Lci Industries 8-K/A, filed Feb 21, 2020
Lci Industries (LCII)
8-K/A
2020-02-21
For: 2019-12-19
View Original
Added on
April 10, 2026
About this 8-K/A
Lci Industries filed this 8-K/A on February 21, 2020, reporting on events of December 19, 2019.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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): December 19, 2019
| (Exact name of registrant as specified in its charter) | ||||||||||||||||||||||||||
| (State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||||||||||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||||||||||||||
| Registrant's telephone number, including area code: | ||||||||||||||||||||||||||
| N/A | ||||||||||||||||||||||||||
| (Former name or former address, if changed since last report) | ||||||||||||||||||||||||||
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 (see General Instruction A.2. below):
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |||||
| Soliciting material pursuant to Rule 14a-12(b) under the Exchange Act (17 CFR 240.14a-12) | |||||
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |||||
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | |||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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. ☐
Explanatory Note
On December 19, 2019, LCI Industries filed a Current Report on Form 8-K (the "Original Form 8-K"), reporting, among other items, that on December 19, 2019, through our wholly-owned subsidiary Lippert Components, Inc., we consummated the previously announced acquisition of Curt Acquisition Holdings, Inc. ("Curt"), pursuant to the Stock Purchase Agreement dated November 21, 2019 (the "Acquisition"). This Current Report on Form 8-K (Amendment No. 1) is being filed to amend and supplement the Original Form 8-K to provide the historical financial statements of Curt and the unaudited pro forma condensed combined financial information required by items 9.01(a) and 9.01(b) of Current Report on Form 8-K, respectively. Such financial information was excluded from the Original Form 8-K in reliance on the instructions to such items.
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
The audited consolidated financial statements of Curt Acquisition Holdings, Inc. and Subsidiaries as of December 31, 2018, and for the year then ended are filed herewith as Exhibit 99.2, and are incorporated herein by reference. The consent of Grant Thornton LLP, Curt's independent auditor, is attached as Exhibit 23.1 to this Amendment No. 1. to Current Report on Form 8-K/A.
The unaudited consolidated financial statements of Curt Acquisition Holdings, Inc. and Subsidiaries as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018 are filed herewith as Exhibit 99.3, and are incorporated herein by reference.
(b) Pro Forma Financial Information
The unaudited pro forma condensed combined financial information of LCI Industries as of September 30, 2019 and for the nine months ended September 30, 2019, and for the year ended December 31, 2018 are filed herewith as Exhibit 99.4, and are incorporated herein by reference. The unaudited pro forma condensed combined balance sheet gives effect to the Acquisition as if it had occurred on September 30, 2019. The unaudited pro forma condensed combined statements of income each give effect to the Acquisition as if it had occurred on January 1, 2018 (the first day of Curt's fiscal year ended December 31, 2018).
(d) Exhibits
Exhibit Index:
| Exhibit No. | Description | ||||
| Consent of Independent Certified Public Accountants | |||||
| Audited consolidated financial statements of Curt Acquisition Holdings, Inc. and Subsidiaries as of and for the year ended December 31, 2018 | |||||
| Unaudited consolidated financial statements of Curt Acquisition Holdings, Inc. and Subsidiaries as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018 | |||||
| Unaudited pro forma condensed combined financial information of LCI Industries as of September 30, 2019 and for the nine months ended September 30, 2019, and the year ended December 31, 2018 | |||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | ||||
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.
LCI INDUSTRIES | ||||||||
(Registrant) | ||||||||
By: /s/ Brian M. Hall Brian M. Hall Chief Financial Officer | ||||||||
| Dated: | February 21, 2020 | |||||||
EXHIBIT 23.1
February 21, 2020
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 30, 2019 (except for Note B, Note F and Note I, as to which the date is February 21, 2020), with respect to the consolidated financial statements of Curt Acquisition Holdings, Inc. and Subsidiaries which are included in the Current Report on Form 8-K/A of LCI Industries filed February 21, 2020. We consent to the incorporation by reference of said report in the Registration Statements of LCI Industries on Form S-8 (File Nos. 333-225177, 333-91174, 333-141276, 333-152873, 333-161242, 333-181272, and 333-201336).
/s/ GRANT THORNTON LLP
Milwaukee, Wisconsin
February 21, 2020
Exhibit 99.2
Consolidated Financial Statements and Report of Independent Certified Public Accountants
Curt Acquisition Holdings, Inc. and Subsidiaries
December 31, 2018
| Contents | |||||
| Page | |||||
| Report of Independent Certified Public Accountants | 3 | ||||
| Consolidated Financial Statements | |||||
| Balance sheet | 4 | ||||
| Statement of operations | 6 | ||||
| Statement of stockholders’ equity | 7 | ||||
| Statement of cash flows | 8 | ||||
| Notes to consolidated financial statements | 10 | ||||
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Curt Acquisition Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated financial statements of Curt Acquisition Holdings, Inc. (a Delaware corporation) and Subsidiaries, which comprise the consolidated balance sheet as of December 31, 2018, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.
Management’s responsibility for the 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 Curt Acquisition Holdings, Inc. 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.
/s/ GRANT THORNTON LLP
Milwaukee, Wisconsin
April 30, 2019 (except for Notes B, F, and I, as to which the date is February 21, 2020)
Curt Acquisition Holdings, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
December 31, 2018
| ASSETS | 2018 | ||||||||||
| CURRENT ASSETS | |||||||||||
| Cash | $ | 314,222 | |||||||||
| Accounts receivable, net of allowance of approximately $1,296,000 | 33,095,921 | ||||||||||
| Inventories, net | 78,373,609 | ||||||||||
| Prepaid expenses and other assets | 1,686,744 | ||||||||||
| Total current assets | 113,470,496 | ||||||||||
| PROPERTY AND EQUIPMENT, NET | 23,675,085 | ||||||||||
| GOODWILL | 33,162,827 | ||||||||||
| INTANGIBLE ASSETS, NET | 71,992,885 | ||||||||||
| OTHER ASSETS | 259,529 | ||||||||||
| TOTAL ASSETS | $ | 242,560,822 | |||||||||
4
Curt Acquisition Holdings, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET - CONTINUED
December 31, 2018
| LIABILITIES AND STOCKHOLDERS’ EQUITY | 2018 | ||||||||||
| CURRENT LIABILITIES | |||||||||||
| Accounts payable | $ | 25,083,392 | |||||||||
| Accrued expenses | 9,336,216 | ||||||||||
| Current portion of long-term debt | 3,618,931 | ||||||||||
| Current portion of capital lease obligation | 466,687 | ||||||||||
| Total current liabilities | 38,505,226 | ||||||||||
| DEFERRED TAX LIABILITY, NON-CURRENT, NET | 11,843,000 | ||||||||||
| OTHER LONG-TERM LIABILITIES | 887,301 | ||||||||||
| LONG-TERM DEBT, NET | 170,912,434 | ||||||||||
| CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION | 1,574,594 | ||||||||||
| Total liabilities | 223,722,555 | ||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
| Common stock, $0.01 par value; 1,000 shares authorized and issued | 10 | ||||||||||
| Additional paid-in capital | 53,319,605 | ||||||||||
| Accumulated deficit | (34,481,348) | ||||||||||
| Total stockholders’ equity | 18,838,267 | ||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 242,560,822 | |||||||||
The accompanying notes are an integral part of this consolidated statement.
5
Curt Acquisition Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 2018
| 2018 | |||||||||||
| Net sales | $ | 259,571,464 | |||||||||
| Cost of sales | 171,666,326 | ||||||||||
| Gross profit | 87,905,138 | ||||||||||
| Operating expenses | |||||||||||
| Selling, general and administrative expenses | 74,237,249 | ||||||||||
| Income from operations | 13,667,889 | ||||||||||
| Other expense | |||||||||||
| Interest expense | 14,017,747 | ||||||||||
| Loss before income tax expense | (349,858) | ||||||||||
| Income tax expense | 323,327 | ||||||||||
| NET LOSS | $ | (673,185) | |||||||||
The accompanying notes are an integral part of this consolidated statement.
6
Curt Acquisition Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Year ended December 31, 2018
| Additional | Total | ||||||||||||||||||||||||||||||||||
| Common stock | paid-in | Accumulated | stockholders’ | ||||||||||||||||||||||||||||||||
| Shares | Value | capital | deficit | equity | |||||||||||||||||||||||||||||||
| Balance at January 1, 2018 | 1,000 | $ | 10 | $ | 78,726,942 | $ | (33,808,163) | $ | 44,918,789 | ||||||||||||||||||||||||||
| Reimbursement from parent for incentive award compensation | — | — | 638,648 | — | 638,648 | ||||||||||||||||||||||||||||||
| Capital contributions | — | — | 3,954,015 | — | 3,954,015 | ||||||||||||||||||||||||||||||
| Dividends paid | — | — | (30,000,000) | — | (30,000,000) | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | (673,185) | (673,185) | ||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 1,000 | $ | 10 | $ | 53,319,605 | $ | (34,481,348) | $ | 18,838,267 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of this consolidated statement.
7
Curt Acquisition Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 2018
| 2018 | |||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | (673,185) | |||||||||
| Adjustments to reconcile net loss to net cash used in operating activities, net of acquisitions | |||||||||||
| Depreciation | 5,655,848 | ||||||||||
| Amortization of intangibles | 9,662,146 | ||||||||||
| Amortization of deferred financing costs | 911,418 | ||||||||||
| Compensation expense | 638,648 | ||||||||||
| Loss on sale of assets | 3,430 | ||||||||||
| Deferred income taxes | (472,000) | ||||||||||
| Paid-in-kind interest added to subordinated debt principal | 591,530 | ||||||||||
| Changes in operating assets and liabilities | |||||||||||
| Accounts receivable | (5,072,846) | ||||||||||
| Inventories | (30,263,399) | ||||||||||
| Prepaid expenses and other assets | (332,469) | ||||||||||
| Accounts payable | 12,480,131 | ||||||||||
| Accrued expenses | (4,404,354) | ||||||||||
| Other long-term liabilities | 72,311 | ||||||||||
| Net cash used in operating activities | (11,202,791) | ||||||||||
| Cash flows from investing activities | |||||||||||
| Assets acquired in asset purchase agreements | (2,625,000) | ||||||||||
| Purchases of property and equipment, net of acquisitions | (7,046,537) | ||||||||||
| Proceeds from sale of assets | 74,499 | ||||||||||
| Net cash used in investing activities | (9,597,038) | ||||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from line of credit | 80,488,667 | ||||||||||
| Repayments of line of credit | (72,649,577) | ||||||||||
| Borrowings of long-term debt | 27,000,000 | ||||||||||
| Payments of long-term debt | (3,206,423) | ||||||||||
| Payments on capital lease | (427,629) | ||||||||||
| Dividends paid | (30,000,000) | ||||||||||
| Capital contributions | 3,954,015 | ||||||||||
| Net cash provided by financing activities | 5,159,053 | ||||||||||
| Net decrease in cash | (15,640,776) | ||||||||||
| Cash at beginning of year | 15,954,998 | ||||||||||
| Cash at end of year | $ | 314,222 | |||||||||
8
Curt Acquisition Holdings, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
Year ended December 31, 2018
| 2018 | |||||||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Cash paid for | |||||||||||
| Interest | $ | 13,276,421 | |||||||||
| Taxes | 1,647,692 | ||||||||||
| Non-cash investing and financing activities | |||||||||||
| Paid-in-kind interest added to subordinated debt principal | $ | 591,530 | |||||||||
| Property and equipment in accounts payable | 430,653 | ||||||||||
The accompanying notes are an integral part of this consolidated statement.
