Compass Diversified Reports Third Quarter 2020 Financial Results
October 28, 2020 at 16:15 PM EDT
Branded Consumer Performance Drives Strong Third Quarter Operating Results, Increasing CAD from Prior Year
Completes Platform Acquisition of Performance Fit Innovator BOA Technology Subsequent to Quarter-End
Achieves Milestone as Cumulative Distributions Paid Increase to Over $20 per Share Since CODI's IPO
WESTPORT, Conn., Oct. 28, 2020 (GLOBE NEWSWIRE) -- Compass Diversified (NYSE: CODI) (“CODI” or the “Company”), an owner of leading middle market businesses, announced today its consolidated operating results for the three months ended September 30, 2020.
Third Quarter 2020 Highlights
"The competitive advantage gained through our permanent capital structure has never been more apparent,” said Elias Sabo, CEO of Compass Diversified. “CODI’s strong performance in the third quarter is a testament to our differentiated model and the outperformance of our branded consumer businesses. Our team continues to execute on our acquisition strategy amid heightened uncertainty, and we are pleased to have completed the acquisition of another growing and aspirational brand, BOA Technology. As we continue to transform our portfolio, BOA joins a strong lineup of branded consumer business, including Marucci, 5.11, Velocity Outdoor and Liberty Safe. As a whole, our branded consumer businesses exceeded expectations again this quarter, benefiting from ongoing consumer demand in outdoor categories.”
Mr. Sabo continued, “CODI’s unique model has proven resilient and looking ahead, we are poised to continue creating long-term shareholder value by executing on our strategy and returning substantial capital with our $1.44 per common share annual distribution. We are pleased to have achieved an important milestone in the third quarter, as our cumulative distributions increased to more than $20 per share, representing our strong track record of paying consistent and sizeable distributions since CODI's IPO in May of 2006.”
Mr. Sabo concluded, “As we approach year end, we remain incredibly proud of all that our team has accomplished in managing the uncertainty of the pandemic. We have positioned our diverse set of subsidiary companies for continued long-term success and we are eager to build upon this momentum in the quarters and years to come.”
Net sales for the quarter ended September 30, 2020 were $418.9 million, as compared to $388.3 million for the quarter ended September 30, 2019.
Net income for the quarter ended September 30, 2020 was $20.9 million, as compared to net loss of $26.5 million for the quarter ended September 30, 2019. CODI recorded a $33.4 million impairment at its Velocity Outdoor subsidiary during the quarter ended September 30, 2019.
Adjusted EBITDA (see "Note Regarding Use of Non-GAAP Financial Measures" below) for the quarter ended September 30, 2020 was $73.9 million, as compared to $63.8 million for the quarter ended September 30, 2019.
Liquidity and Capital Resources
For the quarter ended September 30, 2020, CODI reported Cash Provided by Operating Activities of $24.5 million, as compared to Cash Provided by Operating Activities of $22.9 million for the quarter ended September 30, 2019.
CODI reported CAD (see "Note Regarding Use of Non-GAAP Financial Measures" below) of $43.5 million for the quarter ended September 30, 2020, as compared to $30.2 million for the prior year's comparable quarter. CODI's CAD is calculated after taking into account all interest expenses, cash taxes paid, preferred distributions and maintenance capital expenditures, and includes the operating results of each of our businesses for the periods during which CODI owned them. However, CAD excludes the gains from monetizing interests in CODI's subsidiaries, which have totaled over $1.0 billion since going public in 2006.
CODI's weighted average number of shares outstanding for the quarter ended September 30, 2020 was 64.9 million, and for the quarter ended September 30, 2019 was 59.9 million.
As of September 30, 2020, CODI had approximately $176.8 million in cash and cash equivalents, $600 million outstanding in 8.00% Senior Notes due 2026 and no outstanding borrowings under its revolving credit facility.
The Company has no significant debt maturities until 2026 and had net borrowing availability of $599 million at September 30, 2020 under its revolving credit facility.
