NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2022
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 further amended, the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the LLC’s Sixth Amended and Restated Operating Agreement, dated as of August 3, 2021 (as further amended, 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 reportable operating segments, at March 31, 2022. The segments are as follows: 5.11 Acquisition Corp. ("5.11"), Boa Holdings Inc. ("BOA"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Lugano Diamonds & Jewelry, Inc. ("Lugano Diamonds" or "Lugano"), Marucci Sports, LLC ("Marucci Sports" or "Marucci"), Velocity Outdoor, Inc. ("Velocity Outdoor" or "Velocity"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold"), FFI Compass, Inc. ("Altor Solutions" or "Altor") (formerly "Foam Fabricators"), and The Sterno Group, LLC ("Sterno"). At March 31, 2021, Advanced Circuits has been classified as held-for-sale. Refer to Note C - "Discontinued Operations" and Note Q- "Subsequent Events" for further discussion of Advanced Circuits. 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 ("MSA"). Basis of Presentation
The condensed consolidated financial statements for the three month periods ended March 31, 2022 and March 31, 2021 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, 2021.
Consolidation
The condensed consolidated financial statements include the accounts of 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
On October 13, 2021, the LLC entered into a definitive Agreement and Plan of Merger to sell its majority owned subsidiary, Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), which met the criteria to be classified as a discontinued operation as of December 31, 2021 and March 31, 2022. As a result, the Company reported the results of operations of ACI as discontinued operations in the condensed consolidated statements of operations for all periods presented. In addition, the assets and liabilities associated with this business have been reclassified as held for sale in the consolidated balance sheets.
The Company completed the sale of Liberty Safe Holding Corporation ("Liberty") during the third quarter of 2021. The results of operations of Liberty are reported as discontinued operations in the condensed consolidated statements of operations for the three months ended March 31, 2021. 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.
Change in Tax Status Election
Effective September 1, 2021 (the "Effective Date"), the Trust elected to be treated as a corporation for U.S. federal income tax purposes. Prior to the Effective Date, the Trust was treated as a partnership for U.S. federal income tax purposes and the Trust’s items of income, gain, loss and deduction flowed through from the Trust to the shareholders, and the Trust shareholders were subject to income taxes on their allocable share of the Trust’s income and gain. After the Effective Date, the Trust is taxed as a corporation and is subject to U.S. federal corporate income tax at the Trust level, but items of income, gain, loss and deduction will not flow through to Trust shareholders. Trust shareholders will no longer receive an IRS Schedule K-1. After the Effective Date, distributions from the Trust will be treated as dividends to the extent the Trust has accumulated or current earnings and profits. If the Trust does not have current or accumulated earnings and profits available for distribution, then the distribution will be treated as a return of capital and reduce Trust shareholders’ basis in their shares.
Prior to the Effective Date, each of the LLC’s majority owned subsidiaries were treated as corporations for U.S. federal income tax purposes. The election did not change the tax status of any LLC subsidiary, and each majority owned LLC subsidiary is still treated as a corporation for U.S. federal income tax purposes.
After the Effective Date, the Trust will no longer be taxed as a pass through entity for U.S. federal income tax purposes. Accordingly, the Trust will no longer issue Schedule K-1’s, nor will Trust shareholders be allocated any pass through income, loss, expense, deduction or credit (including “UBIT”) from the Trust.
Note B — Acquisitions
Acquisition of Lugano Diamonds & Jewelry, Inc.
On September 3, 2021, the LLC, through its newly formed acquisition subsidiaries, Lugano Holding, Inc., a Delaware corporation (“Lugano Holdings”), and Lugano Buyer, Inc., a Delaware corporation (“Lugano Buyer”) and a wholly-owned subsidiary of Lugano Holdings, acquired the issued and outstanding shares of stock of Lugano Diamonds & Jewelry Inc. ("Lugano") other than the certain rollover shares (the “Lugano Transaction”). The Lugano Transaction was effectuated pursuant to a Stock Purchase Agreement (the “Lugano Purchase Agreement”), also dated September 3, 2021, by and among Lugano Buyer, the Sellers named therein (“Sellers”) and Mordechai Haim Ferder in his individual capacity and as initial representative of the Sellers. Lugano is a leading designer, manufacturer and marketer of high-end, one-of-a-kind jewelry sought after by some of the world’s most discerning clientele. Lugano conducts sales via its own retail salons as well as pop-up showrooms at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art and philanthropic community. Lugano is headquartered in Newport Beach, California.
The LLC made loans to, and purchased a 60% equity interest in, Lugano. The purchase price, including proceeds from noncontrolling shareholders and net of transaction costs, was $263.3 million. The selling shareholders invested in the transaction along with the LLC, representing 40% initial noncontrolling interest on both a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the LLC in the acquisition and will continue to provide integration services during the first year of the LLC's ownership of Lugano. CGM will receive integration service fees of $2.3 million payable quarterly over a twelve month period as services are rendered which payments began in the quarter ended December 31, 2021. The LLC incurred $1.8 million of transaction costs in conjunction with the Lugano acquisition, which was included in selling, general and administrative expense in the consolidated statements of operations during the third quarter of 2021. The LLC funded the acquisition with cash on hand and a $120 million draw on its 2021 Revolving Credit Facility.
