UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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þ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172021
or
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34927
Compass Diversified Holdings
(Exact name of registrant as specified in its charter)
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| Delaware | | 57-6218917 |
(JurisdictionState or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
Commission File Number: 001-34926
Compass Group Diversified Holdings LLC
(Exact name of registrant as specified in its charter)
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| Delaware | | | 20-3812051 |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
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| 301 Riverside Avenue, Second Floor | | Westport, | CT | 06880 |
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Delaware | | 20-3812051 |
(Jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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301 Riverside Avenue
Second Floor
Westport, CT
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(Address of principal executive offices)office) | | (Zip Code) |
(203) 221-1703
(Registrants’ telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
| Shares representing beneficial interests in Compass Diversified Holdings (“common shares”) | | CODI | | New York Stock Exchange |
Series A Preferred Shares representing Series A Trust Preferred Interestbeneficial interests in Compass Diversified Holdings ("Series | | CODI PR A Preferred Shares") | | New York Stock Exchange |
| Series B Preferred Shares representing beneficial interests in Compass Diversified Holdings | | CODI PR B | | New York Stock Exchange |
| Series C Preferred Shares representing beneficial interests in Compass Diversified Holdings | | CODI PR C | | New York Stock Exchange |
Securities registered pursuant to Section 12 (g)12(g) of the Act: None Indicate by check mark if the registrants are collectively a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrants are collectively not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No þ
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrants are collectively a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | | þ
| Accelerated filer | | ¨
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| Non-accelerated filer | | ¨
| Smaller reporting company | | ¨☐ |
| | | Emerging growth company | | ¨☐ |
If an emerging growth company, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ
Indicate by check mark whether the registrants are collectively a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No þ
The aggregate market value of the outstanding common shares of trust stock held by non-affiliates of Compass Diversified Holdings at June 30, 20172021 was $880,939,012$1,395,132,407 based on the closing price on the New York Stock Exchange on that date. For purposes of the foregoing calculation only, all directors and officers of the registrant have been deemed affiliates. There were 59,900,00069,450,318 common shares of trust stock without par value outstanding at February 23, 2018.18, 2022.
Documents Incorporated by Reference
Certain information in the registrant’s definitive proxy statement to be filed with the Commission relating to the registrant’s 20182022 Annual Meeting of Shareholders is incorporated by reference into Part III.
Table of Contents
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| PART I | | |
| Item 1. | Business | |
| Item 1A. | Risk Factors | |
| Item 1B. | Unresolved Staff Comments | |
| Item 2. | Properties | |
| Item 3. | Legal Proceedings | |
| Item 4. | Mine Safety Disclosures | |
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| PART II | | Page |
PART I | | |
Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II | | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | Other Information | | |
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| PART III | | |
| Item 10. | | |
| Item 11. | Executive Compensation | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV | | |
| Item 15. | | |
| Item 16. | Form 10-K Summary | |
NOTE TO READER
In reading this Annual Report on Form 10-K, references to:
•the “Trust” and “Holdings” refer to Compass Diversified Holdings;
•the “Company”“LLC” refer to Compass Group Diversified Holdings LLC;
•the "Company" refer to Compass Diversified Holdings and Compass Group Diversified Holdings LLC, collectively;
•“businesses”, “operating segments”, “subsidiaries” and “reporting units” all refer to, collectively, the businesses controlled by the Company;
•the “Manager” refer to Compass Group Management LLC (“CGM”);
•the “Trust Agreement”"Trust Agreement" refer to the SecondThird Amended and Restated Trust Agreement of the Trust dated as of December 6, 2016;August 3, 2021;
•the “2011 Credit Facility” refer to the Credit Facility with a group of lenders led by TD Securities (USA) LLC (“TD Securities”) which provided for the 2011 Revolving Credit Facility and the 2011 Term Loan Facility;
the "2014"2021 Credit Facility" refer to the second amended and restated credit agreement entered into on June 14, 2014 with a group of lenders led byMarch 23, 2021 among the Company, the Lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as administrative agent, as amended from time to time, which provides for aAdministrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto;
•the "2021 Revolving Credit Facility" refers to the $600 million in revolving loans, swing line loans and letters of credit provided by the 2021 Credit Facility and a Term Loan;that matures in 2026;
•the "2014 Revolving"2018 Credit Facility" refer to the $550 millionamended and restated credit agreement entered into on April 18, 2018 among the Company, the Lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto, which was subsequently amended and restated by the 2021 Credit Facility;
•the "2018 Revolving Credit FacilityFacility" refers to the $600 million in revolving loans, swing line loans and letters of credit provided by the 20142018 Credit Facility that matures in June 2019;Facility;
•the "2014"2018 Term Loan" refer to the $325$500 million Term Loan Facility,term loan provided by the 20142018 Credit Facility that matures in June 2021;Facility;
•the "2016 Incremental Term Loan""LLC Agreement" refer to the $250 million Tranche B Term Facility provided by the 2014 Credit Facility (together with the 2014 Term Loan, the "Term Loans");
the “LLC Agreement” refer to the fifth amendedSixth Amended and restated operating agreementRestated Operating Agreement of the Company dated as of December 6, 2016;August 3, 2021, as further amended; and
“we”, “us”•"we," "us" and “our”"our" refer to the Trust, the Company and the businesses together.
Statement Regarding Forward-Looking Disclosure
This Annual Report on Form 10-K, including, but not limited to, the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. We may, in some cases, use words such as “project,” “predict,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” or “may”"project," "predict," "believe," "anticipate," "plan," "expect," "estimate," "intend," "should," "would," "could," "potentially," "may," or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. All statements other than statements of historical or current fact are “forward-looking statements” for purposes of federal and state securities laws. Forward looking statements include, among other things, (i) statements as to our future performance or liquidity, such as expectations for our results of operation, net income, adjusted EBITDA, and ability to make quarterly distributions and (ii) our plans, strategies and objectives for future operations, including our business outlook and planned capital expenditures. Forward-looking statements in this Annual Report on Form 10-K are subject to a number of risks and uncertainties, some of which are beyond our control, including, among other things:
•the adverse impact on the U.S. and global economy, including the markets in which we operate, of the novel coronavirus, which causes the Coronavirus disease 2019 (COVID-19), and the impact in the near, medium and long-term on our business, results of operations, financial position, liquidity or cash flows;
•disruption in the global supply chain, labor shortages and high labor costs;
•difficulties and delays in integrating, or business disruptions following, acquisitions or an inability to fully realize cost savings and other benefit related thereto;
•our ability to successfully operate our businesses on a combined basis, and to effectively integrate and improve any future acquisitions;
•our ability to remove our ManagerCGM and our Manager’sCGM’s right to resign;
•our trust and organizational structure, which may limit our ability to meet our dividend and distribution policy;
•our ability to service and comply with the terms of our indebtedness;
•our cash flow available for distribution and reinvestment and our ability to make distributions in the future to our shareholders;
•our ability to pay the management fee and profit allocation if and when due;
•our ability to make and finance future acquisitions;
•our ability to implement our acquisition and management strategies;
•the legal and regulatory environment in which our businesses operate;
•trends in the industries in which our businesses operate;
•changes in general economic, political or business conditions or economic, political or demographic trends in the United States and other countries in which we have a presence, including changes in interest rates and inflation;
•risks associated with possible disruption in operations or the economy generally due to terrorism or natural disaster or social, civil or political unrest;
•environmental risks affecting the business or operations of our businesses;
•our and our Manager’sCGM’s ability to retain or replace qualified employees of our businesses and our Manager;CGM;
•the impact of the tax reclassifications of the Trust;
•costs and effects of legal and administrative proceedings, settlements, investigations and claims; and
•extraordinary or force majeure events affecting the business or operations of our businesses.
Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. A description of some of the risks that could cause our actual results to differ appears under the section “Risk Factors”. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this Annual Report on Form 10-K may not occur. These forward-looking statements are made as of the date of this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise, except as required by law.
PART I
ITEM 1. BUSINESS
Compass Diversified Holdings, a Delaware statutory trust (“Holdings”, or the “Trust”), was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Companycompany (the “Company”“LLC”), was also formed on November 18, 2005. The Trust and the CompanyLLC (collectively, “CODI”the “Company”) were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. The Trust is the sole owner of 100% of the Trust Interests, as defined in our LLC Agreement, of the Company.LLC. Pursuant to the LLC Agreement, the Trust owns an identical number of Trust Interests in the CompanyLLC as exist for the number of outstanding shares of the Trust. Accordingly, our shareholders are
The Trust was previously treated as beneficial ownersa partnership for U.S. federal income tax purposes but elected, effective September 1, 2021, to be taxed as an association taxable as a corporation. Following this tax election, Trust shareholders should generally only be subject to taxation from holding Trust shares in connection with disposition of Trust Interests inshares and receipt of taxable dividends from the Company and, as such, areTrust. Trust shareholders subject to tax under partnership income tax provisions.rules regarding “unrelated business taxable income” (or “UBTI”) will no longer be allocated UBTI from the Trust.
The CompanyLLC is the operating entity with a board of directors whose corporate governance responsibilities are similar to that of a Delaware corporation. The Company’sLLC’s board of directors oversees the management of the Company and our businesses and the performance of Compass Group Management LLC (“CGM” or our “Manager”). Certain persons who are employees and partners of our Manager receive a profit allocation as beneficial owners of 60.4%57.8% through Sostratus LLC of the Allocation Interests in us, as defined in our LLC Agreement.
Overview
We acquire controlling interests in and actively manage businesses that we believe (i) operate in industries with long-term macroeconomic growth opportunities, (ii) have positive and stable cash flows, (iii) face minimal threats of technological or competitive obsolescence, and (iv) have strong management teams largely in place.
Our We offer investors a unique public structure provides investors with an opportunity to participateown a diverse group of leading middle-market businesses in the ownershipniche-industrial and growth of companies which have historically been owned by private equity firms, wealthy individuals or families. Through the acquisition of a diversified group of businesses with these characteristics, we believe we offer investors an opportunity to diversify their own portfolio risk while participating in the ongoing cash flows of those businesses through the receipt of quarterly distributions.branded-consumer sectors.
Our disciplined approach to our target marketmarkets provides opportunities to methodically purchase attractive businesses at values that are accretive to our shareholders. For sellers of businesses, our unique financial structure allows us to acquire businesses efficiently with little or no third party financing contingencies and, following acquisition, to provide our businesses with substantial access to growth capital. In addition, our permanent capital model and ample liquidity allows us to acquire businesses at any point across economic cycles, ensuring that we are able to act quickly when the opportunity presents itself to do so and that we’re not paralyzed when markets are volatile.
We believe that private company operators and corporate parents looking to sell their business units may consider us an attractive purchaser because of our ability to:
•provide ongoing strategic and financial support for their businesses;businesses, including professionalization of our subsidiaries at scale;
•maintain a long-term outlook as to the ownership of those businessesbusinesses;
•sustainably invest in growth capital and/or add-on acquisitions where such an outlook is required for maximization of our shareholders’ return on investment;appropriate; and
•consummate transactions efficiently without being dependent on third-party transaction financing.
In particular, we believe that our outlook on length of ownership and active management on our part may alleviate the concern that many private company operators and parent companies may have with regard to their businesses going through multiple sale processes in a short period of time. We believe this outlook reduces both the risk that businesses may be sold at unfavorable points in the overall market cycle and enhances our ability to develop a comprehensive strategy to grow the earnings and cash flows of each of our businesses, which we expect will better enable us to meet our long-term objective of continuing to pay distributions to our shareholders while increasing shareholder value. businesses.
Finally, it has been our experience, that our ability to acquire businesses without the cumbersome delays and conditions typical of third party transactional financing is appealing to sellers of businesses who are interested in confidentiality, speed and certainty to close.
We believe our management team’s strong relationships with industry executives, accountants, attorneys, business brokers, commercial and investment bankers, and other potential sources of acquisition opportunities offer us substantial opportunities to assess small to middle market businesses available for acquisition. In addition, the
flexibility, creativity, experience and expertise of our management team in structuring transactions allows us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.
In terms of the businesses in which we have a controlling interest as of December 31, 2017,2021, we believe that these businesses have strong management teams, operate in strong markets with defensible market niches and environmental, social and governance ("ESG") tailwinds, and maintain long-standing customer relationships.
We categorize the businesses we own into two separate groups of businesses (i) branded consumer businesses and, (ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we believe
capitalize on a valuable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in their particular product category.categories. Niche industrial businesses are characterized as those businesses that focus on manufacturing and selling particular products and industrial services within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector.sectors.
The following is a brief summary of the businesses in which we own a controlling interest at December 31, 2017:2021:
Branded Consumer Businesses
5.11
5.11 ABR Corp. ("5.11 Tactical" or "5.11"5.11") is a leading provider of purpose-built tacticaltechnical 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, footwear 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 Tactical for approximately $408.2 million in August 2016. We currently own 97.5%97.6% of the outstanding stock of 5.11 on a primary basis and 85.5%88.4% on a fully diluted basis.
BOA
Crosman
Crosman Corp.BOA Holdings Inc. ("Crosman"BOA") creator of the revolutionary, award-winning, patented BOA Fit System, partners with market-leading brands to make the best gear even better. Delivering fit solutions purpose-built for performance, the BOA Fit System is featured in footwear across snow sports, cycling, hiking/trekking, golf, running, court sports, workwear as well as headwear and medical bracing. The system consists of three integral parts: a leading designer, manufacturer,micro-adjustable dial, high-tensile lightweight laces, and marketer of airguns, archery products, laser aiming devices,low friction lace guides creating a superior alternative to laces, buckles, Velcro, and related accessories. Crosman offers its products under the highly recognizable Crosman, Benjaminother traditional closure mechanisms. Each unique BOA configuration is engineered for fast, effortless, precision fit, and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. Crosmanis backed by The BOA Lifetime Guarantee. BOA is headquartered in Bloomfield, New York.Denver, Colorado and has offices in Austria, Greater China, South Korea, and Japan. We made loans to, and purchasedacquired a controlling interest in, CrosmanBOA on June 2, 2017October 16, 2020 for approximately $150.4 million.$454.3 million. We currently own 98.8%91.8% of the outstanding stock of CrosmanBOA on a primary basis and 89.2%83.8% on a fully diluted basis.
Ergobaby
Ergobaby Carrier, Inc. (“Ergobaby”), headquartered in Los Angeles,Torrance, California, is dedicated to building a global community of confident parents with smart, ergonomic solutions that enable and encourage bonding between parents and babies. Ergobaby offers a broad range of award-winning baby carriers, strollers, car seats, swaddlers, nursing pillows, and related products that fit into families’ daily lives seamlessly, comfortably and safely. We made loans to, and purchased a controlling interest in, Ergobaby on September 16, 2010 for approximately $85.2 million. We currently own 82.7%81.7% of the outstanding stock of Ergobaby on a primary basis and 76.6%72.7% on a fully diluted basis.
Liberty SafeLugano
Liberty Safe and Security Products,Lugano Diamonds & Jewelry, Inc. (“Liberty Safe”("Lugano Diamonds" or “Liberty”"Lugano"), headquartered in Payson, Utah, is a leading designer, manufacturer and marketer of premium home, officehigh-end, one-of-a-kind jewelry sought after by some of the world’s most discerning clientele. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art and gun safesphilanthropic community. Lugano is headquartered in North America. From its over 300,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles.Newport Beach, California. We made loans to, and purchased a controlling interest in, Liberty SafeLugano on March 31, 2010September 3, 2021 for approximately $70.2$263.3 million. We currently own 88.6%59.9% of the outstanding stock of Liberty SafeLugano on a primary basis and 84.7%58.1% on a fully diluted basis.
Manitoba HarvestMarucci Sports
Marucci Sports, LLC ("Manitoba Harvest"Marucci Sports" or "Manitoba""Marucci"), headquartered in Winnipeg, Manitoba, is a pioneerleading designer, manufacturer, and leader in the manufacturemarketer of premium wood and distribution of branded, hemp-based foodsmetal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and hemp-based ingredients. Manitoba Harvest’s products, which include Hemp Hearts™, Hemp Heart Bites™,off-field apparel, and Hemp protein powders, are currently carried in approximately 13,000 retail stores across the United Statesother baseball and Canada.softball equipment used by professional and amateur athletes. Marucci also develops and licenses franchises for sports training facilities. We made loans to, and purchased a controlling interest in, Manitoba HarvestMarucci Sports on July 10, 2015April 20, 2020 for approximately $102.7 million (C$130.3 million).approximately $198.9 million. Marucci is headquartered in Baton Rouge, Louisiana. We currently own 76.6%91.1% of the outstanding stock of Manitoba HarvestMarucci Sports on a primary basis and 67.0%82.8% on a fully diluted basis.
Velocity Outdoor
Velocity Outdoor Inc. ("Velocity Outdoor" or "Velocity") is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity Outdoor's other primary product categories are archery, with products including CenterPoint crossbows and the Pioneer Airbow, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products. We made loans to, and purchased a controlling interest in, Velocity Outdoor on June 2, 2017 for approximately $150.4 million. In September 2018, Velocity acquired Ravin Crossbows, LLC ("Ravin" or "Ravin Crossbows"), a manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related to the advancement of crossbow technology. Velocity Outdoor is headquartered in Bloomfield, New York. We currently own 99.3% of the outstanding stock of Velocity Outdoor on a primary basis and 87.6% on a fully diluted basis.
Niche Industrial Businesses
Advanced Circuits
Compass AC Holdings, Inc. (“Advanced Circuits” or “ACI”), headquartered in Aurora, Colorado, is a provider of small-run, quick-turn and volume production rigid printed circuit boards, or “PCBs”, throughout the United States. PCBs are a vital component of virtually all electronic products. The small-run and quick-turn portions of the PCB industry are characterized by customers requiring high levels of responsiveness, technical support and timely delivery. We made loans to, and
purchased a controlling interest in, Advanced Circuits, on May 16, 2006 for approximately $81.0 million.
On October 13, 2021, the Company, as the representative of the holders of stock and options of Advanced Circuits, entered into a definitive plan of merger to sell all of the outstanding securities of Advanced Circuits. Advanced Circuits has been classified as held for sale at December 31, 2021. Refer to Note D - Discontinued Operations for additional information. Altor Solutions
FFI Compass, Inc. ("Altor Solutions" or "Altor") (formerly "Foam Fabricators"), headquartered in Scottsdale, Arizona, is a designer and manufacturer of custom molded protective foam solutions and OEM components made from expanded polystyrene (EPS) and other expanded polymers. Altor provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products and others. Altor’s molded foam solutions offer shock and vibration protection, surface protection, temperature control, resistance to water absorption and vapor transmission and other protective properties critical for shipping small, delicate items, heavy equipment or temperature-sensitive goods. Altor operates 16 molding and fabricating facilities across North America, creating a geographic footprint of strategically located manufacturing plants to efficiently serve national customer accounts. We acquired Altor on February 15, 2018 for a purchase price of approximately $253.4 million. We currently own 69.4%100.0% of the outstanding stock of Advanced CircuitsAltor on a primary basis and 69.2%91.2% on a fully diluted basis.
Arnold
AMT Acquisition Corporation (“Arnold” or “Arnold Magnetics”Corp. ("Arnold"), headquartered in Rochester, New York, with nine additional facilities worldwide, is serves a global manufacturervariety of engineered magnetic solutions for a wide range of specialty applications and end-markets,markets including aerospace and defense, general industrial, motorsport/automotive, oil and gas, medical, general industrial, electric utility,energy, reprographics and advertising specialtyspecialties. Over the course of more than 100 years, Arnold has successfully evolved and adapted its products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold Magnetics produces high performance permanent magnets (PMAG), turnkey electric motors ("Ramco"), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag)(Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold has expanded globally and built a diverse and blue-chip customer base totaling more than 2,000strong relationships with its customers worldwide. Arnold is the largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems. Arnold is headquartered in Rochester, New York. We made loans to, and purchased a controlling interest in, Arnold on March 5, 2012 for approximately $128.8 million. We currently own 96.7%98.0% of the outstanding stock of Arnold on a primary basis and 84.7% on a fully diluted basis.
Clean Earth
Clean Earth Holdings, Inc. ("Clean Earth"), headquartered in Hatboro, Pennsylvania, 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. We made loans to, and purchased a controlling interest in, Clean Earth on August 26, 2014 for approximately $251.4 million. We currently own 97.5% of the outstanding stock of Clean Earth on a primary basis and 79.8%85.5% on a fully diluted basis.
Sterno
Candle Lamp Company,The Sterno Group LLC ("Sterno"), headquartered in Corona, California, is the parent company of Sterno Products, LLC ("Sterno Products") and Rimports, LLC. Sterno is a leading manufacturer and marketer of portable food warming devices and creative table lighting solutionsfuels for the food service industryhospitality and consumer markets, flameless candles and outdoorhouse and garden lighting for the home decor market, and wickless candle products used for consumers. Sterno's product line includes wickhome decor and chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps.fragrance systems. We made loans to, and purchased all of the equity interests in, Sterno on October 10, 2014 for approximately $160.0 million. Sterno offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps through their Sterno Products division. In February 2018, Sterno acquired Rimports Inc. ("Rimports"), which is a manufacturer and distributor of branded and private label scented wax cubes and warmer products used for home decor and fragrance systems. We currently own 100.0% of the outstanding stock of Sterno on a primary basis and 89.5%87.1% on a fully diluted basis.
Our businesses also represent our operating segments. See “Our Businesses”“Our Businesses” and “Note EF – Operating Segment Data” to our Consolidated Financial Statements for further discussion of our businesses as our operating segments, including information related to geographies. 2017 Highlights and Recent Events
Trust Preferred Share Issuance
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares") for gross proceeds of $100.0 million, or $96.4 million net of underwriters' discount and issuance costs.
Acquisition of Crosman
On June 2, 2017, through a wholly owned subsidiary, Crosman Acquisition Corp., we acquired 98.9% of the outstanding equity of Bullseye Acquisition Corporation, which is the sole owner of Crosman Corp. ("Crosman"). Crosman is a designer, manufacturer and marketer of airguns, archery products and related accessories. Headquartered in Bloomfield, New York, Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channels and distributors serving smaller specialty stores and international markets. Its diversified product portfolio includes the widely known Crosman, Benjamin and CenterPoint brands. The purchase price, including proceeds from noncontrolling interests and net of transaction costs, was approximately $150.4 million. Crosman management invested in the transaction along with the Company, representing approximately 1.1% of the initial noncontrolling interest.
Divestiture of FOX shares
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. As a result of this secondary public offering, the Company no longer holds an ownership interest in FOX.
20172021 Distributions
Common shares - For the 20172021 fiscal year we declared distributions to our common shareholders totaling $1.44$2.21 per share.
share, inclusive of our special cash distribution of $0.88 per share in connection with our tax reclassification.
Preferred shares - For the 20172021 fiscal year we declared distributions to our preferred shareholders totaling $1.067$1.8125 per share on our Series A Preferred Shares,
Subsequent Events
Acquisition of Foam Fabricators
In January 2018, we entered into an agreement to acquire Foam Fabricators, Inc. (“Foam Fabricators”) for a purchase price of $247.5 million (excluding working capital and certain other adjustments upon closing). Headquartered in Scottsdale, Arizona, Foam Fabricators is a leading designer and manufacturer of custom molded protective foam solutions and OEM components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP). Founded in 1957, the Foam Fabricators operates 13 state-of-the-art molding and fabricating facilities across North America. Foam Fabricators provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, and building products. For the trailing twelve months ended November 30, 2017, Foam Fabricators reported net revenue of approximately $126 million. The acquisition of Foam Fabricators closed on February 15, 2018, with the Company funding the acquisition through a draw $1.96875 per share on our 2014 Revolving Credit Facility.
Acquisition of Rimports
In January 2018, our Sterno business entered into an agreement to acquire Rimports, Inc. ("Rimports") for a purchase price of approximately $145 million, excluding working capitalSeries B Preferred Shares and other adjustments upon closing, plus a potential earn-out of up to $25 million based on future financial performance of Rimports. Rimports is a manufacturer and distributor of branded and private label scented, wickless candle products used for home decor and fragrance. Headquartered in Provo, Utah, Rimports offers an extensive line of ceramic wax warmers, scented wax cubes, essential oils and diffusers through the mass retail channel. For the trailing twelve months ended November 30, 2017, Rimports reported net revenue of $155.4 million. The acquisition of Rimports closed on February 26, 2018, with the Company funding the acquisition through a draw$1.96875 per share on our 2014 Revolving Credit Facility.Series C Preferred Shares.
Tax Reporting
Information returns will be filed byOn August 3, 2021, the shareholders of CODI approved amendments to the Second Amended and Restated Trust Agreement of the Trust and the Fifth Amended and Restated Operating Agreement of the Company withto allow the Internal Revenue Service ("IRS"Company’s Board of Directors (the “Board”), to cause the Trust to elect to be treated as required, with respecta corporation for U.S. federal income tax purposes (the “tax reclassification”) and, at its discretion in the future, cause the Trust to be converted to a corporation. Following the shareholder vote, the Board resolved to cause the Trust to elect to be treated as a corporation for U.S. federal income tax purposes. The Trust was taxed as a partnership for U.S. federal income tax purposes since January 1, 2007 and until the tax reclassification became effective on September 1, 2021.
The Trust will be treated as a corporation for any taxable period beginning on or after the tax reclassification. Income, gain, loss, deduction and other items derivedcredit from the Company’s activities. The Company has and will file a partnership return with the IRS and intends to issue a Schedule K-1 to the trustee. The trustee intends to provide information to each holder of shares using a monthly convention as the calculation period. For 2017 and future years, the Trust will continueno longer be passed through to the Trust shareholders. The Trust will issue its final Schedule K-1s for the taxable period beginning January 1, 2021 and ending August 31, 2021, the last day on which the Trust was treated as a partnership for U.S. federal income tax purposes. Thereafter the Trust will stop issuing annual Form 1065, Schedule K-1s and Trust shareholders will no longer be subject to current taxation on the Trust’s earnings. Trust shareholders subject to rules regarding “unrelated business taxable income” (or “UBTI”) will no longer be allocated UBTI from the Trust.
The Trust will be required to file a Form 10651120, U.S. Corporation Income Tax Return on an annual basis and issuefor all taxable periods beginning on or after the tax reclassification. In addition, distribution with respect to Trust shares (including Trust preferred shares) will now be reported on Form 1099-DIV, instead of on Schedule K-1 to shareholders. For 2017, we delivered the Schedule K-1 to shareholders within the same time frame as we delivered the schedule to shareholders for the 2016 and 2015 taxable years. The relevant and necessary information for tax purposes is readily available electronically through our website. Each holder will be deemed to have consented to provide relevant information, and if the shares are held through a broker or other nominee, to allow such broker or other nominee to provide such information as is reasonably requested by us for purposes of complying with our tax reporting obligations.K-1.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file reports with the Securities and Exchange Commission (the "SEC" or the "Commission"), including Forms S-1 and S-3 under the Securities Act of 1933, as amended (the "Securities Act"), and Forms 10-K, 10-Q, and 8-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which include exhibits, schedules and amendments to those reports. The public may read and copy any materials we file withreports, as well as other filings required by the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. In addition, copies of such reports, and amendments thereto, are available free of charge through our website at http://www.compassdiversifiedholdings.comwww.ir.compassequity.com as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.
Organizational Structure (1)
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| 1) | |
1)
| The percentage holdings shown in respect to the trust reflect the ownership of the Trust common shares as of December 31, 2017.2021. |
2)
| Our non-affiliated holders |
| 2) | Path Spirit Limited is the ultimate controlling person of common shares own approximately 84.2% of the Trust common shares andCGI Holdings Maygar LLC. CGI Maygar Holdings, LLC owns approximately 13.2%12.0% of the Trust common shares and is our single largest holder. Path Spirit Limited isOur non-affiliated holders of common shares own approximately 85.1% of the ultimate controlling personTrust common shares. The remaining 2.9% of CGI Maygar LLC.Trust common shares are owned by our Directors and Officers. Mr. Offenberg,Sabo, our Chief Executive Officer, is not a director, officer or member of CGI Maygar Holdings, LLC or any of its affiliates. The remaining 2.6% of Trust common shares are owned by our Directors and Officers. |
3)
| 63.4% |
| 3) | 57.8%beneficially owned by certain persons who are employees and partners of our Manager. C. Sean Day, the Chairman of our Board of Directors, CGI and the former founding partnerpartners of the Manager, are non-managing members. |
4)
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| 4) | Mr. OffenbergSabo is a partner of this entity. The Manager owns less than 1.0% of the common shares of the Trust. |
5)
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| 5) | The Allocation Interests, which carry the right to receive a profit allocation, represent less than 0.1% equity interest in the Company. |
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| 6) | On October 13, 2021, we entered into an agreement - subject to closing conditions - to sell ACI. ACI has been classified as held-for-sale at December 31, 2021. |
Our Manager
Our Manager, CGM, has been engaged to manage the day-to-day operations and affairs of the Company and to execute our strategy, as discussed below. Our management team has worked together since 1998. Collectively, our management team has extensive experience in acquiring and managing small and middle market businesses. We believe our Manager is unique in the marketplace in terms of the success and experience of its employees in acquiring and managing diverse businesses of the size and general nature of our businesses. We believe this experience will provide us with an advantage in executing our overall strategy. Our management team devotes a majoritysubstantially all of its time to the affairs of the Company.
We have entered into a management services agreement, (the “Management Services Agreement” or “MSA”) pursuant to which our Manager manages the day-to-day operations and affairs of the Company and oversees the management and operations of our businesses. We pay our Manager a quarterly management fee for the services it performs on our behalf. In addition, certain persons who are employees and partners of our Manager receive a profit allocation with respect to its Allocation Interests in us. All of the Allocation Interests in us are owned by Sostratus LLC. Payment of profit allocations to Sostratus LLC can occur for each of our subsidiaries during the 30-day period following the fifth anniversary of the date upon which we acquired a controlling interest in that business (a "Holding Event") to the extent contribution based profit has been earned and upon the sale of a subsidiary from which there is a realizable gain (a "Sale Event"). See Part III, Item 13 “Certain“Certain Relationships and Related Transactions”Transactions, and Director Independence” for further descriptions of the management fees and profit allocations. The Company’s Chief Executive Officer and Chief Financial Officer are employees of our Manager and have been seconded to us. Neither the Trust nor the CompanyLLC has any other employees. Although our Chief Executive Officer and Chief Financial Officer are employees of our Manager, they report directly to the Company’sLLC’s board of directors. The management fee paid to our Manager covers all expenses related to the services performed by our Manager, including the compensation of our Chief Executive Officer and other personnel providing services to us. The CompanyLLC reimburses our Manager for the compensation and related costs and expenses of our Chief Financial Officer and his staff, who dedicate substantially all of their time to the affairs of the Company.
Market Opportunity
We acquire and actively manage small and middle market businesses. We characterize small to middle market businesses as those that generate annual cash flows of up to $60 million.$100 million per year. We believe that the merger and acquisition market for small to middle marketthese businesses is highly fragmented and often provides opportunities to purchase businesses at more attractive prices.prices and achieve better outcomes for our shareholders. We believe thatthis is driven by the following factors contribute to lower acquisition multiples for small and middle market businesses:factors:
there are fewer potential acquirers•third-party financing for these businesses;
third-party financing generallyacquisitions is often less available or terms are less favorable for these acquisitions;the borrower;
•sellers of these businesses frequently consider non-economic factors, such as continuing board membershiplegacy or the effect of the sale on their employees; and
•these businesses are less frequentlymore likely to be sold pursuant tooutside of an auction process.process or as part of a limited process; and
•"add-on" acquisitions can often be completed at attractive multiples of cash flow.
Frequently, opportunities exist to support and augment existing management at such businesses and improve the performance of these businesses upon their acquisition.acquisition through active management. We are business builders rather than asset traders. In the past, our management team has acquired businesses that were owned by entrepreneurs or large corporate parents. In these cases, our management team has frequently found that there have been opportunities to further build uponprofitably invest in areas of the management teams of acquired businesses beyond thoselevels that existed at the time of acquisition. In addition, our management team has frequently found that processes such as financial reporting and management information systems of acquired businesses may be improved, both of which can leadleading to improvements in reporting and operations and ultimately earnings and cash flow. Finally, because theseour management team often acts as a business development arm for our businesses tend to be too small to have their own corporate development efforts, opportunities frequently exist to assist these businesses as they pursue organic or external growth strategies that were oftenmay not have been pursued by their previous owners.
Our Strategy
CODI’s permanent capital structure enables us to invest in people, processes, culture, and growth opportunities that drive transformational change. We have two primary strategies that we use in order to provide distributions to our shareholders and increase shareholder value.support long-term value creation. First, we focus on growing the earnings and cash flow from our acquired businesses.businesses and help them professionalize at scale. We believe that the scale and scope of our businesses give us a diverse base of cash flow upon which to further build. Second, we identify, perform due diligence on, negotiate and consummate additional platform acquisitions of small to middle market businesses in attractive industry sectors in accordance with acquisition criteria established by the board of directorsdirectors.
Management Strategy
Our management strategy involves the proactive financial and operational management of the businesses we own in order to increase cash flow, pay distributions to our shareholdersflows and increase shareholder value. Our Manager actively oversees and supports the management teams of each of our businesses by, among other things:
•recruiting and retaining talented managers to operate our businesses using structured incentive compensation programs, including non-controlling equity ownership, tailored to each business;
•regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;
•identifying and aligning with external policy and performance tailwinds such as those influenced by growing climate, health, and social justice concerns (and similar environmental, social and governance ("ESG") drivers);
•assisting management in their analysis and pursuit of prudent organic growth strategies;
•identifying and working with management to execute attractive external growth and acquisition opportunities;
•assisting management in controlling and right-sizing overhead costs;
•nurturing an internal culture of transparency, alignment, accountability and governance, including regular reporting;
•professionalizing our subsidiaries at scale; and
•forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.
Specifically, while our businesses have different growth opportunities and potential rates of growth, we expect our Manager to work with the management teams of each of our businesses to increase the value of, and cash generated by, each business through various initiatives, including:
•making selective capital investments to expand geographic reach, increase capacity, or reduce manufacturing costs of our businesses;
•investing in product research and development for new products, processes or services for customers;
•improving and expanding existing sales and marketing programs;
•pursuing reductions in operating costs through improved operational efficiency or outsourcing of certain processes and products; and
•consolidating or improving management of certain overhead functions.
Our businesses typically acquire and integrate complementary businesses. We believe that complementary add-on acquisitions improve our overall financial and operational performance by allowing us to:
•leverage manufacturing and distribution operations;
•leverage branding and marketing programs, as well as customer relationships;
•add experienced management or management expertise;
•increase market share and penetrate new markets; and
•realize cost synergies by allocating the corporate overhead expenses of our businesses across a larger number of businesses and by implementing and coordinating improved management practices.
We incur third party debt financing almost entirely at the Company level, which we use, in combination with our equity capital, to provide debt financing to each of our businesses and to acquire additional businesses. We believe this financing structure is beneficial to the financial and operational activities of each of our businesses by aligning our interests as both equity holders of, and lenders to, our businesses, in a manner that we believe is more efficient than each of our businesses borrowing from third-party lenders.
Acquisition Strategy
Our acquisition strategy involves the acquisition ofis to acquire businesses that we expect to produce stable and growing earnings and cash flow. In this respect, we expect to make platform acquisitions in industries other than those in which our businesses currently operate if we believe an acquisition presents an attractive opportunity. We believe that attractive opportunities will continue to present themselves, as private sector owners seek to monetize their interests in long-standing and privately-held businesses and large corporate parents seek to dispose of their “non-core” operations.
Our ideal acquisition candidate has the following characteristics:
•is a leading branded consumer or niche industrial company headquartered in North America;
•maintains highly defensible position in the markets it serves and with customers;
•operates in an established North American based company;industry with favorable long-term macroeconomic trends;
maintains a significant market share in defensible industry niche (i.e., •has a “reason to exist”);
has a solid and provenstrong management team, witheither currently in place or previously identified, and meaningful incentives;
•has low technological and/or product obsolescence risk; and
•maintains a diversified customer and supplier base.
We benefit from our Manager’s ability to identify potential diverse acquisition opportunities in a variety of industries. In addition, we rely upon our management team’s experience and expertise in researching and valuing prospective target businesses, as well as negotiating the ultimate acquisition of such target businesses. In particular, because there may be a lack of information available about these target businesses, which may make it more difficult to understand or appropriately value such target businesses, on our behalf, our Manager:
•engages in a substantial level of internal and third-party due diligence;
•critically evaluates the target management team;
•identifies and assesses any financial and operational strengths and weaknesses of the target business;
•analyzes comparable businesses to assess financial and operational performances relative to industry competitors;
•actively researches and evaluates information on the relevant industry; and
•thoroughly negotiates appropriate terms and conditions of any acquisition.
The process of acquiring new businesses is both time-consuming and complex. Our management team historically has taken from two to twenty-four months to perform due diligence, negotiate and close acquisitions. Although our management team is always at various stages of evaluating several transactions at any given time, there may be periods of time during which our management team does not recommend any new acquisitions to us. Even if an acquisition is recommended by our management team, our board of directors may not approve it.
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 company level largely through our existing credit facility, to close acquisitions.facility. We believe, and it has been our experience, that having the ability to finance our acquisitions with capital resources raised by us, rather than negotiating separate third partythird-party financing, provides us with an advantage in successfully acquiring attractive businesses by minimizing delay and closing conditions that are often related to acquisition-specific financings. In addition, our strategy of providing this intercompany debt financing within the capital structure of the businesses we acquire and manage allows us the ability to distribute cash to the parent company through monthly interest payments and amortization of principle on these intercompany loans.
Upon acquisition of a new business, we rely on our Manager’s experience and expertise to work efficiently and effectively with the management of the new business to jointly develop and execute a successful business plan.
We believe our financing structure, in which both equity and debt capital are raised at the Company level, allows us to acquire businesses without transaction specific financing and is conducive to our ability to consummate transactions that may be attractive in both the short and long-term.
In addition to acquiring businesses, we sell those businesses that we own from time to time when attractive opportunities arise that outweigh the future growth and value that we believe we will be able to bring such businesses consistent with our long-term investment strategy. As such, our decision to sell a business is based on our belief that doing so will increase shareholder value to a greater extent than through our continued ownership of that business. Upon the sale of a business, we may use the proceeds to retire debt or retain proceeds for acquisitions or general corporate purposes. We do not expect to make special distributions at the time of a sale of one of our businesses; instead, we expect to pay shareholder distributions over time solely through the earnings and cash flows of our businesses.
Since our inception in May 2006, we have recorded net gains on sales of our businesses of approximately $772 million. We sold Crosman Acquisition Company (“Crosman”) in January 2007, Aeroglide Company (“Aeroglide”) and Silvue Technologies Group, Inc. (“Silvue”) in June 2008, Staffmark Holdings Inc. (“Staffmark”) in October 2011, HALO Branded Solutions (“HALO”) in May 2012, CamelBak Products, LLC ("CamelBak") in August 2015, American Furniture Manufacturing, Inc. ("American Furniture") in October 2015, and Tridien Medical Inc. ("Tridien") in September 2016. In addition, we sold our FOX subsidiary through an initial public offering and secondary issuances from August 2013 through March 2017.
Investment in FOX
We owned approximately 14% of the Fox Factory Holding Corp. (NASDAQ - FOXF) as of January 1, 2017. We made loans to and purchased a controlling interest in FOX on January 4, 2008, for approximately $80.4 million. In August 2013, FOX completed an initial public offering of its common stock. As a result of the initial public offering, our ownership interest in FOX was reduced to approximately 53.9%. No gain was reflected as a result of the sale of our FOX shares in the initial public offering because our majority classification of FOX did not change. FOX used a portion of their net proceeds received from the sale of their shares as well as proceeds from a new external FOX credit facility to repay $61.5 million in outstanding indebtedness to us under their existing credit facility with us. In July 2014, through a secondary offering, our ownership in FOX was lowered from approximately 53% to approximately 41%, and as a result we deconsolidated FOX as of July 10, 2014. In March and August 2016, through two more secondary offerings and a share repurchase by FOX, our ownership in the outstanding common stock of FOX was further lowered to approximately 23% as of September 30, 2016. In November 2016, through another secondary offering, our ownership in the outstanding common stock of FOX was further lowered to approximately 14%. On March 13, 2017, 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 recognized total net proceeds from the sales of our FOX shares of approximately $465.1 million, and a total gain of $428.7 million.
Strategic Advantages
Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are well-positioned to acquire additional businesses. Our management team has strong relationships with business brokers, investment and commercial bankers, accountants, attorneys and other potential sources of acquisition opportunities. In addition, our management team also has a successful track record of acquiring and managing small to middlesmall-to-middle market businesses in various industries. In negotiating these acquisitions, we believe our management team has been able to
successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned businesses, management buy-outs and reorganizations.
Our management team has a large networknetwork that we estimate to be approximately 2,000 deal intermediariesintermediaries who we expect to expose us to potential acquisitions. Through this network, as well as our management team’s proprietary transaction sourcing efforts, we have a substantial pipeline of potential acquisition targets. Our management team also has a well-established network of contacts, including professional managers, attorneys, accountants and other third-party consultants and advisors, who may be available to assist us in the performance of due diligence and the negotiation of acquisitions, as well as the management and operation of our acquired businesses.
Finally, because we intend to fund acquisitions through the utilization of our 20142021 Revolving Credit Facility, we expect to minimize the delays and closing conditions typically associated with transaction specific financing, as is typically the case in such acquisitions. We believe this advantage can be a powerful one, especially in a tight credit environment, and is highly unusual in the marketplace for acquisitions in which we operate.
Valuation and Due Diligence
When evaluating businesses or assets for acquisition, our management team performs a rigorous due diligence and a financial evaluations process including an evaluation process. In doing so, we evaluateof the operations of the target business as well asand the outlook for the industry in which the target business operates.its industry. While valuation of a business is by definition, a subjective process, we define valuations under a variety of analyses, including:
•discounted cash flow analyses;
•evaluation of trading values of comparable companies;
•expected value matrices; and
•examination of comparable recent transactions.
One outcome of this process is a projection of the expected cash flows from the target business. A further outcome is an understanding of the types and levels of risk associated with those projections. While future performance and projections are always uncertain, we believe that with detailed due diligence, future cash flows will be better estimated and the prospects for operating the business in the future better evaluated. To assist us in identifying material risks and validating key assumptions in our financial and operational analysis, in addition to our own analysis, we engage third-party experts to review key risk areas, including legal, tax, regulatory, accounting, insurance and environmental. We also engage technical, operational or industry consultants, as necessary.
A further critical component of the evaluation of potential target businesses is the assessment of the capability of the existing management team, including recent performance, expertise, experience, culture and incentives to perform. Where necessary, and consistent with our management strategy, we actively seek to augment, supplement or replace existing members of management who we believe are not likely to execute our business plan for the target business. Similarly, we analyze and evaluate the financial and operational information systems of target businesses and, where necessary, we enhance and improve those existing systems that are deemed to be inadequate or insufficient to support our business plan for the target business.
Environmental, Social and Governance Practices
In the last few years, companies, investors and policymakers have focused more attention on - and have made investments in - companies that are considered leaders in ESG practices. Another way to think about ESG practices is to consider them, collectively, to be long-term performance factors designed to enable real owners to oversee their investments and balance the needs of important stakeholders in doing so. That same concept is mirrored in Compass Diversified’s business model: by bringing the virtues of a diverse set of middle market businesses that are typically privately held to public markets - including to individual investors who would not otherwise have access - we are helping to democratize market access while preserving professional oversight protections.
Our long-term, do-good-by-doing-well, real owners approach is reflected in the companies we acquire and manage, which, among them, provide products and services that support:
•medical and first responder needs;
•education programs;
•outdoor health and recreational pursuits; and
•e-commerce and technology providers.
In addition, a number of our businesses have created robust recycling and responsible sourcing programs, strong human capital management and diversity, equity and inclusion ("DEI") programs. We believe each of these creates long-term financial sustainability as well as making our shared world a better place.
Our long-term responsible approach is also reflected in how we manage ourselves.We have been and remain committed to being a responsible partner to our subsidiaries and are proud stewards of corporate citizenship.
Financing
We haveincur third party debt financing almost entirely at the Company level, which we use, in combination with our equity capital, to provide debt financing to each of our businesses and to acquire additional businesses. We believe this financing structure is beneficial to the financial and operational activities of each of our businesses by aligning our interests as both equity holders of, and lenders to, our businesses, in a credit facility with a groupmanner that we believe is more efficient than each of lenders led by Bank of America N.A. thatour businesses borrowing from third-party lenders.
Debt Financing
2021 Credit Facility
On March 23, 2021, we entered into on June 6, 2014.a Second Amended and Restated Credit Agreement to amend and restate the 2018 Credit Facility. The 20142021 Credit Facility providedprovides for (i) revolving loans, swing line loans and letters of credit up to a maximum aggregate amount of $400$600 million and (ii) a $325 million term loan. On August 15, 2016,also permits the Company, amended the 2014 Credit Facility to, among other things, increase the aggregate amount of the 2014 Credit Facility by $400 million. On August 31, 2016, the Company entered into an Incremental Facility Amendment to the 2014 Credit Agreement (the "Incremental Facility Amendment"). As a result of the Incremental Facility Amendment, the 2014 Credit Facility currently provides for (i) a revolving credit facility of $550 million (as amended from time to time, the "2014 Revolving Credit Facility"), (ii) a $325 million term loan (the "2014 Term Loan Facility"), and (iii) a $250 million incremental term loan (the "2016 Incremental Term Loan"). The 2014 Term Loan and 2016 Incremental Term Loan expire in June 2021.
At December 31, 2017, we had $560.0 million outstanding on the 2014 Term Loan and 2016 Incremental Term Loan, and $42.0 million outstanding on our 2014 Revolving Credit Facility. All amounts outstanding under the 2014 Revolving Credit Facility will become due on June 6, 2019, which is the maturity date of loans advanced under the 2014 Revolving Credit Facility and the termination date of the revolving loan commitment. The 2014 Credit Facility also permits us, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain additional term loans in an aggregate amount of up to $200$250 million, subject to certain restrictions and conditions.
All amounts outstanding under the 2021 Revolving Credit Facility will become due on March 23, 2026, which is the maturity date of loans advanced under the 2021 Revolving Credit Facility.
The 20142021 Credit Facility provides for letters of credit under the 20142021 Revolving Credit Facility in an aggregate face amount not to exceed $100 million outstanding at any time, as well as swing line loans of up to $25 million outstanding at one time. At no time may the (i) aggregate principal amount of all amounts outstanding under the 2021 Revolving Credit Facility, plus (ii) the aggregate amount of all outstanding letters of credit and swing line loans, exceed the borrowing availability under the 20142021 Credit Facility. At December 31, 2017,2021, we had outstanding letters of credit totaling approximately $0.6$1.0 million. The borrowing availability under the 20142021 Revolving Credit Facility at December 31, 20172021 was approximately $507.4$599.0 million.
The 20142021 Credit Facility and 2016 Incremental Facility areis secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. (See "Note JI - Debt" to the consolidated financial statements for more detail regarding our 20142021 Credit Facility). Senior Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% Notes due 2032 (the "2032 Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is payable in cash on July 15th and January 15th of each year. The 2032 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes was used to repay debt outstanding under the 2021 Credit Facility.
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Notes due 2029 (the "2029 Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2029 Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2029 Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on April 15th and October 15th of each year. The 2029 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries.
The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in connection with our entry into the 2021 Credit Facility, as described above, and 2016 Incremental Facility)to redeem our 8.000% Senior Notes due 2026 (the “2026 Notes”).
Equity Financing
Trust Common Shares
The Trust is authorized to issue 500,000,000 Trust common shares and the Company is authorized to issue a corresponding number of LLC interests. The Company will, at all times have an equal amount of LLC interests outstanding as Trust shares. At December 31, 2021, there were 68.7 million Trust common shares outstanding.
Common Share Offering
On September 7, 2021, we filed a prospectus supplement pursuant to which we may, but we have no obligation to, issue and sell up to $500 million shares of the common shares of the Trust in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions, the trading price of Trust common shares and determinations by us regarding appropriate sources of funding. In connection with this offering, we entered into an At Market Issuance Sales Agreement with B. Riley Securities, Inc. (“B. Riley”) and Goldman Sachs & Co. LLC (“Goldman”) pursuant to which we may sell common shares of the Trust having an aggregate offering price of up to $500 million, from time to time through B. Riley and Goldman, acting as sales agents and/or principals. We sold 3,837,885 Trust common shares during the year ended December 31, 2021 and received net proceeds of approximately $115.1 million. We incurred approximately $2.1 million in commissions payable to the Sales Agents during the year ended December 31, 2021.
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 million Trust preferred shares and the Company is authorized to issue a corresponding number of Trust Interests. We issued 4,000,000 7.250% Series A Preferred Shares in 2017, 4,000,000 7.875% Series B Preferred Shares in 2018 and 4,600,000 7.875% Series C Preferred Shares in 2019.
We intend to finance future acquisitions through our 20142021 Revolving Credit Facility, cash on hand and, if necessary, additional equity and debt financings. We believe, and it has been our experience, that having the ability to finance our acquisitions with the capital resources raised by us, rather than negotiating separate third party financing specifically related to the acquisition of individual businesses, provides us with an advantage in acquiring attractive businesses by minimizing delay and closing conditions that are often related to acquisition-specific financings. In this respect, we believe that in the future, we may need to pursue additional debt or equity financings, or offer equity in Holdings or target businesses to the sellers of such target businesses, in order to fund multiple future acquisitions.For example, in light of our recently announced acquisitions of Foam Fabricators and Rimports, we are considering, subject to market conditions among other factors, appropriate debt and other instruments to provide medium and longer term financing for acquisitions.
Our Businesses
We categorize the businesses we own into two separate groups of businesses (i) branded consumer businesses, and (ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we believe capitalize on a valuable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in their particular product category. Niche industrial businesses are characterized as those businesses that focus on manufacturing and selling particular products and industrial services within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector.
The following table represents the percentage of net revenue and operating income each of our businesses contributed to our consolidated results since the date of acquisition for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, and the total assets of each of our businesses as a percentage of the consolidated total as of December 31, 20172021 and 2016.2020.
| | | | | | | | | | | | | | | | | | | | Net Revenue | | Operating Income (1) | | Total Assets |
| | | Year ended December 31, | | Year ended December 31, | | Year ended December 31, | | Year ended December 31, | | Year ended December 31, | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| | | Net Revenue | | Operating Income (1) | | Total Assets | | | | | | | | | | | | | | | | |
| Branded Consumer: | | | | | | | | | | | | | | | | | Branded Consumer: | |
| 5.11 | | 24.4 | % | | 11.2 | % | | n/a |
| | (10.5 | )% | | (17.8 | )% | | n/a |
| | 26.1 | % | | 25.4 | % | 5.11 | | 24.2 | % | | 29.5 | % | | 30.8 | % | | 19.9 | % | | 30.5 | % | | 30.6 | % | | 16.4 | % | | 20.7 | % |
| Crosman | | 6.2 | % | | n/a |
| | n/a |
| | 1.9 | % | | n/a |
| | n/a |
| | 10.9 | % | | — | % | |
| BOA | | BOA | | 9.0 | % | | 1.9 | % | | n/a | | 17.1 | % | | (1.0) | % | | n/a | | 17.1 | % | | 21.8 | % |
| Ergobaby | | 8.1 | % | | 10.6 | % | | 11.9 | % | | 36.1 | % | | 30.0 | % | | 26.4 | % | | 9.8 | % | | 10.4 | % | Ergobaby | | 5.1 | % | | 5.5 | % | | 7.1 | % | | 4.6 | % | | 5.3 | % | | 14.2 | % | | 5.2 | % | | 6.6 | % |
| Liberty Safe | | 7.2 | % | | 10.6 | % | | 13.9 | % | | 13.9 | % | | 23.2 | % | | 14.1 | % | | 4.0 | % | | 4.1 | % | |
| Manitoba Harvest | | 4.4 | % | | 6.1 | % | | 2.4 | % | | (13.7 | )% | | 0.6 | % | | (7.3 | )% | | 7.8 | % | | 8.4 | % | |
| Lugano | | Lugano | | 2.9 | % | | n/a | | n/a | | 5.0 | % | | n/a | | n/a | | 11.3 | % | | n/a |
| Marucci Sports | | Marucci Sports | | 6.4 | % | | 3.2 | % | | n/a | | 8.3 | % | | (4.3) | % | | n/a | | 9.1 | % | | 8.6 | % |
| Velocity Outdoor | | Velocity Outdoor | | 14.7 | % | | 15.9 | % | | 11.7 | % | | 20.0 | % | | 25.2 | % | | (37.1) | % | | 9.3 | % | | 10.7 | % |
| | | 50.3 | % | | 38.5 | % | | 28.2 | % | | 27.7 | % | | 36.0 | % | | 33.2 | % | | 58.6 | % | | 48.2 | % | | 62.2 | % | | 55.9 | % | | 49.6 | % | | 74.9 | % | | 55.6 | % | | 7.8 | % | | 68.3 | % | | 68.4 | % |
| Niche Industrial: | | | | | | | | | | | | | | | | | Niche Industrial: | |
| Advanced Circuits | | 6.9 | % | | 8.8 | % | | 12.0 | % | | 34.7 | % | | 39.8 | % | | 28.8 | % | | 4.4 | % | | 4.6 | % | |
| | Arnold Magnetics | | 8.3 | % | | 11.1 | % | | 16.5 | % | | (8.4 | )% | | (22.6 | )% | | 9.0 | % | | 6.0 | % | | 6.5 | % | Arnold Magnetics | | 7.6 | % | | 7.3 | % | | 9.5 | % | | 6.0 | % | | 2.1 | % | | 11.4 | % | | 5.3 | % | | 4.8 | % |
| Clean Earth | | 16.6 | % | | 19.3 | % | | 24.1 | % | | 17.7 | % | | 13.9 | % | | 13.1 | % | | 19.4 | % | | 20.0 | % | |
| Altor Solutions | | Altor Solutions | | 9.8 | % | | 9.6 | % | | 9.6 | | | 9.1 | % | | 16.1 | % | | 19.5 | | | 11.0 | % | | 11.4 | % |
| Sterno | | 17.8 | % | | 22.4 | % | | 19.2 | % | | 28.2 | % | | 32.9 | % | | 15.8 | % | | 11.2 | % | | 12.0 | % | Sterno | | 20.4 | % | | 27.2 | % | | 31.3 | % | | 10.0 | % | | 26.1 | % | | 61.3 | % | | 12.0 | % | | 15.4 | % |
| | | 49.7 | % | | 61.5 | % | | 71.8 | % | | 72.3 | % | | 64.0 | % | | 66.8 | % | | 41.0 | % | | 43.1 | % | | 37.8 | % | | 44.1 | % | | 50.4 | % | | 25.1 | % | | 44.4 | % | | 92.2 | % | | 28.3 | % | | 31.6 | % |
| Corporate | | — |
| | — |
| | — |
| | — | | — |
| | — |
| | 0.4 | % | | 8.7 | % | Corporate | | — | | | — | | | — | | | — | | — | | | — | | | 3.4 | % | | (0.1) | % |
| | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
(1) Operating income (loss) reflected is as a percentage of the total contributed by the businesses and does not include expenses incurred at the corporate level.
Branded Consumer Businesses
5.11
Overview
5.11 is a leading providerglobal lifestyle brand and innovator of purpose-built tacticaltechnical apparel, footwear and gear for law enforcement, firefighters, EMS,a passionate and loyal group of consumers. 5.11 is a brand of choice for those who demand uncompromising functionality, durability, style and comfort of their gear. 5.11's brand authenticity stems from decades of collaboration with elite first responders and military special operations as well as outdoorprofessionals around the world, innovating to solve their greatest needs in the most mission-critical settings, where failure is not an option. Today, 5.11 continues to design and adventure enthusiasts.innovate for these professionals with the added purpose of delivering that unique functional expertise to everyday consumers. Management believes 5.11's large and growing community of everyday consumers associate with the 5.11 is committed tobrand heritage and authenticity and values 5.11's high-quality product innovation,design and works directly with end users to create apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. functionality.
Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally. 5.11 products are widely distributed in law enforcement dealers, uniform stores, military exchanges, outdoor retail stores, company ownedits own retail stores and online.through e-commerce channels, including 511tactical.com.
History of 5.11
5.11's heritage dates back to the 1970’s when 5.11 was formed in 2003 after spinning out of outdoor apparel company,pants were originally designed by Royal Robbins®. The roots for elite rock climbers. These climbers wanted durable yet flexible and comfortable pants as they scaled the most extreme rock walls in Yosemite National Park. In the early 1990’s, the same 5.11 pant was adopted by the F.B.I. National Academy and became standard training issue because of its superior design and performance. Trusted by law enforcement and military professionals ever since, 5.11's innovative products have formed the cornerstone of the brand. 5.11 however, trace backis an outfitter of choice for our heroes who require rugged, functional, durable, and technically-advanced products capable of withstanding harsh conditions without sacrificing comfort. Consumers’ needs and aspirations fuel 5.11's product innovation engine. 5.11 leveraged this foundation to 1975, when American rock climber Royal Robbins designedexpand their product expertise to a significantly larger market of underserved lifestyle-oriented consumers who identify with 5.11's brand positioning, appreciate their superior designs and share the 5.11® Pant; named after the difficulty level in the Yosemite Decimal System rating scale for rock climbing. With difficulty levels ranging at the time from 5.0 (easy) to 5.10 (difficult), 5.11 was then described: “After thorough inspection, you conclude this move is impossible; however, occasionally someone actually accomplishes it.”"Always Be Ready" ("ABR") mindset.
A product designed for people who were pushing the limits of what was possible, the 5.11® Pant was a success among climbers and outdoor enthusiasts. In 1992, the FBI Academy, in Quantico, Virginia adopted the original 5.11® Pant as its primary training pant, forging a decades-long relationship that supports 5.11’s commitment to the public safety and the first responder communities.
In 2011, 5.11’s corporate headquarters was relocated from Modesto, California to Irvine, California. In 2012, 5.11 acquired Beyond Clothing LLC, a technical survival systems outerwear company located in Seattle, Washington. We acquired a majority interest in 5.11 on August 31, 2016.
Industry
5.11 participates in the global professional and consumer soft goods market for tactical gear and apparel; the addressable global soft goods market iswas estimated by management to be approximately $79 billion.
The domestic 5.11 products are designed for use in a wide variety of activities, from professional public safety market for tactical soft goods is estimated by management to recreational and outdoor and indoor, and can be used all year long. As a $1.7 billion market consisting of sales to active-duty military, law enforcement, private security, fire, corrections officersresult, the markets and EMS. The addressable domestic work wearconsumers 5.11 serves are broad and consumer wear markets are estimated by management to be $4.3 billion and $13.2 billion, respectively.
The international professional public safety market for tactical soft goods is estimated by management to be a $11.7 billion market. The addressable international work wear and consumer wear markets are estimated by management to be $11.4 billion and $36.3 billion, respectively.deep.
Products, Customers and ServicesDistribution
Products
Product innovation is at the core of 5.11’s heritage and identity. Since its inception, 5.11 has continuously developed and introduced innovative apparel, footwear and gear that are highly functional, technically-advanced and expertly designed setting the industry standard in each product category. 5.11’s product portfolio consists of technical apparel, footwear and gear designed with patented materials and functional features to their customers from head-to-toe. 5.11’s purpose-built products are durable, functional and comfortable. 5.11 serves a community of consumers inspired to live a life bigger than themselves and aligned with the “Always Be Ready” mindset. 5.11 offers a portfolio of unique head-to-toe tacticalpurpose-built gear with patented functional features for both professional and consumerrecreational use. No individual product style accounts for more than 7% of total sales, and most product styles tend to have multi-year lifecycles. 5.11 focuses itstheir product offering through six majoracross three categories: tactical apparel, bagsfootwear and packs,gear. Leveraging in-field testing and design feedback from professional collaborations and in-house design and engineering expertise, 5.11 is able to create high quality products in each of its core segments. Innovating around the material and functional needs of professionals, 5.11 then broadens the application of their technical functionality into a range of consumer products within each category. This evolution of 5.11’s product lines creates tremendous leverage for their purpose-built functionality, allowing 5.11 to benefit from their growing and broad crossover appeal. 5.11’s innovations have not been limited to just apparel and textiles, as 5.11 has also proven their abilities within their footwear special make ups/uniforms, accessories, and Beyond Clothing Systems (“Beyond”).gear categories.
Tactical apparelApparel - Apparel represents 5.11’s largest product category.category at 66%, 65% and 67%, respectively, of net sales for the years ending December 31, 2021, 2020 and 2019. Within this category, 5.11 offers a broad assortment of men’s and women’s pants, shorts, shirts, outerwear, polos, and base layers. Apparel is offered in a variety of styles and fits intended to enhance comfort, durability, and mobility.utility. 5.11 has historically designed and developed innovative “families” of products around proprietary fabrics that the company5.11 has created to meet the needs of its unique target market.consumers. These product “families” typically start with a purpose-built pant and then expand into other products. Today,
•Pants - for many consumers, 5.11 technical purpose-built pants are the gateway into the 5.11 brand. 5.11 offers a wide range of pants to tackle any mission in a broad range of waist sizes and in seams for men and women. The fit, proprietary or patented fabrics and purpose-built designs deliver high levels of comfort, utility and durability. Among the most popular pants today are Stryke, Taclite, Apex, Fast-Tac and Defender-Flex, which have price ranges from $55.00 to $85.00. 5.11 offers five distinct pant lines, which anchor five different apparel families:families. The top selling pants include Taclite, which is built with a lighter and stronger fabric to outperform 5.11's original canvas pant, Stryke, which uses our patented FlexTac fabric, Apex, which leverages 5.11's Flex-Tac technology, and 5.11's highly durable FastTac all with stain and water-resistant properties, and Defender-Flex, 5.11’s performance denim.
•Shirts, T-shirts and Polos – 5.11 tops are feature rich just like their pants. Patented document pockets, pen pockets, venting for heat, stain resistant, easy care and snag resistance are among some of these key features. Many of the Defender Flex Pant,shirts fabrics are lighter versions of 5.11’s patented or proprietary fabrics used in their best-selling pants. Taclite shirts $55.00 to $60.00, Stryke shirts $75.00 to $80.00 and Fast-Tac $45.00 to $50.00 are among this product category as examples. These shirts can be used as uniforms and/or casual wear. 5.11's polos are also well known for their comfort, durability and utility. 5.11 offers them in a range of proprietary fabrics that are highly fade resistant, and among some of the Apex™ Pant,most popular styles are Performance Polo, Professional Polo and Utility Polo, which have price ranges from $30.00 to $45.00.
•Outerwear - 5.11 offers a wide range of outerwear solutions for on and off the job. Outerwear used on the job offer features not commonly found in lifestyle outerwear such as blood borne pathogen resistance or large areas of reflective materials. Technical system jackets, hard and soft shell as well as fleece pieces are designed to work individually or as a system. Features include innovations such as quick access side zippers and conceal pockets. 5.11 Stryke™ Pant, the Taclite® Pro Pant,also offers technical survival outerwear systems engineered specifically for missions in extreme conditions. Products include base layers and the 5.11® Tactical Pant.briefs, pullovers, softshell jackets, wind pants, rain pants and jackets made of advanced fabrics.
Gear - Gear represented 24%, 25% and 23%, respectively, of 2021, 2020 and 2019 net sales, which includes multi-use backpacks, cases, load-bearing equipment, range bags, duffels, field knives, watches and gloves. 5.11 bags, pouches, and packs provide reliable, multifunctional storage options designed to excel in a wide range of operational and recreational settings. This category includes backpacks, cases, load-bearing equipment, range bags and duffels. In addition to bags/packs and apparel, 5.11 sells footwear, including boots, low-profile tactical shoes, socks and accessories, as well as special make ups or customized uniforms forThe bag offering meets the critical needs of emergency medical, public safety, agencies.and military professionals in the field, outdoor adventure enthusiasts going off the grid, and anyone who needs to maximize space and convenience packing for a weekend getaway. The recently introduce patented Hexgrid® and Gear Set™ system enhance modularity capabilities. Allowing users to have different sets per mission specific needs and attached pouches in 8 directions vs just up or down like the other systems. 5.11 also offers a wide selectionassortment of complementary accessories including belts, hats, flashlights, gloves, watches, knives eyewear, watches, patches, slings and holsters.patches.
Footwear - Footwear represented 10% of net revenue in each of the years ending 2021, 2020 and 2019 and includes a full line of functional boots, low-profile tactical shoes, trainers, and socks. First embraced by 5.11 professional customers through their field boots, 5.11 has developed and tested footwear that stands up to extreme temperatures and weather conditions. 5.11 has evolved into the current lineup of trainers, casual sneakers and oxfords that afford 5.11's consumers the same level of comfort, protection, durability and style they expect from 5.11. 5.11 trainers feature All Terrain Load Assistance System (A.T.L.A.S.) technology, which is built to help 5.11's consumers undergo the most strenuous of workouts. The 5.11 A/T Trainer adds comfort and substantially increased agility, flexibility, and durability to cross training, functional fitness and heavy workouts.
Beyond,Customers and Distribution Channels
Management believes the brand’s empowering message, innovative product quality, and technically advanced designs appeal to a wholly-owned subsidiarybroad and growing consumer base. Based on the cross-over appeal of its products, 5.11 offers technical survival outerwear systems engineered specificallyconsumers fall into two core groups, professional “Prosumers” and “Everyday Consumers.” The 5.11 community was initially built by Prosumers, which consists of groups such as U.S. military personnel, law enforcement, first responders, and frontline workers, who require unwavering durability and reliability, but also value the design and comfort of the 5.11 products, providing the versatility to wear its products both on and off duty. Over time, 5.11 has expanded its reach into functionally focused Everyday Consumers, who, management believes, are inspired by Prosumers to live a life bigger than themselves and share the always be ready "ABR" mindset. 5.11 products resonate with a diverse group of Prosumers and Consumers, laying the foundation for missions in extreme temperatures. Products are marketed undercontinued expansion of a loyal and engaged consumer base into the Beyond brand namefuture.
•Everyday Consumers: A blend of active, challenge-seeking and include base layersachievement-oriented gear consumers who thrive on fitness and briefs, pullovers, softshell jackets, wind pants, rain pants and jackets made of advanced fabrics. Virtually all Beyond products are manufactured in the United Statesadventure. Inspired by 5.11’s Prosumers to complylive a life bigger than themselves with the Berry Amendment.
5.11’s core product offerings“Always Be Ready” mindset, these Everyday Consumers engage in a range of activities from fitness and suggested average retail prices are listed below:
Pantstraining, to outdoor experiences such as hunting, hiking and Shorts (Men’soverlanding, and Women’s) - $49.99 to $269.99
Woven Tops (Men’s and Women’s) - $39.99 to $229.99
Outerwear (Men’s and Women’s) - $69.99 to $119.99
Footwear (Men’s and Women’s) - $99.99 to $149.99
Bags and Packs - $59.99 to $249.99
Accessories - $19.99 to $79.99
Competitive Strengths
Leading Brand Recognition and Market Share -purchase 5.11 is a leader in the tactical apparel market. 5.11 enjoys strong brand awareness and affinity in the public safety market given its long history of creatingproducts for everyday casual use. They prioritize maintaining high performance and, innovativewe believe, recognize that the functional superiority of 5.11 products aligns with their own achievement-oriented goals. They also appreciate the aesthetic and functional design of 5.11 products, which can take them from the comfort of their home to a favorite nearby hike, as well as 5.11 apparel, footwear and gear, which are as dynamic as they are. We believe the Everyday Consumers align with 5.11 products’ price points and superior value proposition.
•Prosumers: Includes everyone from the most elite U.S. military and law enforcement special forces units on the planet to everyday heroes including first responders, frontline workers, and other professionals, both on duty in mission-critical situations and off-duty. Prosumers are devoted to service, on and off-the-clock, and 5.11 endeavors to match their dedication and commitment as it produces superior technical products for public safety operators.every aspect of their lives. 5.11’s heritageunique combination of developing purpose-built clothingdurability, functional excellence, and gear for law enforcement, firefighters, EMS,comfort allows Prosumers to turn to 5.11 seamlessly across a variety of use-cases, whether on-duty, training, spending a weekend overlanding, backpacking, or camping. Many of the Prosumers are never fully off-duty, making the ability to serve them comfortably and military special operations has imbuedreliably in all aspects of their lives a top priority. 5.11 enables them to “Always Be Ready” to meet any challenges that cross their path.
The strength of the 5.11 business model is the ability to serve the consumer however they prefer to engage while simultaneously reinforcing the 5.11 brand’s premium association and authenticity. Rather than taking the traditional channel approach to the business which management believes limits 5.11's potential, 5.11 enters a trade area with the right mix of owned stores, Consumer Wholesale, Professional Wholesale, eCommerce and marketplaces. By approaching trade areas in this manner, 5.11 shares inventory between stores and eCommerce and optimizes speed and efficiency with logistics that meet consumers’ needs wherever they prefer to shop, rather than directing them into a particular channel. This principle of product accessibility and experiential shopping drives brand with unrivaled authenticitybuilding
and organic lead generation. Though each channel is able to function profitability on an individual basis, the value derived from these channels working in concert is a unique competitive strength 5.11 employs in every market in which it operates.
Direct to Consumer - 5.11’s DTC channel is comprised of its digital platform, 511tactical.com, its growing network of retail stores as well as its third-party marketplace partners. 5.11 has significantly expanded its DTC mix in the tactical apparelpast five years, with DTC now comprising 43%, 39% and gear markets.
Diverse Customer Base -32% of net sales for the years ended December 31, 2021, 2020 and 2019, respectively. 5.11’s website has grown significantly and drives a significant portion of its online sales. 5.11 hasalso operates 87 company owned retail stores in 27 states, with plans to grow its footprint further. Both the online and company owned retail stores enable 5.11 to maintain direct relationships with consumers, influence the brand experience and better understand shopping preferences and behavior.
•eCommerce. 5.11 has grown its ecommerce substantially in the last few years, which has been enabled by continued investment in digital infrastructure capabilities, enhanced consumer experience through increased customization and curation, and a growing global supply chain. Since 2017, 5.11 has invested over 12,500$35 million in capabilities to further its eCommerce infrastructure, including a scalable, ERP system and new locations that enable more cost effective and timely delivery for its eCommerce orders.
•Retail. Since 2011, 5.11 has grown to 87 branded and owned retail locations around the U.S. as of December 31, 2021. Its locations provide an opportunity for 5.11 to showcase its diverse product assortment. Retail also provides an opportunity to further engage with consumers through the ABR mindset, with in-person, local community events and educational opportunities that elevate the experiential retail experience.
•Third-party marketplaces. 5.11’s third-party marketplace partners, such as Amazon, are invaluable tools for its omnichannel presence. The collaboration with the some of the largest retailers brings 5.11increased opportunity from sales and revenue to increased marketing opportunities and brand awareness. Yet at the same time, 5.11 is strategic about protecting its 5.11 brand and delivering a consistent consumer experience in the third-party marketplace.
Wholesale - The Wholesale channel is comprised of Professional Wholesale, Consumer Wholesale and International business. Wholesale sales were 57%, 61% and 68% of net sales for the years ended December 31, 2021, 2020 and 2019, respectively. The Professional Wholesale channel specializes in demand creation for formal procurement through specification of 5.11 on government contracts around the world. The Consumer Wholesale channel is comprised of dealers, outdoor specialty retailers, and military exchanges, serving predominantly Everyday Consumers. The International business includes retail locations and International eCommerce sites. International products are currently distributed in over 120 countries across the globe, but management believes there is significant opportunity for continued International expansion.
•Professional Wholesale. The Professional Wholesale channel consists of Prosumer sales relationships, and is comprised of dealers and resellers of 5.11 technical apparel, footwear and gear through governmental departments and agencies, including their retail front and utilizes an established networkeCommerce services that cater to Prosumers that need additional services, such as tailoring of over 1,500 dealerstheir uniforms, in over 90 countries. 5.11 wins a significant amount of business in the public safety channel through the achievement of “specified” product in thousands of individual contracts with governmental departments and agencies, providing for a broad base of long-term relationships.
Product Breadth and “At-Once” Availability -one-stop-shop experience. Requirements of outfitting entire agencies or departments necessitates carrying numerous, often infrequently used, sizes and colors of a given product. These requirements, coupledIn addition, 5.11’s years of handling these types of customized orders has resulted in 5.11 having a dedicated team with “at-once” product fulfillment demands and often poorly capitalized dealer customers carrying low levels of inventory, makes 5.11specialized expertise, a skillset that is unique in the go-to provider of tactical gear and apparel.industry. We believe 5.11’s significant investment in inventory provides a competitive advantage versus its smaller less well capitalized competitors.competitors that carry low levels of inventory.
Business Strategies
Further Expand into •Consumer Market -Wholesale. The Consumer Wholesale channel consists of Everyday Consumer sales relationships, and is comprised of third-party retailers and their eCommerce sites. 5.11 is well-positioned to continue investing in retail locations throughout the United States. 5.11 currently has twenty-seven company-owned retail locations, and management believes that there are significant opportunities to increase this footprint. 5.11 also sells to manyconsumers can find its products at well-known big box sports, outdoor specialty retailers and military exchanges, in addition to third-party online only retailers who focus on product sales in similar apparel, footwear and gear categories as we do. Shop-in-shop concepts at key retailers who also attract the 5.11 customer base gives consumers a tactile experience with 5.11 products, by which they can feel, try on, and compare 5.11 product offerings. Additionally, 5.11 gains online traction from discussion boards and forums that bring professional and everyday enthusiasts together to discuss 5.11 products and the category in general. Both avenues serve as catalysts to attract new customers and keep long time consumers loyal to the 5.11 brand.
•International. In addition to domestic whitespace, management believes there is opportunity to expand internationally as International only represented 18% of net sales in 2021. While 5.11 products are currently distributed in 120 countries across the globe, 5.11 has limited penetration in many of these countries with limited distribution in certain countries and certain dealers only carrying select styles. As such, management
believes there is significant opportunity for continued international expansion and plan to expand in EMEA, Mexico, Asia, Australia, and Canada, and will leverage third-party logistics facilities in Europe and China as well as 5.11’s owned warehouse in Australia to drive this. 5.11 sees additional opportunities to further expand internationally and plan to methodically continue the expansion of its business.
No individual customer represented greater than 10% of 5.11’s net revenues in 2021. At December 31, 2021 and 2020, 5.11 had approximately $40.7 million and $21.8 million, respectively, in firm backlog.
Market Opportunities
5.11 products are designed for use in a wide variety of activities, from professional to recreational and outdoor and indoor, and can be used all year long. As a result, the markets and consumers 5.11 serves are broad and deep. The market opportunity is both significant and supported by the demand of 5.11’s innovative products providing an opportunity for future, profitable growth. As a category-defining brand, management believes its innovative products serving Everyday Consumers and Prosumers will continue to expand its addressable market.
•U.S. Everyday Consumer Opportunity. 5.11 products address a large and broad Everyday Consumer base consisting of individuals from all walks of life. Everyday Consumers include small business owners, teachers, lawyers, farmers, homemakers and others, who enjoy wearing 5.11 during work, after work and on their weekend adventures. Management believes the Everyday Consumers are multi-generational, though skewing younger. These younger consumers are representative of an expanding, technically-focused consumer base looking for performance in every aspect of their daily lives. 5.11 caters to Everyday Consumers across all regions of the U.S., though management believes Everyday Consumers are located primarily in urban and suburban locations.
•U.S. Prosumer Opportunity. 5.11’s premium product offering addresses a large Prosumer base, including first responders, military personnel, on and off-duty public servants, non-active military and other functionally focused professionals such as contractors, utility workers, hospital professionals and others using 5.11 for professional applications. Management believes Prosumers are multi-generational, though primarily middle-aged males. Similar to our Everyday Consumers, 5.11 caters to Prosumers across all regions of the U.S. and believes Prosumers are located primarily in urban and rural locations. The Prosumer market is a stable, recurring source of demand for our products. Management believes that Prosumer demand is resilient through economic cycles as Prosumers continue to depend on 5.11 products regardless of the economic environment.
•International Opportunity. In addition to the domestic whitespace opportunity, management believes there is opportunity to expand to a large global market, as International only represented 18% of net sales in 2021. 5.11 products are currently distributed in 120 countries across the globe with our market entry point being the Professional Wholesale Channel. Most countries outside the US are under-penetrated with limited distribution and select dealers only carrying a portion of available styles. As such, management believes there is significant opportunity for continued international expansion and plan to expand in EMEA, Mexico, Asia, Australia, and Canada. 5.11’s approach will be to build out each region uniquely based on the size of the opportunity and the complexity of conducting business in a particular country. This approach currently utilizes a mixture of Professional and Consumer wholesale channels, distributors, wholesale partner stores, third party ecommerce sites as well as owned ecommerce websites and retail stores. To build this business 5.11 plans to leverage its third-party logistics facilities in Europe and China as well as its owned warehouses in Australia and the US for supply chain logistics. 5.11 sees additional opportunities to further expand internationally and plan to methodically continue the expansion of its business.
Business Strategies
Increase Brand Awareness and Grow the Passionate 5.11 Community - 5.11 has proven the profitability of its core product offerings and broad geographic relevance, while demonstrating clear brand authenticity and versatility. Though 5.11 is a brand and industry leader in the tactical and functional fitness communities, management believes it still has substantial room to grow through increased penetrationcontinuing to broaden its brand awareness. 5.11 has a large, growing community of deeply loyal consumers who share an authentic connection to the brand. 5.11 brand awareness is driven largely by its authentic association with public safety and improved merchandising.the military, who rely on 5.11 gear for performance both on-duty and off-duty. To increase brand awareness, 5.11 designs and executes a variety of dynamic, high impact marketing strategies to engage existing consumers and reach new consumers, both domestically in the U.S. and internationally.
5.11’s innovative brand and marketing strategy has been able to deliver significant brand awareness growth with relatively low marketing spend to date. The reason this has been so successful is due to the outsized returns from 5.11’s positive, community-driven word-of-mouth, stemming from consumers who share an emotional connection to 5.11. While 5.11’s marketing competencies extend well beyond traditional and digital media; 5.11 is a leader in content development and influencer marketing. 5.11 has built a community with major brand ambassadors and brand partners. 5.11 also partners with other leading brands across categories, such as Spartan in fitness and Ubisoft’s Ghost Recon in gaming. These strategic partnerships reinforce 5.11’s authentic and premium branding while simultaneously engaging a broad and passionate customer base of Domesticpotential 5.11 consumers. Through its deep relationships, history of mutually beneficial partnerships, community, and social events such as “ABR Academies,” as well as its recognized leadership position, management believes 5.11 has become a partner of choice for influencers worldwide, leading to a significant competitive advantage. These marketing efforts deliver authentic, aspirational experiences and exclusive content that drive loyalty and engagement. 5.11 pairs this emotional brand marketing with sophisticated, data-driven performance marketing to further drive profitable customer acquisition, retention and high lifetime value. Through investment in these marketing strategies, 5.11 intends to drive passionate 5.11 connections within its community.
Continued Execution of Integrated Omnichannel Platform to Drive Disciplined Growth - Management believes 5.11 has built a solid omnichannel distribution strategy, comprised of a rapidly growing DTC channel, which includes its owned retail locations, proprietary website, and third-party marketplace partners like Amazon, and a recurring Wholesale channel, which encompasses our Professional Channel -Wholesale, Consumer Wholesale, and International business. Rather than taking the traditional channel approach to the business which management believes limits 5.11's potential, 5.11 enters trade areas with a tailored DTC and wholesale strategy for that market. To best serve its consumers’ needs and to profitably accelerate growth, 5.11 continues to benefitfrommake investments in its omnichannel distribution strategy. To increase connectivity and reach a larger quantum of consumers, 5.11 is accelerating digital growth through the domesticutilization of data analytics, targeted digital tactics and integrated marketing campaigns. In parallel, 5.11 continues to improve its website functionality as measured through strong site traffic, conversion and average order value. 5.11’s digital growth is complemented by the potential to expand its retail footprint. Currently, 5.11 has 87 physical stores, which represents an increase of 83 since 2015. Ultimately, the expansion of both channels presents an accessible near-term opportunity to accelerate growth and better serve evolving consumer preferences.
Leverage Innovation Capabilities to Continue Developing New Products - At its core, 5.11 is an innovator that prides itself on making purpose-built technical apparel, footwear and gear for all of life’s most demanding missions. Throughout its history, 5.11 developed a diverse product portfolio that has helped grow its brand to be an industry leader in both its Wholesale and DTC businesses. Through its product innovation, 5.11 developed brand affinity, built on the foundation of its strong professional public safety market, which providesbusiness. By serving its Prosumer, 5.11 increased demand in its Everyday Consumer segment, creating a stable baselarge whitespace for growth. Moving forward, 5.11 is looking to grow share of recurring growth. Going forward,its consumers’ wardrobe with a continued focus on everyday and weekend wear. In order to accelerate growth and meet consumer preferences, 5.11 plans to continue its consumer product innovation and expand its lifestyle product offering and other ancillary categories. 5.11 built a foundation of infrastructure and processes that allows it to have shorter lead time on product and design. 5.11 will continue to grow within the domestic professional public safety channel through (i) continued conversion of institutional contract opportunity pipeline;refine this in order to accelerate growth and (ii)take market share gains fromin the consumer business through an expanded product portfolio. Management believes that continued product innovation for 5.11's Prosumers drives brand loyalty with its Everyday Consumers. 5.11’s efforts to tailor products for its Prosumers drives innovation and improved merchandising.credibility, which in turn yields superior functionality and appeal to Everyday Consumers. As 5.11 continues to scale, its broader consumer base allows it to reinvest resources back into its technical and functional expertise, further driving continued innovation for its professional consumers.
Disciplined International Market Expansion - TheInternational represents 18% of net sales in 2021 and management believes 5.11 has a large opportunity to expand this business. Management believes Prosumers internationally view U.S. first responders, military and public servants as being among the best in the world, and want the same apparel, footwear and gear that they use both on and off duty. 5.11’s international strategy parallels the success it has enjoyed in the US by seeding the market remainsthrough the Prosumer channels, which creates brand awareness and Everyday Consumer demand.
Currently 5.11 products are distributed in over 120 countries across the globe. 5.11 leverages its proven playbook to invest in the largest, most successful international regions to grow its business. This strategy starts with the Professional Wholesale channel which establishes a profitable recurring revenue stream. As that grows, 5.11 builds a Consumer Wholesale channel and finally a DTC business is established in the most mature markets. While the
strategic approach is consistent, each region is uniquely built based on the size of the opportunity and the complexity of conducting business in a particular country. Management believes there is a significant opportunity to continue 5.11's international expansion with a focus on EMEA, Mexico, Asia, Australia and Canada. 5.11’s ability to supply the same superior apparel, footwear and equipment to global markets allows it to expand its already profitable international business to Everyday Consumers living by the ABR mindset around the world.
Competitive Strengths
Authentic Global Lifestyle Brand with Passionate Following - Since inception, 5.11 has been a trusted brand by military, law enforcement, public safety, first responders and frontline workers and other service professionals around the world. No matter the mission or how demanding the environment, management believes 5.11 makes the apparel, footwear and gear of choice for professionals both on and off duty. This loyalty and trust, proven over decades from when the FBI Academy first adopted 5.11 pants in 1992, is a powerful tool. This stamp of approval from the elite professional community creates a brand halo effect that propels the Everyday Consumer business, allowing 5.11 to appeal to a broad range of consumers who embrace an underpenetrated opportunityactive lifestyle, and who also appreciate 5.11 products’ superior technical performance for 5.11.everyday use.
5.11’s loyal consumers act as brand advocates, proudly wearing branded 5.11 will continuegear and displaying 5.11 banners, decals and patches. Management believes that 5.11's brand advocacy through social media or by word-of-mouth, coupled with its varied marketing efforts, has extended its appeal to the broader community. As 5.11 has expanded its product lines, and broadened its marketing messaging, it has cultivated an increasingly diverse audience of both men and women living throughout the United States and, increasingly, in international sales development through building country-specific salesmarkets. Management believes 5.11's loyal customers, alongside its heritage of authenticity and operations infrastructure, executing on both nearhigh-quality product performance create such a strong connection to the 5.11 brand.
Deep Knowledge of Our Consumers Drives Our Product Development and medium term large foreign government contract opportunities, and expanding consumer awarenessMarketing - Management believe much of the 5.11 brand.
Customersbrand success is accredited to the loyalty of 5.11's consumers. 5.11 continuously strives to understand their evolving needs. Utilizing consumer insights through proprietary research, data, and Distribution Channels
analytics, 5.11 services a wide range of customers including first responders, the military,informs its product design and outdoors enthusiasts in over 90 countries. The primary distribution channels can be segmented into two categories: professional and consumer. 5.11's working capital needs do not differ substantially from those of its competitors in the industry and generally reflect the need to carry significant amounts of inventorydevelopment teams to meet the requirementsdemands and expectations of its customers.
The domesticloyal consumers. Having innovated closely with its Prosumers since 2003, 5.11 has a deep understanding and appreciation for the tactical issues they deal with daily. Seeing itself as problem-solvers first-and-foremost, 5.11 designs products that provide solutions to the obstacles they encounter while on duty, enhancing the daily regimens of its professional channelend-users. 5.11 consumers are passionate about their work and activities, and 5.11 matches that passion as it continuously strives to build functional, durable, and comfortable products. Not only is characterized by thousands of unique “specified”this insight helpful in product contracts with individual public safety departments, serviceddesign and development, but also in outbound marketing efforts, both domestically and internationally. 5.11 supports and builds its brand through a network of more than one-thousand local third party dealers. Public safety departments include federal, state, county, cityfully integrated, high-impact marketing strategy which includes innovative and local law enforcement, firefighters, and EMS. Similar to the domestic professional channel, the international professional channel also consists of many unique “specified” product contracts with individual foreign governmental departments, serviced either directly by 5.11 or through a network of international dealers. Large contracts with government agencies are referred to as Direct-to-Agency (“DTA”). A typical DTA sales process is driven primarily by lengthy governmental approval processes and can take upwards of 18 to 36 months.
Within the consumer segment, the consumer wholesale channel is comprised of (i) outdoor specialty retailers, (ii) military exchanges, and (iii) online. The consumer direct channel is comprised of (i) e-commerce sales directly through the 5.11 website, www.511tactical.com, and (ii) company-owned retail stores. At the end of 2017, 5.11 operated twenty-seven company-owned retail locations in fourteen states. During 2017, 5.11 opened seventeen retail stores in twelve states.
For the year ending December 31, 2017, professional channel sales accounted for approximately 64% of total sales; approximately 7% of total sales were in the form of DTA sales. The consumer channel accounted for approximately 29% of total sales.
5.11’s top 10 customers comprised approximately 26%, 27% and 29% of total sales in the years ended December 31, 2017, 2016 and 2015, respectively.
Sales and Marketing
5.11’s sales organization consists of a mix of direct employees, independent contractors and sales agencies. The domestic salesforce develops direct relationships with thousands of individual public safety departments around the U.S. and participates in thousands of requests for proposal (RFP) processes annually. The salesforce works directly with over 900 local dealers to service local public safety departments once a 5.11 product receives “spec��� as part of the RFP process.
The international salesforce covers three primary regions: Asia Pacific, Europe, Middle East and Africa ("EMEA") and Latin America. While the company does fulfill some orders directly to international customers through its 5.11 website, most sales are serviced through third party distributors and dealers in foreign jurisdictions.
5.11 has implemented a multi-pronged marketing plan including investments in (i) professional and consumer product catalogues; (ii) print media; (iii) tradeshows; (iv) shop-in-shop retail concepts; and (v)exclusive content, digital and social media, content.dedicated weekly Podcast, community-outreach, television and movie product placement and integrations, sponsorships, and local store activations and events that foster consumer engagement.
Purpose-Built, Innovation-Led and High-Quality Product Offering - 5.11’s DNA is readiness. 5.11 addresses the needs of elite professionals around the world, outfitting them with the top-quality gear and equipment necessary to complete their missions. From this powerful foundation, 5.11 develops products to both address the specific needs of these professionals and have broad appeal. The process for development starts with a rigorous analysis of the most important functional qualities for 5.11 Prosumers. 5.11 then engages with the broader community, along with industry and trade professionals, to help find specific voids in the market worth targeting. 5.11 uses this data and insights to develop head-to-toe assortments to serve its consumers holistically whether they are at the office, exercising, experiencing the outdoors, or simply embracing the ABR lifestyle in their daily lives.
5.11 haddelivers a backlogcomprehensive lineup that enables its customer to enjoy high-quality functionality without having to sacrifice lifestyle, comfort, or style. Management believes 5.11's ability to deliver this balance is a deep competitive advantage that is unrivaled and where most of $26.4its competitors have proven to be unsuccessful.
Integrated Omnichannel Distribution Strategy - The foundation of 5.11's business model is to continue to strengthen its ability to serve the Everyday Consumer and Prosumer however they prefer to engage and purchase with 5.11, while simultaneously reinforcing 5.11's brand’s association and authenticity. Rather than taking the traditional channel approach to the business which management believes limits 5.11's potential, 5.11 enters trade areas with a tailored DTC and wholesale strategy for that market. By approaching trade areas in this manner, we believe 5.11 is able to share inventory between our stores and eCommerce, which allowed for 29% of eCommerce orders to be fulfilled out of store locations in late 2020, following the implementation of 5.11's Buy Online Ship From
Store functions. This optimizes speed and efficiency with logistics that truly meet 5.11's Prosumers’ and Everyday Consumers’ needs wherever they prefer to shop, rather than directing them into a particular channel. We believe this principle of product accessibility and adopting to consumers’ shopping choices drives brand building and organic lead generation. Though each channel is able to function profitability on an individual basis, the value 5.11 derives from its channels working in concert is a competitive strength.
Scalable Infrastructure and High-Performance Team to Support Growth - 5.11 has invested approximately $70 million in capital expenditures in the last five years tonot only improve operating and $1.7 million at December 31, 2017fulfillment performance in its current growth phase, but also as a foundation to support continued future growth.5.11’s investment has included implementing a variety of strategic and 2016, respectively.operational improvements, including hiring experienced senior executives, expanding its company owned retail stores, executing merchandising improvements, enhancing distribution and supply chain capabilities and implementing data-driven digital marketing campaigns. 5.11’s current infrastructure allows it to fulfill orders accurately and effectively across all channels, including making certain shipments direct from the source to bypass distribution centers, while still providing buffer capacity capabilities to support future expansion.
Competition
5.11 competes in the global marketplace for purpose-built technical apparel, footwear and gear. Management believes 5.11 has competitive advantages through its global omnichannel business model, which is comprised of a rapidly growing DTC channel and recurring Wholesale channel. 5.11 competes against activewear, outdoor and specialty apparel brands such as Nike, Under Armour, The North Face, Patagonia, Lululemon, Arc’teryx, Carhartt, Propper and Fecheimer Brothers. 5.11 competes with footwear brands such as Timberland, Bates and Danner, and with gear and bag brands such as Camelbak, Osprey and YETI. 5.11 also competes with specialty retailers such as REI, Dick’s Sporting Goods and Galls.
Suppliers
5.11 operates an efficient, low-costhas built a supply chain that is optimized for its business, through which 5.11 controls the design, development and fulfillment of its products.
Sourcing and Manufacturing
5.11 does not own or operate any manufacturing facilities. Instead, it chooses to contract with third-party suppliers for materials (fabric and trims) and manufacturers for finished goods. 5.11 partners with high-quality vendors and retains complete control of all intellectual property associated with its products. 5.11 product design, technical design and development teams work directly with its vendors to incorporate innovative materials that meet the high-quality product standards demanded by its customers. 5.11’s primary product specifications include characteristics like durability, protection, functionality, and comfort. 5.11 collaborates with leading fabric suppliers to develop fabrics that it ultimately trademarks for brand recognition whenever possible.
The materials used in 5.11 products are developed in partnership between its material vendors and its design, product development and sourcing mostteams, then sourced by its manufacturers from a limited number of pre-approved suppliers. To enhance efficiency and profitability, 5.11 recently adopted 3D design capabilities for virtual prototyping allowing it to make better and quicker decisions prior to creating physical prototypes. Additionally, 5.11 recently partnered with one of our apparel manufacturers to create a development center with dedicated resources to facilitate rapid prototyping.
All 5.11 products are manufactured by third-parties. 5.11 works with a group of 60+ vendors, 15 of which produced approximately 80% of its products through contract manufacturersin fiscal year 2021 and 2020. During the year ended December 31, 2021, approximately 44% of 5.11 products at cost were produced in Bangladesh, approximately 36% in Vietnam, and the remainder in China, Cambodia, Taiwan, Philippines, Indonesia, Africa, Central America and the United States. 5.11 does not have any long-term agreements requiring it to use any manufacturer, and no manufacturer is required to produce its products in the Asia Pacific region. Productionlong term. 5.11 purchases from Vietnam accounted for approximately 35% of 5.11’s purchases for the year ending December 31, 2017suppliers on a purchase order basis informed by capacity forecasts. 5.11 measures supplier performance through various performance indicators and represented 5.11’s largest sourcing region. No single core product is 100% sourced by any one vendor.partner closely with them to continually improve efficiency, cost, and quality. Management believes that 5.11’s5.11's principal manufacturers have the additional capacity to accommodate future growth.
ProductionAs a company devoted to the needs of Beyond products occurs primarily through domestic subcontract facilities in the U.S.public safety and through the brand’s headquarters in Seattle, Washington.mission-oriented professionals, 5.11 has developed secure relationships with a number of its vendors and take great care to ensure that they share its commitment to quality
and ethics. Under its supplier agreements, suppliers must follow 5.11’s established product design specifications and quality assurance programs to meet specified standards. To ensure vendor reliability and quality, 5.11 has established a sourcing office in Hong Kong. The officeKong, which employs approximately 5059 individuals whose primary functions include vendor management, commercialization, product development, production planning, vendor compliance, and quality assuranceassurance.
5.11 requires its vendors to comply with its Vendor Code of Conduct relating to working conditions as well as certain environmental, employment and compliance.sourcing practices. 5.11 requires all vendors to contractually commit to upholding these standards. Additionally, in alignment with its values, 5.11 encourages its manufacturers to be certified through the Worldwide Responsible Accredited Production (WRAP) program, which is an independent organization dedicated to promoting safe, lawful, humane and ethical manufacturing. Once a vendor is part of 5.11’s production network, its in-house production team work together with third-party inspectors to closely monitor each partner’s compliance with applicable laws and standards on an ongoing basis.
5.11 regularly sources new suppliers and manufacturers to support its ongoing growth and carefully evaluates all new suppliers and manufacturers to ensure they share its standards for quality and integrity. To mitigate supplier concentration risk, 5.11 commercializes its top key items at multiple factories to ensure it can balance geographic risks as well as respond quickly to spikes in business. 5.11 also continuously seeks out additional suppliers and manufacturers to enable contingency plans that minimize disruptions, as well as support its future growth.
Distribution
5.11 leases and operates a distribution facility in Manteca, California to support its fulfillment needs across the Americas (North, Central & South). Additionally, 5.11 operates a small distribution facility in New South Wales, Australia to serve the Australia and New Zealand markets. 5.11 utilizes global third-party logistics providers to fulfill customer orders in EMEA and Asia-Pacific, which are located in Sweden and China, respectively. These third-party logistics providers manage all various distribution activities in their regional markets, including product receiving, storing, limited product inspection activities, and outbound shipping.
Intellectual Property
To establish and protect its proprietary rights, 5.11 relies on a combination of trademark (including trade dress), patent, design, copyright and trade secret laws, as well as contractual restrictions in license agreements, confidentiality and non-disclosure agreements and other contracts. 5.11’s intellectual property is an important component of its business, and management believes that 5.11's know-how and continuing innovation are important to developing and maintaining its competitive position. Management also believes having distinctive marks that are readily identifiable on 5.11's products is an important factor in continuing to build its brand and distinguish its products. 5.11 considers the 5.11 name and logo trademarks, together with 58 issued and pending patents and 374 registered trademarks, both in the United States and internationally, to be among its most valuable intellectual property assets.
Regulatory Environment
In the United States and the other jurisdictions in which 5.11 operates, it is subject to labor and employment laws, laws governing advertising, safety regulations and other laws, including consumer protection regulations that apply to the promotion and sale of merchandise and the operation of fulfillment centers and privacy, data security and data protection laws and regulations, such as the California Consumer Privacy Act, in the United States, the EU General Data Protection Regulation 2016/679 ("GDPR") in the European Economic Area and Switzerland, the U.K. GDPR and the United Kingdom Data Protection Act 2018 in the United Kingdom, and the Brazilian General Data Protection Law in Brazil, the ePrivacy Directive and national implementing and supplementing laws in the European Economic Area. Privacy and security laws, regulations, and other obligations are constantly evolving, may conflict with each other to complicate compliance efforts, and can result in investigations, proceedings, or actions that lead to significant civil and/or criminal penalties and restrictions on data processing. 5.11 products sold outside of the United States may be subject to tariffs, treaties and various trade agreements, as well as laws affecting the importation of consumer goods. 5.11 monitors changes in these laws and management believes that 5.11 is in material compliance with applicable laws. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. A portion of sales generated by its International business is derived from sales to foreign government agencies, and management believes 5.11 is in material compliance with related applicable laws.
Human Capital
Mission-Driven, Innovative and Supportive Culture – From the beginning, 5.11’s company culture has always been focused on serving those who serve—military, law enforcement officers, public safety and first responders and frontline workers from around the world. The passion for serving these top professionals inspires 5.11 to extend serving its consumers into their everyday lives, to be prepared for whatever life throws their way. 5.11’s teams embrace its ABR mindset, and its core values allow 5.11 to attract passionate and motivated employees who are driven to succeed and share the vision of becoming “an iconic global brand rooted in innovating purpose-built gear for the most demanding missions while inspiring the world to always be ready.”
5.11’s work environment is open and collaborative, spanning a global organization from its headquarters in Irvine, CA and offices in Hong Kong, Mexico, Sweden and Australia, to its distribution center in Manteca, CA, and to its U.S. retail stores. Its employees around the world are 5.11’s most valuable and important brand ambassadors. Their commitment to 5.11 and its mission, and their knowledge and passion for 5.11 products allows 5.11 to execute its company strategy and strengthens its brand loyalty. Additionally, 5.11 store employees are critical to 5.11’s success and often represent members of its communities, with many of them retired military, law enforcement officers and first responders.
5.11 prides itself in its ability to work directly with top professionals around the world, innovating to solve their greatest needs in the most mission-critical settings. 5.11 maintains a global footprint, with employees working in thirty-three states and eighteen countries. At December 31, 2021, 5.11 had 861 full-time employees and 185 part-time employees. 5.11 strives to create a welcoming and caring environment across the entire organization and celebrate the passion its team members bring forward in serving its consumers. 5.11 believes it has created a company culture focused on attracting, retaining, and developing talent, which enables it to exceed consumers’ expectations and meet its growth objectives. 5.11 prioritizes building a diverse, inclusive, equitable and supportive team that is driven by creativity and purposeful innovation.
BOA
Overview
BOA, creator of the revolutionary, award-winning, patented BOA Fit System, partners with market-leading brands to make the best gear even better. Delivering fit solutions purpose-built for performance, the BOA Fit System is featured in footwear across snow sports, cycling, hiking/trekking, golf, running, court sports, workwear as well as headwear and medical bracing. The system consists of three integral parts: a micro-adjustable dial, high-tensile lightweight laces, and low friction lace guides creating a superior alternative to laces, buckles, Velcro, and other traditional closure mechanisms. Each unique BOA configuration is engineered for fast, effortless, precision fit, and is backed by The BOA Lifetime Guarantee. BOA is headquartered in Denver, Colorado and has offices in Austria, Greater China, South Korea, and Japan.
History of BOA
BOA was founded in 2001 by Gary Hammerslag, a snowboarder, surfer, and entrepreneur. Gary moved to Steamboat, Colorado in the mid-90’s after successfully selling his previous company, which created innovative catheter solutions that improved angioplasty procedure speed and effectiveness. After arriving in Steamboat and frequently snowboarding, Gary envisioned a possibility to dramatically improve the fit and performance of snowboard boots by applying elements of his learnings in the medical device field. Gary developed a fit system as an alternative to traditional laces for snowboard boots and partnered with K2 and Vans to launch the first BOA-equipped snowboard boots to consumers in the winter of 2001. After a successful launch, BOA became widely adopted on snowboard boots.
BOA’s next phase of growth was largely in the outdoor sporting and recreation markets. In 2005, BOA expanded its focus to hiking and trail-related footwear, followed by cycling and golf in 2006 and hunting and fishing in 2007, at which point BOA surpassed 1 million users worldwide. From 2008 to 2011, having gained credibility in consumer markets, BOA introduced products for the workwear footwear market as well as products for the medical bracing market. In 2013, the company entered the running and training footwear market.
In 2019, BOA launched its state-of-the-art Performance Fit Lab ("PFL") to quantitatively measure the impact of BOA-equipped footwear on athletic performance. The PFL is used to advance performance footwear fit technology by testing, refining, and improving footwear products in collaboration with the company’s major brand partners and serves as a catalyst for innovation. In 2021, BOA surpassed 25 million users worldwide.
We purchased a majority interest in BOA on October 16, 2020.
Industry
BOA participates broadly in the global footwear market, representing approximately 10 billion pairs of shoes sold annually. BOA’s addressable market is identified based on product type, price lane, and geography. BOA targets the premium segment, where applicable price lanes tend to be at the upper end of each category. With respect to product type, the overall market is segmented into various subcategories, of which BOA primarily targets footwear for active performance sports, outdoor applications, and kids.Based on target footwear categories and applicable price lanes, management estimates BOA’s addressable market to be approximately 750 million pairs of shoes sold annually. Management estimates the company has approximately 3-4% share within its addressable market.
Products, Customers and Distribution Channels
Products
The BOA Fit System consists of a durable lace, which is guided by low-friction guides and attached to a dial that is typically mounted on the footwear heel, tongue or eye-stay for micro-adjustability to enhance performance fit. BOA’s current product portfolio has four platforms, H, L, M, and S-Series, which vary in cost, weight, tension, and use case. Each dial design can be customized with over 220 colors allowing the product to fit cohesively with each brand partners’ specific designs and colorways.
All platforms share the distinctive characteristics that differentiate BOA from competing offerings: micro-adjustability to achieve the perfect fit, measurable performance benefits validated by the company’s testing lab, durability and quality proven in extensive field testing, a lifetime guarantee on the end-product’s dial and laces, and the distinctive BOA sound heard when turning the dial.
Each platform is designed and engineered to address the specific performance fit needs of the end user by use case. Factors such as size and shape of dial, level of torque, internal mechanics, and weight vary amongst platforms, and each platform is further segmented into product collections that differ in aesthetic, optimal placement on the shoe, and cost. Within each product collection, dial designs and materials differ to accommodate preferences of the end user and retail price points of the end product.
Customers and Distribution Channels
BOA has approximately 300 global brand partners, including leading footwear companies such as Adidas, Specialized, Shimano, Fizik, ASICS, Burton, La Sportiva, K2, Vans and FootJoy who feature BOA systems across a variety of sporting and professional industries including snow sports, cycling, outdoor, athletic, workwear and medical. BOA typically sells directly to the manufacturing partner responsible for final assembly of the brand partner’s product. BOA works with 470+ brand partner factories with limited revenue concentration. Most brand partner factories are located in Asia, primarily in China and Vietnam, and are in relatively close proximity to BOA’s supply chain.
Rather than being solely an OEM part supplier, BOA maintains highly collaborative relationships with its brand partners to actively co-develop innovative, performance-driven footwear, helmets and bracing. BOA contributes substantial design and testing resources to ensure its system is used in a way that maximizes performance based on dial placement and configuration. The BOA system is not simply a “lace replacement” or plug and play option, but rather a solution that must be integrated into each product model through a 6-18 month development cycle to create a system that works specifically with a product’s unique structural design. This process allows BOA to ensure brand image consistency, end product quality and the best performance fit.
Footwear, headwear, and medical bracing products featuring BOA systems are primarily sold through brick-and-mortar sporting goods retailers, specialty sport retailers, online retailers, or brand partners’ owned retail and online channels. According to management’s estimates, end consumption is geographically diverse, with approximately 15-20% of products consumed in North America, 30-35% in Europe, and 45-50% in Asia.
No individual customer or brand partner factory represented greater than 8% of BOA’s net revenues in 2021. At December 31, 2021 and 2020, BOA had approximately $31.7 million and $15.2 million in order backlog, respectively.
Business Strategies and Competitive Strengths
Business Strategies
Continued Share Growth in Established Categories - BOA has established a strong presence in certain core categories in Northern Europe, Korea, Japan, and the United States where BOA has proven efficacy and established strong brand partner relationships. In these core categories, BOA is focused on building a community to cross market to and is actively working to reimagine product solutions to deliver the best product to consumers.
Going forward, BOA intends to leverage its brand partner relationships to expand penetration and capture additional share in growing markets such as workwear in North America and Asia, outdoor in markets outside of Korea, and golf in North America. BOA has developed region and category specific products to better cater to the individual dynamics of each market including products that deliver a better price/value proposition, new product configurations for region specific trends and performance fit messaging to increase consumer awareness and adoption. Through its reputation in the marketplace, athlete endorsements and deep relationships with leading brand partners, the company is focused on delivering the performance benefits of the BOA system across an expanding set of sporting categories and geographies.
Expand into Pioneering Categories - BOA has identified several adjacent segments including alpine skiing, trail running, and court sports such as tennis, badminton and basketball which management believes are well suited to benefit from the performance fit that BOA provides. BOA is actively working with leading brand partners to develop sport-specific footwear configurations that can benefit from the advantages of the BOA system. By leveraging BOA’s brand equity and proven solutions, the company believes there is significant whitespace to increase penetration in these early adoption segments.
Competitive Strengths
Culture of Innovation and New Product Development - Management believes that there is significant opportunity to continue advancing product offerings through its commitment to innovation. Product development and innovation are divided amongst (i) BOA’s internal innovation and evolution of its fit systems and platforms, refining and improving on the aesthetics, durability, user experience, and price/value, (ii) the design and engineering collaboration that BOA engages in with its brand partners for project and application-specific needs, and (iii) BOA’s advanced research through its PFL, which is transforming markets through innovative performance fit solutions that are scientifically tested and validated.
Deep Collaborative Partnerships – BOA has deep partnerships with the premier brands in every segment they compete within.They collaborate throughout the entire product lifecycle process, including product strategy, design and development, factory operational/service support, retail education, consumer warranty support, and marketing/demand creation.BOA has a high partner retention rate due to the depth and value of the relationships.
Premium Brand Position - BOA is focused on continuing to build awareness around its aspirational, global brand through content leadership, athlete endorsements, paid media, brand partner affiliations, and other business. BOA primarily increases awareness through direct-to-consumer marketing and co-marketing with its established brand partner relationships. In 2019, BOA launched its “Pioneer Program,” an athletic sponsorship platform. BOA leverages athlete endorsements to further establish its positioning as a performance fit leader as well as drive cross-segment brand awareness. The company recently launched its “Dialed in” Campaign, which showcases pioneers performing at their peak both physically and mentally. BOA also relies on its trusted brand partners to increase BOA brand awareness. The company focuses its efforts on collaborating with brand partners who are innovative market leaders that meet BOA’s brand standards and align with BOA’s positioning as a high-performance, premium brand.
Technology Leader with Robust Patent Portfolio – BOA is a leader in performance fit innovation and has built a diverse global portfolio of issued and pending utility and design patents, creating barriers to entry. Throughout BOA’s history, the company has continually innovated on dial attributes including quick release, durability, manufacturing ease, and micro adjustability, in addition to integrated lace and lace guide designs and configurations critical to imparting precision fit and reduced friction. BOA’s engineering and technical expertise enables the development and production of performance fit solutions, allowing their brand partners to offer performance enhancing technology and product differentiation.
Competition
BOA’s competition can be segmented into three categories: established footwear brands that maintain their own proprietary technology for particular market segments, lower-quality subscale BOA imitators, and non-mechanical lace alternatives (bungies, buckles, plastic lace locks, Velcro, and webbing). Management estimates that BOA is 20+ times the size of its next closest direct competitor.
Research and Development
BOA’s approach to new product development is a multi-stage, cross-functional process. For each new product introduction, BOA works closely with brand partners to identify or develop the best suited BOA solution, its optimal placement on the shoe (or other application), color and design specifications, and cost targets. On existing products, BOA is committed to continuous innovation, including key improvements such as lower installation costs for brand partner factories, thinner and sleeker product profiles for improved aesthetics, in field warranty rate reduction to 0.5%, improved user experience, and the broadening of the platform suite to address key opportunities in alpine skiing, basketball, and outdoor.
As part of BOA’s innovation strategy around improving fit, the company has invested in a state-of-the-art PFL to quantitatively measure the impact of the BOA system on end products. In partnership with the University of Denver, the PFL is testing a significant number of products to evaluate a) Agility & Speed, b) Power & Precision, and c) Endurance & Health. By addressing these global performance attributes rather than segment-by-segment specific needs, PFL findings will be relevant and applicable across BOA’s product lines. The results of these studies help further validate BOA’s value proposition, strengthening the company’s position as a fit and performance leader. Moreover, the PFL serves as a platform to test and refine new product offerings ahead of launch.
Suppliers
BOA maintains a longstanding deep relationship with a sole supplier for plastic injected parts (dial units and lace guides), representing approximately 70% of total purchases.The vendor is based in China with multiple facilities. Furthermore, the vendor has supplied the company since 2001 and has continuously invested in its tools and infrastructure to maintain quality standards and keep up with demand. BOA owns all its injection molds. Lastly, the vendor is also a minority shareholder in BOA and is committed to supporting its growth. The remainder of BOA’s purchases are for steel and steel coated lace, textile laces and guides, monofilament lace and webbing, which are sourced from China, Korea, Europe, and the U.S. Management believes its manufacturing partners have sufficient capacity to accommodate future growth.
Intellectual Property
BOA has built a diverse global portfolio of 233 issued and pending utility and design patents. The company has created 37 patent “families” with intellectual property covering its core technology (dials, guides, laces), as well as strategic configurations and component installation methods. BOA maintains 10 Trademarks in 40+ countries.
Seasonality
Due to the diversity of sporting segments BOA participates in, there is no significant seasonality to the business, though BOA typically has higher sales in the fourth quarter, reflecting higher cycling and golf sales in preparation for the spring retail season, as well as higher sales in the second quarter each year due to purchasing trends in the snow sports product group.
Environmental, Social and Governance
As a forward-looking company, BOA is working towards making a sustainable impact throughout the world, minimizing their imprint on the environment, and diversifying the Outdoor and STEM industries. BOA has set bold goals to dramatically reduce the use of virgin fossil fuel-based plastics, overall manufacturing waste, and materially increase use of sustainable energy. The company has already made progress in all three areas and will be formally distributing its environmental and community impact report in the second quarter of 2022. In the last year, BOA has increased their budget and invested in three new roles to focus on these efforts. The company has formed partnerships with organizations in every region that are focused on providing more access and opportunities to under-represented populations and protecting the environment. Through these programs, BOA is working to create purposeful connections to their employees, partners, and consumers – bringing their mission, values, and products to the hearts and minds of their audience.
Human Capital
BOA strives to be an inclusive global team that trusts and cares for each other, their partners, the community, and the environment. Since their launch in Steamboat, CO in 2001, BOA has maintained a strong and healthy company culture that is rooted in a passion for the outdoors and the various industries that encompass their product offering. As the team has expanded over the last 20 years, BOA has placed an emphasis on creating a diverse and inclusive workplace with the goal of representing their global communities. BOA employees are located in four countries and the United States. As of December 31, 2021, BOA had 241 full-time employees and 4 part-time employees. 131 employees are located in the United States and 114 work outside of the United States in Austria, Greater China, Japan, and South Korea.
BOA is focused on both attracting new talent and growing talent from within the organization - providing learning and development opportunities, placing an emphasis on independent career plans, and building a team of leaders, managers, and staff that represents their mission, vision, and values. BOA maintains a high retention rate of their employees and believes the company's relationship with its employees is connected and transparent.
Ergobaby
Overview
Ergobaby is dedicated to building a global community of confident parents with smart, ergonomic solutions that enable and encourage bonding between parents and babies. Ergobaby offers a broad range of award-winning baby carriers, blankets and swaddlers, nursing pillows, strollers, and related products that fit into families’ daily lives seamlessly, comfortably and safely. Ergobaby is headquartered in Torrance, California.
History of Ergobaby
Ergobaby was founded in 2003 by Karin Frost, who designed her first baby carrier following the birth of her son. The baby carrier product line has since expanded into 3-position and 4-position carriers, with multiple style variations. In its second year of operations, Ergobaby sold 10,500 baby carriers and today sells over 1 million a year.In order to support the rapid growth, in 2007, Ergobaby made a strategic decision to establish an operating subsidiary (“EBEU”) in Hamburg, Germany.
In 2014, Ergobaby launched the Ergobaby Four-Position 360 Baby Carrier which expanded on Ergobaby’s leadership in the baby carrier category by offering an ergonomic, outward forward facing position for the baby and comfort for the parent. The Ergobaby 360 Carrier won the 2014 JPMA Innovation award in the baby carrier category.In 2016, Ergobaby launched the 3-Position Adapt Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs) and offers some unique parent comfort features including lumbar support and crossable shoulder straps, as well as the benefit of being an all-in-one carrier with no need for an infant insert accessory (for babies 7-12lbs.). Also in 2016, Ergobaby acquired membership interests of New Baby Tula LLC (“Baby Tula”). Baby Tula designs, markets and distributes premium baby carriers and accessories and focuses its efforts on both the ergonomics and fashion of its products. In 2017, Ergobaby launched the All Position, All-in-One Omni 360 Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs) and includes all of Ergobaby’s parent & baby comfort features from the 360 and Adapt Baby Carriers, as well as the same consumer benefit of no infant insert accessory needed.
In 2018, Ergobaby entered into the stroller category with 2 new models. The first product launched was a full-size option called the 180 Reversible Stroller. This was followed later in the year by a premium compact option, the Metro Compact City Stroller.In 2019, Ergobaby launched the Embrace Baby Carrier which is geared for newborns (7lbs-25lbs) and merges the coziness of a soft wrap carrier with the simplicity and comfort of a structured carrier. In 2020, Ergobaby launched Everlove, a first of its kind carrier buyback, restoration, and resell program to extend the lifecycle of our carriers for a more sustainable future. In 2021, Ergobaby launched the multiple award winning Aerloom, the first-of-its-kind, FORMAKNIT™ baby carrier made to move, stretch and fit parents' daily life. This carrier has a seamless knit design and 87% of the knit is made with recycled plastic bottles.
We purchased a majority interest in Ergobaby on September 16, 2010.
Industry
Ergobaby competes in the large and expanding infant and juvenile products industry. The industry exhibits little seasonality and is somewhat insulated from overall economic trends, as parents view spending on children as largely non-discretionary in nature. Consequently, parents spend consistently on their children, particularly on
durable items, such as car seats, strollers, baby carriers, and related items that are viewed as necessities. Further, an emotional component is often a factor in parents’ purchasing decisions, as parents’ desire to purchase the best and safest products for their children. On average, households spent between 11 - 27% of their before-tax income on a child. Similar patterns are seen in other countries around the world.
Demand drivers fueling the growing spending on infant and juvenile products include favorable demographic trends, such as (i) a high percentage of first time births; (ii) an increasing age of first time mothers and a large percentage of working mothers with increased disposable income; and (iii) an increasing percentage of single child households and two-family households.
In purchases of baby durables, parents often seek well-known and trusted brands that offer a sense of comfort regarding a product’s reliability and safety.As a result, brand name, comfort and safety certifications can serve as a barrier to entry for competition in the market, as well as allow well-known brands such as Ergobaby and Baby Tula to compete in a growing premium segment.
Products, Customers and Distribution Channels
Products
Baby Carriers - Ergobaby has two main baby carrier product lines: baby carriers and related carrier accessories, sold under both the Ergobaby and Tula brands. Ergobaby’s baby carrier designs support a natural, ergonomic ("M" shaped) sitting position for babies, eliminating compression of the spine and hips that can be caused by unsupported suspension. The baby carrier also distributes the baby’s weight evenly between parents’ hips and shoulders and alleviates physical stress for the parent. Both Ergobaby’s 3-Position and 4-Position baby carriers have been recognized by the International Hip Dysplasia Institute as being “hip healthy”. Additional accessories are provided to complement the baby carriers including the popular Infant Insert.
Within the Ergobaby Baby Carrier product line, Ergo sells 3-Position and 4-Position baby carriers in a variety of style and color variations and Baby Tula sells 3-Position and 4-Position fashion-oriented baby carriers. Baby Carrier sales represented approximately 90%, 89% and 88%, of net sales in 2021, 2020, and 2019, respectively.
Within the baby carrier accessories category, the Infant Insert is the largest sales component of the accessory category but has seen declining sales as customer move to newborn ready carriers. Accessory sales represented approximately 3.2% in 2021, 5.4% in 2020 and 6.1% in 2019, of net sales.
Ergobaby’s core Baby Carrier product offerings with average retail prices are summarized below:
Ergo
•9 styles of baby carriers - $80 - $220
•2 styles of Infant Inserts - $35
Tula
•8 styles of baby carriers - $79 - $1,000
•1 style of Infant Inserts - $20
Customers and Distribution Channels
Ergobaby primarily sells its products through brick-and-mortar retailers, national chain stores, online retailers and distributors. In Europe, Ergobaby products are sold through its German based subsidiary, which services brick-and-mortar retailers and online retailers in Germany and France; it’s United Kingdom based subsidiary; and its Tula subsidiary in Poland; as well as a network of distributors located in Sweden, Norway, Spain, Denmark, Italy, Turkey, Russia and the Ukraine. Customers in Canada are predominately serviced by Ergobaby’s Canadian subsidiary. Sales to customers outside of the U.S., Canadian and European markets are predominantly serviced through distributors granted rights, though not necessarily exclusive, to sell within a specific geographic region.
Ergobaby had approximately $14.3 million and $11.5 million in firm backlog orders at December 31, 2021 and 2020, respectively. Two individual customers accounted for approximately 25% of Ergobaby's gross sales in 2021 and 2020. No other single customer represented more than 10% of Ergobaby’s gross sales in 2021 or 2020.
Business Strategies and Competitive Strengths
Business Strategies
Increase Penetration of Current U.S. Distribution Channels - Ergobaby continues to benefit from steady expansion of the market for wearable baby carriers and related accessories in the U.S. and internationally. Going forward, Ergobaby will continue to leverage and expand the awareness of its outstanding brands (both Ergobaby and Baby Tula) in order to capture additional market share in the U.S., as parents increasingly recognize the enhanced mobility, convenience, and the ability to remain close to the child that all Ergobaby carriers enable. Ergobaby currently markets its products to consumers in the U.S. through brick-and-mortar retailers, national chain stores, online retailers, and directly through Ergobaby.com and Babytula.com websites.
International Market Expansion - Testimony to the global strength of its lifestyle brand, Ergobaby has historically derived approximately 60% of its sales from international markets. Like it has in the U.S., Ergobaby can continue to leverage the Ergo and Tula brand equity in the international markets it currently serves to aggressively drive future growth, as well as expand its international presence into new regions. The market for Ergobaby’s products abroad continues to grow rapidly, in part due to the fact that in many parts of Europe and Asia, the concept of baby wearing is a culturally entrenched form of infant and child transport.
New Product Development - Management believes Ergobaby has an opportunity to leverage its unique, authentic lifestyle brands and expand its product line. Since its founding in 2003, Ergobaby has successfully introduced new carrier products to maintain innovation, uniqueness, and freshness within its baby carrier and travel system product lines and has become the baby carrier industry leader with the Omni 360 baby carrier. In addition to expanding into new product carriers like swaddling and nursing pillows, in 2018, Ergobaby entered the stroller category by introducing a new premium compact stroller (Metro Compact City Stroller) and a full-size stroller (180 Reversible Stroller).
Competitive Strengths
Ergobaby innovation - Ergobaby Carriers are known for their unsurpassed comfort.Ergobaby’s superior design results in improved comfort for both parent and baby. Parents are comfortable because baby’s weight is evenly distributed between the hips and shoulders while baby sits ergonomically in a natural ("M" shaped) sitting position. The concept of baby carrying has increased in popularity in the U.S. as parents recognize the emotional and functional benefits of carrying their baby. Consumers continually cite the comfort, design, and convenient “hands free” mobility the Ergobaby carrier offers as key purchasing criteria. Ergobaby is also recognized as an industry leader in innovation.With the launch of the Ergo 4-Position 360 Carrier in 2014, the launch of the 3-Position ADAPT carrier in 2016, the launch of the All Position Omni 360 carrier in 2017, the launch of the Embrace carrier in 2019, and the launch of the Aerloom carrier in 2021. Ergobaby continues to innovate in the baby carrier segment on a regular basis.
Baby Tula Community - Tula enjoys an active and enthusiastic community who are vocal advocates for the brand.The Tula community acts as both an avid source of feedback on new product launches, which influence future product and patterns, as well as brand influencers to the broader new parenting community.
Competition
The infant and juvenile products market is fragmented, with a few larger manufacturers and marketers with portfolios of brands and a multitude of smaller, private companies with relatively targeted product offerings.
Within the infant and juvenile products market, Ergobaby’s baby carriers primarily compete with companies that market wearable baby carriers. Within the wearable baby carrier market, several distinct segments exist, including (i) slings and wraps; (ii) soft-structured baby carriers; and (iii) hard frame baby carriers.
The primary global competitors in this segment are BabyBjorn, Infantino, and Chicco. In geographies globally, Ergobaby also competes with companies that have developed wearable carriers, such as Infantino, Manduca, Cybex, Nuna, Stokke, Boppy, and Pognae. Within the soft-structured baby carrier segment, Ergobaby benefits from strong distribution, good word of mouth, and the functionality of the design.
Suppliers
During 2021, Ergobaby sourced its Ergo carrier and carrier accessory products from Vietnam and India, and manufactured its stroller systems and accessory products in China. Baby Tula products predominantly were produced from factories in India and Poland and were also produced in its own facility located in Poland. In 2009, Ergobaby partnered with a manufacturer located in India, and in 2012, Ergobaby began sourcing carriers and accessories from a manufacturing facility in Vietnam. More than 50% of Ergobaby’s carriers and accessories came from Vietnam in 2021. Baby Tula sourced its carrier, accessories and blanket products from Poland, Vietnam and India, with purchases from these locations accounted for approximately 14% of total Ergobaby purchases. Management believes its manufacturing partners have the additional capacity to accommodate Ergobaby’s projected growth.
Intellectual Property
Ergobaby maintains and defends a U.S. and international patent portfolio on some of its various products, including its 3-position and 4-position carriers. Currently, it has 81 patents (including allowances) and 33 patents pending in the U.S. and other countries. Ergobaby also depends on brand name recognition and a combination of trademarks and patents in orderpremium product offering to differentiate itself from competition.
Human Capital
Ergobaby is a global organization headquartered in Torrance, California, with offices in Hamburg, London, Paris and Bialystok, and distribution and retail partnerships in more than 75 countries. As of December 31, 2021, Ergobaby had 183 employees globally. Ergobaby’s people are its most valuable asset and the competition. 5.11organization is proud to be recognized as one of LA’s Best Places to Work 2021. Ergobaby strives to create a culture of trust with diversity of thought to drive innovation, create products and be a resource that helps to empower families everywhere. The collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, and unique capabilities of Ergobaby employees is evident in its positive culture and highly recognized brand. The company’s corporate responsibility and diversity and inclusion efforts are employee led, driven by the belief that supporting a global society that is resilient, empathetic, anti-racist, and inclusive starts with having a community where all people can thrive, starting from within the company itself.
Lugano
Overview
Lugano is a leading designer, manufacturer, and retailer of high-end jewelry. Lugano utilizes an extensive network of suppliers to procure high-quality diamonds and rare gemstones. Often taking inspiration directly from the stone, Lugano designs and creates one-of-a-kind jewelry that it sells to a broad base of clients. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art, and philanthropic communities. Lugano is headquartered in Newport Beach, California.
History of Lugano
Lugano was founded in 2004 by husband-and-wife team Moti and Idit Ferder. The company’s chosen name, “Lugano” was inspired by the picturesque Lake Lugano of southern Switzerland, a one-of-a-kind “gemstone of nature” surrounded by the Lugano Prealps mountains.
Lugano opened its first retail salon in 2005 in Newport Beach, California as an appointment only showroom. This salon, located in Orange County’s high-end Fashion Island shopping district, grew rapidly, and served as a critical proof of concept for the Lugano’s bespoke retail strategy. In the subsequent years, Lugano opened three more retail salons with its trademark high-touch sales approach to expand the Lugano’s geographic footprint in key destinations frequented by its target clientele.
In 2008, Lugano started an equestrian division focused on the Southeastern United States to complement its retail sales strategy. Today, Lugano sponsors many key equestrian events and is a long-standing supporter of equestrian-related causes.
Throughout its history, Lugano has also focused on building strong relationships with influential social and philanthropic organizations in the local communities surrounding its retail salons. In Aspen, Colorado Lugano frequently hosts private dinners and events in collaboration with organizations like the Aspen Institute or the Aspen
Museum of Art. Lugano’s event-based marketing strategy enables Lugano to regularly meet prospective clients and reconnect with repeat clients.
In 2020, Lugano expanded its production capabilities by building an in-house workshop to provide increased production efficiencies and improve control over its high-end gemstone inventory. Today, Lugano’s unique go-to-market strategy, one-of-a-kind designs, vertical integration and carefully cultivated network of clientele serve as critical differentiators among the retailer’s competitors in the high-end jewelry market.
We purchased a majority interest in Lugano on September 3, 2021.
Sales and Distribution
Products
Lugano designs, manufactures, and retails high-end jewelry including unique rings, necklaces, earrings, bracelets and brooches that range in price from under $1,000 to well over seven figures, with an average price of approximately $115,000 per piece. Lugano’s designers start with a rare stone as inspiration and craft jewelry that highlights the beauty and perceived value of the stone. As a result, Lugano’s pieces are often seen as one-of-a-kind works of art, creating a highly desirable niche in the broader jewelry marketplace. Competitors’ products are typically high volume or collection-based jewelry lines that are inherently less unique or exclusive – traits highly valued by Lugano’s clientele.
Customers
Lugano’s client base generally consists of sophisticated, high-net-worth individuals who value long-standing relationships and a personalized sales approach over one-time purchases and the high-pressure sales tactics used by other jewelry competitors. A typical Lugano client is community and relationship-driven and seeks unique products with emotional significance. The purchasers or recipients of Lugano pieces are predominantly women and often leaders in their respective communities. Lugano’s clients can range in age from 25 to over 80 and come from all over the nation, with most based in California, followed by Florida, New York, Texas, and Colorado, reflecting the company’s current retail salon footprint, along with limited international clientele.
Lugano’s retail revenue is diversified with no customer representing greater than 10% of total revenue in 2021. Management also believes its client relationships are significantly stickier than those of other jewelry retailers. Lugano enjoys a growing percentage of repeat business year-over-year, with repeat customers contributing an increasing percentage of revenue. Beyond its retail business, Lugano also sells loose diamonds via its wholesale division representing approximately 12% of Lugano’s revenue in 2021.
Distribution
Lugano goes to market via four retail salons in Newport Beach, CA, Palm Beach, FL, Aspen, CO and Ocala, FL, all strategically located in wealthy regions near popular vacation and up-scale shopping destinations frequented by Lugano’s target clientele. In a salon, Lugano aims for an elegant and private ambience to facilitate its high-touch sales approach. Salons are carefully laid out, enabling Lugano to host private dinners, parties, or other social events. Unlike other jewelers that highlight their jewelry with long, rectangular counters that separate the customer from the salesperson, Lugano decorates its salons with curved tables and couches designed to facilitate comfort, relationship-building, and ease of conversation. Lugano also markets and sells jewelry via pop-up showrooms at Lugano-hosted or sponsored events or in the homes of its clients.
Market Trends, Business Strategies and Competition
Market Trends
Lugano competes broadly in the personal luxury goods market, a portion of the overall global luxury market. According to Bain & Company, after years of consistent growth, the personal luxury goods market experienced a brief contraction in 2020. However, since then, the personal luxury goods market grew by 29% to hit $320 billion, increasing the size of the market by 1% versus 2019 levels. Bain & Company estimates that the personal luxury goods market could reach $408-$430 billion by 2025 with a sustained growth of 6-8% annually.
Lugano currently has 18 utility patentsvery low penetration (<1%) within its target market of high-net-worth individuals. Lugano’s addressable client base has been steadily increasing for over a decade and 10 design patents issued,increased by nearly 10% in addition2019 to 17 utilityan estimated 290,000 individuals worldwide, mirroring the growth seen in their combined net worth, which increased to
over $35 trillion. As a result, management believes there is significant runway for additional growth by expanding brand awareness and 3 design patents pending registration. 5.11 currently owns 319 registered trademarks including 3 trade dress registrations. household penetration.
Business Strategies
Lugano believes it is well-positioned to emerge as a leading domestic and international luxury brand. Lugano’s key growth opportunities include expanding its geographic footprint across target markets, domestically and internationally, growing the number of events it hosts, and branching into activities beyond equestrian sports that similarly attract wealthy participants.
Competition
The luxury jewelry market is highly fragmented with the leading six to seven companies accounting for approximately 20% of the market. LVMH, with brands like Tiffany, Bvlgari and Chaumet; Richemont with brands like Cartier and Van Cleef & Arpels; Graff Diamonds; and Harry Winston lead the market. These competitors often utilize a traditional retail model focused on foot traffic and tourism, are typically collection-based, and do not exclusively focus on the high-end segment of the jewelry market. The remaining portion of the market consists of national retail brands and small or midsize players that operate regionally or in an online-only format.
Competitive Strengths
Sourcing, Design and Production Capabilities
A deep network of international vendors enables the company to source rare and difficult-to-find stones. These stones are then combined with the world-class capabilities of Lugano designers who create sought-after masterpieces that cater to the company’s target clientele. Lugano’s in-house production workshop or close network of captive workshops provide increased production efficiencies, improved control over its inventory and better speed to market.
High-touch Retail Model
Lugano’s one-of-a-kind inventory requires a unique and high-touch sales strategy which the company has in-house general counselcultivated over its nearly 20-year history. The company’s retail experience is carefully curated, emphasizing both exclusivity and elegance, both critical to the sale of Lugano jewelry.
Event-based Marketing Strategy
Lugano sponsors over one hundred events each year, enabling the company to meet prospective clients and reconnect with existing clients that manageshave become loyal and repeat purchasers. In each market that Lugano enters, management takes great care to establish itself as part of the registrationlocal community and defensebecome a focal point for its clients’ lifestyles and activities. Through its efforts, Lugano invests in relationships which build brand value and customer loyalty. Lugano-sponsored events are often a client’s gateway into the Lugano community (management estimates over 60% of 5.11 intellectual property.clients are initially contacted at Lugano-sponsored events). Once a part of the Lugano community, customers tend to view jewelry purchases from Lugano as recurring events and often increase the size of their purchase from their previous transaction.
Regulatory EnvironmentSourcing and Availability of Materials
ManagementLugano sources diamonds and precious gemstones from a variety of vendors and wholesalers. Generally, Lugano sources polished diamonds and gemstones that are crafted into a Lugano-designed piece. From time to time, Lugano also opportunistically acquires finished jewelry with a high resale value from its global network of vendors. Most of Lugano’s diamonds are sourced from domestic wholesalers. By not purchasing raw stones directly from mines, Lugano limits conflict diamond exposure. Lugano ensures all its diamond vendors adhere to the Kimberly Process Certification Scheme to prevent conflict diamonds from entering its supply chain.
Lugano’s vendor base is not awarediversified with no vendor making up more than 10% of any existing, pending, or contingent liabilities that could have a material adverse effect on 5.11’stotal purchases and the top 10 vendors making up less than 50% of all purchases. Lugano maintains decade-long and trusted relationships with its top vendors.
Seasonality
While individual retail salons experience some seasonality (e.g., winter in Aspen, summer in Newport Beach), these patterns offset one another at the company-level. Additionally, due to the variety of events Lugano hosts all-year-round, there is no significant seasonality in the business. 5.11 is proactive regarding regulatory issues and is in compliance with all relevant regulations. Management is not aware of any potential environmental issues.
EmployeesHuman Capital
As of December 31, 2017, 5.112021, Lugano employed a totalnon-union labor force of 588 non-unionized,54 full-time employees. 25 employees 45 independent contractors,work in sales and 234 temporary workers. Nonemarketing, 12 work in design & production, 9 work in operations, 4 work in accounting and 4 work in corporate. Lugano intends to continue to grow its headcount and build out its middle management as it executes on its growth strategy of 5.11’snew salon openings, increased event-based marketing, and international expansion. Management believes Lugano's relationship with its employees is good.
Marucci Sports
Overview
Founded in 2009 and headquartered in Baton Rouge, Louisiana, Marucci is a leading designer, manufacturer, and marketer of premium wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also develops and licenses franchises for sports training facilities. Marucci products are available through owned websites, their team sales organization, Big Box Retailers, and third-party e-commerce and resellers. In 2017, Marucci acquired Victus Sports, a King of Prussia, Pennsylvania based complementary baseball equipment manufacturer and distributor. Marucci has vertically integrated wood bat manufacturing and has built long-standing relationships with international suppliers who manufacture the remainder of their product lines.
Marucci is an established brand commanding strong market share across product categories. Marucci’s mission is to “honor the game” and brands itself as such with simplistic imagery and to-the-point marketing campaigns.
Victus is a more recent entrant to the baseball equipment market but garners similar wood bat usage as Marucci. The brand is widely recognized for its edgy designs and big attitude. Victus’ mission, in contrast to Marucci’s, is to embrace the evolution of the game and to salute the next generation of players who set out to change it.
History of Marucci Sports
Marucci Sports was founded in 2009 by a team including two former professional baseball players. Marucci released its first metal bat, the Marucci CAT5, in 2009. In 2013, Marucci released batting gloves and launched its first series of fielding gloves, the Founders’ Series. Marucci was able to leverage its brand power to expand into the baseball apparel and accessories market as well. In 2018, Marucci acquired Carpenter Trade to expand the quality and technology of its fielding glove offering and change the current consumer expectations for a truly customized fielding glove. Victus’ product offering expanded into metal bats in 2019 with the launch of its Vandal line and recently expanded with the launch of the NOX. In 2019 Marucci also acquired two timber mills and a wood drying facility, securing vertical manufacturing capabilities within its wood bat product category and ensuring access to the best wood in the game. In 2021, Marucci acquired Lizard Skins, a designer and seller of branded grip products, protective equipment, bags and apparel for use in baseball, cycling, hockey, Esports and lacrosse. Marucci believes that the acquisition of Lizard Skins will allow it to build on its leading position in diamond sports while simultaneously developing the company’s presence in new sports markets such as hockey and cycling.
Today, Marucci is a designer, manufacturer, and marketer of premium Marucci and Victus-branded baseball and softball equipment including wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment. All of these products are sold around the world in retail stores, online and through its corporate owned and franchised training facilities.
We acquired a majority interest in Marucci on April 20, 2020.
Industry
Marucci Sports primarily competes primarily in the domestic baseball equipment market which includes wood bats, metal bats, fielding gloves, cleats, protective and other gear, and uniforms/ team apparel of which management estimates constitutes approximately $1.3 billion of annual retail revenue. Marucci Sports also competes within the greater global baseball equipment market which management estimates constitutes approximately $2.2 billion of
annual retail revenue. Marucci’s product offering targets primarily the premium equipment price point more often used in competitive club and travel leagues, for which participation rates are generally more stable.
The industry is generally considered to be a stable sector with growth rates in the low single digits. Baseball equipment is largely sold through national retailers. Independent resellers and online platforms also sell baseball equipment while the balance is purchased directly from the manufacturer.
Products, Customers and Distribution Channels
Products
Marucci designs, manufactures, and markets six categories of products: (i) metal bats, (ii) wood bats, (iii) apparel & accessories, (iv) batting gloves, (v) fielding gloves, and (vi) bags & protective equipment. Marucci’s product strategy encompasses producing high quality products recognized by consumers for their performance, craftsmanship, and value, and building on a rich history to introduce innovative new products.
Metal Bats - Metal bats have historically represented Marucci’s largest product category by revenue. The metal bats are priced at the premium end of the market, with average retail prices ranging from $219.99 to $549.99. Marucci produces metal bats for all ages, from college to tee ball, with a focus on elite high school players. The CAT series is the flagship metal bat product from Marucci. Marucci also offers a lower price point model, the F5. Victus’ first metal offering, the Vandal, was first launched in 2019, and is priced similarly to the CAT series. Victus later introduced its first two-piece bat in the NOX. Metal bats used in youth and elite travel leagues are subject to collective bargaining agreements.strict regulations limiting spring and exit velocity. The company has historically followed a two-year product release cycle, and Marucci metal bats have notable staying power with their customer base as prior year models remain in production.
Wood Bats- Marucci’s wood bats are built with quality, precision, and customization. Marucci prides itself in making every pro-bound bat a “game bat”. Marucci offers two types of wood bats: ash and maple. Ash is a soft, open grain wood. Maple bats are a much harder, closed grain wood and constitute a large majority of the company’s wood bat sales. The wide variety of selection and price points offer professional-level quality and cuts to amateur players as well. Innovative customization options further drive engagement.
Fielding Gloves - Marucci offers a growing set of fielding gloves across eight product series: Capitol, Cypress, Ascension, Oxbow, Acadia, Caddo, Magnolia (softball), and Palmetto (softball). Marucci has a complete line of gloves to meet the needs of every position player at every age and skill level. Marucci offers gloves across the pricing spectrum. Marucci acquired Carpenter Trade in 2018, along with their C-Mod technology which provides a unique fit. The C-Mod technology uses a size-specific, ergonomically shaped fit system that creates a more form fitting hand stall for greater control, leverage and responsiveness when fielding. The tailored-fit technology is available in straight or shift.
Apparel & Accessories - Marucci offers a full suite of apparel and accessory offerings that is rapidly expanding. The current product portfolio includes on-field and off-field apparel, sunglasses, hats, grips, and more. Most sales of these products are sold direct-to-team in custom apparel packages including baseball pants, jerseys, practice shirts, and more. Marucci has in-house screen-printing operations allowing for customization of various pieces of apparel. The acquisition of Lizard Skins in October 2021 further enhanced the company’s accessory offering. Lizard Skins is the top manufacturer and marketer of grips used in baseball, cycling, hockey, lacrosse, gaming, and various other sports.
Batting Gloves - All Marucci batting gloves are designed to meet professional standards of comfort, durability and performance while also appealing to users of all levels. Marucci has four lines of batting gloves: Pittards’ Reserve, Signature, Quest, and Code while Victus has one, the Debut. Marucci also offers limited production customized batting gloves. Marucci’s batting gloves span the pricing spectrum.
Bags & Protective Gear - Marucci offers an extensive line of bags and protective gear including bat packs, bat quivers, helmets, shin and elbow guards, catchers gear, and more allowing Marucci to cater to nearly all its customers playing needs.
Customers and Distribution Channels
Marucci sells its products through several channels including Big Box Retailers; Direct-to-Consumer ("DTC"), Direct-to-Team ("DTT"), the company's experiential Clubhouse retail stores and other Owned Channels; and third-party e-
commerce and resellers. Marucci’s top 5 customers accounted for 57.7% of 2021 of net sales.
Business Strategies and Competitive Strengths
Business Strategies
Continued Innovation in Existing Product Categories - Marucci plans to continue to build on its successful history of bringing new, innovative, highly anticipated products to market through leveraging its stringent new product development process, and external and internal manufacturing capabilities. The company has near-term new product launches and existing product updates planned across all categories that will further drive innovation, strengthening our competitive positioning.
Further Penetration of Existing Customer Accounts - Marucci has identified opportunities to leverage its existing relationships with retailers to drive expanded SKU offerings across categories, especially in apparel. Additionally, management believes the company can continue to improve Victus product adoption with existing channel partners.
An approximately $150 million fielding glove market represents a significant growth opportunity for Marucci. Fielding gloves are the second largest hard goods market in baseball / softball. Marucci plans to leverage its brand strength and innovation to capture share in this high margin category. The acquisition of Carpenter Trade in 2018 has allowed Marucci to offer a highly customized glove that serves as a key differentiator in fielding gloves.
Victus Category and Product Expansion - Victus has strong penetration in the majors and key affiliations with top players. The brand released its first metal bat in 2019, the one-piece Victus Vandal BBCOR bat and later launched its first two-piece bat, the NOX. Metal bats sales are expected to meaningfully contribute to Victus’ overall sales in the future. Victus’ key affiliates and player advocacy has driven a halo effect across other categories. Growth in lifestyle and fan apparel represents a significant opportunity for Victus to leverage its brand.
Lizard Skin Expansion – With the acquisition of Lizard Skins in October 2021, Marucci plans to expand its distribution of the company’s key grip product which are used in various sports including baseball, softball, cycling hockey and lacrosse. Additionally, Marucci sees opportunity to expand its grip offering into gaming and other similar applications, as well as batting gloves.
International Market Expansion - International sales currently represent a small portion of total sales. Natural expansion opportunities exist in baseball markets abroad such as Japan, South Korea, Taiwan, Canada, and Latin America. Marucci has achieved profitable growth in Asia by leveraging its premium brands and accessing markets through proven team dealers and distributors. In late 2021, Marucci launched a Japan-based sales office.
Further Penetration of Softball Market - Marucci’s plans to leverage its brand strength in baseball to further penetrate the softball market. Marucci is driving brand awareness and growth in the softball market from the ground up through grassroots marketing efforts, social media influencers, leveraging its partnerships with colleges and affiliated Marucci club teams, as well the recently launched softball mobile tour, to get in front of players of all ages. Marucci has dedicated employees who focus on softball expansion and have experience in the category as former collegiate athletes and coaches.
Expansion of the Direct-to-Team Sales Channel - The Direct-to-Team sales channel, launched in 2014, allows Marucci to sell its equipment and apparel directly to thousands of players. Marucci currently has 29 Founders’ Club organizations, representing 15,000 players. The Founders’ Club is an elite alliance of some of the nation’s premier amateur baseball programs selected by Marucci for their dedication to excellence on and off the field, reputation as a positive influence in their community, and commitment to growing their organization.
Marucci’s proprietary online platform for this channel, “Locker Room”, is ideal for any group that requires individual processing and purchasing. There is potential opportunity to leverage Locker Room capabilities across other team sports as the total market size for U.S. Team Sports Uniforms is approximately $1.3 billion. Marucci feels the DTT strategy is still in its early stages of growth.
Industry Consolidation - With a well-developed global supply chain, external and internal manufacturing capabilities, sophisticated management systems infrastructure, and extensive network of relevant relationships, Marucci is a platform for consolidation within both the baseball and softball equipment and apparel spaces.Management has identified a pipeline of potential acquisition targets that would help Marucci strengthen and expand its product offering and address new market segments.
Competitive Strengths
Originally founded to focus on baseball and softball, Marucci has a unique strength with its authentic knowledge and experience of these sports. Whether leading the Company’s strategy, cutting and sanding wood bats, or shipping product, the Marucci team consists largely of former players or coaches of the game itself. This same strategy extends to any category or market the company participates in so that the product is truly designed by the player for the player.
Product Development – the product development cycle varies by product with bats taking approximately 16 months to reach distribution and batting gloves requiring approximately 9 months. New product development at Marucci occurs in six successive stages: (1) Identify Market Opportunity – search for player needs via internal leads, supplier partners, or on-the ground feedback from players in their network, (2) Cross Functional Ideation – host ongoing dialogue with sourcing partners to identify next-gen technology, (3) Product Development – have sourcing partners begin preliminary testing runs once viable new products are identified, (4) Production and Validation – continue rigorous prototyping and product validation on the field and in the Marucci performance lab where Big League and amateur players test and provide feedback, (5) Marketing – engage in-house marketing team to drive product naming, rollout, branding, and marketing stories to expand awareness, and (6) Product Rollout and Distribution – finalize the marketing story, conduct sales presentations, and provide samples to representatives and finally receiving orders from channel partners and beginning full production.
Leading Brands with Professional Halo – Both Marucci and Victus products are preferred by Big League players (#1 and #2 bat brands in the Big Leagues, respectively), and Lizard Skins is the grip tape of choice for many top athletes at both the professional and amateur levels. Marucci’s leading share of use among the top players at the top levels of baseball underlies the aspirational nature of the brand and creates a “halo effect” for its broader product lines, giving the brands credibility and permission to play in adjacent product categories, customer demographics, and geographic markets.
Vertical Integration – Marucci owns its own wood mills, giving the company greater control over the availability and quality of the supply of wood billets used to produce its wood bats. Marucci’s original value proposition to professional players was to guarantee that each bat delivered would meet the most stringent standards demanded for in-game use. As product tolerances continue to tighten and supply chain complexity creates operational challenges for many competitors, Marucci’s ability to ensure both product quality and availability is a unique competitive advantage.
Competition
Marucci competes with offerings from multiple large baseball equipment manufacturers, including Easton (under the Easton and Rawlings brands) and Wilson Sporting Goods Company (under the Wilson, DeMarini, Louisville Slugger, and Evoshield brands), and numerous smaller wood bat specific brands including Old Hickory, Chandler Bats, Tucci, Dove Tail, Sam Bat, and D-Bat. Key determinants in consumer purchasing decisions include product performance, quality, and brand loyalty.
Suppliers
Marucci leverages a combination of sourcing and in-house manufacturing. Metal bats, apparel, batting gloves, fielding gloves, bags, and other accessories are sourced from an international network of primarily Asian manufacturing partners, while wood bats are manufactured domestically at the company’s Baton Rouge (Marucci) and King of Prussia (Victus) facilities. In 2019, the company acquired two timber mills, effectively consolidating its wood bat supply chain to improve quality and production efficiency and ensuring continued access to the best wood in the game.
Intellectual Property
Marucci maintains 47 trademarks in the U.S., 41 of which are registered and 6 of which are pending registration. Marucci also has 1 issued patent. Management considers its trademarked brand names, preeminent name recognition, ability to design innovative products, and technical and marketing expertise to be its primary competitive advantages.
Regulatory Environment
Baseball and softball equipment, outside of bats, enjoys a largely restriction free Federal/Local government regulatory framework. Metal bats used in youth and elite travel leagues are subject to strict regulations limiting
spring and exit velocity determined by self-regulatory associations connected to the sport. There are three key regulatory groups associated with baseball: USA Baseball, United States Specialty Sports Association (“USSSA”), and Bat-Ball Coefficient of Restitution (“BBCOR”). Each have their own method for measuring bat performance. BBCOR is the standard currently governing adult baseball bats used in High School and Collegiate play while USA and USSSA govern youth leagues. There are also regulatory bodies specific to softball including Amateur Softball Association (ASA) and Independent Softball Association, among others. Wood bats used in professional baseball are subject to league-specific regulations. We believe all of our products adhere to established regulations
Seasonality
Marucci typically has higher sales in the first quarter each year, ahead of the primary baseball season. However, management expects seasonality to smooth as baseball becomes an increasingly year-round sport.
Human Capital
Marucci had 322 employees at December 31, 2021, 256 full-time and 66 part-time employees, all located in the United States. Additionally, Marucci works with a third party Employer of Record in Japan to deploy its strategies in Asia and currently has 5 full-time employees. Marucci's labor force is non-union. Management believes that 5.11Marucci has an excellenta good relationship with its employees.
CrosmanVelocity Outdoor
Overview
Crosman,Velocity Outdoor, headquartered in Bloomfield, New York, is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. CrosmanVelocity Outdoor offers its products under the highly recognizable Crosman,
Benjamin, LaserMax, Ravin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks.Airguns historically represent Crosman'sVelocity Outdoor's largest product category, with more than 50% of gross sales.category. The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Crosman'sVelocity Outdoor's other primary product categories are archery, with products including CenterPoint crossbows and the Pioneer Airbow, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products. In September 2018, Velocity acquired Ravin Crossbows, a manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related to the advancement of crossbow technology.
We made loans to, and purchasedacquired a controllingmajority interest in Crosman for a net purchase price of $150.4 million inVelocity Outdoor on June 2017, representing approximately 98.9% of the initial outstanding equity of Crosman Corp.2, 2017.
History of CrosmanVelocity Outdoor
CrosmanVelocity was founded in 1923 as Crosman Rifle Company and was one of the first manufacturers of recreational airguns in the United States. CrosmanVelocity Outdoor acquired Visible Impact Target Company in 1991 and Benjamin Sheridan Corporation in 1992. Benjamin has continued aswas, and continues to be, a dominant U.S. manufacturerproducer of high-end pneumatic and CO2 powered airguns while Sheridan was one of the world’s foremost manufacturers of high qualityhigh-quality paintball markers.In 2007, CrosmanVelocity expanded its offerings outside the traditional airgun category with the debut of its new optics division, CenterPointCenterpoint Precision Optics. In 2008, CrosmanVelocity diversified further by adding Crosman Archery to its list of branded products and introduced two new hunting crossbows in addition to youth archery products.In 2016, CrosmanVelocity debuted its CenterPointCenterpoint line of crossbows and the Benjamin Pioneer Airbow, the first ever mass-produced air powered archery device. In 2017, Crosman acquireddevice and with the commercial2018 acquisition of Ravin Crossbows, Velocity expanded their archery product line into the higher-end segment of LaserMax, a leading designer and manufacturer of gun-mounted laser aiming devices.the crossbow market.
Today, CrosmanVelocity Outdoor is an international designer, manufacturer and marketer of Crosman and Benjamin airguns including related ammunition and accessories, archery products including the Ravin and Centerpoint crossbows, airsoft rifles, pistols, and ammunition, archery products, laser aiming devices, and precision optics.
Industry
CrosmanVelocity Outdoor primarily competes within the airgun and archery sub-segments of the broader outdoor recreational products industry, which together management estimates constitute approximately $1.0$1.1 billion of annual retailmanufacturer revenue.Both categories share certain common characteristics, including consumer demand for innovation, similar sales channels, and unique regulatory frameworks.
The airgun industry is estimated by management to constitute approximately $275 million to $325 million of annual retailmanufacturer revenue, excludingincluding consumables and excluding accessories. With a history stretching back over a century, the industry is generally considered to be a mature sector, with stable growth rates in the low single digits. Airgun products are largely sold through big box specialty sporting goods retailers, mass merchants and nationalonline retailers, with each accounting for roughly 40% of purchases. Independent dealers22%, 21% and online platforms account for approximately 9% and 8%26% of purchases, respectively, while the balance is purchased directly from the manufacturer.respectively. The remainder moves through Dealers and Distributors. Airguns are less seasonal than archery because there is no defined hunting season, although sales spike somewhat around holidays.
The archery equipment market is estimated by management to constitute between $750 million and $850approximately $770 million of annual retailmanufacturers sales, of which $400-$500-$450550 million is attributable to bows and $350-$200-$400250 million is attributable to related archery accessories.consumables. Vertical and compound bows, are the most prolific type of bow, comprisingand crossbows each comprise about half of the category sales, whilewith crossbows make up approximately 35% and youth bowsgaining share in recent years. Independent archery Dealer’s account for the remaining 15%. Outdoor retailers comprise the largest sales channel, accounting for approximately 45% of consumer purchases, while independent archery stores38% and big box specialty sporting goods retailers constitute 25%account for approximately 33% of consumer purchases. Distributors, mass merchants, and 13%online retailers make up the remainder of total purchases, respectively. E-commerce has grown to hold a 15% share, primarily at the expense of independent archery retailers and big box stores while 2% are direct from the manufacturer.consumer sales.
Products, Customers and ServicesDistribution Channels
CrosmanProducts
Velocity designs, manufacturers and markets five categories of products: (i) airguns, (ii) archery products, (iii) consumables, or pellets, BBs and CO2 cartridges, (iv) optics, and (v) airsoft. Crosman’sVelocity's product strategy encompasses producing high quality, feature-rich products recognized by consumers for their craftsmanship and value, and building on a rich history to introduce innovative new products.
Airguns
Airguns represent Crosman’s- Airguns has historically represented Velocity's largest product category, with gross sales comprising approximately 55% of 2017 sales.category. The airgun product line consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Crosman’sVelocity's airguns are designed to be multi-purpose, multi-occasion products, for use in recreational plinking and target shooting, pest control, and hunting. The CompanyVelocity offers a “good, better, best” array of airguns under the Crosman and Benjamin brands. The Crosman brand is known for high value at an accessible price, where the Benjamin brand is typically associated with premium products falling within the mid- to high-price point. Additionally, CrosmanVelocity rounds out its offering with mid-level products produced under an exclusive licensing agreement with Remington for its Remington, Marlin, DPMS, and Bushmaster brands.
Archery Products
Crosman - Velocity re-entered the archery market in 20152016 with a product line anchored by the CenterPointCenterpoint crossbow and the first-of-its-kind Pioneer Airbow. The Company’s archery segment comprised 15% of 2017 gross sales. CenterPointCenterpoint has grown rapidly since it was launched to become the second largest player in the crossbow category.The CenterPointCenterpoint Sniper 370 is the top-selling SKU in the crossbow market, with more than twice the volume of its nearest competitor. CenterPointCenterpoint acquired market share by offering features like an aluminum frame, higher shooting velocity, integrated string stops, a 4x32mm scope and shoulder sling at very competitive retail prices.
Concurrent with the launch of the CenterPointCenterpoint line of crossbows, CrosmanVelocity also introduced the Pioneer Airbow under the Benjamin brand.. The Pioneer Airbow created a new sportsman category as the first ever mass-produced air-powered archery device, effectively bridging the gap between airguns and archery. ManagementVelocity acquired Ravin Crossbows in 2018, further expanding its product line in the archery market. Ravin Crossbows is a leading designer, manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has worked with state regulatorsdeveloped significant intellectual property related to develop regulatory frameworks for the Airbow, which is currently legal to use for whitetail hunting in eight states and predator hunting in 30 states.advancement of crossbow technology.
Consumables
Crosman’s - Velocity's consumables segment consists of steel and plastic BBs, various styles of lead pellets, and single-use CO2 cartridges used to power airguns. BBs are typically used for plinking, training, or target shooting at a more affordable cost, while different pellet styles are designed either for accuracy, maximum penetration, or a combination of the two. CrosmanVelocity is the world’s largest provider and only domestic manufacturer of CO2 cartridges, having first introduced the use of C02 as an airgun propellant in 1961. Consumables are produced under the Crosman, Benjamin, and Copperhead brand names. The consumables product line comprised approximately 17% of 2017 Crosman’s gross sales.
Optics - Launched in 2006, Crosman’sVelocity's line of optics products offers high-performance, value-priced optics under the CenterPointCenterpoint brand. The scopes, sights, binoculars, lights, and lasers are marketed for traditional firearms, in addition to select airgun and crossbow offerings.In 2017, CrosmanVelocity added to their optics product line with the acquisition of the commercial division of LaserMax.LaserMax is a global leader in hardened and miniaturized laser systems, offering a comprehensive line of premium laser sights for home defense, personal protection and training use. LaserMax’s commercial business provides laser sighting solutions and tactical lights to the firearm original equipment manufacturers ("OEM") and retail channels. Management believes that the addition of the LaserMax products will enable Crosmanenables Velocity to reach a wider range of new customers across retail channels. Crosman’s line of high-quality optics represented 5% of gross sales in 2017.
Airsoft
- Airsoft guns are a class of air, CO2, gas, or electric-powered guns that are typically made from high-impact plastics and are engineered with recreation in mind to fire safe, plastic BBs quickly and accurately. Airsoft products are most often used for recreational purposes by a younger demographic and a strong user base amongst military and law enforcement customers. CrosmanVelocity offers a broad portfolio of airsoft rifles and pistols under its owned Crosman Elite and Game Face brands, as well as the licensed U.S. Marines brand. Sales
Distribution Channels
Velocity's products are sold through over 900 customers across a mix of sales channels, including mass merchants, national retailers, distributors/dealers/regional chains, international distributors, and e-commerce. Over the last 5 years, management has successfully diversified both its sales channel composition and customer mix.
Velocity sells its products through nearly all major domestic mass merchants and sporting goods retailers currently selling airguns and has established a strong e-commerce platform to allow for flexibility in a changing retail environment. The company has been selling to many of its customers for over 20 years, maintaining close relationships with key purchasing personnel through high-touch customer service. Velocity is one of the only players in the sportsman category offering category management services, product assortment, and SKU optimization feedback typical of larger multinational consumer products companies. This data-sharing has resulted in higher retailer sell-through and margin enhancement, more accurate sales forecasting, and a 98% fulfillment rate, all of which are key components in maintaining status as a vendor of choice.
Velocity maintains an internal sales team responsible for covering the vast majority of its customer relationships, or approximately 90% of total sales. Furthermore, Velocity supplements its in-house team with four independent sales representative organizations, providing coverage for approximate 375 additional customers across their respective geographic territories. International sales efforts are handled by Velocity-employed account executives who work through local distributors in order to ensure that products conform to local regulatory standards.
Customers
Velocity sells its products through nearly all major domestic mass merchants and sporting goods retailers and has established a strong e-commerce platform to allow for flexibility in a changing retail environment. The three largest customers represented 35.8% of gross sales in 2021 and represented the major sales channels; mass merchant, e-commerce, and regional retail.
Velocity had approximately $26.6 million and $39.0 million in firm backlog orders at December 31, 2021 and 2020, respectively.
Business Strategies and Competitive Conditions
Business Strategies
Continued Innovation in Existing Product Categories - Velocity plans to continue to build on its successful history of bringing new, technically superior products to market through leveraging its stringent new product development process, internal manufacturing capabilities, and a flexible supply chain. The company has near-term new product launches and existing product updates planned across all categories, including the highlights below.
•Airguns - Building on the Silencing Barrel Device (SBD) technology, Velocity is introducing a line of multi-shot break-barrel models that feature a 10-shot clip that advances automatically.Velocity is also enjoying success with its recent introduction of fast shooting full-auto BB guns under the Crosman brand.In addition, Velocity continues to be the world’s largest producer of BB, pellets and CO2 powerlets.
•Archery - Following the successful 2016 launch of the CenterPoint crossbow line, Velocity continues to offer the best value proposition in the industry.Recently CenterPoint has introduced new crossbow models at higher price points to segments of the market and Ravin continues to introduce models that lead the industry in innovation and performance.Ravin recently introduced its new electric cocking/de-cocking model that shoots at 500 feet per second.
