UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 28, 2018
COMPASS DIVERSIFIED HOLDINGS
(Exact name of registrant as specified in its charter)
Delaware | 001-34927 | 57-6218917 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||
COMPASS GROUP DIVERSIFIED
HOLDINGS LLC
(Exact name of registrant as specified in its charter)
Delaware | 001-34926 | 20-3812051 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||
301 Riverside Avenue
Second Floor
Westport, CT 06880
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (203) 221-1703
Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company | o | ||||
If an emerging growth company, indicate by check mark if the registrant has 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. o
Section 2 Financial Information
Item 2.02 Results of Operations and Financial Condition
On February 28, 2018, Compass Diversified Holdings and Compass Group Diversified Holdings LLC (NYSE: CODI) (collectively “CODI”) issued a press release announcing its consolidated operating results for the three and twelve months ended December 31, 2017. A copy of the press release is furnished within this report as Exhibit 99.1.
Section 9 Financial Statements and Exhibits
Item 9.01 Financial Statements and Exhibits
(d) Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: February 28, 2018 | COMPASS DIVERSIFIED HOLDINGS | ||
By: | /s/ Ryan J. Faulkingham | ||
Ryan J. Faulkingham | |||
Regular Trustee | |||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: February 28, 2018 | COMPASS GROUP DIVERSIFIED HOLDINGS LLC | ||
By: | /s/ Ryan J. Faulkingham | ||
Ryan J. Faulkingham | |||
Chief Financial Officer | |||
Exhibit 99.1
Compass Diversified Holdings Ryan J. Faulkingham Chief Financial Officer 203.221.1703 ryan@compassequity.com | Investor Relations and Media Contact: The IGB Group Leon Berman / Scott Eckstein 212.477.8438 / 212.477.8261 lberman@igbir.com / seckstein@igbir.com |
Compass Diversified Holdings Reports
Fourth Quarter and Full Year 2017 Financial Results
Completes Two Accretive Platform Acquisitions and Four Add-on Acquisitions
During 2017 and Subsequent to Year End
Westport, Conn., February 28, 2018 - Compass Diversified Holdings (NYSE: CODI) (“CODI,” “we,” “our” or the “Company”), an owner of leading middle market businesses, announced today its consolidated operating results for the three and twelve months ended December 31, 2017.
Fourth Quarter 2017 Highlights
• | Generated Cash Provided by Operating Activities of $22.5 million for the fourth quarter of 2017 and $81.8 million for the full year 2017, and Cash Flow Available for Distribution and Reinvestment (“CAD” or “Cash Flow”) of $25.6 million for the fourth quarter of 2017 and $92.2 million for the full year 2017; |
• | Reported net income of $49.1 million for the fourth quarter of 2017 and $33.6 million for the full year 2017; |
• | Paid a fourth quarter 2017 cash distribution of $0.36 per share on CODI’s common shares in January 2018, bringing cumulative distributions paid to $16.0752 per common share since CODI’s IPO in May of 2006; |
• | Paid a quarterly cash distribution of $0.453125 per share on the Company’s 7.250% Series A Preferred Shares in January 2018; |
• | Subsequent to year end, announced the upcoming retirement of Alan B. Offenberg and naming of Elias J. Sabo as CODI’s Chief Executive Officer, effective May 3, 2018; |
• | Completed the accretive platform acquisition of Foam Fabricators, Inc. (“Foam Fabricators”) subsequent to year-end; and |
• | Consummated the add-on acquisition of Rimports Inc. (“Rimports”) subsequent to year end by CODI’s subsidiary Sterno Products, LLC (“Sterno Products”). |
“During 2017 we continued to successfully execute our proven investment strategy, generate strong cash flow and provide sizable distributions to our shareholders,” said Alan Offenberg, CEO of Compass Diversified Holdings. “We consummated the accretive platform acquisition of Crosman Corporation, expanding our branded consumer businesses, while continuing to reinvest in our subsidiaries by completing three attractive add-on acquisitions. Complementing this success, we monetized our remaining interest in Fox Factory Holding Corp., which increased CODI’s realized gains to over $770 million.”
