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 section 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, 2018 and in the section entitled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Overview
Compass Diversified Holdings ("Holdings") was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings LLC (the "Company") was also formed on November 18, 2005. Holdings and the Company (collectively "CODI") were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. The Company is the operating entity and is a controlling owner of eight businesses, or operating segments, at
June 30, 2019
. The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Velocity Outdoor, Inc. (formerly "Crosman Corp.) ("Velocity Outdoor" or "Velocity"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold"), FFI Compass, Inc. ("Foam Fabricators" or "Foam") and The Sterno Group, LLC ("Sterno").
We acquired our existing businesses (segments) at
June 30, 2019
as follows:
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Ownership Interest - June 30, 2019
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Business
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Acquisition Date
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Primary
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Diluted
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Advanced Circuits
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May 16, 2006
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69.4%
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65.8%
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Liberty Safe
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March 31, 2010
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88.6%
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85.2%
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Ergobaby
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September 16, 2010
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81.9%
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75.8%
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Arnold
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March 5, 2012
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96.7%
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80.2%
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Sterno
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October 10, 2014
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100.0%
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88.5%
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5.11 Tactical
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August 31, 2016
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97.5%
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88.4%
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Velocity Outdoor
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June 2, 2017
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99.2%
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91.1%
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Foam Fabricators
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February 15, 2018
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100.0%
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99.1%
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We categorize the businesses we own into two separate groups of businesses: (i) branded consumer businesses, and (ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we believe capitalize on a valuable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in their particular product category. Niche industrial businesses are characterized as those businesses that focus on manufacturing and selling particular products and industrial services within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector. The following is an overview of each of our businesses:
Branded Consumer
5.11 Tactical
- 5.11 is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
Ergobaby
- Headquartered in Los Angeles, California, Ergobaby is dedicated to building a global community of confident parents with smart, ergonomic solutions that enable and encourage bonding between parents and babies. Ergobaby offers a broad range of award-winning baby carriers, strollers, car seats, swaddlers, nursing pillows, and related products
that fit into families’ daily lives seamlessly, comfortably and safely. Historically, Ergobaby derives more than 50% of its sales from outside of the United States.
Liberty
- 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.
Velocity Outdoor
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A leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories, Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity Outdoor's other primary product categories are archery, with products including CenterPoint crossbows and the Pioneer Airbow, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products. In September 2018, Velocity acquired Ravin Crossbows, LLC ("Ravin" or "Ravin Crossbows"), a manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related to the advancement of crossbow technology. Velocity Outdoor is headquartered in Bloomfield, New York.
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.
Arnold
- Arnold serves a variety of markets including aerospace and defense, motorsport/ automotive, oil and gas, medical, general industrial, energy, reprographics and advertising specialties. Over the course of 100+ years, Arnold has successfully evolved and adapted our products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold produces high performance permanent magnets (PMAG), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Arnold has expanded globally and built strong relationships with our customers worldwide. Arnold is the largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems. Arnold is headquartered in Rochester, New York.
Foam Fabricators
- Founded in 1957 and headquartered in Scottsdale, Arizona, Foam Fabricators is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer (OEM) components made from expanded polystyrene (EPS) and expanded polypropylene (EPP). Foam Fabricators operates 13 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products and others.
Sterno
- Sterno, headquartered in Corona, California, is the parent company of Sterno Products, LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and Rimports, LLC ("Rimports"). Sterno is a leading manufacturer and marketer of portable food warming fuels for the hospitality and consumer markets, flameless candles and house and garden lighting for the home decor market, and wickless candle products used for home decor and fragrance systems. We made loans to, and purchased all of the equity interests in, Sterno on October 10, 2014 for approximately $160.0 million. Sterno offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps through their Sterno Products division. In January 2016, Sterno acquired Northern International, Inc. ("Sterno Home"), which sells flameless candles and outdoor lighting products through the retail segment, and in February 2018, Sterno acquired Rimports, which is a manufacturer and distributor of branded and private label scented wax cubes and warmer products used for home decor and fragrance systems.
Our management team’s strategy for our businesses involves:
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utilizing structured incentive compensation programs tailored to each business to attract, recruit and retain talented managers to operate our businesses;
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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;
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assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue and cost related);
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identifying and working with management to execute attractive external growth and acquisition opportunities; and
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forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.
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While our businesses have different growth opportunities and potential rates of growth, we work with the management teams of each of our businesses to increase the value of, and cash generated by, each business through various initiatives, including making selective capital investments to expand geographic reach, increase capacity or reduce manufacturing costs of our businesses; improving and expanding existing sales and marketing programs; and assisting in the acquisition and integration of complementary businesses.
We remain focused on marketing our Company's attractive ownership and management attributes to potential sellers of middle market businesses. In addition, we continue to pursue opportunities for add-on acquisitions by our existing subsidiary companies, which can be particularly attractive from a strategic perspective. The middle market continues to be an active segment for deal flow, with further acceleration of deal flow expected in 2019. High valuation levels continue to be driven by the availability of debt capital with favorable terms and financial and strategic buyers seeking to deploy available equity capital. We believe that companies will focus on expanding their customer bases by diversifying their products and services in existing geographic areas during 2019.
Recent Events
Sale of Clean Earth
On May 8, 2019, the Company, as majority stockholder of CEHI Acquisition Corporation (“CEHI”) and as Sellers’ Representative, entered into a definitive Stock Purchase Agreement (the “Purchase Agreement”) with Calrissian Holdings, LLC (“Buyer”), CEHI, the other holders of stock and options of CEHI and, as Buyer’s guarantor, Harsco Corporation, pursuant to which 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, Buyer completed the acquisition of all of the issued and outstanding securities of CEHI pursuant to the Purchase Agreement. The sale price for CEHI was based on an aggregate total enterprise value of $625 million and is subject to customary working capital adjustments. After the allocation of the sale proceeds to CEHI non-controlling equity holders and the payment of transaction expenses of approximately $10.7 million, we received approximately $552 million of total proceeds at closing related to our debt and equity interests in CEHI. We recognized a gain on the sale of CEHI of $206.3 million in the second quarter of 2019.
Sale of Manitoba Harvest
On February 19, 2019, we entered into a definitive agreement with Tilray, Inc. ("Tilray") and a wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, through Tilray Subco, all of the issued and outstanding securities of our majority owned subsidiary, Manitoba Harvest for total consideration of up to C$419 million. The completion of the sale of Manitoba Harvest was subject to approval by the British Columbia Supreme Court, which occurred on February 21, 2019. The sale closed on February 28, 2019. Subject to certain customary adjustments, the shareholders of Manitoba Harvest, including the Company, received or will receive the following from Tilray as consideration for their shares of Manitoba Harvest: (i) C$150 million in cash to the holders of preferred shares of Manitoba Harvest and the holders of common shares of Manitoba Harvest (“Common Holders”) and C$127.5 million in shares of class 2 Common Stock of Tilray (“Tilray Common Stock”) to the Common Holders on the closing date of the sale (the “Closing Date Consideration”), and (ii) C$50 million in cash and C$42.5 million in Tilray Common Stock to the Common Holders on the date that is six months after the closing date of the arrangement (the “Deferred Consideration”). The sale consideration also includes a potential earnout of up to C$49 million in Tilray Common Stock to the Common Holders, if Manitoba Harvest achieves certain levels of U.S. branded gross sales of edible or topical products containing broad spectrum hemp extracts or cannabidiols prior to December 31, 2019.
The cash portion of the Closing Date Consideration was reduced by the amount of the net indebtedness (including accrued interest) of Manitoba Harvest on the closing date of
C$71.3 million
(
$53.7 million
) and transaction expenses of approximately C$5.0 million. We recognized a gain on the sale of Manitoba Harvest of $121.7 million in the first quarter of 2019. Refer to "Liquidity and Capital Resources, Profit Allocation Payments" for a discussion of the profit allocation associated with the sale of Manitoba Harvest. Our share of the net proceeds after accounting for the redemption of the noncontrolling shareholders and the payment of net indebtedness of Manitoba Harvest and transaction expenses was approximately $124.2 million in cash proceeds and in Tilray Common Stock. We recorded a receivable of
$48.0 million
at June 30, 2019 related to the Deferred Consideration portion of the proceeds. No amount has been recorded related to the potential earnout as of June 30, 2019 based on an assessment of probability at the end of the quarter.
The Tilray Common Stock consideration was issued in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and pursuant to exemptions from applicable securities laws of any state of the United States, such that any shares of Tilray Common Stock received by the Common Holders were freely tradeable. We sold the Tilray Common Stock during March 2019, recognizing a net loss of $5.3 million in Other income (expense) during the quarter ended March 31, 2019.
Non-GAAP Financial Measures
"U.S. GAAP" 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.
Results of Operations
The following discussion reflects a comparison of the historical results of operations of our consolidated business for the three and six months ended
June 30, 2019
and
June 30, 2018
, and components of the results of operations as well as those components presented as a percent of net revenues, for each of our businesses on a stand-alone basis. For the 2018 acquisitions of Foam Fabricators and Rimports, the pro forma results of operations have been prepared as if we purchased these businesses on January 1, 2018. The historical operating results of Rimports prior to acquisition by Sterno on February 26, 2018 have been added to the results of operations of Sterno for the six months ended June 30, 2018 for comparability purposes. Where appropriate, relevant pro forma adjustments are reflected as part of the historical operating results. We believe this is the most meaningful comparison of the operating results for each of our business segments. The following results of operations at each of our businesses are not necessarily indicative of the results to be expected for a full year.
All dollar amounts in the financial tables are presented in thousands. References in the financial tables to percentage changes that are not meaningful are denoted by "NM."
Results of Operations - Consolidated
The following table sets forth our unaudited results of operations for the three and six months ended
June 30, 2019
and
2018
:
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Three months ended
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Six months ended
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June 30, 2019
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June 30, 2018
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June 30, 2019
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June 30, 2018
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Net revenues
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$
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336,084
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$
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339,989
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$
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674,941
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$
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626,119
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Cost of revenues
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213,521
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221,510
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432,823
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403,753
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Gross profit
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122,563
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118,479
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242,118
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222,366
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Selling, general and administrative expense
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80,312
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81,513
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161,709
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161,676
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Fees to manager
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8,521
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10,799
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19,478
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21,436
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Amortization of intangibles
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13,522
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14,465
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27,112
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22,745
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Operating income
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20,208
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11,702
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33,819
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16,509
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Interest expense
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(18,445
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)
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(13,474
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)
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(36,899
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)
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(19,592
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)
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Amortization of debt issuance costs
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(928
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)
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(953
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)
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(1,855
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)
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(2,051
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)
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Other income (expense)
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(90
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)
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(2,207
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)
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(5,824
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)
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(3,540
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)
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Income (loss) from continuing operations before income taxes
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745
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(4,932
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)
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(10,759
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)
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(8,674
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)
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Provision for income taxes
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4,551
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3,330
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5,975
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2,087
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Loss from continuing operations
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$
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(3,806
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)
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$
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(8,262
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)
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$
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(16,734
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)
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$
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(10,761
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)
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Three months ended
June 30, 2019
compared to three months ended
June 30, 2018
Net revenues
On a consolidated basis, net revenues for the three months ended
June 30, 2019
decreased by approximately
$3.9 million
, or
1.1%
, compared to the corresponding period in
2018
. During the three months ended
June 30, 2019
compared to
2018
, we saw a notable increase in net sales at 5.11 (
$8.1 million
increase), offset by decreases in net sales at Velocity Outdoor (
$6.0 million
decrease), Arnold (
$1.7 million
decrease), Foam Fabricators (
$1.5 million
decrease) and Sterno (
$1.5 million
decrease). Refer to "Results of Operations - Business Segments" for a more detailed analysis of net revenues by business segment.
