Compass Diversified (CODI) Q3 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Compass Diversified's Third Quarter 2020 Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Matt Berkowitz of the IGB Group, for introductions and the reading of the safe harbor statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified's Third Quarter 2020 Conference Call. Representing the company today are Elias Sabo, CODI's CEO; Ryan Faulkingham, CODI's CFO; and Pat Maciariello, COO of Compass Group Management. Before we begin, I would like to point out that the Q3 2020 press release, including the financial tables and non-GAAP financial measure reconciliations are available at the Investor Relations section. On the company's website at www.compassdiversified.com. The company also filed its Form 10-Q with the SEC today after the market closed, which includes reconciliations of non-GAAP financial measures discussed on this call and is also available at the Investor Relations section of our website. Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income in the company's financial filings. The company does not provide a reconciliation of its full year expected 2020 adjusted EBITDA or 2020 payout ratio because certain significant reconciling information is not available without unreasonable efforts. Throughout this call, we will refer to Compass Diversified as CODI or the company. Now allow me to read the following safe harbor statement. During this conference call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI and its subsidiaries, words such as believes, expects, plans, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussion in the Form 10-K as filed with the SEC for the year ended December 31, 2019, and as further updated in the forms 10-Q as filed with the SEC for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020, as well as in other SEC filings. In particular, the domestic and global economic environment as currently impacted by the COVID-19 pandemic has a significant impact on our subsidiary company. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. At this time, I would like to turn the call over to Elias Sabo.

Good afternoon. Thank you all for your time, and welcome to our third quarter earnings conference call. Before discussing our results, I would like to take a brief moment to acknowledge the continued impact of the COVID-19 pandemic. This year has been challenging in many ways for so many people, and we hope that you and your families are well in managing through this period of change. Despite the challenges brought on by the pandemic, I am pleased to report that our third quarter results substantially exceeded our expectations. Including Marucci's results from January 1, 2019, pro forma consolidated subsidiary adjusted EBITDA of $76.9 million exceeded prior year by 10%. This outperformance was driven by our branded consumer businesses, which produced pro forma consolidated revenue and adjusted EBITDA growth of 15% and 42%, respectively, over prior year. Looking back on the past few months, I am incredibly proud of our team and the work we have done to position our subsidiaries for long-term success while driving value for our shareholders. Notably, we closed on the acquisition of BOA Technology, our second platform acquisition of the year. As we continue to transform our portfolio, BOA joins our lineup of market-leading branded consumer businesses, including Marucci Sports, which we acquired in April. The ability to source, finance and close these strategic acquisitions amid the height of the pandemic is a clear testament to our differentiated permanent capital model as compared to the traditional private equity model employed by our peers. Throughout 2018 and 2019, while others in the industry were aggressively deploying capital, our permanent capital approach allowed us to be patient. Instead, we capitalized on favorable market conditions and opportunistically divested 2 of our subsidiaries and used the proceeds to repay debt and strengthen our balance sheet. Now in 2020, the pandemic has created market dislocation, and our team has pivoted to a more aggressive acquisition strategy, while peers have struggled to access the credit markets. Our strong results in the third quarter and year-to-date period reflect the significant advantages of our model of owning a diverse set of niche, market-leading companies that serve a variety of end markets. The benefits of diversification have never been more pronounced in reducing the volatility in our financial results, and the addition of BOA and Marucci only serve to further enhance that diversification and the breadth of end markets served. In addition to our capital allocation accomplishments over the past couple of years, I am also proud of the significant strides we have made in enhancing our management talent and depth across our subsidiary company. During the third quarter, we promoted Jason Frame to CEO of Ergobaby. Jason is a talented and experienced executive who has worked with CODI for many years, first, in his capacity as CFO of CamelBak and most recently as CFO of Ergobaby. Additionally, we announced that Craig Carnes would be assuming the role of CEO of the Sterno Group, following Don Hinshaw's planned retirement at the end of the year. I want to thank Don for all his contributions to Sterno and CODI over the years. We look forward to continuing to work with him in his capacity as a Director of Sterno. We have the utmost respect for both Craig and Jason and are highly confident that both will succeed in their new roles. Our push to digitize our subsidiary businesses has further enhanced our financial results. Across all of our businesses, we have been building our digital presence and, where possible, reducing our reliance on physical infrastructure. The pandemic has created a seismic shift towards digitally enabled businesses, and our strong performance in 2020 is the culmination of a significant investment of time and resources over the past few years to digitally transform our subsidiaries. We remain focused on further modernizing our subsidiaries and enhancing their digital capabilities as we believe that increased consumer demand for online retail will last long after the pandemic has been contained. While our results exceeded our expectations in the third quarter, our subsidiary companies continue to see the impact of the ongoing pandemic. Certain of our companies have experienced the sudden decline in revenue due to strain on their end markets, while others have experienced a large increase in demand that has caused stress throughout their supply chain. And across most of our subsidiaries, we struggle to hire additional human capital. I would like to thank each of our subsidiary management teams for their exceptional service, leadership and dedication during these challenging times. Now turning to our financial results. Consolidated subsidiary pro forma revenue for the third quarter increased by 3.9% to $419 million, and consolidated pro forma adjusted EBITDA increased by 10% to $77 million. Of our 9 subsidiaries, 6 showed growth over prior year and virtually all of our companies exceeded our expectations. And although we did not close on BOA Technology until after the third quarter, BOA also produced results that were ahead of our expectations. Management estimates that BOA produced revenue and EBITDA growth of 20% and 67%, respectively, during the third quarter. And on a year-to-date basis, revenue was flat and EBITDA was up 5%. We generated $43.5 million of cash flow available for distribution and reinvestment, which we refer to as CAD, during the third quarter of 2020 as compared to $30.2 million of CAD in the third quarter of 2019. This growth of 44% far exceeded our expectations. However, as Ryan will detail in his section, our third quarter CAD was boosted by a cash tax reversal from the second quarter at Velocity Outdoor. Even without this cash tax reversal, our CAD significantly exceeded our expectations. On a year-to-date basis, our CAD of $74.7 million exceeded prior year-to-date of $74 million and covered our distribution payments to common shareholders of $68.3 million. Turning to guidance. Our outlook for the coming months continues to change every day due to the ongoing pandemic, which means continued uncertainty and limited visibility. While continued shutdowns of certain areas of the economy could negatively impact our results more than we currently anticipate, we felt it was important to provide our shareholders and capital partners with some visibility into our expected performance. Please note that our guidance includes both Marucci and BOA as if they were acquired on January 1, 2020. For full year 2020, we anticipate pro forma adjusted consolidated subsidiary EBITDA of between $270 million and $280 million. For comparison purposes, excluding BOA, we expect full year 2020 pro forma adjusted consolidated subsidiary EBITDA of between $240 million and $250 million as compared to previous guidance of between $210 million and $240 million, reflecting an increase of $20 million at the midpoint or an improvement of 8.8%. We anticipate a CAD payout ratio for the year of 100% to 90%, a substantial improvement over previous guidance of 140% to 120%. Notably, we now expect to cover our annual distribution, notwithstanding the economic headwinds that exist due to the pandemic. As Ryan will detail later in his section, we are forecasting an increased amount of capital expenditures in the fourth quarter as many of our businesses have reduced their capital expenditure spend throughout the year but now, with improved performance, are seeking to invest capital in areas that will strengthen their competitive positioning. With that, I will now turn the call over to Pat.

