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.
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 September 30, 20172020 and December 31, 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| % Ownership (1) September 30, 2020 | | % Ownership (1) December 31, 2019 |
| Primary | | Fully Diluted | | Primary | | Fully Diluted |
5.11 | 97.6 | | | 88.1 | | | 97.6 | | | 88.9 | |
Ergobaby | 81.4 | | | 72.6 | | | 81.9 | | | 75.8 | |
Liberty | 91.2 | | | 86.0 | | | 91.2 | | | 86.0 | |
Marucci | 92.2 | | | 83.8 | | | N/a | | N/a |
Velocity Outdoor | 99.3 | | | 88.0 | | | 99.3 | | | 93.9 | |
ACI | 69.3 | | | 65.4 | | | 69.4 | | | 65.4 | |
Arnold | 96.7 | | | 82.4 | | | 96.7 | | | 80.2 | |
Foam Fabricators | 100.0 | | | 91.5 | | | 100.0 | | | 91.5 | |
Sterno | 100.0 | | | 88.5 | | | 100.0 | | | 88.5 | |
(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 |
(in thousands) | September 30, 2020 | | December 31, 2019 |
5.11 | $ | 13,837 | | | $ | 12,056 | |
Ergobaby | 27,207 | | | 27,036 | |
Liberty | 3,584 | | | 2,936 | |
Marucci | 11,069 | | | 0 | |
Velocity Outdoor | 3,767 | | | 2,506 | |
ACI | 7,587 | | | 3,670 | |
Arnold | 1,232 | | | 1,255 | |
Foam Fabricators | 2,644 | | | 1,873 | |
Sterno | (233) | | | (884) | |
Allocation Interests | 100 | | | 100 | |
| $ | 70,794 | | | $ | 50,548 | |
Note L — Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis at September 30, 2020 and December 31, 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at September 30, 2020 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| | | | | | | |
Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | $ | (303) | | | $ | 0 | | | $ | 0 | | | $ | (303) | |
| | | | | | | |
| | | | | | | |
Total recorded at fair value | $ | (303) | | | $ | 0 | | | $ | 0 | | | $ | (303) | |
(1)Represents put option issued to noncontrolling shareholders in connection with the 5.11 and Liberty acquisitions.
|
| | | | | | | |
| % 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 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2019 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | $ | (111) | | | $ | 0 | | | $ | 0 | | | $ | (111) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total recorded at fair value | $ | (111) | | | $ | 0 | | | $ | 0 | | | $ | (111) | |
(1)Represents put option issued to noncontrolling shareholders in connection with the 5.11 and Liberty acquisitions.
Reconciliations of the change in the carrying value of the Level 3 fair value measurements from January 1, 2019 through September 30, 2020 are as follows (in thousands):
| | | | | |
| Level 3 |
Balance at January 1, 2019 | $ | (4,547) | |
Decrease in the fair value of put option of noncontrolling shareholder - Liberty | 72 | |
| |
Increase in the fair value of put option of noncontrolling shareholder - 5.11 | (10) | |
Adjustment to Ravin contingent consideration (1) | The principal difference between primary and diluted percentages(2,022) | |
Payment of our operating segments is due to stockcontingent consideration - Ravin (1) | 6,396 | |
Balance at December 31, 2019 | $ | (111) | |
Increase in the fair value of put option issuances of operating segment stock to managementnoncontrolling shareholder - Liberty | (151) | |
Increase in the fair value of the respective businesses.put option of noncontrolling shareholder - 5.11 | (41) | |
Balance at September 30, 2020 | $ | (303) | |
(1) The contingent consideration related to Velocity's acquisition of Ravin in September 2018. The purchase price of Ravin included a potential earn-out of up to $25.0 million contingent on the achievement of 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 $6.4 million and paid out during the year ended December 31, 2019. |
| | | | | | | |
| Noncontrolling Interest Balances |
(in thousands) | September 30, 2017 | | December 31, 2016 |
5.11 Tactical | $ | 7,387 |
| | $ | 5,934 |
|
Crosman | 744 |
| | N/a |
|
Ergobaby | 21,282 |
| | 18,647 |
|
Liberty | 2,976 |
| | 2,681 |
|
Manitoba Harvest | 13,852 |
| | 13,687 |
|
ACI | (8,502 | ) | | (11,220 | ) |
Arnold Magnetics | 1,342 |
| | 1,536 |
|
Clean Earth | 6,585 |
| | 5,469 |
|
Sterno Products | 1,860 |
| | 1,305 |
|
Allocation Interests | 100 |
| | 100 |
|
| $ | 47,626 |
| | $ | 38,139 |
|
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 year ended December 31, 2019.
Nonrecurring Fair Value Measurements
There were no assets or liabilities measured on a non-recurring basis during the quarter ended September 30, 2020. The following table provides the assets and liabilities carried at fair value measured on a non-recurring basis as of December 31, 2019. Refer to "Note G – Goodwill and Other Intangible Assets", for a description of the valuation techniques used to determine fair value of the assets measured on a non-recurring basis in the table below. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Expense |
| Fair Value Measurements at December 31, 2019 | | Year ended |
(in thousands) | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | December 31, 2019 |
Goodwill - Velocity Outdoor | $ | 30,079 | | | $ | — | | | $ | — | | | $ | 30,079 | | | $ | 32,881 | |
Note OM — 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 nine months ended September 30, 20172020 and 20162019 is as follows:
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2020 | | 2019 |
United States Federal Statutory Rate | 21.0 | % | | (21.0) | % |
State income taxes (net of Federal benefits) | 5.0 | | | 4.4 | |
Foreign income taxes | 1.3 | | | 7.2 | |
Expenses of Compass Group Diversified Holdings LLC representing a pass through to shareholders (1) | 8.3 | | | 22.7 | |
Impairment expense | 0 | | | 15.7 | |
Impact of subsidiary employee stock options | 1.3 | | | 0.3 | |
Credit utilization | (2.0) | | | (2.0) | |
Non-recognition of NOL carryforwards at subsidiaries | (5.1) | | | 3.9 | |
Effect of Tax Act | 4.7 | | | 4.0 | |
Other | (2.9) | | | (5.5) | |
Effective income tax rate | 31.6 | % | | 29.7 | % |
|
| | | | | |
| 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 | ) |
Impact of subsidiary employee stock options | 2.5 |
| | 0.7 |
|
Credit utilization | (7.7 | ) | | — |
|
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, 2020 and 2019 includes a loss at the Company's parent, which is taxed as a partnership.
| |
(1)
| The effective income tax rate for the nine months ended September 30, 2017 and 2016 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 September 30, 2017.2020. Net periodic benefit cost consists of the following for the three and nine months ended September 30, 20172020 and 20162019 (in thousands):
| | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 | |
Service cost | $ | 134 |
| | $ | 111 |
| | $ | 401 |
| | $ | 325 |
| Service cost | $ | 143 | | | $ | 127 | | | $ | 420 | | | $ | 383 | | |
Interest cost | 24 |
| | 35 |
| | 71 |
| | 103 |
| Interest cost | 8 | | | 33 | | | 23 | | | 99 | | |
Expected return on plan assets | (39 | ) | | (40 | ) | | (117 | ) | | (117 | ) | Expected return on plan assets | (21) | | | (39) | | | (62) | | | (119) | | |
Amortization of unrecognized loss | 63 |
| | 45 |
| | 188 |
| | 132 |
| Amortization of unrecognized loss | 58 | | | 35 | | | 171 | | | 104 | | |
Effect of curtailment | | Effect of curtailment | 352 | | | 0 | | | 352 | | | 0 | | |
Net periodic benefit cost | $ | 182 |
| | $ | 151 |
| | $ | 543 |
| | $ | 443 |
| Net periodic benefit cost | $ | 540 | | | $ | 156 | | | $ | 904 | | | $ | 467 | | |
During the third quarter of 2020, Arnold recognized a curtailment loss as a result of the termination of certain employees at the Switzerland location who were participants in the defined benefit plan. The termination of the employees resulted in a decrease in the accumulated benefit obligation liability and a curtailment loss of $0.4 million. The curtailment loss was recognized in other comprehensive income during the three andmonths ended September 30, 2020.
During the nine months ended September 30, 2017,2020, per the terms of the pension agreement, Arnold contributed $0.1 million and $0.3 million to the plan utilizing reserves from prior years over funding of the plan, respectively.plan. For the remainder of 2017,2020, the expected contribution to the plan will be approximately $0.1 million.
The plan assets are pooled with assets of other participating employers and are not separable; therefore, the fair values of the pension plan assets at September 30, 20172020 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 September 30, 2020. In the three and nine months ended September 30, 2020, the Company recognized $7.9 million and $22.8 million, respectively, in expense related to operating leases in the condensed consolidated statements of operations.
The maturities of lease liabilities at September 30, 2020 were as follows (in thousands):
| | | | | | | | |
2020 (excluding nine months ended September 30, 2020) | | $ | 4,841 | |
2021 | | 27,334 | |
2022 | | 25,059 | |
2023 | | 18,180 | |
2024 | | 14,244 | |
Thereafter | | 43,456 | |
Total undiscounted lease payments | | $ | 133,114 | |
Less: Interest | | 34,584 | |
Present value of lease liabilities | | $ | 98,530 | |
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.
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of September 30, 2020:
| | | | | | | | |
Lease Term and Discount Rate | | |
Weighted-average remaining lease term (years) | | 6.05 |
Weighted-average discount rate | | 7.65 | % |
Supplemental balance sheet information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | |
| | Line Item in the Company’s Consolidated Balance Sheet | | September 30, 2020 |
| | | | |
Operating lease right-of-use assets | | Other non-current assets | | $ | 94,464 | |
Current portion, operating lease liabilities | | Other current liabilities | | $ | 20,739 | |
Operating lease liabilities | | Other non-current liabilities | | $ | 77,791 | |
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | |
| | Nine months ended September 30, 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | | $ | 22,816 | |
Right-of-use assets obtained in exchange for lease obligations: | | |
Operating leases | | $ | 9,913 | |
Note R - Subsequent EventP — Related Party Transactions
In October 2017,Management Services Agreement
The Company entered into the 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 borrowed under the 2018 Revolving Credit Facility. In March 2020, as a proactive measure to provide the Company with additional cash liquidity in light of the COVID-19 pandemic, the Company elected to draw down $200 million on our 2018 Revolving Credit Facility. The Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of March 31, 2020. In addition, due to the unprecedented uncertainty as a result of the COVID-19 pandemic, CGM agreed to waive 50% of the management fee calculated at June 30, 2020 that was paid in July 2020. Further, for the third quarter of 2020, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of September 30, 2020. Integration Services Agreements
Marucci Sports, which was acquired in April 2020, entered into an Integration Services Agreement ("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 Facilityacquired entity's policies and procedures with our other subsidiaries. CGM will receive integration service fees of $2.0 million payable quarterly over a twelve month period as services are rendered beginning in the quarter ended September 30, 2020. Foam Fabricators, which was acquired in 2018, entered into an ISA with CGM. Foam Fabricators paid CGM $2.3 million over the term of the ISA, with $2.0 million paid in 2018 and $0.3 million in 2019. Integration service fees are included in selling, general and administrative expense on the subsidiaries' statement of operations in the period in which they are incurred.
he Company and its businesses have the following significant related party transactions:
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. 5.11 purchased approximately $0.7 million and $2.3 million during the three and nine months ended September 30, 2020, respectively, and $1.1 million and $3.2 million, during the three and nine months endedSeptember 30, 2019, respectively, in inventory from the vendor.
NOTE Q - SUBSEQUENT EVENT
On September 20, 2020, the Company, through its newly formed acquisition subsidiaries, BOA Holdings Inc., a Delaware corporation (“BOA Holdings”) and BOA Parent Inc., a Delaware corporation (“Buyer”) and a wholly-owned subsidiary of BOA Holdings, entered into an Agreement and Plan of Merger (the "First Refinancing Amendment"“Merger Agreement”) to, in effect, refinance the 2014 Term Loanwith Reel Holding Corp., a Delaware corporation (“BOA”) and the 2016 Incremental Term Loan (together,sole stockholder of Boa Technology, Inc., BOA Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Buyer (“Merger Sub”), and Shareholder Representative Services LLC (in its capacity as the “Term Loans”)representative of the stockholders of BOA). Pursuant to the First Refinancing Amendment, outstanding Term Loans at LIBOR Rate bear interest at LIBOR plus an applicable rateMerger Agreement, on October 16, 2020, Merger Sub was merged with and into BOA (the “Merger”) such that the separate existence of 2.25%Merger Sub ceased, and outstanding Term Loans at Base Rate bear interest at Base Rate plus 1.25%BOA survived the Merger as a wholly-owned subsidiary of Buyer. BOA, creators of the award-winning BOA® Fit System featured in performance footwear, action sports, outdoor and medical products worldwide, was founded in 2001 and is headquartered in Denver, Colorado. The total purchase price for the acquisition of BOA was $454 million (excluding working capital and certain other adjustments upon closing, and transaction costs). Prior toThe Company funded the amendment,acquisition with cash on hand and a $300 million draw on its 2018 Revolving Credit Facility. The Company's initial equity ownership in BOA is approximately 82%, as certain existing stockholders in BOA invested in the outstanding Term Loans bore interest at LIBOR plus 2.75% or Base Rate plus 1.75%. In connection withtransaction alongside the First Refinancing Amendment, the Company incurred $1.4 million of debt issuance costs associated with fees charged by term loan lenders.Company.
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, 20162019 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 withand is a boardcontrolling owner of directors whose corporate governance responsibilitiesnine businesses, or operating segments, at September 30, 2020. The segments are similar to that of a Delaware corporation.as follows: 5.11 Acquisition Corp. ("5.11"), The Company’s board of directors oversees the management of the CompanyErgo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and our businessesSecurity Products, Inc. ("Liberty Safe" or "Liberty"), Marucci Sports, LLC ("Marucci" or Marucci Sports"), 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 performance of CompassThe Sterno Group, Management LLC ("CGM" or our "Manager"Sterno"). 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 headquartered in North America. We characterize small to middle market businesses as those that generate annual cash flows of up to $60 million. We focus on companies of this size because of our belief that these companies are often more able to achieve growth rates above those of their relevant industries and are also frequently more susceptible to efforts to improve earnings and cash flow.
In pursuing new acquisitions, we seek businesses with the following characteristics:
North American base of operations;
stable and growing earnings and cash flow;
maintains a significant market share in defensible industry niche (i.e., has a "reason to exist");
solid and proven management team with meaningful incentives;
low technological and/or product obsolescence risk; and
a diversified customer and supplier base.
Our management team’s strategy for our businesses involves:
utilizing structured incentive compensation programs tailored to each business to attract, recruit and retain talented managers to operate our businesses;
regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;
assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue and cost related);
identifying and working with management to execute attractive external growth and acquisition opportunities; and
forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.
We are dependent on the earnings of, and cash receipts from our businesses to meet our corporate overhead and management fee expenses and to pay distributions. These earnings and distributions, net of any minority interests in these businesses, are generally available:
first, to meet capital expenditure requirements, management fees and corporate overhead expenses;
second, to fund distributions from the businesses to the Company; and
third, to be distributed by the Trust to shareholders.
We acquired our existing businesses (segments) that we own at September 30, 20172020 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% |
| | | | | | | | | | | | | | | | | | | | |
| | | | Ownership Interest - September 30, 2020 |
Business | | Acquisition Date | | Primary | | Diluted |
Advanced Circuits | | May 16, 2006 | | 69.3% | | 65.4% |
Liberty Safe | | March 31, 2010 | | 91.2% | | 86.0% |
Ergobaby | | September 16, 2010 | | 81.4% | | 72.6% |
Arnold | | March 5, 2012 | | 96.7% | | 82.4% |
Sterno | | October 10, 2014 | | 100.0% | | 88.5% |
5.11 | | August 31, 2016 | | 97.6% | | 88.1% |
Velocity Outdoor | | June 2, 2017 | | 99.3% | | 88.0% |
Foam Fabricators | | February 15, 2018 | | 100.0% | | 91.5% |
Marucci Sports | | April 20, 2020 | | 92.2% | | 83.8% |
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:
Recent EventsBranded Consumer
Trust Preferred Share Issuance5.11 - 5.11 is a leading provider of purpose-built technical 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.
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares") for gross proceeds
Ergobaby - Headquartered in Los Angeles, California, Ergobaby is dedicated to building a global community of $100.0 million, or $96.4 million netconfident parents with smart, ergonomic solutions that enable and encourage bonding between parents and babies. Ergobaby offers a broad range of underwriters' discountaward-winning baby carriers, strollers, swaddlers, nursing pillows, and issuance costs.
