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Business Combination, Goodwill and Other Intangible Assets
 3 Months Ended
Nov. 26, 2016
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 $520.6 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


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.

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



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.