NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2020
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"), 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 eight businesses, or reportable operating segments, at March 31, 2020. The segments are as follows: 5.11 Acquisition Corp. ("5.11"), 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"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold"), FFI Compass, Inc. ("Foam Fabricators" or "Foam") and The Sterno Group, LLC ("Sterno"). 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 month periods ended March 31, 2020 and March 31, 2019 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, 2019.
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
During the first quarter of 2019, the Company completed the sale of FHF Holdings Ltd. ("Manitoba Harvest"), the parent company of Fresh Hemp Foods Ltd. Additionally, during the second quarter of 2019, the Company completed the sale of CEHI Acquisition Corp. ("Clean Earth"), the parent company of Clean Earth Holdings, Inc. and Clean Earth Inc. The results of operations of Manitoba Harvest and Clean Earth are reported as discontinued operations in the condensed consolidated statements of operations for the three months ended March 31, 2019. Refer to Note B - "Discontinued Operations" for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.
Seasonality
Earnings of certain of our operating segments are seasonal in nature due to various recurring events, holidays and seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and fourth quarter produce the highest net sales during our fiscal year.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments—Credit Losses, which requires companies to present assets held at amortized cost and available for sale debt securities
net of the amount expected to be collected. The guidance requires the measurement of expected credit losses to be based on relevant information from past events, including historical experiences, current conditions and reasonable and supportable forecasts that affect collectibility. The guidance was effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted. The adoption of this guidance on January 1, 2020 did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2021 and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
Note B — Discontinued Operations
Sale of Clean Earth
On May 8, 2019, the Company, as majority stockholder of CEHI Acquisition Corporation ("Clean Earth" or “CEHI”) and as Sellers’ Representative, entered into a definitive Stock Purchase Agreement (the “Purchase Agreement”) with Calrissian Holdings, LLC (“Buyer”), CEHI, the other holders of stock and options of CEHI and, as Buyer’s guarantor, Harsco Corporation, pursuant to which Buyer would acquire all of the issued and outstanding securities of CEHI, the parent company of the operating entity, Clean Earth, Inc.
On June 28, 2019, Buyer completed the acquisition of all of the issued and outstanding securities of CEHI pursuant to the Purchase Agreement. The sale price for Clean Earth was based on an aggregate total enterprise value of $625 million and is subject to customary working capital adjustments. After the allocation of the sale proceeds to Clean Earth non-controlling equity holders, the repayment of intercompany loans to the Company (including accrued interest) of $224.6 million, and the payment of transaction expenses of approximately $10.7 million, the Company received approximately $327.3 million of total proceeds at closing related to our equity interests in Clean Earth. The Company recognized a gain on the sale of Clean Earth of $209.3 million during the year ended December 31, 2019.
Summarized results of operations of Clean Earth for the three months ended March 31, 2019 are as follows (in thousands):
|
|
|
|
|
|
Three months ended
March 31, 2019
|
Net sales
|
$
|
63,632
|
|
Gross profit
|
16,633
|
|
Operating income
|
1,256
|
|
Income from continuing operations before income taxes
|
991
|
|
Benefit for income taxes
|
(1,022
|
)
|
Income from discontinued operations (1)
|
$
|
2,013
|
|
(1) The results of operations for the three months ended March 31, 2019, excludes $4.7 million of intercompany interest expense.
Sale of Manitoba Harvest
On February 19, 2019, the Company entered into a definitive agreement with Tilray, Inc. ("Tilray") and a wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, through Tilray Subco, all of the issued and outstanding securities of our majority owned subsidiary, Manitoba Harvest, for total consideration of up to C$419 million. The completion of the sale of Manitoba Harvest was subject to approval by the British Columbia Supreme Court, which occurred on February 21, 2019. The sale closed on February 28, 2019. Subject to certain customary adjustments, the shareholders of Manitoba Harvest, including the Company, received the following from Tilray as consideration for their shares of Manitoba Harvest: (i) C$150 million in cash to the holders of preferred shares of Manitoba Harvest and the holders of common shares of Manitoba Harvest (“Common Holders”) and C$127.5 million in shares of class 2 Common Stock of Tilray (“Tilray Common Stock”) to the Common Holders on the closing date of the sale (the “Closing Date Consideration”), and (ii) C$50 million in cash and C$42.5 million in Tilray Common Stock
to the Common Holders on the date that was six months after the closing date of the arrangement (the “Deferred Consideration”). The sale consideration also included a potential earnout of up to C$49 million in Tilray Common Stock to the Common Holders, if Manitoba Harvest achieved certain levels of U.S. branded gross sales of edible or topical products containing broad spectrum hemp extracts or cannabidiols prior to December 31, 2019. The threshold for the earnout was not achieved and no additional amount was recorded related to sale of Manitoba Harvest at December 31, 2019.
The cash portion of the Closing Date Consideration was reduced by the amount of the net indebtedness (including accrued interest) of Manitoba Harvest on the closing date of C$71.3 million ($53.7 million) and transaction expenses of approximately C$5.0 million. The Company's share of the net proceeds after accounting for the redemption of the noncontrolling shareholders and the payment of net indebtedness of Manitoba Harvest and transaction expenses was approximately $124.2 million in cash proceeds and in Tilray Common Stock. The Company recognized a gain on the sale of Manitoba Harvest of $121.7 million in the first quarter of 2019. In August 2019, the Company received the Deferred Consideration related to the sale. The Company's portion of the Deferred Consideration totaled $28.4 million in cash proceeds and $19.6 million in Tilray Common Stock.
The Tilray Common Stock consideration was issued in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and pursuant to exemptions from applicable securities laws of any state of the United States, such that any shares of Tilray Common Stock received by the Common Holders were freely tradeable. The Company sold the Tilray Common Stock received as part of the Closing Consideration during March 2019, recognizing a net loss of $5.3 million in Other income/ (expense) during the quarter ended March 31, 2019. In August 2019, the Company sold the Tilray Common Stock received as part of the Deferred Consideration, recognizing a loss of $4.9 million in Other income/ (expense) during the quarter ended September 30, 2019.
