ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Item 2 contains forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the section entitled "Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10-Q as well as those risk factors discussed in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021 and in the section entitled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Overview
Compass Diversified Holdings ("Holdings", or the "Trust") was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings LLC (the "LLC") was also formed on November 18, 2005. Holdings and the LLC (collectively, the "Company") were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. The LLC is a controlling owner of eleven businesses, or operating segments, at September 30, 2022. The segments are as follows: 5.11 Acquisition Corp. ("5.11"), Boa Holdings Inc. ("BOA"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Lugano Holdings, Inc., Inc. ("Lugano Diamonds" or "Lugano"), Marucci Sports, LLC ("Marucci" or "Marucci Sports"), PrimaLoft Technologies Holdings, Inc. ("PrimaLoft), Velocity Outdoor, Inc. ("Velocity Outdoor" or "Velocity"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), FFI Compass, Inc. ("Altor Solutions" or "Altor" (formerly "Foam Fabricators")), AMT Acquisition Corporation ("Arnold"), and The Sterno Group, LLC ("Sterno").
We acquired our existing businesses (segments) that we own at September 30, 2022 as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Ownership Interest - September 30, 2022 |
| Business | | Acquisition Date | | Primary | | Diluted |
| Advanced Circuits | | May 16, 2006 | | 71.8% | | 67.6% |
| Ergobaby | | September 16, 2010 | | 81.6% | | 72.8% |
| Arnold | | March 5, 2012 | | 98.0% | | 85.5% |
| Sterno | | October 10, 2014 | | 99.4% | | 90.8% |
| 5.11 | | August 31, 2016 | | 97.7% | | 88.3% |
| Velocity Outdoor | | June 2, 2017 | | 99.4% | | 87.7% |
| Altor Solutions | | February 15, 2018 | | 100.0% | | 86.9% |
| Marucci Sports | | April 20, 2020 | | 91.0% | | 81.9% |
| BOA | | October 16, 2020 | | 91.8% | | 83.4% |
| Lugano | | September 3, 2021 | | 59.9% | | 55.4% |
| PrimaLoft | | July 12, 2022 | | 90.7% | | 90.7% |
We categorize our subsidiary businesses we own into two separate groups of businesses: (i) branded consumer businesses, and (ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we believe capitalize on a valuable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in their particular product category. Niche industrial businesses are characterized as those businesses that focus on manufacturing and selling particular products and industrial services within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector. We recently announced the launch of our healthcare effort as our third grouping of companies that we will acquire, own and manage. We believe healthcare has multiple attractive, high-growth segments with strong industry tailwinds, is an acyclical vertical that will bring diversification and stability to the current group of companies, and has strong alignment with the Company’s existing subsidiary priorities.
The following is an overview of each of our subsidiary businesses:
Branded Consumer
5.11 - 5.11 is a leading provider of purpose-built technical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel, footwear and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. 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 - BOA Technology, 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 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 half of its sales from outside the United States.
Lugano - 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.
Marucci Sports - Founded in 2009 and headquartered in Baton Rouge, Louisiana, Marucci is a leading designer, manufacturer, and marketer of premium wood and metal baseball bats, fielding gloves, batting gloves, bags, grips, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also develops retail and sports training facilities, both as a corporate owned entity as well as licensing these facilities as franchises. Marucci products are available through owned websites, their team sales organization, Big Box Retailers, and third party e-commerce & resellers.
PrimaLoft - PrimaLoft Technologies 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 - 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 and CenterPoint and King's 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.
Niche Industrial
Advanced Circuits - Advanced Circuits is a provider of small-run, quick-turn and volume production printed circuit boards ("PCBs") to customers throughout the United States. Historically, small-run and quick-turn PCBs have represented approximately 50% - 55% of Advanced Circuits’ gross sales. Small-run and quick-turn PCBs typically
command higher margins than volume production PCBs given that customers require high levels of responsiveness, technical support and timely delivery of small-run and quick-turn PCBs and are willing to pay a premium for them. Advanced Circuits is able to meet its customers’ demands by manufacturing custom PCBs in as little as 24 hours, while maintaining over 98.0% error-free production rates and real-time customer service and product tracking 24 hours per day. Advanced Circuits is headquartered in Aurora, Colorado.
Altor Solutions - Founded in 1957 and headquartered in Scottsdale, Arizona, Altor Solutions is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer (OEM) components made from expanded polystyrene (EPS) and expanded polypropylene (EPP). Altor operates 16 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products and others.
Arnold - Arnold serves a variety of markets including aerospace and defense, general industrial, motorsport/ transportation, oil and gas, medical, energy, reprographics and advertising specialties. Over the course of more than 100 years, Arnold has successfully evolved and adapted our products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold 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 the largest and, we believe, the most technically advanced U.S. solutions provider and manufacturer of engineered magnetic systems. Arnold is headquartered in Rochester, New York.
Sterno - Sterno, headquartered in Corona, California, is the parent company of Sterno LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and Rimports Inc. ("Rimports"). Sterno is a leading manufacturer and marketer of portable food warming systems, creative indoor and outdoor lighting, and home fragrance solutions for the consumer markets. Sterno offers a broad range of wick and gel chafing systems, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps through Sterno Products, flameless candles and outdoor lighting products through Sterno Home, and scented wax cubes and warmer products used for home decor and fragrance systems through Rimports. During 2021, Sterno made the strategic decision to incorporate the product lines of Sterno Home into Rimports.
While our subsidiary businesses have different growth opportunities and potential rates of growth, we actively work with the management teams of each of our subsidiary businesses to increase the value of, and cash generated by, each business through various initiatives, including making selective capital investments to expand geographic reach, increase capacity or reduce manufacturing costs of our subsidiary businesses; improving and expanding existing sales and marketing programs; and assisting in the acquisition and integration of complementary businesses.
Significant Trends Impacting Our Subsidiary Businesses
Macroeconomic Trends
We continue to experience inflationary cost increases in our materials, labor and transportation costs. We expect that these inflationary cost increases will continue but will be partially mitigated by pricing actions implemented in the prior year, as well as those that we have implemented in 2022. However, there has been, and we expect there could continue to be, a difference between the timing of when these pricing and other actions impact our results of operations and when the impact of cost inflation occurs. We expect changing market conditions and continued inflationary pressures to impact consumer spending, particularly for discretionary items purchased by low and middle income consumers. With price pressures unlikely to abate and expected changes in monetary policies, we expect consumer spending to be negatively impacted during the remainder of 2022 and during 2023. We expect continued uncertainty in our business and the global economy due to inflation, changes in consumer spending patterns, and global supply chain disruptions. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today.
Global Supply Chain Trends
The disruption in the global supply chain due to transportation delays and U.S. port congestion continued into the first half of 2022. During the third quarter of 2022 we saw these disruptions and delays begin to moderate
somewhat. While there has been some improvement we expect to have a negative impact on several of our subsidiary businesses for the remainder of the year. During 2022, several of our companies relied on expensive air freight to import goods to meet customer demand. We are also seeing the availability of raw materials, components and finished goods impacted by the supply chain challenges which has led to shortages of certain materials and led to pressure on revenue growth. In addition, the closure of certain Asian manufacturing facilities as a result of local government quarantine efforts has impacted our ability to import products timely. We have taken actions to build capacity as well as increase our supply chain related resources. Further, in the U.S., the surge in demand along with COVID-19 related labor shortages and rising hourly labor wages, are creating labor shortages and higher labor costs. We expect these cost trends to continue through 2022.
COVID-19 Update
The continued spread of COVID-19 and new variants of the virus around the world continue to present significant risks to our business. The economic and health conditions in the United States and across most of the globe have continued to change since the beginning of the pandemic and the ultimate impact of COVID-19 on our business is dependent on future developments, including the duration of the pandemic, the emergence of variants of the virus and the related length of its impact on the global economy, which are highly uncertain and difficult to accurately predict. The public health situation, global response measures and corresponding impacts on various markets remain fluid and uncertain. The health of our team and various stakeholders is our highest priority, and we have taken multiple steps to provide support and a safe work environment. The Company anticipates that COVID-19 will continue to impact the results of operations, including a potential decrease in gross margins, operating income and Adjusted EBITDA at certain of our subsidiary businesses during the remainder of 2022 and into 2023.
Business Outlook
The Company anticipates that the areas of focus for the remainder of 2022, which are generally applicable to each of our businesses, include:
•Pursuing sales growth through a combination of new product development, increasing distribution, new customer acquisitions and international expansion;
•Raising prices where appropriate on our goods due to rising input costs to preserve operating margins,
•Taking market share, where possible, in each of our niche market leading companies, generally at the expense of less well capitalized competitors;
•Striving for excellence in supply chain management, manufacturing and technological capabilities;
•Continuing to pursue expense reduction and cost savings in lower margin business lines or in response to lower production volume;
•Continuing to pursue growth through disciplined, strategic acquisitions and rigorous integration processes; and
•Working to drive free cash flow through increased net income and effective working capital management, enabling continued investment in our businesses.
Recent Events
Acquisition of PrimaLoft
On July 12, 2022, the LLC, through its newly formed 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 total purchase price, including proceeds from noncontrolling shareholders, was approximately $530 million, before working capital and other customary adjustments. The Company funded the acquisition through a draw on its revolving credit facility and a draw in full on its new $400 million term loan facility.
PrimaLoft, Inc. is a branded, advanced material technology company based in Latham, New York and is a leader in the research and innovative development of high-performance material solutions, specializing in insulations and fabrics. PrimaLoft® insulation was originally developed for the U.S. Army as a water-resistant, synthetic alternative to down. Since 1983, a heritage of proven & tested technologies has built trust across the textile industry, with more than 950 global brands using PrimaLoft products in outdoor, lifestyle, home furnishings, work wear, hunting and military applications. With its Relentlessly Responsible™ mission, PrimaLoft strives to balance innovation, performance and sustainability in the pursuit of a better future.
2022 Credit Facility
On July 12, 2022, we entered into the Third Amended and Restated Credit Agreement 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 2022 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.
Advanced Circuits Merger Agreement
On October 13, 2021, the LLC, as the Sellers Representative of the holders of stock and options of 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 would 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”). The AC Merger was conditioned on, among other things, the closing of a business combination between AC Buyer and a publicly traded special purpose acquisition company (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”). The AC Agreement also provided that the AC Agreement could be terminated in the event closing of the AC Merger did not occur prior to January 27, 2022 (the "End Date"). A description of the AC Agreement was included in the Current Report on Form 8-K filed by the Company on October 14, 2021. Advanced Circuits was initially classified as held for sale in the consolidated financial statements as of December 31, 2021.
Due to a delay in closing the SPAC Transaction, the AC Merger did not close on or before the End Date. Because of the delay in closing the SPAC Transaction, on July 29, 2022, the LLC and Advanced Circuits provided the notice of termination of the AC Agreement to AC Buyer. No termination penalties were incurred by either party in connection with the termination of the AC Agreement. The termination of the AC Agreement occurred in the third quarter of 2022 and, in accordance with applicable accounting guidance, Advanced Circuits was reclassified to continuing operations beginning in the quarter ended September 30, 2022.
Non-GAAP Financial Measures
"U.S. GAAP" or "GAAP" refer to generally accepted accounting principles in the United States. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented.
See “Reconciliation of Non-GAAP Financial Measures” for further discussion of our non-GAAP financial measures and related reconciliations.
Results of Operations
The following discussion reflects a comparison of the historical results of operations of our consolidated business for the three and nine months ended September 30, 2022 and September 30, 2021, and components of the results of operations as well as those components presented as a percent of net revenues, for each of our subsidiary businesses on a stand-alone basis.
In the following results of operations, we provide (i) our actual Consolidated Results of Operations for the three and nine months ended September 30, 2022 and 2021, which includes the historical results of operations of each of our
subsidiary businesses (operating segments) from the date of acquisition in accordance with generally accepted accounting principles in the United States ("US GAAP), and (ii) comparative historical components of the results of operations for each of our subsidiary businesses on a stand-alone basis for the three and nine months ended September 30, 2022 and 2021, where all periods presented include relevant pro forma adjustments for pre-acquisition periods and explanations where applicable. For the acquisition of Lugano in September 2021 and PrimaLoft in July 2022, the pro forma results of operations for the Lugano and PrimaLoft business segments have been prepared as if we purchased these businesses on January 1, 2021. We believe this is the most meaningful comparison for the operating results of acquired business segments. The following results of operations at each of our subsidiary businesses are not necessarily indicative of the results to be expected for a full year.
All dollar amounts in the financial tables are presented in thousands. References in the financial tables to percentage changes that are not meaningful are denoted by "NM."
