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Compass Diversified Holdings Reports First Quarter 2019 Financial Results

Reports Growth of Consolidated Revenues, Net Income and Adjusted EBITDA; Provides Shareholders with Stable and Sizable Distributions

Realizes Benefits from Investments in Branded Consumer Subsidiaries

WESTPORT, Conn., May 01, 2019 (GLOBE NEWSWIRE) -- Compass Diversified Holdings (CODI) (“CODI,” “we,” “our” or the “Company”), an owner of leading middle market businesses, announced today its consolidated operating results for the three months ended March 31, 2019.

First Quarter 2019 Highlights

  • Reported net sales of $402.5 million;
  • Reported net income of $110.2 million;
  • Reported non- GAAP Adjusted EBITDA of $56.7 million;
  • Reported Cash Used in Operating Activities of $8.9 million, and Generated Cash Flow Available for Distribution and Reinvestment (“CAD”) of $17.6 million for the first quarter of 2019;
  • Completed the sale of our Manitoba Harvest subsidiary for a $121.7 million gain;
  • Paid a first quarter 2019 cash distribution of $0.36 per share on CODI’s common shares in April 2019, bringing cumulative distributions paid to $17.8752 per common share since CODI’s IPO in May of 2006;
  • Paid a quarterly cash distribution of $0.453125 per share on the Company’s 7.250% Series A Preferred Shares and $0.4921875 per share on the Company's 7.875% Series B Preferred Shares in April 2019;
  • Subsequent to the end of the quarter, promoted Pat Maciariello to newly created position of Chief Operating Officer.

“Our operating results in the first quarter exceeded our expectations, as we reported solid consolidated revenues, net income and adjusted EBITDA growth across our group of leading, niche middle market businesses,” said Elias Sabo, CEO of Compass Diversified Holdings. “During the first quarter, we also realized tangible benefits from previous investments in the management, sales and marketing functions at several of our branded consumer businesses, highlighted by the sale of Manitoba Harvest at a highly attractive valuation and 5.11 Tactical’s improving EBITDA margins.”

Mr. Sabo continued, “Our success monetizing Manitoba Harvest resulted in CODI realizing a sizeable gain in just over three years of ownership, increasing total realized gains to over $870 million for shareholders since our IPO. Complementing our focus on building long-term and sustainable value in CODI and its leading subsidiaries, we are pleased to have promoted long-time partner at Compass Group Management Pat Maciariello to the newly created position of Chief Operating Officer. Going forward, our focus remains on continuing to work with our world-class management teams to best capitalize on growth opportunities, implementing our proven and disciplined acquisition strategy, opportunistically divesting businesses and providing sizable distributions.”

Operating Results

Net sales for the quarter ended March 31, 2019 was $402.5 million, as compared to $344.4 million for the quarter ended March 31, 2018.  The March 31, 2018 net sales do not include Rimports, Foam Fabricators and Ravin net sales prior to CODI’s ownership.

Net income for the quarter ended March 31, 2019 was $110.2 million, as compared to net loss of $1.6 million for the quarter ended March 31, 2018. Current quarter net income includes the $121.7 million gain on the sale of Manitoba Harvest, offset by a loss on the sale of the Tilray shares received at closing of $5.3 million.

Adjusted EBITDA (see Note Regarding Use of Non-GAAP Financial Measures below) for the quarter ended March 31, 2019 was $56.7 million, as compared to $42.9 million for the quarter ended March 31, 2018. March 31, 2018 Adjusted EBITDA does not include Rimports, Foam Fabricators and Ravin results prior to CODI’s ownership.

CODI reported CAD (see Note Regarding Use of Non-GAAP Financial Measures below) of $17.6 million for the quarter ended March 31, 2019, as compared to $14.0 million for the prior year’s comparable quarter. CODI’s CAD is calculated after taking into account all interest expense, cash taxes paid and maintenance capital expenditures, and includes the operating results of each of our businesses for the periods during which CODI owned them. However, CAD excludes the gains from monetizing interests in CODI’s subsidiaries, which have totaled over $870 million since going public in 2006.  The increase in CAD over the prior year quarter is primarily the result of the operating performance of our 2018 acquisitions of Foam Fabricators, Rimports and Ravin, offset by the additional interest cost on our $400 million Senior Notes issued in April 2018.

