UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 22, 2013
MSC INDUSTRIAL DIRECT CO., INC.
(Exact Name of Registrant as Specified in Its Charter)
New York | 1-14130 | 11-3289165 |
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
75 Maxess Road, Melville, New York (Address of principal executive offices) |
11747 |
(Zip Code) |
Registrant’s telephone number, including area code: (516) 812-2000 |
Not Applicable |
(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:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 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)) |
Item 2.01 Completion of Acquisition or Disposition of Assets.
On April 23, 2013, MSC Industrial Direct Co., Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K”) to report the completion of its acquisition (the “Acquisition”) of substantially all of the assets and assumption of certain liabilities of the North American distribution business (“Barnes Distribution North America”) of Barnes Group Inc. (NYSE: B) (“Barnes”), pursuant to the terms of the Asset Purchase Agreement, dated February 22, 2013, between the Company and Barnes. This amendment to the Original Form 8-K is being filed to provide the financial statements of Barnes Distribution North America and the unaudited pro forma financial information listed below, pursuant to Items 2.01 and 9.01 of Form 8-K.
Item 9.01 Financial Statements and Exhibits.
(a) | Financial Statements of Business Acquired |
The audited combined financial statements of Barnes Distribution North America as of and for the year ended December 31, 2012 are filed as Exhibit 99.1 to this Current Report on Form 8-K/A and incorporated herein by reference.
(b) | Pro Forma Financial Information |
The unaudited pro forma condensed financial statements relating to the Acquisition of Barnes Distribution North America, as described above, are furnished as Exhibit 99.2 to this Current Report on Form 8-K/A and incorporated herein by reference.
(d) | Exhibits |
The following exhibits are filed with this Current Report on Form 8-K/A:
Exhibit No. | Description | |
23.1 | Consent of PricewaterhouseCoopers LLP, Independent Accountants | |
99.1 | Audited combined financial statements of Barnes Distribution North America as of and for the year ended December 31, 2012 | |
99.2 | Unaudited pro forma condensed consolidated financial statements |
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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.
MSC INDUSTRIAL DIRECT CO., INC. | |||
Date: July 8, 2013 | By: | /s/ JEFFREY KACZKA | |
Name: | Jeffrey Kaczka | ||
Title: | Executive Vice President and Chief Financial Officer |
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Exhibit Index
Exhibit No. | Description | |
23.1 | Consent of PricewaterhouseCoopers LLP, Independent Accountants | |
99.1 | Audited combined financial statements of Barnes Distribution North America as of and for the year ended December 31, 2012 | |
99.2 | Unaudited pro forma condensed consolidated financial statements |
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Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-48901, 333-84124, 333-70293, 333-130899, 333-156850 and 333-164362) of MSC Industrial Direct Co., Inc. of our report dated April 5, 2013 relating to the combined financial statements of Barnes Distribution North America, which appears in this Current Report on Form 8-K/A of MSC Industrial Direct Co., Inc. dated April 22, 2013, as amended July 8, 2013.
/s/ PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLP |
Hartford, Connecticut |
July 8, 2013 |
Exhibit 99.1
Barnes Distribution North America
(A business of Barnes Group Inc.)
Combined financial statements
Year ended December 31, 2012
Barnes Distribution North America
(A business of Barnes Group Inc.)
Table of Contents
INDEPENDENT AUDITOR’S REPORT | 1 |
COMBINED STATEMENT OF INCOME | 2 |
COMBINED STATEMENT OF COMPREHENSIVE INCOME | 3 |
COMBINED BALANCE SHEET | 4 |
COMBINED STATEMENT OF CHANGES IN PARENT EQUITY | 5 |
COMBINED STATEMENT OF CASH FLOWS | 6 |
NOTES TO COMBINED FINANCIAL STATEMENTS | 7 |
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors and Stockholders of Barnes Group Inc.:
We have audited the accompanying combined financial statements of Barnes Distribution North America (a business of Barnes Group Inc.), which comprise the combined balance sheet as of December 31, 2012, and the related combined statements of income, of comprehensive income, of changes in parent equity and of cash flows for the year then ended.
Management's Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of the combined 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 combined 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 the combined 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 combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the combined 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 Company'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 combined 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 combined financial statements referred to above present fairly, in all material respects, the financial position of Barnes Distribution North America at December 31, 2012, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLP |
Hartford, Connecticut |
April 5, 2013 |
1 |
BARNES DISTRIBUTION NORTH AMERICA
(A BUSINESS OF BARNES GROUP INC.)
COMBINED STATEMENT OF INCOME
(Amounts in thousands of U.S. Dollars) | Year ended December 31, 2012 | |||
Net sales | $ | 301,507 | ||
Cost of sales | 157,020 | |||
Selling and administrative expenses | 126,412 | |||
283,432 | ||||
Operating income | 18,075 | |||
Other expense (income), net | 42 | |||
Income before income taxes | 18,033 | |||
Income taxes | 6,847 | |||
Net income | $ | 11,186 |
See accompanying notes.
2 |
BARNES DISTRIBUTION NORTH AMERICA
(A BUSINESS OF BARNES GROUP INC.)
COMBINED STATEMENT OF COMPREHENSIVE INCOME
(Amounts in thousands of U.S. Dollars) | Year ended December 31, 2012 | |||
Net income | $ | 11,186 | ||
Other comprehensive income (loss), net of tax | ||||
Defined benefit pension and other postretirement benefits, net of tax (1) | (67 | ) | ||
Foreign exchange gain | 567 | |||
Total other comprehensive income, net of tax | 500 | |||
Total comprehensive income | $ | 11,686 |
(1) Net of tax of $20 for the year ended December 31, 2012.
See accompanying notes.
3 |
BARNES DISTRIBUTION NORTH AMERICA
(A BUSINESS OF BARNES GROUP INC.)
COMBINED BALANCE SHEET
(Amounts in thousands of U.S. Dollars) | December 31, 2012 | |||
Assets | ||||
Current assets | ||||
Cash and cash equivalents | $ | - | ||
Accounts receivable, less allowance of $1,113 | 34,983 | |||
Amounts due from related parties | 24 | |||
Inventories | 49,856 | |||
Deferred income taxes | 5,240 | |||
Prepaid expenses and other current assets | 1,628 | |||
Total current assets | 91,731 | |||
Deferred income taxes | 449 | |||
Property, plant and equipment, net | 17,324 | |||
Goodwill | 111,016 | |||
Other intangible assets, net | 113 | |||
Other assets | 1,187 | |||
Total assets | $ | 221,820 | ||
Liabilities and Parent Equity | ||||
Current liabilities | ||||
Accounts payable | $ | 19,057 | ||
Amounts due to related parties | 46 | |||
Accrued liabilities | 10,691 | |||
Total current liabilities | 29,794 | |||
Accrued retirement benefits | 2,192 | |||
Deferred income taxes | 25,315 | |||
Other liabilities | 108 | |||
Commitments and contingencies (Note 13) | ||||
Parent equity | ||||
Net parent investment | 165,460 | |||
Accumulated other comprehensive loss | (1,049 | ) | ||
Total parent equity | 164,411 | |||
Total liabilities and parent equity | $ | 221,820 |
See accompanying notes.
4 |
BARNES DISTRIBUTION NORTH AMERICA
(A BUSINESS OF BARNES GROUP INC.)
COMBINED STATEMENT OF CHANGES IN PARENT EQUITY
(Amounts in thousands of U.S. Dollars) | Net Parent Investment | Accumulated Other Comprehensive Income/(Loss) | Total Parent Equity | |||||||||
Balance as of January 1, 2012 | $ | 170,313 | $ | (1,549 | ) | $ | 168,764 | |||||
Stock-based compensation cost funded by Parent | 172 | - | 172 | |||||||||
Corporate and shared-employee related costs funded by Parent | 11,110 | - | 11,110 | |||||||||
Pension costs funded by Parent | 853 | - | 853 | |||||||||
Comprehensive income | 11,186 | 500 | 11,686 | |||||||||
Net transfers to parent | (28,174 | ) | - | (28,174 | ) | |||||||
Balance as of December 31, 2012 | $ | 165,460 | $ | (1,049 | ) | $ | 164,411 |
See accompanying notes.
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BARNES DISTRIBUTION NORTH AMERICA
(A BUSINESS OF BARNES GROUP INC.)