Thanks, Elias. Before I begin on our subsidiary results for the quarter, which exceeded our expectations, I want to touch generally on the continued effect of the pandemic throughout our subsidiary companies. Similar to last quarter, our branded consumer businesses continued to benefit from increased demand in outdoor categories and, as a result, experienced strong sales and earnings growth. Our niche industrial businesses also exceeded our expectations as a group, though sales and earnings continue to face headwinds predominantly due to work stoppages and slowdowns in the aerospace and hospitality industries. Now on to our subsidiary results for the quarter. I'll begin with our niche industrial businesses. For the third quarter of 2020, revenues declined by 8.1% and EBITDA decreased by 18.3% over the comparable quarter in 2019. For the year-to-date period, revenues declined by 9.1% and EBITDA decreased by 16.1% over the comparable period in 2019. Advanced Circuits continued its steady performance with EBITDA in the quarter growing 2.3% over prior year. The growth CapEx investment we made last year in a new facility in Chandler, Arizona continue to provide benefits as growth in this advanced manufacturing facility offset some weakness in sales of smaller orders typically associated with engineering students and hobbyists driven partially by school closures. Arnold Magnetics EBITDA declined in the quarter from $4.4 million last year to $1.3 million in the current quarter. Arnold's performance was impacted partially by severance and related charges as the company works to adjust its workforce to appropriately respond to the decreases in demand in its aerospace and oil and gas end markets. As we touched on last quarter, we believe the longer-term prospects for Arnold remains strong. However, some of the company's end markets will likely face continued challenges due to the effects of the pandemic and are unlikely to rebound fully in the near term. Foam Fabricators grew by 15.1% in the third quarter. Though the company benefited from the add-on acquisition of Polyfoam Corporation at the beginning of the quarter. Foam Fabricators also experienced improved performance in its core business in both earnings and EPS pounds processed. The Sterno Group's EBITDA in the third quarter was down 27% from the year ago period. Sterno performed better than our expectations in the quarter as the company's consumer business continue to experience elevated demand for its line of wax and essential oil products. Core catering sales of chafing fuel and related products remain challenged. We expect this segment to remain depressed for some time as large gatherings continue to be discouraged. Sterno continued to develop its full line of hand sanitizer products. While sales of these newly introduced items in the third quarter declined sequentially due to significant inventory of product in the supply chain, we remain encouraged by the prospects of this new market for Sterno. Now turning to our branded consumer businesses, which continue to benefit from ongoing consumer demand in outdoor categories. Our results are presented as if we own Marucci from January 1, 2019. However, they do not include the results of BOA, which was acquired following the end of the quarter. For the quarter of 2020, pro forma revenues and adjusted EBITDA for these businesses increased by 15.2% and 42.3%, respectively, over the comparable quarter in 2019, significantly exceeding our expectations. For the year-to-date period, pro forma revenues and adjusted EBITDA increased by 7.8% and 17.7%, respectively, over the comparable period in 2019. Ergobaby's EBITDA was down 17% in the quarter from the year ago period. Several large Asian distributor partners reduced their third quarter and fourth quarter orders due to excess inventory on hand following pandemic-related shutdowns in the second quarter, which negatively impacted Ergobaby's results. End market demand in the most impacted Asian geographies recovered somewhat in the third quarter, but they largely remain below year ago levels. Reduced distributor orders will remain a headwind for the remainder of the year, negatively impacting the company's fourth quarter performance. However, we are encouraged by several planned new product introductions launching in the fourth quarter, and we're optimistic about the company's outlook in 2021. Liberty Safe's EBITDA was up an impressive 96% in the third quarter from the year ago period, significantly above our expectations. End-market demand online and at retailers remain strong for Liberty's products, and much of the company's production capacity remains filled into the first quarter of 2021. The management team and employees at Liberty continue to perform admirably as they work through the dual challenges of COVID-19 and significant increases in demand. Marucci's revenue in the third quarter increased by 31%, and EBITDA increased 81% as compared to the prior year period, significantly surpassing our expectations. The increase in revenues and profitability was driven by the launch of Marucci's new CAT9 line of bats and the gradual return of baseball during the quarter. We are pleased by the success of the launch and believe it affirms the strength of the Marucci brand and the quality of their products. As you may know, professional baseball resumed in the United States and had a successful regular and postseason. Youth baseball has returned at various levels in portions of the United States, though participation levels are not nearing those of 2019 and may not in the short term. Velocity Outdoor's EBITDA increased substantially in the third quarter, up 77% from the year ago period. Velocity's performance was better than expected, and continued consumer interest and outdoor activities drove added demand for all the company's products. Despite challenges placed on the supply chain and production capacity, management and the company's employees continue to adeptly handle heightened levels of demand. Despite Velocity's efforts, retail channels remain low on inventory, and we are working diligently to keep our wholesale partners in stock with adequate inventory levels. Finally, 5.11's EBITDA was up 24% in the third quarter from the year ago period and has increased 15% on a year-to-date basis. The company benefited from increased margins as a greater portion of its revenue was driven by DTC channels. While traffic and performance in the company's retail stores continue to face the impact of COVID-19 operating restrictions, 5.11's e-commerce business continues to exceed our expectations. We believe that numerous macro trends are impacting the 5.11 consumer brand positively and that the company has even greater opportunities ahead. With that, I will turn the call over to Ryan to add his comments on our financial results.