Results of Operations - Consolidated
The following table sets forth our unaudited results of operations for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| (in thousands) | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Net revenues | $ | 597,607 | | | $ | 488,158 | | | $ | 1,669,123 | | | $ | 1,372,266 | |
| Cost of revenues | 358,291 | | | 296,027 | | | 996,210 | | | 818,307 | |
| Gross profit | 239,316 | | | 192,131 | | | 672,913 | | | 553,959 | |
| Selling, general and administrative expense | 148,700 | | | 118,818 | | | 403,428 | | | 337,815 | |
| Fees to manager | 16,717 | | | 12,398 | | | 46,304 | | | 34,504 | |
| Amortization of intangibles | 25,152 | | | 19,056 | | | 67,191 | | | 56,502 | |
| Operating income | 48,747 | | | 41,859 | | | 155,990 | | | 125,138 | |
| Interest expense | (22,799) | | | (13,855) | | | (57,737) | | | (42,607) | |
| Amortization of debt issuance costs | (1,004) | | | (759) | | | (2,735) | | | (2,167) | |
| Loss on debt extinguishment | (534) | | | — | | | (534) | | | (33,305) | |
| Other income (expense) | (2,141) | | | 1,031 | | | 606 | | | (1,906) | |
| Income from continuing operations before income taxes | 22,269 | | | 28,276 | | | 95,590 | | | 45,153 | |
| Provision for income taxes | 21,163 | | | 9,556 | | | 39,201 | | | 24,662 | |
| Net income from continuing operations | $ | 1,106 | | | $ | 18,720 | | | $ | 56,389 | | | $ | 20,491 | |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net revenues
Consolidated net revenues for the three months ended September 30, 2022 increased by approximately $109.4 million, or 22.4%, compared to the corresponding period in 2021. Our Lugano business, which we acquired in September 2021, contributed $40.3 million in incremental net revenue in the third quarter of 2022, and PrimaLoft, which we acquired in July 2022, contributed $10.7 million. During the three months ended September 30, 2022 compared to 2021, we also saw significant increases in net sales at 5.11 ($15.4 million increase), BOA ($10.5 million increase), Marucci ($17.7 million increase), Arnold ($2.5 million increase), and Altor Solutions ($25.5 million increase), partially offset by a decrease in net revenue at Velocity Outdoor ($1.4 million decrease) and Sterno ($12.2 million decrease). Add-on acquisitions at Marucci (Lizard Skins in October 2021) and Altor (Plymouth Foam in October 2021) contributed to the growth in revenue at these businesses in the third quarter of 2022. Historically, the third and fourth quarters have been seasonably stronger than the first half of the year in earnings for certain of our subsidiary businesses. On a consolidated level, our subsidiary businesses were able to increase revenue in the third quarter of 2022 as compared to the prior year as a result of acquisitions and continued strong performance despite increasing economic uncertainty and inflationary pressure. We expect our fourth quarter 2022 results of operations will be negatively impacted as inflationary pressures continue in the fourth quarter and will reduce
demand and discretionary consumer spending in certain of our branded consumer and niche industrial businesses. Refer to "Results of Operations - Business Segments" for a more detailed analysis of net revenues by subsidiary business segment.
We do not generate any revenues apart from those generated by the subsidiary businesses we own and manage. We may generate interest income on the investment of available funds, but we expect such earnings to be minimal. We make loans from the LLC to our subsidiary businesses, and also hold equity interests in those companies. Cash flows coming to the Trust and the LLC are the result of interest payments on those loans, amortization of those loans and dividends on our equity ownership. However, on a consolidated basis, these items will be eliminated.
Cost of revenues
On a consolidated basis, cost of revenues increased approximately $62.3 million during the three months ended September 30, 2022 compared to the corresponding period in 2021. Our Lugano business contributed $21.3 million of the increase in cost of revenues for the quarter ended September 30, 2022 and our PrimaLoft business contributed $5.3 million of the increase in cost of revenues for the quarter ended September 30, 2022. We also saw notable increases in cost of revenues at 5.11 ($7.6 million increase), BOA ($4.6 million increase), Marucci ($7.1 million increase), Altor ($21.8 million increase), and Arnold ($0.7 million increase) that correspond to the revenue increases noted above. We also saw a decrease in cost of revenues at Sterno ($9.0 million decrease) that corresponded to the decrease in revenue noted above. Gross profit as a percentage of net revenues was approximately 40.0% in the three months ended September 30, 2022 compared to 39.4% in the three months ended September 30, 2021. The increase in gross profit as a percentage of net sales in the quarter ended September 30, 2022 as compared to the quarter ended September 30, 2021 is primarily attributable to the acquisition of Lugano in September 2021 and the implementation of price increases at most of our subsidiary businesses in response to rising costs. Most of our subsidiary businesses continue to experience increased material, labor and transportation costs. The gross margins at both our branded consumer businesses and our niche industrial businesses have been impacted by global supply chain constraints and inflation that is leading to pressure on revenue and costs. Refer to "Results of Operations - Business Segments" for a more detailed analysis of gross profit by subsidiary business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $29.9 million during the three months ended September 30, 2022, compared to the corresponding period in 2021. A portion of the increase in selling general and administrative expense in the third quarter of 2022 is due to our Lugano acquisition in September 2021 ($6.6 million of the increase) and our PrimaLoft acquisition in July 2022 ($10.2 million of the increase, of which $5.7 million was attributable to acquisition costs). We also saw increases in selling, general and administrative expenses at Marucci and Altor related to the add-on acquisitions that occurred in the fourth quarter of 2021, as well as increased investment in marketing and headcount at several of our subsidiary businesses with increased revenues. Refer to "Results of Operations - Business Segments" for a more detailed analysis of selling, general and administrative expense by subsidiary business segment. At the corporate level, general and administrative expense was $3.9 million in the third quarter of 2022 and $3.7 million in the third quarter of 2021.
Fees to manager
Pursuant to the Management Services Agreement ("MSA"), we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the three months ended September 30, 2022, we incurred approximately $16.7 million in management fees as compared to $12.4 million in fees in the three months ended September 30, 2021. The increase in Management fees is primarily attributable to our acquisition of PrimaLoft in July 2022. CGM had entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid in the third quarter of 2021 than would have normally been due. CGM also entered into a waiver of the MSA for a period through June 30, 2023 to receive a 1% annual management fee related to PrimaLoft, rather than the 2% called for under the MSA, which resulted in a lower management fee paid in the third quarter of 2022 than would have normally been due.
Amortization expense
Amortization expense for the three months ended September 30, 2022 increased $6.1 million as compared to the three months ended September 30, 2021 as a result of the amortization expense associated with the intangibles that were recognized in conjunction with the purchase price allocation for Lugano, which was acquired in September 2021, and PrimaLoft, which was acquired in July 2022.
Interest expense
We recorded interest expense totaling $22.8 million for the three months ended September 30, 2022 compared to $13.9 million for the comparable period in 2021, an increase of $8.9 million. The increase in interest expense in the current quarter reflects higher amounts outstanding on our revolving credit facility in the current year, the interest expense associated with our new $400 million 2022 Term Loan that we entered into in July 2022 in connection with our acquisition of PrimaLoft, the interest expense associated with our 2032 Notes entered into in November 2021, and the higher interest rate environment in the current quarter versus the comparable quarter in the prior year.
Other income (expense)
For the quarter ended September 30, 2022, we recorded $2.1 million in other expense as compared to $1.0 million in other income in the quarter ended September 30, 2021, an increase in expense of $3.2 million. Other income (expense) typically reflects the movement in foreign currency at our subsidiary businesses with international operations, gains or (losses) realized on the sale of property, plant and equipment, and expenses incurred or income earned that are not considered a part of our operations.
Income taxes
We had an income tax provision of $21.2 million during the three months ended September 30, 2022 compared to an income tax provision of $9.6 million during the same period in 2021, an increase of $11.6 million. Our income before income taxes for the quarter ended September 30, 2022 decreased by approximately $6.0 million as compared to the prior year quarter. On September 1, 2021, the Trust elected to “check-the-box” to have the Trust treated as a corporation for U.S. federal income tax purposes. In connection with the classification of Advanced Circuits as held-for sale in the fourth quarter of 2021, the Trust recognized a deferred tax asset of $12.1 million at December 31, 2021. As a result of the reclassification of Advanced Circuits from held-for-sale to continuing operations in the third quarter of 2022, the losses incurred at the Trust subsequent to September 1, 2021 related to the corporate overhead and management fees resulted in the recording of a valuation allowance against the deferred tax asset and corresponding income tax expense at September 30, 2022.
Nine Months Ended September 30, 2022 compared to nine months ended September 30, 2021
Net revenues
Consolidated net revenues for the nine months ended September 30, 2022 increased by approximately $296.9 million, or 21.6%, compared to the corresponding period in 2021. Our Lugano business, which we acquired in September 2021, contributed $126.4 million in net revenue in the first nine months of 2022, and our PrimaLoft business, which we acquired in July 2022, contributed $10.7 million. During the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, we also saw significant increases in net sales at 5.11 ($29.6 million increase), BOA ($46.2 million increase), Marucci ($36.2 million increase), Arnold ($14.4 million increase), and Altor Solutions ($77.0 million increase), partially offset by a decrease in net revenue at Velocity Outdoor ($25.1 million decrease) and Sterno ($17.7 million decrease). Add-on acquisitions at Marucci (Lizard Skins in October 2021), Altor (Plymouth Foam in October 2021) and Arnold (Ramco Motors in March 2021) contributed to the growth in revenue at these businesses during the first nine months of 2022. During the comparable period in 2021, we saw notable increases in revenue at several of our branded consumer businesses as a result of an increased consumer focus on outdoor related brands during the pandemic. Historically, the third and fourth quarters have been seasonably stronger than the first half of the year in earnings for certain of our subsidiary businesses. On a consolidated level, our subsidiary businesses were able to increase revenue in the third quarter of 2022 as compared to the prior year as a result of acquisitions and continued strong performance despite increasing economic uncertainty and inflationary pressure. We expect the fourth quarter of 2022 results of operations will be negatively impacted as inflationary pressures continue in the fourth quarter and will reduce demand and discretionary consumer spending in certain of our branded consumer and niche industrial businesses. Refer to "Results of Operations - Business Segments" for a more detailed analysis of net revenues by business segment.
We do not generate any revenues apart from those generated by the subsidiary businesses we own and manage. We may generate interest income on the investment of available funds, but we expect such earnings to be minimal. We make loans from the LLC to our subsidiary businesses, and also hold equity interests in those companies. Cash flows coming to the Trust and the LLC are the result of interest payments on those loans, amortization of those loans and dividends on our equity ownership. However, on a consolidated basis, these items will be eliminated.
Cost of revenues
On a consolidated basis, cost of revenues increased approximately $177.9 million during the nine months ended September 30, 2022 compared to the corresponding period in 2021. Our Lugano business contributed $64.3 million of the increase in cost of revenues for the nine months ended September 30, 2022. We also saw notable increases in cost of revenues at 5.11 ($13.2 million increase), Marucci ($23.7 million increase), Altor ($64.7 million increase), and Arnold ($8.3 million increase) that correspond to the revenue increases noted above. Gross profit as a percentage of net revenues was approximately 40.3% in the nine months ended September 30, 2022 compared to 40.4% in the nine months ended September 30, 2021. The gross margins at both our branded consumer businesses and our niche industrial businesses have been impacted by global supply chain constraints and inflation that is leading to pressure on revenue and costs. Our subsidiary businesses have implemented price increases in order to offset these rising costs which have positively impacted gross margins in 2022. Refer to "Results of Operations - Business Segments" for a more detailed analysis of gross profit by business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $65.6 million during the nine months ended September 30, 2022, compared to the corresponding period in 2021. A portion of the increase in the nine months ended September 30, 2022 is due to our Lugano acquisition in September 2021 ($23.7 million of the increase) and our PrimaLoft acquisition in July 2022 ($10.2 million of the increase, of which $5.7 million was attributable to acquisition costs). We also saw increases in selling, general and administrative expenses at Marucci and Altor related to the add-on acquisitions that occurred in the fourth quarter of 2021, as well as increased investment in marketing and headcount at several of our subsidiary businesses with increased revenues. Refer to "Results of Operations - Business Segments" for a more detailed analysis of selling, general and administrative expense by subsidiary business segment. At the corporate level, general and administrative expense was $11.0 million in the first nine months of 2022 and $11.7 million in the first nine months of 2021. In the prior year, we incurred additional expense from professional fees at the corporate level related to the Trust's election to be treated as a corporation for U.S. federal income tax purposes.
Fees to manager
Pursuant to the Management Services Agreement ("MSA"), we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the nine months ended September 30, 2022, we incurred approximately $46.3 million in management fees as compared to $34.5 million in fees in the nine months ended September 30, 2021. The increase in Management fees is primarily attributable to our acquisitions of Lugano in September 2021 and PrimaLoft in July 2022, as well as several add-on acquisitions in the fourth quarter of 2021, offset by our sale of Liberty in August 2021. CGM entered into a waiver of the MSA for a period through June 30, 2023 to receive a 1% annual management fee related to PrimaLoft, rather than the 2% called for under the MSA, which resulted in a lower management fee paid in the third quarter of 2022 than would have normally been due. CGM also had entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid in the first half of 2021 than would have normally been due. In the first quarter of 2021, the LLC and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee related to the amount of the cash proceeds deposited with the Trustee that was in excess of the amount payable related to the 2026 Notes at March 31, 2021. Additionally, CGM had entered into a waiver of the MSA at March 31, 2022 and June 30, 2022 to exclude the cash balances held at the LLC from the calculation of the management fee.
