Alamo Group Inc 8-K/A, filed Jan 7, 2020
Alamo Group Inc (ALG)
8-K/A
2020-01-07
For: 2019-10-29
View Original
Added on
April 11, 2026
About this 8-K/A
Alamo Group Inc filed this 8-K/A on January 7, 2020, reporting on events of October 29, 2019.
Items reported
- Item 2.01: Completed an acquisition or sale of assets
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No.1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 29, 2019
(Exact name of registrant as specified in its charter)
State of | ||||||||
| (State or other jurisdiction of incorporation) | (Commission File No.) | (IRS Employer Identification No.) | ||||||
| (Address of Registrant’s principal executive offices) | (Zip Code) | ||||
(830 ) 379-1480
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
Common Stock, par value $.10 per share | ||||||||||||||
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of
the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of
1934 (§240.12b-2 of this chapter).Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.01 Explanatory Note
On October 29, 2019, Alamo Group Inc. ("Alamo"), filed a current report on on Form 8-K with the Securities and Exchange Commission regarding the acquisition of Morbark Holdings Group, LLC ("Morbark"). Alamo is filing this amendment and supplement to the original Form 8-K. The sole purpose of this amendment is to provide the financial statements and pro forma information required by Item 9.01, which were excluded from the original filing in reliance on paragraphs (a)(4) and (b)(2), respectively, of Item 9.01 of Form 8-K.
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
Morbark Holdings Group, LLC and Subsidiaries unaudited consolidated financial statements as of and for the nine months ended September 30,2019 and audited consolidated financial statements for the years ended December 31, 2018 and December 31, 2017 are attached hereto as Exhibit 99.1, Exhibit 99.2 and Exhibit 99.3 and incorporated herein by reference.
(b) Pro Forma Financial Information.
The unaudited pro forma combined financial statements, as of and for the nine months ended September 30, 2019, and unaudited pro forma combined financial statements for the fiscal year ended December 31, 2018, and the notes to unaudited pro forma combined financial statements, all giving effect to the acquisition of Morbark, are attached hereto as Exhibit 99.4 to this and incorporated herein by reference.
(d) Exhibits:
| Exhibit No. | Description | |||||||
| 23.1 | ||||||||
| 99.1 | ||||||||
| 99.2 | ||||||||
| 99.3 | ||||||||
| 99.4 | ||||||||
| 104 | Cover Page Interactive Data File - Inline XBRL for the cover page of this Current Report on Form 8-K | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| January 7, 2020 | By: /s/ Edward T. Rizzuti | ||||
| Edward T. Rizzuti | |||||
| Vice President, General Counsel & Secretary | |||||
Exhibit 23.1
Consent of Independent Auditor
We consent to the incorporation by reference in the Registration Statements on Form S-3 (Registration No. 333-180049), and on Form S-8 (Registration Nos. 333-231205, 333-204169, 333-174755, 333-143216, and 333-88454) of Alamo Group Inc. of our report dated March 19, 2019 and March 8, 2018, relating to our audit of the consolidated financial statements of Morbark Holdings Group, LLC and subsidiaries as of and for the years ended December 31, 2018 and December 31, 2017, included in this Current Report on Form 8-K/A.
/s/ Doeren Mayhew
Troy, Michigan
January 7, 2020
Exhibit 99.1
MORBARK HOLDINGS GROUP, LLC
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(With Independent Auditor’s Report Thereon)
Exhibit 99.1
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
| Table of Contents | |||||
| Page | |||||
| INDEPENDENT AUDITOR’S REPORT | 1 | ||||
| CONSOLIDATED FINANCIAL STATEMENTS | |||||
| Consolidated Balance Sheets | 2 | ||||
| Consolidated Statement of Earnings and Comprehensive Income | 3 | ||||
| Consolidated Statement of Members’ Equity | 4 | ||||
| Consolidated Statements of Cash Flows | 5 | ||||
| Notes to Consolidated Financial Statements | 6 | ||||
Exhibit 99.1
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors and Members of
Morbark Holdings Group, LLC and Subsidiaries
We have reviewed the accompanying consolidated balance sheet of Morbark Holdings Group, LLC and Subsidaries as of September 30, 2019, and the related consolidated statements of earnings and comprehensive income, members’ equity and cash flows for the nine months then ended.
Management’s Responsibility for the Financial Information
Management is responsible for the preparation and fair presentation of the interim financial information in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with accounting principles generally accepted in the United States of America.
Auditor’s Responsibility
Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information as a whole. Accordingly, we do not express such an opinion.
Conclusion
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in accordance with accounting principles generally accepted in the United States of America.
Troy, Michigan
January 2, 2020
1
Exhibit 99.1
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2019
(Unaudited)
| Assets | |||||
| Current assets: | |||||
| Cash and cash equivalents | $ | 5,677,706 | |||
| Accounts receivable - trade, less allowance for doubtful accounts of $406,805 | 18,576,202 | ||||
| Inventories (note 2) | 66,109,375 | ||||
| Prepaid expenses and other current assets | 844,637 | ||||
| Total current assets | 91,207,920 | ||||
| Property and equipment: | |||||
| At cost, less accumulated depreciation of $7,444,242 (notes 3, 4 and 5) | 34,269,508 | ||||
| Other assets: | |||||
| Goodwill and other intangibles, less accumulated amortization of $9,630,295 (note 1) | 32,259,197 | ||||
| Total assets (notes 4 and 5) | $ | 157,736,625 | |||
| Liabilities and Members' Equity | |||||
| Current liabilities: | |||||
| Checks written in excess of deposits | $ | 324,487 | |||
| Accounts payable - trade | 14,977,863 | ||||
| Current portion of long-term debt (note 5) | 3,081,146 | ||||
| Accrued liabilities: | |||||
| Payroll and payroll related | 3,871,887 | ||||
| Taxes | 693,363 | ||||
| Customer deposits (note 1) | 1,607,727 | ||||
| Warranty and product liability (note 8) | 3,952,687 | ||||
| Long-term incentive plan (note 9) | 3,777,877 | ||||
| Other | 1,499,710 | ||||
| Total current liabilities | 33,786,747 | ||||
| Line-of-credit (note 4) | 17,000,000 | ||||
| Long-term debt (note 5) | 13,694,984 | ||||
| Total liabilities | 64,481,731 | ||||
| Members' equity | |||||
| Members' equity | 93,468,763 | ||||
| Accumulated other comprehensive loss | (213,869) | ||||
| Total members' equity | 93,254,894 | ||||
| Total liabilities and members' equity | $ | 157,736,625 | |||
See accompanying notes to consolidated financial statements
2
Exhibit 99.1
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2019
(Unaudited)
| Net sales | $ | 189,686,690 | |||
| Cost of sales | 136,293,914 | ||||
| Gross profit | 53,392,776 | ||||
| General and administrative expenses | 27,290,867 | ||||
| Engineering costs | 1,099,023 | ||||
| Earnings from operations | 25,002,886 | ||||
| Other income (expense): | |||||
| Rental income | 213,600 | ||||
| Interest income | 4,222 | ||||
| Interest expense | (2,424,854) | ||||
| Foreign income taxes | (674,296) | ||||
| Other - net | 606,887 | ||||
| Total other income (expense) | (2,274,441) | ||||
| Net earnings before other comprehensive income | 22,728,445 | ||||
| Other comprehensive income: | |||||
| Gain on currency translation | 3,964 | ||||
| Net comprehensive income | $ | 22,732,409 | |||
See accompanying notes to consolidated financial statements
3
Exhibit 99.1
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2019
(Unaudited)
| Accumulated Other Comprehensive Income (Loss) | Members' Equity | Total Members' Equity | |||||||||
| Balance - January 1, 2019 | $ | (217,833) | $ | 76,479,913 | $ | 76,262,080 | |||||
| Distributions to members | — | (5,739,595) | (5,739,595) | ||||||||
| Comprehensive income: | |||||||||||
| Net earnings | — | 22,728,445 | 22,728,445 | ||||||||
| Other comprehensive income: | |||||||||||
| Currency translation | 3,964 | — | 3,964 | ||||||||
| Total comprehensive income | 3,964 | 22,728,445 | 22,732,409 | ||||||||
| Balance - September 30, 2019 | $ | (213,869) | $ | 93,468,763 | $ | 93,254,894 | |||||
See accompanying notes to consolidated financial statements
4
Exhibit 99.1
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
NINE MONTHS ENDED SEPTEMBER 30, 2019
(Unaudited)
| Cash flows from operating activities: | |||||
| Net earnings | $ | 22,728,445 | |||
| Adjustments: | |||||
| Depreciation and amortization | 5,565,174 | ||||
| Bad debt recovery | (302,360) | ||||
| Gain on sale of assets | (16,308) | ||||
| Changes in assets and liabilities (net of effects of acquisition): | |||||
| Decrease in accounts receivable | 1,653,370 | ||||
| Increase in inventories | (4,122,931) | ||||
| Decrease in prepaid expenses and other current assets | 446,262 | ||||
| Decrease in accounts payable | (578,433) | ||||
| Decrease in accrued liabilities | (4,422,654) | ||||
| Total adjustments | (1,777,880) | ||||
| Net cash provided from operating activities | 20,950,565 | ||||
| Cash flows from investing activities: | |||||
| Purchase of property and equipment | (2,880,790) | ||||
| Proceeds from sale of property and equipment | 226,270 | ||||
| Net cash used in investing activities | (2,654,520) | ||||
| Cash flows from financing activities: | |||||
| Decrease in checks written in excess of deposits | (180,027) | ||||
| Net payments on line-of-credit | (958,251) | ||||
| Principal payments on long-term debt | (7,328,747) | ||||
| Distributions to members | (5,739,595) | ||||
| Net cash used in financing activities | (14,206,620) | ||||
| Effect of foreign currency exchange rates | 3,964 | ||||
| Net increase in cash and cash equivalents | 4,093,389 | ||||
| Cash and cash equivalents - January 1, 2019 | 1,584,317 | ||||
| Cash and cash equivalents - September 30, 2019 | $ | 5,677,706 | |||
| Supplemental Disclosure of Cash Flow Information | |||||
| Cash paid during the year for interest | $ | 2,424,854 | |||
See accompanying notes to consolidated financial statements
5
Exhibit 99.1
Note 1 - Nature of Business and Significant Accounting Policies
Nature of Business
Morbark Holdings Group, LLC (“Morbark Holdings”) has a wholly-owned subsidiary; Morbark, LLC (“Morbark, LLC”). Morbark, LLC has three wholly-owned subsidiaries; Rayco Manufacturing, LLC (“Rayco”), Morbark IC-DISC, Inc. (“Morbark IC-DISC”), and Denis Cimaf, Inc. (“DC”), (collectively referred to as “Morbark” or “Company”). The Company is in the business of manufacturing industrial grade equipment for the pulp and paper, sawmill, forest products and solid waste industries and sells to customers in approximately 50 states and various regions around the world. The Company also repairs and refurbishes used equipment that is either owned by the customer or purchased by the Company. Rayco is also engaged in renting used equipment on hand to customers. The manufacturing operations are located in Winn, Michigan, Wooster, Ohio and Roxton Falls, Quebec.
Principles of Consolidation
The interim financial information includes the accounts of Morbark Holdings Group, LLC and its wholly-owned subsidiary; Morbark, LLC and, Morbark, LLC’s wholly-owned subsidiaries; Rayco, Morbark IC-DISC and DC. All significant intercompany balances and transactions have been eliminated in the interim financial information.