•Optics - In addition to the launch of three CenterPoint Spectrum First Focal Plane series of scopes, the company recently released CenterPoint optics to include range finding binoculars and scope adapters. Additionally, following the launch of the grip activated GripSense lasers in 2017, Lasermax has introduced a universal rail mounted laser featuring the same activation technology.
•Airsoft - Airsoft guns are a class of air, CO2, gas, or electric-powered guns that are typically made from high-impact plastics and are engineered with recreation in mind to fire safe, plastic BBs quickly and accurately. Airsoft products are most often used for recreational purposes by a younger demographic and a strong user base amongst military and law enforcement customers. Velocity offers a broad portfolio of airsoft rifles and pistols under its owned Game Face brand.
Expand into Adjacent Product Categories - Management believes that the company can leverage in-house manufacturing and sourcing partners to develop products comprised approximately 8%in new categories that utilize Velocity's existing distribution network and brand strength.
Further Penetration of Crosman’s grossExisting Customer Accounts - Management has identified several strategies for further penetrating its existing customer accounts. First, Velocity has identified opportunities to leverage its existing relationships with retailers to drive expanded SKU offerings across categories. Additionally, management believes the company can expand the CenterPoint brand into the dealer network due to the acquisition of Ravin. Furthermore, management believes that the company is well positioned to grow as its brick-and-mortar customers adapt to a changing retail landscape. Velocity believes it can leverage its structured analytical sales approach and new marketing initiatives to assist retailers with enhancing their online sales, similar to the strategies it already employs working with pure e-commerce customers like Amazon and Pyramyd Air.
Consolidation Platform - With a well-developed global supply chain, refined manufacturing capabilities, sophisticated management systems infrastructure, and extensive network of relevant relationships, Velocity sees itself as a platform for consolidation within both the broader outdoor recreational goods space and the archery space specifically.Management has identified a pipeline of potential acquisition targets that would help Velocity strengthen and expand its product offering and address new market segments.
International Growth - Velocity is exploring opportunities to grow international sales and increase market share by pursuing new international distributor relationships. Management has recently focused its efforts on key markets within Latin America. However, with a more fulsome archery product line in 2017.development, the Company believes it is well positioned to expand into key international bowhunting markets such as Europe, Australia, New Zealand, and South Africa.
Competitive Strengths
Innovation and Engineering Capabilities with Strong IP - Velocity is a consumer-focused organization with a deep understanding of our consumers. In addition, Velocity employs and retains engineers who are the most accomplished in our markets which, combined with an innovative culture, have created significantly differentiated, demonstrably superior products with strong intellectual property protection.
Leading Consumer Brands with Branding and Marketing Capabilities to Drive Consumer Awareness, Affinity and Engagement. Velocity owns a portfolio of premium, iconic brands that are leaders in consumer awareness and affinity. These include brands with a long, rich heritage such as Crosman and Benjamin airguns with 99 and 138 year histories, respectively, as well as the fast growing, super premium, and market disruptive brand like Ravin.
Broad Coverage of Consumer Segments and Price Points. Velocity’s portfolio of brands and product lines provides broad coverage of consumer segments and allows the business to position products with a combination of features and retail prices that appeal to all consumers in the category from recreational to avid.
Balanced Manufactured vs. Outsourced Production Model. Velocity retains high quality in-house product manufacturing capabilities while also outsourcing a balanced portion of its product line to vendors in low-cost manufacturing regions. This strategy is aligned with the broad portfolio of brands and product lines and reduces supply chain risk.
Diverse Customer Base. Velocity employs channel strategies that align with each brands market positioning. A brand’s channel strategy may favor independent specialty dealers and in other cases a significant presence in large chain retailers in best to maximize sales and profitability. Taken as a whole, this approach yields a broad and diverse customer base, limiting the reliance on any one customer while reaching all levels and types of consumers.
History of Ergobaby
Ergobaby was founded in 2003 by Karin Frost, who designed her first baby carrier following the birth of her son. The baby carrier product line has since expanded into 3-position and 4-position carriers, with multiple style variations. In its second year of operations, Ergobaby sold 10,500 baby carriers and today sells over 1 million a year.In order to support the rapid growth, in 2007, Ergobaby made a strategic decision to establish an operating subsidiary (“EBEU”) in Hamburg, Germany.
In 2014, Ergobaby launched the Ergobaby Four-Position 360 Baby Carrier which expanded on Ergobaby’s leadership in the baby carrier category by offering an ergonomic, outward forward facing position for the baby and comfort for the parent. The Ergobaby 360 Carrier won the 2014 JPMA Innovation award in the baby carrier category.In 2016, Ergobaby launched the 3-Position Adapt Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs) and offers some unique parent comfort features including lumbar support and crossable shoulder straps, as well as the benefit of being an all-in-one carrier with no need for an infant insert accessory (for babies 7-12lbs.). Also in 2016, Ergobaby acquired membership interests of New Baby Tula LLC (“Baby Tula”). Baby Tula designs, markets and distributes premium baby carriers and accessories and focuses its efforts on both the ergonomics and fashion of its products. In 2017, Ergobaby launched the All Position, All-in-One Omni 360 Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs) and includes all of Ergobaby’s parent & baby comfort features from the 360 and Adapt Baby Carriers, as well as the same consumer benefit of no infant insert accessory needed.
In 2018, Ergobaby entered into the stroller category with 2 new models. The first product launched was a full-size option called the 180 Reversible Stroller. This was followed later in the year by a premium compact option, the Metro Compact City Stroller.In 2019, Ergobaby launched the Embrace Baby Carrier which is geared for newborns (7lbs-25lbs) and merges the coziness of a soft wrap carrier with the simplicity and comfort of a structured carrier. In 2020, Ergobaby launched Everlove, a first of its kind carrier buyback, restoration, and resell program to extend the lifecycle of our carriers for a more sustainable future. In 2021, Ergobaby launched the multiple award winning Aerloom, the first-of-its-kind, FORMAKNIT™ baby carrier made to move, stretch and fit parents' daily life. This carrier has a seamless knit design and 87% of the knit is made with recycled plastic bottles.
We purchased a majority interest in Ergobaby on September 16, 2010.
Industry
Ergobaby competes in the large and expanding infant and juvenile products industry. The industry exhibits little seasonality and is somewhat insulated from overall economic trends, as parents view spending on children as largely non-discretionary in nature. Consequently, parents spend consistently on their children, particularly on
durable items, such as car seats, strollers, baby carriers, and related items that are viewed as necessities. Further, an emotional component is often a factor in parents’ purchasing decisions, as parents’ desire to purchase the best and safest products for their children. On average, households spent between 11 - 27% of their before-tax income on a child. Similar patterns are seen in other countries around the world.
Demand drivers fueling the growing spending on infant and juvenile products include favorable demographic trends, such as (i) a high percentage of first time births; (ii) an increasing age of first time mothers and a large percentage of working mothers with increased disposable income; and (iii) an increasing percentage of single child households and two-family households.
In purchases of baby durables, parents often seek well-known and trusted brands that offer a sense of comfort regarding a product’s reliability and safety.As a result, brand name, comfort and safety certifications can serve as a barrier to entry for competition in the market, as well as allow well-known brands such as Ergobaby and Baby Tula to compete in a growing premium segment.
Products, Customers and Distribution Channels
Products
Baby Carriers - Ergobaby has two main baby carrier product lines: baby carriers and related carrier accessories, sold under both the Ergobaby and Tula brands. Ergobaby’s baby carrier designs support a natural, ergonomic ("M" shaped) sitting position for babies, eliminating compression of the spine and hips that can be caused by unsupported suspension. The baby carrier also distributes the baby’s weight evenly between parents’ hips and shoulders and alleviates physical stress for the parent. Both Ergobaby’s 3-Position and 4-Position baby carriers have been recognized by the International Hip Dysplasia Institute as being “hip healthy”. Additional accessories are provided to complement the baby carriers including the popular Infant Insert.
Within the Ergobaby Baby Carrier product line, Ergo sells 3-Position and 4-Position baby carriers in a variety of style and color variations and Baby Tula sells 3-Position and 4-Position fashion-oriented baby carriers. Baby Carrier sales represented approximately 90%, 89% and 88%, of net sales in 2021, 2020, and 2019, respectively.
Within the baby carrier accessories category, the Infant Insert is the largest sales component of the accessory category but has seen declining sales as customer move to newborn ready carriers. Accessory sales represented approximately 3.2% in 2021, 5.4% in 2020 and 6.1% in 2019, of net sales.
Ergobaby’s core Baby Carrier product offerings with average retail prices are summarized below:
Ergo
•9 styles of baby carriers - $80 - $220
•2 styles of Infant Inserts - $35
Tula
•8 styles of baby carriers - $79 - $1,000
•1 style of Infant Inserts - $20
Customers and Distribution Channels
Ergobaby primarily sells its products through brick-and-mortar retailers, national chain stores, online retailers and distributors. In Europe, Ergobaby products are sold through its German based subsidiary, which services brick-and-mortar retailers and online retailers in Germany and France; it’s United Kingdom based subsidiary; and its Tula subsidiary in Poland; as well as a network of distributors located in Sweden, Norway, Spain, Denmark, Italy, Turkey, Russia and the Ukraine. Customers in Canada are predominately serviced by Ergobaby’s Canadian subsidiary. Sales to customers outside of the U.S., Canadian and European markets are predominantly serviced through distributors granted rights, though not necessarily exclusive, to sell within a specific geographic region.
Ergobaby had approximately $14.3 million and $11.5 million in firm backlog orders at December 31, 2021 and 2020, respectively. Two individual customers accounted for approximately 25% of Ergobaby's gross sales in 2021 and 2020. No other single customer represented more than 10% of Ergobaby’s gross sales in 2021 or 2020.
Business Strategies and Competitive Strengths
Business Strategies
Increase Penetration of Current U.S. Distribution Channels - Ergobaby continues to benefit from steady expansion of the market for wearable baby carriers and related accessories in the U.S. and internationally. Going forward, Ergobaby will continue to leverage and expand the awareness of its outstanding brands (both Ergobaby and Baby Tula) in order to capture additional market share in the U.S., as parents increasingly recognize the enhanced mobility, convenience, and the ability to remain close to the child that all Ergobaby carriers enable. Ergobaby currently markets its products to consumers in the U.S. through brick-and-mortar retailers, national chain stores, online retailers, and directly through Ergobaby.com and Babytula.com websites.
International Market Expansion - Testimony to the global strength of its lifestyle brand, Ergobaby has historically derived approximately 60% of its sales from international markets. Like it has in the U.S., Ergobaby can continue to leverage the Ergo and Tula brand equity in the international markets it currently serves to aggressively drive future growth, as well as expand its international presence into new regions. The market for Ergobaby’s products abroad continues to grow rapidly, in part due to the fact that in many parts of Europe and Asia, the concept of baby wearing is a culturally entrenched form of infant and child transport.
New Product Development - Management believes Ergobaby has an opportunity to leverage its unique, authentic lifestyle brands and expand its product line. Since its founding in 2003, Ergobaby has successfully introduced new carrier products to maintain innovation, uniqueness, and freshness within its baby carrier and travel system product lines and has become the baby carrier industry leader with the Omni 360 baby carrier. In addition to expanding into new product carriers like swaddling and nursing pillows, in 2018, Ergobaby entered the stroller category by introducing a new premium compact stroller (Metro Compact City Stroller) and a full-size stroller (180 Reversible Stroller).
Competitive ConditionsStrengths
AirgunsErgobaby innovation - Ergobaby Carriers are known for their unsurpassed comfort.Ergobaby’s superior design results in improved comfort for both parent and baby. Parents are comfortable because baby’s weight is evenly distributed between the hips and shoulders while baby sits ergonomically in a natural ("M" shaped) sitting position. The concept of baby carrying has increased in popularity in the U.S. as parents recognize the emotional and functional benefits of carrying their baby. Consumers continually cite the comfort, design, and convenient “hands free” mobility the Ergobaby carrier offers as key purchasing criteria. Ergobaby is also recognized as an industry leader in innovation.With the launch of the Ergo 4-Position 360 Carrier in 2014, the launch of the 3-Position ADAPT carrier in 2016, the launch of the All Position Omni 360 carrier in 2017, the launch of the Embrace carrier in 2019, and the launch of the Aerloom carrier in 2021. Ergobaby continues to innovate in the baby carrier segment on a regular basis.
Crosman’s airgun lineBaby Tula Community - Tula enjoys an active and enthusiastic community who are vocal advocates for the brand.The Tula community acts as both an avid source of feedback on new product launches, which influence future product and patterns, as well as brand influencers to the broader new parenting community.
Competition
The infant and juvenile products market is fragmented, with a few larger manufacturers and marketers with portfolios of brands and a multitude of smaller, private companies with relatively targeted product offerings.
Within the infant and juvenile products market, Ergobaby’s baby carriers primarily compete with companies that market wearable baby carriers. Within the wearable baby carrier market, several distinct segments exist, including (i) slings and wraps; (ii) soft-structured baby carriers; and (iii) hard frame baby carriers.
The primary global competitors in this segment are BabyBjorn, Infantino, and Chicco. In geographies globally, Ergobaby also competes with offeringscompanies that have developed wearable carriers, such as Infantino, Manduca, Cybex, Nuna, Stokke, Boppy, and Pognae. Within the soft-structured baby carrier segment, Ergobaby benefits from several airgun manufacturers, including Daisy Outdoor Products, Gamo Outdoor USA (which acquired Daisystrong distribution, good word of mouth, and the functionality of the design.
Suppliers
During 2021, Ergobaby sourced its Ergo carrier and carrier accessory products from Vietnam and India, and manufactured its stroller systems and accessory products in July 2016 but remains separately branded), Germany-based Umarex,China. Baby Tula products predominantly were produced from factories in India and more recently Sig-Sauer, which has begun to producePoland and were also produced in its own linefacility located in Poland. In 2009, Ergobaby partnered with a manufacturer located in India, and in 2012, Ergobaby began sourcing carriers and accessories from a manufacturing facility in Vietnam. More than 50% of airgunsErgobaby’s carriers and accessories came from Vietnam in 2021. Baby Tula sourced its carrier, accessories and blanket products from Poland, Vietnam and India, with purchases from these locations accounted for approximately 14% of total Ergobaby purchases. Management believes its manufacturing partners have the additional capacity to accommodate Ergobaby’s projected growth.
Intellectual Property
Ergobaby maintains and defends a U.S. and international patent portfolio on some of its various products, including its 3-position and 4-position carriers. Currently, it has 81 patents (including allowances) and 33 patents pending in the U.S. and other countries. Ergobaby also depends on brand name recognition and premium product offering to differentiate itself from competition.
Human Capital
Ergobaby is a global organization headquartered in Torrance, California, with offices in Hamburg, London, Paris and Bialystok, and distribution and retail partnerships in more than 75 countries. As of December 31, 2021, Ergobaby had 183 employees globally. Ergobaby’s people are its most valuable asset and the organization is proud to be recognized as one of LA’s Best Places to Work 2021. Ergobaby strives to create a culture of trust with diversity of thought to drive innovation, create products and be a resource that helps to empower families everywhere. The collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, and unique capabilities of Ergobaby employees is evident in its positive culture and highly recognized brand. The company’s corporate responsibility and diversity and inclusion efforts are employee led, driven by the belief that supporting a global society that is resilient, empathetic, anti-racist, and inclusive starts with having a community where all people can thrive, starting from within the company itself.
Lugano
Overview
Lugano is a leading designer, manufacturer, and retailer of high-end jewelry. Lugano utilizes an extensive network of suppliers to procure high-quality diamonds and rare gemstones. Often taking inspiration directly from the stone, Lugano designs and creates one-of-a-kind jewelry that it sells to a broad base of clients. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art, and philanthropic communities. Lugano is headquartered in Newport Beach, California.
History of Lugano
Lugano was founded in 2004 by husband-and-wife team Moti and Idit Ferder. The company’s chosen name, “Lugano” was inspired by the picturesque Lake Lugano of southern Switzerland, a one-of-a-kind “gemstone of nature” surrounded by the Lugano Prealps mountains.
Lugano opened its first retail salon in 2005 in Newport Beach, California as an appointment only showroom. This salon, located in Orange County’s high-end Fashion Island shopping district, grew rapidly, and served as a critical proof of concept for the Lugano’s bespoke retail strategy. In the subsequent years, Lugano opened three more retail salons with its trademark high-touch sales approach to expand the Lugano’s geographic footprint in key destinations frequented by its target clientele.
In 2008, Lugano started an equestrian division focused on the Southeastern United States to complement its powdered firearms offering.retail sales strategy. Today, Lugano sponsors many key equestrian events and is a long-standing supporter of equestrian-related causes.
Throughout its history, Lugano has also focused on building strong relationships with influential social and philanthropic organizations in the local communities surrounding its retail salons. In Aspen, Colorado Lugano frequently hosts private dinners and events in collaboration with organizations like the Aspen Institute or the Aspen
Museum of Art. Lugano’s event-based marketing strategy enables Lugano to regularly meet prospective clients and reconnect with repeat clients.
In 2020, Lugano expanded its production capabilities by building an in-house workshop to provide increased production efficiencies and improve control over its high-end gemstone inventory. Today, Lugano’s unique go-to-market strategy, one-of-a-kind designs, vertical integration and carefully cultivated network of clientele serve as critical differentiators among the retailer’s competitors in the high-end jewelry market.
We purchased a majority interest in Lugano on September 3, 2021.
Sales and Distribution
Products
Lugano designs, manufactures, and retails high-end jewelry including unique rings, necklaces, earrings, bracelets and brooches that range in price from under $1,000 to well over seven figures, with an average price of approximately $115,000 per piece. Lugano’s designers start with a rare stone as inspiration and craft jewelry that highlights the beauty and perceived value of the stone. As a result, Lugano’s pieces are often seen as one-of-a-kind works of art, creating a highly desirable niche in the broader jewelry marketplace. Competitors’ products are typically high volume or collection-based jewelry lines that are inherently less unique or exclusive – traits highly valued by Lugano’s clientele.
Customers
Lugano’s client base generally consists of sophisticated, high-net-worth individuals who value long-standing relationships and a personalized sales approach over one-time purchases and the high-pressure sales tactics used by other jewelry competitors. A typical Lugano client is community and relationship-driven and seeks unique products with emotional significance. The purchasers or recipients of Lugano pieces are predominantly women and often leaders in their respective communities. Lugano’s clients can range in age from 25 to over 80 and come from all over the nation, with most based in California, followed by Florida, New York, Texas, and Colorado, reflecting the company’s current retail salon footprint, along with limited international clientele.
Lugano’s retail revenue is diversified with no customer representing greater than 10% of total revenue in 2021. Management also believes its client relationships are significantly stickier than those of other jewelry retailers. Lugano enjoys a growing percentage of repeat business year-over-year, with repeat customers contributing an increasing percentage of revenue. Beyond its retail business, Lugano also sells loose diamonds via its wholesale division representing approximately 12% of Lugano’s revenue in 2021.
Distribution
Lugano goes to market via four retail salons in Newport Beach, CA, Palm Beach, FL, Aspen, CO and Ocala, FL, all strategically located in wealthy regions near popular vacation and up-scale shopping destinations frequented by Lugano’s target clientele. In a salon, Lugano aims for airgunsan elegant and private ambience to facilitate its high-touch sales approach. Salons are carefully laid out, enabling Lugano to host private dinners, parties, or other social events. Unlike other jewelers that highlight their jewelry with long, rectangular counters that separate the customer from the salesperson, Lugano decorates its salons with curved tables and couches designed to facilitate comfort, relationship-building, and ease of conversation. Lugano also markets and sells jewelry via pop-up showrooms at Lugano-hosted or sponsored events or in the homes of its clients.
Market Trends, Business Strategies and Competition
Market Trends
Lugano competes broadly in the personal luxury goods market, a portion of the overall global luxury market. According to Bain & Company, after years of consistent growth, the personal luxury goods market experienced a brief contraction in 2020. However, since then, the personal luxury goods market grew by 29% to hit $320 billion, increasing the size of the market by 1% versus 2019 levels. Bain & Company estimates that the personal luxury goods market could reach $408-$430 billion by 2025 with a sustained growth of 6-8% annually.
Lugano currently has very low penetration (<1%) within its target market of high-net-worth individuals. Lugano’s addressable client base has been steadily increasing for over a decade and increased by nearly 10% in 2019 to an estimated 290,000 individuals worldwide, mirroring the growth seen in their combined net worth, which increased to
over $35 trillion. As a result, management believes there is relatively concentrated, ledsignificant runway for additional growth by Crosman, Daisy, Gamo, and Umarex, according to Sports OneSource data. Key determinants in consumer purchasing decisions include product performance, quality, and brand loyalty.
Archery
The archery market competes within a “good, better, best” spectrum. Crosman’s CenterPoint product line, as a value-for-price, entry to mid-level brand, tends to lie between the “good” and “better” segments, competing with Barnett Outdoors, Bear Archery, and PSE technologies, among others. Consumers tend to make purchasing decisions based onexpanding brand awareness reliability, customer service, and pricing. Although CenterPoint is a recent entry into the archery market, the brand has been able to outpace more established brands on the reliability, pricing, and service aspects to win market share.
The crossbow category within the archery market is slightly less concentrated than the airgun segment, with four brands holding notable market shares: TenPoint, Barnett, CenterPoint, and PSE.
household penetration.
Business Strategies
Lugano believes it is well-positioned to emerge as a leading domestic and international luxury brand. Lugano’s key growth opportunities include expanding its geographic footprint across target markets, domestically and internationally, growing the number of events it hosts, and branching into activities beyond equestrian sports that similarly attract wealthy participants.
Competition
The luxury jewelry market is highly fragmented with the leading six to seven companies accounting for approximately 20% of the market. LVMH, with brands like Tiffany, Bvlgari and Chaumet; Richemont with brands like Cartier and Van Cleef & Arpels; Graff Diamonds; and Harry Winston lead the market. These competitors often utilize a traditional retail model focused on foot traffic and tourism, are typically collection-based, and do not exclusively focus on the high-end segment of the jewelry market. The remaining portion of the market consists of national retail brands and small or midsize players that operate regionally or in an online-only format.
Competitive Strengths
Sourcing, Design and Production Capabilities
A deep network of international vendors enables the company to source rare and difficult-to-find stones. These stones are then combined with the world-class capabilities of Lugano designers who create sought-after masterpieces that cater to the company’s target clientele. Lugano’s in-house production workshop or close network of captive workshops provide increased production efficiencies, improved control over its inventory and better speed to market.
High-touch Retail Model
Lugano’s one-of-a-kind inventory requires a unique and high-touch sales strategy which the company has cultivated over its nearly 20-year history. The company’s retail experience is carefully curated, emphasizing both exclusivity and elegance, both critical to the sale of Lugano jewelry.
Event-based Marketing Strategy
Lugano sponsors over one hundred events each year, enabling the company to meet prospective clients and reconnect with existing clients that have become loyal and repeat purchasers. In each market that Lugano enters, management takes great care to establish itself as part of the local community and become a focal point for its clients’ lifestyles and activities. Through its efforts, Lugano invests in relationships which build brand value and customer loyalty. Lugano-sponsored events are often a client’s gateway into the Lugano community (management estimates over 60% of clients are initially contacted at Lugano-sponsored events). Once a part of the Lugano community, customers tend to view jewelry purchases from Lugano as recurring events and often increase the size of their purchase from their previous transaction.
Sourcing and Availability of Materials
Lugano sources diamonds and precious gemstones from a variety of vendors and wholesalers. Generally, Lugano sources polished diamonds and gemstones that are crafted into a Lugano-designed piece. From time to time, Lugano also opportunistically acquires finished jewelry with a high resale value from its global network of vendors. Most of Lugano’s diamonds are sourced from domestic wholesalers. By not purchasing raw stones directly from mines, Lugano limits conflict diamond exposure. Lugano ensures all its diamond vendors adhere to the Kimberly Process Certification Scheme to prevent conflict diamonds from entering its supply chain.
Lugano’s vendor base is diversified with no vendor making up more than 10% of total purchases and the top 10 vendors making up less than 50% of all purchases. Lugano maintains decade-long and trusted relationships with its top vendors.
Seasonality
While individual retail salons experience some seasonality (e.g., winter in Aspen, summer in Newport Beach), these patterns offset one another at the company-level. Additionally, due to the variety of events Lugano hosts all-year-round, there is no significant seasonality in the business.
Human Capital
As of December 31, 2021, Lugano employed a non-union labor force of 54 full-time employees. 25 employees work in sales and marketing, 12 work in design & production, 9 work in operations, 4 work in accounting and 4 work in corporate. Lugano intends to continue to grow its headcount and build out its middle management as it executes on its growth strategy of new salon openings, increased event-based marketing, and international expansion. Management believes Lugano's relationship with its employees is good.
Marucci Sports
Overview
Founded in 2009 and headquartered in Baton Rouge, Louisiana, Marucci is a leading designer, manufacturer, and marketer of premium wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also develops and licenses franchises for sports training facilities. Marucci products are available through owned websites, their team sales organization, Big Box Retailers, and third-party e-commerce and resellers. In 2017, Marucci acquired Victus Sports, a King of Prussia, Pennsylvania based complementary baseball equipment manufacturer and distributor. Marucci has vertically integrated wood bat manufacturing and has built long-standing relationships with international suppliers who manufacture the remainder of their product lines.
Marucci is an established brand commanding strong market share across product categories. Marucci’s mission is to “honor the game” and brands itself as such with simplistic imagery and to-the-point marketing campaigns.
Victus is a more recent entrant to the baseball equipment market but garners similar wood bat usage as Marucci. The brand is widely recognized for its edgy designs and big attitude. Victus’ mission, in contrast to Marucci’s, is to embrace the evolution of the game and to salute the next generation of players who set out to change it.
History of Marucci Sports
Marucci Sports was founded in 2009 by a team including two former professional baseball players. Marucci released its first metal bat, the Marucci CAT5, in 2009. In 2013, Marucci released batting gloves and launched its first series of fielding gloves, the Founders’ Series. Marucci was able to leverage its brand power to expand into the baseball apparel and accessories market as well. In 2018, Marucci acquired Carpenter Trade to expand the quality and technology of its fielding glove offering and change the current consumer expectations for a truly customized fielding glove. Victus’ product offering expanded into metal bats in 2019 with the launch of its Vandal line and recently expanded with the launch of the NOX. In 2019 Marucci also acquired two timber mills and a wood drying facility, securing vertical manufacturing capabilities within its wood bat product category and ensuring access to the best wood in the game. In 2021, Marucci acquired Lizard Skins, a designer and seller of branded grip products, protective equipment, bags and apparel for use in baseball, cycling, hockey, Esports and lacrosse. Marucci believes that the acquisition of Lizard Skins will allow it to build on its leading position in diamond sports while simultaneously developing the company’s presence in new sports markets such as hockey and cycling.
Today, Marucci is a designer, manufacturer, and marketer of premium Marucci and Victus-branded baseball and softball equipment including wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment. All of these products are sold around the world in retail stores, online and through its corporate owned and franchised training facilities.
We acquired a majority interest in Marucci on April 20, 2020.
Industry
Marucci Sports primarily competes primarily in the domestic baseball equipment market which includes wood bats, metal bats, fielding gloves, cleats, protective and other gear, and uniforms/ team apparel of which management estimates constitutes approximately $1.3 billion of annual retail revenue. Marucci Sports also competes within the greater global baseball equipment market which management estimates constitutes approximately $2.2 billion of
annual retail revenue. Marucci’s product offering targets primarily the premium equipment price point more often used in competitive club and travel leagues, for which participation rates are generally more stable.
The industry is generally considered to be a stable sector with growth rates in the low single digits. Baseball equipment is largely sold through national retailers. Independent resellers and online platforms also sell baseball equipment while the balance is purchased directly from the manufacturer.
Products, Customers and Distribution Channels
Products
Marucci designs, manufactures, and markets six categories of products: (i) metal bats, (ii) wood bats, (iii) apparel & accessories, (iv) batting gloves, (v) fielding gloves, and (vi) bags & protective equipment. Marucci’s product strategy encompasses producing high quality products recognized by consumers for their performance, craftsmanship, and value, and building on a rich history to introduce innovative new products.
Metal Bats - Metal bats have historically represented Marucci’s largest product category by revenue. The metal bats are priced at the premium end of the market, with average retail prices ranging from $219.99 to $549.99. Marucci produces metal bats for all ages, from college to tee ball, with a focus on elite high school players. The CAT series is the flagship metal bat product from Marucci. Marucci also offers a lower price point model, the F5. Victus’ first metal offering, the Vandal, was first launched in 2019, and is priced similarly to the CAT series. Victus later introduced its first two-piece bat in the NOX. Metal bats used in youth and elite travel leagues are subject to strict regulations limiting spring and exit velocity. The company has historically followed a two-year product release cycle, and Marucci metal bats have notable staying power with their customer base as prior year models remain in production.
Wood Bats- Marucci’s wood bats are built with quality, precision, and customization. Marucci prides itself in making every pro-bound bat a “game bat”. Marucci offers two types of wood bats: ash and maple. Ash is a soft, open grain wood. Maple bats are a much harder, closed grain wood and constitute a large majority of the company’s wood bat sales. The wide variety of selection and price points offer professional-level quality and cuts to amateur players as well. Innovative customization options further drive engagement.
Fielding Gloves - Marucci offers a growing set of fielding gloves across eight product series: Capitol, Cypress, Ascension, Oxbow, Acadia, Caddo, Magnolia (softball), and Palmetto (softball). Marucci has a complete line of gloves to meet the needs of every position player at every age and skill level. Marucci offers gloves across the pricing spectrum. Marucci acquired Carpenter Trade in 2018, along with their C-Mod technology which provides a unique fit. The C-Mod technology uses a size-specific, ergonomically shaped fit system that creates a more form fitting hand stall for greater control, leverage and responsiveness when fielding. The tailored-fit technology is available in straight or shift.
Apparel & Accessories - Marucci offers a full suite of apparel and accessory offerings that is rapidly expanding. The current product portfolio includes on-field and off-field apparel, sunglasses, hats, grips, and more. Most sales of these products are sold direct-to-team in custom apparel packages including baseball pants, jerseys, practice shirts, and more. Marucci has in-house screen-printing operations allowing for customization of various pieces of apparel. The acquisition of Lizard Skins in October 2021 further enhanced the company’s accessory offering. Lizard Skins is the top manufacturer and marketer of grips used in baseball, cycling, hockey, lacrosse, gaming, and various other sports.
Batting Gloves - All Marucci batting gloves are designed to meet professional standards of comfort, durability and performance while also appealing to users of all levels. Marucci has four lines of batting gloves: Pittards’ Reserve, Signature, Quest, and Code while Victus has one, the Debut. Marucci also offers limited production customized batting gloves. Marucci’s batting gloves span the pricing spectrum.
Bags & Protective Gear - Marucci offers an extensive line of bags and protective gear including bat packs, bat quivers, helmets, shin and elbow guards, catchers gear, and more allowing Marucci to cater to nearly all its customers playing needs.
Customers and Distribution Channels
Marucci sells its products through several channels including Big Box Retailers; Direct-to-Consumer ("DTC"), Direct-to-Team ("DTT"), the company's experiential Clubhouse retail stores and other Owned Channels; and third-party e-
commerce and resellers. Marucci’s top 5 customers accounted for 57.7% of 2021 of net sales.
Business Strategies and Competitive Strengths
Business Strategies
Continued Innovation in Existing Product Categories
Crosman - Marucci plans to continue to build on its successful history of bringing new, technically superiorinnovative, highly anticipated products to market through leveraging its stringent new product development process, and external and internal manufacturing capabilities, and a flexible supply chain.capabilities. The Companycompany has near-term new product launches and existing product updates planned across all categories including the highlights below.
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◦ | Airguns - Crosman is still in the early stages of rolling out its new Silencing Barrel Device (“SBD”) technology, a patent-pending asymmetrical barrel design that limits air rifle firing noise to one-third of a non-silenced air rifle. Developed in 2016 and launched in 2017, management believes the SBD will serve as a point of differentiation from the competition, particularly in the break-barrel segment, over the next several years. Additionally, the Company is in the process of gradually upgrading break barrel models with a more effective hydraulic pressure device. More broadly, Crosman began releasing new products under its revitalized licensing agreement with Remington in 2017, enabling the Company to capture additional market share at the mid-level price point between the Crosman and Benjamin brands.
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◦ | Archery - On the heels of the successful 2016 launch of the CenterPoint crossbow line, the Company has introduced new crossbow models at higher price point segments of the market, while continuing to build out its archery product line to include accessories and inclusive “ready-to-hunt” kits.
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◦ | Optics - In addition to the recently launched three-model CenterPoint Spectrum First Focal Plane series of scopes, the Company has plans to expand the CenterPoint optics offering to include binoculars and scope adapters. Additionally, the Company launched its GripSense lasers in 2017, the only firearm laser that is activated simply by a person's grip.
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Expand into Adjacent Product Categoriesthat will further drive innovation, strengthening our competitive positioning.
Management believes that the Company can leverage in-house manufacturing and sourcing partners to develop products in new categories that utilize Crosman’s existing distribution network and brand strength. Most notably, within the archery segment, the Company is in the early stages of rolling out a line of vertical bow SKUs as well as an accessory offering including arrows, scopes, bags, and rope cockers.
Further Penetration of Existing Customer Accounts
Management has identified several strategies for further penetrating its existing customer accounts. First, Crosman - Marucci has identified opportunities to leverage its existing relationships with retailers to drive expanded SKU offerings across categories. For example, only 5 of Crosman’s top 10 customers listed CenterPoint crossbowscategories, especially in calendar year 2016. Management has already attained listings with several of the remaining retailers who did not previously list Crosman archery products.apparel. Additionally, management believes the Companycompany can cross-sell airguns intocontinue to improve Victus product adoption with existing channel partners.
An approximately $150 million fielding glove market represents a significant growth opportunity for Marucci. Fielding gloves are the archery category, building on the recent success and credibility established by the Airbow product. Furthermore, management believes that the Company is well positionedsecond largest hard goods market in baseball / softball. Marucci plans to grow as its brick-and-mortar customers adapt to a changing retail landscape. Crosman can leverage its structured analyticalbrand strength and innovation to capture share in this high margin category. The acquisition of Carpenter Trade in 2018 has allowed Marucci to offer a highly customized glove that serves as a key differentiator in fielding gloves.
Victus Category and Product Expansion - Victus has strong penetration in the majors and key affiliations with top players. The brand released its first metal bat in 2019, the one-piece Victus Vandal BBCOR bat and later launched its first two-piece bat, the NOX. Metal bats sales approachare expected to meaningfully contribute to Victus’ overall sales in the future. Victus’ key affiliates and newplayer advocacy has driven a halo effect across other categories. Growth in lifestyle and fan apparel represents a significant opportunity for Victus to leverage its brand.
Lizard Skin Expansion – With the acquisition of Lizard Skins in October 2021, Marucci plans to expand its distribution of the company’s key grip product which are used in various sports including baseball, softball, cycling hockey and lacrosse. Additionally, Marucci sees opportunity to expand its grip offering into gaming and other similar applications, as well as batting gloves.
International Market Expansion - International sales currently represent a small portion of total sales. Natural expansion opportunities exist in baseball markets abroad such as Japan, South Korea, Taiwan, Canada, and Latin America. Marucci has achieved profitable growth in Asia by leveraging its premium brands and accessing markets through proven team dealers and distributors. In late 2021, Marucci launched a Japan-based sales office.
Further Penetration of Softball Market - Marucci’s plans to leverage its brand strength in baseball to further penetrate the softball market. Marucci is driving brand awareness and growth in the softball market from the ground up through grassroots marketing initiativesefforts, social media influencers, leveraging its partnerships with colleges and affiliated Marucci club teams, as well the recently launched softball mobile tour, to assist retailers with enhancingget in front of players of all ages. Marucci has dedicated employees who focus on softball expansion and have experience in the category as former collegiate athletes and coaches.
Expansion of the Direct-to-Team Sales Channel - The Direct-to-Team sales channel, launched in 2014, allows Marucci to sell its equipment and apparel directly to thousands of players. Marucci currently has 29 Founders’ Club organizations, representing 15,000 players. The Founders’ Club is an elite alliance of some of the nation’s premier amateur baseball programs selected by Marucci for their dedication to excellence on and off the field, reputation as a positive influence in their community, and commitment to growing their organization.
Marucci’s proprietary online sales, similarplatform for this channel, “Locker Room”, is ideal for any group that requires individual processing and purchasing. There is potential opportunity to leverage Locker Room capabilities across other team sports as the strategies it already employs working with pure e-commerce customers like Amazon and PyramydAir.total market size for U.S. Team Sports Uniforms is approximately $1.3 billion. Marucci feels the DTT strategy is still in its early stages of growth.
Industry Consolidation Platform
- With a well-developed global supply chain, refinedexternal and internal manufacturing capabilities, sophisticated management systems infrastructure, and extensive network of relevant relationships, Crosman sees itself asMarucci is a platform for consolidation within both the broader outdoor recreational goods spacebaseball and the archery space specifically. softball equipment and apparel spaces.Management has identified a pipeline of potential acquisition targets that would help CrosmanMarucci strengthen and expand its product offering and address new market segments.
CrosmanCompetitive Strengths
Originally founded to focus on baseball and softball, Marucci has a unique strength with its authentic knowledge and experience of these sports. Whether leading the Company’s strategy, cutting and sanding wood bats, or shipping product, the Marucci team consists largely of former players or coaches of the game itself. This same strategy extends to any category or market the company participates in so that the product is exploring opportunitiestruly designed by the player for the player.
Product Development – the product development cycle varies by product with bats taking approximately 16 months to grow international salesreach distribution and increase market share by pursuingbatting gloves requiring approximately 9 months. New product development at Marucci occurs in six successive stages: (1) Identify Market Opportunity – search for player needs via internal leads, supplier partners, or on-the ground feedback from players in their network, (2) Cross Functional Ideation – host ongoing dialogue with sourcing partners to identify next-gen technology, (3) Product Development – have sourcing partners begin preliminary testing runs once viable new international distributor relationships. Management has recently focused its effortsproducts are identified, (4) Production and Validation – continue rigorous prototyping and product validation on key markets within Latin America. However, with a more fulsome archerythe field and in the Marucci performance lab where Big League and amateur players test and provide feedback, (5) Marketing – engage in-house marketing team to drive product line in development, the Company is well positionednaming, rollout, branding, and marketing stories to expand into key international bowhunting markets such as Europe, Australia, New Zealand,awareness, and South Africa.(6) Product Rollout and Distribution – finalize the marketing story, conduct sales presentations, and provide samples to representatives and finally receiving orders from channel partners and beginning full production.
New Product Development
Crosman has developed a repeatable, structured product development process that integrates all areasLeading Brands with Professional Halo – Both Marucci and Victus products are preferred by Big League players (#1 and #2 bat brands in the Big Leagues, respectively), and Lizard Skins is the grip tape of choice for many top athletes at both the professional and amateur levels. Marucci’s leading share of use among the top players at the top levels of baseball underlies the aspirational nature of the business, including sales, marketing, engineering, purchasing, productionbrand and finance. New products must passcreates a 6“halo effect” for its broader product lines, giving the brands credibility and permission to 18 month, stage gating process designedplay in adjacent product categories, customer demographics, and geographic markets.
Vertical Integration – Marucci owns its own wood mills, giving the company greater control over the availability and quality of the supply of wood billets used to produce its wood bats. Marucci’s original value proposition to professional players was to guarantee that each bat delivered would meet the most stringent standards demanded for in-game use. As product tolerances continue to tighten and supply chain complexity creates operational challenges for many competitors, Marucci’s ability to ensure engineeringboth product quality and commercial viability. Onceavailability is a unique competitive advantage.
Competition
Marucci competes with offerings from multiple large baseball equipment manufacturers, including Easton (under the Easton and Rawlings brands) and Wilson Sporting Goods Company (under the Wilson, DeMarini, Louisville Slugger, and Evoshield brands), and numerous smaller wood bat specific brands including Old Hickory, Chandler Bats, Tucci, Dove Tail, Sam Bat, and D-Bat. Key determinants in consumer purchasing decisions include product idea is identified,performance, quality, and brand loyalty.
Suppliers
Marucci leverages a five-phase step-by-step process is usedcombination of sourcing and in-house manufacturing. Metal bats, apparel, batting gloves, fielding gloves, bags, and other accessories are sourced from an international network of primarily Asian manufacturing partners, while wood bats are manufactured domestically at the company’s Baton Rouge (Marucci) and King of Prussia (Victus) facilities. In 2019, the company acquired two timber mills, effectively consolidating its wood bat supply chain to either (a) refine the idea into a producible, marketable good, or (b) identify contradicting data that may warrant the project being tabled or canceled altogether. A Product Development Committee must approve the advancement of a new product from one phaseimprove quality and production efficiency and ensuring continued access to the next. To balancebest wood in the Company’s new product pipeline, aginggame.
Intellectual Property
Marucci maintains 47 trademarks in the U.S., 41 of which are registered and 6 of which are pending registration. Marucci also has 1 issued patent. Management considers its trademarked brand names, preeminent name recognition, ability to design innovative products, and technical and marketing expertise to be its primary competitive advantages.
Regulatory Environment
underperforming SKUsBaseball and softball equipment, outside of bats, enjoys a largely restriction free Federal/Local government regulatory framework. Metal bats used in youth and elite travel leagues are regularly culled. This intentional focus on constant innovationsubject to strict regulations limiting
spring and consumer feedback has helped Crosman establish a portfolioexit velocity determined by self-regulatory associations connected to the sport. There are three key regulatory groups associated with baseball: USA Baseball, United States Specialty Sports Association (“USSSA”), and Bat-Ball Coefficient of highly-regarded brands across several product categories.
Customers
Crosman sells itsRestitution (“BBCOR”). Each have their own method for measuring bat performance. BBCOR is the standard currently governing adult baseball bats used in High School and Collegiate play while USA and USSSA govern youth leagues. There are also regulatory bodies specific to softball including Amateur Softball Association (ASA) and Independent Softball Association, among others. Wood bats used in professional baseball are subject to league-specific regulations. We believe all of our products through nearly all major domestic mass merchants and sporting goods retailers, and hasadhere to established a strong e-commerce platform to allow for flexibility in a changing retail environment. The three largest customers represent 47% of gross sales in 2017 and three major sales channels; mass merchant, e-commerce, and regional retail.regulations
Seasonality
CrosmanMarucci typically has higher sales in the third and fourthfirst quarter each year, reflectingahead of the primary baseball season. However, management expects seasonality to smooth as baseball becomes an increasingly year-round sport.
Human Capital
Marucci had 322 employees at December 31, 2021, 256 full-time and 66 part-time employees, all located in the United States. Additionally, Marucci works with a third party Employer of Record in Japan to deploy its strategies in Asia and currently has 5 full-time employees. Marucci's labor force is non-union. Management believes that Marucci has a good relationship with its employees.
Velocity Outdoor
Overview
Velocity Outdoor, headquartered in Bloomfield, New York, is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories.Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks.Airguns historically represent Velocity Outdoor's largest product category. The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity Outdoor's other primary product categories are archery, with products including CenterPoint crossbows and the Pioneer Airbow, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products. In September 2018, Velocity acquired Ravin Crossbows, a manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related to the advancement of crossbow technology.
We acquired a majority interest in Velocity Outdoor on June 2, 2017.
History of Velocity Outdoor
Velocity was founded in 1923 as Crosman Rifle Company and was one of the first manufacturers of recreational airguns in the United States. Velocity Outdoor acquired Visible Impact Target Company in 1991 and Benjamin Sheridan Corporation in 1992. Benjamin was, and continues to be, a dominant U.S. producer of high-end pneumatic and CO2 powered airguns while Sheridan was one of the world’s foremost manufacturers of high-quality paintball markers.In 2007, Velocity expanded its offerings outside the traditional airgun category with the debut of its new optics division, Centerpoint Precision Optics. In 2008, Velocity diversified further by adding Crosman Archery to its list of branded products and introduced two new hunting crossbows in addition to youth archery products.In 2016, Velocity debuted its Centerpoint line of crossbows and holiday seasons,the Benjamin Pioneer Airbow, the first ever mass-produced air powered archery device and with the 2018 acquisition of Ravin Crossbows, Velocity expanded their archery product line into the higher-end segment of the crossbow market.
Today, Velocity Outdoor is an international designer, manufacturer and marketer of Crosman and Benjamin airguns including related ammunition and accessories, archery products including the Ravin and Centerpoint crossbows, airsoft rifles, pistols, and ammunition, laser aiming devices, and precision optics.
Industry
Velocity Outdoor primarily competes within the airgun and archery sub-segments of the broader outdoor recreational products industry, which together management estimates constitute approximately $1.1 billion of annual manufacturer revenue.Both categories share certain common characteristics, including consumer demand for innovation, similar sales channels, and unique regulatory frameworks.
The airgun industry is estimated by management to constitute approximately $275 million of annual manufacturer revenue, including consumables and excluding accessories. With a history stretching back over a century, the industry is generally considered to be a mature sector, with stable growth rates in the low single digits. Airgun products are largely sold through big box specialty sporting goods retailers, mass merchants and online retailers, each accounting for roughly 22%, 21% and 26% of purchases, respectively. The remainder moves through Dealers and Distributors. Airguns are less seasonal than archery because there is no defined hunting season, although sales spike somewhat around holidays.
SalesThe archery equipment market is estimated by management to constitute approximately $770 million of annual manufacturers sales, of which $500-$550 million is attributable to bows and Marketing$200-$250 million is attributable to related archery consumables. Vertical and compound bows, and crossbows each comprise about half of the category sales, with crossbows gaining share in recent years. Independent archery Dealer’s account for 38% and big box specialty sporting goods retailers account for approximately 33% of consumer purchases. Distributors, mass merchants, and online retailers make up the remainder of consumer sales.
Crosman’sProducts, Customers and Distribution Channels
Products
Velocity designs, manufacturers and markets five categories of products: (i) airguns, (ii) archery products, (iii) consumables, or pellets, BBs and CO2 cartridges, (iv) optics, and (v) airsoft. Velocity's product strategy encompasses producing high quality, feature-rich products recognized by consumers for their craftsmanship and value, and building on a rich history to introduce innovative new products.
Airguns - Airguns has historically represented Velocity's largest product category. The airgun product line consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity's airguns are designed to be multi-purpose, multi-occasion products, for use in recreational plinking and target shooting, pest control, and hunting. Velocity offers a “good, better, best” array of airguns under the Crosman and Benjamin brands. The Crosman brand is known for high value at an accessible price, where the Benjamin brand is typically associated with premium products falling within the mid- to high-price point. Additionally, Velocity rounds out its offering with mid-level products produced under an exclusive licensing agreement with Remington for its Remington, Marlin, DPMS, and Bushmaster brands.
Archery Products - Velocity re-entered the archery market in 2016 with a product line anchored by the Centerpoint crossbow and the first-of-its-kind Pioneer Airbow. Centerpoint has grown rapidly since it was launched to become the second largest player in the crossbow category.The Centerpoint Sniper 370 is the top-selling SKU in the crossbow market, with more than twice the volume of its nearest competitor. Centerpoint acquired market share by offering features like an aluminum frame, higher shooting velocity, integrated string stops, a 4x32mm scope and shoulder sling at very competitive retail prices.
Concurrent with the launch of the Centerpoint line of crossbows, Velocity also introduced the Pioneer Airbow. The Pioneer Airbow created a new sportsman category as the first ever mass-produced air-powered archery device, effectively bridging the gap between airguns and archery.Velocity acquired Ravin Crossbows in 2018, further expanding its product line in the archery market. Ravin Crossbows is a leading designer, manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related to the advancement of crossbow technology.
Consumables - Velocity's consumables segment consists of steel and plastic BBs, various styles of lead pellets, and single-use CO2 cartridges used to power airguns. BBs are typically used for plinking, training, or target shooting at a more affordable cost, while different pellet styles are designed either for accuracy, maximum penetration, or a combination of the two. Velocity is the world’s largest provider and only domestic manufacturer of CO2 cartridges, having first introduced the use of C02 as an airgun propellant in 1961. Consumables are produced under the Crosman, Benjamin, and Copperhead brand names.
Optics - Launched in 2006, Velocity's line of optics products offers high-performance, value-priced optics under the Centerpoint brand. The scopes, sights, binoculars, lights, and lasers are marketed for traditional firearms, in addition to select airgun and crossbow offerings.In 2017, Velocity added to their optics product line with the acquisition of the commercial division of LaserMax.LaserMax is a global leader in hardened and miniaturized laser systems, offering a comprehensive line of premium laser sights for home defense, personal protection and training use. LaserMax’s commercial business provides laser sighting solutions and tactical lights to the firearm original equipment manufacturers ("OEM") and retail channels. Management believes that the addition of the LaserMax products enables Velocity to reach a wider range of new customers across retail channels.
Airsoft - Airsoft guns are a class of air, CO2, gas, or electric-powered guns that are typically made from high-impact plastics and are engineered with recreation in mind to fire safe, plastic BBs quickly and accurately. Airsoft products are most often used for recreational purposes by a younger demographic and a strong user base amongst military and law enforcement customers. Velocity offers a broad portfolio of airsoft rifles and pistols under its owned Crosman Elite and Game Face brands, as well as the licensed U.S. Marines brand.
Distribution Channels
Velocity's products are sold through over 425900 customers across a mix of sales channels, including mass merchants, national retailers, distributors/dealers/regional chains, international distributors, and e-commerce. Over the last 5 years, Managementmanagement has successfully diversified both its sales channel composition and customer mix.
CrosmanVelocity sells its products through nearly all major domestic mass merchants and sporting goods retailers currently selling airguns and has established a strong e-commerce platform to allow for flexibility in a changing retail environment. The Companycompany has been selling to many of its customers for over 20 years, maintaining close relationships with key purchasing personnel through high-touch customer service. CrosmanVelocity is one of the only players in the sportsman category offering category management services, product assortment, and SKU optimization feedback typical of larger multinational consumer products companies. This data-sharing has resulted in higher retailer sell-through and margin enhancement, more accurate sales forecasting, and a 98% fulfillment rate, all of which are key components in maintaining status as a vendor of choice.
CrosmanVelocity maintains an internal sales team responsible for covering 45the vast majority of the Company’s top 50its customer relationships, or approximately 90% of total sales. Furthermore, CrosmanVelocity supplements its in-house team with four independent sales representative organizations, providing coverage for approximate 375 additional customers across their respective geographic territories. International sales efforts are handled by four Crosman-employedVelocity-employed account executives who work through local distributors in order to ensure that products conform to local regulatory standards.
CrosmanCustomers
Velocity sells its products through nearly all major domestic mass merchants and sporting goods retailers and has established a strong e-commerce platform to allow for flexibility in a changing retail environment. The three largest customers represented 35.8% of gross sales in 2021 and represented the major sales channels; mass merchant, e-commerce, and regional retail.
Velocity had aapproximately $26.6 million and $39.0 million in firm backlog of $12.1 millionorders at December 31, 2017.2021 and 2020, respectively.
ManufacturingBusiness Strategies and Distribution ChannelsCompetitive Conditions
Crosman’sBusiness Strategies
Continued Innovation in Existing Product Categories - Velocity plans to continue to build on its successful history of bringing new, technically superior products to market through leveraging its stringent new product development process, internal manufacturing capabilities, and a flexible supply chain. The company has near-term new product launches and existing product updates planned across all categories, including the highlights below.
•Airguns - Building on the Silencing Barrel Device (SBD) technology, Velocity is based onintroducing a dual strategyline of multi-shot break-barrel models that feature a 10-shot clip that advances automatically.Velocity is also enjoying success with its recent introduction of fast shooting full-auto BB guns under the Crosman brand.In addition, Velocity continues to be the world’s largest producer of BB, pellets and CO2 powerlets.
•Archery - Following the successful 2016 launch of the CenterPoint crossbow line, Velocity continues to offer the best value proposition in the industry.Recently CenterPoint has introduced new crossbow models at higher price points to segments of the market and Ravin continues to introduce models that lead the industry in innovation and performance.Ravin recently introduced its new electric cocking/de-cocking model that shoots at 500 feet per second.
•Optics - In addition to the launch of three CenterPoint Spectrum First Focal Plane series of scopes, the company recently released CenterPoint optics to include range finding binoculars and scope adapters. Additionally, following the launch of the grip activated GripSense lasers in 2017, Lasermax has introduced a universal rail mounted laser featuring the same activation technology.
•Airsoft - Airsoft guns are a class of air, CO2, gas, or electric-powered guns that are typically made from high-impact plastics and are engineered with recreation in mind to fire safe, plastic BBs quickly and accurately. Airsoft products are most often used for recreational purposes by a younger demographic and a strong user base amongst military and law enforcement customers. Velocity offers a broad portfolio of airsoft rifles and pistols under its owned Game Face brand.
Expand into Adjacent Product Categories - Management believes that the company can leverage in-house manufacturing and strategic alliancessourcing partners to develop products in new categories that utilize Velocity's existing distribution network and brand strength.
Further Penetration of Existing Customer Accounts - Management has identified several strategies for further penetrating its existing customer accounts. First, Velocity has identified opportunities to leverage its existing relationships with select sub-contractorsretailers to drive expanded SKU offerings across categories. Additionally, management believes the company can expand the CenterPoint brand into the dealer network due to the acquisition of Ravin. Furthermore, management believes that the company is well positioned to grow as its brick-and-mortar customers adapt to a changing retail landscape. Velocity believes it can leverage its structured analytical sales approach and vendors. Crosman conductsnew marketing initiatives to assist retailers with enhancing their online sales, similar to the strategies it already employs working with pure e-commerce customers like Amazon and Pyramyd Air.
Consolidation Platform - With a well-developed global supply chain, refined manufacturing capabilities, sophisticated management systems infrastructure, and extensive network of relevant relationships, Velocity sees itself as a platform for consolidation within both the broader outdoor recreational goods space and the archery space specifically.Management has identified a pipeline of potential acquisition targets that would help Velocity strengthen and expand its domestic manufacturing operationsproduct offering and address new market segments.
International Growth - Velocity is exploring opportunities to grow international sales and increase market share by pursuing new international distributor relationships. Management has recently focused its efforts on key markets within Latin America. However, with a more fulsome archery product line in development, the Company believes it is well positioned to expand into key international bowhunting markets such as Europe, Australia, New Zealand, and South Africa.
Competitive Strengths
Innovation and Engineering Capabilities with Strong IP - Velocity is a 225,000 square foot facility onconsumer-focused organization with a Company-owned 49 acre campus located in East Bloomfield, New York, approximately 30 miles southeastdeep understanding of Rochester.our consumers. In addition, Velocity employs and retains engineers who are the Company utilizes approximately 144,000 square feet of leased warehouse spacemost accomplished in nearby Farmington, New York, five miles from the East Bloomfield facility.our markets which, combined with an innovative culture, have created significantly differentiated, demonstrably superior products with strong intellectual property protection.
Intellectual Property
Crosman currently hasLeading Consumer Brands with Branding and Marketing Capabilities to Drive Consumer Awareness, Affinity and Engagement. Velocity owns a global portfolio of more than 100 registered trademarks. Additionally,premium, iconic brands that are leaders in consumer awareness and affinity. These include brands with a long, rich heritage such as Crosman and Benjamin airguns with 99 and 138 year histories, respectively, as well as the Company has a globalfast growing, super premium, and market disruptive brand like Ravin.
Broad Coverage of Consumer Segments and Price Points. Velocity’s portfolio of more than 20 issued patentsbrands and many more pending. Management believesproduct lines provides broad coverage of consumer segments and allows the business to position products with a combination of features and retail prices that patents are usefulappeal to all consumers in maintaining the Company’s competitive position, but it considerscategory from recreational to avid.
Balanced Manufactured vs. Outsourced Production Model. Velocity retains high quality in-house product manufacturing capabilities while also outsourcing a balanced portion of its trademarked brand names, preeminent name recognition, abilityproduct line to design innovative products,vendors in low-cost manufacturing regions. This strategy is aligned with the broad portfolio of brands and technicalproduct lines and marketing expertisereduces supply chain risk.
Diverse Customer Base. Velocity employs channel strategies that align with each brands market positioning. A brand’s channel strategy may favor independent specialty dealers and in other cases a significant presence in large chain retailers in best to be its primary competitive advantages.
Regulatory Environment
Airguns
Airguns enjoymaximize sales and profitability. Taken as a relatively unrestrictive federal regulatory framework, with most regulations determined at the state level. Although there are no federal laws regulating their transfer, possession or use, non-powder guns are subject to oversight from the Consumer Product Safety Commission (“CSPC”). Therefore, airguns are subject to generalized statutory limitations involving “substantial product hazard” and articles that pose a substantial risk of injury to children, though the CSPC has not adopted specific mandatory regulations inwhole, this area. Federal law prevents states from prohibiting the sale of airguns, but allows for state-by-state restrictions on sales of airguns to minors. Thirteen states have imposed such restrictions. Historically, there have not been attempts to grandfather the regulation of airguns into that of traditional powdered firearms, as legislative efforts have largely focused on responding to and refining the existing regulatory frameworks for each respective category rather than overhauling the coordination or transfer of enforcement duties across agencies.
Archery
Crossbow hunting restrictions have become less stringent over the last ten years. Since 2006, 12 states, including populous hunting states like Wisconsin, Pennsylvania, and North Carolina, have legalized crossbow hunting, while many others moved to relax restrictions through the opening of limited seasons or creation of exceptions to hunting restrictions for those with disabilities. Today, only Oregon classifies crossbows as illegal. As of 2017, nearly 90% of all hunting permits are filed in states that currently allow crossbow hunting for at least part of the season. Although continued deregulation is expected, it likely will not continue to be a large driver for the crossbow category moving forward.
Employees
Crosman had 263 employees at December 31, 2017. Crosman’s labor force is non-union. Management believes that Crosman has an excellent relationship with its employees.
Ergobaby
Overview
Ergobaby is dedicated to building a global community of confident parents with smart, ergonomic solutions that enable and encourage bonding between parents and babies. Ergobaby offersapproach yields a broad rangeand diverse customer base, limiting the reliance on any one customer while reaching all levels and types of award-winning baby carriers, blankets and swaddlers, nursing pillows, and related products that fit into families’ daily lives seamlessly, comfortably and safely. Ergobaby is headquartered in Los Angeles, California.consumers.
HistoryBusiness Strategies
Increase Brand Awareness and Grow the Passionate 5.11 Community - 5.11 has proven the profitability of Ergobaby
Ergobaby was founded in 2003 by Karin Frost, who designed her first baby carrier following the birth of her son. The baby carrierits core product line has since expanded into 3-positionofferings and 4-position carriers, with multiple style variations. In its second year of operations, Ergobaby sold 10,500 baby carriersbroad geographic relevance, while demonstrating clear brand authenticity and by 2017 sold over 1.1 millionversatility. Though 5.11 is a brand and industry leader in the year. In ordertactical and functional fitness communities, management believes it still has substantial room to supportgrow through continuing to broaden its brand awareness. 5.11 has a large, growing community of deeply loyal consumers who share an authentic connection to the rapid growth, in 2007, Ergobaby madebrand. 5.11 brand awareness is driven largely by its authentic association with public safety and the military, who rely on 5.11 gear for performance both on-duty and off-duty. To increase brand awareness, 5.11 designs and executes a strategic decisionvariety of dynamic, high impact marketing strategies to establish an operating subsidiary (“EBEU”) in Hamburg, Germany. We purchased a majority interest in Ergobaby on September 16, 2010.
On November 18, 2011 Ergobaby acquired Orbit Baby for approximately $17.5 million. Founded in 2004engage existing consumers and based in Newark, California, Orbit Baby produced and marketed a luxury line of strollers and car seats that utilized a patented hub ring to allow parents to easily move car seats from car seat bases to stroller frames in an instant without the need for any additional components. During the second quarter of 2016, Ergobaby's board of directors approved a plan to dispose of the Orbit Baby product line andreach new consumers, both domestically in the fourth quarterU.S. and internationally.
5.11’s innovative brand and marketing strategy has been able to deliver significant brand awareness growth with relatively low marketing spend to date. The reason this has been so successful is due to the outsized returns from 5.11’s positive, community-driven word-of-mouth, stemming from consumers who share an emotional connection to 5.11. While 5.11’s marketing competencies extend well beyond traditional and digital media; 5.11 is a leader in content development and influencer marketing. 5.11 has built a community with major brand ambassadors and brand partners. 5.11 also partners with other leading brands across categories, such as Spartan in fitness and Ubisoft’s Ghost Recon in gaming. These strategic partnerships reinforce 5.11’s authentic and premium branding while simultaneously engaging a broad and passionate customer base of 2016, mostpotential 5.11 consumers. Through its deep relationships, history of the Orbit Baby toolingmutually beneficial partnerships, community, and intellectual property was sold to Orbit Baby’s Korean distributor.
On May 12, 2016, Ergobaby acquired membership interests of New Baby Tula LLC (“Baby Tula”) for approximately $73.8 million, excluding a potential earn-out payment. Baby Tula designs, markets and distributes premium baby carriers and accessories and focuses its efforts on both the ergonomics and fashion of its products.
In 2013, Ergobaby expanded its portfolio into the sleep category. The launch of the Ergobaby Swaddler which focused on a unique, method of swaddling newborns while retaining healthy hip and arm positioning, was the first significant category expansion outside of baby carriers for the Ergobaby brand. In 2016, Ergobaby expanded its offering in the sleep category with the launch of its Baby Sleeping Bag. Baby Tula is also in the sleep category with its blanket offering, focusing on limited edition fashion prints.
In 2014, Ergobaby launched the Ergobaby Four-Position 360 Baby Carrier which expanded on Ergobaby’s leadership in the baby carrier category by offering an ergonomic, outward forward facing position for the baby and comfort for the parent. The Ergobaby 360 Carrier won the 2014 JPMA Innovation award in the baby carrier category. In 2016, Ergobaby launched the 3-Position Adapt Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs) and offers some unique parent comfort features including lumbar support and crossable shoulder straps,social events such as “ABR Academies,” as well as its recognized leadership position, management believes 5.11 has become a partner of choice for influencers worldwide, leading to a significant competitive advantage. These marketing efforts deliver authentic, aspirational experiences and exclusive content that drive loyalty and engagement. 5.11 pairs this emotional brand marketing with sophisticated, data-driven performance marketing to further drive profitable customer acquisition, retention and high lifetime value. Through investment in these marketing strategies, 5.11 intends to drive passionate 5.11 connections within its community.
Continued Execution of Integrated Omnichannel Platform to Drive Disciplined Growth - Management believes 5.11 has built a solid omnichannel distribution strategy, comprised of a rapidly growing DTC channel, which includes its owned retail locations, proprietary website, and third-party marketplace partners like Amazon, and a recurring Wholesale channel, which encompasses our Professional Wholesale, Consumer Wholesale, and International business. Rather than taking the benefittraditional channel approach to the business which management believes limits 5.11's potential, 5.11 enters trade areas with a tailored DTC and wholesale strategy for that market. To best serve its consumers’ needs and to profitably accelerate growth, 5.11 continues to make investments in its omnichannel distribution strategy. To increase connectivity and reach a larger quantum of beingconsumers, 5.11 is accelerating digital growth through the utilization of data analytics, targeted digital tactics and integrated marketing campaigns. In parallel, 5.11 continues to improve its website functionality as measured through strong site traffic, conversion and average order value. 5.11’s digital growth is complemented by the potential to expand its retail footprint. Currently, 5.11 has 87 physical stores, which represents an all-in-one carrier with no needincrease of 83 since 2015. Ultimately, the expansion of both channels presents an accessible near-term opportunity to accelerate growth and better serve evolving consumer preferences.
Leverage Innovation Capabilities to Continue Developing New Products - At its core, 5.11 is an innovator that prides itself on making purpose-built technical apparel, footwear and gear for an infant insert accessory (for babies 7-12lbs.). In 2017, Ergobaby launched the All Position, All-in-One Omni 360 Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs) and includes all of Ergobaby’s parent & baby comfort features from the 360 and Adapt Baby Carriers, as well as the same consumer benefit of no infant insert accessory needed. In the past four years, the 360 Baby Carrier ($160 MSRP), Adapt Baby Carrier ($140 MSRP) and Omni 360 Baby Carrier ($180 MSRP) have all successfully traded up consumers globally who appreciate the comfort and innovationlife’s most demanding missions. Throughout its history, 5.11 developed a diverse product portfolio that Ergobaby has broughthelped grow its brand to the category from its Original Baby Carrier ($115 MSRP).
Industry
Ergobaby competes in the large and expanding infant and juvenile products industry. The industry exhibits little seasonality and is somewhat insulated from overall economic trends, as parents view spending on children as largely non-discretionary
in nature. Consequently, parents spend consistently on their children, particularly on durable items, such as car seats, strollers, baby carriers, and related items that are viewed as necessities. Further, an emotional component is often a factor in parents’ purchasing decisions, as parents’ desire to purchase the best and safest products for their children. As a result, according to the USDA’s most recent report on Expenditures on Children by Families 2013 (released in August 2014), parents on average, spend between $9,130 and $25,700 on their child on an annual basis for related housing, food, transportation, clothes, healthcare, daycare and other items, depending on age of the child and annual income. The amount spent by parents in the highest income group (before tax income greater than $106,540) was more than twice the amounts spent by parents in the lowest income group (before tax income of less than $61,530). On average, households spent between 14 - 25% of their before-tax income on a child. Similar patterns are seen in other counties around the world.
Demand drivers fueling the growing spending on infant and juvenile products include favorable demographic trends, such as (i) an increasing number of births worldwide; (ii) a high percentage of first time births; (iii) an increasing age of first time mothers and a large percentage of working mothers with increased disposable income; and (iv) an increasing percentage of single child households and two-family households.
In purchases of baby durables, parents often seek well-known and trusted brands that offer a sense of comfort regarding a product’s reliability and safety. As a result, brand name, comfort and safety certifications can serve as a barrier to entry for competition in the market, as well as allow well-known brands such as Ergobaby and Baby Tula to compete in a growing premium segment.
Products and Services
Baby Carriers
Ergobaby has two main baby carrier product lines: baby carriers and related carrier accessories, sold under both the Ergobaby and Tula brands. Ergobaby’s baby carrier designs supports a natural, ergonomic ("M" shaped) sitting position for babies, eliminating compression of the spine and hips that can be caused by unsupported suspension. The baby carrier also distributes the baby’s weight evenly between parents’ hips and shoulders, and alleviates physical stress for the parent. Both Ergobaby’s 3-Position and 4-Position baby carriers have been recognized by the International Hip Dysplasia Institute as being “hip healthy”. Additional accessories are provided to complement the baby carriers including the popular Infant Insert.
Within the Ergobaby Baby Carrier product line, Ergo sells 3-Position and 4-Position baby carriers in a variety of style and color variations and Baby Tula sells 3-Position, Standard, Toddler and Wrap Conversion fashion-oriented baby carriers. Baby Carrier sales were approximately $96.0 million, $84.0 million and $68.6 million in the years ended December 31, 2017, 2016, and 2015, respectively, and represented approximately 88%, 81% and 79%, of total sales in 2017, 2016, and 2015, respectively.
Within the baby carrier accessories category, the Infant Insert is the largest sales component of the accessory category, representing more than half of total accessory sales for 2017, 2016, and 2015. Accessory sales were $8.6 million, $10.5 million, and $9.1 million, in 2017, 2016, and 2015, respectively and represented approximately 8.4% in 2017, 10% in 2016 and 11% in 2015, of total sales.
Ergobaby’s core Baby Carrier product offerings with average retail prices are summarized below:
Ergo
4 styles of baby carriers - $115 - $180
3 styles of Infant Inserts - $25 - $38
Tula
3 styles of baby carriers - $149 - $900
1 styles of Infant Inserts - $40
Competitive Strengths
Ergobaby innovation - Ergobaby Carriers are known for their unsurpassed comfort. Ergobaby’s superior design results in improved comfort for both parent and baby. Parents are comfortable because baby’s weight is evenly distributed between the hips and shoulders while baby sits ergonomically in a natural ("M" shaped) sitting position. The concept of baby carrying has increased in popularity in the U.S. as parents recognize the emotional and functional benefits of carrying their baby. Consumers continually cite the comfort, design, and convenient “hands free” mobility the Ergobaby carrier offers as key purchasing criteria. Ergobaby is also recognized as an industry leader in innovation. Withboth its Wholesale and DTC businesses. Through its product innovation, 5.11 developed brand affinity, built on the launchfoundation of the Ergo 4-Position 360 Carrierits strong professional business. By serving its Prosumer, 5.11 increased demand in 2014, the launchits Everyday Consumer segment, creating a large whitespace for growth. Moving forward, 5.11 is looking to grow share of the 3-Position ADAPT carrier in 2016,its consumers’ wardrobe with a continued focus on everyday and the launchweekend wear. In order to accelerate growth and meet consumer preferences, 5.11 plans to continue its consumer product innovation and expand its lifestyle product offering and other ancillary categories. 5.11 built a foundation of the All Position Omni 360 carrier in 2017, Ergobaby continuesinfrastructure and processes that allows it to innovate in the baby carrier segmenthave shorter lead time on a regular basis.
Baby Tula Community- Tula enjoys an active and enthusiastic community who are vocal advocates for the brand. The Tula community acts as both an avid source of feedback on new product launches, which influence future product and patterns, as well as brand influencers to the broader new parenting community.
Business Strategies
Increase Penetration of Current U.S. Distribution Channels - Ergobaby continues to benefit from steady expansion of the market for wearable baby carriers and related accessories in the U.S. and internationally. Going forward, Ergobabydesign. 5.11 will continue to leverage and expand the awareness of its outstanding brands (both Ergobaby and Baby Tula)refine this in order to capture additionalaccelerate growth and take market share in the consumer business through an expanded product portfolio. Management believes that continued product innovation for 5.11's Prosumers drives brand loyalty with its Everyday Consumers. 5.11’s efforts to tailor products for its Prosumers drives innovation and credibility, which in turn yields superior functionality and appeal to Everyday Consumers. As 5.11 continues to scale, its broader consumer base allows it to reinvest resources back into its technical and functional expertise, further driving continued innovation for its professional consumers.
Disciplined International Expansion - International represents 18% of net sales in 2021 and management believes 5.11 has a large opportunity to expand this business. Management believes Prosumers internationally view U.S., first responders, military and public servants as parents increasingly recognizebeing among the enhanced mobility, convenience,best in the world, and want the same apparel, footwear and gear that they use both on and off duty. 5.11’s international strategy parallels the success it has enjoyed in the US by seeding the market through the Prosumer channels, which creates brand awareness and Everyday Consumer demand.
Currently 5.11 products are distributed in over 120 countries across the globe. 5.11 leverages its proven playbook to invest in the largest, most successful international regions to grow its business. This strategy starts with the Professional Wholesale channel which establishes a profitable recurring revenue stream. As that grows, 5.11 builds a Consumer Wholesale channel and finally a DTC business is established in the most mature markets. While the
strategic approach is consistent, each region is uniquely built based on the size of the opportunity and the complexity of conducting business in a particular country. Management believes there is a significant opportunity to continue 5.11's international expansion with a focus on EMEA, Mexico, Asia, Australia and Canada. 5.11’s ability to remain closesupply the same superior apparel, footwear and equipment to global markets allows it to expand its already profitable international business to Everyday Consumers living by the ABR mindset around the world.
Competitive Strengths
Authentic Global Lifestyle Brand with Passionate Following - Since inception, 5.11 has been a trusted brand by military, law enforcement, public safety, first responders and frontline workers and other service professionals around the world. No matter the mission or how demanding the environment, management believes 5.11 makes the apparel, footwear and gear of choice for professionals both on and off duty. This loyalty and trust, proven over decades from when the FBI Academy first adopted 5.11 pants in 1992, is a powerful tool. This stamp of approval from the elite professional community creates a brand halo effect that propels the Everyday Consumer business, allowing 5.11 to appeal to a broad range of consumers who embrace an active lifestyle, and who also appreciate 5.11 products’ superior technical performance for everyday use.
5.11’s loyal consumers act as brand advocates, proudly wearing branded 5.11 gear and displaying 5.11 banners, decals and patches. Management believes that 5.11's brand advocacy through social media or by word-of-mouth, coupled with its varied marketing efforts, has extended its appeal to the childbroader community. As 5.11 has expanded its product lines, and broadened its marketing messaging, it has cultivated an increasingly diverse audience of both men and women living throughout the United States and, increasingly, in international markets. Management believes 5.11's loyal customers, alongside its heritage of authenticity and high-quality product performance create such a strong connection to the 5.11 brand.
Deep Knowledge of Our Consumers Drives Our Product Development and Marketing - Management believe much of the 5.11 brand success is accredited to the loyalty of 5.11's consumers. 5.11 continuously strives to understand their evolving needs. Utilizing consumer insights through proprietary research, data, and analytics, 5.11 informs its product design and development teams to meet the demands and expectations of its loyal consumers. Having innovated closely with its Prosumers since 2003, 5.11 has a deep understanding and appreciation for the tactical issues they deal with daily. Seeing itself as problem-solvers first-and-foremost, 5.11 designs products that all Ergobaby carriers enable. Ergobaby currently marketsprovide solutions to the obstacles they encounter while on duty, enhancing the daily regimens of its professional end-users. 5.11 consumers are passionate about their work and activities, and 5.11 matches that passion as it continuously strives to build functional, durable, and comfortable products. Not only is this insight helpful in product design and development, but also in outbound marketing efforts, both domestically and internationally. 5.11 supports and builds its brand through a fully integrated, high-impact marketing strategy which includes innovative and exclusive content, digital and social media, dedicated weekly Podcast, community-outreach, television and movie product placement and integrations, sponsorships, and local store activations and events that foster consumer engagement.
Purpose-Built, Innovation-Led and High-Quality Product Offering - 5.11’s DNA is readiness. 5.11 addresses the needs of elite professionals around the world, outfitting them with the top-quality gear and equipment necessary to complete their missions. From this powerful foundation, 5.11 develops products to consumersboth address the specific needs of these professionals and have broad appeal. The process for development starts with a rigorous analysis of the most important functional qualities for 5.11 Prosumers. 5.11 then engages with the broader community, along with industry and trade professionals, to help find specific voids in the U.S. through brick-and-mortar retailers, national chain stores; online retailers;market worth targeting. 5.11 uses this data and directly through Ergobaby.cominsights to develop head-to-toe assortments to serve its consumers holistically whether they are at the office, exercising, experiencing the outdoors, or simply embracing the ABR lifestyle in their daily lives.
5.11 delivers a comprehensive lineup that enables its customer to enjoy high-quality functionality without having to sacrifice lifestyle, comfort, or style. Management believes 5.11's ability to deliver this balance is a deep competitive advantage that is unrivaled and Babytula.com websites.where most of its competitors have proven to be unsuccessful.
International Market ExpansionIntegrated Omnichannel Distribution Strategy - TestimonyThe foundation of 5.11's business model is to continue to strengthen its ability to serve the Everyday Consumer and Prosumer however they prefer to engage and purchase with 5.11, while simultaneously reinforcing 5.11's brand’s association and authenticity. Rather than taking the traditional channel approach to the global strengthbusiness which management believes limits 5.11's potential, 5.11 enters trade areas with a tailored DTC and wholesale strategy for that market. By approaching trade areas in this manner, we believe 5.11 is able to share inventory between our stores and eCommerce, which allowed for 29% of eCommerce orders to be fulfilled out of store locations in late 2020, following the implementation of 5.11's Buy Online Ship From
Store functions. This optimizes speed and efficiency with logistics that truly meet 5.11's Prosumers’ and Everyday Consumers’ needs wherever they prefer to shop, rather than directing them into a particular channel. We believe this principle of product accessibility and adopting to consumers’ shopping choices drives brand building and organic lead generation. Though each channel is able to function profitability on an individual basis, the value 5.11 derives from its lifestyle brand, Ergobaby deriveschannels working in concert is a competitive strength.
Scalable Infrastructure and High-Performance Team to Support Growth - 5.11 has invested approximately 61% of its sales from international markets. Like it has$70 million in capital expenditures in the U.S., Ergobaby can continuelast five years to leverage the Ergonot only improve operating and Tula brand equityfulfillment performance in the international markets it currently serves to aggressively drive futureits current growth as well as expand its international presence into new regions. The market for Ergobaby’s products abroad continues to grow rapidly, in part due to the growth in the number of births worldwide and the fact that in many parts of Europe and Asia, the concept of baby wearing is a culturally entrenched form of infant and child transport.
New Product Development - Management believes Ergobaby has an opportunity to leverage its unique, authentic lifestyle brands and expand its product line. Since its founding in 2003, Ergobaby has successfully introduced new carrier products to maintain innovation, uniqueness, and freshness within its baby carrier and travel system product lines. In addition to expanding into new product carriers like swaddling and nursing pillows, Ergobaby has become the baby carrier industry leader with the launch of the 4-Position 360 baby carrier and looks to continue its leadership position with new product launches in 2018.
Customers and Distribution Channels
Ergobaby primarily sells its products through brick-and-mortar retailers, national chain stores, online retailers and distributors and derives approximately 61% of its sales from outside of the U.S. In Europe, Ergobaby products are sold through its German based subsidiary, which services brick-and-mortar retailers and online retailers in Germany and France; it’s United Kingdom based subsidiary; and its Tula subsidiary in Poland; as wellphase, but also as a networkfoundation to support continued future growth.5.11’s investment has included implementing a variety of distributors located in Finland, Russia, Belgium,strategic and operational improvements, including hiring experienced senior executives, expanding its company owned retail stores, executing merchandising improvements, enhancing distribution and supply chain capabilities and implementing data-driven digital marketing campaigns. 5.11’s current infrastructure allows it to fulfill orders accurately and effectively across all channels, including making certain shipments direct from the Netherlands, Sweden, Norway, Spain, Denmark, Italy, Turkey and the Ukraine. Customers in Canada are predominately serviced by Ergobaby’s Canadian subsidiary. Salessource to customers outside of the U.S. and European markets are predominantly serviced through distributors granted rights, though not necessarily exclusive,bypass distribution centers, while still providing buffer capacity capabilities to sell within a specific geographic region.
Sales and Marketing
Within the U.S., Ergobaby directly employ sales professionals and utilizes independent sales representatives assigned to differing U.S. territories managed by in-house sales professionals. Independent salespeople in the U.S. are paid on a commission basis based on customer type and sales territory. In Europe, Ergobaby directly employs its salespeople and salespeople are paid a base salary and a commission on their sales, which is standard in that territory.
Ergobaby has implemented a multi-faceted marketing plan which includes (i) online marketing efforts, including online advertisement, search engine optimization and social networking efforts; (ii) increasing tradeshow attendance at consumer and medical professional shows; and (iii) increasing promotional activities.
Ergobaby had approximately $9.2 million and $12.8 million in firm backlog orders at December 31, 2017 and 2016, respectively.support future expansion.
Competition
5.11 competes in the global marketplace for purpose-built technical apparel, footwear and gear. Management believes 5.11 has competitive advantages through its global omnichannel business model, which is comprised of a rapidly growing DTC channel and recurring Wholesale channel. 5.11 competes against activewear, outdoor and specialty apparel brands such as Nike, Under Armour, The infantNorth Face, Patagonia, Lululemon, Arc’teryx, Carhartt, Propper and juvenileFecheimer Brothers. 5.11 competes with footwear brands such as Timberland, Bates and Danner, and with gear and bag brands such as Camelbak, Osprey and YETI. 5.11 also competes with specialty retailers such as REI, Dick’s Sporting Goods and Galls.
Suppliers
5.11 has built a supply chain that is optimized for its business, through which 5.11 controls the design, development and fulfillment of its products.
Sourcing and Manufacturing
5.11 does not own or operate any manufacturing facilities. Instead, it chooses to contract with third-party suppliers for materials (fabric and trims) and manufacturers for finished goods. 5.11 partners with high-quality vendors and retains complete control of all intellectual property associated with its products. 5.11 product design, technical design and development teams work directly with its vendors to incorporate innovative materials that meet the high-quality product standards demanded by its customers. 5.11’s primary product specifications include characteristics like durability, protection, functionality, and comfort. 5.11 collaborates with leading fabric suppliers to develop fabrics that it ultimately trademarks for brand recognition whenever possible.
The materials used in 5.11 products market is fragmented,are developed in partnership between its material vendors and its design, product development and sourcing teams, then sourced by its manufacturers from a limited number of pre-approved suppliers. To enhance efficiency and profitability, 5.11 recently adopted 3D design capabilities for virtual prototyping allowing it to make better and quicker decisions prior to creating physical prototypes. Additionally, 5.11 recently partnered with one of our apparel manufacturers to create a development center with dedicated resources to facilitate rapid prototyping.
All 5.11 products are manufactured by third-parties. 5.11 works with a few larger manufacturersgroup of 60+ vendors, 15 of which produced approximately 80% of its products in fiscal year 2021 and marketers with portfolios2020. During the year ended December 31, 2021, approximately 44% of brands5.11 products at cost were produced in Bangladesh, approximately 36% in Vietnam, and a multitude of smaller, private companies with relatively targeted product offerings.
Within the infantremainder in China, Cambodia, Taiwan, Philippines, Indonesia, Africa, Central America and juvenile products market, Ergobaby’s baby carriers primarily compete with companies that market wearable baby carriers. Within the wearable baby carrier market, several distinct segments exist, including (i) slingsUnited States. 5.11 does not have any long-term agreements requiring it to use any manufacturer, and wraps; (ii) soft-structured baby carriers; and (iii) hard frame baby carriers.
The primary global competitors in this segment are BabyBjorn, Chicco, Britax and Manduca, which also marketno manufacturer is required to produce its products in the premium price range. Especially in the U.S., Ergobaby brands also compete with several smaller companies that have
developed wearable carriers, such as Infantino, Boba, and Lillebaby. Within the soft-structured baby carrier segment, Ergobaby benefits from strong distribution, good word of mouth, and the functionality of the design.
Suppliers
During 2017, Ergobaby sourced its Ergo carrier and carrier accessory products from Vietnam and India, and manufactured its stroller systems and accessory products in China. Baby Tula products predominantly were produced from factories in India, Poland and Mexico and were also produced in its own facility located in Poland. In 2012, Ergobaby began sourcing carriers and accessories from a manufacturing facility in Vietnam and in 2009, Ergobaby partnered with a manufacturer located in India. More than 50% of Ergobaby’s carriers and accessories came from Vietnam in 2017. Baby Tula sourced its carrier, accessories and blanket products from Mexico, Poland, Vietnam, India and Turkey, withlong term. 5.11 purchases from these locations accounted for approximately 16% of total Ergobaby purchases.suppliers on a purchase order basis informed by capacity forecasts. 5.11 measures supplier performance through various performance indicators and partner closely with them to continually improve efficiency, cost, and quality. Management believes its manufacturing partnersthat 5.11's principal manufacturers have the additional capacity to accommodate Ergobaby’s projectedfuture growth.
As a company devoted to the needs of public safety and mission-oriented professionals, 5.11 has developed secure relationships with a number of its vendors and take great care to ensure that they share its commitment to quality
and ethics. Under its supplier agreements, suppliers must follow 5.11’s established product design specifications and quality assurance programs to meet specified standards. To ensure vendor reliability and quality, 5.11 has established a sourcing office in Hong Kong, which employs approximately 59 individuals whose primary functions include vendor management, commercialization, product development, production planning, vendor compliance, and quality assurance.
5.11 requires its vendors to comply with its Vendor Code of Conduct relating to working conditions as well as certain environmental, employment and sourcing practices. 5.11 requires all vendors to contractually commit to upholding these standards. Additionally, in alignment with its values, 5.11 encourages its manufacturers to be certified through the Worldwide Responsible Accredited Production (WRAP) program, which is an independent organization dedicated to promoting safe, lawful, humane and ethical manufacturing. Once a vendor is part of 5.11’s production network, its in-house production team work together with third-party inspectors to closely monitor each partner’s compliance with applicable laws and standards on an ongoing basis.
5.11 regularly sources new suppliers and manufacturers to support its ongoing growth and carefully evaluates all new suppliers and manufacturers to ensure they share its standards for quality and integrity. To mitigate supplier concentration risk, 5.11 commercializes its top key items at multiple factories to ensure it can balance geographic risks as well as respond quickly to spikes in business. 5.11 also continuously seeks out additional suppliers and manufacturers to enable contingency plans that minimize disruptions, as well as support its future growth.
Distribution
5.11 leases and operates a distribution facility in Manteca, California to support its fulfillment needs across the Americas (North, Central & South). Additionally, 5.11 operates a small distribution facility in New South Wales, Australia to serve the Australia and New Zealand markets. 5.11 utilizes global third-party logistics providers to fulfill customer orders in EMEA and Asia-Pacific, which are located in Sweden and China, respectively. These third-party logistics providers manage all various distribution activities in their regional markets, including product receiving, storing, limited product inspection activities, and outbound shipping.
Intellectual Property
Ergobaby maintainsTo establish and defendsprotect its proprietary rights, 5.11 relies on a U.S.combination of trademark (including trade dress), patent, design, copyright and international patent portfolio on sometrade secret laws, as well as contractual restrictions in license agreements, confidentiality and non-disclosure agreements and other contracts. 5.11’s intellectual property is an important component of its variousbusiness, and management believes that 5.11's know-how and continuing innovation are important to developing and maintaining its competitive position. Management also believes having distinctive marks that are readily identifiable on 5.11's products includingis an important factor in continuing to build its 3-positionbrand and 4-position carriers. Currently, it has 18distinguish its products. 5.11 considers the 5.11 name and logo trademarks, together with 58 issued and pending patents (including allowances) and 13 patents pending374 registered trademarks, both in the U.S.United States and other countries. Ergobaby also depends on brand name recognition and premium product offeringinternationally, to differentiate itself from competition.be among its most valuable intellectual property assets.
Regulatory Environment
ManagementIn the United States and the other jurisdictions in which 5.11 operates, it is not aware of any existing, pending, or contingent liabilities that could have a material adverse effect on Ergobaby’s business. Ergobaby is proactive regarding regulatory issues and is in compliance with all relevant regulations. Ergobaby maintains adequate product liability insurance coverage and to date has not incurred any losses. Management is not aware of any potential environmental issues.
Employees
As of December 31, 2017, Ergobaby employed 208 persons in 6 locations. None of Ergobaby’s employees are subject to collective bargaining agreements. We believelabor and employment laws, laws governing advertising, safety regulations and other laws, including consumer protection regulations that Ergobaby’s relationshipapply to the promotion and sale of merchandise and the operation of fulfillment centers and privacy, data security and data protection laws and regulations, such as the California Consumer Privacy Act, in the United States, the EU General Data Protection Regulation 2016/679 ("GDPR") in the European Economic Area and Switzerland, the U.K. GDPR and the United Kingdom Data Protection Act 2018 in the United Kingdom, and the Brazilian General Data Protection Law in Brazil, the ePrivacy Directive and national implementing and supplementing laws in the European Economic Area. Privacy and security laws, regulations, and other obligations are constantly evolving, may conflict with its employees is good.
Liberty Safe
Overview
Liberty Safe, headquarteredeach other to complicate compliance efforts, and can result in Payson, Utahinvestigations, proceedings, or actions that lead to significant civil and/or criminal penalties and founded in 1988, isrestrictions on data processing. 5.11 products sold outside of the premier designer, manufacturer,United States may be subject to tariffs, treaties and marketer of home, gun and office safes in North America. From its over 300,000 square foot manufacturing facility, Liberty Safe produces a wide range of home, office 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 Safe brand,various trade agreements, as well as a portfoliolaws affecting the importation of licensedconsumer goods. 5.11 monitors changes in these laws and management believes that 5.11 is in material compliance with applicable laws. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private label brands, including Cabela’s, Case IH,litigation. A portion of sales generated by its International business is derived from sales to foreign government agencies, and John Deere. Liberty Safe’smanagement believes 5.11 is in material compliance with related applicable laws.
Human Capital
Mission-Driven, Innovative and Supportive Culture – From the beginning, 5.11’s company culture has always been focused on serving those who serve—military, law enforcement officers, public safety and first responders and frontline workers from around the world. The passion for serving these top professionals inspires 5.11 to extend serving its consumers into their everyday lives, to be prepared for whatever life throws their way. 5.11’s teams embrace its ABR mindset, and its core values allow 5.11 to attract passionate and motivated employees who are driven to succeed and share the vision of becoming “an iconic global brand rooted in innovating purpose-built gear for the most demanding missions while inspiring the world to always be ready.”
5.11’s work environment is open and collaborative, spanning a global organization from its headquarters in Irvine, CA and offices in Hong Kong, Mexico, Sweden and Australia, to its distribution center in Manteca, CA, and to its U.S. retail stores. Its employees around the world are 5.11’s most valuable and important brand ambassadors. Their commitment to 5.11 and its mission, and their knowledge and passion for 5.11 products allows 5.11 to execute its company strategy and strengthens its brand loyalty. Additionally, 5.11 store employees are critical to 5.11’s success and often represent members of its communities, with many of them retired military, law enforcement officers and first responders.
5.11 prides itself in its ability to work directly with top professionals around the market share leader and are sold through an independent dealer network (“Dealer sales”) in additionworld, innovating to various sporting goods, farm and fleet, and home improvement retail outlets (“Non-Dealer sales” or “National sales”). Liberty Safe has the largest independent dealer networksolve their greatest needs in the industry,most mission-critical settings. 5.11 maintains a global footprint, with more than 50%employees working in thirty-three states and eighteen countries. At December 31, 2021, 5.11 had 861 full-time employees and 185 part-time employees. 5.11 strives to create a welcoming and caring environment across the entire organization and celebrate the passion its team members bring forward in serving its consumers. 5.11 believes it has created a company culture focused on attracting, retaining, and developing talent, which enables it to exceed consumers’ expectations and meet its growth objectives. 5.11 prioritizes building a diverse, inclusive, equitable and supportive team that is driven by creativity and purposeful innovation.
BOA
Overview
BOA, creator of Liberty's salesthe revolutionary, award-winning, patented BOA Fit System, partners with market-leading brands to make the best gear even better. Delivering fit solutions purpose-built for performance, the BOA Fit System is featured in the last two years coming from the dealer network.footwear across snow sports, cycling, hiking/trekking, golf, running, court sports, workwear as well as headwear and medical bracing. The system consists of three integral parts: a micro-adjustable dial, high-tensile lightweight laces, and low friction lace guides creating a superior alternative to laces, buckles, Velcro, and other traditional closure mechanisms. Each unique BOA configuration is engineered for fast, effortless, precision fit, and is backed by The BOA Lifetime Guarantee. BOA is headquartered in Denver, Colorado and has offices in Austria, Greater China, South Korea, and Japan.
History of Liberty SafeBOA
The Liberty Safe brand and its leading market share has been built over a 29 year history of superior product quality, engineering and design innovation, and leading customer service and sales support. Liberty Safe has a long history of continuous improvement and innovative approaches to sales and marketing, product development and manufacturing processes. Significant investments over the last five years have solidified Liberty Safe’s reputation for providing substantial value to retailers and enhanced its long-standing position as the leading producer of premium home, office and gun safes.
Liberty Safe commenced operations in 1988 andBOA was founded in 2001 opened its current state-of-the-art facility in Payson, Utah. The new facility allowed Liberty Safeby Gary Hammerslag, a snowboarder, surfer, and entrepreneur. Gary moved to consolidate all of its manufacturing and distribution operations to a centralized location. As the only facilitySteamboat, Colorado in the industry utilizing significant automationmid-90’s after successfully selling his previous company, which created innovative catheter solutions that improved angioplasty procedure speed and effectiveness. After arriving in Steamboat and frequently snowboarding, Gary envisioned a streamlined roll-form manufacturing process, it represented a significant step forward when comparedpossibility to dramatically improve the production capabilitiesfit and performance of its competitors. Incremental investments following the consolidation have solidified Liberty Safe’s position as the preeminent low-cost and most efficient domestic manufacturer.
During 2011, Liberty Safe constructed a new production line that allowed Liberty to build entry level safe products in-house. This production line produces home and gun safe models that were previously completely sourced through foreign
manufacturers. This investment in production capacity makes Liberty Safe the largest manufacturersnowboard boots by applying elements of home, office and gun safeshis learnings in the world. This added investment in capacitymedical device field. Gary developed a fit system as an alternative to traditional laces for snowboard boots and partnered with K2 and Vans to launch the first BOA-equipped snowboard boots to consumers in the U.S. allowed Liberty Safewinter of 2001. After a successful launch, BOA became widely adopted on snowboard boots.
BOA’s next phase of growth was largely in the outdoor sporting and recreation markets. In 2005, BOA expanded its focus to provide shorter lead timeshiking and more competitive pricingtrail-related footwear, followed by cycling and golf in 2006 and hunting and fishing in 2007, at which point BOA surpassed 1 million users worldwide. From 2008 to 2011, having gained credibility in consumer markets, BOA introduced products for the workwear footwear market as well as products for the medical bracing market. In 2013, the company entered the running and training footwear market.
In 2019, BOA launched its North American customer base.state-of-the-art Performance Fit Lab ("PFL") to quantitatively measure the impact of BOA-equipped footwear on athletic performance. The PFL is used to advance performance footwear fit technology by testing, refining, and improving footwear products in collaboration with the company’s major brand partners and serves as a catalyst for innovation. In 2021, BOA surpassed 25 million users worldwide.
We purchased a majority interest in Liberty SafeBOA on March 31, 2010.October 16, 2020.
Industry
Liberty Safe competesBOA participates broadly in the broadly defined North American safeglobal footwear market, representing approximately 10 billion pairs of shoes sold annually. BOA’s addressable market is identified based on product type, price lane, and vault industrygeography. BOA targets the premium segment, where applicable price lanes tend to be at the upper end of each category. With respect to product type, the overall market is segmented into various subcategories, of which includes fireBOA primarily targets footwear for active performance sports, outdoor applications, and document safes, mediakids.Based on target footwear categories and data safes, depository safes, gun safes and cabinets, home safes and hotel safes. According to Technavio's 2016 global safes and vaultsapplicable price lanes, management estimates BOA’s addressable market report, the global safe market was estimated to be approximately $2.9 billion750 million pairs of shoes sold annually. Management estimates the company has approximately 3-4% share within its addressable market.
Products, Customers and Distribution Channels
Products
The BOA Fit System consists of a durable lace, which is guided by low-friction guides and attached to a dial that is typically mounted on the footwear heel, tongue or eye-stay for micro-adjustability to enhance performance fit. BOA’s current product portfolio has four platforms, H, L, M, and S-Series, which vary in 2015,cost, weight, tension, and use case. Each dial design can be customized with over 220 colors allowing the product to fit cohesively with each brand partners’ specific designs and colorways.
All platforms share the distinctive characteristics that differentiate BOA from competing offerings: micro-adjustability to achieve the perfect fit, measurable performance benefits validated by the company’s testing lab, durability and quality proven in extensive field testing, a lifetime guarantee on the end-product’s dial and laces, and the distinctive BOA sound heard when turning the dial.
Each platform is projecteddesigned and engineered to grow at a CAGR of 5.5% through 2020. Gun safes and vaults comprise approximately 16.5%address the specific performance fit needs of the global safe marketend user by use case. Factors such as size and itshape of dial, level of torque, internal mechanics, and weight vary amongst platforms, and each platform is expectedfurther segmented into product collections that percentage will remain consistent through 2020. Domestically, demand for safes dependsdiffer in aesthetic, optimal placement on several key factors, including per capita disposable income since safes are largely considered a discretionary purchase in most households. The gun safe segmentthe shoe, and cost. Within each product collection, dial designs and materials differ to accommodate preferences of the industry typically sees demand that closely correlates to the demand from gunsend user and ammunition manufacturers. When gun sales increase, the potential market for gun safes typically also increases. Increased fears surrounding violence in the country along with political uncertainty concerning gun ownership laws play a part in changes in gun ownership and subsequently, demand for gun safes. The profitability of individual companies depends on efficient operations and effective marketing, with large companies able to take advantage of economies of scale in production and distribution, while smaller companies compete through specialty products.
The domestic safe industry continues to see increased competition from imports, particularly those sourced from China. Imported safes were expected to comprise approximately one-thirdretail price points of the domestic sales in 2017, with competition from imports highest in the small safe product group, which are targeted at households. Imported safes compete on price, with foreign manufacturers passing along savings from operational efficiencies, lower cost labor and raw materials to the end consumer. The competition from imported safes may make it harder to pass increasing costs, including the cost of steel, to the end consumer.
Products and Services
Liberty Safe offers home, office and gun safes with retail prices ranging from $400 to $8,000. Liberty Safe produces 32 home and gun safe models with the most varied assortment of sizes, feature upgrades, accessories and styling options in the industry. Liberty Safe’s premium home and gun safe product line covers sizes from 12 cu. ft. to 50 cu. ft. with smaller sizes available for its personal home safe. Liberty Safe markets its products under Company-owned brands and a portfolio of licensed and private label brands, including Cabela’s, Case IH, Colt and John Deere. Liberty Safe also sells commercial safes, vault doors, handgun vaults, and a number of accessories and options. The overwhelming majority of revenue is derived from the sales of safes.
Competitive Strengths
#1 Premium Home and Gun Safe Brand with Strong Momentum in the Market - Liberty Safe achieved the status of #1 selling safe company in America in 1994 (per statistics provided by Sargent & Greenleaf, the primary lock supplier to the industry) and maintains this prominent position today. Liberty Safe continues to gain market share from the various smaller participants who lack the distribution and sales and marketing capabilities of Liberty Safe.
State-of-the-Art and Scalable Operations - Liberty's management has constructed a highly scalable operational platform and infrastructure that has positioned Liberty Safe for substantial sales growth and enhanced profitability in the coming years. Liberty Safe transitioned itself from a manufacturing oriented operating culture to a demand-based, sales-oriented organization. Its strategic transition required the implementation of a demand-based sales and operating platform, which included (i) new equipment to drive automation and capacity improvements; (ii) re-engineered product lines and production processes to drive efficiency through greater standardization in production; and (iii) new employee incentives tied to labor efficiency, which has improved worker performance as well as employee attitude. These initiatives are enhanced by an experienced senior executive team, a balanced sourcing and in-house manufacturing production strategy, advanced distribution capabilities and sophisticated IT systems. Liberty has combined its demand-based sales and operating initiatives with upgraded production equipment to drive multiple operational improvements. These initiatives combined with Liberty’s cumulative historical investments in operational capabilities have created a lasting competitive advantage over its smaller competitors, who utilize labor-intensive operations and lack the company’s lean manufacturing culture. For the past seventeen years, Liberty Safe has leased a manufacturing and distribution facility in Payson, Utah that management believes represents the most scalable domestic facility in the industry. Liberty Safe’s multi-faceted production capabilities allow for substantial flexibility and scalable capacity, thus assuring a level of supply chain execution far superior to any of its competitors.
Historically, Liberty Safe maintained an optimal mix of in-house and Asian-sourced manufacturing in order to improve its ability to meet customer inventory needs. Beginning in 2012, Liberty Safe began manufacturing entry level safes that were
previously completely sourced from an Asian manufacturer, on its new production line. In 2017, only about 3% of safes sold by Liberty were sourced in Asia.
Reputation for High Quality Products - Liberty Safe offers only the highest quality products on a consistent basis, which over the years has gained it an enviable reputation and a key point of differentiation from its competitors. Liberty Safe distinguishes its products through tested security and fire protection features and industry leading design focused on functionality and aesthetics. The design of its safes meet rigorous internal benchmarks for security and fire protection, with most receiving certification from Underwriters Laboratory, Inc. (“UL”), the leading product safety standard certification, for its security capabilities. Additionally, Liberty Safe’s investment in accessories and feature options have made Liberty safes the most visually appealing and functional in the industry, while providing more customized solutions for retailers and consumers.
Trusted Supplier to National Retailer and Dealer Accounts - Liberty Safe’s comprehensive, high-quality product offering and sophisticated sales and marketing programs have made it a critical supplier to a diverse group of national accounts and dealers. Initially a key supplier primarily to the dealer channel, it has expanded its business with national accounts, such as Cabela’s and John Deere. Liberty Safe provides a superior value proposition as a supplier for its national retailers and dealers via its well-recognized brands, lifetime product warranty, tailored merchandising, category management solutions and superior supply chain execution. Further, Liberty Safe’s products generate more profitable floor-space, with both high absolute gross profit and retail margins over 30%. High retail profitability plus increased inventory turns has entrenched Liberty Safe as a key partner in customers’ success in the safe category. As a core element of building its relationships, Liberty Safe has invested significantly in making its retailers better salespeople through a proprietary suite of training tools, including in-store training, new product demonstrations, online education programs and sales strategy literature.
Business Strategies
Liberty Safe has experienced strong historical growth while executing on multiple new sales and operational initiatives, positioning it to continue to increase its scale and improve profitability. Liberty’s growth strategy is rooted in the sales and marketing and operational initiatives that have spurred its expansion into new accounts and increased penetration of existing accounts. Liberty has significant opportunity in its existing channels to continue to build upon its already strong market share. In addition to growth within its current channels, Liberty’s core competencies can be successfully applied to ventures in the broader security equipment market. Liberty has explored certain of these opportunities, but due to the prioritization of operational initiatives and expansion opportunities within existing channels, they have not been aggressively pursued. Potential near-to-medium term areas for expansion of Liberty’s platform include:
Expand Liberty’s product line into the broader home and office safe market through current customers or new distribution strategies;
Further develop international distribution by entering new countries and expanding current limited presence in Canada, Mexico and Europe;
Enter the residential security market through a strategic partnership with a provider of residential security service solutions to provide a more complete physical and electronic security solution;
Acquire businesses within the premium home and gun safe industry and/or leverage Liberty’s platform into new products or channels; and
Offer additional accessory products to existing distribution networks.
Research and Development
Liberty Safe is the engineering and design leader in its sector, due to a history of first-to-market features and standard-setting design improvements. Liberty’s proactive solicitation of feedback and constant interaction with consumers and retail customers across diverse channels and geographies enables Liberty Safe to stay at the forefront of customer demands. Liberty’s approach to product development increases the likelihood of market acceptance by creating products that are more relevant to consumers’ demands. Research and development costs were $0.5 million in 2017, $0.3 million in 2016, and $0.6 million in 2015.
In addition to product enhancements, new products, such as the plate-door National Security Classic, and a new, 6-SKU line of handgun vaults were launched in 2015 from Liberty’s commitment to R&D. In 2016, Liberty introduced a new 3-section “Extreme” interior design, new safe covers, new handgun vault designs, and several0 new safe sizes.product.
Customers and Distribution Channels
Liberty SafeBOA has fostered long-termapproximately 300 global brand partners, including leading footwear companies such as Adidas, Specialized, Shimano, Fizik, ASICS, Burton, La Sportiva, K2, Vans and FootJoy who feature BOA systems across a variety of sporting and professional industries including snow sports, cycling, outdoor, athletic, workwear and medical. BOA typically sells directly to the manufacturing partner responsible for final assembly of the brand partner’s product. BOA works with 470+ brand partner factories with limited revenue concentration. Most brand partner factories are located in Asia, primarily in China and Vietnam, and are in relatively close proximity to BOA’s supply chain.
Rather than being solely an OEM part supplier, BOA maintains highly collaborative relationships with its brand partners to actively co-develop innovative, performance-driven footwear, helmets and bracing. BOA contributes substantial design and testing resources to ensure its system is used in a way that maximizes performance based on dial placement and configuration. The BOA system is not simply a “lace replacement” or plug and play option, but rather a solution that must be integrated into each product model through a 6-18 month development cycle to create a system that works specifically with a product’s unique structural design. This process allows BOA to ensure brand image consistency, end product quality and the best performance fit.
Footwear, headwear, and medical bracing products featuring BOA systems are primarily sold through brick-and-mortar sporting goods retailers, specialty sport retailers, online retailers, or brand partners’ owned retail and online channels. According to management’s estimates, end consumption is geographically diverse, with approximately 15-20% of products consumed in North America, 30-35% in Europe, and 45-50% in Asia.
No individual customer or brand partner factory represented greater than 8% of BOA’s net revenues in 2021. At December 31, 2021 and 2020, BOA had approximately $31.7 million and $15.2 million in order backlog, respectively.
Business Strategies and Competitive Strengths
Business Strategies
Continued Share Growth in Established Categories - BOA has established a strong presence in certain core categories in Northern Europe, Korea, Japan, and the United States where BOA has proven efficacy and established strong brand partner relationships. In these core categories, BOA is focused on building a community to cross market to and is actively working to reimagine product solutions to deliver the best product to consumers.
Going forward, BOA intends to leverage its brand partner relationships to expand penetration and capture additional share in growing markets such as workwear in North America and Asia, outdoor in markets outside of Korea, and golf in North America. BOA has developed region and category specific products to better cater to the individual dynamics of each market including products that deliver a better price/value proposition, new product configurations for region specific trends and performance fit messaging to increase consumer awareness and adoption. Through its reputation in the marketplace, athlete endorsements and deep relationships with leading national retailers (National or Non-Dealer)brand partners, the company is focused on delivering the performance benefits of the BOA system across an expanding set of sporting categories and geographies.
Expand into Pioneering Categories - BOA has identified several adjacent segments including alpine skiing, trail running, and court sports such as tennis, badminton and basketball which management believes are well suited to benefit from the performance fit that BOA provides. BOA is actively working with leading brand partners to develop sport-specific footwear configurations that can benefit from the advantages of the BOA system. By leveraging BOA’s brand equity and proven solutions, the company believes there is significant whitespace to increase penetration in these early adoption segments.
Competitive Strengths
Culture of Innovation and New Product Development - Management believes that there is significant opportunity to continue advancing product offerings through its commitment to innovation. Product development and innovation are divided amongst (i) BOA’s internal innovation and evolution of its fit systems and platforms, refining and improving on the aesthetics, durability, user experience, and price/value, (ii) the design and engineering collaboration that BOA engages in with its brand partners for project and application-specific needs, and (iii) BOA’s advanced research through its PFL, which is transforming markets through innovative performance fit solutions that are scientifically tested and validated.
Deep Collaborative Partnerships – BOA has deep partnerships with the premier brands in every segment they compete within.They collaborate throughout the entire product lifecycle process, including product strategy, design and development, factory operational/service support, retail education, consumer warranty support, and marketing/demand creation.BOA has a high partner retention rate due to the depth and value of the relationships.
Premium Brand Position - BOA is focused on continuing to build awareness around its aspirational, global brand through content leadership, athlete endorsements, paid media, brand partner affiliations, and other business. BOA primarily increases awareness through direct-to-consumer marketing and co-marketing with its established brand partner relationships. In 2019, BOA launched its “Pioneer Program,” an athletic sponsorship platform. BOA leverages athlete endorsements to further establish its positioning as a performance fit leader as well as numerous Dealers, enabling Liberty Safedrive cross-segment brand awareness. The company recently launched its “Dialed in” Campaign, which showcases pioneers performing at their peak both physically and mentally. BOA also relies on its trusted brand partners to achieve considerableincrease BOA brand awarenessawareness. The company focuses its efforts on collaborating with brand partners who are innovative market leaders that meet BOA’s brand standards and channel exposure. Throughalign with BOA’s positioning as a high-performance, premium brand.
Technology Leader with Robust Patent Portfolio – BOA is a leader in performance fit innovation and has built a diverse global portfolio of issued and pending utility and design patents, creating barriers to entry. Throughout BOA’s history, the company has continually innovated on dial attributes including quick release, durability, manufacturing ease, and micro adjustability, in addition to integrated lace and lace guide designs and configurations critical to imparting precision fit and reduced friction. BOA’s engineering and technical expertise enables the development and production of performance fit solutions, allowing their brand partners to offer performance enhancing technology and product differentiation.
Competition
BOA’s competition can be segmented into three categories: established footwear brands that maintain their own proprietary technology for particular market segments, lower-quality subscale BOA imitators, and non-mechanical lace alternatives (bungies, buckles, plastic lace locks, Velcro, and webbing). Management estimates that BOA is 20+ times the size of its next closest direct competitor.
Research and Development
BOA’s approach to new product development is a multi-stage, cross-functional process. For each new product introduction, BOA works closely with brand partners to identify or develop the best suited BOA solution, its optimal placement on the shoe (or other application), color and design specifications, and cost targets. On existing products, BOA is committed to continuous innovation, including key improvements such as lower installation costs for brand partner factories, thinner and sleeker product profiles for improved aesthetics, in field warranty rate reduction to 0.5%, improved user experience, and the broadening of the platform suite to address key opportunities in alpine skiing, basketball, and outdoor.
As part of BOA’s innovation strategy around improving fit, the company has invested in a state-of-the-art PFL to quantitatively measure the impact of the BOA system on end products. In partnership with the University of Denver, the PFL is testing a significant investmentnumber of products to evaluate a) Agility & Speed, b) Power & Precision, and c) Endurance & Health. By addressing these global performance attributes rather than segment-by-segment specific needs, PFL findings will be relevant and applicable across BOA’s product lines. The results of these studies help further validate BOA’s value proposition, strengthening the company’s position as a fit and performance leader. Moreover, the PFL serves as a platform to test and refine new product offerings ahead of launch.
Suppliers
BOA maintains a longstanding deep relationship with a sole supplier for plastic injected parts (dial units and lace guides), representing approximately 70% of total purchases.The vendor is based in China with multiple facilities. Furthermore, the vendor has supplied the company since 2001 and has continuously invested in its national accountstools and infrastructure to maintain quality standards and keep up with demand. BOA owns all its injection molds. Lastly, the vendor is also a minority shareholder in BOA and is committed to supporting its growth. The remainder of BOA’s purchases are for steel and steel coated lace, textile laces and guides, monofilament lace and webbing, which are sourced from China, Korea, Europe, and the U.S. Management believes its manufacturing partners have sufficient capacity to accommodate future growth.
Intellectual Property
BOA has built a diverse global portfolio of 233 issued and pending utility and design patents. The company has created 37 patent “families” with intellectual property covering its core technology (dials, guides, laces), as well as strategic configurations and component installation methods. BOA maintains 10 Trademarks in 40+ countries.
Seasonality
Due to the diversity of sporting segments BOA participates in, there is no significant seasonality to the business, though BOA typically has higher sales in the fourth quarter, reflecting higher cycling and marketing efforts, Liberty Safegolf sales in preparation for the spring retail season, as well as higher sales in the second quarter each year due to purchasing trends in the snow sports product group.
Environmental, Social and Governance
As a forward-looking company, BOA is working towards making a sustainable impact throughout the world, minimizing their imprint on the environment, and diversifying the Outdoor and STEM industries. BOA has also becomeset bold goals to dramatically reduce the use of virgin fossil fuel-based plastics, overall manufacturing waste, and materially increase use of sustainable energy. The company has already made progress in all three areas and will be formally distributing its environmental and community impact report in the second quarter of 2022. In the last year, BOA has increased their budget and invested in three new roles to focus on these efforts. The company has formed partnerships with organizations in every region that are focused on providing more access and opportunities to under-represented populations and protecting the environment. Through these programs, BOA is working to create purposeful connections to their employees, partners, and consumers – bringing their mission, values, and products to the hearts and minds of their audience.
Human Capital
BOA strives to be an inclusive global team that trusts and cares for each other, their partners, the community, and the environment. Since their launch in Steamboat, CO in 2001, BOA has maintained a leading supplier to National accounts. Expansion into National accountsstrong and healthy company culture that is partrooted in a passion for the outdoors and the various industries that encompass their product offering. As the team has expanded over the last 20 years, BOA has placed an emphasis on creating a diverse and inclusive workplace with the goal of Liberty Safe’s strategy to reach a broader customer baserepresenting their global communities. BOA employees are located in four countries and more varied demographics. National account customers include sporting goods retailers, farm and fleet retailers, and home
improvement retailers.the United States. As of December 31, 2017, 2016 and 2015, Liberty Safe2021, BOA had 16, 13 and 15 Non-Dealer account customers, respectively, that are estimated to have accounted for approximately 46%, 50% and 55% of net sales, respectively.
Dealer customers include local hunting and fishing stores, hardware stores and numerous other local, independent store models. As of December 31, 2017, 2016 and 2015, there were 406, 392 and 356 Dealers that accounted for 54%, 50% and 45% of net sales, respectively.
Liberty Safe’s two largest customers accounted for approximately 32.6%, 36.5% and 37.1% of net sales in 2017, 2016 and 2015, respectively.
Seasonality
Liberty Safe typically experiences its lowest earnings in the second quarter due to lower demand for safes at the onset of summer.
Sales and Marketing
Liberty Safe possesses robust sales and marketing capabilities in the safe industry. Liberty Safe utilizes separate sales teams for National accounts and Dealers, which enables it to provide more focused and effective strategies to manage and develop relationships within different channels. Liberty Safe has made significant recent investments in the development of a comprehensive sales and marketing program including merchandising, sales training and tools, promotions and supply chain management. Through these various initiatives, Liberty Safe offers highly adaptable programs to suit the varying needs of its retailers. This has enabled Liberty Safe to become a key supplier across diverse channels. Liberty Safe began advertising nationally on the Glenn Beck radio show in the second half of 2010. This advertising has been highly successful and Liberty has continued this advertising in each of the following years and intends on continuing this advertisement in the future. Liberty also began advertising nationally with Sean Hannity during the last few months of 2016, and continued that campaign throughout 2017 and into 2018.
Liberty Safe’s comprehensive service offering makes it uniquely suited to service national retailers in a variety of channels. Liberty Safe has designed a Store-within-a-Store program and a more comprehensive Safe Category Management program to build relationships and increase its importance to retailers. Primarily utilized with sporting goods retailers, the Store-within-a-Store concept successfully integrates the effective sales strategies of its dealers for selling a high-price point, niche product into a larger store format. Centered on communicating the benefits of its products to customers, the program enables retailers to more effectively up-sell customers through a good-better-best merchandising platform, increasing margin and inventory turns for its retailers. Liberty’s Safe Category Management program builds on the Store-within-a-Store concept to provide greater sales and marketing control and more complete inventory management solutions. This program facilitates Liberty Safe becoming the sole supplier to retailers, providing large incremental expansion and stronger relationships at accounts. No other market participant has the capabilities to provide a comprehensive suite of customer service solutions to national retailers, such as customized SKU programs, a Store-within-a-Store program and a Safe Category Management program.
Competition
Liberty Safe is the premier brand in the premium home and gun safe industry, with an estimated 34% market share in the category. Liberty is in a class by itself when it comes to manufacturing technology and efficiency and supply chain capabilities. Competitors are generally more heavily focused on either smaller, sourced safes or large, domestically produced safes. Competitive domestic manufacturers run “blacksmith” type factories that are small, inefficient and require a tremendous amount of manual labor that produces inconsistent product. In addition, many of Liberty’s competitors are directly tied to a third-party brand, such as Browning, Winchester or RedHead / Bass Pro.
Liberty competes with other safe manufacturers based on price, breadth of product line, technology, product supply chain capabilities and marketing capabilities.
Channel diversity in the premium home and gun safe industry is rare, with most companies having greater concentration in either the dealer channel or national accounts, but rarely having the supply chain capabilities or sales and marketing programs to service both channels effectively such as Liberty Safe does. Major competitors have limited sales and marketing departments and programs, making it difficult for them to expand sales and gain market share.
Suppliers
Liberty’s primary raw materials are steel, sheetrock, wood, locks, handles and fabric, for which it receives multiple shipments per week. Materials, on average, account for approximately 60% of the total cost of a safe, with steel accounting for approximately 40% of material costs. Liberty purchases its materials from a combination of domestic and foreign suppliers. Historically, Liberty Safe has been able to pass on raw material price increases to its customers.
Liberty purchased approximately 22 million pounds of steel in 2017 primarily from domestic suppliers, using contracts that lock in prices two fiscal quarters in advance. Liberty Safe purchases coiled and flat steel in gauges from four to fourteen. Liberty Safe specifies rigorous requirements related to surface and edge finish and grain direction. All steel products are checked to ASTM specification and dimensional tolerances before entering the production process.
Liberty Safe had approximately $6.2 million and $8.4 million in firm backlog orders at December 31, 2017 and 2016, respectively.
Intellectual Property
Liberty Safe relies upon a combination of patents and trademarks in order to secure and protect its intellectual property rights. Liberty Safe currently owns 32 trademarks and 4 patents on proprietary technologies for safe products.
Regulatory Environment
Liberty Safe's management believes that Liberty Safe is in compliance with applicable environmental and occupational health and safety laws and regulations. Liberty Safe has recently moved to a powder paint application in order to reduce hazardous VOC emissions.
Employees
As of December 31, 2017, Liberty Safe had 343241 full-time employees and 28 temporary4 part-time employees. Liberty’s labor force is non-union. Management believes that Liberty Safe has an excellent relationship with its employees.
Manitoba Harvest
Overview
Headquartered131 employees are located in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and leader in branded, hemp-based foods. Manitoba Harvest’s products, which Management believes are among the fastest growing in the natural foods industry, are currently carried in approximately 13,000 retail stores across the United States and Canada. Manitoba Harvest’s hemp-based, all natural product lineup includes hemp hearts, protein powder, hemp oil and snacks. As the world’s largest vertically-integrated hemp food manufacturer, Manitoba Harvest is involved in every aspect114 work outside of the hemp production process, from “seed-to-shelf.” All of Manitoba Harvest’s products are an excellent source of plant-based protein and essential fatty acids, including omega-3, gamma-linolenic acid and stearidonic acid. The hemp-based food market is rapidly growing as consumers become aware of the unique combination of great taste and nutritional benefits of hemp-based foods.
We purchased a majority interest in Manitoba Harvest on July 10, 2015.
History of Manitoba Harvest
Founded in 1998 following the legalization of industrial hemp production in Canada, Manitoba Harvest has been the industry leader in the manufacture of the highest quality hemp food products while educating people on the benefits of hemp nutrition. Manitoba Harvest initially sold the company’s raw hemp seed and oil products in natural food stores with distribution and marketing efforts focused on promotion of consumer acceptance of hemp seeds as a food product. In 2001, Manitoba Harvest began selling their products at Whole Foods and Loblaws, one of Canada’s largest supermarket chains, which allowed for expansion beyond natural food stores. As hemp food products continued to gain mainstream acceptance, Manitoba Harvest launched additional hemp-based products, including a hemp protein powder line, a hemp smoothie line and hemp-based snacks. Manitoba Harvest’s facility in Winnipeg achieved organic certification in 2004 and non-GMO verification in 2009. Manitoba Harvest has the highest level of global certification in food safety and quality and is the first and only hemp-based food company to achieve British Retail Consortium Global Food Safety Initiative (“BRC”) certification. Leveraging its proven innovation capabilities and position as an industry leader, Manitoba Harvest is currently introducing new product formats with broad appeal, and expanding its retail channels, particularly grocery channels, to capitalize on strong demand from existing customers and to broaden its appeal to reach mainstream consumers.
On December 15, 2015, Manitoba Harvest acquired all the outstanding stock of Hemp Oil Canada Inc. (“HOCI”). HOCI is a wholesale supplier and a private label packager of hemp food products and ingredients. With the acquisition of HOCI, Manitoba Harvest has added a leading manufacturer and supplier of hemp food products and ingredients for a global customer base.
Industry
Hemp is the distinct oilseed and fiber varieties of the plant species Cannabis sativa L., a tall fibrous plant that has been cultivated worldwide for more than 10,000 years. The hemp crop was introduced to North American in the early 1600s, and it played an integral part in North America’s early history as it was used as a material for various products including riggings
and sails on naval ships, paper and fuel oil. Hemp is versatile, with diverse uses from food products to clothing, building materials, fuel and various other applications. As a food product, hemp is packed with essential nutrients such as protein, healthy fats, fiber, magnesium and all 10 essential amino acids.
As a crop, hemp is a low impact and environmentally sustainable resource that can be grown without pesticides or agricultural chemicals. Hemp is beneficial to the agricultural supply chain, aiding in weed suppression and soil building, making it a favored rotation crop. Hemp comes from the Cannabis sativa L. subspecies sativa, which is a different subspecies from that grown to produce marijuana, subspecies indica. Hemp contains 0.001% Tetrahydrocannabinol (“THC”). Although it is completely legal to further process and consume hemp-based food products in the U.S., it is currently illegal to cultivate hemp or process live seeds. As a result, U.S. marketers of hemp-based products must import 100% of the hemp seed, oil and fiber that they need. However, the regulatory environment in the U.S. is slowly changing. The U.S. Agriculture Act of 2014 defined industrial hemp as distinct from marijuana and authorized institutions of higher learning and state agriculture departments to grow industrial hemp for research and agricultural pilot programs, leading to certain states that have legalized hemp cultivation and have begun to authorize farmers to plant and grow hemp for experimental purposes.
In Canada, the commercial cultivation of hemp was authorized in 1998 with the implementation of the Canadian Industrial Hemp Regulations, which governs the cultivation, processing, transportation, sale, import and export of industrial hemp. Since its legalization, hemp has garnered significant interest among Canadian farmers and the Canadian government has supported the industry through market development funding and a favorable regulatory environment. The Canadian agricultural industry views hemp as a valuable alternative crop that complements prairie crop production rotations and offers significant economic opportunity due to its numerous end uses.
Hemp-based foods are considered a superfood that are rich in healthy fats and other important minerals; furthermore, hemp seeds are an excellent dietary source of easily digestible plant based protein. The unique nutritional profile of hemp foods appeals to a broad base of modern diet trends, ranging from paleo to vegetarian diets. Manitoba Harvest broadly competes in the Nuts & Seeds and Protein Powder categories, which Nielsen estimates to be $4.4 billion and $540 million at retail, respectively. The Hemp Industries Association estimates that retail sales of hemp food and body care products in the United States totaled $283 million in 2015.Austria, Greater China, Japan, and South Korea.
ProductsBOA is focused on both attracting new talent and growing talent from within the organization - providing learning and development opportunities, placing an emphasis on independent career plans, and building a team of leaders, managers, and staff that represents their mission, vision, and values. BOA maintains a high retention rate of their employees and believes the company's relationship with its employees is connected and transparent.
Manitoba Harvest
Ergobaby
Overview
Ergobaby is dedicated to building a global leader in branded, hemp-based foods. The Company’s products are the fastest growing products in the hemp food marketcommunity of confident parents with smart, ergonomic solutions that enable and among the fastest growing in the entire natural foods industry. The Company’s hemp-exclusive, consumer-facing 100% all-natural product lineup includes Hemp Hearts, protein powder,encourage bonding between parents and snacks. HOCI processes natural and organic hemp seed which are sold as hulled seed, hemp oil, hemp protein, toasted hemp seed and coarse hemp powder.
Hemp Hearts - Hemp Hearts are raw shelled hemp seeds and have a slightly nutty taste, similar to that of a sunflower seed or a pine nut. Hemp Hearts contain 10 grams of plant-based protein and 10 grams of omega essential fatty acids per 30 gram serving. Hemp Hearts can be used as a topping for yogurt, salads, cereal, as a component for smoothies and other meals, or eaten directly from the package. Manitoba Harvest offers Hemp Hearts in all-natural and organic varieties through a number of SKUs. Hemp Hearts are all-natural and non-GMO verified. Hemp Hearts represented approximately 67% of Manitoba Harvest’s gross revenues in 2017.
Hemp Protein Powder - Manitoba Harvestbabies. Ergobaby offers a varietybroad range of plant based proteins that serve a multitude of culinaryaward-winning baby carriers, blankets and dietary needs including Hemp Pro 70®, Hemp Pro 50®, Hemp Pro Fiber®swaddlers, nursing pillows, strollers, and Hemp Protein Smoothie. Hemp Pro 70® is a hemp protein concentrate that is 65% protein by weight and high in omega essential fatty acids. Hemp Pro 70® is available in several flavors including vanilla and chocolate, which were introduced in 2014 as an extension of the protein powder product line. Hemp Pro 50® is a raw hemp protein powder that is 50% protein by weight and features a balance of protein and fiber. Hemp Pro 70 and Hemp Pro 50 are plant-basedrelated products that are great complements to fruit smoothies, while Hemp Pro Fiberfit into families’ daily lives seamlessly, comfortably and safely. Ergobaby is a great source of protein, essential fatty acids and other nutrients that also offers a high amount of fiber per serving. Hemp Pro Fiber® is raw hemp protein powder, but also offers 52% of the daily recommended fiber intake. Hemp Pro Fiber is a versatile product that can be blended into smoothies, added to yogurt and hot cereal, or incorporated into baking products. Hemp Protein Smoothie was launchedheadquartered in 2015 and is a plant-based nutritional powder that includes 15 grams of protein and 2.6 grams of omega essential fatty acids per 30 gram serving, and is designed to mix easily into smoothies and other drinks. Manitoba Harvest offers hemp protein products in all-natural and organic varieties, and all protein powders are non-GMO verified. Hemp protein powders represent approximately 16% of Manitoba Harvest’s gross revenues in 2017.Torrance, California.
Hemp Snacks and OtherProducts - During 2015, Manitoba Harvest expanded their product lines with the introduction of Hemp Heart Bites, a convenient, bite sized crunchy snack product, which appeal to the mainstream consumer by featuring a simple and clean ingredient list that contains 10.5 grams of plant based protein and 10 grams of omega essential fatty
acids per 45 gram serving. Hemp Heart Bites were launched in response to demand from existing consumers for a convenient, hemp-based food product. Manitoba Harvest’s other products include Hemp Oil, in both liquid and soft-gel formats, and Hemp Bliss, an organic non-dairy beverage. Hemp oil is a cold-pressed oil with no preservatives or artificial colors and is commonly used as a low heat culinary oil or as an ingredient in dressings or sauces. Hemp snacks, Hemp oil and Hemp Bliss comprised approximately 17% of Manitoba Harvest's gross revenues in 2017.
Competitive Strengths
Leading Brand Recognition & Market Share - Manitoba Harvest is an award winning pioneer and global leader in branded, hemp-based foods. Consumer awareness of hemp-based foods and the Manitoba Harvest brand continues to grow rapidly. Manitoba Harvest has developed considerable brand equity with a growing, highly-loyal, and very passionate consumer following. Consumers tend to be extremely loyal after incorporating Manitoba Harvest’s hemp foods into their lifestyle. Management believes that Manitoba Harvest holds more than 50% of the market share of hemp heart seed sales and hemp protein powder sales in North America.
Strong Core Consumer Base - Manitoba Harvest’s core consumers are those who generally prefer all-natural products and focus on practicing a lifestyle of health and sustainability. Among its core consumer base, hemp-based foods have a high level of awareness and Manitoba Harvest possesses a high level of brand recognition among this consumer segment. Consumers tend to be extremely loyal after incorporating Manitoba Harvest’s hemp foods into their lifestyle. Consumers develop a bond with the Manitoba Harvest brand and appreciate that Manitoba Harvest seeks to positively impact the community and the environment with its actions. Manitoba Harvest is committed to having a material positive impact on society and the environment. The company takes this commitment very seriously, and communicates this to consumers, in part, by maintaining certification as a registered “B-Corporation”. Through its actions, Manitoba Harvest inspires consumers to “live the brand” and lead happier and healthier lives.
Vertically-Integrated Supply Chain with Long-Term Relationships with Suppliers - Manitoba Harvest enjoys strong relationships with hemp producers, some dating back to their inception in 1998. Manitoba Harvest has a rigorous qualification process for its suppliers which includes an ongoing supplier scorecard and chooses to purchase hemp seeds from only the highest quality growers. With limited exception, farmers working with Manitoba Harvest are exclusive to them. In North America, hemp is only grown commercially in Canada and Manitoba Harvest accounts for more than 60% of the hemp supply, minimizing risk and ensuring quality hemp seeds for their product. The majority of Canada’s hemp supply outside of Manitoba Harvest’s business goes into ingredient and wholesale markets, making Manitoba Harvest the only vertically-integrated, branded hemp-based food company in North America.
Business StrategiesNiche Industrial Businesses
Manitoba Harvest’sAdvanced Circuits
Compass AC Holdings, Inc. (“Advanced Circuits” or “ACI”), headquartered in Aurora, Colorado, is a provider of small-run, quick-turn and volume production rigid printed circuit boards, or “PCBs”, throughout the United States. PCBs are a vital component of virtually all electronic products. The small-run and quick-turn portions of the PCB industry are characterized by customers requiring high levels of responsiveness, technical support and timely delivery. We made loans to, and purchased a controlling interest in, Advanced Circuits, on May 16, 2006 for approximately $81.0 million.
On October 13, 2021, the Company, as the representative of the holders of stock and options of Advanced Circuits, entered into a definitive plan of merger to sell all of the outstanding securities of Advanced Circuits. Advanced Circuits has been classified as held for sale at December 31, 2021. Refer to Note D - Discontinued Operations for additional information. Altor Solutions
FFI Compass, Inc. ("Altor Solutions" or "Altor") (formerly "Foam Fabricators"), headquartered in Scottsdale, Arizona, is a designer and manufacturer of custom molded protective foam solutions and OEM components made from expanded polystyrene (EPS) and other expanded polymers. Altor provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products and others. Altor’s molded foam solutions offer shock and vibration protection, surface protection, temperature control, resistance to water absorption and vapor transmission and other protective properties critical for shipping small, delicate items, heavy equipment or temperature-sensitive goods. Altor operates 16 molding and fabricating facilities across North America, creating a geographic footprint of strategically located manufacturing plants to efficiently serve national customer accounts. We acquired Altor on February 15, 2018 for a purchase price of approximately $253.4 million. We currently own 100.0% of the outstanding stock of Altor on a primary basis and 91.2% on a fully diluted basis.
Arnold
AMT Acquisition Corp. ("Arnold") serves a variety of markets including aerospace and defense, general industrial, motorsport/ automotive, oil and gas, medical, energy, reprographics and advertising specialties. Over the course of more than 100 years, Arnold has successfully evolved and adapted its products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold produces high performance permanent magnets (PMAG), turnkey electric motors ("Ramco"), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Arnold has expanded globally and built strong relationships with its customers worldwide. Arnold is the largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems. Arnold is headquartered in Rochester, New York. We made loans to, and purchased a controlling interest in, Arnold on March 5, 2012 for approximately $128.8 million. We currently own 98.0% of the outstanding stock of Arnold on a primary basis and 85.5% on a fully diluted basis.
Sterno
The Sterno Group LLC ("Sterno"), headquartered in Corona, California, is the parent company of Sterno Products, LLC ("Sterno Products") and Rimports, LLC. Sterno is a leading manufacturer and marketer 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. We made loans to, and purchased all of the equity interests in, Sterno on October 10, 2014 for approximately $160.0 million. Sterno offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps through their Sterno Products division. In February 2018, Sterno acquired Rimports Inc. ("Rimports"), which is a manufacturer and distributor of branded and private label scented wax cubes and warmer products used for home decor and fragrance systems. We currently own 100.0% of the outstanding stock of Sterno on a primary basis and 87.1% on a fully diluted basis.
Our businesses also represent our operating segments. See “Our Businesses” and “Note F – Operating Segment Data” to our Consolidated Financial Statements for further discussion of our businesses as our operating segments, including information related to geographies. 2021 Distributions
Common shares - For the 2021 fiscal year we declared distributions to our common shareholders totaling $2.21 per share, inclusive of our special cash distribution of $0.88 per share in connection with our tax reclassification.
Preferred shares - For the 2021 fiscal year we declared distributions to our preferred shareholders totaling $1.8125 per share on our Series A Preferred Shares, $1.96875 per share on our Series B Preferred Shares and $1.96875 per share on our Series C Preferred Shares.
Tax Reporting
On August 3, 2021, the shareholders of CODI approved amendments to the Second Amended and Restated Trust Agreement of the Trust and the Fifth Amended and Restated Operating Agreement of the Company to allow the Company’s Board of Directors (the “Board”) to cause the Trust to elect to be treated as a corporation for U.S. federal income tax purposes (the “tax reclassification”) and, at its discretion in the future, cause the Trust to be converted to a corporation. Following the shareholder vote, the Board resolved to cause the Trust to elect to be treated as a corporation for U.S. federal income tax purposes. The Trust was taxed as a partnership for U.S. federal income tax purposes since January 1, 2007 and until the tax reclassification became effective on September 1, 2021.
The Trust will be treated as a corporation for any taxable period beginning on or after the tax reclassification. Income, gain, loss, deduction and credit from the Trust will no longer be passed through to the Trust shareholders. The Trust will issue its final Schedule K-1s for the taxable period beginning January 1, 2021 and ending August 31, 2021, the last day on which the Trust was treated as a partnership for U.S. federal income tax purposes. Thereafter the Trust will stop issuing annual Form 1065, Schedule K-1s and Trust shareholders will no longer be subject to current taxation on the Trust’s earnings. Trust shareholders subject to rules regarding “unrelated business taxable income” (or “UBTI”) will no longer be allocated UBTI from the Trust.
The Trust will be required to file Form 1120, U.S. Corporation Income Tax Return on an annual basis and for all taxable periods beginning on or after the tax reclassification. In addition, distribution with respect to Trust shares (including Trust preferred shares) will now be reported on Form 1099-DIV, instead of on Schedule K-1.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file reports with the Securities and Exchange Commission (the "SEC" or the "Commission"), including Forms S-1 and S-3 under the Securities Act of 1933, as amended (the "Securities Act"), and Forms 10-K, 10-Q, and 8-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which include exhibits, schedules and amendments to those reports, as well as other filings required by the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. In addition, copies of such reports, and amendments thereto, are available free of charge through our website at http://www.ir.compassequity.com as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.
Organizational Structure (1)
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| 1) | The percentage holdings shown in respect to the trust reflect the ownership of the Trust common shares as of December 31, 2021. |
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| 2) | Path Spirit Limited is the ultimate controlling person of CGI Holdings Maygar LLC. CGI Maygar Holdings, LLC owns approximately 12.0% of the Trust common shares and is our single largest holder. Our non-affiliated holders of common shares own approximately 85.1% of the Trust common shares. The remaining 2.9% of Trust common shares are owned by our Directors and Officers. Mr. Sabo, our Chief Executive Officer, is not a director, officer or member of CGI Maygar Holdings, LLC or any of its affiliates. |
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| 3) | 57.8%beneficially owned by certain persons who are employees and partners of our Manager. C. Sean Day, the Chairman of our Board of Directors, and the former founding partners of the Manager, are non-managing members. |
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| 4) | Mr. Sabo is a partner of this entity. The Manager owns less than 1.0% of the common shares of the Trust. |
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| 5) | The Allocation Interests, which carry the right to receive a profit allocation, represent less than 0.1% equity interest in the Company. |
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| 6) | On October 13, 2021, we entered into an agreement - subject to closing conditions - to sell ACI. ACI has been classified as held-for-sale at December 31, 2021. |
Our Manager
Our Manager, CGM, has been engaged to manage the day-to-day operations and affairs of the Company and to execute our strategy, as discussed below. Collectively, our management believesteam has extensive experience in acquiring and managing small and middle market businesses. We believe our Manager is unique in the marketplace in terms of the success and experience of its employees in acquiring and managing diverse businesses of the size and general nature of our businesses. We believe this experience will provide us with an advantage in executing our overall strategy. Our management team devotes substantially all of its time to the affairs of the Company.
We have entered into a management services agreement, (the “Management Services Agreement” or “MSA”) pursuant to which our Manager manages the day-to-day operations and affairs of the Company and oversees the management and operations of our businesses. We pay our Manager a quarterly management fee for the services it performs on our behalf. In addition, certain persons who are employees and partners of our Manager receive a profit allocation with respect to its Allocation Interests in us. All of the Allocation Interests in us are owned by Sostratus LLC. Payment of profit allocations to Sostratus LLC can occur for each of our subsidiaries during the 30-day period following the fifth anniversary of the date upon which we acquired a controlling interest in that business (a "Holding Event") to the extent contribution based profit has been earned and upon the sale of a subsidiary from which there is well positioneda realizable gain (a "Sale Event"). See Part III, Item 13 “Certain Relationships and Related Transactions, and Director Independence” for continued topline growth. As consumer awarenessfurther descriptions of the management fees and profit allocations. The Company’s Chief Executive Officer and Chief Financial Officer are employees of our Manager and have been seconded to us. Neither the Trust nor the LLC has any other employees. Although our Chief Executive Officer and Chief Financial Officer are employees of our Manager, they report directly to the LLC’s board of directors. The management fee paid to our Manager covers all expenses related to the services performed by our Manager, including the compensation of our Chief Executive Officer and other personnel providing services to us. The LLC reimburses our Manager for the compensation and related costs and expenses of our Chief Financial Officer and his staff, who dedicate substantially all of their time to the affairs of the Company.
Market Opportunity
We acquire and actively manage small and middle market businesses. We characterize small to middle market businesses as those that generate annual cash flows of up to $100 million per year. We believe that the acquisition market for these businesses is highly fragmented and often provides opportunities to purchase at more attractive prices and achieve better outcomes for our shareholders. We believe this is driven by the following factors:
•third-party financing for these acquisitions is often less available or terms are less favorable for the borrower;
•sellers of these businesses frequently consider non-economic factors, such as legacy or the effect of the sale on their employees;
•these businesses are more likely to be sold outside of an auction process or as part of a limited process; and
•"add-on" acquisitions can often be completed at attractive multiples of cash flow.
Frequently, opportunities exist to support and augment existing management at such businesses and improve the performance of these businesses upon their acquisition through active management. We are business builders rather than asset traders. In the past, our management team has acquired businesses that were owned by entrepreneurs or large corporate parents. In these cases, our management team has frequently found opportunities to profitably invest in areas of the acquired businesses beyond levels that existed at the time of acquisition. In addition, our management team has frequently found that processes such as financial reporting and management information systems of acquired businesses may be improved, leading to improvements in reporting and operations and ultimately earnings and cash flow. Finally, our management team often acts as a business development arm for our businesses to pursue organic or external growth strategies that may not have been pursued by their previous owners.
Our Strategy
CODI’s permanent capital structure enables us to invest in people, processes, culture, and growth opportunities that drive transformational change. We have two primary strategies that we use to support long-term value creation. First, we focus on growing the earnings and cash flow from our acquired businesses and help them professionalize at scale. We believe that the scale and scope of our businesses give us a diverse base of cash flow upon which to further build. Second, we identify, perform due diligence on, negotiate and consummate additional platform acquisitions of small to middle market businesses in attractive industry sectors in accordance with acquisition criteria established by the board of directors.
Management Strategy
Our management strategy involves the proactive financial and operational management of the businesses we own in order to increase cash flows and shareholder value. Our Manager actively oversees and supports the management teams of each of our businesses by, among other things:
•recruiting and retaining talented managers to operate our businesses using structured incentive compensation programs, including non-controlling equity ownership, tailored to each business;
•regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;
•identifying and aligning with external policy and performance tailwinds such as those influenced by growing climate, health, and social justice concerns (and similar environmental, social and governance ("ESG") drivers);
•assisting management in their analysis and pursuit of prudent organic growth strategies;
•identifying and working with management to execute attractive external growth and acquisition opportunities;
•assisting management in controlling and right-sizing overhead costs;
•nurturing an internal culture of transparency, alignment, accountability and governance, including regular reporting;
•professionalizing our subsidiaries at scale; and
•forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.
Specifically, while our businesses have different growth opportunities and potential rates of growth, we expect our Manager to work with the management teams of each of our businesses to increase the value of, and demandcash generated by, each business through various initiatives, including:
•making selective capital investments to expand geographic reach, increase capacity, or reduce manufacturing costs of our businesses;
•investing in product research and development for hemp-based foods increases, Manitoba Harvestnew products, processes or services for customers;
•improving and expanding existing sales and marketing programs;
•pursuing reductions in operating costs through improved operational efficiency or outsourcing of certain processes and products; and
•consolidating or improving management of certain overhead functions.
Our businesses typically acquire and integrate complementary businesses. We believe that complementary add-on acquisitions improve our overall financial and operational performance by allowing us to:
•leverage manufacturing and distribution operations;
•leverage branding and marketing programs, as well as customer relationships;
•add experienced management or management expertise;
•increase market share and penetrate new markets; and
•realize cost synergies by allocating the corporate overhead expenses of our businesses across a larger number of businesses and by implementing and coordinating improved management practices.
Acquisition Strategy
Our acquisition strategy is to acquire businesses that we expect to produce stable and growing earnings and cash flow. In this respect, we expect to make platform acquisitions in industries other than those in which our businesses currently operate if we believe an acquisition presents an attractive opportunity. We believe that attractive opportunities will continue to leverage its market leadershippresent themselves, as private sector owners seek to monetize their interests in long-standing and privately-held businesses and large corporate parents seek to dispose of their “non-core” operations.
Our ideal acquisition candidate has the following characteristics:
•is a leading branded consumer or niche industrial company headquartered in North America;
•maintains highly defensible position in the markets it serves and with customers;
•operates in an industry with favorable long-term macroeconomic trends;
•has a strong brand awarenessmanagement team, either currently in place or previously identified, and meaningful incentives;
•has low technological and/or product obsolescence risk; and
•maintains a diversified customer and supplier base.
We benefit from our Manager’s ability to grow through existing customers, broadened distribution, new product launches, and expanded ingredients business.
Increasing consumer awareness - Manitoba Harvest was founded with the mission to educate consumers on the health and environmental benefits of hemp-based food products and has taken a grassroots approach to educating consumers. Management estimates that its team interacted directly with more than half a million consumers and distributed more than two million samples to consumers in 2017. Public relations outreach yielded more than 50 million impressions in 2017identify potential diverse acquisition opportunities in a variety of national publications.industries. In addition, to sampling, Manitoba Harvest is driving consumer awareness through media outreach, a growing social media community, digital mediawe rely upon our management team’s experience and network of brand ambassadors. Manitoba Harvest is increasing its investmentexpertise in signage, coupons, in-store displaysresearching and product demos at key retailers in the United States. Educating shoppers in the U.S., many of whom are unaware of the benefits of hemp foods, will continue to drive sales among shoppers and build relationships at accounts. Manitoba Harvest is also a co-sponsor of Hemp History Week, an annual event that features hundreds of product demos and promotional events at major retailers throughout the U.S., including Whole Foods Market.
Continued growth with existing customers - Manitoba Harvest expects to grow same store sales with existing customers by expanding the presence of their products on the shelf throughout stores through the introduction of new formats, improved retail product placement and increased investment in merchandising. Manitoba Harvest also partners with its retail customers to develop new, consumer-centric products, such as the 2015 introduction of the hemp protein smoothie at a large Canadian retailer. In 2016, the hemp protein smoothies were expanded into all channels in Canada and in the United States.
Expansion into new customers - Management believes it has significant opportunity to enter new grocery customers in the mainstream grocery channel, both in Canada and the United States. The grocery channels in both the United States and Canada have experienced significant sales growth in all-natural and organic product categories while sales in traditional product categories have been flat or decreased. Manitoba Harvest recently expanded its direct sales team to improve access
and engagement with key retail accounts, adding additional brand ambassadors and territory managers to expand distribution with mainstream U.S. grocery chains by capitalizing on traditional US grocer emphasis on selling products that align with broad based consumer demand for healthy eating.
Continued innovation and new product development - In 2016, the company introduced Hemp Heart Toppers, and two new flavors of Hemp Heart Bites. Additionally, a new portable, single serve format was introduced for Hemp Protein Smoothie and Hemp Heart Bites. Management plans to continue to innovate on existing product lines through new formats and flavorsvaluing prospective target businesses, as well as continued developmentnegotiating the ultimate acquisition of such target businesses. In particular, because there may be a lack of information available about these target businesses, which may make it more difficult to understand or appropriately value such target businesses, on our behalf, our Manager:
•engages in a substantial level of internal and third-party due diligence;
•critically evaluates the target management team;
•identifies and assesses any financial and operational strengths and weaknesses of the target business;
•analyzes comparable businesses to assess financial and operational performances relative to industry competitors;
•actively researches and evaluates information on the relevant industry; and
•thoroughly negotiates appropriate terms and conditions of any acquisition.
The process of acquiring new product categoriesbusinesses is both time-consuming and complex. Our management team historically has taken from two to broaden customer appealtwenty-four months to perform due diligence, negotiate and close acquisitions. Although our management team is at various stages of evaluating several transactions at any given time, there may be periods of time during which our management team does not recommend any new acquisitions to us. Even if an acquisition is recommended by our management team, our board of directors may not approve it.
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 company level largely through our existing credit facility. We believe, and it has been our experience, that having the ability to finance our acquisitions with capital resources raised by us, rather than negotiating separate third-party financing, provides us with an advantage in successfully acquiring attractive businesses by minimizing delay and closing conditions that are often related to acquisition-specific financings. In addition, our strategy of providing this intercompany debt financing within the capital structure of the businesses we acquire and manage allows us the ability to distribute cash to the parent company through monthly interest payments and amortization of principle on these intercompany loans.
Upon acquisition of a new business, we rely on our Manager’s experience and expertise to work efficiently and effectively with the management of the new business to jointly develop and execute a successful business plan.
Strategic Advantages
Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are well-positioned to acquire additional businesses. Our management team has strong relationships with business brokers, investment and commercial bankers, accountants, attorneys and other potential sources of acquisition opportunities. In addition, our management team has a successful track record of acquiring and managing small-to-middle market businesses in various industries. In negotiating these acquisitions, we believe our management team has been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned businesses, management buy-outs and reorganizations.
Our management team has a large network that we estimate to be approximately 2,000 deal intermediaries who we expect to expose us to potential acquisitions. Through this network, as well as our management team’s proprietary transaction sourcing efforts, we have a substantial pipeline of potential acquisition targets. Our management team also has a well-established network of contacts, including professional managers, attorneys, accountants and other third-party consultants and advisors, who may be available to assist us in the performance of due diligence and the negotiation of acquisitions, as well as the management and operation of our acquired businesses.
Finally, because we intend to fund acquisitions through the utilization of our 2021 Revolving Credit Facility, we expect to minimize the delays and closing conditions typically associated with transaction specific financing, as is typically the case in such acquisitions. We believe this advantage can be a powerful one, especially in a tight credit environment, and is highly unusual in the marketplace for acquisitions in which we operate.
Valuation and Due Diligence
When evaluating businesses or assets for acquisition, our management team performs rigorous due diligence and a financial evaluations process including an evaluation of the operations of the target business and the outlook for its industry. While valuation of a business is a subjective process, we define valuations under a variety of analyses, including:
•discounted cash flow analyses;
•evaluation of trading values of comparable companies;
•expected value matrices; and
•examination of comparable recent transactions.
One outcome of this process is a projection of the expected cash flows from the target business. A further outcome is an understanding of the types and levels of risk associated with those projections. While future performance and projections are always uncertain, we believe that with detailed due diligence, future cash flows will be better estimated and the prospects for operating the business in the future better evaluated. To assist us in identifying material risks and validating key assumptions in our financial and operational analysis, in addition to our own analysis, we engage third-party experts to review key risk areas, including legal, tax, regulatory, accounting, insurance and environmental. We also engage technical, operational or industry consultants, as necessary.
A further critical component of the evaluation of potential target businesses is the assessment of the capability of the existing management team, including recent performance, expertise, experience, culture and incentives to perform. Where necessary, and consistent with our management strategy, we actively seek to augment, supplement or replace existing members of management who we believe are not likely to execute our business plan for the target business. Similarly, we analyze and evaluate the financial and operational information systems of target businesses and, where necessary, we enhance and improve those existing systems that are deemed to be inadequate or insufficient to support our business plan for the target business.
Environmental, Social and Governance Practices
In the last few years, companies, investors and policymakers have focused more attention on - and have made investments in - companies that are considered leaders in ESG practices. Another way to think about ESG practices is to consider them, collectively, to be long-term performance factors designed to enable real owners to oversee their investments and balance the needs of important stakeholders in doing so. That same concept is mirrored in Compass Diversified’s business model: by bringing the virtues of a diverse set of middle market businesses that are typically privately held to public markets - including to individual investors who would not otherwise have access - we are helping to democratize market access while preserving professional oversight protections.
Our long-term, do-good-by-doing-well, real owners approach is reflected in the companies we acquire and manage, which, among them, provide products and services that support:
•medical and first responder needs;
•education programs;
•outdoor health and recreational pursuits; and
•e-commerce and technology providers.
In addition, a number of our businesses have created robust recycling and responsible sourcing programs, strong human capital management and diversity, equity and inclusion ("DEI") programs. We believe each of these creates long-term financial sustainability as well as making our shared world a better place.
Our long-term responsible approach is also reflected in how we manage ourselves.We have been and remain committed to being a responsible partner to our subsidiaries and are proud stewards of corporate citizenship.
Financing
We incur third party debt financing almost entirely at the Company level, which we use, in combination with our equity capital, to provide debt financing to each of our businesses and to acquire additional businesses. We believe this financing structure is beneficial to the financial and operational activities of each of our businesses by aligning our interests as both equity holders of, and lenders to, our businesses, in a manner that we believe is more efficient than each of our businesses borrowing from third-party lenders.
Debt Financing
2021 Credit Facility
On March 23, 2021, we entered into a Second Amended and Restated Credit Agreement to amend and restate the 2018 Credit Facility. The 2021 Credit Facility provides for revolving loans, swing line loans and letters of credit up to a maximum aggregate amount of $600 million and also permits the Company, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain term loans in an aggregate amount of up to $250 million, subject to certain restrictions and conditions. All amounts outstanding under the 2021 Revolving Credit Facility will become due on March 23, 2026, which is the maturity date of loans advanced under the 2021 Revolving Credit Facility.
The 2021 Credit Facility provides for letters of credit under the 2021 Revolving Credit Facility in an aggregate face amount not to exceed $100 million outstanding at any time, as well as swing line loans of up to $25 million outstanding at one time. At no time may the (i) aggregate principal amount of all amounts outstanding under the 2021 Revolving Credit Facility, plus (ii) the aggregate amount of all outstanding letters of credit and swing line loans, exceed the borrowing availability under the 2021 Credit Facility. At December 31, 2021, we had outstanding letters of credit totaling approximately $1.0 million. The borrowing availability under the 2021 Revolving Credit Facility at December 31, 2021 was approximately $599.0 million.
The 2021 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. (See "Note I - Debt" to the consolidated financial statements for more detail regarding our 2021 Credit Facility). Senior Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% Notes due 2032 (the "2032 Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is payable in cash on July 15th and January 15th of each year. The 2032 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes was used to repay debt outstanding under the 2021 Credit Facility.
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Notes due 2029 (the "2029 Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2029 Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2029 Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on April 15th and October 15th of each year. The 2029 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries.
The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in connection with our entry into the 2021 Credit Facility, as described above, and to redeem our 8.000% Senior Notes due 2026 (the “2026 Notes”).
Equity Financing
Trust Common Shares
The Trust is authorized to issue 500,000,000 Trust common shares and the Company is authorized to issue a corresponding number of hemp food usage occasions.LLC interests. The Company will, at all times have an equal amount of LLC interests outstanding as Trust shares. At December 31, 2021, there were 68.7 million Trust common shares outstanding.
Expanded ingredient business - With
Common Share Offering
On September 7, 2021, we filed a prospectus supplement pursuant to which we may, but we have no obligation to, issue and sell up to $500 million shares of the common shares of the Trust in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions, the trading price of Trust common shares and determinations by us regarding appropriate sources of funding. In connection with this offering, we entered into an At Market Issuance Sales Agreement with B. Riley Securities, Inc. (“B. Riley”) and Goldman Sachs & Co. LLC (“Goldman”) pursuant to which we may sell common shares of the Trust having an aggregate offering price of up to $500 million, from time to time through B. Riley and Goldman, acting as sales agents and/or principals. We sold 3,837,885 Trust common shares during the year ended December 31, 2021 and received net proceeds of approximately $115.1 million. We incurred approximately $2.1 million in commissions payable to the Sales Agents during the year ended December 31, 2021.
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 million Trust preferred shares and the Company is authorized to issue a corresponding number of Trust Interests. We issued 4,000,000 7.250% Series A Preferred Shares in 2017, 4,000,000 7.875% Series B Preferred Shares in 2018 and 4,600,000 7.875% Series C Preferred Shares in 2019.
We intend to finance future acquisitions through our 2021 Revolving Credit Facility, cash on hand and, if necessary, additional equity and debt financings. We believe, and it has been our experience, that having the ability to finance our acquisitions with the capital resources raised by us, rather than negotiating separate third party financing specifically related to the acquisition of HOCIindividual businesses, provides us with an advantage in December 2015, Manitoba Harvest addedacquiring attractive businesses by minimizing delay and closing conditions that are often related to acquisition-specific financings. In this respect, we believe that in the future, we may need to pursue additional debt or equity financings, or offer equity in Holdings or target businesses to the sellers of such target businesses, in order to fund multiple future acquisitions.
Our Businesses
We categorize the businesses we own into two separate groups of businesses (i) branded consumer businesses, and (ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we believe capitalize on a leading manufacturervaluable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in their particular product category. Niche industrial businesses are characterized as those businesses that focus on manufacturing and supplier of hemp foodselling particular products and ingredients. As hemp-based food usageindustrial services within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector.
The following table represents the percentage of net revenue and operating income each of our businesses contributed to our consolidated results since the date of acquisition for the years ended December 31, 2021, 2020 and 2019, and the total assets of each of our businesses as a percentage of the consolidated total as of December 31, 2021 and 2020.
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| | Net Revenue | | Operating Income (1) | | Total Assets |
| | Year ended December 31, | | Year ended December 31, | | Year ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
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| Branded Consumer: | | | | | | | | | | | | | | | | |
| 5.11 | | 24.2 | % | | 29.5 | % | | 30.8 | % | | 19.9 | % | | 30.5 | % | | 30.6 | % | | 16.4 | % | | 20.7 | % |
| BOA | | 9.0 | % | | 1.9 | % | | n/a | | 17.1 | % | | (1.0) | % | | n/a | | 17.1 | % | | 21.8 | % |
| Ergobaby | | 5.1 | % | | 5.5 | % | | 7.1 | % | | 4.6 | % | | 5.3 | % | | 14.2 | % | | 5.2 | % | | 6.6 | % |
| Lugano | | 2.9 | % | | n/a | | n/a | | 5.0 | % | | n/a | | n/a | | 11.3 | % | | n/a |
| Marucci Sports | | 6.4 | % | | 3.2 | % | | n/a | | 8.3 | % | | (4.3) | % | | n/a | | 9.1 | % | | 8.6 | % |
| Velocity Outdoor | | 14.7 | % | | 15.9 | % | | 11.7 | % | | 20.0 | % | | 25.2 | % | | (37.1) | % | | 9.3 | % | | 10.7 | % |
| | 62.2 | % | | 55.9 | % | | 49.6 | % | | 74.9 | % | | 55.6 | % | | 7.8 | % | | 68.3 | % | | 68.4 | % |
| Niche Industrial: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Arnold Magnetics | | 7.6 | % | | 7.3 | % | | 9.5 | % | | 6.0 | % | | 2.1 | % | | 11.4 | % | | 5.3 | % | | 4.8 | % |
| Altor Solutions | | 9.8 | % | | 9.6 | % | | 9.6 | | | 9.1 | % | | 16.1 | % | | 19.5 | | | 11.0 | % | | 11.4 | % |
| Sterno | | 20.4 | % | | 27.2 | % | | 31.3 | % | | 10.0 | % | | 26.1 | % | | 61.3 | % | | 12.0 | % | | 15.4 | % |
| | 37.8 | % | | 44.1 | % | | 50.4 | % | | 25.1 | % | | 44.4 | % | | 92.2 | % | | 28.3 | % | | 31.6 | % |
| Corporate | | — | | | — | | | — | | | — | | — | | | — | | | 3.4 | % | | (0.1) | % |
| | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
(1) Operating income (loss) reflected is as a percentage of the total contributed by the businesses and does not include expenses incurred at the corporate level.
Branded Consumer Businesses
5.11
Overview
5.11 is a global lifestyle brand and innovator of purpose-built technical apparel, footwear and gear for a passionate and loyal group of consumers. 5.11 is a brand of choice for those who demand uncompromising functionality, durability, style and comfort of their gear. 5.11's brand authenticity stems from decades of collaboration with elite first responders and military professionals around the world, innovating to solve their greatest needs in the most mission-critical settings, where failure is not an option. Today, 5.11 continues to become moredesign and innovate for these professionals with the added purpose of delivering that unique functional expertise to everyday consumers. Management believes 5.11's large and growing community of everyday consumers associate with the 5.11 brand heritage and authenticity and values 5.11's high-quality product design and functionality.
Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally. 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and through e-commerce channels, including 511tactical.com.
History of 5.11
5.11's heritage dates back to the 1970’s when 5.11 pants were originally designed by Royal Robbins for elite rock climbers. These climbers wanted durable yet flexible and comfortable pants as they scaled the most extreme rock walls in Yosemite National Park. In the early 1990’s, the same 5.11 pant was adopted management believesby the strategic acquisitionF.B.I. National Academy and became standard training issue because of HOCI has positionedits superior design and performance. Trusted by law enforcement and military professionals ever since, 5.11's innovative products have formed the companycornerstone of the brand. 5.11 is an outfitter of choice for our heroes who require rugged, functional, durable, and technically-advanced products capable of withstanding harsh conditions without sacrificing comfort. Consumers’ needs and aspirations fuel 5.11's product innovation engine. 5.11 leveraged this foundation to capitalizeexpand their product expertise to a significantly larger market of underserved lifestyle-oriented consumers who identify with 5.11's brand positioning, appreciate their superior designs and share the "Always Be Ready" ("ABR") mindset.
We acquired a majority interest in 5.11 on August 31, 2016.
Industry
5.11 participates in the growing opportunityglobal professional and consumer soft goods market for tactical gear and apparel; the addressable global soft goods market was estimated by management to be approximately $79 billion. 5.11 products are designed for use in a wide variety of activities, from professional to recreational and outdoor and indoor, and can be used all year long. As a result, the ingredient suppliermarkets and consumers 5.11 serves are broad and deep.
Products, Customers and Distribution
Products
Product innovation is at the core of choice5.11’s heritage and identity. Since its inception, 5.11 has continuously developed and introduced innovative apparel, footwear and gear that are highly functional, technically-advanced and expertly designed setting the industry standard in each product category. 5.11’s product portfolio consists of technical apparel, footwear and gear designed with patented materials and functional features to other leading food manufacturers in complementary foodtheir customers from head-to-toe. 5.11’s purpose-built products are durable, functional and comfortable. 5.11 serves a community of consumers inspired to live a life bigger than themselves and aligned with the “Always Be Ready” mindset. 5.11 offers a portfolio of head-to-toe purpose-built gear with patented functional features for both professional and recreational use. 5.11 focuses their product categories.
