UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172022
Or
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMPASS DIVERSIFIED HOLDINGS
(Exact name of registrant as specified in its charter)
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| Delaware | | 001-34927 | | 57-6218917 | |
| (State or other jurisdiction of incorporation or organization)
| | (Commission file number)
| | (I.R.S. employer identification number)
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COMPASS GROUP DIVERSIFIED HOLDINGS LLC
(Exact name of registrant as specified in its charter)
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| Delaware | | 001-34926 | | 20-3812051 | |
| (State or other jurisdiction of incorporation or organization)
| | (Commission file number)
| | (I.R.S. employer identification number)
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301301 Riverside Avenue,
Second Floor,
Westport, CT 06880
(203)(203) 221-1703
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Shares representing beneficial interests in Compass Diversified Holdings | | CODI | | New York Stock Exchange |
Series A Preferred Shares representing beneficial interests in Compass Diversified Holdings | | CODI PR A | | New York Stock Exchange |
Series B Preferred Shares representing beneficial interests in Compass Diversified Holdings | | CODI PR B | | New York Stock Exchange |
Series C Preferred Shares representing beneficial interests in Compass Diversified Holdings | | CODI PR C | | New York Stock Exchange |
Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesýNo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ýNo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act Act. |
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| Large accelerated filer | | ýx | | Accelerated filer | | ¨ | Non-accelerated filer | | ¨ | |
Non-accelerated filer | Smaller reporting company | ¨ | ☐ | Smaller Reporting Company | | ¨ |
| | | | Emerging growth company | | ¨
☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨☐Noý
As of November 1, 2017,October 28, 2022, there were 59,900,00072,202,729 Trust common shares of Compass Diversified Holdings outstanding.
COMPASS DIVERSIFIED HOLDINGS
QUARTERLY REPORT ON FORM 10-Q
For the period ended September 30, 20172022
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION | | |
ITEM 1. | | | | |
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ITEM 2. | | | | |
ITEM 3. | | | | |
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ITEM 4. | | | | |
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PART II. OTHER INFORMATION | | |
ITEM 1. | | | | |
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ITEM 1A. | | | | |
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ITEM 6. | | | | |
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NOTE TO READER
In reading this Quarterly Report on Form 10-Q, references to:
•the "Trust"“Trust” and "Holdings"“Holdings” refer to Compass Diversified Holdings;
"businesses," "operating segments," "subsidiaries"•the “LLC” refer to Compass Group Diversified Holdings LLC;
•the "Company" refer to Compass Diversified Holdings and "reporting units"Compass Group Diversified Holdings LLC, collectively;
•“businesses”, “operating segments”, “subsidiaries” and “reporting units” all refer to, collectively, the businesses controlled by the Company;
•the "Company" refer to Compass Group Diversified Holdings LLC;
the "Manager"“Manager” refer to Compass Group Management LLC ("CGM"(“CGM”);
•the "Trust Agreement" refer to the SecondThird Amended and Restated Trust Agreement of the Trust dated as of December 6, 2016;August 3, 2021;
•the "2011 Credit Facility" refer to a credit agreement (as amended) with a group of lenders led by Toronto Dominion (Texas) LLC, as agent, which provided for the 2011 Revolving Credit Facility and the 2011 Term Loan Facility;
the "2014"2022 Credit Facility" refer to the third amended and restated credit agreement as amendedentered into on July 12, 2022 among the LLC, the lenders from time to time entered into on June 6, 2014 with a group of lenders led byparty thereto, Bank of America, N.A., as administrative agent, which provides for aAdministrative Agent, Swing Line Lender and letter of credit issuer (the "agent")
•the "2022 Revolving Credit Facility" refers to the $600 million in revolving loans, swing line loans and letters of credit provided by the 2022 Credit Facility and athat matures in 2027;
•the "2022 Term Loan;Loan" refer to the $400 million term loan provided by the 2022 Credit Facility;
•the "2014 Revolving"2021 Credit Facility" refer to the $550 millionsecond amended and restated credit agreement entered into on March 23, 2021 among the LLC, the lenders from time to time party thereto, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto;
•the "2021 Revolving Credit FacilityFacility" refers to the $600 million in revolving loans, swing line loans and letters of credit provided by the 20142021 Credit Facility that maturesmatured in June 2019;2026;
•the "2014"2018 Credit Facility" refer to the amended and restated credit agreement entered into on April 18, 2018 among the LLC, the lenders from time to time party thereto, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto, which was subsequently amended and restated by the 2021 Credit Facility;
•the "2018 Revolving Credit Facility" refers to the $600 million in revolving loans, swing line loans and letters of credit provided by the 2018 Credit Facility;
•the "2018 Term Loan" refer to the $325$500 million Term Loan Facility,term loan provided by the 20142018 Credit Facility that matures in June 2021;Facility;
the "2016 Incremental Term Loan" refer to the $250 million Tranche B Term Facility provided by the 2014 Credit Facility (together with the 2014 Term Loan, the "Term Loans");
•the "LLC Agreement" refer to the fifth amendedSixth Amended and restated operating agreementRestated Operating Agreement of the CompanyLLC dated as of December 6, 2016;August 3, 2021, as further amended; and
•"we," "us" and "our" refer to the Trust, the CompanyLLC and the businesses together.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, contains both historical and forward-looking statements. We may, in some cases, use words such as "project," "predict," "believe," "anticipate," "plan," "expect," "estimate," "intend," "should," "would," "could," "potentially," "may," or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. All statements other than statements of historical or current fact are “forward-looking statements” for purposes of federal and state securities laws. Forward looking statements include, among other things, (i) statements as to our future performance or liquidity, such as expectations for our results of operation, net income, adjusted EBITDA, adjusted earnings, and ability to make quarterly distributions and (ii) our plans, strategies and objectives for future operations, including our planned capital expenditures. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, somesuch as those disclosed or incorporated by reference in our filings with the SEC, including, but not limited to, those described under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the United States Securities and Exchange Commission (“SEC”) on February 24, 2022, as such factors may be updated from time to time in our filings with the SEC. Many of whichthese risks and uncertainties are beyond our control including,. Important factors that could cause our actual results, performance and achievements to differ materially from those estimates or projections contained in our forward-looking statements include, among other things:
•the adverse impact on the U.S. and global economy, including the markets in which we operate, of the novel coronavirus, which causes the Coronavirus disease 2019 (COVID-19), and the impact in the near, medium and long-term on our business, results of operations, financial position, liquidity or cash flows;
•disruption in the global supply chain, labor shortages and high labor costs;
•difficulties and delays in integrating, or business disruptions following, acquisitions or an inability to fully realize cost savings and other benefit related thereto;
•our ability to successfully operate our subsidiary businesses on a combined basis, and to effectively integrate and improve future acquisitions;
•our ability to remove CGM and CGM’s right to resign;
•our organizational structure, which may limit our ability to meet our dividend and distribution policy;
•our ability to service and comply with the terms of our indebtedness;
•our cash flow available for distribution and reinvestment and our ability to make distributions in the future to our shareholders;
•our ability to pay the management fee and profit allocation if and when due;
•our ability to make and finance future acquisitions;
•our ability to implement our acquisition and management strategies;
•the legal and regulatory environment in which our businessessubsidiaries operate;
•trends in the industries in which our businessessubsidiaries operate;
•changes in general economic, political or business conditions or economic, political or demographic trends in the United States and other countries in which we have a presence, including changes in interest rates and inflation;
•risks associated with possible disruption in operations or the economy generally due to terrorism or natural disaster or social, civil or political unrest;
•environmental risks affecting the business or operations of our businesses;subsidiaries;
•our and CGM’s ability to retain or replace qualified employees of our businessessubsidiaries and CGM;
•the impact of the tax reclassifications of the Trust;
•costs and effects of legal and administrative proceedings, settlements, investigations and claims; and
•extraordinary or force majeure events affecting the business or operations of our subsidiary businesses.
Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise, except as required by law.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | September 30, 2022 | | December 31, 2021 |
(in thousands) | September 30, 2017 | | December 31, 2016 | (in thousands) | | (Unaudited) | | |
| (Unaudited) | | | |
Assets | | | | Assets | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 41,487 |
| | $ | 39,772 |
| Cash and cash equivalents | | $ | 61,252 | | | $ | 160,733 | |
Accounts receivable, net | 198,111 |
| | 181,191 |
| Accounts receivable, net | | 326,266 | | | 277,710 | |
Inventories | 242,817 |
| | 212,984 |
| |
Inventories, net | | Inventories, net | | 725,902 | | | 565,743 | |
Prepaid expenses and other current assets | 27,145 |
| | 18,872 |
| Prepaid expenses and other current assets | | 81,130 | | | 57,006 | |
| Total current assets | 509,560 |
| | 452,819 |
| Total current assets | | 1,194,550 | | | 1,061,192 | |
Property, plant and equipment, net | 170,827 |
| | 142,370 |
| Property, plant and equipment, net | | 193,749 | | | 186,477 | |
Investment in FOX (refer to Note F) | — |
| | 141,767 |
| |
Goodwill | 539,925 |
| | 491,637 |
| Goodwill | | 1,194,251 | | | 882,083 | |
Intangible assets, net | 591,878 |
| | 539,211 |
| Intangible assets, net | | 1,096,020 | | | 872,690 | |
Other non-current assets | 8,616 |
| | 9,351 |
| Other non-current assets | | 162,727 | | | 141,819 | |
| Total assets | $ | 1,820,806 |
| | $ | 1,777,155 |
| Total assets | | $ | 3,841,297 | | | $ | 3,144,261 | |
| Liabilities and stockholders’ equity | | | | Liabilities and stockholders’ equity | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable | $ | 77,417 |
| | $ | 61,512 |
| Accounts payable | | $ | 100,511 | | | $ | 124,203 | |
Accrued expenses | 105,058 |
| | 91,041 |
| Accrued expenses | | 211,633 | | | 190,348 | |
| Due to related party | 7,553 |
| | 20,848 |
| Due to related party | | 15,368 | | | 12,802 | |
Current portion, long-term debt | 5,685 |
| | 5,685 |
| Current portion, long-term debt | | 10,000 | | | — | |
Other current liabilities | 15,493 |
| | 23,435 |
| Other current liabilities | | 39,378 | | | 34,269 | |
| Total current liabilities | 211,206 |
| | 202,521 |
| Total current liabilities | | 376,890 | | | 361,622 | |
Deferred income taxes | 122,033 |
| | 110,838 |
| Deferred income taxes | | 153,202 | | | 97,763 | |
Long-term debt | 569,755 |
| | 551,652 |
| Long-term debt | | 1,784,365 | | | 1,284,826 | |
Other non-current liabilities | 18,570 |
| | 17,600 |
| Other non-current liabilities | | 134,857 | | | 115,520 | |
| Total liabilities | 921,564 |
| | 882,611 |
| Total liabilities | | 2,449,314 | | | 1,859,731 | |
| Commitments and contingencies | | Commitments and contingencies | |
| Stockholders’ equity | | | | Stockholders’ equity | |
Trust preferred shares, 50,000 authorized; 4,000 shares issued and outstanding at September 30, 2017 | 96,417 |
| | — |
| |
Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding at September 30, 2017 and December 31, 2016 | 924,680 |
| | 924,680 |
| |
Trust preferred shares, 50,000 authorized; 12,600 shares issued and outstanding at September 30, 2022 and December 31, 2021 | | Trust preferred shares, 50,000 authorized; 12,600 shares issued and outstanding at September 30, 2022 and December 31, 2021 | |
Series A preferred shares, no par value; 4,000 shares issued and outstanding at September 30, 2022 and December 31, 2021 | | Series A preferred shares, no par value; 4,000 shares issued and outstanding at September 30, 2022 and December 31, 2021 | | 96,417 | | | 96,417 | |
Series B preferred shares, no par value; 4,000 shares issued and outstanding at September 30, 2022 and December 31, 2021 | | Series B preferred shares, no par value; 4,000 shares issued and outstanding at September 30, 2022 and December 31, 2021 | | 96,504 | | | 96,504 | |
Series C preferred shares, no par value; 4,600 shares issued and outstanding at September 30, 2022 and December 31, 2021 | | Series C preferred shares, no par value; 4,600 shares issued and outstanding at September 30, 2022 and December 31, 2021 | | 110,997 | | | 110,997 | |
Trust common shares, no par value, 500,000 authorized; 72,203 shares issued and outstanding at September 30, 2022 and 68,738 issued and outstanding at December 31, 2021 | | Trust common shares, no par value, 500,000 authorized; 72,203 shares issued and outstanding at September 30, 2022 and 68,738 issued and outstanding at December 31, 2021 | | 1,207,082 | | | 1,123,193 | |
Accumulated other comprehensive loss | (2,184 | ) | | (9,515 | ) | Accumulated other comprehensive loss | | (2,593) | | | (1,028) | |
Accumulated deficit | (167,297 | ) | | (58,760 | ) | Accumulated deficit | | (336,842) | | | (314,267) | |
Total stockholders’ equity attributable to Holdings | 851,616 |
| | 856,405 |
| Total stockholders’ equity attributable to Holdings | | 1,171,565 | | | 1,111,816 | |
Noncontrolling interest | 47,626 |
| | 38,139 |
| Noncontrolling interest | | 220,418 | | | 172,714 | |
| Total stockholders’ equity | 899,242 |
| | 894,544 |
| Total stockholders’ equity | | 1,391,983 | | | 1,284,530 | |
Total liabilities and stockholders’ equity | $ | 1,820,806 |
| | $ | 1,777,155 |
| Total liabilities and stockholders’ equity | | $ | 3,841,297 | | | $ | 3,144,261 | |
See notes to condensed consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands, except per share data) | | 2022 | | 2021 | | 2022 | | 2021 |
Net revenues | | $ | 597,607 | | | $ | 488,158 | | | $ | 1,669,123 | | | $ | 1,372,266 | |
Cost of revenues | | 358,291 | | | 296,027 | | | 996,210 | | | 818,307 | |
Gross profit | | 239,316 | | | 192,131 | | | 672,913 | | | 553,959 | |
Operating expenses: | | | | | | | | |
Selling, general and administrative expense | | 148,700 | | | 118,818 | | | 403,428 | | | 337,815 | |
Management fees | | 16,717 | | | 12,398 | | | 46,304 | | | 34,504 | |
Amortization expense | | 25,152 | | | 19,056 | | | 67,191 | | | 56,502 | |
| | | | | | | | |
Operating income | | 48,747 | | | 41,859 | | | 155,990 | | | 125,138 | |
Other income (expense): | | | | | | | | |
Interest expense, net | | (22,799) | | | (13,855) | | | (57,737) | | | (42,607) | |
Amortization of debt issuance costs | | (1,004) | | | (759) | | | (2,735) | | | (2,167) | |
Loss on debt extinguishment | | (534) | | | — | | | (534) | | | (33,305) | |
Other income (expense), net | | (2,141) | | | 1,031 | | | 606 | | | (1,906) | |
Income from continuing operations before income taxes | | 22,269 | | | 28,276 | | | 95,590 | | | 45,153 | |
Provision for income taxes | | 21,163 | | | 9,556 | | | 39,201 | | | 24,662 | |
Income from continuing operations | | 1,106 | | | 18,720 | | | 56,389 | | | 20,491 | |
Income (loss) from discontinued operations, net of income taxes | | — | | | (1,309) | | | — | | | 7,665 | |
Gain on sale of discontinued operations, net of income taxes | | 1,479 | | | 72,745 | | | 6,893 | | | 72,745 | |
Net income | | 2,585 | | | 90,156 | | | 63,282 | | | 100,901 | |
Less: Net income from continuing operations attributable to noncontrolling interest | | 4,359 | | | 2,201 | | | 14,927 | | | 7,915 | |
Less: Net income (loss) from discontinued operations attributable to noncontrolling interest | | — | | | (145) | | | — | | | 522 | |
Net income (loss) attributable to Holdings | | $ | (1,774) | | | $ | 88,100 | | | $ | 48,355 | | | $ | 92,464 | |
| | | | | | | | |
Amounts attributable to Holdings | | | | | | | | |
Income (loss) from continuing operations | | $ | (3,253) | | | $ | 16,519 | | | $ | 41,462 | | | $ | 12,576 | |
Income (loss) from discontinued operations, net of income tax | | — | | | (1,164) | | | — | | | 7,143 | |
Gain on sale of discontinued operations, net of income tax | | 1,479 | | | 72,745 | | | 6,893 | | | 72,745 | |
Net income (loss) attributable to Holdings | | $ | (1,774) | | | $ | 88,100 | | | $ | 48,355 | | | $ | 92,464 | |
| | | | | | | | |
Basic income (loss) per common share attributable to Holdings (refer to Note J) | | | | | | | | |
Continuing operations | | $ | (0.23) | | | $ | (0.13) | | | $ | 0.10 | | | $ | (0.46) | |
Discontinued operations | | 0.02 | | | 1.10 | | | 0.10 | | | 1.23 | |
Basic income (loss) per common share attributable to Holdings (refer to Note J) | | $ | (0.21) | | | $ | 0.97 | | | $ | 0.20 | | | $ | 0.77 | |
| | | | | | | | |
Basic weighted average number of shares of common shares outstanding | | 71,910 | | | 65,008 | | | 70,514 | | | 64,936 | |
| | | | | | | | |
Cash distributions declared per Trust common share (refer to Note J) | | $ | 0.25 | | | $ | 1.24 | | | $ | 0.75 | | | $ | 1.96 | |
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| Three months ended September 30, | | Nine months ended September 30, |
(in thousands, except per share data) | 2017 | | 2016 | | 2017 | | 2016 |
Net sales | $ | 268,281 |
| | $ | 200,770 |
| | $ | 767,960 |
| | $ | 525,713 |
|
Service revenues | 55,676 |
| | 51,515 |
| | 153,370 |
| | 134,035 |
|
Total net revenues | 323,957 |
| | 252,285 |
| | 921,330 |
| | 659,748 |
|
Cost of sales | 166,445 |
| | 133,006 |
| | 488,913 |
| | 340,576 |
|
Cost of service revenues | 39,787 |
| | 36,864 |
| | 110,639 |
| | 95,968 |
|
Gross profit | 117,725 |
| | 82,415 |
| | 321,778 |
| | 223,204 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative expense | 80,804 |
| | 53,648 |
| | 239,102 |
| | 140,702 |
|
Management fees | 8,277 |
| | 8,435 |
| | 24,308 |
| | 21,394 |
|
Amortization expense | 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 |
|
Other income (expense): | | | | | | | |
Interest expense, net | (6,945 | ) | | (4,376 | ) | | (22,499 | ) | | (23,204 | ) |
Amortization of debt issuance costs | (1,004 | ) | | (687 | ) | | (2,940 | ) | | (1,827 | ) |
Gain (loss) on investment in FOX | — |
| | 50,414 |
| | (5,620 | ) | | 58,680 |
|
Other income (expense), net | 2,020 |
| | (3,271 | ) | | 2,950 |
| | (1,852 | ) |
Income (loss) from continuing operations before income taxes | 8,548 |
| | 53,438 |
| | (17,861 | ) | | 61,725 |
|
Provision (benefit) for income taxes | 192 |
| | 4,894 |
| | (2,002 | ) | | 9,778 |
|
Income (loss) from continuing operations | 8,356 |
| | 48,544 |
| | (15,859 | ) | | 51,947 |
|
Income (loss) from discontinued operations, net of income tax | — |
| | (455 | ) | | — |
| | 473 |
|
Gain on sale of discontinued operations, net of income tax | — |
| | 2,134 |
| | 340 |
| | 2,134 |
|
Net income (loss) | 8,356 |
| | 50,223 |
| | (15,519 | ) | | 54,554 |
|
Less: Net income attributable to noncontrolling interest | 650 |
| | 682 |
| | 2,492 |
| | 1,749 |
|
Less: Net loss from discontinued operations attributable to noncontrolling interest | — |
| | (164 | ) | | — |
| | (116 | ) |
Net income (loss) attributable to Holdings | $ | 7,706 |
| | $ | 49,705 |
| | $ | (18,011 | ) | | $ | 52,921 |
|
Amounts attributable to Holdings | | | | | | | |
Income (loss) from continuing operations | $ | 7,706 |
| | $ | 47,862 |
| | $ | (18,351 | ) | | $ | 50,198 |
|
Income (loss) from discontinued operations, net of income tax | — |
| | (291 | ) | | — |
| | 589 |
|
Gain on sale of discontinued operations, net of income tax | — |
| | 2,134 |
| | 340 |
| | 2,134 |
|
Net income (loss) attributable to Holdings | $ | 7,706 |
| | $ | 49,705 |
| | $ | (18,011 | ) | | $ | 52,921 |
|
Basic and fully diluted income (loss) per common share attributable to Holdings (refer to Note L) |
| |
|
| | | | |
Continuing operations | $ | 0.10 |
| | $ | 0.72 |
| | $ | (1.03 | ) | | $ | 0.59 |
|
Discontinued operations | — |
| | 0.03 |
| | 0.01 |
| | 0.05 |
|
| $ | 0.10 |
| | $ | 0.75 |
| | $ | (1.02 | ) | | $ | 0.64 |
|
Weighted average number of shares of common shares outstanding – basic and fully diluted | 59,900 |
| | 54,300 |
| | 59,900 |
| | 54,300 |
|
Cash distributions declared per common share (refer to Note L) | $ | 0.36 |
| | $ | 0.36 |
| | $ | 1.08 |
| | $ | 1.08 |
|
See notes to condensed consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Net income | | $ | 2,585 | | | $ | 90,156 | | | $ | 63,282 | | | $ | 100,901 | |
Other comprehensive income (loss) | | | | | | | | |
Foreign currency translation adjustments | | (2,144) | | | (1,339) | | | (3,620) | | | (734) | |
Pension benefit liability, net | | 216 | | | (16) | | | 2,055 | | | 885 | |
Other comprehensive income (loss) | | (1,928) | | | (1,355) | | | (1,565) | | | 151 | |
Total comprehensive income, net of tax | | $ | 657 | | | $ | 88,801 | | | 61,717 | | | 101,052 | |
Less: Net income attributable to noncontrolling interests | | 4,359 | | | 2,056 | | | 14,927 | | | 8,437 | |
Less: Other comprehensive income (loss) attributable to noncontrolling interests | | (30) | | | 7 | | | (32) | | | 30 | |
Total comprehensive income (loss) attributable to Holdings, net of tax | | $ | (3,672) | | | $ | 86,738 | | | $ | 46,822 | | | $ | 92,585 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Net income (loss) | $ | 8,356 |
| | $ | 50,223 |
| | $ | (15,519 | ) | | $ | 54,554 |
|
Other comprehensive income (loss) | | | | | | | |
Foreign currency translation adjustments | 3,370 |
| | (1,945 | ) | | 6,955 |
| | 3,275 |
|
Pension benefit liability, net | (4 | ) | | (765 | ) | | 376 |
| | (1,288 | ) |
Other comprehensive income (loss) | 3,366 |
| | (2,710 | ) | | 7,331 |
| | 1,987 |
|
Total comprehensive income (loss), net of tax | 11,722 |
| | 47,513 |
| | (8,188 | ) | | 56,541 |
|
Less: Net income attributable to noncontrolling interests | 650 |
| | 518 |
| | 2,492 |
| | 1,633 |
|
Less: Other comprehensive income (loss) attributable to noncontrolling interests | 675 |
| | (268 | ) | | 1,336 |
| | 929 |
|
Total comprehensive income (loss) attributable to Holdings, net of tax | $ | 10,397 |
| | $ | 47,263 |
| | $ | (12,016 | ) | | $ | 53,979 |
|
See notes to condensed consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Trust Preferred Shares | | Trust Common Shares | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Stockholders' Equity Attributable to Holdings | | Non- Controlling Interest | | Non- Controlling Interest Attributable to Disc. Ops. | | Total Stockholders’ Equity |
| Series A | | Series B | | Series C | | | | | | | |
Balance — July 1, 2021 | $ | 96,417 | | | $ | 96,504 | | | $ | 110,997 | | | $ | 1,008,564 | | | $ | (270,671) | | | $ | 50 | | | $ | 1,041,861 | | | $ | 126,619 | | | $ | 4,517 | | | $ | 1,172,997 | |
Net income (loss) | — | | | — | | | — | | | — | | | 88,100 | | | — | | | 88,100 | | | 2,201 | | | (145) | | | 90,156 | |
Total comprehensive loss, net | — | | | — | | | — | | | — | | | — | | | (1,355) | | | (1,355) | | | — | | | — | | | (1,355) | |
Issuance of Trust common shares | — | | | — | | | — | | | 18,522 | | | — | | | — | | | 18,522 | | | — | | | — | | | 18,522 | |
Option activity attributable to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,892 | | | 3 | | | 2,895 | |
Effect of subsidiary stock option exercise | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 837 | | | — | | | 837 | |
Purchase of noncontrolling interest | — | | | — | | | — | | | — | | | (8,632) | | | — | | | (8,632) | | | (40,458) | | | — | | | (49,090) | |
Acquisition of Lugano | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 68,000 | | | — | | | 68,000 | |
Disposition of Liberty | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,375) | | | (4,375) | |
Distributions paid to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,275) | | | — | | | (1,275) | |
Distributions paid - Allocation interests | — | | | — | | | — | | | — | | | (12,075) | | | — | | | (12,075) | | | — | | | — | | | (12,075) | |
Distributions paid - Trust Common Shares | — | | | — | | | — | | | — | | | (80,476) | | | — | | | (80,476) | | | — | | | — | | | (80,476) | |
Distributions paid - Trust Preferred Shares | — | | | — | | | — | | | — | | | (6,045) | | | — | | | (6,045) | | | — | | | — | | | (6,045) | |
Balance — September 30, 2021 | $ | 96,417 | | | $ | 96,504 | | | $ | 110,997 | | | $ | 1,027,086 | | | $ | (289,799) | | | $ | (1,305) | | | $ | 1,039,900 | | | $ | 158,816 | | | $ | — | | | $ | 1,198,716 | |
| | | | | | | | | | | | | | | | | | | |
Balance — July 1, 2022 | $ | 96,417 | | | $ | 96,504 | | | $ | 110,997 | | | $ | 1,185,348 | | | $ | (311,092) | | | $ | (665) | | | $ | 1,177,509 | | | $ | 177,337 | | | $ | — | | | $ | 1,354,846 | |
Net income (loss) | — | | | — | | | — | | | — | | | (1,774) | | | — | | | (1,774) | | | 4,359 | | | — | | | 2,585 | |
Total comprehensive loss, net | — | | | — | | | — | | | — | | | — | | | (1,928) | | | (1,928) | | | — | | | — | | | (1,928) | |
Issuance of Trust common shares | — | | | — | | | — | | | 21,734 | | | — | | | — | | | 21,734 | | | — | | | — | | | 21,734 | |
Option activity attributable to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,241 | | | — | | | 3,241 | |
Effect of subsidiary stock option exercise | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 642 | | | — | | | 642 | |
Purchase of noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (424) | | | — | | | (424) | |
Acquisition of PrimaLoft | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 35,263 | | | — | | | 35,263 | |
| | | | | | | | | | | | | | | | | | | |
Distributions paid - Trust Common Shares | — | | | — | | | — | | | — | | | (17,931) | | | — | | | (17,931) | | | — | | | — | | | (17,931) | |
Distributions paid - Trust Preferred Shares | — | | | — | | | — | | | — | | | (6,045) | | | — | | | (6,045) | | | — | | | — | | | (6,045) | |
Balance — September 30, 2022 | $ | 96,417 | | | $ | 96,504 | | | $ | 110,997 | | | $ | 1,207,082 | | | $ | (336,842) | | | $ | (2,593) | | | $ | 1,171,565 | | | $ | 220,418 | | | $ | — | | | $ | 1,391,983 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Trust Preferred Shares | | Trust Common Shares | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Stockholders' Equity Attributable to Holdings | | Non- Controlling Interest | | Total Stockholders’ Equity |
Balance — January 1, 2017 | $ | — |
| | $ | 924,680 |
| | $ | (58,760 | ) | | $ | (9,515 | ) | | $ | 856,405 |
| | $ | 38,139 |
| | $ | 894,544 |
|
Net income (loss) | — |
| | — |
| | (18,011 | ) | | — |
| | (18,011 | ) | | 2,492 |
| | (15,519 | ) |
Total comprehensive income, net | — |
| | — |
| | — |
| | 7,331 |
| | 7,331 |
| | — |
| | 7,331 |
|
Issuance of Trust preferred shares, net of offering costs | 96,417 |
| | — |
| | — |
| | — |
| | 96,417 |
| | — |
| | 96,417 |
|
Option activity attributable to noncontrolling shareholders | — |
| | — |
| | — |
| | — |
| | — |
| | 4,952 |
| | 4,952 |
|
Effect of subsidiary stock option exercise | — |
| | — |
| | — |
| | — |
| | — |
| | 1,222 |
| | 1,222 |
|
Effect of issuance of subsidiary stock | — |
| | — |
| | — |
| | — |
| | — |
| | 40 |
| | 40 |
|
Acquisition of Crosman | — |
| | — |
| | — |
| | — |
| | — |
| | 781 |
| | 781 |
|
Distributions paid - Allocation Interests (refer to Note L) | — |
| | — |
| | (25,834 | ) | | — |
| | (25,834 | ) | | — |
| | (25,834 | ) |
Distributions paid - Trust Common Shares | — |
| | — |
| | (64,692 | ) | | — |
| | (64,692 | ) | | — |
| | (64,692 | ) |
Balance — September 30, 2017 | $ | 96,417 |
| | $ | 924,680 |
| | $ | (167,297 | ) | | $ | (2,184 | ) | | $ | 851,616 |
| | $ | 47,626 |
| | $ | 899,242 |
|
COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Trust Preferred Shares | | Trust Common Shares | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Stockholders' Equity Attributable to Holdings | | Non- Controlling Interest | | Non- Controlling Interest Attributable to Disc. Ops. | | Total Stockholders’ Equity |
| Series A | | Series B | | Series C | | | | | | | |
Balance — January 1, 2021 | $ | 96,417 | | | $ | 96,504 | | | $ | 110,997 | | | $ | 1,008,564 | | | $ | (211,002) | | | $ | (1,456) | | | $ | 1,100,024 | | | $ | 116,288 | | | $ | 3,836 | | | $ | 1,220,148 | |
Net income | — | | | — | | | — | | | — | | | 92,464 | | | — | | | 92,464 | | | 7,915 | | | 522 | | | 100,901 | |
Total comprehensive income, net | — | | | — | | | — | | | — | | | — | | | 151 | | | 151 | | | — | | | — | | | 151�� | |
Issuance of Trust common shares | — | | | — | | | — | | | 18,522 | | | — | | | — | | | 18,522 | | | — | | | — | | | 18,522 | |
Option activity attributable to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,496 | | | 17 | | | 8,513 | |
Effect of subsidiary stock option exercise | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,222 | | | — | | | 1,222 | |
Purchase of noncontrolling interest | — | | | — | | | — | | | — | | | (8,632) | | | — | | | (8,632) | | | (41,830) | | | — | | | (50,462) | |
Acquisition of Lugano | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 68,000 | | | — | | | 68,000 | |
Disposition of Liberty | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | (4,375) | | | (4,375) | |
Distributions paid to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,275) | | | — | | | (1,275) | |
Distributions paid - Allocation interests | — | | | — | | | — | | | — | | | (17,289) | | | — | | | (17,289) | | | — | | | — | | | (17,289) | |
Distributions paid - Trust Common Shares | — | | | — | | | — | | | — | | | (127,204) | | | — | | | (127,204) | | | — | | | — | | | (127,204) | |
Distributions paid - Trust Preferred Shares | — | | | — | | | — | | | — | | | (18,136) | | | — | | | (18,136) | | | — | | | — | | | (18,136) | |
Balance — September 30, 2021 | $ | 96,417 | | | $ | 96,504 | | | $ | 110,997 | | | $ | 1,027,086 | | | $ | (289,799) | | | $ | (1,305) | | | $ | 1,039,900 | | | $ | 158,816 | | | $ | — | | | $ | 1,198,716 | |
| | | | | | | | | | | | | | | | | | | |
Balance — January 1, 2022 | $ | 96,417 | | | $ | 96,504 | | | $ | 110,997 | | | $ | 1,123,193 | | | $ | (314,267) | | | $ | (1,028) | | | $ | 1,111,816 | | | $ | 172,714 | | | $ | — | | | $ | 1,284,530 | |
Net income | — | | | — | | | — | | | — | | | 48,355 | | | — | | | 48,355 | | | 14,927 | | | — | | | 63,282 | |
Total comprehensive loss, net | — | | | — | | | — | | | — | | | — | | | (1,565) | | | (1,565) | | | — | | | — | | | (1,565) | |
Issuance of Trust common shares | — | | | — | | | — | | | 83,889 | | | — | | | — | | | 83,889 | | | — | | | — | | | 83,889 | |
Option activity attributable to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,851 | | | — | | | 8,851 | |
Effect of subsidiary stock option exercise | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,082 | | | — | | | 1,082 | |
Purchase of noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,127) | | | — | | | (1,127) | |
Acquisition of PrimaLoft | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 35,263 | | | — | | | 35,263 | |
Distributions paid to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (11,292) | | | — | | | (11,292) | |
| | | | | | | | | | | | | | | | | | | |
Distributions paid - Trust Common Shares | — | | | — | | | — | | | — | | | (52,794) | | | — | | | (52,794) | | | — | | | — | | | (52,794) | |
Distributions paid - Trust Preferred Shares | — | | | — | | | — | | | — | | | (18,136) | | | — | | | (18,136) | | | — | | | — | | | (18,136) | |
Balance — September 30, 2022 | $ | 96,417 | | | $ | 96,504 | | | $ | 110,997 | | | $ | 1,207,082 | | | $ | (336,842) | | | $ | (2,593) | | | $ | 1,171,565 | | | $ | 220,418 | | | $ | — | | | $ | 1,391,983 | |
See notes to condensed consolidated financial statements.
| | | | | | | | | | | |
COMPASS DIVERSIFIED HOLDINGS |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
| | | |
| Nine months ended September 30, |
(in thousands) | 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income | $ | 63,282 | | | $ | 100,901 | |
Income from discontinued operations | — | | | 7,665 | |
Gain on sale of discontinued operations | 6,893 | | | 72,745 | |
Income from continuing operations | 56,389 | | | 20,491 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Depreciation expense | 32,589 | | | 28,896 | |
Amortization expense - intangibles | 67,191 | | | 56,502 | |
Amortization expense - inventory step-up | 4,899 | | | — | |
Amortization of debt issuance costs | 2,735 | | | 2,084 | |
Noncontrolling stockholder stock based compensation | 8,851 | | | 8,496 | |
Provision for receivable and inventory reserves | 1,143 | | | 4,366 | |
Deferred taxes | 8,207 | | | 2,587 | |
Loss on debt extinguishment | 534 | | | 33,305 | |
Other | 703 | | | 541 | |
Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | (45,200) | | | (20,555) | |
Inventories | (160,717) | | | (48,532) | |
Other current and non-current assets | (16,590) | | | (6,957) | |
Accounts payable and accrued expenses | (657) | | | 61,324 | |
Cash (used in) provided by operating activities - continuing operations | (39,923) | | | 142,548 | |
Cash provided by operating activities - discontinued operations | — | | | 4,600 | |
Cash (used in) provided by operating activities | (39,923) | | | 147,148 | |
Cash flows from investing activities: | | | |
Acquisitions, net of cash acquired | (564,885) | | | (302,110) | |
Purchases of property and equipment | (39,683) | | | (28,001) | |
Proceeds from sale of businesses | 6,893 | | | 101,014 | |
Other investing activities | (1,276) | | | (791) | |
Cash used in investing activities - continuing operations | (598,951) | | | (229,888) | |
Cash provided by investing activities - discontinued operations | — | | | 27,459 | |
Cash used in investing activities | (598,951) | | | (202,429) | |
COMPASS DIVERSIFIED HOLDINGS CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) |
| | | | | | | |
| Nine months ended September 30, |
(in thousands) | 2017 | | 2016 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (15,519 | ) | | $ | 54,554 |
|
Income from discontinued operations | — |
| | 473 |
|
Gain on sale of discontinued operations, net | 340 |
| | 2,134 |
|
Net income (loss) from continuing operations | (15,859 | ) | | 51,947 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
| |
|
Depreciation expense | 24,505 |
| | 19,481 |
|
Amortization expense | 64,154 |
| | 32,691 |
|
Impairment expense | 8,864 |
| | — |
|
Loss on disposal of assets | — |
| | 7,214 |
|
Amortization of debt issuance costs and original issue discount | 3,721 |
| | 2,363 |
|
Unrealized loss on interest rate swap | 1,178 |
| | 8,322 |
|
Noncontrolling stockholder stock based compensation | 4,952 |
| | 3,011 |
|
Excess tax benefit from subsidiary stock options exercised | (417 | ) | | (366 | ) |
Loss (gain) on investment in FOX | 5,620 |
| | (58,680 | ) |
Provision for loss on receivables | 4,310 |
| | 59 |
|
Deferred taxes | (17,937 | ) | | (4,479 | ) |
Other | 494 |
| | 325 |
|
Changes in operating assets and liabilities, net of acquisition: |
| |
|
Increase in accounts receivable | (1,015 | ) | | (8,797 | ) |
(Increase) decrease in inventories | (24,222 | ) | | 440 |
|
(Increase) decrease in prepaid expenses and other current assets | (4,501 | ) | | 2,081 |
|
Increase in accounts payable and accrued expenses | 5,389 |
| | 1,296 |
|
Net cash provided by operating activities - continuing operations | 59,236 |
| | 56,908 |
|
Net cash provided by operating activities - discontinued operations | — |
| | 3,686 |
|
Cash provided by operating activities | 59,236 |
| | 60,594 |
|
Cash flows from investing activities: | | | |
Acquisitions, net of cash acquired | (164,742 | ) | | (528,642 | ) |
Purchases of property and equipment | (30,955 | ) | | (15,528 | ) |
Net proceeds from sale of equity investment | 136,147 |
| | 110,685 |
|
Payment of interest rate swap | (3,050 | ) | | (3,114 | ) |
Purchase of noncontrolling interest | — |
| | (1,476 | ) |
Proceeds from sale of business | 340 |
| | 11,249 |
|
Other investing activities | (696 | ) | | 350 |
|
Net cash used in investing activities - continuing operations | (62,956 | ) | | (426,476 | ) |
Net cash provided by investing activities - discontinued operations | — |
| | 9,192 |
|
Cash used in investing activities | (62,956 | ) | | (417,284 | ) |
| | | | | | | | | | | |
COMPASS DIVERSIFIED HOLDINGS |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
| | | |
| Nine months ended September 30, |
(in thousands) | 2022 | | 2021 |
Cash flows from financing activities: | | | |
Proceeds from issuance of Trust common shares, net | 83,889 | | | 18,522 | |
Borrowings under credit facility | 169,000 | | | 365,000 | |
Repayments under credit facility | (56,000) | | | (538,000) | |
Issuance of Term Loan | 400,000 | | | — | |
Principal Payments - Term Loan | (2,500) | | | — | |
Proceeds from issuance of Senior Notes | — | | | 1,000,000 | |
Redemption of Senior Notes | — | | | (627,688) | |
Distributions paid - common shares | (52,794) | | | (127,204) | |
Distributions paid - preferred shares | (18,136) | | | (18,136) | |
Distributions paid - allocation interests | — | | | (17,289) | |
Distributions paid to noncontrolling shareholders | (11,292) | | | (1,275) | |
Net proceeds provided by noncontrolling shareholders | 1,082 | | | 1,222 | |
Net proceeds provided by noncontrolling shareholders - acquisitions | 35,263 | | | 68,000 | |
Purchase of noncontrolling interest | (1,127) | | | (50,462) | |
Debt issuance costs | (5,276) | | | (17,389) | |
Other | 19 | | | (429) | |
Net cash provided by financing activities | 542,128 | | | 54,872 | |
Foreign currency impact on cash | (2,735) | | | (96) | |
Net decrease in cash and cash equivalents | (99,481) | | | (505) | |
Cash and cash equivalents — beginning of period (1) | 160,733 | | | 70,744 | |
Cash and cash equivalents — end of period | $ | 61,252 | | | $ | 70,239 | |
COMPASS DIVERSIFIED HOLDINGS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| | | | | | | |
| Nine months ended September 30, |
(in thousands) | 2017 | | 2016 |
Cash flows from financing activities: | | | |
Proceeds from the issuance of Trust preferred shares, net | 96,417 |
| | — |
|
Borrowings under credit facility | 214,500 |
| | 633,798 |
|
Repayments under credit facility | (197,664 | ) | | (221,719 | ) |
Distributions paid | (64,692 | ) | | (58,644 | ) |
Net proceeds provided by noncontrolling shareholders | 821 |
| | 9,473 |
|
Distributions paid to noncontrolling shareholders | — |
| | (23,630 | ) |
Distributions paid to allocation interest holders (refer to Note L) | (39,188 | ) | | (16,829 | ) |
Repurchase of subsidiary stock | — |
| | (15,407 | ) |
Excess tax benefit from subsidiary stock options exercised | 417 |
| | 366 |
|
Debt issuance costs | (1,433 | ) | | (5,993 | ) |
Other | (1,316 | ) | | (1,008 | ) |
Net cash provided by financing activities | 7,862 |
| | 300,407 |
|
Foreign currency impact on cash | (2,427 | ) | | (3,197 | ) |
Net increase (decrease) in cash and cash equivalents | 1,715 |
| | (59,480 | ) |
Cash and cash equivalents — beginning of period (1) | 39,772 |
| | 85,869 |
|
Cash and cash equivalents — end of period | $ | 41,487 |
| | $ | 26,389 |
|
(1)Includes cash from discontinued operations of $0.6$4.3 million at January 1, 2016.2021.
