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Section 1: 8-K/A (FORM 8-K/A)

Form 8-K/A

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): December 29, 2017

 

 

American Woodmark Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   000-14798   54-1138147

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification Number)

 

3102 Shawnee Drive, Winchester, Virginia   22601
(Address of principal executive offices)   (Zip Code)

(540) 665-9100

(Registrant’s telephone number, including area code)

 

 

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))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR 230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR 240.12b-2).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

 


On December 29, 2017, American Woodmark Corporation (the “Company”) completed the previously announced acquisition (the “Acquisition”) of RSI Home Products, Inc. (“RSI”) pursuant to the Agreement and Plan of Merger entered into by the Company, RSI, Alliance Merger Sub, Inc. and Ronald M. Simon, solely in his capacity as the Stockholder Representative, on November 30, 2017.

The Company filed a Current Report on Form 8-K on January 5, 2018 (the “Original Form 8-K”) announcing the completion of the Acquisition and providing the disclosure items required in Items 1.01, 2.01, 2.03, 3.02, 7.01 and 9.01 of Form 8-K.

This Current Report on Form 8-K/A is being filed with the SEC to amend and supplement the Original Form 8-K to provide the disclosures required by Item 9.01 of Form 8-K, including the required historical financial information of RSI and the required pro forma financial statements.

Except as otherwise provided herein, the other disclosures made in the Original Form 8-K remain unchanged.

 

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired

The audited consolidated balance sheets of RSI as of December 31, 2016 and January 2, 2016, and the audited related consolidated statements of income, stockholders’ deficit and redeemable common stock and cash flows for each of the three fiscal years ended December 31, 2016, January 2, 2016 and January 3, 2015, together with the reports thereon of PricewaterhouseCoopers LLP, independent accountants, and RSM US LLP, independent auditors and accompanying notes of RSI are filed as Exhibit 99.1.

The unaudited condensed consolidated balance sheets of RSI as of September 30, 2017 and December 31, 2016, the condensed consolidated statements of income and cash flows for the nine months ended September 30, 2017 and October 1, 2016 and accompanying notes of RSI are filed as Exhibit 99.2.

(b) Pro Forma Financial Information

The unaudited pro forma condensed combined financial information of the Company as of October 31, 2017 and for the fiscal year ended April 30, 2017 and the six months ended October 31, 2017 and accompanying notes are filed as Exhibit 99.3.

(c) Not Applicable

(d) Exhibits

 

23.1*    Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2*    Consent of RSM US LLP, independent auditors.
99.1*    Consolidated Financial Statements of RSI Home Products, Inc., together with reports thereon of PricewaterhouseCoopers LLP, independent auditors, and RSM US LLP, independent auditors and accompanying notes.
99.2*    Condensed Consolidated Financial Statements as of September 30, 2017 and for the nine months ended September 30, 2017 and October 1, 2016 and accompanying notes of RSI Home Products, Inc.
99.3*    Unaudited Pro Forma Combined Condensed Financial Information of the Company.

 

* Filed herewith


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.

 

American Woodmark Corporation
By:   /s/ M. Scott Culbreth
  M. Scott Culbreth
  Senior Vice President and
  Chief Financial Officer
  February 7, 2018
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Section 2: EX-23.1 (EXHIBIT 23.1)

Exhibit 23.1

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-122438, 333-136867, 333-141621, 333-172059, 333-176902, 333-186266, 333-213222 and 333-214895) of American Woodmark Corporation of our report dated March 6, 2017, except with respect to our opinion on the consolidated financial statements insofar as it relates to the change in the accounting for deferred income taxes discussed in Note 1 as to which the date is January 28, 2018 relating to the financial statements of RSI Home Products, Inc., which appears in this Current Report on Form 8-K/A of American Woodmark Corporation.

/s/ PricewaterhouseCoopers LLP

Irvine, CA

February 7, 2018

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Section 3: EX-23.2 (EXHIBIT 23.2)

Exhibit 23.2

Exhibit 23.2

Consent of Independent Auditor

We consent to the incorporation by reference in the Registration Statements (Nos. 333-122438, 333-136867, 333-141621, 333-172059, 333-176902, 333-186266, 333-213222 and 333-214895) on Form S-8 of American Woodmark Corporation of our report dated February 16, 2015, relating to the consolidated financial statements of RSI Home Products Inc., appearing in this Current Report on Form 8-K/A.

/s/ RSM US LLP

Irvine, California

February 7, 2018

(Back To Top)

Section 4: EX-99.1 (EXHIBIT 99.1)

Exhibit 99.1

Exhibit 99.1

Report of Independent Auditors

To the Board of Directors of RSI Home Products, Inc.

We have audited the accompanying consolidated financial statements of RSI Home Products, Inc. and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2016 and January 2, 2016, and the related consolidated statements of income, of stockholders’ deficit and redeemable common stock, and of cash flows for the years then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RSI Home Products, Inc. and its subsidiaries as of December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for debt issuance costs and the manner in which it accounts for deferred income taxes in 2016. Our opinion is not modified with respect to this matter.

/s/ PricewaterhouseCoopers LLP

Irvine, California

March 6, 2017, except for the change in the manner in which the Company accounts for deferred income taxes discussed in Note 1 to the consolidated financial statements, as to which the date is January 28, 2018

 

1


Independent Auditor’s Report

Board of Directors

RSI Home Products, Inc.

Anaheim, California

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of RSI Home Products, Inc. and its subsidiaries, which comprise the consolidated statements of income, stockholders’ deficit and redeemable common stock, and cash flows for the year ended January 3, 2015, and the related notes to the consolidated financial statements (collectively, the 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 financial statements referred to above present fairly, in all material respects, the results of the operations and cash flows of RSI Home Products, Inc. and its subsidiaries for the year ended January 3, 2015 in accordance with accounting principles generally accepted in the United States of America.

/s/ RSM US LLP

Irvine, California

February 16, 2015

 

2


RSI HOME PRODUCTS, INC.

CONSOLIDATED BALANCE SHEETS

 

     December 31,
2016
    January 2,
2016
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 49,293,000     $ 47,509,000  

Acounts receivable, net of rebates and allowances of $8,856,000 in 2016 and $8,422,000 in 2015

     61,894,000       64,103,000  

Inventories

     61,777,000       69,853,000  

Prepaid income taxes

     4,396,000        

Prepaid expenses and other current assets

     6,465,000       7,275,000  
  

 

 

   

 

 

 

Total current assets

     183,825,000       188,740,000  

Property and equipment, net

     61,790,000       44,749,000  

Other assets

     3,310,000       4,855,000  

Intangible assets, net

     11,746,000       13,745,000  

Deferred income taxes

     10,673,000       16,167,000  
  

 

 

   

 

 

 

Total assets

   $ 271,344,000     $ 268,256,000  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

Current Liabilities

    

Accounts payable

   $ 25,853,000     $ 24,378,000  

Income taxes payable

           950,000  

Current portion of long-term debt

     365,000       455,000  

Other accrued liabilities

     51,459,000       66,790,000  
  

 

 

   

 

 

 

Total current liabilities

     77,677,000       92,573,000  

Senior secured notes

     566,503,000       565,419,000  

Long-term debt, net of current portion

     525,000       541,000  

Other non-current liabilities

     6,273,000       5,481,000  
  

 

 

   

 

 

 

Total liabilities

     650,978,000       664,014,000  
  

 

 

   

 

 

 

Commitments and contingencies (Notes 5, 8 and 9)

    

Stockholders’ Deficit

    

Common stock — Class A Voting — par value $0.001, authorized:

    

2016 and 2015 — 40,000,000 shares; issued and outstanding:

    

2016 — 19,050,063 shares, 2015 — 16,512,091 shares

     19,000       17,000  

Common stock — Class B Voting — par value $0.001, authorized:

    

2016 and 2015 — 25,000,000 shares; issued and outstanding:

    

2016 - none, 2015 — 2,537,972 shares

           3,000  

Common stock — Class C Nonvoting — par value $0.001, authorized:

    

2016 and 2015 — 25,000,000 shares; issued and outstanding:

    

2016 - 251,980 shares, 2015 — 229,920 shares

            

Additional paid-in capital

     67,515,000       66,995,000  

Accumulated deficit

     (447,168,000     (462,773,000
  

 

 

   

 

 

 

Total stockholders’ deficit

     (379,634,000     (395,758,000
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 271,344,000     $ 268,256,000  
  

 

 

   

 

 

 

See notes to consolidated financial statements

 

3


RSI HOME PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

     Years Ended  
     December 31,
2016
     January 2,
2016
    January 3,
2015
 

Net sales

   $ 598,094,000      $ 595,527,000     $ 540,033,000  

Cost of sales

     420,160,000        418,015,000       374,851,000  
  

 

 

    

 

 

   

 

 

 

Gross profit

     177,934,000        177,512,000       165,182,000  

Selling, general and administrative (including stock-based compensation expense (benefit) of $(12,608,000), $37,353,000 and $11,403,000 in 2016, 2015 and 2014, respectively)

     41,399,000        97,433,000       66,317,000  
  

 

 

    

 

 

   

 

 

 

Operating income

     136,535,000        80,079,000       98,865,000  

Other expense (income)

     334,000        (481,000     552,000  

Loss on extinguishment of debt

            35,353,000        

Interest expense, net

     38,641,000        39,306,000       39,463,000  
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     97,560,000        5,901,000       58,850,000  

Provision for income taxes

     31,955,000        1,521,000       19,737,000  
  

 

 

    

 

 

   

 

 

 

Net income

   $ 65,605,000      $ 4,380,000     $ 39,113,000  
  

 

 

    

 

 

   

 

 

 

See notes to consolidated financial statements

 

4


RSI HOME PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT AND REDEEMABLE COMMON STOCK

 

    Common Stock  
    Class A
Voting Shares
    Amount     Class B
Voting Shares
    Amount     Class C Non-
Voting Shares
    Amount  

Balance, December 28, 2013

    18,764,034     $ 19,000           $           $  

Issuance of common stock

    42,000                         66,228        

Remeasurement of redeemable Class C common stock

                                   

Reclassification of Class C common stock to permanent equity

                            131,000        

Net income

                                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 3, 2015

    18,806,034       19,000                   197,228        

Dividends

                                   

Conversion of common stock

    (2,293,943     (2,000     2,537,972       3,000       (235,739      

Issuance of common stock

                            268,431        

Net income

                                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 2, 2016

    16,512,091       17,000       2,537,972       3,000       229,920        

Dividends

                                   

Conversion of common stock

    2,537,972       2,000       (2,537,972     (3,000            

Issuance of common stock

                            22,060        

Net income

                                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2016

    19,050,063     $ 19,000           $       251,980     $  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


RSI HOME PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT AND REDEEMABLE COMMON STOCK

 

    Common Stock                          
    Additional
Paid-in Capital
    Accumulated
Deficit
    Total
Stockholders’
Deficit
    Redeemable
Class C
Nonvoting
Shares
    Amount  

Balance, December 28, 2013

    49,504,000     $ (404,137,000   $ (354,614,000     56,000     $ 645,000  

Issuance of common stock

    1,962,000             1,962,000       75,000       979,000  

Remeasurement of redeemable

         

Class C common stock

    (297,000           (297,000           297,000  

Reclassification of Class C common stock to permanent equity

    1,921,000             1,921,000       (131,000     (1,921,000

Net income

          39,113,000       39,113,000              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 3, 2015

    53,090,000       (365,024,000     (311,915,000            

Dividends

          (100,000,000     (100,000,000            

Conversion of common stock

                1,000              

Issuance of common stock

    13,905,000       (2,129,000     11,776,000              

Net income

          4,380,000       4,380,000              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 2, 2016

    66,995,000       (462,773,000     (395,758,000            

Dividends

          (50,000,000     (50,000,000            

Conversion of common stock

                (1,000            

Issuance of common stock

    520,000             520,000              

Net income

          65,605,000       65,605,000              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2016

    67,515,000     $ (447,168,000   $ (379,634,000         $  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

6


RSI HOME PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Years Ended  
     December 31,
2016
    January 2,
2016
    January 3,
2015
 

Cash Flows From Operating Activities

      

Net income

   $ 65,605,000     $ 4,380,000     $ 39,113,000  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation

     11,818,000       10,133,000       10,133,000  

Amortization of slotting fees

     1,333,000       1,420,000       482,000  

Amortization of intangible assets

     1,999,000       2,101,000       2,406,000  

Amortization of debt issuance costs

     1,284,000       1,486,000       2,371,000  

Write-off of prior debt issuance costs

           325,000        

Loss on extinguishment of debt

           35,353,000        

Stock-based compensation

     (12,608,000     37,353,000       11,403,000  

Change in fair value of foreign currency hedge

     334,000       (481,000     552,000  

Loss (gain) on disposal of property and equipment

     53,000       62,000       (57,000

Deferred taxes

     5,493,000       (3,430,000     (4,761,000

Change in operating assets and liabilities:

      

Accounts receivable

     2,209,000       (6,832,000     (11,295,000

Inventories

     8,076,000       (9,371,000     (189,000

Prepaid income taxes

     (4,396,000            

Prepaid expenses and other current assets

     645,000       2,556,000       (4,715,000

Other assets

     (1,338,000     (3,966,000     (211,000

Income taxes payable

     (950,000     (1,187,000     4,037,000  

Accounts payable

     1,474,000       10,097,000       2,414,000  

Other accrued liabilities

     (671,000     (12,128,000     2,077,000  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     80,360,000       67,871,000       53,760,000  
  

 

 

   

 

 

   

 

 

 

Cash Flows From Investing Activities

      

Capital expenditures — property and equipment

     (28,339,000     (19,756,000     (11,873,000

Proceeds from sale of property and equipment

     12,000       595,000       1,205,000  
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (28,327,000     (19,161,000     (10,668,000
  

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities

      

Proceeds from senior secured notes

           575,000,000        

Repayment of senior secured notes

           (525,000,000      

Payment of tender offer premium and call premium on senior secured notes

           (28,299,000      

Payments on unsecured notes payable

     (521,000     (709,000     (1,178,000

Payments on bank term loan and financing

                 (182,000

Debt issuance costs

           (10,975,000      

Dividends

     (50,000,000     (100,000,000      

Issuance of common stock

     272,000       600,000       2,372,000  
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (50,249,000     (89,383,000     1,012,000  
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

     1,784,000       (40,673,000     44,104,000  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

      

Beginning

     47,509,000       88,182,000       44,078,000  
  

 

 

   

 

 

   

 

 

 

Ending

   $ 49,293,000     $ 47,509,000     $ 88,182,000  
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

      

Cash payments for:

      

Interest

   $ 37,765,000     $ 38,596,000     $ 36,529,000  
  

 

 

   

 

 

   

 

 

 

Income taxes, net of refunds

   $ 32,146,000     $ 7,027,000     $ 19,966,000  
  

 

 

   

 

 

   

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities

      

Equipment acquired under financing agreement

   $ 262,000     $     $ 51,000  
  

 

 

   

 

 

   

 

 

 

Notes payable issued on options exercised and canceled

   $ 153,000     $ 359,000     $ 222,000  
  

 

 

   

 

 

   

 

 

 

Net change to property and equipment through accrued expense

   $ 323,000     $ 1,216,000     $  
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

7


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of organization

RSI Home Products, Inc. (“RSI”) was founded in 1989. RSI and its subsidiaries are collectively referred to herein as the “Company”. RSI, through its wholly owned subsidiaries, is engaged primarily in the manufacture and distribution of stock and made-to-order bath and kitchen cabinets and cultured marble tops to national home centers, home builders, dealers and distributors throughout the United States and Canada.