Acquisitionrelated products that fit into families’ daily lives seamlessly, comfortably and safely. Historically, Ergobaby derives more than 50% of Crosman
On June 2, 2017, through a wholly owned subsidiary, Crosman Acquisition Corp., we acquired 98.9%its sales from outside of the outstanding equity of Bullseye Acquisition Corporation, whichUnited States.
Liberty - Founded in 1988, Liberty Safe is the sole ownerpremier designer, manufacturer and marketer of Crosman Corp.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 ("Crosman"Dealer sales") in addition to various sporting goods, farm and fleet and home improvement retail outlets ("Non-Dealer sales"). CrosmanLiberty has the largest independent dealer network in the industry. Liberty is headquartered in Payson, Utah.
Marucci Sports - Founded in 2009, Marucci is a leading designer, manufacturer, and marketer of premium wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also develops and licenses franchises for sports training facilities. Marucci is headquartered in Baton Rouge, Louisiana.
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 are available through national retail chains, mass merchants, dealer and distributor networks. The airgun product category consists of air 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. HeadquarteredRavin primarily focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related to the advancement of crossbow technology. Velocity Outdoor is headquartered in Bloomfield, New York, CrosmanYork.
Niche Industrial
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 50% - 55% of Advanced Circuits’ gross sales. 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. Advanced Circuits is headquartered in Aurora, Colorado.
Arnold - Arnold serves over 425a variety of markets including aerospace and defense, general industrial, motorsport/ automotive, oil and gas, medical, energy, reprographics and advertising specialties. Over the course of more than 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,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 14 molding and fabricating facilities across North America and provides products to a variety of end-markets, including mass merchants, sporting goods retailers, online channelsappliances and distributors serving smaller specialty storeselectronics, pharmaceuticals, health and internationalwellness, automotive, building products and others. In July 2020, Foam Fabricators acquired the assets of Polyfoam, a Massachusetts-based manufacturer
of protective and temperature-sensitive packaging solutions for the medical, pharmaceutical, grocery and food industries, among others.
Sterno - Sterno, headquartered in Corona, California, is the parent company of Sterno LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and Rimports Inc. ("Rimports"). Sterno is a leading manufacturer and marketer of portable food warming systems, creative indoor and outdoor lighting, and home fragrance solutions for the foodservice industry and consumer markets. Its diversified product portfolio includes the widely known Crosman, BenjaminSterno offers a broad range of wick and CenterPoint brands. The purchase price, including proceeds from noncontrolling interestsgel chafing systems, butane stoves and net of transaction costs, was approximately $150.4 million. Crosmanaccessories, liquid and traditional wax candles, catering equipment and lamps through Sterno Products, flameless candles and outdoor lighting products through Sterno Home, and scented wax cubes and warmer products used for home decor and fragrance systems through Rimports.
Our management investedteam’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 transaction alongdevelopment 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.
While our businesses have different growth opportunities and potential rates of growth, we work with the Company, representing approximately 1.1%management teams 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 portioneach of our FOX sharesbusinesses to increase the value of, and cash generated by, each business through various initiatives, including making selective capital investments to expand geographic reach, increase capacity or reduce manufacturing costs of our businesses; improving and expanding existing sales and marketing programs; and assisting in March 2017 qualified as a Sale Event under the Company's LLC Agreement. During the second quarteracquisition and integration 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, in part due to continued attractive valuations for sellers. 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.complementary businesses. We remain focused on marketing the Company’sour Company's attractive ownership and management attributes to potential sellers of middle market businesses and intermediaries.businesses. In addition, we continue to pursue opportunities for add-on acquisitions by certain of our existing subsidiary companies, which can be particularly attractive from a strategic perspective.
DiscontinuedImpact of COVID-19 on Our Operations, Financial Condition, Liquidity and Results of Operations
In March 2020, the World Health Organization categorized COVID-19 as a pandemic and, during the third quarter of 2020, the COVID-19 pandemic continued to impact the Company. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration, severity and ultimate impact on our business are currently unknown. The COVID-19 pandemic led to governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter-in-place” and “stay-at-home” orders, travel restrictions, business curtailments, particularly retail operations and non-essential businesses, school closures, and other measures. In addition, governments and central banks in several parts of the world enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. The public health situation, global response measures and corresponding impacts on various markets remain fluid and uncertain. We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it is impacting our customers, employees, supply chains, and distribution networks. We experienced and expect to continue to experience reductions in customer demand in certain of our niche industrial end-markets. We expect that the government measures taken to address the spread of the virus, the reduced operational status of some of our suppliers, the reductions in production at certain facilities, and the decrease in foot traffic at many brick and mortar retail businesses may impact our operations for the remainder of 2020. The health of our team and various stakeholders is our highest priority, and we have taken multiple steps to provide support and a safe work environment.
Due to the unprecedented uncertainty as a result of the COVID-19 pandemic, in April 2020 CGM agreed to waive 50% of the second quarter management fee calculated at June 30, 2020 that was paid in July 2020. We continue to work with management at each of our businesses to reduce our controllable costs, including short-term actions to reduce labor costs, eliminating non-essential travel and reducing discretionary spending. Additionally, our businesses are proactively managing working capital and we have reduced our capital spending plan for the year, without deferring many key strategic ongoing initiatives.
2020 Outlook in Consideration of the COVID-19 Pandemic
The Company anticipates that COVID-19 will continue to have an impact on its results of operations for Tridien for the threeremainder of 2020, including a decrease in operating income and Adjusted EBITDA as compared to the prior year at certain of our niche industrial businesses. For example, the Company expects the Sterno Products division of Sterno to be negatively impacted by the pandemic due to that division's reliance on the food service industry. However, the diversification of our portfolio of businesses has allowed us to offset the decline in operating results from the COVID-19 pandemic experienced by some of our operating segments. Driven by the strong performance at our outdoor consumer brand products, 5.11, Liberty Safe and Velocity Outdoor, and our acquisition of Marucci Sports in April 2020, our consolidated operating income, net income, operating cash flows and Adjusted EBITDA increased in the nine months ended September 30, 2016 are presented2020 as discontinued operationscompared to the nine months ended September 30, 2019.
During 2019, the Company received an aggregate total of $771.6 million in our consolidated financial statementsnet cash proceeds as a result of the divestitures of Manitoba Harvest and Clean Earth, as well as $111.0 million from the issuance and sale of TridienSeries C Preferred Shares. In May 2020, the Company completed a share offering of five million Trust common shares resulting in September 2016. Refernet proceeds of $83.9 million and issued an additional $200 million in our 8% Senior Notes. The Company believes that it currently has adequate liquidity and capital resources to Note D - "Discontinued Operations"meet its existing obligations, and quarterly distributions to its shareholders, as, and if, approved by the Board of Directors, over the next twelve months. However, if the Company’s operations are impacted more than expected during the fourth quarter of 2020 as a result of continued declining COVID-19-related economic conditions and the potential for an extended economic recession, the Company’s results of operations could be impacted more dramatically than currently anticipated and as a result, the Company’s liquidity and capital resources could be even more constrained than expected.
See Part II, Item 1A. "Risk Factors" for additional information.
Recent Events
Sale of Trust Common Shares
In May 2020, the Company completed an offering of 5,000,000 Trust common shares at a public offering price of $17.60 per share. The net proceeds to the Company, after deducting the underwriter's discount and offering costs, totaled approximately $83.9 million.
Issuance of Senior Notes
On May 7, 2020, the Company consummated the issuance and sale of $200 million aggregate principal amount of its 8.000% Senior Notes due 2026 (the "Additional Notes"). The proceeds from the Additional Notes were used to pay down the amount outstanding on the Company's 2018 Revolving Credit Facility.
Acquisition of Marucci Sports, LLC
On March 6, 2020, the Company, through a wholly-owned subsidiary, Wheelhouse Holdings Inc., a Delaware Corporation (“Buyer”), entered into an Agreement and Plan of Merger with Marucci Sports, LLC, a Delaware limited liability company (“Marucci”), Wheelhouse Holdings Merger Sub LLC, a Delaware limited liability company and a wholly owned Subsidiary of Buyer, and, Wheelhouse 2020 LLC, a Delaware limited liability company (in its capacity as the representative of the condensed consolidated financial statementsunit holders and option holders of Marucci), pursuant to which Wheelhouse Holdings Merger Sub LLC was to be merged with and into Marucci (the “Transaction”) such that the separate existence of Wheelhouse Holdings Merger Sub LLC would cease, and Marucci would survive the Transaction as a subsidiary of Buyer. Headquartered in Baton Rouge, Louisiana, Marucci is a leading manufacturer and distributor of baseball and softball equipment. Founded in 2009, Marucci has a product portfolio that includes wood and metal bats, apparel and accessories, batting and fielding gloves and bags and protective gear.
The Buyer, via the Transaction, completed the acquisition of Marucci on April 20, 2020 for further discussiona total purchase price of approximately $200 million in cash, subject to certain adjustments based on matters such as the working capital and indebtedness balances at the time of the operating resultsclosing. The Company funded the purchase price using funds drawn on its 2018 Revolving Credit Facility in March 2020. The Company's initial equity ownership in Marucci is approximately 92%, as certain existing stakeholders in Marucci invested in the transaction alongside the Company.
Acquisition of our discontinued businesses.Reel Holding Corp.
On September 20, 2020, the Company, through its newly formed acquisition subsidiaries, BOA Holdings Inc., a Delaware corporation (“BOA Holdings”) and BOA Parent Inc., a Delaware corporation (“Buyer”) and a wholly-owned subsidiary of BOA Holdings, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Reel Holding Corp., a Delaware corporation (“BOA”) and the sole stockholder of Boa Technology, Inc., BOA Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Buyer (“Merger Sub”), and Shareholder Representative Services LLC (in its capacity as the representative of the stockholders of BOA). Pursuant to the Merger Agreement, on October 16, 2020, Merger Sub was merged with and into BOA (the “Merger”) such that the separate existence of Merger Sub ceased, and BOA survived the Merger as a wholly-owned subsidiary of Buyer. BOA, creators of the award-winning BOA® Fit System featured in performance footwear, action sports, outdoor and medical products worldwide, was founded in 2001 and is headquartered in Denver, Colorado. The total purchase price for the acquisition of BOA was $454 million (excluding working capital and certain other adjustments upon closing, and transaction costs). The Company funded the acquisition with cash on hand and a $300 million draw on its 2018 Revolving Credit Facility. The Company's initial equity ownership in BOA is approximately 82%, as certain existing stockholders in BOA invested in the transaction alongside the Company.
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
The following discussion reflects a comparison of the historical results of operations of our consolidated business for the three and nine months ended September 30, 2020 and September 30, 2019, and components of the results of operations as well as those components presented as a percent of net revenues, for each of our businesses on a stand-alone basis. For the acquisition of Marucci in April 2020, the pro forma results of operations for the Marucci business segment have been prepared as if we purchased that business on January 1, 2019. Where appropriate, relevant pro forma adjustments are reflected as part of the historical operating results of Marucci. We believe this is the most meaningful comparison for the operating results of acquired business segments. The consolidated results of operations reflect the operating results of Marucci from the date of acquisition.
In the first quarter of 2020, we began to see the impacts of COVID-19 on certain of our businesses, markets and operations, particularly those that were most affected by governmental “stay-at home” orders which led to reduced consumer traffic and either a closure of stores by some retailers or a focus on items that were deemed essential. The steps taken by governments to limit the spread of the virus had a negative impact on our operations in the second quarter; April and May saw a slowdown in revenue at several of our businesses, however, we experienced a rebound in June as localities began lifting restrictions. During the third quarter, some of our niche industrial businesses continued to be adversely impacted by the effect of the COVID-19 pandemic on the economy, while certain of our consumer businesses continued to experience solid demand.
The COVID-19 pandemic has had, and may continue to have, negative impacts on certain of our niche industrial businesses, results of operations, financial condition and cash flows in the near and medium term. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration, severity and ultimate impact on our business are currently unknown. The ultimate impact of COVID-19 on our business is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are highly uncertain and cannot be accurately predicted at this time. The following results of operations we provide (i)at each of our actual consolidatedbusinesses 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 nine months ended September 30, 20172020 and 2016, which includes the historical results of operations of our businesses (operating segments) from the date of acquisition and (ii) comparative results of operations for each of our businesses on a stand-alone basis for the three and nine months ended September 30, 2017 and 2016, where all periods presented include relevant proforma adjustments for pre-acquisition periods and explanations where applicable.2019:
Consolidated Results of Operations – Compass Diversified Holdings and Compass Group Diversified Holdings LLC | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net revenues | $ | 418,903 | | | $ | 388,313 | | | $ | 1,085,979 | | | $ | 1,063,254 | |
Cost of revenues | 265,119 | | | 251,778 | | | 695,304 | | | 684,601 | |
Gross profit | 153,784 | | | 136,535 | | | 390,675 | | | 378,653 | |
Selling, general and administrative expense | 93,036 | | | 82,027 | | | 260,850 | | | 243,736 | |
Fees to manager | 9,659 | | | 8,874 | | | 23,436 | | | 28,352 | |
Amortization of intangibles | 15,222 | | | 13,520 | | | 43,506 | | | 40,632 | |
Impairment expense | — | | | 33,381 | | | — | | | 33,381 | |
Operating income (loss) | 35,867 | | | (1,267) | | | 62,883 | | | 32,552 | |
Interest expense | (12,351) | | | (11,525) | | | (32,122) | | | (48,424) | |
Amortization of debt issuance costs | (660) | | | (770) | | | (1,795) | | | (2,625) | |
Loss on sale of securities | — | | | (4,893) | | | — | | | (10,193) | |
Other income (expense) | (447) | | | (5,727) | | | (2,172) | | | (6,251) | |
Income (loss) from continuing operations before income taxes | 22,409 | | | (24,182) | | | 26,794 | | | (34,941) | |
Provision for income taxes | 1,606 | | | 4,400 | | | 8,477 | | | 10,375 | |
Income (loss) from continuing operations | $ | 20,803 | | | $ | (28,582) | | | $ | 18,317 | | | $ | (45,316) | |
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
(in thousands) | |
|
| | | | |
Net sales | $ | 323,957 |
| | $ | 252,285 |
| | $ | 921,330 |
| | $ | 659,748 |
|
Cost of sales | 206,232 |
| | 169,870 |
| | 599,552 |
| | 436,544 |
|
Gross profit | 117,725 |
| | 82,415 |
| | 321,778 |
| | 223,204 |
|
Selling, general and administrative expense | 80,804 |
| | 53,648 |
| | 239,102 |
| | 140,702 |
|
Fees to manager | 8,277 |
| | 8,435 |
| | 24,308 |
| | 21,394 |
|
Amortization of intangibles | 14,167 |
| | 8,423 |
| | 39,256 |
| | 23,966 |
|
Impairment expense | — |
| | — |
| | 8,864 |
| | — |
|
Loss on disposal of assets | — |
| | 551 |
| | — |
| | 7,214 |
|
Operating income | $ | 14,477 |
| | $ | 11,358 |
| | $ | 10,248 |
| | $ | 29,928 |
|
Three months ended September 30, 20172020 compared to three months ended September 30, 20162019
Net salesrevenues
On a consolidated basis, net salesrevenues for the three months ended September 30, 20172020 increased by approximately $71.7$30.6 million, or 28.4%7.9%, 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.2019. During the three months ended September 30, 20172020 compared to 2016,2019, we also saw a notablesignificant increases in net sales increase at Clean EarthLiberty ($4.26.5 million primarily due to two acquisitions in 2016increase), Velocity Outdoor ($24.0 million increase), and one acquisition in 2017)Foam Fabricators ($5.2 million increase), partially offset bywhile several of our other businesses saw a decrease in net sales at our Libertyresulting from the effects of the COVID-19 pandemic, notably Arnold ($5.48.3 million decrease), Ergobaby ($1.8 million decrease), Manitoba Harvest ($2.0 million decrease) and Sterno ($2.913.7 million decrease) subsidiaries.. Our Marucci business, which we acquired in April 2020, contributed $19.6 million in net revenue during the third quarter, while the increase in Foam Fabricator's net revenue for the quarter was primarily attributable to their acquisition of Polyfoam in July 2020. 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 $36.4$13.3 million during the three month period ended September 30, 2017, 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 increase in cost of sales during the three months ended September 30, 2017. Clean Earth accounted for $2.9 million of2020 compared to the increase due to acquisitionscorresponding period in the prior and current year. These increases were offset by decreases in cost of sales at other operating segments, particularly Ergobaby ($4.8 million), Liberty ($4.7 million) and Arnold ($1.4 million).2019. Gross profit as a percentage of salesnet revenues was approximately 36.3%36.7% in the three months ended September 30, 20172020 compared to 32.7%35.2% in the three months ended September 30, 2016.2019. We recognized $1.3 million in expense related to the amortization of the inventory step-up resulting from our purchase price allocation of Marucci Sports during the quarter. Excluding the effect of the Marucci adjustment, gross profit as a percentage of net revenues was 37.0%. The increase in gross profit as a percentage of net sales in the quarter ended September 30, 2020 as compared to the quarter ended September 30, 2019 primarily related to the increase in net revenue at our branded consumer businesses, which have higher gross
margins than our niche industrial businesses. 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 increased approximately $27.2$11.0 million during the three month periodmonths ended September 30, 2017,2020, compared to the corresponding period in 2016. The2019. $7.6 million of the increase in selling, general and administrative expenseis attributable to our Marucci business, which was acquired 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).current year. 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$3.0 million in the third quarter of 20172020 and $2.7$3.3 million in the third quarter of 2016.
