Business Combinations

6 Months Ended

Nov. 03, 2019

Business Combinations

3. Business Combinations

eLuxury, LLC (eLuxury)

Overview

Effective June 22, 2018, we entered into an Equity Purchase Agreement (Equity Agreement)

, pursuant t

which

we acquired an initial

% ownership interest in eLuxury, a company that offers bedding accessories and home goods directly to consumers. eLuxury’s primary products include a line of mattress pads manufactured at eLuxury’s facility located in Evansville, Indiana. eLuxury also offers handmade platform beds, cotton bed sheets, as well as other bedding items

sourced from other suppliers

. Its products are available on eLuxury’s own branded website,

eLuxury.com

as well as

Amazon and other leading online retailers for specialty home goods.

This acquisition brings together eLuxury’s experience in

e-commerce,

online brand building, and

direct-to-consumer

shopping and fulfillment expertise with our global production, sourcing, and distribution capabilities.

The estimated consideration given for the initial 80% ownership interest in eLuxury totaled $

18.1

million, of which $12.5 million represented the estimated purchase price and $

5.6

million represented the fair value for contingent consideration associated with an

earn-out

obligation (see below for further details). Of the $12.5 million estimated purchase price, $11.6 million was paid at closing on June 22, 2018, $185,000 was paid in August 2018, and $749,000 was paid in September 2019.

Assets Acquired and Liabilities Assumed

The following table presents the final allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values.


(dollars in thousands)	Fair Value
Goodwill	$	13,653
Tradename		6,549
Equipment		2,179
Inventory		1,804
Accounts receivable and other current assets		108
Accounts payable		(1,336	)
Accrued expenses		(295	)
Non-controlling interest in eLuxury		(4,532	)

	$	18,130

We recorded the tradename at fair market value based on the relief from royalty method. This tradename was determined to have an indefinite useful life and, therefore, is not being amortized. Equipment will be depreciated on a straight-line basis over useful lives ranging from

five

ten

years.

The goodwill related to this acquisition is attributable to eLuxury’s reputation with the products it offers and management’s experience in

e-commerce,

online brand building, and

direct-to-consumer

shopping and fulfillment expertise. Goodwill is deductible for income tax purposes over the statutory period of fifteen years.

As mentioned above, the Equity Agreement contains a contingent consideration arrangement that requires us to pay the seller, who is also the owner of the noncontrolling interest, an

earn-out

payment based on a multiple of adjusted EBITDA, as defined in the Equity Agreement, for the twelve-month period ending August 31, 2021, less $12.0 million We recorded a contingent liability at the acquisition date for this

earn-out

obligation at its fair value totaling $5.6 million based on the Black Scholes pricing model.

Non-Controlling

Interest

The Equity Agreement contains substantive profit-sharing arrangement provisions which explicitly state the ownership interests at the effective date of this business combination and the allocation of net income or loss between Culp

Inc., as the controlling interest

holder

, and the noncontrolling interest

holder

. The Equity Agreement states that at the effective date of this acquisition (June 22, 2018), we acquired an 80% ownership interest in eLuxury

with the seller retaining a

% noncontrolling interest. Additionally, the Equity Agreement states that eLuxury’s net income or loss and future capital contributions will be allocated at a percentage of

% and

% to Culp

Inc. and the noncontrolling interest

holder

, respectively.

Based on the terms of the Equity Agreement, we believe the related risks associated with the ownership interests are aligned and therefore, the total consideration of $18.1 million for the 80% controlling interest provides information for the equity value of eLuxury as a whole, and is useful in estimating

the

fair value of the 20% noncontrolling interest. In order to determine the carrying value of the noncontrolling interest in eLuxury, we applied the

Hypothetical-Liquidation-At-Book-Value

method (HLBV). HLBV is an approach that is used in practice to determine the carrying value of a noncontrolling interest if it is consistent with an existing profit-sharing arrangement such as the Equity Agreement. Therefore, the carrying amount of the noncontrolling interest of $

4.4

million at November 3, 2019, mostly represents its $

4.5

million fair value determined at the acquisition date, minus its allocation of net losses that were mostly offset by capital contributions that were made subsequent from the acquisition date through the end of our second quarter of fiscal 2020.

Other

Acquisitions costs totaling $

270,000

were included in selling, general, and administrative expenses in our Consolidated Statement of Net Income for the

six-month

period ending October 28, 2018.

Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations for the three-month and

six-month

periods ending November 3, 2019, and October 28, 2018, have been prepared as if the acquisition of eLuxury had occurred on May 1, 2017.


	Three Months Ended
(dollars in thousands, except per share data)	November 3, 2019		October 28, 2018
Net Sales	$	72,619	$	77,006
Income from operations		3,983		4,284
Net income		2,192		2,944
Net loss (income) - noncontrolling interest		108		(11	)
Net income – Culp Inc. common shareholders		2,300		2,933

Net income per share (basic) – Culp Inc. common shareholders		0.19		0.23

Net income per share (diluted) – Culp Inc. common shareholders		0.19		0.23

	Six Months Ended
(dollars in thousands, except per share data)	November 3, 2019		October 28, 2018
Net Sales	$	147,466	$	151,604
Income from operations		6,672		6,357
Net income		3,366		3,883
Net loss (income) - noncontrolling interest		272		(11	)
Net income – Culp Inc. common shareholders		3,638		3,872

Net income per share (basic) – Culp Inc. common shareholders		0.29		0.31

Net income per share (diluted) – Culp Inc. common shareholders		0.29		0.31

The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would actually have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.