Amortization expense
Amortization expense for the nine months ended September 30, 2022 increased $10.7 million as compared to the nine months ended September 30, 2021 as a result of the amortization expense associated with the intangibles that were recognized in conjunction with the purchase price allocation for Lugano, which was acquired in September 2021, and PrimaLoft, which was acquired in July 2022.
Interest expense
We recorded interest expense totaling $57.7 million for the nine months ended September 30, 2022 compared to $42.6 million for the comparable period in 2021, an increase of $15.1 million. The increase in interest expense in the current year reflects the higher amount outstanding on our senior notes during the current year after we redeemed $600.0 million of 8.000% 2026 Senior Notes and issued $1000.0 million of 5.250% 2029 Senior Notes in March of 2021, and issued $300.0 million of 5.000% 2032 Senior Notes in November 2021 and higher amounts outstanding on our revolving credit facility in the current year, as well as the interest expense associated with our new $400 million 2022 Term Loan that we entered into in July 2022 in connection with our acquisition of PrimaLoft. Current year interest expense also reflects the higher interest rate environment applicable to the amounts outstanding under our credit facility. While the actual timing and extent of the future increases in interest rates remains unknown, higher long-term interest rates are expected to increase interest expense on the debt outstanding under our 2022 Credit Facility.
Other income (expense)
For the nine months ended September 30, 2022, we recorded $0.6 million in other income as compared to $1.9 million in other expense in the nine months ended September 30, 2021, an increase in income of $2.5 million. Other income (expense) typically reflects the movement in foreign currency at our subsidiary businesses with international operations, gains or (losses) realized on the sale of property, plant and equipment, and expenses incurred or income earned that are not considered a part of our operations.
Income taxes
We had an income tax provision of $39.2 million during the nine months ended September 30, 2022 compared to an income tax provision of $24.7 million during the same period in 2021. Our income before income taxes in the nine months ended September 30, 2022 increased $50.4 million as compared to the income before income taxes in the nine months ended September 30, 2021. In the prior year comparable period, we had income from operations before income taxes of $45.2 million, which included a $33.3 million loss on debt extinguishment that we recognized associated with the repayment of our $600 million 2026 Senior Notes. The loss on debt extinguishment was incurred at the Trust, which at the time was taxed as a partnership for income tax purposes and did not impact the income tax provision in the prior year. In the current period, our provision was driven by the acquisitions of Lugano in September 2021, and an increase in earnings at several of our subsidiary businesses during the year, particularly 5.11 and BOA as the tax provision reflects an annual effective tax rate at our subsidiaries, the effect of state and local taxes and the related allocation of income, and the losses at our parent company, which was previously taxed as a partnership. On September 1, 2021, the Trust elected to “check-the-box” to have the Trust treated as a corporation for U.S. federal income tax purposes. In connection with the classification of Advanced Circuits as held-for sale in the fourth quarter of 2021, the Trust recognized a deferred tax asset of $12.1 million at December 31, 2021. As a result of the reclassification of Advanced Circuits from held-for-sale to continuing operations in the third quarter of 2022, the losses incurred at the Trust subsequent to September 1, 2021 related to the corporate overhead and management fees resulted in the recording of a valuation allowance against the deferred tax asset and corresponding income tax expense at September 30, 2022 .
Results of Operations - Business Segments
Branded Consumer Businesses
5.11
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Net sales | | $ | 126,537 | | | 100.0 | % | | $ | 111,099 | | | 100.0 | % | | $ | 350,608 | | | 100.0 | % | | $ | 321,009 | | | 100.0 | % |
| Gross profit | | $ | 67,202 | | | 53.1 | % | | $ | 59,332 | | | 53.4 | % | | $ | 186,487 | | | 53.2 | % | | $ | 170,048 | | | 53.0 | % |
| SG&A | | $ | 52,669 | | | 41.6 | % | | $ | 46,788 | | | 42.1 | % | | $ | 148,861 | | | 42.5 | % | | $ | 134,773 | | | 42.0 | % |
| Segment operating income | | $ | 12,091 | | | 9.6 | % | | $ | 10,088 | | | 9.1 | % | | $ | 30,301 | | | 8.6 | % | | $ | 27,893 | | | 8.7 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $126.5 million as compared to net sales of $111.1 million for the three months ended September 30, 2021, an increase of $15.4 million, or 13.9%. This increase is due in part to a $6.9 million, or 14.5%, increase in direct-to-consumer sales largely due to growth in retail store count, as well as an increase in comparable sales for the three months ended September 30, 2022, as compared to the same period last year. Additionally, the increase in sales was driven by a $4.4 million, or 10.9%, increase in domestic wholesale sales, in part a result of backorder fulfillment and strong demand, as well as an increase of $4.3 million, or 20%, in international channel sales due to inventory availability and strong demand, particularly in Europe and Mexico.
Gross profit
Gross profit as a percentage of net sales was 53.1% in the three months ended September 30, 2022 as compared to 53.4% for the three months ended September 30, 2021. Gross profit percentage for the three months ended September 30, 2022, was favorably impacted by price increases. The positive impact of the price increase was partially offset by continued increases in inbound ocean and air freight charges during the period due to logistic challenges, which we expect to moderate during the remainder of the year.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2022 was $52.7 million, or 41.6% of net sales compared to $46.8 million, or 42.1% of net sales for the comparable period in 2021. The increase in selling, general and administrative expense for the three months ended September 30, 2022 as compared to the prior year comparable period was driven by the costs associated with additional retail stores, increased sales and marketing spend to drive digital sales, and increased travel and entertainment spend coming out of the COVID-19 pandemic. These increases were partially offset by a decrease in stock-based compensation due to fewer current year grants, the full vesting of previous years option grants and bonus related expenses.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was $12.1 million, an increase of $2.0 million when compared to segment operating income of $10.1 million for the same period in 2021, based on the factors described above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $350.6 million as compared to net sales of $321.0 million for the nine months ended September 30, 2021, an increase of $29.6 million, or 9.2%. This increase is due in part to direct-to-consumer sales growth of $13.1 million, up 9.6%, from the prior year comparable period. Retail sales grew largely due to store count growth, as well as positive growth in same-store sales for the nine months ended September 30, 2022, as compared to the same period last year. Net sales were also positively impacted by a $10.6 million, or 18.3%, increase in international sales due to inventory availability to meet strong demand, a $6.4 million, or 5.5%, increase in domestic wholesale sales growth following the fulfillment of backorders and strong demand, and $2.6 million, or 258%, increase in direct-to-agency sales following the completion of a large agency contract.
Gross profit
Gross profit as a percentage of net sales was 53.2% in the nine months ended September 30, 2022 as compared to 53.0% for the nine months ended September 30, 2021. Gross profit percentage was favorably impacted by price increases, which was offset by continued increases in inbound ocean and air freight charges during the period due to logistic challenges. We expect the logistics challenges to mitigate during the remainder of the year.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2022 was $148.9 million, or 42.5% of net sales compared to $134.8 million, or 42.0% of net sales for the comparable period in 2021. The increase in selling, general and administrative expense for the nine months ended September 30, 2022 as compared to the prior year comparable period was driven by the costs associated with additional retail stores,
increased sales and marketing spend to drive digital sales, and increased travel and entertainment spend coming out of the COVID-19 pandemic. These increases were partially offset by a decrease in variable marketplace expenses based on decreased sales in the wholesale channel, as well as a decrease in stock-based compensation and bonus related expenses.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $30.3 million, an increase of $2.4 million when compared to segment operating income of $27.9 million for the same period in 2021, based on the factors described above.
BOA
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Net sales | | $ | 50,019 | | | 100.0% | | $ | 39,496 | | | 100.0% | | $ | 166,215 | | | 100.0% | | $ | 120,033 | | | 100.0% |
| Gross profit | | $ | 29,875 | | | 59.7% | | $ | 23,950 | | | 60.6% | | $ | 101,973 | | | 61.4% | | $ | 74,491 | | | 62.1% |
| SG&A | | $ | 12,725 | | | 25.4% | | $ | 12,696 | | | 32.1% | | $ | 39,223 | | | 23.6% | | $ | 36,450 | | | 30.4% |
| | | | | | | | | | | | | | | | |
| Segment operating income | | $ | 12,975 | | | 25.9% | | $ | 7,091 | | | 18.0% | | $ | 50,237 | | | 30.2% | | $ | 25,798 | | | 21.5% |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $50.0 million as compared to net sales of $39.5 million for the three months ended September 30, 2021, an increase of $10.5 million, or 26.6%. The increase was reflected across key industries including Snow Sports, Outdoor, Athletic and Workwear. The three factors impacting their growth rates were market share gains, increased consumer participation as well as accelerated production ordering by BOA’s customers due to longer lead times resulting from overall global supply chain constraints.
Gross profit
Gross profit as a percentage of net sales was 59.7% in the three months ended September 30, 2022 as compared to 60.6% for the three months ended September 30, 2021. The decrease in gross profit as a percentage of net sales was driven by product mix.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2022 was $12.7 million, or 25.4% of net sales compared to $12.7 million, or 32.1% of net sales for the comparable period in 2021. Selling, general, and administrative expense was flat quarter over quarter, with increased employee costs related to incremental headcount and marketing investments offset by $1.1 million in integration services fees paid to CGM that did not recur in the current quarter.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was $13.0 million, an increase of $5.9 million when compared to segment operating income of $7.1 million for the same period in 2021, based on the factors described above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $166.2 million as compared to net sales of $120.0 million for the nine months ended September 30, 2021, an increase of $46.2 million, or 38.5%. The increase was reflected across key industries including Snow Sports, Outdoor, Athletic and Workwear. The three factors impacting their growth rates were market share gains, increased consumer participation as well as accelerated production ordering by BOA’s customers due to longer lead times resulting from overall global supply chain constraints.
Gross profit
Gross profit as a percentage of net sales was 61.4% in the nine months ended September 30, 2022 as compared to 62.1% for the nine months ended September 30, 2021. The decrease in gross profit as a percentage of net sales was driven by product mix.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2022 was $39.2 million, or 23.6% of net sales compared to $36.5 million, or 30.4% of net sales for the comparable period in 2021. The increase in selling, general, and administrative expense is due to increased employee costs related to BOA's bonus plan, incremental headcount and marketing investments. Selling general and administrative expense in the nine months ended September 30, 2021 included $3.3 million in integration services fees paid to CGM that did not recur in the current year.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $50.2 million, an increase of $24.4 million when compared to income from operations of $25.8 million for the same period in 2021, based on the factors described above.
Ergobaby
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Net sales | | $ | 21,540 | | | 100.0 | % | | $ | 19,816 | | | 100.0 | % | | $ | 68,256 | | | 100.0 | % | | $ | 69,100 | | | 100.0 | % |
| Gross profit | | $ | 13,157 | | | 61.1 | % | | $ | 13,121 | | | 66.2 | % | | $ | 42,129 | | | 61.7 | % | | $ | 45,977 | | | 66.5 | % |
| SG&A | | $ | 10,576 | | | 49.1 | % | | $ | 10,892 | | | 55.0 | % | | $ | 32,302 | | | 47.3 | % | | $ | 33,869 | | | 49.0 | % |
| Segment operating income | | $ | 593 | | | 2.8 | % | | $ | 246 | | | 1.2 | % | | $ | 3,866 | | | 5.7 | % | | $ | 5,964 | | | 8.6 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $21.5 million, an increase of $1.7 million, or 8.7%, compared to the same period in 2021. During the three months ended September 30, 2022, international sales were approximately $14.6 million, representing an increase of $3.0 million over the corresponding period in 2021, primarily as a result of consistent orders to the Asia-Pacific region in 2022 as compared to 2021 when we saw delayed production orders to the region due to COVID-19. Domestic sales were $6.9 million in the third quarter of 2022, reflecting a decrease of $1.3 million compared to the corresponding period in 2021. The decrease in domestic sales was primarily attributable to continued softness in Tula brand sales and a hold on orders to a large domestic retailer.
Gross profit
Gross profit as a percentage of net sales was 61.1% for the three months ended September 30, 2022, as compared to 66.2% for the three months ended September 30, 2021. The decrease in gross profit as a percentage of sales was due to shifts in channel mix, product mix, increased material costs as well as the impact of changing foreign exchange rates in the European Union.
Selling, general and administrative expense
Selling, general and administrative expense decreased $0.3 million quarter over quarter, with expense of $10.6 million, or 49.1% of net sales for the three months ended September 30, 2022 as compared to $10.9 million or 55.0% of net sales for the same period of 2021. The decrease in selling, general and administrative expense in the three months ended September 30, 2022 as compared to the comparable period in the prior year is due to favorable payroll expense.
