EX-99.3 5 exhibit993-proformafinanci.htm EX-99.3 Document
Exhibit 99.3


                                                

COMPASS DIVERSIFIED HOLDINGS
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)


    The following pro forma condensed combined financial statements give effect to the acquisition of Boa Holdings, Inc. ("Boa") with a total purchase price of approximately $454 million, as further described on the Form 8-K that we filed on October 19, 2020.

    The following pro forma condensed combined statements of operations for the year ended December 31, 2019 and the nine months ended September 30, 2020 give effect to the acquisition of Boa as if the acquisition had occurred on January 1, 2019. The proforma condensed combined balance sheet as of September 30, 2020 gives effect to the acquisition of Boa as if the acquisition was completed on September 30, 2020.

    The "as reported" financial information of Boa is derived from the historical financial statements of Boa for comparable periods which are included elsewhere in this Form 8-K. The "as reported" financial information for Compass Diversified Holdings (the "Company" or "Holdings") is derived from the audited financial statements of the Company as of December 31, 2019 and for the year ended December 31, 2019 as filed on Form 10-K dated February 26, 2020, and the unaudited financial statements of the Company as of September 30, 2020 and for the nine months ended September 30, 2020 as filed on Form 10-Q dated October 28, 2020.

    Assumptions underlying the pro forma adjustments necessary to reasonably present this unaudited pro forma condensed combined financial information are described in the accompanying notes. The pro forma adjustments described in the accompanying notes have been made based on the available information and, in the opinion of management, are reasonable. The preliminary purchase price has been allocated on a provisional basis to assets acquired and liabilities assumed in connection with the acquisition based on the estimated fair value as of the completion of the acquisition. The unaudited pro forma condensed combined statements of operations reflect the adjustments to the historical consolidated results of operations that are expected to have a continuing effect. The unaudited pro forma condensed combined statements of operations do not include certain items such as transaction costs related to the acquisition. The final purchase price allocation is subject to the final determination of the fair value of assets acquired and liabilities assumed and, therefore, that allocation and the resulting effect on income from operations may differ materially from the unaudited pro forma amounts included herein.

    The historical consolidated financial information has been adjusted to give effect to estimated pro forma events that are directly attributable to the acquisition, factually supportable and, with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the consolidated results of operations. The unaudited pro forma condensed combined financial information should not be considered indicative of actual results that would have been achieved had the acquisition occurred on the date indicated and do not purport to indicate results of operations for any future period.

You should read these unaudited pro forma condensed combined financial statements in conjunction with the accompanying notes, the financial statements of Boa included in this Form 8-K and the consolidated financial statements of the Company, including the notes thereto as previously filed.




Compass Diversified Holdings
Pro Forma Condensed Combined Balance Sheet at September 30, 2020
(unaudited)

(in thousands) Compass Diversified Holdings as ReportedBoa as Reported Pro Forma Adjustments Pro Forma Combined Compass Diversified Holdings
Assets
Current assets:
Cash and cash equivalents$176,819 $81,558 $(171,225)(a),(e)$87,152 
Accounts receivable, net242,947 1,356 — 244,303 
Inventories344,036 4,333 508 (b)348,877 
Prepaid expenses and other current assets36,873 4,835 — 41,708 
Total current assets800,675 92,082 (170,717)722,040 
Property, plant and equipment, net155,601 9,012 6,460 (b)171,073 
Goodwill508,464 — 263,483 (b)771,947 
Intangible assets, net619,925 3,992 232,708 (b)856,625 
Other non-current assets107,319 1,563 13,105 (c)121,987 
Total assets$2,191,984 $106,649 $345,039 $2,643,672 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$98,192 $3,527 $— $101,719 
Accrued expenses151,279 5,248 — 156,527 
Due to related party9,283 — — 9,283 
Other current liabilities25,022 2,926 2,600 (c)30,548 
Total current liabilities283,776 11,701 2,600 298,077 
Deferred income taxes30,854 — 62,315 (b)93,169 
Long-term debt592,107 — 300,000 (a)892,107 
Other non-current liabilities94,554 2,933 10,505 (c)107,992 
Total liabilities1,001,291 14,634 375,420 1,391,345 
Stockholders’ equity
Trust preferred shares, no par value303,918 — — 303,918 
Trust common shares, no par value 1,008,564 — — 1,008,564 
Accumulated other comprehensive income (loss)(4,447)98 (98)(d)(4,447)
Accumulated deficit(188,136)91,917 (91,917)(e)(188,136)
Total stockholders’ equity attributable to Holdings1,119,899 92,015 (92,015)1,119,899 
Noncontrolling interest70,794 — 61,634 (b)132,428 
Total stockholders’ equity1,190,693 92,015 (30,381)1,252,327 
Total liabilities and stockholders’ equity$2,191,984 $106,649 $345,039 $2,643,672 

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information.