We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income on the investment of available funds, but we expect such earnings to be minimal. Our investment in our businesses is typically in the form of loans from the Company to such businesses, as well as equity interests in those companies. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and dividends on our equity ownership. However, on a consolidated basis, these items will be eliminated.
Cost of revenues
On a consolidated basis, cost of revenues decreased approximately
$8.0 million
during the three months ended
June 30, 2019
compared to the corresponding period in
2018
. The decrease in cost of revenues reflects notable decreases at Sterno (
$5.7 million
decrease) and Velocity (
$3.3 million
decrease). Gross profit as a percentage of net revenues was approximately
36.5%
in the three months ended
June 30, 2019
compared to
34.8%
in the three months ended
June 30, 2018
. 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 decreased approximately
$1.2 million
during the three months ended
June 30, 2019
, compared to the corresponding period in
2018
. Refer to "Results of Operations - Business Segments" for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, general and administrative expense was
$3.1 million
in the second quarter of
2019
and
$4.0 million
in the second quarter of
2018
. The decrease in selling, general and administrative expense at Corporate was primarily due to $0.6 million of professional fees in the prior year associated with the refinancing of our credit facility in the second quarter of 2018.
Fees to manager
Pursuant to the Management Services Agreement ("MSA"), we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the three months ended
June 30, 2019
, we incurred approximately
$8.5 million
in management fees as compared to
$10.8 million
in fees in the three months ended
June 30, 2018
. The decrease was attributable to the sale of Manitoba Harvest in the first quarter of 2019 and Clean Earth in the second quarter of 2019. Concurrent with the June 2019 sale of Clean Earth, CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the quarter during which the Company next borrows under the 2018 Revolving Credit Facility.
Amortization expense
Amortization expense for the three months ended
June 30, 2019
decreased
$0.9 million
as compared to the three months ended
June 30, 2018
primarily as a result of finalization of the purchase price allocations related to the acquisition of Foam Fabricators and Rimports in February 2018, offset by the amortization of intangible assets at Velocity related to the Ravin acquisition in August 2018.
Interest Expense
We recorded interest expense totaling
$18.4 million
for the three months ended
June 30, 2019
compared to
$13.5 million
for the comparable period in
2018
, an increase of
$5.0 million
. The increase in interest expense for the quarter reflects the interest associated with the issuance of our Senior Notes in April 2018, as well as an increase of the average amount outstanding under our revolving credit facility in the second quarter of 2019 as compared to the second quarter of 2018.
Other income (expense)
For the quarter ended
June 30, 2019
, we recorded
$0.1 million
in other expense as compared to
$2.2 million
in other expense in the quarter ended
June 30, 2018
, an increase in expense of
$2.1 million
. Other expense in the second quarter of 2018 included a currency translation loss on the intercompany debt issued to our Manitoba Harvest subsidiary, which was sold in February 2019.
Income Taxes
We had an income tax provision of
$4.6 million
from continuing operations during the three months ended
June 30, 2019
compared to an income tax provision of
$3.3 million
from continuing operations during the same period in
2018
. While our loss from continuing operations before taxes for the quarter ended
June 30, 2019
decreased by approximately
$5.7 million
as compared to the prior year quarter ended June 30, 2018, the effect of foreign taxes at our subsidiaries increased our current tax expense provision during the quarter.
Six months ended
June 30, 2019
compared to six months ended
June 30, 2018
Net revenues
On a consolidated basis, net revenues for the six months ended
June 30, 2019
increased by approximately
$48.8 million
, or
7.8%
, compared to the corresponding period in 2018. Our acquisitions of Foam Fabricators and Rimports in February 2018 contributed $13.7 million and $35.8 million, respectively, to the increase in net revenues. During the six months ended June 30, 2019 compared to 2018, we also saw a notable increase in net sales at 5.11 (
$12.2 million
increase), partially offset by a decrease in sales at our legacy Sterno business. Refer to "Results of Operations - Business Segments" for a more detailed analysis of net revenues by business segment.
We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income on the investment of available funds, but we expect such earnings to be minimal. Our investment in our businesses is typically in the form of loans from the Company to such businesses, as well as equity interests in those companies. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and dividends on our equity ownership. However, on a consolidated basis, these items will be eliminated.
Cost of revenues
On a consolidated basis, cost of revenues increased approximately
$29.1 million
during the six months ended
June 30, 2019
compared to the corresponding period in 2018. Our acquisitions of Foam Fabricators and Rimports in February 2018 contributed $8.4 million and $28.8 million, respectively, to the increase. Gross profit as a percentage of net
revenues was approximately
35.9%
in the six months ended June 30, 2019 compared to
35.5%
in the six months ended June 30, 2018. 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 was approximately
$161.7 million
during both the six months ended
June 30, 2019
and 2018. Refer to "Results of Operations - Business Segments" for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, general and administrative expense was
$6.4 million
in the first six months of 2019 and
$7.6 million
in the first six months of 2018. The six months ended June 30, 2018 included additional professional fees at corporate associated with the implementation of new accounting standards and the refinancing of our credit facility.
Fees to manager
Pursuant to the MSA, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the six months ended
June 30, 2019
, we incurred approximately
$19.5 million
in management fees as compared to
$21.4 million
in fees in the six months ended June 30, 2018. The decrease was attributable to the sale of Manitoba Harvest in the first quarter of 2019 and Clean Earth in the second quarter of 2019. Concurrent with the June 2019 sale of Clean Earth, CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the quarter during which the Company next borrows under the 2018 Revolving Credit Facility.
Amortization expense
Amortization expense for the six months ended
June 30, 2019
increased
$4.4 million
as compared to the six months ended
June 30, 2018
primarily as a result of the acquisition of Foam Fabricators and Rimports in February 2018, and the add-on acquisition of Ravin by Velocity in 2018.
Interest Expense
We recorded interest expense totaling
$36.9 million
for the six months ended
June 30, 2019
compared to
$19.6 million
for the comparable period in 2018, an increase of
$17.3 million
. The increase in interest expense for the six months ended June 30, 2019 reflects the interest associated with the issuance of our Senior Notes in April 2018, as well as an increase of the average amount outstanding under our revolving credit facility in the first half of 2019 as compared to the first half of 2018.
Other income (expense)
For the six months ended
June 30, 2019
, we recorded
$5.8 million
in other expense as compared to
$3.5 million
in other expense in the six months ended
June 30, 2018
, an increase in expense of
$2.3 million
. In the current year, we incurred $5.3 million in loss on the sale of the Tilray Common Stock we received related to the sale of Manitoba Harvest, and a loss of $0.4 million related to foreign exchange losses on the repayment of the intercompany loans of Manitoba Harvest.
Income Taxes
We had an income tax provision of
$6.0 million
with an effective income tax rate of
55.5%
from continuing operations during the six months ended
June 30, 2019
compared to an income tax provision of
$2.1 million
with an effective income tax rate of
24.1%
from continuing operations during the six months ended
June 30, 2018
. While our earnings before taxes for the six months ended June 30, 2019 increased by approximately
$3.9 million
as compared to the prior six months ended June 30, 2018, which is primarily due to the effect of the loss at the corporate level, which is taxed as a partnership.
Results of Operations - Business Segments
Branded Consumer Businesses
5.11 Tactical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Net sales
|
|
$
|
92,836
|
|
|
100.0
|
%
|
|
$
|
84,723
|
|
|
100.0
|
%
|
|
$
|
180,925
|
|
|
100.0
|
%
|
|
$
|
168,680
|
|
|
100.0
|
%
|
|
Gross profit
|
|
$
|
45,475
|
|
|
49.0
|
%
|
|
$
|
40,674
|
|
|
48.0
|
%
|
|
$
|
88,420
|
|
|
48.9
|
%
|
|
$
|
79,225
|
|
|
47.0
|
%
|
|
SG&A
|
|
$
|
37,965
|
|
|
40.9
|
%
|
|
$
|
36,219
|
|
|
42.7
|
%
|
|
$
|
76,136
|
|
|
42.1
|
%
|
|
$
|
72,950
|
|
|
43.2
|
%
|
|
Operating income
|
|
$
|
5,073
|
|
|
5.5
|
%
|
|
$
|
2,020
|
|
|
2.4
|
%
|
|
$
|
7,411
|
|
|
4.1
|
%
|
|
$
|
1,403
|
|
|
0.8
|
%
|
Three months ended
June 30, 2019
compared to three months ended
June 30, 2018
Net sales
Net sales for the three months ended
June 30, 2019
were
$92.8 million
as compared to net sales of
$84.7 million
for the three months ended
June 30, 2018
, an increase of
$8.1 million
, or
9.6%
. This increase is due primarily to retail and e-commerce sales growth of $9.1 million or 41.9%, driven by growing demand in direct to consumer channels. Retail sales grew largely due to twelve new retail store openings since June 2018 (bringing the total store count to forty-eight as of
June 30, 2019
). Net sales were further increased through strong sales growth at Beyond, of $3.6 million or 116.8%, driven by increased contract business. Through the Beyond product category, 5.11 offers technical survival outerwear systems engineered for missions in extreme temperatures. The increase in net sales for the three months ended
June 30, 2019
as compared to the corresponding period in the prior year was offset by a $4.8 million decline in professional sales. During the quarters ended March 31, 2018 and June 30, 2018, 5.11 shipped a larger than usual amount of professional orders as they entered 2018 with a large backlog resulting from the implementation of a new enterprise resource planning (ERP) system in 2017 which affects the quarter over quarter comparison of professional sales.
Gross profit
Gross profit as a percentage of net sales was
49.0%
in the three months ended
June 30, 2019
as compared to
48.0%
for the three months ended
June 30, 2018
. The prior period cost of sales included a higher level of chargebacks and discretionary discounts granted to customers as 5.11 worked through the backlog associated with challenges experienced while implementing the new ERP system. In addition, fewer promotional discounts were granted to wholesale customers in the current quarter as compared to the three months ended June 30, 2018.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended
June 30, 2019
was
$38.0 million
, or
40.9%
of net sales compared to
$36.2 million
, or
42.7%
of net sales for the comparable period in
2018
. The comparable quarter in the prior year included a higher level of expense for with temporary labor costs associated with the new ERP system and costs to move into 5.11's new Manteca warehouse facility.
Income from operations
Income from operations for the three months ended
June 30, 2019
was
$5.1 million
, an increase of
$3.1 million
when compared to income from operations of
$2.0 million
for the same period in
2018
, based on the factors described above.