Subsequent to the end of the quarter, CODI completed the acquisition of BOA for a total purchase price of $454 million (excluding working capital and certain other adjustments upon closing, and transaction costs). CODI funded the acquisition of BOA with cash on hand and a $300 million draw on its revolving credit facility. BOA’s minority shareholders invested $61.5mm for an 18% noncontrolling interest in the equity of BOA.
For the third quarter of 2020, Compass Group Management LLC (“CGM”) volunteered to waive the management fee on cash balances held at CODI as of September 30, 2020. This followed CGM’s waiver of 50% of its management fee calculated as of June 30, 2020, which produced cash savings of approximately $5.2 million.
Third Quarter 2020 Distributions
On October 1, 2020, CODI's Board of Directors (the “Board”) declared a third quarter distribution of $0.36 per share on the Company's common shares. The cash distribution was paid on October 22, 2020 to all holders of record of common shares as of October 15, 2020. Since its IPO in 2006, CODI has paid a cumulative distribution of $20.0352 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 “Series A Preferred Shares”). The distribution on the Series A Preferred Shares covers the period from, and including, July 30, 2020, up to, but excluding, October 30, 2020. The distribution for such period is payable on October 30, 2020 to all holders of record of Series A Preferred Shares as of October 15, 2020.
The Board also declared a quarterly cash distribution of $0.4921875 per share on the Company’s 7.875% Series B Preferred Shares (the “Series B Preferred Shares”). The distribution on the Series B Preferred Shares covers the period from, and including, July 30, 2020, up to, but excluding, October 30, 2020. The distribution for such period is payable on October 30, 2020 to all holders of record of Series B Preferred Shares as of October 15, 2020.
The Board also declared a quarterly cash distribution of $0.4921875 per share on the Company’s 7.875% Series C Preferred Shares (the “Series C Preferred Shares”). The distribution on the Series C Preferred Shares covers the period from, and including, July 30, 2020, up to, but excluding, October 30, 2020. The distribution for such period is payable on October 30, 2020 to all holders of record of Series C Preferred Shares as of October 15, 2020.
The Company estimates its full year 2020 consolidated subsidiary Adjusted EBITDA, before deducting corporate expense, and including Marucci and BOA as if they were acquired January 1, 2020, will be between $270 million and $280 million. In addition, the Company estimates its full year 2020 Payout Ratio, defined as our prior year’s annual distribution to common shareholders divided by our 2020 full year estimate for CAD, will be between 90% and 100%.
The Company believes that it currently has adequate liquidity and capital resources to meet its existing obligations and quarterly distributions to its shareholders, if approved by the Board of Directors over the next twelve months. The ultimate impact of COVID-19 on the Company’s business is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are highly uncertain and cannot be accurately predicted at this time. As detailed in our Form 10-Q for the period ending September 30, 2020, the Company’s results of operations, financial condition and cash flow could be impacted more dramatically than currently anticipated and as a result, the Company’s liquidity and capital resources could become more constrained than expected.
Management will host a conference call on Wednesday, October 28, 2020 at 5:00 p.m. ET to discuss the latest corporate developments and financial results. The dial-in number for callers in the U.S. is (833) 900-1532 and the dial-in number for international callers is (236) 712-2273. The access code for all callers is 5056636. A live webcast will also be available on the Company's website at https://www.compassdiversified.com.
A replay of the call will be available through Wednesday, November 4, 2020. To access the replay, please dial (800) 585-8367 in the U.S. and (416) 621-4642 outside the U.S., and then enter the access code 5056636.
Note Regarding Use of Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP measure used by the Company to assess its performance. We have reconciled Adjusted EBITDA to Net Income (Loss) on the attached schedules. We consider Net Income (Loss) to be the most directly comparable GAAP financial measure to Adjusted EBITDA. We believe that Adjusted EBITDA provides useful information to investors and reflects important financial measures as it excludes the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near-term operations. When compared to Net Income (Loss), Adjusted EBITDA is limited in that it does not reflect the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated with impairments, as well as certain cash charges. This presentation also allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition. We believe Adjusted EBITDA is also useful in measuring our ability to service debt and other payment obligations.
