Business Context and Reporting Period
Company: GENESCO INC.
Filing Type: Form 8-K (Current Report)
Reporting Date: June 28, 2011 (Earliest event reported: June 23, 2011)
Context: The filing reports the consummation of the acquisition of Schuh Group Limited, a specialty retailer of casual and athletic footwear in the United Kingdom, and the associated amendments to the Company's credit facilities to fund the transaction.
Key Financial Metrics and Transaction Details
Acquisition Financials
- Target: Schuh Group Limited (Schuh).
- Consideration: Total purchase price of £100.0 million, subject to closing adjustments.
- Debt Assumed: £29.5 million.
- Deferred Consideration: £25.0 million seller note (£15.0 million due in 3 years; £10.0 million due in 4 years, contingent on employment).
- Retention Note: £5.0 million issued to selling shareholders for potential indemnification obligations.
- Escrow: £1.0 million held for working capital adjustments.
- Performance Bonus: Up to £25.0 million in cash bonuses payable in 2015 if specified targets are met.
Credit Facility Amendments
- Aggregate Availability: Increased from $300.0 million to $375.0 million.
- Expansion Option: Reduced from $150.0 million to $75.0 million.
- New Tranche: $30.0 million A-1 Tranche established on a "first out, last in" basis with declining advance rates on inventory and receivables.
- Senior Debt Capacity: Amendment permits up to $250.0 million of additional senior debt subject to conditions.
- UK Credit Facility: Schuh entered into a facility providing up to £29.5 million in term loans and £5.0 million in working capital.
Material Changes Versus Prior Period
This filing represents a discrete event rather than a periodic financial report. Consequently, there are no comparative revenue, profit, or margin figures provided for the current period versus the prior period. The primary material change is the expansion of the Company's balance sheet through the acquisition of a new international subsidiary and the restructuring of its debt capacity to accommodate the transaction.
Guidance, Outlook, Risks, and Contingencies
Management Commentary and Outlook
The acquisition is funded through borrowings under the amended Credit Facility and cash on hand. The Company has implemented a management bonus plan for Schuh management contingent on future performance targets.
Risks and Contingencies
- Debt Covenants (UK Facility): Schuh is subject to a minimum interest coverage covenant (initially 4.25x, increasing to 4.50x), a maximum leverage covenant (initially 2.75x, declining to 2.25x), and a minimum cash flow coverage of 1.10x.
- Contingent Liabilities: The £5.0 million retention note may be used to satisfy indemnification obligations. The £25.0 million performance bonus is contingent on achieving specified targets in 2015.
- Employment Contingency: A portion of the deferred purchase price (£10.0 million) is contingent on the selling shareholders not terminating their employment under specified circumstances.
Unusual Items
The filing notes that financial statements of the acquired business and pro forma financial information are not included in this report but will be filed within 71 calendar days.
Investor Verification Checklist
- Verify the final purchase price after closing adjustments and the £1.0 million escrow release.
- Review the upcoming pro forma financial information to assess the impact of the £29.5 million debt assumption and interest expense on Genesco's consolidated leverage ratios.
- Monitor Schuh's ability to meet the strict UK credit facility covenants (4.25x interest coverage and 2.75x leverage) in the post-acquisition period.
- Track the utilization of the new $30.0 million A-1 Tranche and the declining advance rates on inventory and receivables.
- Assess the likelihood of the £25.0 million performance bonus payout based on Schuh's operational performance leading up to 2015.