Elias Sabo, CODI's CEO-elect, stated, “We commenced 2018 by completing the platform acquisition of Foam Fabricators, a leading designer and manufacturer of custom molded protective foam solutions that has a strong management team, a diversified customer base, strong free cash flow, and attractive growth prospects. This accretive
platform acquisition, combined with our add-on acquisition of Rimports for Sterno Products, strengthens our family of niche leading businesses and positions CODI to continue growing cash flow to a level that meaningfully covers our distribution. Going forward, we will continue to use our considerable financial strength for compelling platform acquisitions as well as add-on acquisitions to accelerate the growth of our subsidiaries.”
Operating Results
For the quarter ended December 31, 2017, CODI generated Cash Provided by Operating Activities of $22.5 million, as compared to Cash Provided by Operating Activities of $50.8 million for the quarter ended December 31, 2016. CODI reported Cash Flow (see Note Regarding Use of Non-GAAP Financial Measures below) of $25.6 million for the quarter ended December 31, 2017, as compared to $24.6 million for the prior year’s comparable quarter. CODI’s weighted average number of shares outstanding for the quarters ended December 31, 2017 and December 31, 2016 were 59.9 million and 55.5 million, respectively.
For the year ended December 31, 2017, CODI generated Cash Provided by Operating Activities of $81.8 million, as compared to Cash Provided by Operating Activities of $111.4 million for the year ended December 31, 2016. CODI reported Cash Flow of $92.2 million for the year ended December 31, 2017, as compared to $76.4 million for the prior year. CODI’s weighted average number of shares outstanding for the twelve month period ended December 31, 2017 was approximately 59.9 million, as compared to approximately 54.6 million for the twelve month period ended December 31, 2016.
CODI’s Cash Flow is calculated after taking into account all interest expense, cash taxes paid and maintenance capital expenditures, and includes the operating results of each of our businesses for the periods during which CODI owned them. However, Cash Flow excludes the gains from monetizing interests in CODI’s subsidiaries, which have totaled over $770 million since going public in 2006.
Net income for the quarter ended December 31, 2017 was $49.1 million, as compared to net income of $2.0 million for the quarter ended December 31, 2016. During the fourth quarter of 2017, CODI recorded an income tax benefit of $38.7 million primarily related to the enactment of the Tax Cuts and Jobs Act in December 2017 which lowered the U.S. federal corporate income tax rate from 35% to 21%. During the fourth quarter of 2016, CODI realized a net gain of $15.8 million related to its equity investment in its former subsidiary Fox Factory Holding Corp. (“FOX”). During the first quarter of 2017, the Company sold its remaining shares in FOX in a secondary public offering.
For the year ended December 31, 2017, CODI reported net income of $33.6 million. This compared to net income of $56.5 million for the year ended December 31, 2016, primarily as a result of a $74.5 million gain on CODI’s investment in FOX.
Liquidity and Capital Resources
As of December 31, 2017, CODI had approximately $39.9 million in cash and cash equivalents, $560 million outstanding on its term loan facility and $42 million in outstanding borrowings under its revolving credit facility. The Company has no significant debt maturities until 2019 and had net borrowing availability of $507.4 million at December 31, 2017 under its revolving credit facility.
Fourth Quarter 2017 Distributions
On January 4, 2018, CODI’s Board of Directors (the “Board”) declared a fourth quarter distribution of $0.36 per share on the Company’s common shares (the “Common Shares”). The cash distribution was paid on January 25, 2018 to all holders of record of Common Shares as of January 18, 2018. Since its IPO in May of 2006, CODI has paid a cumulative distribution of $16.0752 per common share.
The Board also declared a quarterly cash distribution of $0.453125 per share on the Company’s 7.250% Series A Preferred Shares (the “Preferred Shares”). The distribution on the Preferred Shares covered the period from and including October 30, 2017, up to, but excluding, January 30, 2018. The distribution for such period was paid on January 30, 2018 to all holders of record of Preferred Shares as of January 15, 2018.
