WINNEBAGO INDUSTRIES INC (WGO) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A is presented in five sections:
•Overview
•Results of Operations
•Analysis of Financial Condition, Liquidity, and Capital Resources
•Critical Accounting Policies and Estimates
•New Accounting Pronouncements
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8 of Part II in this Annual Report on Form 10-K.
The year-over-year comparisons in this Management's Discussion and Analysis of Financial Condition and Results of Operations are as of and for the fiscal years ended August 28, 2021 and August 29, 2020, unless stated otherwise. The discussion of Fiscal 2019 results and related year-over-year comparisons as of and for the fiscal years ended August 29, 2020 and August 31, 2019 are found in Item 7 of Part II of our Form 10-K for the fiscal year ended August 29, 2020.
Overview
Winnebago Industries, Inc. is one of the leading North American manufacturers of recreation vehicles ("RV"s) and marine products with a diversified portfolio used primarily in leisure travel and outdoor recreational activities. We produce our motorhome units in Iowa and Indiana; our towable units in Indiana; and our marine units in Florida. We distribute our RV and marine products primarily through independent dealers throughout the U.S. and Canada, who then retail the products to the end consumer. We also distribute our marine products internationally through independent dealers, who then retail the products to the end consumer.
Acquisition of Barletta
At the beginning of Fiscal 2022, we completed our acquisition of all the equity interests of Barletta Boat Company, LLC and Three Limes, LLC (collectively, "Barletta") for $255.0 million funded with $230.0 million cash on hand and $25.0 million in common stock issued to the sellers. For further discussion regarding the acquisition, refer to Note 1 to the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K.
COVID-19 Pandemic
We continue to monitor guidance from international and domestic authorities, including federal, state and local public health authorities, regarding the COVID-19 pandemic and may take additional actions based on their requirements and recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. Overall, there has been strong retail demand by consumers of RVs as a safe travel option, and of marine products as a safe way to experience the outdoors, during the COVID-19 pandemic. Our production has experienced certain supply shortages, and if supply shortages continue or there are additional disruptions in our supply chain, it could materially and adversely impact our operating results and financial condition. Despite certain supply shortages, we continue to actively manage through these temporary supply chain disruptions. Refer to the COVID-19 related risk factor disclosed in Item 1A of Part II in this Annual Report on Form 10-K.
Non-GAAP Financial Measures
This MD&A includes financial information prepared in accordance with generally accepted accounting principles ("GAAP"), as well as certain adjusted or non-GAAP financial measures such as EBITDA and Adjusted EBITDA. EBITDA is defined as net income before interest expense, provision for income taxes, and depreciation and amortization expense. Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, depreciation and amortization expense, and other pretax adjustments made in order to present comparable results from period to period.
These non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, have been provided as information supplemental and in addition to the financial measures presented in accordance with GAAP. Such non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein. The non-GAAP financial measures presented may differ from similar measures used by other companies.
Included in "Results of Operations - Fiscal 2021 Compared to Fiscal 2020" is a reconciliation of EBITDA and Adjusted EBITDA from net income, the nearest GAAP measure. We have included these non-GAAP performance measures as a comparable measure to illustrate the effect of non-recurring transactions that occurred during the reported periods and to improve comparability of our
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results from period to period. We believe Adjusted EBITDA provides meaningful supplemental information about our operating performance as this measure excludes amounts from net income that we do not consider part of our core operating results when assessing our performance. Examples of items excluded from Adjusted EBITDA include acquisition-related costs, restructuring expenses, gain or loss on sale of property and equipment, and non-operating (income) loss.
Management uses these non-GAAP financial measures (a) to evaluate our historical and prospective financial performance and trends as well as our performance relative to competitors and peers; (b) to measure operational profitability on a consistent basis; (c) in presentations to the members of our Board of Directors to enable our Board of Directors to have the same measurement basis of operating performance as used by management in its assessments of performance and in forecasting; (d) to evaluate potential acquisitions; and (e) to ensure compliance with covenants and restricted activities under the terms of our ABL Credit Facility and outstanding notes, as further described in Note 9 to the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K. We believe these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in the industry.
