ALLIANCE LAUNDRY HOLDINGS LLC. Quarterly Report for the Period Ended June 30, 2014

Transcription

1 ALLIANCE LAUNDRY HOLDINGS LLC Quarterly Report for the Period Ended June 30, 2014

2 ALLIANCE LAUNDRY HOLDINGS LLC Quarterly Report for the Period Ended June 30, 2014 Table of Contents Financial Statements (Unaudited): Page No. Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and June 30, Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and June 30, Notes to Unaudited Condensed Consolidated Financial Statements 5 Management s Discussion and Analysis of Financial Condition and Results of Operations 29 Quantitative and Qualitative Disclosures About Market Risk 42 Throughout this quarterly report we refer to Alliance Laundry Holdings LLC, a Delaware limited liability company, as Alliance Holdings and, together with its consolidated operations, as the Company, Alliance, we, our and us unless otherwise indicated. Any reference to Alliance Laundry refers to our wholly-owned subsidiary, Alliance Laundry Systems LLC, a Delaware limited liability company, and its consolidated operations unless otherwise indicated. Any reference to ALH refers to ALH Holding Inc., a Delaware corporation, and Alliance Holdings ultimate parent company.

3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALLIANCE LAUNDRY HOLDINGS LLC CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands) June 30, December 31, Assets Current assets: Cash and cash equivalents $ 49,678 $ 60,849 Restricted cash Restricted cash - for securitization investors 20,509 17,087 Accounts receivable, net 45,268 18,688 Inventories, net 68,463 41,644 Accounts receivable - restricted for securitization investors 92,639 86,674 Loans receivable, net - restricted for securitization investors 46,970 45,910 Deferred income tax asset, net 11,170 11,306 Prepaid expenses and other current assets 4,308 2,747 Total current assets 339, ,994 Loans receivable, net 11,222 11,151 Property, plant and equipment, net 110,433 81,235 Goodwill 294, ,174 Loans receivable, net - restricted for securitization investors 209, ,849 Deferred income tax asset, net Debt issuance costs, net 19,248 17,450 Intangible assets, net 259, ,596 Other long-term assets Total assets $ 1,246,229 $ 910,464 Liabilities and Member(s)' Equity Current liabilities: Current portion of long-term debt $ 2,431 $ - Revolving credit facility - - Accounts payable 81,432 59,005 Asset backed borrowings - owed to securitization investors 104, ,023 Deferred income tax liability, net - - Other current liabilities 57,520 43,721 Total current liabilities 246, ,749 Long-term debt, net 675, ,746 Asset backed borrowings - owed to securitization investors 200, ,694 Deferred income tax liability, net 78,821 40,092 Other long-term liabilities 22,285 16,476 Total liabilities 1,223, ,757 Commitments and contingencies (See Note 16) Member(s)' equity 22,401 11,707 Total liabilities and member(s)' equity... $ 1,246,229 $ 910,464 The accompanying notes are an integral part of the financial statements. 2

4 ALLIANCE LAUNDRY HOLDINGS LLC CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (in thousands) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, Net revenues: Equipment and service parts $ 184,728 $ 140,351 $ 327,187 $ 260,556 Equipment financing, net 2,109 2,040 4,271 4,437 Net revenues 186, , , ,993 Cost of sales 125,899 98, , ,274 Gross profit 60,938 43, ,255 79,719 Selling, general and administrative expenses 29,721 19,389 52,267 36,795 Restructuring and other costs 10, , Total operating expenses 39,975 19,781 67,090 37,651 Operating income 20,963 23,793 39,165 42,068 Interest expense 11,398 8,795 21,174 17,841 Loss from early extinguishment of debt ,871 Income before taxes 9,565 14,998 17,991 22,356 Provision for income taxes 3,123 5,009 5,978 7,695 Net income $ 6,442 $ 9,989 $ 12,013 $ 14,661 Comprehensive income: Net income.... $ 6,442 $ 9,989 $ 12,013 $ 14,661 Foreign currency translation adjustment, net.. (2,109) 744 (218) (687) Change in pension liability and other benefits, net (2,212) 850 (2,106) 1,170 Comprehensive income $ 2,121 $ 11,583 $ 9,689 $ 15,144 The accompanying notes are an integral part of the financial statements. 3

