Compass Diversified Holdings on Wednesday reported a net loss for the fourth quarter ended December 31, 2018, of $6.5 million, or earnings per share of (25) cents, as compared to net income of $49.1 million for the quarter ended December 31, 2017. The company missed Wall Street’s EPS targets by 31 cents.

Revenue for the quarter of $452.5 million beat targets by $20.9 million and grew 29.9 percent from the fourth quarter of 2017.

Fourth Quarter 2018 Highlights

  • Generated Cash Provided by Operating Activities of $55.7 million for the fourth quarter of 2018 and $114.5 million for the full year 2018, and Cash Flow Available for Distribution and Reinvestment of $22.9 million for the fourth quarter of 2018 and $93.7 million for the full year 2018;
  • Reported net loss of $6.5 million for the fourth quarter of 2018 and $1.8 million for the full year 2018;
  • Paid a fourth quarter 2018 cash distribution of $0.36 per share on CODI’s common shares in January 2019, bringing cumulative distributions paid to $17.5152 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 in January 2019;
  • Paid a quarterly cash distribution of $0.4921875 per share on the company’s 7.875 percent Series B Preferred Shares in January 2019;
  • Subsequent to year end, entered into a definitive agreement to sell CODI’S majority owned subsidiary, FHF Holdings Ltd. (“Manitoba Harvest”), to Tilray Inc. for an aggregate sales price of up to C$419 million.

“We continued to provide shareholders with a sizeable distribution in 2018, backed by our diverse and uncorrelated middle market businesses and our highest CAD since going public,” said Elias Sabo, CEO of Compass Diversified Holdings. “During the year, we also took important steps to build long-term and sustainable value in CODI and its leading subsidiaries.”

Sabo continued, “We made important investments in our branded consumer businesses to complement growing cash flows in CODI’s industrial businesses and to further drive long-term profitability. We also capitalized on compelling market opportunities, completing a total of six add-on and platform acquisitions to further enhance our earnings power. Complementing this success, we strengthened our liquidity position and capital structure, without diluting shareholders.”

Sabo concluded, “We are pleased to have commenced 2019 by entering into an agreement to monetize Manitoba Harvest at a highly attractive valuation, highlighting our proven investment model and success creating significant value for shareholders. The sale of Manitoba will significantly increase our total realized gains and we intend to deploy the net proceeds towards repaying our revolving credit facility. As we progress through a robust market, we intend to pursue select add-on and platform acquisitions while continuing to opportunistically consider divestitures, consistent with our success realizing sizeable total gains. With a diversified group of leading niche industrial and branded consumer subsidiaries, we also remain well positioned to continue to provide shareholders with sizeable distributions.”

Operating Results
For the quarter ended December 31, 2018, CODI generated Cash Provided by Operating Activities of $55.7 million, as compared to Cash Provided by Operating Activities of $22.5 million for the quarter ended December 31, 2017. CODI reported Cash Flow (see Note Regarding Use of Non-GAAP Financial Measures below) of $22.9 million for the quarter ended December 31, 2018, as compared to $25.6 million for the prior year’s comparable quarter. CODI’s weighted average number of shares outstanding for the quarters ended December 31, 2018 and December 31, 2017 were 59.9 million.

For the year ended December 31, 2018, CODI generated Cash Provided by Operating Activities of $114.5 million, as compared to Cash Provided by Operating Activities of $81.8 million for the year ended December 31, 2017. CODI reported Cash Flow of $93.7 million for the year ended December 31, 2018, as compared to $92.2 million for the prior year. CODI’s weighted average number of shares outstanding for the twelve month periods ended December 31, 2018and December 31, 2017 were 59.9 million.

Cash Flow for the fourth quarter of 2018 reflects year-over-year earnings increases at the company’s Advanced Circuits, Arnold Magnetics, and Sterno Group businesses, offset by declines at the company’s other businesses.

CODI’s Cash Flow is calculated after taking into account all interest expense, cash taxes paid and maintenance capital expenditures, and includes the operating results of each of our businesses for the periods during which CODI owned them. However, Cash Flow excludes the gains from monetizing interests in CODI’s subsidiaries, which have totaled over $770 million since going public in 2006.

Net loss for the quarter ended December 31, 2018 was $6.5 million, as compared to net income of $49.1 million for the quarter ended December 31, 2017. The quarter ended December 31, 2017 included an income tax benefit of $38.7 million primarily related to the enactment of the Tax Cuts and Jobs Act in December 2017, which lowered the U.S. federal corporate income tax rate from 35 percent to 21 percent.

For the year ended December 31, 2018, CODI reported a net loss of $1.8 million. This compared to net income of $33.6 million for the year ended December 31, 2017.

Liquidity and Capital Resources
As of December 31, 2018, CODI had approximately $53.3 million in cash and cash equivalents, $496 million outstanding on its term loan facility, $400 million in Senior Notes and $228 million in outstanding borrowings under its revolving credit facility.

The company has no significant debt maturities until 2023 and had net borrowing availability of approximately $372 million at December 31, 2018 under its revolving credit facility.

Fourth Quarter 2018 Distributions
On January 3, 2019, CODI’s board of directors (the “board”) declared a fourth quarter distribution of $0.36 per share on the company’s common shares (the “Common Shares”). The cash distribution was paid on January 24, 2019 to all holders of record of Common Shares as of January 17, 2019. Since its IPO in May of 2006, CODI has paid a cumulative distribution of $17.5152 per common share.

The board also declared a quarterly cash distribution of $0.453125 per share on the company’s 7.250 percent Series A Preferred Shares (the “Preferred Shares”). The distribution on the Preferred Shares covered the period from and including October 30, 2018, up to, but excluding, January 30, 2019. The distribution for such period was paid on January 30, 2019 to all holders of record of Preferred Shares as of January 15, 2019.

The board also declared a quarterly cash distribution of $0.4921875 per share on the company’s 7.875 percent Series B Preferred Shares (the “Series B Preferred Shares”). The distribution on the Series B Preferred Shares covered the period from and including October 30, 2018, up to, but excluding, January 30, 2019. The distribution for such period was paid on January 30, 2019 to all holders of record of Series B Preferred Shares as of January 15, 2019.

Photo courtesy Compass Diversified Holdings