Liquidity and Capital Resources

For the quarter ended March 31, 2019, CODI reported Cash Used in Operating Activities of $8.9 million, as compared to Cash Provided by Operating Activities of $6.6 million for the quarter ended March 31, 2018.

CODI’s weighted average number of shares outstanding for the quarters ended March 31, 2019 and March 31, 2018 were 59.9 million.

As of March 31, 2019, CODI had approximately $39.8 million in cash and cash equivalents, $495 million outstanding on its term loan facility, $400 million outstanding in Senior Notes and $85 million in outstanding borrowings under its revolving credit facility.

The Company has no significant debt maturities until 2023 and had net borrowing availability of approximately $515 million at March 31, 2019 under its revolving credit facility.

First Quarter 2019 Distributions

On April 4, 2019, CODI’s Board of Directors (the “Board”) declared a first quarter distribution of $0.36 per share on the Company’s common shares (the “Common Shares”). The cash distribution was paid on April 25, 2019 to all holders of record of Common Shares as of April 18, 2019. Since its IPO in May of 2006, CODI has paid a cumulative distribution of $17.8752 per common share.

The Board also declared a quarterly cash distribution of $0.453125 per share on the Company’s 7.250% Series A Preferred Shares (the “Preferred Shares”). The distribution on the Preferred Shares covered the period from and including January 30, 2019, up to, but excluding, April 30, 2019. The distribution for such period was paid on April 30, 2019 to all holders of record of Preferred Shares as of April 15, 2019.

The Board also declared a quarterly cash distribution of $0.4921875 per share on the Company's 7.875% Series B Preferred Shares (the "Series B Preferred Shares"). The distribution on the Series B Preferred Shares covered the period from and including January 30, 2019, up to, but excluding, April 30, 2019. The distribution for such period was paid on April 30, 2019 to all holders of record of Series B Preferred Shares as of April 15, 2019.

Conference Call

Management will host a conference call on Thursday, May 2, 2019 at 9:00 a.m. ET to discuss the latest corporate developments and financial results. The dial-in number for callers in the U.S. is (855) 212-2368 and the dial-in number for international callers is (315) 625-6886. The access code for all callers is 4684535. A live webcast will also be available on the Company's website at www.compassdiversifiedholdings.com.

A replay of the call will be available through May 9, 2019. To access the replay, please dial (855) 859-2056 in the U.S. and (404) 537-3406 outside the U.S., and then enter the access code 4684535.

Note Regarding Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP measure used by the Company to assess its performance.  We have reconciled Adjusted EBITDA to Net Income (Loss) on the attached schedules. We consider Net Income (Loss) to be the most directly comparable GAAP financial measure to Adjusted EBITDA. We believe that Adjusted EBITDA provides useful information to investors and reflects important financial measures as it excludes the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near term operations. When compared to Net Income (Loss), Adjusted EBITDA is limited in that it does not reflect the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated with impairments, as well as certain cash charges. 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 Adjusted EBITDA is also useful in measuring our ability to service debt and other payment obligations.

CAD is a non-GAAP measure used by the Company to assess its performance, as well as its ability to sustain quarterly distributions.  We have reconciled CAD to Net Income (Loss) and Cash Flow from Operating Activities on the attached schedules. We consider Net Income (Loss) and Cash Flow from Operating Activities to be the most directly comparable GAAP financial measures to CAD.

CAD is calculated after taking into account all interest expense, cash taxes paid and maintenance capital expenditures, and includes the operating results of each of our businesses for the periods during which CODI owned them.  We believe that CAD provides investors additional information to enable them to evaluate our performance and ability to make anticipated quarterly distributions.   

Neither of Adjusted EBITDA nor CAD is meant to be a substitute for GAAP measures and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.

About Compass Diversified Holdings (“CODI”)

CODI owns and manages a diverse family of established North American middle market businesses. Each of its current subsidiaries is a leader in its niche market.

CODI maintains controlling ownership interests in each of its subsidiaries in order to maximize its ability to impact long term cash flow generation and value. The Company provides both debt and equity capital for its subsidiaries, contributing to their financial and operating flexibility. CODI utilizes the cash flows generated by its subsidiaries to invest in the long-term growth of the Company and to make cash distributions to its shareholders.