Six months ended
June 30, 2019
compared to six months ended
June 30, 2018
Net sales
Net sales for the six months ended
June 30, 2019
were
$180.9 million
as compared to net sales of
$168.7 million
for the six months ended
June 30, 2018
, an increase of
$12.2 million
, or
7.3%
. This increase is due primarily to retail and e-commerce sales growth of $14.9 million or 35.9%, driven by growing demand in direct to consumer channels. Retail sales grew largely due to twelve new retail store openings since June 2018 (bringing the total store count to forty-eight as of June 30, 2019). Net sales were further increased through strong sales growth at Beyond of $4.8 million or 79.2%, driven by increased contract business. The increase in net sales for the six months ended June 30, 2019 as compared to the corresponding period in the prior year was offset by a $8.7 million decline in professional sales.
Gross profit
Gross profit as a percentage of net sales was
48.9%
in the six months ended
June 30, 2019
as compared to
47.0%
for the six months ended
June 30, 2018
. The prior period cost of sales included a higher level of chargebacks and discretionary discounts granted to customers as 5.11 worked through the backlog associated with challenges experienced while implementing the new ERP system.
Selling, general and administrative expense
Selling, general and administrative expense for the six months ended
June 30, 2019
was
$76.1 million
, or
42.1%
of net sales compared to
$73.0 million
, or
43.2%
of net sales for the comparable period in 2018. The increase in selling, general and administrative expense was largely due to the twelve new retail store openings since June 2018. The comparable period ended June 30, 2018 included a higher level of expense associated with the move into 5.11’s new Manteca warehouse facility which did not reoccur in the six months ended June 30, 2019
.
Income from operations
Income from operations for the six months ended
June 30, 2019
was
$7.4 million
, an increase of
$6.0 million
when compared to income from operations of
$1.4 million
for the same period in 2018, based on the factors described above.
Ergobaby
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Net sales
|
|
$
|
22,971
|
|
|
100.0
|
%
|
|
$
|
23,954
|
|
|
100.0
|
%
|
|
$
|
45,423
|
|
|
100.0
|
%
|
|
$
|
46,116
|
|
|
100.0
|
%
|
|
Gross profit
|
|
$
|
14,573
|
|
|
63.4
|
%
|
|
$
|
15,784
|
|
|
65.9
|
%
|
|
$
|
28,791
|
|
|
63.4
|
%
|
|
$
|
30,723
|
|
|
66.6
|
%
|
|
SG&A
|
|
$
|
9,827
|
|
|
42.8
|
%
|
|
$
|
10,083
|
|
|
42.1
|
%
|
|
$
|
18,959
|
|
|
41.7
|
%
|
|
$
|
20,754
|
|
|
45.0
|
%
|
|
Operating income
|
|
$
|
2,795
|
|
|
12.2
|
%
|
|
$
|
3,575
|
|
|
14.9
|
%
|
|
$
|
5,931
|
|
|
13.1
|
%
|
|
$
|
5,915
|
|
|
12.8
|
%
|
Three months ended
June 30, 2019
compared to three months ended
June 30, 2018
Net sales
Net sales for the three months ended
June 30, 2019
were
$23.0 million
, a decrease of
$1.0 million
, or
4.1%
, compared to the same period in
2018
. During the three months ended
June 30, 2019
, international sales were approximately
$16.1 million
, representing an increase of
$1.5 million
over the corresponding period in
2018
, primarily as a result of increased sales volume at Ergobaby's Asia-Pacific distributors. Domestic sales were $6.9 million in the second quarter of
2019
, reflecting a decrease of $2.5 million compared to the corresponding period in
2018
. The decrease in domestic sales was driven primarily by the Tula brand within the quarter.
Gross profit
Gross profit as a percentage of net sales was
63.4%
for the quarter ended
June 30, 2019
, as compared to
65.9%
for the three months ended
June 30, 2018
. The decrease in gross profit was due to a shift in the sales mix from higher margin channels to lower margin channels quarter over quarter.
Selling, general and administrative expense
Selling, general and administrative expense decreased quarter over quarter, with expense of
$9.8 million
, or
42.8%
of net sales for the three months ended
June 30, 2019
as compared to
$10.1 million
or
42.1%
of net sales for the same period of
2018
. The decrease in selling, general and administrative expense as a percentage of net sales in the three months ended
June 30, 2019
as compared to the comparable period in the prior year is due to lower variable expenses related to sales and less fluctuation of exchange rates during the current period.
Income from operations
Income from operations for the three months ended
June 30, 2019
decreased
$0.8 million
, compared to the same period of
2018
, based on the factors noted above.
Six months ended
June 30, 2019
compared to six months ended
June 30, 2018
Net sales
Net sales for the six months ended
June 30, 2019
were
$45.4 million
, a decrease of
$0.7 million
, or
1.5%
, compared to the same period in 2018. During the six months ended June 30, 2019, international sales were approximately
$31.2 million
, representing an increase of
$2.7 million
over the corresponding period in 2018, primarily as a result of increased sales volume at Ergobaby's Asia-Pacific distributors. Domestic sales were $14.2 million in the first half of 2019, reflecting a decrease of $3.4 million compared to the corresponding period in 2018. The decrease in domestic sales was primarily the result of a decline in the Tula domestic business.
Gross profit
Gross profit as a percentage of net sales was
63.4%
for the six months ended
June 30, 2019
, as compared to
66.6%
for the six months ended
June 30, 2018
. The decrease in gross profit was due to a shift in the sales mix from higher margin channels to lower margin channels.
Selling, general and administrative expense
Selling, general and administrative expense decreased
$1.8 million
for the six months ended June 30, 2019 as compared to the corresponding period in the prior year, with expense of
$19.0 million
, or
41.7%
of net sales for the six months ended
June 30, 2019
as compared to
$20.8 million
or
45.0%
of net sales for the corresponding period in 2018. The decrease in selling, general and administrative expense as a percentage of net sales in the six months ended
June 30, 2019
as compared to the comparable period in the prior year is due to expenses related to the bankruptcy of a large U.S. retail customer that were incurred in the first quarter of 2018, reduction in marketing spend, lower variable expenses related to sales, and a decrease in payroll expense during the current period.
Income from operations
Income from operations for both the six months ended
June 30, 2019
and 2018 was
$5.9 million
, based on the factors noted above.
Liberty Safe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Net sales
|
|
$
|
20,633
|
|
|
100.0
|
%
|
|
$
|
20,416
|
|
|
100.0
|
%
|
|
42,837
|
|
|
100.0
|
%
|
|
43,869
|
|
|
100.0
|
%
|
|
Gross profit
|
|
$
|
4,649
|
|
|
22.5
|
%
|
|
$
|
5,019
|
|
|
24.6
|
%
|
|
9,070
|
|
|
21.2
|
%
|
|
11,268
|
|
|
25.7
|
%
|
|
SG&A
|
|
$
|
2,847
|
|
|
13.8
|
%
|
|
$
|
3,265
|
|
|
16.0
|
%
|
|
5,710
|
|
|
13.3
|
%
|
|
6,556
|
|
|
14.9
|
%
|
|
Operating income
|
|
$
|
1,671
|
|
|
8.1
|
%
|
|
$
|
1,612
|
|
|
7.9
|
%
|
|
3,086
|
|
|
7.2
|
%
|
|
4,427
|
|
|
10.1
|
%
|
Three months ended
June 30, 2019
compared to three months ended
June 30, 2018
Net sales
Net sales for the quarter ended
June 30, 2019
increased approximately
$0.2 million
, or
1.1%
, to
$20.6 million
, compared to the corresponding quarter ended
June 30, 2018
. Non-Dealer sales were comparable quarter over quarter at approximately $8.2 million in both the three months ended
June 30, 2019
and
June 30, 2018
. Dealer sales totaled approximately $12.5 million in the three months ended
June 30, 2019
compared to $12.2 million in the same period in
2018
, representing an increase of $0.3 million or 2.5%.
Gross profit
Gross profit as a percentage of net sales totaled approximately
22.5%
and
24.6%
for the quarters ended
June 30, 2019
and
June 30, 2018
, respectively. The decrease in gross profit as a percentage of net sales during the three months ended
June 30, 2019
compared to the same period in
2018
is primarily attributable to capitalized inventory variances and lower profit on dealer sales in the current quarter.
Selling, general and administrative expense
Selling, general and administrative expense was
$2.8 million
for the three months ended
June 30, 2019
compared to
$3.3 million
for the three months ended
June 30, 2018
. The decrease in selling, general and administrative expense during the current quarter is primarily related to planned expense reductions and the timing of annual advertising spend. Selling, general and administrative expense represented
13.8%
of net sales in the three months ended June 30,
2019
and
16.0%
of net sales for the same period of
2018
.
Income from operations
Income from operations increased during the three months ended
June 30, 2019
to
$1.7 million
, as compared to
$1.6 million
in the corresponding period in
2018
. This increase was primarily a result of the factors noted above.
Six months ended
June 30, 2019
compared to six months ended
June 30, 2018
Net sales
Net sales for the six months ended
June 30, 2019
decreased approximately
$1.0 million
, or
2.4%
, to
$42.8 million
, compared to the corresponding six months ended
June 30, 2018
. Non-Dealer sales were approximately $15.8 million in the six months ended
June 30, 2019
compared to $17.2 million for the six months ended
June 30, 2018
, representing a decrease of $1.4 million, or 8.1%. The decrease is Non-Dealer sales was primarily due to softer demand in the sporting goods channel. Dealer sales totaled approximately $27.0 million in the six months ended June 30, 2019 compared to $26.6 million in the same period in 2018, representing an increase of $0.4 million or 1.5%.
Gross profit
Gross profit as a percentage of net sales totaled approximately
21.2%
and
25.7%
for the six months ended
June 30, 2019
and
June 30, 2018
, respectively. The decrease in gross profit as a percentage of net sales during the six months ended
June 30, 2019
compared to the same period in 2018 is primarily attributable to increases in raw material and capitalized manufacturing variances. Liberty saw a rise in raw material costs, particularly the cost of steel, during 2018 as the tariffs on imported steel led to higher domestic steel prices. We anticipate steel prices will begin to decline in the back half of 2019. On average, materials account for approximately 60% of the total costs of a safe, with steel accounting for 40% of material costs.
Selling, general and administrative expense
Selling, general and administrative expense was
$5.7 million
for the six months ended
June 30, 2019
compared to
$6.6 million
for the six months ended
June 30, 2018
. The decrease in selling, general and administrative expense during the first six months of 2019 is primarily related to planned expense reductions and the timing of annual adverting spend. Selling, general and administrative expense represented
13.3%
of net sales in the six months ended June 30 31, 2019 and
14.9%
of net sales for the same period of 2018.
Income from operations
Income from operations decreased
$1.3 million
during the six months ended
June 30, 2019
to
$3.1 million
, compared to the corresponding period in 2018. This decrease was primarily a result of the decrease in gross profit in the first six months of the current year, for the reasons noted above.
