UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 18, 2014
LYDALL, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 1-7665
| Delaware | 06-0865505 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| One Colonial Road, Manchester, Connecticut | 06042 | |
| (Address of principal executive offices) | (zip code) |
Registrant’s telephone number, including area code: (860) 646-1233
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)) |
Explanatory Note
On February 24, 2014, Lydall, Inc. (the “Company”) filed a report on Form 8-K (the “Initial Form 8-K”) to report the completion of its acquisition of certain industrial filtration businesses of Andrew Industries Limited (“Seller”), a United Kingdom based corporation, (the “Acquisition”). The Acquisition was consummated pursuant to the terms of a Sale and Purchase Agreement, dated as of February 20, 2014 (the “Purchase Agreement”), by and among the Seller, the Company and Lydall UK Ltd, an indirect subsidiary of the Company (together, with the Company, the “Buyers”). Pursuant to the terms of the Purchase Agreement, the Buyers acquired all of the issued and outstanding shares of capital stock of Andrew Webron Limited, Andrew Webron Filtration Limited, Andrew Industries (Hong Kong) Limited and Southern Felt Company, Inc.
As part of the Initial Form 8-K, the Company indicated that the financial statements and pro forma financial information under Item 9.01 would be filed no later than 71 days after the date the initial Form 8-K reporting the Acquisition was required to be filed. This amendment to the Initial Form 8-K, is to provide the financial statements and pro forma financial information required by Item 9.01 of Form 8-K.
| 2 |
Section 9 - Financial Statements and Exhibits
Item 9.01. Financial Statements and Exhibits
| (a) | Financial Statements of business acquired. |
The audited carve out combined financial statements of Southern Felt Company, Inc., Andrew Webron Limited, Andrew Webron Filtration Limited, Andrew Industries Textile Manufacturing Company (Shanghai) Limited, Andrew Industries Textile Manufacturing Company (Wuxi) Limited, Andrew Industries Textile Trading Company (Shanghai) Limited and Andrew Industries (Hong Kong) Limited (collectively, the “Filtration Division of Andrew Industries Limited” or “Industrial Filtration”) as of and for the year ended March 31, 2013 and the related notes are attached as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated herein by reference.
The historical unaudited condensed carve out combined financial statements of the Filtration Division of Andrew Industries Limited as of September 30, 2013 and March 31, 2013 and for the six months ended September 30, 2013 and September 30, 2012 and the related notes, are attached as Exhibit 99.3 to this Current Report on Form 8-K/A and are incorporated herein by reference.
| (b) | Pro Forma financial statements. |
The unaudited pro forma condensed combined financial statements as of and for the nine months ended September 30, 2013, and for the year ended December 31, 2012, are attached as Exhibit 99.4 to this Current Report on Form 8-K/A and are incorporated herein by reference.
| (d) | Exhibits. |
The following exhibits are included with this report, as set forth below:
| Exhibit | Exhibit |
| Number | Description |
| 10.1 | Sale and Purchase Agreement, dated February 20, 2014, by and among the Andrews Industries Limited, Lydall, Inc. and Lydall UK Ltd. (The registrant will supplementally furnish any omitted schedules to the Commission upon request.)* |
| 10.2 | Amended and Restated Credit Agreement, dated February 18, 2014, by and between Lydall, Inc., as borrower, and Bank of America, N.A., as Agent for the Lenders.* |
| 10.3 | Amended and Restated Guaranty Agreement, dated February 18, 2014, by and among Lydall Thermal/Acoustical, Inc., Lydall Filtration/Separation, Inc., Lydall International, Inc., and Bank of America, N.A.* |
| 10.4 | Amended and Restated Security Agreement, dated February 18, 2014 by and between Lydall, Inc., and Bank of America, N.A.* |
| 10.5 | Amended and Restated Security Agreement, dated February 18, 2014 by and between Lydall Thermal/Acoustical, Inc., and Bank of America, N.A.* |
| 10.6 | Amended and Restated Security Agreement, dated February 18, 2014 by and between Lydall Filtration/Separation, Inc., and Bank of America, N.A.* |
| 3 |
| 10.7 | Amended and Restated Security Agreement, dated February 18, 2014 by and between Lydall International, Inc., and Bank of America, N.A.* |
| 23.1 | Consent of McGladrey LLP |
| 99.1 | Investor Presentation, dated February 21, 2014 (Furnished not filed; see Item 7.01)* |
| 99.2 | Audited carve out combined balance sheet of the Filtration Division of Andrew Industries Limited as of March 31, 2013 and the related carve out combined statement of income and comprehensive income, carve out combined statement of changes in parent equity, and carve out combined statement of cash flows for the year ended March 31, 2013 and the related notes |
| 99.3 | Unaudited condensed carve out combined balance sheets of the Filtration Division of Andrew Industries Limited as of September 30, 2013 and March 31, 2013 and the related carve out combined statements of income and comprehensive income and carve out combined statements of cash flows for the six months ended September 30, 2013 and September 30, 2012 and the related notes |
| 99.4 | Unaudited pro forma condensed combined financial statements as of and for the nine months ended September 30, 2013 and for the year ended December 31, 2012 and the related notes |
* Previously filed or furnished
| 4 |
Cautionary Statements
Under the Private Securities Litigation Reform Act of 1995
Any statements contained in this Current Report on Form 8-K/A
that are not statements of historical fact may be deemed to be forward-looking statements. All such forward-looking statements
are intended to provide management’s current expectations for the future operating and financial performance of the Company
based on current expectations and assumptions relating to the Company’s business, the economy and other future conditions.
Forward-looking statements generally can be identified through the use of words such as “believes,” “anticipates,”
“may,” “should,” “will,” “plans,” “projects,” “expects,”
“estimates,” “forecasts,” “predicts,” “targets,” “prospects”, “strategy,”
“signs,” and other words of similar meaning in connection with the discussion of future operating or financial performance.
Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and changes in circumstances
that are difficult to predict. Such risks and uncertainties include, among others, worldwide economic cycles that affect the markets
that the Company’s businesses serve which could have an effect on demand for the Company’s products and impact the
Company’s profitability, challenges encountered by Lydall in the integration of the acquired businesses, disruptions in the
global credit and financial markets, including diminished liquidity and credit availability, swings in consumer confidence and
spending, unstable economic growth, raw material pricing and supply issues, fluctuations in unemployment rates, and increases in
fuel prices, which could cause economic instability and could have a negative impact on the Company’s results of operations
and financial condition. Additional information regarding the factors that may cause actual results to differ materially from these
forward-looking statements is available in our filings with the Securities and Exchange Commission, including the risks and uncertainties
identified in Part I, Item 1A - Risk Factors of Lydall’s Annual Report on Form 10-K for the year ended December 31, 2013.
Accordingly, the Company’s actual results may differ materially from those contemplated by forward-looking statements. Investors,
therefore, are cautioned against relying on any of these forward-looking statements. They are neither statements of historical
fact nor guarantees or assurances of future performance. These forward-looking statements speak only as of the date of this Form
8-K/A, and Lydall does not assume any obligation to update or revise any forward-looking statement made in this Form 8-K/A or that
may from time to time be made by or on behalf of the Company.
| 5 |
SIGNATURE
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 thereunto duly authorized.
| LYDALL, INC. | |||||
| May 2, 2014 | By: | /s/ James V. Laughlan | |||
|
James V. Laughlan Vice President, Chief Accounting Officer and Treasurer | |||||
| 6 |
EXHIBIT INDEX
| Exhibit | Exhibit |
| Number | Description |
| 10.1 | Sale and Purchase Agreement, dated February 20, 2014, by and among the Andrews Industries Limited, Lydall, Inc. and Lydall UK Ltd. (The registrant will supplementally furnish any omitted schedules to the Commission upon request.)* |
| 10.2 | Amended and Restated Credit Agreement, dated February 18, 2014, by and between Lydall, Inc., as borrower, and Bank of America, N.A., as Agent for the Lenders.* |
| 10.3 | Amended and Restated Guaranty Agreement, dated February 18, 2014, by and among Lydall Thermal/Acoustical, Inc., Lydall Filtration/Separation, Inc., Lydall International, Inc., and Bank of America, N.A.* |
| 10.4 | Amended and Restated Security Agreement, dated February 18, 2014 by and between Lydall, Inc., and Bank of America, N.A.* |
| 10.5 | Amended and Restated Security Agreement, dated February 18, 2014 by and between Lydall Thermal/Acoustical, Inc., and Bank of America, N.A.* |
| 10.6 | Amended and Restated Security Agreement, dated February 18, 2014 by and between Lydall Filtration/Separation, Inc., and Bank of America, N.A.* |
| 10.7 | Amended and Restated Security Agreement, dated February 18, 2014 by and between Lydall International, Inc., and Bank of America, N.A.* |
| 23.1 | Consent of McGladrey LLP |
| 99.1 | Investor Presentation, dated February 21, 2014 (Furnished not filed; see Item 7.01)* |
| 99.2 | Audited carve out combined balance sheet of the Filtration Division of Andrew Industries Limited as of March 31, 2013 and the related carve out combined statement of income and comprehensive income, carve out combined statement of changes in parent equity, and carve out combined statement of cash flows for the year ended March 31, 2013 and the related notes |
| 99.3 | Unaudited condensed carve out combined balance sheets of the Filtration Division of Andrew Industries Limited as of September 30, 2013 and March 31, 2013 and the related carve out combined statements of income and comprehensive income and carve out combined statements of cash flows for the six months ended September 30, 2013 and September 30, 2012 and the related notes |
| 99.4 | Unaudited pro forma condensed combined financial statements as of and for the nine months ended September 30, 2013 and for the year ended December 31, 2012 and the related notes |
* Previously filed or furnished
| 7 |
CONSENT OF INDEPENDENT AUDITOR
We consent to the incorporation by reference in Registration Statements (Nos. 333-08886, 333-109500, 333-160511, and 333-181139) on Form S-8 of Lydall, Inc. of our report dated February 12, 2014, relating to our audit of the carve out combined financial statements of Southern Felt Company, Inc., Andrew Webron Limited, Andrew Webron Filtration Limited, Andrew Industries Textile Manufacturing Company (Shanghai) Limited, Andrew Industries Textile Manufacturing Company (Wuxi) Limited, Andrew Industries Textile Trading Company (Shanghai) Limited and Andrew Industries (Hong Kong) Limited (collectively, the Filtration Division of Andrew Industries Limited), as of and for the year ended March 31, 2013, included in this Current Report on Form 8-K/A.
/s/ McGladrey LLP
Atlanta, Georgia
May 2, 2014
Exhibit 99.2
Southern Felt Company, Inc., Andrew Webron Limited, Andrew Webron Filtration Limited, Andrew Industries Textile Manufacturing Company (Shanghai) Limited, Andrew Industries Textile Manufacturing Company (Wuxi) Limited, Andrew Industries Textile Trading Company (Shanghai) Limited and Andrew Industries (Hong Kong) Limited (collectively, the Filtration Division of Andrew Industries Limited)
CARVE OUT COMBINED FINANCIAL STATEMENTS
As of and For the Year Ended
March 31, 2013
FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED
CARVE OUT COMBINED FINANCIAL STATEMENTS
As of and for the year ended March 31, 2013
| INDEX | PAGE |
| Independent Auditor’s Report | 1-2 |
| Carve Out Combined Balance Sheet as of March 31, 2013 | 3 |
| Carve out Combined Statement of Income and Comprehensive Income for the year ended March 31, 2013 | 4 |
| Carve out Combined Statement of Changes in Parent Equity for the year ended March 31, 2013 | 5 |
| Carve out Combined Statement of Cash Flows for the year ended March 31, 2013 | 6-7 |
| Notes to Carve Out Combined Financial Statements | 8-25 |
Independent Auditor’s Report
To the Board of Directors
Andrew Industries
Altham, England
Report on the Financial Statements
We have audited the accompanying carve out combined financial statements of Southern Felt Company Inc., Andrew Webron Limited, Andrew Webron Filtration Limited, Andrew Industries Textile Manufacturing Company (Shanghai) Limited, Andrew Industries Textile Manufacturing Company (Wuxi) Limited, Andrew Industries Textile Trading Company (Shanghai) Limited and Andrew Industries (Hong Kong) Limited (collectively, the Filtration Division of Andrew Industries Limited (“Filtration Division”)) which comprise the carve out combined balance sheet as of March 31, 2013, and the related carve out combined statements of income and comprehensive income, changes in Parent equity, and cash flows for the year then ended, and the related notes to the carve out combined financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these 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 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 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 financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the 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 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 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 carve out combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Filtration Division of Andrew Industries Limited as of March 31, 2013, and the combined 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.
| Page 1 |
Emphasis of Matter
We draw attention to the fact that, as described in Note 1, the Filtration Division has not operated as a separate entity. These carve-out combined financial statements are, therefore, not necessarily indicative of results that would have occurred if the Filtration Division had been a separate stand-alone entity for the year presented or of the future results of the Filtration Division. Our opinion has not been modified with respect to this matter.