Industry Trends
Our operations are organized under two reportable segments, Towable and Motorhome, based on similarities within their markets, products, operations, and distribution.
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 the Recreation Vehicle Industry Association ("RVIA").
•Retail unit registrations - Consumer purchases of RVs from dealers, 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 following is an analysis of changes in these key statistics for the rolling 12 months through August as of 2021 and 2020:
| US and Canada Industry | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Wholesale Unit Shipments per RVIA | Retail Unit Registrations per Stat Surveys | ||||||||||||||||||||||
| Rolling 12 Months through August | Rolling 12 Months through August | ||||||||||||||||||||||
| 2021 | 2020 | Unit Change | % Change | 2021 | 2020 | Unit Change | % Change | ||||||||||||||||
| Towable(1) | 503,516 | 338,602 | 164,914 | 48.7 | % | 514,769 | 415,827 | 98,942 | 23.8 | % | |||||||||||||
| Motorhome(2) | 54,001 | 38,680 | 15,321 | 39.6 | % | 56,041 | 49,722 | 6,319 | 12.7 | % | |||||||||||||
| Combined | 557,517 | 377,282 | 180,235 | 47.8 | % | 570,810 | 465,549 | 105,261 | 22.6 | % |
(1) Towable: Fifth wheel and travel trailer products.
(2) Motorhome: Class A, B and C products.
Wholesale unit shipments have experienced growth (after the initial industry-wide shutdown of RV manufacturing for a six-week period beginning the last week of March 2020) due to high levels of end consumer demand and extremely low levels of dealer inventories, most notably in the towables segment, as consumers considered RVs a safe travel option during the COVID-19 pandemic. The rolling twelve months retail information for 2021 and 2020 illustrates that retail sales remain at healthy levels relative to the industry's historical retail levels. We believe retail demand is the key driver to continued growth in the industry.
The most recent RVIA wholesale shipment forecasts for calendar year 2022, as noted in the table below, indicate that industry shipments are expected to experience growth in 2022. The retail activity is anticipated to remain at healthy levels and wholesale shipments are expected to increase further associated with dealers rebuilding their inventories and the supply chain increasing capacity to serve the growth of the RV industry.
| Calendar Year | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Wholesale Unit Shipment Forecast per RVIA(1) | 2022 Forecast | 2021 Forecast | Unit Change | % Change | |||||||
| Aggressive | 614,100 | 587,400 | 26,700 | 4.5 | % | ||||||
| Most likely | 600,200 | 577,200 | 23,000 | 4.0 | % | ||||||
| Conservative | 586,300 | 567,000 | 19,300 | 3.4 | % |
(1) Prepared by ITR Economics for RVIA and reported in the Roadsigns RV Fall 2021 Industry Forecast Issue.
The RV industry continues to experience supply shortages and shipping delays of raw material components. While we continue to manage through these supply disruptions, they have impacted our ability to increase production to meet existing demand in the current fiscal year. If these shortages and delays worsen, we could experience a negative impact on our sales and earnings in the future.
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Market Share
Our retail unit market share, as reported by Stat Surveys based on state records, is illustrated below. Market share is calculated by taking our brands total unit sales divided by the total units sold in the motorized and travel trailer and fifth wheel markets. The data is used to analyze growth and profitability of our products and brands year over year. This data is subject to adjustment and is continuously updated.
| Rolling 12 Months through August | Calendar Year | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| US and Canada | 2021 | 2020(1) | 2020 | 2019(1) | 2018 | |||||||||
| Travel trailer and fifth wheels | 11.7 | % | 10.0 | % | 10.3 | % | 9.2 | % | 7.8 | % | ||||
| Motorhome A, B, C | 19.9 | % | 20.3 | % | 21.3 | % | 16.1 | % | 15.5 | % | ||||
| Total market share | 12.5 | % | 11.1 | % | 11.5 | % | 10.0 | % | 8.7 | % |
(1) Includes retail unit market share for Newmar since its acquisition on November 8, 2019.