9
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
NOTE A - NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Curt Acquisition Holdings, Inc. and its wholly owned subsidiary, Curt Manufacturing, LLC. Curt Manufacturing, LLC includes its wholly owned subsidiaries, The Hitch Store, LLC, Curt International, LLC, Curt Manufacturing, LTD and Curt Manufacturing Philippines, Inc., (collectively, the Company). The Company develops, manufactures, sells and distributes towing, electrical, aftermarket and tubular products, primarily within North America, to the automotive and truck aftermarket, the recreational vehicle market, the marine market and the trailer manufacturing market. All significant intercompany balances and transactions have been eliminated in consolidation.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions.
Revenue Recognition
Under the terms of its sales agreements with customers, the Company recognizes revenue upon shipment of products, when persuasive evidence of an arrangement exists, pricing is fixed, title has transferred and collection is reasonably assured.
Taxes Collected from Customers
Net sales are presented net of taxes collected from customers and remitted to governmental authorities. These taxes include all taxes assessed by a governmental authority that are imposed on and concurrent with a specific revenue-producing transaction between the Company and a customer.
Shipping and Handling
Amounts billed to customers for shipping and handling are included in net sales, and the Company includes corresponding costs for shipping and handling in cost of sales.
Cash
The Company maintains its cash in bank deposit accounts with financial institutions, which at times may exceed federally insured limits. In addition, the Company has cash balances held in foreign banks at December 31, 2018. The Company has not experienced any losses in such accounts. Management believes the Company is not exposed to any significant credit risk on cash.
Accounts Receivable
The Company extends unsecured credit to customers from sales in the normal course of business and mitigates the associated credit risk by performing credit checks of those customers and pursuing the collections of past-due accounts. Accounts receivable are carried at the original invoice amount less an allowance for uncollectible accounts, as well as an allowance for returns. Management regularly reviews customer accounts and provides an allowance for those amounts when it considers them uncollectible. The actual amount of accounts that is not collected in a timely manner may differ from the allowance estimated by management. Balances that are still outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
10
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2018
Inventories, Net
Inventories are stated at the lower of cost or net realizable value using the first-in, first-out method. Provisions are made to reduce excess and obsolete inventories to their net realizable value.
During 2018, the Company began leasing Mexican manufacturing facilities under the “maquiladora” program. Pursuant to this program, materials and components owned by the Company are transferred to a third-party Mexican operation, where they are used to produce finished goods. The finished goods are returned to the United States and the Company reimburses the Mexican company for their manufacturing costs through a third-party vendor relationship.
Property and Equipment
Property and equipment are stated at cost. As a result of the acquisitions, property and equipment acquired were stated at fair value, which approximated net book value on acquisition date. Expenditures for additions and improvements are capitalized at cost, while replacements, maintenance and repairs that do not improve or extend the useful lives of the respective assets are expensed as incurred. Properties sold or otherwise disposed of are removed from the property accounts, with gains or losses charged to selling, general and administrative expenses.
Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets as follows:
| Asset description | Life | |||||||
| Leasehold improvements | 5 - 15 years | |||||||
| Machinery and equipment | 3 - 15 years | |||||||
| Furniture and office equipment | 3 - 10 years | |||||||
| Vehicles | 3 - 5 years | |||||||
Goodwill
Goodwill represents the excess of purchase price paid over net assets acquired in a business combination. The Company evaluates the carrying value of goodwill, which represents the excess of the purchase price over the underlying tangible and intangible assets acquired and liabilities assumed, at year end and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances include, but are not limited to (1) a significant change in legal factors or business climate, (2) unanticipated competition, (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company first compares the fair value of the reporting unit to the carrying amount. If the carrying amount exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of goodwill to its carrying amount. The Company completed its annual evaluation of goodwill and concluded there was no impairment for the year ended December 31, 2018.
Impairment of Long-lived and Intangible Assets
The Company reviews its long-lived and intangible assets, except for goodwill (see above), for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the carrying values are reduced to the estimated fair value. No events were identified during the year ended December 31, 2018, which would require the Company to perform an impairment test.
11
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2018
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs for the year ended December 31, 2018 were $783,471.
Research and Development
Research and development expenses are recorded in selling, general and administrative expenses in the period they are incurred. Research and development expenses for the year ended December 31, 2018 were $1,497,642.
Fair Value Measurements
Authoritative accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
Subordinated and term debt – Management believes the carrying amount approximates fair value based on current market conditions and interest rates available to the Company for similar financial instruments.
Other – Management believes the carrying amount of cash, accounts receivable, prepaid expenses, accounts payable and accrued expenses approximates fair value as of December 31, 2018, due to the short-term nature of these accounts.
Deferred Financing Costs
Deferred financing costs consist of amounts paid to lenders and third parties in connection with obtaining debt financing and are recorded as a direct deduction from the carrying amount of the debt liability. The costs are amortized using the straight-line method over the term of the related debt agreements. The related amortization expense is included in interest expense in the accompanying consolidated statement of operations. Total amortization expense incurred for the year ended December 31, 2018 was $911,418.
The estimated amortization of deferred financing costs for years subsequent to December 31, 2018, are as follows:
| 2019 | $ | 396,247 | |||
| 2020 | 201,585 | ||||
| 2021 | 201,585 | ||||
| 2022 | 92,394 | ||||
| Total | $ | 891,811 | |||
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due and deferred taxes. Deferred taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences related primarily to inventory, prepaid expenses, property and equipment, goodwill, intangible assets and accrued liabilities. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. The Company is subject to taxation in the United States and various state jurisdictions.
As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
12
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2018
Penalties and interest assessed by income taxing authorities are included in income tax expense, if applicable. For the year ended December 31, 2018, interest and penalties on uncertain tax liabilities are not material to the consolidated financial statements.
For tax years beginning after December 31, 2017, deductions for interest expense are limited under IRC Sec 163(j) to 30% of adjusted taxable income after adding back net interest expense and certain depreciation and amortization. The Company recorded a deferred tax asset of $1,438,000 for non-deductible interest for the year ended December 31, 2018. The Company also recorded a valuation allowance for the same amount as of December 31, 2018, as shown in note I.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as a new topic, Accounting Standards Codification (ASC) Topic 606. The objective of ASU No. 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In applying the new standard, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU No. 2014-09 applies to all contracts with customers, except those that are within the scope of other topics in the ASC. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2018, and shall be applied using either a full retrospective or modified retrospective approach. Early adoption is permitted. The Company elected to not early adopt this standard. The Company is currently evaluating the new guidance and has not determined the impact that this standard may have on its consolidated financial statements or decided on the method of adoption.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires organizations that lease assets (lessees) to recognize the assets and related liabilities for the rights and obligations created by the leases on the balance sheet for leases with terms exceeding 12 months. The standard defines a lease as a contract or part of a contract that conveys the right to control the use of identified assets for a period of time in exchange for consideration. The lessee in a lease will be required to initially measure the right-of-use asset and the lease liability at the present value of the remaining lease payments, as well as capitalize initial direct costs as part of the right-of-use asset. In October 2019, the FASB elected to defer the effective date of ASU No. 2016-02 by one year. This ASU is effective for annual reporting periods beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact on the results of operations, financial condition and cash flows, and has not determined the impact on its consolidated financial statements at this time.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. ASU No. 2017-01 clarifies the definition of a business and requires that an entity apply certain criteria in order to determine when a set of assets and activities qualifies as a business. This guidance is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company has elected to early adopt the guidance for the year ended December 31, 2018.
13
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2018
NOTE C - ACQUISITIONS
On February 20, 2018, Curt Acquisition Holdings, Inc. purchased certain assets of Rock-Slide Engineering, LLC for an aggregate purchase price of $2,625,000. The following table summarizes the consideration paid for the assets acquired on the date of acquisition:
| Intangible assets | $ | 2,250,000 | |||
| Property and equipment | 300,000 | ||||
| Inventory | 75,000 | ||||
| $ | 2,625,000 | ||||
NOTE D - INVENTORIES
Inventories consist of the following at December 31, 2018:
| 2018 | |||||||||||
| Finished goods | $ | 56,015,368 | |||||||||
| Work-in-process | 5,594,924 | ||||||||||
| Raw materials | 10,782,147 | ||||||||||
| Inventory in transit | 8,504,813 | ||||||||||
| Excess/obsolescence reserve | (2,523,643) | ||||||||||
| Inventories, net | $ | 78,373,609 | |||||||||
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2018:
| 2018 | |||||||||||
| Leasehold improvements | $ | 3,720,054 | |||||||||
| Machinery and equipment | 32,141,901 | ||||||||||
| Furniture and office equipment | 9,108,380 | ||||||||||
| Vehicles | 391,848 | ||||||||||
| Construction in progress | 1,227,654 | ||||||||||
| Total property and equipment | 46,589,837 | ||||||||||
| Less accumulated depreciation | 22,914,752 | ||||||||||
| Property and equipment, net | $ | 23,675,085 | |||||||||
Depreciation expense for the year ended December 31, 2018 was $5,655,848.
