Compass Diversified Holdings Reports Second Quarter 2019 Financial Results

Date : 07/31/2019 @ 8:15PM
Source : GlobeNewswire Inc.
Stock : Compass Diversified Holdings (CODI)
Quote : 22.4511  0.4611 (2.10%) @ 8:26PM

Compass Diversified Holdings Reports Second Quarter 2019 Financial Results

Compass Diversified (NYSE:CODI)
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Compass Diversified Holdings (NYSE: CODI) (“CODI,” “we,” “our” or the “Company”), an owner of leading middle market businesses, announced today its consolidated operating results for the three months ended June 30, 2019.

Second Quarter 2019 Highlights

  • Reported net sales of $336.1 million;
  • Reported net income of $218.2 million;
  • Reported non-GAAP Adjusted EBITDA of $52.1 million;
  • Reported Cash Provided by Operating Activities of $17.6 million, and non-GAAP Generated Cash Flow Available for Distribution and Reinvestment (“CAD”) of $26.2 million for the second quarter of 2019;
  • Paid a second quarter 2019 cash distribution of $0.36 per share on CODI’s common shares in July 2019, bringing cumulative distributions paid to $18.2352 per common share since CODI’s IPO in May of 2006;
  • Paid a quarterly cash distribution of $0.453125 per share on the Company’s 7.250% Series A Preferred Shares and $0.4921875 per share on the Company's 7.875% Series B Preferred Shares in July 2019;
  • Promoted Pat Maciariello to newly created position of Chief Operating Officer;
  • Completed the sale of our Clean Earth subsidiary for a gain of $206.3 million;
  • Compass Group Management volunteered to waive the management fee on cash balances held at CODI, commencing with the management fee due for the quarter ending June 30, 2019 and continuing until the quarter during which the Company next borrows under its revolving credit facility.

“The first half of 2019 was important for CODI, as we unlocked significant value for shareholders with the opportunistic and attractive divestitures of two subsidiaries, enabling us to significantly strengthen our balance sheet, while Compass Group Management waived the management fee on cash balances held at CODI,” said Elias Sabo, CEO of Compass Diversified Holdings. “For the six-month 2019 period, our leading branded consumer and niche industrial businesses also generated consolidated operating performance in-line with management expectations and sizable distributions to shareholders.”

Mr. Sabo continued, “We are pleased with CODI’s ongoing investments in our subsidiaries, highlighted by our success monetizing Manitoba Harvest and Clean Earth at attractive valuations, resulting in realized gains for shareholders of over $325 million year-to-date 2019 and over $1 billion since our IPO. Our previous investments in our 5.11 Tactical subsidiary are also evident, as 5.11 generated strong and markedly improved results thus far in 2019.  Moving forward, we will continue to work with our world-class management companies to unlock value for shareholders, while implementing our proven and disciplined acquisition strategy and providing annual distributions of $1.44 per share.

Operating Results

Net sales for the quarter ended June 30, 2019 were $336.1 million, as compared to $340.0 million for the quarter ended June 30, 2018. The June 30, 2018 net sales do not include Ravin net sales prior to CODI’s ownership.

Net income for the quarter ended June 30, 2019 was $218.2 million, as compared to net income of $0.5 million for the quarter ended June 30, 2018. Current quarter net income includes the $206.5 million gain on the sale of Clean Earth.

Adjusted EBITDA (see Note Regarding Use of Non-GAAP Financial Measures below) for the quarter ended June 30, 2019 was $52.1 million, as compared to $51.2 million for the quarter ended June 30, 2018. Adjusted EBITDA does not include the results of Ravin prior to CODI’s ownership.