Results of Operations - Fiscal 2021 Compared to Fiscal 2020
Consolidated Performance Summary
The following is an analysis of changes in key items included in the statements of operations for the fiscal year ended August 28, 2021 compared to the fiscal year ended August 29, 2020:
| (in thousands, except percent and per share data) | 2021 | % of Revenues(1) | 2020 | % of Revenues(1) | $ Change | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenues | $ | 3,629,847 | 100.0 | % | $ | 2,355,533 | 100.0 | % | $ | 1,274,314 | 54.1 | % | ||||||||
| Cost of goods sold | 2,979,484 | 82.1 | % | 2,042,605 | 86.7 | % | 936,879 | 45.9 | % | |||||||||||
| Gross profit | 650,363 | 17.9 | % | 312,928 | 13.3 | % | 337,435 | 107.8 | % | |||||||||||
| Selling, general, and administrative expenses ("SG&A") | 228,581 | 6.3 | % | 177,061 | 7.5 | % | 51,520 | 29.1 | % | |||||||||||
| Amortization of intangible assets | 14,361 | 0.4 | % | 22,104 | 0.9 | % | (7,743) | (35.0) | % | |||||||||||
| Total operating expenses | 242,942 | 6.7 | % | 199,165 | 8.5 | % | 43,777 | 22.0 | % | |||||||||||
| Operating income | 407,421 | 11.2 | % | 113,763 | 4.8 | % | 293,658 | 258.1 | % | |||||||||||
| Interest expense | 40,365 | 1.1 | % | 37,461 | 1.6 | % | 2,904 | 7.8 | % | |||||||||||
| Non-operating income | (394) | — | % | (974) | — | % | (580) | (59.5) | % | |||||||||||
| Income before income taxes | 367,450 | 10.1 | % | 77,276 | 3.3 | % | 290,174 | 375.5 | % | |||||||||||
| Provision for income taxes | 85,579 | 2.4 | % | 15,834 | 0.7 | % | 69,745 | 440.5 | % | |||||||||||
| Net income | $ | 281,871 | 7.8 | % | $ | 61,442 | 2.6 | % | $ | 220,429 | 358.8 | % | ||||||||
| Diluted earnings per share | $ | 8.28 | $ | 1.84 | $ | 6.44 | 350.0 | % | ||||||||||||
| Diluted average shares outstanding | 34,056 | 33,454 | 602 | 1.8 | % |
(1) Percentages may not add due to rounding differences.
Fiscal 2020 results were negatively impacted by the unprecedented series of events related to the COVID-19 pandemic, which included the suspension of the Company's manufacturing operations as well as disruptions across our dealer network, supply chain and end consumers during most of the third quarter.
Net revenues increased primarily due to organic unit sales growth, the annualized impact from our Newmar acquisition, which took place in the first quarter of Fiscal 2020, price increases and lower discounts and allowances, partially offset by unfavorable segment mix.
Gross profit as a percentage of revenue increased primarily due to improved leverage as a result of higher revenues, price increases, lower discounts and allowances, and favorable segment mix.
Operating expenses increased primarily due to an increase in enterprise-wide variable compensation, higher selling costs and a full year of Newmar operating costs, partially offset by a decrease in acquisition-related costs compared to the prior year, a gain on sales of assets and lower Newmar amortization expense in the current year.
Interest expense increased primarily due to a higher interest rate on the refinancing of our Term Loan in the fourth quarter of Fiscal 2020 (as described in Note 9 to the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K).
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The effective tax rate increased to 23.3% in Fiscal 2021 compared to 20.5% in Fiscal 2020 primarily due to relatively consistent year-over-year tax credits on higher pretax income in Fiscal 2021.