See notes to condensed consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 20172022
Note A — Organization- Presentation and Business OperationsPrinciples of Consolidation
Compass Diversified Holdings, a Delaware statutory trust (the "Trust" or "Holdings"), was incorporated in Delaware on November 18, 2005. and Compass Group Diversified Holdings LLC, a Delaware limited liability company (the "Company" or "CODI""LLC"), was also formed on November 18, 2005 with equity interests which were subsequently reclassified as the "Allocation Interests". The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. Collectively, Compass Diversified Holdings and Compass Group Diversified Holdings, LLC are referred to as the "Company". In accordance with the amendedThird Amended and restatedRestated Trust Agreement, dated as of December 6, 2016 (theAugust 3, 2021 (as further amended, the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s amendedLLC’s Sixth Amended and restated operating agreement,Restated Operating Agreement, dated as of December 6, 2016August 3, 2021 (as further amended, and restated, the "LLC Agreement")) of the CompanyLLC and, pursuant to the LLC Agreement, the CompanyLLC has, outstanding, the identical number of Trust Interests as the number of outstanding common shares of the Trust. The CompanyLLC is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The CompanyLLC is a controlling owner of nineeleven businesses, or reportable operating segments, at September 30, 2017.2022. The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), Crosman Corp.Boa Holdings Inc. ("Crosman"BOA"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products,Lugano Diamonds & Jewelry, Inc. ("Liberty Safe"Lugano Diamonds" or "Liberty""Lugano"), Fresh Hemp Foods Ltd.Marucci Sports, LLC ("Manitoba Harvest"Marucci Sports" or "Marucci"), PrimaLoft Technologies Holdings, Inc. ("PrimaLoft"), Velocity Outdoor, Inc. ("Velocity Outdoor" or "Velocity"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold"), FFI Compass, Inc. ("Altor Solutions" or "Arnold Magnetics""Altor"), Clean Earth Holdings, Inc. ("Clean Earth" (formerly "Foam Fabricators"), and The Sterno Products,Group, LLC ("Sterno" or "Sterno Products"). Refer to Note E - "Operating Segment Data" for further discussion of the operating segments. Compass Group Management LLC, a Delaware limited liability company ("CGM" or the "Manager"), manages the day to day operations of the CompanyLLC and oversees the management and operations of our businesses pursuant to a management services agreementManagement Services Agreement ("MSA"). Note B -Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements for the three and nine month periods ended September 30, 20172022 and September 30, 2016,2021 are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or "GAAP") and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Seasonality
Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Crosman typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday seasons. Earnings from Clean Earth are typically lower during the winter months due to the limits on outdoor construction and development activity because of the colder weather in the Northeastern United States. Sterno Products typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer and holiday seasons, respectively.2021.
Consolidation
The condensed consolidated financial statements include the accounts of Holdings and all majority owned subsidiaries.the Company, as well as the businesses acquired as of their respective acquisition date. All significant intercompany transactionsaccounts and balancestransactions have been eliminated in consolidation. Discontinued operating entities are reflected as discontinued operations in the Company's results of operations and statements of financial position.
Discontinued Operations
DuringOn October 13, 2021, the LLC, as the Sellers Representative of the holders of stock and options of Advanced Circuits, a majority owned subsidiary of the LLC, entered into a definitive Agreement and Plan of Merger (the "AC Agreement") with Tempo Automation, Inc. (“AC Buyer”), Aspen Acquisition Sub, Inc. (“AC Merger Sub”) and Advanced Circuits, pursuant to which AC Buyer would acquire all of the issued and outstanding securities of Advanced Circuits, the parent company of the operating entity, Advanced Circuits, Inc., through a merger of AC Merger Sub with and into Advanced Circuits, with Advanced Circuits surviving the merger and becoming a wholly owned subsidiary of AC Buyer (the “AC Merger”). The AC Merger was conditioned on, among other things, the closing of a business combination between AC Buyer and a publicly traded special purpose acquisition company (a “SPAC”). In connection with the AC Merger, AC Buyer announced its entry into a definitive merger agreement for a business combination (the “SPAC Transaction”) with a SPAC, ACE Convergence Acquisition Corp. (“ACE”). The AC Agreement also provided that the AC Agreement could be terminated in the event closing of the AC Merger did not
occur prior to January 27, 2022 (the "End Date").A description of the AC Merger Agreement was included in the Current Report on Form 8-K filed by the Company on October 14, 2021. Advanced Circuits was initially classified as held for sale in the consolidated financial statements as of December 31, 2021.
Due to a delay in closing the SPAC Transaction, the AC Merger did not close on or before the End Date. Because of the delay in closing the SPAC Transaction, on July 29, 2022, the LLC and Advanced Circuits provided the notice of termination of the AC Agreement to AC Buyer. No termination penalties were incurred by either party in connection with the termination of the AC Agreement. The termination of the AC Agreement occurred in the third quarter of 2016,2022 and, in accordance with applicable accounting guidance, Advanced Circuits was reclassified to continuing operations beginning in the quarter ended September 30, 2022.
The Company completed the sale of Tridien Medical, Inc.Liberty Safe Holding Corporation ("Tridien"Liberty"). during the third quarter of 2021. The results of operations of TridienLiberty are reported as discontinued operations in the condensed consolidated statements of operations for the three and ninesix months ended September 30, 2016.2021. Refer toNote DC - "Discontinued Operations" for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations. Recently Adopted Accounting PronouncementsSeasonality
In January 2017, the FASB issued new accounting guidanceEarnings of certain of our operating segments are seasonal in nature due to simplify the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not
to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. Entities will continue to have the option to perform a qualitative test to determine if a quantitative test is necessary. The guidance is effective for fiscal yearsvarious recurring events, holidays and interim periods within those years, after December 31, 2019, with early adoption permitted for any goodwill impairment tests performed after January 1, 2017 and will be applied prospectively. The Company adopted this guidance early, effective January 1, 2017, on a prospective basis, and will apply the guidance as necessary to annual and interim goodwill testing performed subsequent to January 1, 2017.
Recently Issued Accounting Pronouncements
In March 2017, the FASB issued new guidance that will require employers that sponsor defined benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period, and requires the other components of net periodic pension cost to be presented in the income statement separately from the service component cost and outside a subtotal of income from operations. The new guidance shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company's Arnold business segment has a defined benefit plan covering substantially all of Arnold's employees at its Switzerland location. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.
In January 2017, the FASB issued new guidance that changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the set of transferred asset and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognition guidance. The new standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.
In August 2016, the FASB issued an accounting standard update which updates the guidance as to how certain cash receipts and cash payments should be presented and classified within the statement of cash flows. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued an accounting standard update related to the accounting for leases which will require an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The standard update offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires modified retrospective adoption, with early adoption permitted. Accordingly, this standard is effective for the Company on January 1, 2019. The Company is currently assessing the impact of the new standard on our consolidated financial statements.
In May 2014, the FASB issued a comprehensive new revenue recognition standard. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard is designed to create greater comparability for financial statement users across industries, jurisdictions and capital markets and also requires enhanced disclosures. The new standard will be effective for the Company beginning January 1, 2018. The FASB issued four subsequent standards in 2016 containing implementation guidance related to the new standard. These standards provide additional guidance related to principal versus agent considerations, licensing, and identifying performance obligations. Additionally, these standards provide narrow-scope improvements and practical expedientsseasonal weather patterns, as well as technical corrections and improvements.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company will be adopting the standard using the modified retrospective method effective January 1, 2018.
The Company has developed implementation procedures specific to each of its reportable segments.The Company has designed these procedures to assess the impact that the new revenue standard will have on the Company’s financial
statements and to make any changes necessary to its current accounting practices and internal controls over financial reporting. The Company expects to complete the implementation procedures during the fourth quarter of 2017. The Company has identified certain differences as it relates to the concepts of variable consideration, consideration payable to a customer and the focus on control to determine when and how revenue should be recognized (i.e. point in time versus over time) during the implementation process. Although certain differences have been identified around variable consideration and consideration payable to a customer, the total impact on each reportable segment will not be material to the financial statements. The Company has identified two reportable segments where revenue recognition will change to over time recognition from historical point in time revenue recognition. Although the timing of revenue recognitionour acquisitions during a given year. Historically, the third and fourth quarters produce the highest net sales during our fiscal year.
Change in Tax Status Election
Effective September 1, 2021 (the "Effective Date"), the Trust elected to be treated as a corporation for these two reportable segments will change, these changesU.S. federal income tax purposes. Prior to the Effective Date, the Trust was treated as a partnership for U.S. federal income tax purposes and the Trust’s items of income, gain, loss and deduction flowed through from the Trust to the shareholders, and the Trust shareholders were subject to income taxes on their allocable share of the Trust’s income and gain. After the Effective Date, the Trust is taxed as a corporation and is subject to U.S. federal corporate income tax at the Trust level, but items of income, gain, loss and deduction will not have a material impact onflow through to Trust shareholders. Trust shareholders will no longer receive an IRS Schedule K-1. After the Company’s financial statements. The Company expects to adopt certain practical expedients and make certain policy elections relatedEffective Date, distributions from the Trust will be treated as dividends to the accountingextent the Trust has accumulated or current earnings and profits. If the Trust does not have current or accumulated earnings and profits available for significant financing components, sales taxes, shippingdistribution, then the distribution will be treated as a return of capital and handling, costsreduce Trust shareholders’ basis in their shares.
Prior to obtainthe Effective Date, each of the LLC’s majority owned subsidiaries were treated as corporations for U.S. federal income tax purposes. The election did not change the tax status of any LLC subsidiary, and each majority owned LLC subsidiary is still treated as a contract and immaterial promised goodscorporation for U.S. federal income tax purposes.
After the Effective Date, the Trust will no longer be taxed as a pass through entity for U.S. federal income tax purposes. Accordingly, the Trust will no longer issue Schedule K-1’s, nor will Trust shareholders be allocated any pass through income, loss, expense, deduction or services which mitigates any potential differences. In addition,credit (including “UBIT”) from the Trust.
Note B — Acquisitions
The acquisitions of our businesses are accounted for under the acquisition method of accounting. For each platform acquisition, the Company is currently analyzing our internal control over financial reporting framework to determine if controls should be added or modified astypically structures the transaction so that a result of adopting this standard, and reviewing the tax impact, if any, the option of the new standard may have. We also expect that the adoption of the new standard will result in expanded and disaggregated disclosure requirements.
Note C — Acquisitions
Acquisition of Crosman
On June 2, 2017, CBCP Acquisition Corp. (the "Buyer"), a wholly owned subsidiary of the Company, entered into an equity purchase agreement pursuant to which it acquired all of the outstanding equity interests of Bullseye Acquisition Corporation, the indirect ownernewly created holding company acquires 100% of the equity interests in the acquired business. The entirety of Crosman Corp. ("Crosman"). Crosmanthe purchase consideration is paid by the newly created holding company to the selling shareholders. The total purchase consideration is the amount paid to the selling shareholders and we will, from time to time, allow the selling shareholder to reinvest a designer, manufacturerportion of their proceeds alongside the Company at the same price per share, into the holding company that acquires the target business. Once the acquisition is complete, the selling shareholders no longer hold equity interests in the acquired company, but rather hold noncontrolling interest in the holding company that acquired the target business. Because the selling shareholders are investing in the transaction alongside the Company at the same price per share as the Company and marketer of airguns, archery products, laser aiming devices and related accessories. Headquarteredare not retaining their existing equity in Bloomfield, New York, Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channels and distributors serving smaller specialty stores and international markets. Its diversified product portfoliothe acquired business, the Company includes the widely known Crosman, Benjaminamount provided by noncontrolling shareholders in the total purchase consideration.
A component of our acquisition financing strategy that we utilize in acquiring the businesses we own and CenterPoint brands.manage is to provide both equity capital and debt capital, raised at the parent level, typically through our existing credit facility. The debt capital is in the form of “intercompany loans” made by the LLC to the newly created holding company and the acquired business and are due from the newly created holding company and the acquired business, and payable to the LLC by the newly created holding company and the acquired business. The selling shareholders of
the acquired businesses are not a party to the intercompany loan agreements nor do they have any obligation to repay the intercompany loans. These intercompany loans eliminate in consolidation and are not reflected on the Company's consolidated balance sheets.
Acquisition of PrimaLoft Technologies, Inc.
On July 12, 2022, the LLC, through its newly formed acquisition subsidiary, Relentless Intermediate, Inc. ("PrimaLoft Buyer"), acquired PrimaLoft Technologies Holdings, Inc. (“PrimaLoft”) pursuant to a Stock Purchase Agreement (the “PrimaLoft Purchase Agreement”), dated June 4, 2022, by and between PrimaLoft Buyer and VP PrimaLoft Holdings, LLC ("PrimaLoft Seller"). The Company made loans to, and purchasedacquired PrimaLoft for a 98.9% controlling interest in, Crosman. Thetotal purchase price, including proceeds from noncontrolling interestsshareholders and net of transaction costs, wasof approximately $150.4 million. Crosman$539.6 million, before working capital and other customary adjustments. The Company funded the acquisition through a draw on its 2022 Revolving Credit Facility and the proceeds from its new $400 million 2022 Term Loan Facility. PrimaLoft management invested in the transaction along with the Company, representing approximately 1.1%9.2% of the initial noncontrollingequity interest onin PrimaLoft. Concurrent with the closing, the Company provided a primarycredit facility to PrimaLoft pursuant to which a secured revolving loan commitment and fully diluted basis.secured term loan were made available to PrimaLoft (the "PrimaLoft Credit Agreement"). The fair value of the noncontrolling interest was determined basedinitial revolving loan and term loan commitments under these facilities on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership of Crosman.closing date were $178 million. CGM will receive integration service fees of $1.5$4.8 million payable quarterly over a twelve month period as services are rendered beginningwhich payments began in the quarter ended September 30, 2017.2022. The Company incurred $1.5$5.7 million of transaction costs in conjunction with the CrosmanPrimaLoft acquisition, which was included in selling, general and administrative expense in the consolidated statements of incomeoperations during the secondthird quarter of 2017.2022.
PrimaLoft, Inc. is a branded, advanced material technology company based in Latham, New York and is focused on the research and innovative development of high-performance material solutions, specializing in insulations and fabrics.
The results of operations of CrosmanPrimaLoft have been included in the consolidated results of operations since the date of acquisition. Crosman'sPrimaLoft's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the preliminary recording of the fair value of assets acquired and liabilities assumed as of the acquisition date.date of acquisition.
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Preliminary Purchase Price Allocation | | Measurement Period Adjustments | | Preliminary Purchase Price Allocation |
Purchase Consideration | | $ | 539,576 | | | $ | — | | | $ | 539,576 | |
| | | | | | |
Fair value of identifiable assets acquired: | | | | | | |
Cash | | $ | 6,951 | | | $ | — | | | $ | 6,951 | |
Accounts receivable (1) | | 2,992 | | | — | | | 2,992 | |
Inventory | | 1,991 | | | — | | | 1,991 | |
Property, plant and equipment | | 1,058 | | | — | | | 1,058 | |
Intangible assets | | 248,200 | | | — | | | 248,200 | |
Other current and noncurrent assets | | 3,581 | | | — | | | 3,581 | |
Total identifiable assets | | 264,773 | | | — | | | 264,773 | |
| | | | | | |
Fair value of liabilities assumed: | | | | | | |
Current liabilities | | 8,865 | | | — | | | 8,865 | |
Other liabilities | | 360 | | | — | | | 360 | |
Deferred tax liabilities | | 51,268 | | | — | | | 51,268 | |
Total liabilities | | 60,493 | | | — | | | 60,493 | |
| | | | | | |
Net identifiable assets acquired | | 204,280 | | | — | | | 204,280 | |
| | | | | | |
Goodwill | | $ | 335,296 | | | $ | — | | | $ | 335,296 | |
|
| | | | | | | | | | | | |
| | Preliminary Allocation | | Measurement Period Adjustments | | Revised Preliminary Allocation |
(in thousands) | | As of 6/2/2017 | | | As of 9/30/17 |
Assets: | | | | | | |
Cash | | $ | 429 |
| | $ | 781 |
| | $ | 1,210 |
|
Accounts receivable (1) | | 16,751 |
| | — |
| | 16,751 |
|
Inventory | | 25,598 |
| | 3,166 |
| | 28,764 |
|
Property, plant and equipment | | 10,963 |
| | 6,610 |
| | 17,573 |
|
Intangible assets | | — |
| | 82,773 |
| | 82,773 |
|
Goodwill | | 139,434 |
| | (91,316 | ) | | 48,118 |
|
Other current and noncurrent assets | | 2,348 |
| | — |
| | 2,348 |
|
Total assets | | $ | 195,523 |
| | $ | 2,014 |
| | $ | 197,537 |
|
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Acquisition consideration | | | | | | |
Purchase price | | $ | 530,000 | | | $ | — | | | $ | 530,000 | |
Cash acquired | | 7,319 | | | — | | | 7,319 | |
Net working capital adjustment | | 2,257 | | | — | | | 2,257 | |
| | | | | | |
Total purchase consideration | | $ | 539,576 | | | $ | — | | | $ | 539,576 | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | |
Liabilities and noncontrolling interest: | | | | | | |
Current liabilities | | $ | 15,502 |
| | $ | 781 |
| | $ | 16,283 |
|
Other liabilities | | 91,268 |
| | 189 |
| | 91,457 |
|
Deferred tax liabilities | | 27,286 |
| | 1,382 |
| | 28,668 |
|
Noncontrolling interest | | 694 |
| | — |
| | 694 |
|
Total liabilities and noncontrolling interest | | $ | 134,750 |
| | $ | 2,352 |
| | $ | 137,102 |
|
| | | | | | |
Net assets acquired | | $ | 60,773 |
| | $ | (338 | ) | | $ | 60,435 |
|
Noncontrolling interest | | 694 |
| | — |
| | 694 |
|
Intercompany loans to business | | 90,742 |
| | — |
| | 90,742 |
|
| | $ | 152,209 |
| | $ | (338 | ) | | $ | 151,871 |
|
|
| | | | | | | | | | | | |
Acquisition Consideration | | | | | | |
Purchase price | | $ | 151,800 |
| | $ | — |
| | $ | 151,800 |
|
Cash acquired | | 1,417 |
| | (207 | ) | | 1,210 |
|
Working capital adjustment | | (1,008 | ) | | (131 | ) | | (1,139 | ) |
Total purchase consideration | | 152,209 |
| | (338 | ) | | 151,871 |
|
Less: Transaction costs | | 1,397 |
| | 76 |
| | 1,473 |
|
Purchase price, net | | $ | 150,812 |
| | $ | (414 | ) | | $ | 150,398 |
|
(1) Includes $18.0 million of gross contractual accounts receivable of which $1.2 million was not expected to be collected. The fair value of accounts receivable approximatedapproximates book value acquired.
The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including the income, cost and market approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Inventory is recognized at fair value, with finished goods stated at selling price less an estimated cost to sell. Property, plant and equipment is valued at fair value which approximates book value and will be depreciated on a straight-line basis over the remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $335.3 million reflects the strategic fit of PrimaLoft in the Company's branded consumer business and is not expected to be deductible for income tax purposes. The purchase accounting for PrimaLoft is expected to be finalized in the fourth quarter of 2022.
The intangible assets recorded related to the PrimaLoft acquisition are as follows (in thousands):
| | | | | | | | | | | | | | |
Intangible Assets | | Fair Value | | Estimated Useful Lives |
| | | | |
Customer relationships | | $ | 170,000 | | | 15 years |
Tradename | | 48,200 | | | 20 years |
Technology | | 29,500 | | | 11 years |
In-process research and development (1) | | 500 | | | N/a |
| | $ | 248,200 | | | |
(1)In-process research and development is considered indefinite lived until the underlying technology becomes viable, at which point the intangible asset will be amortized over the expected useful life.
The customer relationships were considered the primary intangible asset and was valued at $170.0 million using a multi-period excess earnings method. The technology was valued at $29.5 million using a multi-period excess earnings methodology with an assumed obsolescence factor. The tradename was valued at $48.2 million using a multi period excess earnings method. The multi period excess earnings method assumes an asset has value to the extent that it enables its owners to earn a return in excess of the other assets utilized in the business.
Acquisition of Lugano Diamonds & Jewelry, Inc.
On September 3, 2021, the LLC, through its newly formed acquisition subsidiaries, Lugano Holding, Inc., a Delaware corporation (“Lugano Holdings”), and Lugano Buyer, Inc., a Delaware corporation (“Lugano Buyer”) and a wholly-owned subsidiary of Lugano Holdings, acquired the issued and outstanding shares of stock of Lugano Diamonds & Jewelry Inc. ("Lugano") other than the certain rollover shares (the “Lugano Transaction”). The Lugano Transaction was effectuated pursuant to a Stock Purchase Agreement (the “Lugano Purchase Agreement”), also dated September 3, 2021, by and among Lugano Buyer, the Sellers named therein (“Lugano Sellers”) and Mordechai Haim Ferder in his individual capacity and as initial representative of the Lugano Sellers. Lugano is a leading designer, manufacturer and marketer of high-end, one-of-a-kind jewelry sought after by some of the world’s most discerning clientele. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art and philanthropic community. Lugano is headquartered in Newport Beach, California.
The LLC made loans to, and purchased a 60% equity interest in, Lugano. The purchase price, including proceeds from noncontrolling shareholders and net of transaction costs, was $263.3 million. The selling shareholders invested in the transaction along with the LLC, representing 40% initial noncontrolling interest on both a primary and fully
diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the LLC in the acquisition and will continue to provide integration services during the first year of the LLC's ownership of Lugano. CGM will receive integration service fees of $2.3 million payable quarterly over a twelve month period as services are rendered which payments began in the quarter ended December 31, 2021. The LLC incurred $1.8 million of transaction costs in conjunction with the Lugano acquisition, which was included in selling, general and administrative expense in the consolidated statements of operations during the third quarter of 2021. The LLC funded the acquisition with cash on hand and a $120 million draw on its 2021 Revolving Credit Facility.
The results of operations of Lugano have been included in the consolidated results of operations since the date of acquisition. Lugano's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the recording of the fair value of assets acquired and liabilities assumed as of the date of acquisition.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
(in thousands) | | Preliminary Purchase Price Allocation | | Measurement Period Adjustments | | Final Purchase Price Allocation |
Purchase Consideration | | $ | 267,554 | | | $ | (2,420) | | | $ | 265,134 | |
| | | | | | |
Fair value of identifiable assets acquired: | | | | | | |
Cash | | $ | 1,433 | | | $ | — | | | $ | 1,433 | |
Accounts receivable (1) | | 20,954 | | | — | | | 20,954 | |
Inventory | | 85,794 | | | 9,419 | | | 95,213 | |
Property, plant and equipment | | 2,743 | | | 392 | | | 3,135 | |
Intangible assets | | — | | | 82,454 | | | 82,454 | |
Other current and noncurrent assets | | 4,979 | | | 4,114 | | | 9,093 | |
Total identifiable assets | | 115,903 | | | 96,379 | | | 212,282 | |
| | | | | | |
Fair value of liabilities assumed: | | | | | | |
Current liabilities | | 7,129 | | | 58 | | | 7,187 | |
Other liabilities | | — | | | 3,175 | | | 3,175 | |
Deferred tax liabilities | | — | | | 23,123 | | | 23,123 | |
Total liabilities | | 7,129 | | | 26,356 | | | 33,485 | |
| | | | | | |
Net identifiable assets acquired | | 108,774 | | | 70,023 | | | 178,797 | |
| | | | | | |
Goodwill | | $ | 158,780 | | | $ | (72,443) | | | $ | 86,337 | |
| | | | | | | | | | | | | | | | | | | | |
Acquisition consideration | | | | | | |
Purchase price | | $ | 256,000 | | | $ | — | | | $ | 256,000 | |
Cash acquired (estimate) | | 1,554 | | | (120) | | | 1,434 | |
Net working capital adjustment (estimated at close) | | 10,000 | | | (2,300) | | | 7,700 | |
| | | | | | |
Total purchase consideration | | $ | 267,554 | | | $ | (2,420) | | | $ | 265,134 | |
| | | | | | |
| | | | | | |
(1)The fair value of accounts receivable approximates book value acquired.
The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including the income, cost and market approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Inventory is recognized at fair value, with finished goods stated at selling price less an estimated cost to sell. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $48.1$86.3 million reflects the strategic fit of CrosmanLugano in the Company's branded consumer business and is not expected to be deductible for income tax purposes. The purchase accounting for Crosman is expected to be finalized during the fourth quarter of 2017.
The intangible assets recorded related to the CrosmanLugano acquisition are as follows (in thousands):
| | | | | | | | | | | | | | |
Intangible Assets | | Fair Value | | Estimated Useful Lives |
| | | | |
Tradename | | $ | 48,433 | | | 18 years |
Customer relationships | | 34,021 | | | 15 years |
| | $ | 82,454 | | | |
|
| | | | | | |
Intangible Assets | | Amount | | Estimated Useful Life |
Tradename | | $ | 51,642 |
| | 20 years |
Customer relationships | | 28,718 |
| | 15 years |
Technology | | 2,413 |
| | 15 years |
| | $ | 82,773 |
| | |
The tradename was considered the primary intangible asset and was valued at $51.6$48.4 million using a multi-period excess earnings methodology. method. The customer relationships intangible asset waswere valued at $28.7$34.0 millionusing the distributor method, a variation of the multi-periodmulti period excess earnings methodology, in whichmethod. The multi period excess earnings method assumes an asset is valuablehas value to the extent that it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business.
Unaudited pro forma information
The technologyfollowing unaudited pro forma data for the three and nine months ended September 30, 2022 and 2021 gives effect to the acquisitions of PrimaLoft and Lugano, as described above, and the disposition of Liberty Safe, as if these transactions had been completed as of January 1, 2021. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
(in thousands, except per share data) | | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net sales | | $ | 599,926 | | | $ | 519,740 | | | $ | 1,724,308 | | | $ | 1,495,712 | |
Gross profit | | $ | 241,069 | | | $ | 209,193 | | | $ | 706,701 | | | $ | 620,410 | |
Operating income | | $ | 48,197 | | | $ | 44,768 | | | $ | 168,647 | | | $ | 148,842 | |
Net income (loss) from continuing operations | | $ | (1,779) | | | $ | 17,431 | | | $ | 58,429 | | | $ | 30,596 | |
Net income (loss) from continuing operations attributable to Holdings | | $ | (6,071) | | | $ | 14,092 | | | $ | 42,760 | | | $ | 15,785 | |
Basic and fully diluted net income (loss) per share attributable to Holdings | | $ | (0.27) | | | $ | (0.16) | | | $ | 0.12 | | | $ | (0.41) | |
Other acquisitions
Velocity
Kings - On July 8, 2022, Velocity acquired King's Camo LLC, a manufacturer of outdoor performance apparel and gear, for a purchase price of approximately $25.2 million and included a potential earnout of $3.0 million. The acquisition and related transaction costs were funded through an additional term loan of $25.7 million under the Velocity intercompany credit agreement. Velocity paid approximately $0.2 million in transaction fees. Velocity recorded a preliminary purchase price allocation, including goodwill of approximately $6.9 million, which is expected to be deductible for income tax purposes, and intangible assets of $7.1 million. The remainder of the purchase consideration was valued at $2.4allocated to net assets acquired. The purchase price allocation is expected to be finalized in the fourth quarter of 2022.
Marucci
Lizard Skins - On October 22, 2021, Marucci Sports acquired Lizard Skins, LLC ("Lizard Skins"), an industry leading provider of sporting goods accessories that revolve around the hand-to-grip interface, for an enterprise value of approximately $47.0 million, usingexcluding customary closing adjustments. The acquisition and related transaction costs were funded through an additional term loan of $44.1 million under the Marucci inter-company credit agreement with the LLC, a reliefdraw on the existing Marucci revolving credit facility with the Company, and rollover equity from royalty method.the selling shareholders of Lizard Skins. Marucci issued 11,915 shares to the selling shareholders in exchange for the rollover equity, which represents an ownership interest of approximately 1% in Marucci. Marucci paid approximately $1.4 million in transaction expenses in connection with the acquisition of Lizard Skins. Lizard Skins is a designer and seller of branded grip products, protective equipment, bags and apparel for use in baseball, cycling, hockey, Esports and lacrosse. The acquisition of Lizard Skins will allow Marucci to build on its leading position in diamond sports while simultaneously developing Marucci's presence in new sports markets such as hockey and cycling. Marucci recorded a purchase price allocation, including goodwill of approximately $10.1 million, which is expected to be deductible for income tax purposes, and intangible assets of $27.9 million. The purchase price allocation was finalized in the third quarter of 2022.
AcquisitionAltor Solutions
Plymouth Foam - On October 5, 2021, Altor acquired Plymouth Foam, LLC (“Plymouth”), a manufacturer of 5.11 Tacticalprotective packaging and componentry, for an enterprise value of approximately $56.0 million, excluding customary closing adjustments. The acquisition and related transaction costs were funded through an additional term loan of $52.0 million under the Altor intercompany credit agreement and a draw on the existing Altor intercompany revolving credit facility with the LLC. Altor paid approximately $0.4 million in transaction fees in connection with the acquisition of Plymouth. Plymouth was founded in 1978 and is based in Plymouth, Wisconsin. Plymouth supplies a wide array of high value products, including custom protective packaging, cold chain packaging and internal components made from expanded polystyrene and expanded polypropylene. Plymouth’s complementary product portfolio will allow Altor to be able to further expand its business and capabilities. Altor recorded a purchase price allocation, including goodwill of approximately $15.5 million, which is not expected to be deductible for income tax purposes, and intangible assets of $20.1 million. The purchase price allocation was finalized in the first quarter of 2022.
Polyfoam - On July 1, 2020, Altor acquired substantially all of the assets of Polyfoam Corp. ("Polyfoam"), a Massachusetts-based manufacturer of protective and temperature-sensitive packaging solutions for the medical, pharmaceutical, grocery and food industries, among others. Founded in 1974, Polyfoam operates two manufacturing facilities producing highly engineered foam and injection-molded plastic solutions across a variety of end-markets. The acquisition complements Altor's current operating footprint and provides access to a new customer base and product offerings, including Polyfoam's significant end-market exposure to cold chain (including seafood boxes, insulated shipping containers and grocery delivery totes). The purchase price was approximately $12.8 million and included a potential earnout of $1.4 million if Polyfoam achieved certain financial metrics. The full amount of the earnout was paid during the first quarter of 2022.
Arnold
Ramco - On March 1, 2021, Arnold acquired Ramco Electric Motors, Inc. ("Ramco"), a manufacturer of stators, rotors and full electric motors, for a purchase price of approximately $34.3 million. The acquisition and related transaction costs were funded through an additional equity investment in Arnold by the LLC of $35.5 million. Ramco was founded in 1987 and is based in Greenville, Ohio. Ramco supplies their custom electric motor solutions for general industrial, aerospace and defense, and oil and gas end-markets. Ramco’s complementary product portfolio will allow Arnold to be able to offer more comprehensive, turnkey solutions to their customers. In connection with the
acquisition, Arnold recorded a purchase price allocation of $12.4 million of goodwill, which is not expected to be deductible for income tax purposes and $12.7 million in intangible assets. The remainder of the purchase consideration was allocated to net assets acquired. The purchase price allocation was finalized in the fourth quarter of 2021.
Note C — Discontinued Operations
Sale of Liberty
On July 16, 2021, the LLC, as majority stockholder of Liberty Safe Holding Corporation and as sellers representative, entered into a definitive Stock Purchase Agreement (the “Liberty Purchase Agreement”) with Independence Buyer, Inc. (“Liberty Buyer”), Liberty and the other holders of stock and options of Liberty to sell to Liberty Buyer all of the issued and outstanding securities of Liberty, the parent company of the operating entity, Liberty Safe and Security Products, Inc.
On August 31, 2016, 5.11 ABR Merger Corp. ("Merger Sub"3, 2021, Liberty Buyer and the LLC, as sellers representative, entered into the Amendment to Stock Purchase Agreement (the “Amendment”), a wholly owned subsidiary which amended the Liberty Purchase Agreement to, among other things, provide that, immediately prior to the closing, certain investors in Liberty will, instead of 5.11 ABR Corp. ("Parent"), which in turn is a wholly owned subsidiaryselling all of the Company, merged withshares of Liberty owned by them to Liberty Buyer, contribute a portion of such shares (the “Rollover Shares”) to an indirect parent company of Liberty Buyer in exchange for equity securities of such entity.
On August 3, 2021, Liberty Buyer completed the acquisition of all the issued and into 5.11 Tactical, with 5.11 Tactical asoutstanding securities of Liberty (other than the surviving entity,Rollover Shares) pursuant to the Liberty Purchase Agreement and Amendment (the “Liberty Transaction”). The sale price of Liberty was based on an agreementaggregate total enterprise value of $147.5 million, subject to customary adjustments. After the allocation of the sale proceeds to Liberty's non-controlling shareholders, the repayment of intercompany loans to the LLC (including accrued interest) of $26.5 million, and planthe payment of merger among Merger Sub, Parent, 5.11 Tactical,transaction expenses of approximately $4.5 million, the LLC received approximately $128.0 million of total proceeds from the sale at closing. The LLC recognized a gain on the sale of Liberty of $72.8 million in the year ended December 31, 2021. In the second quarter of 2022, the LLC received an income tax refund of approximately $0.9 million related to Liberty.
Summarized results of operations of Liberty for the three and TA Associates Management L.P.nine months ended September 30, 2021 through the date of disposition are as follows (in thousands):
| | | | | | | | | | | | | | |
| | For the period July 1, 2021 through disposition | | For the period January 1, 2021 through disposition |
Net sales | | $ | 10,828 | | | $ | 75,753 | |
Gross profit | | $ | 2,353 | | | $ | 20,129 | |
Operating income (loss) | | $ | (2,358) | | | $ | 9,175 | |
Income (loss) from continuing operations before income taxes (1) | | $ | (2,406) | | | $ | 9,174 | |
Provision (benefit) for income taxes | | $ | (1,097) | | | $ | 1,509 | |
Income (loss) from discontinued operations (1) | | $ | (1,309) | | | $ | 7,665 | |
(1) The results of operations for the periods July 1, 2021 through disposition and January 1, 2021 through disposition excludes $0.3 million and $1.7 million, respectively, of intercompany interest expense.
Sale of Clean Earth
On May 8, 2019, the LLC, as majority stockholder of CEHI Acquisition Corporation ("Clean Earth" or CEHI") and as sellers’ representative, entered into a definitive Stock Purchase Agreement (the “Clean Earth Purchase Agreement”) with Calrissian Holdings, LLC (“Clean Earth Buyer”), CEHI, the other holders of stock and options of CEHI and, as Clean Earth Buyer’s guarantor, Harsco Corporation, pursuant to which Clean Earth Buyer would acquire all of the issued and outstanding securities of CEHI, the parent company of the operating entity, Clean Earth, Inc. On June 28, 2019, Clean Earth Buyer completed the acquisition of all of the issued and outstanding securities of CEHI pursuant to the Clean Earth Purchase Agreement. The Company recognized a gain on July 29, 2016. the sale of Clean Earth of $209.3 million during the year ended December 31, 2019. In the first quarter of 2022, the LLC received an income tax refund of approximately $6.0 million related to Clean Earth which was recognized as gain on sale of discontinued operations, net of taxes, in the accompanying consolidated statement of operations.
Note D — Revenue
The Company recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities.
Disaggregated Revenue - The Company disaggregates revenue by strategic business unit and by geography for each strategic business unit which are categories that depict how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors. This disaggregation also represents how the Company evaluates its financial performance, as well as how the Company communicates its financial performance to the investors and other users of its financial statements. Each strategic business unit represents the Company’s reportable segments and offers different products and services.
The following tables provide disaggregation of revenue by reportable segment geography for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2022 |
| United States | | Canada | | Europe | | Asia Pacific | | Other International | | Total |
5.11 | $ | 101,112 | | | $ | 2,877 | | | $ | 8,147 | | | $ | 4,528 | | | $ | 9,873 | | | $ | 126,537 | |
BOA | 12,964 | | | 2 | | | 15,899 | | | 21,104 | | | 50 | | | 50,019 | |
Ergobaby | 6,903 | | | 918 | | | 6,713 | | | 6,526 | | | 480 | | | 21,540 | |
Lugano | 50,183 | | | — | | | 668 | | | 294 | | | — | | | 51,145 | |
Marucci | 41,170 | | | 436 | | | 5 | | | 1,136 | | | 6 | | | 42,753 | |
PrimaLoft | 344 | | | 40 | | | 691 | | | 9,383 | | | 254 | | | 10,712 | |
Velocity Outdoor | 69,713 | | | 2,361 | | | 1,997 | | | 205 | | | 1,206 | | | 75,482 | |
Advanced Circuits | 21,788 | | | — | | | — | | | — | | | — | | | 21,788 | |
Altor | 62,368 | | | — | | | — | | | — | | | 7,250 | | | 69,618 | |
Arnold | 26,334 | | | 164 | | | 10,765 | | | 1,683 | | | 431 | | | 39,377 | |
Sterno | 86,652 | | | 2,275 | | | (367) | | | (16) | | | 92 | | | 88,636 | |
| $ | 479,531 | | | $ | 9,073 | | | $ | 44,518 | | | $ | 44,843 | | | $ | 19,642 | | | $ | 597,607 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2021 |
| United States | | Canada | | Europe | | Asia Pacific | | Other International | | Total |
5.11 | $ | 89,866 | | | $ | 2,522 | | | $ | 6,644 | | | $ | 3,826 | | | $ | 8,241 | | | $ | 111,099 | |
BOA | 10,941 | | | 135 | | | 14,408 | | | 13,915 | | | 97 | | | 39,496 | |
Ergobaby | 8,152 | | | 927 | | | 8,010 | | | 2,617 | | | 110 | | | 19,816 | |
Lugano | 10,438 | | | — | | | — | | | 385 | | | — | | | 10,823 | |
Marucci | 24,623 | | | 128 | | | 27 | | | 253 | | | 9 | | | 25,040 | |
| | | | | | | | | | | |
Velocity Outdoor | 69,879 | | | 3,215 | | | 1,944 | | | 314 | | | 1,549 | | | 76,901 | |
Advanced Circuits | 23,182 | | | — | | | — | | | — | | | — | | | 23,182 | |
Altor | 37,519 | | | — | | | — | | | — | | | 6,603 | | | 44,122 | |
Arnold | 26,511 | | | 129 | | | 8,230 | | | 1,484 | | | 498 | | | 36,852 | |
Sterno | 97,547 | | | 2,735 | | | 347 | | | 169 | | | 29 | | | 100,827 | |
| $ | 398,658 | | | $ | 9,791 | | | $ | 39,610 | | | $ | 22,963 | | | $ | 17,136 | | | $ | 488,158 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2022 |
| United States | | Canada | | Europe | | Asia Pacific | | Other International | | Total |
5.11 | $ | 278,458 | | | $ | 7,958 | | | $ | 24,466 | | | $ | 12,578 | | | $ | 27,148 | | | $ | 350,608 | |
BOA | 49,142 | | | 639 | | | 53,829 | | | 62,448 | | | 157 | | | 166,215 | |
Ergobaby | 24,917 | | | 3,041 | | | 22,388 | | | 17,140 | | | 770 | | | 68,256 | |
Lugano | 136,267 | | | — | | | 668 | | | 294 | | | — | | | 137,229 | |
Marucci | 118,893 | | | 1,380 | | | 34 | | | 2,130 | | | 44 | | | 122,481 | |
PrimaLoft | 344 | | | 40 | | | 691 | | | 9,383 | | | 254 | | | 10,712 | |
Velocity Outdoor | 159,863 | | | 8,853 | | | 7,010 | | | 1,047 | | | 4,001 | | | 180,774 | |
Advanced Circuits | 67,194 | | | — | | | — | | | — | | | — | | | 67,194 | |
Altor | 179,885 | | | — | | | — | | | — | | | 19,705 | | | 199,590 | |
Arnold | 79,940 | | | 601 | | | 29,202 | | | 5,032 | | | 1,544 | | | 116,319 | |
Sterno | 243,034 | | | 6,142 | | | 372 | | | 86 | | | 111 | | | 249,745 | |
| $ | 1,337,937 | | | $ | 28,654 | | | $ | 138,660 | | | $ | 110,138 | | | $ | 53,734 | | | $ | 1,669,123 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2021 |
| United States | | Canada | | Europe | | Asia Pacific | | Other International | | Total |
5.11 | $ | 262,113 | | | $ | 7,840 | | | $ | 20,285 | | | $ | 11,707 | | | $ | 19,064 | | | $ | 321,009 | |
BOA | 39,758 | | | 705 | | | 44,746 | | | 34,619 | | | 205 | | | 120,033 | |
Ergobaby | 26,043 | | | 2,789 | | | 23,838 | | | 16,037 | | | 393 | | | 69,100 | |
Lugano | 10,438 | | | — | | | — | | | 385 | | | — | | | 10,823 | |
Marucci | 85,084 | | | 604 | | | 85 | | | 541 | | | 14 | | | 86,328 | |
| | | | | | | | | | | |
Velocity Outdoor | 184,452 | | | 9,339 | | | 7,024 | | | 1,095 | | | 3,981 | | | 205,891 | |
Advanced Circuits | 67,209 | | | — | | | — | | | — | | | — | | | 67,209 | |
Altor | 105,046 | | | — | | | — | | | — | | | 17,536 | | | 122,582 | |
Arnold | 69,967 | | | 545 | | | 24,899 | | | 4,728 | | | 1,754 | | | 101,893 | |
Sterno | 257,000 | | | 8,994 | | | 1,044 | | | 274 | | | 86 | | | 267,398 | |
| $ | 1,107,110 | | | $ | 30,816 | | | $ | 121,921 | | | $ | 69,386 | | | $ | 43,033 | | | $ | 1,372,266 | |
Note E — Operating Segment Data
At September 30, 2022, the Company had eleven reportable operating segments. Each operating segment represents a platform acquisition. The Company’s operating segments are strategic business units that offer different products and services. While each is actively managed by the Company, they are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:
•5.11 Tactical is a leading provider of purpose-built tacticaltechnical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
The Company made loans to, and purchased a 97.5% controlling interest in, 5.11 ABR Corp. The purchase price, including proceeds from noncontrolling interest and net of transaction costs, was approximately $408.2 million. 5.11 management invested in the transaction along with the Company, representing approximately 2.5% initial noncontrolling interest on a primary and fully diluted basis. The fair value•BOA, creator of the noncontrolling interest was determined based onrevolutionary, award-winning, patented BOA Fit System, partners with market-leading brands to make the enterprise value ofbest gear even better. Delivering fit solutions purpose-built for performance, the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the CompanyBOA Fit System is featured in the acquisition and will continue to provide integration services during the first year of the Company's ownership of 5.11. CGM received integration service fees of $3.5 million payable quarterly over a twelve month period as services are rendered beginning in the quarter ended December 31, 2016.
