UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015March 31, 2016
Or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMPASS DIVERSIFIED HOLDINGS
(Exact name of registrant as specified in its charter)
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| | | | | | |
| Delaware | | 001-34927 | | 57-6218917 | |
| (State or other jurisdiction of incorporation or organization) | | (Commission file number) | | (I.R.S. employer identification number) | |
COMPASS GROUP DIVERSIFIED HOLDINGS LLC
(Exact name of registrant as specified in its charter)
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| | | | | | |
| Delaware | | 001-34926 | | 20-3812051 | |
| (State or other jurisdiction of incorporation or organization) | | (Commission file number) | | (I.R.S. employer identification number) | |
Sixty One Wilton Road
Second Floor
Westport, CT 06880
(203) 221-1703
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company’ in Rule 12b-2 of the Exchange Act
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| | | | | | |
Large accelerated filer | | ý | | Accelerated filer | | ¨ |
Non-accelerated filer | | ¨ | | Smaller Reporting Company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of November 1, 2015,April 29, 2016, there were 54,300,000 shares of Compass Diversified Holdings outstanding.
COMPASS DIVERSIFIED HOLDINGS
QUARTERLY REPORT ON FORM 10-Q
For the period ended September 30, 2015March 31, 2016
TABLE OF CONTENTS
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| | | | Page Number |
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Part I | | | | |
Item 1. | | | | |
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Item 2. | | | | |
Item 3. | | | | |
Item 4. | | | | |
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Part II | | | | |
Item 1. | | | | |
Item 1A. | | | | |
Item 6. | | | | |
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NOTE TO READER
In reading this Quarterly Report on Form 10-Q, references to:
the "Trust" and "Holdings" refer to Compass Diversified Holdings;
"businesses," "operating segments," "subsidiaries" and "reporting units" refer to, collectively, the businesses controlled by the Company;
the "Company" refer to Compass Group Diversified Holdings LLC;
the "Manager" refer to Compass Group Management LLC ("CGM");
the "initial businesses" refer to, collectively, Staffmark Holdings, Inc. ("Staffmark"), Crosman Acquisition Corporation, Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits") and Silvue Technologies Group, Inc.;
the "2014 acquisitions" refer to, collectively, the acquisitions of Clean Earth Holdings, Inc. and SternoCandleLamp;Sterno Products;
the "2015 acquisition" refer to the acquisition of Fresh Hemp Foods Ltd. ("Manitoba Harvest")
the "2015 dispositions" refer to, collectively, the sales of CamelBak Acquisition Corp. ("CamelBak") and AFM Holding Corp. ("American Furniture" or "AFM")
the "Trust Agreement" refer to the amended and restated Trust Agreement of the Trust dated as of November 1, 2010;
the "2011 Credit Facility" refer to a credit agreement (as amended) with a group of lenders led by Toronto Dominion (Texas) LLC, as agent, which provided for the 2011 Revolving Credit Facility and the 2011 Term Loan Facility;
the "2011 Revolving Credit Facility" refer to the $320 million Revolving Credit Facility provided by the 2011 Credit Facility;
the "2011 Term Loan Facility" refer to the Term Loan Facility provided by the 2011 Credit Facility;
the "2014 Credit Facility" refer to the credit agreement, as amended from time to time, entered into on June 6, 2014 with a group of lenders led by Bank of America N.A. as administrative agent, which provides for the 2014 Revolving Credit Facility and the 2014 Term Loan Facility;
the "2014 Revolving Credit Facility" refer to the $400 million Revolving Credit Facility provided by the 2014 Credit Facility that matures in June 2019;
the "2014 Term Loan" refer to the $325 million Term Loan Facility, provided by the Credit Facility that matures in June 2021;
the "LLC Agreement" refer to the fourth amended and restated operating agreement of the Company dated as of January 1, 2012; and
"we," "us" and "our" refer to the Trust, the Company and the businesses together.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, contains both historical and forward-looking statements. We may, in some cases, use words such as "project," "predict," "believe," "anticipate," "plan," "expect," "estimate," "intend," "should," "would," "could," "potentially," or "may," or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control, including, among other things:
our ability to successfully operate our businesses on a combined basis, and to effectively integrate and improve future acquisitions;
our ability to remove CGM and CGM’s right to resign;
our organizational structure, which may limit our ability to meet our dividend and distribution policy;
our ability to service and comply with the terms of our indebtedness;
our cash flow available for distribution and reinvestment and our ability to make distributions in the future to our shareholders;
our ability to pay the management fee and profit allocation if and when due;
our ability to make and finance future acquisitions;
our ability to implement our acquisition and management strategies;
the regulatory environment in which our businesses operate;
trends in the industries in which our businesses operate;
changes in general economic or business conditions or economic or demographic trends in the United States and other countries in which we have a presence, including changes in interest rates and inflation;
environmental risks affecting the business or operations of our businesses;
our and CGM’s ability to retain or replace qualified employees of our businesses and CGM;
costs and effects of legal and administrative proceedings, settlements, investigations and claims; and
extraordinary or force majeure events affecting the business or operations of our businesses.
Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise, except as required by law.
PART I
FINANCIAL INFORMATION
ITEM 1. — FINANCIAL STATEMENTS
Compass Diversified Holdings
Condensed Consolidated Balance Sheets
| | (in thousands) | September 30, 2015 | | December 31, 2014 | March 31, 2016 | | December 31, 2015 |
| (unaudited) | | | (unaudited) | | |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 88,725 |
| | $ | 21,946 |
| $ | 72,567 |
| | $ | 85,869 |
|
Accounts receivable, net | 124,240 |
| | 118,852 |
| 127,432 |
| | 114,320 |
|
Inventories | 74,296 |
| | 58,308 |
| 78,994 |
| | 68,371 |
|
Prepaid expenses and other current assets | 24,363 |
| | 23,357 |
| 20,610 |
| | 22,803 |
|
Current assets held for sale | 46,097 |
| | 98,336 |
| |
Total current assets | 357,721 |
| | 320,799 |
| 299,603 |
| | 291,363 |
|
Property, plant and equipment, net | 109,640 |
| | 106,981 |
| 118,085 |
| | 118,050 |
|
Equity method investment (refer to Note F) | 254,733 |
| | 245,214 |
| 191,439 |
| | 249,747 |
|
Goodwill | 376,064 |
| | 353,634 |
| 413,735 |
| | 398,488 |
|
Intangible assets, net | 361,660 |
| | 324,091 |
| 358,373 |
| | 353,404 |
|
Deferred debt issuance costs, less accumulated amortization of $2,923 at September 30, 2015 and $1,233 at December 31, 2014 | 9,887 |
| | 11,197 |
| |
Other non-current assets | 6,431 |
| | 5,687 |
| 11,004 |
| | 9,990 |
|
Non-current assets held for sale | — |
| | 179,827 |
| |
Total assets | $ | 1,476,136 |
| | $ | 1,547,430 |
| $ | 1,392,239 |
| | $ | 1,421,042 |
|
Liabilities and stockholders’ equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | $ | 50,602 |
| | $ | 49,201 |
| $ | 52,651 |
| | $ | 50,403 |
|
Accrued expenses | 45,902 |
| | 52,028 |
| 43,301 |
| | 47,959 |
|
Due to related party | 6,374 |
| | 6,068 |
| 250 |
| | 5,863 |
|
Current portion, long-term debt | 3,250 |
| | 3,250 |
| 3,250 |
| | 3,250 |
|
Other current liabilities | 6,268 |
| | 6,311 |
| 9,974 |
| | 9,004 |
|
Current liabilities held for sale | 22,396 |
| | 24,373 |
| |
Total current liabilities | 134,792 |
| | 141,231 |
| 109,426 |
| | 116,479 |
|
Deferred income taxes | 101,067 |
| | 91,616 |
| 105,608 |
| | 103,745 |
|
Long-term debt, less original issue discount | 313,888 |
| | 485,547 |
| |
Long-term debt | | 308,208 |
| | 308,639 |
|
Other non-current liabilities | 21,354 |
| | 14,039 |
| 27,441 |
| | 18,960 |
|
Non-current liabilities held for sale | — |
| | 6,663 |
| |
Total liabilities | 571,101 |
| | 739,096 |
| 550,683 |
| | 547,823 |
|
Stockholders’ equity | | | | | | |
Trust shares, no par value, 500,000 authorized; 54,300 shares issued and outstanding at September 30, 2015 and December 31, 2014 | 825,321 |
| | 825,321 |
| |
Trust shares, no par value, 500,000 authorized; 54,300 shares issued and outstanding at March 31, 2016 and December 31, 2015 | | 823,736 |
| | 825,321 |
|
Accumulated other comprehensive loss | (6,973 | ) | | (2,542 | ) | (5,107 | ) | | (9,804 | ) |
Accumulated earnings (deficit) | 50,063 |
| | (55,348 | ) | |
Accumulated (deficit) earnings | | (25,004 | ) | | 10,567 |
|
Total stockholders’ equity attributable to Holdings | 868,411 |
| | 767,431 |
| 793,625 |
| | 826,084 |
|
Noncontrolling interest | 36,624 |
| | 25,711 |
| 47,931 |
| | 47,135 |
|
Noncontrolling interest of discontinued operations | — |
| | 15,192 |
| |
Total stockholders’ equity | 905,035 |
| | 808,334 |
| 841,556 |
| | 873,219 |
|
Total liabilities and stockholders’ equity | $ | 1,476,136 |
| | $ | 1,547,430 |
| $ | 1,392,239 |
| | $ | 1,421,042 |
|
See notes to condensed consolidated financial statements.
Compass Diversified Holdings
Condensed Consolidated Statements of Operations
(unaudited)
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2015 | | 2014 | | 2015 |
| 2014 | 2016 | | 2015 |
(in thousands, except per share data) | | | | | | | | | | |
Net sales | $ | 164,056 |
| | $ | 120,975 |
| | $ | 464,375 |
| | $ | 488,967 |
| $ | 169,761 |
| | $ | 144,296 |
|
Service revenues | 44,092 |
| | 20,318 |
| | 122,923 |
| | 20,318 |
| 38,286 |
| | 35,129 |
|
Total net revenues | 208,148 |
| | 141,293 |
| | 587,298 |
| | 509,285 |
| 208,047 |
| | 179,425 |
|
Cost of sales | 110,498 |
| | 81,133 |
| | 314,102 |
| | 330,928 |
| 112,235 |
| | 99,032 |
|
Cost of service revenues | 28,671 |
| | 14,120 |
| | 88,430 |
| | 14,120 |
| 29,551 |
| | 27,823 |
|
Gross profit | 68,979 |
| | 46,040 |
| | 184,766 |
| | 164,237 |
| 66,261 |
| | 52,570 |
|
Operating expenses: | | | | | | | | | | |
Selling, general and administrative expense | 38,975 |
| | 29,227 |
| | 105,946 |
| | 101,235 |
| 44,473 |
| | 33,026 |
|
Management fees | 6,461 |
| | 5,751 |
| | 19,860 |
| | 15,259 |
| 6,458 |
| | 6,733 |
|
Amortization expense | 7,731 |
| | 4,577 |
| | 22,777 |
| | 15,222 |
| 7,826 |
| | 7,822 |
|
Impairment expense | — |
| | — |
| | 9,165 |
| | — |
| — |
| | 8,907 |
|
Operating income | 15,812 |
| | 6,485 |
| | 27,018 |
| | 32,521 |
| |
Operating income (loss) | | 7,504 |
| | (3,918 | ) |
Other income (expense): | | | | | | | | | | |
Interest expense, net | (11,205 | ) | | (7,059 | ) | | (24,047 | ) | | (16,436 | ) | (11,462 | ) | | (9,717 | ) |
Amortization of debt issuance costs | (561 | ) | | (545 | ) | | (1,651 | ) | | (1,698 | ) | (570 | ) | | (545 | ) |
Loss on debt extinguishment | — |
| | — |
| | — |
| | (2,143 | ) | |
Gain on equity method investment | 11,784 |
| | — |
| | 9,518 |
| | — |
| |
Gain on deconsolidation of subsidiary | — |
| | 264,325 |
| | — |
| | 264,325 |
| |
Loss on equity method investment | | (10,623 | ) | | (13,447 | ) |
Other income, net | (950 | ) | | (425 | ) | | (983 | ) | | (177 | ) | 3,420 |
| | 10 |
|
Income from continuing operations before income taxes | 14,880 |
| | 262,781 |
| | 9,855 |
| | 276,392 |
| |
Loss from continuing operations before income taxes | | (11,731 | ) | | (27,617 | ) |
Provision for income taxes | 3,756 |
| | 3,676 |
| | 9,274 |
| | 8,485 |
| 3,296 |
| | 2,393 |
|
Income from continuing operations | 11,124 |
| | 259,105 |
| | 581 |
| | 267,907 |
| |
Loss from continuing operations | | (15,027 | ) | | (30,010 | ) |
Income from discontinued operations, net of income tax | 3,819 |
| | 3,425 |
| | 15,650 |
| | 14,315 |
| — |
| | 4,723 |
|
Gain on sale of discontinued operations, net of income tax | 165,337 |
| | — |
| | 165,337 |
| | — |
| |
Loss on classification as held for sale | (14,262 | ) | | — |
| | (14,262 | ) | | — |
| |
Net income | 166,018 |
| | 262,530 |
| | 167,306 |
| | 282,222 |
| |
Less: Net income attributable to noncontrolling interest | 1,428 |
| | 1,388 |
| | 2,622 |
| | 10,364 |
| |
Net loss | | (15,027 | ) | | (25,287 | ) |
Less: Net income (loss) attributable to noncontrolling interest | | 996 |
| | (526 | ) |
Less: Income from discontinued operations attributable to noncontrolling interest | 90 |
| | 44 |
| | 629 |
| | 382 |
| — |
| | 141 |
|
Net income attributable to Holdings | $ | 164,500 |
| | $ | 261,098 |
| | $ | 164,055 |
| | $ | 271,476 |
| |
Net loss attributable to Holdings | | $ | (16,023 | ) | | $ | (24,902 | ) |
Amounts attributable to Holdings | | | | | | | | | | |
Income (loss) from continuing operations | 9,696 |
| | 257,717 |
| | (2,041 | ) | | 257,543 |
| |
Loss from continuing operations | | (16,023 | ) | | (29,484 | ) |
Income from discontinued operations, net of income tax | 3,729 |
| | 3,381 |
| | 15,021 |
| | 13,933 |
| — |
| | 4,582 |
|
Gain on sale of discontinued operations, net of income tax | 151,075 |
| | — |
| | 151,075 |
| | — |
| |
Net income attributable to Holdings | $ | 164,500 |
| | $ | 261,098 |
| | $ | 164,055 |
| | $ | 271,476 |
| |
Net loss attributable to Holdings | | $ | (16,023 | ) | | $ | (24,902 | ) |
Basic and fully diluted income (loss) per share attributable to Holdings (refer to Note L) |
| |
|
| |
| |
|
| |
|
|
Continuing operations | $ | 0.16 |
| | $ | 5.08 |
| | $ | (0.09 | ) | | $ | 5.05 |
| $ | (0.31 | ) | | $ | (0.55 | ) |
Discontinued operations | 2.85 |
| | 0.07 |
| | 3.06 |
| | 0.29 |
| — |
| | 0.08 |
|
| $ | 3.01 |
| | $ | 5.15 |
| | $ | 2.97 |
| | $ | 5.34 |
| $ | (0.31 | ) | | $ | (0.47 | ) |
Weighted average number of shares of trust stock outstanding – basic and fully diluted | 54,300 |
| | 48,300 |
| | 54,300 |
| | 48,300 |
| 54,300 |
| | 54,300 |
|
Cash distributions declared per share (refer to Note L) | $ | 0.36 |
| | $ | 0.36 |
| | $ | 1.08 |
| | $ | 1.08 |
| $ | 0.36 |
| | $ | 0.36 |
|
See notes to condensed consolidated financial statements.
Compass Diversified Holdings
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
(in thousands) | | | | | | | | | | |
Net income | $ | 166,018 |
| | $ | 262,530 |
| | $ | 167,306 |
| | $ | 282,222 |
| |
Net loss | | $ | (15,027 | ) | | $ | (25,287 | ) |
Other comprehensive income (loss) | | | | | | | | | | |
Foreign currency translation adjustments | (5,145 | ) | | (921 | ) | | (4,772 | ) | | (783 | ) | 5,220 |
| | (90 | ) |
Pension benefit liability, net | 12 |
| | (21 | ) | | 341 |
| | (64 | ) | (523 | ) | | (60 | ) |
Other comprehensive income (loss) | | 4,697 |
| | (150 | ) |
Total comprehensive income, net of tax | $ | 160,885 |
| | $ | 261,588 |
| | $ | 162,875 |
| | $ | 281,375 |
| (10,330 | ) | | (25,437 | ) |
Less: Net income (loss) attributable to noncontrolling interests | | 996 |
| | (385 | ) |
Less: Other comprehensive income (loss) attributable to noncontrolling interests | | 1,226 |
| | (5 | ) |
Total comprehensive loss attributable to Holdings, net of tax | | $ | (12,552 | ) | | $ | (25,047 | ) |
See notes to condensed consolidated financial statements.
Compass Diversified Holdings
Condensed Consolidated Statement of Stockholders’ Equity
(unaudited)
| | | Trust Shares | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Number of Shares | | Amount | | Accumulated Earnings (Deficit) | | Accumulated Other Comprehensive Loss | | Stockholders' Equity Attributable to Holdings | | Non- Controlling Interest | | Non-Controlling Interest Attrib. to Disc. Ops. | | Total Stockholders’ Equity | Number of Shares | | Amount | | Accumulated Earnings (Deficit) | | Accumulated Other Comprehensive Loss | | Stockholders' Equity Attributable to Holdings | | Non- Controlling Interest | | Total Stockholders’ Equity |
Balance — January 1, 2015 | 54,300 |
| | $ | 825,321 |
| | $ | (55,348 | ) | | $ | (2,542 | ) | | $ | 767,431 |
| | $ | 25,711 |
| | $ | 15,192 |
| | $ | 808,334 |
| |
Balance — January 1, 2016 | | 54,300 |
| | $ | 825,321 |
| | $ | 10,567 |
| | $ | (9,804 | ) | | $ | 826,084 |
| | $ | 47,135 |
| | $ | 873,219 |
|
Net income (loss) | — |
| | — |
| | 164,055 |
| | — |
| | 164,055 |
| | 2,622 |
| | 629 |
| | 167,306 |
| — |
| | — |
| | (16,023 | ) | | — |
| | (16,023 | ) | | 996 |
| | (15,027 | ) |
Total comprehensive income, net | — |
| | — |
| | — |
| | (4,431 | ) | | (4,431 | ) | | — |
| | — |
| | (4,431 | ) | — |
| | — |
| | — |
| | 4,697 |
| | 4,697 |
| | — |
| | 4,697 |
|
Option activity attributable to noncontrolling shareholders | — |
| | — |
| | — |
| | — |
| | — |
| | 2,063 |
| | 564 |
| | 2,627 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 1,189 |
| | 1,189 |
|
Effect of subsidiary stock options exercise | — |
| | — |
| | — |
| | — |
| | — |
| | 500 |
| | — |
| | 500 |
| — |
| | (578 | ) | | — |
| | — |
| | (578 | ) | | 4,333 |
| | 3,755 |
|
Acquisition of Manitoba Harvest | — |
| | — |
| | — |
| | — |
| | — |
| | 5,728 |
| | — |
| | 5,728 |
| |
Disposition of CamelBak | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (16,101 | ) | | (16,101 | ) | |
Effect of classification of American Furniture as held for sale | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (284 | ) | | (284 | ) | |
Purchase of noncontrolling interest - Liberty (refer to Note N) | | — |
| | (1,007 | ) | | — |
| | — |
| | (1,007 | ) | | (469 | ) | | (1,476 | ) |
Distributions to noncontrolling shareholders - Liberty (refer to Note N) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5,253 | ) | | (5,253 | ) |
Distributions paid | — |
| | — |
| | (58,644 | ) | | — |
| | (58,644 | ) | | — |
| | — |
| | (58,644 | ) | — |
| | — |
| | (19,548 | ) | | — |
| | (19,548 | ) | | — |
| | (19,548 | ) |
Balance — September 30, 2015 | 54,300 |
| | $ | 825,321 |
| | $ | 50,063 |
| | $ | (6,973 | ) | | $ | 868,411 |
| | $ | 36,624 |
| | $ | — |
| | $ | 905,035 |
| |
Balance — March 31, 2016 | | 54,300 |
| | $ | 823,736 |
| | $ | (25,004 | ) | | $ | (5,107 | ) | | $ | 793,625 |
| | $ | 47,931 |
| | $ | 841,556 |
|
See notes to condensed consolidated financial statements.
Compass Diversified Holdings Condensed Consolidated Statements of Cash Flows (unaudited) | Compass Diversified Holdings Condensed Consolidated Statements of Cash Flows (unaudited) | Compass Diversified Holdings Condensed Consolidated Statements of Cash Flows (unaudited) |
| | Nine months ended September 30, | Three months ended March 31, |
(in thousands) | 2015 | | 2014 | 2016 | | 2015 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 167,306 |
| | $ | 282,222 |
| |
Net loss | | $ | (15,027 | ) | | $ | (25,287 | ) |
Income from discontinued operations | 15,650 |
| | 14,315 |
| — |
| | 4,723 |
|
Gain on sale of discontinued operations, net | 151,075 |
| | — |
| |
Net income from continuing operations | 581 |
| | 267,907 |
| |
Adjustments to reconcile net income to net cash provided by operating activities: |
| |
| |
Net loss from continuing operations | | (15,027 | ) | | (30,010 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | |
| |
|
Depreciation expense | 16,310 |
| | 10,308 |
| 5,859 |
| | 5,549 |
|
Amortization expense | 25,888 |
| | 15,222 |
| 9,049 |
| | 7,822 |
|
Impairment expense | 9,165 |
| | — |
| — |
| | 8,907 |
|
Amortization of debt issuance costs and original issue discount | 2,154 |
| | 2,412 |
| 738 |
| | 713 |
|
Loss on debt extinguishment | — |
| | 2,143 |
| |
Unrealized loss on interest rate swap | 8,044 |
| | 2,809 |
| 7,228 |
| | 4,314 |
|
Noncontrolling stockholder stock based compensation | 2,063 |
| | 2,883 |
| 1,189 |
| | 795 |
|
Loss on equity method investment | (9,518 | ) | | — |
| 10,623 |
| | 13,447 |
|
Net gain on deconsolidation of subsidiary | — |
| | (264,325 | ) | |
Excess tax benefit from subsidiary stock options exercised | — |
| | (1,662 | ) | |
Deferred taxes | (5,220 | ) | | (3,460 | ) | 214 |
| | (1,095 | ) |
Other | 287 |
| | 270 |
| (61 | ) | | 390 |
|
Changes in operating assets and liabilities, net of acquisition: |
| |
|
| |
|
Increase in accounts receivable | (276 | ) | | (11,348 | ) | |
(Increase) decrease in inventories | (10,772 | ) | | 10,289 |
| |
Decrease (increase)in prepaid expenses and other current assets | 1,345 |
| | (5,917 | ) | |
Decrease in accounts receivable | | 6,307 |
| | 10,159 |
|
Increase in inventories | | (1,170 | ) | | (1,769 | ) |
Decrease (increase) in prepaid expenses and other current assets | | (610 | ) | | 418 |
|
Decrease in accounts payable and accrued expenses | (7,902 | ) | | (7,382 | ) | (18,314 | ) | | (21,285 | ) |
Net cash provided by operating activities - continuing operations | 32,149 |
| | 20,149 |
| |
Net cash provided by (used in) operating activities - continuing operations | | 6,025 |
| | (1,645 | ) |
Net cash provided by operating activities - discontinued operations | 14,322 |
| | 26,011 |
| — |
| | 4,932 |
|
Cash provided by operating activities | 46,471 |
| | 46,160 |
| 6,025 |
| | 3,287 |
|
Cash flows from investing activities: | | | | | | |
Acquisitions, net of cash acquired | (98,816 | ) | | (292,223 | ) | (35,553 | ) | | — |
|
Purchases of property and equipment | (12,079 | ) | | (6,980 | ) | (4,406 | ) | | (3,657 | ) |
Net proceeds from sale of equity investment | | 47,685 |
| | — |
|
Payment of interest rate swap | (1,502 | ) | | (1,502 | ) | (500 | ) | | (495 | ) |
Proceeds from sale of business | 244,269 |
| | 517 |
| |
Proceeds from FOX stock offering | — |
| | 65,528 |
| |
Purchase of noncontrolling interest (refer to Note N) | | (1,476 | ) | | — |
|
Other investing activities | 256 |
| | (58 | ) | 97 |
| | 125 |
|
Net cash provided by (used in) investing activities - continuing operations | 132,128 |
| | (234,718 | ) | 5,847 |
| | (4,027 | ) |
Net cash provided by (used in) investing activities - discontinued operations | 114,466 |
| | (3,181 | ) | |
Net cash used in investing activities - discontinued operations | | — |
| | (1,133 | ) |
Cash provided by (used in) investing activities | 246,594 |
| | (237,899 | ) | 5,847 |
| | (5,160 | ) |
Compass Diversified Holdings Condensed Consolidated Statements of Cash Flows (unaudited) | Compass Diversified Holdings Condensed Consolidated Statements of Cash Flows (unaudited) | Compass Diversified Holdings Condensed Consolidated Statements of Cash Flows (unaudited) |
| | Nine months ended September 30, | Three months ended March 31, |
(in thousands) | 2015 | | 2014 | 2016 | | 2015 |
Cash flows from financing activities: | | | | | | |
Borrowings under credit facility | 197,000 |
| | 476,000 |
| — |
| | 35,500 |
|
Repayments under credit facility | (369,163 | ) | | (307,813 | ) | (813 | ) | | (17,038 | ) |
Distributions paid | (58,644 | ) | | (52,164 | ) | (19,548 | ) | | (19,548 | ) |
Net proceeds provided by noncontrolling shareholders | 6,228 |
| | 4,025 |
| |
Distributions paid to noncontrolling shareholders | — |
| | (11,870 | ) | |
Debt issuance costs | (295 | ) | | (7,370 | ) | |
Excess tax benefit from subsidiary stock options exercised | — |
| | 1,662 |
| |
Net proceeds provided by noncontrolling shareholders (refer to Note N) | | 3,755 |
| | — |
|
Distributions paid to noncontrolling shareholders (refer to Note N) | | (5,253 | ) | | — |
|
Other | (576 | ) | | (139 | ) | (282 | ) | | (227 | ) |
Net cash (used in) provided by financing activities | (225,450 | ) | | 102,331 |
| |
Net cash used in financing activities | | (22,141 | ) | | (1,313 | ) |
Foreign currency impact on cash | (2,593 | ) | | (552 | ) | (3,033 | ) | | (67 | ) |
Net increase (decrease) in cash and cash equivalents | 65,022 |
| | (89,960 | ) | |
Net decrease in cash and cash equivalents | | (13,302 | ) | | (3,253 | ) |
Cash and cash equivalents — beginning of period (1) | 23,703 |
| | 113,229 |
| 85,869 |
| | 23,703 |
|
Cash and cash equivalents — end of period (2) | $ | 88,725 |
| | $ | 23,269 |
| $ | 72,567 |
| | $ | 20,450 |
|
(1)Includes cash from discontinued operations of $1.8 million at January 1, 2015 and $2.6 million at January 1, 2014.2015.
(2)Includes cash from discontinued operations of $2.3$3.1 million at September 30, 2014.March 31, 2015.
See notes to condensed consolidated financial statements.
Compass Diversified Holdings
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2015March 31, 2016
Note A — Organization and Business Operations
Compass Diversified Holdings, a Delaware statutory trust (the "Trust" or "Holdings"), was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the "Company" or "CODI"), was also formed on November 18, 2005 with equity interests which were subsequently reclassified as the "Allocation Interests". The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. In accordance with the amended and restated Trust Agreement, dated as of April 25, 2006 (the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s amended and restated operating agreement, dated as of April 25, 2006 (as amended and restated, the "LLC Agreement")) of the Company and, pursuant to the LLC Agreement, the Company has, outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of eight businesses, or reportable operating segments, at September 30, 2015.March 31, 2016. The segments are as follows: The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Fresh Hemp Foods Ltd. ("Manitoba Harvest"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold" or "Arnold Magnetics"), Clean Earth Holdings, Inc. ("Clean Earth"), Candle Lamp Company, LLC ("SternoCandleLamp"Sterno Products") and Tridien Medical, Inc. ("Tridien"). Refer to Note E for further discussion of the operating segments. The Company also owns a non-controlling interest of approximately 41%33.1% in Fox Factory Holding Corp. ("FOX") which is accounted for as an equity method investment. Compass Group Management LLC, a Delaware limited liability company ("CGM" or the "Manager"), manages the day to day operations of the Company and oversees the management and operations of our businesses pursuant to a management services agreement ("MSA").
Note B — Presentation and Principles of Consolidation
The condensed consolidated financial statements for the three and nine month periods ended September 30,March 31, 2016 and March 31, 2015, and September 30, 2014, are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.2015.
Seasonality
Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Earnings from Clean Earth are typically lower in the winter months due to reduced levels of construction and development activity in the Northeastern United States. Sterno Products typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer season and the holiday season.
Consolidation
The condensed consolidated financial statements include the accounts of Holdings and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The results of operations of FOX are included in the Company's historical condensed consolidated results of operations through July 10, 2014, the date on which our investment in FOX fell below 50% and the FOX entity was deconsolidated.
Discontinued Operations
The Company completed the sale of its majority owned subsidiary, CamelBak Products, LLC ("CamelBak") during the third quarter of 2015. In October 2015, the Company sold its majority owned subsidiary, American Furniture Manufacturing, Inc. ("AFM" or "American Furniture") which met the criteria to be classified as a discontinued operation as of September 30, 2015. As a result, the Company reported the results of operations of CamelBak and American Furniture as discontinued operations in
the condensed consolidated statements of operations for all periods presented. In addition, the assets and liabilities associated with these businesses have been reclassified as discontinued operations in the condensed consolidated balance sheets.three months ended March 31, 2015. Refer to Note D for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.
Recently Adopted Accounting Pronouncements
In April 2014,November 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standard update to simplify the presentation of deferred taxes by requiring companies to classify all deferred tax assets and liabilities, along with any related to reporting discontinued operationsvaluation allowances, as noncurrent on the balance sheet. Adoption of this standard is required for annual periods beginning after December 15, 2016 and disclosuresearly adoption is permitted. The Company adopted this guidance early, effective as of disposals of components of an entityJanuary 1, 2016, on a prospective basis, which changesis permitted under the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Understandard. At January 1, 2016, the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or isCompany had $6.1 million classified as held for salecurrent deferred tax assets which was reclassified to long-term deferred tax assets, and "represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results." The new standard applies prospectively to new disposals and new classifications of disposal groupsno amount classified as held for sale after the effective date. The amendment was effective for the Company on January 1, 2015.
Recently Issued Accounting Pronouncements
current deferred tax liabilities.
In September 2015, the FASB issued an accounting standard to simplify the accounting for measurement period adjustments in connection with business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard update is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The standard update is to be applied prospectively to adjustments of provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. We do not expect theThe adoption of this standard todid not have ana significant impact on our condensed consolidated financial statements.
In July 2015, the FASB issued an accounting standard update intended to simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The new guidance applies only to inventory that is determined by methods other than last-in-first-out and the retail inventory method. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements. The guidance isamendment was effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of the guidance is permitted.Company on January 1, 2016.
In April 2015, the FASB issued an accounting standard update intended to simplify the presentation of debt issuance costs in the balance sheet. The new guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as an asset. In August 2015, the FASB issued additional guidance which addresses the Security and Exchange Commission's ("SEC") comments related to the absence of authoritative guidance within the accounting standard update related to line-of-credit arrangements. The Company is currently assessingSEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures.deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings under the line of credit arrangement. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Retrospective adoption is required. The Company adopted this guidance on January 1, 2016 and has reclassified debt issuance costs associated with the Company's term debt of $4.4 million and $4.6 million as of March 31, 2016 and December 31, 2015, respectively, from long-term assets to long-term debt. Deferred debt issuance costs incurred in connection with the Company's revolving credit facility of $4.5 million and $4.9 million at March 31, 2016 and December 31, 2015, respectively, continue to be classified as long-term assets.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued an accounting standard update related to the accounting for leases which will require an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The standard update offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires modified retrospective adoption, with early adoption permitted. Accordingly, thethis standard is effective for the Company on January 1, 2016.2019. The Company is currently assessing impact of the new standard on our consolidated financial statements.
In July 2015, the FASB issued an accounting standard update intended to simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The new guidance applies only to inventory that is determined by methods other than last-in-first-out and the retail inventory method. The Company does not believe that the adoption of this new accounting guidance will have a significant impact on its consolidated financial statements. The guidance is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of the guidance is permitted.