Velocity Outdoor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Net sales
|
|
$
|
29,611
|
|
|
100.0
|
%
|
|
$
|
35,570
|
|
|
100.0
|
%
|
|
60,748
|
|
|
100.0
|
%
|
|
59,977
|
|
|
100.0
|
%
|
|
Gross profit
|
|
$
|
7,531
|
|
|
25.4
|
%
|
|
$
|
10,224
|
|
|
28.7
|
%
|
|
16,818
|
|
|
27.7
|
%
|
|
17,303
|
|
|
28.8
|
%
|
|
SG&A
|
|
$
|
5,201
|
|
|
17.6
|
%
|
|
$
|
5,871
|
|
|
16.5
|
%
|
|
11,744
|
|
|
19.3
|
%
|
|
11,342
|
|
|
18.9
|
%
|
|
Operating income (loss)
|
|
$
|
(74
|
)
|
|
(0.2
|
)%
|
|
$
|
3,019
|
|
|
8.5
|
%
|
|
267
|
|
|
0.4
|
%
|
|
3,292
|
|
|
5.5
|
%
|
Three months ended
June 30, 2019
compared to three months ended
June 30, 2018
Net sales
Net sales for the three months ended
June 30, 2019
were
$29.6 million
, a decrease of
$6.0 million
or
16.8%
, compared to the same period in
2018
. The decrease in net sales for the three months ended
June 30, 2019
is primarily due to the Junior Reserve Officer Training Corps (JROTC) contract shipments in the second quarter of 2018, which did not recur in the current year.
Gross profit
Gross profit for the quarter ended June 30, 2019 decreased
$2.7 million
as compared to the quarter ended June 30, 2018. Gross profit as a percentage of net sales was
25.4%
for the three months ended
June 30, 2019
as compared to
28.7%
in the three months ended
June 30, 2018
. The decrease in gross profit as a percentage of net sales was primarily attributable to margins associated with 2018 JROTC sales as well as with product mix.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended
June 30, 2019
was
$5.2 million
, or
17.6%
of net sales compared to
$5.9 million
, or
16.5%
of net sales for the three months ended
June 30, 2018
. The decrease in selling, general and administrative expense for the three months ended
June 30, 2019
is primarily related to lower sales related expenses and the integration fees paid to CGM in the prior year, partially offset by the expenses associated with the Ravin Crossbows acquisition.
Income (loss) from operations
Loss from operations for the three months ended
June 30, 2019
was
$0.1 million
, a decrease of
$3.1 million
when compared to income from operations of
$3.0 million
for the same period in
2018
, based on the factors described above.
Six months ended
June 30, 2019
compared to six months ended
June 30, 2018
Net sales
Net sales for the six months ended
June 30, 2019
were
$60.7 million
, an increase of
$0.8 million
or
1.3%
, compared to the same period in 2018. The increase in net sales for the six months ended
June 30, 2019
is primarily due to the add-on acquisition of Ravin Crossbows, which had net sales of $15.5 million in the six months ended
June 30, 2019
, partially offset by sales associated with the Junior Reserve Officer Training Corps (JROTC) contract that shipped in the first half of 2018.
Gross profit
Gross profit as a percentage of net sales was
27.7%
for the six months ended
June 30, 2019
as compared to
28.8%
in the six months ended
June 30, 2018
. The decrease in gross profit of
$0.5 million
was driven primarily by the impact of the 2018 JROTC contract partially offset by the acquisition of Ravin Crossbows.
Selling, general and administrative expense
Selling, general and administrative expense for the six months ended
June 30, 2019
was
$11.7 million
, or
19.3%
of net sales compared to
$11.3 million
, or
18.9%
of net sales for the six months ended
June 30, 2018
. The increase in selling, general and administrative expense for the six months ended
June 30, 2019
is primarily related to the acquisition of Ravin partially offset by sales related expenses along with the nonrecurrence of integration fees paid to CGM.
Income from operations
Income from operations for the six months ended
June 30, 2019
was
$0.3 million
, a decrease of
$3.0 million
when compared to income from operations of
$3.3 million
for the same period in 2018, based on the factors described above.
Niche Industrial Businesses
Advanced Circuits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Net sales
|
|
$
|
22,439
|
|
|
100.0
|
%
|
|
$
|
22,967
|
|
|
100.0
|
%
|
|
45,508
|
|
|
100.0
|
%
|
|
45,030
|
|
|
100.0
|
%
|
|
Gross profit
|
|
$
|
10,461
|
|
|
46.6
|
%
|
|
$
|
10,489
|
|
|
45.7
|
%
|
|
21,065
|
|
|
46.3
|
%
|
|
20,515
|
|
|
45.6
|
%
|
|
SG&A
|
|
$
|
3,761
|
|
|
16.8
|
%
|
|
$
|
3,688
|
|
|
16.1
|
%
|
|
7,528
|
|
|
16.5
|
%
|
|
7,346
|
|
|
16.3
|
%
|
|
Operating income
|
|
$
|
6,484
|
|
|
28.9
|
%
|
|
$
|
6,368
|
|
|
27.7
|
%
|
|
12,965
|
|
|
28.5
|
%
|
|
12,300
|
|
|
27.3
|
%
|
Three months ended
June 30, 2019
compared to three months ended
June 30, 2018
Net sales
Net sales for the three months ended
June 30, 2019
were
$22.4 million
, a decrease of approximately
$0.5 million
or
2.3%
compared to the three months ended
June 30, 2018
. The decrease in net sales was due to decreased sales in Quick-Turn Small-Run PCBs, Quick-Turn Production PCBs and subcontract, partially offset by increased sales in Long-Lead Time PCBs and a decrease in promotions. Quick-Turn Small-Run PCBs comprised approximately 19.3% of gross sales and Quick-Turn Production PCBs represented approximately 31.6% of gross sales for the
second
quarter of
2019
. Quick-Turn Small-Run PCBs comprised approximately 19.1% of gross sales and Quick-Turn Production PCBs represented approximately 32.9% of gross sales for the
second
quarter of
2018
.
Gross profit
Gross profit as a percentage of net sales increased 90 basis points during the three months ended
June 30, 2019
compared to the corresponding period in
2018
(
46.6%
at
June 30, 2019
compared to
45.7%
at
June 30, 2018
) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately
$3.8 million
in the three months ended
June 30, 2019
compared to
$3.7 million
in the three months ended
June 30, 2018
. Selling, general and administrative expense represented
16.8%
of net sales for the three months ended
June 30, 2019
compared to
16.1%
of net sales in the corresponding period in
2018
.
Income from operations
Income from operations for the three months ended
June 30, 2019
was approximately
$6.5 million
compared to
$6.4 million
in the same period in
2018
, an increase of approximately
$0.1 million
, principally as a result of the factors described above.
Six months ended
June 30, 2019
compared to six months ended
June 30, 2018
Net sales
Net sales for the six months ended
June 30, 2019
were
$45.5 million
, an increase of approximately
$0.5 million
or
1.1%
compared to the six months ended June 30, 2018. The increase in net sales was due to increased sales in Long-Lead Time PCBs, Subcontract PCBs, and a decrease in promotions, partially offset by decreased sales in Quick-Turn Production PCBs. Quick-Turn Small-Run PCBs comprised approximately 19.3% of gross sales and Quick-Turn Production PCBs represented approximately 31.7% of gross sales for the six months ended June 30, 2019. Quick-Turn Small-Run PCBs comprised approximately 19.2% of gross sales and Quick-Turn Production PCBs represented approximately 33.6% of gross sales for the six months ended June 30, 2018.
Gross profit
Gross profit as a percentage of net sales increased 70 basis points during the six months ended
June 30, 2019
compared to the corresponding period in 2018 (
46.3%
at June 30, 2019 compared to
45.6%
at
June 30, 2018
) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately
$7.5 million
in the six months ended
June 30, 2019
compared to
$7.3 million
in the six months ended
June 30, 2018
. Selling, general and administrative expense represented
16.5%
of net sales for the six months ended June 30, 2019 compared to
16.3%
of net sales in the corresponding period in 2018.
Income from operations
Income from operations for the six months ended
June 30, 2019
was approximately
$13.0 million
compared to
$12.3 million
in the same period in 2018, an increase of approximately
$0.7 million
, principally as a result of the factors described above.
Arnold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Net sales
|
|
$
|
29,481
|
|
|
100.0
|
%
|
|
$
|
31,196
|
|
|
100.0
|
%
|
|
59,509
|
|
|
100.0
|
%
|
|
60,595
|
|
|
100.0
|
%
|
|
Gross profit
|
|
$
|
7,852
|
|
|
26.6
|
%
|
|
$
|
8,785
|
|
|
28.2
|
%
|
|
15,091
|
|
|
25.4
|
%
|
|
16,495
|
|
|
27.2
|
%
|
|
SG&A
|
|
$
|
4,690
|
|
|
15.9
|
%
|
|
$
|
4,857
|
|
|
15.6
|
%
|
|
9,487
|
|
|
15.9
|
%
|
|
9,856
|
|
|
16.3
|
%
|
|
Operating income
|
|
$
|
2,227
|
|
|
7.6
|
%
|
|
$
|
2,945
|
|
|
9.4
|
%
|
|
3,704
|
|
|
6.2
|
%
|
|
4,670
|
|
|
7.7
|
%
|
Three months ended
June 30, 2019
compared to three months ended
June 30, 2018
Net sales
Net sales for the three months ended
June 30, 2019
were approximately
$29.5 million
, a decrease of
$1.7 million
compared to the same period in
2018
. The decrease in net sales is primarily a result of lower demand across various markets. International sales were
$11.8 million
in the three months ended
June 30, 2019
and
$12.3 million
in the three months ended
June 30, 2018
.
Gross profit
Gross profit for the three months ended
June 30, 2019
was approximately
$7.9 million
compared to approximately
$8.8 million
in the same period of
2018
. Gross profit as a percentage of net sales decreased from
28.2%
for the quarter ended
June 30, 2018
to
26.6%
in the quarter ended
June 30, 2019
principally due to sales mix in the current quarter versus the comparable quarter in the prior year.
Selling, general and administrative expense
Selling, general and administrative expense in the three month period ended
June 30, 2019
was
$4.7 million
, which compared favorably to approximately
$4.9 million
for the three months ended
June 30, 2018
. Selling, general and administrative expense was
15.9%
of net sales in the three months ended
June 30, 2019
and
15.6%
in the three months ended
June 30, 2018
.
Income from operations
Income from operations for the three months ended
June 30, 2019
was approximately
$2.2 million
, a decrease of
$0.7 million
when compared to the same period in
2018
, as a result of the factors noted above.
Six months ended
June 30, 2019
compared to six months ended
June 30, 2018
Net sales
Net sales for the six months ended
June 30, 2019
were approximately
$59.5 million
, a decrease of
$1.1 million
compared to the corresponding period in 2018. The decrease in net sales is primarily a result of reduced demand in various markets. International sales were
$24.0 million
in the six months ended June 30, 2019 and
$24.4 million
in the six months ended June 30, 2018.
Gross profit
Gross profit for the six months ended
June 30, 2019
was approximately
$15.1 million
compared to approximately
$16.5 million
in the same period of 2018. Gross profit as a percentage of net sales decreased from
27.2%
for the six months ended June 30, 2018 to
25.4%
in the six months ended
June 30, 2019
principally due to unfavorable sales mix.
Selling, general and administrative expense
Selling, general and administrative expense in the six month period ended
June 30, 2019
was
$9.5 million
, which compared favorably to approximately
$9.9 million
for the six months ended
June 30, 2018
. Selling, general and administrative expense was
15.9%
of net sales in the six months ended
June 30, 2019
and
16.3%
in the six months ended June 30, 2018.
