ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Item 2 contains forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the section entitled "Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10-Q as well as those risk factors discussed in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 and in the section entitled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Overview
Compass Diversified Holdings ("Holdings") was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings LLC (the "Company") was also formed on November 18, 2005. Holdings and the Company (collectively, "CODI") were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. The Company is the operating entity and is a controlling owner of nine businesses, or operating segments, at September 30, 2020. The segments are as follows: 5.11 Acquisition Corp. ("5.11"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Marucci Sports, LLC ("Marucci" or Marucci Sports"), Velocity Outdoor, Inc. (formerly Crosman Corp.) ("Velocity Outdoor" or "Velocity"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold"), FFI Compass, Inc. ("Foam Fabricators" or "Foam"), and The Sterno Group, LLC ("Sterno").
We acquired our existing businesses (segments) that we own at September 30, 2020 as follows:
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Ownership Interest - September 30, 2020
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Business
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Acquisition Date
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Primary
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Diluted
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Advanced Circuits
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May 16, 2006
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69.3%
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65.4%
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Liberty Safe
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March 31, 2010
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91.2%
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86.0%
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Ergobaby
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September 16, 2010
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81.4%
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72.6%
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Arnold
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March 5, 2012
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96.7%
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82.4%
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Sterno
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October 10, 2014
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100.0%
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88.5%
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5.11
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August 31, 2016
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97.6%
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88.1%
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Velocity Outdoor
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June 2, 2017
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99.3%
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88.0%
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Foam Fabricators
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February 15, 2018
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100.0%
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91.5%
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Marucci Sports
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April 20, 2020
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92.2%
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83.8%
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We categorize the businesses we own into two separate groups of businesses: (i) branded consumer businesses, and (ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we believe capitalize on a valuable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in their particular product category. Niche industrial businesses are characterized as those businesses that focus on manufacturing and selling particular products and industrial services within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector. The following is an overview of each of our businesses:
Branded Consumer
5.11 - 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 - Headquartered in Los Angeles, California, Ergobaby is dedicated to building a global community of confident parents with smart, ergonomic solutions that enable and encourage bonding between parents and babies. Ergobaby offers a broad range of award-winning baby carriers, strollers, swaddlers, nursing pillows, and related products that fit into families’ daily lives seamlessly, comfortably and safely. Historically, Ergobaby derives more than 50% of its sales from outside of the United States.
Liberty - Founded in 1988, Liberty Safe is the premier designer, manufacturer and marketer of home and gun safes in North America. From its over 300,000 square foot manufacturing facility, Liberty Safe produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles ranging from an entry level product to good, better and best products. Products are marketed under the Liberty brand, as well as a portfolio of licensed and private label brands, including Cabela’s, Case IH, Colt and John Deere. Liberty Safe’s products are the market share leader and are sold through an independent dealer network ("Dealer sales") in addition to various sporting goods, farm and fleet and home improvement retail outlets ("Non-Dealer sales"). Liberty has the largest independent dealer network in the industry. Liberty is headquartered in Payson, Utah.
Marucci Sports - Founded in 2009, Marucci is a leading designer, manufacturer, and marketer of premium wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also develops and licenses franchises for sports training facilities. Marucci is headquartered in Baton Rouge, Louisiana.
Velocity Outdoor - A leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories, Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity Outdoor's other primary product categories are archery, with products including CenterPoint crossbows and the Pioneer Airbow, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products. In September 2018, Velocity acquired Ravin Crossbows, LLC ("Ravin" or "Ravin Crossbows"), a manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related to the advancement of crossbow technology. Velocity Outdoor is headquartered in Bloomfield, New York.
Niche Industrial
Advanced Circuits - Advanced Circuits is a provider of small-run, quick-turn and volume production printed circuit boards ("PCBs") to customers throughout the United States. Historically, small-run and quick-turn PCBs have represented approximately 50% - 55% of Advanced Circuits’ gross sales. Small-run and quick-turn PCBs typically command higher margins than volume production PCBs given that customers require high levels of responsiveness, technical support and timely delivery of small-run and quick-turn PCBs and are willing to pay a premium for them. Advanced Circuits is able to meet its customers’ demands by manufacturing custom PCBs in as little as 24 hours, while maintaining over 98.0% error-free production rates and real-time customer service and product tracking 24 hours per day. Advanced Circuits is headquartered in Aurora, Colorado.
Arnold - Arnold serves a variety of markets including aerospace and defense, general industrial, motorsport/ automotive, oil and gas, medical, energy, reprographics and advertising specialties. Over the course of more than 100 years, Arnold has successfully evolved and adapted our products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold produces high performance permanent magnets (PMAG), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Arnold has expanded globally and built strong relationships with our customers worldwide. Arnold is the largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems. Arnold is headquartered in Rochester, New York.
Foam Fabricators - Founded in 1957 and headquartered in Scottsdale, Arizona, Foam Fabricators is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer (OEM) components made from expanded polystyrene (EPS) and expanded polypropylene (EPP). Foam Fabricators operates 14 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products and others. In July 2020, Foam Fabricators acquired the assets of Polyfoam, a Massachusetts-based manufacturer
of protective and temperature-sensitive packaging solutions for the medical, pharmaceutical, grocery and food industries, among others.
Sterno - Sterno, headquartered in Corona, California, is the parent company of Sterno LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and Rimports Inc. ("Rimports"). Sterno is a leading manufacturer and marketer of portable food warming systems, creative indoor and outdoor lighting, and home fragrance solutions for the foodservice industry and consumer markets. Sterno offers a broad range of wick and gel chafing systems, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps through Sterno Products, flameless candles and outdoor lighting products through Sterno Home, and scented wax cubes and warmer products used for home decor and fragrance systems through Rimports.
Our management team’s strategy for our businesses involves:
•utilizing structured incentive compensation programs tailored to each business to attract, recruit and retain talented managers to operate our businesses;
•regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;
•assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue and cost related);
•identifying and working with management to execute attractive external growth and acquisition opportunities; and
•forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.
While our businesses have different growth opportunities and potential rates of growth, we work with the management teams of each of our businesses to increase the value of, and cash generated by, each business through various initiatives, including making selective capital investments to expand geographic reach, increase capacity or reduce manufacturing costs of our businesses; improving and expanding existing sales and marketing programs; and assisting in the acquisition and integration of complementary businesses. We remain focused on marketing our Company's attractive ownership and management attributes to potential sellers of middle market businesses. In addition, we continue to pursue opportunities for add-on acquisitions by our existing subsidiary companies, which can be particularly attractive from a strategic perspective.
Impact of COVID-19 on Our Operations, Financial Condition, Liquidity and Results of Operations
In March 2020, the World Health Organization categorized COVID-19 as a pandemic and, during the third quarter of 2020, the COVID-19 pandemic continued to impact the Company. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration, severity and ultimate impact on our business are currently unknown. The COVID-19 pandemic led to governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter-in-place” and “stay-at-home” orders, travel restrictions, business curtailments, particularly retail operations and non-essential businesses, school closures, and other measures. In addition, governments and central banks in several parts of the world enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. The public health situation, global response measures and corresponding impacts on various markets remain fluid and uncertain. We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it is impacting our customers, employees, supply chains, and distribution networks. We experienced and expect to continue to experience reductions in customer demand in certain of our niche industrial end-markets. We expect that the government measures taken to address the spread of the virus, the reduced operational status of some of our suppliers, the reductions in production at certain facilities, and the decrease in foot traffic at many brick and mortar retail businesses may impact our operations for the remainder of 2020. The health of our team and various stakeholders is our highest priority, and we have taken multiple steps to provide support and a safe work environment.
Due to the unprecedented uncertainty as a result of the COVID-19 pandemic, in April 2020 CGM agreed to waive 50% of the second quarter management fee calculated at June 30, 2020 that was paid in July 2020. We continue to work with management at each of our businesses to reduce our controllable costs, including short-term actions to reduce labor costs, eliminating non-essential travel and reducing discretionary spending. Additionally, our businesses are proactively managing working capital and we have reduced our capital spending plan for the year, without deferring many key strategic ongoing initiatives.
2020 Outlook in Consideration of the COVID-19 Pandemic
The Company anticipates that COVID-19 will continue to have an impact on its results of operations for the remainder of 2020, including a decrease in operating income and Adjusted EBITDA as compared to the prior year at certain of our niche industrial businesses. For example, the Company expects the Sterno Products division of Sterno to be negatively impacted by the pandemic due to that division's reliance on the food service industry. However, the diversification of our portfolio of businesses has allowed us to offset the decline in operating results from the COVID-19 pandemic experienced by some of our operating segments. Driven by the strong performance at our outdoor consumer brand products, 5.11, Liberty Safe and Velocity Outdoor, and our acquisition of Marucci Sports in April 2020, our consolidated operating income, net income, operating cash flows and Adjusted EBITDA increased in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.
During 2019, the Company received an aggregate total of $771.6 million in net cash proceeds as a result of the divestitures of Manitoba Harvest and Clean Earth, as well as $111.0 million from the issuance and sale of Series C Preferred Shares. In May 2020, the Company completed a share offering of five million Trust common shares resulting in net proceeds of $83.9 million and issued an additional $200 million in our 8% Senior Notes. The Company believes that it currently has adequate liquidity and capital resources to meet its existing obligations, and quarterly distributions to its shareholders, as, and if, approved by the Board of Directors, over the next twelve months. However, if the Company’s operations are impacted more than expected during the fourth quarter of 2020 as a result of continued declining COVID-19-related economic conditions and the potential for an extended economic recession, the Company’s results of operations could be impacted more dramatically than currently anticipated and as a result, the Company’s liquidity and capital resources could be even more constrained than expected.
See Part II, Item 1A. "Risk Factors" for additional information.
Recent Events
Sale of Trust Common Shares
In May 2020, the Company completed an offering of 5,000,000 Trust common shares at a public offering price of $17.60 per share. The net proceeds to the Company, after deducting the underwriter's discount and offering costs, totaled approximately $83.9 million.
Issuance of Senior Notes
On May 7, 2020, the Company consummated the issuance and sale of $200 million aggregate principal amount of its 8.000% Senior Notes due 2026 (the "Additional Notes"). The proceeds from the Additional Notes were used to pay down the amount outstanding on the Company's 2018 Revolving Credit Facility.
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 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, 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 Wheelhouse Holdings Merger Sub LLC was to be merged with and into Marucci (the “Transaction”) such that the separate existence of Wheelhouse Holdings Merger Sub LLC would cease, and Marucci would survive the Transaction 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 Transaction, 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.
Acquisition of Reel Holding Corp.
On September 20, 2020, the Company, through its newly formed acquisition subsidiaries, BOA Holdings Inc., a Delaware corporation (“BOA Holdings”) and BOA Parent Inc., a Delaware corporation (“Buyer”) and a wholly-owned subsidiary of BOA Holdings, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Reel Holding Corp., a Delaware corporation (“BOA”) and the sole stockholder of Boa Technology, Inc., BOA Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Buyer (“Merger Sub”), and Shareholder Representative Services LLC (in its capacity as the representative of the stockholders of BOA). Pursuant to the Merger Agreement, on October 16, 2020, Merger Sub was merged with and into BOA (the “Merger”) such that the separate existence of Merger Sub ceased, and BOA survived the Merger as a wholly-owned subsidiary of Buyer. BOA, creators of the award-winning BOA® Fit System featured in performance footwear, action sports, outdoor and medical products worldwide, was founded in 2001 and is headquartered in Denver, Colorado. The total purchase price for the acquisition of BOA was $454 million (excluding working capital and certain other adjustments upon closing, and transaction costs). The Company funded the acquisition with cash on hand and a $300 million draw on its 2018 Revolving Credit Facility. The Company's initial equity ownership in BOA is approximately 82%, as certain existing stockholders in BOA invested in the transaction alongside the Company.
Non-GAAP Financial Measures
"U.S. GAAP" or "GAAP" refer to generally accepted accounting principles in the United States. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented.
