May 27, 2023 | August 27, 2022 | |||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 225.9 | $ | 282.2 | |||||||
Receivables, less allowance for doubtful accounts ($0.7 and $0.6, respectively) | 205.3 | 254.1 | |||||||||
| Inventories, net | 518.0 | 525.8 | |||||||||
| Prepaid expenses and other current assets | 22.6 | 31.7 | |||||||||
| Total current assets | 971.8 | 1,093.8 | |||||||||
| Property, plant, and equipment, net | 320.0 | 276.2 | |||||||||
| Goodwill | 514.5 | 484.2 | |||||||||
| Other intangible assets, net | 507.7 | 472.4 | |||||||||
| Investment in life insurance | 29.1 | 28.6 | |||||||||
| Operating lease assets | 42.1 | 41.1 | |||||||||
| Deferred income tax assets, net | 8.3 | — | |||||||||
| Other long-term assets | 19.3 | 20.4 | |||||||||
| Total assets | $ | 2,412.8 | $ | 2,416.7 | |||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 133.0 | $ | 217.5 | |||||||
| Income taxes payable | 1.3 | 0.7 | |||||||||
| Accrued expenses: | |||||||||||
| Accrued compensation | 38.3 | 71.6 | |||||||||
| Product warranties | 106.5 | 127.9 | |||||||||
| Self-insurance | 22.9 | 21.4 | |||||||||
| Promotional | 28.0 | 21.5 | |||||||||
| Accrued interest and dividends | 16.6 | 13.0 | |||||||||
| Other current liabilities | 50.5 | 48.5 | |||||||||
| Total current liabilities | 397.1 | 522.1 | |||||||||
| Long-term debt, net | 591.7 | 545.9 | |||||||||
| Deferred income tax liabilities, net | — | 6.1 | |||||||||
| Unrecognized tax benefits | 6.5 | 5.7 | |||||||||
| Long-term operating lease liabilities | 41.7 | 40.4 | |||||||||
| Deferred compensation benefits, net of current portion | 7.9 | 8.1 | |||||||||
| Other long-term liabilities | 6.6 | 25.4 | |||||||||
| Total liabilities | 1,051.5 | 1,153.7 | |||||||||
| Contingent liabilities and commitments (Note 11) | |||||||||||
| Shareholders' equity: | |||||||||||
Preferred stock, par value $0.01: 10.0 shares authorized; Zero shares issued and outstanding | — | — | |||||||||
Common stock, par value $0.50: 120.0 shares authorized; 51.8 shares issued | 25.9 | 25.9 | |||||||||
| Additional paid-in capital | 195.5 | 256.3 | |||||||||
| Retained earnings | 1,713.4 | 1,537.5 | |||||||||
| Accumulated other comprehensive loss | (0.4) | (0.5) | |||||||||
Treasury stock, at cost: 21.6 and 21.5 shares, respectively | (573.1) | (556.2) | |||||||||
| Total shareholders' equity | 1,361.3 | 1,263.0 | |||||||||
| Total liabilities and shareholders' equity | $ | 2,412.8 | $ | 2,416.7 | |||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
4
Winnebago Industries, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended | |||||||||||
| (in millions) | May 27, 2023 | May 28, 2022 | |||||||||
| Operating activities | |||||||||||
| Net income | $ | 172.1 | $ | 308.0 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Depreciation | 20.9 | 17.0 | |||||||||
| Amortization | 12.0 | 24.2 | |||||||||
| Non-cash interest expense, net | — | 11.2 | |||||||||
| Amortization of debt issuance costs | 2.3 | 1.8 | |||||||||
| Last in, first-out ("LIFO") expense | 2.0 | 5.9 | |||||||||
| Stock-based compensation | 8.2 | 12.5 | |||||||||
| Deferred income taxes | (3.6) | (4.3) | |||||||||
| Contingent consideration fair value adjustment | 2.0 | 24.7 | |||||||||
| Payments of earnout liability above acquisition-date fair value | (13.3) | — | |||||||||
| Other, net | 0.3 | 2.3 | |||||||||
| Change in operating assets and liabilities, net of assets and liabilities acquired | |||||||||||
| Receivables, net | 49.8 | (117.4) | |||||||||
| Inventories, net | 15.8 | (129.1) | |||||||||
| Prepaid expenses and other assets | 12.6 | 10.3 | |||||||||
| Accounts payable | (81.3) | 41.6 | |||||||||
| Income taxes and unrecognized tax benefits | 3.2 | 4.0 | |||||||||
| Accrued expenses and other liabilities | (46.6) | 32.5 | |||||||||
| Net cash provided by operating activities | 156.4 | 245.2 | |||||||||
| Investing activities | |||||||||||
| Purchases of property, plant, and equipment | (68.0) | (63.2) | |||||||||
| Acquisition of business, net of cash acquired | (87.5) | (228.2) | |||||||||
| Proceeds from the sale of property, plant, and equipment | 0.3 | 0.1 | |||||||||
| Other, net | 0.8 | — | |||||||||
| Net cash used in investing activities | (154.4) | (291.3) | |||||||||
| Financing activities | |||||||||||
| Borrowings on long-term debt | 2,840.2 | 3,422.5 | |||||||||
| Repayments on long-term debt | (2,840.2) | (3,422.5) | |||||||||
| Payments of cash dividends | (25.1) | (18.1) | |||||||||
| Payments for repurchases of common stock | (24.9) | (134.2) | |||||||||
| Payments of earnout liability up to acquisition-date fair value | (8.7) | — | |||||||||
| Other, net | 0.4 | 1.9 | |||||||||
| Net cash used in financing activities | (58.3) | (150.4) | |||||||||
| Net decrease in cash and cash equivalents | (56.3) | (196.5) | |||||||||
| Cash and cash equivalents at beginning of period | 282.2 | 434.6 | |||||||||
| Cash and cash equivalents at end of period | $ | 225.9 | $ | 238.1 | |||||||
5
| Supplemental Disclosures | |||||||||||
| Income taxes paid, net | $ | 54.9 | $ | 97.7 | |||||||
| Interest paid | 14.6 | 14.3 | |||||||||
| Non-cash investing and financing activities | |||||||||||
| Issuance of common stock for acquisition of business | $ | — | $ | 22.0 | |||||||
| Issuance of common stock for settlement of earnout liability | — | 13.2 | |||||||||
| Capital expenditures in accounts payable | 2.8 | 4.7 | |||||||||
| Dividends declared not yet paid | 8.9 | 6.2 | |||||||||
| Increase in lease assets in exchange for lease liabilities: | |||||||||||
| Operating leases | 3.9 | 17.2 | |||||||||
| Finance leases | 0.9 | 2.5 | |||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
6
Winnebago Industries, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
| Three Months Ended May 27, 2023 | ||||||||||||||||||||||||||
| (in millions, 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 February 25, 2023 | 51.8 | $ | 25.9 | $ | 193.9 | $ | 1,671.0 | $ | (0.4) | (21.2) | $ | (553.1) | $ | 1,337.3 | ||||||||||||
| Stock-based compensation | — | — | 1.7 | — | — | — | — | 1.7 | ||||||||||||||||||
| Issuance of stock for employee benefit and stock-based awards, net | — | — | (0.1) | — | — | — | — | (0.1) | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (0.4) | (20.0) | (20.0) | ||||||||||||||||||
Common stock dividends; $0.54 per share | — | — | — | (16.7) | — | — | — | (16.7) | ||||||||||||||||||
| Net income | — | — | — | 59.1 | — | — | — | 59.1 | ||||||||||||||||||
Balances at May 27, 2023 | 51.8 | $ | 25.9 | $ | 195.5 | $ | 1,713.4 | $ | (0.4) | (21.6) | $ | (573.1) | $ | 1,361.3 | ||||||||||||
| Three Months Ended May 28, 2022 | ||||||||||||||||||||||||||
| (in millions, 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 February 26, 2022 | 51.8 | $ | 25.9 | $ | 238.2 | $ | 1,357.8 | $ | (0.5) | (19.0) | $ | (412.4) | $ | 1,209.0 | ||||||||||||
| Stock-based compensation | — | — | 5.6 | — | — | — | — | 5.6 | ||||||||||||||||||
| Issuance of stock for settlement of earnout liability | — | — | 7.8 | — | — | 0.2 | 5.4 | 13.2 | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (1.3) | (70.0) | (70.0) | ||||||||||||||||||
Common stock dividends; $0.36 per share | — | — | — | (11.8) | — | — | — | (11.8) | ||||||||||||||||||
| Other | — | — | 0.7 | — | — | — | — | 0.7 | ||||||||||||||||||
| Net income | — | — | — | 117.2 | — | — | — | 117.2 | ||||||||||||||||||
Balances at May 28, 2022 | 51.8 | $ | 25.9 | $ | 252.3 | $ | 1,463.2 | $ | (0.5) | (20.1) | $ | (477.0) | $ | 1,263.9 | ||||||||||||
| Nine Months Ended May 27, 2023 | ||||||||||||||||||||||||||
| (in millions, 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 27, 2022 | 51.8 | $ | 25.9 | $ | 256.3 | $ | 1,537.5 | $ | (0.5) | (21.5) | $ | (556.2) | $ | 1,263.0 | ||||||||||||
| — | — | (62.0) | 29.0 | — | — | — | (33.0) | |||||||||||||||||||
| Stock-based compensation | — | — | 8.2 | — | — | — | — | 8.2 | ||||||||||||||||||
| Issuance of stock for employee benefit and stock-based awards, net | — | — | (7.0) | — | — | 0.4 | 8.0 | 1.0 | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (0.5) | (24.9) | (24.9) | ||||||||||||||||||
Common stock dividends: $0.81 per share | — | — | — | (25.2) | — | — | — | (25.2) | ||||||||||||||||||