Income from operations
Income from operations for the six months ended
June 30, 2019
was approximately
$3.7 million
, a decrease of
$1.0 million
when compared to the same period in 2018, as a result of the factors noted above.
Foam Fabricators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
Net sales
|
|
$
|
31,648
|
|
|
100.0
|
%
|
|
$
|
33,194
|
|
|
100.0
|
%
|
|
$
|
62,330
|
|
|
100.0
|
%
|
|
$
|
63,684
|
|
|
100.0
|
%
|
|
Gross profit
|
|
$
|
9,356
|
|
|
29.6
|
%
|
|
$
|
9,017
|
|
|
27.2
|
%
|
|
$
|
17,844
|
|
|
28.6
|
%
|
|
$
|
16,538
|
|
|
26.0
|
%
|
|
SG&A
|
|
$
|
2,746
|
|
|
8.7
|
%
|
|
$
|
3,054
|
|
|
9.2
|
%
|
|
$
|
5,482
|
|
|
8.8
|
%
|
|
$
|
7,398
|
|
|
11.6
|
%
|
|
Operating income
|
|
$
|
4,364
|
|
|
13.8
|
%
|
|
$
|
3,031
|
|
|
9.1
|
%
|
|
$
|
7,870
|
|
|
12.6
|
%
|
|
$
|
5,017
|
|
|
7.9
|
%
|
Pro forma financial information for Foam Fabricators for the six months ended June 30, 2018 includes pre-acquisition results of operations for the period from January 1, 2018 through February 15, 2018, the date of acquisition of Foam, for comparative purposes. The historical results of Foam Fabricators have been adjusted to reflect the purchase accounting adjustments recorded in connection with the acquisition: $0.2 million in stock compensation expense and $1.0 million in amortization expense, as well as $0.1 million in management fees that would have been incurred by Foam Fabricators if we owned the company during this period.
Three months ended
June 30, 2019
compared to three months ended
June 30, 2018
Net sales
Net sales for the quarter ended
June 30, 2019
were
$31.6 million
, a decrease of
$1.5 million
, or
4.7%
, compared to the quarter ended
June 30, 2018
. The decrease in net sales was primarily due to a nonrecurring customer from the prior year as well as a decrease in sales in the automotive and protective packaging categories in the current period.
Gross profit
Gross profit as a percentage of net sales was
29.6%
and
27.2%
for the three months ended
June 30, 2019
and
2018
, respectively. The increase in gross profit as a percentage of net sales in the quarter ended June 30, 2019 was primarily due to the decreasing price of expanded polystyrene ("EPS") resin. A majority of Foam Fabricator's products are made with EPS resin, an oil and natural gas derived polymer with an added expansion agent, therefore raw material costs will increase with increases in the price of oil and natural gas.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended
June 30, 2019
was
$2.7 million
as compared to
$3.1 million
for the three months ended
June 30, 2018
, a decrease of
$0.3 million
. Selling, general and administrative expense for the three months ended June 30, 2018 included $0.3 million in integration service fees paid to CGM. Excluding the effect of the integration service fee, selling general and administrative expense was comparable quarter over quarter.
Income from operations
Income from operations was
$4.4 million
for the three months ended
June 30, 2019
as compared to
$3.0 million
for the three months ended
June 30, 2018
, an increase of
$1.3 million
, primarily as a result of the factors noted above as well as lower amortization expense of intangible assets in the current quarter as compared to the estimate of amortization expense based on the initial draft of the purchase price allocation included in the quarter ended June 30, 2018.
Six months ended
June 30, 2019
compared to pro forma six months ended
June 30, 2018
Net sales
Net sales for the six months ended
June 30, 2019
were
$62.3 million
, a decrease of
$1.4 million
, or
2.1%
, compared to the six months ended
June 30, 2018
. The decrease in net sales was primarily due to a nonrecurring customer from the prior year as well as well as a decrease in sales in the automotive and protective packaging categories in the current period.
Gross profit
Gross profit as a percentage of net sales was
28.6%
and
26.0%
for the six months ended
June 30, 2019
and 2018, respectively. Cost of sales for the six months ended June 30, 2018 included $0.7 million of expense related to the amortization of inventory step-up resulting from the purchase price allocation of Foam Fabricators. Excluding the effect of the inventory step-up, prior year gross profit as a percentage of net sales was 27.0%. The increase in gross profit as a percentage of net sales in the six months ended June 30, 2019 was due to decreasing EPS prices in the current year.
Selling, general and administrative expense
Selling, general and administrative expense for the six months ended
June 30, 2019
was
$5.5 million
as compared to
$7.4 million
for the six months ended
June 30, 2018
, a decrease of
$1.9 million
. Selling, general and administrative expense for the six months ended June 30, 2018 included $1.5 million in transaction expenses related to the acquisition and $0.3 million in incremental integration service fees paid to CGM. Excluding the acquisition expenses and incremental integration service fees, selling, general and administrative expense for the six months ended June 30, 2018 was $5.6 million, which is consistent with the expenses incurred in the current period.
Income from operations
Income from operations was
$7.9 million
for the six months ended
June 30, 2019
as compared to
$5.0 million
for the six months ended
June 30, 2018
, an increase of
$2.9 million
, primarily as a result of the factors noted above.
Sterno
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
Net sales
|
|
$
|
86,465
|
|
|
100.0
|
%
|
|
$
|
87,969
|
|
|
100.0
|
%
|
|
177,661
|
|
|
100.0
|
%
|
|
$
|
177,996
|
|
|
100.0
|
%
|
|
Gross profit
|
|
$
|
22,665
|
|
|
26.2
|
%
|
|
$
|
18,486
|
|
|
21.0
|
%
|
|
45,020
|
|
|
25.3
|
%
|
|
$
|
40,717
|
|
|
22.9
|
%
|
|
SG&A
|
|
$
|
10,162
|
|
|
11.8
|
%
|
|
$
|
10,493
|
|
|
11.9
|
%
|
|
20,254
|
|
|
11.4
|
%
|
|
$
|
20,585
|
|
|
11.6
|
%
|
|
Operating income
|
|
$
|
8,113
|
|
|
9.4
|
%
|
|
$
|
2,728
|
|
|
3.1
|
%
|
|
16,097
|
|
|
9.1
|
%
|
|
$
|
11,225
|
|
|
6.3
|
%
|
Pro forma financial information for Sterno for the six months ended June 30, 2018 includes pre-acquisition results of operations for Rimports, which was acquired by Sterno on February 26, 2018, for the period from January 1, 2018 through the date of acquisition for comparative purposes. The historical results of Rimports have been adjusted to reflect an additional $1.6 million in amortization expense recorded in connection with the purchase accounting adjustments related to the acquisition.
Three months ended
June 30, 2019
compared to three months ended
June 30, 2018
Net sales
Net sales for the three months ended
June 30, 2019
were approximately
$86.5 million
, a decrease of
$1.5 million
, or
1.7%
, compared to the same period in
2018
. The net sales variance reflects a decrease in sales of outdoor lighting products primarily as a result of a shorter spring period in the domestic market due to weather and higher levels of chargebacks and rebates compared to the second quarter of 2018, offset by an increase in sales volume at Rimports.
Gross profit
Gross profit as a percentage of net sales increased from
21.0%
for the three months ended
June 30, 2018
to
26.2%
for the same period ended
June 30, 2019
. In the second quarter of 2018, Sterno recognized $4.6 million in costs of goods sold related to the amortization of inventory step-up resulting from the purchase price allocation of the Rimports acquisition. After eliminating the effect of the purchase price allocation in the prior year, gross profit as a percentage
of sales was 26.3% in the second quarter of 2018, which is comparable to the gross profit percentage in the current quarter.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended
June 30, 2019
and
2018
was consistent quarter over quarter, at approximately
$10.2 million
and
$10.5 million
, respectively. Selling, general and administrative expense represented
11.8%
of net sales for the three months ended
June 30, 2019
and
11.9%
for the three months ended June 30, 2018.
Income from operations
Income from operations for the three months ended
June 30, 2019
was approximately
$8.1 million
, an increase of
$5.4 million
compared to the three months ended
June 30, 2018
based on the factors noted above.
Six months ended
June 30, 2019
compared to pro forma six months ended
June 30, 2018
Net sales
Net sales for the six months ended
June 30, 2019
were approximately
$177.7 million
, a decrease of
$0.3 million
, or
0.2%
, compared to the corresponding period in 2018. The net sales variance reflects a decrease in sales of outdoor lighting products primarily as a result of a shorter spring period in the domestic market due to weather and higher levels of chargebacks and rebates compared to the prior year, offset by an increase in sales volume at Rimports.
Gross profit
Gross profit as a percentage of net sales increased from
22.9%
for the six months ended
June 30, 2018
to
25.3%
for the same period ended
June 30, 2019
. In the six months ended June 30, 2018, Sterno recognized $4.6 million in costs of goods sold related to the amortization of inventory step-up resulting from the purchase price allocation of the Rimports acquisition. After eliminating the effect of the purchase price allocation in the prior year, gross profit as a percentage of sales for the six months ended June 30, 2018 was 25.5%, which is comparable to the gross profit percentage in the six months ended June 30, 2019.
Selling, general and administrative expense
Selling, general and administrative expense for the six months ended
June 30, 2019
and 2018 was
$20.3 million
and
$20.6 million
, respectively, a decrease of
$0.3 million
. The expense from the prior year reflects $0.6 million in acquisition expenses related to the acquisition of Rimports. Excluding the acquisition expenses, selling, general and administrative expense decreased $0.9 million, reflecting lower marketing costs, commission, legal fees and various cost savings initiatives. Selling, general and administrative expense represented
11.4%
of net sales for the six months ended
June 30, 2019
and
11.6%
for the six months ended
June 30, 2018
.
Income from operations
Income from operations for the six months ended
June 30, 2019
was approximately
$16.1 million
, an increase of
$4.9 million
compared to the six months ended
June 30, 2018
based on the factors noted above.
Liquidity and Capital Resources
Liquidity
At
June 30, 2019
, we had approximately
$485.9 million
of cash and cash equivalents on hand, an increase of
$437.1 million
as compared to the year ended
December 31, 2018
primarily as a result of the proceeds received from our sale of Manitoba Harvest in February 2019 and Clean Earth in June 2019. The majority of our cash is in non-interest bearing checking accounts or invested in short-term money market accounts and is maintained in accordance with the Company’s investment policy, which identifies allowable investments and specifies credit quality standards. The change in cash and cash equivalents is as follows:
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
(in thousands)
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Cash provided by operating activities
|
|
$
|
8,654
|
|
|
$
|
35,312
|
|
|
|
|
|
|
|
For the
six
months ended
June 30, 2019
, cash flows provided by operating activities totaled approximately
$8.7 million
, which represents a
$26.7 million
decrease compared to cash provided by operating activities of
$35.3 million
during the
six
-month period ended
June 30, 2018
. Cash used in operating activities for working capital for the
six
months ended
June 30, 2019
was
$17.5 million
, as compared to cash used in operating activities for working capital of
$4.7 million
for the
six
months ended
June 30, 2018
. The increase in cash used for working capital purposes in the current year primarily reflects the effect of our acquisitions that occurred in February 2018 which resulted in a significant increase in cash needed to fund working capital, particularly at Rimports, our Sterno add-on acquisition. The decrease in cash flows provided by operating activities in the current year was also attributable to the change in the mark-to-market on our interest rate swap, with the six months ended June 30, 2018 having an unrealized gain of $3.9 million, and the six months ending June 30, 2019 having an unrealized loss of $3.4 million, for a net change of $7.3 million due to the change in the present value of future payments and receipts under the interest rate swap agreement.
