NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2023
Note A - Presentation and Principles of Consolidation
Compass Diversified Holdings, a Delaware statutory trust (the "Trust") and Compass Group Diversified Holdings LLC, a Delaware limited liability company (the "LLC"), were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. Collectively, Compass Diversified Holdings and Compass Group Diversified Holdings, LLC are referred to as the "Company". 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 Company’s Sixth Amended and Restated Operating Agreement, dated as of August 3, 2021 (as amended and restated, the "LLC Agreement")) of the LLC and, pursuant to the LLC Agreement, the LLC has, outstanding, the identical number of Trust Interests as the number of outstanding common shares of the Trust. The LLC is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The LLC is a controlling owner of ten businesses, or operating segments, at March 31, 2023. The segments are as follows: 5.11 Acquisition Corp. ("5.11"), Boa Holdings Inc. ("BOA"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Lugano Holdings, Inc. ("Lugano Diamonds" or "Lugano"), Wheelhouse Holdings, Inc. ("Marucci Sports" or "Marucci"), Relentless Intermediate, Inc. ("PrimaLoft"), Velocity Outdoor, Inc. ("Velocity Outdoor" or "Velocity"), AMT Acquisition Corporation ("Arnold"), FFI Compass, Inc. ("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. Refer to Note E - "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 LLC and oversees the management and operations of our businesses pursuant to a management services agreement ( the "Management Services Agreement" or "MSA"). Basis of Presentation
The condensed consolidated financial statements for the three month periods ended March 31, 2023 and March 31, 2022 are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or "GAAP") and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Consolidation
The condensed 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.
Discontinued Operations
During the first quarter of 2023, the Company completed the sale of Compass AC Holdings, Inc. (“Advanced Circuits or ACI”). The results of operations of ACI are reported as discontinued operations in the condensed consolidated statements of operations for the three months ended March 31, 2023 and March 31, 2022. Refer to Note C - "Discontinued Operations" for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.
Seasonality
Earnings of certain of our operating segments are seasonal in nature due to various recurring events, holidays and seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and fourth quarters produce the highest net sales during our fiscal year, however, due to various acquisitions since 2020, there is generally less seasonality in our net sales on a consolidated basis than there has been historically.
Note B — Acquisitions
The acquisitions of our businesses are accounted for under the acquisition method of accounting. For each platform acquisition, the Company typically structures the transaction so that a newly created holding company acquires 100% of the equity interests in the acquired business. The entirety of the purchase consideration is paid by the newly created holding company to the selling shareholders. The total purchase consideration is the amount paid to the selling shareholders and we will, from time to time, allow the selling shareholder to reinvest a portion of their proceeds alongside the Company at the same price per share, into the holding company that acquires the target business. Once the acquisition is complete, the selling shareholders no longer hold equity interests in the acquired company, but rather hold noncontrolling interest in the holding company that acquired the target business. Because the selling shareholders are investing in the transaction alongside the Company at the same price per share as the Company and are not retaining their existing equity in the acquired business, the Company includes the amount provided by noncontrolling shareholders in the total purchase consideration.
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, typically through our existing credit facility. The debt capital is in the form of “intercompany loans” made by the LLC to the newly created holding company and the acquired business and are due from the newly created holding company and the acquired business, and payable to the LLC by the newly created holding company and the acquired business. The selling shareholders of the acquired businesses are not a party to the intercompany loan agreements nor do they have any obligation to repay the intercompany loans. These intercompany loans eliminate in consolidation and are not reflected on the Company's consolidated balance sheets.
Acquisition of PrimaLoft
On July 12, 2022, the LLC, through its newly formed indirect acquisition subsidiary, Relentless Intermediate, Inc. ("PrimaLoft Buyer"), acquired PrimaLoft Technologies Holdings, Inc. (“PrimaLoft”) pursuant to a Stock Purchase Agreement (the “PrimaLoft Purchase Agreement”), dated June 4, 2022, by and between PrimaLoft Buyer and VP PrimaLoft Holdings, LLC ("PrimaLoft Seller"). The Company acquired PrimaLoft for a total purchase price, including proceeds from noncontrolling shareholders, of approximately $541.1 million, before working capital and other customary adjustments. The Company funded the acquisition through a draw on its 2022 Revolving Credit Facility and the proceeds from its $400 million 2022 Term Loan Facility. PrimaLoft management invested in the transaction along with the Company, representing 9.2% of the initial equity interest in PrimaLoft. Concurrent with the closing, the Company provided a credit facility to PrimaLoft pursuant to which a secured revolving loan commitment and secured term loan were made available to PrimaLoft (the "PrimaLoft Credit Agreement"). The initial revolving loan and term loan commitments under these facilities on the closing date were $178 million. CGM will receive integration service fees of $4.8 million payable quarterly over a twelve month period as services are rendered which payments began in the quarter ended September 30, 2022. The Company incurred $5.7 million of transaction costs in conjunction with the PrimaLoft acquisition, which was included in selling, general and administrative expense in the consolidated statements of operations during the third quarter of 2022.
PrimaLoft, Inc. is a branded, advanced material technology company based in Latham, New York and is focused on the research and innovative development of high-performance material solutions, specializing in insulations and fabrics.
The results of operations of PrimaLoft have been included in the consolidated results of operations since the date of acquisition. PrimaLoft's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the recording of the fair value of assets acquired and liabilities assumed as of the date of acquisition.