COMBINED STATEMENT OF CASH FLOWS
(Amounts in thousands of U.S. Dollars) | Year Ended December 31, 2012 | |||
Operating activities: | ||||
Net income | 11,186 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||
Depreciation and amortization | 7,158 | |||
Gain on disposition of property, plant and equipment | (273 | ) | ||
Stock-based compensation cost funded by parent | 172 | |||
Corporate and shared-employee related cost funded by parent | 11,110 | |||
Pension costs funded by parent | 853 | |||
Changes in assets and liabilities: | ||||
Accounts receivable | 2,025 | |||
Inventories | 3,014 | |||
Prepaid expenses and other current assets | (60 | ) | ||
Accounts payable | (1,597 | ) | ||
Accrued liabilities | (4,250 | ) | ||
Deferred income taxes | 2,893 | |||
Long-term retirement benefits | (413 | ) | ||
Other | 101 | |||
Net cash provided by operating activities | 31,919 | |||
Investing activities: | ||||
Proceeds from disposition of property, plant and equipment | 798 | |||
Capital expenditures | (4,543 | ) | ||
Net cash used by investing activities | (3,745 | ) | ||
Financing activities: | ||||
Net transfers to Parent | (28,174 | ) | ||
Net cash used by financing activities | (28,174 | ) | ||
Increase (decrease) in cash and cash equivalents | - | |||
Cash and cash equivalents at beginning of year | - | |||
Cash and cash equivalents at end of year | $ | - |
See accompanying notes.
6 |
BARNES DISTRIBUTION NORTH AMERICA
(A BUSINESS OF BARNES GROUP INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(All dollar amounts included in the notes are stated in thousands)
1. | Basis of Presentation and Principles of Combination |
In the first quarter of 2013, Barnes Group Inc. entered into a definitive agreement to sell its Barnes Distribution North America business (hereinafter referred to as “BDNA” or “the Business”), a business of Barnes Group Inc. (hereinafter referred to as “BGI” or “Parent” or “the Company”), to MSC Industrial Direct Co., Inc. BDNA is included in the Distribution reporting segment of the Parent and provides logistical support services including inventory management, technical sales and customized supply chain solutions for maintenance, repair, and operating supplies, principally through the distribution centers it operates in the United States and Canada.
The historical financial statements of the Business, as of and for the year ended December 31, 2012, reflect the amounts that have been “carved out” from BGI’s consolidated financial statements and reflect assumptions and allocations made by BGI to depict the Business on a standalone basis. BDNA did not historically operate as a separate, standalone entity; rather, it operated as part of BGI and its results of operations were reported in BGI’s consolidated financial statements. The combined financial statements have been prepared solely for the purpose of BGI’s proposed sale of the Business to MSC Industrial Direct Co., Inc. and to demonstrate the historical results of operations, financial position and cash flows of the Business.
The historical combined financial statements were prepared using BGI’s historical basis in the assets and liabilities of the Business, and includes all revenues, costs, assets and liabilities directly attributable to the Business. In addition, certain expenses reflected in the accompanying combined financial statements include allocations of corporate expenses from the Parent, which in the opinion of management are reasonable (See Note 12). As a result, the accompanying combined financial statements may not be indicative of the historical financial position, results of operations and cash flows that would have been presented if the Business had been a standalone entity.
BGI uses a centralized approach for managing cash and financing operations. Accordingly, none of the cash or debt at BGI has been assigned to the Business in the combined financial statements and none of the debt at BGI is directly attributable to BDNA. Interest expense has also not been allocated to the Business and therefore is not reflected in the Combined Statement of Income.
2. | Summary of Significant Accounting Policies |
General: The preparation of combined financial statements requires management to make estimates and assumptions that affect the reported amounts of 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 those estimates.
The accompanying combined financial statements and notes are those of BDNA, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany transactions and account balances have been eliminated. Transactions between BDNA and other businesses of BGI are reflected as related party transactions (See Note 12).
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Revenue recognition: Sales and related cost of sales are recognized when products are shipped or delivered to customers depending upon when title and risk of loss have passed. Service revenue is recognized when the related services are performed. Shipping and other transportation costs billed to customers are included in sales and the related costs are included as costs of sales. The right of return exists and a provision for future returns is estimated and charged against sales.
Operating expenses: The Business includes the costs of its distribution network within cost of sales. Other costs, including selling personnel costs, commissions, advertising, and other general and administrative costs of the Business are included within selling and administrative expenses. Depreciation and amortization expense is allocated between cost of sales and selling and administrative expenses. The Business expenses the costs of advertising as they are incurred. Advertising costs amounted to $546 in 2012.
Accounts receivable are charged against the allowance for doubtful accounts when management believes that collectability is unlikely. The allowance is established through a provision for bad debts charged to operations. The total amount charged to expense in 2012 was $594.
Cash and cash equivalents: The Parent uses a centralized approach for managing cash and financing operations. The Business’s cash is available for use and is regularly “swept” by the Parent at its discretion. Transfers of cash between the Business and the Parent are included within net transfers to Parent on the Combined Statement of Changes in Parent Equity and on the Combined Statement of Cash Flows.
Inventories: Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or market. Inventories at December 31, 2012 consisted entirely of finished goods.
Property, plant and equipment: Property, plant and equipment is stated at cost. Depreciation is recorded over estimated useful lives, ranging from 10 to 50 years for buildings, three to seven years for computer equipment and up to 17 years for machinery and equipment. The straight-line method of depreciation was adopted for all property, plant and equipment placed in service after March 31, 1999. For property, plant and equipment placed into service prior to April 1, 1999, depreciation is calculated using accelerated methods. The Business assesses the impairment of property, plant and equipment subject to depreciation whenever events or changes in circumstances indicate the carrying value may not be recoverable. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts and the resulting gain or loss is reflected in operations.
Leases: The Business leases various types of key cutting machines. The leases are classified as operating leases and have an initial noncancelable term of 36 months after which the lessee may cancel the lease by providing notice prior to the lease anniversary date. If notice of cancellation is not provided, the lease automatically renews annually for the following 12 months. The Business records deferred revenue related to the leasing of key cutting machines. The deferred revenue represents security deposits that are paid at lease inception and in most cases are applied as the final month’s lease payment at the conclusion of the lease. Minimum future rental payments under noncancelable operating leases in effect at December 31, 2012 are $3,761 in 2013, $369 in 2014, and $95 in 2015.
Goodwill: Goodwill represents the excess purchase cost over the fair value of net assets of companies acquired in business combinations by the Business. Goodwill is considered an indefinite-lived asset. Goodwill is subject to impairment testing in accordance with accounting standards governing such on an annual basis or more frequently if an event or change in circumstances indicates that the fair value of a reporting unit has been reduced below its carrying value. In performing the annual goodwill impairment test for 2012, the Business utilized the qualitative assessment approach, commonly known as the Step “0” approach, as prescribed by the FASB’s guidance related to the periodic testing of goodwill for impairment. Based on the assessment performed during 2012, there was no goodwill impairment.
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Intangible assets: Other intangible assets consist of customer relationships. These intangible assets have finite lives and are amortized over the periods in which they provide benefit. The Business assesses the impairment of long-lived assets, whenever significant events or significant changes in circumstances indicate the carrying value may not be recoverable.
Fair value measurements: The provisions of the accounting standard for fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard classifies the inputs used to measure fair value into the following hierarchy:
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. |
Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. |
Level 3 | Unobservable inputs for the asset or liability. |
Foreign currency: The foreign operations of BDNA, principally Canada, use the local currency as the functional currency. Transactions denominated in a currency other than the functional currency are translated to the functional currency with the resulting transaction gain (loss) recorded in other income (expense). Net foreign currency transaction losses of $43 are included in other expense (income), net in the Combined Statement of Income. The reporting currency of BDNA is the U.S. dollar ($). Assets and liabilities of international operations are translated at year-end rates of exchange; revenues and expenses are translated at average rates of exchange. The resulting translation gains or losses are reflected in accumulated other comprehensive loss within Parent Equity.
Parent equity: Parent equity in the Combined Balance Sheet represents the Parent’s historical investment in the Business, which consists of accumulated net income and the net effect of transactions with and allocations from the Parent. The main components of the net transfers to Parent in the Combined Statement of Changes in Parent Equity are cash pooling and various allocations from the Parent.
Self-insurance: The Parent self-insures certain risks where permitted by law or regulation, including workers’ compensation and employee-related benefits including medical and dental benefits. Liabilities associated with these risks are estimated by considering historical claims experience, demographic factors and other actuarial assumptions. The Business incurred $9,741 for medical and dental benefits expense and $1,377 for workers’ compensation expense for the year ended December 31, 2012.
Income taxes: BGI files consolidated income tax returns that include BDNA. For purposes of these combined financial statements, BDNA’s taxes are computed and reported on a “separate return” basis. Income taxes as presented herein allocate current and deferred income taxes of BGI to BDNA in a manner that is systematic, rational, and consistent with the asset and liability method prescribed by FASB Accounting Standards Codification 740 Accounting for Income Taxes (“ASC 740”). Accordingly, as stated in paragraph 30 of ASC 740, the sum of the amounts allocated to the carve-out tax provisions may not equal the historical consolidated provision for BGI. Under the separate return method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Valuation allowances are established when management determines that it is more likely than not that some portion, or all of the deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. The settlement of tax obligations is assumed in the period incurred and included in Parent equity.
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3. | Recent Accounting Changes |
In February 2013, the FASB issued an Accounting Standards Update (“ASU”) related to obligations resulting from Joint and Several Liability Arrangements for which the total amount of the obligation is fixed at the reporting date. The ASU addresses the recognition, measurement, and disclosure of certain obligations including debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The ASU is effective for nonpublic entities for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter. The adoption of this guidance is not expected to have a material impact on the Business’s financial position or results of operations.
