Business Combinations

3 Months Ended

Nov. 28, 2020

Newmar Corporation

On November 8, 2019, pursuant to the terms of the Stock Purchase Agreement dated September 15, 2019 (the "Purchase Agreement"), Winnebago completed the acquisition of 100% of Newmar Corporation, Dutch Real Estate Corp., New-Way Transport, and New-Serv (collectively “Newmar”). Newmar is a leading manufacturer of Class A and Super C motorized recreation vehicles that are sold through an established network of independent authorized dealers throughout North America.

The following table summarizes the total consideration paid for Newmar as stipulated in the Purchase Agreement:


(in thousands)	November 8, 2019
Cash	$	264,433
Winnebago Industries shares: 2,000,000 at $46.29	92,572
Total	$	357,005

The cash portion of the purchase price of the acquisition and certain transaction expenses were funded through the private placement of convertible senior notes (as further described in Note 9, Long-Term Debt) and cash on hand. The stock consideration was discounted by 7.0% due to lack of marketability because of the one year lock-up restrictions.

The total purchase price was allocated to the net tangible and intangible assets of Newmar acquired, based on their fair values at the date of the acquisition. The Company believes that the information provides a reasonable basis for estimating the fair values. During the third quarter of Fiscal 2020, the Company finalized the valuation and completed the purchase price allocation, which included purchase price adjustments of $3.3 million.

The following table summarizes the fair values assigned to the Newmar net assets acquired and the determination of net assets:


(in thousands)	November 8, 2019
Cash	$	3,469
Accounts receivable	37,147
Inventories	82,621
Prepaid expenses and other assets	9,830
Property, plant, and equipment	31,143
Goodwill	73,127
Other intangible assets	172,100
Total assets acquired	409,437
Accounts payable	14,023
Accrued compensation	4,306
Product warranties	15,147
Promotional	6,351
Other	11,637
Deferred tax liabilities	968
Total liabilities assumed	52,432
Total purchase price	$	357,005

The goodwill, recognized in the Company's Motorhome segment, 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. The full amount of goodwill is deductible for tax purposes.

The following table summarizes the other intangible assets acquired:


($ in thousands)	November 8, 2019		Useful Life-Years
Trade name	$	98,000	Indefinite
Dealer network	64,000		12.0
Backlog	8,800		0.5
Non-compete agreements	1,300		5.0

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 the 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 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 saving method. This method uses the replacement of the asset as an indicator of the fair value of the asset. The useful life of the intangibles was determined considering the expected cash flows used to measure the fair value of the intangible assets adjusted for the entity-specific factors including legal, regulatory, contractual, competitive, economic or other factors that may limit the useful life of intangible assets. On the acquisition date, amortizable intangible assets had a weighted-average useful life of approximately 10.5 years.

The results of Newmar's operations have been included in the Company's Condensed Consolidated Financial Statements from the close of the acquisition within the Motorhome segment. The following table provides net revenues and operating income from the Newmar operating segment included in the Company's consolidated results following the November 8, 2019 closing date:


	Three Months Ended
(in thousands)	November 28, 2020		November 30, 2019
Net revenues	$	118,779	$	35,663
Operating income (loss)	4,084		(1,283)

The following information represents the Company's actual results of operations for the three months ended November 28, 2020, and proforma information for the three months ended November 30, 2019 as if the Fiscal 2020 acquisition of Newmar had occurred at the beginning of Fiscal 2020:


	Three Months Ended
(in thousands, except per share data)	November 28, 2020		November 30, 2019
Net revenues	$	793,131	$	741,717
Net income	57,423		17,197
Income per share - basic	$	1.71	$	0.51
Income per share - diluted	$	1.70	$	0.50

The Company's actual results of operations for the three months ended November 28, 2020 did not include any significant non-recurring adjustments related to the close of the transaction. The unaudited pro forma data for the three months ended November 30, 2019 above includes the following significant non-recurring adjustments made to account for certain costs which would have changed if the acquisition of Newmar had occurred at the beginning of Fiscal 2020:


	Three Months Ended
(in thousands)	November 30, 2019
Amortization of intangibles (1 year or less useful life)(1)	$	2,251
Amortization of intangibles(2)	(1,057)
Expenses related to business combination (transaction costs)	9,950
Interest to reflect new debt structure(3)	(3,367)
Taxes related to the adjustments to the pro forma data and to the income of Newmar(4)	(832)

(1) Includes amortization adjustments for our backlog intangible asset and our fair-value inventory adjustment.

(2) Includes amortization adjustments for our dealer network and non-compete intangible assets.

(3) Includes adjustments for cash and non-cash interest expense as well as deferred financing costs. Refer to Note 9, Long-Term Debt, for additional information on the Company's new debt structure as a result of the acquisition.

(4) Calculated using our U.S. federal statutory rate of 21.0%.

The unaudited pro forma information for the three months ended November 30, 2019 is not necessarily indicative of the results that the Company would have achieved had the transaction actually taken place at the beginning of Fiscal 2020, and the unaudited pro forma information for the three months ended November 30, 2019 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.

Total transaction costs related to the Newmar acquisition were $10.4 million, of which $9.8 million were expensed during Fiscal 2020 and $0.6 million were expensed during the fourth quarter of Fiscal 2019. There were no transaction costs incurred during the first three months of Fiscal 2021. Transaction costs are included in Selling, general, and administrative expenses in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.