Fiscal year

The Company operates on a 52 to 53 week fiscal year, with its year ending on the Saturday closest to December 31. The years ended December 31, 2016 and January 2, 2016 each contained 52 weeks. The year ended January 3, 2015 contained 53 weeks.

Basis of presentation and consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of RSI and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes thereto. Actual results could differ from those estimates.

Revenue recognition

For sales to home centers, dealers and distributors, the Company records revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. The Company recognizes revenue for home center customers when delivery has occurred and title and risk of loss has transferred. The Company performs the installation for its home builder customers and records revenue when the cabinets are installed. Revenue is recorded net of applicable provisions for discounts, sales incentives, returns, allowances and taxes. The Company provides certain sales incentives to its customers for co-op advertising, volume rebates, program slotting fees and discounted sales terms. The Company records these sales incentives as a reduction of revenue during the same period in which it records the related sales, and presents sales net of these allowances in the consolidated statements of income.

Debt issuance cost

Deferred debt issuance costs are amortized to interest expense over the life of the related indebtedness using the effective interest method. The net carrying value of unamortized debt issuance costs associated with the senior secured notes are recorded as a reduction to the corresponding indebtedness.

Cost of sales

Cost of sales includes all input costs associated with the manufacture and distribution of the Company’s products including inbound freight costs and outbound shipping and handling costs, if applicable. In addition, the Company includes all depreciation and amortization associated with assets used to manufacture its products and make them saleable.

Cash and cash equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less when purchased.

 

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RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Foreign currency

The financial statements of the Company’s foreign subsidiaries are measured using the U.S. dollar as the functional currency. For subsidiaries with transactions that are denominated in a currency other than the functional currency, the remeasurement of assets and liabilities to the functional currency is included in determining net income. Remeasurement gains recorded to net income were $138,000 and $551,000 for the years ended December 31, 2016 and January 2, 2016, respectively. Remeasurement losses recorded to net income were insignificant for the year ended January 3, 2015.

Accounts receivable

Accounts receivable are carried at original invoice amount less estimates made for allowances, including doubtful receivables. Taking into consideration all relevant factors including actual sales activity for qualifying products, the Company also estimates and records allowances related to discounts and rebates granted to certain customers based on specific arrangements. Management determines the allowance for doubtful accounts by identifying troubled accounts and using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.

Concentration of risks

Financial instruments that potentially subject the Company to concentrations of risk consist primarily of cash and cash equivalents, accounts receivable and foreign exchange forward contracts. The Company maintains its cash and cash equivalents with major financial institutions and such balances may, at times, exceed Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash.

The Company does not require collateral to secure its accounts receivable. Two customers accounted for approximately 84% and 85% of outstanding accounts receivable as of December 31, 2016 and January 2, 2016, respectively, and 86%, 87% and 86% of net sales for the years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively.

Counterparties to the Company’s foreign exchange forward contracts are major financial institutions. The Company is potentially exposed to credit loss in the event of nonperformance by these counterparties. The Company does not use derivative instruments for trading or speculative purposes.

Inventories

Inventories consist primarily of raw materials and finished goods, which are stated at the lower of cost or market. The Company uses standard cost to value inventory which approximates actual cost on a first-in, first out basis. The Company evaluates its inventory and, if necessary, records an adjustment for all slow-moving or obsolete inventory items.

Property and equipment and intangible assets, subject to amortization

Property and equipment is stated at cost less accumulated depreciation. Provision for depreciation is calculated using the straight-line method based upon the estimated useful lives of depreciable assets. Depreciation is discontinued when a property is identified as held-for-sale. Leasehold improvements are being amortized over the remaining lease term or estimated useful life of the asset, whichever is shorter. Displays

 

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RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

represent costs incurred to promote the sale of the Company’s products. The cost of maintenance and repair is charged to expense as incurred. The estimated useful lives of the property and equipment are as follows:

 

     Years  

Buildings

     18-20  

Machinery and equipment

     5-7  

Data processing equipment and software

     3-5  

Forklifts and vehicles

     5-7  

Office furniture and equipment

     7  

Displays

     2-5  

Changes in circumstances, such as dramatic loss of market share or loss of a major customer, could result in the actual useful lives differing from initial estimates. In those cases where the Company determines that the useful life of a long-lived asset should be revised, the Company will amortize or depreciate the net book value over its revised remaining useful life.

Intangible assets include customer relationships, trademarks/trade names and a favorable lease. These assets are being amortized on a straight-line basis over their estimated useful lives, as follows:

 

     Years  

Customer relationships

     13  

Trademark/Trade name

     13  

Favorable lease

     7  

The Company reviews long-lived assets for impairment when events or changes in circumstances indicate that their related carrying amounts may not be recoverable. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest charges) is less than the carrying value of the assets, the assets will be written down to the estimated fair value and such loss is recognized in the period in which the determination is made.

Advertising expense

Advertising expense primarily consists of trade show costs and point-of-purchase merchandising brochures and materials. The Company includes these costs in selling, general and administrative expenses as incurred. Advertising expenses for the years ended December 31, 2016, January 2, 2016 and January 3, 2015 were $2,109,000, $1,414,000 and $1,053,000, respectively.

Customer program costs

The Company incurs various costs associated with new product programs awarded by its customers, including costs to obtain favorable product placement (“slotting fees”) and to promote the sale of its products (“displays”).

The Company capitalizes slotting fees, provided the payments are supported by a time based arrangement with the retailer, and amortizes the associated payments over the appropriate term of the arrangement not to exceed 36 months. During the years ended December 31, 2016, January 2, 2016 and January 3, 2015, the Company incurred costs for slotting fees of $222,000, $4,000,000 and $30,000, respectively. The amortization of slotting fees is treated as a reduction of net sales. The total amortization of slotting fees for the years ended December 31, 2016, January 2, 2016 and January 3, 2015 was $1,333,000, $1,420,000 and $482,000, respectively. The unamortized costs of $1,556,000 and $2,889,000 as of December 31, 2016 and January 2, 2016, respectively, are reported in other assets in the consolidated balance sheets.

 

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RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

During the years ended December 31, 2016, January 2, 2016 and January 3, 2015, the Company incurred costs for displays of $7,732,000, $4,330,000 and $1,115,000, respectively. The unamortized costs of displays of $9,785,000 and $4,171,000 as of December 31, 2016 and January 2, 2016, respectively, are reported in property and equipment in the consolidated balance sheets. The depreciation of displays is included in selling, general and administrative expenses. The total depreciation of displays for the years ended December 31, 2016, January 2, 2016 and January 3, 2015 was $2,118,000, $1,398,000 and $1,235,000, respectively.

Income taxes

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company recognizes tax liabilities when, despite the Company’s belief that its tax return positions are supportable, the Company believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon settlement. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made.

The Company recognizes interest and penalties related to unrecognized tax benefits within the provision for income taxes line in the consolidated statements of income. Accrued interest and penalties are included with the related tax liability in other non-current liabilities in the consolidated balance sheets.

Stock-based compensation

The Company uses the intrinsic value method in measuring stock-based liability awards. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. Currently, there is no active market for the Company’s common shares and fair value is determined by the Company with the assistance of external valuation experts. Stock-based compensation is amortized over the vesting period of the award. Since the Company has a past practice of settling its vested stock options predominantly in cash and unsecured promissory notes, the Company accounts for its option plan using liability accounting. The related liability is adjusted to represent the intrinsic value of vested awards at each balance sheet date. Changes in the fair value of the Company’s stock from one measurement date to the next will affect the carrying value of the previously reported liability. Since the Company utilizes the intrinsic value method and grants options with an exercise price at or above fair value at the time of issuance, there is no intrinsic value on the grant date.

Although the Company has a practice of settling stock options predominantly in cash and unsecured promissory notes, the current stock option plan does not require the Company to do so. In situations where the Company elects to settle options, the settlement amounts have been calculated using a non-contractual formulaic approach. Settlements and the calculated formulaic value are mutually agreed upon between the option holder and the Company. The calculated formulaic value has historically been lower than the intrinsic value of the settled awards. If all the fully vested stock options as of December 31, 2016 were settled in cash and unsecured promissory notes, the total payment before any tax benefit would be $19,222,000.

Fair value of financial instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction

 

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RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs.

The three levels of inputs used to measure fair value are as follows:

 

    Level 1:    Inputs to the valuation are unadjusted quoted prices in active markets for identical assets or liabilities.

 

    Level 2:    Inputs to the valuation may include quoted prices for similar assets and liabilities in active or inactive markets, and inputs other than quoted prices, such as interest rates and yield curves, that are observable for the asset or liability for substantially the full term of the financial instrument.

 

    Level 3:    Inputs to the valuation are unobservable and significant to the fair value measurement. Level 3 inputs shall be used to measure fair value only to the extent that observable inputs are not available.

The estimated fair values of the Company’s short-term financial instruments, including cash and cash equivalents, accounts receivable and accounts payable arising in the ordinary course of business, approximate their individual carrying amounts due to the relatively short period of time between their origination and expected realization. The foreign exchange forward contracts were marked to market and therefore represented fair value. The fair values of these contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. This valuation methodology is considered level 2 in the fair value hierarchy. For liabilities such as long-term debt not accounted for at fair value and without quoted market prices, fair value was based upon borrowing rates available to the Company for bank loans with the same remaining maturities and similar terms and collateral requirements. As such, the fair value of long-term debt approximated its carrying value.

The fair value of the Company’s senior secured notes is estimated based upon the quoted market prices for the same issue if available, or similar issues. This valuation methodology is considered level 2 in the fair value hierarchy. The carrying amount and estimated fair value of the senior secured notes as of December 31, 2016 was $575,000,000 and $603,750,000, respectively. The carrying amount and estimated fair value of the senior secured notes as of January 2, 2016 was $575,000,000 and $593,688,000, respectively.

The following table sets forth the fair value of the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and January 2, 2016 based on the three-tier fair value hierarchy:

 

     Level 1      Level 2      Level 3      Total  

December 31, 2016

           

Foreign exchange forward contracts

   $      $ 404,000      $      $ 404,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

January 2, 2016

           

Foreign exchange forward contracts

   $      $ 71,000      $      $ 71,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives and hedging

Forward contracts

In the normal course of business the Company is subject to risk from adverse fluctuations in foreign exchange rates. The Company manages these risks through the use of derivative financial instruments, primarily foreign exchange forward contracts.

The Company recognizes its outstanding derivative financial instruments in the consolidated balance sheets at their fair values. The Company does not designate these instruments as accounting hedges. The changes in

 

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RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

the fair value of these instruments are recorded in other expense (income) in the consolidated statements of income.

At December 31, 2016, the Company held contracts maturing from January 2017 to June 2017 to purchase 197.0 million Mexican pesos at exchange rates ranging from 20.6 to 21.2 Mexican pesos to the U.S. dollar. At January 2, 2016, the Company held contracts maturing from January 2016 to March 2016 to purchase 102.0 million Mexican pesos at exchange rates ranging from 17.2 to 17.3 Mexican pesos to the U.S. dollar. The Company recorded the fair value of these contracts of $404,000 and $71,000 at December 31, 2016 and January 2, 2016, respectively, in other accrued liabilities in the consolidated balance sheets.

Recently issued accounting pronouncements

New accounting pronouncements adopted

On August 27, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Before this new standard, there was minimal guidance in U.S. GAAP specific to going concern. Under the new standard, disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. The new standard applies to all companies and is effective for the annual period ending after December 15, 2016, and all annual and interim periods thereafter. Accordingly, the Company adopted this new standard in 2016.

In April 2015, the FASB issued Accounting Standards Update ASU No. 2015-03, “Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). In June 2015, the FASB issued ASU No. 2015-15, “Interest — Imputation of Interest (Subtopic 835-30) — Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting” (“ASU 2015-15”). ASU 2015-03 and ASU 2015-15 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. During the year ended December 31, 2016, the Company retrospectively adopted these new standards, resulting in a reclassification of $9,581,000 of debt issuance costs as of January 2, 2016.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes (Topic 740)” (“ASU 2015-17”), which requires that deferred tax assets and liabilities be presented as non-current in the balance sheet. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016 (and interim periods within those fiscal years) with early adoption permitted. The Company adopted ASU 2015-17 at the beginning of fiscal 2017 on a retrospective basis. Accordingly, we reclassified $12,902,000 and $18,157,000 from current assets to non-current assets as of December 31, 2016 and January 2, 2016, respectively and $2,229,000 and $1,990,000 from non-current liabilities to non-current assets as of December 31, 2016 and January 2, 2016, respectively.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which provides for improvements to employee share-based payment accounting. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 (and interim periods within those fiscal years). Early adoption is permitted. The Company adopted ASU 2016-09 at the beginning of fiscal 2017. The adoption did not have a material impact on the consolidated financial statements.

 

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RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

New accounting pronouncements not yet adopted

In May 2014, the FASB issued ASU No. 2014-09, “Revenue From Contracts with Customers (Topic 606)” (“ASU 2014-09”), which requires that a company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 was originally effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date”, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. In 2016, the SEC provided specific guidance for public business entities that otherwise would not meet the definition of a public business entity except for inclusion of its financial statements in another entity’s filing with the Commission. Such public business entities may apply ASU No. 2014-09 for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Therefore, the Company does not plan on adopting ASU 2014-09 until fiscal 2019. The Company has not yet completed an assessment of the impact of this standard on the consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). Upon adoption by an entity, ASU 2015-11 will simplify the subsequent measurement of inventory by replacing the current lower of cost or market test with a lower of cost or net realizable value test. The new guidance applies only to inventories for which cost is determined by methods other than last-in-first-out (LIFO) and the retail inventory method. For inventory within the scope of ASU 2015-11, entities will be required to compare the cost of inventory to only one measure, its net realizable value, and not the three measures required by current guidance (“market,” “subject to a floor,” and a “ceiling”). When evidence exists that the net realizable value of inventory is less than its cost (due to damage, physical deterioration, obsolescence, changes in price levels or other causes), entities will recognize the difference as a loss in earnings in the period in which it occurs. ASU 2015-11 is effective for public entities for fiscal years beginning after December 15, 2016, and interim periods within the year of adoption. Early adoption is permitted. The Company adopted ASU 2015-11 prospectively at the beginning of fiscal 2017. The adoption did not have a material impact on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which supersedes the lease requirements in Accounting Standards Codification Topic 840, Leases. ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 (and interim periods within those fiscal years). In 2016, the SEC provided specific guidance for public business entities that otherwise would not meet the definition of a public business entity except for inclusion of its financial statements in another entity’s filing with the Commission. Such public business entities may apply ASU No. 2016-02 for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Therefore, the Company does not plan on adopting ASU 2016-02 until fiscal 2020. The new standard must be adopted using a modified retrospective transition, requiring application at the beginning of the earliest comparative period presented. The Company has not yet completed an assessment of the impact of this standard on the consolidated financial statements.

