Business Combination, Goodwill and Other Intangible Assets

9 Months Ended

May 27, 2017

Business Combinations [Abstract]

Business Combination, Goodwill and Other Intangible Assets

Business Combination, Goodwill and Other Intangible Assets

We acquired 100% of the ownership interests of Grand Design on November 8, 2016 in accordance with the Securities Purchase Agreement for an aggregate purchase price of $520.5 million, which was paid in cash and Winnebago shares as follows:

(In thousands, except shares)	November 8, 2016
Cash	$	396,442
Winnebago shares: 4,586,555 at $27.05 per share	124,066
Total	$	520,508

The cash portion was funded from cash on hand and borrowings under our ABL and Term Loan agreements. The stock was valued using our share price on the date of closing.

The acquisition has been accounted for in accordance with ASC 805, Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price was allocated to the 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 income taxes. Thus, the preliminary measurements of fair value reflected are subject to change. 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	2,593
Property, plant and equipment	8,998
Goodwill	244,164
Other intangible assets	253,100
Total assets acquired	558,737
Accounts payable	11,163
Accrued compensation	3,615
Product warranties	12,904
Promotional	3,976
Other	1,569
Deferred tax liabilities	5,002
Total liabilities assumed	38,229
Total purchase price	$	520,508

The acquisition of 100% of the ownership interests of Grand Design occurred in two steps: (1) direct purchase of 89.34% of Grand Design member interests and (2) simultaneous acquisition of the remaining 10.66% of Grand Design member interests via the purchase of 100% of the shares of 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 did 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 $8.5 million on the opening balance sheet that relates 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 $245.4 million within the Towable segment as of May 27, 2017 from $1.2 million as of August 27, 2016. No changes were made to the carrying amount of goodwill for the three months ended May 27, 2017.

The allocation of the purchase price to the net assets acquired and liabilities assumed resulted in the recognition of intangible assets with fair value on the closing date of November 8, 2016 and amortization accumulated from the closing date through May 27, 2017 as follows:

(in thousands)	Weighted Average Life- Years	Fair Value Amount			Accumulated Amortization
Trade name	Indefinite	$	148,000		$	—
Dealer network	12.0	80,500			3,676
Backlog	0.5	18,000			18,000
Non-compete agreements	4.0	4,600			767
Leasehold interest-favorable	8.1	2,000			135
Total		253,100			$	22,578
Accumulated amortization		(22,578		)
Net book value of intangible assets		$	230,522

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 the intangible assets.

For the nine months ended May 27, 2017 and May 28, 2016, amortization of intangible assets charged to operations was$22.6 millionand$0, respectively. The weighted average remaining amortization period for intangible assets as of May 27, 2017 was approximately11.6years. Remaining estimated aggregate annual amortization expense by fiscal year is as follows:

(in thousands)	Amount
Remainder of 2017	$	2,082
2018	7,854
2019	7,733
2020	7,733
2021	7,733
2022	7,106
Thereafter	42,281

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

	Nine Months Ended
(in thousands)	May 27, 2017
Net revenues	$	366,309
Operating income	27,083

Unaudited pro forma information has been prepared as if the acquisition had taken place on August 30, 2015. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transaction actually taken place on August 30, 2015, and the unaudited pro forma information does not purport to be indicative of future financial operating results. The unaudited pro forma condensed consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition. Unaudited pro forma information is as follows:

	Three Months Ended				Nine Months Ended
(In thousands, except per share data)	May 27, 2017		May 28, 2016		May 27, 2017		May 28, 2016
Net revenues	$	476,364	$	402,511	$	1,187,849	$	1,022,249
Net income	24,856		21,064		66,009		29,221
Income per share - basic	0.79		0.67		2.09		0.93
Income per share - diluted	0.78		0.67		2.08		0.92

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					Nine Months Ended
(In thousands)	May 27, 2017			May 28, 2016		May 27, 2017			May 28, 2016
Amortization of intangibles (1 year or less useful life)	$	(8,225	)	$	1,579	$	(18,601	)	$	18,722
Increase in amortization of intangibles	—			1,933		1,551			5,799
Expenses related to business combination (transaction costs) (1)	(450		)	450		(6,432		)	6,753
Interest to reflect new debt structure	—			4,884		3,672			14,779
Taxes related to the adjustments to the pro forma data and to the income of Grand Design	3,210			3,892		11,513			(1,838		)

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

We incurred approximately $6.7 million of acquisition-related costs to date, of which $0.5 million and $6.4 million were expensed during the three and nine months ended May 27, 2017 and $0.3 million was expensed in the three months ended August 27, 2016.