14
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2018
NOTE F - INTANGIBLE ASSETS
Intangible assets subject to amortization consist of the following at December 31, 2018:
| Estimated useful life | 2018 | ||||||||||||||||||||||||||||||||||
| Cost | Accumulated amortization | Net book value | |||||||||||||||||||||||||||||||||
| Customer relationships | 13-15 years | $ | 83,473,550 | $ | (29,030,856) | $ | 54,442,694 | ||||||||||||||||||||||||||||
| Trademark | 10-15 years | 15,622,000 | (4,935,825) | 10,686,175 | |||||||||||||||||||||||||||||||
| Non-compete agreements | 2-5 years | 4,216,000 | (4,095,400) | 120,600 | |||||||||||||||||||||||||||||||
| Engineering drawings | 5 years | 3,098,000 | (2,994,733) | 103,267 | |||||||||||||||||||||||||||||||
| Patents | 7-13 years | 1,589,000 | (817,601) | 771,399 | |||||||||||||||||||||||||||||||
| Intellectual property | 10 years | 6,750,000 | (881,250) | 5,868,750 | |||||||||||||||||||||||||||||||
| Total intangible assets | $ | 114,748,550 | $ | (42,755,665) | $ | 71,992,885 | |||||||||||||||||||||||||||||
The estimated amortization of intangible assets for years subsequent to December 31, 2018, is as follows:
| 2019 | $ | 8,580,312 | |||
| 2020 | 8,356,446 | ||||
| 2021 | 8,272,517 | ||||
| 2022 | 8,255,731 | ||||
| 2023 | 8,254,528 | ||||
| Thereafter | 30,273,351 | ||||
| $ | 71,992,885 | ||||
Amortization expense for the year ended December 31, 2018 was $9,662,146.
NOTE G - ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2018:
| 2018 | |||||||||||
| Accrued salaries and related employee expenses | $ | 2,404,053 | |||||||||
| Accrued bonuses | 108,238 | ||||||||||
| Accrued rebates and commissions | 2,950,158 | ||||||||||
| Accrued warranty reserve | 758,632 | ||||||||||
| Accrued medical insurance claims | 554,297 | ||||||||||
| Accrued income taxes | 33,995 | ||||||||||
| Interest payable | 1,833,621 | ||||||||||
| Property tax payable | 548,902 | ||||||||||
| Other | 144,320 | ||||||||||
| Total accrued expenses | $ | 9,336,216 | |||||||||
15
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2018
NOTE H - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2018:
| 2018 | |||||||||||
| Revolving credit loan | $ | 7,839,090 | |||||||||
| Term loan | 58,426,237 | ||||||||||
| Third amendment term loan | 4,452,283 | ||||||||||
| Fourth amendment term loan | 8,235,189 | ||||||||||
| Fifth amendment term loan | 3,684,657 | ||||||||||
| Seventh amendment term loan | 18,768,750 | ||||||||||
| Eighth amendment term loan | 14,812,500 | ||||||||||
| Tenth amendment term loan | 11,925,000 | ||||||||||
| Delayed draw term loan | 13,570,250 | ||||||||||
| Subordinated debt | 33,709,220 | ||||||||||
| Total long-term debt | 175,423,176 | ||||||||||
| Less debt issuance costs | 891,811 | ||||||||||
| Long-term debt, net | 174,531,365 | ||||||||||
| Less current portion of long-term debt | 3,618,931 | ||||||||||
| Long-term debt, net of current portion | $ | 170,912,434 | |||||||||
Credit Facility
In association with the acquisition on March 4, 2014, the Company entered into a new credit facility with Bank of Montreal and several other lenders composed of (1) a term loan of $67,000,000, (2) a revolving credit loan that has a maximum draw of $15,000,000 and (3) a delayed draw term loan with a maximum draw of $20,000,000. On May 30, 2014, the credit facility was amended to add a Canadian sublimit to the current revolving credit loan of $2,000,000. On December 16, 2014, the credit facility was amended to increase the revolving credit loan to have a maximum draw of $20,000,000 as well as add an incremental term loan of $5,000,000 (referred to in the debt schedule as third amendment term loan). On February 1, 2016, $9,000,000 was borrowed under the incremental term loan (representing the fourth amendment term loan), and the credit facility was amended to increase the maximum draw on the incremental term loan an additional $20,000,000. Additionally, $9,250,000 of additional delayed draw term loan was borrowed. An additional $5,000,000 of subordinated debt was borrowed, as well. On April 1, 2016, the credit facility was amended and an additional $4,000,000 was borrowed (representing the fifth amendment term loan). On June 16, 2017, the credit facility was amended and an additional $19,500,000 was borrowed (representing the seventh amendment term loan). On March 2, 2018, the credit facility was amended and an additional $15,000,000 was borrowed (representing the eighth amendment term loan). On December 13, 2018, the credit facility was amended and an additional $12,000,000 was borrowed (representing the tenth amendment term loan). The facility is collateralized by substantially all of the assets of the Company and is subject to certain restrictive covenants common to such agreements. The credit facility also mandates the maintenance of certain financial ratios, including a leverage ratio and a fixed charge coverage ratio. The Company was in compliance with all financial covenants at December 31, 2018.
16
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2018
The principal of the term loan, delayed draw term loan and the amendments to the term loan shall be repaid in quarterly installments of 0.625% of the original principal balance of the term loan until the term loan maturity date, June 16, 2022, when the remaining outstanding principal and accrued and unpaid interest are due. The Company is subject to additional term loan payments if cash flows exceed amounts defined in the Excess Cash Flow provisions of the loan agreement. Interest on the term loans is paid monthly at an annual rate computed on the unpaid principal at either (1) the base rate plus 3.25% or (2) the Eurodollar base rate plus 4.25%, as defined in the credit facility. At December 31, 2018, the effective interest rate on the term loans, with the exception of the tenth amendment, was 6.60%. The effective interest rate on the tenth amendment term loan was 6.71% as of December 31, 2018.
The revolving credit loan provides revolving credit borrowings, with the balance outstanding due on June 16, 2022. Interest on the revolving credit loan is paid monthly at an annual rate computed on the basis of a 365-day year on the unpaid principal at either (1) the base rate plus 3.25% or (2) the Eurodollar base rate plus 4.25%, as defined in the loan agreement. At December 31, 2018, the effective interest rate on the Revolving Credit Loan was 8.75%.
Subordinated Debt
The Company also entered into a note purchase agreement with BB&T Capital Partners Mezzanine Fund II, LP and Teachers Insurance and Annuity Association of America for $26,250,000 on March 4, 2014. The notes bear interest at 11.75% per year, of which 10.0% per year shall be payable in cash each quarter and 1.75% per year shall be added to the principal amount each quarter on the interest payment date. On February 1, 2016, the Company borrowed an additional $5,000,000 under the note purchase agreement in connection with the acquisition of Luverne Trucking Equipment. On June 2, 2017, the note purchase agreement was amended to extend the maturity date to December 16, 2022.
The maturities of long-term debt are as follows for the years ending December 31:
| 2019 | $ | 3,618,931 | |||
| 2020 | 3,618,931 | ||||
| 2021 | 3,618,931 | ||||
| 2022 | 164,566,383 | ||||
| Total | $ | 175,423,176 | |||
NOTE I - INCOME TAXES
The provision for income taxes (benefit) and its components for the year ended December 31, 2018, was as follows:
| 2018 | |||||||||||
| Current | $ | 920,126 | |||||||||
| Deferred | (596,799) | ||||||||||
| Total provision for income taxes | $ | 323,327 | |||||||||
The principal items that cause the Company’s effective tax rate to vary from the U.S. statutory rate are state incomes taxes, goodwill amortization, a valuation allowance related to nondeductible interest expense and prior year adjustments for the reclassification of Canadian and Philippine income for tax purposes.
17
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2018
The components of the net deferred tax assets at December 31, 2018:
| 2018 | |||||||||||
| Deferred tax assets | |||||||||||
| Inventory | $ | 812,000 | |||||||||
| Accrued liabilities | 824,000 | ||||||||||
| Allowance for bad debt | 360,000 | ||||||||||
| Transaction expenses | 888,000 | ||||||||||
| Interest | 1,438,000 | ||||||||||
| Other | 228,000 | ||||||||||
| Total deferred tax assets | 4,550,000 | ||||||||||
| Deferred tax liabilities | |||||||||||
| Goodwill and intangible assets | $ | (11,727,000) | |||||||||
| Fixed assets | (2,780,000) | ||||||||||
| Prepaid expenses | (123,000) | ||||||||||
| Other | (325,000) | ||||||||||
| Total deferred tax liabilities | (14,955,000) | ||||||||||
| Valuation allowance | (1,438,000) | ||||||||||
| Net deferred tax liability | $ | (11,843,000) | |||||||||
In 2018, the valuation allowance increased $1,438,000, due to the new interest expense limitation as imposed under the Tax Cuts and Jobs Act (as discussed previously).
NOTE J - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company currently leases its manufacturing, warehousing and office facilities under operating leases that contain escalating lease payment terms that expire in various years through December 2030. The Company accounts for these leases using the straight-line method and the related deferred rent is recorded in accrued expenses and other long-term liabilities on the accompanying consolidated balance sheet. The Company also leases equipment under the terms of operating leases expiring on various dates through July 2024.
18
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2018
The Company has two agreements with a related party to rent manufacturing and office facilities. Rent expense to the related party was $1,361,680 for the year ended December 31, 2018. Total lease and rental expense to non-related parties was $6,539,562 for the year ended December 31, 2018. At December 31, 2018, the approximate minimum future lease and rental payments under the non-cancelable lease agreements are as follows:
| Related party | Non-related party | Total | |||||||||||||||
| 2019 | $ | 1,364,930 | $ | 6,624,261 | $ | 7,989,191 | |||||||||||
| 2020 | 1,409,478 | 5,699,569 | 7,109,047 | ||||||||||||||
| 2021 | 1,455,363 | 4,933,610 | 6,388,973 | ||||||||||||||
| 2022 | 1,502,623 | 2,362,660 | 3,865,283 | ||||||||||||||
| 2023 | 1,551,302 | 1,208,103 | 2,759,405 | ||||||||||||||
| Thereafter | 12,350,479 | 2,151,170 | 14,501,649 | ||||||||||||||
| $ | 19,634,175 | $ | 22,979,373 | $ | 42,613,548 | ||||||||||||
Capital Leases
The Company has capitalized lease obligations for certain machinery and equipment that expire on various dates through May 2023. The capitalized lease obligations and related assets reflect the present value of future lease payments under the current lease agreements. The capitalized assets and accumulated depreciation are as follows at December 31, 2018:
| 2018 | |||||||||||
| Capitalized assets | $ | 3,486,856 | |||||||||
| Accumulated depreciation | (1,577,299) | ||||||||||
| $ | 1,909,557 | ||||||||||
Depreciation expense included in cost of goods sold was approximately $559,000 for the year ended December 31, 2018. The Company recognized interest expense of approximately $117,000 for the year ended December 31, 2018. The following is a schedule of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments at December 31, 2018:
| 2019 | $ | 560,643 | |||
| 2020 | 560,643 | ||||
| 2021 | 778,945 | ||||
| 2022 | 274,846 | ||||
| 2023 | 81,542 | ||||
| Net minimum lease payments | 2,256,619 | ||||
| Less amount representing interest | 215,338 | ||||
| Less current portion | 466,687 | ||||
| Long-term portion | $ | 1,574,594 | |||
19
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2018
Litigation
In the normal course of business, the Company is party to litigation from time to time. The Company maintains insurance to cover certain actions and believes that resolution of any such litigation will not have a material adverse effect on the Company.