The results of operations of 5.11 have been included in the consolidated results of operations since the date of acquisition. 5.11's results of operations are reported as a separate operating segment. The Company incurred $2.1 million of transaction costs in conjunction with the 5.11 acquisition, which was included in selling, general and administrative expense in the consolidated statements of income during the year of acquisition. The allocation of the purchase price, which was finalized during the fourth quarter of 2016, was based upon management's estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates were based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities were estimated at their historical carrying values. Property, plant and equipment was valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives. Goodwill was calculated as the excess of the consideration transferred over the fair value of the identifiable net assets and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships,footwear across snow sports, cycling, outdoor, athletic, workwear as well as expected future synergies.performance headwear and medical bracing. The goodwillsystem consists of $93.0 million reflects the strategicthree integral parts: a micro-adjustable dial, high-tensile lightweight laces, and low friction lace guides combined with unique configuration applications, which
together create a superior alternative to laces, buckles, hook and loop (Velcro), and other traditional closure and fit of 5.11 in the Company's branded consumer businesssystems. Each configuration is designed and engineered to deliver superior fit and performance, and is not expected to be deductible for income tax purposes.
backed by The customer relationships intangible asset was valued at $75.2 million using an excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on and of the other assets utilized in the business. The tradename intangible asset ($48.7 million) and the design patent technology asset ($4.0 million) were valued using a royalty savings methodology, in which an asset is valuable to the extent that the ownership of the asset relieves the company from the obligation of paying royalties for the benefits generated by the asset.
Unaudited pro forma information
The following unaudited pro forma data for the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016 gives effect to the acquisition of Crosman and 5.11 Tactical, as described above, as if the acquisitions had been completed as of January 1, 2016, and the sale of Tridien as if the disposition had been completed on January 1, 2016. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period.
|
| | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2016 | | 2017 | | 2016 |
Net sales | | $ | 331,829 |
| | $ | 962,976 |
| | $ | 928,157 |
|
Gross profit | | 111,811 |
| | 332,682 |
| | 326,936 |
|
Operating income | | 13,463 |
| | 11,924 |
| | 36,424 |
|
Net income (loss) | | 46,054 |
| | (12,581 | ) | | 52,461 |
|
Net income (loss) attributable to Holdings | | 45,381 |
| | (15,073 | ) | | 50,743 |
|
Basic and fully diluted net income (loss) per share attributable to Holdings | | $ | 0.67 |
| | $ | (0.97 | ) | | $ | 0.60 |
|
Other acquisitions
Ergobaby
On May 11, 2016, the Company's Ergobaby subsidiary acquired all of the outstanding membership interests in New Baby Tula LLC ("Baby Tula"), a maker of premium baby carriers, toddler carriers, slings, blankets and wraps. The purchase price was $73.8 million, net of transaction costs, plus a potential earn-out of $8.2 million based on 2017 financial performance. Ergobaby paid $0.8 million in transaction costs in connection with the acquisition. Ergobaby funded the acquisition and payment of related transaction costs through the issuance of an additional $68.2 million in intercompany loans with the Company, and the issuance of $8.2 million in Ergobaby shares to the selling shareholders. Ergobaby recorded a purchase price allocation of $13.2 million in goodwill, which is expected to be deductible for income tax purposes, $55.3 million in intangible assets comprised of $52.9 million in finite lived tradenames, $1.7 million in non-compete agreements, $0.7 million in customer relationships, and $4.8 million in inventory step-up. In addition, the earn-out provision of the purchase price was allocated a fair value of $3.8 million. The remainder of the purchase consideration was allocated to net assets acquired. The Company finalized the purchase price for the Baby Tula acquisition during the fourth quarter of 2016.
Clean Earth
On June 1, 2016, the Company's Clean Earth subsidiary acquired certain of the assets and liabilities of EWS Alabama, Inc. ("EWS"). Clean Earth funded the acquisition and the related transaction costs through the issuance of additional intercompany debt with the Company. Based in Glencoe, Alabama, EWS provides a range of hazardous and non-hazardous waste management services from a fully permitted hazardous waste RCRA Part B facility. In connection with the acquisition, Clean Earth recorded a purchase price allocation of $3.6 million in goodwill and $12.1 million in intangible assets.
On April 15, 2016, Clean Earth acquired certain assets of Phoenix Soil, LLC ("Phoenix Soil") and WIC, LLC (together with Phoenix Soil, the "Sellers"). Phoenix Soil is based in Plainville, Connecticut and provides environmental services for nonhazardous contaminated soil materials with a primary focus on soil. Phoenix Soil recently completed its transition to a new 58,000 square foot thermal desorption facility owned by WIC, LLC. The acquisition increased Clean Earth's soil treatment capabilities and expanded its geographic footprint into New England. Clean Earth financed the acquisition and payment of related transaction costs through the issuance of additional intercompany loans with the Company. In connection with the acquisition, Clean Earth recorded a purchase price allocation of $3.2 million in goodwill and $5.6 million in intangible assets.
Sterno Products
On January 22, 2016, Sterno Products, a wholly owned subsidiary of the Company, acquired all of the outstanding stock of Northern International, Inc. ("NII"), for a total purchase price of approximately $35.8 million (C$50.6 million), plus a potential earn-out opportunity payable over the next two years up to a maximum amount of $1.8 million (C$2.5 million), and is subject to working capital adjustments. The contingent consideration was fair valued at $1.5 million, based on probability weighted models of the achievement of certain performance based financial targets. Headquartered in Coquitlam, British Columbia, Canada, NII sells flameless candles and outdoor lighting products through the retail segment. Sterno Products financed the acquisition and payment of the related transaction costs through the issuance of an additional $37.0 million in intercompany loans with the Company.
In connection with the acquisition, Sterno recorded a purchase price allocation of $6.0 million of goodwill, which is not expected to be deductible for income tax purposes, $12.7 million in intangible assets and $1.2 million in inventory step-up. In addition, the earn-out provision of the purchase price was allocated a fair value of $1.5 million. The remainder of the purchase consideration was allocated to net assets acquired. Sterno Products incurred $0.4 million in acquisition related costs in connection with the NII acquisition.
Note D - Discontinued Operations
Sale of Tridien
On September 21, 2016, the Company sold its majority owned subsidiary, Tridien, based on an enterprise value of $25 million. After the allocation of the sale proceeds to noncontrolling equity holders and the payment of transaction expenses, the Company received approximately $22.7 million in net proceeds at closing related to its debt and equity interests in Tridien. The Company recognized a gain of $1.7 million for the year ended December 31, 2016 as a result of the sale of Tridien. Approximately $1.6 million of the proceeds received by the Company from the sale of Tridien have been reserved to support the Company’s indemnification obligations for future claims against Tridien that the Company may be liable for under the terms of the Tridien sale agreement.
Operating results of discontinued operations
Summarized operating results of Tridien for the three and nine months ended September 30, 2016 are as follows:
|
| | | | | | | |
(in thousands) | Three months ended September 30, 2016 | | Nine months ended September 30, 2016 |
Net sales | $ | 15,978 |
| | $ | 45,951 |
|
Gross profit | 3,223 |
| | 7,917 |
|
Operating income | 967 |
| | 437 |
|
Income (loss) from continuing operations before income taxes | (440 | ) | | 488 |
|
Provision for income taxes | 15 |
| | 15 |
|
Income (loss) from discontinued operations (1) | $ | (455 | ) | | $ | 473 |
|
(1) The results for the three and nine months ended September 30, 2016 exclude $0.4 million and $1.1 million, respectively, of intercompany interest expense.
Gain on sale of businesses
During the first quarter of 2017, the Company settled the remaining outstanding escrow items related to the sale of American Furniture Manufacturing, Inc. in 2015, and received a settlement related to the CamelBak Products, LLC business, which was also sold in 2015. As a result of these transactions, the Company recognized a gain on sale of discontinued operations of $0.3 million for the nine months ended September 30, 2017.
Note E — Operating Segment Data
At September 30, 2017, the Company had nine reportable operating segments. Each operating segment represents a platform acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:
5.11 Tactical is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
Crosman is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Crosman offers its products under the highly recognizable Crosman, Benjamin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. CrosmanBOA Lifetime Guarantee. BOA is headquartered in Bloomfield, New York.
Denver, Colorado and has offices in Austria, Greater China, South Korea, and Japan.
•Ergobaby, headquartered in Torrance, California, is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, strollers and related products. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives approximately 57%more than 50% of its sales from outside of the United States. Ergobaby
•Lugano Diamonds is a leading designer, manufacturer and marketer of high-end, one-of-a-kind jewelry sought after by some of the world’s most discerning clientele. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art and philanthropic community. Lugano is headquartered in Los Angeles,Newport Beach, California.
Liberty Safe•Marucci Sports is a leading designer, manufacturer, and marketer of premium home, gunwood and office safes in North America. From its over 300,000 square foot manufacturing facility, Liberty producesmetal 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 retail and sports training facilities, both as a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Libertycorporate owned entity as well as licensing these facilities as franchises. Marucci is headquartered in Payson, Utah.
Baton Rouge, Louisiana.
Manitoba Harvest•PrimaLoft is a pioneer and leader in the manufacture and distributionleading provider of branded, hemp-based foodshigh-performance synthetic insulation and hemp-based ingredients. Manitoba Harvest’smaterials used primarily in consumer outerwear, and accessories. The portfolio of PrimaLoft synthetic insulations offers products which include Hemp Hearts™, Hemp Heart Bites™,that can both mimic natural down aesthetics and Hemp protein powders, are currently carried in over 13,000 retail stores acrossprovide the United Statesfreedom to design garments ranging from stylish puffers to lightweight performance apparel. PrimaLoft insulations also offer superior economics to the brand partner and Canada. Manitoba Harvestenable better sustainability characteristics through the use of recycled, low-carbon inputs. PrimaLoft is headquartered in Winnipeg, Manitoba.
Latham, New York.
•Velocity Outdoor is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices, hunting apparel and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, Ravin, LaserMax and CenterPoint and King's brands that are available through national retail chains, mass merchants, dealer and distributor networks. Velocity Outdoor is headquartered in Bloomfield, New York.
•Advanced Circuits is an electronic components manufacturing company that provides small-run, quick-turn and volume production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers primarily in North America. ACI is headquartered in Aurora, Colorado.
•Altor Solutions is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer components made from expanded polystyrene and expanded polypropylene. Altor provides products to a variety of end markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products. Altor is headquartered in Scottsdale, Arizona and operates 17 molding and fabricating facilities across North America subsequent to the acquisition of Polyfoam.
•Arnold Magnetics is a global solutions provider and manufacturer of engineered electric motor and magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, general industrial, motorsport/automotive,transportation, oil and gas, medical, general industrial, electric utility,energy, reprographics and advertising specialty markets.specialties. Arnold Magneticsengineers solutions for and produces high performance permanent magnets (PMAG), flexible magnets (Flexmag)stators, rotors and full electric motors ("Ramco"), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide.customers and leading systems-integrators worldwide with a focus on North America, Europe, and Asia. Arnold Magneticshas built a preferred rare earth supply chain and has leading rare earth and other permanent magnet production capabilities. Arnold is headquartered in Rochester, New York.
Clean Earth provides environmental services for a variety of contaminated materials including soils, dredged material, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as power, construction, oil and gas, infrastructure, industrial and dredging. Clean Earth is headquartered in Hatboro, Pennsylvania and operates 18 facilities in the eastern United States.
•Sterno Products is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food servicefoodservice industry and flameless candles, and outdoor lighting products, scented wax cubes and warmer products for its consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, scented wax cubes and warmer products used for home decor
and fragrance systems, catering equipment and outdoor lighting products. Sterno Products is headquartered in Corona, California.
The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The results of operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. Segment operating income (loss) is the measure used to assess the performance of each business. Corporate consists of corporate overhead and management fees which are not allocated to any of the Company's reportable segments. There were no significant inter-segment transactions.
Summary of Operating Segments
| | | | | | | | | | | | | | | | | | | | | | | |
Net Revenues | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
5.11 | $ | 126,537 | | | $ | 111,099 | | | $ | 350,608 | | | $ | 321,009 | |
BOA | 50,019 | | | 39,496 | | | 166,215 | | | 120,033 | |
Ergobaby | 21,540 | | | 19,816 | | | 68,256 | | | 69,100 | |
Lugano | 51,145 | | | 10,823 | | | 137,229 | | | 10,823 | |
Marucci | 42,753 | | | 25,040 | | | 122,481 | | | 86,328 | |
PrimaLoft | 10,712 | | | — | | | 10,712 | | | — | |
Velocity Outdoor | 75,482 | | | 76,901 | | | 180,774 | | | 205,891 | |
Advanced Circuits | 21,788 | | | 23,182 | | | 67,194 | | | 67,209 | |
Altor | 69,618 | | | 44,122 | | | 199,590 | | | 122,582 | |
Arnold | 39,377 | | | 36,852 | | | 116,319 | | | 101,893 | |
Sterno | 88,636 | | | 100,827 | | | 249,745 | | | 267,398 | |
Total segment revenue | 597,607 | | | 488,158 | | | 1,669,123 | | | 1,372,266 | |
Corporate | — | | | — | | | — | | | — | |
Total consolidated revenues | $ | 597,607 | | | $ | 488,158 | | | $ | 1,669,123 | | | $ | 1,372,266 | |
|
| | | | | | | | | | | | | | | |
Net Revenues | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
5.11 Tactical | $ | 72,005 |
| | $ | 27,203 |
| | $ | 228,471 |
| | $ | 27,203 |
|
Crosman | 34,449 |
| | — |
| | 44,202 |
| | — |
|
Ergobaby | 27,835 |
| | 29,664 |
| | 77,737 |
| | 75,048 |
|
Liberty | 18,423 |
| | 23,810 |
| | 66,008 |
| | 74,713 |
|
Manitoba Harvest | 13,948 |
| | 15,920 |
| | 42,625 |
| | 44,321 |
|
ACI | 22,436 |
| | 21,679 |
| | 66,404 |
| | 64,945 |
|
Arnold Magnetics | 26,489 |
| | 26,912 |
| | 79,421 |
| | 82,791 |
|
Clean Earth | 55,676 |
| | 51,515 |
| | 153,370 |
| | 134,035 |
|
Sterno Products | 52,696 |
| | 55,582 |
| | 163,092 |
| | 156,692 |
|
Total segment revenue | 323,957 |
| | 252,285 |
| | 921,330 |
| | 659,748 |
|
Corporate and other | — |
| | — |
| | — |
| | — |
|
Total consolidated revenues | $ | 323,957 |
| | $ | 252,285 |
| | $ | 921,330 |
| | $ | 659,748 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Segment operating income (loss) | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
5.11 | $ | 12,091 | | | $ | 10,088 | | | $ | 30,301 | | | $ | 27,893 | |
BOA | 12,975 | | | 7,091 | | | 50,237 | | | 25,798 | |
Ergobaby | 593 | | | 246 | | | 3,866 | | | 5,964 | |
Lugano | 12,635 | | | 1,583 | | | 35,885 | | | 1,583 | |
Marucci | 7,692 | | | 3,580 | | | 14,141 | | | 15,267 | |
PrimaLoft | (8,469) | | | — | | | (8,469) | | | — | |
Velocity Outdoor | 10,225 | | | 12,905 | | | 18,721 | | | 33,039 | |
Advanced Circuits | 4,973 | | | 6,791 | | | 17,303 | | | 18,610 | |
Altor | 6,561 | | | 5,380 | | | 18,303 | | | 13,612 | |
Arnold | 5,462 | | | 4,611 | | | 14,075 | | | 10,104 | |
Sterno | 2,795 | | | 4,232 | | | 13,783 | | | 15,094 | |
Total segment operating income | 67,533 | | | 56,507 | | | 208,146 | | | 166,964 | |
Corporate | (18,786) | | | (14,648) | | | (52,156) | | | (41,826) | |
Total consolidated operating income | 48,747 | | | 41,859 | | | 155,990 | | | 125,138 | |
Reconciliation of segment operating income to consolidated income from continuing operations before income taxes: | | | | | | | |
Interest expense, net | (22,799) | | | (13,855) | | | (57,737) | | | (42,607) | |
Amortization of debt issuance costs | (1,004) | | | (759) | | | (2,735) | | | (2,167) | |
Loss on debt extinguishment | (534) | | | — | | | (534) | | | (33,305) | |
Other income (expense), net | (2,141) | | | 1,031 | | | 606 | | | (1,906) | |
Total consolidated income from continuing operations before income taxes | $ | 22,269 | | | $ | 28,276 | | | $ | 95,590 | | | $ | 45,153 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and Amortization Expense | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
5.11 | $ | 5,701 | | | $ | 5,792 | | | $ | 16,648 | | | $ | 16,493 | |
BOA | 5,517 | | | 5,082 | | | 16,161 | | | 14,818 | |
Ergobaby | 2,008 | | | 2,042 | | | 5,998 | | | 6,354 | |
Lugano | 2,976 | | | 41 | | | 8,090 | | | 41 | |
Marucci | 2,467 | | | 2,127 | | | 9,446 | | | 6,290 | |
PrimaLoft | 4,107 | | | — | | | 4,107 | | | — | |
Velocity Outdoor | 3,327 | | | 3,093 | | | 9,740 | | | 9,311 | |
Advanced Circuits | 508 | | | 527 | | | 1,544 | | | 1,568 | |
Altor | 4,062 | | | 3,148 | | | 12,069 | | | 8,845 | |
Arnold | 1,895 | | | 1,965 | | | 5,942 | | | 5,702 | |
Sterno | 4,956 | | | 5,610 | | | 14,934 | | | 15,976 | |
Total | 37,524 | | | 29,427 | | | 104,679 | | | 85,398 | |
Reconciliation of segment to consolidated total: | | | | | | | |
Amortization of debt issuance costs | 1,004 | | | 759 | | | 2,735 | | | 2,084 | |
Consolidated total | $ | 38,528 | | | $ | 30,186 | | | $ | 107,414 | | | $ | 87,482 | |
|
| | | | | | | | | | | | | | | |
Segment profit (loss) (1) | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
5.11 Tactical | $ | (253 | ) | | $ | (1,794 | ) | | $ | (14,542 | ) | | $ | (1,794 | ) |
Crosman | (1,388 | ) | | — |
| | (1,587 | ) | | — |
|
Ergobaby | 5,884 |
| | 4,671 |
| | 14,728 |
| | 9,101 |
|
Liberty | 2,050 |
| | 2,417 |
| | 6,900 |
| | 9,879 |
|
Manitoba Harvest | (169 | ) | | 554 |
| | 75 |
| | (865 | ) |
ACI | 6,191 |
| | 5,759 |
| | 18,106 |
| | 17,241 |
|
Arnold Magnetics | 2,000 |
| | 851 |
| | (4,551 | ) | | 3,828 |
|
Clean Earth | 5,592 |
| | 3,593 |
| | 7,597 |
| | 5,860 |
|
Sterno Products | 4,411 |
| | 5,536 |
| | 13,383 |
| | 14,095 |
|
Total | 24,318 |
| | 21,587 |
| | 40,109 |
| | 57,345 |
|
Reconciliation of segment profit (loss) to consolidated income (loss) before income taxes: | | | | | | | |
Interest expense, net | (6,945 | ) | | (4,376 | ) | | (22,499 | ) | | (23,204 | ) |
Other income (expense), net | 2,020 |
| | (3,271 | ) | | 2,950 |
| | (1,852 | ) |
Gain (loss) on equity method investment | — |
| | 50,414 |
| | (5,620 | ) | | 58,680 |
|
Corporate and other (2) | (10,845 | ) | | (10,916 | ) | | (32,801 | ) | | (29,244 | ) |
Total consolidated income (loss) before income taxes | $ | 8,548 |
| | $ | 53,438 |
| | $ | (17,861 | ) | | $ | 61,725 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Accounts Receivable | | Identifiable Assets |
| September 30, | | December 31, | | September 30, | | December 31, |
(in thousands) | 2022 | | 2021 | | 2022 (1) | | 2021 (1) |
5.11 | $ | 52,068 | | | $ | 50,461 | | | $ | 421,307 | | | $ | 354,666 | |
BOA | 2,318 | | | 2,387 | | | 247,049 | | | 263,052 | |
Ergobaby | 13,095 | | | 11,167 | | | 86,786 | | | 86,530 | |
Lugano | 50,914 | | | 27,812 | | | 307,773 | | | 233,720 | |
Marucci | 29,472 | | | 23,261 | | | 181,367 | | | 146,087 | |
PrimaLoft | 2,512 | | | — | | | 259,934 | | | — | |
Velocity Outdoor | 51,548 | | | 36,017 | | | 240,119 | | | 219,545 | |
Advanced Circuits | 9,902 | | | 9,717 | | | 22,415 | | | 24,120 | |
Altor | 45,032 | | | 38,457 | | | 204,714 | | | 205,631 | |
Arnold | 23,417 | | | 20,372 | | | 101,066 | | | 101,591 | |
Sterno | 61,209 | | | 72,179 | | | 235,038 | | | 244,338 | |
Allowance for doubtful accounts | (15,221) | | | (14,120) | | | — | | | — | |
Total | 326,266 | | | 277,710 | | | 2,307,568 | | | 1,879,280 | |
Reconciliation of segment to consolidated total: | | | | | | | |
Corporate and other identifiable assets | — | | | — | | | 13,212 | | | 105,188 | |
| | | | | | | |
Consolidated total | $ | 326,266 | | | $ | 277,710 | | | $ | 2,320,780 | | | $ | 1,984,468 | |
| |
(1)
| Segment profit (loss) represents operating income (loss). |
| |
(2)
| Primarily relates to management fees expensed and payable to CGM, and corporate overhead expenses. |
|
| | | | | | | | | | | | | | | |
Depreciation and Amortization Expense | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
5.11 Tactical | $ | 4,338 |
| | $ | 5,192 |
| | $ | 34,882 |
| | $ | 5,192 |
|
Crosman | 5,593 |
| | — |
| | 5,842 |
| | — |
|
Ergobaby | 3,068 |
| | 4,409 |
| | 9,386 |
| | 6,046 |
|
Liberty | 358 |
| | 616 |
| | 1,295 |
| | 1,925 |
|
Manitoba Harvest | 1,891 |
| | 1,732 |
| | 4,922 |
| | 5,200 |
|
ACI | 817 |
| | 885 |
| | 2,517 |
| | 2,585 |
|
Arnold Magnetics | 1,452 |
| | 2,268 |
| | 4,962 |
| | 6,778 |
|
Clean Earth | 5,687 |
| | 5,989 |
| | 16,140 |
| | 16,019 |
|
Sterno Products | 2,873 |
| | 2,396 |
| | 8,713 |
| | 8,427 |
|
Total | 26,077 |
| | 23,487 |
| | 88,659 |
| | 52,172 |
|
Reconciliation of segment to consolidated total: | | | | | | | |
Amortization of debt issuance costs and original issue discount | 1,261 |
| | 888 |
| | 3,721 |
| | 2,363 |
|
Consolidated total | $ | 27,338 |
| | $ | 24,375 |
| | $ | 92,380 |
| | $ | 54,535 |
|
(1)Does not include accounts receivable balances per schedule above or goodwill balances - refer to Note G - "Goodwill and Other Intangible Assets".
|
| | | | | | | | | | | | | | | |
| Accounts Receivable | | Identifiable Assets |
| September 30, | | December 31, | | September 30, | | December 31, |
(in thousands) | 2017 | | 2016 | | 2017 (1) | | 2016 (1) |
5.11 Tactical | $ | 46,112 |
| | $ | 49,653 |
| | $ | 313,072 |
| | $ | 311,560 |
|
Crosman | 24,904 |
| | — |
| | 134,047 |
| | — |
|
Ergobaby | 11,140 |
| | 11,018 |
| | 105,627 |
| | 113,814 |
|
Liberty | 13,708 |
| | 13,077 |
| | 27,901 |
| | 26,344 |
|
Manitoba Harvest | 5,251 |
| | 6,468 |
| | 100,330 |
| | 97,977 |
|
ACI | 7,010 |
| | 6,686 |
| | 15,847 |
| | 16,541 |
|
Arnold Magnetics | 15,407 |
| | 15,195 |
| | 69,154 |
| | 64,209 |
|
Clean Earth | 47,659 |
| | 45,619 |
| | 187,460 |
| | 193,250 |
|
Sterno Products | 37,389 |
| | 38,986 |
| | 126,135 |
| | 134,661 |
|
Allowance for doubtful accounts | (10,469 | ) | | (5,511 | ) | | — |
| | — |
|
Total | 198,111 |
| | 181,191 |
| | 1,079,573 |
| | 958,356 |
|
Reconciliation of segment to consolidated total: | | | | |
| |
|
Corporate and other identifiable assets (2) | — |
| | — |
| | 3,197 |
| | 145,971 |
|
Total | $ | 198,111 |
| | $ | 181,191 |
| | $ | 1,082,770 |
| | $ | 1,104,327 |
|
| |
(2)
| Corporate and other identifiable assets for the year ended December 31, 2016 includes the Company's investment in FOX, which was sold during the first quarter of 2017 - refer to Note F - "Investment in FOX". |
Geographic Information
|
| | | | | | | | | | | | | | | |
International Revenues | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
5.11 Tactical | $ | 19,238 |
| | $ | 6,141 |
| | $ | 63,088 |
| | $ | 6,141 |
|
Crosman | 4,542 |
| | — |
| | 6,412 |
| | — |
|
Ergobaby | 17,048 |
| | 16,701 |
| | 46,277 |
| | 40,660 |
|
Manitoba Harvest | 10,720 |
| | 8,573 |
| | 19,979 |
| | 20,983 |
|
Arnold Magnetics | 10,556 |
| | 12,208 |
| | 31,677 |
| | 33,654 |
|
Sterno Products | 5,809 |
| | 6,327 |
| | 16,265 |
| | 16,366 |
|
| $ | 67,913 |
| | $ | 49,950 |
| | $ | 183,698 |
| | $ | 117,804 |
|
Note F - Investment in FOX
Fox Factory Holdings Corp. ("FOX"), a former majority owned subsidiary of the Company that is publicly traded on the NASDAQ Stock Market under the ticker "FOXF," is a designer, manufacturer and marketer of high-performance ride dynamic products used primarily for bicycles, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. The Company held a 41%, ownership interest in FOX as of January 1, 2016, and a 14% ownership interest as of January 1, 2017. The investment in FOX was accounted for using the fair value option.
In March 2016, FOX closed on a secondary public offering (the "March 2016 Offering") of 2,500,000 FOX common shares held by the Company. Concurrently with the closing of the March 2016 Offering, FOX repurchased 500,000 shares of FOX common shares directly from the Company. As a result of the sale of shares through the March 2016 Offering and the repurchase of shares by FOX, the Company sold a total of 3,000,000 shares of FOX common stock, with total net proceeds of approximately $47.7 million. Upon completion of the March 2016 Offering and repurchase of shares by FOX, the Company's ownership interest in FOX was reduced from approximately 41% to 33%.
In August 2016, FOX closed on a secondary public offering (the "August Offering") of 4,025,000 shares held by certain FOX shareholders, including the Company. The Company sold a total of 3,500,000 shares of FOX common stock in the August Offering, for total net proceeds of $63.0 million. Upon completion of the August Offering, the Company's ownership of FOX decreased from approximately 33% to approximately 23%.
In November 2016, FOX closed on a secondary public offering (the "November Offering") of 3,500,000 shares of FOX common stock held by the Company, for total net proceeds of $71.8 million. Upon completion of the November Offering, the Company's ownership of FOX decreased from approximately 23% to approximately 14%. The Company's investment in FOX had a fair value of $141.8 million on December 31, 2016 based on the closing price of FOX shares on that date.
In March 2017, FOX closed on a secondary public offering (the "March 2017 Offering") through which the Company sold their remaining 5,108,718 shares in FOX for total net proceeds of $136.1 million. Subsequent to the March 2017 Offering, the Company no longer holds an ownership interest in FOX.
Note G — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at September 30, 20172022 and December 31, 2016 2021 (in thousands)thousands): | | | September 30, 2017 | | December 31, 2016 | | September 30, 2022 | | December 31, 2021 |
Machinery and equipment | $ | 168,621 |
| | $ | 155,591 |
| Machinery and equipment | $ | 243,226 | | | $ | 233,840 | |
Furniture, fixtures and other | 27,005 |
| | 13,737 |
| Furniture, fixtures and other | 63,941 | | | 55,165 | |
Leasehold improvements | 18,337 |
| | 14,156 |
| Leasehold improvements | 67,278 | | | 60,970 | |
Buildings and land | 39,964 |
| | 35,392 |
| Buildings and land | 13,376 | | | 13,345 | |
Construction in process | 24,699 |
| | 8,308 |
| Construction in process | 22,981 | | | 15,340 | |
| 278,626 |
| | 227,184 |
| | 410,802 | | | 378,660 | |
Less: accumulated depreciation | (107,799 | ) | | (84,814 | ) | Less: accumulated depreciation | (217,053) | | | (192,183) | |
Total | $ | 170,827 |
| | $ | 142,370 |
| Total | $ | 193,749 | | | $ | 186,477 | |
Depreciation expense was $8.7$11.3 million and $24.5$32.6 million for the three and nine months endedSeptember 30, 2022, respectively and $10.4 million and $28.9 million for the three and nine months ended September 30, 2017, and $7.3 million and $19.5 million for the three and nine months ended September 30, 2016,2021, respectively.
Inventory
Inventory is comprised of the following at September 30, 20172022 and December 31, 2016 2021 (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Raw materials | $ | 115,981 | | | $ | 107,307 | |
Work-in-process | 31,997 | | | 29,032 | |
Finished goods | 605,923 | | | 457,274 | |
Less: obsolescence reserve | (27,999) | | | (27,870) | |
Total | $ | 725,902 | | | $ | 565,743 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Raw materials | $ | 38,388 |
| | $ | 29,708 |
|
Work-in-process | 12,294 |
| | 8,281 |
|
Finished goods | 201,348 |
| | 182,886 |
|
Less: obsolescence reserve | (9,213 | ) | | (7,891 | ) |
Total | $ | 242,817 |
| | $ | 212,984 |
|
Note HG — Goodwill and Other Intangible Assets
As a result of acquisitions of various businesses, the Company has significant intangible assets on its balance sheet that include goodwill and indefinite-lived intangibles. The Company’s goodwill and indefinite-lived intangibles are tested and reviewed for impairment annually as of March 31st or more frequently if facts and circumstances warrant by comparing the fair value of each reporting unit to its carrying value. Each of the Company’s businesses represent a reporting unit, except Arnold, which comprises three reporting units.
unit.
Goodwill
20172022 Annual goodwill impairment testingImpairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-stepquantitative goodwill impairment testing. The results of the qualitative analysis indicated that it was more-likely-than-not that the fair value of each of our reporting units exceeded their carrying value.
2021 Annual Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors we consider include, in
part,to determine whether it is more-likely-than-not that the general macroeconomic environment, industry and market specific conditions for eachfair value of a reporting unit financial performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts,is less than its carrying amount as well as issues or events specifica basis for determining whether it is necessary to the reporting unit. At March 31, 2017, weperform quantitative goodwill impairment testing. We determined that the Manitoba HarvestArnold reporting unit required furtheradditional quantitative testing (Step 1) because we could not conclude that the fair value of the reporting unit exceedsexceeded its carrying value based on qualitative factors alone. The Company utilized an income approach to perform the Step 1 testing at Manitoba Harvest. The weighted average cost of capital used in the income approach for Manitoba Harvest was 12.0%. Results of the Step 1 quantitative testing of Manitoba Harvest indicated that the fair value of Manitoba Harvest exceeded its carrying value by 15.0%. Manitoba Harvest's goodwill balance as of the date of the annual impairment testing was approximately $44.5 million. For the reporting units that were tested qualitatively,only on a qualitative basis for the Company concluded that2021 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value of those reporting units exceeded theirthe carrying value and that a quantitative analysis was not necessary.
Manitoba Harvestof these reporting units.
The Companyquantitative test of Arnold was performed Step 1 testing during the 2017 annual impairment testing for Manitoba Harvest. Subsequentusing an income approach to the annual impairment test, the Company has compared the Manitoba Harvest operating results to the forecasts used in the Step 1 testing and has noted no material variances in the results. However, there is a significant degree of uncertainty inherent in the assumptions used to develop the forecast amounts used in the annual impairment test given the changing nature of consumer tastes, particularly related to future years. Therefore, the results of the forecast process 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 at December 31, 2017.
2016 Interim goodwill impairment testing
Arnold
As a result of decreases in forecasted revenue, operating income and cash flows at Arnold, as well as a shortfall in revenue and operating income during the latter half of 2016 as compared to budgeted amounts, the Company determined that it was necessary to perform interim goodwill impairment testing on each of the three reporting units at Arnold. The Company performed Step 1 of the goodwill impairment assessment at December 31, 2016. In Step 1 of the goodwill impairment test, the Company compareddetermine the fair value of the reporting units tounit. The discount rate used in the carrying amount. Based onincome approach was 13.0% and the results of the valuation, the fair value of the Flexmag and PTM reporting units exceeded the carrying amount, therefore, no additional goodwill testing was required. The results of the Step 1 test for the PMAG unit indicated a 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.
In the first test of goodwill impairment testing, we compare the fair value of each reporting unit to its carrying amount. For purposes of the Step 1 for the Arnold reporting units, we estimated the fair value of the reporting unit using an income approach, whereby we estimate the fair value of a reporting unit based on the present value of future cash flows. Cash flow projections are based on management's estimate of revenue growth rates and operating margins and take into consideration industry and market conditions as well as company and reporting unit specific economic factors. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business specific characteristics and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. For the Step 1 quantitative impairment testing for Arnold's reporting units, we used only an income approach because we determined that the guideline public company comparables for PMAG, Flexmag and PTM were not representative of these three reporting units. In the income approach, we used a weighted average cost of capital of 12.5% for PMAG, 12.0% for Flexmag and 13.0% for PTM.
The Company had not completed the Step 2 analysis as of December 31, 2016, and therefore estimated a range of impairment loss of $14 million to $19 million based on the value of the total invested capital of the PMAG unit as well as the results of the Step 1 testing of the fair value of PMAG. The Company recorded an estimated impairment loss for PMAG of $16 million at December 31, 2016 based on that range. The Company completed the Step 2 goodwill impairment test of the PMAG reporting unit in the first quarter of 2017, and the results indicated total impairment of the goodwill of the PMAG reporting unit of $24.9 million. The Step 2 impairment was higher than the initial estimate at December 31, 2016 due primarily to the valuation of PMAG's property, plant and equipment during the Step 2 exercise. The Company recorded the additional impairment loss of $8.9 million in the first quarter of 2017.
2016 Annual goodwill impairment testing
At March 31, 2016, we determined that the Tridien reporting unit (which is reported as a discontinued operation in the accompanying financial statements after the sale of the reporting unit in September 2016) required further quantitative testing (Step 1) because we could not conclude that the fair value of the Arnold reporting unit exceeds itsexceeded the carrying value based on qualitative factors alone. Results of the Step 1 quantitative testing of Tridien indicated that the fair value of Tridien exceeded its carrying value. For the reporting units that were tested qualitatively, the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value.by 272%.