Thank you, Pat. Before I discuss our consolidated financial results for the third quarter of 2020, I want to highlight our third quarter distributions that were recently paid to shareholders. On October 22, 2020, we paid shareholders a cash distribution of $0.36 per common share, representing a current yield of approximately 8.4%. A few notable highlights of our most recent common distribution. One, this marks our 58th quarter in a row that we have paid a distribution. And since our 2006 IPO date, we have paid more than $20 per share in cumulative distributions. Additionally, on Friday of this week, we will pay cash distributions of approximately $0.45 per share on our 7 1/4% Series A preferred shares and approximately $0.49 per share on our 7 7/8% Series B and Series C preferred shares. All 3 preferred distributions cover the period from and including July 30, 2020, up to, but excluding, October 30, 2020. Moving to our consolidated financial results for the quarter ended September 30, 2020. I will limit my comments largely to the overall results for our company since the individual subsidiary results are detailed in our Form 10-Q that was filed with the SEC earlier today. On a consolidated basis, revenue for the quarter ended September 30, 2020, was $418.9 million, up 7.9% compared to $388.3 million for the prior year period. This year-over-year increase primarily reflects strong sales growth at our branded consumer subsidiaries, Velocity Outdoor and Liberty, offset by Sterno and our own businesses most impacted by the COVID-19 pandemic. Consolidated net income for the quarter ended September 30, 2020, was $20.9 million. Consolidated net loss for the prior year's third quarter was $26.5 million and included an impairment charge at Velocity Outdoor of $33.4 million. CAD for the quarter ended September 30, 2020, was $43.5 million, up 44% from $30.2 million in the prior year period. Our CAD that we generated during the quarter was significantly above our expectations, primarily due to our strong third quarter EBITDA increase as compared to prior year. As Elias highlighted, the negative cash tax impact we had in the second quarter at Velocity Outdoor reversed in the third quarter. Thus, we had no cash taxes at the consolidated level, further contributing to our strong cash performance. As we've mentioned many times in the past, our cash taxes are extremely difficult to predict quarter-to-quarter. However, we are able to do so more easily on an annual basis. Other factors impacting our CAD in the third quarter compared to the prior year includes slightly higher CapEx spend and higher preferred share distributions as a result of our Series C issuance in November of 2019. As of September 30, 2020, we had over $175 million in cash, approximately $600 million available on our revolver and our leverage was below 2x. As you are aware, we closed on the BOA acquisition on October 16. To fund this transaction, we used cash on hand, a $300 million draw on our revolver and an investment by BOA minority shareholders of $61.5 million. Pro forma for the BOA funding, our balance sheet remains strong with our leverage at approximately 3.2x. Our revolver availability is approximately $300 million today, providing substantial liquidity. And as previously communicated, we have the ability to upsize our revolver capacity by an additional $250 million. We stand ready and able to provide our subsidiaries the financial support they need, make distributions to our preferred and common shareholders as well as move on compelling investment opportunities in this dislocated market as they present themselves. Turning now to capital expenditures. During the third quarter of 2020, we incurred $3.8 million of maintenance CapEx of our existing businesses compared to $3.3 million in the prior year period. During the third quarter of 2020, we continued to invest growth capital, spending $4.1 million in the quarter, primarily related to 5.11's long-term growth objectives. Growth CapEx in the prior year quarter was $4.3 million. Turning to our expectations for 2020. As a reminder, our quarterly operating and cash flow results can vary materially based on factors such as the timing of shipments of large orders or the timing of certain investments made before or after quarter end. Elias provided adjusted EBITDA guidance and our payout ratio expectations for the full year of 2020. I'd like to now provide guidance on capital expenditures and cash taxes. For maintenance CapEx, our estimate of spend for the full year of 2020, including Marucci and BOA from the date of acquisition, is between $15 million and $18 million. As Elias mentioned, our fourth quarter CapEx spend is forecasted to be higher than original expectations. Many of our businesses are experiencing improved performance and are, therefore, investing capital in areas that will strengthen their competitive positioning. For growth CapEx, our estimate of spend for the full year of 2020 is between $13 million and $15 million, primarily at 5.11. For 2020 cash taxes, we expect full year cash taxes to be between 7.5% to 8.5% of our subsidiaries' total adjusted EBITDA. This cash taxes percentage range is slightly higher than previous guidance given the outperformance at certain of our subsidiaries. Keep in mind, this percentage should be applied to full year 2020 total adjusted EBITDA and not quarterly. As we experienced in Q2 and Q3 with Velocity Outdoor, our cash taxes as a percentage of EBITDA can vary significantly quarter-to-quarter. With that, I will now turn the call back over to Elias.

