|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
(in thousands)
|
|
|
|
|
|
|
|
Net sales
|
$
|
323,957
|
|
|
$
|
252,285
|
|
|
$
|
921,330
|
|
|
$
|
659,748
|
|
Cost of sales
|
206,232
|
|
|
169,870
|
|
|
599,552
|
|
|
436,544
|
|
Gross profit
|
117,725
|
|
|
82,415
|
|
|
321,778
|
|
|
223,204
|
|
Selling, general and administrative expense
|
80,804
|
|
|
53,648
|
|
|
239,102
|
|
|
140,702
|
|
Fees to manager
|
8,277
|
|
|
8,435
|
|
|
24,308
|
|
|
21,394
|
|
Amortization of intangibles
|
14,167
|
|
|
8,423
|
|
|
39,256
|
|
|
23,966
|
|
Impairment expense
|
—
|
|
|
—
|
|
|
8,864
|
|
|
—
|
|
Loss on disposal of assets
|
—
|
|
|
551
|
|
|
—
|
|
|
7,214
|
|
Operating income
|
$
|
14,477
|
|
|
$
|
11,358
|
|
|
$
|
10,248
|
|
|
$
|
29,928
|
|
Three months ended
September 30, 2017
compared to three months ended
September 30, 2016
Net sales
On a consolidated basis, net sales for the three months ended
September 30, 2017
increased by approximately
$71.7 million
, or
28.4%
, compared to the corresponding period in 2016. Our acquisition of 5.11 Tactical on August 31, 2016 contributed $44.8 million to the increase in net sales, while our acquisition of Crosman on June 2, 2017 contributed $34.4 million. During the three months ended
September 30, 2017
compared to 2016, we also saw a notable sales increase at Clean Earth (
$4.2 million
, primarily due to two acquisitions in 2016 and one acquisition in 2017), partially offset by a decrease in sales at our Liberty (
$5.4 million
decrease), Ergobaby (
$1.8 million
decrease), Manitoba Harvest (
$2.0 million
decrease) and Sterno (
$2.9 million
decrease) subsidiaries. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of net sales 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 sales
On a consolidated basis, cost of sales increased approximately
$36.4 million
during the three month period ended September 30, 2017, compared to the corresponding period in 2016. 5.11 Tactical accounted for $17.2 million of the increase, while our Crosman acquisition accounted for $29.0 million of the increase in cost of sales during the three months ended September 30, 2017. Clean Earth accounted for $2.9 million of the increase due to acquisitions in the prior and current year. These increases were offset by decreases in cost of sales at other operating segments, particularly Ergobaby (
$4.8 million
), Liberty (
$4.7 million
) and Arnold (
$1.4 million
). Gross profit as a percentage of sales was approximately
36.3%
in the three months ended
September 30, 2017
compared to
32.7%
in the three months ended September 30, 2016. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of cost of sales by business segment.
Selling, general and administrative expense
On a consolidated basis, selling, general and administrative expense increased approximately
$27.2 million
during the three month period ended
September 30, 2017
, compared to the corresponding period in 2016. The increase in selling, general and administrative expense in the 2017 quarter compared to 2016 is principally the result of the 5.11 Tactical acquisition in August 2016 ($23.6 million) and Crosman in June 2017 ($5.1 million, including $0.3 million in transaction costs incurred for acquisition costs during the quarter). Refer to "Results of Operations - Our Businesses" for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, general and administrative expense was
$2.8 million
in the third quarter of 2017 and
$2.7 million
in the third quarter of 2016.
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, 2017
, we incurred approximately
$8.3 million
in management fees as compared to
$8.4 million
in fees in the three months ended September 30, 2016.
Amortization expense
Amortization expense for the three months ended September 30, 2017 increased
$5.7 million
as compared to the three months ended September 30, 2016 primarily as a result of the acquisitions of 5.11 in August 2016 and Crosman in June 2017.
Loss on disposal of assets
Ergobaby recorded a
$0.6 million
loss on disposal of assets during the third quarter of 2016 related to its decision to dispose of the Orbit Baby product line. Refer to the Ergobaby section under "Results of Operations - Our Businesses" for additional details regarding the loss on disposal.
Nine months ended
September 30, 2017
compared to nine months ended
September 30, 2016
Net sales
On a consolidated basis, net sales for the nine months ended
September 30, 2017
increased by approximately
$261.6 million
, or
39.6%
, compared to the corresponding period in 2016. Our acquisition of 5.11 in August 2016 contributed $201.3 million to the increase in net sales and our acquisition of Crosman in June 2016 contributed $44.2 million to the increase. During the nine months ended
September 30, 2017
compared to 2016, we also saw notable sales increases at Ergobaby (
$2.7 million
, primarily due to the acquisition of Baby Tula), Clean Earth (
$19.3 million
, primarily due to two acquisitions in 2016 and one in 2017) and Sterno (
$6.4 million
, primarily due to the acquisition of Sterno Home
Inc. ("Sterno Home", formerly Northern International, Inc.)
in January 2016), offset by decreases in sales at Liberty (
$8.7 million
) and Arnold Magnetics (
$3.4 million
). Refer to "Results of Operations - Our Businesses" for a more detailed analysis of net sales 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 sales
On a consolidated basis, cost of sales increased approximately
$163.0 million
during the nine month period ended
September 30, 2017
, compared to the corresponding period in 2016. 5.11 accounted for $121.4 million of the increase in cost of sales, including $21.7 in expense related to the amortization of the inventory step-up resulting from purchase accounting during the nine months ended
September 30, 2017
, while our Crosman acquisition accounted for $36.3 million of the increase. Clean Earth accounted for
$14.7 million
of the increase due to acquisitions in the prior and current year, and Sterno accounted for
$6.3 million
of the increase. These increases were offset by decreases in cost of sales at other operating segments, particularly Liberty (
$6.0 million
) and Arnold (
$5.0 million
). Gross profit as a percentage of sales was approximately
34.9%
in the nine months ended
September 30, 2017
compared to
33.8%
in the nine months ended September 30, 2016. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of cost of sales by business segment.
Selling, general and administrative expense
On a consolidated basis, selling, general and administrative expense increased approximately
$98.4 million
during the nine month period ended
September 30, 2017
, compared to the corresponding period in 2016. The increase in selling, general and administrative expense in 2017 compared to 2016 is principally the result of the 5.11 acquisition in August 2016 ($85.3 million), and Crosman in June 2017 ($7.7 million, including $1.8 million in acquisition related expenses). We also saw an increase in selling general and administrative expense for the nine months ended September 30, 2017 at Clean Earth (
$2.9 million
due to acquisitions in the current and prior year), and an increase in selling, general and administrative expense at Ergobaby and Liberty due to the effect of bankruptcy filings by two major retailers during 2017. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, general and administrative expense increased from
$8.6 million
in the nine months ended September 30, 2016 to
$9.0 million
in the nine months ended
September 30, 2017
.
Fees to manager
Pursuant to the MSA, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the nine months ended
September 30, 2017
, we incurred approximately
$24.3 million
in expense for these fees compared to
$21.4 million
for the corresponding period in 2016. The increase in the management fees that occurred is primarily due to the increase in consolidated net assets resulting from the acquisition of 5.11 in August 2016, and the acquisition of Crosman in June 2017.
Amortization expense
Amortization expense for the nine months ended
September 30, 2017
increased
$15.3 million
as compared to the nine months ended September 30, 2016 as a result of the acquisition of 5.11 in August 2016 and Crosman in June 2017.
Impairment expense
Arnold performed an interim impairment test at each of its reporting units in the fourth quarter of 2016, which resulted in the recording of preliminary impairment expense of the PMAG reporting unit of $16.0 million. In the first quarter of 2017, Arnold completed the impairment testing of the PMAG reporting unit and recorded an additional
$8.9 million
impairment expense based on the results of the Step 2 impairment testing.
Loss on disposal of assets
Ergobaby recorded a
$7.2 million
loss on disposal of assets during 2016 related to its decision to dispose of the Orbitbaby product line. Refer to the Ergobaby section under "Results of Operations - Our Businesses" for additional details regarding the loss on disposal.
Results of Operations - Our Businesses
The following discussion reflects a comparison of the historical results of operations of each of our businesses for the three and nine month periods ending
September 30, 2017
and
September 30, 2016
on a stand-alone basis. For the 2017 acquisition of Crosman, the following discussion reflects pro forma results of operations for the three and nine months ended
September 30, 2017
and 2016 as if we had acquired Crosman January 1, 2016. For the 2016 acquisition of 5.11, the following discussion reflects pro forma results of operations for the three and nine months ended September 30, 2016 as if we had acquired 5.11 on January 1, 2016. Where appropriate, relevant pro forma adjustments are reflected as part of the historical operating results. We believe this is the most meaningful comparison of the operating results for each of our business segments. The following results of operations at each of our businesses are not necessarily indicative of the results to be expected for a full year.
Branded Consumer Businesses
5.11 Tactical
Overview
5.11 is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. 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.
We made loans to, and purchased a controlling interest in, 5.11 for a net purchase price of
$408.2 million
in August 2016, representing approximately 97.5% of the initial outstanding equity of 5.11 ABR Corp.
Results of Operations
In the following results of operations, we provide (i) the actual consolidated results of operations for 5.11 for the three and nine months ended September 30, 2017, and (ii) comparative results of operations for 5.11 for the three and nine months ended September 30, 2016, as if we had acquired the business on January 1, 2016, including relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(in thousands)
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
|
|
|
(Pro forma)
|
|
|
|
(Pro forma)
|
Net sales
|
$
|
72,005
|
|
|
$
|
74,655
|
|
|
$
|
228,471
|
|
|
$
|
212,667
|
|
Cost of sales
(1)
|
37,452
|
|
|
46,797
|
|
|
141,590
|
|
|
123,857
|
|
Gross profit
|
34,553
|
|
|
27,858
|
|
|
86,881
|
|
|
88,810
|
|
Selling, general and administrative expense
(2)
|
32,370
|
|
|
25,954
|
|
|
94,000
|
|
|
78,998
|
|
Fees to manager
(3)
|
250
|
|
|
250
|
|
|
750
|
|
|
750
|
|
Amortization of intangibles
(4)
|
2,186
|
|
|
2,047
|
|
|
6,673
|
|
|
6,140
|
|
Income (loss) from operations
|
$
|
(253
|
)
|
|
$
|
(393
|
)
|
|
$
|
(14,542
|
)
|
|
$
|
2,922
|
|
Pro forma results of operations of 5.11 Tactical for the three and nine months ended September 30, 2016 include the following pro forma adjustments, applied to historical results as if we had acquired 5.11 on January 1, 2016:
(1)
Cost of sales was decreased by $0.02 million and $0.08 million, respectively, for the three and nine months ended September 30, 2016 to reflect the increase in the depreciable lives for machinery and equipment.
(2)
Selling, general and administrative expense was decreased by approximately $0.5 million and $2.3 million, respectively, for the three and nine months ended September 30, 2016 to reflect the increase in the depreciable lives for property, plant and equipment. Selling, general and administrative expense was increased by approximately $0.4 and $0.9 million in the three and nine months ended September 30, 2016, respectively, as a result of stock compensation expense related to stock options that were granted to 5.11 employees as a result of the acquisition.
(3)
Represents management fees that would have been payable to the Manager in the nine months ending September 30, 2016.
(4)
Represents amortization of intangible assets in the three and nine month period ended September 30, 2016 for amortization expense associated with the allocation of the fair value of intangible assets resulting from the purchase price allocation in connection with our acquisition.