Results of Operations
The following discussion reflects a comparison of the historical results of operations of our consolidated business for the three and nine months ended September 30, 2020 and September 30, 2019, and components of the results of operations as well as those components presented as a percent of net revenues, for each of our businesses on a stand-alone basis. For the acquisition of Marucci in April 2020, the pro forma results of operations for the Marucci business segment have been prepared as if we purchased that business on January 1, 2019. Where appropriate, relevant pro forma adjustments are reflected as part of the historical operating results of Marucci. We believe this is the most meaningful comparison for the operating results of acquired business segments. The consolidated results of operations reflect the operating results of Marucci from the date of acquisition.
In the first quarter of 2020, we began to see the impacts of COVID-19 on certain of our businesses, markets and operations, particularly those that were most affected by governmental “stay-at home” orders which led to reduced consumer traffic and either a closure of stores by some retailers or a focus on items that were deemed essential. The steps taken by governments to limit the spread of the virus had a negative impact on our operations in the second quarter; April and May saw a slowdown in revenue at several of our businesses, however, we experienced a rebound in June as localities began lifting restrictions. During the third quarter, some of our niche industrial businesses continued to be adversely impacted by the effect of the COVID-19 pandemic on the economy, while certain of our consumer businesses continued to experience solid demand.
The COVID-19 pandemic has had, and may continue to have, negative impacts on certain of our niche industrial businesses, results of operations, financial condition and cash flows in the near and medium term. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration, severity and ultimate impact on our business are currently unknown. The ultimate impact of COVID-19 on our business is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are highly uncertain and cannot be accurately predicted at this time. The following results of operations at each of our businesses are not necessarily indicative of the results to be expected for a full year.
All dollar amounts in the financial tables are presented in thousands. References in the financial tables to percentage changes that are not meaningful are denoted by "NM."
Results of Operations - Consolidated
The following table sets forth our unaudited results of operations for the three and nine months ended September 30, 2020 and 2019:
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Three months ended
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Nine months ended
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September 30, 2020
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September 30, 2019
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September 30, 2020
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September 30, 2019
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Net revenues
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$
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418,903
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$
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388,313
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$
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1,085,979
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$
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1,063,254
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Cost of revenues
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265,119
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251,778
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695,304
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684,601
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Gross profit
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153,784
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136,535
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390,675
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378,653
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Selling, general and administrative expense
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93,036
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82,027
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260,850
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243,736
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Fees to manager
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9,659
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8,874
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23,436
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28,352
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Amortization of intangibles
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15,222
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13,520
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43,506
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40,632
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Impairment expense
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—
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33,381
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—
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33,381
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Operating income (loss)
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35,867
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(1,267)
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62,883
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32,552
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Interest expense
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(12,351)
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(11,525)
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(32,122)
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(48,424)
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Amortization of debt issuance costs
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(660)
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(770)
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(1,795)
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(2,625)
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Loss on sale of securities
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—
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(4,893)
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—
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(10,193)
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Other income (expense)
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(447)
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(5,727)
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(2,172)
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(6,251)
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Income (loss) from continuing operations before income taxes
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22,409
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(24,182)
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26,794
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(34,941)
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Provision for income taxes
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1,606
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4,400
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8,477
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10,375
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Income (loss) from continuing operations
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$
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20,803
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$
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(28,582)
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$
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18,317
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$
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(45,316)
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Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net revenues
On a consolidated basis, net revenues for the three months ended September 30, 2020 increased by approximately $30.6 million, or 7.9%, compared to the corresponding period in 2019. During the three months ended September 30, 2020 compared to 2019, we saw significant increases in net sales at Liberty ($6.5 million increase), Velocity Outdoor ($24.0 million increase), and Foam Fabricators ($5.2 million increase), while several of our other businesses saw a decrease in net sales resulting from the effects of the COVID-19 pandemic, notably Arnold ($8.3 million decrease), and Sterno ($13.7 million decrease). Our Marucci business, which we acquired in April 2020, contributed $19.6 million in net revenue during the third quarter, while the increase in Foam Fabricator's net revenue for the quarter was primarily attributable to their acquisition of Polyfoam in July 2020. Refer to "Results of Operations - Business Segments" for a more detailed analysis of net revenues by business segment.
We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income on the investment of available funds, but we expect such earnings to be minimal. Our investment in our businesses is typically in the form of loans from the Company to such businesses, as well as equity interests in those companies. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and dividends on our equity ownership. However, on a consolidated basis, these items will be eliminated.
Cost of revenues
On a consolidated basis, cost of revenues increased approximately $13.3 million during the three months ended September 30, 2020 compared to the corresponding period in 2019. Gross profit as a percentage of net revenues was approximately 36.7% in the three months ended September 30, 2020 compared to 35.2% in the three months ended September 30, 2019. We recognized $1.3 million in expense related to the amortization of the inventory step-up resulting from our purchase price allocation of Marucci Sports during the quarter. Excluding the effect of the Marucci adjustment, gross profit as a percentage of net revenues was 37.0%. The increase in gross profit as a percentage of net sales in the quarter ended September 30, 2020 as compared to the quarter ended September 30, 2019 primarily related to the increase in net revenue at our branded consumer businesses, which have higher gross
margins than our niche industrial businesses. Refer to "Results of Operations - Business Segments" for a more detailed analysis of gross profit by business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $11.0 million during the three months ended September 30, 2020, compared to the corresponding period in 2019. $7.6 million of the increase is attributable to our Marucci business, which was acquired in the current year. Refer to "Results of Operations - Business Segments" for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, general and administrative expense was $3.0 million in the third quarter of 2020 and $3.3 million in the third quarter of 2019.
Fees to manager
Pursuant to the Management Services Agreement ("MSA"), we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the three months ended September 30, 2020, we incurred approximately $9.7 million in management fees as compared to $8.9 million in fees in the three months ended September 30, 2019. The increase in Management fees is attributable to our acquisition of Marucci in April 2020, partially offset by CGM waiving the portion of the management fee attributable to the cash balances held at the Company as of September 30, 2020.
Amortization expense
Amortization expense for the three months ended September 30, 2020 increased $1.7 million as compared to the three months ended September 30, 2019 as a result of the amortization expense associated with the intangibles that were recognized in conjunction with the preliminary purchase price allocation for Marucci.
Impairment expense
In the third quarter of 2019, we performed interim impairment testing at our Velocity business as a result of operating results below forecasts as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods. We recognized $33.4 million in impairment expense in the quarter ended September 30, 2019 related to the Velocity interim impairment testing.
Interest expense
We recorded interest expense totaling $12.4 million for the three months ended September 30, 2020 compared to $11.5 million for the comparable period in 2019, an increase of $0.8 million. The increase in interest expense for the quarter reflects the repayment of our 2018 Term Loan during 2019 using a portion of the proceeds from the sale of Clean Earth and proceeds from the issuance of preferred shares, offset by an increase in interest expense during the current quarter related to our issuance of an additional $200 million in our 8.000% Senior Notes in May 2020.
Other income (expense)
For the quarter ended September 30, 2020, we recorded $0.4 million in other expense as compared to $5.7 million in other expense in the quarter ended September 30, 2019, a decrease in expense of $5.3 million. In the prior year, we recognized $5.0 million of expense related to the write-off of debt issuance costs due to the repayment of our 2018 Term Loan. Other income (expense) in the current quarter primarily reflects the movement in foreign currency at our businesses with international operations, and gains or (losses) realized on the sale of property, plant and equipment.
Income taxes
We had an income tax provision of $1.6 million from continuing operations during the three months ended September 30, 2020 compared to an income tax provision of $4.4 million from continuing operations during the same period in 2019. While our income from continuing operations before taxes for the quarter ended September 30, 2020 increased by approximately $46.6 million as compared to the prior year quarter ended September 30, 2019, our tax provision decreased $2.8 million as the tax provision reflects an annual effective tax rate at our subsidiaries, the effect of state and local taxes and the related allocation of income, and the losses at our parent company, which is taxed as a partnership.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net revenues
On a consolidated basis, net revenues for the nine months ended September 30, 2020 increased by approximately $22.7 million, or 2.1%, compared to the corresponding period in 2019. During the nine months ended September 30, 2020 compared to 2019, we saw increases in net sales at 5.11 ($2.8 million increase), Liberty ($13.0 million increase), and Velocity ($40.8 million increase), while our other businesses saw a decrease in net sales resulting primarily from the effects of the COVID-19 pandemic, notably Ergobaby ($9.6 million decrease), (Arnold ($14.0 million decrease), Foam Fabricators ($4.3 million decrease) and Sterno ($31.0 million decrease). Our Marucci business, which we acquired in April 2020, had net revenues of $24.8 million since the date of acquisition. Refer to "Results of Operations - Business Segments" for a more detailed analysis of net revenues by business segment.
We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income on the investment of available funds, but we expect such earnings to be minimal. Our investment in our businesses is typically in the form of loans from the Company to such businesses, as well as equity interests in those companies. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and dividends on our equity ownership. However, on a consolidated basis, these items will be eliminated.
Cost of revenues
On a consolidated basis, cost of revenues increased approximately $10.7 million during the nine months ended September 30, 2020 compared to the corresponding period in 2019. Gross profit as a percentage of net revenues was approximately 36.0% in the nine months ended September 30, 2020 compared to 35.6% in the nine months ended September 30, 2019. We recognized $4.4 million in expense related to the amortization of the inventory step-up resulting from our purchase price allocation of Marucci Sports and Foam Fabricators' acquisition of Polyfoam during the nine months ended September 30, 2020. Excluding the effect of the amortization of inventory step-up, gross profit as a percentage of net revenues was 36.4%. Refer to "Results of Operations - Business Segments" for a more detailed analysis of gross profit by business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $17.1 million during the nine months ended September 30, 2020, compared to the corresponding period in 2019. The increase in selling, general and administrative expense primarily relates to our acquisition of Marucci Sports during the second quarter. We incurred $2.0 million in acquisition related expenses and Marucci incurred approximately $11.7 million in selling, general and administrative expense during the period from acquisition through September 30, 2020, which includes $0.5 million in integration service fees paid to CGM. Refer to "Results of Operations - Business Segments" for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, general and administrative expense was $10.0 million in the first nine months of 2020 and $9.7 million in the first nine months of 2019.
Fees to manager
Pursuant to the Management Services Agreement ("MSA"), we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the nine months ended September 30, 2020, we incurred approximately $23.4 million in management fees as compared to $28.4 million in fees in the nine months ended September 30, 2019. Concurrent with the September 2019 sale of Clean Earth, CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended September 30, 2019 and continuing until the quarter during which the Company next borrowed 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. Additionally, as a result of an expected decline in earnings and cash flows in the second quarter of 2020, CGM agreed to waive 50% of the management fee calculated at June 30, 2020 that was paid in July 2020. Further, for the third quarter of 2020, 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 September 30, 2020. The result of these waivers was a decrease in the management fee during the
nine months ended September 30, 2020 as compared to the same period in the prior year, despite the addition of the Marucci business in April 2020.
Amortization expense
Amortization expense for the nine months ended September 30, 2020 increased $2.9 million as compared to the nine months ended September 30, 2019 as a result of the amortization expense associated with the intangibles that were recognized in conjunction with the preliminary purchase price allocation for Marucci.
Impairment expense
In the third quarter of 2019, we performed interim impairment testing at our Velocity business as a result of operating results below forecasts as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods. We recognized $33.4 million in impairment expense in the quarter ended September 30, 2019 related to the Velocity interim impairment testing.
Interest expense
We recorded interest expense totaling $32.1 million for the nine months ended September 30, 2020 compared to $48.4 million for the comparable period in 2019, a decrease of $16.3 million. The decrease in interest expense for the nine months ended September 30, 2020 reflects the repayment of our 2018 Term Loan during 2019 using a portion of the proceeds from the sale of Clean Earth and proceeds from the issuance of preferred shares, offset by an increase in interest expense related to our issuance of an additional $200 million of our 8.000% Senior Notes in May 2020.
Other income (expense)
For the nine months ended September 30, 2020, we recorded $2.2 million in other expense as compared to $6.3 million in other expense in the nine months ended September 30, 2019, an increase in income of $4.1 million. In the prior year, we recognized $5.0 million of expense related to the write-off of debt issuance costs due to the repayment of our 2018 Term Loan. Other income (expense) in the current year primarily reflects the movement in foreign currency at our businesses with international operations.