Segment operating income
Ergobaby had segment operating income of $0.6 million for the three months ended September 30, 2022, an increase of $0.3 million compared to the same period in 2021, based on the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $68.3 million, a decrease of $0.8 million, or 1.2%, compared to the same period in 2021. During the nine months ended September 30, 2022, international sales were approximately $43.3 million, representing an increase of $0.3 million over the corresponding period in 2021, primarily as a result of the timing of sales to Asia-Pacific distributors and Canada specialty account sales. Domestic sales were $25.0 million in the first nine months of 2022, reflecting a decrease of $1.0 million compared to the corresponding period in 2021. The decrease in domestic sales was primarily attributable to lower Tula e-commerce sales versus the prior year.
Gross profit
Gross profit as a percentage of net sales was 61.7% for the nine months ended September 30, 2022, as compared to 66.5% for the nine months ended September 30, 2021. The decrease in gross profit as a percentage of sales was due to channel mix shifts, increased material costs, increased inbound freight (including air freight) as a result of supply chain shortages, as well as the impact of changing foreign exchange rates in the European Union.
Selling, general and administrative expense
Selling, general and administrative expense decreased $1.6 million year over year, with expense of $32.3 million, or 47.3% of net sales for the nine months ended September 30, 2022 as compared to $33.9 million or 49.0% of net sales for the same period of 2021. The decrease in selling, general and administrative expense in the nine months ended September 30, 2022 as compared to the comparable period in the prior year is due to favorable payroll expenses.
Segment operating income
Ergobaby had segment operating income of $3.9 million for the nine months ended September 30, 2022, a decrease of $2.1 million compared to the same period in 2021, based on the factors noted above.
Lugano
In the following results of operations, we provide comparative pro forma results of operations for Lugano for the three and nine months ended September 30, 2021 as if we had acquired the business on January 1, 2021. The results of operations that follows include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. The operating results for Lugano have been included in the consolidated results of operation from the date of acquisition in September 2021.
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| | | | | | Pro forma | | | | | | | | Pro forma | | |
| Net sales | | $ | 51,145 | | | 100.0 | % | | $ | 29,498 | | | 100.0 | % | | $ | 137,229 | | | 100.0 | % | | $ | 81,881 | | | 100.0 | % |
| Gross profit | | $ | 24,207 | | | 47.3 | % | | $ | 14,196 | | | 48.1 | % | | $ | 67,286 | | | 49.0 | % | | $ | 40,129 | | | 49.0 | % |
| SG&A | | $ | 10,145 | | | 19.8 | % | | $ | 7,113 | | | 24.1 | % | | $ | 27,208 | | | 19.8 | % | | $ | 14,671 | | | 17.9 | % |
| Segment operating income | | $ | 12,635 | | | 24.7 | % | | $ | 6,895 | | | 23.4 | % | | $ | 35,885 | | | 26.1 | % | | $ | 24,895 | | | 30.4 | % |
Pro forma results of operations include the following pro form adjustments as if we had acquired Lugano January 1, 2021:
•Management fees that would have been payable to the Manager during each period.
Three months ended September 30, 2022 compared to Pro forma three months ended September 30, 2021
Net sales
Net sales for the quarter ended September 30, 2022 increased approximately $21.6 million, or 73.4%, to $51.1 million, compared to the corresponding quarter ended September 30, 2021. Lugano sells high-end jewelry primarily through retail salons in California, Florida, Texas and Colorado, and via pop-up showrooms at multiple equestrian, social and charitable functions each year. In the current year, Lugano has experienced an increase in sales as it has invested in building out its inventory as well as its sales, marketing and event staff, while increasing the number of functions it has attended.
Gross profit
Gross profit as a percentage of net sales totaled approximately 47.3% and 48.1% for the quarters ended September 30, 2022 and September 30, 2021, respectively. In the current quarter, Lugano recorded $1.5 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales for the three months ended September 30, 2022 was 50.3%. Lugano has an extensive network of suppliers through which they procure high quality diamonds and gemstones, which make up a significant percentage of the cost of sales. The uniqueness of the Lugano jewelry can lead to fluctuations in margins from period to period based on what designs are sold during the period.
Selling, general and administrative expense
Selling, general and administrative expense was $10.1 million for the three months ended September 30, 2022 as compared to $7.1 million in selling, general and administrative expense in the three months ended September 30, 2021. Selling, general and administrative expense represented 19.8% of net sales in the three months ended September 30, 2022 and 24.1% of net sales for the same period of 2021. The increase in selling, general and administrative expense is primarily due to increased marketing spend and personnel costs. Lugano has increased its head count in the last year as it invests in additional professionals to support its growth.
Segment operating income
Segment operating income increased during the three months ended September 30, 2022 to $12.6 million, as compared to $6.9 million in the corresponding period in 2021. This increase was a result of the factors noted above.
Nine months ended September 30, 2022 compared to Pro forma nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 increased approximately $55.3 million, or 67.6%, to $137.2 million, compared to the corresponding nine months ended September 30, 2021. Lugano sells high-end jewelry primarily through retail salons in California, Florida, Texas and Colorado, and via pop-up showrooms at multiple equestrian, social and charitable functions each year. The sales in the first half of the prior year were still impacted by the effects of the COVID-19 pandemic which limited the number of events attended by Lugano and led to reduced net sales as compared to the current year. In the current year, Lugano has experienced an increase in sales as it has invested in building out its sales, marketing and event staff and increased the number of functions it has attended.
Gross profit
Gross profit as a percentage of net sales totaled approximately 49.0% and 49.0% for the nine months ended September 30, 2022 and September 30, 2021, respectively. In the current year, Lugano recorded $3.9 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales for the nine months ended September 30, 2022 was 51.8%. Lugano has an extensive network of suppliers through which they procure high quality diamonds and gemstones, which make up a significant percentage of the cost of sales. The uniqueness of the Lugano jewelry can lead to fluctuations in margins from period to period based on what designs are sold during the period.
Selling, general and administrative expense
Selling, general and administrative expense was $27.2 million for the nine months ended September 30, 2022 as compared to $14.7 million in selling, general and administrative expense in the nine months ended September 30, 2021. Selling, general and administrative expense represented 19.8% of net sales in the nine months ended September 30, 2022 and 17.9% of net sales for the same period of 2021. Lugano has increased its head count in
the last year as it invests in additional professionals to support its growth, and has expanded its investment in advertising and marketing spend during the current year.
Segment operating income
Segment operating income increased during the nine months ended September 30, 2022 to $35.9 million, as compared to $24.9 million in the corresponding period in 2021. This increase was a result of the factors noted above.
Marucci Sports
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Net sales | | $ | 42,753 | | | 100.0 | % | | $ | 25,040 | | | 100.0 | % | | $ | 122,481 | | | 100.0 | % | | $ | 86,328 | | | 100.0 | % |
| Gross profit | | $ | 24,868 | | | 58.2 | % | | $ | 14,226 | | | 56.8 | % | | $ | 60,826 | | | 49.7 | % | | $ | 48,389 | | | 56.1 | % |
| SG&A | | $ | 14,102 | | | 33.0 | % | | $ | 8,851 | | | 35.3 | % | | $ | 38,935 | | | 31.8 | % | | $ | 27,789 | | | 32.2 | % |
| | | | | | | | | | | | | | | | |
| Segment operating income | | $ | 7,692 | | | 18.0 | % | | $ | 3,580 | | | 14.3 | % | | $ | 14,141 | | | 11.5 | % | | $ | 15,267 | | | 17.7 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $42.8 million, an increase of $17.7 million as compared to net sales of $25.0 million for the three months ended September 30, 2021. The increase in net sales was primarily due to Marucci's successful launch of its CatX bat line in August of 2022. Additionally, the increase is attributable to Marucci's acquisition of Lizard Skins in the fourth quarter of 2021, as well as increased customer demand and market share in many of Marucci's key product lines, including aluminum and wood bats, and batting gloves.
Gross profit
Gross profit for the quarter ended September 30, 2022 increased $10.6 million as compared to the three months ended September 30, 2021. Gross profit as a percentage of net sales for the three months ended September 30, 2022 was 58.2%, as compared to gross profit as a percentage of sales of 56.8% for the three months ended September 30, 2021. The increase in gross profit as a percentage of net sales during the quarter ended September 30, 2022 as compared to the quarter ended September 30, 2021, was primarily due to adjustments to the Lizards Skins inventory purchase price allocation.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2022 was $14.1 million, or 33.0% of net sales compared to $8.9 million, or 35.3% of net sales for the three months ended September 30, 2021. The increase in selling, general and administrative expense for the three months ended September 30, 2022 partially correlates to the increase in net sales, with increases in credit card expenses, royalties, commissions, business development fees, and other variable expenses. Marucci also incurred additional professional fees, personnel costs and marketing expenses in 2022 related to investments supporting growth.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was $7.7 million, an increase of $4.1 million when compared to segment operating income of $3.6 million for the same period in 2021, primarily as a result of the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $122.5 million, an increase of $36.2 million as compared to net sales of $86.3 million for the nine months ended September 30, 2021. The increase in net sales was due to Marucci's acquisition of Lizard Skins in the fourth quarter of 2021, as well as increased customer
demand and market share in many of Marucci's key product lines, including aluminum and wood bats, and batting gloves.
Gross profit
Gross profit for the nine months ended September 30, 2022 increased $12.4 million as compared to the nine months ended September 30, 2021. Gross profit as a percentage of net sales for the nine months ended September 30, 2022 was 49.7%, as compared to gross profit as a percentage of sales of 56.1% for the nine months ended September 30, 2021. The decrease in gross profit as a percentage of net sales during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, was primarily due to increased freight costs during the first half of 2022, as delays in Marucci's supply chain coupled with demand exceeding the company's forecast led to increased use of air freight to meet increased demand from Marucci's customer base.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2022 was $38.9 million, or 31.8% of net sales compared to $27.8 million, or 32.2% of net sales for the nine months ended September 30, 2021. The increase in selling, general and administrative expense for the nine months ended September 30, 2022 correlates to the increase in net sales, including the Lizards Skins acquisition, with increases in credit card expenses, royalties, commissions, business development fees, and other variable expenses. Marucci has also incurred additional professional fees, personnel costs and marketing expenses in 2022 related to investments supporting growth.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $14.1 million, a decrease of $1.1 million when compared to income from operations of $15.3 million for the same period in 2021, primarily as a result of the factors noted above and an increase in amortization expense related to the Lizard Skins intangibles assets.
PrimaLoft
In the following results of operations, we provide comparative pro forma results of operations for PrimaLoft for the three and nine months ended September 30, 2022 and 2021 as if we had acquired the business on January 1, 2021. The results of operations that follows include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. The operating results for PrimaLoft have been included in the consolidated results of operation from the date of acquisition in July 2022.
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| | Pro forma | | | | Pro forma | | | | Pro forma | | | | Pro forma | | |
| Net sales | | $ | 13,031 | | | 100.0 | % | | $ | 12,906 | | | 100.0 | % | | $ | 65,897 | | | 100.0 | % | | $ | 52,388 | | | 100.0 | % |
| Gross profit | | $ | 7,194 | | | 55.2 | % | | $ | 8,016 | | | 62.1 | % | | $ | 39,229 | | | 59.5 | % | | $ | 31,472 | | | 60.1 | % |
| SG&A | | $ | 10,780 | | | 82.7 | % | | $ | 3,786 | | | 29.3 | % | | $ | 18,746 | | | 28.4 | % | | $ | 11,302 | | | 21.6 | % |
| Segment operating income (loss) | | $ | (7,942) | | | (60.9) | % | | $ | (126) | | | (1.0) | % | | $ | 7,414 | | | 11.3 | % | | $ | 7,101 | | | 13.6 | % |
Pro forma results of operations include the following pro form adjustments as if we had acquired PrimaLoft January 1, 2021:
•Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation of PrimaLoft of $0.7 million and $8.9 million, respectively, for the three and nine months ended September 30, 2022, and $4.1 million and $12.3 million, respectively, for the three and nine months ended September 30, 2021.
•Management fees that would have been payable to the Manager during each period.
Proforma three months ended September 30, 2022 compared to proforma three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $13.0 million, an increase of $0.1 million as compared to net sales of $12.9 million for the three months ended September 30, 2021.
Gross profit
Gross profit for the quarter ended September 30, 2022 decreased $0.8 million as compared to the three months ended September 30, 2021. Gross profit as a percentage of net sales for the three months ended September 30, 2022 was 55.2%, as compared to gross profit as a percentage of sales of 62.1% for the three months ended September 30, 2021. In the current quarter, PrimaLoft recorded $0.6 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales for the three months ended September 30, 2022 was 60.0%. Gross profit as a percentage of sales decreased quarter over quarter primarily due to an increase in input costs ahead of price increases.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2022 was $10.8 million, or 82.7% of net sales compared to $3.8 million, or 29.3% of net sales for the three months ended September 30, 2021. Selling, general and administrative expense in the current quarter includes $5.8 million of transaction costs related to the Company's acquisition of PrimaLoft, and $1.1 million in integration services fees.