In May 2014, the FASB issued a comprehensive new revenue recognition standard. The new standard outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries, jurisdictions and capital markets and also requires enhanced disclosures. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual
reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
Note C — Acquisitions
Acquisition of Manitoba Harvest
On July 10, 2015, FHF Holdings Ltd., a majority owned subsidiary of the Company, and 1037269 B.C. Ltd., a wholly owned subsidiary of FHF Holdings Ltd. (together, the "Buyer"), closed on the acquisition of all the issued and outstanding capital stock of Fresh Hemp Foods Ltd. ("Manitoba Harvest") pursuant to a stock purchase agreement (the "Manitoba Harvest Purchase Agreement") among the Buyer, Manitoba Harvest, Mike Fata, as the Stockholders’ Representative and the Signing Stockholders (as such term is defined in the Manitoba Harvest Purchase Agreement), entered into previously on June 5, 2015.. Subsequent to the closing, 1037269 B.C. Ltd. merged with and into Manitoba Harvest.
Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and global leader in branded, hemp-based foods. Manitoba Harvest’s products are currently carried in approximately 7,000 retail stores across the U.S. and Canada.The Company’s hemp-exclusive, 100% all-natural product lineup includes hemp hearts, hemp oil and protein powder.
The Company made loans to and purchased an 87% controlling interest in Manitoba Harvest. The purchase price, including proceeds from noncontrolling interest, was approximately $101.4$102.7 million (C$128.6130.3 million). The Company funded its portion of the acquisition price through drawings on its 2014 Revolving Credit Facility. Manitoba Harvest management and a minority shareholder invested in the transaction along with the Company representing approximately 13% initial noncontrolling interest on a primary basis. The fair value of the noncontrolling interest was determined based on enterprise value of the acquired entity multiplied by the ratio number of shares acquired by the minority shareholders to total shares, less a discount applied to account for the lack of marketability of the minority holders' shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership of Manitoba Harvest. CGM will receive integration services fees of $1.0 million which is payable quarterly during the twelve month period subsequent to acquisition as services are rendered.
The results of operations of Manitoba Harvest have been included in the consolidated results of operations since the date of acquisition. Manitoba Harvest's results of operations are reported as a separate operating segment. The estimated fair value of the assets acquired and liabilities assumed presented in the table below are provisional and are based on the information that was available as of the acquisition date. The amounts recorded for property, plant and equipment, intangible assets, goodwill and deferred tax liabilities are preliminary pending finalization of our valuation efforts. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date.
|
| | | | |
Manitoba Harvest | | |
(in thousands) | | |
Assets: | | |
Cash | | $ | 164 |
|
Accounts receivable | | 3,787 |
|
Inventory (1) | | 8,743 |
|
Property, plant and equipment | | 8,203 |
|
Goodwill | | 37,882 |
|
Intangible assets | | 63,687 |
|
Other current and noncurrent assets | | 986 |
|
Total assets | | $ | 123,452 |
|
| | |
Liabilities and noncontrolling interest: | | |
Current liabilities | | $ | 3,267 |
|
Deferred tax liabilities | | 16,593 |
|
Other liabilities | | 23,332 |
|
Noncontrolling interest | | 7,638 |
|
Total liabilities and noncontrolling interest | | $ | 50,830 |
|
| | |
Net assets acquired | | $ | 72,622 |
|
Noncontrolling interest | | 7,638 |
|
Intercompany loans to business | | 23,593 |
|
| | $ | 103,853 |
|
|
| | | | |
Manitoba Harvest | | |
(in thousands) | | |
Assets: | | |
Cash | | $ | 164 |
|
Accounts receivable | | 3,787 |
|
Inventory (1) | | 8,743 |
|
Property, plant and equipment | | 8,203 |
|
Goodwill | | 32,568 |
|
Intangible assets | | 63,765 |
|
Other current and noncurrent assets | | 1,131 |
|
Total assets | | $ | 118,361 |
|
| | |
Liabilities and noncontrolling interest: | | |
Current liabilities | | $ | 2,386 |
|
Deferred tax liabilities | | 13,822 |
|
Other liabilities | | 24,120 |
|
Noncontrolling interest | | 5,728 |
|
Total liabilities and noncontrolling interest | | $ | 46,056 |
|
| | |
| | Net assets acquired | | $ | 72,305 |
| |
Noncontrolling interest | | 5,728 |
| |
Intercompany loans to business | | 24,494 |
| |
| | $ | 102,527 |
| | | | |
Acquisition Consideration | | | | |
Purchase price | | $ | 102,527 |
| | $ | 104,437 |
|
Working capital adjustment | | — |
| | (584 | ) |
Total purchase consideration | | $ | 102,527 |
| | $ | 103,853 |
|
Less: Transaction costs | | 1,145 |
| | 1,145 |
|
Purchase price, net | | $ | 101,382 |
| | $ | 102,708 |
|
(1) Includes $3.1 million of step-up in the basis of inventory.
The Company incurred $1.1 million of transaction costs in conjunction with the acquisition of Manitoba Harvest during the three and nine months ended September 30, 2015 which arewere included in selling, general and administrative expenses in the consolidated statements of income.income during the year ended December 31, 2015. The goodwill of $32.6$37.9 million, which is not expected to be deductible for tax purposes, reflects the strategic fit of Manitoba Harvest into the Company's branded products businesses.
The values assigned to the identified intangible assets were determined by discounting estimated future cash flows associated with these assets to their present value. The intangible assets recorded in connection with the Manitoba Harvest acquisition are as follows (in thousands):
|
| | | | | | |
Intangible assets | | Amount | | Estimated Useful Life |
Tradename (unamortizable) | | $ | 13,636 |
| | N/a |
Technology and processes | | 9,616 |
| | 10 years |
Customer relationships | | 40,513 |
| | 15 years |
| | $ | 63,765 |
| | |
Acquisition of Clean Earth Holdings, Inc.
On August 26, 2014, CEHI Acquisition Corp., a subsidiary of the Company, closed on the acquisition of all the issued and outstanding capital stock of Clean Earth Holdings, Inc. pursuant to a stock purchase agreement among CEHI Acquisition Corp., Clean Earth, holders of stock and options in Clean Earth and Littlejohn Fund III, L.P., entered into on August 7, 2014.
Headquartered in Hatboro, Pennsylvania, Clean Earth provides environmental services for a variety of contaminated materials including soils, dredged material, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as power, construction, oil and gas, infrastructure, industrial and dredging. Treatment includes thermal desorption, dredged material stabilization, bioremediation, physical treatment/screening and chemical fixation. Before the company accepts contaminated materials, it identifies a third party "beneficial reuse" site such as commercial redevelopment or landfill capping where the materials will be sent after they are treated. Clean Earth holds the largest market share in the contaminated materials and dredged material management market and operates 14 permitted facilities in the Eastern U.S. Revenues from the environmental recycling facilities are generally recognized at the time of treatment.
The Company made loans to and purchased a 98% controlling interest in Clean Earth. The purchase price, including proceeds from noncontrolling interest, was approximately $251.4 million. The Company funded its portion of the acquisition through drawings on its 2014 Revolving Credit Facility and cash on hand. Clean Earth management invested in the transaction along with the Company representing an approximate 2% initial noncontrolling interest on a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year
of the Company's ownership of Clean Earth. CGM received integration service fees of approximately $2.5 million which was payable quarterly during a twelve month period as services were rendered beginning in the quarter ended December 31, 2014.
The results of operations of Clean Earth have been included in the consolidated results of operations since the date of acquisition. Clean Earth's results of operations are reported as a separate operating segment. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date.
|
| | | | |
Clean Earth | | |
(in thousands) | | |
Amounts recognized as of the acquisition date | | |
Assets: | | |
Cash | | $ | 3,683 |
|
Accounts receivable (1) | | 41,821 |
|
Property, plant and equipment (2) | | 43,437 |
|
Intangible assets | | 135,939 |
|
Goodwill | | 109,738 |
|
Other current and noncurrent assets | | 8,697 |
|
Total assets | | $ | 343,315 |
|
| |
|
Liabilities and noncontrolling interest: | |
|
Current liabilities | | $ | 27,205 |
|
Other liabilities | | 149,760 |
|
Deferred tax liabilities | | 61,299 |
|
Noncontrolling interest | | 2,275 |
|
Total liabilities and noncontrolling interest | | $ | 240,539 |
|
| |
|
Net assets acquired | | $ | 102,776 |
|
Noncontrolling interest | | 2,275 |
|
Intercompany loans to business | | 148,248 |
|
| | $ | 253,299 |
|
Acquisition Consideration | | |
| | |
Purchase price | | $ | 243,000 |
|
Working capital adjustment | | 6,616 |
|
Cash | | 3,683 |
|
Total purchase consideration | | $ | 253,299 |
|
Less: Transaction costs | | 1,935 |
|
Purchase price, net | | $ | 251,364 |
|
| |
(1)
| Includes $42.5 million of gross contractual accounts receivable of which $0.6 million was not expected to be collected. The fair value of accounts receivable approximated book value acquired. |
| |
(2)
| Includes $20.9 million of property, plant and equipment basis step-up. |
The Company incurred $1.9 million of transaction costs in conjunction with the Clean Earth acquisition during the year ended December 31, 2014 which was included in selling, general and administrative expense in the consolidated statements of income in 2014. The goodwill of $109.7 million reflects the strategic fit of Clean Earth into the Company's niche industrial businesses. The goodwill is not expected to be deductible for tax purposes.
The values assigned to the identified intangible assets were determined by discounting the estimated future cash flows associated with these assets to their present value. The intangible assets recorded in connection with the Clean Earth acquisition are as follows (in thousands):
|
| | | | | | |
Intangible assets | | Amount | | Estimated Useful Life |
Customer relationships | | $ | 25,730 |
| | 15 years |
Permits and Airspace | | 93,209 |
| | 10 - 20 years |
Trade name | | 17,000 |
| | 20 years |
| | $ | 135,939 |
| | |
Acquisition of SternoCandleLamp
On October 10, 2014, the Company, through its wholly owned subsidiary business, Sternocandlelamp Holdings, Inc., entered into a membership interest purchase agreement (the "Sterno Purchase Agreement") with Candle Lamp Holdings, LLC (the "Seller"), and Candle Lamp Company, LLC ("SternoCandleLamp") pursuant to which the Sternocandlelamp Holdings, Inc. acquired all of the issued and outstanding equity of SternoCandleLamp (the "Acquisition"). Headquartered in Corona, California, SternoCandleLamp is the leading manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry. SternoCandleLamp’s product line includes wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps. The purchase price was approximately $160.0 million. In addition to its equity investment in SternoCandleLamp, the Company provided loans totaling approximately $91.6 million to SternoCandleLamp as part of the transaction. The transaction is accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership of SternoCandleLamp. CGM received integration service fees of $1.5 million which was payable quarterly over a twelve month period as services were rendered beginning in the quarter ending December 31, 2014.
The results of operations of SternoCandleLamp have been included in the consolidated results of operations since the date of acquisition. SternoCandleLamp's results of operations are reported as a separate operating segment. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date.
|
| | | | |
SternoCandleLamp | | |
(in thousands) | | |
Assets: | | |
Accounts receivable (1) | | $ | 18,534 |
|
Inventory (2) | | 19,932 |
|
Property, plant and equipment (3) | | 18,004 |
|
Intangible assets | | 90,950 |
|
Goodwill | | 33,717 |
|
Other current and non-current assets | | 1,734 |
|
Total assets | | $ | 182,871 |
|
Liabilities: | | |
Current liabilities | | 20,120 |
|
Other liabilities | | 91,647 |
|
Total liabilities | | $ | 111,767 |
|
| | |
Net assets acquired | | 71,104 |
|
Intercompany loans to business | | 91,647 |
|
| | $ | 162,751 |
|
|
| | | | |
Acquisition Consideration | | |
Purchase price | | $ | 161,500 |
|
Working capital adjustment | | 1,251 |
|
Total purchase consideration | | $ | 162,751 |
|
Less: Transaction costs | | 2,765 |
|
Purchase price, net | | $ | 159,986 |
|
| |
(1)
| Includes $18.8 million of gross contractual accounts receivable of which $0.2 million was not expected to be collected. The fair value of accounts receivable approximates book value acquired. |
| |
(2)
| Includes $2.0 million in inventory basis step-up, which was charged to cost of goods sold during the year ended December 31, 2014.
|
| |
(3)
| Includes $6.9 million of property, plant and equipment basis step-up.
|
The Company incurred $2.8 million of transaction costs in conjunction with the SternoCandleLamp acquisition during the year ended December 31, 2014, which was included in selling, general and administrative expense in the consolidated statements of income during that period. The goodwill of $33.7 million reflects strategic fit of SternoCandleLamp into the Company's niche industrial businesses. The goodwill is expected to be deductible for tax purposes.
The values assigned to the identified intangible assets were determined by discounting the estimated future cash flows associated with these assets to their present value. The intangible assets recorded in connection with the SternoCandleLamp acquisition are as follows (in thousands):
| | Intangible assets | | Amount | | Estimated Useful Life | | Amount | | Estimated Useful Life |
Tradename (unamortizable) | | | $ | 13,005 |
| | N/a |
Technology and processes | | | 9,616 |
| | 10 years |
Customer relationships | | $ | 60,140 |
| | 10 years | | 41,066 |
| | 15 years |
Trade name | | 30,810 |
| | Indefinite | |
| | $ | 90,950 |
| | | $ | 63,687 |
| |
Unaudited pro forma information
The following unaudited pro forma data for the ninethree months ended September 30,March 31, 2015 and September 30, 2014 gives effect to the acquisition of Clean Earth, SternoCandleLamp, and Manitoba Harvest, as described above, as if the acquisition had been completed as of January 1, 2014,2015, and the sale of CamelBak and AFM as if the dispositions had been completed on January 1, 2014. The unaudited pro forma data for the three and nine months ended September 30, 2015 gives effect to the acquisition of Manitoba Harvest as if the acquisition had been completed as of January 1, 2014.2015. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period.
|
| | | | | | | | |
(in thousands) | | Nine months ended September 30, |
| | 2015 | | 2014 |
Net sales | | $ | 610,511 |
| | $ | 731,463 |
|
Operating income | | 28,686 |
| | 38,023 |
|
Net income | | 381 |
| | 258,932 |
|
Net income attributable to Holdings | | (2,719 | ) | | 248,056 |
|
Basic and fully diluted net income per share attributable to Holdings | | $ | (0.10 | ) | | $ | 4.85 |
|
|
| | | | |
(in thousands) | | Three months ended March 31, 2015 |
Net sales | | $ | 190,055 |
|
Operating loss | | (3,870 | ) |
Net loss | | (30,643 | ) |
Net loss attributable to Holdings | | (30,152 | ) |
Basic and fully diluted net loss per share attributable to Holdings | | $ | (0.57 | ) |
Other acquisitions
Clean EarthSterno Products
On January 22, 2016, Sterno Products, a wholly owned subsidiary of the company, acquired all of the outstanding stock of Northern International, Inc. (NII), for a total purchase price of approximately $35.8 million (C$50.6 million), plus a potential earn-out opportunity payable over the next two years up to a maximum amount of $1.8 million (C$2.5 million), and is subject to working
capital adjustments. The contingent consideration was fair valued on a preliminary basis at $1.5 million, based on probability weighted models of the achievement of certain performance based financial targets. Refer to Note K - "Fair Value Measurements." for a description of the valuation technique used to fair value the contingent consideration. Headquartered in Coquitlam, British Columbia, Canada, NII sells flameless candles and outdoor lighting products through the retail segment. Sterno Products financed the acquisition and payment of the related transaction costs through the issuance of an additional $37.0 million in inter-company loans with the Company.
In connection with the acquisition, Sterno recorded a preliminary purchase price allocation of $11.6 million of goodwill, which is not expected to be deductible for income tax purposes, $8.8 in intangible assets and $1.2 million in inventory step-up. In addition, the earn-out provision of the purchase price was allocated a fair value of $1.5 million. The remainder of the purchase consideration was allocated to net assets acquired less net liabilities assumed. Sterno Products incurred $0.4 million in acquisition related costs in connection with the NII acquisition. The Company expects to finalize the purchase price allocation for NII during 2016 within the measurement period.
Manitoba Harvest
On December 15, 2014,2015, the Company's Clean EarthManitoba Harvest subsidiary completed the acquisition of American Environmental Services,Hemp Oil Canada, Inc. ("AES")(HOCI), for a purchase price of approximately $16.1$30.8 million after(C$42.0 million). HOCI is a bulk wholesale producer, private label packager and custom processor of hemp food product ingredients, located in Ste. Agathe, Manitoba. Manitoba Harvest incurred $0.4 million (C$0.5 million) of acquisition related costs for the settlementHOCI acquisition which are recorded in selling, general and administrative expenses in the consolidated results of operation for the year ending December 31, 2015. The purchase price is subject to standard working capital adjustment related toadjustments. In connection with the acquisition of $0.5HOCI, certain of the selling shareholders of HOCI invested $6.8 million during(C$9.3 million) in Manitoba Harvest in exchange for approximately 11% noncontrolling interest in Manitoba Harvest. The Company has not completed the second quarterpreliminary allocation of 2015. AES provides environmental services, managing hazardous and nonhazardous waste from off-site generators. AES has two fully permitted hazardous waste facilities located in Calvert City, Kentucky and Morgantown, West Virginia, serving industrial and government customers across the region. The acquisition expands Clean Earth's customer base and geographic market penetration. The purchase price and has recorded the excess of AES was allocated tothe purchase price over the assets acquired and liabilities assumed based onas goodwill at March 31, 2016. The Company expects to finalize the estimated fair value as of December 15, 2014, with the excess purchase price allocated to goodwill.allocation for HOCI during 2016 within the measurement period.
Note D - Discontinued operations
Sale of CamelBak
On August 3, 2015, the Company sold its majority owned subsidiary, CamelBak, based on a total enterprise value of $412.5 million. The CamelBak purchase agreement contains customary representations, warranties, covenants and indemnification provisions, and the transaction is subject to customary working capital adjustments.
The Company received approximately $367.8 million in cash related to its debt and equity interests in CamelBak after payments to noncontrolling shareholders and payment of all transaction expenses. The Company recognized a gain of $165.3$164.0 million, for the three and nine months ended September 30,net of tax, during 2015 as a result of the sale of CamelBak.
Summarized operating results for the three and nine months ended September 30, 2015 and 2014 through the date of disposition are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
(in thousands) | | For the period July 1, 2015 through disposition | | Three months ended September 30, 2014 | | For the period Jan. 1, 2015 through disposition | | Nine months ended September 30, 2014 |
Net sales | | $ | 17,023 |
| | $ | 33,496 |
| | $ | 96,519 |
| | $ | 113,145 |
|
Gross profit | | 7,282 |
| | 13,732 |
| | 41,415 |
| | 48,016 |
|
Operating income | | 2,713 |
| | 2,833 |
| | 14,348 |
| | 14,517 |
|
Income from continuing operations before income taxes | | 4,315 |
| | 3,275 |
| | 16,607 |
| | 14,995 |
|
Provision for income taxes | | 1,355 |
| | 251 |
| | 5,010 |
| | 3,218 |
|
Income from discontinued operations (1) | | $ | 2,960 |
| | $ | 3,024 |
| | $ | 11,597 |
| | $ | 11,777 |
|
(1) The results for the periods from July 1, 2015 through disposition and January 1, 2015 through disposition, and the three and nine months ended September 30, 2014, exclude $0.6 million, $3.9 million, $2.6 million and $8.0 million, respectively, of intercompany interest expense.
Sale of AFM
On October 5, 2015, the Company sold its majority owned subsidiary, American Furniture, for a sale price of $24.1 million. The Company received approximately $23.5 million in net proceeds related to its debt and equity interests in American Furniture after payment of all transaction expenses. The sale of American Furniture met the criteria for the assets to be classified as held for sale as of September 30, 2015, and American Furniture is presented as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented. The Company recognized a loss on the sale of American Furniture of $14.3 million. This loss was recognizedmillion during the quarter ended September 30, 2015 based on the initial write-down of American Furniture's carrying amounts to fair value. The fair value of the assets and liabilities of American Furniture have been classified as current at September 30, 2015.
Summarized operating results of discontinued operations for the three and nine months ended September 30, 2015 and 2014 through the date of classification as held for sale at September 30,March 31, 2015 are as follows (in thousands):follows:
| | | | | | | | | | | | | Three months ended March 31, 2015 |
(in thousands) | | Three months ended September 30, 2015 | | Three months ended September 30, 2014 | | Nine months ended September 30, 2015 | | Nine months ended September 30, 2014 | | CamelBak | | American Furniture | | Total discontinued operations |
Net sales | | $ | 39,068 |
| | $ | 28,351 |
| | $ | 122,420 |
| | $ | 95,842 |
| | $ | 36,922 |
| | $ | 40,925 |
| | $ | 77,847 |
|
Gross profit | | 3,656 |
| | 2,278 |
| | 11,613 |
| | 8,691 |
| | 15,232 |
| | 4,115 |
| | 19,347 |
|
Operating income | | 901 |
| | 401 |
| | 4,126 |
| | 2,538 |
| | 4,351 |
| | 1,676 |
| | 6,027 |
|
Income from continuing operations before income taxes | | 902 |
| | 401 |
| | 4,134 |
| | 2,538 |
| | 4,029 |
| | 1,681 |
| | 5,710 |
|
Provision for income taxes | | 43 |
| | — |
| | 81 |
| | — |
| | 987 |
| | — |
| | 987 |
|
Income from discontinued operations (1) | | $ | 859 |
| | $ | 401 |
| | $ | 4,053 |
| | $ | 2,538 |
| | $ | 3,042 |
| | $ | 1,681 |
| | $ | 4,723 |
|
(1) The results for the three and nine months ended September 30,March 31, 2015 and the three and nine months ended September 30, 2014, exclude $0.5$2.2 million $1.5 million, $0.6 million and $1.7 million, respectively, of intercompany interest expense.
The following table presents summary balance sheet information of the CamelBak and American Furniture businesses held for sale as of September 30, 2015 and December 31, 2014 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | | September 30, 2015 |
| | December 31, 2014 |
| | | American Furniture | | CamelBak | | American Furniture | | Total |
Assets: | | | | | | | | |
| Cash | | $ | 1,879 |
| | $ | 975 |
| | $ | 781 |
| | $ | 1,756 |
|
| Accounts receivable, net | | 17,666 |
| | 22,492 |
| | 16,191 |
| | 38,683 |
|
| Inventories | | 26,552 |
| | 27,511 |
| | 25,395 |
| | 52,906 |
|
| Prepaid expenses and other current assets | | — |
| | 4,627 |
| | 364 |
| | 4,991 |
|
| Current assets held for sale | | $ | 46,097 |
| | $ | 55,605 |
| | $ | 42,731 |
| | $ | 98,336 |
|
| Property, plant and equipment, net | | — |
| | 7,987 |
| | 903 |
| | 8,890 |
|
| Goodwill | | — |
| | 5,546 |
| | — |
| | 5,546 |
|
| Intangible assets, net | | — |
| | 162,761 |
| | 368 |
| | 163,129 |
|
| Other non-current assets | | — |
| | 2,262 |
| | — |
| | 2,262 |
|
| Noncurrent assets held for sale | | $ | — |
| | $ | 178,556 |
| | $ | 1,271 |
| | $ | 179,827 |
|
Liabilities: | | | | | | | |
|
| Accounts payable | | 19,976 |
| | 6,431 |
| | 6,468 |
| | 12,899 |
|
| Accrued expenses and other current liabilities | | 2,420 |
| | 9,834 |
| | 1,640 |
| | 11,474 |
|
| Current liabilities held for sale | | $ | 22,396 |
| | $ | 16,265 |
| | $ | 8,108 |
| | $ | 24,373 |
|
| Deferred income taxes | | — |
| | 6,115 |
| | — |
| | 6,115 |
|
| Other noncurrent liabilities | | — |
| | 548 |
| | — |
| | 548 |
|
| Noncurrent liabilities held for sale | | $ | — |
| | $ | 6,663 |
| | $ | — |
| | $ | 6,663 |
|
Noncontrolling interest of discontinued operations | | $ | 284 |
| | $ | 14,932 |
| | $ | 260 |
| | $ | 15,192 |
|
Note E — Operating Segment Data
At September 30, 2015,March 31, 2016, the Company had eight reportable operating segments. Each operating segment represents a platform acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:
Ergobaby is a premier designer, marketer and distributor of wearable baby carriers and related baby wearing products, as well as infant travel systems (strollers, car seats and accessories). Ergobaby offers a broad range of wearable baby carriers, infant travel systems and related products that are sold through more than 450 retailers and web shops in the United States and throughout the world. Ergobaby has two main product lines: baby carriers (baby carriers and accessories) and infant travel systems (strollers, car seats and accessories). Ergobaby is headquartered in Los Angeles, California.
Liberty Safe is a designer, manufacturer and marketer of premium home, gun and gunoffice safes in North America. From it’s over 314,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.
Manitoba Harvest is a pioneer and leader in the manufacture and distribution of branded, hemp-based foods. Manitoba Harvest’s products, which include Hemp Hearts™, Hemp Heart Bites™, Hemp Heart Bars™, and Hemp protein powders, are currently carried in over 7,000 retail stores across the U.S. and Canada. Manitoba Harvest is headquartered in Winnipeg, Manitoba.
Advanced Circuits, an electronic components manufacturing company, is a provider of small-run, quick-turn and volume production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers primarily in North America. ACI is headquartered in Aurora, Colorado.
Arnold Magnetics is a leading global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including energy, medical, aerospace and defense, consumer electronics, general industrial and automotive. Arnold Magnetics produces high performance permanent magnets (PMAG), flexible magnets (FlexMag) and precision foil products (Precision Thin Metals) that are mission critical in motors, generators, sensors and other systems and components.
Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide. Arnold Magnetics is headquartered in Rochester, New York.
Clean Earth provides environmental services for a variety of contaminated materials including soils, dredged material, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as power, construction, oil and gas, infrastructure, industrial and dredging. Clean Earth is headquartered in Hatboro, Pennsylvania and operates 14 facilities in the eastern United States.
SternoCandleLampSterno Products is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry. SternoCandleLamp'sSterno Products's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps. SternoCandleLampSterno Products is headquartered in Corona, California.
Tridien is a leading designer and manufacturer of powered and non-powered medical therapeutic support surfaces and patient positioning devices serving the acute care, long-term care and home health care markets. Tridien is headquartered in Coral Springs, Florida and its products are sold primarily in North America.
The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The results of operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. FOX was an operating segment of the Company until July 10, 2014, when FOX was deconsolidated and became an equity method investment. The results of operations of FOX are included in the disaggregated and other financial data presented for the three and nine months ended September 30, 2014.
Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business. Segment profit excludes certain charges from the acquisitions of the Company’s initial businesses not pushed down to the segments which are reflected in the Corporate and other line item. There were no significant inter-segment transactions.
A disaggregation of the Company’s consolidated revenue and other financial data for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 is presented below (in thousands):
| | Net sales of operating segments | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
| 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 |
Ergobaby | $ | 21,944 |
| | $ | 22,429 |
| | $ | 64,104 |
| | $ | 61,468 |
| | $ | 19,415 |
| | $ | 20,668 |
|
FOX | — |
| | 7,514 |
| | — |
| | 149,995 |
| |
Liberty | 23,404 |
| | 19,916 |
| | 74,013 |
| | 67,768 |
| | 29,000 |
| | 25,854 |
|
Manitoba Harvest | 8,856 |
| | — |
| | 8,856 |
| | — |
| | 13,717 |
| | — |
|
ACI | 22,234 |
| | 22,027 |
| | 66,734 |
| | 64,175 |
| | 21,517 |
| | 21,418 |
|
Arnold Magnetics | 32,590 |
| | 31,456 |
| | 93,138 |
| | 94,902 |
| | 27,383 |
| | 31,188 |
|
Clean Earth | 44,092 |
| | 20,318 |
| | 122,923 |
| | 20,318 |
| | 38,286 |
| | 35,129 |
|
SternoCandleLamp | 31,710 |
| | — |
| | 98,680 |
| | — |
| |
Sterno Products | | | 43,969 |
| | 28,604 |
|
Tridien | 23,318 |
| | 17,633 |
| | 58,850 |
| | 50,659 |
| | 14,760 |
| | 16,564 |
|
Total | 208,148 |
| | 141,293 |
| | 587,298 |
| | 509,285 |
| | 208,047 |
| | 179,425 |
|
Reconciliation of segment revenues to consolidated revenues: |
| |
| |
| |
| |
| |
|
Corporate and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total consolidated revenues | $ | 208,148 |
| | $ | 141,293 |
| | $ | 587,298 |
| | $ | 509,285 |
| | $ | 208,047 |
| | $ | 179,425 |
|
|
| | | | | | | | | | | | | | | |
International Revenues | Three months ended September 30, | | Nine months ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Ergobaby | $ | 12,829 |
| | $ | 13,319 |
| | $ | 36,059 |
| | $ | 35,013 |
|
FOX | — |
| | — |
| | — |
| | 79,306 |
|
Manitoba Harvest | 5,206 |
| | — |
| | 5,206 |
| | — |
|
Arnold Magnetics | 10,798 |
| | 14,415 |
| | 33,812 |
| | 44,003 |
|
| $ | 28,833 |
| | $ | 27,734 |
| | $ | 75,077 |
| | $ | 158,322 |
|
| | Profit (loss) of operating segments (1) | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
| 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 |
Ergobaby | $ | 5,717 |
| | $ | 4,881 |
| | $ | 16,764 |
| | $ | 13,439 |
| | $ | 4,090 |
| | $ | 5,406 |
|
FOX | — |
| | 811 |
| | — |
| | 17,294 |
| |
Liberty | 3,545 |
| | (1,692 | ) | | 7,713 |
| | (2,229 | ) | | 4,841 |
| | 1,404 |
|
Manitoba Harvest | (3,955 | ) | | — |
| | (3,955 | ) | | — |
| | 363 |
| | — |
|
ACI | 6,295 |
| | 5,826 |
| | 18,782 |
| | 16,407 |
| | 5,832 |
| | 5,721 |
|
Arnold Magnetics | 3,058 |
| | 2,146 |
| | 6,532 |
| | 6,206 |
| | 626 |
| | 1,754 |
|
Clean Earth | 4,893 |
| | 1,029 |
| | 4,933 |
| | 1,029 |
| | (958 | ) | | (1,554 | ) |
SternoCandleLamp | 2,707 |
| | — |
| | 8,286 |
| | — |
| |
Sterno Products | | | 2,412 |
| | 1,656 |
|
Tridien | 1,183 |
| | 574 |
| | (6,504 | ) | | 1,732 |
| | (577 | ) | | (8,692 | ) |
Total | 23,443 |
| | 13,575 |
| | 52,551 |
| | 53,878 |
| | 16,629 |
| | 5,695 |
|
Reconciliation of segment profit to consolidated income (loss) before income taxes: |
| |
| |
| |
| |
| |
|
Interest expense, net | (11,205 | ) | | (7,059 | ) | | (24,047 | ) | | (16,436 | ) | | (11,462 | ) | | (9,717 | ) |
Other income, net | (950 | ) | | (425 | ) | | (983 | ) | | (177 | ) | | 3,420 |
| | 10 |
|
Gain (loss) on equity method investment | 11,784 |
| | — |
| | 9,518 |
| | — |
| |
Loss on equity method investment | | | (10,623 | ) | | (13,447 | ) |
Corporate and other (2) | (8,192 | ) | | 256,690 |
| | (27,184 | ) | | 239,127 |
| | (9,695 | ) | | (10,158 | ) |
Total consolidated income before income taxes | $ | 14,880 |
| | $ | 262,781 |
| | $ | 9,855 |
| | $ | 276,392 |
| |
Total consolidated loss before income taxes | | | $ | (11,731 | ) | | $ | (27,617 | ) |
| |
(1) | Segment profit (loss) represents operating income (loss). |
| |
(2) | Primarily relates to management fees expensed and payable to CGM, and corporate overhead expenses during 2015 and 2014, and the gain on deconsolidation of FOX in 2014.expenses. |
|
| | | | | | | |
Accounts receivable | September 30, 2015 | | December 31, 2014 |
Ergobaby | $ | 10,456 |
| | $ | 9,671 |
|
Liberty | 13,340 |
| | 11,376 |
|
Manitoba Harvest | 5,546 |
| | — |
|
ACI | 6,804 |
| | 5,730 |
|
Arnold Magnetics | 20,891 |
| | 15,664 |
|
Clean Earth | 41,855 |
| | 52,059 |
|
SternoCandleLamp | 16,959 |
| | 21,113 |
|
Tridien | 12,146 |
| | 7,135 |
|
Total | 127,997 |
| | 122,748 |
|
Reconciliation of segment to consolidated totals: |
| |
|
Corporate and other | — |
| | — |
|
Total | 127,997 |
| | 122,748 |
|
Allowance for doubtful accounts | (3,757 | ) | | (3,896 | ) |
Total consolidated net accounts receivable | $ | 124,240 |
| | $ | 118,852 |
|
| | | Goodwill | | Identifiable Assets | | Depreciation and Amortization Expense | Accounts Receivable | | Identifiable Assets | | Depreciation and Amortization Expense |
| Sept. 30, | | December 31, | | Sept. 30, | | December 31, | | Three months ended September 30, | | Nine months ended September 30, | March 31, | | December 31, | | March 31, | | December 31, | | Three months ended March 31, |
| 2015 | | 2014 | | 2015 (1) | | 2014 (1) | | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 | | 2016 (1) | | 2015 (1) | | 2016 | | 2015 |
Goodwill and identifiable assets of operating segments | | | | | | | | | | | | | | | | |
Ergobaby | $ | 41,664 |
| | $ | 41,664 |
| | $ | 62,277 |
| | $ | 65,309 |
| | $ | 876 |
| | $ | 950 |
| | $ | 2,596 |
| | $ | 2,867 |
| $ | 11,130 |
| | $ | 8,076 |
| | $ | 59,417 |
| | $ | 62,436 |
| | $ | 835 |
| | $ | 850 |
|
FOX | — |
| | — |
| | — |
| | — |
| | — |
| | 252 |
| | — |
| | 4,785 |
| |
Liberty | 32,828 |
| | 32,828 |
| | 30,746 |
| | 34,139 |
| | 648 |
| | 1,582 |
| | 2,880 |
| | 4,663 |
| 12,783 |
| | 12,941 |
| | 29,255 |
| | 31,395 |
| | 656 |
| | 1,592 |
|
Manitoba Harvest | 30,652 |
| | — |
| | 76,889 |
| | — |
| | 4,011 |
| | — |
| | 4,011 |
| | — |
| 8,262 |
| | 5,512 |
| | 88,769 |
| | 88,541 |
| | 1,314 |
| | — |
|
ACI | 57,615 |
| | 57,615 |
| | 16,426 |
| | 19,334 |
| | 726 |
| | 1,278 |
| | 2,207 |
| | 3,836 |
| 6,747 |
| | 5,946 |
| | 18,421 |
| | 17,275 |
| | 841 |
| | 757 |
|
Arnold Magnetics | 51,767 |
| | 51,767 |
| | 74,318 |
| | 77,610 |
| | 2,182 |
| | 2,152 |
| | 6,561 |
| | 6,363 |
| 18,006 |
| | 15,083 |
| | 69,013 |
| | 72,310 |
| | 2,237 |
| | 2,194 |
|
Clean Earth | 111,339 |
| | 110,633 |
| | 191,547 |
| | 203,938 |
| | 5,082 |
| | 1,116 |
| | 15,541 |
| | 1,116 |
| 33,927 |
| | 42,291 |
| | 180,962 |
| | 185,087 |
| | 4,955 |
| | 5,392 |
|
SternoCandleLamp | 33,716 |
| | 33,716 |
| | 126,366 |
| | 126,302 |
| | 2,155 |
| | — |
| | 5,775 |
| | — |
| |
Sterno Products | | 33,922 |
| | 19,508 |
| | 142,403 |
| | 121,910 |
| | 3,451 |
| | 1,464 |
|
Tridien | 7,834 |
| | 16,762 |
| | 15,680 |
| | 14,844 |
| | 641 |
| | 604 |
| | 1,835 |
| | 1,900 |
| 6,301 |
| | 8,571 |
| | 14,421 |
| | 15,526 |
| | 619 |
| | 619 |
|
Allowance for doubtful accounts | | (3,646 | ) | | (3,608 | ) | | — |
| | — |
| | — |
| | — |
|
Total | 367,415 |
| | 344,985 |
| | 594,249 |
| | 541,476 |
| | 16,321 |
| | 7,934 |
| | 41,406 |
| | 25,530 |
| 127,432 |
| | 114,320 |
| | 602,661 |
| | 594,480 |
| | 14,908 |
| | 12,868 |
|
Reconciliation of segment to consolidated total: |
| |
| |
| |
| |
| |
| | | | | | | | |
| |
| |
| |
|
Corporate and other identifiable assets | — |
| | — |
| | 335,486 |
| | 255,305 |
| | — |
| | — |
| | 755 |
| | — |
| — |
| | — |
| | 56,973 |
| | 64,007 |
| | — |
| | 503 |
|
Equity method investment | | — |
| | — |
| | 191,439 |
| | 249,747 |
| | — |
| | — |
|
Amortization of debt issuance costs and original issue discount | — |
| | — |
| | — |
| | — |
| | 729 |
| | 713 |
| | 2,154 |
| | 2,412 |
| — |
| | — |
| | — |
| | — |
| | 738 |
| | 713 |
|
Goodwill carried at Corporate level (2) | 8,649 |
| | 8,649 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Assets of discontinued operations | — |
| | — |
| | 46,097 |
| | 278,163 |
| | — |
| | — |
| | — |
| | — |
| |
Total | $ | 376,064 |
| | $ | 353,634 |
| | $ | 975,832 |
| | $ | 1,074,944 |
| | $ | 17,050 |
| | $ | 8,647 |
| | $ | 44,315 |
| | $ | 27,942 |
| $ | 127,432 |
| | $ | 114,320 |
| | $ | 851,073 |
| | $ | 908,234 |
| | $ | 15,646 |
| | $ | 14,084 |
|
| |
(1) | Does not include accounts receivable balances per schedule above. |
| |
(2)
| Representsabove or goodwill resulting from purchase accounting adjustments not "pushed down"balances - refer to the ACI segment. This amount is allocated back to the respective segment for purposes of goodwill impairment testing."Note H - Goodwill and Other Intangible Assets". |
Geographic Information
|
| | | | | | | | |
International Revenues | | Three months ended March 31, |
| | 2016 | | 2015 |
Ergobaby | | $ | 10,377 |
| | $ | 10,956 |
|
Manitoba Harvest | | 6,130 |
| | — |
|
Arnold Magnetics | | 10,799 |
| | 12,369 |
|
Sterno Products | | 5,192 |
| | 684 |
|
| | $ | 32,498 |
| | $ | 24,009 |
|
Note F - Equity Method Investment
Investment in FOX
FOX is a designer, manufacturer and marketer of high-performance ride dynamic products used primarily for bicycles, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. FOX’s products offer innovative design, performance, durability and reliability that enhance ride dynamics by improving performance and control. FOX is headquartered in Scotts Valley, California. In July 2014, FOX, a former majority owned subsidiary of the Company that is publicly traded on the NASDAQ Stock Market under the ticker "FOXF," used a registration statement on Form S-1 under the Securities Act filed with the Securities and Exchange Commission (the "SEC") for a public offering of its common stock (the "FOX Secondary Offering"). CODI sold 4,466,569 shares of FOX common stock in connection with the FOX Secondary Offering. As a result of the sale of the shares by the Company in the FOX Secondary Offering, the Company’s ownership interest in FOX decreased to approximately 41%41.2%, which resulted in the deconsolidation of the FOX operating segment in the Company’s consolidated financial statements effective as of the date of the FOX Secondary Offering.