Income taxes
We had an income tax provision of $8.5 million from continuing operations during the nine months ended September 30, 2020 compared to an income tax provision of $10.4 million from continuing operations during the same period in 2019. While our income from continuing operations before taxes for the nine months ended September 30, 2020 increased by approximately $61.7 million as compared to the nine months ended September 30, 2019, our tax provision decreased $1.9 million as the tax provision reflects an annual effective tax rate at our subsidiaries, the effect of state and local taxes and the related allocation of income, and the losses at our parent company, which is taxed as a partnership. Our effective tax rate for the nine months ended September 30, 2020 was 31.6% as compared to and effective tax rate of 29.7% for the nine months ended September 30, 2019.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act includes many measures to assist companies, including temporary changes to income and non-income-based tax laws, some of which were enacted under the Tax Cuts and Jobs Act (TCJA) in 2017. Some of the key income tax related provisions of the CARES Act were allowing net operating losses ("NOLs") arising in 2018, 2019 or 2020 to be carried back five years, suspending the 80% taxable income limit until 2021, and increasing the taxable income threshold for the limit on the interest deduction from 30% to 50% for tax years beginning in 2019 and 2020 and allowing taxpayers to use 2019 taxable income to calculate the 2020 limit. While several of our subsidiaries were able to take advantage of the income tax related provisions of the CARES ACT in the current year 2020, the CARES Act did not have a material impact on our consolidated financial statements. We continue to monitor any effects that may result from the CARES Act.
Results of Operations - Business Segments
Branded Consumer Businesses
5.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
|
$
|
98,406
|
|
|
100.0
|
%
|
|
$
|
98,053
|
|
|
100.0
|
%
|
|
$
|
281,822
|
|
|
100.0
|
%
|
|
$
|
278,978
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
51,264
|
|
|
52.1
|
%
|
|
$
|
48,204
|
|
|
49.2
|
%
|
|
$
|
142,842
|
|
|
50.7
|
%
|
|
$
|
136,624
|
|
|
49.0
|
%
|
SG&A
|
|
$
|
40,147
|
|
|
40.8
|
%
|
|
$
|
39,791
|
|
|
40.6
|
%
|
|
$
|
117,564
|
|
|
41.7
|
%
|
|
$
|
115,927
|
|
|
41.6
|
%
|
Operating income
|
|
$
|
8,681
|
|
|
8.8
|
%
|
|
$
|
5,977
|
|
|
6.1
|
%
|
|
$
|
17,969
|
|
|
6.4
|
%
|
|
$
|
13,388
|
|
|
4.8
|
%
|
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were $98.4 million as compared to net sales of $98.1 million for the three months ended September 30, 2019, an increase of $0.4 million, or 0.4%. This increase is due to growth in e-commerce sales and new stores sales offset by the effects of the COVID-19 pandemic on store traffic in our wholesale channels and our own retail stores.
Gross profit
Gross profit as a percentage of net sales was 52.1% in the three months ended September 30, 2020 as compared to 49.2% for the three months ended September 30, 2019. Growth in gross profit was driven by channel mix as direct to consumer sales, which realize higher gross profit than wholesale sales, grew versus the prior period.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2020 was $40.1 million, or 40.8% of net sales compared to $39.8 million, or 40.6% of net sales for the comparable period in 2019. The increase in selling, general and administrative expense for the three months ended September 30, 2020 as compared to the prior year comparable period was driven by the costs associated with additional retail stores (seventy-one open in 2020 versus fifty-four open in 2019 during the comparable period), as well as additional sales and marketing spend to drive digital sales. This increase in expense was offset by management’s decision to reduce variable expenses, including payroll, travel and entertainment, and sales and marketing, a response to potential decreased sales from the effects of the COVID-19 pandemic.
Income from operations
Income from operations for the three months ended September 30, 2020 was $8.7 million, an increase of $2.7 million when compared to income from operations of $6.0 million for the same period in 2019, based on the factors described above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were $281.8 million as compared to net sales of $279.0 million for the nine months ended September 30, 2019, an increase of $2.8 million, or 1.0%. This increase is due primarily to e-commerce sales growth of $18.3 million, offset by the effect of COVID-19 pandemic on store traffic in both our wholesale channel and our own retail stores.
Gross profit
Gross profit as a percentage of net sales was 50.7% in the nine months ended September 30, 2020 as compared to 49.0% for the nine months ended September 30, 2019. Growth in gross margin was driven by channel mix as direct to consumer sales, which realize a higher gross margin than wholesale sales, grew versus the prior period. The growth in gross profit for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 was partially offset by additional inventory reserves and duty drawback accrual (increase in cost of goods sold) for audited duty drawback claims.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2020 was $117.6 million, or 41.7% of net sales compared to $115.9 million, or 41.6% of net sales for the comparable period in 2019. The increase in selling, general and administrative expense for the nine months ended September 30, 2020 as compared to the prior year comparable period was driven by the costs associated with additional retail stores (seventy-one open in 2020 versus fifty-four open in 2019 during the comparable period), as well as additional sales and marketing spend to drive digital sales.
Income from operations
Income from operations for the nine months ended September 30, 2020 was $18.0 million, an increase of $4.6 million when compared to income from operations of $13.4 million for the same period in 2019, based on the factors described above.
Ergobaby
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
|
$
|
19,478
|
|
|
100.0
|
%
|
|
$
|
23,318
|
|
|
100.0
|
%
|
|
$
|
59,171
|
|
|
100.0
|
%
|
|
$
|
68,741
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
12,766
|
|
|
65.5
|
%
|
|
$
|
14,808
|
|
|
63.5
|
%
|
|
$
|
38,708
|
|
|
65.4
|
%
|
|
$
|
43,599
|
|
|
63.4
|
%
|
SG&A
|
|
$
|
8,447
|
|
|
43.4
|
%
|
|
$
|
9,634
|
|
|
41.3
|
%
|
|
$
|
26,897
|
|
|
45.5
|
%
|
|
$
|
28,593
|
|
|
41.6
|
%
|
Operating income
|
|
$
|
2,363
|
|
|
12.1
|
%
|
|
$
|
3,220
|
|
|
13.8
|
%
|
|
$
|
5,943
|
|
|
10.0
|
%
|
|
$
|
9,151
|
|
|
13.3
|
%
|
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were $19.5 million, a decrease of $3.8 million, or 16.5%, compared to the same period in 2019. During the three months ended September 30, 2020, international sales were approximately $13.1 million, representing a decrease of $3.7 million over the corresponding period in 2019, primarily as a result of reduced sales volume at Ergobaby's Asia-Pacific as a result of the COVID-19 pandemic. Domestic sales were $6.4 million in the third quarter of 2020, reflecting a decrease of $0.1 million compared to the corresponding period in 2019. The decrease in domestic sales was due to reduced sales through our retail and specialty account customers' stores as a result of COVID-19.
Gross profit
Gross profit as a percentage of net sales was 65.5% for the quarter ended September 30, 2020, as compared to 63.5% for the three months ended September 30, 2019. The increase in gross profit as a percentage of sales was due to the mix of products sold, reduced freight costs and the mix of sales channels.
Selling, general and administrative expense
Selling, general and administrative expense decreased $1.2 million quarter over quarter, with expense of $8.4 million, or 43.4% of net sales for the three months ended September 30, 2020 as compared to $9.6 million or 41.3% of net sales for the same period of 2019. The decrease in selling, general and administrative expense in the three months ended September 30, 2020 as compared to the comparable period in the prior year is due to reduced travel costs, favorable foreign exchange rates in the current quarter and non-recurring expenses in the third quarter of 2019.
Income from operations
Income from operations for the three months ended September 30, 2020 decreased $0.9 million, compared to the same period of 2019, based on the factors noted above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were $59.2 million, a decrease of $9.6 million, or 13.9%, compared to the same period in 2019. During the nine months ended September 30, 2020, international sales were approximately $39.4 million, representing a decrease of $8.6 million over the corresponding period in 2019, primarily as a result of reduced sales volume at Ergobaby's Asia-Pacific and EMEA distributors as a result of the COVID-19 pandemic. Domestic sales were $19.7 million in the first nine months of 2020, reflecting a decrease of $1.0 million compared to the corresponding period in 2019. The decrease in domestic sales was driven by the Tula brand, primarily in the specialty account channel.
Gross profit
Gross profit as a percentage of net sales was 65.4% for the nine months ended September 30, 2020, as compared to 63.4% for the nine months ended September 30, 2019. The increase in gross profit as a percentage of sales was due to the mix of products sold, reduced freight costs and the mix of sales channels during the nine months ended September 30, 2020.
Selling, general and administrative expense
Selling, general and administrative expense decreased $1.7 million in the first nine months of 2020 as compared to the first nine months of 2019, with expense of $26.9 million, or 45.5% of net sales for the nine months ended September 30, 2020 as compared to $28.6 million or 41.6% of net sales for the same period of 2019. The decrease in selling, general and administrative expense in the nine months ended September 30, 2020 as compared to the comparable period in the prior year is a result of decreases in selling expenses, a reduction in variable expenses in response to the COVID-19 pandemic and non-recurring expenses in the nine months ended September 30, 2019.
Income from operations
Income from operations for the nine months ended September 30, 2020 decreased $3.2 million, compared to the same period of 2019, based on the factors noted above.
Liberty Safe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
|
$
|
31,186
|
|
|
100.0
|
%
|
|
$
|
24,729
|
|
|
100.0
|
%
|
|
$
|
80,599
|
|
|
100.0
|
%
|
|
$
|
67,566
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
8,111
|
|
|
26.0
|
%
|
|
$
|
5,701
|
|
|
23.1
|
%
|
|
$
|
21,058
|
|
|
26.1
|
%
|
|
$
|
14,771
|
|
|
21.9
|
%
|
SG&A
|
|
$
|
2,250
|
|
|
7.2
|
%
|
|
$
|
2,850
|
|
|
11.5
|
%
|
|
$
|
8,402
|
|
|
10.4
|
%
|
|
$
|
8,560
|
|
|
12.7
|
%
|
Operating income
|
|
$
|
5,736
|
|
|
18.4
|
%
|
|
$
|
2,726
|
|
|
11.0
|
%
|
|
$
|
12,281
|
|
|
15.2
|
%
|
|
$
|
5,812
|
|
|
8.6
|
%
|
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the quarter ended September 30, 2020 increased approximately $6.5 million, or 26.1%, to $31.2 million, compared to the corresponding quarter ended September 30, 2019. Non-Dealer sales were approximately $15.4 million in the three months ended September 30, 2020 as compared to $15.2 million in the quarter ended September 30, 2019. The increase in Non-Dealer sales of $0.2 million or 1.3% is attributable to the continued strong performance at sporting goods retailers, which more than offset a decline in net sales in the Farm and Fleet account category during the quarter as a result of sell in of product to a new large Farm and Fleet customer in the third quarter of 2019. Dealer sales totaled approximately $15.8 million in the three months ended September 30, 2020 compared to $9.5 million in the same period in 2019, representing an increase of $6.3 million or 66.3%. The increase in Dealer sales reflects the higher demand for safes that we believe correlate to a large increase in firearm purchases over the prior year.
Gross profit
Gross profit as a percentage of net sales totaled approximately 26.0% and 23.1% for the quarters ended September 30, 2020 and September 30, 2019, respectively. The increase in gross profit as a percentage of net sales during the three months ended September 30, 2020 compared to the same period in 2019 is primarily attributable to favorable manufacturing variances as a result of increased production volume, and a decrease in material costs in the third quarter of 2020 as compared to the third quarter of 2019 when domestic steel prices were trending higher as a result of steel tariffs.
Selling, general and administrative expense
Selling, general and administrative expense was $2.3 million for the three months ended September 30, 2020 as compared to $2.9 million in selling, general and administrative expense in the three months ended September 30, 2019. The decrease in selling, general and administrative expense in the third quarter of 2020 is due to spending reductions in advertising and promotion in an effort to manage demand for safes. Selling, general and administrative expense represented 7.2% of net sales in the three months ended September 30, 2020 and 11.5% of net sales for the same period of 2019.