2019.
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 September 30, 2017,2020, we incurred approximately $8.3$9.7 million in management fees as compared to $8.4$8.9 million in fees in the three months ended September 30, 2016.2019. The increase in Management fees is attributable to our acquisition of Marucci in April 2020, partially offset by CGM waiving the portion of the management fee attributable to the cash balances held at the Company as of September 30, 2020.
Amortization expense
Amortization expense for the three months ended September 30, 20172020 increased $5.7$1.7 million as compared to the three months ended September 30, 2016 primarily2019 as a result of the acquisitions of 5.11amortization expense associated with the intangibles that were recognized in August 2016 and Crosman in June 2017.conjunction with the preliminary purchase price allocation for Marucci.
Loss on disposal of assetsImpairment expense
Ergobaby recorded a $0.6 million loss on disposal of assets duringIn the third quarter of 20162019, we performed interim impairment testing at our Velocity business as a result of operating results below forecasts as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods. We recognized $33.4 million in impairment expense in the quarter ended September 30, 2019 related to its decisionthe Velocity interim impairment testing.
Interest expense
We recorded interest expense totaling $12.4 million for the three months ended September 30, 2020 compared to dispose$11.5 million for the comparable period in 2019, an increase of $0.8 million. The increase in interest expense for the quarter reflects the repayment of our 2018 Term Loan during 2019 using a portion of the Orbit Baby product line. Referproceeds from the sale of Clean Earth and proceeds from the issuance of preferred shares, offset by an increase in interest expense during the current quarter related to our issuance of an additional $200 million in our 8.000% Senior Notes in May 2020.
Other income (expense)
For the quarter ended September 30, 2020, we recorded $0.4 million in other expense as compared to $5.7 million in other expense in the quarter ended September 30, 2019, a decrease in expense of $5.3 million. In the prior year, we recognized $5.0 million of expense related to the Ergobaby section under "Resultswrite-off of Operations - Our Businesses"debt issuance costs due to the repayment of our 2018 Term Loan. Other income (expense) in the current quarter primarily reflects the movement in foreign currency at our businesses with international operations, and gains or (losses) realized on the sale of property, plant and equipment.
Income taxes
We had an income tax provision of $1.6 million from continuing operations during the three months ended September 30, 2020 compared to an income tax provision of $4.4 million from continuing operations during the same period in 2019. While our income from continuing operations before taxes for additional details regarding the loss on disposal.quarter ended September 30, 2020 increased by approximately $46.6 million as compared to the prior year quarter ended September 30, 2019, our tax provision decreased $2.8 million as the tax provision reflects an annual effective tax rate at our subsidiaries, the effect of state and local taxes and the related allocation of income, and the losses at our parent company, which is taxed as a partnership.
Nine months ended September 30, 20172020 compared to nine months ended September 30, 2016
2019
Net salesrevenues
On a consolidated basis, net salesrevenues for the nine months ended September 30, 20172020 increased by approximately $261.6$22.7 million, or 39.6%2.1%, compared to the corresponding period in 2016. Our acquisition of 5.11 in August 2016 contributed $201.3 million to the increase in net sales and our acquisition of Crosman in June 2016 contributed $44.2 million to the increase.2019. During the nine months ended September 30, 20172020 compared to 2016,2019, we also saw notableincreases in net sales increases at 5.11 ($2.8 million increase), Liberty ($13.0 million increase), and Velocity ($40.8 million increase), while our other businesses saw a decrease in net sales resulting primarily from the effects of the COVID-19 pandemic, notably Ergobaby ($2.79.6 million primarily due to the acquisition of Baby Tula)decrease), Clean Earth(Arnold ($19.314.0 million primarily due to two acquisitions in 2016 and one in 2017)decrease), Foam Fabricators ($4.3 million decrease) and Sterno ($6.431.0 million primarily due todecrease). Our Marucci business, which we acquired in April 2020, had net revenues of $24.8 million since the acquisitiondate of Sterno Home Inc. ("Sterno Home", formerly Northern International, Inc.) in January 2016), offset by decreases in sales at Liberty ($8.7 million) and Arnold Magnetics ($3.4 million).acquisition. 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$10.7 million during the nine month periodmonths ended September 30, 2017,2020 compared to the corresponding period in 2016. 5.11 accounted for $121.42019. Gross profit as a percentage of net revenues was approximately 36.0% in the nine months ended September 30, 2020 compared to 35.6% in the nine months ended September 30, 2019. We recognized $4.4 million of the increase in cost of sales, including $21.7 in expense related to the amortization of the inventory step-up resulting from our purchase accountingprice allocation of Marucci Sports and Foam Fabricators' acquisition of Polyfoam during the nine months ended September 30, 2017, while our Crosman acquisition accounted for $36.3 million2020. Excluding the effect of the increase. Clean Earth accounted for $14.7 millionamortization 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). Grossinventory step-up, gross profit as a percentage of salesnet revenues was approximately 34.9% in the nine months ended September 30, 2017 compared to 33.8% in the nine months ended September 30, 2016.36.4%. 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 increased approximately $98.4$17.1 million during the nine month periodmonths ended September 30, 2017,2020, compared to the corresponding period in 2016.2019. The increase in selling, general and administrative expense in 2017 comparedprimarily relates to 2016 is principallyour acquisition of Marucci Sports during the result of the 5.11 acquisition in August 2016 ($85.3 million), and Crosman in June 2017 ($7.7 million, including $1.8second quarter. We incurred $2.0 million in acquisition related expenses). We also saw an increaseexpenses and Marucci incurred approximately $11.7 million in selling, general and administrative expense forduring the nine months endedperiod from acquisition through September 30, 2017 at Clean Earth ($2.92020, which includes $0.5 million duein integration service fees paid to acquisitions in the current 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.CGM. 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 $10.0 million in the first nine months ended September 30, 2016 to $9.0of 2020 and $9.7 million in the first nine months ended September 30, 2017.
of 2019.
Fees to manager
Pursuant to the MSA,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 nine months ended September 30, 2017,2020, we incurred approximately $24.3$23.4 million in expense for thesemanagement fees as compared to $21.4$28.4 million in fees in the nine months ended September 30, 2019. Concurrent with the September 2019 sale of Clean Earth, CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended September 30, 2019 and continuing until the quarter during which the Company next borrowed under the 2018 Revolving Credit Facility. In March 2020, as a proactive measure to provide the Company with additional cash liquidity in light of the COVID-19 pandemic, the Company elected to draw down $200 million on our 2018 Revolving Credit Facility. The Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of March 31, 2020. Additionally, as a result of an expected decline in earnings and cash flows in the second quarter of 2020, CGM agreed to waive 50% of the management fee calculated at June 30, 2020 that was paid in July 2020. Further, for the corresponding period in 2016.third quarter of 2020, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of September 30, 2020. The increaseresult of these waivers was a decrease in the management fees that occurred is primarily duefee during the
nine months ended September 30, 2020 as compared to the increasesame period in consolidated net assets resulting from the acquisitionprior year, despite the addition of 5.11the Marucci business in August 2016, and the acquisition of Crosman in June 2017.April 2020.
Amortization expense
Amortization expense for the nine months ended September 30, 20172020 increased $15.3$2.9 million as compared to the nine months ended September 30, 20162019 as a result of the acquisition of 5.11amortization expense associated with the intangibles that were recognized in August 2016 and Crosman in June 2017.conjunction with the preliminary purchase price allocation for Marucci.
Impairment expense
ArnoldIn the third quarter of 2019, we performed an interim impairment testtesting at eachour Velocity business as a result of its reporting unitsoperating results below forecasts as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods. We recognized $33.4 million in impairment expense in the fourth quarter ended September 30, 2019 related to the Velocity interim impairment testing.
Interest expense
We recorded interest expense totaling $32.1 million for the nine months ended September 30, 2020 compared to $48.4 million for the comparable period in 2019, a decrease of 2016, which resulted$16.3 million. The decrease in interest expense for the nine months ended September 30, 2020 reflects the repayment of our 2018 Term Loan during 2019 using a portion of the proceeds from the sale of Clean Earth and proceeds from the issuance of preferred shares, offset by an increase in interest expense related to our issuance of an additional $200 million of our 8.000% Senior Notes in May 2020.
Other income (expense)
For the nine months ended September 30, 2020, we recorded $2.2 million in other expense as compared to $6.3 million in other expense in the recordingnine months ended September 30, 2019, an increase in income of preliminary impairment expense of the PMAG reporting unit of $16.0$4.1 million. In the first quarterprior year, we recognized $5.0 million of 2017, Arnold completedexpense related to the impairment testingwrite-off of debt issuance costs due to the repayment of our 2018 Term Loan. Other income (expense) in the current year primarily reflects the movement in foreign currency at our businesses with international operations.
Income taxes
We had an income tax provision of $8.5 million from continuing operations during the nine months ended September 30, 2020 compared to an income tax provision of $10.4 million from continuing operations during the same period in 2019. While our income from continuing operations before taxes for the nine months ended September 30, 2020 increased by approximately $61.7 million as compared to the nine months ended September 30, 2019, our tax provision decreased $1.9 million as the tax provision reflects an annual effective tax rate at our subsidiaries, the effect of state and local taxes and the related allocation of income, and the losses at our parent company, which is taxed as a partnership. Our effective tax rate for the nine months ended September 30, 2020 was 31.6% as compared to and effective tax rate of 29.7% for the nine months ended September 30, 2019.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income-based tax laws, some of which were enacted under the Tax Cuts and Jobs Act (TCJA) in 2017. Some of the PMAG reporting unitkey income tax related provisions of the CARES Act were allowing net operating losses ("NOLs") arising in 2018, 2019 or 2020 to be carried back five years, suspending the 80% taxable income limit until 2021, and recorded an additional $8.9 million impairment expense basedincreasing the taxable income threshold for the limit on the resultsinterest deduction from 30% to 50% for tax years beginning in 2019 and 2020 and allowing taxpayers to use 2019 taxable income to calculate the 2020 limit. While several of our subsidiaries were able to take advantage of the Step 2 impairment testing.
Loss on disposal of assets
Ergobaby recorded a $7.2 million loss on disposal of assets during 2016income tax related to its decision to disposeprovisions of the Orbitbaby product line. ReferCARES ACT in the current year 2020, the CARES Act did not have a material impact on our consolidated financial statements. We continue to monitor any effects that may result from the Ergobaby section under "Results of Operations - Our Businesses" for additional details regarding the loss on disposal.CARES Act.
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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net sales | | $ | 98,406 | | | 100.0 | % | | $ | 98,053 | | | 100.0 | % | | $ | 281,822 | | | 100.0 | % | | $ | 278,978 | | | 100.0 | % |
Gross profit | | $ | 51,264 | | | 52.1 | % | | $ | 48,204 | | | 49.2 | % | | $ | 142,842 | | | 50.7 | % | | $ | 136,624 | | | 49.0 | % |
SG&A | | $ | 40,147 | | | 40.8 | % | | $ | 39,791 | | | 40.6 | % | | $ | 117,564 | | | 41.7 | % | | $ | 115,927 | | | 41.6 | % |
Operating income | | $ | 8,681 | | | 8.8 | % | | $ | 5,977 | | | 6.1 | % | | $ | 17,969 | | | 6.4 | % | | $ | 13,388 | | | 4.8 | % |
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 |
|
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 September 30, 20172020 compared to the pro forma three months ended September 30, 20162019
Net sales
Net sales for the three months ended September 30, 20172020 were $72.0$98.4 million as compared to net sales of $74.7$98.1 million for the three months ended September 30, 2016, a decrease2019, an increase of $2.7$0.4 million, or 3.5%0.4%. This decreaseincrease is due primarily to a $3.8 million decreasegrowth 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. Retail and e-commerce sales grew $4.3 million or 56%,and new stores sales offset by the effects of the COVID-19 pandemic on store traffic in our wholesale channels and our own retail stores.
Gross profit
Gross profit as a percentage of net sales was 52.1% in the three months ended September 30, 2020 as compared to 49.2% for the three months ended September 30, 2019. Growth in gross profit was driven by growing demand inchannel mix as direct to consumer channels. Retailsales, which realize higher gross profit than wholesale sales, grew largely due to sixteen new retail store openings since September 2016 (bringingversus the total store count to 24 as ofprior period.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2017). 5.11 implemented a new Enterprise Resource Planning (ERP) system2020 was $40.1 million, or 40.8% of net sales compared to $39.8 million, or 40.6% of net sales for the comparable period in 2019. The increase in selling, general and as part ofadministrative expense for the go-live process 5.11 shut down its warehouse as planned onthree months ended September 28, 2017 to begin the cut-over activities. As a result, 5.11 had less
shipping days during the third quarter of 201730, 2020 as compared to the prior year comparable period was driven by the costs associated with additional retail stores (seventy-one open in 2020 versus fifty-four open in 2019 during the comparable period), as well as additional sales and marketing spend to drive digital sales. This increase in expense was offset by management’s decision to reduce variable expenses, including payroll, travel and entertainment, and sales and marketing, a response to potential decreased sales from the effects of the COVID-19 pandemic.
Income from operations
Income from operations for the three months ended September 30, 2020 was $8.7 million, an increase of $2.7 million when compared to income from operations of $6.0 million for the same period in 2019, based on the factors described above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were $281.8 million as compared to net sales of $279.0 million for the nine months ended September 30, 2019, an increase of $2.8 million, or 1.0%. This increase is due primarily to e-commerce sales growth of $18.3 million, offset by the effect of COVID-19 pandemic on store traffic in both our wholesale channel and our own retail stores.
Gross profit
Gross profit as a percentage of net sales was 50.7% in the nine months ended September 30, 2020 as compared to 49.0% for the nine months ended September 30, 2019. Growth in gross margin was driven by channel mix as direct to consumer sales, which resultedrealize a higher gross margin than wholesale sales, grew versus the prior period. The growth in gross profit for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 was partially offset by additional inventory reserves and duty drawback accrual (increase in cost of goods sold) for audited duty drawback claims.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2020 was $117.6 million, or 41.7% of net sales compared to $115.9 million, or 41.6% of net sales for the comparable period in 2019. The increase in selling, general and administrative expense for the nine months ended September 30, 2020 as compared to the prior year comparable period was driven by the costs associated with additional retail stores (seventy-one open in 2020 versus fifty-four open in 2019 during the comparable period), as well as additional sales and marketing spend to drive digital sales.
Income from operations
Income from operations for the nine months ended September 30, 2020 was $18.0 million, an increase of $4.6 million when compared to income from operations of $13.4 million for the same period in 2019, based on the factors described above.
Ergobaby
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| | Three months ended | | Nine months ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net sales | | $ | 19,478 | | | 100.0 | % | | $ | 23,318 | | | 100.0 | % | | $ | 59,171 | | | 100.0 | % | | $ | 68,741 | | | 100.0 | % |
Gross profit | | $ | 12,766 | | | 65.5 | % | | $ | 14,808 | | | 63.5 | % | | $ | 38,708 | | | 65.4 | % | | $ | 43,599 | | | 63.4 | % |
SG&A | | $ | 8,447 | | | 43.4 | % | | $ | 9,634 | | | 41.3 | % | | $ | 26,897 | | | 45.5 | % | | $ | 28,593 | | | 41.6 | % |
Operating income | | $ | 2,363 | | | 12.1 | % | | $ | 3,220 | | | 13.8 | % | | $ | 5,943 | | | 10.0 | % | | $ | 9,151 | | | 13.3 | % |
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were $19.5 million, a decrease of $3.8 million, or 16.5%, compared to the same period in 2019. During the three months ended September 30, 2020, international sales were approximately $4$13.1 million, to $5representing a decrease of $3.7 million over the corresponding period in 2019, primarily as a result of reduced sales volume at Ergobaby's Asia-Pacific as a result of the COVID-19 pandemic. Domestic sales were $6.4 million in sales shiftingthe third quarter of 2020, reflecting a decrease of $0.1 million compared to the fourthcorresponding period in 2019. The decrease in domestic sales was due to reduced sales through our retail and specialty account customers' stores as a result of COVID-19.