Accounting Standards Adopted in 2019
In 2019, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 and all subsequently issued clarifying ASUs that replaced most existing revenue recognition guidance in U.S. GAAP. The ASU also required expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
As part of the adoption of the ASU, the Company elected the following transition practical expedients: (i) to reflect the aggregate of all contract modifications that occurred prior to the date of initial application when identifying satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price; and (ii) to apply the standard only to contracts that are not completed at the initial date of application. Because contract modifications are minimal, there is not a significant impact as a result of electing these practical expedients.
The Company adopted the ASU using a modified retrospective approach in the first quarter of 2019 which resulted in no change to the retained earnings at January 1, 2019.
Estimates
The preparation of interim financial information in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial information and the reported
6
Exhibit 99.1
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition and Rental Accounting
The Company’s primary source of revenue is from the sale of its products. The Company also records revenue from repair and refurbishment jobs of used equipment as well as equipment rentals. The Company generally recognizes revenue from the sale of its products upon shipment, upon customer acceptance or at the successful completion of a repair. Related shipping and handling costs are included in general and administrative expenses.
Rentals to customers are generally short-term and are classified as operating leases. Under this method, revenue is earned over the term of the lease. The Company does not currently have any leases classified as direct financing leases.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid investments with original maturities of three months or less.
The Company places its temporary cash investments with high credit quality financial institutions. The total cash balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bank. At various times during the period, such balances may be in excess of the FDIC limit, and at September 30, 2019, approximately $5,189,000 was above the insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash balances.
The foreign subsidiaries also maintain cash with high credit quality financial institutions. However, these amounts are placed in institutions in foreign jurisdictions that are not insured from loss due to bank failure and require a processing period to transfer cash to the United States of America. Foreign jurisdiction bank regulations, processing periods, social and geo-political activities and other matters create additional risks for asset realization on cash concentrations. The amount of cash in foreign jurisdictions at September 30, 2019 approximated $435,000.
Accounts Receivable
Accounts receivable are valued at customer invoice amounts less an allowance for doubtful accounts, which is determined by a combination of calculating bad debt experience and applying it to current receivables and determining the collectability of individual accounts, through a charge to earnings and a credit to a valuation allowance. Balances that are still outstanding after management has used reasonable collection efforts are written-off through a charge to the valuation allowance and a credit to accounts receivable.
The Company considers accounts to be past due based upon the contractual terms for individual invoices. Interest is charged to past due accounts up to 18% per annum when an account is ten days past due and recorded as income in the current period.
7
Exhibit 99.1
Transfers of Financial Assets
The Company executes factoring and sales agreements with respect to its trade accounts receivable to support its working capital requirements. The Company accounts for these transactions as sales-type transfers of financial assets based on the terms and conditions of each agreement.
Inventories
Inventories consist of raw materials, parts and components, work-in-process, newly manufactured equipment and used equipment, which is normally taken in trade on sales of new equipment. Inventories are valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. The Company’s policy is to reduce specific inventories for excess and obsolete items based on management’s review of on-hand inventories compared to estimated future sales and usage.
Purchase Concentrations
Morbark, LLC recorded a substantial portion of its cost of goods sold from two major vendors during the period ended September 30, 2019 which represented approximately 20% of total cost of goods sold from Morbark, LLC. The total amounts due to these vendors amount to 18% of the total accounts payable as of September 30, 2019.
Property and Equipment
Property and equipment was recorded at fair value upon acquisition and depreciated using a combination of accelerated and straight-line methods over the estimated useful lives of the respective assets, ranging from 3 to 40 years. The costs of repairs and maintenance are charged to expense as incurred; major renewals and betterments are capitalized. Rental equipment is recorded at cost and depreciated over the estimated useful life of the equipment. Rental equipment is depreciated whether or not it is out on rent. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included on the consolidated statement of earnings and comprehensive income.
The Company reviews the carrying value of long-lived assets used in operations for impairment when events and circumstances warrant such a review. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amounts by which the carrying value exceeds the fair market value. Fair value is determined using the anticipated cash flows discounted at a rate commensurate with the risk involved.
Goodwill and Other Intangibles
The Company accounts for goodwill under ASC 350-30 allowing for amortization of existing goodwill over a period of 10 years beginning in 2018 and resulting in recognition of goodwill amortization of $3,141,712 for the period ended September 30, 2019. The accumulated amortization of goodwill at September 30, 2019 was $9,630,295.
8
Exhibit 99.1
As of December 31, 2018, the Company had total goodwill of $41,770,493. Under ASU No. 2014-02, the Company elected to amortize goodwill over 10 years on a straight-line basis. Accumulated amortization amounted to $6,488,583 as of December 31, 2018. Amortization expense related to goodwill for the year ended December 31, 2018 amounted to $3,448,548.
Future amortization expense for the five years succeeding September 30, 2019 is scheduled as follows:
| 2020 | $ | 4,188,949 | |||
| 2021 | 4,188,949 | ||||
| 2022 | 4,188,949 | ||||
| 2023 | 4,188,949 | ||||
| 2024 | 4,188,949 | ||||
Customer Deposits
The Company may receive payments for future equipment orders. Customer deposits are recorded as accrued liabilities on the consolidated balance sheet.
Warranty Liabilities
Product warranty liabilities are recorded for products sold based on management’s estimates of the amount that will be required to settle such obligations. These reserves are based on several factors including past experience, the length of the warranty period, historical performance of the products, changes in performance of newer products, the mix and volumes sold with respect to such products, as well as various other considerations.
Advertising
Costs related to advertising are charged to expense as incurred. Advertising expense was $485,755 for the interim period ended September 30, 2019.
Income and Sales Taxes
The Company is organized as a limited liability company and is not subject to Federal income tax in accordance with partnership tax rules. Therefore, there is no provision for Federal income tax on the consolidated statements of earnings and comprehensive income and members’ equity, since income is taxed at the individual member level. The Company records foreign income tax expense as incurred.
The Company is subject to sales and use taxes in various state and local jurisdictions in the United States of America. The Company has recorded no amounts for any jurisdictions that may hold claim to previous taxable transactions.
The Company’s income tax filings are subject to audit by various taxing authorities. The Company’s open audit periods are 2016 - 2019.
9
Exhibit 99.1
Foreign Currency Translation
Operations outside of the United States include subsidiaries in Canada and Brazil which are held in Denis Cimaf, Inc. Foreign operations are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government price or foreign exchange controls, and restrictions on currency exchange.
The financial statements of Denis Cimaf, Inc. are maintained at the entities’ functional currency; the Canadian dollar and the Brazilian reais, respectively. The assets and liabilities denominated in a foreign currency have been translated into U.S. dollars at the published exchange rate at the balance sheet date, except for fixed assets, goodwill and equity, which have been translated using historical rates. Revenues and expenses have been translated using the average exchange rate for the period then ended. Resulting translation adjustments are made directly to a separate component of members’ equity (accumulated other comprehensive income or (loss)).
Foreign currency translation for the period ended September 30, 2019 resulted in aggregate exchange gain of approximately $4,000.
The end-of-period spot exchange rates in effect at September 30, 2019 and the average rate for the period then ended for the functional currencies were as follows:
| September 30, 2019 | |||||||||||
| Average Rate | Spot Rate | ||||||||||
| Canadian dollar | 1.3292 | 1.3243 | |||||||||
| Brazilian reais | 3.8858 | 4.1566 | |||||||||
Subsequent Events
Subsequent to the period end, ownership in the Company changed.
The interim financial information and related disclosures include evaluation of events up through and including January 20, 2020, which is the date the interim financial information was available to be issued.
10
Exhibit 99.1
Note 2 - Inventories
Inventories are summarized as follows:
| Raw materials | $ | 9,172,510 | |||
| Parts and components | 24,550,750 | ||||
| Work-in-process | 7,797,242 | ||||
| New equipment | 22,855,214 | ||||
| Used equipment | 1,733,659 | ||||
| Total inventories | $ | 66,109,375 | |||
Note 3 - Property and Equipment
The principal categories of property and equipment are summarized as follows:
| Land | $ | 1,002,240 | |||
| Buildings and improvements | 21,664,481 | ||||
| Machinery and equipment | 14,056,064 | ||||
| Office equipment and software | 2,131,736 | ||||
| Vehicles | 585,301 | ||||
| Construction-in-progress | 2,273,928 | ||||
| Total cost | 41,713,750 | ||||
| Less accumulated depreciation | (7,444,242) | ||||
| Undepreciated cost | 34,269,508 | ||||
Depreciation expense for the year ended December 31, 2018 was $2,422,006.
Construction-in-progress represents expenditures for assets which have not been placed in service as of September 30, 2019. No depreciation expense will be taken on these assets until they are placed in service. At September 30, 2019, the estimated costs to complete construction-in-progress amounted to approximately $550,000.
Note 4 - Revolver Credit Agreement
The Company has a revolving credit agreement with its bank under which the Company may borrow up to the lesser of $50,000,000 or the borrowing base, as defined, which provides for access to certain lending facilities, which are collateralized by substantially all of the assets of the Company. Interest on borrowings under this facility is payable monthly. The agreement expires October 11, 2022. At September 30, 2019, the average effective rate of interest was approximately 4% charged on the outstanding balance of $17,000,000.
11
Exhibit 99.1
Note 5 - Long-Term Debt
Long-term debt is summarized as follows:
Unsecured Isabella term notes payable, with payments commencing at various dates from 2006 through 2046, over periods from 10 to 15 years with varying interest rates at 1% to 2% below the prime rate (minimum interest rate of 6% and maximum interest rate of 10%). At September 30, 2019, interest of $142,368 was owing and rolled back into the notes | $ | 2,769,601 | |||
Term note with a bank, payable in quarterly installments of $714,286, including interest at LIBOR plus 2.75%. The note matures October 2022 and is secured by all assets of the Company. The balance is net of loan fees of $279,186 | 14,006,529 | ||||
| Total | 16,776,130 | ||||
| Less current portion of long-term debt | 3,081,146 | ||||
| Long-term portion | $ | 13,694,984 | |||
Notes bearing interest related to the prime rate have their interest rates fixed for various periods up to one year.
The amounts of long-term debt coming due for the years succeeding September 30, 2019 are scheduled as follows:
| 2020 | $ | 3,081,146 | |||
| 2021 | 2,841,524 | ||||
| 2022 | 2,876,770 | ||||
| 2023 | 2,917,136 | ||||
| 2024 | 2,912,183 | ||||
| Thereafter | 2,147,371 | ||||
The revolver and term loan with the bank contains certain restrictive financial covenants, including the maintenance of a minimum fixed coverage ratio.
Note 6 - Operating Leases
The Company leases certain office equipment under noncancellable agreements, which expire at various dates through 2023. The Company also leases certain other equipment under cancellable leases on a month-to-month basis.
The Company leases their Wooster, Ohio facilities from a related party. This lease expires in October 2027 and carries monthly payments of $39,000.
12
Exhibit 99.1
The Company leases its Roxton Falls, Quebec office facility from a related party. This lease expires in December 2023 and carries monthly payments of approximately $5,500.
The following is a schedule by year of approximate future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of September 30, 2019.
Year Ending December 31st:
| 2020 | $ | 633,959 | |||
| 2021 | 633,959 | ||||
| 2022 | 633,959 | ||||
| 2023 | 597,959 | ||||
| 2024 | 485,663 | ||||
| 2025 and thereafter | 1,326,000 | ||||
Total rental expense included in the determination of net earnings for the interim period ended
September 30, 2019 amounted to $570,106.
