Document
 

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

 
FORM 10-Q
 

(Mark One)
 
 
 
 
x 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended November 26, 2016
 
 
or
 
 
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from _________________ to _________________
 
 
 
 
 
Commission File Number: 001-06403
 

winnebagoindlogor.jpg
WINNEBAGO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Iowa
 
 
42-0802678
(State or other jurisdiction of incorporation or organization)
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
P. O. Box 152, Forest City, Iowa
 
 
50436
(Address of principal executive offices)
 
 
(Zip Code)
 
 
 
 
 
 
 
(641) 585-3535
 
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer  x
 
 Non-accelerated filer o
 
 Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of common stock, par value $0.50 per share, outstanding December 28, 2016 was 31,582,687.

 



Winnebago Industries, Inc.
Table of Contents

 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A
Item 2.
Item 6.
 
 
 



Table of Contents

Glossary


The following terms and abbreviations appear in the text of this report and are defined as follows:
ABL
Credit Agreement dated as of November 8, 2016 among Winnebago Industries, Inc., Winnebago of Indiana, LLC, Grand Design RV, LLC, the Other Loan Parties thereto and JPMorgan Chase Bank, N.A. as Administrative Agent
AOCI
Accumulated Other Comprehensive Income (Loss)
Amended Credit Agreement
Credit Agreement dated as of May 28, 2014 by and between Winnebago Industries, Inc. and Winnebago of Indiana, LLC, as Borrowers, and Wells Fargo Capital Finance, as Agent; terminated on November 8, 2016
ASC
Accounting Standards Codification
ASP
Average Sales Price
ASU
Accounting Standards Update
Credit Facility
Collective reference to the ABL and Term Loan
EBITDA
Earnings Before Income Taxes, Depreciation and Amortization
EPS
Earnings Per Share
ERP
Enterprise Resource Planning
FASB
Financial Accounting Standards Board
FIFO
First In, First Out
GAAP
Generally Accepted Accounting Principles
Grand Design
Grand Design RV, LLC
IRS
Internal Revenue Service
IT
Information Technology
LIFO
Last In, First Out
LIBOR
London Interbank Offered Rate
Motorized
Business segment including motorhomes and other related manufactured products
NMF
Non-Meaningful Figure
NYFRB
New York Federal Reserve Bank
NYSE
New York Stock Exchange
OCI
Other Comprehensive Income
RV
Recreation Vehicle
RVIA
Recreation Vehicle Industry Association
SPA
Securities Purchase Agreement dated October 2, 2016
SEC
U.S. Securities and Exchange Commission
SERP
Supplemental Executive Retirement Plan
Stat Surveys
Statistical Surveys, Inc.
Term Loan
Loan Agreement dated as of November 8, 2016 among Winnebago Industries, Inc., Octavius Corporation, the other loan parties thereto and JPMorgan Chase Bank, N.A. as Administrative Agent
Towable
Business segment including products which are not motorized and are towable by another vehicle
US
United States of America
XBRL
eXtensible Business Reporting Language



1

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Winnebago Industries, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)

 
 
Three Months Ended
(In thousands, except per share data)
 
November 26,
2016
 
November 28,
2015
Net revenues
 
$
245,308

 
$
214,223

Cost of goods sold
 
216,433

 
188,974

Gross profit
 
28,875

 
25,249

Operating expenses:
 
 
 
 
Selling
 
5,870

 
5,015

General and administrative
 
9,906

 
8,820

Postretirement health care benefit income
 
(12,813
)
 
(1,345
)
Transaction costs
 
5,462

 

Amortization of intangible assets
 
2,051

 

Total operating expenses
 
10,476

 
12,490

Operating income
 
18,399

 
12,759

Interest expense
 
1,128

 

Non-operating income
 
(87
)
 
(135
)
Income before income taxes
 
17,358

 
12,894

Provision for income taxes
 
5,620

 
4,336

Net income
 
$
11,738

 
$
8,558

 
 
 
 
 
Income per common share:
 
 
 
 
Basic
 
$
0.42

 
$
0.32

Diluted
 
$
0.42

 
$
0.32

 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
Basic
 
27,836

 
26,976

Diluted
 
27,969

 
27,067

 
 
 
 
 
Dividends paid per common share
 
$
0.10

 
$
0.10

 
 
 
 
 
Net income
 
$
11,738

 
$
8,558

Other comprehensive (loss) income:
 
 
 
 
Amortization of prior service credit
  (net of tax of $7,914 and $653)
 
(12,858
)
 
(1,060
)
Amortization of net actuarial loss
  (net of tax of $3,036 and $142)
 
4,932

 
231

Plan amendment
  (net of tax of $2,402 and $10,895)
 
3,903

 
17,701

Total other comprehensive (loss) income
 
(4,023
)
 
16,872

Comprehensive income
 
$
7,715

 
$
25,430


See notes to condensed consolidated financial statements.



2

Table of Contents

Winnebago Industries, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
November 26,
2016
 
August 27,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
25,584

 
$
85,583

Receivables, less allowance for doubtful accounts ($238 and $278)
81,762

 
66,184

Inventories
155,446

 
122,522

Prepaid expenses and other assets
10,561

 
6,300

Total current assets
273,353

 
280,589

Property, plant and equipment, net
66,703

 
55,931

Other assets:
 
 
 
Goodwill
251,210

 
1,228

Other intangible assets, net
251,049

 

Investment in life insurance
26,653

 
26,492

Deferred income taxes
7,706

 
18,753

Other assets
6,021

 
7,725

Total assets
$
882,695

 
$
390,718

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
50,971

 
$
44,134

Current maturities of long-term debt
7,578

 

Income taxes payable
3,541

 
19

Accrued expenses:
 
 
 
Accrued compensation
20,452

 
19,699

Product warranties
24,551

 
12,412

Self-insurance
6,037

 
5,812

Accrued loss on repurchases
1,340

 
881

Promotional
8,078

 
4,756

Other
5,919

 
5,236

Total current liabilities
128,467

 
92,949

Non-current liabilities:
 
 
 
Long-term debt, less current maturities
334,742

 

Unrecognized tax benefits
2,066

 
2,461

Deferred compensation and postretirement health care benefits, net of current portion
19,961

 
26,949

Total non-current liabilities
356,769

 
29,410

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

 
25,888

Additional paid-in capital
78,941

 
32,717

Retained earnings
629,099

 
620,546

Accumulated other comprehensive income
6,952

 
10,975

Treasury stock, at cost (20,230 and 24,875 shares)
(343,421
)
 
(421,767
)
Total shareholders' equity
397,459

 
268,359

Total liabilities and shareholders' equity
$
882,695

 
$
390,718


See notes to condensed consolidated financial statements.

3

Table of Contents

Winnebago Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
(In thousands)
November 26,
2016
 
November 28,
2015
Operating activities:
 
 
 
Net income
$
11,738

 
$
8,558

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation
1,580

 
1,370

Amortization of intangible assets
2,051

 

Amortization of debt issuance costs
78

 

LIFO expense (income)
299

 
(90
)
Stock-based compensation
821

 
623

Deferred income taxes
(1,613
)
 
382

Postretirement benefit income and deferred compensation expense
(12,471
)
 
(777
)
Other
(271
)
 
(295
)
Change in assets and liabilities:
 
 
 
Inventories
(17,923
)
 
(24,109
)
Receivables, prepaid and other assets
16,080

 
7,366

Income taxes and unrecognized tax benefits
8,200

 
1,254

Accounts payable and accrued expenses
(7,977
)
 
(1,375
)
Postretirement and deferred compensation benefits
(742
)
 
(970
)
Net cash used in operating activities
(150
)
 
(8,063
)
 
 
 
 
Investing activities:
 
 
 
Purchases of property, plant and equipment
(3,562
)
 
(3,109
)
Proceeds from the sale of property

 
5

Acquisition of business, net of cash acquired
(394,835
)
 

Proceeds from life insurance

 
295

Other
901

 
(220
)
Net cash used in investing activities
(397,496
)
 
(3,029
)
 
 
 
 
Financing activities:
 
 
 
Payments for repurchases of common stock
(1,318
)
 
(705
)
Payments of cash dividends
(3,185
)
 
(2,730
)
Payments of debt issuance costs
(10,758
)
 

Borrowings on credit facility
353,000

 

Other
(92
)
 
9

Net cash provided by (used in) financing activities
337,647

 
(3,426
)
 
 
 
 
Net decrease in cash and cash equivalents
(59,999
)
 
(14,518
)
Cash and cash equivalents at beginning of period
85,583

 
70,239

Cash and cash equivalents at end of period
$
25,584

 
$
55,721

 
 
 
 
Supplement cash flow disclosure:
 
 
 
Income taxes paid, net
$
121

 
$
2,675

Non-cash transactions:
 
 
 
Issuance of Winnebago common stock for acquisition of business
$
124,066

 
$

Capital expenditures in accounts payable
$
695

 
$
826

See notes to condensed consolidated financial statements.

