NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2018
Note A - Presentation and Principles of Consolidation
Compass Diversified Holdings, a Delaware statutory trust (the "Trust" or "Holdings") and Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the "Company" or "CODI"), were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. In accordance with the second amended and restated Trust Agreement, dated as of December 6, 2016 (as amended and restated, the "Trust Agreement"), the Trust is sole owner of
100%
of the Trust Interests (as defined in the Company’s fifth amended and restated operating agreement, dated as of December 6, 2016 (as amended and restated, the "LLC Agreement")) of the Company and, pursuant to the LLC Agreement, the Company has, outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of
ten
businesses, or reportable operating segments, at
September 30, 2018
. The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), Velocity Outdoor, Inc. (formerly Crosman Corp.) ("Velocity Outdoor" or "Velocity"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Fresh Hemp Foods Ltd. ("Manitoba Harvest"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold"), Clean Earth Holdings, Inc. ("Clean Earth"), FFI Compass Inc. ("Foam Fabricators" or "Foam") and Sterno Products, LLC ("Sterno"). Refer to
Note D - "Operating Segment Data"
for further discussion of the operating segments. Compass Group Management LLC, a Delaware limited liability company ("CGM" or the "Manager"), manages the day to day operations of the Company and oversees the management and operations of our businesses pursuant to a management services agreement ("MSA").
Basis of Presentation
The condensed consolidated financial statements for the three and nine month periods ended
September 30, 2018
and
September 30, 2017
, are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or "GAAP") and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Consolidation
The condensed consolidated financial statements include the accounts of Holdings and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Discontinued Operations
On September 21, 2016, the Company sold its Tridien subsidiary based on an enterprise value of
$25 million
. After the allocation of proceeds to non-controlling interest holders and the payment of transaction expenses, the Company received approximately
$22.7 million
in net proceeds related to debt and equity interests in Tridien. The Company recognized a gain of
$1.7 million
in September 2016 as a result of the sale of Tridien. Approximately
$1.6 million
of the proceeds received by the Company from the sale of Tridien were reserved as support for the Company's indemnification obligations for future claims against Tridien that the Company may have been liable for under the terms of the Tridien sale agreement. In the second quarter of 2018, all indemnification claims had been settled, and the Company recognized an additional
$1.2 million
in gain on the sale of Tridien.
Seasonality
Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Velocity Outdoor typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday seasons. Earnings from Clean Earth are typically lower during the winter months due to the limits on outdoor construction and development activity
because of the colder weather in the Northeastern United States. Sterno typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer and holiday seasons, respectively.
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
As of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) ("ASC 606"). The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The underlying principle of the new standard is that a company will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires disclosure of the amount, timing and uncertainty of cash flows arising from contracts with customers. The Company adopted the standard using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for reporting periods after January 1, 2018 are presented under the new revenue recognition guidance while prior period amounts were prepared under the previous revenue guidance which is also referred to herein as the "previous guidance". The Company determined that the impact from the new standard is immaterial to our revenue recognition model since the vast majority of our recognition is based on point in time control. Accordingly, the Company has not made any adjustments to opening retained earnings. Refer to
Note C - "Revenue"
for additional information regarding the Company's adoption of ASC 606.
Improving the Presentation of Net Periodic Pension Costs
In March 2017, the Financial Accounting Standards Board ("FASB") issued new guidance that will require employers that sponsor defined benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period, and requires the other components of net periodic pension cost to be presented in the income statement separately from the service component cost and outside a subtotal of income from operations. The new guidance shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company's Arnold business segment has a defined benefit plan covering substantially all of Arnold's employees at its Switzerland location. The adoption of this guidance on January 1, 2018 did not have a material impact upon our financial condition or results of operations.
Changes to the Definition of a Business
In January 2017, the FASB issued new guidance that changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the set of transferred asset and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognition guidance. The new standard was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The adoption of this guidance did not have a material impact upon our financial condition or results of operations.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued an accounting standard update which updates the guidance as to how certain cash receipts and cash payments should be presented and classified within the statement of cash flows. The amended guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. The adoption of this guidance on January 1, 2018 did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Leases
In February 2016, the FASB issued an accounting standard update related to the accounting for leases (Leases "Topic 842") which will require an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The standard update offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, the new standard is effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period. Accordingly, this standard is effective for the Company on January 1, 2019. In July 2018, the FASB issued two updates to Topic 842 to clarify how to apply certain aspects of the new lease standard, and to give entities another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows entities to not apply the new lease standard in the comparative periods presented in the financial statements in the year of adoption. The Company is currently evaluating the effects of adoption of this new standard on the Company’s consolidated financial statements as well as the expected transition method that will be used. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, analyzing the practical expedients available, implementing processes and information technology tools to assist in our ongoing lease data collection and analysis and updating our accounting policies and internal controls that will be impacted by Topic 842. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on the consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
Note B — Acquisitions
Acquisition of Foam Fabricators
On February 15, 2018, pursuant to an agreement entered into on January 18, 2018, the Company, through a wholly owned subsidiary, FFI Compass, Inc. (“Buyer”), entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Warren F. Florkiewicz (“Seller”) pursuant to which Buyer acquired all of the issued and outstanding capital stock of Foam Fabricators, Inc., a Delaware corporation (“Foam Fabricators”). Foam Fabricators is a leading designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer ("OEM") components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP). Founded in 1957 and headquartered in Scottsdale, Arizona, it operates 13 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products.
The Company made loans to, and purchased a
100%
controlling interest in Foam Fabricators. The final purchase price, after the working capital settlement and net of transaction costs, was approximately
$253.4 million
. The Company funded the acquisition through a draw on the 2014 Revolving Credit Facility. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership. CGM will receive integration service fees of
$2.25 million
payable over a twelve month period as services are rendered.
The results of operations of Foam Fabricators have been included in the consolidated results of operations since the date of acquisition. Foam Fabricator's results of operations are reported as a separate operating segment. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary Purchase Allocation
|
|
Measurement Period Adjustments
|
|
Final Purchase Allocation
|
(in thousands)
|
|
As of 2/15/18
|
|
|
|
As of 9/30/18
|
Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
6,282
|
|
|
$
|
—
|
|
|
$
|
6,282
|
|
Accounts receivable
(1)
|
|
19,058
|
|
|
—
|
|
|
19,058
|
|
Inventory
(2)
|
|
13,218
|
|
|
(6
|
)
|
|
13,212
|
|
Property, plant and equipment
(3)
|
|
23,485
|
|
|
4,885
|
|
|
28,370
|
|
Intangible assets
|
|
121,392
|
|
|
(3,050
|
)
|
|
118,342
|
|
Goodwill
|
|
71,489
|
|
|
1,219
|
|
|
72,708
|
|
Other current and noncurrent assets
|
|
2,945
|
|
|
—
|
|
|
2,945
|
|
Total assets
|
|
257,869
|
|
|
3,048
|
|
|
260,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Current liabilities
|
|
5,968
|
|
|
—
|
|
|
5,968
|
|
Other liabilities
|
|
115,033
|
|
|
|
|
115,033
|
|
Total liabilities
|
|
121,001
|
|
|
—
|
|
|
121,001
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
136,868
|
|
|
3,048
|
|
|
139,916
|
|
Intercompany loans to business
|
|
115,033
|
|
|
—
|
|
|
115,033
|
|
|
|
$
|
251,901
|
|
|
$
|
3,048
|
|
|
$
|
254,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Consideration
|
|
|
|
|
|
|
Purchase price
|
|
$
|
247,500
|
|
|
$
|
—
|
|
|
$
|
247,500
|
|
Cash acquired
|
|
3,646
|
|
|
2,433
|
|
|
3,188
|
|
Working capital adjustment
|
|
755
|
|
|
615
|
|
|
4,261
|
|
Total purchase consideration
|
|
$
|
251,901
|
|
|
$
|
3,048
|
|
|
$
|
254,949
|
|
Less: Transaction costs
|
|
1,552
|
|
|
—
|
|
|
1,552
|
|
Purchase price, net
|
|
$
|
250,349
|
|
|
$
|
3,048
|
|
|
$
|
253,397
|
|
(1)
Includes
$19.4 million
of gross contractual accounts receivable of which
$0.03 million
is not expected to be collected. The fair value of accounts receivable approximated book value acquired.
(2)
Includes
$0.7 million
in inventory basis step-up, which was charged to cost of goods sold in the first quarter of 2018.
(3)
Includes
$20.0 million
of property, plant and equipment basis step-up.
The Company incurred
$1.6 million
of transaction costs in conjunction with the Foam Fabricators acquisition, which was included in selling, general and administrative expense in the consolidated results of operations in the quarter ended March 31, 2018. The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of
$72.7 million
reflects the strategic fit of Foam Fabricators in the Company's niche industrial business. Foam Fabricators was an S corporation under Section 1362 of the Internal Revenue Code, and accordingly, taxable income of Foam Fabricators flowed through to its stockholder. The Company and the selling shareholder have agreed to make a joint Section 338(h)(10) election which will treat the acquisition as a deemed asset purchase for United States Federal income tax purposes and accordingly the goodwill is expected to be deductible for income tax purposes.
The intangible assets recorded related to the Foam Fabricators acquisition are as follows (in thousands):
|
|
|
|
|
|
|
|
Intangible assets
|
|
Amount
|
|
Estimated Useful Life
|
Tradename
|
|
$
|
4,215
|
|
|
10 years
|
Customer Relationships
|
|
114,127
|
|
|
15 years
|
|
|
$
|
118,342
|
|
|
|
The tradename was valued at
$4.2 million
using a relief from royalty methodology, in which an asset is valuable to the extent that the ownership of the asset relieves the company from the obligation of paying royalties for the benefits generated by the asset. The customer relationships intangible asset was valued at
$114.1 million
using an excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The customer relationships intangible asset was derived using a risk adjusted discount rate.
Acquisition of Rimports
On February 26, 2018, the Company's Sterno subsidiary acquired all of the issued and outstanding capital stock of Rimports, Inc., a Utah corporation (“Rimports”), pursuant to a Stock Purchase Agreement, dated January 23, 2018, by and among Sterno and Jeffery W. Palmer, individually and in his capacity as Seller Representative, the Jeffery Wayne Palmer Dynasty Trust dated December 26, 2011, the Angela Marie Palmer Irrevocable Trust dated December 26, 2011, the Angela Marie Palmer Charitable Lead Trust, the Fidelity Investments Charitable Gift Fund, the TAK Irrevocable Trust dated June 7, 2012, and the SAK Irrevocable Trust dated June 7, 2012. Headquartered in Provo, Utah, Rimports is a manufacturer and distributor of branded and private label scented wickless candle products used for home décor and fragrance. Rimports offers an extensive line of wax warmers, scented wax cubes, essential oils and diffusers, and other home fragrance systems, through the mass retailer channel.