Self-funded Health Insurance
The Company is self-funded for its employees’ health benefits. The Company has a stop-loss coverage for costs in excess of $100,000 for 2018 per individual per policy period. A liability of $554,297 for claims incurred but not paid at December 31, 2018 has been recorded within accrued expenses on the accompanying consolidated balance sheet. Management believes this liability is sufficient to cover estimated claims including claims incurred but not yet reported.
NOTE K - EMPLOYEE BENEFIT PLAN
The Company maintains a qualified 401(k) plan and profit-sharing plan and trust under which each participant can elect to defer a portion of their compensation into the plan. All employees of the Company who are 21 years of age and have completed 90 days of eligible service, as defined, may participate in the plan. The Company has a discretionary 401(k) match program based on the performance of the Company. For the year ended December 31, 2018, the Company’s match was 50% of the first 8% of employee contributions. The Company’s 401(k) match was $1,430,473 for the year ended December 31, 2018. There were no discretionary employer contributions relating to the profit-sharing plan for the year ended December 31, 2018.
NOTE L - INCENTIVE COMPENSATION
During 2014, the Company established an incentive compensation plan for certain employees. These awards vest with a scheduled passage of time over a five-year period with 20% vesting each year after the grant date, as described within the related certificate. At December 31, 2018, 10,108 awards were authorized, issued, and outstanding. Compensation expense of $638,648 was recorded for the year ended December 31, 2018.
NOTE M - RELATED-PARTY TRANSACTIONS
The Company incurred $1,620,685 in management fees to its majority owner as part of a management agreement for the year ended December 31, 2018.
The Company also has two operating lease agreements with related parties. See note J for additional discussion.
NOTE N - CUSTOMER CONCENTRATIONS
Accounts receivable from the top customer represent 11% of the Company’s accounts receivable outstanding at December 31, 2018.
Sales to the top customer represent 12% of the Company’s sales at December 31, 2018. Payments to the top vendor represent 13% of the Company’s cost of goods sold as of December 31, 2018.
NOTE O - SUBSEQUENT EVENTS
The Company evaluated its December 31, 2018 consolidated financial statements for subsequent events through April 30, 2019, the date the consolidated financial statements were originally issued, and through February 21, 2020 (unaudited), the date these consolidated financial statements were revised. The Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements, except as noted below.
On February 27, 2019, the credit facility was amended to allow for a temporary $7,000,000 increase on the revolving credit loan. The temporary increase period ended on August 27, 2019.
20
Exhibit 99.3
CURT ACQUISITION HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2019
| Contents | |||||
| Page | |||||
| Consolidated Financial Statements (Unaudited) | |||||
| Unaudited balance sheet | 2 | ||||
| Unaudited statements of income | 4 | ||||
| Unaudited statements of stockholders’ equity | 5 | ||||
| Unaudited statements of cash flows | 6 | ||||
| Notes to unaudited consolidated financial statements | 8 | ||||
Curt Acquisition Holdings, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED BALANCE SHEET
September 30, 2019
| September 30, | ||||||||||||||
| ASSETS | 2019 | |||||||||||||
| CURRENT ASSETS | ||||||||||||||
| Cash | $ | 301,567 | ||||||||||||
| Accounts receivable, net | 40,390,563 | |||||||||||||
| Inventories, net | 68,066,602 | |||||||||||||
| Prepaid expenses and other assets | 2,486,076 | |||||||||||||
| Total current assets | 111,244,808 | |||||||||||||
| PROPERTY AND EQUIPMENT, NET | 24,753,847 | |||||||||||||
| GOODWILL | 33,298,938 | |||||||||||||
| INTANGIBLE ASSETS, NET | 65,501,685 | |||||||||||||
| OTHER ASSETS | 176,973 | |||||||||||||
| TOTAL ASSETS | $ | 234,976,251 | ||||||||||||
2
Curt Acquisition Holdings, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED BALANCE SHEET - CONTINUED
September 30, 2019
| September 30, | |||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | 2019 | ||||||||||
| CURRENT LIABILITIES | |||||||||||
| Accounts payable | $ | 17,963,355 | |||||||||
| Accrued expenses | 11,076,522 | ||||||||||
| Current portion of long-term debt | 3,618,932 | ||||||||||
| Current portion of capital lease obligation | 619,829 | ||||||||||
| Total current liabilities | 33,278,638 | ||||||||||
| DEFERRED TAX LIABILITY, NON-CURRENT, NET | 11,843,000 | ||||||||||
| OTHER LONG-TERM LIABILITIES | 1,013,724 | ||||||||||
| LONG-TERM DEBT, NET | 166,224,754 | ||||||||||
| CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION | 3,288,599 | ||||||||||
| Total liabilities | 215,648,715 | ||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
| Common stock, $0.01 par value; 1,000 shares authorized and issued | 10 | ||||||||||
| Additional paid-in capital | 53,319,605 | ||||||||||
| Accumulated deficit | (33,992,079) | ||||||||||
| Total stockholders’ equity | 19,327,536 | ||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 234,976,251 | |||||||||
The accompanying notes are an integral part of these consolidated statements.
3
Curt Acquisition Holdings, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Nine months ended September 30, 2019 and 2018
| Nine Months Ended September 30, | |||||||||||||||||
| 2019 | 2018 | ||||||||||||||||
| Net sales | $ | 213,598,869 | $ | 206,395,623 | |||||||||||||
| Cost of sales | 145,138,637 | 134,696,895 | |||||||||||||||
| Gross profit | 68,460,232 | 71,698,728 | |||||||||||||||
| Operating expenses | |||||||||||||||||
| Selling, general and administrative expenses | 53,709,114 | 54,507,194 | |||||||||||||||
| Income from operations | 14,751,118 | 17,191,534 | |||||||||||||||
| Other expense | |||||||||||||||||
| Interest expense | 11,809,252 | 10,203,425 | |||||||||||||||
| Income before income tax expense | 2,941,866 | 6,988,109 | |||||||||||||||
| Income tax expense | 2,452,597 | 3,698,589 | |||||||||||||||
| NET INCOME | $ | 489,269 | $ | 3,289,520 | |||||||||||||
The accompanying notes are an integral part of these consolidated statements.
4
Curt Acquisition Holdings, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine months ended September 30, 2019 and 2018
| Additional | Total | ||||||||||||||||||||||||||||||||||
| Common stock | paid-in | Accumulated | stockholders’ | ||||||||||||||||||||||||||||||||
| Shares | Value | capital | deficit | equity | |||||||||||||||||||||||||||||||
| Balance at January 1, 2018 | 1,000 | $ | 10 | $ | 78,726,942 | $ | (33,808,163) | $ | 44,918,789 | ||||||||||||||||||||||||||
| Capital contributions | — | — | 3,954,015 | — | 3,954,015 | ||||||||||||||||||||||||||||||
| Dividends paid | — | — | (30,000,000) | — | (30,000,000) | ||||||||||||||||||||||||||||||
| Net income | — | — | — | 3,289,520 | 3,289,520 | ||||||||||||||||||||||||||||||
| Balance at September 30, 2018 | 1,000 | $ | 10 | $ | 52,680,957 | $ | (30,518,643) | $ | 22,162,324 | ||||||||||||||||||||||||||
| Additional | Total | ||||||||||||||||||||||||||||||||||
| Common stock | paid-in | Accumulated | stockholders’ | ||||||||||||||||||||||||||||||||
| Shares | Value | capital | deficit | equity | |||||||||||||||||||||||||||||||
| Balance at January 1, 2019 | 1,000 | $ | 10 | $ | 53,319,605 | $ | (34,481,348) | $ | 18,838,267 | ||||||||||||||||||||||||||
| Net income | — | — | — | 489,269 | 489,269 | ||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 1,000 | $ | 10 | $ | 53,319,605 | $ | (33,992,079) | $ | 19,327,536 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated statements.
5
Curt Acquisition Holdings, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2019 and 2018
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
| Cash flows from operating activities | ||||||||||||||||||||
| Net income | $ | 489,269 | $ | 3,289,520 | ||||||||||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of acquisitions | ||||||||||||||||||||
| Depreciation | 4,443,360 | 4,210,997 | ||||||||||||||||||
| Amortization of intangibles | 6,491,200 | 7,237,234 | ||||||||||||||||||
| Amortization of deferred financing costs | 345,851 | 683,564 | ||||||||||||||||||
| Loss on sale of assets | 1,806 | (6,694) | ||||||||||||||||||
| Deferred income taxes | — | (472,000) | ||||||||||||||||||
| Changes in operating assets and liabilities | ||||||||||||||||||||
| Accounts receivable | (7,294,641) | (16,263,299) | ||||||||||||||||||
| Inventories | 10,307,007 | (11,137,663) | ||||||||||||||||||
| Prepaid expenses and other assets | (716,774) | (690,779) | ||||||||||||||||||
| Accounts payable | (7,310,650) | 6,871,362 | ||||||||||||||||||
| Accrued expenses | 2,189,636 | 485,477 | ||||||||||||||||||
| Other long-term liabilities | 126,423 | 54,234 | ||||||||||||||||||
| Net cash provided by (used in) operating activities | 9,072,487 | (5,738,047) | ||||||||||||||||||
| Cash flows from investing activities | ||||||||||||||||||||
| Assets acquired in asset purchase agreements | (136,111) | (2,625,000) | ||||||||||||||||||
| Purchases of property and equipment, net of acquisitions | 237,305 | 64,814 | ||||||||||||||||||
| Proceeds from sale of assets | (3,207,177) | (4,942,682) | ||||||||||||||||||
| Net cash used in investing activities | (3,105,983) | (7,502,868) | ||||||||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||
| Proceeds from line of credit | 53,109,589 | 57,049,146 | ||||||||||||||||||
| Repayments of line of credit | (55,953,261) | (45,525,256) | ||||||||||||||||||
| Borrowings of long-term debt | — | 15,000,000 | ||||||||||||||||||
| Payments of long-term debt | (2,639,190) | (2,301,693) | ||||||||||||||||||
| Payments on capital lease | (496,297) | (314,713) | ||||||||||||||||||
| Dividends paid | — | (30,000,000) | ||||||||||||||||||
| Capital contributions | — | 3,954,015 | ||||||||||||||||||
| Net cash used in financing activities | (5,979,159) | (2,138,501) | ||||||||||||||||||
| Net decrease in cash | (12,655) | (15,379,416) | ||||||||||||||||||
| Cash at beginning of period | 314,222 | 15,954,998 | ||||||||||||||||||
| Cash at end of period | $ | 301,567 | $ | 575,582 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated statements.