Segment operating income (loss)
Segment operating loss for the three months ended September 30, 2022 was $7.9 million, a decrease of $7.8 million when compared to segment operating loss of $0.1 million for the same period in 2021, primarily as a result of the factors noted above.
Proforma nine months ended September 30, 2022 compared to proforma nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $65.9 million, an increase of $13.5 million as compared to net sales of $52.4 million for the nine months ended September 30, 2021 due to market share gains.
Gross profit
Gross profit for the nine months ended September 30, 2022 increased $7.8 million as compared to the nine months ended September 30, 2021. Gross profit as a percentage of net sales for the nine months ended September 30, 2022 was 59.5%, as compared to gross profit as a percentage of sales of 60.1% for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, PrimaLoft recorded $0.6 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales for the nine months ended September 30, 2022 was 60.5%.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2022 was $18.7 million, or 28.4% of net sales compared to $11.3 million, or 21.6% of net sales for the nine months ended September 30, 2021. Selling, general and administrative expense in the nine months ended September 30, 2022, includes $5.8 million of transaction costs related to the Company's acquisition of PrimaLoft, and $1.1 million in integration services fees.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $7.4 million, an increase of $0.3 million when compared to income from operations of $7.1 million for the same period in 2021, primarily as a result of the factors noted above.
Velocity Outdoor
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Net sales | | $ | 75,482 | | | 100.0 | % | | $ | 76,901 | | | 100.0 | % | | $ | 180,774 | | | 100.0 | % | | $ | 205,891 | | | 100.0 | % |
| Gross profit | | $ | 22,314 | | | 29.6 | % | | $ | 25,436 | | | 33.1 | % | | $ | 50,678 | | | 28.0 | % | | $ | 66,553 | | | 32.3 | % |
| SG&A | | $ | 9,569 | | | 12.7 | % | | $ | 10,123 | | | 13.2 | % | | $ | 24,620 | | | 13.6 | % | | $ | 26,290 | | | 12.8 | % |
| Segment operating income | | $ | 10,225 | | | 13.5 | % | | $ | 12,905 | | | 16.8 | % | | $ | 18,721 | | | 10.4 | % | | $ | 33,039 | | | 16.0 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $75.5 million, a decrease of $1.4 million or 1.8%, compared to the same period in 2021. The decrease in net sales for the three months ended September 30, 2022 is primarily due to inflationary pressures impacting the demand for Airgun products partially offset by new Archery product releases.
Gross profit
Gross profit for the quarter ended September 30, 2022 decreased $3.1 million as compared to the quarter ended September 30, 2021. Gross profit as a percentage of net sales decreased to 29.6% for the three months ended September 30, 2022 as compared to 33.1% in the three months ended September 30, 2021 due to increased supply chain costs.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2022 was $9.6 million, or 12.7% of net sales compared to $10.1 million, or 13.2% of net sales for the three months ended September 30, 2021. The decrease in selling, general and administrative expense for the three months ended September 30, 2022 as compared to the prior period is driven by volume related expenses along with continued cost management. We continue to invest in consumer marketing.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was $10.2 million, a decrease of $2.7 million when compared to segment operating income of $12.9 million for the same period in 2021 based on the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $180.8 million, a decrease of $25.1 million or 12.2%, compared to the same period in 2021. The decrease in net sales for the nine months ended September 30, 2022 is primarily due to inflationary pressure impacting demand for Airgun products partially offset by the impact of new Archery product releases.
Gross profit
Gross profit for the nine months ended September 30, 2022 decreased $15.9 million as compared to the nine months ended September 30, 2021. Gross profit as a percentage of net sales decreased to 28.0% for the nine months ended September 30, 2022 as compared to 32.3% in the nine months ended September 30, 2021 due to product mix as Velocity sold more legacy products with lower margins versus new models at higher margins along with increased supply chain costs.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2022 was $24.6 million, or 13.6% of net sales compared to $26.3 million, or 12.8% of net sales for the nine months ended September 30, 2021. The increase in selling, general and administrative expense as a percentage of net sales for the nine months
ended September 30, 2022 as compared to the prior period is driven by the decrease in net sales as spending on selling, general and administrative expense was down year-over-year driven by volume related expenses. We continue to invest in consumer marketing.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $18.7 million, a decrease of $14.3 million when compared to segment operating income of $33.0 million for the same period in 2021 based on the factors noted above.
Niche Industrial Businesses
Advanced Circuits
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Net sales | | $ | 21,788 | | | 100.0 | % | | $ | 23,182 | | | 100.0 | % | | $ | 67,194 | | | 100.0 | % | | $ | 67,209 | | | 100.0 | % |
| Gross profit | | $ | 9,758 | | | 44.8 | % | | $ | 10,696 | | | 46.1 | % | | $ | 30,782 | | | 45.8 | % | | $ | 30,413 | | | 45.3 | % |
| SG&A | | $ | 4,660 | | | 21.4 | % | | $ | 3,771 | | | 16.3 | % | | $ | 13,091 | | | 19.5 | % | | $ | 11,399 | | | 17.0 | % |
| Segment operating income | | $ | 4,973 | | | 22.8 | % | | $ | 6,791 | | | 29.3 | % | | $ | 17,303 | | | 25.8 | % | | $ | 18,610 | | | 27.7 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were $21.8 million, a decrease of approximately $1.4 million or 6.0% compared to the three months ended September 30, 2021. The decrease in net sales for the quarter ended September 30, 2022 as compared to the quarter ended September 30, 2021 was due primarily to decreased sales in the Quick-Turn Production and Subcontract product lines.
Gross profit
Gross profit as a percentage of net sales decreased during the three months ended September 30, 2022 compared to the corresponding period in 2021 (44.8% at September 30, 2022 compared to 46.1% at September 30, 2021) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $4.7 million in the three months ended September 30, 2022 and $3.8 million in the three months ended September 30, 2021. Selling, general and administrative expense represented 21.4% of net sales for the three months ended September 30, 2022 and 16.3% of net sales in the corresponding period in 2021. The selling, general and administrative expense in the current quarter included $0.9 million in transaction costs associated with a potential divestiture of Advanced Circuits that was terminated during the third quarter.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was $5.0 million as compared to $6.8 million the three months ended September 30, 2021, a decrease of $1.8 million based on the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for both the nine months ended September 30, 2022 and the nine months ended September 30, 2021 were $67.2 million.
Gross profit
Gross profit as a percentage of net sales was 45.8% during the nine months ended September 30, 2022 compared to 45.3% in the corresponding period in 2021 primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expense was approximately $13.1 million in the nine months ended September 30, 2022 and $11.4 million in the nine months ended September 30, 2021. Selling, general and administrative expense represented 19.5% of net sales for the nine months ended September 30, 2022 and 17.0% of net sales in the corresponding period in 2021. The selling, general and administrative expense in the current quarter included $0.9 million in transaction costs associated with a potential divestiture of Advanced Circuits that was terminated during the third quarter.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was $17.3 million as compared to $18.6 million the nine months ended September 30, 2021, a decrease of $1.3 million based on the factors noted above.
Altor Solutions
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Net sales | | $ | 69,618 | | | 100.0 | % | | $ | 44,122 | | | 100.0 | % | | $ | 199,590 | | | 100.0 | % | | $ | 122,582 | | | 100.0 | % |
| Gross profit | | $ | 15,284 | | | 22.0 | % | | $ | 11,636 | | | 26.4 | % | | $ | 43,246 | | | 21.7 | % | | $ | 30,978 | | | 25.3 | % |
| SG&A | | $ | 6,127 | | | 8.8 | % | | $ | 4,016 | | | 9.1 | % | | $ | 17,132 | | | 8.6 | % | | $ | 11,222 | | | 9.2 | % |
| Segment operating income | | $ | 6,561 | | | 9.4 | % | | $ | 5,380 | | | 12.2 | % | | $ | 18,303 | | | 9.2 | % | | $ | 13,612 | | | 11.1 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the quarter ended September 30, 2022 were $69.6 million, an increase of $25.5 million, or 57.8%, compared to the quarter ended September 30, 2021. The increase in net sales during the quarter was due to the acquisition of Plymouth Foam in October 2021, organic growth in Altor's appliance and cold chain customer sectors, and contractual and general increases in selling prices during the latter half of 2021 and the first half of 2022. Plymouth Foam sales for the quarter ended September 30, 2022 were $17.6 million.
Gross profit
Gross profit as a percentage of net sales was 22.0% and 26.4% for the three months ended September 30, 2022 and 2021, respectively. The decrease in gross profit as a percentage of net sales in the quarter ended September 30, 2022, was primarily due to increases in the price of Altor's primary raw material, expanded polystyrene ("EPS") ahead of the timing of contractual price increases for a majority of customers, and increased operating costs, particularly labor, ahead of the timing of contractual price increases for a majority of its customers. We expect gross profit as a percentage of net sales to improve in the near to intermediate term as we have contractual price increases planned and we expect raw material input costs to stabilize.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2022 was $6.1 million as compared to $4.0 million for the three months ended September 30, 2021, an increase of $2.1 million. The increase in selling, general and administrative expense in the third quarter of 2022 was due to the acquisition of Plymouth Foam.
Segment operating income
Segment operating income was $6.6 million in the three months ended September 30, 2022, an increase of $1.2 million as compared to the three months ended September 30, 2021, based on the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were $199.6 million, an increase of $77.0 million, or 62.8%, compared to the nine months ended September 30, 2021. The increase in net sales during the nine months ended September 30, 2022 was primarily due to the acquisition of Plymouth Foam in October 2021, organic growth in Altor's appliance and cold chain customer sectors, and contractual and general increases in selling prices during the latter half of 2021 and the first half of 2022. Plymouth Foam sales for the nine months ended September 30, 2022 were $49.6 million.
Gross profit
Gross profit as a percentage of net sales was 21.7% and 25.3% for the nine months ended September 30, 2022 and 2021, respectively. The decrease in gross profit as a percentage of net sales in the nine months ended September 30, 2022, was primarily due to increases in the price of Altor's primary raw material, expanded polystyrene ("EPS"), and increased operating costs, particularly labor. We expect gross profit as a percentage of net sales to improve in the near to intermediate term as we have contractual price increases planned and we expect raw material input costs to stabilize.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2022 was $17.1 million as compared to $11.2 million for the nine months ended September 30, 2021, an increase of $5.9 million. The increase in selling, general and administrative expense in the nine months ended September 30, 2022 was due to the acquisition of Plymouth Foam.
Segment operating income
Segment operating income was $18.3 million in the nine months ended September 30, 2022, an increase of $4.7 million as compared to the nine months ended September 30, 2021, based on the factors noted above.
Arnold
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Net sales | | $ | 39,377 | | | 100.0 | % | | $ | 36,852 | | | 100.0 | % | | $ | 116,319 | | | 100.0 | % | | $ | 101,893 | | | 100.0 | % |
| Gross profit | | $ | 12,742 | | | 32.4 | % | | $ | 10,957 | | | 29.7 | % | | $ | 35,000 | | | 30.1 | % | | $ | 28,892 | | | 28.4 | % |
| SG&A | | $ | 6,530 | | | 16.6 | % | | $ | 5,410 | | | 14.7 | % | | $ | 18,352 | | | 15.8 | % | | $ | 15,982 | | | 15.7 | % |
| Segment operating income | | $ | 5,462 | | | 13.9 | % | | $ | 4,611 | | | 12.5 | % | | $ | 14,075 | | | 12.1 | % | | $ | 10,104 | | | 9.9 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were approximately $39.4 million, an increase of $2.5 million compared to the same period in 2021. International sales were $13.0 million in the three months ended September 30, 2022 and $10.3 million in the three months ended September 30, 2021. The increase in net sales is primarily a result of increased demand in several markets including industrial and oil and gas.
Gross profit
Gross profit for the three months ended September 30, 2022 was approximately $12.7 million compared to approximately $11.0 million in the same period of 2021. Gross profit as a percentage of net sales increased to 32.4% for the quarter ended September 30, 2022 from 29.7% in the quarter ended September 30, 2021 principally due to increased volume, favorable product mix and improved operational efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense in the three months ended September 30, 2022 was $6.5 million, an increase in expense of approximately $1.1 million compared to $5.4 million for the three months ended September 30, 2021. Selling, general and administrative expense was 16.6% of net sales in the three months
ended September 30, 2022 and 14.7% in the three months ended September 30, 2021. The increase in selling general and administrative expense was due primarily to increased staffing related costs and increased travel and commission expenses.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was approximately $5.5 million, an increase of $0.9 million when compared to the same period in 2021, as a result of the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were approximately $116.3 million, an increase of $14.4 million compared to the same period in 2021. International sales were $36.4 million in the nine months ended September 30, 2022 and $31.9 million in the nine months ended September 30, 2021. The increase in net sales is primarily a result of increased demand in several markets including industrial and transportation, driven in part by the acquisition of Ramco Electric Motors, Inc. in March 2021.