Sterno purchased a
100%
controlling interest in Rimports. The purchase price, after the working capital settlement and net of transaction costs, was approximately
$154.4 million
, subject to any working capital adjustment. The purchase price of Rimports includes a potential earn-out of up to
$25 million
contingent on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019. The fair value of the contingent consideration was estimated at
$4.1 million
. Sterno funded the acquisition through their intercompany credit facility with the Company. The transaction was accounted for as a business combination.
The results of operations of Rimports have been included in the consolidated results of operations since the date of acquisition. Rimport's results of operations are included in the Sterno operating segment. The table below provides the preliminary recording of assets acquired and liabilities assumed as of the acquisition date. The goodwill resulting from the purchase price allocation is expected to be deductible for income tax purposes since Rimports was previously an S-Corporation for Federal income tax purposes and the Company and the selling shareholders have agreed to make a joint Section 338(h)(10) election which will treat the acquisition as a deemed asset purchase for United States Federal income tax purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary Purchase Allocation
|
|
Measurement Period Adjustments
|
|
Preliminary Purchase Allocation
|
(in thousands)
|
|
As of 2/26/18
|
|
|
|
As of 9/30/18
|
Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
10,025
|
|
|
$
|
—
|
|
|
$
|
10,025
|
|
Accounts receivable
(1)
|
|
21,431
|
|
|
—
|
|
|
21,431
|
|
Inventory
|
|
29,691
|
|
|
4,711
|
|
|
34,402
|
|
Property, plant and equipment
|
|
1,493
|
|
|
1,886
|
|
|
3,379
|
|
Intangible assets
|
|
—
|
|
|
86,890
|
|
|
86,890
|
|
Goodwill
|
|
121,364
|
|
|
(109,746
|
)
|
|
11,618
|
|
Other current and noncurrent assets
|
|
446
|
|
|
—
|
|
|
446
|
|
Total assets
|
|
184,450
|
|
|
(16,259
|
)
|
|
168,191
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current liabilities
|
|
9,034
|
|
|
—
|
|
|
9,034
|
|
Other liabilities
(2)
|
|
25,000
|
|
|
(20,900
|
)
|
|
4,100
|
|
Total liabilities
|
|
34,034
|
|
|
(20,900
|
)
|
|
13,134
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
150,416
|
|
|
$
|
4,641
|
|
|
$
|
155,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Consideration
|
|
|
|
|
|
|
Purchase price
|
|
$
|
145,000
|
|
|
$
|
—
|
|
|
$
|
145,000
|
|
Cash acquired
|
|
9,500
|
|
|
525
|
|
|
10,025
|
|
Working capital adjustment
|
|
(4,084
|
)
|
|
4,116
|
|
|
32
|
|
Total purchase consideration
|
|
150,416
|
|
|
4,641
|
|
|
155,057
|
|
Less: Transaction costs
|
|
632
|
|
|
—
|
|
|
632
|
|
Purchase price, net
|
|
$
|
149,784
|
|
|
$
|
4,641
|
|
|
$
|
154,425
|
|
(1)
Includes
$23.8 million
of gross contractual accounts receivable of which
$2.4 million
is not expected to be collected. The fair value of accounts receivable approximated book value acquired.
(2)
The purchase price of Rimports includes a potential earn-out of up to
$25 million
contingent on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019. The earn-out was valued at
$4.1 million
using a probability weighted model.
The intangible assets recorded on a preliminary basis related to the Rimports acquisition are as follows (in thousands):
|
|
|
|
|
|
|
|
Intangible assets
|
|
Amount
|
|
Estimated Useful Life
|
Tradename
|
|
$
|
6,600
|
|
|
8 years
|
Customer Relationships
|
|
80,300
|
|
|
9 years
|
|
|
$
|
86,900
|
|
|
|
Sterno incurred
$0.6 million
of transaction costs in conjunction with the acquisition of Rimports, which was included in selling, general and administrative expense in the consolidated results of operations in the quarter ended March 31, 2018. The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current liabilities are valued at historical carrying values. Property, plant and equipment was valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies.
Acquisition of Velocity Outdoor (formerly Crosman Corp.)
On June 2, 2017, CBCP Acquisition Corp. (the "Buyer"), a wholly owned subsidiary of the Company, entered into an equity purchase agreement pursuant to which it acquired all of the outstanding equity interests of Bullseye Acquisition Corporation, the indirect owner of the equity interests of Crosman Corp. which is now known as Velocity Outdoor. Velocity Outdoor is a designer, manufacturer and marketer of airguns, archery products, laser aiming devices and related accessories. Headquartered in Bloomfield, New York, Velocity Outdoor serves over
425
customers worldwide, including mass merchants, sporting goods retailers, online channels and distributors serving smaller specialty stores and international markets.
The Company made loans to, and purchased an initial
98.9%
controlling interest in Velocity. The purchase price, including proceeds from noncontrolling interests and net of transaction costs, was approximately
$150.4 million
. Velocity's management invested in the transaction along with the Company, representing approximately
1.1%
of the initial noncontrolling interest on a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and provided integration services during the first year of the Company's ownership of Velocity Outdoor. CGM received integration service fees of
$1.5 million
payable quarterly over a twelve month period as services were rendered beginning in the quarter ended September 30, 2017. The Company incurred
$1.5 million
of transaction costs in conjunction with the Velocity acquisition, which was included in selling, general and administrative expense in the consolidated results of operations in the second quarter of 2017. The results of operations
of Velocity Outdoor have been included in the consolidated results of operations since the date of acquisition. Velocity's results of operations are reported as a separate operating segment as a branded consumer business.
The tradename was valued at
$53.5 million
using a multi-period excess earnings methodology. The customer relationships intangible asset was valued at
$28.7 million
using the distributor method, a variation of the multi-period excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The technology was valued at
$2.4 million
using a relief from royalty method.
Unaudited pro forma information
The following unaudited pro forma data for the nine months ended September 30, 2018 and the three and nine months ended
September 30, 2017
gives effect to the acquisition of Velocity, Foam Fabricators and Sterno's acquisition of Rimports, as described above, as if the acquisitions had been completed as of January 1, 2017. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies and should not be construed as representing results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(in thousands)
|
|
2017
|
|
2018
|
|
2017
|
Net sales
|
|
$
|
400,014
|
|
|
$
|
1,278,978
|
|
|
$
|
1,159,717
|
|
Gross profit
|
|
139,596
|
|
|
436,915
|
|
|
390,620
|
|
Operating income
|
|
24,239
|
|
|
52,305
|
|
|
33,797
|
|
Net loss
|
|
12,141
|
|
|
1,876
|
|
|
(8,448
|
)
|
Net loss attributable to Holdings
|
|
11,491
|
|
|
(1,325
|
)
|
|
(10,940
|
)
|
Basic and fully diluted net loss per share attributable to Holdings
|
|
$
|
0.16
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.90
|
)
|
Other acquisitions
Clean Earth
On May 23, 2018, Clean Earth acquired all of the outstanding capital stock of Environmental Soil Management, Inc. (“ESMI”), located in Fort Edward, New York and Loudon, New Hampshire. The acquisition provided Clean Earth the opportunity to geographically expand their soil and hazardous waste solutions in the New York and New England market. The purchase price was approximately
$30.7 million
. In connection with the acquisition, Clean Earth recorded a preliminary purchase price allocation of approximately
$8.4 million
in goodwill, and
$10.4 million
in intangible assets.
On September 5, 2018, Clean Earth acquired the assets of Disposal and Recycling Technologies, Inc. ("DART"), for a purchase price of approximately
$17.6 million
. DART has a RCRA Part B hazardous waste site in Charlotte, North Carolina and a water waste treatment facility in Detroit, Michigan. The acquisition of DART expands Clean Earth's geographical reach in the Midwest and Mid-Atlantic hazardous and non-hazardous waste markets and represents Clean Earth's first water waste treatment facility. Clean Earth has not completed the preliminary purchase price for DART and therefore has recorded the excess amount of the purchase price over net assets acquired as goodwill at September 30, 2018.
Velocity Outdoor
On September 4, 2018, Velocity Outdoor (formerly "Crosman Corp.") acquired all of the outstanding membership interests in Ravin Crossbows, LLC ("Ravin") for a purchase price of approximately
$98.0 million
, net of transaction costs, plus a potential earn-out of up to
$25.0 million
based on gross profit levels for the trailing twelve month period ending December 31, 2018. Velocity funded the acquisition and payment of related transaction costs through the issuance of an additional
$38.9 million
in intercompany loans and the issuance of additional equity to the Company of
$60.6 million
. Velocity has not completed the preliminary purchase price allocation for Ravin and has therefore recor
ded the excess amount of the purchase price over assets acquired less liabilities assumed of
$86.9 million
as goodwill at September 30, 2018. The potential earn-out has been valued at
$8.1 million
based on actual results to date and a forecast for the fourth quarter of 2018.
Velocity incurred
$1.3 million
in acquisition related costs in connection with the Ravin acquisition which were included in selling, general and administrative expense in the third quarter of 2018.
Note C — Revenue
Effective January 1, 2018, the Company adopted the provisions of Revenue from Contracts with Customers, or ASC 606. The adoption of the new revenue guidance represents a change in accounting principle that will more closely align revenue recognition with the transfer of control of the Company's goods and services and will provide financial statement readers with enhanced disclosures. In accordance with the new revenue guidance, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities. The impacts from the adoption of the new revenue guidance primarily relates to the timing of revenue recognition for variable consideration received, consideration payable to a customer and recording right of return assets. Although these differences have been identified, the total impact to each reportable segment was not material to the consolidated financial statements. In addition, the accounting for the estimate of variable consideration in our contracts is not materially different compared to our current practice. The Company has established monitoring controls to identify new sales arrangements and changes in our business environment that could impact our current accounting assessment.