6
Curt Acquisition Holdings, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Nine months ended September 30, 2019 and 2018
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||
| Supplemental disclosures of cash flow information | |||||||||||||||||||||||
| Cash paid for | |||||||||||||||||||||||
| Interest | $ | 9,512,391 | $ | 9,925,304 | |||||||||||||||||||
| Taxes | 2,458,364 | 1,027,589 | |||||||||||||||||||||
| Non-cash investing and financing activities | |||||||||||||||||||||||
| Paid-in-kind interest added to subordinated debt principal | $ | 449,331 | $ | 441,446 | |||||||||||||||||||
| Capital lease obligation | 2,363,444 | — | |||||||||||||||||||||
| Property and equipment in accounts payable | 190,613 | 370,172 | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated statements.
7
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2019
NOTE A - NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Curt Acquisition Holdings, Inc. and its wholly owned subsidiary, Curt Manufacturing, LLC. Curt Manufacturing, LLC includes its wholly owned subsidiaries, The Hitch Store, LLC, Curt International, LLC, Curt Manufacturing, LTD and Curt Manufacturing Philippines, Inc., (collectively, the Company). The Company develops, manufactures, sells and distributes towing, electrical, aftermarket and tubular products, primarily within North America, to the automotive and truck aftermarket, the recreational vehicle market, the marine market and the trailer manufacturing market. All significant intercompany balances and transactions have been eliminated in consolidation.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions.
Revenue Recognition
Under the terms of its sales agreements with customers, the Company recognizes revenue upon shipment of products, when persuasive evidence of an arrangement exists, pricing is fixed, title has transferred and collection is reasonably assured.
Taxes Collected from Customers
Net sales are presented net of taxes collected from customers and remitted to governmental authorities. These taxes include all taxes assessed by a governmental authority that are imposed on and concurrent with a specific revenue-producing transaction between the Company and a customer.
Shipping and Handling
Amounts billed to customers for shipping and handling are included in net sales, and the Company includes corresponding costs for shipping and handling in cost of sales.
Cash
The Company maintains its cash in bank deposit accounts with financial institutions, which at times may exceed federally insured limits. In addition, the Company has cash balances held in foreign banks at September 30, 2019. The Company has not experienced any losses in such accounts. Management believes the Company is not exposed to any significant credit risk on cash.
Accounts Receivable
The Company extends unsecured credit to customers from sales in the normal course of business and mitigates the associated credit risk by performing credit checks of those customers and pursuing the collections of past-due accounts. Accounts receivable are carried at the original invoice amount less an allowance for uncollectible accounts, as well as an allowance for returns. Management regularly reviews customer accounts and provides an allowance for those amounts when it considers them uncollectible. The actual amount of accounts that is not collected in a timely manner may differ from the allowance estimated by management. Balances that are still outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
8
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - CONTINUED
September 30, 2019
Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in, first-out method. Provisions are made to reduce excess and obsolete inventories to their net realizable value.
During 2018, the Company began leasing Mexican manufacturing facilities under the “maquiladora” program. Pursuant to this program, materials and components owned by the Company are transferred to a third-party Mexican operation, where they are used to produce finished goods. The finished goods are returned to the United States and the Company reimburses the Mexican company for their manufacturing costs through a third-party vendor relationship.
Property and Equipment
Property and equipment are stated at cost. As a result of the acquisitions, property and equipment acquired were stated at fair value, which approximated net book value on acquisition date. Expenditures for additions and improvements are capitalized at cost, while replacements, maintenance and repairs that do not improve or extend the useful lives of the respective assets are expensed as incurred. Properties sold or otherwise disposed of are removed from the property accounts, with gains or losses charged to selling, general and administrative expenses.
Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets as follows:
| Asset description | Life | |||||||
| Leasehold improvements | 5 - 15 years | |||||||
| Machinery and equipment | 3 - 15 years | |||||||
| Furniture and office equipment | 3 - 10 years | |||||||
| Vehicles | 3 - 5 years | |||||||
Goodwill
Goodwill represents the excess of purchase price paid over net assets acquired in a business combination. The Company evaluates the carrying value of goodwill, which represents the excess of the purchase price over the underlying tangible and intangible assets acquired and liabilities assumed, at year end and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances include, but are not limited to (1) a significant change in legal factors or business climate, (2) unanticipated competition, (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company first compares the fair value of the reporting unit to the carrying amount. If the carrying amount exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of goodwill to its carrying amount. No events were identified during the nine months ended September 30, 2019 and 2018, which would require the Company to perform an impairment evaluation.
Impairment of Long-lived and Intangible Assets
The Company reviews its long-lived and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the carrying values are reduced to the estimated fair value. No events were identified during the nine months ended September 30, 2019 and 2018, which would require the Company to perform an impairment test.
9
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - CONTINUED
September 30, 2019
Fair Value Measurements
Authoritative accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
Subordinated and term debt – Management believes the carrying amount approximates fair value based on current market conditions and interest rates available to the Company for similar financial instruments.
Other – Management believes the carrying amount of cash, accounts receivable, prepaid expenses, accounts payable and accrued expenses approximates fair value as of December 31, 2018, due to the short-term nature of these accounts.
Deferred Financing Costs
Deferred financing costs consist of amounts paid to lenders and third parties in connection with obtaining debt financing and are recorded as a direct deduction from the carrying amount of the debt liability. The costs are amortized using the straight-line method over the term of the related debt agreements. The related amortization expense is included in interest expense in the accompanying consolidated statement of operations.
NOTE C - ACQUISITIONS
On February 20, 2018, Curt Acquisition Holdings, Inc. purchased certain assets of Rock-Slide Engineering, LLC for an aggregate purchase price of $2,625,000. The following table summarizes the consideration paid for the assets acquired on the date of acquisition:
| Intangible assets | $ | 2,250,000 | |||
| Property and equipment | 300,000 | ||||
| Inventory | 75,000 | ||||
| $ | 2,625,000 | ||||
NOTE D - INVENTORIES
Inventories consist of the following at September 30, 2019:
| Finished goods | $ | 50,549,799 | |||||||||||||||
| Work-in-process | 4,751,761 | ||||||||||||||||
| Raw materials | 12,496,651 | ||||||||||||||||
| Inventory in transit | 2,418,536 | ||||||||||||||||
| Excess/obsolescence reserve | (2,150,145) | ||||||||||||||||
| Inventories, net | $ | 68,066,602 | |||||||||||||||
10
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - CONTINUED
September 30, 2019
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 2019:
| Leasehold improvements | $ | 3,562,975 | |||||||||||||||
| Machinery and equipment | 34,141,942 | ||||||||||||||||
| Furniture and office equipment | 9,568,623 | ||||||||||||||||
| Vehicles | 368,348 | ||||||||||||||||
| Construction in progress | 3,663,806 | ||||||||||||||||
| Total property and equipment | 51,305,694 | ||||||||||||||||
| Less accumulated depreciation | 26,551,847 | ||||||||||||||||
| Property and equipment, net | $ | 24,753,847 | |||||||||||||||
Depreciation expense for the nine months ended September 30, 2019 and 2018, was $4,443,360 and $4,210,997, respectively.
NOTE F - INTANGIBLE ASSETS
Intangible assets subject to amortization consist of the following at September 30, 2019:
| Estimated useful life | Cost | Accumulated amortization | Net book value | ||||||||||||||||||||
| Customer relationships | 13-15 years | $ | 83,473,550 | $ | (33,803,845) | $ | 49,669,705 | ||||||||||||||||
| Trademark | 10-15 years | 15,622,000 | (5,797,050) | 9,824,950 | |||||||||||||||||||
| Non-competes | 2-5 years | 4,216,000 | (4,216,000) | — | |||||||||||||||||||
| Engineering drawings | 5 years | 3,098,000 | (3,098,000) | — | |||||||||||||||||||
| Patents | 7-13 years | 1,589,000 | (944,470) | 644,530 | |||||||||||||||||||
| Intellectual property | 10 years | 6,750,000 | (1,387,500) | 5,362,500 | |||||||||||||||||||
| Total intangible assets | $ | 114,748,550 | $ | (49,246,865) | $ | 65,501,685 | |||||||||||||||||
Amortization expense for the nine months ended September 30, 2019 and 2018 was $6,491,200 and $7,237,234, respectively.
NOTE G - ACCRUED EXPENSES
Accrued expenses consist of the following at September 30, 2019:
| Employee compensation and benefits | $ | 3,764,286 | |||||||||||||||
| Customer rebates, incentives and warranty | 2,883,879 | ||||||||||||||||
| Interest | 3,285,299 | ||||||||||||||||
| Other | 1,143,058 | ||||||||||||||||
| Total accrued expenses | $ | 11,076,522 | |||||||||||||||
11
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - CONTINUED
September 30, 2019
NOTE H - LONG-TERM DEBT
Long-term debt consists of the following at September 30, 2019:
| Revolving credit loan | $ | 4,995,418 | |||||||||||||||
| Term loan | 57,191,880 | ||||||||||||||||
| Third amendment term loan | 4,360,167 | ||||||||||||||||
| Fourth amendment term loan | 8,069,379 | ||||||||||||||||
| Fifth amendment term loan | 3,610,973 | ||||||||||||||||
| Seventh amendment term loan | 18,403,125 | ||||||||||||||||
| Eighth amendment term loan | 14,531,250 | ||||||||||||||||
| Tenth amendment term loan | 11,775,000 | ||||||||||||||||
| Delayed draw term loan | 13,293,903 | ||||||||||||||||
| Subordinated debt | 34,158,551 | ||||||||||||||||
| Total long-term debt | 170,389,646 | ||||||||||||||||
| Less debt issuance costs | 545,960 | ||||||||||||||||
| Long-term debt, net | 169,843,686 | ||||||||||||||||
| Less current portion of long-term debt | 3,618,932 | ||||||||||||||||
| Long-term debt, net of current portion | $ | 166,224,754 | |||||||||||||||
Credit Facility
In association with the acquisition on March 4, 2014, the Company entered into a new credit facility with Bank of Montreal and several other lenders composed of (1) a term loan of $67,000,000, (2) a revolving credit loan that has a maximum draw of $15,000,000 and (3) a delayed draw term loan with a maximum draw of $20,000,000. On May 30, 2014, the credit facility was amended to add a Canadian sublimit to the current revolving credit loan of $2,000,000. On December 16, 2014, the credit facility was amended to increase the revolving credit loan to have a maximum draw of $20,000,000 as well as add an incremental term loan of $5,000,000 (referred to in the debt schedule as third amendment term loan). On February 1, 2016, $9,000,000 was borrowed under the incremental term loan (representing the fourth amendment term loan), and the credit facility was amended to increase the maximum draw on the incremental term loan an additional $20,000,000. Additionally, $9,250,000 of additional delayed draw term loan was borrowed. An additional $5,000,000 of subordinated debt was borrowed, as well. On April 1, 2016, the credit facility was amended and an additional $4,000,000 was borrowed (representing the fifth amendment term loan). On June 16, 2017, the credit facility was amended and an additional $19,500,000 was borrowed (representing the seventh amendment term loan). On March 2, 2018, the credit facility was amended and an additional $15,000,000 was borrowed (representing the eighth amendment term loan). On December 13, 2018, the credit facility was amended and an additional $12,000,000 was borrowed (representing the tenth amendment term loan). On February 27, 2019, the credit facility was amended to allow for a temporary $7,000,000 increase on the revolving credit loan. The temporary increase period ended on August 27, 2019.