4

Table of Contents

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

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

We were incorporated under the laws of the state of Iowa on February 12, 1958 and adopted our present name on February 28, 1961. Our executive offices are located at 605 West Crystal Lake Road in Forest City, Iowa. Our telephone number is (641) 585-3535; our website is www.winnebagoind.com. Our common stock trades on the NYSE under the symbol “WGO.”

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly our consolidated financial position as of November 26, 2016 and the consolidated results of income and comprehensive income and consolidated cash flows for the first three months of Fiscal 2017 and 2016. The consolidated statement of income and comprehensive income for the first three months of Fiscal 2017 is not necessarily indicative of the results to be expected for the full year. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the fiscal year ended August 27, 2016.

Fiscal Period
We follow a 52-/53-week fiscal year, ending the last Saturday in August. Both Fiscal 2017 and Fiscal 2016 are 52-week years.

Goodwill and Indefinite-Lived Intangible Assets
Goodwill resulted primarily from the Grand Design business combination and represents the excess of the purchase price over the fair value of tangible assets and identifiable intangible assets and liabilities assumed. Annually in the fourth quarter, or if conditions indicate an interim review is necessary, we assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and if it is necessary to perform the quantitative two-step goodwill impairment test. If we perform the quantitative test, we compare the carrying value of the reporting unit to an estimate of the reporting unit’s fair value to identify potential impairment. The estimate of the reporting unit’s fair value is determined by weighting a discounted cash flow model and a market-related model using current industry information that involve significant unobservable inputs (Level 3 inputs). In determining the estimated future cash flow, we consider and apply certain estimates and judgments, including current and projected future levels of income based on management’s plans, business trends, prospects and market and economic conditions and market-participant considerations. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed to determine the amount of the potential goodwill impairment. If impaired, goodwill is written down to its estimated implied fair value.

As of November 26, 2016, we had an indefinite-lived intangible asset for trade name of $148.0 million, from the Grand Design acquisition. Annually in the fourth quarter, or if conditions indicate an interim review is necessary, we assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If we perform a quantitative test, projections regarding estimated discounted future cash flows and other factors are made to determine if impairment has occurred. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. If we conclude that there has been impairment, we will write down the carrying value of the asset to its fair value.

Other Intangible and Long-Lived Assets
Long-lived assets, which include property, plant and equipment, and definite-lived intangible assets, primarily the dealer network, are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The impairment testing involves comparing the carrying amount of the asset to the forecasted undiscounted future cash flows generated by that asset. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. In the event the carrying amount of the asset exceeds the undiscounted future cash flows generated by that asset and the carrying amount is not considered recoverable, an impairment exists. An impairment loss is measured as the excess of the asset’s carrying amount over its fair value and is recognized in the statement of income in the period that the impairment occurs. The dealer network is amortized over its estimated useful life of 12 years. The reasonableness of the useful lives of this asset and other long-lived assets is regularly evaluated.

There was no impairment loss for the period ended November 26, 2016 for goodwill, indefinite-lived intangible, or long-lived assets.


5

Table of Contents

Debt Issuance Costs
We incurred $0.8 million of costs related to our revolving credit agreement that are being amortized on a straight-line basis over the five year term of the agreement. We incurred $10.0 million of costs related to the Term Loan that are being amortized on a straight-line basis (which is not materially different from an effective interest method) over the seven year term of the agreement. If early principal payments are made on the Term Loan, a proportional portion of the unamortized issuance costs will be expensed.

New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which specifies how and when to recognize revenue as well as providing informative, relevant disclosures. In August 2015, the FASB deferred the effective date of this standard by one year, which would become effective retrospectively or on a modified retrospective basis for fiscal years beginning after December 15, 2017 (our Fiscal 2019). We are currently evaluating the impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Topic 835), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. We adopted the standard during the first quarter of FY 2017 and, accordingly have presented unamortized debt issuance costs of $1.4 million as a direct reduction of Current maturities of long-term debt and $9.3 million as a direct reduction of Long-term debt, less current maturities on the Consolidated Balance Sheet as of November 26, 2016.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), which requires inventory measured using any method other than last-in, first-out (“LIFO”) or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Under this ASU, subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. ASU 2015-11 will become effective prospectively for fiscal years beginning after December 15, 2016 (our Fiscal 2018). We are currently evaluating the impact of this ASU on our consolidated financial statements and do not expect adoption to have a material impact.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805), to simplify the accounting for measurement-period adjustments in a business combination. Under the new standard, an acquirer must recognize adjustments to provisional amounts in a business combination in the reporting period in which the adjustment amounts are determined, rather than retrospectively adjusting the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill as under current guidance. ASU 2015-16 is effective prospectively for fiscal years, and the interim periods within those years, beginning after December 15, 2015 (our Fiscal 2017). We adopted this standard on August 28, 2016 and there was no impact from this standard for the three months ended November 26, 2016.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new standard is effective retrospectively or on a modified retrospective basis for fiscal years beginning after December 15, 2018 (our Fiscal 2020), including interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the impact of adopting this ASU on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for the related income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 (our Fiscal 2018), including interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements and do not expect adoption to have a material impact.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230), which provides guidance for eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective retrospectively for annual reporting periods beginning after December 15, 2017 (our Fiscal 2019), including interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
 
Note 2: Business Combination, Goodwill and Other Intangible Assets

We acquired 100% of the ownership interests of Grand Design on November 8, 2016 in accordance with the Securities Purchase Agreement for an aggregate purchase price of $520.6 million, which was paid in cash and Winnebago shares as follows:
(In thousands, except shares)
 
November 8,
2016
Cash
 
$
396,583

Winnebago shares: 4,586,555 at $27.05 per share
 
124,066

Total
 
$
520,649


6

Table of Contents

The cash portion was funded from cash on hand and borrowings under our ABL and Term Loan agreements. The stock was valued using our share price on the date of closing.
The acquisition has been accounted for in accordance with ASC Topic 805, Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price was allocated to the net tangible and intangible assets of Grand Design acquired, based on their fair values at the date of the acquisition. The estimated fair values are preliminary and based on the information that was available as of the date of the acquisition. We believe that the information provides a reasonable basis for estimating the fair values, but we are waiting for additional information necessary to finalize these amounts, particularly with respect to the estimated fair value of intangible assets, finalization of net working capital as defined in the SPA and income taxes. Thus, the preliminary measurements of fair value reflected are subject to changes and such changes could be significant. We expect to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. The preliminary allocation of the purchase price to assets acquired and liabilities assumed is as follows:
(in thousands)
 
November 8,
2016
Cash
 
$
1,748

Accounts receivable
 
32,834

Inventories
 
15,300

Prepaid expenses and other assets
 
2,161

Property, plant and equipment
 
8,998

Goodwill
 
249,981

Other intangible assets
 
253,100

Total assets acquired
 
564,122

 
 
 
Accounts payable
 
11,151

Accrued compensation
 
3,615

Product warranties
 
12,904

Promotional
 
3,976

Other
 
1,569

Deferred tax liabilities
 
10,258

Total liabilities assumed
 
43,473

 
 
 
Total purchase price
 
$
520,649

The acquisition of 100% of the ownership interests of Grand Design occurred in two steps: (1) direct purchase of 89.34% of Grand Design member interests and (2) simultaneous acquisition of the remaining 10.66% of Grand Design member interests via the purchase of 100% of the shares of SP GE VIII-B GD RV Blocker Corp. (Blocker Corp) which held the remaining 10.66% of the Grand Design member interests.   We agreed to acquire Blocker Corp as part of the Securities Purchase Agreement and we will not receive a step-up in basis for 10.66% of the Grand Design assets.  As a result, we established a deferred tax liability of $10.3 million on the opening balance sheet that primarily related to intangibles that will not be amortizable for tax purposes.

The goodwill recognized is primarily attributable to the value of the workforce, reputation of founders, customer and dealer growth opportunities and expected synergies. Key areas of cost synergies include increased purchasing power for raw materials, and supply chain consolidation. Goodwill is expected to be mostly deductible for tax purposes. The goodwill resulting from the acquisition of Grand Design increased total goodwill to $251.2 million within the Towable segment as of November 26, 2016 from $1.2 million as of August 27, 2016.