Three months ended
September 30, 2017
compared to the pro forma three months ended
September 30, 2016
Net sales
Net sales for the three months ended
September 30, 2017
were
$72.0 million
as compared to net sales of
$74.7 million
for the three months ended September 30, 2016, a decrease of
$2.7 million
, or
3.5%
. This decrease is due primarily to a $3.8 million decrease in international direct-to-agency business. Direct-to-agency sales represent large non-recurring contracts consisting primarily of special-make-up ("SMU") uniform product designed for large law enforcement divisions. Retail and e-commerce sales grew $4.3 million or 56%, driven by growing demand in direct to consumer channels. Retail sales grew largely due to sixteen new retail store openings since September 2016 (bringing the total store count to 24 as of September 30, 2017). 5.11 implemented a new Enterprise Resource Planning (ERP) system and as part of the go-live process 5.11 shut down its warehouse as planned on September 28, 2017 to begin the cut-over activities. As a result, 5.11 had less
shipping days during the third quarter of 2017 as compared to the prior year, which resulted in approximately $4 million to $5 million in sales shifting to the fourth quarter of 2017. The warehouse reopened on October 9, 2017, and 5.11 has resumed warehouse and shipping operations.
Cost of sales
Cost of sales for the three months ended
September 30, 2017
were
$37.5 million
as compared to
$46.8 million
for the comparable period in 2016, a decrease of
$9.3 million
. Gross profit as a percentage of sales was
48.0%
in the three months ended
September 30, 2017
as compared to
37.3%
in the three months ended
September 30, 2016
. Cost of sales for the three months ended September 30, 2016 includes $4.7 million in expense related to a $39.1 million inventory step-up resulting from the acquisition purchase price allocation. The total inventory step-up amount of $39.1 million was expensed to cost of goods sold over the expected turns of 5.11's inventory. The increase in gross profit percentage is due to lower product costs from efficiency in sourcing operations, improved gross margins on new product introductions, and a larger proportion of revenues from the higher margin retail and e-commerce distribution channels as compared to the same period in 2016.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended
September 30, 2017
was
$32.4 million
, or
45.0%
, of net sales compared to
$26.0 million
, or
34.8%
of net sales for the comparable period in 2016. This increase in selling, general and administrative expense was primarily due to sixteen new retail stores that were not open in the prior comparable period, strategic investments into sales and marketing, and integration service fees billed by CGM to 5.11.
Loss from operations
Loss from operations for the three months ended
September 30, 2017
was
$0.3 million
, an increase of
$0.1 million
when compared to loss from operations of
$0.4 million
for the same period in 2016, based on the factors described above.
Nine months ended
September 30, 2017
compared to the pro forma nine months ended
September 30, 2016
Net sales
Net sales for the nine months ended
September 30, 2017
were
$228.5 million
as compared to net sales of
$212.7 million
for the nine months ended September 30, 2016, an increase of
$15.8 million
, or
7.4%
. This increase is due primarily to an $8.7 million increase in international direct-to-agency business, and increased retail and e-commerce sales. Direct-to-agency sales represent large non-recurring contracts consisting primarily of SMU uniform product designed for large law enforcement divisions. Retail and e-commerce sales grew $10.7 million, or 45%, driven by growing demand in direct to consumer channels. Retail sales grew largely due to sixteen new retail store openings since September 2016 (bringing the total store count to 24 as of September 30, 2017). The consumer wholesale channel experienced a $4.2 million decrease due primarily to the bankruptcy of a large outdoor retail customer.
5.11 implemented a new Enterprise Resource Planning (ERP) system and as part of the go-live process 5.11 shut down its warehouse as planned on September 28, 2017 to begin the cut-over activities. As a result, 5.11 had less shipping days during the third quarter of 2017 as compared to the prior year, which resulted in approximately $4 million to $5 million in sales shifting to the fourth quarter of 2017. The warehouse reopened on October 9, 2017, and 5.11 has resumed warehouse and shipping operations.
Cost of sales
Cost of sales for the nine months ended
September 30, 2017
were
$141.6 million
as compared to
$123.9 million
for the comparable period in 2016, an increase of
$17.7 million
. Gross profit as a percentage of sales was
38.0%
in the nine months ended
September 30, 2017
as compared to
41.8%
in the nine months ended September 30, 2016. Cost of sales for the nine months ended
September 30, 2017
includes $21.7 million in expense related to a $39.1 million inventory step-up resulting from the acquisition purchase price allocation while the nine months ended September 30, 2016 included $4.7 million in expense related to the inventory step-up resulting from the acquisition purchase price allocation, an increase of $17 million year-over-year. The total inventory step-up amount of $39.1 million was expensed to cost of goods sold over the expected turns of 5.11's inventory. Excluding the effect of the expense associated with the inventory step-up in both periods, gross profit as a percentage of sales increased 350 basis points to 47.5% for the nine months ended September 30, 2017 compared to 44.0% for the nine months ended September 30, 2016. This increase in gross profit percentage is due to lower product costs from efficiency in sourcing operations, improved gross margins on new product introductions, and a larger proportion of revenues from the higher margin retail and e-commerce distribution channels as compared to the same period in 2016.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2017 was
$94.0 million
, or
41.1%
of net sales compared to
$79.0 million
, or
37.1%
, of net sales for the comparable period in 2016. This increase in selling, general and administrative expense was primarily due to an accounts receivable reserve for a large outdoor retail customer that filed for bankruptcy,
sixteen new retail stores that were not open in the prior comparable period, strategic investments into sales and marketing, and integration service fees billed by CGM to 5.11.
(Loss) income from operations
Loss from operations for the nine months ended
September 30, 2017
was
$14.5 million
, a decrease of
$17.5 million
when compared to income from operations of
$2.9 million
for the same period in 2016, based on the factors described above.
Crosman
Overview
Crosman, headquartered in Bloomfield, New York, is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Crosman offers its products under the highly recognizable Crosman, Benjamin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. Airguns historically represent Crosman's largest product category, with more than 50% of gross sales. The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Crosman'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, and airsoft products. We made loans to, and purchased a controlling interest in, Crosman for a net purchase price of
$150.4 million
in June 2017, representing approximately 98.9% of the initial outstanding equity of Crosman Corp.
Results of Operations
In the following results of operations, we provide (i) the actual consolidated results of operations for Crosman for the three months ended September 30, 2017, and (ii) comparative results of operations for Crosman for the nine months ended September 30, 2017 and three and nine months ended September 30, 2016, as if we had acquired the business on January 1, 2016, including relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(in thousands)
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
|
|
|
(Pro forma)
|
|
(Pro forma)
|
Net sales
|
$
|
34,449
|
|
|
$
|
32,092
|
|
|
$
|
85,848
|
|
|
$
|
82,945
|
|
Cost of sales
(1)
|
29,034
|
|
|
23,543
|
|
|
67,088
|
|
|
61,012
|
|
Gross profit
|
5,415
|
|
|
8,549
|
|
|
18,760
|
|
|
21,933
|
|
Selling, general and administrative expense
|
5,121
|
|
|
3,780
|
|
|
13,715
|
|
|
11,111
|
|
Fees to manager
(2)
|
125
|
|
|
125
|
|
|
375
|
|
|
375
|
|
Amortization of intangibles
(3)
|
1,557
|
|
|
1,164
|
|
|
3,498
|
|
|
3,493
|
|
Income from operations
|
$
|
(1,388
|
)
|
|
$
|
3,480
|
|
|
$
|
1,172
|
|
|
$
|
6,954
|
|
Pro forma results of operations of Crosman for the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016 include the following pro forma adjustments, applied to historical results as if we had acquired Crosman on January 1, 2016:
(1)
Cost of sales was decreased by $0.2 million for the nine months ended September 30, 2017, and $0.1 million and $0.5 million, respectively, for the three and nine months ended September 30, 2016, to reflect the increase in the depreciable lives for machinery and equipment.
(2)
Represents management fees that would have been payable to the Manager in the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016.
(3)
Represents amortization of intangible assets in the three and nine month period ended September 30, 2017 and 2016 associated with the allocation of the fair value of intangible assets resulting from the purchase price allocation in connection with our acquisition.
Three months ended
September 30, 2017
compared to the pro forma three months ended
September 30, 2016
Net sales
Net sales for the three months ended
September 30, 2017
were
$34.4 million
, an increase of
$2.4 million
or
7.3%
, compared to the same period in 2016. The increase in net sales for the three months ended September 30, 2017 is primarily due to growth in the archery products category and an add-on acquisition during the third quarter of 2017
.
Cost of sales
Cost of sales for the three months ended
September 30, 2017
were
$29.0 million
as compared to
$23.5 million
for the comparable period in 2016, an increase of
$5.5 million
, which is consistent with the net sales increase and also includes $3.2 million in expense related to the inventory step-up resulting from the preliminary purchase price allocation. After excluding the impact of the inventory step-up expense, gross profit as a percentage of sales was 24.9% for the three months ended
September 30, 2017
as compared to
26.6%
in the three months ended
September 30, 2016
due to the mix of products sold during the two periods.
Selling general and administrative expense
Selling, general and administrative expense for the three months ended
September 30, 2017
was
$5.1 million
, or
14.9%
of net sales compared to
$3.8 million
, or
11.8%
of net sales for the three months ended
September 30, 2016
. The selling, general and administrative expense for the three months ended September 30, 2017
includ
es $0.4 million of acquisition related expenses, $0.4 million of integration services fees payable to CGM, $0.2 million of non-recurring consultant fees and increased expenses associated with higher sales
.
(Loss) income from operations
Loss from operations for the three months ended
September 30, 2017
was
$1.4 million
, a decrease of
$4.9 million
when compared to income from operations of
$3.5 million
for the same period in 2016, based on the factors described above.
Pro forma nine months ended
September 30, 2017
compared to the pro forma nine months ended
September 30, 2016
Net sales
Net sales for the nine months ended
September 30, 2017
were
$85.8 million
compared to net sales of
$82.9 million
for the nine months ended
September 30, 2016
, an increase of
$2.9 million
or
3.5%
. The increase in net sales for the nine months ended September 30, 2017 is primarily due to growth in the archery products category
and an add-on acquisition during the third quarter of 2017
.
Cost of sales
Cost of sales for the nine month period ended
September 30, 2017
were
$67.1 million
, an increase of
$6.1 million
as compared to the comparable period in 2016. Cost of sales for the nine months ended September 30, 2017 includes $3.2 million in expense related to the inventory step-up resulting from the preliminary purchase price allocation. Excluding the effect of the inventory step-up, gross profit as a percentage of sales was 25.5% for the nine months ended
September 30, 2017
as compared to
26.4%
for the nine months ended
September 30, 2016
due to the mix of products sold during the two periods.
Selling general and administrative expense
Selling, general and administrative expense for the nine months ended
September 30, 2017
was
$13.7 million
, or
16.0%
of net sales compared to
$11.1 million
, or
13.4%
, for the nine months ended
September 30, 2016
. Selling, general and administrative expense for the nine months ended September 30, 2017 includes $1.8 million in transaction costs paid in relation to the acquisition of Crosman in June 2017 and an add-on acquisition at Crosman completed during the third quarter of 2017, as well as $0.4 million in integration services fees payable to CGM. Excluding the transaction costs and integration services fee from the selling, general and administrative expense, there was no material change in expense items.
Income from operations
Income from operations for the nine months ended
September 30, 2017
was
$1.2 million
, a decrease of
$5.8 million
when compared to income from operations of
$7.0 million
for the comparable period in 2016, based on the factors described above.
Ergobaby
Overview
Ergobaby, headquartered in Los Angeles, California, is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, and related products. On May 12, 2016, Ergobaby acquired New Baby Tula LLC (“Baby Tula”) for approximately $73.8 million, excluding a potential earn-out payment. Baby Tula designs, markets and distributes baby carriers and accessories. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors. Historically, Ergobaby derives approximately 59% of its sales from outside of the United States.