Performance Obligations
-
For 5.11, Velocity Outdoor, Ergobaby, Liberty Safe, Manitoba Harvest, Sterno, Arnold and Foam Fabricators, revenues are recognized when control of the promised goods or service is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Each product or service represents a separate performance obligation. For contracts that contain multiple products, the Company will evaluate those products to determine if they represent performance obligations based on whether those goods or services are distinct (by themselves or as part of a bundle of products). Further, the Company evaluated if the products were separately identifiable from other products in the contract. The Company concluded that the products are distinct and separately identifiable from other products in the contracts. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. The standalone selling price is directly observable as it is the price at which the Company sells its products separately to the customer. As the Company does not meet any of the requirements for over time recognition for any of its products at these operating segments, it will recognize revenue based on the point in time criteria based on the definition of control, which is generally upon shipment terms for products and when the service is performed for services. Transfer of control for Advanced Circuit’s products qualify for over time revenue recognition because the products represent assets with no alternative use and the contracts include an enforceable right to payment for work completed to date. Advanced Circuits has selected the cost to cost input method of measuring progress to recognize revenue over time, based on the status of the work performed. The cost to cost method is representative of the value provided to the customer as it represents the Company’s performance completed to date. However, due to the short-term nature of Advanced Circuit's production cycle, there is an immaterial difference between revenue recognition under the previous guidance and the new revenue recognition guidance. Clean Earth’s arrangements qualify for over time revenue recognition as the customer simultaneously receives and consumes the benefits provided by the Company’s performance. As the Company performs the service, another party would not need to re-perform any of the work completed by the Company to date. Clean Earth has elected to apply the as-invoiced practical expedient to record revenue as the services are provided, given the nature of the services provided and the frequency of billing under the customer contracts.
Shipping and handling costs
-
Costs associated with shipment of products to a customer are accounted for as a fulfillment cost and are included in cost of revenues. The Company has elected to apply the practical expedient for shipping costs under the new revenue guidance and will account for shipping and handling activities performed after control of a good has been transferred to the customer as a fulfillment cost and not a performance obligation. Therefore, both revenue and costs of shipping and handling will be recorded at the same time. As a result, any consideration (including freight and landing costs) related to these activities will be included as a component of the overall transaction consideration and allocated to the performance obligations of the contract.
Warranty
-
For product sales, the Company provides standard assurance-type warranties as the Company only warrants its products against defects in materials and workmanship (i.e., manufacturing flaws). Although the warranties are not required by law, the tasks performed over the warranty period are only to remediate instances when products do not meet the promised specifications. Customers do not have the option to purchase warranties separately. The Company’s warranty periods generally range from 90 days to three years depending on the nature of the product and
are consistent with industry standards. The periods are reasonable to assure that products conform to specifications. The Company does not have a history of performing activities outside the scope of the standard warranty.
Significant Judgments
-
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.
Variable Consideration -
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.
In certain of the Company’s arrangements related to product sales, a right of return exists, which is included in the transaction price. For these right of return arrangements, an asset (and corresponding adjustment to cost of sale) for its right to recover the products from the customers is recorded. The asset recognized will be the carrying amount of the product (for example, inventory) less any expected costs to recover the products (including potential decreases in the value to the Company of the returned product). Additionally, the Company records a refund liability for the amount of consideration that it does not expect to be entitled. The amounts associated with right of return arrangements are not material to the Company's statement of position or operating results.
Sales and Other Similar Taxes -
The Company notes that under its contracts with customers, the customer is responsible for all sales and other similar taxes, which the Company will invoice the customer for if they are applicable. The new revenue guidance allows entities to make an accounting policy election to exclude sales taxes and other similar taxes from the measurement of the transaction price. The scope of this accounting policy election is the same as the scope of the policy election in the previous guidance. As the Company presents taxes on a net basis under the previous guidance there will be no change to the current presentation (net) as a result.
Practical Expedients -
The Company has elected to make the following accounting policy elections through the adoption of the following practical expedients:
Right to Invoice (Clean Earth) -
The Company will record the consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date (for example, in a service contract where 25% of the service has been performed, the Company would recognize 25% of the revenue), the entity may recognize revenue in the amount to which the entity has a right to invoice.
Sales and Other Similar Taxes -
The Company will exclude sales taxes and similar taxes from the measurement of transaction price and will ensure that it complies with the disclosure requirements of applicable accounting guidance.
Cost to Obtain a Contract -
The Company will recognize the incremental costs of obtaining a contract as an expense when incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less.
Promised Goods or Services that are Immaterial in the Context of a Contract -
The Company has elected to assess promised goods or services as performance obligations that are deemed to be immaterial in the context of a contract. As such, the Company will not aggregate and assess immaterial items at the entity level. That is, when determining whether a good or service is immaterial in the context of a contract, the assessment will be made based on the application of the new revenue guidance at the contract level.
Disaggregated Revenue - Revenue Streams & Timing of Revenue Recognition
-
The Company disaggregates revenue by strategic business unit and by geography for each strategic business unit which are categories that depict how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors. This disaggregation also represents how the Company evaluates its financial performance, as well as how the Company communicates its financial performance to the investors and other users of its financial statements. Each strategic business unit represents the Company’s reportable segments and offers different products and services.
The following tables provide disaggregation of revenue by reportable segment geography for the three and nine months ended September 30, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
|
5.11
|
|
Ergo
|
|
Liberty
|
|
Manitoba Harvest
|
|
Velocity
|
|
ACI
|
|
Arnold
|
|
Clean Earth
|
|
Foam
|
|
Sterno
|
|
Total
|
United States
|
$
|
62,085
|
|
|
$
|
8,190
|
|
|
$
|
17,263
|
|
|
$
|
11,970
|
|
|
$
|
29,862
|
|
|
$
|
23,424
|
|
|
$
|
18,202
|
|
|
$
|
71,117
|
|
|
$
|
28,378
|
|
|
$
|
110,274
|
|
|
$
|
380,765
|
|
Canada
|
1,465
|
|
|
697
|
|
|
609
|
|
|
4,859
|
|
|
2,062
|
|
|
—
|
|
|
264
|
|
|
—
|
|
|
—
|
|
|
2,934
|
|
|
12,890
|
|
Europe
|
6,871
|
|
|
7,962
|
|
|
—
|
|
|
334
|
|
|
1,231
|
|
|
—
|
|
|
9,390
|
|
|
—
|
|
|
—
|
|
|
248
|
|
|
26,036
|
|
Asia Pacific
|
3,919
|
|
|
7,176
|
|
|
—
|
|
|
100
|
|
|
375
|
|
|
—
|
|
|
1,311
|
|
|
—
|
|
|
—
|
|
|
110
|
|
|
12,991
|
|
Other international
|
9,002
|
|
|
235
|
|
|
—
|
|
|
37
|
|
|
759
|
|
|
—
|
|
|
724
|
|
|
—
|
|
|
4,959
|
|
|
302
|
|
|
16,018
|
|
|
$
|
83,342
|
|
|
$
|
24,260
|
|
|
$
|
17,872
|
|
|
$
|
17,300
|
|
|
$
|
34,289
|
|
|
$
|
23,424
|
|
|
$
|
29,891
|
|
|
$
|
71,117
|
|
|
$
|
33,337
|
|
|
$
|
113,868
|
|
|
$
|
448,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2017
|
|
5.11
|
|
Ergo
|
|
Liberty
|
|
Manitoba Harvest
|
|
Velocity
|
|
ACI
|
|
Arnold
|
|
Clean Earth
|
|
Sterno
|
|
Total
|
United States
|
$
|
52,767
|
|
|
$
|
10,787
|
|
|
$
|
18,423
|
|
|
$
|
3,228
|
|
|
$
|
29,907
|
|
|
$
|
22,436
|
|
|
$
|
15,933
|
|
|
$
|
55,676
|
|
|
$
|
47,036
|
|
|
$
|
256,193
|
|
Canada
|
1,749
|
|
|
916
|
|
|
—
|
|
|
10,123
|
|
|
1,842
|
|
|
—
|
|
|
366
|
|
|
—
|
|
|
4,344
|
|
|
19,340
|
|
Europe
|
6,082
|
|
|
7,901
|
|
|
—
|
|
|
387
|
|
|
1,372
|
|
|
—
|
|
|
8,771
|
|
|
—
|
|
|
814
|
|
|
25,327
|
|
Asia Pacific
|
2,001
|
|
|
7,991
|
|
|
—
|
|
|
341
|
|
|
318
|
|
|
—
|
|
|
1,013
|
|
|
—
|
|
|
285
|
|
|
11,949
|
|
Other international
|
9,406
|
|
|
240
|
|
|
—
|
|
|
(131
|
)
|
|
1,010
|
|
|
—
|
|
|
406
|
|
|
—
|
|
|
217
|
|
|
11,148
|
|
|
$
|
72,005
|
|
|
$
|
27,835
|
|
|
$
|
18,423
|
|
|
$
|
13,948
|
|
|
$
|
34,449
|
|
|
$
|
22,436
|
|
|
$
|
26,489
|
|
|
$
|
55,676
|
|
|
$
|
52,696
|
|
|
$
|
323,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
5.11
|
|
Ergo
|
|
Liberty
|
|
Manitoba Harvest
|
|
Velocity
|
|
ACI
|
|
Arnold
|
|
Clean Earth
|
|
Foam
|
|
Sterno
|
|
Total
|
United States
|
$
|
192,382
|
|
|
$
|
25,790
|
|
|
$
|
60,126
|
|
|
$
|
36,737
|
|
|
$
|
80,629
|
|
|
$
|
68,454
|
|
|
$
|
54,417
|
|
|
$
|
199,579
|
|
|
$
|
70,604
|
|
|
$
|
255,054
|
|
|
$
|
1,043,772
|
|
Canada
|
5,938
|
|
|
2,277
|
|
|
1,615
|
|
|
14,810
|
|
|
5,118
|
|
|
—
|
|
|
978
|
|
|
—
|
|
|
—
|
|
|
9,750
|
|
|
40,486
|
|
Europe
|
23,334
|
|
|
21,795
|
|
|
—
|
|
|
1,119
|
|
|
4,377
|
|
|
—
|
|
|
29,065
|
|
|
—
|
|
|
—
|
|
|
1,210
|
|
|
80,900
|
|
Asia Pacific
|
12,344
|
|
|
19,713
|
|
|
—
|
|
|
358
|
|
|
978
|
|
|
—
|
|
|
3,803
|
|
|
—
|
|
|
—
|
|
|
481
|
|
|
37,677
|
|
Other international
|
18,024
|
|
|
801
|
|
|
—
|
|
|
145
|
|
|
3,164
|
|
|
—
|
|
|
2,223
|
|
|
—
|
|
|
11,384
|
|
|
574
|
|
|
36,315
|
|
|
$
|
252,022
|
|
|
$
|
70,376
|
|
|
$
|
61,741
|
|
|
$
|
53,169
|
|
|
$
|
94,266
|
|
|
$
|
68,454
|
|
|
$
|
90,486
|
|
|
$
|
199,579
|
|
|
$
|
81,988
|
|
|
$
|
267,069
|
|
|
$
|
1,239,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017
|
|
5.11
|
|
Ergo
|
|
Liberty
|
|
Manitoba Harvest
|
|
Velocity
|
|
ACI
|
|
Arnold
|
|
Clean Earth
|
|
Sterno
|
|
Total
|
United States
|
$
|
165,383
|
|
|
$
|
31,460
|
|
|
$
|
66,008
|
|
|
$
|
22,646
|
|
|
$
|
37,790
|
|
|
$
|
66,404
|
|
|
$
|
47,744
|
|
|
$
|
153,370
|
|
|
$
|
146,827
|
|
|
$
|
737,632
|
|
Canada
|
5,153
|
|
|
2,445
|
|
|
—
|
|
|
18,020
|
|
|
2,483
|
|
|
—
|
|
|
970
|
|
|
—
|
|
|
12,621
|
|
|
41,692
|
|
Europe
|
17,122
|
|
|
19,133
|
|
|
—
|
|
|
1,357
|
|
|
2,140
|
|
|
—
|
|
|
25,329
|
|
|
—
|
|
|
2,283
|
|
|
67,364
|
|
Asia Pacific
|
7,353
|
|
|
23,675
|
|
|
—
|
|
|
581
|
|
|
440
|
|
|
—
|
|
|
3,540
|
|
|
—
|
|
|
1,012
|
|
|
36,601
|
|
Other international
|
33,460
|
|
|
1,024
|
|
|
—
|
|
|
21
|
|
|
1,349
|
|
|
—
|
|
|
1,838
|
|
|
—
|
|
|
349
|
|
|
38,041
|
|
|
$
|
228,471
|
|
|
$
|
77,737
|
|
|
$
|
66,008
|
|
|
$
|
42,625
|
|
|
$
|
44,202
|
|
|
$
|
66,404
|
|
|
$
|
79,421
|
|
|
$
|
153,370
|
|
|
$
|
163,092
|
|
|
$
|
921,330
|
|
Note D — Operating Segment Data
At
September 30, 2018
, the Company had
ten
reportable operating segments. Each operating segment represents a platform acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:
|
|
•
|
5.11 Tactical
is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
|
|
|
•
|
Ergobaby
is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, and related products. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than
50%
of its sales from outside of the United States. Ergobaby is headquartered in Los Angeles, California.