| Total comprehensive income | — | — | — | — | 0.1 | — | — | 0.1 | ||||||||||||||||||
| Net income | — | — | — | 172.1 | — | — | — | 172.1 | ||||||||||||||||||
| Balances at May 27, 2023 | 51.8 | $ | 25.9 | $ | 195.5 | $ | 1,713.4 | $ | (0.4) | (21.6) | $ | (573.1) | $ | 1,361.3 | ||||||||||||
7
| Nine Months Ended May 28, 2022 | ||||||||||||||||||||||||||
| (in millions, 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 | 51.8 | $ | 25.9 | $ | 218.5 | $ | 1,173.0 | $ | (0.5) | (18.7) | $ | (360.0) | $ | 1,056.9 | ||||||||||||
| Stock-based compensation | — | — | 12.5 | — | — | — | — | 12.5 | ||||||||||||||||||
| Issuance of stock for employee benefit and stock-based awards, net | — | — | (1.9) | — | — | 0.2 | 4.5 | 2.6 | ||||||||||||||||||
| Issuance of stock for acquisition | — | — | 14.7 | — | — | 0.4 | 7.3 | 22.0 | ||||||||||||||||||
| Issuance of stock for settlement of earnout liability | — | — | 7.8 | — | — | 0.2 | 5.4 | 13.2 | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (2.2) | (134.2) | (134.2) | ||||||||||||||||||
Common stock dividends; $0.54 per share | — | — | — | (17.9) | — | — | — | (17.9) | ||||||||||||||||||
| Other | — | — | 0.7 | 0.1 | — | — | — | 0.8 | ||||||||||||||||||
| Net income | — | — | — | 308.0 | — | — | — | 308.0 | ||||||||||||||||||
| Balances at May 28, 2022 | 51.8 | $ | 25.9 | $ | 252.3 | $ | 1,463.2 | $ | (0.5) | (20.1) | $ | (477.0) | $ | 1,263.9 | ||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
8
Winnebago Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(All amounts are in millions, 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 27, 2022 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 26, 2023.
Change in Presentation
In the first quarter of Fiscal 2023, we changed our presentation in tables from thousands to millions, unless otherwise designated. As a result, certain rounding adjustments have been made to prior period disclosed amounts in order to conform to the current year presentation. In addition, certain prior period amounts may not recalculate due to rounding. These changes were not significant, and no other updates were made to previously reported financial information.
Comprehensive Income
Comprehensive income refers to the change in stockholders’ equity from transactions and other events and circumstances from non-owner sources. As of May 27, 2023 and May 28, 2022, the difference between comprehensive income and net income was not material.
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.
Recently Adopted 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 must be used for including convertible instruments in diluted EPS as opposed to the treasury stock method. We adopted the new guidance in the first quarter of Fiscal 2023 using the modified retrospective approach, resulting in a decrease to additional paid-in capital of $62.0 million, an increase to long-term debt of $43.8 million, a decrease in the deferred income tax liability of $10.8 million, and an increase to beginning retained earnings of $29.0 million. In addition, the adoption of the amended guidance reduced our non-cash interest expense by $3.9 million (pre-tax) for the three months ended May 27, 2023 and $11.2 million (pre-tax) for the nine months ended May 27, 2023. The if-converted method will be used prospectively to calculate the impact of our convertible instruments on diluted EPS. Under the if-converted method, the 4.7 million shares underlying our convertible instruments are assumed to have been outstanding at the beginning of the reporting period, and any interest expense related to these instruments is excluded from the calculation of diluted EPS. Refer to Note 15 in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for more information on the change from the treasury stock method to the if-converted method.
9
Note 2. Business Combinations
Lithionics Battery, LLC
On April 28, 2023, we purchased 100% of the equity interests of Lithionics Battery, LLC and Lithionics LLC (collectively, "Lithionics"), a premier lithium-ion battery solutions provider to the recreational equipment and specialty vehicle markets. Refer to Note 7 in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for more information relating to the goodwill and other intangible assets acquired. Pro forma results of operations for this acquisition have not been presented as the impact on our consolidated financial statements was not material.
Total transaction costs related to the Lithionics acquisition of $3.1 million were expensed during the third quarter of Fiscal 2023. Transaction costs are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.
Barletta Boat Company, LLC
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.
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 within the next year. 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. As of May 27, 2023 and August 27, 2022, the total fair value of the earnout was $19.8 million and $39.8 million, respectively. The portion of the earnout liability that will be settled within a year was included in other current liabilities on the Consolidated Balance Sheets, and the remaining earnout liability was included in other long-term liabilities on the Consolidated Balance Sheets. As of May 27, 2023, the entire $19.8 million was included in other current liabilities on the Consolidated Balance Sheets. Comparatively, as of August 27, 2022, $21.3 million was included in other current liabilities and $18.5 million was included in other long-term liabilities on the Consolidated Balance Sheets. In the third quarter of Fiscal 2023, we paid $22.0 million to settle earnout obligations associated with the 2022 cash consideration earnout period. In the third quarter of Fiscal 2022, we issued 0.2 million shares of common stock in connection with the settlement of the 2021 earnout period obligation.
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. This resulted in the recognition of goodwill of $136.1 million and other intangible assets of $111.4 million. Goodwill from the Barletta acquisition is recognized in our Marine segment. The other intangible assets acquired include a trade name, dealer network, and backlog. The trade name has an indefinite life, while the dealer network is being amortized on a straight line basis over 12 years. The backlog, which was being amortized over 10 months, was fully amortized as of August 27, 2022. We finalized the allocation of the purchase price in the third quarter of Fiscal 2022.
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. Transaction costs were included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.
Note 3. Business Segments
We have eight operating segments: 1) Grand Design towables, 2) Winnebago towables, 3) Winnebago motorhomes, 4) Newmar motorhomes, 5) Chris-Craft marine, 6) Barletta marine, 7) Winnebago specialty vehicles and 8) Lithionics. 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.
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In the third quarter of Fiscal 2023, we changed the name of our “Towable” reportable segment to “Towable RV” and our “Motorhome” reportable segment to “Motorhome RV”. These name changes had no impact on the composition of our segments, or previously reported results of operations, financial position, cash flows or segment results.
Our three reportable segments are: Towable RV (an aggregation of the Grand Design towables and the Winnebago towables operating segments); Motorhome RV (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 RV is comprised of non-motorized RV products that are generally towed by another vehicle, along with other related manufactured products and services. Motorhome RV is comprised of products that include a motorhome chassis, along with other related manufactured products and services. Marine is comprised of products that include boats, along with other related manufactured products and services.
The Corporate / All Other category includes the Winnebago specialty vehicles and Lithionics operating segments 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 in the Notes to Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 27, 2022.