Conference Call
Management will host a conference call on Thursday, March 1, 2018 at 9:00 a.m. ET to discuss the latest corporate developments and financial results. The dial-in number for callers in the U.S. is (855) 212-2368 and the dial-in number
for international callers is (315) 625-6886. The access code for all callers is 3687727. A live webcast will also be available on the Company's website at www.compassdiversifiedholdings.com.
A replay of the call will be available through March 8, 2018. To access the replay, please dial (855) 859-2056 in the U.S. and (404) 537-3406 outside the U.S., and then enter the access code 3687727.
Note Regarding Use of Non-GAAP Financial Measures
CAD, or Cash Flow, is a non-GAAP measure used by the Company to assess its performance, as well as its ability to sustain and increase quarterly distributions. A number of CODI’s businesses have seasonal earnings patterns. Accordingly, the Company believes that the most appropriate measure of its performance is over a trailing or expected 12-month period. We have reconciled CAD, or Cash Flow, to Net Income and Cash Flow from Operating Activities on the attached schedules. We consider Net Income and Cash Flow from Operating Activities to be the most directly comparable GAAP financial measures to CAD, or Cash Flow.
About Compass Diversified Holdings (“CODI”)
CODI owns and manages a diverse family of established North American middle market businesses. Each of its current subsidiaries is a leader in its niche market.
CODI maintains controlling ownership interests in each of its subsidiaries in order to maximize its ability to impact long term cash flow generation and value. The Company provides both debt and equity capital for its subsidiaries, contributing to their financial and operating flexibility. CODI utilizes the cash flows generated by its subsidiaries to invest in the long-term growth of the Company and to make cash distributions to its shareholders.
Our ten majority-owned subsidiaries are engaged in the following lines of business:
• | The design and marketing of purpose-built tactical apparel and gear serving a wide range of global customers (5.11); |
• | The manufacture of quick-turn, small-run and production rigid printed circuit boards (Advanced Circuits); |
• | The manufacture of engineered magnetic solutions for a wide range of specialty applications and end-markets (Arnold Magnetic Technologies); |
• | Environmental services for a variety of contaminated materials including soils, dredged material, hazardous waste and drill cuttings (Clean Earth); |
• | The design, manufacture and marketing of airguns, archery products, optics and related accessories (Crosman); |
• | The design and marketing of wearable baby carriers, strollers and related products (Ergobaby); |
• | The design and manufacture of custom molded protective foam solutions and OEM components (Foam Fabricators); |
• | The design and manufacture of premium home and gun safes (Liberty Safe); |
• | The manufacture and marketing of branded, hemp-based food products (Manitoba Harvest); and |
• | The manufacture and marketing of portable food warming fuels and creative ambience solutions for the hospitality and consumer markets (Sterno Products). |
This press release may contain certain forward-looking statements, including statements with regard to the future performance of CODI. Words such as "believes," "expects," "projects," and "future" or similar expressions, are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussion in the Form 10-K filed by CODI with the SEC for the year ended December 31, 2017 and other filings with the SEC. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Compass Diversified Holdings Condensed Consolidated Balance Sheets | |||||||
December 31, 2017 | December 31, 2016 | ||||||
(in thousands) | |||||||