Income from operations
Income from operations increased during the three months ended September 30, 2020 to $5.7 million, as compared to $2.7 million in the corresponding period in 2019. This increase was a result of the factors noted above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 increased approximately $13.0 million, or 19.3%, to $80.6 million, compared to the nine months ended September 30, 2019. Non-Dealer sales were approximately $36.6 million in the nine months ended September 30, 2020 as compared to $31.0 million in the nine months ended September 30, 2019. The increase in Non-Dealer sales of $5.6 million or 18.1% is attributable to a new customer in the Farm and Fleet channel as well as increased sales at sporting goods retailers during 2020, despite the shutdown of retail stores resulting from stay at home orders issued by local governments. Dealer sales totaled approximately $44.0 million in the nine months ended September 30, 2020 compared to $36.6 million in the same period in 2019, representing an increase of $7.4 million or 20.2%. The increase in Dealer sales reflects the higher demand for safes that we believe correlate to a large increase in firearm purchases over the prior year.
Gross profit
Gross profit as a percentage of net sales totaled approximately 26.1% and 21.9% for the nine months ended September 30, 2020 and September 30, 2019, respectively. The increase in gross profit as a percentage of net sales during the nine months ended September 30, 2020 compared to the same period in 2019 is primarily attributable to favorable manufacturing variances as a result of increased production volume, and a decrease in material costs in the first nine months of 2020 as compared to the first nine months of 2019 when domestic steel prices were trending higher as a result of steel tariffs.
Selling, general and administrative expense
Selling, general and administrative expense was $8.4 million for the nine months ended September 30, 2020 compared to $8.6 million for the nine months ended September 30, 2019. Selling, general and administrative expense represented 10.4% of net sales in the nine months ended September 30, 2020 and 12.7% of net sales for the nine months ended September 30, 2019.
Income from operations
Income from operations increased during the nine months ended September 30, 2020 to $12.3 million, as compared to $5.8 million in the corresponding period in 2019. This increase was a result of the factors noted above.
Marucci Sports
In the following results of operations, we provide comparative pro forma results of operations for Marucci for the three and nine months ended September 30, 2020 and 2019 as if we had acquired the business on January 1, 2019. The results of operations that follows include relevant pro-forma adjustments for pre-acquisition periods and
explanations where applicable. The operating results for Marucci have been included in the consolidated results of operation from the date of acquisition through September 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
|
|
|
|
|
|
Pro forma
|
|
|
|
Pro forma
|
|
|
|
Pro forma
|
|
|
Net sales
|
|
$
|
19,551
|
|
|
100.0
|
%
|
|
$
|
14,946
|
|
|
100.0
|
%
|
|
$
|
47,308
|
|
|
100.0
|
%
|
|
$
|
49,987
|
|
|
105.7
|
%
|
Gross profit
|
|
$
|
10,688
|
|
|
54.7
|
%
|
|
$
|
8,417
|
|
|
56.3
|
%
|
|
$
|
22,843
|
|
|
48.3
|
%
|
|
$
|
26,823
|
|
|
53.7
|
%
|
SG&A
|
|
$
|
7,612
|
|
|
38.9
|
%
|
|
$
|
6,180
|
|
|
41.3
|
%
|
|
$
|
23,607
|
|
|
49.9
|
%
|
|
$
|
21,171
|
|
|
42.4
|
%
|
Amortization expense
|
|
$
|
1,686
|
|
|
8.6
|
%
|
|
$
|
1,654
|
|
|
11.1
|
%
|
|
$
|
4,996
|
|
|
10.6
|
%
|
|
$
|
4,962
|
|
|
9.9
|
%
|
Operating income (loss)
|
|
$
|
1,265
|
|
|
6.5
|
%
|
|
$
|
458
|
|
|
3.1
|
%
|
|
$
|
(6,135)
|
|
|
(13.0)
|
%
|
|
$
|
315
|
|
|
0.6
|
%
|
Pro forma results of operations include the following pro form adjustments as if we had acquired Marucci January 1, 2019:
•Depreciation expense associated with the increase in depreciable lives of capital assets of $0.2 million for the nine months ended September 30, 2020, and $0.2 million and $0.7 million, respectively, for the three and nine months ended September 30, 2019.
•Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation for Marucci of $1.2 million for the nine months ended September 30, 2020, and $1.5 million and $4.6 million, respectively, for the three and nine months ended September 30, 2019.
•Management fees that would have been payable to the Manager during each period.
Three months ended September 30, 2020 compared to pro forma three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were $19.6 million, an increase of $4.6 million as compared to net sales of $14.9 million for the three months ended September 30, 2019. The increase in net sales during the three months ended September 30, 2020 was primarily due to Marucci’s launch of its CAT9 line of aluminum and composite bats during the third quarter of 2020. Following the economic slowdown resulting from COVID-19 pandemic, baseball participation returned sooner than expected, which also contributed to the increase in sales period over period.
Gross profit
Gross profit for the quarter ended September 30, 2020 increased $2.3 million as compared to the three months ended September 30, 2019. The cost of sales for the three months ended September 30, 2020 includes $1.3 million related to the amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the three months ended September 30, 2020 was 61.1%, as compared to gross profit as a percentage of sales of 56.3% for the three months ended September 30, 2019.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2020 was $7.6 million, or 38.9% of net sales compared to $6.2 million, or 41.3% of net sales for the three months ended September 30, 2019. Selling, general and administrative expense for the three months ended September 30, 2020 includes $0.5 million in in integration service fees paid to CGM. The remainder of the increase in selling, general and administrative expense for the three months ended September 30, 2020 correlates to the increase in net sales, with increases in credit card expenses, royalties, commissions, business development fees, and other variable expenses.
Income from operations
Income from operations for the three months ended September 30, 2020 was $1.3 million, an increase of $0.8 million when compared to income from operations of $0.5 million for the same period in 2019, primarily as a result of the factors noted above.
Pro forma nine months ended September 30, 2020 compared to pro forma nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were $47.3 million, a decrease of $2.7 million as compared to net sales of $50.0 million for the nine months ended September 30, 2019. During 2020, Marucci was affected by the economic slowdown resulting from the COVID-19 pandemic with baseball and softball seasons postponed in the spring and early summer throughout much of the United States. Marucci's “brick and mortar” retail partners were forced to close as a result of the pandemic thus Marucci did not receive fill-in orders during this period. As a result, sales of aluminum and wood bats were significantly less in the first and second quarter of 2020 when compared to the same period last year. Additionally, Major League Baseball postponed their season eliminating the need for wood bats to be purchased for the professional season. During June 2020, Marucci began to see demand pick up as the baseball and softball seasons began and in August 2020, the Company launched its CAT9 line of aluminum and composite bats. With the success of this launch, the demand pickup continued during the third quarter of 2020.
Gross profit
Gross profit for the nine months ended September 30, 2020 decreased $4.0 million as compared to the nine months ended September 30, 2019. Gross profit as a percentage of sales was 48.3% for the nine months ended September 30, 2020 as compared to 53.7% for the nine months ended September 30, 2019. The cost of sales for the nine months ended September 30, 2020 includes $4.3 million related to the amortization of inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the nine months ended September 30, 2020 was 57.3%.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2020 was $23.6 million, or 49.9% of net sales compared to $21.2 million, or 42.4% of net sales for the nine months ended September 30, 2019. Selling, general and administrative expense for the nine months ended September 30, 2020 includes $2.0 million in acquisition related costs that were expensed at the close of the Marucci acquisition, and $0.5 million in integration service fees paid to CGM. Excluding the effect of the acquisition costs and integration service fees, selling, general and administrative expense for the nine months ended September 30, 2020 was $21.1 million, which is consistent with the expense in the nine months ended September 30, 2019.
Loss (income) from operations
Loss from operations for the nine months ended September 30, 2020 was $6.1 million, a decrease of $6.5 million when compared to income from operations of $0.3 million for the same period in 2019, primarily as a result of the factors noted above.
Velocity Outdoor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
|
$
|
70,629
|
|
|
100.0
|
%
|
|
$
|
46,647
|
|
|
100.0
|
%
|
|
$
|
148,240
|
|
|
100.0
|
%
|
|
$
|
107,395
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
23,680
|
|
|
33.5
|
%
|
|
$
|
13,633
|
|
|
29.2
|
%
|
|
$
|
44,433
|
|
|
30.0
|
%
|
|
$
|
30,451
|
|
|
28.4
|
%
|
SG&A
|
|
$
|
10,210
|
|
|
14.5
|
%
|
|
$
|
5,747
|
|
|
12.3
|
%
|
|
$
|
23,313
|
|
|
15.7
|
%
|
|
$
|
17,491
|
|
|
16.3
|
%
|
Impairment expense
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
33,381
|
|
|
71.6
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
33,381
|
|
|
31.1
|
%
|
Operating income (loss)
|
|
$
|
11,062
|
|
|
15.7
|
%
|
|
$
|
(27,902)
|
|
|
(59.8)
|
%
|
|
$
|
13,896
|
|
|
9.4
|
%
|
|
$
|
(27,635)
|
|
|
(25.7)
|
%
|
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were $70.6 million, an increase of $24.0 million or 51.4%, compared to the same period in 2019. The increase in net sales for the three months ended September 30, 2020 is primarily due to significant increase in consumer demand for our Crosman products along with new crossbows being launched by our Ravin product line.
Gross profit
Gross profit for the quarter ended September 30, 2020 increased $10.0 million as compared to the quarter ended September 30, 2019. Gross profit as a percentage of net sales was 33.5% for the three months ended September 30, 2020 as compared to 29.2% in the three months ended September 30, 2019. The increase in gross profit as a percentage of net sales was primarily attributable to favorable sales product mix of airguns, archery equipment and consumables.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2020 was $10.2 million, or 14.5% of net sales compared to $5.7 million, or 12.3% of net sales for the three months ended September 30, 2019. The increase in selling, general and administrative expense for the three months ended September 30, 2020 is primarily related to volume driven expenses that correlate to the increase in sales, as well as additional investments in marketing.
Income (loss) from operations
Income from operations for the three months ended September 30, 2020 was $11.1 million, an increase of $39.0 million when compared to loss from operations of $27.9 million for the same period in 2019. Velocity recognized impairment expense of $33.4 million in the third quarter of 2019 after determining that interim impairment testing was necessary in the prior year. The increase in operating income in the three months ended September 30, 2020 reflects the factors noted above, and the effect of the impairment expense on the operating income for the three months ended September 30, 2019.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were $148.2 million, an increase of $40.8 million or 38.0%, compared to the same period in 2019. The increase in net sales for the nine months ended September 30, 2020 is due to a significant increase in customer demand that we have experienced in the current year reflecting consumer focus on outdoor branded products, as well as the introduction of several new products during 2020.
Gross profit
Gross profit for the nine months ended September 30, 2020 increased $14.0 million as compared to the nine months ended September 30, 2019. Gross profit as a percentage of net sales was 30.0% for the nine months ended September 30, 2020 as compared to 28.4% in the nine months ended September 30, 2019. The increase in gross profit as a percentage of net sales was primarily attributable to product and customer mix.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2020 was $23.3 million, or 15.7% of net sales compared to $17.5 million, or 16.3% of net sales for the nine months ended September 30, 2019. The increase in selling, general and administrative expense for the nine months ended September 30, 2020 is primarily related to volume driven expenses that correlate to the increase in sales, as well as additional investments in marketing.
Income from operations
Income from operations for the nine months ended September 30, 2020 was $13.9 million, an increase of $41.5 million when compared to loss from operations of $27.6 million for the same period in 2019. Velocity recognized impairment expense of $33.4 million in the third quarter of 2019 after determining that interim impairment testing was necessary in the prior year. The increase in operating income in the nine months ended September 30, 2020
reflects the factors noted above, and the effect of the impairment expense on the operating income for the nine months ended September 30, 2019.