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, 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 | Nine Months Ended | ||||||||||||||||||||||
| (in millions) | May 27, 2023 | May 28, 2022 | May 27, 2023 | May 28, 2022 | |||||||||||||||||||
| Net Revenues | |||||||||||||||||||||||
| Towable RV | $ | 384.1 | $ | 805.6 | $ | 1,073.9 | $ | 2,103.2 | |||||||||||||||
| Motorhome RV | 374.4 | 516.3 | 1,242.4 | 1,355.4 | |||||||||||||||||||
| Marine | 129.0 | 126.5 | 373.3 | 303.2 | |||||||||||||||||||
| Corporate / All Other | 13.3 | 9.7 | 30.1 | 16.8 | |||||||||||||||||||
| Consolidated | $ | 900.8 | $ | 1,458.1 | $ | 2,719.7 | $ | 3,778.6 | |||||||||||||||
| Adjusted EBITDA | |||||||||||||||||||||||
| Towable RV | $ | 53.8 | $ | 117.8 | $ | 129.4 | $ | 330.4 | |||||||||||||||
| Motorhome RV | 26.8 | 64.4 | 119.6 | 160.6 | |||||||||||||||||||
| Marine | 17.3 | 19.8 | 50.2 | 43.3 | |||||||||||||||||||
| Corporate / All Other | (1.5) | (10.3) | (17.4) | (24.6) | |||||||||||||||||||
| Consolidated | $ | 96.4 | $ | 191.7 | $ | 281.8 | $ | 509.7 | |||||||||||||||
| Capital Expenditures | |||||||||||||||||||||||
| Towable RV | $ | 3.4 | $ | 12.6 | $ | 23.9 | $ | 34.0 | |||||||||||||||
| Motorhome RV | 8.9 | 0.6 | 23.7 | 16.2 | |||||||||||||||||||
| Marine | 4.4 | 6.0 | 17.0 | 8.6 | |||||||||||||||||||
| Corporate / All Other | 1.9 | 0.6 | 3.4 | 4.4 | |||||||||||||||||||
| Consolidated | $ | 18.6 | $ | 19.8 | $ | 68.0 | $ | 63.2 | |||||||||||||||
| (in millions) | May 27, 2023 | August 27, 2022 | |||||||||
| Assets | |||||||||||
| Towable RV | $ | 818.4 | $ | 874.9 | |||||||
| Motorhome RV | 802.2 | 823.4 | |||||||||
| Marine | 434.4 | 416.1 | |||||||||
| Corporate / All Other | 357.8 | 302.3 | |||||||||
| Consolidated | $ | 2,412.8 | $ | 2,416.7 | |||||||
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Reconciliation of net income to consolidated Adjusted EBITDA is as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (in millions) | May 27, 2023 | May 28, 2022 | May 27, 2023 | May 28, 2022 | |||||||||||||||||||
| Net income | $ | 59.1 | $ | 117.2 | $ | 172.1 | $ | 308.0 | |||||||||||||||
| Interest expense, net | 5.2 | 10.5 | 16.4 | 31.1 | |||||||||||||||||||
| Provision for income taxes | 16.0 | 37.3 | 52.4 | 96.2 | |||||||||||||||||||
| Depreciation | 7.6 | 6.3 | 20.9 | 17.0 | |||||||||||||||||||
| Amortization | 4.4 | 8.0 | 12.0 | 24.2 | |||||||||||||||||||
| EBITDA | 92.3 | 179.3 | 273.8 | 476.5 | |||||||||||||||||||
| Acquisition-related costs | 3.9 | 0.7 | 5.6 | 4.6 | |||||||||||||||||||
| Litigation reserves | — | — | — | 4.0 | |||||||||||||||||||
| Contingent consideration fair value adjustment | — | 11.8 | 2.0 | 24.7 | |||||||||||||||||||
| Non-operating loss (income) | 0.2 | (0.1) | 0.4 | (0.1) | |||||||||||||||||||
| Adjusted EBITDA | $ | 96.4 | $ | 191.7 | $ | 281.8 | $ | 509.7 | |||||||||||||||
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 millions) | May 27, 2023 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets that fund deferred compensation | |||||||||||||||||||||||
| Domestic equity funds | $ | 1.7 | $ | 1.7 | $ | — | $ | — | |||||||||||||||
| International equity funds | 0.1 | 0.1 | — | — | |||||||||||||||||||
| Fixed income funds | — | — | — | — | |||||||||||||||||||
| Total assets at fair value | $ | 1.8 | $ | 1.8 | $ | — | $ | — | |||||||||||||||
| Contingent consideration | |||||||||||||||||||||||
| Earnout liability | $ | 19.8 | $ | — | $ | — | $ | 19.8 | |||||||||||||||
| Total liabilities at fair value | $ | 19.8 | $ | — | $ | — | $ | 19.8 | |||||||||||||||
| Fair Value at | Fair Value Hierarchy | ||||||||||||||||||||||
| (in millions) | August 27, 2022 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets that fund deferred compensation | |||||||||||||||||||||||
| Domestic equity funds | $ | 1.2 | $ | 1.2 | $ | — | $ | — | |||||||||||||||
| International equity funds | 0.1 | 0.1 | — | — | |||||||||||||||||||
| Fixed income funds | 0.1 | 0.1 | — | — | |||||||||||||||||||
| Total assets at fair value | $ | 1.4 | $ | 1.4 | $ | — | $ | — | |||||||||||||||
| Contingent consideration | |||||||||||||||||||||||
| Earnout liability | $ | 39.8 | $ | — | $ | — | $ | 39.8 | |||||||||||||||
| Total liabilities at fair value | $ | 39.8 | $ | — | $ | — | $ | 39.8 | |||||||||||||||
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 in the Notes to Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 27, 2022 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 current 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 gross profit results and discounted at a risk-free rate. The contingent consideration is classified as Level 3. Actual 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.
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The following table provides a reconciliation of the beginning and ending balances of the contingent consideration:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (in millions) | May 27, 2023 | May 28, 2022 | May 27, 2023 | May 28, 2022 | |||||||||||||||||||
| Beginning fair value - contingent consideration | $ | 41.8 | $ | 37.1 | $ | 39.8 | $ | — | |||||||||||||||
| Additions | — | — | — | 24.2 | |||||||||||||||||||
| Fair value adjustments | — | 11.8 | 2.0 | 24.7 | |||||||||||||||||||
| Settlements | (22.0) | (13.2) | (22.0) | (13.2) | |||||||||||||||||||
| Other | — | (0.6) | — | (0.6) | |||||||||||||||||||
| Ending fair value - contingent consideration | $ | 19.8 | $ | 35.1 | $ | 19.8 | $ | 35.1 | |||||||||||||||
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. Refer to Note 2 in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for more information on the classification of earnout 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 nine months ended May 27, 2023 or May 28, 2022.
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 in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for the fair value of our long-term debt.
Note 5. Inventories
Inventories consist of the following:
| (in millions) | May 27, 2023 | August 27, 2022 | |||||||||
| Finished goods | $ | 77.8 | $ | 59.3 | |||||||
| Work-in-process | 152.9 | 198.9 | |||||||||
| Raw materials | 336.7 | 315.0 | |||||||||
| Total | 567.4 | 573.2 | |||||||||
| Less: Excess of FIFO over LIFO cost | 49.4 | 47.4 | |||||||||
| Inventories, net | $ | 518.0 | $ | 525.8 | |||||||
Inventory valuation methods consist of the following:
| (in millions) | May 27, 2023 | August 27, 2022 | |||||||||
| LIFO basis | $ | 239.1 | $ | 212.3 | |||||||
| First-in, first-out ("FIFO") basis | 328.3 | 360.9 | |||||||||
| Total | $ | 567.4 | $ | 573.2 | |||||||
The above inventory value, before reduction for the LIFO reserve, approximates replacement cost at the respective dates.
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Note 6. Property, Plant, and Equipment
Property, plant, and equipment is stated at cost, net of accumulated depreciation, and consists of the following:
| (in millions) | May 27, 2023 | August 27, 2022 | |||||||||
| Land | $ | 14.6 | $ | 14.6 | |||||||
| Buildings and building improvements | 232.1 | 171.0 | |||||||||
| Machinery and equipment | 156.3 | 142.6 | |||||||||
| Software | 49.8 | 43.8 | |||||||||
| Transportation | 7.1 | 6.5 | |||||||||
| Construction in progress | 58.6 | 76.8 | |||||||||
| Property, plant, and equipment, gross | 518.5 | 455.3 | |||||||||
| Less: Accumulated depreciation | 198.5 | 179.1 | |||||||||
| Property, plant, and equipment, net | $ | 320.0 | $ | 276.2 | |||||||
Depreciation expense was $7.6 million and $6.3 million for the three months ended May 27, 2023 and May 28, 2022, respectively; and $20.9 million and $17.0 million for the nine months ended May 27, 2023 and May 28, 2022, respectively.
Note 7. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill by reportable segment, with no accumulated impairment losses, for the nine months ended May 27, 2023 and May 28, 2022 are as follows:
| (in millions) | Towable RV | Motorhome RV | Marine | Corporate / All Other | Total | ||||||||||||||||||||||||
Balances at August 28, 2021 | $ | 244.7 | $ | 73.1 | $ | 30.3 | $ | — | $ | 348.1 | |||||||||||||||||||
Acquisition of Barletta(1) | — | — | 136.1 | — | 136.1 | ||||||||||||||||||||||||
Balances at May 28, 2022 | $ | 244.7 | $ | 73.1 | $ | 166.4 | $ | — | $ | 484.2 | |||||||||||||||||||
Balances at August 27, 2022 | $ | 244.7 | $ | 73.1 | $ | 166.4 | $ | — | $ | 484.2 | |||||||||||||||||||
Acquisition of Lithionics(2) | — | — | — | 30.3 | 30.3 | ||||||||||||||||||||||||
Balances at May 27, 2023 | $ | 244.7 | $ | 73.1 | $ | 166.4 | $ | 30.3 | $ | 514.5 | |||||||||||||||||||
(1) The change in marine activity is related to the acquisition of Barletta that occurred on August 31, 2021. See Note 2 in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
(2) The change in corporate / all other activity is related to the acquisition of Lithionics that occurred on April 28, 2023. See Note 2 in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
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Other intangible assets, net of accumulated amortization, consist of the following:
| May 27, 2023 | |||||||||||||||||
| (in millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||||||
| Trade names | $ | 356.4 | $ | — | $ | 356.4 | |||||||||||
| Dealer networks/customer relationships | 183.6 | 71.6 | 112.0 | ||||||||||||||
| Backlog | 43.6 | 42.4 | 1.2 | ||||||||||||||
| Developed technology | 38.3 | 0.5 | 37.8 | ||||||||||||||
| Non-compete agreements | 6.6 | 6.3 | 0.3 | ||||||||||||||
| Other intangible assets | $ | 628.5 | $ | 120.8 | $ | 507.7 | |||||||||||
| August 27, 2022 | |||||||||||||||||
| (in millions) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||||||
| Trade names | $ | 352.3 | $ | — | $ | 352.3 | |||||||||||
| Dealer networks/customer relationships | 180.0 | 60.5 | 119.5 | ||||||||||||||
| Backlog | 42.3 | 42.3 | — | ||||||||||||||
| Non-compete agreements | 6.6 | 6.0 | 0.6 | ||||||||||||||
| Other intangible assets | $ | 581.2 | $ | 108.8 | $ | 472.4 | |||||||||||
The weighted average remaining amortization period for intangible assets as of May 27, 2023 was approximately seven years.