Note 7 - Employee Benefit Plans
Morbark, LLC adopted the Morbark Employee 401(k) Savings Plan (the Plan) for the benefit of substantially all employees. Morbark, LLC is the Plan Sponsor. The Company matches employee contributions to the Plan up to a specific limit and, at the Company’s discretion, has made additional contributions to the Plan as a percentage of qualified wages. Employer contributions to the Plan were $566,506 for the interim period ended September 30, 2019.
Rayco Manufacturing, LLC adopted the Rayco Manufacturing, LLC 401(k) Plan (the Plan) for the benefit of substantially all employees. Rayco Manufacturing, LLC is the Plan Sponsor. The Company matches employee contributions to the Plan up to a specific limit and, the Company may make additional contributions to the Plan at the Company’s discretion. Employer contributions to the Plan were $307,312 for the interim period ended September 30, 2019.
The Company self-insures medical claims. Individual claims greater than $275,000 are covered by stop-loss insurance. Benefits in excess of this limit are covered by insurance. The Company records an accrual for claims incurred but not yet settled based on management’s analysis of information received from its outside administrator, which is included in accrued liabilities - other on the consolidated balance sheet.
The Company self-insures workers’ compensation administered by Morbark, LLC. Individual claims greater than $600,000 are covered by stop-loss insurance. The Company records an accrual for claims incurred but not yet settled based on management’s analysis of information received from its outside administrator, which is included in accrued liabilities - other on the consolidated balance sheet.
13
Exhibit 99.1
Note 8 - Contingent Liabilities
Morbark Holdings Group, LLC and Subsidiaries are the defendants in a few pending or threatened legal actions involving a variety of matters. Product liability claims are insured above a $250,000 deductible. At September 30, 2019, Morbark Holdings Group, LLC and Subsidiaries have reserved losses of $330,000 for specific claims. Losses arising out of the non-determinable actions are not expected to have a significant impact on the Company’s operations or financial position.
Morbark Holdings Group, LLC and Subsidiaries have recorded a reserve for product warranty claims of $3,622,687 as of September 30, 2019. The estimate includes specific warranty claims and identified warranty issues. The estimate also includes a reserve for unidentified future claims. Warranty expense was $2,139,462 for the interim period ended September 30, 2019.
The change in the Company’s aggregate product warranty liabilities is summarized as follows:
| Beginning reserve | $ | 4,117,517 | |||
| Current period provisions | 1,644,631 | ||||
| Current period claims | (2,139,462) | ||||
| Ending reserve | $ | 3,622,686 | |||
Note 9 - Long-Term Incentive Plan
On March 18, 2016, in conjunction with the Company’s Amended and Restated Limited Liability Agreement (“the LLC Agreement”), the Company adopted a Long-Term Incentive Plan (the “Plan”) that provides for the award of Profits Interest to certain members of management and Directors as compensation for services rendered for or on behalf of the Company. Each profit interest unit granted pursuant to the Plan is intended to qualify as a “profits interest” for U.S. federal income tax purposes and will only have value to the extent the value of the Company increases beyond the value at issuance. The membership interests are represented by units (the “Units”) reserved for issuance of awards under the Plan. The Units do not entitle the holders to share in or be allocated profits and losses of the Company, or to receive any share of distributions pursuant to the LLC Agreement. In connection with the adoption of the Plan, a form of Profits Interest Award Agreement (the “Agreement”) was approved pursuant to which Units may be granted from time to time to the participant. Units vest upon the achievement of certain milestones:
Vesting of Time Profits Interest
1.Time-Based Vesting: 25% of the Time Profits Interest shall become vested in the year of the award, and on each of the first, second and third anniversaries of such date; subject to the participants continued service to the Company.
2.Liquidity Vesting: 100% vested as of immediately prior to the occurrence of a liquidity event, subject to the participants continued service to the Company through the date of the liquidity event.
14
Exhibit 99.1
Vesting of Performance Profits Interest
Performance-Based Vesting
1.12.5% of Performance Profits Interest shall become vested on the determination date with respect to each of the fiscal years 2017 through 2020.
2.A tranche shall become vested on the determination date with respect to each applicable year, subject to the participants continued service to the Company.
Catch up Vesting
3.If EBITDA for an applicable year is less than the EBITDA target for such applicable year, but at least 90% of the EBITDA target for such applicable year, that portion of the performance profits interest that was subject to vesting with respect to an EBITDA missed year but otherwise failed to become vested, shall be vested and exercisable on the determination date subject to certain restrictions in the Profits Interest Award Agreement.
Accelerated Vesting
4.If a participant experiences a qualifying termination as defined under the Agreement, then the Company may allow certain vesting up through the year of termination.
The profits interest units are accounted for in accordance with Accounting Standards Codification (“ASC”) 78-10, “Compensation-Stock Compensation”. The units vest as described above, and therefore, the vesting conditions do not meet the definition of service, market or performance conditions, as defined ASC 718. As such, the units are classified as liability awards. The liability awards are measured at fair value on the grant date and re-measured each reporting period at fair value until the award is settled. Compensation expense is adjusted each reporting period for changes in fair value prorated for the portion of the requisite service period rendered. The vested liabilities related to the Plan recorded by the Company as of and for the interim period ended September 30, 2019 amounted to $3,777,877.
* * * End of Notes * * *
15
Exhibit 99.2
MORBARK HOLDINGS GROUP, LLC
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(With Independent Auditor’s Report Thereon)
Exhibit 99.2
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
| Table of Contents | |||||
| Page | |||||
| INDEPENDENT AUDITOR’S REPORT | 1 | ||||
| CONSOLIDATED FINANCIAL STATEMENTS | |||||
| Consolidated Balance Sheets | 2 | ||||
| Consolidated Statement of Earnings and Comprehensive Income | 3 | ||||
| Consolidated Statement of Members’ Equity | 4 | ||||
| Consolidated Statements of Cash Flows | 5 | ||||
| Notes to Consolidated Financial Statements | 6 | ||||
Exhibit 99.2
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors and Members of
Morbark Holdings Group, LLC and Subsidiaries
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Morbark Holdings Group, LLC and Subsidiaries, which comprise the consolidated balance sheet as of December 31, 2018, and the related consolidated statements of earnings and comprehensive income, members’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes: the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Morbark Holdings Group, LLC and Subsidiaries as of December 31, 2018, and the results of their operations and their cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America.
Troy, Michigan
March 19, 2019
1
Exhibit 99.2
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2018
| Assets | |||||
| Current assets: | |||||
| Cash and cash equivalents | $ | 1,584,317 | |||
| Accounts receivable - trade, less allowance for doubtful accounts of $703,100 | 19,927,212 | ||||
| Inventories (note 2) | 61,869,532 | ||||
| Prepaid expenses and other current assets | 1,290,899 | ||||
| Total current assets | 84,671,960 | ||||
| Property and equipment: | |||||
| At cost, less accumulated depreciation of $5,508,867 (notes 3, 4 and 5) | 34,139,054 | ||||
| Other assets: | |||||
| Goodwill and other intangibles, less accumulated amortization of $6,488,583 (note 1) | 35,400,909 | ||||
| Total assets (notes 4 and 5) | $ | 154,211,923 | |||
| Liabilities and Members' Equity | |||||
| Current liabilities: | |||||
| Checks written in excess of deposits | $ | 504,514 | |||
| Accounts payable - trade | 15,556,296 | ||||
| Current portion of long-term debt (note 5) | 3,233,191 | ||||
| Accrued liabilities: | |||||
| Payroll and payroll related | 3,800,047 | ||||
| Taxes | 955,365 | ||||
| Customer deposits (note 1) | 1,638,850 | ||||
| Warranty and product liability (note 8) | 4,437,559 | ||||
| Long-term incentive plan (note 9) | 3,777,877 | ||||
| Other | 5,216,207 | ||||
| Total current liabilities | 39,119,906 | ||||
| Line-of-credit (note 4) | 17,958,251 | ||||
| Long-term debt (note 5) | 20,871,686 | ||||
| Total liabilities | 77,949,843 | ||||
| Members' equity | 76,262,080 | ||||
| Total liabilities and members' equity | $ | 154,211,923 | |||
See accompanying notes to consolidated financial statements
2
Exhibit 99.2
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2018
| Net sales | $ | 205,463,497 | |||
| Cost of sales | 154,157,080 | ||||
| Gross profit | 51,306,417 | ||||
| General and administrative expenses | 35,457,739 | ||||
| Engineering costs | 4,395,656 | ||||
| Earnings from operations | 11,453,022 | ||||
| Other income (expense): | |||||
| Rental income | 1,695,613 | ||||
| Interest income | 3,975 | ||||
| Interest expense | (2,857,436) | ||||
| Other - net | 276,236 | ||||
| Total other income (expense) | (881,612) | ||||
| Net earnings before other comprehensive loss | 10,571,410 | ||||
| Other comprehensive loss: | |||||
| Loss on currency translation | (217,833) | ||||
| Net comprehensive income | $ | 10,353,577 | |||
See accompanying notes to consolidated financial statements
3
Exhibit 99.2
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 2018
| Balance - January 1, 2018 | $ | 72,923,107 | ||||||
| Member redemptions | (3,000,000) | |||||||
| Distributions to members | (4,014,604) | |||||||
| Comprehensive income: | ||||||||
| Net earnings | 10,571,410 | |||||||
| Other comprehensive loss: | ||||||||
| Currency translation | (217,833) | |||||||
| Total comprehensive income | 10,353,577 | |||||||
| Balance - December 31, 2018 | $ | 76,262,080 | ||||||
See accompanying notes to consolidated financial statements
4
Exhibit 99.2
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
YEAR ENDED DECEMBER 31, 2018
| Cash flows from operating activities: | |||||
| Net earnings | $ | 10,571,410 | |||
| Adjustments: | |||||
| Depreciation and amortization | 6,725,094 | ||||
| Bad debt recovery | (67,329) | ||||
| Loss on sale of assets | 241,638 | ||||
| Interest expense incurred on long-term debt accrued directly to principal balance | 318,675 | ||||
| Changes in assets and liabilities (net of effects of acquisition): | |||||
| Increase in accounts receivable | (3,533,840) | ||||
| Decrease in inventories | 11,508,732 | ||||
| Decrease in prepaid expenses and other current assets | 1,907,184 | ||||
| Decrease in accounts payable | (4,905,550) | ||||
| Increase in accrued liabilities | 9,522,037 | ||||
| Total adjustments | 21,716,641 | ||||
| Net cash provided from operating activities | 32,288,051 | ||||
| Cash flows from investing activities: | |||||
| Purchase of property and equipment | (3,685,126) | ||||
| Proceeds from sale of property and equipment | 77,171 | ||||
| Acquisition of the shares of Denis Cimaf, Inc. (net of $725,371 in cash acquired) | (12,647,755) | ||||
| Net cash used in investing activities | (16,255,710) | ||||
| Cash flows from financing activities: | |||||
| Decrease in checks written in excess of deposits | (2,552,972) | ||||
| Net payments on line-of-credit | (2,110,419) | ||||
| Principal payments on long-term debt | (3,360,030) | ||||
| Member redemptions | (3,000,000) | ||||
| Distributions to members | (4,014,604) | ||||
| Net cash used in financing activities | (15,038,025) | ||||
| Effect of foreign currency exchange rates | (217,833) | ||||
| Net increase in cash | 776,483 | ||||
| Cash - January 1, 2018 | 807,834 | ||||
| Cash - December 31, 2018 | $ | 1,584,317 | |||
| Supplemental Disclosure of Cash Flow Information | |||||
| Cash paid during the year for interest | $ | 2,857,436 | |||
| Schedule of Noncash Financing Activities | |||||
| Interest expense incurred on long-term debt accrued directly to principal balance | $ | 318,675 | |||
See accompanying notes to consolidated financial statements
5
Exhibit 99.2
Note 1 - Nature of Business and Significant Accounting Policies
Nature of Business
Morbark Holdings Group, LLC (“Morbark Holdings”) has a wholly-owned subsidiary; Morbark, LLC (“Morbark, LLC”). Morbark, LLC has three wholly-owned subsidiaries; Rayco Manufacturing, LLC (“Rayco”), Morbark IC-DISC, Inc. (“Morbark IC-DISC”), and Denis Cimaf, Inc. (DC), (collectively referred to as “Morbark” or “Company”). The Company is in the business of manufacturing industrial grade equipment for the pulp and paper, sawmill, forest products and solid waste industries and sells to customers in approximately 50 states and various regions around the world. The Company also repairs and refurbishes used equipment that is either owned by the customer or purchased by the Company. Rayco is also engaged in renting used equipment on hand to customers. The manufacturing operations are located in Winn, Michigan, Wooster, Ohio and Roxton Falls, Quebec.