/s/ McGladrey LLP
Atlanta, Georgia
February 12, 2014
| Page 2 |
FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED
CARVE OUT COMBINED BALANCE SHEET
As of March 31, 2013 (Amounts in Thousands of U.S. Dollars)
| Note | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 2,713 | ||||||
| Accounts receivable-trade, net of allowance for doubtful accounts | ||||||||
| of $547 | 2 | 24,964 | ||||||
| Accounts receivable - related parties | 19 | 2,171 | ||||||
| Accounts receivable - other | 3 | 1,680 | ||||||
| Inventory, net | 4 | 21,491 | ||||||
| Prepaid expenses and other current assets | 5 | 1,589 | ||||||
| Note receivable -related party | 19 | 3,623 | ||||||
| Deferred tax assets | 14 | 594 | ||||||
| Total current assets | 58,825 | |||||||
| Non-current assets | ||||||||
| Property, plant and equipment, net | 6 | 30,131 | ||||||
| Property, plant and equipment under capital leases, net | 11 | 2,346 | ||||||
| Goodwill | 18 | 642 | ||||||
| Other assets | 32 | |||||||
| Total assets | $ | 91,976 | ||||||
| Liabilities and parent equity | ||||||||
| Current liabilities | ||||||||
| Lines of credit | 9 | $ | 3,519 | |||||
| Current portion of capital lease obligations | 11 | 348 | ||||||
| Current portion of long term debt - related parties | 12 | 12,248 | ||||||
| Current portion of long term debt | 13 | 2,254 | ||||||
| Accounts payable - trade | 11,773 | |||||||
| Accounts payable - other | 7 | 1,329 | ||||||
| Accounts payable - related parties | 19 | 232 | ||||||
| Accrued expenses and other current liabilities | 8 | 2,350 | ||||||
| Accrued expenses - related parties | 12 | 1,899 | ||||||
| Deferred revenue | 2 | 1,916 | ||||||
| Total current liabilities | 37,868 | |||||||
| Long term liabilities | ||||||||
| Long term portion of capital lease obligations | 11 | 1,487 | ||||||
| Long term debt - related parties | 12 | 1,911 | ||||||
| Long term debt | 13 | 2,806 | ||||||
| Deferred income taxes | 14 | 2,262 | ||||||
| Long term accounts payable - other | 10 | 592 | ||||||
| Total liabilities | $ | 46,926 | ||||||
| Commitments and contingencies | 15,16 | |||||||
| Parent Equity | ||||||||
| Net Parent investment | 42,638 | |||||||
| Accumulated other comprehensive income | 2,412 | |||||||
| Total parent equity | 45,050 | |||||||
| Total liabilities and parent equity | $ | 91,976 | ||||||
The accompanying notes are an integral part of these carve out combined financial statements.
| Page 3 |
FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED
CARVE OUT COMBINED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars)
| Note | ||||||||
| Net sales | 1 | $ | 119,881 | |||||
| Cost of sales | 103,279 | |||||||
| Gross profit | 16,602 | |||||||
| General and administrative expenses | 1 | 6,550 | ||||||
| Selling expenses | 4,613 | |||||||
| Operating income | 5,439 | |||||||
| Interest income - other | (4 | ) | ||||||
| Interest income - related party | 19 | (90 | ) | |||||
| Interest expense - other | 231 | |||||||
| Interest expense - related parties | 19 | 412 | ||||||
| Loss on foreign exchange transactions | 183 | |||||||
| Total other expenses | 732 | |||||||
| Income before income taxes | 4,707 | |||||||
| Income tax expense | 14 | 1,728 | ||||||
| Net income | 2,979 | |||||||
| Other comprehensive income, net of tax: | ||||||||
| Foreign currency translation | 272 | |||||||
| Comprehensive income | $ | 2,707 | ||||||
The accompanying notes are an integral part of these carve out combined financial statements.
| Page 4 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
CARVE OUT COMBINED STATEMENT OF CHANGES IN PARENT EQUITY |
| For the year ended March 31, 2013 {Amounts in Thousands of U.S. Dollars) |
| Accumulated | ||||||||||||
| other | ||||||||||||
| Net Parent | comprehensive | Total Parent | ||||||||||
| investment | income | equity | ||||||||||
| Balance at April 1, 2012 | $ | 38,107 | $ | 2,684 | $ | 40,791 | ||||||
| Parent investment | 2,552 | 2,552 | ||||||||||
| Comprehensive income: | ||||||||||||
| Net income | 2,979 | 2,979 | ||||||||||
| Other comprehensive income, net of tax: | ||||||||||||
| Foreign currency translation | (272 | ) | (272 | ) | ||||||||
| Other comprehensive income | (272 | ) | (272 | ) | ||||||||
| Dividends paid to parent | (1,000 | ) | (1,000 | ) | ||||||||
| Balance at March 31, 2013 | $ | 42,638 | $ | 2,412 | $ | 45,050 | ||||||
The accompanying notes are an integral part of these carve out combined financial statements.
| Page 5 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| CARVE OUT COMBINED STATEMENT OF CASH FLOWS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
| Cash Flows from Operating Activities: | ||||
| Net income | $ | 2,979 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Depreciation | 4,256 | |||
| Deferred income taxes | 1,026 | |||
| Other | 10 | |||
| (Increase) /decrease in assets: | ||||
| Decrease in accounts receivable – trade | 280 | |||
| Decrease in accounts receivable – related parties | 131 | |||
| (Increase) in accounts receivable – other | (183 | ) | ||
| (Increase) in inventory | (1,163 | ) | ||
| (Increase) in prepaid expenses and other assets | (368 | ) | ||
| Increase/(decrease) in liabilities: | ||||
| (Decrease) in accounts payable – trade | (2,158 | ) | ||
| Increase in accounts payable – other | 2,196 | |||
| (Decrease) in accounts payable – related parties | (261 | ) | ||
| Increase in accrued expenses and other current liabilities | 747 | |||
| Increase in accrued expenses – related party | 304 | |||
| (Decrease) in deferred revenue | (306 | ) | ||
| Net cash provided by operating activities | 7,490 | |||
| Cash Flows from Investing Activities: | ||||
| Payments for property, plant and equipment | (5,435 | ) | ||
| Proceeds from sale of property, plant and equipment | 157 | |||
| Cash paid for business acquisition, net of cash acquired | (218 | ) | ||
| Net cash used in investing activities | (5,496 | ) | ||
| Cash Flows from Financing Activities: | ||||
| Dividends paid to parent | (1,000 | ) | ||
| Proceeds from parent investment | 1,027 | |||
| Net borrowings on lines of credit | 1,365 | |||
| Repayment of debt | (2,787 | ) | ||
| Proceeds from issuance of debt | 698 | |||
| Net cash used in financing activities | (697 | ) | ||
| Effect of exchange rate changes on cash | 168 | |||
| Net increase in cash | 1,465 | |||
| Cash at beginning of year | 1,248 | |||
| Cash at end of year | $ | 2,713 |
The accompanying notes are an integral part of these carve out combined financial statements.
| Page 6 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| CARVE OUT COMBINED STATEMENT OF CASH FLOWS (CONTINUED) |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
| Supplemental cash flow information: | ||||
| Cash paid for interest | $ | 316 | ||
| Cash paid for taxes | 2,015 | |||
| Supplemental noncash investing and financing activities: | ||||
| Assets acquired under capital leases | $ | 2,346 | ||
| Payment of debt through parent contribution | 1,525 | |||
| Payment of debt through intercompany tax relief | 96 | |||
| Accrued consideration for business acquisition | 912 |
The accompanying notes are an integral part of these carve out combined financial statements.
| Page 7 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 1 - BASIS OF PRESENTATION
The accompanying carve out combined financial statements include the accounts of Southern Felt Company, Inc., Andrew Webron Limited, Andrew Webron Filtration Limited, Andrew Industries Textile Manufacturing Company (Shanghai) Limited, Andrew Industries Textile Manufacturing Company (Wuxi) Limited, Andrew Industries Textile Trading Company (Shanghai) Limited and Andrew Industries (Hong Kong) Limited (collectively, the Filtration Division of Andrew Industries Limited (“Parent Company” or “Parent”)) and have been derived from the historical accounting records of the Parent Company.
The combined financial statements reflect the carve-out financial position and the related results of operations, cash flows and the Parent’s net investment in a manner consistent with Parent Company management of the Filtration Division and as though the Filtration Division had been a stand-alone company for the period presented. The carve out combined financial statement have been prepared in accordance with Securities and Exchange Commission (“SEC”) Regulation S-X, Article 3, General Instructions to Financial Statements and SEC Staff Accounting Bulletin Topic 1 -B, Allocations of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity.
CORPORATE ALLOCATIONS AND PARENT EQUITY
The carve out combined financial statements include expense allocations for certain functions provided by the Parent Company, including but not limited to, sales and marketing, technical support, human resources, treasury and accounting, global purchasing and legal.
The direct costs of each Parent Company employee for the year were allocated to the Filtration Division by relating them to the percentage of estimated time spent in support of the Filtration Division. These costs included salaries, benefits, travel expenses and other operating costs.
For the year ended March 31, 2013, the Filtration Division was allocated costs totaling $1,995 incurred by the Parent Company, which are included in the general and administrative expenses in the accompanying carve out combined statement of income and comprehensive income.
The expense allocations have been determined on a basis that both the Filtration Division and the Parent Company consider to be a reasonable reflection of the utilization of services provided or the benefit received. However, the carve out combined financial statements included herein may not necessarily represent what the Filtration Division’s financial position, results of operations and cash flows would have been had it been a stand-alone entity for the year presented, or what the Filtration Division’s financial position, results of operations, and cash flows may be in the future.
The amounts of common stock and retained earnings of each entity included in these combined financial statements have been reflected as Net Parent Investment in the accompanying carves out combined financial statements.
| Page 8 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
CARVE OUT ENTITIES
The principal activities of the Filtration Division are the manufacture and sale of industrial felt textile products for the pollution control, filtration, laundry and automotive industries. The country of incorporation and the ownership structure of each subsidiary are listed below:
| Country of | ||||
| incorporation | Percentage ownership | |||
| Andrew Webron Limited | England | 100% owned by Parent Company | ||
| Andrew Webron Filtration Limited | England | 100% owned by Parent Company | ||
| Southern Felt Company Inc. | USA | 100% owned by Parent Company | ||
| Andrew Industries (Hong Kong) Limited | Hong Kong | 100% owned by Parent Company | ||
| Andrew Industrial Textile Manufacturing Company (Shanghai) Limited | China | 100% owned by Andrew Industries (Hong Kong) Limited | ||
| Andrew Industries Textile Manufacturing Company (Wuxi) Limited | China | 100% owned by Andrew Industries (Hong Kong) Limited | ||
| Andrew Industries Textile Trading Company (Shanghai) Limited | China | 100% owned by Parent Company |
NATURE OF OPERATIONS
Net sales and total assets for each subsidiary of the Filtration Division consist of the following as of and for the year ended March 31, 2013:
| Principal Market | Net Sales | Total Assets | ||||||||
| Andrew Webron Limited | England | $ | 18,662 | $ | 15,182 | |||||
| Andrew Webron Filtration Limited | England | 3,842 | 5,040 | |||||||
| Southern Felt Company Inc. | USA | 70,484 | 45,108 | |||||||
| Andrew Industrial Textile Manufacturing Company (Shanghai) Limited | China | 21,615 | 22,123 | |||||||
| Andrew Industries Textile Manufacturing Company (Wuxi) Limited | China | 5,180 | 4,117 | |||||||
| Andrew Industries Textile Trading Company (Shanghai) Limited | China | 98 | 352 | |||||||
| Andrew Industries (Hong Kong) Limited | Hong Kong | 54 | ||||||||
| $ | 119,881 | $ | 91,976 | |||||||
Andrew Industries (Hong Kong) Limited is a holding company and, as a result, did not generate any net revenues for the year ended March 31, 2013.
| Page 9 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of combination
The accompanying carve out combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of the Filtration Division. All intra-divisional transactions and balances have been eliminated.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain 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 revenue and expenses during the reported period. The most significant estimates and assumptions included in these financial statements are the valuation of inventory and the recoverability of accounts receivable. Actual results could differ from these estimates and assumptions.
Accounts receivable
The Filtration Division’s accounts receivable is comprised of amounts due from customers. Accounts receivable are included in the combined balance sheet net of any allowance for doubtful accounts. The allowance for doubtful accounts is based on management’s assessment of the collectability of customer accounts. Management reviews the allowance for adequacy by considering factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay.
The Filtration Division writes off accounts receivable balances when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Interest is not charged on past due receivables.
Inventory
Inventory consists of raw materials, work in progress, and finished goods. Inventory is stated at the lower of cost or market, using the first-in, first out and weighted average cost methods. Inventories are recorded net of reserves for excess or obsolete inventory, which are based on the age of inventory and an estimate of the likelihood the cost of inventory will be recovered based on forecasted demand and probable selling price.
Property, plant and equipment
Property plant and equipment are stated at cost net of accumulated depreciation. The Filtration Division’s policy is to capitalize expenditures that materially increase asset lives and expense ordinary repairs and maintenance as incurred.
Depreciation of property, plant and equipment is provided on the straight-line method over the estimated useful lives of the assets. The major categories of assets are depreciated over the following estimated useful lives:
| Land improvements | 20 years |
| Buildings | 50 years |
| Leasehold improvements | Lesser of the lease term or the estimated useful life of the related asset |
| Plant, machinery & equipment | 5 to 10 years |
| Furniture and fittings | 3 to 10 years |
| Office equipment | 3 to 10 years |
| Vehicles | 4 to 5 years |
Construction in progress assets are not depreciated until such time as the assets are ready for their intended use.
| Page 10 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination. Goodwill is not amortized but may be written down for subsequent impairment. Goodwill impairment is tested annually or when events occur or circumstances change that more likely than not would reduce the value of goodwill below its carrying value.