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Preliminary Purchase Price Allocation | | Measurement Period Adjustments | | Final Purchase Price Allocation |
| Purchase Consideration | | $ | 539,576 | | | $ | 1,536 | | | $ | 541,112 | |
| | | | | | |
| Fair value of identifiable assets acquired: | | | | | | |
| Cash | | $ | 6,951 | | | $ | — | | | $ | 6,951 | |
Accounts receivable (1) | | 2,992 | | | — | | | 2,992 | |
| Inventory | | 1,991 | | | — | | | 1,991 | |
Property, plant and equipment | | 1,058 | | | — | | | 1,058 | |
| Intangible assets | | 248,200 | | | 58,700 | | | 306,900 | |
| Other current and noncurrent assets | | 3,581 | | | (1,187) | | | 2,394 | |
| Total identifiable assets | | 264,773 | | | 57,513 | | | 322,286 | |
| | | | | | |
| Fair value of liabilities assumed: | | | | | | |
| Current liabilities | | 8,865 | | | (868) | | | 7,997 | |
| Other liabilities | | 360 | | | — | | | 360 | |
| Deferred tax liabilities | | 51,268 | | | 12,699 | | | 63,967 | |
| Total liabilities | | 60,493 | | | 11,831 | | | 72,324 | |
| | | | | | |
| Net identifiable assets acquired | | 204,280 | | | 45,682 | | | 249,962 | |
| | | | | | |
| Goodwill | | $ | 335,296 | | | $ | (44,147) | | | $ | 291,149 | |
| | | | | | | | | | | | | | | | | | | | |
| Acquisition consideration | | | | | | |
| Purchase price | | $ | 530,000 | | | $ | — | | | $ | 530,000 | |
| Cash acquired | | 7,319 | | | (368) | | | 6,951 | |
| Net working capital adjustment | | 2,257 | | | 1,904 | | | 4,161 | |
| | | | | | |
| Total purchase consideration | | $ | 539,576 | | | $ | 1,536 | | | $ | 541,112 | |
| | | | | | |
| | | | | | |
(1) The fair value of accounts receivable approximates book value acquired.
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. Inventory is recognized at fair value, with finished goods stated at selling price less an estimated cost to sell. Property, plant and equipment is valued at fair value which approximates book value and will be depreciated on a straight-line basis over the 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 $291.1 million reflects the strategic fit of PrimaLoft in the Company's branded consumer business and is not expected to be deductible for income tax purposes. The PrimaLoft purchase price allocation was finalized in the first quarter of 2023.
The intangible assets recorded related to the PrimaLoft acquisition are as follows (in thousands):
| | | | | | | | | | | | | | |
| Intangible Assets | | Fair Value | | Estimated Useful Lives |
| | | | |
| Customer relationships | | $ | 209,100 | | | 15 years |
| Tradename | | 48,200 | | | 20 years |
| Technology | | 49,100 | | | 11 years |
In-process research and development (1) | | 500 | | | N/a |
| | $ | 306,900 | | | |
(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 customer relationships were considered the primary intangible asset and was valued at $209.1 million using a multi-period excess earnings method. The technology was valued at $49.1 million using a multi-period excess earnings methodology with an assumed obsolescence factor. The tradename was valued at $48.2 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.
Unaudited pro forma information
The following unaudited pro forma data for the three months ended March 31, 2022 gives effect to the acquisition of PrimaLoft, as described above, as if this transaction had been completed as of January 1, 2022. 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.
| | | | | | | | | | | | |
| | Three months ended | | |
| (in thousands, except per share data) | | March 31, 2022 | | | | |
| Net sales | | $ | 536,261 | | | | | |
| Gross profit | | $ | 216,311 | | | | | |
| Operating income | | $ | 48,857 | | | | | |
| Net income from continuing operations | | $ | 16,118 | | | | | |
| Net income from continuing operations attributable to Holdings | | $ | 10,966 | | | | | |
| Basic and fully diluted net loss per share attributable to Holdings | | $ | (0.03) | | | | | |
Other acquisitions
Velocity
Kings Camo - On July 8, 2022, Velocity acquired the assets of King's Camo LC, a manufacturer of outdoor performance apparel and gear, for a purchase price of approximately $25.2 million and included a potential earnout of $3.0 million. The acquisition and related transaction costs were funded through an additional term loan of $25.7 million under the Velocity intercompany credit agreement. Velocity paid approximately $0.2 million in transaction fees. Velocity recorded a purchase price allocation, including goodwill of approximately $9.7 million, which is expected to be deductible for income tax purposes, and intangible assets of $7.1 million. The remainder of the purchase consideration was allocated to net assets acquired. The purchase price allocation was finalized in the fourth quarter of 2022.
Note C — Discontinued Operations
Sale of Advanced Circuits
On January 10, 2023, the LLC, solely in its capacity as the representative of the holders of stock and options of Compass AC Holdings, Inc., a majority owned subsidiary of the LLC, entered into a definitive Agreement and Plan of Merger with APCT Inc. (“ACI Purchaser”), Circuit Merger Sub, Inc. (“ACI Merger Sub”) and Advanced Circuits,
pursuant to which ACI Purchaser agreed to 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 ACI Merger Sub with and into Advanced Circuits, with Advanced Circuits surviving the merger and becoming a wholly owned subsidiary of ACI Purchaser (the “ACI Merger”). The ACI Merger was completed on February 14, 2023. The sale price of Advanced Circuits was based on an enterprise value of $220 million, subject to certain adjustments based on matters such as the working capital and cash and debt balances of Advanced Circuits at the time of the closing. After the allocation of the sales price to Advanced Circuits non-controlling equity holders and the payment of transaction expenses, CODI received approximately $170.9 million of total proceeds at closing, of which $66.9 million related to the repayment of intercompany loans with the Company. The Company recorded a gain on the sale of ACI of $98.0 million, net of an income tax provision of $6.8 million, in the first quarter of 2023.
Summarized results of operations of ACI for the three months ended March 31, 2023 and 2022 through the date of disposition are as follows (in thousands):
| | | | | | | | | | | |
| For the period January 1, 2023 through disposition | | Three months ended
March 31, 2022 |
| Net sales | $ | 8,829 | | | $ | 23,249 | |
| Gross profit | $ | 3,663 | | | $ | 10,930 | |
| Operating income | $ | 1,058 | | | $ | 6,524 | |
Income (loss) from continuing operations before income taxes (1) | $ | (2,464) | | | $ | 6,477 | |
| Provision (benefit) for income taxes | $ | (1,073) | | | $ | 1,107 | |
Income (loss) from discontinued operations (1) | $ | (1,391) | | | $ | 5,370 | |
(1) The results of operations for the period from January 1, 2023 through disposition and the three months ended March 31, 2022, each exclude $1.4 million and $1.7 million, respectively, of intercompany interest expense.