On December 18, 2018, Morbark, LLC acquired all of the membership interest of DC.
Principles of Consolidation
The consolidated financial statements include the accounts of Morbark Holdings Group, LLC and its wholly-owned subsidiary; Morbark, LLC and, Morbark, LLC’s wholly-owned subsidiaries; Rayco, Morbark IC-DISC and DC. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition and Rental Accounting
The Company’s primary source of revenue is from the sale of its products. The Company also records revenue from repair and refurbishment jobs of used equipment as well as equipment rentals. The Company generally recognizes revenue from the sale of its products upon shipment, upon customer acceptance or at the successful completion of a repair. Related shipping and handling costs are included in general and administrative expenses.
Rentals to customers are generally short-term and are classified as operating leases. Under this method, revenue is earned over the term of the lease. The Company does not currently have any leases classified as direct financing leases.
6
Exhibit 99.2
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid investments with original maturities of three months or less.
The Company places its temporary cash investments with high credit quality financial institutions. The total cash balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bank. At various times during the year, such balances may be in excess of the FDIC limit, and at December 31, 2018, approximately $196,000 was above the insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash balances.
Accounts Receivable
Accounts receivable are valued at customer invoice amounts less an allowance for doubtful accounts, which is determined by a combination of calculating bad debt experience and applying it to current receivables and determining the collectability of individual accounts, through a charge to earnings and a credit to a valuation allowance. Balances that are still outstanding after management has used reasonable collection efforts are written-off through a charge to the valuation allowance and a credit to accounts receivable.
The Company considers accounts to be past due based upon the contractual terms for individual invoices. Interest is charged to past due accounts up to 18% per annum when an account is ten days past due and recorded as income in the current period.
Transfers of Financial Assets
The Company executes factoring and sales agreements with respect to its trade accounts receivable to support its working capital requirements. The Company accounts for these transactions as sales-type transfers of financial assets based on the terms and conditions of each agreement.
Inventories
Inventories consist of raw materials, parts and components, work-in-process, newly manufactured equipment and used equipment, which is normally taken in trade on sales of new equipment. Inventories are valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. The Company’s policy is to reduce specific inventories for excess and obsolete items based on management’s review of on-hand inventories compared to estimated future sales and usage.
Property and Equipment
Property and equipment was recorded at fair value upon acquisition and depreciated using a combination of accelerated and straight-line methods over the estimated useful lives of the respective assets, ranging from 3 to 40 years. The costs of repairs and maintenance are charged to expense as incurred; major renewals and betterments are capitalized. Rental equipment is recorded at cost and depreciated over the estimated useful life of the equipment. Rental
7
Exhibit 99.2
equipment is depreciated whether or not it is out on rent. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included on the consolidated statement of earnings and comprehensive income.
The Company reviews the carrying value of long-lived assets used in operations for impairment when events and circumstances warrant such a review. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amounts by which the carrying value exceeds the fair market value. Fair value is determined using the anticipated cash flows discounted at a rate commensurate with the risk involved.
Business Combination - Goodwill and Other Intangibles
On December 18, 2018, Morbark, LLC entered into a purchase agreement to acquire the shares of DC for a total purchase price of approximately $13,373,000, including the assumption of certain liabilities. The acquisition was funded by financing from the bank.
The Company accounted for this acquisition under the purchase method of accounting. The fair value of the assets acquired and liabilities assumed were based on independent appraisals and estimates by management. However, the Company has elected not to obtain an independent valuation of intangible assets apart from goodwill. The following is a condensed summary of the approximate values of assets and liabilities acquired:
| Current assets | $ | 7,122,000 | ||||||
| Property, plant and equipment | 2,282,000 | |||||||
| Total assets | 9,404,000 | |||||||
| Current liabilities | 3,788,000 | |||||||
| Net assets acquired | 5,616,000 | |||||||
| Total purchase price (before assumed liabilities) | 13,373,000 | |||||||
Purchase price in excess of the fair value of net assets acquired before the allocation of identified intangible assets | $ | 7,757,000 | ||||||
| Goodwill and other intangibles | $ | 7,757,000 | ||||||
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. Certain other intangible assets acquired as part of the business combination include patents, trademarks, service marks, trade name, copyrights and other marks. Similar to other closely held entities, the Company has elected not to obtain a valuation of these other intangible assets apart from goodwill. Instead, the Company has elected to adopt Accounting Standards Update (ASU) No. 2014-18 - Accounting for Identifiable Intangible Assets in a Business Combination, which allows them to apply the entire excess of the purchase process paid over the fair value of the tangible assets acquired to goodwill. The Company meets the
8
Exhibit 99.2
requirements of the new standard, and as a result, the valuation and allocation of the purchase price to certain identifiable other intangible assets apart from goodwill is not required.
The Company evaluates the recoverability of its goodwill when facts and circumstances indicate that the carrying value is not recoverable. If the carrying value is not recoverable, impairment is measured as the amount by which the carrying value exceeds its estimated fair value. At December 31, 2018, the Company evaluated its goodwill and intangible assets for impairment and determined no impairment was necessary.
The Company incurred transaction costs of approximately $268,000 related to the acquisition which are included in consolidated net earnings for the year ended December 31, 2018.
As of December 31, 2018, the Company had total goodwill of $41,770,493. Under ASU No. 2014-02, the Company elected to amortize goodwill over 10 years on a straight-line basis. Accumulated amortization amounted to $6,488,583 as of December 31, 2018. Amortization expense related to goodwill for the year ended December 31, 2018 amounted to $3,448,548.
Future amortization expense for the five years succeeding December 31, 2018 is scheduled as follows:
| 2019 | $ | 4,177,049 | |||
| 2020 | 4,177,049 | ||||
| 2021 | 4,177,049 | ||||
| 2022 | 4,177,049 | ||||
| 2023 | 4,177,049 | ||||
Customer Deposits
The Company may receive payments for future equipment orders. Customer deposits are recorded as accrued liabilities on the consolidated balance sheet.
Warranty Liabilities
Product warranty liabilities are recorded for products sold based on management’s estimates of the amount that will be required to settle such obligations. These reserves are based on several factors including past experience, the length of the warranty period, historical performance of the products, changes in performance of newer products, the mix and volumes sold with respect to such products, as well as various other considerations.
Advertising
Costs related to advertising are charged to expense as incurred. Advertising expense was $719,722 for the year ended December 31, 2018.
Income Taxes
The Company is organized as a limited liability company and is not subject to Federal income tax in accordance with partnership tax rules. Therefore, there is no provision for Federal
9
Exhibit 99.2
income tax on the consolidated statements of earnings and comprehensive income and members’ equity, since income is taxed at the individual member level.
The Company’s income tax filings are subject to audit by various taxing authorities. The Company’s open audit periods are 2015 - 2018.
Subsequent Events
The consolidated financial statements and related disclosures include evaluation of events up through and including March 19, 2019, which is the date the consolidated financial statements were available to be issued.
Note 2 - Inventories
Inventories are summarized as follows:
| Raw materials | $ | 7,089,227 | |||
| Parts and components | 20,298,330 | ||||
| Work-in-process | 12,625,401 | ||||
| New equipment | 19,497,950 | ||||
| Used equipment | 2,358,624 | ||||
| Total inventories | $ | 61,869,532 | |||
Note 3 - Property and Equipment
The principal categories of property and equipment are summarized as follows:
| Land | $ | 1,002,240 | |||
| Buildings and improvements | 21,668,949 | ||||
| Machinery and equipment | 13,813,937 | ||||
| Office equipment and software | 2,049,805 | ||||
| Vehicles | 634,158 | ||||
| Construction-in-progress | 478,832 | ||||
| Total cost | 39,647,921 | ||||
| Less accumulated depreciation | (5,508,867) | ||||
| Undepreciated cost | 34,139,054 | ||||
Depreciation expense for the year ended December 31, 2018 was $2,977,169.
Construction-in-progress represents expenditures for assets which have not been placed in service as of December 31, 2018. No depreciation expense will be taken on these assets until
10
Exhibit 99.2
they are placed in service. At December 31, 2018, the estimated costs to complete construction-in-progress amounted to approximately $297,000.
Note 4 - Revolver Credit Agreement
The Company has a revolving credit agreement with its bank under which the Company may borrow up to the lesser of $50,000,000 or the borrowing base, as defined, which provides for access to certain lending facilities, which are collateralized by substantially all of the assets of the Company. Interest on borrowings under this facility is payable monthly. The agreement expires October 11, 2022. At December 31, 2018, the average effective rate of interest was 4.75% charged on the outstanding balance of $17,958,251.
Note 5 - Long-Term Debt
Long-term debt is summarized as follows:
Unsecured note payable, with the Mackinac Center for Public Policy, due in 2027, with annual installments of $50,000, plus interest at 1% below the prime rate | $ | 404,033 | |||
Unsecured Isabella term notes payable, with payments commencing at various dates from 2000 through 2056, over periods from 10 to 15 years with varying interest rates at 1% to 2% below the prime rate (minimum interest rate of 6% and maximum interest rate of 10%). In 2018, interest of $318,675 was owing and rolled back into the notes | 7,653,354 | ||||
Term note with a bank, payable in quarterly installments of $714,286, including interest at LIBOR plus 2.75%. The note matures October, 2022 and is secured by all assets of the Company. The balance is net of loan fees of $192,586 | 16,047,490 | ||||
| Total | 24,104,877 | ||||
| Less current portion of long-term debt | 3,233,191 | ||||
| Long-term portion | $ | 20,871,686 | |||
Notes bearing interest related to the prime rate have their interest rates fixed for various periods up to one year.
11
Exhibit 99.2
The amounts of long-term debt coming due for the years succeeding December 31, 2018 are scheduled as follows:
| 2019 | $ | 3,233,191 | |||
| 2020 | 2,937,018 | ||||
| 2021 | 2,995,671 | ||||
| 2022 | 3,008,919 | ||||
| 2023 | 3,007,903 | ||||
The revolver and term loan with the bank contains certain restrictive financial covenants, including the maintenance of a minimum fixed coverage ratio.
Note 6 - Operating Leases
The Company leases certain office equipment under noncancelable agreements, which expire at various dates through 2023. The Company also leases certain other equipment under cancelable leases on a month-to-month basis.