5 ALLIANCE LAUNDRY HOLDINGS LLC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Six Months Ended June 30, June 30, Cash flows from operating activities: Net income $ 12,013 $ 14,661 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,556 6,681 Amortization of debt issuance costs 3,136 2,802 Amortization of original issue discount Non-cash interest expense/(income).. (129) (253) Non-cash (gain)/loss on commodity & foreign exchange contracts, net (1,769) 1,058 Non-cash executive unit compensation 3,058 1,095 Non-cash charge for pension and post-retirement benefit plans Non-cash charge for write-off of debt issuance costs Non-cash charge for write-off of original issue discount on long term borrowings Non-cash acquisition related inventory expense... 3,249 - (Gain)/loss on sale of property, plant and equipment (677) - Deferred income taxes 575 6,095 Other, net (100) (11) Changes in assets and liabilities, net of the effects of the acquisition: Accounts and loans receivable, net (2,824) (11,834) Accounts receivable - restricted for securitization investors (5,965) 1,747 Inventories, net (8,792) (2,491) Loans receivable, net - restricted for securitization investors (4,093) (5,420) Other assets (389) (1,021) Accounts payable 12,603 6,706 Other liabilities 5,409 4,868 Net cash provided by operating activities 26,153 26,247 Cash flows from investing activities: Capital expenditures (19,426) (13,176) Restricted cash (4) 12 Restricted cash - for securitization investors (3,422) 2,457 Acquisition of business, net of cash acquired (254,737) - Proceeds on disposition of assets Net cash used by investing activities (276,875) (10,707) Cash flows from financing activities: Proceeds from revolving line of credit borrowings 14,000 - Payments on revolving line of credit borrowings (14,000) - Proceeds from long-term borrowings 236,000 20,000 Payments on long-term borrowings (1,000) (27,000) Proceeds from forgivable loan Cash paid for debt establishment and amendment fees (4,933) (9,974) Net increase in asset backed borrowings owed to securitization investors 8,989 31,593 Member contributions 1,444 1,086 Member distributions (440) - Net cash provided by financing activities 240,060 16,205 Effect of exchange rate changes on cash and cash equivalents (509) (71) (Decrease)/increase in cash and cash equivalents (11,171) 31,674 Cash and cash equivalents at beginning of period 60,849 33,237 Cash and cash equivalents at end of period $ 49,678 $ 64,911 Supplemental disclosure of cash flow information: Cash paid for interest on long-term debt $ 13,560 $ 10,165 Cash paid for interest - for securitized investors $ 3,285 $ 3,038 Cash paid for income taxes $ 5,646 $ 550 Supplemental disclosure of investing and financing non-cash activities: Capital expenditures included in accounts payable $ 5,231 $ 4,349 Assumption of acquisition related debt $ 68,253 $ - The accompanying notes are an integral part of the financial statements. 4

6 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALS STATEMENTS (Dollar amounts in thousands unless otherwise indicated) Note 1 - Basis of Presentation The interim condensed consolidated financial statements of Alliance Laundry Holdings LLC and consolidated subsidiaries have been prepared by the Company and are unaudited. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles ( GAAP ) in the United States have been condensed or omitted as permitted for reporting of interim financial statements. Management believes that the disclosures are adequate to fairly present the financial position, results of operations and cash flows at the dates and for the periods presented. The condensed consolidated financial statements for the six months ended June 30, 2014 should be read in conjunction with our consolidated financial statements presented in our Annual Report for the Year Ended December 31, Results for interim periods are not necessarily indicative of future results. Alliance Holdings is a holding company with no material assets other than its ownership of the common stock of its wholly-owned subsidiary, Alliance Laundry. All of Alliance Holdings business operations are conducted by Alliance Laundry and its subsidiaries. Certain reclassifications have been made to the prior year s Condensed Consolidated Balance Sheets to conform to the 2014 presentation. Separate lines for Restricted cash and Other long-term assets have been added. Certain reclassifications have been made to the prior year s Condensed Consolidated Statements of Cash Flows to conform to the 2014 presentation. Separate lines for Amortization of debt issuance costs and Amortization of original issue discount have been added within Adjustments to reconcile net income to net cash provided by operating activities. The prior year s Condensed Consolidated Statements of Cash Flows has been revised to eliminate the non-cash effect of decreased accrued capital expenditures of $1.3 million from the Changes in Accounts payable line item within Net cash provided by operating activities and the Capital expenditures line item within Net cash used by investing activities. Additionally the prior year s Condensed Consolidated Statements of Cash Flows have been adjusted for the separate presentation of Restricted cash in the prior year s Condensed Consolidated Balance Sheets. These revisions are not considered material to the previously issued financial statements. Note 2 - Acquisition On March 7, 2014, the Company, through its wholly owned subsidiary Alliance Laundry Holding S.ar.L, completed the acquisition ( Primus Acquisition ) of 100% of Primus Laundry Equipment Group ( Primus ) pursuant to a share purchase agreement dated February 10, Primus is headquartered in Gullegem, Belgium with sales and manufacturing facilities in Pribor, Czech Republic and Guangzhou, China and additional sales offices in Belgium, France, Spain, the UAE and Hong Kong. Primus markets commercial washer-extractors, tumbler dryers, ironers and feeding and folding equipment under the Primus, Lavamac and Deli brands. The Company believes the addition of the Primus brands, complementary products, manufacturing facilities, and international sales and marketing presence will significantly strengthen our position in the global laundry marketplace. Prior to March 7, 2014, Primus was a customer of Alliance Laundry. The Company acquired Primus for an aggregate purchase price of approximately $259.4 million, consisting of cash of $191.1 million (including cash acquired of $4.6 million) and the assumption of debt of $68.3 million. The assumed debt was paid in full at the acquisition date. The Primus Acquisition resulted in 5

7 recording approximately $112.6 million of goodwill and $138.3 million of other intangible assets. For further detail related to the goodwill and other intangible assets of the Primus Acquisition see Note 7 - Goodwill and Other Intangibles. The Primus Acquisition was funded with a $230.0 million incremental First Lien Term Loan, provided for by the Third Amendment to the existing First Lien Credit Agreement, and $29.4 million of Company cash from operations. See Note 13 - Debt for additional information. The Company incurred acquisition-related costs of $2.2 million all of which were expensed. In addition, the Company incurred debt-related costs of $5.4 million, of which $4.9 million was capitalized and $0.5 million was expensed. The acquisition-related costs and expensed debt-related costs are included in the Restructuring and other costs and Interest expense lines, respectively, of the Condensed Consolidated Statements of Comprehensive Income for the six months ended June 30, The capitalized debt-related costs are included in the Debt issuance costs, net line of the Condensed Consolidated Balance Sheets as of June 30, The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based upon their respective fair values as of the date of the Primus Acquisition is summarized below: Amount Cash and cash equivalents $ 4,640 Accounts receivable 22,800 Inventories 21,550 Other current assets 1,164 Property, plant and equipment 18,870 Goodwill 112,552 Other intangible assets 138,274 Other noncurrent assets 177 Total assets $ 320,027 Current liabilities $ 20,263 Debt 68,253 Deferred taxes 39,861 Other liabilities 520 Total liabilities $ 128,897 Net assets acquired $ 191,130 The preliminary allocation of the Primus Acquisition price to intangible assets and associated lives are summarized below: Amount Life Trade names $ 24,500 Indefinite Customer relationships 98, years Manufacturing technology 15, years Other 274 Various $ 138,274 Our allocation of purchase price to the assets acquired and the liabilities assumed in the Primus Acquisition is preliminary and subject to refinement as more acquisition date information becomes available. The operating results of Primus are included in the Condensed Consolidated Statements of Comprehensive Income since the date of acquisition. The Company reported $42.6 million in net sales and operating income of $5.7 million from Primus, inclusive of $5.3 million of non-cash purchase accounting 6