Net income and diluted earnings per share increased primarily due to leverage from higher revenues, partially offset by higher operating expenses and a higher effective tax rate.
Non-GAAP Reconciliation
The following table reconciles net income to consolidated EBITDA and Adjusted EBITDA for Fiscal 2021 and 2020:
| (in thousands) | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Net income | $ | 281,871 | $ | 61,442 | ||
| Interest expense | 40,365 | 37,461 | ||||
| Provision for income taxes | 85,579 | 15,834 | ||||
| Depreciation | 18,201 | 15,997 | ||||
| Amortization of intangible assets | 14,361 | 22,104 | ||||
| EBITDA | 440,377 | 152,838 | ||||
| Acquisition-related fair-value inventory step-up | — | 4,810 | ||||
| Acquisition-related costs | 725 | 9,761 | ||||
| Restructuring expense(1) | 112 | 1,640 | ||||
| Gain on sale of property, plant and equipment | (4,753) | — | ||||
| Non-operating income | (394) | (974) | ||||
| Adjusted EBITDA | $ | 436,067 | $ | 168,075 |
(1) Balance excludes depreciation expense classified as restructuring as the balance is already included in the EBITDA calculation.
Reportable Segment Performance Summary
Towable
The following is an analysis of key changes in our Towable segment for Fiscal 2021 and 2020:
| (in thousands, except ASP and units) | 2021 | % of Revenues | 2020 | % of Revenues | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenues | $ | 2,009,959 | $ | 1,227,567 | $ | 782,392 | 63.7 | % | ||||||||||
| Adjusted EBITDA | 289,007 | 14.4 | % | 148,276 | 12.1 | % | 140,731 | 94.9 | % | |||||||||
| Average Selling Price ("ASP")(1) | 33,271 | 32,607 | 664 | 2.0 | % | |||||||||||||
| Unit deliveries | 2021 | Product Mix(2) | 2020 | Product Mix(2) | Unit Change | % Change | ||||||||||||
| Travel trailer | 39,943 | 66.5 | % | 23,184 | 61.2 | % | 16,759 | 72.3 | % | |||||||||
| Fifth wheel | 20,163 | 33.5 | % | 14,706 | 38.8 | % | 5,457 | 37.1 | % | |||||||||
| Total Towable | 60,106 | 100.0 | % | 37,890 | 100.0 | % | 22,216 | 58.6 | % | |||||||||
| August 28, 2021 | August 29, 2020 | Change | % Change | |||||||||||||||
| Backlog(3) | ||||||||||||||||||
| Units | 46,590 | 24,903 | 21,687 | 87.1 | % | |||||||||||||
| Dollars | $ | 1,704,393 | $ | 747,925 | $ | 956,468 | 127.9 | % | ||||||||||
| Dealer Inventory | ||||||||||||||||||
| Units | 10,126 | 10,528 | (402) | (3.8) | % |
(1) ASP excludes off-invoice dealer incentives.
(2) Percentages may not add due to rounding differences.
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(3) Our backlog includes all accepted orders from dealers which generally have been requested to be shipped within the next six months. Orders in backlog can be cancelled or postponed at the option of the dealer at any time without penalty; therefore, backlog may not necessarily be an accurate measure of future sales.
Net revenues increased in Fiscal 2021 compared to Fiscal 2020 primarily due to increased unit sales and pricing.
ASP increased in Fiscal 2021 compared to Fiscal 2020 due to pricing actions taken during Fiscal 2021, partially offset by unfavorable product mix.
Adjusted EBITDA increased in Fiscal 2021 compared to Fiscal 2020 primarily due to operating leverage on an increase in unit sales, partially offset by higher operating expenses and higher variable compensation expense.
Unit deliveries increased in Fiscal 2021 compared to Fiscal 2020 representing an increase in organic volume growth. Our Towable segment market share increased from 10.0% to 11.7% when comparing retail registrations during the twelve-month trailing periods ended August 2020 and August 2021.
