Compass Diversified Holdings (NYSE: CODI)

Press Release

Press Release

<< Back
02/27/19
Compass Diversified Holdings Reports Fourth Quarter and Full Year 2018 Financial Results
Achieves Highest Full Year CAD Since Going Public

WESTPORT, Conn., Feb. 27, 2019 (GLOBE NEWSWIRE) -- Compass Diversified Holdings (NYSE: CODI) (“CODI,” “we,” “our” or the “Company”), an owner of leading middle market businesses, announced today its consolidated operating results for the three and twelve months ended December 31, 2018.

Fourth Quarter 2018 Highlights

  • Generated Cash Provided by Operating Activities of $55.7 million for the fourth quarter of 2018 and $114.5 million for the full year 2018, and Cash Flow Available for Distribution and Reinvestment (“CAD” or “Cash Flow”) of $22.9 million for the fourth quarter of 2018 and $93.7 million for the full year 2018;

  • Reported net loss of $6.5 million for the fourth quarter of 2018 and $1.8 million for the full year 2018;

  • Paid a fourth quarter 2018 cash distribution of $0.36 per share on CODI’s common shares in January 2019, bringing cumulative distributions paid to $17.5152 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 in January 2019;

  • Paid a quarterly cash distribution of $0.4921875 per share on the Company's 7.875% Series B Preferred Shares in January 2019;

  • Subsequent to year end, entered into a definitive agreement to sell CODI’S majority owned subsidiary, FHF Holdings Ltd. (“Manitoba Harvest”), to Tilray Inc. for an aggregate sales price of up to C$419 million.

“We continued to provide shareholders with a sizeable distribution in 2018, backed by our diverse and uncorrelated middle market businesses and our highest CAD since going public,” said Elias Sabo, CEO of Compass Diversified Holdings. “During the year, we also took important steps to build long-term and sustainable value in CODI and its leading subsidiaries.”

Mr. Sabo continued, “We made important investments in our branded consumer businesses to complement growing cash flows in CODI’s industrial businesses and to further drive long-term profitability. We also capitalized on compelling market opportunities, completing a total of six add-on and platform acquisitions to further enhance our earnings power. Complementing this success, we strengthened our liquidity position and capital structure, without diluting shareholders.”

Mr. Sabo concluded, “We are pleased to have commenced 2019 by entering into an agreement to monetize Manitoba Harvest at a highly attractive valuation, highlighting our proven investment model and success creating significant value for shareholders. The sale of Manitoba will significantly increase our total realized gains and we intend to deploy the net proceeds towards repaying our revolving credit facility. As we progress through a robust market, we intend to pursue select add-on and platform acquisitions while continuing to opportunistically consider divestitures, consistent with our success realizing sizeable total gains. With a diversified group of leading niche industrial and branded consumer subsidiaries, we also remain well positioned to continue to provide shareholders with sizeable distributions.”

Operating Results
For the quarter ended December 31, 2018, CODI generated Cash Provided by Operating Activities of $55.7 million, as compared to Cash Provided by Operating Activities of $22.5 million for the quarter ended December 31, 2017. CODI reported Cash Flow (see Note Regarding Use of Non-GAAP Financial Measures below) of $22.9 million for the quarter ended December 31, 2018, as compared to $25.6 million for the prior year’s comparable quarter. CODI’s weighted average number of shares outstanding for the quarters ended December 31, 2018 and December 31, 2017 were 59.9 million.

For the year ended December 31, 2018, CODI generated Cash Provided by Operating Activities of $114.5 million, as compared to Cash Provided by Operating Activities of $81.8 million for the year ended December 31, 2017. CODI reported Cash Flow of $93.7 million for the year ended December 31, 2018, as compared to $92.2 million for the prior year. CODI’s weighted average number of shares outstanding for the twelve month periods ended December 31, 2018 and December 31, 2017 were 59.9 million.

Cash Flow for the fourth quarter of 2018 reflects year-over-year earnings increases at the Company's Advanced Circuits, Arnold Magnetics, and Sterno Group businesses, offset by declines at the Company’s other businesses.

CODI’s Cash Flow 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, Cash Flow excludes the gains from monetizing interests in CODI’s subsidiaries, which have totaled over $770 million since going public in 2006.

Net loss for the quarter ended December 31, 2018 was $6.5 million, as compared to net income of $49.1 million for the quarter ended December 31, 2017. The quarter ended December 31, 2017 included an income tax benefit of $38.7 million primarily related to the enactment of the Tax Cuts and Jobs Act in December 2017, which lowered the U.S. federal corporate income tax rate from 35% to 21%.

For the year ended December 31, 2018, CODI reported a net loss of $1.8 million. This compared to net income of $33.6 million for the year ended December 31, 2017.