Results of Operations
The table below summarizes the income from operations data for Ergobaby for the three and nine months ended
September 30, 2017
and
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(in thousands)
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
Net sales
|
$
|
27,835
|
|
|
$
|
29,664
|
|
|
$
|
77,737
|
|
|
$
|
75,048
|
|
Cost of sales
|
9,003
|
|
|
13,818
|
|
|
25,491
|
|
|
29,169
|
|
Gross profit
|
18,832
|
|
|
15,846
|
|
|
52,246
|
|
|
45,879
|
|
Selling, general and administrative expense
|
9,973
|
|
|
9,947
|
|
|
28,359
|
|
|
27,489
|
|
Fees to manager
|
125
|
|
|
125
|
|
|
375
|
|
|
375
|
|
Amortization of intangibles
|
2,850
|
|
|
552
|
|
|
8,784
|
|
|
1,700
|
|
Loss on disposal of assets
|
—
|
|
|
551
|
|
|
—
|
|
|
7,214
|
|
Income from operations
|
$
|
5,884
|
|
|
$
|
4,671
|
|
|
$
|
14,728
|
|
|
$
|
9,101
|
|
Three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
Net sales
Net sales for the three months ended
September 30, 2017
were
$27.8 million
, a decrease of
$1.8 million
, or
6.2%
, compared to the same period in 2016. Net sales from Baby Tula for the third quarter were $4.8 million, compared to $5.8 million for the corresponding period in 2016. During the second quarter of 2016, Ergobaby’s board of directors approved a plan to dispose of the Orbit Baby infant travel system product line. Net sales from Orbit Baby branded infant travel systems were $1.6 million for the three months ended September 30, 2016. During the three months ended
September 30, 2017
, international sales were approximately
$17.0 million
, representing a decrease of
$0.3 million
over the corresponding period in 2016. International sales from Baby Tula for the third quarter of 2017 were $1.6 million. International sales of baby carriers and accessories, including Baby Tula, increased by approximately $0.8 million and international sales of infant travel systems decreased by approximately $0.5 million during the quarter ended
September 30, 2017
as compared to the comparable quarter in 2016. Domestic sales were $10.8 million in the third quarter of 2017, reflecting a decrease of $2.1 million compared to the corresponding period in 2016. The decrease in domestic sales was due to a $1.0 million decrease in domestic sales of infant travel systems and accessories and a $1.1 million decrease in sales of baby carrier and accessories. Baby carriers and accessories represented 100% of sales in the three months ended
September 30, 2017
compared to 95% in the same period in 2016.
Cost of sales
Cost of sales was approximately
$9.0 million
for the three months ended
September 30, 2017
, as compared to
$13.8 million
for the three months ended September 30, 2016, a decrease of
$4.8 million
. Cost of sales for the quarter ended September 30, 2016 included expense of $3.7 million related to the inventory step-up at Baby Tula resulting from the purchase price allocation. The remaining increase in cost of sales is primarily attributable to the reduction of sales compared to the prior period. Gross profit as a percentage of sales was
67.7%
for the quarter ended
September 30, 2017
, as compared to 65.9% (excluding the effect of the inventory step-up at Baby Tula) for the three months ended September 30, 2016.
Selling, general and administrative expense
Selling, general and administrative expense was
$10.0 million
, or
35.8%
of net sales for the three months ended
September 30, 2017
as compared to
$9.9 million
or
33.5%
of net sales for the same period of 2016. While selling, general and administrative expenses were flat, this resulted from an increase in a bad debt reserve related to a large retail customer that filed for bankruptcy during the third quarter of 2017, which was offset by lower professional fees.
Loss on disposal of assets
Ergobaby recorded a
$0.6 million
loss on disposal of assets during the third quarter of 2016 related to its decision to dispose of the Orbit Baby product line.
Income from operations
Income from operations for the three months ended
September 30, 2017
increased
$1.2 million
, to
$5.9 million
, compared to
$4.7 million
for the same period of 2016, primarily as a result of the loss on disposal of assets and the absence of the inventory step-up at Baby Tula that was recorded in 2016.
Nine months ended
September 30, 2017
compared to nine months ended
September 30, 2016
Net sales
Net sales for the nine months ended
September 30, 2017
were
$77.7 million
, an increase of
$2.7 million
, or
3.6%
, compared to the same period in 2016. Net sales from Baby Tula for the nine months ended September 30, 2017 were $16.5 million, compared to $10.6 million in sales in the post-May acquisition period in 2016. During the nine months ended
September 30, 2017
, international sales were approximately
$46.3 million
, representing an increase of
$5.6 million
over the corresponding period in 2016. International sales of baby carriers and accessories increased by approximately $6.8 million and international sales of infant travel systems decreased by approximately $1.2 million during the nine months ended
September 30, 2017
as compared to the comparable nine month period in 2016.
Baby
Tula international sales during the nine months ended September 30, 2017 increased $2.8 million from the corresponding period in 2017. Domestic sales were $31.4 million during the nine months ended September 30, 2017, reflecting a decrease of $2.9 million compared to the corresponding period in 2016. The decrease in domestic sales is attributable to a $4.4 million decrease in domestic infant travel systems and accessories sales, a $1.7 million decrease in sales of Ergo branded baby carrier and accessories to national and specialty retail accounts, partially offset by a $3.2 million increase in Baby Tula domestic sales. The decrease in baby carrier and accessories sales was attributable to the overall weakness in the U.S. retail market during the nine months ended September 30, 2017. The decrease in infant travel systems and accessories sales was primarily attributable to exiting the Orbit Baby business during 2016. Baby carriers and accessories represented 100% of sales in the nine months ended September 30, 2017 compared to 92% in the same period in 2016.
Cost of sales
Cost of sales was approximately
$25.5 million
for the nine months ended
September 30, 2017
, as compared to
$29.2 million
for the nine months ended September 30, 2016, a decrease of
$3.7 million
. Cost of sales for the nine months ended September 30, 2016 included expense of $3.7 million related to the inventory step-up at Baby Tula resulting from the purchase price allocation. Gross profit as a percentage of sales was
67.2%
for the nine months ended
September 30, 2017
compared to 66.1% for the same period in 2016 after excluding the effect of the inventory step-up at Baby Tula.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended
September 30, 2017
increased to approximately
$28.4 million
, or
36.5%
, of net sales compared to
$27.5 million
or
36.6%
of net sales for the same period of 2016. The
$0.9 million
increase in the nine months ended September 30, 2017 compared to the same period in 2016 is primarily attributable to increases in variable expenses, such as distribution and fulfillment and commission, due to the increases in direct market sales, to increases in employee related costs due to increased staffing levels, due in part to the addition of Baby Tula in 2016 and to a bad debt reserve related to a large retail customer that filed for bankruptcy in the third quarter of 2017. These increases were partially offset by lower professional fees and marketing expenses, due to the timing of marketing spend, and to lower acquisition costs, related to the 2016 Baby Tula acquisition.
Amortization of intangible assets
Amortization of intangible assets increased
$7.1 million
for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 due primarily to the amortization of intangible assets associated with the acquisition of Baby Tula in the prior year.
Loss on disposal of assets
Ergobaby recorded a
$7.2 million
loss on disposal of assets during 2016 related to its decision to dispose of the Orbit Baby product line. The loss was comprised of the write-off of intangible assets of $5.5 million, property, plant and equipment of $0.4 million, and other assets of $1.0 million. Ergobaby also recorded expense of $0.3 million related to the early termination of the Orbitbaby lease.
Income from operations
Income from operations for the nine months ended
September 30, 2017
increased
$5.6 million
, to
$14.7 million
, compared to
$9.1 million
for the same period of 2016, primarily as a result of the loss on disposal of assets that was recorded in 2016.
Liberty Safe
Overview
Based in Payson, Utah and 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. Historically, approximately 55% of Liberty Safe’s net sales are Non-Dealer sales and 45% are Dealer sales.
Results of Operations
The table below summarizes the income from operations data for Liberty Safe for the three and nine months ended
September 30, 2017
and
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(in thousands)
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
Net sales
|
$
|
18,423
|
|
|
$
|
23,810
|
|
|
$
|
66,008
|
|
|
$
|
74,713
|
|
Cost of sales
|
13,026
|
|
|
17,680
|
|
|
47,157
|
|
|
53,197
|
|
Gross profit
|
5,397
|
|
|
6,130
|
|
|
18,851
|
|
|
21,516
|
|
Selling, general and administrative expense
|
3,204
|
|
|
3,332
|
|
|
11,284
|
|
|
10,483
|
|
Fees to manager
|
125
|
|
|
125
|
|
|
375
|
|
|
375
|
|
Amortization of intangibles
|
18
|
|
|
256
|
|
|
292
|
|
|
779
|
|
Income from operations
|
$
|
2,050
|
|
|
$
|
2,417
|
|
|
$
|
6,900
|
|
|
$
|
9,879
|
|
Three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
Net sales
Net sales for the quarter ended
September 30, 2017
decreased approximately
$5.4 million
, or
22.6%
, to
$18.4 million
, compared to the corresponding quarter ended
September 30, 2016
. Non-Dealer sales were approximately $7.9 million in the three months ended
September 30, 2017
compared to $11.9 million for the three months ended September 30, 2016 representing a decrease of $4.0 million, or 33.6%. Dealer sales totaled approximately $10.5 million in the three months ended September 30, 2017 compared to $11.9 million in the same period in 2016, representing a decrease of $1.4 million or 11.8%. The decrease in third quarter 2017 sales for the Non-Dealer channel is primarily attributable to the bankruptcy filing by a national retailer in the first quarter of 2017. The decrease in sales in the Dealer channel can be attributed to lower overall market demand in the third quarter of 2017 as compared to the third quarter of 2016.
Cost of sales
Cost of sales for the three months ended
September 30, 2017
decreased approximately
$4.7 million
when compared to the same period in 2016. Gross profit as a percentage of net sales totaled approximately
29.3%
and
25.7%
for the quarters ended
September 30, 2017
and
September 30, 2016
, respectively. The increase in gross profit as a percentage of sales during the three months ended
September 30, 2017
compared to the same period in 2016 is primarily attributable to lower sales to national accounts, which have lower margins, in the third quarter of 2017 versus the prior year.
Selling, general and administrative expense
Selling, general and administrative expense was
$3.2 million
for the three months ended
September 30, 2017
compared to
$3.3 million
for the three months ended September 30, 2016. Selling, general and administrative expense represented
17.4%
of net sales in 2017 and
14.0%
of net sales for the same period of 2016. The increase in selling, general and administrative expense as a percentage of net sales is a result of the decrease in net sales for the quarter ended September 30, 2017 as compared to the corresponding third quarter in 2016.
Income from operations
Income from operations decreased
$0.4 million
during the three months ended
September 30, 2017
to
$2.1 million
, compared to the corresponding period in 2016. This decrease was principally based on the factors described above.
Nine months ended
September 30, 2017
compared to nine months ended
September 30, 2016
Net sales
Net sales for the nine months ended
September 30, 2017
decreased approximately
$8.7 million
or
11.7%
, to
$66.0 million
, compared to the corresponding nine months ended September 30, 2016. Non-Dealer sales were approximately $29.9 million in the nine months ended
September 30, 2017
compared to $36.4 million for the nine months ended September 30, 2016, representing a decrease of $6.5 million or 17.9%. Dealer sales totaled approximately $36.1 million in the nine months ended
September 30, 2017
compared to $38.3 million in the same period in 2016, representing a decrease of $2.2 million or 5.7%. The decrease in sales is attributable to lower overall market demand.
Cost of sales
Cost of sales for the nine months ended
September 30, 2017
decreased approximately
$6.0 million
when compared to the same period in 2016. Gross profit as a percentage of net sales totaled approximately
28.6%
and
28.8%
for the nine months ended
September 30, 2017
and September 30, 2016, respectively. The decrease in gross profit as a percentage of sales during the nine months ended September 30, 2017 compared to the same period in 2016 is attributable to higher raw material costs, offset by gains in manufacturing efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended
September 30, 2017
increased to approximately
$11.3 million
or
17.1%
of net sales compared to
$10.5 million
or
14.0%
of net sales for the same period of 2016. The
$0.8 million
increase during the nine months ended
September 30, 2017
is primarily attributable to a $1.4 million reserve established to reserve against outstanding accounts receivable of a retail customer that filed for bankruptcy in the first quarter of 2017.