In February 2013, the FASB amended its guidance related to reporting amounts reclassified out of accumulated other comprehensive income (“AOCI”). Under the related ASU, an entity is required to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. This ASU does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The ASU is effective in 2013 and the Business has not opted to early adopt this guidance.
In September 2011, the FASB issued new disclosure requirements for an employer’s participation in a multi-employer benefit plan. The amendments create greater transparency in financial reporting by requiring additional disclosures about an employer’s participation in a multi-employer pension plan. The additional disclosures will increase awareness about the commitments that an employer has made to a multi-employer pension plan and the potential future cash flow implications of an employer’s participation in the plan. The amendments were effective for annual periods for fiscal years ending after December 15, 2012, with early adoption permitted. The adoption of this guidance, which pertains to financial statement disclosures, did not have an impact on the Business’s results of operations.
In September 2011, the FASB amended its guidance related to the periodic testing of goodwill for impairment. This guidance allows companies to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines that this threshold is not met, then performing the two-step impairment test may not be necessary. The provisions of the amended guidance were effective for BDNA in 2012. The Business performed its annual impairment testing of goodwill pursuant to this guidance during 2012.
In June 2011, the FASB issued amendments to its guidance for the presentation of comprehensive income which becomes effective for annual periods ending after December 15, 2012 (for nonpublic companies). The amendments eliminate the current reporting option of displaying components of other comprehensive income within the Statement of Changes in Parent Equity. Under the new guidance, the Business was required to present either a single continuous statement of comprehensive income or an income statement immediately followed by a statement of comprehensive income. The adoption of this guidance did not have a material impact on the Business’s financial position or results of operations.
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4. | Property, Plant and Equipment |
Property, plant and equipment at December 31, 2012 consisted of the following:
Machinery and equipment | $ | 45,527 | ||
Buildings | 8,998 | |||
Land | 657 | |||
55,182 | ||||
Less accumulated depreciation | (37,858 | ) | ||
Total | $ | 17,324 |
Depreciation expense was $6,008 for the year ended December 31, 2012.
The cost and accumulated depreciation associated with leased equipment to customers were $3,395 and $1,614, respectively, as of December 31, 2012.
5. | Goodwill and Other Intangible Assets |
Goodwill: The following table sets forth the change in the carrying amount of goodwill of the Business:
January 1, 2012 | $ | 110,823 | ||
Foreign currency translation | 193 | |||
December 31, 2012 | $ | 111,016 |
The Business’s goodwill as of December 31, 2012 consists of historical acquisitions made by the Business.
Other Intangible Assets: Other intangible assets at December 31, 2012 consisted of:
Useful Lives | Gross Amount | Accumulated Amortization | Net | |||||||||||
Amortized intangible assets: | ||||||||||||||
Customer Lists/Relationships | Up to 10 | $ | 11,500 | $ | (11,387 | ) | $ | 113 | ||||||
Total | $ | 11,500 | $ | (11,387 | ) | $ | 113 |
Amortization of intangible assets for the year ended December 31, 2012 was $1,150. Intangibles will become fully amortized in 2013.
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6. | Accrued Liabilities |
Accrued liabilities at December 31, 2012 consisted of:
Payroll and other compensation | $ | 3,653 | ||
Workers’ compensation | 2,374 | |||
Customer rebates | 1,257 | |||
Accrued medical and dental benefits | 1,314 | |||
Other | 2,093 | |||
Total | $ | 10,691 |
7. | Pension and Other Postretirement Benefits |
The accounting standards related to employers’ accounting for defined benefit pension and other postretirement plans requires the Business to recognize the overfunded or underfunded status of its defined benefit postretirement plans as assets or liabilities in the accompanying Combined Balance Sheet and to recognize changes in the funded status of the plans in comprehensive income. The pension plan assets of BGI, including those of BDNA but excluding the Teamsters Local 641 Pension Fund (hereinafter referred to as the “Edison Multi-Employer Plan”), have been combined under a master trust to facilitate plan monitoring and plan investment management.
The Company provides defined benefit pension, other postretirement, and multi-employer defined pension benefits to eligible employees and retirees.
BDNA employees are eligible to participate in the following Company-sponsored plans: 1) Barnes Group Inc. Salaried Retirement Income Plan, 2) Barnes Group Inc. Hourly Employees’ Pension Plan, 3) Edison Multi-Employer Plan 4) Miscellaneous Plan, and 5) Barnes Group Inc. Postretirement Benefit Plan. Plan benefits for salaried and non-union hourly employees are based on years of service and average salary. Plans covering union hourly employees provide benefits based on years of service. The Business funds U.S. pension costs in accordance with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
The KAR Products Retirement Income Plan (“KAR Plan”) and BD Canadian Salaried Pension Plan (“BD Canada Plan”) are frozen, single-employer BDNA plans (see below).
Other than the KAR Plan and BD Canada Plan, BGI’s defined benefit pension and postretirement plans have been accounted for as multi-employer plans in these combined financial statements in accordance with ASC No. 715-30, “Defined Benefit Plans-Pension” and ASC No. 715-60, “Defined Benefit Plans - Other Postretirement”. ASC No. 715, “Compensation –Retirement Benefits” provides than an employer that participates in a multi-employer defined benefit plan is not required to report a liability beyond the contributions currently due and unpaid to the plan. Therefore, no assets or liabilities related to these plans have been included in the Combined Balance Sheet. These pension and postretirement expenses for the year ended December 31, 2012 were allocated to the Business and are reported in cost of goods sold and selling and administrative expenses in the amounts of $365 and $622, respectively.
The Company and BDNA utilize actuarial methods to recognize the expense for pension benefit plans. Inherent in the application of these actuarial methods are key assumptions, including, but not limited to, discount rates and expected long-term rates of return on plan assets. Changes in the related pension benefit costs may occur in the future arising from changes in the underlying assumptions, changes in the number and composition of plan participants and changes in the level of benefits provided.
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Edison Multi-Employer Plan
The Business also contributes to a third-party multi-employer defined benefit pension plan under the terms of a collective bargaining agreement. This multi-employer plan provides pension benefits to its union-represented employees at the Edison, New Jersey facility of BDNA. The risks of participating in this multi-employer plan are different from single-employer plans in the following aspects:
a. Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.
b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
c. If the Business chooses to stop participating in the multi-employer plan, the Business may be required to pay to this plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Business’s participation in this plan for the annual period ended December 31, 2012 is outlined in the table below. The most recent Pension Protection Act zone status available in 2012 relates to the plan's year-end at February 28, 2012. The zone status is based on information that the Business received from the plan and is certified by the plan's actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject. Contributions made by the Business did not represent more than five percent of the total plan contributions for the plan year ended February 28, 2012. Management estimates that BDNA’s portion of the contingent liability in the case of a full withdrawal from the multi-employer plan at the Edison, New Jersey facility would approximate $3,900 on a pre-tax basis.
The Business also contributes to a multi-employer other postretirement benefit plan under the terms of the collective bargaining agreement at the Edison, New Jersey facility. This health and welfare plan provides medical, prescription, optical and other benefits to its union-represented active employees and retirees. Business contributions to the postretirement plan approximated $171 in 2012.
The following table presents information for the Edison Multi-Employer Plan:
Pension Fund | EIN/ Pension Plan Number |
Pension Protection Act Zone Status |
FIP/RP Status Funding |
Contri- butions by the Business |
Surcharge Imposed |
Expiration Date of Collective Bargaining Agreement | ||||||
Teamsters Local 641 Pension Fund (Edison Plan) |
22-6220288-001 | Red as of March 1, 2011 for Plan year ended February 28, 2012 | Imple-mented (A) | 97 | No Surcharge | January 31, 2014 |
(A) | Plan information is publicly available for the Local 641 Pension Fund. The Form 5500 indicates that the Plan is currently underfunded. Future contributions have increased pursuant to the collective bargaining agreement (dated January 31, 2011 and expiring on January 31, 2014) and the updated Rehabilitation Plan for the Plan year ended February 28, 2012. Per the terms of the Rehabilitation Plan, required contributions will increase by approximately 4% (annually) through 2018. |
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KAR and BD Canada Pension Plans
Reconciliations of the obligations and underfunded status of the KAR Plan (U.S.) and BD Canada Plan (Non-U.S.) are as follows:
KAR Plan (U.S.) | BD Canada Plan (Non-U.S.) | Total | ||||||||||
Benefit obligation, January 1 | $ | 10,415 | $ | 821 | $ | 11,236 | ||||||
Service cost | - | - | - | |||||||||
Interest cost | 512 | 39 | 551 | |||||||||
Actuarial loss | 915 | 78 | 993 | |||||||||
Benefits paid | (641 | ) | (45 | ) | (686 | ) | ||||||
Foreign exchange rate changes | - | 21 | 21 | |||||||||
Benefit obligation, December 31 | 11,201 | 914 | 12,115 | |||||||||
Fair value of plan assets, January 1 | 8,862 | 898 | 9,760 | |||||||||
Actual return on plan assets | 1,140 | (5 | ) | 1,135 | ||||||||
Company contributions | 416 | 14 | 430 | |||||||||
Benefits paid | (641 | ) | (44 | ) | (685 | ) | ||||||
Foreign exchange rate changes | - | 22 | 22 | |||||||||
Fair value of plan assets, December 31 | 9,777 | 885 | 10,662 | |||||||||
Underfunded status, December 31 | $ | (1,424 | ) | $ | (29 | ) | $ | (1,453 | ) |
The accumulated benefit obligation for the above defined benefit plans was $12,115, the same amount as the projected benefit obligation.