7

Table of Contents

The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of intangible assets with fair value on closing date of November 8, 2016 and amortization accumulated from closing date through November 26, 2016 as follows:
(in thousands)
 
Weighted
Average Life-
Years
 
Fair Value
Amount
 
Accumulated
Amortization
Trade name
 
Indefinite
 
$
148,000

 
$

Dealer network
 
12.0
 
80,500

 
331

Backlog
 
0.5
 
18,000

 
1,639

Non-compete agreements
 
4.0
 
4,600

 
69

Leasehold interest-favorable
 
8.1
 
2,000

 
12

Total
 
 
 
253,100

 
$
2,051

Accumulated amortization
 
 
 
(2,051
)
 
 
Net book value of intangible assets
 
 
 
$
251,049

 
 

The fair value of the trade name and dealer network were estimated using an income approach.  Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The fair value of the trade name was estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method is based on the hypothetical royalty stream that would be received if we were to license the trade name and was based on expected revenues. The fair value of the dealer network was estimated using an income approach, specifically the cost to recreate/cost savings method. This method uses the replacement of the asset as an indicator of the fair value of the asset. The useful life of the intangible assets was determined considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive, economic or other factors that may limit the useful life of intangible assets.
For the three months ended November 26, 2016 and November 28, 2015, amortization of intangible assets charged to operations was $2.1 million and $0, respectively. The weighted average remaining amortization period for intangible assets as of November 26, 2016 was approximately 9.8 years. Remaining estimated aggregate annual amortization expense by fiscal year is as follows:
(in thousands)
 
Amount
Remainder of 2017
 
$
22,610

2018
 
7,854

2019
 
7,733

2020
 
7,733

2021
 
7,733

2022
 
7,106

Thereafter
 
42,280

Within the Towable segment, the results of Grand Design's operations have been included in our consolidated financial statements from the close of the acquisition. The following table provides net revenues and operating income (which includes amortization expense) from the Grand Design business included in our consolidated results during the three months ended November 26, 2016 following the November 8, 2016 closing date:
 
 
Three Months Ended
(in thousands)
 
November 26, 2016
Net revenues
 
$
25,836

Operating income
 
760



8

Table of Contents

Unaudited pro forma information has been prepared as if the acquisition had taken place on August 30, 2015. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transaction actually taken place on August 30, 2015, and the unaudited pro forma information does not purport to be indicative of future financial operating results. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisitions. Unaudited pro forma information for the three months ended November 26, 2016 and November 28, 2015 is as follows:
 
 
Three Months Ended
(In thousands, except per share data)
 
November 26,
2016
 
November 28,
2015
Net revenues
 
$
340,975

 
$
300,383

Net income
 
20,269

 
1,197

Income per share - basic
 
0.64

 
0.04

Income per share - diluted
 
0.64

 
0.04


The unaudited pro forma data above includes the following significant non-recurring adjustments made to account for certain costs which would have changed if the acquisition of Grand Design had been completed on August 30, 2015:
 
 
Three Months Ended
(In thousands)
 
November 26,
2016
 
November 28,
2015
Amortization of intangibles (1 year or less useful life)
 
$
(1,941
)
 
$
8,708

Increase in amortization of intangibles
 
1,551

 
1,933

Expenses related to business combination (transaction costs) (1)
 
(5,519
)
 
5,840

Interest to reflect new debt structure
 
3,672

 
4,958

Taxes related to the adjustments to the pro forma data and to the income of Grand Design
 
5,011

 
(4,323
)
(1) Pro forma transaction costs include $0.1 million incurred by Grand Design prior to acquisition.

We incurred approximately $5.8 million of acquisition-related costs, of which $5.5 million were expensed during the three months ended November 26, 2016 and $0.3 million were expensed in the three months ended August 27, 2016.

Note 3: Business Segments

We report segment information based on the "management" approach defined in ASC 280, Segment Reporting. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable operating segments.

In the first quarter of Fiscal 2017, we revised our reporting segments. Previously we had one reporting segment which included all recreational vehicle products and services. With the acquisition of Grand Design in the first quarter, we expanded the number of reporting segments to two: (1) Motorized products and services and (2) Towable products and services. The Towable segment includes all products which are not motorized and are generally towed by another vehicle. The Motorized segment includes all products that include a motorized chassis as well as other related manufactured products. Prior year segment information has been restated to conform to the current reporting segment presentation.

We manage our business on a product basis. Each reportable segment is managed separately to better align to our customers, distribution partners and the unique market dynamics of the product groups. We have aggregated two operating segments into the Towable reporting segment based upon their similar products, customers, distribution methods, production processes and economic characteristics. The accounting policies of both reportable segments are the same and described in Note 1, "Summary of Significant Accounting Policies" in our annual report on Form 10-K for the year ended August 27, 2016.

We evaluate the performance of our reportable segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization and other adjustments made in order to present comparable results from period to period. These types of adjustments are also specified in the definition of certain measures required under the terms of our credit facility. Examples of items excluded from Adjusted EBITDA include the postretirement health care benefit results from terminating the plan and the transaction costs related to our acquisition of Grand Design.



9

Table of Contents

The following table shows information by reporting segment for the first quarter of Fiscal 2017 and Fiscal 2016:
 
 
Three Months Ended
(In thousands)
 
November 26,
2016
 
November 28,
2015
Net revenues
 
 
 
 
Motorized
 
$
195,125

 
$
197,340

Towable
 
50,183

 
16,883

Consolidated
 
$
245,308

 
$
214,223

 
 
 
 
 
Adjusted EBITDA
 
 
 
 
Motorized
 
$
10,015

 
$
11,724

Towable
 
4,664

 
1,060

Consolidated
 
$
14,679

 
$
12,784

 
 
 
 
 
Capital Expenditures
 
 
 
 
Motorized
 
$
3,146

 
$
2,872

Towable
 
416

 
237

   Consolidated
 
$
3,562

 
$
3,109

 
 
 
 
 
Total Assets
 
 
 
 
Motorized
 
$
307,125

 
$
329,081

Towable
 
575,570

 
25,251

   Consolidated
 
$
882,695

 
$
354,332


Reconciliation of net income to consolidated Adjusted EBITDA:
 
 
Three Months Ended
(In thousands)
 
November 26,
2016
 
November 28,
2015
Net income
 
$
11,738

 
$
8,558

Interest expense
 
1,128

 

Provision for income taxes
 
5,620

 
4,336

Depreciation
 
1,580

 
1,370

Amortization of intangible assets
 
2,051

 

EBITDA
 
22,117

 
14,264

Postretirement health care benefit income
 
(12,813
)
 
(1,345
)
Transaction costs
 
5,462

 

Non-operating income
 
(87
)
 
(135
)
Adjusted EBITDA
 
$
14,679

 
$
12,784


Note 4: Concentration Risk

One of our dealer organizations accounted for 14.2% of our consolidated net revenues for both the first three months of Fiscal 2017 and Fiscal 2016. A second dealer organization accounted for 13.7% and 20.9% of our consolidated net revenues for the first three months of Fiscal 2017 and Fiscal 2016, respectively. This second dealer declined on a relative basis due to the growth of other dealers and due to the addition of Grand Design revenue in the first quarter of Fiscal 2017. The loss of either or both of these dealer organizations could have a significant adverse effect on our business. In addition, deterioration in the liquidity or creditworthiness of these dealers could negatively impact our sales and could trigger repurchase obligations under our repurchase agreements.

Note 5: Investments and Fair Value Measurements
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
We account for fair value measurements in accordance with ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measurement and expands disclosure about fair value measurement. The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input

10

Table of Contents

that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The following tables set forth by level within the fair value hierarchy our financial assets that were accounted for at fair value on a recurring basis at November 26, 2016 and August 27, 2016 according to the valuation techniques we used to determine their fair values:
 
 
 
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
 
Fair Value at
November 26,
2016
 
Level 1 Quoted Prices in Active Markets for Identical Assets
 
Level 2 Significant Other
Observable Inputs
 
Level 3 Significant
Unobservable Inputs
Cash equivalents (1)
 
$

 
$

 
$

 
$

Assets that fund deferred compensation:
 
 
 
 
 
 
 
 
  Domestic equity funds
 
3,482

 
3,395

 
87

 

  International equity funds
 
243

 
203

 
40

 

  Fixed income funds
 
272

 
201

 
71

 

Total assets at fair value
 
$
3,997

 
$
3,799

 
$
198

 
$

 
 
 
 
Fair Value Measurements
Using Inputs Considered As
(In thousands)
 
Fair Value at
August 27,
2016
 
Level 1 Quoted Prices in Active Markets for Identical Assets
 
Level 2 Significant Other
Observable Inputs
 
Level 3 Significant
Unobservable Inputs
Cash equivalents (1)
 
$
77,234

 
$
77,234

 
$

 
$

Assets that fund deferred compensation:
 
 
 
 
 
 
 
 
  Domestic equity funds
 
3,587

 
3,515

 
72

 

  International equity funds
 
258

 
225

 
33

 

  Fixed income funds
 
265

 
206

 
59

 

Total assets at fair value
 
$
81,344

 
$
81,180

 
$
164

 
$

(1) 
Cash equivalent balances valued using Level 1 inputs include only those accounts that may fluctuate in value. Cash in disbursing accounts and on-demand accounts are not included above.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash Equivalents
The carrying value of cash equivalents approximates fair value as original maturities are less than three months. Our cash equivalents are comprised of money market funds traded in an active market with no restrictions and are included in cash and cash equivalents on the accompanying consolidated balance sheets.