Income from operations
Income from operations decreased
$3.0 million
during the nine months ended
September 30, 2017
to
$6.9 million
, compared to
$9.9 million
during the same period in 2016, principally as a result of the decrease in sales, as described above.
Manitoba Harvest
Overview
Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and leader in branded, hemp-based foods and ingredients. Manitoba Harvest’s products, which management believes are one of the fastest growing in the hemp food market and among the fastest growing in the natural foods industry, are currently carried in approximately 13,000 retail stores across the United States and Canada.
The Company’s hemp-based, 100% all-natural consumer products include hemp hearts, protein powder, hemp oil and snacks.
Results of Operations
The table below summarizes the income from operations data for Manitoba Harvest for the three and nine months ended
September 30, 2017
and
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(in thousands)
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
Net sales
|
$
|
13,948
|
|
|
$
|
15,920
|
|
|
$
|
42,625
|
|
|
$
|
44,321
|
|
Cost of sales
|
7,792
|
|
|
8,988
|
|
|
23,412
|
|
|
24,442
|
|
Gross profit
|
6,156
|
|
|
6,932
|
|
|
19,213
|
|
|
19,879
|
|
Selling, general and administrative expense
|
5,065
|
|
|
5,072
|
|
|
15,502
|
|
|
17,075
|
|
Fees to manager
|
87
|
|
|
88
|
|
|
262
|
|
|
261
|
|
Amortization of intangibles
|
1,173
|
|
|
1,218
|
|
|
3,374
|
|
|
3,408
|
|
Income (loss) from operations
|
$
|
(169
|
)
|
|
$
|
554
|
|
|
$
|
75
|
|
|
$
|
(865
|
)
|
Three months ended
September 30, 2017
compared to three months ended
September 30, 2016
Net sales
Net sales for the three months ended
September 30, 2017
were approximately
$13.9 million
as compared to
$15.9 million
for the three months ended September 30, 2016, a decrease of
$2.0 million
, or
12.4%
. During the third quarter of 2017, Manitoba Harvest experienced declining ingredients shipments to Asia as well as weak sales of protein powders. This was offset by the return of organic hemp hearts to store shelves after a lack of availability in organic based hemp seeds in 2016, which helped drive growth with key retailers in the United States and Canada. In addition, the company experienced strong growth in their core product line with key online retailers.
Cost of sales
Cost of sales for the three months ended
September 30, 2017
was approximately
$7.8 million
compared to approximately
$9.0 million
for the same period in 2016. Gross profit as a percentage of sales was
44.1%
in the quarter ended
September 30, 2017
and
43.5%
in the quarter ended September 30, 2016. The increase in gross profit as a percentage of sales in the third quarter of 2017 as compared to the same quarter in the prior year is primarily attributable to higher sales of branded hemp products in 2017, which have a higher gross margin percentage than bulk ingredient products.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended
September 30, 2017
was approximately
$5.1 million
in both the third quarter of 2017 and 2016. Selling, general and administrative expense was
36.3%
of net sales in the third quarter of 2017 as compared to
31.9%
of net sales for the same period in 2016. The increase in selling, general and administrative expense as a percentage of sales in the three months ended
September 30, 2017
compared to the same period in 2016 was primarily due to ongoing investments in key operating capability initiatives such as marketing, sales and research and development.
Income (loss) from operations
Income from operations for the three months ended
September 30, 2017
decreased
$0.7 million
when compared to the same period in 2016, based on the factors described above.
Nine months ended
September 30, 2017
compared to nine months ended
September 30, 2016
Net sales
Net sales for the nine months ended
September 30, 2017
were approximately
$42.6 million
as compared to
$44.3 million
for the nine months ended
September 30, 2016
, a decrease of
$1.7 million
, or
3.8%
. Manitoba Harvest experienced declines in bulk hemp seed ingredient sales to international markets. This was partially offset by growth in their Canadian retail, U.S. club and online businesses, driven by sales of branded hemp heart products and hemp oil.
Cost of sales
Cost of sales for the nine months ended
September 30, 2017
was approximately
$23.4 million
compared to approximately
$24.4 million
for the same period in 2016. Gross profit as a percentage of sales was
45.1%
in the nine months ended
September 30, 2017
and
44.9%
in the nine months ended
September 30, 2016
. For the first nine months of the year, gross profit margins in our branded business expanded due to improving product mix and lower material costs. Gross profit margins in our ingredient business declined due to a more competitive pricing environment and less fixed cost leverage.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended
September 30, 2017
decreased to approximately
$15.5 million
or
36.4%
of net sales compared to
$17.1 million
or
38.5%
of net sales for the same period in 2016. The
$1.6 million
decrease in the nine months ended September 30, 2017 compared to the same period in 2016 was primarily due to lower customer shipping costs, more efficient field selling operations and the timing of our consumer promotion spending.
Income (loss) from operations
Income from operations for the nine months ended
September 30, 2017
was approximately
$0.1 million
, compared to loss from operations of
$0.9 million
in the same period in 2016, based on the factors described above.
Niche Industrial Businesses
Advanced Circuits
Overview
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 54% of Advanced Circuits’ gross revenues. 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.
Results of Operations
The table below summarizes the income from operations data for Advanced Circuits for the three and nine months ended
September 30, 2017
and
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(in thousands)
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
Net sales
|
$
|
22,436
|
|
|
$
|
21,679
|
|
|
$
|
66,404
|
|
|
$
|
64,945
|
|
Cost of sales
|
12,137
|
|
|
12,066
|
|
|
36,095
|
|
|
36,024
|
|
Gross profit
|
10,299
|
|
|
9,613
|
|
|
30,309
|
|
|
28,921
|
|
Selling, general and administrative expense
|
3,673
|
|
|
3,417
|
|
|
10,895
|
|
|
10,370
|
|
Fees to manager
|
125
|
|
|
125
|
|
|
375
|
|
|
375
|
|
Amortization of intangibles
|
310
|
|
|
312
|
|
|
933
|
|
|
935
|
|
Income from operations
|
$
|
6,191
|
|
|
$
|
5,759
|
|
|
$
|
18,106
|
|
|
$
|
17,241
|
|
Three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
Net sales
Net sales for the three months ended
September 30, 2017
increased approximately
$0.8 million
to
$22.4 million
compared to the three months ended
September 30, 2016
. The increase in net sales was due to increased sales in Quick-Turn Production PCBs by approximately $0.3 million, Long-Lead Time PCBs by approximately $0.4 million, and Subcontract by approximately $0.2 million, partially offset by decreased sales in Quick-Turn Small-Run PCBs by approximately $0.3 million. On a consolidated basis, Quick-Turn Small-Run PCBs comprised approximately 20.2% of gross sales and Quick-turn production PCBs represented approximately 32.4% of gross sales for the third quarter 2017. Quick-Turn Small-Run PCBs comprised approximately 21.9% of gross sales and Quick-turn production PCBs represented approximately 32.1% of gross sales for the third quarter 2016.
Cost of sales
Cost of sales for both the three months ended
September 30, 2017
and the three months ended September 30, 2016 were
$12.1 million
. Gross profit as a percentage of sales increased 160 basis points during the three months ended
September 30, 2017
compared to the corresponding period in 2016 (
45.9%
at
September 30, 2017
compared to
44.3%
at
September 30, 2016
) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately
$3.7 million
in the three months ended
September 30, 2017
and
$3.4 million
in the three months ended
September 30, 2016
. Selling, general and administrative expense represented
16.4%
of net sales for the three months ended
September 30, 2017
compared to
15.8%
of net sales in the corresponding period in 2016.
Income from operations
Income from operations for the three months ended
September 30, 2017
was approximately
$6.2 million
compared to
$5.8 million
in the same period in 2016, an increase of approximately
$0.4 million
, principally as a result of the factors described above.
Nine months ended
September 30, 2017
compared to nine months ended
September 30, 2016
Net sales
Net sales for the nine months ended
September 30, 2017
increased approximately
$1.5 million
to
$66.4 million
as compared to the nine months ended
September 30, 2016
. The increase in net sales during the nine months ended
September 30, 2017
was due to increased sales in Quick-Turn Production PCBs by approximately $1.2 million, Long-Lead Time PCBs by approximately $0.7 million, Subcontract by approximately $0.5 million, and decreased promotions by approximately $0.3 million. This was partially offset by decreases in Assembly by approximately $0.7 million and Quick-Turn Small-Run PCBs by approximately $0.6 million. On a consolidated basis, Quick-Turn Small-Run comprised approximately 20.7% of gross sales and Quick-Turn Production PCBs represented approximately 32.9% of gross sales for the nine months ended September
30, 2017. Quick-Turn Small-Run comprised approximately 21.9% of gross sales and Quick-Turn Production PCBs represented approximately 31.7% of gross sales for the nine months ended September 30, 2016.
Cost of sales
Cost of sales for the nine months ended
September 30, 2017
was
$36.1 million
as compared to
$36.0 million
for the nine months ended September 30, 2016. Gross profit as a percentage of sales increased 110 basis points during the nine months ended September 30, 2017 compared to the same period in 2016 (
45.6%
at
September 30, 2017
compared to
44.5%
at
September 30, 2016
) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately
$10.9 million
in the nine months ended
September 30, 2017
as compared to
$10.4 million
in the nine months ended
September 30, 2016
. Selling, general and administrative expense represented
16.4%
of net sales for the nine months ended
September 30, 2017
compared to
16.0%
of net sales in the prior year's corresponding period.
Income from operations
Income from operations for the nine months ended
September 30, 2017
was approximately
$18.1 million
compared to
$17.2 million
in the same period in 2016, an increase of approximately
$0.9 million
, principally as a result of the factors described above.
Arnold Magnetics
Overview
Founded in 1895 and headquartered in Rochester, New York, Arnold Magnetics is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, motorsport/automotive, oil and gas, medical, general industrial, electric utility, reprographics and advertising specialties markets. Arnold is the largest and, we believe, most technically advanced U. S. manufacturer of engineered magnets. Arnold is one of two domestic producers to design, engineer and manufacture rare earth magnetic solutions. Arnold operates a 70,000 square foot manufacturing assembly and distribution facility in Rochester, New York with nine additional facilities worldwide, including sites in the United Kingdom, Switzerland and China. Arnold serves customers via three primary product sectors:
|
|
•
|
Permanent Magnet and Assemblies and Reprographics (PMAG) (historically approximately 70% of net sales) - High performance permanent magnets and magnetic assemblies with a wide variety of applications including precision motor/generator sensors as well as beam focusing and reprographics applications;
|
|
|
•
|
Flexible Magnets ("Flexmag") (historically approximately 20% of net sales) - Flexible bonded magnetic materials for commercial printing, advertising, and industrial applications; and
|
|
|
•
|
Precision Thin Metals ("PTM") (historically approximately 10% of net sales) - Ultra thin metal foil products utilizing magnetic and non- magnetic alloys.
|
Results of Operations
The table below summarizes the income from operations data for Arnold Magnetics for the three and nine months ended
September 30, 2017
and
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(in thousands)
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
Net sales
|
$
|
26,489
|
|
|
$
|
26,912
|
|
|
$
|
79,421
|
|
|
$
|
82,791
|
|
Cost of sales
|
19,136
|
|
|
20,520
|
|
|
58,847
|
|
|
63,829
|
|
Gross profit
|
7,353
|
|
|
6,392
|
|
|
20,574
|
|
|
18,962
|
|
Selling, general and administrative expense
|
4,374
|
|
|
4,535
|
|
|
13,285
|
|
|
12,117
|
|
Fees to manager
|
125
|
|
|
125
|
|
|
375
|
|
|
375
|
|
Amortization of intangibles
|
854
|
|
|
881
|
|
|
2,601
|
|
|
2,642
|
|
Impairment expense
|
—
|
|
|
—
|
|
|
8,864
|
|
|
—
|
|
Income (loss) from operations
|
$
|
2,000
|
|
|
$
|
851
|
|
|
$
|
(4,551
|
)
|
|
$
|
3,828
|
|
Three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
Net sales
Net sales for the three months ended
September 30, 2017
were approximately
$26.5 million
, a decrease of
$0.4 million
compared to the same period in 2016.