The facility is collateralized by substantially all of the assets of the Company and is subject to certain restrictive covenants common to such agreements. The credit facility also mandates the maintenance of certain financial ratios, including a leverage ratio and a fixed charge coverage ratio. The Company was in compliance with all financial covenants at September 30, 2019.
12
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - CONTINUED
September 30, 2019
The principal of the term loan, delayed draw term loan and the amendments to the term loan shall be repaid in quarterly installments of 0.625% of the original principal balance of the term loan until the term loan maturity date, June 16, 2022, when the remaining outstanding principal and accrued and unpaid interest are due. The Company is subject to additional term loan payments if cash flows exceed amounts defined in the Excess Cash Flow provisions of the loan agreement. Interest on the term loans is paid monthly at an annual rate computed on the unpaid principal at either (1) the base rate plus 3.25% or (2) the Eurodollar base rate plus 4.25%, as defined in the credit facility. At September 30, 2019 and 2018, the effective interest rate on the term loans, with the exception of the tenth amendment, was 6.57% and 6.36%, respectively. The effective interest rate on the tenth amendment term loan was 6.57% as of September 30, 2019.
The revolving credit loan provides revolving credit borrowings, with the balance outstanding due on June 16, 2022. Interest on the revolving credit loan is paid monthly at an annual rate computed on the basis of a 365-day year on the unpaid principal at either (1) the base rate plus 3.25% or (2) the Eurodollar base rate plus 4.25%, as defined in the loan agreement. At September 30, 2019 and 2018, the effective interest rate on the Revolving Credit Loan was 8.50%.
Subordinated Debt
The Company also entered into a note purchase agreement with BB&T Capital Partners Mezzanine Fund II, LP and Teachers Insurance and Annuity Association of America for $26,250,000 on March 4, 2014. The notes bear interest at 11.75% per year, of which 10.0% per year shall be payable in cash each quarter and 1.75% per year shall be added to the principal amount each quarter on the interest payment date. On February 1, 2016, the Company borrowed an additional $5,000,000 under the note purchase agreement in connection with the acquisition of Luverne Trucking Equipment. On June 2, 2017, the note purchase agreement was amended to extend the maturity date to December 16, 2022.
See Note M for subsequent event related to long-term debt.
NOTE I - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company currently leases its manufacturing, warehousing and office facilities under operating leases that contain escalating lease payment terms that expire in various years through December 2030. The Company accounts for these leases using the straight-line method and the related deferred rent is recorded in accrued expenses and other long-term liabilities on the accompanying consolidated balance sheet. The Company also leases equipment under the terms of operating leases expiring on various dates through July 2024.
13
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - CONTINUED
September 30, 2019
The Company has two agreements with a related party to rent manufacturing and office facilities. Rent expense to the related party was $1,023,698 and $1,031,260 for the nine months ended September 30, 2019 and 2018, respectively. Total lease and rental expense to non-related parties was $4,242,018 and $3,924,790 for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019, the approximate minimum future lease and rental payments under the non-cancelable lease agreements are as follows:
| Related party | Non-related party | Total | |||||||||||||||
| 2019 (three months) | $ | 341,233 | $ | 1,623,966 | $ | 1,965,199 | |||||||||||
| 2020 | 1,409,478 | 5,912,614 | 7,322,092 | ||||||||||||||
| 2021 | 1,455,363 | 5,105,250 | 6,560,613 | ||||||||||||||
| 2022 | 1,502,623 | 2,434,208 | 3,936,831 | ||||||||||||||
| 2023 | 1,551,302 | 1,208,103 | 2,759,405 | ||||||||||||||
| Thereafter | 12,350,479 | 2,151,170 | 14,501,649 | ||||||||||||||
| $ | 18,610,478 | $ | 18,435,311 | $ | 37,045,789 | ||||||||||||
Capital Leases
The Company has capitalized lease obligations for certain machinery and equipment that expire on various dates through May 2023. The capitalized lease obligations and related assets reflect the present value of future lease payments under the current lease agreements. The capitalized assets and accumulated depreciation are as follows at September 30, 2019:
| Capitalized assets | $ | 3,985,396 | |||||||||||||||
| Accumulated depreciation | (1,458,112) | ||||||||||||||||
| $ | 2,527,284 | ||||||||||||||||
Litigation
In the normal course of business, the Company is party to litigation from time to time. The Company maintains insurance to cover certain actions and believes that resolution of any such litigation will not have a material adverse effect on the Company.
Self-funded Health Insurance
The Company is self-funded for its employees’ health benefits. The Company has a stop-loss coverage for costs in excess of $100,000 for 2019 and 2018 per individual per policy period. A liability of $814,740 and $418,972 for claims incurred but not paid at September 30, 2019 and 2018, respectively, has been recorded within accrued expenses on the accompanying consolidated balance sheets. Management believes this liability is sufficient to cover estimated claims including claims incurred but not yet reported.
14
Curt Acquisition Holdings, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - CONTINUED
September 30, 2019
NOTE J - EMPLOYEE BENEFIT PLAN
The Company maintains a qualified 401(k) plan and profit-sharing plan and trust under which each participant can elect to defer a portion of their compensation into the plan. All employees of the Company who are 21 years of age and have completed 90 days of eligible service, as defined, may participate in the plan. The Company has a discretionary 401(k) match program based on the performance of the Company. For the nine months ended September 30, 2019 and 2018, the Company’s match was 50% of the first 8% of employee contributions. The Company’s 401(k) match was $996,350 and $946,258 for the nine months ended September 30, 2019 and 2018, respectively. There were no discretionary employer contributions relating to the profit-sharing plan for the nine months ended September 30, 2019 and 2018.
NOTE K - RELATED-PARTY TRANSACTIONS
The Company incurred $1,261,201 and $1,202,551 in management fees to its majority owner as part of a management agreement for the nine months ended September 30, 2019 and 2018, respectively.
The Company also has two operating lease agreements with related parties. See Note I for additional discussion.
NOTE L - CUSTOMER CONCENTRATIONS
Accounts receivable from the top customer represent 22% of the Company’s accounts receivable outstanding at September 30, 2019.
Sales to the top customer represent 14% of the Company’s sales for each of the nine months ended September 30, 2019 and 2018.
Payments to the top vendor represent 12% and 13% of the Company’s cost of goods sold for the nine months ended September 30, 2019 and 2018, respectively.
NOTE M - SUBSEQUENT EVENTS
The Company evaluated its September 30, 2019 consolidated financial statements for subsequent events through February 21, 2020, the date the consolidated financial statements were available to be issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements, except as noted below.
On November 21, 2019, the Company entered into a Stock Purchase Agreement with Lippert Components, Inc. for the purchase of the Company for cash consideration of $340 million. The acquisition closed on December 19, 2019. As part of the agreement, the Company’s credit facility (including the revolving credit loan, term loans, and delayed draw term loan), capital leases and subordinated debt were repaid in full.
15
Exhibit 99.4
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On December 19, 2019, Lippert Components, Inc., a wholly-owned subsidiary of LCI Industries (“LCI” or the “Company”), completed the acquisition of all of the shares of Curt Acquisition Holdings, Inc. (“Curt”) (the “Acquisition”) pursuant to the terms and conditions of the Stock Purchase Agreement, dated as of November 21, 2019 (the “Purchase Agreement”).
In accordance with the Purchase Agreement, consideration was paid to the sellers at closing consisting of $340 million in cash subject to various closing adjustments including the finalization of net working capital. The cash consideration paid was funded through a combination of cash on hand, borrowings on the Company’s revolving credit facility, and borrowing on a $300 million incremental term loan under the Company’s existing credit agreement.
The unaudited pro forma condensed combined financial information set forth below has been presented for informational purposes only. The pro forma information is not necessarily indicative of what the combined company’s financial position or results of operations would have been had the Acquisition been completed on the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company.
The unaudited pro forma condensed combined balance sheet gives effect to the Acquisition as if it had occurred on September 30, 2019. The unaudited pro forma condensed combined statements of income each give effect to the Acquisition as if it had occurred on January 1, 2018 (the first day of the Company’s fiscal year 2018).
The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (i) directly attributable to the Acquisition, (ii) factually supportable, and (iii) with respect to the statements of income, expected to have a continuing impact on the combined results. The pro forma adjustments do not reflect the cost of any integration activities or benefits from the Acquisition including potential synergies that may be derived in future periods.
The unaudited pro forma condensed combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed combined financial information was based on, and should be read in conjunction with, the following historical consolidated financial statements and accompanying notes of LCI and Curt for the applicable periods:
•Audited historical consolidated financial statements of LCI as of and for the year ended December 31, 2018 and the related notes included in LCI’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 27, 2019;
•Audited historical consolidated financial statements of Curt as of and for the year ended December 31, 2018 and the related notes included in Exhibit 99.2 of this Form 8-K/A;
•Unaudited historical consolidated financial statements of LCI as of and for the nine months ended September 30, 2019 and the related notes included in LCI’s Quarterly Report on Form 10-Q filed with the SEC on November 5, 2019; and
•Unaudited historical consolidated financial statements of Curt as of and for the nine months ended September 30, 2019 and the related notes included in Exhibit 99.3 of this Form 8-K/A.
1
The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting with LCI considered the accounting acquirer. The purchase price will be allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the acquisition date, and any excess value of the consideration transferred over the net assets will be recognized as goodwill. The Company has made a preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed using information currently available. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the Company’s future results of operations and financial position.