The results of operations of Lugano have been included in the consolidated results of operations since the date of acquisition. Lugano's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the recording of assets acquired and liabilities assumed as of the date of acquisition.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| (in thousands) | | Preliminary Purchase Price Allocation | | Measurement Period Adjustments | | Final Purchase Price Allocation |
| Assets: | | | | | | |
| Cash | | $ | 1,433 | | | $ | — | | | $ | 1,433 | |
Accounts receivable (1) | | 20,954 | | | — | | | 20,954 | |
| Inventory | | 85,794 | | | 9,419 | | | 95,213 | |
Property, plant and equipment | | 2,743 | | | 392 | | | 3,135 | |
| Intangible assets | | — | | | 82,454 | | | 82,454 | |
| Goodwill | | 158,780 | | | (72,443) | | | 86,337 | |
| Other current and noncurrent assets | | 4,979 | | | 4,114 | | | 9,093 | |
| Total assets | | $ | 274,683 | | | $ | 23,936 | | | $ | 298,619 | |
| | | | | | |
| Liabilities and noncontrolling interest: | | | | | | |
| Current liabilities | | $ | 7,129 | | | $ | 58 | | | $ | 7,187 | |
| Other liabilities | | 99,381 | | | 755 | | | 100,136 | |
| Deferred tax liabilities | | — | | | 23,123 | | | 23,123 | |
| Noncontrolling interest | | 68,000 | | | — | | | 68,000 | |
| Total liabilities and noncontrolling interest | | $ | 174,510 | | | $ | 23,936 | | | $ | 198,446 | |
| | | | | | |
| Net assets acquired | | $ | 100,173 | | | $ | — | | | $ | 100,173 | |
| Noncontrolling interest | | 68,000 | | | — | | | 68,000 | |
| Intercompany loans to business | | 99,381 | | | (2,420) | | | 96,961 | |
| | $ | 267,554 | | | $ | (2,420) | | | $ | 265,134 | |
| | | | | | | | | | | | | | | | | | | | |
| Acquisition consideration | | | | | | |
| Purchase price | | $ | 256,000 | | | $ | — | | | $ | 256,000 | |
| Cash acquired (estimated) | | 1,554 | | | (120) | | | 1,434 | |
| Net working capital adjustment | | 10,000 | | | (2,300) | | | 7,700 | |
| | | | | | |
| Total purchase consideration | | $ | 267,554 | | | $ | (2,420) | | | $ | 265,134 | |
| Less: Transaction costs | | 1,827 | | | — | | | 1,827 | |
| Net purchase price | | $ | 265,727 | | | $ | (2,420) | | | $ | 263,307 | |
(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 through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $86.3 million reflects the strategic fit of Lugano in the Company's branded consumer business and is not expected to be deductible for income tax purposes.
The intangible assets recorded related to the Lugano acquisition are as follows (in thousands):
| | | | | | | | | | | | | | |
| Intangible Assets | | Fair Value | | Estimated Useful Lives |
| | | | |
| Tradename | | $ | 48,433 | | | 18 years |
| Customer relationships | | 34,021 | | | 15 years |
| | $ | 82,454 | | | |
The tradename was considered the primary intangible asset and was valued at $48.4 million using a multi-period excess earnings method. The customer relationships were valued at $34.0 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, 2021 gives effect to the acquisition of Lugano, as described above, and the dispositions of Liberty Safe and ACI, as if these transactions had been completed as of January 1, 2021. 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, 2021 | | | | |
| Net sales | | $ | 437,995 | | | | | |
| Gross profit | | $ | 183,722 | | | | | |
| Operating income | | $ | 43,260 | | | | | |
| Net income from continuing operations | | $ | 18,090 | | | | | |
| Net income from continuing operations attributable to Holdings | | $ | 13,861 | | | | | |
| Basic and fully diluted net loss per share attributable to Holdings | | $ | 0.00 | | | | | |
Other acquisitions
Marucci
Lizard Skins - On October 22, 2021, Marucci Sports acquired Lizard Skins, LLC ("Lizard Skins"), an industry leading provider of sporting goods accessories that revolve around the hand-to-grip interface, for an enterprise value of approximately $47.0 million, excluding customary closing adjustments. The acquisition and related transaction costs were funded through an additional term loan of $44.1 million under the Marucci inter-company credit agreement with the LLC, a draw on the existing Marucci revolving credit facility with the Company, and rollover equity from the selling shareholders of Lizard Skins. Marucci issued 11,915 shares to the selling shareholders in exchange for the rollover equity, which represents an ownership interest of approximately 1% in Marucci. Marucci paid approximately $1.4 million in transaction expenses in connection with the acquisition of Lizard Skins. Lizard Skins is a designer and seller of branded grip products, protective equipment, bags and apparel for use in baseball, cycling, hockey, Esports and lacrosse. The acquisition of Lizard Skins will allow Marucci to build on its leading position in diamond sports while simultaneously developing Marucci's presence in new sports markets such as hockey and cycling. Marucci recorded a purchase price allocation, including goodwill of approximately $10.1 million, which is expected to be deductible for income tax purposes, and intangible assets of $27.9 million. The purchase price allocation is expected to be finalized in the second quarter of 2022.
Altor Solutions
Plymouth Foam - On October 5, 2021, Altor acquired Plymouth Foam, LLC (“Plymouth”), a manufacturer of protective packaging and componentry, for an enterprise value of approximately $56.0 million, excluding customary closing adjustments. The acquisition and related transaction costs were funded through an additional term loan of $52.0 million under the Altor intercompany credit agreement and a draw on the existing Altor intercompany revolving credit facility with the LLC. Altor paid approximately $0.4 million in transaction fees in connection with the acquisition
of Plymouth. Plymouth was founded in 1978 and is based in Plymouth, Wisconsin. Plymouth supplies a wide array of high value products, including custom protective packaging, cold chain packaging and internal components made from expanded polystyrene and expanded polypropylene. Plymouth’s complementary product portfolio will allow Altor to be able to further expand its business and capabilities. Altor recorded a purchase price allocation, including goodwill of approximately $15.5 million, which is not expected to be deductible for income tax purposes, and intangible assets of $20.1 million. The purchase price allocation was finalized in the first quarter of 2022.
Polyfoam - On July 1, 2020, Altor acquired substantially all of the assets of Polyfoam Corp. ("Polyfoam"), a Massachusetts-based manufacturer of protective and temperature-sensitive packaging solutions for the medical, pharmaceutical, grocery and food industries, among others. Founded in 1974, Polyfoam operates two manufacturing facilities producing highly engineered foam and injection-molded plastic solutions across a variety of end-markets. The acquisition complements Altor's current operating footprint and provides access to a new customer base and product offerings, including Polyfoam's significant end-market exposure to cold chain (including seafood boxes, insulated shipping containers and grocery delivery totes). The purchase price was approximately $12.8 million and included a potential earnout of $1.4 million if Polyfoam achieved certain financial metrics. The full amount of the earnout was paid during the first quarter of 2022.