The following table presents summary balance sheet information of ACI that is presented as discontinued operations as of December 31, 2022 (in thousands):
| | | | | | | | |
| | December 31,
2022 |
| Assets | | |
| Cash and cash equivalents | | $ | 3,391 | |
| Accounts receivable, net | | 10,044 | |
| Inventories, net | | 4,345 | |
| Prepaid expenses and other current assets | | 346 | |
| Current assets of discontinued operations | | $ | 18,126 | |
| Property, plant and equipment, net | | 6,949 | |
| Goodwill | | 66,678 | |
| Other non-current assets | | 6,220 | |
| Non-current assets of discontinued operations | | $ | 79,847 | |
| | |
| Liabilities | | |
| Accounts payable | | $ | 3,810 | |
| Accrued expenses | | 5,570 | |
| Due to related party | | 250 | |
| Other current liabilities | | 1,518 | |
| Current liabilities of discontinued operations | | $ | 11,148 | |
| Deferred income taxes | | 10,999 | |
| Other non-current liabilities | | 5,193 | |
| Non-current liabilities of discontinued operations | | $ | 16,192 | |
| Noncontrolling interest of discontinued operations | | $ | 1,533 | |
Note D — Revenue
The Company recognizes revenue when a customer obtains 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 incentives or taxes collected from customers which are subsequently remitted to government authorities.
Disaggregated Revenue - The Company disaggregates revenue by strategic business unit and 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 three months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2023 |
| United States | | Canada | | Europe | | Asia Pacific | | Other International | | Total |
| 5.11 | $ | 98,527 | | | $ | 3,359 | | | $ | 6,607 | | | $ | 4,183 | | | $ | 11,776 | | | $ | 124,452 | |
| BOA | 11,299 | | | 124 | | | 14,652 | | | 11,696 | | | 215 | | | 37,986 | |
| Ergobaby | 8,829 | | | 3 | | | 6,865 | | | 4,534 | | | 2,187 | | | 22,418 | |
| Lugano | 63,887 | | | — | | | — | | | — | | | — | | | 63,887 | |
| Marucci | 55,578 | | | 1,061 | | | 196 | | | 1,431 | | | 29 | | | 58,295 | |
| PrimaLoft | 166 | | | 47 | | | 720 | | | 23,419 | | | 177 | | | 24,529 | |
| Velocity Outdoor | 29,892 | | | 1,936 | | | 1,340 | | | 129 | | | 743 | | | 34,040 | |
| Altor | 53,462 | | | — | | | — | | | — | | | 8,050 | | | 61,512 | |
| Arnold | 26,649 | | | 163 | | | 10,983 | | | 1,411 | | | 884 | | | 40,090 | |
| Sterno | 71,588 | | | 2,184 | | | 1,247 | | | — | | | — | | | 75,019 | |
| $ | 419,877 | | | $ | 8,877 | | | $ | 42,610 | | | $ | 46,803 | | | $ | 24,061 | | | $ | 542,228 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 |
| United States | | Canada | | Europe | | Asia Pacific | | Other International | | Total |
| 5.11 | $ | 80,803 | | | $ | 2,388 | | | $ | 7,545 | | | $ | 3,964 | | | $ | 9,323 | | | $ | 104,023 | |
| BOA | 20,202 | | | 540 | | | 17,100 | | | 18,904 | | | 64 | | | 56,810 | |
| Ergobaby | 8,173 | | | 793 | | | 7,590 | | | 3,470 | | | 184 | | | 20,210 | |
| Lugano | 47,019 | | | — | | | — | | | — | | | — | | | 47,019 | |
| Marucci | 51,082 | | | 552 | | | 6 | | | 419 | | | 33 | | | 52,092 | |
| | | | | | | | | | | |
| Velocity Outdoor | 43,813 | | | 3,561 | | | 2,426 | | | 354 | | | 1,292 | | | 51,446 | |
| Altor | 57,781 | | | — | | | — | | | — | | | 6,047 | | | 63,828 | |
| Arnold | 26,173 | | | 193 | | | 9,509 | | | 1,782 | | | 508 | | | 38,165 | |
| Sterno | 74,698 | | | 1,799 | | | 302 | | | 102 | | | 19 | | | 76,920 | |
| $ | 409,744 | | | $ | 9,826 | | | $ | 44,478 | | | $ | 28,995 | | | $ | 17,470 | | | $ | 510,513 | |
Note E — Operating Segment Data
At March 31, 2023, the Company had ten 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. While each is actively managed by the Company, 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 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 and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in Costa Mesa, 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.
•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, outdoor, athletic, workwear as well as performance 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 designed with brand partners to deliver superior fit and performance for athletes, is engineered to perform in the toughest conditions 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.
•Ergobaby, headquartered in Torrance, California, is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, strollers, bouncers 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.
•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 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 corporate-owned and franchised sports training facilities. Marucci is headquartered in Baton Rouge, Louisiana.
•PrimaLoft is a leading provider of branded, high-performance synthetic insulation and materials used primarily in consumer outerwear, and accessories. The portfolio of PrimaLoft synthetic insulations offers products that can both mimic natural down aesthetics and provide the freedom to design garments ranging from stylish puffers to lightweight performance apparel. PrimaLoft insulations also offer superior economics to the brand partner and enable better sustainability characteristics through the use of recycled, low-carbon inputs. PrimaLoft is headquartered in Latham, New York.
•Velocity Outdoor is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices, hunting apparel and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin, CenterPoint and King's Camo 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. The apparel category offers high-performance, feature rich hunting and casual apparel of uncompromised quality utilizing King’s own proprietary camo patterns. Velocity Outdoor is headquartered in Bloomfield, New York.