2
LCI INDUSTRIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 2019
| (In thousands) | LCI (As Reported) | CURT (As Reported) | Pro Forma Adjustments (Note 5) | Note | Pro Forma Combined | ||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||
| Current assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 24,168 | $ | 302 | $ | (3,909) | A | $ | 20,561 | ||||||||||||||||||||
| Restricted cash | 3,309 | — | — | 3,309 | |||||||||||||||||||||||||
| Accounts receivable, net | 185,821 | 40,391 | — | 226,212 | |||||||||||||||||||||||||
| Inventories, net | 334,462 | 68,067 | 13,934 | B | 416,463 | ||||||||||||||||||||||||
| Prepaid expenses and other current assets | 32,836 | 2,486 | — | 35,322 | |||||||||||||||||||||||||
| Total current assets | 580,596 | 111,246 | 10,025 | 701,867 | |||||||||||||||||||||||||
| Fixed assets, net | 343,883 | 24,754 | — | 368,637 | |||||||||||||||||||||||||
| Goodwill | 203,505 | 33,299 | 69,620 | C | 306,424 | ||||||||||||||||||||||||
| Other intangible assets, net | 177,310 | 65,502 | 84,203 | D | 327,015 | ||||||||||||||||||||||||
| Operating lease right-of-use assets | 67,666 | — | 27,500 | E | 95,166 | ||||||||||||||||||||||||
| Deferred taxes | 8,654 | — | — | 8,654 | |||||||||||||||||||||||||
| Other assets | 33,199 | 177 | — | 33,376 | |||||||||||||||||||||||||
| Total assets | $ | 1,414,813 | $ | 234,978 | $ | 191,348 | $ | 1,841,139 | |||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||
| Current liabilities | |||||||||||||||||||||||||||||
| Current maturities of long-term indebtedness | $ | — | $ | 3,619 | $ | 11,022 | F | $ | 14,641 | ||||||||||||||||||||
| Accounts payable, trade | 99,899 | 17,963 | 960 | G | 118,822 | ||||||||||||||||||||||||
| Current portion of operating lease obligations | 15,226 | — | 5,300 | E | 20,526 | ||||||||||||||||||||||||
| Current portion of capital lease obligations | — | 620 | (620) | H | — | ||||||||||||||||||||||||
| Accrued expenses and other current liabilities | 140,947 | 11,077 | (3,285) | I | 148,739 | ||||||||||||||||||||||||
| Total current liabilities | 256,072 | 33,279 | 13,377 | 302,728 | |||||||||||||||||||||||||
| Long-term indebtedness | 261,631 | 166,225 | 159,134 | F | 586,990 | ||||||||||||||||||||||||
| Operating lease obligations | 55,307 | — | 22,200 | E | 77,507 | ||||||||||||||||||||||||
| Capital lease obligation | — | 3,289 | (3,289) | H | — | ||||||||||||||||||||||||
| Deferred taxes | — | 11,843 | 20,034 | J | 31,877 | ||||||||||||||||||||||||
| Other long-term liabilities | 64,422 | 1,014 | (1,014) | K | 64,422 | ||||||||||||||||||||||||
| Total liabilities | 637,432 | 215,650 | 210,442 | 1,063,524 | |||||||||||||||||||||||||
| Stockholders’ equity | |||||||||||||||||||||||||||||
| Common stock | 281 | — | — | 281 | |||||||||||||||||||||||||
| Paid-in capital | 209,053 | 53,320 | (53,320) | L | 209,053 | ||||||||||||||||||||||||
| Retained earnings | 632,725 | (33,992) | 34,226 | M | 632,959 | ||||||||||||||||||||||||
| Accumulated other comprehensive loss | (6,516) | — | — | (6,516) | |||||||||||||||||||||||||
| Stockholders’ equity before treasury stock | 835,543 | 19,328 | (19,094) | 835,777 | |||||||||||||||||||||||||
| Treasury stock, at cost | (58,162) | — | — | (58,162) | |||||||||||||||||||||||||
| Total stockholders’ equity | 777,381 | 19,328 | (19,094) | 777,615 | |||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 1,414,813 | $ | 234,978 | $ | 191,348 | $ | 1,841,139 | |||||||||||||||||||||
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed Combined Financial Statements.
3
LCI INDUSTRIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Nine months ended September 30, 2019
| LCI (As Reported) | CURT (As Reported) | Pro Forma Adjustments (Note 6) | Note | Pro Forma Combined | ||||||||||||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
| Net sales | $ | 1,807,461 | $ | 213,599 | $ | — | $ | 2,021,060 | ||||||||||||||||||||||||
| Cost of sales | 1,390,741 | 145,139 | (9,871) | A | 1,526,009 | |||||||||||||||||||||||||||
| Gross profit | 416,720 | 68,460 | 9,871 | 495,051 | ||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 254,155 | 53,709 | 9,866 | B | 317,730 | |||||||||||||||||||||||||||
| Operating profit | 162,565 | 14,751 | 5 | 177,321 | ||||||||||||||||||||||||||||
| Interest expense, net | 6,506 | 11,809 | (3,512) | C | 14,803 | |||||||||||||||||||||||||||
| Income before income taxes | 156,059 | 2,942 | 3,517 | 162,518 | ||||||||||||||||||||||||||||
| Provision for income taxes | 38,357 | 2,453 | 861 | D | 41,671 | |||||||||||||||||||||||||||
| Net income | $ | 117,702 | $ | 489 | $ | 2,656 | $ | 120,847 | ||||||||||||||||||||||||
| Net income per common share: | ||||||||||||||||||||||||||||||||
| Basic | $ | 4.71 | $ | 4.84 | E | |||||||||||||||||||||||||||
| Diluted | $ | 4.70 | $ | 4.82 | E | |||||||||||||||||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||
| Basic | 24,984 | 24,984 | ||||||||||||||||||||||||||||||
| Diluted | 25,053 | 25,053 | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed Combined Financial Statements.
4
LCI INDUSTRIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Year ended December 31, 2018
| LCI (As Reported) | CURT (As Reported) | Pro Forma Adjustments (Note 6) | Note | Pro Forma Combined | ||||||||||||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
| Net sales | $ | 2,475,807 | $ | 259,571 | $ | — | $ | 2,735,378 | ||||||||||||||||||||||||
| Cost of sales | 1,955,463 | 171,666 | (11,476) | A | 2,115,653 | |||||||||||||||||||||||||||
| Gross profit | 520,344 | 87,905 | 11,476 | 619,725 | ||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 321,556 | 74,237 | 10,148 | B | 405,941 | |||||||||||||||||||||||||||
| Operating profit | 198,788 | 13,668 | 1,328 | 213,784 | ||||||||||||||||||||||||||||
| Interest expense, net | 6,436 | 14,018 | (3,015) | C | 17,439 | |||||||||||||||||||||||||||
| Income before income taxes | 192,352 | (350) | 4,343 | 196,345 | ||||||||||||||||||||||||||||
| Provision for income taxes | 43,801 | 323 | 1,063 | D | 45,187 | |||||||||||||||||||||||||||
| Net income (loss) | $ | 148,551 | $ | (673) | $ | 3,280 | $ | 151,158 | ||||||||||||||||||||||||
| Net income per common share: | ||||||||||||||||||||||||||||||||
| Basic | $ | 5.90 | $ | 6.00 | E | |||||||||||||||||||||||||||
| Diluted | $ | 5.83 | $ | 5.94 | E | |||||||||||||||||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||
| Basic | 25,178 | 25,178 | ||||||||||||||||||||||||||||||
| Diluted | 25,463 | 25,463 | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the Unaudited Pro Forma Condensed Combined Financial Statements.
5
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. DESCRIPTION OF TRANSACTION AND BASIS OF PRESENTATION
On December 19, 2019, Lippert Components, Inc., a wholly-owned subsidiary of LCI Industries (“LCI” or the “Company”), completed the acquisition of all of the shares of Curt Acquisition Holdings, Inc. (“Curt”) pursuant to the terms and conditions of the Stock Purchase Agreement, dated November 21, 2019. At the closing of the Acquisition, the Company paid cash consideration of $340 million to existing Curt shareholders. The purchase consideration is subject to various closing adjustments including the finalization of net working capital. The cash consideration paid was funded through a combination of cash on hand, borrowings on the Company’s revolving credit facility, and borrowing on a $300 million incremental term loan under the Company’s existing credit agreement.
The unaudited pro forma condensed combined statements of income illustrate the effects of the Acquisition as if it had been completed on January 1, 2018, and the unaudited pro forma condensed combined balance sheet reflects the effects of the Acquisition as if it had been completed on September 30, 2019. The historical consolidated financial information has been adjusted to give pro forma effect to events that are: (i) directly attributable to the Acquisition, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed combined statements of income, expected to have a continuing impact on the combined results. The pro forma adjustments are preliminary and based on estimates of the purchase consideration and estimates of fair value and useful lives of the assets acquired and liabilities assumed.
ASC Topic 805 requires, among other things, that assets and liabilities acquired be recognized at their fair values as of the acquisition date. Consolidated financial statements of LCI issued after completion of the Acquisition will reflect such fair values, measured as of the acquisition date, which will be different than the preliminary estimated fair values included in these unaudited pro forma condensed combined financial statements. These differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the Company’s future results of operations and financial position.
The unaudited pro forma condensed combined financial information has been prepared using LCI’s significant accounting policies as set forth in its audited consolidated financial statements for the fiscal year ended December 31, 2018. Certain reclassification and preliminary accounting policy alignment adjustments have been made in order to conform the Curt historical financial statements to LCI’s financial statement presentation. Refer to Note 4 - Accounting Policy Alignment and Reclassifications for more details.
2. PURCHASE CONSIDERATION AND PRELIMINARY PURCHASE PRICE ALLOCATION
The table below represents the preliminary purchase price allocation based on estimates, assumptions, valuations and other analyses that have not been finalized in order to make a definitive allocation. Accordingly, the pro forma adjustments to allocate the purchase consideration will remain preliminary until management finalizes the fair values of assets acquired and liabilities assumed. The final amounts allocated to assets acquired and liabilities assumed are dependent upon certain valuations and other analyses that have not yet been completed, and as previously stated could differ materially from the amounts presented in the unaudited pro forma condensed combined financial statements.
6
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The preliminary estimated purchase consideration is allocated to the tangible and intangible assets and liabilities of Curt based on their estimated fair values as if the Acquisition had occurred on September 30, 2019, which is the assumed acquisition date for purposes of the unaudited pro forma condensed combined balance sheet (in thousands):
| Cash consideration, net of cash acquired | $ | 337,640 | ||||||
| Assets acquired | ||||||||
| Accounts receivable | 28,611 | |||||||
| Inventories | 88,765 | |||||||
| Fixed assets | 24,036 | |||||||
| Other tangible assets | 4,060 | |||||||
| Customer relationships | 112,000 | |||||||
| Tradename and other identifiable intangible assets | 37,705 | |||||||
| Operating lease right-of-use assets | 27,925 | |||||||
| Total assets acquired | 323,102 | |||||||
| Liabilities assumed | ||||||||
| Accounts payable | 18,577 | |||||||
| Accrued expenses and other current liabilities | 10,002 | |||||||
| Operating lease obligations | 27,925 | |||||||
| Deferred taxes | 31,877 | |||||||
| Total liabilities assumed | 88,381 | |||||||
| Total fair value of net assets acquired | 234,721 | |||||||
| Goodwill | $ | 102,919 | ||||||
As of the closing date of the Acquisition, the recorded value of intangible assets will be adjusted for the preliminary purchase price allocation. The fair value and useful lives assigned to the identifiable intangible assets have been estimated based on preliminary assumptions. These estimated fair values and useful lives are considered preliminary and are subject to change at the closing date of the Acquisition. Any change in the amount of the final purchase price allocated to amortizable, definite-lived intangible assets could materially affect the carrying amount and related amortization expense of such assets. The fair value of working capital, fixed assets, and other long-term assets approximate their carrying values, thus no adjustments to arrive at fair value are reflected.