A summary of the net carrying value of goodwill at September 30, 20172022 and December 31, 2016,2021, is as follows (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, 2022 | | Year ended December 31, 2021 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Goodwill - gross carrying amount | $ | 1,251,996 | | | $ | 939,828 | |
Accumulated impairment losses | (57,745) | | | (57,745) | |
Goodwill - net carrying amount | $ | 1,194,251 | | | $ | 882,083 | |
|
| | | | | | | |
| Nine months ended September 30, 2017 | | Year ended December 31, 2016 |
Goodwill - gross carrying amount | $ | 564,789 |
| | $ | 507,637 |
|
Accumulated impairment losses | (24,864 | ) | | (16,000 | ) |
Goodwill - net carrying amount | $ | 539,925 |
| | $ | 491,637 |
|
The following is a reconciliation of the change in the carrying value of goodwill for the nine months ended September 30, 20172022 by operating segment (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2017 | | Acquisitions (1) | | Goodwill Impairment | | Foreign currency translation | | Other (4) | | Balance at September 30, 2017 |
5.11 | | $ | 92,966 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 92,966 |
|
Crosman | | — |
| | 49,880 |
| | — |
| | — |
| | — |
| | 49,880 |
|
Ergobaby | | 61,031 |
| | — |
| | — |
| | — |
| | — |
| | 61,031 |
|
Liberty | | 32,828 |
| | — |
| | — |
| | — |
| | — |
| | 32,828 |
|
Manitoba Harvest | | 44,171 |
| | — |
| | — |
| | 3,425 |
| | — |
| | 47,596 |
|
ACI | | 58,019 |
| | — |
| | — |
| | — |
| | — |
| | 58,019 |
|
Arnold (2) | | 35,767 |
| | — |
| | (8,864 | ) | | — |
| | — |
| | 26,903 |
|
Clean Earth | | 118,224 |
| | 802 |
| | — |
| | — |
| | — |
| | 119,026 |
|
Sterno | | 39,982 |
| | 2,898 |
| | — |
| | — |
| | 147 |
| | 43,027 |
|
Corporate (3) | | 8,649 |
| | — |
| | — |
| | — |
| | — |
| | 8,649 |
|
Total | | $ | 491,637 |
| | $ | 53,580 |
| | $ | (8,864 | ) | | $ | 3,425 |
| | $ | 147 |
| | $ | 539,925 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2022 | | Acquisitions/Measurement Period Adjustments | | | | | | | | Balance at September 30, 2022 |
5.11 | | $ | 92,966 | | | $ | — | | | | | | | | | $ | 92,966 | |
BOA | | 254,153 | | | — | | | | | | | | | 254,153 | |
Ergobaby | | 61,448 | | | — | | | | | | | | | 61,448 | |
Lugano | | 83,458 | | | 2,879 | | | | | | | | | 86,337 | |
Marucci | | 107,855 | | | (33,204) | | | | | | | | | 74,651 | |
PrimaLoft | | — | | | 335,296 | | | | | | | | | 335,296 | |
Velocity Outdoor | | 30,079 | | | 6,911 | | | | | | | | | 36,990 | |
Advanced Circuits | | 58,029 | | | — | | | | | | | | | 58,029 | |
Altor | | 90,843 | | | 286 | | | | | | | | | 91,129 | |
Arnold | | 39,267 | | | — | | | | | | | | | 39,267 | |
Sterno | | 55,336 | | | — | | | | | | | | | 55,336 | |
Corporate (1) | | 8,649 | | | — | | | | | | | | | 8,649 | |
Total | | $ | 882,083 | | | $ | 312,168 | | | | | | | | | $ | 1,194,251 | |
(1)Represents goodwill resulting from purchase accounting adjustments not "pushed down" to the ACI segment. This amount is allocated back to the ACI segment for purposes of goodwill impairment testing.
| |
(1)
| The purchase price allocation for Crosman is preliminary and is expected to be completed during the fourth quarter of 2017. Clean Earth, Sterno and Crosman each completed add-on acquisitions during 2017. The goodwill related to the Clean Earth acquisition is based on a preliminary purchase price allocation. Crosman and Sterno completed small add-on acquisitions during the third quarter of 2017, and the preliminary purchase price allocations for these add-on acquisitions have not been prepared yet. The goodwill related to these add-on acquisitions represents the excess of purchase price over net assets acquired at September 30, 2017. |
| |
(2)
| Arnold Magnetics has three reporting units PMAG, Flexmag and Precision Thin Metals with goodwill balances of $15.6 million, $4.8 million and $6.5 million, respectively. |
| |
(3)
| Represents goodwill resulting from purchase accounting adjustments not "pushed down" to the ACI segment. This amount is allocated back to the ACI segment for purposes of goodwill impairment testing. |
| |
(4)
| Represents the final settlement related to Sterno's acquisition of Sterno Home Inc. ("Sterno Home", formerly NII). |
Long lived assets
Annual indefinite lived impairment testing
The Company used a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. The Company evaluated the qualitative factors of each reporting unit that maintains indefinite lived intangible assetsasset in connection with the annual impairment testing for 20172022 and 2016.2021. Results of the qualitative analysis indicate that it is more likely than not that the carryingfair value of the Company’sreporting units that maintain indefinite lived intangible assets did not exceed their fairexceeded the carrying value.
Other intangible assets are comprised of the following at September 30, 20172022 and December 31, 2016 (in2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | $ | 779,271 | | | $ | (253,488) | | | $ | 525,783 | | | $ | 595,673 | | | $ | (218,066) | | | $ | 377,607 | |
Technology and patents | 189,430 | | | (51,229) | | | 138,201 | | | 156,129 | | | (42,035) | | | 114,094 | |
Trade names, subject to amortization | 483,937 | | | (111,917) | | | 372,020 | | | 411,880 | | | (90,196) | | | 321,684 | |
Non-compete agreements | 4,962 | | | (4,084) | | | 878 | | | 4,942 | | | (3,827) | | | 1,115 | |
Other contractual intangible assets | 3,013 | | | (1,340) | | | 1,673 | | | 1,960 | | | (735) | | | 1,225 | |
Total | 1,460,613 | | | (422,058) | | | 1,038,555 | | | 1,170,584 | | | (354,859) | | | 815,725 | |
Trade names, not subject to amortization | 56,965 | | | — | | | 56,965 | | | 56,965 | | | — | | | 56,965 | |
In-process research and development (1) | 500 | | | — | | | 500 | | | — | | | — | | | — | |
Total intangibles, net | $ | 1,518,078 | | | $ | (422,058) | | | $ | 1,096,020 | | | $ | 1,227,549 | | | $ | (354,859) | | | $ | 872,690 | |
(1) In-process research and development is considered indefinite lived until the underlying technology becomes viable, at which point the intangible asset will be amortized over the expected useful life.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | $ | 338,461 |
| | $ | (96,449 | ) | | $ | 242,012 |
| | $ | 304,751 |
| | $ | (79,607 | ) | | $ | 225,144 |
|
Technology and patents | 48,452 |
| | (21,502 | ) | | 26,950 |
| | 44,710 |
| | (18,290 | ) | | 26,420 |
|
Trade names, subject to amortization | 180,565 |
| | (19,194 | ) | | 161,371 |
| | 128,675 |
| | (6,833 | ) | | 121,842 |
|
Licensing and non-compete agreements | 7,865 |
| | (6,365 | ) | | 1,500 |
| | 7,845 |
| | (5,987 | ) | | 1,858 |
|
Permits and airspace | 115,130 |
| | (28,612 | ) | | 86,518 |
| | 113,295 |
| | (21,531 | ) | | 91,764 |
|
Distributor relations and other | 606 |
| | (606 | ) | | — |
| | 606 |
| | (606 | ) | | — |
|
Total | 691,079 |
| | (172,728 | ) | | 518,351 |
| | 599,882 |
| | (132,854 | ) | | 467,028 |
|
Trade names, not subject to amortization | 73,527 |
| | — |
| | 73,527 |
| | 72,183 |
| | — |
| | 72,183 |
|
Total intangibles, net | $ | 764,606 |
| | $ | (172,728 | ) | | $ | 591,878 |
| | $ | 672,065 |
| | $ | (132,854 | ) | | $ | 539,211 |
|
Amortization expense related to intangible assets was $14.2$25.2 million and $39.3$67.2 millionfor the three and nine months ended September 30, 2017,2022, respectively and $8.4$19.1 million and $24.0$56.5 millionfor the three and nine months ended September 30, 2016,2021, respectively.
Estimated charges to amortization expense of intangible assets overfor the remainder of 2022 and the next fivefour years, is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2022 | | 2023 | | 2024 | | 2025 | | 2026 | | | |
| | | | | | | | | | | |
$ | 25,179 | | | $ | 100,226 | | | $ | 98,607 | | | $ | 93,282 | | | $ | 86,929 | | | | |
Note H — Warranties
|
| | | | |
October 1, through Dec. 31, 2017 | | $ | 12,689 |
|
2018 | | 49,367 |
|
2019 | | 48,077 |
|
2020 | | 47,592 |
|
2021 | | 47,288 |
|
| | $ | 205,013 |
|
The Company’s Ergobaby, Marucci, BOA and Velocity Outdoor operating segments estimate their exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty liability quarterly and adjusts the amount as necessary. Warranty liability is included in accrued expenses in the accompanying consolidated balance sheets. A reconciliation of the change in the carrying value of the Company’s warranty liability for the nine months ended September 30, 2022 and the year ended December 31, 2021 is as follows (in thousands): | | | | | | | | | | | |
Warranty liability | Nine months ended September 30, 2022 | | Year ended December 31, 2021 |
| | | |
Beginning balance | $ | 2,062 | | | $ | 1,558 | |
Provision for warranties issued during the period | 2,203 | | | 4,257 | |
Fulfillment of warranty obligations | (2,255) | | | (3,753) | |
Ending balance | $ | 2,010 | | | $ | 2,062 | |
Note I — Debt
20142022 Credit Facility
The 2014 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. The Company amended the 2014 Credit Facility in June 2015, primarily to allow for intercompany loans to, and the acquisition of, Canadian-based companies on an unsecured basis, and to modify provisions that would allow for early termination of a "Leverage Increase Period," thereby providing additional flexibility as to the timing of subsequent acquisitions. On August 15, 2016, the Company amended the 2014 Credit Facility to, among other things, increase the aggregate amount of the 2014 Credit Facility by $400 million. On August 31, 2016,July 12, 2022, the Company entered into an Incremental Facility Amendment to the 2014Third Amended and Restated Credit Agreement (the "Incremental Facility Amendment""2022 Credit Facility"). to amend and restate the 2021 Credit Facility. The Incremental Facility Amendment provided for an increase to the 2014 Revolving2022 Credit Facility provides for revolving loans, swing line loans and letters of $150 million, and credit ("the 2016 Incremental Term Loan, in the2022 Revolving Line of Credit") up to a maximum aggregate amount of $250 million. As$600 million ("the 2022 Revolving Loan Commitment") and a result of the Incremental Facility Amendment, the 2014 Credit Facility currently provides for (i) a revolving credit facility of $550 million (as amended from time to time, the "2014 Revolving Credit Facility"), (ii) a $325$400 million term loan (the "2014“ 2022 Term Loan”). The 2022 Term Loan Facility"),requires quarterly payments ranging from $2.5 million to $7.5 million, commencing September 30, 2022, with a final payment of all remaining principal and (iii) a $250 million incremental term loan (the "2016 Incrementalinterest due on July 12, 2027, which is the 2022 Term Loan").
2014Loan’s maturity date. All amounts outstanding under the 2022 Revolving Line of Credit Facility
The 2014 Revolving Credit Facility will become due on July 12, 2027, which is the termination date of the 2022 Revolving Loan Commitment. The 2022 Credit Facility also permits the LLC, prior to the applicable maturity date, to increase the Revolving Loan Commitment and/or obtain additional term loans in June 2019. an aggregate amount of up to $250 million, subject to certain restrictions and conditions. On the closing date for the 2022 Credit Facility, the 2022 Term Loan was advanced in full and the initial borrowings outstanding under the 2022 Revolving Line of Credit were $115 million. We used the initial proceeds from the 2022 Credit Facility to pay all amounts outstanding under the 2021 Credit Facility, pay fees and expenses incurred in connection with the 2022 Credit Facility and fund the acquisition of PrimaLoft.
The Company canLLC may borrow, prepay and reborrow principal under the 20142022 Revolving Credit Facility from time to time during its term. Advances under the 20142022 Revolving Line of Credit Facility can be either LIBOR rateterm Secured Overnight Financing Rate ("SOFR") loans (as defined below) or base rate loans. LIBOR rateTerm SOFR revolving loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum equal tobased on the London Interbank Offered Rate (the "LIBOR Rate")applicable SOFR as administered by the Federal Reserve Bank of New York (or a successor administrator), as adjusted, plus a margin ranging from 2.00%1.50% to 2.75%2.50%, based on the ratio of consolidated net indebtedness to adjusted consolidated earnings before interest expense, tax expense, and depreciation and amortization expenses for such period (the "Consolidated“Consolidated Total Leverage Ratio"Ratio”). Base rate revolving loans bear interest on the outstanding principal amount thereof at a fluctuating rate per annum equal to the greatesthighest of (i) the primeFederal Funds rate of interest, orplus 0.50%, (ii) the Federal Funds Rate“prime rate”, and (iii) the applicable SOFR plus 0.50%1.0% (the "Base Rate"“Base Rate”), plus a margin ranging from 1.00%0.50% to 1.75%1.50%, based uponon the Company's Consolidated Total Leverage Ratio.
Term Loans
2014Advances under the 2022 Term Loan
can be either term SOFR loans or base rate loans. The 2014 Term Loan Facility expires in June 2021 and requires quarterly payments that commenced September 30, 2014, with a final payment of all remaining principal and interest due on June 6, 2021. The 2014 Term Loan Facility was issued at an original issue discount of 99.5% of par value.
2016 Incremental Term Loan
The 2016 Incremental2022 Term Loan was issued at an original issue discount of 99.25% of par value. The Company incurred $6.0 millionadvanced in additional debt issuance costs related tofull on the Incrementalclosing date for the 2022 Credit Facility which will be recognized as expense during the remaining term of the related 2014 Revolving Credit Facility, and 2014a Term Loan and 2016 Incremental Term Loan. The Incremental Facility Amendment did not change the due dates or applicableSOFR loan with an interest rates of the 2014 Credit Agreement. The quarterly payments for the term advances under the 2014 Credit Agreement increased to approximately $1.4 million per quarter. The additional advances under the Incremental Credit Facility was a loan modification for accounting purposes. Consequently, the Company capitalized debt issuance costs of $6.0 million associated with fees charged by lenders of the Incremental Credit Facility. The capitalized debt issuance costs will be amortized over the remaining period of one month. On the 2014 Credit Facility.
In March 2017, the Company amended the 2014 Credit Facility (the "Fourth Amendment")last day of an interest period, Term SOFR loans may be converted to reduce the applicable rateTerm SOFR loans of a different interest for the 2014period or to Base Rate loans. Term Loan and 2016 Incremental Term Loan. Under the Fourth Amendment, outstanding LIBORSOFR term loans bear interest on the outstanding principal amount thereof for each interest period at LIBORa rate per annum based on the Term SOFR for such interest period plus an applicablea margin ranging from 1.50% to 2.50%, based on the Consolidated Total Leverage Ratio. Base rate of 2.75% and outstanding Base Rateterm loans bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate plus 1.75%. Priora margin ranging from 0.50% to 1.50%, based on the amendment,Consolidated Total Leverage Ratio.
Under the outstanding term loans bore interest at LIBOR plus 3.25% or Base Rate plus 2.25%. In connection with the Fourth Amendment, the Company capitalized debt issuance costs of $1.2 million associated with fees charged by term loan lenders.
Other
The 2014 Credit Facility provides for sub-facilities under the 20142022 Revolving Credit Facility, pursuant to which an aggregate amount of up to $100 million in letters of credit may be issued, as well as swing line loans of up to $25 million outstanding at one time. The issuance of such letters of credit and the making of any swing line loan would reduce the amount available under the 20142021 Revolving Credit Facility. The Company will pay (i) commitment fees on the unused portion of the 2014 Revolving Credit Facility ranging from 0.45% to 0.60% per annum based on its Consolidated Leverage Ratio, (ii) quarterly letter of credit fees, and (iii) administrative and agency fees.
The following table provides the Company’s debt holdings at September 30, 2017 and December 31, 2016 (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Revolving Credit Facility | $ | 25,500 |
| | $ | 4,400 |
|
Term Loan | 561,394 |
| | 565,658 |
|
Original issue discount | (3,777 | ) | | (4,706 | ) |
Debt issuance costs - term loan | (7,677 | ) | | (8,015 | ) |
Total debt | $ | 575,440 |
| | $ | 557,337 |
|
Less: Current portion, term loan facilities | (5,685 | ) | | (5,685 | ) |
Long term debt | $ | 569,755 |
| | $ | 551,652 |
|
Net availability under the 20142022 Revolving Credit Facility was approximately $523.2$484.7 million at September 30, 2017.2022. Letters of credit outstanding at September 30, 20172022 totaled approximately $1.3$2.3 million. At September 30, 2017,2022, the Company was in compliance with all covenants as defined in the 20142022 Credit Facility.
The2022 Revolving Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its subsidiaries.
2021 Credit Facility
On March 23, 2021, we entered into a Second Amended and Restated Credit Agreement (the "2021 Credit Facility") to amend and restate the 2018 Credit Facility (as previously restated and amended) among the Company, the lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent. The 2021 Credit Facility was secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. The 2021 Credit Facility provided for revolving loans, swing line loans and letters of credit (the “2021 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million and also permitted the LLC, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain term loans in an aggregate amount of up to $250 million, subject to certain restrictions and conditions. The Company repaid the outstanding amounts under the 2021 credit facility in the third quarter of 2022.
2018 Credit Facility
On April 18, 2018, the LLC entered into an Amended and Restated Credit Agreement (the "2018 Credit Facility"). The 2018 Credit Facility provided for (i) revolving loans, swing line loans and letters of credit (the “2018 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million, and (ii) a $500 million term loan (the “2018 Term Loan”). The Company repaid the outstanding amounts under the 2018 Term Loan in 2019, and used a portion of the proceeds from the issuance of the 2029 Senior Notes to repay the amount outstanding under the 2018 Revolving Credit Facility in March 2021.
Senior Notes
2032 Senior Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% Senior Notes due 2032 (the “2032 Notes” or "2032 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 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the LLC and U.S. Bank National Association, as trustee (the “Trustee”). The 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is payable in cash on January 15 and July 15 of each year, beginning on July 15, 2022.
The proceeds from the sale of the 2032 Notes was used to repay a portion of our debt under the 2021 Revolving Credit Facility.
2029 Senior Notes
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Senior Notes due 2029 (the "2029 Notes" or "2029 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 2029 Notes were issued pursuant to an indenture, dated as of March 23,
2021 (the “2029 Notes Indenture”), between the LLC and U.S. Bank National Association, as trustee (the "Trustee"). The 2029 Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on April 15th and October 15th of each year. The first interest payment date on the 2029 Senior Notes will be October 15, 2021. The 2029 Notes are general unsecured obligations of the LLC and are not guaranteed by our subsidiaries.
The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in connection with entering into the 2021 Credit Facility, as described above, and to redeem our 8.000% Senior Notes due 2026 (the “2026 Senior Notes”).
2026 Senior Notes
Our 2026 Senior Notes bore interest at 8.000% per annum and were scheduled to mature on May 1, 2026. On March 2, 2021, pursuant to an indenture, dated as of April 18, 2018 between the LLC and U.S. Bank National Association, as trustee ("Trustee"), the Trustee delivered redemption notices, on behalf of the LLC, to holders of the LLC’s 2026 Senior Notes to redeem the 2026 Senior Notes on April 1, 2021. The principal amount of the 2026 Senior Notes redeemed was $600 million, which represented all of the outstanding principal of the 2026 Senior Notes. The 2026 Senior Notes were redeemed at 100% of their principal, plus an applicable premium, and accrued and unpaid interest as of the redemption date. On March 23, 2021, the proceeds required for the redemption of the 2026 Senior Notes, the applicable premium and accrued interest totaling $647.7 million was irrevocably deposited with the Trustee and held by the Trustee until the date of redemption, April 1, 2021. The redemption of the 2026 Senior Notes resulted in a Loss on Debt Extinguishment of approximately $33.3 million, which is comprised of the premium paid for early redemption of the 2026 Senior Notes, and the expensing of the deferred financing costs and bond premium associated with the 2026 Senior Notes.
The following table provides the Company’s debt holdings at September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Effective Interest Rate | | Amount | | Effective Interest Rate | | Amount |
2029 Senior Notes | 5.25 | % | | $ | 1,000,000 | | | 4.89 | % | | $ | 1,000,000 | |
2032 Senior Notes | 5.00 | % | | 300,000 | | | 5.29 | % | | 300,000 | |
2022 Term Loan | 4.56 | % | | 397,500 | | | N/a | | — | |
2022 Revolving Credit Facility | 4.68 | % | | 113,000 | | | N/a | | — | |
Less: Unamortized debt issuance costs | | | (16,135) | | | | | (15,174) | |
Total debt | | | $ | 1,794,365 | | | | | $ | 1,284,826 | |
Less: Current Portion of long-term debt | | | (10,000) | | | | | — | |
Long-term debt | | | $ | 1,784,365 | | | | | $ | 1,284,826 | |
The Senior Notes consisted of the following carrying value and estimated fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Hierarchy Level | | September 30, 2022 |
| | Maturity Date | | Rate | | | Carrying Value | | Fair Value |
2032 Senior Notes | | January 15, 2032 | | 5.000 | % | | 2 | | 300,000 | | | 219,000 | |
2029 Senior Notes | | April 15, 2029 | | 5.250 | % | | 2 | | 1,000,000 | | | 787,500 | |
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the issuance of the Company's financing arrangements. In connection with the 2032 Senior Notes offering in November 2021, the Company recorded $4.3 million in deferred financing costs. In addition, the Company recorded $12.0 million in deferred financing costs related to the 2029 Senior Notes offering in March 2021. The net deferred financing costs associated with the 2026 Senior Notes were $7.2 million at March 31, 2021, and were expensed on April 1, 2021, the date of the redemption of the 2026 Senior Notes. In connection with entering into the 20142022 Credit Facility, as well as amendmentsthe Company recognized $2.5 million in deferred financing costs associated with the 2022 Term Loan, and $2.8 million in deferred financing costs associated with the 2022 Revolving Credit Facility. The Company recorded $5.4 million in deferred financing costs in connection with the 2021 Credit Facility. The Company also incurred $0.5 million in loss on debt extinguishment related to the 2014write-off of deferred financing costs associated with the 2021 Credit Facility and are amortized overupon entry into the term of the related debt instrument. 2022 Credit Facility.
Since the Company can borrow, repay and reborrow principal under the 20142022 Revolving Credit Facility, the debt issuance costs associated with this facilitythe 2021 Revolving Credit Facility have been classified as other non-current assets in the accompanying condensed consolidated balance sheet. The debt issuance costs associated with the 2014 Term Loan and 2016 Incremental Term LoanSenior Notes are classified as a reduction of long-term debt in the accompanying condensed consolidated balance sheet.
The following table summarizes unamortized premiums and debt issuance costs at September 30, 20172022 and December 31, 2016,2021, and the balance sheet classification in each of the periods presentspresented (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Debt issuance costs | $ | 32,526 | | | $ | 27,784 | |
Accumulated amortization | (8,756) | | | (6,021) | |
Unamortized debt issuance costs, net | $ | 23,770 | | | $ | 21,763 | |
| | | |
Balance sheet classification: | | | |
Other noncurrent assets | $ | 7,635 | | | $ | 6,589 | |
Long-term debt | 16,135 | | | 15,174 | |
| $ | 23,770 | | | $ | 21,763 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Deferred debt issuance costs | $ | 20,142 |
| | $ | 18,960 |
|
Accumulated amortization | (9,188 | ) | | (6,248 | ) |
Deferred debt issuance costs, less accumulated amortization | $ | 10,954 |
| | $ | 12,712 |
|
| | | |
Balance Sheet classification: | | | |
Other non-current assets | $ | 3,277 |
| | $ | 4,698 |
|
Long-term debt | 7,677 |
| | 8,014 |
|
| $ | 10,954 |
| | $ | 12,712 |
|
Note J — Derivative Instruments and Hedging Activities
On September 16, 2014, the Company purchased an interest rate swap ("New Swap") with a notional amount of $220 million. The New Swap is effective April 1, 2016 through June 6, 2021, the termination date of the 2014 Term Loan. The agreement requires the Company to pay interest on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. At September 30, 2017 and December 31, 2016, the New Swap had a fair value loss of $8.8 million and $10.7 million, respectively, principally reflecting the present value of future payments and receipts under the agreement.
The Company did not elect hedge accounting for the above derivative transaction and as a result, periodic mark-to-market changes in fair value are reflected as a component of interest expense in the consolidated statement of operations.
The following table reflects the classification of the Company's interest rate swap on the consolidated balance sheets at September 30, 2017 and December 31, 2016 (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Other current liabilities | $ | 3,190 |
| | $ | 4,010 |
|
Other noncurrent liabilities | 5,657 |
| | 6,709 |
|
Total fair value | $ | 8,847 |
| | $ | 10,719 |
|
Note K — Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis at September 30, 2017 and December 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at September 30, 2017 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | $ | (192 | ) | | $ | — |
| | $ | — |
| | $ | (192 | ) |
Contingent consideration - acquisitions (2) | (4,367 | ) | | — |
| | — |
| | (4,367 | ) |
Interest rate swap | (8,847 | ) | | — |
| | (8,847 | ) | | — |
|
Total recorded at fair value | $ | (13,406 | ) | | $ | — |
| | $ | (8,847 | ) | | $ | (4,559 | ) |
| |
(1)
| Represents put option issued to noncontrolling shareholders in connection with the 5.11 Tactical and Liberty acquisitions. |
| |
(2)
| Represents potential earn-outs payable by Sterno Products for the acquisition of NII and Ergobaby in connection with their acquisition of Baby Tula. |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2016 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | |
Equity method investment - FOX | $ | 141,767 |
| | $ | 141,767 |
| | $ | — |
| | $ | — |
|
Liabilities: |
| |
| |
| |
|
Put option of noncontrolling shareholders | (180 | ) | | — |
| | — |
| | (180 | ) |
Contingent consideration - acquisitions | (4,830 | ) | | — |
| | — |
| | (4,830 | ) |
Interest rate swap | (10,719 | ) | | — |
| | (10,719 | ) | | — |
|
Total recorded at fair value | $ | 126,038 |
| | $ | 141,767 |
| | $ | (10,719 | ) | | $ | (5,010 | ) |
Reconciliations of the change in the carrying value of the Level 3 fair value measurements from January 1st through September 30th in 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| 2017 | | 2016 |
Balance at January 1st | $ | (5,010 | ) | | $ | (50 | ) |
Contingent consideration - acquisition | — |
| | (1,500 | ) |
Balance at March 31st | $ | (5,010 | ) | | $ | (1,550 | ) |
Contingent consideration - acquisition | — |
| | (3,780 | ) |
Payment of contingent consideration | 463 |
| | — |
|
Balance at June 30th | $ | (4,547 | ) | | $ | (5,330 | ) |
Put option - noncontrolling shareholder | (12 | ) | | (50 | ) |
Contingent consideration - payment | — |
| | 450 |
|
Balance at September 30th | $ | (4,559 | ) | | $ | (4,930 | ) |
Valuation Techniques
The Company has not changed its valuation techniques in measuring the fair value of any of its other financial assets and liabilities during the period. For details of the Company’s fair value measurement policies under the fair value hierarchy, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
2014 Term Loan and 2016 Incremental Term Loan
At September 30, 2017, the carrying value of the principal under the Company’s outstanding Term Loans, including the current portion, was $561.4 million, which approximates fair value because it has a variable interest rate that reflects market changes in interest rates and changes in the Company's net leverage ratio. The estimated fair value of the outstanding 2014 Term Loan is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 in the fair value hierarchy.
Nonrecurring Fair Value Measurements
The following table provides the assets carried at fair value measured on a non-recurring basis as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | |
| Fair Value Measurements at September 30, 2017 | | Nine months ended |
(in thousands) | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Expense |
| | | | | | | | | |
Goodwill (1) | 26,903 |
| | — |
| | — |
| | 26,903 |
| | 8,864 |
|
|
| | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2016 | | Year ended |
(in thousands) | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Expense |
| | | | | | | | | |
Goodwill | 35,767 |
| | — |
| | — |
| | 35,767 |
| | 16,000 |
|
Property, Plant and Equipment (1) | — |
| | — |
| | — |
| | — |
| | 1,824 |
|
Tradename (1) | — |
| | — |
| | — |
| | — |
| | 317 |
|
Technology (1) | — |
| | — |
| | — |
| | — |
| | 3,460 |
|
Customer relationships (1) | — |
| | — |
| | — |
| | — |
| | 2,426 |
|
Permits (1) | — |
| | — |
| | — |
| | — |
| | 1,177 |
|
(1) Represents the fair value of the respective assets of the Orbit Baby product line of Ergobaby and the Clean Earth Williamsport site, both of which were disposed of during 2016.
Note L — Stockholders’ Equity
Trust Common Shares
The Trust is authorized to issue 500,000,000 Trust common shares and the CompanyLLC is authorized to issue a corresponding number of LLCtrust interests. The Company will at all times have the identical number of LLCtrust interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each Trust share is entitled to one vote per share on any matter with respect to which members of the Company are entitled to vote.
At-The-Market Equity Offering Program
On September 7, 2021, the Company filed a prospectus supplement pursuant to which the Company may, but has no obligation to, issue and sell up to $500 million of common shares of the Trust in amounts and at times to be determined by the Company. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions, the trading price of Trust common shares and determinations by us regarding appropriate sources of funding. The Company incurred approximately $0.1 million in total costs related to the ATM program during both the three and nine months ended September 30, 2022.
In connection with this offering, the Trust entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. and Goldman Sachs & Co. LLC (each a “Sales Agent” and, collectively, the “Sales Agents”). The Sales Agreement provides that the Company may offer and sell Trust common shares from time to time through the Sales Agents up to $500 million, in amounts and at times to be determined by the Company. Pursuant to the Sales Agreement, the shares may be offered and sold through each Sales Agent, acting separately, in ordinary brokers’ transactions, to or through a market maker, on or through the New York Stock Exchange or any other market venue where the securities may be traded, in the over-the-counter market, in
privately negotiated transactions, in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act or through a combination of any such methods of sale.
During the three and nine months ended September 30, 2022, the Company sold 934,906 and 3,464,844 Trust common shares under the Sales Agreement, respectively. During the same periods, the Company received total net proceeds of approximately $21.7 million and $84.0 million, respectively, from these sales and incurred approximately $0.4 million and $1.5 million in commissions payable to the Sales Agents. During the three and nine months ended September 30, 2021, the Company sold 630,108 Trust common shares under the Sales Agreement. For the same period, the Company received total net proceeds of approximately $18.8 million from these sales, and incurred approximately $0.3 million in commissions payable to the Sales Agents.
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 Trust preferred shares and the CompanyLLC is authorized to issue a corresponding number of trust preferred interests.
Series C Preferred Shares
On November 20, 2019, the Trust issued 4,000,000 7.875% Series C Preferred Shares(the "Series C Preferred Shares") with a liquidation preference of $25.00 per share, and on December 2, 2019, the Trust issued 600,000 of the Series C Preferred Shares which were sold pursuant to an option to purchase additional shares by the underwriters. Total proceeds from the issuance of the Series C Preferred Shares were $115.0 million, or $111.0 millionnet of underwriters' discount and issuance costs. Distributions on the Series C Preferred Shares will be payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30, and October 30 of each year, beginning on January 30, 2020, at a rate per annum of 7.875%. Distributions on the Series C Preferred Shares are cumulative and at September 30, 2022, $1.5 million of Series C distributions are accumulated and unpaid. Unless full cumulative distributions on the Series C Preferred Shares have been or contemporaneously are declared and set apart for payment of the Series C Preferred Shares for all past distribution periods, no distribution may be declared or paid for payment on the Trust common shares. The Series C Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the Series C Preferred Shares. The Series C Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after January 30, 2025, at a price of $25.00 per share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding, the redemption date. Except in limited circumstances, holders of Series C Preferred Shares will have no right to require the redemption of the Series C Preferred Shares and there is no maturity date.
Series B Preferred Shares
On March 13, 2018, the Trust issued 4,000,000 7.875% Series B Trust Preferred Shares (the "Series B Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.5 million net of underwriters' discount and issuance costs. Distributions on the Series B Preferred Shares will be payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30, and October 30 of each year, beginning on July 30, 2018, at a rate per annum of 7.875%. Distributions on the Series B Preferred Shares are cumulative and at September 30, 2022, $1.3 million of Series B distributions are accumulated and unpaid. Unless full cumulative distributions on the Series B Preferred Shares have been or contemporaneously are declared and set apart for payment of the Series B Preferred Shares for all past distribution periods, no distribution may be declared or paid for payment on the Trust common shares. The Series B Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the preferred shares. The Series B Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after April 30, 2028, at a price of $25.00 per share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding, the redemption date. Except in limited circumstances, holders of Series B Preferred Shares will have no right to require the redemption of the Series B Preferred Shares and there is no maturity date.
Series A Preferred Shares
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.4 million net of underwriters' discount and issuance costs. When, and if declared by the Company's board of directors, distribution on the Series A Preferred Shares will be payable quarterly on January 30, April 30, July 30, and October 30 of each year, beginning on October 30, 2017, at a rate per annum of 7.250%. Distributions on the Series A Preferred Shares are discretionary and non-cumulative. The Company has no obligation to pay distributions for a
quarterly distribution period if the board of directors does not declare the distribution before the scheduled record of date for the period, whether or not distributions are paid for any subsequent distribution periods with respect to the Series A Preferred Shares, or the Trust common shares. If the Company's board of directors does not declare a distribution for the Series A Preferred Shares for a quarterly distribution period, during the remainder of that quarterly distribution period the Company cannot declare or pay distributions on the Trust common shares. The Series A Preferred Shares became redeemable at the Company's option, in whole or in part, at any time after July 30, 2022, at a price of $25.00 per share, plus any declared and unpaid distributions. Except in limited circumstances, holders of Series A Preferred Shares will have no right to require the redemption of the Series A Preferred Shares and there is no maturity date. The Series A Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the preferred shares.
The Series A Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after July 30, 2022, at a price of $25.00 per share, plus declared and unpaid distribution to, but excluding, the redemption date, without payment of any undeclared distributions. Holders of Series A Preferred Shares will have no right to require the redemption of the Series A Preferred Shares and there is no maturity date.
If a certain tax redemption event occurs prior to July 30, 2022, the Series A Preferred Shares may be redeemed at the Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such tax redemption event, at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. If a certain fundamental change related to the Series A Preferred Shares or the Company occurs (whether before, on or after July 30, 2022), the Company will be required to repurchase the Series A Preferred Shares at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding, the date of purchase, without payment of any undeclared distributions. If (i) a fundamental change occurs and (ii) the Company does not give notice prior to the 31st day following the fundamental change to repurchase all the outstanding Series A Preferred Shares, the distribution rate per annum on the Series A Preferred Shares will increase by 5.00%, beginning on the 31st day following such fundamental change. Notwithstanding any requirement that the Company repurchase all of the outstanding Series A Preferred Shares, the increase in the distribution rate is the sole remedy to holders in the event the Company fails to do so, and following any such increase, the Company will be under no obligation to repurchase any Series A Preferred Shares.
Profit Allocation Interests
The Allocation Interests represent the original equity interest in the Company. The holders of the Allocation Interests ("Holders") are entitled to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The
distributions of the profit allocation are paid upon the occurrence of the sale of a material amount of capital stock or assets of one of the Company’s businesses ("Sale Event") or, at the option of the Holders, at each five-year anniversary date of the acquisition of one of the Company’s businesses ("Holding Event"). The Company records distributions of the profit allocation to the Holders upon occurrence of a Sale Event or Holding Event as distributions declared on Allocation Interests to stockholders’ equity when they are approved by the Company’s board of directors.
Holding Events
Sale Event
The Sale of Liberty in August 2021 qualified as a Sale Event under the Company's LLC Agreement. In April 2017, with respectDuring the fourth quarter of 2021, the Company's Board declared a distribution to the March 2017 Offering, the Company's boardAllocation Member of directors approved and declared a profit allocation payment totaling $25.8 million that$16.8 million. The distribution was paid in the second quarter of 2017.
The sale of FOX shares in March 2016 (refer to Note F - "Investment in FOX") qualified as a Sale Event under the Company's LLC Agreement. In April 2016, with respect to the March 2016 Offering, the Company's board of directors approved and declared a profit allocation payment totaling $8.6 million that was paid to Holders during the second quarter of 2016. In November 2016, with respect to the sale of FOX shares in August 2016 and the sale of Tridien, both qualifying as Sale Events, the Company's board of directors approved and declared a profit allocation payment of $7.0 million that was paid during the fourth quarter of 2016. In the fourth quarter2021.Reconciliation of 2016, the Company's boardnet income (loss) attributable to common shares of directors declared a profit allocation paymentHoldings
The following table reconciles net income (loss) from continuing operations attributable to Holdings to net income (loss) attributable to the Allocation Interest Holderscommon shares of $13.4 million related to the FOX November Offering (refer to Note F - "Investment Holdings (in FOX"thousands). This amount was paid in the first quarter of 2017.: The Company's board of directors also declared and the Company paid an $8.2 million distribution in the third quarter of 2016 to the Allocation Member in connection with a Holding Event of our ownership of the Advanced Circuits subsidiary. The payment is in respect to Advanced Circuits' positive contribution-based profit in the five year holding period ending June 30, 2016. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) from continuing operations attributable to Holdings | | $ | (3,253) | | | $ | 16,519 | | | $ | 41,462 | | | $ | 12,576 | |
Less: Distributions paid - Allocation Interests | | — | | | 12,075 | | | — | | | 17,289 | |
Less: Distributions paid - Preferred Shares | | 6,045 | | | 6,045 | | | 18,136 | | | 18,136 | |
Less: Accrued distributions - Preferred Shares | | 2,869 | | | 2,869 | | | 2,869 | | | 2,869 | |
Net income (loss) from continuing operations attributable to common shares of Holdings | | $ | (12,167) | | | $ | (4,470) | | | $ | 20,457 | | | $ | (25,718) | |
Earnings per share
The Company calculates basic and diluted earnings per share using the two-class method which requires the Company to allocate to participating securities that have rights to earnings that otherwise would have been available only to Trust shareholders as a separate class of securities in calculating earnings per share. The Allocation Interests are considered participating securities that contain participating rights to receive profit allocations upon the occurrence of a Holding Event or Sale Event. The calculation of basic and diluted earnings per share for the three and nine months ended September 30, 20172022 and 20162021 reflects the incremental increase during the period in the profit allocation distribution to Holders related to Holding Events.