Gross profit
Gross profit as a percentage of net sales was 65.5% for the quarter ended September 30, 2020, as compared to 63.5% for the three months ended September 30, 2019. The increase in gross profit as a percentage of sales was due to the mix of products sold, reduced freight costs and the mix of sales channels.
Selling, general and administrative expense
Selling, general and administrative expense decreased $1.2 million quarter over quarter, with expense of $8.4 million, or 43.4% of net sales for the three months ended September 30, 2020 as compared to $9.6 million or 41.3% of net sales for the same period of 2019. The decrease in selling, general and administrative expense in the three months ended September 30, 2020 as compared to the comparable period in the prior year is due to reduced travel costs, favorable foreign exchange rates in the current quarter and non-recurring expenses in the third quarter of 2017.2019.
Income from operations
Income from operations for the three months ended September 30, 2020 decreased $0.9 million, compared to the same period of 2019, based on the factors noted above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were $59.2 million, a decrease of $9.6 million, or 13.9%, compared to the same period in 2019. During the nine months ended September 30, 2020, international sales were approximately $39.4 million, representing a decrease of $8.6 million over the corresponding period in 2019, primarily as a result of reduced sales volume at Ergobaby's Asia-Pacific and EMEA distributors as a result of the COVID-19 pandemic. Domestic sales were $19.7 million in the first nine months of 2020, reflecting a decrease of $1.0 million compared to the corresponding period in 2019. The warehouse reopeneddecrease in domestic sales was driven by the Tula brand, primarily in the specialty account channel.
Gross profit
Gross profit as a percentage of net sales was 65.4% for the nine months ended September 30, 2020, as compared to 63.4% for the nine months ended September 30, 2019. The increase in gross profit as a percentage of sales was due to the mix of products sold, reduced freight costs and the mix of sales channels during the nine months ended September 30, 2020.
Selling, general and administrative expense
Selling, general and administrative expense decreased $1.7 million in the first nine months of 2020 as compared to the first nine months of 2019, with expense of $26.9 million, or 45.5% of net sales for the nine months ended September 30, 2020 as compared to $28.6 million or 41.6% of net sales for the same period of 2019. The decrease in selling, general and administrative expense in the nine months ended September 30, 2020 as compared to the comparable period in the prior year is a result of decreases in selling expenses, a reduction in variable expenses in response to the COVID-19 pandemic and non-recurring expenses in the nine months ended September 30, 2019.
Income from operations
Income from operations for the nine months ended September 30, 2020 decreased $3.2 million, compared to the same period of 2019, based on October 9, 2017,the factors noted above.
Liberty Safe
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| | Three months ended | | Nine months ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net sales | | $ | 31,186 | | | 100.0 | % | | $ | 24,729 | | | 100.0 | % | | $ | 80,599 | | | 100.0 | % | | $ | 67,566 | | | 100.0 | % |
Gross profit | | $ | 8,111 | | | 26.0 | % | | $ | 5,701 | | | 23.1 | % | | $ | 21,058 | | | 26.1 | % | | $ | 14,771 | | | 21.9 | % |
SG&A | | $ | 2,250 | | | 7.2 | % | | $ | 2,850 | | | 11.5 | % | | $ | 8,402 | | | 10.4 | % | | $ | 8,560 | | | 12.7 | % |
Operating income | | $ | 5,736 | | | 18.4 | % | | $ | 2,726 | | | 11.0 | % | | $ | 12,281 | | | 15.2 | % | | $ | 5,812 | | | 8.6 | % |
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the quarter ended September 30, 2020 increased approximately $6.5 million, or 26.1%, to $31.2 million, compared to the corresponding quarter ended September 30, 2019. Non-Dealer sales were approximately $15.4 million in the three months ended September 30, 2020 as compared to $15.2 million in the quarter ended September 30, 2019. The increase in Non-Dealer sales of $0.2 million or 1.3% is attributable to the continued strong performance at sporting goods retailers, which more than offset a decline in net sales in the Farm and 5.11 has resumed warehouseFleet account category during the quarter as a result of sell in of product to a new large Farm and shipping operations.Fleet customer in the third quarter of 2019. Dealer sales totaled approximately $15.8 million in the three months ended September 30, 2020 compared to $9.5 million in the same period in 2019, representing an increase of $6.3 million or 66.3%. The increase in Dealer sales reflects the higher demand for safes that we believe correlate to a large increase in firearm purchases over the prior year.
Gross profit
Gross profit as a percentage of net sales totaled approximately 26.0% and 23.1% for the quarters ended September 30, 2020 and September 30, 2019, respectively. The increase in gross profit as a percentage of net sales during the three months ended September 30, 2020 compared to the same period in 2019 is primarily attributable to favorable manufacturing variances as a result of increased production volume, and a decrease in material costs in the third quarter of 2020 as compared to the third quarter of 2019 when domestic steel prices were trending higher as a result of steel tariffs.
Selling, general and administrative expense
Selling, general and administrative expense was $2.3 million for the three months ended September 30, 2020 as compared to $2.9 million in selling, general and administrative expense in the three months ended September 30, 2019. The decrease in selling, general and administrative expense in the third quarter of 2020 is due to spending reductions in advertising and promotion in an effort to manage demand for safes. Selling, general and administrative expense represented 7.2% of net sales in the three months ended September 30, 2020 and 11.5% of net sales for the same period of 2019.
Income from operations
Income from operations increased during the three months ended September 30, 2020 to $5.7 million, as compared to $2.7 million in the corresponding period in 2019. This increase was a result of the factors noted above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
CostNet sales for the nine months ended September 30, 2020 increased approximately $13.0 million, or 19.3%, to $80.6 million, compared to the nine months ended September 30, 2019. Non-Dealer sales were approximately $36.6 million in the nine months ended September 30, 2020 as compared to $31.0 million in the nine months ended September 30, 2019. The increase in Non-Dealer sales of $5.6 million or 18.1% is attributable to a new customer in the Farm and Fleet channel as well as increased sales at sporting goods retailers during 2020, despite the shutdown of retail stores resulting from stay at home orders issued by local governments. Dealer sales totaled approximately $44.0 million in the nine months ended September 30, 2020 compared to $36.6 million in the same period in 2019, representing an increase of $7.4 million or 20.2%. The increase in Dealer sales reflects the higher demand for safes that we believe correlate to a large increase in firearm purchases over the prior year.
Gross profit
Gross profit as a percentage of net sales totaled approximately 26.1% and 21.9% for the nine months ended September 30, 2020 and September 30, 2019, respectively. The increase in gross profit as a percentage of net sales during the nine months ended September 30, 2020 compared to the same period in 2019 is primarily attributable to favorable manufacturing variances as a result of increased production volume, and a decrease in material costs in the first nine months of 2020 as compared to the first nine months of 2019 when domestic steel prices were trending higher as a result of steel tariffs.
Selling, general and administrative expense
Selling, general and administrative expense was $8.4 million for the nine months ended September 30, 2020 compared to $8.6 million for the nine months ended September 30, 2019. Selling, general and administrative expense represented 10.4% of net sales in the nine months ended September 30, 2020 and 12.7% of net sales for the nine months ended September 30, 2019.
Income from operations
Income from operations increased during the nine months ended September 30, 2020 to $12.3 million, as compared to $5.8 million in the corresponding period in 2019. This increase was a result of the factors noted above.
Marucci Sports
In the following results of operations, we provide comparative pro forma results of operations for Marucci for the three and nine months ended September 30, 2020 and 2019 as if we had acquired the business on January 1, 2019. The results of operations that follows include relevant pro-forma adjustments for pre-acquisition periods and
explanations where applicable. The operating results for Marucci have been included in the consolidated results of operation from the date of acquisition through September 30, 2020.
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| | Three months ended | | Nine months ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| | | | | | Pro forma | | | | Pro forma | | | | Pro forma | | |
Net sales | | $ | 19,551 | | | 100.0 | % | | $ | 14,946 | | | 100.0 | % | | $ | 47,308 | | | 100.0 | % | | $ | 49,987 | | | 105.7 | % |
Gross profit | | $ | 10,688 | | | 54.7 | % | | $ | 8,417 | | | 56.3 | % | | $ | 22,843 | | | 48.3 | % | | $ | 26,823 | | | 53.7 | % |
SG&A | | $ | 7,612 | | | 38.9 | % | | $ | 6,180 | | | 41.3 | % | | $ | 23,607 | | | 49.9 | % | | $ | 21,171 | | | 42.4 | % |
Amortization expense | | $ | 1,686 | | | 8.6 | % | | $ | 1,654 | | | 11.1 | % | | $ | 4,996 | | | 10.6 | % | | $ | 4,962 | | | 9.9 | % |
Operating income (loss) | | $ | 1,265 | | | 6.5 | % | | $ | 458 | | | 3.1 | % | | $ | (6,135) | | | (13.0) | % | | $ | 315 | | | 0.6 | % |
Pro forma results of operations include the following pro form adjustments as if we had acquired Marucci January 1, 2019:
•Depreciation expense associated with the increase in depreciable lives of capital assets of $0.2 million for the nine months ended September 30, 2020, and $0.2 million and $0.7 million, respectively, for the three and nine months ended September 30, 2019.
•Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation for Marucci of $1.2 million for the nine months ended September 30, 2020, and $1.5 million and $4.6 million, respectively, for the three and nine months ended September 30, 2019.
•Management fees that would have been payable to the Manager during each period.
Three months ended September 30, 2020 compared to pro forma three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were $19.6 million, an increase of $4.6 million as compared to net sales of $14.9 million for the three months ended September 30, 2019. The increase in net sales during the three months ended September 30, 2020 was primarily due to Marucci’s launch of its CAT9 line of aluminum and composite bats during the third quarter of 2020.Following the economic slowdown resulting from COVID-19 pandemic, baseball participation returned sooner than expected, which also contributed to the increase in sales period over period.
Gross profit
Gross profit for the quarter ended September 30, 2020 increased $2.3 million as compared to the three months ended September 30, 2019. The cost of sales for the three months ended September 30, 2017 were $37.52020 includes $1.3 million as compared to $46.8 million for the comparable period in 2016, a decrease of $9.3 million. Gross profit as a percentage of sales was 48.0% in the three months ended September 30, 2017 as compared to 37.3% in the three months ended September 30, 2016. Cost of sales for the three months ended September 30, 2016 includes $4.7 million in expense related to a $39.1 millionthe amortization of the inventory step-up resulting from the acquisition purchase price allocation. The totalExcluding the effect of the inventory step-up, amountthe gross profit as a percentage of $39.1net sales for the three months ended September 30, 2020 was 61.1%, as compared to gross profit as a percentage of sales of 56.3% for the three months ended September 30, 2019.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2020 was $7.6 million, or 38.9% of net sales compared to $6.2 million, or 41.3% of net sales for the three months ended September 30, 2019. Selling, general and administrative expense for the three months ended September 30, 2020 includes $0.5 million in in integration service fees paid to CGM. The remainder of the increase in selling, general and administrative expense for the three months ended September 30, 2020 correlates to the increase in net sales, with increases in credit card expenses, royalties, commissions, business development fees, and other variable expenses.
Income from operations
Income from operations for the three months ended September 30, 2020 was expensed$1.3 million, an increase of $0.8 million when compared to income from operations of $0.5 million for the same period in 2019, primarily as a result of the factors noted above.
Pro forma nine months ended September 30, 2020 compared to pro forma nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were $47.3 million, a decrease of $2.7 million as compared to net sales of $50.0 million for the nine months ended September 30, 2019. During 2020, Marucci was affected by the economic slowdown resulting from the COVID-19 pandemic with baseball and softball seasons postponed in the spring and early summer throughout much of the United States. Marucci's “brick and mortar” retail partners were forced to close as a result of the pandemic thus Marucci did not receive fill-in orders during this period. As a result, sales of aluminum and wood bats were significantly less in the first and second quarter of 2020 when compared to the same period last year. Additionally, Major League Baseball postponed their season eliminating the need for wood bats to be purchased for the professional season. During June 2020, Marucci began to see demand pick up as the baseball and softball seasons began and in August 2020, the Company launched its CAT9 line of aluminum and composite bats.With the success of this launch, the demand pickup continued during the third quarter of 2020.
Gross profit
Gross profit for the nine months ended September 30, 2020 decreased $4.0 million as compared to the nine months ended September 30, 2019. Gross profit as a percentage of sales was 48.3% for the nine months ended September 30, 2020 as compared to 53.7% for the nine months ended September 30, 2019. The cost of goods sold oversales for the expected turnsnine months ended September 30, 2020 includes $4.3 million related to the amortization of 5.11's inventory. The increase ininventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the nine months ended September 30, 2020 was 57.3%.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2020 was $23.6 million, or 49.9% of net sales compared to $21.2 million, or 42.4% of net sales for the nine months ended September 30, 2019. Selling, general and administrative expense for the nine months ended September 30, 2020 includes $2.0 million in acquisition related costs that were expensed at the close of the Marucci acquisition, and $0.5 million in integration service fees paid to CGM. Excluding the effect of the acquisition costs and integration service fees, selling, general and administrative expense for the nine months ended September 30, 2020 was $21.1 million, which is dueconsistent with the expense in the nine months ended September 30, 2019.
Loss (income) from operations
Loss from operations for the nine months ended September 30, 2020 was $6.1 million, a decrease of $6.5 million when compared to lower product costsincome from efficiencyoperations of $0.3 million for the same period in sourcing operations, improved gross margins on new product introductions, and2019, primarily as a larger proportionresult of revenues from the higher margin retail and e-commerce distribution channels asfactors noted above.
Velocity Outdoor
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net sales | | $ | 70,629 | | | 100.0 | % | | $ | 46,647 | | | 100.0 | % | | $ | 148,240 | | | 100.0 | % | | $ | 107,395 | | | 100.0 | % |
Gross profit | | $ | 23,680 | | | 33.5 | % | | $ | 13,633 | | | 29.2 | % | | $ | 44,433 | | | 30.0 | % | | $ | 30,451 | | | 28.4 | % |
SG&A | | $ | 10,210 | | | 14.5 | % | | $ | 5,747 | | | 12.3 | % | | $ | 23,313 | | | 15.7 | % | | $ | 17,491 | | | 16.3 | % |
Impairment expense | | $ | — | | | — | % | | $ | 33,381 | | | 71.6 | % | | $ | — | | | — | % | | $ | 33,381 | | | 31.1 | % |
Operating income (loss) | | $ | 11,062 | | | 15.7 | % | | $ | (27,902) | | | (59.8) | % | | $ | 13,896 | | | 9.4 | % | | $ | (27,635) | | | (25.7) | % |
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were $70.6 million, an increase of $24.0 million or 51.4%, compared to the same period in 2016.2019. The increase in net sales for the three months ended September 30, 2020 is primarily due to significant increase in consumer demand for our Crosman products along with new crossbows being launched by our Ravin product line.
Gross profit
Gross profit for the quarter ended September 30, 2020 increased $10.0 million as compared to the quarter ended September 30, 2019. Gross profit as a percentage of net sales was 33.5% for the three months ended September 30, 2020 as compared to 29.2% in the three months ended September 30, 2019. The increase in gross profit as a percentage of net sales was primarily attributable to favorable sales product mix of airguns, archery equipment and consumables.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 20172020 was $32.4$10.2 million, or 45.0%,14.5% of net sales compared to $26.0$5.7 million, or 34.8% 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 open in the prior comparable period, strategic investments into sales and marketing, and integration service fees billed by CGM to 5.11.
Loss from operations
Loss from operations for the three months ended September 30, 2017 was $0.3 million, an increase of $0.1 million when compared to loss from operations of $0.4 million for the same period in 2016, based on the factors described above.
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 $228.5 million as compared to net sales of $212.7 million for the nine months ended September 30, 2016, an increase of $15.8 million, or 7.4%. 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 primarily of SMU uniform product designed for large law enforcement divisions. Retail and e-commerce sales grew $10.7 million, or 45%, driven by growing demand in direct to consumer channels. Retail sales grew largely due to sixteen new retail store openings since September 2016 (bringing the total store count to 24 as of September 30, 2017). The consumer wholesale channel experienced a $4.2 million decrease due primarily to 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 2017 as compared to the prior year, which resulted 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.