On March 15, 2016, the Company sold 2,500,000 of its FOX shares through a secondary offering at a price of $15.895 per share, which represented an underwriter's discount of 8.5% from the FOX share closing price on the date the offering was priced. Concurrently with the offering, FOX purchased 500,000 shares of their shares directly from the Company, also at a price of $15.895 per share. As a result of the sale of shares through the offering and the repurchase of shares by FOX, the Company sold a total of 3,000,000 shares of FOX common stock, with total net proceeds of approximately $47.7 million. Upon completion of the offering and repurchase of shares by FOX, the Company's ownership interest in FOX was reduced from approximately 41.2% to 33.1%. The Company currently owns approximately 15.112.1 million shares of FOX common stock.
The Company has elected to account for its investment in FOX at fair value using the equity method beginning on the date the investment became subject to the equity method of accounting. The Company uses the equity method of accounting when it has the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. For equity method investments which the Company has elected to measure at fair value, unrealized gains and losses are reported in the consolidated statement of operations as gain (loss) from equity method investments. The equity method investment in FOX had a fair value of $254.7$191.4 million on September 30, 2015March 31, 2016 based on the closing price of FOX shares on that date. The Company
recognized a gainloss of $11.8$10.6 million for the three months ended September 30, 2015, and a gain of $9.5 million for the nine months ended September 30, 2015, respectively,March 31, 2016 due to the change in the fair value of the FOX investment.investment and the effect of the underwriter's discount on the sale of FOX shares.
The condensed balance sheet information and results of operations of the Company's FOX investment are summarized below (in thousands)(in thousands):
| | Condensed Balance Sheet information | | | | | | | | |
| | September 30, 2015 | | December 31, 2014 | | March 31, 2016 | | December 31, 2015 |
Current assets | | $ | 160,250 |
| | $ | 112,609 |
| | $ | 132,712 |
| | $ | 131,941 |
|
Non-current assets | | 145,345 |
| | 145,828 |
| | 149,688 |
| | 145,775 |
|
| | $ | 305,595 |
| | $ | 258,437 |
| | $ | 282,400 |
| | $ | 277,716 |
|
| | | | | | | | |
Current liabilities | | $ | 89,813 |
| | $ | 60,825 |
| | $ | 71,809 |
| | $ | 73,970 |
|
Non-current liabilities | | 71,197 |
| | 68,806 |
| | 60,766 |
| | 51,486 |
|
Stockholders' equity | | 144,585 |
| | 128,806 |
| | 149,825 |
| | 152,260 |
|
| | $ | 305,595 |
| | $ | 258,437 |
| | $ | 282,400 |
| | $ | 277,716 |
|
| | | | | | | | |
Condensed Results of Operations (1) | | | | | | | | |
| | Three months ended September 30, 2015 | | Nine months ended September 30, 2015 | | Three months ended March 31, 2016 | | Three months ended March 31, 2015 |
Net revenue | | $ | 106,171 |
| | $ | 271,130 |
| | $ | 80,217 |
| | $ | 67,788 |
|
Gross profit | | 34,786 |
| | 83,437 |
| | 25,118 |
| | 18,783 |
|
Operating income | | 13,821 |
| | 25,897 |
| | 5,694 |
| | 1,539 |
|
Net income | | $ | 10,591 |
| | $ | 18,124 |
| | $ | 3,262 |
| | $ | 770 |
|
| |
(1)
| The results of operations for FOX for the period from January 1, 2014 through July 10, 2014 are included in the results of operations of the Company in the accompanying condensed consolidation statements of income as the Company did not begin accounting for FOX as an equity method investment until July 10, 2014, the date that the Company's ceased holding a majority ownership interest in FOX. |
Note G — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at September 30, 2015March 31, 2016 and December 31, 20142015 (in thousands):
| | | September 30, 2015 | | December 31, 2014 | March 31, 2016 | | December 31, 2015 |
Machinery and equipment | $ | 130,024 |
| | $ | 114,797 |
| $ | 137,866 |
| | $ | 135,357 |
|
Office furniture, computers and software | 8,837 |
| | 6,653 |
| 10,302 |
| | 9,500 |
|
Leasehold improvements | 8,579 |
| | 6,476 |
| 9,419 |
| | 8,706 |
|
Buildings and land | 24,239 |
| | 25,096 |
| 32,767 |
| | 31,856 |
|
| 171,679 |
| | 153,022 |
| 190,354 |
| | 185,419 |
|
Less: accumulated depreciation | (62,039 | ) | | (46,041 | ) | (72,269 | ) | | (67,369 | ) |
Total | $ | 109,640 |
| | $ | 106,981 |
| $ | 118,085 |
| | $ | 118,050 |
|
Depreciation expense was $5.5 million and $16.3$5.9 million for the three and nine months ended September 30, 2015,March 31, 2016, and $3.4 million and $10.3$5.5 million for the three and nine months ended September 30, 2014, respectively.March 31, 2015.
Inventory
Inventory is comprised of the following at September 30, 2015March 31, 2016 and December 31, 20142015 (in thousands):
| | | September 30, 2015 | | December 31, 2014 | March 31, 2016 | | December 31, 2015 |
Raw materials and supplies | $ | 29,159 |
| | $ | 25,826 |
| $ | 30,547 |
| | $ | 29,809 |
|
Work-in-process | 9,961 |
| | 7,147 |
| 10,085 |
| | 9,035 |
|
Finished goods | 39,496 |
| | 30,315 |
| 43,018 |
| | 33,653 |
|
Less: obsolescence reserve | (4,320 | ) | | (4,980 | ) | (4,656 | ) | | (4,126 | ) |
Total | $ | 74,296 |
| | $ | 58,308 |
| $ | 78,994 |
| | $ | 68,371 |
|
Note H — Goodwill and Other Intangible Assets
As a result of acquisitions of various businesses, the Company has significant intangible assets on its balance sheet that include goodwill and indefinite-lived intangibles (primarily trade names). Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Indefinite lived intangible assets are not amortized unless their useful life is determined to be finite. Long-lived intangible assets are subject to amortization using the straight-line method. The Company’s goodwill and indefinite-lived intangibles are tested and reviewed for impairment annually as of March 31st or more frequently if facts and circumstances warrant by comparing the fair value of each reporting unit to its carrying value. Each of the Company’s businesses represents a reporting unit, except Arnold, which comprises three reporting units.
Goodwill
2015 Interim goodwill impairment testing
In January 2015, one of Tridien's largest customer's informed the company that they would not renew their existing purchase agreement when it expires in the fourth quarter of 2015. This customer represented 20% of Tridien's sales in 2014. The expected lost sales and net income were significant enough to trigger an interim goodwill and indefinite-lived intangible asset impairment analysis. The result of the first step of the impairment test indicated that the fair value of Tridien was less than its carrying value; therefore, it was necessary to perform the second step of the impairment test. The Company estimated the fair value of the Tridien reporting unit using a weighted average of an income and market approach. The income approach was based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital ("WACC") of 15.7%. The market approach was based on earnings multiple data and guideline public companies. Based on the second step of the impairment test, the Company concluded on a preliminary basis during the quarter ended March 31, 2015 that the implied fair value of goodwill for Tridien was less than its carrying amount, resulting in impairment of the carrying amount of Tridien's goodwill of $8.9 million as of January 31, 2015. The Company completed the interim goodwill impairment testing of Tridien during the three months ended June 30, 2015 and recorded additional impairment expense of $0.2 million related to the Tridien technology and patent intangible assets.
20152016 Annual goodwill impairment testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely than-notmore-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step evaluation including,goodwill impairment testing. The qualitative factors we consider include, in part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts, as well as issues or events specific to the reporting unit. The Company evaluated the qualitative factors of each reporting unit to determine if the fair values of the reporting units exceed their respective carrying values for the 2015 annual goodwill impairment testing. The CompanyAt March 31, 2016, we determined that Liberty and two of Arnold’s threethe Tridien reporting units, Permanent Magnets and Assemblies ("PMAG") and Flexible Magnets ("Flexmag"),unit required further quantitative testing (Step(step 1) since the Companybecause we could not conclude that the fair value of the Liberty andreporting unit exceeds its carrying value based on qualitative factors alone. For the two Arnold reporting units exceeded their carrying values based solely on qualitative factors. Resultsthat were tested qualitatively, the results of the quantitativequalitative analysis indicated that the fair value of thesethose reporting units exceedsexceeded their carrying value. The Company expects to conclude the goodwill impairment testing during the quarter ended June 30, 2016.
2015 Interim goodwill impairment testing
TableIn January 2015, one of ContentsTridien's largest customers informed Tridien that they would not renew their purchase agreement when it expired in the fourth quarter of 2015. The expected lost sales and net income from this customer were significant enough to trigger an interim goodwill impairment analysis in the first quarter of 2015, which resulted in an impairment of the carrying amount of Tridien's goodwill of $8.9 million.
A summary of the net carrying value of goodwill at March 31, 2016 and December 31, 2015, is as follows (in thousands):
|
| | | | | | | |
| Three months ended March 31, 2016 | | Year ended December 31, 2015 |
Goodwill - gross carrying amount | 475,566 |
| | 460,319 |
|
Accumulated impairment losses | (61,831 | ) | | (61,831 | ) |
Goodwill - net carrying amount | $ | 413,735 |
| | $ | 398,488 |
|
The following is a reconciliation of the change in the carrying value of goodwill for the ninethree months ended September 30, 2015 and the year ended DecemberMarch 31, 2014, is as follows2016 by operating segment (in thousands):
|
| | | | | | | |
| Nine months ended September 30, 2015 | | Year ended December 31, 2014 |
Beginning balance: | | | |
Goodwill | $ | 406,537 |
| | $ | 293,968 |
|
Accumulated impairment losses | (52,903 | ) | | (52,903 | ) |
| 353,634 |
| | 241,065 |
|
Impairment losses (1) | (8,928 | ) | | — |
|
Acquisition of businesses (2) | 32,568 |
| | 157,864 |
|
Foreign currency translation | (1,916 | ) | | — |
|
Adjustments to purchase accounting (3) | 706 |
| | — |
|
Deconsolidation of subsidiary (4) | — |
| | (45,295 | ) |
Total adjustments | 22,430 |
| | 112,569 |
|
Ending balance: |
| |
|
Goodwill | 437,895 |
| | 406,537 |
|
Accumulated impairment losses | (61,831 | ) | | (52,903 | ) |
| $ | 376,064 |
| | $ | 353,634 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Corporate (1) | | Ergobaby | | Liberty | | Manitoba Harvest | | ACI | | Arnold (2) | | Clean Earth | | Sterno | | Tridien | | Total |
Balance as of January 1, 2016 | | $ | 8,649 |
| | $ | 41,664 |
| | $ | 32,828 |
| | $ | 52,672 |
| | $ | 58,019 |
| | $ | 51,767 |
| | $ | 111,339 |
| | $ | 33,716 |
| | $ | 7,834 |
| | $ | 398,488 |
|
Acquisition of Northern International Inc. (3) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11,556 |
| | — |
| | 11,556 |
|
Foreign currency translation | | — |
| | — |
| | — |
| | 3,691 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,691 |
|
Balance as of March 31, 2016 | | $ | 8,649 |
| | $ | 41,664 |
| | $ | 32,828 |
| | $ | 56,363 |
| | $ | 58,019 |
| | $ | 51,767 |
| | $ | 111,339 |
| | $ | 45,272 |
| | $ | 7,834 |
| | $ | 413,735 |
|
| |
(1) | Impairment loss relatesRepresents goodwill resulting from purchase accounting adjustments not "pushed down" to the ACI segment. This amount is allocated back to the respective segment for purposes of goodwill impairment of the Tridien goodwill during the quarter ended March 31, 2015.testing. |
| |
(2) | AcquisitionArnold Magnetics has three reporting units PMAG, FlexMag and Precision Thin Metals with goodwill balances of businesses during the year ended December 31, 2014 relates to the acquisition of Clean Earth in August 2014, SternoCandleLamp in October 2014,$40.4 million, $4.8 million and the add-on acquisition of AES by Clean Earth in December 2014. Acquisition of businesses during the nine months ended September 30, 2015 relates to the acquisition of Manitoba Harvest in July 2015.$6.5 million, respectively. |
| |
(3) | The $0.7 million in purchase accounting adjustments relate to adjustments madegoodwill related to the final purchase price allocation for Clean Earth duringacquisition of NII by Sterno Products in the first quarter of 2015 to record deferred tax amounts2016 is based on the state tax rate in effect for the state in which each of the intangible assets is utilized ($1.0 million), and adjustments to thea preliminary purchase price allocation of AES during the first and second quarter of 2015 ($0.3 million, including the final settlement of working capital of $0.5 million received by Clean Earth). |
| |
(4)
| As a result of the sale of the shares by the Company in the FOX Secondary Offering, the Company’s ownership interest in FOX decreased to approximately 41%, which resulted in the deconsolidation of the FOX operating segment in the Company’s consolidated financial statements effective July 10, 2014.allocation. |
Other intangible assets
20152016 Annual indefinite lived impairment testing
The Company uses a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. The Company evaluated the qualitative factors of each reporting unit that maintains indefinite lived intangible assets in connection with the annual impairment testing for 2015.2016. Results of the qualitative analysis indicate that the carrying value of the Company’s indefinite lived intangible assets did not exceed their fair value.
2015 long-lived asset impairment
The Company evaluates long-lived assets for potential impairment whenever events occur or circumstances indicate that the carrying amount of the assets may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. As noted above, Tridien's expected loss of a large customer atduring the end of the thirdfourth quarter of 2015 triggered an interim goodwill impairment which resulted in Tridien recognizing impairment of both the goodwill and the technology and patent intangible asset. The Company completed the interim impairment testing during the second quarter of 2015 and recognized $0.2 million of impairment expense
related to the technology and patent intangible asset during the three months ended June 30, 2015 in the condensed consolidated statements of operations.
Other intangible assets are comprised of the following at September 30, 2015March 31, 2016 and December 31, 20142015 (in thousands):
| | | September 30, 2015 | | December 31, 2014 | | Weighted Average Useful Lives | | March 31, 2016 | | December 31, 2015 | | Weighted Average Useful Lives |
Customer relationships | $ | 226,299 |
| | $ | 187,976 |
| | 12 | | $ | 232,636 |
| | $ | 226,722 |
| | 12 |
Technology and patents | 41,303 |
| | 32,331 |
| | 9 | | 44,662 |
| | 41,001 |
| | 9 |
Trade names, subject to amortization (1) | 25,047 |
| | 7,070 |
| | 17 | |
Trade names, subject to amortization | | | 27,563 |
| | 25,130 |
| | 17 |
Licensing and non-compete agreements | 6,656 |
| | 6,656 |
| | 5 | | 6,786 |
| | 6,686 |
| | 5 |
Permits and airspace | 98,419 |
| | 98,406 |
| | 13 | | 98,673 |
| | 98,673 |
| | 13 |
Distributor relations and other | 606 |
| | 606 |
| | 5 | | 606 |
| | 606 |
| | 5 |
| 398,330 |
| | 333,045 |
| | | 410,926 |
| | 398,818 |
| |
Accumulated amortization: |
| |
| | |
| |
| |
Customer relationships | (70,524 | ) | | (58,257 | ) | | | (78,665 | ) | | (74,519 | ) | |
Technology and patents | (18,027 | ) | | (15,423 | ) | | | (20,118 | ) | | (19,032 | ) | |
Trade names, subject to amortization | (4,256 | ) | | (3,606 | ) | | | (5,127 | ) | | (4,697 | ) | |
Licensing and non-compete agreements | (6,563 | ) | | (6,299 | ) | | | (6,586 | ) | | (6,575 | ) | |
Permits and airspace | (10,089 | ) | | (3,104 | ) | | | (14,611 | ) | | (12,313 | ) | |
Distributor relations and other | (606 | ) | | (606 | ) | | | (606 | ) | | (606 | ) | |
Total accumulated amortization | (110,065 | ) | | (87,295 | ) | | | (125,713 | ) | | (117,742 | ) | |
Trade names, not subject to amortization (1) | 73,395 |
| | 78,341 |
| | | 73,160 |
| | 72,328 |
| |
Total intangibles, net | $ | 361,660 |
| | $ | 324,091 |
| | | $ | 358,373 |
| | $ | 353,404 |
| |
(1) The trade name for Clean Earth was determined to be subject to amortization, resulting in a reclass from trade names not subject to amortization during the first quarter of 2015 as part of the finalization of the purchase price allocation for Clean Earth.
Amortization expense related to intangible assets was $7.7$7.8 million and $22.8$7.8 million for the three and nine months ended September 30,March 31, 2016 and 2015, respectively, and $4.6 million and $15.2 million for the three and nine months ended September 30, 2014, respectively. Estimated charges to amortization expense of intangible assets over the next five years, is as follows (in thousands):
| | October 1, 2015 through Dec. 31, 2015 | | $ | 8,872 |
| |
2016 | | 35,488 |
| |
April 1, 2016 through Dec. 31, 2016 | | | $ | 22,317 |
|
2017 | | 33,267 |
| | 27,874 |
|
2018 | | 31,100 |
| | 26,902 |
|
2019 | | 30,123 |
| | 25,561 |
|
2020 | | | 25,315 |
|
| | $ | 138,850 |
| | $ | 127,969 |
|
Note I — Debt
2014 Credit Agreement
On June 6, 2014, the Company obtained a $725 million credit facility from a group of lenders (the "2014 Credit Facility") led by Bank of America N.A. as Administrative Agent. The 2014 Credit Facility provides for (i) a revolving credit facility of $400 million (as amended from time to time, the "2014 Revolving Credit Facility") and (ii) a $325 million term loan (the "2014 Term Loan Facility"). The 2014 Credit Facility permits the Company to increase the 2014 Revolving Credit Facility commitment and/ or obtain additional term loans in an aggregate of up to $200 million. The 2014 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. The Company amended the 2014 Credit Facility in June 2015, primarily to allow for intercompany loans to, and the acquisition of, Canadian-based companies on an unsecured basis, and to modify provisions that would allow for early termination of a "Leverage Increase Period," thereby providing
additional flexibility as to the timing of subsequent acquisitions. The Company incurred additional debt issuance costs of approximately $0.3 million in connection with the amendment that was recorded as deferred debt issuance costs and will be amortized over the remaining term of the 2014 Credit Facility.
2014 Revolving Credit Facility
The 2014 Revolving Credit Facility will become due in June 2019. The Company can borrow, prepay and reborrow principal under the 2014 Revolving Credit Facility from time to time during its term. Advances under the 2014 Revolving Credit Facility can be either LIBOR rate loans or base rate loans. LIBOR rate revolving loans bear interest at a rate per annum equal to the London Interbank Offered Rate (the "LIBOR Rate") plus a margin ranging from 2.00% to 2.75% based on the ratio of consolidated net indebtedness to adjusted consolidated earnings before interest expense, tax expense and depreciation and amortization expenses (the "Consolidated Leverage Ratio"). Base rate revolving loans bear interest at a fluctuating rate per annum equal to the greatest of (i) the prime rate of interest, or (ii) the Federal Funds Rate plus 0.50% (the "Base Rate"), plus a margin ranging from 1.00% to 1.75% based upon the Consolidated Leverage Ratio.
2014 Term Loan Facility
The 2014 Term Loan Facility expires in June 2021 and requires quarterly payments of approximately $0.8 million that commenced September 30, 2014, with a final payment of all remaining principal and interest due on June 6, 2021. The 2014 Term Loan Facility was issued at an original issue discount of 99.5% of par value and bears interest at either the applicable LIBOR Rate plus 3.25% per annum, or Base Rate plus 2.25% per annum. The LIBOR Rate applicable to both base rate loans and LIBOR rate loans shall in no event be less than 1.00% at any time.
Use of Proceeds
The proceeds of the 2014 Term Loan Facility and advances under the 2014 Revolving Credit Facility were/will be used to (i) refinance existing indebtedness of the Company, (ii) pay fees and expense, (iii) fund acquisitions of additional businesses, (iv) fund working capital needs and (v) to fund permitted distributions. The Company used approximately $290.0 million of the 2014 Term Loan Facility proceeds to pay all amounts outstanding under the 2011 Credit Agreement and to pay the closing costs. In addition, approximately $1.2 million of the 2014 Revolving Credit Facility commitment was utilized in connection with the issuance of letters of credit.
Other
The 2014 Credit Facility provides for sub-facilities under the 2014 Revolving Credit Facility pursuant to which an aggregate amount of up to $100.0 million in letters of credit may be issued, as well as swing line loans of up to $25.0 million outstanding at one time. The issuance of such letters of credit and the making of any swing line loan reduces the amount available under the 2014 Revolving Credit Facility. The Company will pay (i) commitment fees on the unused portion of the 2014 Revolving Credit Facility ranging from 0.45% to 0.60% per annum based on its Consolidated Leverage Ratio, (ii) quarterly letter of credit fees, and (iii) administrative and agency fees.
Debt Issuance Costs
In connectionDeferred debt issuance costs represent the costs associated with the entering into the 2014 Credit Facility in which the loan syndication consisted of previous members of the syndicate under the 2011 Credit Facility who either maintained or increased their position as well as new syndication members, the debt issuance costs associated with the 2011 Credit Facility and the 2014 Credit Facility have been classified as either debt modification costs which have been capitalized and will be amortized over the term of the 2014 Credit Facility, or debt extinguishment costs which have been recorded as an expense in the accompanying condensed consolidated statement of operations. The Company paid debt issuance costs of $7.3 million in connection with the 2014 Credit Facility (of which $0.2 million was expensed as debt modification and extinguishment costs and $7.1 million is beingare amortized over the term of the related debt ininstrument. The Company's 2014 Credit Facility is comprised of the 2014 Credit Facility) and recorded additional debt modification and extinguishment costs of $2.1 million to write-off previously capitalized debt issuance costs.
2011 Credit Agreement
On October 27, 2011, the Company entered into the 2011 Credit Facility with a group of lenders led by TD Securities for a $515 million credit facility, with an optional $135 million increase (the "2011 Credit Facility"). The 2011 Credit Facility provided for (i) a revolving line of credit of $290 million which was subsequently increased to $320 million (the "2011 Revolving Credit Facility"), and (ii) a $225 million term loan which was subsequently increased to $279 million (the "2011 Term Loan Facility"). The 2011 Revolving Credit Facility was set to matureand the 2014 Term Loan Facility. Since the Company can borrow, repay and reborrow principal under the 2014 Revolving Credit Facility, the debt issuance costs associated with this facility have been classified as other non-current assets in Octoberthe accompanying consolidated balance sheet. The debt issuance costs associated with the 2014 Term Loan are classified as a reduction of long-term debt in the accompanying consolidated balance sheet. The following table summarizes debt issuance costs at March 31, 2016 and December 31, 2015, and the 2011 Term Loan Facility required quarterly payments of approximately $0.71 million, with the final payment of all remaining outstanding principle and interest duebalance sheet classification in October 2017. The Company was required to pay commitment fees of 1% per annumeach of the unused portion of the 2011 Revolving Credit Facility. The 2011 Credit Facility was terminated periods presents (in June 2014.thousands):
|
| | | | | | | |
| March 31, 2016 | | December 31, 2015 |
Deferred debt issuance costs | $ | 12,973 |
| | $ | 12,973 |
|
Accumulated amortization | (4,054 | ) | | (3,508 | ) |
Deferred debt issuance costs, less accumulated amortization | $ | 8,919 |
| | $ | 9,466 |
|
| | | |
Balance Sheet classification: | | | |
Other non-current assets | $ | 4,529 |
| | $ | 4,863 |
|
Long-term debt | 4,390 |
| | 4,603 |
|
| $ | 8,919 |
| | $ | 9,466 |
|
The following table provides the Company’s debt holdings at September 30, 2015March 31, 2016 and December 31, 20142015 (in thousands):
| | | September 30, 2015 | | December 31, 2014 | March 31, 2016 | | December 31, 2015 |
Revolving Credit Facility | $ | — |
| | $ | 169,725 |
| $ | — |
| | $ | — |
|
Term Loan | 320,938 |
| | 323,375 |
| 319,313 |
| | 320,125 |
|
Original issue discount | (3,800 | ) | | (4,303 | ) | (3,465 | ) | | (3,633 | ) |
Debt issuance costs - term loan | | (4,390 | ) | | (4,603 | ) |
Total debt | $ | 317,138 |
| | $ | 488,797 |
| $ | 311,458 |
| | $ | 311,889 |
|
Less: Current portion, term loan facilities | (3,250 | ) | | (3,250 | ) | (3,250 | ) | | (3,250 | ) |
Long term debt | $ | 313,888 |
| | $ | 485,547 |
| $ | 308,208 |
| | $ | 308,639 |
|
Net availability under the 2014 Revolving Credit Facility was approximately $395.6$395.5 million at September 30, 2015.March 31, 2016. Letters of credit outstanding at September 30, 2015March 31, 2016 totaled approximately $4.4$4.5 million. At September 30, 2015,March 31, 2016, the Company was in compliance with all covenants as defined in the 2014 Credit Facility.
Note J — Derivative Instruments and Hedging Activities
On September 16, 2014, the Company purchased an interest rate swap ("New Swap") with a notional amount of $220 million. The New Swap is effective April 1, 2016 through June 6, 2021, the termination date of the 2014 Term Loan. The agreement requires the Company to pay interest on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. At September 30, 2015March 31, 2016 and December 31, 2014,2015, this Swap had a fair value loss of $15.4$20.2 million and $7.4$13.0 million, respectively, principally reflecting the present value of future payments and receipts under the agreement.
On October 31, 2011, the Company purchased a three-year interest rate swap (the "Swap") with a notional amount of $200 million effective January 1, 2014 through March 31, 2016. The agreement requires the Company to pay interest on the notional amount at the rate of 2.49% in exchange for the three-month LIBOR rate, with a floor of 1.5%. At September 30, 2015 and December 31, 2014,2015, the Swap had a fair value loss of $1.0 million and $2.5 million, respectively.
At September 30, 2015$0.5 million. A final payment under the Company's interest rate swaps had a fair value lossSwap of $16.4 million, of which $1.0$0.5 million was included in current liabilities and $15.4 million was included in other non-current liabilities inmade on March 31, 2016 when the condensed consolidated balance sheet, with its periodic mark-to-market value reflected as a component of interest expense.Swap contract ended.
The Company did not elect hedge accounting for the above derivative transactions and as a result, periodic mark-to-market changes in fair value are reflected as a component of interest expense in the consolidated statement of operations.