The goodwill impairment test involves two steps. In the first step the fair value of each reporting unit is compared with its carrying amount, including goodwill. For purposes of the first step, the fair value of a reporting unit determined in the prior year may be carried forward under certain circumstances. The fair value of each reporting unit is determined based on expected discounted future cash flows and a market comparable method. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired. If goodwill is considered impaired, an impairment loss equal to the excess of the carrying amount of goodwill over the implied fair value of the goodwill would be recorded. There was no goodwill impairment for the year ended March 31, 2013.
Impairment of long lived assets
The Filtration Division reviews long-lived assets, including property, plant and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on undiscounted cash flows. If long-lived assets are impaired, an impairment loss is recognized and is measured as the amount by which the carrying value exceeds the estimated fair value of the assets. There was no impairment of long lived assets for the year ended March 31, 2013.
Income taxes
The provision for income taxes is comprised of taxes that are currently payable and deferred taxes that relate to temporary differences between financial reporting carrying values and tax bases of assets and liabilities and has been computed on a separate return basis. Income taxes are accounted for under an asset and liability approach that requires the recognition of deferred income tax assets and liabilities for the expected future consequences of events that have been recognized in the Filtration Division’s financial statements and Income tax returns. The Filtration Division provides a valuation allowance for deferred income tax assets when it is considered more likely than not that all or a portion of such deferred income tax assets will not be realized.
Applicable accounting guidance requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Accounting provisions also require that a change in judgment that results in subsequent recognition, de-recognition, or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) be recognized as a discrete item in the period in which the change occurs.
The Filtration Division evaluated the likelihood of recognizing the benefit for income tax positions taken in various federal, state and foreign filings by considering all relevant facts, circumstances, and information available. No amounts of unrecognized tax benefits have been recorded in the Filtration Division’s combined financial statements as of March 31, 2013.
The Filtration Division recognizes interest and penalties related to uncertain tax positions in income tax expense. For the year ended March 31, 2013, the Filtration Division had no provisions for interest or penalties related to uncertain tax positions.
| Page 11 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency translation
The financial statements of the non-U.S. subsidiaries included in these carve out combined financial statements are translated into U.S. dollars for financial reporting purposes. The functional currency of each non-U.S. subsidiary is its local currency. The cumulative translation adjustments are reflected in accumulated other comprehensive income in Parent equity.
Accordingly, all assets and liabilities of the Filtration Division whose functional currency is not the U.S. dollar are translated at the appropriate exchange rate at the end of the fiscal year and revenues and expenses at average rates in effect during the fiscal year.
Revenue recognition
Revenue is recognized when persuasive evidence of an arrangement exists, our products have been shipped and title and risk of loss have passed to the customer, the sales amount is fixed or determinable and collectability of the amount billed is reasonably assured. We record provisions for discounts, returns, allowances and other adjustments in the same period as the related revenues are recorded.
Deferred revenue of approximately $1.9 million relates to cash received from customers in advance of the goods being shipped to such customers. The deferred revenue is recognized when the goods are shipped to the customer and title and risk of loss have passed to the customer.
Shipping and handling costs
Net sales include amounts billed to customers for shipping and handling at the time of shipment. Costs incurred for shipping and handling total $1,838 and are included in selling expenses in the accompanying carve out combined statement of income and comprehensive income.
General and administrative expenses
General and administrative expenses primarily include payroll and benefit costs for its administrative departments, advertising, and other operating expenses not specifically categorized elsewhere in the carve out combined statement of income and comprehensive income. General and administrative expenses include $1,995 in allocated costs of the Parent Company. See Note 1 for additional information.
Advertising costs
Costs associated with advertising are charged to expense when the advertising first takes place. For the year ended March 31, 2013, the Filtration Division incurred advertising costs of approximately $111, which have been classified as selling expenses in the accompanying carve out combined statement of income and comprehensive income.
Concentration of risks
The Filtration Division’s customer base is concentrated in the specific markets of felt products provided to the laundry, food and beverage, pollution control and filtration felt industries. The Filtration Division’s risk is dependent upon the general business and economic climate of these markets.
For the year ended March 31, 2013 approximately 12% of the Filtration Division’s net sales were to one customer. Loss of this customer could have a significant effect on the combined operations.
| Page 12 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the year ended March 31, 2013, the Filtration Division obtained approximately 50% of its raw materials from seven unrelated sources. None of these suppliers provides a product that is not available from alternative sources. Accounts payable due to one of these major suppliers represented approximately 18% of total accounts payable- trade at March 31, 2013.
The Filtration Division finances its operations through a mixture of retained earnings, Parent investment, borrowings from related parties and external borrowings. The external borrowings and borrowings from the parent and other related parties are a mixture of variable and fixed rate interest loans minimizing any cash flow risk associated with changes in interest rates on variable-rate borrowings.
The Filtration Division has assets and liabilities and transactions denominated in foreign currency which are exposed to foreign currency risk. The Filtration Division does not have a formal foreign currency hedging policy however management monitors foreign exchange exposure to minimize any cash flow risk.
Subsequent events
Management has evaluated subsequent events for potential disclosure in or adjustment to the combined financial statements through February 12, 2014, the date that the accompanying carve out combined financial statements were available to be issued. Based on such evaluation, other than as disclosed in Note 20, no events have occurred that in the opinion of management warrant disclosure in or adjustment to the carve out combined financial statements.
NOTE 3 - ACCOUNTS RECEIVABLE – OTHER
Accounts receivable - other consists of the following as of March 31, 2013:
| Value added tax receivable | $ | 598 | ||
| Other receivables | 1,082 | |||
| $ | 1,680 |
NOTE 4 - INVENTORY
Inventory consists of the following as of March 31, 2013:
| Raw Materials | $ | 10,238 | ||
| Work in Process | 2,025 | |||
| Finished Goods | 10,677 | |||
| 22,940 | ||||
| Less inventory reserve | (1,449 | ) | ||
| $ | 21,491 |
NOTE 5 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following as of March 31, 2013:
| Prepaid income taxes | $ | 1,148 | ||
| Other prepaid expenses | 435 | |||
| Other assets | 6 | |||
| $ | 1,589 |
| Page 13 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consists of the following at March 31, 2013:
| Land and land improvements | $ | 985 | ||
| Buildings | 8,445 | |||
| Leasehold improvements | 352 | |||
| Plant, machinery and equipment | 66,460 | |||
| Furniture and equipment | 335 | |||
| Office equipment | 1,669 | |||
| Vehicles | 661 | |||
| Construction in progress | 321 | |||
| 79,228 | ||||
| Less accumulated depreciation | (49,097 | ) | ||
| $ | 30,131 |
Depreciation expense totaled $4,256 for the year ended March 31, 2013.
In the accompanying carve out combined statement of income and comprehensive income, depreciation expense on production and operating property, plant and equipment is included in cost of goods sold, and depreciation expense on non-production and non-operating property, plant and equipment is included in general and administrative expenses, and selling expenses.
NOTE 7 - ACCOUNTS PAYABLE-OTHER
Accounts payable-other consists of the following at March 31, 2013:
| Taxation and social security | $ | 139 | ||
| Accrued consideration for business acquisition (see Note 18) | 456 | |||
| Other payables | 734 | |||
| $ | 1,329 |
NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at March 31, 2013:
| Accrued wages | $ | 772 | ||
| Accrued holiday pay | 305 | |||
| Accrued interest | 10 | |||
| Other accrued liabilities | 1,073 | |||
| Other current liabilities | 190 | |||
| $ | 2,350 |
| Page 14 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 9 - LINES OF CREDIT
Lines of credit consist of the following as of March 31, 2013:
| Line of credit - UK | $ | 1,888 | ||
| Line of credit - U.S. | 1,631 | |||
| $ | 3,519 |
Andrew Webron Limited and Andrew Webron Filtration Limited are both part of the same credit facility, which provides the Parent Company and its UK subsidiaries with an operating line of credit. This facility is arranged by the Parent Company and there is no individual limit per subsidiary as long as the total facility does not exceed the specified limit of $4,600. Total borrowings on this facility as of March 31, 2013 were $4,227. The line of credit bears interest at UK base rate (0.5% at March 31, 2013) plus 1.9%, is due upon demand and matures in April 2015.
Andrew Webron Limited’s and Andrew Webron Filtration Limited’s outstanding balance on the line of credit was $1,466 and $422, respectively, as of March 31, 2013. Both lines of credit are secured by an interest in their respective land and buildings. In addition Andrew Webron Filtration Limited’s line of credit is also secured by an interest in all of its other assets.
The UK lines of credit are guaranteed by the Parent Company and its UK subsidiaries. See Note 16 for additional information.
Southern Felt Company has a $5,000 line of credit \with a bank, which is due upon demand and matures on November 10, 2014. Borrowings under the line bear interest at the variable one month LIBOR rate (0.20% at March 31, 2013) plus 2.35%. The availability under this line of credit is based on eligible receivables and eligible inventory, as defined in the line of credit agreement. Maximum borrowing capacity under this line credit as of March 31, 2013 was $3,766. The outstanding balance on this line of credit as of March 31, 2013 was approximately $1,631.
The line of credit is secured by inventory and guaranteed by the Parent Company and Southern Felt Company’s subsidiary.
NOTE 10 - LONG TERM ACCOUNTS PAYABLE- OTHER
Long term accounts payable-other consists of the following as of March 31, 2013:
| Accrued consideration for business acquisition (see Note 18) | $ | 456 | ||
| Other payables | 136 | |||
| $ | 592 |
| Page 15 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 11 - CAPITAL LEASES
Andrew Webron Limited has capital leases for plant and machinery. These obligations under capital leases are repayable monthly over a 5 year period through March 2018, and are secured by the plant and machinery to which they relate. The interest rate related to the lease obligations is 3.55%.
The following is a schedule of future minimum lease payments under capital leases at March 31, 2013.
| For the Year Ending March 31 | ||||
| 2014 | $ | 406 | ||
| 2015 | 406 | |||
| 2016 | 406 | |||
| 2017 | 406 | |||
| 2018 | 379 | |||
| Total minimum lease payments | $ | 2,003 | ||
| Less amount representing interest | (168 | ) | ||
| Present value of net minimum lease payments | 1,835 | |||
| Less current portion of capital leases | (348 | ) | ||
| $ | 1,487 |
As of March 31, 2013, assets under capital leases totaled $2,346. There is no accumulated depreciation on these assets as of March 31, 2013 as such assets have not yet been placed in service.
NOTE 12 - LONG TERM DEBT- RELATED PARTY
Long term debt- related party consists of the following as of March 31, 2013:
| Andrew Industries (Hong Kong) Limited has a demand loan payable to Andrew Industries Limited U.K., unsecured, interest accruing at UK base rate (0.50% at March 31, 2013 ) plus 1.9%. The loans do not have a set repayment schedule. | $ | 8,637 | ||
| Andrew Industries Textile Manufacturing Company (Wuxi) Limited has a loan payable to BMP Asia Industries (Shenzhen) Company Limited which is unsecured and bears interest at a fixed rate of 3.05%. The loan matured on August 8, 2013 and was renewed with a new maturity date of September 26, 2015. | 637 | |||
| Andrew Industries Textile Manufacturing Company (Wuxi) Limited has a loan payable to BMP Asia Industries (Shanghai) Company Limited which is unsecured and bears interest at a fixed rate of 3.05%. The loan matured on April 10, 2013 and was renewed with a new maturity date of April 30, 2014. | 637 | |||
| Andrew Industrial Textile Manufacturing Company (Shanghai) Limited has a loan payable to BMP Asia Industries (Shenzhen) Company Limited which is unsecured and bears interest at a fixed rate of 3.05%. The loan matured on June 23, 2013 and was renewed with a new maturity date of June 24, 2014. | 637 |
| Page 16 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 12 - LONG TERM DEBT- RELATED PARTY (CONTINUED)
| Andrew Industrial Textile Manufacturing Company (Shanghai) Limited has loans payable to the Parent Company, unsecured, interest accruing at LIBOR on the date of draw down plus 1.5%. As of March 31, 2013, the interest rates on outstanding loans ranged from 1.79% to 6.89%. The loan matures March 14, 2014. | 2,275 | |||
| Andrew Webron Limited has a demand loan payable to the Parent Company, unsecured, interest accruing at UK base rates (0.50% at March 31, 2013) plus 1.9%. The loan does not have a set repayment schedule. | 946 | |||
| Andrew Webron Limited has a demand loan payable to Andrew Textile Industries Limited, unsecured, non-interest bearing. The loan does not have a set repayment schedule. | 390 | |||
| 14,159 | ||||
| Less current portion of long term debt- related party | (12,248 | ) | ||
| $ | 1,911 |
As of March 31, 2013, accrued interest due to related parties on the above borrowings totaled $1,899.
NOTE 13 - LONG TERM DEBT
Long term debt consists of the following as of March 31, 2013:
| Southern Felt Company has a note payable to a bank, secured by all of Southern Felt Company’s assets, interest accruing at the one month LIBOR rate (0.20% at March 31, 2013) plus 1.7%, monthly principal payments ranging from approximately $48 to $66, plus accrued interest, through January 2014. The note was repaid in January 2014. | $ | 1,243 | ||
| Southern Felt Company has a note payable to a bank, secured by equipment, interest accruing at the one month LIBOR rate (0.20% at March 31, 2013) plus 1.7% monthly principal payments ranging from approximately $9 to $11, plus accrued interest, through October 2015. | 315 | |||
| Southern Felt Company has a mortgage note payable to a bank, secured by buildings, interest accruing at the one month LIBOR rate (0.20% at March 31, 2013) plus 1.7%, monthly principal payments ranging from approximately $15 to $21, plus accrued interest, through July 2016. | 667 | |||
| Southern Felt Company has a mortgage note payable to a bank, secured by buildings, interest accruing at the one month LIBOR rate (0.20% at March 31, 2013) plus 1.7%, monthly principal payments ranging from approximately $6 to $10, plus accrued interest, through October 2017. | 502 | |||
| Southern Felt Company has a note payable to a bank, secured by equipment, interest accruing at the one month LIBOR rate (0.20% at March 31, 2013) plus 2.5%, monthly principal payments of approximately $83 plus accrued interest, through July 2015. | 2,333 | |||
| 5,060 | ||||
| Less current portion of long term debt | (2,254 | ) | ||
| $ | 2,806 |
| Page 17 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 13 - LONG TERM DEBT (CONTINUED)
The long term debt for Southern Felt Company, Inc. is subject to a number of financial covenants, including (i) a tangible net worth of at least $24,000 (ii) debt to tangible net worth of no more than 1.75 to 1 (iii) cash flow coverage ratio of at least 1.3 to 1 (iv) funded debt to EBITDA ratio of no more than 2.75 to 1. Southern Felt Company was in compliance with all financial covenants as of and for the year ended March 31, 2013.