We have seen an increase in the volumes and dollar value of backlog as of August 28, 2021 compared to August 29, 2020 as a result of continued strong retail demand, as well as an increase in demand for our products reflected in our increase in market share.
Motorhome
The following is an analysis of key changes in our Motorhome segment for Fiscal 2021 and 2020:
| (in thousands, except ASP and units) | 2021 | % of Revenues | 2020 | % of Revenues | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net revenues | $ | 1,539,084 | $ | 1,056,794 | $ | 482,290 | 45.6 | % | ||||||||||
| Adjusted EBITDA | 169,205 | 11.0 | % | 32,949 | 3.1 | % | 136,256 | 413.5 | % | |||||||||
| ASP(1) | 138,999 | 130,098 | 8,901 | 6.8 | % | |||||||||||||
| Unit deliveries | 2021 | Product Mix(2) | 2020 | Product Mix(2) | Unit Change | % Change | ||||||||||||
| Class A | 2,957 | 27.1 | % | 2,493 | 30.8 | % | 464 | 18.6 | % | |||||||||
| Class B | 5,431 | 49.8 | % | 3,351 | 41.3 | % | 2,080 | 62.1 | % | |||||||||
| Class C | 2,521 | 23.1 | % | 2,261 | 27.9 | % | 260 | 11.5 | % | |||||||||
| Total Motorhome | 10,909 | 100.0 | % | 8,105 | 100.0 | % | 2,804 | 34.6 | % | |||||||||
| August 28, 2021 | August 29, 2020 | Change | % Change | |||||||||||||||
| Backlog(3) | ||||||||||||||||||
| Units | 18,254 | 8,463 | 9,791 | 115.7 | % | |||||||||||||
| Dollars | $ | 2,303,504 | $ | 1,051,415 | $ | 1,252,089 | 119.1 | % | ||||||||||
| Dealer Inventory | ||||||||||||||||||
| Units | 1,696 | 2,761 | (1,065) | (38.6) | % |
(1) ASP excludes off-invoice dealer incentives.
(2) Percentages may not add due to rounding differences.
(3) Our backlog includes all accepted orders from dealers which generally have been requested to be shipped within the next six months. Orders in backlog can be cancelled or postponed at the option of the dealer at any time without penalty; therefore, backlog may not necessarily be an accurate measure of future sales.
Net revenues increased in Fiscal 2021 compared to Fiscal 2020 primarily due to unit sales growth and pricing, including lower allowances.
Average selling price increased in Fiscal 2021 compared to Fiscal 2020 primarily due to price increases, partially offset by unfavorable product mix.
Adjusted EBITDA increased in Fiscal 2021 compared to Fiscal 2020 primarily due to improved operating leverage on higher revenue as well as increased pricing and lower allowances, partially offset by investments in the business and higher variable compensation expense.
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Unit deliveries increased in Fiscal 2021 compared to Fiscal 2020 representing an increase in organic volume growth. Our Motorhome segment market share decreased slightly, from 20.3% to 19.9%, when comparing retail registrations during the twelve-month trailing periods ended August 2020 and August 2021.
We have seen an increase in the volume and dollar value of backlog as of August 28, 2021 compared to August 29, 2020 primarily due to continued strong retail demand due to the perceived safety of RV travel and reduction in commercial air travel and cruises. These have resulted in historically low dealer inventory levels.
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Analysis of Financial Condition, Liquidity, and Capital Resources
Cash Flows
The following table summarizes our cash flows from total operations for Fiscal 2021 and 2020:
| (in thousands) | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Total cash provided by (used in): | ||||||
| Operating activities | $ | 237,279 | $ | 270,434 | ||
| Investing activities | (33,009) | (293,076) | ||||
| Financing activities | (62,282) | 277,786 | ||||
| Net increase in cash and cash equivalents | $ | 141,988 | $ | 255,144 |
Operating Activities
Cash provided by operating activities decreased in Fiscal 2021 compared to Fiscal 2020 due to investments in working capital to support current year revenue growth, including higher inventory to support customer demand and manage supply chain constraints, and timing of accounts receivable/collections and payments on accounts payable, partially offset by higher profitability and higher enterprise-wide variable compensation in Fiscal 2021.