The Company leases their Wooster, Ohio facilities from a related party. This lease expires in October of 2027 and carries monthly payments of $39,000.
The Company leases its Roxton Falls, Quebec office facility from a related party. This lease expires in December 2023 and carries monthly payments of approximately $5,500.
The following is a schedule by year of approximate future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2018.
Year Ending December 31st:
| 2019 | $ | 632,031 | |||
| 2020 | 632,031 | ||||
| 2021 | 632,031 | ||||
| 2022 | 546,031 | ||||
| 2023 | 546,031 | ||||
| 2024 and thereafter | 1,872,000 | ||||
Total rental expense included in the determination of net earnings for the year ended December 31, 2018 amounted to $708,310.
Note 7 - Employee Benefit Plans
Morbark, LLC adopted the Morbark Employee 401(k) Savings Plan (the Plan) for the benefit of substantially all employees. Morbark, LLC is the Plan Sponsor. The Company matches employee contributions to the Plan up to a specific limit and, at the Company’s discretion, has made additional contributions to the Plan as a percentage of qualified wages. Employer contributions to the Plan were $763,533 for the year ended December 31, 2018.
12
Exhibit 99.2
Rayco Manufacturing, LLC adopted the Rayco Manufacturing, LLC 401(k) Plan (the Plan) for the benefit of substantially all employees. Rayco Manufacturing, LLC is the Plan Sponsor. The Company matches employee contributions to the Plan up to a specific limit and, the Company may make additional contributions to the Plan at the Company’s discretion. Employer contributions to the Plan were $296,893 for the year ended December 31, 2018.
The Company self-insures medical claims. Individual claims greater than $275,000 are covered by stop-loss insurance. Benefits in excess of this limit are covered by insurance. The Company records an accrual for claims incurred but not yet settled based on management’s analysis of information received from its outside administrator, which is included in accrued liabilities - other on the consolidated balance sheet.
The Company self-insures workers’ compensation administered by Morbark, LLC. Individual claims greater than $600,000 are covered by stop-loss insurance. The Company records an accrual for claims incurred but not yet settled based on management’s analysis of information received from its outside administrator, which is included in accrued liabilities - other on the consolidated balance sheet.
Note 8 - Contingent Liabilities
Morbark Holdings Group, LLC and Subsidiaries are the defendants in a few pending or threatened legal actions involving a variety of matters. Product liability claims are insured above a $250,000 deductible. At December 31, 2018, Morbark Holdings Group, LLC and Subsidiaries have reserved losses of $325,000 for specific claims. Losses arising out of the non-determinable actions are not expected to have a significant impact on the Company’s operations or financial position.
Morbark Holdings Group, LLC and Subsidiaries have recorded a reserve for product warranty claims of $4,112,559 as of December 31, 2018. The estimate includes specific warranty claims and identified warranty issues. The estimate also includes a reserve for unidentified future claims. Warranty expense was $2,871,432 for the year ended December 31, 2018.
The change in the Company’s aggregate product warranty liabilities is summarized as follows:
| Beginning reserve | $ | 3,669,353 | |||
| Current year provisions | 3,314,636 | ||||
| Current year claims | (2,871,430) | ||||
| Ending reserve | $ | 4,112,559 | |||
Note 9 - Long-Term Incentive Plan
On March 18, 2016, in conjunction with the Company’s Amended and Restated Limited Liability Agreement (“the LLC Agreement”), the Company adopted a Long-Term Incentive Plan (the “Plan”) that provides for the award of Profits Interest to certain members of management and Directors as compensation for services rendered for or on behalf of the Company. Each profit interest unit granted pursuant to the Plan is intended to qualify as a
13
Exhibit 99.2
“profits interest” for U.S. federal income tax purposes and will only have value to the extent the value of the Company increases beyond the value at issuance. The membership interests are represented by units (the “Units”) reserved for issuance of awards under the Plan. The Units do not entitle the holders to share in or be allocated profits and losses of the Company, or to receive any share of distributions pursuant to the LLC Agreement. In connection with the adoption of the Plan, a form of Profits Interest Award Agreement (the “Agreement”) was approved pursuant to which Units may be granted from time to time to the participant. Units vest upon the achievement of certain milestones:
Vesting of Time Profits Interest
1.Time-Based Vesting: 25% of the Time Profits Interest shall become vested in the year of the award, and on each of the first, second and third anniversaries of such date; subject to the participants continued service to the Company.
2.Liquidity Vesting: 100% vested as of immediately prior to the occurrence of a liquidity event, subject to the participants continued service to the Company through the date of the liquidity event.
Vesting of Performance Profits Interest
Performance-Based Vesting
1.12.5% of Performance Profits Interest shall become vested on the determination date with respect to each of the fiscal years 2017 through 2020.
2.A tranche shall become vested on the determination date with respect to each applicable year, subject to the participants continued service to the Company.
Catch up Vesting
3.If EBITDA for an applicable year is less than the EBITDA target for such applicable year, but at least 90% of the EBITDA target for such applicable year, that portion of the performance profits interest that was subject to vesting with respect to an EBITDA missed year but otherwise failed to become vested, shall be vested and exercisable on the determination date subject to certain restrictions in the Profits Interest Award Agreement.
Accelerated Vesting
4.If a participant experiences a qualifying termination as defined under the Agreement, then the Company may allow certain vesting up through the year of termination.
The profits interest units are accounted for in accordance with Accounting Standards Codification (“ASC”) 78-10, “Compensation-Stock Compensation”. The units vest as described above, and therefore, the vesting conditions do not meet the definition of service, market or performance conditions, as defined ASC 718. As such, the units are classified as liability awards. The liability awards are measured at fair value on the grant date and re-measured each reporting period at fair value until the award is settled. Compensation expense is adjusted each reporting period for changes in fair value prorated for the portion of the
14
Exhibit 99.2
requisite service period rendered. The vested liabilities related to the Plan recorded by the Company as of and for the year ended December 31, 2018 amounted to $3,777,877.
* * * End of Notes * * *
15
Exhibit 99.3
MORBARK HOLDINGS GROUP, LLC
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(With Independent Auditor’s Report Thereon)
Exhibit 99.3
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
| Table of Contents | |||||
| Page | |||||
| INDEPENDENT AUDITOR’S REPORT | 1 | ||||
| CONSOLIDATED FINANCIAL STATEMENTS | |||||
| Consolidated Balance Sheets | 2 | ||||
| Consolidated Statement of Earnings | 3 | ||||
| Consolidated Statement of Members’ Equity | 4 | ||||
| Consolidated Statements of Cash Flows | 5 | ||||
| Notes to Consolidated Financial Statements | 6 | ||||
Exhibit 99.3
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors and Members of
Morbark Holdings Group, LLC and Subsidiaries
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Morbark Holdings Group, LLC and Subsidiaries, which comprise the consolidated balance sheet as of December 31, 2017, and the related consolidated statements of earnings, members’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes: the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Morbark Holdings Group, LLC and Subsidiaries as of December 31, 2017, and the results of their operations and their cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America.
Troy, Michigan
March 08, 2018
1
Exhibit 99.3
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2017
| Assets | |||||
| Current assets: | |||||
| Cash and cash equivalents | $ | 807,834 | |||
| Accounts receivable - trade, less allowance for doubtful accounts of $10,000 | 14,212,055 | ||||
| Inventories (note 2) | 70,121,074 | ||||
| Prepaid expenses and other current assets | 1,230,525 | ||||
| Total current assets | 86,371,488 | ||||
| Property and equipment: | |||||
| At cost, less accumulated depreciation of $2,562,603 (notes 3, 4 and 5) | 31,490,683 | ||||
| Other assets: | |||||
| Goodwill and other intangibles, less accumulated amortization of $2,566,266 (note 1) | 31,220,738 | ||||
| Total assets (notes 4 and 5) | $ | 149,082,909 | |||
| Liabilities and Members' Equity | |||||
| Current liabilities: | |||||
| Checks written in excess of deposits | $ | 2,115,752 | |||
| Accounts payable - trade | 18,002,833 | ||||
| Current portion of long-term debt (note 5) | 3,208,216 | ||||
| Accrued liabilities: | |||||
| Payroll and payroll related | 2,492,470 | ||||
| Taxes | 467,830 | ||||
| Customer deposits (note 1) | 1,184,352 | ||||
| Warranty and product liability (note 8) | 4,079,353 | ||||
| Other | 738,170 | ||||
| Total current liabilities | 32,288,976 | ||||
| Line-of-credit (note 4) | 20,068,670 | ||||
| Long-term debt (note 5) | 23,802,156 | ||||
| Total liabilities | 76,159,802 | ||||
| Members' equity | 72,923,107 | ||||
| Total liabilities and members' equity | $ | 149,082,909 | |||
See accompanying notes to consolidated financial statements
2
Exhibit 99.3
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 2017
| Net sales | $ | 157,340,489 | |||
| Cost of sales | 117,610,425 | ||||
| Gross profit | 39,730,064 | ||||
| General and administrative expenses | 29,748,140 | ||||
| Earnings from operations | 9,981,924 | ||||
| Other income (expense): | |||||
| Interest income | 1,107 | ||||
| Interest expense | (1,468,596) | ||||
| Transaction costs | 440,984 | ||||
| Other - net | (202,047) | ||||
| Total other income (expense) | (1,228,552) | ||||
| Net earnings before other comprehensive loss | $ | 8,753,372 | |||
See accompanying notes to consolidated financial statements
3
Exhibit 99.3
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 2017
| Balance - January 1, 2017 | $ | 56,470,735 | |||
| Contributions from members | 11,000,000 | ||||
| Distributions to members | (3,301,000) | ||||
| Net earnings | 8,753,372 | ||||
| Balance - December 31, 2017 | $ | 72,923,107 | |||
See accompanying notes to consolidated financial statements
4
Exhibit 99.3
MORBARK HOLDINGS GROUP, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
YEAR ENDED DECEMBER 31, 2017
| Cash flows from operating activities: | |||||
| Net earnings | $ | 8,753,372 | |||
| Adjustments: | |||||
| Depreciation and amortization | 3,582,632 | ||||
| Bad debt recovery | 113,909 | ||||
| Loss on sale of assets | 221,430 | ||||
| Interest expense incurred on long-term debt accrued directly to principal balance | 285,132 | ||||
| Changes in assets and liabilities (net of effects of acquisition): | |||||
| Decrease in accounts receivable | 1,188,627 | ||||
| Increase in inventories | (18,682,851) | ||||
| Decrease in prepaid expenses and other current assets | 1,506,343 | ||||
| Increase in accounts payable | 11,328,131 | ||||
| Increase in accrued liabilities | 2,308,923 | ||||
| Total adjustments | 1,852,276 | ||||
| Net cash provided from operating activities | 10,605,648 | ||||
| Cash flows from investing activities: | |||||
| Purchase of property and equipment | (2,408,412) | ||||
| Proceeds from sale of property and equipment | 172,500 | ||||
| Acquisition of the shares of Denis Cimaf, Inc. (net of $1,384,525 in cash acquired) | (36,514,299) | ||||
| Net cash used in investing activities | (38,750,211) | ||||
| Cash flows from financing activities: | |||||
| Increase in checks written in excess of deposits | 2,115,752 | ||||
| Net proceeds from line-of-credit | 11,988,020 | ||||
| Proceeds from long-term debt | 12,142,857 | ||||
| Principal payments on long-term debt | (2,308,972) | ||||
| Distributions to members | (3,301,000) | ||||
| Contributions from members | 8,000,000 | ||||
| Net cash used in financing activities | 28,636,657 | ||||
| Net increase in cash | 492,094 | ||||
| Cash - January 1, 2017 | 315,740 | ||||
| Cash - December 31, 2017 | $ | 807,834 | |||
| Supplemental Disclosure of Cash Flow Information | |||||
| Cash paid during the year for interest | $ | 1,468,596 | |||
| Schedule of Noncash Financing Activities | |||||
| Interest expense incurred on long-term debt accrued directly to principal balance | $ | 3,000,000 | |||
See accompanying notes to consolidated financial statements
5
Exhibit 99.3
Note 1 - Nature of Business and Significant Accounting Policies
Nature of Business
Morbark Holdings Group, LLC (“Morbark Holdings”) has a wholly-owned subsidiary; Morbark, LLC (“Morbark LLC”). Morbark, LLC has two wholly-owned subsidiaries; Rayco Manufacturing, LLC (“Rayco”) and Morbark IC-DISC, Inc. (“Morbark IC-DISC”) (collectively referred to as “Morbark” or “Company”). Morbark, LLC and Rayco are in the business of manufacturing industrial grade equipment for the pulp and paper, sawmill, forest products and solid waste industries and sells to customers in approximately 50 states and various regions around the world. The Company also repairs and refurbishes used equipment that is either owned by the customer or purchased by the Company. The manufacturing operations are located in Winn, Michigan and Wooster, Ohio.