Summarized results of operations of Manitoba Harvest for the period from January 1, 2019 through the date of disposition are as follows (in thousands):
|
|
|
|
|
|
For the period January 1, 2019 through disposition
|
Net revenues
|
$
|
10,024
|
|
Gross profit
|
4,874
|
|
Operating loss
|
(1,118
|
)
|
Loss before income taxes
|
(1,127
|
)
|
Benefit for income taxes
|
(541
|
)
|
Income (loss) from discontinued operations (1)
|
$
|
(586
|
)
|
(1) The results of operations for the period from January 1, 2019 through the date of disposition excludes $1.0 million of intercompany interest expense.
Note C — Revenue
The Company recognizes revenue in accordance with the provisions of Revenue from Contracts with Customers, or ASC 606. 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.
Disaggregated Revenue - Revenue Streams and 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 months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
5.11
|
|
Ergo
|
|
Liberty
|
|
Velocity
|
|
ACI
|
|
Arnold
|
|
Foam
|
|
Sterno
|
|
Total
|
United States
|
$
|
72,427
|
|
|
$
|
6,258
|
|
|
$
|
24,657
|
|
|
$
|
25,879
|
|
|
$
|
21,696
|
|
|
$
|
18,563
|
|
|
$
|
23,587
|
|
|
$
|
80,016
|
|
|
$
|
273,083
|
|
Canada
|
1,474
|
|
|
700
|
|
|
303
|
|
|
1,920
|
|
|
—
|
|
|
156
|
|
|
—
|
|
|
2,927
|
|
|
7,480
|
|
Europe
|
6,307
|
|
|
5,787
|
|
|
—
|
|
|
1,698
|
|
|
—
|
|
|
8,328
|
|
|
—
|
|
|
58
|
|
|
22,178
|
|
Asia Pacific
|
3,511
|
|
|
5,903
|
|
|
—
|
|
|
246
|
|
|
—
|
|
|
1,395
|
|
|
—
|
|
|
28
|
|
|
11,083
|
|
Other international
|
12,062
|
|
|
1,001
|
|
|
—
|
|
|
647
|
|
|
—
|
|
|
1,116
|
|
|
4,796
|
|
|
3
|
|
|
19,625
|
|
|
$
|
95,781
|
|
|
$
|
19,649
|
|
|
$
|
24,960
|
|
|
$
|
30,390
|
|
|
$
|
21,696
|
|
|
$
|
29,558
|
|
|
$
|
28,383
|
|
|
$
|
83,032
|
|
|
$
|
333,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
5.11
|
|
Ergo
|
|
Liberty
|
|
Velocity
|
|
ACI
|
|
Arnold
|
|
Foam
|
|
Sterno
|
|
Total
|
United States
|
$
|
70,477
|
|
|
$
|
7,335
|
|
|
$
|
21,736
|
|
|
$
|
26,164
|
|
|
$
|
23,069
|
|
|
$
|
17,916
|
|
|
$
|
26,137
|
|
|
$
|
85,134
|
|
|
$
|
277,968
|
|
Canada
|
1,664
|
|
|
819
|
|
|
468
|
|
|
1,477
|
|
|
—
|
|
|
179
|
|
|
—
|
|
|
5,032
|
|
|
9,639
|
|
Europe
|
7,282
|
|
|
6,531
|
|
|
—
|
|
|
2,201
|
|
|
—
|
|
|
9,770
|
|
|
—
|
|
|
683
|
|
|
26,467
|
|
Asia Pacific
|
3,414
|
|
|
7,306
|
|
|
—
|
|
|
229
|
|
|
—
|
|
|
1,260
|
|
|
—
|
|
|
290
|
|
|
12,499
|
|
Other international
|
5,252
|
|
|
461
|
|
|
—
|
|
|
1,066
|
|
|
—
|
|
|
903
|
|
|
4,545
|
|
|
57
|
|
|
12,284
|
|
|
$
|
88,089
|
|
|
$
|
22,452
|
|
|
$
|
22,204
|
|
|
$
|
31,137
|
|
|
$
|
23,069
|
|
|
$
|
30,028
|
|
|
$
|
30,682
|
|
|
$
|
91,196
|
|
|
$
|
338,857
|
|
Note D — Operating Segment Data
At March 31, 2020, the Company had eight 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 is a leading provider of purpose-built technical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
|
|
|
•
|
Ergobaby is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, strollers and related products. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than 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.
|
|
|
•
|
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, general industrial, motorsport/automotive, oil and gas, medical, energy, reprographics and advertising specialties. 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.