Niche Industrial Businesses
Advanced Circuits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
|
$
|
22,771
|
|
|
100.0
|
%
|
|
$
|
21,897
|
|
|
100.0
|
%
|
|
$
|
67,423
|
|
|
100.0
|
%
|
|
$
|
67,405
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
10,252
|
|
|
45.0
|
%
|
|
$
|
9,964
|
|
|
45.5
|
%
|
|
$
|
30,360
|
|
|
45.0
|
%
|
|
$
|
31,029
|
|
|
46.0
|
%
|
SG&A
|
|
$
|
3,853
|
|
|
16.9
|
%
|
|
$
|
3,627
|
|
|
16.6
|
%
|
|
$
|
11,490
|
|
|
17.0
|
%
|
|
$
|
11,155
|
|
|
16.5
|
%
|
Operating income
|
|
$
|
6,205
|
|
|
27.2
|
%
|
|
$
|
6,122
|
|
|
28.0
|
%
|
|
$
|
18,272
|
|
|
27.1
|
%
|
|
$
|
19,087
|
|
|
28.3
|
%
|
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were $22.8 million, an increase of approximately $0.9 million or 4.0% compared to the three months ended September 30, 2019. The increase in net sales in the quarter ended September 30, 2020 as compared to the quarter ended September 30, 2019 was primarily attributable to increased sales in Quick-Turn Production by approximately $0.9 million, Quick-Turn Small-Run by approximately $0.3 million, Subcontract by approximately $0.5 million, and decreased promotional allowances of approximately $0.1 million, partially offset by decreases in Assembly of approximately $0.7 million, and Long-Lead Time PCBs by approximately $0.3 million.
Gross profit
Gross profit as a percentage of net sales decreased 50 basis points during the three months ended September 30, 2020 compared to the corresponding period in 2019 (45.0% at September 30, 2020 compared to 45.5% at September 30, 2019) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $3.9 million in the three months ended September 30, 2020 as compared to $3.6 million for the three months ended September 30, 2019. Selling, general and administrative expense represented 16.9% of net sales for the three months ended September 30, 2020 and 16.6% of net sales in the corresponding period in 2019.
Income from operations
Income from operations for the three months ended September 30, 2020 was approximately $6.2 million compared to $6.1 million in the same period in 2019, an increase of approximately $0.1 million, principally as a result of the factors described above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the both the nine months ended September 30, 2020 and the nine months ended September 30, 2019 were $67.4 million. For the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, Quick-Turn Production increased by approximately $1.4 million, Subcontract increased by approximately $0.1 million, and promotional allowances decreased by approximately $0.6 million. This was offset by decreases in Assembly of approximately $1.3 million, Long-Lead Time of approximately $0.6 million, and Quick-Turn Small-Run by approximately $0.1 million.
Gross profit
Gross profit as a percentage of net sales decreased 100 basis points during the nine months ended September 30, 2020 compared to the corresponding period in 2019 (45.0% for the nine months ended September 30, 2020 compared to 46.0% for the nine months September 30, 2019) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $11.5 million in the nine months ended September 30, 2020 as compared to $11.2 million and the nine months ended September 30, 2019. Selling, general and administrative expense represented 17.0% of net sales for the nine months ended September 30, 2020 compared to 16.5% of net sales in the corresponding period in 2019.
Income from operations
Income from operations for the nine months ended September 30, 2020 was approximately $18.3 million compared to $19.1 million in the same period in 2019, a decrease of approximately $0.8 million, principally as a result of the factors described above.
Arnold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
|
$
|
22,619
|
|
|
100.0
|
%
|
|
$
|
30,895
|
|
|
100.0
|
%
|
|
$
|
76,447
|
|
|
100.0
|
%
|
|
$
|
90,404
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
4,989
|
|
|
22.1
|
%
|
|
$
|
8,334
|
|
|
27.0
|
%
|
|
$
|
19,051
|
|
|
24.9
|
%
|
|
$
|
23,425
|
|
|
25.9
|
%
|
SG&A
|
|
$
|
4,549
|
|
|
20.1
|
%
|
|
$
|
4,718
|
|
|
15.3
|
%
|
|
$
|
13,645
|
|
|
17.8
|
%
|
|
$
|
14,205
|
|
|
15.7
|
%
|
Operating income (loss)
|
|
$
|
(495)
|
|
|
(2.2)
|
%
|
|
$
|
2,681
|
|
|
8.7
|
%
|
|
$
|
2,601
|
|
|
3.4
|
%
|
|
$
|
6,385
|
|
|
7.1
|
%
|
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were approximately $22.6 million, a decrease of $8.3 million compared to the same period in 2019. International sales were $8.7 million in the three months ended September 30, 2020 and $12.7 million in the three months ended September 30, 2019. The decrease in net sales is primarily a result of softness in the commercial aerospace, oil and gas and advertising specialty markets caused by the global COVID-19 pandemic.
Gross profit
Gross profit for the three months ended September 30, 2020 was approximately $5.0 million compared to approximately $8.3 million in the same period of 2019. Gross profit as a percentage of net sales decreased to 22.1% for the quarter ended September 30, 2020 from 27.0% in the quarter ended September 30, 2019 principally due to the lower volume in the markets as noted above, partially offset by improved operating efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense in the three month period ended September 30, 2020 was $4.5 million, a decrease in expense of approximately $0.2 million compared to $4.7 million for the three months ended September 30, 2019. The decrease in selling, general and administrative expense was due to lower staffing related costs and lower travel and meeting expense partially offset by increased redundancy costs and pension costs as well as increased legal expenses. Selling, general and administrative expense was 20.1% of net sales in the three months ended September 30, 2020 and 15.3% in the three months ended September 30, 2019 due to the lower sales volume.
Income (loss) from operations
Loss from operations for the three months ended September 30, 2020 was approximately $0.5 million, a decrease of $3.2 million when compared to the same period in 2019, as a result of the factors noted above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were approximately $76.4 million, a decrease of $14.0 million compared to the same period in 2019. International sales were $28.7 million in the nine months ended September 30, 2020 and $36.6 million in the nine months ended September 30, 2019. The decrease in net sales is
primarily a result of softness in the commercial aerospace, oil and gas and advertising specialty markets caused by the global COVID-19 pandemic.
Gross profit
Gross profit for the nine months ended September 30, 2020 was approximately $19.1 million compared to approximately $23.4 million in the same period of 2019. Gross profit as a percentage of net sales decreased to 24.9% for the nine months ended September 30, 2020 from 25.9% in the nine months ended September 30, 2019 principally due to product mix, partially offset by improved operating efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense in the nine month period ended September 30, 2020 was $13.6 million, a decrease in expense of approximately $0.6 million compared to $14.2 million for the nine months ended September 30, 2019. The decrease in selling, general and administrative expense was due to lower staffing related costs and lower travel and meeting expense partially offset by increased redundancy costs, bad debt reserves due to the adoption of the new credit loss accounting standard and increased legal expenses. Selling, general and administrative expense was 17.8% of net sales in the nine months ended September 30, 2020 and 15.7% in the nine months ended September 30, 2019 due to the lower sales volume.
Income from operations
Income from operations for the nine months ended September 30, 2020 was approximately $2.6 million, a decrease of $3.8 million when compared to the same period in 2019, as a result of the factors noted above.
Foam Fabricators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
|
$
|
36,526
|
|
|
100.0
|
%
|
|
$
|
31,304
|
|
|
100.0
|
%
|
|
$
|
89,338
|
|
|
100.0
|
%
|
|
$
|
93,634
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
11,184
|
|
|
30.6
|
%
|
|
$
|
8,928
|
|
|
28.5
|
%
|
|
$
|
27,165
|
|
|
30.4
|
%
|
|
$
|
26,772
|
|
|
28.6
|
%
|
SG&A
|
|
$
|
4,134
|
|
|
11.3
|
%
|
|
$
|
2,541
|
|
|
8.1
|
%
|
|
$
|
9,264
|
|
|
10.4
|
%
|
|
$
|
8,023
|
|
|
8.6
|
%
|
Operating income
|
|
$
|
4,759
|
|
|
13.0
|
%
|
|
$
|
4,141
|
|
|
13.2
|
%
|
|
$
|
11,118
|
|
|
12.4
|
%
|
|
$
|
12,011
|
|
|
12.8
|
%
|
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the quarter ended September 30, 2020 were $36.5 million, an increase of $5.2 million, or 16.7%, compared to the quarter ended September 30, 2019. The increase in net sales during the quarter was primarily due to the acquisition of Polyfoam in July 2020.
Gross profit
Gross profit as a percentage of net sales was 30.6% and 28.5% for the three months ended September 30, 2020 and 2019, respectively. The increase in gross profit as a percentage of net sales in the quarter ended September 30, 2020 was primarily due to the decreasing price of expanded polystyrene ("EPS") resin. A majority of Foam Fabricator's products are made with EPS resin, an oil and natural gas derived polymer with an added expansion agent, therefore raw material costs will fluctuate based on the price of oil and natural gas.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2020 was $4.1 million as compared to $2.5 million for the three months ended September 30, 2019, an increase of $1.6 million. The selling, general and administrative expense in the third quarter of 2020 includes $0.3 million in transaction costs related to Foam Fabricators' acquisition of Polyfoam in the third quarter. The remainder of the increase in selling, general and administrative expense was primarily due to the acquisition of Polyfoam.
Income from operations
Income from operations was $4.8 million in the three months ended September 30, 2020, an increase of $0.6 million as compared to the three months ended September 30, 2019, based on the factors noted above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were $89.3 million, a decrease of $4.3 million, or 4.6%, compared to the nine months ended September 30, 2019. The decrease in net sales during the first nine months of 2020 was due to a slow-down in the appliance and automotive customer sectors, as well as a general slow-down across other customer segments in April and May, as a result of the effect of the COVID-19 pandemic on our customers' operations. While most of our customer sectors saw improved performance beginning in June, the appliance and automotive sectors continued to see a slowdown in sales through the end of the second quarter. During the third quarter of 2020, appliance sales continued to trend lower versus the prior year due to lower demand and supply chain and labor constraints resulting from the COVID-19 pandemic.
Gross profit
Gross profit as a percentage of net sales was 30.4% and 28.6% for the nine months ended September 30, 2020 and 2019, respectively. The increase in gross profit as a percentage of net sales in the nine months ended September 30, 2020 was primarily due to the decreasing price of expanded polystyrene ("EPS") resin. A majority of Foam Fabricator's products are made with EPS resin, an oil and natural gas derived polymer with an added expansion agent, therefore raw material costs will fluctuate based on the price of oil and natural gas.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2020 was $9.3 million as compared to $8.0 million for the nine months ended September 30, 2019, an increase of $1.2 million. Selling, general and administrative expense for the nine months ended September 30, 2019 included $0.3 million in integration service fees paid to CGM, while the nine months ended September 30, 2020 included $0.2 million in transaction costs related to Foam Fabricators' acquisition of Polyfoam in July 2020. The remainder of the increase in selling, general and administrative expense was primarily due to the acquisition of Polyfoam during the third quarter.
Income from operations
Income from operations was $11.1 million in the nine months ended September 30, 2020 as compared to $12.0 million in the nine months ended September 30, 2019, a decrease of $0.9 million based on the factors noted above.
Sterno
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2020
|
|
September 30, 2019
|
|
September 30, 2020
|
|
September 30, 2019
|
Net sales
|
|
$
|
97,737
|
|
|
100.0
|
%
|
|
$
|
111,470
|
|
|
100.0
|
%
|
|
$
|
258,132
|
|
|
100.0
|
%
|
|
$
|
289,131
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
20,849
|
|
|
21.3
|
%
|
|
$
|
26,969
|
|
|
24.2
|
%
|
|
$
|
56,645
|
|
|
21.9
|
%
|
|
$
|
71,989
|
|
|
24.9
|
%
|
SG&A
|
|
$
|
8,797
|
|
|
9.0
|
%
|
|
$
|
9,855
|
|
|
8.8
|
%
|
|
$
|
26,605
|
|
|
10.3
|
%
|
|
$
|
30,109
|
|
|
10.4
|
%
|
Operating income
|
|
$
|
7,674
|
|
|
7.9
|
%
|
|
$
|
12,724
|
|
|
11.4
|
%
|
|
$
|
16,906
|
|
|
6.5
|
%
|
|
$
|
28,821
|
|
|
10.0
|
%
|
Three months ended September 30, 2020 compared to three months ended September 30, 2019
Net sales
Net sales for the three months ended September 30, 2020 were approximately $97.7 million, a decrease of $13.7 million, or 12.3%, compared to the same period in 2019. The net sales variance reflects a decrease in sales at Sterno Products and Sterno Home as a result of the effect of COVID-19 on the food service and retail industries during 2020, partially offset by favorable sales volume at Rimports of wax and essential oils in the third quarter of 2020. We expect the food service industry to continue to be negatively impacted for the remainder of 2020 by COVID-19.