|
|
|
•
|
Liberty Safe
is a designer, manufacturer and marketer of premium home, gun and office safes in North America. From its over
300,000
square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.
|
|
|
•
|
Manitoba Harvest
is a pioneer and leader in the manufacture and distribution of branded, hemp-based foods and hemp-based ingredients. Manitoba Harvest’s products, which include Hemp Hearts™, Hemp Heart Bites™, and Hemp protein powders, are currently carried in over
13,000
retail stores across the United States and Canada. Manitoba Harvest is headquartered in Winnipeg, Manitoba.
|
|
|
•
|
Velocity Outdoor
is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, Ravin, LaserMax and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. Velocity Outdoor is headquartered in Bloomfield, New York.
|
|
|
•
|
Advanced Circuits
is an electronic components manufacturing company that provides small-run, quick-turn and volume production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers primarily in North America. ACI is headquartered in Aurora, Colorado.
|
|
|
•
|
Arnold
is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, motorsport/automotive, oil and gas, medical, general industrial, electric utility, reprographics and advertising specialty markets. Arnold produces high performance permanent magnets (PMAG), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than
2,000
clients worldwide. Arnold is headquartered in Rochester, New York.
|
|
|
•
|
Clean Earth
provides environmental services for a variety of contaminated materials including soils, dredged material, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as power, construction, oil and gas, infrastructure, industrial and dredging. Clean Earth is headquartered in Hatboro, Pennsylvania and operates
28
facilities in the eastern United States.
|
|
|
•
|
Foam Fabricators
is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer components made from expanded polystyrene and expanded polypropylene. Foam Fabricators provides products to a variety of end markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products. Foam Fabricators is headquartered in Scottsdale, Arizona and operates 13 molding and fabricating facilities across North America.
|
|
|
•
|
Sterno
is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry and flameless candles, outdoor lighting products, scented wax cubes and warmer products for consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, scented wax cubes and warmer products used for home decor and fragrance systems, catering equipment and outdoor lighting products. Sterno is headquartered in Corona, California.
|
The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The results of operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. There were no significant inter-segment transactions.
Summary of Operating Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
Three months ended September 30,
|
|
Nine months ended
September 30,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
5.11 Tactical
|
$
|
83,342
|
|
|
$
|
72,005
|
|
|
$
|
252,022
|
|
|
$
|
228,471
|
|
Ergobaby
|
24,260
|
|
|
27,835
|
|
|
70,376
|
|
|
77,737
|
|
Liberty
|
17,872
|
|
|
18,423
|
|
|
61,741
|
|
|
66,008
|
|
Manitoba Harvest
|
17,300
|
|
|
13,948
|
|
|
53,169
|
|
|
42,625
|
|
Velocity Outdoor
|
34,289
|
|
|
34,449
|
|
|
94,266
|
|
|
44,202
|
|
ACI
|
23,424
|
|
|
22,436
|
|
|
68,454
|
|
|
66,404
|
|
Arnold
|
29,891
|
|
|
26,489
|
|
|
90,486
|
|
|
79,421
|
|
Clean Earth
|
71,117
|
|
|
55,676
|
|
|
199,579
|
|
|
153,370
|
|
Foam Fabricators
|
33,337
|
|
|
—
|
|
|
81,988
|
|
|
—
|
|
Sterno
|
113,868
|
|
|
52,696
|
|
|
267,069
|
|
|
163,092
|
|
Total segment revenue
|
448,700
|
|
|
323,957
|
|
|
1,239,150
|
|
|
921,330
|
|
Corporate and other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total consolidated revenues
|
$
|
448,700
|
|
|
$
|
323,957
|
|
|
$
|
1,239,150
|
|
|
$
|
921,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
(1)
|
Three months ended September 30,
|
|
Nine months ended
September 30,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
5.11 Tactical
|
$
|
1,740
|
|
|
$
|
(253
|
)
|
|
$
|
3,143
|
|
|
$
|
(14,542
|
)
|
Ergobaby
|
4,191
|
|
|
5,884
|
|
|
10,106
|
|
|
14,728
|
|
Liberty
|
467
|
|
|
2,050
|
|
|
4,894
|
|
|
6,900
|
|
Manitoba Harvest
|
(885
|
)
|
|
(169
|
)
|
|
(670
|
)
|
|
75
|
|
Velocity Outdoor
|
1,833
|
|
|
(1,388
|
)
|
|
5,125
|
|
|
(1,587
|
)
|
ACI
|
6,902
|
|
|
6,191
|
|
|
19,202
|
|
|
18,106
|
|
Arnold
|
2,287
|
|
|
2,000
|
|
|
6,957
|
|
|
(4,551
|
)
|
Clean Earth
|
4,278
|
|
|
5,592
|
|
|
12,495
|
|
|
7,597
|
|
Foam Fabricators
|
4,100
|
|
|
—
|
|
|
7,856
|
|
|
—
|
|
Sterno
|
11,634
|
|
|
4,411
|
|
|
19,113
|
|
|
13,383
|
|
Total
|
36,547
|
|
|
24,318
|
|
|
88,221
|
|
|
40,109
|
|
Reconciliation of segment profit (loss) to consolidated income (loss) before income taxes:
|
|
|
|
|
|
|
|
Interest expense, net
|
(15,699
|
)
|
|
(6,945
|
)
|
|
(35,465
|
)
|
|
(22,499
|
)
|
Other income (expense), net
|
492
|
|
|
2,020
|
|
|
(3,094
|
)
|
|
2,950
|
|
Loss on equity method investment
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,620
|
)
|
Corporate and other
(2)
|
(13,220
|
)
|
|
(10,845
|
)
|
|
(42,002
|
)
|
|
(32,801
|
)
|
Total consolidated income (loss) before income taxes
|
$
|
8,120
|
|
|
$
|
8,548
|
|
|
$
|
7,660
|
|
|
$
|
(17,861
|
)
|
|
|
(1)
|
Segment profit (loss) represents operating income (loss).
|
|
|
(2)
|
Primarily relates to management fees expensed and payable to CGM, and corporate overhead expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense
|
Three months ended September 30,
|
|
Nine months ended
September 30,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
5.11 Tactical
|
$
|
5,323
|
|
|
$
|
4,338
|
|
|
$
|
15,882
|
|
|
$
|
34,882
|
|
Ergobaby
|
2,086
|
|
|
3,068
|
|
|
6,374
|
|
|
9,386
|
|
Liberty
|
414
|
|
|
358
|
|
|
1,130
|
|
|
1,295
|
|
Manitoba Harvest
|
1,599
|
|
|
1,891
|
|
|
4,800
|
|
|
4,922
|
|
Velocity Outdoor
|
2,077
|
|
|
5,593
|
|
|
6,081
|
|
|
5,842
|
|
ACI
|
786
|
|
|
817
|
|
|
2,384
|
|
|
2,517
|
|
Arnold
|
1,572
|
|
|
1,452
|
|
|
4,656
|
|
|
4,962
|
|
Clean Earth
|
6,349
|
|
|
5,687
|
|
|
17,392
|
|
|
16,140
|
|
Foam Fabricators
|
2,957
|
|
|
—
|
|
|
7,724
|
|
|
—
|
|
Sterno
|
7,584
|
|
|
2,873
|
|
|
21,455
|
|
|
8,713
|
|
Total
|
30,747
|
|
|
26,077
|
|
|
87,878
|
|
|
88,659
|
|
Reconciliation of segment to consolidated total:
|
|
|
|
|
|
|
|
Amortization of debt issuance costs and original issue discount
|
1,079
|
|
|
1,261
|
|
|
3,403
|
|
|
3,721
|
|
Consolidated total
|
$
|
31,826
|
|
|
$
|
27,338
|
|
|
$
|
91,281
|
|
|
$
|
92,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
Identifiable Assets
|
|
September 30,
|
|
December 31,
|
|
September 30,
|
|
December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2018
(1)
|
|
2017
(1)
|
5.11 Tactical
|
$
|
53,509
|
|
|
$
|
60,481
|
|
|
$
|
320,777
|
|
|
$
|
324,068
|
|
Ergobaby
|
12,612
|
|
|
12,869
|
|
|
102,251
|
|
|
105,672
|
|
Liberty
|
9,477
|
|
|
13,679
|
|
|
29,368
|
|
|
26,715
|
|
Manitoba Harvest
|
6,596
|
|
|
5,663
|
|
|
92,307
|
|
|
95,046
|
|
Velocity Outdoor
|
28,362
|
|
|
20,396
|
|
|
149,681
|
|
|
129,033
|
|
ACI
|
8,356
|
|
|
6,525
|
|
|
15,391
|
|
|
14,522
|
|
Arnold
|
20,506
|
|
|
14,804
|
|
|
64,843
|
|
|
66,979
|
|
Clean Earth
|
64,771
|
|
|
50,599
|
|
|
199,134
|
|
|
183,508
|
|
Foam Fabricators
|
25,012
|
|
|
—
|
|
|
159,748
|
|
|
—
|
|
Sterno
|
92,535
|
|
|
40,087
|
|
|
255,726
|
|
|
125,937
|
|
Allowance for doubtful accounts
|
(13,109
|
)
|
|
(9,995
|
)
|
|
—
|
|
|
—
|
|
Total
|
308,627
|
|
|
215,108
|
|
|
1,389,226
|
|
|
1,071,480
|
|
Reconciliation of segment to consolidated total:
|
|
|
|
|
|
|
|
Corporate and other identifiable assets
|
—
|
|
|
—
|
|
|
2,965
|
|
|
2,026
|
|
Total
|
$
|
308,627
|
|
|
$
|
215,108
|
|
|
$
|
1,392,191
|
|
|
$
|
1,073,506
|
|
Note E — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at
September 30, 2018
and December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Machinery and equipment
|
$
|
215,575
|
|
|
$
|
178,187
|
|
Furniture, fixtures and other
|
45,283
|
|
|
28,824
|
|
Leasehold improvements
|
43,098
|
|
|
20,630
|
|
Buildings and land
|
47,740
|
|
|
40,015
|
|
Construction in process
|
17,373
|
|
|
18,153
|
|
|
369,069
|
|
|
285,809
|
|
Less: accumulated depreciation
|
(142,799
|
)
|
|
(112,728
|
)
|
Total
|
$
|
226,270
|
|
|
$
|
173,081
|
|
Depreciation expense was
$11.1 million
and
$31.3 million
for the three and nine months ended
September 30, 2018
, and
$8.7 million
and
$24.5 million
for the three and nine months ended
September 30, 2017
, respectively.