Compass Diversified Holdings
Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 2019
(unaudited)
(in thousands, except per share data) Compass Diversified Holdings as ReportedBoa as Reported Pro Forma Adjustments Pro Forma Combined Compass Diversified Holdings
Net revenues$1,450,253 $106,276 $— $1,556,529 
Cost of revenues930,810 45,032 26 (f)975,868 
Gross Profit519,443 61,244 (26)580,661 
Operating expenses:
Selling, general and administrative expense335,181 37,637 95 (f)372,913 
Management fees37,030 — 4,540 (g)41,570 
Amortization expense54,155 223 15,378 (h)69,756 
Impairment expense32,881 — — 32,881 
Operating income60,196 23,384 (20,039)63,541 
Other income (expense):
Interest income (expense), net(58,216)940 (9,000)(i)(66,276)
Amortization of debt issuance costs(3,314)— — (3,314)
Loss on debt extinguishment(12,319)— — (12,319)
Loss on sale of securities (refer to Note C)(10,193)— — (10,193)
Other income (expense), net(2,185)(51)— (2,236)
Income (loss) from continuing operations before income taxes(26,031)24,273 (29,039)(30,797)
Provision for income taxes14,742 5,452 — 20,194 
Net income (loss) from continuing operations(40,773)18,821 (29,039)(50,991)
Less: Income from continuing operations attributable to noncontrolling interest5,542 — 3,411 (j)8,953 
Net income (loss) attributable to Holdings$(46,315)$18,821 $(32,450)$(59,944)
Basic and fully diluted loss per share attributable to Holdings$(2.17)$(2.39)
Weighted average number of shares59,900 59,900 


See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information.



Compass Diversified Holdings
Pro Forma Condensed Combined Statement of Operations
for the nine months ended September 30, 2020
(unaudited)
(in thousands, except per share data) Compass Diversified Holdings as ReportedBoa as Reported Pro Forma Adjustments Pro Forma Combined Compass Diversified Holdings
Net revenues$1,085,979 $77,173 $— $1,163,152 
Cost of revenues695,304 31,074 72 (f)726,450 
Gross Profit390,675 46,099 (72)436,702 
Operating expenses:
Selling, general and administrative expense260,850 27,765 (98)(f)288,517 
Management fees23,436 — 3,405 (g)26,841 
Amortization expense43,506 184 11,517 (h)55,207 
Operating income62,883 18,150 (14,896)66,137 
Other income (expense):
Interest income (expense), net(32,122)149 (6,750)(i)(38,723)
Amortization of debt issuance cost(1,795)— — (1,795)
Other income (expense), net(2,172)173 — (1,999)
Income (loss) from continuing operations before income taxes26,794 18,472 (21,646)23,620 
Provision for income taxes8,477 105 — 8,582 
Net income from continuing operations18,317 18,367 (21,646)15,038 
Less: Net income from continuing operations attributable to noncontrolling interest4,003 — 3,328 (j)7,331 
Net income (loss) attributable to Holdings from continuing operations$14,314 $18,367 $(24,974)$7,707 
Basic and fully diluted loss per share attributable to Holdings$(0.33)$(0.43)
Weighted average number of shares62,556 62,556 
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information.

Compass Diversified Holdings
Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)


Pro forma information is intended to reflect the impact of the acquisition of Boa on the Company’s historical financial position and results of operations through adjustments that are directly attributable to the transaction, that are factually supportable and, with respect to the pro forma condensed combined statements of operations that are expected to have a continuing impact. This information in Note 1 provides a description of each of the pro forma adjustments from each line item in the pro forma condensed combined financial statements together with information explaining how the adjustments were derived or calculated.

Note 1. Pro Forma Adjustments

Balance Sheet

The following adjustments correspond to those included in the pro forma unaudited condensed combined balance sheet as of September 30, 2020:

(a)    The following reflects the use of cash on hand and the drawdown on the 2018 Revolving Credit Facility to reflect the financing of the acquisition.