On October 11, 2017, Morbark, LLC acquired all of the membership interest of Rayco.
Principles of Consolidation
The consolidated financial statements include the accounts of Morbark Holdings Group, LLC and its wholly-owned subsidiary; Morbark, LLC and, Morbark, LLC’s wholly-owned subsidiaries; Rayco and Morbark IC-DISC. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company’s primary source of revenue is from the sale of its products. The Company also records revenue from repair and refurbishment jobs of used equipment. The Company recognizes revenue from the sale of its products upon shipment to the customer or at the successful completion of a repair. Related shipping and handling costs are included in general and administrative expenses.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid investments with original maturities of three months or less.
The Company places its temporary cash investments with high credit quality financial institutions. The total cash balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bank. At various times during the year, such balances may be in
6
Exhibit 99.3
excess of the FDIC limit, and at December 31, 2017, approximately $423,000 was above the insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash balances.
Accounts Receivable
Accounts receivable are valued at customer invoice amounts less an allowance for doubtful accounts, which is determined by a combination of calculating bad debt experience and applying it to current receivables and determining the collectability of individual accounts, through a charge to earnings and a credit to a valuation allowance. Balances that are still outstanding after management has used reasonable collection efforts are written-off through a charge to the valuation allowance and a credit to accounts receivable.
The Company considers accounts to be past due based upon the contractual terms for individual invoices. Interest is charged to past due accounts up to 18% per annum when an account is ten days past due and recorded as income in the current period.
Inventories
Inventories consist of raw materials, parts and components, work-in-process, newly manufactured equipment and used equipment, which is normally taken in trade on sales of new equipment. Inventories are valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. The Company’s policy is to reduce specific inventories for excess and obsolete items based on management’s review of on-hand inventories compared to estimated future sales and usage.
Property and Equipment
Property and equipment was recorded at fair value upon acquisition and depreciated using a combination of accelerated and straight-line methods over the estimated useful lives of the respective assets, ranging from 3 to 40 years. The costs of repairs and maintenance are charged to expense as incurred; major renewals and betterments are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the consolidated statement of earnings.
The Company reviews the carrying value of long-lived assets used in operations for impairment when events and circumstances warrant such a review. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amounts by which the carrying value exceeds the fair market value. Fair value is determined using the anticipated cash flows discounted at a rate commensurate with the risk involved.
Business Combination - Goodwill and Other Intangibles
On October 11, 2017, Morbark LLC entered into a purchase agreement to acquire the stock of Rayco for a total purchase price of $40,643,544, including the assumption of certain liabilities. Funding of the acquisition consisted of $8,000,000 in cash contributions, $3,000,000 in membership shares and $29,643,544 in financing from the bank.
7
Exhibit 99.3
The Company accounted for this acquisition under the purchase method of accounting. The fair value of the assets acquired and liabilities assumed were based on independent appraisals and estimates by management. However, the Company has elected not to obtain an independent valuation of intangible assets apart from goodwill. The following is a condensed summary of the assets and liabilities acquired:
| Current assets | $ | 18,269,183 | ||||||
| Property, plant and equipment | 4,826,577 | |||||||
| Total assets | 23,095,760 | |||||||
| Current liabilities | 2,804,446 | |||||||
| Net assets acquired | 20,291,314 | |||||||
| Total purchase price (before assumed liabilities) | 40,643,544 | |||||||
Purchase price in excess of the fair value of net assets acquired before the allocation of identified intangible assets | $ | 20,291,314 | ||||||
| Goodwill and other intangibles | $ | 20,291,314 | ||||||
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. Certain other intangible assets acquired as part of the business combination include patents, trademarks, service marks, trade name, copyrights and other marks. Similar to other closely held entities, the Company has elected not to obtain a valuation of these other intangible assets apart from goodwill. Instead, the Company has elected to adopt Accounting Standards Update (ASU) No. 2014-18 - Accounting for Identifiable Intangible Assets in a Business Combination, which allows them to apply the entire excess of the purchase process paid over the fair value of the tangible assets acquired to goodwill. The Company meets the requirements of the new standard, and as a result, the valuation and allocation of the purchase price to certain identifiable other intangible assets apart from goodwill is not required.
The Company evaluates the recoverability of its goodwill when facts and circumstances indicate that the carrying value is not recoverable. If the carrying value is not recoverable, impairment is measured as the amount by which the carrying value exceeds its estimated fair value. At December 31, 2017, the Company evaluated its goodwill and intangible assets for impairment and determined no impairment was necessary.
The Company incurred transaction costs totaling $671,851 related to the acquisition which are included in consolidated net earnings for the year ended December 31, 2017.
As of December 31, 2017, the Company had total goodwill of $34,147,938. Under ASU No. 2014-02, the Company elected to amortize goodwill over 10 years on a straight line basis. Accumulated amortization amounted to $2,566,266 as of December 31, 2017. Amortization expense related to goodwill for the period ended December 31, 2017 amounted to $1,472,503.
8
Exhibit 99.3
Future amortization expense for the years succeeding December 31, 2017 is scheduled as follows:
| 2018 | $ | 3,414,794 | |||
| 2019 | 3,414,794 | ||||
| 2020 | 3,414,794 | ||||
| 2021 | 3,414,794 | ||||
| 2022 | 3,414,794 | ||||
Customer Deposits
The Company may receive payments for future equipment orders. Customer deposits are recorded as accrued liabilities in the consolidated balance sheet.
Warranty Liabilities
Product warranty liabilities are recorded for products sold based on management’s estimates of the amount that will be required to settle such obligations. These reserves are based on several factors including past experience, the length of the warranty period, historical performance of the products, changes in performance of newer products, the mix and volumes sold with respect to such products, as well as various other considerations.
Advertising
Costs related to advertising are charged to expense as incurred. Advertising expense was $548,268 for the year ended December 31, 2017.
Income Taxes
The Company is organized as a limited liability company and is not subject to Federal income tax in accordance with partnership tax rules. Therefore, there is no provision for Federal income tax in the consolidated statements of earnings and members’ equity, since income is taxed at the individual member level.
The Company’s income tax filings are subject to audit by various taxing authorities. The Company’s open audit periods are 2014 - 2017.
Subsequent Events
The consolidated financial statements and related disclosures include evaluation of events up through and including March 8, 2018, which is the date the consolidated financial statements were available to be issued.
9
Exhibit 99.3
Note 2 - Inventories
Inventories are summarized as follows:
| Raw materials | $ | 4,434,416 | |||
| Parts and components | 26,250,738 | ||||
| Work-in-process | 12,593,745 | ||||
| New equipment | 24,074,812 | ||||
| Used equipment | 2,767,363 | ||||
| Total inventories | $ | 70,121,074 | |||
Note 3 - Property and Equipment
The principal categories of property and equipment are summarized as follows:
| Land | $ | 880,000 | ||||||
| Buildings and improvements | 19,554,750 | |||||||
| Machinery and equipment | 10,397,337 | |||||||
| Office equipment and software | 1,182,016 | |||||||
| Vehicles | 452,180 | |||||||
| Construction-in-progress | 1,587,003 | |||||||
| Total cost | 34,053,286 | |||||||
| Less accumulated depreciation | (2,562,603) | |||||||
| Undepreciated cost | 31,490,683 | |||||||
Depreciation expense for the period ended December 31, 2017 was $1,538,201.
Construction-in-progress represents expenditures for assets which have not been placed in service as of December 31, 2017. No depreciation expense will be taken on these assets until they are placed in service. At December 31, 2017, the estimated costs to complete construction-in-progress amounted to approximately $714,500.
Note 4 - Revolver Credit Agreement
The Company has a revolving credit agreement with its bank under which the Company may borrow up to the lesser of $50,000,000 or the borrowing base, as defined, which provides for access to certain lending facilities, which are collateralized by substantially all of the assets of the Company. Interest on borrowings under this facility is payable monthly. The agreement expires October 11, 2022. At December 31, 2017, the average effective rate of interest was 4.44% charged on the outstanding balance of $20,068,670.
10
Exhibit 99.3
Note 5 - Long-Term Debt
Long-term debt is summarized as follows:
Unsecured note payable, with the Mackinac Center for Public Policy, due in 2027, with annual installments of $50,000, plus interest at 1% below the prime rate | $ | 453,686 | |||
Unsecured Isabella term notes payable, with payments commencing at various dates from 2000 through 2056, over periods from 10 to 15 years with varying interest rates at 1% to 2% below the prime rate (minimum interest rate of 6% and maximum interest rate of 10%). In 2017, interest of $285,132 was owing and rolled back into the note | 7,787,911 | ||||
Term note with a bank, payable in quarterly installments of $714,286, including interest at LIBOR plus 2.75%. The note matures October, 2022 and is secured by all assets of the Company. The balance is net of loan fees of $516,939 | 18,768,775 | ||||
| Total | 27,010,372 | ||||
| Less current portion of long-term debt | 3,208,216 | ||||
| Long-term portion | $ | 23,802,156 | |||
Notes bearing interest related to the prime rate have their interest rates fixed for various periods up to one year.
The amounts of long-term debt coming due for the years succeeding December 31, 2017 are scheduled as follows:
| 2018 | $ | 3,208,216 | |||
| 2019 | 2,885,742 | ||||
| 2020 | 2,883,600 | ||||
| 2021 | 2,942,903 | ||||
| 2022 | 2,968,831 | ||||
The revolver and term loan with the bank contains certain restrictive financial covenants, including the maintenance of a minimum fixed coverage ratio.
Note 6 - Operating Leases
The Company leases certain office equipment under noncancelable agreements, which expire at various dates through 2023. The Company also leases certain other equipment under cancelable leases on a month-to-month basis.
11
Exhibit 99.3
The Company leases their Wooster, Ohio facilities from a related party. This lease expires in October of 2027 and carries monthly payments of $39,000.
The following is a schedule by year of approximate future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2017.
Year Ending December 31st:
| 2018 | $ | 566,000 | |||
| 2019 | 566,000 | ||||
| 2020 | 566,000 | ||||
| 2021 | 566,000 | ||||
| 2022 and thereafter | 2,882,000 | ||||
Total rental expense included in the determination of net earnings for the period ended December 31, 2017 amounted to $329,973.