Thank you, Ryan. I'd like to close by briefly discussing M&A activity and our go-forward growth strategy. As I mentioned earlier, we took steps in 2019 to prepare for the unexpected. Those decisions and our unique permanent capital structure have positioned us to not only weather the storm but also proactively execute on our growth strategy. We continue to have the balance sheet strength to support our companies as they operate in these highly unusual times. Our subsidiaries are leaders in their respective industries and are poised to gain additional market share in the months and years to come. We will continue to seek both platform and add-on acquisitions as we believe there are compelling opportunities for us to generate long-term shareholder value during market dislocation like we are currently experiencing. In addition, we will continue to invest in and enhance our subsidiary companies' competitive positioning, which includes supporting them as they build and grow their digital transformation strategy. Our differentiated strategy has set CODI apart for more than a decade, and it remains consistent as we navigate the uncertainty ahead and position our diverse group of subsidiary companies for long-term success. We are intensely focused on executing our proven and disciplined acquisition strategy, improving the operating performance of our companies, opportunistically divesting, enhancing our commitment to ESG initiatives across our portfolio and creating long-term shareholder value. With that, operator, please open up the lines for Q&A.

Your first question is from the line of Larry Solow.

Congrats on a very nice quarter. Just a broad-brush question, and maybe -- I realize that you guys are in a lot of different industries. But clearly, you exited Q2 with a lot of momentum and maybe some pent-up demand. As you exited Q3, it seems like a lot of industries are coming back. There are some exceptions, obviously, hotel business, catering stuff not coming back any time soon, but it seems like a lot of things are coming back or normalizing even with COVID still out there, obviously. As you compare -- do you feel like -- how do you feel like exiting Q3 versus Q2? Do you feel like even better than you did, about the same? Any way to sort of answer that in a broad-brush?

Yes. Larry, it's Elias, and thank you for the question. I would say you're right, in Q2, we exited feeling pretty confident. Clearly, the caveat to what I'm about this day is the pandemic creates such incredible uncertainty that it's really hard to give guidance. And at any one day, you may feel different than you do the next day. I would say today, we woke up to the markets down, whatever, 900 points, and France going into a shutdown and Germany, I guess, having modified shutdown. So there's clearly impacts that are outside of our control. That being said, I would say we feel similar to how we felt at the end of Q2. I mean the businesses largely are running really well. The same trends that existed coming out of Q2 are really remaining intact in Q3. Outdoor continues to be a category that is being benefited significantly. Our industrial businesses that cater to certain end markets like foodservice and aerospace, Sterno and Arnold in particular, are finding the same struggle. So I would say trends remain intact. Now clearly, from quarter-to-quarter, Larry, there can be unique things that happen. For example, we have the CAT9 launch at Marucci. That's going to be a net positive when you have a new launch of something that is a 2-year planned launch. It's a 2-year cycle. So we don't expect that kind of result to happen in the fourth quarter. But when you're talking about large trends, I would say the trends that were here before continue to exist. I think we're getting a little bit better at managing some of our supply chain issues where demand is suddenly boosted. But we did want to call out the continuation of the problem of hiring additional human capital talent. That problem continues, especially at some of the manufacturing job level, and so that does put some capacity constraints on us, the same way that it did after the second quarter.

Okay. Great. I appreciate that color. Just a couple on the segment level, the holding level. Just at 5.11, obviously, you guys did -- kept sales flat in the quarter. And obviously, the general apparel industry, I'm sure, is still down significantly. EBITDA actually grew 25%. And I'm sure part of that is a shift to the online presence. But just maybe you can discuss -- and I realize it's somewhat small numbers, $1 million is 15% of growth, but still pretty commendable to grow EBITDA at 25% on a flat sales level. Any color on that, more color on that?

Yes. This is Pat. I mean I'd say you hit the nail on the head with the -- you hit the nail on the head, as you talked about the increase in margins. That was a big driver of the growth. Honestly, our companies are doing a good job controlling costs in COVID and in 5.11, it's disciplined. Certain of those costs as it relates to travel and entertainment are limited, and that has a net benefit, and it's kind of a culmination of those things, I'd say, Larry, if that makes sense.