 

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RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

NOTE 2 INVENTORIES

Inventories consisted of the following as of:

 

     December 31,
2016
     January 2,
2016
 

Raw materials

   $ 46,352,000      $ 50,777,000  

Finished goods

     15,425,000        19,076,000  
  

 

 

    

 

 

 
   $ 61,777,000      $ 69,853,000  
  

 

 

    

 

 

 

NOTE 3 PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following as of:

 

     December 31,
2016
     January 2,
2016
 

Buildings

   $ 2,840,000      $ 2,678,000  

Land

     940,000        940,000  

Machinery and equipment

     129,489,000        113,554,000  

Data processing equipment and software

     20,396,000        18,654,000  

Displays

     12,937,000        7,830,000  

Forklifts and vehicles

     11,767,000        10,921,000  

Office furniture and equipment

     3,035,000        2,612,000  

Leasehold improvements

     6,790,000        6,130,000  
  

 

 

    

 

 

 
     188,194,000        163,319,000  

Less accumulated depreciation and amortizati

     126,404,000        118,570,000  
  

 

 

    

 

 

 

Net

     61,790,000      $ 44,749,000  
  

 

 

    

 

 

 

Depreciation expense for the years ended December 31, 2016, January 2, 2016 and January 3, 2015 was $11,818,000, $10,133,000 and $10,133,000, respectively.

NOTE 4 INTANGIBLE ASSETS, NET

Intangible assets consisted of the following as of:

 

     December 31, 2016  
     Gross
Carrying
Value
     Accumulated
Amortization
     Net
Carrying
Value
 

Customer relationships

   $ 20,785,000      $ 10,792,000      $ 9,993,000  

Trademark/Trade name

     3,581,000        1,859,000        1,722,000  

Favorable lease

     873,000        842,000        31,000  
  

 

 

    

 

 

    

 

 

 
   $ 25,239,000      $ 13,493,000      $ 11,746,000  
  

 

 

    

 

 

    

 

 

 

 

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RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     January 2, 2016  
     Gross
Carrying
Value
     Accumulated
Amortization
     Net
Carrying
Value
 

Customer relationships

   $ 20,785,000      $ 9,193,000      $ 11,592,000  

Trademark/Trade name

     3,581,000        1,584,000        1,997,000  

Favorable lease

     873,000        717,000        156,000  
  

 

 

    

 

 

    

 

 

 
   $ 25,239,000      $ 11,494,000      $ 13,745,000  
  

 

 

    

 

 

    

 

 

 

The remaining weighted-average life of amortizing intangibles as of December 31, 2016 was 6 years.

Amortization expense for the years ended December 31, 2016, January 2, 2016 and January 3, 2015 related to intangible assets was $1,999,000, $2,101,000 and $2,406,000, respectively.

Estimated amortization related to the remaining intangible assets at December 31, 2016 is as follows:

 

Fiscal Years Ending

   Amount  

2017

   $ 1,905,000  

2018

     1,874,000  

2019

     1,874,000  

2020

     1,874,000  

2021

     1,874,000  

Thereafter

     2,345,000  
  

 

 

 
   $ 11,746,000  
  

 

 

 

NOTE 5 OTHER ACCRUED LIABILITIES

Other accrued liabilities consisted of the following as of:

 

     December 31,
2016
     January 2,
2016
 

Stock-based liability awards

   $ 19,907,000      $ 33,082,000  

Accrued compensation

     9,667,000        11,584,000  

Accrued interest

     10,993,000        11,365,000  

Other accrued expenses

     10,892,000        10,759,000  
  

 

 

    

 

 

 
   $ 51,459,000      $ 66,790,000  
  

 

 

    

 

 

 

Accrued compensation consists of earned but unpaid payroll, incentive compensation and vacation.

Other accrued expenses consist primarily of amounts accrued for self-insurance for workers’ compensation and medical insurance, capital expenditures and consulting agreements.

The Company is partially self-insured related to workers’ compensation claims up to $500,000 per claim for its employees in the United States. As of December 31, 2016 and January 2, 2016, approximately $2,231,000 and $2,600,000, respectively, has been provided for reported but unresolved workers’ compensation claims, and the reserve is included in the consolidated balance sheets. Total expense for workers’ compensation, including insurance premiums, net of refunds received, was approximately $1,678,000, $2,180,000 and $1,214,000 for the years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively.

The Company is self-insured for up to $250,000 per claim under its medical benefit programs in the United States. This amount increased from $200,000 effective January 1, 2016. Total expense under the program for the years ended December 31, 2016, January 2, 2016 and January 3, 2015 was $5,924,000, $6,918,000 and

 

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RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

$4,749,000, respectively. The Company provides for a reserve for actual unpaid claims and an estimate of claims incurred but not reported. At December 31, 2016 and January 2, 2016, $632,000 and $732,000, respectively, had been provided for future costs and is included in the consolidated balance sheets.

NOTE 6 LINES OF CREDIT AND LONG-TERM DEBT

Long-term debt consisted of the following as of:

 

     December 31,
2016
    January 2,
2016
 

$575 million senior secured notes

   $ 575,000,000     $ 575,000,000  

Unsecured notes payable(a)

     670,000       996,000  

Other

     220,000        

Less unamortized debt issuance costs

     (8,497,000     (9,581,000
  

 

 

   

 

 

 
     567,393,000       566,415,000  

Less current portion

     365,000       455,000  
  

 

 

   

 

 

 

Net

   $ 567,028,000     $ 565,960,000  
  

 

 

   

 

 

 

 

(a) Notes due to former and current employees for the cancellation and subsequent settlement of vested stock options. The five year notes bear interest at rates ranging from 1.01% to 1.97% per annum and are due in annual installments of principal and interest on their respective anniversary dates, with final payments of all notes due through June 30, 2021. All are unsecured and subordinated to the credit facilities.

As of December 31, 2016, aggregate maturities of long-term debt, excluding unamortized debt issuance costs, were as follows:

 

Fiscal Years Ending

   Amount  

2017

   $ 365,000  

2018

     192,000  

2019

     171,000  

2020

     104,000  

2021

     52,000  

Thereafter

     575,006,000  
  

 

 

 
   $ 575,890,000  
  

 

 

 

$575 Million Senior Secured Notes

On March 16, 2015, the Company issued $575,000,000 of senior secured second lien notes due 2023 (the “2023 Notes”) with major financial institutions as initial purchasers (1) to repay the existing senior secured second lien notes due in 2018 (the “2018 Notes”), including accrued and unpaid interest, a tender offer premium and a call premium, and (2) for general corporate purposes. The 2023 Notes bear interest at 6.5% per annum and mature on March 15, 2023. Interest on the 2023 Notes is payable semi-annually, in cash in arrears, on March 15 and September 15 of each year, commencing September 15, 2015. The 2023 Notes are subject to redemption, at the option of the Company, in whole or in part, at any time on or after March 15, 2018, at various redemption prices plus accrued and unpaid interest to the redemption dates. The 2023 Notes are fully and unconditionally guaranteed by each of the Company’s wholly-owned domestic subsidiaries, subject to certain exceptions.

The Company incurred $35,353,000 in expense related to the early extinguishment of debt as a result of the prepayment of the 2018 Notes, which included a tender offer premium of $26,597,000, a call premium of $1,702,000 and the write-off of $7,054,000 in unamortized deferred debt issuance costs.

 

17


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The 2023 Notes contain customary covenants, including covenants that limit or restrict the Company’s ability to incur debt, pay dividends, repurchase or make other distributions in respect to its capital stock, make other restricted payments, create liens, sell assets, engage in transactions with affiliates, consolidate or merge into other companies, or convey, transfer or lease to other companies.

$75 Million Credit Facility

On February 22, 2013, the Company entered into an agreement with three financial institutions (collectively, the “Lenders”) whereby the Lenders provided a revolving credit facility to the Company for a total of $75,000,000 (the “Credit Facility”). The Credit Facility also includes a letter of credit commitment from the lenders. Advances under the Credit Facility bear interest at selected variable rates, as defined, plus a margin based on the Company’s financial position. The principal amount of the revolving loans shall be repaid on the maturity date. The credit arrangement is secured by substantially all assets of the Company and expires on August 22, 2017.

On March 16, 2015, the Company amended and restated the Credit Facility, to among other things, extend the maturity date to March 16, 2020.

The Credit Facility contains customary covenants, including covenants that limit or restrict the Company’s ability to incur debt, create liens, consolidate or merge into other companies, sell or lease assets, pay or prepay subordinated debt, engage in sale and leaseback transactions, pay dividends, repurchase or make other distributions in respect to its capital stock and engage in transactions with affiliates. The Credit Facility also requires the Company to maintain certain minimum financial ratios and other financial measures. As of December 31, 2016 and January 2, 2016, there were no outstanding loan balances under this facility.

As of December 31, 2016 and January 2, 2016, the Company had $3,725,000 of outstanding letters of credit related to its self-insured workers’ compensation program (see Note 5).

As of December 31, 2016, the Company was compliant with all of its debt covenants.

For the year ended January 2, 2016, the Company incurred $10,975,000 of debt issuance costs in connection with the issuance of the 2023 Notes and the amendment and restatement of the Credit Facility. The unamortized balance of $9,581,000 as of January 2, 2016 was reclassified from other assets to senior secured notes on the consolidated balance sheets. Amortization expense of debt issuance costs was $1,284,000, $1,486,000 and $2,371,000 for the years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively, and is included in interest expense in the consolidated statements of income.

Net interest expense including amortization of debt issuance costs was $38,641,000, $39,306,000 and $39,463,000 for the years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively. Interest expense for the year ended January 2, 2016 included a write-off of unamortized deferred debt issuance costs of $325,000 related to the amendment and restatement of the Credit Facility.

 

18


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

NOTE 7 INCOME TAXES

The provision for income taxes consists of the following components:

 

         2016             2015             2014      

Current Provision

      

Federal

   $ 21,871,000     $ 3,756,000     $ 20,689,000  

State

     3,860,000       655,000       3,164,000  

Foreign

     731,000       540,000       763,000  
  

 

 

   

 

 

   

 

 

 

Total current

     26,462,000       4,951,000       24,616,000  
  

 

 

   

 

 

   

 

 

 

Deferred Provision

      

Federal

     5,196,000       (2,927,000     (4,032,000

State

     509,000       (468,000     (641,000

Foreign

     (212,000     (35,000     (206,000
  

 

 

   

 

 

   

 

 

 

Total deferred

     5,493,000       (3,430,000     (4,879,000
  

 

 

   

 

 

   

 

 

 

Total provision for income taxes

   $ 31,955,000     $ 1,521,000     $ 19,737,000  
  

 

 

   

 

 

   

 

 

 

Taxes based on income differ from the amount obtained by applying the statutory federal income tax rate to income before taxes as follows:

 

         2016             2015             2014      

Computed provision for taxes based on income at the federal statutory rate

   $ 34,146,000     $ 2,065,000     $ 20,597,000  

State income taxes, net of federal income tax benefit

     2,839,000       122,000       1,640,000  

Domestic manufacturing deduction

     (2,532,000     (495,000     (2,087,000

Tax credits and other

     (2,498,000     (171,000     (413,000
  

 

 

   

 

 

   

 

 

 
   $ 31,955,000     $ 1,521,000     $ 19,737,000  
  

 

 

   

 

 

   

 

 

 

 

19


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Components of the Company’s deferred tax assets and liabilities are as follows:

 

         2016              2015      

Deferred tax assets

     

Inventory uniform capitalization adjustment

   $ 819,000      $ 1,143,000  

Inventory reserves

     181,000        180,000  

Vacation accrual

     813,000        745,000  

Workers’ compensation

     877,000        925,000  

State income taxes

     342,000        144,000  

Stock-based compensation

     7,823,000        13,001,000  

Bonus and commission accrual

     248,000        688,000  

Other reserves

     1,039,000        860,000  

Intangible amortization

     1,497,000        1,498,000  

Accrued expenses and other

     1,354,000        1,453,000  

Deferred rent

     1,768,000        1,041,000  

Foreign tax credt

     254,000         

Business development costs and displays

     112,000         
  

 

 

    

 

 

 

Total deferred tax assets

     17,127,000        21,678,000  
  

 

 

    

 

 

 

Deferred tax liabilities

     

Property and equipment

     6,116,000        5,115,000  

Prepaid supplies and other

     338,000        332,000  

Slotting fees and displays

            64,000  
  

 

 

    

 

 

 

Total deferred tax liabilities

     6,454,000        5,511,000  
  

 

 

    

 

 

 

Net deferred tax assets

   $ 10,673,000      $ 16,167,000  
  

 

 

    

 

 

 

The Company evaluates the realizability of its deferred tax assets and assesses the need for a valuation allowance on an ongoing basis. In evaluating its deferred tax assets, the Company considers whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of deferred tax assets depends upon generating sufficient future taxable income prior to the expiration of the tax attributes. This assessment requires significant judgment. Given the merits of objectively verifiable evidence, including a history of income for both GAAP accounting and income taxes, the Company has determined that there is no need for a valuation allowance as of December 31, 2016 and January 2, 2016.

The following table summarizes the activity related to the Company’s unrecognized tax benefits for the fiscal years ended:

 

         2016             2015      

Unrecognized tax benefits, beginning balance

   $ 2,456,000     $ 3,592,000  

Gross increases (decreases)-tax positions in prior period

     18,000       (61,000

Gross increases-tax positions in current period

     81,000        

Lapse of statute of limitations

     (1,256,000     (1,075,000
  

 

 

   

 

 

 

Unrecognized tax benefits, ending balance

   $ 1,299,000     $ 2,456,000  
  

 

 

   

 

 

 

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2016 and January 2, 2016, the Company had approximately $319,000 and $641,000, respectively, of accrued interest and penalties related to uncertain tax positions.

The Company believes that it is reasonably possible that approximately $647,000 of its unrecognized tax benefits may be recognized by the end of its next fiscal year as a result of a lapse of the statute of limitations.

 

20


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The tax years ended December 28, 2013 to December 31, 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company has received notice from the State of North Carolina that they will conduct an examination of the tax years 2013, 2014 and 2015. The Company does not believe that unrecognized tax benefits as of December 31, 2016 will significantly increase or decrease within the next 12 months.