Liquidity and Capital Resources
As of December 31, 2018, CODI had approximately $53.3 million in cash and cash equivalents, $496 million outstanding on its term loan facility, $400 million in Senior Notes and $228 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 $372 million at December 31, 2018 under its revolving credit facility.

Fourth Quarter 2018 Distributions
On January 3, 2019, CODI’s Board of Directors (the “Board”) declared a fourth quarter distribution of $0.36 per share on the Company’s common shares (the “Common Shares”). The cash distribution was paid on January 24, 2019 to all holders of record of Common Shares as of January 17, 2019. Since its IPO in May of 2006, CODI has paid a cumulative distribution of $17.5152 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 October 30, 2018, up to, but excluding, January 30, 2019. The distribution for such period was paid on January 30, 2019 to all holders of record of Preferred Shares as of January 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 October 30, 2018, up to, but excluding, January 30, 2019. The distribution for such period was paid on January 30, 2019 to all holders of record of Series B Preferred Shares as of January 15, 2019.

Conference Call
Management will host a conference call on Thursday, February 28, 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 9769716. 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 March 7, 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 9769716.

Note Regarding Use of Non-GAAP Financial Measures
CAD, or Cash Flow, is a non-GAAP measure used by the Company to assess its performance, as well as its ability to sustain and increase quarterly distributions. A number of CODI's businesses have seasonal earnings patterns. Accordingly, the Company believes that the most appropriate measure of its performance is over a trailing or expected 12-month period. We have reconciled CAD, or Cash Flow, to Net Income and Cash Flow from Operating Activities on the attached schedules. We consider Net Income and Cash Flow from Operating Activities to be the most directly comparable GAAP financial measures to CAD, or Cash Flow.

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 ten 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 OEM components (Foam Fabricators);

  • The design and manufacture of premium home and gun safes (Liberty Safe);

  • The manufacture and marketing of branded, hemp-based food products (Manitoba Harvest);

  • 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 Balance Sheets
(unaudited)
       
  December 31, 2018   December 31, 2017
(in thousands)      
Assets      
Current assets      
Cash and cash equivalents $ 53,326     $ 39,885  
Accounts receivable, net 272,403     215,108  
Inventories 318,873     246,928  
Prepaid expenses and other current assets 36,583     24,897  
Total current assets 681,185     526,818  
Property, plant and equipment, net 226,817     173,081  
Goodwill and intangible assets, net 1,452,324     1,112,206  
Other non-current assets 12,009     8,198  
Total assets $ 2,372,335     $ 1,820,303  
       
Liabilities and stockholders’ equity      
Current liabilities      
Accounts payable and accrued expenses $ 234,996     $ 191,411  
Due to related party 11,443     7,796  
Current portion, long-term debt 5,000     5,685  
Other current liabilities 7,841     7,301  
Total current liabilities 259,280     212,193  
Deferred income taxes 74,959     81,049  
Long-term debt 1,098,871     584,347  
Other non-current liabilities 19,883     16,715  
Total liabilities 1,452,993     894,304  
Stockholders' equity      
Total stockholders' equity attributable to Holdings 859,372     873,208  
Noncontrolling interest 59,970     52,791  
Total stockholders' equity 919,342     925,999  
Total liabilities and stockholders’ equity $ 2,372,335     $ 1,820,303  
       


 
Compass Diversified Holdings
Condensed Consolidated Statements of Operations
(unaudited)
               
  Three Months Ended
December 31,
  Year Ended
December 31,
(in thousands, except per share data) 2018   2017   2018   2017
Net sales $ 452,523     $ 348,399     $ 1,691,673     $ 1,269,729  
Cost of sales 304,832     222,468     1,117,485     822,020  
Gross profit 147,691     125,931     574,188     447,709  
Operating expenses:              
Selling, general and administrative expense 97,323     79,382     392,501     318,484  
Management fees 11,452     8,385     44,294     32,693  
Amortization expense 18,796     12,747     68,076     52,003  
Impairment expense     8,461         17,325  
Operating income 20,120     16,956     69,317     27,204  
Other income (expense):              
Interest expense, net (20,112 )   (5,124 )   (55,577 )   (27,623 )
Loss on investment             (5,620 )
Amortization of debt issuance costs (927 )   (1,062 )   (3,905 )   (4,002 )
Other income (expense), net (3,241 )   (316 )   (6,335 )   2,634  
Income (loss) from continuing operations before income taxes (4,160 )   10,454     3,500     (7,407 )
Provision (benefit) for income taxes 2,401     (38,677 )   6,548     (40,679 )
Net income (loss) from continuing operations (6,561 )   49,131     (3,048 )   33,272  
Gain on sale of discontinued operations, net of tax 93         1,258     340  
Net income (loss) (6,468 )   49,131     (1,790 )   33,612  
Less: Income from continuing operations attributable to noncontrolling interest 711     3,129     3,912     5,621  
Net income (loss) attributable to Holdings $ (7,179 )   $ 46,002     $ (5,702 )   $ 27,991  
               