Estimated future amortization expense related to finite-lived intangible assets is as follows:
| (in millions) | Amortization | ||||
Remainder of Fiscal 2023 | $ | 5.6 | |||
| Fiscal 2024 | 22.5 | ||||
| Fiscal 2025 | 22.1 | ||||
| Fiscal 2026 | 21.7 | ||||
| Fiscal 2027 | 21.7 | ||||
| Fiscal 2028 | 21.4 | ||||
| Thereafter | 40.3 | ||||
| Total amortization expense remaining | $ | 155.3 | |||
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 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.
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Changes in the product warranty liability are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (in millions) | May 27, 2023 | May 28, 2022 | May 27, 2023 | May 28, 2022 | |||||||||||||||||||
| Balance at beginning of period | $ | 113.7 | $ | 113.8 | $ | 127.9 | $ | 91.2 | |||||||||||||||
Business acquisition(1) | 1.4 | — | 1.4 | 4.7 | |||||||||||||||||||
| Provision | 17.6 | 37.1 | 51.7 | 94.3 | |||||||||||||||||||
| Claims paid | (26.2) | (23.6) | (74.5) | (62.9) | |||||||||||||||||||
| Balance at end of period | $ | 106.5 | $ | 127.3 | $ | 106.5 | $ | 127.3 | |||||||||||||||
(1) Refer to Note 2 in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for more information on the acquisition of Lithionics on April 28, 2023 and the acquisition of Barletta on August 31, 2021.
Note 9. Long-Term Debt
Long-term debt consists of the following:
| (in millions) | May 27, 2023 | August 27, 2022 | |||||||||
| ABL Credit Facility | $ | — | $ | — | |||||||
| Senior Secured Notes | 300.0 | 300.0 | |||||||||
| Convertible Notes | 300.0 | 300.0 | |||||||||
| Long-term debt, gross | 600.0 | 600.0 | |||||||||
Convertible Notes unamortized interest discount(1) | — | (45.3) | |||||||||
| Debt issuance costs, net | (8.3) | (8.8) | |||||||||
| Long-term debt, net | $ | 591.7 | $ | 545.9 | |||||||
(1) In connection with the adoption of ASU 2020-06, the unamortized interest discount was derecognized in the first quarter of Fiscal 2023. Refer to Note 1 in the Notes to Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information.
Credit Agreements
On July 15, 2022, we amended and restated our existing asset-backed revolving credit agreement ("ABL Credit Facility") to, among other things, increase the commitments available from $192.5 million to $350.0 million, and extend the maturity date from October 22, 2024 to July 15, 2027 (subject to certain factors which may accelerate the maturity date). The $350.0 million credit facility is on a revolving basis, subject to availability under a borrowing base consisting of eligible accounts receivable and eligible inventory. The ABL Credit Facility is available for issuance of letters of credit to a specified limit of $35.0 million. We pay a commitment fee of 0.25% based on the average daily amount of the facility available, but unused during the most recent quarter. We can elect to base the interest rate on various rates plus specific spreads depending on the borrowing amount outstanding. If drawn, interest on ABL Credit Facility borrowings is at a floating rate based upon our election, either term SOFR or REVSOFR30 (as defined in the ABL Credit Facility agreement), plus, in each case, a credit spread adjustment of 0.10%, as well as an applicable spread between 1.25% and 1.75%, depending on the usage of the facility during the most recent quarter. Based on current usage, we would pay an applicable spread of 1.25%. In connection with the amendment, we capitalized $1.2 million of issuance costs that will be amortized over the five-year term of the ABL Credit Facility.
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.
Refer to Note 9 in the Notes to Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 27, 2022 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 our election, 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.
Prior to the close of business on the business day immediately preceding October 1, 2024, the Convertible Notes will be convertible only under the following circumstances:
1.during any calendar quarter commencing after December 31, 2019 if the closing sale price of the common stock is more than 130% of the applicable conversion price on each applicable trading day for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
2.during the five consecutive business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1 thousand principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate for the Convertible Notes on each such trading day; or
3.upon the occurrence of certain specified corporate events set forth in the indenture for the Convertible Notes.
We may not redeem the Convertible Notes at our option prior to the maturity date, and no sinking fund is provided for the Convertible Notes.
The conversion rate of the Convertible Notes may be adjusted in certain circumstances, including in connection with a conversion of the Convertible Notes made following certain fundamental changes and under other circumstances set forth in the indenture. 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 in the Notes to Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 27, 2022 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
In the first quarter of Fiscal 2023, we adopted ASU 2020-06 using the modified retrospective approach. The new guidance simplifies the accounting for convertible instruments by removing certain separation models. As a result, more convertible debt instruments will be accounted for as a single liability measured at amortized cost.
Prior to our adoption of ASU 2020-06, 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 represented the difference between the fair value of the initial $215.0 million in debt and
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the $300.0 million of gross proceeds. The initial debt discount of $85.0 million was being amortized over the life of the Convertible Notes as non-cash interest expense using the effective interest method. We recognized $3.9 million and $11.2 million of non-cash interest expense during the three and nine months ended May 28, 2022, respectively. In addition, offering-related costs of $9.8 million were allocated to the liability and equity components in proportion to the allocation of proceeds.
In connection with our adoption of ASU 2020-06, we derecognized the remaining unamortized interest discount on the Convertible Notes and therefore recorded no non-cash interest expense related to the amortization of the debt discount during the nine months ended May 27, 2023. As a result, the Convertible Notes are now accounted for as a single liability measured at amortized cost. Interest expense, representing the amortization of the debt issuance costs as well as the contractual interest expense is amortized using an effective interest rate of 2.1% over the term of the Convertible Notes. We recorded $1.6 million and $4.7 million of interest expense during the three and nine months ended May 27, 2023, respectively.
Refer to Note 15 in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for more information related to the earnings per share impact associated with the Convertible Notes and our adoption of ASU-2020-06.
The net cost incurred in connection with the Call Spread Transactions was $11.2 million. These transactions are classified as equity and are not remeasured each reporting period.
Fair Value and Future Maturities
As of May 27, 2023 and August 27, 2022, the fair value of long-term debt, gross, was $624.5 million and $634.2 million, respectively. The fair value of the Convertible Notes was $332.8 million as of May 27, 2023.
Aggregate contractual maturities of debt in future fiscal years are as follows:
| (in millions) | Amount | ||||
Remainder of Fiscal 2023 | $ | — | |||
| Fiscal 2024 | — | ||||
| Fiscal 2025 | 300.0 | ||||
| Fiscal 2026 | — | ||||
| Fiscal 2027 | — | ||||
| Fiscal 2028 | 300.0 | ||||
| Total Senior Secured Notes and Convertible Notes | $ | 600.0 | |||
Note 10. Employee and Retiree Benefits
Deferred compensation liabilities are as follows:
| (in millions) | May 27, 2023 | August 27, 2022 | |||||||||
| Non-qualified deferred compensation | $ | 6.9 | $ | 7.9 | |||||||
| Supplemental executive retirement plan | 1.1 | 1.4 | |||||||||
| Executive deferred compensation plan | 1.8 | 1.4 | |||||||||
| Total deferred compensation benefits | 9.8 | 10.7 | |||||||||
Less: current portion(1) | 1.9 | 2.6 | |||||||||
| Deferred compensation benefits, net of current portion | $ | 7.9 | $ | 8.1 | |||||||
(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
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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 $2,069.8 million and $1,783.7 million at May 27, 2023 and August 27, 2022, respectively.
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 other current liabilities on the Consolidated Balance Sheets. Our repurchase accrual was $1.3 million and $1.4 million at May 27, 2023 and August 27, 2022, 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.
There was no material activity related to repurchase agreements during the nine months ended May 27, 2023 and May 28, 2022.