Our nine majority-owned subsidiaries are engaged in the following lines of business:

  • The design and marketing of purpose-built tactical apparel and gear serving a wide range of global customers (5.11);
  • The manufacture of quick-turn, small-run and production rigid printed circuit boards (Advanced Circuits);
  • The manufacture of engineered magnetic solutions for a wide range of specialty applications and end-markets (Arnold Magnetic Technologies);
  • Environmental services for a variety of contaminated materials including soils, dredged material, hazardous waste and drill cuttings (Clean Earth);
  • The design and marketing of wearable baby carriers, strollers and related products (Ergobaby);
  • The design and manufacture of custom molded protective foam solutions and OE components (Foam Fabricators);
  • The design and manufacture of premium home and gun safes (Liberty Safe);
  • The manufacture and marketing of portable food warming fuels for the hospitality and consumer markets, flameless candles and house and garden lighting for the home decor market, and wickless candle products used for home decor and fragrance systems (The Sterno Group); and
  • The design, manufacture and marketing of airguns, archery products, optics and related accessories (Velocity Outdoor).

This press release may contain certain forward-looking statements, including statements with regard to the future performance of CODI. Words such as "believes," "expects," "projects," and "future" or similar expressions, are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussion in the Form 10-K filed by CODI with the SEC for the year ended December 31, 2018 and other filings with the SEC. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 
Compass Diversified Holdings
Condensed Consolidated Statements of Operations
(unaudited)
       
  Three Months Ended March 31,
(in thousands, except per share data) 2019   2018
Net sales $ 402,489     $ 344,352  
Cost of sales 266,300     225,186  
Gross profit 136,189     119,166  
Operating expenses:      
Selling, general and administrative expense 93,199     91,300  
Management fees 11,082     10,762  
Amortization expense 17,040     11,537  
Operating income 14,868     5,567  
Other income (expense):      
Interest expense, net (18,582 )   (6,182 )
Amortization of debt issuance costs (927 )   (1,098 )
Loss on sale of Tilray shares (5,300 )    
Other expense, net (571 )   (1,374 )
Income (loss) from continuing operations before income taxes (10,512 )   (3,087 )
Provision (benefit) for income taxes 403     (1,860 )
Net loss from continuing operations (10,915 )   (1,227 )
Loss from discontinued operations, net of tax (586 )   (394 )
Gain on sale of discontinued operations, net of tax 121,659      
Net income (loss) 110,158     (1,621 )
Less: Income from continuing operations attributable to noncontrolling interest 1,300     359  
Less: Income (loss) from discontinued operations attributable to noncontrolling interest (450 )   361  
Net income (loss) attributable to Holdings $ 109,308     $ (2,341 )
       
Basic income (loss) per common share attributable to Holdings      
Continuing operations $ (0.31 )   $ (0.08 )
Discontinued operations 2.03     (0.01 )
  $ 1.72     $ (0.09 )
       
Basic weighted average number of common shares outstanding 59,900     59,900  
       
Cash distributions declared per Trust common share $ 0.36     $ 0.36  
       


Compass Diversified Holdings
Net Sales to Pro Forma Net Sales Reconciliation
(unaudited)
       
  Three months ended March 31,
  2019   2018
       
Net Sales $ 402,489   $ 344,352
Acquisitions (1)   39,828
Pro Forma Net Sales $ 402,489   $ 384,180
       


(1) Net sales of Foam Fabricators and Rimports (Sterno Group add-on) as if those businesses were acquired January 1, 2018.


Compass Diversified Holdings
Subsidiary Pro Forma Net Sales
(unaudited)
       
  Three months ended March 31,
(in thousands) 2019   2018
       
Branded Consumer      
5.11 Tactical $ 88,089   $ 83,957
Ergobaby 22,452   22,162
Liberty 22,204   23,453
Velocity Outdoor (2) 31,137   24,408
Total Branded Consumer $ 163,882   $ 153,980
       
Niche Industrial      
Advanced Circuits $ 23,069   $ 22,063
Arnold Magnetics 30,028   29,399
Clean Earth 63,632   58,221
Foam Fabricators (1) 30,682   30,490
Sterno Group (1) 91,196   90,027
Total Niche Industrial $ 238,607   $ 230,200
       
  $ 402,489   $ 384,180


(1) Foam Fabricators and Rimports (Sterno Group add-on) are proforma as if those businesses were acquired January 1, 2018.
(2) The above 2018 results exclude management's estimate of net sales, before our ownership, of $10.9 million at Ravin which was acquired in August 2018.