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
(in thousands)
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Cash provided by (used in) investing activities
|
|
$
|
718,000
|
|
|
$
|
(454,715
|
)
|
|
|
|
|
|
|
Cash flows provided by investing activities for the
six
months ended
June 30, 2019
totaled
$718.0 million
, compared to cash used in investing activities of
$454.7 million
in the same period of
2018
. Cash flows from Manitoba Harvest and Clean Earth, which are reflected as discontinued operations, totaled
$279.2 million
in the current period and reflects the effect of the sale transactions. Cash provided by investing activities from continuing operations in the current year primarily relates to the proceeds received from the sale of Clean Earth and Manitoba Harvest. In the prior year, we had a platform acquisition in the first quarter, Foam Fabricators, and several add-on acquisitions at our subsidiaries, including the Sterno acquisition of Rimports in February 2018. The total amount spent on acquisitions in the
six
months ended
June 30, 2018
was approximately
$391.2 million
. Capital expenditures in the
six
months ended
June 30, 2019
decreased approximately
$10.8 million
compared to the same period in the prior year, due primarily to higher than typical expenditures at our 5.11 and Arnold businesses in the prior year. We expect capital expenditures for the full year of
2019
to be approximately $35 million to $45 million.
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
(in thousands)
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Cash (used in) provided by financing activities
|
|
$
|
(292,750
|
)
|
|
$
|
415,358
|
|
|
|
|
|
|
|
Cash flows used in financing activities totaled approximately
$292.8 million
during the
six
months ended
June 30, 2019
compared to cash flows provided by financing activities of
$415.4 million
during the
six
months ended
June 30, 2018
. The 2018 activity primarily related to the financing of our acquisitions of Foam Fabricators and Rimports in February 2018, which were financed through draws on our 2014 Revolving Credit Facility, partially offset by net proceeds of
$96.5 million
from the Series B Preferred Shares offering in March 2018 which was used to repay a portion of the outstanding amount on the 2014 Revolving Credit Facility. In April 2018, we issued $400.0 million in Senior Notes and amended our credit facility. The proceeds from the issuance of the Senior Notes were used to pay down outstanding amounts under our credit facility. In the current year, we used proceeds from the sale of Manitoba Harvest and Clean Earth to repay the outstanding amount on the 2018 Revolving Credit Facility, and paid our distributions on our common and preferred shares, as well as a distribution to the Allocation Member of
$8.0 million
related primarily to the sale of Manitoba Harvest.
Intercompany Debt
A component of our acquisition financing strategy that we utilize in acquiring the businesses we own and manage is to provide both equity capital and debt capital, raised at the parent level through our existing credit facility. Our strategy of providing intercompany debt financing within the capital structure of the businesses that we acquire and manage allows us the ability to distribute cash to the parent company through monthly interest payments and amortization of the principal on these intercompany loans. Each loan to our businesses has a scheduled maturity and each business is entitled to repay all or a portion of the principal amount of the outstanding loans, without penalty, prior to maturity. Certain of our businesses have paid down their respective intercompany debt balances through the cash flow generated by these businesses and we have recapitalized, and expect to continue to recapitalize, these businesses in the normal course of our business. The recapitalization process involves funding the intercompany debt using either cash on hand at the parent or our applicable Credit Facility, and serves the purpose of optimizing the capital structure at our subsidiaries and providing the noncontrolling shareholders with a distribution on their ownership interest in a cash flow positive business. In January 2018, the Company completed a recapitalization at Sterno whereby the Company entered into an amendment to the intercompany loan agreement with Sterno (the "Sterno Loan Agreement"). The Sterno Loan Agreement was amended to (i) provide for term loan borrowings of $57.7 million to fund a distribution to the Company, which owned 100% of the outstanding equity of Sterno at the time of the recapitalization, and (ii) extend the maturity dates of the term loans.
Due to significant capital expenditures related to the implementation of a new ERP system, warehouse expansion and retail roll out, we granted 5.11 waivers under their intercompany debt agreement effective as of the quarter ended September 30, 2017 through December 31, 2018. The waivers permitted 5.11 to increase its allowable capital expenditure limits and excluded certain capital expenditures associated with the ERP system and warehouse expansion from the calculation of the fixed charge coverage ratio. We further amended the 5.11 intercompany debt agreement during 2018 to allow for an additional $5.0 million outstanding debt to be permitted under 5.11's Term B loan. In the first quarter of 2019, we further amended the 5.11 intercompany debt agreement to update the definition of capital expenditures to exclude capital expenditures made with respect to 5.11's retail stores from the calculation of the fixed charge coverage ratio. 5.11 was in compliance with the covenants under their intercompany debt agreement at June 30, 2019. Subsequent to the third quarter of 2018, we amended the Sterno Loan Agreement to increase the amount available to Sterno under their intercompany revolving credit facility. Liberty was not in compliance with the financial covenants under their intercompany loan agreement at December 31, 2018, and we amended the Liberty intercompany debt agreement to grant a waiver to them through the quarter ended December 31, 2019. Except as previously noted, all of our subsidiaries were in compliance with the financial covenants included within their intercompany credit arrangements at June 30, 2019.
As of
June 30, 2019
, we had the following outstanding loans due from each of our businesses:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
5.11 Tactical
|
|
$
|
198,577
|
|
|
Ergobaby
|
|
$
|
45,382
|
|
|
Liberty
|
|
$
|
47,239
|
|
|
Velocity Outdoor
|
|
$
|
124,463
|
|
|
Advanced Circuits
|
|
$
|
69,245
|
|
|
Arnold
|
|
$
|
74,430
|
|
|
Foam Fabricators
|
|
$
|
98,375
|
|
|
Sterno
|
|
$
|
250,383
|
|
Our primary source of cash is from the receipt of interest and principal on the outstanding loans to our businesses. Accordingly, we are dependent upon the earnings of and cash flow from these businesses, which are available for (i) operating expenses; (ii) payment of principal and interest under our 2018 Credit Facility; (iii) payments to CGM due pursuant to the MSA and the LLC Agreement; (iv) cash distributions to our shareholders; and (v) investments in future acquisitions. Payments made under (iii) above are required to be paid before distributions to shareholders and may be significant and exceed the funds held by us, which may require us to dispose of assets or incur debt to fund such expenditures.
We believe that we currently have sufficient liquidity and capital resources to meet our existing obligations, including quarterly distributions to our shareholders, as approved by our board of directors, over the next twelve months.
Financing Arrangements
2018 Credit Facility
In April 2018, we entered into an Amended and Restated Credit Agreement (the "2018 Credit Facility") to amend and restate the 2014 Credit Facility. The 2018 Credit Facility provides 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 (the “2018 Revolving Loan Commitment”), and (ii) a $500 million term loan (the “2018 Term Loan”).
We had
$599.8 million
in net availability under the 2018 Revolving Credit Facility at
June 30, 2019
. The outstanding borrowings under the 2018 Revolving Credit Facility include
$0.2 million
of outstanding letters of credit at
June 30, 2019
. At June 30, 2019, we had $493.8 million outstanding on the 2018 Term Loan. In July 2019, we repaid $193.8 million of the outstanding amount due under the 2018 Term Loan, leaving a remaining balance of $300 million as of July 31, 2019.
Senior Notes
On April 18, 2018, we consummated the issuance and sale of $400 million aggregate principal amount of our 8.000% due 2026 (the "Notes" or "Senior Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes will bear interest at the rate of 8.000% per annum and will mature on May 1, 2026. Interest on the Notes is payable in cash on May 1st and November 1st of each year. The Notes are general senior unsecured obligations of the Company and are not guaranteed by our subsidiaries.
The following table reflects required and actual financial ratios as of
June 30, 2019
included as part of the affirmative covenants in our 2018 Credit Facility.
|
|
|
|
|
|
|
|
|
Description of Required Covenant Ratio
|
|
Covenant Ratio Requirement
|
|
Actual Ratio
|
|
|
|
|
|
|
|
Fixed Charge Coverage Ratio
|
|
Greater than or equal to 1.50:1.0
|
|
1:67:1.0
|
|
Total Secured Debt to EBITDA Ratio
|
|
Less than or equal to 3.50:1.0
|
|
0.09:1.0
|
|
Total Debt to EBITDA Ratio
|
|
Less than or equal to 5.00:1.0
|
|
1.86:1.0
|
Interest Expense
The components of interest expense and periodic interest charges on outstanding debt are as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
2019
|
|
2018
|
|
Interest on credit facilities
|
$
|
16,322
|
|
|
$
|
15,581
|
|
|
Interest on Senior Notes
|
16,000
|
|
|
6,488
|
|
|
Unused fee on Revolving Credit Facility
|
882
|
|
|
855
|
|
|
Amortization of original issue discount
|
304
|
|
|
424
|
|
|
Unrealized (gain) loss on interest rate derivative
(1)
|
3,350
|
|
|
(3,900
|
)
|
|
Other interest expense
|
133
|
|
|
164
|
|
|
Interest income
|
(92
|
)
|
|
(20
|
)
|
|
Interest expense
|
$
|
36,899
|
|
|
$
|
19,592
|
|
|
|
|
|
|
|
Average daily balance outstanding - credit facilities
|
$
|
656,997
|
|
|
$
|
736,557
|
|
|
Effective interest rate -
credit facilities
|
6.4
|
%
|
|
3.6
|
%
|
(1)
On September 16, 2014, we purchased an interest rate swap (the "Swap") with a notional amount of $220 million effective April 1, 2016 through June 6, 2021. The agreement requires us to pay interest on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. At
June 30, 2019
, the current portion of the Swap was in a liability position and had a fair value of
$2.2 million
, and the non-current portion of the Swap was in a liability position
with a fair value of
$2.9 million
. The fair value of the Swap reflects the present value of future payments and receipts under the agreement and is reflected as a component of interest expense and non-current assets and current liabilities at
June 30, 2019
.
In the above table, we provide the effective interest rate on our credit facilities, including the effect of the Swap, and excluding the interest on our Senior Notes, which is at a fixed 8.000%.
Reconciliation of Non-GAAP Financial Measures
GAAP or U.S. GAAP refer to generally accepted accounting principles in the United States. From time to time we may publicly disclose certain "non-GAAP" financial measures in the course of our investor presentations, earnings releases, earnings conference calls or other venues. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented.
Non-GAAP financial measures are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These measures are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The tables below reconcile the most directly comparable GAAP financial measures to Earnings before Interest, Income Taxes, Depreciation and Amortization ("EBITDA"), Adjusted EBITDA, and Cash Flow Available for Distribution and Reinvestment ("CAD").
Reconciliation of Net income (Loss) to EBITDA and Adjusted EBITDA
EBITDA
– EBITDA is calculated as net income (loss) before interest expense, income tax expense (benefit), depreciation expense and amortization expense. Amortization expenses consist of amortization of intangibles and debt charges, including debt issuance costs, discounts, etc.