Researchoffering across three categories: apparel, footwear and Development
Manitoba Harvest competes in the natural products industry, which is characterized by researchgear. Leveraging in-field testing and developmentdesign feedback from professional collaborations and which yields food product innovations that contribute to human wellness and sustainable development. The scope of research and development is focused on new product development, product enhancement, processin-house design and improvement, packaging,engineering expertise, 5.11 is able to create high quality products in each of its core segments. Innovating around the material and meetingfunctional needs of professionals, 5.11 then broadens the application of their technical functionality into a range of consumer products within each category. This evolution of 5.11’s product lines creates tremendous leverage for their purpose-built functionality, allowing 5.11 to benefit from their growing and broad crossover appeal. 5.11’s innovations have not been limited to just apparel and textiles, as 5.11 has also proven their abilities within their footwear and gear categories.
Apparel - Apparel represents 5.11’s largest product category at 66%, 65% and 67%, respectively, of net sales for the years ending December 31, 2021, 2020 and 2019. Within this category, 5.11 offers a broad assortment of men’s and women’s pants, shorts, shirts, outerwear, polos, and base layers. Apparel is offered in a variety of styles and fits intended to enhance comfort, durability, and utility. 5.11 has historically designed and developed innovative “families” of products around proprietary fabrics that 5.11 has created to meet the needs of its consumers. These product “families” typically start with a purpose-built pant and then expand into other products.
•Pants - for many consumers, 5.11 technical purpose-built pants are the expanding international business. Additionally, management utilizes analytics to manage the evolution of its relationships with its customers, and conducts consumer research during early stages of new product development initiatives in order to identify key success factors. Manitoba Harvest spent approximately $0.7 million on research and development in 2017, $0.3 million on research and development in 2016, and $0.1 million on research and development during 2015 (post-acquisition).
Customers and Distributions Channels
Manitoba Harvest sells its products through four primary retail channels: natural foods, club, conventional grocery, and e-commerce. After initially establishing the authenticity of its brand and products in the natural channel at retailers such as Whole Foods Markets and Sprouts, Manitoba Harvest expandedgateway into the club and grocery channel, initially in Canada, and then in the United States and internationally. In addition, the company sells their hemp food products and ingredients5.11 brand. 5.11 offers a wide range of pants to value-added manufacturers to be used in hemp cereals, hemp milk, nutrition and protein bars and powders, baked goods and salad dressings.
Manitoba Harvest's three largest customers accounted for approximately 36% of total sales in 2017, 47% of total sales in 2016, and approximately 63% of total sales during 2015 (post acquisition). In 2017, approximately 57% of Manitoba Harvest's gross sales were to customers in the United States and approximately 38% were to customers in Canada. The remaining 5% were primarily to customerstackle any mission in a broad range of international locations. In 2016, approximately 53%waist sizes and in seams for men and women. The fit, proprietary or patented fabrics and purpose-built designs deliver high levels of Manitoba Harvest's grosscomfort, utility and durability. Among the most popular pants today are Stryke, Taclite, Apex, Fast-Tac and Defender-Flex, which have price ranges from $55.00 to $85.00. 5.11 offers five distinct pant lines, which anchor five different apparel families. The top selling pants include Taclite, which is built with a lighter and stronger fabric to outperform 5.11's original canvas pant, Stryke, which uses our patented FlexTac fabric, Apex, which leverages 5.11's Flex-Tac technology, and 5.11's highly durable FastTac all with stain and water-resistant properties, and Defender-Flex, 5.11’s performance denim.
•Shirts, T-shirts and Polos – 5.11 tops are feature rich just like their pants. Patented document pockets, pen pockets, venting for heat, stain resistant, easy care and snag resistance are among some of these key features. Many of the shirts fabrics are lighter versions of 5.11’s patented or proprietary fabrics used in their best-selling pants. Taclite shirts $55.00 to $60.00, Stryke shirts $75.00 to $80.00 and Fast-Tac $45.00 to $50.00 are among this product category as examples. These shirts can be used as uniforms and/or casual wear. 5.11's polos are also well known for their comfort, durability and utility. 5.11 offers them in a range of proprietary fabrics that are highly fade resistant, and among some of the most popular styles are Performance Polo, Professional Polo and Utility Polo, which have price ranges from $30.00 to $45.00.
•Outerwear - 5.11 offers a wide range of outerwear solutions for on and off the job. Outerwear used on the job offer features not commonly found in lifestyle outerwear such as blood borne pathogen resistance or large areas of reflective materials. Technical system jackets, hard and soft shell as well as fleece pieces are designed to work individually or as a system. Features include innovations such as quick access side zippers and conceal pockets. 5.11 also offers technical survival outerwear systems engineered specifically for missions in extreme conditions. Products include base layers and briefs, pullovers, softshell jackets, wind pants, rain pants and jackets made of advanced fabrics.
Gear - Gear represented 24%, 25% and 23%, respectively, of 2021, 2020 and 2019 net sales, which includes multi-use backpacks, cases, load-bearing equipment, range bags, duffels, field knives, watches and gloves. 5.11 bags, pouches, and packs provide reliable, multifunctional storage options designed to excel in a wide range of operational and recreational settings. The bag offering meets the critical needs of emergency medical, public safety, and military professionals in the field, outdoor adventure enthusiasts going off the grid, and anyone who needs to maximize space and convenience packing for a weekend getaway. The recently introduce patented Hexgrid® and Gear Set™ system enhance modularity capabilities. Allowing users to have different sets per mission specific needs and attached pouches in 8 directions vs just up or down like the other systems. 5.11 also offers a wide assortment of complementary accessories including belts, hats, flashlights, gloves, watches, knives and patches.
Footwear - Footwear represented 10% of net revenue in each of the years ending 2021, 2020 and 2019 and includes a full line of functional boots, low-profile tactical shoes, trainers, and socks. First embraced by 5.11 professional customers through their field boots, 5.11 has developed and tested footwear that stands up to extreme temperatures and weather conditions. 5.11 has evolved into the current lineup of trainers, casual sneakers and oxfords that afford 5.11's consumers the same level of comfort, protection, durability and style they expect from 5.11. 5.11 trainers feature All Terrain Load Assistance System (A.T.L.A.S.) technology, which is built to help 5.11's consumers undergo the most strenuous of workouts. The 5.11 A/T Trainer adds comfort and substantially increased agility, flexibility, and durability to cross training, functional fitness and heavy workouts.
Customers and Distribution Channels
Management believes the brand’s empowering message, innovative product quality, and technically advanced designs appeal to a broad and growing consumer base. Based on the cross-over appeal of its products, 5.11 consumers fall into two core groups, professional “Prosumers” and “Everyday Consumers.” The 5.11 community was initially built by Prosumers, which consists of groups such as U.S. military personnel, law enforcement, first responders, and frontline workers, who require unwavering durability and reliability, but also value the design and comfort of the 5.11 products, providing the versatility to wear its products both on and off duty. Over time, 5.11 has expanded its reach into functionally focused Everyday Consumers, who, management believes, are inspired by Prosumers to live a life bigger than themselves and share the always be ready "ABR" mindset. 5.11 products resonate with a diverse group of Prosumers and Consumers, laying the foundation for continued expansion of a loyal and engaged consumer base into the future.
•Everyday Consumers: A blend of active, challenge-seeking and achievement-oriented gear consumers who thrive on fitness and adventure. Inspired by 5.11’s Prosumers to live a life bigger than themselves with the “Always Be Ready” mindset, these Everyday Consumers engage in a range of activities from fitness and training, to outdoor experiences such as hunting, hiking and overlanding, and purchase 5.11 products for everyday casual use. They prioritize maintaining high performance and, we believe, recognize that the functional superiority of 5.11 products aligns with their own achievement-oriented goals. They also appreciate the aesthetic and functional design of 5.11 products, which can take them from the comfort of their home to a favorite nearby hike, as well as 5.11 apparel, footwear and gear, which are as dynamic as they are. We believe the Everyday Consumers align with 5.11 products’ price points and superior value proposition.
•Prosumers: Includes everyone from the most elite U.S. military and law enforcement special forces units on the planet to everyday heroes including first responders, frontline workers, and other professionals, both on duty in mission-critical situations and off-duty. Prosumers are devoted to service, on and off-the-clock, and 5.11 endeavors to match their dedication and commitment as it produces superior technical products for every aspect of their lives. 5.11’s unique combination of durability, functional excellence, and comfort allows Prosumers to turn to 5.11 seamlessly across a variety of use-cases, whether on-duty, training, spending a weekend overlanding, backpacking, or camping. Many of the Prosumers are never fully off-duty, making the ability to serve them comfortably and reliably in all aspects of their lives a top priority. 5.11 enables them to “Always Be Ready” to meet any challenges that cross their path.
The strength of the 5.11 business model is the ability to serve the consumer however they prefer to engage while simultaneously reinforcing the 5.11 brand’s premium association and authenticity. Rather than taking the traditional channel approach to the business which management believes limits 5.11's potential, 5.11 enters a trade area with the right mix of owned stores, Consumer Wholesale, Professional Wholesale, eCommerce and marketplaces. By approaching trade areas in this manner, 5.11 shares inventory between stores and eCommerce and optimizes speed and efficiency with logistics that meet consumers’ needs wherever they prefer to shop, rather than directing them into a particular channel. This principle of product accessibility and experiential shopping drives brand building
and organic lead generation. Though each channel is able to function profitability on an individual basis, the value derived from these channels working in concert is a unique competitive strength 5.11 employs in every market in which it operates.
Direct to Consumer - 5.11’s DTC channel is comprised of its digital platform, 511tactical.com, its growing network of retail stores as well as its third-party marketplace partners. 5.11 has significantly expanded its DTC mix in the past five years, with DTC now comprising 43%, 39% and 32% of net sales for the years ended December 31, 2021, 2020 and 2019, respectively. 5.11’s website has grown significantly and drives a significant portion of its online sales. 5.11 also operates 87 company owned retail stores in 27 states, with plans to grow its footprint further. Both the online and company owned retail stores enable 5.11 to maintain direct relationships with consumers, influence the brand experience and better understand shopping preferences and behavior.
•eCommerce. 5.11 has grown its ecommerce substantially in the last few years, which has been enabled by continued investment in digital infrastructure capabilities, enhanced consumer experience through increased customization and curation, and a growing global supply chain. Since 2017, 5.11 has invested over $35 million in capabilities to further its eCommerce infrastructure, including a scalable, ERP system and new locations that enable more cost effective and timely delivery for its eCommerce orders.
•Retail. Since 2011, 5.11 has grown to 87 branded and owned retail locations around the U.S. as of December 31, 2021. Its locations provide an opportunity for 5.11 to showcase its diverse product assortment. Retail also provides an opportunity to further engage with consumers through the ABR mindset, with in-person, local community events and educational opportunities that elevate the experiential retail experience.
•Third-party marketplaces. 5.11’s third-party marketplace partners, such as Amazon, are invaluable tools for its omnichannel presence. The collaboration with the some of the largest retailers brings 5.11increased opportunity from sales and revenue to increased marketing opportunities and brand awareness. Yet at the same time, 5.11 is strategic about protecting its 5.11 brand and delivering a consistent consumer experience in the third-party marketplace.
Wholesale - The Wholesale channel is comprised of Professional Wholesale, Consumer Wholesale and International business. Wholesale sales were 57%, 61% and 68% of net sales for the years ended December 31, 2021, 2020 and 2019, respectively. The Professional Wholesale channel specializes in demand creation for formal procurement through specification of 5.11 on government contracts around the world. The Consumer Wholesale channel is comprised of dealers, outdoor specialty retailers, and military exchanges, serving predominantly Everyday Consumers. The International business includes retail locations and International eCommerce sites. International products are currently distributed in over 120 countries across the globe, but management believes there is significant opportunity for continued International expansion.
•Professional Wholesale. The Professional Wholesale channel consists of Prosumer sales relationships, and is comprised of dealers and resellers of 5.11 technical apparel, footwear and gear through governmental departments and agencies, including their retail front and eCommerce services that cater to customersProsumers that need additional services, such as tailoring of their uniforms, in a one-stop-shop experience. Requirements of outfitting entire agencies or departments necessitates carrying numerous, often infrequently used, sizes and colors of a given product. In addition, 5.11’s years of handling these types of customized orders has resulted in 5.11 having a dedicated team with specialized expertise, a skillset that is unique in the United Satesindustry. We believe 5.11’s significant investment in inventory provides a competitive advantage versus smaller less well capitalized competitors that carry low levels of inventory.
•Consumer Wholesale. The Consumer Wholesale channel consists of Everyday Consumer sales relationships, and approximately 36%is comprised of grossthird-party retailers and their eCommerce sites. 5.11 consumers can find its products at well-known big box sports, outdoor specialty retailers and military exchanges, in addition to third-party online only retailers who focus on product sales werein similar apparel, footwear and gear categories as we do. Shop-in-shop concepts at key retailers who also attract the 5.11 customer base gives consumers a tactile experience with 5.11 products, by which they can feel, try on, and compare 5.11 product offerings. Additionally, 5.11 gains online traction from discussion boards and forums that bring professional and everyday enthusiasts together to discuss 5.11 products and the category in general. Both avenues serve as catalysts to attract new customers within Canada. The remaining 11% of gross sales were primarilyand keep long time consumers loyal to customers in Asia.the 5.11 brand.
Sales and Marketing
Manitoba Harvest grows sales within existing retail partners by educating and engaging potential customers through in-store demos, consumer events and sampling.
•International. In addition to partneringdomestic whitespace, management believes there is opportunity to expand internationally as International only represented 18% of net sales in 2021. While 5.11 products are currently distributed in 120 countries across the globe, 5.11 has limited penetration in many of these countries with national natural food channel brokers, Manitoba Harvest’s sales organization consistslimited distribution in certain countries and certain dealers only carrying select styles. As such, management
believes there is significant opportunity for continued international expansion and plan to expand in EMEA, Mexico, Asia, Australia, and Canada, and will leverage third-party logistics facilities in Europe and China as well as 5.11’s owned warehouse in Australia to drive this. 5.11 sees additional opportunities to further expand internationally and plan to methodically continue the expansion of salesits business.
No individual customer represented greater than 10% of 5.11’s net revenues in 2021. At December 31, 2021 and 2020, 5.11 had approximately $40.7 million and $21.8 million, respectively, in firm backlog.
Market Opportunities
5.11 products are designed for use in a wide variety of activities, from professional to recreational and outdoor and indoor, and can be used all year long. As a result, the markets and consumers 5.11 serves are broad and deep. The market opportunity is both significant and supported by the demand of 5.11’s innovative products providing an opportunity for future, profitable growth. As a category-defining brand, management believes its innovative products serving Everyday Consumers and Prosumers will continue to expand its addressable market.
•U.S. Everyday Consumer Opportunity. 5.11 products address a large and broad Everyday Consumer base consisting of individuals from all walks of life. Everyday Consumers include small business owners, teachers, lawyers, farmers, homemakers and others, who enjoy wearing 5.11 during work, after work and on their weekend adventures. Management believes the Everyday Consumers are multi-generational, though skewing younger. These younger consumers are representative of an expanding, technically-focused consumer base looking for performance in every aspect of their daily lives. 5.11 caters to Everyday Consumers across all regions of the U.S., though management believes Everyday Consumers are located primarily in urban and suburban locations.
•U.S. Prosumer Opportunity. 5.11’s premium product offering addresses a large Prosumer base, including first responders, military personnel, on and off-duty public servants, non-active military and other functionally focused professionals with direct sales coveragesuch as contractors, utility workers, hospital professionals and others using 5.11 for professional applications. Management believes Prosumers are multi-generational, though primarily middle-aged males. Similar to our Everyday Consumers, 5.11 caters to Prosumers across all regions of over 1,000 retailthe U.S. and believes Prosumers are located primarily in urban and rural locations. The sales forceProsumer market is led bya stable, recurring source of demand for our products. Management believes that Prosumer demand is resilient through economic cycles as Prosumers continue to depend on 5.11 products regardless of the Senior Vice President of Sales and consists of sales managers, territory managers and brand ambassadors dedicated to specific regions in Canada and the United States. Manitoba Harvest’s sales force is focused on the natural, club and grocery channels, through direct key account coverage and winning sales through a focus on data for category and customer management.economic environment.
•International Opportunity. In addition to directthe domestic whitespace opportunity, management believes there is opportunity to expand to a large global market, as International only represented 18% of net sales in 2021. 5.11 products are currently distributed in 120 countries across the company usesglobe with our market entry point being the Professional Wholesale Channel. Most countries outside the US are under-penetrated with limited distribution and select dealers only carrying a networkportion of available styles. As such, management believes there is significant opportunity for continued international expansion and plan to expand in EMEA, Mexico, Asia, Australia, and Canada. 5.11’s approach will be to build out each region uniquely based on the size of the opportunity and the complexity of conducting business in a particular country. This approach currently utilizes a mixture of Professional and Consumer wholesale channels, distributors, wholesale partner stores, third party ecommerce sites as well as owned ecommerce websites and retail stores. To build this business 5.11 plans to service manyleverage its third-party logistics facilities in Europe and China as well as its owned warehouses in Australia and the US for supply chain logistics. 5.11 sees additional opportunities to further expand internationally and plan to methodically continue the expansion of its customers.business.
Manitoba Harvest focuses the majority of sales spending in three key areas: demonstrations/sampling, fixed trade spending and promotions. Successful product demonstrations within the club and grocery channels have helped drive increased sales productivity. Manitoba Harvest utilizes fixed trade spending to secure end-cap positions, ad space and off-shelf displays at various retailers. Additionally, they strategically utilize promotions to position its products in prime display space at retailers.
Competition
The emerging hemp foods category has a limited number of participants that offer a minimal number of hemp-based products while focusing on a broader assortment of food items. While increasing, competition remains limited due to restricted raw hemp seed access in the United States. Manitoba Harvest’s strong supplier relationships, regulated access to hemp seeds and deep knowledge of the growing and harvesting of hemp afford the company with a unique competitive advantage.
Manitoba Harvest has the highest level of global certification in food safety and quality and is the first and only hemp-based food company to achieve British Retail Consortium (“BRC”) Global Food Safety Initiative certification.
Suppliers
Manitoba Harvest is strategically located near their supply of hemp in Canada. The commercial cultivation of hemp was authorized in Canada in 1998 with the implementation of the Canadian Industrial Hemp Regulations. This governs the cultivation, processing, transportation, sale, import and export of industrial hemp. Industrial hemp is viewed by the Canadian and agricultural industry as a valuable new alternative crop that complements crop production rotations and offers significant economic opportunity through numerous end uses. The prairie provinces of Manitoba, Saskatchewan and Alberta have emerged as a leading region for growing hemp due to the ideal agricultural characteristics: a long growing season, sufficient moisture levels, and supportive local governments that view hemp as a strategic crop. The adaptability of hemp makes it ideal for areas of the provinces that have limited cropping options and where high value crops such as edible beans and sunflowers are considered high risk.
Based on its proximity to many of its growers, Manitoba Harvest has developed long-standing relationships with hemp suppliers and currently maintains relationships that provide access to over 60% of the hemp acreage in Canada. Manitoba Harvest has a rigorous qualification process for its suppliers - maintaining an ongoing supplier scorecard and choosing to purchase hemp from high quality growers. With limited exception, farmers working with Manitoba Harvest are exclusive to them. Manitoba Harvest works with approximately 110 conventional hemp growers (48,750 acres), approximately 20 organic growers (18,000 acres), and 7 hemp seed cleaners. As early leaders of the hemp legalization movement, Manitoba Harvest’s founders have developed in-house expertise on the plant, which they share with their hemp grower partners to help them achieve optimal yield and quality harvests.
Manitoba Harvest processes 100% of its Hemp Hearts, hemp oil and protein powder at its dedicated hemp food products manufacturing facility. Manitoba Harvest has leveraged nearly two decades of hemp food manufacturing expertise and has worked with research scientists to develop proprietary processing technology that is specific to hemp. Their facility in Winnipeg is 32,000 square feet and has an annual processing capacity of 35 million pounds of hemp seed. With the acquisition of HOCI in December 2015, Manitoba Harvest added a newly constructed 37,000 square foot facility capable of processing 50 million pounds of hemp seed.
Intellectual Property
Manitoba Harvest relies on brand name recognition and premium natural and organic offerings in the hemp food market to differentiate itself from the competition. Manitoba Harvest holds several trademark registrations in multiple jurisdictions, primarily the United States and Canada.
Regulatory Environment
Management is not aware of any existing, pending or contingent liabilities that could have a material adverse effect on Manitoba Harvest’s business. Manitoba Harvest is proactive regarding regulatory issues and is in compliance with all relevant regulations. Management is not aware of any potential environmental issues.
Employees
As of December 31, 2017, Manitoba Harvest employed approximately 140 persons. None of Manitoba Harvest's employees are subject to collective bargaining agreements. Manitoba Harvest believes its relationship with its employees is good.
Niche Industrial Businesses
Advanced Circuits
Overview
Compass AC Holdings, Inc. (“Advanced Circuits,Circuits” or “ACI”), headquartered in Aurora, Colorado, is a provider of small-run, quick-turn and volume production rigid PCBs,printed circuit boards, or “PCBs”, throughout the United States. Advanced Circuits also provides its customers with assembly services in order to meet its customers’ complete PCB needs.PCBs are a vital component of virtually all electronic products. The small-run and quick-turn portions of the PCB industry are characterized by customers requiring high levels of responsiveness, technical support and timely delivery. DueWe made loans to, the critical roles that PCBs play in the research and development process of electronics, customers often place more emphasis on the turnaround time and quality of a customized PCB than on the price. Advanced Circuits meets this market need by manufacturing and delivering custom PCBs in as little as 24 hours, providing customers with over 98% error-free production and real-time customer service and product tracking 24 hours per day.
History of Advanced Circuits
Advanced Circuits commenced operations in 1989 through the acquisition of a small Denver-based PCB manufacturer. During its first years of operations, Advanced Circuits focused exclusively on manufacturing high volume, production run PCBs with a small group of proportionately large customers. After the loss of a significant customer in the early 1990s, Advanced Circuits began focusing on developing a diverse customer base, and in particular, on meeting the demands of equipment manufacturers with low-volume, high-margin, customized small-run and quick-turn PCBs.
We purchased a controlling interest in, Advanced Circuits, on May 16, 2006. Since our acquisition,2006 for approximately $81.0 million.
On October 13, 2021, the Company, as the representative of the holders of stock and options of Advanced Circuits, entered into a definitive plan of merger to sell all of the outstanding securities of Advanced Circuits. Advanced Circuits has completed several add-on acquisitions thatbeen classified as held for sale at December 31, 2021. Refer to Note D - Discontinued Operations for additional information. Altor Solutions
FFI Compass, Inc. ("Altor Solutions" or "Altor") (formerly "Foam Fabricators"), headquartered in Scottsdale, Arizona, is a designer and manufacturer of custom molded protective foam solutions and OEM components made from expanded theirpolystyrene (EPS) and other expanded polymers. Altor provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products and others. Altor’s molded foam solutions offer shock and vibration protection, surface protection, temperature control, resistance to water absorption and vapor transmission and other protective properties critical for shipping small, delicate items, heavy equipment or temperature-sensitive goods. Altor operates 16 molding and fabricating facilities across North America, creating a geographic footprint of strategically located manufacturing plants to efficiently serve national customer base in various industriesaccounts. We acquired Altor on February 15, 2018 for a purchase price of approximately $253.4 million. We currently own 100.0% of the outstanding stock of Altor on a primary basis and sectors,91.2% on a fully diluted basis.
Arnold
AMT Acquisition Corp. ("Arnold") serves a variety of markets including the aerospace and defense, industrygeneral industrial, motorsport/ automotive, oil and gas, medical, energy, reprographics and advertising specialties. Over the course of more than 100 years, Arnold has successfully evolved and adapted its products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold produces high performance permanent magnets (PMAG), turnkey electric motors ("Ramco"), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Arnold has expanded globally and built strong relationships with its customers worldwide. Arnold is the largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems. Arnold is headquartered in Rochester, New York. We made loans to, and purchased a controlling interest in, Arnold on March 5, 2012 for approximately $128.8 million. We currently own 98.0% of the outstanding stock of Arnold on a primary basis and 85.5% on a fully diluted basis.
Sterno
The Sterno Group LLC ("Sterno"), headquartered in Corona, California, is the parent company of Sterno Products, LLC ("Sterno Products") and Rimports, LLC. Sterno is a leading manufacturer and marketer 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. We made loans to, and purchased all of the equity interests in, Sterno on October 10, 2014 for approximately $160.0 million. Sterno offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps through their Sterno Products division. In February 2018, Sterno acquired Rimports Inc. ("Rimports"), which is a manufacturer and distributor of branded and private label scented wax cubes and warmer products used for home decor and fragrance systems. We currently own 100.0% of the outstanding stock of Sterno on a primary basis and 87.1% on a fully diluted basis.
Our businesses also represent our operating segments. See “Our Businesses” and “Note F – Operating Segment Data” to our Consolidated Financial Statements for further discussion of our businesses as our operating segments, including information related to geographies. 2021 Distributions
Common shares - For the 2021 fiscal year we declared distributions to our common shareholders totaling $2.21 per share, inclusive of our special cash distribution of $0.88 per share in connection with our tax reclassification.
Preferred shares - For the 2021 fiscal year we declared distributions to our preferred shareholders totaling $1.8125 per share on our Series A Preferred Shares, $1.96875 per share on our Series B Preferred Shares and $1.96875 per share on our Series C Preferred Shares.
Tax Reporting
On August 3, 2021, the shareholders of CODI approved amendments to the Second Amended and Restated Trust Agreement of the Trust and the long-lead sector. Over 50%Fifth Amended and Restated Operating Agreement of Advanced Circuits’ sales are derived from highly profitable small-runthe Company to allow the Company’s Board of Directors (the “Board”) to cause the Trust to elect to be treated as a corporation for U.S. federal income tax purposes (the “tax reclassification”) and, quick-turn production PCBs. Advanced Circuits’ success is demonstrated byat its broad base of over 11,000 customers with which it does business throughoutdiscretion in the year.
Industryfuture, cause the Trust to be converted to a corporation. Following the shareholder vote, the Board resolved to cause the Trust to elect to be treated as a corporation for U.S. federal income tax purposes. The Trust was taxed as a partnership for U.S. federal income tax purposes since January 1, 2007 and until the tax reclassification became effective on September 1, 2021.
The PCB industry,Trust will be treated as a corporation for any taxable period beginning on or after the tax reclassification. Income, gain, loss, deduction and credit from the Trust will no longer be passed through to the Trust shareholders. The Trust will issue its final Schedule K-1s for the taxable period beginning January 1, 2021 and ending August 31, 2021, the last day on which consiststhe Trust was treated as a partnership for U.S. federal income tax purposes. Thereafter the Trust will stop issuing annual Form 1065, Schedule K-1s and Trust shareholders will no longer be subject to current taxation on the Trust’s earnings. Trust shareholders subject to rules regarding “unrelated business taxable income” (or “UBTI”) will no longer be allocated UBTI from the Trust.
The Trust will be required to file Form 1120, U.S. Corporation Income Tax Return on an annual basis and for all taxable periods beginning on or after the tax reclassification. In addition, distribution with respect to Trust shares (including Trust preferred shares) will now be reported on Form 1099-DIV, instead of both large global PCB manufacturerson Schedule K-1.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file reports with the Securities and small regional PCB manufacturers, is a vital componentExchange Commission (the "SEC" or the "Commission"), including Forms S-1 and S-3 under the Securities Act of 1933, as amended (the "Securities Act"), and Forms 10-K, 10-Q, and 8-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which include exhibits, schedules and amendments to all electronic equipment supply chains, as PCBs serve as the foundation for virtually all electronic products, including cellular telephones, appliances, personal computers, routers, switches and network servers. PCBs are used by manufacturers of these types of electronic products,those reports, as well as other filings required by the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. In addition, copies of such reports, and amendments thereto, are available free of charge through our website at http://www.ir.compassequity.com as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.
Organizational Structure (1)
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| 1) | The percentage holdings shown in respect to the trust reflect the ownership of the Trust common shares as of December 31, 2021. |
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| 2) | Path Spirit Limited is the ultimate controlling person of CGI Holdings Maygar LLC. CGI Maygar Holdings, LLC owns approximately 12.0% of the Trust common shares and is our single largest holder. Our non-affiliated holders of common shares own approximately 85.1% of the Trust common shares. The remaining 2.9% of Trust common shares are owned by our Directors and Officers. Mr. Sabo, our Chief Executive Officer, is not a director, officer or member of CGI Maygar Holdings, LLC or any of its affiliates. |
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| 3) | 57.8%beneficially owned by certain persons who are employees and partners of our Manager. C. Sean Day, the Chairman of our Board of Directors, and the former founding partners of the Manager, are non-managing members. |
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| 4) | Mr. Sabo is a partner of this entity. The Manager owns less than 1.0% of the common shares of the Trust. |
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| 5) | The Allocation Interests, which carry the right to receive a profit allocation, represent less than 0.1% equity interest in the Company. |
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| 6) | On October 13, 2021, we entered into an agreement - subject to closing conditions - to sell ACI. ACI has been classified as held-for-sale at December 31, 2021. |
Our Manager
Our Manager, CGM, has been engaged to manage the day-to-day operations and affairs of the Company and to execute our strategy, as discussed below. Collectively, our management team has extensive experience in acquiring and managing small and middle market businesses. We believe our Manager is unique in the marketplace in terms of the success and experience of its employees in acquiring and managing diverse businesses of the size and general nature of our businesses. We believe this experience will provide us with an advantage in executing our overall strategy. Our management team devotes substantially all of its time to the affairs of the Company.
We have entered into a management services agreement, (the “Management Services Agreement” or “MSA”) pursuant to which our Manager manages the day-to-day operations and affairs of the Company and oversees the management and operations of our businesses. We pay our Manager a quarterly management fee for the services it performs on our behalf. In addition, certain persons who are employees and partners of our Manager receive a profit allocation with respect to its Allocation Interests in us. All of the Allocation Interests in us are owned by Sostratus LLC. Payment of profit allocations to Sostratus LLC can occur for each of our subsidiaries during the 30-day period following the fifth anniversary of the date upon which we acquired a controlling interest in that business (a "Holding Event") to the extent contribution based profit has been earned and upon the sale of a subsidiary from which there is a realizable gain (a "Sale Event"). See Part III, Item 13 “Certain Relationships and Related Transactions, and Director Independence” for further descriptions of the management fees and profit allocations. The Company’s Chief Executive Officer and Chief Financial Officer are employees of our Manager and have been seconded to us. Neither the Trust nor the LLC has any other employees. Although our Chief Executive Officer and Chief Financial Officer are employees of our Manager, they report directly to the LLC’s board of directors. The management fee paid to our Manager covers all expenses related to the services performed by our Manager, including the compensation of our Chief Executive Officer and other personnel providing services to us. The LLC reimburses our Manager for the compensation and related costs and expenses of our Chief Financial Officer and his staff, who dedicate substantially all of their time to the affairs of the Company.
Market Opportunity
We acquire and actively manage small and middle market businesses. We characterize small to middle market businesses as those that generate annual cash flows of up to $100 million per year. We believe that the acquisition market for these businesses is highly fragmented and often provides opportunities to purchase at more attractive prices and achieve better outcomes for our shareholders. We believe this is driven by the following factors:
•third-party financing for these acquisitions is often less available or terms are less favorable for the borrower;
•sellers of these businesses frequently consider non-economic factors, such as legacy or the effect of the sale on their employees;
•these businesses are more likely to be sold outside of an auction process or as part of a limited process; and
•"add-on" acquisitions can often be completed at attractive multiples of cash flow.
Frequently, opportunities exist to support and augment existing management at such businesses and improve the performance of these businesses upon their acquisition through active management. We are business builders rather than asset traders. In the past, our management team has acquired businesses that were owned by entrepreneurs or large corporate parents. In these cases, our management team has frequently found opportunities to profitably invest in areas of the acquired businesses beyond levels that existed at the time of acquisition. In addition, our management team has frequently found that processes such as financial reporting and management information systems of acquired businesses may be improved, leading to improvements in reporting and operations and ultimately earnings and cash flow. Finally, our management team often acts as a business development arm for our businesses to pursue organic or external growth strategies that may not have been pursued by their previous owners.
Our Strategy
CODI’s permanent capital structure enables us to invest in people, processes, culture, and growth opportunities that drive transformational change. We have two primary strategies that we use to support long-term value creation. First, we focus on growing the earnings and cash flow from our acquired businesses and help them professionalize at scale. We believe that the scale and scope of our businesses give us a diverse base of cash flow upon which to further build. Second, we identify, perform due diligence on, negotiate and consummate additional platform acquisitions of small to middle market businesses in attractive industry sectors in accordance with acquisition criteria established by the board of directors.
Management Strategy
Our management strategy involves the proactive financial and operational management of the businesses we own in order to increase cash flows and shareholder value. Our Manager actively oversees and supports the management teams engagedof each of our businesses by, among other things:
•recruiting and retaining talented managers to operate our businesses using structured incentive compensation programs, including non-controlling equity ownership, tailored to each business;
•regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;
•identifying and aligning with external policy and performance tailwinds such as those influenced by growing climate, health, and social justice concerns (and similar environmental, social and governance ("ESG") drivers);
•assisting management in their analysis and pursuit of prudent organic growth strategies;
•identifying and working with management to execute attractive external growth and acquisition opportunities;
•assisting management in controlling and right-sizing overhead costs;
•nurturing an internal culture of transparency, alignment, accountability and governance, including regular reporting;
•professionalizing our subsidiaries at scale; and
•forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.
Specifically, while our businesses have different growth opportunities and potential rates of growth, we expect our Manager to work with the management teams of each of our businesses to increase the value of, and cash generated by, each business through various initiatives, including:
•making selective capital investments to expand geographic reach, increase capacity, or reduce manufacturing costs of our businesses;
•investing in product research and development for new products, processes or services for customers;
•improving and expanding existing sales and marketing programs;
•pursuing reductions in operating costs through improved operational efficiency or outsourcing of certain processes and products; and
•consolidating or improving management of certain overhead functions.
Our businesses typically acquire and integrate complementary businesses. We believe that complementary add-on acquisitions improve our overall financial and operational performance by allowing us to:
•leverage manufacturing and distribution operations;
•leverage branding and marketing programs, as well as customer relationships;
•add experienced management or management expertise;
•increase market share and penetrate new typesmarkets; and
•realize cost synergies by allocating the corporate overhead expenses of equipmentour businesses across a larger number of businesses and technologies.by implementing and coordinating improved management practices.
Several significant trendsAcquisition Strategy
Our acquisition strategy is to acquire businesses that we expect to produce stable and growing earnings and cash flow. In this respect, we expect to make platform acquisitions in industries other than those in which our businesses currently operate if we believe an acquisition presents an attractive opportunity. We believe that attractive opportunities will continue to present themselves, as private sector owners seek to monetize their interests in long-standing and privately-held businesses and large corporate parents seek to dispose of their “non-core” operations.
Our ideal acquisition candidate has the following characteristics:
•is a leading branded consumer or niche industrial company headquartered in North America;
•maintains highly defensible position in the markets it serves and with customers;
•operates in an industry with favorable long-term macroeconomic trends;
•has a strong management team, either currently in place or previously identified, and meaningful incentives;
•has low technological and/or product obsolescence risk; and
•maintains a diversified customer and supplier base.
We benefit from our Manager’s ability to identify potential diverse acquisition opportunities in a variety of industries. In addition, we rely upon our management team’s experience and expertise in researching and valuing prospective target businesses, as well as negotiating the ultimate acquisition of such target businesses. In particular, because there may be a lack of information available about these target businesses, which may make it more difficult to understand or appropriately value such target businesses, on our behalf, our Manager:
•engages in a substantial level of internal and third-party due diligence;
•critically evaluates the target management team;
•identifies and assesses any financial and operational strengths and weaknesses of the target business;
•analyzes comparable businesses to assess financial and operational performances relative to industry competitors;
•actively researches and evaluates information on the relevant industry; and
•thoroughly negotiates appropriate terms and conditions of any acquisition.
The process of acquiring new businesses is both time-consuming and complex. Our management team historically has taken from two to twenty-four months to perform due diligence, negotiate and close acquisitions. Although our management team is at various stages of evaluating several transactions at any given time, there may be periods of time during which our management team does not recommend any new acquisitions to us. Even if an acquisition is recommended by our management team, our board of directors may not approve it.
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 company level largely through our existing credit facility. We believe, and it has been our experience, that having the ability to finance our acquisitions with capital resources raised by us, rather than negotiating separate third-party financing, provides us with an advantage in successfully acquiring attractive businesses by minimizing delay and closing conditions that are presentoften related to acquisition-specific financings. In addition, our strategy of providing this intercompany debt financing within the PCB manufacturing industry. Productioncapital structure of PCBs in North America has declined in recent years duethe businesses we acquire and manage allows us the ability to increased competition for volume productiondistribute cash to the parent company through monthly interest payments and amortization of PCBs from Asian competitors benefiting from both lower labor costsprinciple on these intercompany loans.
Upon acquisition of a new business, we rely on our Manager’s experience and less restrictive wasteexpertise to work efficiently and environmental regulations. Asian based manufacturerseffectively with the management of PCBs are capitalizing on their lower labor coststhe new business to jointly develop and increasing their market share of volume production PCBs, which are used in high volume consumer electronics application such as computers and cell phones. This “offshoring” of high-volume production orders has placed increased pricing pressure and margin compression on many small domestic manufacturers that are no longer operating at full capacity. Many of these small producers are choosing to cease operations, rather than operate atexecute a loss, as their scale, plant design and customer relationships do not allow them to focus profitablysuccessful business plan.
Strategic Advantages
Based on the small-runexperience of our management team and quick-turn sectorsits ability to identify and negotiate acquisitions, we believe we are well-positioned to acquire additional businesses. Our management team has strong relationships with business brokers, investment and commercial bankers, accountants, attorneys and other potential sources of the market. While Asian manufacturersacquisition opportunities. In addition, our management team has a successful track record of acquiring and managing small-to-middle market businesses in various industries. In negotiating these acquisitions, we believe our management team has been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned businesses, management buy-outs and reorganizations.
Our management team has a large network that we estimate to be approximately 2,000 deal intermediaries who we expect to expose us to potential acquisitions. Through this network, as well as our management team’s proprietary transaction sourcing efforts, we have made large market share gainsa substantial pipeline of potential acquisition targets. Our management team also has a well-established network of contacts, including professional managers, attorneys, accountants and other third-party consultants and advisors, who may be available to assist us in the PCB industry overall, small-runperformance of due diligence and quick-turn production, somethe negotiation of acquisitions, as well as the more complex volume production,management and military production have remained strong inoperation of our acquired businesses.
Finally, because we intend to fund acquisitions through the United States. Rapid advances in technology are significantly shortening product life-cycles and placing increased pressure on original equipment manufacturers ("OEMs") to develop new products in shorter periodsutilization of time. In response to these pressures, OEMs invest heavily in research and development, which results in a demand for PCB companies that can offer engineering support and quick-turn production servicesour 2021 Revolving Credit Facility, we expect to minimize the product development process. Additionally, increased complexity of electronic equipment requires maintainingdelays and closing conditions typically associated with transaction specific financing, as is typically the production infrastructure necessary to manufacture PCBs of increasing complexity. This often requires significant capital expenditures and has acted to reduce the competitiveness of local and regional PCB manufacturers lacking the scale to makecase in such investments.
Both globally and domestically, the PCB marketacquisitions. We believe this advantage can be separated into three categories baseda powerful one, especially in a tight credit environment, and is highly unusual in the marketplace for acquisitions in which we operate.
Valuation and Due Diligence
When evaluating businesses or assets for acquisition, our management team performs rigorous due diligence and a financial evaluations process including an evaluation of the operations of the target business and the outlook for its industry. While valuation of a business is a subjective process, we define valuations under a variety of analyses, including:
•discounted cash flow analyses;
•evaluation of trading values of comparable companies;
•expected value matrices; and
•examination of comparable recent transactions.
One outcome of this process is a projection of the expected cash flows from the target business. A further outcome is an understanding of the types and levels of risk associated with those projections. While future performance and projections are always uncertain, we believe that with detailed due diligence, future cash flows will be better estimated and the prospects for operating the business in the future better evaluated. To assist us in identifying material risks and validating key assumptions in our financial and operational analysis, in addition to our own analysis, we engage third-party experts to review key risk areas, including legal, tax, regulatory, accounting, insurance and environmental. We also engage technical, operational or industry consultants, as necessary.
A further critical component of the evaluation of potential target businesses is the assessment of the capability of the existing management team, including recent performance, expertise, experience, culture and incentives to perform. Where necessary, and consistent with our management strategy, we actively seek to augment, supplement or replace existing members of management who we believe are not likely to execute our business plan for the target business. Similarly, we analyze and evaluate the financial and operational information systems of target businesses and, where necessary, we enhance and improve those existing systems that are deemed to be inadequate or insufficient to support our business plan for the target business.
Environmental, Social and Governance Practices
In the last few years, companies, investors and policymakers have focused more attention on required lead time- and order volume:
Small-run PCBs — These PCBshave made investments in - companies that are considered leaders in ESG practices. Another way to think about ESG practices is to consider them, collectively, to be long-term performance factors designed to enable real owners to oversee their investments and balance the needs of important stakeholders in doing so. That same concept is mirrored in Compass Diversified’s business model: by bringing the virtues of a diverse set of middle market businesses that are typically manufactured for customersprivately held to public markets - including to individual investors who would not otherwise have access - we are helping to democratize market access while preserving professional oversight protections.
Our long-term, do-good-by-doing-well, real owners approach is reflected in researchthe companies we acquire and development departmentsmanage, which, among them, provide products and services that support:
•medical and first responder needs;
•education programs;
•outdoor health and recreational pursuits; and
•e-commerce and technology providers.
In addition, a number of OEMs,our businesses have created robust recycling and academic institutions. Small-run PCBsresponsible sourcing programs, strong human capital management and diversity, equity and inclusion ("DEI") programs. We believe each of these creates long-term financial sustainability as well as making our shared world a better place.
Our long-term responsible approach is also reflected in how we manage ourselves.We have been and remain committed to being a responsible partner to our subsidiaries and are manufacturedproud stewards of corporate citizenship.
Financing
We incur third party debt financing almost entirely at the Company level, which we use, in combination with our equity capital, to provide debt financing to each of our businesses and to acquire additional businesses. We believe this financing structure is beneficial to the specificationsfinancial and operational activities of each of our businesses by aligning our interests as both equity holders of, and lenders to, our businesses, in a manner that we believe is more efficient than each of our businesses borrowing from third-party lenders.
Debt Financing
2021 Credit Facility
On March 23, 2021, we entered into a Second Amended and Restated Credit Agreement to amend and restate the customer, within certain manufacturing guidelines designed2018 Credit Facility. The 2021 Credit Facility provides for revolving loans, swing line loans and letters of credit up to a maximum aggregate amount of $600 million and also permits the Company, prior to the applicable maturity date, to increase speedthe revolving loan commitment and/or obtain term loans in an aggregate amount of up to $250 million, subject to certain restrictions and reduce production costs. Prototypingconditions. All amounts outstanding under the 2021 Revolving Credit Facility will become due on March 23, 2026, which is a critical stagethe maturity date of loans advanced under the 2021 Revolving Credit Facility.
The 2021 Credit Facility provides for letters of credit under the 2021 Revolving Credit Facility in the research and development of new products. These small-runs are used in the design and launch of new electronic equipment and are typically ordered in volumes of 1an aggregate face amount not to 50 PCBs. Because the small-run is used primarily in the research and development phase of a new electronic product, the life cycle is relatively short and requires accelerated delivery time frames of usually less than five days and very high, error-free
quality. Order, production and deliveryexceed $100 million outstanding at any time, as well as responsivenessswing line loans of up to $25 million outstanding at one time. At no time may the (i) aggregate principal amount of all amounts outstanding under the 2021 Revolving Credit Facility, plus (ii) the aggregate amount of all outstanding letters of credit and swing line loans, exceed the borrowing availability under the 2021 Credit Facility. At December 31, 2021, we had outstanding letters of credit totaling approximately $1.0 million. The borrowing availability under the 2021 Revolving Credit Facility at December 31, 2021 was approximately $599.0 million.
The 2021 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. (See "Note I - Debt" to the consolidated financial statements for more detail regarding our 2021 Credit Facility). Senior Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% Notes due 2032 (the "2032 Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with respectRule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is payable in cash on July 15th and January 15th of each year. The 2032 Notes are key factors for customersgeneral unsecured obligations of the Company and are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes was used to repay debt outstanding under the 2021 Credit Facility.
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Notes due 2029 (the "2029 Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2029 Notes were issued pursuant to an indenture, dated as PCBsof March 23, 2021 (the “2029 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2029 Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on April 15th and October 15th of each year. The 2029 Notes are indispensablegeneral unsecured obligations of the Company and are not guaranteed by our subsidiaries.
The proceeds from the sale of the 2029 Notes was used to their researchrepay debt outstanding under the 2018 Credit Facility in connection with our entry into the 2021 Credit Facility, as described above, and development activities.to redeem our 8.000% Senior Notes due 2026 (the “2026 Notes”).
Equity Financing
Trust Common Shares
The Trust is authorized to issue 500,000,000 Trust common shares and the Company is authorized to issue a corresponding number of LLC interests. The Company will, at all times have an equal amount of LLC interests outstanding as Trust shares. At December 31, 2021, there were 68.7 million Trust common shares outstanding.
Quick-Turn Production PCBs — These PCBs16
Common Share Offering
On September 7, 2021, we filed a prospectus supplement pursuant to which we may, but we have no obligation to, issue and sell up to $500 million shares of the common shares of the Trust in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions, the trading price of Trust common shares and determinations by us regarding appropriate sources of funding. In connection with this offering, we entered into an At Market Issuance Sales Agreement with B. Riley Securities, Inc. (“B. Riley”) and Goldman Sachs & Co. LLC (“Goldman”) pursuant to which we may sell common shares of the Trust having an aggregate offering price of up to $500 million, from time to time through B. Riley and Goldman, acting as sales agents and/or principals. We sold 3,837,885 Trust common shares during the year ended December 31, 2021 and received net proceeds of approximately $115.1 million. We incurred approximately $2.1 million in commissions payable to the Sales Agents during the year ended December 31, 2021.
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 million Trust preferred shares and the Company is authorized to issue a corresponding number of Trust Interests. We issued 4,000,000 7.250% Series A Preferred Shares in 2017, 4,000,000 7.875% Series B Preferred Shares in 2018 and 4,600,000 7.875% Series C Preferred Shares in 2019.
We intend to finance future acquisitions through our 2021 Revolving Credit Facility, cash on hand and, if necessary, additional equity and debt financings. We believe, and it has been our experience, that having the ability to finance our acquisitions with the capital resources raised by us, rather than negotiating separate third party financing specifically related to the acquisition of individual businesses, provides us with an advantage in acquiring attractive businesses by minimizing delay and closing conditions that are used for intermediate stages of testing for new products prioroften related to full scale production. After a new product has successfully completed the small-run phase, customers undergo test marketing and other technical testing. This stage requires production of larger quantities of PCBs in a short period of time, generally 10 days or less, while it does not yet require high production volumes. This transition stage between low-volume small-run production and volume production is known as quick-turn production. Manufacturing specifications conform strictly to end product requirements and order quantities are typically in volumes of 10 to 500. Similar to small-run PCBs, response time remains crucial as the delivery of quick-turn PCBs can be a gating itemacquisition-specific financings. In this respect, we believe that in the development of electronic products. Orders for quick-turn production PCBs conform specificallyfuture, we may need to pursue additional debt or equity financings, or offer equity in Holdings or target businesses to the customer’s exact endsellers of such target businesses, in order to fund multiple future acquisitions.
Our Businesses
We categorize the businesses we own into two separate groups of businesses (i) branded consumer businesses, and (ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we believe capitalize on a valuable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in their particular product requirements.
Volume Production PCBs — These PCBs, which we sometimes refer tocategory. Niche industrial businesses are characterized as “long lead”those businesses that focus on manufacturing and “sub-contract”selling particular products and industrial services within a specific market sector. We believe that our niche industrial businesses are usedleaders in the full scale production of electronic equipment and specifications conform strictly to end product requirements. Volume Production PCBs are ordered in large quantities, usually over 100 units, and response time is less important, ranging between 15 days to 10 weeks or more.
These categories can be further distinguished based on board complexity, with each portion facing different competitive threats. Advanced Circuits competes largely in the small-run and quick-turn production portions of the North Americantheir specific market which have not been significantly impacted by Asian-based manufacturers due to the quick response time required for these products. Management believes the North American PCB market was estimated to be approximately $3.5 billion in 2017.
Products and Services
A PCB is comprised of layers of laminate and contains patterns of electrical circuitry to connect electronic components. Advanced Circuits typically manufactures 2 to 20 layer PCBs, and has the capability to manufacture even higher layer PCBs. The level of PCB complexity is determined by several characteristics, including size, layer count, density (line width and spacing), materials and functionality. Beyond complexity, a PCB’s unit cost is determined by the quantity of identical units ordered, as engineering and production setup costs per unit decrease with order volume, and required production time, as longer times often allow increased efficiencies and better production management. Advanced Circuits primarily manufactures lower complexity PCBs.
Advanced Circuits assists its customers throughout the life-cycle of their products, from product conception through volume production. Advanced Circuits works closely with customers throughout each phase of the PCB development process, beginning with the PCB design verification stage using its unique online FreeDFM.com tool, FreeDFM.com™, which enables customers to receive a free manufacturability assessment report within minutes, resolving design problems that would prohibit manufacturability before the order process is completed and manufacturing begins. The combination of Advanced Circuits’ user-friendly website and its design verification tool reduces the amount of human labor involved in the manufacture of each order as PCBs move from Advanced Circuits’ website directly to its computer numerical control, or CNC, machines for production, saving Advanced Circuits and customers cost and time. As a result of its ability to rapidly and reliably respond to the critical customer requirements, Advanced Circuits receives a premium for their small-run and quick-turn PCBs as compared to volume production PCBs.
Advanced Circuits manufactures all high margin small-runs and quick-turn orders internally and occasionally utilizes external partners to manufacture production orders that do not fit within its capabilities or capacity constraints at a given time. As a result, Advanced Circuits constantly adjusts the portion of volume production PCBs produced internally to both maximize profitability and ensure that internal capacity is fully utilized.sector.
The following table shows Advanced Circuits’ gross revenue by products and services for the periods indicated:
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| | Gross Sales by Products and Services (1) | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | Small-run Production | 20.4 | % | | 21.8 | % | | 22.5 | % | |
| | Quick-Turn Production | 33.0 | % | | 31.8 | % | | 31.0 | % | |
| | Volume Production (including assembly) | 44.8 | % | | 45.2 | % | | 46.0 | % | |
| | Third Party | 1.8 | % | | 1.2 | % | | 0.5 | % | |
| | Total | 100.0 | % | | 100.0 | % | | 100.0 | % | |
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(1)
| As a percentage of gross sales, exclusive of sale discounts. |
Competitive Strengths
Advanced Circuits has established itself as a leading provider of small-run and quick-turn PCBs in North America and focuses on satisfying customer demand for on-time delivery of high-quality PCBs. Advanced Circuits’ management believes the following factors differentiate it from many industry competitors:
Numerous Unique Orders Per Day — Advanced Circuits receives on average over 300 customer orders per day. Due to the large quantity of orders received, Advanced Circuits is able to combine multiple orders in a single panel design prior to production. Through this process, Advanced Circuits is able to reduce the number of costly, labor intensive equipment set-ups required to complete several manufacturing orders. As labor represents the single largest costpercentage of production, management believes this capability gives Advanced Circuits a unique advantage over other industry participants.
Diverse Customer Base — Advanced Circuits possesses a customer base with little industry or customer concentration exposure. Fornet revenue and operating income each of our businesses contributed to our consolidated results since the date of acquisition for the years ended December 31, 2021, 2020 and 2019, and the total assets of each of our businesses as a percentage of the consolidated total as of December 31, 2021 and 2020.
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| | Net Revenue | | Operating Income (1) | | Total Assets |
| | Year ended December 31, | | Year ended December 31, | | Year ended December 31, |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| | | | | | | | | | | | | | | | |
| Branded Consumer: | | | | | | | | | | | | | | | | |
| 5.11 | | 24.2 | % | | 29.5 | % | | 30.8 | % | | 19.9 | % | | 30.5 | % | | 30.6 | % | | 16.4 | % | | 20.7 | % |
| BOA | | 9.0 | % | | 1.9 | % | | n/a | | 17.1 | % | | (1.0) | % | | n/a | | 17.1 | % | | 21.8 | % |
| Ergobaby | | 5.1 | % | | 5.5 | % | | 7.1 | % | | 4.6 | % | | 5.3 | % | | 14.2 | % | | 5.2 | % | | 6.6 | % |
| Lugano | | 2.9 | % | | n/a | | n/a | | 5.0 | % | | n/a | | n/a | | 11.3 | % | | n/a |
| Marucci Sports | | 6.4 | % | | 3.2 | % | | n/a | | 8.3 | % | | (4.3) | % | | n/a | | 9.1 | % | | 8.6 | % |
| Velocity Outdoor | | 14.7 | % | | 15.9 | % | | 11.7 | % | | 20.0 | % | | 25.2 | % | | (37.1) | % | | 9.3 | % | | 10.7 | % |
| | 62.2 | % | | 55.9 | % | | 49.6 | % | | 74.9 | % | | 55.6 | % | | 7.8 | % | | 68.3 | % | | 68.4 | % |
| Niche Industrial: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Arnold Magnetics | | 7.6 | % | | 7.3 | % | | 9.5 | % | | 6.0 | % | | 2.1 | % | | 11.4 | % | | 5.3 | % | | 4.8 | % |
| Altor Solutions | | 9.8 | % | | 9.6 | % | | 9.6 | | | 9.1 | % | | 16.1 | % | | 19.5 | | | 11.0 | % | | 11.4 | % |
| Sterno | | 20.4 | % | | 27.2 | % | | 31.3 | % | | 10.0 | % | | 26.1 | % | | 61.3 | % | | 12.0 | % | | 15.4 | % |
| | 37.8 | % | | 44.1 | % | | 50.4 | % | | 25.1 | % | | 44.4 | % | | 92.2 | % | | 28.3 | % | | 31.6 | % |
| Corporate | | — | | | — | | | — | | | — | | — | | | — | | | 3.4 | % | | (0.1) | % |
| | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
(1) Operating income (loss) reflected is as a percentage of the total contributed by the businesses and does not include expenses incurred at the corporate level.
Branded Consumer Businesses
5.11
Overview
5.11 is a global lifestyle brand and innovator of purpose-built technical apparel, footwear and gear for a passionate and loyal group of consumers. 5.11 is a brand of choice for those who demand uncompromising functionality, durability, style and comfort of their gear. 5.11's brand authenticity stems from decades of collaboration with elite first responders and military professionals around the world, innovating to solve their greatest needs in the most mission-critical settings, where failure is not an option. Today, 5.11 continues to design and innovate for these professionals with the added purpose of delivering that unique functional expertise to everyday consumers. Management believes 5.11's large and growing community of everyday consumers associate with the 5.11 brand heritage and authenticity and values 5.11's high-quality product design and functionality.
Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally. 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and through e-commerce channels, including 511tactical.com.
History of 5.11
5.11's heritage dates back to the 1970’s when 5.11 pants were originally designed by Royal Robbins for elite rock climbers. These climbers wanted durable yet flexible and comfortable pants as they scaled the most extreme rock walls in Yosemite National Park. In the early 1990’s, the same 5.11 pant was adopted by the F.B.I. National Academy and became standard training issue because of its superior design and performance. Trusted by law enforcement and military professionals ever since, 5.11's innovative products have formed the cornerstone of the brand. 5.11 is an outfitter of choice for our heroes who require rugged, functional, durable, and technically-advanced products capable of withstanding harsh conditions without sacrificing comfort. Consumers’ needs and aspirations fuel 5.11's product innovation engine. 5.11 leveraged this foundation to expand their product expertise to a significantly larger market of underserved lifestyle-oriented consumers who identify with 5.11's brand positioning, appreciate their superior designs and share the "Always Be Ready" ("ABR") mindset.
We acquired a majority interest in 5.11 on August 31, 2016.
Industry
5.11 participates in the global professional and consumer soft goods market for tactical gear and apparel; the addressable global soft goods market was estimated by management to be approximately $79 billion. 5.11 products are designed for use in a wide variety of activities, from professional to recreational and outdoor and indoor, and can be used all year long. As a result, the markets and consumers 5.11 serves are broad and deep.
Products, Customers and Distribution
Products
Product innovation is at the core of 5.11’s heritage and identity. Since its inception, 5.11 has continuously developed and introduced innovative apparel, footwear and gear that are highly functional, technically-advanced and expertly designed setting the industry standard in each product category. 5.11’s product portfolio consists of technical apparel, footwear and gear designed with patented materials and functional features to their customers from head-to-toe. 5.11’s purpose-built products are durable, functional and comfortable. 5.11 serves a community of consumers inspired to live a life bigger than themselves and aligned with the “Always Be Ready” mindset. 5.11 offers a portfolio of head-to-toe purpose-built gear with patented functional features for both professional and recreational use. 5.11 focuses their product offering across three categories: apparel, footwear and gear. Leveraging in-field testing and design feedback from professional collaborations and in-house design and engineering expertise, 5.11 is able to create high quality products in each of its core segments. Innovating around the material and functional needs of professionals, 5.11 then broadens the application of their technical functionality into a range of consumer products within each category. This evolution of 5.11’s product lines creates tremendous leverage for their purpose-built functionality, allowing 5.11 to benefit from their growing and broad crossover appeal. 5.11’s innovations have not been limited to just apparel and textiles, as 5.11 has also proven their abilities within their footwear and gear categories.
Apparel - Apparel represents 5.11’s largest product category at 66%, 65% and 67%, respectively, of net sales for the years ending December 31, 2021, 2020 and 2019. Within this category, 5.11 offers a broad assortment of men’s and women’s pants, shorts, shirts, outerwear, polos, and base layers. Apparel is offered in a variety of styles and fits intended to enhance comfort, durability, and utility. 5.11 has historically designed and developed innovative “families” of products around proprietary fabrics that 5.11 has created to meet the needs of its consumers. These product “families” typically start with a purpose-built pant and then expand into other products.
•Pants - for many consumers, 5.11 technical purpose-built pants are the gateway into the 5.11 brand. 5.11 offers a wide range of pants to tackle any mission in a broad range of waist sizes and in seams for men and women. The fit, proprietary or patented fabrics and purpose-built designs deliver high levels of comfort, utility and durability. Among the most popular pants today are Stryke, Taclite, Apex, Fast-Tac and Defender-Flex, which have price ranges from $55.00 to $85.00. 5.11 offers five distinct pant lines, which anchor five different apparel families. The top selling pants include Taclite, which is built with a lighter and stronger fabric to outperform 5.11's original canvas pant, Stryke, which uses our patented FlexTac fabric, Apex, which leverages 5.11's Flex-Tac technology, and 5.11's highly durable FastTac all with stain and water-resistant properties, and Defender-Flex, 5.11’s performance denim.
•Shirts, T-shirts and Polos – 5.11 tops are feature rich just like their pants. Patented document pockets, pen pockets, venting for heat, stain resistant, easy care and snag resistance are among some of these key features. Many of the shirts fabrics are lighter versions of 5.11’s patented or proprietary fabrics used in their best-selling pants. Taclite shirts $55.00 to $60.00, Stryke shirts $75.00 to $80.00 and Fast-Tac $45.00 to $50.00 are among this product category as examples. These shirts can be used as uniforms and/or casual wear. 5.11's polos are also well known for their comfort, durability and utility. 5.11 offers them in a range of proprietary fabrics that are highly fade resistant, and among some of the most popular styles are Performance Polo, Professional Polo and Utility Polo, which have price ranges from $30.00 to $45.00.
•Outerwear - 5.11 offers a wide range of outerwear solutions for on and off the job. Outerwear used on the job offer features not commonly found in lifestyle outerwear such as blood borne pathogen resistance or large areas of reflective materials. Technical system jackets, hard and soft shell as well as fleece pieces are designed to work individually or as a system. Features include innovations such as quick access side zippers and conceal pockets. 5.11 also offers technical survival outerwear systems engineered specifically for missions in extreme conditions. Products include base layers and briefs, pullovers, softshell jackets, wind pants, rain pants and jackets made of advanced fabrics.
Gear - Gear represented 24%, 25% and 23%, respectively, of 2021, 2020 and 2019 net sales, which includes multi-use backpacks, cases, load-bearing equipment, range bags, duffels, field knives, watches and gloves. 5.11 bags, pouches, and packs provide reliable, multifunctional storage options designed to excel in a wide range of operational and recreational settings. The bag offering meets the critical needs of emergency medical, public safety, and military professionals in the field, outdoor adventure enthusiasts going off the grid, and anyone who needs to maximize space and convenience packing for a weekend getaway. The recently introduce patented Hexgrid® and Gear Set™ system enhance modularity capabilities. Allowing users to have different sets per mission specific needs and attached pouches in 8 directions vs just up or down like the other systems. 5.11 also offers a wide assortment of complementary accessories including belts, hats, flashlights, gloves, watches, knives and patches.
Footwear - Footwear represented 10% of net revenue in each of the years ending 2021, 2020 and 2019 and includes a full line of functional boots, low-profile tactical shoes, trainers, and socks. First embraced by 5.11 professional customers through their field boots, 5.11 has developed and tested footwear that stands up to extreme temperatures and weather conditions. 5.11 has evolved into the current lineup of trainers, casual sneakers and oxfords that afford 5.11's consumers the same level of comfort, protection, durability and style they expect from 5.11. 5.11 trainers feature All Terrain Load Assistance System (A.T.L.A.S.) technology, which is built to help 5.11's consumers undergo the most strenuous of workouts. The 5.11 A/T Trainer adds comfort and substantially increased agility, flexibility, and durability to cross training, functional fitness and heavy workouts.
Customers and Distribution Channels
Management believes the brand’s empowering message, innovative product quality, and technically advanced designs appeal to a broad and growing consumer base. Based on the cross-over appeal of its products, 5.11 consumers fall into two core groups, professional “Prosumers” and “Everyday Consumers.” The 5.11 community was initially built by Prosumers, which consists of groups such as U.S. military personnel, law enforcement, first responders, and frontline workers, who require unwavering durability and reliability, but also value the design and comfort of the 5.11 products, providing the versatility to wear its products both on and off duty. Over time, 5.11 has expanded its reach into functionally focused Everyday Consumers, who, management believes, are inspired by Prosumers to live a life bigger than themselves and share the always be ready "ABR" mindset. 5.11 products resonate with a diverse group of Prosumers and Consumers, laying the foundation for continued expansion of a loyal and engaged consumer base into the future.
•Everyday Consumers: A blend of active, challenge-seeking and achievement-oriented gear consumers who thrive on fitness and adventure. Inspired by 5.11’s Prosumers to live a life bigger than themselves with the “Always Be Ready” mindset, these Everyday Consumers engage in a range of activities from fitness and training, to outdoor experiences such as hunting, hiking and overlanding, and purchase 5.11 products for everyday casual use. They prioritize maintaining high performance and, we believe, recognize that the functional superiority of 5.11 products aligns with their own achievement-oriented goals. They also appreciate the aesthetic and functional design of 5.11 products, which can take them from the comfort of their home to a favorite nearby hike, as well as 5.11 apparel, footwear and gear, which are as dynamic as they are. We believe the Everyday Consumers align with 5.11 products’ price points and superior value proposition.
•Prosumers: Includes everyone from the most elite U.S. military and law enforcement special forces units on the planet to everyday heroes including first responders, frontline workers, and other professionals, both on duty in mission-critical situations and off-duty. Prosumers are devoted to service, on and off-the-clock, and 5.11 endeavors to match their dedication and commitment as it produces superior technical products for every aspect of their lives. 5.11’s unique combination of durability, functional excellence, and comfort allows Prosumers to turn to 5.11 seamlessly across a variety of use-cases, whether on-duty, training, spending a weekend overlanding, backpacking, or camping. Many of the Prosumers are never fully off-duty, making the ability to serve them comfortably and reliably in all aspects of their lives a top priority. 5.11 enables them to “Always Be Ready” to meet any challenges that cross their path.
The strength of the 5.11 business model is the ability to serve the consumer however they prefer to engage while simultaneously reinforcing the 5.11 brand’s premium association and authenticity. Rather than taking the traditional channel approach to the business which management believes limits 5.11's potential, 5.11 enters a trade area with the right mix of owned stores, Consumer Wholesale, Professional Wholesale, eCommerce and marketplaces. By approaching trade areas in this manner, 5.11 shares inventory between stores and eCommerce and optimizes speed and efficiency with logistics that meet consumers’ needs wherever they prefer to shop, rather than directing them into a particular channel. This principle of product accessibility and experiential shopping drives brand building
and organic lead generation. Though each channel is able to function profitability on an individual basis, the value derived from these channels working in concert is a unique competitive strength 5.11 employs in every market in which it operates.
Direct to Consumer - 5.11’s DTC channel is comprised of its digital platform, 511tactical.com, its growing network of retail stores as well as its third-party marketplace partners. 5.11 has significantly expanded its DTC mix in the past five years, with DTC now comprising 43%, 39% and 32% of net sales for the years ended December 31, 2021, 2020 and 2019, respectively. 5.11’s website has grown significantly and drives a significant portion of its online sales. 5.11 also operates 87 company owned retail stores in 27 states, with plans to grow its footprint further. Both the online and company owned retail stores enable 5.11 to maintain direct relationships with consumers, influence the brand experience and better understand shopping preferences and behavior.
•eCommerce. 5.11 has grown its ecommerce substantially in the last few years, which has been enabled by continued investment in digital infrastructure capabilities, enhanced consumer experience through increased customization and curation, and a growing global supply chain. Since 2017, 5.11 has invested over $35 million in capabilities to further its eCommerce infrastructure, including a scalable, ERP system and new locations that enable more cost effective and timely delivery for its eCommerce orders.
•Retail. Since 2011, 5.11 has grown to 87 branded and owned retail locations around the U.S. as of December 31, 2021. Its locations provide an opportunity for 5.11 to showcase its diverse product assortment. Retail also provides an opportunity to further engage with consumers through the ABR mindset, with in-person, local community events and educational opportunities that elevate the experiential retail experience.
•Third-party marketplaces. 5.11’s third-party marketplace partners, such as Amazon, are invaluable tools for its omnichannel presence. The collaboration with the some of the largest retailers brings 5.11increased opportunity from sales and revenue to increased marketing opportunities and brand awareness. Yet at the same time, 5.11 is strategic about protecting its 5.11 brand and delivering a consistent consumer experience in the third-party marketplace.
Wholesale - The Wholesale channel is comprised of Professional Wholesale, Consumer Wholesale and International business. Wholesale sales were 57%, 61% and 68% of net sales for the years ended December 31, 2021, 2020 and 2019, respectively. The Professional Wholesale channel specializes in demand creation for formal procurement through specification of 5.11 on government contracts around the world. The Consumer Wholesale channel is comprised of dealers, outdoor specialty retailers, and military exchanges, serving predominantly Everyday Consumers. The International business includes retail locations and International eCommerce sites. International products are currently distributed in over 120 countries across the globe, but management believes there is significant opportunity for continued International expansion.
•Professional Wholesale. The Professional Wholesale channel consists of Prosumer sales relationships, and is comprised of dealers and resellers of 5.11 technical apparel, footwear and gear through governmental departments and agencies, including their retail front and eCommerce services that cater to Prosumers that need additional services, such as tailoring of their uniforms, in a one-stop-shop experience. Requirements of outfitting entire agencies or departments necessitates carrying numerous, often infrequently used, sizes and colors of a given product. In addition, 5.11’s years of handling these types of customized orders has resulted in 5.11 having a dedicated team with specialized expertise, a skillset that is unique in the industry. We believe 5.11’s significant investment in inventory provides a competitive advantage versus smaller less well capitalized competitors that carry low levels of inventory.
•Consumer Wholesale. The Consumer Wholesale channel consists of Everyday Consumer sales relationships, and is comprised of third-party retailers and their eCommerce sites. 5.11 consumers can find its products at well-known big box sports, outdoor specialty retailers and military exchanges, in addition to third-party online only retailers who focus on product sales in similar apparel, footwear and gear categories as we do. Shop-in-shop concepts at key retailers who also attract the 5.11 customer base gives consumers a tactile experience with 5.11 products, by which they can feel, try on, and compare 5.11 product offerings. Additionally, 5.11 gains online traction from discussion boards and forums that bring professional and everyday enthusiasts together to discuss 5.11 products and the category in general. Both avenues serve as catalysts to attract new customers and keep long time consumers loyal to the 5.11 brand.
•International. In addition to domestic whitespace, management believes there is opportunity to expand internationally as International only represented 18% of net sales in 2021. While 5.11 products are currently distributed in 120 countries across the globe, 5.11 has limited penetration in many of these countries with limited distribution in certain countries and certain dealers only carrying select styles. As such, management
believes there is significant opportunity for continued international expansion and plan to expand in EMEA, Mexico, Asia, Australia, and Canada, and will leverage third-party logistics facilities in Europe and China as well as 5.11’s owned warehouse in Australia to drive this. 5.11 sees additional opportunities to further expand internationally and plan to methodically continue the expansion of its business.
No individual customer represented greater than 10% of 5.11’s net revenues in 2021. At December 31, 2021 and 2020, 5.11 had approximately $40.7 million and $21.8 million, respectively, in firm backlog.
Market Opportunities
5.11 products are designed for use in a wide variety of activities, from professional to recreational and outdoor and indoor, and can be used all year long. As a result, the markets and consumers 5.11 serves are broad and deep. The market opportunity is both significant and supported by the demand of 5.11’s innovative products providing an opportunity for future, profitable growth. As a category-defining brand, management believes its innovative products serving Everyday Consumers and Prosumers will continue to expand its addressable market.
•U.S. Everyday Consumer Opportunity. 5.11 products address a large and broad Everyday Consumer base consisting of individuals from all walks of life. Everyday Consumers include small business owners, teachers, lawyers, farmers, homemakers and others, who enjoy wearing 5.11 during work, after work and on their weekend adventures. Management believes the Everyday Consumers are multi-generational, though skewing younger. These younger consumers are representative of an expanding, technically-focused consumer base looking for performance in every aspect of their daily lives. 5.11 caters to Everyday Consumers across all regions of the U.S., though management believes Everyday Consumers are located primarily in urban and suburban locations.
•U.S. Prosumer Opportunity. 5.11’s premium product offering addresses a large Prosumer base, including first responders, military personnel, on and off-duty public servants, non-active military and other functionally focused professionals such as contractors, utility workers, hospital professionals and others using 5.11 for professional applications. Management believes Prosumers are multi-generational, though primarily middle-aged males. Similar to our Everyday Consumers, 5.11 caters to Prosumers across all regions of the U.S. and believes Prosumers are located primarily in urban and rural locations. The Prosumer market is a stable, recurring source of demand for our products. Management believes that Prosumer demand is resilient through economic cycles as Prosumers continue to depend on 5.11 products regardless of the economic environment.
•International Opportunity. In addition to the domestic whitespace opportunity, management believes there is opportunity to expand to a large global market, as International only represented 18% of net sales in 2021. 5.11 products are currently distributed in 120 countries across the globe with our market entry point being the Professional Wholesale Channel. Most countries outside the US are under-penetrated with limited distribution and select dealers only carrying a portion of available styles. As such, management believes there is significant opportunity for continued international expansion and plan to expand in EMEA, Mexico, Asia, Australia, and Canada. 5.11’s approach will be to build out each region uniquely based on the size of the opportunity and the complexity of conducting business in a particular country. This approach currently utilizes a mixture of Professional and Consumer wholesale channels, distributors, wholesale partner stores, third party ecommerce sites as well as owned ecommerce websites and retail stores. To build this business 5.11 plans to leverage its third-party logistics facilities in Europe and China as well as its owned warehouses in Australia and the US for supply chain logistics. 5.11 sees additional opportunities to further expand internationally and plan to methodically continue the expansion of its business.
Business Strategies
Increase Brand Awareness and Grow the Passionate 5.11 Community - 5.11 has proven the profitability of its core product offerings and broad geographic relevance, while demonstrating clear brand authenticity and versatility. Though 5.11 is a brand and industry leader in the tactical and functional fitness communities, management believes it still has substantial room to grow through continuing to broaden its brand awareness. 5.11 has a large, growing community of deeply loyal consumers who share an authentic connection to the brand. 5.11 brand awareness is driven largely by its authentic association with public safety and the military, who rely on 5.11 gear for performance both on-duty and off-duty. To increase brand awareness, 5.11 designs and executes a variety of dynamic, high impact marketing strategies to engage existing consumers and reach new consumers, both domestically in the U.S. and internationally.
5.11’s innovative brand and marketing strategy has been able to deliver significant brand awareness growth with relatively low marketing spend to date. The reason this has been so successful is due to the outsized returns from 5.11’s positive, community-driven word-of-mouth, stemming from consumers who share an emotional connection to 5.11. While 5.11’s marketing competencies extend well beyond traditional and digital media; 5.11 is a leader in content development and influencer marketing. 5.11 has built a community with major brand ambassadors and brand partners. 5.11 also partners with other leading brands across categories, such as Spartan in fitness and Ubisoft’s Ghost Recon in gaming. These strategic partnerships reinforce 5.11’s authentic and premium branding while simultaneously engaging a broad and passionate customer base of potential 5.11 consumers. Through its deep relationships, history of mutually beneficial partnerships, community, and social events such as “ABR Academies,” as well as its recognized leadership position, management believes 5.11 has become a partner of choice for influencers worldwide, leading to a significant competitive advantage. These marketing efforts deliver authentic, aspirational experiences and exclusive content that drive loyalty and engagement. 5.11 pairs this emotional brand marketing with sophisticated, data-driven performance marketing to further drive profitable customer acquisition, retention and high lifetime value. Through investment in these marketing strategies, 5.11 intends to drive passionate 5.11 connections within its community.
Continued Execution of Integrated Omnichannel Platform to Drive Disciplined Growth - Management believes 5.11 has built a solid omnichannel distribution strategy, comprised of a rapidly growing DTC channel, which includes its owned retail locations, proprietary website, and third-party marketplace partners like Amazon, and a recurring Wholesale channel, which encompasses our Professional Wholesale, Consumer Wholesale, and International business. Rather than taking the traditional channel approach to the business which management believes limits 5.11's potential, 5.11 enters trade areas with a tailored DTC and wholesale strategy for that market. To best serve its consumers’ needs and to profitably accelerate growth, 5.11 continues to make investments in its omnichannel distribution strategy. To increase connectivity and reach a larger quantum of consumers, 5.11 is accelerating digital growth through the utilization of data analytics, targeted digital tactics and integrated marketing campaigns. In parallel, 5.11 continues to improve its website functionality as measured through strong site traffic, conversion and average order value. 5.11’s digital growth is complemented by the potential to expand its retail footprint. Currently, 5.11 has 87 physical stores, which represents an increase of 83 since 2015. Ultimately, the expansion of both channels presents an accessible near-term opportunity to accelerate growth and better serve evolving consumer preferences.
Leverage Innovation Capabilities to Continue Developing New Products - At its core, 5.11 is an innovator that prides itself on making purpose-built technical apparel, footwear and gear for all of life’s most demanding missions. Throughout its history, 5.11 developed a diverse product portfolio that has helped grow its brand to be an industry leader in both its Wholesale and DTC businesses. Through its product innovation, 5.11 developed brand affinity, built on the foundation of its strong professional business. By serving its Prosumer, 5.11 increased demand in its Everyday Consumer segment, creating a large whitespace for growth. Moving forward, 5.11 is looking to grow share of its consumers’ wardrobe with a continued focus on everyday and weekend wear. In order to accelerate growth and meet consumer preferences, 5.11 plans to continue its consumer product innovation and expand its lifestyle product offering and other ancillary categories. 5.11 built a foundation of infrastructure and processes that allows it to have shorter lead time on product and design. 5.11 will continue to refine this in order to accelerate growth and take market share in the consumer business through an expanded product portfolio. Management believes that continued product innovation for 5.11's Prosumers drives brand loyalty with its Everyday Consumers. 5.11’s efforts to tailor products for its Prosumers drives innovation and credibility, which in turn yields superior functionality and appeal to Everyday Consumers. As 5.11 continues to scale, its broader consumer base allows it to reinvest resources back into its technical and functional expertise, further driving continued innovation for its professional consumers.
Disciplined International Expansion - International represents 18% of net sales in 2021 and management believes 5.11 has a large opportunity to expand this business. Management believes Prosumers internationally view U.S. first responders, military and public servants as being among the best in the world, and want the same apparel, footwear and gear that they use both on and off duty. 5.11’s international strategy parallels the success it has enjoyed in the US by seeding the market through the Prosumer channels, which creates brand awareness and Everyday Consumer demand.
Currently 5.11 products are distributed in over 120 countries across the globe. 5.11 leverages its proven playbook to invest in the largest, most successful international regions to grow its business. This strategy starts with the Professional Wholesale channel which establishes a profitable recurring revenue stream. As that grows, 5.11 builds a Consumer Wholesale channel and finally a DTC business is established in the most mature markets. While the
strategic approach is consistent, each region is uniquely built based on the size of the opportunity and the complexity of conducting business in a particular country. Management believes there is a significant opportunity to continue 5.11's international expansion with a focus on EMEA, Mexico, Asia, Australia and Canada. 5.11’s ability to supply the same superior apparel, footwear and equipment to global markets allows it to expand its already profitable international business to Everyday Consumers living by the ABR mindset around the world.
Competitive Strengths
Authentic Global Lifestyle Brand with Passionate Following - Since inception, 5.11 has been a trusted brand by military, law enforcement, public safety, first responders and frontline workers and other service professionals around the world. No matter the mission or how demanding the environment, management believes 5.11 makes the apparel, footwear and gear of choice for professionals both on and off duty. This loyalty and trust, proven over decades from when the FBI Academy first adopted 5.11 pants in 1992, is a powerful tool. This stamp of approval from the elite professional community creates a brand halo effect that propels the Everyday Consumer business, allowing 5.11 to appeal to a broad range of consumers who embrace an active lifestyle, and who also appreciate 5.11 products’ superior technical performance for everyday use.
5.11’s loyal consumers act as brand advocates, proudly wearing branded 5.11 gear and displaying 5.11 banners, decals and patches. Management believes that 5.11's brand advocacy through social media or by word-of-mouth, coupled with its varied marketing efforts, has extended its appeal to the broader community. As 5.11 has expanded its product lines, and broadened its marketing messaging, it has cultivated an increasingly diverse audience of both men and women living throughout the United States and, increasingly, in international markets. Management believes 5.11's loyal customers, alongside its heritage of authenticity and high-quality product performance create such a strong connection to the 5.11 brand.
Deep Knowledge of Our Consumers Drives Our Product Development and Marketing - Management believe much of the 5.11 brand success is accredited to the loyalty of 5.11's consumers. 5.11 continuously strives to understand their evolving needs. Utilizing consumer insights through proprietary research, data, and analytics, 5.11 informs its product design and development teams to meet the demands and expectations of its loyal consumers. Having innovated closely with its Prosumers since 2003, 5.11 has a deep understanding and appreciation for the tactical issues they deal with daily. Seeing itself as problem-solvers first-and-foremost, 5.11 designs products that provide solutions to the obstacles they encounter while on duty, enhancing the daily regimens of its professional end-users. 5.11 consumers are passionate about their work and activities, and 5.11 matches that passion as it continuously strives to build functional, durable, and comfortable products. Not only is this insight helpful in product design and development, but also in outbound marketing efforts, both domestically and internationally. 5.11 supports and builds its brand through a fully integrated, high-impact marketing strategy which includes innovative and exclusive content, digital and social media, dedicated weekly Podcast, community-outreach, television and movie product placement and integrations, sponsorships, and local store activations and events that foster consumer engagement.
Purpose-Built, Innovation-Led and High-Quality Product Offering - 5.11’s DNA is readiness. 5.11 addresses the needs of elite professionals around the world, outfitting them with the top-quality gear and equipment necessary to complete their missions. From this powerful foundation, 5.11 develops products to both address the specific needs of these professionals and have broad appeal. The process for development starts with a rigorous analysis of the most important functional qualities for 5.11 Prosumers. 5.11 then engages with the broader community, along with industry and trade professionals, to help find specific voids in the market worth targeting. 5.11 uses this data and insights to develop head-to-toe assortments to serve its consumers holistically whether they are at the office, exercising, experiencing the outdoors, or simply embracing the ABR lifestyle in their daily lives.
5.11 delivers a comprehensive lineup that enables its customer to enjoy high-quality functionality without having to sacrifice lifestyle, comfort, or style. Management believes 5.11's ability to deliver this balance is a deep competitive advantage that is unrivaled and where most of its competitors have proven to be unsuccessful.
Integrated Omnichannel Distribution Strategy - The foundation of 5.11's business model is to continue to strengthen its ability to serve the Everyday Consumer and Prosumer however they prefer to engage and purchase with 5.11, while simultaneously reinforcing 5.11's brand’s association and authenticity. Rather than taking the traditional channel approach to the business which management believes limits 5.11's potential, 5.11 enters trade areas with a tailored DTC and wholesale strategy for that market. By approaching trade areas in this manner, we believe 5.11 is able to share inventory between our stores and eCommerce, which allowed for 29% of eCommerce orders to be fulfilled out of store locations in late 2020, following the implementation of 5.11's Buy Online Ship From
Store functions. This optimizes speed and efficiency with logistics that truly meet 5.11's Prosumers’ and Everyday Consumers’ needs wherever they prefer to shop, rather than directing them into a particular channel. We believe this principle of product accessibility and adopting to consumers’ shopping choices drives brand building and organic lead generation. Though each channel is able to function profitability on an individual basis, the value 5.11 derives from its channels working in concert is a competitive strength.
Scalable Infrastructure and High-Performance Team to Support Growth - 5.11 has invested approximately $70 million in capital expenditures in the last five years tonot only improve operating and fulfillment performance in its current growth phase, but also as a foundation to support continued future growth.5.11’s investment has included implementing a variety of strategic and operational improvements, including hiring experienced senior executives, expanding its company owned retail stores, executing merchandising improvements, enhancing distribution and supply chain capabilities and implementing data-driven digital marketing campaigns. 5.11’s current infrastructure allows it to fulfill orders accurately and effectively across all channels, including making certain shipments direct from the source to bypass distribution centers, while still providing buffer capacity capabilities to support future expansion.
Competition
5.11 competes in the global marketplace for purpose-built technical apparel, footwear and gear. Management believes 5.11 has competitive advantages through its global omnichannel business model, which is comprised of a rapidly growing DTC channel and recurring Wholesale channel. 5.11 competes against activewear, outdoor and specialty apparel brands such as Nike, Under Armour, The North Face, Patagonia, Lululemon, Arc’teryx, Carhartt, Propper and Fecheimer Brothers. 5.11 competes with footwear brands such as Timberland, Bates and Danner, and with gear and bag brands such as Camelbak, Osprey and YETI. 5.11 also competes with specialty retailers such as REI, Dick’s Sporting Goods and Galls.
Suppliers
5.11 has built a supply chain that is optimized for its business, through which 5.11 controls the design, development and fulfillment of its products.
Sourcing and Manufacturing
5.11 does not own or operate any manufacturing facilities. Instead, it chooses to contract with third-party suppliers for materials (fabric and trims) and manufacturers for finished goods. 5.11 partners with high-quality vendors and retains complete control of all intellectual property associated with its products. 5.11 product design, technical design and development teams work directly with its vendors to incorporate innovative materials that meet the high-quality product standards demanded by its customers. 5.11’s primary product specifications include characteristics like durability, protection, functionality, and comfort. 5.11 collaborates with leading fabric suppliers to develop fabrics that it ultimately trademarks for brand recognition whenever possible.
The materials used in 5.11 products are developed in partnership between its material vendors and its design, product development and sourcing teams, then sourced by its manufacturers from a limited number of pre-approved suppliers. To enhance efficiency and profitability, 5.11 recently adopted 3D design capabilities for virtual prototyping allowing it to make better and quicker decisions prior to creating physical prototypes. Additionally, 5.11 recently partnered with one of our apparel manufacturers to create a development center with dedicated resources to facilitate rapid prototyping.
All 5.11 products are manufactured by third-parties. 5.11 works with a group of 60+ vendors, 15 of which produced approximately 80% of its products in fiscal year 2021 and 2020. During the year ended December 31, 2021, approximately 44% of 5.11 products at cost were produced in Bangladesh, approximately 36% in Vietnam, and the remainder in China, Cambodia, Taiwan, Philippines, Indonesia, Africa, Central America and the United States. 5.11 does not have any long-term agreements requiring it to use any manufacturer, and no manufacturer is required to produce its products in the long term. 5.11 purchases from suppliers on a purchase order basis informed by capacity forecasts. 5.11 measures supplier performance through various performance indicators and partner closely with them to continually improve efficiency, cost, and quality. Management believes that 5.11's principal manufacturers have the additional capacity to accommodate future growth.
As a company devoted to the needs of public safety and mission-oriented professionals, 5.11 has developed secure relationships with a number of its vendors and take great care to ensure that they share its commitment to quality
and ethics. Under its supplier agreements, suppliers must follow 5.11’s established product design specifications and quality assurance programs to meet specified standards. To ensure vendor reliability and quality, 5.11 has established a sourcing office in Hong Kong, which employs approximately 59 individuals whose primary functions include vendor management, commercialization, product development, production planning, vendor compliance, and quality assurance.
5.11 requires its vendors to comply with its Vendor Code of Conduct relating to working conditions as well as certain environmental, employment and sourcing practices. 5.11 requires all vendors to contractually commit to upholding these standards. Additionally, in alignment with its values, 5.11 encourages its manufacturers to be certified through the Worldwide Responsible Accredited Production (WRAP) program, which is an independent organization dedicated to promoting safe, lawful, humane and ethical manufacturing. Once a vendor is part of 5.11’s production network, its in-house production team work together with third-party inspectors to closely monitor each partner’s compliance with applicable laws and standards on an ongoing basis.
5.11 regularly sources new suppliers and manufacturers to support its ongoing growth and carefully evaluates all new suppliers and manufacturers to ensure they share its standards for quality and integrity. To mitigate supplier concentration risk, 5.11 commercializes its top key items at multiple factories to ensure it can balance geographic risks as well as respond quickly to spikes in business. 5.11 also continuously seeks out additional suppliers and manufacturers to enable contingency plans that minimize disruptions, as well as support its future growth.
Distribution
5.11 leases and operates a distribution facility in Manteca, California to support its fulfillment needs across the Americas (North, Central & South). Additionally, 5.11 operates a small distribution facility in New South Wales, Australia to serve the Australia and New Zealand markets. 5.11 utilizes global third-party logistics providers to fulfill customer orders in EMEA and Asia-Pacific, which are located in Sweden and China, respectively. These third-party logistics providers manage all various distribution activities in their regional markets, including product receiving, storing, limited product inspection activities, and outbound shipping.
Intellectual Property
To establish and protect its proprietary rights, 5.11 relies on a combination of trademark (including trade dress), patent, design, copyright and trade secret laws, as well as contractual restrictions in license agreements, confidentiality and non-disclosure agreements and other contracts. 5.11’s intellectual property is an important component of its business, and management believes that 5.11's know-how and continuing innovation are important to developing and maintaining its competitive position. Management also believes having distinctive marks that are readily identifiable on 5.11's products is an important factor in continuing to build its brand and distinguish its products. 5.11 considers the 5.11 name and logo trademarks, together with 58 issued and pending patents and 374 registered trademarks, both in the United States and internationally, to be among its most valuable intellectual property assets.
Regulatory Environment
In the United States and the other jurisdictions in which 5.11 operates, it is subject to labor and employment laws, laws governing advertising, safety regulations and other laws, including consumer protection regulations that apply to the promotion and sale of merchandise and the operation of fulfillment centers and privacy, data security and data protection laws and regulations, such as the California Consumer Privacy Act, in the United States, the EU General Data Protection Regulation 2016/679 ("GDPR") in the European Economic Area and Switzerland, the U.K. GDPR and the United Kingdom Data Protection Act 2018 in the United Kingdom, and the Brazilian General Data Protection Law in Brazil, the ePrivacy Directive and national implementing and supplementing laws in the European Economic Area. Privacy and security laws, regulations, and other obligations are constantly evolving, may conflict with each other to complicate compliance efforts, and can result in investigations, proceedings, or actions that lead to significant civil and/or criminal penalties and restrictions on data processing. 5.11 products sold outside of the United States may be subject to tariffs, treaties and various trade agreements, as well as laws affecting the importation of consumer goods. 5.11 monitors changes in these laws and management believes that 5.11 is in material compliance with applicable laws. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. A portion of sales generated by its International business is derived from sales to foreign government agencies, and management believes 5.11 is in material compliance with related applicable laws.
Human Capital
Mission-Driven, Innovative and Supportive Culture – From the beginning, 5.11’s company culture has always been focused on serving those who serve—military, law enforcement officers, public safety and first responders and frontline workers from around the world. The passion for serving these top professionals inspires 5.11 to extend serving its consumers into their everyday lives, to be prepared for whatever life throws their way. 5.11’s teams embrace its ABR mindset, and its core values allow 5.11 to attract passionate and motivated employees who are driven to succeed and share the vision of becoming “an iconic global brand rooted in innovating purpose-built gear for the most demanding missions while inspiring the world to always be ready.”
5.11’s work environment is open and collaborative, spanning a global organization from its headquarters in Irvine, CA and offices in Hong Kong, Mexico, Sweden and Australia, to its distribution center in Manteca, CA, and to its U.S. retail stores. Its employees around the world are 5.11’s most valuable and important brand ambassadors. Their commitment to 5.11 and its mission, and their knowledge and passion for 5.11 products allows 5.11 to execute its company strategy and strengthens its brand loyalty. Additionally, 5.11 store employees are critical to 5.11’s success and often represent members of its communities, with many of them retired military, law enforcement officers and first responders.
5.11 prides itself in its ability to work directly with top professionals around the world, innovating to solve their greatest needs in the most mission-critical settings. 5.11 maintains a global footprint, with employees working in thirty-three states and eighteen countries. At December 31, 2021, 5.11 had 861 full-time employees and 185 part-time employees. 5.11 strives to create a welcoming and caring environment across the entire organization and celebrate the passion its team members bring forward in serving its consumers. 5.11 believes it has created a company culture focused on attracting, retaining, and developing talent, which enables it to exceed consumers’ expectations and meet its growth objectives. 5.11 prioritizes building a diverse, inclusive, equitable and supportive team that is driven by creativity and purposeful innovation.
BOA
Overview
BOA, creator of the revolutionary, award-winning, patented BOA Fit System, partners with market-leading brands to make the best gear even better. Delivering fit solutions purpose-built for performance, the BOA Fit System is featured in footwear across snow sports, cycling, hiking/trekking, golf, running, court sports, workwear as well as headwear and medical bracing. The system consists of three integral parts: a micro-adjustable dial, high-tensile lightweight laces, and low friction lace guides creating a superior alternative to laces, buckles, Velcro, and other traditional closure mechanisms. Each unique BOA configuration is engineered for fast, effortless, precision fit, and is backed by The BOA Lifetime Guarantee. BOA is headquartered in Denver, Colorado and has offices in Austria, Greater China, South Korea, and Japan.
History of BOA
BOA was founded in 2001 by Gary Hammerslag, a snowboarder, surfer, and entrepreneur. Gary moved to Steamboat, Colorado in the mid-90’s after successfully selling his previous company, which created innovative catheter solutions that improved angioplasty procedure speed and effectiveness. After arriving in Steamboat and frequently snowboarding, Gary envisioned a possibility to dramatically improve the fit and performance of snowboard boots by applying elements of his learnings in the medical device field. Gary developed a fit system as an alternative to traditional laces for snowboard boots and partnered with K2 and Vans to launch the first BOA-equipped snowboard boots to consumers in the winter of 2001. After a successful launch, BOA became widely adopted on snowboard boots.
BOA’s next phase of growth was largely in the outdoor sporting and recreation markets. In 2005, BOA expanded its focus to hiking and trail-related footwear, followed by cycling and golf in 2006 and hunting and fishing in 2007, at which point BOA surpassed 1 million users worldwide. From 2008 to 2011, having gained credibility in consumer markets, BOA introduced products for the workwear footwear market as well as products for the medical bracing market. In 2013, the company entered the running and training footwear market.
In 2019, BOA launched its state-of-the-art Performance Fit Lab ("PFL") to quantitatively measure the impact of BOA-equipped footwear on athletic performance. The PFL is used to advance performance footwear fit technology by testing, refining, and improving footwear products in collaboration with the company’s major brand partners and serves as a catalyst for innovation. In 2021, BOA surpassed 25 million users worldwide.
We purchased a majority interest in BOA on October 16, 2020.
Industry
BOA participates broadly in the global footwear market, representing approximately 10 billion pairs of shoes sold annually. BOA’s addressable market is identified based on product type, price lane, and geography. BOA targets the premium segment, where applicable price lanes tend to be at the upper end of each category. With respect to product type, the overall market is segmented into various subcategories, of which BOA primarily targets footwear for active performance sports, outdoor applications, and kids.Based on target footwear categories and applicable price lanes, management estimates BOA’s addressable market to be approximately 750 million pairs of shoes sold annually. Management estimates the company has approximately 3-4% share within its addressable market.
Products, Customers and Distribution Channels
Products
The BOA Fit System consists of a durable lace, which is guided by low-friction guides and attached to a dial that is typically mounted on the footwear heel, tongue or eye-stay for micro-adjustability to enhance performance fit. BOA’s current product portfolio has four platforms, H, L, M, and S-Series, which vary in cost, weight, tension, and use case. Each dial design can be customized with over 220 colors allowing the product to fit cohesively with each brand partners’ specific designs and colorways.
All platforms share the distinctive characteristics that differentiate BOA from competing offerings: micro-adjustability to achieve the perfect fit, measurable performance benefits validated by the company’s testing lab, durability and quality proven in extensive field testing, a lifetime guarantee on the end-product’s dial and laces, and the distinctive BOA sound heard when turning the dial.
Each platform is designed and engineered to address the specific performance fit needs of the end user by use case. Factors such as size and shape of dial, level of torque, internal mechanics, and weight vary amongst platforms, and each platform is further segmented into product collections that differ in aesthetic, optimal placement on the shoe, and cost. Within each product collection, dial designs and materials differ to accommodate preferences of the end user and retail price points of the end product.
Customers and Distribution Channels
BOA has approximately 300 global brand partners, including leading footwear companies such as Adidas, Specialized, Shimano, Fizik, ASICS, Burton, La Sportiva, K2, Vans and FootJoy who feature BOA systems across a variety of sporting and professional industries including snow sports, cycling, outdoor, athletic, workwear and medical. BOA typically sells directly to the manufacturing partner responsible for final assembly of the brand partner’s product. BOA works with 470+ brand partner factories with limited revenue concentration. Most brand partner factories are located in Asia, primarily in China and Vietnam, and are in relatively close proximity to BOA’s supply chain.
Rather than being solely an OEM part supplier, BOA maintains highly collaborative relationships with its brand partners to actively co-develop innovative, performance-driven footwear, helmets and bracing. BOA contributes substantial design and testing resources to ensure its system is used in a way that maximizes performance based on dial placement and configuration. The BOA system is not simply a “lace replacement” or plug and play option, but rather a solution that must be integrated into each product model through a 6-18 month development cycle to create a system that works specifically with a product’s unique structural design. This process allows BOA to ensure brand image consistency, end product quality and the best performance fit.
Footwear, headwear, and medical bracing products featuring BOA systems are primarily sold through brick-and-mortar sporting goods retailers, specialty sport retailers, online retailers, or brand partners’ owned retail and online channels. According to management’s estimates, end consumption is geographically diverse, with approximately 15-20% of products consumed in North America, 30-35% in Europe, and 45-50% in Asia.
No individual customer or brand partner factory represented greater than 8% of BOA’s net revenues in 2021. At December 31, 2021 and 2020, BOA had approximately $31.7 million and $15.2 million in order backlog, respectively.
Business Strategies and Competitive Strengths
Business Strategies
Continued Share Growth in Established Categories - BOA has established a strong presence in certain core categories in Northern Europe, Korea, Japan, and the United States where BOA has proven efficacy and established strong brand partner relationships. In these core categories, BOA is focused on building a community to cross market to and is actively working to reimagine product solutions to deliver the best product to consumers.
Going forward, BOA intends to leverage its brand partner relationships to expand penetration and capture additional share in growing markets such as workwear in North America and Asia, outdoor in markets outside of Korea, and golf in North America. BOA has developed region and category specific products to better cater to the individual dynamics of each market including products that deliver a better price/value proposition, new product configurations for region specific trends and performance fit messaging to increase consumer awareness and adoption. Through its reputation in the marketplace, athlete endorsements and deep relationships with leading brand partners, the company is focused on delivering the performance benefits of the BOA system across an expanding set of sporting categories and geographies.
Expand into Pioneering Categories - BOA has identified several adjacent segments including alpine skiing, trail running, and court sports such as tennis, badminton and basketball which management believes are well suited to benefit from the performance fit that BOA provides. BOA is actively working with leading brand partners to develop sport-specific footwear configurations that can benefit from the advantages of the BOA system. By leveraging BOA’s brand equity and proven solutions, the company believes there is significant whitespace to increase penetration in these early adoption segments.
Competitive Strengths
Culture of Innovation and New Product Development - Management believes that there is significant opportunity to continue advancing product offerings through its commitment to innovation. Product development and innovation are divided amongst (i) BOA’s internal innovation and evolution of its fit systems and platforms, refining and improving on the aesthetics, durability, user experience, and price/value, (ii) the design and engineering collaboration that BOA engages in with its brand partners for project and application-specific needs, and (iii) BOA’s advanced research through its PFL, which is transforming markets through innovative performance fit solutions that are scientifically tested and validated.
Deep Collaborative Partnerships – BOA has deep partnerships with the premier brands in every segment they compete within.They collaborate throughout the entire product lifecycle process, including product strategy, design and development, factory operational/service support, retail education, consumer warranty support, and marketing/demand creation.BOA has a high partner retention rate due to the depth and value of the relationships.
Premium Brand Position - BOA is focused on continuing to build awareness around its aspirational, global brand through content leadership, athlete endorsements, paid media, brand partner affiliations, and other business. BOA primarily increases awareness through direct-to-consumer marketing and co-marketing with its established brand partner relationships. In 2019, BOA launched its “Pioneer Program,” an athletic sponsorship platform. BOA leverages athlete endorsements to further establish its positioning as a performance fit leader as well as drive cross-segment brand awareness. The company recently launched its “Dialed in” Campaign, which showcases pioneers performing at their peak both physically and mentally. BOA also relies on its trusted brand partners to increase BOA brand awareness. The company focuses its efforts on collaborating with brand partners who are innovative market leaders that meet BOA’s brand standards and align with BOA’s positioning as a high-performance, premium brand.
Technology Leader with Robust Patent Portfolio – BOA is a leader in performance fit innovation and has built a diverse global portfolio of issued and pending utility and design patents, creating barriers to entry. Throughout BOA’s history, the company has continually innovated on dial attributes including quick release, durability, manufacturing ease, and micro adjustability, in addition to integrated lace and lace guide designs and configurations critical to imparting precision fit and reduced friction. BOA’s engineering and technical expertise enables the development and production of performance fit solutions, allowing their brand partners to offer performance enhancing technology and product differentiation.
Competition
BOA’s competition can be segmented into three categories: established footwear brands that maintain their own proprietary technology for particular market segments, lower-quality subscale BOA imitators, and non-mechanical lace alternatives (bungies, buckles, plastic lace locks, Velcro, and webbing). Management estimates that BOA is 20+ times the size of its next closest direct competitor.
Research and Development
BOA’s approach to new product development is a multi-stage, cross-functional process. For each new product introduction, BOA works closely with brand partners to identify or develop the best suited BOA solution, its optimal placement on the shoe (or other application), color and design specifications, and cost targets. On existing products, BOA is committed to continuous innovation, including key improvements such as lower installation costs for brand partner factories, thinner and sleeker product profiles for improved aesthetics, in field warranty rate reduction to 0.5%, improved user experience, and the broadening of the platform suite to address key opportunities in alpine skiing, basketball, and outdoor.
As part of BOA’s innovation strategy around improving fit, the company has invested in a state-of-the-art PFL to quantitatively measure the impact of the BOA system on end products. In partnership with the University of Denver, the PFL is testing a significant number of products to evaluate a) Agility & Speed, b) Power & Precision, and c) Endurance & Health. By addressing these global performance attributes rather than segment-by-segment specific needs, PFL findings will be relevant and applicable across BOA’s product lines. The results of these studies help further validate BOA’s value proposition, strengthening the company’s position as a fit and performance leader. Moreover, the PFL serves as a platform to test and refine new product offerings ahead of launch.
Suppliers
BOA maintains a longstanding deep relationship with a sole supplier for plastic injected parts (dial units and lace guides), representing approximately 70% of total purchases.The vendor is based in China with multiple facilities. Furthermore, the vendor has supplied the company since 2001 and has continuously invested in its tools and infrastructure to maintain quality standards and keep up with demand. BOA owns all its injection molds. Lastly, the vendor is also a minority shareholder in BOA and is committed to supporting its growth. The remainder of BOA’s purchases are for steel and steel coated lace, textile laces and guides, monofilament lace and webbing, which are sourced from China, Korea, Europe, and the U.S. Management believes its manufacturing partners have sufficient capacity to accommodate future growth.
Intellectual Property
BOA has built a diverse global portfolio of 233 issued and pending utility and design patents. The company has created 37 patent “families” with intellectual property covering its core technology (dials, guides, laces), as well as strategic configurations and component installation methods. BOA maintains 10 Trademarks in 40+ countries.
Seasonality
Due to the diversity of sporting segments BOA participates in, there is no significant seasonality to the business, though BOA typically has higher sales in the fourth quarter, reflecting higher cycling and golf sales in preparation for the spring retail season, as well as higher sales in the second quarter each year due to purchasing trends in the snow sports product group.
Environmental, Social and Governance
As a forward-looking company, BOA is working towards making a sustainable impact throughout the world, minimizing their imprint on the environment, and diversifying the Outdoor and STEM industries. BOA has set bold goals to dramatically reduce the use of virgin fossil fuel-based plastics, overall manufacturing waste, and materially increase use of sustainable energy. The company has already made progress in all three areas and will be formally distributing its environmental and community impact report in the second quarter of 2022. In the last year, BOA has increased their budget and invested in three new roles to focus on these efforts. The company has formed partnerships with organizations in every region that are focused on providing more access and opportunities to under-represented populations and protecting the environment. Through these programs, BOA is working to create purposeful connections to their employees, partners, and consumers – bringing their mission, values, and products to the hearts and minds of their audience.
Human Capital
BOA strives to be an inclusive global team that trusts and cares for each other, their partners, the community, and the environment. Since their launch in Steamboat, CO in 2001, BOA has maintained a strong and healthy company culture that is rooted in a passion for the outdoors and the various industries that encompass their product offering. As the team has expanded over the last 20 years, BOA has placed an emphasis on creating a diverse and inclusive workplace with the goal of representing their global communities. BOA employees are located in four countries and the United States. As of December 31, 2021, BOA had 241 full-time employees and 4 part-time employees. 131 employees are located in the United States and 114 work outside of the United States in Austria, Greater China, Japan, and South Korea.
BOA is focused on both attracting new talent and growing talent from within the organization - providing learning and development opportunities, placing an emphasis on independent career plans, and building a team of leaders, managers, and staff that represents their mission, vision, and values. BOA maintains a high retention rate of their employees and believes the company's relationship with its employees is connected and transparent.
Ergobaby
Overview
Ergobaby is dedicated to building a global community of confident parents with smart, ergonomic solutions that enable and encourage bonding between parents and babies. Ergobaby offers a broad range of award-winning baby carriers, blankets and swaddlers, nursing pillows, strollers, and related products that fit into families’ daily lives seamlessly, comfortably and safely. Ergobaby is headquartered in Torrance, California.
History of Ergobaby
Ergobaby was founded in 2003 by Karin Frost, who designed her first baby carrier following the birth of her son. The baby carrier product line has since expanded into 3-position and 4-position carriers, with multiple style variations. In its second year of operations, Ergobaby sold 10,500 baby carriers and today sells over 1 million a year.In order to support the rapid growth, in 2007, Ergobaby made a strategic decision to establish an operating subsidiary (“EBEU”) in Hamburg, Germany.
In 2014, Ergobaby launched the Ergobaby Four-Position 360 Baby Carrier which expanded on Ergobaby’s leadership in the baby carrier category by offering an ergonomic, outward forward facing position for the baby and comfort for the parent. The Ergobaby 360 Carrier won the 2014 JPMA Innovation award in the baby carrier category.In 2016, Ergobaby launched the 3-Position Adapt Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs) and 2015,offers some unique parent comfort features including lumbar support and crossable shoulder straps, as well as the benefit of being an all-in-one carrier with no need for an infant insert accessory (for babies 7-12lbs.). Also in 2016, Ergobaby acquired membership interests of New Baby Tula LLC (“Baby Tula”). Baby Tula designs, markets and distributes premium baby carriers and accessories and focuses its efforts on both the ergonomics and fashion of its products. In 2017, Ergobaby launched the All Position, All-in-One Omni 360 Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs) and includes all of Ergobaby’s parent & baby comfort features from the 360 and Adapt Baby Carriers, as well as the same consumer benefit of no infant insert accessory needed.
In 2018, Ergobaby entered into the stroller category with 2 new models. The first product launched was a full-size option called the 180 Reversible Stroller. This was followed later in the year by a premium compact option, the Metro Compact City Stroller.In 2019, Ergobaby launched the Embrace Baby Carrier which is geared for newborns (7lbs-25lbs) and merges the coziness of a soft wrap carrier with the simplicity and comfort of a structured carrier. In 2020, Ergobaby launched Everlove, a first of its kind carrier buyback, restoration, and resell program to extend the lifecycle of our carriers for a more sustainable future. In 2021, Ergobaby launched the multiple award winning Aerloom, the first-of-its-kind, FORMAKNIT™ baby carrier made to move, stretch and fit parents' daily life. This carrier has a seamless knit design and 87% of the knit is made with recycled plastic bottles.
We purchased a majority interest in Ergobaby on September 16, 2010.
Industry
Ergobaby competes in the large and expanding infant and juvenile products industry. The industry exhibits little seasonality and is somewhat insulated from overall economic trends, as parents view spending on children as largely non-discretionary in nature. Consequently, parents spend consistently on their children, particularly on
durable items, such as car seats, strollers, baby carriers, and related items that are viewed as necessities. Further, an emotional component is often a factor in parents’ purchasing decisions, as parents’ desire to purchase the best and safest products for their children. On average, households spent between 11 - 27% of their before-tax income on a child. Similar patterns are seen in other countries around the world.
Demand drivers fueling the growing spending on infant and juvenile products include favorable demographic trends, such as (i) a high percentage of first time births; (ii) an increasing age of first time mothers and a large percentage of working mothers with increased disposable income; and (iii) an increasing percentage of single child households and two-family households.
In purchases of baby durables, parents often seek well-known and trusted brands that offer a sense of comfort regarding a product’s reliability and safety.As a result, brand name, comfort and safety certifications can serve as a barrier to entry for competition in the market, as well as allow well-known brands such as Ergobaby and Baby Tula to compete in a growing premium segment.
Products, Customers and Distribution Channels
Products
Baby Carriers - Ergobaby has two main baby carrier product lines: baby carriers and related carrier accessories, sold under both the Ergobaby and Tula brands. Ergobaby’s baby carrier designs support a natural, ergonomic ("M" shaped) sitting position for babies, eliminating compression of the spine and hips that can be caused by unsupported suspension. The baby carrier also distributes the baby’s weight evenly between parents’ hips and shoulders and alleviates physical stress for the parent. Both Ergobaby’s 3-Position and 4-Position baby carriers have been recognized by the International Hip Dysplasia Institute as being “hip healthy”. Additional accessories are provided to complement the baby carriers including the popular Infant Insert.
Within the Ergobaby Baby Carrier product line, Ergo sells 3-Position and 4-Position baby carriers in a variety of style and color variations and Baby Tula sells 3-Position and 4-Position fashion-oriented baby carriers. Baby Carrier sales represented approximately 90%, 89% and 88%, of net sales in 2021, 2020, and 2019, respectively.
Within the baby carrier accessories category, the Infant Insert is the largest sales component of the accessory category but has seen declining sales as customer move to newborn ready carriers. Accessory sales represented approximately 3.2% in 2021, 5.4% in 2020 and 6.1% in 2019, of net sales.
Ergobaby’s core Baby Carrier product offerings with average retail prices are summarized below:
Ergo
•9 styles of baby carriers - $80 - $220
•2 styles of Infant Inserts - $35
Tula
•8 styles of baby carriers - $79 - $1,000
•1 style of Infant Inserts - $20
Customers and Distribution Channels
Ergobaby primarily sells its products through brick-and-mortar retailers, national chain stores, online retailers and distributors. In Europe, Ergobaby products are sold through its German based subsidiary, which services brick-and-mortar retailers and online retailers in Germany and France; it’s United Kingdom based subsidiary; and its Tula subsidiary in Poland; as well as a network of distributors located in Sweden, Norway, Spain, Denmark, Italy, Turkey, Russia and the Ukraine. Customers in Canada are predominately serviced by Ergobaby’s Canadian subsidiary. Sales to customers outside of the U.S., Canadian and European markets are predominantly serviced through distributors granted rights, though not necessarily exclusive, to sell within a specific geographic region.
Ergobaby had approximately $14.3 million and $11.5 million in firm backlog orders at December 31, 2021 and 2020, respectively. Two individual customers accounted for approximately 25% of Ergobaby's gross sales in 2021 and 2020. No other single customer represented more than 2%10% of net sales.Ergobaby’s gross sales in 2021 or 2020.
Highly Responsive CultureBusiness Strategies and Organization — A key strengthCompetitive Strengths
Business Strategies
Increase Penetration of Advanced Circuits isCurrent U.S. Distribution Channels - Ergobaby continues to benefit from steady expansion of the market for wearable baby carriers and related accessories in the U.S. and internationally. Going forward, Ergobaby will continue to leverage and expand the awareness of its abilityoutstanding brands (both Ergobaby and Baby Tula) in order to quickly respond to customer orders and completecapture additional market share in the production process. In contrast to many competitors that require a day or more to offer price quotes on small-run or quick-turn production, Advanced Circuits offers its customers quotes within secondsU.S., as parents increasingly recognize the enhanced mobility, convenience, and the ability to place or track orders any timeremain close to the child that all Ergobaby carriers enable. Ergobaby currently markets its products to consumers in the U.S. through brick-and-mortar retailers, national chain stores, online retailers, and directly through Ergobaby.com and Babytula.com websites.
International Market Expansion - Testimony to the global strength of day.its lifestyle brand, Ergobaby has historically derived approximately 60% of its sales from international markets. Like it has in the U.S., Ergobaby can continue to leverage the Ergo and Tula brand equity in the international markets it currently serves to aggressively drive future growth, as well as expand its international presence into new regions. The market for Ergobaby’s products abroad continues to grow rapidly, in part due to the fact that in many parts of Europe and Asia, the concept of baby wearing is a culturally entrenched form of infant and child transport.
New Product Development - Management believes Ergobaby has an opportunity to leverage its unique, authentic lifestyle brands and expand its product line. Since its founding in 2003, Ergobaby has successfully introduced new carrier products to maintain innovation, uniqueness, and freshness within its baby carrier and travel system product lines and has become the baby carrier industry leader with the Omni 360 baby carrier. In addition Advanced Circuits’ productionto expanding into new product carriers like swaddling and nursing pillows, in 2018, Ergobaby entered the stroller category by introducing a new premium compact stroller (Metro Compact City Stroller) and a full-size stroller (180 Reversible Stroller).
Competitive Strengths
Ergobaby innovation - Ergobaby Carriers are known for their unsurpassed comfort.Ergobaby’s superior design results in improved comfort for both parent and baby. Parents are comfortable because baby’s weight is evenly distributed between the hips and shoulders while baby sits ergonomically in a natural ("M" shaped) sitting position. The concept of baby carrying has increased in popularity in the U.S. as parents recognize the emotional and functional benefits of carrying their baby. Consumers continually cite the comfort, design, and convenient “hands free” mobility the Ergobaby carrier offers as key purchasing criteria. Ergobaby is also recognized as an industry leader in innovation.With the launch of the Ergo 4-Position 360 Carrier in 2014, the launch of the 3-Position ADAPT carrier in 2016, the launch of the All Position Omni 360 carrier in 2017, the launch of the Embrace carrier in 2019, and the launch of the Aerloom carrier in 2021. Ergobaby continues to innovate in the baby carrier segment on a regular basis.
Baby Tula Community - Tula enjoys an active and enthusiastic community who are vocal advocates for the brand.The Tula community acts as both an avid source of feedback on new product launches, which influence future product and patterns, as well as brand influencers to the broader new parenting community.
Competition
The infant and juvenile products market is fragmented, with a few larger manufacturers and marketers with portfolios of brands and a multitude of smaller, private companies with relatively targeted product offerings.
Within the infant and juvenile products market, Ergobaby’s baby carriers primarily compete with companies that market wearable baby carriers. Within the wearable baby carrier market, several distinct segments exist, including (i) slings and wraps; (ii) soft-structured baby carriers; and (iii) hard frame baby carriers.
The primary global competitors in this segment are BabyBjorn, Infantino, and Chicco. In geographies globally, Ergobaby also competes with companies that have developed wearable carriers, such as Infantino, Manduca, Cybex, Nuna, Stokke, Boppy, and Pognae. Within the soft-structured baby carrier segment, Ergobaby benefits from strong distribution, good word of mouth, and the functionality of the design.
Suppliers
During 2021, Ergobaby sourced its Ergo carrier and carrier accessory products from Vietnam and India, and manufactured its stroller systems and accessory products in China. Baby Tula products predominantly were produced from factories in India and Poland and were also produced in its own facility operateslocated in Poland. In 2009, Ergobaby partnered with a manufacturer located in India, and in 2012, Ergobaby began sourcing carriers and accessories from a manufacturing facility in Vietnam. More than 50% of Ergobaby’s carriers and accessories came from Vietnam in 2021. Baby Tula sourced its carrier, accessories and blanket products from Poland, Vietnam and India, with purchases from these locations accounted for approximately 14% of total Ergobaby purchases. Management believes its manufacturing partners have the additional capacity to accommodate Ergobaby’s projected growth.
Intellectual Property
Ergobaby maintains and defends a U.S. and international patent portfolio on some of its various products, including its 3-position and 4-position carriers. Currently, it has 81 patents (including allowances) and 33 patents pending in the U.S. and other countries. Ergobaby also depends on brand name recognition and premium product offering to differentiate itself from competition.
Human Capital
Ergobaby is a global organization headquartered in Torrance, California, with offices in Hamburg, London, Paris and Bialystok, and distribution and retail partnerships in more than 75 countries. As of December 31, 2021, Ergobaby had 183 employees globally. Ergobaby’s people are its most valuable asset and the organization is proud to be recognized as one of LA’s Best Places to Work 2021. Ergobaby strives to create a culture of trust with diversity of thought to drive innovation, create products and be a resource that helps to empower families everywhere. The collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, and unique capabilities of Ergobaby employees is evident in its positive culture and highly recognized brand. The company’s corporate responsibility and diversity and inclusion efforts are employee led, driven by the belief that supporting a global society that is resilient, empathetic, anti-racist, and inclusive starts with having a community where all people can thrive, starting from within the company itself.
Lugano
Overview
Lugano is a leading designer, manufacturer, and retailer of high-end jewelry. Lugano utilizes an extensive network of suppliers to procure high-quality diamonds and rare gemstones. Often taking inspiration directly from the stone, Lugano designs and creates one-of-a-kind jewelry that it sells to a broad base of clients. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art, and philanthropic communities. Lugano is headquartered in Newport Beach, California.
History of Lugano
Lugano was founded in 2004 by husband-and-wife team Moti and Idit Ferder. The company’s chosen name, “Lugano” was inspired by the picturesque Lake Lugano of southern Switzerland, a one-of-a-kind “gemstone of nature” surrounded by the Lugano Prealps mountains.
Lugano opened its first retail salon in 2005 in Newport Beach, California as an appointment only showroom. This salon, located in Orange County’s high-end Fashion Island shopping district, grew rapidly, and served as a critical proof of concept for the Lugano’s bespoke retail strategy. In the subsequent years, Lugano opened three shifts per daymore retail salons with its trademark high-touch sales approach to expand the Lugano’s geographic footprint in key destinations frequented by its target clientele.
In 2008, Lugano started an equestrian division focused on the Southeastern United States to complement its retail sales strategy. Today, Lugano sponsors many key equestrian events and is a long-standing supporter of equestrian-related causes.
Throughout its history, Lugano has also focused on building strong relationships with influential social and philanthropic organizations in the local communities surrounding its retail salons. In Aspen, Colorado Lugano frequently hosts private dinners and events in collaboration with organizations like the Aspen Institute or the Aspen
Museum of Art. Lugano’s event-based marketing strategy enables Lugano to regularly meet prospective clients and reconnect with repeat clients.
In 2020, Lugano expanded its production capabilities by building an in-house workshop to provide increased production efficiencies and improve control over its high-end gemstone inventory. Today, Lugano’s unique go-to-market strategy, one-of-a-kind designs, vertical integration and carefully cultivated network of clientele serve as critical differentiators among the retailer’s competitors in the high-end jewelry market.
We purchased a majority interest in Lugano on September 3, 2021.
Sales and Distribution
Products
Lugano designs, manufactures, and retails high-end jewelry including unique rings, necklaces, earrings, bracelets and brooches that range in price from under $1,000 to well over seven figures, with an average price of approximately $115,000 per piece. Lugano’s designers start with a rare stone as inspiration and craft jewelry that highlights the beauty and perceived value of the stone. As a result, Lugano’s pieces are often seen as one-of-a-kind works of art, creating a highly desirable niche in the broader jewelry marketplace. Competitors’ products are typically high volume or collection-based jewelry lines that are inherently less unique or exclusive – traits highly valued by Lugano’s clientele.
Customers
Lugano’s client base generally consists of sophisticated, high-net-worth individuals who value long-standing relationships and a personalized sales approach over one-time purchases and the high-pressure sales tactics used by other jewelry competitors. A typical Lugano client is community and relationship-driven and seeks unique products with emotional significance. The purchasers or recipients of Lugano pieces are predominantly women and often leaders in their respective communities. Lugano’s clients can range in age from 25 to over 80 and come from all over the nation, with most based in California, followed by Florida, New York, Texas, and Colorado, reflecting the company’s current retail salon footprint, along with limited international clientele.
Lugano’s retail revenue is diversified with no customer representing greater than 10% of total revenue in 2021. Management also believes its client relationships are significantly stickier than those of other jewelry retailers. Lugano enjoys a growing percentage of repeat business year-over-year, with repeat customers contributing an increasing percentage of revenue. Beyond its retail business, Lugano also sells loose diamonds via its wholesale division representing approximately 12% of Lugano’s revenue in 2021.
Distribution
Lugano goes to market via four retail salons in Newport Beach, CA, Palm Beach, FL, Aspen, CO and Ocala, FL, all strategically located in wealthy regions near popular vacation and up-scale shopping destinations frequented by Lugano’s target clientele. In a salon, Lugano aims for an elegant and private ambience to facilitate its high-touch sales approach. Salons are carefully laid out, enabling Lugano to host private dinners, parties, or other social events. Unlike other jewelers that highlight their jewelry with long, rectangular counters that separate the customer from the salesperson, Lugano decorates its salons with curved tables and couches designed to facilitate comfort, relationship-building, and ease of conversation. Lugano also markets and sells jewelry via pop-up showrooms at Lugano-hosted or sponsored events or in the homes of its clients.
Market Trends, Business Strategies and Competition
Market Trends
Lugano competes broadly in the personal luxury goods market, a portion of the overall global luxury market. According to Bain & Company, after years of consistent growth, the personal luxury goods market experienced a brief contraction in 2020. However, since then, the personal luxury goods market grew by 29% to hit $320 billion, increasing the size of the market by 1% versus 2019 levels. Bain & Company estimates that the personal luxury goods market could reach $408-$430 billion by 2025 with a sustained growth of 6-8% annually.
Lugano currently has very low penetration (<1%) within its target market of high-net-worth individuals. Lugano’s addressable client base has been steadily increasing for over a decade and increased by nearly 10% in 2019 to an estimated 290,000 individuals worldwide, mirroring the growth seen in their combined net worth, which increased to
over $35 trillion. As a result, management believes there is significant runway for additional growth by expanding brand awareness and household penetration.
Business Strategies
Lugano believes it is well-positioned to emerge as a leading domestic and international luxury brand. Lugano’s key growth opportunities include expanding its geographic footprint across target markets, domestically and internationally, growing the number of events it hosts, and branching into activities beyond equestrian sports that similarly attract wealthy participants.
Competition
The luxury jewelry market is highly fragmented with the leading six to seven companies accounting for approximately 20% of the market. LVMH, with brands like Tiffany, Bvlgari and Chaumet; Richemont with brands like Cartier and Van Cleef & Arpels; Graff Diamonds; and Harry Winston lead the market. These competitors often utilize a traditional retail model focused on foot traffic and tourism, are typically collection-based, and do not exclusively focus on the high-end segment of the jewelry market. The remaining portion of the market consists of national retail brands and small or midsize players that operate regionally or in an online-only format.
Competitive Strengths
Sourcing, Design and Production Capabilities
A deep network of international vendors enables the company to source rare and difficult-to-find stones. These stones are then combined with the world-class capabilities of Lugano designers who create sought-after masterpieces that cater to the company’s target clientele. Lugano’s in-house production workshop or close network of captive workshops provide increased production efficiencies, improved control over its inventory and better speed to market.
High-touch Retail Model
Lugano’s one-of-a-kind inventory requires a unique and high-touch sales strategy which the company has cultivated over its nearly 20-year history. The company’s retail experience is carefully curated, emphasizing both exclusivity and elegance, both critical to the sale of Lugano jewelry.
Event-based Marketing Strategy
Lugano sponsors over one hundred events each year, enabling the company to meet prospective clients and reconnect with existing clients that have become loyal and repeat purchasers. In each market that Lugano enters, management takes great care to establish itself as part of the local community and become a focal point for its clients’ lifestyles and activities. Through its efforts, Lugano invests in relationships which build brand value and customer loyalty. Lugano-sponsored events are often a client’s gateway into the Lugano community (management estimates over 60% of clients are initially contacted at Lugano-sponsored events). Once a part of the Lugano community, customers tend to view jewelry purchases from Lugano as recurring events and often increase the size of their purchase from their previous transaction.
Sourcing and Availability of Materials
Lugano sources diamonds and precious gemstones from a variety of vendors and wholesalers. Generally, Lugano sources polished diamonds and gemstones that are crafted into a Lugano-designed piece. From time to time, Lugano also opportunistically acquires finished jewelry with a high resale value from its global network of vendors. Most of Lugano’s diamonds are sourced from domestic wholesalers. By not purchasing raw stones directly from mines, Lugano limits conflict diamond exposure. Lugano ensures all its diamond vendors adhere to the Kimberly Process Certification Scheme to prevent conflict diamonds from entering its supply chain.
Lugano’s vendor base is diversified with no vendor making up more than 10% of total purchases and the top 10 vendors making up less than 50% of all purchases. Lugano maintains decade-long and trusted relationships with its top vendors.
Seasonality
While individual retail salons experience some seasonality (e.g., winter in Aspen, summer in Newport Beach), these patterns offset one another at the company-level. Additionally, due to the variety of events Lugano hosts all-year-round, there is no significant seasonality in the business.
Human Capital
As of December 31, 2021, Lugano employed a non-union labor force of 54 full-time employees. 25 employees work in sales and marketing, 12 work in design & production, 9 work in operations, 4 work in accounting and 4 work in corporate. Lugano intends to continue to grow its headcount and build out its middle management as it executes on its growth strategy of new salon openings, increased event-based marketing, and international expansion. Management believes Lugano's relationship with its employees is good.
Marucci Sports
Overview
Founded in 2009 and headquartered in Baton Rouge, Louisiana, Marucci is a leading designer, manufacturer, and marketer of premium wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also develops and licenses franchises for sports training facilities. Marucci products are available through owned websites, their team sales organization, Big Box Retailers, and third-party e-commerce and resellers. In 2017, Marucci acquired Victus Sports, a King of Prussia, Pennsylvania based complementary baseball equipment manufacturer and distributor. Marucci has vertically integrated wood bat manufacturing and has built long-standing relationships with international suppliers who manufacture the remainder of their product lines.
Marucci is an established brand commanding strong market share across product categories. Marucci’s mission is to “honor the game” and brands itself as such with simplistic imagery and to-the-point marketing campaigns.
Victus is a more recent entrant to the baseball equipment market but garners similar wood bat usage as Marucci. The brand is widely recognized for its edgy designs and big attitude. Victus’ mission, in contrast to Marucci’s, is to embrace the evolution of the game and to salute the next generation of players who set out to change it.
History of Marucci Sports
Marucci Sports was founded in 2009 by a team including two former professional baseball players. Marucci released its first metal bat, the Marucci CAT5, in 2009. In 2013, Marucci released batting gloves and launched its first series of fielding gloves, the Founders’ Series. Marucci was able to shipleverage its brand power to expand into the baseball apparel and accessories market as well. In 2018, Marucci acquired Carpenter Trade to expand the quality and technology of its fielding glove offering and change the current consumer expectations for a customer’struly customized fielding glove. Victus’ product offering expanded into metal bats in 2019 with the launch of its Vandal line and recently expanded with the launch of the NOX. In 2019 Marucci also acquired two timber mills and a wood drying facility, securing vertical manufacturing capabilities within 24 hoursits wood bat product category and ensuring access to the best wood in the game. In 2021, Marucci acquired Lizard Skins, a designer and seller of branded grip products, protective equipment, bags and apparel for use in baseball, cycling, hockey, Esports and lacrosse. Marucci believes that the acquisition of Lizard Skins will allow it to build on its leading position in diamond sports while simultaneously developing the company’s presence in new sports markets such as hockey and cycling.
Today, Marucci is a designer, manufacturer, and marketer of premium Marucci and Victus-branded baseball and softball equipment including wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment. All of these products are sold around the world in retail stores, online and through its corporate owned and franchised training facilities.
We acquired a majority interest in Marucci on April 20, 2020.
Industry
Marucci Sports primarily competes primarily in the domestic baseball equipment market which includes wood bats, metal bats, fielding gloves, cleats, protective and other gear, and uniforms/ team apparel of which management estimates constitutes approximately $1.3 billion of annual retail revenue. Marucci Sports also competes within the greater global baseball equipment market which management estimates constitutes approximately $2.2 billion of
annual retail revenue. Marucci’s product offering targets primarily the premium equipment price point more often used in competitive club and travel leagues, for which participation rates are generally more stable.
The industry is generally considered to be a stable sector with growth rates in the low single digits. Baseball equipment is largely sold through national retailers. Independent resellers and online platforms also sell baseball equipment while the balance is purchased directly from the manufacturer.
Products, Customers and Distribution Channels
Products
Marucci designs, manufactures, and markets six categories of products: (i) metal bats, (ii) wood bats, (iii) apparel & accessories, (iv) batting gloves, (v) fielding gloves, and (vi) bags & protective equipment. Marucci’s product strategy encompasses producing high quality products recognized by consumers for their performance, craftsmanship, and value, and building on a rich history to introduce innovative new products.
Metal Bats - Metal bats have historically represented Marucci’s largest product category by revenue. The metal bats are priced at the premium end of the market, with average retail prices ranging from $219.99 to $549.99. Marucci produces metal bats for all ages, from college to tee ball, with a focus on elite high school players. The CAT series is the flagship metal bat product from Marucci. Marucci also offers a lower price point model, the F5. Victus’ first metal offering, the Vandal, was first launched in 2019, and is priced similarly to the CAT series. Victus later introduced its first two-piece bat in the NOX. Metal bats used in youth and elite travel leagues are subject to strict regulations limiting spring and exit velocity. The company has historically followed a two-year product release cycle, and Marucci metal bats have notable staying power with their customer base as prior year models remain in production.
Wood Bats- Marucci’s wood bats are built with quality, precision, and customization. Marucci prides itself in making every pro-bound bat a “game bat”. Marucci offers two types of wood bats: ash and maple. Ash is a soft, open grain wood. Maple bats are a much harder, closed grain wood and constitute a large majority of the company’s wood bat sales. The wide variety of selection and price points offer professional-level quality and cuts to amateur players as well. Innovative customization options further drive engagement.
Fielding Gloves - Marucci offers a growing set of fielding gloves across eight product series: Capitol, Cypress, Ascension, Oxbow, Acadia, Caddo, Magnolia (softball), and Palmetto (softball). Marucci has a complete line of gloves to meet the needs of every position player at every age and skill level. Marucci offers gloves across the pricing spectrum. Marucci acquired Carpenter Trade in 2018, along with their C-Mod technology which provides a unique fit. The C-Mod technology uses a size-specific, ergonomically shaped fit system that creates a more form fitting hand stall for greater control, leverage and responsiveness when fielding. The tailored-fit technology is available in straight or shift.
Apparel & Accessories - Marucci offers a full suite of apparel and accessory offerings that is rapidly expanding. The current product portfolio includes on-field and off-field apparel, sunglasses, hats, grips, and more. Most sales of these products are sold direct-to-team in custom apparel packages including baseball pants, jerseys, practice shirts, and more. Marucci has in-house screen-printing operations allowing for customization of various pieces of apparel. The acquisition of Lizard Skins in October 2021 further enhanced the company’s accessory offering. Lizard Skins is the top manufacturer and marketer of grips used in baseball, cycling, hockey, lacrosse, gaming, and various other sports.
Batting Gloves - All Marucci batting gloves are designed to meet professional standards of comfort, durability and performance while also appealing to users of all levels. Marucci has four lines of batting gloves: Pittards’ Reserve, Signature, Quest, and Code while Victus has one, the Debut. Marucci also offers limited production customized batting gloves. Marucci’s batting gloves span the pricing spectrum.
Bags & Protective Gear - Marucci offers an extensive line of bags and protective gear including bat packs, bat quivers, helmets, shin and elbow guards, catchers gear, and more allowing Marucci to cater to nearly all its customers playing needs.
Customers and Distribution Channels
Marucci sells its products through several channels including Big Box Retailers; Direct-to-Consumer ("DTC"), Direct-to-Team ("DTT"), the company's experiential Clubhouse retail stores and other Owned Channels; and third-party e-
commerce and resellers. Marucci’s top 5 customers accounted for 57.7% of 2021 of net sales.
Business Strategies and Competitive Strengths
Business Strategies
Continued Innovation in Existing Product Categories - Marucci plans to continue to build on its successful history of bringing new, innovative, highly anticipated products to market through leveraging its stringent new product development process, and external and internal manufacturing capabilities. The company has near-term new product launches and existing product updates planned across all categories that will further drive innovation, strengthening our competitive positioning.
Further Penetration of Existing Customer Accounts - Marucci has identified opportunities to leverage its existing relationships with retailers to drive expanded SKU offerings across categories, especially in apparel. Additionally, management believes the company can continue to improve Victus product adoption with existing channel partners.
An approximately $150 million fielding glove market represents a significant growth opportunity for Marucci. Fielding gloves are the second largest hard goods market in baseball / softball. Marucci plans to leverage its brand strength and innovation to capture share in this high margin category. The acquisition of Carpenter Trade in 2018 has allowed Marucci to offer a highly customized glove that serves as a key differentiator in fielding gloves.
Victus Category and Product Expansion - Victus has strong penetration in the majors and key affiliations with top players. The brand released its first metal bat in 2019, the one-piece Victus Vandal BBCOR bat and later launched its first two-piece bat, the NOX. Metal bats sales are expected to meaningfully contribute to Victus’ overall sales in the future. Victus’ key affiliates and player advocacy has driven a halo effect across other categories. Growth in lifestyle and fan apparel represents a significant opportunity for Victus to leverage its brand.
Lizard Skin Expansion – With the acquisition of Lizard Skins in October 2021, Marucci plans to expand its distribution of the company’s key grip product which are used in various sports including baseball, softball, cycling hockey and lacrosse. Additionally, Marucci sees opportunity to expand its grip offering into gaming and other similar applications, as well as batting gloves.
International Market Expansion - International sales currently represent a small portion of total sales. Natural expansion opportunities exist in baseball markets abroad such as Japan, South Korea, Taiwan, Canada, and Latin America. Marucci has achieved profitable growth in Asia by leveraging its premium brands and accessing markets through proven team dealers and distributors. In late 2021, Marucci launched a Japan-based sales office.
Further Penetration of Softball Market - Marucci’s plans to leverage its brand strength in baseball to further penetrate the softball market. Marucci is driving brand awareness and growth in the softball market from the ground up through grassroots marketing efforts, social media influencers, leveraging its partnerships with colleges and affiliated Marucci club teams, as well the recently launched softball mobile tour, to get in front of players of all ages. Marucci has dedicated employees who focus on softball expansion and have experience in the category as former collegiate athletes and coaches.
Expansion of the Direct-to-Team Sales Channel - The Direct-to-Team sales channel, launched in 2014, allows Marucci to sell its equipment and apparel directly to thousands of players. Marucci currently has 29 Founders’ Club organizations, representing 15,000 players. The Founders’ Club is an elite alliance of some of the nation’s premier amateur baseball programs selected by Marucci for their dedication to excellence on and off the field, reputation as a positive influence in their community, and commitment to growing their organization.
Marucci’s proprietary online platform for this channel, “Locker Room”, is ideal for any group that requires individual processing and purchasing. There is potential opportunity to leverage Locker Room capabilities across other team sports as the total market size for U.S. Team Sports Uniforms is approximately $1.3 billion. Marucci feels the DTT strategy is still in its early stages of growth.
Industry Consolidation - With a well-developed global supply chain, external and internal manufacturing capabilities, sophisticated management systems infrastructure, and extensive network of relevant relationships, Marucci is a platform for consolidation within both the baseball and softball equipment and apparel spaces.Management has identified a pipeline of potential acquisition targets that would help Marucci strengthen and expand its product offering and address new market segments.
Competitive Strengths
Originally founded to focus on baseball and softball, Marucci has a unique strength with its authentic knowledge and experience of these sports. Whether leading the Company’s strategy, cutting and sanding wood bats, or shipping product, the Marucci team consists largely of former players or coaches of the game itself. This same strategy extends to any category or market the company participates in so that the product is truly designed by the player for the player.
Product Development – the product development cycle varies by product with bats taking approximately 16 months to reach distribution and batting gloves requiring approximately 9 months. New product development at Marucci occurs in six successive stages: (1) Identify Market Opportunity – search for player needs via internal leads, supplier partners, or on-the ground feedback from players in their network, (2) Cross Functional Ideation – host ongoing dialogue with sourcing partners to identify next-gen technology, (3) Product Development – have sourcing partners begin preliminary testing runs once viable new products are identified, (4) Production and Validation – continue rigorous prototyping and product validation on the field and in the Marucci performance lab where Big League and amateur players test and provide feedback, (5) Marketing – engage in-house marketing team to drive product naming, rollout, branding, and marketing stories to expand awareness, and (6) Product Rollout and Distribution – finalize the marketing story, conduct sales presentations, and provide samples to representatives and finally receiving orders from channel partners and beginning full production.
Leading Brands with Professional Halo – Both Marucci and Victus products are preferred by Big League players (#1 and #2 bat brands in the Big Leagues, respectively), and Lizard Skins is the grip tape of choice for many top athletes at both the professional and amateur levels. Marucci’s leading share of use among the top players at the top levels of baseball underlies the aspirational nature of the brand and creates a “halo effect” for its order.broader product lines, giving the brands credibility and permission to play in adjacent product categories, customer demographics, and geographic markets.
Vertical Integration – Marucci owns its own wood mills, giving the company greater control over the availability and quality of the supply of wood billets used to produce its wood bats. Marucci’s original value proposition to professional players was to guarantee that each bat delivered would meet the most stringent standards demanded for in-game use. As product tolerances continue to tighten and supply chain complexity creates operational challenges for many competitors, Marucci’s ability to ensure both product quality and availability is a unique competitive advantage.
Competition
Marucci competes with offerings from multiple large baseball equipment manufacturers, including Easton (under the Easton and Rawlings brands) and Wilson Sporting Goods Company (under the Wilson, DeMarini, Louisville Slugger, and Evoshield brands), and numerous smaller wood bat specific brands including Old Hickory, Chandler Bats, Tucci, Dove Tail, Sam Bat, and D-Bat. Key determinants in consumer purchasing decisions include product performance, quality, and brand loyalty.
Suppliers
Marucci leverages a combination of sourcing and in-house manufacturing. Metal bats, apparel, batting gloves, fielding gloves, bags, and other accessories are sourced from an international network of primarily Asian manufacturing partners, while wood bats are manufactured domestically at the company’s Baton Rouge (Marucci) and King of Prussia (Victus) facilities. In 2019, the company acquired two timber mills, effectively consolidating its wood bat supply chain to improve quality and production efficiency and ensuring continued access to the best wood in the game.
Intellectual Property
Marucci maintains 47 trademarks in the U.S., 41 of which are registered and 6 of which are pending registration. Marucci also has 1 issued patent. Management considers its trademarked brand names, preeminent name recognition, ability to design innovative products, and technical and marketing expertise to be its primary competitive advantages.
Regulatory Environment
Baseball and softball equipment, outside of bats, enjoys a largely restriction free Federal/Local government regulatory framework. Metal bats used in youth and elite travel leagues are subject to strict regulations limiting
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• | Proprietary FreeDFM.comTM Software — Advanced Circuits offers its customers unique design verification services through its online FreeDFM.com tool. This tool enables customers to receive a free manufacturability assessment report, within minutes, resolving design problems before customers place their orders. The service is relied upon by many of Advanced Circuits’ customers to reduce design errors
spring and exit velocity determined by self-regulatory associations connected to the sport. There are three key regulatory groups associated with baseball: USA Baseball, United States Specialty Sports Association (“USSSA”), and Bat-Ball Coefficient of Restitution (“BBCOR”). Each have their own method for measuring bat performance. BBCOR is the standard currently governing adult baseball bats used in High School and Collegiate play while USA and USSSA govern youth leagues. There are also regulatory bodies specific to softball including Amateur Softball Association (ASA) and Independent Softball Association, among others. Wood bats used in professional baseball are subject to league-specific regulations. We believe all of our products adhere to established regulations Seasonality Marucci typically has higher sales in the first quarter each year, ahead of the primary baseball season. However, management expects seasonality to smooth as baseball becomes an increasingly year-round sport. Human Capital Marucci had 322 employees at December 31, 2021, 256 full-time and 66 part-time employees, all located in the United States. Additionally, Marucci works with a third party Employer of Record in Japan to deploy its strategies in Asia and currently has 5 full-time employees. Marucci's labor force is non-union. Management believes that Marucci has a good relationship with its employees. Velocity Outdoor Overview Velocity Outdoor, headquartered in Bloomfield, New York, is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories.Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks.Airguns historically represent Velocity Outdoor's largest product category. The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity Outdoor's other primary product categories are archery, with products including CenterPoint crossbows and the Pioneer Airbow, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products. In September 2018, Velocity acquired Ravin Crossbows, a manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related to the advancement of crossbow technology. We acquired a majority interest in Velocity Outdoor on June 2, 2017. History of Velocity Outdoor Velocity was founded in 1923 as Crosman Rifle Company and was one of the first manufacturers of recreational airguns in the United States. Velocity Outdoor acquired Visible Impact Target Company in 1991 and Benjamin Sheridan Corporation in 1992. Benjamin was, and continues to be, a dominant U.S. producer of high-end pneumatic and CO2 powered airguns while Sheridan was one of the world’s foremost manufacturers of high-quality paintball markers.In 2007, Velocity expanded its offerings outside the traditional airgun category with the debut of its new optics division, Centerpoint Precision Optics. In 2008, Velocity diversified further by adding Crosman Archery to its list of branded products and introduced two new hunting crossbows in addition to youth archery products.In 2016, Velocity debuted its Centerpoint line of crossbows and the Benjamin Pioneer Airbow, the first ever mass-produced air powered archery device and with the 2018 acquisition of Ravin Crossbows, Velocity expanded their archery product line into the higher-end segment of the crossbow market. Today, Velocity Outdoor is an international designer, manufacturer and marketer of Crosman and Benjamin airguns including related ammunition and accessories, archery products including the Ravin and Centerpoint crossbows, airsoft rifles, pistols, and ammunition, laser aiming devices, and precision optics.
Industry Velocity Outdoor primarily competes within the airgun and archery sub-segments of the broader outdoor recreational products industry, which together management estimates constitute approximately $1.1 billion of annual manufacturer revenue.Both categories share certain common characteristics, including consumer demand for innovation, similar sales channels, and unique regulatory frameworks. The airgun industry is estimated by management to constitute approximately $275 million of annual manufacturer revenue, including consumables and excluding accessories. With a history stretching back over a century, the industry is generally considered to be a mature sector, with stable growth rates in the low single digits. Airgun products are largely sold through big box specialty sporting goods retailers, mass merchants and online retailers, each accounting for roughly 22%, 21% and 26% of purchases, respectively. The remainder moves through Dealers and Distributors. Airguns are less seasonal than archery because there is no defined hunting season, although sales spike somewhat around holidays. The archery equipment market is estimated by management to constitute approximately $770 million of annual manufacturers sales, of which $500-$550 million is attributable to bows and $200-$250 million is attributable to related archery consumables. Vertical and compound bows, and crossbows each comprise about half of the category sales, with crossbows gaining share in recent years. Independent archery Dealer’s account for 38% and big box specialty sporting goods retailers account for approximately 33% of consumer purchases. Distributors, mass merchants, and online retailers make up the remainder of consumer sales. Products, Customers and Distribution Channels Products Velocity designs, manufacturers and markets five categories of products: (i) airguns, (ii) archery products, (iii) consumables, or pellets, BBs and CO2 cartridges, (iv) optics, and (v) airsoft. Velocity's product strategy encompasses producing high quality, feature-rich products recognized by consumers for their craftsmanship and value, and building on a rich history to introduce innovative new products. Airguns - Airguns has historically represented Velocity's largest product category. The airgun product line consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity's airguns are designed to be multi-purpose, multi-occasion products, for use in recreational plinking and target shooting, pest control, and hunting. Velocity offers a “good, better, best” array of airguns under the Crosman and Benjamin brands. The Crosman brand is known for high value at an accessible price, where the Benjamin brand is typically associated with premium products falling within the mid- to high-price point. Additionally, Velocity rounds out its offering with mid-level products produced under an exclusive licensing agreement with Remington for its Remington, Marlin, DPMS, and Bushmaster brands. Archery Products - Velocity re-entered the archery market in 2016 with a product line anchored by the Centerpoint crossbow and the first-of-its-kind Pioneer Airbow. Centerpoint has grown rapidly since it was launched to become the second largest player in the crossbow category.The Centerpoint Sniper 370 is the top-selling SKU in the crossbow market, with more than twice the volume of its nearest competitor. Centerpoint acquired market share by offering features like an aluminum frame, higher shooting velocity, integrated string stops, a 4x32mm scope and shoulder sling at very competitive retail prices. Concurrent with the launch of the Centerpoint line of crossbows, Velocity also introduced the Pioneer Airbow. The Pioneer Airbow created a new sportsman category as the first ever mass-produced air-powered archery device, effectively bridging the gap between airguns and archery.Velocity acquired Ravin Crossbows in 2018, further expanding its product line in the archery market. Ravin Crossbows is a leading designer, manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related to the advancement of crossbow technology. Consumables - Velocity's consumables segment consists of steel and plastic BBs, various styles of lead pellets, and single-use CO2 cartridges used to power airguns. BBs are typically used for plinking, training, or target shooting at a more affordable cost, while different pellet styles are designed either for accuracy, maximum penetration, or a combination of the two. Velocity is the world’s largest provider and only domestic manufacturer of CO2 cartridges, having first introduced the use of C02 as an airgun propellant in 1961. Consumables are produced under the Crosman, Benjamin, and Copperhead brand names.
Optics - Launched in 2006, Velocity's line of optics products offers high-performance, value-priced optics under the Centerpoint brand. The scopes, sights, binoculars, lights, and lasers are marketed for traditional firearms, in addition to select airgun and crossbow offerings.In 2017, Velocity added to their optics product line with the acquisition of the commercial division of LaserMax.LaserMax is a global leader in hardened and miniaturized laser systems, offering a comprehensive line of premium laser sights for home defense, personal protection and training use. LaserMax’s commercial business provides laser sighting solutions and tactical lights to the firearm original equipment manufacturers ("OEM") and retail channels. Management believes that the addition of the LaserMax products enables Velocity to reach a wider range of new customers across retail channels. Airsoft - Airsoft guns are a class of air, CO2, gas, or electric-powered guns that are typically made from high-impact plastics and are engineered with recreation in mind to fire safe, plastic BBs quickly and accurately. Airsoft products are most often used for recreational purposes by a younger demographic and a strong user base amongst military and law enforcement customers. Velocity offers a broad portfolio of airsoft rifles and pistols under its owned Crosman Elite and Game Face brands, as well as the licensed U.S. Marines brand. Distribution Channels Velocity's products are sold through over 900 customers across a mix of sales channels, including mass merchants, national retailers, distributors/dealers/regional chains, international distributors, and e-commerce. Over the last 5 years, management has successfully diversified both its sales channel composition and customer mix. Velocity sells its products through nearly all major domestic mass merchants and sporting goods retailers currently selling airguns and minimize production costs. Beyond improved customer service, FreeDFM.comTM has the added benefit of improving the efficiency of Advanced Circuits’ engineers, as many routine design problems, which typically require an engineer’s time and attention to identify, are identified and sent back to customers automatically. |
Established Partner Network — Advanced Circuits has established third party productiona strong e-commerce platform to allow for flexibility in a changing retail environment. The company has been selling to many of its customers for over 20 years, maintaining close relationships with PCBkey purchasing personnel through high-touch customer service. Velocity is one of the only players in the sportsman category offering category management services, product assortment, and SKU optimization feedback typical of larger multinational consumer products companies. This data-sharing has resulted in higher retailer sell-through and margin enhancement, more accurate sales forecasting, and a 98% fulfillment rate, all of which are key components in maintaining status as a vendor of choice.
Velocity maintains an internal sales team responsible for covering the vast majority of its customer relationships, or approximately 90% of total sales. Furthermore, Velocity supplements its in-house team with four independent sales representative organizations, providing coverage for approximate 375 additional customers across their respective geographic territories. International sales efforts are handled by Velocity-employed account executives who work through local distributors in order to ensure that products conform to local regulatory standards.
Customers
Velocity sells its products through nearly all major domestic mass merchants and sporting goods retailers and has established a strong e-commerce platform to allow for flexibility in a changing retail environment. The three largest customers represented 35.8% of gross sales in 2021 and represented the major sales channels; mass merchant, e-commerce, and regional retail.
Velocity had approximately $26.6 million and $39.0 million in firm backlog orders at December 31, 2021 and 2020, respectively.
Business Strategies and Competitive Conditions
Business Strategies
Continued Innovation in Existing Product Categories - Velocity plans to continue to build on its successful history of bringing new, technically superior products to market through leveraging its stringent new product development process, internal manufacturing capabilities, and a flexible supply chain. The company has near-term new product launches and existing product updates planned across all categories, including the highlights below.
•Airguns - Building on the Silencing Barrel Device (SBD) technology, Velocity is introducing a line of multi-shot break-barrel models that feature a 10-shot clip that advances automatically.Velocity is also enjoying success with its recent introduction of fast shooting full-auto BB guns under the Crosman brand.In addition, Velocity continues to be the world’s largest producer of BB, pellets and CO2 powerlets.
•Archery - Following the successful 2016 launch of the CenterPoint crossbow line, Velocity continues to offer the best value proposition in the industry.Recently CenterPoint has introduced new crossbow models at higher price points to segments of the market and Ravin continues to introduce models that lead the industry in innovation and performance.Ravin recently introduced its new electric cocking/de-cocking model that shoots at 500 feet per second.
•Optics - In addition to the launch of three CenterPoint Spectrum First Focal Plane series of scopes, the company recently released CenterPoint optics to include range finding binoculars and scope adapters. Additionally, following the launch of the grip activated GripSense lasers in 2017, Lasermax has introduced a universal rail mounted laser featuring the same activation technology.
•Airsoft - Airsoft guns are a class of air, CO2, gas, or electric-powered guns that are typically made from high-impact plastics and are engineered with recreation in mind to fire safe, plastic BBs quickly and accurately. Airsoft products are most often used for recreational purposes by a younger demographic and a strong user base amongst military and law enforcement customers. Velocity offers a broad portfolio of airsoft rifles and pistols under its owned Game Face brand.
Expand into Adjacent Product Categories - Management believes that the company can leverage in-house manufacturing and sourcing partners to develop products in new categories that utilize Velocity's existing distribution network and brand strength.
Further Penetration of Existing Customer Accounts - Management has identified several strategies for further penetrating its existing customer accounts. First, Velocity has identified opportunities to leverage its existing relationships with retailers to drive expanded SKU offerings across categories. Additionally, management believes the company can expand the CenterPoint brand into the dealer network due to the acquisition of Ravin. Furthermore, management believes that the company is well positioned to grow as its brick-and-mortar customers adapt to a changing retail landscape. Velocity believes it can leverage its structured analytical sales approach and new marketing initiatives to assist retailers with enhancing their online sales, similar to the strategies it already employs working with pure e-commerce customers like Amazon and Pyramyd Air.
Consolidation Platform - With a well-developed global supply chain, refined manufacturing capabilities, sophisticated management systems infrastructure, and extensive network of relevant relationships, Velocity sees itself as a platform for consolidation within both the broader outdoor recreational goods space and the archery space specifically.Management has identified a pipeline of potential acquisition targets that would help Velocity strengthen and expand its product offering and address new market segments.
International Growth - Velocity is exploring opportunities to grow international sales and increase market share by pursuing new international distributor relationships. Management has recently focused its efforts on key markets within Latin America. However, with a more fulsome archery product line in development, the Company believes it is well positioned to expand into key international bowhunting markets such as Europe, Australia, New Zealand, and South Africa.
Competitive Strengths
Innovation and Engineering Capabilities with Strong IP - Velocity is a consumer-focused organization with a deep understanding of our consumers. In addition, Velocity employs and retains engineers who are the most accomplished in our markets which, combined with an innovative culture, have created significantly differentiated, demonstrably superior products with strong intellectual property protection.
Leading Consumer Brands with Branding and Marketing Capabilities to Drive Consumer Awareness, Affinity and Engagement. Velocity owns a portfolio of premium, iconic brands that are leaders in consumer awareness and affinity. These include brands with a long, rich heritage such as Crosman and Benjamin airguns with 99 and 138 year histories, respectively, as well as the fast growing, super premium, and market disruptive brand like Ravin.
Broad Coverage of Consumer Segments and Price Points. Velocity’s portfolio of brands and product lines provides broad coverage of consumer segments and allows the business to position products with a combination of features and retail prices that appeal to all consumers in the category from recreational to avid.
Balanced Manufactured vs. Outsourced Production Model. Velocity retains high quality in-house product manufacturing capabilities while also outsourcing a balanced portion of its product line to vendors in low-cost manufacturing regions. This strategy is aligned with the broad portfolio of brands and product lines and reduces supply chain risk.
Diverse Customer Base. Velocity employs channel strategies that align with each brands market positioning. A brand’s channel strategy may favor independent specialty dealers and in other cases a significant presence in large chain retailers in best to maximize sales and profitability. Taken as a whole, this approach yields a broad and diverse customer base, limiting the reliance on any one customer while reaching all levels and types of consumers.
Competitive Conditions
Airguns - Velocity's airgun line competes with offerings from several airgun manufacturers, including Daisy Outdoor Products, Gamo Outdoor USA (which acquired Daisy in July 2016 but remains separately branded), and Germany-based Umarex. The market for airguns is relatively concentrated, led by Crosman, Daisy, Gamo, and Umarex, according to Sports OneSource data. Key determinants in consumer purchasing decisions include product performance, quality, and brand loyalty.
Archery - The archery market competes within a “good, better, best” spectrum. Velocity's CenterPoint product line, as a value-for-price, entry to mid-level brand, tends to lie between the “good” and “better” segments, competing with Barnett Outdoors, Killer Instinct, and PSE Technologies, among others. Consumers tend to make purchasing decisions based on brand awareness, reliability, customer service, and pricing. Although CenterPoint is a recent entry into the archery market, the brand has been able to outpace more established brands on the reliability, pricing, and service aspects to win market share. The Ravin product line has a higher price point and falls within the "best" segment for crossbows, competing with the higher end Tenpoint crossbows.Ravin entered the market in 2017 and management believes has since become the number one selling brand as measured by retail dollars.
Suppliers and Manufacturing
Suppliers
Velocity’s supply chain has both a domestic and foreign sourced component, where sourcing decisions are based on manufacturing expertise, cost, lead time, demand requirements as well as other factors. Finished goods manufacturing is balanced between domestic and offshore, largely from the Asia Pacific region. In addition to a well-seasoned supply chain team in the United States, Velocity Outdoor employs an Asian based Supply Chain team to support current sourced product and future growth. In general, raw materials utilized in Velocity’s products include steel, lead, plastics, and corrugated materials. There is ample capacity throughout the value-chain to fully support growth objectives.
Manufacturing
Velocity's product manufacturing is based on a dual strategy of in-house manufacturing and strategic alliances with select sub-contractors and vendors. Velocity conducts its domestic manufacturing operations in two locations.The first is a 225,000 square foot facility on a company-owned 49-acre campus located in East Bloomfield, New York, approximately 30 miles southeast of Rochester. The second is an 85,000 square foot leased facility in Superior, Wisconsin. In addition, the company utilizes approximately 144,000 square feet of leased warehouse space in nearby Farmington, New York, five miles from the East Bloomfield facility.
Intellectual Property
Velocity Outdoor currently holds a global portfolio of more than 100 registered trademarks and a global patent portfolio of more than 50 issued patents with many more pending. Management considers its patent holdings, trademarked brand names, preeminent name recognition, ability to design innovative products, and technical and marketing expertise to be its primary competitive advantages.
Regulatory Environment
Airguns - Airguns enjoy a relatively unrestrictive federal regulatory framework, with most regulations determined at the state level. Although there are no federal laws regulating their transfer, possession or use, non-powder guns are subject to oversight from the Consumer Product Safety Commission (“CSPC”). Therefore, airguns are subject to generalized statutory limitations involving “substantial product hazard” and articles that pose a substantial risk of injury to children, though the CSPC has not adopted specific mandatory regulations in this area. Federal law
prevents states from prohibiting the sale of airguns but allows for state-by-state restrictions on sales of airguns to minors. Thirteen states have imposed such restrictions. Historically, there have not been attempts to grandfather the regulation of airguns into that of traditional powdered firearms, as legislative efforts have largely focused on responding to and refining the existing regulatory framework for each respective category rather than overhauling the coordination or transfer of enforcement duties across agencies.
Archery - Crossbow hunting restrictions have become less stringent over the last several years. Since 2006, 12 states, including populous hunting states like Wisconsin, Pennsylvania, and North Carolina, have legalized crossbow hunting, while many others moved to relax restrictions through the opening of limited seasons or creation of exceptions to hunting restrictions for those with disabilities. Today, only Oregon classifies crossbows as illegal but there is currently a proposal to allow crossbows during the all-weapon deer season in the eastern half of the state. Nearly 90% of all hunting permits are filed in states that currently allow crossbow hunting for at least part of the season. Although continued deregulation is expected, it likely will not be the largest driver for the crossbow category moving forward. Participation levels have steadily increased within the states. This will continue to be the main driver behind market growth moving forward.
Seasonality
Velocity typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday seasons, respectively.
Human Capital
Velocity had 383 employees on December 31, 2021, 349 full-time employees and 34 part-time employees, with 382 employees located within the United States.Velocity’s labor force is non-union.Management believes that Velocity has a good relationship with its employees.
Niche Industrial Businesses
Altor Solutions
Overview
Altor Solutions, headquartered in Scottsdale, Arizona, is a designer and manufacturer of custom molded protective foam solutions and OEM components made from expanded polystyrene (EPS) and other expanded polymers. Altor provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, grocery, automotive, building products and others. Altor's molded foam solutions offer shock and vibration protection, surface protection, temperature control, resistance to water absorption and vapor transmission and other protective properties critical for shipping small, delicate items, heavy equipment or temperature-sensitive goods. Altor operates 16 molding and fabricating facilities across North America, creating a geographic footprint of strategically located manufacturing plants to efficiently serve national customer accounts.
History of Altor Solutions
Altor Solutions was founded in 1957 and Asia.began its operations as a single plant in St. Louis, MO, dedicated to the manufacture of rigid foam plastics. Through thesethe years, Altor expanded its geographic footprint, adding additional molding plants to its operation, as well as growing through acquisitions. Altor also opened two greenfield plants in Mexico to better serve their multinational manufacturing customers.
In July 2020, Altor acquired the assets of Polyfoam, a Massachusetts-based manufacturer of protective and temperature-sensitive packaging solutions for the medical, pharmaceutical, grocery and food industries, among others. In October 2021, Altor acquired Plymouth Foam, a designer and manufacturer of custom protective packaging solutions and componentry. Today, Altor operates out of its corporate headquarters in Scottsdale, Arizona and 16 manufacturing facilities across North America.
We purchased Altor on February 15, 2018.
Industry
Altor competes in the broadly defined global protective packaging market which we estimate was approximately $30 billion in 2021, with foam materials making up the largest component of this market. On the basis of product type, this market is segmented into rigid protective, flexible protective, and foam protective applications. Altor primarily
competes in the North American foam protective packaging market which includes expanded polyurethane foams, loose fills, foam in place polyurethane, and molded foams products. Producers of molded foam products generally fall into two categories: block molders and shape molders. Block molders manufacture large blocks of EPS foam that are typically used as insulation in building products such as walls, roofs and floors and are closely tied to the construction market. Shape molders, such as Altor, manufacture customized molded foam solutions for protective packaging applications, insulated shipping containers and internal parts and components for OEMs. Products made of EPS foam have broad applications across various end markets due to a unique combination of performance characteristics. The superior cushioning and barrier properties paired with insulating and hydrophobic properties make it an ideal material for protective packaging of heavy or valuable goods as well as insulated shipping containers for temperature and moisture sensitive products.