Principal maturities of long term debt are as follows:
| For the Year Ending March 31 | ||||
| 2014 | $ | 2,254 | ||
| 2015 | 1,921 | |||
| 2016 | 696 | |||
| 2017 | 117 | |||
| 2018 | 72 | |||
| $ | 5,060 |
NOTE 14 - INCOME TAXES
Income tax expense for the year ended March 31, 2013 consists of the following:
| Current: | ||||
| Federal | $ | 711 | ||
| State | 108 | |||
| Foreign | (117 | ) | ||
| Total current income tax expense: | 702 |
| Deferred: | ||||
| Federal | 1,020 | |||
| State | 12 | |||
| Foreign | (6 | ) | ||
| Total deferred income tax expense: | 1,026 | |||
| Total income tax expense | $ | 1,728 |
For the year ended March 31, 2013, income before income taxes consists of the following:
| U.S. operations | $ | 5,321 | ||
| Foreign operations | (614 | ) | ||
| $ | 4,707 |
| Page 18 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 14 - INCOME TAXES (CONTINUED)
The effective tax rate on income before taxes differs from the U.S. statutory Federal income tax rate. The following summary reconciles taxes at the U.S. statutory Federal income tax rate with the effective tax rate for the year:
| U.S. statutory Federal income tax rate | 34.0 | % | ||
| State taxes, net of federal benefit | 2.5 | |||
| Difference between U.S. and foreign tax rates | 1.9 | |||
| State tax credits, net of federal benefit | (1.0 | ) | ||
| Domestic manufacturing deduction and other permanent items | 0.3 | |||
| Change in valuation allowance | (1.2 | ) | ||
| Other | 0.2 | |||
| Effective tax rate | 36.7 | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of the assets and liabilities for financial reporting purposes and the amount used for income tax purposes.
Significant components of the Filtration Division’s deferred income tax assets and liabilities as of March 31, 2013 are as follows:
| Deferred tax assets: | ||||
| Net operating loss carryforwards | $ | 1,987 | ||
| Inventory reserves | 144 | |||
| Allowance for doubtful accounts | 123 | |||
| Other accruals | 327 | |||
| Valuation allowance | (1,961 | ) | ||
| Total net deferred tax assets | 620 | |||
| Deferred tax liabilities: | ||||
| Property, plant and equipment | (2,288 | ) | ||
| Total deferred tax liabilities | (2,288 | ) | ||
| Net deferred tax liability | $ | (1,668 | ) |
The components giving rise to the net deferred tax liability above have been classified on the accompanying carve out combined balance sheet as follows:
| Current assets | $ | 594 | ||
| Non-current liabilities | (2,262 | ) | ||
| $ | (1,668 | ) |
The following table summarizes the tax years that remain subject to examination by tax jurisdiction as of March 31, 2013:
| Tax Jurisdiction | Open Years | |||
| United States - federal | 2010-2013 | |||
| United States -state | 2009-2013 | |||
| United Kingdom | 2011-2013 | |||
| People’s Republic of China | 2008-2012 | |||
| Hong Kong | 2007-2012 |
| Page 19 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 14 - INCOME TAXES (CONTINUED)
As of March 31, 2013, the Filtration Division has foreign net operating loss (“NOL”) carry forwards of $8,042, some of which will expire at various dates from 2014 to 2018. Such NOL carry forwards expire as follows:
| 2014 - 2018 | $ | 6,881 | ||
| Indefinite carry forward period | 1.161 | |||
| $ | 8,042 |
During the year ended March 31, 2013, the Filtration Division recorded a decrease to the valuation allowance of $59 on the deferred tax assets to reduce the total to an amount that management believes will ultimately be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry forwards are expected to be available to reduce taxable income.
| Federal | State | Foreign | Total | |||||||||||||
| Valuation allowance as of April 1, 2012 | $ | - | $ | - | $ | (1,915 | ) | $ | (1,915 | ) | ||||||
| Change in valuation allowance | (59 | ) | (59 | ) | ||||||||||||
| Foreign exchange differences | 13 | 13 | ||||||||||||||
| Valuation allowance as of March 31, 2013 | $ | - | $ | - | $ | (1,961 | ) | $ | (1,961 | ) | ||||||
NOTE 15 - OPERATING LEASE COMMITMENTS
The Filtration Division leases certain facilities and equipment under non-cancellable operating leases.
The minimum future lease payments are as follows:
For The Year Ending March 31
| 2014 | $ | 728 | ||
| 2015 | 709 | |||
| 2016 | 563 | |||
| 2017 | 483 | |||
| 2018 | 481 | |||
| Thereafter | 2,373 | |||
| $ | 5,337 |
The total rent expense for the year ended March 31, 2013 was approximately $772.
NOTE 16 - CONTINGENCIES
There is an unlimited cross guarantee between Andrew Webron Limited and the Parent Company and its UK subsidiaries (including Andrew Webron Filtration Limited), in respect of bank borrowings totaling $17,204 as of March 31, 2013.
There is an unlimited cross guarantee between Andrew Webron Filtration Limited and the Parent Company and its UK subsidiaries (including Andrew Webron Limited), in respect of bank borrowings totaling $17,946 as of March 31, 2013.
| Page 20 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 16 - CONTINGENCIES (CONTINUED)
The Filtration Division is subject to certain legal matters arising in the normal course of business, the outcome of which cannot be predicted. In the opinion of management, none of these matters will have a material impact on the financial condition, results of operations of cash flows of the Filtration Division.
NOTE 17 - SELF-INSURANCE AND RETIREMENT PLAN
Southern Felt Company Inc. has adopted a self-insurance plan for losses and liabilities related primarily to health and welfare claims. Losses are accrued based upon the company’s estimate of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry, and based on the company’s experience. The liability for unpaid and incurred but not reported claims was $150 as of March 31, 2013 and is included in accrued expenses in the accompanying carve out combined balance sheet.
While the ultimate amount of claims incurred are dependent on future developments, in management’s opinion, recorded reserves are adequate to cover the future payment of claims. Adjustments, if any, to estimates recorded resulting from ultimate claim payments will be reflected in operations in the periods in which such adjustments are known.
Southern Felt Company, Inc. has a 401(k) retirement plan for the benefit of its eligible employees. Southern Felt Company, Inc. may contribute annually to the plan and also matches a portion of the employee’s salary reduction contributions after one year of service. All employees who are at least 21 years of age are eligible for the plan. All contributions made by Southern Felt Company, Inc. are fully vested after five years of service.
Contributions by Southern Felt Company, Inc. for the year ended March 31, 2013 were approximately $403.
NOTE 18 - BUSINESS COMBINATION
On February 28, 2013, Andrew Webron Filtration Limited purchased 100% of the outstanding common shares of Heath Filtration Limited for cash consideration of $1,368. Of the total cash consideration, $456 was paid on completion and $912 is payable in two equal installments on February 28, 2014 and 2015. The total amount payable is recognized as a liability in the accompanying carves out combined balance sheet as of March 31, 2013. See Notes 7 and 10.
Costs associated with the acquisition totaled $89 and have been included in general and administrative expenses in the accompanying carve out combined statement of income and comprehensive income for the year ended March 31, 2013.
The primary reason for the acquisition was to gain a larger share of the UK market.
| Page 21 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 18 - BUSINESS COMBINATION (CONTINUED)
The following summarizes the consideration paid and the assets acquired and liabilities assumed:
| Total purchase price | $ | 1,368 | ||
| Cash | 246 | |||
| Accounts receivable | 1,491 | |||
| Inventory | 580 | |||
| Property, plant and equipment | 254 | |||
| Accounts payables and accrued liabilities | (1,836 | ) | ||
| Deferred tax liability | (9 | ) | ||
| Total net assets acquired | 726 | |||
| Goodwill | $ | 642 |
The goodwill for the acquisition is attributable to the expected synergies from combining the operations of the acquirer and the acquiree.
The goodwill is not expected to be deductible for UK corporation tax purposes.
NOTE 19 - RELATED PARTY TRANSACTIONS
The Filtration Division has entered into various transactions with the related party companies listed below. All are wholly-owned subsidiaries of the Parent Company and are not included in the Filtration Division.
| Country of incorporation | Percentage ownership by Parent Company | |||||
| Andrew Industries (India) PVT Limited | India | 100% | ||||
| Bondex Inc. | England | 100% | ||||
| BMP Europe Limited | England | 100% | ||||
| BMP America Inc. | USA | 100% | ||||
| BMP Asia Industries (Shenzhen) Company Limited | China | 100% | ||||
| BMP Asia Industries (Shanghai) Company Limited | China | 100% | ||||
| Severnside Fabrics Limited | England | 100% | ||||
| American Laundry Products Inc. | USA | 100% | ||||
| European Laundry Products SARL | France | 100% | ||||
| Andrew Laundry Products (Shanghai) Limited | China | 100% | ||||
| Techline Products Limited | England | 100% owned by BMP Europe Limited | ||||
| Andrew Industries Limited | England | Parent Company | ||||
| Page 22 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 19 - RELATED PARTY TRANSACTIONS (CONTINUED)
The following summarizes the related party transactions as of and for the year ended March 31, 2013:
(a) Net sales to related parties:
| Andrew | Andrew | Andrew | ||||||||||||||||||||||||||
| Industrial | Industries | Industries | ||||||||||||||||||||||||||
| Textile | Textile | Textile | ||||||||||||||||||||||||||
| Southern | Andrew | Mfg. | Trading | Mfg. | ||||||||||||||||||||||||
| Felt | Andrew | Webron | Company | Company | Company | |||||||||||||||||||||||
| Company | Webron | Filtration | (Shanghai) | (Shanghai) | (Wuxi) | |||||||||||||||||||||||
| Inc. | Limited | Limited | Limited | Limited | Limited | Total | ||||||||||||||||||||||
| To: | ||||||||||||||||||||||||||||
| Andrew Industries (India) PVT Limited | $ | - | $ | - | $ | - | $ | 364 | $ | 82 | $ | - | $ | 446 | ||||||||||||||
| American Laundry Products Inc. | 1,905 | 21 | 1,926 | |||||||||||||||||||||||||
| Andrew Laundry Products (Shanghai) Limited | 428 | 428 | ||||||||||||||||||||||||||
| European Laundry Products SARL | 472 | 472 | ||||||||||||||||||||||||||
| Severnside Fabrics Limited | 1,364 | 1,364 | ||||||||||||||||||||||||||
| Bondex Inc. | 264 | 264 | ||||||||||||||||||||||||||
| BMP Europe Limited | 95 | 1 | 96 | |||||||||||||||||||||||||
| BMP America Inc. | 3,966 | 3,966 | ||||||||||||||||||||||||||
| BMPAsia Industries (Shanghai) Company Limited | 1,061 | 1 | 1,062 | |||||||||||||||||||||||||
| Total Net Sales | $ | 6,135 | $ | 1,952 | $ | 1 | $ | 1,853 | $ | 82 | $ | 1 | $ | 10,024 | ||||||||||||||
(b) Interest income (expense) to / from related parties:
| From: | Andrew | Andrew | ||||||||||||||||||||||
| Industrial | Industrial | |||||||||||||||||||||||
| Textile | Andrew | Textile | ||||||||||||||||||||||
| Southern | Mfg. | Industries | Mfg. | |||||||||||||||||||||
| Felt | Andrew | Company | (Hong | Company | ||||||||||||||||||||
| Company | Webron | (Shanghai ) | Kong) | (Wuxi) | ||||||||||||||||||||
| Inc. | Limited | Limited | Limited | Limited | Total | |||||||||||||||||||
| To: | ||||||||||||||||||||||||
| Andrew Industries Ltd | $ | 90 | $ | (10 | ) | $ | (126 | ) | $ | (207 | ) | $ | - | $ | (253 | ) | ||||||||
| BMP Asia Industries (Shenzhen) Company Limited | (29 | ) | (20 | ) | (49 | ) | ||||||||||||||||||
| BMP Asia Industries (Shanghai) Company Limited | (20 | ) | (20 | ) | ||||||||||||||||||||
| Total Interest Income /(Expense) | $ | 90 | $ | (10 | ) | $ | (155 | ) | $ | (207 | ) | $ | (40 | ) | $ | (322 | ) | |||||||
| Page 23 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 19 - RELATED PARTY TRANSACTIONS (CONTINUED)
(c) Accounts receivable from related parties:
| Andrew | ||||||||||||||||||||||||||||||||
| Andrew | Andrew | Industries | ||||||||||||||||||||||||||||||
| Andrew | Industrial | Industrial | Textile | |||||||||||||||||||||||||||||
| Southern | Andrew | Industries | Textile Mfg. | Textile Mfg. | Trading | |||||||||||||||||||||||||||
| Felt | Andrew | Webron | (Hong | Company | Company | Company | ||||||||||||||||||||||||||
| Company | Webron | Filtration | Kong) | (Shanghai) | (Wuxi) | (Shanghai) | ||||||||||||||||||||||||||
| Inc. | Limited | Limited | Limited | Limited | Limited | Limited | Total | |||||||||||||||||||||||||
| To: | ||||||||||||||||||||||||||||||||
| Andrew Industries (India) PVT Limited | $ | - | $ | - | $ | - | $ | - | $ | 186 | $ | - | $ | 7 | $ | 193 | ||||||||||||||||
| Andrew Industries Limited | 4 | 49 | 53 | |||||||||||||||||||||||||||||
| American Laundry Products Inc. | 333 | 333 | ||||||||||||||||||||||||||||||
| Andrew Laundry Products (Shanghai) Limited | 89 | 89 | ||||||||||||||||||||||||||||||
| European Laundry Products SARL | 142 | 142 | ||||||||||||||||||||||||||||||
| Severnside Fabrics Limited | 275 | 275 | ||||||||||||||||||||||||||||||
| Bondex Inc. | 52 | 52 | ||||||||||||||||||||||||||||||
| BMP Europe Limited | 101 | 101 | ||||||||||||||||||||||||||||||
| BMP America Inc. | 690 | 690 | ||||||||||||||||||||||||||||||
| Techline Products Limited | 1 | 14 | 15 | |||||||||||||||||||||||||||||
| BMPAsia Industries (Shanghai) Company Limited | 227 | 1 | 228 | |||||||||||||||||||||||||||||
| Total Accounts Receivable | $ | 1,075 | $ | 523 | $ | 14 | $ | 49 | $ | 502 | $ | 1 | $ | 7 | $ | 2,171 | ||||||||||||||||
| Page 24 |
| FILTRATION DIVISION OF ANDREW INDUSTRIES LIMITED |
| NOTES TO THE CARVE OUT COMBINED FINANCIAL STATEMENTS |
| For the year ended March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
NOTE 19 - RELATED PARTY TRANSACTIONS (CONTINUED)
(d) Accounts payable to related parties:
| Southern Felt | Andrew Webron | Andrew Webron | ||||||||||||||
| Company Inc. | Limited | Filtration Limited | Total | |||||||||||||
| To: | ||||||||||||||||
| Andrew Industries United | $ | 114 | $ | 110 | $ | 7 | $ | 231 | ||||||||
| BMP Europe Limited | 1 | 1 | ||||||||||||||
| Total Accounts Payable | $ | 114 | $ | 111 | $ | 7 | $ | 232 | ||||||||
(e) Notes receivable from related party
Southern Felt Company Inc. has a note receivable from the Parent Company. The amount outstanding as of March 31, 2013 was $3,623. The note bears interest at one month LIBOR rate (0.20% at March 31, 2013) plus 2.25% and is due on March 30, 2014.