Investing Activities
Cash used in investing activities decreased in Fiscal 2021 compared to Fiscal 2020 primarily due to the use of cash in Fiscal 2020 to acquire Newmar, partially offset by proceeds received from the sale of property in Junction City, Oregon.
Financing Activities
Cash was used by financing activities in Fiscal 2021 compared to cash being provided by financing activities in Fiscal 2020 primarily due to increased share repurchases in Fiscal 2021 compared to cash received from the issuance of the Convertible Notes to finance the Newmar acquisition in Fiscal 2020.
Debt and Capital
During the first quarter of Fiscal 2020, we issued the Convertible Notes, which were used to partially fund the Newmar acquisition. Refer to Note 9 to the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K for additional details.
As of July 8, 2020, we closed our private offering (the "Senior Secured Notes Offering") of $300.0 million in aggregate principal amount of 6.25% Senior Secured Notes due 2028 (the "Senior Secured Notes"). The proceeds from the Senior Secured Notes were used to repay the remaining debt on the Term Loan and for general corporate purposes. Refer to Note 9 to the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K for additional details.
We maintain a $192.5 million ABL Credit Facility with a maturity date of October 22, 2024 subject to certain factors which may accelerate the maturity date. As of August 28, 2021, we had $434.6 million in cash and cash equivalents and no borrowings against the ABL Credit Facility. We continue to evaluate the financial stability of the counterparties and counterparty risk for the Convertible Notes, the Senior Secured Notes, and the ABL Credit Facility.
Our cash and cash equivalent balances consist of high quality, short-term money market instruments.
Other Financial Measures
Working capital as of August 28, 2021 and August 29, 2020 was $651.6 million and $413.2 million, respectively.
Capital Expenditures
We anticipate capital expenditures in Fiscal 2022 of approximately $80.0 million to $90.0 million. We will continue to support organic growth through capacity expansion in our facilities and make capital improvements as necessary. We believe cash on hand, funds generated from operations, and the borrowing capacity available under our ABL Credit Facility and other debt instruments will be sufficient to support our capital expenditures.
Share Repurchases and Dividends
We repurchase our common stock and pay dividends pursuant to programs approved by our Board of Directors. Our long-term capital allocation strategy is to first fund operations and investments in growth, maintain reasonable liquidity, maintain a leverage ratio that reflects a prudent capital structure in light of the cyclical industries we compete in, and then return excess cash over time
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to shareholders through dividends and share repurchases. Refer to Item 5 of Part 1 of this Annual Report on Form 10-K for discussion about our share repurchase program and dividend declared on August 18, 2021.
Cash Requirements
Our cash requirements within the next twelve months include accounts payable, accrued expenses, purchase commitments and other current liabilities.
Our cash requirements greater than twelve months from various contractual obligations and commitments include:
Debt Obligations and Interest Payments
Refer to Note 9 in the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K for further detail of our debt and the timing of expected future principal and interest payments. Interest payments are based on fixed interest rates for the Senior Secured Notes and Convertible Notes.
Operating and Finance Leases
Refer to Note 10 in the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K for further detail of our lease obligations and the timing of expected future payments.
Deferred Compensation Obligations
Refer to Note 11 in the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K for further detail of our deferred compensation plans. We expect to pay $2.8 million in the next 12 months and $9.6 million beyond 12 months.
Contracted Services
Contracted services include agreements with third-party service providers for software, payroll services, equipment maintenance services, and audits for periods up to Fiscal 2025. We expect to pay $7.1 million beyond 12 months.
Contingent Repurchase Obligations
Refer to Note 12 in the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K for further detail of our contingent repurchase commitment and estimated obligation, most of which we expect to expire within one year.