Arnold
Ramco - On March 1, 2021, Arnold acquired Ramco Electric Motors, Inc. ("Ramco"), a manufacturer of stators, rotors and full electric motors, for a purchase price of approximately $34.3 million. The acquisition and related transaction costs were funded through an additional equity investment in Arnold by the LLC of $35.5 million. Ramco was founded in 1987 and is based in Greenville, Ohio. Ramco supplies their custom electric motor solutions for general industrial, aerospace and defense, and oil and gas end-markets. Ramco’s complementary product portfolio will allow Arnold to be able to offer more comprehensive, turnkey solutions to their customers. In connection with the acquisition, Arnold recorded a purchase price allocation of $12.4 million of goodwill, which is not expected to be deductible for income tax purposes and $12.7 million in intangible assets. The remainder of the purchase consideration was allocated to net assets acquired. The purchase price allocation was finalized in the fourth quarter of 2021.
Note C — Discontinued Operations
Advanced Circuits Merger Agreement
On October 13, 2021, the LLC, as the representative (the “Sellers Representative”) of the holders (the “AC Sellers”) of stock and options of Compass AC Holdings, Inc. (“Advanced Circuits”), a majority owned subsidiary of the LLC, entered into a definitive Agreement and Plan of Merger (the “AC Agreement”) with Tempo Automation, Inc. (“AC Buyer”), Aspen Acquisition Sub, Inc. (“AC Merger Sub”) and Advanced Circuits, pursuant to which AC Buyer will acquire all of the issued and outstanding securities of Advanced Circuits, the parent company of the operating entity, Advanced Circuits, Inc., through a merger of AC Merger Sub with and into Advanced Circuits, with Advanced Circuits surviving the merger and becoming a wholly owned subsidiary of AC Buyer (the “AC Merger”). Under the terms of the Agreement, the AC Sellers will receive consideration in the amount of $310 million, composed of $240 million in cash and $70 million in common stock of a publicly traded special purpose acquisition company (“SPAC”) selected by AC Buyer to acquire AC Buyer upon the closing of the transaction, excluding certain working capital and other adjustments. In addition, the AC Sellers may receive 2.4 million additional shares of SPAC common stock within five years, subject to SPAC stock price performance. The LLC owns approximately 67% of the outstanding stock of Advanced Circuits on a fully diluted basis and expects to receive approximately 77% of the gross consideration payable under the Agreement. This amount is in respect of the LLC’s outstanding loans to Advanced Circuits and its equity interests in Advanced Circuits. The AC Merger is conditioned on, among other things, the closing of a business combination between AC Buyer and a SPAC. In connection with the AC Merger, AC Buyer announced its entry into a definitive merger agreement for a business combination (the “SPAC Transaction”) with a SPAC, ACE Convergence Acquisition Corp. (“ACE”). In order to obtain shareholder approval of the SPAC Transaction, ACE had previously scheduled and announced an extraordinary general meeting of shareholders for May 5, 2022. On May 2, 2022, ACE postponed the extraordinary general meeting to allow additional time to revise and finalize its financing arrangements with respect to the SPAC Transaction. There can be no assurances that all of the conditions to closing of the AC Merger, which include the closing of the SPAC Transaction, will be satisfied.
The sale of Advanced Circuits met the criteria for the assets to be classified as held for sale as of December 31, 2021 and March 31, 2022, and is presented as discontinued operations in the accompanying consolidated financial statements for all periods presented. Summarized results of operations of Advanced Circuits are as follows (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, 2022 | | Three months ended March 31, 2021 |
| Net sales | $ | 23,249 | | | $ | 21,562 | |
| Gross profit | $ | 10,930 | | | $ | 9,404 | |
| Operating income | $ | 6,524 | | | $ | 5,495 | |
Income from continuing operations before income taxes (1) | $ | 6,477 | | | $ | 5,491 | |
| Provision for income taxes | $ | 1,107 | | | $ | 771 | |
Income from discontinued operations (1) | $ | 5,370 | | | $ | 4,720 | |
(1) The results of operations for the three months ended March 31, 2022 and 2021, each exclude $1.7 million and $1.9 million, respectively, of intercompany interest expense.
The following table presents summary balance sheet information of ACI that is presented as held for sale as of March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 6,857 | | | $ | 3,610 | |
| Accounts receivable, net | | 9,502 | | | 9,447 | |
| Inventories, net | | 3,928 | | | 3,660 | |
| Prepaid expenses and other current assets | | 688 | | | 430 | |
| Current assets held for sale | | $ | 20,975 | | | $ | 17,147 | |
| Property, plant and equipment, net | | 7,624 | | | 8,083 | |
| Goodwill | | 66,668 | | | 66,668 | |
| Intangible assets, net | | 13 | | | 23 | |
| Other non-current assets | | 7,013 | | | 7,502 | |
Non-current assets held for sale (1) | | $ | 81,318 | | | $ | 82,276 | |
| | | | |
| Liabilities | | | | |
| Accounts payable | | $ | 5,838 | | | $ | 3,798 | |
| Accrued expenses | | 4,014 | | | 3,718 | |
| Due to related party | | 125 | | | 125 | |
| Other current liabilities | | 1,600 | | | 1,580 | |
| Current liabilities held for sale | | $ | 11,577 | | | $ | 9,221 | |
| Deferred income taxes | | 13,369 | | | 13,419 | |
| Other non-current liabilities | | 5,959 | | | 6,487 | |
Non-current liabilities held for sale (1) | | $ | 19,328 | | | $ | 19,906 | |
| Noncontrolling interest held for sale | | $ | (1,449) | | | $ | (2,614) | |
(1) The closing of the transaction is expected to occur in the second quarter of 2022, and therefore all assets and liabilities have been classified as current on the consolidated balance sheets as of March 31, 2022 and December 31, 2021.
Sale of Liberty
On July 16, 2021, the LLC, as majority stockholder of Liberty Safe Holding Corporation and as sellers representative, entered into a definitive Stock Purchase Agreement (the “Liberty Purchase Agreement”) with Independence Buyer, Inc. (“Liberty Buyer”), Liberty and the other holders of stock and options of Liberty to sell to Liberty Buyer all of the issued and outstanding securities of Liberty, the parent company of the operating entity, Liberty Safe and Security Products, Inc.
On August 3, 2021, Liberty Buyer and the LLC, as sellers representative, entered into the Amendment to Stock Purchase Agreement (the “Amendment”) which amended the Liberty Purchase Agreement to, among other things, provide that, immediately prior to the closing, certain investors in Liberty will, instead of selling all of the shares of Liberty owned by them to Liberty Buyer, contribute a portion of such shares (the “Rollover Shares”) to an indirect parent company of Liberty Buyer in exchange for equity securities of such entity.