Gross profit
Gross profit for the nine months ended September 30, 2022 was approximately $35.0 million compared to approximately $28.9 million in the same period of 2021. Gross profit as a percentage of net sales increased to 30.1% for the nine months ended September 30, 2022 from 28.4% in the nine months ended September 30, 2021 principally due to increased volume, favorable product mix and improved operational efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense in the nine months ended September 30, 2022 was $18.4 million, an increase in expense of approximately $2.4 million compared to $16.0 million for the nine months ended September 30, 2021. Selling, general and administrative expense was 15.8% of net sales in the nine months ended September 30, 2022 and 15.7% in the nine months ended September 30, 2021. The increase in selling general and administrative expense was due primarily to increased staffing related costs driven in part by the acquisition of Ramco Electric Motors, Inc. in March 2021, and increased travel and commission expenses.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was approximately $14.1 million, an increase of $4.0 million when compared to the same period in 2021, as a result of the factors noted above.
Sterno
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| | Three months ended | | Nine months ended |
| | September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| Net sales | | $ | 88,636 | | | 100.0 | % | | $ | 100,827 | | | 100.0 | % | | $ | 249,745 | | | 100.0 | % | | $ | 267,398 | | | 100.0 | % |
| Gross profit | | $ | 14,469 | | | 16.3 | % | | $ | 17,627 | | | 17.5 | % | | $ | 49,066 | | | 19.6 | % | | $ | 53,068 | | | 19.8 | % |
| SG&A | | $ | 7,417 | | | 8.4 | % | | $ | 9,017 | | | 8.9 | % | | $ | 22,491 | | | 9.0 | % | | $ | 24,840 | | | 9.3 | % |
| Segment operating income | | $ | 2,795 | | | 3.2 | % | | $ | 4,232 | | | 4.2 | % | | $ | 13,783 | | | 5.5 | % | | $ | 15,094 | | | 5.6 | % |
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Net sales
Net sales for the three months ended September 30, 2022 were approximately $88.6 million, a decrease of $12.2 million, or 12.1%, compared to the same period in 2021. The net sales variance reflects lower sales at Rimports due to changes in consumer discretionary buying behaviors as a result of inflationary pressures, partially offset by strong sales at Sterno with increased spending in travel, entertainment, weddings and conventions.
Gross profit
Gross profit as a percentage of net sales decreased from 17.5% for the three months ended September 30, 2021 to 16.3% for the three months ended September 30, 2022. The decrease in gross profit percentage in the third quarter of 2022 as compared to the third quarter of 2021 was primarily attributable to material cost pressures and higher inventory provision at Rimports, as well as higher freight costs and reduced absorption of overhead costs at Rimports due to lower sales volumes.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2022 was approximately $7.4 million as compared to $9.0 million for the three months ended September 30, 2021, a decrease of $1.6 million reflecting lower salaries, bonus, commissions, travel, and marketing programs in the current quarter. Selling, general and administrative expense represented 8.4% of net sales for the three months ended September 30, 2022 and 8.9% for the three months ended September 30, 2021.
Segment operating income
Segment operating income for the three months ended September 30, 2022 was approximately $2.8 million, a decrease of $1.4 million compared to the three months ended September 30, 2021 based on the factors noted above.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021
Net sales
Net sales for the nine months ended September 30, 2022 were approximately $249.7 million, a decrease of $17.7 million, or 6.6%, compared to the same period in 2021. The net sales variance reflects softer sales at Rimports due to change in discretionary consumer buying behaviors due to inflation pressures, partially offset by strong sales at Sterno with increased business travel and conventions.
Gross profit
Gross profit as a percentage of net sales decreased from 19.8% for the nine months ended September 30, 2021 to 19.6% for the same period ended September 30, 2022. The decrease in gross profit percentage in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was primarily attributable to increases in raw material costs and freight, and the continuing impact of absorbing overhead on the reduced sales volume at Rimports.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2022 was approximately $22.5 million as compared to $24.8 million for the nine months ended September 30, 2021, a decrease of $2.3 million reflecting lower salaries and benefits in the current period. Selling, general and administrative expense represented 9.0% of net sales for the nine months ended September 30, 2022 and 9.3% for the nine months ended September 30, 2021.
Segment operating income
Segment operating income for the nine months ended September 30, 2022 was approximately $13.8 million, a decrease of $1.3 million compared to the nine months ended September 30, 2021 based on the factors noted above.
Liquidity and Capital Resources
We generate cash primarily from the operations of our subsidiaries, and we have the ability to borrow under our 2022 Credit Facility to fund our operating, investing and financing activities. In 2021, we filed a prospectus supplement pursuant to which we may, but we have no obligation to, issue and sell up to $500 million of the common shares of the Trust in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions, the trading price of Trust common shares and determinations by us regarding appropriate sources of funding.
Our liquidity requirements primarily relate to our debt service requirements, payments of our common and preferred share distributions, management fees paid to our Manager, working capital needs and purchase commitments at our subsidiaries. As of September 30, 2022, we had $1000.0 million of indebtedness associated with our 5.250% 2029 Notes, $300 million of indebtedness associated with our 5.000% 2032 Notes, $397.5 million outstanding on our 2022 Term Loan, and $113.0 million outstanding on our 2022 Revolving Credit Facility. Only our 2022 Term Loan has required principal payments. Long-term debt liquidity requirements consist of the payment in full of our Notes upon their respective maturity dates, amounts outstanding under our 2022 Revolving Credit Facility upon its maturity date, and principal payments under our 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. At September 30, 2022, approximately 30% of our outstanding debt was subject to interest rate changes.
At September 30, 2022, we had approximately $61.3 million of cash and cash equivalents on hand, a decrease of $99.5 million as compared to the year ended December 31, 2021. The majority of our cash is in non-interest bearing checking accounts or invested in short-term money market accounts and is maintained in accordance with the Company’s investment policy, which identifies allowable investments and specifies credit quality standards. Our availability under our 2022 Revolving Credit Facility at September 30, 2022 was $484.7 million. The change in cash and cash equivalents for the nine months ended September 30, 2022 and 2021 is as follows:
Operating Activities:
| | | | | | | | | | | | | | |
| | Nine months ended |
| (in thousands) | | September 30, 2022 | | September 30, 2021 |
| Cash (used in) provided by operating activities | | $ | (39,923) | | | $ | 147,148 | |
| | | | |
For the nine months ended September 30, 2022, cash flows used in operating activities totaled approximately $39.9 million, which represents a $187.1 million decrease compared to cash provided by operating activities of $147.1 million during the nine-month period ended September 30, 2021. Cash used in operating activities for working capital for the nine months ended September 30, 2022 was $223.2 million, as compared to cash used in operating activities for working capital of $14.7 million for the nine months ended September 30, 2021. We typically have a higher usage of cash for working capital in the first half of the year as most of our subsidiaries will build up inventories after the fourth quarter. In the fourth quarter of 2021 and continuing into 2022, several of our subsidiary businesses increased inventory levels to combat supply chain issues given longer lead times. The increase in cash used in operating activities for working capital in 2022 also reflects the acquisition of Lugano in the third quarter of the prior year. Further, Lugano has used significant cash to build inventory to support its sales growth strategy.
Investing Activities:
| | | | | | | | | | | | | | |
| | Nine months ended |
| (in thousands) | | September 30, 2022 | | September 30, 2021 |
| Cash used in investing activities | | $ | (598,951) | | | $ | (202,429) | |
| | | | |
Cash flows used in investing activities for the nine months ended September 30, 2022 totaled $599.0 million, compared to cash used in investing activities of $202.4 million in the same period of 2021. During the third quarter of 2022, we completed our acquisition of PrimaLoft and our Velocity business had a small add-on acquisition. The total amount of cash used for acquisitions in 2022 totaled $564.9 million. In the prior year, our investing activities reflect the acquisition of Lugano in September 2021 and an add-on acquisition at our Arnold subsidiary in March 2021. The total amount of cash used for acquisitions in 2021 totaled $302.1 million. Capital expenditures spend increased $11.7 million during the nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021, with $39.7 million in capital expenditures in 2022 and $28.0 million in capital expenditures in 2021. The increase in capital expenditures is primarily to support the retail store growth at both 5.11 and Lugano. We expect capital expenditures for the full year of 2022 to be approximately $50 million to $60 million.
Financing Activities:
| | | | | | | | | | | | | | |
| | Nine months ended |
| (in thousands) | | September 30, 2022 | | September 30, 2021 |
| Cash provided by financing activities | | $ | 542,128 | | | $ | 54,872 | |
| | | | |
Cash flows provided by financing activities totaled approximately $542.1 million during the nine months ended September 30, 2022 compared to cash flows provided by financing activities of $54.9 million during the nine months ended September 30, 2021. During the current year, we entered into our 2022 Credit Facility which provides for a $400 million term loan. The net amount of cash provided by debt proceeds under our 2022 Credit Facility in 2022, including the 2022 Term Loan and draws on our revolving credit facility, was $510.5 million, most of which was used to fund our acquisition of PrimaLoft in July 2022. During the first quarter of 2021, we completed an offering of $1,000.0 million of our 2029 Senior Notes, and used the proceeds to pay down our 2018 Revolving Credit Facility and pay off the existing 2026 Senior Notes. In September 2021, we filed a prospectus supplement and entered into a Sales Agreement for an At The Market program pursuant to which we may sell common shares of the Trust. We received $83.9 million in net cash proceeds from the sale of Trust common shares under this program in the nine months ended September 30, 2022 and $18.5 million in the nine months ended September 30, 2021. Financing activities in both periods reflect the payment of our common and preferred share distributions. Additionally, financing activities in both periods reflect cash received from noncontrolling shareholders related to our acquisition of PrimaLoft in 2022 ($35.3 million in cash proceeds provided by noncontrolling shareholders) and Lugano in 2021 ($68.0 million in cash proceeds provided by noncontrolling shareholders). During the nine months ended September 30, 2021, we made a distribution to the Allocation Member of $17.3 million related to the five-year holding event of our Liberty, Ergobaby and Advanced Circuits businesses.
Intercompany Debt
A component of our acquisition financing strategy that we utilize in acquiring the subsidiary businesses we own and manage is to provide both equity capital and debt capital, raised at the parent level through our existing credit facility. Our strategy of providing intercompany debt financing within the capital structure of our subsidiaries allows us the ability to distribute cash to the parent company through monthly interest payments and amortization of the principal on these intercompany loans. Each loan to our subsidiary businesses has a scheduled maturity and each subsidiary business is entitled to repay all or a portion of the principal amount of the outstanding loans, without penalty, prior to maturity. Certain of our subsidiaries have paid down their respective intercompany debt balances through the cash flow generated by these subsidiaries and we have recapitalized, and expect to continue to recapitalize, these subsidiaries in the normal course of our business. The recapitalization process involves funding the intercompany debt using either cash on hand at the parent or our applicable credit facility, and serves the purpose of optimizing the capital structure at our subsidiaries and providing the noncontrolling shareholders with a distribution on their ownership interest in a cash flow positive business.
In February 2022, we completed a recapitalization at Ergobaby whereby the LLC entered into an amendment to the intercompany loan agreement with Ergobaby (the "Ergobaby Loan Agreement"). The Ergobaby Loan Agreement was amended to provide for additional term loan borrowings of $61.5 million to fund a distribution to shareholders. The LLC owned 81.6% of the outstanding shares of Ergobaby on the date of the distribution and received $50.2 million. The remaining amount of the distribution was paid to minority shareholders.
In the first quarter of 2022, we amended the 5.11 and Lugano intercompany credit agreements. The 5.11 amendment increased the capital expenditure allowable under the credit agreement to account for additional growth capital expenditure opportunities primarily related to retail expansion, and amended the financial covenants to reflect the increased allowable expenditure. The Lugano amendment increased the amount available under the revolving credit facility to permit additional investment in inventory, and amended the financial covenants to reflect the increase in the revolving credit facility. We amended the Lugano intercompany credit agreement again in the second quarter of 2022 to increase the amount in available under the revolving credit facility to permit additional investment in inventory, and amended the financial covenants to reflect the increase in the revolving credit facility. We amended the Velocity intercompany credit agreement in the third quarter of 2022 to increase the amount of the
Velocity term loan to allow for the financing of an add-on acquisition. All of our subsidiaries were in compliance with the financial covenants included within their intercompany credit arrangements at September 30, 2022.
As of September 30, 2022, we had the following outstanding loans due from each of our subsidiary businesses:
| | | | | | | | |
| (in thousands) | | |
| 5.11 | | $ | 179,447 | |
| BOA | | 78,945 | |
| Ergobaby | | 87,627 | |
| Lugano | | 211,811 | |
| Marucci | | 101,549 | |
| PrimaLoft | | 165,725 | |
| Velocity Outdoor | | 139,032 | |
| Advanced Circuits | | 72,631 | |
| Altor | | 124,587 | |
| Arnold | | 68,452 | |
| Sterno | | 198,258 | |
| Total intercompany debt | | $ | 1,428,064 | |
| Corporate and eliminations | | (1,428,064) | |
| Total | | $ | — | |
Our primary source of cash is from the receipt of interest and principal on the outstanding loans to our subsidiaries. Accordingly, we are dependent upon the earnings of and cash flow from these businesses, which are available for (i) operating expenses; (ii) payment of principal and interest under our applicable credit facility and interest on our Senior Notes; (iii) payments to CGM due pursuant to the MSA and the LLC Agreement; (iv) cash distributions to our shareholders; and (v) investments in future acquisitions. Payments made under (iii) above are required to be paid before distributions to shareholders and may be significant and exceed the funds held by us, which may require us to dispose of assets or incur debt to fund such expenditures.
