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 SeptemberJune 30, 20172019
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) | |
301301 Riverside Avenue
, Second Floor, Westport, CT06880
Westport, CT 06880
(203) (203)221-1703
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Shares representing beneficial interests in Compass Diversified Holdings | | CODI | | New York Stock Exchange |
Series A Preferred Shares representing Series A Trust Preferred Interest in Compass Diversified Holdings | | CODI PR A | | New York Stock Exchange |
Series B Preferred Shares representing Series B Trust Preferred Interest in Compass Diversified Holdings | | CODI PR B | | New York Stock Exchange |
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. YesýNo¨
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). YesýNo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange ActAct. |
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| Large accelerated filer | | ýx | | Accelerated filer | | ¨ |
Non-accelerated filer | | ¨ | | Smaller Reporting Company | | ¨ |
| Smaller reporting company | | ☐ | | Emerging growth company | | ¨
☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨☐Noý
As of November 1, 2017,July 30, 2019, there were 59,900,000 Trust common shares of Compass Diversified Holdings outstanding.
COMPASS DIVERSIFIED HOLDINGS
QUARTERLY REPORT ON FORM 10-Q
For the period ended SeptemberJune 30, 20172019
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION | | |
ITEM 1. | | | | |
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ITEM 2. | | | | |
ITEM 3. | | | | |
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ITEM 4. | | | | |
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PART II. OTHER INFORMATION | | |
ITEM 1. | | | | |
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ITEM 1A. | | | | |
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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;
the "Company" refer to Compass Group Diversified Holdings LLC;
"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 "Trust Agreement" refer to the Second Amended and Restated Trust Agreement of the Trust dated as of December 6, 2016;
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 "2014 Credit Facility" refer to the credit agreement, as amended, from time to time, entered into on June 6,14, 2014 with a group of lenders led by Bank of America N.A. as administrative agent, as amended from time to time, which provides for a Revolving Credit Facility and a Term Loan;
the "2014 Revolving"2018 Credit Facility" refer to the $550 millionamended and restated credit agreement entered into on April 18, 2018 among the Company, the Lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto.
the "2018 Revolving Credit FacilityFacility" refers to the $600 million in revolving loans, swing line loans and letters of credit provided by the 20142018 Credit Facility that matures in June 2019;2023;
the "2014"2018 Term Loan" refer to the $325$500 million Term Loan Facility,term loan provided by the 20142018 Credit Facility that matures in June 2021;
the "2016 Incremental Term Loan" refer to the $250 million Tranche B Term Facility provided by the 2014 Credit Facility (together with the 2014 Term Loan, the "Term Loans");April 2025;
the "LLC Agreement" refer to the fifth amended and restated operating agreement of the Company dated as of December 6, 2016; 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," "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
| | | | | | | | | June 30, 2019 | | December 31, 2018 |
(in thousands) | September 30, 2017 | | December 31, 2016 | | (Unaudited) | | |
| (Unaudited) | | | |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 41,487 |
| | $ | 39,772 |
| | $ | 485,864 |
| | $ | 48,771 |
|
Accounts receivable, net | 198,111 |
| | 181,191 |
| | 187,321 |
| | 205,545 |
|
Inventories | 242,817 |
| | 212,984 |
| | 327,657 |
| | 307,437 |
|
Prepaid expenses and other current assets | 27,145 |
| | 18,872 |
| | 85,280 |
| | 29,670 |
|
Current assets of discontinued operations | | | — |
| | 89,762 |
|
Total current assets | 509,560 |
| | 452,819 |
| | 1,086,122 |
| | 681,185 |
|
Property, plant and equipment, net | 170,827 |
| | 142,370 |
| | 143,313 |
| | 146,601 |
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Investment in FOX (refer to Note F) | — |
| | 141,767 |
| |
Goodwill | 539,925 |
| | 491,637 |
| | 471,400 |
| | 471,115 |
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Intangible assets, net | 591,878 |
| | 539,211 |
| | 588,618 |
| | 615,592 |
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Other non-current assets | 8,616 |
| | 9,351 |
| | 96,538 |
| | 8,378 |
|
Non-current assets of discontinued operations | | | — |
| | 449,464 |
|
Total assets | $ | 1,820,806 |
| | $ | 1,777,155 |
| | $ | 2,385,991 |
| | $ | 2,372,335 |
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| | | | | |
Liabilities and stockholders’ equity | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 77,417 |
| | $ | 61,512 |
| | $ | 74,833 |
| | $ | 77,169 |
|
Accrued expenses | 105,058 |
| | 91,041 |
| | 104,133 |
| | 106,612 |
|
Due to related party | 7,553 |
| | 20,848 |
| | 8,045 |
| | 11,093 |
|
Current portion, long-term debt | 5,685 |
| | 5,685 |
| | 5,000 |
| | 5,000 |
|
Other current liabilities | 15,493 |
| | 23,435 |
| | 26,650 |
| | 6,912 |
|
Current liabilities of discontinued operations | | | — |
| | 52,494 |
|
Total current liabilities | 211,206 |
| | 202,521 |
| | 218,661 |
| | 259,280 |
|
Deferred income taxes | 122,033 |
| | 110,838 |
| | 33,813 |
| | 33,984 |
|
Long-term debt | 569,755 |
| | 551,652 |
| | 869,918 |
| | 1,098,871 |
|
Other non-current liabilities | 18,570 |
| | 17,600 |
| | 86,818 |
| | 12,615 |
|
Non-current liabilities of discontinued operations | | | — |
| | 48,243 |
|
Total liabilities | 921,564 |
| | 882,611 |
| | 1,209,210 |
| | 1,452,993 |
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| | | | | |
Commitments and contingencies | | | | | |
| | | | | |
Stockholders’ equity | | | | | | | |
Trust preferred shares, 50,000 authorized; 4,000 shares issued and outstanding at September 30, 2017 | 96,417 |
| | — |
| |
Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding at September 30, 2017 and December 31, 2016 | 924,680 |
| | 924,680 |
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Trust preferred shares, 50,000 authorized; 8,000 shares issued and outstanding at June 30, 2019 and December 31, 2018 | | | | | |
Series A preferred shares, no par value; 4,000 shares issued and outstanding at June 30, 2019 and December 31, 2018 | | | 96,417 |
| | 96,417 |
|
Series B preferred shares, no par value; 4,000 shares issued and outstanding at June 30, 2019 and December 31, 2018 | | | 96,504 |
| | 96,504 |
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Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding at June 30, 2019 and December 31, 2018 | | | 924,680 |
| | 924,680 |
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Accumulated other comprehensive loss | (2,184 | ) | | (9,515 | ) | | (4,512 | ) | | (8,776 | ) |
Accumulated deficit | (167,297 | ) | | (58,760 | ) | |
Retained earnings (accumulated deficit) | | | 17,715 |
| | (249,453 | ) |
Total stockholders’ equity attributable to Holdings | 851,616 |
| | 856,405 |
| | 1,130,804 |
| | 859,372 |
|
Noncontrolling interest | 47,626 |
| | 38,139 |
| | 45,977 |
| | 39,922 |
|
Noncontrolling interest of discontinued operations | | | — |
| | 20,048 |
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Total stockholders’ equity | 899,242 |
| | 894,544 |
| | 1,176,781 |
| | 919,342 |
|
Total liabilities and stockholders’ equity | $ | 1,820,806 |
| | $ | 1,777,155 |
| | $ | 2,385,991 |
| | $ | 2,372,335 |
|
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 June 30, | | Six months ended June 30, |
(in thousands, except per share data) | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 268,281 |
| | $ | 200,770 |
| | $ | 767,960 |
| | $ | 525,713 |
| |
Service revenues | 55,676 |
| | 51,515 |
| | 153,370 |
| | 134,035 |
| |
Total net revenues | 323,957 |
| | 252,285 |
| | 921,330 |
| | 659,748 |
| |
Cost of sales | 166,445 |
| | 133,006 |
| | 488,913 |
| | 340,576 |
| |
Cost of service revenues | 39,787 |
| | 36,864 |
| | 110,639 |
| | 95,968 |
| |
Net revenues | | $ | 336,084 |
| | $ | 339,989 |
| | $ | 674,941 |
| | $ | 626,119 |
|
Cost of revenues | | 213,521 |
| | 221,510 |
| | 432,823 |
| | 403,753 |
|
Gross profit | 117,725 |
| | 82,415 |
| | 321,778 |
| | 223,204 |
| 122,563 |
| | 118,479 |
| | 242,118 |
| | 222,366 |
|
Operating expenses: | | | | | | | | | | | | | |
|
Selling, general and administrative expense | 80,804 |
| | 53,648 |
| | 239,102 |
| | 140,702 |
| 80,312 |
| | 81,513 |
| | 161,709 |
| | 161,676 |
|
Management fees | 8,277 |
| | 8,435 |
| | 24,308 |
| | 21,394 |
| 8,521 |
| | 10,799 |
| | 19,478 |
| | 21,436 |
|
Amortization expense | 14,167 |
| | 8,423 |
| | 39,256 |
| | 23,966 |
| 13,522 |
| | 14,465 |
| | 27,112 |
| | 22,745 |
|
Impairment expense | — |
| | — |
| | 8,864 |
| | — |
| |
Loss on disposal of assets | — |
| | 551 |
| | — |
| | 7,214 |
| |
Operating income | 14,477 |
| | 11,358 |
| | 10,248 |
| | 29,928 |
| 20,208 |
| | 11,702 |
| | 33,819 |
| | 16,509 |
|
Other income (expense): | | | | | | | | | | | | | | |
Interest expense, net | (6,945 | ) | | (4,376 | ) | | (22,499 | ) | | (23,204 | ) | (18,445 | ) | | (13,474 | ) | | (36,899 | ) | | (19,592 | ) |
Loss on sale of securities (refer to Note C) | | — |
| | — |
| | (5,300 | ) | | — |
|
Amortization of debt issuance costs | (1,004 | ) | | (687 | ) | | (2,940 | ) | | (1,827 | ) | (928 | ) | | (953 | ) | | (1,855 | ) | | (2,051 | ) |
Gain (loss) on investment in FOX | — |
| | 50,414 |
| | (5,620 | ) | | 58,680 |
| |
Other income (expense), net | 2,020 |
| | (3,271 | ) | | 2,950 |
| | (1,852 | ) | (90 | ) | | (2,207 | ) | | (524 | ) | | (3,540 | ) |
Income (loss) from continuing operations before income taxes | 8,548 |
| | 53,438 |
| | (17,861 | ) | | 61,725 |
| 745 |
| | (4,932 | ) | | (10,759 | ) | | (8,674 | ) |
Provision (benefit) for income taxes | 192 |
| | 4,894 |
| | (2,002 | ) | | 9,778 |
| |
Income (loss) from continuing operations | 8,356 |
| | 48,544 |
| | (15,859 | ) | | 51,947 |
| |
Income (loss) from discontinued operations, net of income tax | — |
| | (455 | ) | | — |
| | 473 |
| |
Gain on sale of discontinued operations, net of income tax | — |
| | 2,134 |
| | 340 |
| | 2,134 |
| |
Provision for income taxes | | 4,551 |
| | 3,330 |
| | 5,975 |
| | 2,087 |
|
Loss from continuing operations | | (3,806 | ) | | (8,262 | ) | | (16,734 | ) | | (10,761 | ) |
Income from discontinued operations, net of income tax | | 15,474 |
| | 7,630 |
| | 16,901 |
| | 8,508 |
|
Gain on sale of discontinued operations | | 206,505 |
| | 1,165 |
| | 328,164 |
| | 1,165 |
|
Net income (loss) | 8,356 |
| | 50,223 |
| | (15,519 | ) | | 54,554 |
| 218,173 |
| | 533 |
| | 328,331 |
| | (1,088 | ) |
Less: Net income attributable to noncontrolling interest | 650 |
| | 682 |
| | 2,492 |
| | 1,749 |
| |
Less: Net loss from discontinued operations attributable to noncontrolling interest | — |
| | (164 | ) | | — |
| | (116 | ) | |
Less: Net income from continuing operations attributable to noncontrolling interest | | 1,387 |
| | 1,486 |
| | 2,755 |
| | 1,787 |
|
Less: Net income (loss) from discontinued operations attributable to noncontrolling interest | | 252 |
| | (45 | ) | | (266 | ) | | 374 |
|
Net income (loss) attributable to Holdings | $ | 7,706 |
| | $ | 49,705 |
| | $ | (18,011 | ) | | $ | 52,921 |
| $ | 216,534 |
| | $ | (908 | ) | | $ | 325,842 |
| | $ | (3,249 | ) |
| | | | | | | | |
Amounts attributable to Holdings | | | | | | | | | | | | | | |
Income (loss) from continuing operations | $ | 7,706 |
| | $ | 47,862 |
| | $ | (18,351 | ) | | $ | 50,198 |
| |
Income (loss) from discontinued operations, net of income tax | — |
| | (291 | ) | | — |
| | 589 |
| |
Loss from continuing operations | | $ | (5,193 | ) | | $ | (9,748 | ) | | $ | (19,489 | ) | | $ | (12,548 | ) |
Income from discontinued operations, net of income tax | | 15,222 |
| | 7,675 |
| | 17,167 |
| | 8,134 |
|
Gain on sale of discontinued operations, net of income tax | — |
| | 2,134 |
| | 340 |
| | 2,134 |
| 206,505 |
| | 1,165 |
| | 328,164 |
| | 1,165 |
|
Net income (loss) attributable to Holdings | $ | 7,706 |
| | $ | 49,705 |
| | $ | (18,011 | ) | | $ | 52,921 |
| $ | 216,534 |
| | $ | (908 | ) | | $ | 325,842 |
| | $ | (3,249 | ) |
Basic and fully diluted income (loss) per common share attributable to Holdings (refer to Note L) |
| |
|
| | | | | |
| | | | | | | | |
Basic income (loss) per common share attributable to Holdings (refer to Note J) | |
| |
|
| | | | |
Continuing operations | $ | 0.10 |
| | $ | 0.72 |
| | $ | (1.03 | ) | | $ | 0.59 |
| $ | (0.32 | ) | | $ | (0.25 | ) | | $ | (0.64 | ) | | $ | (0.34 | ) |
Discontinued operations | — |
| | 0.03 |
| | 0.01 |
| | 0.05 |
| 3.70 |
| | 0.14 |
| | 5.77 |
| | 0.16 |
|
| $ | 0.10 |
| | $ | 0.75 |
| | $ | (1.02 | ) | | $ | 0.64 |
| $ | 3.38 |
| | $ | (0.11 | ) | | $ | 5.13 |
| | $ | (0.18 | ) |
Weighted average number of shares of common shares outstanding – basic and fully diluted | 59,900 |
| | 54,300 |
| | 59,900 |
| | 54,300 |
| |
Cash distributions declared per common share (refer to Note L) | $ | 0.36 |
| | $ | 0.36 |
| | $ | 1.08 |
| | $ | 1.08 |
| |
| | | | | | | | |
Basic weighted average number of shares of common shares outstanding | | 59,900 |
| | 59,900 |
| | 59,900 |
| | 59,900 |
|
Cash distributions declared per Trust common share (refer to Note J) | | $ | 0.36 |
| | $ | 0.36 |
| | $ | 0.72 |
| | $ | 0.72 |
|
See notes to condensed consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| | | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | | | | | | | |
Net income (loss) | $ | 8,356 |
| | $ | 50,223 |
| | $ | (15,519 | ) | | $ | 54,554 |
| $ | 218,173 |
| | $ | 533 |
| | $ | 328,331 |
| | $ | (1,088 | ) |
Other comprehensive income (loss) | | | | | | | | | | | | | | |
Foreign currency translation adjustments | 3,370 |
| | (1,945 | ) | | 6,955 |
| | 3,275 |
| (324 | ) | | (3,004 | ) | | 253 |
| | (4,027 | ) |
Foreign currency amounts reclassified from accumulated other comprehensive income (loss) that increase (decrease) net income: | | | | | | | | |
Disposition of Manitoba Harvest | | — |
| | — |
| | 4,791 |
| | — |
|
Pension benefit liability, net | (4 | ) | | (765 | ) | | 376 |
| | (1,288 | ) | (671 | ) | | 168 |
| | (780 | ) | | 609 |
|
Other comprehensive income (loss) | 3,366 |
| | (2,710 | ) | | 7,331 |
| | 1,987 |
| (995 | ) | | (2,836 | ) | | 4,264 |
| | (3,418 | ) |
Total comprehensive income (loss), net of tax | 11,722 |
| | 47,513 |
| | (8,188 | ) | | 56,541 |
| $ | 217,178 |
| | $ | (2,303 | ) | | $ | 332,595 |
| | $ | (4,506 | ) |
Less: Net income attributable to noncontrolling interests | 650 |
| | 518 |
| | 2,492 |
| | 1,633 |
| 1,639 |
| | 1,441 |
| | 2,489 |
| | 2,161 |
|
Less: Other comprehensive income (loss) attributable to noncontrolling interests | 675 |
| | (268 | ) | | 1,336 |
| | 929 |
| |
Less: Other comprehensive income attributable to noncontrolling interests | | (32 | ) | | (352 | ) | | (30 | ) | | (727 | ) |
Total comprehensive income (loss) attributable to Holdings, net of tax | $ | 10,397 |
| | $ | 47,263 |
| | $ | (12,016 | ) | | $ | 53,979 |
| $ | 215,571 |
| | $ | (3,392 | ) | | $ | 330,136 |
| | $ | (5,940 | ) |
See notes to condensed consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
| | (in thousands) | Trust Preferred Shares | | Trust Common Shares | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Stockholders' Equity Attributable to Holdings | | Non- Controlling Interest | | Total Stockholders’ Equity | Trust Preferred Shares | | Trust Common Shares | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Stockholders' Equity Attributable to Holdings | | Non- Controlling Interest | | Non- Controlling Interest Attributable to Disc. Ops. | | Total Stockholders’ Equity |
Balance — January 1, 2017 | $ | — |
| | $ | 924,680 |
| | $ | (58,760 | ) | | $ | (9,515 | ) | | $ | 856,405 |
| | $ | 38,139 |
| | $ | 894,544 |
| |
| | Series A | | Series B | | Trust Common Shares | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Stockholders' Equity Attributable to Holdings | | Non- Controlling Interest | | Non- Controlling Interest Attributable to Disc. Ops. | | Total Stockholders’ Equity |
Balance — January 1, 2018 | | $ | 96,417 |
| | $ | — |
| |
Net income (loss) | — |
| | — |
| | (18,011 | ) | | — |
| | (18,011 | ) | | 2,492 |
| | (15,519 | ) | — |
| | — |
| | — |
| | (3,249 | ) | | — |
| | (3,249 | ) | | 1,787 |
| | 374 |
| | (1,088 | ) |
Total comprehensive income, net | — |
| | — |
| | — |
| | 7,331 |
| | 7,331 |
| | — |
| | 7,331 |
| |
Total comprehensive loss, net | | — |
| | — |
| | — |
| | — |
| | (3,418 | ) | | (3,418 | ) | | — |
| | — |
| | (3,418 | ) |
Issuance of Trust preferred shares, net of offering costs | 96,417 |
| | — |
| | — |
| | — |
| | 96,417 |
| | — |
| | 96,417 |
| — |
| | 96,504 |
| | — |
| | — |
| | — |
| | 96,504 |
| | — |
| | — |
| | 96,504 |
|
Option activity attributable to noncontrolling shareholders | — |
| | — |
| | — |
| | — |
| | — |
| | 4,952 |
| | 4,952 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,165 |
| | — |
| | 5,165 |
|
Effect of subsidiary stock option exercise | — |
| | — |
| | — |
| | — |
| | — |
| | 1,222 |
| | 1,222 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,377 | ) | | — |
| | (6,377 | ) |
Effect of issuance of subsidiary stock | — |
| | — |
| | — |
| | — |
| | — |
| | 40 |
| | 40 |
| |
Acquisition of Crosman | — |
| | — |
| | — |
| | — |
| | — |
| | 781 |
| | 781 |
| |
Distributions paid - Allocation Interests (refer to Note L) | — |
| | — |
| | (25,834 | ) | | — |
| | (25,834 | ) | | — |
| | (25,834 | ) | |
Distributions paid - Trust Common Shares | — |
| | — |
| | (64,692 | ) | | — |
| | (64,692 | ) | | — |
| | (64,692 | ) | — |
| | — |
| | — |
| | (43,128 | ) | | — |
| | (43,128 | ) | | — |
| | — |
| | (43,128 | ) |
Balance — September 30, 2017 | $ | 96,417 |
| | $ | 924,680 |
| | $ | (167,297 | ) | | $ | (2,184 | ) | | $ | 851,616 |
| | $ | 47,626 |
| | $ | 899,242 |
| |
Distributions paid - Trust Preferred Shares | | — |
| | — |
| | — |
| | (3,625 | ) | | — |
| | (3,625 | ) | | — |
| | — |
| | (3,625 | ) |
Balance — June 30, 2018 | | $ | 96,417 |
| | $ | 96,504 |
| | $ | 924,680 |
| | $ | (195,318 | ) | | $ | (5,991 | ) | | $ | 916,292 |
| | $ | 34,284 |
| | $ | 19,456 |
| | $ | 970,032 |
|
| | | | | | | | | | | | | | | | | | |
Balance — January 1, 2019 | | $ | 96,417 |
| | $ | 96,504 |
| | $ | 924,680 |
| | $ | (249,453 | ) | | $ | (8,776 | ) | | $ | 859,372 |
| | $ | 39,922 |
| | $ | 20,048 |
| | $ | 919,342 |
|
Net income (loss) | | — |
| | — |
| | — |
| | 325,842 |
| | — |
| | 325,842 |
| | 2,755 |
| | (266 | ) | | 328,331 |
|
Total comprehensive income, net | | — |
| | — |
| | — |
| | — |
| | 4,264 |
| | 4,264 |
| | — |
| | — |
| | 4,264 |
|
Option activity attributable to noncontrolling shareholders | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,329 |
| | 1,939 |
| | 5,268 |
|
Effect of subsidiary stock option exercise | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 41 |
| | — |
| | 41 |
|
Purchase of noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (70 | ) | | — |
| | (70 | ) |
Disposition of Manitoba Harvest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,799 | ) | | (10,799 | ) |
Disposition of Clean Earth | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,922 | ) | | (10,922 | ) |
Distributions paid - Allocation Interests | | — |
| | — |
| | — |
| | (7,983 | ) | | — |
| | (7,983 | ) | | — |
| | — |
| | (7,983 | ) |
Distributions paid - Trust Common Shares | | — |
| | — |
| | — |
| | (43,128 | ) | | — |
| | (43,128 | ) | | — |
| | — |
| | (43,128 | ) |
Distributions paid - Trust Preferred Shares | | — |
| | — |
| | — |
| | (7,563 | ) | | — |
| | (7,563 | ) | | — |
| | — |
| | (7,563 | ) |
Balance — June 30, 2019 | | $ | 96,417 |
| | $ | 96,504 |
| | $ | 924,680 |
| | $ | 17,715 |
| | $ | (4,512 | ) | | $ | 1,130,804 |
| | $ | 45,977 |
| | $ | — |
| | $ | 1,176,781 |
|
See notes to condensed consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) |
| | | | | | | |
| Six months ended June 30, |
(in thousands) | 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | 328,331 |
| | $ | (1,088 | ) |
Income from discontinued operations, net of income tax | 16,901 |
| | 8,508 |
|
Gain on sale of discontinued operations | 328,164 |
| | 1,165 |
|
Loss from continuing operations | (16,734 | ) | | (10,761 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation expense | 16,225 |
| | 14,861 |
|
Amortization expense | 27,112 |
| | 28,026 |
|
Amortization of debt issuance costs and original issue discount | 2,159 |
| | 2,324 |
|
Unrealized (gain) loss on interest rate swap | 3,350 |
| | (3,900 | ) |
Noncontrolling stockholder stock based compensation | 3,329 |
| | 3,999 |
|
Provision for loss on receivables | 498 |
| | (177 | ) |
Deferred taxes | (36 | ) | | (1,052 | ) |
Other | 427 |
| | 123 |
|
Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | 16,492 |
| | 249 |
|
Inventories | (19,778 | ) | | (9,311 | ) |
Other current and non-current assets | (6,272 | ) | | (3,770 | ) |
Accounts payable and accrued expenses | (7,980 | ) | | 8,124 |
|
Cash provided by operating activities - continuing operations | 18,792 |
| | 28,735 |
|
Cash provided by (used in) operating activities - discontinued operations | (10,138 | ) | | 6,577 |
|
Cash provided by operating activities | 8,654 |
| | 35,312 |
|
Cash flows from investing activities: | | | |
Acquisitions, net of cash acquired | — |
| | (391,243 | ) |
Purchases of property and equipment | (14,360 | ) | | (25,177 | ) |
Payment of interest rate swap | (303 | ) | | (1,086 | ) |
Proceeds from sale of businesses | 451,654 |
| | — |
|
Other investing activities | 1,790 |
| | 74 |
|
Cash provided by (used in) investing activities - continuing operations | 438,781 |
| | (417,432 | ) |
Cash provided by (used in) investing activities - discontinued operations | 279,219 |
| | (37,283 | ) |
Cash provided by (used in) investing activities | 718,000 |
| | (454,715 | ) |
COMPASS DIVERSIFIED HOLDINGS CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) |
| | | | | | | |
| Nine months ended September 30, |
(in thousands) | 2017 | | 2016 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (15,519 | ) | | $ | 54,554 |
|
Income from discontinued operations | — |
| | 473 |
|
Gain on sale of discontinued operations, net | 340 |
| | 2,134 |
|
Net income (loss) from continuing operations | (15,859 | ) | | 51,947 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
| |
|
Depreciation expense | 24,505 |
| | 19,481 |
|
Amortization expense | 64,154 |
| | 32,691 |
|
Impairment expense | 8,864 |
| | — |
|
Loss on disposal of assets | — |
| | 7,214 |
|
Amortization of debt issuance costs and original issue discount | 3,721 |
| | 2,363 |
|
Unrealized loss on interest rate swap | 1,178 |
| | 8,322 |
|
Noncontrolling stockholder stock based compensation | 4,952 |
| | 3,011 |
|
Excess tax benefit from subsidiary stock options exercised | (417 | ) | | (366 | ) |
Loss (gain) on investment in FOX | 5,620 |
| | (58,680 | ) |
Provision for loss on receivables | 4,310 |
| | 59 |
|
Deferred taxes | (17,937 | ) | | (4,479 | ) |
Other | 494 |
| | 325 |
|
Changes in operating assets and liabilities, net of acquisition: |
| |
|
Increase in accounts receivable | (1,015 | ) | | (8,797 | ) |
(Increase) decrease in inventories | (24,222 | ) | | 440 |
|
(Increase) decrease in prepaid expenses and other current assets | (4,501 | ) | | 2,081 |
|
Increase in accounts payable and accrued expenses | 5,389 |
| | 1,296 |
|
Net cash provided by operating activities - continuing operations | 59,236 |
| | 56,908 |
|
Net cash provided by operating activities - discontinued operations | — |
| | 3,686 |
|
Cash provided by operating activities | 59,236 |
| | 60,594 |
|
Cash flows from investing activities: | | | |
Acquisitions, net of cash acquired | (164,742 | ) | | (528,642 | ) |
Purchases of property and equipment | (30,955 | ) | | (15,528 | ) |
Net proceeds from sale of equity investment | 136,147 |
| | 110,685 |
|
Payment of interest rate swap | (3,050 | ) | | (3,114 | ) |
Purchase of noncontrolling interest | — |
| | (1,476 | ) |
Proceeds from sale of business | 340 |
| | 11,249 |
|
Other investing activities | (696 | ) | | 350 |
|
Net cash used in investing activities - continuing operations | (62,956 | ) | | (426,476 | ) |
Net cash provided by investing activities - discontinued operations | — |
| | 9,192 |
|
Cash used in investing activities | (62,956 | ) | | (417,284 | ) |
COMPASS DIVERSIFIED HOLDINGS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| | | | | | | |
| Six months ended June 30, |
(in thousands) | 2019 | | 2018 |
Cash flows from financing activities: | | | |
Proceeds from the issuance of Trust preferred shares, net | — |
| | 96,504 |
|
Borrowings under credit facility | 108,000 |
| | 1,093,750 |
|
Repayments under credit facility | (338,500 | ) | | (1,106,223 | ) |
Issuance of senior notes | — |
| | 400,000 |
|
Distributions paid - common shares | (43,128 | ) | | (43,128 | ) |
Distributions paid - preferred shares | (7,563 | ) | | (3,625 | ) |
Distributions paid - allocation interests | (7,983 | ) | | — |
|
Net proceeds provided by noncontrolling shareholders | 41 |
| | 14 |
|
Repurchases of subsidiary stock | (70 | ) | | (6,392 | ) |
Debt issuance costs | — |
| | (14,860 | ) |
Other | (3,547 | ) | | (682 | ) |
Net cash provided by (used in) financing activities | (292,750 | ) | | 415,358 |
|
Foreign currency impact on cash | (1,366 | ) | | 1,616 |
|
Net increase (decrease) in cash and cash equivalents | 432,538 |
| | (2,429 | ) |
Cash and cash equivalents — beginning of period (1) | 53,326 |
| | 39,885 |
|
Cash and cash equivalents — end of period | $ | 485,864 |
| | $ | 37,456 |
|
COMPASS DIVERSIFIED HOLDINGS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| | | | | | | |
| Nine months ended September 30, |
(in thousands) | 2017 | | 2016 |
Cash flows from financing activities: | | | |
Proceeds from the issuance of Trust preferred shares, net | 96,417 |
| | — |
|
Borrowings under credit facility | 214,500 |
| | 633,798 |
|
Repayments under credit facility | (197,664 | ) | | (221,719 | ) |
Distributions paid | (64,692 | ) | | (58,644 | ) |
Net proceeds provided by noncontrolling shareholders | 821 |
| | 9,473 |
|
Distributions paid to noncontrolling shareholders | — |
| | (23,630 | ) |
Distributions paid to allocation interest holders (refer to Note L) | (39,188 | ) | | (16,829 | ) |
Repurchase of subsidiary stock | — |
| | (15,407 | ) |
Excess tax benefit from subsidiary stock options exercised | 417 |
| | 366 |
|
Debt issuance costs | (1,433 | ) | | (5,993 | ) |
Other | (1,316 | ) | | (1,008 | ) |
Net cash provided by financing activities | 7,862 |
| | 300,407 |
|
Foreign currency impact on cash | (2,427 | ) | | (3,197 | ) |
Net increase (decrease) in cash and cash equivalents | 1,715 |
| | (59,480 | ) |
Cash and cash equivalents — beginning of period (1) | 39,772 |
| | 85,869 |
|
Cash and cash equivalents — end of period | $ | 41,487 |
| | $ | 26,389 |
|
(1)Includes cash from discontinued operations of $0.6$4.6 million at January 1, 2016.2019 and $4.2 million at January 1, 2018.
See notes to condensed consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SeptemberJune 30, 20172019
Note A — Organization- Presentation and Business OperationsPrinciples of Consolidation
Compass Diversified Holdings, a Delaware statutory trust (the "Trust" or "Holdings"), was incorporated in Delaware on November 18, 2005. and 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 second amended and restated Trust Agreement, dated as of December 6, 2016 (the(as amended and restated, the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s fifth amended and restated operating agreement, dated as of December 6, 2016 (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 nineeight businesses, or reportable operating segments, at SeptemberJune 30, 2017.2019. The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), Velocity Outdoor, Inc. (formerly Crosman Corp.) ("Crosman"Velocity Outdoor" or "Velocity"), 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"), FFI Compass Inc. ("Foam Fabricators" or "Arnold Magnetics""Foam"), Clean Earth Holdings, Inc. ("Clean Earth"), and The Sterno Products,Group, LLC ("Sterno" or "Sterno Products"). Refer to Note E - "Operating Segment Data" for further discussion of the operating segments. 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 agreementManagement Services Agreement ("MSA"). Note B -Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements for the three and ninesix month periods ended SeptemberJune 30, 20172019 and SeptemberJune 30, 2016,2018 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" or "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, 2016.
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. Crosman typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday seasons. Earnings from Clean Earth are typically lower during the winter months due to the limits on outdoor construction and development activity 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 and holiday seasons, respectively.2018.
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.
Discontinued Operations
During the thirdfirst quarter of 2016,2019, the Company completed the sale of Tridien Medical,Fresh Hemp Foods Ltd. ("Manitoba Harvest"). Additionally, during the second quarter of 2019, the Company completed the sale of Clean Earth Holdings, Inc. ("Tridien"Clean Earth"). The results of operations of TridienManitoba Harvest and Clean Earth are reported as discontinued operations in the condensed consolidated statements of operations for the three and ninesix months ended SeptemberJune 30, 2016.2019. Refer toNote DC - "Discontinued Operations" for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations. Seasonality
Earnings of certain of our operating segments are seasonal in nature due to various recurring events, holidays and seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and fourth quarter produce the highest net sales during our fiscal year.
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued new accounting guidance to simplify the accounting for goodwill impairment. The guidance removes step twoLeases
As of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not
to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. Entities will continue to have the option to perform a qualitative test to determine if a quantitative test is necessary. The guidance is effective for fiscal years and interim periods within those years, after December 31, 2019, with early adoption permitted for any goodwill impairment tests performed after January 1, 2017 and will be applied prospectively. The2019, the Company adopted this guidance early, effective January 1, 2017, on a prospective basis, and will apply the guidance as necessary to annual and interim goodwill testing performed subsequent to January 1, 2017.
Recently Issued Accounting Pronouncements
In March 2017, the FASB issued new guidance that will require employers that sponsor defined benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period, and requires the other components of net periodic pension cost to be presented in the income statement separately from the service component cost and outside a subtotal of income from operations. The new guidance shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company's Arnold business segment has a defined benefit plan covering substantially all of Arnold's employees at its Switzerland location. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.
In January 2017, the FASB issued new guidance that changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the set of transferred asset and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognition guidance.Standards Update ("ASU") No. 2016-02, Leases ("Topic 842"). The new standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.
In August 2016, the FASB issued an accounting standard update which updates the guidance as to how certain cash receipts and cash payments should be presented and classified within the statement of cash flows. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued an accounting standard update related to the accounting for leases which will requirerequires 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,In July 2018, the Financial Accounting Standards Board ("FASB") issued two updates to Topic 842 to clarify how to apply certain aspects of the new lease standard, and to give entities another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows entities to not apply the new lease standard in the comparative periods presented in the financial statements in the year of adoption. The Company adopted the new standard isusing the optional transition method. The reported results for reporting periods after January 1, 2019 are presented under the new lease guidance while prior period amounts were prepared under the previous lease guidance.
The new standard provides a number of optional practical expedients in transition. The Company elected to use the package of practical expedients that allows us to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. We additionally elected to use the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component and the practical expedient pertaining to land easements. In addition, the new standard provides for an accounting election that permits a lessee to elect not to apply the recognition requirements of Topic 842 to short-term leases by class of underlying asset. The Company adopted this accounting election for all classes of assets.
The Company has performed an assessment of the impact of the adoption of Topic 842 on the Company's consolidated financial position and results of operations for the Company's leases, which consist of manufacturing facilities, warehouses, office facilities, retail stores, equipment and vehicle leases. The adoption of the new lease standard on January 1, 2019 resulted in the recognition of right-of-use assets of approximately $90.6 million and lease liabilities for operating leases of approximately $97.4 million on our Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations or Consolidated Statement of Cash Flows. We implemented processes and a lease accounting system to ensure adequate internal controls were in place to assess our leasing arrangements and enable proper accounting and reporting of financial information upon adoption. No cumulative effect adjustment was recognized as the amount was not material. Refer to "Note O - Commitments and Contingencies" for additional information regarding the Company's adoption of Topic 842. Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses, which will require companies to present assets held at amortized cost and available for sale debt securities net of the amount expected to be collected. The guidance requires the measurement of expected credit losses to be based on relevant information from past events, including historical experiences, current conditions and reasonable and supportable forecasts that affect collectibility. The guidance will be effective for annual reportingfiscal years and interim periods beginning after December 15, 2018, including interim periods within that reporting period,2019 and requires modified retrospective adoption, with early adoption is permitted. Accordingly,The adoption of this standardguidance is effective for the Company on January 1, 2019. The Company is currently assessing thenot expected to have a material impact of the new standard on our consolidated financial statements.
In May 2014, the FASB issued a comprehensive new revenue recognition standard. The new standard outlines a 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. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard is designed to create greater comparability for financial statement users across industries, jurisdictions and capital markets and also requires enhanced disclosures. The new standard will be effective for the Company beginning January 1, 2018. The FASB issued four subsequent standards in 2016 containing implementation guidance related to the new standard. These standards provide additional guidance related to principal versus agent considerations, licensing, and identifying performance obligations. Additionally, these standards provide narrow-scope improvements and practical expedients as well as technical corrections and improvements.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company will be adopting the standard using the modified retrospective method effective January 1, 2018.
The Company has developed implementation procedures specific to each of its reportable segments.The Company has designed these procedures to assess the impact that the new revenue standard will have on the Company’s financial
statements and to make any changes necessary to its current accounting practices and internal controls over financial reporting. The Company expects to complete the implementation procedures during the fourth quarter of 2017. The Company has identified certain differences as it relates to the concepts of variable consideration, consideration payable to a customer and the focus on control to determine when and how revenue should be recognized (i.e. point in time versus over time) during the implementation process. Although certain differences have been identified around variable consideration and consideration payable to a customer, the total impact on each reportable segment will not be material to the financial statements. The Company has identified two reportable segments where revenue recognition will change to over time recognition from historical point in time revenue recognition. Although the timing of revenue recognition for these two reportable segments will change, these changes will not have a material impact on the Company’s financial statements. The Company expects to adopt certain practical expedients and make certain policy elections related to the accounting for significant financing components, sales taxes, shipping and handling, costs to obtain a contract and immaterial promised goods or services which mitigates any potential differences. In addition, the Company is currently analyzing our internal control over financial reporting framework to determine if controls should be added or modified as a result of adopting this standard, and reviewing the tax impact, if any, the option of the new standard may have. We also expect that the adoption of the new standard will result in expanded and disaggregated disclosure requirements.
Note CB — Acquisitions
Acquisition of CrosmanFoam Fabricators
On June 2, 2017, CBCP Acquisition Corp. (the "Buyer"),February 15, 2018, pursuant to an agreement entered into on January 18, 2018, the Company, through a wholly owned subsidiary, of the Company,FFI Compass, Inc. (“Buyer”), entered into an equity purchase agreementa Stock Purchase Agreement (the “Purchase Agreement”) with Warren F. Florkiewicz (“Seller”) pursuant to which itBuyer acquired all of the issued and outstanding equity interestscapital stock of Bullseye Acquisition Corporation, the indirect owner of the equity interests of Crosman Corp. ("Crosman"Foam Fabricators, Inc., a Delaware corporation (“Foam Fabricators”). CrosmanFoam Fabricators is a leading designer and manufacturer of custom molded protective foam solutions and marketeroriginal equipment manufacturer ("OEM") components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP). Founded in 1957 and headquartered in Scottsdale, Arizona, it operates 13 molding and fabricating facilities across North America and provides products to a variety of airguns, archery products, laser aiming devicesend-markets, including appliances and related accessories. Headquartered in Bloomfield, New York, Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channelselectronics, pharmaceuticals, health and distributors serving smaller specialty storeswellness, automotive, building and international markets. Its diversified product portfolio includes the widely known Crosman, Benjamin and CenterPoint brands.other products.