We expect to satisfy our short-term and long-term obligations through a combination of cash on hand, funds generated from operations, and the borrowing capacity available under our ABL Credit Facility and other debt instruments.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors believed to be relevant at the time our consolidated financial statements are prepared. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K. We believe that the following accounting policies and estimates are the most critical to aid in fully understanding and evaluating our reported financial results. These estimates require our most difficult, subjective, or complex judgments because they relate to matters that are inherently uncertain. We have reviewed these critical accounting policies and estimates and related disclosures with the Audit Committee of our Board of Directors.
We have not made any material changes during the past three fiscal years, nor do we believe there is a reasonable likelihood of a material future change to the accounting methodologies for the areas described below.
Accounting for Business Combinations
We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates, royalty rates and asset lives, among other items.
We used the income approach to value certain intangible assets. 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. We used the income approach
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known as the relief from royalty method to value the fair value of the trade names. 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 known as 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 determination of the fair value of other assets acquired and liabilities assumed involves assessing factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount rates at the date of the acquisition.
Goodwill and Indefinite-lived Intangible Assets
We test goodwill and indefinite-lived intangible assets (trade names) for impairment at least annually in the fourth quarter and more frequently if events or circumstances occur that would indicate a reduction in fair value. Our test of impairment begins by either performing a qualitative evaluation or a quantitative test:
•Qualitative evaluation - Performed to determine whether it is more likely than not that the carrying value of goodwill or the trade name exceeds the fair value of the asset. During our qualitative assessment, we make significant estimates, assumptions, and judgments, including, but not limited to, the macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of the Company and the reporting units, changes in our share price, and relevant company-specific events. If we determine that it is more likely than not that the carrying value of goodwill exceeds the fair value of goodwill, we perform the quantitative test to determine the amount of the impairment.
•Quantitative test - Used to calculate the fair value of goodwill or the trade name. If the carrying value of goodwill or the trade name exceeds the fair value of the asset, the impairment is calculated as the difference between the carrying value and fair value. Our goodwill fair value model uses a blend of the income (discounted future cash flow) and market (guideline public company) approaches, which includes the use of significant unobservable inputs (Level 3 inputs). Our trade name fair value model uses the income (relief-from-royalty) approach, which includes the use of significant unobservable inputs (Level 3 inputs). During these valuations, we make significant estimates, assumptions, and judgments, including, current and projected future levels of income based on management’s plans, business trends, market and economic conditions, and market-participant considerations.
Actual results may differ from assumed and estimated amounts. As of August 28, 2021, our goodwill balance includes $244.7 million related to our Towable segment, $73.1 million related to our Motorhome segment from our Newmar acquisition, and $30.2 million related to our Corporate/All Other operating segment from our Chris-Craft acquisition, and our indefinite-lived intangible asset balance is $275.3 million. No impairments were recorded in Fiscal 2021, 2020, and 2019.
Warranty
We provide certain service and warranty on our products. Estimated costs related to product warranty are accrued at the time of sale and are based upon past warranty claims and unit sales history. Estimates are adjusted as needed to reflect actual costs incurred as information becomes available.
In addition to the costs associated with the contractual warranty coverage provided on our products, we also occasionally incur costs as a result of additional service actions not covered by our warranties, including product recalls and customer satisfaction actions. Although we estimate and reserve for the cost of these service actions, there can be no assurance that expense levels will remain at current levels or such reserves will continue to be adequate.
A significant increase in dealership labor rates, the cost of parts, or the frequency of claims could have a material adverse impact on our operating results for the period or periods in which such claims or additional costs materialize. A hypothetical change of a 10% increase or decrease in our warranty liability as of August 28, 2021 would not have a material effect on our net income.
New Accounting Pronouncements
For a summary of new applicable accounting pronouncements, see Note 1 to the Notes to Consolidated Financial Statements, included in Item 8 of Part II in this Annual Report on Form 10-K.