(in thousands)Boa Acquisition
Cash $99,225 
Revolving credit facility300,000 
$399,225 



(b)    The following reflects the adjustments necessary to reflect: (i) the allocation of the purchase price to inventory, property, plant and equipment, intangible assets, goodwill and the related deferred tax liability resulting from the step up in basis and; (ii) the assignment of noncontrolling shareholder interest derived from the equity value contributed by noncontrolling shareholders. The adjustment to inventory represents the estimated adjustment to step up Boa's finished goods inventory to fair value. The fair value was determined based on the estimated selling price less the selling costs and a normal profit margin on those selling efforts. After the acquisition, the step-up in inventory value will increase cost of revenues over approximately three months as the inventory is sold. This increase is not reflected in the pro forma condensed combined statements of operations because it does not have a continuing impact.

(in thousands)September 30, 2020
Inventory$508 
Property, plant and equipment6,460 
Intangible assets232,708 
Goodwill263,483 
Deferred tax liability(62,315)
Noncontrolling interest(61,634)
$379,210 








(c)     To reflect the adoption of Accounting Standards Update No. 2016-02, Leases ("Topic 842").


(in thousands)September 30, 2020
Right-of-use asset13,105 
Lease liability - current2,600 
Lease liability - long-term10,505 
13,105 


(d)     Represents the elimination of accumulated other comprehensive income of Boa.

(in thousands)Boa
Accumulated other comprehensive income$(98)



(e)    Represents the elimination of historical stockholders' equity of Boa. Immediately prior to the acquisition of Boa by the Company, Boa paid a distribution of $72 million to shareholders. The elimination of historical stockholder' equity of Boa reflects the distribution. The elimination of historical additional-paid-in-capital has been combined with accumulated deficit in the accompanying condensed combined pro forma balance sheet as of September 30, 2020 to conform with the presentation of the Company's stockholders' equity.
(in thousands)Boa
Cash$72,000 
Retained earnings$(72,000)

(in thousands)Boa
Common stock$— 
Additional-paid-in-capital(11,944)
Retained earnings(7,973)
Total Stockholders' equity$(19,917)



Statement of Operations

The following adjustments correspond to those included in the unaudited pro forma condensed combined statements of operations for all periods presented:


(f) Depreciation expense

To record the adjustment to depreciation expense included in cost of revenues and selling, general and administrative expense for the revised property, plant and equipment amount associated with the preliminary allocation of the purchase price (in thousands):

Cost of revenuesFor the year ended December 31, 2019For the nine months ended September 30, 2020
Historical depreciation expense$(1,293)$(917)
Revised depreciation expense1,319 989
$26 $72 

Selling, general and administrative expenseFor the year ended December 31, 2019For the nine months ended September 30, 2020
Historical depreciation expense$(2,466)$(2,019)
Revised depreciation expense2,561 1,921 
$95 $(98)
(g) Management fee
To record the annual management fee payable to Compass Group Management (our Manager) calculated as 1% of the aggregate purchase price of Boa.

(in thousands)For the year ended December 31, 2019For the nine months ended September 30, 2020
Management Fee$4,540 $3,405 


(h) To record the adjustment to amortization expense for the revised intangible assets associated with the preliminary allocation of the purchase price. See Note 2 for the detail on intangible assets acquired.

(in thousands)For the year ended December 31, 2019For the nine months ended September 30, 2020
Historical amortization expense$(223)$(184)
Revised amortization expense15,601 11,701 
$15,378 $11,517 

(i) To record the interest expense associated with the $300 million of revolver borrowings used to fund the acquisition, offset by lower commitment fees (unused fees) on the revolving credit facility. The annual interest rate assumed was 3.25% for the revolving credit facility based on the average rate at September 30, 2020, and the commitment fee was 0.25%.


(in thousands)For the year ended December 31, 2019
Revolver borrowings$300,000 
3.25 %
$9,750 
Less: Commitment fee$300,000 
0.25 %
$750 
Revised interest expense$9,000 
For the nine months ended September 30, 2020
Revised interest expense - 9 months$6,750 

(in thousands)For the year ended December 31, 2019For the nine months ended September 30, 2020
Interest expense$9,000 $6,750 


(j)    To record the noncontrolling interest associated with Boa's net income for the periods presented.