|
|
|
•
|
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 March 31,
|
(in thousands)
|
2020
|
|
2019
|
|
|
|
|
5.11
|
$
|
95,781
|
|
|
$
|
88,089
|
|
Ergobaby
|
19,649
|
|
|
22,452
|
|
Liberty
|
24,960
|
|
|
22,204
|
|
Velocity Outdoor
|
30,390
|
|
|
31,137
|
|
ACI
|
21,696
|
|
|
23,069
|
|
Arnold
|
29,558
|
|
|
30,028
|
|
Foam Fabricators
|
28,383
|
|
|
30,682
|
|
Sterno
|
83,032
|
|
|
91,196
|
|
Total segment revenue
|
333,449
|
|
|
338,857
|
|
Corporate and other
|
—
|
|
|
—
|
|
Total consolidated revenues
|
$
|
333,449
|
|
|
$
|
338,857
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss) (1)
|
Three months ended March 31,
|
(in thousands)
|
2020
|
|
2019
|
|
|
|
|
5.11
|
$
|
4,586
|
|
|
$
|
2,338
|
|
Ergobaby
|
1,554
|
|
|
3,136
|
|
Liberty
|
3,145
|
|
|
1,415
|
|
Velocity Outdoor
|
(1,164
|
)
|
|
341
|
|
ACI
|
5,738
|
|
|
6,481
|
|
Arnold
|
1,653
|
|
|
1,477
|
|
Foam Fabricators
|
3,512
|
|
|
3,506
|
|
Sterno
|
5,269
|
|
|
7,982
|
|
Total
|
24,293
|
|
|
26,676
|
|
Reconciliation of segment profit (loss) to consolidated income (loss) before income taxes:
|
|
|
|
Interest expense, net
|
(8,597
|
)
|
|
(18,454
|
)
|
Other income (expense), net
|
661
|
|
|
(434
|
)
|
Corporate and other (2)
|
(11,255
|
)
|
|
(19,292
|
)
|
Total consolidated income (loss) before income taxes
|
$
|
5,102
|
|
|
$
|
(11,504
|
)
|
|
|
(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 March 31,
|
(in thousands)
|
2020
|
|
2019
|
|
|
|
|
5.11
|
$
|
5,152
|
|
|
$
|
5,157
|
|
Ergobaby
|
2,053
|
|
|
2,111
|
|
Liberty
|
406
|
|
|
407
|
|
Velocity Outdoor
|
3,247
|
|
|
3,251
|
|
ACI
|
646
|
|
|
669
|
|
Arnold
|
1,631
|
|
|
1,622
|
|
Foam Fabricators
|
3,047
|
|
|
2,997
|
|
Sterno
|
5,624
|
|
|
5,372
|
|
Total
|
21,806
|
|
|
21,586
|
|
Reconciliation of segment to consolidated total:
|
|
|
|
Amortization of debt issuance costs and original issue discount
|
525
|
|
|
1,079
|
|
Consolidated total
|
$
|
22,331
|
|
|
$
|
22,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
Identifiable Assets
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
2020
|
|
2019
|
|
2020 (1)
|
|
2019 (1)
|
5.11
|
$
|
50,869
|
|
|
$
|
49,543
|
|
|
$
|
356,614
|
|
|
$
|
357,292
|
|
Ergobaby
|
9,573
|
|
|
10,460
|
|
|
90,969
|
|
|
91,798
|
|
Liberty
|
14,616
|
|
|
13,574
|
|
|
35,600
|
|
|
38,558
|
|
Velocity Outdoor
|
21,959
|
|
|
20,290
|
|
|
186,533
|
|
|
192,288
|
|
ACI
|
7,969
|
|
|
8,318
|
|
|
27,617
|
|
|
24,408
|
|
Arnold
|
19,800
|
|
|
19,043
|
|
|
72,109
|
|
|
72,650
|
|
Foam Fabricators
|
24,290
|
|
|
24,455
|
|
|
154,206
|
|
|
156,914
|
|
Sterno
|
49,134
|
|
|
60,522
|
|
|
251,830
|
|
|
263,530
|
|
Allowance for doubtful accounts
|
(14,107
|
)
|
|
(14,800
|
)
|
|
—
|
|
|
—
|
|
Total
|
184,103
|
|
|
191,405
|
|
|
1,175,478
|
|
|
1,197,438
|
|
Reconciliation of segment to consolidated total:
|
|
|
|
|
|
|
|
Corporate and other identifiable assets
|
—
|
|
|
—
|
|
|
247,397
|
|
|
64,531
|
|
Assets of discontinued operations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
184,103
|
|
|
$
|
191,405
|
|
|
$
|
1,422,875
|
|
|
$
|
1,261,969
|
|
Note E — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Machinery and equipment
|
$
|
193,916
|
|
|
$
|
191,897
|
|
Furniture, fixtures and other
|
34,810
|
|
|
36,604
|
|
Leasehold improvements
|
41,311
|
|
|
40,851
|
|
Buildings and land
|
10,005
|
|
|
10,559
|
|
Construction in process
|
11,002
|
|
|
7,992
|
|
|
291,044
|
|
|
287,903
|
|
Less: accumulated depreciation
|
(147,245
|
)
|
|
(141,475
|
)
|
Total
|
$
|
143,799
|
|
|
$
|
146,428
|
|
Depreciation expense was $8.3 million and $8.0 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
Inventory
Inventory is comprised of the following at March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Raw materials
|
$
|
60,223
|
|
|
$
|
59,888
|
|
Work-in-process
|
14,950
|
|
|
14,318
|
|
Finished goods
|
249,707
|
|
|
262,352
|
|
Less: obsolescence reserve
|
(19,244
|
)
|
|
(19,252
|
)
|
Total
|
$
|
305,636
|
|
|
$
|
317,306
|
|
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.
Goodwill
2020 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. We determined that the Ergobaby, Foam Fabricators and Velocity reporting units 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 reporting units that were tested qualitatively for the 2020 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded the carrying value of these reporting units.
The quantitative tests of Ergobaby, Foam Fabricators and Velocity were performed using an income approach to determine the fair value of the reporting units. For Ergobaby, the discount rate used in the income approach was 15.9% and the results of the quantitative impairment testing indicated that the fair value of the Ergobaby reporting unit exceeded the carrying value by 14.0%. For Foam Fabricators, the discount rate used in the income approach was 13.3%, and the results of the quantitative impairment testing indicated that the fair value of the Foam Fabricators reporting unit exceeded the carrying value by 3.8%. For Velocity, the discount rate used in the income approach was 12.8%, and the results of the quantitative impairment testing indicated that the fair value of the Velocity reporting unit exceeded the carrying value by 16.4%.
2019 Interim Impairment Testing
Velocity Outdoor
The Company performed interim quantitative impairment testing of Velocity Outdoor at September 30, 2019. As a result of operating results below forecasts in the current period as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods, the Company determined that a triggering event occurred in the third quarter of 2019. The Company used an income approach for the impairment test, 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 specific economic factors. The Company used a weighted average cost of capital of 12.2% in the income approach. The discount rate used was based on the weighted average cost of capital adjusted for the relevant risk associated with business specific characteristics and Velocity's ability to execute on the projected cash flows. Based on the results of the impairment test, the fair value of Velocity did not exceed the carrying value, indicating that the goodwill at Velocity was impaired. The difference between the carrying value and fair value of the Velocity business was $32.9 million, which the Company recorded as impairment expense in the consolidated statement of operations for the year ended December 31, 2019.
2019 Annual Impairment Testing
All of the Company's reporting units except Liberty were tested qualitatively at March 31, 2019. We determined that the Liberty reporting unit 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. We used an income approach and market approach for the quantitative impairment test that was performed of the Liberty business at March 31, 2019, with equal weighting assigned to each. The discount rate used in the income approach was 14.8%. The results of the quantitative impairment testing indicated that the fair value of the Liberty reporting unit exceeded the carrying value. For the reporting units that were tested qualitatively for the 2019 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded their carrying value.