The decrease in net sales is primarily a result of a decrease in reprographic sales in the PMAG reporting unit.
International sales were
$10.6 million
in the three months ended September 30, 2017 as compared to
$12.2 million
in the three months ended September 30, 2016, a decrease of
$1.7 million
, primarily as a result of the decrease in sales at PMAG.
Cost of sales
Cost of sales for the three months ended
September 30, 2017
were approximately
$19.1 million
compared to approximately
$20.5 million
in the same period of 2016. Gross profit as a percentage of sales increased from
23.8%
for the quarter ended
September 30, 2016
to
27.8%
in the quarter ended
September 30, 2017
principally due to manufacturing efficiencies and favorable sales mix.
Selling, general and administrative expense
Selling, general and administrative expense in the three month period ended
September 30, 2017
was
$4.4 million
, comparable to approximately
$4.5 million
for the three months ended September 30, 2016.
Income from operations
Income from operations for the three months ended
September 30, 2017
was approximately
$2.0 million
, an increase of
$1.1 million
when compared to the same period in 2016, principally as a result of the factors noted above.
Nine months ended
September 30, 2017
compared to nine months ended
September 30, 2016
Net sales
Net sales for the nine months ended
September 30, 2017
were approximately
$79.4 million
, a decrease of
$3.4 million
compared to the same period in 2016. The decrease in net sales is primarily a result of decreases in the PMAG ($1.8 million) and Flexmag ($1.5 million) product sectors. PMAG sales represented approximately 73% of net sales for the nine months ended
September 30, 2017
and 72% of net sales for the nine months ended
September 30, 2016
. The decrease in PMAG sales is principally attributable to lower sales of reprographic products. The decrease in Flexmag sales is attributable to lower overall customer demand.
International sales were
$31.7 million
during the nine months ended
September 30, 2017
compared to
$33.7 million
during the same period in 2016, a decrease of
$2.0 million
or
5.9%
. The decrease in international sales is due to a decrease in sales at PMAG.
Cost of sales
Cost of sales for the nine months ended
September 30, 2017
were approximately
$58.8 million
compared to approximately
$63.8 million
in the same period of 2016. Gross profit as a percentage of sales increased from
22.9%
for the nine months ended September 30, 2016 to
25.9%
in the nine months ended September 30, 2017 principally due to a reduction in material costs and lower depreciation expense.
Selling, general and administrative expense
Selling, general and administrative expense in the nine month period ended
September 30, 2017
was
$13.3 million
as compared to approximately
$12.1 million
for the nine months ended September 30, 2016. The increase in expense is primarily attributable to
increased legal and professional fees.
Impairment expense
Arnold performed an interim impairment test at each of its reporting units in the fourth quarter of 2016, which resulted in the recording of preliminary impairment expense of the PMAG reporting unit of $16.0 million. In the first quarter of 2017, Arnold completed the impairment testing of the PMAG reporting unit and recorded an additional
$8.9 million
impairment expense based on the results of the Step 2 impairment testing.
(Loss) income from operations
Loss from operations for the nine months ended
September 30, 2017
was approximately
$4.6 million
, a decrease of
$8.4 million
when compared to the same period in 2016, principally as a result of the impairment expense recognized in the first quarter of 2017, and the factors described above.
Excluding the impairment expense, income from operations increased $0.5 million, or 12%, when compared to the same period in 2016.
Clean Earth
Overview
Founded in 1990 and headquartered in Hatboro, Pennsylvania, Clean Earth is a provider of environmental services for a variety of contaminated materials. Clean Earth provides a one-stop shop solution that analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as power, construction, commercial development, oil and gas, medical, infrastructure, industrial and dredging. Historically, the majority of Clean Earth’s revenues have been generated by contaminated soils, which includes environmentally impacted soils, drill cuttings and other materials which are treated at one of its nine permitted soil treatment facilities. Clean Earth also operates four RCRA Part B hazardous waste facilities. The remaining revenue has been generated by dredge material, which consists of sediment removed from the floor of a body of water for navigational purposes and/or environmental remediation of contaminated waterways and is treated at one of its two permitted dredge processing facilities. Approximately 98% of the material processed by Clean Earth is beneficially reused for such purposes as daily landfill cover, industrial and brownfield redevelopment projects.
Results of Operations
The table below summarizes the income from operations data for Clean Earth for the three and nine months ended
September 30, 2017
and
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(in thousands)
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
Service revenues
|
$
|
55,676
|
|
|
$
|
51,515
|
|
|
$
|
153,370
|
|
|
$
|
134,035
|
|
Cost of services
|
39,787
|
|
|
36,863
|
|
|
110,639
|
|
|
95,967
|
|
Gross profit
|
15,889
|
|
|
14,652
|
|
|
42,731
|
|
|
38,068
|
|
Selling, general and administrative expense
|
6,782
|
|
|
7,352
|
|
|
25,205
|
|
|
22,263
|
|
Fees to manager
|
125
|
|
|
125
|
|
|
375
|
|
|
375
|
|
Amortization of intangibles
|
3,390
|
|
|
3,582
|
|
|
9,554
|
|
|
9,570
|
|
Income from operations
|
$
|
5,592
|
|
|
$
|
3,593
|
|
|
$
|
7,597
|
|
|
$
|
5,860
|
|
Three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
.
Service revenues
Revenues for the three months ended
September 30, 2017
were approximately
$55.7 million
, an increase of
$4.2 million
, or
8.1%
, compared to the same period in 2016. The increase in revenues is primarily due to acquisitions made in the second quarter of 2016 and the first quarter of 2017 as well as an increase in contaminated soil revenue. For the three months ended
September 30, 2017
, contaminated soil revenue increased 8% as compared to the same period last year, which is principally attributable to recent large project awards. Hazardous waste revenues increased 30% principally as a result of acquisitions. Revenue from dredged material decreased for the three months ended
September 30, 2017
as compared to the same period in 2016 due to the timing of projects. Contaminated soils represented approximately 55% of net service revenues for both the three months ended September 30, 2017 and the three months ended
September 30, 2016
.
Cost of services
Cost of services for the three months ended
September 30, 2017
were approximately
$39.8 million
compared to approximately
$36.9 million
in the same period of 2016. The increase in costs of services was primarily due to the increased revenue and volume, as well as the mix of services. Gross profit as a percentage of service revenues was flat quarter over quarter, increasing from
28.4%
for the three month period ended
September 30, 2016
to
28.5%
for the same period ended
September 30, 2017
.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended
September 30, 2017
decreased to approximately
$6.8 million
, or
12.2%
, of service revenues, as compared to
$7.4 million
, or
14.3%
, of service revenues for the same period in 2016.
The decrease was primarily due to decreased labor costs.
Income from operations
Income from operations for the three months ended
September 30, 2017
was approximately
$5.6 million
as compared to income from operations of
$3.6 million
for the three months ended September 30, 2016, an increase of
$2.0 million
, primarily as a result of those factors described above.
Nine months ended
September 30, 2017
compared to nine months ended
September 30, 2016
Service revenues
Service revenues for the nine months ended
September 30, 2017
were approximately
$153.4 million
, an increase of
$19.3 million
, or
14.4%
, compared to the same period in 2016. The increase in service revenues is principally due to two acquisitions in 2016 and one in 2017, as well as increased contaminated soil revenue, offset in part by lower dredge revenue.
For the nine months ended
September 30, 2017
, contaminated soil revenue increased 13% as compared to the same period last year principally attributable to increased development activity in the Northeast and an acquisition made in 2016. Hazardous waste revenues increased 32% principally as a result of acquisitions. Revenue from dredged material decreased 44% for the nine months ended September 30, 2017 as compared to the same period in 2016 due to the timing of new bidding activity. Contaminated soils represented approximately 57% of net service revenues for the nine months ended September 30, 2017 compared to 58% for the nine months ended
September 30, 2016
.
Cost of services
Cost of services for the nine months ended
September 30, 2017
were approximately
$110.6 million
compared to approximately
$96.0 million
in the same period of 2016. Gross profit as a percentage of service revenues decreased from
28.4%
for the nine month period ended
September 30, 2016
to
27.9%
for the same period ended
September 30, 2017
. The decrease in gross margin during the nine months ended
September 30, 2017
was primarily due to reduced dredged material volume.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended
September 30, 2017
increased to approximately
$25.2 million
, or
16.4%
, of service revenues, as compared to
$22.3 million
, or
16.6%
, of service revenues for the same period in 2016. The
$2.9 million
increase in selling, general and administrative expense in the nine months ended
September 30, 2017
compared to 2016 is primarily attributable to
acquisitions and increased corporate expenses.
Income from operations
Income from operations for the nine months ended
September 30, 2017
was approximately
$7.6 million
, an increase of
$1.7 million
as compared to the nine months ended
September 30, 2016
, primarily as a result of those factors described above.
Sterno Products
Overview
Sterno Products, headquartered in Corona, California, is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry. Sterno Products offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps. Sterno Products was formed in 2012 with the merger of two manufacturers and marketers of portable food warming fuel products, The Sterno Products Group LLC and the Candle Lamp Company, LLC.
On January 22, 2016, Sterno Products acquired Sterno Home, a seller of flameless candles and outdoor lighting products through the retail segment.
Results of Operations
The table below summarizes the income from operations data for Sterno Products for the three and nine months ended
September 30, 2017
and
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
(in thousands)
|
September 30, 2017
|
|
September 30, 2016
|
|
September 30, 2017
|
|
September 30, 2016
|
Net sales
|
$
|
52,696
|
|
|
$
|
55,582
|
|
|
$
|
163,092
|
|
|
$
|
156,692
|
|
Cost of sales
|
38,865
|
|
|
39,744
|
|
|
119,975
|
|
|
113,724
|
|
Gross Profit
|
13,831
|
|
|
15,838
|
|
|
43,117
|
|
|
42,968
|
|
Selling, general and administrative expense
|
7,466
|
|
|
8,556
|
|
|
23,872
|
|
|
23,568
|
|
Management fees
|
125
|
|
|
125
|
|
|
375
|
|
|
375
|
|
Amortization of intangibles
|
1,829
|
|
|
1,621
|
|
|
5,487
|
|
|
4,930
|
|
Income from operations
|
$
|
4,411
|
|
|
$
|
5,536
|
|
|
$
|
13,383
|
|
|
$
|
14,095
|
|
Three months ended
September 30, 2017
compared to the three months ended
September 30, 2016
Net sales
Net sales for the three months ended
September 30, 2017
were approximately
$52.7 million
, a decrease of
$2.9 million
, or
5.2%
, compared to the same period in 2016.
The sales variance reflects a decrease in sales at the candle and outdoor divisions of Sterno Home, offset by the timing of stocking programs of key Sterno food service customers
.
Cost of sales
Cost of sales for the three months ended
September 30, 2017
were approximately
$38.9 million
compared to approximately
$39.7 million
in the same period of 2016. Gross profit as a percentage of sales decreased from
28.5%
for the three months ended September 30, 2016 to
26.2%
for the same period ended
September 30, 2017
. The decrease in gross profit during the three months ended September 30, 2017 primarily reflects an increase in chemical material costs and lower margins on certain sales.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended
September 30, 2017
and 2016 was approximately
$7.5 million
and
$8.6 million
, respectively. Selling, general and administrative expense represented
14.2%
of net sales for the three months ended September 30, 2017 as compared to
15.4%
of net sales for the same period in 2016.