Assets that Fund Deferred Compensation
Our assets that fund deferred compensation are marketable equity securities measured at fair value using quoted market prices and primarily consist of equity-based mutual funds. The majority of securities are classified as Level 1 as they are traded in an active market for which closing stock prices are readily available. These securities fund the Executive Share Option Plan and the Executive deferred compensation plan (see Note 10). The proportion of the assets that will fund options which expire within a year are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. The remaining assets are classified as noncurrent and are included in other assets.

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

The carrying value of our debt as of November 26, 2016 approximates fair value as interest is at variable market rates.


11

Table of Contents

Note 6: Inventories
Inventories consist of the following:
(In thousands)
 
November 26,
2016
 
August 27,
2016
Finished goods
 
$
41,175

 
$
19,129

Work-in-process
 
76,569

 
76,350

Raw materials
 
71,698

 
60,740

Total
 
189,442

 
156,219

LIFO reserve
 
(33,996
)
 
(33,697
)
Total inventories
 
$
155,446

 
$
122,522

The above value of inventories, before reduction for the LIFO reserve, approximates replacement cost at the respective dates. Of the $189.4 million and $156.2 million inventory at November 26, 2016 and August 27, 2016, respectively, $165.6 million and $149.4 million is valued on a LIFO basis; the remaining inventories of $23.8 million and $6.8 million at November 26, 2016 and August 27, 2016, respectively, are valued on a FIFO basis.

Note 7: Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation and consists of the following:
(In thousands)
 
November 26,
2016
 
August 27,
2016
Land
 
$
4,047

 
$
3,864

Buildings and building improvements
 
69,329

 
62,073

Machinery and equipment
 
98,285

 
95,087

Software
 
17,396

 
15,878

Transportation
 
9,153

 
8,956

Total property, plant and equipment, gross
 
198,210

 
185,858

Less accumulated depreciation
 
(131,507
)
 
(129,927
)
Total property, plant and equipment, net
 
$
66,703

 
$
55,931


On November 8, 2016, with the acquisition of Grand Design, we acquired $9.0 million of property, plant and equipment.

Note 8: Warranty

We provide service and warranty policies on our products. From time to time, we also voluntarily incur costs for certain warranty-type expenses occurring after the normal warranty period to help protect the reputation of our products and the goodwill of our customers. Warranty expense is affected by dealership labor rates, the cost of parts and the frequency of claims.  Estimated costs related to product warranty are accrued at the time of sale and are based upon historical warranty and service claims experience. Adjustments are made to accruals as claim data and cost experience becomes available.

Changes in our product warranty liability are as follows:
 
 
Three Months Ended
(In thousands)
 
November 26,
2016
 
November 28,
2015
Balance at beginning of period
 
$
12,412

 
$
11,254

Provision
 
3,898

 
3,594

Claims paid
 
(4,663
)
 
(3,263
)
Acquisition of Grand Design
 
12,904

 

Balance at end of period
 
$
24,551

 
$
11,585




12

Table of Contents

Note 9: Long-Term Debt

The components of long-term debt are as follows:
(In thousands)
 
November 26,
2016
 
August 27,
2016
ABL
 
$
53,000

 
$

Term Loan
 
300,000

 

 
 
353,000

 

Less: debt issuance cost, net
 
(10,680
)
 

 
 
342,320

 

Less: current maturities
 
(7,578
)
 

Long-term debt, less current maturities
 
$
334,742

 
$


On November 8, 2016, we entered into the ABL and Term Loan agreements with JPMorgan Chase. The Credit Facility replaced the prior Amended Credit Agreement which was terminated that same day. Under the terms of the Credit Facility, we have a $125.0 million ABL credit facility and a $300.0 million Term Loan.
Under the ABL agreement, we have a five year credit facility available on a revolving basis, subject to availability under a borrowing base consisting of 85% of eligible accounts receivable and generally 75% of eligible inventory. The line is available for issuance of letters of credit to a specified limit of $10.0 million.
Under the ABL agreement, to determine interest due, we can elect to base the rate on the alternate base rate (prime rate, NYFRB rate or adjusted LIBOR for one-month period) plus 0.5% to 1.0%, depending on the amount of borrowings outstanding, or an adjusted LIBOR rate for a period of one, two, three or six months as selected by us plus 1.50% to 2.0%, depending on the amount of borrowings outstanding. The interest rate we paid as of November 26, 2016 was 2.4%. We also pay a commitment fee equal to 0.375% if the average utilized portion is less than or equal to 50%, or 0.25% if the utilized portion is greater than 50%.
Under the Term Loan agreement, we have a seven year credit facility repayable in quarterly installments in an aggregate amount equal to 1.0% of the original amount of the Term Loan on March 31, June 30 and September 30, 2017; 1.25% each calendar quarter end thereafter; with the balance payable at the end of seven years on November 8, 2023. There are mandatory prepayments for proceeds of new debt, sale of significant assets or subsidiaries and annually for 50% of excess cash flow beginning with Fiscal 2017 (the 50% is subject to step-downs to 25% and 0% if the total net leverage ratio, as defined in the Term Loan agreement, is less than 2.5 to 1.00 and 2.0 to 1.00, respectively, as of the last day of the period). Incremental term loans of up to $125.0 million are available if certain financial ratios and other conditions are met.
Under the Term Loan agreement, to determine interest due, we can elect to base the rate on the alternate base rate (prime rate, NYFRB rate or adjusted LIBOR for one-month period with a floor of 2%) plus 3.50% or an adjusted LIBOR rate for the interest period selected plus 4.50%. The interest rate as of November 26, 2016 was 5.5%.
Under the Credit Facility, we are required to enter into a hedging arrangement to effectively fix the LIBOR component of interest cost at the prevailing swap rate with a notional amount of at least 50% of the projected outstanding principal amount of the Term Loan. The hedging arrangement needs to be maintained until the later of 3 years from closing date or the date the leverage ratio is less than 2.0 to 1.0. In accordance with this requirement, we plan to enter into interest swap contracts in January 2017.
The Term Loan includes financial covenants requiring that the fixed charge coverage ratio at the end of any four fiscal quarters be not less than 1.0 to 1.0, defined as consolidated EBITDA (as defined) less capital expenditures (as defined), over fixed charges, generally defined as cash interest, cash income taxes, principal payments on loans, and dividends, and that the senior secured net leverage ratio at the end of each fiscal quarter be not greater than 3.5 to 1.0 prior to the fiscal quarter ending November 24, 2018 and 3.25 to 1.0 for each quarter thereafter, defined generally as the ratio of total secured indebtedness minus cash and permitted investments, to consolidated EBITDA (as defined).
The ABL generally contain similar covenants, and include restrictions on indebtedness, liens, mergers, consolidations, investments, guarantees, acquisitions, sales of assets, and transactions with affiliates. Dividends, redemptions and other payments on equity are generally limited to $20.0 million in any fiscal year; higher amounts may be paid if the total net leverage ratio does not exceed 3.0 to 1.0. Customary events of default (with customary grace periods, notice and cure periods and thresholds) include payment default, breach of representation in any material respect, breach of covenants, default to material indebtedness, bankruptcy, ERISA violations, material judgments, change in control and termination of invalidity of guaranty or security documents. As of November 26, 2016, we are in compliance with the financial covenants of the Credit Facility agreements.
The ABL and Term Loan are guaranteed by Winnebago Industries, Inc. and all material direct and indirect domestic subsidiaries, and are secured by a security interest in all property of ours, except minor excluded assets.