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 towable RV units, motorhome RV 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 | Nine Months Ended | ||||||||||||||||||||||
| (in millions) | May 27, 2023 | May 28, 2022 | May 27, 2023 | May 28, 2022 | |||||||||||||||||||
| Net Revenues | |||||||||||||||||||||||
| Towable RV | |||||||||||||||||||||||
| Fifth Wheel | $ | 185.0 | $ | 392.1 | $ | 548.0 | $ | 999.0 | |||||||||||||||
| Travel Trailer | 189.2 | 404.5 | 494.7 | 1,076.7 | |||||||||||||||||||
Other(1) | 9.9 | 9.0 | 31.2 | 27.5 | |||||||||||||||||||
| Total Towable RV | 384.1 | 805.6 | 1,073.9 | 2,103.2 | |||||||||||||||||||
| Motorhome RV | |||||||||||||||||||||||
| Class A | 166.5 | 208.4 | 580.7 | 568.7 | |||||||||||||||||||
| Class B | 112.9 | 194.5 | 366.4 | 507.2 | |||||||||||||||||||
Class C and Other (1) | 95.0 | 113.4 | 295.3 | 279.5 | |||||||||||||||||||
| Total Motorhome RV | 374.4 | 516.3 | 1,242.4 | 1,355.4 | |||||||||||||||||||
| Marine | 129.0 | 126.5 | 373.3 | 303.2 | |||||||||||||||||||
Corporate / All Other(2) | 13.3 | 9.7 | 30.1 | 16.8 | |||||||||||||||||||
| Consolidated Net Revenues | $ | 900.8 | $ | 1,458.1 | $ | 2,719.7 | $ | 3,778.6 | |||||||||||||||
(1) Relates to parts, accessories, services, and other miscellaneous revenue.
(2) Relates to units, parts, accessories, and services associated with Winnebago specialty vehicles. In addition, this activity also includes Lithionics battery sales, including the related systems and accessories, that are sold directly to external customers.
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.
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Concentration of Risk
No single dealer organization accounted for more than 10% of net revenue for the nine months ended May 27, 2023 or May 28, 2022.
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.
Stock-based compensation expense was $1.7 million and $5.6 million for the three months ended May 27, 2023 and May 28, 2022, respectively; and $8.2 million and $12.5 million for the nine months ended May 27, 2023 and May 28, 2022, respectively. Compensation expense is recognized over the requisite service or performance period of the award, unless accelerated by certain retirement eligibility provisions.
Note 14. Income Taxes
Our effective tax rate was 21.4% and 24.2% for the three months ended May 27, 2023 and May 28, 2022, respectively, and 23.4% and 23.8% for the nine months ended May 27, 2023 and May 28, 2022, respectively. The decrease in tax rate for the three months ended May 27, 2023 compared to the three months ended May 28, 2022 was driven primarily by the impact of favorable tax return to provision adjustments. The decrease in tax rate for the nine months ended May 27, 2023 compared to the nine months ended May 28, 2022 was driven primarily by the impact of favorable tax return to provision adjustments in the current year and the impact of mostly consistent tax credits year-over-year over decreased income in the current year, offset by a net favorable benefit in the prior year related to stock compensation.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law in the United States. Among other provisions, the IRA includes a 15% corporate minimum tax rate applied to certain large corporations and a 1% excise tax on corporate stock repurchases made after December 31, 2022. We do not expect the IRA to have a material impact on our consolidated financial statements.
We file a U.S. Federal tax return, as well as returns in various international and state jurisdictions. As of May 27, 2023, our Federal returns from Fiscal 2019 to present are subject to review by the Internal Revenue Service. With limited exceptions, state returns from Fiscal 2018 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 2019 through Fiscal 2021. 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
In the first quarter of Fiscal 2023, we adopted ASU 2020-06. Prior to adoption, we utilized the treasury stock method for calculating the dilutive impact of our Convertible Notes. Upon adoption, we prospectively utilized the if-converted method to calculate the dilutive impact of our Convertible Notes. Under the if-converted method, the Convertible Notes are assumed to be converted into common stock at the beginning of the reporting period, and the resulting shares are included in the denominator of the calculation. In addition, interest charges, net of any income tax effects are added back to the numerator of the calculation.
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Basic and diluted earnings per share are calculated as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (in millions, except per share data) | May 27, 2023 | May 28, 2022 | May 27, 2023 | May 28, 2022 | |||||||||||||||||||
| Earnings per share - basic | |||||||||||||||||||||||
| Net income | $ | 59.1 | $ | 117.2 | $ | 172.1 | $ | 308.0 | |||||||||||||||
| Weighted average common shares outstanding | 30.4 | 32.4 | 30.4 | 32.9 | |||||||||||||||||||
Basic earnings per common share(1) | $ | 1.95 | $ | 3.62 | $ | 5.66 | $ | 9.35 | |||||||||||||||
| Earnings per share - diluted | |||||||||||||||||||||||
| Net income | $ | 59.1 | $ | 117.2 | $ | 172.1 | $ | 308.0 | |||||||||||||||
| Interest expense on convertible notes, net of tax | 1.2 | — | 3.6 | — | |||||||||||||||||||
| Diluted net income | $ | 60.3 | $ | 117.2 | $ | 175.7 | $ | 308.0 | |||||||||||||||
| Weighted average common shares outstanding | 30.4 | 32.4 | 30.4 | 32.9 | |||||||||||||||||||
| Dilutive impact of stock compensation awards | 0.3 | 0.5 | 0.4 | 0.5 | |||||||||||||||||||
| Dilutive impact of convertible notes | 4.7 | — | 4.7 | 0.2 | |||||||||||||||||||
| Weighted average common shares outstanding, assuming dilution | 35.4 | 32.9 | 35.5 | 33.6 | |||||||||||||||||||
| Anti-dilutive securities excluded from weighted average common shares outstanding, assuming dilution | 0.1 | 0.2 | 0.1 | 0.2 | |||||||||||||||||||
Diluted earnings per common share(1) | $ | 1.71 | $ | 3.57 | $ | 4.95 | $ | 9.18 | |||||||||||||||
(1) Earnings per share amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided.
For both periods presented, the dilutive effect of stock compensation awards was determined using the treasury stock method. 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.
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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 27, 2022 (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 are in millions, 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 RV units in Iowa and Indiana; our towable RV 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.
Acquisition of Lithionics
On April 28, 2023, we completed our acquisition of all the equity interests of Lithionics, a premier lithium-ion battery solutions provider to the recreational equipment and specialty vehicle markets. 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.
Reportable Segment Name Changes
In the third quarter of Fiscal 2023, we changed the name of our “Towable” segment to “Towable RV” and our “Motorhome” segment to “Motorhome RV”. These name changes had no impact on the composition of our segments, or previously reported results of operations, financial position, cash flows or segment results.
Known Trends and Uncertainties
Our business continues to be challenged by macroeconomic conditions impacting retail consumers, such as inflation and rising interest rates. These factors have contributed to lower consumer spending and reduced short-term demand for large discretionary products such as RVs and marine products. In response, we are working closely with dealer partners across all our segments to align field inventory levels to meet end consumer demand. We continue to produce and ship in accordance with dealer demand as evidenced and requested by dealer orders.
Despite the current economic slowdown, we still believe in the long-term health of consumer demand for RV and marine products. According to statistics published by Kampgrounds of America, Inc., the number of households in North America that own an RV increased by approximately 34% between 2019 and 2022. In addition, according to a recent study conducted by the National Marine Manufacturers Association, recreational boating saw a 36% increase in annual economic activity from 2018 to 2023.
In the first quarter of Fiscal 2023, Mercedes-Benz AG issued a global recall related to an electronic parking brake defect affecting 2019 through 2022 Sprinter chassis. As a result, all retail sales and wholesale shipments of our products built on this chassis were temporarily suspended until a recall remedy was implemented. During the second quarter of Fiscal 2023, the recall remedy was implemented in cooperation with Mercedes-Benz AG.
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 with, the GAAP financial measures presented herein. The non-GAAP financial measures presented may differ from similar measures used by other companies.
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Included in "Results of Operations" below for the three and nine months ended May 27, 2023 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, 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 in the Notes to 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.