Amounts related to pensions recognized in the accompanying combined balance sheet consist of:
December 31, 2012 | ||||||||||||
KAR Plan (U.S.) | BD Canada Plan (Non-U.S.) | Total | ||||||||||
Accrued retirement benefits | $ | (1,424 | ) | $ | (29 | ) | $ | (1,453 | ) | |||
Accumulated other comprehensive loss, net of tax | (2,128 | ) | (486 | ) | (2,614 | ) |
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Amounts related to pensions recognized in accumulated other comprehensive loss at December 31, 2012 consist of:
KAR Plan (U.S.) | BD Canada Plan (Non-U.S.) | Total | ||||||||||
Net actuarial loss | $ | 365 | $ | 136 | $ | 501 | ||||||
Amortization or settlement recognition of net gain (loss) | (375 | ) | (52 | ) | (427 | ) | ||||||
Effect of exchange rates | - | 13 | 13 | |||||||||
Total | $ | (10 | ) | $ | 97 | $ | 87 |
Weighted-average assumptions used to determine benefit obligations at December 31, 2012 are:
U.S. plans: | ||||
Discount rate | 4.25 | % | ||
Increase in compensation | - | |||
Non-U.S. plans: | ||||
Discount rate | 4.00 | % | ||
Increase in compensation | - |
The expected long-term rate of return is based on the actual historical rates of return of published indices that are used to measure the plans’ target asset allocation. The historical rates are then discounted to consider fluctuations in the historical rates as well as potential changes in the investment environment.
The discount rate used for the Business’s U.S. pension plans reflects the rate at which the pension benefits could be effectively settled. At December 31, 2012, the Business selected a discount rate of 4.25% based on a bond matching model for its U.S. pension plans. Market interest rates have decreased in 2012 as compared with 2011 and, as a result, the discount rate used to measure pension liabilities decreased from 5.05% at December 31, 2011. The discount rates for non-U.S. plans were selected based on bond matching models or on indices of high-quality bonds using criteria applicable to the respective countries. At December 31, 2012, the Business selected a discount rate of 4.00% based on a bond matching model for its non-U.S. pension plans. Market interest rates have decreased in 2012 as compared with 2011 and, as a result, the discount rate used to measure pension liabilities decreased from 4.46% at December 31, 2011.
The investment strategy of the plans is to generate a consistent total investment return sufficient to pay present and future plan benefits to retirees, while minimizing the long-term cost to the Business. Target allocations for asset categories are used to earn a reasonable rate of return, provide required liquidity and minimize the risk of large losses. Targets may be adjusted, as necessary within certain guidelines, to reflect trends and developments within the overall investment environment. The weighted-average target investment allocations by asset category are as follows: 70% in equity securities, 20% in fixed income securities, 5% in real estate and 5% in other investments, including cash.
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The fair values of the Business’s portion of the pension plan assets that are held in a master trust at December 31, 2012 by asset category are as follows:
Fair Value Measurements Using | ||||||||||||||||
Asset Category | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Cash and short-term investments | $ | 442 | $ | 442 | $ | - | $ | - | ||||||||
Equity securities: | ||||||||||||||||
U.S. large-cap | 2,901 | 1,311 | 1,590 | - | ||||||||||||
U.S. mid-cap | 1,252 | 1,252 | - | - | ||||||||||||
U.S. small-cap | 1,285 | 1,285 | - | - | ||||||||||||
International equities | 1,752 | - | 1,752 | - | ||||||||||||
Fixed income securities: | ||||||||||||||||
U.S. bond funds | 2,002 | - | 2,002 | - | ||||||||||||
International bonds | 419 | - | 419 | - | ||||||||||||
Real estate securities | 609 | - | 609 | - | ||||||||||||
December 31, 2012 | $ | 10,662 | $ | 4,290 | $ | 6,372 | $ | - |
The fair values of the Level 1 assets are based on quoted market prices from various financial exchanges. The fair values of the Level 2 assets are based primarily on quoted prices in active markets for similar assets or liabilities. The Level 2 assets are comprised primarily of commingled funds and fixed income securities. Commingled equity funds are valued at their net asset values based on quoted market prices of the underlying assets. Fixed income securities are valued using a market approach which considers observable market data for the underlying asset or securities.
Expected contributions to the pension plans are approximately $15 in 2013.
The following are the estimated future net benefit payments, which include future service, over the next 10 years:
2013 | $ | 784 | ||
2014 | 794 | |||
2015 | 823 | |||
2016 | 851 | |||
2017 | 853 | |||
Years 2018-2022 | 4,139 | |||
Total | $ | 8,244 |
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Pension benefit expenses recognized in the Combined Statement of Income consist of the following:
Service cost | $ | - | ||
Interest cost | 551 | |||
Expected return on plan assets | (641 | ) | ||
Recognized losses | 427 | |||
Net periodic benefit cost | $ | 337 |
The estimated net actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2013 is $411.
Weighted-average assumptions as of December 31, 2011 used to determine the net benefit expense for the year ended December 31, 2012 were:
U.S. plans: | ||||
Discount rate | 5.05 | % | ||
Long-term rate of return | 9.00 | % | ||
Increase in compensation | - | |||
Non-U.S. plans: | ||||
Discount rate | 4.80 | % | ||
Long-term rate of return | 5.75 | % | ||
Increase in compensation | - |
Other Benefit Plans
Certain employees of BDNA participate in a frozen deferred compensation plan referred to as the Curtis Deferred Compensation Plan. The balance of this obligation, which was fully funded as of December 31, 2012 and is included in accrued retirement benefits in the accompanying combined balance sheet, was $739.
The Parent also has various defined contribution plans (i.e., 401(k) and similar type plans) that the Business participates in, the largest of which is the Parent’s Retirement Savings Plan. Most U.S. salaried and non-union hourly employees are eligible to participate in this plan. The Business also maintains various defined contribution plans which cover certain other employees. Business contributions under these plans are based primarily on the performance of the business units and employee compensation. Contribution expense under these other defined contribution plans was $1,747 for the year ended December 31, 2012.
The Business provides other medical, dental and life insurance postretirement benefits for certain of its retired employees in the U.S. and Canada. It is the Business’s practice to fund these benefits as incurred.
8. | Stock-Based Compensation |
The Business participates in BGI stock-based compensation plans. Awards under the plan include stock options, performance share unit awards and restricted share unit awards. Stock-based compensation expense reflected in the accompanying combined financial statements relates to stock plan awards of BGI and not stock awards of the Business, as the Business does not grant stock awards.
The Business accounts for the cost of all share-based payments, including stock options redeemable in Parent shares, by measuring the payments at fair value on the grant date and recognizing the cost in the results of operations. The fair values of stock options are estimated using the Black-Scholes option-pricing model based on certain assumptions. The fair values of service and performance based stock awards are estimated based on the fair market value of the Parent’s stock price on the grant date. The fair value of market based performance share awards are estimated using the Monte Carlo valuation method. Estimated forfeiture rates are applied to outstanding awards.
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Please refer to Note 10 for a description of the Parent’s stock-based compensation plans and their general terms. As of December 31, 2012, incentives have been awarded in the form of performance share unit awards and restricted stock unit awards (collectively, “Rights”) and stock options. The Business has elected to use the straight-line method to recognize compensation costs. Stock options and awards vest over a period ranging from three to four and a half years. The maximum term of stock option awards is 10 years. Upon exercise of a stock option or upon vesting of Rights, shares are issued from treasury shares held by the Parent or from authorized shares of the Parent.
During 2012, the Business recognized $172 of stock-based compensation cost. At December 31, 2012, the Business had $261 of unrecognized compensation costs related to unvested awards which are expected to be recognized over a weighted average period of 2.2 years.