The Company made loans to, and purchased a 98.9%100% controlling interest in Crosman.Foam Fabricators. The final purchase price, including proceeds from noncontrolling interestsafter the working capital settlement and net of transaction costs, was approximately $150.4$253.4 million. Crosman management invested inThe Company funded the transaction along with the Company, representing approximately 1.1% of the initial noncontrolling interest onacquisition through a primary and fully diluted basis. The fair value of the noncontrolling interest was determined baseddraw 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.2014 Revolving Credit Facility. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provideprovided integration services during the first year of the Company's ownership of Crosman.ownership. CGM will receivereceived integration service fees of $1.5$2.25 million payable quarterly over a twelve month period as services are rendered beginning in the quarter ended September 30, 2017.were rendered. The Company incurred $1.5$1.6 million of transaction costs in conjunction with the CrosmanFoam Fabricators acquisition, which was included in selling, general and administrative expense in the consolidated statementsresults of income duringoperations in the second quarter of 2017.
ended March 31, 2018. The results of operations of CrosmanFoam Fabricators have been included in the consolidated results of operations since the date of acquisition. Crosman'sFoam Fabricator's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the preliminary recording of assets acquired and liabilities assumed as of the acquisition date.segment.
|
| | | | | | | | | | | | |
| | Preliminary Allocation | | Measurement Period Adjustments | | Revised Preliminary Allocation |
(in thousands) | | As of 6/2/2017 | | | As of 9/30/17 |
Assets: | | | | | | |
Cash | | $ | 429 |
| | $ | 781 |
| | $ | 1,210 |
|
Accounts receivable (1) | | 16,751 |
| | — |
| | 16,751 |
|
Inventory | | 25,598 |
| | 3,166 |
| | 28,764 |
|
Property, plant and equipment | | 10,963 |
| | 6,610 |
| | 17,573 |
|
Intangible assets | | — |
| | 82,773 |
| | 82,773 |
|
Goodwill | | 139,434 |
| | (91,316 | ) | | 48,118 |
|
Other current and noncurrent assets | | 2,348 |
| | — |
| | 2,348 |
|
Total assets | | $ | 195,523 |
| | $ | 2,014 |
| | $ | 197,537 |
|
| | | | | | |
|
| | | | | | | | | | | | |
Liabilities and noncontrolling interest: | | | | | | |
Current liabilities | | $ | 15,502 |
| | $ | 781 |
| | $ | 16,283 |
|
Other liabilities | | 91,268 |
| | 189 |
| | 91,457 |
|
Deferred tax liabilities | | 27,286 |
| | 1,382 |
| | 28,668 |
|
Noncontrolling interest | | 694 |
| | — |
| | 694 |
|
Total liabilities and noncontrolling interest | | $ | 134,750 |
| | $ | 2,352 |
| | $ | 137,102 |
|
| | | | | | |
Net assets acquired | | $ | 60,773 |
| | $ | (338 | ) | | $ | 60,435 |
|
Noncontrolling interest | | 694 |
| | — |
| | 694 |
|
Intercompany loans to business | | 90,742 |
| | — |
| | 90,742 |
|
| | $ | 152,209 |
| | $ | (338 | ) | | $ | 151,871 |
|
|
| | | | | | | | | | | | |
Acquisition Consideration | | | | | | |
Purchase price | | $ | 151,800 |
| | $ | — |
| | $ | 151,800 |
|
Cash acquired | | 1,417 |
| | (207 | ) | | 1,210 |
|
Working capital adjustment | | (1,008 | ) | | (131 | ) | | (1,139 | ) |
Total purchase consideration | | 152,209 |
| | (338 | ) | | 151,871 |
|
Less: Transaction costs | | 1,397 |
| | 76 |
| | 1,473 |
|
Purchase price, net | | $ | 150,812 |
| | $ | (414 | ) | | $ | 150,398 |
|
(1) Includes $18.0 million of gross contractual accounts receivable of which $1.2 million was not expected to be collected. The fair value of accounts receivable approximated book value acquired.
The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including income, cost and market approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $48.1 million reflects the strategic fit of Crosman in the Company's branded consumer business and is not expected to be deductible for income tax purposes. The purchase accounting for Crosman is expected to be finalized during the fourth quarter of 2017.
The intangible assets recorded related to the Crosman acquisition are as follows (in thousands):
|
| | | | | | |
Intangible Assets | | Amount | | Estimated Useful Life |
Tradename | | $ | 51,642 |
| | 20 years |
Customer relationships | | 28,718 |
| | 15 years |
Technology | | 2,413 |
| | 15 years |
| | $ | 82,773 |
| | |
The tradename was valued at $51.6 million using a multi-period excess earnings methodology. The customer relationships intangible asset was valued at $28.7 million using the distributor method, a variation of the multi-period excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The technology was valued at $2.4 million using a relief from royalty method.
Acquisition of 5.11 Tactical
On August 31, 2016, 5.11 ABR Merger Corp. ("Merger Sub"), a wholly owned subsidiary of 5.11 ABR Corp. ("Parent"), which in turn is a wholly owned subsidiary of the Company, merged with and into 5.11 Tactical, with 5.11 Tactical as the surviving entity, pursuant to an agreement and plan of merger among Merger Sub, Parent, 5.11 Tactical, and TA Associates Management L.P. entered into on July 29, 2016. 5.11 Tactical is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
The Company made loans to, and purchased a 97.5% controlling interest in, 5.11 ABR Corp. The purchase price, including proceeds from noncontrolling interest and net of transaction costs, was approximately $408.2 million. 5.11 management invested in the transaction along with the Company, representing approximately 2.5% 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 5.11. CGM received integration service fees of $3.5 million payable quarterly over a twelve month period as services are rendered beginning in the quarter ended December 31, 2016.
The results of operations of 5.11 have been included in the consolidated results of operations since the date of acquisition. 5.11's results of operations are reported as a separate operating segment. The Company incurred $2.1 million of transaction costs in conjunction with the 5.11 acquisition, which was included in selling, general and administrative expense in the consolidated statements of income during the year of acquisition. The allocation of the purchase price, which was finalized during the fourth quarter of 2016,2018, was based upon management's estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates were based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities were estimated at their historical carrying values. Property, plant and equipment was valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives. Goodwill was calculated as the excess of the consideration transferred over the fair value of the identifiable net assets and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $93.0 million reflects the strategic fit of 5.11 in the Company's branded consumer business and is not expected to be deductible for income tax purposes.
The customer relationships intangible assettradename was valued at $75.2$4.2 million using an excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on and of the other assets utilized in the business. The tradename intangible asset ($48.7 million) and the design patent technology asset ($4.0 million) were valued using arelief from royalty savings methodology, in which an asset is valuable to the extent that the ownership of the asset relieves the company from the obligation of paying royalties for the benefits generated by the asset. The customer relationships intangible asset was valued at $114.1 million using an excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The customer relationships intangible asset was derived using a risk adjusted discount rate.
Acquisition of Rimports
On February 26, 2018, the Company's Sterno subsidiary acquired all of the issued and outstanding capital stock of Rimports, Inc., a Utah corporation (“Rimports”), pursuant to a Stock Purchase Agreement, dated January 23, 2018, by and among Sterno and Jeffery W. Palmer, individually and in his capacity as Seller Representative, the Jeffery Wayne Palmer Dynasty Trust dated December 26, 2011, the Angela Marie Palmer Irrevocable Trust dated December 26, 2011, the Angela Marie Palmer Charitable Lead Trust, the Fidelity Investments Charitable Gift Fund, the TAK Irrevocable Trust dated June 7, 2012, and the SAK Irrevocable Trust dated June 7, 2012. Headquartered in Provo, Utah, Rimports is a manufacturer and distributor of branded and private label scented wickless candle products used for home décor and fragrance. Rimports offers an extensive line of wax warmers, scented wax cubes, essential oils and diffusers, and other home fragrance systems, through the mass retailer channel.
Sterno purchased a 100% controlling interest in Rimports. The purchase price, after the working capital settlement and net of transaction costs, was approximately $154.4 million. The purchase price of Rimports included a potential earn-out of up to $25 million contingent on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019. The fair value of the contingent consideration was estimated at $4.8 million. Sterno funded the acquisition through their intercompany credit facility with the Company. The transaction was accounted for as a business combination. Sterno incurred $0.6 million of transaction costs in conjunction with the acquisition of Rimports, which was included in selling, general and administrative expense in the consolidated results of operations in the quarter ended March 31, 2018. The results of operations of Rimports have been included in the consolidated results of operations since the date of acquisition. Rimport's results of operations are included in the Sterno operating segment.
The allocation of the purchase price, which was finalized during the fourth quarter of 2018, was based upon management's estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates were based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities were estimated at their historical carrying values. Property, plant and equipment was valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives. Goodwill was calculated as the excess of the consideration transferred over the fair value of the identifiable net assets and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The tradename was valued at $6.6 million using a relief from royalty methodology, in which an asset is valuable to the extent that the ownership of the asset
relieves the company from the obligation of paying royalties for the benefits generated by the asset. The customer relationships intangible asset was valued at $79.1 million using an excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The customer relationships intangible asset was derived using a risk adjusted discount rate.
Unaudited pro forma information
The following unaudited pro forma data for the ninesix months ended SeptemberJune 30, 2017 and the three and nine months ended September 30, 20162018 gives effect to the acquisition of CrosmanFoam Fabricators and 5.11 Tactical,Sterno's acquisition of Rimports, as described above, and the disposition of Manitoba Harvest and Clean Earth, as if the acquisitionsthese transactions had been completed as of January 1, 2016, and the sale of Tridien as if the disposition had been completed on January 1, 2016.2018. 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) | | Six months ended June 30, 2018 |
Net revenues | | $ | 665,947 |
|
Gross profit | | 232,784 |
|
Operating income | | 19,639 |
|
Net loss | | (12,381 | ) |
Net loss attributable to Holdings | | (14,168 | ) |
Basic and fully diluted net loss per share attributable to Holdings | | $ | (0.29 | ) |
|
| | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2016 | | 2017 | | 2016 |
Net sales | | $ | 331,829 |
| | $ | 962,976 |
| | $ | 928,157 |
|
Gross profit | | 111,811 |
| | 332,682 |
| | 326,936 |
|
Operating income | | 13,463 |
| | 11,924 |
| | 36,424 |
|
Net income (loss) | | 46,054 |
| | (12,581 | ) | | 52,461 |
|
Net income (loss) attributable to Holdings | | 45,381 |
| | (15,073 | ) | | 50,743 |
|
Basic and fully diluted net income (loss) per share attributable to Holdings | | $ | 0.67 |
| | $ | (0.97 | ) | | $ | 0.60 |
|
Other acquisitions
ErgobabyVelocity Outdoor
Ravin Crossbows - On May 11, 2016, the Company's Ergobaby subsidiarySeptember 4, 2018, Velocity Outdoor (formerly Crosman Corp.) acquired all of the outstanding membership interests in New Baby TulaRavin Crossbows, LLC ("Baby Tula"Ravin" or "Ravin Crossbows"), for a maker of premium baby carriers, toddler carriers, slings, blankets and wraps. The purchase price was $73.8of approximately $98.0 million, net of transaction costs, plus a potential earn-out of $8.2up to $25.0 million based on 2017 financial performance. Ergobaby paid $0.8 million in transaction costs in connection withgross profit levels for the acquisition. Ergobabytrailing twelve month period ending December 31, 2018. Velocity funded the acquisition and payment of related transaction costs through the issuance of an additional $68.2$38.9 million in intercompany loans with the Company, and the issuance of $8.2 million in Ergobaby sharesadditional equity to the selling shareholders. ErgobabyCompany of $60.6 million. Velocity recorded a purchase price allocation for Ravin comprised of $13.2$67.5 million in intangible assets ($14.1 million in finite lived trade name, $42.6 million in technologies valued using an excess earnings methodology, and $10.8 million in customer relationships), $2.5 million in inventory step-up, and $13.3 million in goodwill which is expected to be deductible for income tax purposes, $55.3 million in intangible assets comprised of $52.9 million in finite lived tradenames, $1.7 million in non-compete agreements, $0.7 million in customer relationships, and $4.8 million in inventory step-up. In addition, the earn-out provision of the purchase price was allocated a fair value of $3.8 million.purposes. The remainder of the purchase consideration was allocated to net assets acquired. The Company finalizedpotential earn-out was valued at $4.7 million as part of the purchase price forallocation. Velocity incurred transaction costs of $1.4 million related to the Baby TulaRavin acquisition, which were recorded as selling, general and administrative costs in the accompanying statement of operations as of December 31, 2018. The purchase price allocation was finalized during the fourthfirst quarter of 2016.2019.
Note C — Discontinued Operations
Sale of Clean Earth
On June 1, 2016,May 8, 2019, the Company's Clean Earth subsidiary acquired certainCompany, as majority stockholder of the assets and liabilities of EWS Alabama, Inc. ("EWS"). Clean Earth funded the acquisition and the related transaction costs through the issuance of additional intercompany debt with the Company. Based in Glencoe, Alabama, EWS provides a range of hazardous and non-hazardous waste management services from a fully permitted hazardous waste RCRA Part B facility. In connection with the acquisition, Clean Earth recorded a purchase price allocation of $3.6 million in goodwill and $12.1 million in intangible assets.
On April 15, 2016, Clean Earth acquired certain assets of Phoenix Soil, LLC ("Phoenix Soil"CEHI Acquisition Corporation (“CEHI”) and WIC,as Sellers’ Representative, entered into a definitive Stock Purchase Agreement (the “Purchase Agreement”) with Calrissian Holdings, LLC (together with Phoenix Soil,(“Buyer”), CEHI, the "Sellers"). Phoenix Soil is based in Plainville, Connecticutother holders of stock and provides environmental services for nonhazardous contaminated soil materials with a primary focus on soil. Phoenix Soil recently completed its transitionoptions of CEHI and, as Buyer’s guarantor, Harsco Corporation, pursuant to a new 58,000 square foot thermal desorption facility owned by WIC, LLC. The acquisition increased Clean Earth's soil treatment capabilities and expanded its geographic footprint into New England. Clean Earth financed the acquisition and payment of related transaction costs through the issuance of additional intercompany loans with the Company. In connection with the acquisition, Clean Earth recorded a purchase price allocation of $3.2 million in goodwill and $5.6 million in intangible assets.
Sterno Products
On January 22, 2016, Sterno Products, a wholly owned subsidiary of the Company, acquiredwhich Buyer would acquire all of the issued and outstanding stocksecurities of Northern International,CEHI, the parent company of the operating entity, Clean Earth, Inc. ("NII"),
On June 28, 2019, Buyer completed the acquisition of all of the issued and outstanding securities of CEHI pursuant to the Purchase Agreement. The sale price for aCEHI was based on an aggregate total purchase priceenterprise value of approximately $35.8$625 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 customary working capital adjustments. The contingent consideration was fair valued at $1.5 million, based on probability weighted models of the achievement of certain performance based financial targets. 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 intercompany loans with the Company.
In connection with the acquisition, Sterno recorded a purchase price allocation of $6.0 million of goodwill, which is not expected to be deductible for income tax purposes, $12.7 million 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. Sterno Products incurred $0.4 million in acquisition related costs in connection with the NII acquisition.
Note D - Discontinued Operations
Sale of Tridien
On September 21, 2016, the Company sold its majority owned subsidiary, Tridien, based on an enterprise value of $25 million. After the allocation of the sale proceeds to noncontrollingCEHI non-controlling equity holders, the repayment of intercompany loans to the Company (including accrued interest) of $224.6 million, and the payment of transaction expenses of approximately $10.7 million, the Company received approximately $22.7
$327.3 million in netof total proceeds at closing related to its debt andour equity interests in Tridien.CEHI. The Company recognized a gain of $1.7 million for the year ended December 31, 2016 as a result ofon the sale of Tridien. Approximately $1.6CEHI of $206.3 million in the second quarter of the proceeds received by the Company from the sale of Tridien have been reserved to support the Company’s indemnification obligations for future claims against Tridien that the Company may be liable for under the terms of the Tridien sale agreement.2019.
OperatingSummarized results of discontinued operations
Summarized operating results of TridienClean Earth for the three and ninesix months ended SeptemberJune 30, 20162019 and 2018 through the date of disposition are as follows:follows (in thousands):
|
| | | | | | | |
(in thousands) | Three months ended September 30, 2016 | | Nine months ended September 30, 2016 |
Net sales | $ | 15,978 |
| | $ | 45,951 |
|
Gross profit | 3,223 |
| | 7,917 |
|
Operating income | 967 |
| | 437 |
|
Income (loss) from continuing operations before income taxes | (440 | ) | | 488 |
|
Provision for income taxes | 15 |
| | 15 |
|
Income (loss) from discontinued operations (1) | $ | (455 | ) | | $ | 473 |
|
|
| | | | | | | | | | | | | | | |
| For the period April 1, 2019 through disposition | | Three months ended June 30, 2018 | | For the period January 1, 2019 through disposition | | Six months ended June 30, 2018 |
Net sales | $ | 69,105 |
| | $ | 70,241 |
| | $ | 132,737 |
| | $ | 128,462 |
|
Gross profit | 23,045 |
| | 22,701 |
| | 39,678 |
| | 37,979 |
|
Operating income | 4,976 |
| | 7,458 |
| | 6,232 |
| | 8,217 |
|
Income from continuing operations before income taxes | 4,889 |
| | 7,357 |
| | 5,880 |
| | 8,012 |
|
Provision (benefit) for income taxes | (10,585 | ) | | 996 |
| | (11,607 | ) | | 379 |
|
Income from discontinued operations (1) | $ | 15,474 |
| | $ | 6,361 |
| | $ | 17,487 |
| | $ | 7,633 |
|
(1) The results of operations for the periods from April 1, 2019 through disposition, January 1, 2019 through disposition, and the three and ninesix months ended SeptemberJune 30, 20162018, each exclude $0.4$5.6 million and $1.1$10.2 million and $4.1 million and $7.7 million, respectively, of intercompany interest expense.
Sale of Manitoba Harvest
Gain on sale of businesses
During the first quarter of 2017,On February 19, 2019, the Company, settledas majority shareholder of Manitoba Harvest and as Shareholder Representative, entered into a definitive agreement (the “Arrangement Agreement”) with Tilray, Inc. ("Tilray"), the remainingother shareholders of Manitoba Harvest and a wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, through Tilray Subco, all of the issued and outstanding escrow itemssecurities of Manitoba Harvest.
On February 28, 2019, Tilray Subco completed the acquisition of all the issued and outstanding securities of Manitoba Harvest pursuant to the Arrangement Agreement. Subject to certain customary adjustments, the shareholders of Manitoba Harvest, including the Company, received or will receive the following from Tilray as consideration for their shares of Manitoba Harvest: (i) C$150 million in cash to the holders of preferred shares of Manitoba Harvest and the holders of common shares of Manitoba Harvest (“Common Holders”) and C$127.5 million in shares of class 2 Common Stock of Tilray (“Tilray Common Stock”) to the Common Holders on the closing date of the sale (the “Closing Date Consideration”), and (ii) C$50 million in cash and C$42.5 million in Tilray Common Stock to the Common Holders on the date that is six months after the closing date of the arrangement (the “Deferred Consideration”). The sale consideration also includes a potential earnout of up to C$49 million in Tilray Common Stock to the Common Holders, if Manitoba Harvest achieves certain levels of U.S. branded gross sales of edible or topical products containing broad spectrum hemp extracts or cannabidiols prior to December 31, 2019.
The cash portion of the Closing Date Consideration was reduced by the amount of the net indebtedness (including accrued interest) of Manitoba Harvest on the closing date of C$71.3 million ($53.7 million) and transaction expenses of approximately C$5.0 million. The Company's share of the net proceeds after accounting for the redemption of the noncontrolling shareholders and the payment of net indebtedness of Manitoba Harvest and transaction expenses was approximately $124.2 million in cash proceeds and in Tilray Common Stock. We recorded a receivable of $48.0 million as of March 31, 2019 related to the saleDeferred Consideration portion of American Furniture Manufacturing, Inc. in 2015, and received a settlement related to the CamelBak Products, LLC business, which was also sold in 2015. As a result of these transactions, theproceeds. The Company recognized a gain on the sale of Manitoba Harvest of $121.7 million in the three months ended March 31, 2019. No amount has been recorded related to the potential earnout as of June 30, 2019 based on an assessment of probability at the end of the quarter.
The Tilray Common Stock consideration was issued in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and pursuant to exemptions from applicable securities laws of any state of the United States, such that any shares of Tilray Common Stock received by the Common Holders were freely tradeable. The Company sold the Tilray Common Stock during March 2019, recognizing a net loss of $5.3 million in Other income/ (expense) during the quarter ended March 31, 2019.
Summarized results of operations of Manitoba Harvest for the six months ended June 30, 2019 and the three and six months ended June 30, 2018 through the date of disposition are as follows (in thousands):
|
| | | | | | | | | | | |
| Three months ended June 30, 2018 | | For the period January 1, 2019 through disposition | | Six Months ended June 30, 2018 |
Net revenues | $ | 19,528 |
| | $ | 10,024 |
| | $ | 35,869 |
|
Gross profit | 9,503 |
| | 4,874 |
| | 16,448 |
|
Operating loss | 1,085 |
| | (1,118 | ) | | 216 |
|
Loss before income taxes | 1,082 |
| | (1,127 | ) | | 202 |
|
Benefit for income taxes | (187 | ) | | (541 | ) | | (673 | ) |
Income (loss) from discontinued operations (1) | $ | 1,269 |
| | $ | (586 | ) | | $ | 875 |
|
(1)The results of operations for the periods from January 1, 2019 through date of disposition and the three and six months ended June 30, 2018 exclude $1.0 million, $1.3 million and $2.5 million, respectively, of intercompany interest expense.
The following table presents summary balance sheet information of the Clean Earth and Manitoba Harvest businesses that is presented as discontinued operations as of $0.3 millionDecember 31, 2018 (in thousands):
|
| | | | | | | | | | | |
| December 31, 2018 |
| Manitoba Harvest | | Clean Earth | | Total |
Assets: | | | | | |
Cash and cash equivalents | $ | 2,577 |
| | $ | 1,978 |
| | $ | 4,555 |
|
Accounts receivable, net | 7,169 |
| | 59,689 |
| | 66,858 |
|
Inventories | 11,436 |
| | — |
| | 11,436 |
|
Prepaid expenses and other current assets | 773 |
| | 6,140 |
| | 6,913 |
|
Current assets of discontinued operations | $ | 21,955 |
| | $ | 67,807 |
| | $ | 89,762 |
|
Property, plant and equipment, net | 18,157 |
| | 62,060 |
| | 80,217 |
|
Goodwill | 37,777 |
| | 144,778 |
| | 182,555 |
|
Intangible assets, net | 53,533 |
| | 129,530 |
| | 183,063 |
|
Other non-current assets | — |
| | 3,629 |
| | 3,629 |
|
Non-current assets of discontinued operations | $ | 109,467 |
| | $ | 339,997 |
| | $ | 449,464 |
|
Liabilities: | | | | | |
Accounts payable | 4,259 |
| | 26,135 |
| | 30,394 |
|
Accrued expenses | 4,313 |
| | 16,063 |
| | 20,376 |
|
Due to related party | 350 |
| | — |
| | 350 |
|
Other current liabilities | 507 |
| | 867 |
| | 1,374 |
|
Current liabilities of discontinued operations | $ | 9,429 |
| | $ | 43,065 |
| | $ | 52,494 |
|
Deferred income taxes | 12,675 |
| | 28,300 |
| | 40,975 |
|
Other non-current liabilities | 2,093 |
| | 5,175 |
| | 7,268 |
|
Non-current liabilities of discontinued operations | $ | 14,768 |
| | $ | 33,475 |
| | $ | 48,243 |
|
Noncontrolling interest of discontinued operations | $ | 11,160 |
| | $ | 8,888 |
| | $ | 20,048 |
|
Note D — Revenue
Effective January 1, 2018, the Company adopted the provisions of Revenue from Contracts with Customers, or ASC 606. The adoption of the new revenue guidance represents a change in accounting principle that will more closely align revenue recognition with the transfer of control of the Company's goods and services and will provide financial statement readers with enhanced disclosures. In accordance with the new revenue guidance, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities.
Disaggregated Revenue - Revenue Streams and Timing of Revenue Recognition - The Company disaggregates revenue by strategic business unit and by geography for each strategic business unit which are categories that depict how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors. This disaggregation also represents how the Company evaluates its financial performance, as well as how the Company communicates its financial performance to the investors and other users of its financial statements. Each strategic business unit represents the Company’s reportable segments and offers different products and services.
The following tables provide disaggregation of revenue by reportable segment geography for the ninethree and six months ended SeptemberJune 30, 2017.2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2019 |
| 5.11 | | Ergo | | Liberty | | Velocity | | ACI | | Arnold | | Foam | | Sterno | | Total |
United States | $ | 76,864 |
| | $ | 6,898 |
| | $ | 20,000 |
| | $ | 24,953 |
| | $ | 22,439 |
| | $ | 17,635 |
| | $ | 26,538 |
| | $ | 82,608 |
| | $ | 277,935 |
|
Canada | 2,650 |
| | 827 |
| | 633 |
| | 1,774 |
| | — |
| | 184 |
| | — |
| | 3,184 |
| | 9,252 |
|
Europe | 5,872 |
| | 7,544 |
| | — |
| | 1,632 |
| | — |
| | 9,056 |
| | — |
| | 253 |
| | 24,357 |
|
Asia Pacific | 3,164 |
| | 7,530 |
| | — |
| | 203 |
| | — |
| | 1,541 |
| | — |
| | 418 |
| | 12,856 |
|
Other international | 4,286 |
| | 172 |
| | — |
| | 1,049 |
| | — |
| | 1,065 |
| | 5,110 |
| | 2 |
| | 11,684 |
|
| $ | 92,836 |
| | $ | 22,971 |
| | $ | 20,633 |
| | $ | 29,611 |
| | $ | 22,439 |
| | $ | 29,481 |
| | $ | 31,648 |
| | $ | 86,465 |
| | $ | 336,084 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2018 |
| 5.11 | | Ergo | | Liberty | | Velocity | | ACI | | Arnold | | Foam | | Sterno | | Total |
United States | $ | 65,845 |
| | $ | 9,397 |
| | $ | 20,107 |
| | $ | 30,682 |
| | $ | 22,967 |
| | $ | 18,933 |
| | $ | 28,740 |
| | $ | 84,520 |
| | $ | 281,191 |
|
Canada | 2,456 |
| | 815 |
| | 309 |
| | 1,703 |
| | — |
| | 346 |
| | — |
| | 2,875 |
| | 8,504 |
|
Europe | 7,905 |
| | 6,675 |
| | — |
| | 1,638 |
| | — |
| | 9,529 |
| | — |
| | 122 |
| | 25,869 |
|
Asia Pacific | 4,184 |
| | 6,845 |
| | — |
| | 273 |
| | — |
| | 1,581 |
| | — |
| | 209 |
| | 13,092 |
|
Other international | 4,333 |
| | 222 |
| | — |
| | 1,274 |
| | — |
| | 807 |
| | 4,454 |
| | 243 |
| | 11,333 |
|
| $ | 84,723 |
| | $ | 23,954 |
| | $ | 20,416 |
| | $ | 35,570 |
| | $ | 22,967 |
| | $ | 31,196 |
| | $ | 33,194 |
| | $ | 87,969 |
| | $ | 339,989 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2019 |
| 5.11 | | Ergo | | Liberty | | Velocity | | ACI | | Arnold | | Foam | | Sterno | | Total |
United States | $ | 147,341 |
| | $ | 14,233 |
| | $ | 41,736 |
| | $ | 51,117 |
| | $ | 45,508 |
| | $ | 35,551 |
| | $ | 52,675 |
| | $ | 167,742 |
| | $ | 555,903 |
|
Canada | 4,314 |
| | 1,646 |
| | 1,101 |
| | 3,251 |
| | — |
| | 363 |
| | — |
| | 8,216 |
| | 18,891 |
|
Europe | 13,154 |
| | 14,075 |
| | — |
| | 3,833 |
| | — |
| | 18,826 |
| | — |
| | 936 |
| | 50,824 |
|
Asia Pacific | 6,578 |
| | 14,836 |
| | — |
| | 432 |
| | — |
| | 2,801 |
| | — |
| | 708 |
| | 25,355 |
|
Other international | 9,538 |
| | 633 |
| | — |
| | 2,115 |
| | — |
| | 1,968 |
| | 9,655 |
| | 59 |
| | 23,968 |
|
| $ | 180,925 |
| | $ | 45,423 |
| | $ | 42,837 |
| | $ | 60,748 |
| | $ | 45,508 |
| | $ | 59,509 |
| | $ | 62,330 |
| | $ | 177,661 |
| | $ | 674,941 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2018 |
| 5.11 | | Ergo | | Liberty | | Velocity | | ACI | | Arnold | | Foam | | Sterno | | Total |
United States | $ | 130,297 |
| | $ | 17,600 |
| | $ | 42,863 |
| | $ | 50,767 |
| | $ | 45,030 |
| | $ | 36,215 |
| | $ | 42,226 |
| | $ | 144,779 |
| | $ | 509,777 |
|
Canada | 4,473 |
| | 1,580 |
| | 1,006 |
| | 3,056 |
| | — |
| | 714 |
| | — |
| | 6,816 |
| | 17,645 |
|
Europe | 16,463 |
| | 13,833 |
| | — |
| | 3,146 |
| | — |
| | 19,675 |
| | — |
| | 962 |
| | 54,079 |
|
Asia Pacific | 8,425 |
| | 12,537 |
| | — |
| | 603 |
| | — |
| | 2,492 |
| | — |
| | 372 |
| | 24,429 |
|
Other international | 9,022 |
| | 566 |
| | — |
| | 2,405 |
| | — |
| | 1,499 |
| | 6,425 |
| | 272 |
| | 20,189 |
|
| $ | 168,680 |
| | $ | 46,116 |
| | $ | 43,869 |
| | $ | 59,977 |
| | $ | 45,030 |
| | $ | 60,595 |
| | $ | 48,651 |
| | $ | 153,201 |
| | $ | 626,119 |
|
Note E — Operating Segment Data
At SeptemberJune 30, 2017,2019, the Company had nineeight 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:
5.11 Tactical is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
Crosman is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Crosman offers its products under the highly recognizable Crosman, Benjamin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. Crosman is headquartered in Bloomfield, New York.
Ergobaby is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, and related products. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives approximately 57% of its sales from outside of the United States. Ergobaby is headquartered in Los Angeles, California.
Liberty Safe is a designer, manufacturer and marketer of premium home, gun and office safes in North America. From its over 300,000 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 and hemp-based ingredients. Manitoba Harvest’s products, which include Hemp Hearts™, Hemp Heart Bites™, and Hemp protein powders, are currently carried in over 13,000 retail stores across the United States and Canada. Manitoba Harvest is headquartered in Winnipeg, Manitoba.
Advanced Circuits is an electronic components manufacturing company that provides 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 global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, motorsport/automotive, oil and gas, medical, general industrial, electric utility, reprographics and advertising specialty markets. Arnold Magnetics produces high performance permanent magnets (PMAG), flexible magnets (Flexmag) and precision foil products (Precision Thin Metals or "PTM") 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 18 facilities in the eastern United States.
Sterno Products is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry and flameless candles and outdoor lighting products for consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and outdoor lighting products. Sterno Products is headquartered in Corona, California.
| |
• | 5.11 Tactical is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com. |
| |
• | Ergobaby is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, and related products. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than 50% of its sales from outside of the United States. Ergobaby is headquartered in Los Angeles, California. |
| |
• | Liberty Safe is a designer, manufacturer and marketer of premium home, gun and office safes in North America. From its over 300,000 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. |
| |
• | Velocity Outdoor is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, Ravin, LaserMax and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. Velocity Outdoor is headquartered in Bloomfield, New York. |
| |
• | Advanced Circuits is an electronic components manufacturing company that provides 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 is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, motorsport/automotive, oil and gas, medical, general industrial, electric utility, reprographics and advertising specialty markets. Arnold produces high performance permanent magnets (PMAG), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) 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 is headquartered in Rochester, New York. |
| |
• | Foam Fabricators is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer components made from expanded polystyrene and expanded polypropylene. Foam Fabricators provides products to a variety of end markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products. Foam Fabricators is headquartered in Scottsdale, Arizona and operates 13 molding and fabricating facilities across North America. |
| |
• | Sterno is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry and flameless candles, outdoor lighting products, scented wax cubes and warmer products for consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, scented wax cubes and warmer products used for home decor and fragrance systems, catering equipment and outdoor lighting products. Sterno is headquartered in Corona, California. |
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. There were no significant inter-segment transactions.