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 as a percentage of sales was 38.0% in the nine months ended September 30, 2017 as compared to 41.8% in the nine months ended September 30, 2016. Cost of sales for 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 expense associated with 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.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 was $94.0 million, or 41.1% of net sales compared to $79.0 million, or 37.1%, of net sales for the comparable period in 2016. This increase in selling, general and administrative expense was primarily due to an accounts receivable reserve for a large outdoor retail customer that filed for bankruptcy, sixteen new retail stores that were not open in the prior comparable period, strategic investments into sales and marketing, and integration service fees billed by CGM to 5.11.
(Loss) income from operations
Loss from operations for the nine months ended September 30, 2017 was $14.5 million, a decrease of $17.5 million when compared to income from operations of $2.9 million for the same period in 2016, based on the factors described above.
Crosman
Overview
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 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 September 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, 2016
Net sales
Net sales for the three months ended September 30, 2017 were $34.4 million, an increase of $2.4 million or 7.3%, compared to the same period in 2016. The increase in net sales for the three 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 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%12.3% of net sales for the three months ended September 30, 2016.2019. The increase in selling, general and administrative expense for the three months ended September 30, 2017 includes $0.4 million of acquisition2020 is primarily related to volume driven expenses $0.4 million of integration services fees payablethat correlate to CGM, $0.2 million of non-recurring consultant fees and increased expenses associated with higherthe increase in sales,. as well as additional investments in marketing.
(Loss) incomeIncome (loss) from operations
LossIncome from operations for the three months ended September 30, 20172020 was $1.4$11.1 million, a decreasean increase of $4.9$39.0 million when compared to incomeloss from operations of $3.5$27.9 million for the same period in 2016, based2019. Velocity recognized impairment expense of $33.4 million in the third quarter of 2019 after determining that interim impairment testing was necessary in the prior year. The increase in operating income in the three months ended September 30, 2020 reflects the factors noted above, and the effect of the impairment expense on the factors described above.operating income for the three months ended September 30, 2019.
Pro formaNine months ended September 30, 2020 compared to nine months ended September 30, 2017 compared to the pro forma nine months ended September 30, 20162019
Net sales
Net sales for the nine months ended September 30, 20172020 were $85.8$148.2 million, compared to net sales of $82.9 million for the nine months ended September 30, 2016, an increase of $2.9$40.8 million or 3.5%.38.0%, compared to the same period in 2019. The increase in net sales for the nine months ended September 30, 20172020 is primarily due to growtha significant increase in customer demand that we have experienced in the archerycurrent year reflecting consumer focus on outdoor branded products, category and an add-on acquisitionas well as the introduction of several new products during the third quarter of 2017.2020.
Gross profit
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 salesGross profit for the nine months ended September 30, 2017 includes $3.22020 increased $14.0 million in expense relatedas compared to the inventory step-up resulting from the preliminary purchase price allocation. Excluding the effect of the inventory step-up, grossnine months ended September 30, 2019. Gross profit as a percentage of net sales was 25.5%30.0% for the nine months ended September 30, 20172020 as compared to 26.4% for28.4% in the nine months ended September 30, 2016 due2019. The increase in gross profit as a percentage of net sales was primarily attributable to the mix of products sold during the two periods.
product and customer mix.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 20172020 was $13.7$23.3 million, or 16.0%15.7% of net sales compared to $11.1$17.5 million, or 13.4%,16.3% of net sales for the nine months ended September 30, 2016. Selling,2019. The increase in selling, general and administrative expense for the nine months ended September 30, 2017 includes $1.8 million in transaction costs paid in relation2020 is primarily related to volume driven expenses that correlate to the acquisition of Crosmanincrease in June 2017 and an add-on acquisition at Crosman completed during the third quarter of 2017,sales, as well as $0.4 millionadditional investments 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 change in expense items.
marketing.
Income from operations
Income from operations for the nine months ended September 30, 20172020 was $1.2$13.9 million, a decreasean increase of $5.8$41.5 million when compared to incomeloss from operations of $7.0$27.6 million for the comparablesame period in 2016, based on2019. Velocity recognized impairment expense of $33.4 million in the factors described above.
Ergobaby
Overview
Ergobaby, headquarteredthird quarter of 2019 after determining that interim impairment testing was necessary 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
prior year. The table below summarizesincrease in operating income in the income from operations data for Ergobaby for the three and nine months ended September 30, 20172020
reflects the factors noted above, and the effect of the impairment expense on the operating income for the nine months ended September 30, 2016.2019.
Niche Industrial Businesses
Advanced Circuits
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| | | | | | | | | | | | | | | |
| 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net sales | | $ | 22,771 | | | 100.0 | % | | $ | 21,897 | | | 100.0 | % | | $ | 67,423 | | | 100.0 | % | | $ | 67,405 | | | 100.0 | % |
Gross profit | | $ | 10,252 | | | 45.0 | % | | $ | 9,964 | | | 45.5 | % | | $ | 30,360 | | | 45.0 | % | | $ | 31,029 | | | 46.0 | % |
SG&A | | $ | 3,853 | | | 16.9 | % | | $ | 3,627 | | | 16.6 | % | | $ | 11,490 | | | 17.0 | % | | $ | 11,155 | | | 16.5 | % |
Operating income | | $ | 6,205 | | | 27.2 | % | | $ | 6,122 | | | 28.0 | % | | $ | 18,272 | | | 27.1 | % | | $ | 19,087 | | | 28.3 | % |
Three months ended September 30, 20172020 compared to the three months ended September 30, 20162019
Net sales
Net sales for the three months ended September 30, 20172020 were $27.8 million, a decrease of $1.8 million, or 6.2%, 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. 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 three months ended September 30, 2016. During the three months ended September 30, 2017, international sales were approximately $17.0 million, representing a decrease of $0.3 million over the corresponding period in 2016. International 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. Domestic sales were $10.8 million in the third quarter of 2017, reflecting a decrease of $2.1 million compared to the corresponding period in 2016. The decrease in domestic sales was due to 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 sales in the three months ended September 30, 2017 compared to 95% in the same period in 2016.
Cost of sales
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 sales was 67.7% for the quarter ended September 30, 2017, as compared to 65.9% (excluding the effect of the inventory step-up at Baby Tula) for the three months ended September 30, 2016.
Selling, general and administrative expense
Selling, general and administrative expense was $10.0 million, or 35.8% of net sales for the three months ended September 30, 2017 as compared to $9.9 million or 33.5% 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.
Income from operations
Income from operations for the three months ended September 30, 2017 increased $1.2 million, to $5.9 million, compared to $4.7 million for the same period of 2016, 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.
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 $77.7$22.8 million, an increase of $2.7approximately $0.9 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, 20174.0% compared to the three months ended September 30, 2016
Net2019. The increase in net sales
Net sales for in the quarter ended September 30, 2017 decreased approximately $5.4 million, or 22.6%, to $18.4 million,2020 as compared to the corresponding quarter ended September 30, 2016. Non-Dealer sales were approximately $7.9 million in the three months ended September 30, 2017 compared to $11.9 million for the three months ended September 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, representing a decrease of $1.4 million or 11.8%. The decrease in third quarter 2017 sales for the Non-Dealer channel is2019 was primarily attributable to the bankruptcy filing by a national retailer in the first quarter of 2017. The decrease inincreased sales in the Dealer channel can be attributed to lower overall market demandQuick-Turn Production by approximately $0.9 million, Quick-Turn Small-Run by approximately $0.3 million, Subcontract by approximately $0.5 million, and decreased promotional allowances of approximately $0.1 million, partially offset by decreases in the third quarterAssembly of 2017 as compared to the third quarter of 2016.approximately $0.7 million, and Long-Lead Time PCBs by approximately $0.3 million.
Gross profit
Cost of sales
Cost of sales for the three months ended September 30, 2017 decreased approximately $4.7 million when compared to the same period in 2016. Gross profit as a percentage of net sales totaled approximately 29.3% and 25.7% for the quarters ended September 30, 2017 and September 30, 2016, respectively. The increase in gross profit as a percentage of sales during the three months ended September 30, 2017 compared to the same period in 2016 is primarily attributable to lower sales to national accounts, which have lower margins, in the third quarter of 2017 versus the prior year.
Selling, general and administrative expense
Selling, general and administrative expense was $3.2 million for the three months ended September 30, 2017 compared to $3.3 million for the three months ended September 30, 2016. Selling, general and administrative expense represented 17.4% of net sales in 2017 and 14.0% 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.
Income from operations
Income from operations decreased $0.4 million during the three months ended September 30, 2017 to $2.1 million, compared to the corresponding period in 2016. 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 described above.
Manitoba Harvest
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.
|
| | | | | | | | | | | | | | | |
| 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 September 30, 2017 compared to three months ended September 30, 2016
Net sales
Net sales for the three months ended September 30, 2017 were approximately $13.9 million as compared to $15.9 million for the three months ended September 30, 2016, a decrease of $2.0 million, or 12.4%. During 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 availability in organic based hemp seeds 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 of sales for the three months ended September 30, 2017 was approximately $7.8 million compared to approximately $9.0 million for the same period in 2016. Gross profit as a percentage of sales was 44.1% in the quarter ended September 30, 2017 and 43.5% in the quarter ended September 30, 2016. The increase in gross profit as a percentage of sales in the third quarter of 2017 as compared to the same quarter in the prior year is primarily attributable to higher sales of branded hemp products in 2017, which have a higher gross margin percentage than bulk ingredient products.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2017 was approximately $5.1 million in both the third quarter of 2017 and 2016. Selling, general and administrative expense was 36.3% of net sales in the third quarter of 2017 as compared to 31.9% of net sales for the same period in 2016. The increase in selling, general and administrative expense as a percentage of sales in the three months ended September 30, 2017 compared to the same period in 2016 was primarily due to ongoing investments in key operating capability initiatives such as marketing, sales and research and development.
Income (loss) from operations
Income from operations for the three months ended September 30, 2017 decreased $0.7 million when compared to the same period in 2016, 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 were approximately $42.6 million as compared to $44.3 million for the nine months ended September 30, 2016, a decrease of $1.7 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 million compared to approximately $24.4 million for the same period in 2016. Gross profit as a percentage of sales was 45.1% in the nine months ended September 30, 2017 and 44.9% in the nine months ended September 30, 2016. For the first nine months 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.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 decreased to approximately $15.5 million or 36.4% of net sales compared to $17.1 million or 38.5% of net sales for the same period in 2016. The $1.6 million decrease in the nine months ended September 30, 2017 compared to the same period in 2016 was primarily due to lower customer shipping costs, more efficient field selling operations and the timing of our consumer promotion spending.
Income (loss) from operations
Income from operations for the nine months ended September 30, 2017 was approximately $0.1 million, compared to loss from operations of $0.9 million in the same period in 2016, based on the factors described above.
Niche Industrial Businesses
Advanced Circuits
Overview
Advanced Circuits is a provider of small-run, quick-turn and volume production 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 September 30, 2017 compared to the three months ended September 30, 2016
Net sales
Net sales for the three months ended September 30, 2017 increased approximately $0.8 million to $22.4 million compared to the three months ended September 30, 2016. The increase 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 by approximately $0.3 million. On a consolidated basis, Quick-Turn Small-Run PCBs comprised approximately 20.2% of gross sales and Quick-turn production PCBs represented approximately 32.4% of gross sales for the third quarter 2017. Quick-Turn Small-Run PCBs comprised approximately 21.9% of gross sales and Quick-turn production PCBs represented approximately 32.1% of gross sales for the third quarter 2016.
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 sales increased 16050 basis points during the three months ended September 30, 20172020 compared to the corresponding period in 2016 (45.9%2019 (45.0% at September 30, 20172020 compared to 44.3%45.5% at September 30, 2016)2019) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $3.7$3.9 million in the three months ended September 30, 2017 and $3.42020 as compared to $3.6 million infor the three months ended September 30, 2016.2019. Selling, general and administrative expense represented 16.4%16.9% of net sales for the three months ended September 30, 2017 compared to 15.8%2020 and 16.6% of net sales in the corresponding period in 2016.2019.
Income from operations
Income from operations for the three months ended September 30, 20172020 was approximately $6.2 million compared to $5.8$6.1 million in the same period in 2016,2019, an increase of approximately $0.4$0.1 million, principally as a result of the factors described above.
Nine months ended September 30, 20172020 compared to nine months ended September 30, 20162019
Net sales
Net sales for the both the nine months ended September 30, 2017 increased approximately $1.5 million to $66.4 million2020 and the nine months ended September 30, 2019 were $67.4 million. For the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2016. The increase in net sales during the nine months ended September 30, 2017 was due to increased sales in2019, Quick-Turn Production PCBsincreased by approximately $1.2$1.4 million, Long-Lead Time PCBsSubcontract increased by approximately $0.7$0.1 million, Subcontractand promotional allowances decreased by approximately $0.5 million, and decreased promotions by approximately $0.3$0.6 million. This was partially offset by decreases in Assembly byof approximately $0.7$1.3 million, Long-Lead Time of approximately $0.6 million, and Quick-Turn Small-Run PCBs by approximately $0.6$0.1 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
Gross profit
30, 2017. Quick-Turn Small-Run comprised approximately 21.9% of gross sales and Quick-Turn Production PCBs represented approximately 31.7% of gross sales for the nine months ended September 30, 2016.
Cost of sales
Cost of sales for the nine months ended September 30, 2017 was $36.1 million as compared to $36.0 million for the nine months ended September 30, 2016. Gross profit as a percentage of net sales increased 110decreased 100 basis points during the nine months ended September 30, 20172020 compared to the samecorresponding period in 2016 (45.6% at2019 (45.0% for the nine months ended September 30, 20172020 compared to 44.5% at46.0% for the nine months September 30, 2016)2019) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $10.9$11.5 million in the nine months ended September 30, 20172020 as compared to $10.4$11.2 million inand the nine months ended September 30, 2016.2019. Selling, general and administrative expense represented 16.4%17.0% of net sales for the nine months ended September 30, 20172020 compared to 16.0%16.5% of net sales in the prior year's corresponding period.
period in 2019.
Income from operations
Income from operations for the nine months ended September 30, 20172020 was approximately $18.1$18.3 million compared to $17.2$19.1 million in the same period in 2016, an increase2019, a decrease of approximately $0.9$0.8 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 | | Nine months ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net sales | | $ | 22,619 | | | 100.0 | % | | $ | 30,895 | | | 100.0 | % | | $ | 76,447 | | | 100.0 | % | | $ | 90,404 | | | 100.0 | % |
Gross profit | | $ | 4,989 | | | 22.1 | % | | $ | 8,334 | | | 27.0 | % | | $ | 19,051 | | | 24.9 | % | | $ | 23,425 | | | 25.9 | % |
SG&A | | $ | 4,549 | | | 20.1 | % | | $ | 4,718 | | | 15.3 | % | | $ | 13,645 | | | 17.8 | % | | $ | 14,205 | | | 15.7 | % |
Operating income (loss) | | $ | (495) | | | (2.2) | % | | $ | 2,681 | | | 8.7 | % | | $ | 2,601 | | | 3.4 | % | | $ | 6,385 | | | 7.1 | % |
Three months ended September 30, 20172020 compared to the three months ended September 30, 20162019
Net sales
Net sales for the three months ended September 30, 20172020 were approximately $26.5$22.6 million, a decrease of $0.4$8.3 million compared to the same period in 2016. 2019. International sales were $8.7 million in the three months ended September 30, 2020 and $12.7 millionin the three months ended September 30, 2019. The decrease in net sales is primarily a result of a decrease in reprographic salessoftness in the PMAG reporting unit. International sales were $10.6 million incommercial aerospace, oil and gas and advertising specialty markets caused by the three months ended September 30, 2017 as compared to $12.2 million in the three months ended September 30, 2016, a decrease of $1.7 million, primarily as a result of the decrease in sales at PMAG.global COVID-19 pandemic.