Inventory
Inventory is comprised of the following at
September 30, 2018
and December 31, 2017
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Raw materials
|
$
|
67,795
|
|
|
$
|
36,124
|
|
Work-in-process
|
17,275
|
|
|
13,921
|
|
Finished goods
|
261,558
|
|
|
205,512
|
|
Less: obsolescence reserve
|
(18,080
|
)
|
|
(8,629
|
)
|
Total
|
$
|
328,548
|
|
|
$
|
246,928
|
|
Note F — Goodwill and Other Intangible Assets
As a result of acquisitions of various businesses, the Company has significant intangible assets on its balance sheet that include goodwill and indefinite-lived intangibles. The Company’s goodwill and indefinite-lived intangibles are tested and reviewed for impairment annually as of March 31st or more frequently if facts and circumstances warrant by comparing the fair value of each reporting unit to its carrying value. Each of the Company’s businesses represent a reporting unit. The Arnold business previously comprised
three
reporting units when it was acquired in March 2012, but as a result of changes implemented by Arnold management during 2016 and 2017, the Company reassessed the reporting units at Arnold as of the annual impairment testing date in 2018. After evaluating changes in the operation of the reporting units that led to increased integration and altered how the financial results of the Arnold operating segment were assessed by Arnold management, the Company determined that
the previously identified reporting units no longer operate in the same manner as they did when the Company acquired Arnold. As a result, the separate Arnold reporting units were determined to only comprise one reporting unit at the Arnold operating segment level as of March 31, 2018. As part of the exercise of combining the separate Arnold reporting units into one reporting unit, the Company performed "before" and "after" goodwill impairment testing, whereby we performed the annual impairment testing for each of the existing reporting units of Arnold and then subsequent to the completion of the annual impairment testing of the separate reporting units, we performed a quantitative impairment test of the Arnold operating segment, which will represent the reporting unit for future impairment tests.
Goodwill
2018 Annual Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform quantitative goodwill impairment testing. For the reporting units that were tested qualitatively for the 2018 annual impairment testing, the results of the qualitative analysis indicated that the fair value exceeded their carrying value. At March 31, 2018, we determined that the Flexmag reporting unit of Arnold required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on qualitative factors alone. For the quantitative impairment test of Flexmag, we estimated the fair value of the reporting unit using an income approach, whereby we estimate the fair value of the reporting unit based on the present value of future cash flows. Cash flow projections are based on management's estimate of revenue growth rates and operating margins and take into consideration industry and market conditions as well as company and reporting unit specific economic conditions. 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. The discount rate used in the income approach for Flexmag was
12.4%
.
For the reporting unit change at Arnold, a quantitative impairment test was performed of the Arnold business at March 31, 2018 using an income approach. The discount rate used in the income approach was
12.6%
. The results of the impairment testing indicated that the fair value of the Arnold reporting unit exceeded the carrying value.
2017 Interim Impairment Testing
Manitoba Harvest
The Company performed quantitative testing during the 2017 annual impairment testing for Manitoba Harvest, the results of which indicated that the fair value of Manitoba Harvest exceeded the carrying value. As a result of operating results that were below forecast amounts, as well as a failure of the financial covenants associated with the intercompany
credit facility, we determined that a triggering event had occurred at Manitoba Harvest in the fourth quarter of 2017. We performed impairment testing of the goodwill and indefinite lived tradename at December 31, 2017.
For the quantitative impairment test at Manitoba Harvest, we utilized an income approach. The weighted average cost of capital used in the income approach at Manitoba Harvest was
11.7%
. Results of the quantitative testing of Manitoba Harvest indicated that the carrying value of Manitoba Harvest exceeded its fair value by
$6.3 million
, and the Company recorded
$6.2 million
(after the effect of foreign currency translation) as impairment expense at December 31, 2017. For the indefinite lived trade name, quantitative testing of the Manitoba Harvest tradename indicated that the carrying value exceeded its fair value by
$2.3 million
, and the Company recorded
$2.3 million
(after the effect of foreign currency translation) of impairment expense at December 31, 2017. The Company finalized the Manitoba Harvest impairment testing during the first quarter of 2018 with no changes to the impairment expense recorded as of December 31, 2017.
A summary of the net carrying value of goodwill at September 30, 2018 and December 31, 2017, is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
Year ended
December 31, 2017
|
Goodwill - gross carrying amount
|
$
|
768,100
|
|
|
$
|
562,842
|
|
Accumulated impairment losses
|
(31,153
|
)
|
|
(31,153
|
)
|
Goodwill - net carrying amount
|
$
|
736,947
|
|
|
$
|
531,689
|
|
The following is a reconciliation of the change in the carrying value of goodwill for the nine months ended September 30, 2018 by operating segment
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
Acquisitions
(1)
|
|
Goodwill Impairment
|
|
Foreign currency translation
|
|
Other
|
|
Balance at September 30, 2018
|
5.11
|
|
$
|
92,966
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92,966
|
|
Ergobaby
|
|
61,031
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
61,031
|
|
Liberty
|
|
32,828
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,828
|
|
Manitoba Harvest
|
|
41,024
|
|
|
—
|
|
|
—
|
|
|
(1,130
|
)
|
|
—
|
|
|
39,894
|
|
Velocity Outdoor
|
|
49,352
|
|
|
86,890
|
|
|
—
|
|
|
—
|
|
|
70
|
|
|
136,312
|
|
ACI
|
|
58,019
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
58,019
|
|
Arnold
(2)
|
|
26,903
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,903
|
|
Clean Earth
|
|
119,099
|
|
|
35,102
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
154,201
|
|
Foam Fabricators
|
|
—
|
|
|
72,708
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72,708
|
|
Sterno
|
|
41,818
|
|
|
11,618
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
53,436
|
|
Corporate
(3)
|
|
8,649
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,649
|
|
Total
|
|
$
|
531,689
|
|
|
$
|
206,318
|
|
|
$
|
—
|
|
|
$
|
(1,130
|
)
|
|
$
|
70
|
|
|
$
|
736,947
|
|
|
|
(1)
|
Sterno's acquisition of Rimports and Clean Earth's acquisition of ESMI are based on a preliminary purchase price allocations that are expected to be finalized during the fourth quarter of 2018. The preliminary purchase prices for Clean Earth's acquisition of ESMI and Velocity's acquisition of Ravin have not been completed and the goodwill reflected in the table represents the excess of the purchase price over the net assets acquired.
|
|
|
(2)
|
Arnold had
three
reporting units which were combined into one reporting unit effective March 31, 2018.
|
|
|
(3)
|
Represents goodwill resulting from purchase accounting adjustments not "pushed down" to the ACI segment. This amount is allocated back to the ACI segment for purposes of goodwill impairment testing.
|
Long lived assets
Annual indefinite lived impairment testing
The Company used a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. The Company evaluated the qualitative factors of each reporting unit that maintains indefinite lived intangible assets in connection with the annual impairment testing for 2018 and 2017. Results of the qualitative analysis indicate that the
carrying value of the Company’s indefinite lived intangible assets did not exceed their fair value. The Manitoba Harvest trade name was tested for impairment as part of the interim impairment testing for Manitoba Harvest at December 31, 2017 as noted above, resulting in impairment expense of
$2.3 million
at December 31, 2017.
Other intangible assets are comprised of the following at
September 30, 2018
and December 31, 2017
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Customer relationships
|
$
|
538,148
|
|
|
$
|
(130,653
|
)
|
|
$
|
407,495
|
|
|
$
|
338,719
|
|
|
$
|
(102,271
|
)
|
|
$
|
236,448
|
|
Technology and patents
|
50,714
|
|
|
(25,751
|
)
|
|
24,963
|
|
|
49,075
|
|
|
(22,492
|
)
|
|
26,583
|
|
Trade names, subject to amortization
|
194,814
|
|
|
(33,337
|
)
|
|
161,477
|
|
|
182,976
|
|
|
(22,518
|
)
|
|
160,458
|
|
Licensing and non-compete agreements
|
8,055
|
|
|
(6,836
|
)
|
|
1,219
|
|
|
7,965
|
|
|
(6,488
|
)
|
|
1,477
|
|
Permits and airspace
|
122,722
|
|
|
(38,713
|
)
|
|
84,009
|
|
|
115,230
|
|
|
(31,026
|
)
|
|
84,204
|
|
Distributor relations and other
|
726
|
|
|
(726
|
)
|
|
—
|
|
|
726
|
|
|
(646
|
)
|
|
80
|
|
Total
|
915,179
|
|
|
(236,016
|
)
|
|
679,163
|
|
|
694,691
|
|
|
(185,441
|
)
|
|
509,250
|
|
Trade names, not subject to amortization
|
70,909
|
|
|
—
|
|
|
70,909
|
|
|
71,267
|
|
|
—
|
|
|
71,267
|
|
Total intangibles, net
|
$
|
986,088
|
|
|
$
|
(236,016
|
)
|
|
$
|
750,072
|
|
|
$
|
765,958
|
|
|
$
|
(185,441
|
)
|
|
$
|
580,517
|
|
Amortization expense related to intangible assets was
$17.6 million
and
$14.2 million
for the three months ended September 30, 2018 and 2017, respectively, and
$49.3 million
and
$39.3 million
for the nine months ended September 30, 2018 and 2017, respectively. Estimated charges to amortization expense of intangible assets for the remainder of 2018 and the next four years, is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,784
|
|
|
$
|
79,707
|
|
|
$
|
70,086
|
|
|
$
|
60,373
|
|
|
$
|
58,694
|
|
|
Note G — Warranties
The Company’s Velocity Outdoor, Ergobaby and Liberty operating segments estimate their exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty liability quarterly and adjusts the amount as necessary. A reconciliation of the change in the carrying value of the Company’s warranty liability for the nine months ended
September 30, 2018
and the year ended
December 31, 2017
is as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
Year ended
December 31, 2017
|
Warranty liability:
|
|
|
|
Beginning balance
|
$
|
2,197
|
|
|
$
|
1,258
|
|
Provision for warranties issued during the period
|
2,252
|
|
|
1,982
|
|
Fulfillment of warranty obligations
|
(2,417
|
)
|
|
(1,552
|
)
|
Other
(1)
|
154
|
|
|
509
|
|
Ending balance
|
$
|
2,186
|
|
|
$
|
2,197
|
|
(1)
Represents the warranty liability recorded in relation to acquisitions. Warranty liabilities of acquisitions are recorded at fair value as of the date of acquisition.