8 expenses ($3.2 million related to acquired inventory and $2.1 million for acquired amortization of intangible assets), for the period from the acquisition date through June 30, The following table reflects the unaudited pro forma operating results of the Company for the six months ended June 30, 2014 and 2013, which give effect to the acquisition of Primus as if it had occurred on January 1, The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective January 1, 2013, nor are they intended to be indicative of results that may occur in the future. The underlying pro forma information includes the historical financial results of the Company and Primus adjusted for certain items including depreciation and amortization expense associated with the assets acquired, as well as the Company s expense related to financing arrangements totaling $3.1 million and $3.0 million for the six months ended June 30, 2014 and The pro forma information does not include the effects of any synergies or cost reduction initiatives related to the acquisition. (Unaudited Pro forma) (Unaudited Pro forma) Three Months Ended June 30, Six Months Ended June 30, Net revenues $ 187,084 $ 172,422 $ 348,970 $ 322,636 Operating income $ 23,305 $ 27,901 $ 47,234 $ 40,754 Net income $ 7,911 $ 11,494 $ 17,033 $ 10,477 Pro forma earnings during the three and six months ended June 30, 2014 were adjusted to exclude acquisition-related expenses, debt financing-related expenses, expense related to the fair value adjustment to inventory, integration and restructuring expenses. Pro forma earnings for the six month periods ended June 30, 2013 were adjusted to include $2.2 million of acquisition-related costs, $0.5 million of debt financing-related expenses and $3.2 million of expense related to the fair value adjustments to inventory. Note 3 - Restructuring and Other Costs The following is a summary of Restructuring and other costs as shown in the Condensed Consolidated Statements of Comprehensive Income for the periods indicated. Three Months Ended June 30, Six Months Ended June 30, European restructuring (a) $ 6,711 $ - $ 6,711 $ - Primus acquisition professional fees & expenses 187-2,172 - Post acquisition integration expenses 2,343-3,448 - Entity organizational expenses 1, , Other Total restructuring and other costs $ 10,254 $ 392 $ 14,823 $ 856 (a) In June 2014, the Company approved a plan to consolidate the European manufacturing facilities into one plant in the Czech Republic and cease manufacturing and engineering activities in Wevelgem, Belgium by the end of the first quarter of The plan will affect an estimated 166 employees. The plan is the result of the continued market shift in commercial laundry equipment towards environmentally friendly products with sophisticated controls and features. The increased investment and production costs required to meet future energy and water regulations globally while staying price 7

9 competitive in the market place has required the industry to shift manufacturing to low cost countries. The expense shown relates to employee termination costs as required by Belgium law and other legal expenses. See below for further disclosure on restructuring expense. Certain charges related to the European restructuring activities are included within other lines of the Condensed Consolidated Statements of Comprehensive Income. Included within Cost of sales are charges related to reserves for expected excess and obsolete inventory and accelerated depreciation on fixed assets. Included within Selling, general and administrative expenses is accelerated amortization of intangible assets. The following is a summary of total charges due to the European restructuring. Three Months Ended June 30, Six Months Ended June 30, European restructuring $ 6,711 $ - $ 6,711 $ - Other charges included in Cost of sales Other charges included in Selling, general & administrative expenses Total European restructuring charges $ 7,707 $ - $ 7,707 $ - The following is a reconciliation of the European restructuring liability recorded within Other current liabilities. Balance, December 31, 2013 $ - Charges. 6,711 Cash payments (50) Foreign currency and other 47 Balance, June 30, 2014 $ 6,708 We expect total restructuring charges not to exceed $18.5, inclusive of the $5.0 million included in Note 19 - Subsequent Events. We expect the majority of the restructuring liability to be disbursed by the end of the first quarter of As described in Note 15 - Segment Information, restructuring and other charges are not included in the measure of segment profitability. See also Note 19 - Subsequent Events, for further information regarding the European restructuring. Note 4 - Asset Backed Facility General The Company maintains an internal financing organization to originate and administer sales of trade receivables and equipment loans for financing of equipment purchases primarily for laundromats. The trade receivables are short term in nature and generally do not accrue interest. The equipment loans typically have interest rates ranging primarily from Prime plus 1.0% to Prime plus 6.0% for variable rate equipment loans and 7.99% to 12.75% for fixed rate equipment loans. The average interest rate for all loans at June 30, 2014 was 7.01% with terms ranging primarily from two to ten years. The weighted-average remaining expected life of equipment loans held by the trust was approximately 3.0 years at June 30, All loans allow the holder to prepay outstanding principal amounts without penalty. 8