NOTE 8 COMMITMENTS AND CONTINGENCIES

Operating leases

The Company leases certain facilities under operating lease agreements, which expire on various dates through August 2029 and require minimum annual rentals ranging from $1,000 to $446,000 per month. Certain of these leases provide for rent escalations and renewal options. For leases with stated rent escalations, the Company recognizes rent expense ratably over the lease term. The difference between the ratable rent expense and the amount paid is included in other non-current liabilities in the consolidated balance sheets. The majority of these leases obligate the Company to pay costs of maintenance, utilities and property taxes.

Minimum future rental payments under operating leases at December 31, 2016 are as follows:

 

Fiscal Years Ending

   Amount  

2017

   $ 14,066,000  

2018

     13,852,000  

2019

     12,847,000  

2020

     13,098,000  

2021

     10,650,000  

Thereafter

     40,721,000  
  

 

 

 
   $ 105,234,000  
  

 

 

 

Rent expense for the years ended December 31, 2016, January 2, 2016 and January 3, 2015 was $13,582,000, $12,037,000 and $11,492,000, respectively.

Legal matters

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse impact on the Company’s financial position, results of operations or cash flows. As of December 31, 2016, there was no litigation or contingency with at least a reasonable possibility of a material loss.

NOTE 9 RETIREMENT PLANS

The Company has a defined-contribution 401(k) profit sharing plan (“401(k) plan”) for all non-union employees. Employees are eligible to contribute to the 401(k) plan 60 days after starting employment. Under the 401(k) plan, employees may contribute up to 60 percent of their compensation, subject to an annual contribution limit prescribed by the Internal Revenue Service. The Company has elected to make safe harbor matching contributions of up to four percent of each participant’s eligible compensation. The Company’s safe harbor contributions vest immediately. The Company incurred matching contribution expense for the years ended December 31, 2016, January 2, 2016 and January 3, 2015 of $1,381,000, $1,004,000 and $1,306,000, respectively.

 

21


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

NOTE 10 STOCKHOLDERS’ DEFICIT

On May 22, 2015, the Company amended and restated its certificate of incorporation which authorizes the respective classes and shares of corporate stock as follows:

Shares

The total number of shares of all classes of stock which the Company has authority to issue is 100,000,000, of which 90,000,000 shares are Common Stock, consisting of 40,000,000 shares of Class A Voting Common Stock, par value $0.001 per share (“Class A Common Stock”), 25,000,000 shares of Class B Voting Common Stock, par value $0.001 per share (“Class B Common Stock”), 25,000,000 shares of Class C Non-Voting Common Stock, par value $0.001 per share (“Class C Common Stock” together with the Class A Common Stock and the Class B Common Stock, the “Common Stock”), and 10,000,000 shares of Preferred Stock, par value $0.001 per share (“Preferred Stock”).

Preferred Stock

The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors (“the Board”) is expressly authorized to fix and determine by resolution or resolutions the number of shares of each series of Preferred Stock and the designation thereof, and the voting and other powers, preferences and relative, participating, optional or other special rights.

Common Stock

The rights, preferences, privileges and restrictions granted to and imposed on the Common Stock are as follows:

Relative Rights

Except as any provision of law or any provision in the Eighth Amended and Restated Certificate of Incorporation may otherwise provide, each share of Common Stock, without distinction as to class, shall have the same rights, privileges, interests and attributes, and shall be subject to the same limitations, as every other share of Common Stock.

Voting

Each holder of shares of Class A Common Stock shall be entitled to notice of and to attend all special and annual meetings of the stockholders of the Company and to cast one vote for each outstanding share of Class A Common Stock so held upon any matter or thing (including, without limitation, the election of one or more directors) properly considered and acted upon by the stockholders.

Each holder of shares of Class B Common Stock shall be entitled to notice of and to attend all special and annual meetings of the stockholders of the Company and to cast one vote for each outstanding share of Class B Common Stock so held upon any matter or thing (including, without limitation, the election of one or more directors) properly considered and acted upon by the stockholders.

Except as required by law, holders of shares of Class C Common Stock shall not be entitled to vote on any matter submitted to a vote of the stockholders of the Company.

Dividends

Except as to the Special Dividend, as defined in the Eighth Amended and Restated Certificate of Incorporation, in the aggregate amount of $50,000,000, all dividends payable on the Common Stock in cash, property or shares of capital stock shall be payable to all holders of Common Stock, without distinction as to class. Holders of Class B Common Stock shall not be entitled to receive any Special Dividend payable in cash or property to holders of Class A Common Stock and Class C Common Stock.

 

22


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Liquidation

In the event of any liquidation, the holders of the Common Stock and holders of any class or series of stock entitled to participate therewith, in whole or in part, as to the distribution of assets in such event, shall become entitled to participate, pro-rata, in the distribution of any assets of the Company remaining after the Company shall have paid, or provided for payment of, all debts and liabilities of the Company and after the Company shall have paid, or set aside for payment, to the holders of any class of stock having preference over the Common Stock, in the event of any liquidation, the full preferential amounts, if any, to which they are entitled.

Transaction with BIC Investors, LLC

On May 27, 2015 (the “Closing Date”), the Company and its stockholders (the “Stockholders”) entered into a stock purchase agreement (the “Agreement”) with BIC Investors, LLC (“BIC”).

The Agreement provided, subject to its terms and conditions, for the Stockholders to sell to BIC 2,293,943 shares of Class A Common Stock and 235,739 shares of Class C Common Stock (the “Purchased Shares”). Holders of vested Class C stock options exercised 253,671 options and participated in this transaction, resulting in additional non-cash stock-based compensation expense of $9,115,000 to settle the liability awards. Pursuant to the Eighth Amended and Restated Certificate of Incorporation, the Purchased Shares were automatically converted to 2,537,972 shares of Class B Common Stock immediately prior to the transfer and delivery to BIC. The Aggregate Purchase Price was $130,000,000.

In connection with the BIC transaction, the Company entered into an investor rights agreement with BIC. This agreement included a provision that provided BIC the right, if a qualified Initial Public Offering was not consummated by the sixth anniversary of the transaction in 2021, to request the Company to initiate a sale process of the Company or at the Board’s discretion to repurchase the BIC stock holdings at fair value. As the potential repurchase feature is within the full control of the Board, the Company has accounted for the BIC investment as permanent equity.

Conversion of Common Stock

All issued and outstanding shares of Class B Common Stock shall automatically be converted into the same number of shares of Class A Common Stock on the earlier to occur of (i) payment of the Special Dividend, and (ii) an initial public offering of Common Stock. In the case of clause (i), immediately upon such payment and, in the case of clause (ii), immediately prior to such initial public offering.

During 2016 the Company paid the $50,000,000 Special Dividend and all issued and outstanding shares of Class B Common Stock were converted to Class A Common Stock.

Redemption

At December 28, 2013, Class C Common Stock contained a mandatory redemption feature in the event that the employee stockholder’s employment with the Company was to terminate, and these shares were recorded at the redemption price. Effective June 25, 2014, holders of Class C Common Stock irrevocably amended and restated their Stockholders’ Agreements to eliminate the mandatory redemption feature contained in such agreements with respect to the Class C Common Stock and instead provide the Company the option to purchase some or all of the employee stockholder’s Class C Common Stock upon the termination of such holder’s employment. As a result, 131,000 shares of Class C Common Stock were remeasured to fair value as of June 25, 2014 and reclassified from temporary equity to permanent equity at the carrying amount of $1,921,000.

Stock Option Plans

As of December 31, 2016, the Company had one stock-based compensation plan, the 2013 Stock Incentive Plan, which replaced the 1995 Stock Option Plan and the 2002 Non-Employee Director Stock Plan.

 

23


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

2013 Stock Incentive Plan

The 2013 Stock Incentive Plan (the “2013 Plan” or the “Plan”) was effective October 1, 2013 and replaced all other stock option and/or award plans of the Company. The terms of any grants made under a prior plan shall continue to be governed by the terms of the plan under which the grant was made. The Plan is administered by the Board and the Board may designate a committee to operate and administer the Plan. The Plan covers employees and directors of the Company or any affiliate, and consultants and advisors who render bona fide services to the Company unrelated to the offer or sale of securities. The Plan authorizes grants of options to purchase up to 10,000,000 shares of authorized and unissued Class A Common Stock or shares of Class A Common Stock held in treasury less any shares outstanding under the previous stock incentive plans, subject to capitalization adjustments. Grants under the Plan may be in the form of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock units or a combination thereof, at the discretion of the Board. Under the Plan, options generally vest over five years and expire ten years from the grant date.

All options must be priced at least equal to 100% of the fair market value of the shares on the date the option is granted. The Company has historically utilized a stock valuation methodology for the granting of options (establishing an exercise price) using an approach that determines the Company’s enterprise value using a multiple of EBITDA and subtracting outstanding debt and adding excess cash to arrive at equity value, and then dividing by the number of outstanding common shares, common share equivalents and exercisable option shares.

1995 Stock Option Plan

The 1995 Stock Option Plan, as amended on August 2, 2000 and February 19, 2002 (“1995 Plan”) was administered by the Board. The Company’s Board could grant nonqualified stock options to officers, key employees and directors. The 1995 Plan authorized grants of options to purchase up to 10,000,000 shares of authorized but unissued Class C Common Stock. Stock options were granted with an exercise price equal to or greater than the stock’s fair market value (as determined by the Board) at the date of grant. Stock options were exercisable beginning two years after the grant date with respect to 40% of the total number of shares, and 20% on each of the three succeeding years. Stock options granted under the 1995 Plan have a term of ten years from the date of grant.

This plan was replaced by the 2013 Stock Incentive Plan effective October 1, 2013. However, the terms of the grants already made under this plan continue to be governed by the 1995 Plan.

A summary of the shares reserved for options outstanding and available for grant under each plan as of December 31, 2016 is as follows:

 

     Options
Originally
Authorized
(000’s)
     Options
Outstanding
(000’s)
    Options
Available
for Grant
(000’s)
 

1995 Nonqualified Stock Option Plan

     10,000        1,927        
  

 

 

    

 

 

   

 

 

 

2013 Stock Incentive Plan (replaces previous stock option plans)

     10,000        2,272 (a)      7,728  
  

 

 

    

 

 

   

 

 

 

 

(a) The 2013 Stock Incentive Plan replaces prior stock option plans and the current outstanding options include the option grants for the 1995 Plan.

 

24


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Stock option activity for the years ended December 31, 2016, January 2, 2016 and January 3, 2015 are as follows:

 

2013 Stock Incentive Plan (excludes options granted under 1995
Incentive Plan)

   Options
(000’s)
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
(Years)
 

Outstanding at December 28, 2013

     1,025     $ 23.82        9.79  

Granted

     5       23.82         

Exercised

                   

Cancelled

                   

Forfeited/expired

                   
  

 

 

   

 

 

    

 

 

 

Outstanding at January 3, 2015

     1,030     $ 23.82        8.78  

Granted

     200       25.23         

Exercised

                   

Cancelled

                   

Forfeited/expired

                   
  

 

 

   

 

 

    

 

 

 

Outstanding at January 2, 2016

     1,230     $ 21.18        8.04  

Granted

     25       29.75         

Exercised

                   

Cancelled

                   

Forfeited/expired

     (910     20.68         
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2016

     345     $ 20.14        7.84  
  

 

 

   

 

 

    

 

 

 

Options exercisable at December 31, 2016

     77     $ 15.57        6.80  
  

 

 

   

 

 

    

 

 

 

Vested and expected to vest at December 31, 2016

     199     $ 19.17        7.62  
  

 

 

   

 

 

    

 

 

 

 

25


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

1995 Stock Incentive Plan

   Options
(000’s)
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
(Years)
 

Outstanding at December 28, 2013

     3,061     $ 9.29        5.50  

Granted

                   

Exercised

     (140     9.71         

Cancelled

     (115     9.32         

Forfeited/expired

     (294     11.57         
  

 

 

   

 

 

    

 

 

 

Outstanding at January 3, 2015

     2,512     $ 9.00        4.46  

Granted

                   

Exercised

     (310     8.67         

Cancelled

     (88     9.27         

Forfeited/expired

     (74     12.88         
  

 

 

   

 

 

    

 

 

 

Outstanding at January 2, 2016

     2,040     $ 8.27        3.72  

Granted

                   

Exercised

     (22     9.31         

Cancelled

     (69     10.66         

Forfeited/expired

     (22     7.68         
  

 

 

   

 

 

    

 

 

 

Outstanding at December 31, 2016

     1,927     $ 5.16        2.92  
  

 

 

   

 

 

    

 

 

 

Options exercisable at December 31, 2016

     1,823     $ 5.20        2.72  
  

 

 

   

 

 

    

 

 

 

Vested and expected to vest at December 31, 2016

     1,870     $ 5.18        2.81  
  

 

 

   

 

 

    

 

 

 

The aggregate intrinsic value of the options exercisable and options vested and expected to vest at December 31, 2016 was $24,597,000 and $26,001,000, respectively.

During the years ended December 31, 2016, January 2, 2016 and January 3, 2015, the Company canceled options for 69,256, 88,092 and 115,450 shares of common stock, respectively, from current and former employees. The cancellation values represent a formulaic amount agreed upon between the option holder and the Company. The agreed value paid by the Company for the cancellation of the option grants was paid out in cash and subordinated promissory notes, with consideration totaling $361,000, $582,000 and $375,000, during the years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively (see Note 6).

For the year ended December 31, 2016, the Company paid a dividend of $2.98 per share, totaling $50,000,000 to holders of Class A Common and Class C Common Stock. The Board authorized an equitable adjustment for option holders in the form of a reduction of the exercise price for all outstanding stock options. This resulted in additional stock-based compensation expense of $6,843,000.

For the year ended January 2, 2016, the Company paid a cash dividend of $5.26 per share, totaling $100,000,000 to holders of Class A Common Stock and Class C Common Stock. The Board authorized an equitable adjustment for option holders in the form of a reduction of the exercise price for unvested stock options and a cash bonus to vested option holders. This resulted in additional stock-based compensation expense of $17,889,000.

At December 31, 2016, there was $1,478,000 of total unrecognized compensation cost related to unvested stock options granted under the plans. This cost is expected to be recognized over a weighted-average period of 2.06 years. Because the options are accounted for as liability awards, future compensation cost will vary with changes in the fair value of the underlying common stock and forfeiture rates.

Stock-based compensation expense (expense reversal) is included in selling, general and administrative expense in the accompanying consolidated statements of income and totaled $(12,608,000), $37,353,000 and

 

26


RSI HOME PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

$11,403,000 for each of the years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively. The total income tax (provision) benefit recognized in the consolidated statements of income for stock-based compensation arrangements was $(4,765,000), $13,843,000 and $4,309,000 for each of the years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively.

NOTE 11 SUBSEQUENT EVENTS

The Company has evaluated all events or transactions that occurred after the balance sheet date of December 31, 2016 through March 6, 2017, the date the consolidated financial statements were available to be issued, and has determined that no subsequent events require disclosure in the consolidated financial statements.