Summary of Operating Segments
|
| | | | | | | | | | | | | | | |
Net Revenues | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | |
5.11 Tactical | $ | 92,836 |
| | $ | 84,723 |
| | $ | 180,925 |
| | $ | 168,680 |
|
Ergobaby | 22,971 |
| | 23,954 |
| | 45,423 |
| | 46,116 |
|
Liberty | 20,633 |
| | 20,416 |
| | 42,837 |
| | 43,869 |
|
Velocity Outdoor | 29,611 |
| | 35,570 |
| | 60,748 |
| | 59,977 |
|
ACI | 22,439 |
| | 22,967 |
| | 45,508 |
| | 45,030 |
|
Arnold | 29,481 |
| | 31,196 |
| | 59,509 |
| | 60,595 |
|
Foam Fabricators | 31,648 |
| | 33,194 |
| | 62,330 |
| | 48,651 |
|
Sterno | 86,465 |
| | 87,969 |
| | 177,661 |
| | 153,201 |
|
Total segment revenue | 336,084 |
| | 339,989 |
| | 674,941 |
| | 626,119 |
|
Corporate and other | — |
| | — |
| | — |
| | — |
|
Total consolidated revenues | $ | 336,084 |
| | $ | 339,989 |
| | $ | 674,941 |
| | $ | 626,119 |
|
|
| | | | | | | | | | | | | | | |
Net Revenues | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
5.11 Tactical | $ | 72,005 |
| | $ | 27,203 |
| | $ | 228,471 |
| | $ | 27,203 |
|
Crosman | 34,449 |
| | — |
| | 44,202 |
| | — |
|
Ergobaby | 27,835 |
| | 29,664 |
| | 77,737 |
| | 75,048 |
|
Liberty | 18,423 |
| | 23,810 |
| | 66,008 |
| | 74,713 |
|
Manitoba Harvest | 13,948 |
| | 15,920 |
| | 42,625 |
| | 44,321 |
|
ACI | 22,436 |
| | 21,679 |
| | 66,404 |
| | 64,945 |
|
Arnold Magnetics | 26,489 |
| | 26,912 |
| | 79,421 |
| | 82,791 |
|
Clean Earth | 55,676 |
| | 51,515 |
| | 153,370 |
| | 134,035 |
|
Sterno Products | 52,696 |
| | 55,582 |
| | 163,092 |
| | 156,692 |
|
Total segment revenue | 323,957 |
| | 252,285 |
| | 921,330 |
| | 659,748 |
|
Corporate and other | — |
| | — |
| | — |
| | — |
|
Total consolidated revenues | $ | 323,957 |
| | $ | 252,285 |
| | $ | 921,330 |
| | $ | 659,748 |
|
| | Segment profit (loss) (1) | Three months ended September 30, | | Nine months ended September 30, | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | | | | | | | |
5.11 Tactical | $ | (253 | ) | | $ | (1,794 | ) | | $ | (14,542 | ) | | $ | (1,794 | ) | $ | 5,073 |
| | $ | 2,020 |
| | $ | 7,411 |
| | $ | 1,403 |
|
Crosman | (1,388 | ) | | — |
| | (1,587 | ) | | — |
| |
Ergobaby | 5,884 |
| | 4,671 |
| | 14,728 |
| | 9,101 |
| 2,795 |
| | 3,575 |
| | 5,931 |
| | 5,915 |
|
Liberty | 2,050 |
| | 2,417 |
| | 6,900 |
| | 9,879 |
| 1,671 |
| | 1,612 |
| | 3,086 |
| | 4,427 |
|
Manitoba Harvest | (169 | ) | | 554 |
| | 75 |
| | (865 | ) | |
Velocity Outdoor | | (74 | ) | | 3,019 |
| | 267 |
| | 3,292 |
|
ACI | 6,191 |
| | 5,759 |
| | 18,106 |
| | 17,241 |
| 6,484 |
| | 6,368 |
| | 12,965 |
| | 12,300 |
|
Arnold Magnetics | 2,000 |
| | 851 |
| | (4,551 | ) | | 3,828 |
| |
Clean Earth | 5,592 |
| | 3,593 |
| | 7,597 |
| | 5,860 |
| |
Sterno Products | 4,411 |
| | 5,536 |
| | 13,383 |
| | 14,095 |
| |
Arnold | | 2,227 |
| | 2,945 |
| | 3,704 |
| | 4,670 |
|
Foam Fabricators | | 4,364 |
| | 3,031 |
| | 7,870 |
| | 3,756 |
|
Sterno | | 8,115 |
| | 2,728 |
| | 16,097 |
| | 7,479 |
|
Total | 24,318 |
| | 21,587 |
| | 40,109 |
| | 57,345 |
| 30,655 |
| | 25,298 |
| | 57,331 |
| | 43,242 |
|
Reconciliation of segment profit (loss) to consolidated income (loss) before income taxes: | | | | | | | | | | | | | | |
Interest expense, net | (6,945 | ) | | (4,376 | ) | | (22,499 | ) | | (23,204 | ) | (18,445 | ) | | (13,474 | ) | | (36,899 | ) | | (19,592 | ) |
Other income (expense), net | 2,020 |
| | (3,271 | ) | | 2,950 |
| | (1,852 | ) | (90 | ) | | (2,207 | ) | | (524 | ) | | (3,540 | ) |
Gain (loss) on equity method investment | — |
| | 50,414 |
| | (5,620 | ) | | 58,680 |
| |
Corporate and other (2) | (10,845 | ) | | (10,916 | ) | | (32,801 | ) | | (29,244 | ) | (11,375 | ) | | (14,549 | ) | | (30,667 | ) | | (28,784 | ) |
Total consolidated income (loss) before income taxes | $ | 8,548 |
| | $ | 53,438 |
| | $ | (17,861 | ) | | $ | 61,725 |
| $ | 745 |
| | $ | (4,932 | ) | | $ | (10,759 | ) | | $ | (8,674 | ) |
| |
(1) | Segment profit (loss) represents operating income (loss). |
| |
(2) | Primarily relates to management fees expensed and payable to CGM, and corporate overhead expenses. |
|
| | | | | | | | | | | | | | | |
Depreciation and Amortization Expense | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
5.11 Tactical | $ | 4,338 |
| | $ | 5,192 |
| | $ | 34,882 |
| | $ | 5,192 |
|
Crosman | 5,593 |
| | — |
| | 5,842 |
| | — |
|
Ergobaby | 3,068 |
| | 4,409 |
| | 9,386 |
| | 6,046 |
|
Liberty | 358 |
| | 616 |
| | 1,295 |
| | 1,925 |
|
Manitoba Harvest | 1,891 |
| | 1,732 |
| | 4,922 |
| | 5,200 |
|
ACI | 817 |
| | 885 |
| | 2,517 |
| | 2,585 |
|
Arnold Magnetics | 1,452 |
| | 2,268 |
| | 4,962 |
| | 6,778 |
|
Clean Earth | 5,687 |
| | 5,989 |
| | 16,140 |
| | 16,019 |
|
Sterno Products | 2,873 |
| | 2,396 |
| | 8,713 |
| | 8,427 |
|
Total | 26,077 |
| | 23,487 |
| | 88,659 |
| | 52,172 |
|
Reconciliation of segment to consolidated total: | | | | | | | |
Amortization of debt issuance costs and original issue discount | 1,261 |
| | 888 |
| | 3,721 |
| | 2,363 |
|
Consolidated total | $ | 27,338 |
| | $ | 24,375 |
| | $ | 92,380 |
| | $ | 54,535 |
|
| | Depreciation and Amortization Expense | | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Accounts Receivable | | Identifiable Assets | | | | | | | |
| September 30, | | December 31, | | September 30, | | December 31, | |
(in thousands) | 2017 | | 2016 | | 2017 (1) | | 2016 (1) | |
5.11 Tactical | $ | 46,112 |
| | $ | 49,653 |
| | $ | 313,072 |
| | $ | 311,560 |
| $ | 5,298 |
| | $ | 5,187 |
| | $ | 10,455 |
| | $ | 10,559 |
|
Crosman | 24,904 |
| | — |
| | 134,047 |
| | — |
| |
Ergobaby | 11,140 |
| | 11,018 |
| | 105,627 |
| | 113,814 |
| 2,113 |
| | 2,246 |
| | 4,224 |
| | 4,288 |
|
Liberty | 13,708 |
| | 13,077 |
| | 27,901 |
| | 26,344 |
| 390 |
| | 373 |
| | 797 |
| | 716 |
|
Manitoba Harvest | 5,251 |
| | 6,468 |
| | 100,330 |
| | 97,977 |
| |
Velocity Outdoor | | 3,289 |
| | 2,013 |
| | 6,540 |
| | 4,004 |
|
ACI | 7,010 |
| | 6,686 |
| | 15,847 |
| | 16,541 |
| 523 |
| | 794 |
| | 1,192 |
| | 1,598 |
|
Arnold Magnetics | 15,407 |
| | 15,195 |
| | 69,154 |
| | 64,209 |
| |
Clean Earth | 47,659 |
| | 45,619 |
| | 187,460 |
| | 193,250 |
| |
Sterno Products | 37,389 |
| | 38,986 |
| | 126,135 |
| | 134,661 |
| |
Allowance for doubtful accounts | (10,469 | ) | | (5,511 | ) | | — |
| | — |
| |
Arnold | | 1,580 |
| | 1,568 |
| | 3,202 |
| | 3,084 |
|
Foam Fabricators | | 3,013 |
| | 3,882 |
| | 6,010 |
| | 4,767 |
|
Sterno | | 5,545 |
| | 10,972 |
| | 10,917 |
| | 13,871 |
|
Total | 198,111 |
| | 181,191 |
| | 1,079,573 |
| | 958,356 |
| 21,751 |
| | 27,035 |
| | 43,337 |
| | 42,887 |
|
Reconciliation of segment to consolidated total: | | | | |
| |
| | | | | | | |
Corporate and other identifiable assets (2) | — |
| | — |
| | 3,197 |
| | 145,971 |
| |
Total | $ | 198,111 |
| | $ | 181,191 |
| | $ | 1,082,770 |
| | $ | 1,104,327 |
| |
Amortization of debt issuance costs and original issue discount | | 1,080 |
| | 971 |
| | 2,159 |
| | 2,324 |
|
Consolidated total | | $ | 22,831 |
| | $ | 28,006 |
| | $ | 45,496 |
| | $ | 45,211 |
|
|
| | | | | | | | | | | | | | | |
| Accounts Receivable | | Identifiable Assets |
| June 30, | | December 31, | | June 30, | | December 31, |
(in thousands) | 2019 | | 2018 | | 2019 (1) | | 2018 (1) |
5.11 Tactical | $ | 51,108 |
| | $ | 52,069 |
| | $ | 356,579 |
| | $ | 319,583 |
|
Ergobaby | 11,278 |
| | 11,361 |
| | 97,039 |
| | 100,679 |
|
Liberty | 10,660 |
| | 10,416 |
| | 40,524 |
| | 27,881 |
|
Velocity Outdoor | 18,803 |
| | 21,881 |
| | 208,563 |
| | 209,398 |
|
ACI | 8,860 |
| | 9,193 |
| | 22,114 |
| | 13,407 |
|
Arnold | 16,938 |
| | 16,298 |
| | 74,165 |
| | 66,744 |
|
Foam Fabricators | 27,090 |
| | 23,848 |
| | 159,667 |
| | 155,504 |
|
Sterno | 55,528 |
| | 72,361 |
| | 264,611 |
| | 253,637 |
|
Allowance for doubtful accounts | (12,944 | ) | | (11,882 | ) | | — |
| | — |
|
Total | 187,321 |
| | 205,545 |
| | 1,223,262 |
| | 1,146,833 |
|
Reconciliation of segment to consolidated total: | | | | |
| |
|
Corporate and other identifiable assets | — |
| | — |
| | 504,008 |
| | 8,357 |
|
Assets of discontinued operations | — |
| | — |
| | — |
| | 540,485 |
|
Total | $ | 187,321 |
| | $ | 205,545 |
| | $ | 1,727,270 |
| | $ | 1,695,675 |
|
| |
(2)
| Corporate and other identifiable assets for the year ended December 31, 2016 includes the Company's investment in FOX, which was sold during the first quarter of 2017 - refer to Note F - "Investment in FOX". |
Geographic Information
|
| | | | | | | | | | | | | | | |
International Revenues | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
5.11 Tactical | $ | 19,238 |
| | $ | 6,141 |
| | $ | 63,088 |
| | $ | 6,141 |
|
Crosman | 4,542 |
| | — |
| | 6,412 |
| | — |
|
Ergobaby | 17,048 |
| | 16,701 |
| | 46,277 |
| | 40,660 |
|
Manitoba Harvest | 10,720 |
| | 8,573 |
| | 19,979 |
| | 20,983 |
|
Arnold Magnetics | 10,556 |
| | 12,208 |
| | 31,677 |
| | 33,654 |
|
Sterno Products | 5,809 |
| | 6,327 |
| | 16,265 |
| | 16,366 |
|
| $ | 67,913 |
| | $ | 49,950 |
| | $ | 183,698 |
| | $ | 117,804 |
|
Note F - Investment in FOX
Fox Factory Holdings Corp. ("FOX"), a former majority owned subsidiary of the Company that is publicly traded on the NASDAQ Stock Market under the ticker "FOXF," 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. The Company held a 41%, ownership interest in FOX as of January 1, 2016, and a 14% ownership interest as of January 1, 2017. The investment in FOX was accounted for using the fair value option.
In March 2016, FOX closed on a secondary public offering (the "March 2016 Offering") of 2,500,000 FOX common shares held by the Company. Concurrently with the closing of the March 2016 Offering, FOX repurchased 500,000 shares of FOX common shares directly from the Company. As a result of the sale of shares through the March 2016 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 March 2016 Offering and repurchase of shares by FOX, the Company's ownership interest in FOX was reduced from approximately 41% to 33%.
In August 2016, FOX closed on a secondary public offering (the "August Offering") of 4,025,000 shares held by certain FOX shareholders, including the Company. The Company sold a total of 3,500,000 shares of FOX common stock in the August Offering, for total net proceeds of $63.0 million. Upon completion of the August Offering, the Company's ownership of FOX decreased from approximately 33% to approximately 23%.
In November 2016, FOX closed on a secondary public offering (the "November Offering") of 3,500,000 shares of FOX common stock held by the Company, for total net proceeds of $71.8 million. Upon completion of the November Offering, the Company's ownership of FOX decreased from approximately 23% to approximately 14%. The Company's investment in FOX had a fair value of $141.8 million on December 31, 2016 based on the closing price of FOX shares on that date.
In March 2017, FOX closed on a secondary public offering (the "March 2017 Offering") through which the Company sold their remaining 5,108,718 shares in FOX for total net proceeds of $136.1 million. Subsequent to the March 2017 Offering, the Company no longer holds an ownership interest in FOX.
Note GF — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at SeptemberJune 30, 20172019 and December 31, 2016 (in2018 (in thousands): | | | September 30, 2017 | | December 31, 2016 | June 30, 2019 | | December 31, 2018 |
Machinery and equipment | $ | 168,621 |
| | $ | 155,591 |
| $ | 181,358 |
| | $ | 174,983 |
|
Furniture, fixtures and other | 27,005 |
| | 13,737 |
| 31,786 |
| | 29,096 |
|
Leasehold improvements | 18,337 |
| | 14,156 |
| 34,609 |
| | 34,786 |
|
Buildings and land | 39,964 |
| | 35,392 |
| 11,801 |
| | 9,818 |
|
Construction in process | 24,699 |
| | 8,308 |
| 9,830 |
| | 8,869 |
|
| 278,626 |
| | 227,184 |
| 269,384 |
| | 257,552 |
|
Less: accumulated depreciation | (107,799 | ) | | (84,814 | ) | (126,071 | ) | | (110,951 | ) |
Total | $ | 170,827 |
| | $ | 142,370 |
| $ | 143,313 |
| | $ | 146,601 |
|
Depreciation expense was $8.7$8.2 million and $24.5$16.2 million for the three and ninesix months ended SeptemberJune 30, 2017,2019 and $7.3$7.9 million and $19.5$14.9 million for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively.
Inventory
Inventory is comprised of the following at SeptemberJune 30, 20172019 and December 31, 2016 2018 (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Raw materials | $ | 60,243 |
| | $ | 60,788 |
|
Work-in-process | 13,689 |
| | 12,915 |
|
Finished goods | 272,238 |
| | 253,982 |
|
Less: obsolescence reserve | (18,513 | ) | | (20,248 | ) |
Total | $ | 327,657 |
| | $ | 307,437 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Raw materials | $ | 38,388 |
| | $ | 29,708 |
|
Work-in-process | 12,294 |
| | 8,281 |
|
Finished goods | 201,348 |
| | 182,886 |
|
Less: obsolescence reserve | (9,213 | ) | | (7,891 | ) |
Total | $ | 242,817 |
| | $ | 212,984 |
|
Note HG — 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. 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 represent a reporting unit, exceptunit. The Arnold which comprisesbusiness previously comprised three reporting units.
units when it was acquired in March 2012, but as a result of changes implemented by Arnold management during 2016 and 2017, the Company reassessed the reporting units at Arnold as of the annual impairment testing date in 2018. After evaluating changes in the operation of the reporting units that led to increased integration and altered how the financial results of the Arnold operating segment were assessed by Arnold management, the Company determined thatthe previously identified reporting units no longer operate in the same manner as they did when the Company acquired Arnold. As a result, the separate Arnold reporting units were determined to only comprise one reporting unit at the Arnold operating segment level as of March 31, 2018. As part of the exercise of combining the separate Arnold reporting units into one reporting unit, the Company performed "before" and "after" goodwill impairment testing, whereby we performed the annual impairment testing for each of the existing reporting units of Arnold and then subsequent to the completion of the annual impairment testing of the separate reporting units, we performed a quantitative impairment test of the Arnold operating segment, which will represent the reporting unit for future impairment tests.
Goodwill
20172019 Annual goodwill impairment testingImpairment 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-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-stepquantitative goodwill impairment testing. The qualitative factors we consider include, inAll of the Company's
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. Atunits except Liberty were tested qualitatively at March 31, 2017, we2019. We determined that the Manitoba HarvestLiberty reporting unit required furtheradditional quantitative testing (Step 1) because we could not conclude that the fair value of the reporting unit exceedsexceeded its carrying value based on qualitative factors alone. The Company utilizedWe used an income approach and market approach for the quantitative impairment test that was performed of the Liberty business at March 31, 2019, with equal weighting assigned to perform the Step 1 testing at Manitoba Harvest.each. The weighted average cost of capitaldiscount rate used in the income approach for Manitoba Harvest was 12.0%14.8%. ResultsThe results of the Step 1 quantitative impairment testing of Manitoba Harvest indicated that the fair value of Manitoba Harvestthe Liberty reporting unit exceeded itsthe carrying value by 15.0%. Manitoba Harvest's goodwill balance as of the date of the annual impairment testing was approximately $44.5 million.value. For the reporting units that were tested qualitatively for the Company concluded2019 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded their carrying value.
2018 Annual Impairment Testing
For the reporting units that were tested qualitatively for the 2018 annual impairment testing, the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value and that a quantitative analysis was not necessary.
Manitoba Harvest
The Company performed Step 1 testing during the 2017 annual impairment testing for Manitoba Harvest. Subsequent to the annual impairment test, the Company has compared the Manitoba Harvest operating results to the forecasts used in the Step 1 testing and has noted no material variances in the results. However, there is a significant degree of uncertainty inherent in the assumptions used to develop the forecast amounts used in the annual impairment test given the changing nature of consumer tastes, particularly related to future years. Therefore, the results of the forecast process forvalue. At March 31, 2018, which are expected to be finalized in the fourth quarter of 2017, may make it necessary to perform interim goodwill impairment testing at Manitoba Harvest at December 31, 2017.
2016 Interim goodwill impairment testing
Arnold
As a result of decreases in forecasted revenue, operating income and cash flows at Arnold, as well as a shortfall in revenue and operating income during the latter half of 2016 as compared to budgeted amounts, the Companywe determined that it was necessary to perform interim goodwill impairmentthe Flexmag reporting unit of Arnold required additional quantitative testing on each of the three reporting units at Arnold. The Company performed Step 1 of the goodwill impairment assessment at December 31, 2016. In Step 1 of the goodwill impairment test, the Company comparedbecause we could not conclude that the fair value of the reporting units tounit exceeded its carrying value based on qualitative factors alone. For the carrying amount. Based on the results of the valuation, the fair value of the Flexmag and PTM reporting units exceeded the carrying amount, therefore, no additional goodwill testing was required. The results of the Step 1 test for the PMAG unit indicated a potentialquantitative impairment of goodwill and the Company performed the second step of goodwill impairment testing (Step 2) to determine the amount of impairment of the PMAG reporting unit.
In the first test of goodwill impairment testing, we compare the fair value of each reporting unit to its carrying amount. For purposes of the Step 1 for the Arnold reporting units,Flexmag, we estimated the fair value of the reporting unit using an income approach, whereby we estimate the fair value of athe 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 and reporting unit specific economic factors.conditions. 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. The discount rate used in the income approach for Flexmag was 12.4%.
For the Step 1reporting unit change at Arnold, a quantitative impairment test was performed of the Arnold business at March 31, 2018 using an income approach. The discount rate used in the income approach was 12.6%. The results of the quantitative impairment testing for Arnold's reporting units, we used only an income approach because we determined that the guideline public company comparables for PMAG, Flexmag and PTM were not representative of these three reporting units. In the income approach, we used a weighted average cost of capital of 12.5% for PMAG, 12.0% for Flexmag and 13.0% for PTM.
The Company had not completed the Step 2 analysis as of December 31, 2016, and therefore estimated a range of impairment loss of $14 million to $19 million based on the value of the total invested capital of the PMAG unit as well as the results of the Step 1 testing of the fair value of PMAG. The Company recorded an estimated impairment loss for PMAG of $16 million at December 31, 2016 based on that range. The Company completed the Step 2 goodwill impairment test of the PMAG reporting unit in the first quarter of 2017, and the results indicated total impairment of the goodwill of the PMAG reporting unit of $24.9 million. The Step 2 impairment was higher than the initial estimate at December 31, 2016 due primarily to the valuation of PMAG's property, plant and equipment during the Step 2 exercise. The Company recorded the additional impairment loss of $8.9 million in the first quarter of 2017.
2016 Annual goodwill impairment testing
At March 31, 2016, we determined that the Tridien reporting unit (which is reported as a discontinued operation in the accompanying financial statements after the sale of the reporting unit in September 2016) required further quantitative testing (Step 1) because we could not conclude that the fair value of the Arnold reporting unit exceeds its carrying value based on qualitative factors alone. Results ofexceeded the Step 1 quantitative testing of Tridien indicated that the fair value of Tridien exceeded its carrying value. 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.
A summary of the net carrying value of goodwill at SeptemberJune 30, 20172019 and December 31, 2016,2018, is as follows (in thousands):
| | | Nine months ended September 30, 2017 | | Year ended December 31, 2016 | Six months ended June 30, 2019 | | Year ended December 31, 2018 |
Goodwill - gross carrying amount | $ | 564,789 |
| | $ | 507,637 |
| $ | 502,553 |
| | $ | 502,268 |
|
Accumulated impairment losses | (24,864 | ) | | (16,000 | ) | (31,153 | ) | | (31,153 | ) |
Goodwill - net carrying amount | $ | 539,925 |
| | $ | 491,637 |
| $ | 471,400 |
| | $ | 471,115 |
|
The following is a reconciliation of the change in the carrying value of goodwill for the ninesix months ended SeptemberJune 30, 20172019 by operating segment (in thousands):
| | | | Balance at January 1, 2017 | | Acquisitions (1) | | Goodwill Impairment | | Foreign currency translation | | Other (4) | | Balance at September 30, 2017 | | Balance at January 1, 2019 | | Acquisitions | | Goodwill Impairment | | Other | | Balance at June 30, 2019 |
5.11 | | $ | 92,966 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 92,966 |
| | $ | 92,966 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 92,966 |
|
Crosman | | — |
| | 49,880 |
| | — |
| | — |
| | — |
| | 49,880 |
| |
Ergobaby | | 61,031 |
| | — |
| | — |
| | — |
| | — |
| | 61,031 |
| | 61,031 |
| | — |
| | — |
| | — |
| | 61,031 |
|
Liberty | | 32,828 |
| | — |
| | — |
| | — |
| | — |
| | 32,828 |
| | 32,828 |
| | — |
| | — |
| | — |
| | 32,828 |
|
Manitoba Harvest | | 44,171 |
| | — |
| | — |
| | 3,425 |
| | — |
| | 47,596 |
| |
Velocity Outdoor | | | 62,675 |
| | 285 |
| | — |
| | — |
| | 62,960 |
|
ACI | | 58,019 |
| | — |
| | — |
| | — |
| | — |
| | 58,019 |
| | 58,019 |
| | — |
| | — |
| | — |
| | 58,019 |
|
Arnold (2) | | 35,767 |
| | — |
| | (8,864 | ) | | — |
| | — |
| | 26,903 |
| |
Clean Earth | | 118,224 |
| | 802 |
| | — |
| | — |
| | — |
| | 119,026 |
| |
Arnold (1) | | | 26,903 |
| | — |
| | — |
| | — |
| | 26,903 |
|
Foam Fabricators | | | 72,708 |
| | — |
| | — |
| | — |
| | 72,708 |
|
Sterno | | 39,982 |
| | 2,898 |
| | — |
| | — |
| | 147 |
| | 43,027 |
| | 55,336 |
| | — |
| | — |
| | — |
| | 55,336 |
|
Corporate (3) | | 8,649 |
| | — |
| | — |
| | — |
| | — |
| | 8,649 |
| |
Corporate (2) | | | 8,649 |
| | — |
| | — |
| | — |
| | 8,649 |
|
Total | | $ | 491,637 |
| | $ | 53,580 |
| | $ | (8,864 | ) | | $ | 3,425 |
| | $ | 147 |
| | $ | 539,925 |
| | $ | 471,115 |
| | $ | 285 |
| | $ | — |
| | $ | — |
| | $ | 471,400 |
|
| |
(1) | The purchase price allocation for Crosman is preliminary and is expected to be completed during the fourth quarter of 2017. Clean Earth, Sterno and Crosman each completed add-on acquisitions during 2017. The goodwill related to the Clean Earth acquisition is based on a preliminary purchase price allocation. Crosman and Sterno completed small add-on acquisitions during the third quarter of 2017, and the preliminary purchase price allocations for these add-on acquisitions have not been prepared yet. The goodwill related to these add-on acquisitions represents the excess of purchase price over net assets acquired at September 30, 2017.Arnold had three reporting units which were combined into one reporting unit effective March 31, 2018. |
| |
(2) | Arnold Magnetics has three reporting units PMAG, Flexmag and Precision Thin Metals with goodwill balances of $15.6 million, $4.8 million and $6.5 million, respectively. |
| |
(3)
| Represents goodwill resulting from purchase accounting adjustments not "pushed down" to the ACI segment. This amount is allocated back to the ACI segment for purposes of goodwill impairment testing. |
| |
| Represents the final settlement related to Sterno's acquisition of Sterno Home Inc. ("Sterno Home", formerly NII). |
Long lived assets
Annual indefinite lived impairment testing
The Company used 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 assetsasset in connection with the annual impairment testing for 20172019 and 2016.2018. Results of the qualitative analysis indicate that it is more likely than not that the carryingfair value of the Company’sreporting units that maintain indefinite lived intangible assets did not exceed their fairexceeded the carrying value.
Other intangible assets are comprised of the following at SeptemberJune 30, 20172019 and December 31, 2016 (in2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | $ | 462,686 |
| | $ | (138,009 | ) | | $ | 324,677 |
| | $ | 462,686 |
| | $ | (120,786 | ) | | $ | 341,900 |
|
Technology and patents | 79,732 |
| | (26,098 | ) | | 53,634 |
| | 79,646 |
| | (23,409 | ) | | 56,237 |
|
Trade names, subject to amortization | 189,165 |
| | (39,506 | ) | | 149,659 |
| | 189,056 |
| | (32,506 | ) | | 156,550 |
|
Licensing and non-compete agreements | 7,515 |
| | (6,852 | ) | | 663 |
| | 7,515 |
| | (6,655 | ) | | 860 |
|
Distributor relations and other | 726 |
| | (726 | ) | | — |
| | 726 |
| | (726 | ) | | — |
|
Total | 739,824 |
| | (211,191 | ) | | 528,633 |
| | 739,629 |
| | (184,082 | ) | | 555,547 |
|
Trade names, not subject to amortization | 59,985 |
| | — |
| | 59,985 |
| | 60,045 |
| | — |
| | 60,045 |
|
Total intangibles, net | $ | 799,809 |
| | $ | (211,191 | ) | | $ | 588,618 |
| | $ | 799,674 |
| | $ | (184,082 | ) | | $ | 615,592 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | $ | 338,461 |
| | $ | (96,449 | ) | | $ | 242,012 |
| | $ | 304,751 |
| | $ | (79,607 | ) | | $ | 225,144 |
|
Technology and patents | 48,452 |
| | (21,502 | ) | | 26,950 |
| | 44,710 |
| | (18,290 | ) | | 26,420 |
|
Trade names, subject to amortization | 180,565 |
| | (19,194 | ) | | 161,371 |
| | 128,675 |
| | (6,833 | ) | | 121,842 |
|
Licensing and non-compete agreements | 7,865 |
| | (6,365 | ) | | 1,500 |
| | 7,845 |
| | (5,987 | ) | | 1,858 |
|
Permits and airspace | 115,130 |
| | (28,612 | ) | | 86,518 |
| | 113,295 |
| | (21,531 | ) | | 91,764 |
|
Distributor relations and other | 606 |
| | (606 | ) | | — |
| | 606 |
| | (606 | ) | | — |
|
Total | 691,079 |
| | (172,728 | ) | | 518,351 |
| | 599,882 |
| | (132,854 | ) | | 467,028 |
|
Trade names, not subject to amortization | 73,527 |
| | — |
| | 73,527 |
| | 72,183 |
| | — |
| | 72,183 |
|
Total intangibles, net | $ | 764,606 |
| | $ | (172,728 | ) | | $ | 591,878 |
| | $ | 672,065 |
| | $ | (132,854 | ) | | $ | 539,211 |
|
Amortization expense related to intangible assets was $14.2$13.5 million and $39.3$14.5 million for the three and nine months ended SeptemberJune 30, 2017,2019 and $8.42018, respectively, and $27.1 million and $24.0$22.7 million for the three and ninesix months ended SeptemberJune 30, 2016,2019 and 2018, respectively. Estimated charges to amortization expense of intangible assets overfor the remainder of 2019 and the next fivefour years, is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
2019 | | 2020 | | 2021 | | 2022 | | 2023 | |
| | | | | | | | | |
$ | 27,167 |
| | $ | 54,244 |
| | $ | 53,639 |
| | $ | 51,978 |
| | $ | 51,580 |
| |
|
| | | | |
October 1, through Dec. 31, 2017 | | $ | 12,689 |
|
2018 | | 49,367 |
|
2019 | | 48,077 |
|
2020 | | 47,592 |
|
2021 | | 47,288 |
|
| | $ | 205,013 |
|
Note H — Warranties
The Company’s Ergobaby, Liberty and Velocity Outdoor 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. Warranty liability is included in accrued expenses in the accompanying consolidated balance sheets. A reconciliation of the change in the carrying value of the Company’s warranty liability for the six months ended June 30, 2019 and the year ended December 31, 2018 is as follows (in thousands):
|
| | | | | | | |
Warranty liability | Six months ended June 30, 2019 | | Year ended December 31, 2018 |
| | | |
Beginning balance | $ | 1,624 |
| | $ | 2,197 |
|
Provision for warranties issued during the period | 1,540 |
| | 3,531 |
|
Fulfillment of warranty obligations | (1,662 | ) | | (4,258 | ) |
Other (1) | — |
| | 154 |
|
Ending balance | $ | 1,502 |
| | $ | 1,624 |
|
(1) Represents the warranty liability recorded in relation to acquisitions. Warranty liabilities of acquisitions are recorded at fair value as of the date of acquisition.
Note I — Debt
2018 Credit Facility
On April 18, 2018, the Company entered into an Amended and Restated Credit Agreement (the "2018 Credit Facility") to amend and restate the 2014 Credit Facility,
originally dated as of June 6, 2014 (as previously amended) among the Company, the lenders from time to time party thereto (the “Lenders”), and Bank of America, N.A., as Administrative Agent. The 20142018 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 20142018 Credit Facility in June 2015, primarilyprovides for (i) revolving loans, swing line loans and letters of credit (the “2018 Revolving Credit Facility”) up 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. On August 15, 2016, the Company amended the 2014 Credit Facility to, among other things, increase themaximum aggregate amount of the 2014 Credit Facility by $400 million. On August 31, 2016, the Company entered into an Incremental Facility Amendment to the 2014 Credit Agreement$600 million (the "Incremental Facility Amendment"). The Incremental Facility Amendment provided for an increase to the 2014"2018 Revolving Credit Facility of $150 million,Loan Commitment"), and the 2016 Incremental Term Loan, in the amount of $250 million. As a result of the Incremental Facility Amendment, the 2014 Credit Facility currently provides for (i) a revolving credit facility of $550 million (as amended from time to time, the "2014 Revolving Credit Facility"), (ii) a $325$500 million term loan (the "2014“2018 Term Loan”).
The 2018 Term Loan Facility"),was issued at an original issuance discount of 99.75%. The 2018 Term Loan requires quarterly payments of $1.25 million commencing June 30, 2018, with a final payment of all remaining principal and (iii) a $250 million incremental term loan (the "2016 Incrementalinterest due on April 18, 2025, the maturity date of the 2018 Term Loan").
2014 Revolving Credit Facility
The 2014Loan. All amounts outstanding under the 2018 Revolving Credit Facility will become due on April 18, 2023, which is the maturity date of loans advanced under the 2018 Revolving Credit Facility. The 2018 Credit Facility also permits the Company, prior to the applicable maturity date, to increase the 2018 Revolving Loan Commitment and/or obtain additional term loans in June 2019. an aggregate amount of up to $250 million (the “Incremental Loans”), subject to certain restrictions and conditions.
The Company canmay borrow, prepay and reborrow principal under the 20142018 Revolving Credit Facility from time to time during its term. Advances under the 20142018 Revolving Credit Facility can be either LIBOREurodollar rate loans (as defined below) or base rate loans. LIBOREurodollar rate revolving loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum equal tobased on the London Interbank Offered Rate (the "LIBOR Rate"“Eurodollar Rate”) for such interest period plus a margin ranging from 2.00%1.50% to 2.75%2.50%, based on the ratio of consolidated net indebtedness to adjusted consolidated earnings before interest expense, tax expense, and depreciation and amortization expenses for such period (the "Consolidated“Consolidated Total Leverage Ratio"Ratio”). Base rate revolving loans bear interest on the outstanding principal amount thereof at a fluctuating rate per annum equal to the greatesthighest of (i) the primeFederal Funds rate of interest, orplus 0.50%, (ii) the Federal Funds“prime rate”, and (iii) Eurodollar Rate plus 0.50%1.0% (the "Base Rate"“Base Rate”), plus a margin ranging from 1.00%0.50% to 1.75%1.50%, based uponon the Company's Consolidated Total Leverage Ratio.
Term Loans
2014 Term Loan
The 2014 Term Loan Facility expires in June 2021 and requires quarterly payments 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.
2016 Incremental Term Loan
The 2016 Incremental Term Loan was issued at an original issue discount of 99.25% of par value. The Company incurred $6.0 million in additional debt issuance costs related toUnder the Incremental Credit Facility, which will be recognized as expense during the remaining term of the related 20142018 Revolving Credit Facility, and 2014 Term Loan and 2016 Incremental Term Loan. The Incremental Facility Amendment did not change the due dates or applicable interest rates of the 2014 Credit Agreement. The quarterly payments for the term advances under the 2014 Credit Agreement increased to approximately $1.4 million per quarter. The additional advances under the Incremental Credit Facility was a loan modification for accounting purposes. Consequently, the Company capitalized debt issuance costs of $6.0 million associated with fees charged by lenders of the Incremental Credit Facility. The capitalized debt issuance costs will be amortized over the remaining period of the 2014 Credit Facility.
In March 2017, the Company amended the 2014 Credit Facility (the "Fourth Amendment") to reduce the applicable rate of interest for the 2014 Term Loan and 2016 Incremental Term Loan. Under the Fourth Amendment, outstanding LIBOR loans bear interest at LIBOR plus an applicable rate of 2.75% and outstanding Base Rate loans bear interest at Base Rate plus 1.75%. Prior to the amendment, the outstanding term loans bore interest at LIBOR plus 3.25% or Base Rate plus 2.25%. In connection with the Fourth Amendment, the Company capitalized debt issuance costs of $1.2 million associated with fees charged by term loan lenders.
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 million in letters of credit may be issued, as well as swing line loans of up to $25 million outstanding at one time. The issuance of such letters of credit and the making of any swing line loan would reduce the amount available under the 20142018 Revolving Credit Facility.
2014 Credit Facility
The 2014 Credit Facility, as amended, provided for (i) a revolving credit facility of $550 million, (ii) a $325 million term loan (the "2014 Term Loan"), and (iii) a $250 million incremental term loan. The 2018 Credit Facility amended and restated the 2014 Credit Facility.
Senior Notes
On April 18, 2018, the Company consummated the issuance and sale of $400 million aggregate principal amount of its 8.000% Senior Notes due 2026 (the “Notes” or "Senior Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The Company used the net proceeds from the sale of the Notes to repay debt under its existing credit facilities in connection with a concurrent refinancing transaction described above. The Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee.
The Notes will pay (i) commitment feesbear interest at the rate of 8.000% per annum and will mature on May 1, 2026. Interest on the unused portionNotes is payable in cash on May 1st and November 1st of each year, beginning on November 1, 2018. The Notes are general senior unsecured obligations of the 2014 Revolving Credit Facility ranging from 0.45%Company and are not guaranteed by the subsidiaries through which the Company currently conducts substantially all of its operations. The Notes rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness, and rank senior in right of payment to 0.60% per annum basedall of the Company’s future subordinated indebtedness, if any. The Notes will be effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, including the indebtedness under the Company’s credit facilities described above.
The Indenture contains several restrictive covenants including, but not limited to, limitations on its Consolidated Leverage Ratio,the following: (i) the incurrence of additional indebtedness, (ii) quarterly letterrestricted payments, (iii) dividends and other payments affecting restricted
subsidiaries, (iv) the issuance of credit fees,preferred stock of restricted subsidiaries, (v) transactions with affiliates, (vi) asset sales and (iii) administrativemergers and agency fees.consolidations, (vii) future subsidiary guarantees and (viii) liens, subject in each case to certain exceptions.
The following table provides the Company’s debt holdings at SeptemberJune 30, 20172019 and December 31, 2016 2018 (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Senior Notes | $ | 400,000 |
| | $ | 400,000 |
|
Revolving Credit Facility | — |
| | 228,000 |
|
Term Loan | 493,750 |
| | 496,250 |
|
Less: Unamortized discounts and debt issuance costs | (18,832 | ) | | (20,379 | ) |
Total debt | $ | 874,918 |
| | $ | 1,103,871 |
|
Less: Current portion, term loan facilities | (5,000 | ) | | (5,000 | ) |
Long term debt | $ | 869,918 |
| | $ | 1,098,871 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Revolving Credit Facility | $ | 25,500 |
| | $ | 4,400 |
|
Term Loan | 561,394 |
| | 565,658 |
|
Original issue discount | (3,777 | ) | | (4,706 | ) |
Debt issuance costs - term loan | (7,677 | ) | | (8,015 | ) |
Total debt | $ | 575,440 |
| | $ | 557,337 |
|
Less: Current portion, term loan facilities | (5,685 | ) | | (5,685 | ) |
Long term debt | $ | 569,755 |
| | $ | 551,652 |
|
Net availability under the 20142018 Revolving Credit Facility was approximately $523.2$599.8 million at SeptemberJune 30, 2017.2019. Letters of credit outstanding at SeptemberJune 30, 20172019 totaled approximately $1.3$0.2 million. At SeptemberJune 30, 2017,2019, the Company was in compliance with all covenants as defined in the 20142018 Credit Facility.
Debt Issuance Costs
Deferred debt issuance costs represent In July 2019, the costs associated with the entering into the 2014 Credit Facility as well as amendments to the 2014 Credit Facility, and are amortized over the termCompany repaid $193.8 million of the related debt instrument. Since the Company can borrow, repay and reborrow principaloutstanding amount due under the 2014 Revolving Credit Facility, the debt issuance costs associated with this facility have been classified as other non-current assets in the accompanying consolidated balance sheet. The debt issuance costs associated with the 2014 Term Loan, and 2016 Incremental Term Loan are classifiedleaving a remaining balance of $300 million as a reduction of long-term debt in the accompanying consolidated balance sheet.
The following table summarizes debt issuance costs at September 30, 2017 and DecemberJuly 31, 2016, and the balance sheet classification in each of the periods presents (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Deferred debt issuance costs | $ | 20,142 |
| | $ | 18,960 |
|
Accumulated amortization | (9,188 | ) | | (6,248 | ) |
Deferred debt issuance costs, less accumulated amortization | $ | 10,954 |
| | $ | 12,712 |
|
| | | |
Balance Sheet classification: | | | |
Other non-current assets | $ | 3,277 |
| | $ | 4,698 |
|
Long-term debt | 7,677 |
| | 8,014 |
|
| $ | 10,954 |
| | $ | 12,712 |
|
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, 2017 and December 31, 2016, the New Swap had a fair value loss of $8.8 million and $10.7 million, respectively, principally reflecting the present value of future payments and receipts under the agreement.
The Company did not elect hedge accounting for the above derivative transaction 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 swap on the consolidated balance sheets at September 30, 2017 and December 31, 2016 (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Other current liabilities | $ | 3,190 |
| | $ | 4,010 |
|
Other noncurrent liabilities | 5,657 |
| | 6,709 |
|
Total fair value | $ | 8,847 |
| | $ | 10,719 |
|
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, 2017 and December 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at September 30, 2017 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | $ | (192 | ) | | $ | — |
| | $ | — |
| | $ | (192 | ) |
Contingent consideration - acquisitions (2) | (4,367 | ) | | — |
| | — |
| | (4,367 | ) |
Interest rate swap | (8,847 | ) | | — |
| | (8,847 | ) | | — |
|
Total recorded at fair value | $ | (13,406 | ) | | $ | — |
| | $ | (8,847 | ) | | $ | (4,559 | ) |
| |
(1)
| Represents put option issued to noncontrolling shareholders in connection with the 5.11 Tactical and Liberty acquisitions. |
| |
(2)
| Represents potential earn-outs payable by Sterno Products for the acquisition of NII and Ergobaby in connection with their acquisition of Baby Tula. |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2016 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Equity method investment - FOX | $ | 141,767 |
| | $ | 141,767 |
| | $ | — |
| | $ | — |
|
Liabilities: |
| |
| |
| |
|
Put option of noncontrolling shareholders | (180 | ) | | — |
| | — |
| | (180 | ) |
Contingent consideration - acquisitions | (4,830 | ) | | — |
| | — |
| | (4,830 | ) |
Interest rate swap | (10,719 | ) | | — |
| | (10,719 | ) | | — |
|
Total recorded at fair value | $ | 126,038 |
| | $ | 141,767 |
| | $ | (10,719 | ) | | $ | (5,010 | ) |
Reconciliations of the change in the carrying value of the Level 3 fair value measurements from January 1st through September 30th in 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Balance at January 1st | $ | (5,010 | ) | | $ | (50 | ) |
Contingent consideration - acquisition | — |
| | (1,500 | ) |
Balance at March 31st | $ | (5,010 | ) | | $ | (1,550 | ) |
Contingent consideration - acquisition | — |
| | (3,780 | ) |
Payment of contingent consideration | 463 |
| | — |
|
Balance at June 30th | $ | (4,547 | ) | | $ | (5,330 | ) |
Put option - noncontrolling shareholder | (12 | ) | | (50 | ) |
Contingent consideration - payment | — |
| | 450 |
|
Balance at September 30th | $ | (4,559 | ) | | $ | (4,930 | ) |
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, 2016.
2014 Term Loan and 2016 Incremental Term Loan
2019.