Financing Arrangements
2022 Credit Facility
On July 12, 2022, we 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 up to a maximum aggregate amount of $600 million (the "2022 Revolving Credit Facility") 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 2022 Revolving Credit Facility will become due on July 12, 2027, which is the maturity date of loans advanced under the 2022 Revolving Credit Facility. The 2022 Credit Facility also provides for 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.
We had $484.7 million in net availability under the 2022 Revolving Credit Facility at September 30, 2022. The outstanding borrowings under the 2022 Revolving Credit Facility include $2.3 million of outstanding letters of credit at September 30, 2022.
2021 Credit Facility
On March 23, 2021, we entered into a Second Amended and Restated Credit Agreement to amend and restate the 2018 Credit Facility. The 2021 Credit Facility provided for revolving loans, swing line loans and letters of credit 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. 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 Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% Senior Notes due 2032 (the "2032 Notes") offered pursuant to 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 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is payable in cash on July 15th and January 15th of each year. The 2032 Notes are general unsecured obligations of the LLC and are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes were used to repay debt outstanding under the 2021 Credit Facility.
2029 Notes
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Senior Notes due 2029 (the “2029 Notes”) offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2029 Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes Indenture”), between the LLC and U.S. Bank National Association, as trustee. The 2029 Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on April 15th and October 15th of each year. The 2029 Notes are general unsecured obligations of the LLC and are not guaranteed by our subsidiaries.
The following table reflects required and actual financial ratios as of September 30, 2022 included as part of the affirmative covenants in our 2022 Credit Facility.
| | | | | | | | | | | | | | |
| Description of Required Covenant Ratio | | Covenant Ratio Requirement | | Actual Ratio |
| | | | |
| Consolidated Fixed Charge Coverage Ratio | | Greater than or equal to 1.50:1.0 | | 3.45:1.0 |
| Consolidated Senior Secured Leverage Ratio | | Less than or equal to 3.50:1.0 | | 1.05:1.0 |
| Consolidated Total Leverage Ratio | | Less than or equal to 5.00:1.0 | | 3.93:1.0 |
We have the ability to exercise an option under our 2022 Credit Facility to increase our Consolidated Total Leverage Ratio to 5.75:1.0 within 45 days subsequent to September 30, 2022.
Interest Expense
The components of interest expense and periodic interest charges on outstanding debt are as follows (in thousands):
| | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2022 | | 2021 |
| Interest on credit facilities | $ | 5,434 | | | $ | 1,920 | |
| Interest on Senior Notes | 50,625 | | | 39,417 | |
| Unused fee on Revolving Credit Facility | 1,504 | | | 1,207 | |
| Amortization of bond premium | — | | | (83) | |
| Other interest expense | 214 | | | 158 | |
| Interest income | (40) | | | (12) | |
| Interest expense, net | $ | 57,737 | | | $ | 42,607 | |
The following table provides the effective interest rate of the Company’s outstanding debt at September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 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 | |
| 2022 Term Loan | 4.56% | | 397,500 | | | N/a | | — | |
| 2022 Revolving Credit Facility | 4.68% | | 113,000 | | | N/a | | — | |
| Unamortized debt issuance costs | | | (16,135) | | | | | (15,174) | |
| Total debt outstanding | | | $ | 1,794,365 | | | | | $ | 1,284,826 | |
Reconciliation of Non-GAAP Financial Measures
GAAP or U.S. GAAP refer to generally accepted accounting principles in the United States. From time to time we may publicly disclose certain "non-GAAP" financial measures in the course of our investor presentations, earnings releases, earnings conference calls or other venues. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented.
Non-GAAP financial measures are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These measures are not intended to replace the presentation of financial results in accordance with U.S. GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies. The presentation of these non-GAAP financial measures supplements other metrics we use to internally evaluate our subsidiary businesses and facilitate the comparison of past and present operations.
The tables below reconcile the most directly comparable GAAP financial measures to Earnings before Interest, Income Taxes, Depreciation and Amortization ("EBITDA"), Adjusted EBITDA, and Adjusted Earnings.
Reconciliation of Net income (loss) from continuing operations to EBITDA, Adjusted EBITDA and Net income (loss) to Adjusted Earnings
EBITDA – EBITDA is calculated as net income (loss) from continuing operations before interest expense, income tax expense (benefit), loss on debt extinguishment, depreciation expense and amortization expense. Amortization expenses consist of amortization of intangibles and debt charges, including debt issuance costs, discounts, etc.
Adjusted EBITDA – Adjusted EBITDA is calculated utilizing the same calculation as described above in arriving at EBITDA further adjusted by: (i) noncontrolling stockholder compensation, which generally consists of non-cash stock option expense; (ii) successful acquisition costs, which consist of transaction costs (legal, accounting, due diligence, etc.) incurred in connection with the successful acquisition of a business expensed during the period in compliance with ASC 805; (iii) integration service fees, which reflect fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership; and (iv) items of other income or expense that are material to a subsidiary and non-recurring in nature.
Adjusted Earnings - Adjusted earnings is calculated as net income (loss) adjusted to include the cost of the distributions to preferred shareholders, and adjusted to exclude the impact of certain costs, expenses, gains and losses and other specified items the exclusion of which management believes provides insight regarding our ongoing operating performance. Depending on the period presented, these adjusted measures exclude the impact of certain of the following items: gains (losses) and income (loss) from discontinued operations, income (loss) from noncontrolling interest, amortization expense, subsidiary stock compensation expense, acquisition-related expenses and items of other income or expense that may be material to a subsidiary and non-recurring in nature.
We believe that EBITDA, Adjusted EBITDA and Adjusted Earnings provide useful information to investors and reflect important financial measures that are used by management in the monthly analysis of our operating results and in preparation of our annual budgets. We believe that investors’ understanding of our performance is enhanced by disclosing these performance measures as this presentation allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our subsidiary businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition.
We believe that Adjusted EBITDA and Adjusted Earnings provide useful information to investors and reflects important financial measures as they exclude the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near-term operations. When compared to net income (loss) and net income (loss) from continuing operations, Adjusted Earnings and Adjusted EBITDA, respectively, are each limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our subsidiary businesses or the non-cash charges associated with impairments, as well as certain cash charges. The presentation of Adjusted Earnings provides insight into our operating results and provides a measure for evaluating earnings from continuing operations available to common shareholders. EBITDA, Adjusted EBITDA and Adjusted Earnings are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss) from continuing operations, which we consider to be the most comparable GAAP financial measure (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA |
| Nine months ended September 30, 2022 |
| Corporate | | 5.11 | | BOA | | Ergobaby | | Lugano | | PrimaLoft | | Marucci Sports | | Velocity Outdoor | | ACI | | Altor | | Arnold | | Sterno | | Consolidated |
| Net income (loss) from continuing operations | $ | (51,431) | | | $ | 15,540 | | | 37,122 | | | $ | (634) | | | $ | 21,871 | | | $ | (8,492) | | | $ | 8,374 | | | $ | 7,826 | | | $ | 9,510 | | | $ | 7,149 | | | $ | 7,217 | | | $ | 2,337 | | | $ | 56,389 | |
| Adjusted for: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Provision for income taxes | 12,119 | | | 4,999 | | | 6,819 | | | 432 | | | 5,863 | | | (3,570) | | | 2,821 | | | 2,372 | | | 2,600 | | | 2,907 | | | 2,768 | | | (929) | | | 39,201 | |
| Interest expense, net | 57,559 | | | 12 | | | (19) | | | 2 | | | 12 | | | (4) | | | 13 | | | 142 | | | — | | | — | | | 20 | | | — | | | 57,737 | |
| Intercompany interest | (71,727) | | | 9,501 | | | 5,634 | | | 4,000 | | | 7,841 | | | 3,251 | | | 4,649 | | | 6,987 | | | 4,851 | | | 7,844 | | | 3,947 | | | 13,222 | | | — | |
| Loss on debt extinguishment | 534 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 534 | |
| Depreciation and amortization | 862 | | | 16,804 | | | 16,345 | | | 6,061 | | | 8,385 | | | 4,194 | | | 9,558 | | | 9,981 | | | 1,634 | | | 12,254 | | | 6,065 | | | 15,272 | | | 107,415 | |
| EBITDA | (52,084) | | | 46,856 | | | 65,901 | | | 9,861 | | | 43,972 | | | (4,621) | | | 25,415 | | | 27,308 | | | 18,595 | | | 30,154 | | | 20,017 | | | 29,902 | | | 261,276 | |
| Other (income) expense | (73) | | | 93 | | | 498 | | | 4 | | | 2 | | | 260 | | | (1,829) | | | 1,154 | | | 251 | | | 219 | | | — | | | (1,185) | | | (606) | |
| Noncontrolling shareholder compensation | — | | | 1,210 | | | 1,889 | | | 1,154 | | | 800 | | | — | | | 1,089 | | | 742 | | | 372 | | | 910 | | | 38 | | | 647 | | | 8,851 | |
| Acquisition expenses | — | | | — | | | — | | | — | | | — | | | 5,680 | | | — | | | 222 | | | — | | | 216 | | | — | | | — | | | 6,118 | |
| Integration services fee | — | | | — | | | — | | | — | | | 1,688 | | | 1,063 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,751 | |
| Other | — | | | — | | | — | | | 250 | | | — | | | — | | | 1,802 | | | — | | | 853 | | | — | | | — | | | 1,211 | | | 4,116 | |
| Adjusted EBITDA | $ | (52,157) | | | $ | 48,159 | | | $ | 68,288 | | | $ | 11,269 | | | $ | 46,462 | | | $ | 2,382 | | | $ | 26,477 | | | $ | 29,426 | | | $ | 20,071 | | | $ | 31,499 | | | $ | 20,055 | | | $ | 30,575 | | | $ | 282,506 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA |
| Nine months ended September 30, 2021 |
| Corporate | | 5.11 | | BOA | | Ergobaby | | Lugano | | Marucci Sports | | Velocity Outdoor | | ACI | | Altor | | Arnold | | Sterno | | Consolidated |
Net income (loss) from continuing operations | $ | (64,717) | | | $ | 14,318 | | | $ | 16,908 | | | $ | 3,071 | | | $ | 681 | | | $ | 9,485 | | | $ | 19,157 | | | $ | 10,366 | | | $ | 5,892 | | | $ | 3,839 | | | $ | 1,491 | | | $ | 20,491 | |
| Adjusted for: | | | | | | | | | | | | | | | | | | | | | | | |
| Provision (benefit) for income taxes | — | | | 4,857 | | | 2,165 | | | 1,357 | | | 304 | | | 2,920 | | | 5,381 | | | 2,547 | | | 2,867 | | | 2,062 | | | 202 | | | 24,662 | |
| Interest expense, net | 42,464 | | | 8 | | | — | | | — | | | — | | | 5 | | | 125 | | | — | | | — | | | 5 | | | — | | | 42,607 | |
| Intercompany interest | (53,234) | | | 8,743 | | | 6,320 | | | 1,514 | | | 548 | | | 1,890 | | | 5,586 | | | 5,484 | | | 5,075 | | | 4,128 | | | 13,946 | | | — | |
| Loss on debt extinguishment | 33,305 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 33,305 | |
| Depreciation and amortization | 642 | | | 16,762 | | | 15,033 | | | 6,377 | | | 70 | | | 6,377 | | | 9,489 | | | 1,658 | | | 9,022 | | | 5,822 | | | 16,313 | | | 87,565 | |
| EBITDA | (41,540) | | | 44,688 | | | 40,426 | | | 12,319 | | | 1,603 | | | 20,677 | | | 39,738 | | | 20,055 | | | 22,856 | | | 15,856 | | | 31,952 | | | 208,630 | |
| Other (income) expense | (286) | | | (302) | | | 190 | | | — | | | 22 | | | 881 | | | 2,611 | | | 123 | | | (399) | | | (51) | | | (883) | | | 1,906 | |
| Noncontrolling shareholder compensation | — | | | 1,926 | | | 1,655 | | | 1,241 | | | — | | | 826 | | | 777 | | | 372 | | | 770 | | | 16 | | | 913 | | | 8,496 | |
| Acquisition expenses | 39 | | | — | | | — | | | — | | | 1,827 | | | — | | | — | | | — | | | — | | | 310 | | | — | | | 2,176 | |
| Integration services fee | — | | | — | | | 3,300 | | | — | | | — | | | 1,000 | | | — | | | — | | | — | | | — | | | — | | | 4,300 | |
| Other | 1,085 | | | 273 | | | — | | | — | | | — | | | | | (2,300) | | | — | | | — | | | — | | | 333 | | | (609) | |
Adjusted EBITDA (1) | $ | (40,702) | | | $ | 46,585 | | | $ | 45,571 | | | $ | 13,560 | | | $ | 3,452 | | | $ | 23,384 | | | $ | 40,826 | | | $ | 20,550 | | | $ | 23,227 | | | $ | 16,131 | | | $ | 32,315 | | | $ | 224,899 | |
(1) As a result of the sale of Liberty Safe in August 2021, Adjusted EBITDA for the nine months ended September 30, 2021 does not include $12.7 million in Adjusted EBITDA from Liberty.