In connection with the acquisition of Curt, a deferred tax liability was established primarily for the book to tax differences related to non-goodwill intangible assets. Management is still assessing the tax impact of the Acquisition. Given that this analysis is still in its preliminary stages, any tax benefit that may be realized as a result of the Acquisition is not contemplated by the unaudited pro forma condensed combined financial statements.
7
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
3. DEBT FUNDING OF THE ACQUISITION
To fund the Acquisition, the Company entered into an Incremental Joinder and Amendment No. 1 (“Amendment No. 1”) of the Amended Credit Agreement with several banks, which provided an incremental term loan in the amount of $300.0 million. The term loan is required to be repaid in an amount equal to 1.25% of original principal amount of the term loan for the first eight quarterly periods commencing March 31, 2020, and then 1.875% of the original principal amount of the term loan for each quarter thereafter, until the maturity date of December 14, 2023. In addition, Amendment No.1 modified the credit agreement to allow the Company to request an increase in the facility of up to an additional $300.0 million as an increase to the revolving credit facility or one, or more, incremental term loan facilities upon approval of the lenders and the Company receiving other certain consents. As a result of the new incremental term loan, the borrowing capacity under the Amended Credit Agreement was increased from $600.0 million to $900.0 million. The Company also borrowed an additional $41.4 million on the revolving credit facility to fund the Acquisition and pay for $1.4 million of debt issuance costs related to the amendment.
Interest on borrowings under the revolving credit facility and incremental term loan are designated from time to time by the Company as either (i) the Alternate Base Rate (defined in the Amended Credit Agreement as the greatest of (a) the Prime Rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus 0.5 percent, and (c) the Adjusted LIBO Rate (as defined in the Amended Credit Agreement) for a one month interest period plus 1.0 percent), plus additional interest ranging from 0.0 percent to 0.625 percent depending on the Company’s total net leverage ratio, or (ii) the Adjusted LIBO Rate for a period equal to one, two, three, six, or twelve months (with the consent of each lender) as selected by the Company, plus additional interest ranging from 0.875 percent to 1.625 percent depending on the Company’s total net leverage ratio. At the date of the Acquisition, the interest rate on the revolving credit facility and incremental term loan was 3.1875%.
4. ACCOUNTING POLICY ALIGNMENT AND RECLASSIFICATIONS
The unaudited pro forma condensed combined financial information has been prepared using LCI’s significant accounting policies as set forth in its audited consolidated financial statements for the fiscal year ended December 31, 2018. Based on the procedures performed to date, the accounting policies of Curt are similar in most material respects to LCI’s accounting policies with the exception of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“Topic 842”) and ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”), which Curt had not yet been required to adopt as it was a private company. The unaudited pro forma condensed combined financial statements include an adjustment to reflect the adoption of Topic 842 and Topic 606. Refer to Notes 5 and 6 for more details.
In addition, certain historical consolidated financial statement line items of Curt were renamed or reclassified in order to conform to LCI’s presentation. Shipping and handling costs, previously classified by Curt within cost of sales, were reclassified to selling, general and administrative expenses (see Notes 6.A and 6.B.).
As more information becomes available, we will complete a more detailed review of Curt’s accounting policies. As a result of that review, differences could be identified between the accounting policies of the two companies that, when conformed, could have a material impact on the combined results and financial position.
8
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
5. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET ADJUSTMENTS
A. Reflects (1) the debt financing obtained in connection with the Acquisition (see Note 3) and (2) the cash consideration paid in connection with the close of the Acquisition (in thousands):
| Borrowings on incremental term loan | $ | 300,000 | ||||||
| Borrowings on revolving credit facility | 41,436 | |||||||
| Payment of debt issuance costs on term loan | (1,436) | |||||||
| Settlement of historical Curt indebtedness and accrued interest | (176,492) | |||||||
| Payment of seller transaction expenses at close | (10,290) | |||||||
| Cash consideration distributed | (157,127) | |||||||
| Net adjustment to cash and cash equivalents (i) | $ | (3,909) | ||||||
i.Net adjustment to cash reflects the payoff of capital lease obligations after September 30, 2019, but prior to closing of the Acquisition. The capital lease obligations were settled as a condition of the Acquisition with proceeds from Curt’s historical line of credit (see Note 5.H.).
B. Reflects the step-up adjustment to inventory of $13.9 million representing the preliminary estimate of fair value at the date of acquisition, which is based on estimated selling prices of the acquired inventory, less the sum of costs of disposal and a reasonable profit allowance for the selling effort.
C. Reflects the goodwill to be recorded based on the preliminary purchase price allocation and elimination of Curt’s pre-acquisition goodwill.
D. Represents the estimated fair values of identified intangible assets that were acquired based on the preliminary purchase price allocation and the elimination of Curt’s pre-acquisition net intangible assets. The estimated fair values of identified intangible assets acquired and the estimated useful lives are as follows (in thousands):
| Estimated Fair Value | Estimated Useful Lives | |||||||||||||
| Customer relationships | $ | 112,000 | 17 | |||||||||||
| Tradenames - Non-Retrac | 31,700 | 20 | ||||||||||||
| Tradenames - Retrac | 1,200 | 10 | ||||||||||||
| Developed technology | 4,805 | 10 | ||||||||||||
| $ | 149,705 | |||||||||||||
| Less: Curt pre-acquisition net intangible assets | (65,502) | |||||||||||||
| Net adjustment to intangible assets, net | $ | 84,203 | ||||||||||||
E. Reflects the preliminary estimated impact of adopting Topic 842. The operating lease liability of $27.5 million, of which $5.3 million is classified as current, and corresponding right-of-use asset were measured using the present value of the remaining lease payments using LCI’s incremental borrowing rate of approximately 4.75%. This estimated impact is preliminary and does not purport to represent what the operating lease liability or right-of-use asset would have been had the acquisition been completed on September 30, 2019.
9
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
F. Reflects the repayment of the outstanding principal amounts on Curt’s line of credit, term loans and subordinated debt, the elimination of Curt’s debt issuance costs, and borrowings on LCI’s line of credit and incremental term loan (see Note 3), and payment of debt issuance costs related to the incremental term loan as follows (in thousands):
| Current Portion | Long-Term Portion | |||||||||||||
| Repayment of Curt debt, net of debt issue costs | $ | (3,619) | $ | (166,225) | ||||||||||
| Borrowings on LCI revolving credit facility (i) | — | 41,436 | ||||||||||||
| Borrowings on LCI incremental term loan | 15,000 | 285,000 | ||||||||||||
| Payment of LCI debt issuance costs (i) | (359) | (1,077) | ||||||||||||
| Net adjustments to long-term indebtedness | $ | 11,022 | $ | 159,134 | ||||||||||
i.Debt issuance costs for the incremental term loan were funded with borrowings of $1.4 million on LCI’s revolving credit facility.
G. Reflects adjustment to accounts payable to accrue LCI transaction costs.
H. Reflects the elimination of the current and long-term portion of capital lease obligations settled as a condition of the Acquisition with borrowings on Curt’s historical line of credit after September 30, 2019 and prior to consummation of the Acquisition.
I. Reflects the elimination of accrued interest related to the payoff of Curt’s indebtedness (see Note 5.F.)
J. Reflects the elimination of Curt’s historical net deferred tax liabilities and the recognition of net deferred tax liabilities estimated in the preliminary purchase price allocation for the Acquisition. The new deferred tax liabilities primarily result from the amortization of intangible assets.
K. Reflects the elimination of the non-current portion of deferred rent of Curt as this does not represent a liability of the combined company after the adoption of Topic 842 (see Note 5.E.)
L. Reflects the elimination of Curt’s historical paid-in capital.
M. Represents the net adjustments to retained earnings calculated as follows (in thousands):
| Elimination of Curt’s historical accumulated deficit | $ | 33,992 | ||||||
| LCI transaction expenses accrued (see Note 5.G.) | (960) | |||||||
| Elimination of Curt historical deferred rent (see Note 5.K.) | 1,014 | |||||||
| Elimination of Curt historical debt issuance costs (see Note 5.F.) | 546 | |||||||
| Other adjustments | (366) | |||||||
| Net adjustments to retained earnings | $ | 34,226 | ||||||
6. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME ADJUSTMENTS
A. Reflects the reclassification of historical Curt shipping and handling costs from cost of sales to selling, general and administrative expenses in accordance with LCI’s policy.
10
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
B. Reflects the following adjustments to selling, general and administrative expenses (in thousands):
| Nine months ended September 30, 2019 | Year ended December 31, 2018 | |||||||||||||
| Reclassify shipping and handling costs (Note 6.A.) | $ | 9,871 | $ | 11,476 | ||||||||||
| Eliminate Curt amortization expense | (6,491) | (9,662) | ||||||||||||
| Amortization expense on intangible assets (i) | 6,581 | 8,774 | ||||||||||||
| Eliminate Curt transaction expenses (ii) | (95) | (440) | ||||||||||||
| $ | 9,866 | $ | 10,148 | |||||||||||
i.Reflects the amortization expense related to the estimated fair value of acquired intangible assets.
ii.Reflects the elimination of Curt transaction expenses incurred directly related to the Acquisition.
C. Reflects the reduction of interest expense comprised of the following (in thousands):
| Nine months ended September 30, 2019 | Year ended December 31, 2018 | |||||||||||||
| Elimination of interest expense on Curt indebtedness | $ | (11,809) | $ | (14,018) | ||||||||||
| Cash interest on incremental term loan (i) | 7,037 | 9,323 | ||||||||||||
| Cash interest on revolving credit facility (i) | 991 | 1,321 | ||||||||||||
| Non-cash interest on debt issuance costs | 269 | 359 | ||||||||||||
| Total interest expense adjustment | $ | (3,512) | $ | (3,015) | ||||||||||
i.Interest expense on the incremental term loan and revolving credit facility was based on the interest rate of 3.1875%, the variable rate in effect at the time of the Acquisition (see Note 3).
D. Reflects the income tax effect on pro forma adjustments based on the estimated blended federal and state statutory rate of 24.5%.
E. The unaudited pro forma combined basic and diluted earnings per share calculations are based on the basic and diluted weighted-average outstanding shares of LCI.
11