Yes. No, absolutely. And just on the new store openings, I know you mentioned -- or Ryan mentioned that the growth capital, most of it is going into 5.11. I don't know if you want to give specific numbers, but has that sort of been picking up? Since I know in Q2, sort of it, obviously, stopped temporarily. And have you found more opportunities with sort of the real estate environment not doing so well?

No, we have. And I'm actually looking for the exact number because I don't want to misquote it, and I don't have it here. But we have, and we'll be a little bit north of 70 stores. 73 stores is our sort of view towards the -- at the end of 2020 versus sort of 61 in 2019. So we're finding opportunistically good deals. We've slowed down our growth a little bit this year, obviously, as we kind of halted it for a few months there. But opportunistically, we're looking for good deals and continue to grow. And we're getting -- we remain -- the ROI and our return on these investments continue to be very high.

Yes. And Larry, I would also just mention that in the quarter and expected going forward, there continues to be a lot of technology investment, that is growth CapEx, we categorize as growth CapEx. Our online business, we've said, is kind of growing rapidly, circa it was doubling for a big part of the year and kind of continues with that trend. And so to support that, you really do need to create more robust online, more robust technology capability. But I would say, even broader than that, part of it is supporting online, but part of it is supporting omnichannel, the ability to ship from store. I think we're now up to -- and this is a small number, but we went from 0 to 3 stores that we're able to ship from, and we expect to be somewhere north of 10 by the end of the year. So we're making progress against some of those initiatives. It does take a little bit of time, but you have to invest in technology in advance of being able to do this. And that really relieves some of the distribution and supply constraint problems that you can have from the main facility. It creates a lot of efficiency in the system. So these are good long-term growth initiatives that we continue to put in. I'd say even beyond long term, there are kind of near-term and intermediate-term growth initiatives, but we are making a significant amount of technology spend at 5.11 in particular that is part of that growth CapEx in Q3.

Your next question is from the line of Kyle Joseph.

Congratulations on another good quarter. Ryan, just from a modeling perspective, and I know it sounds like CAD won't be impacted by the tax impact you had talked about in the quarter, and it sounds like it was really essentially a moving part of CAD from the second quarter to the third quarter. But could you kind of -- could you quantify the benefit in the third quarter just so we can kind of get a framework for what the run rate CAD would have been?

Yes, sure, sure. So rough -- I'll give you kind of rough numbers. But in the second quarter, our cash taxes were higher, which negatively affects CAD, by about $6.5 million. That -- and then in the third quarter, that reversed but not the full amount. And therefore, we had a benefit to CAD of roughly $5 million. So when you think about it on a year-to-date basis, the cash taxes at Velocity are appropriate given its taxable income. And on a full year basis, it will, too. It was the nuance of GAAP that created that large swing because they -- Velocity has massively outperformed their budget. Is that helpful?

That's perfect, exactly what I need. And yes, it's a good segue to my next. So on Velocity Outdoor, I think in your prepared remarks, you talked about last year that, at this point, you've taken an impairment charge on the business. And to your point, it's massively outperforming their budget. So what's really driven the recovery there? Is it COVID? Is it some of the management changes you guys made? And if you can give us the outlook for the sustainability of that recovery.

Yes. So I think, Kyle, the -- clearly, the management changes were essential to the performance improvement that we've had. The team that we brought in here is performing at an exceptional level. And I don't want to dismiss the challenges that happen when demand ramps up as quickly as it has. The amount of challenges that our team has, not only at Velocity, but at other of our subsidiaries, 5.11, Liberty, it really is a lot. You're talking about stressing your supply chain and stressing your human capital, a lot of overtime hours, trying to hire and bring onboard new people. So there are a lot of challenges that this management team has been really adept at managing through. So I would, first and foremost, say without them in these seats, I don't know we would have performed nearly this well. Now the backdrop is there's just a large increase in the amount of outdoor activity that is happening and a lot of people that have come back into the sport. And so we think that is more -- is it all sustainable? I don't know. I mean no one has a crystal ball. I would say we think it's more sustainable than not. I think we also are comparing to a period where results were very depressed. And so we had 2 of our retail partners merged together. That created incredible disruption for us as a supplier to them over 2018 and mostly over 2019. So that was a big issue. So now with that largely behind us, we would have expected to see some type of pickup that was pretty substantial. I would say on top of that, we had a real effort to start to build a direct-to-consumer practice, which has lapped under prior leadership, and those efforts are really gaining traction with very strong margins. And so this is sort of a perfect time for us to be able to launch in there. So it's a culmination of a lot of things that are driving the results, I would say, yes, end demand is up. But I think our business is performing beyond just end demand being up because of some of those -- whether it be market changes, kind of our customers no longer having the headwind of merging together, things of that, that may have been onetime more distorting negatively in 2019. So we think this is more sustainable. And going forward into fourth quarter, as Pat had mentioned, inventory in our retail channel partners is very low right now. In fact, if anything, it could be causing us some lost sales because we just don't have adequate product on the shelves. But I think that also bodes well for our performance as we look into fourth quarter and into 2021, just bringing our inventory levels back up to kind of normal levels and capturing sales that we may be missing right now.