At SeptemberJune 30, 2017,2019, the carrying value of the principal under the Company’s outstanding Term Loans,Loan, including the current portion, was $561.4$493.8 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 20142018 Term Loan is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 in the fair value hierarchy. The Company's Senior Notes consisted of the following carrying value and estimated fair value (in thousands):
Nonrecurring Fair Value Measurements |
| | | | | | | | | | | | | |
| | | | | | Fair Value Hierarchy Level | | June 30, 2019 |
| | Maturity Date | | Rate | | | Carrying Value | | Fair Value |
Senior Notes | | May 1, 2026 | | 8.000 | % | | 2 | | 400,000 |
| | 416,000 |
|
| | | | | | | | | | |
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the issuance of the Company's financing arrangements. The Company paid $7.0 million in debt issuance costs related to the Senior Notes issuance, comprised of bank fees, rating agency fees and professional fees. The 2018 Credit Facility was categorized as a debt modification, and the Company incurred $8.4 million of debt issuance costs, $7.8 million of which were capitalized and will be amortized over the life of the related debt instrument, and $0.6 million that were expensed as costs incurred. The Company recorded additional debt modification expense of $0.6 million to write off previously capitalized debt issuance costs. Since the Company can borrow, repay and reborrow principal under the 2018 Revolving Credit Facility, the debt issuance costs associated with the 2014 and 2018 Revolving Credit Facility of $4.6 million and $5.3 million at June 30, 2019 and December 31, 2018, respectively, have been classified as other non-current assets in the accompanying consolidated balance sheet. The original issue discount and the debt issuance costs associated with the 2018 Term Loan and Senior Notes are classified as a reduction of long-term debt in the accompanying consolidated balance sheet.
Interest Rate Swap
In September 2014, the Company purchased an interest rate swap (the "Swap") with a notional amount of $220 million. The Swap is effective April 1, 2016 through June 6, 2021, the original 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 June 30, 2019 and December 31, 2018, the Swap had a fair value loss of $5.1 million and $2.1 million, respectively, principally reflecting the present value of future payments and receipts under the agreement.
The following table providesreflects the assets carriedclassification of the Company's Swap on the consolidated balance sheets at fair value measured on a non-recurring basis as of SeptemberJune 30, 20172019 and December 31, 2016:2018 (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Other current liabilities | $ | 2,225 |
| | $ | 582 |
|
Other noncurrent liabilities | 2,893 |
| | 1,490 |
|
Total fair value | $ | 5,118 |
| | $ | 2,072 |
|
|
| | | | | | | | | | | | | | |
| Fair Value Measurements at September 30, 2017 | | Nine months ended |
(in thousands) | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Expense |
| | | | | | | | | |
Goodwill (1) | 26,903 |
| | — |
| | — |
| | 26,903 |
| | 8,864 |
|
|
| | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2016 | | Year ended |
(in thousands) | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Expense |
| | | | | | | | | |
Goodwill | 35,767 |
| | — |
| | — |
| | 35,767 |
| | 16,000 |
|
Property, Plant and Equipment (1) | — |
| | — |
| | — |
| | — |
| | 1,824 |
|
Tradename (1) | — |
| | — |
| | — |
| | — |
| | 317 |
|
Technology (1) | — |
| | — |
| | — |
| | — |
| | 3,460 |
|
Customer relationships (1) | — |
| | — |
| | — |
| | — |
| | 2,426 |
|
Permits (1) | — |
| | — |
| | — |
| | — |
| | 1,177 |
|
(1) Represents the fair value of the respective assets of the Orbit Baby product line of Ergobaby and the Clean Earth Williamsport site, both of which were disposed of during 2016.
Note LJ — Stockholders’ Equity
Trust Common 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.
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 Trust preferred shares and the Company is authorized to issue a corresponding number of trust preferred interests.
Series B Preferred Shares
On March 13, 2018, the Trust issued 4,000,000 7.875% Series B Trust Preferred Shares (the "Series B Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.5 million net of underwriters' discount and issuance costs. Distributions on the Series B Preferred Shares will be payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30, and October 30 of each year, beginning on July 30, 2018, at a rate per annum of 7.875%. Distributions on the Series B Preferred Shares are cumulative. Unless full cumulative distributions on the Series B Preferred Shares have been or contemporaneously are declared and set apart for payment of the Series B Preferred Shares for all past distribution periods, no distribution may be declared or paid for payment on the Trust common shares. The Series B Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the preferred shares. The Series B Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after April 30, 2028, at a price of $25.00 per share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding, the redemption date. Holders of Series B Preferred Shares will have no right to require the redemption of the Series B Preferred Shares and there is no maturity date.
Series A Preferred Shares
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.4 million net of underwriters' discount and issuance costs. When, and if declared by the Company's board of directors, distribution on the Series A Preferred Shares will be payable quarterly on January 30, April 30, July 30, and October 30 of each year, beginning on October 30, 2017, at a rate per annum of 7.250%. Distributions on the Series A Preferred Shares are discretionary and non-cumulative. The Company has no obligation to pay distributions for a quarterly distribution period if the board of directors does not declare the distribution before the scheduled record of date for the period, whether or not distributions are paid for any subsequent distribution periods with respect to the Series A Preferred Shares, or the Trust common shares. If the Company's board of directors does not declare a distribution for the Series A Preferred Shares for a quarterly distribution period, during the remainder of that quarterly distribution period the Company cannot declare or pay distributions on the Trust common shares. The Series A Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after July 30, 2022, at a price of $25.00 per share, plus any declared and unpaid distributions. Holders of Series A Preferred Shares will have no right to require the redemption of the Series A Preferred Shares and there is no maturity date. The Series A Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the preferred shares.
The Series A Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after July 30, 2022, at a price of $25.00 per share, plus declared and unpaid distribution to, but excluding, the redemption date, without payment of any undeclared distributions. Holders of Series A Preferred Shares will have no right to require the redemption of the Series A Preferred Shares and there is no maturity date.
If a certain tax redemption event occurs prior to July 30, 2022, the Series A Preferred Shares may be redeemed at the Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such tax redemption event, at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. If a certain fundamental change related to the Series A Preferred Shares or the Company occurs (whether before, on or after July 30, 2022), the Company will be required to repurchase the Series A Preferred Shares at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding, the date of purchase, without payment of any undeclared distributions. If (i) a fundamental change occurs and (ii) the Company does not give notice prior to the 31st day following the fundamental change to repurchase all the outstanding Series A Preferred Shares, the distribution rate per annum on the Series A Preferred Shares will increase by 5.00%, beginning on the 31st day following such fundamental change. Notwithstanding any requirement that the Company repurchase all of the outstanding Series A Preferred Shares, the increase in the distribution rate is the sole remedy to holders in the event the Company fails to do so, and following any such increase, the Company will be under no obligation to repurchase any Series A Preferred Shares.
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 are 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 Company records distributions of the profit allocation to the Holders upon occurrence of a Sale Event or Holding Event as distributions declared on Allocation Interests to stockholders’ equity when they are approved by the Company’s board of directors.
Sale Events
The sale of FOX sharesManitoba Harvest in March 2017 (refer to Note F - "Investment in FOX")February 2019 qualified as a Sale Event under the Company's LLC Agreement. In April 2017, with respect to the March 2017 Offering, the Company's board of directors approved and declared a profit allocation payment totaling $25.8 million that was paid inDuring the second quarter of 2017.2019, the Company declared and paid a distribution to the Allocation Member of $7.7 million related to the sale of Manitoba Harvest. The profit allocation distribution was calculated based on the portion of the gain on sale related to the Closing Date Consideration, less the loss on sale of shares that were received as part of the Closing Consideration. An additional profit allocation distribution related to the Sale Event of Manitoba Harvest will be declared subsequent to receipt of the Deferred Consideration in August 2019. The Company also paid an additional $0.3 million in distributions to the Allocation Member related to working capital settlements from prior Sale Events. The sale of FOX sharesClean Earth in March 2016 (refer to Note F - "Investment in FOX")June 2019 qualified as a Sale Event under the Company's LLC Agreement. In April 2016, with respect toDuring the March 2016 Offering,third quarter of 2019, the Company's board of directors approved andCompany declared a profit allocation payment totaling $8.6 million that was paid to Holders during the second quarter of 2016. In November 2016, with respect to the sale of FOX shares in August 2016 and the sale of Tridien, both qualifying as Sale Events, the Company's board of directors approved and declared a profit allocation payment of $7.0 million that was paid during the fourth quarter of 2016. In the fourth quarter of 2016, the Company's board of directors declared a profit allocation paymentdistribution to the Allocation Interest HoldersMember of $13.4 million related to the FOX November Offering (refer to Note F - "Investment in FOX").$43.3 million. This amount wasdistribution will be paid in the first quarter of 2017. The Company's board of directors also declared and the Company paid an $8.2 million distribution in the third quarter of 20162019.
Reconciliation of net income (loss) available to common shares of Holdings
The following table reconciles net loss attributable to Holdings to net loss attributable to the Allocation Member common shares of Holdings (in connection with a Holding Event of our ownership of the Advanced Circuits subsidiary. The payment is in respect to Advanced Circuits' positive contribution-based profit in the five year holding period ending June 30, 2016.thousands):
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Net loss from continuing operations attributable to Holdings | | $ | (5,193 | ) | | $ | (9,748 | ) | | $ | (19,489 | ) | | $ | (12,548 | ) |
| | | | | | | | |
Less: Distributions paid - Allocation Interests | | 7,983 |
| | — |
| | 7,983 |
| | — |
|
Less: Distributions paid - Preferred Shares | | 3,782 |
| | 1,813 |
| | 7,563 |
| | 3,625 |
|
Less: Accrued distributions - Preferred Shares | | 1,334 |
| | 2,341 |
| | 1,334 |
| | 2,341 |
|
Net loss from continuing operations attributable to common shares of Holdings | | $ | (18,292 | ) | | $ | (13,902 | ) | | $ | (36,369 | ) | | $ | (18,514 | ) |
Earnings per share
The Company calculates basic and diluted earnings per share using the two-class method which requires the Company to allocate to 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 ninesix months ended SeptemberJune 30, 20172019 and 20162018 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 ninesix months ended SeptemberJune 30, 20172019 and 20162018 attributable to the common shares of Holdings is calculated as follows (in thousands, except per share data):
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Income (loss) from continuing operations attributable to Holdings | | $ | 7,706 |
| | $ | 47,862 |
| | $ | (18,351 | ) | | $ | 50,198 |
|
Less: Profit Allocation paid to Holders | | — |
| | 8,196 |
| | 39,120 |
| | 16,829 |
|
Less: Effect of contribution based profit - Holding Event | | 1,620 |
| | 812 |
| | 3,954 |
| | 1,292 |
|
Income (loss) from continuing operation attributable to common shares | | $ | 6,086 |
| | $ | 38,854 |
| | $ | (61,425 | ) | | $ | 32,077 |
|
| | | | | | | | |
Income from discontinued operations attributable to Holdings | | $ | — |
| | $ | 1,843 |
| | $ | 340 |
| | $ | 2,723 |
|
Less: Effect of contribution based profit - Holding Event | | — |
| | — |
| | — |
| | — |
|
Income from discontinued operations attributable to common shares | | $ | — |
| | $ | 1,843 |
| | $ | 340 |
| | $ | 2,723 |
|
| | | | | | | | |
Basic and diluted weighted average common shares outstanding | | 59,900 |
| | 54,300 |
| | 59,900 |
| | 54,300 |
|
| | | | | | | | |
Basic and fully diluted income (loss) per common share attributable to Holdings | | | | | | | | |
Continuing operations | | $ | 0.10 |
| | $ | 0.72 |
| | $ | (1.03 | ) | | $ | 0.59 |
|
Discontinued operations | | — |
| | 0.03 |
| | 0.01 |
| | 0.05 |
|
| | $ | 0.10 |
| | $ | 0.75 |
| | $ | (1.02 | ) | | $ | 0.64 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Loss from continuing operations attributable to common shares of Holdings | | $ | (18,292 | ) | | $ | (13,902 | ) | | $ | (36,369 | ) | | $ | (18,514 | ) |
Less: Effect of contribution based profit - Holding Event | | 896 |
| | 797 |
| | 1,853 |
| | 1,708 |
|
Loss from continuing operations attributable to common shares of Holdings | | $ | (19,188 | ) | | $ | (14,699 | ) | | $ | (38,222 | ) | | $ | (20,222 | ) |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | |
Income from discontinued operations attributable to Holdings | | $ | 221,727 |
| | $ | 8,840 |
| | $ | 345,331 |
| | $ | 9,299 |
|
Less: Effect of contribution based profit - Holding Event | | — |
| | 289 |
| | — |
| | — |
|
Income (loss) from discontinued operations attributable to common shares of Holdings | | $ | 221,727 |
| | $ | 8,551 |
| | $ | 345,331 |
| | $ | 9,299 |
|
| | | | | | | | |
Basic and diluted weighted average common shares outstanding | | 59,900 |
| | 59,900 |
| | 59,900 |
| | 59,900 |
|
| | | | | | | | |
Basic and fully diluted income (loss) per common share attributable to Holdings | | | | | | | | |
Continuing operations | | $ | (0.32 | ) | | $ | (0.25 | ) | | $ | (0.64 | ) | | $ | (0.34 | ) |
Discontinued operations | | 3.70 |
| | 0.14 |
| | 5.77 |
| | 0.16 |
|
| | $ | 3.38 |
| | $ | (0.11 | ) | | $ | 5.13 |
| | $ | (0.18 | ) |
Distributions
The following table summarizes information related to our quarterly cash distributions on our Trust Common Shares
On January 26, 2017, the Company paid a distribution of $0.36common and preferred shares (in thousands, except per share to holders of record of the Company's common shares as of January 19, 2017. data):
|
| | | | | | | | | | | | |
Period | | Cash Distribution per Share | | Total Cash Distributions | | Record Date | | Payment Date |
| | | | | | | | |
Trust Common Shares: | | | | | | | | |
April 1, 2019 - June 30, 2019 (1) | | $ | 0.36 |
| | $ | 21,564 |
| | July 18, 2019 | | July 25, 2019 |
January 1, 2019 - March 31, 2019 | | $ | 0.36 |
| | $ | 21,564 |
| | April 18, 2019 | | April 25, 2019 |
October 1, 2018 - December 31, 2018 | | $ | 0.36 |
| | $ | 21,564 |
| | January 17, 2019 | | January 24, 2019 |
July 1, 2018 - September 30, 2018 | | $ | 0.36 |
| | $ | 21,564 |
| | October 18, 2018 | | October 25, 2018 |
April 1, 2018 - June 30, 2018 | | $ | 0.36 |
| | $ | 21,564 |
| | July 19, 2018 | | July 26, 2018 |
January 1, 2018 - March 31, 2018 | | $ | 0.36 |
| | $ | 21,564 |
| | April 19, 2018 | | April 26, 2018 |
October 1, 2017 - December 31, 2017 | | $ | 0.36 |
| | $ | 21,564 |
| | January 19, 2018 | | January 25, 2018 |
| | | | | | | | |
Series A Preferred Shares: | | | | | | | | |
April 30, 2019 - July 29, 2019 (1) | | $ | 0.453125 |
| | $ | 1,813 |
| | July 15, 2019 | | July 30, 2019 |
January 30, 2019 - April 29, 2019 | | $ | 0.453125 |
| | $ | 1,813 |
| | April 15, 2019 | | April 30, 2019 |
October 30, 2018 - January 29, 2019 | | $ | 0.453125 |
| | $ | 1,813 |
| | January 15, 2019 | | January 30, 2019 |
July 30, 2018 - October 29, 2018 | | $ | 0.453125 |
| | $ | 1,813 |
| | October 15, 2018 | | October 30, 2018 |
April 30, 2018 - July 29, 2018 | | $ | 0.453125 |
| | $ | 1,813 |
| | July 16, 2018 | | July 30, 2018 |
January 30, 2018 - April 29, 2018 | | $ | 0.453125 |
| | $ | 1,813 |
| | April 15, 2018 | | April 30, 2018 |
October 30, 2017 - January 29, 2018 | | $ | 0.453125 |
| | $ | 1,813 |
| | January 15, 2018 | | January 30, 2018 |
| | | | | | | | |
Series B Preferred Shares: | | | | | | | | |
April 30, 2019 - July 29, 2019 (1) | | $ | 0.4921875 |
| | $ | 1,969 |
| | July 15, 2019 | | July 30, 2019 |
January 30, 2019 - April 29, 2019 | | $ | 0.4921875 |
| | $ | 1,969 |
| | April 15, 2019 | | April 30, 2019 |
October 30, 2018 - January 29, 2019 | | $ | 0.4921875 |
| | $ | 1,969 |
| | January 15, 2019 | | January 30, 2019 |
July 30, 2018 - October 29, 2018 | | $ | 0.4921875 |
| | $ | 1,969 |
| | October 15, 2018 | | October 30, 2018 |
March 13, 2018 - July 29, 2018 | | $ | 0.74 |
| | $ | 2,960 |
| | July 16, 2018 | | July 30, 2018 |
(1) This distribution was declared on January 5, 2017.
On April 27, 2017, the Company paid a distribution of $0.36 per share to holders of record of the Company's common shares as of April 20, 2017. This distribution was declared on April 6, 2017.
On July 27, 2017, the Company paid a distribution of $0.36 per share to holders of record of the Company's common shares as of July 20, 2017. The distribution was declared on July 6, 2017.
On October 26, 2017, the Company paid a distribution of $0.36 per share to holders of record of the Company's common shares as of October 19, 2017. This distribution was declared on October 5, 2017.
Trust Preferred Shares
On October 30, 2017, the Company paid a distribution of $0.61423611 per share on the Company’s Series A Preferred Shares. The distribution on the Series A Preferred Shares covers the period from and including June 28, 2017, the original issue date of the Preferred Shares, up to, but excluding, October 30, 2017. This distribution was declared on October 5, 2017 and was payable to holders of record of the Company's Series A Preferred Shares as of October 15, 2017.
3, 2019.
Note M — Warranties
The Company’s Crosman, Ergobaby and Liberty 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 nine months ended September 30, 2017 and the year ended December 31, 2016 is as follows (in thousands):
|
| | | | | | | |
| Nine months ended September 30, 2017 | | Year ended December 31, 2016 |
Warranty liability: | | | |
Beginning balance | $ | 1,258 |
| | $ | 1,259 |
|
Accrual | 507 |
| | 252 |
|
Warranty payments | (266 | ) | | (253 | ) |
Other (1) | 509 |
| | — |
|
Ending balance | $ | 2,008 |
| | $ | 1,258 |
|
(1) Represents the warranty liability recorded in relation to the Crosman acquisition in June 2017 and an add-on acquisition by Crosman in July 2017.
Note NK — 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 SeptemberJune 30, 20172019 and December 31, 2016:
2018:
|
| | | | | | | |
| % Ownership (1) September 30, 2017 | | % Ownership (1) December 31, 2016 |
| Primary | | Fully Diluted | | Primary | | Fully Diluted |
5.11 Tactical | 97.5 | | 85.7 | | 97.5 | | 85.1 |
Crosman | 98.8 | | 89.2 | | N/a | | N/a |
Ergobaby | 82.7 | | 76.6 | | 83.5 | | 76.9 |
Liberty | 88.6 | | 84.7 | | 88.6 | | 84.7 |
Manitoba Harvest | 76.6 | | 67.0 | | 76.6 | | 65.6 |
ACI | 69.4 | | 69.2 | | 69.4 | | 69.3 |
Arnold Magnetics | 96.7 | | 84.7 | | 96.7 | | 84.7 |
Clean Earth | 97.5 | | 79.8 | | 97.5 | | 79.8 |
Sterno Products | 100.0 | | 89.5 | | 100.0 | | 89.5 |
|
| | | | | | | |
| % Ownership (1) June 30, 2019 | | % Ownership (1) December 31, 2018 |
| Primary | | Fully Diluted | | Primary | | Fully Diluted |
5.11 Tactical | 97.5 | | 88.4 | | 97.5 | | 88.7 |
Ergobaby | 81.9 | | 75.8 | | 81.9 | | 76.4 |
Liberty | 88.6 | | 85.2 | | 88.6 | | 85.2 |
Velocity Outdoor | 99.2 | | 91.1 | | 99.2 | | 91.0 |
ACI | 69.4 | | 65.8 | | 69.4 | | 69.2 |
Arnold | 96.7 | | 80.2 | | 96.7 | | 79.4 |
Foam Fabricators | 100.0 | | 99.1 | | 100.0 | | 91.5 |
Sterno | 100.0 | | 88.5 | | 100.0 | | 88.9 |
| |
(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, 2017 | | December 31, 2016 | June 30, 2019 | | December 31, 2018 |
5.11 Tactical | $ | 7,387 |
| | $ | 5,934 |
| $ | 11,013 |
| | $ | 9,873 |
|
Crosman | 744 |
| | N/a |
| |
Ergobaby | 21,282 |
| | 18,647 |
| 26,235 |
| | 25,362 |
|
Liberty | 2,976 |
| | 2,681 |
| 3,416 |
| | 3,342 |
|
Manitoba Harvest | 13,852 |
| | 13,687 |
| |
Velocity Outdoor | | 3,098 |
| | 2,524 |
|
ACI | (8,502 | ) | | (11,220 | ) | 1,165 |
| | (1,236 | ) |
Arnold Magnetics | 1,342 |
| | 1,536 |
| |
Clean Earth | 6,585 |
| | 5,469 |
| |
Sterno Products | 1,860 |
| | 1,305 |
| |
Arnold | | 1,184 |
| | 1,176 |
|
Foam Fabricators | | 1,358 |
| | 848 |
|
Sterno | | (1,592 | ) | | (2,067 | ) |
Allocation Interests | 100 |
| | 100 |
| 100 |
| | 100 |
|
| $ | 47,626 |
| | $ | 38,139 |
| $ | 45,977 |
| | $ | 39,922 |
|
Note OL — Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis at June 30, 2019 and December 31, 2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at June 30, 2019 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | $ | (173 | ) | | $ | — |
| | $ | — |
| | $ | (173 | ) |
Contingent consideration - acquisition (2) | (4,374 | ) | | — |
| | — |
| | (4,374 | ) |
Interest rate swap | (5,118 | ) | | — |
| | (5,118 | ) | | — |
|
Total recorded at fair value | $ | (9,665 | ) | | $ | — |
| | $ | (5,118 | ) | | $ | (4,547 | ) |
| |
(1) | Represents put option issued to noncontrolling shareholders in connection with the 5.11 Tactical and Liberty acquisitions. |
| |
(2) | Represents potential earn-out payable as additional purchase price consideration by Velocity Outdoor in connection with the acquisition of Ravin. |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2018 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | $ | (173 | ) | | $ | — |
| | $ | — |
| | $ | (173 | ) |
Contingent consideration - acquisition (2) | (4,374 | ) | | — |
| | — |
| | (4,374 | ) |
Interest rate swap | (2,072 | ) | | — |
| | (2,072 | ) | | — |
|
Total recorded at fair value | $ | (6,619 | ) | | $ | — |
| | $ | (2,072 | ) | | $ | (4,547 | ) |
| |
(1) | Represents put option issued to noncontrolling shareholders in connection with the 5.11 Tactical and Liberty acquisitions. |
| |
(2) | Represents potential earn-out payable as additional purchase price consideration by Velocity Outdoor in connection with the acquisition of Ravin. |
Reconciliations of the change in the carrying value of the Level 3 fair value measurements from January 1, 2018 through June 30, 2019 are as follows (in thousands):
|
| | | |
| Level 3 |
Balance at January 1, 2018 | $ | (178 | ) |
Contingent consideration - Rimports (1) | (4,800 | ) |
Contingent consideration - Ravin (2) | (4,734 | ) |
Decrease in the fair value of put option of noncontrolling shareholder - 5.11 | 5 |
|
Adjustment to Ravin contingent consideration | 360 |
|
Reversal of contingent consideration - Rimports | 4,800 |
|
Balance at January 1, 2019 | $ | (4,547 | ) |
| |
Balance at June 30, 2019 | $ | (4,547 | ) |
(1) The contingent consideration relates to Sterno's acquisition of Rimports in February 2018. The purchase price of Rimports includes a potential earn-out of up to $25 million contingent on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019. The fair value of the contingent consideration related to the earn-out was estimated at $4.8 million at acquisition date and was calculated as the present value of a probability adjusted earnout payment based on the expected term of the payment and a risk-adjusted discount rate. At December 31, 2018, the Company determined that the probability of achieving the earn-out was zero and therefore reversed the amount that was recorded as part of the purchase consideration.
(2) The contingent consideration relates to Velocity's acquisition of Ravin in September 2018. The purchase price of Ravin includes a potential earn-out of up to $25.0 million contingent on the achievement certain financial metrics for the trailing twelve month period ending December 31, 2018. The fair value of the contingent consideration was estimated at $4.7 million at acquisition date and was calculated using a risk-adjusted option pricing model. The earnout was adjusted to $4.3 million at December 31, 2018 based on actual results to date. The earnout is currently subject to arbitration and will be paid once the final amount is determined through the arbitration process.
Valuation Techniques
2018 Term Loan
We classify our fixed and floating rate debt as Level 2 items based on quoted market prices for similar debt issues. In April 2018, the Company issued $400.0 million aggregate principal amount of its Senior Notes due 2026. The fair value of the Senior Notes was determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined this to be a Level 2 measurement as all significant inputs into the quote provided by our pricing source are observable in active markets. At June 30, 2019, the carrying value of the principal under the Company’s outstanding 2018 Term Loan, including the current portion, was $493.8 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 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, 2018.
Nonrecurring Fair Value Measurements
There were no assets carried at fair value on a non-recurring basis at either June 30, 2019 or December 31, 2018.
Note M — 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. Certain foreign operations are subject to foreign income taxation under existing provisions of the laws of those jurisdictions. Pursuant to U.S. tax laws, earnings from those jurisdictions will be subject to the U.S. income tax rate when those earnings are repatriated.
The reconciliation between the Federal Statutory Rate and the effective income tax rate for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 is as follows:
| | | Nine months ended September 30, | Six months ended June 30, |
| 2017 | | 2016 | 2019 | | 2018 |
United States Federal Statutory Rate | (35.0 | )% | | 35.0 | % | (21.0 | )% | | (21.0 | )% |
State income taxes (net of Federal benefits) | (1.0 | ) | | 0.2 |
| 8.5 |
| | (1.5 | ) |
Foreign income taxes | 4.5 |
| | 1.4 |
| 3.0 |
| | 19.7 |
|
Expenses of Compass Group Diversified Holdings LLC representing a pass through to shareholders (1) | 0.3 |
| | 6.3 |
| 47.9 |
| | 8.5 |
|
Impairment expense | 16.9 |
| | — |
| |
Effect of loss (gain) on equity method investment (2) | 11.0 |
| | (33.3 | ) | |
Impact of subsidiary employee stock options | 2.5 |
| | 0.7 |
| 5.2 |
| | 1.6 |
|
Credit utilization | (7.7 | ) | | — |
| (4.8 | ) | | (3.6 | ) |
Domestic production activities deduction | (2.3 | ) | | (0.6 | ) | |
Effect of undistributed foreign earnings | 2.0 |
| | 4.5 |
| |
Non-recognition of NOL carryforwards at subsidiaries | (3.5 | ) | | — |
| 9.5 |
| | 3.4 |
|
Effect of Tax Act | | 7.0 |
| | 17.5 |
|
Other | 1.1 |
| | 1.6 |
| 0.2 |
| | (0.5 | ) |
Effective income tax rate | (11.2 | )% | | 15.8 | % | 55.5 | % | | 24.1 | % |
| |
(1) | The effective income tax rate for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 includes a loss at the Company's parent, which is taxed as a partnership. |
| |
(2)
| The investment in FOX was 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 PN — 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 $3.5$4.9 million is recognized in the consolidated balance sheet as a component of other non-current liabilities at SeptemberJune 30, 2017.2019. Net periodic benefit cost consists of the following for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Service cost | $ | 127 |
| | $ | 131 |
| | $ | 256 |
| | $ | 268 |
|
Interest cost | 33 |
| | 24 |
| | 66 |
| | 49 |
|
Expected return on plan assets | (40 | ) | | (38 | ) | | (80 | ) | | (78 | ) |
Amortization of unrecognized loss | 34 |
| | 48 |
| | 69 |
| | 98 |
|
Net periodic benefit cost | $ | 154 |
| | $ | 165 |
| | $ | 311 |
| | $ | 337 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 134 |
| | $ | 111 |
| | $ | 401 |
| | $ | 325 |
|
Interest cost | 24 |
| | 35 |
| | 71 |
| | 103 |
|
Expected return on plan assets | (39 | ) | | (40 | ) | | (117 | ) | | (117 | ) |
Amortization of unrecognized loss | 63 |
| | 45 |
| | 188 |
| | 132 |
|
Net periodic benefit cost | $ | 182 |
| | $ | 151 |
| | $ | 543 |
| | $ | 443 |
|
During the three and ninesix months ended SeptemberJune 30, 2017,2019, per the terms of the pension agreement, Arnold contributed $0.1 million and $0.3$0.2 million to the plan utilizing reserves from prior years over funding of the plan, respectively.plan. For the remainder of 2017,2019, the expected contribution to the plan will be approximately $0.1$0.6 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 SeptemberJune 30, 20172019 were considered Level 3.
Note QO - Commitments and Contingencies
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.
Leases
The Company and its subsidiaries lease manufacturing facilities, warehouses, office facilities, retail stores, equipment and vehicles under various operating arrangements. Certain of the leases are subject to escalation clauses and renewal periods. The Company and its subsidiaries recognize lease expense, including predetermined fixed escalations, on a straight-line basis over the initial term of the lease including reasonably assured renewal periods from the time that the Company and its subsidiaries control the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Certain of our subsidiaries have leases that contain both fixed rent costs and variable rent costs based on achievement of certain operating metrics. The variable lease expense has not been material on a historic basis and no amount was incurred during the quarter ending June 30, 2019. In the three and six months ended June 30, 2019, the Company recognized $6.3 million and $12.3 million, respectively, in expense related to operating leases in the condensed consolidated statements of operations.
The maturities of lease liabilities at June 30, 2019 were as follows (in thousands):
|
| | | | |
2019 (excluding six months ended June 30, 2019) | | $ | 11,143 |
|
2020 | | 23,688 |
|
2021 | | 20,694 |
|
2022 | | 17,901 |
|
2023 | | 12,003 |
|
Thereafter | | 39,109 |
|
Total undiscounted lease payments | | $ | 124,538 |
|
Less: Interest | | 34,552 |
|
Present value of lease liabilities | | $ | 89,986 |
|
The calculated amount of the right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and discount rate used to present value the minimum lease payments. The Company's lease agreements often include one or more options to renew at the company's discretion. In general, it is not reasonably certain that lease renewals will be exercised at lease commencement and therefore lease renewals are not included in the lease term. Regarding the discount rate, Topic 842 requires the use of a rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes the incremental borrowing rate of the subsidiary entering into the lease arrangement, on a collateralized basis, over a similar term as adjusted for any country specific risk. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of June 30, 2019:
|
| | | |
Lease Term and Discount Rate | | |
Weighted-average remaining lease term (years) | | 6.41 |
|
Weighted-average discount rate | | 7.83 | % |
Supplemental balance sheet information related to leases was as follows (in thousands):
|
| | | | | | |
| | Line Item in the Company’s Consolidated Balance Sheet | | June 30, 2019 |
| | | | |
Operating lease right-of-use assets | | Other non-current assets | | $ | 88,321 |
|
Current portion, operating lease liabilities | | Other current liabilities | | $ | 17,666 |
|
Operating lease liabilities | | Other non-current liabilities | | $ | 72,320 |
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
| | | | |
| | Six months ended June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | | $ | 12,294 |
|
Right-of-use assets obtained in exchange for lease obligations: | | |
Operating leases | | $ | 3,981 |
|
Note R - Subsequent EventP — Related Party Transactions
In October 2017,Management Services Agreement
The Company entered into a Management Services Agreement ("MSA") with CGM effective May 16, 2006. The MSA provides for, among other things, CGM to perform services for the Company furtherin exchange for a management fee paid quarterly and equal to 0.5% of the Company's adjusted net assets, as defined in the MSA. Concurrent with the June 2019 sale of Clean Earth (refer to Note C - Discontinued Operations) CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the quarter during which the Company next borrows under the 2018 Revolving Credit Facility. Integration Services Agreements
Foam Fabricators, which was acquired in 2018, and Velocity Outdoor, which was acquired in 2017, each entered into an Integration Services Agreements ("ISA") with CGM. The ISA provides for CGM to provide services for new platform acquisitions to, amongst other things, assist the management at the acquired entities in establishing a corporate governance program, implement compliance and reporting requirements of the Sarbanes-Oxley Act of 2002, as amended, and align the 2014 Credit Facility (the "First Refinancing Amendment") to, in effect, refinanceacquired entity's policies and procedures with our other subsidiaries. Each ISA is for the 2014 Term Loan and the 2016 Incremental Term Loan (together, the “Term Loans”). Pursuanttwelve month period subsequent to the First Refinancing Amendment, outstanding Term Loansacquisition. Velocity Outdoor paid CGM a total of $1.5 million in integration services fees, with $0.75 million paid in 2018. Foam Fabricators paid CGM $2.3 million over the term of the ISA, $2.0 million in 2018 and $0.3 million in 2019. Integration services fees are included in selling, general and administrative expense on the subsidiaries' statement of operations in the period in which they are incurred.
The Company and its businesses have the following significant related party transactions:
Sterno Recapitalization
In January 2018, the Company completed a recapitalization at LIBOR Rate bear interest at LIBOR plusSterno whereby the Company entered into an applicable rate of 2.25% and outstanding Term Loans at Base Rate bear interest at Base Rate plus 1.25%. Prioramendment to the amendment,intercompany loan agreement with Sterno (the "Sterno Loan Agreement"). The Sterno Loan Agreement was amended to (i) provide for term loan borrowings of $56.8 million to fund a distribution to the Company, which owned 100% of the outstanding Term Loans bore interestequity of Sterno at LIBOR plus 2.75% or Base Rate plus 1.75%.the time of the recapitalization, and (ii) extend the maturity dates of the term loans. In connection with the First Refinancing Amendment,recapitalization, Sterno's management team exercised all of their vested stock options, which represented 58,000 shares of Sterno. The Company then used a portion of the Company incurred $1.4distribution to repurchase the 58,000 shares from management for a total purchase price of $6.0 million. In addition, Sterno issued new stock options to replace the exercised options, thus maintaining the same percentage of fully diluted non-controlling interest that existed prior to the recapitalization.
5.11
Related Party Vendor Purchases - 5.11 purchases inventory from a vendor who is a related party to 5.11 through one of the executive officers of 5.11 via the executive's 40% ownership interest in the vendor. During the three and six months ended June 30, 2019, 5.11 purchased approximately $0.8 million of debt issuance costs associated with fees charged by term loan lenders.and $2.1 million, respectively, in inventory from the vendor.
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 sectionssection entitled "Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10-Q 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, 20162018 and in the section entitled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q.
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 TrustHoldings 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 and is a controlling owner of eight businesses, or operating segments, at June 30, 2019. The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Velocity Outdoor, Inc. (formerly "Crosman Corp.) ("Velocity Outdoor" or "Velocity"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold"), FFI Compass, Inc. ("Foam Fabricators" or "Foam") and The Sterno Group, LLC ("Sterno").
We acquired our existing businesses (segments) at June 30, 2019 as follows:
|
| | | | | | |
| | | | Ownership Interest - June 30, 2019 |
Business | | Acquisition Date | | Primary | | Diluted |
Advanced Circuits | | May 16, 2006 | | 69.4% | | 65.8% |
Liberty Safe | | March 31, 2010 | | 88.6% | | 85.2% |
Ergobaby | | September 16, 2010 | | 81.9% | | 75.8% |
Arnold | | March 5, 2012 | | 96.7% | | 80.2% |
Sterno | | October 10, 2014 | | 100.0% | | 88.5% |
5.11 Tactical | | August 31, 2016 | | 97.5% | | 88.4% |
Velocity Outdoor | | June 2, 2017 | | 99.2% | | 91.1% |
Foam Fabricators | | February 15, 2018 | | 100.0% | | 99.1% |
We categorize the businesses we own into two separate groups of businesses: (i) branded consumer businesses, and (ii) niche industrial businesses. Branded consumer 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 consumer businesses are leaders in their particular product category. Niche industrial businesses are characterized as those businesses that focus on manufacturing and selling particular products and industrial services within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector. The following is an overview of each of our businesses:
Branded Consumer
5.11 Tactical - 5.11 is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
Ergobaby - Headquartered in Los Angeles, California, Ergobaby is dedicated to building a boardglobal community of directors whose corporate governance responsibilities are similar toconfident parents with smart, ergonomic solutions that enable and encourage bonding between parents and babies. Ergobaby offers a broad range of a Delaware corporation. The Company’s boardaward-winning baby carriers, strollers, car seats, swaddlers, nursing pillows, and related products
that fit into families’ daily lives seamlessly, comfortably and safely. Historically, Ergobaby derives more than 50% of directors oversees the managementits sales from outside of the CompanyUnited States.
Liberty - Founded in 1988, Liberty Safe is the premier designer, manufacturer and our businessesmarketer of home 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 60.4% 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 headquarteredgun safes in North America. We characterize smallFrom its over 300,000 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 middlegood, better and best products. Products are marketed under the Liberty brand, as well as a portfolio of licensed and private label brands, including Cabela’s, Case IH, Colt and John Deere. Liberty Safe’s products are the market businesses as thoseshare 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.
Velocity Outdoor - A leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories, Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin and CenterPoint brands that generate annual cash flowsare available through national retail chains, mass merchants, dealer and distributor networks. The airgun product category consists of upair rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity Outdoor's other primary product categories are archery, with products including CenterPoint crossbows and the Pioneer Airbow, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products. In September 2018, Velocity acquired Ravin Crossbows, LLC ("Ravin" or "Ravin Crossbows"), a manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related to $60 million. We focus on companiesthe advancement of this size becausecrossbow technology. Velocity Outdoor is headquartered in Bloomfield, New York.
Niche Industrial
Advanced Circuits - Advanced Circuits is a provider of our beliefsmall-run, quick-turn and volume production printed circuit boards ("PCBs") to customers throughout the United States. Historically, small-run and quick-turn PCBs have represented approximately 50% - 55% of Advanced Circuits’ gross sales. Small-run and quick-turn PCBs typically command higher margins than volume production PCBs given that these companiescustomers require high levels of responsiveness, technical support and timely delivery of small-run and quick-turn PCBs and are often morewilling to pay a premium for them. Advanced Circuits is able to achieve growthmeet its customers’ demands by manufacturing custom PCBs in as little as 24 hours, while maintaining over 98.0% error-free production rates above thoseand real-time customer service and product tracking 24 hours per day.
Arnold - Arnold serves a variety of markets including aerospace and defense, motorsport/ automotive, oil and gas, medical, general industrial, energy, reprographics and advertising specialties. Over the course of 100+ years, Arnold has successfully evolved and adapted our products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold produces high performance permanent magnets (PMAG), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Arnold has expanded globally and built strong relationships with our customers worldwide. Arnold is the largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems. Arnold is headquartered in Rochester, New York.
Foam Fabricators - Founded in 1957 and headquartered in Scottsdale, Arizona, Foam Fabricators is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer (OEM) components made from expanded polystyrene (EPS) and expanded polypropylene (EPP). Foam Fabricators operates 13 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products and others.