•Altor Solutions is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer components made from expanded polystyrene and expanded polypropylene. Altor provides products to a variety of end markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products. Altor is headquartered in Scottsdale, Arizona and operates 18 molding and fabricating facilities across North America.
•Arnold is a global solutions provider and manufacturer of engineered solutions for a wide range of specialty applications and end-markets, including aerospace and defense, general industrial, motorsport/transportation, oil and gas, medical, energy, reprographics and advertising specialties. Arnold engineers solutions for and produces high performance permanent magnets (PMAG), stators, rotors and full 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. Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 customers and leading systems-integrators worldwide with a focus on North America, Europe, and Asia. Arnold has built a preferred rare earth supply chain and has leading rare earth and other permanent magnet production capabilities. Arnold is headquartered in Rochester, New York.
•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, scented wax cubes, warmer products, outdoor lighting and essential oils used for home decor and fragrance systems through Rimports. 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 Manager to assess the performance of each business. Corporate consists of corporate overhead and management fees that are not allocated to any of the Company's reportable segments. There were no significant inter-segment transactions.
Summary of Operating Segments
| | | | | | | | | | | | | | | |
| Net Revenues | Three months ended March 31, | | |
| (in thousands) | 2023 | | 2022 | | | | |
| | | | | | | |
| 5.11 | $ | 124,452 | | | $ | 104,023 | | | | | |
| BOA | 37,986 | | | 56,810 | | | | | |
| Ergobaby | 22,418 | | | 20,210 | | | | | |
| Lugano | 63,887 | | | 47,019 | | | | | |
| Marucci | 58,295 | | | 52,092 | | | | | |
| PrimaLoft | 24,529 | | | — | | | | | |
| Velocity Outdoor | 34,040 | | | 51,446 | | | | | |
| Altor Solutions | 61,512 | | | 63,828 | | | | | |
| Arnold | 40,090 | | | 38,165 | | | | | |
| Sterno | 75,019 | | | 76,920 | | | | | |
| Total segment revenue | 542,228 | | | 510,513 | | | | | |
| Corporate | — | | | — | | | | | |
| Total consolidated revenues | $ | 542,228 | | | $ | 510,513 | | | | | |
| | | | | | | | | | | | | | | |
| Segment Profit (Loss) | Three months ended March 31, | | |
| (in thousands) | 2023 | | 2022 | | | | |
| | | | | | | |
| 5.11 | $ | 7,670 | | | $ | 5,905 | | | | | |
| BOA | 7,951 | | | 18,811 | | | | | |
| Ergobaby | 388 | | | (276) | | | | | |
| Lugano | 19,776 | | | 13,606 | | | | | |
| Marucci | 14,340 | | | 7,885 | | | | | |
| PrimaLoft | 5,021 | | | — | | | | | |
| Velocity Outdoor | (3,276) | | | 3,067 | | | | | |
| Altor Solutions | 6,934 | | | 5,834 | | | | | |
| Arnold | 5,038 | | | 3,288 | | | | | |
| Sterno | 4,493 | | | 3,034 | | | | | |
| Total segment operating income | 68,335 | | | 61,154 | | | | | |
| Corporate | (19,438) | | | (16,552) | | | | | |
| Total consolidated operating income | 48,897 | | | 44,602 | | | | | |
| Reconciliation of segment operating income (loss) to consolidated income from continuing operations before income taxes: | | | | | | | |
| Interest expense, net | (26,180) | | | (17,419) | | | | | |
| Amortization of debt issuance costs | (1,005) | | | (866) | | | | | |
| | | | | | | |
| Other income (expense), net | 1,127 | | | 2,036 | | | | | |
| Total consolidated income from continuing operations before income taxes | $ | 22,839 | | | $ | 28,353 | | | | | |
| | | | | | | | | | | | | | | |
| Depreciation and Amortization Expense | Three months ended March 31, | | |
| (in thousands) | 2023 | | 2022 | | | | |
| | | | | | | |
| 5.11 | $ | 6,377 | | | $ | 5,412 | | | | | |
| BOA | 5,636 | | | 5,254 | | | | | |
| Ergobaby | 2,014 | | | 1,995 | | | | | |
| Lugano | 2,718 | | | 2,169 | | | | | |
| Marucci | 3,014 | | | 4,152 | | | | | |
| PrimaLoft | 5,278 | | | — | | | | | |
| Velocity Outdoor | 3,284 | | | 3,195 | | | | | |
| Altor Solutions | 4,104 | | | 3,928 | | | | | |
| Arnold | 1,978 | | | 2,185 | | | | | |
| Sterno | 4,914 | | | 5,003 | | | | | |
| Total | 39,317 | | | 33,293 | | | | | |
| Reconciliation of segment to consolidated total: | | | | | | | |
| Amortization of debt issuance costs | 1,005 | | | 866 | | | | | |
| Consolidated total | $ | 40,322 | | | $ | 34,159 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Accounts Receivable | | Identifiable Assets |
| March 31, | | December 31, | | March 31, | | December 31, |
| (in thousands) | 2023 | | 2022 | | 2023 (1) | | 2022 (1) |
| 5.11 | $ | 51,552 | | | $ | 53,589 | | | $ | 468,015 | | | $ | 450,537 | |
| BOA | 2,069 | | | 1,630 | | | 236,956 | | | 240,359 | |
| Ergobaby | 14,206 | | | 11,213 | | | 81,975 | | | 84,657 | |
| Lugano | 92,474 | | | 85,911 | | | 370,884 | | | 327,795 | |
| Marucci | 35,881 | | | 35,185 | | | 171,659 | | | 181,528 | |
| PrimaLoft | 2,677 | | | 2,486 | | | 303,708 | | | 310,914 | |
| Velocity Outdoor | 24,617 | | | 33,159 | | | 223,365 | | | 224,356 | |
| Altor Solutions | 44,022 | | | 42,368 | | | 194,606 | | | 198,943 | |
| Arnold | 23,983 | | | 23,666 | | | 107,993 | | | 105,196 | |
| Sterno | 46,564 | | | 54,400 | | | 196,897 | | | 210,780 | |
| Sales allowance accounts | (11,301) | | | (12,211) | | | — | | | — | |
| Total | 326,744 | | | 331,396 | | | 2,356,058 | | | 2,335,065 | |
| Reconciliation of segment to consolidated totals: | | | | | | | |
Corporate and other identifiable assets | — | | | — | | | 8,397 | | | 18,471 | |
| | | | | | | |
| Total | $ | 326,744 | | | $ | 331,396 | | | $ | 2,364,455 | | | $ | 2,451,509 | |
Note F — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Machinery and equipment | $ | 230,445 | | | $ | 225,027 | |
| Furniture, fixtures and other | 67,288 | | | 66,445 | |
| Leasehold improvements | 80,430 | | | 75,318 | |
| Buildings and land | 13,540 | | | 13,386 | |
| Construction in process | 21,749 | | | 18,091 | |
| 413,452 | | | 398,267 | |
| Less: accumulated depreciation | (210,723) | | | (199,742) | |
| Total | $ | 202,729 | | | $ | 198,525 | |
Depreciation expense was $11.8 million and $9.9 million for the three months ended March 31, 2023 and March 31, 2022, respectively.
