Compass Diversified Holdings reported net income for the first quarter of $4.9 million on revenue of $333.4 million, which was a 1.6 percent decline from the same quarter a year ago and missed expectations by $3.6 million.

First Quarter 2020 Highlights

  • Reported net sales of $333.4 million;
  • Reported net income of $4.9 million;
  • Reported non-GAAP Adjusted EBITDA of $46 million;
  • Reported Cash Provided by Operating Activities of $34 million and non-GAAP Cash Flow Available for Distribution and Reinvestment of $17.7 million;
  • Announced acquisition of the Marucci Sports platform, which closed in April 2020;
  • Paid a first quarter 2020 cash distribution of $0.36 per share on CODI’s common shares in April 2020, bringing cumulative distributions paid to $19.3152 per common share since CODI’s IPO in May of 2006;
  • Paid a quarterly cash distribution of $0.453125 per share on the company’s 7.250 percent Series A Preferred Shares, $0.4921875 per share on the company’s 7.875 percent Series B Preferred Shares, and $0.4921875 per share on the company’s 7.875 percent Series C Preferred Shares in April 2020; and
  • Received abatement of $1.2 million in management fees attributable to cash balances held at the company as of March 31, 2020.

“The strong results we delivered this quarter are a testament to the competitive advantage gained through our permanent capital structure, disciplined approach and diverse portfolio of leading businesses,” said Elias Sabo, CEO of Compass Group Diversified Holdings LLC. “We entered 2020 with significant capital resources that enabled us to de-risk our balance sheet and provide CODI with the financial flexibility to navigate current challenges amid the global health pandemic while supporting our leading branded consumer and niche industrial businesses. We are pleased with the first quarter performance of our subsidiaries, generating an increase in cash flow from the prior year, and our ability to declare our 37th consecutive quarter of distributions on our common stock at an annualized $1.44 per share.

“While second-quarter results will undoubtedly be impacted by the abrupt halt to large segments of the economy stemming from the global response to COVID-19, we believe we are well-positioned to effectively operate in a time of market dislocation and remain focused on taking decisive actions that will allow us to emerge even stronger from these unprecedented conditions. The health of our team, stakeholders and the communities in which they operate remains our top priority, as we focus on managing our business for the long-term, maintaining our balance sheet strength and working closely with our subsidiaries’ management teams to build enduring value.

“We sincerely thank those who have been working to keep all of us safe through the crisis. We are proud of how our subsidiaries have responded to COVID-19 and congratulate 5.11’s success supporting first responders as well as the important work Sterno has done producing cotton masks and hand sanitizer for local hospitals and healthcare providers.”

Temporary Abatement of Management Fees in Response to Impact from Global Crisis
The company also announced that Compass Group Management LLC (“CGM”) has elected to waive the portion of its management fee attributable to cash balances held at the company as of March 31, 2020. The cash flow savings impact of this waiver was approximately $1.2 million. Additionally, as a result of an expected decline in earnings and cash flows in the second quarter of 2020, CGM has agreed to waive 50 percent of the management fee calculated at June 30, 2020, that will be paid in July 2020. The company estimates the cash flow savings of this waiver will be between $4.5 million and $5 million.

Sabo added, “CGM’s actions underscore our unwavering focus on shareholder alignment always and especially during this challenging time. We appreciate the trust and value our shareholders put in the long-term prospects of our business and believe the decision to waive fees associated with keeping extra cash on hand is prudent in today’s environment and will contribute to CODI’s long-term success. Additionally, recognizing the cost this pandemic is having on so many businesses, we expect the relief in the second quarter management fee will help offset the challenges ahead.”

Operating Results
Net sales for the quarter ended March 31, 2020 were $333.4 million, as compared to $338.9 million for the quarter ended March 31, 2019.

Net income for the quarter ended March 31, 2020 was $4.9 million, as compared to net income of $110.2 million for the quarter ended March 31, 2019, which included a gain on the sale of our Manitoba Harvest subsidiary.

Adjusted EBITDA for the quarter ended March 31, 2020 was $46 million, as compared to $48.5 million for the quarter ended March 31, 2019.

CODI reported CAD of $17.7 million for the quarter ended March 31, 2020, as compared to $17.6 million for the prior year’s comparable quarter. CODI’s CAD is calculated after taking into account all interest expenses, cash taxes paid, preferred distributions and maintenance capital expenditures, and includes the operating results of each of our businesses for the periods during which CODI owned them. However, CAD excludes the gains from monetizing interests in CODI’s subsidiaries, which have totaled over $1 billion since going public in 2006.

Liquidity and Capital Resources
For the quarter ended March 31, 2020, CODI reported Cash Provided by Operating Activities of $34 million, as compared to Cash Used in Operating Activities of $8.9 million for the quarter ended March 31, 2019. CODI’s weighted average number of shares outstanding for the quarters ended March 31, 2020 and March 31, 2019 were 59.9 million.

As of March 31, 2020, CODI had approximately $291 million in cash and cash equivalents, $400 million outstanding in 8.00 percent Senior Notes due 2026 and $200 million outstanding borrowings under its revolving credit facility.

The company has no significant debt maturities until 2023 and had net borrowing availability of $396.4 million at March 31, 2020 under its revolving credit facility. In March 2020, as a proactive measure to ensure that the company had sufficient cash liquidity in light of the COVID-19 pandemic, CODI elected to draw down $200 million on its revolving credit facility. The company subsequently used a portion of this revolver draw to close the Marucci acquisition in April 2020.

Responding to the Increasing Economic Uncertainties Created by COVID-19
The health of the CODI team and its various stakeholders is the company’s highest priority. The company is closely monitoring the impact of the COVID-19 outbreak on all aspects of its business, including customers, employees, supply chains, and distribution networks. CODI’s subsidiaries experienced reductions in customer demand in several end-markets in the first quarter of 2020 and the company believes this will continue in the near-term. The company expects that government measures taken to limit the spread of the virus, which have led to reductions in production at certain facilities across the portfolio and limited operations at some of their suppliers, will more meaningfully impact operations in the second quarter of 2020.

The company is working with management at each of its businesses to reduce controllable costs, including short-term actions to reduce labor costs (including layoffs and furloughs), eliminating non-essential travel and reducing discretionary spending. CODI’s businesses are proactively managing working capital and the company has reduced its capital spending plan for the year, without deferring key strategic ongoing initiatives. Additionally, CGM has waived certain management fees.

Guidance Update
In light of current economic uncertainty caused by COVID-19, the company has decided to withdraw full-year 2020 Adjusted EBITDA and Payout Ratio guidance until a clearer picture emerges for its businesses.

In the short term, the company anticipates that COVID-19 will have a negative impact on its results of operations, financial condition and cash flows for the second quarter ended June 30, 2020. The company estimates its second-quarter 2020 Total Adjusted EBITDA will decrease approximately 30 percent to 50 percent as compared to the Total Adjusted EBITDA from the prior year second quarter.

During 2019, the company received an aggregate total of $882 million in net cash proceeds as a result of the divestitures of Manitoba Harvest and Clean Earth, as well as the issuance and sale of Series C Preferred Shares. As a result, the company believes that it currently has adequate liquidity and capital resources to meet its existing obligations and quarterly distributions to its shareholders, as approved by the board of directors, over the next 12 months.

The ultimate impact of COVID-19 on the company’s business is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are highly uncertain and cannot be accurately predicted at this time. As detailed in our Form 10-Q for the period ending March 31, 2020, the company’s results of operations, financial condition and cash flow could be impacted more dramatically than currently anticipated and as a result, the company’s liquidity and capital resources could become more constrained than expected.

Photo courtesy CODI