13

Table of Contents

As of November 26, 2016, $10.8 million of debt issuance costs, net of amortization of $0.1 million, were recorded as a direct deduction from long-term debt, $1.4 million from the current portion and $9.3 million from the long-term portion. Unamortized debt issuance costs of $0.1 million related to the prior Amended Credit Agreement were expensed in the three months ended November 26, 2016.
Aggregate contractual maturities of debt in future fiscal years, are as follows:
(In thousands)
 
Amount
Year:
2017
 
$
6,000

 
2018
 
14,250

 
2019
 
15,000

 
2020
 
15,000

 
2021
 
15,000

 
2022
 
68,000

 
2023
 
15,000

 
2024
 
204,750

 
Total debt
 
$
353,000


Note 10: Employee and Retiree Benefits
Postretirement health care and deferred compensation benefits are as follows:
(In thousands)
 
November 26,
2016
 
August 27,
2016
Postretirement health care benefit cost
 
$
32

 
$
6,346

Non-qualified deferred compensation
 
17,616

 
18,003

Executive share option plan liability
 
3,181

 
3,341

SERP benefit liability
 
2,701

 
2,681

Executive deferred compensation
 
467

 
389

Officer stock-based compensation
 
657

 
763

Total deferred compensation and postretirement health care benefits
 
24,654

 
31,523

Less current portion
 
(4,693
)
 
(4,574
)
Long-term deferred compensation and postretirement health care benefits
 
$
19,961

 
$
26,949


Postretirement Health Care Benefits
Historically, we provided certain health care and other benefits for retired employees hired before April 1, 2001, who had fulfilled eligibility requirements at age 55 with 15 years of continuous service. We used a September 1 measurement date for this plan and our postretirement health care plan was not funded.

In Fiscal 2005, through a plan amendment, we established dollar caps on the amount that we paid for postretirement health care benefits per retiree on an annual basis so that we were not exposed to continued medical inflation. Retirees were required to pay a monthly premium in excess of the employer dollar caps for medical coverage based on years of service and age at retirement. Each year from 2012 to 2015, the employer established dollar caps were reduced by 10% through plan amendments. On January 1, 2016, postretirement health care benefits were discontinued for retirees age 65 and over.  The plan amendment also included a 10% reduction in employer paid premiums for retirees under age 65. On October 26, 2016, we announced the termination of the remaining postretirement health care benefits to all participants. Beginning January 1, 2017, postretirement health care benefits will be discontinued for retirees under age 65. As a result of these amendments, our liability for postretirement health care was reduced as presented in the following table.

14

Table of Contents

Date
Event
 
Dollar Cap
Reduction
Liability
Reduction
(In thousands)
Amortization
Period(1)
Fiscal 2005
Established employer dollar caps
 
 
$
40,414

11.5
years
January 2012
Reduced employer dollar caps
 
10%
4,598

7.8
years
January 2013
Reduced employer dollar caps
 
10%
4,289

7.5
years
January 2014
Reduced employer dollar caps
 
10%
3,580

7.3
years
January 2015
Reduced employer dollar caps
 
10%
3,960

7.1
years
January 2016
Reduced employer dollar caps for retirees under age 65; discontinued retiree benefits for retirees age 65 and over
 
10%
28,596

6.9
years
January 2017 (2)
Terminated plan
 
 
6,338

0.2
years
(1) Plan amendments are amortized on a straight-line basis over the expected remaining service period of active plan participants.
(2) In accordance with ASC 715, the effects of the plan amendment are accounted for at the date the amendment is adopted and the date the amendment has been communicated to plan participants. The effective date for this plan amendment was October 26, 2016.

Net periodic postretirement benefit income consisted of the following components:
 
 
Three Months Ended
(In thousands)
 
November 26,
2016
 
November 28,
2015
Interest cost
 
$
29

 
$
153

Service cost
 
16

 
41

Amortization of prior service benefit
 
(20,772
)
 
(1,713
)
Amortization of net actuarial loss
 
7,959

 
368

Net periodic postretirement benefit income
 
$
(12,768
)
 
$
(1,151
)
 
 
 
 
 
Payments for postretirement health care
 
$
53

 
$
228

 
Note 11: Shareholders' Equity
Stock-Based Compensation
We have a 2014 Omnibus Equity, Performance Award, and Incentive Compensation Plan (as amended, the "Plan") in place as approved by shareholders, which allows us to grant or issue non-qualified stock options, incentive stock options, share awards and other equity compensation to key employees and to non-employee directors.
On October 11, 2016 and October 13, 2015 the Human Resources Committee of the Board of Directors granted an aggregate of 97,600 and 204,200 shares, respectively, of restricted common stock to our key employees and non-employee directors under the Plan. The value of the restricted stock award is determined using the intrinsic value method which, in this case, is based on the number of shares granted and the closing price of our common stock on the date of grant.
Stock-based compensation expense was $0.8 million and $0.6 million during the first quarters of Fiscal 2017 and 2016, respectively. Compensation expense is recognized over the requisite service period of the award.
Dividends
On October 12, 2016, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock, which was paid on November 23, 2016 to shareholders of record at the close of business on November 9, 2016.

On December 14, 2016, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock, payable on January 25, 2017 to shareholders of record at the close of business on January 11, 2017.

Pending Share Registration
As a result of the acquisition of Grand Design, Winnebago has agreed to register the 4,586,555 shares of common stock issued to the Summit Sellers and the RDB Sellers pursuant to the terms of a registration rights agreement. Under the registration rights agreement, Winnebago has agreed to file a shelf registration statement on the second business day following the filing of an amendment to Winnebago’s Current Report on Form 8-K reporting the completion of the acquisition of Grand Design containing the financial statements and pro forma financial information concerning the acquisition. Winnebago has agreed to keep the registration statement effective for up to three years. We intend to register these shares on Form S-3 in January of 2017.

Note 12: Contingent Liabilities and Commitments
Repurchase Commitments
Generally, manufacturers in the RV industry enter into repurchase agreements with lending institutions which have provided wholesale floorplan financing to dealers. Most dealers' RVs are financed on a "floorplan" basis under which a bank or finance

15

Table of Contents

company lends the dealer all, or substantially all, of the purchase price, collateralized by a security interest in the recreation vehicles purchased.
Our repurchase agreements provide that, in the event of default by the dealer on the agreement to pay the lending institution, we will repurchase the financed merchandise. The terms of these agreements, which generally can last up to 18 months, provide that our liability will be the lesser of remaining principal owed by the dealer to the lending institution, or dealer invoice less periodic reductions based on the time since the date of the original invoice. Our total contingent liability on all repurchase agreements was approximately $553.1 million and $409.3 million at November 26, 2016 and August 27, 2016, respectively, with the increase attributed primarily to Grand Design.
In certain instances, we also repurchase inventory from our dealers due to state law or regulatory requirements that govern voluntary or involuntary relationship terminations. Although laws vary from state to state, some states have laws in place that require manufacturers of recreation vehicles to repurchase current inventory if a dealership exits the business. Incremental repurchase exposure beyond existing repurchase agreements, related to dealer inventory in states that we have had historical experience of repurchasing inventory, totaled $9.0 million and $7.9 million at November 26, 2016 and August 27, 2016, respectively, with the increase attributed primarily to Grand Design.
Our risk of loss related to our 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 although two dealer organizations account for approximately 28% of our revenues in the three months ended November 26, 2016. The aggregate contingent liability related to our repurchase agreements represents all financed dealer inventory at the period reporting date subject to a repurchase agreement, net of the greater of periodic reductions per the agreement or dealer principal payments. Based on the repurchase exposure as previously described, we established an associated loss reserve. Our accrued losses on repurchases were $1.3 million as of November 26, 2016 and $0.9 million as of August 27, 2016. Repurchase risk is affected by the credit worthiness of our dealer network and we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to establish the loss reserve for repurchase commitments.
A summary of repurchase activity is as follows:
 
 
Three Months Ended
(In thousands)
 
November 26,
2016
 
November 28,
2015
Inventory repurchased
 
$

 
$

Cash collected on resold inventory
 
$

 
$
36

Gain realized on resold inventory
 
$

 
$
(1
)

Litigation
We are involved in various legal proceedings which are ordinary litigation incidental to our business, some of which are covered in whole or in part by insurance. While we believe the ultimate disposition of litigation will not have material adverse effect on our financial position, results of operations or liquidity, there exists the possibility that such litigation may have an impact on our results for a particular reporting period in which litigation effects become probable and reasonably estimable.  Though we do not believe there is a reasonable likelihood that there will be a material change related to these matters, litigation is subject to inherent uncertainties and management’s view of these matters may change in the future.  
Lease Commitments
As part of our acquisition of Grand Design, we acquired leases to two properties which hold Grand Design’s current principal facilities, and facilities under construction for expansion. The lessor under these leases is an Indiana limited liability company, Three Oaks, LLC, owned by three of Grand Design's selling shareholders. One of the selling shareholders, Mr. Don Clark, has assumed the position of Vice President for Winnebago and is the President of Grand Design. Upon joining our company, Mr. Clark has agreed that as long as he is an employee of Grand Design he has relinquished his voting rights in Three Oaks, LLC while retaining all other economic rights in Three Oaks, LLC. Future commitments under these related party leases are as follows:
(In thousands)
 
Amount
Year Ended:
2017
 
$
1,450

 
2018
 
2,181

 
2019
 
2,084

 
2020
 
2,084

 
2021
 
2,084

 
Thereafter
 
6,994

 
Total
 
$
16,877

No other significant changes have been made to lease commitments disclosed in our Form 10-K for the year ended August 27, 2016.