Sterno - Sterno, headquartered in Corona, California, is the parent company of Sterno Products, LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and Rimports, LLC ("Rimports"). Sterno is a leading manufacturer and marketer of portable food warming fuels for the hospitality and consumer markets, flameless candles and house and garden lighting for the home decor market, and wickless candle products used for home decor and fragrance systems. We made loans to, and purchased all of the equity interests in, Sterno on October 10, 2014 for approximately $160.0 million. Sterno offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps through their relevant industriesSterno Products division. In January 2016, Sterno acquired Northern International, Inc. ("Sterno Home"), which sells flameless candles and are also frequently more susceptible to efforts to improve earningsoutdoor lighting products through the retail segment, and cash flow.in February 2018, Sterno acquired Rimports, which is a manufacturer and distributor of branded and private label scented wax cubes and warmer products used for home decor and fragrance systems.
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 onWhile our businesses have different growth opportunities and potential rates of growth, we work with the earningsmanagement teams of each of our businesses to increase the value of, and cash receipts fromgenerated by, each business through various initiatives, including making selective capital investments to expand geographic reach, increase capacity or reduce manufacturing costs of our businesses to meetbusinesses; improving and expanding existing sales and marketing programs; and assisting in the acquisition and integration of complementary businesses.
We remain focused on marketing our corporate overheadCompany's attractive ownership and management fee expenses andattributes to pay distributions. These earnings and distributions, netpotential sellers of any minority interests in these businesses, are generally available:
first,middle market businesses. In addition, we continue to meet capital expenditure requirements, management fees and corporate overhead expenses;
second, to fund distributionspursue opportunities for add-on acquisitions by our existing subsidiary companies, which can be particularly attractive from the businesses to the Company; and
third,a strategic perspective. The middle market continues to be distributed by the Trust to shareholders.
We acquired our existing businesses (segments) at September 30, 2017 as follows:
|
| | | | | | |
| | | | Ownership Interest - September 30, 2017 |
Business | | Acquisition Date | | Primary | | Diluted |
Advanced Circuits | | May 16, 2006 | | 69.4% | | 69.2% |
Liberty Safe | | March 31, 2010 | | 88.6% | | 84.7% |
Ergobaby | | September 16, 2010 | | 82.7% | | 76.6% |
Arnold Magnetics | | March 5, 2012 | | 96.7% | | 84.7% |
Clean Earth | | August 7, 2014 | | 97.5% | | 79.8% |
Sterno Products | | October 10, 2014 | | 100.0% | | 89.5% |
Manitoba Harvest | | July 10, 2015 | | 76.6% | | 67% |
5.11 Tactical | | August 31, 2016 | | 97.5% | | 85.7% |
Crosman | | June 2, 2017 | | 98.8% | | 89.2% |
We categorize the businesses we own into two separate groups of businesses: (i) branded consumer businesses, and (ii) niche industrial businesses. Branded consumer 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 consumer businesses are leaders in their particular product category. Niche industrial businesses are characterized as those businesses that focus on manufacturing and selling particular products and industrial services within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector.
Recent Events
Trust Preferred Share Issuance
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares")an active segment for gross proceeds of $100.0 million, or $96.4 million net of underwriters' discount and issuance costs.
Acquisition of Crosman
On June 2, 2017, through a wholly owned subsidiary, Crosman Acquisition Corp., we acquired 98.9% of the outstanding equity of Bullseye Acquisition Corporation, which is the sole owner of Crosman Corp. ("Crosman"). Crosman is a designer, manufacturer and marketer of airguns, archery products and related accessories. Headquartered in Bloomfield, New York, Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channels and distributors serving smaller specialty stores and international markets. Its diversified product portfolio includes the widely known Crosman, Benjamin and CenterPoint brands. The purchase price, including proceeds from noncontrolling interests and net of transaction costs, was approximately $150.4 million. Crosman management invested in the transaction along with the Company, representing approximately 1.1% of the initial noncontrolling interest.
Divestiture of FOX shares
On March 13, 2017, Fox Factory Holding Corp. ("FOX") closed on a secondary public offering of 5,108,718 shares of FOX common stock held by CODI, which represented CODI's remaining investment in FOX. CODI received $136.1 million in net proceeds as a result of the sale. As a result of this secondary public offering, the Company no longer holds an ownership interest in FOX.
This sale of the portion of our FOX shares in March 2017 qualified as a Sale Event under the Company's LLC Agreement. During the second quarter of 2017, our board of directors declared a distribution to the Holders of the Allocation Interests of $25.8 million in connection with the Sale Event of FOX. The profit allocation payment was made during the quarter ended June 30, 2017.
2017Outlook
Middle market deal flow, continues to remain steady,with further acceleration of deal flow expected in part due to continued attractive valuations for sellers.2019. 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 focusedbelieve that companies will focus on marketingexpanding their customer bases by diversifying their products and services in existing geographic areas during 2019.
Recent Events
Sale of Clean Earth
On May 8, 2019, the Company’s attractive ownershipCompany, as majority stockholder of CEHI Acquisition Corporation (“CEHI”) and management attributesas Sellers’ Representative, entered into a definitive Stock Purchase Agreement (the “Purchase Agreement”) with Calrissian Holdings, LLC (“Buyer”), CEHI, the other holders of stock and options of CEHI and, as Buyer’s guarantor, Harsco Corporation, pursuant to potential sellerswhich Buyer would acquire all of middle market businessesthe issued and intermediaries. In addition,outstanding securities of CEHI, the parent company of the operating entity, Clean Earth, Inc.
On June 28, 2019, Buyer completed the acquisition of all of the issued and outstanding securities of CEHI pursuant to the Purchase Agreement. The sale price for CEHI was based on an aggregate total enterprise value of $625 million and is subject to customary working capital adjustments. After the allocation of the sale proceeds to CEHI non-controlling equity holders and the payment of transaction expenses of approximately $10.7 million, we continuereceived approximately $552 million of total proceeds at closing related to pursue opportunities for add-on acquisitions by certainour debt and equity interests in CEHI. We recognized a gain on the sale of CEHI of $206.3 million in the second quarter of 2019.
Sale of Manitoba Harvest
On February 19, 2019, we entered into a definitive agreement with Tilray, Inc. ("Tilray") and a wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, through Tilray Subco, all of the issued and outstanding securities of our existingmajority owned subsidiary, companies, which can be particularly attractive from a strategic perspective.
Discontinued Operations
Manitoba Harvest for total consideration of up to C$419 million. The results of operations for Tridien for the three and nine months ended September 30, 2016 are presented as discontinued operations in our consolidated financial statements as a resultcompletion of the sale of TridienManitoba Harvest was subject to approval by the British Columbia Supreme Court, which occurred on February 21, 2019. The sale closed on February 28, 2019. Subject to certain customary adjustments, the shareholders of Manitoba Harvest, including the Company, received or will receive the following from Tilray as consideration for their shares of Manitoba Harvest: (i) C$150 million in September 2016.cash to the holders of preferred shares of Manitoba Harvest and the holders of common shares of Manitoba Harvest (“Common Holders”) and C$127.5 million in shares of class 2 Common Stock of Tilray (“Tilray Common Stock”) to the Common Holders on the closing date of the sale (the “Closing Date Consideration”), and (ii) C$50 million in cash and C$42.5 million in Tilray Common Stock to the Common Holders on the date that is six months after the closing date of the arrangement (the “Deferred Consideration”). The sale consideration also includes a potential earnout of up to C$49 million in Tilray Common Stock to the Common Holders, if Manitoba Harvest achieves certain levels of U.S. branded gross sales of edible or topical products containing broad spectrum hemp extracts or cannabidiols prior to December 31, 2019.
The cash portion of the Closing Date Consideration was reduced by the amount of the net indebtedness (including accrued interest) of Manitoba Harvest on the closing date of C$71.3 million ($53.7 million) and transaction expenses of approximately C$5.0 million. We recognized a gain on the sale of Manitoba Harvest of $121.7 million in the first quarter of 2019. Refer to
Note D - "Discontinued Operations", of the condensed consolidated financial statements"Liquidity and Capital Resources, Profit Allocation Payments" for furthera discussion of the operating resultsprofit allocation associated with the sale of our discontinued businesses.Manitoba Harvest. Our share of the net proceeds after accounting for the redemption of the noncontrolling shareholders and the payment of net indebtedness of Manitoba Harvest and transaction expenses was approximately $124.2 million in cash proceeds and in Tilray Common Stock. We recorded a receivable of $48.0 million at June 30, 2019 related to the Deferred Consideration portion of the proceeds. No amount has been recorded related to the potential earnout as of June 30, 2019 based on an assessment of probability at the end of the quarter.
The Tilray Common Stock consideration was issued in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and pursuant to exemptions from applicable securities laws of any state of the United States, such that any shares of Tilray Common Stock received by the Common Holders were freely tradeable. We sold the Tilray Common Stock during March 2019, recognizing a net loss of $5.3 million in Other income (expense) during the quarter ended March 31, 2019.
Non-GAAP Financial Measures
"U.S. GAAP refersGAAP" or "GAAP" refer 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
In theThe following resultsdiscussion reflects a comparison of operations, we provide (i) our actual consolidated results of operations for the three and nine months ended September 30, 2017 and 2016, which includes the historical results of operations of our businesses (operating segments) fromconsolidated business for the datethree and six months ended June 30, 2019 and June 30, 2018, and components of acquisition and (ii) comparativethe results of operations as well as those components presented as a percent of net revenues, for each of our businesses on a stand-alone basisbasis. For the 2018 acquisitions of Foam Fabricators and Rimports, the pro forma results of operations have been prepared as if we purchased these businesses on January 1, 2018. The historical operating results of Rimports prior to acquisition by Sterno on February 26, 2018 have been added to the results of operations of Sterno for the six months ended June 30, 2018 for comparability purposes. 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 of our businesses are not necessarily indicative of the results to be expected for a full year.
All dollar amounts in the financial tables are presented in thousands. References in the financial tables to percentage changes that are not meaningful are denoted by "NM."
Results of Operations - Consolidated
The following table sets forth our unaudited results of operations for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016, where all periods presented include relevant proforma adjustments for pre-acquisition periods and explanations where applicable.
Consolidated Results of Operations – Compass Diversified Holdings and Compass Group Diversified Holdings LLC
2018:
| | | Three months ended | | Nine months ended | Three months ended | | Six months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
(in thousands) | |
|
| | | | | |
Net sales | $ | 323,957 |
| | $ | 252,285 |
| | $ | 921,330 |
| | $ | 659,748 |
| |
Cost of sales | 206,232 |
| | 169,870 |
| | 599,552 |
| | 436,544 |
| |
Net revenues | | $ | 336,084 |
| | $ | 339,989 |
| | $ | 674,941 |
| | $ | 626,119 |
|
Cost of revenues | | 213,521 |
| | 221,510 |
| | 432,823 |
| | 403,753 |
|
Gross profit | 117,725 |
| | 82,415 |
| | 321,778 |
| | 223,204 |
| 122,563 |
| | 118,479 |
| | 242,118 |
| | 222,366 |
|
Selling, general and administrative expense | 80,804 |
| | 53,648 |
| | 239,102 |
| | 140,702 |
| 80,312 |
| | 81,513 |
| | 161,709 |
| | 161,676 |
|
Fees to manager | 8,277 |
| | 8,435 |
| | 24,308 |
| | 21,394 |
| 8,521 |
| | 10,799 |
| | 19,478 |
| | 21,436 |
|
Amortization of intangibles | 14,167 |
| | 8,423 |
| | 39,256 |
| | 23,966 |
| 13,522 |
| | 14,465 |
| | 27,112 |
| | 22,745 |
|
Impairment expense | — |
| | — |
| | 8,864 |
| | — |
| |
Loss on disposal of assets | — |
| | 551 |
| | — |
| | 7,214 |
| |
Operating income | $ | 14,477 |
| | $ | 11,358 |
| | $ | 10,248 |
| | $ | 29,928 |
| 20,208 |
| | 11,702 |
| | 33,819 |
| | 16,509 |
|
Interest expense | | (18,445 | ) | | (13,474 | ) | | (36,899 | ) | | (19,592 | ) |
Amortization of debt issuance costs | | (928 | ) | | (953 | ) | | (1,855 | ) | | (2,051 | ) |
Other income (expense) | | (90 | ) | | (2,207 | ) | | (5,824 | ) | | (3,540 | ) |
Income (loss) from continuing operations before income taxes | | 745 |
| | (4,932 | ) | | (10,759 | ) | | (8,674 | ) |
Provision for income taxes | | 4,551 |
| | 3,330 |
| | 5,975 |
| | 2,087 |
|
Loss from continuing operations | | $ | (3,806 | ) | | $ | (8,262 | ) | | $ | (16,734 | ) | | $ | (10,761 | ) |
Three months ended SeptemberJune 30, 20172019 compared to three months ended SeptemberJune 30, 20162018
Net salesrevenues
On a consolidated basis, net salesrevenues for the three months ended SeptemberJune 30, 2017 increased2019 decreased by approximately $71.7$3.9 million, or 28.4%1.1%, compared to the corresponding period in 2016. Our acquisition of 5.11 Tactical on August 31, 2016 contributed $44.8 million to the increase in net sales, while our acquisition of Crosman on June 2, 2017 contributed $34.4 million.2018. During the three months ended SeptemberJune 30, 20172019 compared to 2016,2018, we also saw a notable increase in net sales increase at Clean Earth5.11 ($4.28.1 million primarily due to two acquisitions in 2016 and one acquisition in 2017)increase), partially offset by a decreasedecreases in net sales at our LibertyVelocity Outdoor ($5.46.0 million decrease), ErgobabyArnold ($1.81.7 million decrease), Manitoba HarvestFoam Fabricators ($2.01.5 million decrease) and Sterno ($2.91.5 million decrease) subsidiaries.. Refer to "Results of Operations - Our Businesses"Business Segments" for a more detailed analysis of net salesrevenues 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 salesrevenues
On a consolidated basis, cost of sales increasedrevenues decreased approximately $36.4$8.0 million during the three month periodmonths ended SeptemberJune 30, 2017,2019 compared to the corresponding period in 2016. 5.11 Tactical accounted for $17.2 million of the increase, while our Crosman acquisition accounted for $29.0 million of the increase2018. The decrease in cost of sales during the three months ended September 30, 2017. Clean Earth accounted for $2.9revenues reflects notable decreases at Sterno ($5.7 million of the increase due to acquisitions in the priordecrease) and current year. These increases were offset by decreases in cost of sales at other operating segments, particularly ErgobabyVelocity ($4.8 million), Liberty ($4.7 million) and Arnold ($1.4 million)3.3 million decrease). Gross profit as a percentage of salesnet revenues was approximately 36.3%36.5% in the three months ended SeptemberJune 30, 20172019 compared to 32.7%34.8% in the three months ended SeptemberJune 30, 2016.2018. Refer to "Results of Operations - Our Businesses"Business Segments" for a more detailed analysis of cost of salesgross profit by business segment.
Selling, general and administrative expense
On a consolidated basis,Consolidated selling, general and administrative expense increaseddecreased approximately $27.2$1.2 million during the three month periodmonths ended SeptemberJune 30, 2017,2019, compared to the corresponding period in 2016. The increase in selling, general and administrative expense in the 2017 quarter compared to 2016 is principally the result of the 5.11 Tactical acquisition in August 2016 ($23.6 million) and Crosman in June 2017 ($5.1 million, including $0.3 million in transaction costs incurred for acquisition costs during the quarter).2018. Refer to "Results of Operations - Our Businesses"Business Segments" for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, general and administrative expense was $2.8$3.1 million in the thirdsecond quarter of 20172019 and $2.7$4.0 million in the thirdsecond quarter of 2016.2018. The decrease in selling, general and administrative expense at Corporate was primarily due to $0.6 million of professional fees in the prior year associated with the refinancing of our credit facility in the second quarter of 2018.
Fees to manager
Pursuant to the Management Services Agreement ("MSA"), 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 SeptemberJune 30, 2017,2019, we incurred approximately $8.3$8.5 million in management fees as compared to $8.4$10.8 million in fees in the three months ended SeptemberJune 30, 2016.2018. The decrease was attributable to the sale of Manitoba Harvest in the first quarter of 2019 and Clean Earth in the second quarter of 2019. Concurrent with the June 2019 sale of Clean Earth, CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the quarter during which the Company next borrows under the 2018 Revolving Credit Facility.
Amortization expense
Amortization expense for the three months ended SeptemberJune 30, 2017 increased $5.72019 decreased $0.9 million as compared to the three months ended SeptemberJune 30, 20162018 primarily as a result of finalization of the acquisitionspurchase price allocations related to the acquisition of 5.11Foam Fabricators and Rimports in February 2018, offset by the amortization of intangible assets at Velocity related to the Ravin acquisition in August 2016 and Crosman2018.
Interest Expense
We recorded interest expense totaling $18.4 million for the three months ended June 30, 2019 compared to $13.5 million for the comparable period in 2018, an increase of $5.0 million. The increase in interest expense for the quarter reflects the interest associated with the issuance of our Senior Notes in April 2018, as well as an increase of the average amount outstanding under our revolving credit facility in the second quarter of 2019 as compared to the second quarter of 2018.
Other income (expense)
For the quarter ended June 2017.
Loss on disposal30, 2019, we recorded $0.1 million in other expense as compared to $2.2 million in other expense in the quarter ended June 30, 2018, an increase in expense of assets
Ergobaby recorded$2.1 million. Other expense in the second quarter of 2018 included a $0.6 millioncurrency translation loss on disposalthe intercompany debt issued to our Manitoba Harvest subsidiary, which was sold in February 2019.
Income Taxes
We had an income tax provision of assets$4.6 million from continuing operations during the thirdthree months ended June 30, 2019 compared to an income tax provision of $3.3 million from continuing operations during the same period in 2018. While our loss from continuing operations before taxes for the quarter of 2016 related to its decision to dispose of the Orbit Baby product line. Referended June 30, 2019 decreased by approximately $5.7 million as compared to the Ergobaby section under "Resultsprior year quarter ended June 30, 2018, the effect of Operations - Our Businesses" for additional details regardingforeign taxes at our subsidiaries increased our current tax expense provision during the loss on disposal.quarter.
NineSix months ended SeptemberJune 30, 20172019 compared to ninesix months ended SeptemberJune 30, 2016
2018
Net salesrevenues
On a consolidated basis, net salesrevenues for the ninesix months ended SeptemberJune 30, 20172019 increased by approximately $261.6$48.8 million, or 39.6%7.8%, compared to the corresponding period in 2016.2018. Our acquisitionacquisitions of 5.11Foam Fabricators and Rimports in August 2016February 2018 contributed $201.3$13.7 million and $35.8 million, respectively, to the increase in net sales and our acquisition of Crosman in June 2016 contributed $44.2 million to the increase.revenues. During the ninesix months ended SeptemberJune 30, 20172019 compared to 2016,2018, we also saw a notable increase in net sales increases at Ergobaby5.11 ($2.712.2 million primarily due to the acquisition of Baby Tula)increase), Clean Earth ($19.3 million, primarily due to two acquisitions in 2016 and one in 2017) and Sterno ($6.4 million, primarily due to the acquisition of Sterno Home Inc. ("Sterno Home", formerly Northern International, Inc.) in January 2016),partially offset by decreasesa decrease in sales at Liberty ($8.7 million) and Arnold Magnetics ($3.4 million).our legacy Sterno business. Refer to "Results of Operations - Our Businesses"Business Segments" for a more detailed analysis of net salesrevenues 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 salesrevenues
On a consolidated basis, cost of salesrevenues increased approximately $163.0$29.1 million during the nine month periodsix months ended SeptemberJune 30, 2017,2019 compared to the corresponding period in 2016. 5.11 accounted for $121.42018. Our acquisitions of Foam Fabricators and Rimports in February 2018 contributed $8.4 million of the increase in cost of sales, including $21.7 in expense relatedand $28.8 million, respectively, to the amortization of the inventory step-up resulting from purchase accounting during the nine months ended September 30, 2017, while our Crosman acquisition accounted for $36.3 million of the increase. Clean Earth accounted for $14.7 million of the increase due to acquisitions in the prior and current year, and Sterno accounted for $6.3 million of the increase. These increases were offset by decreases in cost of sales at other operating segments, particularly Liberty ($6.0 million) and Arnold ($5.0 million). Gross profit as a percentage of salesnet
revenues was approximately 34.9%35.9% in the ninesix months ended SeptemberJune 30, 20172019 compared to 33.8%35.5% in the ninesix months ended SeptemberJune 30, 2016.2018. Refer to "Results of Operations - Our Businesses"Business Segments" for a more detailed analysis of cost of salesgross profit by business segment.
Selling, general and administrative expense
On a consolidated basis,Consolidated selling, general and administrative expense increasedwas approximately $98.4$161.7 million during both the nine month period ended September 30, 2017, compared to the corresponding period in 2016. The increase in selling, general and administrative expense in 2017 compared to 2016 is principally the result of the 5.11 acquisition in August 2016 ($85.3 million), and Crosman in June 2017 ($7.7 million, including $1.8 million in acquisition related expenses). We also saw an increase in selling general and administrative expense for the ninesix months ended SeptemberJune 30, 2017 at Clean Earth ($2.9 million due to acquisitions in the current2019 and prior year), and an increase in selling, general and administrative expense at Ergobaby and Liberty due to the effect of bankruptcy filings by two major retailers during 2017.2018. Refer to "Results of Operations - Our Businesses"Business Segments" for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, general and administrative expense increased from $8.6was $6.4 million in the ninefirst six months ended September 30, 2016 to $9.0of 2019 and $7.6 million in the ninefirst six months of 2018. The six months ended SeptemberJune 30, 2017.
2018 included additional professional fees at corporate associated with the implementation of new accounting standards and the refinancing of our credit facility.
Fees to manager
Pursuant to the MSA, 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 ninesix months ended SeptemberJune 30, 2017,2019, we incurred approximately $24.3$19.5 million in expense for thesemanagement fees as compared to $21.4 million for the corresponding period in 2016. The increasefees in the management fees that occurred is primarily duesix months ended June 30, 2018. The decrease was attributable to the increasesale of Manitoba Harvest in consolidated net assets resulting from the acquisitionfirst quarter of 5.112019 and Clean Earth in August 2016,the second quarter of 2019. Concurrent with the June 2019 sale of Clean Earth, CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the acquisition of Crosman in June 2017.quarter during which the Company next borrows under the 2018 Revolving Credit Facility.
Amortization expense
Amortization expense for the ninesix months ended SeptemberJune 30, 20172019 increased $15.3$4.4 million as compared to the ninesix months ended SeptemberJune 30, 20162018 primarily as a result of the acquisition of 5.11Foam Fabricators and Rimports in August 2016February 2018, and Crosmanthe add-on acquisition of Ravin by Velocity in 2018.
Interest Expense
We recorded interest expense totaling $36.9 million for the six months ended June 2017.
Impairment30, 2019 compared to $19.6 million for the comparable period in 2018, an increase of $17.3 million. The increase in interest expense
Arnold performed for the six months ended June 30, 2019 reflects the interest associated with the issuance of our Senior Notes in April 2018, as well as an interim impairment test at eachincrease of its reporting unitsthe average amount outstanding under our revolving credit facility in the fourth quarterfirst half of 2016, which resulted2019 as compared to the first half of 2018.
Other income (expense)
For the six months ended June 30, 2019, we recorded $5.8 million in other expense as compared to $3.5 million in other expense in the recording of preliminary impairmentsix months ended June 30, 2018, an increase in expense of the PMAG reporting unit of $16.0$2.3 million. In the first quarter of 2017, Arnold completedcurrent year, we incurred $5.3 million in loss on the impairment testingsale of the PMAG reporting unitTilray Common Stock we received related to the sale of Manitoba Harvest, and recorded an additional $8.9a loss of $0.4 million impairment expense basedrelated to foreign exchange losses on the resultsrepayment of the Step 2 impairment testing.intercompany loans of Manitoba Harvest.
Income Taxes
Loss on disposalWe had an income tax provision of assets
Ergobaby recorded a $7.2$6.0 million loss on disposalwith an effective income tax rate of assets55.5% from continuing operations during 2016 relatedthe six months ended June 30, 2019 compared to its decisionan income tax provision of $2.1 million with an effective income tax rate of 24.1% from continuing operations during the six months ended June 30, 2018. While our earnings before taxes for the six months ended June 30, 2019 increased by approximately $3.9 million as compared to disposethe prior six months ended June 30, 2018, which is primarily due to the effect of the Orbitbaby product line. Refer toloss at the Ergobaby section under "Results of Operations - Our Businesses" for additional details regarding the loss on disposal.corporate level, which is taxed as a partnership.
Results of Operations - Our BusinessesBusiness Segments
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, 2017 and September 30, 2016 on a stand-alone basis. For the 2017 acquisition of Crosman, the following discussion reflects pro forma results of operations for the three and nine months ended September 30, 2017 and 2016 as if we had acquired Crosman January 1, 2016. For the 2016 acquisition of 5.11, the following discussion reflects pro forma results of operations for the three and nine months ended September 30, 2016 as if we had acquired 5.11 on January 1, 2016. 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 of our businesses are not necessarily indicative of the results to be expected for a full year.
Branded Consumer Businesses
5.11 Tactical
Overview
5.11 is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
We made loans to, and purchased a controlling interest in, 5.11 for a net purchase price of $408.2 million in August 2016, representing approximately 97.5% of the initial outstanding equity of 5.11 ABR Corp.
Results of Operations
In the following results of operations, we provide (i) the actual consolidated results of operations for 5.11 for the three and nine months ended September 30, 2017, and (ii) comparative results of operations for 5.11 for the three and nine months ended September 30, 2016, as if we had acquired the business on January 1, 2016, including relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| | | (Pro forma) | | | | (Pro forma) |
Net sales | $ | 72,005 |
| | $ | 74,655 |
| | $ | 228,471 |
| | $ | 212,667 |
|
Cost of sales (1) | 37,452 |
| | 46,797 |
| | 141,590 |
| | 123,857 |
|
Gross profit | 34,553 |
| | 27,858 |
| | 86,881 |
| | 88,810 |
|
Selling, general and administrative expense (2) | 32,370 |
| | 25,954 |
| | 94,000 |
| | 78,998 |
|
Fees to manager (3) | 250 |
| | 250 |
| | 750 |
| | 750 |
|
Amortization of intangibles (4) | 2,186 |
| | 2,047 |
| | 6,673 |
| | 6,140 |
|
Income (loss) from operations | $ | (253 | ) | | $ | (393 | ) | | $ | (14,542 | ) | | $ | 2,922 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
Net sales | | $ | 92,836 |
| | 100.0 | % | | $ | 84,723 |
| | 100.0 | % | | $ | 180,925 |
| | 100.0 | % | | $ | 168,680 |
| | 100.0 | % |
Gross profit | | $ | 45,475 |
| | 49.0 | % | | $ | 40,674 |
| | 48.0 | % | | $ | 88,420 |
| | 48.9 | % | | $ | 79,225 |
| | 47.0 | % |
SG&A | | $ | 37,965 |
| | 40.9 | % | | $ | 36,219 |
| | 42.7 | % | | $ | 76,136 |
| | 42.1 | % | | $ | 72,950 |
| | 43.2 | % |
Operating income | | $ | 5,073 |
| | 5.5 | % | | $ | 2,020 |
| | 2.4 | % | | $ | 7,411 |
| | 4.1 | % | | $ | 1,403 |
| | 0.8 | % |
Pro forma results of operations of 5.11 Tactical for the three and nine months ended September 30, 2016 include the following pro forma adjustments, applied to historical results as if we had acquired 5.11 on January 1, 2016:
(1)Cost of sales was decreased by $0.02 million and $0.08 million, respectively, for the three and nine months ended September 30, 2016 to reflect the increase in the depreciable lives for machinery and equipment.
(2) Selling, general and administrative expense was decreased by approximately $0.5 million and $2.3 million, respectively, for the three and nine months ended September 30, 2016 to reflect the increase in the depreciable lives for property, plant and equipment. Selling, general and administrative expense was increased by approximately $0.4 and $0.9 million in the three and nine months ended September 30, 2016, respectively, as a result of stock compensation expense related to stock options that were granted to 5.11 employees as a result of the acquisition.
(3) Represents management fees that would have been payable to the Manager in the nine months ending September 30, 2016.
(4) Represents amortization of intangible assets in the three and nine month period ended September 30, 2016 for amortization expense associated with the allocation of the fair value of intangible assets resulting from the purchase price allocation in connection with our acquisition.
Three months ended SeptemberJune 30, 20172019 compared to the pro forma three months ended SeptemberJune 30, 20162018
Net sales
Net sales for the three months ended SeptemberJune 30, 20172019 were $72.0$92.8 million as compared to net sales of $74.7$84.7 million for the three months ended SeptemberJune 30, 2016, a decrease2018, an increase of $2.7$8.1 million, or 3.5%9.6%. This decreaseincrease is due primarily to a $3.8 million decrease in international direct-to-agency business. Direct-to-agency sales represent large non-recurring contracts consisting primarily of special-make-up ("SMU") uniform product designed for large law enforcement divisions. Retailretail and e-commerce sales grew $4.3growth of $9.1 million or 56%41.9%, driven by growing demand in direct to consumer channels. Retail sales grew largely due to sixteentwelve new retail store openings since September 2016June 2018 (bringing the total store count to 24forty-eight as of SeptemberJune 30, 2017)2019). Net sales were further increased through strong sales growth at Beyond, of $3.6 million or 116.8%, driven by increased contract business. Through the Beyond product category, 5.11 implemented a new Enterprise Resource Planning (ERP) system and as part of the go-live process 5.11 shut down its warehouse as planned on September 28, 2017 to begin the cut-over activities. As a result, 5.11 had less
shipping days during the third quarter of 2017 as compared to the prior year, which resultedoffers technical survival outerwear systems engineered for missions in approximately $4 million to $5 millionextreme temperatures. The increase in sales shifting to the fourth quarter of 2017. The warehouse reopened on October 9, 2017, and 5.11 has resumed warehouse and shipping operations.
Cost of sales
Cost ofnet sales for the three months ended SeptemberJune 30, 2017 were $37.5 million2019 as compared to $46.8 million for the comparablecorresponding period in 2016,the prior year was offset by a decrease$4.8 million decline in professional sales. During the quarters ended March 31, 2018 and June 30, 2018, 5.11 shipped a larger than usual amount of $9.3 million. professional orders as they entered 2018 with a large backlog resulting from the implementation of a new enterprise resource planning (ERP) system in 2017 which affects the quarter over quarter comparison of professional sales.
Gross profit
Gross profit as a percentage of net sales was 48.0%49.0% in the three months ended SeptemberJune 30, 20172019 as compared to 37.3% in the three months ended September 30, 2016. Cost of sales48.0% for the three months ended SeptemberJune 30, 2016 includes $4.7 million in expense related to a $39.1 million inventory step-up resulting from the acquisition purchase price allocation.2018. The total inventory step-up amount of $39.1 million was expensed toprior period cost of goods sold oversales included a higher level of chargebacks and discretionary discounts granted to customers as 5.11 worked through the expected turns of 5.11's inventory. The increasebacklog associated with challenges experienced while implementing the new ERP system. In addition, fewer promotional discounts were granted to wholesale customers in gross profit percentage is due to lower product costs from efficiency in sourcing operations, improved gross margins on new product introductions, and a larger proportion of revenues from the higher margin retail and e-commerce distribution channelscurrent quarter as compared to the same period in 2016.three months ended June 30, 2018.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended SeptemberJune 30, 20172019 was $32.4$38.0 million, or 45.0%,40.9% of net sales compared to $26.0$36.2 million, or 34.8%42.7% of net sales for the comparable period in 2016. This increase in selling, general and administrative expense was primarily due to sixteen new retail stores that were not open2018. The comparable quarter in the prior comparable period, strategic investmentsyear included a higher level of expense for with temporary labor costs associated with the new ERP system and costs to move into sales and marketing, and integration service fees billed by CGM to 5.11.5.11's new Manteca warehouse facility.
LossIncome from operations
LossIncome from operations for the three months ended SeptemberJune 30, 20172019 was $0.3$5.1 million, an increase of $0.1$3.1 million when compared to lossincome from operations of $0.4$2.0 million for the same period in 2016,2018, based on the factors described above.
NineSix months ended SeptemberJune 30, 20172019 compared to the pro forma ninesix months ended SeptemberJune 30, 20162018
Net sales
Net sales for the ninesix months ended SeptemberJune 30, 20172019 were $228.5$180.9 million as compared to net sales of $212.7$168.7 million for the ninesix months ended SeptemberJune 30, 2016,2018, an increase of $15.8$12.2 million, or 7.4%7.3%. This increase is due primarily to an $8.7 million increase in international direct-to-agency business, and increased retail and e-commerce sales. Direct-to-agency sales represent large non-recurring contracts consisting primarilygrowth of SMU uniform product designed for large law enforcement divisions. Retail and e-commerce sales grew $10.7$14.9 million or 45%35.9%, driven by growing demand in direct to consumer channels. Retail sales grew largely due to sixteentwelve new retail store openings since September 2016June 2018 (bringing the total store count to 24forty-eight as of SeptemberJune 30, 2017)2019). Net sales were further increased through strong sales growth at Beyond of $4.8 million or 79.2%, driven by increased contract business. The consumer wholesale channel experienced a $4.2 million decrease due primarily toincrease in net sales for the bankruptcy of a large outdoor retail customer. 5.11 implemented a new Enterprise Resource Planning (ERP) system and as part of the go-live process 5.11 shut down its warehouse as planned on September 28, 2017 to begin the cut-over activities. As a result, 5.11 had less shipping days during the third quarter of 2017six months ended June 30, 2019 as compared to the corresponding period in the prior year which resultedwas offset by a $8.7 million decline in approximately $4 million to $5 million in sales shifting to the fourth quarter of 2017. The warehouse reopened on October 9, 2017, and 5.11 has resumed warehouse and shipping operations.professional sales.
Cost of sales
Cost of sales for the nine months ended September 30, 2017 were $141.6 million as compared to $123.9 million for the comparable period in 2016, an increase of $17.7 million. Gross profit
Gross profit as a percentage of net sales was 38.0%48.9% in the ninesix months ended SeptemberJune 30, 20172019 as compared to 41.8% in47.0% for the ninesix months ended SeptemberJune 30, 2016. Cost2018. The prior period cost of sales forincluded a higher level of chargebacks and discretionary discounts granted to customers as 5.11 worked through the nine months ended September 30, 2017 includes $21.7 million in expense related to a $39.1 million inventory step-up resulting from the acquisition purchase price allocation while the nine months ended September 30, 2016 included $4.7 million in expense related to the inventory step-up resulting from the acquisition purchase price allocation, an increase of $17 million year-over-year. The total inventory step-up amount of $39.1 million was expensed to cost of goods sold over the expected turns of 5.11's inventory. Excluding the effect of the expensebacklog associated with challenges experienced while implementing the inventory step-up in both periods, gross profit as a percentage of sales increased 350 basis points to 47.5% for the nine months ended September 30, 2017 compared to 44.0% for the nine months ended September 30, 2016. This increase in gross profit percentage is due to lower product costs from efficiency in sourcing operations, improved gross margins on new product introductions, and a larger proportion of revenues from the higher margin retail and e-commerce distribution channels as compared to the same period in 2016.ERP system.
Selling, general and administrative expense
Selling, general and administrative expense for the ninesix months ended SeptemberJune 30, 20172019 was $94.0$76.1 million, or 41.1%42.1% of net sales compared to $79.0$73.0 million, or 37.1%,43.2% of net sales for the comparable period in 2016. This2018. The increase in selling, general and administrative expense was primarilylargely due to an accounts receivable reserve for a large outdoor retail customer that filed for bankruptcy, sixteenthe twelve new retail stores that werestore openings since June 2018. The comparable period ended June 30, 2018 included a higher level of expense associated with the move into 5.11’s new Manteca warehouse facility which did not openreoccur in the prior comparable period, strategic investments into sales and marketing, and integration service fees billed by CGM to 5.11.six months ended June 30, 2019.
(Loss) incomeIncome from operations
LossIncome from operations for the ninesix months ended SeptemberJune 30, 20172019 was $14.5$7.4 million, a decreasean increase of $17.5$6.0 million when compared to income from operations of $2.9$1.4 million for the same period in 2016,2018, based on the factors described above.
OverviewErgobaby
Crosman, headquartered in Bloomfield, New York, is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Crosman offers its products under the highly recognizable Crosman, Benjamin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. Airguns historically represent Crosman's largest product category, with more than 50% of gross sales. The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Crosman's other primary product categories are archery, with products including CenterPoint crossbows and the Pioneer Airbow, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, and airsoft products. We made loans |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
Net sales | | $ | 22,971 |
| | 100.0 | % | | $ | 23,954 |
| | 100.0 | % | | $ | 45,423 |
| | 100.0 | % | | $ | 46,116 |
| | 100.0 | % |
Gross profit | | $ | 14,573 |
| | 63.4 | % | | $ | 15,784 |
| | 65.9 | % | | $ | 28,791 |
| | 63.4 | % | | $ | 30,723 |
| | 66.6 | % |
SG&A | | $ | 9,827 |
| | 42.8 | % | | $ | 10,083 |
| | 42.1 | % | | $ | 18,959 |
| | 41.7 | % | | $ | 20,754 |
| | 45.0 | % |
Operating income | | $ | 2,795 |
| | 12.2 | % | | $ | 3,575 |
| | 14.9 | % | | $ | 5,931 |
| | 13.1 | % | | $ | 5,915 |
| | 12.8 | % |
Three months ended June 30, 2019 compared to and purchased a controlling interest in, Crosman for a net purchase price of $150.4 million in June 2017, representing approximately 98.9% of the initial outstanding equity of Crosman Corp.
Results of Operations
In the following results of operations, we provide (i) the actual consolidated results of operations for Crosman for the three months ended SeptemberJune 30, 2017, and (ii) comparative results of operations for Crosman for the nine months ended September 30, 2017 and three and nine months ended September 30, 2016, as if we had acquired the business on January 1, 2016, including relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| | | (Pro forma) | | (Pro forma) |
Net sales | $ | 34,449 |
| | $ | 32,092 |
| | $ | 85,848 |
| | $ | 82,945 |
|
Cost of sales (1) | 29,034 |
| | 23,543 |
| | 67,088 |
| | 61,012 |
|
Gross profit | 5,415 |
| | 8,549 |
| | 18,760 |
| | 21,933 |
|
Selling, general and administrative expense | 5,121 |
| | 3,780 |
| | 13,715 |
| | 11,111 |
|
Fees to manager (2) | 125 |
| | 125 |
| | 375 |
| | 375 |
|
Amortization of intangibles (3) | 1,557 |
| | 1,164 |
| | 3,498 |
| | 3,493 |
|
Income from operations | $ | (1,388 | ) | | $ | 3,480 |
| | $ | 1,172 |
| | $ | 6,954 |
|
Pro forma results of operations of Crosman for the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016 include the following pro forma adjustments, applied to historical results as if we had acquired Crosman on January 1, 2016:
(1)Cost of sales was decreased by $0.2 million for the nine months ended September 30, 2017, and $0.1 million and $0.5 million, respectively, for the three and nine months ended September 30, 2016, to reflect the increase in the depreciable lives for machinery and equipment.
(2) Represents management fees that would have been payable to the Manager in the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016.