The decrease in selling, general and administrative expense of
$1.1 million
during the third quarter of 2017 reflects Sterno Home staffing reductions due to restructuring, as well as reduced legal fees, licensing and royalty costs.
Income from operations
Income from operations for the three months ended
September 30, 2017
was approximately
$4.4 million
, a decrease of
$1.1 million
when compared to the same period in 2016, as a result of those factors described above.
Nine months ended
September 30, 2017
compared to nine months ended
September 30, 2016
Net sales
Net sales for the nine months ended
September 30, 2017
were approximately
$163.1 million
, an increase of
$6.4 million
, or
4.1%
, compared to the same period in 2016.
The increase in net sales is a result of the acquisition of Sterno Home in January 2016, partially offset by sales shortfall at Sterno Home's candle division due to reduced demand and non-repeating orders.
Sterno Home had net sales of $9.0 million in the period prior to acquisition in January 2016.
Cost of sales
Cost of sales for the nine months ended
September 30, 2017
were approximately
$120.0 million
compared to approximately
$113.7 million
in the same period of 2016. Gross profit as a percentage of sales decreased from
27.4%
for the nine months ended September 30, 2016 to
26.4%
for the same period ended September 30, 2017. The decrease in gross margin during the nine months ended September 30, 2017 primarily reflects an increase in chemical material costs.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended
September 30, 2017
and 2016 was approximately
$23.9 million
and
$23.6 million
, respectively. Selling, general and administrative expense represented
14.6%
of net sales for the nine months ended
September 30, 2017
as compared to
15.0%
of net sales for the same period in 2016.
The decrease as a percentage of net sales during the nine months ended September 30, 2017 as compared to the same period in 2016 reflects the increase in sales during the period and Sterno Home reorganization efforts to reduce staff, as well as lower consulting fees, R&D expense and reduced legal expense.
Income from operations
Income from operations for the nine months ended
September 30, 2017
was approximately
$13.4 million
, a decrease of
$0.7 million
when compared to the same period in 2016, as a result of those factors described above.
Liquidity and Capital Resources
Liquidity
At
September 30, 2017
, we had approximately
$41.5 million
of cash and cash equivalents on hand, an increase of
$1.7 million
as compared to the year ended December 31, 2016. The increase in cash is due primarily to the sale of our remaining shares of our FOX investment in the first quarter of 2017, which resulted in net proceeds of
$136.1 million
, and the issuance of preferred shares in the second quarter of 2017, offset by our acquisition of Crosman and our common share distributions. 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:
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
(in thousands)
|
|
September 30, 2017
|
|
September 30, 2016
|
Cash provided by operations
|
|
$
|
59,236
|
|
|
$
|
60,594
|
|
Cash used investing activities
|
|
(62,956
|
)
|
|
(417,284
|
)
|
Cash provided by financing activities
|
|
7,862
|
|
|
300,407
|
|
Effect of exchange rates on cash and cash equivalents
|
|
(2,427
|
)
|
|
(3,197
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
1,715
|
|
|
$
|
(59,480
|
)
|
Operating Activities:
For the nine months ended
September 30, 2017
, cash flows provided by operating activities totaled approximately
$59.2 million
, which represents a
$1.4 million
decrease compared to cash provided by operating activities of
$60.6 million
during the nine month period ended
September 30, 2016
(from both continuing and discontinued operations). This decrease is principally the result of changes in cash used for working capital and non-cash charges in the nine months ended September 30, 2017 as compared to the same period in 2016, primarily as a result of the 5.11 acquisition, which occurred in the third quarter of 2016, and the effect of the cash flows from add-on acquisitions completed in 2016. Cash used in operating activities for working capital for the nine months ended September 30, 2017 was $24.3 million, as compared to cash used in operating activities for working capital of $5.0 million for the nine months ended September 30, 2016. The increase was primarily due to cash used for inventory by our branded consumer businesses during the third quarter.
Investing Activities:
Cash flows used in investing activities for the nine months ended
September 30, 2017
totaled approximately
$63.0 million
, compared to cash used in investing activities of
$417.3 million
in the same period of 2016. In the current year, we received approximately
$136.1 million
related to the sale of our remaining investment in FOX, offset by cash used for our Crosman acquisition and add-on acquisitions at our Clean Earth, Crosman and Sterno businesses (
$164.7 million
in total) and capital expenditures (
$31.0 million
). Capital expenditures in the nine months ended
September 30, 2017
increased approximately
$15.4 million
compared to the prior year, due primarily to expenditures at our 5.11 business. We expect capital expenditures for the full year of 2017 to be approximately $42 million to $47 million. The 2016 investing activities reflect the acquisition of 5.11 in August 2016 ($395.4 million) and add-on acquisitions by Sterno in January 2016 ($35.6 million), Ergobaby in May 2016 ($65.0 million) and add-on acquisitions at Clean Earth during the first and second quarter of 2016 ($33.6 million), offset by proceeds from a partial divestiture of our FOX shares of $47.7 million.
Financing Activities:
Cash flows provided by financing activities totaled approximately
$7.9 million
during the nine months ended
September 30, 2017
compared to cash flows provided by financing activities of
$300.4 million
during the nine months ended
September 30, 2016
. Financing activities reflect the payment of our quarterly distribution ($
64.7 million
in 2017 and
$58.6 million
in 2016), activity on our credit facility and the payment of a profit allocation related to the sale of FOX shares (
$39.2 million
in 2017 and
$16.8 million
in 2016). In the nine months ended September 30, 2017, activity on our credit facility totaled $16.8 million of cash borrowings, while the activity for the nine months ended September 30, 2016 reflected net borrowings of $412.1
million, which was used to fund the acquisitions of 5.11, as well as the acquisitions of Baby Tula by Ergobaby, a Clean Earth add-on acquisition and the repurchase of Ergobaby common stock from a noncontrolling shareholder. We also completed the Series A Preferred Share offering during the second quarter of 2017, resulting in cash proceeds net of transaction costs, of
$96.4 million
.
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 revolving 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.
As a result of significant investment in operational improvements to enhance its competitive position, including planned capital expenditures
to reposition Arnold for future growth, we have granted Arnold a waiver for certain financial covenants under their intercompany debt agreement effective the quarter ended June 30, 2017 through December 31, 2017. Additionally, due to significant capital expenditures related to the implementation of a new ERP system and a warehouse expansion, we have granted 5.11 a waiver under their intercompany debt agreement effective the quarter ended September 30, 2017. The waiver permits 5.11 to exclude certain capital expenditures associated with the ERP system and warehouse expansion from the calculation of the fixed charge coverage ratio.
As of
September 30, 2017
, we had the following outstanding loans due from each of our businesses:
|
|
|
|
|
|
(in thousands)
|
|
|
5.11 Tactical
|
|
$
|
185,750
|
|
Crosman
|
|
$
|
97,327
|
|
Ergobaby
|
|
$
|
66,448
|
|
Liberty
|
|
$
|
49,737
|
|
Manitoba Harvest
|
|
$
|
48,273
|
|
Advanced Circuits
|
|
$
|
95,064
|
|
Arnold Magnetics
|
|
$
|
72,715
|
|
Clean Earth
|
|
$
|
172,786
|
|
Sterno Products
|
|
$
|
75,127
|
|
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 2014 Credit Facility; (iii) payments to CGM due pursuant to the Management Services Agreement and the LLC Agreement; (iv) cash distributions to our shareholders; and (v) investments in future acquisitions. Payments made under (iii) above are required to be paid before distributions to shareholders and may be significant and exceed the funds held by us, which may require us to dispose of assets or incur debt to fund such expenditures.
We believe that we currently have sufficient liquidity and capital resources to meet our existing obligations, including quarterly distributions to our shareholders, as approved by our board of directors, over the next twelve months. The quarterly distribution for the quarter ended September 30, 2017 on our common shares was paid on October 26, 2017 and totaled $21.6 million. A distribution on our Series A Preferred Shares of $2.5 million was paid on October 30, 2017.
Investment in FOX
On March 13, 2017, Fox Factory Holding Corp. ("FOX") closed on a secondary public offering of 5,108,718 shares of FOX common stock held by CODI, which represented CODI's remaining investment in FOX. CODI received $136.1 million in net proceeds as a result of the sale. We acquired a controlling interest in FOX in January 2008 for approximately $80.4 million. FOX completed an initial public offering in August 2013, and additional secondary offerings in July 2014, March, August and
November 2016, and March 2017. We sold shares of FOX in each of these offerings, recognizing total net proceeds of $465.1 million.
2014 Credit Facility
On June 6, 2014, we entered into a new credit facility, the 2014 Credit Facility, which replaced our then existing 2011 Credit Facility entered into in October 2011. On August 31, 2016, we entered into an Incremental Facility Amendment to the 2014 Credit Agreement. The Incremental Facility Amendment provided an increase to the 2014 Revolving Credit Facility of $150.0 million, and the 2016 Incremental Term Loan in the amount of $250.0 million. The 2014 Credit Facility now provides for (i) revolving loans, swing line loans and letters of credit up to a maximum aggregate amount of $550 million and matures in June 2019, (ii) a $325 million term loan, and (iii) a $250 million incremental term loan. Our 2014 Term Loan and 2016 Incremental Term Loan requires quarterly payments with a final payment of the outstanding principal balance due in June 2021. (Refer to
Note I - "Debt"
of the condensed consolidated financial statements for a complete description of our 2014 Credit Facility.)
In March 2017, we amended the 2014 Credit Facility (the "Fourth Amendment") to reduce the applicable rate of interest for the 2014 Term Loan and 2016 Incremental Term Loan. Under the Fourth Amendment, outstanding LIBOR loans bear interest at LIBOR plus an applicable rate of 2.75% and outstanding Base Rate loans bear interest at Base Rate plus 1.75%. Prior to the amendment, the outstanding term loans bore interest at LIBOR plus 3.25% or Base Rate plus 2.25%.
In October 2017, the Company further amended the 2014 Credit Facility (the "First Refinancing Amendment") to, in effect,
refinance the 2014 Term Loan and the 2016 Incremental Term Loan (together, the “Term Loans”). Pursuant to the First Refinancing Amendment,
outstanding Term Loans at LIBOR Rate bear interest at LIBOR plus an applicable rate of 2.25% and outstanding Term Loans at Base Rate bear interest at Base Rate plus 1.25%. Prior to the amendment, the outstanding Term Loans bore interest at LIBOR plus 2.75% or Base Rate plus 1.75%.
We had
$523.2 million
in net availability under the 2014 Revolving Credit Facility at
September 30, 2017
. The outstanding borrowings under the 2014 Revolving Credit Facility includes
$1.3 million
at
September 30, 2017
of outstanding letters of credit.
The following table reflects required and actual financial ratios as of
September 30, 2017
included as part of the affirmative covenants in our 2014 Credit Facility:
|
|
|
|
|
|
Description of Required Covenant Ratio
|
|
Covenant Ratio Requirement
|
|
Actual Ratio
|
Fixed Charge Coverage Ratio
|
|
greater than or equal to 1.50:1.0
|
|
3.12:1.0
|
Total Debt to EBITDA Ratio
|
|
less than or equal to 3.50:1.0
|
|
2.76:1.0
|
We intend to use the availability under our 2014 Credit Facility and cash on hand to pursue acquisitions of additional businesses to the extent permitted under our 2014 Credit Facility, to fund distributions and to provide for other working capital needs.