CAD is a non-GAAP measure used by the Company to assess its performance, as well as its ability to sustain quarterly distributions. We have reconciled CAD to Net Income (Loss) and Cash Flow from Operating Activities on the attached schedules. We consider Net Income (Loss) and Cash Flow from Operating Activities to be the most directly comparable GAAP financial measures to CAD.
CAD is calculated after taking into account all interest expense, cash taxes paid and maintenance capital expenditures, and includes the operating results of each of our businesses for the periods during which CODI owned them. We believe that CAD provides investors additional information to enable them to evaluate our performance and ability to make anticipated quarterly distributions.
Payout Ratio is a non-GAAP measure defined as our prior year's annual distribution to common shareholders divided by our CAD. We believe the Payout Ratio provides investors additional information to enable them to evaluate our performance and our ability to sustain quarterly distributions.
In reliance on the unreasonable efforts exception provided under Item 10(e)(1)(i)(B) of Regulation S-K, we have not reconciled 2020 Adjusted EBITDA or 2020 Payout Ratio (which requires an estimate of 2020 CAD) to their comparable GAAP measure because we do not provide guidance on Net Income (Loss), Cash Flow Provided by Operating Activities or the applicable reconciling items as a result of the uncertainty regarding, and the potential variability of, these items. For the same reasons, we are unable to address the probable significance of the unavailable information, which could be material to future results.
None of Adjusted EBITDA, CAD nor Payout Ratio is meant to be a substitute for GAAP measures and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
About Compass Diversified (“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. For more information, visit compassdiversified.com.
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:
Forward Looking Statements
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements as to our future performance or liquidity, such as expectations regarding our results of operations, financial condition and cash flows for the full year of 2020, our 2020 Total Adjusted EBITDA, 2020 Payout Ratio and 2020 CAD and our ability to meet existing obligations and quarterly distributions as well as other statements with regard to the future performance of CODI. Forward-looking statements involve risks and uncertainties, including, but not limited to, the impact, in the near, medium and long-term, of the COVID-19 pandemic or social or political unrest on our business, results of operations, financial position, liquidity, cash flows or ability to make distributions; our business prospects and the prospects of our portfolio companies; the impact of investments that we make or expect to make; the dependence of our future success on the general economy and its impact on the industries in which we operate; the ability of our portfolio companies to achieve their objectives; the adequacy of our cash resources and working capital; and the timing of cash flows, if any, from the operations of our portfolio companies.
We may use words such as “anticipate,” “believe,” “expect,” “intend,” “will,” “should,” “may,” “seek,” “look,” and similar expressions to identify forward-looking statements. The forward-looking statements contained in this press release involve risks and uncertainties. Actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” and elsewhere in CODI’s annual report on Form 10-K and its quarterly reports on Form 10-Q. Other factors that could cause actual results to differ materially include: changes in the economy, financial markets and political environment; risks associated with possible disruption in CODI’s operations or the economy generally due to terrorism, natural disasters, social, civil and political unrest or the COVID-19 pandemic; future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities); general considerations associated with the COVID-19 pandemic and its impact on the markets in which we operate; and other considerations that may be disclosed from time to time in CODI’s publicly disseminated documents and filings. Undue reliance should not be placed on such forward-looking statements as such statements speak only as of the date on which they are made. Although, except as required by law, CODI undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that CODI may make directly to you or through reports that it in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
(1) Acquisitions reflects the net sales for Marucci on a pro forma basis as if we had acquired this business on January 1, 2019.
(1) Net sales for Marucci Sports are pro forma as if we had acquired this business on January 1, 2019.
(1) Includes cash from discontinued operations of $4.6 million at January 1, 2019.
(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) Represents maintenance capital expenditures that were funded from operating cash flow, net of proceeds from the sale of property, plant and equipment, and excludes growth capital expenditures of approximately $4.1 million and $4.3 million, respectively, for the three months ended September 30, 2020 and 2019, and $9.7 million and $10.7 million, respectively, for the nine months ended September 30, 2020 and 2019.
(4) Represents the effect on earnings of reserves for inventory and accounts receivable.