Gross profit
Gross profit as a percentage of net sales decreased from 24.2% for the three months ended September 30, 2019 to 21.3% for the same period ended September 30, 2020. The decrease in gross profit in the third quarter of 2020 as compared to the third quarter of 2019 was attributable to product mix, with lower margin sales in the third quarter of 2020, higher freight and tariff costs.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2020 was approximately $8.8 million as compared to $9.9 million for the three months ended September 30, 2019, a decrease of $1.1 million, reflecting lower salaries, commissions, and various cost savings initiatives implemented to address the effects of decreased demand from COVID-19. Selling, general and administrative expense represented 9.0% of net sales for the three months ended September 30, 2020 and 8.8% for the three months ended September 30, 2019.
Income from operations
Income from operations for the three months ended September 30, 2020 was approximately $7.7 million, a decrease of $5.1 million compared to the three months ended September 30, 2019 based on the factors noted above.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
Net sales
Net sales for the nine months ended September 30, 2020 were approximately $258.1 million, a decrease of $31.0 million, or 10.7%, compared to the same period in 2019. The net sales variance reflects a decrease in sales at Sterno Products and Sterno Home as a result of the effect of COVID-19 on the food service and retail industries beginning in the latter half of March, partially offset by favorable sales volume at Rimports of wax and essential oils during 2020. We expect the food service industry to continue to be negatively impacted for the remainder of 2020 by COVID-19.
Gross profit
Gross profit as a percentage of net sales was 21.9% for the nine months ended September 30, 2020 as compared to 24.9% for the nine months ended September 30, 2019. The decrease in gross profit during 2020 as compared to 2019 was attributable to product mix, with lower margin sales in 2020, higher freight and tariff costs.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2020 was approximately $26.6 million as compared to $30.1 million for the nine months ended September 30, 2019, a decrease of $3.5 million, reflecting lower salaries, commissions, and various cost savings initiatives implemented to address the effects of decreased demand from COVID-19. Selling, general and administrative expense represented 10.3% of net sales for the nine months ended September 30, 2020 and 10.4% for the nine months ended September 30, 2019.
Income from operations
Income from operations for the nine months ended September 30, 2020 was approximately $16.9 million, a decrease of $11.9 million compared to the nine months ended September 30, 2019 based on the factors noted above.
Liquidity and Capital Resources
Liquidity
At September 30, 2020, we had approximately $176.8 million of cash and cash equivalents on hand, an increase of $76.5 million as compared to the year ended December 31, 2019. In May 2020, we completed an offering of 5,000,000 Trust common shares for net proceeds, after deducting the underwriter's discount and offering costs, of approximately $83.9 million. Also in May 2020, we issued $200 million in additional Senior Notes. We used $200 million of the proceeds from the common share offering and issuance of additional Senior Notes to pay down the outstanding amount on our 2018 Revolving Credit Facility. Subsequent to the end of the quarter, we completed the acquisition of BOA for a total purchase price of $454 million (excluding working capital and certain other adjustments upon closing, and transaction costs). The Company funded the acquisition of BOA with cash on hand and a $300 million draw on its 2018 Revolving Credit Facility. The majority of our cash is in non-interest bearing checking accounts or invested in short-term money market accounts and is maintained in accordance with the Company’s investment policy, which identifies allowable investments and specifies credit quality standards. The change in cash and cash equivalents is as follows:
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
(in thousands)
|
|
September 30, 2020
|
|
September 30, 2019
|
Cash provided by operating activities
|
|
$
|
112,872
|
|
|
$
|
31,584
|
|
|
|
|
|
|
For the nine months ended September 30, 2020, cash flows provided by operating activities totaled approximately $112.9 million, which represents a $81.3 million increase compared to cash provided by operating activities of $31.6 million during the nine-month period ended September 30, 2019. The increase in cash flows in 2020 is attributable to an increase in income from continuing operations in the nine months ended September 30, 2020, driven by strong performance at our 5.11, Liberty and Velocity businesses, and a significant increase in cash provided by working capital. In the prior year, the Company incurred interest expense related to the 2018 Term Loan, which we paid off in the third and fourth quarter of 2019 using the proceeds from the sale of Clean Earth and our Series C Preferred Share Offering. The payoff of the 2018 Term Loan, partially offset by the increase in interest expense related to $200 million in our 8% Senior Notes issued in May 2020, resulted in a decrease in our interest expense in the first nine months of 2020 as compared to the first nine months of 2019 by approximately $16.3 million. In the prior year, we also recognized a loss of $10.2 million related to the sale of common shares received as part of the consideration for the sale of Manitoba Harvest. Cash provided by operating activities for working capital for the nine months ended September 30, 2020 was $10.4 million, as compared to cash used in operating activities for working capital of $28.6 million for the nine months ended September 30, 2019. The increase in cash provided by working capital in the current year primarily reflects steps our businesses have taken to conserve cash in the current economy.
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
(in thousands)
|
|
September 30, 2020
|
|
September 30, 2019
|
Cash (used in) provided by investing activities
|
|
$
|
(236,502)
|
|
|
$
|
760,148
|
|
|
|
|
|
|
Cash flows used in investing activities for the nine months ended September 30, 2020 totaled $236.5 million, compared to cash provided by investing activities of $760.1 million in the same period of 2019. Cash provided by investing activities in the prior year primarily related to the proceeds received from the sale of our Manitoba Harvest and Clean Earth businesses, while investing activities in the nine months ended September 30, 2020 reflect the acquisition of Marucci Sports in April 2020. Our spending on capital expenditures was consistent year over year, with $20.1 million in capital expenditures in the nine months ended September 30, 2020 and $22.0 million in capital expenditures in the nine months ended September 30, 2019. We expect capital expenditures for the full year of 2020 to be approximately $28 million to $33 million, which reflects a reduction in our capital spending from the December 31, 2019 expectation in response to the expected effect of COVID-19 on our cash flows.
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
(in thousands)
|
|
September 30, 2020
|
|
September 30, 2019
|
Cash provided by (used in) financing activities
|
|
$
|
200,395
|
|
|
$
|
(557,118)
|
|
|
|
|
|
|
Cash flows provided by financing activities totaled approximately $200.4 million during the nine months ended September 30, 2020 compared to cash flows used in financing activities of $557.1 million during the nine months ended September 30, 2019. Financing activities in both periods reflect the payment of our common and preferred share distributions, with a $6.3 million increase in the preferred share distribution as a result of the issuance of our Series C Preferred Shares in November 2019. In the prior year, we used the proceeds from our sale of Manitoba Harvest and Clean Earth to repay amounts outstanding under our 2018 Revolving Credit Facility and 2018 Term Loan, while in the current year, we completed a common share offering and the issuance of $200 million in Senior Notes, resulting in net proceeds of $285.9 million. A portion of the proceeds received from the issuance of Senior Notes and common share offering were used to pay down the amount outstanding on our 2018 Revolving Credit
facility. During the nine months ended September 30, 2020, we also made a distribution to the Allocation Member of $9.1 million related to the five year Holding event for our Sterno business.
Intercompany Debt
A component of our acquisition financing strategy that we utilize in acquiring the businesses we own and manage is to provide both equity capital and debt capital, raised at the parent level through our existing credit facility. Our strategy of providing intercompany debt financing within the capital structure of the businesses that we acquire and manage allows us the ability to distribute cash to the parent company through monthly interest payments and amortization of the principal on these intercompany loans. Each loan to our businesses has a scheduled maturity and each business is entitled to repay all or a portion of the principal amount of the outstanding loans, without penalty, prior to maturity. Certain of our businesses have paid down their respective intercompany debt balances through the cash flow generated by these businesses and we have recapitalized, and expect to continue to recapitalize, these businesses in the normal course of our business. The recapitalization process involves funding the intercompany debt using either cash on hand at the parent or our applicable Credit Facility, and serves the purpose of optimizing the capital structure at our subsidiaries and providing the noncontrolling shareholders with a distribution on their ownership interest in a cash flow positive business. All of our subsidiaries were in compliance with the financial covenants included within their intercompany credit arrangements at September 30, 2020.
As of September 30, 2020, we had the following outstanding loans due from each of our businesses:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
5.11
|
|
$
|
170,765
|
|
Ergobaby
|
|
$
|
30,041
|
|
Liberty
|
|
$
|
37,657
|
|
Marucci
|
|
$
|
39,625
|
|
Velocity Outdoor
|
|
$
|
101,140
|
|
Advanced Circuits
|
|
$
|
51,283
|
|
Arnold
|
|
$
|
74,180
|
|
Foam Fabricators
|
|
$
|
87,087
|
|
Sterno
|
|
$
|
236,846
|
|
Our primary source of cash is from the receipt of interest and principal on the outstanding loans to our businesses. Accordingly, we are dependent upon the earnings of and cash flow from these businesses, which are available for (i) operating expenses; (ii) payment of principal and interest under our 2018 Credit Facility and interest on our Senior Notes; (iii) payments to CGM due pursuant to the MSA and the LLC Agreement; (iv) cash distributions to our shareholders; and (v) investments in future acquisitions. Payments made under (iii) above are required to be paid before distributions to shareholders and may be significant and exceed the funds held by us, which may require us to dispose of assets or incur debt to fund such expenditures.
Financing Arrangements
2018 Credit Facility
In April 2018, we entered into an Amended and Restated Credit Agreement (the "2018 Credit Facility") to amend and restate the 2014 Credit Facility. The 2018 Credit Facility provides for (i) revolving loans, swing line loans and letters of credit (the “2018 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million, 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. In July 2019, we repaid $193.8 million of the 2018 Term Loan, and in November 2019, we repaid the remaining $298.8 million due under the 2018 Term Loan.
We had $598.8 million in net availability under the 2018 Revolving Credit Facility at September 30, 2020. The outstanding borrowings under the 2018 Revolving Credit Facility include $1.2 million of outstanding letters of credit at September 30, 2020.
Senior Notes
On April 18, 2018, we consummated the issuance and sale of $400 million aggregate principal amount of our 8.000% due 2026 (the "Notes" or "Senior Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes 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. On May 7, 2020, we consummated the issuance and sale of $200 million aggregate principal amount of its 8.000% Senior Notes due 2026 (the "Additional Notes"). The proceeds from the Additional Notes were used to pay down the amount outstanding on the Company's 2018 Revolving Credit Facility. The Notes and Additional Notes are general senior unsecured obligations of the Company and are not guaranteed by our subsidiaries.
The following table reflects required and actual financial ratios as of September 30, 2020 included as part of the affirmative covenants in our 2018 Credit Facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Required Covenant Ratio
|
|
Covenant Ratio Requirement
|
|
Actual Ratio
|
|
|
|
|
|
Consolidated Fixed Charge Coverage Ratio
|
|
Greater than or equal to 1.50:1.0
|
|
5.28:1.0
|
Consolidated Senior Secured Leverage Ratio
|
|
Less than or equal to 3.50:1.0
|
|
0.00:1.0
|
Consolidated Total Leverage Ratio
|
|
Less than or equal to 5.00:1.0
|
|
1.83:1.0
|
Interest Expense
The components of interest expense and periodic interest charges on outstanding debt are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
2020
|
|
2019
|
Interest on credit facilities
|
$
|
685
|
|
|
$
|
20,225
|
|
Interest on Senior Notes
|
30,400
|
|
|
24,000
|
|
Unused fee on Revolving Credit Facility
|
1,148
|
|
|
1,393
|
|
Amortization of bond premium/ original issue discount
|
(139)
|
|
|
397
|
|
Unrealized loss on interest rate derivative (1)
|
—
|
|
|
3,486
|
|
Other interest expense
|
235
|
|
|
211
|
|
Interest income
|
(207)
|
|
|
(1,288)
|
|
Interest expense, net
|
$
|
32,122
|
|
|
$
|
48,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) On September 16, 2014, we purchased an interest rate swap (the "Swap") with a notional amount of $220 million effective April 1, 2016 through June 6, 2021. The agreement required us to pay interest on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. In connection with the repayment of the 2018 Term Loan in November 2019, the Company settled the Swap with a payment of $4.9 million, the fair value of the Swap as of the date of termination.