The following table reflects the classification of the Company's interest rate swaps on the consolidated Balance Sheets at March 31, 2016 and December 31, 2015 (in thousands):
|
| | | | | | | |
| March 31, 2016 | | December 31, 2015 |
Other current liabilities | $ | 4,967 |
| | $ | 3,914 |
|
Other noncurrent liabilities | 15,243 |
| | 9,569 |
|
Total fair value | $ | 20,210 |
| | $ | 13,483 |
|
Note K — Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis at September 30, 2015March 31, 2016 and December 31, 20142015 (in thousands):
| | | Fair Value Measurements at September 30, 2015 | Fair Value Measurements at March 31, 2016 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 | Carrying Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | | | | |
Equity method investment - FOX | $ | 254,733 |
| | $ | 254,733 |
| | $ | — |
| | $ | — |
| $ | 191,439 |
| | $ | 191,439 |
| | $ | — |
| | $ | — |
|
Liabilities: | | | | | | | | | | | | | | |
Call option of noncontrolling shareholder (1) | (25 | ) | | — |
| | — |
| | (25 | ) | (25 | ) | | — |
| | — |
| | (25 | ) |
Put option of noncontrolling shareholders (2) | (50 | ) | | — |
| | — |
| | (50 | ) | (50 | ) | | — |
| | — |
| | (50 | ) |
Interest rate swaps | (16,371 | ) | | — |
| | (16,371 | ) | | — |
| |
Contingent consideration - acquisition (3) | | (1,500 | ) | | — |
| | — |
| | (1,500 | ) |
Interest rate swap | | (20,210 | ) | | — |
| | (20,210 | ) | | — |
|
Total recorded at fair value | $ | 238,287 |
| | $ | 254,733 |
| | $ | (16,371 | ) | | $ | (75 | ) | $ | 169,654 |
| | $ | 191,439 |
| | $ | (20,210 | ) | | $ | (1,575 | ) |
| |
(1) | Represents a noncontrolling shareholder’s call option to purchase additional common stock in Tridien. |
| |
(2) | Represents put options issued to noncontrolling shareholders in connection with the Liberty acquisition. |
| |
(3) | Represents potential earn-out payable by Sterno Products for the acquisition of NII. |
| | | Fair Value Measurements at December 31, 2014 | Fair Value Measurements at December 31, 2015 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 | Carrying Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | | | | |
Equity method investment - FOX | $ | 245,214 |
| | $ | 245,214 |
| | $ | — |
| | $ | — |
| $ | 249,747 |
| | $ | 249,747 |
| | $ | — |
| | $ | — |
|
Liabilities: |
| |
| |
| |
|
| |
| |
| |
|
Call option of noncontrolling shareholder (1) | (25 | ) | | — |
| | — |
| | (25 | ) | (25 | ) | | — |
| | — |
| | (25 | ) |
Put option of noncontrolling shareholders (2) | (50 | ) | | — |
| | — |
| | (50 | ) | (50 | ) | | — |
| | — |
| | (50 | ) |
Interest rate swaps | (9,828 | ) | | — |
| | (9,828 | ) | | — |
| (13,483 | ) | | — |
| | (13,483 | ) | | — |
|
Total recorded at fair value | $ | 235,311 |
| | $ | 245,214 |
| | $ | (9,828 | ) | | $ | (75 | ) | $ | 236,189 |
| | $ | 249,747 |
| | $ | (13,483 | ) | | $ | (75 | ) |
Reconciliations of the change in the carrying value of the Level 3 fair value measurements from January 1, 20152016 through SeptemberMarch 30, 2015 and from January 1, 2014 through September 30, 20142016 are as follows (in thousands):
|
| | | | | | | |
| 2015 | | 2014 |
Balance at January 1st | $ | (75 | ) | | $ | (75 | ) |
Contingent consideration - Sport Truck (1) | — |
| | (19,035 | ) |
Balance at March 31st | $ | (75 | ) | | $ | (19,110 | ) |
Balance at June 30th | $ | (75 | ) | | $ | (19,110 | ) |
Effect of deconsolidation of FOX | — |
| | 19,035 |
|
Balance at September 30th | $ | (75 | ) | | $ | (75 | ) |
|
| | | |
| 2016 |
Balance at January 1st | $ | (75 | ) |
Contingent consideration - acquisition | (1,500 | ) |
Balance at March 31st | $ | (1,575 | ) |
Valuation Techniques
Contingent Consideration:
Sterno Products entered into a contingent consideration arrangement associated with the purchase of NII in January 2016. The earnout provision provides for payments up to $1.8 million over a two year period subsequent to acquisition. Earnings before interest, taxes, depreciation and amortization ("EBITDA") is the performance target defined and measured to determine the earnout payment due, if any, after each defined measurement period. The contingent consideration was valued at $1.5 million using probability weighted models.
| |
(1)
| As a result of the sale of the shares by the Company in the FOX Secondary Offering, the Company’s ownership interest in FOX decreased to approximately 41%, which resulted in the deconsolidation of the FOX operating segment in the Company’s consolidated financial statements effective July 10, 2014. |
Valuation Techniques
The Company has not changed its valuation techniques in measuring the fair value of any of its other financial assets and liabilities during the period. For details of the Company’s fair value measurement policies under the fair value hierarchy, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.2015.
2014 Term Loan
At September 30, 2015,March 31, 2016, the carrying value of the principal under the Company’s outstanding 2014 Term Loan, including the current portion, was $320.9$319.3 million, which approximates fair value because it has a variable interest rate that reflects market changes in interest rates and changes in the Company's net leverage ratio. The estimated fair value of the outstanding 2014 Term Loan is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 in the fair value hierarchy.
Nonrecurring Fair Value Measurements
The following table provides the assets carried at fair value measured on a non-recurring basis as of September 30,December 31, 2015. There were no assets carried at fair value measuredmeasurement on a non-recurring basis as of DecemberMarch 31, 2014.2016.
| | | | | | | | | | | Expense | | | | | | | | | |
| Fair Value Measurements at September 30, 2015 | | Three months ended | | Nine months ended | Fair Value Measurements at December 31, 2015 | | Year ended |
(in thousands) | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | September 30, 2015 | | September 30, 2015 | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | December 31, 2015 |
| | | | | | | | | | | | | | | | | | | | |
Technology (1) | $ | 376 |
| | $ | — |
| | $ | — |
| | $ | 376 |
| | $ | — |
| | $ | 237 |
| $ | 220 |
| | $ | — |
| | $ | — |
| | $ | 220 |
| | $ | 237 |
|
Goodwill (1) | $ | 7,834 |
| | $ | — |
| | $ | — |
| | $ | 7,834 |
| | $ | — |
| | $ | 8,928 |
| $ | 7,834 |
| | $ | — |
| | $ | — |
| | $ | 7,834 |
| | $ | 8,928 |
|
(1) Represents the fair value of the respective assets at the Tridien business segment subsequent to the goodwill and long-lived asset impairment charge recognized during the three and nine months ended September 30, 2015. Refer to "Note H - Goodwill and Other Intangible Assets" for further discussion regarding the impairment and valuation techniques applied.
Sale of American Furniture
On October 5, 2015, the Company sold its majority owned subsidiary, American Furniture, for a sale price of $24.1 million. The Company received approximately $23.5 million in net proceeds related to its debt and equity interests in American Furniture after payment of all transaction expenses. The sale of American Furniture met the criteria for the assets to be classified as held for sale as of September 30, 2015, and American Furniture is presented as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented. The assets and liabilities of American Furniture were recognized at fair value as of September 30, 2015 based on the net proceeds received as a result of the sale. The Company recognized a loss on the sale of American Furniture of $14.3 million during the three months ended September 30, 2015.
Note L — Stockholders’ Equity
Trust Shares
The Trust is authorized to issue 500,000,000 Trust shares and the Company is authorized to issue a corresponding number of LLC interests. The Company will at all times have the identical number of LLC interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each Trust share is entitled to one vote per share on any matter with respect to which members of the Company are entitled to vote.
Profit Allocation Interests
The Allocation Interests represent the original equity interest in the Company. The holders of the Allocation Interests ("Holders") are entitled to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The distributions of the profit allocation isare paid upon the occurrence of the sale of a material amount of capital stock or assets of one of the Company’s businesses ("Sale Event") or, at the option of the Holders, at each five year anniversary date of the acquisition of one of the Company’s businesses ("Holding Event"). The Manager, as the original holder of the Allocation Interests, previously had the right to cause the Company to purchase the Allocation Interests upon termination of the MSA in accordance with a Supplemental Put Agreement. On July 1, 2013, the Company and the Manager amended the MSA to provide for certain modifications related to the Manager’s registration as an investment advisor under the Investment Advisor’s Act of 1940, as amended (the "Advisor’s Act"). In connection with the amendment resulting from the Managers’ registration as an investment advisor under the Advisor’s Act, the Company and the Manager agreed to terminate the Supplemental Put Agreement. The Company historically recorded the obligation associated with the Supplemental Put agreement as a liability that represented the amount the Company would have to
pay to physically settle the purchase of the Allocation Interests upon termination of the MSA. As a result of the termination of the Supplemental Put Agreement, the Company currently records distributions of the profit allocation to the Holders upon occurrence of a Sale Event or Holding Event as dividendsdistributions declared on Allocation Interests to stockholders’ equity when they are approved by the Company’s board of directors. The sale of FOX shares in March 2016 (refer to "Note F - Equity Method Investment") qualified as a Sale Event under the Company's LLC Agreement. As a result, in April 2016, the Company's board of directors approved and declared a profit allocation payment totaling $8.6 million profit allocation payment that will be paid to Holders during the second quarter of 2016.
Earnings per share
Prior to the termination of the Supplemental Put Agreement,The Company calculates basic and diluted earnings per share attributable to Holdings were calculated on a weighted average basis. Since the termination of the Supplemental Put Agreement, basic and diluted earnings per share is calculated using the two-class method which requires the Company to allocate participating securities that have rights to earnings that otherwise would have been available only to Trust shareholders as a separate class of securities in calculating earnings per share. The Allocation Interests are considered participating securities that contain participating rights to receive profit allocations upon the occurrence of a Holding Event or Sale Event. The calculation of basic and diluted earnings per share for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 reflects the incremental increase during the period in the profit allocation distribution to Holders related to Holding Events.
Basic and diluted earnings per share for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 attributable to Holdings is calculated as follows:
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
Income (loss) from continuing operations attributable to Holdings | $ | 9,696 |
| | $ | 257,717 |
| | $ | (2,041 | ) | | $ | 257,543 |
| |
Less: Profit Allocation paid to Holdings | — |
| | 11,870 |
| | — |
| | 11,870 |
| |
Loss from continuing operations attributable to Holdings | | $ | (16,023 | ) | | $ | (29,484 | ) |
Less: Effect of contribution based profit - Holding Event | 910 |
| | 649 |
| | 2,837 |
| | 1,728 |
| 850 |
| | 618 |
|
Income from continuing operation attributable to Trust shares | $ | 8,786 |
| | $ | 245,198 |
| | $ | (4,878 | ) | | $ | 243,945 |
| |
Loss from continuing operation attributable to Trust shares | | $ | (16,873 | ) | | $ | (30,102 | ) |
| | | | | | | | | | |
Income from discontinued operations attributable to Holdings | $ | 154,804 |
| | $ | 3,381 |
| | $ | 166,096 |
| | $ | 13,933 |
| $ | — |
| | $ | 4,582 |
|
Less: Effect of contribution based profit | — |
| | — |
| | — |
| | 29 |
| — |
| | 180 |
|
Income from discontinued operations attributable to Trust shares | $ | 154,804 |
| | $ | 3,381 |
| | $ | 166,096 |
| | $ | 13,904 |
| $ | — |
| | $ | 4,402 |
|
| | | | | | | | | | |
Basic and diluted weighted average shares outstanding | 54,300 |
| | 48,300 |
| | 54,300 |
| | 48,300 |
| 54,300 |
| | 54,300 |
|
| | | | | | | | | | |
Basic and fully diluted income per share attributable to Holdings | | | | | | | | |
Basic and fully diluted income (loss) per share attributable to Holdings | | | | |
Continuing operations | $ | 0.16 |
| | $ | 5.08 |
| | $ | (0.09 | ) | | $ | 5.05 |
| $ | (0.31 | ) | | $ | (0.55 | ) |
Discontinued operations | 2.85 |
| | 0.07 |
| | 3.06 |
| | 0.29 |
| — |
| | 0.08 |
|
| $ | 3.01 |
| | $ | 5.15 |
| | $ | 2.97 |
| | $ | 5.34 |
| $ | (0.31 | ) | | $ | (0.47 | ) |
Distributions
On January 29, 2015,28, 2016, the Company paid a distribution of $0.36 per share to holders of record as of January 22, 2015.21, 2016. This distribution was declared on January 8, 2015.7, 2016.
On April 29, 2015,28, 2016, the Company paid a distribution of $0.36 per share to holders of record as of April 22, 2015.21, 2016. This distribution was declared on April 9, 2015.
On July 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of July 22, 2015. This distribution was declared on July 9, 2015.
On October 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of October 22, 2015. This distribution was declared on October 7, 2015.2016.
Note M — Warranties
The Company’s Ergobaby, Liberty and Tridien operating segments estimate their exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty
liability quarterly and adjusts the amount as necessary. A reconciliation of the change in the carrying value of the Company’s warranty liability for the ninethree months ended September 30, 2015March 31, 2016 and the year ended December 31, 20142015 is as follows (in thousands):
| | | Nine months ended September 30, 2015 | | Year ended December 31, 2014 | Three months ended March 31, 2016 | | Year ended December 31, 2015 |
Warranty liability: | | | | | | |
Beginning balance | $ | 1,984 |
| | $ | 5,419 |
| $ | 2,771 |
| | $ | 1,984 |
|
Accrual | 432 |
| | 1,871 |
| 134 |
| | 1,194 |
|
Warranty payments | (290 | ) | | (1,426 | ) | (72 | ) | | (407 | ) |
Deconsolidation of subsidiary | — |
| | (3,880 | ) | |
Ending balance | $ | 2,126 |
| | $ | 1,984 |
| $ | 2,833 |
| | $ | 2,771 |
|
Note N — Noncontrolling Interest
Noncontrolling interest represents the portion of the Company’s majority-owned subsidiary’s net income (loss) and equity that is owned by noncontrolling shareholders. The following tables reflect the Company’s ownership percentage of its majority owned operating segments and related noncontrolling interest balances as of September 30, 2015March 31, 2016 and December 31, 2014:2015:
| | | % Ownership (1) September 30, 2015 | | % Ownership (1) December 31, 2014 | % Ownership (1) March 31, 2016 | | % Ownership (1) December 31, 2015 |
| Primary | | Fully Diluted | | Primary | | Fully Diluted | Primary | | Fully Diluted | | Primary | | Fully Diluted |
Ergobaby | 81.0 | | 74.2 | | 81.0 | | 74.3 | 81.0 | | 74.2 | | 81.0 | | 74.2 |
Liberty | 96.2 | | 84.6 | | 96.2 | | 84.8 | 88.6 | | 84.7 | | 96.2 | | 84.6 |
Manitoba Harvest | 86.5 | | 72.8 | | n/a | | n/a | 76.6 | | 65.6 | | 76.6 | | 65.6 |
ACI | 69.4 | | 69.3 | | 69.4 | | 69.3 | 69.4 | | 69.3 | | 69.4 | | 69.3 |
Arnold Magnetics | 96.7 | | 87.3 | | 96.7 | | 87.5 | 96.7 | | 86.9 | | 96.7 | | 87.3 |
Clean Earth | 97.5 | | 82.5 | | 97.9 | | 86.2 | 97.5 | | 86.2 | | 97.5 | | 86.2 |
SternoCandleLamp | 100.0 | | 89.9 | | 100.0 | | 91.7 | |
Sterno Products | | 100.0 | | 89.7 | | 100.0 | | 89.7 |
Tridien | 81.3 | | 67.3 | | 81.3 | | 65.4 | 81.3 | | 67.3 | | 81.3 | | 67.3 |
| |
(1) | The principal difference between primary and diluted percentages of our operating segments is due to stock option issuances of operating segment stock to management of the respective businesses. |
| | | Noncontrolling Interest Balances | Noncontrolling Interest Balances |
(in thousands) | September 30, 2015 | | December 31, 2014 | March 31, 2016 | | December 31, 2015 |
Ergobaby | 16,948 |
| | 14,783 |
| 18,353 |
| | 17,754 |
|
Liberty | 2,815 |
| | 2,547 |
| 1,937 |
| | 2,934 |
|
Manitoba Harvest | 5,310 |
| | — |
| 14,114 |
| | 14,071 |
|
ACI | 3,503 |
| | 790 |
| 5,237 |
| | 4,295 |
|
Arnold Magnetics | 2,103 |
| | 1,950 |
| 2,117 |
| | 2,113 |
|
Clean Earth | 3,984 |
| | 2,672 |
| 4,519 |
| | 4,308 |
|
SternoCandleLamp | 500 |
| | 125 |
| |
Sterno Products | | 778 |
| | 644 |
|
Tridien | 1,361 |
| | 2,744 |
| 776 |
| | 916 |
|
Allocation Interests | 100 |
| | 100 |
| 100 |
| | 100 |
|
| $ | 36,624 |
| | $ | 25,711 |
| $ | 47,931 |
| | $ | 47,135 |
|
Liberty Recapitalization
During the first quarter of 2016, the Company completed a recapitalization at Liberty whereby the Company entered into an amendment to the intercompany loan agreement with Liberty (the “Liberty Loan Agreement”). The Liberty Loan Agreement was amended to (i) provide for term loan borrowings of $38.0 million and revolving credit facility borrowings of $5.0 million to fund cash distributions totaling $35.3 million to its shareholders, including the Company, and (ii) extend the maturity dates of the term loans and revolving credit facility. Liberty’s noncontrolling shareholders received approximately $5.3 million in distributions as a result of the recapitalization. Immediately prior to the recapitalization, management exercised stock options for 75,095 shares of Liberty common shares, resulting in net proceeds from stock options at Liberty of $3.8 million. Liberty recognized $0.3 million in compensation expense related to the accelerated vesting of a portion of management's stock options at the time of exercise. The Company then purchased $1.5 million in Liberty common shares from members of Liberty management, resulting in Liberty's noncontrolling shareholders holding 11.4% of Liberty's outstanding shares subsequent to the recapitalization. The purchase of the Liberty common stock from noncontrolling shareholders and issuance of Liberty common stock related to the exercise of stock options by noncontrolling shareholders were at fair value and resulted in no change in control of Liberty. The difference between the consideration paid for the noncontrolling interest and the adjustment to the carrying amount of the Company's noncontrolling interest in Liberty was recognized in the Company's equity. Subsequent to the purchase of Liberty common shares and the exercise of the options, the Company owns 88.6% of Liberty on a primary basis and 84.7% on a fully diluted basis.
Note O — Income taxes
Each fiscal quarter the Company estimates its annual effective tax rate and applies that rate to its interim pre-tax earnings. In this regard, the Company reflects the full year’s estimated tax impact of certain unusual or infrequently occurring items and the effects of changes in tax laws or rates in the interim period in which they occur.
The computation of the annual estimated effective tax rate in each interim period requires certain estimates and significant judgment, including the projected operating income for the year, projections of the proportion of income earned and taxed in other jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, as additional information is obtained or as the tax environment changes.
The reconciliation between the Federal Statutory Rate and the effective income tax rate for the ninethree months ended September 30,March 31, 2016 and 2015 and 2014 are as follows:
| | | Nine months ended September 30, | Three months ended March 31, |
| 2015 | | 2014 | 2016 | | 2015 |
United States Federal Statutory Rate | 35.0 | % | | 35.0 | % | (35.0 | )% | | (35.0 | )% |
State income taxes (net of Federal benefits) | 11.8 |
| | (0.7 | ) | 1.9 |
| | 0.1 |
|
Foreign income taxes | (10.0 | ) | | (0.3 | ) | 7.6 |
| | (0.1 | ) |
Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders (1) | 66.3 |
| | 1.4 |
| 19.9 |
| | 10.5 |
|
Effect of deconsolidation of subsidiary | — |
| | (33.5 | ) | |
Effect of gain on equity method investment (2) | (33.8 | ) | | — |
| |
Effect of loss on equity method investment (2) | | 31.7 |
| | 17.0 |
|
Impact of subsidiary employee stock options | 1.6 |
| | — |
| 1.1 |
| | 0.1 |
|
Domestic production activities deduction | (6.6 | ) | | (0.3 | ) | (2.2 | ) | | (0.6 | ) |
Effect of impairment expense | 27.3 |
| | — |
| — |
| | 9.7 |
|
Non-recognition of NOL carryforwards at subsidiaries | (3.2 | ) | | — |
| 2.4 |
| | 0.2 |
|
Other | 5.7 |
| | 1.5 |
| 0.7 |
| | 6.7 |
|
Effective income tax rate | 94.1 | % | | 3.1 | % | 28.1 | % | | 8.6 | % |
| |
(1) | The effective income tax rate for the ninethree months ended September 30,March 31, 2016 and 2015 and 2014 includes a significant loss at the Company's parent, which is taxed as a partnership. |
| |
(2) | The equity method investment in FOX is held at the Company's parent, which is taxed as a partnership, resulting in the gain or loss on the investment as a reconciling item in deriving the effective tax rate. |
Note P — Defined Benefit Plan
In connection with the acquisition of Arnold, the Company has a defined benefit plan covering substantially all of Arnold’s employees at its Lupfig, Switzerland location. The benefits are based on years of service and the employees’ highest average compensation during the specific period.
The unfunded liability of $2.9$3.8 million is recognized in the consolidated balance sheet as a component of other non-current liabilities at September 30, 2015.March 31, 2016. Net periodic benefit cost consists of the following for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014: (in thousands):
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended March 31, |
| 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
Service cost | $ | 121 |
| | $ | 110 |
| | $ | 455 |
| | $ | 331 |
| $ | 109 |
| | $ | 162 |
|
Interest cost | 34 |
| | 70 |
| | 132 |
| | 211 |
| 34 |
| | 47 |
|
Expected return on plan assets | (282 | ) | | (128 | ) | | (416 | ) | | (390 | ) | 5 |
| | (49 | ) |
Effect of curtailment | 37 |
| | — |
| | (864 | ) | | — |
| |
Net periodic benefit cost | $ | (90 | ) | | $ | 52 |
| | $ | (693 | ) | | $ | 152 |
| $ | 148 |
| | $ | 160 |
|
During the secondfirst quarter of 2015,2016, Arnold recognized a curtailment gainan increase in the unfunded pension liability primarily as a result of the termination of certain employees at the Switzerland location who were participants in the defined benefit plan. The termination of the employees resulted in a decrease in the accumulateddiscount rate used to measure the pension benefit obligation. The discount rate decreased from 1.00% at December 31, 2015 to 0.45% at March 31, 2016, resulting in an increase to the pension benefit obligation liability and a curtailment gain of $0.9 million. The curtailment gain was recognized in other comprehensive income duringat March 31, 2016.
During the three months ended June 30, 2015.
During the three and nine months ended September 30, 2015,March 31, 2016, per the terms of the pension agreement, Arnold contributed $0.1 million and $0.3 million, respectively, to the plan. For the remainder of 2015,2016, the expected contribution to the plan will be approximately $0.2$0.4 million.
The plan assets are pooled with assets of other participating employers and are not separable; therefore the fair values of the pension plan assets at September 30, 2015March 31, 2016 were considered Level 3.
Note Q - Commitments and Contingencies
Legal Proceedings
Tridien
Tridien's subsidiary, AMF Support Services, Inc. ("AMF") is subject to a workers' compensation claim in the State of California, being adjudicated by the Riverside County Workers' Compensation Appeals Board. Tridien is a majority owned subsidiary of the Company. The claim is the result of an industrial accident that occurred on March 2, 2013, and the injuries sustained by a contract employee working at Tridien's Corona, California facility. The employee is seeking workers' compensation benefits from AMF, as the special employer, and the staffing company who employed the worker, as the general employer. The employee has also alleged that the employee's injuries are the result of the employer's "serious and willful misconduct", and has made a claim under California Labor Code § 4553 for damages. If proven, the "serious and willful" penalty is fixed by statute at either $0 or 50% of the value of all workers' compensation benefits paid as a result of the injury and is not insurable. The underlying workers' compensation claims are still being adjudicated. On July 8, 2015, the California District Attorney's Office for the County of Riverside filed a complaint against Tridien in Superior Court of California, County of Riverside, alleging that Tridien committed a violation of Labor Code section 6425(a), a felony, by willfully and unlawfully violating an occupational safety and health standard, order, and special order, or Health and Safety Code section 25910, to wit, 8 CCR 4353(a) and 8 CCR 348(a), and that such violation caused the injuries resulting from the March 2, 2013 industrial accident referenced above. At this stage, it is not feasible to predict the outcome of or a range of loss, should a loss occur, from these proceedings. Accordingly, no amounts in respect of this matter have been provided in the Company's accompanying financial statements. The Company believes it has meritorious defenses to all the foregoing allegations and will continue to vigorously defend against the claims. In addition, in July 2015, the California District Attorney's Office for the County of Riverside filed a criminal complaint against Tridien/AMF in Superior Court of California, County of Riverside, alleging violations of the California Labor Code and Penal Code in connection with the above described industrial accident. In March 2016, Tridien/AMF pled no contest to a 6423(a) misdemeanor charge. As required by the sentence imposed by the court, in April 2016, Tridien made payments totaling $750,000 for fines, penalties, and assessments to the Riverside Superior Court and certain other agencies as directed by the court. Concurrently, Tridien made a payment of $49,875 to the California Division of Occupational Safety and Health Bureau of Investigations ("CAL OSHA") pursuant to a Stipulated Settlement Agreement (admitting no fault or liability) entered into by and between Tridien and CAL OSHA to end the appeal of seven OSHA citations issued by CAL OSHA related to the aforementioned accident. Tridien had previously accrued $750,000 for legal fees, costs and potential fines related to foregoing criminal matter.
In the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that any unfavorable outcomes will have a material adverse effect on the Company's consolidated financial position or results of operations.
Note R - Subsequent Events
Sale of American Furniture
On October 5, 2015, the Company sold its majority owned subsidiary, American Furniture, for a sale price of $24.1 million. The Company’s share of the net proceeds at closing, after accounting for the payment of transaction expenses, totaled $23.5 million.
The sale of American Furniture met the criteria for the assets to be classified as held for sale as of September 30, 2015, and the American Furniture subsidiary is presented as discontinued operations in the accompanying condensed consolidated financial
statements for all periods presented. The Company recognized a loss on the sale of American Furniture of $14.3 million during the quarter ended September 30, 2015 based on the initial write-down of American Furniture's carrying amounts to fair value.
Allocation Interests - Profit Allocation Payments
Sale EventsEvent
The sale of CamelBaka portion of the Company's FOX shares in August 2015 and American Furniture in October 2015March 2016 qualified as a Sale EventsEvent under the Company's LLC Agreement. During the fourthsecond quarter, the CompanyCompany's Board of Directors declared a distribution to the Holders of the Allocation MemberInterests of $8.6 million in connection with the Sale Event of CamelBak. Under the terms of the LLC Agreement, the Allocation Member has the right to defer a portion of the distribution. The Allocation Member exercised this right and deferred a portion of the distribution for the CamelBak Sale Event in the amount of the high water mark calculation as a result of the loss on the sale of American Furniture. The result is a net distribution to the Allocation Member of $14.6 million.FOX. The profit allocation payment will be made during the quarter ended December 31, 2015.June 30, 2016.
Holding EventAcquisition
Clean Earth add-on
On April 15, 2016, the Company's Clean Earth subsidiary acquired certain assets of Phoenix Soil, LLC ("Phoenix Soil") and WIC, LLC (together with Phoenix Soil, the "Sellers") for a purchase price of $13.3 million. Phoenix Soil is based in Plainville, CT and provides environmental services for nonhazardous contaminated soil materials with a primary focus on soil. Phoenix Soil recently completed its transition to a new 58,000 square foot thermal desorption facility owned by WIC, LLC. The acquisition will increase Clean Earth's soil treatment capabilities and expand its geographic footprint into New England. Clean Earth financed the acquisition
and payment of related transaction costs through the issuance of an additional $13.7 million in inter-company loans with the Company. The Company used cash on hand to fund the purchase price of Phoenix Soil.
Recapitalization of Advanced Circuits
During the fourthsecond quarter of 2016, the Company declaredcompleted a recapitalization at Advanced Circuits whereby the Company entered into an amendment to the inter-company loan agreement with Advanced Circuits (the "ACI Loan Agreement"). The ACI loan agreement was amended to provide for additional term loan borrowings of $61.0 million to fund a cash distributions to shareholders totaling $60.1 million. Minority interest shareholders of Advanced Circuits, including certain members of management at Advanced Circuits, received total distribution proceeds of $18.4 million. The Company used cash on hand to fund the distribution to the Allocation Member of approximately $3.1 million in connection with a Holding Event for our five year ownership of the Ergobaby subsidiary. The payment is in respect of its positive contribution-based profit since our acquisition in September of 2010, and will be paid during the quarter ended December 31, 2015.minority shareholders.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Item 2 contains forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the sections entitled "Forward-Looking Statements" included elsewhere in this Quarterly Report as well as those risk factors discussed in the section entitled "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 20142015 and Item 1A. Risk Factors in Part II of this quarterly report.
Overview
Compass Diversified Holdings, a Delaware statutory trust ("Holdings" or the "Trust"), was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company (the "Company"), was also formed on November 18, 2005. The Trust and the Company (collectively "CODI") were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. The Trust is the sole owner of 100% of the Trust Interests, as defined in our LLC Agreement, of the Company. Pursuant to the LLC Agreement, the Trust owns an identical number of Trust Interests in the Company as exist for the number of outstanding shares of the Trust. Accordingly, our shareholders are treated as beneficial owners of Trust Interests in the Company and, as such, are subject to tax under partnership income tax provisions. The Company is the operating entity with a board of directors whose corporate governance responsibilities are similar to that of a Delaware corporation. The Company’s board of directors oversees the management of the Company and our businesses and the performance of Compass Group Management LLC ("CGM" or our "Manager"). Certain persons who are employees and partners of our Manager receive a profit allocation as owners of 58.8% of the Allocation Interests in us, as defined in our LLC Agreement.
The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. We characterize small to middle market businesses as those that generate annual cash flows of up to $60 million. We focus on companies of this size because of our belief that these companies are often more able to achieve growth rates above those of their relevant industries and are also frequently more susceptible to efforts to improve earnings and cash flow.
In pursuing new acquisitions, we seek businesses with the following characteristics:
North American base of operations;
stable and growing earnings and cash flow;
maintains a significant market share in defensible industry niche (i.e., has a "reason to exist");
solid and proven management team with meaningful incentives;
low technological and/or product obsolescence risk; and
a diversified customer and supplier base.
Our management team’s strategy for our businesses involves:
utilizing structured incentive compensation programs tailored to each business to attract, recruit and retain talented managers to operate our businesses;
regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;
assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue and cost related);
identifying and working with management to execute attractive external growth and acquisition opportunities; and
forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.
We are dependent on the earnings of, and cash receipts from our businesses to meet our corporate overhead and management fee expenses and to pay distributions. These earnings and distributions, net of any minority interests in these businesses, are generally available:
first, to meet capital expenditure requirements, management fees and corporate overhead expenses;
second, to fund distributions from the businesses to the Company; and
third, to be distributed by the Trust to shareholders.
Recent Events
Acquisition of Manitoba HarvestNorthern International Inc.
On July 10, 2015, we closed onJanuary 22, 2016, Sterno Products, a wholly owned subsidiary of the acquisition ofcompany, acquired all of the issued and outstanding capital stock of Fresh Hemp Foods Ltd. ("Manitoba Harvest") pursuant toNorthern International, Inc. (NII), for a stock purchase agreement entered into on June 5, 2015. Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and global leader in branded, hemp-based foods. Manitoba Harvest’s award-winning products are currently carried in about 7,000 retail stores across the U.S. and Canada.
price of approximately $35.8 million (C$50.6 million). The purchase price was approximately $101.4includes an earn-out payable over two years of up to a maximum amount of $1.8 million (C$128.62.5 million), and acquisition related costs were approximately $1.1 million (C$1.4 million). We fundedis subject to working capital adjustments. Headquartered in Coquitlam, British Columbia, Canada, NII sells flameless candles and outdoor lighting products through the retail segment. Sterno Products financed the acquisition and payment of the related transaction costs through drawings on our 2014 Revolving Credit Facility. CGM acted asthe issuance of an advisor to us onadditional $37.0 million in inter-company loans with the deal and will continue to provide integration services duringCompany.
Partial Divestiture of FOX shares
During the first yearquarter of 2016, our ownership of Manitoba Harvest. CGM receives integration service fees of approximately $1.0 million, which are payable quarterly as services are rendered, beginning September 30, 2015.
Sale of CamelBak
On August 3, 2015, pursuant to a stock purchase agreement dated July 24, 2015, we sold our majority owned subsidiary, CamelBak, basedequity method investment, FOX, closed on a total enterprise valuesecondary public offering of $412.5 million. Our share2,500,000 shares of FOX common shares held by the Company. Concurrently with the closing of the net proceeds, at closing, after accounting foroffering, FOX repurchased 500,000 shares of FOX common stock held by the redemption of CamelBak’s noncontrolling holders and the payment of transaction expenses totaled $367.8 million. We recognized a gain of $165.3 million for the three and nine months ended September 30, 2015 asCompany. As a result of the sale of CamelBak. Refershares through the offering and the repurchase of shares by FOX, we sold a total of 3,000,000 shares of FOX common stock, with total net proceeds of approximately $47.7 million. Upon completion of the offering and repurchase of shares by FOX, our ownership interest in FOX was reduced from approximately 41% to "Liquidity and Capital Resources, Subsequent Events - Profit33%. The sale of the portion of our FOX shares in March 2016 qualified as a Sale Event under the Company's LLC Agreement. During the second quarter, our Board of Directors declared a distribution to the Holders of the Allocation Payments" for a discussionInterests of $8.6 million in connection with the Sale Event of FOX. The profit allocation payment associated with the sale of CamelBak.