CODI reported CAD (see Note Regarding Use of Non-GAAP Financial Measures below) of $26.2 million for the quarter ended June 30, 2019, as compared to $30.3 million for the prior year’s comparable quarter.  CODI’s CAD is calculated after taking into account all interest expense, cash taxes paid and maintenance capital expenditures, and includes the operating results of each of our businesses for the periods during which CODI owned them. However, CAD excludes the gains from monetizing interests in CODI’s subsidiaries, which have totaled over $1 billion since going public in 2006.  The decrease in CAD versus the prior year quarter is primarily the result of increased financing cost associated with the debt refinancing in April 2018 and the Series B Preferred Share issuance in March 2018.

Liquidity and Capital Resources

For the quarter ended June 30, 2019, CODI reported Cash Provided by Operating Activities of $17.6 million, as compared to Cash Provided by Operating Activities of $28.7 million for the quarter ended June 30, 2018.

CODI’s weighted average number of shares outstanding for the quarters ended June 30, 2019 and June 30, 2018 were 59.9 million.

As of June 30, 2019, CODI had approximately $485.9 million in cash and cash equivalents, $493.8 million outstanding on its term loan facility, $400 million outstanding in Senior Notes and no outstanding borrowings under its revolving credit facility.  Subsequent to the end of the quarter, CODI prepaid $193.8 million on its term loan facility.

The Company has no significant debt maturities until 2023 and had net borrowing availability of $600 million at June 30, 2019 under its revolving credit facility.

Second Quarter 2019 Distributions

On July 3, 2019, CODI’s Board of Directors (the “Board”) declared a second quarter distribution of $0.36 per share on the Company’s common shares. The cash distribution was paid on July 25, 2019 to all holders of record of common shares as of July 18, 2019. Since its IPO in May of 2006, CODI has paid a cumulative distribution of $18.2352 per common share.

The Board also declared a quarterly cash distribution of $0.453125 per share on the Company’s 7.250% Series A Preferred Shares (the “Series A Preferred Shares”). The distribution on the Series A Preferred Shares covered the period from and including April 30, 2019, up to, but excluding, July 30, 2019. The distribution for such period was paid on July 30, 2019 to all holders of record of Series A Preferred Shares as of July 15, 2019.

The Board also declared a quarterly cash distribution of $0.4921875 per share on the Company's 7.875% Series B Preferred Shares (the "Series B Preferred Shares"). The distribution on the Series B Preferred Shares covered the period from and including April 30, 2019, up to, but excluding, July 30, 2019. The distribution for such period was paid on July 30, 2019 to all holders of record of Series B Preferred Shares as of July 15, 2019.

Conference Call

Management will host a conference call on Thursday, August 1, 2019 at 9:00 a.m. ET to discuss the latest corporate developments and financial results. The dial-in number for callers in the U.S. is (855) 212-2368 and the dial-in number for international callers is (315) 625-6886. The access code for all callers is 7355967. A live webcast will also be available on the Company's website at www.compassdiversifiedholdings.com.

A replay of the call will be available through August 8, 2019. To access the replay, please dial (855) 859-2056 in the U.S. and (404) 537-3406 outside the U.S., and then enter the access code 7355967.

Note Regarding Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP measure used by the Company to assess its performance.  We have reconciled Adjusted EBITDA to Net Income (Loss) on the attached schedules. We consider Net Income (Loss) to be the most directly comparable GAAP financial measure to Adjusted EBITDA. We believe that Adjusted EBITDA provides useful information to investors and reflects important financial measures as it excludes 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), Adjusted EBITDA is limited in that it does not reflect the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated with impairments, as well as certain cash charges. This presentation also allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition. We believe Adjusted EBITDA is also useful in measuring our ability to service debt and other payment obligations.

CAD is a non-GAAP measure used by the Company to assess its performance, as well as its ability to sustain quarterly distributions.  We have reconciled CAD to Net Income (Loss) and Cash Flow from Operating Activities on the attached schedules. We consider Net Income (Loss) and Cash Flow from Operating Activities to be the most directly comparable GAAP financial measures to CAD.

CAD is calculated after taking into account all interest expense, cash taxes paid and maintenance capital expenditures, and includes the operating results of each of our businesses for the periods during which CODI owned them.  We believe that CAD provides investors additional information to enable them to evaluate our performance and ability to make anticipated quarterly distributions.