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 | — | 141,767 | |||||
Goodwill and intangible assets, net | 1,112,206 | 1,030,848 | |||||
Other non-current assets | 8,198 | 9,351 | |||||
Total assets | $ | 1,820,303 | $ | 1,777,155 | |||
Liabilities and stockholders’ equity | |||||||
Current liabilities | |||||||
Accounts payable and accrued expenses | $ | 191,411 | $ | 152,553 | |||
Due to related party | 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 | |||||
Stockholders' equity | |||||||
Total stockholders' equity attributable to Holdings | 873,208 | 856,405 | |||||
Noncontrolling interests | 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 Condensed Consolidated Statements of Operations | |||||||||||||||
Three Months Ended | Year Ended | ||||||||||||||
(in thousands, except per share data) | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||
Net sales | $ | 348,399 | $ | 318,561 | $ | 1,269,729 | $ | 978,309 | |||||||
Cost of sales | 222,468 | 215,195 | 822,020 | 651,739 | |||||||||||
Gross profit | 125,931 | 103,366 | 447,709 | 326,570 | |||||||||||
Operating expenses: | |||||||||||||||
Selling, general and administrative expense | 79,382 | 77,128 | 318,484 | 217,830 | |||||||||||
Management fees | 8,385 | 8,012 | 32,693 | 29,406 | |||||||||||
Amortization expense | 12,747 | 11,103 | 52,003 | 35,069 | |||||||||||
Impairment expense/ Loss on disposal of assets | 8,461 | 17,990 | 17,325 | 25,204 | |||||||||||
Operating income (loss) | 16,956 | (10,867 | ) | 27,204 | 19,061 | ||||||||||
Other income (expense): | |||||||||||||||
Interest expense, net | (5,124 | ) | (1,447 | ) | (27,623 | ) | (24,651 | ) | |||||||
Gain (loss) on investment | — | 15,810 | (5,620 | ) | 74,490 | ||||||||||
Amortization of debt issuance costs | (1,062 | ) | (936 | ) | (4,002 | ) | (2,763 | ) | |||||||
Other income (expense), net | (316 | ) | (1,067 | ) | 2,634 | (2,919 | ) | ||||||||
Income (loss) from continuing operations before income taxes | 10,454 | 1,493 | (7,407 | ) | 63,218 | ||||||||||
Provision (benefit) for income taxes | (38,677 | ) | (309 | ) | (40,679 | ) | 9,469 | ||||||||
Net income from continuing operations | 49,131 | 1,802 | 33,272 | 53,749 | |||||||||||
Income from discontinued operations, net of income tax | — | — | — | 473 | |||||||||||
Gain on sale of discontinued operations, net of tax | — | 174 | 340 | 2,308 | |||||||||||
Net income | 49,131 | 1,976 | 33,612 | 56,530 | |||||||||||
Less: Income from continuing operations attributable to noncontrolling interest | 3,129 | 212 | 5,621 | 1,961 | |||||||||||
Less: Loss from discontinued operations attributable to noncontrolling interest | — | — | — | (116 | ) | ||||||||||
Net income attributable to Holdings | $ | 46,002 | $ | 1,764 | $ | 27,991 | $ | 54,685 | |||||||
Basic and fully diluted income (loss) per share | |||||||||||||||
Continuing operations | $ | 0.53 | $ | (0.14 | ) | $ | (0.45 | ) | $ | 0.46 | |||||
Discontinued operations | — | — | 0.01 | 0.05 | |||||||||||
$ | 0.53 | $ | (0.14 | ) | $ | (0.44 | ) | $ | 0.51 | ||||||
Basic and fully diluted weighted average number of shares outstanding | 59,900 | 55,457 | 59,900 | 54,591 | |||||||||||
Cash distributions declared per share | $ | 0.36 | $ | 0.36 | $ | 1.44 | $ | 1.44 | |||||||
Compass Diversified Holdings Summarized Statement of Cash Flows | |||||||
Year Ended | |||||||
(in thousands) | December 31, 2017 | December 31, 2016 | |||||
Net cash provided by operating activities | $ | 81,771 | $ | 111,372 | |||
Net cash used in investing activities | (77,278 | ) | (363,021 | ) | |||
Net cash (used in) provided by financing activities | (2,588 | ) | 208,726 | ||||
Effect of foreign currency on cash | (1,792 | ) | (3,174 | ) | |||
Net increase (decrease) in cash and cash equivalents | 113 | (46,097 | ) | ||||
Cash and cash equivalents — beginning of period | 39,772 | 85,869 | |||||