Got it. That's very helpful. And then one last one for me and really just trying to gauge your appetite for future acquisitions, whether they be platform or add on. And so 2 parts to this question, first, in terms of your balance sheet pro forma, the BOA closing and your -- it sounds like leverage is around the 3.2x area. And then also in consideration of competition, I think it's fantastic, you guys were able to complete 2 platform acquisitions when markets were really disruptive between March and today. But from everything we track and we follow in terms of sponsor activity, it seems like things are normalizing. So I guess, first, in terms of your own balance sheet but also in terms of what seems to be a normalizing sponsor market out there, your appetite for acquisitions from here.

Yes, I'm going to let Ryan speak to our balance sheet, which we feel very comfortable with and still has capacity, but I'll let him speak to that. Let me address your second question, which is the sponsor activity and what we're seeing. We were really quick to move and have the balance sheet strength and capital market access, as you guys know, and we're able to close on Marucci and BOA. And I would say that was when the markets were most disrupted. I think it depends, Kyle, where you're looking right now. So there are certain segments of the M&A markets that are coming back and are coming back with real strength. And then there are certain areas of them that continue to stay really to depressed. And so I think it depends on where you are in the economy and how impacted your results were, whether or not you're able to attract capital, I think it depends on how big you are, how differentiated. So there's a lot of qualitative factors that are out there right now. But your holistic statement of private equity is starting to become more active and, as a result of that, is our competitive advantage somewhat dissipating. I would say the answer to that is yes. And so we feel good. We put $700 million, roughly -- whatever, $654 million of capital to work so far this year. We've achieved what our goals are. I think we were able to find some add-on acquisitions to the 9 platforms we have right now. That would be good, accretive, value-enhancing ways for us to deploy capital. I would say what we're seeing trading in the market right now in terms of new platforms doesn't seem overly interesting to us. So we don't have, I would say, a pipeline that is quite as robust as what it was earlier in the year with this high quality of opportunities. But things can change pretty quickly. And again, I'll go back to what I said when Larry asked his first question, the pandemic is creating a heightened uncertainty, and so what we may have heard over the last 2 weeks when people felt a vaccine was close or therapeutics were close or the economy was going to stay open globally and start to regain steam, that could actually change really quickly like it did today when we heard some European economies are already starting to close down. Chicago just had all indoor dining closed. So we are in a really fluid market right now. And that definitely impacts M&A, right, confidence of buyers impact that dramatically. So I think you're right, PE is picking up. We forecast that private equity in 2021 will continue to increase the net activity level, and we'll have to adjust and find good opportunities deploy capital against that backdrop. Ryan, you want to speak a little to our balance sheet capacity?

Yes, sure. Thanks, Elias. So as I said in my remarks, Kyle, and as you highlighted, we're roughly 3.2x leveraged. As a financial policy, we've communicated last year that 3.5x is a comfortable area to be. We're obviously below that, so feel very good about our leverage. Our performance continues to improve. So think about that denominator as continuing decline, which should only help our leverage levels. And in terms of liquidity, we've got $300 million available on the revolver. We still have the ability to upsize that by $250 million. So plenty of liquidity to move on transactions whether they be platform or add-on acquisitions. So I feel like we're in a great, great position balance sheet-wise.

Our next question is from the line of Matt Koranda.

Just wanted to cover a few segment questions. So first on Marucci, just wanted some help with the drivers of strength there in the quarter. I know you guys mentioned the bat launch, which obviously was probably pretty helpful. But just was there any pent-up demand or like a shift from 2Q into 3Q? I know there's probably quite a bit of seasonality in the business, and we probably shouldn't pull forward sort of 28% EBITDA margins into the off-season. But just wanted to get a sense for the drivers of strength and then how we should sort of be modeling sort of revenue cadence and seasonality in that business going forward in the 4Q and next year.

Yes. I mean COVID is changing a lot of the seasonality, right? And I would say we're not 100% sure on how the seasonality will move on this. I would say was there a little bit of shift from Q2 into Q3, maybe a little. But really, the CAT9 launch exceeded our expectations. The market reception to it was very positive. And that was one of the drivers. Obviously, we're not going to repeat a launch of that size this quarter, but that was one of the drivers. Elias, you have something to add?

Yes, Matt, I'll just say one thing about Marucci because I think it's -- when we acquired this business, it was at the depths of the pandemic. And prior to that, this was a business that was growing north of 20% annually on the revenue line. And we know that is massively faster than what the market was growing. And then everything shut down in youth sport and in baseball, and Marucci wasn't spared of that. And I think there were some real concerns in Q2. But what we had looked at and what we saw there was an extraordinary brand that had a lot of authenticity from the number of Major League Baseball players that were swinging their bats and how that translated into the youth sport category and the adoption. And I think what Q3 has proven more so to us. And as you mentioned, could there be a little bit of seasonal shift here or there? Yes. But I would say against the backdrop of the fact that youth sports hasn't fully reopened, right? In California, we're not even getting travel baseball anymore, which is the category where the company goes into. So this is a company that is a disruptor in its industry. It is an awesome brand. It is an exceptional management team. It's disrupting the sales channels by which it was able to deliver its product. And that manifested in an incredibly successful product launch, really the best in the company's history despite this backdrop. And so will things shift a little bit here and there? Yes. The pandemic is going to do that. It's going to create really weird seasonality 2020, probably in 2021. But I think what we'd like to -- the message out of this is the things that we saw in this business prior to the pandemic and which gave us the confidence to close this when we were right in the depths of the pandemic and the entire economy was shut down really shined through in Q3, and we couldn't be more excited to own this brand and what we believe is its future potential.