Neither of Adjusted EBITDA nor CAD is meant to be a substitute for GAAP measures and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.

About Compass Diversified Holdings (“CODI”)

CODI owns and manages a diverse family of established North American middle market businesses. Each of its current subsidiaries is a leader in its niche market.

CODI maintains controlling ownership interests in each of its subsidiaries in order to maximize its ability to impact long term cash flow generation and value. The Company provides both debt and equity capital for its subsidiaries, contributing to their financial and operating flexibility. CODI utilizes the cash flows generated by its subsidiaries to invest in the long-term growth of the Company and to make cash distributions to its shareholders.

Our eight majority-owned subsidiaries are engaged in the following lines of business:

  • The design and marketing of purpose-built tactical apparel and gear serving a wide range of global customers (5.11);
  • The manufacture of quick-turn, small-run and production rigid printed circuit boards (Advanced Circuits);
  • The manufacture of engineered magnetic solutions for a wide range of specialty applications and end-markets (Arnold Magnetic Technologies);
  • The design and marketing of wearable baby carriers, strollers and related products (Ergobaby);
  • The design and manufacture of custom molded protective foam solutions and OE components (Foam Fabricators);
  • The design and manufacture of premium home and gun safes (Liberty Safe);
  • The manufacture and marketing of portable food warming fuels for the hospitality and consumer markets, flameless candles and house and garden lighting for the home decor market, and wickless candle products used for home decor and fragrance systems (The Sterno Group); and
  • The design, manufacture and marketing of airguns, archery products, optics and related accessories (Velocity Outdoor)

This press release may contain certain forward-looking statements, including statements with regard to the future performance of CODI. Words such as "believes," "expects," "projects," and "future" or similar expressions, are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussion in the Form 10-K filed by CODI with the SEC for the year ended December 31, 2018 and other filings with the SEC. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Compass Diversified HoldingsCondensed Consolidated Statements of Operations(unaudited) 
        
 Three months ended June 30, Six months ended June 30,
(in thousands, except per share data)2019 2018 2019 2018
Net sales$336,084  $339,989  $674,941  $626,119 
Cost of sales213,521  221,510  432,823  403,753 
Gross profit122,563  118,479  242,118  222,366 
Operating expenses:       
Selling, general and administrative expense80,312  81,513  161,709  161,676 
Management fees8,521  10,799  19,478  21,436 
Amortization expense13,522  14,465  27,112  22,745 
Operating income20,208  11,702  33,819  16,509 
Other income (expense):       
Interest expense, net(18,445) (13,474) (36,899) (19,592)
Amortization of debt issuance costs(928) (953) (1,855) (2,051)
Loss on sale of Tilray securities    (5,300)  
Other expense, net(90) (2,207) (524) (3,540)
Income (loss) from continuing operations before income taxes745  (4,932) (10,759) (8,674)
Provision for income taxes4,551  3,330  5,975  2,087 
Loss from continuing operations(3,806) (8,262) (16,734) (10,761)
Income from discontinued operations, net of tax15,474  7,630  16,901  8,508 
Gain on sale of discontinued operations, net of tax206,505  1,165  328,164  1,165 
Net income (loss)218,173  533  328,331  (1,088)
Less: Income from continuing operations attributable to noncontrolling interest1,387  1,486  2,755  1,787 
Less: Income (loss) from discontinued operations attributable to noncontrolling interest252  (45) (266) 374 
Net income (loss) attributable to Holdings$216,534  $(908) $325,842  $(3,249)
        
Basic income (loss) per common share attributable to Holdings      
Continuing operations$(0.32) $(0.25) $(0.64) $(0.34)
Discontinued operations3.70  0.14  5.77  0.16 
 $3.38  $(0.11) $5.13  $(0.18)
        