(3) Represents amortization of intangible assets in the three and nine month period ended September 30, 2017 and 2016 associated with the allocation of the fair value of intangible assets resulting from the purchase price allocation in connection with our acquisition.
Three months ended September 30, 2017 compared to the pro forma three months ended September 30, 20162018
Net sales
Net sales for the three months ended SeptemberJune 30, 20172019 were $34.4$23.0 million, an increasea decrease of $2.4$1.0 million, or 7.3%4.1%, compared to the same period in 2016.2018. During the three months ended June 30, 2019, international sales were approximately $16.1 million, representing an increase of $1.5 million over the corresponding period in 2018, primarily as a result of increased sales volume at Ergobaby's Asia-Pacific distributors. Domestic sales were $6.9 million in the second quarter of 2019, reflecting a decrease of $2.5 million compared to the corresponding period in 2018. The increasedecrease in domestic sales was driven primarily by the Tula brand within the quarter.
Gross profit
Gross profit as a percentage of net sales was 63.4% for the quarter ended June 30, 2019, as compared to 65.9% for the three months ended SeptemberJune 30, 2017 is primarily2018. The decrease in gross profit was due to growtha shift in the archery products category and an add-on acquisition during the thirdsales mix from higher margin channels to lower margin channels quarter of 2017.
Cost of sales
Cost of sales for the three months ended September 30, 2017 were $29.0 million as compared to $23.5 million for the comparable period in 2016, an increase of $5.5 million, which is consistent with the net sales increase and also includes $3.2 million in expense related to the inventory step-up resulting from the preliminary purchase price allocation. After excluding the impact of the inventory step-up expense, gross profit as a percentage of sales was 24.9% for the three months ended
September 30, 2017 as compared to 26.6% in the three months ended September 30, 2016 due to the mix of products sold during the two periods.
Selling general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2017 was $5.1 million, or 14.9% of net sales compared to $3.8 million, or 11.8% of net sales for the three months ended September 30, 2016. The selling, general and administrative expense for the three months ended September 30, 2017 includes $0.4 million of acquisition related expenses, $0.4 million of integration services fees payable to CGM, $0.2 million of non-recurring consultant fees and increased expenses associated with higher sales.
(Loss) income from operations
Loss from operations for the three months ended September 30, 2017 was $1.4 million, a decrease of $4.9 million when compared to income from operations of $3.5 million for the same period in 2016, based on the factors described above.
Pro forma nine months ended September 30, 2017 compared to the pro forma nine months ended September 30, 2016
Net sales
Net sales for the nine months ended September 30, 2017 were $85.8 million compared to net sales of $82.9 million for the nine months ended September 30, 2016, an increase of $2.9 million or 3.5%. The increase in net sales for the nine months ended September 30, 2017 is primarily due to growth in the archery products category and an add-on acquisition during the third quarter of 2017.
Cost of sales
Cost of sales for the nine month period ended September 30, 2017 were $67.1 million, an increase of $6.1 million as compared to the comparable period in 2016. Cost of sales for the nine months ended September 30, 2017 includes $3.2 million in expense related to the inventory step-up resulting from the preliminary purchase price allocation. Excluding the effect of the inventory step-up, gross profit as a percentage of sales was 25.5% for the nine months ended September 30, 2017 as compared to 26.4% for the nine months ended September 30, 2016 due to the mix of products sold during the two periods.
over quarter.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 was $13.7decreased quarter over quarter, with expense of $9.8 million, or 16.0%42.8% of net sales for the three months ended June 30, 2019 as compared to $11.1$10.1 million or 13.4%,42.1% of net sales for the nine months ended September 30, 2016. Selling, general and administrative expense for the nine months ended September 30, 2017 includes $1.8 millionsame period of 2018. The decrease in transaction costs paid in relation to the acquisition of Crosman in June 2017 and an add-on acquisition at Crosman completed during the third quarter of 2017, as well as $0.4 million in integration services fees payable to CGM. Excluding the transaction costs and integration services fee from the selling, general and administrative expense there was no material changeas a percentage of net sales in expense items.
the three months ended June 30, 2019 as compared to the comparable period in the prior year is due to lower variable expenses related to sales and less fluctuation of exchange rates during the current period.
Income from operations
Income from operations for the ninethree months ended SeptemberJune 30, 2017 was $1.22019 decreased $0.8 million, a decrease of $5.8 million when compared to income from operationsthe same period of $7.0 million for the comparable period in 2016,2018, based on the factors describednoted above.
Ergobaby
Overview
Ergobaby, headquartered in Los Angeles, California, is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, and related products. On May 12, 2016, Ergobaby acquired New Baby Tula LLC (“Baby Tula”) for approximately $73.8 million, excluding a potential earn-out payment. Baby Tula designs, markets and distributes baby carriers and accessories. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors. Historically, Ergobaby derives approximately 59% of its sales from outside of the United States.
Results of Operations
The table below summarizes the income from operations data for Ergobaby for the three and nineSix months ended SeptemberJune 30, 2017 and September 30, 2016.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Net sales | $ | 27,835 |
|
| $ | 29,664 |
| | $ | 77,737 |
| | $ | 75,048 |
|
Cost of sales | 9,003 |
|
| 13,818 |
| | 25,491 |
| | 29,169 |
|
Gross profit | 18,832 |
|
| 15,846 |
| | 52,246 |
| | 45,879 |
|
Selling, general and administrative expense | 9,973 |
|
| 9,947 |
| | 28,359 |
| | 27,489 |
|
Fees to manager | 125 |
|
| 125 |
| | 375 |
| | 375 |
|
Amortization of intangibles | 2,850 |
|
| 552 |
| | 8,784 |
| | 1,700 |
|
Loss on disposal of assets | — |
| | 551 |
| | — |
| | 7,214 |
|
Income from operations | $ | 5,884 |
|
| $ | 4,671 |
| | $ | 14,728 |
| | $ | 9,101 |
|
Three2019 compared to six months ended SeptemberJune 30, 2017 compared to the three months ended September 30, 20162018
Net sales
Net sales for the threesix months ended SeptemberJune 30, 20172019 were $27.8$45.4 million, a decrease of $1.8$0.7 million, or 6.2%1.5%, compared to the same period in 2016. Net sales from Baby Tula for the third quarter were $4.8 million, compared to $5.8 million for the corresponding period in 2016.2018. During the second quarter of 2016, Ergobaby’s board of directors approved a plan to dispose of the Orbit Baby infant travel system product line. Net sales from Orbit Baby branded infant travel systems were $1.6 million for the threesix months ended SeptemberJune 30, 2016. During the three months ended September 30, 2017,2019, international sales were approximately $17.0$31.2 million, representing a decreasean increase of $0.3$2.7 million over the corresponding period in 2016. International2018, primarily as a result of increased sales from Baby Tula for the third quarter of 2017 were $1.6 million. International sales of baby carriers and accessories, including Baby Tula, increased by approximately $0.8 million and international sales of infant travel systems decreased by approximately $0.5 million during the quarter ended September 30, 2017 as compared to the comparable quarter in 2016.volume at Ergobaby's Asia-Pacific distributors. Domestic sales were $10.8$14.2 million in the third quarterfirst half of 2017,2019, reflecting a decrease of $2.1$3.4 million compared to the corresponding period in 2016.2018. The decrease in domestic sales was due toprimarily the result of a $1.0 million decrease in domestic sales of infant travel systems and accessories and a $1.1 million decrease in sales of baby carrier and accessories. Baby carriers and accessories represented 100% of salesdecline in the three months ended September 30, 2017 compared to 95% in the same period in 2016.Tula domestic business.
Cost of salesGross profit
Cost of sales was approximately $9.0 million for the three months ended September 30, 2017, as compared to $13.8 million for the three months ended September 30, 2016, a decrease of $4.8 million. Cost of sales for the quarter ended September 30, 2016 included expense of $3.7 million related to the inventory step-up at Baby Tula resulting from the purchase price allocation. The remaining increase in cost of sales is primarily attributable to the reduction of sales compared to the prior period. Gross profit as a percentage of net sales was 67.7%63.4% for the six months ended June 30, 2019, as compared to 66.6% for the six months ended June 30, 2018. The decrease in gross profit was due to a shift in the sales mix from higher margin channels to lower margin channels.
Selling, general and administrative expense
Selling, general and administrative expense decreased $1.8 million for the six months ended June 30, 2019 as compared to the corresponding period in the prior year, with expense of $19.0 million, or 41.7% of net sales for the six months ended June 30, 2019 as compared to $20.8 million or 45.0% of net sales for the corresponding period in 2018. The decrease in selling, general and administrative expense as a percentage of net sales in the six months ended June 30, 2019 as compared to the comparable period in the prior year is due to expenses related to the bankruptcy of a large U.S. retail customer that were incurred in the first quarter of 2018, reduction in marketing spend, lower variable expenses related to sales, and a decrease in payroll expense during the current period.
Income from operations
Income from operations for both the six months ended June 30, 2019 and 2018 was $5.9 million, based on the factors noted above.
Liberty Safe
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
Net sales | | $ | 20,633 |
| | 100.0 | % | | $ | 20,416 |
| | 100.0 | % | | 42,837 |
| | 100.0 | % | | 43,869 |
| | 100.0 | % |
Gross profit | | $ | 4,649 |
| | 22.5 | % | | $ | 5,019 |
| | 24.6 | % | | 9,070 |
| | 21.2 | % | | 11,268 |
| | 25.7 | % |
SG&A | | $ | 2,847 |
| | 13.8 | % | | $ | 3,265 |
| | 16.0 | % | | 5,710 |
| | 13.3 | % | | 6,556 |
| | 14.9 | % |
Operating income | | $ | 1,671 |
| | 8.1 | % | | $ | 1,612 |
| | 7.9 | % | | 3,086 |
| | 7.2 | % | | 4,427 |
| | 10.1 | % |
Three months ended June 30, 2019 compared to three months ended June 30, 2018
Net sales
Net sales for the quarter ended SeptemberJune 30, 2017, as2019 increased approximately $0.2 million, or 1.1%, to $20.6 million, compared to 65.9% (excluding the effect of the inventory step-upcorresponding quarter ended June 30, 2018. Non-Dealer sales were comparable quarter over quarter at Baby Tula) forapproximately $8.2 million in both the three months ended SeptemberJune 30, 2016.2019 and June 30, 2018. Dealer sales totaled approximately $12.5 million in the three months ended June 30, 2019 compared to $12.2 million in the same period in 2018, representing an increase of $0.3 million or 2.5%.
Gross profit
Gross profit as a percentage of net sales totaled approximately 22.5% and 24.6% for the quarters ended June 30, 2019 and June 30, 2018, respectively. The decrease in gross profit as a percentage of net sales during the three months ended June 30, 2019 compared to the same period in 2018 is primarily attributable to capitalized inventory variances and lower profit on dealer sales in the current quarter.
Selling, general and administrative expense
Selling, general and administrative expense was $10.0$2.8 million or 35.8% of net sales for the three months ended SeptemberJune 30, 2017 as2019 compared to $9.9$3.3 million or 33.5%for the three months ended June 30, 2018. The decrease in selling, general and administrative expense during the current quarter is primarily related to planned expense reductions and the timing of annual advertising spend. Selling, general and administrative expense represented 13.8% of net sales in the three months ended June 30, 2019 and 16.0% of net sales for the same period of 2016. While selling, general and administrative expenses were flat, this resulted from an increase in a bad debt reserve related to a large retail customer that filed for bankruptcy during the third quarter of 2017, which was offset by lower professional fees.
Loss on disposal of assets
Ergobaby recorded a $0.6 million loss on disposal of assets during the third quarter of 2016 related to its decision to dispose of the Orbit Baby product line.
2018.
Income from operations
Income from operations forincreased during the three months ended SeptemberJune 30, 2017 increased $1.22019 to $1.7 million, to $5.9 million,as compared to $4.7$1.6 million forin the samecorresponding period of 2016,in 2018. This increase was primarily as a result of the loss on disposal of assets and the absence of the inventory step-up at Baby Tula that was recorded in 2016.factors noted above.
NineSix months ended SeptemberJune 30, 20172019 compared to ninesix months ended SeptemberJune 30, 2016
Net sales
Net sales for the nine months ended September 30, 2017 were $77.7 million, an increase of $2.7 million, or 3.6%, compared to the same period in 2016. Net sales from Baby Tula for the nine months ended September 30, 2017 were $16.5 million, compared to $10.6 million in sales in the post-May acquisition period in 2016. During the nine months ended September 30, 2017, international sales were approximately $46.3 million, representing an increase of $5.6 million over the corresponding period in 2016. International sales of baby carriers and accessories increased by approximately $6.8 million and international sales of infant travel systems decreased by approximately $1.2 million during the nine months ended September 30, 2017 as compared to the comparable nine month period in 2016. BabyTula international sales during the nine months ended September 30, 2017 increased $2.8 million from the corresponding period in 2017. Domestic sales were $31.4 million during the nine months ended September 30, 2017, reflecting a decrease of $2.9 million compared to the corresponding period in 2016. The decrease in domestic sales is attributable to a $4.4 million decrease in domestic infant travel systems and accessories sales, a $1.7 million decrease in sales of Ergo branded baby carrier and accessories to national and specialty retail accounts, partially offset by a $3.2 million increase in Baby Tula domestic sales. The decrease in baby carrier and accessories sales was attributable to the overall weakness in the U.S. retail market during the nine months ended September 30, 2017. The decrease in infant travel systems and accessories sales was primarily attributable to exiting the Orbit Baby business during 2016. Baby carriers and accessories represented 100% of sales in the nine months ended September 30, 2017 compared to 92% in the same period in 2016.
Cost of sales
Cost of sales was approximately $25.5 million for the nine months ended September 30, 2017, as compared to $29.2 million for the nine months ended September 30, 2016, a decrease of $3.7 million. Cost of sales for the nine months ended September 30, 2016 included expense of $3.7 million related to the inventory step-up at Baby Tula resulting from the purchase price allocation. Gross profit as a percentage of sales was 67.2% for the nine months ended September 30, 2017 compared to 66.1% for the same period in 2016 after excluding the effect of the inventory step-up at Baby Tula.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 increased to approximately $28.4 million, or 36.5%, of net sales compared to $27.5 million or 36.6% of net sales for the same period of 2016. The $0.9 million increase in the nine months ended September 30, 2017 compared to the same period in 2016 is primarily attributable to increases in variable expenses, such as distribution and fulfillment and commission, due to the increases in direct market sales, to increases in employee related costs due to increased staffing levels, due in part to the addition of Baby Tula in 2016 and to a bad debt reserve related to a large retail customer that filed for bankruptcy in the third quarter of 2017. These increases were partially offset by lower professional fees and marketing expenses, due to the timing of marketing spend, and to lower acquisition costs, related to the 2016 Baby Tula acquisition.
Amortization of intangible assets
Amortization of intangible assets increased $7.1 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 due primarily to the amortization of intangible assets associated with the acquisition of Baby Tula in the prior year.
Loss on disposal of assets
Ergobaby recorded a $7.2 million loss on disposal of assets during 2016 related to its decision to dispose of the Orbit Baby product line. The loss was comprised of the write-off of intangible assets of $5.5 million, property, plant and equipment of $0.4 million, and other assets of $1.0 million. Ergobaby also recorded expense of $0.3 million related to the early termination of the Orbitbaby lease.
Income from operations
Income from operations for the nine months ended September 30, 2017 increased $5.6 million, to $14.7 million, compared to $9.1 million for the same period of 2016, primarily as a result of the loss on disposal of assets that was recorded in 2016.
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 300,000 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 Cabela’s, Case IH, Colt 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 55% of Liberty Safe’s net sales are Non-Dealer sales and 45% are Dealer sales.
Results of Operations
The table below summarizes the income from operations data for Liberty Safe for the three and nine months ended September 30, 2017 and September 30, 2016.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Net sales | $ | 18,423 |
|
| $ | 23,810 |
| | $ | 66,008 |
| | $ | 74,713 |
|
Cost of sales | 13,026 |
|
| 17,680 |
| | 47,157 |
| | 53,197 |
|
Gross profit | 5,397 |
|
| 6,130 |
| | 18,851 |
| | 21,516 |
|
Selling, general and administrative expense | 3,204 |
|
| 3,332 |
| | 11,284 |
| | 10,483 |
|
Fees to manager | 125 |
|
| 125 |
| | 375 |
| | 375 |
|
Amortization of intangibles | 18 |
|
| 256 |
| | 292 |
| | 779 |
|
Income from operations | $ | 2,050 |
|
| $ | 2,417 |
| | $ | 6,900 |
| | $ | 9,879 |
|
Three months ended September 30, 2017 compared to the three months ended September 30, 20162018
Net sales
Net sales for the quartersix months ended SeptemberJune 30, 20172019 decreased approximately $5.4$1.0 million, or 22.6%2.4%, to $18.4$42.8 million, compared to the corresponding quartersix months ended SeptemberJune 30, 2016.2018. Non-Dealer sales were approximately $7.9$15.8 million in the threesix months ended SeptemberJune 30, 20172019 compared to $11.9$17.2 million for the threesix months ended SeptemberJune 30, 2016 representing a decrease of $4.0 million, or 33.6%. Dealer sales totaled approximately $10.5 million in the three months ended September 30, 2017 compared to $11.9 million in the same period in 2016,2018, representing a decrease of $1.4 million, or 11.8%8.1%. The decrease in third quarter 2017is Non-Dealer sales for the Non-Dealer channel iswas primarily attributabledue to the bankruptcy filing by a national retailer in the first quarter of 2017. The decrease in sales in the Dealer channel can be attributed to lower overall marketsofter demand in the third quarter of 2017 assporting goods channel. Dealer sales totaled approximately $27.0 million in the six months ended June 30, 2019 compared to the third quarter of 2016.
Cost of sales
Cost of sales for the three months ended September 30, 2017 decreased approximately $4.7$26.6 million when compared toin the same period in 2016. 2018, representing an increase of $0.4 million or 1.5%.
Gross profit
Gross profit as a percentage of net sales totaled approximately 29.3%21.2% and 25.7% for the quarterssix months ended SeptemberJune 30, 20172019 and SeptemberJune 30, 2016,2018, respectively. The increasedecrease in gross profit as a percentage of net sales during the threesix months ended SeptemberJune 30, 20172019 compared to the same period in 20162018 is primarily attributable to lower salesincreases in raw material and capitalized manufacturing variances. Liberty saw a rise in raw material costs, particularly the cost of steel, during 2018 as the tariffs on imported steel led to national accounts, which have lower margins,higher domestic steel prices. We anticipate steel prices will begin to decline in the third quarterback half of 2017 versus2019. On average, materials account for approximately 60% of the prior year.total costs of a safe, with steel accounting for 40% of material costs.
Selling, general and administrative expense
Selling, general and administrative expense was $3.2$5.7 million for the threesix months ended SeptemberJune 30, 20172019 compared to $3.3$6.6 million for the threesix months ended SeptemberJune 30, 2016.2018. The decrease in selling, general and administrative expense during the first six months of 2019 is primarily related to planned expense reductions and the timing of annual adverting spend. Selling, general and administrative expense represented 17.4%13.3% of net sales in 2017the six months ended June 30 31, 2019 and 14.0%14.9% of net sales for the same period of 2016. The increase in selling, general and administrative expense as a percentage of net sales is a result of the decrease in net sales for the quarter ended September 30, 2017 as compared to the corresponding third quarter in 2016.
2018.
Income from operations
Income from operations decreased $0.4$1.3 million during the threesix months ended SeptemberJune 30, 20172019 to $2.1$3.1 million, compared to the corresponding period in 2016.2018. This decrease was principally based on the factors described above.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Net sales
Net sales for the nine months ended September 30, 2017 decreased approximately $8.7 million or 11.7%, to $66.0 million, compared to the corresponding nine months ended September 30, 2016. Non-Dealer sales were approximately $29.9 million in the nine months ended September 30, 2017 compared to $36.4 million for the nine months ended September 30, 2016, representing a decrease of $6.5 million or 17.9%. Dealer sales totaled approximately $36.1 million in the nine months ended
September 30, 2017 compared to $38.3 million in the same period in 2016, representing a decrease of $2.2 million or 5.7%. The decrease in sales is attributable to lower overall market demand.
Cost of sales
Cost of sales for the nine months ended September 30, 2017 decreased approximately $6.0 million when compared to the same period in 2016. Gross profit as a percentage of net sales totaled approximately 28.6% and 28.8% for the nine months ended September 30, 2017 and September 30, 2016, respectively. The decrease in gross profit as a percentage of sales during the nine months ended September 30, 2017 compared to the same period in 2016 is attributable to higher raw material costs, offset by gains in manufacturing efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 increased to approximately $11.3 million or 17.1% of net sales compared to $10.5 million or 14.0% of net sales for the same period of 2016. The $0.8 million increase during the nine months ended September 30, 2017 is primarily attributable to a $1.4 million reserve established to reserve against outstanding accounts receivable of a retail customer that filed for bankruptcy in the first quarter of 2017.
Income from operations
Income from operations decreased $3.0 million during the nine months ended September 30, 2017 to $6.9 million, compared to $9.9 million during the same period in 2016, principally as a result of the decrease in sales, as describedgross profit in the first six months of the current year, for the reasons noted above.
Overview
Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and leader in branded, hemp-based foods and ingredients. Manitoba Harvest’s products, which management believes are one of the fastest growing in the hemp food market and among the fastest growing in the natural foods industry, are currently carried in approximately 13,000 retail stores across the United States and Canada. The Company’s hemp-based, 100% all-natural consumer products include hemp hearts, protein powder, hemp oil and snacks.
Results of Operations
The table below summarizes the income from operations data for Manitoba Harvest for the three and nine months ended September 30, 2017 and September 30, 2016.
Velocity Outdoor
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Net sales | $ | 13,948 |
| | $ | 15,920 |
| | $ | 42,625 |
| | $ | 44,321 |
|
Cost of sales | 7,792 |
| | 8,988 |
| | 23,412 |
| | 24,442 |
|
Gross profit | 6,156 |
| | 6,932 |
| | 19,213 |
| | 19,879 |
|
Selling, general and administrative expense | 5,065 |
| | 5,072 |
| | 15,502 |
| | 17,075 |
|
Fees to manager | 87 |
| | 88 |
| | 262 |
| | 261 |
|
Amortization of intangibles | 1,173 |
| | 1,218 |
| | 3,374 |
| | 3,408 |
|
Income (loss) from operations | $ | (169 | ) | | $ | 554 |
| | $ | 75 |
| | $ | (865 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
Net sales | | $ | 29,611 |
| | 100.0 | % | | $ | 35,570 |
| | 100.0 | % | | 60,748 |
| | 100.0 | % | | 59,977 |
| | 100.0 | % |
Gross profit | | $ | 7,531 |
| | 25.4 | % | | $ | 10,224 |
| | 28.7 | % | | 16,818 |
| | 27.7 | % | | 17,303 |
| | 28.8 | % |
SG&A | | $ | 5,201 |
| | 17.6 | % | | $ | 5,871 |
| | 16.5 | % | | 11,744 |
| | 19.3 | % | | 11,342 |
| | 18.9 | % |
Operating income (loss) | | $ | (74 | ) | | (0.2 | )% | | $ | 3,019 |
| | 8.5 | % | | 267 |
| | 0.4 | % | | 3,292 |
| | 5.5 | % |
Three months ended SeptemberJune 30, 20172019 compared to three months ended SeptemberJune 30, 2016
2018
Net sales
Net sales for the three months ended SeptemberJune 30, 20172019 were approximately $13.9$29.6 million, as compared to $15.9 million for the three months ended September 30, 2016, a decrease of $2.0$6.0 million or 12.4%. During16.8%, compared to the third quarter of 2017, Manitoba Harvest experienced declining ingredients shipments to Asia as well as weak sales of protein powders. This was offset by the return of organic hemp hearts to store shelves after a lack of availabilitysame period in organic based hemp seeds2018. The decrease in 2016, which helped drive growth with key retailers in the United States and Canada. In addition, the company experienced strong growth in their core product line with key online retailers.
Cost of sales
Cost ofnet sales for the three months ended SeptemberJune 30, 2017 was approximately $7.82019 is primarily due to the Junior Reserve Officer Training Corps (JROTC) contract shipments in the second quarter of 2018, which did not recur in the current year.
Gross profit
Gross profit for the quarter ended June 30, 2019 decreased $2.7 million as compared to approximately $9.0 million for the same period in 2016.quarter ended June 30, 2018. Gross profit as a percentage of net sales was 44.1%25.4% for the three months ended June 30, 2019 as compared to 28.7% in the quarterthree months ended SeptemberJune 30, 2017 and 43.5% in the quarter ended September 30, 2016.2018. The increasedecrease in gross profit as a percentage of net sales in the third quarter of 2017 as compared to the same quarter in the prior year iswas primarily attributable to highermargins associated with 2018 JROTC sales of branded hemp products in 2017, which have a higher gross margin percentage than bulk ingredient products.as well as with product mix.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended SeptemberJune 30, 20172019 was approximately $5.1$5.2 million, in both the third quarter of 2017 and 2016. Selling, general and administrative expense was 36.3%or 17.6% of net sales in the third quarter of 2017 as compared to 31.9%$5.9 million, or 16.5% of net sales for the same period in 2016.three months ended June 30, 2018. The increasedecrease in selling, general and administrative expense as a percentage of sales infor the three months ended SeptemberJune 30, 2017 compared2019 is primarily related to lower sales related expenses and the same periodintegration fees paid to CGM in 2016 was primarily due to ongoing investments in key operating capability initiatives such as marketing, sales and research and development.the prior year, partially offset by the expenses associated with the Ravin Crossbows acquisition.
Income (loss) from operations
IncomeLoss from operations for the three months ended SeptemberJune 30, 2017 decreased $0.72019 was $0.1 million, a decrease of $3.1 million when compared to income from operations of $3.0 million for the same period in 2016,2018, based on the factors described above.
NineSix months ended SeptemberJune 30, 20172019 compared to ninesix months ended SeptemberJune 30, 20162018
Net sales
Net sales for the ninesix months ended SeptemberJune 30, 20172019 were approximately $42.6$60.7 million, as compared to $44.3 million for the nine months ended September 30, 2016, a decreasean increase of $1.7$0.8 million or 3.8%. Manitoba Harvest experienced declines in bulk hemp seed ingredient sales to international markets. This was partially offset by growth in their Canadian retail, U.S. club and online businesses, driven by sales of branded hemp heart products and hemp oil.
Cost of sales
Cost of sales for the nine months ended September 30, 2017 was approximately $23.4 million1.3%, compared to approximately $24.4 million for the same period in 2016. 2018. The increase in net sales for the six months ended June 30, 2019 is primarily due to the add-on acquisition of Ravin Crossbows, which had net sales of $15.5 million in the six months ended June 30, 2019, partially offset by sales associated with the Junior Reserve Officer Training Corps (JROTC) contract that shipped in the first half of 2018.
Gross profit
Gross profit as a percentage of net sales was 45.1%27.7% for the six months ended June 30, 2019 as compared to 28.8% in the ninesix months ended SeptemberJune 30, 2017 and 44.9%2018. The decrease in gross profit of $0.5 million was driven primarily by the nine months ended September 30, 2016. For the first nine monthsimpact of the year, gross profit margins in our branded business expanded due to improving product mix and lower material costs. Gross profit margins in our ingredient business declined due to a more competitive pricing environment and less fixed cost leverage.
2018 JROTC contract partially offset by the acquisition of Ravin Crossbows.
Selling, general and administrative expense
Selling, general and administrative expense for the ninesix months ended SeptemberJune 30, 2017 decreased to approximately $15.52019 was $11.7 million, or 36.4%19.3% of net sales compared to $17.1$11.3 million, or 38.5%18.9% of net sales for the same period in 2016. The $1.6 million decrease in the ninesix months ended SeptemberJune 30, 2017 compared2018. The increase in selling, general and administrative expense for the six months ended June 30, 2019 is primarily related to the same period in 2016 was primarily dueacquisition of Ravin partially offset by sales related expenses along with the nonrecurrence of integration fees paid to lower customer shipping costs, more efficient field selling operations and the timing of our consumer promotion spending.CGM.
Income (loss) from operations
Income from operations for the ninesix months ended SeptemberJune 30, 20172019 was approximately $0.1$0.3 million, a decrease of $3.0 million when compared to lossincome from operations of $0.9$3.3 million infor the same period in 2016,2018, based on the factors described above.
Niche Industrial Businesses
Advanced Circuits
Advanced Circuits is a provider of small-run, quick-turn and volume production printed circuit boards ("PCBs") to customers throughout the United States. Historically, small-run and quick-turn PCBs have represented approximately 54% of Advanced Circuits’ gross 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.
Results of Operations
The table below summarizes the income from operations data for Advanced Circuits for the three and nine months ended September 30, 2017 and September 30, 2016.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Net sales | $ | 22,436 |
| | $ | 21,679 |
| | $ | 66,404 |
| | $ | 64,945 |
|
Cost of sales | 12,137 |
| | 12,066 |
| | 36,095 |
| | 36,024 |
|
Gross profit | 10,299 |
| | 9,613 |
| | 30,309 |
| | 28,921 |
|
Selling, general and administrative expense | 3,673 |
| | 3,417 |
| | 10,895 |
| | 10,370 |
|
Fees to manager | 125 |
| | 125 |
| | 375 |
| | 375 |
|
Amortization of intangibles | 310 |
| | 312 |
| | 933 |
| | 935 |
|
Income from operations | $ | 6,191 |
| | $ | 5,759 |
| | $ | 18,106 |
| | $ | 17,241 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
Net sales | | $ | 22,439 |
| | 100.0 | % | | $ | 22,967 |
| | 100.0 | % | | 45,508 |
| | 100.0 | % | | 45,030 |
| | 100.0 | % |
Gross profit | | $ | 10,461 |
| | 46.6 | % | | $ | 10,489 |
| | 45.7 | % | | 21,065 |
| | 46.3 | % | | 20,515 |
| | 45.6 | % |
SG&A | | $ | 3,761 |
| | 16.8 | % | | $ | 3,688 |
| | 16.1 | % | | 7,528 |
| | 16.5 | % | | 7,346 |
| | 16.3 | % |
Operating income | | $ | 6,484 |
| | 28.9 | % | | $ | 6,368 |
| | 27.7 | % | | 12,965 |
| | 28.5 | % | | 12,300 |
| | 27.3 | % |
Three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018
Net sales
Net sales for the three months ended SeptemberJune 30, 2017 increased2019 were $22.4 million, a decrease of approximately $0.8$0.5 million to $22.4 millionor 2.3% compared to the three months ended SeptemberJune 30, 2016.2018. The increasedecrease in net sales was due to increased sales in Quick-Turn Production PCBs by approximately $0.3 million, Long-Lead Time PCBs by approximately $0.4 million, and Subcontract by approximately $0.2 million, partially offset by decreased sales in Quick-Turn Small-Run PCBs, Quick-Turn Production PCBs and subcontract, partially offset by approximately $0.3 million. Onincreased sales in Long-Lead Time PCBs and a consolidated basis,decrease in promotions. Quick-Turn Small-Run PCBs comprised approximately 20.2%19.3% of gross sales and Quick-turn productionQuick-Turn Production PCBs represented approximately 32.4%31.6% of gross sales for the thirdsecond quarter 2017.of 2019. Quick-Turn Small-Run PCBs comprised approximately 21.9%19.1% of gross sales and Quick-turn productionQuick-Turn Production PCBs represented approximately 32.1%32.9% of gross sales for the thirdsecond quarter 2016.of 2018.
Gross profit
Cost of sales
Cost of sales for both the three months ended September 30, 2017 and the three months ended September 30, 2016 were $12.1 million. Gross profit as a percentage of net sales increased 16090 basis points during the three months ended SeptemberJune 30, 20172019 compared to the corresponding period in 2016 (45.9%2018 (46.6% at SeptemberJune 30, 20172019 compared to 44.3%45.7% at SeptemberJune 30, 2016)2018) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $3.8 million in the three months ended June 30, 2019 compared to $3.7 million in the three months ended SeptemberJune 30, 2017 and $3.4 million in the three months ended September 30, 2016.2018. Selling, general and administrative expense represented 16.4%16.8% of net sales for the three months ended SeptemberJune 30, 20172019 compared to 15.8%16.1% of net sales in the corresponding period in 2016.2018.
Income from operations
Income from operations for the three months ended SeptemberJune 30, 20172019 was approximately $6.2$6.5 million compared to $5.8$6.4 million in the same period in 2016,2018, an increase of approximately $0.4$0.1 million, principally as a result of the factors described above.
NineSix months ended SeptemberJune 30, 20172019 compared to ninesix months ended SeptemberJune 30, 20162018
Net sales
Net sales for the ninesix months ended SeptemberJune 30, 2017 increased2019 were $45.5 million, an increase of approximately $1.5$0.5 million to $66.4 million asor 1.1% compared to the ninesix months ended SeptemberJune 30, 2016.2018. The increase in net sales during the nine months ended September 30, 2017 was due to increased sales in Quick-Turn Production PCBs by approximately $1.2 million, Long-Lead Time PCBs, by approximately $0.7 million, Subcontract by approximately $0.5 million,PCBs, and decreaseda decrease in promotions, by approximately $0.3 million. This was partially offset by decreasesdecreased sales in Assembly by approximately $0.7 million andQuick-Turn Production PCBs. Quick-Turn Small-Run PCBs by approximately $0.6 million. On a consolidated basis, Quick-Turn Small-Run comprised approximately 20.7% of gross sales and Quick-Turn Production PCBs represented approximately 32.9% of gross sales for the nine months ended September
30, 2017. Quick-Turn Small-Run comprised approximately 21.9%19.3% of gross sales and Quick-Turn Production PCBs represented approximately 31.7% of gross sales for the ninesix months ended SeptemberJune 30, 2016.
Cost2019. Quick-Turn Small-Run PCBs comprised approximately 19.2% of gross sales
Cost and Quick-Turn Production PCBs represented approximately 33.6% of gross sales for the ninesix months ended SeptemberJune 30, 2017 was $36.1 million as compared to $36.0 million for the nine months ended September 30, 2016. 2018.
Gross profit
Gross profit as a percentage of net sales increased 11070 basis points during the ninesix months ended SeptemberJune 30, 20172019 compared to the samecorresponding period in 2016 (45.6%2018 (46.3% at SeptemberJune 30, 20172019 compared to 44.5%45.6% at SeptemberJune 30, 2016)2018) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $10.9$7.5 million in the ninesix months ended SeptemberJune 30, 2017 as2019 compared to $10.4$7.3 million in the ninesix months ended SeptemberJune 30, 2016.2018. Selling, general and administrative expense represented 16.4%16.5% of net sales for the ninesix months ended SeptemberJune 30, 20172019 compared to 16.0%16.3% of net sales in the prior year's corresponding period.
period in 2018.
Income from operations
Income from operations for the ninesix months ended SeptemberJune 30, 20172019 was approximately $18.1$13.0 million compared to $17.2$12.3 million in the same period in 2016,2018, an increase of approximately $0.9$0.7 million, principally as a result of the factors described above.
Arnold Magnetics
Overview
Founded in 1895 and headquartered in Rochester, New York, Arnold Magnetics is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, motorsport/automotive, oil and gas, medical, general industrial, electric utility, reprographics and advertising specialties markets. Arnold is the largest and, we believe, most technically advanced U. S. manufacturer of engineered magnets. Arnold is one of two domestic producers to design, engineer and manufacture rare earth magnetic solutions. Arnold operates a 70,000 square foot manufacturing assembly and distribution facility in Rochester, New York with nine additional facilities worldwide, including sites in the United Kingdom, Switzerland and China. Arnold serves customers via three primary product sectors:
Permanent Magnet and Assemblies and Reprographics (PMAG) (historically approximately 70% of net sales) - High performance permanent magnets and magnetic assemblies with a wide variety of applications including precision motor/generator sensors as well as beam focusing and reprographics applications;
Flexible Magnets ("Flexmag") (historically approximately 20% of net sales) - Flexible bonded magnetic materials for commercial printing, advertising, and industrial applications; and
Precision Thin Metals ("PTM") (historically approximately 10% of net sales) - Ultra thin metal foil products utilizing magnetic and non- magnetic alloys.
Results of Operations
The table below summarizes the income from operations data for Arnold Magnetics for the three and nine months ended September 30, 2017 and September 30, 2016.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Net sales | $ | 26,489 |
| | $ | 26,912 |
| | $ | 79,421 |
| | $ | 82,791 |
|
Cost of sales | 19,136 |
| | 20,520 |
| | 58,847 |
| | 63,829 |
|
Gross profit | 7,353 |
| | 6,392 |
| | 20,574 |
| | 18,962 |
|
Selling, general and administrative expense | 4,374 |
| | 4,535 |
| | 13,285 |
| | 12,117 |
|
Fees to manager | 125 |
| | 125 |
| | 375 |
| | 375 |
|
Amortization of intangibles | 854 |
| | 881 |
| | 2,601 |
| | 2,642 |
|
Impairment expense | — |
| | — |
| | 8,864 |
| | — |
|
Income (loss) from operations | $ | 2,000 |
| | $ | 851 |
| | $ | (4,551 | ) | | $ | 3,828 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
Net sales | | $ | 29,481 |
| | 100.0 | % | | $ | 31,196 |
| | 100.0 | % | | 59,509 |
| | 100.0 | % | | 60,595 |
| | 100.0 | % |
Gross profit | | $ | 7,852 |
| | 26.6 | % | | $ | 8,785 |
| | 28.2 | % | | 15,091 |
| | 25.4 | % | | 16,495 |
| | 27.2 | % |
SG&A | | $ | 4,690 |
| | 15.9 | % | | $ | 4,857 |
| | 15.6 | % | | 9,487 |
| | 15.9 | % | | 9,856 |
| | 16.3 | % |
Operating income | | $ | 2,227 |
| | 7.6 | % | | $ | 2,945 |
| | 9.4 | % | | 3,704 |
| | 6.2 | % | | 4,670 |
| | 7.7 | % |
Three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018
Net sales
Net sales for the three months ended SeptemberJune 30, 20172019 were approximately $26.5$29.5 million, a decrease of $0.4$1.7 million compared to the same period in 2016. 2018. The decrease in net sales is primarily a result of a decrease in reprographic sales in the PMAG reporting unit.lower demand across various markets. International sales were $10.6$11.8 million in the three months ended SeptemberJune 30, 2017 as compared to $12.22019 and $12.3 millionin the three months ended SeptemberJune 30, 2016, a decrease of $1.7 million, primarily as a result of the decrease in sales at PMAG.2018.
Cost of salesGross profit
Cost of salesGross profit for the three months ended SeptemberJune 30, 2017 were2019 was approximately $19.1$7.9 million compared to approximately $20.5$8.8 million in the same period of 2016.2018. Gross profit as a percentage of net sales increaseddecreased from 23.8%28.2% for the quarter ended SeptemberJune 30, 20162018 to 27.8%26.6% in the quarter ended SeptemberJune 30, 20172019 principally due to manufacturing efficiencies and favorable sales mix.
mix in the current quarter versus the comparable quarter in the prior year.