On August 3, 2021, Liberty Buyer completed the acquisition of all the issued and outstanding securities of Liberty (other than the Rollover Shares) pursuant to the Liberty Purchase Agreement and Amendment (the “Liberty Transaction”). The sale price of Liberty was based on an aggregate total enterprise value of $147.5 million, subject to customary adjustments. After the allocation of the sale proceeds to Liberty's non-controlling shareholders, the repayment of intercompany loans to the LLC (including accrued interest) of $26.5 million, and the payment of transaction expenses of approximately $4.5 million, the LLC received approximately $128.0 million of total proceeds from the sale at closing. The LLC recognized a gain on the sale of Liberty of $72.8 million in the year ended December 31, 2021.
Summarized results of operations of Liberty for the three months ended March 31, 2021 are as follows (in thousands):
| | | | | | | | |
| | Three months ended
March 31, 2021 |
| Net sales | | $ | 31,479 | |
| Gross profit | | $ | 8,897 | |
| Operating income | | $ | 5,630 | |
Income from continuing operations before income taxes (1) | | $ | 5,636 | |
| Provision for income taxes | | $ | 1,441 | |
Income from discontinued operations (1) | | $ | 4,195 | |
(1) The results of operations for the three months ended March 31, 2021, excludes $0.7 million of intercompany interest expense.
Sale of Clean Earth
On May 8, 2019, the LLC, as majority stockholder of CEHI Acquisition Corporation ("Clean Earth" or CEHI") and as sellers’ representative, entered into a definitive Stock Purchase Agreement (the “Clean Earth Purchase Agreement”) with Calrissian Holdings, LLC (“Clean Earth Buyer”), CEHI, the other holders of stock and options of CEHI and, as Clean Earth Buyer’s guarantor, Harsco Corporation, pursuant to which Clean Earth Buyer would acquire all of the issued and outstanding securities of CEHI, the parent company of the operating entity, Clean Earth, Inc. On June 28, 2019, Clean Earth Buyer completed the acquisition of all of the issued and outstanding securities of CEHI pursuant to the Clean Earth Purchase Agreement. The Company recognized a gain on the sale of Clean Earth of $209.3 million during the year ended December 31, 2019. In the first quarter of 2022, the LLC received an income tax refund of approximately $6.0 million related to Clean Earth which was recognized as gain on sale of discontinued operations in the accompanying consolidated statement of operations.
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, 2022 and 2021 (in thousands):
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| Three months ended March 31, 2022 |
| 5.11 | | BOA | | Ergo | | Lugano | | Marucci | | Velocity | | Altor | | Arnold | | Sterno | | Total |
| United States | $ | 80,803 | | | $ | 20,202 | | | $ | 8,173 | | | $ | 47,019 | | | $ | 51,082 | | | $ | 43,813 | | | $ | 57,781 | | | $ | 26,173 | | | $ | 74,698 | | | $ | 409,744 | |
| Canada | 2,388 | | | 540 | | | 793 | | | — | | | 552 | | | 3,561 | | | — | | | 193 | | | 1,799 | | | 9,826 | |
| Europe | 7,545 | | | 17,100 | | | 7,590 | | | — | | | 6 | | | 2,426 | | | — | | | 9,509 | | | 302 | | | 44,478 | |
| Asia Pacific | 3,964 | | | 18,904 | | | 3,470 | | | — | | | 419 | | | 354 | | | — | | | 1,782 | | | 102 | | | 28,995 | |
| Other international | 9,323 | | | 64 | | | 184 | | | — | | | 33 | | | 1,292 | | | 6,047 | | | 508 | | | 19 | | | 17,470 | |
| $ | 104,023 | | | $ | 56,810 | | | $ | 20,210 | | | $ | 47,019 | | | $ | 52,092 | | | $ | 51,446 | | | $ | 63,828 | | | $ | 38,165 | | | $ | 76,920 | | | $ | 510,513 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2021 |
| 5.11 | | Boa | | Ergo | | | | Marucci | | Velocity | | Altor | | Arnold | | Sterno | | Total |
| United States | $ | 80,783 | | | 14,081 | | | $ | 8,799 | | | | | $ | 36,096 | | | $ | 58,269 | | | $ | 32,744 | | | $ | 21,361 | | | $ | 74,025 | | | $ | 326,158 | |
| Canada | 2,554 | | | 224 | | | 754 | | | | | 341 | | | 3,223 | | | — | | | 205 | | | 3,000 | | | 10,301 | |
| Europe | 7,155 | | | 13,350 | | | 7,345 | | | | | 29 | | | 2,521 | | | — | | | 8,858 | | | 249 | | | 39,507 | |
| Asia Pacific | 3,813 | | | 8,728 | | | 5,261 | | | | | 182 | | | 276 | | | — | | | 1,293 | | | 15 | | | 19,568 | |
| Other international | 5,572 | | | 69 | | | 169 | | | | | — | | | 1,343 | | | 5,076 | | | 768 | | | 25 | | | 13,022 | |
| $ | 99,877 | | | $ | 36,452 | | | $ | 22,328 | | | | | $ | 36,648 | | | $ | 65,632 | | | $ | 37,820 | | | $ | 32,485 | | | $ | 77,314 | | | $ | 408,556 | |
Note E — Operating Segment Data
At March 31, 2022, the Company had nine reportable operating segments. Each operating segment represents a platform acquisition. Advanced Circuits has been classified as held for sale at March 31, 2022 and is not considered a reportable segment. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services 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 Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
•BOA, creator of the revolutionary, award-winning, patented BOA Fit System, partners with market-leading brands to make the best gear even better. Delivering fit solutions purpose-built for performance, the BOA Fit System is featured in footwear across snow sports, cycling, hiking/trekking, golf, running, court sports, workwear as well as 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 combined with unique configuration applications, which together create a superior alternative to laces, buckles, hook and loop (Velcro), and other traditional closure and fit systems. Each configuration is designed and engineered to deliver superior fit and performance, 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 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 retail and sports training facilities, both as a corporate owned entity as well as licensing these facilities as franchises. Marucci is headquartered in Baton Rouge, Louisiana.