Inventory
Inventory is comprised of the following at March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Raw materials | $ | 99,944 | | | $ | 104,735 | |
| Work-in-process | 29,645 | | | 30,158 | |
| Finished goods | 660,523 | | | 621,854 | |
| Less: obsolescence reserve | (26,083) | | | (28,664) | |
| Total | $ | 764,029 | | | $ | 728,083 | |
Note G — Goodwill and Other Intangible Assets
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.
Goodwill
Annual Impairment Testing
The Company uses a qualitative approach to test goodwill and 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 a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform quantitative goodwill impairment testing.
2023 Annual Impairment Testing
The Company determined that the Velocity 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 2023 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 Velocity was performed using an income approach to determine the fair value of the reporting unit. The discount rate used in the income approach was 15% and the results of the quantitative impairment testing indicated that the fair value of the Velocity reporting unit exceeded the carrying value by 21%.
2022 Annual Impairment Testing
The results of the qualitative analysis indicated that it was more-likely-than-not that the fair value of each of our reporting units exceeded their carrying value for the 2022 annual impairment testing.
Interim Impairment Testing
2022 Interim Impairment Testing
Ergobaby - The Company performed interim quantitative impairment testing at Ergobaby of goodwill and the indefinite lived tradename at December 31, 2022. As a result of operating results that were below historical and forecast amounts, the Company determined that a triggering event had occurred at Ergobaby. 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 16% 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 Ergobaby's ability to execute on projected cash flows. Based on the results of the impairment test, the fair value of Ergobaby did not exceed its carrying value. We recorded goodwill
impairment of $20.6 million at December 31, 2022. For the indefinite lived tradename, quantitative testing indicated that the fair value exceeded the carrying value.
The following is a summary of the net carrying amount of goodwill at March 31, 2023 and December 31, 2022, is as follows (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, 2023 | | Year ended
December 31, 2022 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Goodwill - gross carrying amount | $ | 1,145,023 | | | $ | 1,145,023 | |
Accumulated impairment losses (1) | (78,297) | | | (78,297) | |
| Goodwill - net carrying amount | $ | 1,066,726 | | | $ | 1,066,726 | |
(1) Includes goodwill impairment expense of $20.6 million recorded at Ergobaby, $32.9 million at Velocity and $24.9 million at Arnold.
The following is a reconciliation of the change in the carrying value of goodwill for the three months ended March 31, 2023 by operating segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2023 | | Acquisitions/Measurement Period Adjustments | | | | | | | | Balance at March 31, 2023 |
| 5.11 | | $ | 92,966 | | | $ | — | | | | | | | | | $ | 92,966 | |
| BOA | | 254,153 | | | — | | | | | | | | | 254,153 | |
| Ergobaby | | 40,896 | | | — | | | | | | | | | 40,896 | |
| Lugano | | 86,337 | | | — | | | | | | | | | 86,337 | |
| Marucci | | 75,719 | | | — | | | | | | | | | 75,719 | |
| PrimaLoft | | 291,150 | | | — | | | | | | | | | 291,150 | |
| Velocity Outdoor | | 39,773 | | | — | | | | | | | | | 39,773 | |
| Altor | | 91,129 | | | — | | | | | | | | | 91,129 | |
| Arnold | | 39,267 | | | — | | | | | | | | | 39,267 | |
| Sterno | | 55,336 | | | — | | | | | | | | | 55,336 | |
| Total | | $ | 1,066,726 | | | $ | — | | | | | | | | | $ | 1,066,726 | |
Long lived assets
Annual indefinite lived 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 indefinite lived intangible asset in connection with the annual impairment testing for 2023 and 2022. Results of the qualitative analysis indicate that it is more likely than not that the fair value of the reporting units that maintain indefinite lived intangible assets exceeded the carrying value.
Other intangible assets are comprised of the following at March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Customer relationships | $ | 785,303 | | | $ | (254,279) | | | $ | 531,024 | | | $ | 785,303 | | | $ | (239,752) | | | $ | 545,551 | |
| Technology and patents | 212,385 | | | (56,862) | | | 155,523 | | | 211,648 | | | (52,811) | | | 158,837 | |
| Trade names, subject to amortization | 483,197 | | | (126,259) | | | 356,938 | | | 483,179 | | | (118,684) | | | 364,495 | |
| Non-compete agreements | 4,637 | | | (3,889) | | | 748 | | | 4,637 | | | (3,824) | | | 813 | |
| Other contractual intangible assets | 1,960 | | | (1,298) | | | 662 | | | 1,960 | | | (1,185) | | | 775 | |
| Total | 1,487,482 | | | (442,587) | | | 1,044,895 | | | 1,486,727 | | | (416,256) | | | 1,070,471 | |
| Trade names, not subject to amortization | 56,965 | | | — | | | 56,965 | | | 56,965 | | | — | | | 56,965 | |
In-process research and development (1) | 500 | | | — | | | 500 | | | 500 | | | — | | | 500 | |
| Total intangibles, net | $ | 1,544,947 | | | $ | (442,587) | | | $ | 1,102,360 | | | $ | 1,544,192 | | | $ | (416,256) | | | $ | 1,127,936 | |
(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.