Note 7 - Employee Benefit Plans
Morbark LLC adopted the Morbark Employee 401(k) Savings Plan (the Plan) for the benefit of substantially all employees. Morbark, LLC. is the Plan Sponsor. The Company matches employee contributions to the Plan up to a specific limit and, at the Company’s discretion, has made additional contributions to the Plan as a percentage of qualified wages. Employer contributions to the Plan were $850,022 for the period ended December 31, 2017.
Rayco Manufacturing, Inc. adopted the Rayco Manufacturing, Inc. 401(k) Plan (the Plan) for the benefit of substantially all employees. Rayco Manufacturing, Inc. is the Plan Sponsor. The Company matches employee contributions to the Plan up to a specific limit and, the Company may make additional contributions to the Plan at the Company’s discretion. Employer contributions to the Plan were $110,580 for the period ended December 31, 2017.
The Company self-insures medical claims. Individual claims greater than $275,000 are covered by stop-loss insurance. Benefits in excess of this limit are covered by insurance. The Company records an accrual for claims incurred but not yet settled based on management’s analysis of information received from its outside administrator, which is included in accrued liabilities - other on the consolidated balance sheet.
The Company self-insures workers’ compensation administered by Morbark, LLC. Individual claims greater than $600,000 are covered by stop-loss insurance. The Company records an accrual for claims incurred but not yet settled based on management’s analysis of information received from its outside administrator, which is included in accrued liabilities - other in the consolidated balance sheet.
Note 8 - Contingent Liabilities
Morbark Holdings Group, LLC and Subsidiaries are the defendants in a few pending or threatened legal actions involving a variety of matters. Product liability claims are insured above a $250,000 deductible. At December 31, 2017, Morbark Holdings Group, LLC and
12
Exhibit 99.3
Subsidiaries have reserved losses of $410,000 for specific claims. Losses arising out of the non-determinable actions are not expected to have a significant impact on the Company’s operations or financial position.
Morbark Holdings Group, LLC and Subsidiaries have recorded a reserve for product warranty claims of $3,669,353 as of December 31, 2017. The estimate includes specific warranty claims and identified warranty issues. The estimate also includes a reserve for unidentified future claims. Warranty expense was $4,323,967 for the year ended December 31, 2017.
The change in the Company’s aggregate product warranty liabilities is summarized as follows:
| Beginning reserve | $ | 1,616,165 | |||
| Current year provisions | 6,377,155 | ||||
| Current year claims | (4,323,967) | ||||
| Ending reserve | $ | 3,669,353 | |||
* * * End of Notes * * *
13
Exhibit 99.4
ALAMO GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On October 24, 2019, Alamo Group Inc., a Delaware corporation (“Alamo Group”), acquired Morbark Holdings Group, LLC, a portfolio company of Stellex Capital Management, LLC ("Morbark"). The purchase included the products sold under Morbark, Rayco, Denis Cimaf and Boxer Equipment brand names and related trademarks (the "Acquisition") pursuant to the terms of the Securities Purchase Agreement dated September 11, 2019 (the “Agreement”). The purchase price consideration was approximately $352 million, on a debt free basis and subject to certain post-closing adjustments.
In connection with the Acquisition on October 24, 2019, Alamo Group expanded its credit facility from $250 million to $650 million to accommodate this transaction and the ongoing needs of the combined entities. The new credit facility has a five-year duration and consists of a $300 million term loan and a $350 million revolving line of credit.
The following Unaudited Pro Forma Combined Financial Statements is based on the historical consolidated financial statements of Alamo Group and Morbark after giving the effect to the acquisition and the assumptions and adjustments described in the accompanying Notes to Unaudited Pro Forma Combined Financial Information.
The Unaudited Pro Forma Combined Financial Statements are prepared by management for informational purposes only in accordance with Article 11 of Regulation S-X and are not necessarily indicative of future results or of actual results that would have been achieved had the Acquisition been consummated as of the dates presented, and should not be taken as representative of future consolidated results of operations or financial position of Alamo Group. The Unaudited Pro Forma Combined Balance Sheet is based upon Alamo Group's historical unaudited
balance sheet as of September 30, 2019 and the historical unaudited balance sheet of Morbark as of September
30, 2019 giving the effect to the Acquisition of Morbark by Alamo Group on October 24, 2019, as if it had been
completed on September 30, 2019. The Unaudited Pro Forma Combined Statements of Operations for the year ended December 31, 2018, and for the nine months ended September 30, 2019, are presented as if the transaction had been completed on January 1, 2018. The Unaudited Pro Forma Combined Statements of Operations do not reflect any operating efficiencies and/or cost savings that Alamo Group may achieve, or any additional expenses that it may incur, with respect to the consolidated companies. Because the Unaudited Pro Forma Combined Financial Statements is based on the operating results of Morbark during the period when Morbark was not under the control, influence or management of Alamo Group, the information presented may not be indicative of the results for the year ended December 31, 2018 and for the nine months ended September 30, 2019, that would have actually occurred had the Acquisition been consummated as of January 1, 2018, nor is it indicative of our future financial or operating results of the consolidated entity.
The Unaudited Pro Forma Combined Financial Information have been developed from and should be read in conjunction with Alamo Groups’ historical consolidated financial statements and accompanying notes contained in Alamo Group’s Annual Report on Form 10-K for its fiscal year ended December 31, 2018 filed on March 1, 2019 and Quarterly Report on Form 10-Q for its quarter ended September 30, 2019 filed on October 31, 2019 and the unaudited historical combined financial statements as of and for the nine months ended September 30, 2019, which are included in 99.4, respectively.
The Acquisition is being accounted for in accordance with ASC Topic 805 Business Combinations (“ASC Topic 805”). Accordingly, the total purchase price has been allocated on a preliminary basis to assets acquired and liabilities assumed in connection with the Acquisition based on their estimated fair values as of the completion of the Acquisition. These allocations reflect various preliminary estimates that were available at the time of the preparation of this Current Report on Form 8-K/A, and are subject to change during the purchase price allocation period (generally one year from the acquisition date) as valuations are finalized. It is anticipated that adjustments to the preliminary fair values of the acquired intangibles, fixed assets, inventory and the deferred tax accounts will be made along with associated adjustments to goodwill. Additionally other adjustments to the purchase price allocation may be required as additional information becomes available and as the company completes its analysis.
1
Exhibit 99.4
ALAMO GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2019
(in thousands)
| Historical | ||||||||||||||||||||||||||||||||||||||
| Alamo Group Inc. | Morbark Holdings Group, LLC | |||||||||||||||||||||||||||||||||||||
| September 30, 2019 | Pro forma Adjustments | Pro forma Consolidated | ||||||||||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 60,279 | $ | 5,678 | — | $ | 65,957 | |||||||||||||||||||||||||||||||
| Accounts receivable, net | 243,296 | 18,576 | — | 261,872 | ||||||||||||||||||||||||||||||||||
| Inventories, net | 206,516 | 66,109 | 8,081 | (a) | 280,706 | |||||||||||||||||||||||||||||||||
| Prepaid expenses and other current assets | 7,771 | 845 | — | 8,616 | ||||||||||||||||||||||||||||||||||
| Income tax receivable | 6,615 | — | — | 6,615 | ||||||||||||||||||||||||||||||||||
| Total current assets | 524,477 | 91,208 | 8,081 | 623,766 | ||||||||||||||||||||||||||||||||||
| Rental equipment, net | 56,177 | — | — | 56,177 | ||||||||||||||||||||||||||||||||||
| Property and equipment, net | 106,939 | 34,270 | 7,152 | (b) | 148,361 | |||||||||||||||||||||||||||||||||
| Intangible assets, net | 59,205 | — | 140,000 | (c) | 199,205 | |||||||||||||||||||||||||||||||||
| Goodwill | 93,468 | 32,259 | 75,636 | (d) | 201,363 | |||||||||||||||||||||||||||||||||
| Deferred income taxes | 1,060 | — | — | 1,060 | ||||||||||||||||||||||||||||||||||
| Other non-current assets | 15,067 | — | 3,819 | (e) | 18,886 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 856,393 | $ | 157,737 | $ | 234,688 | $ | 1,248,818 | ||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||||||||||||||
| Trade accounts payable | $ | 69,009 | $ | 15,302 | — | $ | 84,311 | |||||||||||||||||||||||||||||||
| Income taxes payable | 2,516 | 693 | — | 3,209 | ||||||||||||||||||||||||||||||||||
| Accrued liabilities | 48,525 | 14,711 | 1,774 | (e),(k),(j) | 65,010 | |||||||||||||||||||||||||||||||||
| Current maturities of long-term debt and finance lease obligations | 113 | 3,081 | (3,081) | (f) | 113 | |||||||||||||||||||||||||||||||||
| Total current liabilities | 120,163 | 33,787 | (1,307) | 152,643 | ||||||||||||||||||||||||||||||||||
| Long-term debt and finance lease obligations, net of current maturities | 150,192 | 30,695 | 321,305 | (f) | 502,192 | |||||||||||||||||||||||||||||||||
| Long-term tax liability | 6,710 | — | — | 6,710 | ||||||||||||||||||||||||||||||||||
| Deferred pension liability | 1,606 | — | — | 1,606 | ||||||||||||||||||||||||||||||||||
| Other long-term liabilities | 14,190 | — | 3,455 | (e) | 17,645 | |||||||||||||||||||||||||||||||||
| Deferred income taxes | 12,480 | — | 7,756 | (g) | 20,236 | |||||||||||||||||||||||||||||||||
| Total long-term liabilities | 185,178 | 30,695 | 332,516 | 548,389 | ||||||||||||||||||||||||||||||||||
| Stockholders’ equity | ||||||||||||||||||||||||||||||||||||||
| Common stock | 1,175 | — | — | 1,175 | ||||||||||||||||||||||||||||||||||
| Additional paid-in capital | 112,629 | — | — | 112,629 | ||||||||||||||||||||||||||||||||||
| Partnership equity | — | 93,469 | (93,469) | (h) | — | |||||||||||||||||||||||||||||||||
| Treasury stock at cost | (4,566) | — | — | (4,566) | ||||||||||||||||||||||||||||||||||
| Retained earnings (deficit) | 492,161 | — | (3,266) | (k) | 488,895 | |||||||||||||||||||||||||||||||||
| Accumulated other comprehensive income | (50,347) | (214) | 214 | (h) | (50,347) | |||||||||||||||||||||||||||||||||
| Total stockholders’ equity | 551,052 | 93,255 | (96,521) | 547,786 | ||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 856,393 | $ | 157,737 | $ | 234,688 | $ | 1,248,818 | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the unaudited pro forma combined financial statements.
2
Exhibit 99.4
ALAMO GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019
(in thousands, except per share data)
| Historical | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Alamo Group Inc. | Morbark Holdings Group, LLC | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2019 | Pro forma Adjustments | Pro forma Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 818,949 | $ | 189,687 | $ | — | $ | 1,008,636 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 613,798 | 136,294 | 241 | (b) | 750,333 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 205,151 | 53,393 | (241) | 258,303 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general, and administrative | 128,741 | 28,390 | 4,190 | (c),(j),(k) | 161,321 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 128,741 | 28,390 | 4,190 | 161,321 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | 76,410 | 25,003 | (4,431) | 96,982 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (5,222) | (2,425) | (7,997) | (i) | (15,644) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | 862 | 4 | — | 866 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | (442) | 820 | — | 378 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | 71,608 | 23,402 | (12,428) | 82,582 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax provision | 18,270 | 674 | 2,126 | (l) | 21,070 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 53,338 | $ | 22,728 | $ | (14,554) | $ | 61,512 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income per share-Basic | $ | 4.55 | $ | 5.25 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income per share-Diluted | $ | 4.52 | $ | 5.21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares used in per share calculation-Basic | 11,724 | 11,724 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares used in per share calculation-Diluted | 11,796 | 11,796 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the unaudited pro forma combined financial statements.