Basic and diluted earnings per share for the three and nine months ended September 30, 20172022 and 20162021 attributable to the common shares of Holdings is calculated as follows (in thousands, except per share data):
| | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, |
| | Three months ended September 30, | | Nine months ended September 30, | | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) from continuing operations attributable to common shares of Holdings | | Net income (loss) from continuing operations attributable to common shares of Holdings | | $ | (12,167) | | | $ | (4,470) | | | $ | 20,457 | | | $ | (25,718) | |
Less: Effect of contribution based profit - Holding Event | | Less: Effect of contribution based profit - Holding Event | | 4,548 | | | 3,779 | | | 13,545 | | | 4,194 | |
Net income (loss) from continuing operations attributable to common shares of Holdings | | Net income (loss) from continuing operations attributable to common shares of Holdings | | $ | (16,715) | | | $ | (8,249) | | | $ | 6,912 | | | $ | (29,912) | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
Income (loss) from continuing operations attributable to Holdings | | $ | 7,706 |
| | $ | 47,862 |
| | $ | (18,351 | ) | | $ | 50,198 |
| |
Less: Profit Allocation paid to Holders | | — |
| | 8,196 |
| | 39,120 |
| | 16,829 |
| |
Less: Effect of contribution based profit - Holding Event | | 1,620 |
| | 812 |
| | 3,954 |
| | 1,292 |
| |
Income (loss) from continuing operation attributable to common shares | | $ | 6,086 |
| | $ | 38,854 |
| | $ | (61,425 | ) | | $ | 32,077 |
| |
| | | | | | | | | |
Income from discontinued operations attributable to Holdings | | $ | — |
| | $ | 1,843 |
| | $ | 340 |
| | $ | 2,723 |
| |
Less: Effect of contribution based profit - Holding Event | | — |
| | — |
| | — |
| | — |
| |
Income from discontinued operations attributable to common shares | | $ | — |
| | $ | 1,843 |
| | $ | 340 |
| | $ | 2,723 |
| |
| Income from discontinued operations attributable to common shares of Holdings | | Income from discontinued operations attributable to common shares of Holdings | | $ | 1,479 | | | $ | 71,581 | | | $ | 6,893 | | | $ | 79,888 | |
| | | | | | | | | |
Basic and diluted weighted average common shares outstanding | | 59,900 |
| | 54,300 |
| | 59,900 |
| | 54,300 |
| Basic and diluted weighted average common shares outstanding | | 71,910 | | | 65,008 | | | 70,514 | | | 64,936 | |
| | | | | | | | | |
Basic and fully diluted income (loss) per common share attributable to Holdings | | | | | | | | | Basic and fully diluted income (loss) per common share attributable to Holdings | |
Continuing operations | | $ | 0.10 |
| | $ | 0.72 |
| | $ | (1.03 | ) | | $ | 0.59 |
| Continuing operations | | $ | (0.23) | | | $ | (0.13) | | | $ | 0.10 | | | $ | (0.46) | |
Discontinued operations | | — |
| | 0.03 |
| | 0.01 |
| | 0.05 |
| Discontinued operations | | 0.02 | | | 1.10 | | | 0.10 | | | 1.23 | |
| | $ | 0.10 |
| | $ | 0.75 |
| | $ | (1.02 | ) | | $ | 0.64 |
| | $ | (0.21) | | | $ | 0.97 | | | $ | 0.20 | | | $ | 0.77 | |
Distributions
The following table summarizes information related to our quarterly cash distributions on our Trust Common Sharescommon and preferred shares (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Cash Distribution per Share | | Total Cash Distributions | | Record Date | | Payment Date |
| | | | | | | | |
Trust Common Shares: | | | | | | | | |
July 1, 2022 - September 30, 2022 (1) | | $ | 0.25 | | | $ | 18,051 | | | October 20, 2022 | | October 27, 2022 |
April 1, 2022 - June 30, 2022 | | $ | 0.25 | | | $ | 17,931 | | | July 21, 2022 | | July 28, 2022 |
January 1, 2022 - March 31, 2022 | | $ | 0.25 | | | $ | 17,510 | | | April 21, 2022 | | April 28, 2022 |
October 1, 2021 - December 31, 2021 | | $ | 0.25 | | | $ | 17,352 | | | January 13, 2022 | | January 20, 2022 |
July 1, 2021 - September 30, 2021 | | $ | 0.36 | | | $ | 23,742 | | | October 15, 2021 | | October 22, 2021 |
August 3, 2021 (2) | | $ | 0.88 | | | $ | 57,112 | | | August 31, 2021 | | September 7, 2021 |
April 1, 2021 - June 30, 2021 | | $ | 0.36 | | | $ | 23,364 | | | July 15, 2021 | | July 22, 2021 |
January 1, 2021 - March 31, 2021 | | $ | 0.36 | | | $ | 23,364 | | | April 15, 2021 | | April 22, 2021 |
October 1, 2020 - December 31, 2020 | | $ | 0.36 | | | $ | 23,364 | | | January 15, 2021 | | January 22, 2021 |
| | | | | | | | |
Series A Preferred Shares: | | | | | | | | |
July 30, 2022 - October 29, 2022 (1) | | $ | 0.453125 | | | $ | 1,813 | | | October 15, 2022 | | October 30, 2022 |
April 30, 2022 - July 29, 2022 | | $ | 0.453125 | | | $ | 1,813 | | | July 15, 2022 | | July 30, 2022 |
January 30, 2022 - April 29, 2022 | | $ | 0.453125 | | | $ | 1,813 | | | April 15, 2022 | | April 30, 2022 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
October 30, 2021 - January 29, 2022 | | $ | 0.453125 | | | $ | 1,813 | | | January 15, 2022 | | January 30, 2022 |
July 30, 2021 - October 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | October 15, 2021 | | October 30, 2021 |
April 30, 2021 - July 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | July 15, 2021 | | July 30, 2021 |
January 30, 2021 - April 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | April 15, 2021 | | April 30, 2021 |
October 30, 2020 - January 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | January 15, 2021 | | January 30, 2021 |
| | | | | | | | |
Series B Preferred Shares: | | | | | | | | |
July 30, 2022 - October 29, 2022 (1) | | $ | 0.4921875 | | | $ | 1,969 | | | October 15, 2022 | | October 30, 2022 |
April 30, 2022 - July 29, 2022 | | $ | 0.4921875 | | | $ | 1,969 | | | July 15, 2022 | | July 30, 2022 |
January 30, 2022 - April 29, 2022 | | $ | 0.4921875 | | | $ | 1,969 | | | April 15, 2022 | | April 30, 2022 |
October 30, 2021 - January 29, 2022 | | $ | 0.4921875 | | | $ | 1,969 | | | January 15, 2022 | | January 30, 2022 |
July 30, 2021 - October 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | October 15, 2021 | | October 30, 2021 |
April 30, 2021 - July 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | July 15, 2021 | | July 30, 2021 |
January 30, 2021 - April 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | April 15, 2021 | | April 30, 2021 |
October 30, 2020 - January 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | January 15, 2021 | | January 30, 2021 |
| | | | | | | | |
Series C Preferred Shares: | | | | | | | | |
July 30, 2022 - October 29, 2022 (1) | | $ | 0.4921875 | | | $ | 2,264 | | | October 15, 2022 | | October 30, 2022 |
April 30, 2022 - July 29, 2022 | | $ | 0.4921875 | | | $ | 2,264 | | | July 15, 2022 | | July 30, 2022 |
January 30, 2022 - April 29, 2022 | | $ | 0.4921875 | | | $ | 2,264 | | | April 15, 2022 | | April 30, 2022 |
October 30, 2021 - January 29, 2022 | | $ | 0.4921875 | | | $ | 2,264 | | | January 15, 2022 | | January 30, 2022 |
July 30, 2021 - October 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | October 15, 2021 | | October 30, 2021 |
April 30, 2021 - July 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | July 15, 2021 | | July 30, 2021 |
January 30, 2021 - April 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | April 15, 2021 | | April 30, 2021 |
October 30, 2020 - January 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | January 15, 2021 | | January 30, 2021 |
(1) This distribution was declared on October 4, 2022.
(2) On January 26, 2017,August 3, 2021, in order to offset a portion of the tax liability to the shareholders as a result of the election to cause the Trust to be treated as a corporation for U.S. federal income tax purposes, the Company's Board of Directors declared a special cash distribution on the Trust’s common shares. A distribution of $57.1 million was made on August 31, 2021 to Trust common shareholders. Beginning with the quarter ended December 31, 2021, the Company paidhas declared a quarterly distribution of $0.25 per share, which was reduced from $0.36 per share in prior periods to holders of recordreflect the effect of the Company's common sharesTrust being taxed as of January 19, 2017. This distribution was declared on January 5, 2017.a corporation.
On April 27, 2017, the Company paid a distribution of $0.36 per share to holders of record of the Company's common shares as of April 20, 2017. This distribution was declared on April 6, 2017.
On July 27, 2017, the Company paid a distribution of $0.36 per share to holders of record of the Company's common shares as of July 20, 2017. The distribution was declared on July 6, 2017.
On October 26, 2017, the Company paid a distribution of $0.36 per share to holders of record of the Company's common shares as of October 19, 2017. This distribution was declared on October 5, 2017.
Trust Preferred Shares
On October 30, 2017, the Company paid a distribution of $0.61423611 per share on the Company’s Series A Preferred Shares. The distribution on the Series A Preferred Shares covers the period from and including June 28, 2017, the original issue date of the Preferred Shares, up to, but excluding, October 30, 2017. This distribution was declared on October 5, 2017 and was payable to holders of record of the Company's Series A Preferred Shares as of October 15, 2017.
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’sLLC’s ownership percentage of its majority owned operating segments and related noncontrolling interest balances as of September 30, 20172022 and December 31, 2016:
2021:
|
| | | | | | | |
| % Ownership (1) September 30, 2017 | | % Ownership (1) December 31, 2016 |
| Primary | | Fully Diluted | | Primary | | Fully Diluted |
5.11 Tactical | 97.5 | | 85.7 | | 97.5 | | 85.1 |
Crosman | 98.8 | | 89.2 | | N/a | | N/a |
Ergobaby | 82.7 | | 76.6 | | 83.5 | | 76.9 |
Liberty | 88.6 | | 84.7 | | 88.6 | | 84.7 |
Manitoba Harvest | 76.6 | | 67.0 | | 76.6 | | 65.6 |
ACI | 69.4 | | 69.2 | | 69.4 | | 69.3 |
Arnold Magnetics | 96.7 | | 84.7 | | 96.7 | | 84.7 |
Clean Earth | 97.5 | | 79.8 | | 97.5 | | 79.8 |
Sterno Products | 100.0 | | 89.5 | | 100.0 | | 89.5 |
| | | | | | | | | | | | | | | | | | | | | | | |
| % Ownership (1) September 30, 2022 | | % Ownership (1) December 31, 2021 |
| Primary | | Fully Diluted | | Primary | | Fully Diluted |
5.11 | 97.7 | | | 88.3 | | | 97.6 | | | 88.4 | |
BOA | 91.8 | | | 83.4 | | | 91.8 | | | 83.8 | |
Ergobaby | 81.6 | | | 72.8 | | | 81.7 | | | 72.7 | |
Lugano | 59.9 | | | 55.4 | | | 59.9 | | | 58.1 | |
Marucci | 91.0 | | | 81.9 | | | 91.1 | | | 82.8 | |
PrimaLoft | 90.7 | | | 90.7 | | | — | | | — | |
Velocity Outdoor | 99.4 | | | 87.7 | | | 99.3 | | | 87.6 | |
Advanced Circuits | 71.8 | | | 67.6 | | | 71.8 | | | 67.6 | |
Altor | 100.0 | | | 86.9 | | | 100.0 | | | 91.2 | |
Arnold | 98.0 | | | 85.5 | | | 98.0 | | | 85.5 | |
Sterno | 99.4 | | | 90.8 | | | 100.0 | | | 87.1 | |
(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, 2022 | | December 31, 2021 |
5.11 | $ | 16,718 | | | $ | 15,458 | |
BOA | 35,562 | | | 30,581 | |
Ergobaby | 19,006 | | | 29,435 | |
Lugano | 80,158 | | | 70,585 | |
Marucci | 19,393 | | | 17,175 | |
PrimaLoft | 34,983 | | | — | |
Velocity Outdoor | 5,909 | | | 5,250 | |
Advanced Circuits | 438 | | | (2,614) | |
Altor | 4,846 | | | 3,936 | |
Arnold | 1,463 | | | 1,284 | |
Sterno | 1,842 | | | 1,524 | |
Allocation Interests | 100 | | | 100 | |
| $ | 220,418 | | | $ | 172,714 | |
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, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at September 30, 2022 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| | | | | | | |
Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | $ | (142) | | | $ | — | | | $ | — | | | $ | (142) | |
Contingent consideration - acquisition (2) | (1,600) | | | — | | | — | | | (1,600) | |
| | | | | | | |
Total recorded at fair value | $ | (1,742) | | | $ | — | | | $ | — | | | $ | (1,742) | |
(1)Represents put option issued to noncontrolling shareholders in connection with the 5.11 acquisition.
(2) Represents potential earn-out payable as additional purchase price consideration by Velocity in connection with an acquisition.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2021 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | $ | (151) | | | $ | — | | | $ | — | | | $ | (151) | |
Contingent consideration - acquisition (2) | (1,350) | | | — | | | — | | | (1,350) | |
| | | | | | | |
| | | | | | | |
Total recorded at fair value | $ | (1,501) | | | $ | — | | | $ | — | | | $ | (1,501) | |
(1)Represents a put option issued to a noncontrolling shareholder in connection with the 5.11 acquisition.
(2)Represents potential earn-out payable as additional purchase price consideration by Altor in connection with the acquisition of Polyfoam. The payment of the earn-out occurred on March 31, 2022.
Reconciliations of the change in the carrying value of the Level 3 fair value measurements from January 1, 2021 through September 30, 2022 are as follows (in thousands):
| | | | | |
(1)
| The principal difference between primary and diluted percentagesLevel 3 |
Balance at January 1, 2021 | $ | (1,785) | |
Termination of our operating segments is due to stockput option issuances of operating segment stock to managementnoncontrolling shareholder - Liberty | 314 | |
Increase in the fair value of put option of noncontrolling shareholder - 5.11 | (30) | |
Balance at December 31, 2021 | $ | (1,501) | |
Decrease in the respective businesses.fair value of put option of noncontrolling shareholder - 5.11 | 9 | |
Payment of contingent consideration - Polyfoam | 1,350 | |
Contingent consideration - Velocity acquisition | (1,600) | |
Balance at September 30, 2022 | $ | (1,742) | |
|
| | | | | | | |
| 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 |
|
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, 2021.
Nonrecurring Fair Value Measurements There were no assets or liabilities measured on a non-recurring basis during the nine months ended September 30, 2022 or the year ended December 31, 2021.
Note OM — Income taxes
Each fiscal quarter,Effective September 1, 2021, the LLC’s parent (i.e., the Trust) elected to be treated as a corporation for U.S federal income tax purposes. Prior to September 1, 2021, the Company’s items of income, gain, loss and deduction flowed through to owners of the Trust without being subject to income taxes at the Trust level. Consequently, the Company’s earnings did not reflect a provision for income taxes except those for foreign, state, city and local income taxes incurred at the entity level. From and after September 1, 2021, the Trust will be subject to entity-level U.S. federal, state, and local corporate income taxes on the Company’s earnings that flow through to the Trust. However, the Trust itself will no longer be taxed as a flow through entity for U.S. federal income tax purposes. Trust shareholders will no longer receive Schedule K-1’s, nor will Trust shareholders be allocated any pass through income, loss, deduction, expense, or credit (including “UBIT”) from the Trust.
The Company estimates its annual effective tax rate each fiscal quarter and applies that estimated 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 infor each interim period requires certain assumptions, estimates, and significant judgment, including with respect to the projected operating income for the year, projections of the proportion of income earned and taxedtaxes incurred in othervarious jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated in the current year.assets. The accounting estimates used to compute the provision for income taxes may change as new events occur, as additional information is obtained, as our tax structure changes or as the
tax environment changes.laws change. 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, 20172022 and 20162021 is as follows:
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
United States Federal Statutory Rate | 21.0 | % | | 21.0 | % |
State income taxes (net of Federal benefits) | 3.4 | | | 5.6 | |
Foreign income taxes | 1.6 | | | 3.4 | |
Expenses of Compass Group Diversified Holdings LLC representing a pass through to shareholders (1) | — | | | 29.3 | |
Impact of subsidiary employee stock options | 0.7 | | | 0.5 | |
Credit utilization | (5.1) | | | (5.6) | |
Non-recognition of NOL carryforwards | 11.0 | | | (0.5) | |
Effect of Tax Act | (1.0) | | | (1.6) | |
Effect of classification of assets held for sale | 9.0 | | | — | |
Other | 0.4 | | | 2.5 | |
Effective income tax rate | 41.0 | % | | 54.6 | % |
|
| | | | | |
| 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, 2021 included a loss at the Trust, which was taxed as a partnership through August 31, 2021. Beginning September 1, 2021, the Trust is taxed as a corporation.
| |
(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 Companycompany 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$0.2 million is recognized in the consolidated balance sheet as a component of other non-current liabilities at September 30, 2017.2022. Net periodic benefit cost consists of the following for the three and nine months ended September 30, 20172022 and 20162021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Service cost | $ | 105 | | | $ | 103 | | | $ | 321 | | | $ | 317 | |
Interest cost | 10 | | | 10 | | | 31 | | | 27 | |
Expected return on plan assets | (18) | | | (18) | | | (54) | | | (55) | |
Amortization of unrecognized loss | (7) | | | (7) | | | (20) | | | (5) | |
Effect of curtailment | — | | | 23 | | | (31) | | | 111 | |
Net periodic benefit cost | $ | 90 | | | $ | 111 | | | $ | 247 | | | $ | 395 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 134 |
| | $ | 111 |
| | $ | 401 |
| | $ | 325 |
|
Interest cost | 24 |
| | 35 |
| | 71 |
| | 103 |
|
Expected return on plan assets | (39 | ) | | (40 | ) | | (117 | ) | | (117 | ) |
Amortization of unrecognized loss | 63 |
| | 45 |
| | 188 |
| | 132 |
|
Net periodic benefit cost | $ | 182 |
| | $ | 151 |
| | $ | 543 |
| | $ | 443 |
|
During the three and nine months ended September 30, 2017,2022, 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 2017,2022, 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, 20172022 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 was not a material component of our total lease expense for the three and nine months ended September 30, 2022 and 2021. The Company recognized $11.8 million and $33.4 million in the three and nine months ended September 30, 2022 and $8.2 million and $24.3 million in the three and nine months ended September 30, 2021, respectively, in expense related to operating leases in the condensed consolidated statements of operations.
The maturities of lease liabilities at September 30, 2022 are as follows (in thousands):
| | | | | | | | |
2022 (excluding nine months ended September 30, 2022) | | $ | 10,371 | |
2023 | | 39,249 | |
2024 | | 34,345 | |
2025 | | 29,815 | |
2026 | | 26,147 | |
Thereafter | | 63,177 | |
Total undiscounted lease payments | | $ | 203,104 | |
Less: Interest | | 39,720 | |
Present value of lease liabilities | | $ | 163,384 | |
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, lease accounting guidance 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:
| | | | | | | | | | | | | | |
Lease Term and Discount Rate | | September 30, 2022 | | September 30, 2021 |
Weighted-average remaining lease term (years) | | 6.05 | | 5.51 |
Weighted-average discount rate | | 7.16 | % | | 7.62 | % |
Supplemental balance sheet information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Line Item in the Company’s Consolidated Balance Sheet | | September 30, 2022 | | December 31, 2021 |
| | | | | | |
Operating lease right-of-use assets | | Other non-current assets | | $ | 143,754 | | | $ | 124,438 | |
Current portion, operating lease liabilities | | Other current liabilities | | $ | 29,694 | | | $ | 27,242 | |
Operating lease liabilities | | Other non-current liabilities | | $ | 133,690 | | | $ | 110,287 | |
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | |
| | Nine months ended September 30, 2022 | | Nine months ended September 30, 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 29,805 | | | $ | 21,053 | |
Right-of-use assets obtained in exchange for lease obligations: | | | | |
Operating leases | | $ | 39,811 | | | $ | 13,633 | |
Note RP — Related Party Transactions
Management Services Agreement
The LLC entered into the Management Services Agreement ("MSA") with CGM effective May 16, 2006. The MSA provides for, among other things, CGM to perform services for the LLC in exchange for a management fee paid quarterly and equal to 0.5% of the Company's adjusted net assets, as defined in the MSA. During 2022, CGM entered into a waiver of the MSA for the period through June 30, 2023 to receive a 1% annual management fee related to PrimaLoft, rather than the 2% called for under the MSA, which resulted in a lower management fee at September 30, 2022 than would normally have been due. At June 30, 2022 and March 31, 2022, CGM entered into a waiver to exclude cash balances held at the LLC from the calculation of the management fee.
During 2021, CGM entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid during 2021 than would have normally been due. In the first quarter of 2021, the LLC and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee related to the amount of the proceeds deposited with the Trustee that was in excess of the amount payable related to the 2026 Senior Notes at March 31, 2021. Additionally, CGM entered into a waiver of the MSA at December 31, 2021 to exclude the cash balances held at the LLC from the calculation of the management fee.
Integration Services Agreements
PrimaLoft, which was acquired in July 2022, entered into an Integration Services Agreement ("ISA") with CGM whereby PrimaLoft will pay CGM an integration services fee of $4.8 million quarterly over a twelve-month period ended June 30, 2023. Lugano, which was acquired in September 2021, entered into an ISA with CGM whereby Lugano will pay CGM an integration services fee of $2.3 million quarterly over a twelve month period as services are rendered, beginning in the quarter ended December 31, 2021. BOA, which was acquired in October 2020, entered into an ISA with CGM whereby BOA paid CGM an integration service fee of $4.4 million quarterly over a twelve month period as services were rendered, beginning in the quarter ended December 31, 2020. Marucci Sports, which was acquired in April 2020, entered into an ISA with CGM. Marucci paid CGM an integration service fee of $2.0 million quarterly over a twelve month period as services were rendered, beginning in the quarter ended September 30, 2020. 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. Under the ISAs, CGM provides 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 other subsidiaries.
The Company and its businesses have the following significant related party transactions
5.11
Recapitalization - Subsequent Event
In October 2017,August 2021, the Company furthercompleted a recapitalization of 5.11 whereby the LLC entered into an amendment to the intercompany loan agreement with 5.11 (the "5.11 Loan Agreement"). The 5.11 Loan Agreement was amended to provide for additional term loan borrowings of $55.0 million to fund a distribution to shareholders. The LLC owned 97.7% of the 2014outstanding shares of 5.11 on the date of the distribution and received $53.7 million. The remaining amount of the distribution was paid to minority shareholders.
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 $0.3 million and $1.1 million during the three and nine months endedSeptember 30, 2022, respectively, and $0.1 million and $0.9 million during the three and nine months ended September 30, 2021, respectively in inventory from the vendor.
BOA
Repurchase of Noncontrolling Interest - In September 2021, BOA repurchased shares of its issued and outstanding common shares from its largest minority shareholder for a total payment of $48.0 million, which BOA financed by borrowing under their intercompany credit facility with the LLC (the "BOA Credit Facility (the "First Refinancing Amendment"Agreement"). The BOA Credit Agreement was amended to (i) provide for additional term loan borrowings of $38.0 million, and (ii) consent to the repurchase of the shares from the minority shareholder. The transaction was accounted for in effect, refinanceaccordance with ASC 810 - Consolidation, whereby the 2014 Term Loancarrying amount of the noncontrolling interest was adjusted to reflect the change in the ownership interest in BOA that occurred as a result of the share repurchase. The difference between the fair value of the consideration paid of $48.0 million and the 2016 Incremental Term Loan (together,amount by which the “Term Loans”). Pursuantnoncontrolling interest was adjusted of $39.4 million was recognized in equity attributable to the First Refinancing Amendment, outstanding Term Loans at LIBOR Rate bear interest at LIBOR plusLLC.
Related Party Vendor Purchases - A contract manufacturer used by BOA as the primary supplier of molded injection parts is a noncontrolling shareholder of BOA. BOA had approximately $12.7 million and $43.8 million in purchases from this supplier during the three and nine months ended September 30, 2022, respectively and $11.2 million and $32.8 million during the three and nine months ended September 30, 2021, respectively.
Ergobaby
Recapitalization - In February 2022, the Company completed a recapitalization of Ergobaby whereby the LLC entered into an applicable rate of 2.25% and outstanding Term Loans at Base Rate bear interest at Base Rate plus 1.25%. Prioramendment to the amendment,intercompany loan agreement with Ergobaby (the "Ergo Loan Agreement"). The Ergo Loan Agreement was amended to provide for additional loan borrowings of $61.5 million to fund a distribution to shareholders. The LLC owned 81.6% of the outstanding Term Loans bore interest at LIBOR plus 2.75% or Base Rate plus 1.75%. In connection withshares of Ergobaby on the First Refinancing Amendment,date of the Company incurred $1.4 milliondistribution and received $50.2 million. The remaining amount of debt issuance costs associated with fees charged by term loan lenders.the distribution was paid to minority shareholders.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Item 2 contains forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the 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, 20162021 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""LLC"), was also formed on November 18, 2005. The TrustHoldings and the CompanyLLC (collectively, "CODI"the "Company") were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. The TrustLLC is the solea controlling owner of 100% of the Trust Interests,eleven businesses, or operating segments, at September 30, 2022. The segments are as defined in ourfollows: 5.11 Acquisition Corp. ("5.11"), Boa Holdings Inc. ("BOA"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Lugano Holdings, Inc., Inc. ("Lugano Diamonds" or "Lugano"), Marucci Sports, LLC Agreement, of the Company. Pursuant to the("Marucci" or "Marucci Sports"), PrimaLoft Technologies Holdings, Inc. ("PrimaLoft), Velocity Outdoor, Inc. ("Velocity Outdoor" or "Velocity"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), FFI Compass, Inc. ("Altor Solutions" or "Altor" (formerly "Foam Fabricators")), AMT Acquisition Corporation ("Arnold"), and The Sterno Group, LLC Agreement, the Trust owns an identical number of Trust Interests in the Company as exist for the number of outstanding shares of the Trust. Accordingly, our shareholders are treated as beneficial owners of Trust Interests in the Company and, as such, are subject to tax under partnership income tax provisions. The Company is the operating entity with a board of directors whose corporate governance responsibilities are similar to that of a Delaware corporation. The Company’s board of directors oversees the management of the Company and our businesses and the performance of Compass Group Management LLC ("CGM" or our "Manager"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, 20172022 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, 2022 |
Business | | Acquisition Date | | Primary | | Diluted |
Advanced Circuits | | May 16, 2006 | | 71.8% | | 67.6% |
Ergobaby | | September 16, 2010 | | 81.6% | | 72.8% |
Arnold | | March 5, 2012 | | 98.0% | | 85.5% |
Sterno | | October 10, 2014 | | 99.4% | | 90.8% |
5.11 | | August 31, 2016 | | 97.7% | | 88.3% |
Velocity Outdoor | | June 2, 2017 | | 99.4% | | 87.7% |
Altor Solutions | | February 15, 2018 | | 100.0% | | 86.9% |
Marucci Sports | | April 20, 2020 | | 91.0% | | 81.9% |
BOA | | October 16, 2020 | | 91.8% | | 83.4% |
Lugano | | September 3, 2021 | | 59.9% | | 55.4% |
PrimaLoft | | July 12, 2022 | | 90.7% | | 90.7% |
We categorize theour subsidiary 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. We recently announced the launch of our healthcare effort as our third grouping of companies that we will acquire, own and manage. We believe healthcare has multiple attractive, high-growth segments with strong industry tailwinds, is an acyclical vertical that will bring diversification and stability to the current group of companies, and has strong alignment with the Company’s existing subsidiary priorities.
Trust Preferred Share IssuanceThe following is an overview of each of our subsidiary businesses:
On June 28, 2017,Branded Consumer
5.11 - 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, footwear and gear designed to enhance the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares") for gross proceedssafety, accuracy, speed and performance of $100.0 million, or $96.4 million net of underwriters' discounttactical professionals and issuance costs.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.
Acquisition of Crosman
On June 2, 2017, through a wholly owned subsidiary, Crosman Acquisition Corp., we acquired 98.9%BOA - BOA Technology, creator of the outstanding equityrevolutionary, award-winning, patented BOA Fit System, partners with market-leading brands to make the best gear even better. Delivering fit solutions purpose-built for performance, the BOA Fit System is featured in footwear across snow sports, cycling, outdoor, athletic, workwear as well as performance headwear and medical bracing. The system consists of Bullseye Acquisition Corporation,three integral parts: a micro-adjustable dial, high-tensile lightweight laces, and low friction lace guides combined with unique configuration applications, which together create a superior alternative to laces, buckles, hook and loop (Velcro), and other traditional closure and fit systems. Each configuration is the sole owner of Crosman Corp. ("Crosman"). Crosmandesigned and engineered to deliver superior fit and performance, and is backed by The BOA Lifetime Guarantee. BOA is headquartered in Denver, Colorado and has offices in Austria, Greater China, South Korea, and Japan.
Ergobaby - Headquartered in Torrance, California, is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, strollers and related products. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than half of its sales from outside the United States.
Lugano - Lugano is a leading designer, manufacturer and marketer of high-end, one-of-a-kind jewelry sought after by some of the world’s most discerning clientele. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art and philanthropic community. Lugano is headquartered in Newport Beach, California.
Marucci Sports - Founded in 2009 and headquartered in Baton Rouge, Louisiana, Marucci is a leading designer, manufacturer, and marketer of premium wood and metal baseball bats, fielding gloves, batting gloves, bags, grips, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also develops retail and sports training facilities, both as a corporate owned entity as well as licensing these facilities as franchises. Marucci products are available through owned websites, their team sales organization, Big Box Retailers, and third party e-commerce & resellers.
PrimaLoft - PrimaLoft Technologies is a leading provider of branded, high-performance synthetic insulation and materials used primarily in consumer outerwear, and accessories. The portfolio of PrimaLoft synthetic insulations offers products that can both mimic natural down aesthetics and provide the freedom to design garments ranging from stylish puffers to lightweight performance apparel. PrimaLoft insulations also offer superior economics to the brand partner and enable better sustainability characteristics through the use of recycled, low-carbon inputs. PrimaLoft is headquartered in Latham, New York.
Velocity Outdoor - A leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices, hunting apparel and related accessories. Headquarteredaccessories, Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin and CenterPoint and King's 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 and Ravin crossbows, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products. The apparel category offers high-performance, feature rich hunting and casual apparel of uncompromised quality utilizing King’s own proprietary camo patterns.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.
Altor Solutions - Founded in 1957 and headquartered in Scottsdale, Arizona, Altor Solutions 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). Altor operates 16 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products and others.
Arnold - Arnold serves over 425a variety of markets including aerospace and defense, general industrial, motorsport/ transportation, 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 engineers solutions for and produces high performance permanent magnets (PMAG), stators, rotors and full electric motors ("Ramco"), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 customers and leading systems-integrators worldwide with a focus on North America, Europe, and Asia. Arnold has built a preferred rare earth supply chain and has leading rare earth and other permanent magnet production capabilities. Arnold is the largest and, we believe, the most technically advanced U.S. solutions provider and manufacturer of engineered magnetic systems. Arnold is headquartered in Rochester, New York.
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 consumer markets. Sterno offers a broad range of wick and gel chafing systems, butane stoves and accessories, 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. During 2021, Sterno made the strategic decision to incorporate the product lines of Sterno Home into Rimports.
While our subsidiary businesses have different growth opportunities and potential rates of growth, we actively work with the management teams of each of our subsidiary businesses to increase the value of, and cash generated by, each business through various initiatives, including mass merchants, sportingmaking selective capital investments to expand geographic reach, increase capacity or reduce manufacturing costs of our subsidiary businesses; improving and expanding existing sales and marketing programs; and assisting in the acquisition and integration of complementary businesses.
Significant Trends Impacting Our Subsidiary Businesses
Macroeconomic Trends
We continue to experience inflationary cost increases in our materials, labor and transportation costs. We expect that these inflationary cost increases will continue but will be partially mitigated by pricing actions implemented in the prior year, as well as those that we have implemented in 2022. However, there has been, and we expect there could continue to be, a difference between the timing of when these pricing and other actions impact our results of operations and when the impact of cost inflation occurs. We expect changing market conditions and continued inflationary pressures to impact consumer spending, particularly for discretionary items purchased by low and middle income consumers. With price pressures unlikely to abate and expected changes in monetary policies, we expect consumer spending to be negatively impacted during the remainder of 2022 and during 2023. We expect continued uncertainty in our business and the global economy due to inflation, changes in consumer spending patterns, and global supply chain disruptions. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today.
Global Supply Chain Trends
The disruption in the global supply chain due to transportation delays and U.S. port congestion continued into the first half of 2022. During the third quarter of 2022 we saw these disruptions and delays begin to moderate
somewhat.While there has been some improvement we expect to have a negative impact on several of our subsidiary businesses for the remainder of the year. During 2022, several of our companies relied on expensive air freight to import goods retailers, online channelsto meet customer demand. We are also seeing the availability of raw materials, components and distributors serving smaller specialty storesfinished goods impacted by the supply chain challenges which has led to shortages of certain materials and led to pressure on revenue growth. In addition, the closure of certain Asian manufacturing facilities as a result of local government quarantine efforts has impacted our ability to import products timely. We have taken actions to build capacity as well as increase our supply chain related resources. Further, in the U.S., the surge in demand along with COVID-19 related labor shortages and rising hourly labor wages, are creating labor shortages and higher labor costs. We expect these cost trends to continue through 2022.
COVID-19 Update
The continued spread of COVID-19 and new variants of the virus around the world continue to present significant risks to our business. The economic and health conditions in the United States and across most of the globe have continued to change since the beginning of the pandemic and the ultimate impact of COVID-19 on our business is dependent on future developments, including the duration of the pandemic, the emergence of variants of the virus and the related length of its impact on the global economy, which are highly uncertain and difficult to accurately predict. The public health situation, global response measures and corresponding impacts on various markets remain fluid and uncertain. 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. The Company anticipates that COVID-19 will continue to impact the results of operations, including a potential decrease in gross margins, operating income and Adjusted EBITDA at certain of our subsidiary businesses during the remainder of 2022 and into 2023.
Business Outlook
The Company anticipates that the areas of focus for the remainder of 2022, which are generally applicable to each of our businesses, include:
•Pursuing sales growth through a combination of new product development, increasing distribution, new customer acquisitions and international markets. Its diversified product portfolio includesexpansion;
•Raising prices where appropriate on our goods due to rising input costs to preserve operating margins,
•Taking market share, where possible, in each of our niche market leading companies, generally at the widely known Crosman, Benjamin expense of less well capitalized competitors;
•Striving for excellence in supply chain management, manufacturing and CenterPoint brands.technological capabilities;
•Continuing to pursue expense reduction and cost savings in lower margin business lines or in response to lower production volume;
•Continuing to pursue growth through disciplined, strategic acquisitions and rigorous integration processes; and
•Working to drive free cash flow through increased net income and effective working capital management, enabling continued investment in our businesses.
Recent Events
Acquisition of PrimaLoft
On July 12, 2022, the LLC, through its newly formed acquisition subsidiary, Relentless Intermediate, Inc. ("PrimaLoft Buyer"), acquired PrimaLoft Technologies Holdings, Inc. (“PrimaLoft”) pursuant to a Stock Purchase Agreement (the “PrimaLoft Purchase Agreement”), dated June 4, 2022, by and between PrimaLoft Buyer and VP PrimaLoft Holdings, LLC ("PrimaLoft Seller"). The total purchase price, including proceeds from noncontrolling interests and net of transaction costs,shareholders, was approximately $150.4 million. Crosman management invested$530 million, before working capital and other customary adjustments. The Company funded the acquisition through a draw on its revolving credit facility and a draw in full on its new $400 million term loan facility.
PrimaLoft, Inc. is a branded, advanced material technology company based in Latham, New York and is a leader in the transaction alongresearch and innovative development of high-performance material solutions, specializing in insulations and fabrics. PrimaLoft® insulation was originally developed for the U.S. Army as a water-resistant, synthetic alternative to down. Since 1983, a heritage of proven & tested technologies has built trust across the textile industry, with more than 950 global brands using PrimaLoft products in outdoor, lifestyle, home furnishings, work wear, hunting and military applications. With its Relentlessly Responsible™ mission, PrimaLoft strives to balance innovation, performance and sustainability in the Company, representing approximately 1.1%pursuit of a better future.
2022 Credit Facility
On July 12, 2022, we entered into the Third Amended and Restated Credit Agreement to amend and restate the 2021 Credit Facility. The 2022 Credit Facility provides for revolving loans, swing line loans and letters of credit (the "2022 Revolving Line of Credit") up to a maximum aggregate amount of $600 million (the "2022 Revolving Loan Commitment") and a $400 million term loan (the “2022 Term Loan”). The 2022 Term Loan requires quarterly payments ranging from $2.5 million to $7.5 million, commencing September 30, 2022, with a final payment of all remaining principal and interest due on July 12, 2027, which is the 2022 Term Loan’s maturity date. All amounts outstanding under the 2022 Revolving Line of Credit will become due on July 12, 2027, which is the termination date of the 2022 Revolving Loan Commitment. The 2022 Credit Facility also permits the LLC, prior to the applicable maturity date, to increase the 2022 Revolving Loan Commitment and/or obtain additional term loans in an aggregate amount of up to $250 million, subject to certain restrictions and conditions. On the closing date for the 2022 Credit Facility, the 2022 Term Loan was advanced in full and the initial noncontrolling interest.
Divestiture of FOX shares
On March 13, 2017, Fox Factory Holding Corp. ("FOX") closed on a secondary public offering of 5,108,718 shares of FOX common stock held by CODI, which represented CODI's remaining investment in FOX. CODI received $136.1 million in net proceeds as a result of the sale. As a result of this secondary public offering, the Company no longer holds an ownership interest in FOX.
This sale of the portion of our FOX shares in March 2017 qualified as a Sale Eventborrowings outstanding under the Company's LLC Agreement. During2022 Revolving Line of Credit were $115 million. We used the second quarter of 2017, our board of directors declared a distributioninitial proceeds from the 2022 Credit Facility to pay all amounts outstanding under the Holders of the Allocation Interests of $25.8 million2021 Credit Facility, pay fees and expenses incurred in connection with the Sale Event2022 Credit Facility and fund the acquisition of FOX.PrimaLoft.
Advanced Circuits Merger Agreement
On October 13, 2021, the LLC, as the Sellers Representative of the holders of stock and options of Advanced Circuits, a majority owned subsidiary of the LLC, entered into a definitive Agreement and Plan of Merger (the "AC Agreement") with Tempo Automation, Inc. (“AC Buyer”), Aspen Acquisition Sub, Inc. (“AC Merger Sub”) and Advanced Circuits, pursuant to which AC Buyer would acquire all of the issued and outstanding securities of Advanced Circuits, the parent company of the operating entity, Advanced Circuits, Inc., through a merger of AC Merger Sub with and into Advanced Circuits, with Advanced Circuits surviving the merger and becoming a wholly owned subsidiary of AC Buyer (the “AC Merger”). The profit allocation paymentAC Merger was made duringconditioned on, among other things, the quarter ended June 30, 2017.
2017Outlook
Middle market deal flow continuesclosing of a business combination between AC Buyer and a publicly traded special purpose acquisition company (a “SPAC”). In connection with the AC Merger, AC Buyer announced its entry into a definitive merger agreement for a business combination (the “SPAC Transaction”) with a SPAC, ACE Convergence Acquisition Corp. (“ACE”). The AC Agreement also provided that the AC Agreement could be terminated in the event closing of the AC Merger did not occur prior to remain steady,January 27, 2022 (the "End Date"). A description of the AC Agreement was included in part due to continued attractive valuations for sellers. High valuation levels continue to be driventhe Current Report on Form 8-K filed by the availability of debt capital with favorable terms and financial and strategic buyers seeking to deploy available equity capital. We remain focusedCompany on marketingOctober 14, 2021. Advanced Circuits was initially classified as held for sale in the Company’s attractive ownership and management attributes to potential sellers of middle market businesses and intermediaries. In addition, we continue to pursue opportunities for add-on acquisitions by certain of our existing subsidiary companies, which can be particularly attractive from a strategic perspective.
Discontinued Operations
The results of operations for Tridien for the three and nine months ended September 30, 2016 are presented as discontinued operations in our consolidated financial statements as of December 31, 2021.
Due to a
resultdelay in closing the SPAC Transaction, the AC Merger did not close on or before the End Date. Because of the
saledelay in closing the SPAC Transaction, on July 29, 2022, the LLC and Advanced Circuits provided the notice of
Tridien in September 2016. Refer to Note D - "Discontinued Operations",termination of the condensed consolidated financial statements for further discussionAC Agreement to AC Buyer. No termination penalties were incurred by either party in connection with the termination of the operating resultsAC Agreement. The termination of our discontinued businesses.
the AC Agreement occurred in the third quarter of 2022 and, in accordance with applicable accounting guidance, Advanced Circuits was reclassified to continuing operations beginning in the quarter ended September 30, 2022.
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
See “Reconciliation of Non-GAAP Financial Measures” for further discussion of our non-GAAP financial measures 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.related reconciliations.
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, 2022 and September 30, 2021, and components of the results of operations as well as those components presented as a percent of net revenues, for each of our subsidiary businesses on a stand-alone basis.
In the following results of operations, we provide (i) our actual consolidated resultsConsolidated Results of operationsOperations for the three and nine months ended September 30, 20172022 and 2016,2021, which includes the historical results of operations of each of our
subsidiary businesses (operating segments) from the date of acquisition in accordance with generally accepted accounting principles in the United States ("US GAAP), and (ii) comparative historical components of the results of operations for each of our subsidiary businesses on a stand-alone basis for the three and nine months ended September 30, 20172022 and 2016,2021, where all periods presented include relevant proformapro forma adjustments for pre-acquisition periods and explanations where applicable. For the acquisition of Lugano in September 2021 and PrimaLoft in July 2022, the pro forma results of operations for the Lugano and PrimaLoft business segments have been prepared as if we purchased these businesses on January 1, 2021. We believe this is the most meaningful comparison for the operating results of acquired business segments. The following results of operations at each of our subsidiary businesses are not necessarily indicative of the results to be expected for a full year.