Basic weighted average number of common shares outstanding59,900  59,900  59,900  59,900 
        
Cash distributions declared per Trust common share$0.36  $0.36  $0.72  $0.72 
        

Compass Diversified Holdings
Net Sales to Pro Forma Net Sales Reconciliation
(unaudited)
        
 Three months ended June 30, Six months ended June 30,
 2019 2018 2019 2018
        
Net Sales$336,084  $339,989  $674,941  $626,119 
Acquisitions (1)      39,828 
Pro Forma Net Sales$336,084  $339,989  $674,941  $665,947 
        

(1) Net sales of Foam Fabricators and Rimports (Sterno Group add-on) as if those businesses were acquired January 1, 2018.

Compass Diversified Holdings
Subsidiary Pro Forma Net Sales
(unaudited)
      
 Three months ended June 30, Six months ended June 30,
(in thousands)2019 2018 2019 2018
        
Branded Consumer       
5.11 Tactical$92,836  $84,723  $180,925  $168,680 
Ergobaby22,971  23,954  45,423  46,116 
Liberty20,633  20,416  42,837  43,869 
Velocity Outdoor (2)29,611  35,570  60,748  59,977 
Total Branded Consumer$166,051  $164,663  $329,933  $318,642 
        
Niche Industrial       
Advanced Circuits$22,439  $22,967  $45,508  $45,030 
Arnold Magnetics29,481  31,196  59,509  60,595 
Foam Fabricators (1)31,648  33,194  62,330  63,684 
Sterno Group (1)86,465  87,969  177,661  177,996 
Total Niche Industrial$170,033  $175,326  $345,008  $347,305 
        
 $336,084  $339,989  $674,941  $665,947 

(1) Foam Fabricators and Rimports (Sterno Group add-on) are proforma as if those businesses were acquired January 1, 2018.
   
(2) The above 2018 results exclude management's estimate of net sales of $10.7 million and $21.6 million for the three and six months ended June 30, 2018, respectively, at Ravin before our ownership.  Ravin was acquired by Velocity Outdoor in August 2018.

Compass Diversified Holdings
Net Income to Adjusted EBITDA and Cash flow Available for Distribution and Reinvestment
(Unaudited)
        
 Three months ended June 30, Six months ended June 30,
(in thousands)2019 2018 2019 2018
Net income (loss)$218,173  $533  $328,331  $(1,088)
Income from discontinued operations, net of income tax15,474  7,630  16,901  8,508 
Gain on sale of discontinued operations206,505  1,165  328,164  1,165 
Loss from continuing operations$(3,806) $(8,262) $(16,734) $(10,761)
Provision for income taxes4,551  3,330  5,975  2,087 
Income (loss) from continuing operations before income taxes$745  $(4,932) $(10,759) $(8,674)
Other expense, net(90) (2,207) (524) (3,540)
Amortization of debt issuance costs(928) (953) (1,855) (2,051)
Loss on sale of securities    (5,300)  
Interest expense, net(18,445) (13,474) (36,899) (19,592)
Operating Income$20,208  $11,702  $33,819  $16,509 
Adjusted For:       
Depreciation8,230  7,951  16,225  14,909 
Amortization13,522  19,084  27,112  27,978 
Non-controlling shareholder compensation1,601  2,047  3,329  3,999 
Acquisition expenses      2,189 
Integration services fees  938  281  1,594 
Management fees8,521  10,799  19,478  21,436 
Other(1) (1,278) 324  (905)
Adjusted EBITDA$52,081  $51,243  $100,568  $87,709 
Interest at Corporate, net of unused fee (1)(15,550) (13,911) (32,365) (22,243)
Swap payment(209) (380) (303) (1,086)
Management fees(8,521) (10,799) (19,478) (21,435)
Capital expenditures (maintenance)(4,362) (6,069) (8,009) (10,698)
Current tax expense (cash taxes) (2)(2,555) (1,372) (6,010) (3,139)
Preferred share distributions(3,782) (1,812) (7,563) (3,625)
Discontinued operations9,076  12,396  16,987  18,361 
Miscellaneous items  999    469 
Cash Flow Available for Distribution or Reinvestment ('CAD')$26,178  $30,295  $43,827  $44,313 

   
(1) Interest expense at Corporate reflects consolidated interest expense less non-cash components such as, unrealized gains and losses on our swap and original issue discount amortization.  We include the cash component of our swap payment above in our reconciliation to CAD.
   