The transaction is subject to adjustments for certain changes in the working capital of CamelBak. The Stock Purchase Agreement contains customary representations, warranties, covenants and indemnification provisions.
Sale of American Furniture
On October 5, 2015, we sold our majority owned subsidiary, American Furniture, for a sale price of $24.1 million. The Company’s share of the net proceeds at closing, after accounting for the payment of transaction expenses, totaled $23.5 million. The sale of American Furniture met the criteria for the assets towill be classified as held for sale as of September 30, 2015, and the American Furniture subsidiary is presented as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented. The Company recognized a loss on the sale of American Furniture of $14.3 million onmade during the quarter ended SeptemberJune 30, 2015 based on the initial write-down of American Furniture's carrying amounts to fair value. Refer to "Liquidity and Capital Resources, Profit Allocation Payments" for a discussion of the profit allocation associated with the sale of American Furniture.2016.
20152016 Outlook
Middle market deal flow remained steady in the first quarter was down compared to both the first and fourth quarter of 2015, year-to-date relativeas purchase price multiples continue to 2014, in part due to continued attractive valuations for sellers.increase. High valuation levels continue to be driven by the availability of debt capital with favorable terms and financial and strategic buyers seeking to deploy available equity capital.
We remain focused on marketing the Company’s attractive ownership and management attributes to potential sellers of middle market businesses and intermediaries. In addition, we continue to pursue opportunities for add-on acquisitions by certain of our existing subsidiary companies, which can be particularly attractive from a strategic perspective. We completed an add-on acquisition at our Sterno Products subsidiary in the first quarter of 2016, and additional add-on acquisition at our Clean Earth subsidiary subsequent to the end of the first quarter.
Discontinued Operations
The saleresults of operations for CamelBak and American Furniture for the three months ended March 31, 2015 are presented as discontinued operations in our consolidated financial statements for all periods presented.as a result of the sale of these operating segments in August and October 2015, respectively. See Note D - "Discontinued Operations", to our consolidated financial statements for further discussion of the operating results of our discontinued businesses.
Non-GAAP Financial Measures
U.S. GAAP refers to generally accepted accounting principles in the United States. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments
that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented. Our Manitoba Harvest acquisition uses the Canadian Dollar as its functional currency. We will periodically refer to net sales and net sales growth rates in the Manitoba Harvest management's discussion and analysis on a "constant currency" basis so that the business results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of Manitoba Harvest's business performance. "Constant currency" net sales results are calculated by translating current period net sales in local currency using the prior year’s currency conversion rate. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. "Constant currency" measured net sales is not a measure of net sales presented in accordance with U.S. GAAP.
Results of Operations
We were formed on November 18, 2005 and acquired our existing businesses (segments) at September 30, 2015March 31, 2016 as follows:
|
| | | | | | |
| | | | | | |
May 16, 2006 | | August 1, 2006 | | March 31, 2010 | | September 16, 2010 |
| | | | | | |
Advanced Circuits | | Tridien | | Liberty Safe | | Ergobaby |
| | | | | | |
March 5, 2012 | | August 26, 2014 | | October 10, 2014 | | July 10, 2015 |
| | | | | | |
Arnold Magnetics | | Clean Earth | | SternoCandleLampSterno Products | | Manitoba Harvest |
In the following results of operations, we provide (i) our actual consolidated results of operations for the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, which includes the historical results of operations of our businesses (operating segments) from the date of acquisition and (ii) comparative results of operations for each of our businesses on a stand-alone basis for the three and nine months ended September 30, 2015March 31, 2016 and 2014. On July 10, 2014 our ownership interest in FOX decreased to 41% and as a result, beginning July 10, 2014 FOX no longer met the requirements for inclusion in our consolidated Results of Operations.2015.
In the table below we remove the results of operations of FOX that are included in our historical condensed consolidated results of operations through July 10, 2014, in order to provide a meaningful comparison of the combined results of operations of our majority-owned businesses for the three and nine month periods ended September 30, 2015 and 2014.
Consolidated Results of Operations – Compass Diversified Holdings and Compass Group Diversified Holdings LLC
| | | | | | | | | | | | | | Consolidated Results of Operations |
| Three Months Ended September 30, 2015 | | Three Months Ended September 30, 2014 | Three Months Ended March 31, 2016 | | Three Months Ended March 31, 2015 |
(in thousands) | Consolidated Results of Operations |
| Consolidated Results of Operations |
| Less: FOX (10 days) | | Consolidated Results less FOX | |
|
|
Net sales | $ | 208,148 |
| | $ | 141,293 |
| | $ | 7,514 |
| | $ | 133,779 |
| $ | 208,047 |
| | $ | 179,425 |
|
Cost of sales | 139,169 |
| | 81,133 |
| | 5,190 |
| | 90,063 |
| 141,786 |
| | 126,855 |
|
Gross profit | 68,979 |
| | 46,040 |
| | 2,324 |
| | 43,716 |
| 66,261 |
| | 52,570 |
|
Selling, general and administrative expense | 38,975 |
| | 29,227 |
| | 1,328 |
| | 27,899 |
| 44,473 |
| | 33,026 |
|
Fees to manager | 6,461 |
| | 5,751 |
| | — |
| | 5,751 |
| 6,458 |
| | 6,733 |
|
Amortization of intangibles | 7,731 |
| | 4,577 |
| | 185 |
| | 4,392 |
| 7,826 |
| | 7,822 |
|
Operating income | $ | 15,812 |
| | $ | 6,485 |
| | $ | 811 |
| | $ | 5,674 |
| |
Impairment expense | | — |
| | 8,907 |
|
Operating income (loss) | | $ | 7,504 |
| | $ | (3,918 | ) |
|
| | | | | | | | | | | | | | | |
| Nine months ended September 30, 2015 | | Nine Months Ended September 30, 2014 |
(in thousands) | Consolidated Results of Operations | | Consolidated Results of Operations | | Less: FOX (191 days) | | Consolidated Results less FOX |
Net sales | $ | 587,298 |
| | $ | 509,285 |
| | $ | 149,995 |
| | $ | 359,290 |
|
Cost of sales | 402,532 |
| | 345,048 |
| | 103,701 |
| | 241,347 |
|
Gross profit | 184,766 |
| | 164,237 |
| | 46,294 |
| | 117,943 |
|
Selling, general and administrative expense | 105,946 |
| | 101,235 |
| | 25,780 |
| | 75,455 |
|
Fees to manager | 19,860 |
| | 15,259 |
| | — |
| | 15,259 |
|
Amortization of intangibles | 22,777 |
| | 15,222 |
| | 3,220 |
| | 12,002 |
|
Impairment expense | 9,165 |
| | — |
| | — |
| | — |
|
Operating income | $ | 27,018 |
| | $ | 32,521 |
| | $ | 17,294 |
| | $ | 15,227 |
|
Three months ended September 30, 2015March 31, 2016 compared to three months ended September 30, 2014March 31, 2015
Net sales
On a consolidated basis, net of FOX, net sales for the three months ended September 30, 2015March 31, 2016 increased by approximately $74.4$28.6 million or 55.6%16.0% compared to the corresponding period in 2014.2015. Our acquisitions of Clean Earth and SternoCandleLamp in August and October 2014, respectively, contributed $55.5 million of the total increase, and our acquisition of Manitoba Harvest in July 2015 contributed an additional $8.9$13.7 million to the increase in net sales. During the three months ended September 30, 2015March 31, 2016 compared to 2014,2015, we also saw notable sales increases at Liberty ($3.53.1 million), Clean Earth ($3.2 million) and Sterno ($15.4 million, primarily due to the acquisition of NII in January 2016), offset by decreases in sales at Ergo ($1.3 million), Tridien ($5.71.8 million) and Arnold Magnetics ($1.13.8 million). Refer to "Results of Operations - Our Businesses" for a more detailed analysis of net sales by business segment.
We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income on the investment of available funds, but we expect such earnings to be minimal. Our investment in our businesses is typically in the form of loans from the Company to such businesses, as well as equity interests in those companies. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and dividends on our equity ownership. However, on a consolidated basis these items will be eliminated.
Cost of sales
On a consolidated basis, net of FOX, cost of sales increased approximately $49.1$14.9 million during the three month period ended September 30, 2015,March 31, 2016, compared to the corresponding period in 2014. The 2014 acquisitions, less the period that Clean Earth was included in our results of operations subsequent to acquisition,2015. Manitoba Harvest accounted for $37.9$6.7 million of the increase in cost of sales during the three months ended September 30, 2015,March 31, 2016, and our Manitoba HarvestSterno's acquisition, NII, accounted for $7.3$12.4 million of the increase, including the amortizationincrease. These increases were offset by decreases in cost of the step up in fair value of inventory associated with the purchase price allocationsales at other operating segments, particularly Arnold ($3.12.7 million). Gross profit as a percentage of sales was approximately 33.1%31.8% in the three months ended September 30, 2015March 31, 2016 compared to 32.7%29.3% in 2014.2015. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of cost of sales by business segment.
Selling, general and administrative expense
On a consolidated basis, net of FOX, selling, general and administrative expense increased approximately $11.1$11.4 million during the three month period ended September 30, 2015,March 31, 2016, compared to the corresponding period in 2014.2015. The increase in expenses in the 20152016 quarter compared to 20142015 is principally the result of including the expenses from our 2014 acquisitions ($6.8 million) and our Manitoba Harvest acquisition in July 2015 ($4.7 million, including5.7 million), and Sterno Products' acquisition costs).of NII in January 2016. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, selling, general and administrative expense decreased $0.2increased from $3.2 million in the three months ended September 30,March 31, 2015 compared to $3.6 million in the same period in 2014.three months ended March 31, 2016.
Fees to manager
Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the three months ended September 30, 2015,March 31, 2016, we incurred approximately $6.5 million in expense for these fees compared to $5.8$6.7 million for the corresponding period in 2014.2015. The $0.7 million increasedecrease in the three months ended September 30, 2015March 31, 2016 is principally due to the increasedecrease in consolidated net assets resulting from the acquisitions of SternoCandleLamp during the fourth quarter of 2014, and Manitoba Harvest in July 2015, partially offset by the effect of the sale of CamelBak in August 2015.
Nine months ended September 30, 2015 compared to the nine months ended September 30, 2014
Net sales
On a consolidated basis, net of FOX, net sales for the nine months ended September 30,and AFM in October 2015, increasedpartially offset by approximately $228.0 million or 63.5% compared to the corresponding period in 2014. Our acquisitions of Clean Earth and SternoCandleLamp in August and October 2014, respectively, contributed $201.3 million of the total increase, and the acquisition of Manitoba Harvest in July 2015 contributed an additional $8.9 million. During the nine months ended September 30, 2015 compared to 2014, we also saw notable sales increases at Ergobaby ($2.6 million), Liberty ($6.2 million), Advanced Circuits ($2.6 million) and Tridien ($8.1 million), offset in part by decreased sales at Arnold Magnetics ($1.8 million). Refer to "Results of Operations - Our Businesses" for a more detailed analysis of net sales by business segment.
Cost of sales
On a consolidated basis, net of FOX, cost of sales increased approximately $161.2 million during the nine month period ended September 30, 2015, compared to the corresponding period in 2014. The 2014 acquisitions ($148.7 million) and Manitoba Harvest ($7.3 million of the increase, including the amortization of the step up in fair value of inventory associated with the purchase price allocation) were the primary drivers of the increase in cost of sales during the nine months ended September 30, 2015. Gross profit as a percentage of sales was approximately 31.5% in the nine months ended September 30, 2015 compared to 32.8% in 2014. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of cost of sales by business segment.
Selling, general and administrative expense
On a consolidated basis, net of FOX, selling, general and administrative expense increased approximately $30.5 million during the nine month period ended September 30, 2015, compared to the corresponding period in 2014. The increase in expenses in 2015 compared to 2014 is principally the result of including the expenses from our 2014 acquisitions ($27.1 million) and Manitoba Harvest ($4.7 million, including acquisition costs) . Refer to "Results of Operations - Our Businesses" for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, selling, general and administrative expense was flat in the nine months ended September 30, 2015, compared to the same period in 2014.
Fees to manager
Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the nine months ended September 30, 2015, we incurred approximately $19.9 million in expense for these fees compared to $15.3 million for the corresponding period in 2014. The $4.6 million increase in the nine months ended September 30, 2015 is principally due to the increase in consolidated net assets resulting from the acquisitions of Clean Earth and SternoCandleLamp during the third and fourth quarter of 2014.
Impairment expense
In January 2015, one of Tridien's largestlarger customers informed the CompanyTridien that itthey would not renew itstheir purchase agreement when it expiresexpired in the fourth quarter of 2015. This customer represented 20% of Tridien's sales in 2014. The expected lost sales and net income from this customer were significant enough to trigger an interim goodwill and indefinite-lived assetindefinite lived impairment analysis which resulted in impairment of the Tridien goodwill of $8.9 million during the first quarter of 2015. We completed the impairment testing during the second quarter2015, which resulted in a write down of 2015 and recorded an additional $0.3 million in impairment expense related to goodwill and long-lived assets.goodwill.
Results of Operations — Our Businesses
We categorize the businesses we own into two separate groups of businesses (i) branded products businesses and, (ii) niche industrial businesses. Branded products businesses are characterized as those businesses that we believe capitalize on a valuable brand name in their respective market sector. We believe that our branded products businesses are leaders in their particular category. Niche industrial businesses are characterized as those businesses that focus on manufacturing, servicing and selling particular products within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector.
The following discussion reflects a comparison of the historical results of operations of each of our businesses for the three and nine month periods ending September 30,March 31, 2016 and March 31, 2015 and September 30, 2014 on a stand-alone basis. For the 2014 acquisitions of Clean Earth
and SternoCandleLamp, the following discussion reflects pro forma results of operations for the three and nine months ended September 30, 2014 as if we had acquired the businesses on January 1, 2014. For the 2015 acquisition of Manitoba Harvest, the following discussion reflects pro forma results of operations for the three and nine months ended September 2014 andMarch 31, 2015 as if we had acquired Manitoba Harvest on January 1, 2014.2015. Where appropriate, relevant pro forma adjustments are reflected as part of the historical operating results. We believe this is the most meaningful comparison of the operating results for each of our business segments. The following results of operations at each our businesses are not necessarily indicative of the results to be expected for a full year.
Branded Products Businesses
Ergobaby
Overview
Ergobaby, headquartered in Los Angeles, California, is a premier designer, marketer and distributor of wearable baby carriers and related baby wearing products, as well as infant travel systems consisting of strollers, car seats and accessories. Ergobaby offers a broad range of wearable baby carriers, infant travel systems and related products that are sold through more than 450 retailers and web shops in the United States and throughout the world. Ergobaby has two main product lines: baby carriers (baby carriers and accessories) and infant travel systems (strollers, car seats and accessories).
On September 16, 2010, we made loans to and purchased a controlling interest in Ergobaby for approximately $85.2 million, representing approximately 84% of the equity in Ergobaby.
On November 18, 2011, Ergobaby acquired all the outstanding stock of Orbit Baby for $17.5 million. Orbit Baby produces and markets a premium line of infant travel systems. Orbit Baby’s high-quality products include stroller frames, seats, car seats and bassinets that are interchangeable using a patented hub ring.
Results of Operations
The table below summarizes the income from operations data for Ergobaby for the three months ended March 31, 2016 and nine month periods ended September 30, 2015 and September 30, 2014.March 31, 2015.
| | | Three months ended | | Nine months ended | Three months ended |
(in thousands) | September 30, 2015 | | September 30, 2014 | | September 30, 2015 | | September 30, 2014 | March 31, 2016 | | March 31, 2015 |
Net sales | $ | 21,944 |
|
| $ | 22,429 |
| | $ | 64,104 |
| | $ | 61,468 |
| $ | 19,415 |
|
| $ | 20,668 |
|
Cost of sales | 7,866 |
|
| 7,987 |
| | 22,369 |
| | 22,248 |
| 6,802 |
|
| 7,155 |
|
Gross profit | 14,078 |
|
| 14,442 |
| | 41,735 |
| | 39,220 |
| 12,613 |
|
| 13,513 |
|
Selling, general and administrative expense | 7,602 |
|
| 8,680 |
| | 22,686 |
| | 23,139 |
| 7,825 |
|
| 7,339 |
|
Fees to manager | 125 |
|
| 125 |
| | 375 |
| | 375 |
| 125 |
|
| 125 |
|
Amortization of intangibles | 634 |
|
| 756 |
| | 1,910 |
| | 2,267 |
| 573 |
|
| 643 |
|
Income from operations | $ | 5,717 |
|
| $ | 4,881 |
| | $ | 16,764 |
| | $ | 13,439 |
| $ | 4,090 |
|
| $ | 5,406 |
|
Three months ended September 30, 2015March 31, 2016 compared to the three months ended September 30, 2014March 31, 2015
Net sales
Net sales for the three months ended September 30, 2015March 31, 2016 were $21.9$19.4 million, a decrease of $0.5$1.3 million or 2.2%6.1% compared to the same period in 2014.2015. During the three months ended September 30, 2015,March 31, 2016, international sales were approximately $12.8$10.4 million, representing a decrease of $0.5$0.6 million over the corresponding period in 2014.2015. International sales of infant travel systems and baby carriers and accessories decreased by approximately $0.2$0.1 million and $0.3$0.5 million, respectively during the quarter ended September 30, 2015March 31, 2016 as compared to the comparable quarter in 2014.2015. Ergobaby is currently in the process of moving to a direct sales model from a distributor model in Canada, which negatively impacted the year-over-year quarterly international sales comparison. Domestic sales were $9.1 million in the thirdfirst quarter of 2015, the same as2016, reflecting a decrease of $0.7 million compared to the corresponding period in 2014.2015. The flatdecrease in domestic sales activity induring the thirdfirst quarter of 20152016 compared to the same period in 20142015 was due to an increasea decrease in sales of baby carrier and accessories ($0.50.3 million) to national and specialty retail accounts, offset byand a decrease in domestic revenues for infant travel systems and accessories ($0.50.4 million). The increasedecrease in baby carrier sales was attributable to the demandlower orders for the Ergobaby’s 360 four position carrier which was launched domestically latedue to changes in the second quartertiming of 2014.promotional activities for Ergobaby chain customers and inconsistent order patterns for boutique retail customers. The decrease in infant travel systems and accessories sales was primarily attributable to higher revenueslower demand of travel systems compared to the comparable quarter in the three month period ended September 30, 2014, which was still a strong sell-in period for launch of the Orbit Baby G3 infant travel system, which includes stroller bases, various seats and accessories, into the domestic market.2015. Baby carriers and accessories represented 85.4%89.3% of sales in the three months ended September 30, 2015March 31, 2016 compared to 82.7%85.5% in the same period in 2014.2015.
Cost of sales
Cost of sales was approximately $7.9$6.8 million for the three months ended September 30, 2015,March 31, 2016, as compared to $8.0$7.2 million for the three months ended September 30, 2014,March 31, 2015, a decrease of $0.1$0.4 million. The decrease in cost of sales was primarily attributable to lower sales compared to the prior period. Gross profit as a percentage of sales was 64.2%65.0% for the quarter ended September 30, 2015March 31, 2016 compared to 64.4%65.4% for the same period in 2014.2015.
Selling, general and administrative expenses
Selling, general and administrative expense for the three months ended September 30, 2015 decreasedMarch 31, 2016 increased to approximately $7.6$7.8 million or 34.6%40.3% of net sales compared to $8.7$7.3 million or 38.7%35.5% of net sales for the same period of 2014.2015. The $1.1$0.5 million decreaseincrease in the three months ended September 30, 2015March 31, 2016 compared to the same period in 20142015 was primarily attributable to to the timing of marketing spend, lower legal fees in the 2015 period, and a decrease in foreign currency translation costs, partially offset by increases in employee related costs due to increased headcount.staffing levels, and higher professional fees, partially offset by decreased variable expenses, such as distribution and fulfillment and commissions, due to the decrease in domestic sales.
Income from operations
Income from operations for the three months ended September 30, 2015 increased $0.8March 31, 2016 decreased $1.3 million, to $5.7$4.1 million, compared to $4.9$5.4 million for the same period of 2014,2015, based on the factors described above.
Nine months ended September 30, 2015 compared to the nine months ended September 30, 2014
Net sales
Net sales for the nine months ended September 30, 2015 were $64.1 million, an increase of $2.6 million or 4.3% compared to the same period in 2014. During the nine months ended September 30, 2015, international sales were approximately $36.1 million, representing an increase of $1.0 million over the corresponding period in 2014. International baby carrier and accessory sales increased by approximately $0.7 million, and international infant travel systems sales increased by approximately $0.3 million during the first nine months of 2015 as compared to the first nine months of 2014. Domestic sales were $28.0 million in the first nine months of 2015 reflecting an increase of $1.6 million over the corresponding period in 2014. The growth in domestic sales in the first nine months of 2015 compared to the same period in 2014 is attributable to increased sales of baby carrier and accessories ($3.9 million) to national and specialty retail accounts, offset by a decrease in domestic revenues for infant travel systems and accessories ($2.3 million). The increase in baby carrier sales was attributable to the demand for the Ergobaby’s 360 four position carrier, which was domestically available late in the second quarter of 2014. The decrease in infant travel systems and accessories sales was primarily attributable to higher revenues in the nine month period ended September 30, 2014 in which Ergobaby launched the new Orbit Baby G3 infant travel system, which includes stroller bases, various seats and accessories, into the domestic market. Baby carriers and accessories represented 85.7% of sales in the nine months ended September 30, 2015 compared to 81.8% in the same period in 2014.
Cost of sales
Cost of sales was approximately $22.4 million for the nine months ended September 30, 2015 as compared to $22.2 million for the nine months ended September 30, 2014. The increase in cost of sales was primarily attributable to higher sales volume
compared to the prior period. Gross profit as a percentage of sales was 65.1% for the nine months ended September 30, 2015 compared to 63.8% for the same period in 2014. The 130 basis point increase is primarily attributable to product sales mix, with a larger percentage of higher margin baby carrier sales as compared to the prior period.
Selling, general and administrative expenses
Selling, general and administrative expense for the nine months ended September 30, 2015 decreased to approximately $22.7 million or 35.4% of net sales compared to $23.1 million or 37.6% of net sales for the same period of 2014. The $0.5 million decrease in the nine months ended September 30, 2015 compared to the same period in 2014 was primarily attributable to timing in marketing spend and a decrease in foreign currency translation costs in the period; partially offset by higher personnel costs due to increased staffing levels.
Income from operations
Income from operations for the nine months ended September 30, 2015 increased $3.3 million, to $16.8 million, compared to $13.4 million for the same period of 2014, based on the factors described above.
Liberty Safe
Overview
Based in Payson, Utah and founded in 1988, Liberty Safe is the premier designer, manufacturer and marketer of home and gun safes in North America. From its over 314,000 square foot manufacturing facility, Liberty Safe produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles ranging from an entry level product to good, better and best products. Products are marketed under the Liberty brand, as well as a portfolio of licensed and private label brands, including Remington, Cabela’s, Case IH and John Deere. Liberty Safe’s products are the market share leader and are sold through an independent dealer network ("Dealer sales") in addition to various sporting goods, farm and fleet and home improvement retail outlets ("Non-Dealer sales"). Liberty has the largest independent dealer network in the industry. Historically, approximately 60%55% of Liberty Safe’s net sales are Non-Dealer sales and 40%45% are Dealer sales.
We made loans to and purchased a controlling interest in Liberty Safe for approximately $70.2 million in March 2010, representing approximately 96% of the equity in Liberty.
Results of Operations
The table below summarizes the income from operations data for Liberty Safe for the three months ended March 31, 2016 and nine month periods ended September 30, 2015 and September 30, 2014.March 31, 2015.
| | | Three months ended | | Nine months ended | Three months ended |
(in thousands) | September 30, 2015 | | September 30, 2014 | | September 30, 2015 | | September 30, 2014 | March 31, 2016 | | March 31, 2015 |
Net sales | $ | 23,404 |
|
| $ | 19,916 |
| | $ | 74,013 |
| | $ | 67,768 |
| $ | 29,000 |
|
| $ | 25,854 |
|
Cost of sales | 16,207 |
|
| 17,757 |
| | 54,462 |
| | 57,841 |
| 19,699 |
|
| 20,083 |
|
Gross profit | 7,197 |
|
| 2,159 |
| | 19,551 |
| | 9,927 |
| 9,301 |
|
| 5,771 |
|
Selling, general and administrative expense | 3,263 |
|
| 2,746 |
| | 9,955 |
| | 8,874 |
| 4,071 |
|
| 3,261 |
|
Fees to manager | 125 |
|
| 125 |
| | 375 |
| | 375 |
| 125 |
|
| 125 |
|
Amortization of intangibles | 264 |
|
| 980 |
| | 1,508 |
| | 2,907 |
| 264 |
|
| 980 |
|
Income (loss) from operations | $ | 3,545 |
|
| $ | (1,692 | ) | | $ | 7,713 |
| | $ | (2,229 | ) | |
Income from operations | | $ | 4,841 |
|
| $ | 1,405 |
|
Three months ended September 30, 2015March 31, 2016 compared to the three months ended September 30, 2014March 31, 2015
Net sales
Net sales for the quarter ended September 30, 2015March 31, 2016 increased approximately $3.5$3.1 million or 17.5%12.2%, to $23.4$29.0 million, compared to the corresponding quarter ended September 30, 2014.March 31, 2015. Non-Dealer sales were approximately $12.5$14.3 million in the three months ended September 30, 2015March 31, 2016 compared to $12.2$14.6 million for the three months ended September 30, 2014March 31, 2015, representing an increase
a decrease of $0.3 million or 2.5%2.1%. Dealer sales totaled approximately $10.9$14.7 million in the three months ended September 30, 2015March 31, 2016 compared to $7.7$11.2 million in the same period in 2014,2015, representing an increase of $3.2$3.5 million or 41.6%31.6%. The increase in thirdfirst quarter 20152016 sales is attributable to a return to a more normalized level ofstronger overall market demand following the abnormal industry cycle in 2013 and 2014, particularly the market softening experienced during 2014. Liberty Safe hasLiberty’s increased itsability to meet that demand through increased production output continuously to meetand the current demand, and has reached targeted manufacturing output levelsutilization of additional quantities of finished goods inventory that were built during the thirdfourth quarter of 2015.
Cost of sales
Cost of sales for the three months ended September 30, 2015March 31, 2016 decreased approximately $1.6$0.4 million when compared to the same period in 2014.2015. Gross profit as a percentage of net sales totaled approximately 30.8%32.1% and 10.8%22.3% for the quarters ended September 30,March 31, 2016 and March 31, 2015, and September 30, 2014, respectively. The significant increase in gross profit as a percentage of sales during the three months ended September 30, 2015March 31, 2016 compared to the same period in 20142015 is attributable to favorable cost variances as a result of improved manufacturing efficiencies due to greater volume output, and favorable material costs.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2015March 31, 2016 increased to approximately $3.3$4.1 million or 13.9%14.0% of net sales compared $2.7to $3.3 million or 13.8%12.6% of net sales for the same period of 2014.2015. The $0.6$0.8 million increase during the three months ended September 30, 2015March 31, 2016 is primarily attributable to a higher level of dealerincreased spending on radio and other advertising expense,media, higher sales commission expense, and an increased annual advertising allowances for national account customers.expenses of approximately $0.4 million related to accelerated vesting of employee stock options and legal fees associated with the recapitalization of Liberty in March 2016.
Amortization of intangibles
Amortization expense in the first quarter of 2016 decreased $0.7 million because certain intangibles assets that resulted from the purchase of Liberty in March 2010 are now fully amortized.
Income (loss) from operations
Income from operations increased $5.2$3.4 million during the three months ended September 30, 2015March 31, 2016 to $3.5$4.8 million, compared to a loss from operations of $1.7$1.4 million during the same period in 2014,2015, principally as a result of the increase in sales and gross profit, and decrease in amortization expense, as described above.
Nine months ended September 30, 2015 compared to the nine months ended September 30, 2014
Net sales
Net sales for the nine months ended September 30, 2015 increased approximately $6.2 million or 9.2%, to $74.0 million, compared to the corresponding period ended September 30, 2014. Non-Dealer sales were approximately $39.9 million in the nine months ended September 30, 2015 compared to $38.1 million for the nine months ended September 30, 2014 representing an increase of $1.8 million or 4.7%. Dealer sales totaled approximately $33.9 million in the nine months ended September 30, 2015 compared to $29.6 million in the same period in 2014, representing an increase of $4.3 million or 14.5%. Higher production output coupled with the increase in market demand has facilitated the year over year sales growth. In addition, the increase in 2015 sales is attributable to a return to a more normalized level of market demand following the abnormal industry cycle in 2013 and 2014, particularly the market softening experienced during 2014. Liberty Safe’s sales backlog was approximately $9.7 million at September 30, 2015 compared to approximately $8.5 million at September 30, 2014.
Cost of sales
Cost of sales for the nine months ended September 30, 2015 decreased approximately $3.4 million when compared to the same period in 2014. Gross profit as a percentage of net sales totaled approximately 26.4% and 14.6% for the nine months ended September 30, 2015 and September 30, 2014, respectively. The significant increase in gross profit as a percentage of sales during the nine months ended September 30, 2015 compared to the same period in 2014 is attributable to favorable cost variances as a result of improved manufacturing efficiencies due to greater volume output and favorable material costs.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2015 increased to approximately $10.0 million or 13.5% of net sales compared to $8.9 million or 13.1% of net sales for the same period of 2014. The $1.1 million increase is primarily attributable to a higher level of dealer co-op advertising, higher sales commission expense, and an increased annual advertising allowance for national account customers.
Income (loss) from operations
Income from operations increased $9.9 million during the nine months ended September 30, 2015 to $7.7 million compared to a loss from operations of $2.2 million during the same period in 2014, principally as a result of the increase in sales and gross profit, as described above.
Manitoba Harvest
Overview
Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and leader in branded, hemp-based foods. Manitoba Harvest’s products, which Management believes are the fastest growing in the hemp food market and among the fastest growing in the natural foods industry, are currently carried in approximately 7,000 retail stores across the U.S. and Canada. The Company’s hemp-exclusive, consumer-facing 100% all-natural product lineup includes hemp hearts, protein powder, hemp oil and snacks.
We made loans to and purchased a controlling interest in Manitoba Harvest for approximately $101.4$102.7 million in July 2015 representing approximately 87% of the equity in Manitoba Harvest. On December 15, 2015, Manitoba Harvest acquired all of the outstanding stock of Hemp Oil Canada, Inc. ("HOCI") for approximately $30.8 million. HOCI is a wholesale supplier and a private label packager of hemp food products and ingredients.
Results of Operations
The table below summarizes the pro forma income from operations data for Manitoba Harvest for the three months ended March 31, 2016 and nine month periodsthe pro forma income from operations for the three months ended September 30,March 31, 2015. The results of operations for HOCI are included subsequent to acquisition and are not included in the proforma 2015 and September 30, 2014.presentation.
| | | Three months ended | | Nine months ended | Three months ended |
(in thousands) | September 30, 2015 | | September 30, 2014 | | September 30, 2015 | | September 30, 2014 | March 31, 2016 | | March 31, 2015 |
| (Pro forma) | | (Pro forma) | | (Pro forma) | | (Pro forma) | | | (Pro forma) |
Net sales | $ | 9,341 |
| | $ | 7,681 |
| | $ | 32,069 |
| | $ | 26,383 |
| $ | 13,717 |
| | $ | 10,630 |
|
Cost of sales (1) | 4,414 |
| | 4,231 |
| | 15,645 |
| | 14,859 |
| 6,668 |
| | 5,135 |
|
Gross profit | 4,927 |
| | 3,450 |
| | 16,424 |
| | 11,524 |
| 7,049 |
| | 5,495 |
|
Selling, general and administrative expense (2) | 5,531 |
| | 3,506 |
| | 14,389 |
| | 10,365 |
| 5,742 |
| | 3,986 |
|
Fees to manager (3) | 88 |
| | 88 |
| | 263 |
| | 263 |
| 88 |
| | 88 |
|
Amortization of intangibles (4) | 889 |
| | 1,067 |
| | 2,771 |
| | 3,185 |
| 856 |
| | 945 |
|
Loss from operations | $ | (1,581 | ) | | $ | (1,211 | ) | | $ | (999 | ) | | $ | (2,289 | ) | |
Income from operations | | $ | 363 |
| | $ | 476 |
|
Pro forma results of operations of Manitoba Harvest for the three and nine months ended September 30,March 31, 2015 and 2014 include the following pro forma adjustments, applied to historical results as if we acquired Manitoba Harvest January 1, 2014:2015:
(1) Cost of sales for the three and nine months ended September 30,March 31, 2015 does not include $3.1 million of amortization expense associated with the inventory fair value step-up recorded in 2015 as a result of our purchase price allocation for Manitoba Harvest.