Interest Expense
We recorded interest expense totaling
$22.6 million
for the nine months ended
September 30, 2017
compared to
$23.2 million
for the comparable period in 2016. The components of interest expense and periodic interest charges on outstanding debt are as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
2017
|
|
2016
|
Interest on credit facilities
|
$
|
18,008
|
|
|
$
|
12,612
|
|
Unused fee on Revolving Credit Facility
|
2,143
|
|
|
1,356
|
|
Amortization of original issue discount
|
781
|
|
|
536
|
|
Unrealized loss on interest rate derivatives
(1)
|
1,178
|
|
|
8,322
|
|
Letter of credit fees
|
63
|
|
|
79
|
|
Other
|
414
|
|
|
320
|
|
Interest expense
|
$
|
22,587
|
|
|
$
|
23,225
|
|
Average daily balance of debt outstanding
|
$
|
593,314
|
|
|
$
|
403,988
|
|
Effective interest rate
(1)
|
5.1
|
%
|
|
7.7
|
%
|
(1)
On September 16, 2014, we purchased an interest rate swap (the "New Swap") with a notional amount of $220 million effective April 1, 2016 through June 6, 2021. The agreement requires us to pay interest on the notional amount at the rate
of 2.97% in exchange for the three-month LIBOR rate. At
September 30, 2017
, the New Swap had a fair value loss of
$8.8 million
, reflecting the present value of future payments and receipts under the agreement and is reflected as a component of interest expense and current and other non-current liabilities. Refer to "
Note J - Derivatives and Hedging Activities
" of the condensed consolidated financial statements for a description of the New Swap.
Income Taxes
We incurred an income tax benefit of
$2.0 million
with an effective income tax rate of
(11.2)%
during the nine months ended
September 30, 2017
compared to income tax expense of
$9.8 million
with an effective income tax rate of
15.8%
during the same period in 2016. The impairment expense at our Arnold business and non-deductible costs at the corporate level, including the effect of the loss on our equity investment of FOX prior to the sale of our FOX shares in the first quarter, account for the majority of the remaining difference in our effective income tax rates in the first nine months of 2017, while non-deductible costs at the corporate level, including the gain on our equity investment in FOX, account for the majority of the remaining differences in the first nine months of 2016. Certain foreign operations are subject to foreign income taxation under existing provisions of the laws of those jurisdictions. Pursuant to U.S. tax laws, earnings from those jurisdictions will be subject to the U.S. income tax rate when those earnings are repatriated.
The components of income tax expense as a percentage of income from continuing operations before income taxes for the nine months ended
September 30, 2017
and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
United States Federal Statutory Rate
|
|
(35.0
|
)%
|
|
35.0
|
%
|
State income taxes (net of Federal benefits)
|
|
(1.0
|
)
|
|
0.2
|
|
Foreign income taxes
|
|
4.5
|
|
|
1.4
|
|
Expenses of Compass Group Diversified Holdings LLC representing a pass through to shareholders
(1)
|
|
0.3
|
|
|
6.3
|
|
Impairment expense
|
|
16.9
|
|
|
—
|
|
Effect of loss (gain) on equity method investment
(2)
|
|
11.0
|
|
|
(33.3
|
)
|
Credit utilization
|
|
(7.7
|
)
|
|
—
|
|
Impact of subsidiary employee stock options
|
|
2.5
|
|
|
0.7
|
|
Domestic production activities deduction
|
|
(2.3
|
)
|
|
(0.6
|
)
|
Effect of undistributed foreign earnings
|
|
2.0
|
|
|
4.5
|
|
Non-recognition of NOL carryforwards at subsidiaries
|
|
(3.5
|
)
|
|
—
|
|
Other
|
|
1.1
|
|
|
1.6
|
|
Effective income tax rate
|
|
(11.2
|
)%
|
|
15.8
|
%
|
(1)
The effective income tax rate for the nine months ended September 30, 2017 and 2016 includes a loss at the Company's parent, which is taxed as a partnership.
(2)
The equity method investment in FOX was held at the Company's parent, which is taxed as a partnership, resulting in the gain or loss on the investment being a reconciling item in deriving our effective tax rate.
Reconciliation of Non-GAAP Financial Measures
U.S. GAAP refers 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 income (loss) from continuing operations 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 Management Services Agreement ("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) gains or losses recorded in connection with our investment; (vi) gains or losses recorded in connection with the sale of fixed assets and (vii) foreign currency transaction gains or losses incurred in connection with the conversion of intercompany debt from a foreign functional currency to U.S. dollar.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors and reflect important financial measures as they exclude the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near term operations. When compared to income (loss) from continuing operations these financial measures are limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated with impairments. This presentation also allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition.
We believe that these measurements are also useful in measuring our ability to service debt and other payment obligations. EBITDA and Adjusted EBITDA are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss), which we consider to be the most comparable GAAP financial measure
(in thousands)
:
Adjusted EBITDA
Nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
5.11
|
|
Crosman
|
|
Ergobaby
|
|
Liberty
|
|
Manitoba Harvest
|
|
ACI
|
|
Arnold
|
|
Clean Earth
|
|
Sterno
|
|
Consolidated
|
Net income (loss)
|
$
|
(5,407
|
)
|
|
$
|
(15,043
|
)
|
|
$
|
(3,375
|
)
|
|
$
|
5,364
|
|
|
$
|
2,522
|
|
|
$
|
(2,505
|
)
|
|
$
|
8,839
|
|
|
$
|
(10,282
|
)
|
|
$
|
(1,980
|
)
|
|
$
|
6,348
|
|
|
$
|
(15,519
|
)
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
—
|
|
|
(10,405
|
)
|
|
(962
|
)
|
|
3,941
|
|
|
1,351
|
|
|
(944
|
)
|
|
2,755
|
|
|
270
|
|
|
(1,041
|
)
|
|
3,034
|
|
|
(2,001
|
)
|
Interest expense, net
|
22,154
|
|
|
51
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
37
|
|
|
(11
|
)
|
|
—
|
|
|
245
|
|
|
—
|
|
|
22,499
|
|
Intercompany interest
|
(49,297
|
)
|
|
10,697
|
|
|
2,561
|
|
|
4,628
|
|
|
2,989
|
|
|
3,211
|
|
|
6,194
|
|
|
5,194
|
|
|
10,108
|
|
|
3,715
|
|
|
—
|
|
Depreciation and amortization
|
1,392
|
|
|
35,233
|
|
|
5,932
|
|
|
10,002
|
|
|
1,359
|
|
|
5,011
|
|
|
2,716
|
|
|
5,238
|
|
|
16,502
|
|
|
8,995
|
|
|
92,380
|
|
EBITDA
|
(31,158
|
)
|
|
20,533
|
|
|
4,179
|
|
|
23,935
|
|
|
8,221
|
|
|
4,810
|
|
|
20,493
|
|
|
420
|
|
|
23,834
|
|
|
22,092
|
|
|
97,359
|
|
Gain on sale of business
|
(340
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(340
|
)
|
(Gain) loss on sale of fixed assets
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46
|
|
|
(227
|
)
|
|
(10
|
)
|
|
(9
|
)
|
|
(56
|
)
|
|
486
|
|
|
230
|
|
Noncontrolling shareholder compensation
|
—
|
|
|
1,786
|
|
|
—
|
|
|
521
|
|
|
7
|
|
|
750
|
|
|
18
|
|
|
149
|
|
|
1,166
|
|
|
555
|
|
|
4,952
|
|
Acquisition expenses and other
|
—
|
|
|
—
|
|
|
1,836
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,836
|
|
Impairment expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,864
|
|
|
—
|
|
|
—
|
|
|
8,864
|
|
Integration services fee
|
—
|
|
|
2,333
|
|
|
375
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,708
|
|
Loss on equity method investment
|
5,620
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,620
|
|
Gain on foreign currency transaction and other
|
(3,583
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,583
|
)
|
Management fees
|
20,881
|
|
|
750
|
|
|
165
|
|
|
375
|
|
|
375
|
|
|
262
|
|
|
375
|
|
|
375
|
|
|
375
|
|
|
375
|
|
|
24,308
|
|
Adjusted EBITDA
|
$
|
(8,580
|
)
|
|
$
|
25,402
|
|
|
$
|
6,555
|
|
|
$
|
24,831
|
|
|
$
|
8,649
|
|
|
$
|
5,595
|
|
|
$
|
20,876
|
|
|
$
|
9,799
|
|
|
$
|
25,319
|
|
|
$
|
23,508
|
|
|
$
|
141,954
|
|
Adjusted EBITDA
Nine months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
5.11
|
|
Crosman
|
|
Ergobaby
|
|
Liberty
|
|
Manitoba Harvest
|
|
ACI
|
|
Arnold
|
|
Clean Earth
|
|
Sterno
|
|
Consolidated
|
Net income (loss)
(1)
|
$
|
49,623
|
|
|
$
|
(3,167
|
)
|
|
|
|
$
|
3,192
|
|
|
$
|
3,942
|
|
|
$
|
(4,084
|
)
|
|
$
|
7,297
|
|
|
$
|
(3,961
|
)
|
|
$
|
(3,544
|
)
|
|
$
|
4,783
|
|
|
$
|
54,081
|
|
Adjusted for:
|
|
|
|
|
Not Applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
—
|
|
|
(1,963
|
)
|
|
|
2,242
|
|
|
2,614
|
|
|
(1,468
|
)
|
|
3,846
|
|
|
2,486
|
|
|
(832
|
)
|
|
2,853
|
|
|
9,778
|
|
Interest expense, net
|
22,840
|
|
|
6
|
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
(2
|
)
|
|
341
|
|
|
12
|
|
|
23,204
|
|
Intercompany interest
|
(36,432
|
)
|
|
1,206
|
|
|
|
3,405
|
|
|
3,172
|
|
|
2,932
|
|
|
5,619
|
|
|
5,046
|
|
|
9,156
|
|
|
5,896
|
|
|
—
|
|
Depreciation and amortization
|
667
|
|
|
5,237
|
|
|
|
6,306
|
|
|
2,099
|
|
|
5,256
|
|
|
2,938
|
|
|
7,035
|
|
|
16,380
|
|
|
8,617
|
|
|
54,535
|
|
EBITDA
|
36,698
|
|
|
1,319
|
|
|
|
15,145
|
|
|
11,827
|
|
|
2,643
|
|
|
19,700
|
|
|
10,604
|
|
|
21,501
|
|
|
22,161
|
|
|
141,598
|
|
Gain on sale of businesses
|
(2,134
|
)
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,134
|
)
|
(Gain) loss on sale of fixed assets
|
—
|
|
|
—
|
|
|
|
—
|
|
|
48
|
|
|
2
|
|
|
(10
|
)
|
|
—
|
|
|
375
|
|
|
—
|
|
|
415
|
|
Noncontrolling shareholder compensation
|
—
|
|
|
—
|
|
|
|
585
|
|
|
327
|
|
|
564
|
|
|
18
|
|
|
192
|
|
|
853
|
|
|
472
|
|
|
3,011
|
|
Loss on disposal of assets
|
—
|
|
|
—
|
|
|
|
7,214
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,214
|
|
Acquisition related expenses
|
98
|
|
|
2,063
|
|
|
|
799
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
738
|
|
|
189
|
|
|
3,887
|
|
Integration services fee
|
—
|
|
|
292
|
|
|
|
—
|
|
|
—
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
792
|
|
Gain on equity method investment
|
(58,680
|
)
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
(58,680
|
)
|
Gain on foreign currency transaction and other
|
(2,396
|
)
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,396
|
)
|
Management fees
|
18,800
|
|
|
83
|
|
|
|
375
|
|
|
375
|
|
|
261
|
|
|
375
|
|
|
375
|
|
|
375
|
|
|
375
|
|
|
21,394
|
|
Adjusted EBITDA
(2)
|
$
|
(7,614
|
)
|
|
$
|
3,757
|
|
|
|
$
|
24,118
|
|
|
$
|
12,577
|
|
|
$
|
3,970
|
|
|
$
|
20,083
|
|
|
$
|
11,171
|
|
|
$
|
23,842
|
|
|
$
|
23,197
|
|
|
$
|
115,101
|
|
(1)
Net income (loss) does not include income from discontinued operations for the nine months ended September 30, 2016.