•Velocity Outdoor is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, Ravin, LaserMax and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. 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 17 molding and fabricating facilities across North America subsequent to the acquisition of Polyfoam.
•Arnold is a global designer and manufacturer of engineered electric motor and magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, general industrial, motorsport/automotive, 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 clients worldwide. Arnold is headquartered in Rochester, New York.
•Sterno is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the foodservice industry and flameless candles, outdoor lighting products, scented wax cubes and warmer products for its consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, scented wax cubes and warmer products used for home decor and fragrance systems, catering equipment and outdoor lighting products. Sterno is headquartered in Corona, California.
The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The results of operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. There were no significant inter-segment transactions.
Summary of Operating Segments
| | | | | | | | | | | | | | | |
| Net Revenues | Three months ended March 31, | | |
| (in thousands) | 2022 | | 2021 | | | | |
| | | | | | | |
| 5.11 | $ | 104,023 | | | $ | 99,877 | | | | | |
| BOA | 56,810 | | | 36,452 | | | | | |
| Ergobaby | 20,210 | | | 22,328 | | | | | |
| Lugano | 47,019 | | | — | | | | | |
| Marucci | 52,092 | | | 36,648 | | | | | |
| Velocity Outdoor | 51,446 | | | 65,632 | | | | | |
| Altor | 63,828 | | | 37,820 | | | | | |
| Arnold | 38,165 | | | 32,485 | | | | | |
| Sterno | 76,920 | | | 77,314 | | | | | |
| Total segment revenue | 510,513 | | | 408,556 | | | | | |
| Corporate and other | — | | | — | | | | | |
| Total consolidated revenues | $ | 510,513 | | | $ | 408,556 | | | | | |
| | | | | | | | | | | | | | | |
Segment profit (loss) (1) | Three months ended March 31, | | |
| (in thousands) | 2022 | | 2021 | | | | |
| | | | | | | |
| 5.11 | $ | 5,905 | | | $ | 5,836 | | | | | |
| BOA | 18,811 | | | 7,254 | | | | | |
| Ergobaby | (276) | | | 1,964 | | | | | |
| Lugano | 13,606 | | | — | | | | | |
| Marucci | 7,885 | | | 10,507 | | | | | |
| Velocity Outdoor | 3,067 | | | 11,034 | | | | | |
| Altor | 5,834 | | | 4,684 | | | | | |
| Arnold | 3,288 | | | 2,996 | | | | | |
| Sterno | 3,034 | | | 4,284 | | | | | |
| Total | 61,154 | | | 48,559 | | | | | |
| Reconciliation of segment profit (loss) to consolidated net income before income taxes: | | | | | | | |
| Interest expense, net | (17,419) | | | (13,805) | | | | | |
| Other income (expense), net | 2,036 | | | (2,228) | | | | | |
Corporate and other (2) | (17,418) | | | (14,136) | | | | | |
| Total consolidated income before income taxes | $ | 28,353 | | | $ | 18,390 | | | | | |
(1)Segment profit (loss) represents operating income (loss).
(2)Primarily relates to management fees expensed and payable to CGM, and corporate overhead expenses.
| | | | | | | | | | | | | | | |
| Depreciation and Amortization Expense | Three months ended March 31, | | |
| (in thousands) | 2022 | | 2021 | | | | |
| | | | | | | |
| 5.11 | $ | 5,412 | | | $ | 5,358 | | | | | |
| BOA | 5,254 | | | 4,890 | | | | | |
| Ergobaby | 1,995 | | | 2,217 | | | | | |
| Lugano | 2,169 | | | — | | | | | |
| Marucci | 4,152 | | | 2,139 | | | | | |
| Velocity Outdoor | 3,195 | | | 3,073 | | | | | |
| Altor | 3,928 | | | 2,563 | | | | | |
| Arnold | 2,185 | | | 1,721 | | | | | |
| Sterno | 5,003 | | | 5,185 | | | | | |
| Total | 33,293 | | | 27,146 | | | | | |
| Reconciliation of segment to consolidated total: | | | | | | | |
| Amortization of debt issuance costs and bond premium | 866 | | | 603 | | | | | |
| Consolidated total | $ | 34,159 | | | $ | 27,749 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Accounts Receivable | | Identifiable Assets |
| March 31, | | December 31, | | March 31, | | December 31, |
| (in thousands) | 2022 | | 2021 | | 2022 (1) | | 2021 (1) |
| 5.11 | $ | 46,644 | | | $ | 50,461 | | | $ | 361,564 | | | $ | 354,666 | |
| BOA | 3,700 | | | 2,387 | | | 256,196 | | | 263,052 | |
| Ergobaby | 11,069 | | | 11,167 | | | 88,769 | | | 86,530 | |
| Lugano | 30,633 | | | 27,812 | | | 270,623 | | | 233,720 | |
| Marucci | 31,891 | | | 23,261 | | | 165,096 | | | 146,087 | |
| Velocity Outdoor | 33,328 | | | 36,017 | | | 231,439 | | | 219,545 | |
| Altor | 42,325 | | | 38,457 | | | 210,942 | | | 205,631 | |
| Arnold | 22,359 | | | 20,372 | | | 98,771 | | | 101,591 | |
| Sterno | 57,356 | | | 72,179 | | | 241,800 | | | 244,338 | |
| Allowance for doubtful accounts | (14,018) | | | (13,851) | | | — | | | — | |
| Total | 265,287 | | | 268,262 | | | 1,925,200 | | | 1,855,160 | |
| Reconciliation of segment to consolidated total: | | | | | | | |
Corporate and other identifiable assets | — | | | — | | | 53,574 | | | 106,011 | |
| Assets held for sale | — | | | — | | | 102,293 | | | 99,423 | |
| | | | | | | |
| Consolidated total | $ | 265,287 | | | $ | 268,262 | | | $ | 2,081,067 | | | $ | 2,060,594 | |
Note F — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Machinery and equipment | $ | 208,231 | | | $ | 206,919 | |
| Furniture, fixtures and other | 55,753 | | | 52,794 | |
| Leasehold improvements | 57,577 | | | 56,988 | |
| Buildings and land | 13,345 | | | 13,345 | |
| Construction in process | 19,971 | | | 15,340 | |
| 354,877 | | | 345,386 | |
| Less: accumulated depreciation | (175,700) | | | (166,993) | |
| Total | $ | 179,177 | | | $ | 178,393 | |
Depreciation expense was $9.9 million and $8.6 million for the three months ended March 31, 2022 and March 31, 2021, respectively.