(2) Selling, general and administrative expenses were increased by approximately $0.3 million and $0.9 million, respectively, in the three and nine months ended September 30,March 31, 2015 and 2014 as a result of stock compensation expense related to stock options granted to Manitoba Harvest employees as of the date of acquisition.
(3) Represents management fees that would have been payable to the Manager in each of the periods presented.
(4) Represents an increase in amortization of intangible assets totaling approximately $1.0 million and $3.0 million in the three and nine month periodsmonths ended September 30,March 31, 2015 and September 30, 2014, respectively, for additional amortization expense associated with the step up in fair value of intangible assets resulting from the purchase price allocation in connection with our acquisition.
Pro forma threeThree months ended September 30, 2015March 31, 2016 compared to pro forma three months ended September 30, 2014March 31, 2015
Net sales
Net sales for the three months ended September 30, 2015March 31, 2016 were approximately $9.3$13.7 million as compared to $7.7$10.6 million for the three months ended September 30, 2014,March 31, 2015, an increase of $1.7$3.1 million, or 21.6%29.0%. OnNet sales of HOCI for the three months ended March 31, 2016 were $4.9 million. Manitoba Harvest on a stand alone basis had a decrease in net sales of $0.7 million, or $0.4 million on a constant currency basis, netprimarily due to a decrease in private label sales increased $2.1 million or 27.9%. Thefor the first quarter of 2016 versus the comparable prior year period, and a slight increase in net sales isdiscounts during the period. In the first quarter of 2015, one of Manitoba Harvest's private label customers expanded distribution into additional stores, resulting in a resulthigher level of increased sell-through of existing products, new product introductions and expanded retail distribution during 2015.
private label sales versus the current period.
Cost of sales
Cost of sales for the three months ended September 30, 2015March 31, 2016 was approximately $4.4$6.7 million compared to approximately $4.2$5.1 million for the same period in 2014.2015. Cost of sales for HOCI were $2.6 million. Gross profit as a percentage of sales was 52.7%51.4% in the quarter ended September 30, 2015March 31, 2016 and 44.9%51.7% in the quarter ended September 30, 2014, an increaseMarch 31, 2015, a decrease of 780300 basis points, primarily as a result of reduced direct labor costs duethe gross margins at HOCI, which are historically lower since HOCI is a wholesale provider of ingredients. After removing the effect of HOCI from gross margins, Manitoba Harvest's gross margin increased from 51.7% on a pro forma basis for the first quarter of 2015 to increased manufacturing efficiencies.
53.5% for the first quarter of 2016, primarily as a result of efficiencies in operations.
Selling, general and administrative expense
Selling, general and administrative expenses for the three months ended September 30, 2015March 31, 2016 increased to approximately $5.5$5.7 million or 59.2%41.9% of net sales compared to $3.5$4.0 million or 45.6%37.5% of net sales for the same period in 2014.2015. The $2.0$1.8 million increase in the three months ended September 30, 2015March 31, 2016 compared to the same period in 20142015 was primarily due to additional selling and administrative expenses attributable to HOCI ($0.7 million), increases in employee related costs due to increased headcount, increases inand higher expenses to support retail advertising, product demonstrations and marketing expenditures and one time buyer transaction costs incurred in July 2015 ($1.1 million).expenditures.
LossIncome from operations
LossIncome from operations for the three months ended September 30, 2015March 31, 2016 was approximately $1.6$0.4 million, a decrease of $0.4$0.1 million when compared to the same period in 2014,2015, based on the factors described above.
Pro forma nine months ended September 30, 2015 compared to pro forma nine months ended September 30, 2014
Net sales
Net sales for the nine months ended September 30, 2015 were approximately $32.1 million, an increase of $5.7 million, or 21.6% , compared to the same period in 2014. On a constant currency basis, net sales increased 31.4%. The increase in net sales is a result of increased sell-through of existing products, new product introductions and expanded retail distribution during 2015.
Cost of sales
Cost of sales for the nine months ended September 30, 2015 were approximately $15.6 million compared to approximately $14.9 million for the nine months ended September 30, 2014. Gross profit as a percentage of sales increased to 51.2% for the nine months ended September 30, 2015 from 43.7% for the nine months ended September 30, 2014. The increase in gross profit as a percentage of sales is principally attributable to reduced direct labor costs due to increased manufacturing efficiencies, and reduced material costs due to the insourcing of a portion of the production process which was temporarily outsourced for a part of 2014 while the company completed the expansion of their manufacturing facility.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2015 increased to approximately $14.4 million or 44.9% of net sales compared to $10.4 million or 39.3% of net sales for the same period of 2014. The $4.0 million increase in the nine months ended September 30, 2015 compared to the same period in 2014 was primarily attributable to increases in employee related costs due to increased headcount, increases in marketing expenditures and one time buyer transaction costs incurred in July 2015 ($1.1 million).
Loss from operations
Loss from operations for the nine months ended September 30, 2015 was approximately $1.0 million, a decrease of $1.3 million when compared to the same period in 2014, based on the factors described above.
Niche Industrial Businesses
Advanced Circuits
Overview
Advanced Circuits is a provider of small-run, quick-turn and volume production PCBs to customers throughout the United States. Collectively,Historically, small-run and quick-turn PCBs have represented approximately 53%54% of Advanced Circuits’ gross revenues in 2015.revenues. Small-run and quick-turn PCBs typically command higher margins than volume production PCBs given that customers require high levels of responsiveness, technical support and timely delivery of small-run and quick-turn PCBs and are willing to pay a premium for them. Advanced Circuits is able to meet its customers’ demands by manufacturing custom PCBs in as little as 24 hours, while maintaining over 98.0% error-free production rates and real-time customer service and product tracking 24 hours per day.
We purchased a controlling interest in Advanced Circuits on May 16, 2006.
Results of Operations
The table below summarizes the income from operations data for Advanced Circuits for the three and nine month periods ended September 30, 2015March 31, 2016 and September 30, 2014.March 31, 2015.
| | | Three months ended | | Nine months ended | Three months ended |
(in thousands) | September 30, 2015 | | September 30, 2014 | | September 30, 2015 | | September 30, 2014 | March 31, 2016 | | March 31, 2015 |
Net sales | $ | 22,234 |
| | $ | 22,027 |
| | $ | 66,734 |
| | $ | 64,175 |
| $ | 21,517 |
| | $ | 21,418 |
|
Cost of sales | 12,228 |
| | 11,949 |
| | 36,609 |
| | 34,796 |
| 11,826 |
| | 11,867 |
|
Gross profit | 10,006 |
| | 10,078 |
| | 30,125 |
| | 29,379 |
| 9,691 |
| | 9,551 |
|
Selling, general and administrative expense | 3,335 |
| | 3,360 |
| | 10,207 |
| | 10,297 |
| 3,423 |
| | 3,446 |
|
Fees to manager | 125 |
| | 125 |
| | 375 |
| | 375 |
| 125 |
| | 125 |
|
Amortization of intangibles | 251 |
| | 767 |
| | 761 |
| | 2,300 |
| 311 |
| | 259 |
|
Income from operations | $ | 6,295 |
| | $ | 5,826 |
| | $ | 18,782 |
| | $ | 16,407 |
| $ | 5,832 |
| | $ | 5,721 |
|
Three months ended September 30, 2015March 31, 2016 compared to the three months ended September 30, 2014March 31, 2015
Net sales
Net sales for the three months ended September 30, 2015March 31, 2016 increased approximately $0.2$0.1 million to $22.2$21.5 million as compared to the three months ended September 30, 2014.March 31, 2015. During the three months ended September 30, 2015,March 31, 2016, gross sales in Long-Lead Time PCBs increaseddecreased by $0.9$1.0 million, andoffset by increases of $0.2 million in gross sales inof Quick-Turn Small-Run and Quick-Turn Production PCBs decreased by $0.8and $0.9 million when compared to the three months ended September 30, 2014.in gross sales from Assembly. Sales from Quick-Turn Small-Run and Quick-Turn Production PCBs represented approximately 53.1%54.5% of gross sales in the thirdfirst quarter of 20152016 compared to 56.9%54.2% during the same period of 2014.2015.
Cost of sales
Cost of sales for the three months ended September 30, 2015March 31, 2016 increased approximately $0.3 millionthe same as compared to the comparable period in 2014.three months ended March 31, 2015. Gross profit as a percentage of sales decreased 8040 basis points during the three months ended September 30, 2015March 31, 2016 (45.0% at September 30, 2015March 31, 2016 compared to 45.8%44.6% at September 30, 2014)March 31, 2015) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expenses were approximately $3.3$3.4 million in both the three months ended September 30, 2015 as compared to $3.4 million forMarch 31, 2016 and the three months ended September 30, 2014.March 31, 2015. Selling, general and administrative expenses represented 15.0%15.9% of net sales for the three months ended September 30, 2015March 31, 2016 compared to 15.3%16.1% of net sales in the prior year period. The decrease in selling, general and administrative expenses is primarily due to unsuccessful acquisition costs recognized in the prior year period.
Income from operations
Income from operations for the three months ended September 30, 2015March 31, 2016 was approximately $6.3$5.8 million compared to $5.8$5.7 million in the same period in 2014,2015, an increase of approximately $0.5$0.1 million, principally as a result of the factors described above, as well as a decrease in amortization expense of $0.5 million due to certain intangible assets being fully amortized during the prior year.above.
Nine months ended September 30, 2015 compared to the nine months ended September 30, 2014
Net sales
Net sales for the nine months ended September 30, 2015 increased approximately $2.6 million to $66.7 million as compared to the nine months ended September 30, 2014. During the nine months ended September 30, 2015, gross sales increased in Long-Lead Time PCBs by $2.3 million, Assembly sales increased by $0.8 million, and Quick-Turn Production and Small-Run PCBs decreased by $0.4 million when compared to the nine months ended September 30, 2014. Sales from Quick-Turn production and Small-Run PCBs represented approximately 53.1% of gross sales in the first nine months of 2015 compared to 55.9% during the same period of 2014.
Cost of sales
Cost of sales for the nine months ended September 30, 2015 increased approximately $1.8 million compared to the comparable period in 2014. Gross profit as a percentage of sales decreased 70 basis points during the nine months ended September 30, 2015 (45.1% at September 30, 2015 compared to 45.8% at September 30, 2014) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expenses were approximately $10.2 million in the nine months ended September 30, 2015 compared to $10.3 million in the nine months ended 2014. Selling, general and administrative expenses represented 15.3% of net sales for the nine months ended September 30, 2015 compared to 16.0% of net sales in the prior year period.
Income from operations
Income from operations for the nine months ended September 30, 2015 was approximately $18.8 million compared to $16.4 million in the same period in 2014, an increase of approximately $2.4 million, principally as a result of the factors described above, as well as a decrease in amortization expense of $1.5 million as a result of certain intangible assets being fully amortized during the prior year.
Arnold Magnetics
Overview
Founded in 1895 and headquartered in Rochester, New York, Arnold Magnetics is a manufacturer of engineered, application specific permanent magnets. Arnold products are used in applications such as general industrial, reprographic systems, aerospace and defense, advertising and promotional, consumer and appliance, energy, automotive and medical technology. Arnold is the largest U.S. manufacturer of engineered magnets as well as only one of two domestic producers to design, engineer and manufacture rare earth magnetic solutions. Arnold operates a 70,000 sq. ft. manufacturing assembly and distribution facility in Rochester, New York with nine additional facilities worldwide, in countries including the United Kingdom, Switzerland and China. Arnold serves customers via three primary product sectors:
Permanent Magnet and Assemblies and Reprographics ("PMAG") (approximately 72%(historically approximately 70% of net sales) – High performance magnets for precision motor/generator sensors as well as beam focusing applications and reprographic applications;
Flexmag (approximately(historically approximately 20% of net sales) – Flexible bonded magnets for advertising, consumer and industrial applications; and
Precision Thin Metals (approximately 8%(historically approximately 10% of net sales) – Ultra thin metal foil products utilizing magnetic and non- magnetic alloys.
On March 5, 2012, we made loans to and purchased a controlling interest in Arnold for approximately $131$128.8 million, representing approximately 96.6% of the equity in Arnold Magnetics.
Results of Operations
The table below summarizes the income from operations data for Arnold Magnetics for the three and nine month periods ended September 30, 2015March 31, 2016 and September 30, 2014.March 31, 2015.
| | | Three months ended | | Nine months ended | Three months ended |
(in thousands) | September 30, 2015 | | September 30, 2014 | | September 30, 2015 | | September 30, 2014 | March 31, 2016 | | March 31, 2015 |
Net sales | $ | 32,590 |
| | $ | 31,456 |
| | $ | 93,138 |
| | $ | 94,902 |
| $ | 27,383 |
| | $ | 31,188 |
|
Cost of sales | 24,648 |
| | 24,284 |
| | 71,944 |
| | 72,677 |
| 21,499 |
| | 24,180 |
|
Gross profit | 7,942 |
| | 7,172 |
| | 21,194 |
| | 22,225 |
| 5,884 |
| | 7,008 |
|
Selling, general and administrative expense | 3,878 |
| | 4,017 |
| | 11,645 |
| | 13,011 |
| 4,252 |
| | 4,248 |
|
Fees to manager | 125 |
| | 125 |
| | 375 |
| | 375 |
| 125 |
| | 125 |
|
Amortization of intangibles | 881 |
| | 884 |
| | 2,642 |
| | 2,633 |
| 881 |
| | 881 |
|
Income from operations | $ | 3,058 |
| | $ | 2,146 |
| | $ | 6,532 |
| | $ | 6,206 |
| $ | 626 |
| | $ | 1,754 |
|
Three months ended September 30, 2015March 31, 2016 compared to the three months ended September 30, 2014March 31, 2015
Net sales
Net sales for the three months ended September 30, 2015March 31, 2016 were approximately $32.6$27.4 million, an increasea decrease of $1.1$3.8 million compared to the same period in 2014.2015. The increasedecrease in net sales is primarily a result of an increasedecreases in the PMAG ($0.52.7 million) and Precision Thin Metals ($0.91.0 million) product sectors offset by a decrease in net sales in the Flexmag sector ($0.3 million).sectors. PMAG sales represented approximately 72%73% of net sales for the three months ended September 30, 2015,March 31, 2016, compared to 73%72% for the three months ended September 30, 2014.March 31, 2015. The decrease in FlexmagPrecision Thin Metal sales during the three months ended September 30, 2015March 31, 2016 compared to the same period in 20142015 is principally attributable to lower customer demand during the quarter. The increasedecrease in PMAG sales is the result of new customer demand during the quarter, offset by a decline in its reprographics business. The increase in Precision Thin Metals sales isprincipally attributable to positive steps taken overweakness in the last year by management to identify new customersoil and applications.gas sector negatively impacting PMAG sales, particularly in Europe, and lower sales of reprographic products.
International sales were $10.8 million during the three months ended September 30, 2015March 31, 2016 compared to $14.4$12.4 million during the same period in 2014,2015, a decrease of $3.6$1.6 million or 25.1%12.7%. The decrease in international sales is due to a decrease in sales in the
PMAG sector attributable to lower sales of the reprographic applications, as well as weaker economic conditions in Europe, primarily in the oil and gas sector.
Cost of sales
Cost of sales for the three months ended September 30, 2015March 31, 2016 were approximately $24.6$21.5 million compared to approximately $24.3$24.2 million in the same period of 2014.2015. Gross profit as a percentage of sales increaseddecreased from 22.8%22.5% for the quarter ended September 30, 2014March 31, 2015 to 24.4%21.5% in the quarter ended September 30, 2015. The increase isMarch 31, 2016 principally attributable to increased margins in the PMAG sector due to favorable impact of restructuring activities in Switzerland and China, offset in part by a decrease in margin in the Flexmag and Precision Thin Metals sectors. The decrease in margin in the Flexmag sector is due to a volume and customer/productlower sales mix during the three months ended September 30, 2015 compared to the same period in 2014. The decrease in margin in the Precision Thin Metals sector is due to customer sales mix.volume.
Selling, general and administrative expense
Selling, general and administrative expense in the three month period ended September 30, 2015March 31, 2016 was $3.9$4.3 million as compared to approximately $4.0$4.2 million for the three months ended September 30, 2014.March 31, 2015. The decreaseincrease in expense is primarily attributable to reductiona one time adjustment to the Swiss Pension Plan resulting from the relocation of certain positions in advertising, information technology and travel expenses, offset by an increase in professional services fees.Switzerland to the United Kingdom.
Income from operations
Income from operations for the three months ended September 30, 2015March 31, 2016 was approximately $3.1$0.6 million, an increasea decrease of $0.9$1.1 million when compared to the same period in 2014, principally as a result of the factors described above.
Nine months ended September 30, 2015, compared to the nine months ended September 30, 2014
Net sales
Net sales for the nine months ended September 30, 2015 were approximately $93.1 million, a decrease of $1.8 million compared to the same period in 2014. The decrease in net sales is a result of a decrease in sales in the PMAG product sector ($3.9 million) and Flexible product sector ($0.3 million), offset by an increase in net sales in the Precision Thin Metals sector ($2.4 million). PMAG sales represented approximately 71% of net sales for the nine months ended September 30, 2015 compared to 75% for the nine months ended September 30, 2014. The decrease in PMAG sales during the nine months ended September 30, 2015 compared to the same period in 2014 is principally attributable to lower sales of the reprographic application of the PMAG division, as well as weaker economic conditions in Europe, primarily in the oil and gas sector, which is a component of PMAG. The decrease in Flexmag sales is the result of decreased customer demand during the quarter. The increase in Precision Thin Metals sales is attributable to positive steps taken over the last year by management to identify new customers and applications.
International sales were $33.8 million during the nine months ended September 30, 2015 compared to $44.0 million during the same period in 2014, a decrease of $10.2 million or 23.2%. The decrease in international sales is due to a decrease in sales in the PMAG sector as noted above.
Cost of sales
Cost of sales for the nine months ended September 30, 2015 were approximately $71.9 million compared to approximately $72.7 million in the same period of 2014. Gross profit as a percentage of sales decreased from 23.4% for the nine months ended September 30, 2014 to 22.8% in the nine months ended September 30, 2015. The decrease is principally attributable to decreased margins in the PMAG sector due to volume reductions, and a slight decrease in margin in the Precision Thin Metals sector due to customer mix. These decreases in margins were partially offset by an increase in margins in the Flexmag sector due to successful cost saving initiatives.
Selling, general and administrative expense
Selling, general and administrative expense in the nine month period ended September 30, 2015 was $11.6 million as compared to approximately $13.0 million for the nine months ended September 30, 2014. The decrease in expense is primarily attributable to headcount reduction in Switzerland and China.
Income from operations
Income from operations for the nine months ended September 30, 2015 was approximately $6.5 million, an increase of $0.3 million when compared to the same period in 2014, principally as a result of the factors described above.
Clean Earth
Overview
Founded in 1990 and headquartered in Hatboro, Pennsylvania, Clean Earth is a provider of environmental services for a variety of contaminated materials. Clean Earth provides a one-stop shop solution that analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as power, construction, commercial development, oil and gas, infrastructure, industrial and dredging. Historically, the majority of Clean Earth’s revenues have been generated by contaminated soils which includes environmentally impacted soils, drill cuttings and other materials which are treated at one of its nine permitted soil treatment facilities. Clean Earth also operates three RCRA Part B hazardous waste facilities. The remaining revenue has been generated by dredge material, which consists of sediment removed from the floor of a body of water for navigational purposes and/or environmental remediation of contaminated waterways and is treated at one of its two permitted dredge processing facilities. Approximately 98% of the material processed by Clean Earth is beneficially reused for such purposes as daily landfill cover, industrial and brownfield redevelopment projects.
On August 26, 2014, we made loans to and purchased a controlling interest in Clean Earth for approximately $251.4 million, representing approximately 98% of the equity in Clean Earth.
Results of Operations and Pro forma Results of Operations
The table below summarizes the income from operations data for Clean Earth for the three month and nine month periods ended September 30, 2015March 31, 2016 and the pro forma income from operations data for the three and nine month periods ended September 30, 2014.March 31, 2015.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2015 | | September 30, 2014 | | September 30, 2015 | | September 30, 2014 |
| | | (Pro forma) | | | | (Pro forma) |
Service revenues | $ | 44,092 |
| | $ | 48,362 |
| | $ | 122,923 |
| | $ | 116,415 |
|
Cost of services (a) | 28,671 |
| | 31,904 |
| | 88,430 |
| | 79,070 |
|
Gross profit | 15,421 |
| | 16,458 |
| | 34,493 |
| | 37,345 |
|
Selling, general and administrative expense (b) | 7,457 |
| | 8,390 |
| | 19,905 |
| | 18,849 |
|
Fees to manager (c) | 125 |
| | 125 |
| | 375 |
| | 375 |
|
Amortization of intangibles (d) | 2,946 |
| | 2,881 |
| | 9,280 |
| | 8,643 |
|
Income from operations | $ | 4,893 |
| | $ | 5,062 |
| | $ | 4,933 |
| | $ | 9,478 |
|
|
| | | | | | | |
| Three months ended |
(in thousands) | March 31, 2016 | | March 31, 2015 |
Service revenues | $ | 38,286 |
| | $ | 35,129 |
|
Cost of services | 29,551 |
| | 27,823 |
|
Gross profit | 8,735 |
| | 7,306 |
|
Selling, general and administrative expense | 6,592 |
| | 5,432 |
|
Fees to manager | 125 |
| | 125 |
|
Amortization of intangibles | 2,976 |
| | 3,303 |
|
Loss from operations | $ | (958 | ) | | $ | (1,554 | ) |
Pro-forma results of operations of Clean Earth for the three and nine
Three months ended September 30, 2014 include the following pro-forma adjustments, appliedMarch 31, 2016 compared to historical results as if we acquired Clean Earth on January 1, 2014:
(a) Cost of services was increased $0.0 million and $0.4 million in the three months and nine months ended September 30, 2014, respectively, for additional depreciation expense associated the fair value step up of property, plant and equipment, resulting from the purchase price allocation in connection with our acquisition.
(b) Selling, general and administrative costs was reduced by approximately $13.1 million in the three and nine months ended September 30, 2014 representing an adjustment for one-time seller's transaction costs as a result of our purchase, offset by additional expense related to stock options issued to management.
(c) Represents management fees that would have been payable to the Manager in the three and nine months ended September 30, 2014.
(d) Represents an increase in amortization of intangible assets totaling $2.4 million and $6.6 million in the three and nine months ended September 30, 2014, respectively, for additional amortization expense associated with the fair value step up of intangible assets resulting from the purchase price allocation in connection with our acquisition.
Three months ended September 30, 2015 compared to the pro forma three months ended September 30, 2014.March 31, 2015.
Service revenues
Service revenues for the three months ended September 30, 2015March 31, 2016 were approximately $44.1$38.3 million, a decreasean increase of $4.3$3.2 million or 8.8%9.0% compared to the same period in 2014.2015. The decreaseincrease in service revenues is due to reduced dredge material revenues offset byan increase in contaminated soil volume, hazardous waste revenue from American Environmental Services, Inc ("AES"), whichand transportation revenue on projects where Clean Earth acquired in December 2014. schedules the transportation. Transportation revenue has very low margins and is generally a pass-through to the customer.
For the three months ended September 30, 2015,March 31, 2016, contaminated soil volume decreased 22%increased 14% as compared to the same period last year principally attributable to timing ofincreased commercial development activity in the Greater Washington, D. C. area.Northeast. Hazardous waste volumerevenues increased 90% primarily9% principally as a result of the AES acquisition.increased drum and aerosol can volume. Revenue from dredged material decreased for the three months ended September 30, 2015March 31, 2016 as compared to the same period in 20142015 due to the timing of new bidding activity as well as competitive factors. Contaminated soils represented approximately 62%63% of net sales for both the three months ended September 30, 2015 and September 30, 2014.March 31, 2016 compared to 55% for the three months ended March 31, 2015.
Cost of services
Cost of services for the three months ended September 30, 2015March 31, 2016 were approximately $28.7$29.6 million compared to approximately $31.9$27.8 million in the same period of 2014.2015. Gross profit as a percentage of sales increased from 34.0%20.8% for the three month period ended September 30, 2014March 31, 2015 to 35.0%22.8% for the same period ended September 30, 2015.March 31, 2016. The 100200 basis points increase in gross margin during the three months ended September 30, 2015March 31, 2016 was primarily due to increased dredge marginsthe reclassification of certain labor costs associated with American Environmental Services ("AES"), which was acquired in December 2014, that had previously been classified by AES as cost of sales but were determined to be selling, general and administrative costs. Excluding this reclassification, gross margin decreased as a result of athe sales mix in the first quarter of private2016 versus government projects partially offset by reduced contaminated soil margins due to increased beneficial use costs at somethe first quarter of the contaminated soil facilities.2015.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2015 decreasedMarch 31, 2016 increased to approximately $7.5$6.6 million or 16.9%17.2% of service revenues, as compared to $8.4$5.4 million or 17.3%15.5% of service revenues for the same period in 2014.2015. The $0.9$1.2 million decreaseincrease in selling, general and administrative expenses in the three months ended September 30, 2015March 31, 2016 compared to 20142015 is primarily attributable to reductions in transactionthe reclassification of certain labor costs associated with the acquisitionAES from cost of Clean Earth in the third quarter of 2014, partially offset by incremental costs associated with the acquisition of AES in December 2014.sales to selling, general and administrative expense.
Amortization expense
Amortization expense for the three months ended September 30, 2015March 31, 2016 was $2.9$3.0 million, an increasedecrease of $0.1$0.3 million compared to the three months ended September 30, 2014. The increase is due to additional amortization expense in 2015 from the AES acquisition.March 31, 2015.
IncomeLoss from operations
IncomeLoss from operations for the three months ended September 30, 2015March 31, 2016 was approximately $4.9$1.0 million as compared to incomeloss from operations of $5.1$1.6 million for the three months ended September 30, 2014,March 31, 2015, a decrease of $0.2$0.6 million, primarily as a result of those factors described above.
Nine months ended September 30, 2015 compared to Clean Earth's results of operations are historically lower in the pro forma nine months ended September 30, 2014
Service revenues
Service revenues for the nine months ended September 30, 2015 were approximately $122.9 million, an increase of $6.5 million or 5.3% compared to the same period in 2014. The increase in service revenues is principally the resultfirst quarter of the Clean Earth’s December 2014 acquisitionfiscal year due to reduced levels of all of the assets of American Environmental Services, Inc ("AES") which operates two RCRA Part B hazardous waste facilities,construction and growth at its existing RCRA Part B facility. For the nine months ended September 30, 2015, contaminated soil volumes increased 4% as compared to the same period last year principally attributable to commercial development activity in the New York City and Greater Washington, D. C. areas. Hazardous waste volume increased 105%, primarily as a result of the AES acquisition. Revenue from dredged material decreased for the nine months ended September 30, 2015 as compared to the same period in 2014 due to the timing of new bidding activity. Contaminated soils represented approximately 61% of net sales for the nine months ended September 30, 2015 and 61% of net sales for the nine months ended September 30, 2014.Northeastern United States during winter.
Cost of services
Cost of services for the nine months ended September 30, 2015 were approximately $88.4 million compared to approximately $79.1 million in the same period of 2014. Gross profit as a percentage of sales decreased from 32.1% for the nine month period ended September 30, 2014 to 28.1% for the same period ended September 30, 2015. The 400 basis points decrease in gross margin
during the nine months ended September 30, 2015 was primarily due to the mix of services provided during the nine months ended September 30, 2015 as compared to the prior year, as well as decreased margins from contaminated soils due to increased equipment rental expense and increased beneficial use costs at some of the contaminated soil facilities.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2015 increased to approximately $19.9 million or 16.2% of service revenues compared to $18.8 million or 16.2% of service revenues for the same period in 2014. The $1.1 million increase in selling, general and administrative expenses in the nine months ended September 30, 2015 compared to 2014 is primarily attributable to the acquisition of AES in December 2014 and costs associated with the acquisition of Clean Earth in 2014 offset by reductions in professional fees and bad debt expenses.
Amortization expense
Amortization expense for the nine months ended September 30, 2015 was $9.3 million, an increase of $0.6 million compared to the nine months ended September 30, 2014. The increase is due to additional amortization expense in 2015 from the AES acquisition ($0.4 million) and an increase in the amortization of airspace, which is recognized based on usage rather than over the estimated useful life of the asset.
Income from operations
Income from operations for the nine months ended September 30, 2015 was approximately $4.9 million as compared to income from operations of $9.5 million for the nine months ended September 30, 2014, a decrease of $4.5 million, primarily as a result of those factors described above.
SternoCandleLampSterno Products
Overview
SternoCandleLamp,Sterno Products, headquartered in Corona, California, is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry. SternoCandleLampSterno Products offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps. SternoCandleLampSterno Products was formed in 2012 with the merger of two manufacturers and marketers of portable food warming fuel products, The Sterno Group LLC and the Candle Lamp Company, LLC. On January 22, 2016, Sterno Products acquired Northern International, Inc. ("NII"), which sells flameless candles and outdoor lighting products through the retail segment.
On October 10, 2014, we made loans to and purchased all of the equity of SternoCandleLampSterno Products for approximately $160.0 million.
Results of Operations
The table below summarizes the income from operations data for SternoCandleLampSterno Products for the three and nine months ended September 30, 2015March 31, 2016 and March 31, 2015. The results of NII have been included from the pro forma income from operations data fordate of acquisition through the three and nine month period ended September 30, 2014.end of the quarter.
| | | Three months ended | | Nine months ended | Three months ended |
(in thousands) | September 30, 2015 | | September 30, 2014 | | September 30, 2015 | | September 30, 2014 | March 31, 2016 | | March 31, 2015 |
| | | (Pro forma) | | | | (Pro forma) | |
Net sales | $ | 31,710 |
| | $ | 32,350 |
| | $ | 98,680 |
| | $ | 99,699 |
| $ | 43,969 |
| | $ | 28,604 |
|
Cost of sales | 23,390 |
| | 25,472 |
| | 74,424 |
| | 77,872 |
| 33,123 |
| | 22,389 |
|
Gross Profit | 8,320 |
| | 6,878 |
| | 24,256 |
| | 21,827 |
| 10,846 |
| | 6,215 |
|
Selling, general and administrative expenses | 3,985 |
| | 4,097 |
| | 11,776 |
| | 10,978 |
| 6,790 |
| | 3,622 |
|
Management fees (a) | 125 |
| | 125 |
| | 375 |
| | 375 |
| |
Amortization of intangibles (b) | 1,503 |
| | 1,504 |
| | 3,819 |
| | 4,511 |
| |
Management fees | | 125 |
| | 125 |
|
Amortization of intangibles | | 1,519 |
| | 812 |
|
Income from operations | $ | 2,707 |
| | $ | 1,152 |
| | $ | 8,286 |
| | $ | 5,963 |
| $ | 2,412 |
| | $ | 1,656 |
|
Pro-forma results of operations of SternoCandleLamp for the three and nine months ended September 30, 2014 include the following pro-forma adjustments, applied to historical results as if we acquired SternoCandleLamp on January 1, 2014:
(a) Represents management fees that would have been payable to the Manager in the three and nine months ended September 30, 2014.
(b) Represents an increase in amortization of intangible assets totaling $1.0 million and $1.9 million, respectively, in the three and nine months ended September 30, 2014 for additional amortization expense associated the fair value step up of intangible assets resulting from the purchase price allocation in connection with our acquisition.
Three months ended September 30, 2015March 31, 2016 compared to the pro forma three months ended September 30, 2014March 31, 2015
Net sales
Net sales for the three months ended September 30, 2015March 31, 2016 were approximately $31.7$44.0 million, a decreasean increase of $0.6$15.4 million or 2.0%53.7% compared to the same period in 2014.2015. The decreaseincrease in net sales is primarily a result of the acquisition of NII in January 2016 ($15.2 million in net sales) and the timing of orders from SternoCandleLamp's largerstocking programs of key Sterno customers.
Cost of sales
Cost of sales for the three months ended September 30, 2015March 31, 2016 were approximately $23.4$33.1 million compared to approximately $25.5$22.4 million in the same period of 2014.2015. Cost of sales for NII were approximately $12.4 million, and includes $1.2 million in expense associated with the inventory step-up recorded in connection with the preliminary purchase price allocation for NII. Gross profit as a percentage of sales increased from 21.3%21.7% for the three months ended September 30, 2014March 31, 2015 to 26.2%24.7% for the same period ended September 30, 2015.March 31, 2016. The increase in gross margin during the three months ended September 30, 2015March 31, 2016 primarily reflects labor anda favorable margin mix with the acquisition of NII, manufacturing efficiencies during the third quarter of 2015 as compared to the third quarter of 2014resulting from investment in automation and material savings from both lowerfavorable trend in global commodity prices and material savings programs.prices.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30,March 31, 2016 and 2015 and 2014 was approximately $4.0$6.8 million and $4.1$3.6 million, respectively. Selling, general and administrative expense represented 12.6%15.4% of net sales for the three months ended September 30, 2015March 31, 2016 as compared to 12.7% of net sales for the same period in 2014.2015. The increase in selling, general and administrative expenses during the first quarter of 2016 reflects the acquisition of NII, which has historically had a higher selling, general and administrative expense as a percentage of revenue, as well as an increase in staffing to strengthen sales and marketing and increased professional service costs associated with the acquisition of NII.