A summary of the net carrying value of goodwill at March 31, 2020 and December 31, 2019, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
Year ended
December 31, 2019
|
Goodwill - gross carrying amount
|
$
|
496,264
|
|
|
$
|
496,264
|
|
Accumulated impairment losses
|
(57,745
|
)
|
|
(57,745
|
)
|
Goodwill - net carrying amount
|
$
|
438,519
|
|
|
$
|
438,519
|
|
The following is a reconciliation of the change in the carrying value of goodwill for the three months ended March 31, 2020 by operating segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
Acquisitions
|
|
Goodwill Impairment
|
|
Other
|
|
Balance at March 31, 2020
|
5.11
|
|
$
|
92,966
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92,966
|
|
Ergobaby
|
|
61,031
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
61,031
|
|
Liberty
|
|
32,828
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,828
|
|
Velocity Outdoor
|
|
30,079
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,079
|
|
ACI
|
|
58,019
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
58,019
|
|
Arnold
|
|
26,903
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,903
|
|
Foam Fabricators
|
|
72,708
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72,708
|
|
Sterno
|
|
55,336
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
55,336
|
|
Corporate (1)
|
|
8,649
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,649
|
|
Total
|
|
$
|
438,519
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
438,519
|
|
|
|
(1)
|
Represents goodwill resulting from purchase accounting adjustments not "pushed down" to the ACI segment. This amount is allocated back to the ACI segment for purposes of goodwill impairment testing.
|
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 indefinite lived intangible asset in connection with the annual impairment testing for 2020 and 2019. Results of the qualitative analysis indicate that it is more likely than not that the fair value of the reporting units that maintain indefinite lived intangible assets exceeded the carrying value. The Ergobaby and Liberty reporting units have indefinite lived trade names that were tested in conjunction with the goodwill impairment tests at March 31, 2020 and March 31, 2019, respectively. The results of the quantitative impairment testing indicated that the trade names were not impaired.
Other intangible assets are comprised of the following at March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Customer relationships
|
$
|
462,686
|
|
|
$
|
(163,796
|
)
|
|
$
|
298,890
|
|
|
$
|
462,686
|
|
|
$
|
(155,200
|
)
|
|
$
|
307,486
|
|
Technology and patents
|
80,370
|
|
|
(30,076
|
)
|
|
50,294
|
|
|
80,082
|
|
|
(28,748
|
)
|
|
51,334
|
|
Trade names, subject to amortization
|
189,183
|
|
|
(50,001
|
)
|
|
139,182
|
|
|
189,183
|
|
|
(46,507
|
)
|
|
142,676
|
|
Licensing and non-compete agreements
|
7,515
|
|
|
(7,136
|
)
|
|
379
|
|
|
7,515
|
|
|
(7,050
|
)
|
|
465
|
|
Distributor relations and other
|
726
|
|
|
(726
|
)
|
|
—
|
|
|
726
|
|
|
(726
|
)
|
|
—
|
|
Total
|
740,480
|
|
|
(251,735
|
)
|
|
488,745
|
|
|
740,192
|
|
|
(238,231
|
)
|
|
501,961
|
|
Trade names, not subject to amortization
|
59,985
|
|
|
—
|
|
|
59,985
|
|
|
59,985
|
|
|
—
|
|
|
59,985
|
|
Total intangibles, net
|
$
|
800,465
|
|
|
$
|
(251,735
|
)
|
|
$
|
548,730
|
|
|
$
|
800,177
|
|
|
$
|
(238,231
|
)
|
|
$
|
561,946
|
|
Amortization expense related to intangible assets was $13.5 million and $13.6 million for the three months ended March 31, 2020 and 2019, respectively. Estimated charges to amortization expense of intangible assets for the remainder of 2020 and the next four years, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,566
|
|
|
$
|
53,645
|
|
|
$
|
52,013
|
|
|
$
|
51,616
|
|
|
$
|
50,525
|
|
|
Note G — Warranties
The Company’s Ergobaby, Liberty and Velocity Outdoor operating segments estimate their exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty liability quarterly and adjusts the amount as necessary. Warranty liability is included in accrued expenses in the accompanying consolidated balance sheets. A reconciliation of the change in the carrying value of the Company’s warranty liability for the three months ended March 31, 2020 and the year ended December 31, 2019 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Warranty liability
|
Three months ended March 31, 2020
|
|
Year ended
December 31, 2019
|
|
|
|
|
Beginning balance
|
$
|
1,583
|
|
|
$
|
1,624
|
|
Provision for warranties issued during the period
|
406
|
|
|
2,238
|
|
Fulfillment of warranty obligations
|
(626
|
)
|
|
(2,279
|
)
|
Ending balance
|
$
|
1,363
|
|
|
$
|
1,583
|
|
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 Credit Facility also permits the Company, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain additional term loans in an aggregate amount of up to $250 million (the “Incremental Loans”), subject to certain restrictions and conditions.
2018 Revolving Credit Facility
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 Company may borrow, prepay and reborrow principal under the 2018 Revolving Credit Facility from time to time during its term.
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.
2018 Term Loan
The 2018 Term Loan was issued at an original issuance discount of 99.75%. The 2018 Term Loan required 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. In July 2019, the Company repaid approximately $193.8 million of the 2018 Term Loan using a portion of the proceeds received from the sale of Clean Earth, and in November 2019, the Company repaid the remaining $298.8 million balance due under the 2018 Term Loan.
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, 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 Notes bear interest at the rate of 8.000% per annum and will mature on May 1, 2026. Interest on the Notes is payable in cash on May 1st and November 1st of each year, 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 above.
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 March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Senior Notes
|
$
|
400,000
|
|
|
$
|
400,000
|
|
Revolving Credit Facility
|
200,000
|
|
|
—
|
|
Less: Unamortized discounts and debt issuance costs
|
(5,336
|
)
|
|
(5,555
|
)
|
Long term debt
|
$
|
594,664
|
|
|
$
|
394,445
|
|
Net availability under the 2018 Revolving Credit Facility was approximately $396.4 million at March 31, 2020. Letters of credit outstanding at March 31, 2020 totaled approximately $3.6 million. At March 31, 2020, the Company was in compliance with all covenants as defined in the 2018 Credit Facility.