(f) Intercompany tax receivables
Andrew Webron Limited, Andrew Webron Filtration Limited and Andrew Industries (Hong Kong) Limited are part of a UK group for corporation tax purposes. This tax group also includes the Parent Company and its other UK subsidiaries.
During the year Andrew Webron Limited, Andrew Webron Filtration Limited and Andrew Industries (Hong Kong) Limited have surrendered their respective corporation tax losses generated to others members of the UK tax group. This has resulted in each company recognizing a corporation tax benefit in the accompanying carve out combined financial statements.
The corporation tax losses surrendered in the year totaled $74, $14 and $49 for Andrew Webron Limited, Andrew Webron Filtration Limited and Andrew Industries (Hong Kong) Limited, respectively.
(g) Directors’ loans
At March 31, 2013 there are loans totaling $399 payable from Andrew Webron Filtration Limited to one of its directors as the previous owner Heath Filtration Limited. This is included within other payables in Note 7. The loan is interest free and repayable on February 28, 2014.
NOTE 20 - SUBSEQUENT EVENTS
On April 9, 2013, Southern Felt Company, Inc. experienced a fire in a piece of equipment in its manufacturing plant in North Augusta, South Carolina. The equipment was an original 1988 purchase and has zero net book value. The company has since received proceeds from its insurance provider of $784 in full settlement of the claim.
The Parent Company is expected to sell the Filtration Division to a U.S. publicly listed company for $83 million. It is anticipated that the closing date for the sale will be before the end of February 2014.
| Page 25 |
Exhibit 99.3
| Southern Felt Company, Inc., Andrew Webron Limited, Andrew Webron Filtration Limited, Andrew Industries Textile Manufacturing Company (Shanghai) Limited, Andrew Industries Textile Manufacturing Company (Wuxi) Limited, Andrew Industries Textile Trading Company (Shanghai) Limited and Andrew Industries (Hong Kong) Limited (collectively, the Filtration Division of Andrew Industries Limited) | |
| UNAUDITED CONDENSED CARVE OUT COMBINED FINANCIAL STATEMENTS | |
| As of September 30, 2013 and March 31, 2013 and For the Six Months Ended September 30, 2013 and 2012 |
| INDEX | PAGE |
| Unaudited Condensed Carve Out Combined Balance Sheets as of September 30, 2013 and March 31, 2013 | 2 |
| Unaudited Condensed Carve Out Combined Statements of Income and Comprehensive Income for the six months ended September 30, 2013 and 2012 | 3 |
| Unaudited Condensed Carve Out Combined Statements of Cash Flows for the six months ended September 30, 2013 and 2012 | 4 |
| Notes to Unaudited Condensed Carve Out Combined Financial Statements | 5 - 11 |
| Page 1 |
| Filtration Division of Andrew Industries Limited |
| UNAUDITED CONDENSED CARVE OUT COMBINED BALANCE SHEETS |
| As of September 30, 2013 and March 31, 2013 (Amounts in Thousands of U.S. Dollars) |
| Note | September 30, 2013 | March 31, 2013 | ||||||||
| Assets | ||||||||||
| Current assets | ||||||||||
| Cash | $ | 3,209 | $ | 2,713 | ||||||
| Accounts receivable-trade, net of allowance for doubtful accounts of $625 and $547, respectively | 27,062 | 24,964 | ||||||||
| Accounts receivable - related parties | 3,092 | 2,171 | ||||||||
| Accounts receivable - other | 1,975 | 1,680 | ||||||||
| Inventory, net | 3 | 23,712 | 21,491 | |||||||
| Prepaid expenses and other assets | 898 | 1,589 | ||||||||
| Note receivable – related parties | 3,623 | 3,623 | ||||||||
| Deferred tax asset | 377 | 594 | ||||||||
| Total current assets | $ | 63,948 | $ | 58,825 | ||||||
| Non-current assets | ||||||||||
| Property, plant and equipment, net | 28,823 | 30,131 | ||||||||
| Property, plant and equipment under capital leases, net | 2,430 | 2,346 | ||||||||
| Goodwill | 687 | 642 | ||||||||
| Other assets | 32 | 32 | ||||||||
| Total assets | $ | 95,920 | $ | 91,976 | ||||||
| Liabilities and parent equity | ||||||||||
| Current liabilities | ||||||||||
| Lines of credit | 4 | 3,177 | 3,519 | |||||||
| Current portion of capital lease obligations | 375 | 348 | ||||||||
| Current portion of long - term debt - related parties | 5 | 14,684 | 12,248 | |||||||
| Current portion of long - term debt | 6 | 2,215 | 2,254 | |||||||
| Accounts payable - trade | 11,958 | 11,773 | ||||||||
| Accounts payable - other | 1,479 | 1,329 | ||||||||
| Accounts payable - related parties | 335 | 232 | ||||||||
| Accrued expenses and other current liabilities | 2,391 | 2,350 | ||||||||
| Accrued expenses – related parties | 2,110 | 1,899 | ||||||||
| Deferred revenue | 1,908 | 1,916 | ||||||||
| Total current liabilities | $ | 40,632 | $ | 37,868 | ||||||
| Long term liabilities | ||||||||||
| Long term portion of capital lease obligations | 1,392 | 1,487 | ||||||||
| Long term debt – related parties | 5 | 650 | 1,911 | |||||||
| Long term debt | 6 | 1,689 | 2,806 | |||||||
| Deferred income taxes | 2,262 | 2,262 | ||||||||
| Long term accounts payable – other | 484 | 592 | ||||||||
| Total liabilities | $ | 47,109 | $ | 46,926 | ||||||
| Commitments and contingencies | 7 | |||||||||
| Parent Equity | ||||||||||
| Net Parent Investment | 45,486 | 42,638 | ||||||||
| Accumulated other comprehensive income | 3,325 | 2,412 | ||||||||
| Total parent equity | $ | 48,811 | $ | 45,050 | ||||||
| Total liabilities and parent equity | $ | 95,920 | $ | 91,976 | ||||||
The accompanying notes are an integral part of these unaudited condensed carve out combined financial statements.
| Page 2 |
Filtration Division of Andrew Industries Limited |
| UNAUDITED CONDENSED CARVE OUT COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME |
| For the six months ended September 30, 2013 and 2012 (Amounts in Thousands) |
| 2013 | 2012 | |||||||
| Net sales | $ | 65,256 | $ | 62,238 | ||||
| Cost of sales | 54,824 | 53,908 | ||||||
| Gross profit | 10,432 | 8,330 | ||||||
| General and administrative expenses | 3,129 | 3,048 | ||||||
| Selling expenses | 2,813 | 2,327 | ||||||
| Operating income | 4,490 | 2,955 | ||||||
| Interest income – other | (3 | ) | (2 | ) | ||||
| Interest income – related party | (44 | ) | (45 | ) | ||||
| Interest expense – other | 117 | 116 | ||||||
| Interest expense – related parties | 212 | 209 | ||||||
| Loss on foreign exchange transactions | 7 | 48 | ||||||
| Total other expense | 289 | 326 | ||||||
| Income before income taxes | 4,201 | 2,629 | ||||||
| Income tax expense | 1,370 | 977 | ||||||
| Net income | 2,831 | 1,652 | ||||||
| Other comprehensive income, net of tax: | ||||||||
| Foreign currency translation | 912 | (221 | ) | |||||
| Comprehensive income | $ | 3,743 | $ | 1,431 | ||||
The accompanying notes are an integral part of these unaudited condensed carve out combined financial statements.
| Page 3 |
| Filtration Division of Andrew Industries Limited |
| UNAUDITED CONDENSED CARVE OUT COMBINED STATEMENTS OF CASH FLOWS |
| For the six months ended September 30, 2013 and 2012 (Amounts in Thousands of U.S. Dollars) |
| 2013 | 2012 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | 2,831 | $ | 1,652 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | 2,240 | 2,194 | ||||||
| Deferred income taxes | 228 | (40 | ) | |||||
| Other | (42 | ) | (5 | ) | ||||
| (Increase)/decrease in assets: | ||||||||
| (Increase)/decrease in accounts receivable - trade | (1,531 | ) | 324 | |||||
| (Increase)/decrease in accounts receivable – related parties | (876 | ) | 351 | |||||
| (Increase) in accounts receivable – other | (248 | ) | (548 | ) | ||||
| (Increase)/decrease in inventory | (1,714 | ) | 191 | |||||
| Decrease in prepaid expenses and other assets | 708 | 119 | ||||||
| Increase/(decrease) in liabilities: | ||||||||
| (Decrease) in accounts payable – trade | (144 | ) | (1,721 | ) | ||||
| Increase in accounts payable – other | 78 | 52 | ||||||
| Increase in accounts payable – related parties | 102 | 3 | ||||||
| (Decrease)/increase in accrued expenses and other current liabilities | (36 | ) | 484 | |||||
| Increase in accrued expenses – related party | 174 | 176 | ||||||
| (Decrease) in deferred revenue | (18 | ) | (392 | ) | ||||
| Net cash provided by operating activities | 1,752 | 2,840 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Payments for property, plant and equipment | (562 | ) | (2,694 | ) | ||||
| Proceeds from sale of property, plant and equipment | 30 | 33 | ||||||
| Net cash used in investing activities | (532 | ) | (2,661 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Dividends paid to parent | - | (1,000 | ) | |||||
| Proceeds from parent investment | - | 237 | ||||||
| Net borrowings on lines of credit | (477 | ) | 3,093 | |||||
| Repayment of debt | (1,634 | ) | (1,323 | ) | ||||
| Proceeds from issuance of debt | 1,283 | - | ||||||
| Net cash provided by (used in) financing activities | (828 | ) | 1,007 | |||||
| Effect of exchange rate changes on cash | 104 | (6 | ) | |||||
| Net increase in cash | 496 | 1,180 | ||||||
| Cash at beginning of period | 2,713 | 1,248 | ||||||
| Cash at end of period | $ | 3,209 | $ | 2,428 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | 139 | $ | 130 | ||||
| Cash paid for taxes | 16 | 816 | ||||||
| Supplemental noncash investing and financing activities: | - | $ | 1,525 | |||||
| Payment of debt through parent contribution | ||||||||
The accompanying notes are an integral part of these unaudited condensed carve out combined financial statements.
| Page 4 |
| Filtration Division of Andrew Industries Limited |
| NOTES TO THE UNAUDITED CONDENSED CARVE OUT COMBINED FINANCIAL STATEMENTS |
As of September 30, 2013 and March 31, 2013 and for the six months ended September 30, 2013 and 2012 (Amounts in Thousands of U.S. Dollars) |
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed carve out combined financial statements include the accounts of Southern Felt Company, Inc., Andrew Webron Limited, Andrew Webron Filtration Limited, Andrew Industries Textile Manufacturing Company (Shanghai) Limited, Andrew Industries Textile Manufacturing Company (Wuxi) Limited, Andrew Industries Textile Trading Company (Shanghai) Limited and Andrew Industries (Hong Kong) Limited (collectively, the Filtration Division of Andrew Industries Limited (“Parent Company” or “Parent”)) and have been derived from the historical accounting records of the Parent Company.