Products, Customers and Distribution Channels
Products
Altor Solutions designs and manufactures a broad array of custom molded protective foam solutions and OEM components serving various end markets. Altor's molded foam products are predominately made of expandable polystyrene (EPS), which is a rigid, closed-cell foam. EPS is comprised of polystyrene, a thermoplastic derived from the styrene monomer and benzene, and an added expansion agent, usually pentane. The final shape mold finished product is 98% air and is created in a low-pressure press which heats EPS beads that expand and fill a customer-specific mold. Altor also uses other moldable materials including expandable polypropylene (EPP) and expandable polyethylene (EPE) depending on project and customer requirements. EPS foam is an environmentally friendly material that is fully recyclable, uses less energy to produce, generates fewer emissions and has less environmental impact than most competitive material options.
Altor Solutions’ custom-engineered molded foam products fall into four major categories: protective packaging, insulated shipping containers, OEM parts and componentry and fabricated foam. These products are used across a variety of end markets including consumer electronics, appliances, temperature-sensitive pharmaceuticals and food, automotive, home and office furnishings and building products among others.
Protective Packaging - Altor Solutions creates custom molded corner pads, edge pads, “clear-view” packages and other protective foam packaging solutions for durable goods such as large and counter-top appliances, furniture, consumer electronics and military applications. Molded foam is an ideal protective packaging choice because it can be shaped into almost any form at tight tolerances and provides lightweight yet strong cushioning during product shipment.
Insulated Shipping Containers - Transporting healthcare and pharmaceutical products requires complex logistical processes, specific equipment, storage facilities and special handling procedures to maintain product integrity. These requirements make EPS foam an ideal material to be used in insulated shipping containers due to its thermal insulation, water impermeability and shock absorbing properties. Similar to its uses in the healthcare industry, Altor manufactures insulated shipping containers for online grocers and meal delivery services to transport prepared meals and perishable food and beverage products that must be shipped in a temperature-controlled environment.
OEM Parts and Componentry - Altor Solutions manufactures a variety of internal components used by OEMs as replacements for injection molded plastic or sheet metal parts across various end-markets. Compared to traditional plastic parts, foam offers vibration protection, insulation benefits, lower tooling costs and shorter lead times. Altor offers thin-wall molded air ducts and other internal components for household appliances such as refrigerators and air conditioners. In the automotive sector, Altor manufactures foam door panels, trunk liners, bumper components, instrument panels, center consoles, side pillars, seat components and head rests. Foam is increasingly being used in new vehicle designs because it offers equivalent impact strength and toughness to traditional chassis materials with 10 to 40% less weight. Altor also makes products used in personal watercraft flotation and seating parts as well as recreational vehicle roof panels and core laminates that go underneath aluminum outer skins. Lastly, Altor produces building products for the construction market including insulated concrete forms. Insulated concrete forms are hollow sections of molded foam that construction crews stack into the shape of the walls of a building and fill with concrete to create the permanent structure.
Fabricated Foam - Altor Solutions also uses a variety of methods including die cutting, saw cutting, hot wire slicing and pressure cutting to create fabricated foam shapes as opposed to molded shapes. These products do not require tooling or dies so there is less upfront costs for the customer and are usually best suited for medium to low volume projects. Fabricated foam products represent a small portion of Altor overall net sales.
Customers and Distribution Channels
Altor Solutions maintains a broad base of over 300 customers across a wide variety of end-markets, including appliances, pharmaceuticals, food and beverage, consumer electronics, automotive, furniture, building products and logistics. Altor's products are sold primarily direct to the customer or through third-party packaging distributors. Altor has maintained long-standing relationships Advanced Circuits is ablewith its top customers, often averaging ten or more years. Altor's three largest customers comprised approximately 34%, 43%, and 44% of net sales in the years ended December 31, 2021, 2020 and 2019, respectively.
Altor Solutions often maintains resin cost pass-through provisions with its contracted customers, allowing it to offerpass-through material resin price changes - resin constitutes its customersprimary raw material cost.
The following table sets forth Altor's customer breakdown by sector for the fiscal years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| Appliance | | 37.1 | % | | 33.5 | % | | 39.0 | % |
| Insulated shipping containers | | 35.6 | % | | 38.5 | % | | 32.4 | % |
| Protective packaging | | 10.1 | % | | 12.3 | % | | 8.3 | % |
| Construction | | 5.3 | % | | 1.0 | % | | 1.9 | % |
| Office furniture | | 4.6 | % | | 4.6 | % | | 4.9 | % |
| Automotive | | 3.5 | % | | 2.7 | % | | 4.0 | % |
| Other | | 3.8 | % | | 7.4 | % | | 9.5 | % |
| | 100 | % | | 100 | % | | 100 | % |
Business Strategies and Competitive Strengths
Business Strategies
Defend Market Position - As a completeleading supplier of custom molded foam solutions, management believes Altor enjoys strong brand awareness and a reputation for superior quality and service in the industry. In a market characterized by fragmented competition, Altor will continue to focus on providing a best in class suite of products including those outside of its core productionand capabilities. Additionally, these relationships allow Advanced Circuits to outsource orders for volume production and focus internal capacity on higher margin, short lead time, production and quick-turn manufacturing.
Business Strategies
Advanced Circuits’ management is focused on strategies to increase market share and further improve operating efficiencies. The following is a discussion of these strategies:
Increase Portion of Revenue from Small-run and Quick-Turn Production — Advanced Circuits’ management believes it can grow revenues and cash flow by continuing to leverage its core small-run and quick-turn capabilities. Over its history, Advanced Circuits has developed a suite of capabilities that management believes allow it to offer a combination of price and customer service unequaled in the market. Though reductions in military spending have created headwinds in recent years, Advanced Circuits intends to leverage this factor, as well as its core skill set, to increase net sales derived from higher margin small-run and quick-turn production PCBs.
Acquire Customers from Local and Regional Competitors — Advanced Circuits’ management believes the majority of its competition for small-run and quick-turn PCB orders comes from smaller scale local and regional PCB manufacturers. Advanced Circuits continues to enter into small-run and quick-turn manufacturing relationships with several subscale local and regional PCB manufacturers. Management believes that while many of these manufacturers maintain strong, long-standing customer relationships, they are unable to produce PCBs with short turn-around times at competitive prices. As a result, Advanced Circuits sees an opportunity for growth by providing production support to these manufacturers or direct support to the customers of these manufacturers, whereby the manufacturers act more as a broker for the relationship.
Remain Committed to Customers - Functional and Employees — Advanced Circuitserror-free products are key considerations for its customers and Altor has remained focused on providingmaintained a disciplined approach to ensure its products meet the highest standard of quality. Utilizing a balanced scorecard, Altor has achieved a 99.0% 1st piece acceptance rate, less than 2 complaints per 1000 shipments and a less than 0.05% rejection rate. As a result of this strong quality products and servicesassurance, Altor has had little customer attrition.
Pursue Selective Acquisitions - Altor Solutions views acquisitions as a potentially attractive means to expand its customers. Management believes this focus has allowed Advanced Circuits to achievenational footprint or broaden its outstanding delivery and quality record. Advanced Circuits’ management believes this reputation is a key competitive differentiator and is focused on maintaining and building upon it. Similarly, management believes its committed base of employees is a key differentiating factor. Management believes that Advanced Circuits’ emphasis on sharing rewards and creating a positive work environment has led to increased loyalty. Advanced Circuits plans to continue to focus on similar programs to maintain this competitive advantage.
Opportunistically Acquire Smaller PCB Manufacturers — Historically, Advanced Circuits has selectively made tuck-in acquisitions of regional PCB manufacturers.current product offering. Management will continue to seek tuck-in acquisitions of smaller PCB manufacturersregional foam molders and other packaging suppliers where sales and operational efficiencies can be realized, and to diversify into packaging products other than molded foam.
Competitive Strengths
National Scale and Proximity to Customers - Altor Solutions maintains a national footprint of 16 manufacturing locations across North America. Facilities are strategically located near customers’ production locations enabling Altor to be one of only a few foam molders capable of serving large national accounts. Due to foam’s high volume-to-weight ratio, foam manufacturers generally confine product shipments to a 300-mile radius in which shipping costs are economically viable. Thus, Altor is uniquely positioned to provide multi-facility support to its largest customers who often have multiple manufacturing or strategic technical capabilities expanded.distribution locations.
ResearchEngineering and DevelopmentDesign Capabilities - Altor Solutions has five coordinated design and testing centers with experienced packaging and mechanical engineers that work closely with customers to support packaging design needs. Engineering services include optimizing molds to meet customer needs and address complex design
Advanced Circuits engages in continual research
requirements, identifying pre-manufacturing challenges, solving post-manufacturing issues, improving packaging processes and development activities in the ordinary course of businesslaboratory testing final designs. Early customer involvement and collaboration to update or strengthen its order processing, production and delivery systems. By engaging in these activities, Advanced Circuits expects to maintain and build upon the competitive strengths from which it benefits currently. Research and development expenses were not material in each of the last three years.
Customers and Distribution Channels
Advanced Circuits’ focus on customer service and product qualitydevelop packaging solutions has resulted in increased project win rates and better visibility into product development pipelines.
Barriers to Entry
•High Customer Switching Costs - The operational risk and disruption associated with switching existing molds to operate on a broadcompetitor’s press makes shifting or splitting business between different shape molders difficult and infrequent. In general, most customers pay for their own molds, which are custom built for a specific molders’ presses. The financial cost of retooling is estimated to be $5,000 - $25,000 per mold, making it cost prohibitive to change molders on existing projects.
•Favorable Cost-to-value Proposition - The high cost of failure, relatively low proportionate cost of foam to the final product being protected, and a sometimes lengthy testing and qualification process represent significant barriers to customers changing solution providers or packaging material choices.
•Equipment and Processing Infrastructure - Altor's existing base of customers inproduction equipment has a variety of end markets, including industrial, consumer, telecommunications, aerospace/defense, biotechnology and electronics manufacturing. These customers range in size from large, blue-chip manufacturers to small, not-for-profit university engineering departments. The following table sets forth management’s estimate of Advanced Circuits’ approximate customer breakdown by industry sector for the fiscal years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | | |
| | | Customer Distribution | |
| | Industry Sector | 2017 | | 2016 | | 2015 | |
| | Electrical Equipment and Components | 24 | % | | 22 | % | | 23 | % | |
| | Measuring Instruments | 5 | % | | 4 | % | | 6 | % | |
| | Electronics Manufacturing Services | 24 | % | | 21 | % | | 25 | % | |
| | Engineer Services | 3 | % | | 4 | % | | 3 | % | |
| | Industrial and Commercial Machinery | 15 | % | | 12 | % | | 10 | % | |
| | Business Services | 1 | % | | 2 | % | | 1 | % | |
| | Wholesale Trade-Durable Goods | 1 | % | | 1 | % | | 1 | % | |
| | Educational Institutions | 10 | % | | 17 | % | | 15 | % | |
| | Transportation Equipment | 8 | % | | 12 | % | | 10 | % | |
| | All Other Sectors Combined | 9 | % | | 5 | % | | 6 | % | |
| | Total | 100 | % | | 100 | % | | 100 | % | |
significant estimated replacement cost. Management estimates the cost of opening a new shape molding facility at approximately $5 million, excluding real estate, and it must meet stringent environmental standards. A new entrant could require as much as 1-2 years of lead time to match the process performance requirements, customization of equipment and material formulations necessary to effectively compete in the molded foam industry. Moreover, Altor has a strong preventive maintenance program and in-house equipment division that over 75%is responsible for repairing and rebuilding presses. This allows Altor to significantly extend the average useful life of its orders are generated from existing customers. Moreover, more than half of Advanced Circuits’ orders in each ofmachinery and reduce the years 2017, 2016ongoing capital investment requirements, creating an advantage over competitors.
Suppliers and 2015 were delivered within five days (not including long-lead orders). In a typical year, no single customer represents more than 2% of Advanced Circuits’ sales.
Sales and Marketing
Advanced Circuits has established a “consumer products” marketing strategy to both acquire new customers and retain existing customers. Advanced Circuits uses initiatives such as direct mail postcards, web banners, aggressive pricing specials and proactive outbound customer call programs as part of this strategy. Advanced Circuits spends approximately 1% of net sales each year on its marketing initiatives and advertising and has employees organized geographically throughout North America dedicated to its marketing and sales efforts. The sales team takes a systematic approach to placing sales calls and receiving inquiries and, on average, will place over 200 outbound sales calls and receive approximately 140 inbound phone inquiries per day. Beyond proactive customer acquisition initiatives, management believes a substantial portion of new customers are acquired through referrals from existing customers. In addition, other customers are acquired on-line where Advanced Circuits generates over 90% of its orders from its website. Substantially all revenue is derived from sales within the United States.
Advanced Circuits, due to the volume of small-run and quick turn sales, had a negligible amount in firm backlog orders at December 31, 2017 and 2016.
Competition
There are currently an estimated 170 active domestic PCB manufacturers. Advanced Circuits’ competitors differ amongst its products and services.
Competitors in the small-run and quick-turn PCBs production industry include larger companies as well as small domestic manufacturers. The largest independent domestic small-run and quick-turn PCB manufacturer in North America is TTM
Technologies, Inc. Though this company produces small-run PCBs to varying degrees, in many ways it is not a direct competitor with Advanced Circuits. In recent years, larger competitors have primarily focused on producing boards with greater complexity in response to the offshoring of low and medium layer count technology to Asia. Compared to Advanced Circuits, small-run and quick-turn PCB production accounts for much smaller portions of larger competitors revenues. Further, these competitors often have much greater customer concentrations and a greater portion of sales through large electronics manufacturing services intermediaries. Beyond large, public companies, Advanced Circuits’ competitors include numerous small, local and regional manufacturers, often with revenues under $20 million that have long-term customer relationships and typically produce both small-run and quick-turn PCBs and production PCBs for small OEMs and EMS companies. The competitive factors in small-run and quick-turn production PCBs are response time, quality, error-free production and customer service. Competitors in the long lead-time production PCBs generally include large companies, including Asian manufacturers, where price is the key competitive factor.
New market entrants into small-run and quick-turn production PCBs confront substantial barriers including significant investments in equipment, highly skilled workforce with extensive engineering knowledge and compliance with environmental regulations. Beyond these tangible barriers, Advanced Circuits’ management believes that its network of customers, established over the last two decades, would be very difficult for a competitor to replicate.
Suppliers
Advanced Circuits’ raw materials inventory is small relative to sales and must be regularly and rapidly replenished. Advanced Circuits uses a just-in-time procurement practice to maintain raw materials inventory at low levels. Additionally, Advanced Circuits has established consignment relationships with several vendors allowing it to pay for raw materials as used. Because it provides primarily lower-volume quick-turn services, this inventory policy does not hamper its ability to complete customer orders. Raw material costs constituted approximately 21%, 19% and 20% of net sales for each of the fiscal years ended December 31, 2017, 2016 and 2015, respectively.Manufacturing
The primary raw materials that are used in production are core materials,plastic resins, such as copper clad layersexpandable polystyrene (EPS), expandable polypropylene (EPP) and expandable polyethylene (EPE). In addition to plastic resins, Altor also purchases fabricating material including blocks of glassEPE and chemical solutions,EPP foam, polyethylene and copperurethane, as well as other packaging materials including corrugate, boxes, paperboard, tape and gold for plating operations, photographic filmplastic film. Altor purchases its materials from a combination of domestic and carbide drill bits. Multipleforeign suppliers and sources existhas maintained strong relationships with key resin suppliers for all materials.over 30 years. Adequate amounts of all raw materials have been available in the past, and Advanced Circuits’Altor's management believes this will continue in the foreseeable future. Advanced Circuits works closely
Altor maintains 16 manufacturing facilities across North America with its suppliers to incorporate technological advances15 located in the U.S. and two in Mexico, as well as one non-manufacturing corporate headquarters. Given the high volume, low density nature of foam, Altor's manufacturing facilities are strategically located near its largest customers’ production locations to minimize freight and logistics costs. Altor's geographic footprint covers a large portion of the continental U.S. and Mexico. Each plant has a warehouse space for raw materials, they purchase. Advanced Circuits does not believe that it has significant exposuresupplies and finished goods. Several plants also use third-party warehousing to fluctuationsstore excess inventory. Altor uses common carriers to deliver finished product and in raw material prices. The fact that price is notcertain cases, some customers pick up directly from the primary factor affecting the purchase decision of many of Advanced Circuits’ customers has allowed management to historically pass along a portion of raw material price increases to its customers. Advanced Circuits does not knowingly purchase material originating in the Democratic Republic of the Congo or adjoining countries.
Intellectual Property
Advanced Circuits seeks to protect certain proprietary technology by entering into confidentiality and non-disclosure agreements with its employees, consultants and customers, as needed, and generally limits access to and distribution of its proprietary information and processes. Advanced Circuits’ management does not believe that patents are critical to protecting Advanced Circuits’ core intellectual property, but, rather, its effective and quick execution of fabrication techniques, its website FreeDFM.com™ and its highly skilled workforce are the primary factors in maintaining its competitive position.
Advanced Circuits uses the following brand names: FreeDFM.com™, 4pcb.com™, 4PCB.com™, 33each.com™, barebonespcb.com™ and Advanced Circuits™. These trade names have strong brand equity and are material to Advanced Circuits’ business.plants.
Regulatory Environment
Advanced Circuits’Altor's manufacturing operations and facilities are subject to evolving federal, state and local environmental and occupational health and safety laws and regulations. These include laws and regulations governing air emissions, wastewater discharge and the storage and handling of chemicals and hazardous substances. Management believes that Advanced Circuits is in compliance, in all material respects, with applicable environmental and occupational health and safety laws and regulations. New requirements, more stringent application of existing requirements, or discovery of previously unknown environmental conditions may result in material environmental expenditures in the future. Advanced Circuits has been recognized three times for exemplary environmental compliance and it was awarded the Denver Metro Wastewater Reclamation District Gold Award the seven of the last ten years.materials.
EmployeesHuman Capital
As of December 31, 2017, Advanced Circuits2021, Altor employed 523 persons.789 full-time employees. None of Advanced Circuits’Altor's’ U.S.-based employees are subject to collective bargaining agreements. Advanced CircuitsUnder Mexican Federal Labor Law, 111 employees at the two Mexican manufacturing facilities are unionized. Altor believes its relationship with its employees is good.
Arnold
Overview
Headquartered in Rochester, New York, Arnold serves a variety of markets including aerospace and defense, general industrial, motorsport/ automotive, oil and gas, medical, general industrial, energy, reprographics and advertising specialties. Over the course of 100+more than 100 years, Arnold has successfully evolved and adapted ourits products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold has expanded globally and built strong relationships with ourits customers worldwide. As a result, Arnold has led the way in our chosen industriesprovides its customers with new and innovative materials and solutions that empower our customersempowers them to develop next generation technologies. Arnold is the largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems. Arnold is one of two domestic producers to design, engineer and manufacture rare earth magnetic solutions. Arnold serves customers and generates revenues via threefour business units:
•PMAG - Permanent Magnets and Assemblies Group- Arnold’s high performance permanent magnets have a wide variety of applications, mainly used for rotating electrical machinery such as motor and generators. Industries served include aerospace and defense, energy exploration, industrial, motorsport and medical.
•Electric Motors - Low-to-mid volume AC induction, Switched Reluctance, and Brushless DC stators, rotors, and rotor shaft assemblies. Finished motors range from under 1kW through 500kW for aerospace and defense, industrial, energy, hybrid electric motors on military ships, militaryplatforms and commercial aircraft, and motorsport to pump couplings, batteries, solar panels and NMR Equipment.
energy exploration.•Precision Thin Metals - Produces thin and ultra-thin alloys that improve the power density ofelectrical systems such as motors, generators, and transformers batteries and manyalong with thin foils for other applications in automotive,such as electromagnetic shielding, lightweight structures, and implantable structures. Industries served include aerospace and defense, industrial, energy exploration, industrial and medical markets.
.•Flexmag™ - The highestHigh quality flexible magnetic sheet and strip, Flexmag products not only are magnetic but their processing capabilities allow for over a quarterloading of a century, Flexmag products cover a wide rangevariety of applications, frommaterials into their flexible sheet products. Industries served include advertising specialties, industrial, automotivemedical, and medical applications to signage, displays and novelty items.
automotive.Arnold operates 911 manufacturing facilities worldwide split under the three business units shown above but functions as one company and one team. The facilities are split under the four business units shown above along with prototyping and advanced technology development through its Technology Center.
History of Arnold
Arnold was founded in 1895 as the Arnold Electric Power Station Company. Arnold began producing AlNiCo permanent magnets in its Marengo, Illinois facility in the mid-1930s. In 1946, Allegheny Ludlum Steel Corporation (Allegheny) purchased Arnold, and over the next few years began production of several additional magnetic product lines under license agreement with the Western Electric Company. In 1970, Arnold acquired Ogallala Electronics, which manufactured high power coils and electromagnets.
SPS Technologies (SPS), at the time a publicly traded company, purchased Arnold Engineering Company from Allegheny in 1986. Under SPS, Arnold made a series of acquisitions and partnerships to expand its portfolio and geographic reach. In 2003, Precision Castparts, also a publicly traded company, acquired SPS. In January 2005, Audax, a Boston-based private equity firm acquired Arnold from Precision Castparts.
In February 2007, Arnold Magnetic Technologies completed the acquisition of Precision Magnetics, which expanded its geographic footprint to include operations in Sheffield, England and Lupfig, Switzerland. In addition, Arnold’s Lupfig, Switzerland operation is a joint venture partner with a Chinese rare earth producer. The joint venture manufactures RECOMA® Samarium Cobalt blocks for select markets.
In 2016, Arnold developed and launched the world’s strongest Samarium Cobalt magnet grade, RECOMA 35E, that enables significant opportunity for increased performance in smaller packages, and at higher temperatures, with no trade off in stability.
Through 2018 and 2019, Arnold deployed more advanced material from its PTM group such as Arnon 2 and 4 gauge electrical steels along with advanced performance molypermalloy metals. Advancements from the PMAG group during this same timeframe were targeted at magnet retention in high performance applications. The result of this hard work was the development of Carbon Fiber sleeving capabilities at its Sheffield UK facility. Lastly, Flexmag also introduced customized highly loaded composite materials for a variety of applications. In 2021, Arnold acquired Ramco Electric Motors, Inc. ("Ramco"), a provider of custom electric motor solutions for general industrial,
aerospace and defense and oil and gas end markets. Ramco's complementary product portfolio will allow Arnold to offer more comprehensive, turn-key solutions to their customers.
We purchased a majority interest in Arnold on March 5, 2012. With the support of CODI, Arnold has made significant investment to support future growth strategies.
Industry
Permanent Magnets
- There exists a broad range of permanent magnets which include Rare Earth Magnets and magnets made from specialty magnetic alloys. Magnets produced from these materials may be sliced, ground, coated and magnetized to customer requirements. Those industry players with the broadest portfolio of these magnets, such as Arnold, maintain a significant competitive advantage over competitors as they are able to offer one-stop shop capabilities to customers. Management believes that being a manufacturer of these magnets, subject to patent rights, is another critical market advantage.
Magnetic Assemblies- Arnold offers complex, customized value added magnetic assemblies. These assemblies are used in devices such as motors, generators, beam focusing arrays, sensors, and solenoid actuators. Magnetic assembly production capabilities include machined metal components, magnet fabrication, machining, encapsulation or sleeving, balancing, and field mapping.
Electric Motors – There exists a global demand for electric motors. Arnold is a manufacturer for low-to-mid volume AC induction, Switched Reluctance, and Brushless DC stators, rotors, and rotor shaft assemblies. Arnold works with companies of all sizes: from small businesses and medium-sized companies all the way to Fortune 500s. The industry exists wherever electrical energy needs conversion to mechanical use.
Precision Strip and Foil
- Precision rolled thin metal foil products are manufactured from a wide range of materials for use in applications such as transformers, motor laminations, honeycomblightweight structures, shielding, and composite structures. These products are commonly found in security tags, medical implants, aerospace structures, batteries and speaker domes. Arnold hasThey have the expertise andunique processing capability to roll anneal,foils as thin as 2.5 microns while providing critical heat treatment maintaining competitive material properties. Once completed the product is coated if necessary and is slit and coat a wide range of materials to extremely thin gauges (2.5 microns) and exacting tolerances.the application width.
Flexible Magnets
- Flexible magnet products span the range of applications from advertising (refrigerator magnets and displays) to medical applications (needle counters) to sealing and holding applications (door gaskets). Other applications include Electromagnetic or Radio Frequency Shielding for high end electronics.
Products, Customers and ServicesDistribution Channels
Products
Permanent Magnets and Assemblies Group
- Arnold’s Permanent Magnets and Assemblies Group (PMAG) segment is a leading global manufacturer of precision magnetic assemblies and high-performance magnets. The segment’s products include tight tolerance assemblies consisting of many dozens of components and employing RECOMA® SmCo, Neo, and AlNiCo magnets. These products are sold to a wide range of industries including aerospace and defense, motorsport/ automotive, oil and gas, medical, general industrial, energy and reprographics. Arnold has established a reputation in the magnetic industry as the engineering solutions provider, assisting customers to ensure their critical assemblies meet expectations.
PMAG is Arnold’s largest business unit representing approximately 72% 67% of Arnold sales on an annualized basis (including Reprographics) with a global footprint including manufacturing facilities in the U.S., U.K., Switzerland, and China.
PMAG—Products and Applications:
•High precision magnetic rotors for use in electric motors and generators. Typically used in demanding applications such as aerospace and defense, oil and gas exploration, energy recovery systems, power dense medical equipment, and under the hood automotive
•Sealed pump couplings
•Beam focusing assemblies such as traveling wave tubes
•Oil & Gas NMRexploration tools as well as pipeline inspection and down hole power generation
•Linear positioning Hall effect sensor systems
Rare Earth Magnets
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• | Samarium Cobalt (SmCo) - SmCo magnets are typically used in critical applications that require corrosion resistance or high temperature stability, such as motors, generators, actuators and sensors. Arnold markets its SmCo magnets under the trade name of RECOMA ®, and is DFARS (Defense Federal Acquisition Regulation) compliant.
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•Samarium Cobalt (SmCo) - SmCo magnets are typically used in critical applications that require corrosion resistance or high temperature stability, such as motors, generators, actuators and sensors. Arnold markets its SmCo magnets under the trade name of RECOMA ®, and is DFARS (Defense Federal Acquisition Regulation) compliant.
•Neodymium (Neo) - Neo magnets offer the highest magnetic energy level of any material in the market.Applications include motors and generators, VCM’s, magnetic resonance imaging, magnetic inspection systems, sensors and loudspeakers.
Other Permanent Magnet Types
•AlNiCo - The AlNiCo family of magnets remains a preferred material for many mission critical applications. Its favorable linear temperature characteristics, high magnetic flux density and good corrosion resistance are ideally suited for use in applications requiring magnetic stability.This material is manufactured by Arnold in the United States, making it a DFARS compliant material.
•Hard Ferrite - Hard ferrite (ceramic) magnets were developed as a low cost alternative to metallic magnets (steel and AlNiCo). Although they exhibit lower energy when compared to other materials available today and are relatively brittle, ferrite magnets have gained acceptance due to their low price per magnetic output.
•Injection Molded - Injection molded magnets are a composite of various types of resin and magnetic powders. The physical and magnetic properties of the product depend on the raw materials, but are generally lower in magnetic strength and resemble plastics in their physical properties. However, a major benefit of the injection molding process is that magnet material can be injection or over-molded, eliminating subsequent manufacturing steps.
Electric Motors
Arnold manufactures electric motors and related components for use in industrial, military, and aerospace applications and represents approximately 13% of Arnold sales on an annualized basis. Arnold Electric Motor division is a trusted partner, supplying high-quality, electrical components and assemblies to many well-known brands in the industrial and aerospace industries. Arnold's competent, trained staff are committed to engineering solutions together with its customers and ensuring their satisfaction. Arnold is registered with ITAR and maintains ISO 9001 and AS9100D quality certifications.
Electric Motors—Products and Applications:
•Stator Manufacturing
◦AC & DC Stators
◦Stator Core Construction
◦Stator Construction
◦Varnishing
•Rotor Manufacturing
◦AC Induction
◦DC Permeant
◦Switched Reluctance
•Rotor & Shaft Assembly
◦In House Machine Shop
◦Rotor Balancing
•Motor Assembly
◦Complete Motor Assembly
•Applications for electric motors span all industries. Arnold is a trusted supplier for technologies such as hybrid and electric transportation motors, aerospace and defense power generation, HVAC fan motors, marine propulsions and stabilization technologies, vertical lift motors and many others.
Precision Thin Metals
Arnold’s precision thin metals segment manufactures precision thin strip and foil products from an array of materials and represents approximately 8% of Arnold sales on an annualized basis. The Precision Thin Metals segment serves the aerospace and defense, power transmission, alternative energy (hybrids, wind, battery, solar), medical, security, and general industrial end-markets. With top-of-the-line equipment and superior engineering, Precision Thin Metals has developed unique
processing capabilities that allow it to produce foils and strip with precision and quality that are unmatched in the industry (down to 1/10th thickness of a human hair). In addition, the segment’s facility is capable of increasing production from current levels with its existing equipment and is, we believe, well-positioned to realize future growth.
Precision Thin Metals—Metals - Products and Applications:
•Electrical steels for hybrid propulsion systems, electric motors, and micro turbines
Security•Electromagnetic and product ID tagsRadio Frequency Shielding
Honeycomb•Lightweight structures for aerospace applications
•Irradiation windows
•Batteries
•Military countermeasures
Flexmag
Arnold is one of two North American manufacturers of flexible rubber magnets for specialty advertising, medical, and reprographic applications.Flexmag representsrepresented approximately 20%11% of Arnold sales on an annualized basis. It primarily sells its products to specialty advertisers and original equipment manufacturers. With highly automated manufacturing processes, Flexmag can accommodate customer’scustomers required short lead times. Flexmag benefits from a loyal customer base and significant barriers to entry in the industry. Flexmag’s success is driven by superior customer service, and proprietary formulations offering enhanced product performance.
Flexmag—Flexmag - Products and Applications:
•Extruded and calendared flexible rubber magnets with optional laminated printable substrates
•Electromagnetic and Radio Frequency Shielding
•Retail displays
•Theft detection/ security
•Seals and enclosures
•Signage for various advertising and promotions
Existing End-Markets and Geographies
Aerospace and Defense - In the aerospace and defense sector, Arnold is selling electric motor components, magnets, magnetic assemblies and ultra-thin foil solutions. Specifically, in the aerospace industry, Arnold’s assemblies have been designed into products, which enables Arnold to benefit from the market growth and a healthy flow of business based on current airframe orders. Through its OEM customers, many new commercial aircraft placed in service contain assemblies produced by Arnold. Arnold’s sales to large aerospace and defense manufacturers includes magnetic assemblies used in applications such as motors and generators, actuators, trigger mechanisms, and guidance systems, as well as magnets for these and other uses. In addition, it sells its ultra-thin foil for use in military countermeasures, lightweight structures, brazing alloys, and motor laminations.
General Industrial - Within the industrial sector, Arnold provides electric motors, magnet assemblies as well as magnets for custom made motor systems. These include stepper motors, pick and place robotic systems, and new designs that are increasingly being required by regulation to meet energy efficiency standards. An example is a motor utilizing Arnold’s bonded magnets for use in commercial refrigeration systems.Arnold also produces magnetic couplings for seal-less pumps used in chemical and oil & gas applications that allow chemical companies to meet environmental requirements.
Motorsport / Automotive - Arnold produces high performance motor components and sub-assemblies for motorsport and automotive applications, such as the Kinetic Energy Recovery System, which includes a composite sleeved RECOMA® SmCo magnet rotor for a high speed, high power system and Electric Turbo Chargers that operate at greater than 100,000 RPM. Further emerging magnetic applications include electric traction drives, regenerative
braking systems, starter generators, and electric turbo charging.As much of this technology utilizes magnetic systems, Arnold expects to benefit from this trend.
Oil and Gas - Arnold currently provides magnets and precision assemblies for use in oil and gas exploration and production, applications which typically require exceptional collaboration and co-development with its customers. Arnold supplies products used in applications such as electric submersible pumps, oil well shutoff valves, down-hole logging while drilling tooling, and a down-hole magnetic transfer coupling. Other applications for which Arnold is actively involved include pipeline inspection, wireless tomography tools, and chip collection.
Medical - Within the medical sector, Arnold provides magnetic assemblies, magnets, flexible magnets, and ultrathin foils. Its magnet assemblies and magnets are critical parts of motor systems for dental instruments as well as saws and grinders. Magnet assemblies are also provided for skin expansion systems, shunt valves, and position sensors. Its Precision Thin Metals business unit provides precision titanium used for implantable devices.
Energy - Arnold’s Precision Thin Metals segment supplies grain-oriented silicon steel produced with proprietary methods for use in transformers and inductors. These cores allow for the production of very efficient transformers and inductors while minimizing size. In addition, Arnold’s magnet solutions can be found in advanced automatic circuit re-closer solutions that substantially reduce the stress on system components on the grid. Arnold’s solutions are also present in new power storage systems. The permanent magnet bearings used in new designs improve the efficiency of the flywheel energy storage system.
Customers and Distribution Channels
Arnold’s focus on customer service and product quality has resulted in a broad base of customers in a variety of end markets. Products are used in applications such as aerospace and defense, motorsport / automotive, oil and gas, medical, general industrial, energy, reprographics, and advertising specialties.
The following table sets forth management’s estimate of Arnold’s approximate customer breakdown by industry sector for the fiscal years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Customer Distribution | |
| Industry Sector | 2021 | | 2020 | | 2019 | |
| Aerospace and Defense | 38 | % | | 36 | % | | 36 | % | |
| General Industrial | 29 | % | | 26 | % | | 24 | % | |
| Motorsport/ automotive | 14 | % | | 11 | % | | 11 | % | |
| Advertising specialties | 5 | % | | 8 | % | | 10 | % | |
| Oil and Gas | 4 | % | | 4 | % | | 5 | % | |
| Energy | 3 | % | | 3 | % | | 4 | % | |
| Medical | 2 | % | | 3 | % | | 4 | % | |
| Reprographic | 2 | % | | 3 | % | | 2 | % | |
| All Other Sectors Combined | 3 | % | | 6 | % | | 4 | % | |
| Total | 100 | % | | 100 | % | | 100 | % | |
Arnold has a large and diverse, blue-chip customer base. Sales to Arnold’s top ten customers were 35% for the year ended December 31, 2021, 24% for the year ended December 31, 2020, and 26% of total sales for the year ended December 31, 2019. In 2021, one customer represented approximately 14% of Arnold's net revenues, with no other individual customer representing more than 10% of Arnold's net revenues. No individual customer represented greater that 10% of Arnold’s net revenues in 2020 or 2019.
Arnold had firm backlog orders totaling approximately $62.6 million and $65.8 million, respectively, at December 31, 2021 and 2020.
Business Strategies and Competitive Strengths
Business Strategies
Engineering and Product Development - Arnold’s engineers work closely with the customer to provide system solutions, representing a significant competitive advantage. Arnold’s engineering expertise is leveraged with state-of-the-art technology across the various business units located in North America, Europe and Asia Pacific. Arnold’s
engineers work with customers on a global basis to optimize designs, guide material choices, and create magnetic models resulting in Arnold’s products being specified into customer designs.
Arnold has a talented and experienced engineering staff of design and application experts, quality personnel and technicians. Included in this team are engineers with backgrounds in materials science, physics, and metallurgical engineering. Other members of the team bring backgrounds in ceramics, mechanical engineering, chemical engineering and electrical engineering.
Arnold continues to be an industry leader with regard to new product formulations and innovations. As evidence of this, Arnold currently relies on a deep portfolio of “trade secrets” and proprietary intellectual property. Arnold continuously endeavors to introduce electromagnetic solutions that exceed the performance of current offerings and meet customer design specifications.
Growth in Arnold’s business is primarily focused in three areas:
•Growing market share in existing end-markets and geographies, with a focus on aerospace and defense, niche industrial systems, and oil and gas;
•Vertical integration through new products and technologies; and
•Completing opportunistic acquisitions and partnerships to reduce product introduction and market penetration time.
Competitive Landscape
The specialty magnetic systems industry is highly fragmented, creating a competitive landscape with a variety of magnetic component manufacturers. However, few have the breadth of capabilities that Arnold possesses. Manufacturers compete on the basis of technical innovation, co-development capabilities, time-to-market, quality, geographic reach and total cost of ownership. Industry competitors relevant to Arnold’s served markets range from large multinational manufacturers to small, regional participants. Given these dynamics, we believe the industry will likely favor players that are able to achieve vertical integration and a diversification of offerings across a breadth of products along with magnet engineering and design expertise. The focus will be engineering solutions together with our customers.
Barriers to Entry
Low Substitution Risk – Arnold’s solutions are typically specified into its customers’ program designs through a co-development and qualification process that often takes 6-18 months. Arnold’s customers are typically contractors and component manufacturers whose products are integrated into end-customers’ applications. The high cost of failure, relatively low proportionate cost of magnets to the final product, sometimes lengthy testing and qualification process, and substantial upfront co-engineering investment required, represent significant barriers to customers changing solution providers such as Arnold.
Equipment and Processing – Arnold’s existing base of production equipment has a significant estimated replacement cost. A new entrant could require as much as 2-3 years of lead time to match the process performance requirements, customization of equipment and material formulations necessary to effectively compete in the specialty magnet industry. Further, given the program nature of a majority Arnold’s sales, management estimates that it could take 5-10 years to build a sufficient book of business and base of institutional knowledge to generate positive cash flow out of a new manufacturing plant.
Business Strategies
Engineering and Product Development
Arnold’s engineers work closely with the customer to provide system solutions, representing a significant competitive advantage. Arnold’s engineering expertise is leveraged with state-of-the-art technology across the various business units located in North America, Europe and Asia Pacific. Arnold’s engineers work with customers on a global basis to optimize
designs, guide material choices, and create magnetic models resulting in Arnold’s products being specified into customer designs.
Arnold has a talented and experienced engineering staff of design and application experts, quality personnel and technicians. Included in this team are engineers with backgrounds in materials science, physics, and metallurgical engineering. Other members of the team bring backgrounds in ceramics, mechanical engineering, chemical engineering and electrical engineering.
Arnold continues to be an industry leader with regard to new product formulations and innovations. As evidence of this, Arnold currently relies on a deep portfolio of “trade secrets” and internal intellectual property. Arnold continuously endeavors to introduce magnet solutions that exceed the performance of current offerings and meet customer design specifications.
Growth in Arnold’s business is primarily focused in three areas:
(i) Growing market share in existing end-markets and geographies, with a focus on aerospace and defense, medical and niche industrial systems;
(ii) Vertical integration through new products and technologies;
(iii) Completing opportunistic acquisitions and partnerships to reduce product introduction and market penetration time.
Existing End-Markets and Geographies
Aerospace and Defense
In the aerospace and defense sector, Arnold is selling magnets, magnetic assemblies and ultra-thin foil solutions. Specifically, in the aerospace industry, Arnold’s assemblies have been designed into products, which enables Arnold to benefit from the market growth and a healthy flow of business based on current airframe orders. Through its OEM customers, essentially all new commercial aircraft placed in service contain assemblies produced by Arnold. Arnold’s sales to large aerospace and defense manufacturers includes magnetic assemblies used in applications such as motors and generators, actuators, trigger mechanisms, and guidance systems, as well as magnets for these and other uses. In addition, it sells its ultra-thin foil for use in military countermeasures, honeycomb structures, brazing alloys, and motor laminations.
Motorsport / Automotive
Arnold produces high performance motor components and sub-assemblies for motorsport and automotive applications, such as Kinetic Energy Recovery System, which includes a composite sleeved RECOMA® SmCo magnet rotor for a 50,000+ RPM, 100KW+ system and Electric Turbo Chargers that operate at > 100,000 RPM. Further emerging magnetic applications include electric traction drives, regenerative braking systems, starter generators, and electric turbo charging. As much of this technology utilizes magnetic systems, Arnold expects to benefit from this trend.
Oil and Gas
Arnold currently provides magnets and precision assemblies for use in oil and gas exploration and production, applications which typically require exceptional collaboration and co-development with its customers. Arnold supplies products used in applications such as a new oil well shutoff valve, a new down-hole logging while drilling tool, and a down-hole magnetic transfer coupling. Other applications for which Arnold is actively involved include pipeline inspection, wireless tomography tools, and chip collection.
Medical
Within the medical sector, Arnold provides magnetic assemblies, magnets, flexible magnets, and ultrathin foils. Its magnet assemblies and magnets are critical parts of motor systems for dental instruments as well as saws and grinders. Magnet assemblies are also provided for skin expansion systems, shunt valves, and position sensors. In addition, its Precision Thin Metals business unit is providing a specialty alloy for advanced breast cancer treatment.
General Industrial
Within the industrial sector, Arnold provides magnet assemblies as well as magnets for custom made motor systems. These include stepper motors, pick and place robotic systems, and new designs that are increasingly being required by regulation to meet energy efficiency standards. An example is a motor utilizing Arnold’s bonded magnets for use in commercial refrigeration systems. Arnold also produces magnetic couplings for seal-less pumps used in chemical and oil & gas applications that allow chemical companies to meet environmental requirements.
Energy
Arnold’s Precision Thin Metals segment supplies grain-oriented silicon steel produced with proprietary methods for use in transformers and inductors. These cores allow for the production of very efficient transformers and inductors while minimizing size. In addition, Arnold’s magnet solutions can be found in advanced automatic circuit re-closer solutions that substantially reduce the stress on system components on the grid. Arnold’s solutions are also present in new power storage systems. The permanent magnet bearings used in new designs improve the efficiency of the flywheel energy storage system.
Research and Development
Arnold has a core research and development team, which has collectively over 120 years of combined industry experience. In addition to the core engineering group, a large number of other Arnold staff members assigned to the business units contribute to the research and development effort at various stages. Product development also includes collaborating with customers and field testing. This feedback helps ensure products will meet Arnold’s demanding standards of excellence as well as the constantly changing needs of end users. Arnold’s research and development activities are supported by state-of-the-art engineering software design tools, integrated manufacturing facilities and a performance testing center equipped to ensure product safety, durability and superior performance.
Customers and Distribution Channels
Arnold’s focus on customer service and product quality has resulted in a broad base of customers in a variety of end markets. Products are used in applications such as aerospace and defense, motorsport / automotive, oil and gas, medical, general industrial, energy, reprographics ,and advertising specialties.
The following table sets forth management’s estimate of Arnold’s approximate customer breakdown by industry sector for the fiscal years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | | |
| | | Customer Distribution | |
| | Industry Sector | 2017 | | 2016 | | 2015 | |
| | Aerospace and Defense | 25 | % | | 28 | % | | 23 | % | |
| | Motorsport/ automotive | 13 | % | | 12 | % | | 9 | % | |
| | Oil and Gas | 4 | % | | 2 | % | | 6 | % | |
| | Medical | 3 | % | | 3 | % | | 3 | % | |
| | General Industrial | 28 | % | | 24 | % | | 24 | % | |
| | Energy | 4 | % | | 3 | % | | 7 | % | |
| | Reprographic | 7 | % | | 11 | % | | 11 | % | |
| | Advertising specialties | 13 | % | | 13 | % | | 13 | % | |
| | All Other Sectors Combined | 3 | % | | 4 | % | | 4 | % | |
| | Total | 100 | % | | 100 | % | | 100 | % | |
Arnold has a large and diverse, blue-chip customer base. Sales to Arnold’s top ten customers were 24% of total sales for the year ended December 31, 2017, 29% of total sales for the year ended December 31, 2016, and 33% of total sales for the year ended December 31, 2015. No customer represented greater that 10% of Arnold’s annual revenue in 2017.
Sales and Marketing
Arnold has aglobal team of direct sales and marketing professionals and critical design and application engineers for each of its product lines. The Arnold sales force is organized for regional coverage with a focus on sales in the U.S., Europe, and Asia-Pacific. The majority of revenues for each business unit are project based, and Arnold’s highly-qualified application engineers are often integrated into its customers’ product design, planning, and implementation phases, offering the most cost-effective solution for demanding clients.
The following table sets forth Arnold’s net sales by geographic location for the fiscal years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | | |
| | Geographic location | 2017 | | 2016 | | 2015 | |
| | North America | 63 | % | | 66 | % | | 66 | % | |
| | Europe | 32 | % | | 28 | % | | 28 | % | |
| | Asia Pacific | 5 | % | | 6 | % | | 6 | % | |
| | Total | 100 | % | | 100 | % | | 100 | % | |
Arnold had firm backlog orders totaling approximately $43.7 million and $28.1 million, respectively, at December 31, 2017 and 2016.
Competition
Management believes the following companies represent Arnold’s top competitors:
Magnum Magnetics Corporation
Dexter Magnetic Technologies
Electron Energy Corp
Vacuumschmelze Gruner
Thomas & Skinner
Suppliers
Raw materials utilized by Arnold include nickel and cobalt, stainless steel shafts, Inconel sleeves, adhesives, laminates, aluminum extrusions and binders. Although Arnold considers its relationships with vendors to be strong, Arnold’s management team also maintains a variety of alternative sources of comparable quality, quantity and price. The management team therefore believes that it is not dependent upon any single vendor to meet its sourcing needs. Arnold is generally able to pass through material costs to its customers and believes that in the event of significant price increases by vendors that it could pass the increases to its customers.
Intellectual Property
Arnold currently relies on a deep portfolio of “trade secrets” and internal intellectual property.
Patents
Arnold currently has 1 patent in force in the United States. Arnold also has one pending patent application in the United States and corresponding pending applications in Europe and Japan.
Trademarks
Arnold currently has 86 trademarks, 12 of which are in the U.S. The most notable trademarked items are the following: “RECOMA”, “PLASTIFORM”, “FLEXMAG” & “ARNOLD”. Application dates for various trademarks date back to as early as 1960.
Regulatory Environment
Arnold’s domestic manufacturing and assembly operations and its facilities are subject to evolving Federal, state and local environmental and occupational health and safety laws and regulations. These include laws and regulations governing air emissions, wastewater discharge and the storage and handling of chemicals and hazardous substances. Arnold’s foreign manufacturing and assembly operations are also subject to local environmental and occupational health and safety laws and regulations. Management believes that Arnold is in compliance, in all material respects, with applicable environmental and occupational health and safety laws and regulations. New requirements, more stringent application of existing requirements, or discovery of previously unknown environmental conditions could result in material environmental expenditures in the future.
Arnold is a major producer of both Samarium Cobalt permanent magnets under its brand name RECOMA® and Alnico (in both cast and sintered forms). Both materials from Arnold meet the current Berry Amendment or Defense Federal Acquisition Regulations Systems (DFARS) requirements per clause 252.225.7014 further described under 10 U.S.C. 2533b. This provision covers the protection of strategic materials critical to national security. These magnet types are considered “specialty metals” under these regulations.
Employees
Arnold is led by a capable management team of industry veterans that possess a balanced combination of industry experience and operational expertise. Arnold employs approximately 660 hourly and salaried employees located throughout North America, Europe and Asia. Arnold’s employees are compensated at levels commensurate with industry standards, based on their respective position and job grade.
Arnold’s workforce is non-union except for approximately 61 hourly employees at its Marengo, Illinois facilities, which are represented by the International Association of Machinists (IAM). Arnold enjoys good labor relations with its employees and union and has a three year contract in place with the IAM, which will expire in June 2019.
Clean Earth
Overview
Headquartered in Hatboro, Pennsylvania, Clean Earth provides environmental services for a variety of contaminated materials including soils, dredged material, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles waste streams generated in multiple end markets such as power, construction, oil and gas, medical, infrastructure, industrial and dredging. Treatment includes thermal desorption, dredged material stabilization, bioremediation, physical treatment/screening and chemical fixation. Before the company accepts contaminated materials, it identifies a third party “beneficial reuse” site such as commercial redevelopment or landfill capping where the materials will be sent after they are treated. Clean Earth operates 24 permitted facilities in the Eastern United States. Revenues from the environmental recycling facilities are generally recognized at the time of receipt.
History of Clean Earth
Clean Earth was founded in 1990 with the establishment of a contaminated material treatment facility in New Castle, Delaware focused on processing soils. The treatment of contaminated materials has diversified significantly over the years as Clean Earth now also processes dredged material, coal ash, hazardous waste and drill cuttings. Clean Earth has been able to grow consistently via both organic initiatives and acquisition. In 1997, the Company opened Clean Earth of Carteret, which was the first “fixed-based” bioremediation facility permitted in the State of New Jersey. In 1998, Clean Earth started offering hazardous waste treatment after acquiring S&W Waste, now Clean Earth of North Jersey, a fully permitted commercial Resource Conservation and Recovery Act (“RCRA”) Part B Treatment, Storage & Disposal Facility (“TSDF”). That same year, Clean Earth also expanded services into the treatment of dredged material through the acquisition of Consolidated Technologies Inc. (now Clean Earth Dredging Technologies). Today, Clean Earth is one of the largest providers of contaminated materials treatment in the East. In addition to diversifying the number of contaminated materials it handles, Clean Earth has also significantly expanded its geography. The Company now operates permitted facilities from Connecticut to Florida, and with its recent acquisitions, Clean Earth has expanded their footprint of permitted facilities to Kentucky, West Virginia and Alabama.
We purchased a majority interest in Clean Earth on August 26, 2014.
Industry
Overview
The U.S. environmental services industry is highly fragmented, with Clean Earth most closely correlated with the remediation and hazardous waste management segments of the industry. Historically, growth in these sectors has been primarily driven by increasing regulations and growing volume of waste generated, and is now positively affected by increases in waste disposal costs and resulting landfill avoidance trends. Other trends driving growth include increasing concern in corporate America regarding environmental liabilities and a push by companies to outsource a larger amount of environmental services to a smaller number of service providers due to increasing compliance costs.
Contaminated Materials
Contamination of soils and other materials is prevalent and often caused by the introduction of chemicals, petroleum hydrocarbons, solvents, pesticides, lead and other heavy metals into the earth. These contaminants are common in areas of industrialization and severely impact the environment as a result of inadequate containment or improper disposal. As a result of their prevalence and impact, these contaminates are subject to ever more stringent environmental regulations which now govern the handling, treatment, and disposal of these contaminants. As a result, when soil or other materials are removed from a site, they must be tested. The strong likelihood that materials will contain some level of contamination generates consistent demand for treatment and beneficial reuse solutions. Contaminated materials are routinely associated with infrastructure, commercial development, and other excavation projects, heavy industrial activity, spill clean-up or environmental remediation projects, locations with former manufactured gas plants (“MGP”), underground storage tanks (“UST”) or aboveground storage tanks, and a wide variety of increasingly regulated waste streams.
Dredge Market
Dredging is the act of removing sediment from the bottom of waterways, both inland (rivers and canals) and ocean (floors, harbors, channels, etc.), and is performed for both navigational and environmental purposes. Like soil, most dredged material largely contains some level of contamination, particularly in current or historically industrially active areas. Accordingly, the Environmental Protection Agency (the "EPA") has established regulations that govern the disposal methods of dredged material, including the Marine Protection, Research and Sanctuaries Act (“MPRSA”), and the Federal Water Pollution Control Act, or the Clean Water Act.
The treatment and beneficial reuse of dredged material began in 1995, when various government entities in New Jersey and New York permitted a unique project to demonstrate the feasibility of using treated and processed dredged material to reclaim a former landfill and repurpose it for a new building project. Regulations require contaminated dredge spoils to be taken upland for treatment or disposal in accordance with Title 33 as administered by the United States Army Corps of Engineers and the EPA. Once treated, dredged material is used for structural fill and development purposes.
Hazardous Waste
The hazardous waste services industry encompasses the generation, collection, treatment, and ultimate disposal of wastes classified as hazardous by RCRA. RCRA, the primary law governing the disposal of solid and hazardous waste, was passed by Congress in 1976 to address increasing problems associated with growing volumes of municipal and industrial waste.
Accidents, spills, leaks, and improper handling and disposal of hazardous materials and waste have resulted in the contamination of land, water and air in the U.S. The U.S. generated 34 million tons of hazardous waste in 2011, according to the EPA. These wastes come primarily from three sources, Superfund sites, routine business and the increasingly expanding waste regulations.
In order to address these environmental hazards, the EPA established a program known as the Superfund, which allows the EPA to clean up such sites, or to compel responsible parties to perform clean-ups or reimburse the EPA for its clean-up expenses. This includes regulatory requirements that raise both the monetary and reputational costs for non-compliance. The Superfund program has identified tens of thousands of sites that require treatment over its more than 20-year history.
Outside of the known Superfund sites, hazardous waste is also generated during the routine course of business and manufacturing, requiring the same care of handling by a specialized treatment facility. The generation of hazardous waste is common throughout the chemicals and petrochemical, steel, general manufacturing, government, aerospace and public utilities industries. Within the U.S., the Northeast region is one of the most densely concentrated areas for generators of hazardous waste.
In addition to hazardous waste generated by industrial activity, increasingly complex regulations have expanded the scope of what is considered hazardous waste from non-traditional sources, such as retailers and households. For instance, environmental regulations require large quantity generators such as big box retailers to dispose of all returned or damaged products that include pesticides, aerosols, fertilizers and cleaners through a permitted hazardous waste disposal program. Similarly, household products, such as paints, oils, batteries, fluorescent light bulbs and pesticides, which contain potentially hazardous ingredients, require special treatment and disposal.
Growing and Increasingly Regulated Waste Streams
Federal, state and local regulators have continuously expanded legal guidelines to include additional waste streams, becoming increasingly vigilant to ensure the proper treatment and disposal of an ever-increasing number of contaminants. Two of the most prevalent increasingly regulated waste streams include drill cuttings from natural gas drilling and coal ash, a byproduct of fossil fuel power plants.
Services
Clean Earth provides services to a variety of customers handling numerous unique sites that often require a range of custom solutions based upon project-specific factors. Clean Earth provides its core material treatment capabilities and complementary services. In addition to its treatment offerings, Clean Earth also provides turnkey services that include proper identification of waste services, management of all transportation and logistics, appropriate testing and analytics, manifesting/documentation and environmentally compliant placement of treated materials at backend locations.
Site Planning and Sampling
Before work commences, Clean Earth has the ability to conduct waste characterization services consisting of field sampling, contaminated material collection and laboratory analysis. Properly identifying waste contaminants upfront can be important, as misclassification leads to mishandling of the waste, which can be costly in terms of fines, penalties, reduced recycling rates (increased disposal fees), and lost project time. Results are analyzed to assess time, cost and logistics, which give Clean Earth the ability to provide customers with a disposal recommendation and a cost-effective solution.
Testing and Analytics
Clean Earth utilizes internal and external, fully-certified and approved laboratories that perform field sampling and contaminated material collection, laboratory analysis, site sampling plans and sampling location diagrams. Laboratory testing is customizable, and Clean Earth determines appropriate testing methods to assess the quantity and type of contaminant in the material. Clean Earth analyzes the results to determine an appropriate treatment and beneficial reuse plan specific to each material. Clean Earth maintains a state-certified hazardous waste laboratory in the New York metropolitan area at its Kearny, New Jersey facility.
Transportation and Logistics
Clean Earth operates an asset-light business model in which it arranges for transportation of the materials on behalf of its customers via pre-qualified independent hauling companies for the vast majority of its volume. Due to Clean Earth’s ability to provide year-round work for transportation companies and its consistent payment practices, it has developed very strong and long-standing relationships with its vendors, providing a large pool of available trucks to complete projects efficiently.
Manifesting and Documentation
Clean Earth provides uniform manifests for customer projects that can be used throughout its network of facilities. These manifests provide tracking of all material moved from a customer site to its facilities and eventually to the final beneficial use site. Furthermore, these documents are maintained and submitted to regulatory agencies such as the EPA for their review.
Treatment
Clean Earth offers several processes to treat, stabilize and/or decharacterize waste material and subsequently avoid costly landfill disposal and meet strict regulatory and site-specific requirements before being beneficially reused.
Thermal Desorption
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◦ | Primarily used to treat soil with high levels of volatile contaminants by heating it in a rotating dryer to volatilize and then subsequently destroy the contaminants |
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◦ | The treated material then enters a soil conditioner (called a pugmill), where it is cooled and rehydrated |
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◦ | Finally, the cooled soil is stockpiled, sampled, and tested by an independent certified laboratory to ensure effective treatment and fulfillment of reuse standards |
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◦ | This treatment method is primarily used for soils that contain high levels of contaminants, such as soil from manufactured gas plant sites |
Stabilization of Dredged Material
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◦ | Dredged sediments are screened to remove large objects and excess water |
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◦ | The remaining material is fed through a conveyor belt to a pugmill mixing system, where proprietary reagent admixtures are introduced |
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◦ | The resulting material is valued for its geotechnical properties and is beneficially reused as fill material |
Bioremediation
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◦ | Used to treat soil that is contaminated with petroleum hydrocarbons |
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◦ | Involves inoculating the contaminated material with engineered bacteria and nutrients to break down the contaminants |
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◦ | The bacteria consume and process the nutrients and the hydrocarbons thereby remediating the contaminants |
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◦ | Used for light to medium hydrocarbon and/or contaminated material impacted by light or heavy metals
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◦ | Soil is screened, and paired with chemical additives to formulate a chemically stable and geotechnically desirable material |
Physical Treatment/Screening
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◦ | Special sizing and segregation processes remove unsuitable materials from inbound materials to meet site-specific geotechnical specifications |
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◦ | The segregated material, often rock, can be mixed with other material for reuse or crushed to create aggregate material for resale |
Placement at Backend Sites
Clean Earth maintains a vast network of permitted, active backend locations owned by third parties that utilize its treated materials to achieve site specifications and/or meet regulatory obligations. Clean Earth operates a system in which before accepting any material it identifies which specific backend site will accept it and how much it will cost to treat, transport, and place. Its beneficial reuse solutions serve as an alternative to permitted landfill disposal and incineration. In order to ensure sufficient capacity for any future project, the Clean Earth continuously seeks to add backend sites to its network.
Business Strategies
Growth in Clean Earth’s business is primarily focused in five areas:
Continued participation in large and growing end markets
Within the U.S. environmental services market, Clean Earth primarily operates within the remediation and hazardous waste management segments. Growth in the industry will be driven by numerous secular trends, including an increasing national
awareness and dedication to environmental stewardship, regulatory guidelines for a growing number of contaminated waste streams, and increasing prevalence of and preference for cost-effective landfill avoidance and recycling strategies. As a result of these market trends, generators or those responsible for contaminated waste streams will likely seek to utilize service providers like Clean Earth that can offer environmentally compliant and cost-effective solutions for their treatment and disposal needs.
Contaminated Materials
Clean Earth’s operations are diversified across a variety of stable end markets focused primarily in the power, oil & gas, infrastructure and industrial industries. Clean Earth has also positioned itself to capitalize on future increases in the commercial development sector.
Dredged Material
Clean Earth has maintained a strong position in the New York and New Jersey harbors for its dredged material management and recycling services. Demand for Clean Earth’s services has grown such that it constructed a second dredge processing facility in 2009. Outside of the New York and New Jersey harbors, increased demand for maintenance projects is expected to be driven largely by the increasing size of heavy shipping vessels and expansion of the Panama Canal. As waterways are deepened, sediment accumulates in greater volume, which must be regularly removed to maintain the new depth.
Hazardous Waste
Clean Earth maintains unique hazardous waste operations in an active region of the United States. There are significant number of hazardous waste generators in the U.S. that are located in New York and New Jersey and Clean Earth operates one the few commercial RCRA Part B permitted TSDFs in the New York metro area. Clean Earth is currently able to accept hazardous liquids, solids and gasses, as well as a variety of other specialty waste classes, including lab-packs, electronic waste, universal waste, wastewater, household hazardous waste, medical waste, used oils and antifreeze. Clean Earth can also accept nonhazardous waste at this facility. In addition to its hazardous waste facility in New Jersey, Clean Earth also operates RCRA Part B facilities in Calvert City, KY and Morgantown, WV.
Increasing share in existing markets
Clean Earth has historically increased the volume of materials processed at its existing facilities by expanding the scope of its existing permits and developing new treatment and processing techniques. The permitting expertise of its environmental, health, and safety organization allows Clean Earth to be proactive in seeking additional waste streams and adaptable to changing contaminants found in the materials it manages, as well as in newly regulated materials.
Numerous dynamics have made the market increasingly beneficial for Clean Earth in its core markets. These dynamics include stricter regulations, increasing levels of enforcement and a more discerning customer base.
Accelerating participation in increasingly regulated end markets
Within its current footprint, there are opportunities for Clean Earth to continue to expand the scope of its service offering by adding additional specialty waste streams.
Continued tuck-in acquisition growth
Since 2011, Clean Earth has expanded its footprint and technical capabilities by launching operations in Florida (acquired), the Marcellus Shale (greenfield), Georgia (acquired), Kentucky (acquired), West Virginia (acquired), Greater Washington, D.C. region (acquired and repurposed) Connecticut (acquired), Alabama (acquired) and Pennsylvania (acquired).
The market for waste management services is highly fragmented, with many companies operating a single facility. Accordingly, there are several tuck-in acquisition opportunities in Clean Earth’s marketplace that would enable it to continue growing in existing and adjacent markets, as well as in new geographies.
Platform expansion opportunities
While Clean Earth has historically remained focused on its core markets, many opportunities exist to diversify and augment its environmental service offering using Clean Earth as a platform. Clean Earth can acquire select competitors and industrial services companies, as well as pursue vertical integration prospects and new treatment technologies.
Customers
Clean Earth serves approximately 1,700 customers at more than 6,300 discrete sites. The Company maintains strong relationships with customers at various levels of the decision and supply chain, including public and private corporations and property owners, as well as environmental consultants, brokers, construction firms, municipalities, and regulatory agencies, among others.
In 2017, 2016 and 2015, the top 10 customers accounted for approximately 29%, 27% and 28% of net sales, respectively. While Clean Earth works with certain customers that have recurring needs for disposal and recycling solutions, its revenue
per customer changes frequently. Many of the Clean Earth's customers are long-time customers, but do not generate a consistent amount of revenue year in, year out. Consequently, Clean Earth is more focused on winning specific “projects” as opposed to winning the business of a particular customer.
Seasonality
Clean Earth typically has lower earnings in the winter months due to limits on outdoor construction due to colder weather and dredging due to environmental restrictions in certain waterways in the Northeastern United States.
Sales and Marketing
Clean Earth’s team is comprised of sales and marketing professionals that are primarily focused on direct selling to customers. Clean Earth is focused on servicing customers at various levels of the decision and supply chain, including waste generators, environmental service companies, consultants, construction and engineering firms, commercial developers, municipalities and government-sponsored organizations, and regulatory agencies, among others. Clean Earth has spent years developing direct relationships with its clients, many of whom routinely generate large volumes of waste and demand treatment and disposal solutions at various sites and locations.
The large dredging contractors manage the vast majority of the dredging activity. Clean Earth has built relationships with these contractors to ensure it is well-positioned to serve as many of the large or small dredging projects in the New York/New Jersey harbor and surrounding waterways, as possible.
Competition
Competitive Landscape
The environmental services marketspecialty magnetic systems industry is highly fragmented, creating a competitive landscape with numerous participants.a variety of magnetic component manufacturers. However, a majorityfew have the breadth of these companies specialize in a narrower scopecapabilities that Arnold possesses. Manufacturers compete on the basis of services or treatment capabilities.technical innovation, co-development capabilities, time-to-market, quality, geographic reach and total cost of ownership. Industry competitors relevant to Clean Earth’sArnold’s served markets range from large public companiesmultinational manufacturers to small, single-serviceregional participants. Competition primarily includes processors of contaminated soils, dredging companies (to a limited extent), waste treatment providers and waste management companies. In Clean Earth’s core markets, competition tends to be primarily comprised of regional services providers or single-service companies with limited scale. Given these dynamics, we believe the industry will likely favor players such as Clean Earth that have large scaleare able to achieve vertical integration and management teamsa diversification of offerings across a breadth of products along with many years of experiencemagnet engineering and extensive familiaritydesign expertise.The focus will be engineering solutions together with the regulatory landscape.its customers.
Barriers to Entry
•Low Substitution Risk – Arnold’s solutions are typically specified into its customers’ program designs through a co-development and qualification process that often takes 6-18 months. Arnold’s customers are typically contractors and component manufacturers whose products are integrated into end-customers’ applications. The high cost of failure, relatively low proportionate cost of magnets to the final product, sometimes lengthy testing and qualification process, and substantial upfront co-engineering investment required, represent significant barriers to customers changing solution providers such as Arnold.
Permits- Clean Earth•Equipment and Processing – Arnold’s existing base of production equipment has a significant estimated replacement cost. A new entrant could require as much as 2-3 years of lead time to match the process performance requirements, customization of equipment and material formulations necessary to effectively compete in the specialty magnet industry. Further, given the program nature of a majority Arnold’s sales, management estimates that it could take 5-10 years to build a sufficient book of business and base of institutional knowledge to generate positive cash flow out of a new manufacturing plant.
Competition
Management believes the following companies represent Arnold’s top competitors:
•Vacuumschmelze Gruner
•Dexter Magnetic Technologies
•Electron Energy Corp
•Magnum Magnetics Corporation
•Thomas & Skinner
Suppliers and Manufacturing
Raw materials utilized by Arnold include neodymium, samarium, dysprosium, nickel and cobalt, stainless steel shafts, Inconel sleeves, adhesives, laminates, aluminum extrusions and binders. Although Arnold considers its relationships with vendors to be strong, Arnold’s management team also maintains an extensive portfolioa variety of regulatory permits, including approximately 180 active permitsalternative sources of comparable quality, quantity and 200 permit modifications. Each facility maintains various local, state,price. The management team therefore believes that it is not dependent upon any single vendor to meet its sourcing needs. Arnold is generally able to pass through material costs to its customers and federal authorizations forbelieves that in the acceptance, treatment, and beneficial reuseevent of significant price increases by vendors that it could pass the increases to its customers.
Arnold has a wide variety of hazardousmanufacturing capabilities. For permanent magnets and nonhazardousassemblies our magnets are produced and fabricated utilizing personnel, skills, tools, and specific machinery to convert raw materials into finished magnet and then integration of those magnets and machines components into devices or sub-assemblies. Orders are all built to specific customer needs and distributed directly from our manufacturing facilities located worldwide.
Research and Development
Arnold has a core research and development team with extensive industry experience located at its Technology Center. In addition to the Technology Center, a large number of other Arnold staff members assigned to the business units contribute to the research and development effort at various stages. Product development also includes collaborating with customers and field testing. This feedback helps ensure products will meet Arnold’s demanding standards of excellence as well as all necessary airthe constantly changing needs of end users. Arnold’s research and water discharge permits requireddevelopment activities are supported by state-of-the-art engineering software design tools, integrated manufacturing facilities and a performance testing center equipped to ensure product safety, durability and superior performance.
Intellectual Property
Arnold currently relies on a deep portfolio of “trade secrets” and proprietary intellectual property.
Patents
Arnold currently has 2 patents in force in the United States and 1 patent in force in Japan. Arnold also has a patent application pending in Europe.
Trademarks
Arnold currently has 86 trademarks, 12 of which are in the U.S. The most notable trademarked items are the following: “RECOMA”, “PLASTIFORM”, “FLEXMAG” & “ARNOLD”. Application dates for operation. These permits are extremely difficultvarious trademarks date back to obtain due to the complex navigation of multiple layers of regulation, lengthy and costly public review periods and typical public NIMBY opposition. Clean Earth maintains a large team of environmental, health and safety experts that have developed trusted relationships and credibility with local, state and federal regulatory agencies over the last 25 years.
Extensive Network - The Company’s extensive network of 24 permitted facilities is strategically located near major waste generation centers with an abundance of regulations governing waste treatment and disposal. Given transportation costs, the proximity of Clean Earth’s facilities to key markets and convenient access to rail, barge, and trucking transportation are significant competitive advantages that drive profitability. Furthermore, its maintenance of multiple backend beneficial reuse sites provides flexibility to direct volume to the most appropriate facilities based on available processing and placement capacity.
as early as 1960.Regulatory Environment
Clean Earth’s facilityArnold’s domestic manufacturing and assembly operations and its facilities are subject to various local,evolving Federal, state and federal authorizations for the acceptance, treatment, and beneficial reuse of a wide variety of hazardous and nonhazardous materials, as well as all necessary air and water discharge permits required for operation. These permits are extremely difficult to obtain due to the complex navigation of multiple layers of regulation, lengthy and costly public review periods, and typical public NIMBY opposition. Clean Earth maintains a large team of environmental, health, and safety experts that have developed trusted relationships and credibility with local state, and federal regulatory agencies over the last 25 years. Management believes that Clean Earth is in compliance, in all material respects, w ith applicable environmental and occupational health and safety laws and regulations. These include laws and regulations governing air emissions, wastewater discharge and the storage and handling of chemicals and hazardous substances. Arnold’s foreign manufacturing and assembly operations are also subject to local environmental and occupational health and safety laws and regulations. New requirements, more stringent application of existing requirements, or discovery of previously unknown environmental conditions could result in material environmental expenditures in the future.
Arnold is a major producer of both Samarium Cobalt permanent magnets under its brand name RECOMA® and Alnico (in both cast and sintered forms). Both materials from Arnold meet the current Berry Amendment or Defense Federal Acquisition Regulations Systems (DFARS) requirements per clause 252.225.7014 further described under 10 U.S.C. 2533b. This provision covers the protection of strategic materials critical to national security. These magnet types are considered “specialty metals” under these regulations.
EmployeesHuman Capital
Clean EarthArnold is led by a capable management team of industry veterans that possess a balanced combination of industry experience and operational expertise. The current senior management team has over 150 years of cumulative experience with an average tenure of approximately 10 years at Clean Earth. Current management has implemented numerous operational, strategic, and financial initiatives over the past several years. In addition to the senior management team, there are operational managers that hold significant responsibilities across the business and work closely with management on a daily basis.
Clean Earth employs approximately 522 hourlyArnold employed approximately 686 hourly and salaried employees located throughout the United States. Clean Earth’sNorth America, Europe and Asia at December 31, 2021. Arnold’s employees are compensated at levels commensurate with industry standards, based on theirtheir respective position and job grade.
Arnold’s workforce is non-union except for approximately 1963 hourly employees at its dredgeMarengo, Illinois facilities, whowhich are represented by the International UnionAssociation of Operating Engineers Local No. 825 (IUOE Local 825)Machinists (IAM). Clean EarthArnold enjoys good labor relations with its employees and union and has a three year contract in place with the IUOE Local 825,IAM, which will expire in July 2019.June 2022.
Sterno
Overview
The Sterno Group LLC ("Sterno"), headquartered in Corona, California, is a manufacturer and marketerthe parent company of portable food warming fuel and creative table lighting solutions for the foodservice industry. Through its two divisions, Sterno Products, LLC ("Sterno Products") and Rimports, LLC ("Rimports"). Sterno Home, operates via two product divisions:
•Sterno Products - Sterno Products offers a broad range of wick and gel chafing fuels, liquid and traditional wax candles, butane stoves and accessories, liquid wax, traditional wax and flameless candles, catering equipment and lamps. For over 100 years, the iconic "Sterno" brand has been synonymous with quality canned heat. The heritage of reliabilitylamps for restaurants, hotel and innovation continues today, ashome entertainment uses, selling both Sterno continues to bring to market new products that give foodservice industry professionals greater control over food qualityBrand and décor.private label. As thea leading supplier of canned heat to foodservice distributors and foodservice group purchasing organizations, Sterno is always pursuing end-user solutions and innovations to strengthen its position in the marketplace.
In January 2016,•Rimports - Rimports is a manufacturer and distributor of branded and private label wickless candle products used for home decor and fragrance systems under the ScentSationals, AmbiEscents, Oak & Rye, Estate and Ador brands. The company offers unique lines of wickless candle products including ceramic wax warmers, scented wax cubes and essential oil and diffusers. Rimports also sells flameless candles, lanterns, and outdoor lighting. Sterno acquired allRimports in February 2018. In 2021, Sterno integrated the product lines of the outstanding stock of Northern International,Sterno Home Inc. ("Sterno Home"). with Rimports. Previously, Sterno Home markets and manufactureswas a complete arrayseparate product division of outdoor and indoor lighting products aimed at the Home Improvement / Home Decor Market. Sterno Home'swhose product offerings includes a full line of innovative patentedincluded flameless candles, traditional house and garden lighting including path lights, spotlights, bollards, coach and security lights as well as emerging décor categories of illuminated products such as post caps, deck, patio and fence lighting and other popular novelty products including stick lights, string lights, baskets and lanterns. The flameless candles and novelty lighting are powered by solar or battery power and the more traditional outdoor lighting fixtures are driven via solar power or low voltage technologies. Sterno Home brands include Candle Impressions®, Mirage®, Night Splendor® and Inglow® for flameless candles as well as Paradise Garden Lighting®, Manor House®, Style Line® and Lumabrite® for outdoor décor and security lighting.lights.
History of Sterno
Sterno’s history dates back to 1893 when S. Sternau & Co. began making chafing dishes and coffee percolators in Tenafly, New Jersey. In 1914, S. Sternau & Co. introduced “canned heat” with the launch of its gelled ethanol product under the “Sterno” brand. Since then, the Sternau and Sterno names have been the most well-known names in portable food warming fuel. In 1917, S. Sternau & Co. was renamed The Sterno Corporation.During World War I, Sterno portable stoves were promoted as an essential gift for soldiers going to fight in the trenches of Europe.Sterno stoves heated water and rations, sterilized surgical instruments, and provided light and warmth in bunkers and foxholes. During World War II, Sterno produced ethanol and methanol chafing fuels under contract with the U.S. military. Sterno's production facilities were moved from New Jersey to Texarkana, Texas in the early 1980s.In 2012, Sterno merged with the Candle Lamp Company, LLC ("CandleLamp"). CandleLamp, was founded in Riverside, California in 1978, focusingfocused initially on the liquid wax candle market. Over the next several decades, CandleLamp began to supply chafing fuel in addition to lighting products. Today,
In 2016, Sterno operates outexpanded their product offering with the acquisition of its corporate headquarters in Corona California and two manufacturing facilities in Texarkana, Texas and Memphis, Tennessee.
Northern International Inc. ("Sterno Home was formed in 1997 by its three founding partners who had been in the import and product development business since 1979. Home").The success in the outdoor lighting of an innovative use of LED technology evolved into the development of patented flameless candle product line.In February 2018, Sterno Home's flamelessacquired Rimports, a manufacturer and distributor of branded and private label wickless candle evolvedproducts used for home decor and fragrance systems. Rimports offers unique lines of wickless candle products including ceramic wax warmers, scented wax cubes and essential oil and diffusers.
Today, Sterno operates out of its corporate headquarters in Corona, California, two manufacturing facilities in Texarkana, Texas and Memphis, Tennessee, and the battery operated candle market from a functional safety oriented product into an attractive décor piece meant to enhance the beauty of consumer’s homes.Rimports facility in Provo, Utah.
We purchased Sterno on October 10, 2014.
Industry
Sterno Products competes in the broadly defined U.S. foodservice industry and the flameless candle and outdoor lighting home décor industry. In the foodservice industry,where historically restaurant, catering and hospitality sales accounthave accounted for approximately 67%60% - 70% of the market with the remainder comprised of the travel and leisure, education and healthcare related sales. The Sterno Product line focusesProducts product offerings focus on safe, portable fire solutions for cooking and warming, as well as tabletop lighting décor.
Sterno HomeRimports operates in the broad North American home decor space (retail) which is heavily correlated to general consumer spending. Flameless and reusable wax products have seen increased adoption by younger consumers
who prioritize economical and environmentally friendly products.Within the home decor space, Rimports competes in the U.S. candle space and the U.S. home fragrance space, and, with the integration of Sterno Home, has added the flameless candles, lanterns and outdoor lighting and home decor industry. Sterno Home's sales are concentrated in the United States and Canada, with a small percentage of sales coming through global retailers with locations in Japan, Taiwan, the United Kingdom and Australia. Management believes that a rise in demand from high-income households and businesses will bolster growth, with consumers spending more money on the cocooning trend and specifically on beautifying their indoor and outdoor home, changing out trendy accent items more frequently and investing in more spacious and comfortable outdoor spaces with many equivalent amenities of their indoor spaces.
Products and Services
Sterno Products is a “full-line” supplier offering a broad array of portable chafing fuels, table lighting, and outdoor lighting products, wickless candles and fragrance products with approximately 4004000 SKUs serving the foodservice and retail markets. Sterno originally focused on chafing fuel (“canned heat”) products and later expanded its offerings to include table ambiance products such as liquid wax, wax candles and votive lamp,lamps, as well as outdoor lighting with the acquisition of Sterno Home in 2016. 2016, and wax cubes and warmer products through its acquisition of Rimports.Sterno’s products fall into fivesix major categories: canned heat, catering equipment and butane products, table lighting, flameless candles and outdoor lighting, catering equipmentwickless candle and butanefragrance products.
Products, Customers and Distribution Channels
Products
Canned Heat - The canned heat product line is composed of various chafing fuels packaged in small, portable cans. The portable warming (canned heat) line is composed of wick-based and gel-based chafing fuels packaged in steel cans. These products are used by foodservice professionals in a variety of food serving and holding applications and are designed to keep food products at an optimal food-safe serving temperature of 140-165 Fahrenheit.The canned heat product line is composed of two subcategories: wick chafing fuel and gel chafing fuel. The subcategories are distinguished based on the type of chafing fuel being used; the four primary chafing fuels are diethylene glycol (“DEG”), propylene glycol, ethanol and methanol. Each fuel contains unique characteristics and properties that allow the Company to offer a broad array of configurations to suit varying user requirements.
•Wick chafingChafing Fuel
- The wick chafing fuel line (“Wick”) is composed of either DEG or propylene glycol chafing fuel. DEG and propylene glycol chafing fuels with advance wick technology have higher heat output than alternatives such as ethanol and methanol. The liquid Wick products feature a variety of wick types and burn times to meet the specific needs of the user. Wick fuels are clean burning, biodegradable, nonflammable if spilled (will not ignite without a wick) and the can stays cool to the touch when lit.
•Gel Chafing Fuel
- The gel chafing fuel line (“Gel”) is composed of either gelled ethanol or gelled methanol chafing fuel.Ethanol chafing fuel has a higher heat output than methanol fuel; both ethanol and methanol fuels have lower heat output than some DEG and propylene glycol products. The Gel product line tends to have shorter burn times than the Wick product.
For an Environmentallyenvironmentally preferred chafing fuel, the Company offers a patented line of “Green” chafing fuels featuring USDA Certified Biobased Product formulas that are also endorsed by the Green Restaurant Association. The “Green Heat” and “Green Wick” products perform similar to the Wick and Gel chafing fuels, but are made from renewable resources that are biodegradable and more environmentally friendly.
Catering Equipment - Catering equipment products are designed to provide a complete commercial catering solution whether indoor or outdoor.Products include chafing dish frames and lids, wind guards and buffet sets.
Butane - Sterno produces a full line of professional quality portable butane stoves, ideal for action stations, made-to-order omelet lines, tableside and off-site cooking, outdoor events and more.Products also include select butane accessories for special culinary applications such as the culinary torch. Sterno butane fuel comes with an additional safety feature called Countersink Release Vent (CRV) Technology.
Table Lighting - Sterno sells a variety of items designed to enhance lighting and ambiance at meal settings which are critical to a customer’s experience.Products include liquid wax, traditional hard wax and flameless electronic candles, as well as votive lamps, shaded lamps and accent lamps.
Flameless Candles and Outdoor Lighting - Through Sterno Home, Sterno offers a wide selection of lighting for your home, garden, patio and yard with over 1000 SKUSSKU's available in our retail markets. Sterno Home first delved into lighting with lighting fixtures for illuminating front and backyard pathways. Sterno Home quickly expanded its line to include other types of home lighting products, most notably bollards, shepherd hook lights and line voltage powered coach lights and street lights. Sterno Home’s 20-year history of providing high quality, low cost consumer-directed lighting has cemented it as a top tier supplier in both the flameless candle and outdoor lighting categories. All of Sterno Home’sSterno's products are powered by one of the following:
following - 1) Solar - solar panel with rechargeable power source - usually a rechargeable battery
battery; 2) Battery - battery operated
operated; 3) Plug-in - plugs directly into a regular wall socket either with 2 or 3 prong plug and with or without included and attached transformer
transformer; 4) Low Voltage - part of a set which includes a stand-alone transformer. Fixtures connect through a stand-alone wire via clip connectors
connectors; 5) Line Voltage - hardwired into a home's electrical circuitry,
or 6) Rechargeable - product is recharged when empty usually through a plug in wire and an onboard rechargeable power sourcesource.
•Flameless Candles
- The flameless candle product line is made up of various types and sizes of candles with all of them sharing the one main attribute: their glow is powered by an artificial power source, most often battery. This makes them inherently safer than traditional candles as there is no flame or even heat generated to cause any type of accidents. Although pillar type candles are the most common shape, Sterno Home also designs and manufactures votives, tealights, tapers as well as specialty molded candles. Sterno Home was also the first to introduce the timer function to their flameless candle line. Sterno Home’s candles stand out from the competition as they are the only manufacturer that offers the patented black wick.Sterno Home also developed its unique algorithm-based light circuit which gives the candle a naturally random flicker and glow.
•Landscape Lighting
The landscape lighting category was Sterno Home’s first offering. Starting with simple low voltage path lights, Sterno Home quickly expanded its offering to reflect the growing needs of the DIY and home décor consumer. - Landscape lighting is lighting that promotes and accentuates elements of a consumer’s home, yard or garden so its beauty can be enjoyed both in daytime and nighttime. Another benefit of landscape lighting is added safety as it is easier to navigate around a home at night when it is reasonably well-lit. Landscape lighting was originally most commonly powered through a low voltage setup but as solar technologies have rapidly developed, many of these fixtures can achieve their lighting purposes with only a solar panel asfor power generation. Consumers with higher and more consistent lighting requirements most often opt for low voltage kits using wire and transformers to light their fixtures. Solar powered fixtures are advantageous for those consumers looking for cheaper and quicker to set up lighting solutions even if it often means lesserless lumens and light. Another notable technology has been the development of LED lighting. LED’s more efficient power generation technology has allowed for advantageous fixture designs and a higher level of power generation which were not easy or as cost effective to achieve as with legacy lighting technologies such as incandescent or halogen. LEDs also last longer and are generally more robust than older technologies.
•Décor Lighting
Décor lighting is Sterno Home’s newest category. - Décor lighting has similar functions to landscape lighting but is usually less about safety and functionality and more about accenting an area of the outside home with ornamentation of some sort. With a décor piece, the light the piece gives off and the item itself together become elements of beauty in the setting. Because these items are very trend driven, consumers are more apt to switch them out more often therefore increasing repeat purchase potential and other recurrent sales opportunities for Sterno Home. Sterno.Some of the most common categories of décor lighting are lanterns and baskets and string lighting.
Catering EquipmentWickless Candle and Fragrance Products
•WaxWarmers and Scented Wax Cubes - Catering equipmentThe wax and wax warmer line is composed of a large variety of fragrance and warmer design choices for consumers. The wax cubes are long-lasting and consistently release strong fragrance. The consumer likes the product because the scented wax cubes are an impulse item ($2~ price range) and this product makes it easy and quick for the customer to change fragrance. The flameless feature is a plus in that it is very safe. The proprietary formula and world-class fragrances add to the high quality of the domestically-made products. Ongoing research ensures consumer loyalty, superior quality, and well-rounded fragrance programs. The wax warmers are made up of quality materials including wood, metal, ceramic, and glass.
•Essential Oils and Diffusers - The 100% Pure Essential Oil lines and brands consists of Peppermint, Lavender, Lemon, Eucalyptus, Sweet Orange, Grapefruit, Tea tree, Cinnamon, etc. Customers are attracted
to high quality, 100 percent pure oil products with no additives or fillers. Attractively designed diffusers appeal to consumers in the Aromatherapy Home Fragrance section.
•ScentCharms - ScentCharms is Rimports’ newest product category. With various interchangeable high-quality fragrance oils and plug-in designs, consumers enjoy a personalized experience. The product is designed to be no spill, no mess, clutter-free, and long-lasting.
•Aromatherapy Products - The aromatherapy line consists of room sprays, liquid hand soaps, foaming hand soaps, hand sanitizers, body lotions, and body scrubs, etc. The five unique fragrance combinations - lavender and chamomile, eucalyptus and rosemary, orange and vanilla, lemon and grapefruit, and peppermint and geranium - are made with 100 percent pure essential oils.
Customers and Distribution Channels
Sterno's products are designedsold primarily through the foodservice and consumer retail channels. Sterno’s product distribution network is comprised of long-standing, entrenched relationships with a diversified set of customers. Sterno’s top ten customers comprised approximately 71%, 73%, and 73% of gross sales in the years ended December 31, 2021, 2020 and 2019, respectively.
•Foodservice - The foodservice channel consists of multiple layers of distribution comprised of broadline distributors, equipment and supply dealers and cash and carry dealers. Within the foodservice channel, Sterno’s products are predominantly used in the restaurant, lodging/hospitality and catering markets.
•Retail - The retail channel consists of club stores, mass merchants, specialty retailers, grocers and national and regional DIY stores. The Company’s retail products are used in home, camping and emergency applications. The Company’s retail products appeal to provide a complete commercial catering solution whether indoor or outdoor. Products include chafing dish frameswide variety of consumers, from home entertainers to recreational campers and lids, wind guardsextreme outdoorsmen. Online retail sales are also an important channel for Sterno Home and buffet sets.Rimports. With an online dynamic, it is also much easier to showcase how Sterno Home’s and Rimport's products look in actual dark use conditions, directly addressing their primary merchandising challenge.
Butane - Sterno produces a full line of professional quality portable butane stoves, ideal for action stations, made-to-order omelet lines, tableside and off-site cooking, outdoor events and more.Products also include select butane accessories for special culinary applications such as the culinary torch. Sterno butane fuel comes with an additional safety feature called Countersink Release Vent (CRV) Technology.
Sterno sells into Foodservice, Retail and OEM markets. The following table sets forth Sterno’s gross revenue by product for the fiscal years ended December 31, 2017, 20162021, 2020 and 2015:2019:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
Gross sales by product (1) | | 2021 | | 2020 | | 2019 |
| Wickless Candle Products | | 40 | % | | 40 | % | | 28 | % |
| Flameless Candle and Outdoor Lighting | | 13 | % | | 16 | % | | 20 | % |
| Canned Heat | | 21 | % | | 11 | % | | 29 | % |
| Diffusers and Essential Oils | | 6 | % | | 9 | % | | 5 | % |
| Table Lighting | | 3 | % | | 2 | % | | 5 | % |
| Other | | 17 | % | | 22 | % | | 13 | % |
| | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | |
Gross sales by product (1) | | 2017 | | 2016 | | 2015 |
| Canned Heat | | 46 | % | | 47 | % | | 72 | % |
| Flameless Candle and Outdoor Lighting | | 34 | % | | 35 | % | | — | % |
| Table Lighting | | 6 | % | | 6 | % | | 10 | % |
| Other | | 14 | % | | 12 | % | | 18 | % |
| | | 100 | % | | 100 | % | | 100 | % |
(1) As a percentage of gross sales, exclusive of sale discounts.
Sterno had approximately $29.9 million and $39.5 million in firm backlog orders at December 31, 2021 and 2020, respectively.
Business Strategies and Competitive Strengths
Business Strategies
Defend Leading Market Position - As a leading supplier of canned fuels, flameless candles and outdoor lighting, wickless candles and fragrance products, Sterno’s places great value delivering unmatched customer service and product selection.In a market characterized by fragmented categories and competition, Sterno will continue to focus on providing the best in class service to its customers.Sterno Products has been the recipient of numerous vendor awards for its high degree of customer service.
Pursue Selective Acquisitions - Sterno views acquisitions as a potentially attractive means to expand its product offerings in the foodservice and retail channels as well as enter new international markets.
Expand Retail Distribution - Sterno’s management believes that there is an opportunity to leverage the iconic nature of the “Sterno Products” brand to expand its retail product offering and to expand distribution into additional retailers.
Create Innovative Products - Having innovative design, marketing, and production teams enables Rimports to expand into new fragrance systems markets, as it has done with Essential Oil Diffusers and ScentCharms (Decorative Liquid plug-in fragrance units). Rimports will continue to focus on providing the best quality products and low prices to retailers and end-users.
Competitive Strengths
Leading Brand Recognition & Market Share - Sterno Products is the market share leader in the canned chafing fuel market.Management believes Sterno Products enjoys outstanding brand awareness and a reputation for superior quality and performance with distributors, caterers, hotels and other end users.Sterno Home offers a wide variety of products to a cross section of North American retail and ourits diversity gives us a unique standing in this marketplace. Most of SternSterno Home's competitors specialize in one aspect of fulfilling the market. They either only sell to a few retailers or only actively develop few or even only one category of product. This exposes them to major financial challenges when they lose that account or when that product is beat out by a competitor or starts to wane in the marketplace. Rimports is a leader in fragrance systems, particularly the wickless candle market, and is growing its market share in the essential oils and diffusers and plug-in liquid fragrance markets. Rimports offers a large variety of products to retailers in North America, Canada, China, and the United Kingdom.
Low Cost versus Alternatives - Sterno'sSterno Product's customers are typically caterers, hotels or restaurants who utilize canned chafing fuel to maintain prepared food at a safe and enjoyable serving temperature. The risk of ruining a dining experience and the low proportionate cost of canned chafing fuel relative to the cost of a catered event represent significant barriers to customers switching out of Sterno’s canned chafing fuel products.Additionally, management believes that there is no other technology available today that offers the portability, reliability and low cost of the Sterno canned chafing fuel products.
Business Strategies
Defend Leading Market Position - As a leading supplier of canned fuels, flameless candles and outdoor lighting, Sterno’s places great value delivering unmatched customer service and product selection. In a market characterized by fragmented categories and competition, Sterno will continue to focus on providing the best in class service to its customers. Sterno has been the recipient of numerous vendor awards for itsRimports’ ultimate consumers seek high degree of customer service.
Pursue Selective Acquisitions - Sterno views acquisitions as a potentially attractive means to expand its product offeringsquality products in the foodserviceHome Fragrance section. This high value strength ensures consumer loyalty and retail channels as well as enter new international markets.
Expand Retail Distribution - Sterno’s management believes that there is an opportunity to leverage the iconic nature of the “Sterno Products” brand to expand its retail product offering and to expand distribution into additional retailers.
Customers and Distribution Channels
Sterno's products are sold primarily through the foodservice and consumer retail channels. Sterno’s product distribution network is comprised of long-standing, entrenched relationships with a diversified set of customers. Sterno’s top ten customers comprised approximately 68%, 59%, 69% of gross sales in the year ended December 31, 2017, 2016 and 2015, respectively.
Foodservice - The foodservice channel consists of multiple layers of distribution comprised of broadline distributors, equipment and supply dealers and cash and carry dealers. Within the foodservice channel, Sterno’s products are predominantly used in the restaurant, lodging/hospitality and catering markets.
Retail - The retail channel consists of club stores, mass merchants, specialty retailers, grocers and national and regional DIY stores. The Company’s retail products are used in home, camping and emergency applications. The Company’s retail products appeal to a wide variety of consumers, from home entertainers to recreational campers and extreme outdoorsmen. Online retail sales are also an important channel for Sterno Home. With an online dynamic, it is also much easier to showcase how Sterno Home’s products look in actual dark use conditions, directly addressing Sterno Home product’s primary merchandising challenge.
Sterno had approximately $28.7 million and $25.3 million in firm backlog orders at December 31, 2017 and 2016, respectively.
Seasonality
Sterno typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer season and the holiday season.
Sales and marketing
Within the foodservice channel, Sterno directly employ sales professionals and utilizes a broad network of independent sales representative firms assigned to differing U.S. territories managed by in-house sales management professionals. The independent sales representatives have long-standing relationships with distributors and end-users and typically represent 10 to 20 of the best non-food product lines alongside the Company’s products. The independent sales representatives are used primarily to manage the day to day order fulfillment and customer relationships. The independent sales representative firms are paid on a commission basis based on customer type and sales territory.
Within the retail channel, Sterno directly employ sales professionals and utilizes a network of independent retail sales broker firms. The independent retail sales brokers are paid on a commission basis based on customer type and sales territory. Sterno maintains direct sales relationships with many key customers. Sterno Home also utilizes a broad network of
independent sales representative firms and retail-linked agencies. These agents and firms are managed by Sterno Home's in-house sales management professionals.
Sterno has implemented a multi-faceted marketing plan which includes (i) targeted print advertising; (ii) tradeshows; (iii) increasing online education through the Sterno Products University and the Sterno Home websites; and (iv) social media.satisfaction.
Suppliers and Manufacturing
Sterno's product manufacturing is based on a dual strategy of in-house manufacturing and strategic alliances with select vendors. Sterno operates an efficient, low-cost supply chain, sourcing materials and employing contract manufacturers from across the Asia-Pacific region and the U.S.
Sterno’sSterno Products' primary raw materials are Diethylene glycol, ethanol, liquid paraffin and steel cans for which it receives multiple shipments per month. Sterno Products purchases its materials from a combination of domestic and foreign suppliers.
Rimports sources raw materials from and outsources manufacturing processes to companies in the U.S. and China. Raw materials include wax, fragrances, and color dye for waxes; essential oils; wood, metal, ceramic, and glass for warmers and diffusers; and packaging supplies. Products are shipped to retailers from outsourced manufacturing warehouses and Rimports’ two Utah warehouses. The Sterno Home product lines are sources all their entire inventoryentirely from China. Sterno Home operates an efficient supply chain with emphasis on quality production and low cost. Sterno Home’s China-based support team in the Yuyao office permits Sterno Home to be more hands on in the factories reporting proactively on potential issues and working to implement practical solutions when required.
Intellectual Property
Sterno relies upon a combination of trademarks and patents in order to secure and protect its intellectual property rights. Sterno currently owns approximately 218269 registered trademarks and 10174 patents globally, and has 2628 applications for patents pending.
Regulatory Environment
Sterno is proactive regarding regulatory issues and management believes that it is in compliance with all relevant regulations. Sterno maintains adequate product liability insurance coverage. Management believes that Sterno is in compliance, in all material respects, with applicable environmental and occupational health and safety laws and regulations.
AsSeasonality
Sterno typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer season and the holiday season. Rimports typically has higher sales in the third and fourth quarter of each year, reflecting the holiday season.
Human Capital
At December 31, 20172021, Sterno had 549 employees within its three product divisions - 259 employees at Sterno Products, employed approximately 580 persons34 employees at Sterno Home and 256 employees at Rimports. Sterno Products operates out of four locations in 8 locations. Nonethe United States, with a majority of Sterno’stheir employees located at production facilities in Memphis, Tennessee and Texarkana, Texas. Rimports employees are subject to collective bargaining agreements. We believeprimarily operate out of Rimports' facilities in Provo, Utah. Sterno believes that Sterno’sits relationship with its employees is good.
ITEM 1A. RISK FACTORS
Our business, operations and financial condition are subject to various risks and uncertainties. The following discussion of risk factors should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section and the consolidated financial statements and related notes. In addition to the factors affecting our specific operating segments identified in connection with the descriptions of these segments and the financial results of the operations of these operating segments elsewhere in this report, the most significant factors affecting our operations include the following:
Risks Related to Our Business and Structure
The global outbreak of the novel coronavirus, or COVID-19, caused severe disruptions in the U.S. and global economies, including supply chain disruptions, and has impacted, and may continue to adversely impact our performance and results of operations.
The COVID-19 pandemic has adversely impacted global commercial activity and contributed to significant volatility in the equity and debt markets. The COVID-19 pandemic and restrictive measures taken during the course of the pandemic to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, or the re-introduction of business shutdowns, cancellations of events and restrictions on travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions, labor shortages, increased inflationary pressure and overall economic and financial market instability both globally and in the United States. Many states, including those in which we operate, have issued orders requiring the closure of, or certain restrictions on the operation of certain businesses. Such actions and effects remain ongoing and the ultimate duration and severity of the COVID-19 pandemic, including COVID-19 variants, such as the recent Delta and Omicron variants, remain uncertain. Recurring COVID-19 outbreaks caused by different virus variants continue to lead to the re-introduction of certain restrictions in certain states in the United States and globally. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and our business and operations, as well as the business and operations of our subsidiaries, could be materially adversely affected by a prolonged recession in the U.S. and other major markets.
The COVID-19 pandemic is having a particularly adverse impact on industries in which certain of our subsidiaries operate, including the foodservice and hospitality industries in which Sterno operates. As a result of the COVID-19 pandemic and other factors, supply chains worldwide have been, and continue to be, interrupted, slowed or rendered inoperable, which have also adversely impacted certain of our subsidiaries operating results.
Relatedly, costly litigation could increase in connection with merger and acquisition transactions, as parties to such transactions explore ways to avoid transactions by the assertion of claims of force majeure, material adverse change in the condition of target investments, and/or fraudulent misrepresentation. COVID-19 also continues to present a significant threat to our employees’ well-being and morale. Our key employees or executive officers may become sick or otherwise unable to perform their duties for an extended period of time and we may experience a potential loss of productivity, and extended period of remote working by our employees may increase operational risks, including technology availability and heightened cybersecurity risk.
These and other factors relating to or arising from the outbreak could have a material adverse effect on the Company’s business, results of operations, and cash flows. Even after COVID-19 has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus's global economic impact and any economic impact that has occurred or may occur in the future.
The COVID-19 pandemic is continuing as of the filing date of this Annual Report on Form 10-K, and its extended duration may have further adverse impacts on our business. In addition to the foregoing, COVID-19 has exacerbated and may continue to exacerbate, many of the other risks described in this Annual Report on Form 10-K.
Our future success is dependent on the employees of our Manager and the management teams of our businesses, the loss of any of whom could materially adversely affect our financial condition, business and results of operations.
Our future success depends, to a significant extent, on the continued services of the employees of our Manager, most of whom have worked together for a number of years. While ourOur Manager willdoes not have an employment agreements agreement
with certain of its employees, including our Chief FinancialExecutive Officer theseand, in any event, employment agreements may not prevent our Manager’s employees from leaving or from competing with us in the future. Our Manager does not have an employment agreement with our Chief Executive Officer.
The future success of our businesses also depends on their respective management teams because we operate our businesses on a stand-alone basis, primarily relying on existing management teams for management of their day-to-day operations. Consequently, their operational success, as well as the success of our internal growth strategy, will be dependent on the continued efforts of the management teams of the businesses. We provide such persons with equity incentives in their respective businesses and have employment agreements and/or non-competition agreements with certain persons we have identified as key to their businesses. However, these measures may not prevent the departure of these managers. The loss of services of one or more members of our management team or the management team at one of our businesses could materially adversely affect our financial condition, business and results of operations.
We face risks with respect to the evaluation and management of future platform or add-on acquisitions.
A component of our strategy is to continue to acquire additional platform subsidiaries, as well as add-on businesses for our existing businesses. Generally, because such acquisition targets are held privately, we may experience difficulty in evaluating potential target businesses as the information concerning these businesses is not publicly available. In addition, we and our subsidiary companies may have difficulty effectively managing or integrating acquisitions. We may experience greater than expected costs or difficulties relating to such acquisition, in which case, we might not achieve the anticipated returns from any particular acquisition, which may have a material adverse effect on our financial condition, business and results of operations.
We may not be able to successfully fund future acquisitions of new businesses due to the lack of availability of debt or equity financing at the Company level on acceptable terms, which could impede the implementation of our acquisition strategy and materially adversely impact our financial condition, business and results of operations.
In order to make future acquisitions, we intend to raise capital primarily through debt financing at the Company level, additional equity offerings, the sale of stock or assets of our businesses, and by offering equity in the Trust or our businesses to the sellers of target businesses or by undertaking a combination of any of the above. Since the timing and size of acquisitions cannot be readily predicted, we may need to be able to obtain funding on short notice to benefit fully from attractive acquisition opportunities. Such funding may not be available on acceptable terms. In addition, the level of our indebtedness may impact our ability to borrow at the Company level. Another source of capital for us may be the sale of additional shares, subject to market conditions and investor demand for the shares at prices that we consider to be in the interests of our shareholders. These risks may materially adversely affect our ability to pursue our acquisition strategy successfully and materially adversely affect our financial condition, business and results of operations.
While we intendUnder the Trust Agreement, the Company’s board of directors will have the power to make regular cash distributionscause the Trust to be converted to a corporation in the future at its sole discretion in ways with which you may disagree.
The Trust Agreement authorizes the Company, acting through the its board of directors and without further shareholder approval, to cause the Trust to be converted to a corporation (the “Conversion”). As a shareholder of the Trust, you may disagree with the terms of the Conversion that might be implemented by the Company’s board of directors in the future, and you may disagree with the board’s determination that the terms of the Conversion are not materially adverse to you as a shareholder or that they are in the best interests of the Trust and its shareholders. Your recourse, if you disagree, will be limited because our Trust Agreement gives broad authority and discretion to the Company’s board of directors to implement the Conversion as long as the board determines that it will be in the best interests of the Trust and its shareholders theto do so.
The Company’s board of directors has full authority and discretion over the distributions of the Company, other than the profit allocation, and it may decide to reduce or eliminate distributions at any time, which may materially adversely affect the market price for our shares.
To date, we have declared and paid quarterly distributions, and although we intend to pursue a policy of paying regular distributions, theThe Company’s board of directors has full authority and discretion to determine whether or not a distribution by the Company should be declared and paid to the Trust and in turn, subject to U.S. federal income taxes and applicable state and local taxes, to our shareholders, as well as the amount and timing of any distribution. In addition, the management fee and profit allocation will be payment obligations of the Company and, as a result, will be paid, along with other Company obligations, prior to the payment of distributions to our shareholders. The Company’s board of directors may, based on their review of our financial condition and results of operations and pending
acquisitions or our tax structure, determine to reduce or eliminate distributions, which may have a material adverse effect on the market price of our shares.
We will rely entirely on receipts from our businesses to make distributions to our shareholders.
The Trust’s sole asset is its interest in the Company,LLC, which holds controlling interests in our businesses. Therefore, we are dependent upon the ability of our businesses to generate earnings and cash flow and distribute them to us in the form of interest and principal payments on indebtedness and, from time to time, dividends on equity to enable us, first, to satisfy our financial and tax obligations and second to make distributions to our shareholders. This ability may be subject to limitations under laws of the jurisdictions in which they are incorporated or organized. If, as a consequence of these various restrictions, we are unable to generate sufficient receipts from our businesses, we may not be able to declare, or may have to delay or cancel payment of, distributions to our shareholders.
We do not own 100% of our businesses. While we receive cash payments from our businesses which are in the form of interest payments, debt repayment and dividends, if any dividends were to be paid by our businesses, they would be shared pro rata with the minority shareholders of our businesses and the amounts of dividends made to minority shareholders would not be available to us for any purpose, including Company debt service or distributions to our shareholders. Any proceeds from the sale of a business will be allocated among us and the non-controlling shareholders of the business that is sold.
The Company’s board of directors has the power to change the terms of our shares in its sole discretion in ways with which you may disagree.
As an owner of our shares, you may disagree with changes made to the terms of our shares, and you may disagree with the Company’s board of directors’ decision that the changes made to the terms of the shares are not materially adverse to you as a shareholder or that they do not alter the characterization of the Trust. Your recourse, if you disagree, will be limited because our Trust Agreement gives broad authority and discretion to our board of directors. However, the Trust Agreement does not relieve the Company’s board of directors from any fiduciary obligation that is imposed on them pursuant to applicable law. In addition, we may change the nature of the shares to be issued to raise additional equity and remain a fixed-investment trust for tax purposes.
Certain provisions of the LLC Agreement of the Company and the Trust Agreement make it difficult for third parties to acquire control of the Trust and the CompanyLLC and could deprive you of the opportunity to obtain a takeover premium for your shares.
The amended and restated LLC Agreement of the Company, which we refer to as the LLC Agreement, and the amended and restated Trust Agreement of the Trust which we refer to as the Trust Agreement, contain a number of provisions that could make it more difficult for a third party to acquire, or may discourage a third party from acquiring, control of the Trust and the Company. These provisions include, among others:
•restrictions on the Company’sLLC’s ability to enter into certain transactions with our major shareholders, with the exception of our Manager, modeled on the limitation contained in Section 203 of the Delaware General Corporation Law, or DGCL;
•allowing only the Company’sLLC’s board of directors to fill newly created directorships, for those directors who are elected by our shareholders, and allowing only our Manager, as holder of a portion of the Allocation Interests, to fill vacancies with respect to the class of directors appointed by our Manager;
•requiring that directors elected by our shareholders be removed, with or without cause, only by a vote of 85% of our shareholders;
•requiring advance notice for nominations of candidates for election to the Company’s board of directors or for proposing matters that can be acted upon by our shareholders at a shareholders’ meeting;
•having a substantial number of additional authorized but unissued shares that may be issued without shareholder action;
•providing the Company’s board of directors with certain authority to amend the LLC Agreement and the Trust Agreement, subject to certain voting and consent rights of the holders of trust interests and Allocation Interests; and
providing for a staggered board of directors of the Company, the effect of which could be to deter a proxy contest for control of the Company’s board of directors or a hostile takeover; and
•limitations regarding calling special meetings and written consents of our shareholders.
These provisions, as well as other provisions in the LLC Agreement and Trust Agreement may delay, defer or prevent a transaction or a change in control that might otherwise result in you obtaining a takeover premium for your shares.
We may have conflicts of interest with the noncontrolling shareholders of our businesses.
The boards of directors of our respective businesses have fiduciary duties to all their shareholders, including the Company and noncontrolling shareholders. As a result, they may make decisions that are in the best interests of their shareholders generally, but which are not necessarily in the best interest of the Company or our shareholders. In dealings with the Company, the directors of our businesses may have conflicts of interest and decisions may have to be made without the participation of directors appointed by the Company, and such decisions may be different from those that we would make.
Our third party credit facility exposesfinancing arrangements expose us to additional risks associated with leverage and inhibits our operating flexibility and reduces earnings and cash flow available for distributions to our shareholders.
At December 31, 2017,2021, we had approximately $560.0$1,300 million outstanding under our 2014 Term Loan and 2016 Incremental Term Loan Facility and $42.6 million outstanding under our 2014 Revolving Credit Facility (representing the outstanding revolver balance and outstanding letters of credit). We expect to increase ourconsolidated debt outstanding. This level of consolidated debt could have important consequences, such as (i) limiting our ability to obtain additional financing to fund our potential growth; (ii) increasing the cost of future borrowings; (iii) limiting our ability to use operating cash flow in the future. The termsour other areas of our 2014 Revolving Credit Facility contains a numberbusiness because of cash requirements to service our debt; and (iv) increasing our vulnerability to adverse economic conditions. Our financing arrangements subject the Company to certain customary affirmative and restrictive covenants that, among other things, require us to:
maintain a minimum level of cash flow;
leverage new businesses we acquire to a minimum specified level at the time of acquisition;
keep our total debt to cash flow at or below a ratio of 3.5 to 1; and
make acquisitions that satisfy certain specified minimum criteria.
covenants. If we violate any of these covenants, our lender may accelerate the maturity of any debt outstanding and we may be prohibited from making any distributions tounder our shareholders. Such debt is secured by all of our assets, including the stock we own in our businesses and the rights we have under the loan agreements with our businesses.2021 Credit Facility. Our ability to meet our debt service obligations may be affected by events beyond our control and will depend primarily upon cash produced by our businesses. Any failure to comply with the terms of our indebtedness could materially adversely affect us.
Changes in interest rates could materially adversely affect us.
Our 2021 Credit Facility bears interest at floating rates which will generally change as interest rates change. We bear the risk that the rates we are charged by our lender will increase faster than the earnings and cash flow of our businesses, which could reduce profitability, adversely affect our ability to service our debt, cause us to breach covenants contained in our 2021 Revolving Credit Facility and reduce earnings and cash flow available for distribution, any of which could materially adversely affect us.
We may engage in a business transaction with one or more target businesses that have relationships with our officers, our directors, or our Manager, or CGI, which may create potential conflicts of interest.
We may decide to acquire one or more businesses with which our officers, our directors, or our Manager or CGI have a relationship. While we might obtain a fairness opinion from an independent investment banking firm, potentialPotential conflicts of interest may still exist with respect to a particular acquisition, and, as a result, the terms of the acquisition of a target business may not be as advantageous to our shareholders as it would have been absent any conflicts of interest.
CGI Maygar Holdings LLC may exercise significant influence over the Company.
CGI through a wholly owned subsidiary,Maygar Holdings LLC owns 7,931,000approximately 8.3 million or approximately 13.2%approximately 12.0% of our common shares and may have significant influence over the election of directors in the future.
We could be negatively impacted by cybersecurity attacks.
We, and our businesses, use a variety of information technology systems in the ordinary course of business, which are potentially vulnerable to unauthorized access, computer viruses and cybersecurity attacks, including cybersecurity attacks to our information technology infrastructure and attempts by others to gain access to our propriety or sensitive information, and ranging from individual attempts to advanced persistent threats. The procedures and controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent cybersecurity incidents. The results of these incidents could include misstated financial data, theft of trade secrets or other intellectual property, liability for disclosure of confidential customer, supplier or employee information, increased costs arising from the implementation of additional security protective measures, litigation and reputational damage, which could materially adversely affect our financial condition, business and results of operations. Any remedial costs or other liabilities related to cybersecurity incidents may not be fully insured or indemnified by other means.
If, in the future, we cease to control and operate our businesses, we may be deemed to be an investment company under the Investment Company Act of 1940, as amended.
Under the terms of the LLC Agreement, we have the latitude to make investments in businesses that we will not operate or control. If we make significant investments in businesses that we do not operate or control or cease to operate and control
our businesses, we may be deemed to be an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. If we were deemed to be an investment company, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our investments or organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, cause us to lose our status as an exempt publicly traded partnership for federal income tax purposes, materially adversely affect our financial condition, business and results of operations, materially limit our ability to borrow funds or engage in other transactions involving leverage and require us to add directors who are independent of us or our Manager and otherwise will subject us to additional regulation that will be costly and time-consuming.
Certain of our businesses are dependent on a limited number of customers to derive a large portion of their revenue, and the loss of one of these customers may adversely affect the financial condition, business and results of operations of these businesses.
Our Marucci, Velocity, Altor and Sterno businesses derive a significant amount of revenue from a concentrated number of retailers, distributors or manufacturers.Any negative change involving these retailers, distributors or manufacturers, including industry consolidation, store closings, reduction in purchasing levels or bankruptcies, could negatively impact the sales of these businesses and may have a material adverse effect on the results of operations, financial condition and cash flows of these businesses.
Our businesses do not have and may not have long-term contracts with their customers and clients and the loss of customers and clients could materially adversely affect their financial condition, business and results of operations.
Our businesses are and may be, based primarily upon individual orders and sales with their customers and clients. Our businesses historically have not entered into long-term supply contracts with their customers and clients. As such, their customers and clients could cease using their services or buying their products from them at any time and for any reason. The fact that they do not enter into long-term contracts with their customers and clients means that they have no recourse in the event a customer or client no longer wants to use their services or purchase products from them. If a significant number of their customers or clients elect not to use their services or purchase their products, it could materially adversely affect their financial condition, business and results of operations.
Risks Related to Taxation
The Trust will be subject to U.S. corporate income taxes which reduces the earnings and cash available for distributions to holders of Trust common shares in respect of such investments and could adversely affect the value of Trust common shareholders’ investment.
Effective September 1, 2021, the Trust elected to be treated as a corporation for U.S. federal income tax purposes (the “Election”). The Trust will now incur entity level U.S. federal corporate income taxes and applicable state and local taxes that it would not otherwise incur if it were still treated as a partnership for U.S. tax purposes. In addition, before the tax reclassification, income from the Trust was passed through to holders of its preferred shares, which resulted in less income being passed through from the Trust to holders of its common shares and effectively reduced each common shareholder’s allocable share of the Trust’s income; however, after the tax reclassification, no income will pass through to any shareholders, but the Trust will not be able to claim a tax deduction for distributions in respect of the preferred shares. Therefore, the amount of cash available for distributions to holders of Trust common shares could be reduced and their investment could be adversely affected.
Following the tax reclassification, determinations, declarations, and payments of distributions to holders of Trust common shares will continue to be at the sole discretion of the Company’s board of directors. Historically, our distribution policy has been to make regular distributions on outstanding common shares, and we expect to continue this policy of regular distributions. However, because the Trust will incur entity level income taxes following the tax reclassification, we reduced our previous annual distribution from $1.44 per Trust common share per year to approximately $1.00 per common share per year. Our distribution policy may be changed at any time at the discretion of the Company’s board of directors.
Future changes to tax laws are uncertain and may result in the Trust paying corporate income tax at rates higher than expected or result in the Trust failing to realize the anticipated benefits of the Election.
Recent proposals for tax reform include proposals to raise corporate income tax rates and capital gains tax rates. Future changes to tax laws are uncertain, but any such changes could cause the Trust to fail to realize the anticipated benefits of the Election. If corporate income tax rates are raised, the anticipated advantages of being treated as a corporation for U.S. tax purposes would be diminished. In addition, any general changes to tax laws, such as changes to limitations on the deductibility of interest, could result in the Trust or its shareholders paying tax at rates higher than anticipated.
We may fail to realize the anticipated benefits of the Election or those benefits may take longer to realize than expected or not offset the costs of the Election, which could have a material and adverse impact on the trading price of our securities.
We believe that the Election will, among other things, make it easier for both institutional and retail investors to own shares of the Trust, expand our investor base and drive greater value for all of our shareholders over time. The level of investor interest in the shares of the Trust, however, may not meet our expectations. The Election did not result in the Trust’s immediate inclusion in certain stock market indices, such as the Russell indices, and may not result in inclusion at all. Inclusion in such indices may not result in an increased demand for the Trust’s securities, we may not have greater access to capital and our profile with rating agencies may not improve. Consequently, we may fail to realize the anticipated benefits of the Election or those benefits may take longer to realize than we expect. In addition, there can be no assurance that the anticipated benefits of the Election will offset its costs, which could be greater than we expect, particularly if there is an increase in the U.S. federal corporate income tax rate. Our failure to achieve the anticipated benefits of the Election at all or in a timely manner, or a failure of any benefits realized to offset their costs, could have a material and adverse impact on the trading price of our securities.
Risks Related to the Series A Preferred Shares
Distributions on the Series A Preferred Shares are discretionary and non-cumulative.
Distributions on the Series A Preferred Shares are discretionary and non-cumulative. Holders of the Series A Preferred Shares will only receive distributions of the Series A Preferred Shares when, as and if declared by the board of directors of the Company. Consequently, if the board of directors of the Company does not authorize and declare a distribution for a distribution period, holders of the Series A Preferred Shares would not be entitled to receive any distribution for such distribution period, and such unpaid distribution will not be payable in such distribution period or in later distribution periods. We will have no obligation to pay distributions for a distribution period if the board of directors of the Company does not declare such distribution before the scheduled record date for such period, whether or not distributions are declared or paid for any subsequent distribution period with respect to the Series A Preferred Shares, or any other preferred shares we may issue or our common shares. This may result in holders of the Series A Preferred Shares not receiving the full amount of distributions that they expect to receive, or any distributions, and may make it more difficult to resell Series A Preferred Shares or to do so at a price that the holder finds attractive.
The board of directors of the Company may, in its sole discretion, determine to suspend distributions on the Series A Preferred Shares, which may have a material adverse effect on the market price of the Series A Preferred Shares. There can be no assurances that our operations will generate sufficient cash flows to enable us to pay distributions on the Series A Preferred Shares. Our financial and operating performance is subject to prevailing economic and industry conditions and to financial, business and other factors, some of which are beyond our control.
The Series A, Series B and Series C Preferred Shares are equity securities and are subordinated to our existing and future indebtedness. The Series A, Series B and Series C Preferred Shares are our equity interests and do not constitute indebtedness. This means that the Series A, Series B and Series C Preferred Shares rank junior to all of our indebtedness and to other non-equity claims on us and our assets available to satisfy claims on us, including claims in our liquidation. In addition, the rights allocated to the Company’s allocation interests may reduce the amount available for distribution by the Trust upon its liquidation, dissolution or winding up. Further, the Series A, Series B and Series C Preferred Shares place no restrictions on our business or operations or on our ability to incur indebtedness or engage in any transactions, subject only to the limited voting rights.
Risks RelatingRelated to Our ManagerTaxation
Our Chief Executive Officer, directors, ManagerThe Trust will be subject to U.S. corporate income taxes which reduces the earnings and management team may allocate somecash available for distributions to holders of their time to other businesses, thereby causing conflictsTrust common shares in respect of interest in their determination as to how much time to devote to our affairs, which may materiallysuch investments and could adversely affect our operations.the value of Trust common shareholders’ investment.
WhileEffective September 1, 2021, the membersTrust elected to be treated as a corporation for U.S. federal income tax purposes (the “Election”). The Trust will now incur entity level U.S. federal corporate income taxes and applicable state and local taxes that it would not otherwise incur if it were still treated as a partnership for U.S. tax purposes. In addition, before the tax reclassification, income from the Trust was passed through to holders of our management team anticipate devotingits preferred shares, which resulted in less income being passed through from the Trust to holders of its common shares and effectively reduced each common shareholder’s allocable share of the Trust’s income; however, after the tax reclassification, no income will pass through to any shareholders, but the Trust will not be able to claim a substantialtax deduction for distributions in respect of the preferred shares. Therefore, the amount of cash available for distributions to holders of Trust common shares could be reduced and their timeinvestment could be adversely affected.
Following the tax reclassification, determinations, declarations, and payments of distributions to the affairsholders of the Company, only Mr. Ryan Faulkingham, our Chief Financial Officer, devotes substantially all of his time to our affairs. Our Chief Executive Officer, directors, Manager and members of our management team may engage in other business activities. This may result in a conflict of interest in allocating their time between our operations and our management and operations of other businesses. Their other business endeavors may be related to CGI, whichTrust common shares will continue to own several businesses that were managed by our management team prior to our initial public offering, or affiliates of CGI as well as other parties. Conflicts of interest that arise overbe at the allocation of time may not always be resolved in our favor and may materially adversely affect our operations. See the section entitled “Certain Relationships and Related Party Transactions” for the potential conflicts of interest of which you should be aware.
Our Manager and its affiliates, including members of our management team, may engage in activities that compete with us or our businesses.
While our management team intends to devote a substantial majority of their time to the affairs of the Company, and while our Manager and its affiliates currently do not manage any other businesses that are in similar lines of business as our businesses, and while our Manager must present all opportunities that meet the Company’s acquisition and disposition criteria to the Company’s board of directors, neither our management team nor our Manager is expressly prohibited from investing in or managing other entities, including those that are in the same or similar line of business as our businesses. In this regard, the management services agreement and the obligation to provide management services will not create a mutually exclusive relationship between our Manager and its affiliates, on the one hand, and the Company, on the other.
Our Manager need not present an acquisition or disposition opportunity to us if our Manager determines on its own that such acquisition or disposition opportunity does not meet the Company’s acquisition or disposition criteria.
Our Manager will review any acquisition or disposition opportunity presented to the Manager to determine if it satisfies the Company’s acquisition or disposition criteria, as established by the Company’s board of directors from time to time. If our Manager determines, in its sole discretion that an opportunity fits our criteria, our Manager will refer the opportunity to the
Company’s board of directors for its authorization and approval prior to the consummation thereof; opportunities that our Manager determines do not fit our criteria do not need to be presented to the Company’s board of directors for consideration. If such an opportunity is ultimately profitable, we will have not participated in such opportunity. Upon a determination by the Company’s board of directors not to promptly pursue an opportunity presented to it by our Manager in whole or in part, our Manager will be unrestricted in its ability to pursue such opportunity, or any part that we do not promptly pursue, on its own or refer such opportunity to other entities, including its affiliates.
We cannot remove our Manager solely for poor performance, which could limit our ability to improve our performance and could materially adversely affect the market price of our shares.
Under the terms of the management services agreement, our Manager cannot be removed as a result of under-performance. Instead, the Company’s board of directors can only remove our Manager in certain limited circumstances or upon a vote by the majority of the Company’s board of directorsdirectors. Historically, our distribution policy has been to make regular distributions on outstanding common shares, and we expect to continue this policy of regular distributions. However, because the majorityTrust will incur entity level income taxes following the tax reclassification, we reduced our previous annual distribution from $1.44 per Trust common share per year to approximately $1.00 per common share per year. Our distribution policy may be changed at any time at the discretion of the Company’s board of directors.
Future changes to tax laws are uncertain and may result in the Trust paying corporate income tax at rates higher than expected or result in the Trust failing to realize the anticipated benefits of the Election.
Recent proposals for tax reform include proposals to raise corporate income tax rates and capital gains tax rates. Future changes to tax laws are uncertain, but any such changes could cause the Trust to fail to realize the anticipated benefits of the Election. If corporate income tax rates are raised, the anticipated advantages of being treated as a corporation for U.S. tax purposes would be diminished. In addition, any general changes to tax laws, such as changes to limitations on the deductibility of interest, could result in the Trust or its shareholders paying tax at rates higher than anticipated.
We may fail to realize the anticipated benefits of the Election or those benefits may take longer to realize than expected or not offset the costs of the Election, which could have a material and adverse impact on the trading price of our securities.
We believe that the Election will, among other things, make it easier for both institutional and retail investors to own shares of the Trust, expand our investor base and drive greater value for all of our shareholders over time. The level of investor interest in the shares of the Trust, however, may not meet our expectations. The Election did not result in the Trust’s immediate inclusion in certain stock market indices, such as the Russell indices, and may not result in inclusion at all. Inclusion in such indices may not result in an increased demand for the Trust’s securities, we may not have greater access to terminatecapital and our profile with rating agencies may not improve. Consequently, we may fail to realize the management services agreement. This limitationanticipated benefits of the Election or those benefits may take longer to realize than we expect. In addition, there can be no assurance that the anticipated benefits of the Election will offset its costs, which could materially adversely affectbe greater than we expect, particularly if there is an increase in the marketU.S. federal corporate income tax rate. Our failure to achieve the anticipated benefits of the Election at all or in a timely manner, or a failure of any benefits realized to offset their costs, could have a material and adverse impact on the trading price of our shares.securities.
Our Manager can resign
Risks Related to the Preferred Shares
Distributions on 180 days’ noticethe Series A Preferred Shares are discretionary and we maynon-cumulative.
Distributions on the Series A Preferred Shares are discretionary and non-cumulative. Holders of the Series A Preferred Shares will only receive distributions of the Series A Preferred Shares when, as and if declared by the board of directors of the Company. Consequently, if the board of directors of the Company does not authorize and declare a distribution for a distribution period, holders of the Series A Preferred Shares would not be ableentitled to find a suitable replacement within that time, resulting in a disruption in our operations that could materially adversely affect our financial condition, businessreceive any distribution for such distribution period, and results of operations as well as the market price of our shares.
Our Manager has the right, under the management services agreement, to resign at any time on 180 days’ written notice, whether we have found a replacement or not. If our Manager resigns, we maysuch unpaid distribution will not be able to contract with a new managerpayable in such distribution period or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 90 days, or at all, in which case our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our abilitylater distribution periods. We will have no obligation to pay distributions for a distribution period if the board of directors of the Company does not declare such distribution before the scheduled record date for such period, whether or not distributions are likelydeclared or paid for any subsequent distribution period with respect to be adversely affected and the market price ofSeries A Preferred Shares, or any other preferred shares we may issue or our shares may decline. In addition, the coordination of our internal management, acquisition activities and supervision of our businesses is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Manager and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our businessescommon shares. This may result in additional costs and time delaysholders of the Series A Preferred Shares not receiving the full amount of distributions that could materially adversely affect our financial condition, business and results of operations.
We must pay our Manager the management fee regardless of our performance.
Our Manager is entitledthey expect to receive, or any distributions, and may make it more difficult to resell Series A Preferred Shares or to do so at a management feeprice that is based on our adjusted consolidated net assets, as defined in the management services agreement, regardlessholder finds attractive.
The board of directors of the performance of our businesses. The calculation ofCompany may, in its sole discretion, determine to suspend distributions on the management fee is unrelated to the Company’s net income. As a result, the management feeSeries A Preferred Shares, which may incentivize our Manager to increase the amount of our assets, for example, the acquisition of additional assets or the incurrence of third party debt rather than increase the performance of our businesses.
We cannot determine the amount of the management fee that will be paid over time with any certainty.
The management fee paid to CGM for the year ended December 31, 2017 was $32.7 million. The management fee is calculated by reference to the Company’s adjusted net assets, which will be impacted by the acquisition or disposition of businesses, which can be significantly influenced by our Manager, as well as the performance of our businesses and other businesses we may acquire in the future. Changes in adjusted net assets and in the resulting management fee could be significant, resulting inhave a material adverse effect on the Company’s resultsmarket price of operations.the Series A Preferred Shares. There can be no assurances that our operations will generate sufficient cash flows to enable us to pay distributions on the Series A Preferred Shares. Our financial and operating performance is subject to prevailing economic and industry conditions and to financial, business and other factors, some of which are beyond our control.
The Series A, Series B and Series C Preferred Shares are equity securities and are subordinated to our existing and future indebtedness.
The Series A, Series B and Series C Preferred Shares are our equity interests and do not constitute indebtedness. This means that the Series A, Series B and Series C Preferred Shares rank junior to all of our indebtedness and to other non-equity claims on us and our assets available to satisfy claims on us, including claims in our liquidation. In addition, if the performance of the Company declines, assuming adjusted net assets remains the same, management fees will increase as a percentage ofrights allocated to the Company’s net income.
We cannot determine the amount of profit allocation that will be paid over time with any certainty.
We cannot determine the amount of profit allocation that will be paid over time with any certainty. Such determination would be dependent on the potential sale proceeds received for any of our businesses and the performance of the Company and its businesses over a multi-year period of time, among other factors that cannot be predicted with certainty at this time. Such factors may have a significant impact on the amount of any profit allocation to be paid. Likewise, such determination would be dependent on whether certain hurdles were surpassed giving rise to a payment of profit allocation. Any amounts paid in respect of the profit allocation are unrelated to the management fee earned for performance of services under the management services agreement.
The fees to be paid to our Manager pursuant to the management services agreement, the offsetting management services agreements and integration services agreements and the profit allocation to be paid to certain persons who are employees and partners of our Manager, as holders of the Allocation Interests, pursuant to the LLC Agreement may significantly reduce the amount of cash available for distribution to our shareholders.
Under the management services agreement, the Company will be obligated to pay a management fee to and, subject to certain conditions, reimburse the costs and out-of-pocket expenses of our Manager incurred on behalf of the Company in connection with the provision of services to the Company. Similarly, our businesses will be obligated to pay fees to and reimburse the costs and expenses of our Manager pursuant to any offsetting management services agreements entered into between our Manager and one of our businesses, or any integration services agreements to which such businesses are a party. In addition, Sostratus LLC, as holder of the Allocation Interests, will be entitled to receive profit allocations. While it is difficult to quantify with any certainty the actual amount of any such payments in the future, we do expect that such amounts could be substantial. See the section entitled “Certain Relationships and Related Party Transactions” for more information about these payment obligations of the Company. The management fee and profit allocation will be payment obligations of the Company and, as a result, will be paid, along with other Company obligations, prior to the payment of distributions to shareholders. As a result, the payment of these amounts may significantly reduce the amount of cash flow available for distribution to our shareholders.
Our Manager’s influence on conducting our operations, including on our conducting of transactions, gives it the ability to increase its fees, whichinterests may reduce the amount of cash flow available for distribution by the Trust upon its liquidation, dissolution or winding up. Further, the Series A, Series B and Series C Preferred Shares place no restrictions on our business or operations or on our ability to our shareholders.
Under the terms of the management services agreement, our Manager is paid a management fee calculated as a percentage of the Company’s adjusted net assets for certain items and is unrelated to net incomeincur indebtedness or engage in any other performance base or measure. Our Manager, controls, may advise us to consummate transactions, incur third party debt or conduct our operations in a manner that, in our Manager’s reasonable discretion, are necessarysubject only to the future growth of our businesses and are in the best interests of our shareholders. These transactions, however, may increase the amount of fees paid to our Manager. Our Manager’s ability to increase its fees, through the influence it has over our operations, may increase the compensation paid by our Manager. Our Manager’s ability to influence the management fee paid to it by us could reduce the amount of cash flow available for distribution to our shareholders.limited voting rights.
Fees paid by the Company and our businesses pursuant to integration services agreements do not offset fees payable under the management services agreement and will be in addition to the management fee payable by the Company under the management services agreement.
The management services agreement provides that our businesses may enter into integration services agreements with our Manager pursuant to which our businesses will pay fees to our Manager for services provided by our Manager relating to the integration of a business’s financial reporting, computer systems and decision making and management processes into our operations following an acquisition of such business. See the section entitled “Certain Relationships and Related Party Transactions” for more information about these agreements. Unlike fees paid under the offsetting management services agreements, fees that are paid pursuant to such integration services agreements will not reduce the management fee payable by the Company. Therefore, such fees will be in excess of the management fee payable by the Company.
The fees to be paid to our Manager pursuant to these integration service agreements will be paid prior to any principal, interest or dividend payments to be paid to the Company by our businesses, which will reduce the amount of cash flow available for distributions to shareholders.
Our profit allocation may induce our Manager to make suboptimal decisions regarding our operations.
Sostratus LLC, as holder of our Allocation Interests, will receive a profit allocation based on ongoing cash flows and capital gains in excess of a hurdle rate. Certain persons who are employees and partners of our Manager are owners of Sostratus LLC. In this respect, a calculation and payment of profit allocation may be triggered upon the sale of one of our businesses. As a result, our Manager may be incentivized to recommend the sale of one or more of our businesses to the Company’s board of directors at a time that may not be optimal for our shareholders.
The obligations to pay the management fee and profit allocation may cause the Company to liquidate assets or incur debt.
If we do not have sufficient liquid assets to pay the management fee and profit allocation when such payments are due, we may be required to liquidate assets or incur debt in order to make such payments. This circumstance could materially adversely affect our liquidity and ability to make distributions to our shareholders.
Risks Related to Taxation
Our shareholders will be subject to tax on their share of the Company’s taxable income, which taxes or taxable income could exceed the cash distributions they receive from the Trust.
For so long as the Company or theThe Trust (if it is treated as a tax partnership) would not be required to register as an investment company under the Investment Company Act of 1940 and at least 90% of our gross income for each taxable year constitutes ‘‘qualifying income’’ within the meaning of Section 7704(d) of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’),
on a continuing basis, we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. In that case our shareholders will be subject to U.S. federalcorporate income taxtaxes which reduces the earnings and possibly, state, local and foreign income tax, on their share of the Company’s taxable income, which taxes or taxable income could exceed the cash distributions they receive from the Trust. There is, accordingly, a risk that our shareholders may not receive cash distributions equal to that portion of our taxable income or sufficient in amount even to satisfy their personal tax liability that results from that income. This may result from gains on the sale or exchange of stock or debt of subsidiaries that will be allocated to shareholders who hold (or are deemed to hold) shares on the day such gains were realized if there is no corresponding distribution of the proceeds from such sales, or where a shareholder disposes of shares after an allocation of gain but before proceeds (if any) are distributed by the Company. Shareholders may also realize income in excess of distributions due to the Company’s use of cash from operations or sales proceeds for uses other than to make distributions to shareholders, including funding acquisitions, satisfying short- and long-term working capital needs of our businesses, or satisfying known or unknown liabilities. In addition, certain financial covenants with the Company’s lenders may limit or prohibit the distribution of cash to shareholders. The Company’s board of directors is also free to change the Company’s distribution policy. The Company is under no obligation to make distributions to shareholders equal to or in excess of their portion of our taxable income or sufficient in amount even to satisfy the tax liability that results from that income.
All of the Company’s income could be subject to an entity-level tax in the United States, which could result in a material reduction in cash flow available for distributiondistributions to holders of Trust common shares in respect of the Trustsuch investments and thus could result in a substantial reduction inadversely affect the value of Trust common shareholders’ investment.
Effective September 1, 2021, the shares.
We do not expect the CompanyTrust elected to be characterized as a corporation so long as it would not be required to register as an investment company under the Investment Company Act of 1940 and 90% or more of its gross income for each taxable year constitutes “qualifying income.” The Company expects to receive more than 90% of its gross income each year from dividends, interest and gains on sales of stock or debt instruments, including principally from or with respect to stock or debt of corporations in which the Company holds a majority interest. The Company intends to treat all such dividends, interest and gains as “qualifying income.”
If the Company fails to satisfy this “qualifying income” exception, the Company will be treated as a corporation for U.S. federal (and certain state and local) income tax purposes (the “Election”). The Trust will now incur entity level U.S. federal corporate income taxes and applicable state and local taxes that it would not otherwise incur if it were still treated as a partnership for U.S. tax purposes. In addition, before the tax reclassification, income from the Trust was passed through to holders of its preferred shares, which resulted in less income being passed through from the Trust to holders of its common shares and effectively reduced each common shareholder’s allocable share of the Trust’s income; however, after the tax reclassification, no income will pass through to any shareholders, but the Trust will not be requiredable to payclaim a tax deduction for distributions in respect of the preferred shares. Therefore, the amount of cash available for distributions to holders of Trust common shares could be reduced and their investment could be adversely affected.
Following the tax reclassification, determinations, declarations, and payments of distributions to holders of Trust common shares will continue to be at the sole discretion of the Company’s board of directors. Historically, our distribution policy has been to make regular distributions on outstanding common shares, and we expect to continue this policy of regular distributions. However, because the Trust will incur entity level income taxes following the tax reclassification, we reduced our previous annual distribution from $1.44 per Trust common share per year to approximately $1.00 per common share per year. Our distribution policy may be changed at any time at the discretion of the Company’s board of directors.
Future changes to tax laws are uncertain and may result in the Trust paying corporate income tax at regularrates higher than expected or result in the Trust failing to realize the anticipated benefits of the Election.
Recent proposals for tax reform include proposals to raise corporate income tax rates and capital gains tax rates. Future changes to tax laws are uncertain, but any such changes could cause the Trust to fail to realize the anticipated benefits of the Election. If corporate income tax rates are raised, the anticipated advantages of being treated as a corporation for U.S. tax purposes would be diminished. In addition, any general changes to tax laws, such as changes to limitations on the deductibility of interest, could result in the Trust or its income. Taxationshareholders paying tax at rates higher than anticipated.
We may fail to realize the anticipated benefits of the Election or those benefits may take longer to realize than expected or not offset the costs of the Election, which could have a material and adverse impact on the trading price of our securities.
We believe that the Election will, among other things, make it easier for both institutional and retail investors to own shares of the Trust, expand our investor base and drive greater value for all of our shareholders over time. The level of investor interest in the shares of the Trust, however, may not meet our expectations. The Election did not result in the Trust’s immediate inclusion in certain stock market indices, such as the Russell indices, and may not result in inclusion at all. Inclusion in such indices may not result in an increased demand for the Trust’s securities, we may not have greater access to capital and our profile with rating agencies may not improve. Consequently, we may fail to realize the anticipated benefits of the Election or those benefits may take longer to realize than we expect. In addition, there can be no assurance that the anticipated benefits of the Election will offset its costs, which could be greater than we expect, particularly if there is an increase in the U.S. federal corporate income tax rate. Our failure to achieve the anticipated benefits of the Election at all or in a timely manner, or a failure of any benefits realized to offset their costs, could have a material and adverse impact on the trading price of our securities.
Risks Related to the Preferred Shares
Distributions on the Series A Preferred Shares are discretionary and non-cumulative.
Distributions on the Series A Preferred Shares are discretionary and non-cumulative. Holders of the Series A Preferred Shares will only receive distributions of the Series A Preferred Shares when, as and if declared by the board of directors of the Company. Consequently, if the board of directors of the Company does not authorize and declare a distribution for a distribution period, holders of the Series A Preferred Shares would not be entitled to receive any distribution for such distribution period, and such unpaid distribution will not be payable in such distribution period or in later distribution periods. We will have no obligation to pay distributions for a distribution period if the board of directors of the Company does not declare such distribution before the scheduled record date for such period, whether or not distributions are declared or paid for any subsequent distribution period with respect to the Series A Preferred Shares, or any other preferred shares we may issue or our common shares. This may result in holders of the Series A Preferred Shares not receiving the full amount of distributions that they expect to receive, or any distributions, and may make it more difficult to resell Series A Preferred Shares or to do so at a price that the holder finds attractive.
The board of directors of the Company may, in its sole discretion, determine to suspend distributions on the Series A Preferred Shares, which may have a material adverse effect on the market price of the Series A Preferred Shares. There can be no assurances that our operations will generate sufficient cash flows to enable us to pay distributions on the Series A Preferred Shares. Our financial and operating performance is subject to prevailing economic and industry conditions and to financial, business and other factors, some of which are beyond our control.
The Series A, Series B and Series C Preferred Shares are equity securities and are subordinated to our existing and future indebtedness.
The Series A, Series B and Series C Preferred Shares are our equity interests and do not constitute indebtedness. This means that the Series A, Series B and Series C Preferred Shares rank junior to all of our indebtedness and to other non-equity claims on us and our assets available to satisfy claims on us, including claims in our liquidation. In addition, the rights allocated to the Company’s allocation interests may reduce the amount available for distribution by the Trust upon its liquidation, dissolution or winding up. Further, the Series A, Series B and Series C Preferred Shares place no restrictions on our business or operations or on our ability to incur indebtedness or engage in any transactions, subject only to the limited voting rights.
Risks Relating to Our Manager
Our Chief Executive Officer, directors, Manager and management team may allocate some of their time to other businesses, thereby causing conflicts of interest in their determination as a corporation couldto how much time to devote to our affairs, which may materially adversely affect our operations.
Only our Chief Financial Officer, Mr. Ryan Faulkingham, devotes substantially all of his time to our affairs. Our Chief Executive Officer, directors, Manager and members of our management team may engage in other business activities. This may result in a material reductionconflict of interest in distributions toallocating their time between our shareholdersoperations and after-tax returnour management and thus, could likely resultoperations of other businesses. Conflicts of interest that arise over the allocation of time may not always be resolved in a reductionour favor and may materially adversely affect our operations. See Part III, Item 13. "Certain
Our Manager and its affiliates, including members of our management team, may engage in activities that compete with us or our businesses.
Neither our management team nor our Manager is expressly prohibited from investing in or managing other entities, including those that are in the valuesame or similar line of business as our businesses. In this regard, the Management Services Agreement and the obligation to provide management services will not create a mutually exclusive relationship between our Manager and its affiliates, on the one hand, and the Company, on the other.
Our Manager need not present an acquisition or disposition opportunity to us if our Manager determines on its own that such acquisition or disposition opportunity does not meet the Company’s acquisition or disposition criteria.
Our Manager will review any acquisition or disposition opportunity presented to the Manager to determine if it satisfies the Company’s acquisition or disposition criteria, as established by the Company’s board of directors from time to time. If our Manager determines, in its sole discretion, that an opportunity fits our criteria, our Manager will refer the opportunity to the Company’s board of directors for its authorization and approval prior to the consummation thereof; opportunities that our Manager determines do not fit our criteria do not need to be presented to the Company’s board of directors for consideration. If such an opportunity is ultimately profitable, we will have not participated in such opportunity. Upon a determination by the Company’s board of directors not to promptly pursue an opportunity presented to it by our Manager in whole or in part, our Manager will be unrestricted in its ability to pursue such opportunity, or any part that we do not promptly pursue, on its own or refer such opportunity to other entities, including its affiliates.
We cannot remove our Manager solely for poor performance, which could limit our ability to improve our performance and could materially adversely affect the market price of our shares.
Under the sharesterms of the Trust.
A shareholder may recognizeManagement Services Agreement, our Manager cannot be removed as a greater taxable gain (orresult of under-performance. Instead, the Company’s board of directors can only remove our Manager in certain limited circumstances or upon a smaller tax loss) on a disposition of shares than expected becausevote by the majority of the treatmentCompany’s board of debt underdirectors and the partnership tax accounting rules.majority of our shareholders to terminate the Management Services Agreement. This limitation could materially adversely affect the market price of our shares.
WeOur Manager can resign on 180 days’ notice and we may incur debt fornot be able to find a varietysuitable replacement within that time, resulting in a disruption in our operations that could materially adversely affect our financial condition, business and results of reasons, including for acquisitionsoperations as well as other purposes. Under partnership tax accounting principles (which applythe market price of our shares.
Our Manager has the right, under the management services agreement, to resign at any time on 180 days’ written notice, whether we have found a replacement or not. If our Manager resigns, we may not be able to contract with a new manager or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 90 days, or at all, in which case our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management, acquisition activities and supervision of our businesses is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Manager and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our businesses may result in additional costs and time delays that could materially adversely affect our financial condition, business and results of operations.
We must pay our Manager the management fee regardless of our performance.
Our Manager is entitled to receive a management fee that is based on our adjusted consolidated net assets, as defined in the management services agreement, regardless of the performance of our businesses. The calculation of the management fee is unrelated to the Company),Company’s net income. As a result, the management fee may incentivize our Manager to increase the amount of our assets. For example, the acquisition of additional assets or the incurrence of third party debt could be prioritized rather than increasing the performance of our businesses.
We cannot determine the amount of the management fee that will be paid over time with any certainty.
The management fee paid to CGM for the year ended December 31, 2021 was $46.9 million. The management fee is calculated by reference to the Company’s adjusted net assets, which will be impacted by the acquisition or disposition of businesses, which can be significantly influenced by our Manager, as well as the performance of our businesses and other businesses we may acquire in the future. Changes in adjusted net assets and in the resulting management fee could be significant, resulting in a material adverse effect on the Company’s results of operations. In addition, if the performance of the Company generallydeclines, assuming adjusted net assets remains the same, management fees will be allocable to our shareholders, who will realize the benefit of including their allocable share of the debt in the tax basis of their investment in shares. At the timeincrease as a shareholder later sells shares, the selling shareholder’s amount realized on the sale will include not only the sales price of the shares but also the shareholder’s portionpercentage of the Company’s debt allocable to his shares (which is treated as proceeds fromnet income.
We cannot determine the saleamount of those shares). Dependingprofit allocation that will be paid over time with any certainty.
We cannot determine the amount of profit allocation that will be paid over time with any certainty. Such determination would be dependent on the naturepotential sale proceeds received for any of our businesses and the performance of the Company and its businesses over a multi-year period of time, among other factors that cannot be predicted with certainty at this time. Such factors may have a significant impact on the amount of any profit allocation to be paid. Likewise, such determination would be dependent on whether certain hurdles were surpassed giving rise to a payment of profit allocation. Any amounts paid in respect of the profit allocation are unrelated to the management fee earned for performance of services under the management services agreement.
The fees to be paid to our Manager pursuant to the Management Services Agreement, the offsetting Management Services Agreements and integration services agreements and the profit allocation to be paid to certain persons who are employees and partners of our Manager, as holders of the Allocation Interests, pursuant to the LLC Agreement may significantly reduce the amount of earnings and cash available for distribution to our shareholders.
Under the Management Services Agreement, the Company will be obligated to pay a management fee to and, subject to certain conditions, reimburse the costs and out-of-pocket expenses of our Manager incurred on behalf of the Company in connection with the provision of services to the Company. Similarly, our businesses will be obligated to pay fees to and reimburse the costs and expenses of our Manager pursuant to any offsetting Management Services Agreements entered into between our Manager and one of our businesses, or any integration services agreements to which such businesses are a party. In addition, Sostratus LLC, as holder of the Allocation Interests, will be entitled to receive profit allocations. While it is difficult to quantify with any certainty the actual amount of any such payments in the future, we do expect that such amounts could be substantial. See the section entitled Part 3, Item 13. “Certain Relationships and Related Transactions, and Director Independence” for more information about these payment obligations of the Company. The management fee and profit allocation will be payment obligations of the Company and, as a result, will be paid, along with other Company obligations, prior to the payment of distributions to shareholders. As a result, the payment of these amounts may significantly reduce the amount of earnings and cash available for distribution to our shareholders. Our Manager’s influence on conducting our operations, including on our conducting of transactions, gives it the ability to increase its fees, which may reduce the amount of earnings and cash available for distribution to our shareholders.
Under the terms of the Management Services Agreement, our Manager is paid a management fee calculated as a percentage of the Company’s activities after having incurred the debt,adjusted net assets for certain items and the utilization of the borrowed funds, a later sale of shares could result in a larger taxable gain (or a smaller tax loss) than anticipated.
is unrelated to net income or any other performance base or measure. Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authorityManager controls and may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.
The U.S. federal income tax treatment of holders of the Shares depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. You should be aware that the U.S. federal income tax rules are constantly under review by persons involved in the legislative process, the IRS, and the U.S. Treasury Department, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The IRS pays close attention to the proper application of tax laws to partnerships. The present U.S. federal income tax treatment of an investment in the Shares may be modified by administrative, legislative or judicial interpretation at any time, and any such action may affect investments and commitments previously made. For example, changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or impossible to meet the qualifying income exception foradvise us to be treated as a partnership for U.S. federal income tax purposes that is not taxable as a corporation, affectconsummate transactions, incur third party debt or cause us to changeconduct our investments and commitments, affect the tax considerations of an investment in us and adversely affect an investment in our Shares. Our organizational documents and agreements permit the Board of Directors to modify our operating agreement from time to time, without the consent of the holders of Shares, in order to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all of
the holders of our Shares. Moreover, we will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to holdersoperations in a manner that, reflectsin our Manager’s reasonable discretion, are necessary to the future growth of our businesses and are in the best interests of our shareholders. These transactions, however, may increase the amount of fees paid to our Manager. Our Manager’s ability to increase its fees, through the influence it has over our operations, may increase the compensation paid by our Manager. Our Manager’s ability to influence the management fee paid to it by us could reduce the amount of earnings and cash available for distribution to our shareholders.
Fees paid by the Company and our businesses pursuant to integration services agreements do not offset fees payable under the Management Services Agreement and will be in addition to the management fee payable by the Company under the Management Services Agreement.
The Management Services Agreement provides that our businesses may enter into integration services agreements with our Manager pursuant to which our businesses will pay fees to our Manager for services provided by our Manager relating to the integration of a business’s financial reporting, computer systems and decision making and
management processes into our operations following an acquisition of such holders’ beneficial ownershipbusiness. See Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence” for more information about these agreements. Unlike fees paid under the offsetting Management Services Agreements, fees that are paid pursuant to such integration services agreements will not reduce the management fee payable by the Company. Therefore, such fees will be in excess of partnership items, taking into account variationthe management fee payable by the Company. The fees to be paid to our Manager pursuant to these integration service agreements will be paid prior to any principal, interest or dividend payments to be paid to the Company by our businesses, which will reduce the amount of earnings and cash available for distributions to shareholders.
Our profit allocation may induce our Manager to make suboptimal decisions regarding our operations.
Sostratus LLC, as holder of our Allocation Interests, will receive a profit allocation based on ongoing cash flows and capital gains in ownership interests during each taxable year becauseexcess of trading activity. However, these assumptionsa hurdle rate. Certain persons who are employees and conventionspartners of our Manager are owners of Sostratus LLC. In this respect, a calculation and payment of profit allocation may be triggered upon the sale of one of our businesses. As a result, our Manager may be incentivized to recommend the sale of one or more of our businesses to the Company’s board of directors at a time that may not be in compliance with all aspects of applicable tax requirements. It is possible thatoptimal for our shareholders.
The obligations to pay the IRS will assert successfully thatmanagement fee and profit allocation may cause the conventions and assumptions used by usCompany to liquidate assets or incur debt.
If we do not satisfyhave sufficient liquid assets to pay the technical requirementsmanagement fee and profit allocation when such payments are due, we may be required to liquidate assets or incur debt in order to make such payments. This circumstance could materially adversely affect our liquidity and ability to make distributions to our shareholders.
General Risk Factors
We could be negatively impacted by cybersecurity attacks.
We, and our businesses, use a variety of information technology systems in the Code and/ordinary course of business, which are potentially vulnerable to unauthorized access, computer viruses and cybersecurity attacks, including cybersecurity attacks to our information technology infrastructure and attempts by others to gain access to our proprietary or Treasurysensitive information, and ranging from individual attempts to advanced persistent threats. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusions, including by computer hackers, nation-state affiliated actors, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. The procedures and controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent cybersecurity incidents. The results of these incidents could include misstated financial data, theft of trade secrets or other intellectual property, liability for disclosure of confidential customer, supplier or employee information, increased costs arising from the implementation of additional security protective measures, litigation and reputational damage, which could materially adversely affect our financial condition, business and results of operations. Any remedial costs or other liabilities related to cybersecurity incidents may not be fully insured or indemnified by other means.
In addition, cybersecurity has become a top priority for global lawmakers and regulators, and some jurisdictions have proposed or enacted laws requiring companies to notify regulators and individuals of data security breaches involving certain types of personal data. If we fail to comply with the relevant and increasing complex laws and regulations, andwe could require that itemssuffer financial losses, a disruption of income, gain, deductions, lossour business, liability to investors, regulatory intervention or credit, including interest deductions, be adjusted, reallocated, or disallowed, in a manner that adversely affects holders of the Shares.
Risks Relating Generally to Our Businessesreputational damage.
Impairment of our goodwill, indefinite-lived intangible assets or other long-lived assets could result in significant charges that would adversely impact our future operating results.
A significant portion of our long-term assets are comprised of intangible assets, including goodwill and indefinite lived intangible assets recorded as a result of past acquisitions. We assess the potential impairment of goodwill and indefinite lived intangible assets on an annual basis, as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If our analysis indicates that an individual asset’s carrying value exceeds its fair market value, we will record a loss equal to the excess of the individual asset’s carrying value over its fair value. The impairment testing steps require significant amounts of judgment and subjectivity.
Factors that could trigger impairment include the following:
•significant under performance relative to historical or projected future operating results;
•significant changes in the manner of or use of the acquired assets or the strategy for our overall business;
•significant negative industry or economic trends;
•significant decline in our stock price for a sustained period;
•changes in our organization or management reporting structure could result in additional reporting units, which may require alternative methods of estimating fair values or greater desegregation or aggregation in our analysis by reporting unit; and
•a decline in our market capitalization below net book value.
As of December 31, 2017,2021, we had identified indefinite lived intangible assets with a carrying value in our financial statements of $71.3$57.0 million, and goodwill of $531.7$815.4 million.
Our businesses are subject to unplanned business interruptions which may adversely affect our performance.
Operational interruptions and unplanned events at one or more of our production facilities, such as explosions, fires, inclement weather, natural disasters, accidents, transportation interruptions and supply could cause substantial losses in our production capacity. Furthermore, because customers may be dependent on planned deliveries from us, customers that have to reschedule their own operations due to our delivery delays may be able to pursue financial claims against us, and we may incur costs to correct such problems in addition to any liability resulting from such claims. Such interruptions may also harm our reputation among actual and potential customers, potentially resulting in a loss of business. To the extent these losses are not covered by insurance, our financial position, results of operations and cash flows may be adversely affected by such events.
Our businesses could experience fluctuations in the costs and availability of raw materials, components or whole goods which could result in significant disruptions to supply chains, production disruptions and increased costs for our businesses.
Our businesses require access to various raw materials, components and whole goods to manufacture and distribute products. Changes in the availability and price of raw materials, components and whole goods, which can fluctuate significantly as a result of economic volatility, regulatory instability or change in import tariffs or trade agreements, can significantly increase the costs of production and distribution, which could have a material negative effect on the profitability of the businesses.
We could be adversely affected if we experience shortages of components from our suppliers or if disruptions in the supply chain lead to parts shortages for our customers.
A portion of our annual cost of sales is driven by the purchase of goods. We select our suppliers based on total value (including price, delivery and quality), taking into consideration their production capacities and financial condition, and we expect that they will be able to support our needs. However, there is no assurance that adverse financial conditions, including bankruptcies of our suppliers, reduced levels of production, natural disasters, staffing shortages, supply chain issues or other problems experienced by our suppliers will not result in shortages or delays in their supply of components to us.For example, the COVID-19 pandemic has resulted in labor shortages and supply chain disruptions. Any significant production disruption could have a material impact on our operations, operating results and financial condition.If we were to experience a significant or prolonged shortage of critical components from our suppliers, we may be unable to meet our production schedules for some of our key products and to ship such products to our customers in a timely fashion, which would adversely affect our sales, profitability and customer relations.
Our businesses rely and may rely on their intellectual property and licenses to use others’ intellectual property, for competitive advantage. If our businesses are unable to protect their intellectual property, are unable to obtain or retain licenses to use other’s intellectual property, or if they infringe upon or are alleged to have infringed upon others’ intellectual property, it could have a material adverse effect on their financial condition, business and results of operations.
Each business's success depends in part on their, or licenses to use others’, brand names, proprietary technology and manufacturing techniques. These businesses rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and contractual provisions to protect their intellectual property rights. The steps they have taken to protect their intellectual property rights may not prevent third parties from using their intellectual property and other proprietary information without their authorization or independently developing intellectual property and other proprietary information that is similar. In addition, the laws of foreign countries may not protect our businesses’ intellectual property rights effectively or to the same extent as the laws of the United States.
Stopping unauthorized use of their proprietary information and intellectual property, and defending claims that they have made unauthorized use of others’ proprietary information or intellectual property, may be difficult, time-consuming and costly. The use of their intellectual property and other proprietary information by others, and the use by others of their intellectual
property and proprietary information, could reduce or eliminate any competitive advantage they have developed, cause them to lose sales or otherwise harm their business.
Our businesses may become involved in legal proceedings and claims in the future either to protect their intellectual property or to defend allegations that they have infringed upon others’ intellectual property rights. These claims and any resulting litigation could subject them to significant liability for damages and invalidate their property rights. In addition, these lawsuits, regardless of their merits, could be time consuming and expensive to resolve and could divert management’s time and attention. The costs associated with any of these actions could be substantial and could have a material adverse effect on their financial condition, business and results of operations.
Our businesses could experience fluctuations in the costs of raw materials as a result of inflation and other economic conditions, which fluctuations could have a material adverse effect on their financial condition, business and results of operations.
Changes in inflation could materially adversely affect the costs and availability of raw materials used in our manufacturing businesses, and changes in fuel costs likely will affect the costs of transporting materials from our suppliers and shipping goods to our customers, as well as the effective areas from which we can recruit temporary staffing personnel. For example, for Advanced Circuits, the principal raw materials consist of copper and glass and typically represent approximately 20% of net sales. Prices for these key raw materials may fluctuate during periods of high demand. The ability by these businesses to offset the effect of increases in raw material prices by increasing their prices is uncertain. If these businesses are unable to cover price increases of these raw materials, their financial condition, business and results of operations could be materially adversely affected.
Certain of our businesses are dependent on a limited number of customers to derive a large portion of their revenue, and the loss of one of these customers may adversely affect the financial condition, business and results of operations of these businesses.
Our Crosman, Liberty, Manitoba Harvest and Sterno businesses derive a significant amount of revenue from a concentrated number of retailers and distributors. Any negative change involving these retailers or distributors, including industry consolidation, store closings, reduction in purchasing levels or bankruptcies, could negatively impact the sales of these businesses and may have a material adverse effect on the results of operations, financial condition and cash flows of these businesses.
Our businesses do not have and may not have long-term contracts with their customers and clients and the loss of customers and clients could materially adversely affect their financial condition, business and results of operations.
Our businesses are and may be, based primarily upon individual orders and sales with their customers and clients. Our businesses historically have not entered into long-term supply contracts with their customers and clients. As such, their customers and clients could cease using their services or buying their products from them at any time and for any reason. The fact that they do not enter into long-term contracts with their customers and clients means that they have no recourse in the event a customer or client no longer wants to use their services or purchase products from them. If a significant number of their customers or clients elect not to use their services or purchase their products, it could materially adversely affect their financial condition, business and results of operations.
Our businesses are and may be subject to federal, state and foreign environmental laws and regulations that expose them to potential financial liability. Complying with applicable environmental laws requires significant resources, and if our businesses fail to comply, they could be subject to substantial liability.
Some of the facilities and operations of our businesses are and may be subject to a variety of federal, state and foreign environmental laws and regulations including laws and regulations pertaining to the handling, storage and transportation of raw materials, products and wastes, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently in place and in the future. Compliance with current and future environmental laws is a major consideration for our businesses as any material violations of these laws can lead to substantial liability, revocations of discharge permits, fines or penalties. Because some of our businesses use hazardous materials and generate hazardous wastes in their operations, they may be subject to potential financial liability for costs associated with the investigation and remediation of their own sites, or sites at which they have arranged for the disposal of hazardous wastes, if such sites become contaminated. Even if they fully comply with applicable environmental laws and are not directly at fault for the contamination, our businesses may still be liable. Our businesses may also be held liable for damages caused by environmental and other conditions that existed prior to our acquisition the assets, business or operations involved, whether or not such damages are subject to indemnification from a prior owner. Costs associated with these risks could have a material adverse effect on our financial condition, business and results of operations.
Defects in the products provided by our companies could result in financial or other damages to their customers, which could result in reduced demand for our companies’ products and/or liability claims against our companies.
As manufacturers and distributors of consumer products, certain of our companies are subject to various laws, rules and regulations, which may empower governmental agencies and authorities to exclude from the market products that are found to be unsafe or hazardous. Under certain circumstances, a governmental authority could require our companies to repurchase or recall one or more of their products. Additionally, laws regulating certain consumer products exist in some cities and states, as well as in other countries in which they sell their products, where more restrictive laws and regulations exist or may be adopted in the future. Any repurchase or recall of such products could be costly and could damage the reputation of our companies. If any of our companies were required to remove, or voluntarily remove, their products from the market, their reputation may be tarnished and they may have large quantities of finished products that they cannot sell. Additionally, our companies may be subject to regulatory actions that could harm their reputations, adversely impact the values of their brands and/or increase the cost of production.