Compass Diversified Holdings
Net Income to Adjusted EBITDA and Cash flow Available for Distribution and Reinvestment
(Unaudited)
       
  Three Months Ended March 31,
(in thousands) 2019   2018
Net income (loss) $ 110,158     $ (1,621 )
Loss from discontinued operations, net of income tax (586 )   (394 )
Gain on sale of discontinued operations 121,659      
Income (loss) from continuing operations $ (10,915 )   $ (1,227 )
Provision (benefit) for income taxes 403     (1,860 )
Income (loss) from continuing operations before income taxes $ (10,513 )   $ (3,087 )
Other income (expense), net (571 )   (1,374 )
Amortization of debt issuance costs (927 )   (1,098 )
Gain (loss) on sale of securities (5,300 )    
Interest expense, net (18,582 )   (6,182 )
Operating Income $ 14,867     $ 5,567  
Adjusted For:      
Depreciation 10,581     9,104  
Amortization 17,040     12,208  
Non-controlling shareholder compensation 2,116     2,340  
Acquisition expenses 366     2,189  
Integration services fees 281     656  
Management fees 11,082     10,762  
Other 414     80  
Adjusted EBITDA $ 56,747     $ 42,906  
Interest at Corporate, net of unused fee (1) (16,944 )   (8,395 )
Swap payment (94 )   (706 )
Management fees (11,082 )   (10,762 )
Capital expenditures (maintenance) (4,997 )   (5,886 )
Current tax expense (cash taxes) (2) (2,029 )   (1,783 )
Preferred share distributions (3,781 )   (1,813 )
Discontinued operations (171 )   695  
Miscellaneous items     (238 )
Cash Available for Distribution or Reinvestment ('CAD') $ 17,649     $ 14,018  


(1) Interest expense at Corporate reflects consolidated interest expense less non-cash components such as, unrealized gains and losses on our swap and original issue discount amortization.  We include the cash component of our swap payment above in our reconciliation to CAD.
(2) Current tax expense is calculated by deducting the change in deferred tax from the statement of cash flows from the income tax provision on the statement of operations


Compass Diversified Holdings
Adjusted EBITDA (1)
(unaudited)
       
  Three months ended March 31,
(in thousands) 2019   2018
       
Branded Consumer      
5.11 Tactical $ 8,305     $ 5,896  
Ergobaby 5,597     4,698  
Liberty 2,222     3,346  
Velocity Outdoor (2) 3,987     3,147  
Total Branded Consumer $ 20,111     $ 17,087  
       
Niche Industrial      
Advanced Circuits $ 7,339     $ 6,865  
Arnold Magnetics 3,210     3,398  
Clean Earth 8,260     6,733  
Foam Fabricators (2) 7,226     3,503  
Sterno Group (2) 13,900     8,908  
Total Niche Industrial $ 39,935     $ 29,407  
       
Corporate expense (3) (3,299 )   (3,588 )
Total Adjusted EBITDA $ 56,747     $ 42,906  


(1) Please refer to our recently filed 10-Q for detail on subsidiary pro forma adjusted EBITDA, and reconciliation to Net Income. 
(2) The above 2018 results exclude management's estimate of adjusted EBITDA, before our ownership, of $5.5 million at Rimports, $2.8 million at Foam Fabricators and $2.9 million at Ravin. 
(3) Please refer to the recently filed 10-Q for a reconciliation of our Corporate expense to Net Income.