Inventory
Inventory is comprised of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Raw materials | $ | 106,966 | | | $ | 105,654 | |
| Work-in-process | 37,003 | | | 27,026 | |
| Finished goods | 497,393 | | | 457,274 | |
| Less: obsolescence reserve | (24,203) | | | (27,870) | |
| Total | $ | 617,159 | | | $ | 562,084 | |
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
2022 Annual Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform quantitative goodwill impairment testing. 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.
2021 Annual Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform quantitative goodwill impairment testing. We determined that the Arnold reporting unit required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on qualitative factors alone. For the reporting units that were tested only on a qualitative basis for the 2021 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded the carrying value of these reporting units.
The quantitative test of Arnold was performed using an income approach to determine the fair value of the reporting unit. The discount rate used in the income approach was 13.0% and the results of the quantitative impairment testing indicated that the fair value of the Arnold reporting unit exceeded the carrying value by 272%.
A summary of the net carrying value of goodwill at March 31, 2022 and December 31, 2021, is as follows (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, 2022 | | Year ended
December 31, 2021 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Goodwill - gross carrying amount | $ | 848,919 | | | $ | 873,150 | |
| Accumulated impairment losses | (57,745) | | | (57,745) | |
| Goodwill - net carrying amount | $ | 791,174 | | | $ | 815,405 | |
The following is a reconciliation of the change in the carrying value of goodwill for the three months ended March 31, 2022 by operating segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2022 | | Acquisitions/Measurement Period Adjustments | | | | | | | | Balance at March 31, 2022 |
| 5.11 | | $ | 92,966 | | | $ | — | | | | | | | | | $ | 92,966 | |
| BOA | | 254,153 | | | — | | | | | | | | | 254,153 | |
| Ergobaby | | 61,448 | | | — | | | | | | | | | 61,448 | |
| Lugano | | 83,458 | | | 2,879 | | | | | | | | | 86,337 | |
| Marucci | | 107,855 | | | (29,657) | | | | | | | | | 78,198 | |
| Velocity Outdoor | | 30,079 | | | — | | | | | | | | | 30,079 | |
| Altor | | 90,843 | | | 2,547 | | | | | | | | | 93,390 | |
| Arnold | | 39,267 | | | — | | | | | | | | | 39,267 | |
| Sterno | | 55,336 | | | — | | | | | | | | | 55,336 | |
| Total | | $ | 815,405 | | | $ | (24,231) | | | | | | | | | $ | 791,174 | |
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 2022 and 2021. 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, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Customer relationships | $ | 574,834 | | | $ | (200,260) | | | $ | 374,574 | | | $ | 566,805 | | | $ | (180,581) | | | $ | 386,224 | |
| Technology and patents | 158,334 | | | (41,982) | | | 116,352 | | | 153,124 | | | (49,898) | | | 103,226 | |
| Trade names, subject to amortization | 425,348 | | | (96,242) | | | 329,106 | | | 411,100 | | | (87,178) | | | 323,922 | |
| Non-compete agreements | 4,617 | | | (3,613) | | | 1,004 | | | 4,617 | | | (3,502) | | | 1,115 | |
| Other contractual intangible assets | 2,243 | | | (899) | | | 1,344 | | | 1,960 | | | (735) | | | 1,225 | |
| Total | 1,165,376 | | | (342,996) | | | 822,380 | | | 1,137,606 | | | (321,894) | | | 815,712 | |
| Trade names, not subject to amortization | 56,965 | | | — | | | 56,965 | | | 56,965 | | | — | | | 56,965 | |
| Total intangibles, net | $ | 1,222,341 | | | $ | (342,996) | | | $ | 879,345 | | | $ | 1,194,571 | | | $ | (321,894) | | | $ | 872,677 | |
Amortization expense related to intangible assets was $21.1 million and $18.6 million for the three months ended March 31, 2022 and March 31, 2021, respectively.
Estimated charges to amortization expense of intangible assets for the remainder of 2022 and the next four years, is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | | |
| | | | | | | | | | | |
| $ | 62,608 | | | $ | 82,965 | | | $ | 81,372 | | | $ | 76,035 | | | $ | 69,685 | | | | |
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, 2022 and the year ended December 31, 2021 is as follows (in thousands):
| | | | | | | | | | | |
| Warranty liability | Three months ended March 31, 2022 | | Year ended December 31, 2021 |
| | | |
| Beginning balance | $ | 2,062 | | | $ | 1,558 | |
| Provision for warranties issued during the period | 184 | | | 4,257 | |
| Fulfillment of warranty obligations | (429) | | | (3,753) | |
| Ending balance | $ | 1,817 | | | $ | 2,062 | |
Note I — Debt
2021 Credit Facility
On March 23, 2021, we entered into a Second Amended and Restated Credit Agreement (the "2021 Credit Facility") to amend and restate the 2018 Credit Facility (as previously restated and amended) among the Company, the lenders from time to time party thereto (the “Lenders”), and Bank of America, N.A., as Administrative Agent. The 2021 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. The 2021 Credit Facility provides for revolving loans, swing line loans and letters of credit (the “2021 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million and also permits the 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. All amounts outstanding under the 2021 Revolving Credit Facility will become due on March 23, 2026, which is the maturity date of loans advanced under the 2021 Credit Facility.
The LLC may borrow, prepay and reborrow principal under the 2021 Revolving Credit Facility from time to time during its term. Advances under the 2021 Revolving Credit Facility can be either Eurodollar rate loans or base rate loans. Eurodollar rate revolving loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum based on the London Interbank Offered Rate or a Successor Rate, as defined, (the “Eurodollar Rate”) for such interest period 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) Eurodollar Rate 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.
Under the 2021 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 2021 Revolving Credit Facility.
Net availability under the 2021 Revolving Credit Facility was approximately $599.0 million at March 31, 2022. Letters of credit outstanding at March 31, 2022 totaled approximately $1.0 million. At March 31, 2022, the Company was in compliance with all covenants as defined in the 2021 Credit Facility.