Makes a lot of sense. And then just one follow-up on Marucci as well. Obviously, you guys have a lot of institutional knowledge there on building an omnichannel business in 5.11. What learnings can you take from 5.11 and apply to Marucci in terms of the omnichannel and more of a DTC approach at Marucci?

I would say, and I'll let Dave to comment. Dave, you can comment. But they're ahead of where 5.11 was when we purchased 5.11 as a percentage of sales online, kind of as they go to market online. They've actually done a good job, and we're just working to -- not surprisingly, we're just working to support them and augment them. We will be making an investment, and it's not the scale of the 5.11 investments, but we will be making investment late this year and early next year in some additional IT infrastructure to help them with that. And Dave, do you have any other comments on that?

Yes. The only other thing I'd add is a couple of other aspects that are of direct-to-consumer in addition to website. They have a nice business and a rapidly growing business in team sales, and they have what they call locker room, which is a direct-to-consumer to teams. And then also a small part of the business but I think has some exciting opportunities, what they call clubhouse, which is kind of a combination [ batting cage ] but also retail experience, which is mostly on a franchise basis. But those are the other components of DTC that we're excited about and we think have nice growth opportunities.

Very helpful. And then just if we can shift gears over to BOA, I wanted to kind of cover -- one, I mean, I know it hasn't been that long, but how has the onboarding process been since the close? And then you guys referenced a really strong third quarter at BOA, which obviously isn't included in these results here, but wanted to get a sense for drivers of the 20% revenue growth and the 67%, I think, EBITDA growth that you guys referenced at BOA. I mean very strong pull-through. What's creating that margin expansion, if you will, and the pull-through that they're getting?

Yes. We don't think -- I want to be clear, we expect this business to grow and we have a good view of the adjacencies that are both close and the ones that are a little bit further away, over the next several years. And we're confident that the business will be a strong grower for us. There's a lumpiness to the business, however, quarter-to-quarter, month-to-month, that drives some of that, and that kind of drove Q3-over-Q3 last year. You might see that in Q1 going -- hopefully, it won't be a reversal of that, but you'll see that in Q4, just some lumpiness. But the long-term trends, the trends we see in bookings, the trends we see in platforms that we're on and in products that we're on in the market continue to be very positive. So that's just some lumpiness but, again, a good solid growth, consistent with the multiple we paid for it, is expected and continues to be expected. As far as the onboarding, you're right, it is relatively new into the deal, but these are great people, and this is a great team. And their positioning is just as kind of we thought it would in diligence. And we're all getting to know each other. And so far, so good.

Great. And then just one more, if I can sneak one in really quickly, guys. Sorry for so many questions. But on 5.11, I'm curious, just heading into holiday and winter, there's been a lot of, I guess, industry commentary out there saying that outerwear as well as winter sports products are doing well. I know these guys aren't squarely in that category. But I was just curious to get your sense heading into 4Q, sort of if they see a lift from sort of increasing outerwear trends and adoption there. And what are the margin implications there in that type of scenario?

I can't point you to a specific product. I know we have some shoes that are coming out that are -- that people -- and some boots that people are very excited about. I can't point to a specific outerwear product off the top of my head. I do think 5.11 will continue to perform well in Q4. And I guess I wouldn't -- whatever margins you have in the model, I wouldn't necessarily shift them because of a push to outerwear or anything like that.

Your next question is from the line of Robert Dodd with Raymond James.

Congratulations on the quarter. Pretty good is an understatement. On your guidance, if I can, I mean you've talked a lot about uncertainty. The full year guidance for EBITDA that you've narrowed the range pretty considerably, now it's a $10 million range. Only 1 quarter left to go, obviously. But last quarter, it was $30 million range with 2 quarters left to go. So I mean that -- is there anything to be read in there in either your confidence in your ability to predict how these businesses are going to do over the fourth quarter, kind of Christmas holiday season, et cetera? Or maybe by the sound of it, with Velocity and Liberty, the revenue might be locked already. I mean you're fully booked. You're just trying to fill the supply chain's backup. So can you give us any color on the driver for why that range narrowed? And what that says about confidence about predictability?

Yes. I think, Robert, the -- and this is Elias. The -- we did bring down the range. Part of the range coming -- the narrowness of the range is just we have only 1 versus 2 quarters, right? So mathematically, that should narrow somewhat. We even brought it in a little bit more than that. I think your observation that in certain of our businesses, we have revenue mostly booked in the fourth quarter and maybe even beyond, that helps to get a better indication of where we're going to be running. So I think when we looked at everything, we just felt more comfortable that we were able to bring it down, that range down. I don't know that it necessarily means that there's any less uncertainty out there because uncertainty is unfortunately high given that governments are making decisions that we have no control over regarding the reopening. But I would -- so just, in general, the other thing is we've seen how our companies are able to perform within an environment that has significant restrictions imposed on it. And we talked about digital transformation in our companies. I think it has been lost over the years how much we've invested in both time and capital in enabling our companies to be able to conduct digital business. It may sound crazy, but a company like Advanced Circuits, they obviously have physical presence to produce a product. But virtually everything they do on the front end is done in an online capacity, right? And you go to someone like Liberty, and you say how do you deliver a 2,000-pound safe online and the fastest part of their growth by -- and I'm not talking about little numbers, by like order of magnitude, the fastest part of their growth is in online deliveries and how they've been able to manage through that. Just because it's a tough challenge, doesn't mean that our companies don't have to solve it. And so I think as we've been able to get more comfort with the way that our companies are able to operate in this environment and with a belief that now we're through October pretty much, and the operating environment isn't changing or hasn't yet changed, we will see in November and December, I think we just have a little bit more confidence. But I would say the decisions that can be made around COVID, which are outside of our control, continue to be an overhang and has likely been factored in -- or not likely, that has been factored into the low end of our range.