Selling, general and administrative expense
Selling, general and administrative expense in the three month period ended SeptemberJune 30, 20172019 was $4.4$4.7 million, comparablewhich compared favorably to approximately $4.5$4.9 million for the three months ended SeptemberJune 30, 2016.
2018. Selling, general and administrative expense was 15.9% of net sales in the three months ended June 30, 2019 and 15.6% in the three months ended June 30, 2018.
Income from operations
Income from operations for the three months ended SeptemberJune 30, 20172019 was approximately $2.0 million, an increase of $1.1 million when compared to the same period in 2016, principally as a result of the factors noted above.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Net sales
Net sales for the nine months ended September 30, 2017 were approximately $79.4 million, a decrease of $3.4 million compared to the same period in 2016. The decrease in net sales is primarily a result of decreases in the PMAG ($1.8 million) and Flexmag ($1.5 million) product sectors. PMAG sales represented approximately 73% of net sales for the nine months ended September 30, 2017 and 72% of net sales for the nine months ended September 30, 2016. The decrease in PMAG sales is principally attributable to lower sales of reprographic products. The decrease in Flexmag sales is attributable to lower overall customer demand.
International sales were $31.7 million during the nine months ended September 30, 2017 compared to $33.7 million during the same period in 2016, a decrease of $2.0 million or 5.9%. The decrease in international sales is due to a decrease in sales at PMAG.
Cost of sales
Cost of sales for the nine months ended September 30, 2017 were approximately $58.8 million compared to approximately $63.8 million in the same period of 2016. Gross profit as a percentage of sales increased from 22.9% for the nine months ended September 30, 2016 to 25.9% in the nine months ended September 30, 2017 principally due to a reduction in material costs and lower depreciation expense.
Selling, general and administrative expense
Selling, general and administrative expense in the nine month period ended September 30, 2017 was $13.3 million as compared to approximately $12.1 million for the nine months ended September 30, 2016. The increase in expense is primarily attributable to increased legal and professional fees.
Impairment expense
Arnold performed an interim impairment test at each of its reporting units in the fourth quarter of 2016, which resulted in the recording of preliminary impairment expense of the PMAG reporting unit of $16.0 million. In the first quarter of 2017, Arnold completed the impairment testing of the PMAG reporting unit and recorded an additional $8.9 million impairment expense based on the results of the Step 2 impairment testing.
(Loss) income from operations
Loss from operations for the nine months ended September 30, 2017 was approximately $4.6 million, a decrease of $8.4 million when compared to the same period in 2016, principally as a result of the impairment expense recognized in the first quarter of 2017, and the factors described above. Excluding the impairment expense, income from operations increased $0.5 million, or 12%, when compared to the same period in 2016.
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, medical, 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 four 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.
Results of Operations
The table below summarizes the income from operations data for Clean Earth for the three and nine months ended September 30, 2017 and September 30, 2016.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Service revenues | $ | 55,676 |
| | $ | 51,515 |
| | $ | 153,370 |
| | $ | 134,035 |
|
Cost of services | 39,787 |
| | 36,863 |
| | 110,639 |
| | 95,967 |
|
Gross profit | 15,889 |
| | 14,652 |
| | 42,731 |
| | 38,068 |
|
Selling, general and administrative expense | 6,782 |
| | 7,352 |
| | 25,205 |
| | 22,263 |
|
Fees to manager | 125 |
| | 125 |
| | 375 |
| | 375 |
|
Amortization of intangibles | 3,390 |
| | 3,582 |
| | 9,554 |
| | 9,570 |
|
Income from operations | $ | 5,592 |
| | $ | 3,593 |
| | $ | 7,597 |
| | $ | 5,860 |
|
Three months ended September 30, 2017 compared to the three months ended September 30, 2016.
Service revenues
Revenues for the three months ended September 30, 2017 were approximately $55.7 million, an increase of $4.2 million, or 8.1%, compared to the same period in 2016. The increase in revenues is primarily due to acquisitions made in the second quarter of 2016 and the first quarter of 2017 as well as an increase in contaminated soil revenue. For the three months ended September 30, 2017, contaminated soil revenue increased 8% as compared to the same period last year, which is principally attributable to recent large project awards. Hazardous waste revenues increased 30% principally as a result of acquisitions. Revenue from dredged material decreased for the three months ended September 30, 2017 as compared to the same period in 2016 due to the timing of projects. Contaminated soils represented approximately 55% of net service revenues for both the three months ended September 30, 2017 and the three months ended September 30, 2016.
Cost of services
Cost of services for the three months ended September 30, 2017 were approximately $39.8 million compared to approximately $36.9 million in the same period of 2016. The increase in costs of services was primarily due to the increased revenue and volume, as well as the mix of services. Gross profit as a percentage of service revenues was flat quarter over quarter, increasing from 28.4% for the three month period ended September 30, 2016 to 28.5% for the same period ended September 30, 2017.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2017 decreased to approximately $6.8 million, or 12.2%, of service revenues, as compared to $7.4 million, or 14.3%, of service revenues for the same period in 2016. The decrease was primarily due to decreased labor costs.
Income from operations
Income from operations for the three months ended September 30, 2017 was approximately $5.6 million as compared to income from operations of $3.6 million for the three months ended September 30, 2016, an increase of $2.0 million, primarily as a result of those factors described above.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Service revenues
Service revenues for the nine months ended September 30, 2017 were approximately $153.4 million, an increase of $19.3 million, or 14.4%, compared to the same period in 2016. The increase in service revenues is principally due to two acquisitions in 2016 and one in 2017, as well as increased contaminated soil revenue, offset in part by lower dredge revenue.
For the nine months ended September 30, 2017, contaminated soil revenue increased 13% as compared to the same period last year principally attributable to increased development activity in the Northeast and an acquisition made in 2016. Hazardous waste revenues increased 32% principally as a result of acquisitions. Revenue from dredged material decreased 44% for the nine months ended September 30, 2017 as compared to the same period in 2016 due to the timing of new bidding activity. Contaminated soils represented approximately 57% of net service revenues for the nine months ended September 30, 2017 compared to 58% for the nine months ended September 30, 2016.
Cost of services
Cost of services for the nine months ended September 30, 2017 were approximately $110.6 million compared to approximately $96.0 million in the same period of 2016. Gross profit as a percentage of service revenues decreased from 28.4% for the nine month period ended September 30, 2016 to 27.9% for the same period ended September 30, 2017. The decrease in gross margin during the nine months ended September 30, 2017 was primarily due to reduced dredged material volume.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 increased to approximately $25.2 million, or 16.4%, of service revenues, as compared to $22.3 million, or 16.6%, of service revenues for the same period in 2016. The $2.9 million increase in selling, general and administrative expense in the nine months ended September 30, 2017 compared to 2016 is primarily attributable to acquisitions and increased corporate expenses.
Income from operations
Income from operations for the nine months ended September 30, 2017 was approximately $7.6 million, an increase of $1.7 million as compared to the nine months ended September 30, 2016, primarily as a result of those factors described above.
Sterno Products
Overview
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. Sterno Products offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps. Sterno Products was formed in 2012 with the merger of two manufacturers and marketers of portable food warming fuel products, The Sterno Products Group LLC and the Candle Lamp Company, LLC. On January 22, 2016, Sterno Products acquired Sterno Home, a seller of flameless candles and outdoor lighting products through the retail segment.
Results of Operations
The table below summarizes the income from operations data for Sterno Products for the three and nine months ended September 30, 2017 and September 30, 2016.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Net sales | $ | 52,696 |
| | $ | 55,582 |
| | $ | 163,092 |
| | $ | 156,692 |
|
Cost of sales | 38,865 |
| | 39,744 |
| | 119,975 |
| | 113,724 |
|
Gross Profit | 13,831 |
| | 15,838 |
| | 43,117 |
| | 42,968 |
|
Selling, general and administrative expense | 7,466 |
| | 8,556 |
| | 23,872 |
| | 23,568 |
|
Management fees | 125 |
| | 125 |
| | 375 |
| | 375 |
|
Amortization of intangibles | 1,829 |
| | 1,621 |
| | 5,487 |
| | 4,930 |
|
Income from operations | $ | 4,411 |
| | $ | 5,536 |
| | $ | 13,383 |
| | $ | 14,095 |
|
Three months ended September 30, 2017 compared to the three months ended September 30, 2016
Net sales
Net sales for the three months ended September 30, 2017 were approximately $52.7 million, a decrease of $2.9 million, or 5.2%, compared to the same period in 2016. The sales variance reflects a decrease in sales at the candle and outdoor divisions of Sterno Home, offset by the timing of stocking programs of key Sterno food service customers.
Cost of sales
Cost of sales for the three months ended September 30, 2017 were approximately $38.9 million compared to approximately $39.7 million in the same period of 2016. Gross profit as a percentage of sales decreased from 28.5% for the three months ended September 30, 2016 to 26.2% for the same period ended September 30, 2017. The decrease in gross profit during the three months ended September 30, 2017 primarily reflects an increase in chemical material costs and lower margins on certain sales.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2017 and 2016 was approximately $7.5 million and $8.6 million, respectively. Selling, general and administrative expense represented 14.2% of net sales for the three months ended September 30, 2017 as compared to 15.4% of net sales for the same period in 2016. The decrease in selling, general and administrative expense of $1.1 million during the third quarter of 2017 reflects Sterno Home staffing reductions due to restructuring, as well as reduced legal fees, licensing and royalty costs.
Income from operations
Income from operations for the three months ended September 30, 2017 was approximately $4.4 million, a decrease of $1.1 million when compared to the same period in 2016, as a result of those factors described above.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Net sales
Net sales for the nine months ended September 30, 2017 were approximately $163.1 million, an increase of $6.4 million, or 4.1%, compared to the same period in 2016. The increase in net sales is a result of the acquisition of Sterno Home in January 2016, partially offset by sales shortfall at Sterno Home's candle division due to reduced demand and non-repeating orders. Sterno Home had net sales of $9.0 million in the period prior to acquisition in January 2016.
Cost of sales
Cost of sales for the nine months ended September 30, 2017 were approximately $120.0 million compared to approximately $113.7 million in the same period of 2016. Gross profit as a percentage of sales decreased from 27.4% for the nine months ended September 30, 2016 to 26.4% for the same period ended September 30, 2017. The decrease in gross margin during the nine months ended September 30, 2017 primarily reflects an increase in chemical material costs.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 and 2016 was approximately $23.9 million and $23.6 million, respectively. Selling, general and administrative expense represented 14.6% of net sales for the nine months ended September 30, 2017 as compared to 15.0% of net sales for the same period in 2016. The decrease as a percentage of net sales during the nine months ended September 30, 2017 as compared to the same period in 2016 reflects the increase in sales during the period and Sterno Home reorganization efforts to reduce staff, as well as lower consulting fees, R&D expense and reduced legal expense.
Income from operations
Income from operations for the nine months ended September 30, 2017 was approximately $13.4$2.2 million, a decrease of $0.7 million when compared to the same period in 2016,2018, as a result of thosethe factors describednoted above.
Six months ended June 30, 2019 compared to six months ended June 30, 2018
Net sales
Net sales for the six months ended June 30, 2019 were approximately $59.5 million, a decrease of $1.1 million compared to the corresponding period in 2018. The decrease in net sales is primarily a result of reduced demand in various markets. International sales were $24.0 million in the six months ended June 30, 2019 and $24.4 million in the six months ended June 30, 2018.
Gross profit
Gross profit for the six months ended June 30, 2019 was approximately $15.1 million compared to approximately $16.5 million in the same period of 2018. Gross profit as a percentage of net sales decreased from 27.2% for the six months ended June 30, 2018 to 25.4% in the six months ended June 30, 2019 principally due to unfavorable sales mix.
Selling, general and administrative expense
Selling, general and administrative expense in the six month period ended June 30, 2019 was $9.5 million, which compared favorably to approximately $9.9 million for the six months ended June 30, 2018. Selling, general and administrative expense was 15.9% of net sales in the six months ended June 30, 2019 and 16.3% in the six months ended June 30, 2018.
Income from operations
Income from operations for the six months ended June 30, 2019 was approximately $3.7 million, a decrease of $1.0 million when compared to the same period in 2018, as a result of the factors noted above.
Foam Fabricators
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| | | | | | | | | | | | | | Pro forma | | |
Net sales | | $ | 31,648 |
| | 100.0 | % | | $ | 33,194 |
| | 100.0 | % | | $ | 62,330 |
| | 100.0 | % | | $ | 63,684 |
| | 100.0 | % |
Gross profit | | $ | 9,356 |
| | 29.6 | % | | $ | 9,017 |
| | 27.2 | % | | $ | 17,844 |
| | 28.6 | % | | $ | 16,538 |
| | 26.0 | % |
SG&A | | $ | 2,746 |
| | 8.7 | % | | $ | 3,054 |
| | 9.2 | % | | $ | 5,482 |
| | 8.8 | % | | $ | 7,398 |
| | 11.6 | % |
Operating income | | $ | 4,364 |
| | 13.8 | % | | $ | 3,031 |
| | 9.1 | % | | $ | 7,870 |
| | 12.6 | % | | $ | 5,017 |
| | 7.9 | % |
Pro forma financial information for Foam Fabricators for the six months ended June 30, 2018 includes pre-acquisition results of operations for the period from January 1, 2018 through February 15, 2018, the date of acquisition of Foam, for comparative purposes. The historical results of Foam Fabricators have been adjusted to reflect the purchase accounting adjustments recorded in connection with the acquisition: $0.2 million in stock compensation expense and $1.0 million in amortization expense, as well as $0.1 million in management fees that would have been incurred by Foam Fabricators if we owned the company during this period.
Three months ended June 30, 2019 compared to three months ended June 30, 2018
Net sales
Net sales for the quarter ended June 30, 2019 were $31.6 million, a decrease of $1.5 million, or 4.7%, compared to the quarter ended June 30, 2018. The decrease in net sales was primarily due to a nonrecurring customer from the prior year as well as a decrease in sales in the automotive and protective packaging categories in the current period.
Gross profit
Gross profit as a percentage of net sales was 29.6% and 27.2% for the three months ended June 30, 2019 and 2018, respectively. The increase in gross profit as a percentage of net sales in the quarter ended June 30, 2019 was primarily due to the decreasing price of expanded polystyrene ("EPS") resin. A majority of Foam Fabricator's products are made with EPS resin, an oil and natural gas derived polymer with an added expansion agent, therefore raw material costs will increase with increases in the price of oil and natural gas.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended June 30, 2019 was $2.7 million as compared to $3.1 million for the three months ended June 30, 2018, a decrease of $0.3 million. Selling, general and administrative expense for the three months ended June 30, 2018 included $0.3 million in integration service fees paid to CGM. Excluding the effect of the integration service fee, selling general and administrative expense was comparable quarter over quarter.
Income from operations
Income from operations was $4.4 million for the three months ended June 30, 2019 as compared to $3.0 million for the three months ended June 30, 2018, an increase of $1.3 million, primarily as a result of the factors noted above as well as lower amortization expense of intangible assets in the current quarter as compared to the estimate of amortization expense based on the initial draft of the purchase price allocation included in the quarter ended June 30, 2018.
Six months ended June 30, 2019 compared to pro forma six months ended June 30, 2018
Net sales
Net sales for the six months ended June 30, 2019 were $62.3 million, a decrease of $1.4 million, or 2.1%, compared to the six months ended June 30, 2018. The decrease in net sales was primarily due to a nonrecurring customer from the prior year as well as well as a decrease in sales in the automotive and protective packaging categories in the current period.
Gross profit
Gross profit as a percentage of net sales was 28.6% and 26.0% for the six months ended June 30, 2019 and 2018, respectively. Cost of sales for the six months ended June 30, 2018 included $0.7 million of expense related to the amortization of inventory step-up resulting from the purchase price allocation of Foam Fabricators. Excluding the effect of the inventory step-up, prior year gross profit as a percentage of net sales was 27.0%. The increase in gross profit as a percentage of net sales in the six months ended June 30, 2019 was due to decreasing EPS prices in the current year.
Selling, general and administrative expense
Selling, general and administrative expense for the six months ended June 30, 2019 was $5.5 million as compared to $7.4 million for the six months ended June 30, 2018, a decrease of $1.9 million. Selling, general and administrative expense for the six months ended June 30, 2018 included $1.5 million in transaction expenses related to the acquisition and $0.3 million in incremental integration service fees paid to CGM. Excluding the acquisition expenses and incremental integration service fees, selling, general and administrative expense for the six months ended June 30, 2018 was $5.6 million, which is consistent with the expenses incurred in the current period.
Income from operations
Income from operations was $7.9 million for the six months ended June 30, 2019 as compared to $5.0 million for the six months ended June 30, 2018, an increase of $2.9 million, primarily as a result of the factors noted above.
Sterno
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| | | | | | | | | | | | | | Pro forma | | |
Net sales | | $ | 86,465 |
| | 100.0 | % | | $ | 87,969 |
| | 100.0 | % | | 177,661 |
| | 100.0 | % | | $ | 177,996 |
| | 100.0 | % |
Gross profit | | $ | 22,665 |
| | 26.2 | % | | $ | 18,486 |
| | 21.0 | % | | 45,020 |
| | 25.3 | % | | $ | 40,717 |
| | 22.9 | % |
SG&A | | $ | 10,162 |
| | 11.8 | % | | $ | 10,493 |
| | 11.9 | % | | 20,254 |
| | 11.4 | % | | $ | 20,585 |
| | 11.6 | % |
Operating income | | $ | 8,113 |
| | 9.4 | % | | $ | 2,728 |
| | 3.1 | % | | 16,097 |
| | 9.1 | % | | $ | 11,225 |
| | 6.3 | % |
Pro forma financial information for Sterno for the six months ended June 30, 2018 includes pre-acquisition results of operations for Rimports, which was acquired by Sterno on February 26, 2018, for the period from January 1, 2018 through the date of acquisition for comparative purposes. The historical results of Rimports have been adjusted to reflect an additional $1.6 million in amortization expense recorded in connection with the purchase accounting adjustments related to the acquisition.
Three months ended June 30, 2019 compared to three months ended June 30, 2018
Net sales
Net sales for the three months ended June 30, 2019 were approximately $86.5 million, a decrease of $1.5 million, or 1.7%, compared to the same period in 2018. The net sales variance reflects a decrease in sales of outdoor lighting products primarily as a result of a shorter spring period in the domestic market due to weather and higher levels of chargebacks and rebates compared to the second quarter of 2018, offset by an increase in sales volume at Rimports.
Gross profit
Gross profit as a percentage of net sales increased from 21.0% for the three months ended June 30, 2018 to 26.2% for the same period ended June 30, 2019. In the second quarter of 2018, Sterno recognized $4.6 million in costs of goods sold related to the amortization of inventory step-up resulting from the purchase price allocation of the Rimports acquisition. After eliminating the effect of the purchase price allocation in the prior year, gross profit as a percentage
of sales was 26.3% in the second quarter of 2018, which is comparable to the gross profit percentage in the current quarter.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended June 30, 2019 and 2018 was consistent quarter over quarter, at approximately $10.2 million and $10.5 million, respectively. Selling, general and administrative expense represented 11.8% of net sales for the three months ended June 30, 2019 and 11.9% for the three months ended June 30, 2018.
Income from operations
Income from operations for the three months ended June 30, 2019 was approximately $8.1 million, an increase of $5.4 million compared to the three months ended June 30, 2018 based on the factors noted above.
Six months ended June 30, 2019 compared to pro forma six months ended June 30, 2018
Net sales
Net sales for the six months ended June 30, 2019 were approximately $177.7 million, a decrease of $0.3 million, or 0.2%, compared to the corresponding period in 2018. The net sales variance reflects a decrease in sales of outdoor lighting products primarily as a result of a shorter spring period in the domestic market due to weather and higher levels of chargebacks and rebates compared to the prior year, offset by an increase in sales volume at Rimports.
Gross profit
Gross profit as a percentage of net sales increased from 22.9% for the six months ended June 30, 2018 to 25.3% for the same period ended June 30, 2019. In the six months ended June 30, 2018, Sterno recognized $4.6 million in costs of goods sold related to the amortization of inventory step-up resulting from the purchase price allocation of the Rimports acquisition. After eliminating the effect of the purchase price allocation in the prior year, gross profit as a percentage of sales for the six months ended June 30, 2018 was 25.5%, which is comparable to the gross profit percentage in the six months ended June 30, 2019.
Selling, general and administrative expense
Selling, general and administrative expense for the six months ended June 30, 2019 and 2018 was $20.3 million and $20.6 million, respectively, a decrease of $0.3 million. The expense from the prior year reflects $0.6 million in acquisition expenses related to the acquisition of Rimports. Excluding the acquisition expenses, selling, general and administrative expense decreased $0.9 million, reflecting lower marketing costs, commission, legal fees and various cost savings initiatives. Selling, general and administrative expense represented 11.4% of net sales for the six months ended June 30, 2019 and 11.6%for the six months ended June 30, 2018.
Income from operations
Income from operations for the six months ended June 30, 2019 was approximately $16.1 million, an increase of $4.9 million compared to the six months ended June 30, 2018 based on the factors noted above.
Liquidity and Capital Resources
Liquidity
At SeptemberJune 30, 2017,2019, we had approximately $41.5$485.9 million of cash and cash equivalents on hand, an increase of $1.7$437.1 million as compared to the year ended December 31, 2016. The increase in cash is due2018 primarily toas a result of the proceeds received from our sale of our remaining shares of our FOX investmentManitoba Harvest in the first quarter of 2017, which resultedFebruary 2019 and Clean Earth in net proceeds of $136.1 million, and the issuance of preferred shares in the second quarter of 2017, offset by our acquisition of Crosman and our common share distributions.June 2019. 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.
The change in cash and cash equivalents is as follows:
|
| | | | | | | | |
| | Nine months ended |
(in thousands) | | September 30, 2017 | | September 30, 2016 |
Cash provided by operations | | $ | 59,236 |
| | $ | 60,594 |
|
Cash used investing activities | | (62,956 | ) | | (417,284 | ) |
Cash provided by financing activities | | 7,862 |
| | 300,407 |
|
Effect of exchange rates on cash and cash equivalents | | (2,427 | ) | | (3,197 | ) |
Increase (decrease) in cash and cash equivalents | | $ | 1,715 |
| | $ | (59,480 | ) |
Operating Activities:
|
| | | | | | | | |
| | Six months ended |
(in thousands) | | June 30, 2019 | | June 30, 2018 |
Cash provided by operating activities | | $ | 8,654 |
| | $ | 35,312 |
|
| | | | |
For the ninesix months ended SeptemberJune 30, 2017,2019, cash flows provided by operating activities totaled approximately $59.2$8.7 million, which represents a $1.4$26.7 million decrease compared to cash provided by operating activities of $60.6$35.3 million during the nine monthsix-month period ended SeptemberJune 30, 2016 (from both continuing and discontinued operations). This decrease is principally the result of changes in cash used for working capital and non-cash charges in the nine months ended September 30, 2017 as compared to the same period in 2016, primarily as a result of the 5.11 acquisition, which occurred in the third quarter of 2016, and the effect of the cash flows from add-on acquisitions completed in 2016.2018. Cash used in operating activities for working capital for the ninesix months ended SeptemberJune 30, 20172019 was $24.3$17.5 million, as compared to cash used in operating activities for working capital of $5.0$4.7 million for the ninesix months ended SeptemberJune 30, 2016.2018. The increase was primarily due toin cash used for inventoryworking capital purposes in the current year primarily reflects the effect of our acquisitions that occurred in February 2018 which resulted in a significant increase in cash needed to fund working capital, particularly at Rimports, our Sterno add-on acquisition. The decrease in cash flows provided by operating activities in the current year was also attributable to the change in the mark-to-market on our branded consumer businesses duringinterest rate swap, with the third quarter.six months ended June 30, 2018 having an unrealized gain of $3.9 million, and the six months ending June 30, 2019 having an unrealized loss of $3.4 million, for a net change of $7.3 million due to the change in the present value of future payments and receipts under the interest rate swap agreement.
Investing Activities:
|
| | | | | | | | |
| | Six months ended |
(in thousands) | | June 30, 2019 | | June 30, 2018 |
Cash provided by (used in) investing activities | | $ | 718,000 |
| | $ | (454,715 | ) |
| | | | |
Cash flows used inprovided by investing activities for the ninesix months ended SeptemberJune 30, 20172019 totaled approximately $63.0$718.0 million, compared to cash used in investing activities of $417.3$454.7 million in the same period of 2016. In2018. Cash flows from Manitoba Harvest and Clean Earth, which are reflected as discontinued operations, totaled $279.2 million in the current period and reflects the effect of the sale transactions. Cash provided by investing activities from continuing operations in the current year weprimarily relates to the proceeds received approximately $136.1 million related tofrom the sale of our remaining investmentClean Earth and Manitoba Harvest. In the prior year, we had a platform acquisition in FOX, offset by cash used for our Crosman acquisitionthe first quarter, Foam Fabricators, and several add-on acquisitions at our Clean Earth, Crosman andsubsidiaries, including the Sterno businesses ($164.7 millionacquisition of Rimports in total) and capital expenditures ($31.0 million).February 2018. The total amount spent on acquisitions in the six months ended June 30, 2018 was approximately $391.2 million. Capital expenditures in the ninesix months ended SeptemberJune 30, 2017 increased2019 decreased approximately $15.4$10.8 million compared to the same period in the prior year, due primarily to higher than typical expenditures at our 5.11 business.and Arnold businesses in the prior year. We expect capital expenditures for the full year of 20172019 to be approximately $42$35 million to $47$45 million. The 2016 investing activities reflect the acquisition of 5.11 in August 2016 ($395.4 million) and add-on acquisitions by Sterno in January 2016 ($35.6 million), Ergobaby in May 2016 ($65.0 million) and add-on acquisitions at Clean Earth during the first and second quarter of 2016 ($33.6 million), offset by proceeds from a partial divestiture of our FOX shares of $47.7 million.
Financing Activities:
|
| | | | | | | | |
| | Six months ended |
(in thousands) | | June 30, 2019 | | June 30, 2018 |
Cash (used in) provided by financing activities | | $ | (292,750 | ) | | $ | 415,358 |
|
| | | | |
Cash flows provided byused in financing activities totaled approximately $7.9$292.8 million during the ninesix months ended SeptemberJune 30, 20172019 compared to cash flows provided by financing activities of $300.4$415.4 million during the ninesix months ended SeptemberJune 30, 2016. Financing activities reflect2018. The 2018 activity primarily related to the paymentfinancing of our quarterly distribution ($64.7acquisitions of Foam Fabricators and Rimports in February 2018, which were financed through draws on our 2014 Revolving Credit Facility, partially offset by net proceeds of $96.5 million from the Series B Preferred Shares offering in March 2018 which was used to repay a portion of the outstanding amount on the 2014 Revolving Credit Facility. In April 2018, we issued $400.0 million in 2017Senior Notes and $58.6 million in 2016), activityamended our credit facility. The proceeds from the issuance of the Senior Notes were used to pay down outstanding amounts under our credit facility. In the current year, we used proceeds from the sale of Manitoba Harvest and Clean Earth to repay the outstanding amount on the 2018 Revolving Credit Facility, and paid our distributions on our credit facilitycommon and preferred shares, as well as a distribution to the paymentAllocation Member of a profit allocation$8.0 million related primarily to the sale of FOX shares ($39.2 million in 2017 and $16.8 million in 2016). In the nine months ended September 30, 2017, activity on our credit facility totaled $16.8 million of cash borrowings, while the activity for the nine months ended September 30, 2016 reflected net borrowings of $412.1Manitoba Harvest.
million, which was used to fund the acquisitions of 5.11, as well as the acquisitions of Baby Tula by Ergobaby, a Clean Earth add-on acquisition and the repurchase of Ergobaby common stock from a noncontrolling shareholder. We also completed the Series A Preferred Share offering during the second quarter of 2017, resulting in cash proceeds net of transaction costs, of $96.4 million.
Intercompany 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 intercompany 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 principal on these intercompany 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 intercompany 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 intercompany debt using either cash on hand at the parent or our revolving credit facility,applicable 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. In January 2018, the Company completed a recapitalization at Sterno whereby the Company entered into an amendment to the intercompany loan agreement with Sterno (the "Sterno Loan Agreement"). The Sterno Loan Agreement was amended to (i) provide for term loan borrowings of $57.7 million to fund a distribution to the Company, which owned 100% of the outstanding equity of Sterno at the time of the recapitalization, and (ii) extend the maturity dates of the term loans.
As a result of significant investment in operational improvements to enhance its competitive position, including planned capital expendituresto reposition Arnold for future growth, we have granted Arnold a waiver for certain financial covenants under their intercompany debt agreement effective the quarter ended June 30, 2017 through December 31, 2017. Additionally, dueDue to significant capital expenditures related to the implementation of a new ERP system, and a warehouse expansion and retail roll out, we have granted 5.11 a waiverwaivers under their intercompany debt agreement effective as of the quarter ended September 30, 2017.2017 through December 31, 2018. The waiver permitswaivers permitted 5.11 to excludeincrease its allowable capital expenditure limits and excluded certain capital expenditures associated with the ERP system and warehouse expansion from the calculation of the fixed charge coverage ratio.
We further amended the 5.11 intercompany debt agreement during 2018 to allow for an additional $5.0 million outstanding debt to be permitted under 5.11's Term B loan. In the first quarter of 2019, we further amended the 5.11 intercompany debt agreement to update the definition of capital expenditures to exclude capital expenditures made with respect to 5.11's retail stores from the calculation of the fixed charge coverage ratio. 5.11 was in compliance with the covenants under their intercompany debt agreement at June 30, 2019. Subsequent to the third quarter of 2018, we amended the Sterno Loan Agreement to increase the amount available to Sterno under their intercompany revolving credit facility. Liberty was not in compliance with the financial covenants under their intercompany loan agreement at December 31, 2018, and we amended the Liberty intercompany debt agreement to grant a waiver to them through the quarter ended December 31, 2019. Except as previously noted, all of our subsidiaries were in compliance with the financial covenants included within their intercompany credit arrangements at June 30, 2019.
As of SeptemberJune 30, 2017,2019, we had the following outstanding loans due from each of our businesses:
| | (in thousands) | | | | |
5.11 Tactical | | $ | 185,750 |
| | $ | 198,577 |
|
Crosman | | $ | 97,327 |
| |
Ergobaby | | $ | 66,448 |
| | $ | 45,382 |
|
Liberty | | $ | 49,737 |
| | $ | 47,239 |
|
Manitoba Harvest | | $ | 48,273 |
| |
Velocity Outdoor | | | $ | 124,463 |
|
Advanced Circuits | | $ | 95,064 |
| | $ | 69,245 |
|
Arnold Magnetics | | $ | 72,715 |
| |
Clean Earth | | $ | 172,786 |
| |
Sterno Products | | $ | 75,127 |
| |
Arnold | | | $ | 74,430 |
|
Foam Fabricators | | | $ | 98,375 |
|
Sterno | | | $ | 250,383 |
|
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 20142018 Credit Facility; (iii) payments to CGM due pursuant to the Management Services AgreementMSA 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.
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 quarter ended September 30, 2017 on our common shares was paid on October 26, 2017 and totaled $21.6 million. A distribution on our Series A Preferred Shares of $2.5 million was paid on October 30, 2017.
Investment in FOXFinancing Arrangements
On March 13, 2017, Fox Factory Holding Corp. ("FOX") closed on a secondary public offering of 5,108,718 shares of FOX common stock held by CODI, which represented CODI's remaining investment in FOX. CODI received $136.1 million in net proceeds as a result of the sale. We acquired a controlling interest in FOX in January 2008 for approximately $80.4 million. FOX completed an initial public offering in August 2013, and additional secondary offerings in July 2014, March, August and
November 2016, and March 2017. We sold shares of FOX in each of these offerings, recognizing total net proceeds of $465.1 million.
20142018 Credit Facility
On June 6, 2014, we entered into a new credit facility, the 2014 Credit Facility, which replaced our then existing 2011 Credit Facility entered into in October 2011. On August 31, 2016,In April 2018, we entered into an Incremental Facility AmendmentAmended and Restated Credit Agreement (the "2018 Credit Facility") to amend and restate the 2014 Credit Agreement.Facility. The Incremental Facility Amendment provided an increase to the 2014 Revolving2018 Credit Facility of $150.0 million, and the 2016 Incremental Term Loan in the amount of $250.0 million. The 2014 Credit Facility now provides for (i) revolving loans, swing line loans and letters of credit (the “2018 Revolving Credit Facility”) up to a maximum aggregate amount of $550$600 million (the “2018 Revolving Loan Commitment”), and matures in June 2019, (ii) a $325$500 million term loan and (iii) a $250 million incremental term loan. Our 2014(the “2018 Term Loan and 2016 Incremental Term Loan requires quarterly payments with a final payment of the outstanding principal balance due in June 2021. (Refer to Note I - "Debt" of the condensed consolidated financial statements for a complete description of our 2014 Credit Facility.)
In March 2017, we amended the 2014 Credit Facility (the "Fourth Amendment") to reduce the applicable rate of interest for the 2014 Term Loan and 2016 Incremental Term Loan. Under the Fourth Amendment, outstanding LIBOR loans bear interest at LIBOR plus an applicable rate of 2.75% and outstanding Base Rate loans bear interest at Base Rate plus 1.75%. Prior to the amendment, the outstanding term loans bore interest at LIBOR plus 3.25% or Base Rate plus 2.25%.
In October 2017, the Company further amended the 2014 Credit Facility (the "First Refinancing Amendment") to, in effect, refinance the 2014 Term Loan and the 2016 Incremental Term Loan (together, the “Term Loans”Loan”). Pursuant to the First Refinancing Amendment, outstanding Term Loans at LIBOR Rate bear interest at LIBOR plus an applicable rate of 2.25% and outstanding Term Loans at Base Rate bear interest at Base Rate plus 1.25%. Prior to the amendment, the outstanding Term Loans bore interest at LIBOR plus 2.75% or Base Rate plus 1.75%.
We had $523.2$599.8 million in net availability under the 20142018 Revolving Credit Facility at SeptemberJune 30, 2017.2019. The outstanding borrowings under the 20142018 Revolving Credit Facility includes $1.3include $0.2 million at September 30, 2017 of outstanding letters of credit.credit at June 30, 2019. At June 30, 2019, we had $493.8 million outstanding on the 2018 Term Loan. In July 2019, we repaid $193.8 million of the outstanding amount due under the 2018 Term Loan, leaving a remaining balance of $300 million as of July 31, 2019.
Senior Notes
On April 18, 2018, we consummated the issuance and sale of $400 million aggregate principal amount of our 8.000% due 2026 (the "Notes" or "Senior Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes will bear interest at the rate of 8.000% per annum and will mature on May 1, 2026. Interest on the Notes is payable in cash on May 1st and November 1st of each year. The Notes are general senior unsecured obligations of the Company and are not guaranteed by our subsidiaries.
The following table reflects required and actual financial ratios as of SeptemberJune 30, 20172019 included as part of the affirmative covenants in our 20142018 Credit Facility: Facility.
|
| | | | |
Description of Required Covenant Ratio | | Covenant Ratio Requirement | | Actual Ratio |
| | | | |
Fixed Charge Coverage Ratio | | greaterGreater than or equal to 1.50:1.0 | | 3.12:1:67:1.0 |
Total Secured Debt to EBITDA Ratio | | Less than or equal to 3.50:1.0 | | 0.09:1.0 |
Total Debt to EBITDA Ratio | | lessLess than or equal to 3.50:5.00:1.0 | | 2.76:1.86:1.0 |
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.
Interest Expense
We recorded interest expense totaling $22.6 million for the nine months ended September 30, 2017 compared to $23.2 million for the comparable period in 2016. The components of interest expense and periodic interest charges on outstanding debt are as follows (in thousands):
|
| | | | | | | |
| Nine months ended September 30, |
| 2017 | | 2016 |
Interest on credit facilities | $ | 18,008 |
| | $ | 12,612 |
|
Unused fee on Revolving Credit Facility | 2,143 |
| | 1,356 |
|
Amortization of original issue discount | 781 |
| | 536 |
|
Unrealized loss on interest rate derivatives (1) | 1,178 |
| | 8,322 |
|
Letter of credit fees | 63 |
| | 79 |
|
Other | 414 |
| | 320 |
|
Interest expense | $ | 22,587 |
| | $ | 23,225 |
|
Average daily balance of debt outstanding | $ | 593,314 |
| | $ | 403,988 |
|
Effective interest rate (1) | 5.1 | % | | 7.7 | % |
|
| | | | | | | |
| Six months ended June 30, |
| 2019 | | 2018 |
Interest on credit facilities | $ | 16,322 |
| | $ | 15,581 |
|
Interest on Senior Notes | 16,000 |
| | 6,488 |
|
Unused fee on Revolving Credit Facility | 882 |
| | 855 |
|
Amortization of original issue discount | 304 |
| | 424 |
|
Unrealized (gain) loss on interest rate derivative (1) | 3,350 |
| | (3,900 | ) |
Other interest expense | 133 |
| | 164 |
|
Interest income | (92 | ) | | (20 | ) |
Interest expense | $ | 36,899 |
| | $ | 19,592 |
|
| | | |
Average daily balance outstanding - credit facilities | $ | 656,997 |
| | $ | 736,557 |
|
Effective interest rate - credit facilities | 6.4 | % | | 3.6 | % |
(1) On September 16, 2014, we purchased an interest rate swap (the "New Swap""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 SeptemberJune 30, 2017,2019, the Newcurrent portion of the Swap was in a liability position and had a fair value loss of $8.8$2.2 million, reflectingand the non-current portion of the Swap was in a liability position
with a fair value of $2.9 million. The fair value of the Swap reflects the present value of future payments and receipts under the agreement and is reflected as a component of interest expense and
non-current assets and current
and other non-current liabilities. Refer to "Note J - Derivatives and Hedging Activities" ofliabilities at June 30, 2019. In the condensed consolidated financial statements for a description ofabove table, we provide the New Swap.
Income Taxes
We incurred an income tax benefit of $2.0 million with an effective income taxinterest rate of (11.2)% during the nine months ended September 30, 2017 compared to income tax expense of $9.8 million with an effective income tax rate of 15.8% during the same period in 2016. The impairment expense aton our Arnold business and non-deductible costs at the corporate level,credit facilities, including the effect of the lossSwap, and excluding the interest on our equity investment of FOX prior to the sale of our FOX shares in the first quarter, account for the majority of the remaining difference in our effective income tax rates in the first nine months of 2017, while non-deductible costs at the corporate level, including the gain on our equity investment in FOX, account for the majority of the remaining differences in the first nine months of 2016. Certain foreign operations are subject to foreign income taxation under existing provisions of the laws of those jurisdictions. Pursuant to U.S. tax laws, earnings from those jurisdictions will be subject to the U.S. income tax rate when those earnings are repatriated.