(2)
As a result of the sale of our Tridien subsidiary in September 2016, Adjusted EBITDA for the nine months ended September 30, 2016 does not include Adjusted EBITDA from Tridien of $1.5 million.
Cash Flow Available for Distribution and Reinvestment
The table below details cash receipts and payments that are not reflected on our income statement in order to provide an additional measure of management's estimate of cash available for distribution ("CAD"). CAD is a non-GAAP measure that we believe provides additional, useful information to our shareholders in order to enable them to evaluate our ability to make anticipated quarterly distributions. CAD is not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The following table reconciles CAD to net income (loss) and cash flows provided by (used in) 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, 2017
|
|
September 30, 2016
|
Net income (loss)
|
$
|
(15,519
|
)
|
|
$
|
54,554
|
|
Adjustment to reconcile net (income) loss to cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
88,659
|
|
|
53,972
|
|
Impairment expense/ loss on disposal of assets
|
8,864
|
|
|
7,214
|
|
Gain on sale of businesses
|
(340
|
)
|
|
(2,134
|
)
|
Amortization of debt issuance costs and original issue discount
|
3,721
|
|
|
2,363
|
|
Unrealized loss on interest rate hedges
|
1,178
|
|
|
8,322
|
|
Loss (gain) on equity method investment
|
5,620
|
|
|
(58,680
|
)
|
Noncontrolling shareholder charges
|
4,952
|
|
|
3,012
|
|
Excess tax benefit on stock compensation
|
(417
|
)
|
|
(366
|
)
|
Provision for loss on receivables
|
4,310
|
|
|
59
|
|
Deferred taxes
|
(17,937
|
)
|
|
(4,280
|
)
|
Other
|
494
|
|
|
349
|
|
Changes in operating assets and liabilities
|
(24,349
|
)
|
|
(3,791
|
)
|
Net cash provided by operating activities
|
59,236
|
|
|
60,594
|
|
Plus:
|
|
|
|
Unused fee on revolving credit facility
|
2,143
|
|
|
1,355
|
|
Integration services fee
(1)
|
2,708
|
|
|
792
|
|
Successful acquisition costs
|
1,836
|
|
|
3,888
|
|
Excess tax benefit on stock compensation
|
417
|
|
|
366
|
|
Changes in operating assets and liabilities
|
24,349
|
|
|
3,791
|
|
Other
|
—
|
|
|
245
|
|
Less:
|
|
|
|
Payments on swap
|
3,050
|
|
|
3,114
|
|
Maintenance capital expenditures:
(2)
|
|
|
|
Compass Group Diversified Holdings LLC
|
—
|
|
|
—
|
|
5.11 Tactical
|
2,914
|
|
|
540
|
|
Advanced Circuits
|
219
|
|
|
2,845
|
|
Arnold
|
2,548
|
|
|
1,625
|
|
Clean Earth
|
3,591
|
|
|
4,504
|
|
Crosman
|
968
|
|
|
—
|
|
Ergobaby
|
788
|
|
|
441
|
|
Liberty
|
389
|
|
|
850
|
|
Manitoba Harvest
|
625
|
|
|
1,146
|
|
Sterno Products
|
1,373
|
|
|
1,408
|
|
Tridien
|
—
|
|
|
385
|
|
Realized gain from foreign currency
(3)
|
3,583
|
|
|
2,396
|
|
Other
(4)
|
3,980
|
|
|
—
|
|
Estimated cash flow available for distribution and reinvestment
|
$
|
66,661
|
|
|
$
|
51,777
|
|
|
|
|
|
Distribution paid in April 2017/2016
|
$
|
(21,564
|
)
|
|
$
|
(19,548
|
)
|
Distribution paid in July 2017/2016
|
(21,564
|
)
|
|
(19,548
|
)
|
|
|
|
|
|
|
|
|
|
Distribution paid in October 2017/ 2016
|
(21,564
|
)
|
|
(19,548
|
)
|
|
$
|
(64,692
|
)
|
|
$
|
(58,644
|
)
|
(1)
Represents fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership, payable quarterly.
(2)
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 $17.5 million for the nine months ended September 30, 2017 and $1.6 million for the nine months ended September 30, 2016.
|
|
(3)
|
Reflects the foreign currency transaction gain or loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest.
|
|
|
(4)
|
Includes amounts for the establishment of accounts receivable reserves related to two retail customers who filed bankruptcy during the first and third quarters of 2017.
|
Seasonality
Earnings of certain of our operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Crosman typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday seasons. Earnings from Clean Earth are typically lower during the winter months due to the limits on outdoor construction and development activity because of the colder weather in the Northeastern United States. Sterno Products typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer and holiday seasons, respectively.
Related Party Transactions
Equity method investment in FOX
In March 2017, FOX closed on a secondary offering through which we sold our remaining 5,108,718 shares in FOX for total net proceeds of
$136.1 million
, after the underwriter's discount of $8.9 million. Subsequent to the sale of FOX shares in March 2017, we no longer hold an ownership interest in FOX. The sale of FOX shares in a secondary offering in March 2017 qualified as a Sale Event under the Company's LLC Agreement. During the second quarter of 2017, our board of directors declared a distribution to the Allocation Member in connection with the FOX Sale Event of $25.8 million. The profit allocation payment was made during the quarter ended June 30, 2017.
The following table reflects the year to date activity from our investment in FOX (
in thousands
):
|
|
|
|
|
|
|
|
2017
|
Balance January 1, 2017
|
|
$
|
141,767
|
|
Proceeds from sale of FOX shares
|
|
(136,147
|
)
|
Mark-to-market adjustment - March 7, 2017
(1)
|
|
(5,620
|
)
|
Balance September 30, 2017
|
|
$
|
—
|
|
(1)
Represents the unrealized loss on the investment in FOX as of the date of the FOX secondary offering through which we sold our remaining shares in FOX.
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, 2017, 5.11 purchased approximately $1.0 million and $4.7 million, respectively, in inventory from this vendor.
Off-Balance Sheet Arrangements
We have no special purpose entities or off-balance sheet arrangements, other than operating leases entered into in the ordinary course of business.
Contractual Obligations
Long-term contractual obligations, except for our long-term debt obligations, 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, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Total
|
|
Less than 1
Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
Long-term debt obligations
(1)
|
$
|
688,792
|
|
|
$
|
21,231
|
|
|
$
|
89,699
|
|
|
$
|
577,862
|
|
|
$
|
—
|
|
Operating lease obligations
(2)
|
92,734
|
|
|
12,231
|
|
|
24,744
|
|
|
17,333
|
|
|
38,426
|
|
Purchase obligations
(3)
|
408,105
|
|
|
237,110
|
|
|
105,495
|
|
|
65,500
|
|
|
—
|
|
Total
(4)
|
$
|
1,189,631
|
|
|
$
|
270,572
|
|
|
$
|
219,938
|
|
|
$
|
660,695
|
|
|
$
|
38,426
|
|
|
|
(1)
|
Reflects commitment fees and letter of credit fees under our 2014 Revolving Credit Facility and amounts due, together with interest on our 2014 Term Loan and 2016 Incremental Term Loan.
|
|
|
(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, 2017
, including: (i) shareholder distributions of $86.3 million; (ii) estimated management fees of $32.8 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 $10.5 million in liabilities associated with unrecognized tax benefits as of
September 30, 2017
as the timing of the recognition of this liability is not certain. The amount of the liability is not expected to significantly change in the next twelve months.
|
Critical Accounting Estimates
The preparation of our financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates under different assumptions and judgments and uncertainties, and potentially could result in materially different results under different conditions. These critical accounting estimates are reviewed periodically by our independent auditors and the audit committee of our board of directors.
Except as set forth below, our critical accounting estimates have not changed materially from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the year ended December 31, 2016, as filed with the Securities and Exchange Commission ("SEC") on March 2, 2017.
Goodwill and Indefinite-lived Intangible Asset Impairment Testing
Goodwill
Goodwill represents the excess amount of the purchase price over the fair value of the assets acquired. Our goodwill and indefinite lived intangible assets are tested for impairment on an annual basis as of March 31
st
, and if current events or circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which are generally an operating segment or one level below the operating segment. Each of our businesses represents a reporting unit except Arnold, which is comprised of three reporting units, and each reporting unit is included in our annual impairment test.
We use a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment testing. The qualitative factors we consider include, in part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts, as well as issues or events specific to the reporting unit.
2017 Annual Impairment Testing
At March 31, 2017, we determined that the Manitoba Harvest reporting unit required further quantitative testing (Step 1) because we could not conclude that the fair value of the reporting unit exceeds its carrying value based on qualitative factors alone. For the Step 1 quantitative impairment test at Manitoba, the Company utilized an income approach. The weighted average cost of capital used in the income approach at Manitoba was 12.0%. Results of the Step 1 quantitative testing of Manitoba Harvest indicated that the fair value of Manitoba Harvest exceeded its carrying value. For the reporting units that were tested qualitatively, the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value.
Manitoba Harvest
We performed Step 1 testing during the 2017 annual impairment testing for Manitoba Harvest. Subsequent to the annual impairment test, we have compared the Manitoba Harvest operating results to the forecasts used in the Step 1 testing and noted no material variances in the results. However, there is a significant degree of uncertainty inherent in the assumptions used to develop the forecast amounts used in the annual impairment test given the changing nature of consumer tastes, particularly related to future years. Therefore, the results of the forecast process for 2018, which are expected to be finalized in the fourth quarter of 2017, may make it necessary to perform interim goodwill impairment testing at Manitoba Harvest in the fourth quarter of 2017.
2016 Interim Impairment Testing
As a result of decreases in forecasted revenue, operating income and cash flows at Arnold, as well as a shortfall in revenue and operating income during the latter half of 2016 as compared to budgeted amounts, we determined that it was necessary to perform interim goodwill impairment testing on each of the three reporting units at Arnold. We performed Step 1 of the goodwill impairment assessment at December 31, 2016. For purposes of Step 1 for the Arnold reporting units, we estimated the fair value of the reporting unit using only an income approach, whereby we estimate the fair value of a reporting unit based on the present value of future cash flows. We do not believe that the market approach results in relevant data points for market multiples or comparative data from comparable public companies since most of Arnold's competitors are privately held and do not publish data that can be used in a market approach. In the income approach, we used a weighted average cost of capital of 12.5% for PMAG, 12.0% for Flexmag and 13.0% for PTM. Results of the Step 1 testing for Arnold's Flexmag and PTM reporting units indicated that the fair value of these reporting units exceeded their carrying value by 34% and 38%, respectively. The results of the Step 1 test for the PMAG unit indicated a potential impairment of goodwill and the Company performed the second step of goodwill impairment testing (Step 2) to determine the amount of impairment of the PMAG reporting unit.
We had not completed the Step 2 testing for PMAG at December 31, 2016, and recorded an estimated impairment loss for PMAG of $16 million based on a range of impairment loss. During the first quarter of 2017, we recorded an additional $8.9 million of goodwill impairment after the results of the Step 2 indicated total goodwill impairment of the PMAG reporting unit of $24.9 million. The Step 2 impairment was higher than the initial estimate at December 31, 2016 due primarily to the valuation of PMAG's property, plant and equipment during the Step 2 exercise.
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
$73.5 million
. The Manitoba Harvest trade name, which had a carrying value of $12.4 million at March 31, 2017, was included in the Step 1 impairment testing for Manitoba Harvest as noted above. The results of the qualitative analysis of our other reporting unit's indefinite-lived intangible assets, which we completed as of March 31, 2017, indicated that the fair value of the indefinite lived intangible assets exceeded their carrying value.
Recent Accounting Pronouncements