Basic income (loss) per common share attributable to Holdings              
Continuing operations $ (0.25 )   $ 0.53     $ (0.44 )   $ (0.45 )
Discontinued operations         0.02     0.01  
  $ (0.25 )   $ 0.53     $ (0.42 )   $ (0.44 )
               
Basic weighted average number of common shares outstanding 59,900     59,900     59,900     59,900  
               
Cash distributions declared per Trust common share $ 0.36     $ 0.36     $ 1.44     $ 1.44  
               


 
Compass Diversified Holdings
Summarized Statement of Cash Flows
(unaudited)
       
  Year Ended
(in thousands) December 31, 2018   December 31, 2017
Net cash provided by operating activities $ 114,452     $ 81,771  
Net cash used in investing activities (604,080 )   (77,278 )
Net cash provided by (used in) financing activities 500,111     (2,588 )
Effect of foreign currency on cash 2,958     (1,792 )
Net increase in cash and cash equivalents 13,441     113  
Cash and cash equivalents — beginning of period 39,885     39,772  
Cash and cash equivalents — end of period $ 53,326     $ 39,885  
       


 
Compass Diversified Holdings
Condensed Consolidated Table of Cash Flows Available for Distribution and Reinvestment
(unaudited)
  Three Months Ended
December 31,
  Year Ended
December 31,
(in thousands) 2018   2017   2018   2017
Net income (loss) $ (6,468 )   $ 49,131     $ (1,790 )   $ 33,612  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:              
Depreciation and amortization 32,697     21,392     120,575     110,051  
Impairment expense     8,461         17,325  
Gain on sale of businesses, net (93 )       (1,258 )   (340 )
Amortization of debt issuance costs and original issue discount 1,080     1,286     4,483     5,007  
Unrealized (gain) loss on derivatives 2,398     (1,826 )   (2,251 )   (648 )
Loss on investment in FOX             5,620  
Noncontrolling stockholder charges 1,281     2,075     8,975     7,027  
Excess tax benefit on stock compensation             (417 )
Provision for loss on receivables (26 )   (346 )   433     3,964  
Other 961     (101 )   1,007     393  
Deferred taxes (2,850 )   (41,492 )   (9,472 )   (59,429 )
Changes in operating assets and liabilities 26,700     (16,045 )   (6,250 )   (40,394 )
Net cash provided by operating activities 55,680     22,535     114,452     81,771  
Plus:              
Unused fee on revolving credit facility 348     713     1,630     2,856  
Successful acquisition costs 348     214     5,343     2,050  
Integration services fee (1) 563     375     2,719     3,083  
Realized loss from foreign currency effect (2) 2,719     268     4,083      
Excess tax benefit on stock compensation             417  
Changes in operating assets and liabilities     16,045     6,250     40,394  
Other (3) 4,296     394     5,181      
Less:              
Maintenance capital expenditures (4) 5,425     6,855     27,246     20,270  
Payment of interest rate swap 339     914     1,783     3,964  
Changes in operating assets and liabilities 26,700              
Realized gain from foreign currency effect (2)             3,315  
Preferred share distributions 3,781     2,457     12,179     2,457  
Earnout provision adjustment 4,800     4,736     4,800     4,736  
Other (5)             3,586  
Estimated cash flow available for distribution and reinvestment $ 22,909     $ 25,582     $ 93,650     $ 92,243  
               
Distribution paid in April 2018/ 2017 $     $     $ 21,564     $ 21,564  
Distribution paid in July 2018/ 2017         21,564     21,564  
Distribution paid in October 2018/ 2017         21,564     21,564  
Distribution paid in January 2019/ 2018 21,564     21,564     21,564     21,564  
  $ 21,564     $ 21,564     $ 86,256     $ 86,256  
                               

(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)  Includes $4.2 million in additional reserves established during the fourth quarter of 2018 for slow moving inventory acquired prior to our ownership of 5.11.
(4)  Excludes growth capital expenditures of approximately $3.3 million and $6.8 million for the three months ended December 31, 2018 and 2017, and $22.5 million and $24.3 million for the year ended December 31, 2018 and 2017, respectively.
(5)  Includes amounts for the establishment of additional accounts receivable reserves related to a retail customer who filed bankruptcy during the first and third quarter of 2017.

   
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
   

 

CompassLogo.jpg

Source: Compass Diversified Holdings