NOTE 12 SUBSEQUENT EVENTS (Unaudited)

On November 30, 2017, American Woodmark Corporation (“Woodmark”) and the Company entered into an Agreement and Plan of Merger. On December 29, 2017, Woodmark consummated the previously announced acquisition of the Company. At the closing of the Acquisition, Woodmark assumed the Company’s indebtedness consisting primarily of the Company’s privately placed 6.5% Senior Secured Second Lien Notes due 2023 issued in March 2015.

On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”), was signed into law by President Trump. The Act includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35 percent to 21 percent, effective January 1, 2018 and the establishment of a territorial-style system for taxing foreign-source income of domestic multinational corporations. The Company is in the process of quantifying the tax impacts of The Act. As a result of The Act, the Company expects there will be one-time adjustments for the re-measurement of deferred tax assets (liabilities) and the deemed repatriation tax on the unremitted foreign earnings and profits. The Company is in the process of quantifying the impact of the Act.

 

27

(Back To Top)

Section 5: EX-99.2 (EXHIBIT 99.2)

Exhibit 99.2

Exhibit 99.2

RSI HOME PRODUCTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 30,
2017
    December 31,
2016
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 80,941,000     $ 49,293,000  

Acounts receivable, net of rebates and allowances of $10,752,000 in 2017 and $8,856,000 in 2016

     50,815,000       61,894,000  

Inventories

     63,601,000       61,777,000  

Prepaid income taxes

     1,476,000       4,396,000  

Prepaid expenses and other current assets

     9,019,000       6,465,000  
  

 

 

   

 

 

 

Total current assets

     205,852,000       183,825,000  

Property and equipment, net

     61,288,000       61,790,000  

Other assets

     2,192,000       3,310,000  

Intangible assets, net

     10,308,000       11,746,000  

Deferred income taxes

     10,797,000       10,673,000  
  

 

 

   

 

 

 

Total assets

   $ 290,437,000     $ 271,344,000  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

    

Current Liabilities

    

Accounts payable

   $ 25,290,000     $ 25,853,000  

Current portion of long-term debt

     685,000       365,000  

Other accrued liabilities

     35,250,000       51,459,000  
  

 

 

   

 

 

 

Total current liabilities

     61,225,000       77,677,000  

Senior secured notes

     567,365,000       566,503,000  

Long-term debt, net of current portion

     2,334,000       525,000  

Other non-current liabilities

     6,080,000       6,273,000  
  

 

 

   

 

 

 

Total liabilities

     637,004,000       650,978,000  
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

    

Stockholders’ Deficit

    

Common stock — Class A Voting — par value $0.001, authorized:

    

2017 and 2016 — 40,000,000 shares; issued and outstanding:

    

2017 — 19,050,063 shares, 2016 — 19,050,063 shares

     19,000       19,000  

Common stock — Class C Nonvoting — par value $0.001, authorized:

    

2017 and 2016 — 25,000,000 shares; issued and outstanding:

    

2017—251,980 shares, 2016 — 251,980 shares

            

Additional paid-in capital

     67,515,000       67,515,000  

Accumulated deficit

     (414,101,000     (447,168,000
  

 

 

   

 

 

 

Total stockholders’ deficit

     (346,567,000     (379,634,000
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 290,437,000     $ 271,344,000  
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

1


RSI HOME PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Nine Months Ended  
     September 30,
2017
    October 1,
2016
 

Net sales

   $ 428,478,000     $ 457,546,000  

Cost of sales

     304,520,000       322,368,000  
  

 

 

   

 

 

 

Gross profit

     123,958,000       135,178,000  

Selling, general and administrative (including stock-based compensation benefit of $(780,000) and $(14,881,000) in 2017 and 2016, respectively)

     45,340,000       26,580,000  
  

 

 

   

 

 

 

Operating income

     78,618,000       108,598,000  

Other (income) expense

     (1,429,000     278,000  

Interest expense, net

     29,207,000       29,248,000  
  

 

 

   

 

 

 

Income before income taxes

     50,840,000       79,072,000  

Provision for income taxes

     17,773,000       27,320,000  
  

 

 

   

 

 

 

Net income

   $ 33,067,000     $ 51,752,000  
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


RSI HOME PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended  
     September 30,
2017
    October 1,
2016
 

Cash Flows From Operating Activities

    

Net income

   $ 33,067,000     $ 51,752,000  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     10,015,000       8,517,000  

Amortization of slotting fees

     1,000,000       1,000,000  

Amortization of intangible assets

     1,438,000       1,499,000  

Amortization of debt issuance costs

     1,010,000       956,000  

Stock-based compensation

     (780,000     (14,881,000

Change in fair value of foreign currency hedge

     (1,429,000     278,000  

(Gain) loss on disposal of property and equipment

     (11,000     53,000  

Deferred taxes

     (124,000     (10,000

Change in operating assets and liabilities:

    

Accounts receivable

     11,079,000       1,593,000  

Inventories

     (1,824,000     6,362,000  

Prepaid expenses and other current assets

     (3,701,000     146,000  

Other assets

     (1,430,000     (1,345,000

Income taxes payable

     2,920,000       2,046,000  

Accounts payable

     (563,000     2,781,000  

Other accrued liabilities

     (7,727,000     (6,610,000
  

 

 

   

 

 

 

Net cash provided by operating activities

     42,940,000       54,137,000  
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Capital expenditures — property and equipment

     (11,153,000     (21,890,000

Proceeds from sale of property and equipment

     111,000       12,000  
  

 

 

   

 

 

 

Net cash used in investing activities

     (11,042,000     (21,878,000
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Payments on unsecured notes payable

     (250,000     (372,000

Issuance of common stock

           50,000  
  

 

 

   

 

 

 

Net cash used in financing activities

     (250,000     (322,000
  

 

 

   

 

 

 

Net increase in cash

     31,648,000       31,937,000  

Cash and cash equivalents

    

Beginning

     49,293,000       47,509,000  
  

 

 

   

 

 

 

Ending

   $ 80,941,000     $ 79,446,000  
  

 

 

   

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities

 

Equipment acquired under financing agreement

   $     $ 262,000  
  

 

 

   

 

 

 

Notes payable issued on options exercised and canceled

   $ 2,473,000     $ 153,000  
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


RSI HOME PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 NATURE OF ORGANIZATION AND BASIS OF PRESENTATION

RSI Home Products, Inc. (“RSI”) was founded in 1989. RSI and its subsidiaries are collectively referred to herein as the “Company”. RSI, through its wholly owned subsidiaries, is engaged primarily in the manufacture and distribution of stock and made-to-order bath and kitchen cabinets and cultured marble tops to national home centers, home builders, dealers and distributors throughout the United States and Canada.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 30, 2017. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statement and notes for the fiscal year ended December 31, 2016.

NOTE 2 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

New accounting pronouncements adopted

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). Upon adoption by an entity, ASU 2015-11 will simplify the subsequent measurement of inventory by replacing the current lower of cost or market test with a lower of cost or net realizable value test. The new guidance applies only to inventories for which cost is determined by methods other than last-in-first-out (LIFO) and the retail inventory method. For inventory within the scope of ASU 2015-11, entities will be required to compare the cost of inventory to only one measure, its net realizable value, and not the three measures required by current guidance (“market,” “subject to a floor,” and a “ceiling”). When evidence exists that the net realizable value of inventory is less than its cost (due to damage, physical deterioration, obsolescence, changes in price levels or other causes), entities will recognize the difference as a loss in earnings in the period in which it occurs. ASU 2015-11 is effective for public entities for fiscal years beginning after December 15, 2016, and interim periods within the year of adoption. Early adoption is permitted. The Company adopted the provisions of ASU 2015-11 prospectively at the beginning of fiscal 2017. The adoption did not have a material impact on the consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes (Topic 740)” (“ASU 2015-17”), which requires that deferred tax assets and liabilities be presented as non-current in the balance sheet. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016 (and interim periods within those fiscal years) with early adoption permitted. The Company adopted ASU 2015-17 at the beginning of fiscal 2017 on a retrospective basis. Accordingly, we reclassified $12,902,000 from current assets to non-current assets and $2,229,000 from non-current liabilities to non-current assets as of December 31, 2016.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which provides for improvements to employee share-based payment accounting. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 (and interim periods within those fiscal years). Early adoption is permitted. The Company adopted ASU 2016-09 at the beginning of fiscal 2017. The adoption did not have a material impact on the consolidated financial statements.

 

4


RSI HOME PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

New accounting pronouncements, not yet adopted

In May 2014, the FASB issued ASU No. 2014-09, “Revenue From Contracts with Customers (Topic 606)” (“ASU 2014-09”), which requires that a company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 was originally effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date”, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. In 2016, the SEC provided specific guidance for public business entities that otherwise would not meet the definition of a public business entity except for inclusion of its financial statements in another entity’s filing with the Commission. Such public business entities may apply ASU No. 2014-09 for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Therefore, the Company does not plan on adopting ASU 2014-09 until fiscal 2019. The Company has not yet completed an assessment of the impact of this standard on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which supersedes the lease requirements in Accounting Standards Codification Topic 840, Leases. ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 (and interim periods within those fiscal years). In 2016, the SEC provided specific guidance for public business entities that otherwise would not meet the definition of a public business entity except for inclusion of its financial statements in another entity’s filing with the Commission. Such public business entities may apply ASU No. 2016-02 for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Therefore, the Company does not plan on adopting ASU 2016-02 until fiscal 2020. The new standard must be adopted using a modified retrospective transition, requiring application at the beginning of the earliest comparative period presented. The Company has not yet completed an assessment of the impact of this standard on the consolidated financial statements.

 

NOTE 3 FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs.

The three levels of inputs used to measure fair value are as follows:

 

    Level 1:    Inputs to the valuation are unadjusted quoted prices in active markets for identical assets or liabilities.

 

    Level 2:    Inputs to the valuation may include quoted prices for similar assets and liabilities in active or inactive markets, and inputs other than quoted prices, such as interest rates and yield curves, that are observable for the asset or liability for substantially the full term of the financial instrument.

 

    Level 3:    Inputs to the valuation are unobservable and significant to the fair value measurement. Level 3 inputs shall be used to measure fair value only to the extent that observable inputs are not available.

The estimated fair values of the Company’s short-term financial instruments, including cash and cash equivalents, accounts receivable and accounts payable arising in the ordinary course of business, approximate

 

5


RSI HOME PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

their individual carrying amounts due to the relatively short period of time between their origination and expected realization. The foreign exchange forward contracts were marked to market and therefore represented fair value. The fair values of these contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. This valuation methodology is considered level 2 in the fair value hierarchy. For liabilities such as long-term debt not accounted for at fair value and without quoted market prices, fair value was based upon borrowing rates available to the Company for bank loans with the same remaining maturities and similar terms and collateral requirements. As such, the fair value of long-term debt approximated its carrying value.

The fair value of the Company’s senior secured notes is estimated based upon the quoted market prices for the same issue if available, or similar issues. This valuation methodology is considered level 2 in the fair value hierarchy. The carrying amount and estimated fair value of the senior secured notes as of September 30, 2017 was $575,000,000 and $606,625,000, respectively. The carrying amount and estimated fair value of the senior secured notes as of December 31, 2016 was $575,000,000 and $603,750,000, respectively.

The following table sets forth the fair value of the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 based on the three-tier fair value hierarchy:

 

     Level 1      Level 2     Level 3      Total  

September 30, 2017

          

Foreign exchange forward contracts

   $      $ 1,025,000     $      $ 1,025,000  
  

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2016

          

Foreign exchange forward contracts

   $      $ (404,000   $      $ (404,000
  

 

 

    

 

 

   

 

 

    

 

 

 

NOTE 4 DERIVATIVES AND HEDGING

Forward contracts

In the normal course of business the Company is subject to risk from adverse fluctuations in foreign exchange rates. The Company manages these risks through the use of derivative financial instruments, primarily foreign exchange forward contracts.

The Company recognizes its outstanding derivative financial instruments in the condensed consolidated balance sheets at their fair values. The Company does not designate these instruments as accounting hedges. The changes in the fair value of these instruments are recorded in other (income) expense in the condensed consolidated statements of income.

At September 30, 2017, the Company held contracts maturing from October 2017 to December 2017 to purchase 103.0 million Mexican pesos at exchange rates ranging from 18.3 to 18.5 Mexican pesos to the U.S. dollar. At December 31, 2016, the Company held contracts maturing from January 2017 to June 2017 to purchase 197.0 million Mexican pesos at exchange rates ranging from 20.6 to 21.2 Mexican pesos to the U.S. dollar. The Company recorded the fair value of these contracts of $1,025,000 and $(404,000) at September 30, 2017 and December 31, 2016, respectively, in other assets and other accrued liabilities in the condensed consolidated balance sheets.

 

6


RSI HOME PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

NOTE 5 INVENTORIES

Inventories consisted of the following as of:

 

     September 30,
2017
     December 31,
2016
 

Raw materials

   $ 48,819,000      $ 46,352,000  

Finished goods

     14,782,000        15,425,000  
  

 

 

    

 

 

 
   $ 63,601,000      $ 61,777,000  
  

 

 

    

 

 

 

NOTE 6 OTHER ACCRUED LIABILITIES

Other accrued liabilities consisted of the following as of:

 

     September 30,
2017
     December 31,
2016
 

Stock-based liability awards

   $ 14,576,000      $ 19,907,000  

Accrued compensation

     11,753,000        9,667,000  

Accrued interest

     1,674,000        10,993,000  

Other accrued expenses

     7,247,000        10,892,000  
  

 

 

    

 

 

 
   $ 35,250,000      $ 51,459,000  
  

 

 

    

 

 

 

Accrued compensation consists of earned but unpaid payroll, incentive compensation and vacation.

Other accrued expenses consist primarily of amounts accrued for self-insurance for workers’ compensation and medical insurance, capital expenditures and consulting agreements.

The Company is partially self-insured related to workers’ compensation claims up to $500,000 per claim for its employees in the United States. As of September 30, 2017 and December 31, 2016, approximately $2,386,000 and $2,231,000, respectively, has been provided for reported but unresolved workers’ compensation claims, and the reserve is included in the condensed consolidated balance sheets. Total expense for workers’ compensation, including insurance premiums, net of refunds received, was approximately $1,363,000 and $1,622,000 for the nine months ended September 30, 2017 and October 1, 2016, respectively.

The Company is self-insured for up to $250,000 per claim under its medical benefit programs in the United States. Total expense under the program for the nine months ended September 30, 2017 and October 1, 2016 was $5,589,000 and $4,293,000, respectively. The Company provides for a reserve for actual unpaid claims and an estimate of claims incurred but not reported. At September 30, 2017 and December 31, 2016, $702,000 and $632,000, respectively, had been provided for future costs and is included in the condensed consolidated balance sheets.