(in thousands)For the year ended December 31, 2019For the nine months ended September 30, 2020
Boa Net Income$18,821 $18,367 
Noncontrolling interest ownership percentage18.1 %18.1 %
$3,411 $3,328 


Note 2. Purchase Price Allocation and Valuation Assumptions

The following table summarizes the preliminary purchase price for the Boa acquisition (in thousands):

Acquisition Consideration
Gross purchase price$454,000 
Working capital adjustment - preliminary(1,076)
Other adjustment(2,592)
Cash acquired - preliminary6,600 
$456,932 
Less: Transaction costs2,517 
Net purchase price$459,449 

The purchase price is preliminary and is subject to adjustment based upon the difference between the estimated net working capital to be transferred and the actual amount of working capital transferred on the date of closing. The initial purchase price has been allocated to the acquired assets and assumed liabilities based on estimated fair values. The purchase price allocation is preliminary pending a final determination of the fair values of the assets and liabilities. The table below provides the provisional recording of assets acquired and liabilities assumed as of the


acquisition date. The amounts recorded for inventory, property, plant and equipment, intangible assets and goodwill are preliminary pending finalization of valuation efforts.

Amounts Recognized as of the acquisition Date
(in thousands)Preliminary
Assets:
Cash$7,677 
Accounts receivable, net2,065 
Inventory, net5,203 
Property, plant and equipment15,432 
Intangible assets236,700 
Goodwill257,743 
Other current and non-current assets19,813 
Total assets544,633 
Liabilities and Noncontrolling Interest:
Current liabilities$10,816 
Other liabilities131,402 
Deferred tax liabilities62,315 
Noncontrolling interest61,634 
$266,167 
Net assets acquired$278,466 
Intercompany loans119,349 
Noncontrolling interest61,634 
$459,449 
Transaction costs incurred$2,517 

The preliminary allocation presented above is based upon management's estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are estimated at their historical carrying values. Property, plant and equipment is valued through a preliminary purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The Company does not expect the goodwill balance to be deductible for tax purposes.

The identified intangible assets are definite lived intangibles and will be amortized over the estimated useful life assigned to the underlying intangible asset. The intangible assets preliminarily recorded in connection with the Boa acquisition are as follows (in thousands):



Intangible AssetsAmountEstimated Useful Life
Tradename$84,300 20 years
Technology72,900 10 - 12 years
Customer Relationships73,000 15 years
In-process research and development6,500 18 years
$236,700 

Note 3. Earnings Per Share
Basic and fully diluted earnings per Trust common share is computed using the two-class method which requires companies to allocate participating securities that have rights to earnings that otherwise would have been available to common shareholders as a separate class of securities in calculating earnings per share. The Company has granted Allocation Interests that contain participating rights to receive profit allocations upon the occurrence of certain events, and has issued preferred shares that have rights to distributions when, and if, declared by the Company's Board of Directors. The calculation of basic and fully diluted earnings per Trust common share is computed by dividing income available to common shareholders by the weighted average number of Trust common shares outstanding during the period. Earnings per common share reflects the effect of distributions that were declared and paid to holders of the Allocation Interests, and distributions that were paid or cumulative on preferred shares during the period.
Reconciliation of pro forma net income (loss) from continuing operations available to common shares of Holdings
The following table reconciles net income (loss) attributable to the common shares of Holdings:
(in thousands)Year endedNine months ended
December 31, 2019September 30, 2020
Pro forma net income (loss) from continuing operations attributable to Holdings$(59,943)$7,707 
Less: Distributions paid - Allocation Interests60,3699,087
Less: Distributions paid - Preferred Shares15,12517,633
Less: Accrued distributions - Preferred Shares2,3152,869
Pro forma net loss from continuing operations attributable to Holdings$(137,752)$(21,882)
Pro forma earnings per share - continuing operations
Year endedNine months ended
(in thousands, except per share data)December 31, 2019September 30, 2020
Pro forma net loss from continuing operations attributable to Holdings$(137,752)$(21,882)
Less: Effect of Contribution based profit - Holding Event5,6595,134
Pro forma loss from Holdings attributable to common shares$(143,411)$(27,016)
Basic and diluted weighted average common shares of Holdings59,90062,556
Basic and fully diluted pro forma income (loss) per share attributable to Holdings
Continuing operations$(2.39)$(0.43)