The Company's Senior Notes consisted of the following carrying value and estimated fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
March 31, 2020
|
|
|
Maturity Date
|
|
Rate
|
|
|
Carrying Value
|
|
Fair Value
|
Senior Notes
|
|
May 1, 2026
|
|
8.000
|
%
|
|
2
|
|
400,000
|
|
|
384,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the issuance of the Company's financing arrangements. In connection with the repayment of the 2018 Term Loan, the Company wrote-off $8.9 million in deferred financing costs associated with the 2018 Term Loan and $3.4 million associated with the original issue discount.
Since the Company can borrow, repay and reborrow principal under the 2018 Revolving Credit Facility, the debt issuance costs associated with the 2018 Revolving Credit Facility have been classified as other non-current assets in the accompanying consolidated balance sheet. The debt issuance costs associated with the Senior Notes are classified as a reduction of long-term debt in the accompanying consolidated balance sheet.
The following table summarizes debt issuance costs at March 31, 2020 and December 31, 2019, and the balance sheet classification in each of the periods presents (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Deferred debt issuance costs
|
$
|
13,252
|
|
|
$
|
13,252
|
|
Accumulated amortization
|
(4,192
|
)
|
|
(3,667
|
)
|
Deferred debt issuance costs, net
|
$
|
9,060
|
|
|
$
|
9,585
|
|
|
|
|
|
Balance sheet classification:
|
|
|
|
Other noncurrent assets
|
$
|
3,724
|
|
|
$
|
4,030
|
|
Long-term debt
|
5,336
|
|
|
5,555
|
|
|
$
|
9,060
|
|
|
$
|
9,585
|
|
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 C Preferred Shares
On November 20, 2019, the Trust issued 4,000,000 7.875% Series C Preferred Shares (the "Series C Preferred Shares") with a liquidation preference of $25.00 per share, and on December 2, 2019, the Trust issued 600,000 of the Series C Preferred Shares which were sold pursuant to an option to purchase additional shares by the underwriters. Total proceeds from the issuance of the Series C Preferred Shares were $115.0 million, or $111.0 million net of underwriters' discount and issuance costs. Distributions on the Series C Preferred Shares will be payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30, and October 30 of each year, beginning on January 30, 2020, at a rate per annum of 7.875%. Distributions on the Series C Preferred Shares are cumulative and at March 31, 2020, $1.5 million of Series C distributions are accumulated and unpaid. Unless full cumulative distributions on the Series C Preferred Shares have been or contemporaneously are declared and set apart for payment of the Series C Preferred Shares for all past distribution periods, no distribution may be declared or paid for payment on the Trust common shares. The Series C Preferred Shares are not convertible into
Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the Series C Preferred Shares. The Series C Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after January 30, 2025, at a price of $25.00 per share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding, the redemption date. Holders of Series C Preferred Shares will have no right to require the redemption of the Series C Preferred Shares and there is no maturity date.
Series B Preferred Shares
On March 13, 2018, the Trust issued 4,000,000 7.875% Series B Trust Preferred Shares (the "Series B Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.5 million net of underwriters' discount and issuance costs. Distributions on the Series B Preferred Shares will be payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30, and October 30 of each year, beginning on July 30, 2018, at a rate per annum of 7.875%. Distributions on the Series B Preferred Shares are cumulative and at March 31, 2020, $1.3 million of Series B distributions are accumulated and unpaid. Unless full cumulative distributions on the Series B Preferred Shares have been or contemporaneously are declared and set apart for payment of the Series B Preferred Shares for all past distribution periods, no distribution may be declared or paid for payment on the Trust common shares. The Series B Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the preferred shares. The Series B Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after April 30, 2028, at a price of $25.00 per share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding, the redemption date. Holders of Series B Preferred Shares will have no right to require the redemption of the Series B Preferred Shares and there is no maturity date.
Series A Preferred Shares
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.4 million net of underwriters' discount and issuance costs. When, and if declared by the Company's board of directors, distribution on the Series A Preferred Shares will be payable quarterly on January 30, April 30, July 30, and October 30 of each year, beginning on October 30, 2017, at a rate per annum of 7.250%. Distributions on the Series A Preferred Shares are discretionary and non-cumulative. The Company has no obligation to pay distributions for a quarterly distribution period if the board of directors does not declare the distribution before the scheduled record of date for the period, whether or not distributions are paid for any subsequent distribution periods with respect to the Series A Preferred Shares, or the Trust common shares. If the Company's board of directors does not declare a distribution for the Series A Preferred Shares for a quarterly distribution period, during the remainder of that quarterly distribution period the Company cannot declare or pay distributions on the Trust common shares. The Series A Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after July 30, 2022, at a price of $25.00 per share, plus any declared and unpaid distributions. Holders of Series A Preferred Shares will have no right to require the redemption of the Series A Preferred Shares and there is no maturity date. 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.
Holding Event
The five-year anniversary of the acquisition of Sterno Products occurred in October 2019 which represented a Holding Event. The Company declared and paid a distribution to the Allocation Member of $9.1 million in February 2020. The ten-year anniversary of Liberty occurred in March 2020 which represented a Holding Event. The Holders elected to defer the distribution of $3.3 million until after the end of 2020.
Sale Events
The sales of Manitoba Harvest in February 2019 and Clean Earth in June 2019 each qualified as a Sale Event under the Company's LLC Agreement. During the second quarter of 2019, the Company declared and paid a distribution to the Allocation Member of $8.0 million related to the sale of Manitoba Harvest and working capital settlements from prior Sale Events. The profit allocation distribution was calculated based on the portion of the gain on sale related to the Closing Date Consideration, less the loss on sale of shares that were received as part of the Closing Consideration. During the third quarter of 2019, the Company declared and paid a distribution to the Allocation Member of $43.3 million related to the sale of Clean Earth. During the fourth quarter of 2019, the Company declared and paid a distribution to the Allocation Member of $9.1 million related to the Deferred Consideration from the Manitoba Harvest sale and the working capital settlement received from the sale of Clean Earth.