Consolidated 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 – Compass Diversified Holdings- Consolidated
The following table sets forth our unaudited results of operations for the three and Compass Group Diversified Holdings LLCnine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net revenues | $ | 597,607 | | | $ | 488,158 | | | $ | 1,669,123 | | | $ | 1,372,266 | |
Cost of revenues | 358,291 | | | 296,027 | | | 996,210 | | | 818,307 | |
Gross profit | 239,316 | | | 192,131 | | | 672,913 | | | 553,959 | |
Selling, general and administrative expense | 148,700 | | | 118,818 | | | 403,428 | | | 337,815 | |
Fees to manager | 16,717 | | | 12,398 | | | 46,304 | | | 34,504 | |
Amortization of intangibles | 25,152 | | | 19,056 | | | 67,191 | | | 56,502 | |
Operating income | 48,747 | | | 41,859 | | | 155,990 | | | 125,138 | |
Interest expense | (22,799) | | | (13,855) | | | (57,737) | | | (42,607) | |
Amortization of debt issuance costs | (1,004) | | | (759) | | | (2,735) | | | (2,167) | |
Loss on debt extinguishment | (534) | | | — | | | (534) | | | (33,305) | |
Other income (expense) | (2,141) | | | 1,031 | | | 606 | | | (1,906) | |
Income from continuing operations before income taxes | 22,269 | | | 28,276 | | | 95,590 | | | 45,153 | |
Provision for income taxes | 21,163 | | | 9,556 | | | 39,201 | | | 24,662 | |
Net income from continuing operations | $ | 1,106 | | | $ | 18,720 | | | $ | 56,389 | | | $ | 20,491 | |
|
| | | | | | | | | | | | | | | |
| 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, 20172022 compared to three months ended September 30, 20162021
Net salesrevenues
On a consolidated basis,Consolidated net salesrevenues for the three months ended September 30, 20172022 increased by approximately $71.7$109.4 million, or 28.4%22.4%, compared to the corresponding period in 2016.2021. Our acquisitionLugano business, which we acquired in September 2021, contributed $40.3 million in incremental net revenue in the third quarter of 5.11 Tactical on August 31, 20162022, and PrimaLoft, which we acquired in July 2022, contributed $44.8 million to the increase in net sales, while our acquisition of Crosman on June 2, 2017 contributed $34.4$10.7 million. During the three months ended September 30, 20172022 compared to 2016,2021, we also saw a notablesignificant increases in net sales increase at Clean Earth5.11 ($4.215.4 million primarily due to two acquisitions in 2016increase), BOA ($10.5 million increase), Marucci ($17.7 million increase), Arnold ($2.5 million increase), and one acquisition in 2017)Altor Solutions ($25.5 million increase), partially offset by a decrease in salesnet revenue at our LibertyVelocity Outdoor ($5.4 million decrease), Ergobaby ($1.8 million decrease), Manitoba Harvest ($2.01.4 million decrease) and Sterno ($2.912.2 million decrease) subsidiaries. . Add-on acquisitions at Marucci (Lizard Skins in October 2021) and Altor (Plymouth Foam in October 2021) contributed to the growth in revenue at these businesses in the third quarter of 2022. Historically, the third and fourth quarters have been seasonably stronger than the first half of the year in earnings for certain of our subsidiary businesses. On a consolidated level, our subsidiary businesses were able to increase revenue in the third quarter of 2022 as compared to the prior year as a result of acquisitions and continued strong performance despite increasing economic uncertainty and inflationary pressure. We expect our fourth quarter 2022 results of operations will be negatively impacted as inflationary pressures continue in the fourth quarter and will reduce
demand and discretionary consumer spending in certain of our branded consumer and niche industrial businesses. Refer to "Results of Operations - Our Businesses"Business Segments" for a more detailed analysis of net salesrevenues by subsidiary business segment.
We do not generate any revenues apart from those generated by the subsidiary businesses we own.own and manage. 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 ofWe make loans from the CompanyLLC to suchour subsidiary businesses, as well asand also hold equity interests in those companies. Cash flows coming to the Trust and the CompanyLLC 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$62.3 million during the three month periodmonths ended September 30, 2017,2022 compared to the corresponding period in 2016. 5.11 Tactical accounted for $17.2 million of the increase, while our Crosman acquisition accounted for $29.02021. Our Lugano business contributed $21.3 million of the increase in cost of revenues for the quarter ended September 30, 2022 and our PrimaLoft business contributed $5.3 million of the increase in cost of revenues for the quarter ended September 30, 2022. We also saw notable increases in cost of revenues at 5.11 ($7.6 million increase), BOA ($4.6 million increase), Marucci ($7.1 million increase), Altor ($21.8 million increase), and Arnold ($0.7 million increase) that correspond to the revenue increases noted above. We also saw a decrease in cost of revenues at Sterno ($9.0 million decrease) that corresponded to the decrease in revenue noted above. Gross profit as a percentage of net revenues was approximately 40.0% in the three months ended September 30, 2022 compared to 39.4% in the three months ended September 30, 2021. The increase in gross profit as a percentage of net sales in the quarter ended September 30, 2022 as compared to the quarter ended September 30, 2021 is primarily attributable to the acquisition of Lugano in September 2021 and the implementation of price increases at most of our subsidiary businesses in response to rising costs. Most of our subsidiary businesses continue to experience increased material, labor and transportation costs. The gross margins at both our branded consumer businesses and our niche industrial businesses have been impacted by global supply chain constraints and inflation that is leading to pressure on revenue and costs. Refer to "Results of Operations - Business Segments" for a more detailed analysis of gross profit by subsidiary business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $29.9 million during the three months ended September 30, 2017. Clean Earth accounted for $2.9 million of the increase due to acquisitions 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). Gross profit as a percentage of sales was approximately 36.3% in the three months ended September 30, 2017 compared to 32.7% in the three months ended September 30, 2016. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of cost of sales by business segment.
Selling, general and administrative expense
On a consolidated basis, selling, general and administrative expense increased approximately $27.2 million during the three month period ended September 30, 2017,2022, compared to the corresponding period in 2016. The2021. A portion of the increase in selling general and administrative expense in the 2017third quarter comparedof 2022 is due to 2016 is principally the resultour Lugano acquisition in September 2021 ($6.6 million of the 5.11 Tacticalincrease) and our PrimaLoft acquisition in August 2016July 2022 ($23.6 million)10.2 million of the increase, of which $5.7 million was attributable to acquisition costs). We also saw increases in selling, general and Crosmanadministrative expenses at Marucci and Altor related to the add-on acquisitions that occurred in June 2017 ($5.1 million, including $0.3 millionthe fourth quarter of 2021, as well as increased investment in transaction costs incurred for acquisition costs during the quarter).marketing and headcount at several of our subsidiary businesses with increased revenues. Refer to "Results of Operations - Our Businesses"Business Segments" for a more detailed analysis of selling, general and administrative expense by subsidiary business segment. At the corporate level, general and administrative expense was $2.8$3.9 million in the third quarter of 20172022 and $2.7$3.7 million in the third quarter of 2016.
2021.
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, 2017,2022, we incurred approximately $8.3$16.7 million in management fees as compared to $8.4$12.4 million in fees in the three months ended September 30, 2016.2021. The increase in Management fees is primarily attributable to our acquisition of PrimaLoft in July 2022. CGM had entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid in the third quarter of 2021 than would have normally been due. CGM also entered into a waiver of the MSA for a period through June 30, 2023 to receive a 1% annual management fee related to PrimaLoft, rather than the 2% called for under the MSA, which resulted in a lower management fee paid in the third quarter of 2022 than would have normally been due.
Amortization expense
Amortization expense for the three months ended September 30, 20172022 increased $5.7$6.1 million as compared to the three months ended September 30, 2016 primarily2021 as a result of the acquisitionsamortization expense associated with the intangibles that were recognized in conjunction with the purchase price allocation for Lugano, which was acquired in September 2021, and PrimaLoft, which was acquired in July 2022.
Interest expense
We recorded interest expense totaling $22.8 million for the three months ended September 30, 2022 compared to $13.9 million for the comparable period in 2021, an increase of 5.11$8.9 million. The increase in August 2016interest expense in the current quarter reflects higher amounts outstanding on our revolving credit facility in the current year, the interest expense associated with our new $400 million 2022 Term Loan that we entered into in July 2022 in connection with our acquisition of PrimaLoft, the interest expense associated with our 2032 Notes entered into in November 2021, and Crosmanthe higher interest rate environment in June 2017.the current quarter versus the comparable quarter in the prior year.
LossOther income (expense)
For the quarter ended September 30, 2022, we recorded $2.1 million in other expense as compared to $1.0 million in other income in the quarter ended September 30, 2021, an increase in expense of $3.2 million. Other income (expense) typically reflects the movement in foreign currency at our subsidiary businesses with international operations, gains or (losses) realized on disposalthe sale of assetsproperty, plant and equipment, and expenses incurred or income earned that are not considered a part of our operations.
Ergobaby recordedIncome taxes
We had an income tax provision of $21.2 million during the three months ended September 30, 2022 compared to an income tax provision of $9.6 million during the same period in 2021, an increase of $11.6 million. Our income before income taxes for the quarter ended September 30, 2022 decreased by approximately $6.0 million as compared to the prior year quarter. On September 1, 2021, the Trust elected to “check-the-box” to have the Trust treated as a $0.6corporation for U.S. federal income tax purposes. In connection with the classification of Advanced Circuits as held-for sale in the fourth quarter of 2021, the Trust recognized a deferred tax asset of $12.1 million loss on disposalat December 31, 2021. As a result of assets duringthe reclassification of Advanced Circuits from held-for-sale to continuing operations in the third quarter of 20162022, the losses incurred at the Trust subsequent to September 1, 2021 related to its decisionthe corporate overhead and management fees resulted in the recording of a valuation allowance against the deferred tax asset and corresponding income tax expense at September 30, 2022.
Nine Months Ended September 30, 2022 compared to dispose of the Orbit Baby product line. Refer to the Ergobaby section under "Results of Operations - Our Businesses" for additional details regarding the loss on disposal.
Ninenine months ended September 30, 2017 compared to nine months ended September 30, 2016
2021
Net salesrevenues
On a consolidated basis,Consolidated net salesrevenues for the nine months ended September 30, 20172022 increased by approximately $261.6$296.9 million, or 39.6%21.6%, compared to the corresponding period in 2016.2021. Our acquisition of 5.11Lugano business, which we acquired in August 2016September 2021, contributed $201.3$126.4 million to the increase in net salesrevenue in the first nine months of 2022, and our acquisition of CrosmanPrimaLoft business, which we acquired in June 2016July 2022, contributed $44.2 million to the increase.$10.7 million. During the nine months ended September 30, 20172022 compared to 2016,the nine months ended September 30, 2021, we also saw notablesignificant increases in net sales increases at Ergobaby5.11 ($2.729.6 million primarily dueincrease), BOA ($46.2 million increase), Marucci ($36.2 million increase), Arnold ($14.4 million increase), and Altor Solutions ($77.0 million increase), partially offset by a decrease in net revenue at Velocity Outdoor ($25.1 million decrease) and Sterno ($17.7 million decrease). Add-on acquisitions at Marucci (Lizard Skins in October 2021), Altor (Plymouth Foam in October 2021) and Arnold (Ramco Motors in March 2021) contributed to the acquisitiongrowth in revenue at these businesses during the first nine months of Baby Tula), Clean Earth ($19.3 million, primarily due2022. During the comparable period in 2021, we saw notable increases in revenue at several of our branded consumer businesses as a result of an increased consumer focus on outdoor related brands during the pandemic. Historically, the third and fourth quarters have been seasonably stronger than the first half of the year in earnings for certain of our subsidiary businesses. On a consolidated level, our subsidiary businesses were able to two acquisitionsincrease revenue in 2016 and one in 2017) and Sterno ($6.4 million, primarily duethe third quarter of 2022 as compared to the acquisitionprior year as a result of Sterno Home Inc. ("Sterno Home", formerly Northern International, Inc.)acquisitions and continued strong performance despite increasing economic uncertainty and inflationary pressure. We expect the fourth quarter of 2022 results of operations will be negatively impacted as inflationary pressures continue in January 2016), offset by decreasesthe fourth quarter and will reduce demand and discretionary consumer spending in sales at Liberty ($8.7 million)certain of our branded consumer and Arnold Magnetics ($3.4 million).niche industrial businesses. 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 subsidiary businesses we own.own and manage. 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 ofWe make loans from the CompanyLLC to suchour subsidiary businesses, as well asand also hold equity interests in those companies. Cash flows coming to the Trust and the CompanyLLC 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$177.9 million during the nine month periodmonths ended September 30, 2017,2022 compared to the corresponding period in 2016. 5.11 accounted for $121.42021. Our Lugano business contributed $64.3 million of the increase in cost of sales, including $21.7revenues for the nine months ended September 30, 2022. We also saw notable increases in expense relatedcost of revenues at 5.11 ($13.2 million increase), Marucci ($23.7 million increase), Altor ($64.7 million increase), and Arnold ($8.3 million increase) that correspond to the amortizationrevenue increases noted above. Gross profit as a percentage of net revenues was approximately 40.3% in the inventory step-up resulting from purchase accountingnine months ended September 30, 2022 compared to 40.4% in the nine months ended September 30, 2021. The gross margins at both our branded consumer businesses and our niche industrial businesses have been impacted by global supply chain constraints and inflation that is leading to pressure on revenue and costs.Our subsidiary businesses have implemented price increases in order to offset these rising costs which have positively impacted gross margins in 2022. Refer to "Results of Operations - Business Segments" for a more detailed analysis of gross profit by business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $65.6 million during the nine months ended September 30, 2017, while our Crosman acquisition accounted for $36.3 million2022, compared to the corresponding period in 2021. A portion of the increase. Clean Earth accounted for $14.7 million of the increase due to acquisitions in the prior and current year, and Sterno accounted for $6.3 million of the increase. These increases were offset by decreases in cost of sales at other operating segments, particularly Liberty ($6.0 million) and Arnold ($5.0 million). Gross profit as a percentage of sales was approximately 34.9% in the nine months ended September 30, 2017 compared2022 is due to 33.8%our Lugano acquisition in September 2021 ($23.7 million of the increase) and our PrimaLoft acquisition in July 2022 ($10.2 million of the increase, of which $5.7 million was attributable to acquisition costs). We also saw increases in selling, general and administrative expenses at Marucci and Altor related to the add-on acquisitions that occurred in the nine months ended September 30, 2016.fourth quarter of 2021, as well as increased investment in marketing and headcount at several of our subsidiary businesses with increased revenues. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of cost of sales by business segment.
Selling, general and administrative expense
On a consolidated basis, selling, general and administrative expense increased approximately $98.4 million during the nine month period ended September 30, 2017, compared to the corresponding period in 2016. The increase in selling, general and administrative expense in 2017 compared to 2016 is principally the result of the 5.11 acquisition in August 2016 ($85.3 million), and Crosman in June 2017 ($7.7 million, including $1.8 million in acquisition related expenses). We also saw an increase in selling general and administrative expense for the nine months ended September 30, 2017 at Clean Earth ($2.9 million due 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. Refer to "Results of Operations - Our Businesses"Business Segments" for a more detailed analysis of selling, general and administrative expense by subsidiary business segment. At the corporate level, general and administrative expense increased from $8.6was $11.0 million in the first nine months ended September 30, 2016 to $9.0of 2022 and $11.7 million in the first nine months ended September 30, 2017.
of 2021. In the prior year, we incurred additional expense from professional fees at the corporate level related to the Trust's election to be treated as a corporation for U.S. federal income tax purposes.
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, 2017,2022, we incurred approximately $24.3$46.3 million in expense for thesemanagement fees as compared to $21.4$34.5 million forin fees in the corresponding period in 2016.nine months ended September 30, 2021. The increase in Management fees is primarily attributable to our acquisitions of Lugano in September 2021 and PrimaLoft in July 2022, as well as several add-on acquisitions in the fourth quarter of 2021, offset by our sale of Liberty in August 2021. CGM entered into a waiver of the MSA for a period through June 30, 2023 to receive a 1% annual management fee related to PrimaLoft, rather than the 2% called for under the MSA, which resulted in a lower management fee paid in the third quarter of 2022 than would have normally been due. CGM also had entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid in the first half of 2021 than would have normally been due. In the first quarter of 2021, the LLC and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fees that occurred is primarily duefee related to the increaseamount of the cash proceeds deposited with the Trustee that was in consolidated net assets resultingexcess of the amount payable related to the 2026 Notes at March 31, 2021. Additionally, CGM had entered into a waiver of the MSA at March 31, 2022 and June 30, 2022 to exclude the cash balances held at the LLC from the acquisitioncalculation of 5.11 in August 2016, and the acquisition of Crosman in June 2017.management fee.
Amortization expense
Amortization expense for the nine months ended September 30, 20172022 increased $15.3$10.7 million as compared to the nine months ended September 30, 20162021 as a result of the amortization expense associated with the intangibles that were recognized in conjunction with the purchase price allocation for Lugano, which was acquired in September 2021, and PrimaLoft, which was acquired in July 2022.
Interest expense
We recorded interest expense totaling $57.7 million for the nine months ended September 30, 2022 compared to $42.6 million for the comparable period in 2021, an increase of $15.1 million. The increase in interest expense in the current year reflects the higher amount outstanding on our senior notes during the current year after we redeemed $600.0 million of 8.000% 2026 Senior Notes and issued $1000.0 million of 5.250% 2029 Senior Notes in March of 2021, and issued $300.0 million of 5.000% 2032 Senior Notes in November 2021 and higher amounts outstanding on our revolving credit facility in the current year, as well as the interest expense associated with our new $400 million 2022 Term Loan that we entered into in July 2022 in connection with our acquisition of PrimaLoft. Current year interest expense also reflects the higher interest rate environment applicable to the amounts outstanding under our credit facility. While the actual timing and extent of the future increases in interest rates remains unknown, higher long-term interest rates are expected to increase interest expense on the debt outstanding under our 2022 Credit Facility.
Other income (expense)
For the nine months ended September 30, 2022, we recorded $0.6 million in other income as compared to $1.9 million in other expense in the nine months ended September 30, 2021, an increase in income of $2.5 million. Other income (expense) typically reflects the movement in foreign currency at our subsidiary businesses with international operations, gains or (losses) realized on the sale of property, plant and equipment, and expenses incurred or income earned that are not considered a part of our operations.
Income taxes
We had an income tax provision of $39.2 million during the nine months ended September 30, 2022 compared to an income tax provision of $24.7 million during the same period in 2021. Our income before income taxes in the nine months ended September 30, 2022 increased $50.4 million as compared to the income before income taxes in the nine months ended September 30, 2021. In the prior year comparable period, we had income from operations before income taxes of $45.2 million, which included a $33.3 million loss on debt extinguishment that we recognized associated with the repayment of our $600 million 2026 Senior Notes. The loss on debt extinguishment was incurred at the Trust, which at the time was taxed as a partnership for income tax purposes and did not impact the income tax provision in the prior year. In the current period, our provision was driven by the acquisitions of Lugano in September 2021, and an increase in earnings at several of our subsidiary businesses during the year, particularly 5.11 in August 2016 and Crosman in June 2017.
Impairment expense
Arnold performedBOA as the tax provision reflects an interim impairment testannual effective tax rate at eachour subsidiaries, the effect of its reporting unitsstate and local taxes and the related allocation of income, and the losses at our parent company, which was previously taxed as a partnership. On September 1, 2021, the Trust elected to “check-the-box” to have the Trust treated as a corporation for U.S. federal income tax purposes. In connection with the classification of Advanced Circuits as held-for sale in the fourth quarter of 2016, which2021, the Trust recognized a deferred tax asset of $12.1 million at December 31, 2021. As a result of the reclassification of Advanced Circuits from held-for-sale to continuing operations in the third quarter of 2022, the losses incurred at the Trust subsequent to September 1, 2021 related to the corporate overhead and management fees resulted in the recording of preliminary impairmenta valuation allowance against the deferred tax asset and corresponding income tax 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.at September 30, 2022 .
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 Orbitbaby product line. Refer to the Ergobaby section under "Results of Operations - Our Businesses" for additional details regarding the loss on disposal.
Results of Operations - Our BusinessesBusiness Segments
The following discussion reflects a comparison of the historical results of operations of each of our businesses for the three and nine month periods ending September 30, 2017 and September 30, 2016 on a stand-alone basis. For the 2017 acquisition of Crosman, the following discussion reflects pro forma results of operations for the three and nine months ended September 30, 2017 and 2016 as if we had acquired Crosman January 1, 2016. For the 2016 acquisition of 5.11, the following discussion reflects pro forma results of operations for the three and nine months ended September 30, 2016 as if we had acquired 5.11 on January 1, 2016. Where appropriate, relevant pro forma adjustments are reflected as part of the historical operating results. We believe this is the most meaningful comparison of the operating results for each of our business segments. The following results of operations at each of our businesses are not necessarily indicative of the results to be expected for a full year.
Branded Consumer Businesses
5.11 Tactical
Overview
5.11 is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
We made loans to, and purchased a controlling interest in, 5.11 for a net purchase price of $408.2 million in August 2016, representing approximately 97.5% of the initial outstanding equity of 5.11 ABR Corp.
Results of Operations
In the following results of operations, we provide (i) the actual consolidated results of operations for 5.11 for the three and nine months ended September 30, 2017, and (ii) comparative results of operations for 5.11 for the three and nine months ended September 30, 2016, as if we had acquired the business on January 1, 2016, including relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net sales | | $ | 126,537 | | | 100.0 | % | | $ | 111,099 | | | 100.0 | % | | $ | 350,608 | | | 100.0 | % | | $ | 321,009 | | | 100.0 | % |
Gross profit | | $ | 67,202 | | | 53.1 | % | | $ | 59,332 | | | 53.4 | % | | $ | 186,487 | | | 53.2 | % | | $ | 170,048 | | | 53.0 | % |
SG&A | | $ | 52,669 | | | 41.6 | % | | $ | 46,788 | | | 42.1 | % | | $ | 148,861 | | | 42.5 | % | | $ | 134,773 | | | 42.0 | % |
Segment operating income | | $ | 12,091 | | | 9.6 | % | | $ | 10,088 | | | 9.1 | % | | $ | 30,301 | | | 8.6 | % | | $ | 27,893 | | | 8.7 | % |
|
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| 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, 20172022 compared to the pro forma three months ended September 30, 20162021
Net sales
Net sales for the three months ended September 30, 20172022 were $72.0$126.5 million as compared to net sales of $74.7$111.1 million for the three months ended September 30, 2016, a decrease2021, an increase of $2.7$15.4 million, or 3.5%13.9%. This decreaseincrease is due primarilyin part to a $3.8 million decrease in international direct-to-agency business. Direct-to-agency sales represent large non-recurring contracts consisting primarily of special-make-up ("SMU") uniform product designed for large law enforcement divisions. Retail and e-commerce sales grew $4.3$6.9 million, or 56%14.5%, driven by growing demandincrease in direct to consumer channels. Retaildirect-to-consumer sales grew largely due to sixteen newgrowth in retail store openings since September 2016 (bringing the total store count, to 24 as of September 30, 2017). 5.11 implemented a new Enterprise Resource Planning (ERP) system andwell 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 resultedan increase 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 ofcomparable sales for the three months ended September 30, 2017 were $37.5 million2022, as compared to $46.8the same period last year. Additionally, the increase in sales was driven by a $4.4 million, for the comparable periodor 10.9%, increase in 2016,domestic wholesale sales, in part a decreaseresult of $9.3 million. backorder fulfillment and strong demand, as well as an increase of $4.3 million, or 20%, in international channel sales due to inventory availability and strong demand, particularly in Europe and Mexico.
Gross profit
Gross profit as a percentage of net sales was 48.0%53.1% in the three months ended September 30, 20172022 as compared to 37.3% in the three months ended September 30, 2016. Cost of sales53.4% for the three months ended September 30, 2016 includes $4.7 million in expense related to a $39.1 million inventory step-up resulting from the acquisition purchase price allocation. 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. The increase in gross2021. Gross profit percentage isfor the three months ended September 30, 2022, was favorably impacted by price increases. The positive impact of the price increase was partially offset by continued increases in inbound ocean and air freight charges during the period due to lower product costs from efficiency in sourcing operations, improved gross margins on new product introductions, and a larger proportionlogistic challenges, which we expect to moderate during the remainder of revenues from the higher margin retail and e-commerce distribution channels as compared to the same period in 2016.year.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 20172022 was $32.4$52.7 million, or 45.0%,41.6% of net sales compared to $26.0$46.8 million, or 34.8%42.1% 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 2016.2021. 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% of net sales for the three months ended September 30, 2016. The selling, general and administrative expense for the three months ended September 30, 2017 includes $0.4 million of acquisition related expenses, $0.4 million of integration services fees payable2022 as compared to CGM, $0.2 million of non-recurring consultant feesthe prior year comparable period was driven by the costs associated with additional retail stores, increased sales and marketing spend to drive digital sales, and increased expenses associated with higher sales.travel and entertainment spend coming out of the COVID-19 pandemic. These increases were partially offset by a decrease in stock-based compensation due to fewer current year grants, the full vesting of previous years option grants and bonus related expenses.
(Loss)Segment operating income from operations
Loss from operationsSegment operating income for the three months ended September 30, 20172022 was $1.4$12.1 million, a decreasean increase of $4.9$2.0 million when compared to segment operating income from operations of $3.5$10.1 million for the same period in 2016,2021, based on the factors described above.
Pro formaNine months ended September 30, 2022 compared to nine months ended September 30, 2017 compared to the pro forma nine months ended September 30, 20162021
Net sales
Net sales for the nine months ended September 30, 20172022 were $85.8$350.6 million as compared to net sales of $82.9$321.0 million for the nine months ended September 30, 2016,2021, an increase of $2.9$29.6 million, or 3.5%9.2%. TheThis increase is due in netpart to direct-to-consumer sales growth of $13.1 million, up 9.6%, from the prior year comparable period. Retail sales grew largely due to store count growth, as well as positive growth in same-store sales for the nine months ended September 30, 2017 is primarily due to growth in the archery products category and an add-on acquisition during the third quarter of 2017.
Cost of sales
Cost of sales for the nine month period ended September 30, 2017 were $67.1 million, an increase of $6.1 million2022, as compared to the comparablesame period last year. Net sales were also positively impacted by a $10.6 million, or 18.3%, increase in 2016. Costinternational sales due to inventory availability to meet strong demand, a $6.4 million, or 5.5%, increase in domestic wholesale sales growth following the fulfillment of backorders and strong demand, and $2.6 million, or 258%, increase in direct-to-agency sales following the completion of a large agency contract.
Gross profit
Gross profit as a percentage of net sales was 53.2% in the nine months ended September 30, 2022 as compared to 53.0% for the nine months ended September 30, 2017 includes $3.2 million2021. Gross profit percentage was favorably impacted by price increases, which was offset by continued increases in expense relatedinbound ocean and air freight charges during the period due to logistic challenges. We expect the inventory step-up resulting fromlogistics challenges to mitigate during the preliminary purchase price allocation. Excluding the effectremainder of the inventory step-up, gross profit as a percentage of sales was 25.5% for the nine months ended September 30, 2017 as compared to 26.4% for the nine months ended September 30, 2016 due to the mix of products sold during the two periods.
year.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 20172022 was $13.7$148.9 million, or 16.0%42.5% of net sales compared to $11.1$134.8 million, or 13.4%,42.0% of net sales for the nine months ended September 30, 2016. Selling,comparable period in 2021. 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 relation2022 as compared to the acquisitionprior year comparable period was driven by the costs associated with additional retail stores,
increased sales and marketing spend to drive digital sales, and increased travel and entertainment spend coming out of Crosmanthe COVID-19 pandemic. These increases were partially offset by a decrease in June 2017 and an add-on acquisition at Crosman completed duringvariable marketplace expenses based on decreased sales in the third quarter of 2017,wholesale channel, as well as $0.4 milliona decrease in integration services fees payable to CGM. Excluding the transaction costsstock-based compensation and integration services fee from the selling, general and administrative expense, there was no material change in expense items.bonus related expenses.
Segment operating income
Income from operations
Income from operationsSegment operating income for the nine months ended September 30, 20172022 was $1.2$30.3 million, a decreasean increase of $5.8$2.4 million when compared to segment operating income from operations of $7.0$27.9 million for the comparablesame period in 2016,2021, based on the factors described above.
Ergobaby
OverviewBOA
Ergobaby, headquartered in Los Angeles, California, is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, and related products. On May 12, 2016, Ergobaby acquired New Baby Tula LLC (“Baby Tula”) for approximately $73.8 million, excluding a potential earn-out payment. Baby Tula designs, markets and distributes baby carriers and accessories. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors. Historically, Ergobaby derives approximately 59% of its sales from outside of the United States. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net sales | | $ | 50,019 | | | 100.0% | | $ | 39,496 | | | 100.0% | | $ | 166,215 | | | 100.0% | | $ | 120,033 | | | 100.0% |
Gross profit | | $ | 29,875 | | | 59.7% | | $ | 23,950 | | | 60.6% | | $ | 101,973 | | | 61.4% | | $ | 74,491 | | | 62.1% |
SG&A | | $ | 12,725 | | | 25.4% | | $ | 12,696 | | | 32.1% | | $ | 39,223 | | | 23.6% | | $ | 36,450 | | | 30.4% |
| | | | | | | | | | | | | | | | |
Segment operating income | | $ | 12,975 | | | 25.9% | | $ | 7,091 | | | 18.0% | | $ | 50,237 | | | 30.2% | | $ | 25,798 | | | 21.5% |
Results of Operations
The table below summarizes the income from operations data for Ergobaby 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 | $ | 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 September 30, 20172022 compared to the three months ended September 30, 20162021
Net sales
Net sales for the three months ended September 30, 20172022 were $27.8$50.0 million a decrease of $1.8 million, or 6.2%,as compared to the same period in 2016. Netnet 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$39.5 million for the three months ended September 30, 2016. During the2021, an increase of $10.5 million, or 26.6%. The increase was reflected across key industries including Snow Sports, Outdoor, Athletic and Workwear. The three months ended September 30, 2017, international salesfactors impacting their growth rates were approximately $17.0 million, representingmarket share gains, increased consumer participation as well as accelerated production ordering by BOA’s customers due to longer lead times resulting from overall global supply chain constraints.
Gross profit
Gross profit as a decreasepercentage 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 domesticnet 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 sales59.7% in the three months ended September 30, 20172022 as compared to 95% in the same period in 2016.
Cost of sales
Cost of sales was approximately $9.0 million60.6% for the three months ended September 30, 2017, as compared to $13.8 million for the three months ended September 30, 2016, a2021. The 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. Grossgross profit as a percentage of net 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.
driven by product mix.
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 as2022 was $12.7 million, or 25.4% of net sales compared to $9.9$12.7 million, or 33.5%32.1% of net sales for the samecomparable period of 2016. While selling,in 2021. Selling, general, and administrative expenses wereexpense was flat this resulted from an increase in a bad debt reservequarter over quarter, with increased employee costs related to a large retail customer that filed for bankruptcy during the third quarter of 2017, which wasincremental headcount and marketing investments offset by lower professional fees.$1.1 million in integration services fees paid to CGM that did not recur in the current quarter.
Loss on disposal of assetsSegment operating income
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 operationsSegment operating income for the three months ended September 30, 2017 increased $1.22022 was $13.0 million, toan increase of $5.9 million when compared to $4.7segment operating income of $7.1 million for the same period of 2016, primarily as a result ofin 2021, based on the loss on disposal of assets and the absence of the inventory step-up at Baby Tula that was recorded in 2016.factors described above.
Nine months ended September 30, 20172022 compared to nine months ended September 30, 2016
2021
Net sales
Net sales for the nine months ended September 30, 20172022 were $77.7$166.2 million an increase of $2.7 million, or 3.6%, compared to the same period in 2016. Net sales from Baby Tula for the nine months ended September 30, 2017 were $16.5 million, compared to $10.6 million in sales in the post-May acquisition period in 2016. During the nine months ended September 30, 2017, international sales were approximately $46.3 million, representing an increase of $5.6 million over the corresponding period in 2016. International sales of baby carriers and accessories increased by approximately $6.8 million and international sales of infant travel systems decreased by approximately $1.2 million during the nine months ended September 30, 2017 as compared to the comparable nine month period in 2016. BabyTula international sales during the nine months ended September 30, 2017 increased $2.8 million from the corresponding period in 2017. Domestic sales were $31.4 million during the nine months ended September 30, 2017, reflecting a decrease of $2.9 million compared to the corresponding period in 2016. The decrease in domestic sales is attributable to a $4.4 million decrease in domestic infant travel systems and accessories sales, a $1.7 million decrease innet 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$120.0 million for the nine months ended September 30, 2017,2021, an increase of $46.2 million, or 38.5%. The increase was reflected across key industries including Snow Sports, Outdoor, Athletic and Workwear. The three factors impacting their growth rates were market share gains, increased consumer participation as well as accelerated production ordering by BOA’s customers due to longer lead times resulting from overall global supply chain constraints.
Gross profit
Gross profit as a percentage of net sales was 61.4% in the nine months ended September 30, 2022 as compared to $29.2 million62.1% for the nine months ended September 30, 2016, a2021. The 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. Grossin gross profit as a percentage of net 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.
driven by product mix.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 increased to approximately $28.42022 was $39.2 million, or 36.5%,23.6% of net sales compared to $27.5$36.5 million, or 36.6%30.4% of net sales for the comparable period in 2021. The increase in selling, general, and administrative expense is due to increased employee costs related to BOA's bonus plan, incremental headcount and marketing investments. Selling general and administrative expense in the nine months ended September 30, 2021 included $3.3 million in integration services fees paid to CGM that did not recur in the current year.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $50.2 million, an increase of $24.4 million when compared to income from operations of $25.8 million for the same period in 2021, based on the factors described above.
Ergobaby
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net sales | | $ | 21,540 | | | 100.0 | % | | $ | 19,816 | | | 100.0 | % | | $ | 68,256 | | | 100.0 | % | | $ | 69,100 | | | 100.0 | % |
Gross profit | | $ | 13,157 | | | 61.1 | % | | $ | 13,121 | | | 66.2 | % | | $ | 42,129 | | | 61.7 | % | | $ | 45,977 | | | 66.5 | % |
SG&A | | $ | 10,576 | | | 49.1 | % | | $ | 10,892 | | | 55.0 | % | | $ | 32,302 | | | 47.3 | % | | $ | 33,869 | | | 49.0 | % |
Segment operating income | | $ | 593 | | | 2.8 | % | | $ | 246 | | | 1.2 | % | | $ | 3,866 | | | 5.7 | % | | $ | 5,964 | | | 8.6 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $21.5 million, an increase of $1.7 million, or 8.7%, compared to the same period in 2021. During the three months ended September 30, 2022, international sales were approximately $14.6 million, representing an increase of $3.0 million over the corresponding period in 2021, primarily as a result of consistent orders to the Asia-Pacific region in 2022 as compared to 2021 when we saw delayed production orders to the region due to COVID-19. Domestic sales were $6.9 million in the third quarter of 2022, reflecting a decrease of $1.3 million compared to the corresponding period in 2021. The decrease in domestic sales was primarily attributable to continued softness in Tula brand sales and a hold on orders to a large domestic retailer.
Gross profit
Gross profit as a percentage of net sales was 61.1% for the three months ended September 30, 2022, as compared to 66.2% for the three months ended September 30, 2021. The decrease in gross profit as a percentage of sales was due to shifts in channel mix, product mix, increased material costs as well as the impact of changing foreign exchange rates in the European Union.
Selling, general and administrative expense
Selling, general and administrative expense decreased $0.3 million quarter over quarter, with expense of $10.6 million, or 49.1% of net sales for the three months ended September 30, 2022 as compared to $10.9 million or 55.0% of net sales for the same period of 2016.2021. The $0.9decrease in selling, general and administrative expense in the three months ended September 30, 2022 as compared to the comparable period in the prior year is due to favorable payroll expense.
Segment operating income
Ergobaby had segment operating income of $0.6 million for the three months ended September 30, 2022, an increase of $0.3 million compared to the same period in 2021, based on the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $68.3 million, a decrease of $0.8 million, or 1.2%, compared to the same period in 2021. During the nine months ended September 30, 2022, international sales were approximately $43.3 million, representing an increase of $0.3 million over the corresponding period in 2021, primarily as a result of the timing of sales to Asia-Pacific distributors and Canada specialty account sales. Domestic sales were $25.0 million in the first nine months of 2022, reflecting a decrease of $1.0 million compared to the corresponding period in 2021. The decrease in domestic sales was primarily attributable to lower Tula e-commerce sales versus the prior year.
Gross profit
Gross profit as a percentage of net sales was 61.7% for the nine months ended September 30, 2022, as compared to 66.5% for the nine months ended September 30, 2021. The decrease in gross profit as a percentage of sales was due to channel mix shifts, increased material costs, increased inbound freight (including air freight) as a result of supply chain shortages, as well as the impact of changing foreign exchange rates in the European Union.
Selling, general and administrative expense
Selling, general and administrative expense decreased $1.6 million year over year, with expense of $32.3 million, or 47.3% of net sales for the nine months ended September 30, 2022 as compared to $33.9 million or 49.0% of net sales for the same period of 2021. The decrease in selling, general and administrative expense in the nine months ended September 30, 20172022 as compared to the comparable period in the prior year is due to favorable payroll expenses.
Segment operating income
Ergobaby had segment operating income of $3.9 million for the ninemonths ended September 30, 2022, a decrease of $2.1 million compared to the same period in 2016 is primarily attributable to increases in variable expenses, such as distribution and fulfillment and commission, due to2021, based on the increases in direct market sales, to increases in employee related costs due to increased staffing levels, due in part tofactors noted above.
Lugano
In the additionfollowing results of Baby Tula in 2016 and to a bad debt reserve related to a large retail customer that filed for bankruptcy in the third quarteroperations, we provide comparative pro forma results 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 SafeLugano for the three and nine months ended September 30, 20172021 as if we had acquired the business on January 1, 2021. The results of operations that follows include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. The operating results for Lugano have been included in the consolidated results of operation from the date of acquisition in September 30, 2016. 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| | | | | | Pro forma | | | | | | | | Pro forma | | |
Net sales | | $ | 51,145 | | | 100.0 | % | | $ | 29,498 | | | 100.0 | % | | $ | 137,229 | | | 100.0 | % | | $ | 81,881 | | | 100.0 | % |
Gross profit | | $ | 24,207 | | | 47.3 | % | | $ | 14,196 | | | 48.1 | % | | $ | 67,286 | | | 49.0 | % | | $ | 40,129 | | | 49.0 | % |
SG&A | | $ | 10,145 | | | 19.8 | % | | $ | 7,113 | | | 24.1 | % | | $ | 27,208 | | | 19.8 | % | | $ | 14,671 | | | 17.9 | % |
Segment operating income | | $ | 12,635 | | | 24.7 | % | | $ | 6,895 | | | 23.4 | % | | $ | 35,885 | | | 26.1 | % | | $ | 24,895 | | | 30.4 | % |
Pro forma results of operations include the following pro form adjustments as if we had acquired Lugano January 1, 2021:
•Management fees that would have been payable to the Manager during each period.
|
| | | | | | | | | | | | | | | |
| 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, 20172022 compared to thePro forma three months ended September 30, 20162021
Net sales
Net sales for the quarter ended September 30, 2017 decreased2022 increased approximately $5.4$21.6 million, or 22.6%73.4%, to $18.4$51.1 million, compared to the corresponding quarter ended September 30, 2016. Non-Dealer sales were approximately $7.9 million2021. Lugano sells high-end jewelry primarily through retail salons in California, Florida, Texas and Colorado, and via pop-up showrooms at multiple equestrian, social and charitable functions each year. 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 is primarily attributable to the bankruptcy filing by a national retailer in the first quarter of 2017. The decreasecurrent year, Lugano has experienced an increase in sales as it has invested in building out its inventory as well as its sales, marketing and event staff, while increasing the Dealer channel can be attributed to lower overall market demand in the third quarternumber of 2017 as compared to the third quarter of 2016.functions it has attended.
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%47.3% and 25.7%48.1% for the quarters ended September 30, 20172022 and September 30, 2016,2021, respectively. The increaseIn the current quarter, Lugano recorded $1.5 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales duringfor the three months ended September 30, 2017 compared2022 was 50.3%. Lugano has an extensive network of suppliers through which they procure high quality diamonds and gemstones, which make up a significant percentage of the cost of sales. The uniqueness of the Lugano jewelry can lead to fluctuations in margins from period to period based on what designs are sold during 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.period.
Selling, general and administrative expense
Selling, general and administrative expense was $3.2$10.1 million for the three months ended September 30, 20172022 as compared to $3.3$7.1 million forin selling, general and administrative expense in the three months ended September 30, 2016.2021. Selling, general and administrative expense represented 17.4%19.8% of net sales in 2017the three months ended September 30, 2022 and 14.0%24.1% of net sales for the same period of 2016.2021. The increase in selling, general and administrative expense is primarily due to increased marketing spend and personnel costs. Lugano has increased its head count in the last year as a percentage of net sales is a result of the decreaseit invests in net sales for the quarter ended September 30, 2017 as comparedadditional professionals to the corresponding third quarter in 2016.support its growth.
Segment operating income
Income from operations
Income from operations decreased $0.4 millionSegment operating income increased during the three months ended September 30, 20172022 to $2.1$12.6 million, as compared to $6.9 million in the corresponding period in 2016.2021. This decreaseincrease was principally based ona result of the factors describednoted above.
Nine months ended September 30, 20172022 compared to Pro forma nine months ended September 30, 2016
2021
Net sales
Net sales for the nine months ended September 30, 2017 decreased2022 increased approximately $8.7$55.3 million, or 11.7%67.6%, to $66.0$137.2 million, compared to the corresponding nine months ended September 30, 2016. Non-Dealer2021. Lugano sells high-end jewelry primarily through retail salons in California, Florida, Texas and Colorado, and via pop-up showrooms at multiple equestrian, social and charitable functions each year. The sales were approximately $29.9 million in the nine months ended September 30, 2017 comparedfirst half of the prior year were still impacted by the effects of the COVID-19 pandemic which limited the number of events attended by Lugano and led to $36.4 million for the nine months ended September 30, 2016, representing a decrease of $6.5 million or 17.9%. Dealerreduced net 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 whenas compared to the same periodcurrent year. In the current year, Lugano has experienced an increase in 2016. sales as it has invested in building out its sales, marketing and event staff and increased the number of functions it has attended.