The combined financial statements reflect the carve-out financial position and the related results of operations, cash flows and the Parent’s net investment in a manner consistent with Parent Company management of the Filtration Division and as though the Filtration Division had been a stand-alone company for the period presented. The unaudited condensed carve out combined financial statement have been prepared in accordance with Securities and Exchange Commission (“SEC”) Regulation S-X, Article 3, General Instructions to Financial Statements and SEC Staff Accounting Bulletin Topic 1-B, Allocations of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity.
In the opinion of management, the accompanying unaudited condensed carve out combined balance sheets and related unaudited condensed carve out combined statements of income and other comprehensive income, and unaudited condensed carve out combined statement of cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Interim results are not necessarily indicative of results for a full year. Certain notes and other information have been omitted from the interim financial statements presented. The unaudited condensed combined financial statements should be read in conjunction with the audited carve out combined financial statements of the Filtration Division of Andrew Industries Limited as of March 31, 2013 and for the year then ended.
General and administrative expenses for the six month ended September 30, 2013, includes $676 of net insurance proceeds received by Southern Felt Company, Inc. in full settlement of a claim as result of a fire in a piece of equipment in its manufacturing plant in North Augusta, South Carolina.
CORPORATE ALLOCATIONS AND PARENT EQUITY
The unaudited condensed carve out combined financial statements include expense allocations for certain functions provided by the Parent Company, including but not limited to, sales and marketing, technical support, human resources, treasury and accounting, global purchasing and legal.
The direct costs of each Parent Company employee for the periods presented year were allocated to the Filtration Division by relating them to the percentage of estimated time spent in support of the Filtration Division. These costs included salaries, benefits, travel expenses and other operating costs.
For the six months ended September 30, 2013 and 2012, the Filtration Division was allocated costs totaling $971 and $1,019 respectively incurred by the Parent Company, which are included in the general and administrative expenses in the accompanying unaudited condensed carve out combined statements of income and comprehensive income.
The expense allocations have been determined on a basis that both the Filtration Division and the Parent Company consider to be a reasonable reflection of the utilization of services provided or the benefit received. However, the unaudited condensed carve out combined financial statements included herein may not necessarily represent what the Filtration Division’s financial position, results of operations and cash flows would have been had it been a stand-alone entity for the periods presented, or what the Filtration Division’s financial position, results of operations, and cash flows may be in the future.
| Page 5 |
| Filtration Division of Andrew Industries Limited |
| NOTES TO THE UNAUDITED CONDENSED CARVE OUT COMBINED FINANCIAL STATEMENTS |
As of September 30, 2013 and March 31, 2013 and for the six months ended September 30, 2013 and 2012 (Amounts in Thousands of U.S. Dollars) |
The amounts of common stock and retained earnings of each entity included in these combined financial statements have been reflected as Net Parent Investment in the accompanying unaudited condensed carve out combined balance sheets.
CARVE OUT ENTITIES
The principal activities of the Filtration Division are the manufacture and sale of industrial felt textile products for the pollution control, filtration, laundry and automotive industries. The country of incorporation and the ownership structure of each subsidiary are listed below:
Country of incorporation |
Percentage ownership | |||
| Andrew Webron Limited | England | 100% owned by Parent Company | ||
| Andrew Webron Filtration Limited | England | 100% owned by Parent Company | ||
| Southern Felt Company Inc. | USA | 100% owned by Parent Company | ||
| Andrew Industries (Hong Kong) Limited | Hong Kong | 100% owned by Parent Company | ||
| Andrew Industrial Textile Manufacturing Company (Shanghai) Limited | China | 100% owned by Andrew Industries (Hong Kong) Limited | ||
| Andrew Industries Textile Manufacturing Company (Wuxi) Limited | China | 100% owned by Andrew Industries (Hong Kong) Limited | ||
| Andrew Industries Textile Trading Company (Shanghai) Limited | China | 100% owned by Parent Company |
NATURE OF OPERATIONS
Net sales for each subsidiary of the Filtration Division consist of the following for the six months periods ended September 30, 2013 and 2012, respectively:
| Principal Market | 2013 | 2012 | ||||||||
| Andrew Webron Limited | England | $ | 9,786 | $ | 9,780 | |||||
| Andrew Webron Filtration Limited | England | 5,065 | 1,805 | |||||||
| Southern Felt Company Inc. | USA | 32,545 | 36,798 | |||||||
| Andrew Industrial Textile Manufacturing Company (Shanghai) Limited | China | 15,509 | 11,283 | |||||||
| Andrew Industries Textile Manufacturing Company (Wuxi) Limited | China | 2,278 | 2,489 | |||||||
| Andrew Industries Textile Trading Company (Shanghai) Limited | China | 73 | 83 | |||||||
| $ | 65,256 | $ | 62,238 | |||||||
Andrew Industries (Hong Kong) Limited is a holding company and, as a result, did not generate any net revenues for the six month periods ended September 30, 2013 and 2012.
| Page 6 |
| Filtration Division of Andrew Industries Limited |
| NOTES TO THE UNAUDITED CONDENSED CARVE OUT COMBINED FINANCIAL STATEMENTS |
As of September 30, 2013 and March 31, 2013 and for the six months ended September 30, 2013 and 2012 (Amounts in Thousands of U.S. Dollars) |
NOTE 1 – BASIS OF PRESENTATION (CONTINUED)
Total assets for each subsidiary of the Filtration Division consist of the following as of September 30, 2013 and March 31, 2013:
| September 30, 2013 | March 31, 2013 | |||||||
| Andrew Webron Limited | $ | 17,946 | $ | 15,182 | ||||
| Andrew Webron Filtration Limited | 5,945 | 5,040 | ||||||
| Southern Felt Company Inc. | 44,422 | 45,108 | ||||||
| Andrew Industrial Textile Manufacturing Company (Shanghai) Limited | 22,952 | 22,123 | ||||||
| Andrew Industries Textile Manufacturing Company (Wuxi) Limited | 4,170 | 4,117 | ||||||
| Andrew Industries Textile Trading Company (Shanghai) Limited | 404 | 352 | ||||||
| Andrew Industries (Hong Kong) Limited | 81 | 54 | ||||||
| $ | 95,920 | $ | 91,976 | |||||
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of combination
The accompanying unaudited condensed carve out combined financial statements have been prepared in U.S. GAAP and include the accounts of the Filtration Division. All intra-divisional transactions and balances have been eliminated.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain 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 revenue and expenses during the periods presented. The most significant estimates and assumptions included in these financial statements are the valuation of inventory and the recoverability of accounts receivable. Actual results could differ from these estimates and assumptions.
Subsequent events
Management has evaluated subsequent events for potential disclosure in or adjustment to the combined financial statements through May 2, 2014, the date that the accompanying unaudited condensed carve out combined financial statements were available to be issued. Based on such evaluation, other than as disclosed in Note 8, no events have occurred that in the opinion of management warrant disclosure in or adjustment to the unaudited condensed carve out combined financial statements.
| Page 7 |
| Filtration Division of Andrew Industries Limited |
| NOTES TO THE UNAUDITED CONDENSED CARVE OUT COMBINED FINANCIAL STATEMENTS |
As of September 30, 2013 and March 31, 2013 and for the six months ended September 30, 2013 and 2012 (Amounts in Thousands of U.S. Dollars) |
NOTE 3 – INVENTORY
Inventory consists of the following as of September 30, 2013 and March 31, 2013:
| September 30, 2013 | March 31, 2013 | |||||||
| Raw Materials | $ | 11,357 | $ | 10,238 | ||||
| Work in Process | 2,166 | 2,025 | ||||||
| Finished Goods | 12,189 | 10,677 | ||||||
| 25,712 | 22,940 | |||||||
| Less inventory reserve | (2,000 | ) | (1,449 | ) | ||||
| $ | 23,712 | $ | 21,491 | |||||
NOTE 4 – LINES OF CREDIT
Lines of credit consist of the following as of September 30, 2013 and March 31, 2013:
| September 30, 2013 | March 31, 2013 | |||||||
| Line of credit – UK | $ | 2,398 | $ | 1,888 | ||||
| Line of credit – U.S. | 779 | 1,631 | ||||||
| $ | 3,177 | $ | 3,519 | |||||
Andrew Webron Limited and Andrew Webron Filtration Limited are both part of the same credit facility, which provides the Parent Company and its UK subsidiaries with an operating line of credit. This facility is arranged by the Parent Company and total borrowings on this facility as of September 30, 2013 were $10,167. The line of credit bears interest at UK base rate (0.5% at September 30, 2013) plus 1.9%, is due upon demand and matures in April 2015.
Andrew Webron Limited's and Andrew Webron Filtration Limited's outstanding balance on the line of credit was $1,480 and $918, respectively, as of September 30, 2013 and $1,466 and $422, respectively, as of March 31, 2013. Both lines of credit are secured by an interest in their respective land and buildings. In addition Andrew Webron Filtration Limited's line of credit is also secured by an interest in all of its other assets.
These lines of credit are guaranteed by the Parent Company and its UK subsidiaries. See Note 7 for additional information. The UK lines of credit were repaid in February 2014.
Southern Felt Company has a $5,000 line of credit with a bank, which is due upon demand and matures on November 10, 2014. Borrowings under the line bear interest at the variable one month LIBOR rate (0.18% at September 30, 2013) plus 2.35%. The availability under this line of credit is based on eligible receivables and eligible inventory, as defined in the line of credit agreement. Maximum borrowing capacity under this line credit as of September 30, 2013 was $4,141 and as of March 31, 2013 was $3,766. The outstanding balance on this line of credit as of September 30, 2013 was $779 and as of March 31, 2013 was $1,631.
The line of credit is secured by inventory and guaranteed by the Parent Company and Southern Felt Company’s subsidiary. The Southern Felt Company line of credit was repaid in February 2014.
| Page 8 |
| Filtration Division of Andrew Industries Limited |
| NOTES TO THE UNAUDITED CONDENSED CARVE OUT COMBINED FINANCIAL STATEMENTS |
As of September 30, 2013 and March 31, 2013 and for the six months ended September 30, 2013 and 2012 (Amounts in Thousands of U.S. Dollars) |
NOTE 5 – LONG TERM DEBT - RELATED PARTIES
Long term debt - related parties consists of the following as of September 30, 2013 and March 31, 2013:
| September 30, 2013 | March 31, 2013 | |||||||
| Andrew Industries (Hong Kong) Limited has a demand loan payable to Andrew Industries Limited U.K., unsecured, interest accruing at UK base rate (0.50% at September 30, 2013) plus 1.9%. The loan does not have a set repayment schedule. This note was repaid in February 2014. | $ | 8,656 | $ | 8,637 | ||||
| Andrew Industries Textile Manufacturing Company (Wuxi) Limited has a loan payable to BMP Asia Industries (Shenzhen) Company Limited which is unsecured and bears interest at a fixed rate of 3.05%. The loan matured on August 8, 2013 and was renewed with a new maturity date of September 26, 2015. | 650 | 637 | ||||||
| Andrew Industries Textile Manufacturing Company (Wuxi) Limited has a loan payable to BMP Asia Industries (Shanghai) Company Limited which is unsecured and bears interest at a fixed rate of 3.05%. The loan matured on April 10, 2013 and was renewed with a new maturity date of April 30, 2014. | 650 | 637 | ||||||
| Andrew Industrial Textile Manufacturing Company (Shanghai) Limited has a loan payable to BMP Asia Industries (Shenzhen) Company Limited which is unsecured and bears interest at a fixed rate of 3.05%. The loan matured on June 23, 2013 and was renewed with a new maturity date of June 24, 2014. This loan was repaid in April 2014. | 650 | 637 | ||||||
| Andrew Industrial Textile Manufacturing Company (Shanghai) Limited has loans payable to the Parent Company, unsecured, interest accruing at LIBOR on the date of draw down plus 1.5%. As of September 30, 2013, the interest rates on outstanding loans ranged from 1.79% to 6.89%. The loan is due upon demand. | 2,290 | 2,275 | ||||||
| Andrew Webron Limited has a demand loan payable to the Parent Company, unsecured, interest accruing at UK base rates (0.50% at September 30, 2013) plus 1.9%. The loan does not have a set repayment schedule. This note was repaid in February 2014. | 2,024 | 946 | ||||||
| Andrew Webron Limited has a demand loan payable to Andrew Textile Industries Limited, unsecured, non-interest bearing. The loan does not have a set repayment schedule. This note was repaid in February 2014. | 414 | 390 | ||||||
| 15,334 | 14,159 | |||||||
| Less current portion of long term debt – related parties | (14,684 | ) | (12,248 | ) | ||||
| $ | 650 | $ | 1,911 | |||||
As of September 30, 2013 and March 31, 2013, accrued interest due to related parties on the above borrowings totaled $2,110 and $1,899 respectively.