 

7


RSI HOME PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

NOTE 7 LINES OF CREDIT AND LONG-TERM DEBT

Long-term debt consisted of the following as of:

 

     September 30,
2017
    December 31,
2016
 

Senior secured notes

   $ 575,000,000     $ 575,000,000  

Unsecured notes payable(a)

     2,827,000       670,000  

Other

     192,000       220,000  

Less unamortized debt issuance costs

     (7,635,000     (8,497,000
  

 

 

   

 

 

 
     570,384,000       567,393,000  

Less current portion

     685,000       365,000  
  

 

 

   

 

 

 

Net

   $ 569,699,000     $ 567,028,000  
  

 

 

   

 

 

 

 

(a) Notes due to former and current employees for the cancellation and subsequent settlement of vested stock options. The five year notes bear interest at rates ranging from 1.01% to 2.12% per annum and are due in annual installments of principal and interest on their respective anniversary dates, with final payments of all notes due through June 30, 2022. All are unsecured and subordinated to the credit facilities.

As of September 30, 2017 and December 31, 2016, aggregate maturities of long-term debt, excluding unamortized debt issuance costs, were as follows:

 

Years Ending

   September 30,
2017
     December 31,
2016
 

2017

   $ 137,000      $ 365,000  

2018

     667,000        192,000  

2019

     647,000        171,000  

2020

     580,000        104,000  

2021

     528,000        52,000  

Thereafter

     575,460,000        575,006,000  
  

 

 

    

 

 

 
   $ 578,019,000      $ 575,890,000  
  

 

 

    

 

 

 

Senior Secured Notes

On March 16, 2015, the Company issued $575,000,000 of senior secured second lien notes due 2023 (the “2023 Notes”) with major financial institutions as initial purchasers (1) to repay the existing senior secured second lien notes due in 2018 (the “2018 Notes”), including accrued and unpaid interest, a tender offer premium and a call premium, and (2) for general corporate purposes. The 2023 Notes bear interest at 6.5% per annum and mature on March 15, 2023. Interest on the 2023 Notes is payable semi-annually, in cash in arrears, on March 15 and September 15 of each year, commencing September 15, 2015. The 2023 Notes are subject to redemption, at the option of the Company, in whole or in part, at any time on or after March 15, 2018, at various redemption prices plus accrued and unpaid interest to the redemption dates. The 2023 Notes are fully and unconditionally guaranteed by each of the Company’s wholly-owned domestic subsidiaries, subject to certain exceptions.

The 2023 Notes contain customary covenants, including covenants that limit or restrict the Company’s ability to incur debt, pay dividends, repurchase or make other distributions in respect to its capital stock, make other restricted payments, create liens, sell assets, engage in transactions with affiliates, consolidate or merge into other companies, or convey, transfer or lease to other companies.

 

8


RSI HOME PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

$75 Million Credit Facility

On February 22, 2013, the Company entered into an agreement with three financial institutions (collectively, the “Lenders”) whereby the Lenders provided a revolving credit facility to the Company for a total of $75,000,000 (the “Credit Facility”). The Credit Facility also includes a letter of credit commitment from the lenders. Advances under the Credit Facility bear interest at selected variable rates, as defined, plus a margin based on the Company’s financial position. The principal amount of the revolving loans shall be repaid on the maturity date. The credit arrangement is secured by substantially all assets of the Company and expires on August 22, 2017.

On March 16, 2015, the Company amended and restated the Credit Facility, to among other things, extend the maturity date to March 16, 2020.

The Credit Facility contains customary covenants, including covenants that limit or restrict the Company’s ability to incur debt, create liens, consolidate or merge into other companies, sell or lease assets, pay or prepay subordinated debt, engage in sale and leaseback transactions, pay dividends, repurchase or make other distributions in respect to its capital stock and engage in transactions with affiliates. The Credit Facility also requires the Company to maintain certain minimum financial ratios and other financial measures. As of September 30, 2017 and December 31, 2016, there were no outstanding loan balances under this facility.

As of September 30, 2017 and December 31, 2016, the Company had $3,725,000 of outstanding letters of credit related to its self-insured workers’ compensation program (see Note 6).

As of September 30, 2017 and December 31, 2016, the Company was compliant with all of its debt covenants.

Amortization expense of debt issuance costs was $1,009,000 and $956,000 for the nine months ended September 30, 2017 and October 1, 2016, respectively, and is included in interest expense in the condensed consolidated statements of income.

NOTE 8 COMMITMENTS AND CONTINGENCIES

Operating leases

The Company leases certain facilities under operating lease agreements, which expire on various dates through August 2029 and require minimum annual rentals ranging from $1,000 to $446,000 per month. Certain of these leases provide for rent escalations and renewal options. For leases with stated rent escalations, the Company recognizes rent expense ratably over the lease term. The difference between the ratable rent expense and the amount paid is included in other liabilities in the condensed consolidated balance sheets. The majority of these leases obligate the Company to pay costs of maintenance, utilities and property taxes.

Rent expense for the nine months ended September 30, 2017 and October 1, 2016 was $10,993,000 and $10,082,000, respectively.

Legal matters

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse impact on the Company’s financial position, results of operations or cash flows. As of September 30, 2017, there was no litigation or contingency with at least a reasonable possibility of a material loss either individually or in the aggregate.

NOTE 9 SUBSEQUENT EVENTS

The Company has evaluated all events or transactions that have occurred after the balance sheet date of September 30, 2017 through January 28, 2018, the date the condensed consolidated financial statements were available to be issued.

 

9


RSI HOME PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

On November 30, 2017, American Woodmark Corporation (“Woodmark”) and the Company entered into an Agreement and Plan of Merger. On December 29, 2017, Woodmark consummated the previously announced acquisition of the Company. At the closing of the Acquisition, Woodmark assumed the Company’s indebtedness consisting primarily of the Company’s privately placed 6.5% Senior Secured Second Lien Notes due 2023 issued in March 2015.

On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”), was signed into law by President Trump. The Act includes a number of provisions, including the lowering of the U.S. corporate tax rate from 35 percent to 21 percent, effective January 1, 2018 and the establishment of a territorial-style system for taxing foreign-source income of domestic multinational corporations. The Company is in the process of quantifying the tax impacts of The Act. As a result of The Act, the Company expects there will be one-time adjustments for the re-measurement of deferred tax assets (liabilities) and the deemed repatriation tax on the unremitted foreign earnings and profits. The Company is in the process of quantifying the impact of the Act.

 

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Section 6: EX-99.3 (EXHIBIT 99.3)

Exhibit 99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On November 30, 2017, American Woodmark Corporation (“American Woodmark”), Alliance Merger Sub, Inc. (“Merger Sub”), RSI Home Products, Inc. (“RSI”) and Ronald M. Simon, as the RSI stockholder representative, entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the parties agreed to merge Merger Sub with and into RSI pursuant to the terms and subject to the conditions set forth in the Merger Agreement, with RSI continuing as the surviving corporation and as a wholly owned subsidiary of American Woodmark (the “RSI Acquisition”). On December 29, 2017 (the “Acquisition Date”), American Woodmark consummated the RSI Acquisition pursuant to the terms of the Merger Agreement. As a result of the merger of Merger Sub with and into RSI, Merger Sub’s separate corporate existence ceased, and RSI continued as the surviving corporation and a wholly owned subsidiary of American Woodmark.

In connection with the RSI Acquisition, on December 29, 2017, American Woodmark entered into Senior Secured Credit Facilities consisting of a $100 million Senior Secured Revolving Facility, a $250 million Senior Secured Initial Term Loan and a $250 million Senior Secured Delayed Draw Term Loan Facility. American Woodmark used the proceeds of the Senior Secured Initial Term Loan, together with cash on its balance sheet, to fund the cash portion of the RSI Acquisition consideration and its transaction fees and expenses. In addition, American Woodmark drew down $50 million from the Senior Secured Revolving Facility to provide ongoing working capital and for other general corporate purposes of American Woodmark and its subsidiaries.

At the closing of the RSI Acquisition, American Woodmark assumed approximately $589 million of RSI’s indebtedness, including accrued interest, consisting largely of RSI’s 61/2% Senior Secured Second Lien Notes due 2023 (the “RSI Notes”). On January 25, 2018, RSI gave notice that it has elected to conditionally redeem 20% (the “Conditional Redemption”), or $115 million in principal amount, of the $575 million outstanding principal amount of the RSI Notes and repurchase the RSI Notes not subject to the Conditional Redemption pursuant to a cash tender offer and consent solicitation by RSI (the “Tender Offer and Consent Solicitation”). In addition, RSI intends to issue an irrevocable notice of redemption for any and all RSI Notes not tendered and accepted for purchase pursuant to the Tender Offer and Consent Solicitation at the “make-whole” redemption price described in the RSI Notes Indenture (the “Make-Whole Redemption”). This statement of intent shall not constitute a notice of redemption under the RSI Notes Indenture or an obligation to issue a notice of redemption. Such notice, if made, will be made only in accordance with the applicable provisions of the RSI Notes Indenture.

On January 31, 2018, American Woodmark entered into a purchase agreement with Wells Fargo Securities, LLC, as representative of the several initial purchasers named therein, pursuant to which American Woodmark has agreed to sell to the initial purchasers $350 million aggregate principal amount of its 4.875% Senior Notes due 2026 (the “Notes”) for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and certain non-U.S. persons in accordance with Regulation S under the Securities Act. The settlement of the sale of the Notes and the redemption and repurchase of the RSI Notes is anticipated to be completed on February 12, 2018. The closing of the offering of the Notes is subject to the satisfaction of certain closing conditions contained in the Purchase Agreement and, as a result, there can be no assurance that the offering of the Notes will be completed. The anticipated proceeds of the Notes and an anticipated $250 million drawdown on the Senior Secured Delayed Draw Term Loan, together with cash on hand of American Woodmark and RSI, will be used to redeem or repurchase the RSI Notes, repay the outstanding balance of the Senior Secured Revolving Facility and pay fees, costs and expenses in connection with the foregoing.

The “RSI Transactions” refers to, collectively, the (i) entry by American Woodmark into the Senior Secured Credit Facilities (including the initial borrowings thereunder and the use of the proceeds thereof), (ii) RSI Acquisition, (iii) repayment and termination of American Woodmark’s revolving credit facility available under that certain Credit Agreement, dated as of December 2, 2009 (the “2009 Revolving Facility”), by and between American Woodmark and Wells Fargo Bank, National Association (as amended, amended and restated, modified or supplemented after the date hereof), and (iv) payment of fees, commissions and expenses in connection with the foregoing. The “Refinancing Transactions” refers to, collectively, the following anticipated transactions: (i) Conditional Redemption, (ii) Tender Offer and Consent Solicitation, (iii) Make-Whole Redemption, (iv) repayment of the outstanding balance of loans under the Senior Secured Revolving Facility and (v) payment of fees, commissions and expenses in connection with the foregoing. The RSI Transactions and the Refinancing Transactions are referred to, collectively, as “the Transactions”.

The pro forma adjustments to reflect the RSI Transactions and the Refinancing Transactions are presented separately in the unaudited pro forma condensed combined financial information to reflect that the RSI Transactions have occurred as of the date of this Form 8-K/A, while the Refinancing Transactions have not occurred as of the date of this Form 8-K but are anticipated to occur and are related to the RSI Transactions. The pro forma adjustments to reflect the RSI Transactions are included under columns titled “RSI Acquisition and Financing” and the pro forma adjustments to reflect the Refinancing Transactions are included under columns titled “Assumed Refinancing”.

The following unaudited pro forma condensed combined financial information presents the historical consolidated statements of operations and consolidated balance sheet of American Woodmark and the historical consolidated statements of operations and consolidated balance sheet of RSI adjusted to reflect the Transactions. The historical financial statements were prepared in conformity with GAAP. The unaudited pro forma condensed combined financial information is presented in accordance with the rules specified by Article 11 of Regulation S-X promulgated by the SEC, and has been prepared using the assumptions described in the notes thereto.

The following unaudited pro forma condensed combined financial information has been prepared by applying the acquisition method of accounting with American Woodmark treated as the acquirer for accounting purposes and is dependent on certain valuations and other analyses that have yet to progress to a stage where there is sufficient information for a definitive measurement. Accordingly, any pro forma adjustments, including the allocation of the purchase price are preliminary, have been made solely for the purposes of providing unaudited pro forma condensed combined financial information and may be revised as additional information becomes available and additional analysis is performed.

The pro forma condensed combined statement of income for the year ended April 30, 2017 combines the historical audited results of American Woodmark for the fiscal year ended April 30, 2017 and the unaudited results of RSI for the year ended April 1, 2017, which was derived from the audited results of RSI for the fiscal year ended December 31, 2016 less the unaudited results of RSI for the three months ended April 2, 2016 plus the unaudited results of RSI for the three months ended April 1, 2017. The pro forma condensed combined statement of income for the six months ended October 31, 2017 combines the historical unaudited results of American Woodmark for the six months ended October 31, 2017 and the historical unaudited results of RSI for the six months ended September 30, 2017. The pro forma condensed combined balance sheet as of October 31, 2017 combines the historical unaudited balance sheet of American Woodmark as of October 31, 2017 and the historical unaudited balance sheet of RSI as of September 30, 2017. The unaudited pro forma condensed combined balance sheet give effect to the Transactions as if they had occurred as of the balance sheet date. The unaudited pro forma condensed combined statements of operations give effect to the Transactions as if they had occurred on May 1, 2016, the beginning of the American Woodmark’s fiscal year ended April 30, 2017.

 

1


The historical financial statements have been adjusted in the Pro Forma Financial Statements to give effect to events that are (1) directly attributable to the pro forma events, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined company.

The unaudited pro forma condensed combined statements of income do not reflect cost savings expected to be realized from the elimination of certain expenses and synergies expected to be created or the costs to achieve such cost savings or synergies. Such costs may be material and no assurance can be given that cost savings or synergies will be realized.

The unaudited pro forma condensed combined financial information includes adjustments which are preliminary and may be revised. Acquisition accounting is dependent on certain valuations and other analyses that have yet to progress to a stage where there is sufficient information for a definitive measurement. Accordingly, any pro forma adjustments, including the allocation of the purchase consideration, are preliminary estimates, may be revised as additional information becomes available, and there can be no assurance that any such revisions will not result in material changes. The unaudited pro forma condensed combined financial statements have been prepared for illustrative purposes only. The pro forma information is not necessarily indicative of what the combined company’s condensed consolidated financial position or results of operations would actually have been had the pro forma events been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company. The pro forma information is based on the assumptions, adjustments and eliminations described in the accompanying notes to the unaudited pro forma combined condensed financial statements.

The following unaudited pro forma condensed combined financial information is presented:

 

    Unaudited pro forma condensed combined balance sheet as of October 31, 2017

 

    Unaudited pro forma condensed combined statement of income for the year ended April 30, 2017

 

    Unaudited pro forma condensed combined statements of income for the six months ended October 31, 2017

The unaudited pro forma condensed combined financial information should be read in conjunction with the historical audited annual and unaudited interim financial statements, including the notes thereto, of American Woodmark and RSI, included in Exhibits 99.1 and 99.2 of this Form 8-K. The pro forma financial information included in this offering memorandum are presented for illustrative purposes only and may not be an indication of American Woodmark’s financial condition or results of operations following the RSI Acquisition”.