The components of income tax expense as a percentage of income from continuing operations before income taxes for the nine months ended September 30, 2017 and 2016 are as follows:
|
| | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
United States Federal Statutory Rate | | (35.0 | )% | | 35.0 | % |
State income taxes (net of Federal benefits) | | (1.0 | ) | | 0.2 |
|
Foreign income taxes | | 4.5 |
| | 1.4 |
|
Expenses of Compass Group Diversified Holdings LLC representing a pass through to shareholders (1) | | 0.3 |
| | 6.3 |
|
Impairment expense | | 16.9 |
| | — |
|
Effect of loss (gain) on equity method investment (2) | | 11.0 |
| | (33.3 | ) |
Credit utilization | | (7.7 | ) | | — |
|
Impact of subsidiary employee stock options | | 2.5 |
| | 0.7 |
|
Domestic production activities deduction | | (2.3 | ) | | (0.6 | ) |
Effect of undistributed foreign earnings | | 2.0 |
| | 4.5 |
|
Non-recognition of NOL carryforwards at subsidiaries | | (3.5 | ) | | — |
|
Other | | 1.1 |
| | 1.6 |
|
Effective income tax rate | | (11.2 | )% | | 15.8 | % |
(1)The effective income tax rate for the nine months ended September 30, 2017 and 2016 includes a loss at the Company's parent,Senior Notes, which is taxed asat a partnership.fixed 8.000%.
(2) The equity method investment in FOX was 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
GAAP or U.S. GAAP refersrefer 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 – EBITDA is calculated as net 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;by: (i) noncontrolling stockholder compensation, which generally consists of non-cash stock option expense; (ii) successful acquisition costs, which consist of transaction costs (legal, accounting, due diligence, 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’),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 investment;and (vi) gains or losses recorded in connection with the sale of fixed assets and (vii) foreign currency transaction gains or losses incurred in connection with the conversion of intercompany 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 that 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 tables reconcile EBITDA and Adjusted EBITDA to net income (loss), which we consider to be the most comparable GAAP financial measure (in thousands):
Adjusted EBITDA
NineSix months ended SeptemberJune 30, 20172019
| | | Corporate | | 5.11 | | Crosman | | Ergobaby | | Liberty | | Manitoba Harvest | | ACI | | Arnold | | Clean Earth | | Sterno | | Consolidated | Corporate | | 5.11 | | Ergobaby | | Liberty | | Velocity Outdoor | | ACI | | Arnold | | Foam | | Sterno | | Consolidated |
Net income (loss)(1) | $ | (5,407 | ) | | $ | (15,043 | ) | | $ | (3,375 | ) | | $ | 5,364 |
| | $ | 2,522 |
| | $ | (2,505 | ) | | $ | 8,839 |
| | $ | (10,282 | ) | | $ | (1,980 | ) | | $ | 6,348 |
| | $ | (15,519 | ) | $ | 303,610 |
| | $ | (2,255 | ) | | $ | 2,672 |
| | $ | 490 |
| | $ | (5,636 | ) | | $ | 7,578 |
| | $ | 11 |
| | $ | 1,906 |
| | $ | 3,054 |
| | $ | 311,430 |
|
Adjusted for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Provision (benefit) for income taxes | — |
| | (10,405 | ) | | (962 | ) | | 3,941 |
| | 1,351 |
| | (944 | ) | | 2,755 |
| | 270 |
| | (1,041 | ) | | 3,034 |
| | (2,001 | ) | — |
| | 311 |
| | 1,380 |
| | 368 |
| | (648 | ) | | 1,973 |
| | 454 |
| | 977 |
| | 1,160 |
| | 5,975 |
|
Interest expense, net | 22,154 |
| | 51 |
| | 23 |
| | — |
| | — |
| | 37 |
| | (11 | ) | | — |
| | 245 |
| | — |
| | 22,499 |
| 36,786 |
| | 2 |
| | — |
| | — |
| | 112 |
| | — |
| | (1 | ) | | — |
| | — |
| | 36,899 |
|
Intercompany interest | (49,297 | ) | | 10,697 |
| | 2,561 |
| | 4,628 |
| | 2,989 |
| | 3,211 |
| | 6,194 |
| | 5,194 |
| | 10,108 |
| | 3,715 |
| | — |
| (41,454 | ) | | 9,110 |
| | 1,868 |
| | 2,157 |
| | 5,599 |
| | 3,424 |
| | 3,198 |
| | 4,524 |
| | 11,574 |
| | — |
|
Depreciation and amortization | 1,392 |
| | 35,233 |
| | 5,932 |
| | 10,002 |
| | 1,359 |
| | 5,011 |
| | 2,716 |
| | 5,238 |
| | 16,502 |
| | 8,995 |
| | 92,380 |
| 993 |
| | 10,658 |
| | 4,239 |
| | 839 |
| | 6,661 |
| | 1,267 |
| | 3,245 |
| | 6,148 |
| | 11,142 |
| | 45,192 |
|
EBITDA | (31,158 | ) | | 20,533 |
| | 4,179 |
| | 23,935 |
| | 8,221 |
| | 4,810 |
| | 20,493 |
| | 420 |
| | 23,834 |
| | 22,092 |
| | 97,359 |
| 299,935 |
| | 17,826 |
| | 10,159 |
| | 3,854 |
| | 6,088 |
| | 14,242 |
| | 6,907 |
| | 13,555 |
| | 26,930 |
| | 399,496 |
|
Gain on sale of business | (340 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (340 | ) | (328,164 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (328,164 | ) |
(Gain) loss on sale of fixed assets | — |
| | — |
| | — |
| | — |
| | 46 |
| | (227 | ) | | (10 | ) | | (9 | ) | | (56 | ) | | 486 |
| | 230 |
| |
Other (income) expense | | (582 | ) | | 39 |
| | (4 | ) | | 29 |
| | 718 |
| | (84 | ) | | (2 | ) | | 325 |
| | 85 |
| | 524 |
|
Noncontrolling shareholder compensation | — |
| | 1,786 |
| | — |
| | 521 |
| | 7 |
| | 750 |
| | 18 |
| | 149 |
| | 1,166 |
| | 555 |
| | 4,952 |
| — |
| | 1,196 |
| | 412 |
| | 18 |
| | 665 |
| | 45 |
| | 8 |
| | 510 |
| | 475 |
| | 3,329 |
|
Acquisition expenses and other | — |
| | — |
| | 1,836 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,836 |
| |
Impairment expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,864 |
| | — |
| | — |
| | 8,864 |
| |
Loss on sale of investment | | 5,300 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,300 |
|
Integration services fee | — |
| | 2,333 |
| | 375 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,708 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 281 |
| | — |
| | 281 |
|
Loss on equity method investment | 5,620 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,620 |
| |
Gain on foreign currency transaction and other | (3,583 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,583 | ) | |
Other | | — |
| | — |
| | — |
| | 266 |
| | — |
| | 58 |
| | — |
| | — |
| | — |
| | 324 |
|
Management fees | 20,881 |
| | 750 |
| | 165 |
| | 375 |
| | 375 |
| | 262 |
| | 375 |
| | 375 |
| | 375 |
| | 375 |
| | 24,308 |
| 17,103 |
| | 500 |
| | 250 |
| | 250 |
| | 250 |
| | 250 |
| | 250 |
| | 375 |
| | 250 |
| | 19,478 |
|
Adjusted EBITDA | $ | (8,580 | ) | | $ | 25,402 |
| | $ | 6,555 |
| | $ | 24,831 |
| | $ | 8,649 |
| | $ | 5,595 |
| | $ | 20,876 |
| | $ | 9,799 |
| | $ | 25,319 |
| | $ | 23,508 |
| | $ | 141,954 |
| $ | (6,408 | ) | | $ | 19,561 |
| | $ | 10,817 |
| | $ | 4,417 |
| | $ | 7,721 |
| | $ | 14,511 |
| | $ | 7,163 |
| | $ | 15,046 |
| | $ | 27,740 |
| | $ | 100,568 |
|
Adjusted EBITDA
Nine months ended September 30, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | 5.11 | | Crosman | | Ergobaby | | Liberty | | Manitoba Harvest | | ACI | | Arnold | | Clean Earth | | Sterno | | Consolidated |
Net income (loss) (1) | $ | 49,623 |
| | $ | (3,167 | ) | | | | $ | 3,192 |
| | $ | 3,942 |
| | $ | (4,084 | ) | | $ | 7,297 |
| | $ | (3,961 | ) | | $ | (3,544 | ) | | $ | 4,783 |
| | $ | 54,081 |
|
Adjusted for: |
| | | | Not Applicable | |
| |
| | | |
| |
| | | | | |
|
Provision (benefit) for income taxes | — |
| | (1,963 | ) | | | 2,242 |
| | 2,614 |
| | (1,468 | ) | | 3,846 |
| | 2,486 |
| | (832 | ) | | 2,853 |
| | 9,778 |
|
Interest expense, net | 22,840 |
| | 6 |
| | | — |
| | — |
| | 7 |
| | — |
| | (2 | ) | | 341 |
| | 12 |
| | 23,204 |
|
Intercompany interest | (36,432 | ) | | 1,206 |
| | | 3,405 |
| | 3,172 |
| | 2,932 |
| | 5,619 |
| | 5,046 |
| | 9,156 |
| | 5,896 |
| | — |
|
Depreciation and amortization | 667 |
| | 5,237 |
| | | 6,306 |
| | 2,099 |
| | 5,256 |
| | 2,938 |
| | 7,035 |
| | 16,380 |
| | 8,617 |
| | 54,535 |
|
EBITDA | 36,698 |
| | 1,319 |
| | | 15,145 |
| | 11,827 |
| | 2,643 |
| | 19,700 |
| | 10,604 |
| | 21,501 |
| | 22,161 |
| | 141,598 |
|
Gain on sale of businesses | (2,134 | ) | | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,134 | ) |
(Gain) loss on sale of fixed assets | — |
| | — |
| | | — |
| | 48 |
| | 2 |
| | (10 | ) | | — |
| | 375 |
| | — |
| | 415 |
|
Noncontrolling shareholder compensation | — |
| | — |
| | | 585 |
| | 327 |
| | 564 |
| | 18 |
| | 192 |
| | 853 |
| | 472 |
| | 3,011 |
|
Loss on disposal of assets | — |
| | — |
| | | 7,214 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,214 |
|
Acquisition related expenses | 98 |
| | 2,063 |
| | | 799 |
| | — |
| | — |
| | — |
| | — |
| | 738 |
| | 189 |
| | 3,887 |
|
Integration services fee | — |
| | 292 |
| | | — |
| | — |
| | 500 |
| | — |
| | — |
| | — |
| | — |
| | 792 |
|
Gain on equity method investment | (58,680 | ) | | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | | (58,680 | ) |
Gain on foreign currency transaction and other | (2,396 | ) | | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,396 | ) |
Management fees | 18,800 |
| | 83 |
| | | 375 |
| | 375 |
| | 261 |
| | 375 |
| | 375 |
| | 375 |
| | 375 |
| | 21,394 |
|
Adjusted EBITDA (2) | $ | (7,614 | ) | | $ | 3,757 |
| | | $ | 24,118 |
| | $ | 12,577 |
| | $ | 3,970 |
| | $ | 20,083 |
| | $ | 11,171 |
| | $ | 23,842 |
| | $ | 23,197 |
| | $ | 115,101 |
|
(1)Net income (loss) does not include income from discontinued operations for the ninesix months ended SeptemberJune 30, 2016.2019.
Adjusted EBITDA
Six months ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | 5.11 | | Ergobaby | | Liberty | | Velocity Outdoor | | ACI | | Arnold | | Foam | | Sterno | | Consolidated |
Net income (loss) (1) | $ | (12,528 | ) | | $ | (5,873 | ) | | $ | 2,279 |
| | $ | 1,731 |
| | $ | (567 | ) | | $ | 6,969 |
| | $ | (980 | ) | | $ | 184 |
| | $ | (811 | ) | | $ | (9,596 | ) |
Adjusted for: |
| | | |
| |
| | | |
| |
| | | | | |
|
Provision (benefit) for income taxes | — |
| | (1,321 | ) | | 911 |
| | 598 |
| | (374 | ) | | 1,434 |
| | 2,346 |
| | (208 | ) | | (1,299 | ) | | 2,087 |
|
Interest expense, net | 19,439 |
| | 5 |
| | 1 |
| | — |
| | 148 |
| | (1 | ) | | — |
| | — |
| | — |
| | 19,592 |
|
Intercompany interest | (36,606 | ) | | 8,438 |
| | 2,588 |
| | 2,060 |
| | 3,977 |
| | 3,739 |
| | 3,145 |
| | 3,511 |
| | 9,148 |
| | — |
|
Depreciation and amortization | 1,449 |
| | 10,774 |
| | 4,303 |
| | 756 |
| | 4,118 |
| | 1,673 |
| | 3,194 |
| | 4,879 |
| | 14,067 |
| | 45,213 |
|
EBITDA | (28,246 | ) | | 12,023 |
| | 10,082 |
| | 5,145 |
| | 7,302 |
| | 13,814 |
| | 7,705 |
| | 8,366 |
| | 21,105 |
| | 57,296 |
|
Gain on sale of businesses | (1,165 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | | — |
| | (1,165 | ) |
Loss on sale of fixed assets | — |
| | — |
| | — |
| | 59 |
| | — |
| |
|
| | 48 |
| | 6 |
| | — |
| | 113 |
|
Noncontrolling shareholder compensation | — |
| | 1,235 |
| | 503 |
| | 28 |
| | 764 |
| | 12 |
| | 77 |
| | 339 |
| | 1,041 |
| | 3,999 |
|
Acquisition related expenses | 5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,552 |
| | 632 |
| | 2,189 |
|
Integration services fee | — |
| | — |
| | — |
| | — |
| | 750 |
| | — |
| | — |
| | 844 |
| | — |
| | 1,594 |
|
Loss on foreign currency transactions | 2,247 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,247 |
|
Management fees | 19,155 |
| | 500 |
| | 250 |
| | 250 |
| | 250 |
| | 250 |
| | 250 |
| | 281 |
| | 250 |
| | 21,436 |
|
Adjusted EBITDA (2) | $ | (8,004 | ) | | $ | 13,758 |
| | $ | 10,835 |
| | $ | 5,482 |
| | $ | 9,066 |
| | $ | 14,076 |
| | $ | 8,080 |
| | $ | 11,388 |
| | $ | 23,028 |
| | $ | 87,709 |
|
(1) Net income (loss) does not include loss from discontinued operations for the six months ended June 30, 2018.
(2)As a result of the sale of our Tridien subsidiaryManitoba Harvest in September 2016,February 2019 and Clean Earth in June 2019, Adjusted EBITDA for the ninesix months ended SeptemberJune 30, 20162019 does not include Adjusted EBITDA from TridienManitoba Harvest of $1.5$4.0 million and Clean Earth of $20.5 million.
Cash Flow Available for Distribution and Reinvestment
The table below details cash receipts and payments that are not reflected on our income statement in order to provide an additional measure of management's estimate of 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 CAD to net income (loss) and cash flows provided by (used in) operating activities, which we consider to be the most directly comparable financial measure calculated and presented in accordance with GAAP.
| | | Nine Months Ended | Six Months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | June 30, 2019 | | June 30, 2018 |
Net income (loss) | $ | (15,519 | ) | | $ | 54,554 |
| $ | 328,331 |
| | $ | (1,088 | ) |
Adjustment to reconcile net (income) loss to cash provided by operating activities: |
| |
| |
Adjustment to reconcile net income (loss) to cash provided by operating activities: | |
| |
|
Depreciation and amortization | 88,659 |
| | 53,972 |
| 56,491 |
| | 57,131 |
|
Impairment expense/ loss on disposal of assets | 8,864 |
| | 7,214 |
| |
Gain on sale of businesses | (340 | ) | | (2,134 | ) | (328,164 | ) | | (1,165 | ) |
Amortization of debt issuance costs and original issue discount | 3,721 |
| | 2,363 |
| 2,159 |
| | 2,324 |
|
Unrealized loss on interest rate hedges | 1,178 |
| | 8,322 |
| |
Loss (gain) on equity method investment | 5,620 |
| | (58,680 | ) | |
Unrealized (gain) loss on interest rate hedge | | 3,350 |
| | (3,900 | ) |
Noncontrolling shareholder charges | 4,952 |
| | 3,012 |
| 5,268 |
| | 5,165 |
|
Excess tax benefit on stock compensation | (417 | ) | | (366 | ) | |
Provision for loss on receivables | 4,310 |
| | 59 |
| 745 |
| | 98 |
|
Deferred taxes | (17,937 | ) | | (4,280 | ) | (12,366 | ) | | (3,242 | ) |
Other | 494 |
| | 349 |
| 496 |
| | 135 |
|
Changes in operating assets and liabilities | (24,349 | ) | | (3,791 | ) | (47,656 | ) | | (20,146 | ) |
Net cash provided by operating activities | 59,236 |
| | 60,594 |
| 8,654 |
| | 35,312 |
|
Plus: |
| |
|
| |
|
Unused fee on revolving credit facility | 2,143 |
| | 1,355 |
| 882 |
| | 855 |
|
Integration services fee (1) | 2,708 |
| | 792 |
| 281 |
| | 1,594 |
|
Successful acquisition costs | 1,836 |
| | 3,888 |
| 596 |
| | 2,347 |
|
Excess tax benefit on stock compensation | 417 |
| | 366 |
| |
Realized loss from foreign currency (2) | | 363 |
| | 2,247 |
|
Loss on sale of Tilray Common Stock | | 5,300 |
| | — |
|
Changes in operating assets and liabilities | 24,349 |
| | 3,791 |
| 47,656 |
| | 20,146 |
|
Other | — |
| | 245 |
| — |
| | 791 |
|
Less: |
| |
|
| |
|
Payments on swap | 3,050 |
| | 3,114 |
| |
Maintenance capital expenditures: (2) |
| |
| |
Payment of interest rate swap | | 303 |
| | 1,086 |
|
Maintenance capital expenditures: (3) | |
| |
|
Compass Group Diversified Holdings LLC | — |
| | — |
| — |
| | — |
|
5.11 Tactical | 2,914 |
| | 540 |
| 1,336 |
| | 2,429 |
|
Advanced Circuits | 219 |
| | 2,845 |
| 1,126 |
| | 523 |
|
Arnold | 2,548 |
| | 1,625 |
| 1,806 |
| | 2,123 |
|
Clean Earth | 3,591 |
| | 4,504 |
| 3,495 |
| | 3,313 |
|
Crosman | 968 |
| | — |
| |
Ergobaby | 788 |
| | 441 |
| 237 |
| | 407 |
|
Foam Fabricators | | 936 |
| | 940 |
|
Liberty | 389 |
| | 850 |
| 307 |
| | 935 |
|
Manitoba Harvest | 625 |
| | 1,146 |
| — |
| | 257 |
|
Sterno Products | 1,373 |
| | 1,408 |
| |
Tridien | — |
| | 385 |
| |
Realized gain from foreign currency (3) | 3,583 |
| | 2,396 |
| |
Other (4) | 3,980 |
| | — |
| |
Sterno | | 1,221 |
| | 1,042 |
|
Velocity Outdoor | | 1,040 |
| | 2,299 |
|
Other | | 535 |
| | — |
|
Preferred share distribution | | 7,563 |
| | 3,625 |
|
Estimated cash flow available for distribution and reinvestment | $ | 66,661 |
| | $ | 51,777 |
| $ | 43,827 |
| | $ | 44,313 |
|
| | | | | | |
Distribution paid in April 2017/2016 | $ | (21,564 | ) | | $ | (19,548 | ) | |
Distribution paid in July 2017/2016 | (21,564 | ) | | (19,548 | ) | |
Distribution paid in April 2019/2018 | | $ | (21,564 | ) | | $ | (21,564 | ) |
Distribution paid in July 2019/2018 | | (21,564 | ) | | (21,564 | ) |
| | $ | (43,128 | ) | | $ | (43,128 | ) |
|
| | | | | | | |
Distribution paid in October 2017/ 2016 | (21,564 | ) | | (19,548 | ) |
| $ | (64,692 | ) | | $ | (58,644 | ) |
(1) Represents fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership, payable quarterly.
(2) Represents maintenance capital expenditures that were funded from operating cash flow, net of proceeds Reflects the foreign currency transaction gain or loss resulting from the sale of property, plant and equipment, and excludes growth capital expenditures of approximately $17.5 million for the nine months ended September 30, 2017 and $1.6 million for the nine months ended September 30, 2016.Canadian dollar intercompany loans issued to Manitoba Harvest.
| |
(3) | Reflects the foreign currency transaction gain or loss resultingRepresents maintenance capital expenditures that were funded from operating cash flow, net of proceeds from the Canadian dollar intercompany loans issued to Manitoba Harvest. |
| |
(4)
| Includes amountssale of property, plant and equipment, and excludes growth capital expenditures of approximately $8.5 million for the establishment of accounts receivable reserves related to two retail customers who filed bankruptcy duringsix months ended June 30, 2019 and $14.5 million for the first and third quarters of 2017.six months ended June 30, 2018. |
Seasonality
Earnings of certain of our operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarternature due to lower demand for safes atvarious recurring events, holidays and seasonal weather patterns, as well as the onsettiming of summer. Crosman typically has higher sales inour acquisitions during a given year. Historically, the third and fourth quarter each year, reflectingproduce the hunting and holiday seasons. Earnings from Clean Earth are typically lowerhighest net sales during the winter months due to the limits on outdoor construction and development activity 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 and holiday seasons, respectively.
our fiscal year.
Related Party Transactions
Equity method investmentManagement Services Agreement
We entered into a Management Services Agreement ("MSA") with CGM effective May 16, 2006. The MSA provides for, among other things, CGM to perform services for the Company in FOX
In March 2017, FOX closed onexchange for a
secondary offering through which we sold our remaining 5,108,718 sharesmanagement fee paid quarterly and equal to 0.5% of the Company's adjusted net assets, as defined in
FOX for total net proceeds of $136.1 million, after the
underwriter's discount of $8.9 million. Subsequent toMSA. Concurrent with the
June 2019 sale of
FOX shares in March 2017, we no longer hold an ownership interest in FOX. The sale of FOX shares in a secondary offering in March 2017 qualified as a Sale Event underClean Earth (refer to Note C - Discontinued Operations) CGM agreed to waive the Company's LLC Agreement. Duringmanagement fee on cash balances held at the second quarter of 2017, our board of directors declared a distribution to the Allocation Member in connectionCompany, commencing with the FOX Sale Event of $25.8 million. The profit allocation payment was made during the quarter ended June 30, 2017.2019 and continuing until the quarter during which the Company next borrows under the 2018 Revolving Credit Facility.
Integrations Services Agreements
Foam Fabricators, which was acquired in 2018, entered into Integration Services Agreements ("ISA") with CGM. The following table reflectsISA provides for CGM to provide services for new platform acquisitions to, amongst other things, assist the year to date activity from our investmentmanagement at the acquired entities in FOX (in thousands):
|
| | | | |
| | 2017 |
Balance January 1, 2017 | | $ | 141,767 |
|
Proceeds from sale of FOX shares | | (136,147 | ) |
Mark-to-market adjustment - March 7, 2017 (1) | | (5,620 | ) |
Balance September 30, 2017 | | $ | — |
|
(1) Represents the unrealized loss on the investment in FOX asestablishing a corporate governance program, implement compliance and reporting requirements of the dateSarbanes-Oxley Act and align the acquired entity's policies and procedures with our other subsidiaries. Each ISA is for the twelve-month period subsequent to the acquisition. Foam Fabricators paid CGM $2.3 million over the term of the FOX secondary offering through which we sold our remaining sharesISA, $2.0 million in FOX.2018 and $0.3 million in 2019.
5.11 - Related Party Vendor Purchases
5.11 purchases inventory from a vendor who is a related party to 5.11 through one of the executive officers of 5.11 via the executive's 40% ownership interest in the vendor. During the three and ninesix months ended SeptemberJune 30, 2017,2019, 5.11 purchased approximately $1.0$2.1 million and $4.7 million, respectively, in inventory from thisthe vendor.
Profit Allocation Payments
The sale of Manitoba Harvest in February 2019 and Clean Earth in June 2019 each qualified as a Sale Event under the Company's LLC Agreement. During the second quarter of 2019, the Company declared a distribution to the Allocation Member in connection with the Sale Event of Manitoba Harvest of $7.7 million which was paid in the second quarter of 2019. The profit allocation distribution was calculated based on the portion of the gain on sale related to the Closing Date Consideration, less the loss on sale of shares that were received as part of the Closing Consideration. An additional profit allocation distribution related to the Sale Event of Manitoba Harvest will be declared subsequent to receipt of the Deferred Consideration in August 2019. During the third quarter of 2019, the Company declared a distribution to the Allocation Member in connection with the Sale Event of Clean Earth of $43.3 million which will be paid in the third quarter of 2019.
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.arrangements.
Contractual Obligations
Long-term contractual obligations, except for our long-term debt obligations and operating lease liabilities, 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 SeptemberJune 30, 2017:2019:
| | (in thousands) | 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) | $ | 688,792 |
| | $ | 21,231 |
| | $ | 89,699 |
| | $ | 577,862 |
| | $ | — |
| $ | 1,194,814 |
| | $ | 333,115 |
| | $ | 104,647 |
| | $ | 103,837 |
| | $ | 653,215 |
|
Operating lease obligations (2) | 92,734 |
| | 12,231 |
| | 24,744 |
| | 17,333 |
| | 38,426 |
| 124,538 |
| | 11,144 |
| | 44,382 |
| | 29,903 |
| | 39,109 |
|
Purchase obligations (3) | 408,105 |
| | 237,110 |
| | 105,495 |
| | 65,500 |
| | — |
| 400,721 |
| | 177,010 |
| | 106,660 |
| | 81,609 |
| | 35,442 |
|
Total (4) | $ | 1,189,631 |
| | $ | 270,572 |
| | $ | 219,938 |
| | $ | 660,695 |
| | $ | 38,426 |
| $ | 1,720,073 |
| | $ | 521,269 |
| | $ | 255,689 |
| | $ | 215,349 |
| | $ | 727,766 |
|
| |
(1) | Reflects commitment fees and letter of credit feesamounts due under our 2014 Revolving2018 Credit Facility, and amounts due,as well as our Senior Notes, together with interest on our 2014 Term Loan and 2016 Incremental Term Loan.debt obligations. |
| |
(2) | Reflects various operating leases for office space, manufacturing facilities and equipment from third parties with various lease terms. |
| |
(3) | Reflects non-cancelable commitments as of SeptemberJune 30, 2017,2019, including: (i) shareholder distributions of $86.3$141.0 million; (ii) estimated management fees of $32.8$30.4 million per year over the next five years,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 $10.5$1.1 million in liabilities associated with unrecognized tax benefits as of SeptemberJune 30, 20172019 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, 2016,2018, as filed with the Securities and Exchange Commission ("SEC") on March 2, 2017.February 27, 2019.
Goodwill and Indefinite-lived Intangible Asset 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.
unit.
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. If qualitative factors are not sufficient to determine that the fair value of a reporting unit is more likely than not to exceed its carrying value. we will perform a quantitative test the reporting unit whereby we estimate the fair value of the reporting unit using an income approach or market approach, or a weighting of the two methods. Under the income approach, we estimate the fair value of our 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 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 characteristics that are
2017similar 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.
2019 Annual Impairment Testing
At- For our annual impairment testing at March 31, 2017,2019, we determined that the Manitoba Harvest reporting unitour Liberty operating segment required further quantitative testing (Step 1) because we could not conclude that the fair value of the reporting unit exceedsLiberty significantly exceeded its carrying value based on qualitative factors alone. ForWe concluded the Step 1goodwill impairment testing during the quarter ended June 30, 2019. The results of the quantitative impairment test at Manitoba, the Company utilized an income approach. The weighted average cost of capital used in the income approach at Manitoba was 12.0%. Resultstesting of the Step 1 quantitative testing of Manitoba HarvestLiberty reporting unit indicated that the fair value of Manitoba Harvestthe Liberty reporting unit exceeded itsthe carrying value. For thevalue by 135%. All of our other reporting units that were tested qualitatively as of March 31, 2019, and the results of the qualitative analysis indicated that the fair value of thoseexceeded their carrying value.
For the reporting units that were tested qualitatively for the 2019 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded their carrying value.
Manitoba Harvest
We2018 Annual Impairment Testing - Our Arnold operating segment previously had three separate reporting units. As a result of changes implemented by Arnold management during 2016 and 2017, we reassessed the reporting units at Arnold as of the annual impairment testing date in 2018. The separate Arnold reporting units were determined to only comprise one reporting unit at the Arnold operating segment level as of March 31, 2018. As part of the exercise of combining the separate Arnold reporting units into one reporting unit, we performed Step 1"before" and "after" goodwill impairment testing, duringwhereby we performed the 2017 annual impairment testing for Manitoba Harvest. Subsequenteach of the existing reporting units of Arnold and then subsequent to the completion of the annual impairment test,testing of the separate reporting units, we have compared the Manitoba Harvest operating results to the forecasts used in the Step 1 testing and noted no material variances in the results. However, there isperformed a significant degree of uncertainty inherent in the assumptions used to develop the forecast amounts used in the annualquantitative impairment test given the changing nature of consumer tastes, particularly related to future years. Therefore, the results of the forecast process for 2018, which are expected to be finalized in the fourth quarterArnold operating segment. Two of 2017, may make it necessary to perform interim goodwill impairment testing at Manitoba Harvest in the fourth quarter of 2017.
2016 Interim Impairment Testing
As a result of decreases in forecasted revenue, operating income and cash flows at Arnold, as well as a shortfall in revenue and operating income during the latter half of 2016 as compared to budgeted amounts, we determined that it was necessary to perform interim goodwill impairment testing on each of the three reporting units at Arnold. We performed Step 1 of the goodwill impairment assessment at December 31, 2016. For purposes of Step 1 for the Arnold reporting units, we estimated the fair valuePMAG and PTM, were tested qualitatively as part of the "before" test, while a quantitative impairment test was performed on the Flexmag reporting unit using only an income approach, wherebybecause we estimatecould not determine that it was more-likely than-not that the fair value of a reporting unit based on the present value of future cash flows.exceeded its carrying value. We do not believe that the market approach results in relevant data points for market multiples or comparative data from comparable public companies since most of Arnold's competitors are privately held and do not publish data that can be used inthen performed a market approach. In the income approach, we used a weighted average cost of capital of 12.5% for PMAG, 12.0% for Flexmag and 13.0% for PTM. Resultsquantitative impairment test of the Step 1Arnold operating segment, which combined the three reporting units. The results of the quantitative impairment testing for Arnold's Flexmag and PTMof the Arnold reporting unitsunit indicated that the fair value of thesethe Arnold reporting unitsunit exceeded theirthe carrying value by 34%254%. All of our other reporting units were tested qualitatively as of March 31, 2018, and 38%, respectively. The results of the Step 1 test for the PMAG unit indicated a potential impairment of goodwill and the Company performed the second step of goodwill impairment testing (Step 2) to determine the amount of impairment of the PMAG reporting unit.
We had not completed the Step 2 testing for PMAG at December 31, 2016, and recorded an estimated impairment loss for PMAG of $16 million based on a range of impairment loss. During the first quarter of 2017, we recorded an additional $8.9 million of goodwill impairment after the results of the Step 2qualitative analysis indicated total goodwill impairment ofthat the PMAG reporting unit of $24.9 million. The Step 2 impairment was higher than the initial estimate at December 31, 2016 due primarily to the valuation of PMAG's property, plant and equipment during the Step 2 exercise.
fair value exceeded their carrying value.
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 $73.5$60.0 million. The Manitoba Harvest trade name, which had a carrying value of $12.4 million at March 31, 2017, was included in the Step 1 impairment testing for Manitoba Harvest as noted above. The results of the qualitative analysis of our other reporting unit's indefinite-lived intangible assets, which we completed as of March 31, 2017,2019, indicated that the fair value of the indefinite lived intangible assets exceeded their carrying value.
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board ("FASB") issued a comprehensive new revenue recognition standard. The new standard outlines a 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. In addition, the standard requires disclosure of the amount, timing and uncertainty of cash flows arising from contracts with customers. The new standard, and all related amendments, was effective for us beginning January 1, 2018 and was adopted using the modified retrospective method for all contracts not completed as of the date of adoption.
The adoption of the new revenue guidance represented a change in accounting principle that will more closely align revenue recognition with the transfer of control of our goods and services and will provide financial statement readers with enhanced disclosures. In accordance with the new revenue guidance, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities.
The Company’s contracts with customers often include promises to transfer multiple products to a customer. Determining whether the promises are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once the performance obligations are identified, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The corresponding revenues are
recognized as the related performance obligations are satisfied as discussed above. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately and therefore observable.
Upon adoption of the new revenue guidance, the Company’s policy around estimating variable consideration related to sales incentives (early pay discounts, rights of return, rebates, chargebacks, and other discounts) included in certain customer contracts remained consistent with previous guidance. These incentives are recorded as a reduction in the transaction price. Under the new guidance, variable consideration is estimated and included in total consideration at contract inception based on either the expected value method or the most likely outcome method. The method was applied consistently among each type of variable consideration and the Company applies the expected value method to estimate variable consideration. These estimates are based on historical experience, anticipated performance and the Company’s best judgment at the time and as a result, reflect applicable constraints. The Company includes in the transaction price an amount of variable consideration estimated in accordance with the new guidance only to the extent that it is probablethat a significant reversal in the amount of cumulative revenuerecognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Business Combinations
The acquisitions of our businesses are accounted for under the acquisition method of accounting. Accounting for business combinations requires the use of estimates and assumptions in determining the fair value of assets acquired and liabilities assumed in order to allocate the purchase price. The estimates of fair value of the assets acquired and liabilities assumed are based upon assumptions believed to be reasonable using established valuation methods, taking into consideration information supplied by the management of the acquired entities and other relevant information. The determination of fair values requires significant judgment both by our management team and, when appropriate, valuations by independent third-party appraisers. We amortize intangible assets, such as trademarks and customer relationships, as well as property, plant and equipment, over their economic useful lives, unless those lives are indefinite. We consider factors such as historical information, our plans for the asset and similar assets held by our previously acquired portfolio companies. The impact could result in either higher or lower amortization and/or depreciation expense.
Recent Accounting Pronouncements
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our market risk since December 31, 2016.2018. For a further discussion of our exposure to market risk, refer to the section entitled "Quantitative and Qualitative Disclosures about Market Risk" that was disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016,2018, as filed with the SEC on March 2, 2017.February 27, 2019.
ITEM 4. CONTROLS AND PROCEDURES
As required by Securities Exchange Act of 1934, as amended (the "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 Rules 13a-15(e) and 15d-15(e)), as of SeptemberJune 30, 2017.2019. 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 SeptemberJune 30, 2017.2019.
There have been no material changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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
There have been no material changes to those legal proceedings associated with the Company’s and Holdings’ business together with legal proceedings for the businesses discussed in the section entitled "Legal Proceedings" that was disclosed in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 20162018, as filed with the SEC on March 2, 2017.February 27, 2019.
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" that was disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016,2018, as filed with the SEC on March 2, 2017 except as noted below related to our acquisition of Crosman in June 2017, and our issuance of Series A Preferred Shares in June 2017.
Risks Related to Crosman
Crosman’s products are subject to product safety and liability lawsuits, which could materially and adversely affect its financial condition, business and results of operations.
As a manufacturer of recreational airguns, archery products, laser aiming devices and related accessories, Crosman is involved in various litigation matters that occur in the ordinary course of business. Although Crosman provides information regarding safety procedures and warnings with all of its product packaging, not all users of its products will observe all proper safety practices. Failure to observe proper safety practices may result in injuries that give rise to product liability and personal injury claims and lawsuits, as well as claims for breach of contract, loss of profits and consequential damages.
If any unresolved lawsuits or claims are determined adversely, they could have a material adverse effect on Crosman, its financial condition, business and results of operations. As more of Crosman’s products are sold to and used by its consumers, the likelihood of product liability claims being made against it increases. In addition, the running of statutes of limitations in the United States for personal injuries to minor children may be suspended during a child’s legal minority. Therefore, it is possible that accidents resulting in injuries to minors may not give rise to lawsuits until a number of years later.
While Crosman maintains product liability insurance to insure against potential claims, there is a risk such insurance may not be sufficient to cover all liabilities incurred in connection with such claims and the financial consequences of these claims and lawsuits will have a material adverse effect on its business, financial condition, liquidity and results of operations.
Risks Related to the Series A Preferred Shares
Distributions on the Series A Preferred Shares are discretionary and non-cumulative.
Distributions on the Series A Preferred Shares are discretionary and non-cumulative. Holders of the Series A Preferred Shares will only receive distributions of the Series A Preferred Shares when, as and if declared by the board of directors of the Company. Consequently, if the board of directors of the Company does not authorize and declare a distribution for a distribution period, holders of the Series A Preferred Shares would not be entitled to receive any distribution for such distribution period, and such unpaid distribution will not be payable in such distribution period or in later distribution periods. We will have no obligation to pay distributions for a distribution period if the board of directors of the Company does not declare such distribution before the scheduled record date for such period, whether or not distributions are declared or paid for any subsequent distribution period with respect to the Series A Preferred Shares, or any other preferred shares we may issue or our common shares. This may result in holders of the Series A Preferred Shares not receiving the full amount of distributions that they expect to receive, or any distributions, and may make it more difficult to resell Series A Preferred Shares or to do so at a price that the holder finds attractive.
The board of directors of the Company may, in its sole discretion, determine to suspend distributions on the Series A Preferred Shares, which may have a material adverse effect on the market price of the Series A Preferred Shares. There can be no assurances that our operations will generate sufficient cash flows to enable us to pay distributions on the Series A Preferred Shares. Our financial and operating performance is subject to prevailing economic and industry conditions and to financial, business and other factors, some of which are beyond our control.February 27, 2019.
|
| | |
ITEM 6.EXHIBITS |
| |
Exhibit Number | | Description |
| | |
10.1*2.1 | | First Refinancing Amendment to the CreditStock Purchase Agreement, dated October 25, 2017,May 8, 2019, by and among (i) Calrissian Holdings, LLC; (ii) CEHI Acquisition Corporation; (iii) Compass Group Diversified Holdings LLC, BankLLC; (iv) each Stockholder and Optionholder of America, N.A.,the Company; and (v) solely for the lenders theretopurposes of Section 9(r) thereof, Harsco Corporation (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on May 9, 2019 (File No. 001-34927)). |
| | |
12.1* | | |
| | |
31.1* | | |
| |
31.2* | | |
| |
32.1*+ | | |
| |
32.2*+ | | |
| |
101.INS* | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| COMPASS DIVERSIFIED HOLDINGS |
| | |
| By: | | /s/ Ryan J. Faulkingham |
| | | Ryan J. Faulkingham |
| | | Regular Trustee |
Date: 11/8/2017July 31, 2019
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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: 11/8/2017July 31, 2019
EXHIBIT INDEX
|
| | |
Exhibit Number | | Description |
| | |
10.1*2.1 | | |
| | |
12.1* | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
32.1*+ | | |
| | |
32.2*+ | | |
| | |
101.INS* | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | |
101.SCH* | | XBRL Taxonomy Extension Schema Document |
| | |
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 |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
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* | Filed herewith. |
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+ | 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. |