3
Exhibit 99.4
ALAMO GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2018
(in thousands, except per share data)
| Historical | ||||||||||||||||||||||||||||||||||||||
| Alamo Group Inc. | Morbark Holdings Group, LLC | |||||||||||||||||||||||||||||||||||||
| December 31, 2018 | Pro forma Adjustments | Pro forma Consolidated | ||||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,008,822 | $ | 205,463 | $ | — | $ | 1,214,285 | ||||||||||||||||||||||||||||||
| Cost of sales | 752,707 | 154,157 | 574 | (b) | 907,438 | |||||||||||||||||||||||||||||||||
| Gross profit | 256,115 | 51,306 | (574) | 306,847 | ||||||||||||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||||||||
| Selling, general, and administrative | 155,027 | 39,854 | 7,549 | (c),(j) | 202,430 | |||||||||||||||||||||||||||||||||
| Total operating expenses | 155,027 | 39,854 | 7,549 | 202,430 | ||||||||||||||||||||||||||||||||||
| Income from operations | 101,088 | 11,452 | (8,123) | 104,417 | ||||||||||||||||||||||||||||||||||
| Interest expense | (5,493) | (2,857) | (10,105) | (i) | (18,455) | |||||||||||||||||||||||||||||||||
| Interest income | 410 | 4 | — | 414 | ||||||||||||||||||||||||||||||||||
| Other income (expense), net | (1,474) | 1,754 | — | 280 | ||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | 94,531 | 10,353 | (18,228) | 86,656 | ||||||||||||||||||||||||||||||||||
| Income tax provision | 21,045 | — | (1,753) | (l) | 19,292 | |||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 73,486 | $ | 10,353 | $ | (16,475) | $ | 67,364 | ||||||||||||||||||||||||||||||
| Net income per share-Basic | $ | 6.30 | $ | 5.78 | ||||||||||||||||||||||||||||||||||
| Net income per share-Diluted | $ | 6.25 | $ | 5.73 | ||||||||||||||||||||||||||||||||||
| Shares used in per share calculation-Basic | 11,660 | 11,660 | ||||||||||||||||||||||||||||||||||||
| Shares used in per share calculation-Diluted | 11,761 | 11,761 | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the unaudited pro forma combined financial statements.
4
Exhibit 99.4
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Basis of Pro Forma Presentation
The Unaudited Pro Forma Combined Financial Information was prepared based on the historical financial statements of Alamo Group and Morbark.
The Acquisition has been accounted for in accordance with ASC Topic 805 and uses the fair value concepts defined in ASC Topic 820, Fair Value Measurements. ASC Topic 805 requires, among other things, that most assets acquired and liabilities assumed in an acquisition be recognized at their fair values as of the acquisition date and requires that fair value be measured based on the principles in ASC Topic 820. ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC Topic 820 also requires that a fair value measurement reflects the assumptions market participants would use in pricing an asset or liability based on the best information available.
Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.
Under the acquisition method of accounting, the assets acquired and liabilities assumed were recorded as of the completion of the acquisition, primarily at their respective preliminary estimated fair values and added to those of Alamo Group.
Under ASC Topic 805, acquisition-related transaction costs (i.e., advisory, legal, valuation, and other professional fees) are not included as a component of consideration transferred, but are accounted for as expenses in the periods in which the costs are incurred. Total acquisition-related transaction costs expected to be incurred by Alamo Group in future periods are estimated to be approximately $3,266,000 and are reflected in the balance sheets of these unaudited pro forma combined financial statements.
2. Estimate of Assets Acquired and Liabilities Assumed
We have made a preliminary allocation of the consideration paid to the acquired assets and liabilities at their respective fair values. In accordance with ASC Topic 805, any excess acquisition consideration over the fair value of acquired net assets results in goodwill. The Company has not completed the related analysis and thus, the fair value estimates in these pro-forma financials are only preliminary. The final goodwill calculation and allocation of the purchase price may change significantly from these estimates.
5
Exhibit 99.4
The following is a preliminary estimate of the assets acquired, liabilities assumed, and the estimated goodwill recorded for the Acquisition (in thousands):
| Cash | $ | 5,678 | |||
| Accounts receivable | 18,576 | ||||
| Inventory | 74,190 | ||||
| Prepaid expenses | 845 | ||||
| Property, plant & equipment | 41,422 | ||||
| Intangible assets | 140,000 | ||||
| Other assets | 3,819 | ||||
| Deferred income tax liabilities | (7,756) | ||||
| Other liabilities assumed | (34,537) | ||||
| Net assets assumed | 242,237 | ||||
| Goodwill | 109,763 | ||||
| Preliminary Purchase Price | $ | 352,000 | |||
6
Exhibit 99.4
3. Pro Forma Adjustments
The pro forma adjustments included in the unaudited pro forma combined financial statements are as follows:
(a)To record the adjustment for Inventory is to reflect step-up in fair value of the Morbark inventory. The pro forma income statement does not include an adjustment to cost of sales to reflect the increase in the recorded value of the inventory as the inventory is sold because the sales are expected to occur within the first year following the merger. The increase in cost of sales is considered a nonrecurring charge that will be included in the income statement within the 12 months following the transaction.
| (in thousands) | Historical Amount | Estimated Fair Value | Estimated Fair Value Adjustment | ||||||||||||||
| Inventory | $ | 66,109 | $ | 74,190 | $ | 8,081 | |||||||||||
(b)To record the preliminary estimated fair value of the property, plant and equipment acquired and the related depreciation expense (using the straight -line method) within cost of goods sold in the statement of operations are as follows:
| (in thousands) | Pro Forma Depreciation | ||||||||||||||||||||||||||||
| Estimated Fair Value | Estimated Useful Lives | For the nine months ended September 30, 2019 | For the year ended December 31, 2018 | ||||||||||||||||||||||||||
| Property Plant & Equipment | $ | 41,422 | 9 to 13 years | $ | 2,663 | $ | 3,551 | ||||||||||||||||||||||
| Elimination of historical Morbark balance | (34,270) | (2,422) | (2,977) | ||||||||||||||||||||||||||
| Pro forma adjustment | $ | 7,152 | $ | 241 | $ | 574 | |||||||||||||||||||||||
(c)To record the preliminary estimated fair value of the definite lived intangible assets acquired and the related amortization expense (using the straight-line method) within selling, general and administrative expense on the statement of operations are as follows:
| (in thousands) | Pro Forma Amortization | ||||||||||||||||||||||||||||
| Intangible Assets | Estimated Fair Value | Estimated Useful Lives | For the nine months ended September 30, 2019 | For the year ended December 31, 2018 | |||||||||||||||||||||||||
| Trade names and Trademarks | $ | 35,000 | 25 years | $ | 1,050 | $ | 1,400 | ||||||||||||||||||||||
| Customer and Dealer Relationships | 87,500 | 15 years | 4,375 | 5,833 | |||||||||||||||||||||||||
| Patents, Technology & Drawings | 17,500 | 10 years | 1,313 | 1,750 | |||||||||||||||||||||||||
| Total Definite Lived Intangible assets | $ | 140,000 | $ | 6,738 | $ | 8,983 | |||||||||||||||||||||||
(d)To eliminate the historic goodwill on the Morbark financial statements and record preliminary estimated goodwill as a result of the acquisition.
(e)To reflect the adoption of ASC 842 – “Leases” and recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. Based upon the contractual payment terms, $376,000 of the liability has been presented as a current obligation with the remainder $3,455,000 presented as non-current within the unaudited pro forma combined balance sheet.
(f)To reflect the draw on the revolving credit facility of Alamo Group used to complete the acquisition and to record the payoff of the Morbark debt assumed in the Acquisition.
7
Exhibit 99.4
| (in thousands) | Principal Balance | Interest Rate | |||||||||
| Revolving credit facility | $ | 352,000 | 4.21% | ||||||||
| Elimination of historical Morbark balance | (33,776) | ||||||||||
| Pro forma adjustment | $ | 318,224 | |||||||||
(g)To record the deferred tax liability adjustment for Morbark that has been recorded related to the preliminary valuation for inventory step-up, property plant and equipment, and intangibles assets as of the acquisition date:
| (in thousands) | Historical Amount | Estimated Fair Value | Estimated Fair Value Adjustment | ||||||||||||||
| Deferred tax liability | $ | — | $ | 7,756 | $ | 7,756 | |||||||||||
(h)To reflect the elimination of partnership equity and accumulated other comprehensive income from stockholders’ equity.
(i)Reflects the increase in interest expense resulting from the amended loan facility in conjunction with the amendment of our existing credit facility to allow for the Morbark Acquisition.
| (in thousands) | For the Nine Months Ended September 30, 2019 | For the Year Ended December 31, 2018 | ||||||||||||
| Increase related to interest expense on the amended agreement | $ | 17,657 | $ | 20,763 | ||||||||||
| Pro forma amortization of deferred financing fees | 412 | 549 | ||||||||||||
| 18,069 | 21,312 | |||||||||||||
| Elimination of historical Morbark expense | (2,425) | (2,857) | ||||||||||||
| Pro forma total interest expense | $ | 15,644 | $ | 18,455 | ||||||||||
We assumed a 4.21% interest rate on the amended and restated credit facility for calculating the pro forma interest expense. A change of 1% in the interest rate would result in an approximate change in the interest expense of $2,640,000 for the nine months ended September 30, 2019 and $3,520,000, for the year ended December 31, 2018. The deferred financing fees are amortized using the straight-line method over the period until the facility matures.
(j)To reflect the elimination of the deferred compensation and related expense associated with the compensation plans not assumed by Alamo Group in the Acquisition, which approximately $1,868,000 for the nine months ended September 30, 2019 and $1,434,000 for the year ended December 31, 2018.
(k)To reflect the elimination of $680,000 in transaction costs incurred by Alamo Group for the nine months ended September 30, 2019 related to the Morbark acquisition, which have been eliminated from the pro forma combined statement of operations. Included in the pro forma combined balance sheet are approximately $3,266,000 in estimated future transaction costs.
8
Exhibit 99.4
(l)Previously, Morbark was organized as a limited liability company and not subject to Federal income tax in accordance with partnership tax rules. This adjustment is to record tax expense for Morbark’s income for the periods presented based on a 25% U.S. tax rate and 27% Canadian tax rate, both of which approximate Alamo’s effective rates for those periods.
| (in thousands) | For the Nine Months Ended September 30, 2019 | For the Year Ended December 31, 2018 | ||||||||||||
| Tax effect of Historical Morbark income | $ | 5,971 | $ | 2,305 | ||||||||||
| Tax effect related to pro-forma adjustments | (3,171) | (4,058) | ||||||||||||
| Elimination of historical Morbark tax provision | (674) | — | ||||||||||||
| Pro forma tax expense (benefit) | $ | 2,126 | $ | (1,753) | ||||||||||
4. Earnings per Share
The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma combined consolidated statement of operations are based upon the weighted-average number of Alamo Group common shares outstanding.
9