Results of Operations - Three Months Ended May 27, 2023 Compared to the Three Months Ended May 28, 2022
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 May 27, 2023 compared to the three months ended May 28, 2022:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| ($ in millions, except per share data) | May 27, 2023 | % of Revenues(1) | May 28, 2022 | % of Revenues(1) | $ Change(1) | % Change(1) | |||||||||||||||||||||||||||||
| Net revenues | $ | 900.8 | 100.0 | % | $ | 1,458.1 | 100.0 | % | $ | (557.3) | (38.2) | % | |||||||||||||||||||||||
| Cost of goods sold | 749.4 | 83.2 | % | 1,185.1 | 81.3 | % | (435.8) | (36.8) | % | ||||||||||||||||||||||||||
| Gross profit | 151.4 | 16.8 | % | 273.0 | 18.7 | % | (121.5) | (44.5) | % | ||||||||||||||||||||||||||
| Selling, general, and administrative expenses | 66.5 | 7.4 | % | 88.3 | 6.1 | % | (21.7) | (24.6) | % | ||||||||||||||||||||||||||
| Amortization | 4.4 | 0.5 | % | 8.0 | 0.5 | % | (3.6) | (44.7) | % | ||||||||||||||||||||||||||
| Total operating expenses | 70.9 | 7.9 | % | 96.3 | 6.6 | % | (25.3) | (26.3) | % | ||||||||||||||||||||||||||
| Operating income | 80.5 | 8.9 | % | 176.7 | 12.1 | % | (96.2) | (54.5) | % | ||||||||||||||||||||||||||
| Interest expense, net | 5.2 | 0.6 | % | 10.5 | 0.7 | % | (5.4) | (51.0) | % | ||||||||||||||||||||||||||
| Non-operating loss | 0.2 | — | % | 11.7 | 0.8 | % | (11.4) | (98.1) | % | ||||||||||||||||||||||||||
| Income before income taxes | 75.1 | 8.3 | % | 154.5 | 10.6 | % | (79.4) | (51.4) | % | ||||||||||||||||||||||||||
| Provision for income taxes | 16.0 | 1.8 | % | 37.3 | 2.6 | % | (21.3) | (57.0) | % | ||||||||||||||||||||||||||
| Net income | $ | 59.1 | 6.6 | % | $ | 117.2 | 8.0 | % | $ | (58.2) | (49.6) | % | |||||||||||||||||||||||
| Diluted earnings per share | $ | 1.71 | $ | 3.57 | $ | (1.86) | (52.1) | % | |||||||||||||||||||||||||||
| Diluted weighted average shares outstanding | 35.4 | 32.9 | 2.5 | 7.6 | % | ||||||||||||||||||||||||||||||
(1) Amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided. In addition, percentages may not add in total due to rounding.
Net revenues decreased primarily due to lower unit sales related to retail market conditions and higher discounts and allowances compared to prior year, partially offset by carryover price increases.
Gross profit as a percentage of revenue decreased primarily from deleverage and higher discounts and allowances compared to prior year.
Operating expenses decreased primarily due to lower incentive-based compensation related to operating performance, and lower amortization related to Barletta intangible assets, partially offset by strategic investments and Lithionics transaction costs.
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Non-operating loss decreased due to a lower contingent consideration fair value adjustment related to the earnout from the acquisition of Barletta.
Our effective tax rate decreased primarily from the impact of favorable tax return to provision adjustments.
Non-GAAP Reconciliation
The following table reconciles net income to consolidated EBITDA and Adjusted EBITDA for the three months ended May 27, 2023 and May 28, 2022:
| Three Months Ended | |||||||||||
| (in millions) | May 27, 2023 | May 28, 2022 | |||||||||
| Net income | $ | 59.1 | $ | 117.2 | |||||||
| Interest expense, net | 5.2 | 10.5 | |||||||||
| Provision for income taxes | 16.0 | 37.3 | |||||||||
| Depreciation | 7.6 | 6.3 | |||||||||
| Amortization | 4.4 | 8.0 | |||||||||
| EBITDA | 92.3 | 179.3 | |||||||||
| Acquisition-related costs | 3.9 | 0.7 | |||||||||
| Contingent consideration fair value adjustment | — | 11.8 | |||||||||
| Non-operating loss (income) | 0.2 | (0.1) | |||||||||
| Adjusted EBITDA | $ | 96.4 | $ | 191.7 | |||||||
Reportable Segment Performance Summary
Towable RV
The following is an analysis of key changes in our Towable RV segment for the three months ended May 27, 2023 compared to the three months ended May 28, 2022:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in millions, except ASP and units) | May 27, 2023 | % of Revenues(2) | May 28, 2022 | % of Revenues(2) | $ Change(2) | % Change(2) | |||||||||||||||||||||||||||||
| Net revenues | $ | 384.1 | $ | 805.6 | $ | (421.5) | (52.3) | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 53.8 | 14.0 | % | 117.8 | 14.6 | % | (64.0) | (54.3) | % | ||||||||||||||||||||||||||
Average Selling Price ("ASP")(1) | $ | 44,070 | $ | 45,322 | $ | (1,252) | (2.8) | % | |||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | May 27, 2023 | Product Mix(3) | May 28, 2022 | Product Mix(3) | Unit Change | % Change | |||||||||||||||||||||||||||||
| Travel trailer | 6,376 | 73.2 | % | 12,031 | 68.1 | % | (5,655) | (47.0) | % | ||||||||||||||||||||||||||
| Fifth wheel | 2,339 | 26.8 | % | 5,644 | 31.9 | % | (3,305) | (58.6) | % | ||||||||||||||||||||||||||
| Total Towable RV | 8,715 | 100.0 | % | 17,675 | 100.0 | % | (8,960) | (50.7) | % | ||||||||||||||||||||||||||
(1) ASP excludes off-invoice dealer incentives.
(2) Amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided.
(3) Percentages may not add due to rounding differences.
Net revenues decreased primarily due to a decline in unit volume associated with retail market conditions and higher discounts and allowances compared to prior year.
Adjusted EBITDA decreased primarily due to lower revenues associated with volume declines related to retail market conditions, and higher discounts and allowances compared to prior year, partially offset by favorable warranty experience.
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Motorhome RV
The following is an analysis of key changes in our Motorhome RV segment for the three months ended May 27, 2023 compared to the three months ended May 28, 2022:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in millions, except ASP and units) | May 27, 2023 | % of Revenues(2) | May 28, 2022 | % of Revenues(2) | $ Change(2) | % Change(2) | |||||||||||||||||||||||||||||
| Net revenues | $ | 374.4 | $ | 516.3 | $ | (142.0) | (27.5) | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 26.8 | 7.2 | % | 64.4 | 12.5 | % | (37.5) | (58.3) | % | ||||||||||||||||||||||||||
ASP(1) | $ | 177,612 | $ | 159,699 | $ | 17,913 | 11.2 | % | |||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | May 27, 2023 | Product Mix(3) | May 28, 2022 | Product Mix(3) | Unit Change | % Change | |||||||||||||||||||||||||||||
| Class A | 524 | 24.6 | % | 672 | 21.0 | % | (148) | (22.0) | % | ||||||||||||||||||||||||||
| Class B | 1,018 | 47.8 | % | 1,801 | 56.3 | % | (783) | (43.5) | % | ||||||||||||||||||||||||||
| Class C | 589 | 27.6 | % | 728 | 22.7 | % | (139) | (19.1) | % | ||||||||||||||||||||||||||
| Total Motorhome RV | 2,131 | 100.0 | % | 3,201 | 100.0 | % | (1,070) | (33.4) | % | ||||||||||||||||||||||||||
(1) ASP excludes off-invoice dealer incentives.
(2) Amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided.
(3) Percentages may not add due to rounding differences.
Net revenues decreased primarily due to unit volume decline and higher discounts and allowances compared to prior year, partially offset by price increases related to higher chassis costs.
Adjusted EBITDA decreased primarily due to lower revenues associated with volume declines, higher discounts and allowances compared to prior year, and productivity and operational efficiency challenges, primarily related to an ERP system implementation.
Marine
The following is an analysis of key changes in our Marine segment for the three months ended May 27, 2023 compared to the three months ended May 28, 2022:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in millions, except ASP and units) | May 27, 2023 | % of Revenues(2) | May 28, 2022 | % of Revenues(2) | $ Change(2) | % Change(2) | |||||||||||||||||||||||||||||
| Net revenues | $ | 129.0 | $ | 126.5 | $ | 2.4 | 1.9 | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 17.3 | 13.4 | % | 19.8 | 15.7 | % | (2.5) | (12.5) | % | ||||||||||||||||||||||||||
ASP(1) | $ | 81,492 | $ | 76,371 | $ | 5,121 | 6.7 | % | |||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | May 27, 2023 | May 28, 2022 | Unit Change | % Change | |||||||||||||||||||||||||||||||
| Boats | 1,586 | 1,655 | (69) | (4.2) | % | ||||||||||||||||||||||||||||||
(1) ASP excludes off-invoice dealer incentives.
(2) Amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided.
Net revenues increased primarily due to carryover price increases, partially offset by unit volume decline.
Adjusted EBITDA decreased primarily due to higher discounts and allowances compared to prior year.