Reconciliation of Net income (loss) to Adjusted Earnings and Adjusted EBITDA
The following table reconciles Adjusted Earnings to net income (loss), which we consider to be the most comparable GAAP financial measure, and Adjusted Earnings to Adjusted EBITDA (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Nine months ended September 30, |
| | | | | 2022 | | 2021 |
| Net income | | | | | $ | 63,282 | | | $ | 100,901 | |
| Gain on sale of discontinued operations, net of tax | | | | | 6,893 | | | 72,745 | |
| Income from discontinued operations, net of tax | | | | | — | | | 7,665 | |
| Net income from continuing operations | | | | | $ | 56,389 | | | $ | 20,491 | |
| Less: income from continuing operations attributable to noncontrolling interest | | | | | 14,927 | | | 7,915 | |
| Net income attributable to Holdings - continuing operations | | | | | $ | 41,462 | | | $ | 12,576 | |
| Adjustments: | | | | | | | |
| Distributions paid - preferred shares | | | | | (18,136) | | | (18,136) | |
| Amortization expense - intangibles and inventory step up | | | | | 72,092 | | | 56,502 | |
| Loss on debt extinguishment | | | | | 534 | | | 33,305 | |
| Stock compensation | | | | | 8,851 | | | 8,496 | |
| Acquisition expenses | | | | | 6,118 | | | 2,176 | |
| Integration Services Fee | | | | | 2,750 | | | 4,300 | |
| Held for Sale corporate tax effect | | | | | 12,119 | | | — | |
| Other | | | | | 4,116 | | | (609) | |
| Adjusted earnings | | | | | $ | 129,906 | | | $ | 98,610 | |
| Plus (less): | | | | | | | |
| Depreciation expense | | | | | 32,589 | | | 28,896 | |
| Income tax provision | | | | | 39,201 | | | 24,662 | |
| Held for Sale corporate tax effect | | | | | (12,119) | | | — | |
| Interest expense | | | | | 57,737 | | | 42,607 | |
| Amortization of debt issuance costs | | | | | 2,735 | | | 2,167 | |
| Income from continuing operations attributable to noncontrolling interest | | | | | 14,927 | | | 7,915 | |
| Distributions paid - preferred shares | | | | | 18,136 | | | 18,136 | |
| Other | | | | | (606) | | | 1,906 | |
| Adjusted EBITDA | | | | | $ | 282,506 | | | $ | 224,899 | |
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 quarter produce the highest net sales during our fiscal year.
Related Party Transactions
Management Services Agreement
We entered into the MSA with CGM effective May 16, 2006. The MSA provides for, among other things, CGM to perform services for the LLC in exchange for a management fee paid quarterly and equal to 0.5% of the Company's adjusted net assets, as defined in the MSA.
During 2022, CGM entered into a waiver of the MSA for the period through June 30, 2023 to receive a 1% annual management fee related to PrimaLoft, rather than the 2% called for under the MSA, which resulted in a lower
management fee at September 30, 2022 than would normally have been due. At June 30, 2022 and March 31, 2022, CGM entered into a waiver to exclude cash balances held at the LLC from the calculation of the management fee.
During 2021, CGM entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid during 2021 than would have normally been due. In the first quarter of 2021, the LLC and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee related to the amount of the proceeds deposited with the Trustee that was in excess of the amount payable related to the 2026 Senior Notes at March 31, 2021. Additionally, CGM entered into a waiver of the MSA at December 31, 2021 to exclude cash balances held at the LLC from the calculation of the management fee.
For the three and nine months ended September 30, 2022 and 2021, the Company incurred the following management fees to CGM, by entity:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| 5.11 | $ | 250 | | | $ | 250 | | | $ | 750 | | | $ | 750 | |
| BOA | 250 | | 250 | | | 750 | | | 750 | |
| Ergobaby | 125 | | 125 | | | 375 | | | 375 | |
| Lugano | 188 | | 58 | | | 563 | | | 58 | |
| Marucci | 125 | | 125 | | | 375 | | | 375 | |
| PrimaLoft | 250 | | — | | | 250 | | | — | |
| Velocity | 125 | | 125 | | | 375 | | | 375 | |
| Advanced Circuits | 125 | | | 125 | | | 375 | | | 375 | |
| Altor | 188 | | 188 | | | 563 | | | 563 | |
| Arnold Magnetics | 125 | | 125 | | | 375 | | | 375 | |
| Sterno | 125 | | 125 | | | 375 | | | 375 | |
| Corporate | 14,841 | | | 10,902 | | | 41,178 | | | 30,133 | |
| $ | 16,717 | | | $ | 12,398 | | | $ | 46,304 | | | $ | 34,504 | |
Integration Services Agreements
PrimaLoft, which was acquired in July 2022, entered into an Integration Services Agreement ("ISA") with CGM whereby PrimaLoft will pay CGM an integration services fee of $4.8 million quarterly over a twelve-month period ended June 30, 2023. Lugano, which was acquired in September 2021, entered into an ISA with CGM whereby Lugano paid CGM an integration services fee of $2.3 million quarterly over a twelve-month period ended September 30, 2022. Under the ISAs, CGM provides services for new platform acquisitions to, amongst other things, assist the management at the acquired entities in establishing a corporate governance program, implement compliance and reporting requirements of the Sarbanes-Oxley Act of 2002, as amended, and align the acquired entity's policies and procedures with our other subsidiaries. Integration services fees are recorded as selling, general and administrative expense in the consolidated statement of operations.
Profit Allocation Payments
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 of $2.0 million related to the Ergobaby Holding Event were both paid in January 2021. The fifteen-year anniversary of ACI occurred in May 2021 which represented a Holding Event. The Company's Board declared a distribution of $12.1 million that was paid to the Holders in July 2021. The sale of Liberty in August 2021 represented a Sale Event, and the Company's board declared a profit allocation distribution to Holders of $16.8 million. This distribution was paid in the fourth quarter of 2021.
5.11
Recapitalization - In August 2021, the Company completed a recapitalization of 5.11 whereby the LLC entered into an amendment to the intercompany loan agreement with 5.11 (the "5.11 Loan Agreement"). The 5.11 Loan Agreement was amended to provide for additional term loan borrowings of $55.0 million to fund a distribution to shareholders. The LLC owned 97.7% of the outstanding shares of 5.11 on the date of the distribution and received $53.7 million. The remaining amount of the distribution was paid to minority shareholders.
Related Party Vendor Purchases - 5.11 purchases inventory from a vendor who is a related party to 5.11 through one of the executive officers of 5.11 via the executive's 40% ownership interest in the vendor. 5.11 purchased approximately $0.3 million and $1.1 million during the three and nine months ended September 30, 2022, respectively, and $0.1 million and $0.9 million during the three and nine months ended September 30, 2021, respectively in inventory from the vendor.
BOA
Repurchase of Noncontrolling Interest - In September 2021, BOA repurchased shares of its issued and outstanding common shares from its largest minority shareholder for a total payment of $48.0 million, which BOA financed by borrowing under their intercompany credit facility with the LLC (the "BOA Credit Agreement"). The BOA Credit Agreement was amended to (i) provide for additional term loan borrowings of $38.0 million, and (ii) consent to the repurchase of the shares from the minority shareholder. The transaction was accounted for in accordance with ASC 810 - Consolidation, whereby the carrying amount of the noncontrolling interest was adjusted to reflect the change in the ownership interest in BOA that occurred as a result of the share repurchase. The difference between the fair value of the consideration paid of $48.0 million and the amount by which the noncontrolling interest was adjusted of $39.4 million was recognized in equity attributable to the LLC.
Related Party Vendor Purchases - A contract manufacturer used by BOA as the primary supplier of molded injection parts is a noncontrolling shareholder of BOA. BOA had approximately $12.7 million and $43.8 million in purchases from this supplier during the three and nine months ended September 30, 2022, respectively and $11.2 million and $32.8 million during the three and nine months ended September 30, 2021, respectively.
Ergobaby
Recapitalization - In February 2022, the Company completed a recapitalization of Ergobaby whereby the LLC entered into an amendment to the intercompany loan agreement with Ergobaby (the "Ergo Loan Agreement"). The Ergo Loan Agreement was amended to provide for additional loan borrowings of $61.5 million to fund a distribution to shareholders. The LLC owned 81.6% of the outstanding shares of Ergobaby on the date of the distribution and received $50.2 million. The remaining amount of the distribution was paid to minority shareholders.
Off-Balance Sheet Arrangements
We have no special purpose entities or off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates under different assumptions and judgments and uncertainties, and potentially could result in materially different results under different conditions. These critical accounting policies and estimates are reviewed periodically by our independent auditors and the audit committee of our board of directors.
Except as set forth below, our critical accounting estimates have not changed materially from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the year ended December 31, 2021, as filed with the SEC on February 24, 2022.
Goodwill and Indefinite-lived Intangible Asset Impairment Testing
Goodwill
Goodwill represents the excess amount of the purchase price over the fair value of the assets acquired. Our goodwill and indefinite lived intangible assets are tested for impairment on an annual basis as of March 31st, and if current events or circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which are generally an operating segment. Each of our subsidiary businesses represents a reporting unit.
We use a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment testing. The qualitative factors we consider include, in part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts, as well as issues or events specific to the reporting unit. If qualitative factors are not sufficient to determine that the fair value of a reporting unit is more likely than not to exceed its carrying value, we will perform a quantitative test of the reporting unit whereby we estimate the fair value of the reporting unit using an income approach or market approach, or a weighting of the two methods. Under the income approach, we estimate the fair value of our reporting unit based on the present value of future cash flows. Cash flow projections are based on management's estimate of revenue growth rates and operating margins and take into consideration industry and market conditions as well as company specific economic factors. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. Under the market approach, we estimate fair value based on market multiples of revenue and earnings derived from comparable public companies with operating characteristics that are similar to the reporting unit. When market comparables are not meaningful or available, we estimate the fair value of the reporting unit using only the income approach. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about appropriate sales growth rates, operating margins, weighted average cost of capital, and comparable company market multiples. When developing these key judgments and assumptions, we consider economic, operational and market conditions that could impact the fair value of the reporting unit. Estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will most likely differ from actual future results.
2022 Annual Impairment Testing - For our annual impairment testing at March 31, 2022, we performed a qualitative assessment of our reporting units. 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 - For our annual impairment testing at March 31, 2021, we performed a qualitative assessment of our reporting units. The qualitative factors we consider include, in part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts, as well as issues or events specific to the reporting unit. As a result of the COVID-19 pandemic, we also considered how we expected COVID-19 to impact our future operating results and short and long term financial condition as part of our qualitative assessment, including the effects on our end customers, potential short-term supply chain constraints, and the continued restrictions imposed by government and regulatory authorities. The results of the qualitative analysis indicated that it was more-likely-than-not that the fair value of each of our reporting units except Arnold exceeded their carrying value. Based on our analysis, we determined that the Arnold operating segment required quantitative testing because we could not conclude that the fair value of this reporting unit significantly exceeded the carrying value based on qualitative factors alone.
We performed the quantitative tests of Arnold using an income approach to determine the fair value of the reporting units. We do not believe that the market approach results in relevant data points for market multiples or data from comparable companies since most of Arnold's competitors are privately held and do not publish data that can be used in an income approach. In developing the prospective financial information used in the income approach, we considered recent market conditions, taking into consideration the uncertainty associated with the COVID-19 pandemic and its economic fallout. The prospective financial information considers reporting unit specific facts and circumstances and is our best estimate of operational results and cash flows for the Arnold reporting unit as of the date of our impairment testing. The discount rate used in the income approach was 13.0%, and the results of the quantitative impairment testing indicated that the fair value of the Arnold reporting unit exceeded the carrying value
by approximately 272%. The prospective financial information that is used to determine the fair values of the Arnold reporting unit requires us to make assumptions regarding future operational results including revenue growth rates and gross margins. If we do not achieve the forecasted revenue growth rates and gross margins, the results of the quantitative testing could change, potentially leading to additional testing and impairment at the reporting unit that was tested quantitatively.
Indefinite-lived intangible assets
We use a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. Our indefinite-lived intangible assets consist of trade names with a carrying value of approximately $57.0 million. The results of the qualitative analysis of our reporting unit's indefinite-lived intangible assets, which we completed as of March 31, 2022, indicated that the fair value of the indefinite lived intangible assets exceeded their carrying value.
Recent Accounting Pronouncements