Our companies also face exposure to product liability claims in the event that one of their products is alleged to have resulted in property damage, bodily injury or other adverse effects. Defects in products could result in customer dissatisfaction or a reduction in, or cancellation of, future purchases or liability claims against our companies. If these defects occur frequently, our reputation may be impaired permanently. Defects in products could also result in financial or other damages to customers, for which our companies may be asked or required to compensate their customers, in the form of substantial monetary judgments or otherwise. While our companies take the steps deemed necessary to comply with all laws and regulations, thereThere can be no assurance that rapidly changing safety standards will not render unsaleable products that complied with previously-applicable safety standards. As a result, these types of claims could have a material adverse effect on our businesses, results of operations and financial condition.
Some of our businesses are subject to certain risks associated with the movement of businesses offshore.
Some of our businesses are potentially at risk of losing business to competitors operating in lower cost countries. An additional risk is the movement offshore of some of our businesses’ customers, leading them to procure products or services from more closely located companies. Either of these factors could negatively impact our financial condition, business and results of operations.
Our businesses are subject to certain risks associated with their foreign operations or business they conduct in foreign jurisdictions.
Some of our businesses have and may have operations or conduct business outside the United States. Certain risks are inherent in operating or conducting business in foreign jurisdictions, including exposure to local economic conditions; difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; longer payment cycles for foreign customers; adverse currency exchange controls; exposure to risks associated with changes in foreign exchange rates; potential adverse changes in political environments; actual or threatened geopolitical conflict; withholding taxes and restrictions on the withdrawal of foreign investments and earnings; export and import restrictions; difficulties in enforcing intellectual property rights; and required compliance with a variety of foreign laws and regulations. These risks individually and collectively have the potential to negatively impact our financial condition, business and results of operations.
Regulations related to conflict minerals may force certainThe success of our branded consumer businesses depends on our ability to incur additional expenses, may makemaintain the supply chain of such businesses more complexvalue and may result in damage to the customer relationships of such businesses.
In August 2012, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Securities and Exchange Commission promulgated final rules regarding disclosurereputation of the usebrand.
The name of certain mineralsour branded consumer businesses is integral to those businesses. Maintaining, promoting, and positioning our branded consumer businesses will depend, in part, on the success of marketing and merchandising efforts and the ability to provide a consistent, high quality products and services. Our branded consumer businesses rely on social media, as one of their derivatives, including tin, tantalum, tungstenmarketing strategies, to have a positive impact on both brand value and gold, known as “conflict minerals,”reputation. The brand and reputation of our branded consumer businesses could be adversely affected if these minerals are necessarythose subsidiaries fail to the functionalityachieve their objectives, if their public image was to be tarnished by negative publicity, which could be amplified by social media, or productionif they fail to deliver innovative and high quality products. The reputation of the company’s products. These regulations require such issuers to report annuallyour branded consumer businesses could also be impacted by adverse publicity, whether or not such minerals originate from the Democratic Republic of Congo (DRC) and adjoining countries and in some casesvalid, regarding allegations that we or our subsidiaries, or persons associated with us or our subsidiaries or formerly associated with us or our subsidiaries, have violated applicable laws or regulations, including but not limited to perform extensive due diligence on their supply chains for such minerals.
Our businesses have incurred and will continue to incur additional costs to comply with the disclosure requirements, including coststhose related to determiningsafety, employment, discrimination, harassment, whistle-blowing, privacy, corporate citizenship or improper business practices. Additionally, while our branded consumer businesses devote effort and resources to protecting their intellectual property, if these efforts are not successful the sourcevalue of any ofthose brands may be harmed. Any harm to the relevant minerals used in the products of certainbrand or reputation of our businesses. These requirements could adversely affect the sourcing, availability and pricing of conflict minerals used in the manufacturing processes for certain products of our businesses. We have determined that certain of our subsidiaries’ products contain conflict minerals and we have developed a process to identify where such minerals originated. As of the date of our conflict minerals report for the 2015 calendar year, we were unable to determine whether or not such minerals originated in the DRC or its adjoining countries. We may continue to face difficulties in gathering this information in the future since the supply chain of certain of our businesses is complex, and we may not be able to ascertain the origins for these minerals or determine that these minerals are DRC conflict-free, which may harm the reputation of some of our businesses. Our pool of suppliers from
which some of our businesses source these minerals may be limited, and we may be unable to obtain conflict-free minerals at competitive prices, which could increase costs and adversely affect the manufacturing operations and profitability of certain of our businesses. Any one or a combination of these various factors could negatively impact our financial condition, business and results of operations.
Risks Related to Advanced Circuits
Advanced Circuits’ customers operate in industries that experience rapid technological change resulting in short product life cycles and as a result, if the product life cycles of its customers slow materially, and research and development expenditures are reduced, its financial condition, business and results of operations will be materially adversely affected.
Advanced Circuits’ customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvement in products and services. These conditions frequently result in short product life cycles. As professionals operating in research and development departments represent the majority of Advanced Circuits’ net sales, the rapid development of electronic products is a key driver of Advanced Circuits’ sales and operating performance. Any decline in the development and introduction of new electronic products could slow the demand for Advanced Circuits’ services andsubsidiaries could have a material adverse effect on itsour financial condition, business and results of operations.condition.
Electronics manufacturing services corporations are increasingly acting as intermediaries, positioning themselves between PCB manufacturers and OEMS, which could reduce operating margins.
Advanced Circuits’ OEM customers are increasingly outsourcing the assembly of equipmentRisks Specific to third party manufacturers. These third party manufacturers typically assemble products for multiple customers and often purchase circuit boards from Advanced Circuits in larger quantities than OEM manufacturers. The ability of Advanced Circuits to sell products to these customers at margins comparable to historical averages is uncertain. Any material erosion in margins could have a material adverse effect on Advanced Circuits’ financial condition, business and results of operations.Our Subsidiaries
Risks Related to Arnold
Changes inArnold's operations and the cost and availabilityprior operations of certain rare earth minerals and magnets could materially harm Arnold’s business, financial condition and resultspredecessor companies expose it to the risk of operations.
Arnold manufactures precision magnetic assemblies and high-performance rare earth magnets including Samarium Cobalt magnets. Arnold is especially susceptible to changes in the price and availability of certain rare earth materials. The price of these materials has fluctuated significantly in recent years and we believe price fluctuations are likely to occur in the future. Arnold’s need to maintain a continuing supply of rare earth materials makes it difficult to resist price increases and surcharges imposed by its suppliers. Arnold’s ability to pass increases in costs for such materials through to its customers by increasing the selling prices of its products is an important factor in Arnold’s business. We cannot guarantee that Arnold will be able to maintain an appropriate differential at all times. If costs for rare earth materials increase, and if Arnold is unable to pass along, or is delayed in passing along, those increases to its customers, Arnold will experience reduced profitability. Rare earth minerals and magnets are available from a limited number of suppliers, primarily in China. Political and civil instability and unexpected adverse changes in laws or regulatory requirements, including with respect to export duties, quotas or embargoes, may affect the market price and availability of rare earth materials, particularly from China. If a substantial interruption should occur in the supply of rare earth materials, Arnold may not be able to obtain other sources of supply in a timely fashion, at a reasonable price or as would be necessary to satisfy its requirements. Accordingly, a change in the supply of, or price for, rare earth minerals and magnets could materially harm Arnold’s business, financial condition and results of operations.
Risks Related to Clean Earth
If Clean Earth is unable to renew its operating permits or lease agreements with regulatory bodies, its business would be adversely affected.
Clean Earth’s facilities operate using permits and licenses issued by various regulatory bodies at various local, state and federal government levels. Failure to renew its permits and licenses necessary to operate Clean Earth’s facilities on a timely basis or failure to renew or maintain compliance with its permits and site lease agreements on a timely basis could prevent or restrict its ability to provide certain services, resulting in a material adverse effect on its business. There can be no assurance that Clean Earth will continue to be successful in obtaining timely permit or license applications approval, maintaining compliance with its permits and lease agreements and obtaining timely lease renewals.
Clean Earth operates eighteen facilities that accept, process and/or treat materials provided by its customers. These facilities may be inherently dangerous workplaces. If Clean Earth fails to maintain safe worksites, it may be subject
to significant operating risks and hazards that could resultin injury or death to persons,environmental liabilities, which could result in losses orliabilities to it.
Clean Earth’s safety record is an important consideration for it and its customers. If serious accidents or fatalities occur or its safety record was to deteriorate, it may be ineligible to bid on certain work, and existing service arrangements could be terminated. Further, regulatory changes implemented by OSHA could impose additional costs on Clean Earth. Adverse experience with hazards and claims could have a negative effect on Clean Earth’s reputation with its existing or potential new customers and its prospects for future work.
If Clean Earth fails to comply with applicable environmental laws and regulations, its business could be adversely affected.
The changing regulatory framework governing Clean Earth’s business creates significant risks. Clean Earth could be held liable if its operations cause contamination of air, groundwater or soil or expose its employees or the public to contamination. Under current law, Clean Earth may be held liable for damage caused by conditions that existed before it acquired the assets, business or operations involved. Also, it may be liable if it arranges for the transportation, disposal or treatment of hazardous substances that cause environmental contamination at facilities operated by others, or if a predecessor made such arrangements and Clean Earth is a successor. Liability for environmental damage could have a material adverse effect on Clean Earth’s financial condition or results of operations and cash flows.operations.
Stringent regulations of federal, state or provincial governments have a substantial impact on Clean Earth’s contaminated soil, dredge material and solid and hazardous waste treatment, storage, disposal and beneficial use activities. Local government controls may also apply. Many complex laws, rules, orders and regulatory interpretations govern environmental protection, health, safety, noise, visual impact, odor, land use, zoning, transportation and related matters. Clean Earth alsoArnold may be subject to potential liabilities related to the remediation of environmental hazards and to claims of personal injuries or property damages that may be caused by hazardous substance releases and exposures, mainly because of past operations and the operations of predecessor companies. Arnold continues to incur remedial response and voluntary clean-up costs for site contamination, for which we may not be fully indemnified, and are a party to lawsuits and claims associated with environmental and safety matters, including past production of products containing hazardous materials. Arnold also may become party to various legal proceedings relating to alleged impacts from pollutants released into the environment. Various federal, state, local and foreign governments regulate the discharge of materials into the environment and can impose substantial fines and criminal sanctions for violations. In addition, changes in laws, concerningregulations and enforcement of policies, the protectiondiscovery of previously unknown contamination or information related to individual sites, the establishment of stricter state or federal toxicity standards with respect to certain marine and bird species, their habitats, and wetlands. It maycontaminants, or the imposition of new clean-up requirements or remedial techniques could require Arnold to incur substantialadditional costs in order to conduct its operations in compliance with these environmental laws and regulations. Changes in environmental laws or regulations or changes in the enforcement or interpretation of existing laws, regulations or permitted activities may require Clean Earth to make significant capital or other expenditures, to modify existing operating licenses or permits, or obtain additional approvals or limit operations. New environmental laws or regulationsfuture that raise compliance standards or require changes in operating practices or technology may impose significant costs and/or limit Clean Earth’s operations.
Clean Earth’s revenue is primarily generated aswould have a result of requirements imposednegative effect on our customers under federal, state, and provincial laws and regulations to protect public health and the environment. If requirements to comply with laws and regulations governing management of contaminated soils, dredge material, and hazardous wastes were relaxed or less vigorously enforced, demand for Clean Earth’s services could materially decrease and its revenues and earnings could be significantly reduced.
Risks Related to Crosman
Crosman’s products are subject to product safety and liability lawsuits, which could materially adversely affect its financial condition business andor results of operations.
As a manufacturer of recreational airguns and archery products, Crosman is involved in various litigation matters that occur in the ordinary course of business. Although Crosman provides information regarding safety procedures and warnings with all of its product packaging, not all users of its products will observe all proper safety practices. Failure to observe proper safety practices may result in injuries that give rise to product liability and personal injury claims and lawsuits, as well as claims for breach of contract, loss of profits and consequential damages.
If any unresolved lawsuits or claims are determined adversely, they could have a material adverse effect on Crosman, its financial condition, business and results of operations. As more of Crosman’s products are sold to and used by its consumers, the likelihood of product liability claims being made against it increases. In addition, the running of statutes of limitations in the United States for personal injuries to minor children may be suspended during the child’s legal minority. Therefore, it is possible that accidents resulting in injuries to minors may not give rise to lawsuits until a number of years later.
While Crosman maintains product liability insurance to insure against potential claims, there is a risk such insurance may not be sufficient to cover all liabilities incurred in connection with such claims and the financial consequences of these claims and lawsuits will have a material adverse effect on its business, financial condition, liquidity and results of operations.
Risks Related to Manitoba Harvest
Reduced availability of raw materials and other inputs, as well as increased costs for our raw materials and other inputs, could adversely affect us.
Manitoba Harvest's business depends heavily on raw materials and other inputs used in the production of our products, particularly raw hemp seeds and organic raw hemp seeds. The raw materials are generally sourced from third-party farmers, and we are not assured of continued supply or pricing. In addition, a substantial portion of our raw materials are agricultural products, which are vulnerable to adverse weather conditions and natural disasters, such as severe rains, floods, droughts, frost, earthquakes, and pestilence. Adverse weather conditions and natural disasters also can lower hemp seeds crop yields and reduce supplies of this ingredient or increase its prices. Incremental costs, including transportation, may also be incurred if we need to find alternate short-term supplies of hemp seeds from other growers. These factors can increase costs, decrease revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of operations and financial condition.
Cost increases in raw materials and other inputs could cause our profits to decrease significantly compared to prior periods, as we may be unable to increase our prices to offset the increased cost of these raw materials and other inputs. If we are unable to obtain raw materials and other inputs for our products or offset any increased costs for such raw materials and inputs, our business could be negatively affected.
Risks Related to Sterno
Sterno's products operate at high temperatures and use flammable fuels, each of which could subject our business to product liability claims.
Sterno products expose it to potential product liability claims typical of fuel based heating products. The fuels Sterno uses in its products are flammable and may be toxic if ingested. Although Sterno products have comprehensive labeling and it follows government and third party based standards and protocols, it cannot
guarantee there will not be accidents due to misuse or otherwise. Accidents involving Sterno products may have an adverse effect on its reputation and reduce demand for its products. In addition, Sterno Products may be held responsible for damages beyond its insurance coverage and there can be no guarantee that it will be able to produceprocure adequate insurance coverage in the future.
Risks Related to Velocity Outdoor
Velocity’s products are subject to product safety and liability lawsuits, which could materially adversely affect its financial condition, business and results of operations.
As a manufacturer of recreational airguns and archery products, Velocity is involved in various litigation matters that occur in the ordinary course of business. Although Velocity provides information regarding safety procedures and warnings with all of its product packaging, not all users of its products will observe all proper safety practices. Failure to observe proper safety practices may result in injuries that give rise to product liability and personal injury claims and lawsuits, as well as claims for breach of contract, loss of profits and consequential damages.
If any unresolved lawsuits or claims are determined adversely, they could have a material adverse effect on Velocity, its financial condition, business and results of operations. As more of Velocity’s products are sold to and used by its consumers, the likelihood of product liability claims being made against it increases. In addition, the running of statutes of limitations in the United States for personal injuries to minor children may be suspended during the child’s legal minority. Therefore, it is possible that accidents resulting in injuries to minors may not give rise to lawsuits until a number of years later.
There is a risk that Velocity's product liability insurance may not be sufficient to cover all liabilities incurred in connection with such claims and the financial consequences of these claims and lawsuits will have a material adverse effect on its business, financial condition, liquidity and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
NONE
ITEM 2. PROPERTIES
The following is a summary as of December 31, 20172021 of the physical properties owned or leased by our business.businesses that we consider materially important to those businesses.
5.11
5.11 is headquartered in Irvine, California and leases offices and warehouse space in locations worldwide. The summary below outlines 5.11's primary leased offices and warehouse space.
|
| | | | | | | | | | | | | |
| Location | | Square Feet | | Use |
Lathrop,Irvine, CA | | 221,89321,807 |
| | WarehouseOffice |
Modesto, CA | | 66,545 |
| | Warehouse/Office |
Irvine, CA | | 21,807 |
| | Office |
Irvine,Manteca, CA | | 1,073400,000 |
| | OfficeWarehouse |
Irvine, CA | | 4,381 |
| | Office |
Manteca, CASeattle, WA | | 400,00011,340 |
| | WarehouseOffice |
Penrose Place, CO | | 1,100 |
| | Office |
Seattle, WABankstown, Australia | | 11,34010,387 |
| | Office |
Mexico City, Mexico | | 2,583 |
| | Office |
Bankstown, Australia | | 10,387 |
| | Office |
Malmo, Sweden | | 6,049 |
| | Office |
| Kowloon Bay, Hong Kong | | 13,61317,759 |
| | Office |
Dubai, UAE | | 1,951 |
| |
| Office | | | |
In addition, at December 31, 2017,2021, 5.11 leased space for 3187 retail stores, ranging in size from 3,250 square feet to 8,37510,000 square feet.
BOA
CrosmanBOA is headquartered in Denver, Colorado and leases offices and warehouse space in locations worldwide. The summary below outlines BOA's primary leased offices and warehouse space.
| | | | | | | | | | | | | | |
| Location | | Square Feet | | Use |
| Denver, CO | | 88,000 | | | Office |
| | | | |
| | | | |
| Mondsee, Austria | | 15,714 | | | Office |
| | | | |
| | | | |
| | | | |
| Hong Kong, China | | 20,000 | | | Office/Warehouse |
| | | | |
Ergobaby
Ergobaby is headquartered in Torrance, California and leases office and warehouse locations worldwide. The summary below outlines Ergobaby's primary leased office and warehouse space.
| | | | | | | | | | | | | | |
| Location | | Square Feet | | Use |
| Torrance, CA | | 4,595 | | | Corporate |
| Los Angeles, CA | | 16,378 | | | Corporate |
| | | | |
| Carson, CA | | 5,000 | | | Warehouse |
| | | | |
| | | | |
| | | | |
| | | | |
| Bialystok, Poland | | 9,688 | | | Warehouse |
Lugano
Lugano is headquartered in Newport Beach, California. The summary below outlines Lugano's primary leased office space and retail locations.
| | | | | | | | | | | | | | |
| Location | | Square Feet | | Use |
| Newport Beach, CA | | 17,792 | | | Corporate office and Retail salon |
| | | | |
| | | | |
| | | | |
| Palm Beach, FL | | 2,155 | | | Retail salon |
| | | | |
| | | | |
| Aspen, CO | | 1,463 | | | Retail salon |
| Lane Ocala, FL | | 2,014 | | | Retail salon |
Marucci Sports
Marucci is headquartered in Baton Rouge, Louisiana. The summary below outlines Marucci's primary leased office and manufacturing space.
| | | | | | | | | | | | | | |
| Location | | Square Feet | | Use |
| Baton Rouge, LA | | 73,900 | | | Office/Distribution Center |
| | | | |
| | | | |
| King of Prussia, PA | | 22,500 | | | Manufacturing |
| | | | |
| Punxsutawney, PA | | 15,000 | | | Manufacturing |
| Winnfield, PA | | 14,330 | | | Manufacturing |
| Lafayette, LA | | 12,192 | | | Retail Store |
| American Fort, UT | | 22,500 | | | Distribution Center |
Arnold
Arnold is headquartered in Rochester, New York and has eleven manufacturing facilities. Arnold owns the Ogallala, NE and the Greenville, OH locations. All other locations are leased. The summary below outlines Arnold's primary property locations.
| | | | | | | | | | | | | | |
| Location | | Square Feet | | Use |
| Marengo, IL | | 94,220 | | | Office/Warehouse |
| Marietta, OH | | 81,000 | | | Office/Warehouse |
| Marengo, IL | | 55,200 | | | Office/Warehouse |
| Norfolk, NE | | 109,000 | | | Office/Warehouse |
| Rochester, NY | | 73,000 | | | Office/Warehouse |
| Ogallala, NE | | 25,000 | | | Office/Warehouse |
| Greenville, OH | | 70,908 | | | Office/Warehouse |
| | | | | | | | | | | | | | |
| Sheffield, England | | 25,000 | | | Office/Warehouse |
| Lupfig, Switzerland | | 52,937 | | | Office/Warehouse |
| Guangdong Province, China | | 113,302 | | | Office/Warehouse |
| | | | |
| | | | |
| | | | |
Altor Solutions
Altor is headquartered in Scottsdale, Arizona and operates 17 molding and fabricating facilities across North America. Altor owns the New Albany, IN, Bloomsburg, PA and El Dorado Springs, MO locations. All other locations are leased. The summary below outlines Altor's primary property locations.
| | | | | | | | | | | | | | |
| Location | | Square Feet | | Use |
| Scottsdale, Arizona | | 7,000 | | | Corporate |
| Anderson, South Carolina | | 133,250 | | | Manufacturing/Warehouse |
| Compton, California | | 44,000 | | | Manufacturing/Warehouse |
| Erie, Pennsylvania | | 35,772 | | | Manufacturing/Warehouse |
| Fort Madison, Iowa | | 114,000 | | | Manufacturing/Warehouse |
| Jackson, Tennessee | | 55,000 | | | Manufacturing/Warehouse |
| Jefferson, Georgia | | 60,000 | | | Manufacturing/Warehouse |
| Keller, Texas | | 131,073 | | | Manufacturing/Warehouse |
| Modesto, California | | 79,000 | | | Manufacturing/Warehouse |
| El Dorado Springs, Missouri | | 38,000 | | | Manufacturing/Warehouse |
| New Albany, Indiana | | 65,000 | | | Manufacturing/Warehouse |
| Bloomsburg, Pennsylvania | | 54,000 | | | Manufacturing/Warehouse |
| Northbridge, MA | | 380,000 | | | Manufacturing/Warehouse |
| | | | |
| Plymouth, WI | | 248,000 | | | Manufacturing/Warehouse |
| Gnadenhutten, OH | | 98,200 | | | Manufacturing/Warehouse |
| Tijuana, Mexico | | 60,000 | | | Manufacturing/Warehouse |
| Queretaro, Mexico | | 100,000 | | | Manufacturing/Warehouse |
Sterno
Sterno is headquartered in Corona, California. Sterno owns manufacturing and production facilities in Memphis, Tennessee and Texarkana, Texas. All other properties are leased. The summary below outlines Sterno's primary property locations.
| | | | | | | | | | | | | | |
| Location | | Square Feet | | Use |
| Corona, CA | | 12,330 | | | Corporate Office |
| Memphis, TN | | 228,316 | | | Manufacturing |
| Texarkana, TX | | 337,700 | | | Manufacturing |
| Delta, Canada | | 45,000 | | | Warehouse |
| La Porte, IN | | 20,000 | | | Office |
| Toronto, Canada | | 13,867 | | | Office |
| Vancouver, Canada | | 50,372 | | | Office |
| Vancouver, Canada | | 33,711 | | | Warehouse |
| Mississauga, Canada | | 100,000 | | | Warehouse |
| | | | |
| | | | |
| Provo, UT | | 171,361 | | | Office/Warehouse |
| Spanish Fork, UT | | 530,014 | | | Warehouse |
| | | | |
| Calgary, Canada | | 28,748 | | | Office/Warehouse |
Velocity Outdoor
Velocity Outdoor is headquartered in Bloomfield, New York. CrosmanVelocity owns a 225,000 square foot manufacturing facility in Bloomfield, New York that also holds their corporate offices, and leases a 144,000 square foot finished goods warehouse in Farmington, New York.
Ergobaby
Ergobaby is headquartered in Los Angeles, California and has four other office locations worldwide. The summary below outlines Ergobaby's property locations. All locations are leased.
|
| | | | | |
| | Location | | Square Feet |
Ergobaby - Corporate | | Los Angeles, CA | | 16,378 |
|
Ergobaby - Office | | Los Angeles, CA | | 3,292 |
|
Ergobaby - Office | | Salt Lake City, Utah | | 3,550 |
|
Ergobaby | | Pukalani, HI | | 2,907 |
|
Ergobaby Europe | | Hamburg, Germany | | 2,410 |
|
Ergobaby France | | Paris, France | | 4,680 |
|
Ergobaby UK | | Surrey, United Kingdom | | 251 |
|
Tula | | San Diego, CA | | 4,915 |
|
Tula | | Bialystok, Poland | | 9,688 |
|
Liberty Safe
Liberty Safe is headquartered in Payson, Utah. Liberty leases offices and warehouse facilities at two locations in Payson, Utah, where it is headquartered. The corporate headquarters and manufacturing facility are located in a 314,000 square foot building. Liberty leases Velocity's Ravin subsidiary operates an additional warehouse facility totaling approximately 30,000 square feet.
Manitoba Harvest
Manitoba Harvest is headquartered in Winnipeg, Manitoba. Manitoba Harvest leases office and warehouse facilities at two locations in a connected building in Winnipeg, Manitoba. The manufacturing and warehouse facility are located in a facility totaling approximately 14,700 square feet, and its customer experience center and additional warehouse space are located in a facility that total approximately 11,000 square feet. Manitoba Harvest's subsidiary, HOCI, owns a recently built facility on seven acres of land in St. Agathe, Manitoba. The facility is approximately 35,000 square feet and comprises manufacturing, warehouse and office space. Manitoba Harvest also leases a corporate office in Minneapolis, Minnesota which opened in 2017.
Advanced Circuits
Advanced Circuits' operations are located in an 113,000 square foot building in Aurora, Colorado, a 30,000 square foot building in Tempe, Arizona, and a 50,000 square foot building in Maple Grove, Minnesota. These facilities are leased and comprise both the factory and office space. The lease terms are for approximately 15 years with a renewal option at the Aurora, Colorado location for an additional 10 years.
Arnold
Arnold is headquartered in Rochester, New York and has nine manufacturing facilities. The summary below outlines Arnold’s property locations. Arnold owns the Ogallala, Nebraska location and the other locations are leased.
|
| | | | | |
Location | | Square Feet | | Use |
Marengo, IL | | 94,220 |
| | Office/Warehouse |
Marietta, OH | | 81,000 |
| | Office/Warehouse |
Marietta, OH | | 22,646 |
| | Warehouse |
Marengo, IL | | 55,200 |
| | Office/Warehouse |
Norfolk, NE | | 109,000 |
| | Office/Warehouse |
Rochester, NY | | 73,000 |
| | Office/Warehouse |
Ogallala, NE | | 25,000 |
| | Office/Warehouse |
Guangdong Province, China | | 154,210 |
| | Office/Warehouse |
Sheffield, England | | 25,000 |
| | Office/Warehouse |
Lupfig, Switzerland | | 58,405 |
| | Office/Warehouse |
Hanau, Germany | | 1,092 |
| | Office |
Crolles, France | | 215 |
| | Office |
Algonquin, IL | | ~750 |
| | Corporate |
Clean Earth
Clean Earth is headquartered in Hatboro, Pennsylvania and has eighteen permitted facilities as well as several offices. The summary below outlines Clean Earth's property locations.
|
| | | | | | |
Location (County, State) | | Operation | | Size | | Leased or Owned |
Montgomery, PA | | Corporate Headquarters | | 16,669 sq. ft. | | Leased |
Butler, PA | | Offices | | 7,525 sq. ft. | | Leased |
Middlesex, NJ | | Fixed Base Remediation | | ~ 16 acres | | Leased |
Hudson, NJ | | Dredged Material Processing and Beneficial Reuse | | ~ 7 acres | | Leased |
Hudson, NJ | | RCRA TSDF | | ~ 14.5 acres | | Owned/ Leased |
Hudson, NJ | | Dredging Services and Beneficial Reuse | | ~ 20 acres | | Lease |
Philadelphia, PA | | Med. Temperature Thermal Desorption | | 8.5 acres | | Owned |
Bucks, PA | | Med. Temperature Thermal Desorption | | 7.8 acres | | Owned |
Lycoming, PA | | Drill Cuttings Stabilization | | ~ 2 acres | | Leased |
New Castle, DE | | Med. Temperature Thermal Desorption | | 7.6 acres | | Leased |
Prince Georges, MD | | Chemical Stabilization | | 42.49 acres | | Owned |
Washington, MD | | Chemical Stabilization | | 13.67 acres | | Owned |
Glades, FL | | Med. Temperature Thermal Desorption | | 11.29 acres | | Owned |
Camden, GA | | Med. Temperature Thermal Desorption | | 2.92 acres | | Owned |
Marshall, KY | | RCRA TSDF | | ~ 25.2 acres | | Owned |
Monongalia, WV | | RCRA TSDF - Aerosol Recycling | | ~ 1 acres | | Owned |
Butler, PA | | Transportation facility | | 1,500 sq. ft. | | Leased |
Newport News, VA | | Office & Warehouse | | 3,200 sq. ft. | | Leased |
Hartford, CT | | Thermal Desorption | | 16 acres | | Owned |
Etowah, AL | | RCRA Part B Permitted Hazardous Waste TSDF | | 42 acres | | Owned |
Allentown, PA | | PADEP Solid Waste permit Handler | | 32,000 sq. ft. | | Leased |
Allentown, PA | | PADEP RCRA Part B Mercury (D009) PCB Capacitors | | 32,132 sq. ft. | | Leased |
Richmond, VA | | Universal waste/Electronic Waste/10-day In-transit Storage | | 10,625 sq. ft. | | Leased |
West Melbourne, FL | | FLDEP U&E Waste Handler | | 15,000 sq. ft. | | Leased |
West Melbourne, FL | | RCRA PART B Mercury/PCB's/10-=day In-transit Storage | | 13,000 sq. ft. | | Leased |
|
| | | | | | |
Hayward, CA | | DTSC RCRA Permit For Mercury (D009) | | 6,892 sq. ft. | | Leased |
Modesto, CA | | Registerd U & E Waste Handler | | 25,992 sq. ft. | | Leased |
Sterno
Sterno is headquartered in Corona, California. Sterno owns a 103,50080,000 square foot manufacturing and production facility in Memphis, Tennessee, a 214,000 square foot manufacturing and production facility in Texarkana, Texas, and a 15,000 square foot facility La Porte County, Indiana. All other properties are leased.Superior, Wisconsin.
|
| | | | | |
Location | | Square Feet | | Use |
Corona, CA | | 12,330 |
| | Corporate Office |
Memphis, TN | | 103,500 |
| | Manufacturing |
Texarkana, TX | | 214,000 |
| | Manufacturing |
Texarkana, TX | | 16,000 |
| | Warehouse |
Des Plaines, IL | | 11,400 |
| | Office (subleased) |
Toronto, Canada | | 13,867 |
| | Office |
Vancouver, Canada | | 50,372 |
| | Office |
Vancouver, CA | | 33,711 |
| | Warehouse |
Montreal, CA | | 2,100 |
| | Warehouse |
Montreal, Canada | | 12,500 |
| | Office |
Atlanta, GA | | 1,235 |
| | Showroom |
Las Vegas, NV | | 342 |
| | Showroom |
Yuyao, China | | 2,982 |
| | Office |
Yuyao, China | | 323 |
| | Office |
Shunde, China | | 343 |
| | Office |
Our corporate offices are located in Westport, Connecticut and Costa Mesa, California, where we lease approximately 4,800 square feet fromutilize space provided by our Manager.
We believe that our properties and the terms of their leases at each of our businesses are sufficient to meet our present needs and we do not anticipate any difficulty in securing additional space, as needed, on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, we do not believe that their outcome will have a material adverse effect on our financial position or results of operations.
Arnold
Our Arnold subsidiary was named as co-defendant, together with 300 West LLC (“300 West”), in a suit filed in the Twenty-Second Judicial Circuit, McHenry County, Illinois, Chancery Division (Case No. 13CH1046) in 2013 by the State of Illinois (the “Marengo Litigation”). Arnold leases a site in Marengo, McHenry County, Illinois (the “Site”) from 300 West. Since 2008, Arnold and 300 West have been a part of the Illinois Remediation Program with respect to the Site. In the Marengo Litigation, the State of Illinois claimed that 300 West and Arnold discharged Chlorinated VOCs into the groundwater on-Site, which has since migrated off-Site into private drinking wells. The State of Illinois sought injunctive relief and civil penalties. In June of 2016, the parties entered into a consent order (as amended and restated up and through the date hereof, the “Consent Order”). 300 West, at its expense, connected residents whose drinking water was impacted by the alleged release to the City of Marengo’s public water supply, as required by the Consent Order. The Consent Order also requires Arnold and 300 West to submit to the Illinois Environmental Protection Agency (IEPA) a comprehensive plan detailing steps to be taken by 300 West and Arnold to remediate on- and off-site soil and groundwater contamination. Remediation efforts are ongoing. The Consent Order also requires the ultimate settlement of any stipulated and civil penalties related to the Marengo Litigation. In May of 2021, the McHenry County State’s Attorney joined the Marengo Litigation as a plaintiff. Certain damages incurred by Arnold in connection with the Marengo Litigation are subject to indemnification pursuant to the Stock Purchase Agreement, among SPS Technologies, LLC (“SPS”), SPS Technologies Limited (“SPS Ltd.”), Precision Castparts Corp. (collectively with SPS and SPS Ltd., the “SPS Entities”), Arnold and Audax Private Equity Fund, L.P., dated December 20, 2004, and prior consents to indemnification given by the SPS Entities. Arnold has cooperated with the governmental agencies in the Marengo Litigation investigations and proceedings, as well as the obligations agreed to pursuant to the Consent Order. CODI does not believe that the outcome of the Marengo Litigation will have a material adverse effect on its financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common shares of Trust stock has traded on the New York Stock Exchange (the “NYSE”) under the symbol “CODI” since November 1, 2011. Previously, our stock was traded on the NASDAQ Global Select Market under the symbol “CODI.” The following table sets forth the intraday high and low sales prices per share as reported on the NYSE for the periods indicated:
|
| | | | | | | | | | | |
| Quarter Ended | High | | Low | | Distribution Declared |
| December 31, 2017 | $ | 18.35 |
| | $ | 16.30 |
| | $ | 0.36 |
|
| September 30, 2017 | 17.90 |
| | 16.50 |
| | 0.36 |
|
| June 30, 2017 | 17.45 |
| | 15.95 |
| | 0.36 |
|
| March 31, 2017 | 18.40 |
| | 15.90 |
| | 0.36 |
|
| December 31, 2016 | 19.50 |
| | 16.95 |
| | 0.36 |
|
| September 30, 2016 | 17.58 |
| | 16.51 |
| | 0.36 |
|
| June 30, 2016 | 17.00 |
| | 15.41 |
| | 0.36 |
|
| March 31, 2016 | 16.09 |
| | 13.65 |
| | 0.36 |
|
Common Stock Holders
On December 31, 20172021 there were 1914 registered holdersholders of our common stock. The number of registered holders includes banks and brokers who act as nominees, each of whom may represent more than one shareholder.
Securities Authorized for Issuance under Equity Compensation Plans
There are no securities currently authorized for issuance under an equity compensation plan.
COMPARATIVE PERFORMANCE OF SHARES OF TRUST COMMON STOCK
The performance graph shown below compares the change in cumulative total shareholder return on common shares of Trust stock with the NASDAQ Stock Market Index, the NASDAQ Other Finance Index, the NYSE Composite Index and the NYSE Financial Sector Index for the previous five years, through the quarteryear ended December 31, 2017.2021. The graph sets the beginning value of common shares of Trust stock and the indices at $100, and assumes that all quarterly dividends were reinvested at the time of payment. This graph does not forecast future performance of common shares of Trust stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| Data | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| Compass Diversified Holdings | $ | 100.00 | | | $ | 102.78 | | | $ | 82.16 | | | $ | 178.31 | | | $ | 150.68 | | | $ | 258.61 | |
| NYSE Composite Index | $ | 100.00 | | | $ | 118.73 | | | $ | 108.10 | | | $ | 135.68 | | | $ | 145.16 | | | $ | 175.18 | |
| NYSE Financial Sector Index | $ | 100.00 | | | $ | 121.23 | | | $ | 105.31 | | | $ | 135.16 | | | $ | 132.21 | | | $ | 165.77 | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | |
| Data | March 31,
2013 | | June 30,
2013 | | September 30,
2013 | | December 31,
2013 |
| Compass Diversified Holdings | $ | 174.98 |
| | $ | 195.86 |
| | $ | 201.45 |
| | $ | 224.45 |
|
| NASDAQ Stock Market Index | $ | 146.58 |
| | $ | 152.67 |
| | $ | 169.19 |
| | $ | 187.36 |
|
| NASDAQ Other Finance Index | $ | 98.41 |
| | $ | 102.70 |
| | $ | 106.62 |
| | $ | 117.93 |
|
| NYSE Financial Sector Index | $ | 63.14 |
| | $ | 65.10 |
| | $ | 68.66 |
| | $ | 73.10 |
|
| NYSE Composite Index | $ | 108.58 |
| | $ | 108.65 |
| | $ | 114.71 |
| | $ | 124.00 |
|
| | | | | | | | |
| Data | March 31,
2014 | | June 30,
2014 | | September 30,
2014 | | December 31,
2014 |
| Compass Diversified Holdings | $ | 218.56 |
| | $ | 212.14 |
| | $ | 206.95 |
| | $ | 194.20 |
|
| NASDAQ Stock Market Index | $ | 188.37 |
| | $ | 197.75 |
| | $ | 201.58 |
| | $ | 212.46 |
|
| NASDAQ Other Finance Index | $ | 115.15 |
| | $ | 114.94 |
| | $ | 113.84 |
| | $ | 117.29 |
|
| NYSE Financial Sector Index | $ | 73.30 |
| | $ | 75.02 |
| | $ | 74.39 |
| | $ | 77.17 |
|
| NYSE Composite Index | $ | 125.52 |
| | $ | 130.90 |
| | $ | 127.60 |
| | $ | 129.23 |
|
| | | | | | | | |
|
| | | | | | | | | | | | | | | |
| Data | March 31,
2015 | | June 30,
2015 | | September 30,
2015 | | December 31,
2015 |
| Compass Diversified Holdings | $ | 206.87 |
| | $ | 200.67 |
| | $ | 199.51 |
| | $ | 198.94 |
|
| NASDAQ Stock Market Index | $ | 219.86 |
| | $ | 223.71 |
| | $ | 207.26 |
| | $ | 224.64 |
|
| NASDAQ Other Finance Index | $ | 121.74 |
| | $ | 121.61 |
| | $ | 112.03 |
| | $ | 115.43 |
|
| NYSE Financial Sector Index | $ | 75.83 |
| | $ | 76.67 |
| | $ | 70.13 |
| | $ | 72.55 |
|
| NYSE Composite Index | $ | 129.94 |
| | $ | 128.82 |
| | $ | 116.84 |
| | $ | 120.93 |
|
| | | | | | | | |
| Data | March 31,
2016 | | June 30,
2016 | | September 30,
2016 | | December 31,
2016 |
| Compass Diversified Holdings | $ | 198.47 |
| | $ | 212.87 |
| | $ | 225.44 |
| | $ | 234.50 |
|
| NASDAQ Stock Market Index | $ | 218.46 |
| | $ | 217.24 |
| | $ | 238.3 |
| | $ | 241.49 |
|
| NASDAQ Other Finance Index | $ | 114.3 |
| | $ | 117.57 |
| | $ | 123.62 |
| | $ | 133.75 |
|
| NYSE Financial Sector Index | $ | 68.25 |
| | $ | 67.88 |
| | $ | 71.76 |
| | $ | 80.10 |
|
| NYSE Composite Index | $ | 121.7 |
| | $ | 125.06 |
| | $ | 127.83 |
| | $ | 131.82 |
|
| | | | | | | | |
| Data | March 31,
2017 | | June 30,
2017 | | September 30,
2017 | | December 31, 2017 |
| Compass Diversified Holdings | $ | 219.71 |
| | $ | 233.46 |
| | $ | 239.93 |
| | $ | 231.39 |
|
| NASDAQ Stock Market Index | $ | 265.2 |
| | $ | 275.46 |
| | $ | 291.41 |
| | $ | 309.69 |
|
| NASDAQ Other Finance Index | $ | 138.49 |
| | $ | 148.74 |
| | $ | 155.32 |
| | $ | 164.29 |
|
| NYSE Financial Sector Index | $ | 83.03 |
| | $ | 85.93 |
| | $ | 89.52 |
| | $ | 94.76 |
|
| NYSE Composite Index | $ | 137.02 |
| | $ | 140.23 |
| | $ | 145.56 |
| | $ | 152.71 |
|
Distributions
ForDuring the years 2017, 2016 and 2015,year ended December 31, 2021, we have declared and paid quarterly cash distributions of $2.21 to holders of record of our common shares, including a special distribution to shareholders in August 2021. On August 3, 2021,in order to offset a portion of the tax liability to the shareholders as follows:
|
| | | | | |
| | | | |
| Quarter Ended | Declaration Date | Payment Date | Distribution Per Share |
| December 31, 2017 | January 4, 2018 | January 25, 2018 | $ | 0.36 |
|
| September 30, 2017 | October 5, 2017 | October 26, 2017 | $ | 0.36 |
|
| June 30, 2017 | July 6, 2017 | July 27, 2017 | $ | 0.36 |
|
| March 31, 2017 | April 6, 2017 | April 27, 2017 | $ | 0.36 |
|
| December 31, 2016 | January 5, 2017 | January 26, 2017 | $ | 0.36 |
|
| September 30, 2016 | October 6, 2016 | October 27, 2016 | $ | 0.36 |
|
| June 30, 2016 | July 7, 2016 | July 28, 2016 | $ | 0.36 |
|
| March 31, 2016 | April 7, 2016 | April 28, 2016 | $ | 0.36 |
|
| December 31, 2015 | January 7, 2016 | January 28, 2016 | $ | 0.36 |
|
| September 30, 2015 | October 7, 2015 | October 29, 2015 | $ | 0.36 |
|
| June 30, 2015 | July 9, 2015 | July 29, 2015 | $ | 0.36 |
|
| March 31, 2015 | April 9, 2015 | April 29, 2015 | $ | 0.36 |
|
We currently intenda result of the election to continuecause the Trust to declarebe treated as a corporation for U.S. federal income tax purposes, the Company's board of directors declared a special cash distribution on the Trust’s common shares of $0.88 per common share. For the years 2020 and pay regular quarterly2019, we declared and paid cash distributions of $1.44 per share to holders of record of our common shares. Following the tax reclassification, the Company’s board reduced our anticipated annual distribution from the current $1.44 per Trust common share per year to approximately $1.00 per common share per year. The Company’s board of directors has full authority and discretion to determine whether or not a distribution by the Company should be declared and paid to the Trust and in turn to our shareholders, as well as the amount and timing of any distribution. The Company’s board of directors may, based on all outstanding common shares through fiscal year 2018. See “Management’s Discussiontheir review of our financial condition and Analysisresults of Financial Conditionoperations and Results of Operations—Liquidity and Capital Resources” in Part II, Item 7.
any future changes to our tax structure, determine to modify future distributions.
Recent Sales of Unregistered Securities
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% 2029 Notes (the "2029 Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the Notes is payable in cash on April 15th and October 15th of each year. The 2029 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries.
None.The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in connection with entering into the 2021 Credit Facility and to redeem our 8.000% Senior Notes due 2026 (the “2026 Notes”).
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% 2032 Notes (the "2032 Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the Notes is payable in cash on July 15th and January 15th of each year. The 2032 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes was used to repay debt outstanding under the 2021 Credit Facility.
Purchases of Equity Securities by Issuer and Affiliated PartnersPurchasers
None.
ITEM 6. – SELECTED FINANCIAL DATA
The following table sets forth selected historical and other data of the Company and should be read in conjunction with the more detailed consolidated financial statements included elsewhere in this Annual Report. Selected financial data below includes the results of operations, cash flow and balance sheet data of the Company for the years ended December 31, 2017, 2016, 2015, 2014, and 2013.
The Company sold 5,800,238 shares of FOX during FOX's initial public offering in August 2013, and an additional 4,466,569 shares during a FOX secondary offering in July 2014, resulting in the Company holding approximately 41% ownership interest in FOX at December 31, 2015 and 2014. Effective July 11, 2014, the date that the Company's ownership interest in FOX fell below 50%, the Company began accounting for the investment in FOX as an equity method investment at fair value. FOX's results of operations and cash flows are included in the consolidated results of operations and cash flows of the Company from the date of acquisition through July 10, 2014, the date at which the Company began accounting for the investment in FOX using the equity method of accounting. In March 2017, we sold our remaining ownership interest in FOX.
The operating results for Tridien in 2016, 2015, 2014 and 2013 are reflected as discontinued operations in each of the years presented in the table below and are not included in continuing operations. The operating results of CamelBak and American Furniture in 2015, 2014, and 2013 are reflected as discontinued operations and are not included in the continuing operations data below. Data included below only includes activity in our operating subsidiaries from their respective dates of acquisition.[Reserved]
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Statements of Operations Data: | | | | | | | | | |
| Net sales | $ | 1,269,729 |
| | $ | 978,309 |
| | $ | 727,978 |
| | $ | 636,675 |
| | $ | 680,639 |
|
| Cost of sales | 822,020 |
| | 651,739 |
| | 487,242 |
| | 431,658 |
| | 457,913 |
|
| Gross profit | 447,709 |
| | 326,570 |
| | 240,736 |
| | 205,017 |
| | 222,726 |
|
| Operating expenses: |
| |
| |
| |
| |
|
| Selling, general and administrative | 318,484 |
| | 217,830 |
| | 136,399 |
| | 128,190 |
| | 116,549 |
|
| Supplemental put expense (reversal) | — |
| | — |
| | — |
| | — |
| | (45,995 | ) |
| Management fees | 32,693 |
| | 29,406 |
| | 25,658 |
| | 21,872 |
| | 17,782 |
|
| Amortization expense | 52,003 |
| | 35,069 |
| | 28,761 |
| | 23,063 |
| | 19,350 |
|
| Impairment expense/ loss on disposal of assets | 17,325 |
| | 25,204 |
| | — |
| | — |
| | — |
|
| Operating income | 27,204 |
| | 19,061 |
| | 49,918 |
| | 31,892 |
| | 115,040 |
|
| Gain on deconsolidation of subsidiary | — |
| | — |
| | — |
| | 264,325 |
| | — |
|
| (Loss) gain on equity method investment | (5,620 | ) | | 74,490 |
| | 4,533 |
| | 11,029 |
| | — |
|
| Income from continuing operations | 33,272 |
| | 53,749 |
| | 8,991 |
| | 270,077 |
| | 71,052 |
|
| Income and gain from discontinued operations | 340 |
| | 2,781 |
| | 156,779 |
| | 21,078 |
| | 7,764 |
|
| Net income | 33,612 |
| | 56,530 |
| | 165,770 |
| | 291,155 |
| | 78,816 |
|
| Net income from continuing operations—noncontrolling interest | 5,621 |
| | 1,961 |
| | 5,133 |
| | 11,661 |
| | 12,124 |
|
| Net income (loss) from discontinued operations—noncontrolling interest | — |
| | (116 | ) | | (1,201 | ) | | 659 |
| | (1,372 | ) |
| Net income attributable to Holdings | $ | 27,991 |
| | $ | 54,685 |
| | $ | 161,838 |
| | $ | 278,835 |
| | $ | 68,064 |
|
| Basic and fully diluted income (loss) per share attributable to Holdings: |
| |
| |
| |
| |
|
| Continuing operations | $ | (0.45 | ) | | $ | 0.46 |
| | $ | (0.30 | ) | | $ | 4.98 |
| | $ | 0.86 |
|
| Discontinued operations | 0.01 |
| | 0.05 |
| | 2.91 |
| | 0.40 |
| | 0.19 |
|
| Basic and fully diluted income (loss) per share attributable to Holdings | $ | (0.44 | ) | | $ | 0.51 |
| | $ | 2.61 |
| | $ | 5.38 |
| | $ | 1.05 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| Cash distribution declared per common share | $ | 1.44 |
| | $ | 1.44 |
| | $ | 1.44 |
| | $ | 1.44 |
| | $ | 1.44 |
|
| | | | | | | | | | |
| Cash Flow Data: |
| |
| |
| |
| |
|
| Cash provided by operating activities | $ | 81,771 |
| | $ | 111,372 |
| | $ | 84,548 |
| | $ | 70,695 |
| | $ | 72,374 |
|
| Cash (used in) provided by investing activities | (77,278 | ) | | (363,021 | ) | | 233,880 |
| | (424,753 | ) | | 66,286 |
|
| Cash (used in) provided by financing activities | (2,588 | ) | | 208,726 |
| | (254,357 | ) | | 265,487 |
| | (44,122 | ) |
| Foreign currency impact on cash | (1,792 | ) | | (3,174 | ) | | (1,905 | ) | | (955 | ) | | 450 |
|
| Net increase (decrease) in cash and cash equivalents | $ | 113 |
| | $ | (46,097 | ) | | $ | 62,166 |
| | $ | (89,526 | ) | | $ | 94,988 |
|
| | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Balance Sheet Data: |
| |
| |
| |
| |
|
| Current assets | $ | 526,818 |
| | $ | 452,819 |
| | $ | 291,363 |
| | $ | 320,799 |
| | $ | 399,133 |
|
| Total assets | 1,820,303 |
| | 1,777,155 |
| | 1,421,042 |
| | 1,547,430 |
| | 1,044,913 |
|
| Current liabilities | 212,193 |
| | 202,521 |
| | 116,479 |
| | 141,231 |
| | 130,130 |
|
| Long-term debt | 584,347 |
| | 551,652 |
| | 308,639 |
| | 485,547 |
| | 280,389 |
|
| Total liabilities | 894,304 |
| | 882,611 |
| | 547,823 |
| | 739,096 |
| | 475,978 |
|
| Noncontrolling interests | 52,791 |
| | 38,139 |
| | 47,135 |
| | 40,903 |
| | 95,550 |
|
| Shareholders’ equity attributable to Holdings | 873,208 |
| | 856,405 |
| | 826,084 |
| | 767,431 |
| | 473,385 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Item 7 contains forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K are subject to a number of risks and uncertainties, some of which are beyond our control. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the sections entitled “Forward-Looking Statements” and “Risk Factors” included elsewhere in this Annual Report.
Overview
Compass Diversified Holdings, a Delaware statutory trust, was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings LLC, a Delaware limited liability Company, was also formed on November 18, 2005. In accordance with the Third Amended and Restated Trust Agreement, dated as of August 3, 2021 (as amended and restated, the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the LLC Agreement)Company's Sixth Amended and Restated Operating Agreement, dated as of August 3, 2021 (as amended and restated, the "LLC Agreement") of the Company and, pursuant to the LLC Agreement, the Company has outstanding the identical number of Trust Interests as the number of outstanding shares of the Trust. Sostratus LLC owns all of our Allocation Interests. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. We characterize small and middle market businesses as those that generate annual cash flows of up to $60$75 million. We focus on companies of this size because we believe that these companies are more able to achieve growth rates above those of their relevant industries and are also frequently more susceptibleamenable to efforts to improve earnings and cash flow.
In pursuing new acquisitions, we seek businesses with the following characteristics:
•North American base of operations;
•stable and growing earnings and cash flow;
•maintains a significant market share in defensible industry niche (i.e., has a “reason to exist”);
•solid and proven management team with meaningful incentives;
•low technological and/or product obsolescence risk; and
•a diversified customer and supplier base.
Our management team’s strategy for our subsidiaries involves:
◦utilizing structured incentive compensation programs tailored to each business in order to attract, recruit and retain talented managers to operate our businesses;
◦regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;
◦assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue and cost related);
◦identifying and working with management to execute attractive external growth and acquisition opportunities; and
◦forming strong subsidiary level boards of directors, including independent directors, to supplement management in their development and implementation of strategic goals and objectives.
Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are well-well positioned to acquire additional attractive businesses. Our management team has a large network of approximately 2,000 deal intermediaries to whom it actively markets and who we expect to expose us to potential acquisitions. Through this network, as well as our management team’s active proprietary transaction sourcing efforts, we typically have a substantial pipeline of potential acquisition targets. In consummating transactions, our management team has, in the past, been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs,spin-
offs, transitions of family-owned businesses, management buy-outs and reorganizations. We believe the flexibility, creativity, experience and expertise of our management team in structuring transactions provides us with a strategic advantage by allowing us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.
In addition, because we intend to fund acquisitions through the utilization of our 2021 Revolving Credit Facility, we do not expect to be subject to delays in or conditions by closing acquisitions that would be typically associated with transaction specific financing, as is typically the case in such acquisitions. We believe this advantage is a powerful one and is highly unusual in the marketplace for acquisitions in which we operate.
Initial public offering and Company formation
On May 16, 2006, we completed our initial public offering of 13,500,000 shares of the Trust at an offering price of $15.00 per share (the “IPO”). Subsequent to the IPO the Company’s board of directors engaged our Manager to externally manage the day-to-day operations and affairs of the Company, oversee the management and operations of the businesses and to perform those services customarily performed by executive officers of a public company.
From May 16, 2006 through December 31, 2017,2021, we purchased seventeentwenty-two businesses (each of our businesses is treated as a separate operating segment) and disposed of seveneleven businesses. The tables below reflect summarized information relating to our acquisitions and dispositions from the date of our IPO through December 31, 20172021 (in thousands):
Acquisitions
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Ownership Interest - December 31, 2021 |
| Business | | Acquisition Date | | CODI Purchase Price | | Primary | | Diluted |
CBS Holdings (Staffmark) (1) | | May 16, 2006 | | $ | 183,200 | | | N/a | | N/a |
Crosman (2) | | May 16, 2006 | | $ | 72,600 | | | N/a | | N/a |
Advanced Circuits (3) | | May 16, 2006 | | $ | 81,000 | | | 71.8% | | 67.6% |
| Silvue | | May 16, 2006 | | $ | 36,000 | | | N/a | | N/a |
Tridien (3) | | August 1, 2006 | | $ | 31,000 | | | N/a | | N/a |
| Aeroglide | | February 28, 2007 | | $ | 58,200 | | | N/a | | N/a |
| Halo | | February 28, 2007 | | $ | 62,300 | | | N/a | | N/a |
| American Furniture | | August 31, 2007 | | $ | 97,000 | | | N/a | | N/a |
FOX (4) | | January 4, 2008 | | $ | 80,400 | | | N/a | | N/a |
Liberty Safe (3) | | March 31, 2010 | | $ | 70,200 | | | 59.9% | | 58.1% |
Ergobaby (3) | | September 16, 2010 | | $ | 85,200 | | | 81.7% | | 72.7% |
| CamelBak | | August 24, 2011 | | $ | 251,400 | | | N/a | | N/a |
| Arnold Magnetics | | March 5, 2012 | | $ | 128,800 | | | 98% | | 85.5% |
Clean Earth (3) | | August 7, 2014 | | $ | 251,400 | | | N/a | | N/a |
Sterno (3) (5) | | October 10, 2014 | | $ | 314,400 | | | 100.0% | | 87.1% |
Manitoba Harvest (3) | | July 10, 2015 | | $ | 102,700 | | | N/a | | N/a |
| 5.11 | | August 31, 2016 | | $ | 408,200 | | | 97.6% | | 88.4% |
Velocity Outdoor (2) (3) | | June 2, 2017 | | $ | 150,400 | | | 99.3% | | 87.6% |
Altor Solutions (3) | | February 15, 2018 | | $ | 253,400 | | | 100.0% | | 91.2% |
Maruccci Sports (3) | | April 20, 2020 | | $ | 198,900 | | | 91.1% | | 82.8% |
| BOA | | October 16, 2020 | | $ | 454,300 | | | 91.8% | | 83.8% |
| Lugano | | September 3, 2021 | | $ | 263,300 | | | 59.9% | | 58.1% |
|
| | | | | | | | | | |
| | | | | | | Ownership Interest - December 31, 2017 |
| Business | | Acquisition Date | | CODI Purchase Price | | Primary | | Diluted |
CBS Holdings (Staffmark) (1) | | May 16, 2006 | | $ | 183,200 |
| | N/a | | N/a |
Crosman (4) | | May 16, 2006 | | $ | 72,600 |
| | N/a | | N/a |
Advanced Circuits (3) | | May 16, 2006 | | $ | 81,000 |
| | 69.4% | | 69.2% |
| Silvue | | May 16, 2006 | | $ | 36,000 |
| | N/a | | N/a |
Tridien (3) | | August 1, 2006 | | $ | 31,000 |
| | N/a | | N/a |
| Aeroglide | | February 28, 2007 | | $ | 58,200 |
| | N/a | | N/a |
| Halo | | February 28, 2007 | | $ | 62,300 |
| | N/a | | N/a |
| American Furniture | | August 31, 2007 | | $ | 97,000 |
| | N/a | | N/a |
FOX (2) | | January 4, 2008 | | $ | 80,400 |
| | N/a | | N/a |
Liberty Safe (3) | | March 31, 2010 | | $ | 70,200 |
| | 88.6% | | 84.7% |
Ergobaby (3) | | September 16, 2010 | | $ | 85,200 |
| | 82.7% | | 76.6% |
| CamelBak | | August 24, 2011 | | $ | 251,400 |
| | N/a | | N/a |
| Arnold Magnetics | | March 5, 2012 | | $ | 128,800 |
| | 96.7% | | 84.7% |
Clean Earth (3) | | August 7, 2014 | | $ | 251,400 |
| | 97.5% | | 79.8% |
Sterno (3) | | October 10, 2014 | | $ | 160,000 |
| | 100.0% | | 89.5% |
Manitoba Harvest (3) | | July 10, 2015 | | $ | 102,700 |
| | 76.6% | | 67% |
| 5.11 | | August 31, 2016 | | $ | 408,200 |
| | 97.5% | | 85.5% |
Crosman (3) (4) | | June 2, 2017 | | $ | 150,400 |
| | 98.8% | | 89.2% |
(1)The total purchase price for CBS Holdings includes the acquisition of Staffmark Investment LLC onin January 21, 2008 for a purchase price of $128.6 million. The Company renamed its CBS Personnel business Staffmark subsequent to the acquisition.
(2)Velocity Outdoor (formerly "Crosman Corp.") was purchased by the Company in May 2006 and subsequently sold in January 2007. We reacquired Velocity Outdoor in June 2017.
(3)The total purchase price does not reflect add-on acquisitions made by our businesses subsequent to their purchase by CODI unless indicated.
(4) FOX completed an IPO of its common stock in August 2013 in which we sold a 22% interest in FOX, reducing our ownership interest to 53%..9. In July 2014, FOX completed a secondary offering in which we sold a 12% interest in FOX, reducing our ownership interest to 41% and resulting in the deconsolidation of FOX from our financial results. We subsequently sold our remaining shares of FOX and now hold no ownership interest in FOX. We recognized total net proceeds from the sale of our FOX shares of approximately $465.1 million.
(3)
(5)The total purchase price does not reflect add-on acquisitions made by our businesses subsequent to theirof Sterno includes the acquisition of Rimports in February 2018 for a purchase by CODI.
(4) Crosman was purchased by the Company in May 2006 and subsequently sold in January 2007. We reacquired Crosman in June 2017.
price of $154.4 million.
Dispositions
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Business | | Date of Disposition | | Sale Price | | CODI Proceeds from Disposition (1) | | Gain (loss) recognized (2) |
| Crosman | | January 5, 2007 | | $ | 143,000 | | | $ | 109,600 | | | $ | 35,800 | |
| Aeroglide | | June 24, 2008 | | $ | 95,000 | | | $ | 78,500 | | | $ | 33,700 | |
| Silvue | | June 25, 2008 | | $ | 95,000 | | | $ | 63,600 | | | $ | 39,600 | |
| Staffmark | | October 17, 2011 | | $ | 295,000 | | | $ | 216,000 | | | $ | 88,500 | |
| Halo | | May 1, 2012 | | $ | 76,500 | | | $ | 66,500 | | | $ | (300) | |
| CamelBak | | August 3, 2015 | | $ | 412,500 | | | $ | 367,800 | | | $ | 158,300 | |
| American Furniture | | October 5, 2015 | | $ | 24,100 | | | $ | 23,500 | | | $ | (14,100) | |
| Tridien | | September 21, 2016 | | $ | 25,000 | | | $ | 22,700 | | | $ | 1,700 | |
| FOX | | * | | * | | $ | 526,600 | | | $ | 428,700 | |
Manitoba Harvest (3) | | February 28, 2019 | | $ | 294,300 | | | $ | 219,700 | | | $ | 121,700 | |
| Clean Earth | | June 28, 2019 | | $ | 625,000 | | | $ | 551,900 | | | $ | 209,300 | |
| Liberty | | August 3, 2021 | | $ | 147,500 | | | $ | 128,000 | | | $ | 72,800 | |
|
| | | | | | | | | | | | | | |
| Business | | Date of Disposition | | Sale Price | | CODI Proceeds from Disposition (1) | | Gain (loss) recognized (2) |
| Crosman | | January 5, 2007 | | $ | 143,000 |
| | $ | 109,600 |
| | $ | 35,800 |
|
| Aeroglide | | June 24, 2008 | | $ | 95,000 |
| | $ | 78,500 |
| | $ | 33,700 |
|
| Silvue | | June 25, 2008 | | $ | 95,000 |
| | $ | 63,600 |
| | $ | 39,600 |
|
| Staffmark | | October 17, 2011 | | $ | 295,000 |
| | $ | 216,000 |
| | $ | 88,500 |
|
| Halo | | May 1, 2012 | | $ | 76,500 |
| | $ | 66,500 |
| | $ | (300 | ) |
| CamelBak | | August 3, 2015 | | $ | 412,500 |
| | $ | 367,800 |
| | $ | 158,300 |
|
| American Furniture | | October 5, 2015 | | $ | 24,100 |
| | $ | 23,500 |
| | $ | (14,100 | ) |
| Tridien | | September 21, 2016 | | $ | 25,000 |
| | $ | 22,700 |
| | $ | 1,700 |
|
| FOX | | * | | * | | $ | 526,600 |
| | $ | 428,700 |
|
(1)CODI portion of the net proceeds from disposition includes debt and equity proceeds and reflects the accounting for the redemption of the sold business's minority shareholders and transaction expenses.
(2) Gain (loss) recognized on sale of our businesses is calculated by deducting our total invested capital from the net sale proceeds received.
(3) Sale price of Manitoba Harvest was C$370 million. Translation to USD is as of the date of sale.
* We made loans to and purchased a controlling interest in FOX on January 4, 2008, for approximately $80.4 million. In August 2013, FOX completed an initial public offering of its common stock. As a result of the initial public offering, our ownership interest in FOX was reduced to approximately 53.9%. No gain was reflected as a result of the sale of our FOX shares in the initial public offering because our majority classification of FOX did not change. FOX used a portion of their net proceeds received from the sale of their shares as well as proceeds from a new external FOX credit facility to repay $61.5 million in outstanding indebtedness to us under their existing credit facility with us. In July 2014, through a secondary offering, our ownership in FOX was lowered from approximately 53%54% to approximately 41%, and as a result we deconsolidated FOX as of July 10, 2014. In March and August 2016, through two more secondary offerings and a share repurchase by FOX, our ownership in the outstanding common stock of FOX was further lowered to approximately 23% as of September 30, 2016. In November 2016, through another secondary offering, our ownership in the outstanding common stock of FOX was further lowered to approximately 14%. On March 13, 2017, 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. We recognized total net proceeds from the sales of our FOX shares of approximately $465.1 million, plus proceeds from the repayment of the FOX credit facility of $61.5 million upon completion of their initial public offering, and a total gain of $428.7 million.
We are dependent on the earnings of, and cash receipts from, the businesses that we own in order to meet our corporate overhead and management fee expenses and to pay distributions. The earnings and distributions of our
businesses are generally lowest in the first quarter, and strongest in the third and fourth quarter, of each fiscal year. These earnings and distributions, net of any non-controlling interest in these businesses, are available to:
•meet capital expenditure requirements, management fees and corporate overhead charges;
•fund distributions from the businesses to the Company; and
•be distributed by the Trust to shareholders.
20172021 Highlights and Recent Events
Trust Tax Reclassification
On August 3, 2021, the shareholders of CODI approved amendments to the Second Amended and Restated Trust Agreement of the Trust and the Fifth Amended and Restated Operating Agreement of the Company to allow the Company’s Board of Directors (the “Board”) to cause the Trust to elect to be treated as a corporation for U.S. federal income tax purposes (the “tax reclassification”) and, at its discretion in the future, cause the Trust to be converted to a corporation. Following the shareholder vote, the Board resolved to cause the Trust to elect to be treated as a corporation for U.S. federal income tax purposes. Such election became effective September 1, 2021, prior to which the Trust had been taxed as a partnership for U.S. federal income tax purposes since January 1, 2007.
The tax reclassification resulted in a taxable gain to the Trust for U.S. federal income tax purposes of approximately $328 million, which gain was allocated and passed through to the Trust’s common shareholders of record as of the close of business on August 31, 2021. This taxable gain created current tax liability for those shareholders and will be reported on the Trust’s final 2021 Schedule K-1. Consequently, the Trust paid a special distribution of $0.88 cents per share on September 7, 2021 to Trust common shareholders of record as of the close of business on August 31, 2021 that was intended to partially cover the taxable income incurred by those shareholders.
Following the tax reclassification, determinations, declarations, and payments of distributions to holders of Trust common shares will continue to be at the sole discretion of the Board. Historically, our distribution policy has been to make regular distributions on outstanding common shares. Because the Trust will incur entity level income taxes following the tax reclassification, we reduced our anticipated annual distribution from the current $1.44 per Trust common share per year to $1.00 per Trust common share per year. Our distribution policy may be changed at any time at the discretion of the Board.
We will issue final Schedule K-1s with respect to our final taxable period as a partnership beginning January 1, 2021 and ending August 31, 2021, the last day on which the Trust was treated as a partnership for U.S. federal income tax purposes. Thereafter, items of income, gain loss, and deduction will not flow through to Trust shareholders and the Trust will no longer issue Schedule K-1s. Common shareholders will no longer be allocated taxable income as a result of their investment in the Trust and shareholders subject to rules regarding “unrelated business taxable income” (or “UBTI”) will no longer be allocated UBTI.
The Trust will be required to file Form 1120, U.S. Corporation Income Tax Return on an annual basis and for all taxable periods beginning on or after the tax reclassification. In addition, distribution with respect to Trust shares (including Trust preferred shares) will now be treated as corporate distributions and reported on Form 1099-DIV, instead of on Schedule K-1. Distributions from the Trust will be taxable as dividends to the extent the Trust has positive earnings and profits, as determined for U.S. federal income tax purposes. Dividends from the Trust with respect to Trust shares should be eligible for preferential tax treatment as “qualified dividends” to the extent the Trust shareholders receiving such dividends meet certain holding period requirements.
The foregoing description addresses only certain U.S. federal income tax consequences of the tax reclassification applicable to shareholders generally. We do not provide tax advice and nothing herein should be considered as such. Each shareholder should consult its tax advisor concerning the particular U.S. federal income, U.S. federal estate or gift, state, local, foreign and other tax consequences of the tax reclassification and holding Trust shares.
Acquisition of CrosmanLugano Diamonds
On June 2, 2017,September 3, 2021, the Company, through its newly formed acquisition subsidiaries, Lugano Holding, Inc., a wholly ownedDelaware corporation (“Lugano Holdings”), and Lugano Buyer, Inc., a Delaware corporation (“Lugano Buyer”) and a wholly-owned subsidiary Crosman Acquisition Corp.of Lugano Holdings, acquired the issued and outstanding shares of stock of Lugano Diamonds and Jewelry Inc. ("Lugano") other than certain rollover shares described below (the “Lugano Transaction”). The Lugano Transaction was effectuated pursuant to a Stock Purchase Agreement (the “Lugano
Purchase Agreement”), we acquired 98.9%also dated September 3, 2021, by and among Lugano Buyer, the sellers named therein (“Lugano Sellers”) and Mordechai Haim Ferder in his individual capacity and as initial representative of the outstandingSellers. Based in Newport Beach, California and founded in 2004, Lugano makes one-of-a-kind jewelry for some of the world’s most discerning clientele. In addition to its product offerings, Lugano frequently partners with local, influential organizations to host and sponsor more than 100 equestrian, social and charity events throughout the year.
The Company made loans to, and purchased a 60% equity of Bullseye Acquisition Corporation, which is the sole owner of Crosman Corp. ("Crosman"). Crosman is a designer, manufacturer and marketer of airguns, archery products, laser aiming devices, and related accessories. Headquarteredinterest in, Bloomfield, New York, Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channels and distributors serving smaller specialty stores and international markets. Its diversified product portfolio includes the widely known Crosman, Benjamin and CenterPoint brands.Lugano. The purchase price, including proceeds from noncontrolling interestsshareholders and net of transaction costs, was approximately $150.4$263.3 million. Crosman managementThe selling shareholders invested in the transaction along with the Company, representing approximately 1.1%40% initial noncontrolling interest on both a primary and fully diluted basis. The fair value of the initial noncontrolling interest.interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership of Lugano. CGM will receive integration service fees of $2.3 million payable quarterly over a twelve month period as services are rendered which payments began in the quarter ended December 31, 2021. The Company incurred $1.8 million of transaction costs in conjunction with the Lugano acquisition, which was included in selling, general and administrative expense in the consolidated statements of operations during the third quarter of 2021. The Company funded the acquisition with cash on hand and a $120 million draw on its 2021 Revolving Credit Facility.
Divestiture of FOX shares2021 Credit Facility
On March 13, 2017, Fox Factory Holding Corp. ("FOX"23, 2021, we entered into a Second Amended and Restated Credit Agreement (the "2021 Credit Facility") closedto amend and restate the 2018 Credit Facility. The 2021 Credit Facility provides for revolving loans, swing line loans and letters of credit (the "2021 Revolving Credit Facility") up to a maximum aggregate amount of $600 million and also permits the Company, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain term loans in an aggregate amount of up to $250 million, subject to certain restrictions and conditions. All amounts outstanding under the 2021 Revolving Credit Facility will become due on March 23, 2026, which is the maturity date of loans advanced under the 2021 Revolving Credit Facility.
Senior Notes Issuance
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Notes due 2029 (the "2029 Notes") offered pursuant to a secondary publicprivate offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2029 Notes were issued pursuant to an indenture, dated as of 5,108,718 sharesMarch 23, 2021 (the “2029 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2029 Notes bear interest at the rate of FOX common stock held by CODI, which represented CODI's remaining investment5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in FOX. CODI received $136.1 million in net proceeds as a resultcash on April 15th and October 15th of each year. The 2029 Notes are general unsecured obligations of the sale. As a result of this secondary public offering, the Company no longer holds an ownership interest in FOX. We recognized total netand are not guaranteed by our subsidiaries.
The proceeds from the sales of our FOX shares of approximately $465.1 million.
This sale of the portion2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in connection with our entry into the 2021 Credit Facility and to redeem our 2026 Notes.
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our FOX shares5.000% Notes due 2032 (the "2032 Notes") offered pursuant to a private offering to qualified institutional buyers in March 2017 qualified as a Sale Eventaccordance with Rule 144A under the Company'sSecurities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the Notes is payable in cash on January 15th and July 15th of each year. The 2032 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes was used to repay debt outstanding under the 2021 Revolving Credit Facility.
Common Share Offering
On September 7, 2021, we filed a prospectus supplement pursuant to which we may, but we have no obligation to, issue and sell up to $500 million shares of the common shares of the Trust in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions, the trading price of Trust common shares and determinations by us regarding appropriate sources of funding. In connection with this offering, we entered into an At Market Issuance Sales
Agreement with B. Riley Securities, Inc. (“B. Riley”) and Goldman Sachs & Co. LLC (“Goldman” and, together with B. Riley, the “Sales Agents”) pursuant to which we may sell common shares of the Trust having an aggregate offering price of up to $500 million, from time to time through B. Riley and Goldman, acting as sales agents and/or principals. We sold 3,387,385 Trust common shares during the year ended December 31, 2021 and received net proceeds of approximately $115.1 million. We incurred approximately $2.1 million in commissions payable to the Sales Agents during the year ended December 31, 2021.
Disposition of Liberty Safe
On July 16, 2021, the Company, as majority stockholder of Liberty Safe Holding Corporation (“Liberty”) and as Sellers Representative, entered into a definitive Stock Purchase Agreement (the “Liberty Purchase Agreement”) with Independence Buyer, Inc. (“Liberty Buyer”), Liberty and the other holders of stock and options of Liberty to sell to Liberty Buyer all of the issued and outstanding securities of Liberty, the parent company of the operating entity, Liberty Safe and Security Products, Inc. On August 3, 2021, Liberty Buyer completed the acquisition of Liberty pursuant to the Liberty Purchase Agreement, as amended. The sale price of Liberty was based on an aggregate total enterprise value of $147.5 million, and is subject to customary adjustments. After the allocation of the sale proceeds to Liberty's non-controlling shareholders, the repayment of intercompany loans to the Company (including accrued interest) of $26.5 million, and the payment of transaction expenses of approximately $4.5 million, the Company received approximately $128.0 million of total proceeds from the sale at closing. The Company recognized a gain on the sale of Liberty of $72.8 million during the year ended December 31, 2021.
Sale of Advanced Circuits
On October 13, 2021, the Company, as the representative (the “Sellers Representative”) of the holders (the “AC Sellers”) of stock and options of Compass AC Holdings, Inc. (“Advanced Circuits”), a majority owned subsidiary of the Company, entered into a definitive Agreement and Plan of Merger (the “AC Agreement”) with Tempo Automation, Inc. (“AC Buyer”), Aspen Acquisition Sub, Inc. (“AC Merger Sub”) and Advanced Circuits, pursuant to which AC Buyer will acquire all of the issued and outstanding securities of Advanced Circuits, the parent company of the operating entity, Advanced Circuits, Inc., through a merger of AC Merger Sub with and into Advanced Circuits, with Advanced Circuits surviving the merger and becoming a wholly owned subsidiary of AC Buyer (the “AC Merger”). Under the terms of the AC Agreement, the AC Sellers will receive consideration in the amount of $310 million, composed of $240 million in cash and $70 million in common stock of a publicly traded special purpose acquisition company (“SPAC”) selected by AC Buyer to acquire AC Buyer (the “SPAC Transaction”) upon the closing of the transaction, excluding certain working capital and other adjustments. In addition, the AC Sellers may receive 2.4 million additional shares of SPAC common stock within five years, subject to SPAC stock price performance. The Company owns approximately 67% of the outstanding stock of Advanced Circuits on a fully diluted basis and expects to receive approximately 77% of the gross consideration payable under the AC Agreement. DuringThis amount is in respect of the Company’s outstanding loans to Advanced Circuits and its equity interests in Advanced Circuits. The closing of the transaction is expected to occur in the second quarter of 2017, our board of directors declared a distribution to the Holders2022, however, there can be no assurances that all of the Allocation Interestsconditions to closing, which include the closing of $25.8 million in connection with the Sale Event of FOX. The profit allocation payment was made during the quarter ended June 30, 2017.SPAC transaction, will be satisfied.
Trust Preferred Share Issuance
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares") for gross proceeds of $100.0 million, or $96.4 million net of underwriters' discount and issuance costs.
2017 Distributions
Common shares - For the 20172021 fiscal year we declared distributions to our common shareholders totaling $1.44$2.21 per share.share, inclusive of our special cash distribution of $0.88 per share in connection with our tax reclassification.
Preferred shares - For the 20172021 fiscal year we declared distributions to our preferred shareholders totaling $1.067$1.8125 per share on our Series A Preferred Shares and $1.96875 on our Series B Preferred Shares and $1.96875 on our Series C Preferred Shares.
Subsequent Events2021 Outlook and Significant Trends
Acquisition of Foam FabricatorsCOVID-19 Update
In January 2018, we entered into an agreementMarch 2020, the World Health Organization categorized COVID-19 as a pandemic. The continued spread of COVID-19 and new variants of the virus around the world continue to acquire Foam Fabricators, Inc. (“Foam Fabricators”) for a purchase pricepresent significant risks to our business. The economic and health conditions in the United States and across most of $247.5 million (excluding working capitalthe globe have continued to change since the beginning of the pandemic and certain other adjustments upon closing). Headquartered in Scottsdale, Arizona, Foam Fabricators is a leading designer and manufacturerthe ultimate impact of custom molded protective foam solutions and OEM components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP). Founded in 1957, the Foam Fabricators operates 13 state-of-the-art molding and fabricating facilities across North America. Foam Fabricators provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, and building products. For the trailing twelve months ended November 30, 2017, Foam Fabricators reported net revenue of approximately $126 million. The acquisition of Foam Fabricators closed on February 15, 2018, with the Company funding the acquisition through a drawCOVID-19 on our 2014 Revolving Credit Facility.business is dependent on future developments, including the duration of the pandemic, the emergence of variants of the virus and the related length of its impact on the global economy, which are highly uncertain and difficult to accurately predict. The public health situation, global response measures and corresponding impacts on various markets remain fluid and uncertain. The health of our team and various stakeholders is our highest priority, and we have taken multiple steps to provide support and a safe work environment. The Company anticipates that COVID-19 will continue to impact the results of
operations, including a potential decrease in gross margins, operating income and Adjusted EBITDA at certain of Rimportsour businesses during 2022.
In January 2018,The following are two significant trends resulting from COVID-19 that we anticipate may negatively impact our Sterno business entered into an agreementoperating performance in 2022:
Global Supply Chain
The disruption in the global supply chain due to acquire Rimports, Inc. ("Rimports") for a purchase pricetransportation delays and U.S. port congestion are expected to continue in 2022 and continue to place constraints on several of approximately $145 million, excluding working capitalour businesses. Surges in demand and shifts in shopping patterns related to COVID-19, as well as other factors, have continued to strain the global supply chain network, which has resulted in carrier-imposed capacity restrictions, carrier delays, and longer lead times. U.S. ports that have been unable to keep pace with unprecedented inbound container volume, which has led to shipping and unloading backlogs. The situation has been further exacerbated by COVID-19 protocols at many port locations. Due to the backlog at the ports and other adjustments upon closing, plus a potential earn-outsupply chain disruptions, most of upour businesses are experiencing shortages in materials and products, and significant increases in freight costs. Many of our companies are relying on expensive air freight to $25 million based on future financial performance of Rimports. Rimports is a manufacturer and distributor of branded and private label scented, wickless candle products used for home decor and fragrance. Headquartered in Provo, Utah, Rimports offers an extensive line of ceramic wax warmers, scented wax cubes, essential oils and diffusers through the mass retail channel. For the trailing twelve months ended November 30, 2017, Rimports reported net revenue of $155.4 million. The acquisition of Rimports closed on February 26, 2018, with the Company funding the acquisition through a draw on our 2014 Revolving Credit Facility.
2018 Outlook
Middle market deal flow remained steady in 2017 relativeimport goods to 2016, in part due to continued attractive valuations for sellers. High valuation levels continue to be driven bymeet customer demand. We are also seeing the availability of debt capital with favorable termsraw materials, components and financialfinished goods impacted by the supply chain challenges which has led to shortages of certain materials and strategic buyers seekingled to deploy available equity capital.
We remain focusedpressure on marketing the Company’s attractive ownership and management attributes to potential sellers of middle market businesses and intermediaries.revenue growth. In addition, the closure of certain Asian manufacturing facilities as a result of a lack of COVID-19 vaccines, local government quarantine efforts and electricity shortages have impacted our ability to import products timely. Further, in the U.S., the surge in demand along with COVID-19 related government stimulus and rising hourly labor wages, are creating labor shortages and higher labor costs. We expect these cost trends to continue in 2022.
Inflationary Cost Environment
During 2021, we experienced inflationary cost increases in our materials, labor and transportation costs. We expect that these inflationary cost increases will continue but will be partially mitigated by pricing actions implemented in 2021, as well as those that we plan to pursue opportunities for add-on acquisitions by certain of our existing subsidiary companies, which canimplement in 2022. In 2022, we expect changing market conditions and continued inflationary pressures to impact consumer spending. In December 2021, the Consumer Price Index increased approximately 7% year-over-year. and with price pressures unlikely to abate and expected changes in monetary policies, consumer spending may be particularly attractive from a strategic perspective.negatively impacted in 2022.
Business Outlook
The Company anticipates that the areas of focus for 2018,2022, which are generally applicable to each of our businesses, include:
•Achieving sales growth through a combination of new product development, increasing distribution, new customer acquisitions and international expansion;
•Raising prices on our goods due to rising input costs to preserve operating margins,
•Taking market share, where possible, in each of our niche market leading companies, generally at the expense of less well capitalized competitors;
•Striving for excellence in supply chain management, manufacturing and technological capabilities;
•Continuing to pursue expense reduction and cost savings in lower margin business lines or in response to lower production volume;
•Continuing to grow through disciplined, strategic acquisitions and rigorous integration processes; and
•Driving free cash flow through increased net income and effective working capital management, enabling continued investment in our businesses, strategic acquisitions, and distributions to our shareholders.businesses.
Results of Operations
We were formed on November 18, 2005 and acquired our existing businesses (segments) as follows:
|
| | | | | | | | |
May 16, 2006 | | March 31, 2010 | | September 16, 2010 | | March 5, 2012 | | August 26, 2014 |
Advanced Circuits | | Liberty Safe | | Ergobaby | | Arnold | | Clean Earth |
|
| | | | | | |
October 10, 2014 | | July 10, 2015 | | August 31, 2016 | | June 2, 2017 |
Sterno | | Manitoba Harvest | | 5.11 | | Crosman |
Fiscal years 2017, 2016 and 2015 each represent a full year of operating results included in our consolidated results of operations for six of our businesses. We acquired Crosman in June 2017, 5.11 in August 2016, and Manitoba Harvest in July 2015. In the following results of operations, we provide (i) our actual Consolidated Results of Operations for the years ended December 31, 2017, 2016 and 2015, which includes the historical results of operations of each of our businesses (operating segments) from the date of acquisition and (ii) comparative historical results of operations for each of our businesses on a stand-alone basis (“Results of Operations – Our Businesses”), for each of the years ended December 31, 2017, 2016 and 2015, where all years presented include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable.
Consolidated Results of Operations — Compass Diversified Holdings
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Net revenues | | $ | 1,269,729 |
| | $ | 978,309 |
| | $ | 727,978 |
|
| Cost of sales | | 822,020 |
| | 651,739 |
| | 487,242 |
|
| Gross profit | | 447,709 |
| | 326,570 |
| | 240,736 |
|
| Selling, general and administrative expense | | 318,484 |
| | 217,830 |
| | 136,399 |
|
| Management fees | | 32,693 |
| | 29,406 |
| | 25,658 |
|
| Amortization of intangibles | | 52,003 |
| | 35,069 |
| | 28,761 |
|
| Impairment expense | | 17,325 |
| | 16,000 |
| | — |
|
| Loss on disposal of assets | | — |
| | 9,204 |
| | — |
|
| Operating income | | $ | 27,204 |
| | $ | 19,061 |
| | $ | 49,918 |
|
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 increased by approximately $291.4 million or 29.8% compared to the corresponding period in 2016. Crosman sales since the date of acquisition were $78.4 million, while $200.0 million of the increase reflects a full year of net sales at 5.11 in 2017 as compared to 2016. We also saw notable sales increases at Clean earth ($22.3 million, primarily due to two acquisitions in 2016 and one acquisition in 2017) and Sterno ($7.3 million, primarily due to the acquisition of Sterno Home in January 2016), offset by decreases in sales at Liberty ($11.9 million) and Manitoba Harvest ($3.6 million) in 2017 as compared to 2016. 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 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 businesses. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and, in some cases, 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 $170.3 million during the year ended December 31, 2017, compared to the corresponding period in 2016. Crosman cost of sales since the date of acquisition were $61.7 million, while 5.11 Tactical accounted for $103.5 million of the increase, reflecting a full year of ownership in 2017. The remaining amount of the increase was primarily due to add-on acquisitions made during 2016 at Clean Earth, Sterno and Ergobaby. Gross
profit as a percentage of sales was approximately 35.3% in year ended December 31, 2017 compared to 33.4% in 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
Consolidated selling, general and administrative expense increased approximately $100.7 million during the year ended December 31, 2017, compared to the corresponding period in 2016. The increase in expenses in 2017 compared to 2016 is principally the result of the acquisition of Crosman in June 2017 ($12.3 million in selling, general and administrative expenses, including $1.8 million in acquisition costs for Crosman and the add-on acquisition of Lasermax in July 2017), and a full year of ownership of 5.11 ($125.0 million in selling, general and administrative expenses in 2017 compared to $38.1 million in 2016). 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 $12.3 million in 2016 to $12.7 million in 2017, primarily due to increased professional fees associated with compliance costs.
Fees to manager
Pursuant to the Management Services Agreement, 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 year ended December 31, 2017, we incurred approximately $32.7 million in expense for these fees compared to $29.4 million for the corresponding period in 2016. The $3.3 million increase in the year ended December 31, 2017 is principally due to the increase in consolidated net assets resulting from the acquisition of Crosman in June 2017, 5.11 in August 2016, and the add-on acquisitions by our businesses that occurred throughout 2016.
Amortization expense
Amortization expense for the year ended December 31, 2017 increased $16.9 million to $52.0 million as compared to the prior year, primarily as a result of the acquisition of Crosman in June 2017 and 5.11 in August 2016.
Impairment expense
Manitoba Harvest performed an interim impairment test of goodwill and its indefinite lived trade name in the fourth quarter of 2017, which resulted in the recording of preliminary impairment expense of $8.5 million. $6.2 million of the impairment expense related to goodwill, and $2.3 million of the impairment expense related to the Manitoba Harvest trade name. We expect to finalize the impairment test in the first quarter of 2018.
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 as of December 31, 2016. 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.
Year ended December 31, 2016 compared to the Year ended December 31, 2015
Net sales
On a consolidated basis, net sales for the year ended December 31, 2016 increased by approximately $250.3 million or 34.4% compared to the corresponding period in 2015. 5.11 sales since the date of acquisition were $109.8 million, while $41.9 million of the increase reflects a full year of net sales at Manitoba Harvest in 2016 as compared to 2015. The remaining amount of the increase was primarily due to add-on acquisitions made during 2016, specifically the Ergobaby acquisition of Baby Tula in May 2016 ($16.3 million in net sales from date of acquisition), and the Sterno acquisition of Sterno Home in January 2016 ($77.9 million in Sterno Home sales from the date of acquisition). 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 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 businesses. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and, in some cases, 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 $164.5 million during the year ended December 31, 2016, compared to the corresponding period in 2015. 5.11 cost of sales since the date of acquisition were $78.8 million, while $20.9 million of the increase reflects a full year of cost of sales at Manitoba Harvest in 2016 as compared to 2015. The remaining amount of the increase was primarily due to add-on acquisitions made during 2016, specifically the Ergobaby acquisition of Baby Tula in May 2016 ($4.7 million in cost of sales from date of acquisition), and the Sterno acquisition of Sterno Home in January 2016 ($58.1 million in net sales from the date of acquisition). Gross profit as a percentage of sales
was approximately 35.3% in the year ended December 31, 2016 compared to 33.1% in 2015. 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 $81.4 million during the year ended December 31, 2016, compared to the corresponding period in 2015. The increase in expenses in 2016 compared to 2015 is principally the result of the acquisition of 5.11 in August 2016 ($38.1 million in selling, general and administrative expenses, including $2.1 million in acquisition costs), a full year of expense related to our 2015 acquisition, Manitoba Harvest, ($11.5 million), and the add on acquisitions of Baby Tula by Ergobaby and Sterno Home by Sterno ($3.9 million and $18.6 million, respectively, in selling, general and administrative expense). 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 $10.6 million in 2015 to $12.3 million in 2016.
Fees to manager
Pursuant to the Management Services Agreement, 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 year ended December 31, 2016, we incurred approximately $32.7 million in expense for these fees compared to $25.7 million for the corresponding period in 2015. The $3.7 million increase in the year ended December 31, 2016 is principally due to the increase in consolidated net assets resulting from the acquisition of 5.11 in August 2016, and the add-on acquisitions by our businesses that occurred throughout 2016.
Amortization expense
Amortization expense increased $6.3 million, from $25.7 million for the year ended December 31, 2015 to $35.1 million for the year ended December 31, 2016. The increase primarily relates to our acquisition of 5.11 in August 2016 ($2.8 million), a full year of amortization at Manitoba Harvest in 2016, and the amortization of intangible assets for the 2016 add-on acquisitions.
Impairment expense
The Company performed interim goodwill impairment testing on the three reporting units of Arnold as of December 31, 2016. The results of the impairment test (Step 1) indicated that the goodwill associated with the PMAG reporting unit was impaired. The Company developed an estimated range of the potential goodwill impairment at PMAG of between $14 million and $19 million, and recorded impairment expense of $16 million at December 31, 2016. The result of the Step 2 analysis was completed during the first quarter of 2017, resulting in additional impairment expense of $8.9 million.
Loss on disposal of assets
Both the Ergobaby and Clean Earth businesses recognized losses on disposal of assets during 2016. Ergobaby recorded a $5.9 million loss on disposal of assets during the year ended December 31, 2016 related to its decision to dispose of the Orbit Baby product line. The loss is 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. In October 2016, Ergobaby sold a majority of the Orbit Baby intellectual property and tooling assets. The proceeds of the sale reduced the loss recorded on disposal of assets by approximately $1.0 million in the fourth quarter of 2016. Clean Earth recognized a loss on disposal of assets of $0.0 million during the fourth quarter of 2016 related to the closure of the Company’s Williamsport, Pennsylvania site which processed drill cuttings. The loss was comprised of intangible assets specific to the Williamsport location, as well as equipment that could not be repurposed to other sites at the time of the closing of the facility.
Results of Operations — Our Businesses
As previously discussed, we acquired our businesses on various acquisition dates beginning May 16, 2006. As a result, our consolidated operating results only include the results of operations since the acquisition date associated with each of our businesses in accordance with generally accepted accounting principles in the United States ("GAAP"). The following discussion reflects a comparison of the historical results of operations for each of our businesses (segments) for the complete fiscal years ending December 31, 2017, 2016 and 2015. For Crosman, which we acquired in June 2017, the following discussion reflects comparative pro forma results as if we had acquired the business on January 1, 2016. For 5.11, which we acquired in August 2016, the following discussion reflects the historical results of operations for the fiscal year ended December 31, 2017, and the comparative pro forma results of operations for the fiscal years ended December 31, 2016 and 2015 as if we had acquired the business on January 1, 2015. For Manitoba Harvest, which was acquired in July 2015, the following discussion reflects the historical operations for the years ended December 31, 2017 and 2016, and comparative pro forma results of operation for the fiscal year ending December 31, 2015 as if we had acquired the business January 1, 2015. Where appropriate, relevant pro forma adjustments are reflected as part of the historical operating results. We believe
this presentation enhances the discussion and provides a more meaningful comparison of operating results. The following operating results of our businesses are not necessarily indicative of the results to be expected for a full year, going forward.
We categorize the businesses we own into two separate groups of businesses (i) branded consumer businesses, and (ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we believe capitalize on a valuable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in their particular category. Niche industrial businesses are characterized as those businesses that focus on manufacturing and selling particular products or services within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector.
Branded Consumer Businesses
5.11
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 year ended December 31, 2017, and (ii) comparative results of operations for 5.11 for the years ended December 31, 2016 and 2015, as if we had acquired the business on January 1, 2015, including relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable.
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| (in thousands) | | | | (Pro forma) | | (Pro forma) |
| Net sales | | $ | 309,999 |
| | $ | 295,256 |
| | $ | 284,471 |
|
Cost of sales (1) | | 182,291 |
| | 182,456 |
| | 161,785 |
|
| Gross profit | | 127,708 |
| | 112,800 |
| | 122,686 |
|
Selling, general and administrative expenses (2) | | 124,970 |
| | 107,149 |
| | 97,953 |
|
Management fees (3) | | 1,000 |
| | 1,000 |
| | 1,000 |
|
Amortization of intangibles (4) | | 8,859 |
| | 8,503 |
| | 8,189 |
|
| (Loss) income from operations | | $ | (7,121 | ) | | $ | (3,852 | ) | | $ | 15,544 |
|
Pro forma results of operations for 5.11 for the annual periods ended December 31, 2016 and 2015 include the following pro forma adjustments applied to historical results:
(1)Cost of sales was decreased by $0.1 million and $0.2 million, for the years ended December 31, 2016 and 2015, respectively, to reflect the increase in the depreciable lives for machinery and equipment.
(2) Selling, general and administrative expenses were increased by approximately $0.9 million and $1.1 million in the years ended December 31, 2016 and 2015, respectively, as a result of stock compensation expense related to stock options that have been granted to 5.11 employees as a result of the acquisition.
(3) Represents management fees that would have been payable to the Manager in each period presented.
(4) Represents amortization of intangible assets for the years ended December 31, 2016 and 2015, respectively, for amortization expense associated with the allocation of the fair value of intangible assets resulting from the final purchase price allocation in connection with our acquisition.
Year ended December 31, 2017 compared to the Pro Forma Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were $310.0 million, an increase of $14.7 million, or 5.0%, compared to the same period in 2016. This increase is due primarily to an $8.2 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 $16.3 million, or 50%, driven by growing demand in direct to consumer channels. Retail sales grew largely due to seventeen new retail store openings in 2017 (bringing the total store count to 27 as of December 31, 2017). The consumer wholesale channel experienced a $4.6 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. Upon reopening the warehouse on October 9, 2017, 5.11 encountered shipping challenges due to the ERP system not functioning as designed. This resulted in lost orders and an order backlog that reached over $20.0 million as of December 31, 2017. This backlog carried forward and will ship in January and February of 2018 as 5.11 has resolved most of its ERP system challenges and has resumed normal shipping operations.
Cost of sales
Cost of sales for the year ended December 31, 2017 were $182.3 million compared to $182.5 million for the year ended December 31, 2016. Gross profit as a percentage of sales increased from 38.2% in the year ended December 31, 2016 to 41.2% in the year ended December 31, 2017. Cost of sales for the year ended December 31, 2017 includes $21.7 million in expense related to a $39.1 million inventory step-up resulting from the acquisition purchase price allocation, while cost of sales for the year ended December 31, 2016 includes $17.4 million in expense related to the 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. Excluding the effect of the expense associated with the inventory step-up in both periods, gross profit as a percentage of sales increased 420 basis points to 48.2% for the year ended December 31, 2017 compared to 44.0% for the year ended December 31, 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 expenses
Selling, general and administrative expenses for the year ended December 31, 2017 increased to $125.0 million or 40.3% of net sales compared to $107.1 million or 36.3% of net sales in the same period in 2016. This increase in selling, general and administrative expenses was primarily attributable to seventeen 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 ($1.2 million in 2016 compared to $2.3 million in 2017).
Loss from operations
Loss from operations for the year ended December 31, 2017 was $7.1 million, a decrease of $3.3 million when compared to the same period in 2016, primarily due to the amortization of the inventory step-up resulting from the purchase price allocation, as well as the other factors noted above.
Pro Forma Year ended December 31, 2016 compared to Pro Forma Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were $295.3 million, an increase of $10.8 million, or 3.8%, compared to the same period in 2015. Base revenues, which are considered all revenues outside of direct-to-agency business, increased $15.8 million, or 6% over the comparable period. This increase was driven primarily by growing demand in the consumer wholesale channel, which increased 11% due to strong sell-through in the outdoor and sporting goods accounts. Retail and e-commerce revenues grew 131% and 20%, respectively. Retail revenues grew due to six new store openings since January 2015 (bringing the total store count to ten as of December 31, 2016), and a comparable store sales increase of 16%. Direct-to-agency sales decreased $5.7 million in fiscal year 2016 compared to 2015, primarily as a result of a significant contract that shipped in the third quarter of 2015 but did not recur in 2016.
Cost of sales
Cost of sales for the year ended December 31, 2016 were $182.5 million compared to $161.8 million for the year ended December 31, 2015. Gross profit as a percentage of sales decreased from 43.1% in the year ended December 31, 2015 to 38.2% in the year ended December 31, 2016. Cost of sales for the year ended December 31, 2016 includes $17.4 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 will be expensed to cost of goods sold over the expected turns of 5.11's inventory, with the remaining amount of $21.7 million at December 31, 2016 recognized during the first half of 2017. Excluding the
effect of $17.4 million of expense associated with the inventory step-up, gross profit as a percentage of sales increased from 43.1% for the year ended December 31, 2015 to 44.1% for the year ended December 31, 2016. The gross profit as a percentage of sales increased 100 bps due to lower discounts and promotional activity and a larger proportion of revenues from the higher margin retail and e-commerce distribution channels as compared to the prior year period. During the year ended December 31, 2015, 5.11 incurred unusually high levels of discounts and promotional activity caused by the West Coast Port slowdown. These unusually high levels of discounts and promotional activity did not recur in the year ended December 31, 2016.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2016 increased to $107.1 million or 36.3% of net sales compared to $98.0 million or 34.4% of net sales in the same period in 2015. This increase in selling, general and administrative expenses was primarily attributable to increases in employee related costs including wage increases and slightly increased staffing levels, as well as six new retail stores that were not open in the prior year comparable period. Selling, general and administrative expense for the year ended December 31, 2016 also includes $1.2 million in integration fees paid to CGM and $2.1 million in one-time buyer transaction costs incurred in August 2016 related to the 5.11 acquisition by the Company.
(Loss) income from operations
Loss from operations for the year ended December 31, 2016 was $3.9 million, a decrease of $19.4 million when compared to the same period in 2015, primarily due to the amortization of the inventory step-up resulting from the purchase price allocation, transaction related costs resulting from the acquisition, as well as the other factors noted 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 comparative results of operations for Crosman for the years ended December 31, 2017 and 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.
|
| | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 |
| (in thousands) | | (Pro forma) | | (Pro forma) |
| Net sales | | $ | 120,033 |
| | $ | 118,736 |
|
Cost of sales (1) | | 92,392 |
| | 87,009 |
|
| Gross profit | | 27,641 |
| | 31,727 |
|
Selling, general and administrative expenses (2) | | 18,636 |
| | 15,660 |
|
Management fees (3) | | 500 |
| | 500 |
|
Amortization of intangibles (4) | | 4,749 |
| | 4,658 |
|
| Income from operations | | $ | 3,756 |
| | $ | 10,909 |
|
Pro forma results of operations of Crosman for the years ended December 31, 2017 and December 31, 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 year ended December 31, 2017, and $0.6 million for the year ended December 31, 2016, to reflect the increase in the depreciable lives for machinery and equipment.
(2) Selling, general and administrative expense was increased by $0.4 million for the year ended December 31, 2017, and $0.8 million for the year ended December 31, 2016, to reflect stock compensation expense related to profit interests that have been granted to Crosman employees as a result of the acquisition.
(3) Represents management fees that would have been payable to the Manager in the years ended December 31, 2017 and 2016.
(4)Represents amortization of intangible assets in the years ended December 31, 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.
Pro Forma Year ended December 31, 2017 compared to the Pro Forma Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were $120.0 million compared to net sales of $118.7 million for the year ended December 31, 2016, an increase of $1.3 million or 1.1%. The increase in net sales for the year ended December 31, 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 year ended December 31, 2017 were $92.4 million, an increase of $5.4 million as compared to the comparable period in 2016. Cost of sales for the year ended December 31, 2017 includes $3.3 million in expense related to the inventory step-up resulting from the purchase price allocation for Crosman. Excluding the effect of the inventory step-up, gross profit as a percentage of sales was 25.8% for the year ended December 31, 2017 as compared to 26.7% for the year ended December 31, 2016 due to the mix of products sold during the two periods.
Selling general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2017 was $18.6 million, or 15.5% of net sales compared to $15.7 million, or 13.2% of net sales, for the year ended December 31, 2016. Selling, general and administrative expense for the year ended December 31, 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 $0.7 million in integration services fees paid or 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 year ended December 31, 2017 was $3.8 million, a decrease of $7.2 million when compared to income from operations of $10.9 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. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives approximately 61% of its sales from outside of the United States.
On November 18, 2011, Ergobaby acquired Orbit Baby for approximately $17.5 million. Orbit Baby produced and marketed a luxury line of strollers and car seats that utilized a patented hub ring to allow parents to easily move car seats from car seat bases to stroller frames in an instant without the need for any additional components. During the second quarter of 2016, Ergobaby's board of directors approved a plan to dispose of the Orbit Baby product line and in the fourth quarter of 2016, most of the Orbit Baby tooling and intellectual property was sold to Orbit Baby’s Korean distributor. Ergobaby recognized a net loss on the disposal of the Orbit Baby assets of $5.9 million during 2016.
On May 12, 2016, Ergobaby acquired membership interests of 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. The results of operations of Baby Tula are included from the date of acquisition.
Results of Operations
The table below summarizes the results of operations for Ergobaby for the fiscal years ended December 31, 2017, 2016 and 2015.
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Net sales | | $ | 102,969 |
| | $ | 103,348 |
| | $ | 86,506 |
|
| Cost of sales | | 34,024 |
| | 39,962 |
| | 30,070 |
|
| Gross profit | | 68,945 |
| | 63,386 |
| | 56,436 |
|
| Selling, general and administrative expenses | | 33,359 |
| | 37,703 |
| | 31,296 |
|
| Management fees | | 500 |
| | 500 |
| | 500 |
|
| Amortization of intangibles | | 10,583 |
| | 2,133 |
| | 2,483 |
|
| Loss on disposal of assets | | — |
| | 5,899 |
| | — |
|
| Income from operations | | $ | 24,503 |
| | $ | 17,151 |
| | $ | 22,157 |
|
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were $103.0 million, a decrease of $0.4 million or 0.4% compared to the same period in 2016. Net sales from Baby Tula for the year ended December 31, 2017 were $22.4 million, compared to $16.3 million in sales in the post-May acquisition period in 2016. During the year ended December 31, 2017, international sales were approximately $62.6 million, representing an increase of $5.2 million over the corresponding period in 2016. International sales of baby carriers and accessories increased by approximately $7.2 million and international sales of infant travel systems decreased by approximately $1.4 million during the year ended December 31, 2017 as compared to the comparable period in 2016. BabyTula international sales during the year ended December 31, 2017 increased $3.3 million from the corresponding period in 2016. Domestic sales were $40.4 million during the year ended December 31, 2017, reflecting a decrease of $6.4 million compared to the corresponding period in 2016. The decrease in domestic sales is attributable to a $6.1 million decrease in domestic infant travel systems and accessories sales, a $2.1 million decrease in sales of Ergo branded baby carrier and accessories to national and specialty retail accounts, partially offset by a $1.8 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 2017, as well as the bankruptcy of a large national retailer. The decrease in infant travel systems and accessories sales was primarily attributable to exiting the Orbit Baby business during 2016. Baby carriers, sleep products and accessories represented 100% of sales in 2017 compared to 93% in 2016.
Cost of sales
Cost of sales was approximately $34.0 million for the year ended December 31, 2017 as compared to $40.0 million for the year ended December 31, 2016, a decrease of $5.9 million. Cost of sales for the year ended December 31, 2016 included expense of $4.7 million related to the inventory step-up at Baby Tula resulting from the purchase price allocation. Gross profit as a percentage of sales was 67.0% for the year ended December 31, 2017 compared to 61.3% for the same period in 2016. Excluding the step-up in inventory at Baby Tula 2016, gross margin would have been 66.0% in the prior year.
Selling, general and administrative expenses
Selling, general and administrative expense for the year ended December 31, 2017 decreased to approximately $33.4 million or 32.4% of net sales compared to $37.7 million or 36.5% of net sales for the same period of 2016. The $4.3 million decrease in the year ended December 31, 2017 compared to the same period in 2016 was primarily attributable to the reversal of the fair value of the contingent consideration related to Ergobaby's acquisition of Baby Tula. The contingent consideration related to the acquisition of Baby Tula had a fair value of $3.8 million and was reversed as of December 31, 2017, when the metrics related to the earnout were not met. The decrease in expense was also due to 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 $8.5 million for the year ended December 31, 2017 as compared to the year ended December 31, 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 $5.9 million loss on disposal of assets during the year ended December 31, 2016 related to its decision to dispose of the Orbit Baby product line. The loss is 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. In October 2016, Ergobaby sold a majority of the Orbit Baby intellectual property and tooling assets. The proceeds of the sale reduced the loss recorded on disposal of assets by approximately $1.0 million in the fourth quarter of 2016.
Income from operations
Income from operations for the year ended December 31, 2017 increased $7.4 million, to $24.5 million, compared to $17.2 million for the same period of 2016, primarily as a result of the factors described above, and the prior year loss on disposal of assets.
Year ended December 31, 2016 compared to the Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were $103.3 million, an increase of $16.8 million or 19.5% compared to the same period in 2015. Net sales for Baby Tula subsequent to the acquisition were $16.3 million. During the year ended December 31, 2016, international sales were approximately $57.4 million, representing an increase of $9.2 million over the corresponding period in 2015. International sales of baby carriers, accessories and product adjacencies (sleep and nursing) increased by approximately $10.7 million and international sales of infant travel systems decreased by approximately $1.5 million during the year ended December 31, 2016 as compared to the year ended December 31, 2015. Baby Tula international sales represent an increase of $5.2 million. During 2016, Ergobaby moved to a direct sales model from a distributor model in Canada, the United Kingdom and Switzerland, which negatively impacted the year-over-year international sales comparison. Domestic sales were $45.9 million during the year ended December 31, 2016, reflecting an increase of $7.7 million compared to the corresponding period in 2015. Domestic sales of baby carriers, accessories and product adjacencies (sleep and nursing) increased $10.3 million and domestic sales of infant travel systems and accessories decreased $2.6 million during the year ended December 31, 2016 compared to the same period in 2015. Baby Tula domestic sales represent an increase of $11.1 million. The decrease in domestic infant travel systems and accessories was primarily attributable to lower demand of travel systems and the decision to exit the Orbit Baby brand. Baby carriers, accessories and product adjacencies (sleep and nursing) represented 93% of sales in the year ended December 31, 2016 compared to 87% in the same period in 2015.
Cost of sales
Cost of sales was approximately $40.0 million for the year ended December 31, 2016 as compared to $30.1 million for the year ended December 31, 2015. Cost of sales for Baby Tula were approximately $10.1 million, and includes $4.7 million in expense associated with the inventory step-up recorded in connection with the purchase price allocation for Baby Tula. The increase in cost of sales was primarily attributable to higher sales compared to the prior period. Gross profit as a percentage of sales was 61.3% for the year ended December 31, 2016 compared to 65.2% for the same period in 2015. Excluding the impact of the inventory step-up expense on cost of sales, gross profit as a percentage of sales was 65.9% for the year ended December 31, 2016.
Selling, general and administrative expenses
Selling, general and administrative expense for the year ended December 31, 2016 increased to approximately $37.7 million or 36.5% of net sales compared to $31.3 million or 36.2% of net sales for the same period of 2015. The $6.4 million increase in the year ended December 31, 2016 compared to the same period in 2015 was primarily attributable to the acquisition costs and additional selling, general and administrative expenses related to Baby Tula, higher marketing spend, increases in employee related costs due to increased staffing levels, and increased legal fees, partially offset by decreased variable expenses, such as distribution and fulfillment and commissions.
Loss on disposal of assets
Ergobaby recorded a $5.9 million loss on disposal of assets during the year ended December 31, 2016 related to its decision to dispose of the Orbit Baby product line. The loss is 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. In October 2016, Ergobaby sold a majority of the Orbit Baby intellectual property and tooling assets. The proceeds of the sale reduced the loss recorded on disposal of assets by approximately $1.0 million in the fourth quarter of 2016.
Income from operations
Income from operations for the year ended December 31, 2016 decreased $5.0 million, to $17.2 million, compared to $22.2 million for the same period of 2015, primarily as a result of the loss on disposal of assets.
Liberty Safe
Overview
Based in Payson, Utah and founded in 1988, Liberty Safe is the premier designer, manufacturer and marketer of home, office and gun safes in North America. From its over 314,000 square foot manufacturing facility, Liberty Safe produces a wide range of home, office 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 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 Safe has the largest independent dealer network in the industry, with more than 50% of Liberty's sales in the last two years coming from the Dealer network.
Results of Operations
The table below summarizes the results of operations for Liberty Safe for the full fiscal years ended December 31, 2017, and 2016 and 2015.
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Net sales | | $ | 91,956 |
| | $ | 103,812 |
| | $ | 101,146 |
|
| Cost of sales | | 66,311 |
| | 74,305 |
| | 73,935 |
|
| Gross profit | | 25,645 |
| | 29,507 |
| | 27,211 |
|
| Selling, general and administrative expenses | | 15,361 |
| | 14,737 |
| | 13,081 |
|
| Management fees | | 500 |
| | 500 |
| | 500 |
|
| Amortization of intangibles | | 309 |
| | 1,036 |
| | 1,772 |
|
| Income from operations | | $ | 9,475 |
| | $ | 13,234 |
| | $ | 11,858 |
|
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 decreased approximately $11.9 million or 11.4%, to $92.0 million, compared to the corresponding period ended December 31, 2016. Non-Dealer sales were approximately $42.3 million in 2017 compared to $52.5 million in 2016, representing a decrease of $10.2 million or 19.4%. Dealer sales totaled approximately $49.5 million in the year ended December 31, 2017 compared to $51.3 million in the same period in 2016, representing a decrease of $1.8 million or 3.5%. The decrease in sales is attributable to lower overall market demand during the current year as compared to 2016, when uncertainty surrounding the 2016 domestic elections and regulatory environment led to an increased level of demand for safes. The non-dealer channel also saw a decrease in sales due to the bankruptcy of a large outdoor retailer in the first quarter of 2017. Liberty Safe’s sales backlog was approximately $6.2 million at December 31, 2017 compared to approximately $8.4 million at December 31, 2016.
Cost of sales
Cost of sales for the year ended December 31, 2017 decreased approximately $8.0 million when compared to the same period in 2016. Gross profit as a percentage of net sales totaled approximately 27.9% in 2017 compared to 28.4% in 2016. The decrease in gross profit as a percentage of sales during the year ended December 31, 2017 compared to the same period in 2016 is attributable primarily to higher material costs related to the cost of steel, which is Liberty's primary raw material, partially offset by gains in manufacturing efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2017 increased to approximately $15.4 million or 16.7% of net sales compared to $14.7 million or 14.2% of net sales for the same period of 2016. The $0.6 million increase is primarily attributable to a $1.9 million reserve established against the outstanding accounts receivable of a retail customer that filed for bankruptcy in the first quarter of 2017, offset by a reduction in administrative expenses.
Income from operations
Income from operations decreased $3.8 million during the year ended December 31, 2017 to $9.5 million compared to income from operations of $13.2 million during the same period in 2016, principally as a result of the decrease in sales and gross profit in 2017, as described above.
Year ended December 31, 2016 compared to the Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 increased approximately $2.7 million or 2.6%, to $103.8 million, compared to the corresponding period ended December 31, 2015. Non-Dealer sales were approximately $52.5 million in 2016 compared to $55.2 million in 2015, representing a decrease of $2.7 million or 5.0%. Dealer sales totaled approximately $51.3 million in the year ended December 31, 2016 compared to $45.9 million in the same period in 2015, representing an increase of $5.4 million or 11.8 %. The increase in sales is attributable to good overall market demand during the year, particularly in the first quarter of 2016, and Liberty’s increased ability to meet that demand with pre-built inventory and increased production capacity. 2016 also saw significant growth in Liberty's handgun vault business. Liberty Safe’s sales backlog was approximately $8.4 million at December 31, 2016 compared to approximately $7.1 million at December 31, 2015.
Cost of sales
Cost of sales for the year ended December 31, 2016 increased approximately $0.4 million when compared to the same period in 2015. Gross profit as a percentage of net sales totaled approximately 28.4% in 2016 compared to 26.9% in 2015. The increase in gross profit as a percentage of sales during the year ended December 31, 2016 compared to the same period in 2015 is attributable primarily to favorable material costs related to the cost of steel, which is Liberty's primary raw material.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2016 increased to approximately $14.7 million or 14.2% of net sales compared to $13.1 million or 12.9% of net sales for the same period of 2015. The $1.7 million increase is primarily attributable to increased spending on radio and other advertising media, higher sales commission expense, and additional expenses related to accelerated vesting of employee stock options and legal fees associated with the recapitalization of Liberty in March 2016.
Income from operations
Income from operations increased $1.4 million during the year ended December 31, 2016 to $13.2 million compared to income from operations of $11.9 million during the same period in 2015, principally as a result of the increase in sales and gross profit, as described above.
Manitoba Harvest
Overview
Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and leader in branded, hemp-based foods. 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 U.S. and Canada. The Company’s hemp-exclusive, consumer-facing 100% all-natural product lineup includes hemp hearts, protein powder, hemp oil and snacks.
We made loans to and purchased a controlling interest in Manitoba Harvest for approximately $102.7 million in July 2015 representing approximately 87% of the equity in Manitoba Harvest. On December 15, 2015, Manitoba Harvest acquired all of the outstanding stock of Hemp Oil Canada Inc. (“HOCI”) for approximately $32.7 million. HOCI is a wholesale supplier and a private label packager of hemp food products and ingredients.
Results of Operations
The table below summarizes the results of operations for Manitoba Harvest for the years ended December 31, 2017 and 2016, and the pro forma results of operations for Manitoba Harvest for the full fiscal year ended December 31, 2015.
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| (in thousands) | | | | | | (Pro forma) |
| Net sales | | $ | 55,699 |
| | $ | 59,323 |
| | $ | 40,586 |
|
| Cost of sales | | 30,598 |
| | 32,818 |
| | 20,268 |
|
| Gross profit | | 25,101 |
| | 26,505 |
| | 20,318 |
|
Selling, general and administrative expense (1) | | 21,092 |
| | 21,326 |
| | 19,425 |
|
Fees to manager (2) | | 350 |
| | 350 |
| | 350 |
|
Amortization of intangibles (3) | | 4,530 |
| | 4,508 |
| | 3,676 |
|
| Impairment expense | | 8,461 |
| | — |
| | — |
|
| Income (loss) from operations | | $ | (9,332 | ) | | $ | 321 |
| | $ | (3,133 | ) |
Pro forma results of operations of Manitoba Harvest for the year ended December 31, 2015 include the following pro forma adjustments, applied to historical results as if we had acquired Manitoba Harvest January 1, 2015:
(1) Selling, general and administrative expenses were increased by $0.6 million in the year ended December 31, 2015 to reflect stock compensation expense for stock options granted to Manitoba Harvest employees as of the date of acquisition.
(2) Represents Management fees that would have been payable to the Manager in each of the periods presented.
(3) Represents an increase in amortization expense totaling approximately $2.0 million in the year ended December 31, 2015 for amortization expense associated with the allocation of the purchase price for Manitoba Harvest to definite lived intangible assets.
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were approximately $55.7 million, a decrease of $3.6 million, or 6.1%, compared to the same period in 2016. Manitoba Harvest experienced declines in bulk hemp seed ingredient sales to international markets in the current year, which 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 year ended December 31, 2017 were approximately $30.6 million compared to approximately $32.8 million for the year ended December 31, 2016. Gross profit as a percentage of sales increased to 45.1% for the year ended December 31, 2017 from 44.7% for the year ended December 31, 2016, primarily due to the decrease in sales of ingredients, which have historically had lower margins than the branded Manitoba Harvest products. Gross profit margins in our branded business increased 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 year ended December 31, 2017 decreased to approximately $21.1 million or 37.9% of net sales compared to $21.3 million or 35.9% of net sales for the same period of 2016. The $0.2 million decrease in 2017 compared to 2016 is primarily due to lower customer shipping costs, and more efficient field selling operations.
Impairment expense
Manitoba Harvest performed an interim impairment test of goodwill and its indefinite lived trade name in the fourth quarter of 2017, which resulted in the recording of preliminary impairment expense of $8.5 million. $6.2 million of the impairment expense related to goodwill, and $2.3 million of the impairment expense related to the Manitoba Harvest trade name. We expect to finalize the impairment test in the first quarter of 2018.
Income (loss) from operations
Loss from operations for the year ended December 31, 2017 was approximately $9.3 million, as compared to income of $0.3 million for the same period in 2016, based on the factors described above.
Year ended December 31, 2016 compared to the Pro forma Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were approximately $59.3 million, an increase of $18.7 million, or 46.2%, compared to the same period in 2015. Net sales of HOCI for the year ended December 31, 2016 were $20.7 million. Manitoba Harvest on a stand-alone basis had a decrease in net sales of $2.2 million, or an increase of $0.9 million on a constant currency basis, primarily due to a shift in product sales mix, increases in sales discounts and promotion expenses, the lack of availability of organic hemp seed during most of 2016, and a decrease in private label sales for the first quarter of 2016 versus the comparable prior year period. In the first quarter of 2015, one of Manitoba Harvest's private label customers expanded distribution into additional stores, resulting in a higher level of private label sales versus the current period.
Cost of sales
Cost of sales for the year ended December 31, 2016 were approximately $32.8 million compared to approximately $20.3 million for the year ended December 31, 2015. Gross profit as a percentage of sales decreased to 44.7% for the year ended December 31, 2016 from 50.1% for the year ended December 31, 2015, primarily as a result of the gross margins at HOCI, which are historically lower since HOCI is a wholesale provider of ingredients. After removing the effect of HOCI from gross margins, Manitoba Harvest's gross margin at 45.7% is down 4% compared to the prior year, primarily as a result of the lack of availability of organic hemp seed, which has higher gross margins, sales deduction, additional reserves recorded for slow moving inventory, and higher discounts and promotions expense in the current year as compared to 2015.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2016 increased to approximately $21.3 million or 35.9% of net sales compared to $19.4 million or 47.9% of net sales for the same period of 2015. The $1.9 million increase in 2016 compared to 2015 is primarily due to additional selling and administrative expenses attributable to HOCI ($2.0 million), increases in employee related costs due to increased headcount, and higher expenses to support retail advertising, product demonstrations, marketing expenditures, as well as costs associated with the integration of HOCI post-acquisition. The 2015 costs include one-time buyer transaction costs incurred in July 2015 related to the acquisition of Manitoba Harvest, and December 2015 related to the acquisition of HOCI ($1.5 million).
Income (loss) from operations
Income from operations for the year ended December 31, 2016 was approximately $0.3 million, as compared to a loss of $3.1 million for the same period in 2015, 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 PCBs to customers throughout the United States. Historically, small-run and quick-turn PCBs have represented approximately 50% to 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 statement of operations for Advanced Circuits for the fiscal years ending December 31, 2017, 2016 and 2015.
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Net sales | | $ | 87,782 |
| | $ | 86,041 |
| | $ | 87,532 |
|
| Cost of sales | | 47,898 |
| | 47,997 |
| | 48,201 |
|
| Gross profit | | 39,884 |
| | 38,044 |
| | 39,331 |
|
| Selling, general and administrative expenses | | 14,565 |
| | 13,579 |
| | 13,636 |
|
| Management fees | | 500 |
| | 500 |
| | 500 |
|
| Amortization of intangibles | | 1,244 |
| | 1,247 |
| | 1,051 |
|
| Income from operations | | $ | 23,575 |
| | $ | 22,718 |
| | $ | 24,144 |
|
Year ended December 31, 2017 compared to Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were approximately $87.8 million compared to approximately $86.0 million for the same period in 2016, an increase of approximately $1.7 million or 2.0%. The increase in net sales during the year ended December 31, 2017 was due to increased sales in Quick-Turn Production PCBs by approximately $1.5 million, Long-Lead Time PCBs by approximately $0.5 million, Subcontract by approximately $0.6 million, and a decrease in promotions by approximately $0.4 million. This was partially offset by decreases in Assembly by approximately $0.3 million and Quick-Turn Small-Run PCBs by approximately $1.0 million. On a consolidated basis, Quick-Turn Small-Run PCBs comprised approximately 20.4% of gross sales and Quick-Turn Production PCBs represented approximately 33.0% of gross sales for the twelve months ended December 31, 2017. Quick-Turn Small-Run PCBs comprised approximately 21.8% of gross sales and Quick-Turn Production PCBs represented approximately 31.8% of gross sales for the twelve months ended December 31, 2016.
Cost of sales
Cost of sales for the year ended December 31, 2017 decreased approximately $0.1 million compared to the comparable period in 2016. Gross profit as a percentage of sales increased 120 basis points during the year ended December 31, 2017 (45.4% in 2017 compared to 44.2% in 2016) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expenses were approximately $14.6 million in the year ended December 31, 2017 as compared to $13.6 million in the year ended December 31, 2016, an increase of approximately $1.0 million. The increase in selling, general and administrative expense is primarily due to growth within financial, sales, and production management in the current year. Selling, general and administrative expenses represented 16.6% of net sales for the year ended December 31, 2017 compared to 15.8% of net sales in 2016.
Income from operations
Income from operations for the year ended December 31, 2017 was approximately $23.6 million compared to $22.7 million in the same period in 2016, an increase of approximately $0.9 million, as a result of the factors described above.
Year ended December 31, 2016 compared to Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were approximately $86.0 million compared to approximately $87.5 million for the same period in 2015, a decrease of approximately $1.5 million or 1.7%. The decrease in net sales was due to decreased sales in Long-Lead Time PCBs by approximately $3.5 million, and Quick-Turn Small-Run PCBs by approximately $1.0 million. This was partially offset by increases in Quick-Turn Production PCBs sales by approximately $0.3 million, Assembly sales by approximately $2.0 million, Subcontract sales by approximately $0.6 million, and decreased promotion expense by approximately $0.1 million. On a consolidated basis, Quick-Turn Small-Run comprised approximately 21.8% of gross sales and Quick-Turn Production PCBs represented approximately 31.8% of gross sales for the twelve months ended December 31, 2016. Quick-Turn Small-Run comprised approximately 22.5% of gross sales and Quick-Turn Production PCBs represented approximately 31.0% of gross sales for the twelve months ended December 31, 2015.
Cost of sales
Cost of sales for the year ended December 31, 2016 decreased approximately $0.2 million compared to the comparable period in 2015. Gross profit as a percentage of sales decreased 70 basis points during the year ended December 31, 2016 (44.2% in 2016 compared to 44.9% in 2015) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expenses were approximately $13.6 million in both the year ended December 31, 2016 and 2015. Selling, general and administrative expenses represented 15.8% of net sales for the year ended December 31, 2016 compared to 15.6% of net sales in 2015.
Income from operations
Income from operations for the year ended December 31, 2016 was approximately $22.7 million compared to $24.1 million in the same period in 2015, a decrease of approximately $1.4 million, as a result of the factors described above.
Arnold
Overview
Headquartered in Rochester, New York, Arnold serves a variety of markets including aerospace and defense, motorsport/ automotive, oil and gas, medical, general industrial, energy, reprographics and advertising specialties. Over the course of 100+ years, Arnold has successfully evolved and adapted our products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold has expanded globally and built strong relationships with our customers worldwide. As a result, Arnold has led the way in our chosen industries with new materials and solutions that empower our customers to develop next generation technologies. Arnold is the largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems. Arnold is one of two domestic producers to design, engineer and manufacture rare earth magnetic solutions. Arnold serves customers and generates revenues via three business units:
PMAG - Permanent Magnet and Assemblies Group- Arnold’s high performance permanent magnets have a wide variety of applications, from electric motors on military ships, military and commercial aircraft, and motorsport to pump couplings, batteries, solar panels and NMR Equipment.
Precision Thin Metals - Produces thin and ultra-thin alloys that improve the power density of motors, transformers, batteries and many other applications in automotive, aerospace, energy exploration, industrial and medical markets.
Flexmag™ - The highest quality flexible magnetic sheet and strip for over a quarter of a century. Flexmag products cover a wide range of applications, from industrial, automotive and medical applications to signage and displays, to novelty items.
Arnold is also a 50% partner in a China rare earth mine-to-magnet joint venture. Arnold accounts for its activity in the joint venture utilizing the equity method of accounting. Gains and losses from the joint venture were not material during the years ended December 31, 2017, 2016, or 2015.
Arnold operates 9 manufacturing facilities worldwide split under the three business units shown above but functions as one company and one team.
Results of Operations
The table below summarizes the results of operations for Arnold for the fiscal years ending December 31, 2017, 2016 and 2015.
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Net sales | | $ | 105,580 |
| | $ | 108,179 |
| | $ | 119,994 |
|
Cost of sales | | 78,863 |
| | 84,475 |
| | 93,559 |
|
| Gross profit | | 26,717 |
| | 23,704 |
| | 26,435 |
|
| Selling, general and administrative expenses | | 19,583 |
| | 16,602 |
| | 14,828 |
|
| Management fees | | 500 |
| | 500 |
| | 500 |
|
| Amortization of intangibles | | 3,463 |
| | 3,523 |
| | 3,523 |
|
| Impairment expense | | 8,864 |
| | 16,000 |
| | — |
|
| (Loss) income from operations | | $ | (5,693 | ) | | $ | (12,921 | ) | | $ | 7,584 |
|
Year ended December 31, 2017 compared to Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were approximately $105.6 million, a decrease of $2.6 million compared to the same period in 2016. The decrease in net sales is primarily a result of decreases in the PMAG ($2.1 million), and Flexmag ($1.5 million) product sectors. PMAG sales represented 72% of net sales in each of the years ended December 31, 2017 and 2016. The decrease in PMAG sales is mainly attributable to lower sales of reprographic products. The decrease in Flexmag sales during the year ended December 31, 2017 compared to the same period in 2016 is largely due to decreased customer demand. International sales were $42.3 million and $42.0 million for the years ended December 31, 2017 and 2016, respectively.
Cost of sales
Cost of sales for the year ended December 31, 2017 were approximately $78.9 million compared to approximately $84.5 million in the same period of 2016. Gross profit as a percentage of sales increased from 21.9% in 2016 to 25.3% in 2017 despite lower sales. The increase is principally attributable to an increase in Precision Thin Metals margins partially offset by the impact of PMAG volume reductions. Flexmag margin in 2017 was consistent with 2016.
Selling, general and administrative expense
Selling, general and administrative expense in the year ended December 31, 2017 was $19.6 million as compared to approximately $16.6 million for the year ended December 31, 2016. The increase in expense is primarily attributable to a one-time increase in legal, professional and environmental 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 from operations
Arnold had a loss from operations for the year ended December 31, 2017 of approximately $5.7 million, as compared to a loss from operations of $12.9 million for the year ended December 31, 2016, with the loss in both years primarily as a result of the impairment expense.
Year ended December 31, 2016 compared to Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were approximately $108.2 million, a decrease of $11.8 million compared to the same period in 2015. The decrease in net sales is a result of decreases in the PMAG ($7.9 million), Precision Thin Metals ($2.4 million) and Flexmag ($1.5 million) product sectors. PMAG sales represented 72% of net sales for the year ended December 31, 2016, compared to 71% for the year ended December 31, 2015. The decrease in PMAG sales is mainly attributable to weakness in the oil and gas sector and lower sales of reprographic products. The decrease in Precision Thin Metals and Flexmag sales during the year ended December 31, 2016 compared to the same period in 2015 is largely due to decreased customer demand. International sales were $42.0 million during the year ended December 31, 2016 compared to $44.2 million during the same period in 2015, a decrease of $2.2 million or 4.9%. The decrease in international sales is due to a decrease in sales in the PMAG sector as noted above.
Cost of sales
Cost of sales for the year ended December 31, 2016 were approximately $84.5 million compared to approximately $93.6 million in the same period of 2015. Gross profit as a percentage of sales decreased from 22.0% in 2015 to 21.9% in 2016. The decrease is principally attributable to a slight decrease in the PMAG sector due to volume reductions and customer mix, partially offset by an increase in margin in the Precision Thin Metals sector due to customer mix. Flexmag margin in 2016 was consistent with 2015.
Selling, general and administrative expense
Selling, general and administrative expense in the year ended December 31, 2016 was $16.6 million as compared to approximately $14.8 million for the year ended December 31, 2015. The increase in expense is primarily attributable to severance related to changes within management and a one-time expense related to the Swiss pension.
Impairment expense
The Company performed interim goodwill impairment testing on the three reporting units of Arnold as of December 31, 2016. The results of the impairment test (step 1) indicated that the goodwill associated with the PMAG reporting unit was impaired. The Company developed an estimated range of the potential goodwill impairment at PMAG of between $14 million and $19 million, and has recorded impairment expense of $16 million at December 31, 2016. The result of the Step 2 analysis was recorded in the first quarter of 2017.
(Loss) income from operations
Arnold had a loss from operations for the year ended December 31, 2016 of approximately $12.9 million, as compared to income from operations of $7.6 million for the year ended December 31, 2015. This decrease of $20.5 million is primarily the result of the impairment expense as well as the overall decrease in net sales, as described above.
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.
Clean Earth completed two add-on acquisitions during the second quarter of 2016, Phoenix Soil and EWS, and a small add-on acquisition in March 2017, AERC. The results of operations for the add-on acquisitions have been included in Clean Earth's results from the date of acquisition through the end of the reporting period.
Results of Operations
The table below summarizes the results of operations for Clean Earth for the fiscal years ended December 31, 2017, 2016 and 2015.
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Net service revenues | | $ | 211,247 |
| | $ | 188,997 |
| | $ | 175,386 |
|
| Cost of revenues | | 150,028 |
| | 134,667 |
| | 125,178 |
|
| Gross profit | | 61,219 |
| | 54,330 |
| | 50,208 |
|
| Selling, general and administrative expenses | | 35,875 |
| | 30,018 |
| | 26,512 |
|
| Management fees | | 500 |
| | 500 |
| | 500 |
|
| Amortization of intangibles | | 12,807 |
| | 12,578 |
| | 12,183 |
|
| Loss on disposal of assets | | — |
| | 3,305 |
| | — |
|
| Income from operations | | $ | 12,037 |
| | $ | 7,929 |
| | $ | 11,013 |
|
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Service revenues
Service revenues for the year ended December 31, 2017 were approximately $211.2 million, an increase of $22.3 million or 11.8% compared to the same period in 2016. The increase in service revenues is principally due to two acquisitions in 2016 and one in 2017. For the year ended December 31, 2017, contaminated soil volumes increased 11% as compared to the same period last year principally attributable to commercial development activity in the New York City area, and the acquisition of Phoenix Soil in April 2016. Revenue from dredged material decreased during 2017 as compared to 2016 due to the timing and flow of new maintenance contracts in our core markets. Contaminated soils represented approximately 55% of net sales for both the years ended December 31, 2017 and 2016.
Cost of revenues
Cost of services for the year ended December 31, 2017 were approximately $150.0 million compared to approximately $134.7 million in the same period of 2016, an increase of $15.4 million, primarily as a result of the two acquisitions in 2016 and one acquisition in 2017. Gross profit as a percentage of sales increased from 28.7% for the year ended December 31, 2016 to 29.0% for the year ended December 31, 2017.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2017 increased to approximately $35.9 million or 17.0% of service revenues compared to $30.0 million or 15.9% of service revenues for the same period in 2016. The $5.9 million increase in selling, general and administrative expenses in the year ended December 31, 2017 compared to 2016 is primarily attributable to Clean Earth's recent acquisitions.
Amortization expense
Amortization expense for the year ended December 31, 2017 was $12.8 million, an increase of $0.2 million compared to 2016.
Loss on disposal of assets
Clean Earth recognized a loss on disposal of assets of $3.3 million during the fourth quarter of 2016 related to the closure of the Company’s Williamsport, Pennsylvania site which processed drill cuttings. The loss was comprised of intangible assets specific to the Williamsport location, as well as equipment that could not be repurposed to other sites at the time of the closing of the facility.
Income from operations
Income from operations for the year ended December 31, 2017 was approximately $12.0 million as compared to income from operations of $7.9 million for the year ended December 31, 2016, an increase of $4.1 million, primarily as a result of the loss on disposal of assets related to the closure of Clean Earth's Williamsport site.
Year ended December 31, 2016 compared to the Year ended December 31, 2015
Service revenues
Service revenues for the year ended December 31, 2016 were approximately $189.0 million, an increase of $13.6 million or 7.8% compared to the same period in 2015. The increase in service revenues is principally due to two acquisitions in 2016. For the year ended December 31, 2016, contaminated soil volumes increased 4% as compared to the same period last year principally attributable to commercial development activity in the New York City area, and its acquisition of Phoenix Soil in April 2016. Revenue from dredged material decreased during 2016 as compared to 2015 due to the timing and flow of new maintenance contracts in our core markets. Contaminated soils represented approximately 55% and 58%, respectively, of net sales for the years ended December 31, 2016 and 2015.
Cost of revenues
Cost of services for the year ended December 31, 2016 were approximately $134.7 million compared to approximately $125.2 million in the same period of 2015, an increase of $9.5 million, primarily as a result of the two acquisitions made in 2016. Gross profit as a percentage of sales increased from 28.6% for the year ended December 31, 2015 to 28.7% for the year ended December 31, 2016.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2016 increased to approximately $30.0 million or 15.9% of service revenues compared to $26.5 million or 15.1% of service revenues for the same period in 2015. The $3.5 million increase in selling, general and administrative expenses in the year ended December 31, 2016 compared to 2015 is primarily attributable to Clean Earth's recent acquisitions.
Amortization expense
Amortization expense for the year ended December 31, 2016 was $12.6 million, an increase of $0.4 million compared to 2015. The increase is due to additional amortization expense in 2016 from the amortization of airspace, which is recognized based on usage rather than over the estimated useful life of the asset.
Loss on disposal of assets
Clean Earth recognized a loss on disposal of assets of $3.3 million during the fourth quarter of 2016 related to the closure of the Company’s Williamsport, Pennsylvania site which processed drill cuttings. The loss was comprised of intangible assets
specific to the Williamsport location, as well as equipment that could not be repurposed to other sites at the time of the closing of the facility.
Income from operations
Income from operations for the year ended December 31, 2016 was approximately $7.9 million as compared to income from operations of $11.0 million for the year ended December 31, 2015, a decrease of $3.1 million, primarily as a result of the loss on disposal of assets related to the closure of Clean Earth's Williamsport site.
Sterno
Overview
Sterno, 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 offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps through their Sterno Products division. In January 2016, Sterno acquired Northern International, Inc. ("Sterno Home"), which sells flameless candles and outdoor lighting products through the retail segment.
Results of Operations
The table below summarizesfollowing discussion reflects a comparison of the historical results of operations of our consolidated business for the years ended December 31, 2021, 2020 and 2019, and components of the results of operations as well as those components presented as a percent of net revenues, for each of our businesses on a stand-alone basis.
We acquired Lugano Diamonds in September 2021, BOA in October 2020 and Marucci Sports in April 2020. In the following results of operations, we provide (i) our actual Consolidated Results of Operations for the years ended December 31, 2021, 2020 and 2019, which includes the historical results of operations of each of our businesses (operating segments) from the date of acquisition in accordance with generally accepted accounting principles in the United States ("GAAP" or "US GAAP") and (ii) comparative historical components of the results of operations for Sternoeach of our businesses on a stand-alone basis (“Results of Operations – Our Businesses”), for each of the fiscal years ended December 31, 2017, 20162021, 2020 and 2015.2019, where all years presented include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. For the 2021 acquisition of Lugano Diamonds, the pro forma results of operations have been prepared as if we purchased this business on January 1, 2020. For the 2020 acquisitions of Marucci Sports and BOA, the pro forma results of operations have been prepared as if we purchased these businesses on January 1, 2019. We believe this presentation enhances the discussion and provides a more meaningful comparison of operating results. The following operating results of our businesses are not necessarily indicative of the results to be expected for a full year, going forward.
All dollar amounts in the financial tables are presented in thousands. References in the financial tables to percentage changes that are not meaningful are denoted by "NM." |
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Net sales | | $ | 226,110 |
| | $ | 218,817 |
| | $ | 139,991 |
|
| Cost of sales | | 170,355 |
| | 158,722 |
| | 104,372 |
|
| Gross profit | | 55,755 |
| | 60,095 |
| | 35,619 |
|
| Selling, general and administrative expenses | | 28,662 |
| | 34,362 |
| | 16,596 |
|
| Management fee | | 500 |
| | 500 |
| | 500 |
|
| Amortization of intangibles | | 7,399 |
| | 6,434 |
| | 5,323 |
|
| Income from operations | | $ | 19,194 |
| | $ | 18,799 |
| | $ | 13,200 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| Net revenues | | $ | 1,841,668 | | | $ | 1,359,566 | | | $ | 1,263,298 | |
| Cost of revenues | | 1,115,711 | | | 864,601 | | | 806,366 | |
| Gross profit | | 725,957 | | | 494,965 | | | 456,932 | |
| Selling, general and administrative expense | | 459,204 | | | 344,418 | | | 308,402 | |
| Management fees | | 46,943 | | | 33,749 | | | 36,030 | |
| Amortization of intangible assets | | 80,307 | | | 61,682 | | | 53,629 | |
| Asset impairment expense | | — | | | — | | | 32,881 | |
| Operating income | | 139,503 | | | 55,116 | | | 25,990 | |
| Interest expense, net | | (58,839) | | | (45,769) | | | (58,218) | |
| Amortization of debt issuance costs | | (2,979) | | | (2,454) | | | (3,314) | |
| Loss on debt extinguishment | | (33,305) | | | — | | | (12,319) | |
| Other income (expense) | | (1,184) | | | (2,459) | | | (12,239) | |
| Income (loss) from continuing operations before income taxes | | 43,196 | | | 4,434 | | | (60,100) | |
| Provision (benefit) for income taxes | | 18,337 | | | 10,175 | | | 9,914 | |
| Income (loss) from continuing operations | | $ | 24,859 | | | $ | (5,741) | | | $ | (70,014) | |
Year ended December 31, 20172021 compared to the Year ended December 31, 20162020
Net revenues
Net revenues for the year ended December 31, 2021 increased by approximately $482.1 million or 35.5% compared to the corresponding period in 2020. Our Marucci business, which we acquired in April 2020, contributed $74.7 million in incremental net revenue during the year ended December 31, 2021, and our BOA business, which we acquired in October 2020, contributed $139.9 million in incremental revenue in 2021. Our Lugano business, which we acquired in September 2021, had $54.4 million in revenue during the period of our ownership. During the year ended December 31, 2021 as compared to the year ended December 31, 2020, we saw notable sales increases at 5.11 ($43.9 million increase), and Velocity ($54.4 million increase) as a result of an increased consumer focus on
outdoor related brands. Our Altor Solutions business also saw an increase in net revenues of $50.2 million, primarily as a result of add-on acquisitions that occurred in July 2020 and October 2020. We also saw notable increases in net revenue in 2021 as compared to 2020 at several of our other business which saw increased sales compared to the prior year, which was negatively impacted by the COVID-19 pandemic. These increases in net revenue occurred at Ergobaby ($18.9 million increase), Arnold ($41.0 million increase, which was partially attributable to an add-on acquisition in March 2021) and Sterno ($5.1 million increase). Refer to "Results of Operations - Our Businesses" for a more detailed analysis of net revenue 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 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 businesses. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and, in some cases, dividends on our equity ownership. However, on a consolidated basis these items will be eliminated.
Cost of revenues
On a consolidated basis, cost of revenues increased approximately $251.1 million during the year ended December 31, 2021, compared to the corresponding period in 2020, primarily as a result of the increase in net revenues. Our Marucci and BOA businesses contributed $84.7 million of the increase, and our Lugano business had $30.2 million in cost of revenues in 2021. Gross profit as a percentage of net revenues was approximately 39.4% in year ended December 31, 2021 compared to 36.4% in 2020. We recognized $5.9 million in expense related to the amortization of the inventory step-up resulting from our purchase price allocation of Marucci Sports and BOA and Altor's acquisition of Polyfoam during the year ended December 31, 2020, and $2.8 million in expense related to the inventory step-up resulting from our purchase price allocation for Lugano during the year-ended December 31, 2021. Excluding the effect of the amortization of inventory step-up, gross profit as a percentage of net revenues was 39.7% and 36.8%, respectively, for 2021 and 2020. The increase in gross profit percentage in 2021 as compared to 2020 was primarily related to the increase in net revenue at our branded consumer businesses, which have higher gross margins than our niche industrial businesses. The gross margins at our niche industrial businesses have been impacted by global supply chain constraints and increased costs of materials and components. The impact from these factors has been mostly offset by gains in operating efficiencies and price increases to our customers. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of gross profit by business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $114.8 million during the year ended December 31, 2021, compared to the corresponding period in 2020. $20.2 million of the increase is attributable to our Marucci business, which was acquired in April 2020, and $38.9 million of the increase is attributable to BOA, which was acquired in October 2020. $12.0 million of the increase is attributable to Lugano, including $1.8 million in transaction costs related to the acquisition of Lugano in the current year. We also saw an increase in selling, general and administrative expense at several of our subsidiaries versus the prior year as spending on variable expenses was reduced in the prior year in response to the impact of the COVID-19 pandemic, with the current year spend reflecting more normal levels of selling, general and administrative spend. 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 $14.2 million in 2020 to $17.3 million in 2021. The increase in corporate general and administrative expense during 2021 is primarily due to increased professional fees associated with our election for the Trust to be treated as a corporation for U.S. federal income tax purposes, and an increase in variable spending that had been reduced in the prior year as a result of the COVID-19 pandemic.
Fees to manager
Pursuant to the Management Services Agreement, 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 year ended December 31, 2021, we incurred approximately $46.9 million in management fees as compared to $33.7 million in fees in the year ended December 31, 2020. The increase in management fees is primarily attributable to our acquisition of Marucci in April 2020, BOA in October 2020 and Lugano in September 2021, offset by our sale of Liberty in August 2021. CGM has entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid during 2021 than would have normally been due. In the first quarter of 2021, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee related to the amount of the cash proceeds deposited with the Trustee that was in excess of the amount payable related to the 2026 Notes at March 31, 2021. Additionally, CGM has entered into a waiver of the MSA at December 31, 2021 to exclude the cash balances held at the LLC from the calculation of the management fee. In the first quarter of 2020, as a proactive measure to provide the Company with additional liquidity in light of the onset of the COVID-19 pandemic, the Company drew $200 million down on the 2018 Revolving Credit Facility. The Company and CGM entered a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to cash balances at March 31, 2020 which reduced the amount of management fee that would have been paid in the first quarter of 2020. Additionally, as a result of an expected decline in earnings and cash flows in the second quarter of 2020 in light of the COVID-19 pandemic, CGM agreed to waive 50% of the management fee calculated at June 30, 2020.
Amortization expense
Amortization expense for the year ended December 31, 2021 increased $18.6 million to $80.3 million as compared to the prior year, primarily as a result of the acquisitions of Marucci in April 2020, BOA in October 2020 and Lugano in September 2021.
Interest Expense
We recorded interest expense totaling $58.8 million for the year ended December 31, 2021 compared to $45.8 million for the comparable period in 2020, an increase of $13.1 million. The increase in interest expense in the current year reflects the higher amount outstanding on our senior notes during the current year after we redeemed $600.0 million of our 8.000% 2026 Senior Notes and issued $1000.0 million of 5.250% 2029 Notes in March of 2021, and issued an additional $300.0 million of 5.000% Senior Notes due in 2032 in November 2021. We also had an increase in the average amount outstanding under our Revolving Credit Facility during 2021 compared to the prior year. The average amount outstanding on our Revolving Credit Facility in 2021 was approximately $125.2 million, while the average amount outstanding during 2020 was $101.4 million.
Income Taxes
We had income tax expense of $18.3 million with an effective income tax rate of 42.5% during the year ended December 31, 2021 compared to income tax expense of $10.2 million with an effective income tax rate of 229.5% during the same period in 2020. Our net income from continuing operations before income taxes for the year ended December 31, 2021 increased $38.8 million as compared to income from continuing operations before taxes for the year ended December 31, 2020 ($43.2 million in 2021 compared to $4.4 million in 2020). Our income tax provision increased by $8.2 million in 2021 as compared to 2020. The tax provision reflects the effect of state and local taxes, foreign taxes and the related allocation of income at our subsidiaries, in addition to the effect of the losses at our parent company. The effective tax rate for the years ended December 31, 2021 and 2020 includes a loss at our parent company, which was previously taxed as a partnership.
On September 1, 2021, the Trust elected to “check-the-box” to have the Trust treated as a corporation for U.S. federal income tax purposes. The Trust recorded a deferred tax benefit of $12.1 million at December 31, 2021 to reflect the effect of the classification of ACI as held-for-sale.
Year ended December 31, 2020 compared to the Year ended December 31, 2019
Net revenues
Net revenues for the year ended December 31, 2020 increased by approximately $96.3 million or 7.6% compared to the corresponding period in 2019. During the year ended December 31, 2020 as compared to the year ended
December 31, 2019, we saw notable sales increases at 5.11 ($12.5 million increase) and Velocity ($68.2 million increase) as a result of an increased consumer focus on outdoor related brands. Our Altor business also saw an increase in net revenues of $8.6 million as a result of an add-on acquisition that occurred in July 2020. Our Marucci business, which we acquired in April 2020, had net sales of $43.4 million during our ownership period in 2020, and our BOA business, which we acquired in October 2020, had net sales of $25.3 million during our period of ownership. These increases in net revenue were partially offset by decreases in net revenue in 2020 as compared to 2019 at our other businesses, primarily as a result of the effects of the COVID-19 pandemic, notably Ergobaby ($15.3 million decrease), Arnold ($21.0 million decrease) and Sterno ($25.5 million decrease). Refer to "Results of Operations - Our Businesses" for a more detailed analysis of net revenue 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 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 businesses. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and, in some cases, dividends on our equity ownership. However, on a consolidated basis these items will be eliminated.
Cost of revenues
On a consolidated basis, cost of revenues increased approximately $58.2 million during the year ended December 31, 2020, compared to the corresponding period in 2019, primarily as a result of the increase in net revenues. Gross profit as a percentage of net revenues was approximately 36.4% in year ended December 31, 2020 compared to 36.2% in 2019. We recognized $5.9 million in expense related to the amortization of the inventory step-up resulting from our purchase price allocation of Marucci Sports and BOA and Altor's acquisition of Polyfoam during the year ended December 31, 2020. Excluding the effect of the amortization of inventory step-up, gross profit as a percentage of net revenues was 36.8%. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of gross profit by business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $36.0 million during the year ended December 31, 2020, compared to the corresponding period in 2019. The increase in selling, general and administrative expense primarily relates to the acquisition of Marucci Sports in April 2020 and BOA in October 2020. In addition to the incremental selling, general and administrative expense incurred by these businesses subsequent to their acquisition, we incurred $4.8 million in acquisition costs and $2.1 million in integration related fees from these acquisitions in 2020. 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 decreased from $14.9 million in 2019 to $14.2 million in 2020, primarily due to decreased travel costs, partially offset by costs associated with an unsuccessful acquisition.
Fees to manager
Pursuant to the Management Services Agreement, 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. Concurrent with the September 2019 sale of Clean Earth, CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended September 30, 2019 and continuing until the quarter during which the Company next borrowed under the 2018 Revolving Credit Facility. In March 2020, as a proactive measure to provide the Company with additional cash liquidity in light of the COVID-19 pandemic, the Company elected to draw down $200 million on our 2018 Revolving Credit Facility. The Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of March 31, 2020. Additionally, as a result of an expected decline in earnings and cash flows in the second quarter of 2020, CGM agreed to waive 50% of the management fee calculated at June 30, 2020 that was paid in July 2020. Further, for the third quarter of 2020, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of September 30, 2020. The result of these waivers was a decrease in the management fee during the year ended December 31, 2020 as compared to the prior year, despite the addition of the Marucci business in April 2020. CGM has also entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which reduced the management fee paid for the fourth quarter of 2020.
Amortization expense
Amortization expense for the year ended December 31, 2020 increased $8.1 million to $61.7 million as compared to the prior year, primarily as a result of the acquisitions of Marucci in April 2020 and BOA in October 2020.
Impairment expense
Velocity Outdoor performed an interim impairment test of their goodwill during the quarter ended September 30, 2019 as a result of operating results below forecasts in the current period as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods. The impairment test resulted in Velocity Outdoor recording impairment expense of $32.9 million in the prior year ended December 31, 2019.
Interest Expense
We recorded interest expense totaling $45.8 million for the year ended December 31, 2020 compared to $58.2 million for the comparable period in 2019, a decrease of $12.4 million. The decrease in interest expense for the year ended December 31, 2020 reflects the repayment of our 2018 Term Loan during 2019 using a portion of the proceeds from the sale of Clean Earth and proceeds from the issuance of preferred shares, offset by an increase in interest expense related to our issuance of an additional $200 million of our 8.000% Senior Notes in May 2020.
Income Taxes
We had income tax expense of $10.2 million with an effective income tax rate of 229.5% during the year ended December 31, 2020 compared to income tax expense of $9.9 million with an effective income tax rate of 16.5% during the same period in 2019. The effective tax rate for the years ended December 31, 2020 and 2019 includes a loss at our parent company, which was previously taxed as a partnership. Although we had income from continuing operations before income taxes for the year ended December 31, 2020 as compared to a loss from continuing operations for the year ended December 31, 2019 ($4.4 million income in 2020 compared to a $60.1 million loss in 2019), our income tax provision increased by only $0.3 million in 2020 as compared to 2019. The tax provision reflects the effect of state and local taxes, foreign taxes and the related allocation of income at our subsidiaries, in addition to effect of the losses at our parent company. The effective income tax rate in the prior year also reflects the effect of the impairment expense recognized at Velocity and the utilization of tax credits.
Results of Operations — Our Businesses
We categorize the businesses we own into two separate groups of businesses (i) branded consumer businesses, and (ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we believe capitalize on a valuable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in their particular category. Niche industrial businesses are characterized as those businesses that focus on manufacturing and selling particular products or services within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector.
Branded Consumer Businesses
5.11
Overview
5.11 is a leading provider of purpose-built technical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity and works directly with end users to create purpose-built apparel, footwear and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. 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.
Results of Operations
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| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Net sales | | $ | 444,963 | | 100.0 | % | | $ | 401,106 | | 100.0 | % | | $ | 388,645 | | 100.0 | % |
| Gross profit | | $ | 235,288 | | 52.9 | % | | $ | 202,245 | | 50.4 | % | | $ | 191,594 | | 49.3 | % |
| Selling, general and administrative expense | | $ | 186,090 | | 41.8 | % | | $ | 162,386 | | 40.5 | % | | $ | 159,441 | | 41.0 | % |
| Operating income | | $ | 39,374 | | 8.8 | % | | $ | 30,087 | | 7.5 | % | | $ | 22,408 | | 5.8 | % |
Year ended December 31, 2021 compared to the Year ended December 31, 2020
Net sales
Net sales for the year ended December 31, 20172021 were approximately $226.1$445.0 million, an increase of $7.3$43.9 million, or 3.3%10.9%, compared to the same period in 2016.2020. This increase is due primarily to direct-to-consumer growth of $35.0 million, up 22% from the prior year comparable period. Retail sales grew largely due to fifteen new retail store openings since December 2020 (bringing the total store count to eighty-seven as of December 31, 2021) as well as positive growth in same-store sales for the year ended December 31, 2021 as compared to the same period last year which was negatively impacted by the effects of the COVID-19 pandemic. Net sales were also positively impacted by wholesale sales growth of $18.6 million, up 8% from the prior year which was negatively impacted by the effects of the COVID-19 pandemic. The increase in sales from direct-to-consumer and wholesale was partially offset by a decrease of $8.4 million in sales in our direct to agency business (DTA) as we fulfilled a large contract in 2020 which did not repeat in 2021.
Gross profit
Gross profit as a percentage of net sales increased from 50.4% in the year ended December 31, 2020 to 52.9% in the year ended December 31, 2021. Growth in gross margin was driven by channel mix as direct-to-consumer sales, which realize a higher gross margin than wholesale sales, grew versus the prior period. The growth in gross profit percentage for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was partially offset by increases in inbound ocean and air freight as logistic challenges caused by the COVID-19 pandemic increased supply chain costs.
Selling, general and administrative expense
Selling, general and administrative expenses for the year ended December 31, 2021 increased to $186.1 million or 41.8% of net sales compared to $162.4 million or 40.5% of net sales for the year ended December 31, 2020. The increase in selling, general and administrative expense for the year ended December 31, 2021 as compared to the prior year comparable period was driven by the costs associated with additional retail stores (eighty-seven open in 2021 versus seventy-three open in 2020 during the comparable period), as well as additional sales and marketing spend to drive digital sales. For the year ended December 31, 2020, management significantly reduced variable expenses, including payroll, bonus, travel and entertainment, and sales and marketing, as a response to decreased sales from the effects of the COVID-19 pandemic. While management continues to control and reduce variable expenses, payroll and bonus for fiscal 2021 increased in correlation with the increase in net sales.
Income from operations
Income from operations for the year ended December 31, 2021 was $39.4 million, an increase of $9.3 million when compared to the same period in 2020, based on the factors described above.
Year ended December 31, 2020 compared to the Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were $401.1 million, an increase of $12.5 million, or 3.2%, compared to the same period in 2019. This increase is due primarily to growth in e-commerce and retail sales growth of $30.2 million, or 31.2%, driven by growing demand in direct-to-consumer channels, specifically digital. Retail sales grew largely through twelve new retail store openings since December 2019 (bringing the total store count to seventy-three as of December 31, 2020) as well as the full-year impact of the sixteen stores opened in
2019. The increase in net sales is a resultfor the year ended December 31, 2020 were further increased by Direct-to-Agency (“DTA”) contracts fulfilled in 2020. The increase in net sales for the year ended December 31, 2020 as compared to the prior year was offset by the effects of the acquisitionCOVID-19 pandemic on store traffic in our wholesale channels and our own retail stores.
Gross Profit
Gross profit as a percentage of Sterno Homenet sales increased from 49.3% in January 2016,the year ended December 31, 2019 to 50.4% in the year ended December 31, 2020. Growth in gross margin was driven by channel mix as direct-to-consumer sales, which realize a higher gross margin than wholesale sales, grew versus the prior period. The growth in gross profit for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was partially offset by additional inventory reserves and duty drawback accrual (increase in cost of goods sold) for audited duty drawback claims.
Selling, general and administrative expense
Selling, general and administrative expenses for the year ended December 31, 2020 increased to $162.4 million or 40.5% of net sales shortfall at Sterno Home's candle division duecompared to reduced$159.4 million or 41.0% of net sales for the year ended December 31, 2019. The decrease in selling, general and administrative expense as a percentage of net sales was driven by management’s decision to reduce variable expenses, including travel and entertainment, sales and marketing, and payroll as a response to decreased sales from the effects of the COVID-19 pandemic. The decrease was partially offset by an increase in marketing spend to drive demand in the growing direct to consumer channels and non-repeating orders. Sterno Homeby the costs associated with additional retail stores (seventy-three open in 2020 versus sixty-one open in 2019 during the comparable period).
Income from operations
Income from operations for the year ended December 31, 2020 was $30.1 million, an increase of $7.7 million when compared to the same period in 2019, based on the factors described above.
BOA
Overview
BOA, creator of the revolutionary, award-winning, patented BOA Fit System, partners with market-leading brands to make the best gear even better. Delivering fit solutions purpose-built for performance, the BOA Fit System is featured in footwear across snow sports, cycling, hiking/trekking, golf, running, court sports, workwear as well as headwear and medical bracing. The system consists of three integral parts: a micro-adjustable dial, high-tensile lightweight laces, and low friction lace guides creating a superior alternative to laces, buckles, Velcro, and other traditional closure mechanisms. Each unique BOA configuration is engineered for fast, effortless, precision fit, and is backed by The BOA Lifetime Guarantee. BOA is headquartered in Denver, Colorado and has offices in Austria, Greater China, South Korea, and Japan.
Results of Operations
In the following results of operations, we provide comparative pro forma results of operations for BOA for the years ended December 31, 2020 and 2019 as if we had acquired the business on January 1, 2019. The results of operations that follow include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. The operating results for BOA have been included in the consolidated results of operation from the date of acquisition, October 16, 2020.
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| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| (in thousands) | | | | | | Pro forma | | | | Pro forma | | |
| Net sales | | $ | 165,150 | | | 100.0 | % | | $ | 106,365 | | | 100.0 | % | | $ | 106,276 | | | 100.0 | % |
| Gross profit | | $ | 100,976 | | | 61.1 | % | | $ | 62,840 | | | 59.1 | % | | $ | 61,647 | | | 58.0 | % |
| Selling, general and administrative expense | | $ | 50,591 | | | 30.6 | % | | $ | 40,845 | | | 38.4 | % | | $ | 39,153 | | | 36.8 | % |
| Income from operations | | $ | 33,976 | | | 20.6 | % | | $ | 5,750 | | | 5.4 | % | | $ | 6,254 | | | 5.9 | % |
Pro forma financial information for BOA for the year ended December 31, 2020 and December 31, 2019 includes pre-acquisition results of operations for the period from January 1, 2020 through October 16, 2020, the acquisition date of BOA, and January 1, 2019 through December 31, 2019, for comparative purposes. The historical results of BOA have been adjusted to reflect the purchase accounting adjustments recorded in connection with the acquisition. Pro forma results of operations include the following pro forma adjustments as if we had acquired BOA January 1, 2019:
•Depreciation expense associated with the increase in depreciable lives of capital assets of $0.1 million for the year ended December 31, 2019.
•Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation for BOA of $11.9 million for the year ended December 31, 2020, and $15.0 million for the year ended December 31, 2019.
•Management fees that would have been payable to the Manager during each period.
Year ended December 31, 2021 compared to the Pro forma Year ended December 31, 2020
Net sales
Net sales for the year ended December 31, 2021 were $165.2 million, an increase of $58.8 million or 55.3% when compared to net sales of $9.0$106.4 million for the year ended December 31, 2020. This increase is due to underlying category and BOA momentum within key markets including Snow Sports, Cycling, Athletic, Outdoor & Workwear. The three factors primarily impacting growth rates were market share gains in key categories, consumer participation increases as well as accelerated production ordering by BOA’s customers due to longer lead times resulting from overall global supply chain constraints.
Gross profit
Gross profit as a percentage of net sales was 61.1% for the year ended December 31, 2021 compared to 59.1% for the same period prior to acquisition in January 2016.
Cost of sales
Cost2020. The cost of sales for the year ended December 31, 2017 were approximately $170.42020 includes $1.5 million related to the amortization of inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the year ended December 31, 2020 was 60.5%. The increase in gross profit as a percentage of net sales during the current year is attributable primarily to product mix.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2021 was $50.6 million, an increase of $9.7 million as compared to approximately $158.7selling, general and administrative expense of $40.8 million for the year ended December 31, 2020. Selling general and administrative expense in the current year includes $3.3 million in integration services fees paid to CGM. The remainder of the same periodincrease in selling, general, and administrative expense is due to increased employee costs related to BOA's bonus plan, incremental headcount and marketing investments. Selling, general and administrative expense for the year ended December 31, 2020 included $2.5 million in transaction costs related to the acquisition of 2016. BOA, and $1.1 million in integration services fees paid to CGM.