10 Funding Facilities On June 14, 2013, Alliance Laundry, through a special-purpose bankruptcy remote subsidiary, Alliance Laundry Equipment Receivables 2013 LLC ( ALER 2013 ), and a trust (a qualified special purpose entity), Alliance Laundry Equipment Receivables Trust 2013-A ( ALERT 2013A ), entered into a two year $330.0 million revolving credit facility (the Asset Backed Facility ) backed by equipment loans and trade receivables originated by the Company. Through June 12, 2015, the revolving period of the Asset Backed Facility (the Revolving Period ), Alliance Laundry is permitted, from time to time, to sell its trade receivables and certain equipment loans to its special-purpose subsidiary, which in turn transfers them to the trust. The Company incurred $5.3 million of fees in connection with the establishment of the Asset Backed Facility of which $4.8 million were capitalized and included in the Debt issuance costs, net line of the Condensed Consolidated Balance Sheets. These costs are being amortized over the two year life of the facility. The remaining fee of $0.5 million was incurred to purchase an interest rate cap. The interest rate cap is marked to market each month and is included in the Accounts receivable, net line of the Condensed Consolidated Balance Sheets. The trust finances the acquisition of the trade receivables and equipment loans through borrowings under the Asset Backed Facility in the form of funding notes which are limited to an advance rate of approximately 91% for equipment loans and 77% for trade receivables. Funding availability for trade receivables is limited to a maximum of $65.0 million while funding for equipment loans is limited to $330.0 million less the amount of funding outstanding for trade receivables. Funding for the trade receivables and equipment loans is subject to certain eligibility criteria, including concentration and other limits, which are standard for transactions of this type. The administrative agent and noteholders under the Asset Backed Facility have the right to extend the termination date of the Revolving Period through June 10, 2016, provided no event of default or rapid amortization event has occurred and is continuing, upon a request by ALERT 2013A and will inform ALERT 2013A at least thirty (30) days prior to the termination date whether such date is extended. An inability to extend the Revolving Period or replace this facility could have a material adverse effect on the business, financial condition and results of operations. After the Revolving Period, or June 10, 2016 if the Revolving Period is extended (or earlier in the event of a rapid amortization event or an event of default), the trust will not be permitted to request new borrowings under the facility and the outstanding borrowings will amortize over a period of up to ten and one half years. Additional advances under the Asset Backed Facility are subject to certain continuing conditions, including but not limited to: (i) covenant restrictions relating to the weighted average life, weighted average interest rate and the amount of fixed rate equipment loans held by the trust; (ii) the absence of a rapid amortization event or event of default, as defined; (iii) our compliance, as servicer, with certain financial covenants and (iv) no event having occurred which materially and adversely affects our operations. The variable funding notes issued under the Asset Backed Facility will commence amortization, and borrowings under the Asset Backed Facility will cease prior to the end of the Revolving Period, or June 10, 2016 if the Revolving Period is extended, upon the occurrence of certain rapid amortization events which include: (i) a borrowing base shortfall exists and remains uncured; (ii) delinquency, dilution or default ratios on pledged receivables and equipment loans exceeding certain specified ratios in any given month; (iii) the days sales outstanding on receivables exceed a specified number of days; (iv) the occurrence and continuance of an event of default or servicer default under the Asset Backed Facility, including but not limited to, as servicer, a material adverse change in our business or financial condition and our compliance with certain required financial covenants and (v) a number of other specified events. As of June 30, 2014 no rapid amortization events have occurred. The risk of loss to the note purchasers under the Asset Backed Facility resulting from default or dilution on trade receivables and equipment loans is mitigated by credit enhancement provided by us in the form of cash reserves, letters of credit ($36.0 million as of June 30, 2014) and over-collateralization. All of the residual beneficial interests in the trust and cash flows remaining from the pool of receivables and loans after payment of 9

11 all obligations under the Asset Backed Facility will accrue to the benefit of Alliance Laundry. The Company provides no support or recourse for the risk of loss relating to default on the assets transferred to the trust except for the retained interests and amounts of the letters of credit outstanding from time to time as credit enhancement. The Company also retains the servicing rights and receives a monthly servicing fee for the trade receivables and equipment loans sold at a 1.0% annual rate of the aggregate balance of such trade receivables and equipment loans. The Asset Backed Facility replaces a similar facility previously maintained through a special-purpose bankruptcy remote subsidiary, Alliance Laundry Equipment Receivables 2009 LLC ( ALER 2009 ), and a trust (a qualified special purpose entity or QSPE ), Alliance Laundry Equipment Receivables Trust 2009-A ( ALERT 2009A ). In connection with the establishment of the new facility on June 14, 2013, Alliance Laundry, through its special-purpose subsidiaries, repurchased and simultaneously resold the assets held by the ALERT 2009A to the new Asset Backed Facility. Note 5 - Securitization Activities The Company s securitization activities are accounted for as a secured borrowing and the trust is treated as a consolidated subsidiary of the Company. The following lines of the Company s Condensed Consolidated Balance Sheets are specific to the Company s securitization and are restricted for securitization investors only: Restricted cash - for securitization investors Accounts receivable - restricted for securitization investors Loans receivable, net - restricted for securitization investors (current and long-term) Asset backed borrowings - owed to securitization investors (current and long-term) Certain aspects of the Company s retained interest in the assets of the trust constitute intercompany positions which are eliminated in the preparation of the Company s Condensed Consolidated Balance Sheets. Trust receivables underlying the Company s retained interest are recorded in Accounts receivable - restricted for securitization investors and Loans receivable, net - restricted for securitization investors. Restricted Cash - for Securitization Investors To protect the noteholders of the trust, additional collateral in the form of a cash reserve equal to 1.0% of the accounts receivable and loans receivable balances is maintained as well as a yield account for lower interest rate loans. Additionally, collection accounts to facilitate the collection and disbursement of funds are maintained separately for accounts receivable and loans receivable. At June 30, 2014 and December 31, 2013, the components of restricted cash were: June 30, December 31, Cash reserve accounts $ 3,537 $ 3,441 Collection accounts - accounts receivable 6,752 4,782 Collection accounts - loans receivable 10,220 8,864 Restricted cash - for securitization investors $ 20,509 $ 17,087 Securitization Activities The Company transfers accounts receivable and equipment loans to its special-purpose bankruptcy remote subsidiary in the ordinary course of business as part of its ongoing securitization activities. The Company receives a combination of cash and residual interests in the transferred assets in its securitization transactions. 10