Income from operations
Income from operations for the three months ended September 30, 2015March 31, 2016 was approximately $2.7$2.4 million, an increase of $1.6$0.8 million when compared to the same period in 2014,2015, as a result of those factors described above.
Nine months ended September 30, 2015 compared to the pro forma nine months ended September 30, 2014
Net sales
Net sales for the nine months ended September 30, 2015 were approximately $98.7 million, a decrease of $1.0 million or 1.0% compared to the same period in 2014. The decrease in net sales is primarily a result of the timing of orders from two of SternoCandleLamp's larger customers.
Cost of sales
Cost of sales for the nine months ended September 30, 2015 were approximately $74.4 million compared to approximately $77.9 million in the same period of 2014. Gross profit as a percentage of sales increased from 21.9% for the nine months ended September 30, 2014 to 24.6% for the same period ended September 30, 2015. The increase in gross margin during the nine months ended September 30, 2015 primarily reflects greater labor and manufacturing efficiencies during the first nine months of 2015 as compared to the first nine months of 2014 as SternoCandleLamp continued to integrate the acquisition of Sterno by CandleLamp during 2014, and favorable material costs reflecting lower commodity prices and material savings programs.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2015 and 2014 was approximately $11.8 million and $11.0 million, respectively. The increase is primarily a result of integration services fees incurred during the nine months ended September 30, 2015. Selling, general and administrative expense represented 11.9% of net sales for the nine months ended September 30, 2015 as compared to compared to 11.0% of net sales for the same period in 2014.
Income from operations
Income from operations for the nine months ended September 30, 2015 was approximately $8.3 million, an increase of $2.3 million when compared to the same period in 2014, due to those factors described above, as well as a decrease in amortization expense as a result of the finalization of the purchase price allocation for SternoCandleLamp in the three months ended March 31, 2015.
Tridien
Overview
Tridien, headquartered in Coral Springs, Florida, is a leading designer and manufacturer of powered and non-powered medical therapeutic support services and patient positioning devices serving the acute care, long-term care and home health care markets. Tridien is one of the nation’s leading designers and manufacturers of specialty therapeutic support surfaces with manufacturing operations in multiple locations to better serve a national customer base.
Tridien, together with its subsidiary companies, provides customers the opportunity to source leading surface technologies from the designer and manufacturer.
Tridien develops products both independently and in partnership with large distribution intermediaries. Medical distribution companies then sell or rent the therapeutic support surfaces, sometimes in conjunction with bed frames and accessories to one of three end markets: (i) acute care, (ii) long term care and (iii) home health care. The level of sophistication largely varies for each product, as some patients require simple foam mattress beds ("non-powered" support surfaces) while others may require
electronically controlled, low air loss, lateral rotation, pulmonary therapy or alternating pressure surfaces ("powered" support surfaces). The design, engineering and manufacturing of all products is completed in-house (with the exception of PrimaTech products, which are manufactured in Taiwan) and are FDA compliant. Tridien historically receives approximately two-thirds of its revenues from its threetwo largest customers.
We purchased a controlling interest in Tridien in August 2006.
Results of Operations
The table below summarizes the income from operations data for Tridien for the three and nine month periods ended September 30,March 31, 2016 and March 31, 2015 and September 30, 2014
| | | Three months ended | | Nine months ended | Three months ended |
(in thousands) | September 30, 2015 | | September 30, 2014 | | September 30, 2015 | | September 30, 2014 | March 31, 2016 | | March 31, 2015 |
Net sales | $ | 23,318 |
| | $ | 17,633 |
| | $ | 58,850 |
| | $ | 50,659 |
| $ | 14,760 |
| | $ | 16,564 |
|
Cost of sales | 18,909 |
| | 13,967 |
| | 47,043 |
| | 39,667 |
| 12,618 |
| | 13,357 |
|
Gross profit | 4,409 |
| | 3,666 |
| | 11,807 |
| | 10,992 |
| 2,142 |
| | 3,207 |
|
Selling, general and administrative expense | 2,666 |
| | 2,559 |
| | 7,561 |
| | 7,663 |
| 2,185 |
| | 2,459 |
|
Fees to manager | 88 |
| | 88 |
| | 263 |
| | 263 |
| 88 |
| | 88 |
|
Amortization of intangibles | 472 |
| | 445 |
| | 1,322 |
| | 1,334 |
| 446 |
| | 445 |
|
Impairment expense | — |
| | — |
| | 9,165 |
| | — |
| — |
| | 8,907 |
|
Income (loss) from operations | $ | 1,183 |
| | $ | 574 |
| | $ | (6,504 | ) | | $ | 1,732 |
| |
Loss from operations | | $ | (577 | ) | | $ | (8,692 | ) |
Three months ended September 30, 2015March 31, 2016 compared to the three months ended September 30, 2014March 31, 2015
Net sales
Net sales for the three months ended September 30, 2015March 31, 2016 were approximately $23.3$14.8 million compared to approximately $17.6$16.6 million for the same period in 2014, an increase2015, a decrease of $5.7$1.8 million or 32.2%10.9%. Sales of non-powered products (including patient positioning devices) totaled $18.2$10.5 million during the three months ended September 30, 2015March 31, 2016 representing an increasea decrease of $3.7$3.4 million compared to the same period in 2014.2015. Sales of powered products totaled $5.1$4.4 million during the three months ended September 30, 2015March 31, 2016 representing an increase of $2.0$1.6 million compared to the same period in 2014.2015. The increasedecrease in non-powered product sales in the three months ended September 30, 2015March 31, 2016 compared to the same period in 20142015 is principallydue to the resultloss of increased sales to one of Tridien's larger customers, whose contract is expiringexpired in the fourth quarter of 2015. Improved powered
products sales in the three months ended September 30, 2015March 31, 2016 compared to the same period in 20142015 is principally the result of increased sales of recently developed products.two new products launched in 2015.
Cost of sales
Cost of sales increaseddecreased approximately $4.9$0.7 million for the three months ended September 30, 2015March 31, 2016 compared to the same period in 2014. Gross profit as a percentage of sales was approximately 18.9%14.5% in the three month period ended September 30, 2015March 31, 2016 compared to 20.8%19.4% in the samethree month period of 2014.ended March 31, 2015. The decrease in gross profit as a percentage of sales was primarily due to higher costlabor costs to meet unexpected demand from one of production for recently developed powered products.Tridien’s larger customers during the three months ending March 31, 2016.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2015March 31, 2016 was approximately $2.7$2.2 million as compared to $2.6$2.5 million for the same period in 2014. The increase in selling, general2015. Tridien incurred higher research and administrative expenses is due to increased legal fees during the quarter.
Income from operations
Income from operations was approximately $1.2 million in the three months ended September 30, 2015 as compared to $0.6 million in the three months ended September 30, 2014, an increase of $0.6 million due primarily to the factors described above.
Nine months ended September 30, 2015 compared to the nine months ended September 30, 2014
Net sales
Net sales for the nine months ended September 30, 2015 were approximately $58.9 million compared to approximately $50.7 million for the same period in 2014, an increase of $8.2 million or 16.2%. Sales of non-powered products (including patient positioning devices) totaled $46.7 million during the nine months ended September 30, 2015 representing an increase of $5.5 million compared to the same period in 2014. Sales of powered products totaled $12.1 million during the nine months ended September 30, 2015 representing an increase of $2.7 million compared to the same period in 2014. The increase in non-powered product sales in the nine months ended September 30, 2015 compared to the same period in 2014 is principally the result of increased sales to two of Tridien's largest customers, one of whose contract is expiring in the fourth quarter of 2015. Improved powered products sales in the nine months ended September 30, 2015 compared to the same period in 2014 is principally the result of sales of recently developed products.
Cost of sales
Cost of sales increased approximately $7.4 million for the nine months ended September 30, 2015 compared to the same period in 2014. Gross profit as a percentage of sales was approximately 20.1% in the nine month period ended September 30, 2015 compared to 21.7% in the same period of 2014. The decrease in gross profit as a percentage of sales was primarily due to an unfavorable product sales mix, adjustments to inventory reserves, and higher production costs incurred during the nine months ended September 30, 2015 compared to the same period in 2014.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2015 was approximately $7.6 million as compared to $7.7 million for the same period in 2014. There were no notable changes in the components of thesedevelopment costs during the current year.first quarter of 2015 leading up to the launch of two new powered products.
Impairment expense
In January 2015, one of Tridien's largestlarger customers informed the CompanyTridien that itthey would not renew itstheir purchase agreement when it expiresexpired in the fourth quarter of 2015. This customer represented 20% of Tridien's sales in 2014. The expected lost sales and net income from this customer were significant enough to trigger an interim goodwill and indefinite-lived asset impairment analysis. The result of thisindefinite lived impairment analysis (step 1) indicated that goodwill was impaired. The resultsin the first quarter of the step 2 impairment analysis2015, which resulted in a write down of goodwill of $8.9 million and a write down of long-lived intangible assets of $0.2 million.goodwill.
Income (loss)Loss from operations
Loss from operations was approximately $6.5$0.6 million in the ninethree months ended September 30, 2015March 31, 2016 as compared to income from operations of approximately $1.7$8.7 million in the ninethree months ended September 30, 2014,March 31, 2015, a decrease of approximately $8.2$8.1 million due primarily to the goodwill impairment.factors described above.
Liquidity and Capital Resources
The change in cash and cash equivalents is as follows:
|
| | | | | | | | |
| | Nine months ended |
(in thousands) | | September 30, 2015 | | September 30, 2014 |
Cash provided by operations | | $ | 46,471 |
| | $ | 46,160 |
|
Cash used in investing activities | | 246,594 |
| | (237,899 | ) |
Cash (used in) provided by financing activities | | (225,450 | ) | | 102,331 |
|
Effect of exchange rates on cash and cash equivalents | | (2,593 | ) | | (552 | ) |
Increase (decrease) in cash and cash equivalents | | $ | 65,022 |
| | $ | (89,960 | ) |
Cash Flow from Operating Activities
For the nine months ended September 30, 2015, cash flows provided by operating activities (from both continuing and discontinued operations) totaled approximately $46.5 million, which represents a $0.3 million increase compared to cash provided by operations of $46.2 million during the nine month period ended September 30, 2014. This increase is principally the result of changes in cash used for working capital in the nine months ended September 30, 2015 as compared to the same period in 2014 as a result of the seasonality of FOX in 2014 which is not reflected in 2015 after the deconsolidation of FOX during the third quarter of 2014, the effect of the acquisition of Clean Earth and SternoCandleLamp in the third and fourth quarter of 2014, respectively, the the acquisition of Manitoba Harvest in July 2015 and sale of CamelBak in August 2015.
Cash Flow from Investing Activities
Cash flows provided by investing activities for the nine months ended September 30, 2015 totaled approximately $246.6 million, compared to $237.9 million used in investing activities in the same period of 2014. The 2015 investing activities reflect the acquisition of Manitoba Harvest in the third quarter ($101.2 million) and proceeds from the sale of CamelBak in August 2015 offset by the receivable recorded to reflect the proceeds related to the sale of American Furniture, which were received in October 2015 ($244.7 million). The 2014 investing activities reflect FOX's acquisition of Sport Truck ($41.0 million) and our acquisition of Clean Earth ($250.0 million, net of cash). Capital expenditures in the nine months ended September 30, 2015 increased approximately $4.5 million (including capital expenditures at discontinued operations in both 2015 and 2014), with the increase primarily due to capital expenditures at our 2014 acquisitions, Clean Earth and SternoCandleLamp. We expect capital expenditures for the remainder of 2015 to be approximately $6 million to $8 million.
Cash Flow from Financing Activities
Cash flows used in financing activities totaled approximately $225.5 million during the nine months ended September 30, 2015 principally reflecting payment of our shareholder distribution ($58.6 million) and the repayment of our 2014 Revolving Credit Facility using the proceeds from the sale of CamelBak during the third quarter. Cash flows provided by financing activities during the nine months ended September 30, 2014 were approximately $102.3 million principally reflecting net borrowings under our credit facility to finance a portion of the acquisition purchase price for Clean Earth in the third quarter of 2014 and FOX's borrowings to finance offset in part by our shareholder distribution ($52.2 million), and a profit allocation payment to our Manager related to the FOX secondary offering ($11.9 million).
Liquidity
At September 30, 2015,March 31, 2016, we had approximately $88.7$72.6 million of cash and cash equivalents on hand. The majority of our cash is in non-interest bearing checking accounts or invested in short-term money market accounts and is maintained in accordance with the Company’s investment policy, which identifies allowable investments and specifies credit quality standards.
As of September 30, 2015, we had the following outstanding loans due from each of our businesses:The change in cash and cash equivalents is as follows:
|
| | | | |
(in thousands) | | |
Ergobaby | | $ | 19,953 |
|
Liberty | | $ | 31,150 |
|
Manitoba Harvest | | $ | 23,294 |
|
Advanced Circuits | | $ | 59,547 |
|
Arnold Magnetics | | $ | 73,700 |
|
Clean Earth | | $ | 153,093 |
|
SternoCandleLamp | | $ | 83,042 |
|
Tridien | | $ | 12,231 |
|
|
| | | | | | | | |
| | Three months ended |
(in thousands) | | March 31, 2016 | | March 31, 2015 |
Cash provided by operations | | $ | 6,025 |
| | $ | 3,287 |
|
Cash provided by (used in) investing activities | | 5,847 |
| | (5,160 | ) |
Cash used in financing activities | | (22,141 | ) | | (1,313 | ) |
Effect of exchange rates on cash and cash equivalents | | (3,033 | ) | | (67 | ) |
Decrease in cash and cash equivalents | | $ | (13,302 | ) | | $ | (3,253 | ) |
Cash Flow from Operating Activities
For the three months ended March 31, 2016, cash flows provided by operating activities totaled approximately $6.0 million, which represents a $2.7 million increase compared to cash provided by operations of $3.3 million during the three month period ended March 31, 2015 (from both continuing and discontinued operations). This increase is principally the result of changes in cash used for working capital in the three months ended March 31, 2016 as compared to the same period in 2015, primarily as a result of the lower net loss in 2016 compared to 2015, and the effect of the cash flows from discontinued operations. Both American Furniture and CamelBak, which were sold in 2015 and are presented as discontinued operations, had higher working capital needs in the first quarter of our fiscal year due to their seasonality.
Cash Flow from Investing Activities
Cash flows provided by investing activities for the three months ended March 31, 2016 totaled approximately $5.8 million, compared to $5.2 million used in investing activities in the same period of 2015. The 2016 investing activities reflect the acquisition of NII by Sterno in January 2016 ($35.6 million), offset by the proceeds from the partial divestiture of FOX shares of $47.7 million. Capital expenditures in the three months ended March 31, 2016 decreased approximately $0.4 million (including capital expenditures at discontinued operations in 2015). We expect capital expenditures for the full year of 2016 to be approximately $16 million to $21 million.
Cash Flow from Financing Activities
Cash flows used in financing activities totaled approximately $22.1 million during the three months ended March 31, 2016 principally reflecting payment of our shareholder distribution ($19.5 million) and distributions to noncontrolling shareholders of $5.3 million as a result of the Liberty recapitalization. Cash flows provided by financing activities during the three months ended March 31, 2015 were approximately $1.3 million principally reflecting the payment of our shareholder distribution offset by borrowings under our 2014 revolving credit facility.
Inter-company Debt
A component of our acquisition financing strategy that we utilize in acquiring the businesses we own and manage is to provide both equity capital and debt capital, raised at the parent level through our existing credit facility. Our strategy of providing inter-company debt financing within the capital structure of the businesses that we acquire and manage allows us the ability to distribute cash to the parent company through monthly interest payments and amortization of the principle on these inter-company loans. Each loan to our businesses has a scheduled maturity and each business is entitled to repay all or a portion of the principal amount of the outstanding loans, without penalty, prior to maturity. Certain of our businesses have paid down their respective inter-
company debt balances through the cash flow generated by these businesses and we have recapitalized, and expect to continue to recapitalize, these businesses in the normal course of our business. The recapitalization process involves funding the inter-company debt using either cash on hand at the parent or our revolving credit facility, and serves the purpose of optimizing the capital structure at our subsidiaries and providing the noncontrolling shareholders with a distribution on their ownership interest in a cash flow positive business.
During the first quarter of 2016, we completed a recapitalization at Liberty whereby we entered into an amendment to the inter-company loan agreement with Liberty (the “Liberty Loan Agreement”). The Liberty Loan Agreement was amended to (i) provide for term loan borrowings of $38.0 million and revolving credit facility borrowings of $5.0 million to fund cash distributions totaling $35.3 million to its shareholders, including the Company, and (ii) extend the maturity dates of the term loans and revolving credit facility. Liberty’s noncontrolling shareholders received approximately $5.3 million in distributions as a result of the recapitalization. Certain members of Liberty's management also exercised stock option immediately prior to the recapitalization, resulting in net proceeds from stock options at Liberty of $3.8 million. The Company then purchased $1.5 million in shares from members of Liberty management, resulting in Liberty's noncontrolling shareholders holding 11.4% of Liberty's outstanding shares subsequent to the recapitalization.
During the first quarter of 2016 we waived certain financial covenant defaults under the inter-company loan agreement with Tridien, which occurred during the fourth quarter of 2015.
As of March 31, 2016, we had the following outstanding loans due from each of our businesses:
|
| | | | |
(in thousands) | | |
Ergobaby | | $ | 13,753 |
|
Liberty | | $ | 57,775 |
|
Manitoba Harvest | | $ | 45,646 |
|
Advanced Circuits | | $ | 53,952 |
|
Arnold Magnetics | | $ | 71,265 |
|
Clean Earth | | $ | 144,083 |
|
Sterno Products | | $ | 108,191 |
|
Tridien | | $ | 11,856 |
|
Our primary source of cash is from the receipt of interest and principal on the outstanding loans to our businesses. Accordingly, we are dependent upon the earnings of and cash flow from these businesses, which are available for (i) operating expenses; (ii) payment of principal and interest under our 2014 Credit Facility; (iii) payments to CGM due pursuant to the Management Services Agreement and the LLC Agreement; (iv) cash distributions to our shareholders; and (v) investments in future acquisitions. Payments made under (iii) above are required to be paid before distributions to shareholders and may be significant and exceed the funds held by us, which may require us to dispose of assets or incur debt to fund such expenditures.
On August 3, 2015,FOX Equity Investment
During the Company sold its majority owned subsidiary, CamelBak, basedfirst quarter of 2016, the Company's equity method investment, FOX, closed on a total enterprise valuesecondary public offering if 2,500,000 shares of $412.5 million. The Company received approximately $367.8 million in cash related to its debt and equity interests in CamelBak after payments to noncontrolling shareholders and paymentFOX common shares held by the Company. Concurrently with the closing of all transaction expenses. The Company recognized a gainthe offering, FOX repurchased 500,000 shares of $165.3 million for asFOX common stock held by the Company. As a result of the sale of CamelBak.
On October 5, 2015,shares through the offering and the repurchase of shares by FOX, the Company sold its majority owned subsidiary, American Furniture, for a total of 3,000,000 shares of FOX common stock, with total net proceeds of approximately $47.7 million. Upon completion of the offering and repurchase of shares by FOX, the Company's ownership interest in FOX was reduced from approximately 41% to 33%. The sale price of $24.1 million. The Company received approximately $23.5a portion of the Company's FOX shares in March 2016 qualified as a Sale Event under the Company's LLC Agreement. During the second quarter, the Company's Board of Directors declared a distribution to the Holders of the Allocation Interests of $8.6 million in net proceeds related to its debt and equity interests in American Furniture afterconnection with the Sale Event of FOX. The profit allocation payment of all transaction expenses. The Company recognized a loss onwill be made during the sale of American Furniture of $14.3 million.quarter ended June 30, 2016.
We believe that we currently have sufficient liquidity and capital resources to meet our existing obligations, including quarterly distributions to our shareholders, as approved by our Board of Directors, over the next twelve months. The quarterly distribution for the three months ended September 30, 2015March 31, 2016 was paid on July 29, 2015April 28, 2016 and totaled $19.5 million.
2014 Credit Facility
On June 6, 2014 we entered in a new credit facility, the 2014 Credit Facility replacing our existing 2011 Credit Facility entered into in October 2011. The 2014 Credit Facility provides for (i) revolving loans, swing line loans and letters of credit up to an maximum aggregate amount of $400 million and matures in June 2019, and (ii) a $325 million term loan. Our 2014 Term Loan requires quarterly payments of $0.8 million with a final payment of the outstanding principal balance due in June 2021. (Refer to Note I to the Condensed Consolidated Financial Statements for a complete description of our 2014 Credit Facility.) We amended the 2014 Credit Facility in June 2015, primarily to allow us to make intercompany loans to, and acquire, Canadian-based companies on an unsecured basis, and to modify provisions that would allow for early termination of a "Leverage Increase Period," thereby providing us with additional flexibility as to the timing of subsequent acquisitions.
We had $395.6$395.5 million in net availability under the 2014 Revolving Credit Facility at September 30, 2015. $4.4March 31, 2016. The $4.5 million in outstanding borrowings under the 2014 Revolving Credit Facility at September 30, 2015 reflectedMarch 31, 2016 reflect outstanding letters of credit.
The following table reflects required and actual financial ratios as of September 30, 2015March 31, 2016 included as part of the affirmative covenants in our 2014 Credit Facility:
|
| | | | |
Description of Required Covenant Ratio | | Covenant Ratio Requirement | | Actual Ratio |
Fixed Charge Coverage Ratio | | greater than or equal to 1.5:1.0 | | 2.85:3.72:1.0 |
Total Debt to EBITDA Ratio | | less than or equal to 4.25:1.0 | | 1.72:1.80:1.0 |
We intend to use the availability under our 2014 Credit Facility and cash on hand to pursue acquisitions of additional businesses to the extent permitted under our 2014 Credit Facility, to fund distributions and to provide for other working capital needs.
Subsequent Events
Subsequent Events - Profit Allocation Payments
Sale EventRecapitalization of Advanced Circuits
During the fourthsecond quarter we declaredof 2016, the Company completed a recapitalization at Advanced Circuits whereby the Company entered into an amendment to the inter-company loan agreement with Advanced Circuits (the "ACI Loan Agreement"). The ACI loan agreement was amended to provide for additional term loan borrowings of $60.1 million to fund a cash distributions to shareholders totaling $61.0 million. Minority interest shareholders of Advanced Circuits, including certain members of management at Advanced Circuits, received total distribution proceeds of $18.4 million. The Company used cash on hand to fund the distribution to minority shareholders.
Acquisition - Clean Earth add-on
Subsequent to the Allocation Member in connection with the Sale Event of CamelBak. Under the termsend of the quarter, the Company's Clean Earth subsidiary completed an add-on acquisition. Clean Earth acquired Phoenix Soil, LLC, Agreement, the Allocation Member has the right to defer a portionConnecticut based provider of the distribution. The Allocation Member exercised this right and deferredenvironmental services, for a portion of the distribution for the CamelBak Sale Event in the amount of the high water mark calculation as a result of the loss on the sale of American Furniture. The result is a net distribution to the Allocation Member of $14.6 million. The profit allocation payment will be made during the quarter ended December 31, 2015.
Holding Event
During the fourth quarter, we declared a distribution to the Allocation Memberpurchase price of approximately $3.1$13.3 million, in connection with a Holding Event for our five year ownership of the Ergobaby subsidiary. The payment is in respect of its positive contribution-based profit since ourClean Earth add-on acquisition in September of 2010, and will be paid during the three months ended December 31, 2015.was funded using cash on hand.
Interest Expense
We recorded interest expense totaling $24.1$11.5 million for the ninethree months ended September 30, 2015March 31, 2016 compared to $16.5$9.7 million for the comparable period in 2014.2015.
The components of interest expense and periodic interest charges on outstanding debt are as follows (in thousands)(in thousands):
| | | Nine months ended September 30, | Three months ended March 31, |
| 2015 | | 2014 | 2016 | | 2015 |
Interest on credit facilities | $ | 14,137 |
| | $ | 11,284 |
| $ | 3,439 |
| | $ | 4,840 |
|
Unused fee on Revolving Credit Facility | 1,062 |
| | 1,635 |
| 500 |
| | 310 |
|
Amortization of original issue discount | 503 |
| | 713 |
| 168 |
| | 168 |
|
Unrealized losses (gains) on interest rate derivatives (1) | 8,044 |
| | 2,797 |
| |
Unrealized losses on interest rate derivatives (1) | | 7,228 |
| | 4,314 |
|
Letter of credit fees | 94 |
| | 33 |
| 24 |
| | 31 |
|
Other | 210 |
| | 7 |
| 119 |
| | 55 |
|
Interest expense | $ | 24,050 |
| | $ | 16,469 |
| $ | 11,478 |
| | $ | 9,718 |
|
Average daily balance of debt outstanding | $ | 484,603 |
| | $ | 329,437 |
| $ | 320,116 |
| | $ | 512,496 |
|
Effective interest rate(1) | 6.6 | % | | 6.7 | % | 14.3 | % | | 7.6 | % |
(1) On September 16, 2014, we purchased an interest rate swap (the "New Swap") with a notional amount of $220 million effective April 1, 2016 through June 6, 2021. The agreement requires us to pay interest on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. At September 30, 2015,March 31, 2016, the New Swap had a fair value loss of $15.4$20.2 million, reflecting the present value of future payments and receipts under the agreement and is reflected as a component of interest expense and other non-current liabilities. InRemoving the above table, we provideeffect of the unrealized loss on the interest rate swap results in an effective interest rate on outstanding debt, which includes the mark-to-market loss on the New Swap. The effective interest rate for incurred debtof 5.3% for the nine months ended September 30, 2015 after eliminationfirst quarter of 2016 and 4.2% for the New Swap, which has a term that does not begin until April 1, 2016, is 4.4%.first quarter of 2015. Refer to Note J - Derivatives and Hedging Activities of the condensed consolidated financial statements.
Income Taxes
We incurred income tax expense of $9.3$3.3 million with an effective tax rate of 94.1%28.1% during the ninethree months ended September 30, 2015March 31, 2016 compared to $8.5$2.4 million with an effective income tax rate of 3.1%8.6% during the same period in 2014.2015. Non-deductible costs at the corporate level, including the gain on our equity method investment in FOX in the ninethree months ended September 30, 2015,March 31, 2016, as well as the effect of the impairment loss at our Tridien subsidiary in 2015, account for the majority of the remaining difference in our effective income tax rates in both periods.
The components of income tax expense as a percentage of income from continuing operations before income taxes for the ninethree months ended September 30,March 31, 2016 and 2015 and 2014 are as follows:
| | | | Nine months ended September 30, | | Three months ended March 31, |
| | 2015 | | 2014 | | 2016 | | 2015 |
United States Federal Statutory Rate | | 35.0 | % | | 35.0 | % | | (35.0 | )% | | (35.0 | )% |
State income taxes (net of Federal benefits) | | 11.8 |
| | (0.7 | ) | | 1.9 |
| | 0.1 |
|
Foreign income taxes | | (10.0 | ) | | (0.3 | ) | | 7.6 |
| | (0.1 | ) |
Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders (1) | | 66.3 |
| | 1.4 |
| | 19.9 |
| | 10.5 |
|
Effect of deconsolidation of subsidiary | | — |
| | (33.5 | ) | | — |
| | — |
|
Effect of gain on equity method investment (2) | | (33.8 | ) | | — |
| | 31.7 |
| | 17.0 |
|
Impact of subsidiary employee stock options | | 1.6 |
| | — |
| | 1.1 |
| | 0.1 |
|
Domestic production activities deduction | | (6.6 | ) | | (0.3 | ) | | (2.2 | ) | | (0.6 | ) |
Effect of impairment expense | | 27.3 |
| | — |
| | — |
| | 9.7 |
|
Non-recognition of NOL carryforwards at subsidiaries | | (3.2 | ) | | — |
| | 2.4 |
| | 0.2 |
|
Other | | 5.7 |
| | 1.5 |
| | 0.7 |
| | 6.7 |
|
Effective income tax rate | | 94.1 | % | | 3.1 | % | | 28.1 | % | | 8.6 | % |
(1) The effective income tax rate for the ninethree months ended September 30,March 31, 2016 and 2015 and 2014 includes a significant loss at the Company's parent, which is taxed as a partnership.
(2) The equity method investment in FOX is held at the Company's parent, which is taxed as a partnership, resulting in the gain or loss on the investment being a reconciling item in deriving our effective tax rate.
Reconciliation of Non-GAAP Financial Measures
U.S. GAAP refers to generally accepted accounting principles in the United States. From time to time we may publicly disclose certain "non-GAAP" financial measures in the course of our investor presentations, earnings releases, earnings conference calls or other venues. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented.
Non-GAAP financial measures are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These measures are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The tables below reconcile the most directly comparable GAAP financial measures to Earnings before Interest, Income Taxes, Depreciation and Amortization ("EBITDA"), Adjusted EBITDA, and Cash Flow Available for Distribution and Reinvestment ("CAD").
Reconciliation of Net income (Loss) to EBITDA and Adjusted EBITDA
EBITDA –EBITDA is calculated as income (loss) from continuing operations before interest expense, income tax expense (benefit), depreciation expense and amortization expense. Amortization expenses consist of amortization of intangibles and debt charges, including debt issuance costs, discounts, etc.
Adjusted EBITDA – Adjusted EBITDA is calculated utilizing the same calculation as described above in arriving at EBITDA further adjusted by; (i) non-controlling stockholder compensation, which generally consists of non-cash stock option expense; (ii) successful acquisition costs, which consist of transaction costs (legal, accounting , due diligences, etc.,) incurred in connection with the successful acquisition of a business expensed during the period in compliance with ASC 805; (iii) management fees, which reflect fees due quarterly to our Manager in connection with our Management Services Agreement ("MSA’), as well as Integration Services Fees paid by newly acquired companies; (iv) impairment charges, which reflect write downs to goodwill or other intangible assets; (v) gains or losses recorded in connection with our equity method investment; and (vi) gains or losses recorded in connection with the sale of fixed assets.assets and (vii) foreign currency transaction gains or losses incurred in connection with the conversion of inter-company debt from a foreign functional currency to U.S. dollar.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors and reflect important financial measures as they exclude the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near term operations. When compared to income (loss) from continuing operations these financial measures are limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated with impairments. This presentation also allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition.