Income from operations
Income from operations was $34.0 million for the year ended December 31, 2021 as compared to $5.8 million in income from operations in the year ended December 31, 2020, an increase of $28.2 million based on the factors noted above.
Pro forma Year ended December 31, 2020 compared to the Pro forma Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were $106.4 million, an increase of $0.1 million or 0.1% when compared to net sales of $106.3 million for the year ended December 31, 2019.
Gross profit
Gross profit as a percentage of net sales decreased from 27.5%was 59.1% for the year ended December 31, 20162020 compared to 24.7%58.0% for the same period in 2019. The cost of sales for the year ended December 31, 2017.2020 includes $1.5 million related to the amortization of inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the year ended December 31, 2020 was 60.5%. The decreaseincrease in gross marginprofit as a percentage of net sales during 2017the current year is attributable primarily reflects an increase in chemical material costs, and a reclassification of certain expenses at Sterno Home from selling, general and administrative expense to cost of goods sold. The reclassification was approximately $3.2 million and was made to align costs related to quality assurance and engineering with the classification used by Sterno Products.product mix.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 20172020 was approximately $28.7$40.8 million, an increase of $1.7 million as compared to $34.4 million in the year ended December 31, 2016, a decrease of $5.7 million or 16.6%. Selling,selling, general and administrative expense represented 12.7% of net sales$39.2 million for the year ended December 31, 2017 as compared to 15.7% of net sales2019. Selling, general and administrative expense for the same periodyear ended December 31, 2020 included $2.5 million in 2016. The decrease as a percentage of net sales in 2017 as comparedtransaction costs related to the same periodacquisition of BOA, and $1.1 million in 2016 reflects the increase in sales during the period and Sterno Home reorganization effortsintegration services fees paid to reduce staff, as well as the reclassification of certain expenses related to Sterno Home fromCGM. Excluding these nonrecurring costs, selling, general and administrative expense to cost of
goods sold. The reclassificationfor the year ended December 31, 2020 was approximately $3.2$37.2 million, and was made to align costs related to quality assurance and engineering with the classification used by Sterno Products. Sterno also recognized a reversaldecrease of the fair value of the contingent consideration related$2.0 million compared to the acquisitionyear ended December 31, 2019. This decrease was primarily attributable to a reduction in marketing activity and a reduced level of Sterno Home $1.0 million in the fourth quarter of 2017.travel during 2020.
Income from operations
Income from operations was $5.8 million for the year ended December 31, 2017 was approximately $19.22020 as compared to $6.3 million in income from operations in the year ended December 31, 2019, a decrease of $0.4$0.5 million when compared tobased on the same periodfactors noted above.
Ergobaby
Overview
Ergobaby, headquartered in 2016, dueTorrance, California, is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, strollers, and related products. Ergobaby primarily tosells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than half of its sales from outside of the increase in material costs in 2017 as described above.United States.
Results of Operations
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| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Net sales | | $ | 93,631 | | 100.0 | % | | $ | 74,728 | | 100.0 | % | | $ | 89,995 | | 100.0 | % |
| Gross profit | | $ | 61,139 | | 65.3 | % | | $ | 49,295 | | 66.0 | % | | $ | 57,081 | | 63.4 | % |
| Selling, general and administrative expense | | $ | 43,923 | | 46.9 | % | | $ | 36,281 | | 48.6 | % | | $ | 38,867 | | 43.2 | % |
| Income from operations | | $ | 9,087 | | 9.7 | % | | $ | 5,194 | | 7.0 | % | | $ | 10,404 | | 11.6 | % |
Year ended December 31, 20162021 compared to the Year ended December 31, 20152020
Net sales
Net sales for the year ended December 31, 20162021 were approximately $218.8$93.6 million, an increase of $78.8$18.9 million or 56.3%25.3% compared to the same period in 2015.2020. During the year ended December 31, 2021, international sales were approximately $60.3 million, representing an increase of $12.2 million over the corresponding period in 2020 primarily as a result of increased sales to APAC and EMEA distributors as well as increased sales in EMEA direct territories through key accounts and e-commerce channels. Domestic sales were $33.3 million during the year ended December 31, 2021, reflecting an increase of $6.6 million compared to the corresponding period in 2020. The increase in domestic sales was primarily attributable to strong e-commerce sales across both the Ergo and Tula brands as well as increased key accounts sales.
Gross profit
Gross profit as a percentage of net sales is a result of the acquisition of Sterno Home in January 2016 ($74.6 million in net sales), offset by the timing of stocking programs of key Sterno customers.
Cost of sales
Cost of saleswas 65.3% for the year ended December 31, 2016 were approximately $158.7 million2021 compared to approximately $104.4 million in66.0% for the same period in 2020. The decrease in gross profit as a percentage of 2015. The increase in cost ofnet sales was primarily due to the acquisition of Sterno Home. Gross profitincreased inbound freight as a percentageresult of continued supply chain shortages. This more than offset favorable shifts in the mix of sales increased from 25.4% for the year ended December 31, 2015 to 27.5% for the same period ended December 31, 2016. The increase in gross marginchannels and mix of products sold during the year ended December 31, 2016 primarily reflects a favorable margin mix with the acquisition of Sterno Home, manufacturing efficiencies resulting from investment in automation and favorable trends in global commodity prices.2021.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2016 and 2015 was2021 increased to approximately $34.4$43.9 million and $16.6 million, respectively. Selling, general and administrative expense represented 15.7%or 46.9% of net sales for the year ended December 31, 2016 as compared to 11.9%$36.3 million or 48.6% of net sales for the same period in 2015. of 2020.
The increase in selling, general and administrative expenses duringexpense for the year ended December 31, 2016 reflects2021 as compared to the acquisitionyear ended December 31, 2020 is a result of Sterno Home, which has historically had a higher selling, general and administrative expense as a percentage of revenue,increases in variable expenses tied to sales (primarily outbound freight), marketing expenses related to multiple new product launches, as well as an increase in staffing to strengthen sales and marketing, and increased professional service costs associated with the acquisition of Sterno Home.payroll expenses.
Income from operations
Income from operations for the year ended December 31, 20162021 increased $3.9 million, to $9.1 million, compared to $5.2 million for the same period of 2020, primarily as a result of the factors described above.
Year ended December 31, 2020 compared to the Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were $74.7 million, a decrease of $15.3 million or 17.0% compared to the same period in 2019. During the year ended December 31, 2020, international sales were approximately $48.1 million, representing a decrease of $13.9 million over the corresponding period in 2019 primarily as a result of reduced sales volume at Ergobaby's Asia-Pacific and EMEA distributors as a result of the COVID-19 pandemic. Domestic sales were $26.7 million during the year ended December 31, 2020, reflecting a decrease of $1.4 million compared to the corresponding period in 2019. The decrease in domestic sales was driven by the Tula brand, primarily in the specialty account channel.
Gross Profit
Gross profit as a percentage of net sales was 66.0% for the year ended December 31, 2020 compared to 63.4% for the same period in 2019. The increase in gross profit as a percentage of net sales was due to the mix of sales channels, mix of products sold, as well as reduced freight costs and warranty expense during the year ended December 31, 2020.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2020 decreased to approximately $18.8$36.3 million or 48.6% of net sales compared to $38.9 million or 43.2% of net sales for the same period of 2019. The decrease in selling, general and administrative expense for the year ended December 31, 2020 as compared to the year ended December 31, 2019 is a result of decreases in variable expenses in response to the COVID-19 pandemic and non-recurring expenses in the prior year.
Income from operations
Income from operations for the year ended December 31, 2020 decreased $5.2 million, to $5.2 million, compared to $10.4 million for the same period of 2019, primarily as a result of the factors described above.
Lugano
Overview
Lugano is a leading designer, manufacturer and marketer of high-end, one-of-a-kind jewelry sought after by some of the world’s most discerning clientele. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art and philanthropic community. Lugano is headquartered in Newport Beach, California.
Results of Operations
In the following results of operations, we provide comparative pro forma results of operations for Lugano for the years ended December 31, 2021 and 2020 as if we had acquired the business on January 1, 2020. The results of operations that follow include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. The operating results for Lugano have been included in the consolidated results of operation from the date of acquisition, September 3, 2021.
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| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 | | |
| | Pro forma | | | Pro forma | | | | |
| Net sales | | $ | 125,105 | | 100.0 | % | | $ | 67,221 | | 100.0 | % | | | |
| Gross profit | | $ | 58,778 | | 47.0 | % | | $ | 33,194 | | 49.4 | % | | | |
| Selling, general and administrative expense | | $ | 23,846 | | 19.1 | % | | $ | 12,642 | | 18.8 | % | | | |
| Income from operations | | $ | 29,165 | | 23.3 | % | | $ | 14,826 | | 22.1 | % | | | |
Pro forma financial information for Lugano for the year ended December 31, 2021 and December 31, 2020 includes pre-acquisition results of operations for the period from January 1, 2021 through September 3, 2021, the acquisition date of Lugano, and January 1, 2020 through December 31, 2020, for comparative purposes. The historical results of Lugano have been adjusted to reflect the purchase accounting adjustments recorded in connection with the acquisition. Pro forma results of operations include the following pro forma adjustments as if we had acquired Lugano January 1, 2020:
•Depreciation expense associated with the increase in depreciable lives of capital assets of $0.3 million and $0.6 million, for the years ended December 31, 2021 and 2020, respectively.
•Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation for Lugano of $5.0 million for the years ended December 31, 2021 and 2020.
•Management fees that would have been payable to the Manager during each period.
Pro forma Year ended December 31, 2021 compared to the Pro forma Year ended December 31, 2020
Net sales
Net sales for the year ended December 31, 2021 increased approximately $57.9 million or 86.1%, to $125.1 million, compared to the corresponding year ended December 31, 2020. Lugano sells high-end jewelry primarily through retail salons in California, Florida and Colorado, and via pop-up showrooms at multiple equestrian, social and charitable functions each year. The effects of the COVID-19 pandemic in the prior year severely impacted both the operations of the retail salons and the number of events attended by Lugano which led to reduced net sales as compared to the current year.
Gross profit
Gross profit as a percentage of net sales totaled approximately 47.0% in the year ended December 31, 2021 compared to 49.4% in the year ended December 31, 2020. Lugano has an extensive network of suppliers through which they procure high quality diamonds and gemstones, which make up a significant percentage of the cost of sales. The uniqueness of the Lugano jewelry can lead to fluctuations in margins from period to period based on what designs are sold during the period. In the current period, Lugano recorded $2.8 million in amortization to cost of goods sold related to the amortization of inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the year ended December 31, 2021 was 53.0%.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2021 increased to approximately $23.8 million or 19.1% of net sales compared to $12.6 million or 18.8% of net sales for the same period of 2020. The effects of the COVID-19 pandemic in the prior year led to a reduction in variable costs, particularly marketing spend, in the year ended December 31, 2021. The selling, general and administrative expense in the current year reflects a more normalized level of spending.
Income from operations
Income from operations increased $14.3 million during the year ended December 31, 2021 to $29.2 million compared to income from operations of $14.8 million during the same period in 2020, principally as a result of the increase in sales and gross profit in 2021, as described above.
Marucci Sports
Overview
Founded in 2009 and headquartered in Baton Rouge, Louisiana, Marucci is a leading designer, manufacturer, and marketer of premium wood and metal baseball bats, fielding gloves, batting gloves, bags, grips, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also develops and licenses franchises for sports training facilities. Marucci products are available through owned websites, their team sales organization, Big Box Retailers, and third party e-commerce & resellers.
Results of Operations
In the following results of operations, we provide comparative pro forma results of operations for Marucci for the years ended December 31, 2020 and 2019 as if we had acquired the business on January 1, 2019. The results of operations that follows include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. The operating results for Marucci have been included in the consolidated results of operation from the date of acquisition, April, 20, 2020.
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| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| (in thousands) | | | | | | Pro forma | | | | Pro forma | | |
| Net sales | | $ | 118,166 | | | 100.0 | % | | $ | 65,942 | | | 100.0 | % | | $ | 66,524 | | | 100.0 | % |
| Gross profit | | $ | 64,377 | | | 54.5 | % | | $ | 33,774 | | | 51.2 | % | | $ | 35,834 | | | 53.9 | % |
| Selling, general and administrative expense | | $ | 40,825 | | | 34.5 | % | | $ | 30,458 | | | 46.2 | % | | $ | 30,927 | | | 46.5 | % |
| Income (loss) from operations | | $ | 16,419 | | | 13.9 | % | | $ | (3,898) | | | (5.9) | % | | $ | (604) | | | (0.9) | % |
Pro forma financial information for Marucci for the year ended December 31, 2020 and December 31, 2019 includes pre-acquisition results of operations for the period from January 1, 2020 through April 20, 2020, the acquisition date of Marucci, and January 1, 2019 through December 31, 2019, for comparative purposes. The historical results of Marucci have been adjusted to reflect the purchase accounting adjustments recorded in connection with the acquisition. Pro forma results of operations include the following pro forma adjustments as if we had acquired Marucci January 1, 2019:
•Depreciation expense associated with the increase in depreciable lives of capital assets of $0.2 million for the year ended December 31, 2020, and $0.8 million for the year ended December 31, 2019.
•Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation for Marucci of $1.2 million for the year ended December 31, 2020, and $4.1 million for the year ended December 31, 2019.
•Management fees that would have been payable to the Manager during each period.
Year ended December 31, 2021 compared to the Pro forma Year ended December 31, 2020
Net sales
Net sales for the year ended December 31, 2021 were $118.2 million, an increase of $5.6$52.2 million as compared to net sales of $65.9 million for the year ended December 31, 2020. The increase in net sales was primarily due to increased customer demand and market share in many of Marucci's key product lines including aluminum and wood bats, batting gloves, and bags. The increased sales from these products occurred in both retail and direct channels. In the prior year, the shutdown of professional and youth baseball and softball in March as a response to the COVID-19 pandemic led to a significant drop off in demand for product through the first half of 2020, with demand beginning to pick up during the back half of 2020 after the resumption of professional and youth sports.
Gross profit
Gross profit for the year ended December 31, 2021 increased $30.6 million as compared to the year ended December 31, 2020. Gross profit as a percentage of sales was 54.5% for the year ended December 31, 2021 as compared to 51.2% for the year ended December 31, 2020. The cost of sales for the year ended December 31, 2020 includes $4.3 million related to the amortization of inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the year ended December 31, 2020 was 57.7%. During the current year, Marucci's facilities in Baton Rouge were damaged by floodwaters, which resulted in the write-off of $1.8 million in inventory, negatively impacting the gross profit in 2021 and resulting in a decrease versus adjusted gross profit percentage from 2020. Gross profit as a
percentage of net sales during the year ended December 31, 2021 was also impacted by various factors including a shift of product mix in favor of higher margin products, mainly its aluminum bats, and channel mix, with increased sales through Marucci's higher margin direct-to-consumer and e-commerce channels, as well as increased freight costs.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2021 was $40.8 million, or 34.5% of net sales compared to $30.5 million, or 46.2% of net sales for the year ended December 31, 2020. The increase in selling, general and administrative expense correlates to the increase in net sales, with increases in credit card expenses, royalties, commissions, business development fees, and other variable expenses.
Income (loss) from operations
Income from operations for the year ended December 31, 2021 was $16.4 million compared to loss from operations of $3.9 million for the same period in 2020, primarily as a result of the factors noted above.
Pro forma Year ended December 31, 2020 compared to the Pro forma Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were $65.9 million, a decrease of $0.6 million as compared to net sales of $66.5 million for the year ended December 31, 2019. During 2020, Marucci was affected by the economic slowdown resulting from the COVID-19 pandemic with baseball and softball seasons postponed in the spring and early summer throughout much of the United States. Marucci's “brick and mortar” retail partners were forced to close as a result of the pandemic thus Marucci did not receive fill-in orders during this period. As a result, sales of aluminum and wood bats were significantly less in the first and second quarter of 2020 when compared to the same period last year. Additionally, Major League Baseball postponed the beginning of their season eliminating the need for wood bats to be purchased for the professional season. During June 2020, Marucci began to see demand pick up as the baseball and softball seasons began and in August 2020, the company launched its CAT9 line of aluminum and composite bats.With the success of this launch, the demand pickup continued through the remainder of 2020.
Gross profit
Gross profit for the year ended December 31, 2020 decreased $2.1 million as compared to the year ended December 31, 2019. Gross profit as a percentage of sales was 51.2% for the year ended December 31, 2020 as compared to 53.9% for the year ended December 31, 2019. The cost of sales for the year ended December 31, 2020 includes $4.3 million related to the amortization of inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the year ended December 31, 2020 was 57.7%. The increase in gross profit as a percentage of net sales was attributable to an increase in retail sales price of Marucci's aluminum bats, specifically the CAT9, increased e-commerce sales resulting from the closure of retail brick and mortar stores at various times during 2020, and greater operating efficiencies resulting from Marucci's consolidation of its wood mills during the latter part of 2019.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2020 was $30.5 million, or 46.2% of net sales compared to $30.9 million, or 46.5% of net sales for the year ended December 31, 2019. Selling, general and administrative expense for the year ended December 31, 2020 includes $2.0 million in acquisition related costs that were expensed at the close of the Marucci acquisition, and $1.0 million in integration service fees paid to CGM. Excluding the effect of the acquisition costs and integration service fees, selling, general and administrative expense for the year ended December 30, 2020 was $27.5 million, with the decrease in expense attributable to reductions in travel and entertainment as a result of the COVID-19 pandemic, a reduction in royalty fees related to the acquisition in 2019 of a technology used with Marucci's aluminum bats, and a decrease in commission expense due to bringing the Marucci's sales team in-house.
Loss from operations
Loss from operations for the year ended December 31, 2020 was $3.9 million compared to loss from operations of $0.6 million for the same period in 2019, primarily as a result of the factors noted above.
Velocity Outdoor
Overview
Velocity Outdoor is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin and Centerpoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity Outdoor's other primary product categories are archery, with products including Centerpoint and Ravin crossbows, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Net sales | | $ | 270,426 | | 100.0 | % | | $ | 215,996 | | 100.0 | % | | $ | 147,842 | | 100.0 | % |
| Gross profit | | $ | 85,147 | | 31.5 | % | | $ | 66,819 | | 30.9 | % | | $ | 40,660 | | 27.5 | % |
| Selling, general and administrative expense | | $ | 35,790 | | 13.2 | % | | $ | 32,263 | | 14.9 | % | | $ | 25,295 | | 17.1 | % |
| Impairment expense | | $ | — | | — | % | | $ | — | | — | % | | $ | 32,881 | | 22.2 | % |
| Income (loss) from operations | | $ | 39,725 | | 14.7 | % | | $ | 24,925 | | 11.5 | % | | $ | (27,138) | | (18.4) | % |
Year ended December 31, 2021 compared to the Year ended December 31, 2020
Net sales
Net sales for the year ended December 31, 2021 were $270.4 million compared to net sales of $216.0 million for the year ended December 31, 2020, an increase of $54.4 million or 25.2%. The increase in net sales during the year ended December 31, 2021 is attributable to launching innovative new products, new branding initiatives, along with an increase in consumer participation in Velocity categories.
Gross profit
Gross profit as a percentage of net sales was 31.5% for the year ended December 31, 2021 as compared to 30.9% in the year December 31, 2020. The increase in gross profit as a percentage of net sales was primarily attributable to the impact of new, feature rich, higher margin products across Airgun and Archery divisions..
Selling general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2021 was $35.8 million, or 13.2% of net sales compared to $32.3 million, or 14.9% of net sales, for the year ended December 31, 2020. The increase in selling, general and administrative expense is primarily related to volume driven expenses that correlate to the increase in sales, as well as additional investments in branding and marketing initiatives.
Income from operations
Income from operations for the year ended December 31, 2021 was $39.7 million, an increase of $14.8 million when compared to income from operations of $24.9 million for the comparable period in 2020. The increase in operating income in the year ended December 31, 2021 reflects the factors noted above.
Year ended December 31, 2020 compared to the Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were $216.0 million compared to net sales of $147.8 million for the year ended December 31, 2019, an increase of $68.2 million or 46.1%. The increase in net sales during the year ended December 31, 2020 is due to a significant increase in customer demand that we have experienced in the current year reflecting consumer focus on outdoor branded products, as well as the introduction of several new products during 2020.
Gross Profit
Gross profit as a percentage of net sales was 30.9% for the year ended December 31, 2020 as compared to 27.5% in the year December 31, 2019. The increase in gross profit as a percentage of net sales was primarily attributable to product and customer mix.
Selling general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2020 was $32.3 million, or 14.9% of net sales compared to $25.3 million, or 17.1% of net sales, for the year ended December 31, 2019. The increase in selling, general and administrative expense is primarily related to volume driven expenses that correlate to the increase in sales, as well as additional investments in marketing.
Income (loss) income from operations
Income from operations for the year ended December 31, 2020 was $24.9 million, an increase of $52.1 million when compared to loss from operations of $27.1 million for the comparable period in 2019. Velocity recognized impairment expense of $32.9 million in 2019 after determining that interim impairment testing was necessary in the prior year. The increase in operating income in the year ended December 31, 2020 reflects the factors noted above, and the effect of the impairment expense on the operating income in 2019.
Niche Industrial Businesses
Altor Solutions
Overview
Founded in 1957 and headquartered in Scottsdale, Arizona, Altor Solutions is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer (OEM) components made from expanded polystyrene (EPS) and expanded polypropylene (EPP). Altor operates 16 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products and others.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| (in thousands) | | | | | | | | | |
| Net sales | | $ | 180,217 | | 100.0 | % | | $ | 130,046 | | 100.0 | % | | $ | 121,424 | | 100.0 | % |
| Gross profit | | $ | 43,759 | | 24.3 | % | | $ | 39,435 | | 30.3 | % | | $ | 34,418 | | 28.3 | % |
| Selling, general and administrative expense | | $ | 17,068 | | 9.5 | % | | $ | 14,423 | | 11.1 | % | | $ | 11,143 | | 9.2 | % |
| Income from operations | | $ | 17,962 | | 10.0 | % | | $ | 15,939 | | 12.3 | % | | $ | 14,292 | | 11.8 | % |
Year ended December 31, 2021 compared to the Year ended December 31, 2020
Net sales
Net sales for the year ended December 31, 2021 were $180.2 million, an increase of $50.2 million, or 38.6%, compared to the year ended December 31, 2020. The increase in net sales during the year was primarily due to the acquisition of Polyfoam in July 2020, the acquisition of Plymouth Foam in October 2021, the continued recovery from the effects of the COVID-19 pandemic experienced in the prior year, organic growth and contractual increases in selling prices during the current year.
Gross profit
Gross profit as a percentage of net sales was 24.3% and 30.3%, respectively, for the years ended December 31, 2021 and 2020. The decrease in gross profit as a percentage of net sales in the year ended December 31, 2021 was primarily due to increases in the price of Altor's primary raw material, EPS, during 2021, margin dilution due to the acquisition of Polyfoam and Plymouth Foam, which have historically had lower margins than the legacy
business, and increased operating expenses, including labor, utilities and supplies.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2021 was $17.1 million as compared to $14.4 million for the year ended December 31, 2020, an increase of $2.6 million. The increase in selling, general and administrative expense for the year ended December 31, 2021 is primarily attributable to the acquisition of Polyfoam in the third quarter of 2020 and Plymouth Foam in the fourth quarter of 2021, and increased information technology and professional fees incurred during the current year.
Income from operations
Income from operations was $18.0 million for the year ended December 31, 2021 as compared to $15.9 million for the year ended December 31, 2020, an increase of $2.0 million based on the factors noted above.
Year ended December 31, 2020 compared to the Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were $130.0 million, an increase of $8.6 million, or 7.1%, compared to the year ended December 31, 2019. The increase in net sales during the year was primarily due to the acquisition of Polyfoam in July 2020, partially offset by a slow-down in the appliance and automotive customer sectors, as well as a general slow-down across other customer segments in April and May, as a result of the effect of the COVID-19 pandemic on our customers' operations. While most of our customer sectors saw improved performance beginning in June, the appliance and automotive sectors continued to see a slowdown in sales through the end of the second quarter. During the latter half of 2020, appliance sales continued to trend lower versus the prior year due to lower demand and supply chain and labor constraints resulting from the COVID-19 pandemic.
Gross profit
Gross profit as a percentage of net sales was 30.3% and 28.3%, respectively, for the years ended December 31, 2020 and 2019. The increase in gross profit as a percentage of net sales in the year ended December 31, 2020 was primarily due to the decreasing price of expanded polystyrene ("EPS") resin. A majority of Altor's products are made with EPS resin, an oil and natural gas derived polymer with an added expansion agent, therefore raw material costs will fluctuate based on the price of oil and natural gas.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2020 was $14.4 million as compared to $11.1 million for the year ended December 31, 2019, an increase of $3.3 million. The increase in selling, general and administrative expense for the year ended December 31, 2020 is primarily attributable to the acquisition of Polyfoam in the third quarter of 2020 and an increase in performance based compensation versus the prior year.
Income from operations
Income from operations was $15.9 million for the year ended December 31, 2020 as compared to $14.3 million for the year ended December 31, 2019, an increase of $1.6 million based on the factors noted above.
Arnold
Overview
Arnold serves a variety of markets including aerospace and defense, general industrial, motorsport/ automotive, oil and gas, medical, energy, reprographics and advertising specialties. Over the course of more than 100 years, Arnold has successfully evolved and adapted our products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold produces high performance permanent magnets (PMAG), turnkey electric motors ("Ramco"), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Arnold has expanded globally and built strong relationships with our customers worldwide.Arnold is the largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems. Arnold is headquartered in Rochester, New York.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Net sales | | $ | 139,941 | | 100.0 | % | | $ | 98,990 | | 100.0 | % | | $ | 119,948 | | 100.0 | % |
| Gross profit | | $ | 39,463 | | 28.2 | % | | $ | 23,529 | | 23.8 | % | | $ | 31,180 | | 26.0 | % |
| Selling, general and administrative expense | | $ | 22,751 | | 16.3 | % | | $ | 17,692 | | 17.9 | % | | $ | 19,050 | | 15.9 | % |
| | | | | | | | | |
| Income from operations | | $ | 11,988 | | 8.6 | % | | $ | 2,096 | | 2.1 | % | | $ | 8,361 | | 7.0 | % |
Year ended December 31, 2021 compared to the Year ended December 31, 2020
Net sales
Net sales for the year ended December 31, 2021 were approximately $139.9 million, an increase of $41.0 million compared to the same period in 2020. The increase in net sales is primarily a result of increased demand in defense and industrial markets driven in part by the acquisition of Ramco Electric Motors, Inc. ("Ramco") in March 2021. International sales were $43.0 million and $37.9 million for the years ended December 31, 2021 and 2020, respectively, an increase of $5.1 million.
Gross profit
Gross profit was $39.5 million for the year ended December 31, 2021 as compared to $23.5 million for the same period in 2020. Gross profit as a percentage of net sales increased to 28.2% in 2021 from 23.8% in 2020, principally due to increased volume, favorable product mix and improvements in operating efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense in the year ended December 31, 2021 was $22.8 million as compared to approximately $17.7 million for the year ended December 31, 2020. The increase in selling, general and administrative expense was due to higher staffing related costs, acquisition costs, recruiting costs and increased information technology costs. Selling, general and administrative expense represented 16.3% of net sales for the year ended December 31, 2021 as compared to 17.9% for the same period in 2020. The decrease in selling, general and administrative expense as a percentage of net sales was due to overall higher sales volume as compared to the prior year.
Income from operations
Arnold had income from operations of approximately $12.0 million for the year ended December 31, 2021, as compared to income from operations of $2.1 million for the year ended December 31, 2020, an increase of $9.9 million year over year based on the factors stated above.
Year ended December 31, 2020 compared to the Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were approximately $99.0 million, a decrease of $21.0 million compared to the same period in 2019. The decrease in net sales is primarily a result of softness in the commercial aerospace, oil and gas and advertising specialty markets caused by the global COVID-19 pandemic. International sales were $37.9 million and $47.4 million for the years ended December 31, 2020 and 2019, respectively, a decrease of $9.5 million.
Gross Profit
Gross profit was $23.5 million for the year ended December 31, 2020 as compared to $31.2 million for the same period in 2019. Gross profit as a percentage of net sales decreased to 23.8% in 2020 from 26.0% in 2019, principally due to the lower volume in the markets as noted above, partially offset by improved operating efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense in the year ended December 31, 2020 was $17.7 million as compared to approximately $19.1 million for the year ended December 31, 2019. The decrease in selling, general and administrative expense was due to lower staffing related costs and lower travel and meeting expenses. Selling, general and administrative expense represented 17.9% of net sales for the year ended December 31, 2020 as compared to 15.9% for the same period in 2019. The increase in selling, general and administrative expense as a percentage of net sales was due to overall lower sales volume.
Income from operations
Arnold had income from operations of approximately $2.1 million for the year ended December 31, 2020, as compared to income from operations of $8.4 million for the year ended December 31, 2019, a decrease of $6.3 million year over year based on the factors stated above.
Sterno
Overview
Sterno, headquartered in Corona, California, is the parent company of Sterno LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and Rimports Inc. ("Rimports"). Sterno is a leading manufacturer and marketer of portable food warming systems, creative indoor and outdoor lighting, and home fragrance solutions for the consumer markets. Sterno offers a broad range of wick and gel chafing systems, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps through Sterno Products, flameless candles and outdoor lighting products through Sterno Home, and scented wax cubes and warmer products used for home decor and fragrance systems through Rimports. During 2021, Sterno made the strategic decision to incorporate the product lines of Sterno Home into Rimports.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Net sales | | $ | 375,127 | | | 100.0 | % | | $ | 369,981 | | | 100.0 | % | | $ | 395,444 | | | 100.0 | % |
| Gross profit | | $ | 72,010 | | | 19.2 | % | | $ | 78,203 | | | 21.1 | % | | $ | 101,999 | | | 25.8 | % |
| Selling, general and administrative expense | | $ | 32,856 | | | 8.8 | % | | $ | 34,919 | | | 9.4 | % | | $ | 39,740 | | | 10.0 | % |
| Income from operations | | $ | 19,877 | | | 5.3 | % | | $ | 25,772 | | | 7.0 | % | | $ | 44,810 | | | 11.3 | % |
Year ended December 31, 2021 compared to the Year ended December 31, 2020
Net sales
Net sales for the year ended December 31, 2021 were approximately $375.1 million, an increase of $5.1 million or 1.4% compared to net sales for the year ended December 31, 2020. The increase in net sales reflects an increase in sales at both Sterno Products and Rimports as compared to the prior year. Sterno Products began to see a return of demand in the food service and hospitality industries in the latter half of 2021, while Rimports has continued to see strong consumer demand for their products at the retail level.
Gross profit
Gross profit as a percentage of net sales decreased from 21.1% for the year ended December 31, 2020 to 19.2% for the same period ended December 31, 2021. The decrease in gross profit as a percentage of net sales during 2021 as compared to 2020 was attributable to sales mix, additional inventory reserves recorded in 2021 due to product rationalization as Sterno Home integrated with Rimports, and increases in distribution costs, wages and raw materials.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2021 was approximately $32.9 million as compared to $34.9 million in the year ended December 31, 2020, a decrease of $2.1 million or 5.9%, reflecting lower salaries, commissions, and various cost savings initiatives implemented to address the effects of decreased demand from COVID-19. Selling, general and administrative expense represented 8.8% of net sales for the year ended December 31, 2021 and 9.4% for the year ended December 31, 2020.
Income from operations
Income from operations for the year ended December 31, 2021 was approximately $19.9 million, a decrease of $5.9 million when compared to the same period in 2015, due2020, based on the factors noted above.
Year ended December 31, 2020 compared to thosethe Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were approximately $370.0 million, a decrease of $25.5 million or 6.4% compared to net sales for the year ended December 31, 2019. The net sales variance reflects a decrease in sales at Sterno Products and Sterno Home as a result of the effect of COVID-19 on the food service and retail industries beginning in the latter half of March, partially offset by favorable sales volume at Rimports of wax and essential oils during 2020. The food service industry continues to be negatively impacted by the COVID-19 pandemic in 2021.
Gross Profit
Gross profit as a percentage of net sales decreased from 25.8% for the year ended December 31, 2019 to 21.1% for the same period ended December 31, 2020. The decrease in gross profit as a percentage of net sales during 2020 as compared to 2019 was attributable to product mix, with lower margin sales in 2020, as well as higher freight and tariff costs.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2020 was approximately $34.9 million as compared to $39.7 million in the year ended December 31, 2019, a decrease of $4.8 million or 12.1%, reflecting lower salaries, commissions, and various cost savings initiatives implemented to address the effects of decreased demand from COVID-19.
Income from operations
Income from operations for the year ended December 31, 2020 was approximately $25.8 million, a decrease of $19.0 million when compared to the same period in 2019, based on the factors describednoted above.
Liquidity and Capital Resources
The changeWe generate cash primarily from the operations of our subsidiaries, and we have the ability to borrow under our 2021 Credit Facility to fund our operating, investing and financing activities. In 2021, we filed a prospectus supplement pursuant to which we may, but we have no obligation to, issue and sell up to $500 million shares of the common shares of the Trust in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions, the trading price of Trust common shares and determinations by us regarding appropriate sources of funding. Our principal uses of cash are operating expenses, payment of management fees, capital expenditures, working capital needs, debt service, dividends on our common and preferred Trust shares, and strategic growth initiatives, including acquisitions. We had total available cash and cash equivalents isof $157.1 million and $60.0 million as follows:of December 31, 2021 and 2020, respectively.
Our liquidity requirements primarily relate to our debt service requirements, payments of our common and preferred share distributions, management fees paid to our Manager, working capital needs and purchase commitments at our subsidiaries. As of December 31, 2021, we had $1000.0 million of indebtedness associated with our 5.250% 2029 Notes, and $300 million of indebtedness associated with our 5.000% 2032 Notes. There are no required quarterly principal payments on our 2029 Notes or 2032 Notes. Long-term debt liquidity requirements consist of the payment in full of our Notes upon their respective maturity dates. |
| | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2015 |
| Cash provided by operating activities | $ | 81,771 |
| | $ | 111,372 |
| | $ | 84,548 |
|
| Cash (used in) provided by investing activities | (77,278 | ) | | (363,021 | ) | | 233,880 |
|
| Cash provided by (used in) financing activities | (2,588 | ) | | 208,726 |
| | (254,357 | ) |
| Effect of exchange rates on cash and cash equivalents | (1,792 | ) | | (3,174 | ) | | (1,905 | ) |
| (Decrease) increase in cash and cash equivalents | $ | 113 |
| | $ | (46,097 | ) | | $ | 62,166 |
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Cash provided by operating activities | $ | 134,051 | | | $ | 148,625 | | | $ | 84,562 | |
| Cash (used in) provided by investing activities | (317,496) | | | (700,834) | | | 743,126 | |
| Cash provided by (used in) financing activities | 273,206 | | | 521,725 | | | (779,522) | |
| Effect of exchange rates on cash and cash equivalents | 228 | | | 914 | | | (1,178) | |
| Increase (decrease) in cash and cash equivalents | $ | 89,989 | | | $ | (29,570) | | | $ | 46,988 | |
Cash Flow from Operating Activities
20172021
Cash flows provided by operating activities totaled approximately $81.8$134.1 million for the year ended December 31, 2017,2021, which represents a decrease of $29.6$14.6 million compared to cash flow from operating activities of $111.4$148.6 million for the year ended December 31, 2016.2020. The decrease in cash flows in 2021 is primarily attributable to an increase in cash used for working capital. Cash used in operating activities for working capital for the year ended December 31, 20172021 was $40.4$81.0 million, as compared to cash provided by operating activities for working capital of $18.5$2.4 million for the year ended December 31, 2016.2020. We typically have a higher usage of cash for working capital in the first half of the year as most of our companies will build up inventories after the fourth quarter. In the current year, several of our businesses had higher inventory levels than normal given significantly longer lead times due to supply chain issues, which led to higher than normal levels of inventory at December 31, 2021. In the prior year, the COVID-19 pandemic led our businesses to implement a variety of steps to conserve cash and increase liquidity given the uncertainty in the economy, resulting in a lower usage of cash for working capital. The increase was primarily due toin cash used in operating activities for inventory by our branded consumer businesses during 2017, as well as a full year of operations at 5.11 (acquired in August 2016) andworking capital also reflects the acquisition of CrosmanMarucci Sports and BOA in June 2017. The change in cash used to purchase inventory in 2017 was approximately $31.1 million as compared tothe second and fourth quarter, respectively, of the prior year, with $29.8 millionand Lugano in the third quarter of the variance relatedcurrent year. We expect that Lugano will use cash to build inventory over the branded consumer businesses.next twelve months to support its anticipated sales growth.
20162020
For the year ended December 31, 2016, cashCash flows provided by operating activities (from both continuing and discontinued operations) totaled approximately $111.4$148.6 million for December 31, 2020, which represents a $26.8an increase of $64.1 million increase compared to cash flow from operating activities of $84.5$84.6 million duringfor the year ended December 31, 2015. Net2019. The increase in cash flows in 2020 is attributable to an increase in income from continuing operations in the year ended December 31, 2020, driven by strong performance at our 5.11, Liberty and Velocity businesses, and an increase in cash provided by discontinued operations totaled $3.7working capital. In the prior year, the Company incurred interest expense related to the 2018 Term Loan, which we paid off in the third and fourth quarter of 2019 using the proceeds from the sale of Clean Earth and our Series C Preferred Share Offering. The payoff of the 2018 Term
Loan, partially offset by the increase in interest expense related to $200 million in 2016our 8% Senior Notes issued in May 2020, resulted in a decrease in our interest expense in the current year as compared to $15.52019 by approximately $12.4 million. In the prior year, we also recognized a loss of $10.2 million in 2015, with the decrease duerelated to the numbersale of dispositions reflected in each yearcommon shares received as well as the timingpart of the dispositions. The increase in net cashconsideration for the sale of Manitoba Harvest. Cash provided by operating activities for working capital for the year ended December 31, 2020 was $3.3 million as compared to cash used in operating activities for working capital of continuing operations of $38.7$15.2 million which is principallyfor the result of higher net income in 2016 and changesyear ended December 31, 2019. The increase in cash provided by working capital in the current year ended December 31, 2016 as comparedprimarily reflects steps our businesses have taken to maintain liquidity in the same period in 2015 (an increase of $13.2 million), as a result of the acquisitions completed during 2016.current economy.
20152019
ForCash flows provided by operating activities totaled approximately $84.6 million for the year ended December 31, 2015, on a consolidated basis, cash flows provided by operating activities (from both continuing and discontinued operations) totaled $84.5 million,2019, which represents a $13.9decrease of $29.9 million increase compared to cash flow from operating activities of $114.5 million for the year ended December 31, 2014.2018. The decrease in cash provide by operating activities is primarily due to the effect of cash flows from discontinued operations and reflects the timing of the sale of Manitoba Harvest and Clean Earth in fiscal year 2019. Cash fromused in operating activities of continuingdiscontinued operations in the year ended December 31, 2019 was $69.0$10.1 million in 2015 compared to $36.2 million in 2014. Cash fromwhile cash provided by operating activities of discontinued operations was $15.5$42.6 million in 2015year ended December 31, 2018. Fiscal year 2018 reflects a full year of operations of our discontinued operations while 2019 reflects the effect of the sales of Manitoba Harvest in February 2019 and Clean Earth in June 2019. Cash used in operating activities for working capital for the year ended December 31, 2019 was $15.2 million as compared to $34.4cash used for working capital of $7.7 million in 2014.for the year ended December 31, 2018. The increase in cash from operating activity of continuing activities is principally the result of changes inused for working capital primarily resulting from our 2014 acquisitions of Clean Earth and Sternopurposes in the third and fourth quartercurrent year primarily reflects the effect of 2014, respectively, and the acquisition of Manitoba Harvestour acquisitions that occurred in July 2015, and the increased operating income year over year as a result of these acquisitions.February 2018 which resulted in an increase in cash needed to fund working capital, particularly at Rimports.
Cash Flow from Investing Activities
20172021
Cash flows used in investing activities totaled approximately $77.3$317.5 million for the year ended December 31, 2021, compared to $363.0$700.8 million used in investing activities during the year ended December 31, 2016, a decrease of $285.7 million. During 2016, we completed2020. Investing activities in the current year reflect our acquisition of 5.11Lugano in August, and severalSeptember 2021, plus add-on acquisitions includingat Arnold (Ramco Electric Motors), Altor Solutions (Plymouth Foam) and Marucci (Lizard Skins) ($404.3 million), while investing activities in the acquisition of Baby Tula by Ergobaby and Sterno Home by Sterno for a total of $536.2 million in cash investment, while in 2017, our total cash paid for acquisitions of $165.0 million related toprior year reflect our acquisition of CrosmanMarucci in April 2020, BOA in October 2020 and two smalleran add-on acquisitions.acquisition by Altor Solutions in July 2020 ($667.1 million). The cash flows used in investing activities in the current year was offset by the proceeds received from our sale of Liberty Safe in August 2021 ($101.0 million in proceeds).
Our spending on capital expenditures increased $11.1 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020, with $39.9 million in capital expenditures in 2021 and $28.8 million in capital expenditures in 2020. The additional capital expenditures reflects our acquisitions of Marucci in the second quarter of 2020 and BOA in the fourth quarter of 2020, as well as an increase in expenditures in the current year after reduced spending in 2020 as our businesses limited spending during the early stages of the COVID-19 pandemic. We expect capital expenditures for fiscal year 2022 to be approximately $70 million to $80 million.
2020
Cash flows used in investing activities totaled approximately $700.8 million for the year ended December 31, 2020, compared to $743.1 million provided by investing activities during the year ended December 31, 2019. Cash provided by investing activities in the prior year primarily related to the proceeds received from the sale of our Manitoba Harvest and Clean Earth businesses, while investing activities in the current year reflect our acquisition of Marucci in April 2020, BOA in October 2020 and an add-on acquisition by Altor Solutions in July 2020 ($667.1 million). Capital expenditures in the year ended December 31, 2017 increased $20.82020 decreased $4.1 million compared to the year ended December 31, 2019, which reflects a reduction in our capital spending in the current year in response to the anticipated effect of the COVID-19 pandemic on our cash flows.
2019
Cash flows provided by investing activities totaled approximately $743.1 million for the year ended December 31, 2019, compared to $604.1 million used in investing activities during the year ended December 31, 2018. Cash flows from Clean Earth and Manitoba Harvest, which are reflected as discontinued operations, totaled $279.2 million in
fiscal year 2019 and reflects the effect of the sale transactions. Cash provided by investing activities in the current year primarily relates to the proceeds received from the sales of Clean Earth and Manitoba. In the year ended December 31, 2018, we had a platform acquisition in the first quarter, Altor, and several add-on acquisitions at our subsidiaries. Sterno acquired Rimports in February 2018, and our Velocity Outdoor subsidiary acquired Ravin in September 2018. The total cash paid for these acquisitions during 2018 was $495.1 million. Capital expenditures in the year ended December 31, 2019 decreased $6.1 million, due primarily to expenditures at our 5.11 business related to investments in various infrastructure and systems projects to position them for future growth. We expect capital expenditures for fiscal yearin 2018 to be approximately $45 million to $55 million. The cash paid for acquisitions and capital expenditures was offsetthat were nonrecurring in both years by proceeds from the sale of our investment in FOX, $136.1 million in 2017 and $182.5 million in 2016, as well as the sale of our Tridien business in 2016. The sale of our FOX shares in 2017 represented our remaining investment in FOX.
2016
Cash flows used in investing activities for the year ended December 31, 2016 totaled approximately $363.0 million, compared to $233.9 million provided by investing activities in the same period of 2015. The 2016 investing activities primarily reflect the acquisition of 5.11 in the third quarter and the add-on acquisition of Sterno Home, Baby Tula, Phoenix Soil and EWS ($536.2 million) and net proceeds from the sale of Tridien in September 2016 ($11.2 million in net proceeds). Capital expenditures from continuing operations in the year ended December 31, 2016 increased approximately $8.3 million, from $15.7 million in 2015 to $24.0 million in 2016. The increase in capital expenditures is attributable to our acquisition of 5.11 in August 2016, and additional investment in Sterno, Advanced Circuits and Liberty during 2016 compared to the prior year. The 2016 investing activities also reflect proceeds from the sale of FOX shares during the year of $182.5 million.
2015
Cash flows provided by investing activities for the year ended December 31, 2015 was $233.9 million compared to $424.8 million used in investing activities in the same period of 2014. The 2015 investing activities reflect the acquisition of Manitoba Harvest in the third quarter and the add-on acquisition of HOCI in the fourth quarter of 2015 ($130.3 million) and net proceeds from the sale of CamelBak in August 2015 and American Furniture in October 2015 ($385.5 million in the aggregate). Capital expenditures from continuing operations in the year ended December 31, 2015 increased approximately $5.7 million, from $15.7 million in 2014 to $24.0 million in 2015, with the increase primarily due to capital expenditures from our 2014 acquisitions, Clean Earth and Sterno.2019.
Cash Flow from Financing Activities
20172021
Cash flows used inprovided by financing activities totaled approximately $2.6$273.2 million for the year ended December 31, 2017,2021, as compared to cash flows used in financing activities of $521.7 million for the year ended December 31, 2020. During the first quarter of 2021, we completed an offering of $1,000.0 million of our 2029 Notes, and used the proceeds to pay down our 2018 Revolving Credit Facility and pay off the existing 2026 Notes. In the fourth quarter of 2021, we completed an offering of $300.0 million of our 2032 Notes, and used the proceeds to pay down our 2021 Revolving Credit Facility. Financing activities in both periods reflect the payment of our common and preferred share distributions. In the current year, we also paid a special common share distribution of $57.1 million to our shareholders upon the reclassification of the Trust to a corporation for income tax purposes. In September 2021, we filed a prospectus supplement and entered into a Sales Agreement for an At The Market program pursuant to which we may sell common shares of the Trust. We received $114.6 million in net cash proceeds from the sale of Trust common shares under this program in the current year. During the year ended December 31, 2021, we made a distribution to the Allocation Member of $17.3 million related to the five-year Holding Event of our Liberty, Ergobaby and ACI business, and $16.8 million related to the Sale Event of Liberty Safe. In the prior year, we made a distribution to the Allocation Member of $9.1 million related to the five-year Holding Event for our Sterno business.
2020
Cash flows provided by financing activities totaled approximately $521.7 million for the year ended December 31, 2020, as compared to cash flows used in financing activities of $779.5 million for the year ended December 31, 2019. Financing activities in both periods reflect the payment of our common and preferred share distributions, with a $6.3 million increase in the preferred share distribution as a result of the issuance of our Series C Preferred Shares in November 2019. In the prior year, we used the proceeds from our sale of Manitoba Harvest and Clean Earth to repay amounts outstanding under our 2018 Revolving Credit Facility and 2018 Term Loan, while in the current year, we completed a common share offering and the issuance of $200 million in additional 2026 Notes, resulting in net proceeds of $285.9 million. We drew approximately $200 million on our 2018 Revolving Credit Facility that was used in the financing of our Marucci acquisition, and $300 million that was used in the financing of our BOA acquisition. A portion of the proceeds received from the issuance of the additional 2026 Notes and common share offering was used to pay down the amount outstanding on our 2018 Revolving Credit facility subsequent to the Marucci acquisition. During the year ended December 31, 2020, we also made a distribution to the Allocation Member of $9.1 million related to the five year Holding Event for our Sterno business.
2019
Cash flows used by financing activities totaled approximately $779.5 million for the year ended December 31, 2019, as compared to cash flows provided by financing activities of $208.7 million. Our financing cash flows in 2017 principally reflect the following:
The payments of our shareholder distributions of $86.3$500.1 million related to our common shares and $2.5 million related to our Series A Preferred Shares;
Distributions of $39.2 million paid during 2017 to Holders of the allocation interest related to the sale of our FOX shares;
Proceeds of $96.4 million from a preferred stock offering completed in June 2017; and
Net borrowings during the year of $31.9 million under our 2014 Credit Facility.
The decrease in cash flows from financing activities in 2017 as compared to 2016 is primarily due to the borrowings in the prior year related to the amendment of our credit facility, including borrowings under our 2016 Incremental Term Loan of $250 million, which was used to fund the acquisition of 5.11.
2016
Cash flows provided by financing activities totaled approximately $208.7 million during the year ended December 31, 2016 principally reflecting the following:
The payments of our shareholder distributions of $78.2 million in the year ended December 31, 2016;
Distributions of $23.6 million paid during 2016 to noncontrolling shareholders as a result of the Liberty and ACI recapitalizations;
Net borrowings during the year ended December 31, 2016 under our 2014 Credit Facility totaled $248.1 million, including borrowings under our 2016 Incremental Term Loan, which was used to fund the acquisitions of 5.11 during the third quarter, EWS and Baby Tula during the second quarter, and the repurchase of Ergobaby common stock from noncontrolling shareholders during the third quarter;
Distributions of $23.8 million to the Holders of the allocation interest related to Sale Events (March and August Offerings of FOX, and September Disposition of Tridien) and a Holding Event (ACI); and
Issuance of Trust common shares for net proceeds of $99.4 million.
2015
Cash flows used in financing activities for the year ended December 31, 2015 was $208.72018. During 2019, we used the proceeds from our sales of Manitoba Harvest and Clean Earth as well as the proceeds from our Series C Preferred Share offering to repay $832.3 million principally reflecting:
of the outstanding amount under our 2018 Credit Facility, which represented all of the amount outstanding under our 2018 Term Loan, as well as the outstanding amounts under our 2018 Revolving Credit Facility. In additional to the payment of our shareholdercommon and preferred share distributions, we also made a distribution ($78.2 million);
the payment of profit allocationduring 2019 to our Allocation Interest Holdersholders of $17.7 million;$60.4 million related to the sales of Manitoba Harvest and Clean Earth.
the repayment of our 2014 Revolving Credit Facility using the net proceeds from the sale of CamelBak in the third quarter of 2015.
At December 31, 2017, we had approximately $39.9 million of cash and cash equivalents on hand. The majority of the cash held at corporate was held in checking and money market accounts at December 31, 2017. At the corporate level, cash
balances are maintained in accordance with the Company’s investment policy, which identifies allowable investments and specifies credit quality standards. The primary objective of our investment activities is the preservation of principal and minimizing risk. We do not hold any investments for trading purposes.
On January 25, 2018, we paid our fourth quarter 2017 common share distribution to our shareholders of $21.6 million, and on January 30, 2018 we paid our fourth quarter 2017 preferred share distribution of $1.8 million.
Total Liabilities and Intercompany loans to our businesses
The following table summarizes the total liabilities and intercompany debt of our business as of December 31, 2017:2021: | | | (in thousands) | | Intercompany Loans | | Total Liabilities | (in thousands) | | Intercompany Loans | | Total Liabilities |
| 5.11 | | $ | 199,452 |
| | $ | 259,168 |
| 5.11 | | $ | 164,510 | | | $ | 308,250 | |
| Crosman | | 93,415 |
| | 127,204 |
| |
| BOA | | BOA | | 124,245 | | | 203,121 | |
| Ergobaby | | 66,648 |
| | 83,411 |
| Ergobaby | | 23,177 | | | 44,247 | |
| Liberty | | 48,787 |
| | 59,724 |
| |
| Manitoba Harvest | | 48,507 |
| | 73,550 |
| |
| Lugano | | Lugano | | 132,248 | | | 169,262 | |
| Marucci Sports | | Marucci Sports | | 93,619 | | | 125,412 | |
| Velocity Outdoor | | Velocity Outdoor | | 98,759 | | | 153,824 | |
Advanced Circuits | | 91,418 |
| | 110,977 |
| | 82,363 | | | — | |
| Arnold | | 70,465 |
| | 95,614 |
| Arnold | | 68,802 | | | 108,096 | |
| Clean Earth | | 168,575 |
| | 232,004 |
| |
| Altor Solutions | | Altor Solutions | | 131,691 | | | 174,173 | |
| Sterno | | 64,127 |
| | 107,514 |
| Sterno | | 207,609 | | | 288,458 | |
| | | $ | 1,127,023 | | | $ | 1,574,843 | |
| Corporate and eliminations | | Corporate and eliminations | | (1,127,023) | | | 255,761 | |
| Liabilities held-for-sale | | Liabilities held-for-sale | | — | | | 29,127 | |
| Total | | $ | 851,394 |
| | $ | 1,149,166 |
| Total | | $ | — | | | $ | 1,859,731 | |
| Corporate and eliminations | | (851,394 | ) | | (254,862 | ) | |
| | | $ | — |
| | $ | 894,304 |
| |
(1) In October 2021, the Company entered into a merger agreement to sell all of the outstanding securities of Advanced Circuits. The transaction is expected to close in the second quarter of 2022 and Advanced Circuits has been presented as held-for-sale at December 31, 2021.
Each loan 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. 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 principle 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.
During the second quarter of 2016,In August 2021, we completed a recapitalization at Advanced Circuits5.11 whereby the Company entered into an amendment to the intercompany loan agreement with Advanced Circuits5.11 (the "ACI"5.11 Loan Agreement"). The ACI loan agreement5.11 Loan Agreement was amended to provide for additional term loan borrowings of $60.1 million and to extend the maturity date for the term loans. The ACI noncontrolling shareholders received approximately $18.6 million in distributions as a result of the recapitalization.
During the first quarter of 2016, we completed a recapitalization at Liberty whereby we entered into an amendment to the intercompany loan agreement with Liberty (the “Liberty Loan Agreement”). The Liberty Loan Agreement was amended to (i) provide for term loan borrowings of $38.0 million and revolving credit facility borrowings of $5.0$55.0 million to fund cash distributions totaling $35.3 milliona distribution to its shareholders, including theshareholders. The Company and (ii) extend the maturity datesowned 97.7% of the term loans and revolving credit facility. Liberty’s noncontrolling shareholders received approximately $5.3 million in distributions as a resultoutstanding shares of 5.11 on the date of the recapitalization. Certain members of Liberty's management also exercised stock option immediately prior to the recapitalization, resulting in net proceeds from stock options at Liberty of $3.8distribution and received $53.7 million. The Company then purchased $1.5 million in shares from membersremaining amount of Liberty management, resulting in Liberty's noncontrolling shareholders holding 11.4% of Liberty's outstanding shares subsequentthe distribution went to the recapitalization.minority shareholders.
Subsequent to year end in January 2018,In November 2020, the Company completed a recapitalization at Sternoof ACI whereby the Company entered into an amendment to the intercompany loan agreement with SternoACI (the "Sterno"ACI Loan Agreement"). The SternoACI Loan
Agreement was amended to (i) provide for term loan borrowings of $56.8$48.8 million to fund the repurchase of shares from an existing shareholder and to fund a distribution to the Company, which owned 100% of the outstanding equity of Sterno at the time of the recapitalization,shareholders, and (ii)ii) extend the maturity dates of the term loans.loans, and termination date of the revolving loan commitment. In connection with the recapitalization, Sterno's management team exercised all of their vested stock options, which represented 58,000ACI repurchased 47,870 shares of Sterno.ACI capital stock, and distributed $42.8 million to shareholders. The Company then used a portionowned 71.8% of the outstanding shares of ACI on the date of the distribution and received $30.7 million. The remaining amount of the distribution went to repurchase the 58,000minority shareholders.
In September 2021, BOA repurchased shares of its issued and outstanding common shares from
managementits largest minority shareholder for a total
purchase pricepayment of
$6.0 million. In addition, Sterno issued new stock options to replace the exercised option, thus maintaining the same percentage of fully diluted non-controlling interest that existed prior to the recapitalization. In February 2018, Sterno completed the acquisition of Rimports (refer to "Note T - Subsequent Events" for a description of the transaction) for a purchase price of approximately $145 million. Concurrent with the closing of the acquisition of Rimports, we amended the Sterno Loan Agreement to provide for the advance of additional term loans in the aggregate amount of $136$48.0 million, and revolving loans in the amount of $10 million. During 2017, we granted three of our subsidiaries waivers or amendments to their intercompany credit agreement that waived certain financial covenants that the subsidiaries were in violation ofwhich BOA financed by borrowing under their intercompany credit agreements. As a resultfacility with the Company (the "BOA Credit Agreement"). The BOA Credit Agreement was amended to (i) provide for additional term loan borrowings of significant investment in operational improvements$38.0 million, and (ii) consent to enhance its competitive position, including plannedthe repurchase of the shares from the minority shareholder.
In the fourth quarter of 2021, we amended the Arnold intercompany credit agreement to increase capital expendituresexpenditure allowable under the credit agreement to reposition Arnoldaccount for futureadditional growth we granted Arnold an amendment to their intercompany debt agreement effective the quarter ended June 30, 2017 that waived the default of their fixed charge coverage ratiocapital expenditure opportunities, and amended the covenant compliance levels through December 31, 2017. Additionally, duefinancial covenants to significantreflect the increased allowable expenditure. In the fourth quarter of 2020, we amended the Arnold intercompany credit agreement to increase the revolving credit commitment available under the credit agreement, and amended the financial covenants to reflect the increased commitment. In the first quarter of 2019, we amended the 5.11 intercompany credit agreement to update the definition of capital expenditures related to the implementation of a new ERP system, warehouse expansion and retail roll out, we have granted 5.11 waivers under their intercompany debt agreement effective the quarter ended September 30, 2017 through December 31, 2018. The waivers permit 5.11 to increase its allowable capital expenditure limits and exclude certain capital expenditures associatedmade with the ERP system and warehouse expansionrespect to 5.11's retail stores from the calculation of the fixed charge coverage ratio. Manitoba Harvest was not in compliance with the financial covenants under their intercompany loan agreement at December 31, 2017, and we amended the Manitoba Harvest intercompany debt agreement to grant a waiver to them through December 31, 2018. Except as previously noted, allAll of our subsidiaries were in compliance with the financial covenants included within their intercompany credit arrangements at December 31, 2017.2021.
Our primary source of cash is from the receipt of interest and principal on our outstanding loans to our businesses. Accordingly, we are dependent upon the earnings and cash flow of these businesses, which are available for (i) operating expenses;expenses; (ii) payment of principalinterest of our 2029 and interest under our Credit Facility;2032 Notes; (iii) payments to CGM due or potentially due pursuant to the revised MSA and the LLC Agreement; (iv) cash distributionsdistributions to our shareholders; and (v) investments in future acquisitions. Payments made under (i) through (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.
Investment in FOXWe 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.
FOX is a designer, manufacturer and marketer of high performance suspension products used primarily on mountain bikes, off-road vehicles and trucks, snowmobiles and motorcycles. We purchased a controlling interest in FOX on January 4, 2008 for approximately $80.4 million. In August 2013, FOX completed an initial public offering of its common stock. FOX trades on the NASDAQ stock market under the ticker “FOXF”. We retained approximately 53% of the outstanding shares of FOX immediately subsequent to their initial public offering. After our sale of FOX common shares through an additional secondary offerings of FOX in July 2014, our ownership interest in FOX decreased to 41%. As a result of the decrease in ownership interest, we deconsolidated FOX and we began accounting for the investment in FOX at fair value using the equity method of accounting, with unrealized investment gains and losses reported in the consolidated statement of operations as gain (loss) from equity method investment. We sold additional common shares of FOX through FOX secondary offerings in March, August and November 2016. Subsequent to the November 2016 secondary offering, our ownership in FOX decreased to approximately 14%, and we no longer account for the investment in FOX as an equity method investment. We recorded an unrealized loss on the equity method investment of $5.6 million for the year ended December 31, 2016. The investment in FOX had a fair value of $141.8 million at December 31, 2016. On March 13, 2017, 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. Our total net proceeds from the sale of shares of FOX was approximately $465.1 million.Financing Arrangements
2021 Credit Facility
On June 6, 2014 we entered in 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,March 23, 2021, we entered into an Incremental Facility Amendmenta Second Amended and Restated Credit Agreement to amend and restate the 20142018 Credit Agreement.Facility. The Incremental Facility Amendment provided an increase to the 2014 Revolving2021 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$600 million and maturesalso permits the Company, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain term loans in June 2019, (ii) a $325 million term loan, and (iii) aan aggregate amount of up to $250 million, incremental term loan. Our 2014 Term Loan requires quarterly payments with a final payment ofsubject to certain restrictions and conditions. All amounts outstanding under the outstanding principal balance due in June 2021. (Refer to Note J - Debt in the consolidated financial statements for a complete description of our 2014 Credit Facility.)
In connection with the 2016 Incremental Facility Amendment, we incurred $5.9 million in additional debt issuance costs which will be recognized as expense during the remaining term of the related 20142021 Revolving Credit Facility and 2014 Term Loan andwill become due on March 23, 2026, which is the 2016 Incremental Term Loan. The Incremental Facility Amendment did not change the due dates or applicable interest ratesmaturity date of the 2014 Credit Agreement. The quarterly payments for the term loan advancesloans advanced under the 20142021 Revolving Credit Facility increased to approximately $1.4 million per quarter. We used the proceeds from the Incremental Facility Amendment to fund the acquisition of 5.11 Tactical.
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 this amendment, the outstanding Term Loans bore interest at LIBOR plus 2.75% or Base Rate plus 1.75%.
Facility. At December 31, 2017,2021, we had Lettersnothing outstanding under our 2021 Revolving Credit Facility.
The 2021 Credit Facility provides for letters of credit under the 2021 Revolving Credit Facility in an aggregate face amount not to exceed $100 million outstanding at any time, as well as swing line loans of up to $25 million outstanding at one time. At no time may the (i) aggregate principal amount of all amounts outstanding under the 2021 Revolving Credit Facility, plus (ii) the aggregate amount of all outstanding letters of credit and swing line loans, exceed the borrowing availability under the 2021 Credit Facility.
The 2021 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. At December 31, 2021, we had letters of credit totaling $0.6$1.0 million outstanding under the 20142021 Revolving Credit Facility. We had approximately $507.4$599.0 million in borrowing base availability under this facility at December 31, 2017. Subsequent2021. (See "Note I - Debt" to year end,the consolidated financial statements for more detail regarding our 2018 Credit Facility). 2018 Credit Facility
In April 2018, we completedentered into an Amended and Restated Credit Agreement (the "2018 Credit Facility") to amend and restate our credit agreement entered into in 2014. The 2018 Credit Facility provided for (i) revolving loans, swing line loans and letters of credit (the “2018 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million, and (ii) a $500 million term loan (the “2018 Term Loan”). The 2018 Credit Facility also permitted the acquisitionsCompany, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain additional term loans in an aggregate amount of Foam Fabricators, Inc. on February 15,up to $250 million, subject to certain restrictions and conditions. In 2019, we repaid the amounts due under the 2018 and Rimports, Inc. on February 26, 2018.Term Loan. We utilized our 2014used a portion of the proceeds from the issuance of the
2029 Notes offering to pay all amounts outstanding under the 2018 Revolving Credit Facility in March 2021. The 2018 Credit Facility was replaced by the 2021 Credit Facility.
Senior Notes
2032 Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% Senior Notes due 2032 (the "2032 Notes") offered pursuant to financea private offering to qualified institutional buyers in accordance with Rule 144A under the acquisitions, resultingSecurities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is payable in a borrowing basecash on July 15th and January 15th of availability of between $50 million and $75 million after completioneach year. The 2032 Notes are general unsecured obligations of the acquisitions.Company and are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes were used to repay debt outstanding under the 2021 Credit Facility.
2029 Notes
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Senior Notes due 2029 (the “2029 Notes”) offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act.The 2029 Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2029 Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on April 15th and October 15th of each year. The 2029 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries.
The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in connection with our entry into the 2021 Credit Facility, as described above, and to redeem our 8.000% Senior Notes due 2026 (the “2026 Notes”).
2026 Notes
On April 18, 2018, we consummated the issuance and sale of $400 million aggregate principal amount of our 2026 Notes offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2026 Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the “2026 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. .On May 7, 2020, we consummated the issuance and sale of an additional $200 million aggregate principal amount of the 2026 Notes. The proceeds from the 2026 Notes were used to pay down the amount outstanding on the Company's then existing credit facilities and for general corporate purposes. All of the 2026 Notes were redeemed, on April 1, 2021, with proceeds from the sale of the 2020 Senior Notes.
The 2029 Notes Indenture and the 2032 Notes Indenture contain several restrictive covenants including, but not limited to, limitations on the following: (i) the incurrence of additional indebtedness, (ii) restricted payments, (iii) the purchase, redemption or retirement of capital stock or subordinated debt, (iv) dividends and other payments affecting restricted subsidiaries, (v) transactions with affiliates, (vi) asset sales and mergers and consolidations, (vii) future subsidiary guarantees and (viii) incurring liens, (ix) entering into sale-leaseback transactions and (x) making certain investments, subject in each case to certain exceptions.
The following table reflects required and actual financial ratios as of December 31, 20172021 included as part of the affirmative covenants in our 20142021 Credit Facility:
| | | | | | | | | | | | | | |
| Description of Required Covenant Ratio | | Covenant Ratio Requirement | | Actual Ratio |
| | |
Description of Required Covenant Ratio | Covenant Ratio Requirement | Actual Ratio |
| Fixed Charge Coverage Ratio | greater | Greater than or equal to 1.5:1.01.50:1.00 | 2.82: | 5.07:1.00 |
| Total Secured Debt to EBITDA Ratio | | Less than or equal to 3.50:1.00 | | 0.00:1.00 |
| Total Debt to EBITDA Ratio | less | Less than or equal to 3.50:1.05.00:1.00 | 3.00: | 2.96:1.00 |
We intend to use the availability under our 2021 Credit Facility and cash on hand to pursue acquisitions of additional businesses, to fund distributions (if and to the extent approved by our board of directors) and to provide for other working capital needs. We believe that we currently have sufficient liquidity and capital resources, which include amounts available under our 20142021 Revolving Credit Facility, to meet our existing obligations including quarterly distributions to our shareholders, as approved by our board of directors, over the next twelve months.
Interest Expense
We incurred interest expense totaling $58.8 million in the year ended December 31, 2021, as compared to $45.8 million in the year ended December 31, 2020 and $58.2 million for the year ended December 31, 2019.
The components of interest expense on our outstanding debt are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2021 | | 2020 | | 2019 |
| Interest on credit facilities | $ | 2,669 | | | $ | 2,164 | | | $ | 21,996 | |
| Interest on Senior Notes | 54,441 | | | 42,400 | | | 32,000 | |
| Unused fee on Revolving Credit Facility | 1,598 | | | 1,386 | | | 1,851 | |
| Amortization of bond premium/ original issue discount | (83) | | | (222) | | | — | |
Unrealized (gain) loss on interest rate derivatives (1) | — | | | — | | | 3,486 | |
| | | | | |
| Other interest expense | 227 | | | 294 | | | 772 | |
| Interest income | (13) | | | (253) | | | (1,887) | |
| Interest expense, net | $ | 58,839 | | | $ | 45,769 | | | $ | 58,218 | |
(1)On September 12,16, 2014, we purchased an interest rate swap (“New Swap”) with a notional amount of $220 million effective April 1, 2016 through June 6, 2021. The agreement requiresrequired us to pay interest on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. At December 31, 2017,In connection with the New Swap had a fair value loss of $6.1 million, principally reflecting the present value of future payments and receipts under the agreement. $2.5 million of New Swap is reflected as a component of current liabilities and $3.6 million is reflected as a component of noncurrent liabilities in the consolidated balance sheet at December 31, 2017.
Interest Expense
We incurred interest expense totaling $27.8 million in the year ended December 31, 2017, as compared to $24.7 million in the year ended December 31, 2016 and $25.9 million for the year ended December 31, 2015. The components of interest expense in eachrepayment of the years ended2018 Term Loan in December 31, 2017, 2016 and 2015 are as follows (in thousands):
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Interest on credit facilities | $ | 23,940 |
| | $ | 19,861 |
| | $ | 17,590 |
|
| Unused fee on Revolving Credit Facility | 2,856 |
| | 1,947 |
| | 1,612 |
|
| Amortization of original issue discount | 1,037 |
| | 802 |
| | 671 |
|
Unrealized (gains) losses on interest rate derivatives (1) | (648 | ) | | 1,539 |
| | 5,662 |
|
| Letter of credit fees | 70 |
| | 108 |
| | 121 |
|
| Other | 538 |
| | 415 |
| | 286 |
|
| Interest expense | $ | 27,793 |
| | $ | 24,672 |
| | $ | 25,942 |
|
| Average daily balance of debt outstanding | $ | 597,114 |
| | $ | 477,656 |
| | $ | 443,348 |
|
| Effective interest rate | 4.7 | % | | 5.2 | % | | 5.9 | % |
(1)On September 14, 2014, we purchased an interest rate swap (the “New Swap”)2019, the Company terminated the Swap with a notional amountpayment of $220$4.9 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 December 31, 2016 and 2015, this New Swap had a fair value of negative $10.7 million and $13.0 million, respectively, essentially reflecting the present value of future payments and receipts under the agreement and is reflectedSwap as a component of interest expense and other non-current liabilities. In the above table, we provide the effective interest rate on outstanding debt, which includes the mark-to-market loss on the New Swap. Refer to Note K - Derivative Instruments and Hedging Activities of the consolidated financial statements.date of settlement.Income Taxes
On December 22, 2017,August 3, 2021, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changesshareholders of CODI approved amendments to the U.S. tax code which may impact, positively or negatively, the CompanySecond Amended and our portfolio companies for taxable years ended December 31, 2017 and thereafter. The impactRestated Trust Agreement of many provisions of the Tax Act are unclear and subject to interpretation pending further guidance from the Internal Revenue Service. The ultimate impact of the Tax Act on the Company and its portfolio companies is dependent on ongoing review and analysis.
Among other important changes in the Tax Act, the tax rate on corporations was reduced from 35% to 21%; a limitation on the deduction of interest expense was enacted; certain tangible property acquired after September 27, 2017 will qualify for 100% expensing; gain from the sale of a partnership interest by a foreign person will be subject to U.S. tax to the extent that the partnership is engaged in a trade or business; a special deduction for qualified business income from pass-through entities was added; U.S. federal income taxes on foreign earnings was eliminated (subject to several important exceptions), and new provisions designed to tax currently global intangible low taxed income and a new base erosion anti-abuse tax were added.
For taxable years beginning after December 31, 2017, a deduction for interest will generally be allowed for any entity only up to 30% of adjusted taxable income (determined without regard to interest income or expense) plus the amount of interest income. Only interest income and expense incurred in a trade or business is taken into account, i.e., investment interest income and deductions are ignored. For partnerships, the limitation is applied at the partnership level and then adjustments are made at the partner level to avoid double counting and to allow an owner to use any excess income in calculating the interest deduction at his or her level. It is not expected that the provision will limit the deduction of interest by the Company for 2018 but it may impact the deduction for certain of the portfolio companies.
Although the Trust and the Fifth Amended and Restated Operating Agreement of the Company areto allow the Company’s Board of Directors (the “Board”) to cause the Trust to elect to be treated as partnershipsa corporation for U.S. federal income tax purposes (the “tax reclassification”) and, therefore notat its discretion in the future, cause the Trust to be converted to a corporation. Following the shareholder vote, the Board resolved to cause the Trust to elect to be treated as a corporation for U.S. federal income tax purposes. Such election became effective September 1, 2021, prior to which the Trust had been taxed as a partnership for U.S. federal income tax purposes since January 1, 2007. The Company was treated as a partnership prior to the Trust’s tax reclassification and it will continue to be treated as a partnership following the Trust’s tax reclassification.
Each of the Company’s majority owned subsidiaries are subject to net income tax, for U.S. GAAP purposes, we consolidate the results of our businessesFederal, state and in which we own or control more than a 50% share of the voting interest. We have made a reasonable estimate of the effects of the Tax Act on the existing deferred tax balances and the one-time transition tax. We have substantially completed our accounting for the revaluation of our net U.S. federal deferred tax liabilities and recorded a tax benefit of approximately $34.7 million in the fourth quarter of 2017. The one-time transition tax under the Tax Act is based on earnings and profits ("E&P") that were previously deferred from U.S.some cases, foreign income taxes. For the year ended December 31, 2017, the provision for income taxes includes provisional tax expense of $4.9 million related to the one-time transition tax liability of our foreign subsidiaries. We have not completed the calculation of the total E&P for these foreign subsidiaries and expect to refine our calculations as additional analysis is completed. In addition, the Company's estimates may be affected as additional regulatory guidance is issued with respect to the Tax Act. Any adjustments to the provisional amounts will be recognized as a component of the provision for income taxes in the period in which such adjustments are determined within the annual period following the enactment of the Tax Act.
We recorded an income tax benefitprovision of $40.7$18.3 million with an annual effective rate of (549.2)%42.5% during the year ended December 31, 2017, $9.5 million in2021, an income tax expenseprovision of $10.2 million with an annual effective tax rate of 15%229.5% during the year ended December 31, 2016,2020, and $15.0$9.9 million in income tax expensebenefit with an effective tax rate of 62.5%16.5% during the year ended December 31, 2015. Our gains and losses incurred at2019.
During the Company's parent, which is an LLC, are notfourth quarter of 2021, the Company recorded a $12.1 million deferred tax deductible at the corporate level as those costs are passed through to the shareholders. During 2015, the effective rate is therefore increasedbenefit as a result of the gain on saleaccounting treatment of businesses.Advanced Circuits as held-for-sale at December 31, 2021.
The components of our income tax (benefit) expense as a percentage of income from continuing operations before income taxes for the years ended December 31, 2017, 20162021, 2020 and 20152019 are as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| United States Federal Statutory Rate | 21.0 | % | | 21.0 | % | | (21.0) | % |
| State income taxes (net of Federal benefits) | 4.8 | | | 34.8 | | | 3.2 | |
| Foreign income taxes | 8.2 | | | 37.5 | | | 1.1 | |
Expenses of Compass Group Diversified Holdings LLC representing a pass through to shareholders (1) | 29.0 | | | 137.0 | | | 20.9 | |
| Impairment expense | — | | | — | | | 9.4 | |
| Impact of subsidiary employee stock options | (0.3) | | | 7.2 | | | 0.1 | |
| Non-deductible acquisition costs | 0.6 | | | 11.5 | | | — | |
| Non-recognition of various carryforwards at subsidiaries | (2.3) | | | (24.5) | | | 2.0 | |
| | | | | |
| Utilization of tax credits | (5.2) | | | 2.6 | | | (2.6) | |
| Foreign-derived intangible income (FDII) and GILTI tax | (2.4) | | | (5.0) | | | 2.4 | |
| Effect of classification of assets held for sale | (16.8) | | | — | | | — | |
| Other | 5.9 | | | 7.4 | | | 1.0 | |
| Effective income tax rate | 42.5 | % | | 229.5 | % | | 16.5 | % |
|
| | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| United States Federal Statutory Rate | (35.0 | )% | | 35.0 | % | | 35.0 | % |
| State income taxes (net of Federal benefits) | (6.5 | ) | | 0.6 |
| | 6.5 |
|
| Foreign income taxes | (18.4 | ) | | 1.5 |
| | 1.2 |
|
Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders (1) | (3.3 | ) | | 3.6 |
| | 29.1 |
|
| Impairment expense | 69.4 |
| | — |
| | — |
|
| Effect of gain on investment in FOX | 26.6 |
| | (41.2 | ) | | (6.6 | ) |
| Impact of subsidiary employee stock options | 9.9 |
| | 1.3 |
| | 1.3 |
|
| Domestic production activities deduction | (8.4 | ) | | (0.9 | ) | | (3.2 | ) |
| Non-deductible acquisition costs | 4.6 |
| | 1.9 |
| | — |
|
| Effect of undistributed foreign earnings | (18.7 | ) | | 4.2 |
| | — |
|
| Non-recognition of NOL carryforwards at subsidiaries | (18.1 | ) | | 3.6 |
| | (6.1 | ) |
Adjustments to uncertain tax positions (2) | (124.0 | ) | | — |
| | — |
|
| Utilization of tax credits | (40.1 | ) | | (0.7 | ) | | (1.1 | ) |
Effect of Tax Act - remeasurement of deferred tax assets and liabilities (3) | (468.0 | ) | | — |
| | — |
|
Effect of Tax Act - transition tax on non-U.S. subsidiaries' earnings (3) | 65.6 |
| | — |
| | — |
|
| Other | 15.2 |
| | 6.1 |
| | 6.4 |
|
| Effective income tax rate | (549.2 | )% | | 15.0 | % | | 62.5 | % |
(1)The effective income tax rate for each of the years presented includes losses at the Company’s parent, which was taxed as a partnership through August 1, 2021. Effective September 1, 2021, the Company's parent is taxed as a corporation.
| |
(1)
| The effective income tax rate for each of the years presented includes losses at the Company’s parent, which is taxed as a partnership. |
| |
(2)
| Represents the effect of the reversal of an uncertain tax position at our 5.11 business that existed as of the acquisition date and was settled during the fourth quarter of 2017, resulting in a tax benefit of $9.2 million in our 2017 tax provision. |
| |
(3)
| The effect of the enactment of the Tax Act on our tax provision for the year ended December 31, 2017 was a benefit of $34.7 million related to the reduction in the U.S. federal corporate income tax rate from 35% to 21%, and tax expense of $4.9 million related to the one-time transition tax liability of our foreign subsidiaries. Our income before income taxes for 2017 was $7.4 million, and as a result, the effect from the Tax Act on the reconciliation in the table above was significant.
|
Reconciliation of Non-GAAP Financial Measures
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. GAAP or US GAAP refers to generally accepted accounting principles in the United States.
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 EBITDA, Adjusted EBITDA and Cash Flow Available for Distribution and Reinvestment (“CAD”).
Reconciliation of Net income (loss) to EBITDA and Adjusted EBITDA
EBITDA – Earnings before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”) is calculated as net 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– Is calculated utilizing the same calculation as described above in arriving at EBITDA further adjusted by: (i) non-controlling shareholder compensation, which generally consists of non-cash stock option expense; (ii) successful acquisition costs, which consist of transaction costs (legal, accounting, due diligences,diligence, etc.) incurred in connection with the successful acquisition of a business expensed during the period in compliance with ASC 805; (iii) management fees, which reflect fees due quarterly to our Manager in connection with our MSA; (iv) impairment charges, which reflect write downs to goodwill or other intangible assets; (v) gainsother income or losses recorded in connection with changes in the fair value of our investment in FOX; (vi)expense, including gains or losses recorded in connection with the sale of fixed assets; (vi) changes in the fair value of contingent consideration subsequent to initial purchase accounting, and (vii) gains or losses recognized uponintegration service fees, which reflect fees paid by newly acquired companies to the saleManager for integration services performed during the first year of a business.ownership.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors and reflect important financial measures as they exclude the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near term operations. When compared to net income (loss) these financial measures are limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated with impairments. This presentation also allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition.
We believe 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 |
| Year ended December 31, 2017 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Corporate | | 5.11 | | Crosman | | Ergobaby | | Liberty | | Manitoba Harvest | | Advanced
Circuits | | Arnold | | Clean Earth | | Sterno | | Consolidated |
| Net income (loss) | | $ | (4,577 | ) | | $ | (9,405 | ) | | $ | 7,634 |
| | $ | 16,674 |
| | $ | 4,861 |
| | $ | (12,359 | ) | | $ | 17,503 |
| | $ | (10,740 | ) | | $ | 13,309 |
| | $ | 10,712 |
| | $ | 33,612 |
|
| Adjusted for: | | | | | | | | | | | | | | | | | | | | | | |
| Provision (benefit) for income taxes | | — |
| | (12,492 | ) | | (11,274 | ) | | 917 |
| | 531 |
| | (1,469 | ) | | (2,518 | ) | | (2,337 | ) | | (15,469 | ) | | 3,432 |
| | (40,679 | ) |
| Interest expense, net | | 27,047 |
| | 53 |
| | 167 |
| | — |
| | — |
| | 41 |
| | (12 | ) | | — |
| | 327 |
| | — |
| | 27,623 |
|
| Intercompany interest | | (66,811 | ) | | 14,521 |
| | 4,590 |
| | 5,990 |
| | 4,029 |
| | 4,150 |
| | 8,171 |
| | 6,996 |
| | 13,468 |
| | 4,896 |
| | — |
|
| Depreciation and amortization | | 2,150 |
| | 40,393 |
| | 7,878 |
| | 12,042 |
| | 1,742 |
| | 6,458 |
| | 3,578 |
| | 6,821 |
| | 22,128 |
| | 11,868 |
| | 115,058 |
|
| EBITDA | | (42,191 | ) | | 33,070 |
| | 8,995 |
| | 35,623 |
| | 11,163 |
| | (3,179 | ) | | 26,722 |
| | 740 |
| | 33,763 |
| | 30,908 |
| | 135,614 |
|
| Gain on sale of business | | (340 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (340 | ) |
| (Gain) loss on sale of fixed assets | | — |
| | (160 | ) | | 43 |
| | — |
| | 46 |
| | (244 | ) | | (4 | ) | | (7 | ) | | (40 | ) | | 216 |
| | (150 | ) |
| Non-controlling shareholder compensation | | — |
| | 2,301 |
| | 508 |
| | 698 |
| | 17 |
| | 996 |
| | 23 |
| | 191 |
| | 1,553 |
| | 740 |
| | 7,027 |
|
| Acquisition expenses | | — |
| | — |
| | 1,836 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 214 |
| | 2,050 |
|
| Impairment expense | | — |
| | — |
| | — |
| | — |
| | — |
| | 8,461 |
| | — |
| | 8,864 |
| | — |
| | — |
| | 17,325 |
|
| Loss on equity method investment | | 5,620 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,620 |
|
| Adjustment to earnout provision | | — |
| | — |
| | — |
| | (3,780 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (956 | ) | | (4,736 | ) |
| (Gain) loss on foreign currency transaction and other | | (3,137 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,137 | ) |
| Integration services fee | | — |
| | 2,333 |
| | 750 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,083 |
|
| Management fees | | 28,053 |
| | 1,000 |
| | 290 |
| | 500 |
| | 500 |
| | 350 |
| | 500 |
| | 500 |
| | 500 |
| | 500 |
| | 32,693 |
|
| Adjusted EBITDA | | $ | (11,995 | ) | | $ | 38,544 |
| | $ | 12,422 |
| | $ | 33,041 |
| | $ | 11,726 |
| | $ | 6,384 |
| | $ | 27,241 |
| | $ | 10,288 |
| | $ | 35,776 |
| | $ | 31,622 |
| | $ | 195,049 |
|
| | | Adjusted EBITDA | Adjusted EBITDA | Adjusted EBITDA |
| Year ended December 31, 2016 | |
| Year ended December 31, 2021 | | Year ended December 31, 2021 |
| | | | | | | | | | | | | | | | | | | | | | | | Corporate | | 5.11 | | BOA | | Ergobaby | | Lugano | | Marucci Sports | | Velocity Outdoor | | | Altor | | Arnold | | Sterno | | Consolidated |
| | | Corporate | | 5.11 | | Crosman | | Ergobaby | | Liberty | | Manitoba Harvest | | Advanced
Circuits | | Arnold | | Clean Earth | | Sterno | | Consolidated | |
Net income (loss) (1) | | $ | 70,381 |
| | $ | (10,441 | ) | | $ | 5,916 |
| | $ | 5,409 |
| | $ | (4,972 | ) | | $ | 9,294 |
| | $ | (22,782 | ) | | $ | (3,158 | ) | | $ | 6,411 |
| | $ | 56,058 |
| |
| Net income (loss) from continuing operations | | Net income (loss) from continuing operations | | $ | (72,624) | | | $ | 20,152 | | | $ | 21,178 | | | $ | 5,079 | | | $ | 5,239 | | | $ | 10,232 | | | $ | 23,035 | | | | $ | 7,871 | | | $ | 5,013 | | | $ | (316) | | | $ | 24,859 | |
| Adjusted for: | | | | | | | | | | | | | | | | | | | | | Adjusted for: | | | |
| Provision (benefit) for income taxes | | — |
| | (5,190 | ) | | 4,440 |
| | 3,449 |
| | (1,682 | ) | | 5,020 |
| | 2,761 |
| | (2,782 | ) | | 3,453 |
| | 9,469 |
| Provision (benefit) for income taxes | | (12,119) | | | 6,905 | | | 3,559 | | | 2,018 | | | 2,094 | | | 3,070 | | | 6,237 | | | | 2,619 | | | 1,345 | | | 2,609 | | | 18,337 | |
| Interest expense, net | | 24,131 |
| | 40 |
| | — |
| | — |
| | 9 |
| | — |
| | — |
| | 460 |
| | 12 |
| | 24,652 |
| Interest expense, net | | 58,639 | | | 16 | | | — | | | — | | | 9 | | | 5 | | | 165 | | | | (1) | | | 6 | | | — | | | 58,839 | |
| Intercompany interest | | (52,609 | ) | | 4,847 |
| | 5,134 |
| | 4,203 |
| | 4,065 |
| | 7,810 |
| | 6,721 |
| | 12,437 |
| | 7,392 |
| | — |
| Intercompany interest | | (66,765) | | | 11,868 | | | 8,581 | | | 1,960 | | | 2,450 | | | 3,110 | | | 7,461 | | | | 7,558 | | | 5,455 | | | 18,322 | | | — | |
| Loss on debt extinguishment | | Loss on debt extinguishment | | 33,305 | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | 33,305 | |
| Depreciation and amortization | | (805 | ) | | 23,594 |
| | 9,350 |
| | 2,956 |
| | 6,487 |
| | 3,938 |
| | 9,421 |
| | 21,640 |
| | 12,589 |
| | 89,170 |
| Depreciation and amortization | | 1,025 | | | 22,355 | | | 20,279 | | | 8,435 | | | 4,757 | | | 8,634 | | | 12,704 | | | | 12,938 | | | 8,888 | | | 23,369 | | | 123,384 | |
| EBITDA | | 41,098 |
| | 12,850 |
| | Not Applicable | | 24,840 |
| | 16,017 |
| | 3,907 |
| | 26,062 |
| | (3,879 | ) | | 28,597 |
| | 29,857 |
| | 179,349 |
| EBITDA | | (58,539) | | | 61,296 | | | 53,597 | | | 17,492 | | | 14,549 | | | 25,051 | | | 49,602 | | | | 30,985 | | | 20,707 | | | 43,984 | | | 258,724 | |
| Gain on sale of discontinued operations | | (2,308 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,308 | ) | |
| (Gain) loss on sale of fixed assets | | — |
| | — |
| | — |
| | 48 |
| | 1,120 |
| | (10 | ) | | 5 |
| | 484 |
| | — |
| | 1,647 |
| |
| Other (income) expense | | Other (income) expense | | (284) | | | 125 | | | 377 | | | — | | | 16 | | | (119) | | | 2,573 | | | | (323) | | | 8 | | | (1,189) | | | 1,184 | |
| Non-controlling shareholder compensation | | — |
| | 473 |
| | 677 |
| | 342 |
| | 780 |
| | 23 |
| | 184 |
| | 1,240 |
| | 661 |
| | 4,380 |
| Non-controlling shareholder compensation | | — | | | 2,428 | | | 2,194 | | | 1,693 | | | 190 | | | 1,101 | | | 1,020 | | | | 1,035 | | | 38 | | | 1,242 | | | 10,941 | |
| Acquisition expenses | | 98 |
| | 2,063 |
| | 799 |
| | — |
| | — |
| | — |
| | — |
| | 738 |
| | 189 |
| | 3,887 |
| Acquisition expenses | | 39 | | | — | | | — | | | — | | | 1,827 | | | 971 | | | — | | | | 444 | | | 310 | | | — | | | 3,591 | |
| Impairment expense/ Loss on disposal of assets | | — |
| | — |
| | 5,899 |
| | — |
| | — |
| | — |
| | 16,000 |
| | 3,305 |
| | — |
| | 25,204 |
| |
| Gain on equity method investment | | (74,490 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (74,490 | ) | |
| Adjustment to earnout provision | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 394 |
| | 394 |
| |
| (Gain) loss on foreign currency transaction and other | | (1,327 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,327 | ) | |
| Integration services fee | | — |
| | 1,167 |
| | — |
| | — |
| | 500 |
| | — |
| | — |
| | — |
| | — |
| | 1,667 |
| Integration services fee | | — | | | — | | | 3,300 | | | — | | | 563 | | | 1,000 | | | — | | | | — | | | — | | | — | | | 4,863 | |
| Other | | Other | | 1,132 | | | 273 | | | — | | | — | | | — | | | 1,000 | | | (2,300) | | | | — | | | — | | | 995 | | | 1,100 | |
| Management fees | | 25,723 |
| | 333 |
| | 500 |
| | 500 |
| | 350 |
| | 500 |
| | 500 |
| | 500 |
| | 500 |
| | 29,406 |
| Management fees | | 41,505 | | | 1,000 | | | 1,000 | | | 500 | | | 188 | | | 500 | | | 500 | | | | 750 | | | 500 | | | 500 | | | 46,943 | |
Adjusted EBITDA (2) | | $ | (11,206 | ) | | $ | 16,886 |
| | $ | 32,715 |
| | $ | 16,907 |
| | $ | 6,657 |
| | $ | 26,575 |
| | $ | 12,810 |
| | $ | 34,864 |
| | $ | 31,601 |
| | $ | 167,809 |
| |
| Adjusted EBITDA | | Adjusted EBITDA | | $ | (16,147) | | | $ | 65,122 | | | $ | 60,468 | | | $ | 19,685 | | | $ | 17,333 | | | $ | 29,504 | | | $ | 51,395 | | | | $ | 32,891 | | | $ | 21,563 | | | $ | 45,532 | | | $ | 327,346 | |
(1)Net income (loss) does not include income (loss) from discontinued operations for the year ended December 31, 2016.2021.
(2)As a result of the sale of Tridien in September 2016, Adjusted EBITDA does not include $4.0 million of Adjusted EBITDA from Tridien.
| | | Adjusted EBITDA | Adjusted EBITDA | Adjusted EBITDA |
| Year ended December 31, 2015 | |
| Year ended December 31, 2020 | | Year ended December 31, 2020 |
| | | | | | | | | | | | | | | | | | | | | Corporate | | 5.11 | | BOA | | Ergobaby | | Marucci | | Velocity Outdoor | | Altor | | Arnold | | Sterno | | Consolidated |
| | Corporate | | 5.11 | | Crosman | | Ergobaby | | Liberty | | Manitoba Harvest | | Advanced
Circuits | | Arnold | | Clean Earth | | Sterno | | Consolidated | |
Net income (loss) (1) | | $ | 132,683 |
| | $ | 11,798 |
| | $ | 4,956 |
| | $ | (5,917 | ) | | $ | 11,868 |
| | $ | 803 |
| | $ | (1,181 | ) | | $ | 3,779 |
| | $ | 158,789 |
| |
Net income (loss) from continuing operations(1) | | Net income (loss) from continuing operations(1) | | $ | (28,931) | | | $ | 12,356 | | | $ | (2,640) | | | $ | 725 | | | $ | (4,785) | | | $ | 11,161 | | | $ | 6,092 | | | $ | (3,539) | | | $ | 3,820 | | | $ | (5,741) | |
| Adjusted for: | | | |
| | | | | | | | | | | | | |
| Adjusted for: | |
| Provision (benefit) for income taxes | | (286 | ) | | 6,650 |
| | 2,415 |
| | (1,288 | ) | | 6,285 |
| | (412 | ) | | (713 | ) | | 2,350 |
| | 15,001 |
| Provision (benefit) for income taxes | | — | | | 1,808 | | | (535) | | | 2,033 | | | (1,390) | | | 3,560 | | | 2,554 | | | (198) | | | 2,343 | | | 10,175 | |
| Interest expense, net | | 25,536 |
| | — |
| | — |
| | 7 |
| | (1 | ) | | 13 |
| | 369 |
| | — |
| | 25,924 |
| Interest expense, net | | 45,610 | | | 19 | | | — | | | — | | | 7 | | | 131 | | | — | | | — | | | 1 | | | 45,768 | |
| Intercompany interest | | (40,248 | ) | | 3,726 |
| | 4,319 |
| | 949 |
| | 5,581 |
| | 6,996 |
| | 11,829 |
| | 6,848 |
| | — |
| Intercompany interest | | (61,123) | | | 14,085 | | | 2,043 | | | 2,405 | | | 1,843 | | | 8,915 | | | 7,084 | | | 5,730 | | | 19,018 | | | — | |
| | Depreciation and amortization | | 999 |
| | 3,794 |
| | 3,701 |
| | 5,231 |
| | 3,367 |
| | 9,114 |
| | 20,898 |
| | 8,186 |
| | 55,290 |
| Depreciation and amortization | | 838 | | | 21,483 | | | 5,589 | | | 8,199 | | | 10,203 | | | 12,781 | | | 12,722 | | | 6,805 | | | 22,510 | | | 101,130 | |
| EBITDA | | 118,684 |
| | Not Applicable | | Not Applicable | | 25,968 |
| | 15,391 |
| | (1,018 | ) | | 27,100 |
| | 16,514 |
| | 31,202 |
| | 21,163 |
| | 255,004 |
| EBITDA | | (43,606) | | | 49,751 | | | 4,457 | | | 13,362 | | | 5,878 | | | 36,548 | | | 28,452 | | | 8,798 | | | 47,692 | | | 151,332 | |
| Gain on sale of discontinued operations | | (149,798 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (149,798 | ) | |
| (Gain) loss on sale of fixed assets | | — |
| | — |
| | 25 |
| | 3 |
| | — |
| | (165 | ) | | 280 |
| | — |
| | 143 |
| |
| Other (income) expense | | Other (income) expense | | — | | | 1,420 | | | 39 | | | — | | | (42) | | | 931 | | | (38) | | | 9 | | | 140 | | | 2,459 | |
| Non-controlling shareholder compensation | | — |
| | 728 |
| | 200 |
| | 419 |
| | 23 |
| | 136 |
| | 1,145 |
| | 519 |
| | 3,170 |
| Non-controlling shareholder compensation | | — | | | 2,489 | | | 469 | | | 1,156 | | | 634 | | | 1,549 | | | 1,028 | | | (20) | | | 1,166 | | | 8,471 | |
| Acquisition expenses | | — |
| | — |
| | — |
| | 1,541 |
| | — |
| | | | — |
| | 285 |
| | 1,826 |
| Acquisition expenses | | — | | | — | | | 2,517 | | | — | | | 2,042 | | | — | | | 273 | | | — | | | — | | | 4,832 | |
| Gain on equity method investment | | (4,533 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,533 | ) | |
| Integration services fee | | — |
| | | | — |
| | 500 |
| | — |
| | — |
| | 1,875 |
| | 1,125 |
| | 3,500 |
| Integration services fee | | — | | | — | | | 1,125 | | | — | | | 1,000 | | | — | | | — | | | — | | | — | | | 2,125 | |
| Other | | Other | | 324 | | | — | | | — | | | 598 | | | — | | | — | | | — | | | — | | | — | | | 922 | |
| Management fees | | 22,483 |
| | 500 |
| | 500 |
| | 175 |
| | 500 |
| | 500 |
| | 500 |
| | 500 |
| | 25,658 |
| Management fees | | 29,402 | | | 1,000 | | | 250 | | | 500 | | | 347 | | | 500 | | | 750 | | | 500 | | | 500 | | | 33,749 | |
Adjusted EBITDA (2) | | $ | (13,164 | ) | | $ | 27,196 |
| | $ | 16,116 |
| | $ | 1,620 |
| | $ | 27,623 |
| | $ | 16,985 |
| | $ | 35,002 |
| | $ | 23,592 |
| | $ | 134,970 |
| |
| Adjusted EBITDA | | Adjusted EBITDA | | $ | (13,880) | | | $ | 54,660 | | | $ | 8,857 | | | $ | 15,616 | | | $ | 9,859 | | | $ | 39,528 | | | $ | 30,465 | | | $ | 9,287 | | | $ | 49,498 | | | $ | 203,890 | |
(1) Net income (loss) does not include income (loss) from discontinued operations for the year ended December 31, 2015.2020.
(2) As a result of the sale of our CamelBak and AFM subsidiaries in August and October 2015, respectively, and the sale of Tridien in September 2016, Adjusted EBITDA
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjusted EBITDA |
| Year ended December 31, 2019 |
| | Corporate | | 5.11 | | Ergobaby | | | | Velocity Outdoor | | | | Altor | | Arnold | | Sterno | | Consolidated |
Net income (loss) from continuing operations(1) | | $ | (59,914) | | | $ | 2,059 | | | $ | 4,793 | | | | | $ | (36,982) | | | | | $ | 2,883 | | | $ | 700 | | | $ | 16,447 | | | $ | (70,014) | |
| Adjusted for: | | | | | | | | | | | | | | | | | | | | |
| Provision (benefit) for income taxes | | — | | | 2,520 | | | 2,250 | | | | | (2,782) | | | | | 1,258 | | | 1,280 | | | 5,388 | | | 9,914 | |
| Interest expense, net | | 57,980 | | | (24) | | | 17 | | | | | 242 | | | | | — | | | (1) | | | 4 | | | 58,218 | |
| Intercompany interest | | (69,649) | | | 17,567 | | | 3,325 | | | | | 11,194 | | | | | 8,635 | | | 6,295 | | | 22,633 | | | — | |
| Loss on debt extinguishment | | 12,319 | | | — | | | — | | | | | — | | | | | — | | | — | | | — | | | 12,319 | |
| Depreciation and amortization | | 1,832 | | | 21,540 | | | 8,561 | | | | | 13,222 | | | | | 12,452 | | | 6,545 | | | 22,486 | | | 86,638 | |
| EBITDA | | (57,432) | | | 43,662 | | | 18,946 | | | | | (15,106) | | | | | 25,228 | | | 14,819 | | | 66,958 | | | 97,075 | |
| (Gain) loss on sale of fixed assets | | 91 | | | (122) | | | (11) | | | | | 952 | | | | | 1,247 | | | 1 | | | (112) | | | 2,046 | |
| Non-controlling shareholder compensation | | — | | | 2,360 | | | 828 | | | | | 322 | | | | | 1,025 | | | 56 | | | 1,183 | | | 5,774 | |
| | | | | | | | | | | | | | | | | | | | |
| Impairment expense | | — | | | — | | | — | | | | | 32,881 | | | | | — | | | — | | | — | | | 32,881 | |
| Integration services fee | | — | | | — | | | — | | | | | — | | | | | 281 | | | — | | | — | | | 281 | |
| Adjustment to earnout provision | | — | | | — | | | — | | | | | 2,022 | | | | | — | | | — | | | — | | | 2,022 | |
| (Gain) loss on foreign currency transaction and other | | 10,193 | | | — | | | — | | | | | — | | | | | — | | | — | | | — | | | 10,193 | |
| Management fees | | 32,280 | | | 1,000 | | | 500 | | | | | 500 | | | | | 750 | | | 500 | | | 500 | | | 36,030 | |
Adjusted EBITDA (2) | | $ | (14,868) | | | $ | 46,900 | | | $ | 20,263 | | | | | $ | 21,571 | | | | | $ | 28,531 | | | $ | 15,376 | | | $ | 68,529 | | | $ | 186,302 | |
(1)Net income (loss) does not include Adjusted EBITDAincome (loss) from CamelBak and AFMdiscontinued operations for the period January 1, 2015 through the dates of sales, and Tridien for fiscal year 2015, of $31.6 million.ended December 31, 2019.
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 CAD.available for distribution ("CAD"). CAD is a non-GAAP measure that we believe provides additional information to our shareholders in order to enable them to evaluate our ability to make anticipated quarterly distributions. Because other entities do not necessarily calculate CAD the same way we do, our presentation of CAD may not be comparable to similarly titled measures provided by other entities. We believe that our historic and future CAD, together with our cash balances and access to cash via our debt facilities, will be sufficient to meet our anticipated distributions over the next twelve months. The table below reconciles CAD to net income and to cash flow provided by operating activities, which we consider to be the most directly comparable financial measure calculated and presented in accordance with GAAP.
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Net income | $ | 126,809 | | | $ | 27,197 | | | $ | 307,141 | |
| Adjustment to reconcile net income to cash provided by operating activities: | | | | | |
| Depreciation and amortization | 123,574 | | | 102,752 | | | 100,462 | |
| Impairment expense | — | | | — | | | 32,881 | |
| Gain on sale of businesses | (72,770) | | | (100) | | | (331,013) | |
| Amortization of debt issuance costs and premium/ discount | 2,896 | | | 2,232 | | | 3,773 | |
| Loss on debt extinguishment | 33,305 | | | — | | | 12,319 | |
| Noncontrolling stockholders charges | 11,454 | | | 8,995 | | | 7,993 | |
| Provision for reserves | 6,268 | | | 2,809 | | | 3,556 | |
| Deferred taxes | (10,468) | | | (781) | | | (12,876) | |
| Other | 818 | | | 2,172 | | | 5,619 | |
| Changes in operating assets and liabilities | (87,835) | | | 3,349 | | | (45,293) | |
| Net cash provided by operating activities | 134,051 | | | 148,625 | | | 84,562 | |
| Plus: | | | | | |
| Unused fee on revolving credit facility | 1,598 | | | 1,386 | | | 1,851 | |
| Successful acquisition expense | 3,591 | | | 4,832 | | | 596 | |
Integration services agreement (1) | 4,863 | | | 2,125 | | | 281 | |
Realized loss from foreign currency effect (2) | — | | | — | | | 363 | |
Earnout provision adjustment (3) | — | | | — | | | 2,022 | |
| Loss on sale of Tilray common stock | — | | | — | | | 10,193 | |
| | | | | |
| Changes in operating assets and liabilities | 87,835 | | | — | | | 45,293 | |
| Less: | | | | | |
| Changes in operating assets and liabilities | — | | | 3,349 | | | — | |
| Payment on interest rate swap | — | | | — | | | 675 | |
Other (4) | 2,769 | | | 2,211 | | | 3,318 | |
Maintenance capital expenditures: (5) | | | | | |
| Compass Group Diversified Holdings LLC | — | | | — | | | — | |
| 5.11 | 2,591 | | | 1,262 | | | 2,243 | |
| Advanced Circuits | 671 | | | 594 | | | 4,790 | |
| Altor Solutions | 2,801 | | | 2,287 | | | 1,746 | |
| Arnold | 7,224 | | | 4,884 | | | 3,862 | |
| BOA | 1,353 | | | 794 | | | — | |
| Clean Earth (divested in June 2019) | — | | | — | | | 3,495 | |
| Ergobaby | 174 | | | 482 | | | 605 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2015 |
| Net income | $ | 33,612 |
| | $ | 56,530 |
| | $ | 165,770 |
|
| Adjustment to reconcile net income to cash provided by operating activities: |
| |
| |
|
| Depreciation and amortization | 110,051 |
| | 87,405 |
| | 63,072 |
|
| Impairment expense/ Loss on disposal of assets | 17,325 |
| | 25,204 |
| | 9,165 |
|
| Gain on sale of businesses | (340 | ) | | (2,308 | ) | | (149,798 | ) |
| Amortization of debt issuance costs and original issue discount | 5,007 |
| | 3,565 |
| | 2,883 |
|
| Unrealized (gain) loss on interest rate hedges | (648 | ) | | 1,539 |
| | 5,662 |
|
| Noncontrolling stockholders charges | 7,027 |
| | 4,382 |
| | 3,737 |
|
| Loss (gain) on equity method investment | 5,620 |
| | (74,490 | ) | | (4,533 | ) |
| Excess tax benefit on stock compensation | (417 | ) | | (1,163 | ) | | — |
|
| Provision for loss on receivables | 3,964 |
| | 407 |
| | (48 | ) |
| Deferred taxes | (59,429 | ) | | (9,669 | ) | | (3,131 | ) |
| Other | 393 |
| | 1,486 |
| | 82 |
|
| Changes in operating assets and liabilities | (40,394 | ) | | 18,484 |
| | (8,313 | ) |
| Net cash provided by operating activities | 81,771 |
| | 111,372 |
| | 84,548 |
|
| Plus: |
| |
| | |
| Unused fee on revolving credit facility | 2,856 |
| | 1,947 |
| | 1,612 |
|
| Excess tax benefit from subsidiary stock option exercise | 417 |
| | 1,163 |
| | — |
|
| Successful acquisition expense | 2,050 |
| | 3,888 |
| | 1,826 |
|
Integration services agreement (1) | 3,083 |
| | 1,667 |
| | 3,500 |
|
Realized loss from foreign currency effect (2) | — |
| | — |
| | 2,561 |
|
Earnout provision adjustment (3) | — |
| | 394 |
| | — |
|
| Other | — |
| | 421 |
| | 200 |
|
| Changes in operating assets and liabilities | 40,394 |
| | — |
| | 8,313 |
|
| Less: | | |
| |
|
| Changes in operating assets and liabilities | — |
| | 18,484 |
| | — |
|
| Payment on interest rate swap | 3,964 |
| | 4,303 |
| | 2,007 |
|
Earnout provision adjustment (3) | 4,736 |
| | — |
| | — |
|
Realized gain from foreign currency effect (2) | 3,315 |
| | 1,327 |
| | — |
|
Other (4) | 3,586 |
| | — |
| | — |
|
Maintenance capital expenditures: (5) |
| |
| |
|
| Compass Group Diversified Holdings LLC | — |
| | — |
| | — |
|
| 5.11 | 2,934 |
| | 1,838 |
| | — |
|
| Advanced Circuits | 628 |
| | 2,931 |
| | 1,525 |
|
| American Furniture (divested October 2015) | — |
| | — |
| | 311 |
|
| | | | | | | | | | | | | | | | | |
| Liberty (divested in August 2021) | 137 | | | 704 | | | 534 | |
| Lugano | 323 | | | — | | | — | |
| Marucci Sports | 4,972 | | | 849 | | | — | |
| Sterno | 2,680 | | | 1,377 | | | 1,831 | |
| Velocity | 4,662 | | | 3,851 | | | 2,899 | |
| Preferred share distributions | 24,181 | | | 23,678 | | | 15,125 | |
| Estimated cash flow available for distribution and reinvestment | $ | 177,400 | | | $ | 110,646 | | | $ | 104,038 | |
| | | | | |
| Distribution paid in April 2021/2020/2019 | $ | (23,364) | | | $ | (21,564) | | | $ | (21,564) | |
| Distribution paid in July 2021/2020/2019 | (23,364) | | | (23,364) | | | (21,564) | |
| Distribution paid in October 2021/2020/2019 | (23,742) | | | (23,364) | | | (21,564) | |
| Distribution paid in January 2022/2021/2020 | (17,352) | | | (23,364) | | | (21,564) | |
| $ | (87,822) | | | $ | (91,656) | | | $ | (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)Represents the foreign currency transaction gain or loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest. |
| | | | | | | | | | | |
| Arnold | 4,851 |
| | 3,801 |
| | 2,618 |
|
| CamelBak (divested August 2015) | — |
| | — |
| | 1,295 |
|
| Clean Earth | 5,289 |
| | 6,202 |
| | 6,295 |
|
| Crosman | 1,831 |
| | — |
| | — |
|
| Ergobaby | 1,041 |
| | 826 |
| | 1,543 |
|
| Liberty | 706 |
| | 1,098 |
| | 1,158 |
|
| Manitoba Harvest | 647 |
| | 1,495 |
| | 594 |
|
| Sterno | 2,343 |
| | 1,787 |
| | 1,928 |
|
| Tridien (divested September 2016) | — |
| | 385 |
| | 927 |
|
| Preferred share distributions | 2,457 |
| | — |
| | — |
|
| Estimated cash flow available for distribution and reinvestment | $ | 92,243 |
| | $ | 76,375 |
| | $ | 82,359 |
|
| | | | | | |
| Distribution paid in April 2017/2016/2015 | $ | (21,564 | ) | | $ | (19,548 | ) | | $ | (19,548 | ) |
| Distribution paid in July 2017/2016/2015 | (21,564 | ) | | (19,548 | ) | | (19,548 | ) |
| Distribution paid in October 2017/2016/2015 | (21,564 | ) | | (19,548 | ) | | (19,548 | ) |
| Distribution paid in January 2018/2017/2016 | (21,564 | ) | | (21,564 | ) | | (19,548 | ) |
| | $ | (86,256 | ) | | $ | (80,208 | ) | | $ | (78,192 | ) |
(4)Represents the effect on earnings of reserves for inventory and accounts receivable.
| |
(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 the foreign currency transaction gain or loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest. |
| |
(3)
| Earnout provision adjustment related to the change in estimate of contingent consideration that was recorded in the consolidated statement of operations. |
| |
(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. |
| |
(5)
| Represents maintenance capital expenditures that were funded from operating cash flow and excludes growth capital expenditures of approximately $24.3 million, $3.4 million and $1.0 million incurred during the years ended December 31, 2017, 2016 and 2015, respectively. |
(5)Represents maintenance capital expenditures that were funded from operating cash flow and excludes growth capital expenditures of approximately $14.1 million, $13.7 million and $16.4 million incurred during the years ended December 31, 2021, 2020 and 2019, respectively.
On August 3, 2021, the Company's Board of Directors declared a special cash distribution on the Trust's common shares in order to offset a portion of the tax liability incurred by shareholders as a result of the tax election to cause the Trust to be treated as a corporation for U.S. federal income tax purposes. A cash distribution of $57.1 million was made on September 7, 2021 to Trust common shareholders as of the close of business on August 31, 2021.
Seasonality
The following table presents the net sales by quarter as a percentage of our annual net sales.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Quarter ended | | 2021 | | 2020 | | 2019 |
| March 31st | | 22.2 | % | | 21.1 | % | | 23.2 | % |
| June 30th | | 23.4 | % | | 21.1 | % | | 23.2 | % |
| September 30th | | 25.2 | % | | 26.8 | % | | 27.0 | % |
| December 31st | | 29.1 | % | | 31.0 | % | | 26.6 | % |
Earnings of certain of our operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarternature due to lower demand for safes atvarious recurring events, holidays and seasonal weather patterns, as well as the onsettiming of summer. Crosman typically has higher sales inour acquisitions during a given year. Historically, the third and fourth quarter each year, reflectingproduce the hunting and holiday seasons. Earnings from Clean Earth are typically lowerhighest net sales 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 typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer and holiday seasons, respectively.our fiscal year.
Related Party Transactions and Certain Transactions Involving our Businesses
We have entered into the following related party transactions with our Manager, CGM:CGM including the following:
•Management Services Agreement
•LLC Agreement
•Integration Services Agreements
•Cost Reimbursement and Fees
Management Services Agreement
LLC Agreement
Integration Services Agreement
Cost Reimbursement and Fees
Management Services Agreement
We entered into the MSA with CGM effective May 16, 2006. Our Chief Executive Officer is a partner of CGM. The MSA provides for, among other things, CGM to perform services for us in exchange for a management fee paid quarterly and equal to 0.5% of our adjusted net assets. The management fee is required to be paid prior to the payment of any distributions to shareholders. For the years ended December 31, 2017, 2016,2021, 2020, and 2015,2019, we incurred $32.7$46.9 million, $29.4$33.7 million, and $25.7$36.0 million, respectively, in management fees to CGM (excludes offsetting fees paid by CamelBak in 2015 and Tridien in 2016 and 2015).CGM.
Pursuant to the MSA, CGM is entitled to enter into off-setting management service agreements with each of our segments.businesses. The amount of the fee is negotiated between CGM and the operating management of each segment and is based upon the
value of the services to be provided. The fees paid directly to CGM by the segments offset on a dollar for dollar basis the amount due to CGM by the Company under the MSA.CGM has entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid during 2021 than would have normally been due. In the first quarter of 2021, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee related to the amount of the proceeds deposited with the Trustee that was in excess of the amount payable related to the 2026 Notes at March 31, 2021. Additionally, CGM has entered into a waiver of the MSA at December 31, 2021 to exclude the cash balances held at the LLC from the calculation of the management fee.
In March 2020, as a proactive measure to provide the Company with additional cash liquidity in light of the COVID-19 pandemic, the Company elected to draw down $200 million on our 2018 Revolving Credit Facility. The Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of March 31, 2020. In addition, due to the unprecedented uncertainty as a result of the COVID-19 pandemic, CGM agreed to waive 50% of the management fee calculated at June 30, 2020 that was paid in July 2020. Further, for the third quarter of 2020, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of September 30, 2020.
Concurrent with the June 2019 sale of Clean Earth (refer to Note D - Discontinued Operations) CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the quarter during which the Company next borrowed under the 2018 Revolving Credit Facility. The Company paid CGM $0.4 million and $0.1 million, respectively, in the years ended December 31, 2021 and 2020, representing the management fee due from Arnold for the fourth quarter of 2020 and the first three quarters of 2021. At December 31, 2021, Arnold reimbursed the Company for the management fee paid on their behalf.
LLC Agreement
As distinguished from its provision of providing management services to us, pursuant to the amended MSA, members of CGM are owners of 60.4%50.0% of the Allocation Interests in us through their ownership in Sostratus LLC. The LLC agreement gives the holders of Allocation Interests the right to distributions pursuant to a profit allocation formula upon the occurrence of a Sale Event or a Holding Event. The Allocation Interest Holders are entitled to receive and as such can elect to receive the positive contribution-based profit allocation payment for each of the business acquisitions during the 30-day period following the fifth anniversary of the date upon which we acquired a controlling interest in that business (Holding Event) and upon the sale of the business (Sale Event). During the year ended December 31, 2017, Holders received $39.2$34.1 million,$9.1 million and $60.4 million in distributions related to Sale and Holding Events in November 2016that occurred during 2021, 2020 and March 20172019, respectively. Refer to "Note K - Stockholders' Equity" for a description of FOX shares. At December 31, 2016, we accrued a distribution payable to the Allocation Interest Holders of $13.4 million related to our November 2016 sale of FOX shares. This distribution was paid in the first quarter of 2017. Holders received $25.8 million related to the March 2017 sale of FOX shares. During the year ended December 31, 2016, Holders received $23.8 million in total distributions related to Sale Events of FOX shares in March and August 2016, a fifth year anniversary Holding Event of our ACI business, and the sale of Tridien in September 2016. During the year ended December 31, 2015, Holders were paid $14.6 million related to the sale of CamelBak and American Furniture (Sale Events) and $3.1 million related to the five year holding event for Ergobaby (Holding Event).profit allocation payments. Certain persons who are employees and partners of the Manager, including the Company’s Chief Executive Officer, and Chief Financial Officer, beneficially own 60.4%owned (through Sostratus LLC) 57.8% of the Allocation Interests through Sostratus LLC, at December 31, 20172021, and 2016, and 58.8% at December 31, 2015. Of the remaining 39.6% non-voting ownership45% of the Allocation Interests at December 31, 2020. Of the remaining 42.2% at December 31, 2021 and 55% at December 31, 2020, 5.0% iswas held by CGI Diversified Holdings LP, 5.0% iswas held by the Chairman of the Company’s Board of Directors, and the remaining 29.6% isAllocation Interests were held by the former founding partnerpartners of the Manager.
Integration Services AgreementAgreements
Integration services represent fees paid by newly acquired companies to the Manager for integration services
performed during the first year of ownership. Crosman, which was acquired in June 2017, 5.11, which was acquired in 2016, and Manitoba Harvest, which was acquired in 2015, entered intoUnder the Integration Services AgreementsAgreement ("ISA") with CGM. The ISA, CGM provides for CGM to provide services for new platform acquisitions to, amongst other things, assist the management at the acquired entities in establishing a corporate governance program, including the retention of independent board members to serve on their board of directors, implement compliance and reporting requirements of the Sarbanes-Oxley Act of 2002, as amended, (the "Sarbanes-Oxley Act") and align the acquired entity's policies and procedures with our other subsidiaries. Lugano, which was acquired in September 2021, entered into an ISA with CGM whereby Lugano will pay CGM an integration services fee of $2.3 million quarterly over a twelve month period beginning in the quarter ended December 31, 2021. BOA, which was acquired in October 2020, Marucci Sports, which was acquired in April 2020, and Altor Solutions, which was acquired in 2018 each entered into an ISA with CGM. Each ISA iswas for the twelve month period subsequent to the acquisition and iswas payable quarterly. Crosman will payBOA paid CGM a total integration service fee of $1.5 million, with $0.75 million paid in 2017, and $0.75 to be paid in 2018. 5.11 paid CGM $3.5$4.4 million under the agreement, with $1.2 million paidISA, beginning in 2016, and $2.3 million paid in 2017. Manitoba Harvestthe quarter ended December 31, 2020. Marucci paid CGM $1.0a total of $2.0 million in integration services fees, underbeginning in the agreement.quarter ended September 30, 2020. Altor paid CGM a total of $2.3 million in integration services fees, with $0.3 million paid in 2019.
During the years ended December 31, 2021, 2020 and 2019, CGM received $4.9 million, $2.1 million, and $0.3 million, respectively, in total integration service fees.
Cost Reimbursement and Fees
We reimbursed CGM approximately $3.8$5.4 million, $3.8$5.2 million, and $3.5$5.6 million, principally for occupancy and staffing costs incurred by CGM on our behalf during the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.
Investment in FOX
As of July 10, 2014, our ownership interest in FOX decreased from 53% to approximately 41% after we sold shares in a secondary offering by FOX. Since we no longer held a majority interest in FOX, we began accounting for our investment in FOX at fair value utilizing the equity method of accounting. We elected to measure our investment in FOX using the fair value option fair value, with unrealized gains and losses reflected in the consolidated statement of operations as income (loss). In November 2016, our ownership interest in FOX decreased to approximately 14%. 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 following table reflects the 2017 and 2016 activity from our investment in FOX (in thousands):
|
| | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 |
| Balance January 1st | | $ | 141,767 |
| | $ | 249,747 |
|
| Proceeds from sale of FOX shares, net - March | | (136,147 | ) | | (47,685 | ) |
| Proceeds from sale of FOX shares, net - August | | — |
| | (63,000 | ) |
| Proceeds from sale of FOX shares, net - November | | — |
| | (71,785 | ) |
Mark-to-market adjustment - investment (1) | | (5,620 | ) | | 74,490 |
|
| Balance December 31st | | $ | — |
| | $ | 141,767 |
|
(1)The mark-to-market adjustment represents the change in the fair value of the FOX common shares for the period indicated. The 2017 mark-to-market adjustment 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.
The Company and its businesses have the following significant related party transactions:
5.11
Related Party Vendor Purchases - 5.11 purchases inventory from a vendor who is a related party to 5.11 through one of the executive officers of 5.11 via the executive's 40% ownership interest in the vendor. During the years ended December 31, 20172021, 2020 and 2016 (from the date of acquisition)2019, 5.11 purchased approximately $5.6$1.1 million, $2.7 million, and $2.3$4.4 million, respectively, in inventory from the vendor.
ACI
Recapitalization - During the second quarter of 2016,In August 2021, the Company completed a recapitalization at ACI whereby the Company entered into an amendment to the intercompany debt agreement with ACI (the "ACI Loan Agreement"). The ACI loan agreement was amended to provide for additional term loan borrowings of $61.0 million to fund a cash distribution to shareholders totaling $60.1 million. Minority interest shareholders of Advanced Circuits, including certain members of management at Advanced Circuits, received total distribution proceeds of $18.4 million. The Company used cash on hand to fund the distribution to minority shareholders.
Liberty
Recapitalization - During the first quarter of 2016, we completed a recapitalization at Liberty whereby we entered into an amendment to the intercompany loan agreement with Liberty (the “Liberty Loan Agreement”). The Liberty Loan Agreement was amended to (i) provide for term loan borrowings of $38.0 million and revolving credit facility borrowings of $5.0 million to fund cash distributions totaling $35.3 million to its shareholders, including the Company, and (ii) extend the maturity dates of the term loans and revolving credit facility. Liberty’s noncontrolling shareholders received approximately $5.3 million in distributions as a result of the recapitalization. Immediately prior to the recapitalization, management exercised stock options for 75,095 shares of Liberty common shares, resulting in net proceeds from stock options at Liberty of $3.8 million. Liberty recognized $0.3 million in compensation expense related to the accelerated vesting of a portion of management's stock options at the time of exercise. We then purchased $1.5 million in Liberty common shares from members of Liberty management, resulting in Liberty's noncontrolling shareholders holding 11.4% of Liberty's outstanding shares subsequent to the recapitalization. The purchase of the Liberty common stock from noncontrolling shareholders and issuance of Liberty common stock related to the exercise of stock options by noncontrolling shareholders were at fair value and resulted in no change in control of Liberty. The difference between the consideration paid for the noncontrolling interest and the adjustment to the carrying amount of our noncontrolling interest in Liberty was recognized in our equity. Subsequent to the purchase of Liberty common shares and the exercise of the options, we own 88.6% of Liberty on a primary basis and 84.7% on a fully diluted basis.
Liberty Related Party Vendor Purchases - Liberty purchases inventory raw materials from two vendors who are related parties to Liberty through two of the executive officers of Liberty via the employment of family members at the vendors. During the years ended December 31, 2017, 2016 and 2015, Liberty purchased approximately $2.1 million, $2.5 million and $3.3 million, respectively, in raw materials from the two vendors.
FOX
In September 2014, the Company and FOX entered into an agreement for the provision of services to FOX for assistance in complying the Sarbanes-Oxley Act of 2002, as amended (the “Services Agreement”). The Services Agreement terminated
on March 31, 2016. A statement of work was agreed to in connection with the Service Agreement, which provided that the Company’s internal audit team will assist FOX with various tasks, including, but not limited to, the development of internal control policies and procedures, risk and control matrices and the evaluation of internal controls. Services provided in accordance with the Services Agreement were billed on a time and materials basis. Fees paid for services provided in 2016 and 2015 were approximately $72,000 and $135,000, respectively.
Sterno
Recapitalization - In January 2018, the Company completed a recapitalization at Sterno5.11 whereby the Company entered into an amendment to the intercompany loan agreement with Sterno5.11 (the "Sterno"5.11 Loan Agreement"). The 5.11 Loan Agreement was amended to provide for additional term loan borrowings of $55.0 million to fund a distribution to shareholders. The Company owned 97.7% of the outstanding shares of 5.11 on the date of the distribution and received $53.7 million. The remaining amount of the distribution went to minority shareholders.
BOA
Repurchase of Noncontrolling Interest - In September 2021, BOA repurchased shares of its issued and outstanding common shares from its largest minority shareholder for a total payment of $48.0 million, which BOA financed by borrowing under their intercompany credit facility with the Company (the "BOA Credit Agreement"). The BOA Credit Agreement was amended to (i) provide for additional term loan borrowings of $38.0 million, and (ii) consent to the repurchase of the shares from the minority shareholder. The transaction was accounted for in accordance with ASC 810 - Consolidation, whereby the carrying amount of the noncontrolling interest was adjusted to reflect the change in the ownership interest in BOA that occurred as a result of the share repurchase. The difference between the fair value of the consideration paid of $48.0 million and the amount by which the noncontrolling interest was adjusted of $39.4 million was recognized in equity attributable to the Company.
Related Party Vendor Purchases - A contract manufacturer used by BOA as the primary supplier of molded injection parts is a noncontrolling shareholder of BOA. During the year ended December 31, 2021 and for the period from October 16, 2020 (date of acquisition) through December 31, 2020, BOA purchased approximately $48.3 million and $6.7 million, respectively, in parts from this supplier.
Advanced Circuits
Recapitalization - In November 2020, the Company completed a recapitalization of ACI whereby the Company entered into an amendment to the intercompany loan agreement with ACI (the "ACI Loan Agreement"). The SternoACI Loan Agreement was amended to (i) provide for term loan borrowings of $56.8$48.8 million to fund the repurchase of shares from an existing shareholder and to fund a distribution to the Company, which owned 100% of the outstanding equity of Sterno at the time of the recapitalization,shareholders, and (ii)ii) extend the maturity dates of the term loans.loans, and termination date of the revolving loan commitment. In connection with the recapitalization, Sterno's management team exercised all of their vested stock options, which represented 58,000ACI repurchased 47,870 shares of Sterno.ACI capital stock, and distributed $42.8 million to shareholders. The Company then used a portionowned
71.8% of the outstanding shares of ACI on the date of the distribution to repurchase the 58,000 shares from management for a total purchase price of $6.0and received $30.7 million. In addition, Sterno issued new stock options to replace the exercised option, thus maintaining the same percentage of fully diluted non-controlling interest that existed prior to the recapitalization.
Clean Earth
In January 2018, Clean Earth purchased a permit and some tangible property consisting primarily of machinery and equipment from an officerThe remaining amount of the company for approximately $2 million.distribution was paid to minority shareholders.
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 December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Total |
| Less than 1 Year |
| 1-3 Years |
| 3-5 Years |
| More than
5 Years |
Long-term debt obligations (1) | $ | 689,062 |
|
| $ | 33,760 |
|
| $ | 102,186 |
|
| $ | 553,116 |
|
| $ | — |
|
Operating lease obligations (2) | 106,867 |
|
| 17,858 |
|
| 26,198 |
|
| 21,220 |
|
| 41,591 |
|
Purchase obligations (3) | 382,377 |
|
| 213,544 |
|
| 96,033 |
|
| 72,800 |
|
| — |
|
Total (4) | $ | 1,178,306 |
|
| $ | 265,162 |
|
| $ | 224,417 |
|
| $ | 647,136 |
|
| $ | 41,591 |
|
| |
(1)
| Reflects commitment fees and letter of credit fees under our Revolving Credit Facility and amounts due, together with interest on our Revolving Credit Facility and Term Loan Facility. |
| |
(2)
| Reflects various operating leases for office space, manufacturing facilities and equipment from third parties. |
| |
(3)
| Reflects non-cancelable commitments as of December 31, 2017, including: (i) shareholder distributions of $93.5 million; (ii) estimated management fees of $36.4 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 fiscal quarter. The amount approved for future quarters may differ from the amount included in this schedule. |
| |
(4)
| The contractual obligation table does not include approximately $1.1 million in liabilities associated with unrecognized tax benefits as of December 31, 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 Policies and Estimates
The preparation of our financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. Such estimates and judgments may involve varying degrees of uncertainty. Actual results could differ from these estimates under different assumptions and changes in other facts and circumstances, and potentially could result in materially different results. Our critical accounting estimates are discussed below. For a summary of our significant accounting policies, including those policies discussed below, refer to "Note B - Summary of Significant Accounting Policies" to our consolidated financial statements.
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable and collectability is reasonably assured. Provisions for customer returns and other allowances based on historical experience are recognized at the time the related sale is recognized. Revenue from the Company's Clean Earth business is recognized as services are rendered, generally when material is received at Clean Earth's facilities.
Business Combinations
The acquisitions of our businesses are accounted for under the acquisition method of accounting. Accounting for business combinations requires the use of estimates and assumptions in determining the fair value of assets acquired and liabilities assumed in order to allocate the purchase price. The estimates of fair value of the assets acquired and liabilities assumed are based upon assumptions believed to be reasonable using established valuation methods, taking into consideration information supplied by the management of the acquired entities and other relevant information. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of assumptions with respect to future cash inflows and outflows, discount rates, royalty rates, customer attrition rates, asset lives and market multiples, among other items. The determination of fair values requires significant judgment both by our management team and, when appropriate, valuations by independent third-party appraisers. We amortize intangible assets, such as trademarks and customer relationships, as well as property, plant and equipment, over their economic useful lives, unless those lives are indefinite. We consider factors such as historical information, our plans for the asset and similar assets held by our previously acquired portfolio companies.businesses. The impact could result in either higher or lower amortization and/or depreciation expense.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the assets acquired. We are required to perform impairment reviews at least annually and more frequently in certain circumstances. The estimates of future earnings and other market assumptions used to derive and test the fair value at each of our reporting units requires judgment on the part of management. Even minor adjustments to those values used and assumptions made can lead to significantly different results.
Goodwill and Indefinite Lived Intangible Assets
Goodwill represents the excess amount of the purchase price over the fair value of the assets acquired. Our goodwill and indefinite lived intangible assets are tested for impairment on an annual basis as of March 31st, and if current events or circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which are generally an operating segment or one level below the operating segment. Each of our businesses represents a reporting unit except Arnold, which is comprised of three reporting units, and each reporting unit was included in our annual impairment test at March 31, 2017.unit.
We use a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely than-not that the fair value of a reporting unit is 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, for operating income, net income and adjusted EBITDA, operating costs and cost impacts, as well as issues or events specific to the reporting unit. AtIf qualitative factors are not sufficient to determine that the fair value of a reporting unit is more likely than not to exceed its carrying value, we will perform a quantitative test the reporting unit whereby we estimate the fair value of the reporting unit using an income approach or market approach, or a weighting of the two methods. Under the income approach, we estimate the fair value of our reporting unit based on the present value of future cash flows. Cash flow projections are based on Management's estimate of revenue growth rates and operating margins and take into consideration industry and market conditions as well as company specific economic factors. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. Under the market approach, we estimate fair value based on market multiples of revenue and earnings derived from comparable public companies with operating characteristics that are similar to the reporting unit. When market comparables are not meaningful or available, we estimate the fair value of the reporting unit using only the income approach.
2021 Annual Impairment Testing - For our annual impairment testing at March 31, 2017,2021, we performed a qualitative assessment of our reporting units. 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. As a result of the current COVID-19 pandemic, we have considered how we
expect COVID-19 to impact our future operating results and short and long term financial condition as part of our qualitative assessment, including the effects on our end customers, potential short-term supply chain constraints, and the continued restrictions imposed by government and regulatory authorities. The results of the qualitative analysis indicated that it was more-likely-than-not that the fair value of each of our reporting units except Arnold exceeded their carrying value. Based on our analysis, we determined that the Manitoba Harvest reporting unitArnold operating segment required further quantitative testing (Step 1) because we could not conclude that the fair value of thethis reporting unit exceeds itssignificantly exceeded the carrying value based on qualitative factors alone. For
We performed the Step 1 quantitative impairment test at Manitoba, the Company utilizedtests of Arnold using 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.
2017 Interim Impairment Testing
As a result of operating results that were below forecasted amounts, as well as a failure of the financial covenants associated with the intercompany credit facility, we determined that a triggering event had occurred at Manitoba Harvest in the fourth quarter of 2017. We performed impairment testing of the goodwill and the indefinite lived tradename at Manitoba Harvest as of December 31, 2017.For the quantitative impairment test at Manitoba, we utilized an income approach. The weighted average cost of capital used in the income approach at Manitoba was 11.7%. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Results of the quantitative testing of Manitoba Harvest indicated that the carrying value of Manitoba Harvest exceeded its fair value by $6.3 million, and we recorded $6.2 million (after the effect of foreign currency translation) as impairment expense at December 31, 2017. For the indefinite lived trade name, quantitative testing of the Manitoba Harvest tradename indicated that the carrying value exceeded its fair value by $2.3 million, and we recorded $2.3 million (after the effect of foreign currency translation) of impairment expense at December 31, 2017. We expect to finalize the Manitoba Harvest impairment testing during the first quarter of 2018.
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 estimateddetermine 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.units. 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 marketan income approach. In developing the prospective financial information used in the income approach, we considered recent market conditions, taking into consideration the uncertainty associated with the COVID-19 pandemic and its economic fallout. The prospective financial information considers reporting unit specific facts and circumstances and is our best estimate of operational results and cash flows for the Arnold reporting unit as of the date of our impairment testing. The discount rate used in the income approach was 13.0%, and the results of the quantitative impairment testing indicated that the fair value of the Arnold reporting unit exceeded the carrying value by approximately 272%. The prospective financial information that is used to determine the fair values of the Arnold reporting unit requires us to make assumptions regarding future operational results including revenue growth rates and gross margins. If we do not achieve the forecasted revenue growth rates and gross margins, the results of the quantitative testing could change, potentially leading to additional testing and impairment at the reporting unit that was tested quantitatively.
2020 Annual Impairment Testing - For our annual impairment testing at March 31, 2020, we performed a qualitative assessment of our reporting units. As part of our current year analysis, we have considered how we expect the COVID-19 pandemic to impact our future operating results and short and long-term financial condition. In addition to the typical qualitative factors we consider as part of the assessment, we went through a process with each of our reporting units whereby we considered various scenarios for the remainder of the year, probability weighted for what we consider the most likely outcome given existing facts and circumstances. This process included consideration of the reporting unit's industry and customers, including customer liquidity, operational capacity given local government restrictions imposed to prevent spread of the COVID-19 virus, supply chain constraints that may exist as a result of the virus and ability of the subsidiary to reduce cash outflows. The results of the qualitative analysis indicated that it was more-likely-than-not that the fair value of our 5.11, ACI, Arnold, Liberty and Sterno reporting units exceeded their carrying value. Based on our analysis, we determined that our Ergobaby, Altor and Velocity operating segments required quantitative testing because we could not conclude that the fair value of these reporting units significantly exceeded the carrying value based on qualitative factors alone.
We performed the quantitative tests of Ergobaby, Altor and Velocity using an income approach to determine the fair value of the reporting units. We were unable to use a market approach due to the current market conditions as a result of the COVID-19 pandemic resulting in significant volatility and lack of available market comparables. In developing the prospective financial information used in the income approach, we considered recent market conditions, taking into consideration the uncertainty associated with the COVID-19 pandemic and its economic fallout. The prospective financial information considers reporting unit specific facts and circumstances and is our best estimate of operational results and cash flows for each reporting unit as of the date of our impairment testing. For Ergobaby, the discount rate used in the income approach was 15.9% and the results of the quantitative impairment testing indicated that the fair value of the Ergobaby reporting unit exceeded the carrying value by 14.0%. For Altor, the discount rate used in the income approach was 13.3%, and the results of the quantitative impairment testing indicated that the fair value of the Altor reporting unit exceeded the carrying value by 3.8%. The impairment test for Velocity used a discount rate of 12.8% in the income approach, and the results of the quantitative impairment testing indicated that the fair value of the Velocity reporting unit exceeded the carrying value by 16.4%. The prospective financial information that is used to determine the fair values of the reporting units requires us to make assumptions regarding future operational results including revenue growth rates and gross margins. If we do not achieve the forecasted revenue growth rates and gross margins, the results of the quantitative testing could change, potentially leading to additional testing and impairment at the reporting units that were tested quantitatively.
2019 Interim Impairment Testing - As a result of operating results below forecasts in the current period as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods, we determined that a triggering event had occurred at Velocity Outdoor in the third quarter of 2019 and performed
an interim impairment test of goodwill as of September 30, 2019. The Company used an income approach for the impairment test, whereby we estimate the fair value of the reporting unit based on the present value of future cash flows. Cash flow projections are based on management's estimate of revenue growth rates and operating margins, and take into consideration industry and market conditions as well as company specific economic factors. The Company used a weighted average cost of capital of 12.5%12.2% in the income approach. The discount rate used was based on the weighted average cost of capital adjusted for PMAG, 12.0% for Flexmagthe relevant risk associated with business specific characteristics and 13.0% for PTM. ResultsVelocity's ability to execute on the projected cash flows. Based on the results of the Step 1 testingimpairment test, the fair value of Velocity did not exceed the carrying value, indicating that the goodwill at Velocity is impaired. The difference between the carrying value and fair value of the Velocity business was $32.9 million, which the Company has recorded as impairment expense in the accompanying consolidated statement of operations for Arnold's Flexmag and PTMthe year ended December 31, 2019.
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 $57.0 million. The results of the qualitative analysis of our other reporting unitsunit's indefinite-lived intangible assets, which we completed as of March 31, 2021, indicated that the fair value of these reporting unitsthe indefinite lived intangible assets 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.
In connection with the annual goodwill impairment testing, we test other indefinite-lived intangible assets (trade names) at our reporting units. We are permitted to make a qualitative assessment of whether it is more likely than not that the fair value of an individual reporting unit's indefinite lived assets exceeds its carrying amount before applying a quantitative analysis. If a company concludes that it is not more likely than not that the fair value of a reporting unit’s indefinite-lived assets exceeds its carrying amount it is not required to perform a quantitative test for that reporting unit. At March 31, 2017, we elected to use the qualitative assessment alternative to test indefinite-lived assets for impairment for each of our reporting units that record indefinite lived assets except Manitoba Harvest, where we preformed a Step 1. At that time, it was determined that the fair value of indefinite lived assets at each of our reporting units exceeded its carrying amount.value.
Definite-Lived Intangible Assets
Long-lived intangible assets subject to amortization, including customer relationships, non-compete agreements, permits and technology are amortized using the straight-line method over the estimated useful lives of the intangible assets, which we determine based on the consideration of several factors including the period of time the asset is expected to remain in service. We evaluate long-lived assets for potential impairment whenever events occur or circumstances indicate that the carrying amount of the assets may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount of a long-lived asset is not recoverable and is greater than its fair value, the asset is impaired and an impairment loss must be recognized. Both the Ergobaby and Clean Earth businesses recognized losses on disposal of assets during 2016. Ergobaby recorded a $5.9 million loss on disposal of assets during the year ended December 31, 2016 related to its decision to dispose of the Orbit Baby product line. The loss is 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. In October 2016, Ergobaby sold a majority of the Orbit Baby intellectual property and tooling assets. The proceeds of the sale reduced the loss recorded on disposal of assets by approximately $1.0 million in the fourth quarter of 2016. Clean Earth recognized a loss on disposal of assets of $3.3 million during the fourth quarter of 2016 related to the closure of the Company’s Williamsport, Pennsylvania site which processed drill cuttings. The loss was comprised of intangible assets specific to the Williamsport location, as well as equipment that could not be repurposed to other sites at the time of the closing of the facility.
The determination of fair values and estimated useful lives requires significant judgment both by our management team and by outside experts engaged to assist in this process. This judgment could result in either a higher or lower value assigned to our reporting units and intangible assets. The impact could result in either higher or lower amortization and/or the incurrence of an impairment charge.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts on an entity-by-entity basis with consideration for historical loss experience, customer payment patterns and current economic trends. The Company reviews the adequacy of the allowance for doubtful accounts on a periodic basis and adjusts the balance, if necessary. The determination of the adequacy of the allowance for doubtful accounts requires significant judgment by management. The impact of either over or under estimating the allowance could have a material effect on future operating results. The consolidated allowance for doubtful accounts is approximately $10.0 million at December 31, 2017.
Income taxes
On December 22, 2017, the U.S. government enacted the Tax Act which significantly revises the U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a partial territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on the deductibility of certain costs. Due to the complexities of accounting for the effect of the Tax Act, the U.S. Securities and Exchange Commission issued guidance that requires companies to include in their financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. The Company has made a reasonable estimate of the effects of the Tax Act on its existing deferred tax balances and the one-time transition tax. The Company has substantially completed its accounting for the revaluation of its net U.S. federal deferred tax liabilities and recorded a tax benefit of approximately $34.7 million in the fourth quarter of 2017. The one-time transition tax under the Tax Act is based on earnings and profits ("E&P) that were previously deferred from U.S. income taxes. For the year ended December 31, 2017, the provision for income taxes includes provisional tax expense of $4.9 million related to the one-time transition tax liability of our foreign subsidiaries. The Company has not completed the calculation of the total E&P for these foreign subsidiaries and expects to refine its calculations as additional analysis is completed. In addition, the Company's estimates may be affected as additional regulatory guidance is issued with respect to the Tax Act. Any adjustments to the provisional amounts will be recognized as a component of the provision for income taxes in the period in which such adjustments are determined within the annual period following the enactment of the Tax Act.
Several of our majority owned subsidiaries have deferred tax assets recorded at December 31, 2017 which in total amount to approximately $38.9 million. This deferred tax asset is net of $5.9 million of valuation allowance primarily associated with 5.11 and Arnold related to an expected inability to utilize foreign tax credits. These deferred tax assets are comprised primarily of reserves not currently deductible for tax purposes. The temporary differences that have resulted in the recording of these tax assets may be used to offset taxable income in future periods, reducing the amount of taxes we might otherwise be required to pay. Realization of the deferred tax assets is dependent on generating sufficient future taxable income. Based upon the expected future results of operations, we believe it is more likely than not that we will generate sufficient future taxable income to realize the benefit of existing temporary differences, although there can be no assurance of this. The impact of not realizing these deferred tax assets would result in an increase in income tax expense for such period when the determination was made that the assets are not realizable. (Refer to "Note L – “Income Taxes" in the notes to consolidated financial statements.)Profit Allocation Interests
At the time of our Initial Public Offering, we issued Allocation Interests governed by our LLC agreement that entitle the holders (the "Holders") to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The Holders are entitled to receive and as such can elect to receive the positive contribution based profit allocation payment for each of the business acquisitions during the 30-day period following the fifth anniversary of the date upon which we acquired a controlling interest in that business (Holding Event)(a "Holding Event") and upon the sale of that business (Sale Event)(a "Sale Event").
Recent Accounting Pronouncements
ITEM 7A.–Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
At December 31, 2017, we were exposed to interest rate risk primarily through borrowingsBorrowings under our 20142021 Credit Facility because borrowings under this agreement are subject to variable interest rates. Werates and thus would expose us to interest rate risk. As of December 31, 2021, we had $560.0 millionno amounts outstanding under the 2014 Term Loan Facility and 2016 Incremental Term Loan at December 31, 2017. On September 16, 2014, we purchased an interest rate swap with a notional amount of $220 million. This swap is effective April 1, 2016 through June 6,our 2021 the termination date of our 2014 Term Loan, and requires us to pay interest at rates on the notional amount at 2.97% in exchange for the three-month LIBOR rate.
Interest on our 2014 Term Loan Facility and 2016 Incremental Term Loan is subject to a LIBOR floor of 1.0% and three-month LIBOR is approximately 169 basis points at December 31, 2017. We currently estimate that a 100 basis point increase in LIBOR would not have a material impact on our results of operations, cash flows or financial condition.
We expect to borrow under our Revolving Credit Facility in the future in order to finance our short term working capital needs and future acquisitions. These borrowings will be subject to variable interest rates.
Facility.
Foreign Exchange Rate Sensitivity
During fiscal year 2015, we acquired a Canadian subsidiary, Manitoba Harvest, and weWe are exposed to transactional foreign currency exposure related to the issuance of intercompany loansexchange rate risk arising from transactions in the Canadian dollar, the functionalnormal course of business at certain of our subsidiaries, such as sales to third party customers, foreign plant operations, and purchases from suppliers. We may also experience foreign currency of Manitoba Harvest. At December 31, 2017, the outstanding amount of intercompany loans with Manitoba Harvest was $48.5 million (C$60.9 million). We recognized foreign exchange gains of approximately $3.3 million during 2017 related to changes in the Canadian dollar. A 10% decrease/ increase in the exchange rate wouldexposure as a result in approximately $4.6 million additional expense/ income based on our current amount of intercompany loans outstanding. We also have translation exposure resultingthe volatility and uncertainty that may arise as a result of the United Kingdom's exit from translating the financial statements of Manitoba Harvest into the U.S. Dollar.European Union.
Credit Risk
We are exposed to credit risk associated with cash equivalents, investments, and trade receivables. We do not believe that our cash equivalents or investments present significant credit risks because the counterparties to the instruments consist of major financial institutions and we manage the notional amount of contracts entered into with any one counterparty. Our cash and cash equivalents at December 31, 20172021 consists principally of (i) treasury backed securities, (ii) insured prime money market funds, (iii) FDIC insured Certificates of Deposit, and (iv)(iii) cash balances in several non-interest bearing checking accounts. Substantially all trade receivable balances of our businesses are unsecured. The concentration of credit risk with respect to trade receivables is limited by the large number of customers in our customer base and their dispersion across various industries and geographic areas. Although we have a large number of customers who are dispersed across different industries and geographic areas, a prolonged economic downturn could increase our exposure to credit risk on our trade receivables. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial statement schedules referred to in the index contained on page F-1 of this report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
(a) Management’s Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2017,2021, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and in ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussions regarding required disclosure.
(b) Information with respect to Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013 framework). Based on our assessment under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.2021.
The audited financial statements of the Company included in this Annual Reportannual report on Form 10-K include the results of acquisitions from their respective dates of acquisition. Management's assessment of internal control over financial reporting for the year ended December 31, 20172021 does not include an assessment of Crosman,Lugano Diamonds and Jewelry, Inc., a majority owned subsidiary of the Company that was acquired during the year ended December 31, 2017.2021. The financial statements of CrosmanLugano Diamonds Inc. reflect total assets and net revenues constituting 11% and 6%3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.2021. Refer to "Note C - Acquisition of Businesses" for a description of the acquisition of Crosman.Lugano Diamonds, Inc.
The effectiveness of our internal control over financial reporting as of December 31, 20172021 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report that is included herein.
(c) Information with respect to Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting is contained on page F-2 of this Annual Report on Form 10-K and is incorporated herein by reference.
(d) Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter to which this Annual Report on Form 10-K relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
NONE
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our executive officers is incorporated herein by reference to information included in the Proxy Statement for our 20182022 Annual Meeting of Shareholders.
Information with respect to our directors and the nomination process is incorporated herein by reference to information included in the Proxy Statement for our 20182022 Annual Meeting of Shareholders.
Information regarding our corporate governance, including our audit committee and our audit committee financial expertscode of ethics, is incorporated herein by reference to information included in the Proxy Statement for our 20182022 Annual Meeting of Shareholders.
Information required by Item 405regarding compliance with Section 16(a) of Regulation S-Kthe Exchange Act is incorporated herein by reference to information included in the Proxy Statement for our 20182022 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by reference to information included in the Proxy Statement for our 20182022 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to information included in the Proxy Statement for our 20182022 Annual Meeting of Shareholders.
Securities Authorized for Issuance under Equity Compensation Plans
There are no securities currently authorized for issuance under an equity compensation plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to such contractual relationships and independence is incorporated herein by reference to the information in the Proxy Statement for our 20182022 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to principal accountant fees and services and pre-approval policies are incorporated herein by reference to information included in the Proxy Statement for our 20182022 Annual Meeting of Shareholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.Financial Statements
For the Registrant, see “Index to Consolidated Financial Statements and Supplemental Financial Data” set forth on page F-1.
| |
2. | Financial Statement Schedule |
2.Financial Statement Schedule
For the Registrant, see “Index to Consolidated Financial Statements and Supplemental Financial Data” set forth on page F-1.S-1.
3.Exhibits
For the Registrant, see “Index to Exhibits” set forth on page E-1.below.
INDEX TO EXHIBITS
|
| | | | | | | | |
Exhibit
Number
| | Description | |
| 2.1 | | |
2.1 | | | |
| 2.2 | | | |
| 2.3 | | Stock Purchase Agreement, dated October 17, 2011, by and among Recruit Co., LTD. and RGF Staffing USA, Inc., as Buyers, the shareholders of Staffmark Holdings, Inc., as Sellers, Staffmark Holdings, Inc. and Compass Group Diversified Holdings LLC as Seller Representative (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on October 18, 2011 (File No. 001-34927)). | |
| 2.4 | | | |
| 2.5 | | | |
3.12.6 | | Stock Purchase Agreement by and among Compass Group Diversified Holdings LLC, Compass Group Investments, Inc., Compass CS Partners, L.P., Compass CS II Partners, L.P., Compass Crosman Partners, L.P., Compass Advanced Partners, L.P. and Compass Silvue Partners, LP (incorporated by reference to Exhibit 2.1 of the Form S-1 filed on April 13, 2006 (File No. 333-130326)). | |
| 2.7 | | | |
| 2.8 | | | |
| 2.9 | | | |
| 3.1 | | | |
| 3.2 | | | |
| 3.3 | | | |
| 3.4 | | | |
| 3.5 | | | |
| 3.6 | | Second Amendment to the Amended and Restated Trust Agreement, dated as of April 25, 2006, as amended on May 23, 2007, of Compass Diversified Trust among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit 3.2 of the Form 8-K filed on September 13, 2007 (File No. 000-51937)). | |
| 3.7 | | Third Amendment to the Amended and Restated Trust Agreement dated as of April 25, 2006, as amended on May 25, 2007 and September 14, 2007, of Compass Diversified Holdings among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit 4.1 of the Form 8-K filed on December 21, 2007 (File No. 000-51937)). | |
| 3.8 | | Fourth Amendment dated as of November 1, 2010 to the Amended and Restated Trust Agreement, as amended effective November 1, 2010, of Compass Diversified Holdings, originally effective as of April 25, 2006, by and among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit 3.1 of the Form 10-Q filed on November 8, 2010 (File No. 001-34927)). | |
| 3.9 | | | |
| | | | | | | | | |
| 3.10 | | | |
| 3.11 | | | |
3.113.12 | | | |
3.123.13 | | | |
3.133.14 | | | |
3.143.15 | | | |
| 3.16 | | |
|
| | |
| 3.17 | | Number 3.3 of the Form 8-K filed on August 4, 2021 (File No. 001-34927)).
| | Description |
3.153.18 | |
| |
4.13.19 | | | |
| 3.20 | | | |
| 3.21 | | | |
| 3.22 | | | |
| 4.1 | | |
|
| | |
| 4.2 | | | |
| 4.3 | | | |
| 4.4 | | | |
| 4.5 | | | |
| 4.6 | | | |
| 4.7 | | | |
10.14.8* | | | |
| 10.1 | | | |
| 10.2 | | | |
10.3†10.3 | | |
10.4 | | | |
10.510.4 | | | |
10.610.5 | | |
10.7 | | | |
10.810.6 | | | |
10.910.7 | | | |
10.1010.8 | | | |
| | | | | | | | | |
10.1110.9 | | |
10.12 | | |
10.13 | | |
10.14 | | | |
10.15†10.10† | | |
|
| | |
10.1610.11 | |
|
10.17 | | Commitment Letter, dated August 1, 2016, fromfinancial institutions party thereto and Bank of America, N.A. Merrill Lynch, Pierce, Fenner & Smith Incorporated, dated as of March 23, 2021 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on August 1, 2016March 23, 2021 (File No. 001-34927)). | |
10.1821.1* | | |
10.19 | | |
10.20 | | |
10.21 | | |
10.22* | | |
12.1* | | |
21.1* | | | |
| 23.1* | | | |
31.1*24.1* | | | |
| 31.1* | | | |
| 31.2* | | | |
32.1*+ | | | |
32.2*+ | | | |
| 99.1 | | |
99.2 | | |
99.3 | | Stock Purchase Agreement dated May 8, 2008, among Mitsui Chemicals, Inc., Silvue Technologies Group, Inc., the stockholders of Silvue Technologies Group, Inc. and the holders of Options listed on the signature pages thereto, and Compass Group Management LLC, as the Stockholders Representative (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on May 9, 2008 (File No. 000-51937)). |
99.4 | | | |
99.599.2 | | | |
99.699.3 | | Securities Purchase Agreement dated August 24, 2011, by and among CBK Holdings, LLC, CamelBak Products, LLC, CamelBak Acquisition Corp., for purposes of Section 6.15 and Articles 10 only, Compass Group Diversified Holdings LLC, and for purposes of Section 6.13 and Article 10 only, IPC/CamelBak LLC (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on August 25, 2011 (File No. 001-34927)). |
99.7 | | |
99.8 | | |
|
| | |
99.999.4 | | | |
99.1099.5 | | |
99.11 | | | |
99.1299.6 | | | |
99.1399.7 | | | |
99.1499.8 | | | |
| 99.9 | | Agreement and Plan of Merger, dated as of March 6, 2020, among Marucci Sports, LLC, Wheelhouse Holdings, Inc., Jeffery W. Palmer, the Jeffery Wayne Palmer Dynasty Trust dated December 26, 2011, the Angela Marie Palmer Irrevocable Trust dated December 26, 2011, the Angela Marie Palmer Charitable Lead Trust, the Fidelity Investments Charitable Gift Fund, the TAK Irrevocable Trust dated June 7, 2012,Wheelhouse Holdings Merger Sub LLC and the SAK Irrevocable Trust dated June 7, 2012, Todd Knapp and Signe Knapp, and Sterno Products,Wheelhouse 2020 LLC (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on January 24, 2018March 9, 2020 (File No. 001-34927)). |
|
| | |
101.INS*99.10 | | | |
| 99.11 | | | |
| 99.12 | | Stock Purchase Agreement, dated September 3, 2021, between Lugano Buyer Inc., Mordechai Haim Ferder, as trustee of The Haim Family Trust dated 2/24/2009, Edit Fintzi Ferder, as trustee of The RF 2021 Irrevocable Trust dated 8/30/2021, Mordechai Haim Ferder, as trustee of The TF 2021 Irrevocable Trust dated 8/30/2021, Simba IL Holdings, LLC and Mordechai Haim Ferder in his individual capacity and as initial representative of the Sellers (incorporated by reference to Exhibit 99.2 of the Form 8-K filed on September 7, 2021 (File No. 001-34927 and Accession No. 0001345126-21-000039)). | |
| 101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| | | | | | | | | |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | | Cover page formatted as Inline XBRL and contained in Exhibit 101 | |
|
| | | | | | | |
| * | | Filed or furnished herewith. |
| † | | Denotes management contracts and compensatory plans or arrangements. |
| + | | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
ITEM 16. FORM 10-K SUMMARY
NONE
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| COMPASS GROUP DIVERSIFIED HOLDINGS LLC |
| | |
| Date: February 24, 2022 | COMPASS GROUP DIVERSIFIED HOLDINGS LLCBy: | /s/ Elias J. Sabo |
| | Elias J. Sabo |
Date: 2/28/2018 | By: | /s/ Alan B. Offenberg |
| | Alan B. Offenberg |
| | Chief Executive Officer |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alan B. OffenbergElias J. Sabo and Ryan J. Faulkingham, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and either of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | |
| Signature | Title | Date |
| | |
| /s/ Elias J. Sabo | Chief Executive Officer | February 24, 2022 |
| Elias J. Sabo | (Principal Executive Officer)
and Director | |
| | |
Signature | Title | Date |
| | |
/s/ Alan B. Offenberg | Chief Executive Officer | February 28, 2018 |
Alan B. Offenberg | (Principal Executive Officer)
and Director
| |
| | |
| /s/ Ryan J. Faulkingham | Chief Financial Officer | February 28, 201824, 2022 |
| Ryan J. Faulkingham | (Principal Financial and Accounting Officer) | |
| | |
| /s/ C. Sean Day | Director | February 28, 201824, 2022 |
| C. Sean Day | | |
| | |
/s/ D. Eugene Ewing | Director | February 28, 2018 |
D. Eugene Ewing | | |
| | |
| /s/ Harold S. Edwards | Director | February 28, 201824, 2022 |
| Harold S. Edwards | | |
| | |
| | |
| /s/ Gordon Burns | Director | February 28, 201824, 2022 |
| Gordon Burns | | |
| | |
| /s/ James J. Bottiglieri | Director | February 28, 201824, 2022 |
| James J. Bottiglieri | | |
| | |
| /s/ Sarah G. McCoy | Director | February 28, 201824, 2022 |
| Sarah G. McCoy | | |
| | |
| /s/ Larry L. Enterline | Director | February 24, 2022 |
| Larry L. Enterline | | |
| | |
| /s/ Alexander S. Bhathal | Director | February 24, 2022 |
| Alexander S. Bhathal | | |
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| COMPASS DIVERSIFIED HOLDINGS |
| | |
| Date: February 24, 2022 | COMPASS DIVERSIFIED HOLDINGS |
| By: | | |
Date: 2/28/2018 | By: | /s/ Ryan J. Faulkingham |
| | Ryan J. Faulkingham |
| | Regular Trustee |
COMPASS DIVERSIFIED HOLDINGS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL FINANCIAL DATA
| | | | | |
| Page |
| Page |
| Historical Financial Statements: | |
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| |
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| |
| |
| Supplemental Financial Data: | |
| The following supplementary financial data of the registrant and its subsidiaries required to be included in Item 15(a)(2) of Form 10-K are listed below: | |
| |
| All other schedules not listed above have been omitted as not applicable or because the required information is included in the Consolidated Financial Statements or in the notes thereto. | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders'Stockholders
Compass Diversified Holdings
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Compass Diversified Holdings (a Delaware trust) and subsidiaries (the “Company”) as of December 31, 2017,2021, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017,2021, and our report dated February 28, 201824, 2022 expressed an unqualified opinionon those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control overOver Financial Reporting(“ (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Crosman Corp.Lugano Diamonds & Jewelry Inc. (“Lugano”), a majority-owned subsidiary, whose financial statements reflect total assets and revenuesrevenue constituting 1111% and 6 percent,3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.2021. As indicated in Management’s Report, Crosman Corp.Lugano was acquired during 2017.2021. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Crosman Corp.Lugano.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTONGrant Thornton LLP
New York, New York
February 28, 201824, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders'Stockholders
Compass Diversified Holdings
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Compass Diversified Holdings (a Delaware trust) and subsidiaries (the “Company”) as of December 31, 20172021 and 2016,2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2021, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, thefinancial statements present fairly, in all material respects, the financial position of the Companyas of December 31, 20172021 and 2016,2020, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2017,2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017,2021, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 201824, 2022expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Acquisition of Lugano Diamonds & Jewelry, Inc. (“Lugano”) – Fair Value of Intangible Assets Acquired
As described further in Note C to the financial statements, the Company completed the acquisition of Lugano on September 3, 2021 for consideration of $265.1 million. The identifiable intangible assets acquired include a tradename and customer relationships, which have been recorded by management at their preliminary fair values of $49.5 million and $33.4 million, respectively. We identified the preliminary valuation of the intangible assets acquired in the Lugano acquisition as a critical audit matter.
The principal considerations for our determination that the preliminary valuation of the acquired tradename and customer relationships is a critical audit matter are that the determination of the preliminary fair values of such assets required management to make significant estimates and assumptions related to forecasted revenues and operating margins as well as the discount rates used. This required a high degree of auditor judgement and an
increased extent of effort, including professionals with specialized skill and knowledge, in auditing these assumptions made by management.
Our audit procedures related to the preliminary valuation of the acquired tradename and customer relationships included the following procedures, among others:
•We tested the design and operating effectiveness of controls relating to the determination of preliminary fair values of the tradename and customer relationships, including controls over the development of assumptions related to revenue growth rates, operating margins and discount rates, as well as the controls around the appropriateness of the valuation models used.
•We evaluated the valuation methodologies and discount rates utilized by management with the assistance of our valuation professionals with specialized skill and knowledge.
•We tested the forecasted revenues and operating margins by assessing the reasonableness of management’s forecasts compared to historical results and forecasted market and industry trends.
Election to be Taxed as a Corporation
As described further in Note B and Note L to the financial statements, effective September 1, 2021, Compass Diversified Holdings (the “Trust”) elected to be treated as a corporation for U.S. federal income tax purposes (the “Election”), which resulted in a change in the tax reporting for the Trust and its shareholders. We identified the Trust’s election to be taxed as a corporation for U.S. federal income tax purposes as a critical audit matter.
The principal consideration for our determination that the Trust’s election to be taxed as a corporation for U.S. federal income tax purposes is a critical audit matter is that auditing the Election required a greater level of effort, including the involvement of our tax professionals, to evaluate the application of the Internal Revenue Code applicable to the transaction and the resulting tax accounting impacts to the Trust and its shareholders.