 

2


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME

SIX MONTHS ENDED OCTOBER 31, 2017

(in thousands, except per share data)

 

    Historical                                            
    American
Woodmark
    RSI                                            
                    Pro Forma Adjustments        
    Six months
ended
October 31,

2017
    Six months
ended
September 30,

2017
    Reclassification
Adjustments
    RSI
Acquisition
and Financing
    Assumed
Refinancing
    Pro-Forma
Combined
 
        Amount     Note     Amount     Note     Amount     Note    

Net Sales

  $ 551,596       280,927             $       $ 832,523  

Cost of sales and distribution

    435,767       201,501               (77     C               637,191  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Gross Profit

    115,829       79,426               77                 195,332  

Selling and marketing expenses

    36,230             11,989       A       (22     D               48,197  

General and administrative expenses

    17,950       23,983       (11,989     A       24,508       E               54,452  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Operating Income

    61,649       55,443               (24,409               92,683  

Interest expense

    105       19,444       136       B       5,384       F       (5,707     J       19,362  

Other (income) expense

    (1,291     798       (136     B       669       G       312       K       352  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Income Before Income Taxes

    62,835       35,201               (30,462       5,395         72,969  

Income tax expense (benefit)

    20,799       12,245               (12,316     H       2,181       L       22,909  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net Income

  $ 42,036     $ 22,956     $       $ (18,146     $ 3,214       $ 50,060  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net Earnings Per Share

                 

Weighted Average Shares Outstanding

                 

Basic

    16,235                     1,458       I               17,693  

Diluted

    16,319                     1,458       I               17,777  

Net earnings per share

                 

Basic

  $ 2.59                                   $ 2.83  

Diluted

  $ 2.58                                   $ 2.82  

 

3


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME

YEAR ENDED APRIL 30, 2017

(in thousands, except per share data)

 

    Historical                                            
    American
Woodmark
    RSI                                            
                    Pro Forma Adjustments        
    Year
ended
April 30,
2017
    Year
ended
April 1,
2017
    Reclassification
Adjustments
    RSI
Acquisition
and Financing
    Assumed
Refinancing
    Pro-Forma
Combined
 
        Amount     Note     Amount     Note     Amount     Note    

Net Sales

  $ 1,030,248       596,107     $       $       $       $ 1,626,355  

Cost of sales and distribution

    805,612       417,853               365       C               1,223,830  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Gross Profit

    224,636       178,254               (365               402,525  

Selling and marketing expenses

    70,979             23,221       A       100       D               94,300  

General and administrative expenses

    45,419       63,275       (23,221     A       46,413       E               131,886  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Operating Income

    108,238       114,979               (46,878               176,339  

Interest expense

    885       38,657       54       B       10,768       F       (10,997     J       39,367  

Other (income) expense

    (1,572     (1,428     (54     B       629       G       293       K       (2,132
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Income Before Income Taxes

    108,925       77,750               (58,275       10,704         139,104  

Income tax expense (benefit)

    37,726       24,864           (23,560     H       4,328       L       43,357  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net Income

  $ 71,199     $ 52,886     $       $ (34,715     $ 6,376       $ 95,747  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Net Earnings Per Share

                 

Weighted Average Shares Outstanding

                 

Basic

    16,259                     1,458       I               17,717  

Diluted

    16,398                     1,458       I               17,856  

Net earnings per share

                 

Basic

  $ 4.38                                   $ 5.40  

Diluted

  $ 4.34                                   $ 5.36  

 

4


UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

OCTOBER 31, 2017

(in thousands)

 

    Historical                 Pro Forma Adjustments        
    American
Woodmark
    RSI     Reclassification
Adjustments
    RSI Acquisition
and Financing
    Assumed
Refinancing
       
    As of
October 31,
2017
    As of
September 30,
2017
    Amount     Note     Amount     Note     Amount     Note     Pro Forma
Combined
 

Current Assets

                 

Cash and cash equivalents

  $ 162,545     $ 80,941     $       $ (79,510     D     $ (61,957     S     $ 102,019  

Investments — certificates of deposit

    57,500                     (49,500     E               8,000  

Customer receivables, net

    66,211       50,815                               117,026  

Inventories

    46,723       63,601               3,889       F               114,213  

Prepaid expenses and other

    9,189       9,019       1,476       A       13,594       G, I       14,003       T       47,281  

Prepaid income taxes

          1,476       (1,476     A                    
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total Current Assets

    342,168       205,852               (111,527       (47,954       388,539  

Property, plant and equipment, net

    121,732       61,288       (8,359     B       32,889       H               207,550  

Investments — certificates of deposit

    24,250                     (21,750     E               2,500  

Promotional displays, net

    4,729             8,359       B                       13,088  

Deferred income taxes

    10,140       10,797               (20,937     I                

Other assets

    10,286       2,192                               12,478  

Intangible Assets other than Goodwill

          10,308               279,692       J               290,000  

Goodwill

                        804,881       K               804,881  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total Assets

  $ 513,305     $ 290,437     $       $ 963,248       $ (47,954 )      $ 1,719,036  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Current Liabilities

                 

Accounts payable

  $ 38,739     $ 25,290     $       $ 12,200       L     $       $ 76,229  

Current maturities of long-term debt

    1,710       685               9,375       M       9,375       U       21,145  

Accrued compensation and related expenses

    35,119             16,989       C                       52,108  

Accrued marketing expenses

    12,512                                     12,512  

Other accrued expenses

    12,130       35,250       (16,989     C       53       N, I       (1,557     V       28,887  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total Current Liabilities

    100,210       61,225               21,628         7,818         190,881  

Long Term Liabilities

                 

Long-term debt, less current maturities

    16,087       569,699               319,108       O       (68,588     W       836,306  

Defined benefit pension liabilities

    18,151                                     18,151  

Other long-term liabilities

    3,714       6,080               (5,180     N, I               4,614  

Deferred income taxes

                        103,476       I       14,003       T       117,479  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total Liabilities

    138,162       637,004               439,032         (46,767 )        1,167,431  

Shareholders’ Equity

                 

Preferred stock

                                         

Common stock

    170,389       19               189,830       P               360,238  

Additional paid in capital

          67,515               (67,515     Q                

Retained earnings

    244,683       (414,101             401,901       R       (1,187     X       231,296  

Defined benefit pension plans

    (39,929                                   (39,929
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total Shareholders’ Equity

    375,143       (346,567             524,216         (1,187       551,605  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

Total Liabilities And Shareholders’ Equity

  $ 513,305     $ 290,437     $       $ 963,248       $ (47,954 )      $ 1,719,036  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

 

5


NOTES TO UNAUDITED PRO FORMA

CONDENSED COMBINED FINANCIAL INFORMATION

(amounts in thousands except per share data)

 

1. Description of the Transactions

The Merger — On December 29, 2017 (the “Acquisition Date”), American Woodmark consummated the RSI Acquisition pursuant to the terms of the Merger Agreement. As a result of the merger of Merger Sub with and into RSI, Merger Sub’s separate corporate existence ceased, and RSI continued as the surviving corporation and a wholly owned subsidiary of American Woodmark.

As consideration for the RSI Acquisition, American Woodmark paid total accounting consideration of $553.2 million including (i) cash consideration of $363.3 million, net of cash acquired and (ii) 1,457,568 newly issued shares of American Woodmark common stock valued at $189.9 million based on $130.25 per share, which was the closing stock price on the Acquisition Date. The consideration paid is subject to a working capital adjustment by which the consideration will be adjusted upward or downward depending on whether the amount of working capital delivered at the Acquisition Date exceeds or is less than a target amount. The working capital adjustment has not yet been finalized and these pro forma financial statements do not reflect any adjustment to the estimated working capital reflected in the consideration paid at the Acquisition Date.

Senior Secured Credit Facilities — In connection with the RSI Acquisition, on December 29, 2017, American Woodmark entered into the Senior Secured Credit Facilities consisting of the $100 million Senior Secured Revolving Facility, the $250 million Senior Secured Initial Term Loan, and the $250 million Senior Secured Delayed Draw Term Loan. The borrowing rate on the Senior Secured Credit Facilities is a grid—based pricing based on the ratio of total funded debt under the Senior Secured Credit Facilities to EBITDA. The initial borrowing rate for the Senior Secured Credit Facilities is LIBOR plus 2.00% and an annual 0.25% commitment fee on the average daily undrawn portion of the Senior Secured Revolving Facility. Amounts borrowed under the Revolving Credit Facility are due December 29, 2022. American Woodmark used the proceeds of the Senior Secured Initial Term Loan, together with cash on its balance sheet, to fund the cash portion of the RSI Acquisition consideration and its transaction fees and expenses. In addition, American Woodmark drew down $50 million from the Senior Secured Revolving Facility to provide ongoing working capital and for other general corporate purposes of American Woodmark and its subsidiaries.

Senior Unsecured Notes — The anticipated proceeds of the Notes and the Senior Secured Delayed Draw Term Loan, together with cash on hand of American Woodmark and RSI, will be used to redeem or repurchase the RSI Notes, repay the outstanding balance of the Senior Secured Revolving Facility and pay fees, costs and expenses in connection with the foregoing.

 

2. Basis of Presentation

The accompanying unaudited pro forma condensed combined financial statements, or the “Pro Forma Statements,” and related notes were prepared using the acquisition method of accounting with American Woodmark considered the acquirer of RSI for accounting purposes. Accordingly, the consideration paid in the RSI Acquisition has been allocated to assets and liabilities of RSI based upon their estimated fair values as of the Acquisition Date. Any amount of the consideration that is in excess of the estimated fair values of assets acquired and liabilities assumed will be recorded as goodwill after the finalization of the purchase price allocation. Although management believes that the preliminary purchase price allocation herein is reasonable, there can be no assurance that finalization of such purchase price allocation will not result in material changes from the preliminary purchase price allocation included in the accompanying Pro Forma Financial Statements.

The historical financial statements have been adjusted in the Pro Forma Financial Statements to give effect to events that are (1) directly attributable to the pro forma events, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined company. The unaudited pro forma condensed combined statements of income does not reflect cost savings expected to be realized from the elimination of certain expenses and synergies expected to be created or the costs to achieve such cost savings or synergies. Such costs may be material and no assurance can be given that cost savings or synergies will be realized.

 

6


Certain pro forma adjustments have been made to align the accounting policies of RSI with American Woodmark where such RSI accounting policies are expected to change after the Acquisition Date. Further review may identify additional differences between the accounting policies of the two companies that, when conformed, could have a material impact on the financial statements of the combined company. However, at this time, we are not aware of any accounting policy differences that would have a material impact on the unaudited pro forma condensed combined financial statements of the combined company that are not reflected in the pro forma adjustments. Historically, American Woodmark has valued its inventory on a last-in, first-out basis (“LIFO”) and RSI has valued its inventory on a first-in, first-out basis (“FIFO”). American Woodmark’s management intends to maintain RSI’s FIFO valuation basis after the Acquisition Date. Therefore, a pro forma adjustment has not been made to conform RSI’s inventory valuation basis from FIFO to LIFO.

American Woodmark operates on a fiscal year basis which ends on April 30 of each year. Prior to the RSI Acquistion, RSI operated on a 52 to 53 week fiscal year, with its fiscal year ending on the Saturday closest to December 31. The pro forma condensed combined financial statements included herein are labeled based on American Woodmark’s convention. The pro forma condensed combined statement of income for the year ended April 30, 2017 combines the historical audited results of American Woodmark for the fiscal year ended April 30, 2017 and the unaudited results of RSI for the year ended April 1, 2017, which was derived from the audited results of RSI for the fiscal year ended December 31, 2016 less the unaudited results of RSI for the three months ended April 2, 2016 plus the unaudited results of RSI for the three months ended April 1, 2017. The pro forma condensed combined statement of income for the six months ended October 31, 2017 combines the historical unaudited results of American Woodmark for the six months ended October 31, 2017 and the historical unaudited results of RSI for the six months ended September 30, 2017. The pro forma condensed combined balance sheet as of October 31, 2017 combines the historical unaudited balance sheet of American Woodmark as of October 31, 2017 and the historical unaudited balance sheet of RSI as of September 30, 2017.

 

3. Pro Forma Purchase Price Allocation

American Woodmark has performed a preliminary valuation analysis of the fair value of RSI’s assets acquired and liabilities assumed as of the acquisition date. The following table summarizes the allocation of the preliminary purchase price as of the pro forma condensed combined balance sheet date, which is based on the accounting consideration of $553.2 million, to the estimated fair value of assets acquired and liabilities assumed as if the RSI acquisition had occurred on October 31, 2017:

 

     (in thousands)  

Customer receivables, net

   $ 50,815  

Inventories

     67,490  

Prepaid expenses and other

     24,089  

Property, plant and equipment

     94,177  

Trademark intangibles

     10,000  

Customer relationship intangibles

     280,000  

Other non-current assets

     2,192  

Goodwill

     804,881  
  

 

 

 

Total identifiable assets and goodwill acquired

     1,333,644  
  

 

 

 

Accounts payable

     25,290  

Accrued compensation and related expenses

     16,989  

Other accrued expenses

     18,314  

Deferred Income Taxes

     113,616  

Other long-term liabilities

     900  

Debt

     605,332  
  

 

 

 

Total liabilities assumed

     780,441  
  

 

 

 

Total accounting consideration

   $ 553,203  
  

 

 

 

This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma condensed combined balance sheet and statements of earnings. US GAAP permits companies to complete the final determination of the fair value of assets and liabilities up to one year from the acquisition date. The final allocation may also result in changes to amortization periods assigned to the assets. Any potential adjustments made could be material in relation to the preliminary values.

 

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4. Reclassification Adjustments

The reclassification adjustments to the historical presentation of RSI’s income statements and balance sheet were made to conform RSI’s presentation to American Woodmark’s presentation. Further review of RSI’s financial statements may result in additional reclassifications to conform to American Woodmark’s presentation. American Woodmark does not expect that any such revision would be material. The reclassification adjustments are presented below.

Reclassifications Reflected on the Unaudited Pro Forma Condensed Combined Statements of Income for the six months ended October 31, 2017 and year ended April 30, 2017

Adjustment A Reclassifies certain sales and marketing expenses of RSI from general and administrative expenses to selling and marketing expenses to conform to American Woodmark’s presentation.

Adjustment B — Reclassifies interest income of RSI from interest expense to other (income) expense to conform to American Woodmark’s presentation.

Reclassifications Reflected on the Unaudited Pro Forma Condensed Combined Balance Sheet as of October 31, 2017

Adjustment A Reclassifies prepaid income taxes of RSI to Prepaid Expenses and Other to conform to American Woodmark’s presentation.

Adjustment B Reclassifies promotional displays of RSI from Property, Plant and Equipment, net to Promotional Displays, net to conform to American Woodmark’s presentation.