Cash and cash equivalents — end of period | $ | 39,885 | $ | 39,772 | |||
Compass Diversified Holdings Condensed Consolidated Table of Cash Flows Available for Distribution and Reinvestment (unaudited) | |||||||||||||||
Three Months Ended | Year Ended | ||||||||||||||
(in thousands) | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||
Net income | $ | 49,131 | $ | 1,976 | $ | 33,612 | $ | 56,530 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
Depreciation and amortization | 21,392 | 33,433 | 110,051 | 87,405 | |||||||||||
Impairment expense/ loss on disposal of assets | 8,461 | 17,990 | 17,325 | 25,204 | |||||||||||
Gain on sale of businesses, net | — | (173 | ) | (340 | ) | (2,308 | ) | ||||||||
Amortization of debt issuance costs and original issue discount | 1,286 | 1,202 | 5,007 | 3,565 | |||||||||||
Unrealized loss on derivatives | (1,826 | ) | (6,783 | ) | (648 | ) | 1,539 | ||||||||
(Gain) loss on investment in FOX | — | (15,810 | ) | 5,620 | (74,490 | ) | |||||||||
Noncontrolling stockholder charges | 2,075 | 1,370 | 7,027 | 4,382 | |||||||||||
Excess tax benefit on stock compensation | — | (797 | ) | (417 | ) | (1,163 | ) | ||||||||
Provision for loss on receivables | (346 | ) | 551 | 3,964 | 407 | ||||||||||
Other | (101 | ) | 934 | 393 | 1,486 | ||||||||||
Deferred taxes | (41,492 | ) | (5,390 | ) | (59,429 | ) | (9,669 | ) | |||||||
Changes in operating assets and liabilities | (16,045 | ) | 22,275 | (40,394 | ) | 18,484 | |||||||||
Net cash provided by operating activities | 22,535 | 50,778 | 81,771 | 111,372 | |||||||||||
Plus: | |||||||||||||||
Unused fee on revolving credit facility | 713 | 591 | 2,856 | 1,947 | |||||||||||
Successful acquisition costs | 214 | — | 2,050 | 3,888 | |||||||||||
Integration services fee (1) | 375 | 875 | 3,083 | 1,667 | |||||||||||
Realized loss from foreign currency effect (2) | 268 | 1,069 | — | — | |||||||||||
Excess tax benefit on stock compensation | — | 797 | 417 | 1,163 | |||||||||||
Earnout provision adjustment | — | 394 | — | 394 | |||||||||||
Changes in operating assets and liabilities | 16,045 | — | 40,394 | — | |||||||||||
Other | 394 | 177 | — | 421 | |||||||||||
Less: | |||||||||||||||
Maintenance capital expenditures (3) | 6,855 | 6,619 | 20,270 | 20,363 | |||||||||||
Payment on swap | 914 | 1,189 | 3,964 | 4,303 | |||||||||||
Changes in operating assets and liabilities | — | 22,275 | — | 18,484 | |||||||||||
Realized gain from foreign currency effect (2) | — | — | 3,315 | 1,327 | |||||||||||
Preferred share distribution | 2,457 | — | 2,457 | — | |||||||||||
Earnout provision adjustment | 4,736 | — | 4,736 | — | |||||||||||
Other (4) | — | — | 3,586 | — | |||||||||||
Estimated cash flow available for distribution and reinvestment | $ | 25,582 | $ | 24,598 | $ | 92,243 | $ | 76,375 | |||||||
Distribution paid in April 2017/2016 | $ | — | $ | — | $ | 21,564 | $ | 19,548 | |||||||
Distribution paid in July 2017/ 2016 | — | — | 21,564 | 19,548 | |||||||||||
Distribution paid in October 2017/ 2016 | — | — | 21,564 | 19,548 | |||||||||||
Distribution paid in January 2018/ 2017 | 21,564 | 21,564 | 21,564 | 21,564 | |||||||||||
$ | 21,564 | $ | 21,564 | $ | 86,256 | $ | 80,208 | ||||||||
(1) | Represents fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership, payable quarterly. |
(2) | Reflects the foreign currency transaction gain/ loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest. |
(3) | Excludes growth capital expenditures of approximately $6.8 million and $2.1 million, for the three months ended December 31, 2017 and 2016, respectively, and $24.3 million and $3.4 million for the year ended December 31, 2017 and 2016, respectively. |
(4) | Includes amounts for the establishment of accounts receivable reserves related to two retail customers who filed bankruptcy during the first and third quarter of 2017. |