The following table summarizes information about the Business’s stock option awards during the year ended December 31, 2012:
Number of Shares | Weighted-Average Exercise Price | |||||||
Outstanding, January 1, 2012 | 180,745 | $ | 18.14 | |||||
Granted | - | - | ||||||
Exercised | (61,940 | ) | 16.07 | |||||
Forfeited | (14,965 | ) | 22.47 | |||||
Outstanding, December 31, 2012 | 103,840 | 18.75 |
The following table summarizes information about stock options outstanding at December 31, 2012:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Range of Exercise Prices | Number Of Shares | Average Remaining Life (Years) | Average Exercise Price | Number Of Shares | Average Exercise Price | |||||||||||||||
$9.56 to $12.62 | 15,750 | 4.25 | $ | 11.65 | 11,650 | $ | 11.72 | |||||||||||||
$14.77 to $15.83 | 28,702 | 4.38 | 15.08 | 18,686 | 14.92 | |||||||||||||||
$18.63 to $20.69 | 26,775 | 6.78 | 20.14 | 12,142 | 19.48 | |||||||||||||||
$22.34 to $27.06 | 32,613 | 4.58 | 24.25 | 32,613 | 24.25 |
The Parent received cash proceeds from the exercise of stock options of $995 in 2012. The total intrinsic value (the amount by which the stock price exceeds the exercise price of the option on the date of exercise) of the stock options exercised during 2012 was $514.
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The following table summarizes information about stock options outstanding that are expected to vest and stock options outstanding that are exercisable at December 31, 2012:
Options Outstanding, Expected to Vest | Options Outstanding, Exercisable | |||||||||||||||||||||||||||||
Shares | Weighted- Average Exercise Price | Aggregate Intrinsic Value | Weighted- Average Remaining Term (Years) | Shares | Weighted- Average Exercise Price | Aggregate Intrinsic Value | Weighted- Average Remaining Term (Years) | |||||||||||||||||||||||
102,290 | $ | 18.75 | $ | 441 | 5.04 | 75,091 | $ | 19.21 | $ | 304 | 4.11 |
The following table summarizes information about the Business’s Rights during 2012:
Service Based Rights | Service and Performance Based Rights | Service and Market Based Rights | ||||||||||||||||||||||
Number of Units | Weighted Average Grant Date Fair Value | Number of Units | Weighted Average Grant Date Fair Value | Number of Units | Weighted Average Grant Date Fair Value | |||||||||||||||||||
Outstanding, January 1, 2012 | 3,066 | $ | 17.78 | - | $ | - | - | $ | - | |||||||||||||||
Granted | 8,125 | 26.59 | 1,223 | 26.59 | 612 | 42.59 | ||||||||||||||||||
Forfeited | (2,814 | ) | 20.23 | (246 | ) | 26.59 | (124 | ) | 42.59 | |||||||||||||||
Vested / Issued | (1,402 | ) | 20.09 | - | - | - | - | |||||||||||||||||
Outstanding, December 31, 2012 | 6,975 | $ | 26.59 | 977 | $ | 26.59 | 488 | $ | 42.59 |
The Parent granted 8,125 restricted stock unit awards and 1,835 performance share unit awards to employees of BDNA in 2012. All of the restricted stock unit awards vest upon meeting certain service conditions. The performance share unit awards are part of a long-term Relative Measure Program, which is designed to assess the Parent’s long-term performance relative to the performance of companies included in the Russell 2000 Index. The performance goals are independent of each other and based on three metrics, the Parent's total shareholder return (“TSR”), basic earnings per share growth and operating income before depreciation and amortization growth (weighted equally). The participants can earn from zero to 250% of the target award and the award includes a forfeitable right to dividend equivalents, which are not included in the aggregate target award numbers. Compensation expense for the awards is recognized over the three year service period based upon the value determined under the intrinsic value method for the basic earnings per share growth and operating income before depreciation and amortization growth portions of the award and the Monte Carlo simulation valuation model for the TSR portion of the award since it contains a market condition. The weighted average assumptions used to determine the weighted average fair values of the market based portion of the 2012 awards include a 0.34% risk-free interest rate and a 43.6% expected volatility rate.
Compensation expense for the TSR portion of the awards is fixed at the date of grant and will not be adjusted in future periods based upon the achievement of the TSR performance goal. Compensation expense for the basic earnings per share growth and operating income before depreciation and amortization growth portions of the awards is recorded based upon a probability assessment of achieving the goals and will be adjusted at the end of the service period based upon the actual achievement of those performance goals.
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9. | Income Taxes |
As previously discussed in the Significant Accounting Policies section, though the U.S. portion of BDNA was historically included in BGI’s consolidated U.S. federal income tax return, BDNA’s income taxes are computed and reported herein under the “separate return method.” Use of the separate return method may result in differences when the sum of the amounts allocated to carve-out tax provisions are compared with amounts presented in consolidated financial statements. In that event, the related deferred tax assets and liabilities could be significantly different from those presented herein. Furthermore, certain tax attributes, e.g., net operating loss carryforwards, may or may not exist at the carve-out level that were actually reflected in the consolidated financial statements.
The components of Income before income taxes and Income taxes follow:
Year Ended | ||||
December 31, 2012 | ||||
Income before income taxes: | ||||
U.S. | $ | 15,734 | ||
International | 2,299 | |||
Income before income taxes | $ | 18,033 | ||
Income tax provision: | ||||
Current: | ||||
U.S. – federal | $ | 2,699 | ||
U.S. – state | 515 | |||
International | 740 | |||
3,954 | ||||
Deferred: | ||||
U.S. – federal | 2,544 | |||
U.S. – state | 487 | |||
International | (138 | ) | ||
2,893 | ||||
Income taxes | $ | 6,847 |
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Effective and Statutory Rate Reconciliation
The following table summarizes a reconciliation of the U.S. federal statutory income tax rate to BDNA’s effective tax rate, for the year ended December 31, 2012.
Statutory federal income tax rate | 35.0 | % | ||
Increase (decrease): | ||||
State taxes (net of federal benefit) | 3.6 | |||
Effect of tax rates in foreign jurisdictions | (1.2 | ) | ||
Other | 0.6 | |||
Effective income tax rate | 38.0 | % |
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered. In addition, certain corporate allocations were pushed-down to the carve-out financial statements, without corresponding assets or liabilities. In such cases, the related deferred tax liability (or deferred tax asset, if applicable) was deemed to remain with BGI and was not recorded by BDNA.
The following table summarizes the deferred tax assets and liabilities, as of December 31, 2012.
Deferred tax assets: | ||||
Property, plant and equipment | $ | 332 | ||
Allowance for bad debts | 416 | |||
Inventory valuation reserve | 855 | |||
263A UNICAP adjustment | 1,745 | |||
Pension | 553 | |||
Workers’ compensation accrual | 903 | |||
Other accrued expenses | 1,210 | |||
Other deferred tax assets | 539 | |||
Total tax assets | 6,553 | |||
Deferred tax liabilities: | ||||
Goodwill | (26,089 | ) | ||
Other deferred tax liability | (90 | ) | ||
Total tax liabilities | (26,179 | ) | ||
Net deferred tax liabilities | $ | (19,626 | ) |
Uncertain Tax Positions
BGI is subject to income tax examinations by tax authorities. Upon audit, taxing authorities may challenge all or part of an income tax position. BGI regularly assesses the outcome of potential examinations in each of the tax jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax position, BDNA has determined it has no uncertain tax positions through December 31, 2012. However, audit outcomes and the timing of audit settlements and future events that would impact BDNA’s unrecognized tax benefits are subject to significant uncertainty.
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The Parent or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state jurisdictions and Canada. In the normal course of business, the Business is subject to examination by various taxing authorities, including the IRS in the U.S. and the taxing authority of Canada. With few exceptions, the Business is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2005.
10. | Stock Plans |
The Parent has an Employee Stock Purchase Plan (“ESPP”) under which eligible employees may elect to have up to the lesser of $25 or 10% of base compensation deducted from their payroll checks for the purchase of the Parent’s common stock at 95% of the average market value on the date of purchase. The maximum number of shares which may be purchased under the ESPP is 4,550,000. The number of shares purchased on behalf of the Business under the ESPP was 7,000 in 2012.
The 1991 Barnes Group Stock Incentive Plan (the “1991 Plan”) authorized the granting of incentives to executive officers, directors and key employees in the form of stock options, stock appreciation rights, incentive stock rights and performance unit awards. Options granted under the 1991 Plan that terminated without being exercised become available for future grants under the 2004 Plan.
The Barnes Group Inc. Employee Stock and Ownership Program (the “2000 Plan”) was approved on April 12, 2000, and subsequently amended on April 10, 2002 by the Parent’s stockholders. The 2000 Plan permitted the granting of incentive stock options, nonqualified stock options, restricted stock awards, performance share or cash unit awards and stock appreciation rights, or any combination of the foregoing, to eligible employees to purchase shares of the Parent’s common stock.
The Barnes Group Stock and Incentive Award Plan (the “2004 Plan”) was approved on April 14, 2004, and subsequently amended on April 20, 2006 and May 7, 2010 upon approval of Amendments to the 2004 Plan on such dates by the Parent’s stockholders. The 2004 Plan permits the issuance of incentive awards, stock option grants and stock appreciation rights to eligible participants to purchase shares of common stock.