(2) Current tax expense is calculated by deducting the change in deferred tax from the statement of cash flows from the income tax provision on the statement of operations

Compass Diversified Holdings
Adjusted EBITDA (1)
(unaudited)
        
 Three months ended June 30, Six months ended June 30,
(in thousands)2019 2018 2019 2018
        
Branded Consumer       
5.11 Tactical$11,256  $7,862  $19,561  $13,758 
Ergobaby5,220  6,137  10,817  10,835 
Liberty2,195  2,136  4,417  5,482 
Velocity Outdoor (2)3,734  5,919  7,721  9,066 
Total Branded Consumer$22,405  $22,054  $42,516  $39,141 
        
Niche Industrial       
Advanced Circuits$7,172  $7,211  $14,511  $14,076 
Arnold Magnetics3,953  4,682  7,163  8,080 
Foam Fabricators (2)7,820  7,885  15,046  11,388 
Sterno Group (2)13,840  14,120  27,740  23,028 
Total Niche Industrial$32,785  $33,898  $64,460  $56,572 
        
Corporate expense (3)(3,109) (4,709) (6,408) (8,004)
Total Adjusted EBITDA$52,081  $51,243  $100,568  $87,709 

(1) Please refer to our recently filed 10-Q for detail on subsidiary pro forma adjusted EBITDA, and reconciliation to net income.
   
(2) The above 2018 results exclude management's estimate of adjusted EBITDA, before our ownership, of $5.5 million at Rimports, $2.8 million at Foam Fabricators and $6.1 million at Ravin for the six months ended June 30th, and $3.2 million at Ravin for the three months ended June 30th.
   
(3) Please refer to the recently filed 10-Q for a reconciliation of our Corporate expense to Net Income.

Compass Diversified HoldingsSummarized Statement of Cash Flows(unaudited)
    
 Six months ended June 30,
(in thousands)2019 2018
Net cash provided by operating activities$8,654  $35,312 
Net cash provided by (used in) investing activities718,000  (454,715)
Net cash (used in) provided by financing activities(292,750) 415,358 
Effect of foreign currency on cash(1,366) 1,616 
Net increase (decrease) in cash and cash equivalents432,538  (2,429)
Cash and cash equivalents — beginning of period (1)53,326  39,885 
Cash and cash equivalents — end of period$485,864  $37,456 
    

(1) Includes cash from discontinued operations of $4.6 million at January 1, 2019 and $4.2 million at January 1, 2018.

Compass Diversified HoldingsCondensed Consolidated Table of Cash Flow Available for Distribution and Reinvestment(unaudited)
 
 Three months ended June 30, Six months ended June 30,
(in thousands)2019 2018 2019 2018
Net income (loss)$218,173  $533  $328,331  $(1,088)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:       
Depreciation and amortization27,853  34,198  56,491  57,131 
Gain on sale of business(206,505) (1,165) (328,164) (1,165)
Amortization of debt issuance costs and original issue discount1,080  971  2,159  2,324 
Unrealized (gain) loss on derivatives2,251  (999) 3,350  (3,900)
Noncontrolling stockholder charges3,063  2,614  5,268  5,165 
Provision for loss on receivables49  (230) 745  98 
Other162  312  496  135 
Deferred taxes(10,043) 1,069  (12,366) (3,242)
Changes in operating assets and liabilities(18,493) (8,634) (47,656) (20,146)
Net cash provided by operating activities17,590  28,669  8,654  35,312 
Plus:       
Unused fee on revolving credit facility495  403  882  855 
Successful acquisition costs230  158  596  1,594 
Integration services fee (1)  938  281  2,347 
Realized loss from foreign currency effect (2)  908  363  2,247 
Changes in operating assets and liabilities18,493  8,634  47,656  20,146 
Loss on sale of Tilray securities    5,300   
Less:       
Maintenance capital expenditures (3)6,507  8,296  11,504  14,268 
Payment of interest rate swap209  380  303  1,086 
Preferred share distributions3,782  1,812  7,563  3,625 
Other132    535   
CAD$26,178  $30,295  $43,827  $44,313 
        
