Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 
COMPASS DIVERSIFIED HOLDINGS
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-34927
 
57-6218917
 
 
(State or other jurisdiction of
incorporation or organization)
 
(Commission
file number)
 
(I.R.S. employer
identification number)
 
 
COMPASS GROUP DIVERSIFIED HOLDINGS LLC
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
001-34926
 
20-3812051
 
 
(State or other jurisdiction of
incorporation or organization)
 
(Commission
file number)
 
(I.R.S. employer
identification number)
 
301 Riverside Avenue
Second Floor
Westport, CT 06880
(203) 221-1703
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
 
Smaller Reporting Company
 
¨
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

As of August 1, 2018, there were 59,900,000 Trust common shares of Compass Diversified Holdings outstanding.
 



COMPASS DIVERSIFIED HOLDINGS
QUARTERLY REPORT ON FORM 10-Q
For the period ended June 30, 2018
TABLE OF CONTENTS
 
 
 
 
Page
Number
 
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
ITEM 3.
 
 
 
 
 
 
 
ITEM 4.
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 1A.
 
 
 
 
 
 
 
ITEM 6.
 
 
 
 
 
 
 
 
 


2


NOTE TO READER
In reading this Quarterly Report on Form 10-Q, references to:

the "Trust" and "Holdings" refer to Compass Diversified Holdings;
"businesses," "operating segments," "subsidiaries" and "reporting units" refer to, collectively, the businesses controlled by the Company;
the "Company" refer to Compass Group Diversified Holdings LLC;
the "Manager" refer to Compass Group Management LLC ("CGM");
the "Trust Agreement" refer to the Second Amended and Restated Trust Agreement of the Trust dated as of December 6, 2016;
the "2014 Credit Facility" refer to the credit agreement, as amended from time to time, entered into on June 6, 2014 with a group of lenders led by Bank of America N.A. as administrative agent, which provides for a Revolving Credit Facility and a Term Loan;
the "2014 Revolving Credit Facility" refer to the $550 million Revolving Credit Facility provided by the 2014 Credit Facility that matures in June 2019;
the "2018 Credit Facility" refer to the amended and restated credit agreement entered into on April 18, 2018 among the Company, the Lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto.
the "2018 Revolving Credit Facility" refers to the $600 million in revolving loans, swing line loans and letters of credit provided by the 2018 Credit Facility that matures in 2023;
the "2018 Term Loan" refer to the $500 million term loan provided by the 2018 Credit Facility that matures in June 2021;
the "LLC Agreement" refer to the fifth amended and restated operating agreement of the Company dated as of December 6, 2016; and
"we," "us" and "our" refer to the Trust, the Company and the businesses together.


3


FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, contains both historical and forward-looking statements. We may, in some cases, use words such as "project," "predict," "believe," "anticipate," "plan," "expect," "estimate," "intend," "should," "would," "could," "potentially," "may," or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control, including, among other things:

our ability to successfully operate our businesses on a combined basis, and to effectively integrate and improve future acquisitions;
our ability to remove CGM and CGM’s right to resign;
our organizational structure, which may limit our ability to meet our dividend and distribution policy;
our ability to service and comply with the terms of our indebtedness;
our cash flow available for distribution and reinvestment and our ability to make distributions in the future to our shareholders;
our ability to pay the management fee and profit allocation if and when due;
our ability to make and finance future acquisitions;
our ability to implement our acquisition and management strategies;
the regulatory environment in which our businesses operate;
trends in the industries in which our businesses operate;
changes in general economic or business conditions or economic or demographic trends in the United States and other countries in which we have a presence, including changes in interest rates and inflation;
environmental risks affecting the business or operations of our businesses;
our and CGM’s ability to retain or replace qualified employees of our businesses and CGM;
costs and effects of legal and administrative proceedings, settlements, investigations and claims; and
extraordinary or force majeure events affecting the business or operations of our businesses.
Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise, except as required by law.


4


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30,
2018
 
December 31,
2017
(in thousands)
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
37,456

 
$
39,885

Accounts receivable, net
272,707

 
215,108

Inventories
300,263

 
246,928

Prepaid expenses and other current assets
37,656

 
24,897

Total current assets
648,082

 
526,818

Property, plant and equipment, net
212,610

 
173,081

Goodwill
645,102

 
531,689

Intangible assets, net
753,210

 
580,517

Other non-current assets
12,292

 
8,198

Total assets
$
2,271,296

 
$
1,820,303

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
103,718

 
$
84,538

Accrued expenses
118,126

 
106,873

Due to related party
10,247

 
7,796

Current portion, long-term debt
5,000

 
5,685

Other current liabilities
4,749

 
7,301

Total current liabilities
241,840

 
212,193

Deferred income taxes
77,263

 
81,049

Long-term debt
963,851

 
584,347

Other non-current liabilities
18,310

 
16,715

Total liabilities
1,301,264

 
894,304

Commitments and contingencies
 
 
 
Stockholders’ equity
 
 
 
Trust preferred shares, 50,000 authorized; 8,000 shares issued and outstanding at June 30, 2018 and 4,000 shares issued and outstanding at December 31, 2017
 