12 At June 30, 2014 and December 31, 2013, the Company s residual interests in Accounts receivable - restricted for securitization investors were: June 30, December 31, Accounts receivable - restricted for securitization investors $ 92,639 $ 86,674 Less: Asset backed borrowings - owed to securitization investors (60,421) (56,499) Company's residual interest in securitized accounts receivable $ 32,218 $ 30,175 At June 30, 2014 and December 31, 2013, the Company s residual interests in Loans receivable, net - restricted for securitization investors were: June 30, 2014 December 31, 2013 Current Long-term Current Long-term Loans receivable - restricted for securitization investors $ 49,814 $ 215,674 $ 48,912 $ 213,046 Less: Allowance for loan losses (2,844) (5,792) (3,002) (6,197) Loans receivable, net - restricted for securitization investors 46, ,882 45, ,849 Less: Asset backed borrowings - owed to securitization investors (44,529) (200,756) (43,524) (196,694) Company's residual interest in securitized loans receivable $ 2,441 $ 9,126 $ 2,386 $ 10,155 Asset Backed Borrowings - Owed to Securitization Investors The asset backed borrowings owed to securitization investors in the Company s Condensed Consolidated Balance Sheets represent the third-party noteholders interest in trade receivables and equipment loans receivable. Amounts owed to securitization investors as of June 30, 2014 for their interest in accounts receivable and securitized loans receivable were $60.4 million and $245.3 million, respectively. Credit Quality of Financing Receivables Past due balances of loans receivable represent the principal balance of loans held with any payment amounts between 30 and 89 days past the contractual payment due date. Non-performing loans receivable represent loans that are generally more than 89 days delinquent and the estimated uncollectible amounts have been written off to the allowance for loan losses. The Company does not accrue interest income on nonperforming loans. Finance income for non-performing loans receivable is recognized on a cash basis. An aging analysis of past due, non-performing and current loans receivable as of June 30, 2014 and December 31, 2013 are as follows: June 30, 2014 Over 89 Days Total Allowance Total Days Days Total Non- Portfolio for Loan Loans Past Due Past Due Days Past Due Performing Current Balance Losses Receivable, net Unsecuritized Loan Portfolio $ 75 $ - $ 75 $ 293 $ 12,674 $ 13,042 $ (1,820) $ 11,222 Securitized Loan Portfolio $ 2,355 $ 825 $ 3,180 $ 4,608 $ 257,700 $ 265,488 $ (8,636) $ 256,852 December 31, 2013 Over 89 Days Total Allowance Total Days Days Total Non- Portfolio for Loan Loans Past Due Past Due Days Past Due Performing Current Balance Losses Receivable, net Unsecuritized Loan Portfolio $ - $ - $ - $ 131 $ 12,120 $ 12,251 $ (1,100) $ 11,151 Securitized Loan Portfolio $ 1,994 $ 473 $ 2,467 $ 5,185 $ 254,306 $ 261,958 $ (9,199) $ 252,759 11

13 The following table presents activity in the allowance for loan losses related to loans held on the Condensed Consolidated Balance Sheets: Troubled Debt Restructurings Unsecuritized Securitized Loan Portfolio Loan Portfolio Balance, December 31, 2013 $ 1,100 $ 9,199 Provision 715 (52) Write-offs (5) (671) Recoveries Balance, June 30, 2014 $ 1,820 $ 8,636 A troubled debt restructuring ( TDR ) occurs when a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. The Company offers various types of concessions when modifying an equipment loan including extended maturities, below market interest rates, interest-only periods and deferred payment periods; however, forgiveness of principal is rarely granted. TDRs are reviewed along with other equipment loans as part of management s ongoing evaluation of the adequacy of the allowance for loan losses. The allowance for loan losses attributable to TDRs is based on the most probable source of recovery which is normally the liquidation of collateral. The Company estimates the current fair market value of collateral and also factors in credit enhancements such as additional collateral and contractual third-party guarantees. As of June 30, 2014 there was one loan for $0.2 million modified as a TDR. The modification did not reduce principal but did lengthen the repayment term and lowered the interest rate. Other Trust Items Amortization expense related to debt issuance costs was $0.6 million and $0.7 for the three months ended June 30, 2014 and 2013, and $1.2 and $1.3 for the six months ended June 30, 2014 and 2013, respectively. An interest rate cap is in place as part of the Asset Backed Facility to limit the Company s exposure to interest rate increases which may adversely affect the overall performance of the Company s equipment financing activities. The interest rate cap strike rate is 5.19%. Fair value disclosures related to the interest rate cap agreement are as follows: June 30, 2014 Fair Value (Level 2) Notional Hedge Hedge Location on Undesignated derivatives: Amount Assets Liabilities Balance Sheet Term Interest rate cap $ 44,550 $ 210 $ - Accounts receivable, net Through 7/5/23 December 31, 2013 Fair Value (Level 2) Notional Hedge Hedge Location on Undesignated derivatives: Amount Assets Liabilities Balance Sheet Term Interest rate cap $ 44,550 $ 522 $ - Accounts receivable, net Through 7/5/23 12