Amortization expense related to intangible assets was $26.4 million and $21.1 million for the three months ended March 31, 2023 and March 31, 2022, respectively.
Estimated charges to amortization expense of intangible assets for the remainder of 2023 and the next four years, is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | | |
| | | | | | | | | | | |
| $ | 78,564 | | | $ | 103,128 | | | $ | 97,803 | | | $ | 91,447 | | | $ | 80,713 | | | | |
Note H — Warranties
The Company’s Ergobaby, Marucci, BOA and Velocity Outdoor operating segments estimate their exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty liability quarterly and adjusts the amount as necessary. Warranty liability is included in accrued expenses in the accompanying consolidated balance sheets. A reconciliation of the change in the carrying value of the Company’s warranty liability for the three months ended March 31, 2023 and the year ended December 31, 2022 is as follows (in thousands):
| | | | | | | | | | | |
| Warranty liability | Three months ended March 31, 2023 | | Year ended December 31, 2022 |
| | | |
| Beginning balance | $ | 1,754 | | | $ | 2,062 | |
| Provision for warranties issued during the period | 618 | | | 3,301 | |
| Fulfillment of warranty obligations | (922) | | | (3,609) | |
| Ending balance | $ | 1,450 | | | $ | 1,754 | |
Note I — Debt
2022 Credit Facility
On July 12, 2022, the LLC entered into the Third Amended and Restated Credit Agreement (the "2022 Credit Facility") to amend and restate the 2021 Credit Facility. The 2022 Credit Facility provides for revolving loans, swing line loans and letters of credit ("the 2022 Revolving Line of Credit") up to a maximum aggregate amount of $600 million ("the 2022 Revolving Loan Commitment") and a $400 million term loan (the “ 2022 Term Loan”). The 2022 Term Loan requires quarterly payments ranging from $2.5 million to $7.5 million, commencing September 30, 2022, with a final payment of all remaining principal and interest due on July 12, 2027, which is the 2022 Term
Loan’s maturity date. All amounts outstanding under the 2022 Revolving Line of Credit will become due on July 12, 2027, which is the termination date of the 2022 Revolving Loan Commitment. The 2022 Credit Facility also permits the LLC, 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 $250 million, subject to certain restrictions and conditions. On the closing date for the 2022 Credit Facility, the 2022 Term Loan was advanced in full and the initial borrowings outstanding under the 2022 Revolving Line of Credit were $115 million. We used the initial proceeds from the 2022 Credit Facility to pay all amounts outstanding under the 2021 Credit Facility, pay fees and expenses incurred in connection with the 2022 Credit Facility and fund the acquisition of PrimaLoft.
The LLC may borrow, prepay and reborrow principal under the 2022 Revolving Credit Facility from time to time during its term. Advances under the 2022 Revolving Line of Credit can be either term Secured Overnight Financing Rate ("SOFR") loans or base rate loans. Term SOFR revolving loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum based on the applicable SOFR as administered by the Federal Reserve Bank of New York (or a successor administrator), as adjusted, plus a margin ranging from 1.50% to 2.50%, based on the ratio of consolidated net indebtedness to adjusted consolidated earnings before interest expense, tax expense, and depreciation and amortization expenses for such period (the “Consolidated Total Leverage Ratio”). Base rate revolving loans bear interest on the outstanding principal amount thereof at a rate per annum equal to the highest of (i) Federal Funds rate plus 0.50%, (ii) the “prime rate”, and (iii) the applicable SOFR plus 1.0% (the “Base Rate”), plus a margin ranging from 0.50% to 1.50%, based on the Company's Consolidated Total Leverage Ratio.
Advances under the 2022 Term Loan can be either term SOFR loans or base rate loans. The 2022 Term Loan was advanced in full on the closing date for the 2022 Credit Facility as a Term SOFR loan with an interest period of one month. On the last day of an interest period, Term SOFR loans may be converted to Term SOFR loans of a different interest period or to Base Rate loans. Term SOFR term loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum based on the Term SOFR for such interest period plus a margin ranging from 1.50% to 2.50%, based on the Consolidated Total Leverage Ratio. Base rate term loans bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate plus a margin ranging from 0.50% to 1.50%, based on the Consolidated Total Leverage Ratio.
Under the 2022 Revolving Credit Facility, an aggregate amount of up to $100 million in letters of credit may be issued, as well as swing line loans of up to $25 million outstanding at one time. The issuance of such letters of credit and the making of any swing line loan would reduce the amount available under the 2022 Revolving Credit Facility.
Net availability under the 2022 Revolving Credit Facility was approximately $589.8 million at March 31, 2023. Letters of credit outstanding at March 31, 2023 totaled approximately $2.2 million. At March 31, 2023, the Company was in compliance with all covenants as defined in the 2022 Credit Facility.
The 2022 Revolving Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its subsidiaries.
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 LLC, the lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent. The 2021 Credit Facility provided 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 permitted the LLC, 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. The Company repaid the outstanding amounts under the 2021 credit facility in the third quarter of 2022 in connection with entering into the 2022 Credit Facility.
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” or "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 outstanding 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 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, as described above, and to redeem our 8.000% Senior Notes due 2026 (the “2026 Senior Notes”).