| Page 9 |
| Filtration Division of Andrew Industries Limited |
| NOTES TO THE UNAUDITED CONDENSED CARVE OUT COMBINED FINANCIAL STATEMENTS |
As of September 30, 2013 and March 31, 2013 and for the six months ended September 30, 2013 and 2012 (Amounts in Thousands of U.S. Dollars) |
NOTE 6 – LONG TERM DEBT
Long term debt consists of the following as of September 30, 2013 and March 31, 2013:
| September 30, 2013 | March 31, 2013 | |||||||
| Southern Felt Company has a note payable to a bank, secured by all of Southern Felt Company’s assets, interest accruing at the one month LIBOR rate (0.18% at September 30, 2013) plus 1.7%, monthly principal payments ranging from approximately $48 to $66, plus accrued interest, through January 2014. The note was repaid in January 2014. | $ | 824 | $ | 1,243 | ||||
| Southern Felt Company has a note payable to a bank, secured by equipment, interest accruing at the one month LIBOR rate (0.18% at September 30, 2013) plus 1.7% monthly principal payments ranging from approximately $9 to $11, plus accrued interest, through October 2015. This note was repaid in February 2014. | 242 | 315 | ||||||
| Southern Felt Company has a mortgage note payable to a bank, secured by buildings, interest accruing at the one month LIBOR rate (0.18% at September 30, 2013), plus 1.7%, monthly principal payments ranging from approximately $15 to $21, plus accrued interest, through July 2016. This note was repaid in February 2014. | 557 | 667 | ||||||
| Southern Felt Company has a mortgage note payable to a bank, secured by buildings, interest accruing at the one month LIBOR rate (0.18% at September 30, 2013) plus 1.7%, monthly principal payments ranging from approximately $6 to $10, plus accrued interest, through October 2017. This note was repaid in February 2014. | 448 | 502 | ||||||
| Southern Felt Company has a note payable to a bank, secured by equipment, interest accruing at the one month LIBOR rate (0.18% at September 30, 2013) plus 2.5%, monthly principal payments of approximately $83 plus accrued interest, through July 2015. This note was repaid in February 2014. | 1,833 | 2,333 | ||||||
| 3,904 | 5,060 | |||||||
| Less current portion of long term debt | (2,215 | ) | (2,254 | ) | ||||
| $ | 1,689 | $ | 2,806 | |||||
The long term debt for Southern Felt Company, Inc. is payable to the same bank and is subject to a number of financial covenants, including (i) a tangible net worth of at least $24,000 (ii) debt to tangible net worth of no more than 1.75 to 1 (iii) cash flow coverage ratio of at least 1.3 to 1 (iv) funded debt to EBITDA ratio of no more than 2.75 to 1. Southern Felt Company was in compliance with all financial covenants as of September 30, 2013 and March 31, 2013.
NOTE 7 – CONTINGENCIES
There is an unlimited cross guarantee between Andrew Webron Limited and the Parent Company and its UK subsidiaries (including Andrew Webron Filtration Limited), in respect of bank borrowing of $22,512 as of September 30, 2013.
| Page 10 |
| Filtration Division of Andrew Industries Limited |
| NOTES TO THE UNAUDITED CONDENSED CARVE OUT COMBINED FINANCIAL STATEMENTS |
As of September 30, 2013 and March 31, 2013 and for the six months ended September 30, 2013 and 2012 (Amounts in Thousands of U.S. Dollars) |
There is an unlimited cross guarantee between Andrew Webron Filtration Limited and the Parent Company and its UK subsidiaries (including Andrew Webron Limited), in respect of bank borrowing of $21,983 as of September 30, 2013.
The Filtration Division is subject to certain legal matters arising in the normal course of business, the outcome of which cannot be predicted. In the opinion of management, none of these matters will have a material impact on the financial condition, results of operations of cash flows of the Filtration Division.
NOTE 8 – SUBSEQUENT EVENTS
On February 20, 2014, the Parent Company sold the Filtration Division to Lydall, Inc. for approximately $86.7 million.
| Page 11 |
Exhibit 99.4
Lydall, Inc.
Unaudited Pro Forma Condensed Combined Financial Statements
Overview
On February 20, 2014, Lydall, Inc. (“Lydall” or the “Company”) completed an acquisition of certain industrial filtration businesses (“Industrial Filtration”) of Andrew Industries Limited (“Seller”), a United Kingdom based corporation, for $86.7 million in cash, subject to certain customary post-closing adjustments (the “Acquisition”). The Acquisition was consummated pursuant to the terms of a Sale and Purchase Agreement, dated as of February 20, 2014 (the “Purchase Agreement”), by and among the Seller, the Company and Lydall UK Ltd, an indirect subsidiary of the Company (together, with the Company, the “Buyers”). The signing of the Purchase Agreement and the closing of the Acquisition occurred simultaneously. Industrial Filtration has operations in the United States, the United Kingdom and China serving a global customer base in the manufacture of non-woven filter felt media and filter bags used primarily in industrial air filtration applications.
The unaudited pro forma condensed combined balance sheet as of September 30, 2013 is based upon the historical unaudited condensed consolidated balance sheet of the Company as of September 30, 2013 (as filed with the SEC in its Quarterly Report on Form 10-Q for the period ended September 30, 2013) and the historical unaudited condensed carve out combined balance sheet of Industrial Filtration as of September 30, 2013 (attached as Exhibit 99.3 in this Current Report on Form 8-K/A) and is presented as if the Acquisition had occurred on September 30, 2013.
The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2013 and for the year ended December 31, 2012 are presented on a pro forma basis to give effect to the Acquisition as if it had occurred on January 1, 2012. The Company and Industrial Filtration had different fiscal year ends. However, the historical information of Industrial Filtration in the pro forma condensed combined statements of operations is within 93 days of the Company’s fiscal year-end in accordance with SEC Regulation S-X 11-02(c)(3).
The unaudited condensed consolidated historical financial statements of the Company and the unaudited condensed carve out combined financial statements of Industrial Filtration as of and for the nine months ended September 30, 2013 and for the year ended December 31, 2012 have been adjusted in the pro forma condensed combined financial statements to give effect to events that are directly attributable to the Acquisition, are factually supportable and expected to have a continuing impact on the combined company.
The unaudited pro forma condensed combined financial statements have been presented for informational purposes only. The pro forma condensed combined financial statements are not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the Acquisition been completed as of the dates indicated. In addition, the pro forma condensed combined financial statements do not purport to project the future financial position or operating results of the combined company. There were no transactions between Lydall and Industrial Filtration as of and for the periods presented in the pro forma condensed combined financial statements that would need to be eliminated.
The pro forma condensed combined financial statements have been prepared using the acquisition method of accounting under general accepted accounting principles in the United States of America (“GAAP”). Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes and should be read in conjunction with the pro forma condensed combined financial statements.
Acquisition accounting is dependent upon certain valuations and other studies that have not yet been finalized. Accordingly, the pro forma adjustments related to the Acquisition are preliminary and have been made solely for the purpose of preparing the pro forma condensed combined financial statements and are based upon preliminary information available at the time of the preparation of this Form 8-K/A. Differences between these preliminary estimates and the final acquisition accounting could occur and these differences could have a material impact on the pro forma condensed combined financial statements and the combined company’s future results of operations and financial position.
The pro forma condensed combined financial statements do not reflect any operating efficiencies or cost savings that the combined company may achieve as a result of the Acquisition and the effects of the foregoing item could, individually or in the aggregate, materially impact the pro forma financial statements.
| 2 |
| Lydall, Inc. |
| UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET |
| As of September 30, 2013 | ||||||||||||||||
| In thousands of dollars and shares | Historical Lydall, Inc. | Historical Industrial Filtration | Pro Forma Adjustments (Note 5) | Pro Forma Combined | ||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 59,996 | $ | 3,209 | $ | (27,010 | )(f) | $ | 36,195 | |||||||
| Accounts receivable, net | 63,708 | 32,129 | - | 95,837 | ||||||||||||
| Inventories | 38,576 | 23,712 | 2,054 | (k) | 64,342 | |||||||||||
| Prepaid expenses and other current assets | 10,260 | 4,898 | (3,039 | )(e)(m) | 12,181 | |||||||||||
| Total current assets | 172,540 | 63,948 | (27,933 | ) | 208,555 | |||||||||||
| Property, plant and equipment, net | 77,152 | 31,253 | 9,311 | (j) | 117,716 | |||||||||||
| Goodwill and other intangible assets | 22,044 | 687 | 7,503 | (h)(i) | 30,234 | |||||||||||
| Other assets, net | 1,049 | 32 | 310 | (b) | 1,329 | |||||||||||
| Total assets | $ | 272,785 | $ | 95,920 | $ | (10,871 | ) | $ | 357,834 | |||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Current portion of long-term debt | $ | 718 | $ | 20,451 | $ | (20,451 | )(c) | $ | 718 | |||||||
| Accounts payable | 34,317 | 13,772 | - | 48,089 | ||||||||||||
| Other accrued liabilities | 15,496 | 6,409 | 1,950 | (d)(l)(m) | 23,855 | |||||||||||
| Total current liabilities | 50,531 | 40,632 | (18,501 | ) | 72,662 | |||||||||||
| Long-term debt | 1,201 | 3,731 | 56,269 | (a)(c) | 61,201 | |||||||||||
| Deferred tax liabilities | 6,989 | 2,262 | 3,048 | (l) | 12,299 | |||||||||||
| Benefit plan and other long-term liabilities | 26,160 | 484 | - | 26,644 | ||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Common stock | 2,404 | - | - | 2,404 | ||||||||||||
| Capital in excess of par value | 61,285 | - | - | 61,285 | ||||||||||||
| Net Parent Investment | - | 45,486 | (45,486 | )(g) | ||||||||||||
| Retained earnings | 216,119 | - | (2,876 | )(m) | 213,243 | |||||||||||
| Accumulated other comprehensive income (loss) | (16,095 | ) | 3,325 | (3,325 | )(g) | (16,095 | ) | |||||||||
| Treasury stock, at cost | (75,809 | ) | - | - | (75,809 | ) | ||||||||||
| Total stockholders’ equity | 187,904 | 48,811 | (51,687 | ) | 185,028 | |||||||||||
| Total liabilities and stockholders’ equity | $ | 272,785 | $ | 95,920 | $ | (10,871 | ) | $ | 357,834 | |||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements.
| 3 |
| Lydall, Inc. |
| UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS |
| For the nine months ended September 30, 2013 | ||||||||||||||||
| In thousands except per share data | Historical Lydall, Inc. | Historical Industrial Filtration | Pro Forma Adjustments (Note 6) | Pro Forma Combined | ||||||||||||
| Net sales | $ | 298,075 | $ | 96,425 | $ | - | $ | 394,500 | ||||||||
| Cost of sales | 233,179 | 80,603 | 1,939 | (i)(f) | 315,721 | |||||||||||
| Gross profit | 64,896 | 15,822 | (1,939 | ) | 78,779 | |||||||||||
| Selling, product development and administrative expenses | 41,472 | 8,810 | (1,214 | )(d)(f)(g)(i) | 49,068 | |||||||||||
| Operating income | 23,424 | 7,012 | (725 | ) | 29,711 | |||||||||||
| Interest expense | 231 | 487 | 210 | (a)(b)(c) | 928 | |||||||||||
| Other expense, net | 44 | - | 66 | (h) | 110 | |||||||||||
| Income before income taxes | 23,149 | 6,525 | (1,001 | ) | 28,673 | |||||||||||
| Income tax expense | 8,127 | 1,955 | (380 | )(e) | 9,702 | |||||||||||
| Net income | $ | 15,022 | $ | 4,570 | $ | (621 | ) | $ | 18,971 | |||||||
| Earning per share | ||||||||||||||||
| Basic | $ | 0.90 | $ | 1.14 | ||||||||||||
| Diluted | $ | 0.89 | $ | 1.12 | ||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Basic | 16,599 | 16,599 | ||||||||||||||
| Diluted | 16,888 | 16,888 | ||||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements.
| 4 |
| Lydall, Inc. |
| UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS |
| For the year ended December 31, 2012 | ||||||||||||||||
| In thousands except per share data | Historical Lydall, Inc. | Historical Industrial Filtration | Pro Forma Adjustments (Note 7) | Pro Forma Combined | ||||||||||||
| Net sales | $ | 378,924 | $ | 119,881 | $ | - | $ | 498,805 | ||||||||
| Cost of sales | 301,117 | 103,279 | 2,382 | (g)(f) | 406,778 | |||||||||||
| Gross profit | 77,807 | 16,602 | (2,382 | ) | 92,027 | |||||||||||
| Selling, product development and administrative expenses | 57,239 | 11,163 | (1,312 | )(d)(f)(g) | 67,090 | |||||||||||
| Gain on sale of product line | (810 | ) | - | - | (810 | ) | ||||||||||
| Operating income | 21,378 | 5,439 | (1,070 | ) | 25,747 | |||||||||||
| Interest expense | 365 | 643 | 286 | (a)(b)(c) | 1,294 | |||||||||||
| Other expense, net | 31 | 89 | 90 | (h) | 210 | |||||||||||
| Income before income taxes | 20,982 | 4,707 | (1,446 | ) | 24,243 | |||||||||||
| Income tax expense | 4,176 | 1,728 | (549 | )(e) | 5,355 | |||||||||||
| Net income | $ | 16,806 | $ | 2,979 | $ | (897 | ) | $ | 18,888 | |||||||
| Earning per share | ||||||||||||||||
| Basic | $ | 1.01 | $ | 1.13 | ||||||||||||
| Diluted | $ | 0.99 | $ | 1.11 | ||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Basic | 16,717 | 16,717 | ||||||||||||||
| Diluted | 16,973 | 16,973 | ||||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements.
| 5 |
Notes to the unaudited pro forma condensed combined financial statements
Note 1 – The Transaction
On February 20, 2014, Lydall, Inc. (“Lydall” or the “Company”), completed an acquisition of certain industrial filtration businesses (“Industrial Filtration”) of Andrew Industries Limited (“Seller”), a United Kingdom based corporation, for a purchase price of approximately $86.7 million in cash, subject to certain customary post-closing adjustments (the “Acquisition”). The Acquisition was consummated pursuant to the terms of a Sale and Purchase Agreement, dated as of February 20, 2014 (the “Purchase Agreement”), by and among the Seller, the Company and Lydall UK Ltd, an indirect subsidiary of the Company (together, with the Company, the “Buyers”). The signing of the Purchase Agreement and the closing of the Acquisition occurred simultaneously.
Pursuant to the terms of the Purchase Agreement, the Buyers acquired all of the issued and outstanding shares of capital stock of Andrew Webron Limited, Andrew Webron Filtration Limited, Andrew Industries (Hong Kong) Limited and Southern Felt Company, Inc. (collectively, with their subsidiaries, “Industrial Filtration”).
The Company used borrowings under its Amended and Restated Credit Agreement in addition to cash on hand to fund the Acquisition. The total consideration for the Acquisition was approximately $86.7 million in cash.
Note 2 – Basis of Presentation
The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting in accordance with generally accepted accounting principles in the United States (“GAAP”) and were derived based on the historical financial statements of the Company and Industrial Filtration after giving effect to the Acquisition and after applying the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements do not assume any differences in accounting policies, however certain reclassification adjustments were made for presentation purposes as detailed in Note 3. At this time, the Company is not aware of any policy differences that have a material impact on the pro forma condensed combined financial statements. There were no transactions between Lydall and Industrial Filtration as of and for the periods presented in the pro forma condensed combined financial statements that would need to be eliminated. The financial periods required to be presented in this Current Report on Form 8-K/A are based on the Company’s fiscal periods. The unaudited pro forma condensed combined balance sheet as of September 30, 2013 is presented as if the Acquisition had occurred on September 30, 2013. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2013 and for the year ended December 31, 2012 are presented as if the Acquisition had occurred on January 1, 2012. The historical financial information has been adjusted to give effect to pro forma events that are (i) directly attributable to the Acquisition; (ii) factually supportable; and (iii) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined company’s results.
| 6 |
The unaudited pro forma condensed combined balance sheet as of September 30, 2013 is based upon the historical unaudited condensed consolidated balance sheet of the Company as of September 30, 2013 (as filed with the SEC in its Quarterly Report on Form 10-Q for the period ended September 30, 2013) and the historical unaudited condensed carve out combined balance sheet of Industrial Filtration as of September 30, 2013 (attached as Exhibit 99.3 in this Current Report on Form 8-K/A).
The Company and Industrial Filtration have different fiscal year ends. However, the historical information of Industrial Filtration in the pro forma condensed combined statements of operations is within 93 days of the Company’s fiscal year-end in accordance with SEC Regulation S-X 11-02(c)(3). The unaudited pro forma condensed combined statement of operations for nine months ended September 30, 2013 combines the Company’s historical unaudited condensed consolidated statement of operations for the nine months ended September 30, 2013 (as filed with the SEC in its Quarterly Report on Form 10-Q for the period ended September 30, 2013) and Industrial Filtration’s unaudited condensed carve out combined statement of income for the six months ended September 30, 2013 (attached as Exhibit 99.3 in this Current Report on Form 8-K/A) and the results of operations for Industrial Filtration from the last three months of its fiscal year ended March 31, 2013.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2012 combines the Company’s historical audited statement of operations for the year ended December 31, 2012 (as filed with the SEC in its 2012 Annual Report on Form 10-K) with Industrial Filtration’s historical audited carve out combined statement of income for the year ended March 31, 2013 (attached as Exhibit 99.2 in this Current Report on Form 8-K/A).
Under the acquisition method of accounting, the Company measures and recognizes separately from goodwill the fair value as of February 20, 2014 of all identifiable assets acquired and liabilities assumed as part of the Acquisition. For purposes of measuring the fair value of the assets acquired and liabilities assumed, the Company has applied the accounting guidance for fair value measurements in accordance with GAAP. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The fair value measurements utilize estimates based on key assumptions, including historical and current market data. The preliminary allocation of the purchase price as detailed in Note 4, “Purchase Price Allocation” of these unaudited pro forma condensed combined financial statements is based upon preliminary estimates and assumptions that are subject to change as the Company’s management finalizes the fair values of the assets acquired and liabilities assumed. The final purchase price allocation will differ from that reflected in the pro forma condensed combined financial statements after final valuation procedures are performed and amounts are finalized. Notwithstanding those items, management believes that the assumptions provide a reasonable basis for presenting all of the significant effects of the Acquisition and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial statements.
Estimated transaction costs have been excluded from the unaudited pro forma condensed combined statement of operations as they reflect non-recurring charges directly related to the Acquisition. However, the transaction costs are reflected in the unaudited pro forma condensed combined balance sheet as an increase to other current liabilities and a decrease to retained earnings.
| 7 |
The unaudited pro forma condensed combined financial statements do not reflect any revenue enhancements or cost savings (or associated costs to achieve such savings) from operating efficiencies, synergies or other restructuring that could result from the Acquisition.
The unaudited pro forma condensed combined financial statements are presented for informational purposes only and are not intended to reflect the results of operations or the financial position of the combined company that would have resulted had the Acquisition been effective as of and for the periods presented or the results that may be obtained by the combined company in the future.
Note 3 – Reclassifications
A reclassification adjustment has been made in the presentation of Industrial Filtration’s historical amounts to conform to the Company’s presentation. The adjustment reclassifies Industrial Filtration’s shipping and handling costs from Selling, General and Administrative expenses to Cost of Sales, refer to Note 6(i) and Note 7(g).
Note 4 – Purchase Price Allocation
Pursuant to the Company’s business combinations accounting policy, the total preliminary purchase price for Industrial Filtration was allocated to the preliminary net tangible and intangible assets based upon their preliminary fair values as set forth below. The excess of the purchase price over the preliminary net tangible and intangible assets was recorded as goodwill. The purchase price was allocated based upon preliminary estimates and assumptions that are subject to change as the Company finalizes the fair values of assets acquired and liabilities assumed. The final purchase price allocation will differ from that reflected in the pro forma condensed combined financial statements after final valuation procedures are performed and amounts are finalized.
The following is a preliminary estimate of the assets acquired and the liabilities assumed by the Company in the completed acquisition of Industrial Filtration:
| (In thousands) | ||||
| Cash | $ | 3,209 | ||
| Accounts receivable | 32,129 | |||
| Other assets | 1,307 | |||
| Inventory | 25,766 | |||
| Property, plant and equipment | 40,564 | |||
| Identifiable intangible assets | 5,596 | |||
| Goodwill | 2,594 | |||
| Current liabilities | (18,671 | ) | ||
| Other liabilities | (5,794 | ) | ||
| Total purchase price | $ | 86,700 | ||
| 8 |
Identifiable intangible assets: The estimated fair value of the identifiable intangible assets and the weighted average estimated useful lives (in years) are as follows:
| Estimated Fair Value (In thousands) | Estimated Useful Life | |||||
| Technology | $ | 2,500 | 15 | |||
| Customer relationships | 2,540 | 11 | ||||
| Trade names | 220 | 5 | ||||
| Favorable leases | 336 | 5 | ||||
| Total | $ | 5,596 | ||||
Goodwill: Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized.
Other liabilities: Adjustments were made for deferred taxes as part of the accounting for the Acquisition. Included in other liabilities above reflects the deferred tax liability impact of the acquisition on the balance sheet of $3,648, primarily related to fair value adjustments for acquired inventory, identifiable intangible assets, and property, plant and equipment.
Note 5 – Pro forma adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet
The following pro forma adjustments were applied to the unaudited historical balance sheets of the Company and Industrial Filtration at September 30, 2013 to arrive at the unaudited pro forma condensed combined balance sheet (in thousands):
| (a) | To record borrowings under Amended and Restated Credit Agreement used to complete the Acquisition, which bear interest at LIBOR plus 1.25% and matures January 2019 | $ | 60,000 | |||
| (b) | To record additional deferred financing costs associated with amended and restated credit facility | $ | 310 | |||
| (c) | To eliminate existing debt of Industrial Filtration settled prior to the Acquisition, of which $20,451 is current | $ | (24,182 | ) | ||
| (d) | To eliminate accrued interest expense related to settled debt of Industrial Filtration | $ | (2,110 | ) | ||
| (e) | To eliminate notes receivable from Seller settled prior to the Acquisition | $ | (3,623 | ) | ||
| (f) | To reflect use of existing Lydall cash in the Industrial Filtration acquisition and payment of deferred financing costs | $ | (27,010 | ) | ||
| (g) | To eliminate the equity accounts of Industrial Filtration | $ | (48,811 | ) | ||
| (h) | To eliminate Industrial Filtration’s historical goodwill balance of $687 and to record the preliminary estimate for goodwill for the acquisition as disclosed in Note 4 of $2,594 | $ | 1,907 | |||
| (i) | To record identifiable intangible assets of Industrial Filtration at fair value. Fair value and estimated useful life of identifiable intangible assets are based on estimates as discussed in Note 4, and are subject to review and finalization by the Company’s Management. | $ | 5,596 | |||
| (j) | To record the fair value of property, plant and equipment acquired in the Acquisition as disclosed in Note 4 | $ | 9,311 | |||
| (k) | To record the step-up in fair value of inventory acquired in the Acquisition as disclosed in Note 4 | $ | 2,054 | |||
| (l) | To record the deferred tax liabilities (based on local jurisdiction tax rates) related to the fair value adjustments recorded for the assets acquired and liabilities assumed, excluding goodwill, as disclosed in Note 4, of which $600 is current. | $ | 3,648 | |||
| (m) | To record the estimated transaction related expenses to other accrued liabilities and retained earnings, net the associated tax benefit of $584. | $ | 3,460 |
| 9 |
Note 6 – Pro Forma Adjustments to the Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine Months ended September 30, 2013
The following pro forma adjustments were applied to the historical statements of operations for the Company and Industrial Filtration for the nine months ended September 30, 2013 (in thousands):
| (a) | To record interest expense on $60,000 in borrowings to complete the Acquisition, using an interest rate of LIBOR of 0.195%, plus 1.25% at Acquisition Date. Interest rates for the Amended and Restated Credit Agreement are variable and the actual rate of interest can change from the assumed LIBOR of 0.195% above. A 1/8% variance in the interest rate on the new borrowings would impact interest expense by approximately $56. | $ | 650 | |||
| (b) | To record amortization of deferred financing costs of $310. | $ | 47 | |||
| (c) | To eliminate historical interest expense on debt settled prior to Acquisition | $ | (487 | ) | ||
| (d) | To record amortization of intangible assets. The amortization of purchased technology, customer relationships, trade names and favorable leases has been calculated based on their respective fair values and amortized over the estimated life as discussed in Note 4. | $ | 397 | |||
| (e) | To record the provision for income taxes. Provision for income taxes equals the Company’s estimated statutory tax rate 38% of combined pre-tax income, adjusted for pro forma entries. | $ | 380 | |||
| (f) | To record additional depreciation expense resulting from increased basis of property, plant and equipment acquired and depreciated using straight line basis over the estimated remaining useful lives. Approximately $408 of depreciation expense is recorded to cost of sales and $32 to selling, product development and administrative expenses. | $ | 440 | |||
| (g) | To eliminate Lydall’s transaction expenses | $ | (112 | ) | ||
| (h) | To eliminate interest income related to notes receivable settled prior to Acquisition | $ | 66 | |||
| (i) | To reclass Shipping and Handling costs classified as general and administrative expenses by Industrial Filtration to cost of sales to conform with the Company’s presentation. | $ | 1,531 |
Note 7 – Pro Forma Adjustments to the Unaudited Pro Forma Condensed Combined Statement of Operations for the Year ended December 31, 2012
The following pro forma adjustments were applied to the historical statements of operations for the Company and Industrial Filtration for the year ended December 31, 2012 (in thousands):
| (a) | To record interest expense on $60,000 in borrowings to complete the Acquisition, using an interest rate of LIBOR of 0.195%, plus 1.25% at Acquisition date. Interest rates for the Amended and Restated Credit Agreement are variable and the actual rate of interest can change from the assumed LIBOR of 0.195% above. A 1/8% variance in the interest rate on the new borrowings would impact interest expense by approximately $75. | $ | 867 | |||
| (b) | To record amortization of deferred financing costs of $310. | $ | 62 | |||
| (c) | To eliminate historical interest expense on debt settled prior to Acquisition | $ | (643 | ) | ||
| (d) | To record amortization of intangible assets. The amortization of purchased technology, customer relationships, trade names and favorable leases has been calculated based on their respective fair values and amortized over the estimated life as discussed in Note 4. | $ | 484 | |||
| (e) | To record the provision for income taxes. Provision for income taxes equals the Company’s estimated statutory tax rate 38% of combined pre-tax income, adjusted for pro forma entries. | $ | 549 | |||
| (f) | To record additional depreciation expense resulting from increased basis of property, plant and equipment acquired and depreciated using straight line basis over the estimated remaining useful life. Approximately $544 of depreciation expense is recorded to cost of sales and $42 to Selling, product development and administrative expenses. | $ | 586 | |||
| (g) | To reclass Shipping and Handling costs classified as general and administrative expenses by Industrial Filtration to cost of sales to conform with the Company’s presentation | $ | 1,838 | |||
| (h) | To eliminate interest income related to notes receivable settled prior to Acquisition | $ | 90 |
| 10 |