Cost of salesGross profit
Cost of salesGross profit for the three months ended September 30, 2017 were2020 was approximately $19.1$5.0 million compared to approximately $20.5$8.3 million in the same period of 2016.2019. Gross profit as a percentage of net sales increased from 23.8%decreased to 22.1% for the quarter ended September 30, 2016 to 27.8%2020 from 27.0% in the quarter ended September 30, 20172019 principally due to manufacturing efficiencies and favorable sales mix.
the lower volume in the markets as noted above, partially offset by improved operating efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense in the three month period ended September 30, 20172020 was $4.4$4.5 million, comparablea decrease in expense of approximately $0.2 millioncompared to approximately $4.5$4.7 million for the three months ended September 30, 2016.2019. The decrease in selling, general and administrative expense was due to lower staffing related costs and lower travel and meeting expense partially offset by increased redundancy costs and pension costs as well as increased legal expenses. Selling, general and administrative expense was 20.1% of net sales in the three months ended September 30, 2020 and 15.3% in the three months ended September 30, 2019 due to the lower sales volume.
Income (loss) from operations
Loss from operations for the three months ended September 30, 2020 was approximately $0.5 million, a decrease of $3.2 million when compared to the same period in 2019, as a result of the factors noted above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were approximately $76.4 million, a decrease of $14.0 million compared to the same period in 2019. International sales were $28.7 million in the nine months ended September 30, 2020 and $36.6 millionin the nine months ended September 30, 2019. The decrease in net sales is
primarily a result of softness in the commercial aerospace, oil and gas and advertising specialty markets caused by the global COVID-19 pandemic.
Gross profit
Gross profit for the nine months ended September 30, 2020 was approximately $19.1 million compared to approximately $23.4 million in the same period of 2019. Gross profit as a percentage of net sales decreased to 24.9% for the nine months ended September 30, 2020 from 25.9% in the nine months ended September 30, 2019 principally due to product mix, partially offset by improved operating efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense in the nine month period ended September 30, 2020 was $13.6 million, a decrease in expense of approximately $0.6 millioncompared to $14.2 million for the nine months ended September 30, 2019. The decrease in selling, general and administrative expense was due to lower staffing related costs and lower travel and meeting expense partially offset by increased redundancy costs, bad debt reserves due to the adoption of the new credit loss accounting standard and increased legal expenses. Selling, general and administrative expense was 17.8% of net sales in the nine months ended September 30, 2020 and 15.7% in the nine months ended September 30, 2019 due to the lower sales volume.
Income from operations
Income from operations for the nine months ended September 30, 2020 was approximately $2.6 million, a decrease of $3.8 million when compared to the same period in 2019, as a result of the factors noted above.
Foam Fabricators
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net sales | | $ | 36,526 | | | 100.0 | % | | $ | 31,304 | | | 100.0 | % | | $ | 89,338 | | | 100.0 | % | | $ | 93,634 | | | 100.0 | % |
Gross profit | | $ | 11,184 | | | 30.6 | % | | $ | 8,928 | | | 28.5 | % | | $ | 27,165 | | | 30.4 | % | | $ | 26,772 | | | 28.6 | % |
SG&A | | $ | 4,134 | | | 11.3 | % | | $ | 2,541 | | | 8.1 | % | | $ | 9,264 | | | 10.4 | % | | $ | 8,023 | | | 8.6 | % |
Operating income | | $ | 4,759 | | | 13.0 | % | | $ | 4,141 | | | 13.2 | % | | $ | 11,118 | | | 12.4 | % | | $ | 12,011 | | | 12.8 | % |
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the quarter ended September 30, 2020 were $36.5 million, an increase of $5.2 million, or 16.7%, compared to the quarter ended September 30, 2019. The increase in net sales during the quarter was primarily due to the acquisition of Polyfoam in July 2020.
Gross profit
Gross profit as a percentage of net sales was 30.6% and 28.5% for the three months ended September 30, 2020 and 2019, respectively. The increase in gross profit as a percentage of net sales in the quarter ended September 30, 2020 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 fluctuate based on the price of oil and natural gas.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2020 was $4.1 million as compared to $2.5 million for the three months ended September 30, 2019, an increase of $1.6 million. The selling, general and administrative expense in the third quarter of 2020 includes $0.3 million in transaction costs related to Foam Fabricators' acquisition of Polyfoam in the third quarter. The remainder of the increase in selling, general and administrative expense was primarily due to the acquisition of Polyfoam.
Income from operations
Income from operations was $4.8 million in the three months ended September 30, 2020, an increase of $0.6 million as compared to the three months ended September 30, 2019, based on the factors noted above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were $89.3 million, a decrease of $4.3 million, or 4.6%, compared to the nine months ended September 30, 2019. The decrease in net sales during the first nine months of 2020 was due to a slow-down in the appliance and automotive customer sectors, as well as a general slow-down across other customer segments in April and May, as a result of the effect of the COVID-19 pandemic on our customers' operations. While most of our customer sectors saw improved performance beginning in June, the appliance and automotive sectors continued to see a slowdown in sales through the end of the second quarter. During the third quarter of 2020, appliance sales continued to trend lower versus the prior year due to lower demand and supply chain and labor constraints resulting from the COVID-19 pandemic.
Gross profit
Gross profit as a percentage of net sales was 30.4% and 28.6% for the nine months ended September 30, 2020 and 2019, respectively. The increase in gross profit as a percentage of net sales in the nine months ended September 30, 2020 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 fluctuate based on the price of oil and natural gas.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2020 was $9.3 million as compared to $8.0 million for the nine months ended September 30, 2019, an increase of $1.2 million. Selling, general and administrative expense for the nine months ended September 30, 2019 included $0.3 million in integration service fees paid to CGM, while the nine months ended September 30, 2020 included $0.2 million in transaction costs related to Foam Fabricators' acquisition of Polyfoam in July 2020. The remainder of the increase in selling, general and administrative expense was primarily due to the acquisition of Polyfoam during the third quarter.
Income from operations
Income from operations was $11.1 million in the nine months ended September 30, 2020 as compared to $12.0 million in the nine months ended September 30, 2019, a decrease of $0.9 million based on the factors noted above.
Sterno
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
Net sales | | $ | 97,737 | | | 100.0 | % | | $ | 111,470 | | | 100.0 | % | | $ | 258,132 | | | 100.0 | % | | $ | 289,131 | | | 100.0 | % |
Gross profit | | $ | 20,849 | | | 21.3 | % | | $ | 26,969 | | | 24.2 | % | | $ | 56,645 | | | 21.9 | % | | $ | 71,989 | | | 24.9 | % |
SG&A | | $ | 8,797 | | | 9.0 | % | | $ | 9,855 | | | 8.8 | % | | $ | 26,605 | | | 10.3 | % | | $ | 30,109 | | | 10.4 | % |
Operating income | | $ | 7,674 | | | 7.9 | % | | $ | 12,724 | | | 11.4 | % | | $ | 16,906 | | | 6.5 | % | | $ | 28,821 | | | 10.0 | % |
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were approximately $97.7 million, a decrease of $13.7 million, or 12.3%, compared to the same period in 2019. The net sales variance reflects a decrease in sales at Sterno Products and Sterno Home as a result of the effect of COVID-19 on the food service and retail industries during 2020, partially offset by favorable sales volume at Rimports of wax and essential oils in the third quarter of 2020. We expect the food service industry to continue to be negatively impacted for the remainder of 2020 by COVID-19.
Gross profit
Gross profit as a percentage of net sales decreased from 24.2% for the three months ended September 30, 2019 to 21.3% for the same period ended September 30, 2020. The decrease in gross profit in the third quarter of 2020 as compared to the third quarter of 2019 was attributable to product mix, with lower margin sales in the third quarter of 2020, higher freight and tariff costs.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2020 was approximately $8.8 million as compared to $9.9 million for the three months ended September 30, 2019, a decrease of $1.1 million, reflecting lower salaries, commissions, and various cost savings initiatives implemented to address the effects of decreased demand from COVID-19. Selling, general and administrative expense represented 9.0% of net sales for the three months ended September 30, 2020 and 8.8% for the three months ended September 30, 2019.
Income from operations
Income from operations for the three months ended September 30, 20172020 was approximately $2.0$7.7 million, an increasea decrease of $1.1$5.1 million when compared to the same period in 2016, principally as a result ofthree months ended September 30, 2019 based on the factors noted above.
Nine months ended September 30, 20172020 compared to nine months ended September 30, 20162019
Net sales
Net sales for the nine months ended September 30, 20172020 were approximately $79.4$258.1 million, a decrease of $3.4$31.0 million, or 10.7%, compared to the same period in 2016.2019. The net sales variance reflects a decrease in net sales is primarilyat Sterno Products and Sterno Home as a result of decreasesthe effect of COVID-19 on the food service and retail industries beginning in the PMAG ($1.8 million)latter half of March, partially offset by favorable sales volume at Rimports of wax and Flexmag ($1.5 million) product sectors. PMAG sales represented approximately 73%essential oils during 2020. We expect the food service industry to continue to be negatively impacted for the remainder of 2020 by COVID-19.
Gross profit
Gross profit as a percentage of net sales was 21.9% for the nine months ended September 30, 2017 and 72% of net sales2020 as compared to 24.9% for the nine months ended September 30, 2016.2019. The decrease in PMAG sales is principallygross profit during 2020 as compared to 2019 was attributable to product mix, with lower margin 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 costs2020, higher freight and lower depreciation expense.
tariff costs.
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 to2020 was approximately $25.2$26.6 million or 16.4%, of service revenues, as compared to $22.3$30.1 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 compared2019, a decrease of $3.5 million, reflecting lower salaries, commissions, and various cost savings initiatives implemented to 2016 is primarily attributable to acquisitionsaddress the effects of decreased demand from COVID-19. Selling, general and increased corporate expenses.administrative expense represented 10.3% of net sales for the nine months ended September 30, 2020 and 10.4% for the nine months ended September 30, 2019.
Income from operations
Income from operations for the nine months ended September 30, 20172020 was approximately $7.6$16.9 million, an increasea decrease of $1.7$11.9 million as compared to the nine months ended September 30, 2016, primarily as a result of those2019 based on the factors describednoted 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 million, a decrease of $0.7 million when compared to the same period in 2016, as a result of those factors described above.
Liquidity and Capital Resources
Liquidity
At September 30, 2017,2020, we had approximately $41.5$176.8 million of cash and cash equivalents on hand, an increase of $1.7$76.5 million as compared to the year ended December 31, 2016. The increase2019. In May 2020, we completed an offering of 5,000,000 Trust common shares for net proceeds, after deducting the underwriter's discount and offering costs, of approximately $83.9 million. Also in cash is due primarilyMay 2020, we issued $200 million in additional Senior Notes. We used $200 million of the proceeds from the common share offering and issuance of additional Senior Notes to pay down the outstanding amount on our 2018 Revolving Credit Facility. Subsequent to the saleend of our remaining shares of our FOX investment in the first quarter, of 2017, which resulted in net proceeds of $136.1 million, andwe completed the issuance of preferred shares in the second quarter of 2017, offset by our acquisition of CrosmanBOA for a total purchase price of $454 million (excluding working capital and our common share distributions.certain other adjustments upon closing, and transaction costs). The Company funded the acquisition of BOA with cash on hand and a $300 million draw on its 2018 Revolving Credit Facility. 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:
| | | | | | | | | | | | | | |
| | Nine months ended |
(in thousands) | | September 30, 2020 | | September 30, 2019 |
Cash provided by operating activities | | $ | 112,872 | | | $ | 31,584 | |
| | | | |
For the nine months ended September 30, 2017,2020, cash flows provided by operating activities totaled approximately $59.2$112.9 million, which represents a $1.4$81.3 million decreaseincrease compared to cash provided by operating activities of $60.6$31.6 million during the nine monthnine-month period ended September 30, 2016 (from both continuing and discontinued operations). This decrease is principally the result of changes2019. The increase in cash used for working capital and non-cash chargesflows in 2020 is attributable to an increase in income from continuing operations in the nine months ended September 30, 20172020, driven by strong performance at our 5.11, Liberty and Velocity businesses, and a significant increase in cash provided by working capital. In the prior year, the Company incurred interest expense related to the 2018 Term Loan, which we paid off in the third and fourth quarter of 2019 using the proceeds from the sale of Clean Earth and our Series C Preferred Share Offering. The payoff of the 2018 Term Loan, partially offset by the increase in interest expense related to $200 million in our 8% Senior Notes issued in May 2020, resulted in a decrease in our interest expense in the first nine months of 2020 as compared to the same period in 2016, primarilyfirst nine months of 2019 by approximately $16.3 million. In the prior year, we also recognized a loss of $10.2 million related to the sale of common shares received as a resultpart of the 5.11 acquisition, which occurred inconsideration for the third quartersale of 2016, and the effect of the cash flows from add-on acquisitions completed in 2016.Manitoba Harvest. Cash used inprovided by operating activities for working capital for the nine months ended September 30, 20172020 was $24.3$10.4 million, as compared to cash used in operating activities for working capital of $5.0$28.6 million for the nine months ended September 30, 2016.2019. The increase wasin cash provided by working capital in the current year primarily duereflects steps our businesses have taken to conserve cash used for inventory by our branded consumer businesses duringin the third quarter.current economy.
Investing Activities:
| | | | | | | | | | | | | | |
| | Nine months ended |
(in thousands) | | September 30, 2020 | | September 30, 2019 |
Cash (used in) provided by investing activities | | $ | (236,502) | | | $ | 760,148 | |
| | | | |
Cash flows used in investing activities for the nine months ended September 30, 20172020 totaled approximately $63.0$236.5 million, compared to cash used inprovided by investing activities of $417.3$760.1 million in the same period of 2016. In2019. Cash provided by investing activities in the currentprior year weprimarily related to the proceeds received approximately $136.1 million related tofrom the sale of our remaining investment in FOX, offset by cash used for our Crosman acquisitionManitoba Harvest and add-on acquisitions at our Clean Earth Crosman and Sterno businesses, ($164.7while investing activities in the nine months ended September 30, 2020 reflect the acquisition of Marucci Sports in April 2020. Our spending on capital expenditures was consistent year over year, with $20.1 million in total) and capital expenditures ($31.0 million). Capital expenditures in the nine months ended September 30, 2017 increased approximately $15.42020 and $22.0 million compared toin capital expenditures in the prior year, due primarily to expenditures at our 5.11 business.nine months ended September 30, 2019. We expect capital expenditures for the full year of 20172020 to be approximately $42$28 million to $47 million. The 2016 investing activities reflect$33 million, which reflects a reduction in our capital spending from the acquisitionDecember 31, 2019 expectation in response to the expected effect 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 ofCOVID-19 on our FOX shares of $47.7 million.
cash flows.
Financing Activities:
| | | | | | | | | | | | | | |
| | Nine months ended |
(in thousands) | | September 30, 2020 | | September 30, 2019 |
Cash provided by (used in) financing activities | | $ | 200,395 | | | $ | (557,118) | |
| | | | |
Cash flows provided by financing activities totaled approximately $7.9$200.4 million during the nine months ended September 30, 20172020 compared to cash flows provided byused in financing activities of $300.4$557.1 million during the nine months ended September 30, 2016.2019. Financing activities in both periods reflect the payment of our quarterlycommon and preferred share distributions, with a $6.3 million increase in the preferred share distribution ($64.7as a result of the issuance of our Series C Preferred Shares in November 2019. In the prior year, we used the proceeds from our sale of Manitoba Harvest and Clean Earth to repay amounts outstanding under our 2018 Revolving Credit Facility and 2018 Term Loan, while in the current year, we completed a common share offering and the issuance of $200 million in 2017Senior Notes, resulting in net proceeds of $285.9 million. A portion of the proceeds received from the issuance of Senior Notes and $58.6 million in 2016), activitycommon share offering were used to pay down the amount outstanding on our credit facility and the payment of a profit allocation related to the sale of FOX shares ($39.2 million in 2017 and $16.8 million in 2016). In2018 Revolving Credit
facility. During the nine months ended September 30, 2017, activity on2020, we also made a distribution to the Allocation Member of $9.1 million related to the five year Holding event for 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 $412.1
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.Sterno business.
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.
As a result All of significant investmentour subsidiaries were in operational improvements to enhance its competitive position, including planned capital expendituresto reposition Arnold for future growth, we have granted Arnold a waiver for certaincompliance with the financial covenants underincluded within their intercompany debt agreement effective the quarter ended June 30, 2017 through December 31, 2017. Additionally, due to significant capital expenditures related to the implementation of a new ERP system and a warehouse expansion, we have granted 5.11 a waiver under their intercompany debt agreement effective the quarter endedcredit arrangements at September 30, 2017. The waiver permits 5.11 to exclude certain capital expenditures associated with the ERP system and warehouse expansion from the calculation of the fixed charge coverage ratio.
2020.