The following table provides the effective interest rate of the Company’s outstanding long-term debt at September 30, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Effective Interest Rate
|
|
Amount
|
|
Effective Interest Rate
|
|
Amount
|
Senior Notes
|
7.92%
|
|
$
|
600,000
|
|
|
8.00%
|
|
$
|
400,000
|
|
Unamortized premiums and debt issuance costs
|
|
|
(7,893)
|
|
|
|
|
(5,555)
|
|
Long-term debt
|
|
|
$
|
592,107
|
|
|
|
|
$
|
394,445
|
|
Reconciliation of Non-GAAP Financial Measures
GAAP or U.S. GAAP refer to generally accepted accounting principles in the United States. From time to time we may publicly disclose certain "non-GAAP" financial measures in the course of our investor presentations, earnings releases, earnings conference calls or other venues. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented.
Non-GAAP financial measures are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These measures are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The tables below reconcile the most directly comparable GAAP financial measures to Earnings before Interest, Income Taxes, Depreciation and Amortization ("EBITDA"), Adjusted EBITDA, and Cash Flow Available for Distribution and Reinvestment ("CAD").
Reconciliation of Net income (Loss) to EBITDA and Adjusted EBITDA
EBITDA – EBITDA is calculated as net income (loss) before interest expense, income tax expense (benefit), depreciation expense and amortization expense. Amortization expenses consist of amortization of intangibles and debt charges, including debt issuance costs, discounts, etc.
Adjusted EBITDA – Adjusted EBITDA is calculated utilizing the same calculation as described above in arriving at EBITDA further adjusted by: (i) noncontrolling stockholder compensation, which generally consists of non-cash stock option expense; (ii) successful acquisition costs, which consist of transaction costs (legal, accounting, due diligence, etc.) incurred in connection with the successful acquisition of a business expensed during the period in compliance with ASC 805; (iii) management fees, which reflect fees due quarterly to our Manager in connection with our MSA, as well as Integration Services Fees paid by newly acquired companies; (iv) impairment charges, which reflect write downs to goodwill or other intangible assets; (v) foreign currency transaction gains or losses incurred in connection with the conversion of intercompany debt from a foreign functional currency to U.S. dollar and (vi) items of other income or expense that are material to a subsidiary and non-recurring in nature.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors and reflect important financial measures as they exclude the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near term operations. When compared to net income (loss) these financial measures are limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated with impairments. This presentation also allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition.
We believe that these measurements are also useful in measuring our ability to service debt and other payment obligations. EBITDA and Adjusted EBITDA are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss), which we consider to be the most comparable GAAP financial measure (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
Nine months ended September 30, 2020
|
|
Corporate
|
|
5.11
|
|
Ergobaby
|
|
Liberty
|
|
Marucci Sports
|
|
Velocity Outdoor
|
|
ACI
|
|
Arnold
|
|
Foam
|
|
Sterno
|
|
Consolidated
|
Net income (loss)
|
$
|
(10,535)
|
|
|
$
|
5,515
|
|
|
$
|
1,837
|
|
|
$
|
7,119
|
|
|
$
|
(5,344)
|
|
|
$
|
4,245
|
|
|
$
|
10,980
|
|
|
$
|
(1,719)
|
|
|
$
|
4,188
|
|
|
$
|
2,131
|
|
|
$
|
18,417
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
—
|
|
|
(55)
|
|
|
2,265
|
|
|
2,357
|
|
|
(2,351)
|
|
|
1,386
|
|
|
2,878
|
|
|
(56)
|
|
|
1,891
|
|
|
162
|
|
|
8,477
|
|
Interest expense, net
|
31,971
|
|
|
43
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
102
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,122
|
|
Intercompany interest
|
(51,429)
|
|
|
10,770
|
|
|
1,818
|
|
|
2,748
|
|
|
1,194
|
|
|
6,945
|
|
|
4,176
|
|
|
4,300
|
|
|
5,290
|
|
|
14,188
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
467
|
|
|
16,033
|
|
|
6,152
|
|
|
1,294
|
|
|
8,031
|
|
|
9,651
|
|
|
1,980
|
|
|
5,040
|
|
|
9,473
|
|
|
17,251
|
|
|
75,372
|
|
EBITDA
|
(29,526)
|
|
|
32,306
|
|
|
12,072
|
|
|
13,518
|
|
|
1,536
|
|
|
22,329
|
|
|
20,014
|
|
|
7,565
|
|
|
20,842
|
|
|
33,732
|
|
|
134,388
|
|
Gain on sale of business
|
(100)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(100)
|
|
Other (income) expense
|
3
|
|
|
1,398
|
|
|
—
|
|
|
(4)
|
|
|
(46)
|
|
|
1,048
|
|
|
126
|
|
|
(1)
|
|
|
(438)
|
|
|
86
|
|
|
2,172
|
|
Noncontrolling shareholder compensation
|
—
|
|
|
1,870
|
|
|
748
|
|
|
22
|
|
|
361
|
|
|
1,287
|
|
|
372
|
|
|
34
|
|
|
771
|
|
|
651
|
|
|
6,116
|
|
Acquisition expenses and other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,042
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
273
|
|
|
—
|
|
|
2,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration services fee
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
500
|
|
Other
|
—
|
|
|
—
|
|
|
598
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
598
|
|
Management fees
|
19,651
|
|
|
750
|
|
|
375
|
|
|
375
|
|
|
222
|
|
|
375
|
|
|
375
|
|
|
375
|
|
|
563
|
|
|
375
|
|
|
23,436
|
|
Adjusted EBITDA
|
$
|
(9,972)
|
|
|
$
|
36,324
|
|
|
$
|
13,793
|
|
|
$
|
13,911
|
|
|
$
|
4,615
|
|
|
$
|
25,039
|
|
|
$
|
20,887
|
|
|
$
|
7,973
|
|
|
$
|
22,011
|
|
|
$
|
34,844
|
|
|
$
|
169,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
Nine months ended September 30, 2019
|
|
Corporate
|
|
5.11
|
|
Ergobaby
|
|
Liberty
|
|
Marucci Sports
|
|
Velocity Outdoor
|
|
ACI
|
|
Arnold
|
|
Foam
|
|
Sterno
|
|
Consolidated
|
Net income (loss) (1)
|
$
|
292,440
|
|
|
$
|
(1,071)
|
|
|
$
|
4,251
|
|
|
$
|
1,404
|
|
|
|
|
$
|
(35,242)
|
|
|
$
|
11,035
|
|
|
$
|
(132)
|
|
|
$
|
3,383
|
|
|
$
|
8,819
|
|
|
$
|
284,887
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
—
|
|
|
742
|
|
|
2,248
|
|
|
1,058
|
|
|
|
|
(2,198)
|
|
|
2,934
|
|
|
1,679
|
|
|
1,492
|
|
|
2,420
|
|
|
10,375
|
|
Interest expense, net
|
48,247
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
|
|
173
|
|
|
(1)
|
|
|
(1)
|
|
|
—
|
|
|
4
|
|
|
48,424
|
|
Intercompany interest
|
(61,609)
|
|
|
13,500
|
|
|
2,640
|
|
|
3,278
|
|
|
Not Applicable
|
|
8,484
|
|
|
5,029
|
|
|
4,777
|
|
|
6,675
|
|
|
17,226
|
|
|
—
|
|
Loss on debt extinguishment
|
5,038
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,038
|
|
Depreciation and amortization
|
1,333
|
|
|
16,037
|
|
|
6,566
|
|
|
1,248
|
|
|
|
9,937
|
|
|
1,830
|
|
|
4,883
|
|
|
9,258
|
|
|
16,793
|
|
|
67,885
|
|
EBITDA
|
285,449
|
|
|
29,210
|
|
|
15,705
|
|
|
6,988
|
|
|
|
(18,846)
|
|
|
20,827
|
|
|
11,206
|
|
|
20,808
|
|
|
45,262
|
|
|
416,609
|
|
Gain on sale of businesses
|
(330,203)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
(330,203)
|
|
Other (income) expense
|
91
|
|
|
(92)
|
|
|
(11)
|
|
|
10
|
|
|
|
|
968
|
|
|
(22)
|
|
|
(3)
|
|
|
256
|
|
|
16
|
|
|
1,213
|
|
Noncontrolling shareholder compensation
|
—
|
|
|
1,742
|
|
|
620
|
|
|
(15)
|
|
|
|
|
86
|
|
|
167
|
|
|
32
|
|
|
767
|
|
|
866
|
|
|
4,265
|
|
Impairment expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
33,381
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,381
|
|
Loss on sale of investment
|
10,193
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,193
|
|
Integration services fee
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
281
|
|
|
—
|
|
|
281
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
266
|
|
|
|
|
—
|
|
|
58
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
324
|
|
Management fees
|
24,789
|
|
|
750
|
|
|
375
|
|
|
375
|
|
|
|
|
375
|
|
|
375
|
|
|
375
|
|
|
563
|
|
|
375
|
|
|
28,352
|
|
Adjusted EBITDA
|
$
|
(9,681)
|
|
|
$
|
31,610
|
|
|
$
|
16,689
|
|
|
$
|
7,624
|
|
|
|
|
$
|
15,964
|
|
|
$
|
21,405
|
|
|
$
|
11,610
|
|
|
$
|
22,675
|
|
|
$
|
46,519
|
|
|
$
|
164,415
|
|
(1) Net income (loss) does not include loss from discontinued operations for the nine months ended September 30, 2019.
Reconciliation of Cash Flow Available for Distribution and Reinvestment
The table below details cash receipts and payments that are not reflected on our income statement in order to provide an additional measure of management's estimate of cash flow available for distribution ("CAD"). CAD is a non-GAAP measure that we believe provides additional, useful information to our shareholders in order to enable them to evaluate our ability to make anticipated quarterly distributions. CAD is not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The following table reconciles CAD to net income (loss) and cash flows provided by operating activities, which we consider to be the most directly comparable financial measure calculated and presented in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
(in thousands)
|
September 30, 2020
|
|
September 30, 2019
|
Net income
|
$
|
18,417
|
|
|
$
|
301,788
|
|
Adjustment to reconcile net income to cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
73,578
|
|
|
78,413
|
|
Impairment expense
|
—
|
|
|
33,381
|
|
Gain on sale of businesses
|
(100)
|
|
|
(330,203)
|
|
Amortization of debt issuance costs, discount and premium
|
1,656
|
|
|
3,022
|
|
Unrealized loss on interest rate hedge
|
—
|
|
|
3,486
|
|
Noncontrolling shareholder charges
|
6,116
|
|
|
6,204
|
|
Provision for loss on receivables
|
4,374
|
|
|
2,786
|
|
Deferred taxes
|
(3,352)
|
|
|
(14,538)
|
|
Other
|
1,776
|
|
|
5,961
|
|
Changes in operating assets and liabilities
|
10,407
|
|
|
(58,716)
|
|
Net cash provided by operating activities
|
112,872
|
|
|
31,584
|
|
Plus:
|
|
|
|
Unused fee on revolving credit facility
|
1,148
|
|
|
1,393
|
|
Integration services fee (1)
|
500
|
|
|
281
|
|
Successful acquisition costs
|
2,315
|
|
|
596
|
|
Realized loss from foreign currency (2)
|
—
|
|
|
363
|
|
Loss on sale of Tilray Common Stock
|
—
|
|
|
10,193
|
|
Changes in operating assets and liabilities
|
—
|
|
|
58,716
|
|
|
|
|
|
Less:
|
|
|
|
Payment of interest rate swap
|
—
|
|
|
675
|
|
Changes in operating assets and liabilities
|
10,407
|
|
|
—
|
|
Maintenance capital expenditures: (3)
|
|
|
|
Compass Group Diversified Holdings LLC
|
—
|
|
|
—
|
|
5.11
|
897
|
|
|
1,547
|
|
Advanced Circuits
|
354
|
|
|
1,126
|
|
Arnold
|
2,761
|
|
|
2,874
|
|
Clean Earth
|
—
|
|
|
3,495
|
|
Ergobaby
|
374
|
|
|
583
|
|
Foam Fabricators
|
1,518
|
|
|
1,387
|
|
Liberty
|
438
|
|
|
720
|
|
Marucci Sports
|
220
|
|
|
—
|
|
Sterno
|
1,061
|
|
|
932
|
|
Velocity Outdoor
|
2,743
|
|
|
2,096
|
|
Other
|
3,776
|
|
|
2,301
|
|
Preferred share distribution
|
17,633
|
|
|
11,344
|
|
Estimated cash flow available for distribution and reinvestment
|
$
|
74,653
|
|
|
$
|
74,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution paid in April 2020/2019
|
$
|
(21,564)
|
|
|
$
|
(21,564)
|
|
Distribution paid in July 2020/2019
|
(23,364)
|
|
|
(21,564)
|
|
Distribution paid in October 2020/2019
|
(23,364)
|
|
|
(21,564)
|
|
|
$
|
(68,292)
|
|
|
$
|
(64,692)
|
|
(1) Represents fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership, payable quarterly.