Adjusted EBITDA
– Adjusted EBITDA is calculated utilizing the same calculation as described above in arriving at EBITDA further adjusted by: (i) noncontrolling stockholder compensation, which generally consists of non-cash stock option expense; (ii) successful acquisition costs, which consist of transaction costs (legal, accounting, due diligence, etc.) incurred in connection with the successful acquisition of a business expensed during the period in compliance with ASC 805; (iii) management fees, which reflect fees due quarterly to our Manager in connection with our MSA, as well as Integration Services Fees paid by newly acquired companies; (iv) impairment charges, which reflect write downs to goodwill or other intangible assets; and (vi) foreign currency transaction gains or losses incurred in connection with the conversion of intercompany debt from a foreign functional currency to U.S. dollar.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors and reflect important financial measures as they exclude the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near term operations. When compared to income (loss) from continuing operations these financial measures are limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated with impairments. This presentation also allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition.
We believe that these measurements are also useful in measuring our ability to service debt and other payment obligations. EBITDA and Adjusted EBITDA are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss), which we consider to be the most comparable GAAP financial measure
(in thousands)
:
Adjusted EBITDA
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
5.11
|
|
Ergobaby
|
|
Liberty
|
|
Velocity Outdoor
|
|
ACI
|
|
Arnold
|
|
Foam
|
|
Sterno
|
|
Consolidated
|
|
Net income (loss)
(1)
|
$
|
303,610
|
|
|
$
|
(2,255
|
)
|
|
$
|
2,672
|
|
|
$
|
490
|
|
|
$
|
(5,636
|
)
|
|
$
|
7,578
|
|
|
$
|
11
|
|
|
$
|
1,906
|
|
|
$
|
3,054
|
|
|
$
|
311,430
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
—
|
|
|
311
|
|
|
1,380
|
|
|
368
|
|
|
(648
|
)
|
|
1,973
|
|
|
454
|
|
|
977
|
|
|
1,160
|
|
|
5,975
|
|
|
Interest expense, net
|
36,786
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
112
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
36,899
|
|
|
Intercompany interest
|
(41,454
|
)
|
|
9,110
|
|
|
1,868
|
|
|
2,157
|
|
|
5,599
|
|
|
3,424
|
|
|
3,198
|
|
|
4,524
|
|
|
11,574
|
|
|
—
|
|
|
Depreciation and amortization
|
993
|
|
|
10,658
|
|
|
4,239
|
|
|
839
|
|
|
6,661
|
|
|
1,267
|
|
|
3,245
|
|
|
6,148
|
|
|
11,142
|
|
|
45,192
|
|
|
EBITDA
|
299,935
|
|
|
17,826
|
|
|
10,159
|
|
|
3,854
|
|
|
6,088
|
|
|
14,242
|
|
|
6,907
|
|
|
13,555
|
|
|
26,930
|
|
|
399,496
|
|
|
Gain on sale of business
|
(328,164
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(328,164
|
)
|
|
Other (income) expense
|
(582
|
)
|
|
39
|
|
|
(4
|
)
|
|
29
|
|
|
718
|
|
|
(84
|
)
|
|
(2
|
)
|
|
325
|
|
|
85
|
|
|
524
|
|
|
Noncontrolling shareholder compensation
|
—
|
|
|
1,196
|
|
|
412
|
|
|
18
|
|
|
665
|
|
|
45
|
|
|
8
|
|
|
510
|
|
|
475
|
|
|
3,329
|
|
|
Loss on sale of investment
|
5,300
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,300
|
|
|
Integration services fee
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
281
|
|
|
—
|
|
|
281
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
266
|
|
|
—
|
|
|
58
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
324
|
|
|
Management fees
|
17,103
|
|
|
500
|
|
|
250
|
|
|
250
|
|
|
250
|
|
|
250
|
|
|
250
|
|
|
375
|
|
|
250
|
|
|
19,478
|
|
|
Adjusted EBITDA
|
$
|
(6,408
|
)
|
|
$
|
19,561
|
|
|
$
|
10,817
|
|
|
$
|
4,417
|
|
|
$
|
7,721
|
|
|
$
|
14,511
|
|
|
$
|
7,163
|
|
|
$
|
15,046
|
|
|
$
|
27,740
|
|
|
$
|
100,568
|
|
(1)
Net income (loss) does not include income from discontinued operations for the six months ended June 30, 2019.
Adjusted EBITDA
Six months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
5.11
|
|
Ergobaby
|
|
Liberty
|
|
Velocity Outdoor
|
|
ACI
|
|
Arnold
|
|
Foam
|
|
Sterno
|
|
Consolidated
|
|
Net income (loss)
(1)
|
$
|
(12,528
|
)
|
|
$
|
(5,873
|
)
|
|
$
|
2,279
|
|
|
$
|
1,731
|
|
|
$
|
(567
|
)
|
|
$
|
6,969
|
|
|
$
|
(980
|
)
|
|
$
|
184
|
|
|
$
|
(811
|
)
|
|
$
|
(9,596
|
)
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
—
|
|
|
(1,321
|
)
|
|
911
|
|
|
598
|
|
|
(374
|
)
|
|
1,434
|
|
|
2,346
|
|
|
(208
|
)
|
|
(1,299
|
)
|
|
2,087
|
|
|
Interest expense, net
|
19,439
|
|
|
5
|
|
|
1
|
|
|
—
|
|
|
148
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,592
|
|
|
Intercompany interest
|
(36,606
|
)
|
|
8,438
|
|
|
2,588
|
|
|
2,060
|
|
|
3,977
|
|
|
3,739
|
|
|
3,145
|
|
|
3,511
|
|
|
9,148
|
|
|
—
|
|
|
Depreciation and amortization
|
1,449
|
|
|
10,774
|
|
|
4,303
|
|
|
756
|
|
|
4,118
|
|
|
1,673
|
|
|
3,194
|
|
|
4,879
|
|
|
14,067
|
|
|
45,213
|
|
|
EBITDA
|
(28,246
|
)
|
|
12,023
|
|
|
10,082
|
|
|
5,145
|
|
|
7,302
|
|
|
13,814
|
|
|
7,705
|
|
|
8,366
|
|
|
21,105
|
|
|
57,296
|
|
|
Gain on sale of businesses
|
(1,165
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
(1,165
|
)
|
|
Loss on sale of fixed assets
|
—
|
|
|
—
|
|
|
—
|
|
|
59
|
|
|
—
|
|
|
|
|
|
48
|
|
|
6
|
|
|
—
|
|
|
113
|
|
|
Noncontrolling shareholder compensation
|
—
|
|
|
1,235
|
|
|
503
|
|
|
28
|
|
|
764
|
|
|
12
|
|
|
77
|
|
|
339
|
|
|
1,041
|
|
|
3,999
|
|
|
Acquisition related expenses
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,552
|
|
|
632
|
|
|
2,189
|
|
|
Integration services fee
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
750
|
|
|
—
|
|
|
—
|
|
|
844
|
|
|
—
|
|
|
1,594
|
|
|
Loss on foreign currency transactions
|
2,247
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,247
|
|
|
Management fees
|
19,155
|
|
|
500
|
|
|
250
|
|
|
250
|
|
|
250
|
|
|
250
|
|
|
250
|
|
|
281
|
|
|
250
|
|
|
21,436
|
|
|
Adjusted EBITDA
(2)
|
$
|
(8,004
|
)
|
|
$
|
13,758
|
|
|
$
|
10,835
|
|
|
$
|
5,482
|
|
|
$
|
9,066
|
|
|
$
|
14,076
|
|
|
$
|
8,080
|
|
|
$
|
11,388
|
|
|
$
|
23,028
|
|
|
$
|
87,709
|
|
(1)
Net income (loss) does not include loss from discontinued operations for the six months ended June 30, 2018.
(2)
As a result of the sale of Manitoba Harvest in February 2019 and Clean Earth in June 2019, Adjusted EBITDA for the six months ended June 30, 2019 does not include Adjusted EBITDA from Manitoba Harvest of $4.0 million and Clean Earth of $20.5 million.
Cash Flow Available for Distribution and Reinvestment
The table below details cash receipts and payments that are not reflected on our income statement in order to provide an additional measure of management's estimate of cash available for distribution ("CAD"). CAD is a non-GAAP measure that we believe provides additional, useful information to our shareholders in order to enable them to evaluate our ability to make anticipated quarterly distributions. CAD is not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The following table reconciles CAD to net income (loss) and cash flows provided by operating activities, which we consider to be the most directly comparable financial measure calculated and presented in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended
|
|
(in thousands)
|
June 30, 2019
|
|
June 30, 2018
|
|
Net income (loss)
|
$
|
328,331
|
|
|
$
|
(1,088
|
)
|
|
Adjustment to reconcile net income (loss) to cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
56,491
|
|
|
57,131
|
|
|
Gain on sale of businesses
|
(328,164
|
)
|
|
(1,165
|
)
|
|
Amortization of debt issuance costs and original issue discount
|
2,159
|
|
|
2,324
|
|
|
Unrealized (gain) loss on interest rate hedge
|
3,350
|
|
|
(3,900
|
)
|
|
Noncontrolling shareholder charges
|
5,268
|
|
|
5,165
|
|
|
Provision for loss on receivables
|
745
|
|
|
98
|
|
|
Deferred taxes
|
(12,366
|
)
|
|
(3,242
|
)
|
|
Other
|
496
|
|
|
135
|
|
|
Changes in operating assets and liabilities
|
(47,656
|
)
|
|
(20,146
|
)
|
|
Net cash provided by operating activities
|
8,654
|
|
|
35,312
|
|
|
Plus:
|
|
|
|
|
Unused fee on revolving credit facility
|
882
|
|
|
855
|
|
|
Integration services fee
(1)
|
281
|
|
|
1,594
|
|
|
Successful acquisition costs
|
596
|
|
|
2,347
|
|
|
Realized loss from foreign currency
(2)
|
363
|
|
|
2,247
|
|
|
Loss on sale of Tilray Common Stock
|
5,300
|
|
|
—
|
|
|
Changes in operating assets and liabilities
|
47,656
|
|
|
20,146
|
|
|
Other
|
—
|
|
|
791
|
|
|
Less:
|
|
|
|
|
Payment of interest rate swap
|
303
|
|
|
1,086
|
|
|
Maintenance capital expenditures:
(3)
|
|
|
|
|
Compass Group Diversified Holdings LLC
|
—
|
|
|
—
|
|
|
5.11 Tactical
|
1,336
|
|
|
2,429
|
|
|
Advanced Circuits
|
1,126
|
|
|
523
|
|
|
Arnold
|
1,806
|
|
|
2,123
|
|
|
Clean Earth
|
3,495
|
|
|
3,313
|
|
|
Ergobaby
|
237
|
|
|
407
|
|
|
Foam Fabricators
|
936
|
|
|
940
|
|
|
Liberty
|
307
|
|
|
935
|
|
|
Manitoba Harvest
|
—
|
|
|
257
|
|
|
Sterno
|
1,221
|
|
|
1,042
|
|
|
Velocity Outdoor
|
1,040
|
|
|
2,299
|
|
|
Other
|
535
|
|
|
—
|
|
|
Preferred share distribution
|
7,563
|
|
|
3,625
|
|
|
Estimated cash flow available for distribution and reinvestment
|
$
|
43,827
|
|
|
$
|
44,313
|
|
|
|
|
|
|
|
Distribution paid in April 2019/2018
|
$
|
(21,564
|
)
|
|
$
|
(21,564
|
)
|
|
Distribution paid in July 2019/2018
|
(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 or loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest.
|
|
|
|
(3)
|
Represents maintenance capital expenditures that were funded from operating cash flow, net of proceeds from the sale of property, plant and equipment, and excludes growth capital expenditures of approximately $8.5 million for the six months ended
June 30, 2019
and $14.5 million for the six months ended
June 30, 2018
.
|
Seasonality
Earnings of certain of our operating segments are seasonal in nature due to various recurring events, holidays and seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and fourth quarter produce the highest net sales during our fiscal year.