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
March 31,
|
|
|
2020
|
|
2019
|
Net income (loss) from continuing operations attributable to Holdings
|
|
$
|
3,665
|
|
|
$
|
(14,296
|
)
|
Less: Distributions paid - Allocation Interests
|
|
9,087
|
|
|
—
|
|
Less: Distributions paid - Preferred Shares
|
|
5,542
|
|
|
3,781
|
|
Less: Accrued distributions - Preferred Shares
|
|
2,869
|
|
|
1,334
|
|
Net loss from continuing operations attributable to common shares of Holdings
|
|
$
|
(13,833
|
)
|
|
$
|
(19,411
|
)
|
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 months ended March 31, 2020 and 2019 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 months ended March 31, 2020 and 2019 attributable to the common shares of Holdings is calculated as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
2020
|
|
2019
|
Loss from continuing operations attributable to common shares of Holdings
|
|
$
|
(13,833
|
)
|
|
$
|
(19,411
|
)
|
Less: Effect of contribution based profit - Holding Event
|
|
1,517
|
|
|
981
|
|
Loss from continuing operations attributable to common shares of Holdings
|
|
$
|
(15,350
|
)
|
|
$
|
(20,392
|
)
|
|
|
|
|
|
Income from discontinued operations attributable to Holdings
|
|
$
|
—
|
|
|
$
|
123,604
|
|
Less: Effect of contribution based profit - Holding Event
|
|
—
|
|
|
—
|
|
Income from discontinued operations attributable to common shares of Holdings
|
|
$
|
—
|
|
|
$
|
123,604
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
59,900
|
|
|
59,900
|
|
|
|
|
|
|
Basic and fully diluted income (loss) per common share attributable to Holdings
|
|
|
|
|
Continuing operations
|
|
$
|
(0.26
|
)
|
|
$
|
(0.34
|
)
|
Discontinued operations
|
|
—
|
|
|
2.06
|
|
|
|
$
|
(0.26
|
)
|
|
$
|
1.72
|
|
Distributions
The following table summarizes information related to our quarterly cash distributions on our Trust common and preferred shares (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Cash Distribution per Share
|
|
Total Cash Distributions
|
|
Record Date
|
|
Payment Date
|
|
|
|
|
|
|
|
|
|
Trust Common Shares:
|
|
|
|
|
|
|
|
|
January 1, 2020 - March 31, 2020 (1)
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
April 16, 2020
|
|
April 23, 2020
|
October 1, 2019 - December 31, 2019
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
January 16, 2020
|
|
January 23, 2020
|
July 1, 2019 - September 30, 2019
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
October 17, 2019
|
|
October 24, 2019
|
April 1, 2019 - June 30, 2019
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
July 18, 2019
|
|
July 25, 2019
|
January 1, 2019 - March 31, 2019
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
April 18, 2019
|
|
April 25, 2019
|
October 1, 2018 - December 31, 2018
|
|
$
|
0.36
|
|
|
$
|
21,564
|
|
|
January 17, 2019
|
|
January 24, 2019
|
|
|
|
|
|
|
|
|
|
Series A Preferred Shares:
|
|
|
|
|
|
|
|
|
January 30, 2020 - April 29, 2020 (1)
|
|
$
|
0.453125
|
|
|
$
|
1,813
|
|
|
April 15, 2020
|
|
April 30, 2020
|
October 30, 2019 - January 29, 2020
|
|
$
|
0.453125
|
|
|
$
|
1,813
|
|
|
January 15, 2020
|
|
January 30, 2020
|
July 30, 2019 - October 29, 2019
|
|
$
|
0.453125
|
|
|
$
|
1,813
|
|
|
October 15, 2019
|
|
October 30, 2019
|
April 30, 2019 - July 29, 2019
|
|
$
|
0.453125
|
|
|
$
|
1,813
|
|
|
July 15, 2019
|
|
July 30, 2019
|
January 30, 2019 - April 29, 2019
|
|
$
|
0.453125
|
|
|
$
|
1,813
|
|
|
April 15, 2019
|
|
April 30, 2019
|
October 30, 2018 - January 29, 2019
|
|
$
|
0.453125
|
|
|
$
|
1,813
|
|
|
January 15, 2019
|
|
January 30, 2019
|
|
|
|
|
|
|
|
|
|
Series B Preferred Shares:
|
|
|
|
|
|
|
|
|
January 30, 2020 - April 29, 2020 (1)
|
|
$
|
0.4921875
|
|
|
$
|
1,969
|
|
|
April 15, 2020
|
|
April 30, 2020
|
October 30, 2019 - January 29, 2020
|
|
$
|
0.4921875
|
|
|
$
|
1,969
|
|
|
January 15, 2020
|
|
January 30, 2020
|
July 30, 2019 - October 29, 2019
|
|
$
|
0.4921875
|
|
|
$
|
1,969
|
|
|
October 15, 2019
|
|
October 30, 2019
|
April 30, 2019 - July 29, 2019
|
|
$
|
0.4921875
|
|
|
$
|
1,969
|
|
|
July 15, 2019
|
|
July 30, 2019
|
January 30, 2019 - April 29, 2019
|
|
$
|
0.4921875
|
|
|
$
|
1,969
|
|
|
April 15, 2019
|
|
April 30, 2019
|
October 30, 2018 - January 29, 2019
|
|
$
|
0.4921875
|
|
|
$
|
1,969
|
|
|
January 15, 2019
|
|
January 30, 2019
|
|
|
|
|
|
|
|
|
|
Series C Preferred Shares:
|
|
|
|
|
|
|
|
|
January 30, 2020 - April 29, 2020 (1)
|
|
$
|
0.4921875
|
|
|
$
|
2,264
|
|
|
April 15, 2020
|
|
April 30, 2020
|
November 20, 2019 - January 29, 2020
|
|
$
|
0.38281
|
|
|
$
|
1,531
|
|
|
January 15, 2020
|
|
January 30, 2020
|
(1) This distribution was declared on April 2, 2020.