Gross profit
Gross profit as a percentage of net sales totaled approximately 28.6%49.0% and 28.8%49.0% for the nine months ended September 30, 20172022 and September 30, 2016,2021, respectively. In the current year, Lugano recorded $3.9 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales for the nine months ended September 30, 2022 was 51.8%. Lugano has an extensive network of suppliers through which they procure high quality diamonds and gemstones, which make up a significant percentage of the cost of sales. The uniqueness of the Lugano jewelry can lead to fluctuations in margins from period to period based on what designs are sold during the period.
Selling, general and administrative expense
Selling, general and administrative expense was $27.2 million for the nine months ended September 30, 2022 as compared to $14.7 million in selling, general and administrative expense in the nine months ended September 30, 2021. Selling, general and administrative expense represented 19.8% of net sales in the nine months ended September 30, 2022 and 17.9% of net sales for the same period of 2021. Lugano has increased its head count in
the last year as it invests in additional professionals to support its growth, and has expanded its investment in advertising and marketing spend during the current year.
Segment operating income
Segment operating income increased during the nine months ended September 30, 2022 to $35.9 million, as compared to $24.9 million in the corresponding period in 2021. This increase was a result of the factors noted above.
Marucci Sports
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net sales | | $ | 42,753 | | | 100.0 | % | | $ | 25,040 | | | 100.0 | % | | $ | 122,481 | | | 100.0 | % | | $ | 86,328 | | | 100.0 | % |
Gross profit | | $ | 24,868 | | | 58.2 | % | | $ | 14,226 | | | 56.8 | % | | $ | 60,826 | | | 49.7 | % | | $ | 48,389 | | | 56.1 | % |
SG&A | | $ | 14,102 | | | 33.0 | % | | $ | 8,851 | | | 35.3 | % | | $ | 38,935 | | | 31.8 | % | | $ | 27,789 | | | 32.2 | % |
| | | | | | | | | | | | | | | | |
Segment operating income | | $ | 7,692 | | | 18.0 | % | | $ | 3,580 | | | 14.3 | % | | $ | 14,141 | | | 11.5 | % | | $ | 15,267 | | | 17.7 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $42.8 million, an increase of $17.7 million as compared to net sales of $25.0 million for the three months ended September 30, 2021. The increase in net sales was primarily due to Marucci's successful launch of its CatX bat line in August of 2022. Additionally, the increase is attributable to Marucci's acquisition of Lizard Skins in the fourth quarter of 2021, as well as increased customer demand and market share in many of Marucci's key product lines, including aluminum and wood bats, and batting gloves.
Gross profit
Gross profit for the quarter ended September 30, 2022 increased $10.6 million as compared to the three months ended September 30, 2021. Gross profit as a percentage of net sales for the three months ended September 30, 2022 was 58.2%, as compared to gross profit as a percentage of sales of 56.8% for the three months ended September 30, 2021. The increase in gross profit as a percentage of net sales during the quarter ended September 30, 2022 as compared to the quarter ended September 30, 2021, was primarily due to adjustments to the Lizards Skins inventory purchase price allocation.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2022 was $14.1 million, or 33.0% of net sales compared to $8.9 million, or 35.3% of net sales for the three months ended September 30, 2021. The increase in selling, general and administrative expense for the three months ended September 30, 2022 partially correlates to the increase in net sales, with increases in credit card expenses, royalties, commissions, business development fees, and other variable expenses. Marucci also incurred additional professional fees, personnel costs and marketing expenses in 2022 related to investments supporting growth.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was $7.7 million, an increase of $4.1 million when compared to segment operating income of $3.6 million for the same period in 2021, primarily as a result of the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $122.5 million, an increase of $36.2 million as compared to net sales of $86.3 million for the nine months ended September 30, 2021. The increase in net sales was due to Marucci's acquisition of Lizard Skins in the fourth quarter of 2021, as well as increased customer
demand and market share in many of Marucci's key product lines, including aluminum and wood bats, and batting gloves.
Gross profit
Gross profit for the nine months ended September 30, 2022 increased $12.4 million as compared to the nine months ended September 30, 2021. Gross profit as a percentage of net sales for the nine months ended September 30, 2022 was 49.7%, as compared to gross profit as a percentage of sales of 56.1% for the nine months ended September 30, 2021. The decrease in gross profit as a percentage of net sales during the nine months ended September 30, 20172022 as compared to the nine months ended September 30, 2021, was primarily due to increased freight costs during the first half of 2022, as delays in Marucci's supply chain coupled with demand exceeding the company's forecast led to increased use of air freight to meet increased demand from Marucci's customer base.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2022 was $38.9 million, or 31.8% of net sales compared to $27.8 million, or 32.2% of net sales for the nine months ended September 30, 2021. The increase in selling, general and administrative expense for the nine months ended September 30, 2022 correlates to the increase in net sales, including the Lizards Skins acquisition, with increases in credit card expenses, royalties, commissions, business development fees, and other variable expenses. Marucci has also incurred additional professional fees, personnel costs and marketing expenses in 2022 related to investments supporting growth.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $14.1 million, a decrease of $1.1 million when compared to income from operations of $15.3 million for the same period in 2016 is attributable2021, primarily as a result of the factors noted above and an increase in amortization expense related to higher raw materialthe Lizard Skins intangibles assets.
PrimaLoft
In the following results of operations, we provide comparative pro forma results of operations for PrimaLoft for the three and nine months ended September 30, 2022 and 2021 as if we had acquired the business on January 1, 2021. The results of operations that follows include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. The operating results for PrimaLoft have been included in the consolidated results of operation from the date of acquisition in July 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| | Pro forma | | | | Pro forma | | | | Pro forma | | | | Pro forma | | |
Net sales | | $ | 13,031 | | | 100.0 | % | | $ | 12,906 | | | 100.0 | % | | $ | 65,897 | | | 100.0 | % | | $ | 52,388 | | | 100.0 | % |
Gross profit | | $ | 7,194 | | | 55.2 | % | | $ | 8,016 | | | 62.1 | % | | $ | 39,229 | | | 59.5 | % | | $ | 31,472 | | | 60.1 | % |
SG&A | | $ | 10,780 | | | 82.7 | % | | $ | 3,786 | | | 29.3 | % | | $ | 18,746 | | | 28.4 | % | | $ | 11,302 | | | 21.6 | % |
Segment operating income (loss) | | $ | (7,942) | | | (60.9) | % | | $ | (126) | | | (1.0) | % | | $ | 7,414 | | | 11.3 | % | | $ | 7,101 | | | 13.6 | % |
Pro forma results of operations include the following pro form adjustments as if we had acquired PrimaLoft January 1, 2021:
•Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation of PrimaLoft of $0.7 million and $8.9 million, respectively, for the three and nine months ended September 30, 2022, and $4.1 million and $12.3 million, respectively, for the three and nine months ended September 30, 2021.
•Management fees that would have been payable to the Manager during each period.
Proforma three months ended September 30, 2022 compared to proforma three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $13.0 million, an increase of $0.1 million as compared to net sales of $12.9 million for the three months ended September 30, 2021.
Gross profit
Gross profit for the quarter ended September 30, 2022 decreased $0.8 million as compared to the three months ended September 30, 2021. Gross profit as a percentage of net sales for the three months ended September 30, 2022 was 55.2%, as compared to gross profit as a percentage of sales of 62.1% for the three months ended September 30, 2021. In the current quarter, PrimaLoft recorded $0.6 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales for the three months ended September 30, 2022 was 60.0%. Gross profit as a percentage of sales decreased quarter over quarter primarily due to an increase in input costs offset by gainsahead of price increases.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2022 was $10.8 million, or 82.7% of net sales compared to $3.8 million, or 29.3% of net sales for the three months ended September 30, 2021. Selling, general and administrative expense in manufacturing efficiencies.the current quarter includes $5.8 million of transaction costs related to the Company's acquisition of PrimaLoft, and $1.1 million in integration services fees.
Segment operating income (loss)
Segment operating loss for the three months ended September 30, 2022 was $7.9 million, a decrease of $7.8 million when compared to segment operating loss of $0.1 million for the same period in 2021, primarily as a result of the factors noted above.
Proforma nine months ended September 30, 2022 compared to proforma nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $65.9 million, an increase of $13.5 million as compared to net sales of $52.4 million for the nine months ended September 30, 2021 due to market share gains.
Gross profit
Gross profit for the nine months ended September 30, 2022 increased $7.8 million as compared to the nine months ended September 30, 2021. Gross profit as a percentage of net sales for the nine months ended September 30, 2022 was 59.5%, as compared to gross profit as a percentage of sales of 60.1% for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, PrimaLoft recorded $0.6 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales for the nine months ended September 30, 2022 was 60.5%.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 increased to approximately $11.32022 was $18.7 million, or 17.1%28.4% of net sales compared to $10.5$11.3 million, or 14.0%21.6% 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 bankruptcy2021. Selling, general and administrative expense in the first quarter of 2017.
Income from operations
Income from operations decreased $3.0 million during the nine months ended September 30, 20172022, includes $5.8 million of transaction costs related to $6.9the Company's acquisition of PrimaLoft, and $1.1 million in integration services fees.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $7.4 million, an increase of $0.3 million when compared to $9.9income from operations of $7.1 million duringfor the same period in 2016, principally2021, primarily as a result of the decrease in sales, as describedfactors noted 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 | ) |
Velocity Outdoor
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net sales | | $ | 75,482 | | | 100.0 | % | | $ | 76,901 | | | 100.0 | % | | $ | 180,774 | | | 100.0 | % | | $ | 205,891 | | | 100.0 | % |
Gross profit | | $ | 22,314 | | | 29.6 | % | | $ | 25,436 | | | 33.1 | % | | $ | 50,678 | | | 28.0 | % | | $ | 66,553 | | | 32.3 | % |
SG&A | | $ | 9,569 | | | 12.7 | % | | $ | 10,123 | | | 13.2 | % | | $ | 24,620 | | | 13.6 | % | | $ | 26,290 | | | 12.8 | % |
Segment operating income | | $ | 10,225 | | | 13.5 | % | | $ | 12,905 | | | 16.8 | % | | $ | 18,721 | | | 10.4 | % | | $ | 33,039 | | | 16.0 | % |
Three months ended September 30, 20172022 compared to three months ended September 30, 2016
2021
Net sales
Net sales for the three months ended September 30, 20172022 were approximately $13.9$75.5 million, as compared to $15.9 million for the three months ended September 30, 2016, a decrease of $2.0$1.4 million or 12.4%. During1.8%, compared to the third quarter of 2017, Manitoba Harvest experienced declining ingredients shipments to Asia as well as weak sales of protein powders. This was offset by the return of organic hemp hearts to store shelves after a lack of availabilitysame period in organic based hemp seeds2021. The decrease in 2016, which helped drive growth with key retailers in the United States and Canada. In addition, the company experienced strong growth in their core product line with key online retailers.
Cost of sales
Cost ofnet sales for the three months ended September 30, 2017 was approximately $7.82022 is primarily due to inflationary pressures impacting the demand for Airgun products partially offset by new Archery product releases.
Gross profit
Gross profit for the quarter ended September 30, 2022 decreased $3.1 million as compared to approximately $9.0the quarter ended September 30, 2021. Gross profit as a percentage of net sales decreased to 29.6% for the three months ended September 30, 2022 as compared to 33.1% in the three months ended September 30, 2021 due to increased supply chain costs.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2022 was $9.6 million, or 12.7% of net sales compared to $10.1 million, or 13.2% of net sales for the three months ended September 30, 2021. The decrease in selling, general and administrative expense for the three months ended September 30, 2022 as compared to the prior period is driven by volume related expenses along with continued cost management.We continue to invest in consumer marketing.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was $10.2 million, a decrease of $2.7 million when compared to segment operating income of $12.9 million for the same period in 2016.2021 based on the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $180.8 million, a decrease of $25.1 million or 12.2%, compared to the same period in 2021. The decrease in net sales for the nine months ended September 30, 2022 is primarily due to inflationary pressure impacting demand for Airgun products partially offset by the impact of new Archery product releases.
Gross profit
Gross profit for the nine months ended September 30, 2022 decreased $15.9 million as compared to the nine months ended September 30, 2021. Gross profit as a percentage of net sales decreased to 28.0% for the nine months ended September 30, 2022 as compared to 32.3% in the nine months ended September 30, 2021 due to product mix as Velocity sold more legacy products with lower margins versus new models at higher margins along with increased supply chain costs.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2022 was 44.1%$24.6 million, or 13.6% of net sales compared to $26.3 million, or 12.8% of net sales for the nine months ended September 30, 2021. The increase in selling, general and administrative expense as a percentage of net sales for the nine months
ended September 30, 2022 as compared to the prior period is driven by the decrease in net sales as spending on selling, general and administrative expense was down year-over-year driven by volume related expenses.We continue to invest in consumer marketing.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $18.7 million, a decrease of $14.3 million when compared to segment operating income of $33.0 million for the same period in 2021 based on the factors noted above.
Niche Industrial Businesses
Advanced Circuits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net sales | | $ | 21,788 | | | 100.0 | % | | $ | 23,182 | | | 100.0 | % | | $ | 67,194 | | | 100.0 | % | | $ | 67,209 | | | 100.0 | % |
Gross profit | | $ | 9,758 | | | 44.8 | % | | $ | 10,696 | | | 46.1 | % | | $ | 30,782 | | | 45.8 | % | | $ | 30,413 | | | 45.3 | % |
SG&A | | $ | 4,660 | | | 21.4 | % | | $ | 3,771 | | | 16.3 | % | | $ | 13,091 | | | 19.5 | % | | $ | 11,399 | | | 17.0 | % |
Segment operating income | | $ | 4,973 | | | 22.8 | % | | $ | 6,791 | | | 29.3 | % | | $ | 17,303 | | | 25.8 | % | | $ | 18,610 | | | 27.7 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $21.8 million, a decrease of approximately $1.4 million or 6.0% compared to the three months ended September 30, 2021. The decrease in net sales for the quarter ended September 30, 2017 and 43.5% in2022 as compared to the quarter ended September 30, 2016.2021 was due primarily to decreased sales in the Quick-Turn Production and Subcontract product lines.
Gross profit
Gross profit as a percentage of net sales decreased during the three months ended September 30, 2022 compared to the corresponding period in 2021 (44.8% at September 30, 2022 compared to 46.1% at September 30, 2021) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $4.7 million in the three months ended September 30, 2022 and $3.8 million in the three months ended September 30, 2021. Selling, general and administrative expense represented 21.4% of net sales for the three months ended September 30, 2022 and 16.3% of net sales in the corresponding period in 2021. The selling, general and administrative expense in the current quarter included $0.9 million in transaction costs associated with a potential divestiture of Advanced Circuits that was terminated during the third quarter.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was $5.0 million as compared to $6.8 million the three months ended September 30, 2021, a decrease of $1.8 million based on the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for both the nine months ended September 30, 2022 and the nine months ended September 30, 2021 were $67.2 million.
Gross profit
Gross profit as a percentage of net sales was 45.8% during the nine months ended September 30, 2022 compared to 45.3% in the corresponding period in 2021 primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $13.1 million in the nine months ended September 30, 2022 and $11.4 million in the ninemonths ended September 30, 2021. Selling, general and administrative expense represented 19.5% of net sales for the nine months ended September 30, 2022 and 17.0% of net sales in the corresponding period in 2021. The selling, general and administrative expense in the current quarter included $0.9 million in transaction costs associated with a potential divestiture of Advanced Circuits that was terminated during the third quarter.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $17.3 million as compared to $18.6 million the nine months ended September 30, 2021, a decrease of $1.3 million based on the factors noted above.
Altor Solutions
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net sales | | $ | 69,618 | | | 100.0 | % | | $ | 44,122 | | | 100.0 | % | | $ | 199,590 | | | 100.0 | % | | $ | 122,582 | | | 100.0 | % |
Gross profit | | $ | 15,284 | | | 22.0 | % | | $ | 11,636 | | | 26.4 | % | | $ | 43,246 | | | 21.7 | % | | $ | 30,978 | | | 25.3 | % |
SG&A | | $ | 6,127 | | | 8.8 | % | | $ | 4,016 | | | 9.1 | % | | $ | 17,132 | | | 8.6 | % | | $ | 11,222 | | | 9.2 | % |
Segment operating income | | $ | 6,561 | | | 9.4 | % | | $ | 5,380 | | | 12.2 | % | | $ | 18,303 | | | 9.2 | % | | $ | 13,612 | | | 11.1 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the quarter ended September 30, 2022 were $69.6 million, an increase of $25.5 million, or 57.8%, compared to the quarter ended September 30, 2021. The increase in net sales during the quarter was due to the acquisition of Plymouth Foam in October 2021, organic growth in Altor's appliance and cold chain customer sectors, and contractual and general increases in selling prices during the latter half of 2021 and the first half of 2022. Plymouth Foam sales for the quarter ended September 30, 2022 were $17.6 million.
Gross profit
Gross profit as a percentage of net sales was 22.0% and 26.4% for the three months ended September 30, 2022 and 2021, respectively. The decrease in gross profit as a percentage of net sales in the third quarter of 2017 as comparedended September 30, 2022, was primarily due to the same quarterincreases in the prior year is primarily attributableprice of Altor's primary raw material, expanded polystyrene ("EPS") ahead of the timing of contractual price increases for a majority of customers, and increased operating costs, particularly labor, ahead of the timing of contractual price increases for a majority of its customers. We expect gross profit as a percentage of net sales to higher sales of branded hemp productsimprove in 2017, whichthe near to intermediate term as we have a higher gross margin percentage than bulk ingredient products.contractual price increases planned and we expect raw material input costs to stabilize.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 20172022 was approximately $5.1$6.1 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$4.0 million for the same period in 2016.three months ended September 30, 2021, an increase of $2.1 million. The increase in selling, general and administrative expense as a percentagein the third quarter of sales2022 was due to the acquisition of Plymouth Foam.
Segment operating income
Segment operating income was $6.6 million in the three months ended September 30, 20172022, an increase of $1.2 million as 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 2016,2021, based on the factors describednoted above.
Nine months ended September 30, 20172022 compared to nine months ended September 30, 20162021
Net sales
Net sales for the nine months ended September 30, 20172022 were approximately $42.6$199.6 million, asan increase of $77.0 million, or 62.8%, compared to $44.3 million for the nine months ended September 30, 2016, a decrease2021. The increase in net sales during the nine months ended September 30, 2022 was primarily due to the acquisition of $1.7 million, or 3.8%. Manitoba Harvest experienced declinesPlymouth Foam in bulk hemp seed ingredient sales to international markets. This was partially offset byOctober 2021, organic growth in their Canadian retail, U.S. clubAltor's appliance and online businesses, driven by salescold chain customer sectors, and contractual and general increases in selling prices during the latter half of branded hemp heart products2021 and hemp oil.
Costthe first half of sales
Cost of2022. Plymouth Foam 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. 2022 were $49.6 million.
Gross profit
Gross profit as a percentage of net sales was 45.1%21.7% and 25.3% for the nine months ended September 30, 2022 and 2021, respectively. The decrease in gross profit as a percentage of net sales in the nine months ended September 30, 2017 and 44.9%2022, was primarily due to increases in the nine months ended September 30, 2016. For the first nine monthsprice of the year,Altor's primary raw material, expanded polystyrene ("EPS"), and increased operating costs, particularly labor. We expect gross profit marginsas a percentage of net sales to improve in our branded business expanded duethe near to improving product mixintermediate term as we have contractual price increases planned and lowerwe expect raw material costs. Gross profit margins in our ingredient business declined dueinput costs to a more competitive pricing environment and less fixed cost leverage.
stabilize.
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 to2022 was $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 160 basis points during the three months ended September 30, 2017 compared to the corresponding period in 2016 (45.9% at September 30, 2017 compared to 44.3% at September 30, 2016) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $3.7 million in the three months ended September 30, 2017 and $3.4 million in the three months ended September 30, 2016. Selling, general and administrative expense represented 16.4% of net sales for the three months ended September 30, 2017 compared to 15.8% of net sales in the corresponding period in 2016.
Income from operations
Income from operations for the three months ended September 30, 2017 was approximately $6.2 million compared to $5.8 million in the same period in 2016, an increase of approximately $0.4 million, principally as a result of 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 increased approximately $1.5 million to $66.4 million 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 in Quick-Turn Production PCBs by approximately $1.2 million, Long-Lead Time PCBs by approximately $0.7 million, Subcontract by approximately $0.5 million, and decreased promotions by approximately $0.3 million. This was partially offset by decreases in Assembly by approximately $0.7 million and Quick-Turn Small-Run PCBs by approximately $0.6 million. On a consolidated basis, Quick-Turn Small-Run comprised approximately 20.7% of gross sales and Quick-Turn Production PCBs represented approximately 32.9% of gross sales for the nine months ended September
30, 2017. Quick-Turn Small-Run comprised approximately 21.9% 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$11.2 million for the nine months ended September 30, 2016. Gross profit as a percentage of sales increased 110 basis points during the nine months ended September 30, 2017 compared to the same period in 2016 (45.6% at September 30, 2017 compared to 44.5% at September 30, 2016) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $10.9 million in the nine months ended September 30, 2017 as compared to $10.4 million in the nine months ended September 30, 2016. Selling, general and administrative expense represented 16.4% of net sales for the nine months ended September 30, 2017 compared to 16.0% of net sales in the prior year's corresponding period.
Income from operations
Income from operations for the nine months ended September 30, 2017 was approximately $18.1 million compared to $17.2 million in the same period in 2016,2021, an increase of approximately $0.9 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 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 $26.5 million, a decrease of $0.4 million compared to the same period in 2016. The decrease in net sales is primarily a result of a decrease in reprographic sales in the PMAG reporting unit. International sales were $10.6 million in 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.
Cost of sales
Cost of sales for the three months ended September 30, 2017 were approximately $19.1 million compared to approximately $20.5 million in the same period of 2016. Gross profit as a percentage of sales increased from 23.8% for the quarter ended September 30, 2016 to 27.8% in the quarter ended September 30, 2017 principally due to manufacturing efficiencies and favorable sales mix.
Selling, general and administrative expense
Selling, general and administrative expense in the three month period ended September 30, 2017 was $4.4 million, comparable to approximately $4.5 million for the three months ended September 30, 2016.
Income from operations
Income from operations for the three months ended September 30, 2017 was approximately $2.0 million, an increase of $1.1 million when compared to the same period in 2016, principally as a result of the factors noted above.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Net sales
Net sales for the nine months ended September 30, 2017 were approximately $79.4 million, a decrease of $3.4 million compared to the same period in 2016. The decrease in net sales is primarily a result of decreases in the PMAG ($1.8 million) and Flexmag ($1.5 million) product sectors. PMAG sales represented approximately 73% of net sales for the nine months ended September 30, 2017 and 72% of net sales for the nine months ended September 30, 2016. The decrease in PMAG sales is principally attributable to lower sales of reprographic products. The decrease in Flexmag sales is attributable to lower overall customer demand.
International sales were $31.7 million during the nine months ended September 30, 2017 compared to $33.7 million during the same period in 2016, a decrease of $2.0 million or 5.9%. The decrease in international sales is due to a decrease in sales at PMAG.
Cost of sales
Cost of sales for the nine months ended September 30, 2017 were approximately $58.8 million compared to approximately $63.8 million in the same period of 2016. Gross profit as a percentage of sales increased from 22.9% for the nine months ended September 30, 2016 to 25.9% in the nine months ended September 30, 2017 principally due to a reduction in material costs and lower depreciation expense.
Selling, general and administrative expense
Selling, general and administrative expense in the nine month period ended September 30, 2017 was $13.3 million as compared to approximately $12.1 million for the nine months ended September 30, 2016. The increase in expense is primarily attributable to increased legal and professional fees.
Impairment expense
Arnold performed an interim impairment test at each of its reporting units in the fourth quarter of 2016, which resulted in the recording of preliminary impairment expense of the PMAG reporting unit of $16.0$5.9 million. In the first quarter of 2017, Arnold completed the impairment testing of the PMAG reporting unit and recorded an additional $8.9 million impairment expense based on the results of the Step 2 impairment testing.
(Loss) income from operations
Loss from operations for the nine months ended September 30, 2017 was approximately $4.6 million, a decrease of $8.4 million when compared to the same period in 2016, principally as a result of the impairment expense recognized in the first quarter of 2017, and the factors described above. Excluding the impairment expense, income from operations increased $0.5 million, or 12%, when compared to the same period in 2016.
Clean Earth
Overview
Founded in 1990 and headquartered in Hatboro, Pennsylvania, Clean Earth is a provider of environmental services for a variety of contaminated materials. Clean Earth provides a one-stop shop solution that analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as power, construction, commercial development, oil and gas, medical, infrastructure, industrial and dredging. Historically, the majority of Clean Earth’s revenues have been generated by contaminated soils, which includes environmentally impacted soils, drill cuttings and other materials which are treated at one of its nine permitted soil treatment facilities. Clean Earth also operates four RCRA Part B hazardous waste facilities. The remaining revenue has been generated by dredge material, which consists of sediment removed from the floor of a body of water for navigational purposes and/or environmental remediation of contaminated waterways and is treated at one of its two permitted dredge processing facilities. Approximately 98% of the material processed by Clean Earth is beneficially reused for such purposes as daily landfill cover, industrial and brownfield redevelopment projects.
Results of Operations
The table below summarizes the income from operations data for Clean Earth for the three and nine months ended September 30, 2017 and September 30, 2016.
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
(in thousands) | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Service revenues | $ | 55,676 |
| | $ | 51,515 |
| | $ | 153,370 |
| | $ | 134,035 |
|
Cost of services | 39,787 |
| | 36,863 |
| | 110,639 |
| | 95,967 |
|
Gross profit | 15,889 |
| | 14,652 |
| | 42,731 |
| | 38,068 |
|
Selling, general and administrative expense | 6,782 |
| | 7,352 |
| | 25,205 |
| | 22,263 |
|
Fees to manager | 125 |
| | 125 |
| | 375 |
| | 375 |
|
Amortization of intangibles | 3,390 |
| | 3,582 |
| | 9,554 |
| | 9,570 |
|
Income from operations | $ | 5,592 |
| | $ | 3,593 |
| | $ | 7,597 |
| | $ | 5,860 |
|
Three months ended September 30, 2017 compared to the three months ended September 30, 2016.
Service revenues
Revenues for the three months ended September 30, 2017 were approximately $55.7 million, an increase of $4.2 million, or 8.1%, compared to the same period in 2016. The increase in revenues is primarily due to acquisitions made in the second quarter of 2016 and the first quarter of 2017 as well as an increase in contaminated soil revenue. For the three months ended September 30, 2017, contaminated soil revenue increased 8% as compared to the same period last year, which is principally attributable to recent large project awards. Hazardous waste revenues increased 30% principally as a result of acquisitions. Revenue from dredged material decreased for the three months ended September 30, 2017 as compared to the same period in 2016 due to the timing of projects. Contaminated soils represented approximately 55% of net service revenues for both the three months ended September 30, 2017 and the three months ended September 30, 2016.
Cost of services
Cost of services for the three months ended September 30, 2017 were approximately $39.8 million compared to approximately $36.9 million in the same period of 2016. The increase in costs of services was primarily due to the increased revenue and volume, as well as the mix of services. Gross profit as a percentage of service revenues was flat quarter over quarter, increasing from 28.4% for the three month period ended September 30, 2016 to 28.5% for the same period ended September 30, 2017.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2017 decreased to approximately $6.8 million, or 12.2%, of service revenues, as compared to $7.4 million, or 14.3%, of service revenues for the same period in 2016. The decrease was primarily due to decreased labor costs.
Income from operations
Income from operations for the three months ended September 30, 2017 was approximately $5.6 million as compared to income from operations of $3.6 million for the three months ended September 30, 2016, an increase of $2.0 million, primarily as a result of those factors described above.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Service revenues
Service revenues for the nine months ended September 30, 2017 were approximately $153.4 million, an increase of $19.3 million, or 14.4%, compared to the same period in 2016. The increase in service revenues is principally due to two acquisitions in 2016 and one in 2017, as well as increased contaminated soil revenue, offset in part by lower dredge revenue.
For the nine months ended September 30, 2017, contaminated soil revenue increased 13% as compared to the same period last year principally attributable to increased development activity in the Northeast and an acquisition made in 2016. Hazardous waste revenues increased 32% principally as a result of acquisitions. Revenue from dredged material decreased 44% for the nine months ended September 30, 2017 as compared to the same period in 2016 due to the timing of new bidding activity. Contaminated soils represented approximately 57% of net service revenues for the nine months ended September 30, 2017 compared to 58% for the nine months ended September 30, 2016.
Cost of services
Cost of services for the nine months ended September 30, 2017 were approximately $110.6 million compared to approximately $96.0 million in the same period of 2016. Gross profit as a percentage of service revenues decreased from 28.4% for the nine month period ended September 30, 2016 to 27.9% for the same period ended September 30, 2017. The decrease in gross margin during the nine months ended September 30, 2017 was primarily due to reduced dredged material volume.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 increased to approximately $25.2 million, or 16.4%, of service revenues, as compared to $22.3 million, or 16.6%, of service revenues for the same period in 2016. The $2.9 million increase in selling, general and administrative expense in the nine months ended September 30, 2017 compared2022 was due to 2016 is primarily attributable to acquisitions and increased corporate expenses.the acquisition of Plymouth Foam.
Income from operationsSegment operating income
Income from operations forSegment operating income was $18.3 million in the nine months ended September 30, 2017 was approximately $7.6 million,2022, an increase of $1.7$4.7 million as compared to the nine months ended September 30, 2016, primarily as a result of those2021, based on the factors describednoted above.
Sterno ProductsArnold
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.
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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 | $ | 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 |
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net sales | | $ | 39,377 | | | 100.0 | % | | $ | 36,852 | | | 100.0 | % | | $ | 116,319 | | | 100.0 | % | | $ | 101,893 | | | 100.0 | % |
Gross profit | | $ | 12,742 | | | 32.4 | % | | $ | 10,957 | | | 29.7 | % | | $ | 35,000 | | | 30.1 | % | | $ | 28,892 | | | 28.4 | % |
SG&A | | $ | 6,530 | | | 16.6 | % | | $ | 5,410 | | | 14.7 | % | | $ | 18,352 | | | 15.8 | % | | $ | 15,982 | | | 15.7 | % |
Segment operating income | | $ | 5,462 | | | 13.9 | % | | $ | 4,611 | | | 12.5 | % | | $ | 14,075 | | | 12.1 | % | | $ | 10,104 | | | 9.9 | % |
Three months ended September 30, 20172022 compared to the three months ended September 30, 20162021
Net sales
Net sales for the three months ended September 30, 20172022 were approximately $52.7$39.4 million, a decreasean increase of $2.9$2.5 million or 5.2%, compared to the same period in 2016. 2021. International sales were $13.0 million in the three months ended September 30, 2022 and $10.3 millionin the three months ended September 30, 2021. The increase in net sales variance reflectsis primarily a decreaseresult of increased demand in several markets including industrial and oil and gas.
Gross profit
Gross profit for the three months ended September 30, 2022 was approximately $12.7 million compared to approximately $11.0 million in the same period of 2021. Gross profit as a percentage of net sales atincreased to 32.4% for the candlequarter ended September 30, 2022 from 29.7% in the quarter ended September 30, 2021 principally due to increased volume, favorable product mix and outdoor divisionsimproved operational efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense in the three months ended September 30, 2022 was $6.5 million, an increase in expense of Sterno Home, offsetapproximately $1.1 millioncompared to $5.4 million for the three months ended September 30, 2021. Selling, general and administrative expense was 16.6% of net sales in the three months
ended September 30, 2022 and 14.7% in the three months ended September 30, 2021. The increase in selling general and administrative expense was due primarily to increased staffing related costs and increased travel and commission expenses.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was approximately $5.5 million, an increase of $0.9 million when compared to the same period in 2021, as a result of the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were approximately $116.3 million, an increase of $14.4 million compared to the same period in 2021. International sales were $36.4 million in the nine months ended September 30, 2022 and $31.9 millionin the nine months ended September 30, 2021. The increase in net sales is primarily a result of increased demand in several markets including industrial and transportation, driven in part by the timingacquisition of stocking programsRamco Electric Motors, Inc. in March 2021.
Gross profit
Gross profit for the nine months ended September 30, 2022 was approximately $35.0 million compared to approximately $28.9 million in the same period of key Sterno food service customers.2021. Gross profit as a percentage of net sales increased to 30.1% for the nine months ended September 30, 2022 from 28.4% in the nine months ended September 30, 2021 principally due to increased volume, favorable product mix and improved operational efficiencies.
CostSelling, general and administrative expense
Selling, general and administrative expense in the nine months ended September 30, 2022 was $18.4 million, an increase in expense of approximately $2.4 millioncompared to $16.0 million for the nine months ended September 30, 2021. Selling, general and administrative expense was 15.8% of net sales in the nine months ended September 30, 2022 and 15.7% in the nine months ended September 30, 2021. The increase in selling general and administrative expense was due primarily to increased staffing related costs driven in part by the acquisition of Ramco Electric Motors, Inc. in March 2021, and increased travel and commission expenses.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was approximately $14.1 million, an increase of $4.0 million when compared to the same period in 2021, as a result of the factors noted above.
Sterno
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Net sales | | $ | 88,636 | | | 100.0 | % | | $ | 100,827 | | | 100.0 | % | | $ | 249,745 | | | 100.0 | % | | $ | 267,398 | | | 100.0 | % |
Gross profit | | $ | 14,469 | | | 16.3 | % | | $ | 17,627 | | | 17.5 | % | | $ | 49,066 | | | 19.6 | % | | $ | 53,068 | | | 19.8 | % |
SG&A | | $ | 7,417 | | | 8.4 | % | | $ | 9,017 | | | 8.9 | % | | $ | 22,491 | | | 9.0 | % | | $ | 24,840 | | | 9.3 | % |
Segment operating income | | $ | 2,795 | | | 3.2 | % | | $ | 4,232 | | | 4.2 | % | | $ | 13,783 | | | 5.5 | % | | $ | 15,094 | | | 5.6 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Cost ofNet sales for the three months ended September 30, 20172022 were approximately $38.9$88.6 million, a decrease of $12.2 million, or 12.1%, compared to approximately $39.7 million in the same period in 2021. The net sales variance reflects lower sales at Rimports due to changes in consumer discretionary buying behaviors as a result of 2016. inflationary pressures, partially offset by strong sales at Sterno with increased spending in travel, entertainment, weddings and conventions.
Gross profit
Gross profit as a percentage of net sales decreased from 28.5%17.5% for the three months ended September 30, 20162021 to 26.2%16.3% for the same period ended September 30, 2017. The decrease in gross profit during the three months ended September 30, 20172022. The decrease in gross profit percentage in the third quarter of 2022 as compared to the third quarter of 2021 was primarily reflects an increase in chemicalattributable to material cost pressures and higher inventory provision at Rimports, as well as higher freight costs and reduced absorption of overhead costs at Rimports due to lower margins on certain sales.sales volumes.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2017 and 20162022 was approximately $7.5$7.4 million as compared to $9.0 million for the three months ended September 30, 2021, a decrease of $1.6 million reflecting lower salaries, bonus, commissions, travel, and $8.6 million, respectively. marketing programs in the current quarter. Selling, generalgeneral and administrative expense represented 14.2%8.4% 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, general2022 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 operations8.9% for the three months ended September 30, 20172021.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was approximately $4.4$2.8 million, a decrease of $1.1$1.4 million when compared to the same period in 2016, as a result of thosethree months ended September 30, 2021 based on the factors describednoted above.
Nine months ended September 30, 20172022 compared to nine months ended September 30, 20162021
Net sales
Net sales for the nine months ended September 30, 20172022 were approximately $163.1$249.7 million, an increasea decrease of $6.4$17.7 million, or 4.1%or 6.6%, compared to the same period in 2016. 2021. The increase in net sales is a result of the acquisition of Sterno Homevariance reflects softer sales at Rimports due to change in January 2016,discretionary consumer buying behaviors due to inflation pressures, partially offset by strong sales shortfall at Sterno Home's candle division due to reduced demandwith increased business travel and non-repeating orders. Sterno Home hadconventions.
Gross profit
Gross profit as a percentage of net sales of $9.0 million in the period prior to acquisition in January 2016.
Cost of sales
Cost of salesdecreased from 19.8% for the nine months ended September 30, 2017 were approximately $120.0 million compared2021 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%19.6% for the same period ended September 30, 2017.2022. The decrease in gross margin duringprofit percentage in the nine months ended September 30, 20172022 as compared to the nine months ended September 30, 2021 was primarily reflects an increaseattributable to increases in chemicalraw material costs.
costs and freight, and the continuing impact of absorbing overhead on the reduced sales volume at Rimports.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 and 20162022 was approximately $23.9$22.5 million as compared to $24.8 million for the nine months ended September 30, 2021, a decrease of $2.3 million reflecting lower salaries and $23.6 million, respectively.benefits in the current period. Selling, generalgeneral and administrative expense represented 14.6%9.0% 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 period2022 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 operations9.3% for the nine months ended September 30, 20172021.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was approximately $13.4$13.8 million, a decrease of $0.7$1.3 million when compared to the same period in 2016, as a result of thosenine months ended September 30, 2021 based on the factors describednoted above.
Liquidity and Capital Resources
We generate cash primarily from the operations of our subsidiaries, and we have the ability to borrow under our 2022 Credit Facility to fund our operating, investing and financing activities. In 2021, we filed a prospectus supplement pursuant to which we may, but we have no obligation to, issue and sell up to $500 million of the common shares of the Trust in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions, the trading price of Trust common shares and determinations by us regarding appropriate sources of funding.
Liquidity
Our liquidity requirements primarily relate to our debt service requirements, payments of our common and preferred share distributions, management fees paid to our Manager, working capital needs and purchase commitments at our subsidiaries. As of September 30, 2022, we had $1000.0 million of indebtedness associated with our 5.250% 2029 Notes, $300 million of indebtedness associated with our 5.000% 2032 Notes, $397.5 million outstanding on our 2022 Term Loan, and $113.0 million outstanding on our 2022 Revolving Credit Facility. Only our 2022 Term Loan has required principal payments. Long-term debt liquidity requirements consist of the payment in full of our Notes upon their respective maturity dates, amounts outstanding under our 2022 Revolving Credit Facility upon its maturity date, and principal payments under our 2022 Term Loan. The 2022 Term Loan requires quarterly payments ranging from $2.5 million to $7.5 million, commencing September 30, 2022, with a final payment of all remaining principal and interest due on July 12, 2027, which is the 2022 Term Loan’s maturity date. At September 30, 2022, approximately 30% of our outstanding debt was subject to interest rate changes.
At September 30, 2017,2022, we had approximately $41.5$61.3 million of cash and cash equivalents on hand, an increasea decrease of $1.7$99.5 million as compared to the year ended December 31, 2016. The increase in cash is due primarily to the sale of our remaining shares of our FOX investment in the first quarter of 2017, which resulted in net proceeds of $136.1 million, and the issuance of preferred shares in the second quarter of 2017, offset by our acquisition of Crosman and our common share distributions.2021. 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.
Our availability under our 2022 Revolving Credit Facility at September 30, 2022 was $484.7 million. The change in cash and cash equivalents for the nine months ended September 30, 2022 and 2021 is as follows:
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| | | | | | | | |
| | 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, 2022 | | September 30, 2021 |
Cash (used in) provided by operating activities | | $ | (39,923) | | | $ | 147,148 | |
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For the nine months ended September 30, 2017,2022, cash flows provided byused in operating activities totaled approximately $59.2$39.9 million, which represents a $1.4$187.1 million decrease compared to cash provided by operating activities of $60.6$147.1 million during the nine monthnine-month period ended September 30, 2016 (from both continuing and discontinued operations). This decrease is principally the result of changes in cash used for working capital and non-cash charges in the nine months ended September 30, 2017 as compared to the same period in 2016, primarily as a result of the 5.11 acquisition, which occurred in the third quarter of 2016, and the effect of the cash flows from add-on acquisitions completed in 2016.2021. Cash used in operating activities for working capital for the nine months ended September 30, 20172022 was $24.3$223.2 million, as compared to cash used in operating activities for working capital of $5.0$14.7 million for the nine months ended September 30, 2016.2021. We typically have a higher usage of cash for working capital in the first half of the year as most of our subsidiaries will build up inventories after the fourth quarter. In the fourth quarter of 2021 and continuing into 2022, several of our subsidiary businesses increased inventory levels to combat supply chain issues given longer lead times. The increase was primarily due toin cash used in operating activities for inventory by our branded consumer businesses duringworking capital in 2022 also reflects the acquisition of Lugano in the third quarter.quarter of the prior year. Further, Lugano has used significant cash to build inventory to support its sales growth strategy.