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Results of Operations - Nine Months Ended May 27, 2023 Compared to the Nine Months Ended May 28, 2022
Consolidated Performance Summary
The following is an analysis of changes in key items included in the Consolidated Statements of Income for the nine months ended May 27, 2023 compared to the nine months ended May 28, 2022:
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| ($ in millions, except per share data) | May 27, 2023 | % of Revenues(1) | May 28, 2022 | % of Revenues(1) | $ Change(1) | % Change(1) | |||||||||||||||||||||||||||||
| Net revenues | $ | 2,719.7 | 100.0 | % | $ | 3,778.6 | 100.0 | % | $ | (1,058.8) | (28.0) | % | |||||||||||||||||||||||
| Cost of goods sold | 2,261.1 | 83.1 | % | 3,059.6 | 81.0 | % | (798.5) | (26.1) | % | ||||||||||||||||||||||||||
| Gross profit | 458.6 | 16.9 | % | 719.0 | 19.0 | % | (260.3) | (36.2) | % | ||||||||||||||||||||||||||
| Selling, general, and administrative expenses | 203.4 | 7.5 | % | 235.0 | 6.2 | % | (31.5) | (13.4) | % | ||||||||||||||||||||||||||
| Amortization | 12.0 | 0.4 | % | 24.2 | 0.6 | % | (12.1) | (50.2) | % | ||||||||||||||||||||||||||
| Total operating expenses | 215.4 | 7.9 | % | 259.2 | 6.9 | % | (43.6) | (16.8) | % | ||||||||||||||||||||||||||
| Operating income | 243.2 | 8.9 | % | 459.8 | 12.2 | % | (216.7) | (47.1) | % | ||||||||||||||||||||||||||
| Interest expense, net | 16.4 | 0.6 | % | 31.1 | 0.8 | % | (14.7) | (47.3) | % | ||||||||||||||||||||||||||
| Non-operating loss | 2.3 | 0.1 | % | 24.5 | 0.6 | % | (22.3) | (90.9) | % | ||||||||||||||||||||||||||
| Income before income taxes | 224.5 | 8.3 | % | 404.2 | 10.7 | % | (179.7) | (44.5) | % | ||||||||||||||||||||||||||
| Provision for income taxes | 52.4 | 1.9 | % | 96.2 | 2.5 | % | (43.7) | (45.5) | % | ||||||||||||||||||||||||||
| Net income | $ | 172.1 | 6.3 | % | $ | 308.0 | 8.2 | % | $ | (136.0) | (44.1) | % | |||||||||||||||||||||||
| Diluted earnings per share | $ | 4.95 | $ | 9.18 | $ | (4.23) | (46.1) | % | |||||||||||||||||||||||||||
| Diluted weighted average shares outstanding | 35.5 | 33.6 | 1.9 | 5.7 | % | ||||||||||||||||||||||||||||||
(1) Amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided. In addition, percentages may not add in total due to rounding.
Net revenues decreased primarily due to lower unit sales related to retail market conditions, and higher discounts and allowances compared to prior year, partially offset by carryover price increases in all segments.
Gross profit as a percentage of revenue decreased primarily due to deleverage and higher discounts and allowances compared to prior year.
Operating expenses decreased primarily due to lower incentive-based compensation related to operating performance, lower amortization related to Barletta intangible assets and lower legal settlement expenses, partially offset by strategic investments.
Non-operating loss decreased due to a lower contingent consideration fair value adjustment related to the earnout from the acquisition of Barletta.
Our effective tax rate decreased primarily from the impact of favorable tax return to provision adjustments in the current year and the impact of mostly consistent tax credits year-over-year over decreased income in the current year, offset by a net favorable benefit in the prior year related to stock compensation.
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Non-GAAP Reconciliation
The following table reconciles net income to consolidated EBITDA and Adjusted EBITDA for the nine months ended May 27, 2023 and May 28, 2022:
| Nine Months Ended | |||||||||||
| (in millions) | May 27, 2023 | May 28, 2022 | |||||||||
| Net income | $ | 172.1 | $ | 308.0 | |||||||
| Interest expense, net | 16.4 | 31.1 | |||||||||
| Provision for income taxes | 52.4 | 96.2 | |||||||||
| Depreciation | 20.9 | 17.0 | |||||||||
| Amortization | 12.0 | 24.2 | |||||||||
| EBITDA | 273.8 | 476.5 | |||||||||
| Acquisition-related costs | 5.6 | 4.6 | |||||||||
| Litigation reserves | — | 4.0 | |||||||||
| Contingent consideration fair value adjustment | 2.0 | 24.7 | |||||||||
| Non-operating loss (income) | 0.4 | (0.1) | |||||||||
| Adjusted EBITDA | $ | 281.8 | $ | 509.7 | |||||||
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Reportable Segment Performance Summary
Towable RV
The following is an analysis of key changes in our Towable RV segment for the nine months ended May 27, 2023 compared to the nine months ended May 28, 2022:
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| (in millions, except ASP and units) | May 27, 2023 | % of Revenues(2) | May 28, 2022 | % of Revenues(2) | $ Change(2) | % Change(2) | |||||||||||||||||||||||||||||
| Net revenues | $ | 1,073.9 | $ | 2,103.2 | $ | (1,029.3) | (48.9) | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 129.4 | 12.0 | % | 330.4 | 15.7 | % | (201.1) | (60.9) | % | ||||||||||||||||||||||||||
ASP(1) | $ | 46,018 | $ | 42,244 | $ | 3,774 | 8.9 | % | |||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | May 27, 2023 | Product Mix(3) | May 28, 2022 | Product Mix(3) | Unit Change | % Change | |||||||||||||||||||||||||||||
| Travel trailer | 16,049 | 68.8 | % | 33,938 | 68.7 | % | (17,889) | (52.7) | % | ||||||||||||||||||||||||||
| Fifth wheel | 7,293 | 31.2 | % | 15,462 | 31.3 | % | (8,169) | (52.8) | % | ||||||||||||||||||||||||||
| Total Towable RV | 23,342 | 100.0 | % | 49,400 | 100.0 | % | (26,058) | (52.7) | % | ||||||||||||||||||||||||||
| May 27, 2023 | May 28, 2022 | Change(2) | % Change(2) | ||||||||||||||||||||||||||||||||
Backlog(4) | |||||||||||||||||||||||||||||||||||
| Units | 5,297 | 31,606 | (26,309) | (83.2) | % | ||||||||||||||||||||||||||||||
| Dollars | $ | 236.0 | $ | 1,312.9 | $ | (1,076.9) | (82.0) | % | |||||||||||||||||||||||||||
| Dealer Inventory | |||||||||||||||||||||||||||||||||||
| Units | 20,218 | 25,230 | (5,012) | (19.9) | % | ||||||||||||||||||||||||||||||
(1) ASP excludes off-invoice dealer incentives.
(2) Amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided.
(3) Percentages may not add due to rounding differences.
(4) 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 decreased primarily due to a decline in unit volume related to retail market conditions and higher discounts and allowances compared to prior year, partially offset by carryover price increases.
Adjusted EBITDA decreased primarily due to lower revenues associated with volume declines related to retail market conditions and higher discounts and allowances compared to prior year.
Backlog decreased compared to the prior year when dealers were replenishing inventories.
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Motorhome RV
The following is an analysis of key changes in our Motorhome RV segment for the nine months ended May 27, 2023 compared to the nine months ended May 28, 2022:
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| (in millions, except ASP and units) | May 27, 2023 | % of Revenues(2) | May 28, 2022 | % of Revenues(2) | $ Change(2) | % Change(2) | |||||||||||||||||||||||||||||
| Net revenues | $ | 1,242.4 | $ | 1,355.4 | $ | (113.0) | (8.3) | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 119.6 | 9.6 | % | 160.6 | 11.9 | % | (41.0) | (25.5) | % | ||||||||||||||||||||||||||
ASP(1) | $ | 182,326 | $ | 153,139 | $ | 29,187 | 19.1 | % | |||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | May 27, 2023 | Product Mix(3) | May 28, 2022 | Product Mix(3) | Unit Change | % Change | |||||||||||||||||||||||||||||
| Class A | 1,734 | 25.5 | % | 2,004 | 22.9 | % | (270) | (13.5) | % | ||||||||||||||||||||||||||
| Class B | 3,233 | 47.5 | % | 4,889 | 55.8 | % | (1,656) | (33.9) | % | ||||||||||||||||||||||||||
| Class C | 1,837 | 27.0 | % | 1,874 | 21.4 | % | (37) | (2.0) | % | ||||||||||||||||||||||||||
| Total Motorhome RV | 6,804 | 100.0 | % | 8,767 | 100.0 | % | (1,963) | (22.4) | % | ||||||||||||||||||||||||||
| May 27, 2023 | May 28, 2022 | Change(2) | % Change(2) | ||||||||||||||||||||||||||||||||
Backlog(4) | |||||||||||||||||||||||||||||||||||
| Units | 4,595 | 15,180 | (10,585) | (69.7) | % | ||||||||||||||||||||||||||||||
| Dollars | $ | 800.4 | $ | 2,285.2 | $ | (1,484.8) | (65.0) | % | |||||||||||||||||||||||||||
| Dealer Inventory | |||||||||||||||||||||||||||||||||||
| Units | 4,544 | 3,008 | 1,536 | 51.1 | % | ||||||||||||||||||||||||||||||
(1) ASP excludes off-invoice dealer incentives.
(2) Amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided.
(3) Percentages may not add due to rounding differences.
(4) 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 decreased primarily due to unit volume decline, partially offset by price increases.
Adjusted EBITDA decreased due to lower revenues and productivity and operational efficiency challenges.
Backlog decreased due to normalizing levels of dealer inventories.