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 March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
% Ownership (1)
March 31, 2020
|
|
% Ownership (1)
December 31, 2019
|
|
Primary
|
|
Fully
Diluted
|
|
Primary
|
|
Fully
Diluted
|
5.11
|
97.6
|
|
88.9
|
|
97.6
|
|
88.9
|
Ergobaby
|
81.9
|
|
75.8
|
|
81.9
|
|
75.8
|
Liberty
|
91.2
|
|
86.0
|
|
91.2
|
|
86.0
|
Velocity Outdoor
|
99.3
|
|
87.5
|
|
99.3
|
|
93.9
|
ACI
|
69.4
|
|
65.3
|
|
69.4
|
|
65.4
|
Arnold
|
96.7
|
|
81.4
|
|
96.7
|
|
80.2
|
Foam Fabricators
|
100.0
|
|
91.5
|
|
100.0
|
|
91.5
|
Sterno
|
100.0
|
|
87.5
|
|
100.0
|
|
88.5
|
|
|
(1)
|
The principal difference between primary and diluted percentages of our operating segments is due to stock option issuances of operating segment stock to management of the respective businesses.
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest Balances
|
(in thousands)
|
March 31, 2020
|
|
December 31, 2019
|
5.11
|
$
|
12,613
|
|
|
$
|
12,056
|
|
Ergobaby
|
27,407
|
|
|
27,036
|
|
Liberty
|
3,085
|
|
|
2,936
|
|
Velocity Outdoor
|
3,130
|
|
|
2,506
|
|
ACI
|
4,656
|
|
|
3,670
|
|
Arnold
|
1,292
|
|
|
1,255
|
|
Foam Fabricators
|
2,131
|
|
|
1,873
|
|
Sterno
|
(606
|
)
|
|
(884
|
)
|
Allocation Interests
|
100
|
|
|
100
|
|
|
$
|
53,808
|
|
|
$
|
50,548
|
|
Note K — Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis at March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2020
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities:
|
|
|
|
|
|
|
|
Put option of noncontrolling shareholders (1)
|
$
|
(215
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(215
|
)
|
Total recorded at fair value
|
$
|
(215
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(215
|
)
|
|
|
(1)
|
Represents put option issued to noncontrolling shareholders in connection with the 5.11 and Liberty acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities:
|
|
|
|
|
|
|
|
Put option of noncontrolling shareholders (1)
|
$
|
(111
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(111
|
)
|
Total recorded at fair value
|
$
|
(111
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(111
|
)
|
|
|
(1)
|
Represents put option issued to noncontrolling shareholders in connection with the 5.11 and Liberty acquisitions.
|
Reconciliations of the change in the carrying value of the Level 3 fair value measurements from January 1, 2019 through March 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
Level 3
|
Balance at January 1, 2019
|
$
|
(4,547
|
)
|
Decrease in the fair value of put option of noncontrolling shareholder - Liberty
|
72
|
|
Increase in the fair value of put option of noncontrolling shareholder - 5.11
|
(10
|
)
|
Adjustment to Ravin contingent consideration (1)
|
(2,022
|
)
|
Payment of contingent consideration - Ravin (1)
|
6,396
|
|
Balance at December 31, 2019
|
$
|
(111
|
)
|
Increase in the fair value of put option of noncontrolling shareholder - Liberty
|
(63
|
)
|
Increase in the fair value of put option of noncontrolling shareholder - 5.11
|
(41
|
)
|
Balance at March 31, 2020
|
$
|
(215
|
)
|
(1) The contingent consideration related to Velocity's acquisition of Ravin in September 2018. The purchase price of Ravin included a potential earn-out of up to $25.0 million contingent on the achievement of certain financial metrics for the trailing twelve month period ending December 31, 2018. The fair value of the contingent consideration was estimated at $4.7 million at acquisition date and was calculated using a risk-adjusted option pricing model. The earnout was adjusted to $6.4 million and paid out during the year ended December 31, 2019.
Valuation Techniques
The Company has not changed its valuation techniques in measuring the fair value of any of its other financial assets and liabilities during the period. For details of the Company’s fair value measurement policies under the fair value hierarchy, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Nonrecurring Fair Value Measurements
There were no assets or liabilities measured on a non-recurring basis during the quarter ended March 31, 2020. The following table provides the assets and liabilities carried at fair value measured on a non-recurring basis as of December 31, 2019. Refer to "Note F – Goodwill and Other Intangible Assets", for a description of the valuation techniques used to determine fair value of the assets measured on a non-recurring basis in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
Fair Value Measurements at December 31, 2019
|
|
Year ended
|
(in thousands)
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
December 31, 2019
|
Goodwill - Velocity Outdoor
|
$
|
30,079
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,079
|
|
|
$
|
32,881
|
|
Note 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.
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 three months ended March 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2020
|
|
2019
|
United States Federal Statutory Rate
|
21.0
|
%
|
|
(21.0
|
)%
|
State income taxes (net of Federal benefits)
|
12.2
|
|
|
2.6
|
|
Foreign income taxes
|
(1.6
|
)
|
|
(3.3
|
)
|
Expenses of Compass Group Diversified Holdings LLC representing a pass through to shareholders (1)
|
6.7
|
|
|
30.6
|
|
Impact of subsidiary employee stock options
|
6.2
|
|
|
0.4
|
|
Credit utilization
|
(4.5
|
)
|
|
(2.5
|
)
|
Non-recognition of NOL carryforwards at subsidiaries
|
(47.1
|
)
|
|
1.0
|
|
Effect of Tax Act
|
6.2
|
|
|
3.1
|
|
Other
|
5.2
|
|
|
1.5
|
|
Effective income tax rate
|
4.3
|
%
|
|
12.4
|
%
|
|
|
(1)
|
The effective income tax rate for the three months ended March 31, 2020 and 2019 includes a loss at the Company's parent, which is taxed as a partnership.
|
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 $4.2 million is recognized in the consolidated balance sheet as a component of other non-current liabilities at March 31, 2020. Net periodic benefit cost consists of the following for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2020
|
|
2019
|
Service cost
|
$
|
139
|
|
|
$
|
127
|
|
Interest cost
|
8
|
|
|
33
|
|
Expected return on plan assets
|
(21
|
)
|
|
(40
|
)
|
Amortization of unrecognized loss
|
56
|
|
|
34
|
|
Net periodic benefit cost
|
$
|
182
|
|
|
$
|
154
|
|
During the three months ended March 31, 2020, per the terms of the pension agreement, Arnold contributed $0.1 million to the plan. For the remainder of 2020, the expected contribution to the plan will be approximately $1.1 million.