Distribution paid in April 2019/ 2018$  $  $21,564  $21,564 
Distribution paid in July 2019/ 201821,564  21,564  21,564  21,564 
 $21,564  $21,564  $43,128  $43,128 

(1) Represents fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership, payable quarterly.
   
(2) Reflects the foreign currency transaction gain/ loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest.
   
(3) Excludes growth capital expenditures of approximately $3.9 million and $8.3 million for the three months ended June 30, 2019 and 2018, respectively, and $6.4 million and $14.5 million for the six months ended June 30, 2019 and 2018, respectively.

 

Compass Diversified Holdings
Maintenance Capital Expenditures
(unaudited)
      
 Three months ended June 30, Six months ended June 30,
(in thousands)2019 2018 2019 2018
Niche Industrial       
Advanced Circuits$938  $426  $1,126  $523 
Arnold Magnetics694  871  1,806  2,123 
Foam Fabricators438  542  936  940 
Sterno Group769  658  1,221  1,042 
Total Niche Industrial$2,839  $2,497  $5,089  $4,628 
        
Branded Consumer       
5.11 Tactical$1,124  $1,067  $1,336  $2,429 
Ergobaby166  119  237  407 
Liberty181  874  307  935 
Velocity Outdoor52  1,512  1,040  2,299 
Total Branded Consumer$1,523  $3,572  $2,920  $6,070 
        
Total maintenance capital expenditures$4,362  $6,069  $8,009  $10,698 

Compass Diversified HoldingsCondensed Consolidated Balance Sheets
    
 June 30, 2019 December 31, 2018
(in thousands)(unaudited)  
Assets   
Current assets   
Cash and cash equivalents$485,864  $48,771 
Accounts receivable, net187,321  205,545 
Inventories327,657  307,437 
Prepaid expenses and other current assets85,280  29,670 
Current assets of discontinued operations  89,762 
Total current assets1,086,122  681,185 
Property, plant and equipment, net143,313  146,601 
Goodwill and intangible assets, net1,060,018  1,086,707 
Other non-current assets96,538  8,378 
Non-current assets of discontinued operations  449,464 
Total assets$2,385,991  $2,372,335 
    
Liabilities and stockholders’ equity   
Current liabilities   
Accounts payable and accrued expenses$178,966  $183,781 
Due to related party8,045  11,093 
Current portion, long-term debt5,000  5,000 
Other current liabilities26,650  6,912 
Current liabilities of discontinued operations  52,494 
Total current liabilities218,661  259,280 
Deferred income taxes33,813  33,984 
Long-term debt869,918  1,098,871 
Other non-current liabilities86,818  12,615 
Non-current liabilities of discontinued operations  48,243 
Total liabilities1,209,210  1,452,993 
Stockholders' equity   
Total stockholders' equity attributable to Holdings1,130,804  859,372 
Noncontrolling interest45,977  39,922 
Noncontrolling interest of discontinued operations  20,048 
Total stockholders' equity1,176,781  919,342 
Total liabilities and stockholders’ equity$2,385,991  $2,372,335 
    

Compass Diversified HoldingsRyan J. FaulkinghamChief Financial Officer203.221.1703ryan@compassequity.comInvestor Relations and Media Contact:The IGB GroupLeon Berman212.477.8438lberman@igbir.com

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