14 The non-cash effects of the interest rate cap on the Company s Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013 are as follows: Location in Gain/(Loss) Recognized on Undesignated Derivatives Statement of Three Months Ended Six Months Ended Undesignated derivatives: Income June 30, 2014 June 30, 2014 Interest rate cap Interest expense $ (137) $ (312) Location in Gain/(Loss) Recognized on Undesignated Derivatives Statement of Three Months Ended Six Months Ended Undesignated derivatives: Income June 30, 2013 June 30, 2013 Interest rate cap Interest expense $ (35) $ (35) Equipment financing, net as shown in the Condensed Consolidated Statements of Comprehensive Income is comprised of the following amounts: Three Months Ended Six Months Ended June 30, 2014 June 30, 2014 Interest income $ 4,551 $ 9,097 Other income Interest expense on asset backed borrowings - owed to securitization investors (1,422) (2,822) Underwriting and collection expenses (903) (2,021) Bad debt expense (467) (663) Equipment financing, net $ 2,109 $ 4,271 Three Months Ended Six Months Ended June 30, 2013 June 30, 2013 Interest income $ 4,681 $ 9,448 Other income Interest expense on asset backed borrowings - owed to securitization investors (1,293) (2,555) Underwriting and collection expenses (1,054) (1,983) Bad debt expense (647) (1,120) Equipment financing, net $ 2,040 $ 4,437 13

15 Note 6 - Inventories Inventories are stated at cost using the first-in, first-out method, but not in excess of net realizable value, and consist of the following: June 30, December 31, Materials and purchased parts $ 24,586 $ 13,913 Work in process 10,627 6,912 Finished goods 39,709 25,292 Inventory reserves (6,459) (4,473) Inventories, net $ 68,463 $ 41,644 Note 7 - Goodwill and Other Intangibles Goodwill The changes in the carrying value of goodwill by reporting segment for the six months ended June 30, 2014 are summarized below (in millions): United States Middle East & Canada Europe Latin America Asia & Africa Consolidated Balance, December 31, 2013 $ $ 26.7 $ 0.6 $ 2.8 $ 1.7 $ Goodwill acquired Currency translation Balance, June 30, 2014 $ $ $ 0.8 $ 3.5 $ 1.9 $ Other Intangibles Identifiable intangible assets, which are subject to amortization, consist primarily of customer agreements and distributor networks, engineering drawings, product designs and manufacturing processes, noncompete agreements, patents and computer software. These intangible assets are amortized over the assets estimated useful lives which range from three to twenty years. Intangible assets also include certain trademarks and trade names which have an indefinite life. Such assets are not amortized, but are subject to an annual impairment test pursuant to current accounting guidance. Amortization expense was $2.6 and $0.9 million for each of the three months ended June 30, 2014 and 2013, respectively, and $4.1 million and $1.9 million for the six months ended June 30, 2014 and 2013, respectively. 2013: The following is a summary of identifiable intangible assets as of June 30, 2014 and December 31, June 30, 2014 December 31, 2013 Gross Accumulated Net Gross Accumulated Net Amount Amortization Amount Amount Amortization Amount Amortizable intangible assets $ 171,464 $ 49,385 $ 122,079 $ 58,087 $ 45,408 $ 12,679 Non-amortizable intangible assets 137, , , ,917 $ 308,824 $ 49,385 $ 259,439 $ 171,004 $ 45,408 $ 125,596 In connection with the Primus Acquisition, the Company recorded intangible assets of $138.3 million, which includes $98.2 million attributable to customer relationships (19 year life), $15.3 million attributable to manufacturing technology (12 year life), $24.5 million attributable to trade names (indefinite life) and $0.3 million attributable to other intangibles (various lives). Further information can be found in Note 2 - Acquisition. 14

16 Note 8 - Derivative Financial Instruments Derivative instruments are accounted for at fair value. The accounting for changes in the fair value of a derivative depends on the intended use, designation and type of the derivative instrument. The Company does not designate any of its derivatives as hedges and, as such, records all changes in fair values as a component of earnings. Using derivative instruments means assuming counterparty credit risk. Counterparty credit risk relates to the loss the Company could incur if a counterparty were to default on a derivative contract. The Company primarily deals with investment grade counterparties and monitors its overall credit risk and exposure to individual counterparties. The Company does not anticipate nonperformance by any counterparties. The amount of counterparty credit exposure is the unrealized gains, if any, on such derivative contracts. The Company does not require, nor does it post collateral or security on such contracts. The Company is exposed to certain risks relating to its ongoing business operations. As a result, the Company enters into derivative transactions to manage certain of these exposures that arise in the normal course of business. The primary risks managed through the use of derivative instruments are fluctuations in interest rates, foreign currency exchange rates and commodity prices. Fluctuations in these rates and prices can affect the Company s operating results and financial condition. The Company manages the exposure to these market risks through operating and financing activities and through the use of derivative financial instruments. The Company does not enter into derivative financial instruments for trading or speculative purposes. Interest Rate Risk. Borrowings outstanding under the First Lien Term Loan totaled $584.0 million, exclusive of original issue discount, at June 30, The First Lien Term Loan is subject to a LIBOR-based minimum interest rate of 1.25% plus an applicable margin. The variable interest rate in effect as of June 30, 2014 was below the minimum interest rate. An assumed 10% increase/decrease in the variable portion of the interest rate in effect at June 30, 2014 would have no effect on interest expense or cash interest paid. At June 30, 2014, the Company also maintained a $44.6 million interest rate cap against the Asset Backed Facility. Further information can be found at Note 5 - Securitization Activities under Other Trust Items. Foreign Currency Risk. The Company has manufacturing, sales and distribution facilities in Belgium, Czech Republic and China and various sales and distribution facilities in France, Spain, Norway, the UAE, Hong Kong and Brazil. We also make investments and enter into transactions denominated in foreign currencies. The vast majority of the Company s international sales from its domestic operations are denominated in U.S. dollars. However, the Company is exposed to transactional and translational foreign exchange risk related to its foreign operations. Regarding transactional foreign exchange risk, the Company from time to time enters into certain forward exchange contracts to reduce the variability of the earnings and cash flow impacts of foreign denominated receivables and payables. The Company does not designate these contracts as hedge transactions. Accordingly, the mark-to-market impact of these contracts is recorded each period to current earnings. At June 30, 2014, the Company was managing $4.9 million of euro foreign currency contracts which are not designated as accounting hedges. The Company s primary translation exchange risk exposure at June 30, 2014 was the euro. Amounts invested in non-u.s. based subsidiaries are translated into U.S. dollars at the exchange rate in effect at quarter end. The resulting translation adjustments are recorded in Accumulated other comprehensive income as foreign currency translation adjustments. The foreign currency translation adjustment component of Accumulated other comprehensive income at June 30, 2014 was a $3.2 million gain. The net amount invested in foreign operations at June 30, 2014 was approximately $306.3 million for which no hedges have been established. Commodity Risk. The Company is subject to the effects of changing raw material and component costs caused by movements in underlying commodity prices. The Company purchases raw materials and components 15