2018 Credit Facility
On April 18, 2018, the LLC entered into an Amended and Restated Credit Agreement (the "2018 Credit Facility"). The 2018 Credit Facility provided for (i) revolving loans, swing line loans and letters of credit (the “2018 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million, and (ii) a $500 million term loan (the “2018 Term Loan”). The Company repaid the outstanding amounts under the 2018 Term Loan in 2019, and used a portion of the proceeds from the issuance of the 2029 Senior Notes to repay the amount outstanding under the 2018 Revolving Credit Facility in March 2021.
Senior Notes
2032 Senior Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% Senior Notes due 2032 (the “2032 Notes” of "2032 Senior Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the LLC and U.S. Bank National Association, as trustee (the “Trustee”). The 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is payable in cash on January 15 and July 15 of each year, beginning on July 15, 2022.
The proceeds from the sale of the 2032 Notes was used to repay a portion of our debt under the 2021 Revolving Credit Facility.
2029 Senior Notes
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Senior Notes due 2029 (the "2029 Notes" or "2029 Senior Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes Indenture”), between the LLC 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 will be October 15, 2021. The 2029 Notes are general unsecured obligations of the LLC 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”).
2026 Senior Notes
Our 2026 Senior Notes bore interest at 8.000% per annum and were scheduled to mature on May 1, 2026. On March 2, 2021, pursuant to an indenture, dated as of April 18, 2018 between the LLC and U.S. Bank National Association, as trustee ("Trustee"), the Trustee delivered redemption notices, on behalf of the LLC, to holders of the LLC’s 2026 Senior Notes to redeem the 2026 Senior Notes on April 1, 2021. The principal amount of the 2026 Senior Notes redeemed was $600 million, which represented all of the outstanding principal of the 2026 Senior Notes. The 2026 Senior Notes were redeemed at 100% of their principal, plus an applicable premium, and accrued and unpaid interest as of the redemption date. On March 23, 2021, the proceeds required for the redemption of the 2026 Senior Notes, the applicable premium and accrued interest totaling $647.7 million was irrevocably deposited with the Trustee and held by the Trustee until the date of redemption, April 1, 2021. The redemption of the 2026 Senior Notes resulted in a Loss on Debt Extinguishment of approximately $33.3 million, which is comprised of the premium paid for early redemption of the 2026 Senior Notes, and the expensing of the deferred financing costs and bond premium associated with the 2026 Senior Notes.
The following table provides the Company’s debt holdings at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Effective Interest Rate | | Amount | | Effective Interest Rate | | Amount |
| 2029 Senior Notes | 5.25 | % | | $ | 1,000,000 | | | 4.89 | % | | $ | 1,000,000 | |
| 2032 Senior Notes | 5.00 | % | | 300,000 | | | 5.29 | % | | 300,000 | |
| | | | | | | |
| Less: Unamortized premiums and debt issuance costs | | | (14,696) | | | | | (15,174) | |
| | | | | | | |
| | | | | | | |
| Long-term debt | | | $ | 1,285,304 | | | | | $ | 1,284,826 | |
The Senior Notes consisted of the following carrying value and estimated fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Hierarchy Level | | March 31, 2022 |
| | Maturity Date | | Rate | | | Carrying Value | | Fair Value |
| 2032 Senior Notes | | January 15, 2032 | | 5.000 | % | | 2 | | 300,000 | | | 271,500 | |
| 2029 Senior Notes | | April 15, 2029 | | 5.250 | % | | 2 | | 1,000,000 | | | 930,000 | |
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the issuance of the Company's financing arrangements. In connection with the 2032 Senior Notes offering in November 2021, the Company recorded $4.3 million in deferred financing costs. In addition, the Company recorded $12.0 million in deferred financing costs related to the 2029 Senior Notes offering in March 2021. The net deferred financing costs associated with the 2026 Senior Notes were $7.2 million at March 31, 2021, and were expensed on April 1, 2021, the date of the redemption of the 2026 Senior Notes. In connection with entering into the 2021 Credit Facility, the Company recorded $5.4 million in deferred financing costs.
Since the Company can borrow, repay and reborrow principal under the 2021 Revolving Credit Facility, the debt issuance costs associated with the 2021 Revolving Credit Facility have been classified as other non-current assets in the accompanying condensed consolidated balance sheet. The debt issuance costs associated with the Senior Notes are classified as a reduction of long-term debt in the accompanying condensed consolidated balance sheet.
The following table summarizes unamortized premiums and debt issuance costs at March 31, 2022 and December 31, 2021, and the balance sheet classification in each of the periods presented (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Unamortized premiums and debt issuance costs | $ | 27,784 | | | $ | 27,784 | |
| Accumulated amortization | (6,886) | | | (6,021) | |
| Unamortized premiums and debt issuance costs, net | $ | 20,898 | | | $ | 21,763 | |
| | | |
| Balance sheet classification: | | | |
| Other noncurrent assets | $ | 6,202 | | | $ | 6,589 | |
| Long-term debt | 14,696 | | | 15,174 | |
| $ | 20,898 | | | $ | 21,763 | |
630Note 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 trust interests. The Company will at all times have the identical number of trust interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each Trust share is entitled to one vote per share on any matter with respect to which members of the Company are entitled to vote.
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 Trust 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, 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.
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 Trust preferred shares and the LLC is authorized to issue a corresponding number of trust preferred 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, 2022, $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 Trust Preferred Shares (the "Series B Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.5 million net of underwriters' discount and issuance costs. Distributions on the Series B Preferred Shares will be payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30, and October 30 of each year, beginning on July 30, 2018, at a rate per annum of 7.875%. Distributions on the Series B Preferred Shares are cumulative and at March 31, 2022, $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 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 Trust 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 may be redeemed at the Company's option, in whole or in part, at any time after July 30, 2022, at a price of $25.00 per share, plus any declared and unpaid distributions. Holders of Series A Preferred Shares will have no right to require the redemption of the Series A Preferred Shares and there is no maturity date. 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 preferred shares.
Profit Allocation Interests
The Allocation Interests represent the original equity interest in the Company. The holders of the Allocation Interests ("Holders") are entitled to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The distributions of the profit allocation are 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 distributions declared on Allocation Interests to stockholders’ equity when they are approved by the Company’s board of directors.