Investing Activities:
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| | Nine months ended |
(in thousands) | | September 30, 2022 | | September 30, 2021 |
Cash used in investing activities | | $ | (598,951) | | | $ | (202,429) | |
| | | | |
Cash flows used in investing activities for the nine months ended September 30, 20172022 totaled approximately $63.0$599.0 million, compared to cash used in investing activities of $417.3$202.4 million in the same period of 2016. In2021. During the current year,third quarter of 2022, we received approximately $136.1 million related to the salecompleted our acquisition of PrimaLoft and our remaining investment in FOX, offset byVelocity business had a small add-on acquisition. The total amount of cash used for acquisitions in 2022 totaled $564.9 million. In the prior year, our Crosmaninvesting activities reflect the acquisition of Lugano in September 2021 and an add-on acquisitionsacquisition at our Clean Earth, Crosman and Sterno businesses ($164.7 millionArnold subsidiary in total) and capital expenditures ($31.0 million).March 2021. The total amount of cash used for acquisitions in 2021 totaled $302.1 million. Capital expenditures inspend increased $11.7 million during the nine months ended September 30, 2017 increased approximately $15.4 million2022 as compared to the prior year, duenine months ended
September 30, 2021, with $39.7 million in capital expenditures in 2022 and $28.0 million in capital expenditures in 2021. The increase in capital expenditures is primarily to expendituressupport the retail store growth at ourboth 5.11 business.and Lugano. We expect capital expenditures for the full year of 20172022 to be approximately $42approximately $50 million to $47$60 million. The 2016 investing activities reflect the acquisition of 5.11 in August 2016 ($395.4 million) and add-on acquisitions by Sterno in January 2016 ($35.6 million), Ergobaby in May 2016 ($65.0 million) and add-on acquisitions at Clean Earth during the first and second quarter of 2016 ($33.6 million), offset by proceeds from a partial divestiture of our FOX shares of $47.7 million.
Financing Activities:
| | | | | | | | | | | | | | |
| | Nine months ended |
(in thousands) | | September 30, 2022 | | September 30, 2021 |
Cash provided by financing activities | | $ | 542,128 | | | $ | 54,872 | |
| | | | |
Cash flows provided by financing activities totaled approximately $7.9$542.1 million during the nine months ended September 30, 20172022 compared to cash flows provided by financing activities of $300.4$54.9 million during the nine months ended September 30, 2016. Financing activities reflect2021. During the paymentcurrent year, we entered into our 2022 Credit Facility which provides for a $400 million term loan. The net amount of cash provided by debt proceeds under our 2022 Credit Facility in 2022, including the 2022 Term Loan and draws on our revolving credit facility, was $510.5 million, most of which was used to fund our acquisition of PrimaLoft in July 2022. During the first quarter of 2021, we completed an offering of $1,000.0 million of our quarterly distribution ($64.72029 Senior Notes, and used the proceeds to pay down our 2018 Revolving Credit Facility and pay off the existing 2026 Senior Notes. In September 2021, we filed a prospectus supplement and entered into a Sales Agreement for an At The Market program pursuant to which we may sell common shares of the Trust. We received $83.9 million in 2017 and $58.6 million in 2016), activity on our credit facility and the payment of a profit allocation related tonet cash proceeds from the sale of FOXTrust common shares ($39.2 millionunder this program in 2017 and $16.8 million in 2016). In the nine months ended September 30, 2017, activity on our credit facility totaled $16.82022 and $18.5 million of cash borrowings, while the activity forin the nine months ended September 30, 2016 reflected net borrowings2021. Financing activities in both periods reflect the payment of $412.1
million, which was usedour common and preferred share distributions. Additionally, financing activities in both periods reflect cash received from noncontrolling shareholders related to fund the acquisitionsour acquisition 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, resultingPrimaLoft in 2022 ($35.3 million in cash proceeds netprovided by noncontrolling shareholders) and Lugano in 2021 ($68.0 million in cash proceeds provided by noncontrolling shareholders). During the nine months ended September 30, 2021, we made a distribution to the Allocation Member of transaction costs,$17.3 million related to the five-year holding event of $96.4 million.our Liberty, Ergobaby and Advanced Circuits businesses.
Intercompany Debt
A component of our acquisition financing strategy that we utilize in acquiring the subsidiary 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 manageour subsidiaries 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 subsidiary businesses has a scheduled maturity and each subsidiary 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 businessessubsidiaries have paid down their respective intercompany debt balances through the cash flow generated by these businessessubsidiaries and we have recapitalized, and expect to continue to recapitalize, these businessessubsidiaries 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 revolvingapplicable credit facility, and serves the purpose of optimizing the capital structure at our subsidiaries and providing the noncontrolling shareholders with a distribution on their ownership interest in a cash flow positive business.
In February 2022, we completed a recapitalization at Ergobaby whereby the LLC entered into an amendment to the intercompany loan agreement with Ergobaby (the "Ergobaby Loan Agreement"). The Ergobaby Loan Agreement was amended to provide for additional term loan borrowings of $61.5 million to fund a distribution to shareholders. The LLC owned 81.6% of the outstanding shares of Ergobaby on the date of the distribution and received $50.2 million. The remaining amount of the distribution was paid to minority shareholders.
As a resultIn the first quarter of significant2022, we amended the 5.11 and Lugano intercompany credit agreements. The 5.11 amendment increased the capital expenditure allowable under the credit agreement to account for additional growth capital expenditure opportunities primarily related to retail expansion, and amended the financial covenants to reflect the increased allowable expenditure. The Lugano amendment increased the amount available under the revolving credit facility to permit additional investment in operational improvements to enhance its competitive position, including planned capital expendituresto reposition Arnold for future growth, we have granted Arnold a waiver for certaininventory, and amended the financial covenants to reflect the increase in the revolving credit facility. We amended the Lugano intercompany credit agreement again in the second quarter of 2022 to increase the amount in available under the revolving credit facility to permit additional investment in inventory, and amended the financial covenants to reflect the increase in the revolving credit facility. We amended the Velocity intercompany credit agreement in the third quarter of 2022 to increase the amount of the
Velocity term loan to allow for the financing of an add-on acquisition. All of our subsidiaries were in compliance with the financial covenants included 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.
2022.
As of September 30, 2017,2022, we had the following outstanding loans due from each of our subsidiary businesses:
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| | | | |
(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 |
|
| | | | | | | | |
(in thousands) | | |
5.11 | | $ | 179,447 | |
BOA | | 78,945 | |
Ergobaby | | 87,627 | |
Lugano | | 211,811 | |
Marucci | | 101,549 | |
PrimaLoft | | 165,725 | |
Velocity Outdoor | | 139,032 | |
Advanced Circuits | | 72,631 | |
Altor | | 124,587 | |
Arnold | | 68,452 | |
Sterno | | 198,258 | |
Total intercompany debt | | $ | 1,428,064 | |
Corporate and eliminations | | (1,428,064) | |
Total | | $ | — | |
Our primary source of cash is from the receipt of interest and principal on the outstanding loans to our businesses.subsidiaries. Accordingly, we are dependent upon the earnings of and cash flow from these businesses, which are available for (i) operating expenses; (ii) payment of principal and interest under our 2014 Credit Facility;applicable credit 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.
20142022 Credit Facility
On June 6, 2014,July 12, 2022, we entered into a new credit facility, the 2014Third Amended and Restated Credit Agreement (the "2022 Credit Facility") to amend and restate the 2021 Credit Facility. The 2022 Credit Facility which replaced our then existing 2011 Credit Facility entered into in October 2011. On August 31, 2016, we entered into an Incremental Facility Amendment to the 2014 Credit Agreement. The Incremental Facility Amendment provided an increase to the 2014 Revolving 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 up to a maximum aggregate amount of $550$600 million (the "2022 Revolving Credit Facility") and maturesalso permits the LLC, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain term loans in June 2019, (ii)an aggregate amount of up to $250 million, subject to certain restrictions and conditions. All amounts outstanding under the 2022 Revolving Credit Facility will become due on July 12, 2027, which is the maturity date of loans advanced under the 2022 Revolving Credit Facility. The 2022 Credit Facility also provides for a $325$400 million term loan and (iii) a $250 million incremental term loan. Our 2014(the “2022 Term Loan and 2016 IncrementalLoan”). The 2022 Term Loan requires quarterly payments ranging from $2.5 million to $7.5 million, commencing September 30, 2022, with a final payment of all remaining principal and interest due on July 12, 2027, which is 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 20142022 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%.
Loan’s maturity date.
We had $523.2$484.7 million in net availability under the 20142022 Revolving Credit Facility at September 30, 2017.2022. The outstanding borrowings under the 20142022 Revolving Credit Facility includes $1.3include $2.3 million at September 30, 2017 of outstanding letters of credit.credit at September 30, 2022.
2021 Credit Facility
On March 23, 2021, we entered into a Second Amended and Restated Credit Agreement to amend and restate the 2018 Credit Facility. The 2021 Credit Facility provided for revolving loans, swing line loans and letters of credit up to a maximum aggregate amount of $600 million and also permits the LLC, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain term loans in an aggregate amount of up to $250 million, subject to certain restrictions and conditions. The Company repaid the outstanding amounts under the 2021 credit facility in the third quarter of 2022 in connection with entering into the 2022 Credit Facility.
Senior Notes
2032 Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% Senior Notes due 2032 (the "2032 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 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the LLC and U.S. Bank National Association, as trustee. The 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is payable in cash on July 15th and January 15th of each year. The 2032 Notes are general unsecured obligations of the LLC and are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes were used to repay debt outstanding under the 2021 Credit Facility.
2029 Notes
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Senior Notes due 2029 (the “2029 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 2029 Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes Indenture”), between the LLC and U.S. Bank National Association, as trustee. The 2029 Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on April 15th and October 15th of each year. The 2029 Notes are general unsecured obligations of the LLC and are not guaranteed by our subsidiaries.
The following table reflects required and actual financial ratios as of September 30, 20172022 included as part of the affirmative covenants in our 20142022 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 | | 3.12:3.45:1.0 |
Total Debt to EBITDAConsolidated Senior Secured Leverage Ratio | | lessLess than or equal to 3.50:1.0 | | 2.76:1.05:1.0 |
Consolidated Total Leverage Ratio | | Less than or equal to 5.00:1.0 | | 3.93:1.0 |
We intendhave the ability to use the availabilityexercise an option under our 2014 Credit Facility and cash on hand to pursue acquisitions of additional businesses to the extent permitted under our 20142022 Credit Facility to fund distributions andincrease our Consolidated Total Leverage Ratio to provide for other working capital needs.
5.75:1.0 within 45 days subsequent to September 30, 2022.
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, |
| 2022 | | 2021 |
Interest on credit facilities | $ | 5,434 | | | $ | 1,920 | |
Interest on Senior Notes | 50,625 | | | 39,417 | |
Unused fee on Revolving Credit Facility | 1,504 | | | 1,207 | |
Amortization of bond premium | — | | | (83) | |
Other interest expense | 214 | | | 158 | |
Interest income | (40) | | | (12) | |
Interest expense, net | $ | 57,737 | | | $ | 42,607 | |
|
| | | | | | | |
| 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 anThe following table provides the effective interest rate swap (the "New Swap") with a notional amount of $220 million effective April 1, 2016 through June 6, 2021. The agreement requires us to pay interest on the notional amountCompany’s outstanding debt at the rate
of 2.97% in exchange for the three-month LIBOR rate. At September 30, 2017, the New Swap had a fair value loss of $8.8 million, reflecting the present value of future payments2022 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, 2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Effective Interest Rate | | Amount | | Effective Interest Rate | | Amount |
2029 Senior Notes | 5.25% | | $ | 1,000,000 | | | 4.89% | | $ | 1,000,000 | |
2032 Senior Notes | 5.00% | | 300,000 | | | 5.29% | | 300,000 | |
2022 Term Loan | 4.56% | | 397,500 | | | N/a | | — | |
2022 Revolving Credit Facility | 4.68% | | 113,000 | | | N/a | | — | |
Unamortized debt issuance costs | | | (16,135) | | | | | (15,174) | |
Total debt outstanding | | | $ | 1,794,365 | | | | | $ | 1,284,826 | |
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 meantintended to be a substitute forreplace the presentation of financial results in accordance with U.S. GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The presentation of these non-GAAP financial measures supplements other metrics we use to internally evaluate our subsidiary businesses and facilitate the comparison of past and present operations.
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").
Adjusted Earnings.
Reconciliation of Net income (Loss)(loss) from continuing operations to EBITDA, and Adjusted EBITDA and Net income (loss) to Adjusted Earnings
EBITDA –EBITDA – EBITDA is calculated as net income (loss) from continuing operations before interest expense, income tax expense (benefit), loss on debt extinguishment, 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) managementintegration service fees, which reflect fees due quarterly to our Manager in connection with our Management Services Agreement ("MSA’), as well as Integration Services Fees paid by newly acquired companies;companies to the Manager for integration services performed during the first year of ownership; and (iv) impairment charges,items of other income or expense that are material to a subsidiary and non-recurring in nature.
Adjusted Earnings - Adjusted earnings is calculated as net income (loss) adjusted to include the cost of the distributions to preferred shareholders, and adjusted to exclude the impact of certain costs, expenses, gains and losses and other specified items the exclusion of which reflect write downsmanagement believes provides insight regarding our ongoing operating performance. Depending on the period presented, these adjusted measures exclude the impact of certain of the following items: gains (losses) and income (loss) from discontinued operations, income (loss) from noncontrolling interest, amortization expense, subsidiary stock compensation expense, acquisition-related expenses and items of other income or expense that may be material to goodwill or other intangible assets; (v) gains or losses recordeda subsidiary and non-recurring 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.nature.
We believe that EBITDA, Adjusted EBITDA and Adjusted EBITDAEarnings provide useful information to investors and reflect important financial measures as they excludethat are used by management in the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near term operations. When compared to income (loss) from continuing operations these financial measures are limited in that they do not reflect the periodic costs of certain capital assets used in generating revenuesmonthly analysis of our businesses or the non-cash charges associated with impairments. Thisoperating results and in preparation of our annual budgets. We believe that investors’ understanding of our performance is enhanced by disclosing these performance measures as 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 subsidiary 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.Adjusted EBITDA and Adjusted Earnings provide useful information to investors and reflects 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) and net income (loss) from continuing operations, Adjusted Earnings and Adjusted EBITDA, respectively, are each limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our subsidiary businesses or the non-cash charges associated with impairments, as well as certain cash charges. The presentation of Adjusted Earnings provides insight into our operating results and provides a measure for evaluating earnings from continuing operations available to common shareholders. EBITDA, Adjusted EBITDA and Adjusted Earnings 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) from continuing operations, which we consider to be the most comparable GAAP financial measure (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA |
Nine months ended September 30, 2022 |
| Corporate | | 5.11 | | BOA | | Ergobaby | | Lugano | | PrimaLoft | | Marucci Sports | | Velocity Outdoor | | ACI | | Altor | | Arnold | | Sterno | | Consolidated |
Net income (loss) from continuing operations | $ | (51,431) | | | $ | 15,540 | | | 37,122 | | | $ | (634) | | | $ | 21,871 | | | $ | (8,492) | | | $ | 8,374 | | | $ | 7,826 | | | $ | 9,510 | | | $ | 7,149 | | | $ | 7,217 | | | $ | 2,337 | | | $ | 56,389 | |
Adjusted for: | | | | | | | | | | | | | | | | | | | | | | | | | |
Provision for income taxes | 12,119 | | | 4,999 | | | 6,819 | | | 432 | | | 5,863 | | | (3,570) | | | 2,821 | | | 2,372 | | | 2,600 | | | 2,907 | | | 2,768 | | | (929) | | | 39,201 | |
Interest expense, net | 57,559 | | | 12 | | | (19) | | | 2 | | | 12 | | | (4) | | | 13 | | | 142 | | | — | | | — | | | 20 | | | — | | | 57,737 | |
Intercompany interest | (71,727) | | | 9,501 | | | 5,634 | | | 4,000 | | | 7,841 | | | 3,251 | | | 4,649 | | | 6,987 | | | 4,851 | | | 7,844 | | | 3,947 | | | 13,222 | | | — | |
Loss on debt extinguishment | 534 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 534 | |
Depreciation and amortization | 862 | | | 16,804 | | | 16,345 | | | 6,061 | | | 8,385 | | | 4,194 | | | 9,558 | | | 9,981 | | | 1,634 | | | 12,254 | | | 6,065 | | | 15,272 | | | 107,415 | |
EBITDA | (52,084) | | | 46,856 | | | 65,901 | | | 9,861 | | | 43,972 | | | (4,621) | | | 25,415 | | | 27,308 | | | 18,595 | | | 30,154 | | | 20,017 | | | 29,902 | | | 261,276 | |
Other (income) expense | (73) | | | 93 | | | 498 | | | 4 | | | 2 | | | 260 | | | (1,829) | | | 1,154 | | | 251 | | | 219 | | | — | | | (1,185) | | | (606) | |
Noncontrolling shareholder compensation | — | | | 1,210 | | | 1,889 | | | 1,154 | | | 800 | | | — | | | 1,089 | | | 742 | | | 372 | | | 910 | | | 38 | | | 647 | | | 8,851 | |
Acquisition expenses | — | | | — | | | — | | | — | | | — | | | 5,680 | | | — | | | 222 | | | — | | | 216 | | | — | | | — | | | 6,118 | |
Integration services fee | — | | | — | | | — | | | — | | | 1,688 | | | 1,063 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,751 | |
Other | — | | | — | | | — | | | 250 | | | — | | | — | | | 1,802 | | | — | | | 853 | | | — | | | — | | | 1,211 | | | 4,116 | |
Adjusted EBITDA | $ | (52,157) | | | $ | 48,159 | | | $ | 68,288 | | | $ | 11,269 | | | $ | 46,462 | | | $ | 2,382 | | | $ | 26,477 | | | $ | 29,426 | | | $ | 20,071 | | | $ | 31,499 | | | $ | 20,055 | | | $ | 30,575 | | | $ | 282,506 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA |
Nine months ended September 30, 2021 |
| Corporate | | 5.11 | | BOA | | Ergobaby | | Lugano | | Marucci Sports | | Velocity Outdoor | | ACI | | Altor | | Arnold | | Sterno | | Consolidated |
Net income (loss) from continuing operations | $ | (64,717) | | | $ | 14,318 | | | $ | 16,908 | | | $ | 3,071 | | | $ | 681 | | | $ | 9,485 | | | $ | 19,157 | | | $ | 10,366 | | | $ | 5,892 | | | $ | 3,839 | | | $ | 1,491 | | | $ | 20,491 | |
Adjusted for: | | | | | | | | | | | | | | | | | | | | | | | |
Provision (benefit) for income taxes | — | | | 4,857 | | | 2,165 | | | 1,357 | | | 304 | | | 2,920 | | | 5,381 | | | 2,547 | | | 2,867 | | | 2,062 | | | 202 | | | 24,662 | |
Interest expense, net | 42,464 | | | 8 | | | — | | | — | | | — | | | 5 | | | 125 | | | — | | | — | | | 5 | | | — | | | 42,607 | |
Intercompany interest | (53,234) | | | 8,743 | | | 6,320 | | | 1,514 | | | 548 | | | 1,890 | | | 5,586 | | | 5,484 | | | 5,075 | | | 4,128 | | | 13,946 | | | — | |
Loss on debt extinguishment | 33,305 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 33,305 | |
Depreciation and amortization | 642 | | | 16,762 | | | 15,033 | | | 6,377 | | | 70 | | | 6,377 | | | 9,489 | | | 1,658 | | | 9,022 | | | 5,822 | | | 16,313 | | | 87,565 | |
EBITDA | (41,540) | | | 44,688 | | | 40,426 | | | 12,319 | | | 1,603 | | | 20,677 | | | 39,738 | | | 20,055 | | | 22,856 | | | 15,856 | | | 31,952 | | | 208,630 | |
Other (income) expense | (286) | | | (302) | | | 190 | | | — | | | 22 | | | 881 | | | 2,611 | | | 123 | | | (399) | | | (51) | | | (883) | | | 1,906 | |
Noncontrolling shareholder compensation | — | | | 1,926 | | | 1,655 | | | 1,241 | | | — | | | 826 | | | 777 | | | 372 | | | 770 | | | 16 | | | 913 | | | 8,496 | |
Acquisition expenses | 39 | | | — | | | — | | | — | | | 1,827 | | | — | | | — | | | — | | | — | | | 310 | | | — | | | 2,176 | |
Integration services fee | — | | | — | | | 3,300 | | | — | | | — | | | 1,000 | | | — | | | — | | | — | | | — | | | — | | | 4,300 | |
Other | 1,085 | | | 273 | | | — | | | — | | | — | | | | | (2,300) | | | — | | | — | | | — | | | 333 | | | (609) | |
Adjusted EBITDA (1) | $ | (40,702) | | | $ | 46,585 | | | $ | 45,571 | | | $ | 13,560 | | | $ | 3,452 | | | $ | 23,384 | | | $ | 40,826 | | | $ | 20,550 | | | $ | 23,227 | | | $ | 16,131 | | | $ | 32,315 | | | $ | 224,899 | |
(1) As a result of the sale of Liberty Safe in August 2021, Adjusted EBITDA for the nine months ended September 30, 2021 does not include $12.7 million in Adjusted EBITDA from Liberty.
Reconciliation of Net income (loss) to Adjusted Earnings and Adjusted EBITDA
The following table reconciles Adjusted Earnings to net income (loss), which we consider to be the most comparable GAAP financial measure, and Adjusted Earnings to Adjusted EBITDA (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Nine months ended September 30, |
| | | | | 2022 | | 2021 |
Net income | | | | | $ | 63,282 | | | $ | 100,901 | |
Gain on sale of discontinued operations, net of tax | | | | | 6,893 | | | 72,745 | |
Income from discontinued operations, net of tax | | | | | — | | | 7,665 | |
Net income from continuing operations | | | | | $ | 56,389 | | | $ | 20,491 | |
Less: income from continuing operations attributable to noncontrolling interest | | | | | 14,927 | | | 7,915 | |
Net income attributable to Holdings - continuing operations | | | | | $ | 41,462 | | | $ | 12,576 | |
Adjustments: | | | | | | | |
Distributions paid - preferred shares | | | | | (18,136) | | | (18,136) | |
Amortization expense - intangibles and inventory step up | | | | | 72,092 | | | 56,502 | |
Loss on debt extinguishment | | | | | 534 | | | 33,305 | |
Stock compensation | | | | | 8,851 | | | 8,496 | |
Acquisition expenses | | | | | 6,118 | | | 2,176 | |
Integration Services Fee | | | | | 2,750 | | | 4,300 | |
Held for Sale corporate tax effect | | | | | 12,119 | | | — | |
Other | | | | | 4,116 | | | (609) | |
Adjusted earnings | | | | | $ | 129,906 | | | $ | 98,610 | |
Plus (less): | | | | | | | |
Depreciation expense | | | | | 32,589 | | | 28,896 | |
Income tax provision | | | | | 39,201 | | | 24,662 | |
Held for Sale corporate tax effect | | | | | (12,119) | | | — | |
Interest expense | | | | | 57,737 | | | 42,607 | |
Amortization of debt issuance costs | | | | | 2,735 | | | 2,167 | |
Income from continuing operations attributable to noncontrolling interest | | | | | 14,927 | | | 7,915 | |
Distributions paid - preferred shares | | | | | 18,136 | | | 18,136 | |
Other | | | | | (606) | | | 1,906 | |
Adjusted EBITDA | | | | | $ | 282,506 | | | $ | 224,899 | |
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, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | 5.11 | | Crosman | | Ergobaby | | Liberty | | Manitoba Harvest | | ACI | | Arnold | | Clean Earth | | Sterno | | Consolidated |
Net income (loss) (1) | $ | 49,623 |
| | $ | (3,167 | ) | | | | $ | 3,192 |
| | $ | 3,942 |
| | $ | (4,084 | ) | | $ | 7,297 |
| | $ | (3,961 | ) | | $ | (3,544 | ) | | $ | 4,783 |
| | $ | 54,081 |
|
Adjusted for: |
| | | | Not Applicable | |
| |
| | | |
| |
| | | | | |
|
Provision (benefit) for income taxes | — |
| | (1,963 | ) | | | 2,242 |
| | 2,614 |
| | (1,468 | ) | | 3,846 |
| | 2,486 |
| | (832 | ) | | 2,853 |
| | 9,778 |
|
Interest expense, net | 22,840 |
| | 6 |
| | | — |
| | — |
| | 7 |
| | — |
| | (2 | ) | | 341 |
| | 12 |
| | 23,204 |
|
Intercompany interest | (36,432 | ) | | 1,206 |
| | | 3,405 |
| | 3,172 |
| | 2,932 |
| | 5,619 |
| | 5,046 |
| | 9,156 |
| | 5,896 |
| | — |
|
Depreciation and amortization | 667 |
| | 5,237 |
| | | 6,306 |
| | 2,099 |
| | 5,256 |
| | 2,938 |
| | 7,035 |
| | 16,380 |
| | 8,617 |
| | 54,535 |
|
EBITDA | 36,698 |
| | 1,319 |
| | | 15,145 |
| | 11,827 |
| | 2,643 |
| | 19,700 |
| | 10,604 |
| | 21,501 |
| | 22,161 |
| | 141,598 |
|
Gain on sale of businesses | (2,134 | ) | | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,134 | ) |
(Gain) loss on sale of fixed assets | — |
| | — |
| | | — |
| | 48 |
| | 2 |
| | (10 | ) | | — |
| | 375 |
| | — |
| | 415 |
|
Noncontrolling shareholder compensation | — |
| | — |
| | | 585 |
| | 327 |
| | 564 |
| | 18 |
| | 192 |
| | 853 |
| | 472 |
| | 3,011 |
|
Loss on disposal of assets | — |
| | — |
| | | 7,214 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,214 |
|
Acquisition related expenses | 98 |
| | 2,063 |
| | | 799 |
| | — |
| | — |
| | — |
| | — |
| | 738 |
| | 189 |
| | 3,887 |
|
Integration services fee | — |
| | 292 |
| | | — |
| | — |
| | 500 |
| | — |
| | — |
| | — |
| | — |
| | 792 |
|
Gain on equity method investment | (58,680 | ) | | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | | (58,680 | ) |
Gain on foreign currency transaction and other | (2,396 | ) | | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,396 | ) |
Management fees | 18,800 |
| | 83 |
| | | 375 |
| | 375 |
| | 261 |
| | 375 |
| | 375 |
| | 375 |
| | 375 |
| | 21,394 |
|
Adjusted EBITDA (2) | $ | (7,614 | ) | | $ | 3,757 |
| | | $ | 24,118 |
| | $ | 12,577 |
| | $ | 3,970 |
| | $ | 20,083 |
| | $ | 11,171 |
| | $ | 23,842 |
| | $ | 23,197 |
| | $ | 115,101 |
|
(1) Net income (loss) does not include income from discontinued operations for the nine months ended September 30, 2016.
(2) As a result 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 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, 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 October 2017/ 2016 | (21,564 | ) | | (19,548 | ) |
| $ | (64,692 | ) | | $ | (58,644 | ) |
(1)Represents fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership, payable quarterly.
(2) Represents maintenance capital expenditures that were funded from operating cash flow, net of proceeds from the sale of property, plant and equipment, and excludes growth capital expenditures of approximately $17.5 million for the nine months ended September 30, 2017 and $1.6 million for the nine months ended September 30, 2016.
| |
(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. |
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 LLC in FOXexchange for a management fee paid quarterly and equal to 0.5% of the Company's adjusted net assets, as defined in the MSA.
During 2022, CGM entered into a waiver of the MSA for the period through June 30, 2023 to receive a 1% annual management fee related to PrimaLoft, rather than the 2% called for under the MSA, which resulted in a lower
management fee at September 30, 2022 than would normally have been due. At June 30, 2022 and March 31, 2022, CGM entered into a waiver to exclude cash balances held at the LLC from the calculation of the management fee.
During 2021, CGM entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid during 2021 than would have normally been due. In the first quarter of 2021, the LLC and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee related to the amount of the proceeds deposited with the Trustee that was in excess of the amount payable related to the 2026 Senior Notes at March 2017, FOX closed on31, 2021. Additionally, CGM entered into a secondary offering throughwaiver of the MSA at December 31, 2021 to exclude cash balances held at the LLC from the calculation of the management fee.
For the three and nine months ended September 30, 2022 and 2021, the Company incurred the following management fees to CGM, by entity:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
5.11 | $ | 250 | | | $ | 250 | | | $ | 750 | | | $ | 750 | |
BOA | 250 | | 250 | | | 750 | | | 750 | |
Ergobaby | 125 | | 125 | | | 375 | | | 375 | |
Lugano | 188 | | 58 | | | 563 | | | 58 | |
Marucci | 125 | | 125 | | | 375 | | | 375 | |
PrimaLoft | 250 | | — | | | 250 | | | — | |
Velocity | 125 | | 125 | | | 375 | | | 375 | |
Advanced Circuits | 125 | | | 125 | | | 375 | | | 375 | |
Altor | 188 | | 188 | | | 563 | | | 563 | |
Arnold Magnetics | 125 | | 125 | | | 375 | | | 375 | |
Sterno | 125 | | 125 | | | 375 | | | 375 | |
Corporate | 14,841 | | | 10,902 | | | 41,178 | | | 30,133 | |
| $ | 16,717 | | | $ | 12,398 | | | $ | 46,304 | | | $ | 34,504 | |
Integration Services Agreements
PrimaLoft, which we soldwas acquired in July 2022, entered into an Integration Services Agreement ("ISA") with CGM whereby PrimaLoft will pay CGM an integration services fee of $4.8 million quarterly over a twelve-month period ended June 30, 2023. Lugano, which was acquired in September 2021, entered into an ISA with CGM whereby Lugano paid CGM an integration services fee of $2.3 million quarterly over a twelve-month period ended September 30, 2022. Under the ISAs, CGM provides 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 5,108,718 sharesother subsidiaries. Integration services fees are recorded as selling, general and administrative expense in FOX for total net proceedsthe consolidated statement of $136.1 million,operations.
Profit Allocation Payments
The ten-year anniversary of Liberty occurred in March 2020 and the ten-year anniversary of Ergobaby occurred in September 2020. Both of these represented a Holding Event, and the holders of the Allocation Interests elected to defer the distribution until after the underwriter's discountend of $8.9 million. Subsequent to the 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 under the Company's LLC Agreement. During the second quarter of 2017, our board of directors declared a distribution to the Allocation Member in connection with the FOX Sale Event of $25.8 million.2020. The profit allocation payment of $3.3 million related to the Liberty Holding Event and the profit allocation of $2.0 million related to the Ergobaby Holding Event were both paid in January 2021. The fifteen-year anniversary of ACI occurred in May 2021 which represented a Holding Event. The Company's Board declared a distribution of $12.1 million that was made duringpaid to the Holders in July 2021. The sale of Liberty in August 2021 represented a Sale Event, and the Company's board declared a profit allocation distribution to Holders of $16.8 million. This distribution was paid in the fourth quarter ended June 30, 2017.
The following table reflects the year to date activity from our investment in FOX (in thousands):of 2021.
|
| | | | |
| | 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 | | $ | — |
|
5.11
(1) RepresentsRecapitalization - In August 2021, the unrealized lossCompany completed a recapitalization of 5.11 whereby the LLC entered into an amendment to the intercompany loan agreement with 5.11 (the "5.11 Loan Agreement"). The 5.11 Loan Agreement was amended to provide for additional term loan borrowings of $55.0 million to fund a distribution to shareholders. The LLC owned 97.7% of the outstanding shares of 5.11 on the investment in FOX as of the date of the FOX secondary offering through which we sold ourdistribution and received $53.7 million. The remaining shares in FOX.amount of the distribution was paid to minority shareholders.
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. During5.11 purchased approximately $0.3 million and $1.1 million during the three and nine months endedSeptember 30, 2022, respectively, and $0.1 million and $0.9 million during the three and nine months ended September 30, 2017, 5.11 purchased approximately $1.0 million and $4.7 million,2021, respectively in inventory from the vendor.
BOA
Repurchase of Noncontrolling Interest - In September 2021, BOA repurchased shares of its issued and outstanding common shares from its largest minority shareholder for a total payment of $48.0 million, which BOA financed by borrowing under their intercompany credit facility with the LLC (the "BOA Credit Agreement"). The BOA Credit Agreement was amended to (i) provide for additional term loan borrowings of $38.0 million, and (ii) consent to the repurchase of the shares from the minority shareholder. The transaction was accounted for in accordance with ASC 810 - Consolidation, whereby the carrying amount of the noncontrolling interest was adjusted to reflect the change in the ownership interest in BOA that occurred as a result of the share repurchase. The difference between the fair value of the consideration paid of $48.0 million and the amount by which the noncontrolling interest was adjusted of $39.4 million was recognized in equity attributable to the LLC.
Related Party Vendor Purchases - A contract manufacturer used by BOA as the primary supplier of molded injection parts is a noncontrolling shareholder of BOA. BOA had approximately $12.7 million and $43.8 million in purchases from this vendor.supplier during the three and nine months ended September 30, 2022, respectively and $11.2 million and $32.8 million during the three and nine months ended September 30, 2021, respectively.
Ergobaby
Recapitalization - In February 2022, the Company completed a recapitalization of Ergobaby whereby the LLC entered into an amendment to the intercompany loan agreement with Ergobaby (the "Ergo Loan Agreement"). The Ergo Loan Agreement was amended to provide for additional loan borrowings of $61.5 million to fund a distribution to shareholders. The LLC owned 81.6% of the outstanding shares of Ergobaby on the date of the distribution and received $50.2 million. The remaining amount of the distribution was paid to minority shareholders.
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, 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:
|
| | | | | | | | | | | | | | | | | | | |
(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 |
| | $ | — |
|
Operating lease obligations (2) | 92,734 |
| | 12,231 |
| | 24,744 |
| | 17,333 |
| | 38,426 |
|
Purchase obligations (3) | 408,105 |
| | 237,110 |
| | 105,495 |
| | 65,500 |
| | — |
|
Total (4) | $ | 1,189,631 |
| | $ | 270,572 |
| | $ | 219,938 |
| | $ | 660,695 |
| | $ | 38,426 |
|
| |
(1)
| Reflects commitment fees and letter of credit fees under our 2014 Revolving Credit Facility and amounts due, together with interest on our 2014 Term Loan 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, 2016,2021, as filed with the Securities and Exchange Commission ("SEC")SEC on March 2, 2017.February 24, 2022.
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 subsidiary 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. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about appropriate sales growth rates, operating margins, weighted average cost of capital, and comparable company market multiples. When developing these key judgments and assumptions, we consider economic, operational and market conditions that could impact the fair value of the reporting unit. Estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will most likely differ from actual future results.
2022 Annual Impairment Testing - For our annual impairment testing at March 31, 2022, we performed a qualitative assessment of our reporting units. The results of the qualitative analysis indicated that it was more-likely-than-not that the fair value of each of our reporting units exceeded their carrying value.
20172021 Annual Impairment Testing
At - For our annual impairment testing at March 31, 2017,2021, we performed a qualitative assessment of our reporting units. 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. As a result of the COVID-19 pandemic, we also considered how we expected COVID-19 to impact our future operating results and short and long term financial condition as part of our qualitative assessment, including the effects on our end customers, potential short-term supply chain constraints, and the continued restrictions imposed by government and regulatory authorities. The results of the qualitative analysis indicated that it was more-likely-than-not that the fair value of each of our reporting units except Arnold exceeded their carrying value. Based on our analysis, we determined that the Manitoba Harvest reporting unitArnold operating segment required further quantitative testing (Step 1) because we could not conclude that the fair value of thethis reporting unit exceeds itssignificantly exceeded the carrying value based on qualitative factors alone. For
We performed the Step 1 quantitative impairment test at Manitoba, the Company utilizedtests of Arnold using an income approach. The weighted average cost of capital used in the income approach at Manitoba was 12.0%. Results of the Step 1 quantitative testing of Manitoba Harvest indicated that the fair value of Manitoba Harvest exceeded its carrying value. For the reporting units that were tested qualitatively, the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value.
Manitoba Harvest
We performed Step 1 testing during the 2017 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 determined that it was necessary to perform interim goodwill impairment testing on each of the three reporting units at Arnold. We performed Step 1 of the goodwill impairment assessment at December 31, 2016. For purposes of Step 1 for the Arnold reporting units, we estimateddetermine 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.units. 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 marketan income approach. In developing the prospective financial information used in the income approach, we used a weighted average costconsidered 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 specific facts and circumstances and is our best estimate of capital of 12.5%operational results and cash flows for PMAG, 12.0% for Flexmag and 13.0% for PTM. Resultsthe Arnold reporting unit as of the Step 1date of our impairment testing. The discount rate used in the income approach was 13.0%, and the results of the quantitative impairment testing for Arnold's Flexmag and PTM reporting units indicated that the fair value of thesethe Arnold reporting unitsunit exceeded theirthe 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)
by approximately 272%. The prospective financial information that is used to determine the amount of impairmentfair values of the PMAGArnold reporting unit.
We hadunit requires us to make assumptions regarding future operational results including revenue growth rates and gross margins. If we do not completedachieve the Step 2 testing for PMAG at December 31, 2016,forecasted revenue growth rates 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 aftergross margins, the results of the Step 2 indicated total goodwillquantitative testing could change, potentially leading to additional testing and impairment ofat the PMAG reporting unit of $24.9 million. The Step 2 impairmentthat 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.
tested quantitatively.
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$57.0 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, 2017,2022, indicated that the fair value of the indefinite lived intangible assets exceeded their carrying value.
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, 2016.2021. 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, 2016,2021, as filed with the SEC on March 2, 2017.February 24, 2022.
ITEM 4. CONTROLS AND PROCEDURES
As required by Securities Exchange Act of 1934, as amended (the "Exchange Act") Rule 13a-15(b), Holdings’the Trust's Regular Trustees and the Company’sLLC’s management, including the Chief Executive Officer and Chief Financial Officer of the Company,LLC, conducted an evaluation of the effectiveness of Holdings’the Trust's and the Company’sLLC’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of September 30, 2017.2022. Based on that evaluation, the Holdings’Trust's Regular Trustees and the Chief Executive Officer and Chief Financial Officer of the CompanyLLC concluded that Holdings’the Trust's and the Company’sLLC’s disclosure controls and procedures were effective as of September 30, 2017.2022.
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, 20162021, as filed with the SEC on March 2, 2017.February 24, 2022.
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 filed2021 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, 2022 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.
Risks Related tofinancial condition. We believe there have been no material changes from the Series A Preferred Shares
Distributionsrisk factors previously disclosed in our Annual Report on Form 10-K for 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.
fiscal year ended December 31, 2021.
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ITEM 6.EXHIBITS |
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Exhibit Number | | Description |
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10.1*10.1 | | |
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12.1*31.1* | | |
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31.1* | | |
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31.2* | | |
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32.1*+ | | |
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32.2*+ | | |
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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. |
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101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104 | | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
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* | Filed herewith. |
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*+ | Filed herewith. |
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+ | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act. |
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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Date: November 3, 2022 | COMPASS DIVERSIFIED HOLDINGS |
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| By: | | /s/ Ryan J. Faulkingham |
| | | Ryan J. Faulkingham |
| | | Regular Trustee |
Date: 11/8/2017
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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Date: November 3, 2022 | COMPASS GROUP DIVERSIFIED HOLDINGS LLC |
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| By: | | /s/ Ryan J. Faulkingham |
| | | Ryan J. Faulkingham |
| | | Chief Financial Officer
(Principal Financial and Accounting Officer)
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Date: 11/8/2017
EXHIBIT INDEX
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| | |
| By: | Description | /s/ Ryan J. Faulkingham |
| | | Ryan J. Faulkingham |
10.1* | | | Chief Financial Officer (Principal Financial and Accounting Officer) |
EXHIBIT INDEX
| | | | | | | | |
Exhibit Number | | Description |
| | |
10.1 | | |
| | |
12.1*31.1* | | |
| | |
31.1* | | |
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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. |