Adjustment C Reclassifies compensation accruals of RSI from Other Accrued Expenses to Accrued Compensation and Related Expense to conform to American Woodmark’s presentation.

 

5. Pro Forma Adjustments: RSI Acquisition and Financing

The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information to reflect the RSI Transactions, including the acquisition of RSI and the related financing transactions to facilitate the acquisition, including the borrowing of the $250 million of Senior Secured Initial Term Loan and the drawdown of $50 million on the Senior Secured Revolving Facility. The pro forma adjustments are based on preliminary estimates and assumptions that are subject to change.

Pro Forma Adjustments Reflected on the Unaudited Pro Forma Condensed Combined Statements of Income for the six months ended October 31, 2017 and year ended April 30, 2017

Adjustment C

The following summarizes pro forma adjustments impacting Cost of Sales:

 

          Six months
ended
October 31,
2017
    Year Ended
April 30,
2017
 
          (in thousands)  

C-1

  

Eliminate RSI’s historical depreciation expense for plant, property and equipment.

   $ (4,799   $ (9,088

C-2

  

Record depreciation expense for plant, property and equipment based on the preliminary estimated fair value of RSI’s plant, property and equipment acquired at the Acquisition Date.

     4,722       9,453  
     

 

 

   

 

 

 
      $ (77   $ 365  
     

 

 

   

 

 

 

See balance sheet adjustment H which describes the depreciation periods for property, plant and equipment.

 

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Adjustment D

The following summarizes pro forma adjustments impacting Selling and Marketing expenses:

 

          Six months
ended
October 31,
2017
    Year Ended
April 30,
2017
 
          (in thousands)  

D-1

  

Eliminate RSI’s historical depreciation expense for plant, property and equipment.

   $ (1,363   $ (2,488

D-2

  

Record depreciation expense for plant, property and equipment based on the preliminary estimated fair value of RSI’s plant, property and equipment acquired at the Acquisition Date.

     1,341       2,588  
     

 

 

   

 

 

 
      $ (22   $ 100  
     

 

 

   

 

 

 

See balance sheet adjustment H which describes the depreciation periods for property, plant and equipment.

Adjustment E

The following summarizes pro forma adjustments impacting General and Administrative expenses:

 

          Six months
ended
October 31,
2017
    Year Ended
April 30,
2017
 
          (in thousands)  

E-1

  

Eliminate RSI’s historical depreciation expense for plant, property and equipment.

   $ (495   $ (1,018

E-2

  

Record depreciation expense for plant, property and equipment based on the preliminary estimated fair value of RSI’s plant, property and equipment acquired at the Acquisition Date.

     487       1,059  

E-3

  

Eliminate acquisition costs

     (484     (3,628

E-4

  

Record amortization of trademarks intangible acquired

     1,667       3,333  

E-5

  

Record amortization of customer relationship intangible acquired

     23,333       46,667  
     

 

 

   

 

 

 
      $ 24,508     $ 46,413  
     

 

 

   

 

 

 

See balance sheet adjustment H which describes the depreciation periods for property, plant and equipment. See balance sheet adjustment J which describes the amortization period for trademarks and customer relationship intangibles.

Adjustment F

The following summarizes pro forma adjustments impacting Interest Expense:

 

          Six months
ended
October 31,
2017
     Year Ended
April 30,
2017
 
          (in thousands)  

F-1

  

Record estimated interest expense associated with Senior Secured Initial Term Loan.

     4,613        9,225  

F-2

  

Record commitment fee on Senior Secured Revolving Facility.

     125        250  

F-3

  

Record amortization on fees and costs for Senior Secured Credit Facilities.

     647        1,293  
     

 

 

    

 

 

 
      $ 5,384      $ 10,768  
     

 

 

    

 

 

 

A one-eighth percent increase or decrease in the LIBOR based interest rate on the Senior Secured Initial Term Loan would cause a $312,500 annual increase or decrease, respectively, in the amount of pro forma interest expense.

 

9


Adjustment G

The pro forma adjustment is to reduce historical interest income to reflect estimated lower outstanding balances of cash and cash equivalents and investments in certificates of deposit due to the use of cash, in part, to acquire RSI.

Adjustment H

Reflects the income tax effect of pro forma adjustments based on historical statutory tax rates.

Adjustment I

Reflects the 1,457,568 newly issued shares of American Woodmark included in the consideration for the RSI Acquisition.

Pro Forma Adjustments Reflected on the Unaudited Pro Forma Condensed Combined Balance Sheet as of October 31, 2017

The pro forma balance sheet adjustments include adjustments to record the preliminary estimates of the fair value of assets acquired and liabilities assumed associated with the RSI Acquisition (as shown in Note 3), offset by elimination of RSI’s historical values as of the acquisition had occurred on October 31, 2017.

Adjustment D

The following summarizes pro forma adjustments impacting Cash:

 

(in thousands)      
D1      $(444,295)    

Cash consideration component for RSI Acquisition.

D2      50,000    

Draw down of Senior Secured Revolving Facility at Closing Date.

D3      250,000    

Proceeds of Senior Secured Initial Term Loan.

D4      (6,465)    

Record payment of estimated debt issuance costs related to the Senior Secured Credit Facilities.

D5      71,250     Reclass amounts from Investments in CDs to cash to partially fund RSI Acquisition.
  

 

 

   
   $ (79,510  
  

 

 

   

Adjustment E

Adjustments reflect redemption of investments in certificates of deposit to fund, in part, the RSI Acquisition.

Adjustment F

Represents the estimated adjustment to step up RSI’s inventory to fair value. The estimated fair value of RSI inventories includes raw materials at historical cost (which approximated fair value) and finished goods and certain work-in-process at estimated fair value determined based on the estimated selling price of the inventory less the remaining manufacturing and selling costs and a normal profit margin on those manufacturing and selling efforts. The estimated fair value of finished goods inventory reflects a stepped-up value from historical cost at the Acquisition Date of $3.9 million, which will increase cost of sales over approximately 1 month as the inventory is sold. This increase is not reflected in the pro forma condensed combined statements of income because it does not have a continuing impact.

Adjustment G

Adjustment to assign no value to RSI’s tooling inventory to conform to American Woodmark’s policy of expensing such items when purchased.

Adjustment H

Adjustment to step-up RSI’s property, plant and equipment to preliminary estimated fair value. The fair value of property plant and equipment includes $4.7 million for buildings and $89.5 million for equipment. Estimated useful lives are 15 years for buildings and 7 years for equipment. The fair value and useful lives calculations are preliminary and subject to change after American Woodmark finalizes its review of the specific types, nature, age, condition and location of RSI’s property, plant and equipment.

 

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Adjustment I

Adjusts tax assets and liabilities resulting from the acquisition of RSI. The pro forma condensed combined balance sheet as of October 31, 2017 includes the following tax balances resulting from the purchase price allocation: taxes receivable of $19.3 million (included in prepaid expenses and other), taxes payable of $78,000 (included in other accrued expenses), $900,000 included in other long-term liabilities, and deferred income tax liabilities of $113.6 million. The estimated increase in deferred tax liabilities to $113.6 million stems primarily from acquired intangibles based on an estimated tax rate of 40.43%. This estimate of deferred income tax balances is preliminary and subject to change based on management’s final determination of the fair value of assets acquired and liabilities assumed by jurisdiction.

The following table presents the pro forma adjustments made to arrive at the pro forma tax balances:

 

     Pro-Forma
Tax
Adjustments
 
     (in thousands)  

Prepaid expenses and other

   $ 17,831  

Deferred income taxes (within Total Assets) (a)

     (20,937

Other accrued expenses

     78  

Other long-term liabilities

     (400

Deferred income taxes (within Total Liabilities) (a)

     103,476  

 

(a) Includes reclassification of deferred tax asset of $10.1 million included on American Woodmark’s historical October 31, 2017 balance sheet to deferred tax liability to reflect a net deferred tax liability in the pro forma condensed combined balance sheet.

Adjustment J

The following summarizes pro forma adjustments impacting Intangible Assets other than goodwill:

 

(in thousands)       
J1      $(10,308)     

Eliminate RSI historical balance of intangible assets other than goodwill.

J2      10,000     

Record preliminary estimated trademark intangible based on preliminary purchase price allocation for RSI Acquisition.

J3      280,000     

Record preliminary estimated customer relationship intangible based on preliminary purchase price allocation for RSI Acquisition.

  

 

 

    
     $279,692     
  

 

 

    

As part of the preliminary valuation analysis, American Woodmark identified intangible assets, including trademarks and customer relationships. The fair value of identifiable intangible assets is determined primarily using the “income approach”, which requires a forecast of all of the expected future cash flows. Trademarks and customer relationship intangibles are estimated to have a useful life of three years and six years, respectively. These preliminary estimates of fair value and estimated useful lives will likely differ from final amounts Woodmark will calculate after completing a detailed valuation analysis, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.

Adjustment K

Records preliminary estimated goodwill based on preliminary purchase price allocation as if the acquisition of RSI had occurred on October 31, 2017.

Adjustment L

Represents transaction costs not reflected in the historical balance sheets. The adjustment results in a reduction of equity (See Adjustment R). No adjustment has been made to the Unaudited Pro Forma Condensed Combined Statements of Income for the six months ended October 31, 2017 and the year ended April 30, 2017 because the costs are non-recurring in nature.

 

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Adjustment M

Reflects the current portion of the Senior Secured Initial Term Loan.

Adjustment N

Represents the write-off of RSI’s historical balance of accrued rent, which is not an assumed liability.

Adjustment O

The following summarizes pro forma adjustments to Long Term Debt less Current Maturities:

 

(in thousands)       
O1      $ 34,948     

Record fair value adjustment of RSI Debt less historical debt issuance costs.

O2      250,000     

Record Senior Secured Initial Term Loan.

O3      (9,375)     

Reclass current portion of Senior Secured Initial Term Loan

O4      (6,465)     

Record estimated debt issuance costs related to the Senior Secured Credit Facilities.

O5      50,000     

Record draw down of Senior Secured Revolving Facility at Closing Date.

  

 

 

    
     $319,108     
  

 

 

    

Adjustment P

The following tables details the adjustments to common stock:

 

(in thousands)       
P1      $ (19)     

Eliminate historical RSI on stock.

P2      189,849     

Record fair value of American Woodmark common stock issued as part of consideration for RSI Acquisition.

  

 

 

    
     $189,830     
  

 

 

    

Adjustment Q

Represents the elimination of RSI’s additional paid in capital.

Adjustment R

The following summarizes pro forma adjustments impacting Retained Earnings:

 

(in thousands)       
R1      $414,101     

Eliminate historical RSI balance of retained earnings

R2      (12,200)     

Record estimated acquisition expenses not reflected in the historical financial statements.

  

 

 

    
     $401,901     
  

 

 

    

 

6. Pro Forma Adjustments: Refinancing Transactions

The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information to reflect the assumed Refinancing Transactions, including the issuance of the Notes offered hereby and the drawdown of $250 million on the Senior Secured Delayed Draw Term Loan, repayment of amounts outstanding under the Senior Secured Revolving Facility and the redemption or repurchase of the RSI Notes. The pro forma adjustments are based on preliminary estimates and assumptions that are subject to change.

 

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Pro Forma Adjustments Reflected on the Unaudited Pro Forma Condensed Combined Statements of Income for the six months ended October 31, 2017 and year ended April 30, 2017

Adjustment J

The following summarizes pro forma adjustments to Interest Expense:

 

          Six months
ended
October 31,
2017
    Year Ended
April 30,
2017
 

I-1

  

Eliminate historical RSI interest expense associated with RSI Notes.

   $ (18,688   $ (37,012

I-2

  

Eliminate historical RSI amortization of debt issuance costs associated with the RSI Notes.

     (579     (1,102

I-3

  

Record estimated interest expense associated with assumed issuance of Senior Delayed Draw Term Loan

     4,613       9,225  

I-4

  

Record estimated interest expense associated with assumed issuance of the Notes.

     8,532       17,063  

I-5

  

Record estimated amortization of debt issuance costs of assumed issuance of the Notes.

     415       829  
     

 

 

   

 

 

 
      $ (5,707   $ (10,997
     

 

 

   

 

 

 

A one-eighth percent increase or decrease in the LIBOR based interest rate on the Senior Delayed Draw Term Loan would cause a $312,500 annual increase or decrease, respectively, in the amount of pro forma interest expense.

Adjustment K

The pro forma adjustment is to reduce historical interest income to reflect estimated lower outstanding balances of cash and cash equivalents and investments in certificates of deposit due to the use of cash, in part, to acquire RSI.

Adjustment L

Reflects the income tax effect of pro forma adjustments based on historical statutory tax rates.

Pro Forma Adjustments Reflected on the Unaudited Pro Forma Condensed Combined Balance Sheet as of October 31, 2017

Adjustment S

The following summarizes pro forma adjustments to cash:

 

S1      $250,000     

Estimated proceeds from assumed drawdown of Senior Secured Delayed Draw Term Loan.

S2      350,000     

Estimated proceeds from assumed issuance of Notes offered hereby.

S3      (576,557)     

Assumed repurchase of RSI Notes and payment of accrued interest.

S4      (28,500)     

Estimated tender premium and estimated expenses related to assumed repurchase of RSI Notes.

S5      (50,000)     

Assumed repayment of Senior Secured Revolving Facility.

S6      (6,200)     

Record payment of estimated debt issuance costs related to assumed issuance of Notes offered hereby.

S7      (700)     

Record payment of estimated debt issuance costs related to assumed drawdown of Senior Delayed Draw Term Loan.

  

 

 

    
     $(61,957)     
  

 

 

    

Adjustment T

Represents the estimated tax effect of the refinancing transaction primarily related to the anticipated repurchase premium on the RSI Notes.

Adjustment U

Reflects the current portion of the assumed Senior Secured Delayed Draw Term Loan.

 

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Adjustment V

Pro forma adjustment to reflect the assumed payment of accrued interest on RSI Notes.

Adjustment W

The following summarizes the pro forma adjustments to long-term debt, less current maturities:

 

(in thousands)       
W1      $(575,000)     

Record at par value assumed repurchase of RSI Notes.

W2      (27,313)     

Write-off fair value step-up on RSI Notes.

W3      250,000     

Record assumed draw down of Senior Secured Delayed Draw Term Loan.

W4      (9,375)     

Reclass current portion of Senior Secured Delayed Draw Term Loan.

W5      350,000     

Record assumed issuance of Notes issued hereby.

W6      (6,200)     

Record estimated debt issuance costs related to assumed issuance of Notes offered hereby.

W7      (700)     

Record payment of estimated debt issuance costs related to assumed drawdown of Senior Delayed Draw Term Loan.

W8      (50,000)     

Record assumed repayment of Senior Secured Revolving Facility.

  

 

 

    
     $(68,588)     
  

 

 

    

Adjustment X

Represents the estimated loss (including transaction expenses) on repurchase of RSI Notes.

 

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