16

Table of Contents

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

We file tax returns in the US federal jurisdiction, as well as various international and state jurisdictions. Although certain years are no longer subject to examination by the IRS and various state taxing authorities, net operating loss carryforwards generated in those years may still be adjusted upon examination by the IRS or state taxing authorities if they have been or will be used in a future period. As of November 26, 2016, our federal returns from Fiscal 2012 to present continue to be subject to review by the IRS. Our Fiscal 2014 Federal Return continues to remain under review by the IRS. With few exceptions, the state returns from Fiscal 2009 to present continue to be subject to review by the state taxing jurisdictions. A number of years may elapse before an uncertain tax position is audited and finally resolved, and it is often very difficult to predict the outcome of such audits.

As of November 26, 2016, our unrecognized tax benefits were $2.1 million including accrued interest and penalties of $0.6 million. If we were to prevail on all unrecognized tax benefits recorded, $1.6 million of the $2.1 million would benefit the overall effective tax rate. It is our policy to recognize interest and penalties accrued relative to unrecognized tax benefits as tax expense. We do not believe that there will be a significant change in the total amount of unrecognized tax benefits within the next twelve months.

Note 14: Earnings Per Share
The following table reflects the calculation of basic and diluted net income per share:
 
 
Three Months Ended
(In thousands, except per share data)
 
November 26,
2016
 
November 28,
2015
Income per share - basic
 
 
 
 
Net income
 
$
11,738

 
$
8,558

Weighted average shares outstanding
 
27,836

 
26,976

Net income per share - basic
 
$
0.42

 
$
0.32

 
 
 
 
 
Income per share - assuming dilution
 
 
 
 
Net income
 
$
11,738

 
$
8,558

Weighted average shares outstanding
 
27,836

 
26,976

Dilutive impact of awards and options outstanding
 
133

 
91

Weighted average shares and potential dilutive shares outstanding
 
27,969

 
27,067

Net income per share - assuming dilution
 
$
0.42

 
$
0.32


The computation of weighted average shares and potential dilutive shares outstanding excludes the effects of options to purchase 44,000 and 24,000 shares of common stock for the first quarter of Fiscal 2017 and Fiscal 2016, respectively. These amounts were not included in the computation of diluted income per share because they are considered anti-dilutive under the treasury stock method per ASC 260, Earnings Per Share.

Note 15: Comprehensive Income (Loss)

Changes in defined benefit pension items in AOCI, net of tax, were:
 
 
Three Months Ended
(In thousands)
 
November 26,
2016
 
November 28,
2015
Balance at beginning of period
 
$
10,975

 
$
(2,274
)
 
 
 
 
 
OCI before reclassifications
 
3,903

 
17,701

Amounts reclassified from AOCI
 
(7,926
)
 
(829
)
Net current-period OCI
 
(4,023
)
 
16,872

 
 
 
 
 
Balance at end of period
 
$
6,952

 
$
14,598


17

Table of Contents


Reclassifications out of AOCI in net periodic benefit costs, net of tax, were:
 
 
 
 
Three Months Ended
(In thousands)
 
Location on Consolidated Statements
of Income and Comprehensive Income
 
November 26,
2016
 
November 28,
2015
Amortization of prior service credit
 
Operating expenses
 
$
(12,858
)
 
$
(1,060
)
Amortization of net actuarial loss
 
Operating expenses
 
4,932

 
231

Total reclassifications
 
 
 
$
(7,926
)
 
$
(829
)

Note 16: Subsequent Event

On December 14, 2016 our Board of Directors declared a cash dividend of $0.10 per share as noted in Note 11.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This management's discussion should be read in conjunction with the Unaudited Consolidated Financial Statements contained in this Form 10-Q as well as the Management's Discussion and Analysis and Risk Factors included in our Annual Report on Form 10‑K for the fiscal year ended August 27, 2016 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Forward-Looking Information

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements, including, but not limited to increases in interest rates, availability of credit, low consumer confidence, availability of labor, significant increase in repurchase obligations, inadequate liquidity or capital resources, availability and price of fuel, a slowdown in the economy, increased material and component costs, availability of chassis and other key component parts, sales order cancellations, slower than anticipated sales of new or existing products, new product introductions by competitors, the effect of global tensions, integration of operations relating to mergers and acquisitions activities, any unexpected expenses related to ERP, risks relating to the integration of our acquisition of Grand Design including: risks inherent in the achievement of cost synergies and the timing thereof, risks related to the disruption of the transaction to Winnebago and Grand Design and its management, the effect of announcement of the transaction on Grand Design's ability to retain and hire key personnel and maintain relationships with customers, suppliers and other third parties, risk related to compliance with debt covenants and leverage ratios, risks related to integration of the two companies and other factors. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested is contained in our filings with the SEC over the last 12 months, copies of which are available from the SEC or from us upon request. We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this release or to reflect any changes in expectations after the date of this release or any change in events, conditions or circumstances on which any statement is based, except as required by law.

Overview
Winnebago Industries, Inc. is a leading US manufacturer of RVs with a proud history of manufacturing RV products for more than 50 years. We currently produce virtually all of our motorhomes in vertically integrated manufacturing facilities in Iowa and we produce all travel trailer and fifth wheel trailers in Indiana. We are in the process of expanding some motorhome manufacturing to Junction City, Oregon. We distribute our products primarily through independent dealers throughout the US and Canada, who then retail the products to the end consumer.
Significant Transaction

On November 8, 2016, we closed on the acquisition of all the issued and outstanding capital stock of towable recreational vehicle manufacturer Grand Design for initial consideration of $520.6 million. This acquisition was funded from our cash on hand, $353.0 million from asset-based revolving and term loan credit facilities, as well as stock consideration as is more fully described in Note 2 and Note 9 to the Consolidated Financial Statements. We purchased Grand Design to significantly expand our existing towable RV product offerings and dealer base and acquire executive talent in the RV industry.

In the first quarter of Fiscal 2017, we revised our reporting segments. Previously we had one reporting segment which included all recreational vehicle products and services. With the acquisition of Grand Design in the first quarter, we expanded the number of reporting segments to two: (1) Motorized products and services and (2) Towable products and services. The Towable segment includes all products which are not motorized and are generally towed by another vehicle. The Motorized segment includes all products that include a motorized chassis as well as other related manufactured products. Prior year segment information has been restated to conform to the current reporting segment presentation.


18

Table of Contents


Market Share

Our retail unit market share, as reported by Stat Surveys based on state records, is illustrated below. We separately included the retail unit market share for Grand Design, which reflects results prior to our acquisition. Note that this data is subject to adjustment and is continuously updated.
 
 
Rolling 12 Months
Through October
 
Calendar Year
US and Canada
 
2016
2015
 
2015
2014
2013
Motorized A, B, C
 
18.1
%
20.7
%
 
20.4
%
20.7
%
18.6
%
Travel trailer and fifth wheels - Winnebago
 
1.1
%
0.9
%
 
0.9
%
0.8
%
1.0
%
Travel trailer and fifth wheels - Grand Design
 
3.2
%
2.1
%
 
2.2
%
1.5
%
0.3
%

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

We track RV industry conditions using these key statistics to monitor trends and evaluate and understand our performance relative to the overall industry. The rolling twelve months shipment and retail information for 2016 and 2015 as noted below illustrates that the RV industry continues to grow both at the wholesale and retail level. We believe that retail demand is the key driver to continued growth in the RV industry and that annual RV shipments will generally be in line with retail registrations in the future.
 
US and Canada Industry
 
Wholesale Unit Shipments per RVIA
 
Retail Unit Registrations per Stat Surveys
 
Rolling 12 Months through October
 
Rolling 12 Months through October
 
2016

2015

Unit Change
% Change
 
2016

2015

Unit Change
% Change
Towable (1)
343,579

312,885

30,694

9.8
%
 
343,145

313,622

29,523

9.4
%
Motorized (2)
53,459

46,140

7,319

15.9
%
 
48,998

44,228

4,770

10.8
%
Combined
397,038

359,025

38,013

10.6
%
 
392,143

357,850

34,293

9.6
%
(1) 
Towable: Fifth wheel and travel trailer products
(2) 
Motorized: Class A, B and C products

The most recent towable and motorized RVIA wholesale shipment forecasts for calendar year 2016 and 2017 as noted in the table below illustrates continued projected growth of the industry. The outlook for future growth in RV sales is based on continued modest gains in job and disposable income prospects as well as low inflation, and takes into account the impact of slowly rising interest rates, a strong U.S. dollar and continued weakness in energy production and prices.
 