As of September 30, 2017,2020, we had the following outstanding loans due from each of our businesses:
| | | | | | | | |
(in thousands) | | |
5.11 | | $ | 170,765 | |
Ergobaby | | $ | 30,041 | |
Liberty | | $ | 37,657 | |
Marucci | | $ | 39,625 | |
Velocity Outdoor | | $ | 101,140 | |
Advanced Circuits | | $ | 51,283 | |
Arnold | | $ | 74,180 | |
Foam Fabricators | | $ | 87,087 | |
Sterno | | $ | 236,846 | |
|
| | | | |
(in thousands) | | |
5.11 Tactical | | $ | 185,750 |
|
Crosman | | $ | 97,327 |
|
Ergobaby | | $ | 66,448 |
|
Liberty | | $ | 49,737 |
|
Manitoba Harvest | | $ | 48,273 |
|
Advanced Circuits | | $ | 95,064 |
|
Arnold Magnetics | | $ | 72,715 |
|
Clean Earth | | $ | 172,786 |
|
Sterno Products | | $ | 75,127 |
|
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;Facility and interest on our Senior Notes; (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.
Financing Arrangements
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 FOX
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, and matures in June 2019, (ii) a $325$500 million term loan and (iii) a(the “2018 Term Loan”). The 2018 Credit Facility also permits the Company, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain additional term loans in an aggregate amount of up to $250 million incremental term loan. Our 2014(the “Incremental Loans”), subject to certain restrictions and conditions. In July 2019, we repaid $193.8 million of the 2018 Term Loan, and 2016 Incrementalin November 2019, we repaid the remaining $298.8 million due under the 2018 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”). 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$598.8 million in net availability under the 20142018 Revolving Credit Facility at September 30, 2017.2020. The outstanding borrowings under the 20142018 Revolving Credit Facility includes $1.3include $1.2 million at September 30, 2017 of outstanding letters of credit.credit at September 30, 2020.
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 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. On May 7, 2020, we consummated the issuance and sale of $200 million aggregate principal amount of its 8.000% Senior Notes due 2026 (the "Additional Notes"). The proceeds from the Additional Notes were used to pay down the amount outstanding on the Company's 2018 Revolving Credit Facility. The Notes and Additional 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 September 30, 20172020 included as part of the affirmative covenants in our 20142018 Credit Facility:
| | | | | | | | | | | | | | |
Description of Required Covenant Ratio | | Covenant Ratio Requirement | | Actual Ratio |
| | | | |
Description of Required Covenant Ratio | | Covenant Ratio Requirement | | Actual Ratio |
Consolidated Fixed Charge Coverage Ratio | | greaterGreater than or equal to 1.50:1.0 | | 3.12:5.28:1.0 |
Total Debt to EBITDAConsolidated Senior Secured Leverage Ratio | | lessLess than or equal to 3.50:1.0 | | 2.76:0.00:1.0 |
Consolidated Total Leverage Ratio | | Less than or equal to 5.00:1.0 | | 1.83:1.0 |
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, |
| 2020 | | 2019 |
Interest on credit facilities | $ | 685 | | | $ | 20,225 | |
Interest on Senior Notes | 30,400 | | | 24,000 | |
Unused fee on Revolving Credit Facility | 1,148 | | | 1,393 | |
Amortization of bond premium/ original issue discount | (139) | | | 397 | |
Unrealized loss on interest rate derivative (1) | — | | | 3,486 | |
Other interest expense | 235 | | | 211 | |
Interest income | (207) | | | (1,288) | |
Interest expense, net | $ | 32,122 | | | $ | 48,424 | |
| | | |
| | | |
| | | |
|
| | | | | | | |
| 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 | % |
(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 requiresrequired us to pay interest on the notional amount at the rate
of 2.97% in exchange for the three-month LIBOR rate. AtIn connection with the repayment of the 2018 Term Loan in November 2019, the Company settled the Swap with a payment of $4.9 million, the fair value of the Swap as of the date of termination.
The following table provides the effective interest rate of the Company’s outstanding long-term debt at September 30, 2017, the New Swap had a fair value loss of $8.8 million, reflecting the present value of future payments2020 and receipts under the agreement and is reflected as a component of interest expense and current and other non-current liabilities. Refer to "Note J - Derivatives and Hedging Activities" of the condensed consolidated financial statements for a description of the New Swap.December 31, 2019 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Effective Interest Rate | | Amount | | Effective Interest Rate | | Amount |
Senior Notes | 7.92% | | $ | 600,000 | | | 8.00% | | $ | 400,000 | |
Unamortized premiums and debt issuance costs | | | (7,893) | | | | | (5,555) | |
Long-term debt | | | $ | 592,107 | | | | | $ | 394,445 | |
Income Taxes
We incurred an income tax benefit of $2.0 million with an effective income tax 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 at our Arnold business and non-deductible costs at the corporate level, including the effect of the loss 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, which is taxed as a partnership.
(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; (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.dollar and (vi) items of other income or expense that are material to a subsidiary and non-recurring in nature.
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 net 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
Nine months ended September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | 5.11 | | Crosman | | Ergobaby | | Liberty | | Manitoba Harvest | | ACI | | Arnold | | Clean Earth | | Sterno | | Consolidated |
Net income (loss) | $ | (5,407 | ) | | $ | (15,043 | ) | | $ | (3,375 | ) | | $ | 5,364 |
| | $ | 2,522 |
| | $ | (2,505 | ) | | $ | 8,839 |
| | $ | (10,282 | ) | | $ | (1,980 | ) | | $ | 6,348 |
| | $ | (15,519 | ) |
Adjusted for: | | | | | | | | | | | | | | | | | | | | | |
Provision (benefit) for income taxes | — |
| | (10,405 | ) | | (962 | ) | | 3,941 |
| | 1,351 |
| | (944 | ) | | 2,755 |
| | 270 |
| | (1,041 | ) | | 3,034 |
| | (2,001 | ) |
Interest expense, net | 22,154 |
| | 51 |
| | 23 |
| | — |
| | — |
| | 37 |
| | (11 | ) | | — |
| | 245 |
| | — |
| | 22,499 |
|
Intercompany interest | (49,297 | ) | | 10,697 |
| | 2,561 |
| | 4,628 |
| | 2,989 |
| | 3,211 |
| | 6,194 |
| | 5,194 |
| | 10,108 |
| | 3,715 |
| | — |
|
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 |
|
EBITDA | (31,158 | ) | | 20,533 |
| | 4,179 |
| | 23,935 |
| | 8,221 |
| | 4,810 |
| | 20,493 |
| | 420 |
| | 23,834 |
| | 22,092 |
| | 97,359 |
|
Gain on sale of business | (340 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (340 | ) |
(Gain) loss on sale of fixed assets | — |
| | — |
| | — |
| | — |
| | 46 |
| | (227 | ) | | (10 | ) | | (9 | ) | | (56 | ) | | 486 |
| | 230 |
|
Noncontrolling shareholder compensation | — |
| | 1,786 |
| | — |
| | 521 |
| | 7 |
| | 750 |
| | 18 |
| | 149 |
| | 1,166 |
| | 555 |
| | 4,952 |
|
Acquisition expenses and other | — |
| | — |
| | 1,836 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,836 |
|
Impairment expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,864 |
| | — |
| | — |
| | 8,864 |
|
Integration services fee | — |
| | 2,333 |
| | 375 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,708 |
|
Loss on equity method investment | 5,620 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,620 |
|
Gain on foreign currency transaction and other | (3,583 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,583 | ) |
Management fees | 20,881 |
| | 750 |
| | 165 |
| | 375 |
| | 375 |
| | 262 |
| | 375 |
| | 375 |
| | 375 |
| | 375 |
| | 24,308 |
|
Adjusted EBITDA | $ | (8,580 | ) | | $ | 25,402 |
| | $ | 6,555 |
| | $ | 24,831 |
| | $ | 8,649 |
| | $ | 5,595 |
| | $ | 20,876 |
| | $ | 9,799 |
| | $ | 25,319 |
| | $ | 23,508 |
| | $ | 141,954 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA |
Nine months ended September 30, 2020 |
| Corporate | | 5.11 | | Ergobaby | | Liberty | | Marucci Sports | | Velocity Outdoor | | ACI | | Arnold | | Foam | | Sterno | | Consolidated |
Net income (loss) | $ | (10,535) | | | $ | 5,515 | | | $ | 1,837 | | | $ | 7,119 | | | $ | (5,344) | | | $ | 4,245 | | | $ | 10,980 | | | $ | (1,719) | | | $ | 4,188 | | | $ | 2,131 | | | $ | 18,417 | |
Adjusted for: | | | | | | | | | | | | | | | | | | | | | |
Provision (benefit) for income taxes | — | | | (55) | | | 2,265 | | | 2,357 | | | (2,351) | | | 1,386 | | | 2,878 | | | (56) | | | 1,891 | | | 162 | | | 8,477 | |
Interest expense, net | 31,971 | | | 43 | | | — | | | — | | | 6 | | | 102 | | | — | | | — | | | — | | | — | | | 32,122 | |
Intercompany interest | (51,429) | | | 10,770 | | | 1,818 | | | 2,748 | | | 1,194 | | | 6,945 | | | 4,176 | | | 4,300 | | | 5,290 | | | 14,188 | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | 467 | | | 16,033 | | | 6,152 | | | 1,294 | | | 8,031 | | | 9,651 | | | 1,980 | | | 5,040 | | | 9,473 | | | 17,251 | | | 75,372 | |
EBITDA | (29,526) | | | 32,306 | | | 12,072 | | | 13,518 | | | 1,536 | | | 22,329 | | | 20,014 | | | 7,565 | | | 20,842 | | | 33,732 | | | 134,388 | |
Gain on sale of business | (100) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (100) | |
Other (income) expense | 3 | | | 1,398 | | | — | | | (4) | | | (46) | | | 1,048 | | | 126 | | | (1) | | | (438) | | | 86 | | | 2,172 | |
Noncontrolling shareholder compensation | — | | | 1,870 | | | 748 | | | 22 | | | 361 | | | 1,287 | | | 372 | | | 34 | | | 771 | | | 651 | | | 6,116 | |
Acquisition expenses and other | — | | | — | | | — | | | — | | | 2,042 | | | — | | | — | | | — | | | 273 | | | — | | | 2,315 | |
| | | | | | | | | | | | | | | | | | | | | |
Integration services fee | — | | | — | | | — | | | — | | | 500 | | | — | | | — | | | — | | | — | | | — | | | 500 | |
Other | — | | | — | | | 598 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 598 | |
Management fees | 19,651 | | | 750 | | | 375 | | | 375 | | | 222 | | | 375 | | | 375 | | | 375 | | | 563 | | | 375 | | | 23,436 | |
Adjusted EBITDA | $ | (9,972) | | | $ | 36,324 | | | $ | 13,793 | | | $ | 13,911 | | | $ | 4,615 | | | $ | 25,039 | | | $ | 20,887 | | | $ | 7,973 | | | $ | 22,011 | | | $ | 34,844 | | | $ | 169,425 | |
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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA |
Nine months ended September 30, 2019 |
| Corporate | | 5.11 | | Ergobaby | | Liberty | | Marucci Sports | | Velocity Outdoor | | ACI | | Arnold | | Foam | | Sterno | | Consolidated |
Net income (loss) (1) | $ | 292,440 | | | $ | (1,071) | | | $ | 4,251 | | | $ | 1,404 | | | | | $ | (35,242) | | | $ | 11,035 | | | $ | (132) | | | $ | 3,383 | | | $ | 8,819 | | | $ | 284,887 | |
Adjusted for: | | | | | | | | | | | | | | | | | | | | | |
Provision (benefit) for income taxes | — | | | 742 | | | 2,248 | | | 1,058 | | | | | (2,198) | | | 2,934 | | | 1,679 | | | 1,492 | | | 2,420 | | | 10,375 | |
Interest expense, net | 48,247 | | | 2 | | | — | | | — | | | | | 173 | | | (1) | | | (1) | | | — | | | 4 | | | 48,424 | |
Intercompany interest | (61,609) | | | 13,500 | | | 2,640 | | | 3,278 | | | Not Applicable | | 8,484 | | | 5,029 | | | 4,777 | | | 6,675 | | | 17,226 | | | — | |
Loss on debt extinguishment | 5,038 | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | 5,038 | |
Depreciation and amortization | 1,333 | | | 16,037 | | | 6,566 | | | 1,248 | | | | 9,937 | | | 1,830 | | | 4,883 | | | 9,258 | | | 16,793 | | | 67,885 | |
EBITDA | 285,449 | | | 29,210 | | | 15,705 | | | 6,988 | | | | (18,846) | | | 20,827 | | | 11,206 | | | 20,808 | | | 45,262 | | | 416,609 | |
Gain on sale of businesses | (330,203) | | | — | | | — | | | — | | | | | — | | | — | | | — | | | | | — | | | (330,203) | |
Other (income) expense | 91 | | | (92) | | | (11) | | | 10 | | | | | 968 | | | (22) | | | (3) | | | 256 | | | 16 | | | 1,213 | |
Noncontrolling shareholder compensation | — | | | 1,742 | | | 620 | | | (15) | | | | | 86 | | | 167 | | | 32 | | | 767 | | | 866 | | | 4,265 | |
Impairment expense | — | | | — | | | — | | | — | | | | | 33,381 | | | — | | | — | | | — | | | — | | | 33,381 | |
Loss on sale of investment | 10,193 | | | — | | | — | | | — | | | | | — | | | — | | | — | | | — | | | — | | | 10,193 | |
Integration services fee | — | | | — | | | — | | | — | | | | | — | | | — | | | — | | | 281 | | | — | | | 281 | |
Other | — | | | — | | | — | | | 266 | | | | | — | | | 58 | | | — | | | — | | | — | | | 324 | |
Management fees | 24,789 | | | 750 | | | 375 | | | 375 | | | | | 375 | | | 375 | | | 375 | | | 563 | | | 375 | | | 28,352 | |
Adjusted EBITDA | $ | (9,681) | | | $ | 31,610 | | | $ | 16,689 | | | $ | 7,624 | | | | | $ | 15,964 | | | $ | 21,405 | | | $ | 11,610 | | | $ | 22,675 | | | $ | 46,519 | | | $ | 164,415 | |
(1)Net income (loss) does not include incomeloss from discontinued operations for the nine months ended September 30, 2016.2019.