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Marine
The following is an analysis of key changes in our Marine segment for the nine months ended May 27, 2023 compared to the nine months ended May 28, 2022:
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| (in millions, except ASP and units) | May 27, 2023 | % of Revenues(2) | May 28, 2022 | % of Revenues(2) | $ Change(2) | % Change(2) | |||||||||||||||||||||||||||||
| Net revenues | $ | 373.3 | $ | 303.2 | $ | 70.1 | 23.1 | % | |||||||||||||||||||||||||||
| Adjusted EBITDA | 50.2 | 13.5 | % | 43.3 | 14.3 | % | 6.9 | 15.9 | % | ||||||||||||||||||||||||||
ASP(1) | $ | 82,582 | $ | 73,669 | $ | 8,913 | 12.1 | % | |||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| Unit deliveries | May 27, 2023 | May 28, 2022 | Unit Change | % Change | |||||||||||||||||||||||||||||||
| Boats | 4,552 | 4,112 | 440 | 10.7 | % | ||||||||||||||||||||||||||||||
| May 27, 2023 | May 28, 2022 | Change(2) | % Change(2) | ||||||||||||||||||||||||||||||||
Backlog(3) | |||||||||||||||||||||||||||||||||||
| Units | 1,348 | 2,491 | (1,143) | (45.9) | % | ||||||||||||||||||||||||||||||
| Dollars | $ | 146.3 | $ | 245.4 | $ | (99.2) | (40.4) | % | |||||||||||||||||||||||||||
Dealer Inventory(4) | |||||||||||||||||||||||||||||||||||
| Units | 4,109 | 2,454 | 1,655 | 67.4 | % | ||||||||||||||||||||||||||||||
(1) ASP excludes off-invoice dealer incentives.
(2) Amounts are calculated based on unrounded numbers and therefore may not recalculate using the rounded numbers provided.
(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.
(4) Due to the nature of the Marine industry, this amount includes a higher proportion of retail sold units than our other segments.
Net revenues increased primarily due to unit growth and price increases.
Adjusted EBITDA increased primarily due to increased revenue, partially offset by higher discounts and allowances compared to prior year.
Backlog decreased due to normalizing levels of dealer inventories.
Analysis of Financial Condition, Liquidity, and Resources
Cash Flows
The following table summarizes our cash flows from operations:
| Nine Months Ended | |||||||||||
| (in millions) | May 27, 2023 | May 28, 2022 | |||||||||
| Total cash provided by (used in): | |||||||||||
| Operating activities | $ | 156.4 | $ | 245.2 | |||||||
| Investing activities | (154.4) | (291.3) | |||||||||
| Financing activities | (58.3) | (150.4) | |||||||||
| Net decrease in cash and cash equivalents | $ | (56.3) | $ | (196.5) | |||||||
Operating Activities
During the nine months ended May 27, 2023, cash provided by operating activities was $156.4 million compared to $245.2 million in the same period last year. The decrease is primarily driven by lower profitability adjusted for non-cash items, partially offset by
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net favorable changes in operating assets and liabilities. The favorable impact of operating assets and liabilities is primarily due to changes in accounts receivable due to lower sales and timing of invoicing/collections, and changes in inventory due to elevated purchases in Fiscal 2022 to support customer demand, partially offset by a decrease in accounts payable due to lower purchasing requirements.
Investing Activities
Cash used in investing activities decreased primarily due to our acquisition of Barletta during the first quarter of Fiscal 2022 compared to the acquisition of Lithionics during the third quarter of Fiscal 2023.
Financing Activities
Cash used in financing activities decreased primarily due to $24.9 million of stock repurchases in the first nine months of Fiscal 2023 compared to $134.2 million in the first nine months of Fiscal 2022.
Debt and Capital
We maintain a $350.0 million asset-based revolving credit facility ("ABL Credit Facility") with a maturity date of July 15, 2027 subject to certain factors which may accelerate the maturity date. As of May 27, 2023, we had no borrowings against the ABL Credit Facility.
As of May 27, 2023, we had $225.9 million in cash and cash equivalents and $350.0 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.
Working Capital
Working capital at May 27, 2023 and August 27, 2022 was $574.7 million and $571.7 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
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 August 17, 2022, our Board of Directors authorized a new share repurchase program in the amount of $350.0 million with no time restriction on the authorization, which took effect immediately and replaced the prior program. In the nine months ended May 27, 2023, we repurchased 346,860 shares of our own common stock at a cost of $20.0 million under this authorization, and 86,840 shares at a cost of $4.9 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. As of May 27, 2023, we have $330.0 million remaining on our Board approved repurchase authorization.
On May 17, 2023, our Board of Directors approved a quarterly cash dividend of $0.27 per share payable on June 28, 2023, to common stockholders of record at the close of business on June 14, 2023.
Contractual Obligations and Commercial Commitments
There have been no material changes in our contractual obligations since the end of Fiscal 2022. See our Annual Report on Form 10-K for the fiscal year ended August 27, 2022 for additional information regarding our contractual obligations and commercial commitments.
Critical Accounting Policies
We describe our critical accounting policies in Note 1 in the Notes to Consolidated Financial Statements included in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 27, 2022. 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 27, 2022. There have been no material changes to our critical accounting policies or critical accounting estimates since the end of Fiscal 2022.
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Recently Issued Accounting Pronouncements
There have been no new accounting pronouncements issued but not yet adopted or effective that we believe will have a significant impact on our consolidated financial statements.
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 27, 2022, 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:
•General economic uncertainty in key markets and a worsening of domestic and global economic conditions or low levels of economic growth.
•Uncertainty surrounding the COVID-19 pandemic.
•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.
•Risk related to independent dealers.
•Significant increase in repurchase obligations.
•Business or production disruptions.
•Inadequate inventory and distribution channel management.
•Ability to retain relationships with our suppliers and obtain components.
•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 and trade names.
•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
The ABL Credit Facility, which is our only floating rate debt instrument, remains undrawn as of May 27, 2023.
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.
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Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the third quarter of Fiscal 2023 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 in the Notes to 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 Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended August 27, 2022, except for the risk factor updated below:
For some of the components used in production, we depend on a small group of suppliers and the loss of any of these suppliers could affect our ability to obtain components timely or at competitive prices, which would decrease our results of operations, financial condition, and cash flows.
Most of our RV and marine components are readily available from numerous sources. However, a few of our components are produced by a small group of suppliers. In the case of motorhome RV chassis, Mercedes-Benz (USA and Canada), Stellantis N.V., Freightliner Trucks, Ford Motor Company, and Spartan RV Chassis are our major suppliers. Our relationship with our chassis suppliers is similar to our other supplier relationships in that no specific contractual commitments are engaged in by either party. This means that we do not have minimum purchase requirements, and our chassis suppliers do not have minimum supply requirements. Our chassis suppliers also supply to our competitors. Historically, chassis suppliers resort to an industry-wide allocation system during periods when supply is restricted. These allocations have been based on the volume of chassis previously purchased, which could mean our larger competitors could receive more chassis in a time of scarcity. Sales of motorhome RVs rely on chassis supply and are affected by shortages, instability, or recalls from time to time. For example, in the first quarter of Fiscal 2023, the Mercedes-Benz Sprinter chassis became subject to a recall notice, which temporarily suspended all retail sales and wholesale shipments of our products built on this chassis until a recall remedy was implemented. The remedy was implemented in the second quarter of Fiscal 2023 in cooperation with Mercedes-Benz AG. Furthermore, decisions by our suppliers to decrease production, production delays or work stoppages by the employees of such suppliers, or price increases could have a material adverse effect on our ability to produce motorhome RVs and ultimately, on our results of operations, financial condition, and cash flows. In Fiscal 2022, one of our suppliers individually accounted for approximately 11% of our consolidated raw material purchases.
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 third quarter of Fiscal 2023 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) (in millions) | |||||||||||||||||||
| 2/26/23 - 4/1/23 | 52,556 | $ | 57.08 | 52,556 | $ | 347.0 | |||||||||||||||||
| 4/2/23 - 4/29/23 | 294,304 | 57.76 | 294,304 | 330.0 | |||||||||||||||||||
| 4/30/23 - 5/27/23 | 113 | 58.73 | — | 330.0 | |||||||||||||||||||
| Total | 346,973 | $ | 57.66 | 346,860 | $ | 330.0 | |||||||||||||||||
(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 $350.0 million share repurchase program authorized by our Board of Directors on August 17, 2022. There is no time restriction on the authorization.
Our Senior Secured Notes, as defined in Note 9 in the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q, contain 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: | June 21, 2023 | By: | /s/ Michael J. Happe | |||||||||||
Michael J. Happe | ||||||||||||||
| Chief Executive Officer, President | ||||||||||||||
| (Principal Executive Officer) | ||||||||||||||
| Date: | June 21, 2023 | By: | /s/ Bryan L. Hughes | |||||||||||
| Bryan L. Hughes | ||||||||||||||
| Chief Financial Officer and Senior Vice President | ||||||||||||||
| (Principal Financial and Accounting Officer) | ||||||||||||||
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