Holding Events
The fifteen-year anniversary of ACI occurred in May 2021 which represented a Holding Event. The Company declared and paid a distribution to the Holders of $12.1 million in July 2021. The ten-year anniversary of Liberty occurred in March 2020 and the ten-year anniversary of Ergobaby occurred in September 2020. Both of these represented a Holding Event, and the Holders of the Allocation Interests elected to defer the distribution until after the end of 2020. The profit allocation payment of $3.3 million related to the Liberty Holding Event and the profit allocation payment of $2.0 million related to the Ergobaby Holding Event were both paid in January 2021.
Sale Event
The Sale of Liberty in August 2021 qualified as a Sale Event under the LLC Agreement. During the fourth quarter of 2021, the Company's Board declared a distribution to the Allocation Member of $16.8 million. The distribution was paid in the fourth quarter of 2021.
Reconciliation of net income (loss) available to common shares of Holdings
The following table reconciles net income (loss) attributable to Holdings to net loss attributable to the common shares of Holdings (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2022 | | 2021 | | | | |
| Net income from continuing operations attributable to Holdings | | $ | 13,440 | | | $ | 11,179 | | | | | |
| Less: Distributions paid - Allocation Interests | | — | | | 5,214 | | | | | |
| 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 | | $ | 4,526 | | | $ | (2,949) | | | | | |
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, 2022 and 2021 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, 2022 and 2021 attributable to the common shares of Holdings is calculated as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2022 | | 2021 | | | | |
| Net income (loss) from continuing operations attributable to common shares of Holdings | | $ | 4,526 | | | $ | (2,949) | | | | | |
| Less: Effect of contribution based profit - Holding Event | | 4,254 | | | 3,516 | | | | | |
| Net loss from continuing operations attributable to common shares of Holdings | | $ | 272 | | | $ | (6,465) | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Income from discontinued operations attributable to Holdings | | $ | 10,322 | | | $ | 7,815 | | | | | |
| Less: Effect of contribution based profit - Holding Event | | 630 | | | 538 | | | | | |
| Income from discontinued operations attributable to common shares of Holdings | | $ | 9,692 | | | $ | 7,277 | | | | | |
| | | | | | | | |
| Basic and diluted weighted average common shares outstanding | | 69,375 | | | 64,900 | | | | | |
| | | | | | | | |
| Basic and fully diluted income (loss) per common share attributable to Holdings | | | | | | | | |
| Continuing operations | | $ | 0.00 | | | $ | (0.10) | | | | | |
| Discontinued operations | | 0.14 | | | 0.11 | | | | | |
| | $ | 0.14 | | | $ | 0.01 | | | | | |
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):
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| Period | | Cash Distribution per Share | | Total Cash Distributions | | Record Date | | Payment Date |
| | | | | | | | |
| Trust Common Shares: | | | | | | | | |
January 1, 2022 - March 31, 2022 (1) | | $ | 0.25 | | | $ | 17,510 | | | April 21, 2022 | | April 28, 2022 |
| October 1, 2021 - December 31, 2021 | | $ | 0.25 | | | $ | 17,352 | | | January 13, 2022 | | January 20, 2022 |
| July 1, 2021 - September 30, 2021 | | $ | 0.36 | | | $ | 23,742 | | | October 15, 2021 | | October 22, 2021 |
August 3, 2021 (2) | | $ | 0.88 | | | $ | 57,112 | | | August 31, 2021 | | September 7, 2021 |
| April 1, 2021 - June 30, 2021 | | $ | 0.36 | | | $ | 23,364 | | | July 15, 2021 | | July 22, 2021 |
| January 1, 2021 - March 31, 2021 | | $ | 0.36 | | | $ | 23,364 | | | April 15, 2021 | | April 22, 2021 |
| October 1, 2020 - December 31, 2020 | | $ | 0.36 | | | $ | 23,364 | | | January 15, 2021 | | January 22, 2021 |
| | | | | | | | |
| Series A Preferred Shares: | | | | | | | | |
January 30, 2022 - April 29, 2022 (1) | | $ | 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 |
| July 30, 2021 - October 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | October 15, 2021 | | October 30, 2021 |
| April 30, 2021 - July 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | July 15, 2021 | | July 30, 2021 |
| January 30, 2021 - April 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | April 15, 2021 | | April 30, 2021 |
| October 30, 2020 - January 29, 2021 | | $ | 0.453125 | | | $ | 1,813 | | | January 15, 2021 | | January 30, 2021 |
| | | | | | | | |
| Series B Preferred Shares: | | | | | | | | |
January 30, 2022 - April 29, 2022 (1) | | $ | 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 |
| July 30, 2021 - October 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | October 15, 2021 | | October 30, 2021 |
| April 30, 2021 - July 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | July 15, 2021 | | July 30, 2021 |
| January 30, 2021 - April 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | April 15, 2021 | | April 30, 2021 |
| October 30, 2020 - January 29, 2021 | | $ | 0.4921875 | | | $ | 1,969 | | | January 15, 2021 | | January 30, 2021 |
| | | | | | | | |
| Series C Preferred Shares: | | | | | | | | |
January 30, 2022 - April 29, 2022 (1) | | $ | 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 |
| July 30, 2021 - October 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | October 15, 2021 | | October 30, 2021 |
| April 30, 2021 - July 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | July 15, 2021 | | July 30, 2021 |
| January 30, 2021 - April 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | April 15, 2021 | | April 30, 2021 |
| October 30, 2020 - January 29, 2021 | | $ | 0.4921875 | | | $ | 2,264 | | | January 15, 2021 | | January 30, 2021 |
(1) This distribution was declared on April 1, 2022.
(2) On August 3, 2021, in order to offset a portion of the tax liability to the shareholders as a result of the election to cause the Trust to be treated as a corporation for U.S. federal income tax purposes, the Company's Board of Directors declared a special cash distribution on the Trust’s common shares. A distribution of $57.1 million was made on August 31, 2021 to Trust common shareholders. Beginning with the quarter ended December 31, 2021, the Company has declared a quarterly distribution of $0.25 per share, which was reduced from $0.36 per share in prior periods to reflect the effect of the Trust being taxed as a corporation.