 
Calendar Year
Wholesale Unit Shipment Forecast per RVIA (1)
 
2017

2016

Unit Change
% Change
Towable
 
370,300

353,000

17,300

4.9
%
Motorized
 
54,800

53,300

1,500

2.8
%
Combined
 
425,100

406,300

18,800

4.6
%
(1) 
Prepared by Dr. Richard Curtin of the University of Michigan Consumer Survey Research Center for RVIA and reported in the Roadsigns RV Winter 2016 Industry Forecast Issue.

ERP System

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


19

Table of Contents

The following table illustrates the cumulative project costs:
 
 
Fiscal
 
Fiscal
 
Fiscal 2017
 
Cumulative
(In thousands)
 
2015
 
2016
 
Q1
 
Investment
Capitalized
 
$
3,291

 
$
7,798

 
$
1,518

 
$
12,607

(1) 
57
%
Expensed
 
2,528

 
5,930

 
1,165

 
9,623

 
43
%
Total
 
$
5,819

 
$
13,728

 
$
2,683

 
$
22,230

 
100
%
(1) $6.4 million of our cumulative capitalized investment has been placed in service and is being amortized over a 10-year life.

Management Team Changes

During the first quarter of Fiscal 2017, the Executive Leadership Team (ELT) was strengthened by several additions including a new VP and GM of the Motorized business, a new VP of Operations, and a new CIO. In addition, one of the former owners of Grand Design joined the ELT in November.

Consolidated Results of Operations
Current Quarter Compared to the Comparable Quarter Last Year
The following is an analysis of changes in key items included in the consolidated statements of operations:
 
 
Three Months Ended
(In thousands, except percent
and per share data)
 
November 26,
2016
% of
Revenues(1)
 
November 28,
2015
% of
Revenues(1)
 
Increase
(Decrease)
%
Change
Net revenues
 
$
245,308

100.0
 %
 
$
214,223

100.0
 %
 
$
31,085

14.5
 %
Cost of goods sold
 
216,433

88.2
 %
 
188,974

88.2
 %
 
27,459

14.5
 %
Gross profit
 
28,875

11.8
 %
 
25,249

11.8
 %
 
3,626

14.4
 %
 
 
 
 
 
 
 
 
 
 
Selling
 
5,870

2.4
 %
 
5,015

2.3
 %
 
855

17.0
 %
General and administrative
 
9,906

4.0
 %
 
8,820

4.1
 %
 
1,086

12.3
 %
Postretirement health care benefit income
 
(12,813
)
(5.2
)%
 
(1,345
)
(0.6
)%
 
(11,468
)
NMF

Transaction costs
 
5,462

2.2
 %
 

 %
 
5,462

 %
Amortization of intangibles assets
 
2,051

0.8
 %
 

 %
 
2,051

 %
Operating expenses
 
10,476

4.3
 %
 
12,490

5.8
 %
 
(2,014
)
(16.1
)%
 
 
 
 
 
 
 
 
 
 
Operating income
 
18,399

7.5
 %
 
12,759

6.0
 %
 
5,640

44.2
 %
Interest expense
 
1,128

0.5
 %
 

 %
 
1,128

 %
Non-operating income
 
(87
)
 %
 
(135
)
(0.1
)%
 
48

(35.6
)%
Income before income taxes
 
17,358

7.1
 %
 
12,894

6.0
 %
 
4,464

34.6
 %
Provision for taxes
 
5,620

2.3
 %
 
4,336

2.0
 %
 
1,284

29.6
 %
Net income
 
$
11,738

4.8
 %
 
$
8,558

4.0
 %
 
$
3,180

37.2
 %
 
 
 
 
 
 
 
 
 
 
Diluted income per share
 
$
0.42

 
 
$
0.32

 
 
$
0.10

31.3
 %
Diluted average shares outstanding
 
27,969

 
 
27,067

 
 
902

3.3
 %
(1) Percentages may not add due to rounding differences.
Consolidated net revenues increased $31.1 million or 14.5% in the first quarter of Fiscal 2017 over the first quarter of Fiscal 2016. This was primarily due to the acquisition of Grand Design which added revenues of $25.8 million in the quarter. In addition, Winnebago-branded Towables rose $7.5 million or 44.2% in the quarter. Motorhome revenue was up modestly in the quarter. Partially offsetting growth was the $5.0 million reduction in sales to aluminum extrusion customers compared to the first quarter of Fiscal 2016 as we have ceased those activities in order to better utilize constrained labor resources in Iowa.

Cost of goods sold was $216.4 million, or 88.2% of net revenues for the first quarter of Fiscal 2017 compared to $189.0 million, or 88.2% of net revenues for the same period a year ago due to the following:
Total variable costs (materials, direct labor, variable overhead, delivery expense and warranty), as a percent of net revenues, decreased from 83.6% to 82.9%, primarily due to favorable product mix in part due to our decision to cease aluminum extrusion sales and due to higher proportion of Towables revenue in the quarter.

20

Table of Contents

Fixed overhead (manufacturing support labor, depreciation and facility costs) and research and development-related costs increased from 4.7% to 5.3% of net revenues due mainly to the addition of our Junction City, Oregon facility.
All factors considered, gross profit was steady at 11.8% of net revenues.
Selling expenses were $5.9 million and $5.0 million, or 2.4% and 2.3% of net revenues in the first quarter of Fiscal 2017 and Fiscal 2016, respectively. The increase in the first quarter of Fiscal 2017 was primarily due to the addition of $0.8 million in selling expenses of Grand Design.
General and administrative expenses were $9.9 million and $8.8 million, or 4.0% and 4.1% of net revenues in the first quarter of Fiscal 2017 and Fiscal 2016, respectively. This dollar increase was due to the addition of $0.6 million of general and administrative expenses associated with Grand Design and an increase in salaried wages associated with additions to the management team, while the expenses as a percentage of revenues declined.
Postretirement health care benefit increased by $11.5 million in the first quarter of Fiscal 2017 due to the plan termination which was announced on October 26, 2016. Beginning January 1, 2017, postretirement health care benefits will be discontinued for retirees under age 65. As a result of this amendment, our liability for postretirement health care was reduced and a benefit was recorded on the statement of income. The expected impact of the plan termination to the remainder of Fiscal 2017 is $12.0 million postretirement health care benefit income in the second quarter.
Transaction costs of $5.5 million in the first quarter of Fiscal 2017 relate to the acquisition of Grand Design.
Amortization of intangibles expense is related to definite-lived intangibles established as of the acquisition of Grand Design in the first quarter of Fiscal 2017.
Interest expense is related to the newly established ABL and Term Loan agreements as we borrowed $353 million on November 8, 2016 for the acquisition of Grand Design. We paid interest expense of 2.4% plus a commitment fee of .375% on $53 million borrowed under the ABL and interest expense of 5.5% on the $300 million borrowed under the Term Loan. Also included in interest expense is the amortization of deferred financing costs of $0.1 million.
The overall effective income tax rate for the first quarter of Fiscal 2017 was 32.4% compared to the effective tax rate of 33.6% for the same period in Fiscal 2016. The decrease in effective rate is due primarily to a reduction in the liability for an uncertain tax position related to the favorable resolution of a state tax matter during the quarter.
Net income and diluted income per share were $11.7 million and $0.42 per share, respectively, for the first quarter of Fiscal 2017. In the first quarter of Fiscal 2016, net income was $8.6 million and diluted income was $0.32 per share.

Non-GAAP Reconciliation
We have provided the following non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as information supplemental and in addition to the financial measures presented in accordance with GAAP. Such non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein. The non-GAAP financial measures presented below may differ from similar measures used by other companies.

The following table reconciles net income to consolidated Adjusted EBITDA.
 
 
 
Three Months Ended
 
(In thousands)
 
November 26,
2016
 
November 28,
2015
 
Net income
 
$
11,738

 
$
8,558

 
Interest expense
 
1,128

 

 
Provision for income taxes
 
5,620

 
4,336

 
Depreciation
 
1,580

 
1,370

 
Amortization of intangible assets
 
2,051

 

 
EBITDA
 
22,117

 
14,264

 
Postretirement health care benefit income
 
(12,813
)
 
(1,345
)
 
Transaction costs
 
5,462

 

 
Non-operating income
 
(87
)
 
(135
)
 
Adjusted EBITDA
 
$
14,679

 
$
12,784


We have provided non-GAAP performance measures of EBITDA and Adjusted EBITDA as a comparable measure to illustrate the effect of non-recurring transactions occurring during the quarter and improve comparability of our results from period to period. EBITDA is defined as net income before interest expense, provision for income taxes, and depreciation and amortization expense.  We believe EBITDA and Adjusted EBITDA provide meaningful supplemental information about our operating performance because

21

Table of Contents

each measure excludes amounts that we do not consider part of our core operating results when assessing our performance. These types of adjustments are also specified in the definition of certain measures required under the terms of our credit facility. Examples of items excluded from Adjusted EBITDA include the postretirement health care benefit results from terminating the plan and the transaction costs related to our acquisition of Grand Design RV.