Our audit procedures related to the Election included the following procedures, among others:
•We tested the design and operating effectiveness of controls relating to management’s review of the accounting impacts of the Election.
•With assistance from our tax professionals with specialized skill and knowledge we tested the formulaic accuracy of the mathematical model used by management and its third-party specialist to compute book to tax basis differences resulting from the Election in order to determine whether such calculations were made in accordance with relevant tax laws and regulations and the resulting tax accounting impacts.
/s/ GRANT THORNTONGrant Thornton LLP
We have served as the Company’s auditor since 2005.
New York, New York
February 28, 201824, 2022
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| (in thousands) | December 31,
2017 | | December 31,
2016 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 39,885 |
| | $ | 39,772 |
|
| Accounts receivable, net | 215,108 |
| | 181,191 |
|
| Inventories | 246,928 |
| | 212,984 |
|
| Prepaid expenses and other current assets | 24,897 |
| | 18,872 |
|
| Total current assets | 526,818 |
| | 452,819 |
|
| Property, plant and equipment, net | 173,081 |
| | 142,370 |
|
| Investment in FOX (refer to Note F) | — |
| | 141,767 |
|
| Goodwill | 531,689 |
| | 491,637 |
|
| Intangible assets, net | 580,517 |
| | 539,211 |
|
| Other non-current assets | 8,198 |
| | 9,351 |
|
| Total assets | $ | 1,820,303 |
| | $ | 1,777,155 |
|
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 84,538 |
| | $ | 61,512 |
|
| Accrued expenses | 106,873 |
| | 91,041 |
|
| Due to related parties (refer to Note R) | 7,796 |
| | 20,848 |
|
| Current portion, long-term debt | 5,685 |
| | 5,685 |
|
| Other current liabilities | 7,301 |
| | 23,435 |
|
| Total current liabilities | 212,193 |
| | 202,521 |
|
| Deferred income taxes | 81,049 |
| | 110,838 |
|
| Long-term debt | 584,347 |
| | 551,652 |
|
| Other non-current liabilities | 16,715 |
| | 17,600 |
|
| Total liabilities | 894,304 |
| | 882,611 |
|
| | | | |
| Commitments and contingencies (Note P) | | | |
| | | | |
| Stockholders’ equity | | | |
| Trust preferred shares, no par value, 50,000 authorized; 4,000 shares issued and outstanding at December 31, 2017 and none issued at December 31, 2016 | 96,417 |
| | — |
|
| Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding at December 31, 2017 and December 31, 2016 | 924,680 |
| | 924,680 |
|
| Accumulated other comprehensive loss | (2,573 | ) | | (9,515 | ) |
| Accumulated earnings (deficit) | (145,316 | ) | | (58,760 | ) |
| Total stockholders’ equity attributable to Holdings | 873,208 |
| | 856,405 |
|
| Noncontrolling interest | 52,791 |
| | 38,139 |
|
| Total stockholders’ equity | 925,999 |
| | 894,544 |
|
| Total liabilities and stockholders’ equity | $ | 1,820,303 |
| | $ | 1,777,155 |
|
| | | | | | | | | | | |
| COMPASS DIVERSIFIED HOLDINGS |
| CONSOLIDATED BALANCE SHEETS |
| | | |
| (in thousands) | December 31,
2021 | | December 31,
2020 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 157,125 | | | $ | 60,023 | |
| Accounts receivable, net | 268,262 | | | 206,728 | |
| Inventories | 562,084 | | | 350,594 | |
| Prepaid expenses and other current assets | 56,575 | | | 40,381 | |
| Current assets held for sale | 99,423 | | | 17,136 | |
| Current assets of discontinued operations | — | | | 33,505 | |
| Total current assets | 1,143,469 | | | 708,367 | |
| Property, plant and equipment, net | 178,393 | | | 153,653 | |
| Goodwill | 815,405 | | | 666,507 | |
| Intangible assets, net | 872,677 | | | 834,082 | |
| Other non-current assets | 134,317 | | | 97,309 | |
| Non-current assets held for sale | — | | | 84,728 | |
| Non-current assets of discontinued operations | — | | | 53,872 | |
| Total assets | $ | 3,144,261 | | | $ | 2,598,518 | |
| | | |
| | | | | | | | | | | |
| COMPASS DIVERSIFIED HOLDINGS |
| CONSOLIDATED BALANCE SHEETS |
| | | |
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 120,405 | | | $ | 91,701 | |
| Accrued expenses | 174,801 | | | 134,218 | |
| Deferred revenue | 12,802 | | | 7,955 | |
| Due to related parties (refer to Note Q) | 11,705 | | | 10,012 | |
| Other current liabilities | 32,688 | | | 26,426 | |
| Current liabilities held for sale | 29,127 | | | 9,169 | |
| Current liabilities of discontinued operations | — | | | 15,230 | |
| Total current liabilities | 381,528 | | | 294,711 | |
| Deferred income taxes | 84,344 | | | 67,836 | |
| Long-term debt | 1,284,826 | | | 899,460 | |
| Other non-current liabilities | 109,033 | | | 83,693 | |
| Non-current liabilities held for sale | — | | | 21,535 | |
| Non-current liabilities of discontinued operations | — | | | 11,135 | |
| Total liabilities | 1,859,731 | | | 1,378,370 | |
| | | |
| Commitments and contingencies (refer to Note P) | | | |
| | | |
| Stockholders’ equity | | | |
| Trust preferred shares, 50,000 authorized; 12,600 shares issued and outstanding at December 31, 2021 and December 31, 2020 | | | |
| Series A preferred shares, no par value, 4,000 shares issued and outstanding at December 31, 2021 and December 31, 2020 | 96,417 | | | 96,417 | |
| Series B preferred shares, no par value, 4,000 shares issued and outstanding at December 31, 2021 and December 31, 2020 | 96,504 | | | 96,504 | |
| Series C preferred shares, no par value, 4,600 shares issued and outstanding at December 31, 2021 and December 31, 2020 | 110,997 | | | 110,997 | |
| Trust common shares, no par value, 500,000 authorized; 68,738 shares issued and outstanding at December 31, 2021 and 64,900 shares issued and outstanding at December 31, 2020 | 1,123,193 | | | 1,008,564 | |
| Accumulated other comprehensive loss | (1,028) | | | (1,456) | |
| Accumulated deficit | (314,267) | | | (211,002) | |
| Total stockholders’ equity attributable to Holdings | 1,111,816 | | | 1,100,024 | |
| Noncontrolling interest | 175,328 | | | 123,463 | |
| Noncontrolling interest held for sale | (2,614) | | | (7,175) | |
| Noncontrolling interest of discontinued operations | — | | | 3,836 | |
| Total stockholders’ equity | 1,284,530 | | | 1,220,148 | |
| Total liabilities and stockholders’ equity | $ | 3,144,261 | | | $ | 2,598,518 | |
See notes to consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in thousands, except per share data) | 2021 | | 2020 | | 2019 |
| Net revenues | $ | 1,841,668 | | | $ | 1,359,567 | | | $ | 1,263,298 | |
| Cost of revenues | 1,115,711 | | | 864,602 | | | 806,366 | |
| Gross profit | 725,957 | | | 494,965 | | | 456,932 | |
| Operating expenses: | | | | | |
| Selling, general and administrative expense | 459,204 | | | 344,418 | | | 308,402 | |
| Management fees | 46,943 | | | 33,749 | | | 36,030 | |
| Amortization expense | 80,307 | | | 61,682 | | | 53,629 | |
| Impairment expense | — | | | — | | | 32,881 | |
| Operating income | 139,503 | | | 55,116 | | | 25,990 | |
| Other income (expense): | | | | | |
| Interest expense, net | (58,839) | | | (45,769) | | | (58,218) | |
| Amortization of debt issuance costs | (2,979) | | | (2,454) | | | (3,314) | |
| Loss on debt extinguishment | (33,305) | | | — | | | (12,319) | |
| Loss on sale of securities (refer to Note D) | — | | | — | | | (10,193) | |
| Other income (expense), net | (1,184) | | | (2,459) | | | (2,046) | |
| Income (loss) from continuing operations before income taxes | 43,196 | | | 4,434 | | | (60,100) | |
| Provision for income taxes | 18,337 | | | 10,175 | | | 9,914 | |
| Income (loss) from continuing operations | 24,859 | | | (5,741) | | | (70,014) | |
| Income from discontinued operations, net of income tax | 29,180 | | | 32,838 | | | 46,142 | |
| Gain on sale of discontinued operations, net of income tax | 72,770 | | | 100 | | | 331,013 | |
| Net income | 126,809 | | | 27,197 | | | 307,141 | |
| Less: Net income (loss) from continuing operations attributable to noncontrolling interest | 7,740 | | | (480) | | | 653 | |
| Less: Net income from discontinued operations attributable to noncontrolling interest | 4,517 | | | 4,897 | | | 4,623 | |
| Net income attributable to Holdings | $ | 114,552 | | | $ | 22,780 | | | $ | 301,865 | |
| | | | | |
| Amounts attributable to common shares of Holdings: | | | | | |
| Loss from continuing operations | $ | 17,119 | | | $ | (5,261) | | | $ | (70,667) | |
| Income from discontinued operations, net of income tax | 24,663 | | | 27,941 | | | 41,519 | |
| Gain on sale of discontinued operations, net of income tax | 72,770 | | | 100 | | | 331,013 | |
| Net income attributable to Holdings | $ | 114,552 | | | $ | 22,780 | | | $ | 301,865 | |
| Basic and fully diluted income (loss) per share attributable to Holdings (refer to Note K) | | | | | |
| Continuing operations | $ | (0.76) | | | $ | (0.72) | | | $ | (2.54) | |
| Discontinued operations | 1.49 | | | 0.38 | | | 6.18 | |
| $ | 0.73 | | | $ | (0.34) | | | $ | 3.64 | |
| | | | | |
| Weighted average number of shares outstanding - basic and fully diluted | 65,362 | | | 63,151 | | | 59,900 | |
| Cash distribution declared per share (refer to Note K) | $ | 2.21 | | | $ | 1.44 | | | $ | 1.44 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands, except per share data) | 2017 | | 2016 | | 2015 |
| Net revenues | $ | 1,269,729 |
| | $ | 978,309 |
| | $ | 727,978 |
|
| Cost of revenues | 822,020 |
| | 651,739 |
| | 487,242 |
|
| Gross profit | 447,709 |
| | 326,570 |
| | 240,736 |
|
| Operating expenses: | | | | | |
| Selling, general and administrative expense | 318,484 |
| | 217,830 |
| | 136,399 |
|
| Management fees | 32,693 |
| | 29,406 |
| | 25,658 |
|
| Amortization expense | 52,003 |
| | 35,069 |
| | 28,761 |
|
| Impairment expense | 17,325 |
| | 16,000 |
| | — |
|
| Loss on disposal of assets | — |
| | 9,204 |
| | — |
|
| Operating income | 27,204 |
| | 19,061 |
| | 49,918 |
|
| Other income (expense): | | | | | |
| Interest expense, net | (27,623 | ) | | (24,651 | ) | | (25,924 | ) |
| Gain (loss) on investment (refer to Note F) | (5,620 | ) | | 74,490 |
| | 4,533 |
|
| Amortization of debt issuance costs | (4,002 | ) | | (2,763 | ) | | (2,212 | ) |
| Other income (expense), net | 2,634 |
| | (2,919 | ) | | (2,323 | ) |
| Income (loss) from continuing operations before income taxes | (7,407 | ) | | 63,218 |
| | 23,992 |
|
| Provision (benefit) for income taxes | (40,679 | ) | | 9,469 |
| | 15,001 |
|
| Income from continuing operations | 33,272 |
| | 53,749 |
| | 8,991 |
|
| Income from discontinued operations, net of income tax | — |
| | 473 |
| | 6,981 |
|
| Gain on sale of discontinued operations, net of income tax | 340 |
| | 2,308 |
| | 149,798 |
|
| Net income | 33,612 |
| | 56,530 |
| | 165,770 |
|
| Less: Income from continuing operations attributable to noncontrolling interest | 5,621 |
| | 1,961 |
| | 5,133 |
|
| Less: Income (loss) from discontinued operations attributable to noncontrolling interest | — |
| | (116 | ) | | (1,201 | ) |
| Net income attributable to Holdings | 27,991 |
| | 54,685 |
| | 161,838 |
|
| Less: Distributions paid - Allocation Interests | 39,188 |
| | 23,779 |
| | 17,731 |
|
| Less: Distributions paid - Preferred Shares | 2,457 |
| | — |
| | — |
|
| Net income (loss) attributable to common shares of Holdings | $ | (13,654 | ) | | $ | 30,906 |
| | $ | 144,107 |
|
| | | | | | |
| Amounts attributable to common shares of Holdings: | | | | | |
| Income (loss) from continuing operations | $ | (13,994 | ) | | $ | 28,009 |
| | $ | (13,873 | ) |
| Income from discontinued operations, net of income tax | — |
| | 589 |
| | 8,182 |
|
| Gain on sale of discontinued operations, net of income tax | 340 |
| | 2,308 |
| | 149,798 |
|
| Net income (loss) attributable to Holdings | $ | (13,654 | ) | | $ | 30,906 |
| | $ | 144,107 |
|
| Basic and fully diluted income (loss) per share attributable to Holdings (refer to Note N) | | | | | |
| Continuing operations | $ | (0.45 | ) | | $ | 0.46 |
| | $ | (0.30 | ) |
| Discontinued operations | 0.01 |
| | 0.05 |
| | 2.91 |
|
| | $ | (0.44 | ) | | $ | 0.51 |
| | $ | 2.61 |
|
| | | | | | |
| Weighted average number of shares outstanding - basic and fully diluted | 59,900 |
| | 54,591 |
| | 54,300 |
|
| Cash distribution declared per share (refer to Note N) | $ | 1.44 |
| | $ | 1.44 |
| | $ | 1.44 |
|
See notes to consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Net income | $ | 126,809 | | | $ | 27,197 | | | $ | 307,141 | |
| Other comprehensive income (loss) | | | | | |
| Foreign currency translation adjustments | (489) | | | 879 | | | 599 | |
| Foreign currency amounts reclassified from accumulated other comprehensive income (loss) that increase (decrease) net income: | | | | | |
| Disposition of Manitoba Harvest | — | | | — | | | 4,791 | |
| Pension benefit liability, net | 917 | | | 1,598 | | | (547) | |
| Total comprehensive income, net of tax | 127,237 | | | 29,674 | | | 311,984 | |
| Less: Net income attributable to noncontrolling interests | 12,257 | | | 4,417 | | | 5,276 | |
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | 38 | | | 113 | | | (23) | |
| Total comprehensive income attributable to Holdings, net of tax | $ | 114,942 | | | $ | 25,144 | | | $ | 306,731 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2015 |
| Net income | $ | 33,612 |
| | $ | 56,530 |
| | $ | 165,770 |
|
| Other comprehensive income (loss) | | | | | |
| Foreign currency translation adjustments | 6,533 |
| | 615 |
| | (7,733 | ) |
| Pension benefit liability, net | 409 |
| | (326 | ) | | 471 |
|
| Total comprehensive income, net of tax | 40,554 |
| | 56,819 |
| | 158,508 |
|
| Less: Net income attributable to noncontrolling interests | 5,621 |
| | 1,845 |
| | 3,932 |
|
| Less: Other comprehensive income (loss) attributable to noncontrolling interests | 1,223 |
| | 516 |
| | (1,624 | ) |
| Total comprehensive income attributable to Holdings, net of tax | $ | 33,710 |
| | $ | 54,458 |
| | $ | 156,200 |
|
See notes to consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trust Preferred Shares | | Trust Common Shares | | Accumulated
Deficit | | Accumulated Other
Comprehensive
Loss | | Stockholders’
Equity
Attributable to
Holdings | | Non-
Controlling
Interest | | Non-Controlling
Interest of Disc. Ops. | | Total
Stockholders’
Equity |
| (in thousands) | Series A | | Series B | | Series C | | | | | | | |
| Balance — January 1, 2019 | $ | 96,417 | | | $ | 96,504 | | | $ | — | | | $ | 924,680 | | | $ | (249,453) | | | $ | (8,776) | | | $ | 859,372 | | | $ | 37,808 | | | $ | 22,162 | | | $ | 919,342 | |
| Net income | — | | | — | | | — | | | — | | | 301,865 | | | — | | | 301,865 | | | 653 | | | 4,623 | | | 307,141 | |
| Total comprehensive income, net | — | | | — | | | — | | | — | | | — | | | 4,843 | | | 4,843 | | | — | | | — | | | 4,843 | |
| Issuance of Trust preferred shares, net of offering costs | — | | | — | | | 110,997 | | | — | | | — | | | — | | | 110,997 | | | — | | | — | | | 110,997 | |
| Option activity attributable to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,782 | | | 2,211 | | | 7,993 | |
| Effect of subsidiary stock option exercise | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 41 | | | 41 | |
| Purchase of noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (301) | | | (710) | | | (1,011) | |
| Disposition of Manitoba Harvest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10,799) | | | (10,799) | |
| Disposition of Clean Earth | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10,922) | | | (10,922) | |
| Distributions paid - Allocation Interests (refer to Note K) | — | | | — | | | — | | | — | | | (60,369) | | | — | | | (60,369) | | | — | | | — | | | (60,369) | |
| Distributions paid - Trust preferred shares | — | | | — | | | — | | | — | | | (15,125) | | | — | | | (15,125) | | | — | | | — | | | (15,125) | |
| Distributions paid - Trust common shares | — | | | — | | | — | | | — | | | (86,256) | | | — | | | (86,256) | | | — | | | — | | | (86,256) | |
| Balance — December 31, 2019 | 96,417 | | | 96,504 | | | 110,997 | | | 924,680 | | | (109,338) | | | (3,933) | | | 1,115,327 | | | 43,942 | | | 6,606 | | | 1,165,875 | |
| Net income (loss) | — | | | — | | | — | | | — | | | 22,780 | | | — | | | 22,780 | | | (480) | | | 4,897 | | | 27,197 | |
| Total comprehensive income, net | — | | | — | | | — | | | — | | | — | | | 2,477 | | | 2,477 | | | — | | | — | | | 2,477 | |
| Issuance of Trust common shares, net of offering costs | — | | | — | | | — | | | 83,884 | | | — | | | — | | | 83,884 | | | — | | | — | | | 83,884 | |
| Option activity attributable to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,471 | | | 524 | | | 8,995 | |
| Effect of subsidiary stock option exercise | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 72 | | | 181 | | | 253 | |
| Purchase of noncontrolling interest | — | | | — | | | — | | | — | | | (1,823) | | | — | | | (1,823) | | | (1,303) | | | (3,487) | | | (6,613) | |
| Distributions paid to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,060) | | | (12,060) | |
| Acquisition of Marucci | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 11,127 | | | — | | | 11,127 | |
| Acquisition of BOA | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 61,634 | | | — | | | 61,634 | |
| Distributions paid - Allocation Interests (refer to Note K) | — | | | — | | | — | | | — | | | (9,087) | | | — | | | (9,087) | | | — | | | — | | | (9,087) | |
| Distributions paid - Trust preferred shares | — | | | — | | | — | | | — | | | (23,678) | | | — | | | (23,678) | | | — | | | — | | | (23,678) | |
| Distributions paid - Trust common shares | — | | | — | | | — | | | — | | | (89,856) | | | — | | | (89,856) | | | — | | | — | | | (89,856) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Trust Preferred Shares | | Trust Common Shares | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Stockholders’ Equity Attributable to Holdings | | Non- Controlling Interest | | Non-Controlling Interest of Disc. Ops. | | Total Stockholders’ Equity |
| Balance — January 1, 2015 | $ | — |
| | $ | 825,321 |
| | $ | (55,348 | ) | | $ | (2,542 | ) | | $ | 767,431 |
| | $ | 22,967 |
| | $ | 17,936 |
| | $ | 808,334 |
|
| Net income | — |
| | — |
| | 161,838 |
| | — |
| | 161,838 |
| | 5,133 |
| | (1,201 | ) | | 165,770 |
|
| Total comprehensive loss, net | — |
| | — |
| | — |
| | (7,262 | ) | | (7,262 | ) | | — |
| | — |
| | (7,262 | ) |
| Option activity attributable to noncontrolling shareholders | — |
| | — |
| | — |
| | — |
| | — |
| | 3,170 |
| | 566 |
| | 3,736 |
|
| Effect of subsidiary stock option exercise | — |
| | — |
| | — |
| | — |
| | — |
| | 500 |
| | — |
| | 500 |
|
| Proceeds from noncontrolling shareholders | — |
| | — |
| | — |
| | — |
| | — |
| | 14,449 |
| | — |
| | 14,449 |
|
| Disposition of businesses | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (16,385 | ) | | (16,385 | ) |
| Distribution paid - Allocation Interest holders (refer to Note N) | — |
| | — |
| | (17,731 | ) | | — |
| | (17,731 | ) | | — |
| | — |
| | (17,731 | ) |
| Distributions paid - Trust common shares | — |
| | — |
| | (78,192 | ) | | — |
| | (78,192 | ) | | — |
| | — |
| | (78,192 | ) |
| Balance — December 31, 2015 | $ | — |
| | $ | 825,321 |
| | $ | 10,567 |
| | $ | (9,804 | ) | | $ | 826,084 |
| | $ | 46,219 |
| | $ | 916 |
| | $ | 873,219 |
|
| Net income | — |
| | — |
| | 54,685 |
| | — |
| | 54,685 |
| | 1,961 |
| | (116 | ) | | 56,530 |
|
| Total comprehensive income, net | — |
| | — |
| | — |
| | 289 |
| | 289 |
| | — |
| | — |
| | 289 |
|
| Issuance of Trust common shares, net of offering costs | — |
| | 99,359 |
| | — |
| | — |
| | 99,359 |
| | — |
| | — |
| | 99,359 |
|
| Option activity attributable to noncontrolling shareholders | — |
| | — |
| | — |
| | — |
| | — |
| | 4,381 |
| | 1 |
| | 4,382 |
|
| Effect of subsidiary stock option exercise | — |
| | — |
| | (578 | ) | | — |
| | (578 | ) | | 5,496 |
| | — |
| | 4,918 |
|
| Issuance of subsidiary shares | — |
| | — |
| | 4,809 |
| | — |
| | 4,809 |
| | 3,392 |
| | — |
| | 8,201 |
|
| Repurchase of subsidiary shares - Ergo | — |
| | — |
| | (11,911 | ) | | — |
| | (11,911 | ) | | (4,929 | ) | | — |
| | (16,840 | ) |
| Purchase of noncontrolling interest | — |
| | — |
| | (1,007 | ) | | — |
| | (1,007 | ) | | (469 | ) | | — |
| | (1,476 | ) |
| Distributions to noncontrolling shareholders | — |
| | — |
| | — |
| | — |
| | — |
| | (23,630 | ) | | — |
| | (23,630 | ) |
| Acquisition of 5.11 | — |
| | — |
| | — |
| | — |
| | — |
| | 5,718 |
| | — |
| | 5,718 |
|
| Disposition of Tridien | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (801 | ) | | (801 | ) |
| Distribution paid - Allocation Interest Holders (refer to Note N) | — |
| | — |
| | (23,779 | ) | | — |
| | (23,779 | ) | | — |
| | — |
| | (23,779 | ) |
| Distributions payable to Allocation Interest Holders (refer to Note N) | — |
| | — |
| | (13,354 | ) | | — |
| | (13,354 | ) | | — |
| | — |
| | (13,354 | ) |
| Distributions paid - Trust common shares | — |
| | — |
| | (78,192 | ) | | — |
| | (78,192 | ) | | — |
| | — |
| | (78,192 | ) |
| Balance — December 31, 2016 | $ | — |
| | $ | 924,680 |
| | $ | (58,760 | ) | | $ | (9,515 | ) | | $ | 856,405 |
| | $ | 38,139 |
| | $ | — |
| | $ | 894,544 |
|
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trust Preferred Shares | | Trust Common Shares | | Accumulated
Deficit | | Accumulated Other
Comprehensive
Loss | | Stockholders’
Equity
Attributable to
Holdings | | Non-
Controlling
Interest | | Non-Controlling
Interest of Disc. Ops. | | Total
Stockholders’
Equity |
| (in thousands) | Series A | | Series B | | Series C | | | | | | | |
| Balance — December 31, 2020 | 96,417 | | | 96,504 | | | 110,997 | | | 1,008,564 | | | (211,002) | | | (1,456) | | | 1,100,024 | | | 123,463 | | | (3,339) | | | 1,220,148 | |
| Net income | — | | | — | | | — | | | — | | | 114,552 | | | — | | | 114,552 | | | 7,740 | | | 4,517 | | | 126,809 | |
| Total comprehensive income, net | — | | | — | | | — | | | — | | | — | | | 428 | | | 428 | | | — | | | — | | | 428 | |
| Issuance of trust common shares | — | | | — | | | — | | | 114,629 | | | — | | | — | | | 114,629 | | | — | | | — | | | 114,629 | |
| Option activity attributable to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 10,941 | | | 513 | | | 11,454 | |
| Effect of subsidiary stock option exercise | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,281 | | | 70 | | | 4,351 | |
| Purchase of noncontrolling interest | — | | | — | | | — | | | — | | | (8,632) | | | — | | | (8,632) | | | (42,008) | | | — | | | (50,640) | |
| Distributions paid to noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,275) | | | — | | | (1,275) | |
| Proceeds provided by noncontrolling shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,886 | | | — | | | 3,886 | |
| Acquisition of Lugano | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 68,300 | | | — | | | 68,300 | |
| Disposition of Liberty | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,375) | | | (4,375) | |
| Distributions paid - Allocation Interests (refer to Note K) | — | | | — | | | — | | | — | | | (34,058) | | | — | | | (34,058) | | | — | | | — | | | (34,058) | |
| Distributions paid - Trust Preferred Shares | — | | | — | | | — | | | — | | | (24,181) | | | — | | | (24,181) | | | — | | | — | | | (24,181) | |
| Distributions paid - Trust Common Shares | — | | | — | | | — | | | — | | | (150,946) | | | — | | | (150,946) | | | — | | | — | | | (150,946) | |
| Balance — December 31, 2021 | $ | 96,417 | | | $ | 96,504 | | | $ | 110,997 | | | $ | 1,123,193 | | | $ | (314,267) | | | $ | (1,028) | | | $ | 1,111,816 | | | $ | 175,328 | | | $ | (2,614) | | | $ | 1,284,530 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Trust Preferred Shares | | Trust Common Shares | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Stockholders’ Equity Attributable to Holdings | | Non- Controlling Interest | | Non-Controlling Interest of Disc. Ops. | | Total Stockholders’ Equity |
| Balance — December 31, 2016 | — |
| | 924,680 |
| | (58,760 | ) | | (9,515 | ) | | 856,405 |
| | 38,139 |
| | — |
| | 894,544 |
|
| Net income | — |
| | — |
| | 27,991 |
| | — |
| | 27,991 |
| | 5,621 |
| | — |
| | 33,612 |
|
| Total comprehensive income, net | — |
| | — |
| | — |
| | 6,942 |
| | 6,942 |
| | — |
| | — |
| | 6,942 |
|
| Issuance of Trust preferred shares, net of offering costs | 96,417 |
| | — |
| | — |
| | — |
| | 96,417 |
| | — |
| | — |
| | 96,417 |
|
| Option activity attributable to noncontrolling shareholders | — |
| | — |
| | — |
| | — |
| | — |
| | 7,028 |
| | — |
| | 7,028 |
|
| Effect of subsidiary stock option exercise | — |
| | — |
| | — |
| | — |
| | — |
| | 1,222 |
| | — |
| | 1,222 |
|
| Issuance of subsidiary shares | — |
| | — |
| | — |
| | — |
| | — |
| | 40 |
| | — |
| | 40 |
|
| Repurchase of subsidiary shares | — |
| | — |
| | — |
| | — |
| | — |
| | (40 | ) | | — |
| | (40 | ) |
| Acquisition of Crosman | — |
| | — |
| | — |
| | — |
| | — |
| | 781 |
| | — |
| | 781 |
|
| Distribution paid - Allocation Interest Holders (refer to Note N) | — |
| | — |
| | (25,834 | ) | | — |
| | (25,834 | ) | | — |
| | — |
| | (25,834 | ) |
| Distributions paid - Trust common shares | — |
| | — |
| | (86,256 | ) | | — |
| | (86,256 | ) | | — |
| | — |
| | (86,256 | ) |
| Distributions paid - Trust preferred shares | — |
| | — |
| | (2,457 | ) | | — |
| | (2,457 | ) | | — |
| | — |
| | (2,457 | ) |
| Balance — December 31, 2017 | $ | 96,417 |
| | $ | 924,680 |
| | $ | (145,316 | ) | | $ | (2,573 | ) | | $ | 873,208 |
| | $ | 52,791 |
| | $ | — |
| | $ | 925,999 |
|
See notes to consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 126,809 | | | $ | 27,197 | | | $ | 307,141 | |
| Income from discontinued operations | | 29,180 | | | 32,838 | | | 46,142 | |
| Gain on sale of discontinued operations | | 72,770 | | | 100 | | | 331,013 | |
| Income (loss) from continuing operations | | 24,859 | | | (5,741) | | | (70,014) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Depreciation expense | | 37,336 | | | 31,131 | | | 29,695 | |
| Amortization expense - intangibles | | 80,307 | | | 61,682 | | | 53,629 | |
| Amortization expense - inventory step-up | | 2,762 | | | 5,863 | | | — | |
| Amortization of debt issuance costs and original issue discount | | 2,896 | | | 2,232 | | | 3,773 | |
| Impairment expense | | — | | | — | | | 32,881 | |
| Loss on debt extinguishment | | 33,305 | | | — | | | 12,319 | |
| Loss (gain) on interest rate derivative | | — | | | — | | | 3,500 | |
| Noncontrolling stockholder stock based compensation | | 10,941 | | | 8,471 | | | 5,782 | |
| Provision for loss on receivables | | 6,025 | | | 2,874 | | | 3,207 | |
| Deferred taxes | | (9,666) | | | (2,228) | | | (2,057) | |
| Other | | 896 | | | 2,221 | | | 1,946 | |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
| (Increase) decrease in accounts receivable | | (30,542) | | | (24,591) | | | 13,365 | |
| Increase in inventories | | (106,396) | | | (29,584) | | | (10,707) | |
| Increase in prepaid expenses and other current assets | | (7,479) | | | (2,338) | | | (7,556) | |
| Increase (decrease) in accounts payable and accrued expenses | | 63,427 | | | 58,933 | | | (12,488) | |
| Net cash provided by operating activities - continuing operations | | 108,671 | | | 108,925 | | | 57,275 | |
| Net cash provided by operating activities - discontinued operations | | 25,380 | | | 39,700 | | | 27,287 | |
| Net cash provided by operations | | 134,051 | | | 148,625 | | | 84,562 | |
| Cash flows from investing activities: | | | | | | |
| Acquisitions, net of cash acquired | | (404,318) | | | (667,101) | | | — | |
| Purchases of property and equipment | | (39,880) | | | (28,812) | | | (26,925) | |
| Proceeds from sale of businesses | | 101,039 | | | 100 | | | 502,703 | |
| Payment of interest rate swap | | — | | | — | | | (675) | |
| Payment for termination of interest rate swap | | — | | | — | | | (4,942) | |
| Other investing activities | | (1,125) | | | (3,008) | | | 1,715 | |
| Net cash provided by (used in) investing activities - continuing operations | | (344,284) | | | (698,821) | | | 471,876 | |
| Net cash provided by (used in) investing activities - discontinued operations | | 26,788 | | | (2,013) | | | 271,250 | |
| Net cash provided by (used in) investing activities | | (317,496) | | | (700,834) | | | 743,126 | |
| | | | | | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 33,612 |
| | $ | 56,530 |
| | $ | 165,770 |
|
| Income from discontinued operations | | — |
| | 473 |
| | 6,981 |
|
| Gain on sale of discontinued operations | | 340 |
| | 2,308 |
| | 149,798 |
|
| Net income from continuing operations | | 33,272 |
| | 53,749 |
| | 8,991 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation expense | | 33,041 |
| | 26,853 |
| | 21,231 |
|
| Amortization expense | | 77,010 |
| | 58,752 |
| | 31,844 |
|
| Amortization of debt issuance costs and original issue discount | | 5,007 |
| | 3,565 |
| | 2,883 |
|
| Impairment expense | | 17,325 |
| | 16,000 |
| | — |
|
| Loss on disposal of assets | | — |
| | 9,204 |
| | — |
|
| Unrealized (gain) loss on interest rate swap | | (648 | ) | | 1,539 |
| | 5,662 |
|
| Noncontrolling stockholder stock based compensation | | 7,028 |
| | 4,382 |
| | 3,171 |
|
| Excess tax benefit from subsidiary stock options exercised | | (417 | ) | | (1,163 | ) | | — |
|
| Loss (gain) on equity method investment | | 5,620 |
| | (74,490 | ) | | (4,533 | ) |
| Provision for loss on receivables | | 3,964 |
| | 448 |
| | (69 | ) |
| Deferred taxes | | (59,429 | ) | | (9,868 | ) | | (4,333 | ) |
| Other | | 392 |
| | 1,420 |
| | 25 |
|
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | |
| (Increase) decrease in accounts receivable | | (17,581 | ) | | (15,596 | ) | | 13,243 |
|
| (Increase) decrease in inventories | | (28,247 | ) | | 2,893 |
| | (1,810 | ) |
| (Increase) decrease in prepaid expenses and other current assets | | (3,312 | ) | | 4,850 |
| | 805 |
|
| Increase (decrease) in accounts payable and accrued expenses | | 8,746 |
| | 25,148 |
| | (8,108 | ) |
| Net cash provided by operating activities - continuing operations | | 81,771 |
| | 107,686 |
| | 69,002 |
|
| Net cash provided by operating activities - discontinued operations | | — |
| | 3,686 |
| | 15,546 |
|
| Net cash provided by operations | | 81,771 |
| | 111,372 |
| | 84,548 |
|
| Cash flows from investing activities: | | | | | | |
| Acquisitions, net of cash acquired | | (164,950 | ) | | (536,175 | ) | | (130,292 | ) |
| Purchases of property and equipment | | (44,767 | ) | | (23,969 | ) | | (15,661 | ) |
| Proceeds from FOX stock offerings | | 136,147 |
| | 182,470 |
| | — |
|
| Proceeds from sale of businesses | | 340 |
| | 11,249 |
| | 385,510 |
|
| Purchase of noncontrolling interest | | — |
| | (1,475 | ) | | — |
|
| Payment of interest rate swap | | (3,964 | ) | | (4,303 | ) | | (2,007 | ) |
| Other investing activities | | (84 | ) | | (10 | ) | | (104 | ) |
| Net cash (used in) provided by investing activities - continuing operations | | (77,278 | ) | | (372,213 | ) | | 237,446 |
|
| Net cash provided by (used in) investing activities - discontinued operations | | — |
| | 9,192 |
| | (3,566 | ) |
| Net cash (used in) provided by investing activities | | (77,278 | ) | | (363,021 | ) | | 233,880 |
|
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Cash flows from financing activities: | | | | | | |
| Proceeds from the issuance of Trust common shares, net | | 114,629 | | | 83,884 | | | — | |
| Proceeds from the issuance of Trust preferred shares, net | | — | | | — | | | 110,997 | |
| Borrowings under credit facility | | 557,000 | | | 565,000 | | | 108,000 | |
| Repayments under credit facility | | (864,000) | | | (258,000) | | | (832,250) | |
| Issuance of Senior Notes | | 1,300,000 | | | 202,000 | | | — | |
| Redemption of Senior Notes | | (627,688) | | | — | | | — | |
| Distributions paid - common shares | | (150,946) | | | (89,856) | | | (86,256) | |
| Distributions paid - preferred shares | | (24,181) | | | (23,678) | | | (15,125) | |
| Net proceeds provided by noncontrolling shareholders | | 8,237 | | | 253 | | | 41 | |
| Net proceeds provided by noncontrolling shareholders - acquisitions | | 68,300 | | | 72,761 | | | — | |
| Purchase of noncontrolling interest | | (50,640) | | | (6,613) | | | (1,011) | |
| Distributions to noncontrolling shareholders | | (1,275) | | | (12,060) | | | — | |
| Distributions paid - Allocation Interests | | (34,058) | | | (9,087) | | | (60,369) | |
| Debt issuance costs | | (21,708) | | | (3,214) | | | — | |
| Other | | (464) | | | 335 | | | (3,549) | |
| Net cash provided by (used in) financing activities | | 273,206 | | | 521,725 | | | (779,522) | |
| Foreign currency impact on cash | | 228 | | | 914 | | | (1,178) | |
| Net increase (decrease) in cash and cash equivalents | | 89,989 | | | (29,570) | | | 46,988 | |
Cash and cash equivalents — beginning of period (1) | | 70,744 | | | 100,314 | | | 53,326 | |
| Cash and cash equivalents — end of period | | $ | 160,733 | | | $ | 70,744 | | | $ | 100,314 | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Cash flows from financing activities: | | | | | | |
| Proceeds from the issuance of Trust common shares, net | | — |
| | 99,359 |
| | — |
|
| Proceeds from the issuance of Trust preferred shares, net | | 96,417 |
| | — |
| | — |
|
| Borrowings under credit facility | | 260,500 |
| | 671,298 |
| | 197,000 |
|
| Repayments under credit facility | | (228,585 | ) | | (423,240 | ) | | (369,975 | ) |
| Distributions paid - common shares | | (86,256 | ) | | (78,192 | ) | | (78,192 | ) |
| Distributions paid - preferred shares | | (2,457 | ) | | — |
| | — |
|
| Net proceeds provided by noncontrolling shareholders | | 822 |
| | 8,887 |
| | 14,949 |
|
| Distributions paid to noncontrolling shareholders | | — |
| | (23,630 | ) | | — |
|
| Distributions paid - Allocation Interests | | (39,188 | ) | | (23,779 | ) | | (17,731 | ) |
| Repurchase of subsidiary stock | | — |
| | (15,407 | ) | | — |
|
| Debt issuance costs | | (2,899 | ) | | (5,986 | ) | | (440 | ) |
| Excess tax benefit on stock-based compensation | | 417 |
| | 1,163 |
| | — |
|
| Other | | (1,359 | ) | | (1,747 | ) | | 32 |
|
| Net cash (used in) provided by financing activities | | (2,588 | ) | | 208,726 |
| | (254,357 | ) |
| Foreign currency impact on cash | | (1,792 | ) | | (3,174 | ) | | (1,905 | ) |
| Net increase (decrease) in cash and cash equivalents | | 113 |
| | (46,097 | ) | | 62,166 |
|
Cash and cash equivalents — beginning of period (1) | | 39,772 |
| | 85,869 |
| | 23,703 |
|
| Cash and cash equivalents — end of period | | $ | 39,885 |
| | $ | 39,772 |
| | $ | 85,869 |
|
(1) Includes cash from discontinued operations of $0.6$10.7 million at January 1, 2016, and $1.82021, $6.9 million at January 1, 2015.2020 and $8.2 million at January 1, 2019.
See notes to consolidated financial statements.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note A — Organization and Business Operations
Compass Diversified Holdings, a Delaware statutory trust (“the Trust”), was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company (the “Company”“LLC”), was also formed on November 18, 2005 with equity interests which were subsequently reclassified as the “Allocation Interests”. Collectively, Compass Diversified Holdings and Compass Group Diversified Holdings, LLC are referred to as the "Company". The Trust and the Company werewas formed to acquire and manage a group of small and middle-market businesses headquartered in North America. In accordance with the amendedThird Amended and restatedRestated Trust Agreement, dated as of April 25, 2006 (theAugust 3, 2021 (as amended and restated, the “Trust Agreement”), the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s amendedSixth Amended and restated operating agreement,Restated Operating Agreement, dated as of April 25, 2006August 3, 2021 (as amended and restated, the “LLC Agreement”)) of the CompanyLLC and, pursuant to the LLC Agreement, the CompanyLLC has, outstanding, the identical number of Trust Interests as the number of outstanding common shares of the Trust. Compass Group Diversified Holdings,The LLC a Delaware limited liability company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of nine10 businesses, or operating segments at December 31, 2017.2021. The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), Crosman Corp.Boa Holdings Inc. ("Crosman"BOA"), The Ergo Baby Carrier, Inc. (“Ergobaby”), Liberty Safe and Security Products,Lugano Diamonds & Jewelry, Inc. (“Liberty Safe”("Lugano Diamonds" or “Liberty”"Lugano"), Fresh Hemp Foods Ltd.Marucci Sports, LLC ("Manitoba Harvest"Marucci Sports" or "Manitoba""Marucci"), Velocity Outdoor, Inc. ("Velocity Outdoor" or "Velocity"), Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”), AMT Acquisition Corporation (“Arnold”), Clean Earth Holdings,FFI Compass, Inc. ("Clean Earth"Altor Solutions" or "Altor"), (formerly "Foam Fabricators") and Sterno Products, LLC (“Sterno”). The segments are referred to interchangeably as “businesses”, “operating segments” or “subsidiaries” throughout the financial statements. At December 31, 2021, Advanced Circuits has been classified as held-for-sale. Refer to Note ED - "Discontinued Operations" for further discussion of Advanced Circuits. Refer to Note F - "Operating Segment Data" for further discussion of the operating segments. Compass Group Management LLC, a Delaware limited liability Company (“CGM” or the “Manager”), manages the day to day operations of the Company and oversees the management and operations of our businesses pursuant to a management services agreement (“MSA”(the "Management Services Agreement" or “MSA”). Note B — Summary of Significant Accounting Policies
Accounting principlesBasis of presentation
The Company’s consolidated financial statements arehave been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP)("GAAP" or "US GAAP").
Basis of presentation
The results of operations for the years ended December 31, 2017, 2016 and 2015 represent the results of operations of the Company’s acquired businesses from the date of their acquisition by the Company, and therefore aremay not be indicative of the results to be expected for the full year.
Principles of consolidation
The consolidated financial statements include the accounts of the Trust and the Company, as well as the businesses acquired as of their respective acquisition date. All significant intercompany accounts and transactions have been eliminated in consolidation. Discontinued operating entities are reflected as discontinued operations in the Company’s results of operations and statements of financial position.
The acquisition of businesses that the Company owns or controls more than a 50% share of the voting interest are accounted for under the acquisition method of accounting. The amount assigned to the identifiable assets acquired and the liabilities assumed is based on the estimated fair values as of the date of acquisition, with the remainder, if any, recorded as goodwill.
Discontinued Operations
TheOn October 13, 2021, the Company completed the saleentered into a definitive Agreement and Plan of Merger to sell its majority owned subsidiary, Tridien Medical, Inc. ("Tridien") duringAdvanced Circuits, which met the third quartercriteria to be classified as a discontinued operation as of 2016,December 31, 2021. As a result, the sale of its majority owned subsidiary CamelBak Products, LLC ("CamelBak") inCompany reported the third quarter of 2015 and the sale of its majority owned subsidiary, American Furniture Manufacturing, Inc. ("AFM" or "American Furniture"), during the fourth quarter of 2015. The results of operations of Tridien are presentedACI as discontinued operations in the consolidated statements of operations for all periods presented. In addition, the years ended December 31, 2016assets and 2015.liabilities associated with this business have been reclassified as held for sale in the consolidated balance sheets.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company completed the sale of Liberty Safe Holding Corporation ("Liberty") during the third quarter of 2021, the sale of Fresh Hemp Foods Ltd. ("Manitoba Harvest") during the first quarter of 2019 and the sale of Clean Earth Holdings, Inc. ("Clean Earth") during the second quarter of 2019. The results of operations of CamelBak and American FurnitureLiberty are presentedreported as discontinued operations in the consolidated statements of operations for years ended December 31, 2021, 2020 and 2019. The results of operations of Manitoba Harvest and Clean Earth are reported as discontinued operations in the consolidated statements of operations for year ended December 31, 2015.2019. Refer to "Note D - Discontinued Operations" for additional information. Unless otherwise indicated, the disclosures accompanying the consolidated financial statements reflect the Company's continuing operations.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atin the date of theconsolidated financial statements and the reported amounts of revenues and expenses duringrelated notes to the reporting period.consolidated financial statements. These estimates are based on historical factors, management’s best knowledge of current events and actions the Company may undertake in the future. It is possible that in 20182022 actual conditions could be better or worse than anticipated when the Company developed the estimates and assumptions, which could materially affect the results of operations and financial position in the future. Such changes could result in future impairment of goodwill, intangibles and long-lived assets, inventory obsolescence, establishment of valuation allowances on deferred tax assets and increased tax liabilities, among other things. Actual results could differ from those estimates.
Profit Allocation Interests
At the time of the Company's Initial Public Offering, the Company issued Allocation Interests governed by the LLC agreement that entitle the holders (the "Holders") to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The Holders are entitled to receive and as such can elect to receive the positive contribution based profit allocation payment for each of the business acquisitions during the 30-day period following the fifth anniversary of the date upon which the Company acquired a controlling interest in that business (Holding Event)(a "Holding Event") and upon the sale of that business (Sale Event)(a "Sale Event"). Payments of profit allocation to the Holders are accounted for as dividends declared on Allocation Interests and recorded in stockholders' equity once they are approved by our Board of Directors.
Revenue recognition
The Company recordsrecognizes revenue for goods and services when persuasive evidence of an arrangement exists, delivery of the product or performance of services has occurred, and collectability of the fixed or determinable sales price is reasonably assured. Revenue is recognized upon shipment of product to the customer or performance of services for a customer netobtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales returns and allowances. Appropriate reserves are established for anticipated returns and allowances based on historical experience. Shipping and handling costs are charged to operations when incurred and are generally classified as a component of cost of sales. Taxesincentives or taxes collected from customers andwhich are subsequently remitted to governmental authorities are presented ongovernment authorities. Refer to "Note E - Revenue" for a net basis in the accompanying Consolidated Statementsdetailed description of Operations. Revenue is typically recorded at F.O.B. shipping point for our businesses. Revenue from the Company's Clean Earth business is recognized as services are rendered, generally when material is received at Clean Earth's facilities.revenue recognition policies. Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Certain cash account balances held in domestic financial institutions exceed FDIC insurance limits of $250,000 per account and, as a result, there is a concentration of credit risk related to amounts in excess of the insurance limits. We monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash or cash equivalents. At December 31, 20172021 and 2016,2020, the amount of cash and cash equivalents held by our subsidiaries in foreign bank accounts was $16.0$33.9 million and $16.7$28.1 million, respectively.
AllowanceAccounts receivable and allowance for doubtful accounts
Trade receivables are reported on the consolidated balance sheets at cost adjusted for any write-offs and net of an allowance for doubtful accounts. The Company uses estimates to determine the amount of the allowance for doubtful accounts in order to reduce accounts receivable to their estimated net realizable value. The Company estimates the amount of the required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. The Company’s estimate also includes analyzing existing economic conditions. When the Company becomes aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the Company will record an allowance against amounts due, and thereby reduce the net receivable to the amount it reasonably believes will be collectible. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories consist of raw materials, work-in-process, manufactured goods and purchased goods acquired for resale. Inventories are stated at the lower of cost or market, determined on the first-in, first-out method. Cost includes raw materials, direct labor, manufacturing overhead and indirect overhead. Market value is based on current replacement cost for raw materials and supplies and on net realizable value for finished goods.
Property, plant and equipment
Property, plant and equipment is recorded at cost. The cost of major additions or betterments is capitalized, while maintenance and repairs that do not improve or extend the useful lives of the related assets are expensed as incurred.
Depreciation is provided principally on the straight-line method over estimated useful lives. Leasehold improvements are amortized over the life of the lease or the life of the improvement, whichever is shorter.
The ranges of useful lives are as follows:
|
| | | | |
| Buildings and improvements | 6 to 2528 years |
| Machinery and equipment | 2 to 2018 years |
| Office furniture, computers and software | 2 to 8 years |
| Leasehold improvements | Shorter of useful life or lease term |
Property, plant and equipment and other long-lived assets that have definitive lives are evaluated for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable (‘triggering event’). Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to its fair value.
Fair value of financial instruments
The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to their short term nature. Term Debt with a carrying value of $556.5 million, net of original issue discount, at December 31, 2017 approximated fair value. The fair value isof the Company's senior notes are based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. If measured at fair value in the financial statements, the Term DebtSenior Notes would be classified as Level 2 in the fair value hierarchy.
Business combinations
The Company allocates the amount it pays for each acquisition to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, including identifiable intangible assets which arise from a contractual or legal right or are separable from goodwill. The Company bases the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. The Company allocates any excess purchase price that exceeds the fair value of the net tangible and identifiable intangible assets acquired to goodwill. The use of alternative valuation assumptions, including estimated growth rates, cash flows, discount rates and estimated useful lives could result in different purchase price allocations and amortization expense in current and future periods. Transaction costs associated with these acquisitions are expensed as incurred through selling, general and administrative expense on the consolidated statement of operations. In those circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments expected to be made as of the acquisition date. The Company re-measures this liability each reporting period and records changes in the fair value through operating income within the consolidated statements of operations.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is required to perform impairment reviews at each of its reporting units annually and more frequently in certain circumstances. In accordance with accounting guidelines, the Company is able to make a
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the quantitative goodwill impairment test.
In January 2017, the FASB issued new accounting guidance to simplify the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company adopted this guidance early, effective January 1, 2017, on a prospective basis, and applied the guidance as necessary to annual and interim goodwill testing performed subsequent to January 1, 2017.
The first step of the process after the qualitative assessment fails is estimating the fair value of each of its reporting units based on a discounted cash flow (“DCF”) model using revenue and profit forecast and a market approach which compares peer data and earnings multiples. The Company then compares those estimated fair values with the carrying values, which include allocated goodwill. If the estimated fair value is less than the carrying value, then a goodwill impairment is recorded.
The Company cannot predict the occurrence of certain future events that might adversely affect the implied value of goodwill and/or the fair value of intangible assets. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on its customer base, and material adverse effects in relationships with significant customers. The impact of over-estimating or under-estimating the implied fair value of goodwill at any of the reporting units could have a material effect on the results of operations and financial position. In
addition, the value of the implied goodwill is subject to the volatility of the Company’s operations which may result in significant fluctuation in the value assigned at any point in time.
Deferred debt issuance costs
Deferred debt issuance costs represent the costs associated with the issuance of debt instruments and are amortized over the life of the related debt instrument. The Company adopted new guidance effective January 1, 2016 that requiresDeferred debt issuance costs to beare presented in the consolidated balance sheet as a deduction from the carrying value of the associated debt liability rather than as an asset.liability.
Product Warranty Costs
The Company recognizes warranty costs based on an estimate of the amounts required to meet future warranty obligations. The Company accrues an estimated liability for exposure to warranty claims at the time of a product sale based on both current and historical claim trends and warranty costs incurred. Warranty reserves are included within "Accrued expenses" in the Company's consolidated balance sheets.
Foreign currency
Certain of the Company’s segments have operations outside the United States, and the local currency is typically the functional currency. The financial statements are translated into U.S. dollars using exchange rates in effect at year-end for assets and liabilities and average exchange rates during the year for results of operations. The resulting translation gain or loss is included in stockholders' equity as other comprehensive income or loss.
In 2015, the Company acquired a Canadian subsidiary, Manitoba Harvest, and is exposed to transactional foreign currency gains and losses related to the issuance of intercompany loans in the Canadian dollar, the functional currency of Manitoba Harvest. Foreign currency transactional gains and losses are included in the results of operations and are generally classified as Other Income (Expense).
Derivatives and hedging
The Company utilizes interest rate swaps to manage risks related to interest rates on the term loan portion of their Credit Facility. The Company has not elected hedge accounting treatment for the existing interest rate derivatives entered into as part of the Credit Facility. Refer to "Note J - Debt" for more information on the Company’s Credit Facility.Noncontrolling interest
Noncontrolling interest represents the portion of a majority-owned subsidiary’s net income that is owned by noncontrolling shareholders. Noncontrolling interest on the balance sheet represents the portion of equity in a consolidated subsidiary owned by noncontrolling shareholders.
Income taxes
On December 22, 2017,Change in Company Tax Status Election
Effective September 1, 2021 (the "Effective Date"), the U.S. government enacted comprehensive tax legislation commonly referredTrust elected to be treated as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code which may impact, positively or negatively, the Company and our portfolio companiesa corporation for taxable years ended December 31, 2017 and thereafter. The impact of many provisions of the Tax Act are unclear and subject to interpretation pending further guidance from the Internal Revenue Service. The ultimate impact of the Tax Act on the Company and its portfolio companies is dependent on ongoing review and analysis.
Among other important changes in the Tax Act, the tax rate on corporations was reduced from 35% to 21%; a limitation on the deduction of interest expense was enacted; certain tangible property acquired after September 27, 2017 will qualify for 100% expensing; gain from the sale of a partnership interest by a foreign person will be subject to U.S. tax to the extent that the partnership is engaged in a trade or business; a special deduction for qualified business income from pass-through entities was added; U.S. federal income taxes on foreign earnings was eliminated (subjecttax purposes. Prior to several important exceptions), and new provisions designed to tax currently global intangible low taxed income and a new base erosion anti-abuse tax were added.
For taxable years beginning after December 31, 2017, a deduction for interest will generally be allowed for any entity only up to 30% of adjusted taxable income (determined without regard to interest income or expense) plus the amount of interest income. Only interest income and expense incurred in a trade or business is taken into account, i.e., investment interest income and deductions are ignored. For partnerships, the limitation is applied at the partnership level and then adjustments are made at the partner level to avoid double counting and to allow an owner to use any excess income in calculating the interest deduction at his or her level. It is not expected that the provision will limit the deduction of interest by the Company for 2018 but it may impact the deduction for certain of the portfolio companies.
AlthoughEffective Date, the Trust and the Company arewas treated as partnershipsa partnership for U.S. federal income tax purposes and therefore notthe Trust’s items of income, gain, loss and deduction flowed through from the Trust to the shareholders, and the Trust shareholders were subject to net income tax, for U.S. GAAP purposes, we consolidate the results of our businesses in which we own or control more than a 50%taxes on their allocable share of the voting interest. The Company has madeTrust’s income and gain. After the Effective Date, the trust is taxed as a reasonable estimate of the effects of the Tax Act on its existing deferred tax balancescorporation and the one-time transition tax. The Company has substantially completed its accounting for the revaluation of its netis subject to U.S. federal deferredcorporate income tax liabilitiesat the Trust level, but items of income, gain, loss and recorded a tax benefit of approximately $34.7 million indeduction will not flow through to Trust shareholders. Trust shareholders will no longer receive an IRS Schedule K-1. After the fourth quarter of 2017. The one-time transition tax underEffective Date, distributions from the Tax Act is based onTrust will be treated as dividends to the extent the Trust has accumulated or current earnings and profits. If the Trust does not have current or accumulated earnings and profits ("E&P) that were previously deferred from U.S. income taxes. Foravailable for distribution, then the year ended December 31, 2017, the provision for income taxes includes provisional tax expensedistribution will be treated as a return of $4.9 million relatedcapital and reduce Trust shareholders’ basis in their shares.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the one-time transition tax liability of our foreign subsidiaries. The Company has not completed the calculationEffective Date, each of the total E&PCompany’s majority owned subsidiaries were treated as corporations for these foreign subsidiariesU.S. federal income tax purposes. The election did not change the tax status of any Company subsidiary, and expects to refine its calculations as additional analysiseach majority owned Company subsidiary is completed. In addition, the Company's estimates may be affected as additional regulatory guidance is issued with respect to the Tax Act. Any adjustments to the provisional amounts will be recognizedstill treated as a component of the provisioncorporation for U.S. federal income taxes in the period in which such adjustments are determined within the annual period following the enactment of the Tax Act.tax purposes.
Deferred Income Taxes
Deferred income taxes are calculated under the asset and liability method. Deferred income taxes are provided for the differences between the basis of assets and liabilities for financial reporting and income tax purposes at the enacted tax rates. A valuation allowance is established when necessary to reduce deferred tax assets to the amount that is expected to more likely than not be realized. Several of the Company’s majority owned subsidiaries have deferred tax assets recorded at December 31, 20172021 which in total amount to approximately $38.9$90.4 million. This deferred tax asset is net of $5.9$9.4 million of valuation allowance primarily associated with the realization of foreign net operating losses, and foreigndomestic tax credits at Arnold and 5.11.the limitation on the deduction of interest expense. These deferred tax assets are comprised primarily of reserves not currently deductible for tax purposes. The temporary differences that have resulted in the recording of these tax assets may be used to offset taxable income in future periods, reducing the amount of taxes required to be paid. Realization of the deferred tax assets is dependent on generating sufficient future taxable income at those subsidiaries with deferred tax assets. Based upon the expected future results of operations, the Company believes it is more likely than not that those subsidiaries with deferred tax assets will generate sufficient future taxable income to realize the benefit of existing temporary differences, although there can be no assurance of this. The impact of not realizing these deferred tax assets would result in an increase in income tax expense for such period when the determination was made that the assets are not realizable.
Earnings per common share
Basic and fully diluted earnings per Trust common share is computed using the two-class method which requires companies to allocate participating securities that have rights to earnings that otherwise would have been available only to common shareholders as a separate class of securities in calculating earnings per share. The Company has granted Allocation Interests that contain participating rights to receive profit allocations upon the occurrence of a Holding Event or a Sale Event, and has issued preferred shares that have rights to distributions when, and if, declared by the Company's board of directors.
The calculation of basic and fully diluted earnings per common share is computed by dividing income available to common share holdersshareholders by the weighted average number of Trust common shares outstanding during the period. Earnings per common share reflects the effect of distributions that were declared and paid to the Holders and distributions that were paid on preferred shares during the period.
The weighted average number of Trust common shares outstanding for fiscal year 2017 was computed based on 59,900,000 shares outstanding for the period from January 1st through December 31st. The weighted average number of Trust common shares outstanding for fiscal year 2016 was computed based on 54,300,000 shares outstanding for the period from January 1st through December 13th and 5,600,000 additional shares outstanding for the period from December 13th through December 31st. The weighted average number of Trust common shares outstanding for fiscal 2015 was computed based on 54,300,000 shares outstanding for the period from January 1st through December 31st.
The Company did not have any stock option plans or any other potentially dilutive securities outstanding during the years ended December 31, 2017, 20162021, 2020 and 2015.
2019.
Advertising costs
Advertising costs are expensed as incurred and included in selling, general and administrative expense in the consolidated statements of operations. Advertising costs were $17.8$26.2 million, $15.6$18.0 million and $11.8$17.3 million during the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.
Research and development
Research and development costs are expensed as incurred and included in selling, general and administrative expense in the consolidated statements of operations. The Company incurred research and development expense of $1.9$11.9 million, $1.7$3.0 million and $2.1$0.8 million during the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.
Employee retirement plans
The Company and many of its segments sponsor defined contribution retirement plans, such as 401(k) plans. Employee contributions to the plan are subject to regulatory limitations and the specific plan provisions. The Company and its segments may match these contributions up to levels specified in the plans and may make additional discretionary contributions as determined by management. The total employer contributions to these plans were $3.4$3.5 million, $2.2$2.5 million and $1.8$2.1 million for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s Arnold subsidiary maintains a defined benefit plan for certain of its employees which is more fully described in "Note MJ - Defined Benefit Plan". Accounting guidelines require employers to recognize the overfunded or underfunded status of defined benefit pension and postretirement plans as assets or liabilities in their consolidated balance sheets and to recognize changes in that funded status in the year in which the changes occur as a component of comprehensive income. Seasonality
Earnings of certain of the Company’sour operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarternature due to lower demand for safes atvarious recurring events, holidays and seasonal weather patterns, as well as the onsettiming of summer. Crosman typically has higher sales inour acquisitions during a given year. Historically, the third and fourth quarter each year, reflectingproduce the hunting and holiday seasons. Earnings from Clean Earth are typically lowerhighest net sales 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 typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer and holiday seasons, respectively.our fiscal year.
Stock based compensation
The Company does not have a stock based compensation plan; however, all of the Company’s subsidiaries maintain stock based compensation plans. During the years ended December 31, 2017, 20162021, 2020 and 2015, $7.02019, $10.9 million, $4.4$8.5 million, and $3.2$5.8 million of stock based compensation expense was recorded to each expense category that included related salary expense in the consolidated statements of operations. As of December 31, 2017,2021, the amount to be recorded for stock-based compensation expense in future years for unvested options is approximately $27.2$28.5 million.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Simplifying the Test for Goodwill Impairment
In January 2017,December 2019, the FASB issued new accountingASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions related to simplify the accountingapproach for goodwill impairment.intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. Entities will continue to have the option to perform a qualitative test to determine if a quantitative test is necessary. The guidance iswas effective for fiscal years and interim periods within those years, after December 31, 2019, with early adoption permitted for any goodwill impairment tests performed after January 1, 2017 and will be applied prospectively. The Company adopted this guidance early, effective January 1, 2017, on a prospective basis, and will apply the guidance as necessary to annual and interim goodwill testing performed subsequent to January 1, 2017.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued an accounting standard update intended to simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The new guidance applies only to inventory that is determined by methods other than last-in-first-out and the retail inventory method. The guidance was effective for the Company as of January 1, 2017. Adoption of this new accounting guidance did not have a significant impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
Improving the Presentation of Net Periodic Pension Costs
In March 2017, the FASB issued guidance that requires presentation of all components of net periodic pension and postretirement benefit costs, other than service costs, in an income statement line item outside of a subtotal of income from operations. The service cost component will continue to be presented in the same line items as other employee compensation costs. The new guidance is effective January 1, 2018 for the Company's Arnold business, which has a defined benefit plan covering substantially all of Arnold’s employees at its Lupfig, Switzerland location (refer to "Note M - Defined Benefit Plan"). The guidance is required to be adopted retrospectively with respect to the income statement presentation requirement. See "Note M - Defined Benefit Plan" for the amount of each component of net periodic pension and postretirement benefit costs that Arnold has reported historically. These amounts of net periodic pension and postretirement benefit costs are not necessarily indicative of future amounts that may arise in years following implementation of the new accounting pronouncement.Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued an accounting standard update which updates the guidance as to how certain cash receipts and cash payments should be presented and classified within the statement of cash flows. The guidance eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayments or extinguishment costs, the maturing of zero coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and distributions received from equity method investees. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with2020 and early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial statements.
Leases
In February 2016, the FASB issued an accounting standard update related to the accounting for leases which will require an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The standard update offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires modified retrospective adoption, with early adoption permitted. Accordingly, this standard is effective for the Company on January 1, 2019. The Company is currently assessing the2021 did not have a material impact of the new standard on our consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued a comprehensive new revenue recognition standard. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard is designed to create greater comparability for financial statement users across industries, jurisdictions and capital markets and also requires enhanced disclosures. The new standard will be effective for the Company beginning January 1, 2018. The FASB issued four subsequent standards in 2016 containing implementation guidance related to the new standard. These standards provide additional guidance related to principal versus agent considerations, licensing, and identifying performance obligations. Additionally, these standards provide narrow-scope improvements and practical expedients as well as technical corrections and improvements.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company will be adopting the standard as of January 1, 2018, using the modified retrospective method applied to contracts which were not completed as of that date. We expect that the adoption of Topic 606 will not have a material impact to our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Operations.
The impact to the Company’s future results are not expected to be material based on the analysis of revenue streams and contracts under the new revenue recognition guidance which supports revenue recognition at a point in time for seven out of nine of our reportable segments. For the seven reportable segments, this is consistent with the Company’s previous revenue recognition model whereby the majority of revenue was recognized based on the Company’s shipping terms. The Company has identified two reportable segments where revenue recognition will change to over time recognition from
historical point in time revenue recognition. Although the timing of revenue recognition for these two reportable segments will change, these changes will not have a material impact on the Company’s consolidated financial statements due to the over time recognition being closely aligned with point in time recognition.
The impacts from the adoption of the revenue standard update primarily relate to the timing of revenue recognition for variable consideration received, consideration payable to a customer and recording right of return assets. Although these differences have been identified, the total impact to each reportable segment will not be material to the consolidated financial statements. In addition the accounting for the estimate of variable consideration in our contracts is not materially different compared to our current practice.
The Company will adopt practical expedients and make policy elections related to the accounting for sales taxes, shipping and handling, costs to obtain a contract and immaterial promised goods or services which mitigates any potential differences. The Company is not expecting significant changes in the internal controls over financial reporting that will have a material effect to our internal controls over financial reporting.
Note C — Acquisition of Businesses
Acquisition of CrosmanLugano Diamonds & Jewelry, Inc.
On June 2, 2017, CBCP Acquisition Corp. (the "Buyer")September 3, 2021, the Company, through its newly formed acquisition subsidiaries, Lugano Holding, Inc., a wholly ownedDelaware corporation (“Lugano Holdings”), and Lugano Buyer, Inc., a Delaware corporation (“Lugano Buyer”) and a wholly-owned subsidiary of Lugano Holdings, acquired the Company, entered into an equity purchase agreementissued and outstanding shares of stock of Lugano Diamonds & Jewelry Inc. ("Lugano") other than certain rollover shares (the “Lugano Transaction”). The Lugano Transaction was effectuated pursuant to which it acquired alla Stock Purchase Agreement (the “Lugano Purchase Agreement”), also dated September 3, 2021, by and among Lugano Buyer, the sellers named therein (“Lugano Sellers”) and Mordechai Haim Ferder in his individual capacity and as initial representative of the outstanding equity interests of Bullseye Acquisition Corporation, the indirect owner of the equity interests of Crosman Corp. ("Crosman"). CrosmanLugano Sellers. Lugano is a leading designer, manufacturer and marketer of airguns, archery products, laser aiming deviceshigh-end, one-of-a-kind jewelry sought after by some of the world’s most discerning clientele. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art and related accessories. Headquarteredphilanthropic community. Lugano is headquartered in Bloomfield, New York, Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channels and distributors serving smaller specialty stores and international markets. Its diversified product portfolio includes the widely known Crosman, Benjamin and CenterPoint brands.
Newport Beach, California.
The Company made loans to, and purchased a 98.9% controlling60% equity interest in, Crosman.Lugano. The purchase price, including proceeds from noncontrolling interestsshareholders and net of transaction costs, was approximately $150.4$263.3 million. Crosman managementThe selling shareholders invested in the transaction along with the Company, representing approximately 1.1% of the40% initial noncontrolling interest on both a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership of Crosman.Lugano. CGM will receive integration service fees of $1.5$2.3 million payable quarterly over a twelve month period as services are rendered beginningwhich payments began in the quarter ended September 30, 2017.December 31, 2021. The Company incurred $1.5$1.8 million of transaction costs in conjunction with the CrosmanLugano acquisition, which was included in selling, general and administrative expense in the consolidated statements of incomeoperations during the secondthird quarter of 2017.2021. The Company funded the acquisition with cash on hand and a $120 million draw on its 2021 Revolving Credit Facility.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The results of operations of CrosmanLugano have been included in the consolidated results of operations since the date of acquisition. Crosman'sLugano's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the preliminary recording of assets acquired and liabilities assumed as of the acquisition date.date of acquisition.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| (in thousands) | | Preliminary Purchase Price Allocation | | Measurement Period Adjustments | | Preliminary Purchase Price Allocation | |
| Assets: | | | | | | | |
| Cash | | $ | 1,433 | | | $ | — | | | $ | 1,433 | | |
Accounts receivable (1) | | 20,954 | | | — | | | 20,954 | | |
| Inventory | | 85,794 | | | 12,829 | | | 98,623 | | |
Property, plant and equipment | | 2,743 | | | 392 | | | 3,135 | | |
| Intangible assets | | — | | | 82,886 | | | 82,886 | | |
| Goodwill | | 158,780 | | | (75,322) | | | 83,458 | | |
| Other current and noncurrent assets | | 4,979 | | | 4,114 | | | 9,093 | | |
| Total assets | | $ | 274,683 | | | $ | 24,899 | | | $ | 299,582 | | |
| | | | | | | |
| Liabilities and noncontrolling interest: | | | | | | | |
| Current liabilities | | $ | 7,129 | | | $ | 58 | | | $ | 7,187 | | |
| Other liabilities | | 99,381 | | | 755 | | | 100,136 | | |
| Deferred tax liabilities | | — | | | 24,086 | | | 24,086 | | |
| Noncontrolling interest | | 68,000 | | | — | | | 68,000 | | |
| Total liabilities and noncontrolling interest | | $ | 174,510 | | | $ | 24,899 | | | $ | 199,409 | | |
| | | | | | | |
| Net assets acquired | | $ | 100,173 | | | $ | — | | | $ | 100,173 | | |
| Noncontrolling interest | | 68,000 | | | — | | | 68,000 | | |
| Intercompany loans to business | | 99,381 | | | (2,420) | | | 96,961 | | |
| | $ | 267,554 | | | $ | (2,420) | | | $ | 265,134 | | |
| | | | | | | | | | | | | | | | | | | | |
| Acquisition consideration | | | | | | |
| Purchase price | | $ | 256,000 | | | $ | — | | | $ | 256,000 | |
| Cash acquired (estimated) | | 1,554 | | | (120) | | | 1,434 | |
| Net working capital adjustment | | 10,000 | | | (2,300) | | | 7,700 | |
| | | | | | |
| Total purchase consideration | | $ | 267,554 | | | $ | (2,420) | | | $ | 265,134 | |
| Less: Transaction costs | | 1,827 | | | — | | | 1,827 | |
| Net purchase price | | $ | 265,727 | | | $ | (2,420) | | | $ | 263,307 | |
|
| | | | | | | | | | | | |
| | | Preliminary Allocation | | Measurement Period Adjustments | | Final Purchase Allocation |
| (in thousands) | | As of 6/2/17 | | | As of 12/31/17 |
| Assets: | | | | | | |
| Cash | | $ | 429 |
| | $ | 781 |
| | $ | 1,210 |
|
Accounts receivable (1) | | 16,751 |
| | — |
| | 16,751 |
|
| Inventory | | 25,598 |
| | 3,275 |
| | 28,873 |
|
| Property, plant and equipment | | 10,963 |
| | 4,051 |
| | 15,014 |
|
| Intangible assets | | — |
| | 84,594 |
| | 84,594 |
|
| Goodwill | | 139,434 |
| | (90,675 | ) | | 48,759 |
|
| Other current and noncurrent assets | | 2,348 |
| | — |
| | 2,348 |
|
| Total assets | | $ | 195,523 |
| | $ | 2,026 |
| | $ | 197,549 |
|
|
| | | | | | | | | | | | |
| | | | | | | |
| Liabilities and noncontrolling interest: | | | | | | |
| Current liabilities | | $ | 15,502 |
| | $ | 781 |
| | $ | 16,283 |
|
| Other liabilities | | 91,268 |
| | 354 |
| | 91,622 |
|
| Deferred tax liabilities | | 27,286 |
| | 1,229 |
| | 28,515 |
|
| Noncontrolling interest | | 694 |
| | — |
| | 694 |
|
| Total liabilities and noncontrolling interest | | $ | 134,750 |
| | $ | 2,364 |
| | $ | 137,114 |
|
| | | | | | | |
| Net assets acquired | | $ | 60,773 |
| | (338 | ) | | $ | 60,435 |
|
| Noncontrolling interest | | 694 |
| | — |
| | 694 |
|
| Intercompany loans to business | | 90,742 |
| | — |
| | 90,742 |
|
| | | $ | 152,209 |
| | (338 | ) | | $ | 151,871 |
|
| | | | | | | |
|
| | | | | | | | | | | | |
| Acquisition Consideration | | | | | | |
| Purchase price | | $ | 151,800 |
| | $ | — |
| | $ | 151,800 |
|
| Cash acquired | | 1,417 |
| | (207 | ) | | 1,210 |
|
| Working capital adjustment | | (1,008 | ) | | (131 | ) | | (1,139 | ) |
| Total purchase consideration | | $ | 152,209 |
| | $ | (338 | ) | | $ | 151,871 |
|
| Less: Transaction costs | | 1,397 |
| | 76 |
| | 1,473 |
|
| Purchase price, net | | $ | 150,812 |
| | $ | (414 | ) | | $ | 150,398 |
|
(1) Includes $18.0 million of gross contractual accounts receivable of which $1.2 million was not expected to be collected. The fair value of accounts receivable approximated netapproximates book value acquired.
The preliminary allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including the income, cost and market approaches.approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values, which approximatesvalues. Inventory is recognized at fair value.value, with finished goods stated at selling price less an estimated cost to sell. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. The inventory was valued at fair value, resulting in a basis step-up of $3.3 million, which was charged to cost of goods sold over the inventory turns of the acquired entity. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $48.8$83.5 million reflects the strategic fit of CrosmanLugano in the Company's branded consumer business and is not expected to be deductible for income tax purposes. The purchase accounting for Crosman wasLugano is expected to be finalized duringin the fourthfirst quarter of 2017.2022.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The intangible assets recorded related to the CrosmanLugano acquisition are as follows (in thousands):
| | | | | | | | | | | | | | |
| Intangible Assets | | Fair Value | | Estimated Useful Lives |
| | | | |
| Tradename | | $ | 49,493 | | | 18 years |
| Customer relationships | | 33,393 | | | 15 years |
| | $ | 82,886 | | | |
The tradename was considered the primary intangible asset and was valued at $49.5 million using a multi period excess earnings method. The customer relationships were valued at $33.4 million using a multi period excess earnings method. The multi period excess earnings method assumes an asset has value to the extent that it enables its owners to earn a return in excess of the other assets utilized in the business.
Acquisition of Marucci Sports, LLC
On April 20, 2020, pursuant to an Agreement and Plan of Merger entered into on March 6, 2020, the Company, through a wholly-owned subsidiary, Wheelhouse Holdings Inc., a Delaware corporation (“Marucci Buyer”) and Wheelhouse Holdings Merger Sub LLC, a Delaware limited liability company and a wholly owned Subsidiary of Marucci Buyer (“Marucci Merger Sub”), completed a merger (the “Marucci Transaction”) with Marucci Sports, LLC, a Delaware limited liability company (“Marucci”). Upon the completion of the Marucci Transaction, Marucci became a wholly-owned subsidiary of Marucci Buyer and an indirect subsidiary of the Company. Headquartered in Baton Rouge, Louisiana, Marucci is a leading manufacturer and distributor of baseball and softball equipment. Founded in 2009, Marucci has a product portfolio that includes wood and metal bats, apparel and accessories, batting and fielding gloves and bags and protective gear.
The Company made loans to, and purchased a 92.2% equity interest in, Marucci. The purchase price, including proceeds from noncontrolling shareholders and net of transaction costs, was $198.9 million. Marucci management and certain existing shareholders invested in the Transaction along with the Company, representing 7.8% initial noncontrolling interest on both a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and provided integration services during the first year of the Company's ownership of Marucci. CGM received integration service fees of $2.0 million payable over a twelve month period as services were rendered. The Company incurred $2.0 million of transaction costs in conjunction with the Marucci acquisition, which was included in selling, general and administrative expense in the consolidated statements of operations during the second quarter of 2020.
The results of operations of Marucci have been included in the consolidated results of operations since the date of acquisition. Marucci's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the recording of assets acquired and liabilities assumed as of the date of acquisition.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | |
| Intangible Assets | | Amount | | Estimated Useful Life |
| Tradename | | $ | 53,463 |
| | 20 years |
| Customer relationships | | 28,718 |
| | 15 years |
| Technology | | 2,413 |
| | 15 years |
| | | $ | 84,594 |
| | |
| | | | | | | | |
| | Final Purchase Price Allocation |
| (in thousands) | | |
| Assets | | |
| Cash | | $ | 2,730 | |
Accounts Receivable (1) | | 11,471 | |
Inventory (2) | | 14,481 | |
Property, plant and equipment (3) | | 10,307 | |
| Intangible assets | | 100,211 | |
| Goodwill | | 68,170 | |
| Other current and noncurrent assets | | 2,208 | |
| Total assets | | 209,578 | |
| | |
| Liabilities and noncontrolling interest | | |
| Current liabilities | | 6,501 | |
| Other liabilities | | 43,058 | |
| Deferred tax liabilities | | 1,161 | |
| Noncontrolling interest | | 11,127 | |
| Total liabilities and noncontrolling interest | | 61,847 | |
| | |
| Net assets acquired | | 147,731 | |
| Noncontrolling interest | | 11,127 | |
| Intercompany loans | | 42,100 | |
| | $ | 200,958 | |
| | | | | | | | |
| Acquisition consideration | | |
| Purchase price | | $ | 200,000 | |
| Cash acquired | | 2,730 | |
| Net working capital adjustment | | 728 | |
| Other adjustments | | (2,500) | |
| Total purchase consideration | | $ | 200,958 | |
| Less: Transaction costs | | 2,042 | |
| Net purchase price | | $ | 198,916 | |
| | |
(1)Includes $12.7 million in gross contractual accounts receivable, of which $1.2 million is not expected to be collected. The fair value of accounts receivable approximates book value acquired.
(2) Includes $4.3 million in inventory basis step-up, which was charged to cost of goods sold. $3.0 million was amortized to cost of goods sold in the second quarter of 2020, and $1.3 million was charged to cost of goods sold in the third quarter of 2020.
(3) Includes $2.5 million of property, plant and equipment basis step-up. The fair value of property, plant and equipment will be depreciated over the remaining useful lives of the assets.
The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including the income, cost and market approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $68.2 million reflects the strategic fit of Marucci in the Company's branded consumer business and is expected to be deductible for income tax purposes.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The intangible assets recorded related to the Marucci acquisition are as follows (in thousands):
| | | | | | | | | | | | | | |
| Intangible Assets | | Fair Value | | Estimated Useful Life |
| Tradename | | $ | 84,891 | | | 15 years |
| Customer relationships | | 11,120 | | | 15 years |
| Technology | | 4,200 | | | 15 years |
| | $ | 100,211 | | | |
The tradename was valued at $53.5$84.9 million using a multi-period excess earnings methodology. The customer relationships intangible asset was valued at $28.7$11.1 million using the distributor method, a variation of the multi-period excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The technology was valued at $2.4$4.2 million using a relief from royalty method.
Acquisition of 5.11 TacticalBoa Technology, Inc.
On AugustOctober 16, 2020, the Company, through its newly formed acquisition subsidiaries, BOA Holdings Inc., a Delaware corporation (“BOA Holdings”) and BOA Parent Inc., a Delaware corporation (“BOA Buyer”) and a wholly-owned subsidiary of BOA Holdings, acquired BOA Technology Inc. ("BOA"), and its subsidiaries pursuant to an Agreement and Plan of Merger (the “BOA Merger Agreement”) by and among BOA Buyer, Reel Holding Corp., a Delaware corporation (“Reel”) and the sole stockholder of Boa Technology, Inc., BOA Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of BOA Buyer (“BOA Merger Sub”) and Shareholder Representative Services LLC (in its capacity as the representative of the stockholders of Reel). Pursuant to the BOA Merger Agreement, BOA Merger Sub was merged with and into Reel (the “BOA Merger”) such that the separate existence of BOA Merger Sub ceased, and Reel survived the BOA Merger as a wholly-owned subsidiary of BOA Buyer. BOA, creators of the award-winning BOA® Fit System featured in performance footwear, action sports, outdoor and medical products worldwide, was founded in 2001 and is headquartered in Denver, Colorado.
The Company made loans to, and purchased an 82% equity interest in, BOA. The purchase price, including proceeds from noncontrolling shareholders and net of transaction costs, was $454.3 million. BOA management and certain existing shareholders invested in the transaction along with the Company, representing 18% initial noncontrolling interest on both a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and provided integration services during the first year of the Company's ownership of BOA. CGM received integration service fees of $4.4 million payable over a twelve month period as services were rendered. The Company incurred $2.5 million of transaction costs in conjunction with the BOA acquisition, which was included in selling, general and administrative expense in the consolidated statements of operations during the fourth quarter of 2020. The Company funded the acquisition with cash on hand and a $300 million draw on its 2018 Revolving Credit Facility.
The results of operations of BOA have been included in the consolidated results of operations since the date of acquisition. BOA's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the recording of assets acquired and liabilities assumed as of the date of acquisition.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | |
| | Final Purchase Allocation |
| (in thousands) | | |
| Assets: | | |
| Cash | | $ | 7,677 | |
Accounts receivable (1) | | 2,065 | |
Inventory (2) | | 6,178 | |
Property, plant and equipment (3) | | 15,431 | |
| Intangible assets | | 234,000 | |
| Goodwill | | 254,153 | |
| Other current and noncurrent assets | | 12,554 | |
| Total assets | | $ | 532,058 | |
| | |
| Liabilities and noncontrolling interest: | | |
| Current liabilities | | $ | 14,008 | |
| Other liabilities | | 130,587 | |
| Deferred tax liabilities | | 49,969 | |
| Noncontrolling interest | | 61,534 | |
| Total liabilities and noncontrolling interest | | $ | 256,098 | |
| | |
| Net assets acquired | | $ | 275,960 | |
| Noncontrolling interest | | 61,534 | |
| Intercompany loans to business | | 119,349 | |
| | $ | 456,843 | |
| | | | | | | | |
| Acquisition consideration | | |
| Purchase price | | $ | 454,000 | |
| Cash acquired | | 7,677 | |
| Net working capital adjustment | | (1,970) | |
| Other adjustments | | (2,864) | |
| Total purchase consideration | | $ | 456,843 | |
| Less: Transaction costs | | 2,517 | |
| Net purchase price | | $ | 454,326 | |
| | |
(1)Includes $2.1 million in gross contractual accounts receivable, of which $0.06 million is not expected to be collected. The fair value of accounts receivable approximates book value acquired.
(2) Includes $1.5 million in inventory basis step-up, which was charged to cost of goods sold in the fourth quarter of 2020.
(3) Includes $6.5 million of property, plant and equipment basis step-up. The fair value of property, plant and equipment will be depreciated over the remaining useful lives of the assets.
The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including the income, cost and market approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
relationships, as well as expected future synergies. The goodwill of $254.2 million reflects the strategic fit of BOA in the Company's branded consumer business and is not expected to be deductible for income tax purposes.
The intangible assets recorded related to the BOA acquisition are as follows (in thousands):
| | | | | | | | | | | | | | |
| Intangible Assets | | Fair Value | | Estimated Useful Lives |
| | | | |
| Technology | | $ | 70,200 | | | 10 - 12 years |
| Tradename | | 84,300 | | | 20 years |
| Customer relationships | | 73,000 | | | 15 years |
In-process Research & Development (1) | | 6,500 | | | |
| | $ | 234,000 | | | |
(1) In-process research and development is considered indefinite lived until the underlying technology becomes viable, at which point the intangible asset will be amortized over the expected useful life.
The technology was considered the primary intangible asset in the acquisition and was valued at $70.2 million using a multi-period excess earnings methodology with an assumed obsolescence factor. The tradename was valued at $84.3 million using a relief-from-royalty method. The customer relationships, which represent BOA's relationship with brand partners, were valued at $73.0 million using the distributor method, a variation of the multi-period excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business.
Unaudited pro forma information
The following unaudited pro forma data for the year ended December 31, 2016, 5.11 ABR2021 and 2020 gives effect to the acquisitions of Lugano, BOA and Marucci, as described above, and the dispositions of Liberty Safe and ACI, as if these transactions had been completed as of January 1, 2020. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period.
| | | | | | | | | | | | | | |
| | Year ended |
| (in thousands, except per share data) | | December 31, 2021 | | December 31, 2020 |
| Net sales | | $ | 1,912,726 | | | $ | 1,530,375 | |
| Gross profit | | $ | 760,936 | | | $ | 589,332 | |
| Operating income | | $ | 155,699 | | | $ | 68,102 | |
| Net income (loss) from continuing operations | | $ | 37,029 | | | $ | (12,601) | |
| Net income (loss) from continuing operations attributable to Holdings | | $ | 23,840 | | | $ | (14,040) | |
| Basic and fully diluted net loss per share from continuing operations attributable to Holdings | | $ | (0.65) | | | $ | (0.87) | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other acquisitions
Marucci
Lizard Skins - On October 22, 2021, Marucci Sports acquired Lizard Skins, LLC ("Lizard Skins"), an industry leading provider of sporting goods accessories that revolve around the hand-to-grip interface, for an enterprise value of approximately $47.0 million, excluding customary closing adjustments. The acquisition and related transaction costs were funded through an additional term loan of $44.1 million under the Marucci inter-company credit agreement with the Company, a draw on the existing Marucci revolving credit facility with the Company, and rollover equity from the selling shareholders of Lizard Skins. Marucci issued 11,915 shares to the selling shareholders in exchange for the rollover equity, which represents an ownership interest of approximately 1% in Marucci. Marucci paid approximately $1.4 million in transaction expenses in connection with the acquisition of Lizard Skins. Lizard Skins is a designer and seller of branded grip products, protective equipment, bags and apparel for use in baseball, cycling, hockey, Esports and lacrosse. The acquisition of Lizard Skins will allow Marucci to buildon its leading position in diamond sports while simultaneously developing Marucci's presence in new sports markets such as hockey and cycling. Marucci has not completed the preliminary purchase price allocation for the Lizard Skins acquisition and the excess purchase price over net assets acquired has been recorded as goodwill of $39.7 million on a preliminary basis at December 31, 2021.
Altor Solutions
Plymouth Foam - On October 5, 2021, Altor acquired Plymouth Foam, LLC (“Plymouth”), a manufacturer of protective packaging and componentry, for an enterprise value of approximately $56.0 million, excluding customary closing adjustments. The acquisition and related transaction costs were funded through an additional term loan of $52.0 million under the Altor intercompany credit agreement and a draw on the existing Altor intercompany revolving credit facility with the Company. Altor paid approximately $0.4 million in transaction fees in connection with the acquisition of Plymouth. Plymouth was founded in 1978 and is based in Plymouth, Wisconsin. Plymouth supplies a wide array of high value products, including custom protective packaging, cold chain packaging and internal components made from expanded polystyrene and expanded polypropylene. Plymouth’s complementary product portfolio will allow Altor to be able to further expand its business and capabilities. Altor has not finalized the purchase price allocation for the Plymouth acquisition and has recorded a preliminary purchase price allocation, including goodwill of $15.5 million at December 31, 2021. The purchase price for Plymouth Foam will be finalized in the first quarter of 2022.
Polyfoam - On July 1, 2020, Altor acquired substantially all of the assets of Polyfoam Corp. ("Polyfoam"), a Massachusetts-based manufacturer of protective and temperature-sensitive packaging solutions for the medical, pharmaceutical, grocery and food industries, among others. Founded in 1974, Polyfoam operates two manufacturing facilities producing highly engineered foam and injection-molded plastic solutions across a variety of end-markets. The acquisition complements Altor's current operating footprint and provides access to a new customer base and product offerings, including Polyfoam's significant end-market exposure to cold chain (including seafood boxes, insulated shipping containers and grocery delivery totes). The purchase price was approximately $12.8 million and includes a potential earnout of $1.4 million if Polyfoam achieves certain financial metrics.
Arnold
Ramco - On March 1, 2021, Arnold acquired Ramco Electric Motors, Inc. ("Ramco"), a manufacturer of stators, rotors and full electric motors, for a purchase price of approximately $34.3 million. The acquisition and related transaction costs were funded through an additional equity investment in Arnold by the Company of $35.5 million. Ramco was founded in 1987 and is based in Greenville, Ohio. Ramco supplies their custom electric motor solutions for general industrial, aerospace and defense, and oil and gas end-markets. Ramco’s complementary product portfolio will allow Arnold to be able to offer more comprehensive, turnkey solutions to their customers. In connection with the acquisition, Arnold recorded a purchase price allocation of $12.4 million of goodwill, which is not expected to be deductible for income tax purposes and $12.7 million in intangible assets. The remainder of the purchase consideration was allocated to net assets acquired. The purchase price allocation was finalized in the fourth quarter of 2021.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D — Discontinued Operations
Sale of Advanced Circuits
On October 13, 2021, the Company, as the representative (the “Sellers Representative”) of the holders (the “AC Sellers”) of stock and options of Advanced Circuits, a majority owned subsidiary of the Company, entered into a definitive Agreement and Plan of Merger Corp. ("(the “AC Agreement”) with Tempo Automation, Inc. (“AC Buyer”), Aspen Acquisition Sub, Inc. (“AC Merger Sub"Sub”) and Advanced Circuits, pursuant to which AC Buyer will acquire all of the issued and outstanding securities of Advanced Circuits, the parent company of the operating entity, Advanced Circuits, Inc., through a merger of AC Merger Sub with and into Advanced Circuits, with Advanced Circuits surviving the merger and becoming a wholly owned subsidiary of 5.11 ABR Corp. ("Parent"AC Buyer (the “AC Merger”). Under the terms of the AC Agreement, the AC Sellers will receive consideration in the amount of $310 million, composed of $240 million in cash and $70 million in common stock of a publicly traded special purpose acquisition company (“SPAC”) selected by AC Buyer to acquire AC Buyer (the “SPAC Transaction”) upon the closing of the transaction, excluding certain working capital and other adjustments. In addition, the AC Sellers may receive 2.4 million additional shares of SPAC common stock within five years, subject to SPAC stock price performance. The Company owns approximately 67% of the outstanding stock of Advanced Circuits on a fully diluted basis and expects to receive approximately 77% of the gross consideration payable under the AC Agreement. This amount is in respect of the Company’s outstanding loans to Advanced Circuits and its equity interests in Advanced Circuits. The closing of the transaction is expected to occur in the second quarter of 2022, however, there can be no assurances that all of the conditions to closing, which include the closing of the SPAC transaction, will be satisfied.
The sale of Advanced Circuits met the criteria for the assets to be classified as held for sale as of December 31, 2021, and is presented as discontinued operations in the accompanying consolidated financial statements for all periods presented. Summarized results of operations of Advanced Circuits are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 | | Year ended
December 31, 2020 | | Year ended December 31, 2019 |
| Net sales | $ | 90,487 | | | $ | 88,075 | | | $ | 90,791 | |
| Gross profit | 41,049 | | | 38,838 | | | 41,506 | |
| Operating income | 25,232 | | | 22,891 | | | 25,680 | |
Income from continuing operations before income taxes (1) | 24,933 | | | 22,738 | | | 25,560 | |
| Provision for income taxes | 3,419 | | | 3,431 | | | 3,896 | |
Income from discontinued operations (1) | $ | 21,514 | | | $ | 19,307 | | | $ | 21,664 | |
(1) The results of operations for the years ended December 31, 2021, 2020 and 2019, each exclude $7.2 million,$5.8 million and $6.5 million, respectively, of intercompany interest expense.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents summary balance sheet information of ACI that is presented as held for sale as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | |
| | December 31,
2021 | | December 31,
2020 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 3,610 | | | $ | 6,379 | |
| Accounts receivable, net | | 9,447 | | | 6,967 | |
| Inventories, net | | 3,660 | | | 3,373 | |
| Prepaid expenses and other current assets | | 430 | | | 417 | |
| Current assets held for sale | | $ | 17,147 | | | $ | 17,136 | |
| Property, plant and equipment, net | | 8,083 | | | 9,465 | |
| Goodwill | | 66,668 | | | 66,668 | |
| Intangible assets, net | | 23 | | | 62 | |
| Other non-current assets | | 7,502 | | | 8,533 | |
Non-current assets held for sale (1) | | $ | 82,276 | | | $ | 84,728 | |
| | | | |
| Liabilities | | | | |
| Accounts payable | | $ | 3,798 | | | $ | 2,476 | |
| Accrued expenses | | 3,718 | | | 5,042 | |
| Due to related party | | 125 | | | 125 | |
| Other current liabilities | | 1,526 | | | 1,526 | |
| Current liabilities held for sale | | $ | 9,167 | | | $ | 9,169 | |
| Deferred income taxes | | 13,419 | | | 13,890 | |
| Other non-current liabilities | | 6,487 | | | 7,645 | |
Non-current liabilities held for sale (1) | | $ | 19,906 | | | $ | 21,535 | |
| Noncontrolling interest held for sale | | $ | (2,614) | | | $ | (7,175) | |
(1) The closing of the transaction is expected to occur in the second quarter of 2022, and therefore all assets and liabilities have been classified as current on the consolidated balance sheet for the year ended December 31, 2021.
Sale of Liberty
On July 16, 2021, the Company, as majority stockholder of Liberty Safe Holding Corporation and as Sellers Representative, entered into a definitive Stock Purchase Agreement (the “Liberty Purchase Agreement”) with Independence Buyer, Inc. (“Liberty Buyer”), Liberty and the other holders of stock and options of Liberty to sell to Liberty Buyer all of the issued and outstanding securities of Liberty, the parent company of the operating entity, Liberty Safe and Security Products, Inc.
On August 3, 2021, Liberty Buyer and the Company, as Sellers Representative, entered into the Amendment to Stock Purchase Agreement (the “Liberty Amendment”) which amended the Liberty Purchase Agreement to, among other things, provide that, immediately prior to the closing, certain investors in turnLiberty will, instead of selling all of the shares of Liberty owned by them to Liberty Buyer, contribute a portion of such shares (the “Liberty Rollover Shares”) to an indirect parent company of Liberty Buyer in exchange for equity securities of such entity.
On August 3, 2021, Liberty Buyer completed the acquisition of all the issued and outstanding securities of Liberty (other than the Liberty Rollover Shares) pursuant to the Liberty Purchase Agreement and Liberty Amendment (the “Liberty Transaction”). The sale price of Liberty was based on an aggregate total enterprise value of $147.5 million, subject to customary adjustments. After the allocation of the sale proceeds to Liberty's non-controlling shareholders, the repayment of intercompany loans to the Company (including accrued interest) of $26.5 million, and the payment of transaction expenses of approximately $4.5 million, the Company received approximately $128.0 million of total proceeds from the sale at closing. The Company recognized a gain on the sale of Liberty of $72.8 million during the year ended December 31, 2021.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized results of operations of Liberty for the previous years through the date of disposition are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| For the period January 1, 2021 through disposition | | Year ended
December 31, 2020 | | Year ended December 31, 2019 |
| Net sales | $ | 75,753 | | | $ | 113,115 | | | $ | 96,164 | |
| Gross profit | 20,129 | | | 28,978 | | | 21,005 | |
| Operating income | 9,175 | | | 16,826 | | | 8,526 | |
Income from continuing operations before income taxes (1) | 9,174 | | | 16,819 | | | 8,509 | |
| Provision for income taxes | 1,509 | | | 3,288 | | | 932 | |
Income from discontinued operations (1) | $ | 7,665 | | | $ | 13,531 | | | $ | 7,577 | |
(1) The results of operations for the periods from January 1, 2021 through disposition and the years ended December 31, 2020 and 2019, each exclude $1.7 million, $3.5 million and $4.4 million, respectively, of intercompany interest expense.
The following table presents summary balance sheet information of Liberty that is presented as discontinued operations as of December 31, 2020 (in thousands):
| | | | | | | | |
| | December 31,
2020 |
| Assets | | |
| Cash and cash equivalents | | $ | 4,342 | |
| Accounts receivable, net | | 18,812 | |
| Inventories, net | | 9,406 | |
| Prepaid expenses and other current assets | | 945 | |
| Current assets of discontinued operations | | $ | 33,505 | |
| Property, plant and equipment, net | | 9,551 | |
| Goodwill | | 32,828 | |
| Intangible assets, net | | 3,020 | |
| Other non-current assets | | 8,473 | |
| Non-current assets of discontinued operations | | $ | 53,872 | |
| | |
| Liabilities | | |
| Accounts payable | | $ | 7,495 | |
| Accrued expenses | | 4,911 | |
| Due to related party | | 101 | |
| Other current liabilities | | 2,723 | |
| Current liabilities of discontinued operations | | $ | 15,230 | |
| Deferred income taxes | | 1,815 | |
| Other non-current liabilities | | 9,320 | |
| Non-current liabilities of discontinued operations | | $ | 11,135 | |
| Noncontrolling interest of discontinued operations | | $ | 3,836 | |
Sale of Clean Earth
On May 8, 2019, the Company, as majority stockholder of CEHI Acquisition Corporation ("Clean Earth" or CEHI") and as Sellers’ Representative, entered into a whollydefinitive Stock Purchase Agreement (the “Clean Earth Purchase Agreement”) with Calrissian Holdings, LLC (“Clean Earth Buyer”), CEHI, the other holders of stock and options of CEHI and, as Clean Earth Buyer’s guarantor, Harsco Corporation, pursuant to which Clean Earth Buyer would acquire all of the issued and outstanding securities of CEHI, the parent company of the operating entity, Clean Earth, Inc.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 28, 2019, Clean Earth Buyer completed the acquisition of all of the issued and outstanding securities of CEHI pursuant to the Clean Earth Purchase Agreement. The sale price for Clean Earth was based on an aggregate total enterprise value of $625 million and is subject to customary working capital adjustments. After the allocation of the sale proceeds to Clean Earth non-controlling equity holders, the repayment of intercompany loans to the Company (including accrued interest) of $224.6 million, and the payment of transaction expenses of approximately $10.7 million, the Company received approximately $327.3 million of total proceeds at closing related to our equity interests in Clean Earth. The Company recognized a gain on the sale of Clean Earth of $209.3 million during the year ended December 31, 2019.
Summarized operating results for Clean Earth for 2019 through the date of disposition were as follows (in thousands):
| | | | | |
| For the period January 1, 2019 through disposition |
| Net sales | $ | 132,737 | |
| Gross profit | 39,678 | |
| Operating income | 6,232 | |
| Income before income taxes | 5,880 | |
| Benefit for income taxes | (11,607) | |
Income from discontinued operations (1) | $ | 17,487 | |
(1) The results of operations for the period from January 1, 2019 through the date of disposition, excludes $10.2 million of intercompany interest expense.
Sale of Manitoba Harvest
On February 19, 2019, the Company entered into a definitive agreement with Tilray, Inc. ("Tilray") and a wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, through Tilray Subco, all of the issued and outstanding securities of our majority owned subsidiary, Manitoba Harvest for total consideration of up to C$419 million. The completion of the sale of Manitoba Harvest was subject to approval by the British Columbia Supreme Court, which occurred on February 21, 2019. The sale closed on February 28, 2019. Subject to certain customary adjustments, the shareholders of Manitoba Harvest, including the Company, merged withreceived the following from Tilray as consideration for their shares of Manitoba Harvest: (i) C$150 million in cash to the holders of preferred shares of Manitoba Harvest and into 5.11 Tactical, with 5.11 Tacticalthe holders of common shares of Manitoba Harvest (“Common Holders”) and C$127.5 million in shares of class 2 Common Stock of Tilray (“Tilray Common Stock”) to the Common Holders on the closing date of the sale (the “Closing Date Consideration”), and (ii) C$50 million in cash and C$42.5 million in Tilray Common Stock to the Common Holders on the date that was six months after the closing date of the arrangement (the “Deferred Consideration”). The sale consideration also included a potential earnout of up to C$49 million in Tilray Common Stock to the Common Holders, if Manitoba Harvest achieved certain levels of U.S. branded gross sales of edible or topical products containing broad spectrum hemp extracts or cannabidiols prior to December 31, 2019. The threshold for the earnout was not achieved and no additional amount was recorded related to sale of Manitoba Harvest at December 31, 2019.
The cash portion of the Closing Date Consideration was reduced by the amount of the net indebtedness (including accrued interest) of Manitoba Harvest on the closing date of C$71.3 million ($53.7 million) and transaction expenses of approximately C$5.0 million. The Company's share of the net proceeds after accounting for the redemption of the noncontrolling shareholders and the payment of net indebtedness of Manitoba Harvest and transaction expenses was approximately $124.2 million in cash proceeds and in Tilray Common Stock. The Company recognized a gain on the sale of Manitoba Harvest of $121.7 million in the first quarter of 2019. In August 2019, the Company received the Deferred Consideration related to the sale. The Company's portion of the Deferred Consideration totaled $28.4 million in cash proceeds and $19.6 million in Tilray Common Stock.
The Tilray Common Stock consideration was issued in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and pursuant to exemptions from applicable securities laws of any state of the United States, such that any shares of Tilray Common Stock received by the Common Holders were freely tradeable. The Company sold the Tilray Common Stock received as part of the Closing Consideration during March 2019, recognizing a net loss of $5.3 million in Other income/ (expense) during
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the quarter ended March 31, 2019. In August 2019, the Company sold the Tilray Common Stock received as part of the Deferred Consideration, recognizing a loss of $4.9 million in Other income/ (expense) during the quarter ended September 30, 2019.
Summarized operating results for Manitoba Harvest for 2019 through the date of disposition were as follows (in thousands):
| | | | | |
| For the period January 1, 2019 through disposition |
| Net revenues | $ | 10,024 | |
| Gross profit | 4,874 | |
| Operating loss | (1,118) | |
| Loss before income taxes | (1,127) | |
| Benefit for income taxes | (541) | |
Loss from discontinued operations (1) | $ | (586) | |
(1)The results of operations for the period from January 1, 2019 through the date of disposition excludes $1.0 million of intercompany interest expense.
Note E - Revenue
Performance Obligations -Revenues are recognized when control of the promised goods or service is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Each product or service represents a separate performance obligation. Once the performance obligations are identified, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The corresponding revenues are recognized as the surviving entity, pursuantrelated performance obligations are satisfied as discussed above. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. The standalone selling price is directly observable as it is the price at which the Company sells its products separately to the customer. The Company assesses promised goods or services as performance obligations deemed immaterial at the contract level. Revenue is recognized generally upon shipment terms for products and when the service is performed for services.
Shipping and handling costs - Costs associated with shipment of products to a customer are accounted for as a fulfillment cost and are included in cost of revenues. The Company accounts for shipping and handling activities performed after control of a good has been transferred to the customer as a fulfillment cost. Therefore, both revenue and costs of shipping and handling are recorded at the same time. As a result, any consideration (including freight and landing costs) related to these activities are included as a component of the overall transaction consideration and allocated to the performance obligations of the contract.
Warranty - For product sales, the Company provides standard assurance-type warranties as the Company only warrants its products against defects in materials and workmanship (i.e., manufacturing flaws). Although the warranties are not required by law, the tasks performed over the warranty period are only to remediate instances when products do not meet the promised specifications. Customers do not have the option to purchase warranties separately. The Company’s warranty periods generally range from 90 days to three years depending on the nature of the product and are consistent with industry standards. The periods are reasonable to assure that products conform to specifications. The Company does not have a history of performing activities outside the scope of the standard warranty.
Variable Consideration - The Company’s policy around estimating variable consideration related to sales incentives (early pay discounts, rights of return, rebates, chargebacks, and other discounts) included in certain customer contracts are recorded as a reduction in the transaction price. The Company applies the expected value method to estimate variable consideration. These estimates are based on historical experience, anticipated performance and the Company’s best judgment at the time and as a result, reflect applicable constraints. The Company includes in the transaction price an agreementamount of variable consideration only to the extent that it is probable
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that a significant reversal in the amount of cumulative revenuerecognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
In certain of the Company’s arrangements related to product sales, a right of return exists, which is included in the transaction price. For these right of return arrangements, an asset (and corresponding adjustment to cost of sale) for its right to recover the products from the customers is recorded. The asset recognized is the carrying amount of the product (for example, inventory) less any expected costs to recover the products (including potential decreases in the value to the Company of the returned product). Additionally, the Company records a refund liability for the amount of consideration that it does not expect to be entitled. The amounts associated with right of return arrangements are not material to the Company's statement of position or operating results.
Sales and planOther Similar Taxes - The Company notes that under its contracts with customers, the customer is responsible for all sales and other similar taxes, which the Company will invoice the customer for if they are applicable. The Company excludes sales taxes and similar taxes from the measurement of merger among Merger Sub, Parent, 5.11 Tactical,transaction price.
Cost to Obtain a Contract - The Company recognizes the incremental costs of obtaining a contract as an expense when incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less.
Disaggregated Revenue - Revenue Streams & Timing of Revenue Recognition - The Company disaggregates revenue by strategic business unit and TA Associates Management L.P. entered into on July 29, 2016. by geography for each strategic business unit which are categories that depict how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors. This disaggregation also represents how the Company evaluates its financial performance, as well as how the Company communicates its financial performance to the investors and other users of its financial statements. Each strategic business unit represents the Company’s reportable segments and offers different products and services.
The following tables provide disaggregation of revenue by reportable segment geography for the years ended December 31, 2021, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
| 5.11 | | BOA | | Ergo | | Lugano | | Marucci | | Velocity | | | | Altor | | Arnold | | Sterno | | Total |
| United States | $ | 363,017 | | | $ | 52,804 | | | $ | 33,319 | | | $ | 53,662 | | | $ | 116,277 | | | $ | 243,347 | | | | | $ | 154,882 | | | $ | 96,944 | | | $ | 361,586 | | | $ | 1,475,838 | |
| Canada | 10,387 | | | 834 | | | 3,485 | | | — | | | 770 | | | 11,539 | | | | | — | | | 662 | | | 12,079 | | | 39,756 | |
| Europe | 27,393 | | | 57,570 | | | 31,411 | | | — | | | 85 | | | 8,546 | | | | | — | | | 33,828 | | | 1,071 | | | 159,904 | |
| Asia Pacific | 15,715 | | | 53,735 | | | 24,891 | | | 385 | | | 973 | | | 1,328 | | | | | — | | | 6,086 | | | 281 | | | 103,394 | |
| Other international | 28,451 | | | 207 | | | 525 | | | — | | | 61 | | | 5,666 | | | | | 25,335 | | | 2,421 | | | 110 | | | 62,776 | |
| $ | 444,963 | | | $ | 165,150 | | | $ | 93,631 | | | $ | 54,047 | | | $ | 118,166 | | | $ | 270,426 | | | | | $ | 180,217 | | | $ | 139,941 | | | $ | 375,127 | | | $ | 1,841,668 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 |
| 5.11 | | BOA | | Ergo | | Marucci | | Velocity | | | | Altor | | Arnold | | | | Sterno | | Total |
| United States | $ | 319,181 | | | $ | 6,894 | | | $ | 26,653 | | | $ | 42,823 | | | $ | 194,578 | | | | | $ | 110,829 | | | $ | 61,112 | | | | | $ | 354,388 | | | $ | 1,116,458 | |
| Canada | 7,192 | | | 98 | | | 3,251 | | | 136 | | | 10,124 | | | | | — | | | 296 | | | | | 14,793 | | | 35,890 | |
| Europe | 28,239 | | | 9,783 | | | 25,679 | | | 24 | | | 7,688 | | | | | — | | | 29,190 | | | | | 537 | | | 101,140 | |
| Asia Pacific | 15,157 | | | 8,476 | | | 17,868 | | | 444 | | | 1,028 | | | | | — | | | 4,604 | | | | | 96 | | | 47,673 | |
| Other international | 31,337 | | | 27 | | | 1,277 | | | 15 | | | 2,578 | | | | | 19,217 | | | 3,788 | | | | | 167 | | | 58,406 | |
| $ | 401,106 | | | $ | 25,278 | | | $ | 74,728 | | | $ | 43,442 | | | $ | 215,996 | | | | | $ | 130,046 | | | $ | 98,990 | | | | | $ | 369,981 | | | $ | 1,359,567 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2019 |
| 5.11 | | Ergo | | Velocity | | | | | | Altor | | Arnold | | Sterno | | Total |
| United States | $ | 307,552 | | | $ | 28,028 | | | $ | 131,061 | | | | | | | $ | 101,622 | | | 72,593 | | | $ | 375,537 | | | $ | 1,016,393 | |
| Canada | 8,203 | | | 3,541 | | | 6,134 | | | | | | | — | | | 712 | | | 15,987 | | | 34,577 | |
| Europe | 29,042 | | | 27,318 | | | 6,207 | | | | | | | — | | | 36,711 | | | 1,412 | | | 100,690 | |
| Asia Pacific | 13,933 | | | 30,197 | | | 756 | | | | | | | — | | | 6,019 | | | 2,385 | | | 53,290 | |
| Other international | 29,915 | | | 911 | | | 3,684 | | | | | | | 19,802 | | | 3,913 | | | 123 | | | 58,348 | |
| $ | 388,645 | | | $ | 89,995 | | | $ | 147,842 | | | | | | | $ | 121,424 | | | 119,948 | | | $ | 395,444 | | | $ | 1,263,298 | |
Note F — Operating Segment Data
At December 31, 2021, the Company had 9 reportable operating segments. Each operating segment represents a platform acquisition. Advanced Circuits has been classified as held for sale at December 31, 2021 and is not considered a reportable segment. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products from which each segment derives its revenues is as follows:
•5.11 Tactical is a leading provider of purpose-built tacticaltechnical 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.
The Company made loans to, and purchased a 97.5% controlling interest in 5.11 ABR Corp. The purchase price, including proceeds from noncontrolling interest and net of transaction costs, was approximately $408.2 million after final settlement•BOA, creator of the working capitalrevolutionary, award-winning, patented BOA Fit System, partners with market-leading brands to make the best gear even better. Delivering fit solutions purpose-built for performance, the BOA Fit System is featured in the fourth quarter of 2016. The Company funded its portion of the acquisition through an amendment to the 2014 Credit Facility that allowed for an increase in the 2014 Revolving Credit Facility and the 2016 Incremental Term Loan (refer to Note J - Debt). 5.11 management invested in the transaction along with the Company, representing approximately 2.5% initial noncontrolling interest on a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership of 5.11. CGM received integration service fees of $3.5 million payable quarterly over a twelve month period as services were rendered beginning in the quarter ended December 31, 2016.
The results of operations of 5.11 have been included in the consolidated results of operations since the date of acquisition. 5.11's results of operations are reported as a separate operating segment. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date.
|
| | | | |
| 5.11 Tactical | | |
| (in thousands) | | |
| Assets: | | |
| Cash | | $ | 12,581 |
|
Accounts receivable (1) | | 38,323 |
|
Inventory (2) | | 160,304 |
|
Property, plant and equipment (3) | | 22,723 |
|
| Intangible assets | | 127,890 |
|
| Goodwill | | 92,966 |
|
| Other current and noncurrent assets | | 4,884 |
|
| Total assets | | $ | 459,671 |
|
| Liabilities and noncontrolling interest: | | |
| Current liabilities | | $ | 38,229 |
|
| Other liabilities | | 180,231 |
|
| Deferred tax liabilities | | 10,163 |
|
| Noncontrolling interest | | 5,568 |
|
| Total liabilities and noncontrolling interest | | $ | 234,191 |
|
| | | |
| Net assets acquired | | $ | 225,480 |
|
| Noncontrolling interest | | 5,568 |
|
| Intercompany loans to business | | 179,237 |
|
| | | $ | 410,285 |
|
| | | |
|
| | | | |
| Acquisition Consideration | | |
| Purchase price | | $ | 400,000 |
|
| Working capital adjustment | | (2,296 | ) |
| Cash | | 12,581 |
|
| Total purchase consideration | | $ | 410,285 |
|
| Less: Transaction costs | | 2,063 |
|
| Purchase price, net | | $ | 408,222 |
|
(1)Includes $40.1 million of gross contractual accounts receivable of which $1.7 million was not expected to be collected. The fair value of accounts receivable approximated book value acquired.
(2) Includes $39.1 million in inventory basis step-up, which was charged to cost of goods sold over the inventory turns of the acquired entity.
(3) Includes $7.6 million of property, plant and equipment basis step-up.
The Company incurred $2.1 million of transaction costs in conjunction with the 5.11 acquisition, which was included in selling, general and administrative expense in the consolidated statements of operations in the year of acquisition. The allocation of the purchase price presented above is based upon management's estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are estimated at their historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships,footwear across snow sports, cycling, hiking/trekking, golf, running, court sports, workwear as well as expected future synergies.headwear and medical bracing. The goodwillsystem consists of $93.0 million reflects the strategicthree integral parts: a micro-adjustable dial, high-tensile lightweight laces, and low friction lace guides creating a superior alternative to laces, buckles, Velcro, and other traditional closure mechanisms. Each unique BOA configuration is engineered for fast, effortless, precision fit, of 5.11 in the Company's branded products business and is not expected to be deductible for income tax purposes.backed by The purchase accounting for 5.11 was finalized during the fourth quarter of 2016, with the changes from the provisional purchase price allocation related to the settlement of working capital and the recording of a change in the deferred taxes related to a reduction of net operating loss carryforwards.
The intangible assets recorded related to the 5.11 acquisition are as follows (in thousands):
|
| | | | | | |
| Intangible assets | | Amount | | Estimated Useful Life |
| Trade name | | $ | 48,665 |
| | 15 years |
| Customer relationships | | 75,218 |
| | 15 years |
| Technology | | 4,007 |
| | 10 years |
| | | $ | 127,890 |
| | |
The customer relationships intangible asset was valued at $75.2 million using an excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on and of the other assets utilized in the business. Customer relationships intangible asset was derived using a risk-adjusted discount rate. The tradename intangible asset and the design patent technology asset were valued using a royalty savings methodology, in which an asset is valuable to the extent that the ownership of the asset relieves the company from the obligation of paying royalties for the benefits generated by the asset.
Unaudited pro forma information
The following unaudited pro forma data for the years ended December 31, 2017 and 2016 gives effect to the acquisition of Crosman and 5.11 Tactical, as described above, as if the acquisitions had been completed as of January 1, 2016, and the sale of Tridien as if the disposition had been completed as of January 1, 2016. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period.
|
| | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2017 | | 2016 |
| Net revenues | $ | 1,311,375 |
| | $ | 1,282,509 |
|
| Gross profit | 458,613 |
| | 440,095 |
|
| Operating income | 28,920 |
| | 29,004 |
|
| Net income from continuing operations | 36,590 |
| | 50,591 |
|
| Net income from continuing operations attributable to Holdings | 30,969 |
| | 48,632 |
|
| Basic and fully diluted net income (loss) per share attributable to Holdings | (0.39 | ) | | 0.40 |
|
Other acquisitions
Ergobaby
On May 11, 2016, the Company's Ergobaby subsidiary acquired all of the outstanding membership interests in New Baby Tula LLC ("Baby Tula"), a maker of premium baby carriers, toddler carriers, slings, blankets and wraps. The purchase price was $73.8 million, net of transaction costs, plus a potential earn-out of $8.2 million based on 2017 financial performance. Ergobaby paid $0.8 million in transaction costs in connection with the acquisition. Ergobaby funded the acquisition and payment of related transaction costs through the issuance of an additional $68.2 million in intercompany loans with the Company, and the issuance of $8.2 million in Ergobaby shares to the selling shareholders. The fair value of the Ergobaby shares issued to the selling shareholders was determined based on a model that multiplies the trailing twelve months earnings before interest, taxes, depreciation and amortization by an estimated enterprise value multiple to determine an estimated fair value. The fair value calculation assumes proceeds from the conversion of outstanding stock options, deducts the carrying value of debt at Ergobaby and estimated selling costs of the entity, and divides the resulting amount by the total number of outstanding shares, including converted stock options, to determine a per share value for the stock issued. The Company funded the additional intercompany loans used for the acquisition with available cash on the balance sheet and a draw on the 2014 Revolving Credit Facility. Ergobaby recorded a purchase price allocation of $13.2 million in goodwill, which is expected to be deductible for income tax purposes, $55.3 million in intangible assets comprised of $52.9 million in finite lived tradenames, $1.7 million in non-compete agreements; and $0.7 million in customer relationships, and $4.8 million in inventory step-up. The inventory step-up has been charged to cost of goods sold during the third and fourth quarters of 2016. In addition, the earn-out provision of the purchase price was allocated a fair value of $3.8 million. The remainder of the purchase consideration was allocated to net assets acquired. The Company finalized the purchase accounting for the Baby Tula acquisition during the fourth quarter of 2016. In the fourth quarter of 2017, Ergobaby determined that the earn-out related to the Baby Tula acquisition would not be paid out and reversed the fair value of the earn-out, recording the reversal in operating income.
Clean Earth
On June 1, 2016, the Company's Clean Earth subsidiary acquired certain of the assets and liabilities of EWS Alabama, Inc. ("EWS"). Clean Earth funded the acquisition and the related transaction costs through the issuance of additional intercompany debt with the Company. Based in Glencoe, Alabama, EWS provides a range of hazardous and non-hazardous waste management services from a fully permitted hazardous waste RCRA Part B facility. The Company funded the additional intercompany loans with Clean Earth through a draw on its 2014 Revolving Credit Facility. In connection with the acquisition, Clean Earth recorded a purchase price allocation of $3.6 million in goodwill and $12.1 million in intangible assets. The Company finalized the purchase price during the fourth quarter of 2016.
On April 15, 2016, Clean Earth acquired certain assets of Phoenix Soil, LLC ("Phoenix Soil") and WIC, LLC (together with Phoenix Soil, the "Sellers"). Phoenix Soil is based in Plainville, CT and provides environmental services for nonhazardous contaminated soil materials with a primary focus on soil. Phoenix Soil recently completed its transition to a new 58,000 square foot thermal desorption facility owned by WIC, LLC. The acquisition increases Clean Earth's soil treatment capabilities and expand its geographic footprint into New England. Clean Earth financed the acquisition and payment of related transaction costs through the issuance of additional intercompany loans with the Company. The Company used cash on hand to fund the purchase price of Phoenix Soil. In connection with the acquisition, Clean Earth recorded a purchase price allocation of $3.2 million in goodwill and $5.6 million in intangible assets in the second quarter of 2016. The Company finalized the purchase price during the fourth quarter of 2016.
Sterno
On January 22, 2016, Sterno, a wholly owned subsidiary of the company, acquired all of the outstanding stock of Northern International, Inc. ("Sterno Home"), for a total purchase price of approximately $35.8 million (C$50.6 million), plus a potential
earn-out opportunity payable over the next two years up to a maximum amount of $1.8 million (C$2.5 million). The contingent consideration was fair valued at $1.5 million, based on probability weighted models of the achievement of certain performance based financial targets. Refer to Note I - "Fair Value Measurement" for a description of the valuation technique used to fair value the contingent consideration. Headquartered in Coquitlam, British Columbia, Canada, Sterno Home sells flameless candles and outdoor lighting products through the retail segment. Sterno financed the acquisition and payment of the related transaction costs through the issuance of an additional $37.0 million in intercompany loans with the Company.In connection with the acquisition, Sterno recorded a purchase price allocation of $6.0 million of goodwill, which is not expected to be deductible for income tax purposes, $12.7 million in intangible assets and $1.2 million in inventory step-up. In addition, the earn-out provision of the purchase price was allocated a fair value of $1.5 million. The remainder of the purchase consideration was allocated to net assets acquired. Sterno incurred $0.4 million in acquisition related costs in connection with the Sterno Home acquisition.
Note D — Discontinued Operations
Sale of Tridien
On September 21, 2016, the Company sold its majority owned subsidiary, Tridien, based on an enterprise value of $25 million. After the allocation of sale proceeds to non-controlling interest holders and the payment of transaction expenses, the Company received approximately $22.7 million in net proceeds related to its debt and equity interests in Tridien. The Company recognized a gain of $1.7 million in September 2016 as a result of the sale of Tridien. Approximately $1.6 million of the proceeds received by the Company from the sale of Tridien have been reserved as support for the Company's indemnification obligations for future claims against Tridien that the Company may be liable for under the terms of the Tridien sale agreement.
Summarized operating results for Tridien for the previous years through the date of disposition were as follows (in thousands):
|
| | | | | | | |
| (in thousands) | For the period January 1, 2016 through disposition | | Year ended December 31, 2015 |
| Net sales | $ | 45,951 |
| | $ | 77,406 |
|
| Gross profit | 7,917 |
| | 13,137 |
|
| Operating income | 437 |
| | (8,703 | ) |
| Income from continuing operations before income taxes | 488 |
| | (8,696 | ) |
| Provision for income taxes | 15 |
| | (27 | ) |
Income from discontinued operations (1) | $ | 473 |
| | $ | (8,669 | ) |
(1) The results of operations for the period from January 1, 2016 through the date of disposition, and for the year ended December 31, 2015 exclude $1.1 million and $1.1 million, respectively, of intercompany interest expense.
Sale of CamelBak
On August 3, 2015, the Company sold its majority owned subsidiary, CamelBak, based on a total enterprise value of $412.5 million. The CamelBak purchase agreement contains customary representations, warranties, covenants and indemnification provisions, and the transaction was subject to customary working capital adjustments.
The Company received approximately $367.8 million in cash related to its debt and equity interests in CamelBak after payments to noncontrolling shareholders and payment of all transaction expenses. Under the terms of the LLC agreement, the Allocation Member has the right to defer a portion of the distribution for the CamelBak sale. The Allocation member deferred the profit allocation from the sale of CamelBak and the loss from the sale of American Furniture was used to net the calculation of the high water mark from the Camelback sale. The result was a net distribution of $14.6 million that was paid during the fourth quarter of 2015. (Refer to "Note N - Stockholders' Equity" for a discussion of the profit allocation paid as a result of the sale of CamelBak.) The Company recognized a gain of $164.0 million, net of tax, during 2015 as a result of the sale of CamelBak, which was subject to final settlement during 2016. During the third quarter of 2016, the Company, settled the outstanding working capital adjustments related to CamelBak, resulting in the recognition of additional gain on the sale of business of $0.6 million during the quarter ended September 30, 2016.
Summarized operating results for CamelBak through the date of disposition were as follows (in thousands):
|
| | | | |
| (in thousands) | | For the period January 1, 2015 through disposition |
| Net sales | | $ | 96,519 |
|
| Gross profit | | 41,415 |
|
| Operating income | | 14,348 |
|
| Income from continuing operations before income taxes | | 16,607 |
|
| Provision for income taxes | | 5,010 |
|
Income from discontinued operations (1) | | $ | 11,597 |
|
(1) The results for the period from January 1, 2015 through disposition exclude $5.4 million of intercompany interest expense.
Sale of AFM
On October 5, 2015, the Company sold its majority owned subsidiary, American Furniture, for a sale price of $24.1 million. The Company received approximately $23.5 million in net proceeds related to its debt and equity interests in American Furniture after payment of all transaction expenses. The Company recognized a loss on the sale of American Furniture of $14.3 million. This loss was recognized during the quarter ended September 30, 2015 based on the initial write-down of American Furniture's carrying amounts to fair value.
Summarized operating results for American Furniture for the previous years through the date of disposition were as follows (in thousands):
|
| | | | |
| (in thousands) | | For the period January 1, 2015 through disposition |
| Net sales | | $ | 122,420 |
|
| Gross profit | | 11,613 |
|
| Operating income | | 4,126 |
|
| Income from continuing operations before income taxes | | 4,134 |
|
| Provision for income taxes | | 81 |
|
Income from discontinued operations (1) | | $ | 4,053 |
|
(1) The results for the period from January 1, 2015 through disposition exclude $1.5 million of intercompany interest expense.
Note E — Operating Segment Data
At December 31, 2017, the Company had nine reportable operating segments. Each operating segment represents a platform acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products from which each segment derives its revenues is as follows:
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.
Crosman 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. CrosmanBOA Lifetime Guarantee. BOA is headquartered in Bloomfield, New York.
Denver, Colorado and has offices in Austria, Greater China, South Korea, and Japan.•Ergobaby, headquartered in Los Angeles,Torrance, California, is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, strollers and related products. Ergobaby primarily sells its
Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than 50% of its sales from outside of the United States.
Liberty Safe•Lugano Diamonds is a leading designer, manufacturer and marketer of high-end, one-of-a-kind jewelry sought after by some of the world’s most discerning clientele. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art and philanthropic community. Lugano is headquartered in Newport Beach, California.
•Marucci Sports is a leading designer, manufacturer, and marketer of premium home, officewood and gun safes in North America. From its over 300,000 square foot manufacturing facility, Liberty produces a wide range of homemetal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and gun safe models in a broad assortment of sizes, featuresoff-field apparel, and styles. Libertyother baseball and softball equipment used by professional and amateur athletes. Marucci also develops and licenses franchises for sports training facilities. Marucci is headquartered in Payson, Utah.
Baton Rouge, Louisiana.Manitoba Harvest•Velocity Outdoor is a pioneerleading designer, manufacturer, and leader inmarketer of airguns, archery products, laser aiming devices and related accessories. Velocity Outdoor offers its products under the manufacturehighly recognizable Crosman, Benjamin, Ravin, LaserMax and distribution of branded, hemp-based foodsCenterpoint brands that are available through national retail
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
chains, mass merchants, dealer and hemp-based ingredients. Manitoba Harvest’s products, which include Hemp Hearts™, Hemp Heart Bites™, and Hemp protein powders, are currently carried in over 13,000 retail stores across the U.S. and Canada. Manitoba Harvestdistributor networks. Velocity Outdoor is headquartered in Winnipeg, Manitoba.
Bloomfield, New York.Advanced Circuits, an electronic components manufacturing company,•Altor Solutions is a providerdesigner and manufacturer of small-run, quick-turncustom molded protective foam solutions and volume production rigid printed circuit boards. ACI manufacturesoriginal equipment manufacturer components made from expanded polystyrene and delivers custom printed circuit boardsexpanded polypropylene. Altor provides products to customers primarily in North America. ACIa variety of end markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products. Altor is headquartered in Aurora, Colorado.
Scottsdale, Arizona and operates 17 molding and fabricating facilities across North America.•Arnold is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, general industrial, motorsport/automotive, oil and gas, medical, general industrial, electric utility,energy, reprographics and advertising specialty markets.specialties. Arnold produces high performance permanent magnets (PMAG), turnkey electric motors ("Ramco"), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag)(Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide. Arnold is headquartered in Rochester, New York.
Clean Earth provides environmental services for a variety of contaminated materials including soils dredged materials, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles waste streams generated in multiple end markets such as power, construction, oil and gas, medical, infrastructure, industrial and dredging. Clean Earth is headquartered in Hatsboro, Pennsylvania and operates 18 facilities in the eastern United States.
•Sternois a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry and flameless candles, and outdoor lighting products, scented wax cubes and warmer products for consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, scented wax cubes and warmer products used for home decor and fragrance systems, catering equipment and outdoor lighting products. Sterno is headquartered in Corona, California.
The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business. All our operating segments are deemed reporting units for purposes of annual or event-driven goodwill impairment testing, with the exception of Arnold which has three reporting units (PMAG, Precision Thin Metals and Flexmag). There were no significant inter-segment transactions.
Summary of Operating Segments
| | | | | | | | | | | | | | | | | |
| Net Revenues | Year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| 5.11 | $ | 444,963 | | | $ | 401,106 | | | $ | 388,645 | |
| BOA | 165,150 | | | 25,278 | | | — | |
| Ergobaby | 93,631 | | | 74,728 | | | 89,995 | |
| Lugano | 54,047 | | | — | | | — | |
| Marucci | 118,166 | | | 43,442 | | | — | |
| Velocity Outdoor | 270,426 | | | 215,996 | | | 147,842 | |
| | | | | |
| Altor Solutions | 180,217 | | | 130,046 | | | 121,424 | |
| Arnold | 139,941 | | | 98,990 | | | 119,948 | |
| Sterno | 375,127 | | | 369,981 | | | 395,444 | |
| Total | 1,841,668 | | | 1,359,567 | | | 1,263,298 | |
| Reconciliation of segment revenues to consolidated revenues: | | | | | |
| Corporate and other | — | | | — | | | — | |
| Total consolidated revenues | 1,841,668 | | | 1,359,567 | | | 1,263,298 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| Net Revenues | Year ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2015 |
| 5.11 | $ | 309,999 |
| | $ | 109,792 |
| | $ | — |
|
| Crosman | 78,387 |
| | — |
| | — |
|
| Ergobaby | 102,969 |
| | 103,348 |
| | 86,506 |
|
| Liberty | 91,956 |
| | 103,812 |
| | 101,146 |
|
| Manitoba Harvest | 55,699 |
| | 59,323 |
| | 17,423 |
|
| ACI | 87,782 |
| | 86,041 |
| | 87,532 |
|
| Arnold | 105,580 |
| | 108,179 |
| | 119,994 |
|
| Clean Earth | 211,247 |
| | 188,997 |
| | 175,386 |
|
| Sterno | 226,110 |
| | 218,817 |
| | 139,991 |
|
| Total | 1,269,729 |
| | 978,309 |
| | 727,978 |
|
| Reconciliation of segment revenues to consolidated revenues: | | | | | |
| Corporate and other | — |
| | — |
| | — |
|
| Total consolidated revenues | $ | 1,269,729 |
| | $ | 978,309 |
| | $ | 727,978 |
|
| | | | | | | | | | | | | | | | | |
Segment Profit (Loss) (1) | Year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| 5.11 | $ | 39,374 | | | $ | 30,087 | | | $ | 22,408 | |
| BOA | 33,976 | | | (1,021) | | | — | |
| Ergobaby | 9,087 | | | 5,194 | | | 10,404 | |
| Lugano | 9,923 | | | — | | | — | |
| Marucci | 16,419 | | | (4,272) | | | — | |
Velocity Outdoor (2) | 39,725 | | | 24,925 | | | (27,138) | |
| | | | | |
| Altor Solutions | 17,962 | | | 15,939 | | | 14,292 | |
| Arnold | 11,988 | | | 2,096 | | | 8,361 | |
| Sterno | 19,877 | | | 25,772 | | | 44,810 | |
| Total | 198,331 | | | 98,720 | | | 73,137 | |
| Reconciliation of segment profit (loss) to consolidated income from continuing operations before income taxes: | | | | | |
| Interest expense, net | (58,839) | | | (45,769) | | | (58,218) | |
| Other income (expense), net | (1,184) | | | (2,459) | | | (2,046) | |
| Corporate and other | (95,112) | | | (46,058) | | | (72,973) | |
| Total consolidated income (loss) from continuing operations before income taxes | $ | 43,196 | | | $ | 4,434 | | | $ | (60,100) | |
(1)Segment profit (loss) represents operating income (loss).
(2)Velocity Outdoor - Operating loss from Velocity Outdoor for the year ended December 31, 2019 includes $32.9 million in goodwill impairment.
| | | | | | | | | | | | | | | | | |
| Depreciation and Amortization Expense | Year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| 5.11 | $ | 22,048 | | | $ | 21,085 | | | $ | 21,131 | |
| BOA | 19,999 | | | 5,515 | | | — | |
| Ergobaby | 8,405 | | | 8,169 | | | 8,531 | |
| Lugano | 1,881 | | | — | | | — | |
| Marucci | 8,513 | | | 10,109 | | | — | |
| Velocity Outdoor | 12,451 | | | 12,555 | | | 12,984 | |
| | | | | |
| Altor Solutions | 12,700 | | | 12,474 | | | 12,183 | |
| Arnold | 8,728 | | | 6,710 | | | 6,459 | |
| Sterno | 22,918 | | | 22,059 | | | 22,034 | |
| Total | 117,643 | | | 98,676 | | | 83,322 | |
| Reconciliation of segment to consolidated total: | | | | | |
| Amortization of debt issuance costs and debt premiums/ discounts | 2,896 | | | 2,232 | | | 3,773 | |
| Consolidated total | $ | 120,539 | | | $ | 100,908 | | | $ | 87,095 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
Segment Profit (Loss) (1) | Year ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2015 |
5.11 (2) | $ | (7,121 | ) | | $ | (10,153 | ) | | $ | — |
|
Crosman (3) | 1,308 |
| | — |
| | — |
|
| Ergobaby | 24,503 |
|
| 17,151 |
|
| 22,157 |
|
| Liberty | 9,475 |
|
| 13,234 |
|
| 11,858 |
|
Manitoba Harvest (4) | (9,332 | ) | | 321 |
| | (6,150 | ) |
ACI | 23,575 |
|
| 22,718 |
|
| 24,144 |
|
Arnold (5) | (5,693 | ) |
| (12,921 | ) |
| 7,584 |
|
| Clean Earth | 12,037 |
| | 7,929 |
| | 11,013 |
|
| Sterno | 19,194 |
| | 18,799 |
| | 13,200 |
|
| Total | 67,946 |
| | 57,078 |
| | 83,806 |
|
| Reconciliation of segment profit (loss) to consolidated income from continuing operations before income taxes: | | | | | |
| Interest expense, net | (27,623 | ) | | (24,651 | ) | | (25,924 | ) |
| Other income (expense), net | 2,634 |
| | (2,919 | ) | | (2,323 | ) |
| Gain (loss) on equity method investment | (5,620 | ) | | 74,490 |
| | 4,533 |
|
| Corporate and other | (44,744 | ) | | (40,780 | ) | | (36,100 | ) |
| Total consolidated (loss) income from continuing operations before income taxes | $ | (7,407 | ) | | $ | 63,218 |
| | $ | 23,992 |
|
| |
(1)
| Segment profit (loss) represents operating income (loss). |
| |
(2)
| 5.11 - The year ended December 31, 2017 includes $21.7 million cost of goods sold expense related to the amortization of the step-up in inventory basis resulting from the purchase price allocation of 5.11, and $2.3 million in integration services fees paid to CGM. The year ended December 31, 2016 includes $2.1 million of acquisition related costs incurred in connection with the acquisition of 5.11, $17.4 million of cost of goods sold expense related to the amortization of the step-up in inventory basis resulting from the purchase price allocation of 5.11, and $1.2 million in integration services fees paid to CGM.
|
| |
(3)
| Crosman - The year ended December 31, 2017 includes $1.8 million in acquisition related costs, $3.3 million cost of goods sold expense related to the amortization of the step-up in inventory basis resulting from the purchase price allocation of Crosman, and $0.75 million in integration services fees paid to CGM.
|
| |
(4)
| Manitoba Harvest - The year ended December 31, 2017 includes $8.5 million in impairment expense related to goodwill and the Manitoba Harvest tradename. The year ended December 31, 2016 includes $0.5 million in integration services fees paid to CGM. Results from the year ended December 31, 2015 include $1.5 million of acquisition related costs, $3.1 million of cost of goods sold expense related to the amortization of the step-up in inventory basis resulting from the purchase price allocation of Manitoba Harvest, and $0.5 million in integration service fees paid to CGM. |
| |
(5)
| Arnold - Operating loss from Arnold for the years ended December 31, 2017 and 2016 includes $8.9 million and $16.0 million, respectively, in goodwill impairment expense related to the PMAG reporting unit. Refer to "Note H - Goodwill and Intangible Assets." |
| | | | | | | | | | | | | | | | | | | | | | | |
| Accounts Receivable | | Identifiable Assets |
| December 31, | | December 31 |
| (in thousands) | 2021 | | 2020 | | 2021 (1) | | 2020 (1) |
| 5.11 | $ | 50,461 | | | $ | 50,082 | | | $ | 354,666 | | | $ | 354,033 | |
| BOA | 2,387 | | | 1,492 | | | 263,052 | | | 269,438 | |
| Ergobaby | 11,167 | | | 5,034 | | | 86,530 | | | 91,293 | |
| Lugano | 27,812 | | | — | | | 233,720 | | | — | |
| Marucci | 23,261 | | | 10,172 | | | 146,087 | | | 129,116 | |
| Velocity | 36,017 | | | 40,126 | | | 219,545 | | | 191,180 | |
| | | | | | | |
| Altor Solutions | 38,457 | | | 34,088 | | | 205,631 | | | 164,800 | |
| Arnold | 20,372 | | | 13,237 | | | 101,591 | | | 75,958 | |
| Sterno | 72,179 | | | 70,467 | | | 244,338 | | | 251,307 | |
| Sales allowance accounts | (13,851) | | | (17,970) | | | — | | | — | |
| Total | 268,262 | | | 206,728 | | | 1,855,160 | | | 1,527,125 | |
| Reconciliation of segment to consolidated totals: | | | | | | | |
| Corporate and other identifiable assets | — | | | — | | | 106,011 | | | 8,917 | |
| Assets held for sale | — | | | — | | | 99,423 | | | 101,864 | |
| Assets of discontinued operations | — | | | — | | | — | | | 87,377 | |
| Total | $ | 268,262 | | | $ | 206,728 | | | $ | 2,060,594 | | | $ | 1,725,283 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Accounts Receivable | | Identifiable Assets | | Depreciation and Amortization |
| | December 31, | | December 31 | | Year ended December 31, |
| | 2017 | | 2016 | | 2017 (1) | | 2016 (1) | | 2017 | | 2016 | | 2015 |
| 5.11 | $ | 60,481 |
| | $ | 49,653 |
| | $ | 324,068 |
| | $ | 311,560 |
| | $ | 39,934 |
| | $ | 23,414 |
| | $ | — |
|
| Crosman | 20,396 |
| | — |
| | 129,033 |
| | — |
| | 7,726 |
| | — |
| | — |
|
| Ergobaby | 12,869 |
| | 11,018 |
| | 105,672 |
| | 113,814 |
| | 11,419 |
| | 7,769 |
| | 3,475 |
|
| Liberty | 13,679 |
| | 13,077 |
| | 26,715 |
| | 26,344 |
| | 1,657 |
| | 2,758 |
| | 3,518 |
|
| Manitoba Harvest | 5,663 |
| | 6,468 |
| | 95,046 |
| | 97,977 |
| | 6,344 |
| | 6,403 |
| | 5,192 |
|
| ACI | 6,525 |
| | 6,686 |
| | 14,522 |
| | 16,541 |
| | 3,323 |
| | 3,476 |
| | 2,996 |
|
| Arnold | 14,804 |
| | 15,195 |
| | 66,979 |
| | 64,209 |
| | 6,428 |
| | 9,079 |
| | 8,766 |
|
| Clean Earth | 50,599 |
| | 45,619 |
| | 183,508 |
| | 193,250 |
| | 21,647 |
| | 21,157 |
| | 20,410 |
|
| Sterno | 40,087 |
| | 38,986 |
| | 125,937 |
| | 134,661 |
| | 11,573 |
| | 11,549 |
| | 7,963 |
|
| Sales allowance accounts | (9,995 | ) | | (5,511 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | 215,108 |
| | 181,191 |
| | 1,071,480 |
| | 958,356 |
| | 110,051 |
| | 85,605 |
| | 52,320 |
|
| Reconciliation of segment to consolidated totals: | | | | | | | | | | | | | |
| Corporate and other identifiable assets | — |
| | — |
| | 2,026 |
| | 145,971 |
| | — |
| | — |
| | 755 |
|
| Amortization of debt issuance costs and original issue discount | — |
| | — |
| | — |
| | — |
| | 5,007 |
| | 3,565 |
| | 2,883 |
|
| Total | $ | 215,108 |
| | $ | 181,191 |
| | $ | 1,073,506 |
| | $ | 1,104,327 |
| | $ | 115,058 |
| | $ | 89,170 |
| | $ | 55,958 |
|
Geographic Information
Net Revenues
The segments in the table below had revenues from geographic locations outside the United States in each of the periods presented. Revenue attributable to Canada represented approximately 22.4%10.9% of total international revenuerevenues in 2017, 24.0%2021, 14.8% of total international revenuerevenues in 20162020, and 14.6%14.0% of total international revenuerevenues in 2015.2019. Revenue attributable to any other individual foreign country was not material in 2017, 20162021, 2020 or 2015.2019.
|
| | | | | | | | | | | | |
| Net Revenues | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| United States | | $ | 1,020,948 |
| | $ | 798,671 |
| | $ | 623,246 |
|
| Canada | | 55,556 |
| | 42,241 |
| | 14,310 |
|
| Europe | | 89,661 |
| | 58,730 |
| | 46,431 |
|
| Asia Pacific | | 55,082 |
| | 52,612 |
| | 40,872 |
|
| Other international | | 48,482 |
| | 26,055 |
| | 3,119 |
|
| Total net revenues | | $ | 1,269,729 |
| | $ | 978,309 |
| | $ | 727,978 |
|
Identifiable Assets
The Company's Manitoba Harvest segment is based in Canada, and severalSeveral of the Company's operating segments have subsidiaries with assets located outside of the United States. The following table presents identifiable assets by geographic area:
| | | | | | | | | | | |
| Identifiable Assets | December 31, |
| (in thousands) | 2021 | | 2020 |
| United States | $ | 1,894,754 | | | $ | 1,473,100 | |
| Canada | 688 | | | 1,363 | |
| Europe | 36,075 | | | 37,621 | |
| Other international | 29,654 | | | 23,958 | |
Total identifiable assets (1) | $ | 1,961,171 | | | $ | 1,536,042 | |
(1) Does not include assets held for sale or assets of discontinued operations during the years ended December 31, 2021 and 2020.
|
| | | | | | | |
| Identifiable Assets | December 31, |
| | 2017 | | 2016 |
| United States | $ | 878,322 |
| | $ | 890,537 |
|
| Canada | 130,033 |
| | 145,032 |
|
| Europe | 47,574 |
| | 41,285 |
|
| Other international | 17,577 |
| | 27,473 |
|
| Total identifiable assets | $ | 1,073,506 |
| | $ | 1,104,327 |
|
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note FG - Inventory and Property, Plant, and Equipment
| | | | | | | | | | | |
| Inventory | December 31, |
| (in thousands) | 2021 | | 2020 |
| Raw materials and supplies | $ | 105,654 | | | $ | 75,285 | |
| Work-in-process | 27,026 | | | 13,151 | |
| Finished goods | 457,274 | | | 283,380 | |
| 589,954 | | | 371,816 | |
| Less: obsolescence reserve | (27,870) | | | (21,222) | |
| Total | $ | 562,084 | | | $ | 350,594 | |
| | | | | | | | | | | |
| Property, plant and equipment | December 31, |
| (in thousands) | 2021 | | 2020 |
| Machinery and equipment | $ | 206,919 | | | $ | 169,980 | |
| Office furniture, computers and software | 52,794 | | | 45,223 | |
| Leasehold improvements | 56,988 | | | 45,305 | |
| Construction in process | 13,345 | | | 10,817 | |
| Buildings and land | 15,340 | | | 15,713 | |
| 345,386 | | | 287,038 | |
| Less: accumulated depreciation | (166,993) | | | (133,385) | |
| Total | $ | 178,393 | | | $ | 153,653 | |
Depreciation expense was approximately $37.3 million, $31.1 million and $29.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Note H — InvestmentGoodwill and Intangible Assets
Investment in FOXGoodwill
Fox Factory Holdings Corp. ("FOX"), a former majority owned subsidiary of the Company that is publicly traded on the NASDAQ Stock Market under the ticker "FOXF," is a designer, manufacturer and marketer of high-performance ride dynamic products used primarily for bicycles, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. The Company held a 41%, ownership interest in FOX as of January 1, 2016, and a 14% ownership interest as of January 1, 2017. The investment in FOX was accounted for using the fair value option.
In March 2016, FOX closed on a secondary public offering of 2,500,000 shares of FOX common shares held by the Company. Concurrently with the closing of the March Offering, FOX repurchased 500,000 shares of FOX common stock held by the Company. As a result of acquisitions of various businesses, the Company has significant intangible assets on its balance sheet that include goodwill and indefinite-lived intangibles. The Company’s goodwill and indefinite-lived intangibles are tested and reviewed for impairment annually as of March 31st or more frequently if facts and circumstances warrant by comparing the fair value of each reporting unit to its carrying value. Each of the Company’s businesses represent a reporting unit.
A reconciliation of the change in the carrying value of goodwill by segment for the years ended December 31, 2021 and 2020 are as follows (in thousands):
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2021 | | Acquisitions (1) | | Balance at December 31, 2021 |
| 5.11 | | $ | 92,966 | | | $ | — | | | $ | 92,966 | |
| BOA | | 254,153 | | | — | | | 254,153 | |
| Ergobaby | | 63,531 | | | (2,083) | | | 61,448 | |
| Lugano | | — | | | 83,458 | | | 83,458 | |
| Marucci | | 68,170 | | | 39,685 | | | 107,855 | |
| Velocity Outdoor | | 30,079 | | | — | | | 30,079 | |
| | | | | | |
| Altor Solutions | | 75,369 | | | 15,474 | | | 90,843 | |
| Arnold | | 26,903 | | | 12,364 | | | 39,267 | |
| Sterno | | 55,336 | | | — | | | 55,336 | |
| | | | | | |
| Total | | $ | 666,507 | | | $ | 148,898 | | | $ | 815,405 | |
(1) Acquisition of businesses during the year ended December 31, 2021 includes the acquisition of Lugano by the Company, and add-on acquisitions at Altor, Arnold, and Marucci.
| | | | | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2020 | | Acquisitions (1) | | | | Balance at December 31, 2020 |
| 5.11 | | $ | 92,966 | | | $ | — | | | | | $ | 92,966 | |
| BOA | | — | | | 254,153 | | | | | 254,153 | |
| Ergobaby | | 61,031 | | | 2,500 | | | | | 63,531 | |
| Marucci | | — | | | 68,170 | | | | | 68,170 | |
| Velocity Outdoor | | 30,079 | | | — | | | | | 30,079 | |
| ACI | | — | | | — | | | | | — | |
| Altor Solutions | | 72,708 | | | 2,661 | | | | | 75,369 | |
| Arnold | | 26,903 | | | — | | | | | 26,903 | |
| Sterno | | 55,336 | | | — | | | | | 55,336 | |
| | | | | | | | |
| Total | | $ | 339,023 | | | $ | 327,484 | | | | | $ | 666,507 | |
(1) Acquisition of businesses during the year ended December 31, 2020 includes the acquisitions of Marucci and BOA by the Company, and add-on acquisitions at Altor and Ergobaby.
Approximately $223.3 million of goodwill is deductible for income tax purposes at December 31, 2021.
2021 Annual Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform quantitative goodwill impairment testing. We determined that the Arnold reporting unit required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on qualitative factors alone. For the reporting units that were tested only on a qualitative basis for the 2021 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded the carrying value of these reporting units.
The quantitative test of Arnold was performed using an income approach to determine the fair value of the reporting unit. The discount rate used in the income approach was 13.0% and the results of the quantitative impairment testing indicated that the fair value of the Arnold reporting unit exceeded the carrying value by 272%.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2020 Annual Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform quantitative goodwill impairment testing. We determined that the Ergobaby, Altor Solutions and Velocity reporting units required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on qualitative factors alone. For the reporting units that were tested only on a qualitative basis for the 2020 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded the carrying value of these reporting units.
The quantitative tests of Ergobaby, Altor Solutions and Velocity were performed using an income approach to determine the fair value of the reporting units. For Ergobaby, the discount rate used in the income approach was 15.9% and the results of the quantitative impairment testing indicated that the fair value of the Ergobaby reporting unit exceeded the carrying value by 14.0%. For Altor, the discount rate used in the income approach was 13.3%, and the results of the quantitative impairment testing indicated that the fair value of the Altor reporting unit exceeded the carrying value by 3.8%. For Velocity, the discount rate used in the income approach was 12.8%, and the results of the quantitative impairment testing indicated that the fair value of the Velocity reporting unit exceeded the carrying value by 16.4%.
2019 Interim Impairment Testing
Velocity Outdoor
The Company performed interim quantitative impairment testing of Velocity Outdoor at September 30, 2019. As a result of operating results below forecasts in the current period as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods, the Company determined that a triggering event occurred in the third quarter of 2019 and performed an interim impairment test of goodwill as of September 30, 2019. The Company used an income approach for the impairment test, whereby we estimate the fair value of the reporting unit based on the present value of future cash flows. Cash flow projections are based on management's estimate of revenue growth rates and operating margins, and take into consideration industry and market conditions as well as company specific economic factors. The Company used a weighted average cost of capital of 12.2% in the income approach. The discount rate used was based on the weighted average cost of capital adjusted for the relevant risk associated with business specific characteristics and Velocity's ability to execute on the projected cash flows. Based on the results of the impairment test, the fair value of Velocity did not exceed the carrying value, indicating that the goodwill at Velocity is impaired. The difference between the carrying value and fair value of the Velocity business was $32.9 million, which the Company has recorded as impairment expense in the accompanying consolidated statement of operations for the year December 31, 2019.
2019 Annual Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform quantitative goodwill impairment testing. All of the Company's reporting units except Liberty were tested qualitatively at March 31, 2019. We determined that the Liberty reporting unit required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on qualitative factors alone. We used an income approach and market approach for the quantitative impairment test that was performed of the Liberty business at March 31, 2019, with equal weighting assigned to each. The discount rate used in the income approach was 14.8%. The results of the quantitative impairment testing indicated that the fair value of the Liberty reporting unit exceeded the carrying value. For the reporting units that were tested qualitatively for the 2019 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded their carrying value.
The following is a summary of the net carrying amount of goodwill at December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Goodwill - gross carrying amount | | $ | 873,150 | | | $ | 724,252 | |
| Accumulated impairment losses | | (57,745) | | | (57,745) | |
| Goodwill - net carrying amount | | $ | 815,405 | | | $ | 666,507 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
Intangible assets are comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted
Average
Useful Lives |
| Customer relationships | $ | 566,805 | | | $ | (180,581) | | | $ | 386,224 | | | $ | 505,657 | | | $ | (148,599) | | | $ | 357,058 | | | 13 |
| Technology and patents | 153,124 | | | (49,898) | | | 103,226 | | | 145,392 | | | (25,552) | | | 119,840 | | | 12 |
| Trade names, subject to amortization | 411,100 | | | (87,178) | | | 323,922 | | | 357,978 | | | (64,478) | | | 293,500 | | | 16 |
| Non-compete agreements | 4,617 | | | (3,502) | | | 1,115 | | | 3,378 | | | (3,159) | | | 219 | | | 4 |
| Other contractual intangible assets | 1,960 | | | (735) | | | 1,225 | | | 210 | | | (210) | | | — | | | 4 |
| 1,137,606 | | | (321,894) | | | 815,712 | | | 1,012,615 | | | (241,998) | | | 770,617 | | | |
| Trade names, not subject to amortization | 56,965 | | | — | | | 56,965 | | | 56,965 | | | — | | | 56,965 | | | |
In-process research and development (1) | — | | | — | | | — | | | 6,500 | | | — | | | 6,500 | | | |
| Total intangibles, net | $ | 1,194,571 | | | $ | (321,894) | | | $ | 872,677 | | | $ | 1,076,080 | | | $ | (241,998) | | | $ | 834,082 | | | |
(1)In-process research and development is considered indefinite lived until the underlying technology becomes viable, at which point the intangible asset will be amortized over the expected useful life. The Company determined that the in-process research and development technology asset acquired in the BOA acquisition achieved viability in the second quarter of 2021, and will be amortized over a ten-year period.
The Company’s amortization expense of intangible assets for the years ended December 31, 2021, 2020 and 2019 totaled $80.3 million, $61.7 million and $53.6 million, respectively.
Estimated charges to amortization expense of intangible assets over the next five years, is as follows, (in thousands):
| | | | | |
| 2022 | $ | 76,799 | |
| 2023 | $ | 75,067 | |
| 2024 | $ | 73,683 | |
| 2025 | $ | 68,566 | |
| 2026 | $ | 65,836 | |
Note I – Debt
Financing Arrangements
2021 Credit Facility
On March 23, 2021, we entered into a Second Amended and Restated Credit Agreement (the "2021 Credit Facility") to amend and restate the 2018 Credit Facility (as previously restated and amended) among the Company, the lenders from time to time party thereto (the “Lenders”), and Bank of America, N.A., as Administrative Agent. The 2021 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. The 2021 Credit Facility provides for revolving loans, swing line loans and letters of credit (the “2021 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million and also permits the Company, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain term loans in an aggregate amount of up to $250 million, subject to certain restrictions and conditions. All amounts outstanding under the 2021 Revolving Credit Facility will become due on March 23, 2026, which is the maturity date of loans advanced under the 2021 Credit Facility.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2018 Credit Facility
On April 18, 2018, the Company entered into an Amended and Restated Credit Agreement (the "2018 Credit Facility"). The 2018 Credit Facility provided for (i) revolving loans, swing line loans and letters of credit (the “2018 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million, and (ii) a $500 million term loan (the “2018 Term Loan”). The Company repaid the outstanding amounts under the 2018 Term Loan in 2019, and used a portion of the proceeds from the issuance of the 2029 Senior Notes to repay the amount outstanding under the 2018 Revolving Credit Facility in March 2021.
Senior Notes
2032 Senior Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% Senior Notes due 2032 (the “2032 Notes” of "2032 Senior Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee (the “Trustee”). The 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is payable in cash on January 15 and July 15 of each year, beginning on July 15, 2022.
The proceeds from the sale of the 2032 Notes was used to repay a portion of our debt under the 2021 Revolving Credit Facility.
2029 Senior Notes
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Senior Notes due 2029 (the "2029 Notes" or "2029 Senior Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2029 Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee (the "Trustee"). The 2029 Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on April 15th and October 15th of each year. The first interest payment date on the 2029 Senior Notes was October 15, 2021. The 2029 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries.
The 2029 Notes rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness, and rank senior in right of payment to all of the Company’s future subordinated indebtedness, if any. The 2029 Notes will be effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, including the indebtedness under the Company’s credit facilities described below. The 2032 Notes Indenture and the 2029 Notes Indenture contains several restrictive covenants including, but not limited to, limitations on the following: (i) the incurrence of additional indebtedness, (ii) restricted payments, (iii) the purchase, redemption or retirement of capital stock or subordinated debt, (iv) dividends and other payments affecting restricted subsidiaries, (v) transactions with affiliates, (vi) asset sales and mergers and consolidations, (vii) future subsidiary guarantees and (viii) incurring liens, (ix) entering into sale-leaseback transactions and (x) making certain investments, subject in each case to certain exceptions
The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in connection with our entry into the 2021 Credit Facility, as described above, and to redeem our 8.000% Senior Notes due 2026 (the “2026 Senior Notes”).
2026 Senior Notes
Our 2026 Senior Notes bore interest at 8.000% per annum and were scheduled to mature on May 1, 2026. On March 2, 2021, pursuant to an indenture, dated as of April 18, 2018 between the Company and U.S. Bank National Association, as trustee ("Trustee"), the Trustee delivered redemption notices, on behalf of the Company, to holders of the Company’s 2026 Senior Notes to redeem the 2026 Senior Notes on April 1, 2021. The principal amount of the 2026 Senior Notes redeemed was $600 million, which represented all of the outstanding principal of the 2026 Senior Notes. The 2026 Senior Notes were redeemed at 100% of their principal, plus an applicable premium, and accrued and unpaid interest as of the redemption date. On March 23, 2021, the proceeds required for the redemption of the 2026 Senior Notes, the applicable premium and accrued interest totaling $647.7 million was
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
irrevocably deposited with the Trustee and held by the Trustee until the date of redemption, April 1, 2021. The redemption of the 2026 Senior Notes resulted in a Loss on Debt Extinguishment of approximately $33.3 million, which is comprised of the premium paid for early redemption of the 2026 Senior Notes, and the expensing of the deferred financing costs and bond premium associated with the 2026 Senior Notes.
The following table provides the Company’s outstanding long-term debt and effective interest rates at December 31, 2021 and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Effective Interest Rate | | Amount | | Effective Interest Rate | | Amount |
| 2029 Senior Notes | 4.89% | | $ | 1,000,000 | | | N/a | | $ | — | |
| 2032 Senior Notes | 5.29% | | 300,000 | | | N/a | | — | |
| 2026 Senior Notes | N/a | | — | | | 7.92% | | 600,000 | |
| Revolving Credit Facility | N/a | | — | | | 2.13% | | 307,000 | |
| | | | | | | |
| Unamortized premiums and debt issuance costs | | | (15,174) | | | | | (7,540) | |
| | | | | | | |
| | | | | | | |
| Long-term debt | | | $ | 1,284,826 | | | | | $ | 899,460 | |
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the issuance of the Company's financing arrangements. In connection with the 2032 Senior Notes offering in November 2021, the Company recorded $4.3 million in deferred financing costs. In addition, the Company recorded $12.0 million in deferred financing costs related to the 2029 Senior Notes offering in March 2021. The net deferred financing costs associated with the Company's 2026 Senior Notes were $7.2 million at March 31, 2021, and were expensed on April 1, 2021, the date of the redemption of the 2026 Senior Notes. In connection with entering into the 2021 Credit Facility, the Company recorded $5.4 million in deferred financing costs.
The 2018 Credit Facility was categorized as a debt modification, and the Company incurred $8.4 million of debt issuance costs, $7.8 million of which were capitalized and will be amortized over the life of the related debt instrument, and $0.6 million that were expensed as costs incurred. For the year ended December 31, 2019, in connection with the repayment of the 2018 Term Loan, the Company wrote-off $12.3 million in deferred financing costs associated with the 2018 Term Loan. The write-off of the deferred financing costs and original issue discount was recorded as loss on debt extinguishment in the accompanying consolidated statement of operations.
Since the Company can borrow, repay and reborrow principal under the 2021 Revolving Credit Facility, the debt issuance costs associated with the 2021 Revolving Credit Facility have been classified as other non-current assets in the accompanying consolidated balance sheet. The debt issuance costs associated with the Senior Notes are classified as a reduction of long-term debt in the accompanying consolidated balance sheets.
The following table summarizes debt issuance costs at December 31, 2021 and December 31, 2020, and the balance sheet classification in each of the periods presents (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Deferred debt issuance costs | $ | 27,784 | | | $ | 16,466 | |
| Accumulated amortization | (6,021) | | | (6,121) | |
| Deferred debt issuance costs, net | $ | 21,763 | | | $ | 10,345 | |
| | | |
| Balance sheet classification: | | | |
| Other noncurrent assets | $ | 6,589 | | | $ | 2,805 | |
| Long-term debt | 15,174 | | | 7,540 | |
| $ | 21,763 | | | $ | 10,345 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Covenants
The Company is subject to certain customary affirmative and restrictive covenants arising under the 2021 Credit Facility. The following table reflects required and actual financial ratios as of December 31, 2021 included as part of the affirmative covenants in the 2021 Credit Facility:
| | | | | | | | | | | | | | |
| Description of Required Covenant Ratio | | Covenant Ratio Requirement | | Actual Ratio |
| | | | |
| Fixed Charge Coverage Ratio | | Greater than or equal to 1.50: 1.00 | | 5.07:1.00 |
| Total Secured Debt to EBITDA Ratio | | Less than or equal to 3.50: 1.00 | | 0.00:1.00 |
| Total Debt to EBITDA Ratio | | Less than or equal to 5.00: 1.00 | | 2.96:1.00 |
A breach of any of these covenants will be an event of default under the 2021 Credit Facility. Upon the occurrence of an event of default under the 2021 Credit Facility, the 2021 Revolving Credit Facility may be terminated, and all outstanding loans and other obligations under the 2021 Credit Facility may become immediately due and payable and any letters of credit then outstanding may be required to be cash collateralized, and the Agent and the Lenders may exercise any rights or remedies available to them under the 2021 Credit Facility. Any such event would materially impair the Company’s ability to conduct its business. As of December 31, 2021, the Company was in compliance with all covenants as defined in the 2021 Credit Facility.