Note H — Debt
2018 Credit Facility
On April 18, 2018, the Company entered into an Amended and Restated Credit Agreement (the "2018 Credit Facility") to amend and restate the 2014 Credit Facility, originally dated as of June 6, 2014 (as previously amended) among the
Company, the lenders from time to time party thereto (the “Lenders”), and Bank of America, N.A., as Administrative Agent. The 2018 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries.
The 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
, and (ii) a
$500 million
term loan (the “2018 Term Loan”). The 2018 Term Loan was issued at an original issuance discount of
99.75%
. The 2018 Term Loan requires quarterly payments of
$1.25 million
commencing June 30, 2018, with a final payment of all remaining principal and interest due on April 18, 2025, the maturity date of the 2018 Term Loan. All amounts outstanding under the 2018 Revolving Credit Facility will become due on April 18, 2023, which is the maturity date of loans advanced under the 2018 Revolving Credit Facility. The 2018 Credit Facility also permits the Company, prior to the applicable maturity date, to increase the 2018 Revolving Loan Commitment and/or obtain additional term loans in an aggregate amount of up to
$250 million
(the “Incremental Loans”), subject to certain restrictions and conditions.
The Company may borrow, prepay and reborrow principal under the 2018 Revolving Credit Facility from time to time during its term. Advances under the 2018 Revolving Credit Facility can be either Eurodollar rate loans or base rate loans. Eurodollar rate revolving loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum based on the London Interbank Offered Rate (the “Eurodollar Rate”) for such interest period plus a margin ranging from
1.50%
to
2.50%
, based on the ratio of consolidated net indebtedness to adjusted consolidated earnings before interest expense, tax expense, and depreciation and amortization expenses for such period (the “Consolidated Total Leverage Ratio”). Base rate revolving loans bear interest on the outstanding principal amount thereof at a rate per annum equal to the highest of (i) Federal Funds rate plus 0.50%, (ii) the “prime rate”, and (iii) Eurodollar Rate plus 1.0% (the “Base Rate”), plus a margin ranging from
0.50%
to
1.50%
, based on the Company's Consolidated Total Leverage Ratio.
Under the 2018 Revolving Credit Facility, an aggregate amount of up to
$100 million
in letters of credit may be issued, as well as swing line loans of up to
$25 million
outstanding at one time. The issuance of such letters of credit and the making of any swing line loan would reduce the amount available under the 2018 Revolving Credit Facility.
2014 Credit Facility
The 2014 Credit Facility, as amended, provided for (i) a revolving credit facility of
$550 million
, (ii) a
$325 million
term loan (the "2014 Term Loan"), and (iii) a
$250 million
incremental term loan. The 2018 Credit Facility amended and restated the 2014 Credit Facility.
Senior Notes
On April 18, 2018, the Company consummated the issuance and sale of
$400 million
aggregate principal amount of its
8.000%
Senior Notes due 2026 (the “Notes” or "Senior Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons under Regulation S under the Securities Act. The Company used the net proceeds from the sale of the Notes to repay debt under its existing credit facilities in connection with a concurrent refinancing transaction described above. The Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee (the “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, beginning on November 1, 2018. The Notes are general senior unsecured obligations of the Company and are not guaranteed by the subsidiaries through which the Company currently conducts substantially all of its operations. The Notes rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness, and rank senior in right of payment to all of the Company’s future subordinated indebtedness, if any. The Notes will be effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, including the indebtedness under the Company’s credit facilities described below.
The Indenture contains several restrictive covenants including, but not limited to, limitations on the following: (i) the incurrence of additional indebtedness, (ii) restricted payments, (iii) dividends and other payments affecting restricted subsidiaries, (iv) the issuance of preferred stock of restricted subsidiaries, (v) transactions with affiliates, (vi) asset sales and mergers and consolidations, (vii) future subsidiary guarantees and (viii) liens, subject in each case to certain exceptions.
The following table provides the Company’s debt holdings at
September 30, 2018
and December 31, 2017
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Senior Notes
|
400,000
|
|
|
—
|
|
Revolving Credit Facility
|
$
|
233,000
|
|
|
$
|
42,000
|
|
Term Loan
|
497,500
|
|
|
559,973
|
|
Less: unamortized discounts and debt issuance costs
|
(21,152
|
)
|
|
(11,941
|
)
|
Total debt
|
$
|
1,109,348
|
|
|
$
|
590,032
|
|
Less: Current portion, term loan facilities
|
(5,000
|
)
|
|
(5,685
|
)
|
Long term debt
|
$
|
1,104,348
|
|
|
$
|
584,347
|
|
Net availability under the 2018 Revolving Credit Facility was approximately
$366.7 million
at
September 30, 2018
. Letters of credit outstanding at
September 30, 2018
totaled approximately
$0.3 million
. At
September 30, 2018
, the Company was in compliance with all covenants as defined in the 2018 Credit Facility.
At
September 30, 2018
, the carrying value of the principal under the Company’s outstanding Term Loan, including the current portion, was
$497.5 million
, which approximates fair value because it has a variable interest rate that reflects market changes in interest rates and changes in the Company's net leverage ratio. The estimated fair value of the outstanding 2018 Term Loan is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 in the fair value hierarchy. The Company's Senior Notes consisted of the following carrying value and estimated fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
September 30, 2018
|
|
|
Maturity Date
|
|
Rate
|
|
|
Carrying Value
|
|
Fair Value
|
Senior Notes
|
|
May 1, 2026
|
|
8.000
|
%
|
|
2
|
|
400,000
|
|
|
416,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the issuance of the Company's financing arrangements. The Company paid
$7.0 million
in debt issuance costs related to the Senior Notes issuance, comprised of bank fees, rating agency fees and professional fees. The 2018 Credit Facility was categorized as a debt modification, and the Company incurred
$8.4 million
of debt issuance costs,
$7.8 million
of which were capitalized and will be amortized over the life of the related debt instrument, and
$0.6 million
that were expensed as costs incurred. The Company recorded additional debt modification expense of
$0.6 million
to write off previously capitalized debt issuance costs. Since the Company can borrow, repay and reborrow principal under the 2018 Revolving Credit Facility, the debt issuance costs associated with the 2014 and 2018 Revolving Credit Facility of
$5.6 million
and
$2.8 million
at September 30, 2018 and December 31, 2017, respectively, have been classified as other non-current assets in the accompanying consolidated balance sheet. The original issue discount and the debt issuance costs associated with the 2018 Term Loan and Senior Notes are classified as a reduction of long-term debt in the accompanying consolidated balance sheet.
Interest Rate Swap
In September 2014, the Company purchased an interest rate swap (the "Swap") with a notional amount of
$220 million
. The Swap is effective April 1, 2016 through June 6, 2021, the original termination date of the 2014 Term Loan. The agreement requires the Company to pay interest on the notional amount at the rate of
2.97%
in exchange for the
three
-month LIBOR rate. At
September 30, 2018
and December 31, 2017, the Swap had a fair value loss of
$0.0 million
and
$6.1 million
, respectively, principally reflecting the present value of future payments and receipts under the agreement.
The following table reflects the classification of the Company's Swap on the consolidated balance sheets at
September 30, 2018
and December 31, 2017 (
in thousands
):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Other non-current assets
|
$
|
539
|
|
|
$
|
—
|
|
Other current liabilities
|
(553
|
)
|
|
(2,468
|
)
|
Other noncurrent liabilities
|
—
|
|
|
(3,639
|
)
|
Total fair value
|
$
|
(14
|
)
|
|
$
|
(6,107
|
)
|
Note I — Stockholders’ Equity
Trust Common Shares
The Trust is authorized to issue
500,000,000
Trust shares and the Company is authorized to issue a corresponding number of LLC interests. The Company will at all times have the identical number of LLC interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each Trust share is entitled to one vote per share on any matter with respect to which members of the Company are entitled to vote.
Trust Preferred Shares
The Trust is authorized to issue up to
50,000,000
Trust preferred shares and the Company is authorized to issue a corresponding number of trust preferred interests.
Series B Preferred Shares
On March 13, 2018, the Trust issued
4,000,000
7.875% Series B Trust Preferred Shares (the "Series B Preferred Shares") with a liquidation preference of
$25.00
per share, for gross proceeds of
$100.0 million
, or
$96.5 million
net of underwriters' discount and issuance costs. Distributions on the Series B Preferred Shares will be payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30, and October 30 of each year, beginning on July 30, 2018, at a rate per annum of 7.875%. Distributions on the Series B Preferred Shares are cumulative. Unless full cumulative distributions on the Series B Preferred Shares have been or contemporaneously are declared and set apart for payment of the Series B Preferred Shares for all past distribution periods, no distribution may be declared or paid for payment on the Trust common shares. The Series B Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the preferred shares. The Series B Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after April 30, 2028, at a price of
$25.00
per share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding, the redemption date. Holders of Series B Preferred Shares will have no right to require the redemption of the Series B Preferred Shares and there is no maturity date.