Compass Diversified Holdings
Summarized Statement of Cash Flows
(unaudited)
       
  Three Months Ended March 31,
(in thousands) 2019   2018
Net cash (used in) provided by operating activities $ (8,936 )   $ 6,643  
Net cash provided by (used in) investing activities 168,944     (415,628 )
Net cash (used in) provided by financing activities (172,448 )   413,418  
Effect of foreign currency on cash (1,049 )   2,007  
Net increase (decrease) in cash and cash equivalents (13,489 )   6,440  
Cash and cash equivalents — beginning of period 53,326     39,885  
Cash and cash equivalents — end of period $ 39,837     $ 46,325  
       


Compass Diversified Holdings
Condensed Consolidated Table of Cash Flows Available for Distribution and Reinvestment
(unaudited)
  Three Months Ended March 31,
(in thousands) 2019   2018
Net income (loss) $ 110,158     $ (1,621 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:      
Depreciation and amortization 28,638     22,933  
Gain on sale of business (121,659 )    
Amortization of debt issuance costs and original issue discount 1,079     1,353  
Unrealized (gain) loss on derivatives 1,099     (2,901 )
Noncontrolling stockholder charges 2,205     2,551  
Provision for loss on receivables 696     328  
Other 334     (177 )
Deferred taxes (2,323 )   (4,311 )
Changes in operating assets and liabilities (29,163 )   (11,512 )
Net cash (used in) provided by operating activities (8,936 )   6,643  
Plus:      
Unused fee on revolving credit facility 387     452  
Successful acquisition costs 366     2,189  
Integration services fee (1) 281     656  
Realized loss from foreign currency effect (2) 363     1,339  
Changes in operating assets and liabilities 29,163     11,512  
Loss on sale of Tilray shares 5,300      
Less:      
Maintenance capital expenditures (3) 4,997     5,972  
Payment of interest rate swap 94     706  
Preferred share distributions 3,781     1,813  
Other 403     282  
CAD $ 17,649     $ 14,018  
       
Distribution paid in April 2019/ 2018 $ 21,564     $ 21,564  


(1) Represents fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership, payable quarterly.
(2) Reflects the foreign currency transaction gain/ loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest.
(3) Excludes growth capital expenditures of approximately $2.5 million and $6.2 million for the three months ended March 31, 2019 and 2018, respectively.


Compass Diversified Holdings
Maintenance Capital Expenditures
(unaudited)
   
  Three months ended March 31,
(in thousands) 2019   2018
Niche Industrial      
Advanced Circuits $ 188   $ 97
Arnold Magnetics 1,112   1,252
Clean Earth 1,350   1,257
Foam Fabricators 498   398
Sterno Group 452   384
Total Niche Industrial $ 3,600   $ 3,388
       
Branded Consumer      
5.11 Tactical $ 212   $ 1,362
Ergobaby 71   288
Liberty 126   61
Velocity Outdoor 988   787
Total Branded Consumer $ 1,397   $ 2,498
       
  $ 4,997   $ 5,886


Compass Diversified Holdings
Condensed Consolidated Balance Sheets
       
  March 31, 2019   December 31, 2018
(in thousands) (unaudited)    
Assets      
Current assets      
Cash and cash equivalents $ 39,837   $ 50,749
Accounts receivable, net 263,494   265,234
Inventories 313,910   307,437
Prepaid expenses and other current assets 87,964   35,810
Current assets of discontinued operations   21,955
Total current assets 705,205   681,185
Property, plant and equipment, net 203,549   208,661
Goodwill and intangible assets, net 1,345,230   1,361,014
Other non-current assets 115,642   12,008
Non-current assets of discontinued operations   109,467
Total assets $ 2,369,626   $ 2,372,335
       
Liabilities and stockholders’ equity      
Current liabilities      
Accounts payable and accrued expenses $ 207,165   $ 226,424
Due to related party 10,609   11,093
Current portion, long-term debt 5,000   5,000
Other current liabilities 27,338   7,334
Current liabilities of discontinued operations   9,429
Total current liabilities 250,112   259,280
Deferred income taxes 61,023   62,284
Long-term debt 955,395   1,098,871
Other non-current liabilities 102,315   17,790
Non-current liabilities of discontinued operations   14,768
Total liabilities 1,368,845   1,452,993
Stockholders' equity      
Total stockholders' equity attributable to Holdings 948,594   859,372
Noncontrolling interest 52,187   48,810
Noncontrolling interest of discontinued operations   11,160
Total stockholders' equity 1,000,781   919,342
Total liabilities and stockholders’ equity $ 2,369,626   $ 2,372,335
       


Compass Diversified Holdings
Ryan J. Faulkingham
Chief Financial Officer
203.221.1703
ryan@compassequity.com
Investor Relations and Media Contact:
The IGB Group
Leon Berman
212.477.8438
lberman@igbir.com