Got it. I appreciate that color. And then another one kind of leverage, right? 3.2x is, yes, not the high end of the range, not even the comfort level, as Ryan said, at 3.5x. But that probably means you're maybe one solid add-on acquisition away from being at the midpoint of the range or rather being at your kind of target, 3.5x. What would you say your comfort -- if the M&A market does continue opening up, if you see some opportunities on the add-on side, how high would you be willing to go in the short term? Short term is relative. And then tied to that, what would your -- how would you rank your tools for -- if you do go above 3.5x, bringing it down. Obviously, the preferred has been one of the tools. Historically, you've also sold businesses. And bluntly, the ROI in your branded consumer is much higher than the ROI right now in your industrials. So would some of those be on the block? Or would there be something else that you'd consider maybe even just pausing and kind of growing EBITDA into the leverage? Can you rank those kind of questions for me about how -- or the potential that leverage could go meaningfully higher and how you would address that if it were to happen? Not that it's a bad thing, it's just a question.

Yes. And I think, Robert, we try to keep in mind where we are in a cycle with respect to our leverage and what our target leverage is. And I think when we mentioned 3.5x as being target leverage, that's a good number that I would call a good mid-cycle number for us. We all feel we probably are closer to a trough right now in earnings than we are at a peak given where kind of the cycle, how it's played out. So I think that right now, just naturally, we would have a slightly higher propensity to take on more leverage and maybe go above midpoint. We have been up to 4x at one point in our history and we were later in the cycle. Now I would tell you that didn't feel overly comfortable and we moved pretty quickly to deleverage. But Ryan made a great point earlier, which is the denominator is growing, and we expect 2021 to show some solid growth. Again, we can't predict what's going to happen with the pandemic, but assuming that we start to get more containment of a pandemic, there's nothing that would suggest that our earnings aren't growing. And as we talked about in our presentation around the BOA transaction, the businesses we acquired this year in BOA and Marucci have been additive to our growth profile. So I think as we've been able to add more growth and as we have more confidence that leverage will be coming down organically with growth in EBITDA, it gives us more confidence in potentially going above 3.5x. Now would we go into the 4s? I don't think so. That's not a comfortable zone for us. But if we were in the kind of mid-, high 3s, I think given the growth that we're seeing in EBITDA and the fact that we now are creating -- I mean what I think is miraculous is the fact that we're in a pandemic, and we're going through something we've never experienced before. And yet we've now guided to be covering our distribution. So we're not using capital to support what our distribution is. And with growth next year, clearly, that should only further to enhance our cash flow production. And so those factors lead me to be a little bit more confident in being able to bring up kind of our leverage to facilitate a couple of add-ons and maybe a meaningful size one. To the extent we were to deleverage and look for more capital because we saw opportunities out there, I think -- and it's hard for us to rank order these, but I think you hit on them. I mean it goes to sale of businesses. And even though we are right now where we are in the cycle, the truth is everything is available for sale, it's all about a matter of price. So if we're able to yield a value that we like in our companies, we will divest them. And we've shown a willingness to do that in the past. Preferred has been a great source of nondilutive capital to us. I would tell you definitively with a $17 stock, common isn't part of that. And if something went horrifically wrong in the economy and earnings were falling apart, which we don't foresee, but we feel we are pretty significantly undervalued right now given the results that we've put up. And so I think our common stock would have to appreciate pretty dramatically for us to think of that as a tool to use. So really, as we think of levers to pull, it would be much more either on a divestiture or on issuance of preferred. Ryan, anything to add?

I think you hit on everything there, Elias. I think all those points are spot-on, so I've got nothing else. Thank you.

Okay. I appreciate it and I really appreciate the color last. And congratulations on covering the dividend this year, quite impressive.

Thank you. We're very proud of that.

Your last question is from the line of Derek Hewett with Bank of America.

I reiterate kind of congrats on a good quarter. Following up on Kyle's question earlier. CAD was, I think, $43.5 million, and I believe that there was a $5 million benefit from the Velocity cash reversal, so "normalized" is more of a kind of a $38.5 million CAD run rate. That being said, were there any other kind of onetime items or other noise to consider as we look at third quarter CAD, just given, I think even $38.5 million is a record number, kind of despite the challenging backdrop?

Nothing else meaningful, Derek. This is Ryan. It's really driven primarily by just really strong EBITDA performance.

I would now like to turn the call over to Elias Sabo for any closing remarks.

Thank you, operator. I'd like to take a moment to inform our shareholders, analysts and capital providers that our Investor Day will be held virtually on December 10. We will be highlighting our most recent acquisition, BOA, and we'll have remarks from its CEO, Shawn Neville. We will have a public announcement shortly but wanted everyone to mark their calendars. In the meantime, we hope everyone heads out and picks up a pair of shoes with the BOA Fit System and experiences firsthand its performance enhancing technology. As always, I'd like to thank everyone again for joining us on today's call and for your continued interest in CODI. We look forward to sharing our progress with you in the future. And with that, the call is over. Thank you, operator.

Thank you. That does conclude today's conference. Thank you for participating. You may now disconnect.