Restricted stock unit awards under the 2004 Plan (“Stock Rights”) entitle the holder to receive, without payment, one share of the Parent’s common stock after the expiration of the vesting period. Certain Stock Rights are also subject to the satisfaction of established performance goals. Additionally, holders of certain Stock Rights are credited with dividend equivalents, which are converted into additional Stock Rights, and holders of certain restricted stock units are paid dividend equivalents in cash when dividends are paid to other stockholders. All Stock Rights have a vesting period of up to 4.5 years.
11. | Information on Business Segments |
The Business is managed and financial results are reported on the basis of one reportable segment, which is the same as the operating segment. The operations of the Business are conducted primarily in North America.
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12. | Related Party Transactions and Corporate Allocations |
Corporate Allocations
BDNA has historically been managed and operated in the normal course of business by BGI along with other businesses. Corporate allocations represents a total pool of costs incurred at the Corporate level that relate to costs that are either directly charged to the underlying organization based on actual usage or allocated to the Business as part of normal operations based on consistent methodologies. Accordingly, certain shared costs have been allocated to BDNA and are reflected as expenses in these standalone financial statements. Such costs include, but are not limited to, treasury, tax department, executive functions, human resources, corporate accounting, and others. The costs associated with these generally include all payroll and benefit costs as well as overhead costs related to the support functions. All such costs have been deemed to have been incurred and settled through Parent equity in the period where the costs were recorded.
Management of BGI considers the allocation methodologies used to be reasonable and appropriate reflections of the related expenses attributable to BDNA for purposes of these standalone financial statements; however, the expenses reflected in these financial statements may not be indicative of the actual expenses that would have been incurred during the period presented if BDNA had historically operated as a separate, standalone entity. In addition, the expenses reflected in the financial statements may not be indicative of expenses that will be incurred in the future by BDNA. The amounts that would have been or will be incurred on a standalone basis could differ from the amounts allocated due to economies of scale, differences in management judgment, a requirement for more or fewer employees, or other factors. Management does not believe, however, that it is practicable to estimate what these expenses would have been had the Business operated as an independent entity, including any expenses associated with obtaining any of these services from unaffiliated entities. These expenses are included in selling and administrative expenses in the Combined Statement of Income and totaled $11,282 for the year ended December 31, 2012.
The costs were allocated to BDNA using various allocation methods, such as relative revenue, head count, tangible assets, and payroll costs or by using actual services rendered.
Related Party Purchases and Sales
For the year ended December 31, 2012, intercompany sales to other businesses of the Parent totaled $328 and intercompany cost of goods sold amounted to $198. BDNA purchases of inventory from other businesses of the Parent amounted to $189 in 2012.
13. | Commitments and Contingencies |
Leases
The Business has various noncancellable operating leases for buildings, office space and equipment. Rent expense was $5,573 for the year ended December 31, 2012. Minimum rental commitments under noncancellable leases in years 2013 through 2017 are $4,575, $2,739, $1,194, $859 and $401, respectively. The rental expense and minimum rental commitments of leases with step rent provisions are recognized on a straight-line basis over the lease term.
Product Warranties
The Business provides product warranties in connection with the sale of certain products. From time to time, the Business is subject to customer claims with respect to product warranties. Product warranty liabilities were not significant as of December 31, 2012.
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14. | Subsequent Events |
On February 22, 2013, the Parent entered into a definitive agreement to sell BDNA to MSC Industrial Direct Co., Inc. for $550,000, subject to certain purchase price adjustments. The transaction, which is subject to various conditions, including customary closing conditions and approvals, is expected to close early in the second quarter of 2013.
These combined financial statements reflect management’s evaluation of subsequent events, through April 5, 2013, the date the financial statements were available to be issued.
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Exhibit 99.2
MSC INDUSTRIAL DIRECT CO., INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On April 22, 2013 (the “Closing Date”), MSC Industrial Direct Co., Inc. (“MSC” or the “Company”) acquired (the “Acquisition”) substantially all of the assets and assumed certain liabilities of the North American distribution business (“BDNA”, or the “Business” ) of Barnes Group Inc. (NYSE: B) (“Barnes”), pursuant to the terms of the Asset Purchase Agreement, dated February 22, 2013, between the Company and Barnes (the “Asset Purchase Agreement”). In connection with the Acquisition, the total cash consideration we paid to Barnes was $548.8 million, subject to certain post-closing adjustments set forth in the Asset Purchase Agreement. In connection with the Acquisition, we entered into a new $650.0 million credit facility (the “New Credit Facility”). The New Credit Facility, which matures on April 22, 2018, provides for a five-year unsecured revolving loan facility in the aggregate amount of $400.0 million and a five-year unsecured term loan facility in the aggregate amount of $250.0 million. On the Closing Date, we borrowed the full $250.0 million available under the term loan facility and $120.0 million of the revolving loan facility in order to pay a portion of the cash consideration for the Acquisition. The remainder of the cash consideration for the Acquisition was financed using existing cash. As of June 28, 2013, the Company has paid down its remaining outstanding balance on the revolving credit note.
The New Credit Facility replaced the Company’s existing $200.0 million Credit Agreement, dated June 8, 2011(the “Existing Credit Facility”), which Existing Credit Facility was terminated on the Closing Date. The interest rate payable for all borrowings is based on the Company’s leverage and is currently 100 basis points over LIBOR rates. Under the terms of the New Credit Facility, we will be subject to various operating and financial covenants.
The Business is a leading distributor of fasteners and other high margin, low cost consumables with a broad distribution footprint throughout the U.S. and Canada. The Business has a strong presence with customers across manufacturing, government, transportation and natural resources end-markets. The Business specializes in lowering the total cost of their customer’s inventory management through storeroom organization and vendor managed inventory.
The following unaudited pro forma condensed consolidated balance sheet as of March 2, 2013 was prepared by combining the unaudited historical consolidated balance sheet of the Company at March 2, 2013 (the end of the Company’s second quarter of fiscal 2013), with the audited historical combined balance sheet of the Business at December 31, 2012 (calendar year end of the Business), giving effect to the acquisition as though it was completed on March 2, 2013. Adjustments include borrowings made in connection with an unsecured credit facility pursuant to the New Credit Facility, as discussed above, and applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed consolidated financial statements, as if such Acquisition had occurred as of March 2, 2013 for pro forma balance sheet purposes.
The following unaudited pro forma condensed consolidated statement of income for the twenty-six week period ended March 2, 2013 was prepared by combining the unaudited historical consolidated statement of income of the Company and the unaudited historical combined statement of income of the Business for the twenty-six week period ended March 2, 2013 and the six-month period ended December 31, 2012, respectively, giving effect to the Acquisition as though it was completed on August 28, 2011, the first day of the Company’s fiscal year 2012.
1 |
The following unaudited pro forma condensed consolidated statement of income for the year ended September 1, 2012 was prepared by combining the audited historical consolidated statement of income of the Company and the audited historical combined statement of income of the Business for the fiscal year ended September 1, 2012 and for the twelve months ended June 30, 2012, respectively, giving effect to the Acquisition as though it was completed on August 28, 2011, the first day the Company’s fiscal year 2012.
The unaudited pro forma condensed consolidated financial information is presented in accordance with Article 11 of Regulation S-X. The Acquisition has been accounted for under the purchase method of accounting in accordance with ASC Topic 805, “Business Combinations” (“ASC 805”). Under the purchase method of accounting, the total estimated purchase price, calculated as described in Note 1 to these unaudited pro forma condensed consolidated financial statements, is allocated to the net tangible and intangible assets acquired and liabilities assumed of the Business in connection with the Acquisition, based on their estimated fair values at the Closing Date. Management has made a preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed based on various preliminary estimates. MSC has determined, with the assistance of an independent third-party valuation firm, the fair values of identifiable intangible assets and certain tangible assets. Such a valuation requires significant estimates and assumptions including but not limited to estimating future cash flows and developing appropriate discount rates. The preliminary work performed has been considered in management’s estimates of the fair values reflected in these unaudited condensed consolidated financial statements. The Company’s purchase accounting is preliminary primarily due to the pending final assessment of the valuation of the intangible assets and inventory. The allocation of the estimated purchase price is preliminary pending finalization of those estimates and analyses. Final purchase accounting adjustments may differ materially from the pro forma adjustments presented herein.
The unaudited pro forma condensed consolidated financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the combined companies’ condensed consolidated financial position or results of operations in future periods or the results that actually would have been realized had MSC and the Business been a combined company during the specified periods. The unaudited pro forma condensed consolidated financial statements do not reflect any operating efficiencies and cost savings MSC may achieve with respect to the combined companies nor do they include the effects of MSC’s repayments of the remaining outstanding balance under the revolving loan facility. The unaudited pro forma condensed consolidated financial statements also do not reflect any post closing purchase price adjustments set forth in the Asset Purchase Agreement. These adjustments could have the effect of the Company paying an incremental purchase price amount or receiving an amount as a reduction in the purchase price, but any such amount is not expected to be material in relation to the size of the overall transaction. The pro forma adjustments are based upon available information and assumptions that the Company believes are reasonable at this point in time. The unaudited pro forma condensed consolidated financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, MSC’s historical consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 1, 2012 and in its Form 10-Q for the twenty-six week period ended March 2, 2013, and the historical combined financial statements of the Business for the fiscal year ended December 31, 2012 which is included as Exhibit 99.1 to this Form 8-K/A.