Related Party Transactions
Management Services Agreement
We entered into a Management Services Agreement ("MSA") with CGM effective May 16, 2006. The MSA provides for, among other things, CGM to perform services for the Company in exchange for a management fee paid quarterly and equal to 0.5% of the Company's adjusted net assets, as defined in the MSA. Concurrent with the June 2019 sale of Clean Earth (refer to
Note C - Discontinued Operations
) CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the quarter during which the Company next borrows under the 2018 Revolving Credit Facility.
Integrations Services Agreements
Foam Fabricators, which was acquired in 2018, entered into Integration Services Agreements ("ISA") with CGM. The ISA provides for CGM to provide services for new platform acquisitions to, amongst other things, assist the management at the acquired entities in establishing a corporate governance program, implement compliance and reporting requirements of the Sarbanes-Oxley Act and align the acquired entity's policies and procedures with our other subsidiaries. Each ISA is for the twelve-month period subsequent to the acquisition.
Foam Fabricators paid CGM $2.3 million over the term of the ISA, $2.0 million in 2018 and $0.3 million in 2019.
5.11 - Related Party Vendor Purchases
5.11 purchases inventory from a vendor who is a related party to 5.11 through one of the executive officers of 5.11 via the executive's 40% ownership interest in the vendor.
During the six months ended
June 30, 2019
, 5.11 purchased approximately $2.1 million in inventory from the vendor.
Profit Allocation Payments
The sale of Manitoba Harvest in February 2019 and Clean Earth in June 2019 each qualified as a Sale Event under the Company's LLC Agreement. During the second quarter of 2019, the Company declared a distribution to the Allocation Member in connection with the Sale Event of Manitoba Harvest of $7.7 million which was paid in the second quarter of 2019. The profit allocation distribution was calculated based on the portion of the gain on sale related to the Closing Date Consideration, less the loss on sale of shares that were received as part of the Closing Consideration. An additional profit allocation distribution related to the Sale Event of Manitoba Harvest will be declared subsequent to receipt of the Deferred Consideration in August 2019. During the third quarter of 2019, the Company declared a distribution to the Allocation Member in connection with the Sale Event of Clean Earth of $43.3 million which will be paid in the third quarter of 2019.
Off-Balance Sheet Arrangements
We have no special purpose entities or off-balance sheet arrangements.
Contractual Obligations
Long-term contractual obligations, except for our long-term debt obligations and operating lease liabilities, are generally not recognized in our consolidated balance sheet. Non-cancelable purchase obligations are obligations we incur during the normal course of business, based on projected needs.
The table below summarizes the payment schedule of our contractual obligations at
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Total
|
|
Less than 1
Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
|
Long-term debt obligations
(1)
|
$
|
1,194,814
|
|
|
$
|
333,115
|
|
|
$
|
104,647
|
|
|
$
|
103,837
|
|
|
$
|
653,215
|
|
|
Operating lease obligations
(2)
|
124,538
|
|
|
11,144
|
|
|
44,382
|
|
|
29,903
|
|
|
39,109
|
|
|
Purchase obligations
(3)
|
400,721
|
|
|
177,010
|
|
|
106,660
|
|
|
81,609
|
|
|
35,442
|
|
|
Total
(4)
|
$
|
1,720,073
|
|
|
$
|
521,269
|
|
|
$
|
255,689
|
|
|
$
|
215,349
|
|
|
$
|
727,766
|
|
|
|
|
|
(1)
|
Reflects amounts due under our 2018 Credit Facility, as well as our Senior Notes, together with interest on our debt obligations.
|
|
|
|
|
(2)
|
Reflects various operating leases for office space, manufacturing facilities and equipment from third parties with various lease terms.
|
|
|
|
|
(3)
|
Reflects non-cancelable commitments as of
June 30, 2019
, including: (i) shareholder distributions of $141.0 million; (ii) estimated management fees of $30.4 million per year over the next five years; and (iii) other obligations including amounts due under employment agreements. Distributions to our shareholders are approved by our board of directors each quarter. The amount ultimately approved as future quarterly distributions may differ from the amount included in this schedule.
|
|
|
|
|
(4)
|
The contractual obligation table does not include approximately $1.1 million in liabilities associated with unrecognized tax benefits as of
June 30, 2019
as the timing of the recognition of this liability is not certain. The amount of the liability is not expected to significantly change in the next twelve months.
|
Critical Accounting Estimates
The preparation of our financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates under different assumptions and judgments and uncertainties, and potentially could result in materially different results under different conditions. These critical accounting estimates are reviewed periodically by our independent auditors and the audit committee of our board of directors.
Except as set forth below, our critical accounting estimates have not changed materially from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the year ended
December 31, 2018
, as filed with the Securities and Exchange Commission ("SEC") on February 27, 2019.
Goodwill and Indefinite-lived Intangible Asset Impairment Testing
Goodwill
Goodwill represents the excess amount of the purchase price over the fair value of the assets acquired. Our goodwill and indefinite lived intangible assets are tested for impairment on an annual basis as of March 31
st
, and if current events or circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which are generally an operating segment or one level below the operating segment. Each of our businesses represents a reporting unit.
We use a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment testing. The qualitative factors we consider include, in part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts, as well as issues or events specific to the reporting unit. If qualitative factors are not sufficient to determine that the fair value of a reporting unit is more likely than not to exceed its carrying value. we will perform a quantitative test the reporting unit whereby we estimate the fair value of the reporting unit using an income approach or market approach, or a weighting of the two methods. Under the income approach, we estimate the fair value of our reporting unit based on the present value of future cash flows. Cash flow projections are based on Management's estimate of revenue growth rates and operating margins and take into consideration industry and market conditions as well as company specific economic factors. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. Under the market approach, we estimate fair value based on market multiples of revenue and earnings derived from comparable public companies with operating characteristics that are
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.
2019 Annual Impairment Testing
- For our annual impairment testing at March 31, 2019, we determined that our Liberty operating segment required quantitative testing because we could not conclude that the fair value of Liberty significantly exceeded its carrying value based on qualitative factors alone. We concluded the goodwill impairment testing during the quarter ended June 30, 2019. The results of the quantitative impairment testing of the Liberty reporting unit indicated that the fair value of the Liberty reporting unit exceeded the carrying value by 135%. All of our other reporting units were tested qualitatively as of March 31, 2019, and the results of the qualitative analysis indicated that the fair value exceeded their carrying value.
For the reporting units that were tested qualitatively for the 2019 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded their carrying value.
2018 Annual Impairment Testing
- Our Arnold operating segment previously had three separate reporting units. As a result of changes implemented by Arnold management during 2016 and 2017, we reassessed the reporting units at Arnold as of the annual impairment testing date in 2018. The separate Arnold reporting units were determined to only comprise one reporting unit at the Arnold operating segment level as of March 31, 2018. As part of the exercise of combining the separate Arnold reporting units into one reporting unit, we performed "before" and "after" goodwill impairment testing, whereby we performed the annual impairment testing for each of the existing reporting units of Arnold and then subsequent to the completion of the annual impairment testing of the separate reporting units, we performed a quantitative impairment test of the Arnold operating segment. Two of the Arnold reporting units, PMAG and PTM, were tested qualitatively as part of the "before" test, while a quantitative impairment test was performed on the Flexmag reporting unit because we could not determine that it was more-likely than-not that the fair value of a reporting unit exceeded its carrying value. We then performed a quantitative impairment test of the Arnold operating segment, which combined the three reporting units. The results of the quantitative impairment testing of the Arnold reporting unit indicated that the fair value of the Arnold reporting unit exceeded the carrying value by 254%. All of our other reporting units were tested qualitatively as of March 31, 2018, and the results of the qualitative analysis indicated that the fair value exceeded their carrying value.
Indefinite-lived intangible assets
We use a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. Our indefinite-lived intangible assets consist of trade names with a carrying value of approximately
$60.0 million
. The results of the qualitative analysis of our reporting unit's indefinite-lived intangible assets, which we completed as of March 31, 2019, indicated that the fair value of the indefinite lived intangible assets exceeded their carrying value.
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board ("FASB") issued a comprehensive new revenue recognition standard. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In addition, the standard requires disclosure of the amount, timing and uncertainty of cash flows arising from contracts with customers. The new standard, and all related amendments, was effective for us beginning January 1, 2018 and was adopted using the modified retrospective method for all contracts not completed as of the date of adoption.
The adoption of the new revenue guidance represented a change in accounting principle that will more closely align revenue recognition with the transfer of control of our goods and services and will provide financial statement readers with enhanced disclosures. In accordance with the new revenue guidance, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities.
The Company’s contracts with customers often include promises to transfer multiple products to a customer. Determining whether the promises are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once the performance obligations are identified, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The corresponding revenues are
recognized as the related performance obligations are satisfied as discussed above. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately and therefore observable.
Upon adoption of the new revenue guidance, the Company’s policy around estimating variable consideration related to sales incentives (early pay discounts, rights of return, rebates, chargebacks, and other discounts) included in certain customer contracts remained consistent with previous guidance. These incentives are recorded as a reduction in the transaction price. Under the new guidance, variable consideration is estimated and included in total consideration at contract inception based on either the expected value method or the most likely outcome method. The method was applied consistently among each type of variable consideration and the Company applies the expected value method to estimate variable consideration. These estimates are based on historical experience, anticipated performance and the Company’s best judgment at the time and as a result, reflect applicable constraints. The Company includes in the transaction price an amount of variable consideration estimated in accordance with the new guidance only to the extent that it is probable
that a significant reversal in the amount of cumulative revenue
recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Business Combinations
The acquisitions of our businesses are accounted for under the acquisition method of accounting. Accounting for business combinations requires the use of estimates and assumptions in determining the fair value of assets acquired and liabilities assumed in order to allocate the purchase price. The estimates of fair value of the assets acquired and liabilities assumed are based upon assumptions believed to be reasonable using established valuation methods, taking into consideration information supplied by the management of the acquired entities and other relevant information. The determination of fair values requires significant judgment both by our management team and, when appropriate, valuations by independent third-party appraisers. We amortize intangible assets, such as trademarks and customer relationships, as well as property, plant and equipment, over their economic useful lives, unless those lives are indefinite. We consider factors such as historical information, our plans for the asset and similar assets held by our previously acquired portfolio companies. The impact could result in either higher or lower amortization and/or depreciation expense.
Recent Accounting Pronouncements