If a certain tax redemption event occurs prior to April 30, 2028, the Series B Preferred Shares may be redeemed at the Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such tax redemption event, at a price of
$25.25
per share, plus accumulated and unpaid distributions to, but excluding, the redemption date. If a certain fundamental change related to the Series B Preferred Shares or the Company occurs (whether before, on or after April 30, 2028), the Company will be required to repurchase the Series B Preferred Shares at a price of
$25.25
per share, plus accumulated and unpaid distributions to, but excluding, the date of purchase. If (i) a fundamental change occurs and (ii) the Company does not give notice prior to the 31st day following the fundamental change to repurchase all the outstanding Series B Preferred Shares, the distribution rate per annum on the Series B Preferred Shares will increase by
5.00%
, beginning on the 31st day following such fundamental change. Notwithstanding any requirement that the Company repurchase all of the outstanding Series B Preferred Shares, the increase in the distribution rate is the sole remedy to holders in the event the Company fails to do so, and following any such increase, the Company will be under no obligation to repurchase any Series B Preferred Shares.
Series A Preferred Shares
On June 28, 2017, the Trust issued
4,000,000
7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares") with a liquidation preference of
$25.00
per share, for gross proceeds of
$100.0 million
, or
$96.4 million
net of underwriters' discount and issuance costs. When, and if declared by the Company's board of directors, distribution on the Series A Preferred Shares will be payable quarterly on January 30, April 30, July 30, and October 30 of each year, beginning on October 30, 2017, at a rate per annum of 7.250%. Distributions on the Series A Preferred Shares are discretionary and non-cumulative. The Company has no obligation to pay distributions for a quarterly distribution
period if the board of directors does not declare the distribution before the scheduled record of date for the period, whether or not distributions are paid for any subsequent distribution periods with respect to the Series A Preferred Shares, or the Trust common shares. If the Company's board of directors does not declare a distribution for the Series A Preferred Shares for a quarterly distribution period, during the remainder of that quarterly distribution period the Company cannot declare or pay distributions on the Trust common shares. The Series A Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the preferred shares.
Profit Allocation Interests
The Allocation Interests represent the original equity interest in the Company. The holders of the Allocation Interests ("Holders") are entitled to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The distributions of the profit allocation are paid upon the occurrence of the sale of a material amount of capital stock or assets of one of the Company’s businesses ("Sale Event") or, at the option of the Holders, at each five-year anniversary date of the acquisition of one of the Company’s businesses ("Holding Event"). The Company records distributions of the profit allocation to the Holders upon occurrence of a Sale Event or Holding Event as distributions declared on Allocation Interests to stockholders’ equity when they are approved by the Company’s board of directors.
The sale of Fox Factory Holding Corp. ("FOX") shares in March 2017 (refer to
Note N - "Investment in FOX"
) qualified as a Sale Event under the Company's LLC Agreement. In April 2017, with respect to the March 2017 Offering, the Company's board of directors approved and declared a profit allocation payment totaling
$25.8 million
that was paid in the second quarter of 2017.
Reconciliation of net income (loss) available to common shares of Holdings
The following table reconciles net loss attributable to Holdings to net loss attributable to the common shares of Holdings (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income (loss) from continuing operations attributable to Holdings
|
|
$
|
4,726
|
|
|
$
|
7,706
|
|
|
$
|
312
|
|
|
$
|
(18,351
|
)
|
|
|
|
|
|
|
|
|
|
Less: Distributions paid - Allocation Interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39,120
|
|
Less: Distributions paid - Preferred Shares
|
|
4,773
|
|
|
—
|
|
|
8,398
|
|
|
—
|
|
Less: Accrued distributions - Preferred Shares
|
|
1,619
|
|
|
—
|
|
|
1,619
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to common shares of Holdings
|
|
$
|
(1,666
|
)
|
|
$
|
7,706
|
|
|
$
|
(9,705
|
)
|
|
$
|
(57,471
|
)
|
Earnings per share
The Company calculates basic and diluted earnings per share using the two-class method which requires the Company to allocate to participating securities that have rights to earnings that otherwise would have been available only to Trust shareholders as a separate class of securities in calculating earnings per share. The Allocation Interests are considered participating securities that contain participating rights to receive profit allocations upon the occurrence of a Holding Event or Sale Event. The calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017 reflects the incremental increase during the period in the profit allocation distribution to Holders related to Holding Events.
Basic and diluted earnings per share for the three and nine months ended
September 30, 2018
and 2017 attributable to the common shares of Holdings is calculated as follows
(in thousands, except per share data)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Income (loss) from continuing operations attributable to common shares of Holdings
|
|
$
|
(1,666
|
)
|
|
$
|
7,706
|
|
|
$
|
(9,705
|
)
|
|
$
|
(57,471
|
)
|
Less: Effect of contribution based profit - Holding Event
|
|
2,404
|
|
|
1,620
|
|
|
3,719
|
|
|
3,954
|
|
Income (loss) from continuing operation attributable to common shares of Holdings
|
|
$
|
(4,070
|
)
|
|
$
|
6,086
|
|
|
$
|
(13,424
|
)
|
|
$
|
(61,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations attributable to common shares of Holdings
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,165
|
|
|
$
|
340
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
59,900
|
|
|
59,900
|
|
|
59,900
|
|
|
59,900
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted income (loss) per common share attributable to Holdings
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.07
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.22
|
)
|
|
$
|
(1.03
|
)
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
0.02
|
|
|
0.01
|
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.20
|
)
|
|
$
|
(1.02
|
)
|
Distributions
The following table summarizes information related to our quarterly cash distributions on our Trust common and preferred shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Cash Distribution per Share
|
|
Total Cash Distributions
|
|
Record Date
|
|
Payment Date
|
|
|
|
|
(in thousands)
|
|
|
|
|
Trust Common Shares:
|
|
|
|
|
|
|
|
|
July 1, 2018 - September 30, 2018
(1)
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
October 18, 2018
|
|
October 25, 2018
|
April 1, 2018 - June 30, 2018
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
July 19, 2018
|
|
July 26, 2018
|
January 1, 2018 - March 31, 2018
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
April 19, 2018
|
|
April 26, 2018
|
October 1, 2017 - December 31, 2017
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
January 19, 2018
|
|
January 25, 2018
|
July 1, 2017 - September 30, 2017
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
October 19, 2017
|
|
October 26, 2017
|
April 1, 2017 - June 30, 2017
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
July 20, 2017
|
|
July 27, 2017
|
January 1, 2017 - March 31, 2017
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
April 20, 2017
|
|
April 27, 2017
|
October 1, 2016 - December 31, 2016
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
January 19, 2017
|
|
January 26, 2017
|
|
|
|
|
|
|
|
|
|
Series A Preferred Shares:
|
|
|
|
|
|
|
|
|
July 30, 2018 - October 29, 2018
(1)
|
|
$
|
0.453125
|
|
|
$
|
1,813
|
|
|
October 15, 2018
|
|
October 30, 2018
|
April 30, 2018 - July 29, 2018
|
|
$
|
0.453125
|
|
|
$
|
1,813
|
|
|
July 16, 2018
|
|
July 30, 2018
|
January 30, 2018 - April 29, 2018
|
|
$
|
0.453125
|
|
|
$
|
1,813
|
|
|
April 15, 2018
|
|
April 30, 2018
|
October 30, 2017 - January 29, 2018
|
|
$
|
0.453125
|
|
|
$
|
1,813
|
|
|
January 15, 2018
|
|
January 30, 2018
|
June 28, 2017 - October 29, 2017
|
|
$
|
0.61423611
|
|
|
$
|
2,457
|
|
|
October 15, 2017
|
|
October 30, 2017
|
|
|
|
|
|
|
|
|
|
Series B Preferred Shares:
|
|
|
|
|
|
|
|
|
July 30, 2018 - October 29, 2018
(1)
|
|
$
|
0.4921875
|
|
|
$
|
1,969
|
|
|
October 15, 2018
|
|
October 30, 2018
|
March 13, 2018 - July 29, 2018
|
|
$
|
0.74
|
|
|
$
|
2,960
|
|
|
July 16, 2018
|
|
July 30, 2018
|
(1)
This distribution was
declared on October 4, 2018.
Note J — Noncontrolling Interest
Noncontrolling interest represents the portion of the Company’s majority owned subsidiary’s net income (loss) and equity that is owned by noncontrolling shareholders. The following tables reflect the Company’s ownership percentage of its majority owned operating segments and related noncontrolling interest balances as of
September 30, 2018
and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
% Ownership
(1)
September 30, 2018
|
|
% Ownership
(1)
December 31, 2017
|
|
Primary
|
|
Fully
Diluted
|
|
Primary
|
|
Fully
Diluted
|
5.11 Tactical
|
97.5
|
|
87.7
|
|
97.5
|
|
85.5
|
Ergobaby
|
82.1
|
|
76.8
|
|
82.7
|
|
76.6
|
Liberty
|
88.6
|
|
85.2
|
|
88.6
|
|
84.7
|
Manitoba Harvest
|
76.6
|
|
68.0
|
|
76.6
|
|
67.0
|
Velocity Outdoor
|
99.4
|
|
94.2
|
|
98.8
|
|
89.2
|
ACI
|
69.4
|
|
69.2
|
|
69.4
|
|
69.2
|
Arnold
|
96.7
|
|
79.4
|
|
96.7
|
|
84.7
|
Clean Earth
|
97.5
|
|
79.8
|
|
97.5
|
|
79.8
|
Foam Fabricators
|
100.0
|
|
91.5
|
|
N/a
|
|
N/a
|
Sterno
|
100.0
|
|
88.5
|
|
100.0
|
|
89.5
|
|
|
(1)
|
The principal difference between primary and diluted percentages of our operating segments is due to stock option issuances of operating segment stock to management of the respective businesses.