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MSC Industrial Direct Co., Inc.
Pro Forma Condensed Consolidated Balance Sheet as of March 2, 2013
(In thousands)
(Unaudited)
MSC Industrial Direct Co., Inc. | BDNA | Pro Forma Adjustments (Note 2) |
Pro Forma Consolidated | ||||||||||||||
ASSETS | |||||||||||||||||
CURRENT ASSETS: | |||||||||||||||||
Cash and cash equivalents | $ | 243,949 | $ | - | $ | (180,673 | ) | (a), (i) | $ | 63,276 | |||||||
Accounts receivable, net of allowance for doubtful accounts | 304,712 | 34,983 | - | 339,695 | |||||||||||||
Amounts due from related parties | - | 24 | (24 | ) | (g) | - | |||||||||||
Inventories | 364,726 | 49,856 | 1,671 | (b) | 416,253 | ||||||||||||
Prepaid expenses and other current assets | 38,791 | 1,628 | - | 40,419 | |||||||||||||
Deferred income taxes | 31,718 | 5,240 | (5,240 | ) | (h) | 31,718 | |||||||||||
Total current assets | 983,896 | 91,731 | (184,266 | ) | 891,361 | ||||||||||||
Deferred income taxes | - | 449 | (449 | ) | (h) | - | |||||||||||
Property, plant and equipment, net | 201,628 | 17,324 | 2,446 | (b) | 221,398 | ||||||||||||
Identifiable intangible assets, net | 45,876 | 113 | 117,287 | (e) | 163,276 | ||||||||||||
Goodwill | 289,124 | 111,016 | 242,301 | (d) | 642,441 | ||||||||||||
Other assets | 6,131 | 1,187 | 107 | (i), (f) | 7,425 | ||||||||||||
Total Assets | $ | 1,526,655 | $ | 221,820 | $ | 177,426 | $ | 1,925,901 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||
CURRENT LIABILITIES: | |||||||||||||||||
Current maturities of capital lease and financing obligations | $ | 1,265 | $ | - | $ | - | $ | 1,265 | |||||||||
Revolving credit note | - | - | 120,000 | (a) | 120,000 | ||||||||||||
Current maturities of long-term debt | - | - | 9,375 | (a) | 9,375 | ||||||||||||
Accounts payable | 86,599 | 19,057 | - | 105,656 | |||||||||||||
Amounts due to related parties | - | 46 | (46 | ) | (g) | - | |||||||||||
Accrued liabilities | 57,179 | 10,691 | 3,983 | (j) | 71,853 | ||||||||||||
Total current liabilities | 145,043 | 29,794 | 133,312 | 308,149 | |||||||||||||
Capital lease obligations, net of current maturities | 1,986 | - | - | 1,986 | |||||||||||||
Long-term debt, net of current maturities | - | - | 240,625 | (a) | 240,625 | ||||||||||||
Other liabilities | - | 108 | - | 108 | |||||||||||||
Accrued retirement benefits | - | 2,192 | (2,192 | ) | (f) | - | |||||||||||
Deferred income taxes and tax uncertainties | 85,061 | 25,315 | (25,315 | ) | (h) | 85,061 | |||||||||||
Total liabilities | 232,090 | 57,409 | 346,430 | 635,929 | |||||||||||||
Shareholders’ equity | 1,294,565 | 164,411 | (169,004 | ) | ( c), (i), (j) | 1,289,972 | |||||||||||
Total Liabilities and Shareholders’ Equity | $ | 1,526,655 | $ | 221,820 | $ | 177,426 | $ | 1,925,901 |
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are an integral part of these financial statements.
3 |
MSC Industrial Direct Co.,
Inc.
Pro Forma Condensed Consolidated Statement of Income for the Twenty-Six Week Period Ended March 2, 2013
(In thousands, except per share data)
(Unaudited)
MSC Industrial Direct Co., Inc. | BDNA | Pro Forma Adjustments (Note 2) | Pro Forma Consolidated | ||||||||||||||
Net sales | $ | 1,146,953 | $ | 142,915 | $ | - | $ | 1,289,868 | |||||||||
Cost of goods sold | 625,495 | 74,640 | (10,866 | ) | (1), (3) | 689,269 | |||||||||||
Gross profit | 521,458 | 68,275 | 10,866 | 600,599 | |||||||||||||
Operating expenses | 328,530 | 61,154 | 11,710 | (1), (3), (4), (7) | 401,394 | ||||||||||||
Income from operations | 192,928 | 7,121 | (844 | ) | 199,205 | ||||||||||||
Other income (Expense): | |||||||||||||||||
Interest expense | (125 | ) | - | (2,329 | ) | (2), (i) | (2,454 | ) | |||||||||
Interest income | 82 | - | - | 82 | |||||||||||||
Other income (expense), net | 71 | (8 | ) | - | 63 | ||||||||||||
Total other income (expense) | 28 | (8 | ) | (2,329 | ) | (2,309 | ) | ||||||||||
Income before provision for | |||||||||||||||||
income taxes | 192,956 | 7,113 | (3,173 | ) | 196,896 | ||||||||||||
Provision for income taxes | 73,690 | 2,701 | 16 | (5) | 76,407 | ||||||||||||
Net income | $ | 119,266 | $ | 4,412 | $ | (3,189 | ) | $ | 120,489 | ||||||||
Per Share Information | |||||||||||||||||
Net income per share Two Class Method: | |||||||||||||||||
Basic | $ | 1.89 | $ | 1.91 | |||||||||||||
Diluted | $ | 1.88 | $ | 1.90 | |||||||||||||
Weighted average shares used in computing net income per share: | |||||||||||||||||
Basic | 62,538 | 62,538 | |||||||||||||||
Diluted | 62,854 | 62,854 | |||||||||||||||
Cash dividend declared per common share | $ | 0.60 | $ | 0.60 |
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are an integral part of these financial statements.
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MSC Industrial Direct Co., Inc.
Pro Forma Condensed Consolidated Statement of Income for the Year Ended September 1, 2012
(In thousands, except per share data)
(Unaudited)
MSC Industrial Direct Co., Inc. | BDNA | Pro Forma Adjustments (Note 2) | Pro Forma Consolidated | ||||||||||||||
Net sales | $ | 2,355,918 | $ | 308,168 | $ | - | $ | 2,664,086 | |||||||||
Cost of goods sold | 1,277,715 | 159,754 | (20,701 | ) | (1),(3), (6) | 1,416,768 | |||||||||||
Gross profit | 1,078,203 | 148,414 | 20,701 | 1,247,318 | |||||||||||||
Operating expenses | 665,987 | 131,851 | 28,784 | (1), (3), (4) | 826,622 | ||||||||||||
Income from operations | 412,216 | 16,563 | (8,083 | ) | 420,696 | ||||||||||||
Other income (Expense): | |||||||||||||||||
Interest expense | (241 | ) | (3 | ) | (5,410 | ) | (2), (i) | (5,654 | ) | ||||||||
Interest income | 196 | - | - | 196 | |||||||||||||
Other income (expense), net | (29 | ) | (112 | ) | - | (141 | ) | ||||||||||
Total other income (expense) | (74 | ) | (115 | ) | (5,410 | ) | (5,599 | ) | |||||||||
Income before provision for | |||||||||||||||||
income taxes | 412,142 | 16,448 | (13,493 | ) | 415,097 | ||||||||||||
Provision for income taxes | 153,111 | 6,245 | (127 | ) | (5) | 159,229 | |||||||||||
Net income | $ | 259,031 | $ | 10,203 | $ | (13,366 | ) | $ | 255,868 | ||||||||
Per Share Information | |||||||||||||||||
Net income per share Two Class Method: | |||||||||||||||||
Basic | $ | 4.12 | $ | 4.06 | |||||||||||||
Diluted | $ | 4.09 | $ | 4.04 | |||||||||||||
Weighted average shares used in computing net income per share: | |||||||||||||||||
Basic | 62,434 | 62,434 | |||||||||||||||
Diluted | 62,803 | 62,803 | |||||||||||||||
Cash dividend declared per common share | $ | 1.00 | $ | 1.00 |
The accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements are an integral part of these financial statements.
5 |
MSC Industrial Direct Co., Inc.