The following table provides the Company’s outstanding long-term debt and effective interest rates at March 31, 2023 and December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Effective Interest Rate | | Amount | | Effective Interest Rate | | Amount |
| 2029 Senior Notes | 5.25 | % | | $ | 1,000,000 | | | 5.25 | % | | $ | 1,000,000 | |
| 2032 Senior Notes | 5.00 | % | | 300,000 | | | 5.00 | % | | 300,000 | |
| 2022 Term Loan | 6.97 | % | | 392,500 | | | 5.20 | % | | 395,000 | |
| 2022 Revolving Credit Facility | 6.89 | % | | 8,000 | | | 5.98 | % | | 155,000 | |
| Less: Unamortized debt issuance costs | | | (14,929) | | | | | (15,532) | |
| Total debt | | | $ | 1,685,571 | | | | | $ | 1,834,468 | |
| Less: Current Portion, term loan facilities | | | (10,000) | | | | | (10,000) | |
| Long-term debt | | | $ | 1,675,571 | | | | | $ | 1,824,468 | |
Annual maturities of the Company's debt obligations are as follows (in thousands):
| | | | | | | | |
| 2023 | | $ | 10,000 | |
| 2024 | | 10,000 | |
| 2025 | | 15,000 | |
| 2026 | | 25,000 | |
| 2027 | | 340,500 | |
| 2028 and thereafter | | 1,300,000 | |
| | $ | 1,700,500 | |
The Senior Notes consisted of the following carrying value and estimated fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Hierarchy Level | | March 31, 2023 |
| | Maturity Date | | Rate | | | Carrying Value | | Fair Value |
| 2032 Senior Notes | | January 15, 2032 | | 5.000 | % | | 2 | | 300,000 | | | 243,000 | |
| 2029 Senior Notes | | April 15, 2029 | | 5.250 | % | | 2 | | 1,000,000 | | | 875,000 | |
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the issuance of the Company's financing arrangements. In connection with entering into the 2022 Credit Facility, the Company recognized $2.5 million in deferred financing costs associated with the 2022 Term Loan, and $2.8 million in deferred financing costs associated with the 2022 Revolving Credit Facility. In connection with the 2032 Senior Notes offering in November 2021, the Company recorded $4.3 million in deferred financing costs, and $12.0 million in deferred financing costs related to the 2029 Senior Notes offering in March 2021.
Since the Company can borrow, repay and reborrow principal under the 2022 Revolving Credit Facility, the debt issuance costs associated with the 2022 Revolving Credit Facility have been classified as other non-current assets in the accompanying condensed consolidated balance sheet. The debt issuance costs associated with the 2022 Term Loan and Senior Notes are classified as a reduction of long-term debt in the accompanying condensed consolidated balance sheets.
The following table summarizes debt issuance costs at March 31, 2023 and December 31, 2022, and the balance sheet classification in each of the periods presented (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Deferred debt issuance costs | $ | 32,526 | | | $ | 32,526 | |
| Accumulated amortization | (10,765) | | | (9,760) | |
| Deferred debt issuance costs, net | $ | 21,761 | | | $ | 22,766 | |
| | | |
| Balance sheet classification: | | | |
| Other noncurrent assets | $ | 6,832 | | | $ | 7,234 | |
| Long-term debt | 14,929 | | | 15,532 | |
| $ | 21,761 | | | $ | 22,766 | |
Note J — 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 Trust share is entitled to one vote per share on any matter with respect to which members of the LLC are entitled to vote.
Share repurchase program
In January 2023, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase, through December 31, 2023, up to $50 million of its outstanding common shares.
The Company repurchased 210,000 shares for $4.0 million during the three months ended March 31, 2023. As of March 31, 2023, $46.0 million remained available to purchase under the share repurchase program.
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.
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 Sales Agents up to $500 million, in amounts and at times to be determined by the Company. 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 any such methods of sale.
During the three months ended March 31, 2023, there were no sales of Trust common shares under the Sales Agreement as the at-the-market program is not active when the share repurchase program is active.
During the three months ended March 31, 2022, the Company sold 712,433 Trust common shares under the Sales Agreement. For the same period, the Company received total net proceeds of approximately $20.2 million from these sales, and incurred approximately $0.4 million in commissions payable to the Sales Agents.
The Company incurred approximately $0.1 million in total costs related to the ATM program during both the three months ended March 31, 2023 and 2022.
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 Series C Preferred Shares which were sold pursuant to an option to purchase additional shares by the underwriters. Total proceeds from the issuance of the Series C Preferred Shares were $115.0 million, or $111.0 million net of underwriters' discount and issuance costs. Distributions on the Series C 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 January 30, 2020, at a rate per annum of 7.875%. Distributions on the Series C Preferred Shares are cumulative and at March 31, 2023, $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.
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 are 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%. Holders of the Series B Preferred Shares are entitled to receive cumulative cash distributions (i) from and including the date of issuance to, but excluding, April 30, 2028 a rate equal to7.875% per annum and (ii) from and including April 30, 2028, at a floating rate equal to the applicable three-month LIBOR (or at a successor rate) plus a spread of 4.985% per annum. Subsequent to April 30, 2028, the distribution rate will be reset quarterly. At March 31, 2023, $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.
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.
Allocation Interests
The 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.
Sale Event
The sale of Advanced Circuits in February 2023 represented a Sale Event and the Company's board of director's approved a distribution of $24.4 million in April 2023, subsequent to the end of the first quarter. In addition, the Company's board of directors approved a distribution of $2.1 million related to various sale proceeds received related to previous Sale Events. These distributions were paid to the Holders of the Allocation Interests in April 2023.
Reconciliation of net income (loss) available to common shares of Holdings
The following table reconciles net income (loss) attributable to Holdings to net income (loss) attributable to the common shares of Holdings (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| Net income from continuing operations attributable to Holdings | | $ | 8,022 | | | $ | 13,440 | | | | | |
| | | | | | | | |
| Less: Distributions paid - Preferred Shares | | 6,045 | | | 6,045 | | | | | |
| Less: Accrued distributions - Preferred Shares | | 2,869 | | | 2,869 | | | | | |
| Net income (loss) from continuing operations attributable to common shares of Holdings | | $ | (892) | | | $ | 4,526 | | | | | |
Earnings per share
The Company calculates basic and diluted earnings per share using the two-class method which requires the Company to allocate to participating securities that have rights to earnings that otherwise would have been available only to Trust shareholders as a separate class of securities in calculating earnings per share. The Allocation Interests are considered participating securities that contain participating rights to receive profit allocations upon the occurrence of a Holding Event or Sale Event. The calculation of basic and diluted earnings per share for the three months ended March 31, 2023 and 2022 reflects the incremental increase during the period in the profit allocation distribution to Holders related to Holding Events.
