Helped by a strong performance at 5.11 and improvement at Liberty Safe, Compass Diversified Holdings LLC (CODI) reported consolidated subsidiary EBITDA returned to growth in the third quarter, exceeding internal expectations.
On a conference call with analysts, Elias Sabo, CEO, said the gains were led by its in branded consumer segment with EBITDA growth of approximately 15 percent over the third quarter of 2018. He added, “Notably, our branded consumer segment is ahead of expectations and we expect this segment to continue to outperform for the remainder of 2019.”
5.11, the tactical brand, continues to perform significantly ahead of expectations with revenue and EBITDA growing approximately 18 percent and 60 percent, respectively, versus the third quarter of 2018.
“The strong performance is driven by the rapid growth in the company’s consumer lifestyle segment,” said Sabo. “Tapping into the growing demand from 5.11, enthusiastic, highly engaged, and well-identified core consumer. 5.11’s impressive growth follows our restructuring of the business in 2018 and we believe is a direct result of actions taken at the time, along with continued investments in people, systems and logistics.”
Pat Maciariello, COO, said 5.11’s performance marked an acceleration from second quarter’s growth in revenue and EBITDA of approximately 10 percent and 43 percent, respectively.
5.11 has opened nine new retail stores in 2019 and as a group, the 2019 stores are performing even better than a “solid 2018 class,” said Maciariello. 5.11 had 54 stores open as of September 30 and expects to have approximately 60 by year-end. In addition, 5.11 continues to benefit from investments to accelerate growth online.
“Product innovation remains at the forefront of 5.11 and in the quarter, the recently introduced Icon Pant and Nora sneaker made their way to the company’s top seller list,” added Maciariello. “We continue to be pleased with the performance of 5.11 and maintain our view that this business will be our fastest growing subsidiary over the long-term and has transformational potential to the entire CODI business.”
Liberty Safe’s revenue and EBITDA for the quarter exceeded internal expectations as the company rolled-out product to a new large farm and fleet customer. Liberty’s strong third-quarter performance is expected to continue into the fourth quarter. Said Sabo, “Our management team at Liberty Safe led by Steve Allred is doing an exceptional job driving significant market share gains and realizing the benefits of operational leverage.”
Velocity Outdoor, a maker of archery and other shooting products, embarked on a restructuring during the quarter and a $33.4 million non-cash goodwill impairment charge was recorded. The segment’s brands include Crosman and Benjamin Airguns, Ravin Crossbows, CenterPoint Archery and Optics, LaserMax Laser Aiming Devices and GameFace Airsoft.
“The Hunting & Outdoor channel continues to be under significant pressure, leading to reduced financial performance,” said Sabo. “Despite the challenges in the marketplace, its Archery segment continues to perform well, led by Ravin Crossbows, which brought significant innovation to the Crossbow market through its extensive IP portfolio.”
To lead the turnaround of Velocity Outdoor, Tom McGann has been appointed as executive chairman and interim leader of the business. The business realized approximately $700,000 of restructuring costs in the period.
Said Maciariello, “Given the difficult market environment, we expect Velocity’s financial performance to be subdued through 2020. As with other restructurings, we have executed in the past however, we are confident that this process will lead to value creation for all stakeholders.”
In its remaining consumer branded business, Ergobaby’s results were down slightly compared to 2018, in line with expectations.
CODI’s other segment, niche industrial businesses, continued to perform in line with expectations. However, EBITDA declined 4.7 percent for the quarter from a year-ago period, reflecting a weakening global manufacturing environment, the relocation of a facility at Advanced Circuits and a timing shift and a large promotional order at Sterno.
Companywide, net sales for the quarter were $388.3 million, as compared to $360.3 million a year ago. The year-ago period doesn’t include sales attributable to Ravin prior to CODI’s ownership.
The net loss for the quarter was $26.5 million, as compared to net income of $5.8 million the prior year. The latest period included the $33.4 million impairment charge at Velocity Outdoor.
Adjusted EBITDA improved to $63.8 million, as compared to $57.9 million for the quarter a year ago. Adjusted EBITDA does not include the results of Ravin prior to CODI’s ownership.
Addressing potential M&A activity, Sabo said its efforts this year, including the divestitures of both Manitoba Harvest and Clean Earth, have resulted in CODI having the strongest balance sheet in its history “with unprecedented liquidity to pursue acquisitions”
He noted that middle-market M&A activity remains at historically high levels, capital remains robust with favorable terms, and strategic and private equity acquirers continue to seek opportunities to deploy available capital.
“As a result, valuation multiples remain robust,” said Sabo. “Our acquisition efforts will continue to focus on accretive add-on opportunities and selective platform acquisitions of niche market leaders at valuations where we can expect to exceed our weighted average cost of capital. Going forward, we will maintain an intense focus on executing our proven and disciplined acquisition strategy, improving the operating performance of our companies opportunistically divesting when appropriate, distributing sizable distribution and creating long-term shareholder value.”
Photo courtesy 5.11