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest Balances
|
(in thousands)
|
September 30, 2018
|
|
December 31, 2017
|
5.11 Tactical
|
$
|
9,655
|
|
|
$
|
8,003
|
|
Ergobaby
|
25,046
|
|
|
23,416
|
|
Liberty
|
3,348
|
|
|
3,254
|
|
Manitoba Harvest
|
11,507
|
|
|
11,725
|
|
Velocity Outdoor
|
2,458
|
|
|
1,373
|
|
ACI
|
(2,580
|
)
|
|
(5,850
|
)
|
Arnold
|
1,474
|
|
|
1,368
|
|
Clean Earth
|
8,578
|
|
|
7,357
|
|
Foam Fabricators
|
594
|
|
|
—
|
|
Sterno
|
(2,471
|
)
|
|
2,045
|
|
Allocation Interests
|
100
|
|
|
100
|
|
|
$
|
57,709
|
|
|
$
|
52,791
|
|
Note K — Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis at
September 30, 2018
and December 31, 2017 (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2018
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities:
|
|
|
|
|
|
|
|
Put option of noncontrolling shareholders
(1)
|
$
|
(178
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(178
|
)
|
Contingent consideration - acquisition
(2)
|
(12,179
|
)
|
|
—
|
|
|
—
|
|
|
(12,179
|
)
|
Interest rate swap
|
(14
|
)
|
|
—
|
|
|
(14
|
)
|
|
—
|
|
Total recorded at fair value
|
$
|
(12,371
|
)
|
|
$
|
—
|
|
|
$
|
(14
|
)
|
|
$
|
(12,357
|
)
|
|
|
(1)
|
Represents put option issued to noncontrolling shareholders in connection with the 5.11 Tactical and Liberty acquisitions.
|
|
|
(2)
|
Represents potential earn-out payable by Sterno for the acquisition of Rimports, and Velocity for the acquisition of Ravin.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities:
|
|
|
|
|
|
|
|
Put option of noncontrolling shareholders
|
$
|
(178
|
)
|
|
—
|
|
|
—
|
|
|
$
|
(178
|
)
|
Interest rate swap
|
(6,107
|
)
|
|
—
|
|
|
(6,107
|
)
|
|
—
|
|
Total recorded at fair value
|
$
|
(6,285
|
)
|
|
$
|
—
|
|
|
$
|
(6,107
|
)
|
|
$
|
(178
|
)
|
Reconciliations of the change in the carrying value of the Level 3 fair value measurements from January 1, 2017 through
September 30, 2018
are as follows (
in thousands
):
|
|
|
|
|
|
Level 3
|
Balance at January 1, 2017
|
$
|
(5,010
|
)
|
Contingent consideration - Sterno Home
|
(382
|
)
|
Payment of contingent consideration - Sterno Home
|
475
|
|
Reversal of contingent consideration - Baby Tula
|
3,780
|
|
Reversal of contingent consideration - Sterno Home
|
956
|
|
Change in noncontrolling shareholder put options
|
3
|
|
Balance at January 1, 2018
|
$
|
(178
|
)
|
Contingent consideration - Rimports
(1)
|
(4,100
|
)
|
Contingent consideration - Ravin
(2)
|
(8,079
|
)
|
Balance at September 30, 2018
|
$
|
(12,357
|
)
|
(1)
The contingent consideration relates to Sterno's acquisition of Rimports in February 2018. The purchase price of Rimports includes a potential earn-out of up to
$25 million
contingent on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019. The fair value of the contingent consideration related to the earn-out was allocated a fair value of
$4.1 million
using a probability weighted option pricing model and is recorded as a current liability in the consolidated balance sheet at
September 30, 2018
.
(2) The contingent consideration relates to Velocity's acquisition of Ravin in September 2018. The purchase price of Ravin includes a potential earn-out of up to
$25.0 million
contingent on the achievement certain financial metrics for the trailing twelve month period ending December 31, 2018. The fair value of the contingent consideration was calculated based on actual results to date and a forecast for the fourth quarter of 2018.
Valuation Techniques
Debt
We classify our fixed and floating rate debt as Level 2 items based on quoted market prices for similar debt issues. In April 2018, the Company issued
$400.0 million
aggregate principal amount of its Senior Notes due 2026. The fair value of the Senior Notes was determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined this to be a Level 2 measurement as all significant inputs into the quote provided by our pricing source are observable in active markets. At
September 30, 2018
, the carrying value of the principal under the Company’s outstanding 2018 Term Loan, including the current portion, was
$497.5 million
, which approximates fair value because it has a variable interest rate that reflects market changes in interest rates and changes in the Company's net leverage ratio.
The Company has not changed its valuation techniques in measuring the fair value of any of its other financial assets and liabilities during the period. For details of the Company’s fair value measurement policies under the fair value hierarchy, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Nonrecurring Fair Value Measurements
The following table provides the assets carried at fair value measured on a non-recurring basis as of December 31, 2017. There were no assets carried at fair value on a non-recurring basis at
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017
|
|
Year ended
|
(in thousands)
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
Goodwill - Arnold
|
$
|
26,903
|
|
|
—
|
|
|
—
|
|
|
$
|
26,903
|
|
|
$
|
8,864
|
|
Goodwill - Manitoba Harvest
|
41,024
|
|
|
—
|
|
|
—
|
|
|
41,024
|
|
|
6,188
|
|
Tradename - Manitoba Harvest
|
10,834
|
|
|
—
|
|
|
—
|
|
|
10,834
|
|
|
2,273
|
|
Note L — Income taxes
Each fiscal quarter, the Company estimates its annual effective tax rate and applies that rate to its interim pre-tax earnings. In this regard, the Company reflects the full year’s estimated tax impact of certain unusual or infrequently occurring items and the effects of changes in tax laws or rates in the interim period in which they occur.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21% and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The one-time transition tax under the Tax Act is based on earnings and profits ("E&P") that were previously deferred from U.S. income taxes. For the year ended December 31, 2017, the provision for income taxes included provisional tax expense of
$4.9 million
related to the one-time transition tax liability of our foreign subsidiaries. The Company has substantially completed the calculation of the total E&P for these foreign subsidiaries although the Company's estimates may be affected as additional regulatory guidance is issued with respect to the Tax Act. Any adjustments to the provisional amounts will be recognized as a component of the provision for income taxes in the period in which such adjustments are determined within the annual period following the enactment of the Tax Act.
The computation of the annual estimated effective tax rate in each interim period requires certain estimates and significant judgment, including the projected operating income for the year, projections of the proportion of income earned and taxed in other jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, as additional information is obtained or as the tax environment changes. Certain foreign operations are subject to foreign income taxation under existing provisions of the laws of those jurisdictions.
The reconciliation between the Federal Statutory Rate and the effective income tax rate for the nine months ended
September 30, 2018
and 2017 is as follows:
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
2018
|
|
2017
|
United States Federal Statutory Rate
|
21.0
|
%
|
|
(35.0
|
)%
|
State income taxes (net of Federal benefits)
|
(4.1
|
)
|
|
(1.0
|
)
|
Foreign income taxes
|
23.1
|
|
|
4.5
|
|
Expenses of Compass Group Diversified Holdings LLC representing a pass through to shareholders
(1)
|
12.0
|
|
|
0.3
|
|
Impairment expense
|
—
|
|
|
16.9
|
|
Effect of loss on equity method investment
(2)
|
—
|
|
|
11.0
|
|
Impact of subsidiary employee stock options
|
(8.6
|
)
|
|
2.5
|
|
Credit utilization
|
(6.9
|
)
|
|
(7.7
|
)
|
Domestic production activities deduction
|
—
|
|
|
(2.3
|
)
|
Effect of undistributed foreign earnings
|
—
|
|
|
2.0
|
|
Non-recognition of NOL carryforwards at subsidiaries
|
20.4
|
|
|
(3.5
|
)
|
Effect of Tax Act
|
(3.2
|
)
|
|
—
|
|
Other
|
0.4
|
|
|
1.1
|
|
Effective income tax rate
|
54.1
|
%
|
|
(11.2
|
)%
|
|
|
(1)
|
The effective income tax rate for the nine months ended
September 30, 2018
and 2017 includes a loss at the Company's parent, which is taxed as a partnership.
|
|
|
(2)
|
The equity method investment was held at the Company's parent, which is taxed as a partnership, resulting in the gain or loss on the investment as a reconciling item in deriving the effective tax rate.
|
Note M — Defined Benefit Plan
In connection with the acquisition of Arnold, the Company has a defined benefit plan covering substantially all of Arnold’s employees at its Lupfig, Switzerland location. The benefits are based on years of service and the employees’ highest average compensation during the specific period.
The unfunded liability of $
3.4 million
is recognized in the consolidated balance sheet as a component of other non-current liabilities at
September 30, 2018
. Net periodic benefit cost consists of the following for the three and nine months ended
September 30, 2018
and 2017
(in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
135
|
|
|
$
|
134
|
|
|
$
|
403
|
|
|
$
|
401
|
|
Interest cost
|
24
|
|
|
24
|
|
|
72
|
|
|
71
|
|
Expected return on plan assets
|
(39
|
)
|
|
(39
|
)
|
|
(117
|
)
|
|
(117
|
)
|
Amortization of unrecognized loss
|
49
|
|
|
63
|
|
|
148
|
|
|
188
|
|
Net periodic benefit cost
|
$
|
169
|
|
|
$
|
182
|
|
|
$
|
506
|
|
|
$
|
543
|
|
During the nine months ended
September 30, 2018
, Arnold used previously funded contribution reserves to fund the employers' contribution to the pension plan. The total expected contribution by Arnold to the plan will be approximately
$0.6 million
, which will be paid using the plan's contribution reserves.
The plan assets are pooled with assets of other participating employers and are not separable; therefore, the fair values of the pension plan assets at
September 30, 2018
were considered Level 3.
Note N - Investment in FOX
FOX, a former majority owned subsidiary of the Company that is publicly traded on the NASDAQ Stock Market under the ticker "FOXF," is a designer, manufacturer and marketer of high-performance ride dynamic products used primarily for bicycles, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. The Company held a
14%
ownership interest as of January 1, 2017. The investment in FOX was accounted for using the fair value option.
In March 2017, FOX closed on a secondary public offering (the "March 2017 Offering") through which the Company sold their remaining
5,108,718
shares in FOX for total net proceeds of
$136.1 million
. Subsequent to the March 2017 Offering, the Company no longer holds an ownership interest in FOX.
Note O - Commitments and Contingencies
In the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that any unfavorable outcomes will have a material adverse effect on the Company's consolidated financial position or results of operations.
Note P — Related Party Transactions
Integration Services Agreements
Foam Fabricators, which was acquired in 2018, and Velocity Outdoor, which was acquired in 2017, 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 of 2002, as amended, 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. Velocity Outdoor
paid CGM
$0.75 million
in integration services fees during 2017 and
$0.75 million
in integration services fees in 2018. Foam Fabricators will pay CGM
$2.25 million
over the term of the ISA,
$2.0 million
in 2018 and
$0.25 million
in 2019. Integration services fees are included in selling, general and administrative expense on the subsidiaries' statement of operations in the period in which they are incurred.
The Company and its businesses have the following significant related party transactions
:
Sterno Recapitalization
In January 2018, the Company completed a recapitalization at 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. In connection with the recapitalization, Sterno's management team exercised all of their vested stock options, which represented
58,000
shares of Sterno. The Company then used a portion of the distribution to repurchase the
58,000
shares from management for a total purchase price of
$6.0 million
. In addition, Sterno issued new stock options to replace the exercised options, thus maintaining the same percentage of fully diluted non-controlling interest that existed prior to the recapitalization.
5.11
Related Party Vendor Purchases -
5.11 purchases inventory from a vendor who is a related party to 5.11 through one of the executive officers of 5.11 via the executive's
40%
ownership interest in the vendor. During the three and nine months ended September 30, 2018, 5.11 purchased approximately
$0.9 million
and
$2.9 million
, respectively, in inventory from the vendor.