Management uses these non-GAAP financial measures (a) to evaluate our historical and prospective financial performance and trends as well as our performance relative to competitors and peers; (b) to measure operational profitability on a consistent basis; (c) in presentations to the members of our board of directors to enable our board of directors to have the same measurement basis of operating performance as is used by management in their assessments of performance and in forecasting and budgeting for our company; (d) to evaluate potential acquisitions; and, (e) to ensure compliance with covenants and restricted activities under the terms of our credit facility. We believe these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry.

Segment Results of Operations
The following is an analysis of key changes in our Motorized business unit.
Motorized
 
 
 
 
 
 
 
 
 
(In thousands, except units)
 
Three Months Ended
 
 
Nov 26,
2016
% of Revenue
 
Nov 28,
2015
% of Revenue
 
Decrease
%
Change
Net revenues
 
$
195,125

 
 
$
197,340

 
 
$
(2,215
)
(1.1
)%
Adjusted EBITDA
 
10,015

5.1
%
 
11,724

5.9
%
 
(1,709
)
(14.6
)%
 
 
 
 
 
 
 
 
 
 
Unit deliveries
 
Nov 26,
2016
Product
Mix % (1)
 
Nov 28,
2015
Product
Mix % (1)
 
(Decrease)
Increase
%
Change
Class A
 
666

33.3
%
 
751

39.1
%
 
(85
)
(11.3
)%
Class B
 
301

15.1
%
 
239

12.4
%
 
62

25.9
 %
Class C
 
1,033

51.7
%
 
931

48.5
%
 
102

11.0
 %
Total motorhomes
 
2,000

100.0
%
 
1,921

100.0
%
 
79

4.1
 %
 
 
 
 
 
 
 
 
 
 
Motorhome ASP
 
$
95,046

 
 
$
97,887

 
 
$
(2,841
)
(2.9
)%
 
 
As Of
 
 
 
Backlog (2)
 
Nov 26,
2016
 
 
Nov 28,
2015
 
 
(Decrease)
Increase
%
Change
Units
 
2,286

 
 
2,412

 
 
(126
)
(5.2
)%
Dollars
 
$
207,056

 
 
$
222,055

 
 
$
(14,999
)
(6.8
)%
 
 
 
 
 
 
 
 
 
 
Dealer Inventory
 
 
 
 
 
 
 
 
 
Units
 
4,330

 
 
4,115

 
 
215

5.2
 %
(1) Percentages may not add due to rounding differences.
(2) We include in our backlog all accepted orders from dealers to be shipped within the next six months. Orders in backlog can be cancelled or postponed at the option of the dealer at any time without penalty and, therefore, backlog may not necessarily be an accurate measure of future sales

Motorized net revenues decreased $2.2 million or 1.1% in the first quarter of Fiscal 2017 as compared to the first quarter of Fiscal 2016. This was primarily due to the $5.0 million reduction in sales to aluminum extrusion customers as we have ceased those activities, which were comparably low margin, in order to better utilize constrained labor resources in Iowa. Offsetting this reduction was modest growth in motorhome revenues.

Motorized deliveries grew by 4.1% in the quarter which is lower than recent industry growth. Our overall motorized market share has moved from 20.7% to 18.1% when comparing shipments during the twelve month trailing periods ended October 2015 and October 2016. The decline has come in higher priced, Class A products. We have seen a related reduction in the backlog volumes. The unit growth we have generated has shifted our mix more towards Class B and Class C products which have a lower average selling price. So although units increased 4.1%, motorhome ASP decreased 2.9%.

In part, the motorized market share decline has been influenced by limited production capacity within our North Iowa facilities and our required time to deliver product. In recent quarters, we have begun to make investments to unlock further capacity via improved operational processes and adding new facilities. While these investments have not been fully realized to date, we have taken near term actions to seek to improve the profitability of the motorized product with improved mix, cost containment efforts and pricing initiatives.

A key metric used to evaluate motorized dealer inventory levels is the retail turn rate (12 month retail volume/current dealer inventory). At the end of the first quarter of Fiscal 2017 the retail turn rate was 2.1 turns for motorized product. Historically turn

22

Table of Contents

rates of 2.0 or above have been an indication of a balanced dealer inventory, thus we believe motorized dealer inventory levels are in alignment with retail demand.

Motorized segment Adjusted EBITDA decreased $1.7 million or 14.6%. This reduction was due to incrementally higher expenses related to workers compensation, costs associated with ramp-up of our Junction City, Oregon production facility, an increase in salaried wages associated with additions to the management team, and some material cost increases.

The following is an analysis of key changes in our Towable business unit.
Towable
 
 
 
 
 
 
 
 
 
(In thousands, except units)
 
Three Months Ended
 
 
Nov 26,
2016
% of Revenue
 
Nov 28,
2015
% of Revenue
 
Increase
%
Change
Net revenues
 
$
50,183

 
 
$
16,883

 
 
$
33,300

197.2
%
Adjusted EBITDA
 
4,664

9.3
%
 
1,060

6.3
%
 
3,604

340.0
%
 
 
 
 
 
 
 
 
 
 
Unit deliveries
 
Nov 26,
2016
Product
Mix % (1)
 
Nov 28,
2015
Product
Mix % (1)
 
Increase
%
Change
Travel trailer
 
1,509

75.0
%
 
724

88.7
%
 
785

108.4
%
Fifth wheel
 
503

25.0
%
 
92

11.3
%
 
411

446.7
%
    Total Towables
 
2,012

100.0
%
 
816

100.0
%
 
1,196

146.6
%
 
 
 
 
 
 
 
 
 
 
Towables ASP
 
24,862

 
 
20,685

 
 
4,177

20.2
%
 
 
 
 
 
 
 
 
 
 
 
 
As Of
 
 
 
Backlog (2)
 
Nov 26,
2016
 
 
Nov 28,
2015
 
 
Increase
%
Change
Units
 
6,475

 
 
312

 
 
6,163

NMF

Dollars
 
$
214,178

 
 
$
7,249

 
 
$
206,929

NMF

 
 
 
 
 
 
 
 
 
 
Dealer Inventory
 
 
 
 
 
 
 
 
 
Units
 
7,118

 
 
1,838

 
 
5,280

287.3
%

(1) Percentages may not add due to rounding differences.
(2) We include in our backlog all accepted orders from dealers to be shipped within the next six months. Orders in backlog can be cancelled or postponed at the option of the dealer at any time without penalty and, therefore, backlog may not necessarily be an accurate measure of future sales

Towable net revenues increased $33.3 million or 197.2% in the first quarter of Fiscal 2017 as compared to the first quarter of Fiscal 2016. This was primarily due to the acquisition of Grand Design which added revenues of $25.8 million in the quarter. In addition, Winnebago-branded Towable revenues rose $7.5 million or 44.2% in the quarter.

Towable deliveries grew by 146.6% in the quarter which is far in excess of recent industry trends. With the addition of Grand Design, our towables market share increased from 0.9% to 4.3% when comparing shipments during the twelve month trailing periods ended October 2015 and October 2016. The addition of Grand Design has also resulted in a higher ASP due to a greater proportion of higher-priced fifth wheel units for the first quarter of Fiscal 2017 compared to the same period in Fiscal 2016. Other strong increases in backlog and the dealer inventory turn ratio have been influenced by the acquisition of Grand Design in the quarter.

Towable segment Adjusted EBITDA excludes the costs associated with the acquisition and as such increased $3.6 million or 340.4%. This increase illustrates the favorable impact of Grand Design and the organic growth of the Winnebago-branded towables operating unit. We achieved strong results in our towables operations, where shipments grew much faster than the industry as a result of greater penetration of our new products and further expansion of our distribution base. We believe we can continue to achieve growth in excess of the overall towables market projections for the remainder of Fiscal 2017.

Analysis of Financial Condition, Liquidity and Resources
Cash and cash equivalents decreased $60.0 million during the first three months of Fiscal 2017 and totaled $25.6 million as of November 26, 2016. Significant liquidity events that occurred during the first three months of Fiscal 2017 were: