UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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Indicate by check mark whether the registrant is an emerging growth company as defined by Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
EXPLANATORY NOTE
This Current Report on Form 8-K/A amends the Original 8-K to file the financial statements and pro forma financial information required by Items 9.01(a) and 9.01(b) of Form 8-K.
This Current Report on Form 8-K/A should be read in connection with the Original Form 8-K, which provides a more complete description of said acquisition. The pro forma financial information included in this Current Report on Form 8-K/A has been presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations that would have been realized had the acquisition of TRUaire occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the Registrant will experience after the acquisition.
Item 9.01 | Financial Statements and Exhibits. |
(a) Financial Statements of Business Acquired.
The historical audited consolidated balance sheet of TRUaire as of December 31, 2019, the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for the year ended December 31, 2019, the related notes and the related Independent Auditors’ Report thereon are filed as Exhibit 99.1 hereto.
The unaudited condensed consolidated financial statements of TRUaire as of September 30, 2020 and September 30, 2019 and for the nine months ended September 30, 2020 and September 30, 2019 and the related notes are filed as Exhibit 99.2 hereto.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined financial information of the Registrant, giving effect to the acquisition of TRUaire, which includes the unaudited pro forma condensed consolidated balance sheet as of September 30, 2020, the unaudited pro forma condensed combined statements of operations for the year ended March 31, 2020 and for the six months ended September 30, 2020 and the related notes, are filed as Exhibit 99.3 hereto.
(d) | Exhibits |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: February 3, 2021
By: | /s/ James E. Perry | |
Name: | James E. Perry | |
Title: | Executive Vice President & Chief Financial Officer |
Exhibit 23.1
Consent of Independent Auditor
We hereby consent to the incorporation by reference into Registration Statements No. 333-250003 on Form S-3 and No. 333-207178 on Form S-8 of our report, dated April 15, 2020, relating to our audit of the financial statements of T.A. Industries, Inc. for the year ended December 31, 2019, which appears in this Form 8-K/A of CSW Industrials, Inc. dated February 3, 2021.
/s/ Lee & Park Co.
Los Angeles, CA
February 3, 2021
Exhibit 99.1
T.A. INDUSTRIES, INC.
FINANCIAL STATEMENTS
Year Ended December 31, 2019
(With Independent Auditor’s Report Thereon)
Contents | |
Independent Auditors' Report | 2 |
Consolidated Balance Sheet | 4 |
Consolidated Statements of Income and Comprehensive Income | 5 |
Consolidated Statement of Stockholders' Equity | 6 |
Consolidated Statement of Cash Flows | 7 |
Notes to Consolidated Financial Statements | 8 |
Independent Auditors’ Report
To the Board of Directors and Stockholders of
T.A. Industries, Inc.
We have audited the accompanying consolidated financial statements of T.A. Industries, Inc. (the "Company"), which comprise the balance sheets as of December 31, 2019, and the related statements of comprehensive income, shareholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the presentation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the presentation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on those financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of 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 statement.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
2
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
/s/ Lee & Park Co.
April 15, 2020
3
T.A. INDUSTRIES, INC. |
CONSOLIDATED BALANCE SHEET |
As of December 31, 2019 |
A S S E T S | ||||
Current assets: | ||||
Cash and cash equivalents | $ | 454,113 | ||
Accounts receivable, net | 11,006,521 | |||
Advance to suppliers and other receivable | 949,119 | |||
Inventory (note 3) | 34,926,865 | |||
Other current assets | 4,052,966 | |||
Total current assets | 51,389,584 | |||
Property and equipment, net | 24,583,153 | |||
Other asset: | ||||
Intangible assets, net | 130,907 | |||
Deferred tax assets | 987,158 | |||
Deposits | 747,335 | |||
Other long-term assets | 7,801,466 | |||
Total other assets | 9,666,866 | |||
Total assets | $ | 85,639,603 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||
Current liabilities: | ||||
Accounts payable | $ | 4,910,425 | ||
Income tax payable | 2,748,022 | |||
Revolving line of credit payable | 22,419,512 | |||
Current portion of long-term debts | 371,810 | |||
Accrued and other current liabilities | 1,329,095 | |||
Total current liabilities | 31,778,864 | |||
Long-term debts | 49,398 | |||
Total liabilities | 31,828,262 | |||
Shareholders' equity: | ||||
Common stock, no par value; 100,000,000 shares authorized, 2,450,000 shares issued and outstanding | 2,450,000 | |||
Additional paid-in capital | 6,600,000 | |||
Accumulated other comprehensive income (loss) | (6,356,197 | ) | ||
Retained earnings | 51,117,538 | |||
Total shareholders' equity | 53,811,341 | |||
Total liabilities and shareholders' equity | $ | 85,639,603 |
See accompanying notes to financial statements
4
T.A. INDUSTRIES, INC. |
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME |
For the year ended December 31, 2019 |
Net sales | $ | 94,414,125 | ||
Cost of sales | 42,270,112 | |||
Gross profit | 52,144,013 | |||
Selling and administrative expenses | 38,389,598 | |||
Income from operations | 13,754,415 | |||
Interest expense, net | (1,218,146 | ) | ||
Financial income, net | 58,184 | |||
Other income (expense), net | (163,778 | ) | ||
Income before income tax provision | 12,430,675 | |||
Income tax provision | (2,672,635 | ) | ||
Net income | $ | 9,758,040 | ||
Other comprehensive income (loss) | $ | 74,310 | ||
Comprehensive income | $ | 9,832,350 |
See accompanying notes to financial statements
5
T.A. INDUSTRIES, INC. |
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY |
For the year ended December 31, 2019 |
Accumulated | ||||||||||||||||||||||||
Additional | other | Net | ||||||||||||||||||||||
Shares | Common | paid-in | comprehensive | Retained | shareholders' | |||||||||||||||||||
outstanding | stock | capital | income (loss) | earnings | equity | |||||||||||||||||||
Balance at January 1, 2019 | 2,450,000 | $ | 2,450,000 | $ | 6,600,000 | $ | (6,430,507 | ) | $ | 41,359,498 | $ | 43,978,991 | ||||||||||||
Net Income | 9,758,040 | 9,758,040 | ||||||||||||||||||||||
Other Comprehensive Income | 74,310 | 74,310 | ||||||||||||||||||||||
Balance at December 31, 2019 | 2,450,000 | $ | 2,450,000 | $ | 6,600,000 | $ | (6,356,197 | ) | $ | 51,117,538 | $ | 53,811,341 |
See accompanying notes to financial statements
6
T.A. INDUSTRIES, INC. |
CONSOLIDATED STATEMENT OF CASH FLOWS |
For the year ended December 31, 2019 |
Cash flows from operating activities: | ||||
Net income | $ | 9,758,040 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||
Depreciation and amortization | 2,364,250 | |||
Working capital and other changes related to operations: | ||||
Accounts receivable | (596,349 | ) | ||
Advances to suppliers and other receivable | 1,835,983 | |||
Inventory | (2,588,712 | ) | ||
Other current assets | (715,096 | ) | ||
Other assets | (3,276,491 | ) | ||
Accounts payable | 940,874 | |||
Income tax payable | 462,602 | |||
Accrued and other current liabilities | (961,861 | ) | ||
Deferred tax liabilities/assets | (367,201 | ) | ||
Net cash provided by operating activities | 6,856,039 | |||
Cash flows from investing activities: | ||||
Proceeds from the sale of construction-in-progress | 1,505,979 | |||
Purchase of property and equipment | (8,772,708 | ) | ||
Net cash used in investing activities | (7,266,729 | ) | ||
Cash flows from financing activities: | ||||
Payments for revolving line of credit payable | (448,427 | ) | ||
Payments for long-term debts | (470,673 | ) | ||
Net cash used in financing activities | (919,100 | ) | ||
Effect of exchange rate changes | 74,310 | |||
Net decrease in cash and cash equivalents | (1,255,480 | ) | ||
Cash and cash equivalents at beginning of year | 1,709,593 | |||
Cash and cash equivalents at end of year | $ | 454,113 | ||
Supplemental disclosure of cash flow information | ||||
Cash paid during the year for interest | $ | 1,218,146 | ||
Cash paid during the year for tax | $ | 3,884,215 |
See accompanying notes to financial statements
7
T.A. INDUSTRIES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
December 31, 2019 |
1. Organization
T.A. Industries, Inc. ("Company", "TA"), was incorporated in June of 1995 in the state of California and has branches in Jacksonville, Florida, Aberdeen, Maryland, Greenwood, Indiana, and Houston, Texas. TA has been engaged principally in the import and wholesale distribution of grilles and diffusers. The Company’s wholly-owned subsidiary, T.A. Industries Vietnam Co. Ltd., ("TA Vietnam"), established in September 2004 in Vietnam, manufactures all the products TA distributes throughout the U.S. The Company sells its products under the brand name of "Truaire", a well-recognized brand in the industry.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements included the accounts of T.A. Industries, Inc., and its wholly-owned subsidiary. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.
Management Estimates
Management uses estimates and assumptions in preparing financial statements in conformity with generally accepted accounting principles in the U.S. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Accordingly, actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers operating checking accounts, money market account, and term deposits with less than 90 days maturity to be cash equivalents. As of December 31, 2019, cash and cash equivalents included no Term Deposits with less than 90 days maturity.
Revenue Recognition
Wholesale revenue is recognized when title and the risk and rewards of ownership have passed to the customer based on the terms of sale. This occurs upon shipment of products to customers.
In 2017, TA signed a contract with Home Depot to open a new line of business, a Decorative Line. To gain the new business, TA agreed to pay Home Depot $500,000 and purchase all existing Home Depot inventory for $1,440,160, which had no salvage value. To compensate for the $1,440,160 for the purchase of old inventory, they agreed on a 5% mark-up on all future sales of this new line of business, which the Company will offset against $1,440,160. Accordingly, both $500,000 and $1,440,160 were recorded as pre-payment in the other long-term assets. $500,000 was amortized over the period of 15 years while the $1,440,160 was offset by the 5% mark-up in Decorative Line sales annually. In 2019, the total sale for the Decorative Line business was $4,281,703, including the additional 5% mark-up of $214,085.
The balance at December 31, 2019, was as follows:
Original balance | $ | 1,940,160 | ||
2017 reduction | (187,586 | ) | ||
2018 reduction | (249,155 | ) | ||
2019 reduction | (247,419 | ) | ||
Balance as of 12/31/19 | $ | 1,256,000 | ||
Less current portion | (248,334 | ) | ||
Total | $ | 1,007,666 |
8
T.A. INDUSTRIES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
December 31, 2019 |
The Company routinely commits to a one-time or an on-going rebate program as sales incentives to dealers/wholesalers/contractors that require the Company to estimate and accrue the costs of such program. The policy regarding the recognition and presentation within the statement of income and comprehensive income is as follows:
Discounts and Rebates
There are two types of discounts: Sales Discount and Targeted Contractor Accounts (“TCAP”) Discount. Sales discounts are given to customers for on-time payment and volume orders for either Home Depot or large-volume customers. TCAP discounts are given to contractor groups with pre-contracted discount incentives based on increased sales on existing accounts and/or sales on new accounts. The rebates are given to buying groups and the Home Depot based on monthly, quarterly, or yearly sales. Buying groups are made up of members purchasing in large quantities to obtain a better price as a whole. The costs of these discounts and rebates are recognized at the date of payment receipt or quarterly or annually. The cost of these discounts and rebates is estimated based on the payment history and the contractual obligations at year-end. Substantially all discounts and rebates are included in the determination of net sales.
Shipping and Handling Costs
The Company records shipping and handling fees collected from its customers as revenue. The Company records inbound freight as a cost of sales, and it records shipping and handling costs associated with shipping products to its customers as selling and administrative expenses. Total shipping and handling fees recorded as revenue and total shipping and handling costs included in selling and administrative expenses were approximately $708,000 and $4,495,000, respectively, for the year ended December 31, 2019.
Allowance for Uncollectible Accounts
Accounts receivable consists primarily of amounts receivable from customers. The Company makes ongoing estimates related to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. The allowance for uncollectible accounts receivable was $39,883 as of December 31, 2019.
Inventories
Inventories are stated at lower of cost, using the first-in first-out method, or market value.
Property and Equipment
Property and equipment are stated at cost. Expenditures for repairs and maintenance are expensed as incurred, and any gain or loss on disposition is included in income as realized. Depreciation and amortization are provided on the straight-line method over the following estimated useful lives:
Automobiles | 5 – 10 years |
Building and structure | 10 – 44 years |
Machinery and equipment | 5 - 10 years |
Office equipment | 5 years |
Leasehold improvements | Shorter of 31.5 years or term of the lease |
9
Identified Intangible Assets
Intangible assets are stated at cost. The Company capitalizes and amortizes intangible assets on a straight-line basis over the following estimated useful lives:
Goodwill purchased | 15 years |
Patent | 15 years |
Loan fees paid | Shorter of 5 years or term of the loan |
Impairment of Long-lived Assets and Intangible Assets
The Company assesses potential impairment to its long-lived assets and intangible assets subject to amortization when events or changes in circumstances have made recovery of the assets carrying value unlikely and the carrying amount of the assets exceeds the estimated future undiscounted cash flows. If the assessment indicates that the carrying amounts may not be recoverable, an impairment loss would reduce the assets’ carrying amount to its estimated fair value based on the present value of estimated future cash flows. During the year ended December 31, 2019, the Company did not recognize any impairment related to long-lived assets and intangible assets subject to amortization.
Fair Value of Financial Instruments
Substantially all of the Company’s current assets and liabilities are considered financial instruments. These assets and liabilities are reflected at fair value, or at carrying amounts that approximate fair value because of the short maturity of the instrument. Other financial instruments consist of long-term obligations. The fair value of long-term obligations is estimated based on current interest rates offered to the Company for obligations with similar remaining maturities. The recorded value of these financial instruments approximated fair value at December 31, 2019.
Foreign Currency Translation and Foreign Currency Transactions
Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the foreign currency transaction adjustment, a component of accumulated other comprehensive income in shareholders’ equity.
The Company’s subsidiary has various assets and liabilities, which are denominated in their functional currencies. These balance sheet items are subject to remeasurement, the impact of which is recorded in net of other income and expenses within the consolidated statements of income as other comprehensive income or loss.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes are recognized for differences between the bases of assets and liabilities for financial statement and income tax purposes.
The differences in asset and liability bases relate primarily to depreciable assets (using different methods and periods to calculate depreciation), net operating loss carry forward, and allowance for uncollectible accounts to reduce deferred tax assets to an amount that is more likely than not to be realized.
The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses and tax credits that are available to offset future income taxes. The components of the deferred tax assets and liabilities are classified as current and noncurrent based on their characteristics. Valuation allowances are provided for deferred tax assets based on the management of projection of the sufficiency of future taxable income to realize the assets. The Company records liabilities and tax benefits to uncertain tax positions in accordance with FASB ASC 740, Income Taxes.
10
T.A. INDUSTRIES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
December 31, 2019 |
The Company’s income tax filings are subject to audit by various taxing authorities. In evaluating the Company’s tax provisions and accruals, future taxable income and the reversal of temporary differences, interpretations, and tax planning strategies are considered. The Company believes its estimates are appropriate based on current facts and circumstances.
U.S. income taxes as applicable to the earnings of its non-U.S. subsidiary that are expected to be repatriated are provided currently on the financial statement. The Company determines annually the amount of undistributed income to distribute, but, with the Tax Cuts and Jobs Act of 2017, the Company is not subject to any tax liabilities of future repatriated distribution of non-U.S. earnings indefinitely after the recognition of the initial tax liabilities on deemed mandatory repatriation for undistributed earnings up to year 2017 with the election.
With that election, the Company owed federal income tax liabilities totaling $2,264,562 as of December 31, 2019 (initial liabilities $3,056,085 less $791,523 payments made), and the future payment schedule is as follows:
Year Ending December 31, | |||||
2020 | $ | 186,425 | |||
2021 | 244,487 | ||||
2022 | 458,412 | ||||
2023 | 611,217 | ||||
2024 | 764,021 | ||||
$ | 2,264,562 |
The Company evaluates all significant tax positions as required by accounting principles generally accepted in the United States of America. As of December 31, 2019, the Company records the impacts properly.
Advertising
Advertising is charged to expenses when the advertisement is placed, and the aggregate amount of advertising expense was $196,247 for the year ended December 31, 2019. These expenses are included in selling and administrative expenses.
3. Inventory
As of December 31, 2019, inventory consisted of the following:
TA | ||||
Inventory in warehouse | $ | 31,792,238 | ||
Inventory in transit | 6,234,305 | |||
Subtotal inventory | $ | 38,026,543 | ||
TA VIETNAM | ||||
Raw materials | $ | 4,033,951 | ||
Tools and supplies | 164,571 | |||
Work in process | 762,097 | |||
Finished goods | 324,827 | |||
Subtotal inventory | $ | 5,285,446 | ||
$ | 43,311,989 | |||
Less: inter-company profit | (8,385,124 | ) | ||
Total Inventory | $ | 34,926,865 |
11
T.A. INDUSTRIES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
December 31, 2019 |
4. Other Current Assets
Other current assets as of December 31, 2019, included the following:
Prepaid income taxes and expenses | $ | 3,052,262 | ||
Home Depot advance purchase - current | 248,334 | |||
Deductible value added tax | 752,370 | |||
Total | $ | 4,052,966 |
5. Property and Equipment
As of December 31, 2019, property and equipment including the subsidiary’s consisted of the following:
TA | TA VIETNAM | Total | ||||||||||
Automobiles | $ | 1,190,015 | $ | 595,557 | $ | 1,785,572 | ||||||
Building and structure | 199,822 | 8,774,372 | 8,974,194 | |||||||||
Machine and equipment | 4,339,191 | 20,066,883 | 24,406,074 | |||||||||
Office equipment | 640,319 | 69,537 | 709,856 | |||||||||
Leasehold improvements | 5,940,871 | - | 5,940,871 | |||||||||
12,310,218 | 29,506,349 | 41,816,567 | ||||||||||
Accumulated depreciation | (5,292,790 | ) | (11,940,624 | ) | (17,233,414 | ) | ||||||
$ | 7,017,428 | $ | 17,565,725 | $ | 24,583,153 |
6. Intangible Assets
Intangible assets as of December 31, 2019, consisted of the following:
Patents purchased | $ | 400,000 | ||
Goodwill purchased | 132,000 | |||
$ | 532,000 | |||
Less accumulated amortization | (401,093 | ) | ||
$ | 130,907 |
Amortization expenses for intangible assets totaled $35,467 for the year ended December 31, 2019.
12
T.A. INDUSTRIES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
December 31, 2019 |
7. Other Long-Term Assets
Other long-term assets at December 31, 2019, consisted of the following:
Deposit | $ | 482 | ||
Home Depot advance purchase | 1,007,666 | |||
Term-loans receivable | 6,224,724 | * | ||
Long-term prepaid | 568,593 | |||
$ | 7,801,465 |
*See note 12 for additional information
8. Debts
Revolving Line of Credit
The Company has a revolving line of credit with Comerica Bank with a maximum balance of $18,000,000 due on July 28, 2020. The purpose of the loan is to provide funds for general operations and working capital. The line is secured by substantially all of the Company’s assets now owned and hereafter created or acquired by the Company. The interest is based on either the Wall Street Journal’s prime rate (current rate is 4.75%) or 30-Day LIBOR rate plus 2.0%.
TA Vietnam has two short-term loans from Vietcombank and Vietinbank. The loan from Vietcombank was entered on September 25, 2019, with a maximum balance of $10,049,278 with interest rates from 3.6% to 3.9% secured by the machinery equipment and factory. The loan from Vietinbank was entered on September 20, 2019, with a maximum balance of $3,000,000 with interest rates of 4.0% secured by the machinery equipment and factory.
As of December 31, 2019, outstanding loan balances from Comerica bank, Vietcombank, and Vietinbank were $10,424,749 and $9,157,361 and 2,837,402, respectively, for a total of $22,419,512.
Long-term Debts
Long-term debt consisted of the following as of December 31, 2019:
Notes payable for three automobile loans and five capital leases that expire on various dates up to November 23, 2021, with interest rates from 0.00% to 5.69%, total monthly payment of $6,716 | $ | 121,199 | ||
Note payable with Comerica that expires on August 31, 2020, with interest of Wall Street Journal prime rate or 30-Day LIBOR rate plus 2.0%, monthly installment payment of $33,333 plus interest | 300,009 | |||
Less current portion | (371,810 | ) | ||
Total | $ | 49,398 |
13
T.A. INDUSTRIES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
December 31, 2019 |
9. Accrued and Other Current Liabilities
Accrued and other current liabilities as of December 31, 2019, included the following:
Employees and tax payables | $ | 601,828 | ||
Commission payable | 499,282 | |||
Equipment rental payable | 181,891 | |||
Others | 46,094 | |||
Total | $ | 1,329,095 |
10. Income Taxes
The provisions for income taxes for the year ended December 31, 2019, consisted of the following components:
Current: | ||||
Federal | $ | 1,370,283 | ||
States | 592,994 | |||
Foreign | 1,076,557 | |||
3,039,834 | ||||
Deferred: | ||||
Federal | $ | (238,131 | ) | |
States | (129,068 | ) | ||
Foreign | - | |||
(367,199 | ) | |||
Total | $ | 2,672,635 |
The provision for income taxes differs from the amount computed by applying the U.S. federal statutory income rate and state statutory income rate of 21% and 6%, respectively, to the pretax book income of the Company, due primarily to state income tax and timing differences of depreciation and amortization of fixed assets and intangible assets.
Beginning deferred tax assets and liabilities as of January 1, 2019:
Deferred income tax assets: | ||||
State tax | $ | 74,675 | ||
Accounts receivable, bad debt reserve | 10,769 | |||
Inventory, 263A capitalization | 769,770 | |||
Net deferred income tax assets | 855,214 | |||
Deferred income tax liabilities: | ||||
Depreciation and amortization | (235,256 | ) | ||
Deferred income tax asset, net | $ | 619,958 |
14
T.A. INDUSTRIES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
December 31, 2019 |
Ending deferred tax assets and liabilities as of December 31, 2019:
Deferred income tax assets: | ||||
State tax | $ | 191,814 | ||
Accounts receivable, bad debt reserve | 10,769 | |||
Inventory, 263A capitalization | 1,180,372 | |||
Net deferred income tax assets | 1,382,955 | |||
Deferred income tax liabilities: | ||||
Depreciation and amortization | (395,797 | ) | ||
Deferred income tax asset, net | $ | 987,158 |
11. Accumulated Other Comprehensive Income/(Loss)
As of December 31, 2019, all accumulated other comprehensive loss, net of tax, represents the cumulative translation adjustment resulting from translating foreign functional currency financial statements into U.S. dollars.
12. Related Party Transactions
Guarantor
Two major shareholders, Mr. Yongki Yi and Mr. Tony Yi, guarantee an $18,000,000 bank line of credit and term loan outstanding from Comerica Bank on behalf of the Company. The shareholders' assets are cross-collateralized as security for this line of credit together with the assets of the companies that are all related through common ownership. These guarantees would require the shareholders to make required payments on the line of credit in the event the Company is unable to do so.
Transactions between related parties:
1. | The Company has lease contracts with Twin Sunrise Properties, Inc. and U & Y Investment MD, LLC, both properties 100% owned by two major shareholders, Mr. Yongki Yi and Mr. Tony Yi. The following is the summary of transactions with the two major shareholders for the year ended and as of December 31, 2019: |
Lease payments made to and security deposit receivable from Twin Sunrise Properties, Inc, respectively: | $578,462 and $67,500 | |||
Lease payments made to and security deposit receivable from U & Y Investment MD, LLC, respectively: | $760,320 and $387,500 |
2. | The Company has three term loan receivables from the companies in Vietnam that are owned by Mr. Tony Yi, one of the major shareholders. The total amount of the loans as of December 31, 2019 was $6,224,724 and the loan balance is included in other long-term assets. |
15
T.A. INDUSTRIES, INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
December 31, 2019 |
13. Commitments and Contingencies
The Company entered into a non-cancelable operating lease agreement for headquarters office and warehouse space in California expiring on August 31, 2024. Other non-cancelable operating leases for branches in Florida, Maryland, Indiana, and Texas are expiring in years 2025, 2025, 2024, and 2025, respectively. Future expenses from the lease agreements in effect are as follows:
Years ending December, 31, | |||||
2020 | $ | 5,340,946 | |||
2021 | 5,410,760 | ||||
2022 | 5,482,296 | ||||
2023 | 5,555,596 | ||||
2024 and after years | 4,775,238 | ||||
Total | $ | 26,564,836 |
The Company is not aware of any pending or threatened litigation, claims, or assessments or unasserted claims or assessments that are required to be accrued or disclosed in the financial statements.
14. Concentration of Credit Risk
The Company’s cash and cash equivalents, along with accounts receivable, involve elements of market and credit risk. The Company maintains two checking accounts in one commercial bank. Cash in these accounts at times exceeded $250,000, while the Federal Deposit Insurance Corporation (“FDIC”) secures the checking accounts up to $250,000. There was no unsecured cash balance was as of December 31, 2019.
The Company’s revenues are from a variety of customers ranging from large retail stores to small individuals. The Company provides credit in the normal course of business to its customers and performs ongoing credit evaluations of these customers. Historically, the Company has never experienced any significant loss from bad debt.
The Company has certain customers whose revenue individually represented 10% or more of the Company’s total revenue and whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable. For the year ended December 31, 2019, two major customers accounted for approximately 38.5% of gross revenue and the same two major customers accounted for approximately 41.5% of accounts receivable at the end of December 31, 2019.
15. Subsequent Events
Upon reviewing the events and transactions that have occurred after the audit period of December 31, 2019, the Management has determined that no material subsequent events or transactions have occurred that would require the Company either to recognize the financial impact or disclose such events in the financial statements.
16
EXHIBIT 99.2
T.A. INDUSTRIES, INC.
FINANCIAL STATEMENTS
Nine Months Ended September 30, 2020 and 2019
Contents | |
Consolidated Balance Sheets | 2 |
Consolidated Statements of Income and Comprehensive Income | 3 |
Consolidated Statements of Shareholders' Equity | 4 |
Consolidated Statements of Cash Flows | 5 |
Notes to Consolidated Financial Statements | 6 |
T.A. INDUSTRIES, INC. | |||
CONSOLIDATED BALANCE SHEETS | |||
As of September 30, 2020 and September 30, 2019 | |||
2020 | 2019 | |||||||
A S S E T S | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,276,171 | $ | 711,691 | ||||
Accounts receivable, net | 14,450,776 | 12,393,666 | ||||||
Advance to suppliers | 1,389,436 | 1,344,191 | ||||||
Other receivables | 11,362,608 | 123,653 | ||||||
Inventory | 33,100,322 | 34,864,574 | ||||||
Other current assets | 2,956,678 | 3,104,360 | ||||||
Total current assets | 64,535,991 | 52,542,135 | ||||||
Property and equipment, net | 23,510,460 | 21,863,943 | ||||||
Construction-in-progress | - | 1,332,477 | ||||||
Other asset: | ||||||||
Intangible assets, net | 104,307 | 139,773 | ||||||
Deferred tax assets | 1,277,581 | 908,736 | ||||||
Deposits | 808,371 | 747,335 | ||||||
Other long-term assets | 11,245,774 | 10,536,546 | ||||||
Total other assets | 13,436,033 | 12,332,390 | ||||||
Total assets | $ | 101,482,484 | $ | 88,070,945 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,680,597 | $ | 3,944,611 | ||||
Income tax payable | 4,512,752 | 2,482,708 | ||||||
Revolving line of credit payable | 18,182,640 | 24,120,598 | ||||||
Current portion of long-term debts | 48,363 | 485,164 | ||||||
Accrued and other current liabilities | 691,533 | 1,491,844 | ||||||
Total current liabilities | 29,115,885 | 32,524,925 | ||||||
Long-term debts | 17,508 | 64,629 | ||||||
Total liabilities | 29,133,393 | 32,589,554 | ||||||
Shareholders' equity: | ||||||||
Common stock, no par value; 100,000,000 shares authorized, 2,450,000 shares issued and outstanding | 2,450,000 | 2,450,000 | ||||||
Additional paid-in capital | 6,600,000 | 6,600,000 | ||||||
Accumulated other comprehensive income (loss) | (6,384,836 | ) | (6,243,993 | ) | ||||
Retained earnings | 69,683,927 | 52,675,384 | ||||||
Total shareholders' equity | 72,349,091 | 55,481,391 | ||||||
Total liabilities and shareholders' equity | $ | 101,482,484 | $ | 88,070,945 |
See accompanying notes to financial statements
2
T.A. INDUSTRIES, INC. | ||||||||
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME | ||||||||
For the nine months ended September 30, 2020 and September 30, 2019 | ||||||||
2020 | 2019 | |||||||
Net sales | $ | 81,087,651 | $ | 71,319,872 | ||||
Cost of sales | 34,451,552 | 32,377,972 | ||||||
Gross profit | 46,636,099 | 38,941,900 | ||||||
Selling and administrative expenses | 22,867,049 | 23,849,405 | ||||||
Income from operations | 23,769,050 | 15,092,495 | ||||||
Interest income (expense), net | (669,555 | ) | (975,914 | ) | ||||
Financial income (expense), net | 34,595 | 61,852 | ||||||
Other income (expense), net | 261,929 | (192,162 | ) | |||||
Income before income tax provision | 23,396,019 | 13,986,271 | ||||||
Income tax provision | (4,829,630 | ) | (2,670,384 | ) | ||||
Net income | $ | 18,566,389 | $ | 11,315,887 | ||||
Other comprehensive income (loss) | $ | (28,639 | ) | $ | 186,513 | |||
Comprehensive income | $ | 18,537,750 | $ | 11,502,400 |
See accompanying notes to financial statements
3
T.A. INDUSTRIES, INC. | ||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||
For the nine months ended September 30, 2020 and September 30, 2019 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | other | Net | ||||||||||||||||||||||
Shares | Common | paid-in | comprehensive | Retained | shareholders' | |||||||||||||||||||
outstanding | stock | capital | income (loss) | earnings | equity | |||||||||||||||||||
Balance at December 31, 2019 | 2,450,000 | $ | 2,450,000 | $ | 6,600,000 | $ | (6,356,197 | ) | $ | 51,117,538 | $ | 53,811,341 | ||||||||||||
Net Income | 18,566,389 | 18,566,389 | ||||||||||||||||||||||
Other Comprehensive Income Loss | (28,639 | ) | (28,639 | ) | ||||||||||||||||||||
Balance at September 30, 2020 | 2,450,000 | $ | 2,450,000 | $ | 6,600,000 | $ | (6,384,836 | ) | $ | 69,683,927 | $ | 72,349,091 |
Accumulated | ||||||||||||||||||||||||
Additional | other | Net | ||||||||||||||||||||||
Shares | Common | paid-in | comprehensive | Retained | shareholders' | |||||||||||||||||||
outstanding | stock | capital | income (loss) | earnings | equity | |||||||||||||||||||
Balance at December 31, 2018 | 2,450,000 | $ | 2,450,000 | $ | 6,600,000 | $ | (6,430,506 | ) | $ | 41,359,497 | $ | 43,978,991 | ||||||||||||
Net Income | 11,315,887 | 11,315,887 | ||||||||||||||||||||||
Other Comprehensive Income | 186,513 | 186,513 | ||||||||||||||||||||||
Balance at September 30, 2019 | 2,450,000 | $ | 2,450,000 | $ | 6,600,000 | $ | (6,243,993 | ) | $ | 52,675,384 | $ | 55,481,391 |
See accompanying notes to financial statements
4
T.A. INDUSTRIES, INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
For the nine months ended September 30, 2020 and September 30, 2019 |
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 18,566,389 | $ | 11,315,887 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 2,001,762 | 1,722,963 | ||||||
Working capital and other changes related to operations: | ||||||||
Accounts receivable | (3,444,256 | ) | (1,983,495 | ) | ||||
Advances to suppliers and other receivable | (542,204 | ) | 697,835 | |||||
Other receivable | (11,260,721 | ) | 619,423 | |||||
Inventory | 1,826,543 | (2,526,421 | ) | |||||
Other current assets | 1,096,289 | 233,510 | ||||||
Deferred tax assets | (290,423 | ) | (288,778 | ) | ||||
Deposit | (61,036 | ) | - | |||||
Other long-term assets | (3,444,309 | ) | (6,011,572 | ) | ||||
Accounts payable | 770,171 | (24,940 | ) | |||||
Income tax payable | 1,764,731 | 197,288 | ||||||
Accrued and other current liabilities | (637,562 | ) | (799,111 | ) | ||||
Net cash provided by operating activities | 6,345,374 | 3,152,589 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from the sale of construction-in-progress | - | 173,503 | ||||||
Purchase of property and equipment | (932,663 | ) | (5,434,961 | ) | ||||
Net cash used in investing activities | (932,663 | ) | (5,261,458 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from revolving line of credit payable | (4,236,872 | ) | 1,252,659 | |||||
Repayments for revolving line of credit | (355,336 | ) | (342,089 | ) | ||||
Net cash provided by (used in) financing activities | (4,592,208 | ) | 910,570 | |||||
Effect of exchange rate changes | 1,555 | 200,397 | ||||||
Net increase (decrease) in cash and cash equivalents | 822,058 | (997,902 | ) | |||||
Cash and cash equivalents at beginning of year | 454,113 | 1,709,593 | ||||||
Cash and cash equivalents at end of year | $ | 1,276,171 | $ | 711,691 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid during the year for interest | $ | 669,677 | $ | 976,004 | ||||
Cash paid during the year for tax | $ | 1,793,360 | $ | 2,523,835 |
See accompanying notes to financial statements
5
T.A. INDUSTRIES, INC |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2020 and 2019 |
1. Organization
T.A. Industries, Inc. ("Company", "TA"), was incorporated in June of 1995 in the state of California and has branches in Jacksonville, Florida, Aberdeen, Maryland, Greenwood, Indiana, and Houston, Texas. TA has been engaged principally in the import and wholesale distribution of grilles and diffusers. The Company’s wholly-owned subsidiary, T.A. Industries Vietnam Co. Ltd., ("TA Vietnam"), established in September 2004 in Vietnam, manufactures all the products TA distributes throughout the U.S. The Company sells its products under the brand name of "Truaire", a well-recognized brand in the industry.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements included the accounts of T.A. Industries, Inc., and its wholly owned subsidiary. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.
Management Estimates
Management uses estimates and assumptions in preparing financial statements in conformity with generally accepted accounting principles in the U.S. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Accordingly, actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers operating checking accounts, money market account, and term deposits with less than 90 days maturity to be cash equivalents. As of September 30, 2020 and 2019, cash and cash equivalents included no term deposits with less than 90 days maturity.
Revenue Recognition
Wholesale revenue is recognized when the title and the risk and rewards of ownership have passed to the customer based on the terms of sale. This occurs upon shipment of products to customers.
In 2017, TA signed a contract with Home Depot to open a new line of business, a Decorative Line. To gain the new business, TA agreed to pay Home Depot $500,000 and purchase all existing Home Depot inventory for $1,440,160, which had no salvage value. To compensate for the $1,440,160 for the purchase of old inventory, they agreed on a 5% mark-up on all future sales of this new line of business, which the Company will offset against $1,440,160. Accordingly, both $500,000 and $1,440,160 were recorded as advance payment in the other long-term assets. The $500,000 was amortized over the period of 15 years while the $1,440,160 was offset by the 5% mark-up in Decorative Line sales annually.
For 9 months in 2020 and 2019, the total sales for the Decorative Line business were $3,510,657 and $3,159,804, including the additional 5% mark-up of $175,533 and $157,990, respectively, which was offset to the advance payment. The balances of the Home Depot advance payment as of September 30, 2020 and 2019, were as follows:
Original balance | $ | 1,940,160 | ||
2017 and 2018 offset and amortization applied | (436,741 | ) | ||
2019 offset and amortization applied – 9 month | (178,999 | ) | ||
Balance as of 9/30/19 | $ | 1,324,420 | ||
2019 offset and amortization applied – remaining 3 month | (68,420 | ) | ||
2020 offset and amortization applied – 9 month | (200,532 | ) | ||
Balance as of 9/30/20 | $ | 1,055,468 |
While the advance payment is included in other long-term assets, the current portion is included in other current assets.
6
T.A. INDUSTRIES, INC |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2020 and 2019 |
The Company routinely commits to a one-time or an on-going rebate program as sales incentives to dealers/wholesalers/contractors that require the Company to estimate and accrue the costs of such program. The policy regarding the recognition and presentation within the statement of income and comprehensive income is as follows:
Discounts and Rebates
There are two types of discounts: Sales Discount and Targeted Contractor Accounts (“TCAP”) Discount. Sales discounts are given to customers for on-time payment and volume orders for either Home Depot or large-volume customers. TCAP discounts are given to contractor groups with pre-contracted discount incentives based on increased sales on existing accounts and/or sales on new accounts. The rebates are given to buying groups and the Home Depot based on monthly, quarterly, or yearly sales. Buying groups are made up of members purchasing in large quantities to obtain a better price as a whole. The costs of these discounts and rebates are recognized at the date of payment receipt or quarterly or annually. The cost of these discounts and rebates is estimated based on the payment history and the contractual obligations at year-end. Substantially all discounts and rebates are included in the determination of net sales.
Shipping and Handling Costs
The Company records shipping and handling fees collected from its customers as revenue. The Company records inbound freight as cost of sales, and it records shipping and handling costs associated with shipping products to its customers as selling and administrative expenses.
Allowance for Uncollectible Accounts
Accounts receivable consists primarily of amounts receivable from customers. The Company makes ongoing estimates related to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company considers historical levels of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. The allowance for uncollectible accounts receivable was $39,833 and $39,883 as of September 30, 2020 and 2019, respectively.
Inventories
Inventories are stated at lower of cost, using the first-in first-out method, or market value.
Property and Equipment
Property and equipment are stated at cost. Expenditures for repairs and maintenance are expensed as incurred, and any gain or loss on disposition is included in income as realized. Depreciation and amortization are provided on the straight-line method over the following estimated useful lives:
Automobiles | 5 – 10 years |
Building and structure | 10 – 44 years |
Machinery and equipment | 5 - 10 years |
Office equipment | 5 years |
Leasehold improvements | Shorter of 31.5 years or term of the lease |
7
T.A. INDUSTRIES, INC |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2020 and 2019 |
Identified Intangible Assets
Intangible assets are stated at cost. The Company capitalizes and amortizes intangible assets on a straight-line basis over the following estimated useful lives:
Goodwill purchased | 15 years |
Patent | 15 years |
Loan fees paid | Shorter of 5 years or term of the loan |
Impairment of Long-lived Assets and Intangible Assets
The Company assesses potential impairment to its long-lived assets and intangible assets subject to amortization when events or changes in circumstances have made recovery of the assets carrying value unlikely and the carrying amount of the assets exceeds the estimated future undiscounted cash flows. If the assessment indicates that the carrying amounts may not be recoverable, an impairment loss would reduce the assets’ carrying amount to its estimated fair value based on the present value of estimated future cash flows. During the nine months ended September 30, 2020 and 2019, the Company did not recognize any impairment related to long-lived assets and intangible assets subject to amortization.
Fair Value of Financial Instruments
Substantially all of the Company’s current assets and liabilities are considered financial instruments. These assets and liabilities are reflected at fair value, or at carrying amounts that approximate fair value because of the short maturity of the instrument. Other financial instruments consist of long-term obligations. The fair value of long-term obligations is estimated based on current interest rates offered to the Company for obligations with similar remaining maturities. The recorded value of these financial instruments approximated fair value at September 30, 2020 and 2019.
Foreign Currency Translation and Foreign Currency Transactions
Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the foreign currency transaction adjustment, a component of accumulated other comprehensive income in shareholders’ equity.
The Company’s subsidiary has various assets and liabilities, which are denominated in their functional currencies. These balance sheet items are subject to remeasurement, the impact of which is recorded in net of other income and expenses within the consolidated statements of income as other comprehensive income or loss.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes are recognized for differences between the bases of assets and liabilities for financial statement and income tax purposes.
The differences in asset and liability bases relate primarily to depreciable assets (using different methods and periods to calculate depreciation), net operating loss carry forward, and allowance for uncollectible accounts to reduce deferred tax assets to an amount that is more likely than not to be realized.
The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses and tax credits that are available to offset future income taxes. The components of the deferred tax assets and liabilities are classified as current and noncurrent based on their characteristics. Valuation allowances are provided for deferred tax assets based on the management of projection of the sufficiency of future taxable income to realize the assets. The Company records liabilities and tax benefits to uncertain tax positions in accordance with FASB ASC 740, Income Taxes.
8
T.A. INDUSTRIES, INC |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2020 and 2019 |
The Company’s income tax filings are subject to audit by various taxing authorities. In evaluating the Company’s tax provisions and accruals, future taxable income and the reversal of temporary differences, interpretations, and tax planning strategies are considered. The Company believes its estimates are appropriate based on current facts and circumstances.
U.S. income taxes as applicable to the earnings of its non-U.S. subsidiary that are expected to be repatriated are provided currently on the financial statement. The Company determines annually the amount of undistributed income to distribute, but, with the Tax Cuts and Jobs Act of 2017, the Company is not subject to any tax liabilities of future repatriated distribution of non-U.S. earnings indefinitely after the recognition of the initial tax liabilities on deemed mandatory repatriation for undistributed earnings up to year 2017 with the election.
With that election, the Company owed federal income tax liabilities totaling $2,264,562 as of September 30, 2020 (initial liabilities $3,056,085 less $791,523 payments made), and the future payment schedule is as follows:
Year Ending December 31, | ||||
2020 | $ | 186,425 | ||
2021 | 244,487 | |||
2022 | 458,412 | |||
2023 | 611,217 | |||
2024 | 764,021 | |||
$ | 2,264,562 |
The Company evaluated and recorded all significant tax positions as required by accounting principles generally accepted in the U.S. as of September 30, 2020 and 2019.
Advertising
Advertising is charged to expenses when the advertisement is placed, and the aggregate amount of advertising expense was $122,849 and $152,616 for the nine months ended September 30, 2020 and 2019, respectively. These expenses are included in selling and administrative expenses.
3. Other Receivables
Other receivable as of September 30, 2020 and 2019, included the following:
2020 | 2019 | |||||||
Receivable from Shareholders | $ | 11,261,455 | $ | - | ||||
Receivable from investment | 100,000 | 100,000 | ||||||
Other receivable | 1,153 | 23,653 | ||||||
Total | $ | 11,362,608 | $ | 123,653 |
9
T.A. INDUSTRIES, INC |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2020 and 2019 |
4. Inventory
As of September 30, 2020 and 2019, inventory consisted of the following:
2020 | 2019 | |||||||
TA | ||||||||
Inventory in warehouse | $ | 30,202,270 | $ | 30,258,395 | ||||
Inventory in transit | 6,422,182 | 5,262,208 | ||||||
Subtotal inventory | $ | 36,624,452 | $ | 35,520,603 | ||||
TA VIETNAM | ||||||||
Raw materials | $ | 4,185,827 | $ | 5,494,772 | ||||
Tools and supplies | 207,721 | 208,752 | ||||||
Work in process | 700,310 | 800,477 | ||||||
Finished goods | 194,795 | 204,561 | ||||||
Less devaluation | (141,295 | ) | - | |||||
Subtotal inventory | $ | 5,147,358 | $ | 6,708,562 | ||||
$ | 41,771,810 | $ | 42,229,165 | |||||
Less: inter-company profit | (8,671,488 | ) | (7,364,591 | ) | ||||
Total Inventory | $ | 33,100,322 | $ | 34,864,574 |
5. Other Current Assets
Other current assets as of September 30, 2020 and 2019, included the following:
2020 | 2019 | |||||||
Prepaid income taxes and expenses | $ | 1,945,036 | $ | 1,782,141 | ||||
Home Depot advance payment - current | 248,334 | 251,410 | ||||||
Deductible value added tax | 763,308 | 1,070,809 | ||||||
Total | $ | 2,956,678 | $ | 3,104,360 |
10
T.A. INDUSTRIES, INC |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2020 and 2019 |
6. Property and Equipment
As of September 30, 2020 and 2019, property and equipment including the subsidiary’s consisted of the following:
2020 | TA | TA VIETNAM | Total | |||||||||
Automobiles | $ | 1,190,015 | $ | 456,367 | $ | 1,646,382 | ||||||
Building and structure | 199,822 | 8,761,825 | 8,961,647 | |||||||||
Machine and equipment | 4,411,348 | 21,005,183 | 25,416,531 | |||||||||
Office equipment | 640,318 | 65,061 | 705,379 | |||||||||
Leasehold improvements | 5,964,214 | - | 5,964,214 | |||||||||
12,405,717 | 30,288,436 | 42,694,153 | ||||||||||
Accumulated depreciation | (6,040,569 | ) | (13,143,124 | ) | (19,183,693 | ) | ||||||
$ | 6,365,148 | $ | 17,145,312 | $ | 23,510,460 |
2019 | TA | TA VIETNAM | Total | |||||||||
Automobiles | $ | 1,190,015 | $ | 583,789 | $ | 1,773,804 | ||||||
Building and structure | 199,822 | 7,315,619 | 7,515,441 | |||||||||
Machine and equipment | 4,339,191 | 18,658,248 | 22,997,439 | |||||||||
Office equipment | 631,283 | 65,061 | 696,344 | |||||||||
Leasehold improvements | 5,577,882 | - | 5,577,882 | |||||||||
11,938,193 | 26,622,717 | 38,560,910 | ||||||||||
Accumulated depreciation | (5,046,319 | ) | (11,650,648 | ) | (16,696,967 | ) | ||||||
$ | 6,891,874 | $ | 14,972,069 | $ | 21,863,943 |
7. Intangible Assets
Intangible assets as of September 30, 2020 and 2019, consisted of the following:
2020 | 2019 | |||||||
Patents purchased | $ | 400,000 | $ | 400,000 | ||||
Goodwill purchased | 132,000 | 132,000 | ||||||
$ | 532,000 | $ | 532,000 | |||||
Less accumulated amortization | (427,693 | ) | (392,227 | ) | ||||
$ | 104,307 | $ | 139,773 |
Amortization expenses for intangible assets totaled $26,600 and $26,600 for the nine months ended September 30, 2020 and 2019, respectively.
8. Other Long-Term Assets
Other long-term assets as of September 30, 2020 and 2019, consisted of the following:
2020 | 2019 | |||||||
Deposit | $ | 1,332 | $ | 481 | ||||
Home Depot advance payment | 807,134 | 1,073,010 | ||||||
Term-loans receivable | 9,923,304 | * | 8,826,605 | * | ||||
Long-term prepaid | 514,004 | 636,450 | ||||||
$ | 11,245,774 | $ | 10,536,546 |
*See note 13 for additional information
11
T.A. INDUSTRIES, INC |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2020 and 2019 |
9. Debts
Revolving Line of Credit
The Company has a revolving line of credit with Comerica Bank with a maximum balance of $23,000,000 due on July 28, 2021. The purpose of the loan is to provide funds for general operations and working capital. The line is secured by substantially all of the Company’s assets now owned and hereafter created or acquired by the Company. The interest is based on either the Wall Street Journal’s prime rate (current rate is 4.75%) or 30-Day LIBOR rate plus 2.0%.
TA Vietnam has two short-term loans from Vietcombank and Vietinbank. The loan from Vietcombank was entered on September 25, 2019, with a maximum balance of $10,049,278 with interest rates from 3.6% to 3.9% secured by the machinery equipment and factory. The loan from Vietinbank was entered on September 20, 2019, with a maximum balance of $3,000,000 with interest rates of 4.0% secured by the machinery equipment and factory.
As of September 30, 2020, outstanding loan balances from Comerica Bank, Vietcombank, and Vietinbank were $5,914,749, $9,400,221, and $2,867,670, respectively, for a total of $18,182,640.
As of September 30, 2019, outstanding loan balances from Comerica Bank, Vietcombank, and Vietinbank were $14,274,749, $7,164,052, and $2,681,797, respectively, for a total of $24,120,598.
Long-term Debts
Long-term debt consisted of the following as of September 30, 2020 and 2019:
2020 | 2019 | |||||||
Notes payable for automobile loans and capital leases that expire on various dates up to November 23, 2021, with interest rates from 0.00% to 5.69%, | $ | 65,871 | $ | 149,785 | ||||
Note payable with Comerica that expires on August 31, 2020, with interest of Wall Street Journal prime rate or 30-Day LIBOR rate plus 2.0%, | - | 400,008 | ||||||
Less current portion | (48,363 | ) | (485,164 | ) | ||||
Total | $ | 17,508 | $ | 64,629 |
10. Accrued and Other Current Liabilities
Accrued and other current liabilities as of September 30, 2020 and 2019, included the following:
2020 | 2019 | |||||||
Employees and tax payables | $ | 658,357 | $ | 643,064 | ||||
Machine leasing | - | 181,578 | ||||||
Commission payable | - | 487,252 | ||||||
Others | 33,176 | 179,950 | ||||||
Total | $ | 691,533 | $ | 1,491,844 |
12
T.A. INDUSTRIES, INC |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2020 and 2019 |
11. Income Taxes
The provisions for income taxes for the nine months ended September 30, 2020 and 2019, consisted of the following components:
2020 | 2019 | ||||||||
Current: | |||||||||
Federal | $ | 3,209,029 | $ | 1,511,606 | |||||
States | 985,758 | 678,262 | |||||||
Foreign | 925,266 | 769,294 | |||||||
5,120,053 | 2,959,162 | ||||||||
Deferred: | |||||||||
Federal | $ | (290,423 | ) | $ | (195,129 | ) | |||
States | - | (93,649 | ) | ||||||
(290,423 | ) | (288,778 | ) | ||||||
Total | $ | 4,829,630 | $ | 2,670,384 |
Deferred tax assets and liabilities as of September 30, 2020:
Deferred income tax assets: | ||||
State tax | $ | 191,814 | ||
Accounts receivable, bad debt reserve | 10,769 | |||
Inventory, 263A capitalization | 1,180,371 | |||
Net deferred income tax assets | $ | 1,382,954 |
Deferred income tax liabilities: | ||||
Depreciation and amortization | (105,373 | ) | ||
Deferred income tax asset, net | $ | 1,277,581 |
Deferred tax assets and liabilities as of September 30, 2019:
Deferred income tax assets: | ||||
State tax | $ | 162,530 | ||
Accounts receivable, bad debt reserve | 10,769 | |||
Inventory, 263A capitalization | 1,077,721 | |||
Net deferred income tax assets | $ | 1,251,020 |
Deferred income tax liabilities: | ||||
Depreciation and amortization | (342,284 | ) | ||
Deferred income tax asset, net | $ | 908,736 |
13
T.A. INDUSTRIES, INC |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2020 and 2019 |
12. Accumulated Other Comprehensive Income/(Loss)
As of September 30, 2020 and 2019, all accumulated other comprehensive loss, net of tax, represents the cumulative translation adjustment resulting from translating foreign functional currency financial statements into U.S. dollars.
13. Related Party Transactions
Guarantors
Two major shareholders, Mr. Yongki Yi and Mr. Tony Yi, guarantee a $21,000,000 bank line of credit and term loan outstanding from Comerica Bank on behalf of the Company. The shareholders' assets are cross-collateralized as security for this line of credit together with the assets of the companies that are all related through common ownership. These guarantees would require the shareholders to make required payments on the line of credit in the event the Company is unable to do so.
Transactions between related parties:
1. The Company has lease contracts with the properties owned by two major shareholders, Mr. Yongki Yi and Mr. Tony Yi. The following is a summary of transactions of which the two major shareholders own 100% ownership for the year ended and as of September 30, 2020 and 2019, respectively:
2020 | 2019 | Deposit | ||||||||||
Lease payments made to and security deposit receivable from Twin Sunrise Properties, Inc.: | $ | 405,000 | $ | 405,000 | $ | 64,288 | ||||||
Lease payments made to and security deposit receivable from U & Y Investment MD, LLC: | $ | 364.800 | $ | 364,800 | $ | 387,500 | ||||||
Lease payments made to and security deposit receivable from U & Y Investment FL, LLC: | $ | 533,702 | $ | 533,702 | $ | 27,914 |
2. The Company has various term loan receivables from the companies in Vietnam that are owned by Mr. Tony Yi, one of the major shareholders. The total amounts of the loans as of September 30, 2020 and 2019 were $9,923,304 and $8,826,605, respectively, and the loan balance is included in other long-term assets.
3. The Company advanced to two major shareholders, Mr. Yongki Yi and Mr. Tony Yi, equally in the total amount of $11,261,455 and $ 0 as of September 30, 2020 and 2019, respectively. The advance is treated as a short-term loan that is offset against their bonuses and dividends before the end of each year. The loan balance is included in other receivables.
14
T.A. INDUSTRIES, INC |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
September 30, 2020 and 2019 |
14. Commitments and Contingencies
In 2019, the Company entered into a non-cancelable operating lease agreement for headquarters office and warehouse space in California expiring on August 31, 2024. Other non-cancelable operating leases for branches in Florida, Maryland, Indiana, and Texas are expiring in years 2025, 2025, 2024, and 2025, respectively. Future expenses from the lease agreements in effect are as follows:
Years ending September 30, | |||||
2021 | $ | 5,410,760 | |||
2022 | 5,482,296 | ||||
2023 | 5,555,597 | ||||
2024 and after years | 4,775,238 | ||||
Total | $ | 21,223,891 |
The Company is not aware of any pending or threatened litigation, claims, or assessments or unasserted claims or assessments that are required to be accrued or disclosed in the financial statements.
15. Concentration of Credit Risk
The Company’s cash and cash equivalents, along with accounts receivable, involve elements of market and credit risk. The Company maintains two checking accounts in one commercial bank. Cash in these accounts at times exceeded $250,000, while the Federal Deposit Insurance Corporation (“FDIC”) secures the checking accounts up to $250,000. There was no unsecured cash balance as of June 30, 2020 and 2019.
The Company’s revenues are from a variety of customers ranging from large retail stores to small individuals. The Company provides credit in the normal course of business to its customers and performs ongoing credit evaluations of these customers. Historically, the Company has never experienced any significant loss from bad debt.
The Company has certain customers whose revenue individually represented 10% or more of the Company’s total revenue and whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable. For the nine months ended September 30, 2020 and 2019, two major customers accounted for approximately 34.6 % and 36.0% of gross revenue, respectively, and the same two major customers accounted for approximately 39.5 % and 36.0% of accounts receivable at the end of September 30, 2020 and 2019, respectively.
16. Subsequent Events
Upon reviewing the events and transactions that have occurred after the audit period of September 30, 2020, the Management has determined that no material subsequent events or transactions have occurred that would require the Company either to recognize the financial impact or disclose such events in the financial statements.
15
Exhibit 99.3
CSW INDUSTRIALS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On December 15, 2020, CSW Industrials, Inc. (the “Company” or “CSW”) acquired 100% of the outstanding equity of T.A. Industries, Inc. (“TRUaire”), a leading manufacturer of grilles, registers, and diffusers for the residential and commercial HVAC/R end market, based in Santa Fe Springs, California. The acquisition also included TRUaire’s wholly-owned manufacturing facility based in Vietnam. The acquisition is expected to extend the Company’s product offerings to the HVAC/R market as well as provide strategic distribution facilities.
The contractual consideration paid for TRUaire included cash of $284 million ($288.1 million after working capital and closing cash adjustments) and 849,852 shares of the Company’s common stock (valued at approximately $76.0 million at transaction signing on November 4, 2020) valued at $97.7 million at transaction close based on the closing market price of the Company's common shares on the acquisition date. The cash consideration was funded through a combination of cash on hand and borrowings under the Company’s revolving credit facility. The 849,852 shares of common stock delivered to the sellers were reissued from treasury shares. The material terms of the acquisition were previously disclosed by the Company in the Company’s current report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on December 16, 2020.
The following unaudited pro forma combined financial statements should be read in conjunction with the historical financial statements and accompanying notes of the Company included in the Quarterly Report on Form 10-Q as of and for the three and six months ended September 30, 2020, filed with the SEC on October 30, 2020, the Annual Report on Form 10-K for the year ended March 31, 2020, filed with the SEC on May 20, 2020, as well as the notes to the unaudited pro forma combined financial statements included in this Form 8-K, and the historical financial statements and related notes of TRUaire included in this Form 8-K.
TRUaire’s audited financial statements and accompanying notes as of and for the year ended December 31, 2019 are included as Exhibit 99.1 to this Form 8-K. In addition, TRUaire’s unaudited condensed consolidated financial statements as of and for the nine months ended September 30, 2020 are included as Exhibit 99.2 to this Form 8-K. The presentation of the unaudited pro forma combined statements of operations reflect the combined results of operations as if the acquisition had occurred on April 1, 2019, the beginning of the Company’s 2020 fiscal year, and include the accounting for the transaction and present other transaction effects that have occurred or are reasonably expected to occur.
The preliminary allocation of the consideration presented in Note 3 and used to prepare the unaudited pro forma combined financial statements is based on a preliminary valuation of assets acquired and liabilities assumed. Accordingly, the purchase price allocation is considered preliminary and may materially change before final determination. The preliminary pro forma purchase price adjustments have been made solely for the purpose of providing the unaudited pro forma combined financial statements included herewith. A final determination of these fair values shall be based on the actual net tangible and intangible assets of TRUaire that exist as of the closing date of the acquisition. In addition, the unaudited pro forma combined financial statements do not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies or revenue synergies that may result from the acquisition. The unaudited pro forma combined financial statements also do not reflect pro forma adjustments for non-recurring charges related to integration activities or exit costs that may be incurred by the Company or TRUaire in connection with the acquisition.
The unaudited pro forma condensed combined financial information has been prepared by management in accordance with Regulation S-X Article 11, “Pro Forma Financial Information,” as amended by the final rule, “Amendments to Financial Disclosures About Acquired and Disposed Businesses,” as adopted by the U.S. Securities and Exchange Commission (the “SEC”) on May 21, 2020 (“Article 11”) and is presented in U.S. dollars. The Company elected to voluntarily comply with the amended Article 11 in advance of the mandatory compliance date. The pro forma condensed combined financial information has been presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations that would have been realized had the acquisition of TRUaire occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the Company will experience after the acquisition.
CSW Industrials, Inc.
Pro Forma Condensed Consolidated Balance Sheets as of September 30, 2020
(Unaudited)
Historical | ||||||||||||||||||||
(Amounts in thousands, except per share amounts) | CSW Industrials, Inc. | T.A. Industries, Inc. | Pro Forma Adjustments | Note | Pro Forma Combined | |||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 47,299 | $ | 1,276 | $ | (41,190 | ) | (a) | $ | 7,385 | ||||||||||
Accounts receivable, net of allowance for expected credit losses of $576 | 70,092 | 14,451 | - | 84,543 | ||||||||||||||||
Inventories, net | 52,090 | 33,100 | - | 85,190 | ||||||||||||||||
Prepaid expenses and other current assets | 5,377 | 15,709 | (6,011 | ) | (b)(g) | 15,075 | ||||||||||||||
Total current assets | 174,858 | 64,536 | (47,201 | ) | 192,193 | |||||||||||||||
Property, plant and equipment, net of accumulated depreciation of $79,864 | 57,734 | 23,510 | 4,771 | (c) | 86,015 | |||||||||||||||
Goodwill | 92,419 | - | 132,186 | (d) | 224,605 | |||||||||||||||
Intangible assets, net | 43,368 | 104 | 218,082 | (e) | 261,554 | |||||||||||||||
Other assets | 23,288 | 13,332 | 38,840 | (f)(g)(t) | 75,460 | |||||||||||||||
Total assets | $ | 391,667 | $ | 101,482 | $ | 346,678 | $ | 839,827 | ||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | 20,736 | $ | 5,681 | - | $ | 26,417 | |||||||||||||
Accrued and other current liabilities | 36,113 | 5,204 | 11,648 | (h)(t) | 52,965 | |||||||||||||||
Current portion of long-term debt | 561 | 48 | (48 | ) | (i) | 561 | ||||||||||||||
Total current liabilities | 57,410 | 10,933 | 11,600 | 79,943 | ||||||||||||||||
Long-term debt | 10,056 | 18,200 | 226,652 | (i) | 254,908 | |||||||||||||||
Retirement benefits payable | 1,853 | - | - | 1,853 | ||||||||||||||||
Other long-term liabilities | 20,307 | - | 116,831 | (j)(t) | 137,138 | |||||||||||||||
Total liabilities | 89,626 | 29,133 | 355,083 | 473,842 | ||||||||||||||||
Equity: | ||||||||||||||||||||
Common shares, $0.01 par value | 160 | 2,450 | (2,450 | ) | (k) | 160 | ||||||||||||||
Shares authorized – 50,000,000 | - | - | - | |||||||||||||||||
Shares issued – 16,115 | - | - | - | - | ||||||||||||||||
Preferred shares, $0.01 par value | - | - | - | - | ||||||||||||||||
Shares authorized (10,000) and issued (0) | - | - | - | - | ||||||||||||||||
Additional paid-in capital | 50,936 | 6,600 | 44,594 | (k) | 102,130 | |||||||||||||||
Treasury shares, at cost (496 shares) | (79,401 | ) | - | 46,462 | (k) | (32,939 | ) | |||||||||||||
Retained earnings | 339,397 | 69,684 | (103,396 | ) | (k)(l) | 305,685 | ||||||||||||||
Accumulated other comprehensive loss | (9,051 | ) | (6,385 | ) | 6,385 | (k) | (9,051 | ) | ||||||||||||
Total equity | 302,041 | 72,349 | (8,405 | ) | 365,985 | |||||||||||||||
Total liabilities and equity | $ | 391,667 | $ | 101,482 | $ | 346,678 | $ | 839,827 |
CSW Industrials, Inc.
Pro Forma Condensed Combined Statement of Operations
(Unaudited)
(Amounts in thousands, except per share amounts)
Historical | ||||||||||||||||||||
Year Ended March 31, 2020 | Year
Ended December 31, 2019 | |||||||||||||||||||
CSW Industrials, Inc. | T.A. Industries, Inc. | Pro Forma Adjustments | Note | Pro Forma Combined | ||||||||||||||||
Revenues, net | $ | 385,871 | $ | 94,414 | $ | - | $ | 480,285 | ||||||||||||
Cost of revenues | (208,821 | ) | (42,270 | ) | (32,884 | ) | (m)(n)(q)(t) | (283,975 | ) | |||||||||||
Gross profit | 177,050 | 52,144 | (32,884 | ) | 196,310 | |||||||||||||||
Selling, general and administrative expenses | (102,238 | ) | (37,407 | ) | 15,550 | (n)(r)(t) | (124,095 | ) | ||||||||||||
Depreciation and amortization | (7,794 | ) | (983 | ) | (12,933 | ) | (o) | (21,710 | ) | |||||||||||
Impairment expenses | (951 | ) | - | - | (951 | ) | ||||||||||||||
Operating income | 66,067 | 13,754 | (30,267 | ) | 49,554 | |||||||||||||||
Interest expense, net | (1,331 | ) | (1,218 | ) | (4,175 | ) | (p) | (6,724 | ) | |||||||||||
Other expense, net | (7,135 | ) | (106 | ) | - | (7,241 | ) | |||||||||||||
Income before income taxes | 57,601 | 12,430 | (34,442 | ) | 35,589 | |||||||||||||||
Provision for income taxes | (12,784 | ) | (2,673 | ) | 7,546 | (s) | (7,911 | ) | ||||||||||||
Net income | $ | 44,817 | $ | 9,757 | $ | (26,896 | ) | $ | 27,678 | |||||||||||
Basic earnings per common share | $ | 2.98 | $ | 1.74 | ||||||||||||||||
Diluted earnings per common share | $ | 2.95 | $ | 1.72 | ||||||||||||||||
Weighted-average shares of common stock outstanding (in thousands) | ||||||||||||||||||||
Basic | 15,039 | 15,889 | ||||||||||||||||||
Diluted | 15,206 | 16,056 |
CSW Industrials, Inc.
Pro Forma Condensed Combined Statement of Operations
(Unaudited)
(Amounts in thousands, except per share amounts)
Historical | ||||||||||||||||||||
Six Months Ended September 30, 2020 | Six Months Ended June 30, 2020 | |||||||||||||||||||
CSW Industrials, Inc. | T.A. Industries, Inc. | Pro Forma Adjustments | Note | Pro Forma Combined | ||||||||||||||||
Revenues, net | $ | 195,904 | $ | 52,378 | $ | - | $ | 248,282 | ||||||||||||
Cost of revenues | (104,416 | ) | (22,233 | ) | (12,350 | ) | (m)(n)(t) | (138,999 | ) | |||||||||||
Gross profit | 91,488 | 30,145 | (12,350 | ) | 109,283 | |||||||||||||||
Selling, general and administrative expenses | (49,217 | ) | (14,433 | ) | 11,937 | (n)(t) | (51,713 | ) | ||||||||||||
Depreciation and amortization | (3,839 | ) | (528 | ) | (6,467 | ) | (o) | (10,834 | ) | |||||||||||
Impairment expenses | - | - | - | - | ||||||||||||||||
Operating income | 38,432 | 15,184 | (6,880 | ) | 46,736 | |||||||||||||||
Interest expense, net | (602 | ) | (505 | ) | (2,088 | ) | (p) | (3,195 | ) | |||||||||||
Other expense, net | (667 | ) | 244 | - | (423 | ) | ||||||||||||||
Income before income taxes | 37,163 | 14,923 | (8,968 | ) | 43,118 | |||||||||||||||
Provision for income taxes | (8,851 | ) | (3,523 | ) | 2,152 | (s) | (10,222 | ) | ||||||||||||
Net income | $ | 28,312 | $ | 11,400 | $ | (6,816 | ) | $ | 32,896 | |||||||||||
Basic earnings per common share | $ | 1.92 | $ | 2.11 | ||||||||||||||||
Diluted earnings per common share | $ | 1.91 | $ | 2.10 | ||||||||||||||||
Weighted-average shares of common stock outstanding (in thousands) | ||||||||||||||||||||
Basic | 14,727 | 15,577 | ||||||||||||||||||
Diluted | 14,825 | 15,675 |
Note 1. Basis of pro forma preparation
The unaudited pro forma combined financial statements are based on the historical consolidated financial statements of the Company and the historical financial statements of TRUaire, after giving effect to the acquisition using the acquisition method of accounting in accordance with Accounting Standards Codification Topic 805, Business Combinations, (ASC 805) and applying the assumptions and adjustments described in the accompanying notes. As it relates to the pro forma income statement for the six months ended September 30, 2020, the TRUaire consolidated statement of operations included in these pro forma combined financial statements are for the six months ended June 30, 2020. As it relates to the pro forma income statement for the fiscal year ended March 31, 2020, the TRUaire consolidated statement of operations included in these pro forma combined financial statements are for the twelve months ended December 31, 2019. The unaudited pro forma combined statements are presented as if the acquisition had occurred on April 1, 2019, the beginning of the Company’s fiscal year ended March 31, 2020.
Note 2. Accounting policies
During preparation of the unaudited pro forma condensed combined financial information, CSW management has performed a preliminary analysis and is not aware of any material differences other than the pro forma reclassifications detailed in Note 5. Accordingly, this unaudited pro forma condensed combined financial information assumes no material differences in accounting policies between the two companies, other than the pro forma reclassifications detailed in Note 5. Following the acquisition date, CSW management will conduct a final review of TRUaire’s accounting policies in order to determine if differences in accounting policies require adjustment or reclassification of TRUaire’s results of operations or reclassification of assets or liabilities to conform to CSW’s accounting policies. As a result of this review, CSW management may identify differences that, when adjusted or reclassified, could have a material impact on this unaudited pro forma condensed combined financial information.
Note 3. Preliminary purchase price allocation
The TRUaire acquisition was accounted for as a business combination under ASC 805. Pursuant to ASC 805, the Company allocated the TRUaire purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, December 15, 2020. The excess of the purchase price over those fair values was recorded to goodwill. The Company's evaluation of the facts and circumstances available of December 15, 2020, to assign fair values to assets acquired and liabilities assumed, including income tax related amounts, is ongoing. As the Company completes further analysis of tangible assets, intangible assets and liabilities assumed, additional information impacting the assets acquired and the related allocation thereof, may become available. A change in information related to the net assets acquired may change the amount of the purchase price assigned to goodwill, and, as a result, the preliminary fair values set forth below are subject to adjustments when additional information is obtained and valuations are completed. Provisional adjustments, if any, will be recognized during the reporting period in which the adjustments are determined. The Company expects to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. The following table summarizes the Company's best initial estimate of the aggregate fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands).
Assets acquired: | ||||
Cash and cash equivalents | $ | 1,471 | ||
Accounts receivable, net | 13,467 | |||
Prepaid and other current assets | 6,285 | |||
Inventory | 46,313 | |||
Property and equipment | 28,832 | |||
Intangible assets | 237,500 | |||
Goodwill | 129,169 | |||
Other non-current assets | 59,390 | |||
Total assets acquired | 522,427 | |||
Total liabilities assumed | (136,692 | ) | ||
Less: Transaction costs | 7,100 | |||
Total net assets acquired less transaction costs | $ | 378,635 |
The consideration for the acquisition is summarized below:
Acquisition Consideration (amounts in thousands, except for shares) | ||||
Cash (a) | $ | 288,079 | ||
Common Stock (849,852 shares) | 97,656 | |||
Total consideration transferred | $ | 385,735 |
(a) Includes $8.3 million in tax liabilities to be paid by the Company on behalf of the sellers, within 90 days following the acquisition date, pursuant to the purchase agreement
Note 4. Long-Term Debt
The Company has a five-year, $250.0 million revolving credit facility agreement, with an additional $50.0 million accordion feature, which matures on September 15, 2022 (the “Revolving Credit Facility”). On December 1, 2020, the Company entered into an amendment of the Revolving Credit Facility to utilize the accordion feature and increase the commitment from $250.0 million to $300.0 million, which also reduced the available incremental commitment by a corresponding amount. In connection with the acquisition, the Company borrowed $245.0 million to fund a portion of the cash considerations. Until the Company reports its leverage ratio at December 31, 2020, borrowings under this facility bear interest at a rate of prime plus 0.25% or London Interbank Offered Rate ("LIBOR") plus 1.25%. The interest rates for our borrowings will increase 0.5% in accordance with the existing terms, as our leverage ratio to be reported for the quarter ended December 31, 2020 will exceed 2.00x. The Company pays a commitment fee of 0.15% for the unutilized portion of the Revolving Credit Facility. Interest and commitment fees are payable at least quarterly and the outstanding principal balance is due at the maturity date. The Revolving Credit Facility is secured by substantially all of the Company’s domestic assets.
Note 5. Pro forma adjustments
The pro forma adjustments are based on the Company’s preliminary estimates and assumptions that are subject to change including with respect to final purchase price and allocation thereof. Accordingly, the purchase price allocation is considered preliminary and may materially change before final determination. The changes would affect the values assigned to tangible or intangible assets and the amount of depreciation and amortization expense recorded in the combined financial statements. The following adjustments have been reflected in the unaudited pro forma combined financial statements as if the acquisition occurred on April 1, 2019:
(a) | Represents the cash consideration paid in connection with the acquisition ($279.8 million, net of $8.3 million tax liabilities to be paid by the Company on behalf of the sellers, within 90 days following the acquisition date, pursuant to the purchase agreement), cash received in connection with borrowings against the revolving line of credit to fund the acquisition ($244.9 million) and interest expense associated with those borrowings as if they were funded as of April 1, 2019 ($6.3 million). |
(b) | Represents the current portion of tax indemnity assets acquired in connection with the acquisition ($5.0 million) as well as certain other current assets acquired in connection with the acquisition. |
(c) | Represents the fair value step-up associated with property, plant and equipment acquired in connection with the acquisition ($5.5 million), offset by the related accumulated depreciation. |
(d) | Represents the preliminary estimate of goodwill arising from the excess of the purchase price over the fair value of tangible and intangible assets acquired and liabilities assumed. |
(e) | Represents the preliminary estimate of intangible assets and estimated amortization expense for the periods below (amounts in thousands): |
Amortization | ||||||||||||||||
Estimated Fair Value | Estimated Useful Life in Years | For the Six Months Ended September 30, 2020 | For the Year Ended December 31, 2020 | |||||||||||||
Trade name | 43,500 | Indefinite | — | — | ||||||||||||
Customer relationships | 194,000 | 15 | 6,467 | 12,933 | ||||||||||||
Total preliminary estimate of intangibles acquired | 237,500 | 6,467 | 12,933 |
(f) | Represents the establishment of right-of-use assets related to the accounting for leases in connection with the acquisition ($49.0 million) and the long-term portion of tax indemnity assets established in connection with the acquisition ($7.5 million), partially offset by the amortization of right-of-use assets ($7.8 million). |
(g) | Represents settlements of historical short term ($11.3 million in prepaid expenses and other current assets) and long-term ($9.9 million in other assets) loans receivable from the sellers in connection with the acquisition. |
(h) | Represents tax liabilities to be paid by the Company on behalf of the sellers within 90 days following the acquisition date ($8.3 million), accrued expenses associated with acquisition-related transaction costs ($7.1 million), the establishment of short-term lease liabilities in connection with the acquisition ($4.8 million), other current liabilities of ($0.9 million), partially offset primarily by a reduction due to the tax benefit of pro forma adjustments of $9.7 million. |
(i) | Represents the incremental borrowings against the Company’s revolving line of credit in connection with the acquisition ($244.9 million) (see note 4), partially offset by the settlement of a revolving loan previously held by TRUaire ($18.2 million) in connection with the acquisition. |
(j) | Represents the following in connection with the acquisition: establishment of deferred tax liabilities ($56.2 million), establishment of long-term lease liabilities ($45.4 million) and the recognition of tax contingencies ($22.5 million), partially offset by the reduction of long-term leases liabilities ($7.3 million). |
(k) | Represents the elimination of TRUaire’s historical equity which included common shares ($2.5 million), additional paid-in-capital ($6.6 million), retained earnings ($69.7 million), partially offset by accumulated other comprehensive loss ($6.4 million). Also includes the issuance of 849,852 shares of the Company’s common stock valued at approximately $97.7 million at the close of the acquisition. |
(l) | Represents the effect of income statement pro forma adjustments described in this Form 8-K totaling $33.7 million ($26.9 million for the year ended March 31, 2020 and $6.8 million for the six months ended September 30, 2020) on retained earnings as of September 30, 2020. |
(m) | Represents the incremental cost of revenues related to the depreciation of property plant and equipment as a result of the fair value step-up in connection with the acquisition for the year ended March 31, 2020 and the six months ended September 30, 2020, $0.5 million and $0.2 million, respectively. |
(n) | Represents a reclassification from selling, general and administrative expense to cost of revenue in connection with the acquisition to align TRUaire’s accounting policies to those of the Company ($12.0 million and $22.8 million for the six months ended September 30, 2020 and the 12 months ended December 31, 2020, respectively). |
(o) | Represents the amortization expense for the six months ended September 30, 2020 ($6.5 million) and the year ended March 31, 2020 ($12.9 million) associated with the customer relationships acquired in connection with the acquisition. |
(p) | Represents the interest expense for the six months ended September 30, 2020 ($2.1 million) and the year ended March 31, 2020 ($4.2 million) associated with the borrowings related to the acquisition. Note that the weighted average interest rate used for the purposes of these combined financial statements is 1.6%. Should that interest rate increase by 1%, the annual impact on interest expense will be an increase of approximately $2.5 million (see Note 4). |
(q) | Represents the incremental cost of revenues as a result of amortizing the fair value step-up of inventory ($9.2 million for the year ended March 31, 2020) and the depreciation of property plant and equipment, which was also stepped-up in connection with the acquisition ($0.5 million). |
(r) | Represents transaction costs associated with the acquisition which were incurred subsequent to March 31, 2020. These costs have been included as if they had been incurred on April 1, 2019 ($7.1 million). |
(s) | Represents the income tax effect of pro forma adjustments excluding non-deductible transaction costs using an effective tax rate of 24%. |
(t) | Represents the scheduled amortization of the right-of-use assets and reductions of lease liabilities ("scheduled movement") for the year ended March 31, 2020 and the six months ended September 30, 2020. The scheduled movement resulted in additional cost of revenues of $0.4 million and $0.1 million for the year ended March 31, 2020 and the six months ended September 30, 2020, respectively. The scheduled movement also resulted in additional selling, general and administrative expenses of $0.1 million for the year ended March 31, 2020. |
In addition to the above, certain compensation costs incurred by TRUaire prior to the acquisition are not expected to continue in the future. These amounts have not been eliminated in the pro forma adjustments. The total of these amounts were $5.6 million and $7.6 million for the six months ended June 30, 2020 and the twelve months ended March 31, 2020, respectively.