(2) Reflects the foreign currency transaction gain or loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest.
(3) Represents maintenance capital expenditures that were funded from operating cash flow, net of proceeds from the sale of property, plant and equipment, and excludes growth capital expenditures of approximately $9.7 million for the nine months ended September 30, 2020 and $10.7 million for the nine months ended September 30, 2019.
Seasonality
Earnings of certain of our operating segments are seasonal in nature due to various recurring events, holidays and seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and fourth quarter produce the highest net sales during our fiscal year.
Related Party Transactions
Management Services Agreement
We entered into 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 C - Discontinued Operations), CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the quarter during which the Company next borrowed 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 agreed to waive 50% of the management fee calculated at June 30, 2020 that was paid in July 2020. Further, for the third quarter of 2020, 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 September 30, 2020.
Integrations Services Agreements
Marucci Sports, which was acquired in April 2020, 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. CGM will receive integration service fees of $2.0 million payable quarterly over a twelve month period as services are rendered beginning in the quarter ended September 30, 2020. Foam Fabricators, which was acquired in 2018, entered into an ISA with CGM. 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.
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, 2020, 5.11 purchased approximately $0.7 million and $2.3 million, respectively, in inventory from the vendor.
Profit Allocation Payments
October 2019 represented the five-year anniversary of the Company's acquisition of Sterno, which qualified as a Holding Event under the Company's LLC Agreement (the "Sterno Holding Event"). During the first quarter of 2020, the Company declared and paid a distribution of $9.1 million to the Allocation Member related to the Sterno Holding
Event. The ten-year anniversary of Liberty occurred in March 2020 which represented a Holding Event. The holders of the Allocation Interests elected to defer the distribution of $3.3 million until after the end of 2020. The ten-year anniversary of Ergo occurred in September 2020 which represented a Holding Event. The Holders elected to defer the distribution of $2.0 million until after the end of 2020.
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.
Off-Balance Sheet Arrangements
We have no special purpose entities or off-balance sheet arrangements.
Contractual Obligations
Long-term contractual obligations, except for our long-term debt obligations and operating lease liabilities, are generally not recognized in our consolidated balance sheet. Non-cancelable purchase obligations are obligations we incur during the normal course of business, based on projected needs.
The table below summarizes the payment schedule of our contractual obligations at September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Total
|
|
Less than 1
Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
Long-term debt obligations (1)
|
$
|
865,233
|
|
|
$
|
24,000
|
|
|
$
|
96,000
|
|
|
$
|
97,233
|
|
|
$
|
648,000
|
|
Operating lease obligations (2)
|
133,114
|
|
|
4,841
|
|
|
52,393
|
|
|
32,424
|
|
|
43,456
|
|
Purchase obligations (3)
|
767,926
|
|
|
192,371
|
|
|
288,114
|
|
|
287,441
|
|
|
—
|
|
Total (4)
|
$
|
1,766,273
|
|
|
$
|
221,212
|
|
|
$
|
436,507
|
|
|
$
|
417,098
|
|
|
$
|
691,456
|
|
(1)Reflects amounts due under our 2018 Credit Facility, as well as our Senior Notes, together with interest on our debt obligations.
(2)Reflects various operating leases for office space, manufacturing facilities and equipment from third parties with various lease terms.
(3)Reflects non-cancelable commitments as of September 30, 2020, including: (i) shareholder distributions of $110.4 million; (ii) estimated management fees of $30.9 million per year over the next five years; and (iii) other obligations including amounts due under employment agreements. Distributions to our shareholders are approved by our board of directors each quarter. The amount ultimately approved as future quarterly distributions may differ from the amount included in this schedule.
(4)The contractual obligation table does not include approximately $1.1 million in liabilities associated with unrecognized tax benefits as of September 30, 2020 as the timing of the recognition of this liability is not certain. The amount of the liability is not expected to significantly change in the next twelve months.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates under different assumptions and judgments and uncertainties, and potentially could result in materially different results under different conditions. These critical accounting policies and estimates are reviewed periodically by our independent auditors and the audit committee of our board of directors.
Except as set forth below, our critical accounting estimates have not changed materially from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K, for the year ended December 31, 2019, as filed with the Securities and Exchange Commission ("SEC") on February 26, 2020.
Goodwill and Indefinite-lived Intangible Asset Impairment Testing
Goodwill
Goodwill represents the excess amount of the purchase price over the fair value of the assets acquired. Our goodwill and indefinite lived intangible assets are tested for impairment on an annual basis as of March 31st, and if current events or circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which are generally an operating segment or one level below the operating segment. Each of our businesses represents a reporting unit.
We use a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment testing. The qualitative factors we consider include, in part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts, as well as issues or events specific to the reporting unit. If qualitative factors are not sufficient to determine that the fair value of a reporting unit is more likely than not to exceed its carrying value, we will perform a quantitative test of the reporting unit whereby we estimate the fair value of the reporting unit using an income approach or market approach, or a weighting of the two methods. Under the income approach, we estimate the fair value of our reporting unit based on the present value of future cash flows. Cash flow projections are based on management's estimate of revenue growth rates and operating margins and take into consideration industry and market conditions as well as company specific economic factors. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. Under the market approach, we estimate fair value based on market multiples of revenue and earnings derived from comparable public companies with operating characteristics that are similar to the reporting unit. When market comparables are not meaningful or available, we estimate the fair value of the reporting unit using only the income approach.
2020 Annual Impairment Testing - For our annual impairment testing at March 31, 2020, we performed a qualitative assessment of our reporting units. As part of our current year analysis, we have considered how we expect the COVID-19 pandemic to impact our future operating results and short and long-term financial condition. In addition to the typical qualitative factors we consider as part of the assessment, we went through a process with each of our reporting units whereby we considered various scenarios for the remainder of the year, probability weighted for what we consider the most likely outcome given existing facts and circumstances. This process included consideration of the reporting unit's industry and customers, including customer liquidity, operational capacity given local government restrictions imposed to prevent spread of the COVID-19 virus, supply chain constraints that may exist as a result of the virus and ability of the subsidiary to reduce cash outflows. The results of the qualitative analysis indicated that it was more-likely-than-not that the fair value of our 5.11, ACI, Arnold, Liberty and Sterno reporting units exceeded their carrying value. Based on our analysis, we determined that our Ergobaby, Foam Fabricators and Velocity operating segments required quantitative testing because we could not conclude that the fair value of these reporting units significantly exceeded the carrying value based on qualitative factors alone.
We performed the quantitative tests of Ergobaby, Foam Fabricators and Velocity using an income approach to determine the fair value of the reporting units. We were unable to use a market approach due to the current market conditions as a result of the COVID-19 pandemic resulting in significant volatility and lack of available market comparables. In developing the prospective financial information used in the income approach, we considered recent market conditions, taking into consideration the uncertainty associated with the COVID-19 pandemic and its economic fallout. The prospective financial information considers reporting unit specific facts and circumstances and is our best estimate of operational results and cash flows for each reporting unit as of the date of our impairment testing. 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%. The impairment test for Velocity used a discount rate of 12.8% in the income approach, 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%. The prospective financial information that is used to determine the fair values of the reporting units requires us to make assumptions regarding future operational results including revenue
growth rates and gross margins. If we do not achieve the forecasted revenue growth rates and gross margins, the results of the quantitative testing could change, potentially leading to additional testing and impairment at the reporting units that were tested quantitatively.
2019 Interim Impairment Testing - As a result of operating results below forecasts as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods, we determined that a triggering event had occurred at Velocity Outdoor in the third quarter of 2019. We performed goodwill impairment testing at Velocity as of September 30, 2019. For the quantitative impairment test at Velocity, we utilized an income approach. 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. We 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 is 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 during the year ended December 31, 2019.
2019 Annual Impairment Testing - For our annual impairment testing at March 31, 2019, we determined that our Liberty operating segment required quantitative testing because we could not conclude that the fair value of Liberty significantly exceeded its carrying value based on qualitative factors alone. We concluded the goodwill impairment testing during the quarter ended June 30, 2019. The results of the quantitative impairment testing of the Liberty reporting unit indicated that the fair value of the Liberty reporting unit exceeded the carrying value by 135%. All of our other reporting units were tested qualitatively as of March 31, 2019, and the results of the qualitative analysis indicated that the fair value exceeded their carrying value.
For the reporting units that were tested qualitatively for the 2019 annual impairment testing, the results of the qualitative analysis indicated that it was more-likely-than-not that the fair value exceeded their carrying value.
Indefinite-lived intangible assets
We use a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. Our indefinite-lived intangible assets consist of trade names with a carrying value of approximately $60.0 million. The results of the qualitative analysis of our reporting unit's indefinite-lived intangible assets, which we completed as of March 31, 2020 and 2019, indicated that the fair value of the indefinite lived intangible assets exceeded their 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.
Revenue from Contracts with Customers
The Company recognizes revenue in accordance with the provisions of Revenue from Contracts with Customers, or ASC 606. The revenue standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In addition, the standard requires disclosure of the amount, timing and uncertainty of cash flows arising from contracts with customers.
Revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities. The Company’s contracts with customers often include promises to transfer multiple products to a customer. Determining whether the promises are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once the performance obligations are identified, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The corresponding revenues are recognized as the related performance obligations are satisfied as discussed above. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately and therefore observable.
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 remains consistent with previous guidance. These incentives are recorded as a reduction in the transaction price. Under the revenue standard guidance, variable consideration is estimated and included in total consideration at contract inception based on either the expected value method or the most likely outcome method. The method was applied consistently among each type of variable consideration and the Company applies the expected value method to estimate variable consideration. These estimates are based on historical experience, anticipated performance and the Company’s best judgment at the time and as a result, reflect applicable constraints. The Company includes in the transaction price an amount of variable consideration estimated in accordance with the new guidance only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Business Combinations
The acquisitions of our businesses are accounted for under the acquisition method of accounting. Accounting for business combinations requires the use of estimates and assumptions in determining the fair value of assets acquired and liabilities assumed in order to allocate the purchase price. The estimates of fair value of the assets acquired and liabilities assumed are based upon assumptions believed to be reasonable using established valuation methods, taking into consideration information supplied by the management of the acquired entities and other relevant information. The determination of fair values requires significant judgment both by our management team and, when appropriate, valuations by independent third-party appraisers. We amortize intangible assets, such as trademarks and customer relationships, as well as property, plant and equipment, over their economic useful lives, unless those lives are indefinite. We consider factors such as historical information, our plans for the asset and similar assets held by our previously acquired portfolio companies. The impact could result in either higher or lower amortization and/or depreciation expense.
Recent Accounting Pronouncements