Reconciliation of the sale of our Tridien subsidiary in September 2016, Adjusted EBITDA for the nine months ended September 30, 2016 does not include Adjusted EBITDA from Tridien of $1.5 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 flow 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 |
(in thousands) | September 30, 2020 | | September 30, 2019 |
Net income | $ | 18,417 | | | $ | 301,788 | |
Adjustment to reconcile net income to cash provided by operating activities: | | | |
Depreciation and amortization | 73,578 | | | 78,413 | |
Impairment expense | — | | | 33,381 | |
Gain on sale of businesses | (100) | | | (330,203) | |
Amortization of debt issuance costs, discount and premium | 1,656 | | | 3,022 | |
Unrealized loss on interest rate hedge | — | | | 3,486 | |
Noncontrolling shareholder charges | 6,116 | | | 6,204 | |
Provision for loss on receivables | 4,374 | | | 2,786 | |
Deferred taxes | (3,352) | | | (14,538) | |
Other | 1,776 | | | 5,961 | |
Changes in operating assets and liabilities | 10,407 | | | (58,716) | |
Net cash provided by operating activities | 112,872 | | | 31,584 | |
Plus: | | | |
Unused fee on revolving credit facility | 1,148 | | | 1,393 | |
Integration services fee (1) | 500 | | | 281 | |
Successful acquisition costs | 2,315 | | | 596 | |
Realized loss from foreign currency (2) | — | | | 363 | |
Loss on sale of Tilray Common Stock | — | | | 10,193 | |
Changes in operating assets and liabilities | — | | | 58,716 | |
| | | |
Less: | | | |
Payment of interest rate swap | — | | | 675 | |
Changes in operating assets and liabilities | 10,407 | | | — | |
Maintenance capital expenditures: (3) | | | |
Compass Group Diversified Holdings LLC | — | | | — | |
5.11 | 897 | | | 1,547 | |
Advanced Circuits | 354 | | | 1,126 | |
Arnold | 2,761 | | | 2,874 | |
Clean Earth | — | | | 3,495 | |
Ergobaby | 374 | | | 583 | |
Foam Fabricators | 1,518 | | | 1,387 | |
Liberty | 438 | | | 720 | |
Marucci Sports | 220 | | | — | |
Sterno | 1,061 | | | 932 | |
Velocity Outdoor | 2,743 | | | 2,096 | |
Other | 3,776 | | | 2,301 | |
Preferred share distribution | 17,633 | | | 11,344 | |
Estimated cash flow available for distribution and reinvestment | $ | 74,653 | | | $ | 74,046 | |
| | | |
|
| | | | | | | |
| Nine Months Ended |
(in thousands) | September 30, 2017 | | September 30, 2016 |
Net income (loss) | $ | (15,519 | ) | | $ | 54,554 |
|
Adjustment to reconcile net (income) loss to cash provided by operating activities: |
| |
|
Depreciation and amortization | 88,659 |
| | 53,972 |
|
Impairment expense/ loss on disposal of assets | 8,864 |
| | 7,214 |
|
Gain on sale of businesses | (340 | ) | | (2,134 | ) |
Amortization of debt issuance costs and original issue discount | 3,721 |
| | 2,363 |
|
Unrealized loss on interest rate hedges | 1,178 |
| | 8,322 |
|
Loss (gain) on equity method investment | 5,620 |
| | (58,680 | ) |
Noncontrolling shareholder charges | 4,952 |
| | 3,012 |
|
Excess tax benefit on stock compensation | (417 | ) | | (366 | ) |
Provision for loss on receivables | 4,310 |
| | 59 |
|
Deferred taxes | (17,937 | ) | | (4,280 | ) |
Other | 494 |
| | 349 |
|
Changes in operating assets and liabilities | (24,349 | ) | | (3,791 | ) |
Net cash provided by operating activities | 59,236 |
| | 60,594 |
|
Plus: |
| |
|
Unused fee on revolving credit facility | 2,143 |
| | 1,355 |
|
Integration services fee (1) | 2,708 |
| | 792 |
|
Successful acquisition costs | 1,836 |
| | 3,888 |
|
Excess tax benefit on stock compensation | 417 |
| | 366 |
|
Changes in operating assets and liabilities | 24,349 |
| | 3,791 |
|
Other | — |
| | 245 |
|
Less: |
| |
|
Payments on swap | 3,050 |
| | 3,114 |
|
Maintenance capital expenditures: (2) |
| |
|
Compass Group Diversified Holdings LLC | — |
| | — |
|
5.11 Tactical | 2,914 |
| | 540 |
|
Advanced Circuits | 219 |
| | 2,845 |
|
Arnold | 2,548 |
| | 1,625 |
|
Clean Earth | 3,591 |
| | 4,504 |
|
Crosman | 968 |
| | — |
|
Ergobaby | 788 |
| | 441 |
|
Liberty | 389 |
| | 850 |
|
Manitoba Harvest | 625 |
| | 1,146 |
|
Sterno Products | 1,373 |
| | 1,408 |
|
Tridien | — |
| | 385 |
|
Realized gain from foreign currency (3) | 3,583 |
| | 2,396 |
|
Other (4) | 3,980 |
| | — |
|
Estimated cash flow available for distribution and reinvestment | $ | 66,661 |
| | $ | 51,777 |
|
| | | |
Distribution paid in April 2017/2016 | $ | (21,564 | ) | | $ | (19,548 | ) |
Distribution paid in July 2017/2016 | (21,564 | ) | | (19,548 | ) |
| | | | | | | | | | | |
Distribution paid in April 2020/2019 | $ | (21,564) | | | $ | (21,564) | |
Distribution paid in July 2020/2019 | (23,364) | | | (21,564) | |
Distribution paid in October 2020/2019 | (23,364) | | | (21,564) | |
| $ | (68,292) | | | $ | (64,692) | |
|
| | | | | | | |
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) Reflects the foreign currency transaction gain or loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest.
(3) Represents maintenance capital expenditures that were funded from operating cash flow, net of proceeds from the sale of property, plant and equipment, and excludes growth capital expenditures of approximately $17.5$9.7 million for the nine months ended September 30, 20172020 and $1.6$10.7 million for the nine months ended September 30, 2016.
| |
(3)
| Reflects the foreign currency transaction gain or loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest. |
| |
(4)
| Includes amounts for the establishment of accounts receivable reserves related to two retail customers who filed bankruptcy during the first and third quarters of 2017. |
2019.
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 the 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 borrowed under the 2018 Revolving Credit Facility. In March 2020, as a proactive measure to provide the Company with additional cash liquidity in light of the COVID-19 pandemic, the Company elected to draw down $200 million on our 2018 Revolving Credit Facility. The following table reflectsCompany and CGM entered into a waiver agreement whereby CGM agreed to waive the yearportion of the management fee attributable to date activity from our investment 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 oncash balances held at the investment in FOXCompany as of March 31, 2020. In addition, as a result of an expected decline in earnings and cash flows in the datesecond quarter of 2020, CGM agreed to waive 50% of the FOX secondary offering throughmanagement fee calculated at June 30, 2020 that was paid in July 2020. Further, for the third quarter of 2020, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of September 30, 2020.
Integrations Services Agreements
Marucci Sports, which we soldwas acquired in April 2020, entered into an Integration Services Agreement ("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 acquired entity's policies and procedures with our remaining sharesother subsidiaries. CGM will receive integration service fees of $2.0 million payable quarterly over a twelve month period as services are rendered beginning in FOX.the quarter ended September 30, 2020. Foam Fabricators, which was acquired in 2018, entered into an ISA with CGM. Foam Fabricators paid CGM $2.3 million over the term of the ISA, with $2.0 million paid in 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 nine months ended September 30, 2017,2020, 5.11 purchased approximately $1.0$0.7 million and $4.7$2.3 million, respectively, in inventory from thisthe vendor.
Profit Allocation Payments
October 2019 represented the five-year anniversary of the Company's acquisition of Sterno, which qualified as a Holding Event under the Company's LLC Agreement (the "Sterno Holding Event"). During the first quarter of 2020, the Company declared and paid a distribution of $9.1 million to the Allocation Member related to the Sterno Holding
Event. The ten-year anniversary of Liberty occurred in March 2020 which represented a Holding Event. The holders of the Allocation Interests elected to defer the distribution of $3.3 million until after the end of 2020. The ten-year anniversary of Ergo occurred in September 2020 which represented a Holding Event. The Holders elected to defer the distribution of $2.0 million until after the end of 2020.
The sales 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 and paid a distribution to the Allocation Member of $8.0 million related to the sale of Manitoba Harvest and working capital settlements from prior Sale Events. 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. During the third quarter of 2019, the Company declared and paid a distribution to the Allocation Member of $43.3 million related to the sale of Clean Earth. During the fourth quarter of 2019, the Company declared and paid a distribution to the Allocation Member of $9.1 million related to the Deferred Consideration from the Manitoba Harvest sale and the working capital settlement received from the sale of Clean Earth.
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 September 30, 2017:2020:
| | (in thousands) | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | (in thousands) | 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 |
| | $ | — |
| Long-term debt obligations (1) | $ | 865,233 | | | $ | 24,000 | | | $ | 96,000 | | | $ | 97,233 | | | $ | 648,000 | |
Operating lease obligations (2) | 92,734 |
| | 12,231 |
| | 24,744 |
| | 17,333 |
| | 38,426 |
| Operating lease obligations (2) | 133,114 | | | 4,841 | | | 52,393 | | | 32,424 | | | 43,456 | |
Purchase obligations (3) | 408,105 |
| | 237,110 |
| | 105,495 |
| | 65,500 |
| | — |
| Purchase obligations (3) | 767,926 | | | 192,371 | | | 288,114 | | | 287,441 | | | — | |
Total (4) | $ | 1,189,631 |
| | $ | 270,572 |
| | $ | 219,938 |
| | $ | 660,695 |
| | $ | 38,426 |
| Total (4) | $ | 1,766,273 | | | $ | 221,212 | | | $ | 436,507 | | | $ | 417,098 | | | $ | 691,456 | |
| |
(1)(1)Reflects amounts due under our 2018 Credit Facility, as well as our Senior Notes, together with interest on our 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 September 30, 2020, including: (i) shareholder distributions of $110.4 million; (ii) estimated management fees of $30.9 million per year over the next five years; and (iii) other obligations including amounts due under employment agreements. Distributions to our shareholders are approved by our board of directors each quarter. The amount ultimately approved as future quarterly distributions may differ from the amount included in this schedule. (4)The contractual obligation table does not include approximately $1.1 million in liabilities associated with unrecognized tax benefits as of September 30, 2020 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. | Reflects commitment fees and letter of credit fees under our 2014 Revolving Credit Facility and amounts due, together with interest on our 2014 Term Loan and 2016 Incremental Term Loan. |
| |
(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 September 30, 2017, including: (i) shareholder distributions of $86.3 million; (ii) estimated management fees of $32.8 million per year over the next five years, and (iii) other obligations including amounts due under employment agreements. Distributions to our shareholders are approved by our board of directors each quarter. The amount ultimately approved as future quarterly distributions may differ from the amount included in this schedule. |
| |
(4)
| The contractual obligation table does not include approximately $10.5 million in liabilities associated with unrecognized tax benefits as of September 30, 2017 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 Policies and 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 policies and 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, 2016,2019, as filed with the Securities and Exchange Commission ("SEC") on March 2, 2017.February 26, 2020.
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-notmore-likely-than-not that the fair value of a reporting unit is lessgreater 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 of 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 similar 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.
20172020 Annual Impairment Testing
At - For our annual impairment testing at March 31, 2017,2020, we performed a qualitative assessment of our reporting units. As part of our current year analysis, we have considered how we expect the COVID-19 pandemic to impact our future operating results and short and long-term financial condition. In addition to the typical qualitative factors we consider as part of the assessment, we went through a process with each of our reporting units whereby we considered various scenarios for the remainder of the year, probability weighted for what we consider the most likely outcome given existing facts and circumstances. This process included consideration of the reporting unit's industry and customers, including customer liquidity, operational capacity given local government restrictions imposed to prevent spread of the COVID-19 virus, supply chain constraints that may exist as a result of the virus and ability of the subsidiary to reduce cash outflows. The results of the qualitative analysis indicated that it was more-likely-than-not that the fair value of our 5.11, ACI, Arnold, Liberty and Sterno reporting units exceeded their carrying value. Based on our analysis, we determined that the Manitoba Harvest reporting unitour Ergobaby, Foam Fabricators and Velocity operating segments required further quantitative testing (Step 1) because we could not conclude that the fair value of these reporting units significantly exceeded the carrying value based on qualitative factors alone.
We performed the quantitative tests of Ergobaby, Foam Fabricators and Velocity using an income approach to determine the fair value of the reporting units. We were unable to use a market approach due to the current market conditions as a result of the COVID-19 pandemic resulting in significant volatility and lack of available market comparables. In developing the prospective financial information used in the income approach, we considered recent market conditions, taking into consideration the uncertainty associated with the COVID-19 pandemic and its economic fallout. The prospective financial information considers reporting unit exceedsspecific facts and circumstances and is our best estimate of operational results and cash flows for each reporting unit as of the date of our impairment testing. For Ergobaby, the discount rate used in the income approach was 15.9% and the results of the quantitative impairment testing indicated that the fair value of the Ergobaby reporting unit exceeded the carrying value by 14.0%. For Foam Fabricators, the discount rate used in the income approach was 13.3%, and the results of the quantitative impairment testing indicated that the fair value of the Foam Fabricators reporting unit exceeded the carrying value by 3.8%. The impairment test for Velocity used a discount rate of 12.8% in the income approach, and the results of the quantitative impairment testing indicated that the fair value of the Velocity reporting unit exceeded the carrying value by 16.4%. The prospective financial information that is used to determine the fair values of the reporting units requires us to make assumptions regarding future operational results including revenue
growth rates and gross margins. If we do not achieve the forecasted revenue growth rates and gross margins, the results of the quantitative testing could change, potentially leading to additional testing and impairment at the reporting units that were tested quantitatively.
2019 Interim Impairment Testing - As a result of operating results below forecasts as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods, we determined that a triggering event had occurred at Velocity Outdoor in the third quarter of 2019. We performed goodwill impairment testing at Velocity as of September 30, 2019. For the quantitative impairment test at Velocity, we utilized an income approach. 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. We used a weighted average cost of capital of 12.2% in the income approach. The discount rate used was based on the weighted average cost of capital adjusted for the relevant risk associated with business specific characteristics and Velocity's ability to execute on the projected cash flows. Based on the results of the impairment test, the fair value of Velocity did not exceed the carrying value, indicating that the goodwill at Velocity is impaired. The difference between the carrying value and fair value of the Velocity business was $32.9 million, which the Company recorded as impairment expense during the year ended December 31, 2019.
2019 Annual Impairment Testing - For our annual impairment testing at March 31, 2019, we determined that our Liberty operating segment required quantitative testing because we could not conclude that the fair value of Liberty 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 those reporting units exceeded their carrying value.
Manitoba Harvest
We performed Step 1 testing duringFor the 2017reporting units that were tested qualitatively for the 2019 annual impairment testing, for Manitoba Harvest. Subsequent to the annual impairment test, 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 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 for 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 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 determinedqualitative analysis indicated 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 value of the reporting unit using only an income approach, whereby we estimate the fair value of a reporting unit based on the present value of future cash flows. 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 in 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. Results of the Step 1 testing for Arnold's Flexmag and PTM reporting units indicatedmore-likely-than-not that the fair value of these reporting units exceeded their carrying value by 34% 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 2 indicated total goodwill impairment 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.
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, 2017,2020 and 2019, indicated that the fair value of the indefinite lived intangible assets exceeded their carrying value. The Ergobaby and Liberty reporting units have indefinite lived trade names that were tested in conjunction with the goodwill impairment tests at March 31, 2020 and March 31, 2019, respectively. The results of the quantitative impairment testing indicated that the trade names were not impaired.
Revenue from Contracts with Customers
The Company recognizes revenue in accordance with the provisions of Revenue from Contracts with Customers, or ASC 606. The revenue 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.
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.
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 remains consistent with previous guidance. These incentives are recorded as a reduction in the transaction price. Under the revenue standard 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, 2016.2019. 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, 2016,2019, as filed with the SEC on March 2, 2017.February 26, 2020.
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 September 30, 2017.2020. Based on that evaluation, the Holdings’ Regular Trustees and the Chief Executive Officer and Chief Financial Officer of the Company concluded that Holdings’ and the Company’s disclosure controls and procedures were effective as of September 30, 2017.2020.
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, 20162019, as filed with the SEC on March 2, 2017.February 26, 2020.
ITEM 1A. RISK FACTORS
There have been no material changes in thoseThe 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 fiscal year ended December 31, 2016, as filed2019 and updated in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 should be considered together with information included in this Quarterly Report on Form 10-Q for the SEC on March 2, 2017 except as noted below relatedquarter ended September 30, 2020 and should not be considered the only risks to which we are exposed. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our acquisition of Crosman in June 2017, andbusiness, including 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,operations, liquidity and results of operations.financial condition. We believe there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as updated by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
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.
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ITEM 6.EXHIBITS |
| |
Exhibit Number | | Description |
| | |
10.1*31.1* | | |
| | |
12.1* | | |
| | |
31.1* | | |
| |
31.2* | | |
| |
32.1*+ | | |
| |
32.2*+ | | |
| |
101.INS* | | Inline 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* | | Inline XBRL Taxonomy Extension Schema Document |
| |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104 | | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
| | | | | |
* | Filed herewith. |
| |
*+ | 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.
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| | | | | | | | | | |
| COMPASS DIVERSIFIED HOLDINGS |
| | |
| By: | | /s/ Ryan J. Faulkingham |
| | | Ryan J. Faulkingham |
| | | Regular Trustee |
Date: 11/8/2017October 28, 2020
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.
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| | | | | | | | | | |
| COMPASS GROUP DIVERSIFIED HOLDINGS LLC |
| | |
| By: | | /s/ Ryan J. Faulkingham |
| | | Ryan J. Faulkingham |
| | | Chief Financial Officer
(Principal Financial and Accounting Officer)
|
Date: 11/8/2017
EXHIBIT INDEX
|
| | |
| By: | Description | /s/ Ryan J. Faulkingham |
| | | Ryan J. Faulkingham |
10.1* | | | Chief Financial Officer (Principal Financial and among Compass Group Diversified Holdings LLC, Bank of America, N.A., and the lenders theretoAccounting Officer) |
Date: October 28, 2020
EXHIBIT INDEX
| | | | | | | | |
Exhibit Number | | Description |
12.1* | | |
31.1* | | |
31.1* | | |
| | |
31.2* | | |
| | |
32.1*+ | | |
| | |
32.2*+ | | |
| | |
101.INS* | | Inline 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* | | Inline XBRL Taxonomy Extension Schema Document |
| | |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104 | | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
| | | | | |
* | Filed herewith. |
| |
*+ | 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. |