17 containing various commodities including nickel, zinc, aluminum and copper. The Company generally buys these raw materials and components based upon market prices that are established with the vendor as part of the procurement process. From time to time, the Company enters into contracts with its vendors to lock in commodity prices for various periods to limit our near-term exposure to fluctuations in raw material and component prices. In addition, the Company enters into commodity hedge contracts to hedge certain commodity prices, such as nickel, copper and aluminum to reduce the variability on its earnings and cash flows of purchasing raw materials containing such commodities. The Company does not designate these contracts as hedge transactions. Accordingly, the mark-to-market impacts of these commodity hedge contracts are recorded each period to current earnings. At June 30, 2014, the Company was managing $3.5 million of nickel hedge contracts, $6.1 million of copper hedge contracts and $1.9 million of aluminum hedge contracts. The following table summarizes the Company s outstanding derivative contracts and their effects on its Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, June 30, 2014 Fair Value (Level 2) Notional Hedge Hedge Location on Undesignated derivatives: Amount Assets Liabilities Balance Sheet Term Commodity hedges $ 11,488 $ 1,028 $ - Accounts receivable, net Various through 12/31/15 Foreign currency hedges $ 4, Other current liabilities Various through 12/10/14 Total undesignated derivatives $ 1,028 $ 114 December 31, 2013 Fair Value (Level 2) Notional Hedge Hedge Location on Amount Assets Liabilities Balance Sheet Term Undesignated Derivatives: Commodity hedges $ 9,917 $ - $ 841 Other current liabilities Various through 12/31/14 Total undesignated derivatives $ - $ 841 The combined cash and non-cash effects of derivative instruments on the Company s Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013 are as follows: Gain/(Loss) Recognized on Location in Undesignated Derivatives Statement of Three Months Ended Six Months Ended Undesignated Derivatives Income June 30, 2014 June 30, 2014 Foreign currency hedges Cost of sales $ 124 $ 124 Commodity hedges Cost of sales 1,271 1,371 $ 1,395 $ 1,495 Gain/(Loss) Recognized on Location in Undesignated Derivatives Statement of Three Months Ended Six Months Ended Undesignated Derivatives Income June 30, 2013 June 30, 2013 Interest rate swaps Interest expense $ (16) $ (17) Foreign currency hedges Cost of sales 61 (88) Commodity hedges Cost of sales (1,324) (1,808) $ (1,279) $ (1,913) 16

18 The following tables summarize the offsetting of derivative contracts in the Company s Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, Offsetting of Derivative Assets June 30, 2014 Gross Gross Amounts Net Amounts of Assets Amounts of Offset in the Presented in the Recognized Condensed Consolidated Condensed Consolidated Description Assets Balance Sheet Balance Sheet Derivatives Commodity hedges.. $ 1,154 $ (126) $ 1,028 Offsetting of Derivative Liabilities June 30, 2014 Gross Gross Amounts Net Amounts of Liabilities Amounts of Offset in the Presented in the Recognized Condensed Consolidated Condensed Consolidated Description Liabilities Balance Sheet Balance Sheet Derivatives Commodity hedges (126) - Foreign currency hedges $ 240 $ (126) $ 114 Offsetting of Derivative Assets December 31, 2013 Gross Gross Amounts Net Amounts of Assets Amounts of Offset in the Presented in the Recognized Condensed Consolidated Condensed Consolidated Description Assets Balance Sheet Balance Sheet Derivatives Commodity hedges.. $ 33 $ (33) $ - Offsetting of Derivative Liabilities December 31, 2013 Gross Gross Amounts Net Amounts of Liabilities Amounts of Offset in the Presented in the Recognized Condensed Consolidated Condensed Consolidated Description Liabilities Balance Sheet Balance Sheet Derivatives Commodity hedges (33) 841 The Company does not maintain derivative contracts which require financial instrument or collateral balances and therefore these items are not presented. See Note 5 - Securitization Activities under Other Trust Items for disclosures related to the Company s interest rate cap. Note 9 - Fair Value Measurements The carrying amounts reported in the Condensed Consolidated Balance Sheets for the following balance sheet categories approximate fair value either due to their short-term nature or since longer-term instruments have interest at variable rates that re-price frequently. Cash and cash equivalents Restricted cash 17