Basic and diluted earnings per share for the three months ended March 31, 2023 and 2022 attributable to the common shares of Holdings is calculated as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| Net income (loss) from continuing operations attributable to common shares of Holdings | | $ | (892) | | | $ | 4,526 | | | | | |
| Less: Effect of contribution based profit - Holding Event | | 3,593 | | | 4,254 | | | | | |
| Net income (loss) from continuing operations attributable to common shares of Holdings | | $ | (4,485) | | | $ | 272 | | | | | |
| | | | | | | | |
| Income from discontinued operations attributable to Holdings | | $ | 97,375 | | | $ | 10,322 | | | | | |
| Less: Effect of contribution based profit - Holding Event | | — | | | 630 | | | | | |
| Income from discontinued operations attributable to common shares of Holdings | | $ | 97,375 | | | $ | 9,692 | | | | | |
| | | | | | | | |
| Basic and diluted weighted average common shares outstanding | | 72,178 | | | 69,375 | | | | | |
| | | | | | | | |
| Basic and fully diluted income (loss) per common share attributable to Holdings | | | | | | | | |
| Continuing operations | | $ | (0.06) | | | $ | — | | | | | |
| Discontinued operations | | 1.35 | | | 0.14 | | | | | |
| | $ | 1.29 | | | $ | 0.14 | | | | | |
Distributions
The following table summarizes information related to our quarterly cash distributions on our Trust common and preferred shares (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Cash Distribution per Share | | Total Cash Distributions | | Record Date | | Payment Date |
| | | | | | | | |
| Trust Common Shares: | | | | | | | | |
January 1, 2023 - March 31, 2023 (1) | | $ | 0.25 | | | $ | 17,987 | | | April 20, 2023 | | April 27, 2023 |
| October 1, 2022 - December 31, 2022 | | $ | 0.25 | | | $ | 18,051 | | | January 19, 2023 | | January 26, 2023 |
| July 1, 2022 - September 30, 2022 | | $ | 0.25 | | | $ | 18,051 | | | October 20, 2022 | | October 27, 2022 |
| April 1, 2022 - June 30, 2022 | | $ | 0.25 | | | $ | 17,931 | | | July 21, 2022 | | July 28, 2022 |
| January 1, 2022 - March 31, 2022 | | $ | 0.25 | | | $ | 17,510 | | | April 21, 2022 | | April 28, 2022 |
| | | | | | | | |
| Series A Preferred Shares: | | | | | | | | |
January 30, 2023 - April 29, 2023 (1) | | $ | 0.453125 | | | $ | 1,813 | | | April 15, 2023 | | April 30, 2023 |
| October 30, 2022 - January 29, 2023 | | $ | 0.453125 | | | $ | 1,813 | | | January 15, 2023 | | January 30, 2023 |
| July 30, 2022 - October 29, 2022 | | $ | 0.453125 | | | $ | 1,813 | | | October 15, 2022 | | October 30, 2022 |
| April 30, 2022 - July 29, 2022 | | $ | 0.453125 | | | $ | 1,813 | | | July 15, 2022 | | July 30, 2022 |
| January 30, 2022 - April 29, 2022 | | $ | 0.453125 | | | $ | 1,813 | | | April 15, 2022 | | April 30, 2022 |
| October 30, 2021 - January 29, 2022 | | $ | 0.453125 | | | $ | 1,813 | | | January 15, 2022 | | January 30, 2022 |
| | | | | | | | |
| Series B Preferred Shares: | | | | | | | | |
January 30, 2023 - April 29, 2023 (1) | | $ | 0.4921875 | | | $ | 1,969 | | | April 15, 2023 | | April 30, 2023 |
| October 30, 2022 - January 29, 2023 | | $ | 0.4921875 | | | $ | 1,969 | | | January 15, 2023 | | January 30, 2023 |
| July 30, 2022 - October 29, 2022 | | $ | 0.4921875 | | | $ | 1,969 | | | October 15, 2022 | | October 30, 2022 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 30, 2022 - July 29, 2022 | | $ | 0.4921875 | | | $ | 1,969 | | | July 15, 2022 | | July 30, 2022 |
| January 30, 2022 - April 29, 2022 | | $ | 0.4921875 | | | $ | 1,969 | | | April 15, 2022 | | April 30, 2022 |
| October 30, 2021 - January 29, 2022 | | $ | 0.4921875 | | | $ | 1,969 | | | January 15, 2022 | | January 30, 2022 |
| | | | | | | | |
| Series C Preferred Shares: | | | | | | | | |
January 30, 2023 - April 29, 2023 (1) | | $ | 0.4921875 | | | $ | 2,264 | | | April 15, 2023 | | April 30, 2023 |
| October 30, 2022 - January 29, 2023 | | $ | 0.4921875 | | | $ | 2,264 | | | January 15, 2023 | | January 30, 2023 |
| July 30, 2022 - October 29, 2022 | | $ | 0.4921875 | | | $ | 2,264 | | | October 15, 2022 | | October 30, 2022 |
| April 30, 2022 - July 29, 2022 | | $ | 0.4921875 | | | $ | 2,264 | | | July 15, 2022 | | July 30, 2022 |
| January 30, 2022 - April 29, 2022 | | $ | 0.4921875 | | | $ | 2,264 | | | April 15, 2022 | | April 30, 2022 |
| October 30, 2021 - January 29, 2022 | | $ | 0.4921875 | | | $ | 2,264 | | | January 15, 2022 | | January 30, 2022 |
(1) This distribution was declared on April 3, 2023.