We believe these measurements are also useful in measuring our ability to service debt and other payment obligations. EBITDA and Adjusted EBITDA are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The following table reconciles EBITDA and Adjusted EBITDA to income (loss) from continuing operations, which we consider to be the most comparable GAAP financial measure (in thousands):
Adjusted EBITDA
NineThree months ended September 30, 2015
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | Ergobaby | | Liberty | | Manitoba Harvest | | Advanced Circuits | | Arnold Magnetics | | Clean Earth | | Sterno Candle Lamp | | Tridien | | Consolidated |
Net income (loss) | $ | 141,400 |
| | $ | 8,576 |
| | $ | 2,968 |
| | $ | (3,103 | ) | | $ | 9,293 |
| | $ | 1,529 |
| | $ | (3,394 | ) | | $ | 1,802 |
| | $ | (7,414 | ) | | $ | 151,657 |
|
Adjusted for: |
| |
| |
| | | |
| |
| |
| |
| |
| |
|
Provision (benefit) for income taxes | (285 | ) | | 5,210 |
| | 1,373 |
| | (1,293 | ) | | 4,898 |
| | (335 | ) | | (1,485 | ) | | 1,123 |
| | 68 |
| | 9,274 |
|
Interest expense, net | 23,740 |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
| | 298 |
| | — |
| | — |
| | 24,050 |
|
Intercompany interest | (31,186 | ) | | 3,077 |
| | 3,257 |
| | 407 |
| | 4,274 |
| | 5,250 |
| | 8,929 |
| | 5,191 |
| | 801 |
| | — |
|
Depreciation and amortization | 902 |
| | 2,836 |
| | 3,007 |
| | 4,029 |
| | 2,485 |
| | 6,822 |
| | 15,909 |
| | 5,945 |
| | 1,876 |
| | 43,811 |
|
EBITDA | 134,571 |
| | 19,699 |
| | 10,605 |
| | 46 |
| | 20,950 |
| | 13,272 |
| | 20,257 |
| | 14,061 |
| | (4,669 | ) | | 228,792 |
|
Gain on sale of discontinued operations | (151,075 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (151,075 | ) |
(Gain) loss on sale of fixed assets | — |
| | — |
| | 7 |
| | 1 |
| | — |
| | (183 | ) | | 274 |
| | — |
| | 20 |
| | 119 |
|
Non-controlling shareholder compensation | — |
| | 534 |
| | 156 |
| | — |
| | 18 |
| | 102 |
| | 877 |
| | 375 |
| | 1 |
| | 2,063 |
|
Impairment expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,165 |
| | 9,165 |
|
Acquisition expenses | — |
| | — |
| | — |
| | 1,126 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,126 |
|
Integration services fee | — |
| | — |
| | — |
| | 250 |
| | — |
| | — |
| | 1,875 |
| | 1,125 |
| | — |
| | 3,250 |
|
Gain on equity method investment | (9,518 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,518 | ) |
Management fees | 17,261 |
| | 375 |
| | 375 |
| | 86 |
| | 375 |
| | 375 |
| | 375 |
| | 375 |
| | 263 |
| | 19,860 |
|
Adjusted EBITDA (1) | $ | (8,761 | ) | | $ | 20,608 |
| | $ | 11,143 |
| | $ | 1,509 |
| | $ | 21,343 |
| | $ | 13,566 |
| | $ | 23,658 |
| | $ | 15,936 |
| | $ | 4,780 |
| | $ | 103,782 |
|
Adjusted EBITDA
Nine months ended September 30, 2014March 31, 2016
| | | Corporate | | Ergobaby | | Liberty | | Manitoba Harvest | | Advanced Circuits | | Arnold Magnetics | | Clean Earth | | Sterno Candle Lamp | | Tridien | | Consolidated | Corporate | | Ergobaby | | Liberty | | Manitoba Harvest | | Advanced Circuits | | Arnold Magnetics | | Clean Earth | | Sterno Products | | Tridien | | Consolidated |
Net income (loss) (1) | $ | 253,019 |
| | $ | 5,696 |
| | $ | (3,720 | ) | | | | $ | 7,478 |
| | $ | (669 | ) | | $ | (64 | ) | | | | $ | 843 |
| | $ | 262,583 |
| $ | (17,284 | ) | | $ | 2,129 |
| | $ | 2,490 |
| | $ | (799 | ) | | $ | 3,063 |
| | $ | (1,538 | ) | | $ | (2,361 | ) | | $ | 28 |
| | $ | (755 | ) | | $ | (15,027 | ) |
Adjusted for: |
| |
| |
| | Not Applicable | |
| |
| | | | Not Applicable | |
| |
|
| |
| |
| | | |
| |
| |
| |
| |
| |
|
Provision (benefit) for income taxes | — |
| | 3,844 |
| | (2,137 | ) | | 3,641 |
| | 1,164 |
| | (30 | ) | | 47 |
| | 6,529 |
| — |
| | 1,368 |
| | 1,188 |
| | 138 |
| | 1,477 |
| | 389 |
| | (1,608 | ) | | 344 |
| | — |
| | 3,296 |
|
Interest expense, net | 16,011 |
| | 9 |
| | 4 |
| | (1 | ) | | (3 | ) | | 36 |
| | 1 |
| | 16,057 |
| 11,314 |
| | — |
| | — |
| | 1 |
| | — |
| | (1 | ) | | 136 |
| | 12 |
| | — |
| | 11,462 |
|
Intercompany interest | (28,810 | ) | | 3,747 |
| | 3,413 |
| | 4,996 |
| | 5,435 |
| | 1,077 |
| | 885 |
| | (9,257 | ) | (10,426 | ) | | 517 |
| | 1,045 |
| | 858 |
| | 1,251 |
| | 1,687 |
| | 2,758 |
| | 1,981 |
| | 329 |
| | — |
|
Depreciation and amortization | 65 |
| | 3,140 |
| | 4,866 |
| | 4,114 |
| | 6,631 |
| | 1,159 |
| | 1,918 |
| | 21,893 |
| 109 |
| | 914 |
| | 780 |
| | 1,368 |
| | 934 |
| | 2,323 |
| | 5,074 |
| | 3,512 |
| | 632 |
| | 15,646 |
|
Loss on debt extinguishment | 2,143 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,143 |
| |
EBITDA | 242,428 |
| | 16,436 |
| | 2,426 |
| | 20,228 |
| | 12,558 |
| | 2,178 |
| | 3,694 |
| | 299,948 |
| (16,287 | ) | | 4,928 |
| | 5,503 |
| | 1,566 |
| | 6,725 |
| | 2,860 |
| | 3,999 |
| | 5,877 |
| | 206 |
| | 15,377 |
|
(Gain) loss on sale of fixed assets | — |
| | — |
| | 17 |
| | — |
| | 11 |
| | — |
| | (2 | ) | | 26 |
| — |
| | — |
| | — |
| | — |
| | (10 | ) | | 1 |
| | (5 | ) | | — |
| | (164 | ) | | (178 | ) |
Non-controlling shareholder compensation | — |
| | 405 |
| | 302 |
| | 18 |
| | 100 |
| | — |
| | 19 |
| | 844 |
| — |
| | 195 |
| | 298 |
| | 230 |
| | 6 |
| | 55 |
| | 270 |
| | 134 |
| | 1 |
| | 1,189 |
|
Acquisition related expenses | — |
| | — |
| | 96 |
| | — |
| | — |
| | 1,935 |
| | — |
| | 2,031 |
| |
Gain on deconsolidation of subsidiary | (264,325 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (264,325 | ) | |
Acquisition expenses and other | | — |
| | 300 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 189 |
| | — |
| | 489 |
|
Integration services fee | | — |
| | — |
| | — |
| | 250 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 250 |
|
Loss on equity method investment | | 10,623 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,623 |
|
Gain on foreign currency transaction and other | | (3,317 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,317 | ) |
Management fees | 13,496 |
| | 375 |
| | 375 |
| | Not Applicable | | 375 |
| | 375 |
| | — |
| | Not Applicable | | 263 |
| | 15,259 |
| 5,536 |
| | 125 |
| | 125 |
| | 84 |
| | 125 |
| | 125 |
| | 125 |
| | 125 |
| | 88 |
| | 6,458 |
|
Adjusted EBITDA (1) | $ | (8,401 | ) | | $ | 17,216 |
| | $ | 3,216 |
| | $ | 20,621 |
| | $ | 13,044 |
| | $ | 4,113 |
| | $ | 3,974 |
| | $ | 53,783 |
| |
Adjusted EBITDA | | $ | (3,445 | ) | | $ | 5,548 |
| | $ | 5,926 |
| | $ | 2,130 |
| | $ | 6,846 |
| | $ | 3,041 |
| | $ | 4,389 |
| | $ | 6,325 |
| | $ | 131 |
| | $ | 30,891 |
|
Adjusted EBITDA
Three months ended March 31, 2015
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | Ergobaby | | Liberty | | Manitoba Harvest | | Advanced Circuits | | Arnold Magnetics | | Clean Earth | | Sterno Products | | Tridien | | Consolidated |
Loss from continuing operations | $ | (22,109 | ) | | $ | 2,598 |
| | $ | 206 |
| | | | $ | 2,729 |
| | $ | (74 | ) | | $ | (4,306 | ) | | $ | (89 | ) | | $ | (8,965 | ) | | $ | (30,010 | ) |
Adjusted for: |
| |
| |
| | Not Applicable | |
| |
| | | | | |
| |
|
Provision (benefit) for income taxes | (189 | ) | | 1,605 |
| | 86 |
| | | 1,419 |
| | (7 | ) | | (483 | ) | | (31 | ) | | (7 | ) | | 2,393 |
|
Interest expense, net | 9,642 |
| | — |
| | — |
| | | — |
| | — |
| | 76 |
| | — |
| | — |
| | 9,718 |
|
Intercompany interest | (10,310 | ) | | 1,124 |
| | 1,101 |
| | | 1,470 |
| | 1,740 |
| | 3,014 |
| | 1,718 |
| | 265 |
| | 122 |
|
Depreciation and amortization | 457 |
| | 926 |
| | 1,604 |
| | | 850 |
| | 2,276 |
| | 5,517 |
| | 1,523 |
| | 633 |
| | 13,786 |
|
EBITDA | (22,509 | ) | | 6,253 |
| | 2,997 |
| | | 6,468 |
| | 3,935 |
| | 3,818 |
| | 3,121 |
| | (8,074 | ) | | (3,991 | ) |
(Gain) loss on sale of fixed assets | — |
| | — |
| | 7 |
| | | — |
| | — |
| | 112 |
| | — |
| | 3 |
| | 122 |
|
Non-controlling shareholder compensation | — |
| | 170 |
| | 94 |
| | | 6 |
| | 34 |
| | 365 |
| | 125 |
| | — |
| | 794 |
|
Impairment expense | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | 8,907 |
| | 8,907 |
|
Acquisition related expenses | — |
| | — |
| | — |
| | | — |
| | — |
| | 625 |
| | 375 |
| | — |
| | 1,000 |
|
Loss on equity method investment | 13,447 |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | | | — |
| | 13,447 |
|
Management fees | 5,896 |
| | 125 |
| | 125 |
| | | 125 |
| | 125 |
| | 125 |
| | 125 |
| | 87 |
| | 6,733 |
|
Adjusted EBITDA (1) | $ | (3,166 | ) | | $ | 6,548 |
| | $ | 3,223 |
| | | $ | 6,599 |
| | $ | 4,094 |
| | $ | 5,045 |
| | $ | 3,746 |
| | $ | 923 |
| | $ | 27,012 |
|
(1) As a result of the deconsolidationsale of our FOX subsidiaryCamelBak and American Furniture subsidiaries in July 2014, Net income does not include Net income from FOX of $14.5 millionAugust and October 2015, respectively, Adjusted EBITDA for the period January 1, 2014 through September 30, 2014, and Adjusted EBITDAthree months ended March 31, 2015 does not include Adjusted EBITDA from FOXCamelBak and American Furniture of $24.1 million$9.2 million.
Cash Flow Available for the period January 1, 2014 through September 30, 2014.Distribution and Reinvestment
Reconciliationmanagement's estimate of net income to CAD
cash available for distribution ("CAD"). CAD is a non-GAAP measure that we believe provides additional, useful information to our shareholders in order to enable them to evaluate our ability to make anticipated quarterly distributions. CAD is not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The following table reconciles cash receipts and payments that are not reflected on our income statementCAD to net income (loss) and cash flows provided by (used in) operating activities, which we consider to be the most directly comparable GAAP financial measuresmeasure calculated and presented in order to provide an additional measure of management’s estimate of CAD.accordance with GAAP.
|
| | | | | | | |
| Nine Months Ended |
(in thousands) | September 30, 2015 | | September 30, 2014 |
Net income | $ | 167,306 |
| | $ | 282,222 |
|
Adjustment to reconcile net income to cash provided by operating activities: |
| |
|
Depreciation and amortization | 49,743 |
| | 35,884 |
|
Impairment expense | 9,165 |
| | — |
|
Gain on sale of CamelBak | (165,337 | ) | | — |
|
Loss on sale of American Furniture | 14,262 |
| | — |
|
Amortization of debt issuance costs and original issue discount | 2,154 |
| | 2,412 |
|
Loss on debt extinguishment | — |
| | 2,143 |
|
Unrealized (gain) loss on interest rate and foreign currency hedges | 8,044 |
| | 2,809 |
|
Excess tax benefit from subsidiary stock option exercise (1) | — |
| | (1,662 | ) |
Gain on deconsolidation of subsidiary | — |
| | (264,325 | ) |
Loss on equity method investment | (9,518 | ) | | — |
|
Noncontrolling shareholder charges | 2,627 |
| | 3,592 |
|
Deferred taxes | (3,863 | ) | | (1,944 | ) |
Other | 324 |
| | 361 |
|
Changes in operating assets and liabilities | (28,436 | ) | | (15,332 | ) |
Net cash provided by operating activities | 46,471 |
| | 46,160 |
|
Plus: |
| |
|
Unused fee on revolving credit facility (2) | 1,062 |
| | 1,635 |
|
Excess tax benefit from subsidiary stock option exercise (1) | — |
| | 1,662 |
|
Integration services fee (3) | 3,250 |
| | — |
|
Successful acquisition costs | 1,126 |
| | 2,030 |
|
Realized loss from foreign currency effect | 1,297 |
| | — |
|
Changes in operating assets and liabilities | 28,436 |
| | 15,332 |
|
Other | — |
| | 123 |
|
Less: |
| |
|
Payments on swap | 1,502 |
| | 1,502 |
|
Maintenance capital expenditures: (4) |
| |
|
Compass Group Diversified Holdings LLC | — |
| | — |
|
Advanced Circuits | 358 |
| | 482 |
|
American Furniture | 311 |
| | 335 |
|
Arnold | 2,038 |
| | 2,258 |
|
CamelBak | 1,295 |
| | 1,976 |
|
Clean Earth | 5,326 |
| | 170 |
|
Ergobaby | 1,333 |
| | 298 |
|
Fox | — |
| | 2,381 |
|
Liberty | 758 |
| | 508 |
|
|
| | | | | | | |
| Three Months Ended |
(in thousands) | March 31, 2016 | | March 31, 2015 |
Net loss | $ | (15,027 | ) | | $ | (25,287 | ) |
Adjustment to reconcile net loss to cash provided by operating activities: |
| |
|
Depreciation and amortization | 14,908 |
| | 16,535 |
|
Impairment expense | — |
| | 8,907 |
|
Amortization of debt issuance costs and original issue discount | 738 |
| | 713 |
|
Unrealized loss on interest rate and foreign currency hedges | 7,228 |
| | 4,314 |
|
Loss on equity method investment | 10,623 |
| | 13,447 |
|
Noncontrolling shareholder charges | 1,189 |
| | 1,024 |
|
Deferred taxes | 214 |
| | (806 | ) |
Other | (61 | ) | | 427 |
|
Changes in operating assets and liabilities | (13,787 | ) | | (15,987 | ) |
Net cash provided by operating activities | 6,025 |
| | 3,287 |
|
Plus: |
| |
|
Unused fee on revolving credit facility (1) | 500 |
| | 309 |
|
Integration services fee (2) | 250 |
| | 1,000 |
|
Successful acquisition costs | 489 |
| | — |
|
Changes in operating assets and liabilities | 13,787 |
| | 15,987 |
|
Less: |
| |
|
Payments on swap | 500 |
| | 495 |
|
Maintenance capital expenditures: (3) |
| |
|
Compass Group Diversified Holdings LLC | — |
| | — |
|
Advanced Circuits | 465 |
| | 26 |
|
American Furniture | — |
| | 63 |
|
Arnold | 670 |
| | 260 |
|
CamelBak | — |
| | 569 |
|
Clean Earth | 902 |
| | 2,090 |
|
Ergobaby | 45 |
| | 875 |
|
Liberty | 643 |
| | 126 |
|
Manitoba Harvest | 210 |
| | — |
|
Sterno Products | 538 |
| | 161 |
|
Tridien | 211 |
| | 119 |
|
Realized gain from foreign currency (4) | 3,079 |
| | — |
|
Other | 187 |
| | 305 |
|
Estimated cash flow available for distribution and reinvestment | $ | 13,601 |
| | $ | 15,494 |
|
| | | |
Distribution paid in April 2016/2015 | $ | (19,548 | ) | | $ | (19,548 | ) |
|
| | | | | | | |
Manitoba Harvest | 509 |
| | — |
|
SternoCandleLamp | 1,047 |
| | — |
|
Tridien | 710 |
| | 593 |
|
FOX CAD (5) | — |
| | 15,716 |
|
Other | 209 |
| | 201 |
|
Estimated cash flow available for distribution and reinvestment | $ | 66,246 |
| | $ | 40,522 |
|
Distribution paid in April 2015/2014 | $ | (19,548 | ) | | $ | (17,388 | ) |
Distribution paid in July 2015/2014 | (19,548 | ) | | (17,388 | ) |
Distribution paid in October 2015/2014 | (19,548 | ) | | (17,388 | ) |
| $ | (58,644 | ) | | $ | (52,164 | ) |
(1)Represents the non-cash excess tax benefit at FOX related to the exercise of stock options.
(2)Represents the commitment fee on the unused portion of the revolving credit facilities.
(3) (2)Represents fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership, payable quarterly.
(4)(3) Represents maintenance capital expenditures that were funded from operating cash flow, net of proceeds from the sale of property, plant and equipment, and excludes growth capital expenditures of approximately $1.0$0.7 million and $1.2$0.5 million for the ninethree months ended September 30, 2015March 31, 2016 and 2014.2015.
| |
(4) | Reflects the foreign currency transaction gain or loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest. |
(5) Represents FOX CAD during the nine months ended September 30, 2014. The amount includes approximately $24.2 million of EBITDA, less: $3.8 million of cash taxes, $1.9 million of management fees, $2.4 million of maintenance capital expenditures and $0.4 million of interest expense.
Seasonality
Earnings of certain of our operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Earnings from CamelBak are typically higher in the spring and summer months than other months as this corresponds with warmer weather in the Northern Hemisphere and an increase in hydration related activities. Earnings from Clean Earth are typically lower during the winter months due to the limits on outdoor construction and dredging because of the colder weather in the Northeastern United States. Sterno Products typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer season and the holiday season.
Related Party Transactions
Liberty Recapitalization
During the first quarter of 2016, we completed a recapitalization at Liberty whereby we entered into an amendment to the intercompany loan agreement with Liberty (the “Liberty Loan Agreement”). The Liberty Loan Agreement was amended to (i) provide for term loan borrowings of $38.0 million and revolving credit facility borrowings of $5.0 million to fund cash distributions totaling $35.3 million to its shareholders, including the Company, and (ii) extend the maturity dates of the term loans and revolving credit facility. Liberty’s noncontrolling shareholders received approximately $5.3 million in distributions as a result of the recapitalization. Certain members of Liberty's management also exercised stock option immediately prior to the recapitalization, resulting in net proceeds from stock options at Liberty of $3.8 million. The Company then purchased $1.5 million in shares from members of Liberty management, resulting in Liberty's noncontrolling shareholders holding 11.4% of Liberty's outstanding shares subsequent to the recapitalization.
Equity method investment in FOX
During the first quarter of 2016, the Company's equity method investment, FOX, closed on a secondary public offering if 2,500,000 shares of FOX common shares held by the Company. Concurrently with the closing of the offering, FOX repurchased 500,000 shares of FOX common stock held by the Company. As a result of July 10, 2014, ourthe sale of shares through the offering and the repurchase of shares by FOX, the Company sold a total of 3,000,000 shares of FOX common stock, with total net proceeds of approximately $47.7 million. Upon completion of the offering and repurchase of shares by FOX, the Company's ownership interest in FOX decreasedwas reduced from 53% to approximately 41% after we soldto 33%. The sale of a portion of the Company's FOX shares in March 2016 qualified as a secondary offering bySale Event under the Company's LLC Agreement. During the second quarter, the Company's Board of Directors declared a distribution to the Holders of the Allocation Interests of $8.6 million in connection with the Sale Event of FOX. Since we no longer hold a majority interest in FOX, we account for our investment in FOX at fair value utilizingThe profit allocation payment will be made during the equity method of accounting. We elected to measure our investment in FOX at fair value, with unrealized gains and losses reflected in the consolidated statement of operations as income (loss) from equity method investments.quarter ended June 30, 2016.
The following table reflects the year to date activity from our investment in FOX (in thousands):
|
| | | | |
| | 2015 |
Balance January 1, 2015 | | $ | 245,214 |
|
Mark-to-market adjustment - March 31, 2015 | | (13,447 | ) |
Balance March 31, 2015 | | $ | 231,767 |
|
Mark-to-market adjustment - June 30, 2015 | | 11,181 |
|
Balance at June 30, 2015 | | $ | 242,948 |
|
Mark-to market adjustment - September 30,2015 | | 11,784 |
|
Balance at September 30, 2015 | | $ | 254,732 |
|
|
| | | | |
| | 2015 |
Balance January 1, 2016 | | $ | 249,747 |
|
Proceeds from sale of FOX shares | | (52,110 | ) |
Discount on sale of FOX shares | | 4,425 |
|
Mark-to-market adjustment - March 31, 2016 | | (10,623 | ) |
Balance March 31, 2016 | | $ | 191,439 |
|
Contractual Obligations and Off-Balance Sheet Arrangements
We have no special purpose entities or off balance sheet arrangements, other than operating leases entered into in the ordinary course of business.
Long-term contractual obligations, except for our long-term debt obligations, are generally not recognized in our consolidated balance sheet. Non-cancelable purchase obligations are obligations we incur during the normal course of business, based on projected needs.
The table below summarizes the payment schedule of our contractual obligations at September 30, 2015:March 31, 2016:
| | | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
Long-term debt obligations (1) | $ | 414,046 |
| | $ | 9,337 |
| | $ | 43,088 |
| | $ | 41,044 |
| | $ | 320,577 |
| $ | 400,980 |
| | $ | 15,970 |
| | $ | 42,319 |
| | $ | 40,768 |
| | $ | 301,923 |
|
Operating lease obligations (2) | 72,652 |
| | 12,613 |
| | 19,313 |
| | 12,411 |
| | 28,315 |
| 68,512 |
| | 11,320 |
| | 18,755 |
| | 11,098 |
| | 27,339 |
|
Purchase obligations (3) | 258,133 |
| | 162,419 |
| | 48,189 |
| | 47,525 |
| | — |
| 277,326 |
| | 191,926 |
| | 42,950 |
| | 42,450 |
| | — |
|
Total (4) | $ | 744,831 |
| | $ | 184,369 |
| | $ | 110,590 |
| | $ | 100,980 |
| | $ | 348,892 |
| $ | 746,818 |
| | $ | 219,216 |
| | $ | 104,024 |
| | $ | 94,316 |
| | $ | 329,262 |
|
| |
(1) | Reflects commitment fees and letter of credit fees under our 2014 Revolving Credit Facility and amounts due, together with interest on our 2014 Term Loan Facility. |
| |
(2) | Reflects various operating leases for office space, manufacturing facilities and equipment from third parties with various lease terms running from one to fourteen years. |
| |
(3) | Reflects non-cancelable commitments as of September 30, 2015,March 31, 2016, including: (i) shareholder distributions of $78.2 million; (ii) estimated management fees of $23.8$21.6 million per year over the next five years, and (iii) other obligations including amounts due under employment agreements. Distributions to our shareholders are approved by our Board of Directors each quarter. The amount ultimately approved as future quarterly distributions may differ from the amount included in this schedule. |
| |
(4) | The contractual obligation table does not include approximately $0.4 million in liabilities associated with unrecognized tax benefits as of September 30, 2015March 31, 2016 as the timing of the recognition of this liability is not certain. The amount of the liability is not expected to significantly change in the next twelve months. |
Critical Accounting Estimates
The preparation of our financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates under different assumptions and judgments and uncertainties, and potentially could result in materially different results under different conditions. These critical accounting estimates are reviewed periodically by our independent auditors and the audit committee of our board of directors.
Except as set forth below, our critical accounting estimates have not changed materially from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the year ended December 31, 2014,2015, as filed with the SEC.
2015 Interim Impairment Testing - Goodwill, Indefinite-lived Intangible Assets and Long-Lived Assets
In January 2015, one of Tridien's largest customer's informed the company that they would not renew their existing purchase agreement when it expires in the fourth quarter of 2015. This customer represented 20% of Tridien's sales in 2014. The expected lost sales and net income were significant enough to trigger an interim goodwill impairment analysis as of January 31, 2015. The result of the first step of the impairment test indicated that the fair value of Tridien was less than its carrying value therefore it was necessary to perform the second step of the impairment test. We estimated the fair value of the Tridien reporting unit using a weighted average of an income and market approach. The income approach was based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital ("WACC") of 15.7%. The market approach was based on earnings multiple data and guideline public companies. The determination of fair value involves the use of significant estimates and assumptions, including revenue growth rates, operating margins, working capital requirements, capital expenditures, tax rates and terminal growth rates. Due to the inherent uncertainty associated with forming these estimates, actual results could differ from those estimates. Future events and changing market conditions may impact our assumptions as to future
revenue growth rates, operating margins, market-based WACC and other factors that may result in changes in the estimates of Tridien's fair value.
Based on the second step of the impairment test, we concluded that the implied fair value of goodwill for Tridien was less than its carrying amount, resulting in impairment of the carrying amount of Tridien's goodwill of $8.9 million as of January 31, 2015. We completed our interim goodwill impairment testing of Tridien during the three months ended June 30, 2015, and in addition to the goodwill impairment expense recorded during the first quarter of 2015, we recorded an impairment of Tridien's technology and patents intangible asset of $0.2 million resulting from the Step 2 testing. Tridien's remaining goodwill balance subsequent to the impairment charge is $7.8 million, and Tridien's technology and patent intangible asset balance after the impairment charge was $0.4 million, which is being amortized over a remaining useful life of five years.
20152016 Annual Impairment Testing - Goodwill and Indefinite-lived Intangible AssetsIndefinite Lived Impairment Testing
Goodwill
Goodwill represents the excess amount of the purchase price over the fair value of the assets acquired. Our goodwill and indefinite lived intangible assets are tested for impairment on an annual basis as of March 31st, and if current events or circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which are generally an operating segment or one level below the operating segment. Each of our businesses represents a reporting unit except Arnold, which is comprised of three reporting units, and each reporting unit is included in our annual impairment test with the exception of American Furniture, which has no goodwill or indefinite lived intangible assets, and Tridien, which was tested for impairment in January 2015 as a result of a triggering event.test.
We use a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment testing. The qualitative factors we consider include, in part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts, as well as issues or events specific to the reporting unit. At March 31, 2015,2016, we determined that Liberty and two of the threeTridien reporting units at Arnold, PMAG and Flexmag,unit required further quantitative testing (step 1) because we could not conclude that the fair value of the reporting unitsunit exceeds theirits carrying value based on qualitative factors alone. For the reporting units that were tested qualitatively, the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value.
In the first step of the We expect to conclude our goodwill impairment test, we comparetesting during the fair value of each reporting unit to its carrying amount. We estimate the fair value of our reporting units using either an income approach or a market approach, or, where applicable, a weighting of the two methods. Under the income approach, we estimate the fair value of a reporting unit based on the present value of future cash flows. Cash flow projections are based on Management's estimate of revenue growth rates and operating margins and take into consideration industry and market conditions as well as company specific economic factors. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business specific characteristics and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. Under the market approach, we estimate fair value based on market multiples of revenue and earnings derived from comparable public companies with operating and investment characteristics that are similar to the report unit. We weigh the fair value derived from the market approach depending on the level of comparability of these public companies to the reporting unit. When market comparables are not meaningful or available, we estimate the fair value of the reporting unit using only the income approach. For the step 1 quantitative impairment test at Liberty, we utilized both the income approach and the market approach, with a 50% weighting assigned to each method. The weighted average cost of capital used in the income approach at Liberty was 13.8%. For the step 1 quantitative impairment test at the PMAG and Flexmag reporting units of Arnold, we used only an income approach as we determined that the guideline public company comparables for both units were not representative of these reporting units' markets. In the income approach, we used a weighted average cost of capital of 13.6% for PMAG and 14.6% for Flexmag. Results of the quantitative testing of the Liberty reporting unit and Arnold's PMAG and Flexmag reporting units indicated that the fair value of these reporting units exceeded their carrying value.quarter ended June 30, 2016.
Indefinite-lived intangible assets
We use a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. Our indefinite-lived intangible assets consist of trade names with a carrying value of approximately $73.4$73.2 million. The results of the qualitative analysis of our indefinite lived
intangible assets, which we completed during the quarter ended June 30, 2015,as of March 31, 2016, indicated that the fair value of the indefinite lived intangible assets exceeded their carrying value.
Recent Accounting Pronouncements
Refer to Footnote B to our condensed consolidated financial statements.
ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our market risk since December 31, 2014.2015. For a further discussion of our exposure to market risk, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," contained in our Annual Report on Form 10-K for the year ended December 31, 2014.2015.
ITEM 4. – CONTROLS AND PROCEDURES
As required by Exchange Act Rule 13a-15(b), Holdings’ Regular Trustees and the Company’s management, including the Chief Executive Officer and Chief Financial Officer of the Company, conducted an evaluation of the effectiveness of Holdings’ and the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of September 30, 2015.March 31, 2016. Based on that evaluation, the Holdings’ Regular Trustees and the Chief Executive Officer and Chief Financial Officer of the Company concluded that Holdings’ and the Company’s disclosure controls and procedures were effective as of September 30, 2015.March 31, 2016.
There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings associated with the Company’s and Holdings’ business together with legal proceedings for the businesses have not changed materially, except as noted below in relation to Tridien, from those disclosed in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 20142015 as filed with the SEC on March 2, 2015.February 29, 2016.
Tridien's subsidiary, AMF Support Services, Inc. ("AMF") is subject to a workers' compensation claim in the State of California, being adjudicated by the Riverside County Workers' Compensation Appeals Board. Tridien is a majority owned subsidiary of the Company. The claim is the result of an industrial accident that occurred on March 2, 2013, and the injuries sustained by a contract employee working at Tridien's Corona, California facility. The employee is seeking workers' compensation benefits from AMF, as the special employer, and the staffing company who employed the worker, as the general employer. The employee has also alleged that the employee's injuries are the result of the employer's "serious and willful misconduct", and has made a claim under California Labor Code § 4553 for damages. The claim was initiated on September 13, 2013. If proven, the "serious and willful" penalty is fixed by statute at either $0 or 50% of the value of all workers' compensation benefits paid as a result of the injury and is not insurable. The underlying workers' compensation claims are still being adjudicated. OnIn addition, in July 8, 2015, the California District Attorney's Office for the County of Riverside filed a criminal complaint against TridienTridien/AMF in Superior Court of California, County of Riverside, alleging that Tridien committed a violationviolations of the California Labor Code section 6425(a),and Penal Code in connection with the above described industrial accident. In March 2016, Tridien/AMF pled no contest to a felony,6423(a) misdemeanor charge. As required by willfullythe sentence imposed by the court, in April 2016, Tridien made payments totaling $750,000 for fines, penalties, and unlawfully violating an occupational safetyassessments to the Riverside Superior Court and health standard, order,certain other agencies as directed by the court. Concurrently, Tridien made a payment of $49,875 to the California Division of Occupational Safety and special order,Health Bureau of Investigations ("CAL OSHA") pursuant to a Stipulated Settlement Agreement (admitting no fault or Healthliability) entered into by and Safety Code section 25910,between Tridien and CAL OSHA to wit, 8 CCR 4353(a)end the appeal of seven OSHA citations issued by CAL OSHA related to the aforementioned accident. Tridien had previously accrued $750,000 for legal fees, costs and 8 CCR 348(a), and that such violation causedpotential fines related to the injuries resulting from the March 2, 2013 industrial accident referenced above. At this stage, it is not feasible to predict the outcome of or a range of loss, should a loss occur, from these proceedings. Accordingly, no amounts in respect of this matter have been provided in the Company's accompanying financial statements. We believe we have meritorious defenses to all the foregoing allegations and will continue to vigorously defend against the claims.settled charges.
ITEM 1A. RISK FACTORS
There have been no material changes in those risk factors and other uncertainties associated with the Company and Holdings discussed in the section entitled "Risk Factors" disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014,2015, as filed with the SEC on March 2, 2015, other than as described below related to our Manitoba Harvest subsidiary, which was acquired in July 2015, and the risk factors in our Annual Report on Form 10-K related to American Furniture, which are no longer applicable since we have sold American Furniture.February 29, 2016.
Risks Related to Manitoba Harvest
Reduced availability of raw materials and other inputs, as well as increased costs for our raw materials and other inputs, could adversely affect us.
Our business depends heavily on raw materials and other inputs, particularly raw hemp seeds, used in the production of our products. Our raw materials are generally sourced from third-party farmers, and we are not assured of continued supply or pricing. In addition, a substantial portion of our raw materials are agricultural products, which are vulnerable to adverse weather conditions and natural disasters, such as severe rains, floods, droughts, frost, earthquakes, and pestilence. Adverse weather conditions and natural disasters also can lower hemp seeds crop yields and reduce supplies of this ingredient or increase its prices. Incremental costs, including transportation, may also be incurred if we need to find alternate short-term supplies of hemp seeds from other growers. These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.
Cost increases in raw materials and other inputs could cause our profits to decrease significantly compared to prior periods, as we may be unable to increase our prices to offset the increased cost of these raw materials and other inputs. If we are unable to obtain raw materials and other inputs for our products or offset any increased costs for such raw materials and inputs, our business could be negatively affected.
The loss of a significant customer could negatively impact our sales and profitability.
Manitoba Harvest’s three largest customers account for approximately 60% of their total sales. The loss of any large customer, the reduction of purchasing levels or the cancellation of any business from a large customer for an extended length of time could negatively impact our sales and may have a material adverse effect on its business, results of operations, financial conditions and cash flows.
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ITEM 6. Exhibits |
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Exhibit Number | | Description |
| |
31.1* | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Registrant |
| |
31.2* | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Registrant |
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32.1*+ | | Certification of Chief Executive Officer of Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2*+ | | Certification of Chief Financial Officer of Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* | | XBRL Instance Document |
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101.SCH* | | XBRL Taxonomy Extension Schema Document |
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101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
|
| |
* | Filed herewith. |
+ | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act. |
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 thereunto duly authorized.
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| | | |
| COMPASS DIVERSIFIED HOLDINGS |
| | |
| By: | | /s/ Ryan J. Faulkingham |
| | | Ryan J. Faulkingham |
| | | Regular Trustee |
Date: NovemberMay 4, 20152016
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 thereunto duly authorized.
|
| | | |
| COMPASS GROUP DIVERSIFIED HOLDINGS LLC |
| | |
| By: | | /s/ Ryan J. Faulkingham |
| | | Ryan J. Faulkingham |
| | | Chief Financial Officer (Principal Financial and Accounting Officer) |
Date: NovemberMay 4, 20152016
EXHIBIT INDEX
|
| | |
Exhibit Number | | Description |
| | |
31.1* | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Registrant |
| | |
31.2* | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Registrant |
| | |
32.1*+ | | Certification of Chief Executive Officer of Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2*+ | | Certification of Chief Financial Officer of Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* | | XBRL Instance Document |
| | |
101.SCH* | | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
|
| |
* | Filed herewith. |
+ | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act. |