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
On April 22, 2013, MSC Industrial Direct Co., Inc. (“MSC” or the “Company”) acquired (the “Acquisition”) substantially all of the assets and assumed certain liabilities of the North American distribution business (“BDNA” or the “Business”) of Barnes Group Inc. (NYSE: B) (“Barnes”), pursuant to the terms of the Asset Purchase Agreement, dated February 22, 2013, between the Company and Barnes (the “Asset Purchase Agreement”). In connection with the Acquisition, the total cash consideration we paid to Barnes was $548.8 million, subject to certain post closing adjustments set forth in the Asset Purchase Agreement. In connection with the Acquisition, we entered into a new $650.0 million credit facility (the “New Credit Facility”). The New Credit Facility, which matures on April 22, 2018, provides for a five-year unsecured revolving loan facility in the aggregate amount of $400.0 million and a five-year unsecured term loan facility in the aggregate amount of $250.0 million. On the Closing Date, we borrowed the full $250.0 million available under the term loan facility and $120.0 million of the revolving loan facility in order to pay a portion of the cash consideration for the Acquisition. The remainder of the cash consideration for the Acquisition was financed using existing cash. As of June 28, 2013, the Company has paid down its remaining outstanding balance on the revolving credit note.
The New Credit Facility replaced the Company’s existing $200.0 million Credit Agreement, dated June 8, 2011 (the “Existing Credit Facility”), which Existing Credit Facility was terminated on the Closing Date. The interest rate payable for all borrowings is based on the Company’s leverage and is currently 100 basis points over LIBOR rates. Under the terms of the New Credit Facility, we will be subject to various operating and financial covenants.
The accompanying unaudited and audited condensed consolidated financial statements for the Company and the Business are presented for each company’s reporting periods. The Company’s fiscal year is on a 52 or 53 week basis, ending on a Saturday closest to August 31. For the fiscal year ended September 1, 2012, the reporting period was 53 weeks. The reporting period of the Business is based on a calendar month, and the year ends on December 31 of each year.
The accompanying unaudited pro forma condensed consolidated financial information presents the pro forma results of operations and financial position of MSC and the Business on a combined basis based on the historical financial information of each company and after giving effect to the Acquisition of the Business by MSC on April 22, 2013. The Acquisition was recorded using the purchase method of accounting.
The unaudited pro forma condensed consolidated balance sheet has been prepared assuming the Acquisition occurred as of March 2, 2013. The unaudited pro forma condensed consolidated statements of income have been prepared assuming the Acquisition was completed on August 28, 2011, the first day of our fiscal year 2012.
For the pro forma condensed consolidated balance sheet, the $548.8 million purchase price has been allocated based on management’s preliminary estimate of the fair values of assets acquired and liabilities assumed as of April 22, 2013. For the twenty-six week period ended March 2, 2013, approximately $1.6 million of costs were incurred by the Company directly as a result of the Acquisition. The purchase price allocation is considered preliminary, particularly as it relates to the final valuation of certain identifiable intangible assets and there could be significant adjustments when the valuation is finalized. In addition certain post-closing purchase price adjustments set forth in the Asset Purchase Agreement may result in the Company paying an incremental purchase price amount or receiving an amount as a reduction in the purchase price, although such amount is not anticipated to be material in relation to the overall transaction and does not relate to intangible assets and the values accorded thereto. The preliminary estimate of the purchase price allocation is as follows (in thousands):
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Book value of net assets acquired | $ | 164,411 | ||
Less: Historical goodwill | (111,016 | ) | ||
Less: Historical intangible assets | (113 | ) | ||
Add: Amounts due to/from related parties | 22 | |||
Add: Accrued retirement benefits, net of related assets | 1,005 | |||
Adjusted book value of net assets acquired | $ | 54,309 | ||
Adjustments to: | ||||
Inventories | 1,671 | |||
Deferred income taxes | 19,626 | |||
Property, plant and equipment | 2,446 | |||
Identifiable intangible assets | 117,400 | |||
Goodwill | 353,317 | |||
Total adjustments | $ | 494,460 | ||
Purchase Price | $ | 548,769 |
Acquired intangible assets with a fair value of $117.4 million consist of customer relationships of $107.0 million with a useful life of 18 years, an indefinite lived tradename of $7.5 million and a tradename of $2.9 million with a useful life of 5 years. The goodwill recorded is based on the benefits the Company expects to generate from the future cash flows of the ongoing BDNA business. The goodwill amount of $353.3 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The primary items that generated the goodwill were the premium paid by the Company for the right to control the business acquired and the expected synergies from the result of adding a highly complementary provider of fasteners and other high margin consumable products and services with an experienced field sales force and Vendor Managed Inventory solution. In addition, the Acquisition extends the Company’s presence into Canada and other new end markets.
Note 2. Pro Forma Adjustments
The following are the descriptions of the pro forma condensed consolidated balance sheet adjustments:
(a) | To finance the Acquisition, the Company borrowed $250.0 million under its new term loan facility and $120.0 million of the revolving loan facility under the New Credit Facility, which was closed simultaneously with the Acquisition. The remainder of the cash consideration paid of $178.8 million was financed using existing cash. |
(b) | This adjustment reflects the fair value of the assets acquired and liabilities assumed in connection with the Acquisition at fair value. |
(c) | This adjustment is made to eliminate the stockholder’s equity of the Business. |
(d) | This adjustment is made to eliminate the goodwill of the Business of $111.0 million and establish new goodwill of $353.3 million. |
(e) | This adjustment is made to eliminate the identifiable intangible assets of $0.1 million of the Business and to reflect the estimated fair value of the intangible assets based on the preliminary purchase price allocation of the purchase price, which consist of customer relationships and tradenames and which totaled $117.4 million. |
(f) | This adjustment is made to eliminate $1.2 million in other assets of the Business associated with benefit plans and $2.2 million in accrued retirement benefits that were settled in conjunction with the Acquisition. |
(g) | This adjustment is made to eliminate intercompany receivables and payables of the Business in conjunction with the Acquisition. |
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(h) | This adjustment is to eliminate deferred taxes of the Business, since at the time of Acquisition, there is no difference between the book and tax value of the assets and liabilities acquired. |
(i) | This adjustment is to record debt issuance costs of $1.9 million associated with the Company’s New Credit Facility and write-off of $0.6 million of debt issuance costs associated with the Company’s previous $200.0 million Credit Agreement, dated June 8, 2011. Included in the pro forma for the fiscal year ended September 1, 2012 is a charge to interest expense for the write-off of the debt issuance costs associated with the Company’s previous $200.0 million Credit Agreement of $0.7 million. |
This adjustment also includes the additional amortization expense of $0.1 million and $0.2 million, respectively, for the twenty-six week period ended March 2, 2013 and fiscal year ended September 1, 2012, which is incurred as a result of the new debt issuance costs associated with the Company’s New Credit Facility. |
(j) | This adjustment is to accrue for non-recurring transaction costs of $4.0 million. |
The following are descriptions of the pro forma condensed consolidated statements of operations adjustments:
(1) | This adjustment represents the reclassification of the warehouse costs of the Business, which the Business records in cost of sales, to operating expenses to conform to the Company’s presentation. The amount of warehouse costs reclassified from cost of sales to operating expense for the twenty-six week period ended March 2, 2013 and for the fiscal year ended September 1, 2012 is $10.7 million and $23.1 million, respectively. |
(2) | This adjustment represents the increase in interest expense associated with the $250.0 million borrowing under the Company’s new term loan facility and $120.0 million of the revolving loan. The interest rate payable for all borrowings is based on the borrowing rate in effect at that date and is currently 100 basis points over LIBOR rates. A change of one-eighth of one percent in the interest rate on the Company’s borrowing would impact interest expense by $0.5 million and $0.2 million for the twenty-six week period ended March 2, 2013 and for the fiscal year ended September 1, 2012, respectively. At April 22, 2013, the interest rate was 1.2%. The additional interest expense recorded for the twenty-six week period ended March 2, 2013 and for the fiscal year ended September 1, 2012 is $2.2 million and $4.5 million, respectively. |
(3) | This adjustment is to remove pension expense associated with any benefit plans that were not assumed in connection with the Acquisition. The amount of pension expense removed from cost of sales and operating expense for the twenty-six week period ended March 2, 2013 was $0.2 million and $0.6 million, respectively. The amount of pension expense removed from cost of sales and operating expense for the fiscal year ended September 1, 2012 was ($0.7) million and $0.8 million, respectively. |
(4) | This adjustment records the amortization expense of intangible assets subject to amortization estimated on a straight-line basis over eighteen years for customer relationships and five years for tradenames. Additional amortization expense recorded for the twenty-six week period ended March 2, 2013 and for the fiscal year ended September 1, 2012 is $3.2 million and $6.5 million, respectively. |
(5) | This adjustment is based on the pre-tax income effect of the pro forma adjustments calculated at a rate of 38.20% and 37.20%, respectively, for the twenty-six week period ended March 2, 2013 and the fiscal year ended September 1, 2012. |
(6) | This adjustment to cost of sales is to record the fair value adjustment of finished goods inventory acquired. The amount included in cost of sales for the fiscal year ended September 1, 2012 is $1.7 million. |
(7) | This adjustment to operating expenses is to remove non-recurring transaction costs associated with the Acquisition. The amount of non-recurring transaction costs associated with the Acquisition removed from operating expense for the twenty-six week period ended March 2, 2013 is $1.6 million. |
8 |