Letters of credit
The 2021 Credit Facility allows for letters of credit in an aggregate face amount of up to $100 million. Letters of credit outstanding at December 31, 2021 totaled $1.0 million and at December 31, 2020 totaled $1.3 million.
Interest Rate Swap
In September 2014, the Company purchased an interest rate swap (the "Swap") with a notional amount of $220 million on our outstanding debt on our Term Loan. The Swap was effective April 1, 2016 through June 6, 2021, the original termination date of the 2014 Term Loan. The agreement required the Company to pay interest on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. In connection with the repayment of the 2018 Term Loan in November 2019, the Company settled the Swap with a payment of $4.9 million, the fair value of the Swap as of the date of settlement.
Interest expense
The following details the components of interest expense in each of the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Interest on credit facilities | $ | 2,669 | | | $ | 2,164 | | | $ | 21,996 | |
| Interest on Senior Notes | 54,441 | | | 42,400 | | | 32,000 | |
| Unused fee on Revolving Credit Facility | 1,598 | | | 1,386 | | | 1,851 | |
| Amortization of debt premium/ discount | (83) | | | (222) | | | — | |
| Unrealized (gains) losses on interest rate derivatives | — | | | — | | | 3,486 | |
| | | | | |
| Other interest expense | 227 | | | 294 | | | 772 | |
| Interest income | (13) | | | (253) | | | (1,887) | |
| Interest expense, net | $ | 58,839 | | | $ | 45,769 | | | $ | 58,218 | |
Note J – Defined Benefit Plan
In connection with the acquisition of Arnold, the Company has a defined benefit plan covering substantially all of Arnold’s employees at its Lupfig, Switzerland location. The benefits are based on years of service and the employees’ highest average compensation during the specific period.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2020, Arnold terminated certain employees at the Switzerland location who were participants in the defined benefit plan. The termination of the employees resulted in a decrease in the accumulated benefit obligation liability in 2020. A curtailment loss of $0.1 million and $0.4 million was recognized during the years ended December 31, 2021 and 2020, respectively.
The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated balance sheets at December 31, 2021 and 2020:
| | | | | | | | | | | |
| December 31, |
| (in thousands) | 2021 | | 2020 |
| Change in benefit obligation: | | | |
| Benefit obligation, beginning of year | $ | 14,025 | | | $ | 14,854 | |
| Service cost | 422 | | | 571 | |
| Interest cost | 38 | | | 31 | |
| Actuarial (gain)/loss | (484) | | | (63) | |
| Plan amendment | (267) | | | (47) | |
| Employee contributions and transfer | 304 | | | 356 | |
| Benefits paid | 253 | | | (153) | |
| Settlement | (1,445) | | | (1,998) | |
| Plan curtailment | — | | | (921) | |
| Foreign currency translation | (535) | | | 1,395 | |
| Benefit obligation | $ | 12,311 | | | $ | 14,025 | |
| Change in plan assets: | | | |
| Fair value of assets, beginning of period | $ | 10,034 | | | $ | 10,108 | |
| Actual return on plan assets | 349 | | | 407 | |
| Company contribution | 324 | | | 385 | |
| Employee contributions and transfer | 304 | | | 356 | |
| Benefits paid | 253 | | | (153) | |
| Settlement | (1,445) | | | (1,998) | |
| Foreign currency translation | (370) | | | 929 | |
| Fair value of assets | 9,449 | | | 10,034 | |
| Funded status | $ | (2,862) | | | $ | (3,991) | |
The unfunded liability of $2.9 million and $4.0 million at December 31, 2021 and 2020, respectively, is recognized in the consolidated balance sheet within other non-current liabilities. Net periodic benefit cost consists of the following:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Service cost | $ | 422 | | | $ | 571 | | | $ | 512 | |
| Interest cost | 38 | | | 31 | | | 132 | |
| Expected return on plan assets | (73) | | | (84) | | | (135) | |
| Amortization of unrecognized loss | (12) | | | 232 | | | 140 | |
| Effect of curtailment | 111 | | | 381 | | | — | |
| Net periodic benefit cost | $ | 486 | | | $ | 1,131 | | | $ | 649 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assumptions used to determine the benefit obligations and components of the net periodic benefit cost at December 31, 2021 and 2020:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| | | |
| Discount rate | 0.35 | % | | 0.20 | % |
| Expected return on plan assets | 0.80 | % | | 0.80 | % |
| Rate of compensation increase | 2.00 | % | | 2.00 | % |
The Company considers the historical level of long-term returns and the current level of expected long-term returns for the plan assets, as well as the current and expected allocation of assets when developing its expected long-term rate of return on assets assumption. The assumptions used for the plan are based upon customary rates and practices for the location of the Company.
Arnold expects to contribute approximately $0.3 million to the defined benefit plan in 2022.
The following presents the benefit payments which are expected to be paid for the plan in each year indicated (in thousands):
| | | | | |
| 2022 | $ | 451 | |
| 2023 | 460 | |
| 2024 | 682 | |
| 2025 | 597 | |
| 2026 | 653 | |
| Thereafter | 2,744 | |
| $ | 5,587 | |
Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market risk and providing adequate liquidity to meet immediate and future benefit payment requirements.
The assets of the plan are reinsured in their entirety with Swiss Life Ltd. (“Swiss Life”) within the framework of the corresponding contracts with Swiss Life Collective BVG Foundation and Swiss Life Complementary Foundation. The assets are guaranteed by the insurance company and pooled with the assets of other participating employers. The allocation of pension plan assets by category in Swiss Life’s group life portfolio is as follows at December 31, 2021:
| | | | | |
| Fixed income bonds and securities | 63 | % |
| Real estate | 20 | % |
| Equities and investment funds | 13 | % |
| Certificates of deposit and cash and cash equivalents | 2 | % |
| Other investments | 2 | % |
| 100 | % |
The plan assets are pooled with assets of other participating employers and are not separable; therefore the fair values of the pension plan assets at December 31, 2021 and 2020 were considered Level 3.
Note K — Stockholders' Equity
Trust Common Shares
The Trust is authorized to issue 500,000,000 Trust common shares and the LLC is authorized to issue a corresponding number of LLC interests. The Company will, at all times, have the identical number of LLC interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trust share is entitled to one vote per share on any matter with respect to which members of the LLC are entitled to vote.
At-The-Market Equity Offering Program
On September 7, 2021, the Company filed a prospectus supplement pursuant to which the Company may, but has no obligation to, issue and sell up to $500 million common shares of the Trust in amounts and at times to be determined by the Company. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions, the trading price of Trust common shares and determinations by us regarding appropriate sources of funding. The Company incurred $0.5 million in total costs related to the ATM program during the year ended December 31, 2021.
In connection with this offering, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. and Goldman Sachs & Co. LLC (each a “Sales Agent” and, collectively, the “Sales Agents”). The Sales Agreement provides that the Company may offer and sell Trust common shares from time to time through the March OfferingSales Agents up to $500 million, in amounts and at times to be determined by the repurchaseCompany. Pursuant to the Sales Agreement, the shares may be offered and sold through each Sales Agent, acting separately, in ordinary brokers’ transactions, to or through a market maker, on or through the New York Stock Exchange or any other market venue where the securities may be traded, in the over-the-counter market, in privately negotiated transactions, in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act or through a combination of shares by FOX,any such methods of sale.
During the year ended December 31, 2021, the Company sold a total of 3,000,0003,837,885 Trust common shares of FOX common stock, withunder the Sales Agreement. For the same period, the Company received total net proceeds of approximately $47.7$115.1 million from these sales, and incurred approximately $2.1 million in commissions payable to the Sales Agents.
Secondary Offering
In May 2020, the Company completed an offering of 5,000,000 Trust common shares at a public offering price of $17.60 per share. The net proceeds to the Company, after deducting the underwriter's discount and offering costs, totaled approximately $83.9 million. Upon completion
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 Trust preferred shares and the Company is authorized to issue a corresponding number of Trust Interests.
Series C Preferred Shares
On November 20, 2019, the Trust issued 4,000,000 7.875% Series C Preferred Shares(the "Series C Preferred Shares") with a liquidation preference of $25.00 per share, and on December 2, 2019, the Trust issued 600,000 of the March Offering and repurchase ofSeries C Preferred Shares which were sold pursuant to an option to purchase additional shares by FOX, the Company's ownership interest in FOX was reducedunderwriters. Total proceeds from approximately 41% to 33%.
In August 2016, FOX closed on a secondary public offering of 4,025,000 shares held by certain FOX shareholders, including the Company. The Company sold a total of 3,500,000 shares of FOX common stock in the August Offering, for total net proceeds of $63.0 million. Upon completionissuance of the August offering,Series C Preferred Shares were $115.0 million, or $111.0 million net of underwriters' discount and issuance costs. Distributions on the Company's ownership of FOX decreased from approximately 33% to approximately 23%.
In November 2016, FOX closed on a secondary offering of 3,500,000 shares of FOX common stock heldSeries C Preferred Shares will be payable quarterly in arrears, when and as declared by the Company, for total net proceeds of $71.8 million. Upon completion of the August offering, our ownership of FOX decreased from approximately 23% to approximately 14%.
In March 2017, FOX closed on a secondary public offering (the "March 2017 Offering") through which the Company sold their remaining 5,108,718 shares in FOX for total net proceeds of $136.1 million. Subsequent to the March 2017 Offering, the Company no longer holds an ownership interest in FOX.
The sale of a portion of the Company's FOX shares in March 2016, August 2016, November 2016 and March 2017 qualified as a Sale Event under the Company's LLC Agreement. During the second quarter, the Company's board of directors on January 30, April 30, July 30, and October 30 of each year, beginning on January 30, 2020, at a rate per annum of 7.875%. Distributions on the Series C Preferred Shares are cumulative and at December 31, 2021, $1.5 million of Series C distributions are accumulated and unpaid. Unless full cumulative distributions on the Series C Preferred Shares have been or contemporaneously are declared and set apart for payment of the Series C Preferred Shares for all past distribution periods, no distribution may be declared or paid for payment on the Trust common shares. The Series C Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the Series C Preferred Shares. The Series C Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after January 30, 2025, at a price of $25.00 per share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding, the redemption date. Holders of Series C Preferred Shares will have no right to require the redemption of the Series C Preferred Shares and there is no maturity date.
If a certain tax redemption event occurs prior to January 30, 2025, the Series C Preferred Shares may be redeemed at the Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such tax redemption event, at a price of $25.25 per share, plus accumulated and unpaid distributions to, but excluding, the redemption date. If a certain fundamental change related to the Series C Preferred Shares or the Company occurs (whether before, on or after January 30, 2025), the Company will be required to repurchase the Series C Preferred Shares at a price of $25.25 per share, plus accumulated and unpaid distributions to, but
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
excluding, the date of purchase. If (i) a fundamental change occurs and (ii) the Company does not give notice prior to the 31st day following the fundamental change to repurchase all the outstanding Series C Preferred Shares, the distribution rate per annum on the Series C Preferred Shares will increase by 5.00%, beginning on the 31st day following such fundamental change. Notwithstanding any requirement that the Company repurchase all of the outstanding Series C Preferred Shares, the increase in the distribution rate is the sole remedy to holders in the event the Company fails to do so, and following any such increase, the Company will be under no obligation to repurchase any Series C Preferred Shares.
Series B Preferred Shares
On March 13, 2018, the Trust issued 4,000,000 7.875% Series B Preferred Shares (the "Series B Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.5 million net of underwriters' discount and issuance costs. Distributions on the Series B Preferred Shares will be payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30, and October 30 of each year, beginning on July 30, 2018, at a rate per annum of 7.875%. Distributions on the Series B Preferred Shares are cumulative and at December 31, 2021, $1.3 million of Series B distributions are accumulated and unpaid. Unless full cumulative distributions on the Series B Preferred Shares have been or contemporaneously are declared and set apart for payment of the Series B Preferred Shares for all past distribution periods, no distribution may be declared or paid for payment on the Trust common shares. The Series B Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the Series B Preferred Shares. The Series B Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after April 30, 2028, at a price of $25.00 per share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding, the redemption date. Holders of Series B Preferred Shares will have no right to require the redemption of the Series B Preferred Shares and there is no maturity date.
If a certain tax redemption event occurs prior to April 30, 2028, the Series B Preferred Shares may be redeemed at the Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such tax redemption event, at a price of $25.25 per share, plus accumulated and unpaid distributions to, but excluding, the redemption date. If a certain fundamental change related to the Series B Preferred Shares or the Company occurs (whether before, on or after April 30, 2028), the Company will be required to repurchase the Series B Preferred Shares at a price of $25.25 per share, plus accumulated and unpaid distributions to, but excluding, the date of purchase. If (i) a fundamental change occurs and (ii) the Company does not give notice prior to the 31st day following the fundamental change to repurchase all the outstanding Series B Preferred Shares, the distribution rate per annum on the Series B Preferred Shares will increase by 5.00%, beginning on the 31st day following such fundamental change. Notwithstanding any requirement that the Company repurchase all of the outstanding Series B Preferred Shares, the increase in the distribution rate is the sole remedy to holders in the event the Company fails to do so, and following any such increase, the Company will be under no obligation to repurchase any Series B Preferred Shares.
Series A Preferred Shares
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Preferred Shares (the "Series A Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.4 million net of underwriters' discount and issuance costs. When, and if declared by the Company's board of directors, distribution on the Series A Preferred Shares will be payable quarterly on January 30, April 30, July 30, and October 30 of each year, beginning on October 30, 2017, at a rate per annum of 7.250%. Distributions on the Series A Preferred Shares are discretionary and non-cumulative. The Company has no obligation to pay distributions for a quarterly distribution period if the board of directors does not declare the distribution before the scheduled record of date for the period, whether or not distributions are paid for any subsequent distribution periods with respect to the Series A Preferred Shares, or the Trust common shares. If the Company's board of directors does not declare a distribution for the Series A Preferred Shares for a quarterly distribution period, during the remainder of that quarterly distribution period the Company cannot declare or pay distributions on the Trust common shares. The Series A Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the Series A Preferred Shares.
The Series A Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after July 30, 2022, at a price of $25.00 per share, plus declared and unpaid distribution to, but excluding, the redemption date, without payment of any undeclared distributions. Holders of Series A Preferred Shares will have no right to require the redemption of the Series A Preferred Shares and there is no maturity date.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If a certain tax redemption event occurs prior to July 30, 2022, the Series A Preferred Shares may be redeemed at the Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such tax redemption event, at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. If a certain fundamental change related to the Series A Preferred Shares or the Company occurs (whether before, on or after July 30, 2022), the Company will be required to repurchase the Series A Preferred Shares at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding, the date of purchase, without payment of any undeclared distributions. If (i) a fundamental change occurs and (ii) the Company does not give notice prior to the 31st day following the fundamental change to repurchase all the outstanding Series A Preferred Shares, the distribution rate per annum on the Series A Preferred Shares will increase by 5.00%, beginning on the 31st day following such fundamental change. Notwithstanding any requirement that the Company repurchase all of the outstanding Series A Preferred Shares, the increase in the distribution rate is the sole remedy to holders in the event the Company fails to do so, and following any such increase, the Company will be under no obligation to repurchase any Series A Preferred Shares.
Profit Allocation Interests
The Profit Allocation Interests represent the original equity interest in the Company. The holders of the Allocation Interests (“Holders”), through Sostratus LLC, are entitled to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The distributions of the profit allocation is paid upon the occurrence of the sale of a material amount of capital stock or assets of one of the Company’s businesses (“Sale Event”) or, at the option of the Holders, at each five year anniversary date of the acquisition of one of the Company’s businesses (“Holding Event”). The Company records distributions of the profit allocation to the Holders upon occurrence of a Sale Event or Holding Event as dividends declared on Allocation Interests to stockholders’ equity when they are approved by the Company’s board of directors.
The following is a summary of the profit allocation payments made to the Allocation Interest Holders during each of the years ended December 31, 2021, 2020 and 2019.
Year ended December 31, 2021
•The fifteen-year anniversary of the acquisition of ACI occurred in May 2021 which represented a Holding Event. The Company declared and paid a distribution to the Holders of $12.1 million in July 2021.
•During the fourth quarter of 2021, the Company declared and paid a distribution to the Allocation InterestsMember of $8.6$16.8 million in connection withrelated to the sale of FOX sharesLiberty (refer to Note D - "Discontinued Operations"). Year ended December 31, 2020
•The ten-year anniversary of Liberty occurred in March 2016.2020 which represented a Holding Event. The Holders elected to defer the distribution of $3.3 million until after the end of 2020. The ten-year anniversary of Ergo occurred in September 2020 which represented a Holding Event. The Holders elected to defer the distribution of $2.0 million until after the end of 2020. The profit allocation payment was made duringof $3.3 million related to the quarter ended June 30, 2016. Liberty Holding Event and the profit allocation payment of $2.0 million related to the Ergobaby Holding Event were both paid in January 2021.
•The Company's boardfive-year anniversary of directorsthe acquisition of Sterno Products occurred in October 2019 which represented a Holding Event. The Company declared and paid a distribution to the Holders of $9.1 million in February 2020.
Year ended December 31, 2019
•During the second quarter of 2019, the Company declared and paid a distribution to the Allocation InterestsMember of $11.6$8.0 million related to the sale of Manitoba Harvest and working capital settlements from prior Sale Events (refer to Note D - "Discontinued Operations"). •During the third quarter of 2019, the Company declared and paid a distribution to the Allocation Member of $43.3 million related to the sale of Clean Earth (refer to Note D - "Discontinued Operations"). •During the fourth quarter of 2019, the Company declared and paid a distribution to the Allocation Member of $9.1 million related to the deferred consideration from the Manitoba Harvest sale and the working capital settlement received from the sale of Clean Earth (refer to Note D - "Discontinued Operations").
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation of net loss available to common shares of Holdings
The following table reconciles net income (loss) attributable to Holdings to net loss attributable to the common shares of Holdings:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
(in thousands) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Net income (loss) from continuing operations attributable to Holdings | | $ | 17,119 | | | $ | (5,261) | | | $ | (70,667) | |
| Less: Distributions paid - Allocation Interests | | 34,058 | | | 9,087 | | | 60,369 | |
| Less: Distributions paid - Preferred Shares | | 24,181 | | | 23,678 | | | 15,125 | |
| Less: Accrued distributions - Preferred Shares | | 2,869 | | | 2,869 | | | 2,315 | |
| Net loss from continuing operations attributable to common shares of Holdings | | $ | (43,989) | | | $ | (40,895) | | | $ | (148,476) | |
Earnings per share
Basic and diluted earnings per share for the fiscal year ended December 31, 2021, 2020 and 2019 is calculated as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (in thousands, except per share data) | 2021 | | 2020 | | 2019 |
| Loss from continuing operations attributable to common shares of Holdings | $ | (43,989) | | | $ | (40,895) | | | $ | (148,476) | |
| Less: Effect of contribution based profit—Holding Event | 5,361 | | | 4,974 | | | 3,222 | |
| Loss from continuing operations attributable to common shares | $ | (49,350) | | | $ | (45,869) | | | $ | (151,698) | |
| | | | | |
| Income from discontinued operations attributable to Holdings | $ | 97,432 | | | $ | 28,041 | | | $ | 372,532 | |
| Less: Effect of contribution based profit | — | | | 3,806 | | | 2,437 | |
| Income from discontinued operations of Holdings attributable to common shares | $ | 97,432 | | | $ | 24,235 | | | $ | 370,095 | |
| | | | | |
| Basic and diluted weighted average common shares of Holdings outstanding | 65,362 | | | 63,151 | | | 59,900 | |
| | | | | |
| Basic and fully diluted income (loss) per common share attributable to Holdings | | | | | |
| | | | | |
| Continuing operations | $ | (0.76) | | | $ | (0.72) | | | $ | (2.54) | |
| Discontinued operations | 1.49 | | | 0.38 | | | 6.18 | |
| $ | 0.73 | | | $ | (0.34) | | | $ | 3.64 | |
Distributions
The following table summarizes information related to our quarterly cash distributions on our Trust common and preferred shares:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Cash Distribution per Share | | Total Cash Distributions | | Record Date | | Payment Date |
| | | | (in thousands) | | | | |
| Trust Common Shares: | | | | | | | | |
October 1, 2021 - December 31, 2021 (1) | | $ | 0.25 | | | $ | 17,352 | | | January 13, 2022 | | January 20, 2022 |
| July 1, 2021 - September 30, 2021 | | $ | 0.36 | | | $ | 23,742 | | | October 15, 2021 | | October 22, 2021 |
August 3, 2021 (2) | | $ | 0.88 | | | $ | 57,112 | | | August 31, 2021 | | September 7, 2021 |
| April 1, 2021 - June 30, 2021 | | $ | 0.36 | | | $ | 23,364 | | | July 15, 2021 | | July 22, 2021 |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1, 2021 - March 31, 2021 | | $ | 0.36 | | | $ | 23,364 | | | April 15, 2021 | | April 22, 2021 |
| October 1, 2020 - December 31, 2020 | | $ | 0.36 | | | $ | 23,364 | | | January 15, 2020 | | January 22, 2021 |
| July 1, 2020 - September 30, 2020 | | $ | 0.36 | | | $ | 23,364 | | | October 15, 2020 | | October 22, 2020 |
| April 1, 2020 - June 30, 2020 | | $ | 0.36 | | | $ | 23,364 | | | July 16, 2020 | | July 23, 2020 |
| January 1, 2020 - March 31, 2020 | | $ | 0.36 | | | $ | 21,564 | | | April 16, 2020 | | April 23, 2020 |
| October 1, 2019 - December 31, 2019 | | $ | 0.36 | | | $ | 21,564 | | | January 16, 2020 | | January 23, 2020 |
| July 1, 2019 - September 30, 2019 | | $ | 0.36 | | | $ | 21,564 | | | October 17, 2019 | | October 24, 2019 |
| April 1, 2019 - June 30, 2019 | | $ | 0.36 | | | $ | 21,564 | | | July 18, 2019 | | July 25, 2019 |
| January 1, 2019 - March 31, 2019 | | $ | 0.36 | | | $ | 21,564 | | | April 18, 2019 | | April 25, 2019 |
| | | | | | | | |
| Series A Preferred Shares: | | | | | | | | |
October 30, 2021 - January 29, 2022 (1) | | $ | 0.453125 | | | $ | 1,813 | | | January 15, 2022 | | January 30, 2022 |
| July 30, 2021 - September 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | October 15, 2021 | | October 30, 2021 |
| April 30, 2021 - July 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | July 15, 2021 | | July 30, 2021 |
| January 30, 2021 - April 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | April 15, 2021 | | April 30, 2021 |
| October 30, 2020 - January 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | January 15, 2021 | | January 30, 2021 |
| July 30, 2020 - October 29, 2020 | | $ | 0.453125 | | | $ | 1,813 | | | October 15, 2020 | | October 30, 2020 |
| April 30, 2020 - July 29, 2020 | | $ | 0.453125 | | | $ | 1,813 | | | July 15, 2020 | | July 30, 2020 |
| January 30, 2020 - April 29, 2020 | | $ | 0.453125 | | | $ | 1,813 | | | April 15, 2020 | | April 30, 2020 |
| October 30, 2019 - January 29, 2020 | | $ | 0.453125 | | | $ | 1,813 | | | January 15, 2020 | | January 30, 2020 |
| July 30, 2019 - October 29, 2019 | | $ | 0.453125 | | | $ | 1,813 | | | October 15, 2019 | | October 30, 2019 |
| April 30, 2019 - July 29, 2019 | | $ | 0.453125 | | | $ | 1,813 | | | July 15, 2019 | | July 30, 2019 |
| January 30, 2019 - April 29, 2019 | | $ | 0.453125 | | | $ | 1,813 | | | April 15, 2019 | | April 30, 2019 |
| | | | | | | | |
| Series B Preferred Shares: | | | | | | | | |
October 30, 2021 - January 29, 2022 (1) | | $ | 0.4921875 | | | $ | 1,969 | | | January 15, 2022 | | January 30, 2022 |
| July 30, 2021 - September 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | October 15, 2021 | | October 30, 2021 |
| April 30, 2021 - July 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | July 15, 2021 | | July 30, 2021 |
| January 30, 2021 - April 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | April 15, 2021 | | April 30, 2021 |
| October 30, 2020 - January 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | January 15, 2021 | | January 30, 2021 |
| July 30, 2020 - October 29, 2020 | | $ | 0.4921875 | | | $ | 1,969 | | | October 15, 2020 | | October 30, 2020 |
| April 30, 2020 - July 29, 2020 | | $ | 0.4921875 | | | $ | 1,969 | | | July 15, 2020 | | July 30, 2020 |
| January 30, 2020 - April 29, 2020 | | $ | 0.4921875 | | | $ | 1,969 | | | April 15, 2020 | | April 30, 2020 |
| October 30, 2019 - January 29, 2020 | | $ | 0.4921875 | | | $ | 1,969 | | | January 15, 2020 | | January 30, 2020 |
| July 30, 2019 - October 29, 2019 | | $ | 0.4921875 | | | $ | 1,969 | | | October 15, 2019 | | October 30, 2019 |
| April 30, 2019 - July 29, 2019 | | $ | 0.4921875 | | | $ | 1,969 | | | July 15, 2019 | | July 30, 2019 |
| January 30, 2019 - April 29, 2019 | | $ | 0.4921875 | | | $ | 1,969 | | | April 15, 2019 | | April 30, 2019 |
| | | | | | | | |
| Series C Preferred Shares: | | | | | | | | |
October 30, 2021 - January 29, 2022 (1) | | $ | 0.4921875 | | | $ | 2,264 | | | January 15, 2022 | | January 30, 2022 |
| July 30, 2021 - September 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | October 15, 2021 | | October 30, 2021 |
| April 30, 2021 - July 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | July 15, 2021 | | July 30, 2021 |
| January 30, 2021 - April 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | April 15, 2021 | | April 30, 2021 |
| October 30, 2020 - January 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | January 15, 2021 | | January 30, 2021 |
| July 30, 2020 - October 29, 2020 | | $ | 0.4921875 | | | $ | 2,264 | | | October 15, 2020 | | October 30, 2020 |
| April 30, 2020 - July 29, 2020 | | $ | 0.4921875 | | | $ | 2,264 | | | July 15, 2020 | | July 30, 2020 |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 30, 2020 - April 29, 2020 | | $ | 0.4921875 | | | $ | 2,264 | | | April 15, 2020 | | April 30, 2020 |
| November 20, 2019 - January 29, 2020 | | $ | 0.38281 | | | $ | 1,531 | | | January 15, 2020 | | January 30, 2020 |
(1) This distribution was declared on January 3, 2022.
(2) On August 3, 2021, in order to offset a portion of the tax liability to the shareholders as a result of the election to cause the Trust to be treated as a corporation for U.S. federal income tax purposes, the Company's Board of Directors declared a special cash distribution on the Trust’s common shares. A distribution of $57.1 million was made on August 31, 2021 to Trust common shareholders. The Company declared a distribution of $0.25 per share for the quarter ended December 31, 2021,which was reduced from $0.36 per share in prior periods to reflect the effect of the Trust being taxed as a corporation.
Note L — Income Taxes
Effective September 1, 2021, the Company’s parent (i.e., the Trust) elected to be treated as a corporation for U.S federal income tax purposes. Prior to September 1, 2021, the Company’s items of income, gain, loss and deduction flowed through to owners of the parent Trust without being subject to income taxes at the Trust level. Consequently, the Company’s earnings did not reflect a provision for income taxes except those for foreign, state, city and local income taxes incurred at the entity level. From and after September 1, 2021, the parent Trust will be subject to entity-level U.S. federal, state, and local corporate income taxes on the Company’s earnings that flow through to the Trust.
Components of the Company's pretax income (loss) before taxes are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
(in thousands) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Domestic (including U.S. exports) | | $ | 27,799 | | | $ | 6,092 | | | $ | (72,264) | |
| Foreign subsidiaries | | 15,397 | | | (1,658) | | | 12,164 | |
| | $ | 43,196 | | | $ | 4,434 | | | $ | (60,100) | |
Components of the Company’s income tax provision are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Current taxes | | | | | | |
| Federal | | $ | 18,439 | | | $ | 5,979 | | | $ | 5,450 | |
| State | | 4,122 | | | 1,620 | | | 1,537 | |
| Foreign | | 5,234 | | | 4,804 | | | 4,984 | |
| Total current taxes | | 27,795 | | | 12,403 | | | 11,971 | |
| Deferred taxes: | | | | | | |
| Federal | | (9,271) | | | 241 | | | (2,471) | |
| State | | (1,725) | | | 294 | | | 663 | |
| Foreign | | 1,538 | | | (2,763) | | | (249) | |
| Total deferred taxes | | (9,458) | | | (2,228) | | | (2,057) | |
| Total tax provision | | $ | 18,337 | | | $ | 10,175 | | | $ | 9,914 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that have resulted in the creation of deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
| | | |
| Deferred tax assets: | | | |
| Tax credits | $ | 7,501 | | | $ | 4,431 | |
| Accounts receivable and allowances | 1,769 | | | 1,964 | |
| Net operating loss carryforwards | 29,979 | | | 32,271 | |
| Accrued expenses | 8,061 | | | 5,431 | |
| Interest expense limitation carryforwards | 2,651 | | | 2,079 | |
| Lease liabilities | 28,906 | | | 21,310 | |
| Held-for-sale effect | 8,601 | | | — | |
| Other | 12,339 | | | 11,768 | |
| Total deferred tax assets | $ | 99,807 | | | $ | 79,254 | |
Valuation allowance (1) | (9,413) | | | (7,012) | |
| Net deferred tax assets | $ | 90,394 | | | $ | 72,242 | |
| Deferred tax liabilities: | | | |
| Intangible assets | $ | (123,946) | | | $ | (102,748) | |
| Property and equipment | (23,966) | | | (17,859) | |
| Repatriation of foreign earnings | (38) | | | (37) | |
| Right of use assets | (26,087) | | | (18,831) | |
| Prepaid and other expenses | (701) | | | (603) | |
| Total deferred tax liabilities | $ | (174,738) | | | $ | (140,078) | |
| Total net deferred tax liability | $ | (84,344) | | | $ | (67,836) | |
(1)Primarily relates to the 5.11, Arnold and Ergo operating segments.
For the years ending December 31, 2021 and 2020, the Company recognized approximately $174.7 million and $140.1 million, respectively in deferred tax liabilities. A significant portion of the balance in deferred tax liabilities reflects temporary differences in the basis of property and equipment and intangible assets related to the Company’s purchase accounting adjustments in connection with the saleacquisition of FOX sharescertain of its businesses. For financial accounting purposes the Company has recognized a significant increase in August 2016. That paymentthe fair values of the intangible assets and property and equipment in certain of the businesses it acquired. For income tax purposes the existing, pre-acquisition tax basis of the intangible assets and property and equipment is utilized. In order to reflect the increase in the financial accounting basis over the existing tax basis, a deferred tax liability was made, offsetrecorded. This liability will decrease in future periods as these temporary differences reverse but may be replaced by negative profit allocationdeferred tax liabilities generated as a result of future acquisitions.
A valuation allowance relating to the realization of foreign net operating losses, domestic and foreign tax credits and the limitation on the deduction of interest expense of $9.4 million was provided at December 31, 2021 and a valuation allowance related to the Sale Event fromrealization of foreign net operating losses, domestic and foreign tax credits and the Tridien disposition,limitation on the deduction of interest expense of $7.0 million was provided at December 31, 2020. A valuation allowance is provided whenever it is more likely than not that some or all of deferred assets recorded may not be realized.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation between the Federal Statutory Rate and the effective income tax rate for 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| United States Federal Statutory Rate | 21.0 | % | | 21.0 | % | | (21.0) | % |
| State income taxes (net of Federal benefits) | 4.8 | | | 34.8 | | | 3.2 | |
| Foreign income taxes | 8.2 | | | 37.5 | | | 1.1 | |
Expenses of Compass Group Diversified Holdings LLC representing a pass through to shareholders (1) | 29.0 | | | 137.0 | | | 20.9 | |
| Impact of subsidiary employee stock options | (0.3) | | | 7.2 | | | 0.1 | |
| Non-deductible acquisition costs | 0.6 | | | 11.5 | | | — | |
| Impairment expense | — | | | — | | | 9.4 | |
| Non-recognition of various carryforwards at subsidiaries | (2.3) | | | (24.5) | | | 2.0 | |
| Utilization of tax credits | (5.2) | | | 2.6 | | | (2.6) | |
| Foreign-derived intangible income (FDII) and GILTI tax | (2.4) | | | (5.0) | | | 2.4 | |
| Effect of classification of assets held for sale | (16.8) | | | — | | | — | |
| Other | 5.9 | | | 7.4 | | | 1.0 | |
| Effective income tax rate | 42.5 | % | | 229.5 | % | | 16.5 | % |
(1)The effective income tax rate for each of the years presented includes losses at the Company’s parent, which was taxed as a partnership through August 31, 2021. Beginning September 1, 2021, the Company's parent is taxed as a corporation.
A reconciliation of the amount of unrecognized tax benefits for 2021, 2020 and 2019 are as follows (in thousands):
| | | | | |
| Balance at January 1, 2019 | $ | 894 | |
| Additions for current years’ tax positions | 73 | |
| Additions for prior years’ tax positions | 26 | |
| Reductions for prior years’ tax positions | — | |
| Balance at December 31, 2019 | $ | 993 | |
| Additions for current years’ tax positions | 14 | |
| Additions for prior years’ tax positions | 427 | |
| Reductions for prior years' tax positions | (73) | |
| Reductions for expiration of statute of limitations | (27) | |
| Balance at December 31, 2020 | $ | 1,334 | |
| Additions for current years’ tax positions | 31 | |
| Additions for prior years’ tax positions | 15 | |
| Reductions for prior years' tax positions | (63) | |
| Reductions for expiration of statute of limitations | (63) | |
| Balance at December 31, 2021 | $ | 1,254 | |
Included in the fourth quarterunrecognized tax benefits at both December 31, 2021 and 2020 is $1.0 million of 2016.tax benefits that, if recognized, would affect the Company’s effective tax rate. The Company's board of directors declared a distribution to the Holders of the Allocation Interests of $13.4 millionCompany accrues interest and penalties related to the November 2016 sale of FOX shares in the fourth quarter of 2016.uncertain tax positions. The amount of the distribution wasamounts accrued at December 31, 20162021, 2020 and 2019 are not material to the Company. Such amounts are included in the line Due to Related Partyprovision (benefit) for income taxes in the accompanying consolidated Balance Sheet, and paid in January 2017. The salestatements of FOX shares in March 2017 qualified as a Sale Event underoperations. It is expected that the Company's LLC Agreement. In April 2017, with respect to the March 2017 Offering, the Company's boardamount of directors approved and declared a profit allocation payment totaling $25.8 million that was paidunrecognized tax benefits will change in the second quarternext twelve months. However, we do not expect the change to have a significant impact on the consolidated results of 2017.operations or financial position.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each of the Company’s businesses file U.S. Federal, state and foreign income tax returns in multiple jurisdictions with varying statutes of limitations. The 2016 through 2021 tax years generally remain subject to examinations by the taxing authorities.
Note M — Fair Value Measurement
The following table reflectsprovides the yearassets and liabilities carried at fair value measured on a recurring basis as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2021 |
| Carrying
Value | | Level 1 | | Level 2 | | Level 3 |
| Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | $ | (151) | | | $ | — | | | $ | — | | | $ | (151) | |
Contingent consideration - acquisition (2) | $ | (1,350) | | | $ | — | | | $ | — | | | $ | (1,350) | |
| Total recorded at fair value | $ | (1,501) | | | $ | — | | | $ | — | | | $ | (1,501) | |
(1)Represents a put option issued to date activitya noncontrolling shareholder in connection with the 5.11 acquisition.
(2)Represents potential earn-out payable as additional purchase price consideration by Altor Solutions in connection with the acquisition of Polyfoam.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2020 |
| Carrying
Value | | Level 1 | | Level 2 | | Level 3 |
| Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | $ | (435) | | | $ | — | | | $ | — | | | $ | (435) | |
Contingent consideration - acquisition (2) | (1,350) | | | — | | | — | | | (1,350) | |
| Total recorded at fair value | $ | (1,785) | | | $ | — | | | $ | — | | | $ | (1,785) | |
(1)Represents put options issued to noncontrolling shareholders in connection with the Liberty and 5.11 acquisitions. Liberty was sold on July 16, 2021.
(2)Represents potential earn-out payable as additional purchase price consideration by Altor Solutions in connection with the acquisition of Polyfoam.
A reconciliation of the change in the carrying value of the Company’s Level 3 fair value measurements is as follows:
| | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2021 | | 2020 |
| | | |
| Balance at January 1st | $ | (1,785) | | | $ | (111) | |
| Contingent consideration - Polyfoam | — | | | (1,350) | |
| Termination of put option of noncontrolling shareholder- Liberty | 314 | | | — | |
| Increase in the fair value of put option of noncontrolling shareholders - Liberty | — | | | (264) | |
| Increase in the fair value of put option of noncontrolling shareholder - 5.11 | (30) | | | (60) | |
| Balance at December 31st | $ | (1,501) | | | $ | (1,785) | |
Valuation Techniques
Options of noncontrolling shareholders
The put options of noncontrolling shareholders were determined based on inputs that were not readily available in public markets or able to be derived from our investmentinformation available in FOXpublicly quoted markets. As such, the Company categorized the put options of the noncontrolling shareholders as Level 3. The primary inputs associated with this
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
valuation are earnings before interest, taxes amortization and depreciation times a multiple established in the shareholder put option agreement, which is used to determine a per share equity value for 2017 and 2016:
|
| | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 |
| Balance January 1st | | $ | 141,767 |
| | $ | 249,747 |
|
| Proceeds from sale of FOX shares, net - March 2017 and 2016 | | (136,147 | ) | | (47,685 | ) |
| Proceeds from sale of FOX shares, net - August 2016 | | — |
| | (63,000 | ) |
| Proceeds from sale of FOX shares, net - November 2016 | | — |
| | (71,785 | ) |
Mark to market adjustment on investment (1) | | (5,620 | ) | | 74,490 |
|
| Balance December 31st | | $ | — |
| | $ | 141,767 |
|
(1)The mark-to-market adjustment is the resultshares that can be put back to the Company. An increase or decrease in these primary inputs would not have a material impact on the determination of the fair value changesof these put options.
Contingent Consideration
For certain acquisition of businesses that the Company or its subsidiaries make, a portion of the FOX investment duringacquisition price will be contingent consideration. The following is a summary of the year.contingent consideration arrangements entered into by the Company's subsidiaries in the prior three years and the valuation methodologies:
•Altor Solutions entered into a contingent consideration arrangement in connection with their purchase of Polyfoam in July 2020. The 2017 mark-to-market adjustmentpurchase price of Polyfoam includes a potential earn-out of $1.4 million if Polyfoam achieves certain financial metrics.
Senior Notes
The Company's Senior Notes consisted of the following carrying value and estimated fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Hierarchy Level | | December 31, 2021 |
| | Maturity Date | | Rate | | | Carrying Value | | Fair Value |
| 2032 Senior Notes | | January 15, 2032 | | 5.000 | % | | 2 | | $ | 300,000 | | | $ | 307,700 | |
| 2029 Senior Notes | | April 15, 2029 | | 5.250 | % | | 2 | | $ | 1,000,000 | | | $ | 1,051,700 | |
Nonrecurring Fair Value Measurements
The following table provides the assets and liabilities carried at fair value measured on a non-recurring basis as of December 31, 2019. Refer to "Note H – Goodwill and Intangible Assets", for a description of the valuation techniques used to determine fair value of the assets measured on a non-recurring basis in the table below. There were no assets and liabilities carried at fair value measured on a non-recurring basis as of December 31, 2021 and 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Expense |
| Fair Value Measurements at December 31, 2019 | | Year ended |
| (in thousands) | Carrying
Value | | Level 1 | | Level 2 | | Level 3 | | December 31, 2019 |
| Goodwill - Velocity Outdoor | $ | 30,079 | | | — | | | — | | | $ | 30,079 | | | $ | 32,881 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N — Noncontrolling Interest
Noncontrolling interest represents the unrealized loss onportion of a majority-owned subsidiary’s net income and equity that is owned by noncontrolling shareholders.
The following tables reflect the investment in FOXCompany’s percentage ownership of its businesses, as of the dateDecember 31, 2021, 2020 and 2019 and related noncontrolling interest balances as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % Ownership (1) December 31, 2021 | | % Ownership (1) December 31, 2020 | | % Ownership (1) December 31, 2019 |
| Primary | | Fully
Diluted | | Primary | | Fully
Diluted | | Primary | | Fully
Diluted |
| 5.11 | 97.6 | | | 88.4 | | | 97.6 | | | 88.1 | | | 97.6 | | | 88.9 | |
| BOA | 91.8 | | | 83.8 | | | 81.9 | | | 74.8 | | | N/a | | N/a |
| Ergobaby | 81.7 | | | 72.7 | | | 81.4 | | | 72.6 | | | 81.9 | | | 75.8 | |
| Lugano | 59.9 | | | 58.1 | | | N/a | | N/a | | N/a | | N/a |
| Marucci | 91.1 | | | 82.8 | | | 92.2 | | | 83.8 | | | N/a | | N/a |
| Velocity | 99.3 | | | 87.6 | | | 99.3 | | | 88.0 | | | 99.3 | | | 93.9 | |
| | | | | | | | | | | |
| Altor | 100.0 | | | 91.2 | | | 100.0 | | | 91.5 | | | 100.0 | | | 91.5 | |
| Arnold | 98.0 | | | 85.5 | | | 96.7 | | | 81.1 | | | 96.7 | | | 80.2 | |
| Sterno | 100.0 | | | 87.1 | | | 100.0 | | | 88.5 | | | 100.0 | | | 88.5 | |
(1)The principal difference between primary and fully diluted percentages of our operating segments is due to stock option issuances of operating segment stock to management of the FOX secondary offering through which the Company sold our remaining shares in FOX.respective business.
| | | | | | | | | | | |
| Noncontrolling Interest Balances |
| (in thousands) | December 31,
2021 | | December 31,
2020 |
| 5.11 | $ | 15,458 | | | $ | 14,567 | |
| BOA | 30,581 | | | 61,625 | |
| Ergobaby | 29,435 | | | 27,408 | |
| Lugano | 70,585 | | | — | |
| Marucci | 17,175 | | | 11,386 | |
| Velocity | 5,250 | | | 4,077 | |
| | | |
| Altor | 3,936 | | | 2,901 | |
| Arnold | 1,284 | | | 1,117 | |
| Sterno | 1,524 | | | 282 | |
| Allocation Interests | 100 | | | 100 | |
| $ | 175,328 | | | $ | 123,463 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note O — Supplemental Data
Supplemental Balance Sheet Data (in thousands):
| | | | | | | | | | | |
| Summary of accrued expenses | December 31, |
| 2021 | | 2020 |
| | | |
| Accrued payroll and fringes | $ | 43,270 | | | $ | 34,324 | |
| Accrued taxes | 16,472 | | | 14,014 | |
| Income taxes payable | 6,163 | | | 6,067 | |
| Accrued interest | 13,563 | | | 8,259 | |
| Accrued rebates and discounts | 10,687 | | | 5,170 | |
| Warranty payable | 2,062 | | | 1,558 | |
| Accrued inventory | 50,122 | | | 40,461 | |
| Other accrued expenses | 32,462 | | | 24,365 | |
| Total | $ | 174,801 | | | $ | 134,218 | |
| | | | | | | | | | | |
| Warranty liability | Year ended December 31, |
| 2021 | | 2020 |
| | | |
| Beginning balance | $ | 1,558 | | | $ | 784 | |
| Accrual | 4,257 | | | 2,821 | |
| Warranty payments | (3,753) | | | (2,696) | |
Other (1) | — | | | 649 | |
| Ending balance | $ | 2,062 | | | $ | 1,558 | |
(1) Represents warranty liabilities of acquired businesses.
Supplemental Statement of Operations Data (in thousands):
| | | | | | | | | | | | | | | | | |
| Other income (expense), net | Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Foreign currency gain (loss) | $ | 27 | | | $ | 71 | | | $ | (67) | |
| Loss on sale of capital assets | (1,458) | | | (1,851) | | | (1,626) | |
| Other income (expense) | 247 | | | (679) | | | (353) | |
| $ | (1,184) | | | $ | (2,459) | | | $ | (2,046) | |
Supplemental Cash Flow Statement Data (in thousands):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Interest paid | $ | 58,553 | | | $ | 43,730 | | | $ | 56,431 | |
| Taxes paid | $ | 27,371 | | | $ | 10,189 | | | $ | 15,367 | |
Investments
Arnold Joint VentureContingent Consideration
Arnold isFor certain acquisition of businesses that the Company or its subsidiaries make, a 50% partner in a China rare earth mine-to-magnet joint venture. Arnold accounts for its activity in the joint venture utilizing the equity method of accounting. Gains and losses from the joint venture were not material for the years ended December 31, 2017, 2016 and 2015.
Note G - Inventory and Property, Plant, and Equipment
Inventory
Inventory is comprisedportion of the following (in thousands):
|
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| Raw materials and supplies | $ | 36,124 |
| | $ | 29,708 |
|
| Work-in-process | 13,921 |
| | 8,281 |
|
| Finished goods | 205,512 |
| | 182,886 |
|
| | 255,557 |
| | 220,875 |
|
| Less: obsolescence reserve | (8,629 | ) | | (7,891 | ) |
| Total | $ | 246,928 |
| | $ | 212,984 |
|
Property, plant and equipment
Property, plant and equipment is comprised of the following (in thousands):
|
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| Machinery and equipment | $ | 178,187 |
| | $ | 155,591 |
|
| Office furniture, computers and software | 28,824 |
| | 13,737 |
|
| Leasehold improvements | 20,630 |
| | 14,156 |
|
| Construction in process | 18,153 |
| | 8,308 |
|
| Buildings and land | 40,015 |
| | 35,392 |
|
| | 285,809 |
| | 227,184 |
|
| Less: accumulated depreciation | (112,728 | ) | | (84,814 | ) |
| Total | $ | 173,081 |
| | $ | 142,370 |
|
Depreciation expense was approximately $33.0 million, $26.9 million and $21.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Note H — Goodwill and Other Intangible Assets
Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Indefinite lived intangible assets, representing trademarks and trade names, are not amortized unless their useful life is determined toacquisition price will be finite. Long-lived intangible assets are subject to amortization using the straight-line method. Goodwill and indefinite lived intangible assets are tested for impairment annually as of March 31st of each year and more often if a triggering event occurs, by comparing the fair value of each reporting unit to its carrying value. Each of the Company’s businesses represents a reporting unit except Arnold, which is comprised of three reporting units.
2017 Interim Impairment Testing
Manitoba Harvest
The Company performed Step 1 testing during the 2017 annual impairment testing for Manitoba Harvest. As a result of operating results that were below forecasted amounts, as well as a failure of the financial covenants associated with the intercompany credit facility, we determined that a triggering event had occurred at Manitoba Harvest in the fourth quarter of 2017. We performed impairment testing of the goodwill and indefinite lived tradename at December 31, 2017.For the quantitative impairment test at Manitoba, we utilized an income approach. The weighted average cost of capital used in the income approach at Manitoba was 11.7%. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Results of the quantitative testing of Manitoba Harvest indicated that the carrying value of Manitoba Harvest exceeded its fair value by $6.3 million, and the Company recorded $6.2 million (after the effect of foreign currency translation) as impairment expense at December 31,
2017. For the indefinite lived trade name, quantitative testing of the Manitoba Harvest tradename indicated that the carrying value exceeded its fair value by $2.3 million, and the Company recorded $2.3 million (after the effect of foreign currency translation) of impairment expense at December 31, 2017. The Company expects to finalize the Manitoba Harvest impairment testing during the first quarter of 2018.
2017 Annual Goodwill Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform 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. 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. The Company utilized an income approach to perform the Step 1 testing at Manitoba Harvest. The weighted average cost of capital used in the income approach for Manitoba Harvest 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 by 15.0%. Manitoba Harvest's goodwill balance as of the date of the annual impairment testing was approximately $44.5 million. For the reporting units that were tested qualitatively, the Company concluded that the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value and that a quantitative analysis was not necessary.
2017 Indefinite Lived Intangible Asset Impairment Testing
The Company used a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. The Company evaluated the qualitative factors of each reporting unit that maintains indefinite lived intangible assets in connection with the annual impairment testing for 2017. Our indefinite lived intangible assets consist of trade names with a carrying value of approximately $71.3 million at December 31, 2017. The results of the qualitative analysis of our indefinite lived intangible assets, which we completed during the quarter ended June 30, 2017, indicated that the fair value of the indefinite lived intangible assets exceeded their carrying value. The indefinite lived trade name of Manitoba Harvest was tested in connection with the Step 1 test at March 31, 2017 - refer to above.
2016 Interim Goodwill Impairment Testing
Arnold
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, the Company determined that it was necessary to perform interim goodwill impairment testing on each of the three reporting units at Arnold. The Company performed the first step ("Step 1") of the goodwill impairment assessment at December 31, 2016. In Step 1 of the goodwill impairment test, the Company compared the fair value of the reporting units to the carrying amount. Based on the results of the valuation, the fair value of the Flexmag and PTM reporting units exceeded the carrying amount, therefore no additional goodwill testing was required. 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.
In the first test of goodwill impairment testing, we compare the fair value of each reporting unit to its carrying amount. For purposes of the Step 1 for the Arnold reporting units, we estimated the fair value of the reporting unit using an income approach, whereby we estimate the fair value of a reporting unit based on the present value of future cash flows. Cash flow projections are based on Management's estimate of revenue growth rates and operating margins and take into consideration industry and market conditions as well as company and reporting unit specific economic factors. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business specific characteristics and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. For the Step 1 quantitative impairment testing for Arnold's reporting units, we used only an income approach because we determined that the guideline public company comparables for PMAG, PTM, and Flexmag were not representative of these reporting three reporting units. In the income approach, we used a weighted average cost of capital of 12.5% for PMAG, 13.0% for PTM and 12% for Flexmag.
The Company 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, the Company 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.
2016 Annual Goodwill Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform 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. At March 31, 2016, we determined that the Tridien reporting unit (which is reported as a discontinued operations in the accompanying financial statements after the sale of the reporting unit in September 2016) 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. Results of the Step 1 quantitative testing of Tridien indicated that the fair value of Tridien 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.
2016 Indefinite Lived Intangible Asset Impairment Testing
The Company uses a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. The Company evaluated the qualitative factors of each reporting unit that maintains indefinite lived intangible assets in connection with the annual impairment testing for 2016. Our indefinite-lived intangible assets consist of trade names with a carrying value of approximately $72.2 million at December 31, 2016. The results of the qualitative analysis of our indefinite lived intangible assets, which we completed during the quarter ended June 30, 2016, indicated that the fair value of the indefinite lived intangible assets exceeded their carrying value.
2015 Annual goodwill impairment testing
The Company used a qualitative approach to test goodwill for impairment for the 2015 annual impairment test. At March 31, 2015, we determined that Liberty and two of the three reporting units at Arnold, PMAG and Flexmag, required further quantitative testing (Step 1) because we could not conclude that the fair value of the reporting units exceeds their carrying value based on qualitative factors alone. 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.
In the first step of the goodwill impairment test, we compare the fair value of each reporting unit to its carrying amount. We estimate the fair value of our reporting units using either an income approach or a market approach, or, where applicable, a weighting of the two methods. Under the income approach, we estimate the fair value of a reporting unit based on the present value of future cash flows. Cash flow projections are based on Management's estimate of revenue growth rates and operating margins and take into consideration industry and market conditions as well as company specific economic factors. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business specific characteristics and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. Under the market approach, we estimate fair value based on market multiples of revenue and earnings derived from comparable public companies with operating and investment characteristics that are similar to the reporting unit. We weigh the fair value derived from the market approach depending on the level of comparability of these public companies to the reporting unit. When market comparables are not meaningful or available, we estimate the fair value of the reporting unit using only the income approach. For the Step 1 quantitative impairment test at Liberty, we utilized both the income approach and the market approach, with a 50% weighting assigned to each method. The weighted average cost of capital used in the income approach at Liberty was 13.8%. For the Step 1 quantitative impairment test at the PMAG and Flexmag reporting units of Arnold, we used only an income approach as we determined that the guideline public company comparables for both units were not representative of these reporting units' markets. In the income approach, we used a weighted average cost of capital of 13.6% for PMAG and 14.6% for Flexmag. Results of the quantitative testing of the Liberty reporting unit and Arnold's PMAG and Flexmag reporting units indicated that the fair value of these reporting units exceeded their carrying value.
2015 Indefinite Lived Intangible Asset Impairment Testing
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 $72.2 million at December 31, 2015. Results of the qualitative analysis indicate that the carrying value of the Company’s indefinite lived intangible assets did not exceed their fair value.
Long lived assets
Orbit Baby
During the second quarter of 2016, Ergobaby's board of directors approved a plan to dispose of the Orbit Baby product line. Ergobaby determined at the time the plan was approved that the carrying value of the long lived assets associated with the Orbit Baby product line was not recoverable, and therefore, Ergobaby recorded a loss on disposal of assets of $5.9 million related to the write off of the long-lived assets of Orbit Baby. The loss is comprised of the write-off of intangible assets of $5.5 million, property, plant and equipment of $0.4 million. Ergobaby received approximately $1.0 million during the fourth quarter of 2016 related to the sale of certain assets of the Orbit Baby product line, which reduced the loss on disposal.
Clean Earth
Clean Earth recognized a loss on disposal of assets of $3.3 million during the fourth quarter of 2016 related to the closure of the Clean Earth’s Williamsport, Pennsylvania site which processed drill cuttings. The loss was comprised of intangible assets specific to the Williamsport location ($1.9 million), as well as equipment ($1.4 million) that could not be repurposed to other sites at the time of the closing of the facility.
contingent consideration. The following is a summary of the net carrying amount of goodwill at December 31, 2017 and 2016 (in thousands):
|
| | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| Goodwill - gross carrying amount | | $ | 562,842 |
| | $ | 507,637 |
|
| Accumulated impairment losses | | (31,153 | ) | | (16,000 | ) |
| Goodwill - net carrying amount | | $ | 531,689 |
| | $ | 491,637 |
|
A reconciliation ofcontingent consideration arrangements entered into by the changeCompany's subsidiaries in the carrying valueprior three years and the valuation methodologies:
•Altor Solutions entered into a contingent consideration arrangement in connection with their purchase of goodwill for the years ended December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2017 | | Acquisitions (1) | | Goodwill Impairment | | Foreign currency translation | | Other (4) | | Balance at December 31, 2017 |
| 5.11 | $ | 92,966 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 92,966 |
|
| Crosman | — |
| | 49,352 |
| | — |
| | — |
| | — |
| | 49,352 |
|
| Ergobaby | 61,031 |
| | — |
| | — |
| | — |
| | — |
| | 61,031 |
|
| Liberty | 32,828 |
| | — |
| | — |
| | — |
| | — |
| | 32,828 |
|
| Manitoba Harvest | 44,171 |
| | — |
| | (6,289 | ) | | 3,142 |
| | — |
| | 41,024 |
|
| ACI | 58,019 |
| | — |
| | — |
| | — |
| | — |
| | 58,019 |
|
Arnold (2) | 35,767 |
| | — |
| | (8,864 | ) | | — |
| | — |
| | 26,903 |
|
| Clean Earth | 118,224 |
| | 875 |
| | — |
| | — |
| | — |
| | 119,099 |
|
| Sterno | 39,982 |
| | 1,689 |
| | — |
| | — |
| | 147 |
| | 41,818 |
|
Corporate (3) | 8,649 |
| | — |
| | — |
| | — |
| | — |
| | 8,649 |
|
| Total | $ | 491,637 |
| | $ | 51,916 |
| | $ | (15,153 | ) | | $ | 3,142 |
| | $ | 147 |
| | $ | 531,689 |
|
(1) Acquisition of businesses during the year ended December 31, 2017 includes the acquisition of Crosman by the Company in June 2017, and add-on acquisitions at Clean Earth in March 2017, CrosmanPolyfoam in July 2017 and Sterno in August 2017.2020. The purchase price of Polyfoam includes a potential earn-out of $1.4 million if Polyfoam achieves certain financial metrics.
(2) Arnold has three reporting units PMAG, Precision Thin Metals and Flexmag with goodwill balances of $15.6 million, $6.5 million and $4.8 million, respectively.Senior Notes
(3) Represents goodwill resulting from purchase accounting adjustments not “pushed down” to the ACI segment. This amount is allocated back to the ACI segment for purposes of goodwill impairment testing.
(4) Represents the final settlement related to Sterno's acquisition of Sterno Home Inc. ("Sterno Home", formerly NII).
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2016 | | Acquisitions (1) | | Goodwill Impairment | | Foreign currency translation | | Other (4) | | Balance at December 31, 2016 |
| 5.11 | $ | — |
| | $ | 92,966 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 92,966 |
|
| Ergobaby | 41,664 |
| | 19,367 |
| | — |
| | — |
| | — |
| | 61,031 |
|
| Liberty | 32,828 |
| | — |
| | — |
| | — |
| | — |
| | 32,828 |
|
| Manitoba Harvest | 52,673 |
| | — |
| | — |
| | 2,077 |
| | (10,579 | ) | | 44,171 |
|
| ACI | 58,019 |
| | — |
| | — |
| | — |
| | — |
| | 58,019 |
|
Arnold (2) | 51,767 |
| | — |
| | (16,000 | ) | | — |
| | — |
| | 35,767 |
|
| Clean Earth | 111,339 |
| | 6,885 |
| | — |
| | — |
| | — |
| | 118,224 |
|
| Sterno | 33,716 |
| | 6,266 |
| | — |
| | — |
| | — |
| | 39,982 |
|
Corporate (3) | 8,649 |
| | — |
| | — |
| | — |
| | — |
| | 8,649 |
|
| Total | $ | 390,655 |
| | $ | 125,484 |
| | $ | (16,000 | ) | | $ | 2,077 |
| | $ | (10,579 | ) | | $ | 491,637 |
|
| |
(1)
| Acquisition of businesses during the year ended December 31, 2016 includes the acquisition of 5.11 by the Company in August 2016, and the add-on acquisitions by Sterno in January 2016, Clean Earth in April and June 2016, and Ergobaby in May 2016. |
| |
(2)
| Arnold has three reporting units PMAG, Precision Thin Metals and Flexmag with goodwill balances of $24.4 million, $6.5 million and $4.8 million, respectively. |
| |
(3)
| Represents goodwill resulting from purchase accounting adjustments not “pushed down” to the ACI segment. This amount is allocated back to the ACI segment for purposes of goodwill impairment testing. |
| |
(4)
| Purchase accounting adjustments related to the Manitoba acquisition of HOCI in December 2015. The purchase accounting for HOCI was finalized in the first quarter of 2016. |
Approximately $91.1 million of goodwill is deductible for income tax purposes at December 31, 2017.
Other intangible assets subject to amortization are comprisedThe Company's Senior Notes consisted of the following (incarrying value and estimated fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Hierarchy Level | | December 31, 2021 |
| | Maturity Date | | Rate | | | Carrying Value | | Fair Value |
| 2032 Senior Notes | | January 15, 2032 | | 5.000 | % | | 2 | | $ | 300,000 | | | $ | 307,700 | |
| 2029 Senior Notes | | April 15, 2029 | | 5.250 | % | | 2 | | $ | 1,000,000 | | | $ | 1,051,700 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 | |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Weighted Average Useful Lives |
| Customer relationships | $ | 338,719 |
| | $ | (102,271 | ) | | $ | 236,448 |
| | $ | 304,751 |
| | $ | (79,607 | ) | | $ | 225,144 |
| 13 |
| Technology and patents | 49,075 |
| | (22,492 | ) | | 26,583 |
| | 44,710 |
| | (18,290 | ) | | $ | 26,420 |
| 9 |
| Trade names, subject to amortization | 182,976 |
| | (22,518 | ) | | 160,458 |
| | 128,675 |
| | (6,833 | ) | | $ | 121,842 |
| 15 |
| Licensing and non-compete agreements | 7,965 |
| | (6,488 | ) | | 1,477 |
| | 7,845 |
| | (5,987 | ) | | $ | 1,858 |
| 4 |
Permits and airspace (1) | 115,230 |
| | (31,026 | ) | | 84,204 |
| | 113,295 |
| | (21,531 | ) | | $ | 91,764 |
| 13 |
| Distributor relations and other | 726 |
| | (646 | ) | | 80 |
| | 606 |
| | (606 | ) | | $ | — |
| 5 |
| | 694,691 |
| | (185,441 | ) | | 509,250 |
| | 599,882 |
| | (132,854 | ) | | 467,028 |
| |
| Trade names, not subject to amortization | 71,267 |
| | — |
| | 71,267 |
| | 72,183 |
| | — |
| | 72,183 |
| |
| Total intangibles, net | $ | 765,958 |
| | (185,441 | ) | | 580,517 |
| | $ | 672,065 |
| | $ | (132,854 | ) | | $ | 539,211 |
| |
(1)Permits and airspace intangible assets relate to the Company's Clean Earth business. Permits are obtained by Clean Earth for the treatment of soil and solid waste from various government municipalities and are amortized over the estimated life of the permit. Modifications of existing permits to accept new waste streams, alterations of existing permits to enhance the permit limitations, and new permits, as well as the related costs associated with obtaining, modifying or renewing the permits, are capitalized and amortized over the estimated life of the permit.
Estimated charges to amortization expense of intangible assets over the next five years, is as follows, (in thousands):
|
| | | |
| 2018 | $ | 62,983 |
|
| 2019 | 61,930 |
|
| 2020 | 52,308 |
|
| 2021 | 42,596 |
|
| 2022 | 40,917 |
|
| | $ | 260,734 |
|
The Company’s amortization expense of intangible assets for the years ended December 31, 2017, 2016 and 2015 totaled $52.0 million, $35.1 million and $28.8 million, and respectively.
Note I —Nonrecurring Fair Value MeasurementMeasurements
The following table provides the assets and liabilities carried at fair value measured on a recurringnon-recurring basis as of December 31, 20172019. Refer to "Note H – Goodwill and 2016 (in thousands): |
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2017 |
| | Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (1) | (178 | ) | | — |
| | — |
| | (178 | ) |
| Interest rate swap | (6,107 | ) | | — |
| | (6,107 | ) | | — |
|
| Total recorded at fair value | $ | (6,285 | ) | | $ | — |
| | $ | (6,107 | ) | | $ | (178 | ) |
| |
(1)
| Represents put options issued to noncontrolling shareholders in connection with the Liberty acquisition in 2010 and the 5.11 acquisition in 2016. |
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2016 |
| | Carrying
Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Equity method investment - FOX | $ | 141,767 |
| | $ | 141,767 |
| | $ | — |
| | $ | — |
|
| Liabilities: | | | | | | | |
Put option of noncontrolling shareholders (3) | (180 | ) | | — |
| | — |
| | (180 | ) |
Contingent consideration - acquisitions (2) | (4,830 | ) | | — |
| | — |
| | (4,830 | ) |
| Interest rate swap | (10,719 | ) | | — |
| | (10,719 | ) | | — |
|
| Total recorded at fair value | $ | 126,038 |
| | $ | 141,767 |
| | $ | (10,719 | ) | | $ | (5,010 | ) |
| | | | | | | | |
| |
(1)
| Represents put options issued to noncontrolling shareholders in connection with the Liberty acquisition in 2010 and the 5.11 acquisition in 2016. |
| |
(2)
| Represents potential earn-outs payable as additional purchase price consideration by Sterno in connection with the acquisition of Sterno Home and Ergobaby in connection with the acquisition of Baby Tula. |
| |
(3)
| Represents put options issued to noncontrolling shareholders in connection with the Liberty acquisition. |
A reconciliation of the change in the carrying value of the Company’s Level 3 fair value measurements for the year ended December 31, 2017 and 2016 is as follows (in thousands):
|
| | | | | | | |
| | 2017 | | 2016 |
| Balance at January 1st | $ | (5,010 | ) | | $ | (50 | ) |
| Contingent consideration - Sterno Home | (382 | ) | | (1,500 | ) |
| Contingent consideration - Baby Tula | — |
| | (3,780 | ) |
| Put option issued to noncontrolling shareholder - 5.11 | — |
| | (50 | ) |
| Payment of contingent consideration - Sterno Home | 475 |
| | 450 |
|
| (Increase) decrease in the fair value of put option of noncontrolling shareholders - Liberty | 8 |
| | (80 | ) |
| Increase in the fair value of put option of noncontrolling shareholder - 5.11 | (5 | ) | | — |
|
| Reversal of contingent consideration - Baby Tula | 3,780 |
| | — |
|
| Reversal of contingent consideration - Sterno Home | 956 |
| | — |
|
| Balance at December 31st | $ | (178 | ) | | $ | (5,010 | ) |
Valuation Techniques
Options of noncontrolling shareholders
The put options of noncontrolling shareholders were determined based on inputs that were not readily available in public markets or able to be derived from information available in publicly quoted markets. As such, the Company categorized the put options of the noncontrolling shareholders as Level 3. The primary inputs associated with this valuation are earnings before interest, taxes amortization and depreciation times a multiple established in the shareholder put option agreement, which is used to determine a per share equity value for the shares that can be put back to the Company. The per share equity value of the Liberty put option is discounted for liquidity and marketability, as well as a the probability of a triggering event. An increase or decrease in these primary inputs would not have a material impact on the determination of the fair value of these put options. As a result of the Liberty recapitalization (refer to Intangible Assets"Note O - Noncontrolling Interest", for a description of the transaction), the number of shares that can be put backvaluation techniques used to the Company by the noncontrolling shareholders increased, resulting in an increase in thedetermine fair value of the put option.Interest rate swap
The Company’s derivative instrumentsassets measured on a non-recurring basis in the table below. There were no assets and liabilities carried at fair value measured on a non-recurring basis as of December 31, 2017 consisted2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Expense |
| Fair Value Measurements at December 31, 2019 | | Year ended |
| (in thousands) | Carrying
Value | | Level 1 | | Level 2 | | Level 3 | | December 31, 2019 |
| Goodwill - Velocity Outdoor | $ | 30,079 | | | — | | | — | | | $ | 30,079 | | | $ | 32,881 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N — Noncontrolling Interest
Noncontrolling interest represents the portion of an over-the-countera majority-owned subsidiary’s net income and equity that is owned by noncontrolling shareholders.
The following tables reflect the Company’s percentage ownership of its businesses, as of December 31, 2021, 2020 and 2019 and related noncontrolling interest rate swap contract whichbalances as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % Ownership (1) December 31, 2021 | | % Ownership (1) December 31, 2020 | | % Ownership (1) December 31, 2019 |
| Primary | | Fully
Diluted | | Primary | | Fully
Diluted | | Primary | | Fully
Diluted |
| 5.11 | 97.6 | | | 88.4 | | | 97.6 | | | 88.1 | | | 97.6 | | | 88.9 | |
| BOA | 91.8 | | | 83.8 | | | 81.9 | | | 74.8 | | | N/a | | N/a |
| Ergobaby | 81.7 | | | 72.7 | | | 81.4 | | | 72.6 | | | 81.9 | | | 75.8 | |
| Lugano | 59.9 | | | 58.1 | | | N/a | | N/a | | N/a | | N/a |
| Marucci | 91.1 | | | 82.8 | | | 92.2 | | | 83.8 | | | N/a | | N/a |
| Velocity | 99.3 | | | 87.6 | | | 99.3 | | | 88.0 | | | 99.3 | | | 93.9 | |
| | | | | | | | | | | |
| Altor | 100.0 | | | 91.2 | | | 100.0 | | | 91.5 | | | 100.0 | | | 91.5 | |
| Arnold | 98.0 | | | 85.5 | | | 96.7 | | | 81.1 | | | 96.7 | | | 80.2 | |
| Sterno | 100.0 | | | 87.1 | | | 100.0 | | | 88.5 | | | 100.0 | | | 88.5 | |
(1)The principal difference between primary and fully diluted percentages of our operating segments is not traded on a public exchange. The fair valuedue to stock option issuances of operating segment stock to management of the Company’s interest rate swap contract was determined based on inputs that were readily available in public markets or could be derived from information available in publicly quoted markets. As such, the Company categorized the swap as Level 2. Changes in the fair valuerespective business.
| | | | | | | | | | | |
| Noncontrolling Interest Balances |
| (in thousands) | December 31,
2021 | | December 31,
2020 |
| 5.11 | $ | 15,458 | | | $ | 14,567 | |
| BOA | 30,581 | | | 61,625 | |
| Ergobaby | 29,435 | | | 27,408 | |
| Lugano | 70,585 | | | — | |
| Marucci | 17,175 | | | 11,386 | |
| Velocity | 5,250 | | | 4,077 | |
| | | |
| Altor | 3,936 | | | 2,901 | |
| Arnold | 1,284 | | | 1,117 | |
| Sterno | 1,524 | | | 282 | |
| Allocation Interests | 100 | | | 100 | |
| $ | 175,328 | | | $ | 123,463 | |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note O — Supplemental Data
Supplemental Balance Sheet Data (in thousands):
| | | | | | | | | | | |
| Summary of accrued expenses | December 31, |
| 2021 | | 2020 |
| | | |
| Accrued payroll and fringes | $ | 43,270 | | | $ | 34,324 | |
| Accrued taxes | 16,472 | | | 14,014 | |
| Income taxes payable | 6,163 | | | 6,067 | |
| Accrued interest | 13,563 | | | 8,259 | |
| Accrued rebates and discounts | 10,687 | | | 5,170 | |
| Warranty payable | 2,062 | | | 1,558 | |
| Accrued inventory | 50,122 | | | 40,461 | |
| Other accrued expenses | 32,462 | | | 24,365 | |
| Total | $ | 174,801 | | | $ | 134,218 | |
| | | | | | | | | | | |
| Warranty liability | Year ended December 31, |
| 2021 | | 2020 |
| | | |
| Beginning balance | $ | 1,558 | | | $ | 784 | |
| Accrual | 4,257 | | | 2,821 | |
| Warranty payments | (3,753) | | | (2,696) | |
Other (1) | — | | | 649 | |
| Ending balance | $ | 2,062 | | | $ | 1,558 | |
(1) Represents warranty liabilities of the interest rate swap liability during the year ended December 31, 2017 were expensed to interest expense on the consolidated statementacquired businesses.
| | | | | | | | | | | | | | | | | |
| Other income (expense), net | Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Foreign currency gain (loss) | $ | 27 | | | $ | 71 | | | $ | (67) | |
| Loss on sale of capital assets | (1,458) | | | (1,851) | | | (1,626) | |
| Other income (expense) | 247 | | | (679) | | | (353) | |
| $ | (1,184) | | | $ | (2,459) | | | $ | (2,046) | |
Supplemental Cash Flow Statement Data (in thousands):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Interest paid | $ | 58,553 | | | $ | 43,730 | | | $ | 56,431 | |
| Taxes paid | $ | 27,371 | | | $ | 10,189 | | | $ | 15,367 | |
Investments
Contingent Consideration
SternoFor certain acquisition of businesses that the Company or its subsidiaries make, a portion of the acquisition price will be contingent consideration. The following is a summary of the contingent consideration arrangements entered into by the Company's subsidiaries in the prior three years and the valuation methodologies:
•Altor Solutions entered into a contingent consideration arrangement associatedin connection with thetheir purchase of Sterno Home (formerly NII)Polyfoam in January 2016.July 2020. The earnout provision provides for payments up to $1.8purchase price of Polyfoam includes a potential earn-out of $1.4 million over a two year period subsequent to acquisition. Earnings before interest, taxes, depreciation and amortization ("EBITDA") is the performance target defined and measured to determine the earnout payment due, if any, after each defined measurement period. Polyfoam achieves certain financial metrics.
Senior Notes
The contingent consideration was valued at $1.5 million using probability weighted models. During the quarter ended September 30, 2016, Sterno paid $0.5 millionCompany's Senior Notes consisted of the contingent consideration. At December 31, 2016, Sterno determined that it was more likely than not that the full amount of the contingent consideration would be paid out, and recorded an additional $0.4 million in earnout, which was recorded though the statement of operations. Sterno paid an additional $0.5 million in the first quarter of 2017 related to an earnout milestone as of December 31, 2016. At December 31, 2017, Sterno determined that the final earnout milestone had not been met, and reversed the remaining contingent consideration liability.
In connection with the acquisition of Baby Tula in May 2016, Ergobaby entered into a contingent consideration arrangement with the sellers. The earnout provision provides for additional consideration of $8.2 million if the gross profit for Baby Tula for the 2017 fiscal year exceeds a specified level. No earnout amount will be paid if the specified gross profit level is not met. Ergobaby valued the contingent consideration at a fair value of $3.8 million using a probability weighted option pricing model. At December 31, 2017, Ergobaby determined that the earnout provision would not be met and reversed the fair value of the liability.
2014 Term Loan and 2016 Incremental Term Loan
At December 31, 2017, thefollowing carrying value of the principal under the Company's outstanding 2014 Term Loan, including the current portion, was $560.0 million, which approximates fair value because it has a variable interest rate that reflects market changes in interest rates and changes in the Company's net leverage ratio. The estimated fair value of the outstanding 2014 Term Loan is classified as Level 2 in the fair value hierarchy.(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Hierarchy Level | | December 31, 2021 |
| | Maturity Date | | Rate | | | Carrying Value | | Fair Value |
| 2032 Senior Notes | | January 15, 2032 | | 5.000 | % | | 2 | | $ | 300,000 | | | $ | 307,700 | |
| 2029 Senior Notes | | April 15, 2029 | | 5.250 | % | | 2 | | $ | 1,000,000 | | | $ | 1,051,700 | |
Nonrecurring Fair Value Measurements
The following tables providetable provides the assets and liabilities carried at fair value measured on a non-recurring basis as of December 31, 2017 and 2016 (in thousands).2019. Refer to "Note H – Goodwill and IntangiblesIntangible Assets", for a description of the valuation techniques used to determine fair value of the assets measured on a non-recurring basis in the table below. There were no assets and liabilities carried at fair value measured on a non-recurring basis as of December 31, 2015. |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Expense |
| | Fair Value Measurements at December 31, 2017 | | Year ended |
| (in thousands) | Carrying
Value | | Level 1 | | Level 2 | | Level 3 | | December 31, 2017 |
| Goodwill - Arnold | $ | 26,903 |
| | $ | — |
| | $ | — |
| | $ | 26,903 |
| | $ | 8,864 |
|
| Goodwill - Manitoba Harvest | 41,024 |
| | — |
| | — |
| | 41,024 |
| | 6,188 |
|
| Tradename - Manitoba | 10,834 |
| | — |
| | — |
| | 11,550 |
| | 2,273 |
|
| | | | | | | | | | $ | 17,325 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Expense |
| | Fair Value Measurements at December 31, 2016 | | Year ended |
| (in thousands) | Carrying
Value | | Level 1 | | Level 2 | | Level 3 | | December 31, 2016 |
| Goodwill - Arnold | $ | 35,767 |
| | $ | — |
| | $ | — |
| | $ | 35,767 |
| | $ | 16,000 |
|
Property, plant and equipment (1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,824 |
|
Tradename (1) | $ | — |
| | $ | ��� |
| | $ | — |
| | $ | — |
| | $ | 317 |
|
Technology (1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,460 |
|
Customer relationships (1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,426 |
|
Permits (1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,177 |
|
(1) Represents the fair value of the respective assets at the Orbit Baby product line, and the Clean Earth Williamsport site. Refer to "Note H - Goodwill and Other Intangible Assets" for further discussion regarding the impairment and valuation techniques applied.Note J – Debt
2014 Credit Agreement
On June 6, 2014, the Company obtained a $725 million credit facility from a group of lenders (the “2014 Credit Facility”) led by Bank of America N.A. as Administrative Agent. The 2014 Credit Facility provides for (i) a revolving credit facility of $400 million (the “2014 Revolving Credit Facility”) and (ii) a $325 million term loan (the “2014 Term Loan Facility”). The 2014 Credit Facility permits the Company to increase the 2014 Revolving Credit Facility commitment and/ or obtain additional term loans in an aggregate of up to $200 million. The 2014 Credit Agreement is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. The 2014 Credit Facility was amended in June 2015, primarily to allow for intercompany loans to, and the acquisition of, Canadian-based companies on an unsecured basis, and to modify provisions that would allow for early termination of a "Leverage Increase Period," thereby providing additional flexibility as to the timing of subsequent acquisitions. On August 15, 2016, the Company amended the 2014 Credit Facility to, among other things, increase the aggregate amount of the 2014 Credit Facility by $400 million. On August 31, 2016, the Company entered into an Incremental Facility Amendment to the 2014 Credit Agreement (the "Incremental Facility Amendment"). The Incremental Facility Amendment provided for an increase to the 2014 Revolving Credit Facility of $150 million, and the 2016 Incremental Term Loan, in the amount of $250 million. As a result of the Incremental Facility Amendment, the 2014 Credit Facility currently provides for (i) a revolving credit facility of $550 million (as amended from time to time, the "2014 Revolving Credit Facility"), (ii) a $325 million term loan (the "2014 Term Loan Facility"), and (iii) a $250 million incremental term loan "the "2016 Incremental Term Loan").
2014 Revolving Credit Facility
The 2014 Revolving Credit Facility will become due in June 2019. The Company can borrow, prepay and re-borrow principal under the 2014 Revolving Credit Facility from time to time during its term. Advances under the 2014 Revolving Credit Facility can be either LIBOR rate loans or base rate loans. LIBOR rate revolving loans bear interest at a rate per annum equal to the London Interbank Offered Rate (the “LIBOR Rate”) plus a margin ranging from 2.00% to 2.75% based on the ratio of consolidated net indebtedness to adjusted consolidated earnings before interest expense, tax expense and depreciation and amortization expenses (the “Consolidated Leverage Ratio”). Base rate revolving loans bear interest at a fluctuating rate per annum equal to the greatest of (i) the prime rate of interest, or (ii) the Federal Funds Rate plus 0.5% (the “Base Rate”), plus a margin ranging from 1.00% to 1.75% based upon the Consolidated Leverage Ratio.
2014 Term Loan Facility
The 2014 Term Loan Facility expires in June 2021 and requires quarterly payments that commenced September 30, 2014, with a final payment of all remaining principal and interest due on June 6, 2021. The 2014 Term Loan Facility was issued at an original issue discount of 99.5% of par value and bears interest at either the applicable LIBOR Rate plus 3.25% per annum, or Base Rate plus 2.25% per annum. The LIBOR Rate applicable to both base rate loans and LIBOR rate loans shall in no event be less than 1.00% at any time.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Expense |
| Fair Value Measurements at December 31, 2019 | | Year ended |
| (in thousands) | Carrying
Value | | Level 1 | | Level 2 | | Level 3 | | December 31, 2019 |
| Goodwill - Velocity Outdoor | $ | 30,079 | | | — | | | — | | | $ | 30,079 | | | $ | 32,881 | |
2016 Incremental Term Loan
The 2016 Incremental Term Loan was issued at an original issue discount of 99.25% of par value. The Company incurred $6.0 million in additional debt issuance costs related to the Incremental Credit Facility, which will be recognized as expense during the remaining term of the related 2014 Revolving Credit Facility, and 2014 Term Loan and 2016 Incremental Term Loan. The Incremental Facility Amendment did not change the due dates or applicable interest rates of the 2014 Credit Agreement. The quarterly payments for the term advances under the 2014 Credit Agreement increased to approximately $1.4 million per quarter. The Company used the proceeds from the Incremental Facility Amendment to fund the acquisition of 5.11 Tactical (refer to "Note C - Acquisition of Businesses"").In March 2017, the Company 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 connection with the Fourth Amendment, the Company capitalized debt issuance costs of $1.2 million associated with fees charged by term loan lenders.
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%. In connection with the First Refinancing Amendment, the Company incurred $1.4 million of debt issuance costs associated with fees charged by term loan lenders.
Other
The 2014 Credit Facility provides for sub-facilities under the 2014 Revolving Credit Facility pursuant to which an aggregate amount of up to $100.0 million in letters of credit may be issued, as well as swing line loans of up to $25.0 million outstanding at one time. The issuance of such letters of credit and the making of any swing line loan reduces the amount available under the 2014 Revolving Credit Facility. The Company will pay (i) commitment fees on the unused portion of the 2014 Revolving Credit Facility ranging from 0.45% to 0.60% per annum based on its Consolidated Leverage Ratio, (ii) quarterly letter of credit fees, and (iii) administrative and agency fees.
The following table provides the Company’s debt holdings at December 31, 2017 and December 31, 2016 (in thousands):
|
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| Revolving Credit Facility | $ | 42,000 |
| | $ | 4,400 |
|
| Term Loan Facility | 559,973 |
| | 565,658 |
|
Original issue discount (1) | (3,483 | ) | | (4,706 | ) |
| Deferred financing costs - term debt | (8,458 | ) | | (8,015 | ) |
| Total debt | $ | 590,032 |
| | $ | 557,337 |
|
| Less: Current portion, term loan facilities | (5,685 | ) | | (5,685 | ) |
| Long-term debt | $ | 584,347 |
| | $ | 551,652 |
|
COMPASS DIVERSIFIED HOLDINGS
| |
(1)
| The Company recorded $4.6 million in original issue discount upon issuance of the 2014 Term Loan Facility in June 2014 and $1.9 million in original issue discount upon issuance of the 2016 Incremental Term Loan. This discount is being amortized over the life of the 2014 Term Loan Facility and 2016 Incremental Term Loan. |
Annual maturities of the Company's debt obligations under the 2014 Credit Facility are as follows (in thousands):NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
| 2018 | 5,685 |
|
| 2019 | 47,685 |
|
| 2020 | 5,685 |
|
| 2021 | 539,435 |
|
| | $ | 598,490 |
|
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the entering into the 2014 Credit Facility as well as the issuance costs associated with the August 2016 Incremental Facility Amendment and are amortized over the term of the related debt instrument. Since the Company can borrow, repay and re-borrow principal under the 2014 Revolving Credit Facility, the debt issuance costs associated with this facility have been classified as other non-current assets in the accompanying consolidated balance sheet. The debt issuance costs associated with the 2014 Term Loan and 2016 Incremental Term Loan are classified as a reduction of long-term debt in the accompanying consolidated balance sheet.
The Company paid debt issuance costs of $7.3 million in connection with the 2014 Credit Facility (of which $0.2 million was expensed as debt modification and extinguishment costs and $7.1 million is being amortized over the term of the related debt in the 2014 Credit Facility) and recorded additional debt modification and extinguishment costs of $2.1 million to write-off previously capitalized debt issuance costs associated with the Company's prior credit facility. The Company paid $6.0 million in debt issuance costs in connection with the 2016 Incremental Facility Amendment.
The following table summarizes debt issuance costs at December 31, 2017 and December 31, 2016, and the balance sheet classification in each of the periods presents (in thousands):
|
| | | | | | | |
| | December 31, 2017 |
| | December 31, 2016 |
|
| Deferred debt issuance costs | $ | 21,491 |
| | $ | 18,960 |
|
| Accumulated amortization | (10,250 | ) | | (6,248 | ) |
| Deferred debt issuance costs, net | $ | 11,241 |
| | $ | 12,712 |
|
| | | | |
| Balance sheet classification: | | | |
| Other noncurrent assets | $ | 2,784 |
| | $ | 4,698 |
|
| Long-term debt | 8,458 |
| | 8,014 |
|
| | $ | 11,241 |
| | $ | 12,712 |
|
Covenants
The Company is subject to certain customary affirmative and restrictive covenants arising under the 2014 Credit Facility. The following table reflects required and actual financial ratios as of December 31, 2017 included as part of the affirmative covenants in the 2014 Credit Facility:
|
| | |
Description of Required Covenant Ratio | Covenant Ratio Requirement | Actual Ratio |
Fixed Charge Coverage Ratio | greater than or equal to 1.50: 1.00 | 2.82:1.00 |
Total Debt to EBITDA Ratio | less than or equal to 3:50: 1.00 | 3.00:1.00 |
A breach of any of these covenants will be an event of default under the 2014 Credit Facility. Upon the occurrence of an event of default under the 2014 Credit Facility, the 2014 Revolving Credit Facility may be terminated, the 2014 Term Loan Facility and all outstanding loans and other obligations under the 2014 Credit Facility may become immediately due and payable and any letters of credit then outstanding may be required to be cash collateralized, and the Agent and the Lenders may exercise any rights or remedies available to them under the 2014 Credit Facility. Any such event would materially impair the Company’s ability to conduct its business. As of December 31, 2017, the Company was in compliance with all covenants as defined in the 2014 Credit Agreement.
Letters of credit
The 2014 Credit Facility allows for letters of credit in an aggregate face amount of up to $100.0 million. Letters of credit outstanding at December 31, 2017 totaled $0.6 million and at December 31, 2016 totaled $4.2 million. Letter of credit fees recorded to interest expense totaled $0.1 million in each of the years ended December 31, 2017, 2016 and 2015.
Interest hedge
The Company entered into an interest rate swap on $220 million of outstanding debt for a period from April 2016 through June 2021 in connection with the term of our 2014 Term Loan. Refer to "Note K - Derivative Instruments and Hedging Activities" for further information on the interest rate derivatives entered into as part of the Term Loan Facility.Interest expense
The following details the components of interest expense in each of the years ended December 31, 2017, 2016 and 2015 (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Interest on credit facilities | $ | 23,940 |
| | $ | 19,861 |
| | $ | 17,590 |
|
| Unused fee on Revolving Credit Facility | 2,856 |
| | 1,947 |
| | 1,612 |
|
| Amortization of original issue discount | 1,037 |
| | 802 |
| | 671 |
|
| Unrealized (gains) losses on interest rate derivatives | (648 | ) | | 1,539 |
| | 5,662 |
|
| Letter of credit fees | 70 |
| | 108 |
| | 121 |
|
| Other | 538 |
| | 415 |
| | 286 |
|
| Interest expense | $ | 27,793 |
| | $ | 24,672 |
| | $ | 25,942 |
|
| Average daily balance of debt outstanding | $ | 597,114 |
| | $ | 477,656 |
| | $ | 443,348 |
|
| Effective interest rate | 4.7 | % | | 5.2 | % | | 5.9 | % |
Note K — Derivative Instruments and Hedging Activities
Interest Rate Swaps
On September 16, 2014, the Company purchased an interest rate swap ("New Swap") with a notional amount of $220 million. The New Swap is effective April 1, 2016 through June 6, 2021, the termination date of our 2014 Term Loan. The interest rate swap agreement requires the Company to pay interest rates on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. At December 31, 2017 and 2016, the New Swap had a fair value loss of $6.1 million and $10.7 million, respectively, principally reflecting the present value of future payments and receipts under the agreement.
In October 2011, the Company purchased a three-year interest rate swap (the "Swap") with a notional amount of $200 million effective January 1, 2012 through March 31, 2016. The interest rate swap agreement required the Company to pay interest
on the notional amount at the rate of 2.49% in exchange for the three-month LIBOR rate, with a floor of 1.5%. At December 31, 2015, this Swap had a fair value loss of $0.5 million. A final payment under the Swap of $0.5 million was made on March 31, 2016 when the Swap contract ended.
The following table reflects the classification of the Company's Interest Rate Swap on the Consolidated Balance Sheets at December 31, 2017 and 2016 (in thousands):
|
| | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 |
| Other current liabilities | | $ | 2,468 |
| | $ | 4,010 |
|
| Other non-current liabilities | | 3,639 |
| | 6,709 |
|
| Total fair value | | $ | 6,107 |
| | $ | 10,719 |
|
The Company did not elect hedge accounting for the above derivative transaction associated with the Credit Facility and changes in fair value are included in interest expense on the consolidated statement of operations.
Foreign Currency Contracts
The Company's Arnold operating segment from time to time will use forward contracts and options to hedge the value of the Eurodollar against the Swiss Franc or the British Pound Sterling. Mark-to-market gains and losses on these instruments were not material to the consolidated results during each of the years ended December 31, 2017, 2016 or 2015. At December 31, 2017 and 2016, these contracts had notional values of €0.3 million and €0.8 million, respectively, and maturity dates within three months of year end.
Note L — Income Taxes
Compass Diversified Holdings and Compass Group Diversified Holdings LLC are classified as partnerships for U.S. Federal income tax purposes and are not subject to income taxes. Each of the Company’s majority owned subsidiaries are subject to Federal and state income taxes.
Components of the Company's pretax income (loss) before taxes are as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Domestic (including U.S. exports) | | $ | (13,276 | ) | | $ | 63,782 |
| | $ | 29,432 |
|
| Foreign subsidiaries | | 5,869 |
| | (564 | ) | | (5,440 | ) |
| | | $ | (7,407 | ) | | $ | 63,218 |
| | $ | 23,992 |
|
Components of the Company’s income tax provision (benefit) are as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Current taxes | | | | | | |
| Federal | | $ | 10,293 |
| | $ | 12,994 |
| | $ | 16,079 |
|
| State | | 2,221 |
| | 2,486 |
| | 2,567 |
|
| Foreign | | 6,236 |
| | 3,857 |
| | 688 |
|
| Total current taxes | | 18,750 |
| | 19,337 |
| | 19,334 |
|
| Deferred taxes: | | | | | | |
| Federal | | (55,299 | ) | | (5,816 | ) | | (764 | ) |
| State | | (1,712 | ) | | (1,357 | ) | | 70 |
|
| Foreign | | (2,418 | ) | | (2,695 | ) | | (3,639 | ) |
| Total deferred taxes | | (59,429 | ) | | (9,868 | ) | | (4,333 | ) |
| Total tax provision | | $ | (40,679 | ) | | $ | 9,469 |
| | $ | 15,001 |
|
The tax effects of temporary differences that have resulted in the creation of deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Tax credits | $ | 5,035 |
| | $ | 11,485 |
|
| Accounts receivable and allowances | 1,134 |
| | 1,032 |
|
| Net operating loss carryforwards | 27,631 |
| | 28,896 |
|
| Accrued expenses | 5,789 |
| | 7,324 |
|
| Other | 5,174 |
| | 3,966 |
|
| Total deferred tax assets | $ | 44,763 |
| | $ | 52,703 |
|
Valuation allowance (1) | (5,912 | ) | | (7,256 | ) |
| Net deferred tax assets | $ | 38,851 |
| | $ | 45,447 |
|
| Deferred tax liabilities: | | | |
| Intangible assets | $ | (102,581 | ) | | $ | (120,645 | ) |
| Property and equipment | (17,060 | ) | | (19,810 | ) |
| Repatriation of foreign earnings | (68 | ) | | (8,973 | ) |
| Prepaid and other expenses | (191 | ) | | (6,857 | ) |
| Total deferred tax liabilities | $ | (119,900 | ) | | $ | (156,285 | ) |
| Total net deferred tax liability | $ | (81,049 | ) | | $ | (110,838 | ) |
| |
(1)
| Primarily relates to the 5.11 and Arnold operating segments. |
For the years ending December 31, 2017 and 2016, the Company recognized approximately $119.9 million and $156.3 million, respectively in deferred tax liabilities. A significant portion of the balance in deferred tax liabilities reflects temporary differences in the basis of property and equipment and intangible assets related to the Company’s purchase accounting adjustments in connection with the acquisition of certain of its businesses. For financial accounting purposes the Company has recognized a significant increase in the fair values of the intangible assets and property and equipment in certain of the businesses it acquired. For income tax purposes the existing, pre-acquisition tax basis of the intangible assets and property and equipment is utilized. In order to reflect the increase in the financial accounting basis over the existing tax basis, a deferred tax liability was recorded. This liability will decrease in future periods as these temporary differences reverse but may be replaced by deferred tax liabilities generated as a result of future acquisitions.
A valuation allowance relating to the realization of foreign tax credits and net operating losses of $5.9 million was provided at December 31, 2017 and $7.3 million was provided at December 31, 2016. A valuation allowance is provided whenever it is more likely than not that some or all of deferred assets recorded may not be realized.
The reconciliation between the Federal Statutory Rate and the effective income tax rate for 2017, 2016 and 2015 are as follows:
|
| | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| United States Federal Statutory Rate | (35.0 | )% |
| 35.0 | % |
| 35.0 | % |
| State income taxes (net of Federal benefits) | (6.5 | ) | | 0.6 |
| | 6.5 |
|
| Foreign income taxes | (18.4 | ) | | 1.5 |
| | 1.2 |
|
Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders (1) | (3.3 | ) |
| 3.6 |
|
| 29.1 |
|
| Effect of (gain) loss on equity method investment | 26.6 |
| | (41.2 | ) | | (6.6 | ) |
| Impact of subsidiary employee stock options | 9.9 |
|
| 1.3 |
|
| 1.3 |
|
| Domestic production activities deduction | (8.4 | ) |
| (0.9 | ) |
| (3.2 | ) |
| Non-deductible acquisition costs | 4.6 |
|
| 1.9 |
|
| — |
|
| Impairment expense | 69.4 |
| | — |
| | — |
|
| Effect of undistributed foreign earnings | (18.7 | ) | | 4.2 |
| | — |
|
| Non-recognition of NOL carryforwards at subsidiaries | (18.1 | ) |
| 3.6 |
|
| (6.1 | ) |
Adjustments to uncertain tax positions (2) | (124.0 | ) | | — |
| | — |
|
| Utilization of tax credits | (40.1 | ) | | (0.7 | ) | | (1.1 | ) |
Effect of Tax Act - remeasurement of deferred tax assets and liabilities (3) | (468.0 | ) | | — |
| | — |
|
Effect of Tax Act - transition tax on non-U.S. subsidiaries' earnings(3) | 65.6 |
| | — |
| | — |
|
| Other | 15.2 |
|
| 6.1 |
|
| 6.4 |
|
| Effective income tax rate | (549.2 | )% | | 15.0 | % | | 62.5 | % |
| |
(1)
| The effective income tax rate for each of the years presented includes losses at the Company’s parent, which is taxed as a partnership. |
| |
(2)
| Represents the effect of the reversal of an uncertain tax position at our 5.11 business that existed as of the acquisition date and was settled during the fourth quarter of 2017, resulting in a tax benefit of $9.2 million in our 2017 tax provision. |
| |
(3)
| The effect of the enactment of the Tax Act on our tax provision for the year ended December 31, 2017 was a benefit of $34.7 million related to the reduction in the U.S. federal corporate income tax rate from 35% to 21%, and tax expense of $4.9 million related to the one-time transition tax liability of our foreign subsidiaries. Our loss before income taxes for 2017 was $7.4 million, and as a result, the effect from the Tax Act on the reconciliation in the table above was significant.
|
A reconciliation of the amount of unrecognized tax benefits for 2017, 2016 and 2015 are as follows (in thousands):
|
| | | |
| Balance at January 1, 2015 | $ | 433 |
|
| Additions for current years’ tax positions | 73 |
|
| Additions for prior years’ tax positions | — |
|
| Reductions for prior years’ tax positions | (15 | ) |
| Reductions for settlements | — |
|
| Reductions for expiration of statute of limitations | (102 | ) |
| Balance at December 31, 2015 | $ | 389 |
|
| Additions for current years’ tax positions | 64 |
|
Additions for prior years’ tax positions (1) | 10,150 |
|
| Reductions for prior years’ tax positions | (16 | ) |
| Reductions for settlements | — |
|
| Reductions for expiration of statute of limitations | (87 | ) |
| Balance at December 31, 2016 | $ | 10,500 |
|
|
| | | |
| Additions for current years’ tax positions | 96 |
|
| Additions for prior years’ tax positions | 23 |
|
Reductions for prior years’ tax positions (1) | (9,397 | ) |
| Reductions for settlements | — |
|
| Reductions for expiration of statute of limitations | (87 | ) |
| Balance at December 31, 2017 | $ | 1,135 |
|
(1) The increase in prior year tax positions during the year ended December 31, 2016 related to an unrecognized tax benefit at the Company's 5.11 business, which was acquired in August 2016. The uncertainty was resolved in the fourth quarter of 2017 and the amount was reversed.
Included in the unrecognized tax benefits at December 31, 2017 and 2016 is $1.0 million and $10.4 million, respectively, of tax benefits that, if recognized, would affect the Company’s effective tax rate. The Company accrues interest and penalties related to uncertain tax positions. The amounts accrued at December 31, 2017, 2016 and 2015 are not material to the Company. Such amounts are included in the provision (benefit) for income taxes in the accompanying consolidated statements of operations. The change in the unrecognized tax benefit during 2017 and 2016 resulted from the acquisition of 5.11. The change in the unrecognized tax benefit during 2015 was not material. It is expected that the amount of unrecognized tax benefits will change in the next twelve months. However, we do not expect the change to have a significant impact on the consolidated results of operations or financial position.
Each of the Company’s businesses file U.S. Federal, state and foreign income tax returns in multiple jurisdictions with varying statutes of limitations. The 2013 through 2017 tax years generally remain subject to examinations by the taxing authorities.
Note M – Defined Benefit Plan
In connection with the acquisition of Arnold, the Company has a defined benefit plan covering substantially all of Arnold’s employees at its Lupfig, Switzerland location. The benefits are based on years of service and the employees’ highest average compensation during the specific period.
The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated balance sheets at December 31, 2017 and 2016 (in thousands):
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Change in benefit obligation: | | | |
| Benefit obligation, beginning of year | $ | 13,804 |
| | $ | 13,392 |
|
| Service cost | 534 |
| | 409 |
|
| Interest cost | 94 |
| | 130 |
|
| Actuarial (gain)/loss | (59 | ) | | 817 |
|
| Employee contributions and transfer | 319 |
| | 315 |
|
| Benefits paid | (555 | ) | | (810 | ) |
| Foreign currency translation | 616 |
| | (449 | ) |
| Benefit obligation | $ | 14,753 |
| | $ | 13,804 |
|
| Change in plan assets: | | | |
| Fair value of assets, beginning of period | $ | 10,549 |
| | $ | 10,897 |
|
| Actual return on plan assets | 348 |
| | 122 |
|
| Company contribution | 7 |
| | 390 |
|
| Employee contributions and transfer | 319 |
| | 315 |
|
| Benefits paid | (555 | ) | | (810 | ) |
| Foreign currency translation | 464 |
| | (365 | ) |
| Fair value of assets | 11,132 |
| | 10,549 |
|
| Funded status | $ | (3,621 | ) | | $ | (3,255 | ) |
The unfunded liability of $3.6 million and $3.3 million at December 31, 2017 and 2016, respectively, is recognized in the consolidated balance sheet within other non-current liabilities. Net periodic benefit cost consists of the following (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Service cost | $ | 534 |
| | $ | 409 |
| | $ | 578 |
|
| Interest cost | 94 |
| | 130 |
| | 167 |
|
| Expected return on plan assets | (155 | ) | | (147 | ) | | 310 |
|
| Amortization of unrecognized loss | 250 |
| | 165 |
| | — |
|
| Net periodic benefit cost | $ | 723 |
| | $ | 557 |
| | $ | 1,055 |
|
Assumptions used to determine the benefit obligations and components of the net periodic benefit cost at December 31, 2017 and 2016:
|
| | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Discount rate | 0.65 | % | | 0.65 | % |
| Expected return on plan assets | 1.40 | % | | 1.40 | % |
| Rate of compensation increase | 1.00 | % | | 1.00 | % |
The Company considers the historical level of long-term returns and the current level of expected long-term returns for the plan assets, as well as the current and expected allocation of assets when developing its expected long-term rate of return on assets assumption. The assumptions used for the plan are based upon customary rates and practices for the location of the Company.
The Company, for 2018, will be contributing per the terms of the agreement, and the expected contribution to the plan will total approximately $0.6 million.
The following presents the benefit payments which are expected to be paid for the plan in each year indicated (in thousands):
|
| | | |
| 2018 | $ | 551 |
|
| 2019 | 963 |
|
| 2020 | 1,254 |
|
| 2021 | 706 |
|
| 2022 | 635 |
|
| Thereafter | 3,692 |
|
| | $ | 7,801 |
|
Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market risk and providing adequate liquidity to meet immediate and future benefit payment requirements.
The assets of the plan are reinsured in their entirety with Swiss Life Ltd. (“Swiss Life”) within the framework of the corresponding contracts with Swiss Life Collective BVG Foundation and Swiss Life Complementary Foundation. The assets are guaranteed by the insurance company and pooled with the assets of other participating employers. The allocation of pension plan assets by category in Swiss Life’s group life portfolio is as follows at December 31, 2017:
|
| | |
Certificates of deposit and cash and cash equivalents | 66 | % |
Fixed income bonds and securities | 8 | % |
Equities and investment funds | 8 | % |
Real estate | 16 | % |
Other investments | 2 | % |
| 100 | % |
The plan assets are pooled with assets of other participating employers and are not separable; therefore the fair values of the pension plan assets at December 31, 2017 and 2016 were considered Level 3.
Note N — Stockholders' Equity
Trust Common Shares
The Trust is authorized to issue 500,000,000 Trust common shares and the Company is authorized to issue a corresponding number of LLC interests. The Company will, at all times, have the identical number of LLC interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each Trust share is entitled to one vote per share on any matter with respect to which members of the Company are entitled to vote. In December 2016, the Company completed an offering of 5,600,000 Trust common shares at an offering price of $18.65 per share. The net proceeds to the Company, after deducting the underwriter's discount and offering costs, totaled approximately $99.4 million.
Trust Preferred Shares
Pursuant to the Trust agreement, the Trust is authorized to issue up to 50,000,000 Trust preferred shares and the Company is authorized to issue a corresponding number of Trust Interests. On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Preferred Shares (the "Series A Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.4 million net of underwriters' discount and issuance costs. When, and if declared by the Company's board of directors, distribution on the Series A Preferred Shares will be payable quarterly on January 30, April 30, July 30, and October 30 of each year, beginning on October 30, 2017, at a rate per annum of 7.250%. Distributions on the Series A Preferred Shares are discretionary and non-cumulative. The Company has no obligation to pay distributions for a quarterly distribution period if the board of directors does not declare the distribution before the scheduled record of date for the period, whether or not distributions are paid for any subsequent distribution periods with respect to the Series A Preferred Shares, or the Trust common shares. If the Company's board of directors does not declare a distribution for the Series A Preferred Shares for a quarterly distribution period, during the remainder of that quarterly distribution period the Company cannot declare or pay distributions on the Trust common shares. The Series A Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the Series A Preferred Shares.
The Series A Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after July 30, 2022, at a price of $25.00 per share, plus declared and unpaid distribution to, but excluding, the redemption date, without payment of any undeclared distributions. Holders of Series A Preferred Shares will have no right to require the redemption of the Series A Preferred Shares and there is no maturity date.
If a certain tax redemption event occurs prior to July 30, 2022, the Series A Preferred Shares may be redeemed at the Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such tax redemption event, at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding, the redemption date, without payment of any undeclared distributions. If a certain fundamental change related to the Series A Preferred Shares or the Company occurs (whether before, on or after July 30, 2022), the Company will be required to repurchase the Series A Preferred Shares at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding, the date of purchase, without payment of any undeclared distributions. If (i) a fundamental change occurs and (ii) the Company does not give notice prior to the 31st day following the fundamental change to repurchase all the outstanding Series A Preferred Shares, the distribution rate per annum on the Series A Preferred Shares will increase by 5.00%, beginning on the 31st day following such fundamental change. Notwithstanding any requirement that the Company repurchase all of the outstanding Series A Preferred Shares, the increase in the distribution rate is the sole remedy to holders in the event the Company fails to do so, and following any such increase, the Company will be under no obligation to repurchase any Series A Preferred Shares.
Profit Allocation Interests
The Profit Allocation Interests represent the original equity interest in the Company. The holders of the Allocation Interests (“Holders”), through Sostratus LLC, are entitled to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The distributions of the profit allocation is paid upon the occurrence of the sale of a material amount of capital stock or assets of one of the Company’s businesses (“Sale Event”) or, at the option of the Holders, at each five year anniversary date of the acquisition of one of the Company’s businesses (“Holding Event”). The Company records distributions of the profit allocation to the Holders upon occurrence of a Sale Event or Holding Event as dividends declared on Allocation Interests to stockholders’ equity when they are approved by the Company’s board of directors.
The following is a summary of the profit allocation payments made to the Allocation Interest Holders during each of the year ended December 31, 2017, 2016 and 2015:
Year ended December 31, 2017
| |
• | The Company's board of directors approved and declared a profit allocation payment in the fourth quarter of 2016 to the Allocation Interest Holders of $13.4 million related to the FOX November Offering (refer to Note F - "Investment"). This amount was recorded as "Due to related parties" in the accompanying balance sheet at December 31, 2016, and was paid in the first quarter of 2017. |
| |
• | $25.8 million paid in the second quarter of 2017 resulting from the sale of FOX shares in March 2017 (refer to Note F - "Investment") which qualified as a Sale Event under the Company's LLC Agreement. |
Year ended December 31, 2016
| |
• | $8.6 million paid in the second quarter as a result of a Sale Event related to the sale of FOX shares in March 2016 (refer to "Note F - Investment"); |
$8.2 million paid in the third quarter as a result of the five year ownership holding period of our ACI business. The payment is in respect of its positive contribution-based profit during the five years ended June 30, 2016;
| |
• | $7.0 million paid in the fourth quarter as a result of a Sale Event related to the sale of FOX shares in August 2016 (refer to "Note F - Investment") and the sale of Tridien in September 2016 (refer to "Note D - Discontinued Operations"). Under the terms of the Company's LLC Agreement, the Company offset the profit allocation distribution resulting from the FOX Sale Event by the negative profit allocation amount from the Tridien Sale Event, resulting in a net distribution to the Allocation Member; |
Year ended December 31, 2015
| |
• | $14.6 million paid in the fourth quarter as a result of a Sale Event related to the sale of CamelBak in August 2015 and the sale of Tridien in October 2015 (refer to "Note D - Discontinued Operations"). Under the terms of the Company's LLC Agreement, the Company offset the profit allocation distribution resulting from the CamelBak Sale Event by the negative profit allocation amount related to the American Furniture Sale Event, resulting in a net distribution to the Allocation Member. |
$3.1 million paid in the fourth quarter as a result of a Holding Event for our five year ownership holding period of our Ergobaby business. The payment is in respect of its positive contribution-based profit since our acquisition in September of 2010.
Earnings per share
Basic and diluted earnings per share for the fiscal year ended December 31, 2017, 2016 and 2015 is calculated as follows:
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Income (loss) from continuing operations attributable to common shares of Holdings | $ | (13,994 | ) | | $ | 28,009 |
| | $ | (13,873 | ) |
| Less: Effect of contribution based profit—Holding Event | 12,726 |
| | 2,862 |
| | 2,804 |
|
| Income (loss) from Holdings attributable to common shares | $ | (26,720 | ) | | $ | 25,147 |
| | $ | (16,677 | ) |
| | | | | | |
| Income from discontinued operations attributable to Holdings | $ | 340 |
| | $ | 2,898 |
| | $ | 157,980 |
|
| Less: Effect of contribution based profit | — |
| | — |
| | — |
|
| Income from discontinued operations of Holdings attributable to common shares | $ | 340 |
| | $ | 2,898 |
| | $ | 157,980 |
|
| | | | | | |
| Basic and diluted weighted average common shares of Holdings outstanding | 59,900 |
| | 54,591 |
| | 54,300 |
|
| | | | | | |
| Basic and fully diluted income (loss) per common share attributable to Holdings | | | | | |
| Continuing operations | $ | (0.45 | ) | | $ | 0.46 |
| | $ | (0.30 | ) |
| Discontinued operations | $ | 0.01 |
| | $ | 0.05 |
| | $ | 2.91 |
|
| | $ | (0.44 | ) | | $ | 0.51 |
| | $ | 2.61 |
|
Distributions
During the year ended December 31, 2017, the Company paid the following distributions:
Trust Common Shares
On January 26, 2017, the Company paid a distribution of $0.36 per share to holders of record as of January 19, 2017. This distribution was declared on January 5, 2017.
On April 27, 2017, the Company paid a distribution of $0.36 per share to holders of record as of April 20, 2017. This distribution was declared on April 6, 2017.
On July 27, 2017, the Company paid a distribution of $0.36 per share to holders of record as of July 20, 2017. This distribution was declared on July 6, 2017.
On October 26, 2017, the Company paid a distribution of $0.36 per share to holders of record as of October 19, 2017. This distribution was declared on October 5, 2017.
On January 25, 2018, the Company paid a distribution of $0.36 per share to holders of record as of January 18, 2018. This distribution was declared on January 4, 2018.
During the year ended December 31, 2016, the Company paid the following distributions:
On January 28, 2016, the Company paid a distribution of $0.36 per share to holders of record as of January 21, 2016. This distribution was declared on January 7, 2016.
On April 28, 2016, the Company paid a distribution of $0.36 per share to holders of record as of April 22, 2016. This distribution was declared on April 7, 2016.
On July 28, 2016, the Company paid a distribution of $0.36 per share to holders of record as of July 21, 2016. This distribution was declared on July 7, 2016.
On October 27, 2016, the Company paid a distribution of $0.36 per share to holders of record as of October 20, 2016. This distribution was declared on October 6, 2016.
During the year ended December 31, 2015, the Company paid the following distributions:
On January 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of January 22, 2015. This distribution was declared on January 8, 2015.
On April 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of April 22, 2015. This distribution was declared on April 9, 2015.
On July 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of July 22, 2015. This distribution was declared on July 9, 2015.
On October 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of October 22, 2015. This distribution was declared on October 7, 2015.
Trust Preferred Shares
On October 30, 2017, the Company paid a distribution of $0.61423611 per share on the Company’s Series A Preferred Shares. The distribution on the Series A Preferred Shares covers the period from and including June 28, 2017, the original issue date of the Series A Preferred Shares, up to, but excluding, October 30, 2017. This distribution was declared on October 5, 2017 and was payable to holders of record of the Company's Series A Preferred Shares as of October 15, 2017.
On January 30, 2018, the Company paid a distribution of $0.453125 per share on the Company’s Series A Preferred Shares. This distribution was declared on January 4, 2018.
Note O — Noncontrolling Interest
Noncontrolling interest represents the portion of a majority-owned subsidiary’s net income and equity that is owned by noncontrolling shareholders.
The following tables reflect the Company’s percentage ownership of its businesses, as of December 31, 2017, 20162021, 2020 and 20152019 and related noncontrolling interest balances as of December 31, 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| % Ownership (1) December 31, 2021 | | % Ownership (1) December 31, 2020 | | % Ownership (1) December 31, 2019 |
| Primary | | Fully
Diluted | | Primary | | Fully
Diluted | | Primary | | Fully
Diluted |
| 5.11 | 97.6 | | | 88.4 | | | 97.6 | | | 88.1 | | | 97.6 | | | 88.9 | |
| BOA | 91.8 | | | 83.8 | | | 81.9 | | | 74.8 | | | N/a | | N/a |
| Ergobaby | 81.7 | | | 72.7 | | | 81.4 | | | 72.6 | | | 81.9 | | | 75.8 | |
| Lugano | 59.9 | | | 58.1 | | | N/a | | N/a | | N/a | | N/a |
| Marucci | 91.1 | | | 82.8 | | | 92.2 | | | 83.8 | | | N/a | | N/a |
| Velocity | 99.3 | | | 87.6 | | | 99.3 | | | 88.0 | | | 99.3 | | | 93.9 | |
| | | | | | | | | | | |
| Altor | 100.0 | | | 91.2 | | | 100.0 | | | 91.5 | | | 100.0 | | | 91.5 | |
| Arnold | 98.0 | | | 85.5 | | | 96.7 | | | 81.1 | | | 96.7 | | | 80.2 | |
| Sterno | 100.0 | | | 87.1 | | | 100.0 | | | 88.5 | | | 100.0 | | | 88.5 | |
(1)The principal difference between primary and fully diluted percentages of our operating segments is due to stock option issuances of operating segment stock to management of the respective business.
| | | | | | | | | | | |
| Noncontrolling Interest Balances |
| (in thousands) | December 31,
2021 | | December 31,
2020 |
| 5.11 | $ | 15,458 | | | $ | 14,567 | |
| BOA | 30,581 | | | 61,625 | |
| Ergobaby | 29,435 | | | 27,408 | |
| Lugano | 70,585 | | | — | |
| Marucci | 17,175 | | | 11,386 | |
| Velocity | 5,250 | | | 4,077 | |
| | | |
| Altor | 3,936 | | | 2,901 | |
| Arnold | 1,284 | | | 1,117 | |
| Sterno | 1,524 | | | 282 | |
| Allocation Interests | 100 | | | 100 | |
| $ | 175,328 | | | $ | 123,463 | |
|
| | | | | | | | | | | |
| | % Ownership (1) December 31, 2017 | | % Ownership (1) December 31, 2016 | | % Ownership (1) December 31, 2015 |
| | Primary | | Fully Diluted | | Primary | | Fully Diluted | | Primary | | Fully Diluted |
| 5.11 Tactical | 97.5 | | 85.5 | | 97.5 | | 85.1 | | n/a | | n/a |
| Crosman | 98.8 | | 89.2 | | n/a | | n/a | | n/a | | n/a |
| Ergobaby | 82.7 | | 76.6 | | 83.5 | | 76.9 | | 81.0 | | 74.2 |
| Liberty | 88.6 | | 84.7 | | 88.6 | | 84.7 | | 96.2 | | 84.6 |
| Manitoba Harvest | 76.6 | | 67.0 | | 76.6 | | 65.6 | | 76.6 | | 65.6 |
| ACI | 69.4 | | 69.2 | | 69.4 | | 69.3 | | 69.4 | | 69.3 |
| Arnold | 96.7 | | 84.7 | | 96.7 | | 84.7 | | 96.7 | | 87.3 |
| Clean Earth | 97.5 | | 79.8 | | 97.5 | | 79.8 | | 97.5 | | 86.2 |
| Sterno | 100.0 | | 89.5 | | 100.0 | | 89.5 | | 100.0 | | 89.7 |
COMPASS DIVERSIFIED HOLDINGS
| |
(1)
| The principal difference between primary and fully diluted percentages of our operating segments is due to stock option issuances of operating segment stock to management of the respective business. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | |
| | Noncontrolling Interest Balances |
| (in thousands) | December 31,
2017 | | December 31,
2016 |
| 5.11 Tactical | $ | 8,003 |
| | $ | 5,934 |
|
| Crosman | 1,373 |
| | — |
|
| Ergobaby | 23,416 |
| | 18,647 |
|
| Liberty | 3,254 |
| | 2,681 |
|
| Manitoba Harvest | 11,725 |
| | 13,687 |
|
| ACI | (5,850 | ) | | (11,220 | ) |
| Arnold | 1,368 |
| | 1,536 |
|
| Clean Earth | 7,357 |
| | 5,469 |
|
| Sterno | 2,045 |
| | 1,305 |
|
| Allocation Interests | 100 |
| | 100 |
|
| | $ | 52,791 |
| | $ | 38,139 |
|
Supplemental Balance Sheet Data (in thousands):
| | | | | | | | | | | |
| Summary of accrued expenses | December 31, |
| 2021 | | 2020 |
| | | |
| Accrued payroll and fringes | $ | 43,270 | | | $ | 34,324 | |
| Accrued taxes | 16,472 | | | 14,014 | |
| Income taxes payable | 6,163 | | | 6,067 | |
| Accrued interest | 13,563 | | | 8,259 | |
| Accrued rebates and discounts | 10,687 | | | 5,170 | |
| Warranty payable | 2,062 | | | 1,558 | |
| Accrued inventory | 50,122 | | | 40,461 | |
| Other accrued expenses | 32,462 | | | 24,365 | |
| Total | $ | 174,801 | | | $ | 134,218 | |
The Company's businesses had | | | | | | | | | | | |
| Warranty liability | Year ended December 31, |
| 2021 | | 2020 |
| | | |
| Beginning balance | $ | 1,558 | | | $ | 784 | |
| Accrual | 4,257 | | | 2,821 | |
| Warranty payments | (3,753) | | | (2,696) | |
Other (1) | — | | | 649 | |
| Ending balance | $ | 2,062 | | | $ | 1,558 | |
(1) Represents warranty liabilities of acquired businesses.
Supplemental Statement of Operations Data (in thousands):
| | | | | | | | | | | | | | | | | |
| Other income (expense), net | Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Foreign currency gain (loss) | $ | 27 | | | $ | 71 | | | $ | (67) | |
| Loss on sale of capital assets | (1,458) | | | (1,851) | | | (1,626) | |
| Other income (expense) | 247 | | | (679) | | | (353) | |
| $ | (1,184) | | | $ | (2,459) | | | $ | (2,046) | |
Supplemental Cash Flow Statement Data (in thousands):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Interest paid | $ | 58,553 | | | $ | 43,730 | | | $ | 56,431 | |
| Taxes paid | $ | 27,371 | | | $ | 10,189 | | | $ | 15,367 | |
Investments
Arnold Joint Venture
Arnold is a 50% partner in a China rare earth mine-to-magnet joint venture. Arnold accounts for its activity in the following transactions with minority shareholders duringjoint venture utilizing the yearequity method of accounting. Gains and losses from the joint venture were not material for the years ended December 31, 2016:2021, 2020 and 2019.
COMPASS DIVERSIFIED HOLDINGS
ACI RecapitalizationNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the second quarter of 2016, the Company completed a recapitalization at ACI whereby the Company entered into an amendment to the intercompany debt agreement with ACI (the "ACI Loan Agreement"). The ACI loan agreement was amended to provide for additional term loan borrowings of $61.0 million to fund a cash distribution to shareholders totaling $60.1 million. Minority interest shareholders of Advanced Circuits, including certain members of management at Advanced Circuits, received total distribution proceeds of $18.4 million. The Company used cash on hand to fund the distribution to minority shareholders.
Liberty RecapitalizationAltor Solutions
During the first quarter of 2016, the Company completed a recapitalization at Liberty whereby the Company entered into an amendment to the intercompany loan agreement with Liberty (the “Liberty Loan Agreement”). The Liberty Loan Agreement was amended to (i) provide for term loan borrowings of $38.0 million and revolving credit facility borrowings of $5.0 million to fund cash distributions totaling $35.3 million to its shareholders, including the Company, and (ii) extend the maturity dates of the term loans and revolving credit facility. Liberty’s noncontrolling shareholders received approximately $5.3In September 2020, Altor invested $3.6 million in distributions asRational Packaging, LLC, a resultdesigner and manufacturer of the recapitalization. Immediately prior to the recapitalization, management exercised stock options for 75,095 shares of Liberty common shares, resulting in net proceeds from stock options at Liberty of $3.8 million. Liberty
recognized $0.3 million in compensation expense related to the accelerated vesting of a portion of management's stock options at the time of exercise.recyclable, paperboard-based structural packaging components. The Company then purchased $1.5 million in Liberty common shares from members of Liberty management, resulting in Liberty's noncontrolling shareholders holding 11.4% of Liberty's outstanding shares subsequent to the recapitalization. The purchase of the Liberty common stock from noncontrolling shareholders and issuance of Liberty common stock related to the exercise of stock options by noncontrolling shareholders were at fair value and resulted in no change in control of Liberty. The difference between the consideration paid for the noncontrolling interest and the adjustment to the carrying amount of the Company's noncontrolling interest in Liberty was recognized in the Company's equity. Subsequent to the purchase of Liberty common shares and the exercise of the options, the Company owns 88.6% of Liberty on a primary basis and 84.7% on a fully diluted basis.
Ergobaby Share Issuance
In connection with the Ergobaby acquisition of Baby Tula in May 2016, Ergobaby issued shares of their stock valued at $8.2 million to the selling shareholders (refer to "Note C - Acquisition of Businesses" for the methodology used to determine the value of the shares at issuance). Subsequent to the issuance of the shares, the Company's ownership interest in Ergobaby was 77.9% on a primary basis and 71.2% on a fully diluted basis.
Ergobaby Share Repurchase
In June 2016, Ergobaby repurchased 77,425 shares of Ergobaby common stock from certain noncontrolling shareholders for a total purchase price of $15.4 million. Ergobaby financed the repurchase of shares with an increase to the intercompany debt facility with the Company. The difference between the consideration paid for the noncontrolling interest and the adjustment to the carrying amount of the Company's noncontrolling interest in Ergobaby was recognized in the Company's equity. Subsequent to the repurchase, the Company's ownership interest in Ergobaby was 83.9% on a primary basis and 76.2% on a fully diluted basis. The repurchased shares have beeninvestment will be accounted for as treasury shares by Ergobaby.
Ergobaby Share Issuancean equity method investment. Gains and Share Repurchase
In December 2016, an Ergobaby employee exercised stock options resulting in the issuance of 10,989 shares of Ergobaby common stock. Ergobaby then repurchased 6,204 of these shareslosses from the employee for a total purchase price of $1.4 million. The difference between the consideration paidinvestment were not material for the noncontrolling interestyears ended December 31, 2021 and the adjustment to the carrying amount of the Company's noncontrolling interest in Ergobaby was recognized in the Company's equity. Subsequent to the option exercise and repurchase, the Company's ownership interest in Ergobaby was 83.5% on a primary basis and 76.9% on a fully diluted basis. The repurchased shares have been accounted for as treasury shares by Ergobaby.2020.
Note P — Commitments and Contingencies
Leases
The Company and its subsidiaries lease office and manufacturing facilities, computer equipment and software under various operating arrangements. Certain of the leases are subject to escalation clauses and renewal periods. The Company and its subsidiaries recognize lease expense, including predetermined fixed escalations, on a straight-line basis over the initial term of the lease including reasonably assured renewal periods from the time that the Company and its subsidiaries control the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Certain of our subsidiaries have leases that contain both fixed rent costs and variable rent costs based on achievement of certain operating metrics. The variable lease expense has not been material on a historic basis and no amount was incurred during the year ending December 31, 2021.
The future minimum rental commitmentsmaturities of lease liabilities at December 31, 20172021 under operating leases having an initial or remaining non-cancelable term of one year or more are as follows (in thousands):
|
| | | | |
| 2018 | | $ | 17,857 |
|
| 2019 | | 14,005 |
|
| 2020 | | 12,540 |
|
| 2021 | | 11,327 |
|
| 2022 | | 9,595 |
|
| Thereafter | | 41,518 |
|
| | | $ | 106,842 |
|
| | | | | | | | |
| 2022 | | $ | 34,887 | |
| 2023 | | 29,571 | |
| 2024 | | 25,272 | |
| 2025 | | 20,721 | |
| 2026 | | 17,413 | |
| Thereafter | | 37,138 | |
| Total undiscounted lease payments | | $ | 165,002 | |
| Less: Interest | | 35,539 | |
| Present value of lease liabilities | | $ | 129,463 | |
The Company’s rent expense for the fiscal years ended December 31, 2017, 20162021, 2020 and 20152019 totaled $23.5$35.8 million, $15.9$27.8 million and $10.7$23.7 million, respectively.
The calculated amount of the right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and discount rate used to present value the minimum lease payments. The Company's lease agreements often include one or more options to renew at the company's discretion. In general, it is not reasonably certain that lease renewals will be exercised at lease commencement and therefore lease renewals are not included in the lease term. As the discount rate is rarely determinable, the Company utilizes the incremental borrowing rate of the subsidiary entering into the lease arrangement, on a collateralized basis, over a similar term as adjusted for any country specific risk.
The weighted average remaining lease terms and discount rates for all of our operating leases were as follows:
| | | | | | | | | | | | | | |
| Lease Term and Discount Rate | | December 31, 2021 | | December 31, 2020 |
| Weighted-average remaining lease term (years) | | 5.89 | | 5.44 |
| Weighted-average discount rate | | 7.41 | % | | 7.45 | % |
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Line Item in the Company’s Consolidated Balance Sheet | | December 31, 2021 | | December 31, 2020 |
| | | | | | |
| Operating lease right-of-use assets | | Other non-current assets | | $ | 116,992 | | | $ | 83,662 | |
| Current portion, operating lease liabilities | | Other current liabilities | | $ | 25,663 | | | $ | 21,228 | |
| Operating lease liabilities | | Other non-current liabilities | | $ | 103,800 | | | $ | 68,179 | |
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | |
| | Year ended December 31, 2021 | | Year ended December 31, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 37,012 | | | $ | 32,154 | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | |
| Operating leases | | $ | 43,404 | | | $ | 10,543 | |
Legal Proceedings
In the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that any unfavorable outcomes will have a material adverse effect on the Company’s consolidated financial position or results of operations.
Note Q — Supplemental Data
Supplemental Balance Sheet Data (in thousands):
|
| | | | | | | |
| Summary of accrued expenses: | December 31,
2017 | | December 31,
2016 |
| Accrued payroll and fringes | $ | 23,905 |
| | $ | 22,440 |
|
| Accrued taxes | 3,441 |
| | 5,307 |
|
| Income taxes payable | 6,873 |
| | 6,232 |
|
| Accrued interest | 221 |
| | 182 |
|
| Accrued rebates | 13,516 |
| | 12,289 |
|
| Warranty payable | 2,197 |
| | 1,258 |
|
| Accrued inventory | 32,810 |
| | 20,763 |
|
| Accrued transportation and disposal costs | 4,985 |
| | 7,324 |
|
| Other accrued expenses | 18,925 |
| | 15,246 |
|
| Total | $ | 106,873 |
| | $ | 91,041 |
|
|
| | | | | | | |
| | Year ended December 31, |
| Warranty liability: | 2017 | | 2016 |
| Beginning balance | $ | 1,258 |
| | $ | 1,259 |
|
| Accrual | 1,982 |
| | 252 |
|
| Warranty payments | (1,552 | ) | | (253 | ) |
Other (1) | 509 |
| | — |
|
| Ending balance | $ | 2,197 |
| | $ | 1,258 |
|
(1) Represents warranty liabilities of acquired businesses.
Supplemental Statement of Operations Data (in thousands):
|
| | | | | | | | | | | |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Other income (expense), net: | | | | | |
| Foreign currency gain (loss) | $ | 3,268 |
| | $ | (1,386 | ) | | $ | (2,561 | ) |
| Gain (loss) on sale of capital assets | 47 |
| | (1,249 | ) | | (138 | ) |
| Other income (expense) | (681 | ) | | (284 | ) | | 376 |
|
| | $ | 2,634 |
| | $ | (2,919 | ) | | $ | (2,323 | ) |
Supplemental Cash Flow Statement Data (in thousands):
|
| | | | | | | | | | | |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| Interest paid | $ | 27,754 |
| | $ | 22,840 |
| | $ | 21,180 |
|
| Taxes paid | $ | 19,326 |
| | $ | 15,324 |
| | $ | 6,494 |
|
Note R — Related Party Transactions
The Company has entered into the following related party transactions with its Manager, CGM:CGM, including the following:
•Management Services Agreement
•LLC Agreement
•Integration Services AgreementAgreements
•Cost reimbursementReimbursement and feesFees
Management Services Agreement
The Company entered into a MSA with CGM effective May 16, 2006, as amended. Our Chief Executive Officer is a partner of CGM. The MSA provides for, among other things, CGM to perform services for the Company in exchange for a management fee paid quarterly and equal to 0.5% of the Company’s adjusted net assets, as defined in the MSA. The management fee is required to be paid prior to the payment of any distributions to shareholders.
Pursuant to the MSA, CGM is entitled to enter into off-setting management service agreements with each of the operating segments. The amount of the fee is negotiated between CGM and the operating management of each segment and is based upon the value of the services to be provided. The fees paid directly to CGM by the segments offset on a dollar for dollar basis the amount due CGM by the Company under the MSA.CGM has entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid during 2021 than would have normally been due. In the first quarter of 2021, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee related to the amount of the proceeds deposited with the Trustee that was in excess of the amount payable related to the 2026 Senior Notes at March 31, 2021. Additionally, CGM has entered into a waiver of the MSA at December 31, 2021 to exclude the cash balances held at the LLC from the calculation of the management fee.
In March 2020, as a proactive measure to provide the Company with additional cash liquidity in light of the COVID-19 pandemic, the Company elected to draw down $200 million on our 2018 Revolving Credit Facility. The Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of March 31, 2020. In addition, due to the unprecedented uncertainty as a result of the COVID-19 pandemic, CGM agreed to waive 50% of the
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
management fee calculated at June 30, 2020 that was paid in July 2020. Further, for the third quarter of 2020, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of September 30, 2020.
Concurrent with the June 2019 sale of Clean Earth (refer to Note D - Discontinued Operations) CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the quarter during which the Company next borrowed under the 2018 Revolving Credit Facility. The Company paid CGM $0.4 million and $0.1 million, respectively, in the years ended December 31, 2021 and 2020, representing the management fee due from Arnold for the fourth quarter of 2020 and the first three quarters of 2021. At December 31, 2021, Arnold reimbursed the Company for the management fee paid on their behalf.
For the year ended December 31, 2017, 20162021, 2020 and 2015,2019, the Company incurred the following management fees to CGM, by entity (in thousands):entity:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| 5.11 | $ | 1,000 | | | $ | 1,000 | | | $ | 1,000 | |
| BOA | 1,000 | | | 250 | | | N/a |
| Ergobaby | 500 | | | 500 | | | 500 | |
| Lugano | 188 | | | N/a | | N/a |
| Marucci | 500 | | | 347 | | | N/a |
| Velocity | 500 | | | 500 | | | 500 | |
| | | | | |
| Altor Solutions | 750 | | | 750 | | | 750 | |
| Arnold | 500 | | | 500 | | | 500 | |
| Sterno | 500 | | | 500 | | | 500 | |
| Corporate | 41,505 | | | 29,402 | | | 32,280 | |
| $ | 46,943 | | | $ | 33,749 | | | $ | 36,030 | |
|
| | | | | | | | | | | |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
| 5.11 | $ | 1,000 |
| | $ | 333 |
| | n/a |
|
| Crosman | 290 |
| | n/a |
| | n/a |
|
| Ergobaby | 500 |
| | 500 |
| | $ | 500 |
|
| Liberty | 500 |
| | 500 |
| | 500 |
|
| Manitoba Harvest | 350 |
| | 350 |
| | 175 |
|
| Advanced Circuits | 500 |
| | 500 |
| | 500 |
|
| Arnold | 500 |
| | 500 |
| | 500 |
|
| Clean Earth | 500 |
| | 500 |
| | 500 |
|
| Sterno | 500 |
| | 500 |
| | 500 |
|
| Corporate | 28,053 |
| | 25,723 |
| | 22,483 |
|
| | $ | 32,693 |
| | $ | 29,406 |
| | $ | 25,658 |
|
Not included in the table above are management fees paid to CGM by Tridien of $0.2Approximately $11.7 million and $0.4 million in the years ended December 31, 2016 and 2015, respectively, and CamelBak of $0.3 million in the year ended December 31, 2015. These amounts are included in income (loss) from discontinued operations on the consolidated statements of operations.
Approximately $7.8 million and $7.4$10.0 million of the management fees incurred were unpaid as of December 31, 20172021 and 2016,2020, respectively, and are reflected in Due to related party on the consolidated balance sheets.
LLC Agreement
The LLC agreement gives Holders the right to distributions pursuant to a profit allocation formula upon the occurrence of a Sale Event or a Holding Event. The Holders are entitled to receive and as such can elect to receive the positive contribution-based profit allocation payment for each of the business acquisitions during the 30-day period following the fifth anniversary of the date upon which we acquired a controlling interest in that business (Holding Event) and upon the sale of the business (Sale Event). Holders received $41.5$34.1 million, $9.1 million and $60.4 million in distributions related to Sale and Holding Events that occurred during 2017, 20162021, 2020 and 2015.2019, respectively. Refer to "Note NK - Stockholders' Equity" for a description of the 2017, 2016 and 2015 profit allocation payments. Certain persons who are employees and partners of the Manager, including the Company’s Chief Executive Officer, beneficially own (through Sostratus LLC) 60.4%57.8% of the Allocation Interests at December 31, 20172021 and 2016, and 58.8% of the Allocation Interests45.0% at December 31, 2015.2020. Of the remaining 39.6% non-voting ownership of the Allocation Interests,42.2% at December 31, 2021 and 55.0% at December 31, 2020, 5.0% is held by CGI Diversified Holdings LP,LP, 5.0% isis held by the Chairman of the Company’s Board of Directors, and the remaining 29.6% ispercentage of Allocation Interests are held by the former founding partnerpartners of the Manager.
Integrations Services Agreements
Crosman, which wasIntegration services represent fees paid by newly acquired in 2017, 5.11, which was acquired in 2016, and Manitoba, which was acquired in 2015, entered intocompanies to the Manager for integration services performed during the first year of ownership. Under the Integration Services AgreementsAgreement ("ISA") with CGM. The ISA, CGM provides for CGM to provide services for new platform acquisitions to, amongst other things, assist the management at the acquired entities in establishing a corporate governance program, implement compliance and reporting requirements of the Sarbanes-Oxley Act of 2002, as amended, and align the acquired entity's policies and procedures with our other subsidiaries.
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lugano, which was acquired in September 2021, entered into an ISA with CGM whereby Lugano will pay CGM an integration services fee of $2.3 million quarterly over a twelve month period as services are rendered, beginning in the quarter ended December 31, 2021.
BOA, which was acquired in October 2020, Marucci Sports, which was acquired in April 2020 and Altor Solutions, which was acquired in 2018 each entered into an ISA with CGM. Each ISA iswas for the twelve month period subsequent to the acquisition and iswas payable quarterly. Manitoba HarvestBOA paid CGM $1.0a total of $4.4 million under the agreement ($0.5 millionISA, beginning in integration service fees in 2015 and $0.5 million in 2016) and 5.11 Tacticalthe quarter ended December 31, 2020. Marucci paid CGM $3.5 million under the agreement ($1.2a total of $2.0 million in integration services fees, beginning in 2016 and $2.3 million in 2017). Crosmanthe quarter ended September 30, 2020. Altor paid CGM $0.75a total of $2.3 million in integration services fees, during 2017 and will pay $0.75with $0.3 million paid in integration services fees in 2018. 2019.
During the yearyears ended December 31, 2017, 20162021, 2020 and 2015,2019, CGM received $3.1$4.9 million, $1.7$2.1 million, and $3.5$0.3 million, respectively, in total integration service fees. Integration service fees are included in selling, general and administrative expense on the subsidiaries' statement of operations in the period in which they are incurred.
Cost Reimbursement and Fees
The Company reimbursed its Manager, CGM, approximately $3.8$5.4 million, $3.8$5.2 million, and $3.5$5.6 million, principally for occupancy and staffing costs incurred by CGM on the Company’s behalf during the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.
The Company and its businesses have the following significant related party transactions:
FOX5.11
Investment in FOX - The Company purchased a controlling interest in FOX on January 4, 2008. On July 10, 2014, 5,750,000 shares of FOX common stock, held by certain FOX shareholders, including us, were sold in a secondary offering. As a selling shareholder, we sold a total of 4,466,569 shares of FOX common stock. Upon completion of the offering, our ownership in FOX decreased from approximately 53% to 41%, or 15,108,718 shares of FOX’s common stock. We recorded a gain of $264.3 million in July 2014 in connection with the Fox deconsolidation. In March, August and November 2016, through three additional secondary offerings and a share repurchase by FOX, the Company's ownership in the outstanding common stock of FOX was further reduced to 14.0%. 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. Refer to "Note F - Investment" for additional information related to the Company's investment in FOX.FOX Services AgreementRecapitalization - In September 2014,August 2021, the Company and FOXcompleted a recapitalization of 5.11 whereby the Company entered into an agreement for the provision of services to FOX for assistance in complying with the Sarbanes-Oxley Act of 2002, as amended (the “Services Agreement”). The Services Agreement terminated on March 31, 2016. A statement of work was agreed to in connection with the Service Agreement, which provided that the Company’s internal audit team would assist FOX with various tasks, including, but not limitedamendment to the developmentintercompany loan agreement with 5.11 (the "5.11 Loan Agreement"). The 5.11 Loan Agreement was amended to provide for additional term loan borrowings of internal control policies$55.0 million to fund a distribution to shareholders. The Company owned 97.7% of the outstanding shares of 5.11 on the date of the distribution and procedures. Services provided in accordance withreceived $53.7 million. The remaining amount of the Services Agreement were billed on a time and materials basis. Fees paid for services provided in 2016 and 2015 were approximately $72,000 and $135,000, respectively.distribution went to minority shareholders.
5.11
Related Party Vendor Purchases - 5.11 purchases inventory from a vendor who is a related party to 5.11 through one1 of the executive officers of 5.11 via the executive's 40% ownership interest in the vendor. During the yearyears ended December 31, 2016 (from the date of acquisition)2021, 2020 and 2019, 5.11 purchased approximately $2.3$1.1 million, $2.7 million, and $4.4 million, respectively, in inventory from the vendor.
LibertyBOA
Liberty Recapitalization - Refer to "Note O -Repurchase of Noncontrolling Interest" - In September 2021, BOA repurchased shares of its issued and outstanding common shares from its largest minority shareholder for a total payment of $48.0 million, which BOA financed by borrowing under their intercompany credit facility with the Company (the "BOA Credit Agreement"). The BOA Credit Agreement was amended to (i) provide for additional details with regardsterm loan borrowings of $38.0 million, and (ii) consent to the Liberty recapitalization.repurchase of the shares from the minority shareholder. The transaction was accounted for in accordance with ASC 810 - Consolidation, whereby the carrying amount of the noncontrolling interest was adjusted to reflect the change in the ownership interest in BOA that occurred as a result of the share repurchase. The difference between the fair value of the consideration paid of $48.0 million and the amount by which the noncontrolling interest was adjusted of $39.4 million was recognized in equity attributable to the Company.Related Party Vendor Purchases - Liberty purchases inventory raw materials from two vendors who are related parties to Liberty through twoA contract manufacturer used by BOA as the primary supplier of the executive officersmolded injection parts is a noncontrolling shareholder of Liberty via the employment of family members at the vendors.BOA. During the yearsyear ended December 31, 2017, 20162021 and 2015, Libertyfor the period from October 16, 2020 (date of acquisition) through December 31, 2020, BOA purchased approximately $2.1approximately $48.3 million $2.5 million and $3.3$6.7 million, respectively, in raw materialsparts from the two vendors.this supplier.
Advanced Circuits
Clean Earth
In January 2018, Clean Earth purchased a permit and some tangible property consisting primarily of machinery and equipment from an officer of the company for approximately $2.0 million.
Note SR – Unaudited Quarterly Financial Data
The following table presents the unaudited quarterly financial data. This information has been prepared on a basis consistent with that of the audited consolidated financial statements and all necessary material adjustments, consisting of normal recurring accruals and adjustments, have been included to present fairly the unaudited quarterly financial data. The quarterly results of operations for these periods are not necessarily indicative of future results of operations. Typically, the first quarter of each fiscal year has the lower results than the remainder of the year, representing the Company's weakest quarter due to seasonality at our businesses. The per share calculations for each of the quarters are based on the weighted average number of shares for each period using the two class
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
method, which requires companies to allocate participating securities that have rights to earnings that otherwise would have been available only to common shareholders as a separate class of securities in calculating earnings per share; therefore, the sum of the quarters will not equal to the full year per share amount.
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | December 31, 2021 (1)(2) | | September 30, 2021 (1)(3) | | June 30, 2021 | | March 31, 2021 |
| Total revenues | $ | 536,612 | | | $ | 464,975 | | | $ | 431,525 | | | $ | 408,556 | |
| Gross profit | 202,410 | | | 181,435 | | | 173,564 | | | 168,548 | |
| Operating income | 32,973 | | | 35,069 | | | 36,352 | | | 35,109 | |
| Income (loss) from continuing operations | 20,306 | | | 13,079 | | | (21,608) | | | 13,082 | |
| Income from discontinued operations | 5,577 | | | 4,332 | | | 10,357 | | | 8,914 | |
| Gain on sale of discontinued operations, net of tax | 25 | | | 72,745 | | | — | | | — | |
| Net income (loss) attributable to Holdings | $ | 22,088 | | | $ | 88,100 | | | $ | (14,630) | | | $ | 18,994 | |
| | | | | | | |
| Basic and fully diluted income (loss) per share attributable to Holdings: | | | | | | | |
| Continuing operations | $ | (0.14) | | | $ | (0.19) | | | $ | (0.50) | | | $ | (0.10) | |
| Discontinued operations | 0.06 | | | 1.16 | | | 0.12 | | | 0.11 | |
| Basic and fully diluted income (loss) per share attributable to Holdings | $ | (0.08) | | | $ | 0.97 | | | $ | (0.38) | | | $ | 0.01 | |
|
| | | | | | | | | | | | | | | |
| (in thousands) | December 31, 2017 (1) | | September 30,
2017 | | June 30,
2017 | | March 31, 2017 (2) |
| Total revenues | $ | 348,199 |
| | $ | 323,957 |
| | $ | 307,581 |
| | $ | 289,992 |
|
| Gross profit | 125,931 |
| | 117,725 |
| | 109,720 |
| | 94,333 |
|
| Operating income | 11,956 |
| | 14,477 |
| | 12,183 |
| | (11,412 | ) |
| Income (loss) from continuing operations | 44,131 |
| | 8,356 |
| | 2,260 |
| | (21,475 | ) |
| Gain on sale of discontinued operations, net of tax | — |
| | — |
| | — |
| | 340 |
|
| Net income (loss) attributable to Holdings | $ | 41,002 |
| | $ | 7,706 |
| | $ | 888 |
| | $ | (21,605 | ) |
| | | | | | | | |
| Basic and fully diluted income (loss) per share attributable to Holdings: | | | | | | | |
| Continuing operations | $ | 0.53 |
| | $ | 0.10 |
| | $ | (0.45 | ) | | $ | (0.61 | ) |
| Discontinued operations | — |
| | — |
| | — |
| | 0.01 |
|
| Basic and fully diluted income (loss) per share attributable to Holdings | $ | 0.53 |
| | $ | 0.10 |
| | $ | (0.45 | ) | | $ | (0.60 | ) |
| |
(1)
| As a result of Tax Act, the Company recognized a tax benefit of $29.8 million in the fourth quarter, representing the effect of the reduction in the U.S. federal corporate income tax rate from 35% to 21%, offset by the one-time transition tax liability of our foreign subsidiaries. The Company also recognized impairment expense related to our Manitoba business of $8.5 million in the fourth quarter of 2017. |
| |
(2)
| The Company recorded goodwill impairment expense of $8.9 million related to the Arnold business in the first quarter of 2017. |
|
| | | | | | | | | | | | | | | |
| (in thousands) | December 31, 2016 (1) | | September 30, 2016 (2) | | June 30,
2016 | | March 31,
2016 |
| Total revenues | $ | 318,561 |
| | $ | 252,285 |
| | $ | 214,176 |
| | $ | 193,287 |
|
| Gross profit | 103,366 |
| | 82,415 |
| | 76,670 |
| | 64,119 |
|
| Operating income | (10,867 | ) | | 11,358 |
| | 10,489 |
| | 8,081 |
|
| Income from continuing operations | 1,802 |
| | 48,544 |
| | 18,017 |
| | (14,614 | ) |
| Income from discontinued operations | — |
| | (455 | ) | | 1,341 |
| | (413 | ) |
| Gain on sale of discontinued operation, net of tax | 175 |
| | 2,134 |
| | — |
| | — |
|
| Net income attributable to Holdings | 1,764 |
| | 49,705 |
| | 19,239 |
| | (16,023 | ) |
| | | | | | | | |
| Basic and fully diluted income (loss) per share attributable to Holdings: | | | | | | | |
| Continuing operations | $ | (0.14 | ) | | $ | 0.72 |
| | $ | (0.05 | ) | | $ | (0.31 | ) |
| Discontinued operations | — |
| | 0.03 |
| | 0.11 |
| | — |
|
| Basic and fully diluted income per share attributable to Holdings | $ | (0.14 | ) | | $ | 0.75 |
| | $ | 0.06 |
| | $ | (0.31 | ) |
| |
(1)
| The quarter ended December 31, 2016 includes a full quarter of operating results from 5.11, which the Company acquired on August 31, 2016, and reflects the goodwill impairment expense of our Arnold business of $16.0 million. The Company |
recognized an additional $0.2 gain on the sale of Tridien in the fourth quarter related to the working capital settlement with the buyer.
(2) During the three months(1)The quarters ended September 30, 2016,2021 and December 31, 2021 includes the operating results from Lugano, which the Company acquired on September 3, 2021.
(2) As of December 31, 2021, ACI met the criteria to be classified as held for sale, and therefore is presented as discontinued operations in all prior periods.
(3) The Company sold their Tridienits Liberty operating segment forin the third quarter of 2021, recording a net gain on sale of approximately $1.5$72.8 million. All prior periods are presented as discontinued operations.
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | December 31, 2020 (1)(2)(3) | | September 30, 2020 (1)(2)(3) | | June 30, 2020 (1)(2)(3) | | March 31, 2020 (2)(3) |
| Total revenues | $ | 421,609 | | | $ | 364,948 | | | $ | 286,218 | | | $ | 286,792 | |
| Gross profit | 155,707 | | | 135,422 | | | 100,691 | | | 103,145 | |
| Operating income (loss) | 22,786 | | | 23,926 | | | 3,724 | | | 4,680 | |
| Income (loss) from continuing operations | 1,141 | | | 11,235 | | | (16,081) | | | (2,036) | |
| Income from discontinued operations | 7,639 | | | 9,568 | | | 8,715 | | | 6,916 | |
| Gain on sale of discontinued operations, net of tax | — | | | 100 | | | — | | | — | |
| Net income (loss) attributable to Holdings | $ | 8,366 | | | $ | 19,186 | | | $ | (8,437) | | | $ | 3,665 | |
| | | | | | | |
| Basic and fully diluted income (loss) per share attributable to Holdings: | | | | | | | |
| Continuing operations | $ | (0.15) | | | $ | (0.03) | | | $ | (0.40) | | | $ | (0.35) | |
| Discontinued operations | 0.09 | | | 0.11 | | | 0.10 | | | 0.09 | |
| Basic and fully diluted income (loss) per share attributable to Holdings | $ | (0.06) | | | $ | 0.08 | | | $ | (0.30) | | | $ | (0.26) | |
(1)The quarters ended June 30, 2020, September 30, 2020 and December 31, 2020 include operating results from Marucci, which the Company also purchased 5.11 Tactical for a purchase price of approximately $408.2 million - refer to "Note C - Acquisition of Businesses". Discontinued Operations
During theacquired on April 20, 2020. The quarter ended September 30, 2016,December 31, 2020 includes the operating results from BOA, which the Company acquired on October 16, 2020.
(2) As of December 31, 2021, ACI met the criteria to be classified as held for sale, and therefore is presented as discontinued operations in all prior periods.
(3) The Company sold its TridienLiberty operating segment and reclassifiedin the historical operationsthird quarter of Tridien to2021. All prior periods are presented as discontinued operations.
|
| | | | | | | | | | | | | |
| (in thousands) | December 31, 2016 | | September 30, 2016 | | June 30, 2016 | | March 31, 2016 |
| Total revenue | N/a | | $ | 15,978 |
| | $ | 15,212 |
| | $ | 14,760 |
|
| Gross Profit | N/a | | 3,223 |
| | 2,821 |
| | 2,142 |
|
| Operating income | N/a | | 967 |
| | 1,107 |
| | (577 | ) |
| Income from discontinued operations, net of tax | N/a | | (455 | ) | | 1,341 |
| | (413 | ) |
NOTE T - SUBSEQUENT EVENTS
Acquisition of Foam Fabricators
In January 2018, the Company entered into an agreement to acquire Foam Fabricators, Inc. (“Foam Fabricators”) for a purchase price of $247.5 million (excluding working capital and certain other adjustments upon closing). Headquartered in Scottsdale, AZ, Foam Fabricators is a leading designer and manufacturer of custom molded protective foam solutions and OEM components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP). Founded in 1957, the Foam Fabricators operates 13 state-of-the-art molding and fabricating facilities across North America. Foam Fabricators provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, and building products. For the trailing twelve months ended November 30, 2017, Foam Fabricators reported net revenue of approximately $126 million. The acquisition of Foam Fabricators closed on February 15, 2018, with the Company funding the acquisition through a draw on the 2014 Revolving Credit Facility.
Acquisition of Rimports
In January 2018, our Sterno business entered into an agreement to acquire Rimports, Inc. (Rimports) for a purchase price of approximately $145 million, excluding working capital and other adjustments upon closing, plus a potential earn-out of up to $25 million based on future financial performance of Rimports. Rimports is a manufacturer and distributor of branded and private label scented, wickless candle products used for home decor and fragrance. Headquartered in Provo, Utah, Rimports offers an extensive line of ceramic wax warmers, scented wax cubes, essential oils and diffusers through the mass retail channel. For the trailing twelve months ended November 30, 2017, Rimports reported net revenue of $155.4 million. The acquisition of Rimports closed on February 26, 2018, with the Company funding the acquisition through a draw on the 2014 Revolving Credit Facility.
Recapitalization
In January 2018, the Company completed a recapitalization at Sterno whereby the Company entered into an amendment to the intercompany loan agreement with Sterno (the "Sterno Loan Agreement"). The Sterno Loan Agreement was amended to (i) provide for term loan borrowings of $56.8 million to fund a distribution to the Company, which owned 100% of the outstanding equity of Sterno at the time of the recapitalization, and (ii) extend the maturity dates of the term loans. In connection with the recapitalization, Sterno's management team exercised all of their vested stock options, which represented 58,000 shares of Sterno. The Company then used a portion of the distribution to repurchase the 58,000 shares from management for a total purchase price of $6.0 million. In addition, Sterno issued new stock options to replace the exercised option, thus maintaining the same percentage of fully diluted non-controlling interest that existed prior to the recapitalization.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Additions | | | | | | |
| (in thousands) | Balance at beginning
of Year | | Charge to costs
and expense | | Other (1) | | Deductions | | Balance at
end of Year |
| Sales allowance accounts - 2021 | $ | 17,971 | | | $ | 4,891 | | | $ | (3,533) | | | $ | 5,477 | | | $ | 13,852 | |
| Sales allowance accounts - 2020 | $ | 14,397 | | | $ | 7,005 | | | $ | 1,221 | | | $ | 4,652 | | | $ | 17,971 | |
| Sales allowance accounts - 2019 | $ | 11,532 | | | $ | 6,965 | | | $ | — | | | $ | 4,100 | | | $ | 14,397 | |
| | | | | | | | | |
| Valuation allowance for deferred tax assets - 2021 | $ | 7,012 | | | $ | 2,903 | | | $ | — | | | $ | 502 | | | $ | 9,413 | |
| Valuation allowance for deferred tax assets - 2020 | $ | 8,099 | | | $ | 606 | | | $ | 60 | | | $ | 1,753 | | | $ | 7,012 | |
| Valuation allowance for deferred tax assets - 2019 | $ | 6,904 | | | $ | 1,195 | | | $ | — | | | $ | — | | | $ | 8,099 | |
(1)Represents opening allowance balances related to acquisitions made during the period indicated. In addition, during the year ended December 31, 2021, due to a shift in revenue, certain sales allowance accounts were reclassified to accrued expenses.
|
| | | | | | | | | | | | | | | | | | | |
| | | | Additions | | | | | | |
| (in thousands) | Balance at beginning of Year | | Charge to costs and expense | | Other (1) | | Deductions | | Balance at end of Year |
| Sales allowance accounts - 2015 | $ | 3,756 |
| | $ | 3,164 |
| | $ | 15 |
| | $ | 3,490 |
| | $ | 3,445 |
|
| Sales allowance accounts - 2016 | $ | 3,445 |
| | $ | 4,775 |
| | $ | 2,105 |
| | $ | 4,814 |
| | $ | 5,511 |
|
| Sales allowance accounts - 2017 | $ | 5,511 |
| | $ | 15,612 |
| | $ | 1,164 |
| | $ | 12,292 |
| | $ | 9,995 |
|
| Valuation allowance for deferred tax assets - 2015 | $ | 2,776 |
| | $ | 1 |
| | $ | — |
| | $ | 1,469 |
| | $ | 1,308 |
|
| Valuation allowance for deferred tax assets - 2016 | $ | 1,308 |
| | $ | 2,266 |
| | $ | 3,692 |
| | $ | 10 |
| | $ | 7,256 |
|
| Valuation allowance for deferred tax assets - 2017 | $ | 7,256 |
| | $ | 625 |
| | $ | — |
| | $ | 1,969 |
| | $ | 5,912 |
|
| |
(1)
| Represents opening allowance balances related to acquisitions made during the period indicated. |
INDEX TO EXHIBITS
|
| | | | | | | |
Exhibit
Number
| | Description |
| 2.1 | | |
| 2.2 | | |
| 2.3 | | Stock Purchase Agreement, dated October 17, 2011, by and among Recruit Co., LTD. and RGF Staffing USA, Inc., as Buyers, the shareholders of Staffmark Holdings, Inc., as Sellers, Staffmark Holdings, Inc. and Compass Group Diversified Holdings LLC as Seller Representative (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on October 18, 2011 (File No. 001-34927)). |
| 2.4 | | |
3.12.5 | | |
| 2.6 | | Stock Purchase Agreement by and among Compass Group Diversified Holdings LLC, Compass Group Investments, Inc., Compass CS Partners, L.P., Compass CS II Partners, L.P., Compass Crosman Partners, L.P., Compass Advanced Partners, L.P. and Compass Silvue Partners, LP (incorporated by reference to Exhibit 2.1 of the Form S-1 filed on April 13, 2006 (File No. 333-130326)). |
| 2.7 | | |
| 2.8 | | |
| 2.9 | | |
| 3.1 | | |
| 3.2 | | |
| 3.3 | | |
| 3.4 | | |
| 3.5 | | |
| 3.6 | | Second Amendment to the Amended and Restated Trust Agreement, dated as of April 25, 2006, as amended on May 23, 2007, of Compass Diversified Trust among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit 3.2 of the Form 8-K filed on September 13, 2007 (File No. 000-51937)). |
| 3.7 | | Third Amendment to the Amended and Restated Trust Agreement dated as of April 25, 2006, as amended on May 25, 2007 and September 14, 2007, of Compass Diversified Holdings among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit 4.1 of the Form 8-K filed on December 21, 2007 (File No. 000-51937)). |
| 3.8 | | Fourth Amendment dated as of November 1, 2010 to the Amended and Restated Trust Agreement, as amended effective November 1, 2010, of Compass Diversified Holdings, originally effective as of April 25, 2006, by and among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit 3.1 of the Form 10-Q filed on November 8, 2010 (File No. 001-34927)). |
| 3.9 | | |
| 3.10 | | |
| | | | | | | | |
Exhibit
Number | | Description |
| 3.11 | | |
3.113.12 | | |
3.123.13 | | |
3.133.14 | | |
3.143.15 | | |
| 3.16 | | |
3.153.17 | | |
| 3.18 | | |
4.13.19 | | |
| 3.20 | | |
| 3.21 | | |
| 3.22 | | |
| 4.1 | | |
|
| 4.2 | | |
4.2 | | |
| 4.3 | | |
| 4.4 | | |
| 4.5 | | |
| 4.6 | | |
| 4.7 | | |
10.14.8* | | |
| 10.1 | | |
| 10.2 | | |
10.3†10.3 | | |
10.4 | | |
10.510.4 | | |
10.610.5 | | |
10.7 | | |
10.810.6 | | |
10.910.7 | | |
10.1010.8 | | |
| | | | | | | | |
10.11Exhibit
Number | | Description |
10.1210.9 | | |
10.13 | | |
10.14 | | |
10.15†10.10† | | |
10.1610.11 | | |
10.17 | | |
10.18 | | |
10.19 | | |
|
| 21.1* | | |
10.20 | | |
10.21 | | |
10.22* | | |
12.1* | | |
21.1* | | |
| 23.1* | | |
31.1*24.1* | | |
| 31.1* | | |
| 31.2* | | |
32.1*+ | | |
|
| | |
32.2*+ | | |
| 99.1 | | |
99.2 | | |
99.3 | | Stock Purchase Agreement dated May 8, 2008, among Mitsui Chemicals, Inc., Silvue Technologies Group, Inc., the stockholders of Silvue Technologies Group, Inc. and the holders of Options listed on the signature pages thereto, and Compass Group Management LLC, as the Stockholders Representative (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on May 9, 2008 (File No. 000-51937)). |
99.4 | | |
99.599.2 | | |
99.699.3 | | Securities Purchase Agreement dated August 24, 2011, by and among CBK Holdings, LLC, CamelBak Products, LLC, CamelBak Acquisition Corp., for purposes of Section 6.15 and Articles 10 only, Compass Group Diversified Holdings LLC, and for purposes of Section 6.13 and Article 10 only, IPC/CamelBak LLC (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on August 25, 2011 (File No. 001-34927)). |
99.7 | | |
99.899.4 | | |
99.9 | | |
99.1099.5 | | |
99.11 | | |
99.1299.6 | | |
99.1399.7 | | |
|
| 99.8 | | |
99.14 | | |
| 99.9 | | Agreement and Plan of Merger, dated as of March 6, 2020, among Marucci Sports, LLC, Wheelhouse Holdings, Inc., Jeffery W. Palmer, the Jeffery Wayne Palmer Dynasty Trust dated December 26, 2011, the Angela Marie Palmer Irrevocable Trust dated December 26, 2011, the Angela Marie Palmer Charitable Lead Trust, the Fidelity Investments Charitable Gift Fund, the TAK Irrevocable Trust dated June 7, 2012,Wheelhouse Holdings Merger Sub LLC and the SAK Irrevocable Trust dated June 7, 2012, Todd Knapp and Signe Knapp, and Sterno Products,Wheelhouse 2020 LLC (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on January 24, 2018March 9, 2020 (File No. 001-34927)).
|
101.INS*99.10 | | |
| 99.11 | | |
| 99.12 | | Stock Purchase Agreement, dated September 3, 2021, between Lugano Buyer Inc., Mordechai Haim Ferder, as trustee of The Haim Family Trust dated 2/24/2009, Edit Fintzi Ferder, as trustee of The RF 2021 Irrevocable Trust dated 8/30/2021, Mordechai Haim Ferder, as trustee of The TF 2021 Irrevocable Trust dated 8/30/2021, Simba IL Holdings, LLC and Mordechai Haim Ferder in his individual capacity and as initial representative of the Sellers (incorporated by reference to Exhibit 99.2 of the Form 8-K filed on September 7, 2021 (File No. 001-34927 and Accession No. 0001345126-21-000039)). |
| 101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | | | | | | | |
101.LAB*Exhibit
Number | | Description |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
|
| | | | | | | |
| * | | Filed or furnished herewith. |
| † | | Denotes management contracts and compensatory plans or arrangements. |
| + | | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