The plan assets are pooled with assets of other participating employers and are not separable; therefore, the fair values of the pension plan assets at March 31, 2020 were considered Level 3.
Note N - Commitments and Contingencies
In the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that any unfavorable outcomes will have a material adverse effect on the Company's consolidated financial position or results of operations.
Leases
The Company and its subsidiaries lease manufacturing facilities, warehouses, office facilities, retail stores, equipment and vehicles under various operating arrangements. Certain of the leases are subject to escalation clauses and renewal periods. The Company and its subsidiaries recognize lease expense, including predetermined fixed escalations, on a straight-line basis over the initial term of the lease including reasonably assured renewal periods from the time that
the Company and its subsidiaries control the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Certain of our subsidiaries have leases that contain both fixed rent costs and variable rent costs based on achievement of certain operating metrics. The variable lease expense has not been material on a historic basis and no amount was incurred during the quarter ending March 31, 2020. In the three months ended March 31, 2020, the Company recognized $7.3 million in expense related to operating leases in the condensed consolidated statements of operations.
The maturities of lease liabilities at March 31, 2020 were as follows (in thousands):
|
|
|
|
|
|
2020 (excluding three months ended March 31, 2020)
|
|
$
|
19,270
|
|
2021
|
|
24,165
|
|
2022
|
|
21,947
|
|
2023
|
|
15,754
|
|
2024
|
|
12,426
|
|
Thereafter
|
|
41,362
|
|
Total undiscounted lease payments
|
|
$
|
134,924
|
|
Less: Interest
|
|
39,345
|
|
Present value of lease liabilities
|
|
$
|
95,579
|
|
The calculated amount of the right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and discount rate used to present value the minimum lease payments. The Company's lease agreements often include one or more options to renew at the company's discretion. In general, it is not reasonably certain that lease renewals will be exercised at lease commencement and therefore lease renewals are not included in the lease term. Regarding the discount rate, Topic 842 requires the use of a rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes the incremental borrowing rate of the subsidiary entering into the lease arrangement, on a collateralized basis, over a similar term as adjusted for any country specific risk.
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31, 2020:
|
|
|
|
|
Lease Term and Discount Rate
|
|
|
Weighted-average remaining lease term (years)
|
|
6.39
|
|
Weighted-average discount rate
|
|
7.75
|
%
|
Supplemental balance sheet information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Line Item in the Company’s Consolidated Balance Sheet
|
|
March 31, 2020
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
Other non-current assets
|
|
$
|
91,830
|
|
Current portion, operating lease liabilities
|
|
Other current liabilities
|
|
$
|
18,721
|
|
Operating lease liabilities
|
|
Other non-current liabilities
|
|
$
|
76,858
|
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
7,319
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
|
$
|
4,539
|
|
Note O — Related Party Transactions
Management Services Agreement
The Company entered into the MSA with CGM effective May 16, 2006. The MSA provides for, among other things, CGM to perform services for the Company in exchange for a management fee paid quarterly and equal to 0.5% of the Company's adjusted net assets, as defined in the MSA. Concurrent with the June 2019 sale of Clean Earth (refer to Note B - Discontinued Operations), CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the quarter during which the Company next borrows under the 2018 Revolving Credit Facility. In March 2020, as a proactive measure to provide the Company with additional cash liquidity in light of the COVID-19 pandemic, the Company elected to draw down $200 million on our 2018 Revolving Credit Facility. The Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of March 31, 2020. In addition, as a result of an expected decline in earnings and cash flows in the second quarter of 2020, CGM has agreed to waive 50% of the management fee calculated at June 30, 2020 that will be paid in July 2020.
Integration Services Agreements
Foam Fabricators, which was acquired in 2018, entered into an Integration Services Agreement ("ISA") with CGM. The ISA provides for CGM to provide services for new platform acquisitions to, amongst other things, assist the management at the acquired entities in establishing a corporate governance program, implement compliance and reporting requirements of the Sarbanes-Oxley Act of 2002, as amended, and align the acquired entity's policies and procedures with our other subsidiaries. The ISA is for the twelve-month period subsequent to the acquisition. Foam Fabricators paid CGM $2.3 million over the term of the ISA, with $2.0 million paid in 2018 and $0.3 million in 2019. Integration 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:
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 months ended March 31, 2020 and March 31, 2019, 5.11 purchased approximately $0.5 million and $1.3 million, respectively, in inventory from the vendor.
Note P - Subsequent Event
Acquisition of Marucci Sports, LLC
On March 6, 2020, the Company, through a wholly-owned subsidiary, Wheelhouse Holdings Inc., a Delaware corporation (“Buyer”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Marucci Sports, LLC, a Delaware limited liability company (“Marucci”), Wheelhouse Holdings Merger Sub LLC, a Delaware limited liability company and a wholly owned Subsidiary of Buyer (“Merger Sub”), and, Wheelhouse 2020 LLC, a Delaware limited liability company (in its capacity as the representative of the unit holders and option holders of Marucci), pursuant to which Merger Sub was to merge with and into Marucci (the “Merger”) such that the separate existence of Merger Sub would cease, with Marucci surviving the Merger as a subsidiary of Buyer. Headquartered in Baton Rouge, Louisiana, Marucci is a leading manufacturer and distributor of baseball and softball equipment. Founded in 2009, Marucci has a product portfolio that includes wood and metal bats, apparel and accessories, batting and fielding gloves and bags and protective gear.
The Buyer, via the Merger, completed the acquisition of Marucci on April 20, 2020 for a total purchase price of approximately $200 million in cash, subject to certain adjustments based on matters such as the working capital and indebtedness balances at the time of the closing. The Company funded the purchase price using funds drawn on its 2018 Revolving Credit Facility in March 2020. The Company's initial equity ownership in Marucci is approximately 92%, as certain existing stakeholders in Marucci invested in the transaction alongside the Company.