19 Restricted cash - for securitization investors Accounts receivable, net Accounts receivable - restricted for securitization investors Loans receivable, net - restricted for securitization investors Accounts payable Asset backed borrowings - owed to securitization investors The fair values of the Company s First and Second Lien Term Loans are estimated based upon prices prevailing in recent market transactions at June 30, 2014 and December 31, A comparison of carrying values to fair values at June 30, 2014 and December 31, 2013 is as follows: June 30, 2014 December 31, 2013 Carrying Fair Value Carrying Fair Value Value (Level 2) Value (Level 2) Long-term borrowings due within one year: First Lien Term Loan $ 2,398 $ 2,415 $ - $ - Total $ 2,398 $ 2,415 $ - $ - Long-term borrowings excluding original issue discount: First Lien Term Loan $ 581,602 $ 585,600 $ 355,000 $ 357,219 Second Lien Term Loan 90,000 91,688 90,000 91,575 Total $ 671,602 $ 677,288 $ 445,000 $ 448,794 The fair values of the interest rate swap and commodity and foreign currency hedges in Note 8 - Derivative Financial Instruments and the interest rate cap in Note 5 - Securitization Activities are based upon third-party quotes. Note 10 - Income Taxes The Company has various foreign subsidiaries which were acquired in conjunction with the Primus Acquisition. In the opinion of management, the earnings of these subsidiaries are permanently invested outside the United States. During the second quarter of 2014, the Company calculated its estimated annual effective tax rate to be 32.3% as compared to 32.0% for the year ended December 31, The primary reasons for the higher effective tax rate is the expiration of the federal research and development credit and the Wisconsin super research and development credit, net of the increased benefit recorded for foreign jurisdictions with a lower statutory tax rate. The effective tax rate (including discrete adjustments) for the six month period ending June 30, 2014 was 33.2%. At the end of each interim period, the Company makes an estimate of the effective tax rate expected to be applicable for the full fiscal year and the impact of discrete items, if any, and adjusts the quarterly rate as necessary. There are various factors that may cause the Company s tax assumptions to change in the near term and as a result the Company may have to increase or decrease its valuation allowance against net deferred income tax assets. The Company cannot predict whether future U.S. federal, foreign and state income tax laws and regulations might be passed that could have a material effect on its results of operations. The Company assesses the impact of significant changes to the U.S. federal, foreign and state income tax laws and regulations on a regular basis and updates the assumptions and estimates used to prepare its consolidated financial statements when new legislation and regulations are enacted. The Company has approximately $2.1 million of unrecognized tax benefits as of June 30, 2014 which, if recognized, would impact the effective tax rate. Unrecognized tax benefits of $0.5 million relate to certain 18

20 credit carry forwards and are therefore netted against the related noncurrent deferred tax assets in accordance with new accounting guidance adopted effective January 1, The Company s policy is to accrue interest and penalties related to unrecognized tax benefits in income tax expense. Tax years which remain subject to examination by tax authorities for the Company in significant tax jurisdictions include years subsequent to 2009 in the United States, Belgium and Czech Republic and years subsequent to 2008 in Luxemburg. Note 11 - Guarantees The Company, through its special-purpose bankruptcy remote subsidiary, entered into a $330.0 million Asset Backed Facility as described in Note 4 - Asset Backed Facility. Pursuant to the terms of the Asset Backed Facility, the Company provides credit enhancement to the noteholders including an irrevocable letter of credit which is an unconditional lending commitment of the lenders under the Asset Backed Facility, subject to certain limits. The Company is obligated under the reimbursement provisions of the Asset Backed Facility to reimburse the lenders for any drawings on the credit enhancement by the facility indenture trustee. The trust will not be permitted to request new borrowings under the Asset Backed Facility and the Asset Backed Facility will begin to amortize if the credit enhancement is not replenished by the Company after a drawing. The amount of the irrevocable letter of credit related to the Asset Backed Facility at June 30, 2014 was $36.0 million. At June 30, 2014, the Company maintained a total of $38.2 million of letters of credit that were issued on our behalf under the Amended December 2012 Revolving Credit Facility. Further information can be found in Note 13 - Debt. The Company offers warranties to its customers depending upon the specific product and the product use. Standard product warranties vary from one to three years for most components with certain components extending to fifteen years. Certain customers have elected to buy without warranty coverage. The standard warranty program requires that the Company replace defective components within a specified time period from the date of installation. The Company also sells separately priced extended warranties associated with its products. The Company recognizes extended warranty revenues over the period covered by the extended warranty. The Company records an estimate for future warranty related costs based on actual historical incident rates of occurrence and cost per incident trends. The carrying amount of our warranty liability is adjusted as necessary based on an analysis of these and other factors. It is possible that future warranty costs could exceed the Company s estimates although the Company s warranty costs have historically been within its calculated estimates. The changes in the carrying amount of our total product warranty liability were as follows: Six Months Ended June 30, June 30, Balance at beginning of period $ 8,915 $ 8,276 Currency translation adjustment. (2) (10) Accruals for current and pre-existing warranties issued during the period 3,318 3,043 Payments made during the period (3,060) (2,576) Acquisition of warranty reserve Balance at end of period $ 9,572 $ 8,733 Note 12 - Pensions and Other Employee Benefits The Company provides pension and healthcare benefits for certain employees, eligible retirees and their dependents. Contributions are made to fund accrued pension benefits while the healthcare benefits are paid as 19