 
 
Series A preferred shares, no par value; 4,000 shares issued and outstanding at June 30, 2018 and December 31, 2017
96,417

 
96,417

Series B preferred shares, no par value; 4,000 shares issued and outstanding at June 30, 2018
96,504

 

Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding at June 30, 2018 and December 31, 2017
924,680

 
924,680

Accumulated other comprehensive loss
(5,991
)
 
(2,573
)
Accumulated deficit
(195,318
)
 
(145,316
)
Total stockholders’ equity attributable to Holdings
916,292

 
873,208

Noncontrolling interest
53,740

 
52,791

Total stockholders’ equity
970,032

 
925,999

Total liabilities and stockholders’ equity
$
2,271,296

 
$
1,820,303

See notes to condensed consolidated financial statements.

5


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Net revenues
$
429,757

 
$
307,381

 
$
790,450

 
$
597,373

Cost of revenues
279,075

 
197,661

 
513,657

 
393,320

Gross profit
150,682

 
109,720

 
276,793

 
204,053

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expense
100,407

 
79,575

 
198,272

 
158,298

Management fees
11,011

 
8,183

 
21,860

 
16,031

Amortization expense
19,019

 
14,779

 
31,718

 
25,089

Impairment expense

 

 

 
8,864

Operating income (loss)
20,245

 
7,183

 
24,943

 
(4,229
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(13,580
)
 
(8,418
)
 
(19,766
)
 
(15,554
)
Amortization of debt issuance costs
(953
)
 
(1,003
)
 
(2,051
)
 
(1,936
)
Loss on investment in FOX

 

 

 
(5,620
)
Other income (expense), net
(2,205
)
 
952

 
(3,586
)
 
930

Income (loss) from continuing operations before income taxes
3,507

 
(1,286
)
 
(460
)
 
(26,409
)
Provision (benefit) for income taxes
4,139

 
1,454

 
1,793

 
(2,194
)
Loss from continuing operations
(632
)
 
(2,740
)
 
(2,253
)
 
(24,215
)
Gain on sale of discontinued operations, net of income tax
1,165

 

 
1,165

 
340

Net income (loss)
533

 
(2,740
)
 
(1,088
)
 
(23,875
)
Less: Net income attributable to noncontrolling interest
1,441

 
1,372

 
2,161

 
1,842

Net loss attributable to Holdings
$
(908
)
 
$
(4,112
)
 
$
(3,249
)
 
$
(25,717
)
 
 
 
 
 
 
 
 
Amounts attributable to Holdings
 
 
 
 
 
 
 
Loss from continuing operations
$
(2,073
)
 
$
(4,112
)
 
$
(4,414
)
 
$
(26,057
)
Gain on sale of discontinued operations, net of income tax
1,165

 

 
1,165

 
340

Net loss attributable to Holdings
$
(908
)
 
$
(4,112
)
 
$
(3,249
)
 
$
(25,717
)
Basic income (loss) per common share attributable to Holdings (refer to Note I)

 


 
 
 
 
Continuing operations
$
(0.12
)
 
$
(0.53
)
 
$
(0.20
)
 
$
(1.14
)
Discontinued operations
0.02

 

 
0.02

 
0.01

 
$
(0.10
)
 
$
(0.53
)
 
$
(0.18
)
 
$
(1.13
)
 
 
 
 
 
 
 
 
Basic weighted average number of shares of common shares outstanding
59,900

 
59,900

 
59,900

 
59,900

Cash distributions declared per Trust common share (refer to Note I)
$
0.36

 
$
0.36

 
$
0.72

 
$
0.72


See notes to condensed consolidated financial statements.

6


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income (loss)
$
533

 
$
(2,740
)
 
$
(1,088
)
 
$
(23,875
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(3,004
)
 
2,554

 
(4,027
)
 
3,585

Pension benefit liability, net
168

 
324

 
609

 
380

Other comprehensive income (loss)
(2,836
)
 
2,878

 
(3,418
)
 
3,965

Total comprehensive income (loss), net of tax
(2,303
)
 
138

 
(4,506
)
 
(19,910
)
Less: Net income attributable to noncontrolling interests
1,441

 
1,372

 
2,161

 
1,842

Less: Other comprehensive income (loss) attributable to noncontrolling interests
(352
)
 
473

 
(727
)
 
659

Total comprehensive loss attributable to Holdings, net of tax
$
(3,392
)
 
$
(1,707
)
 
$
(5,940
)
 
$
(22,411
)
See notes to condensed consolidated financial statements.


7


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)

(in thousands)
Trust Preferred Shares
 
Trust Common Shares
 
Accumulated Deficit
 
Accumulated Other
Comprehensive
Loss
 
Stockholders' Equity Attributable
to Holdings
 
Non-
Controlling
Interest
 
Total
Stockholders’
Equity
 
Series A
 
Series B
 
 
 
 
 
 
Balance — January 1, 2018
$
96,417

 

 
$
924,680

 
$
(145,316
)
 
$
(2,573
)
 
$
873,208

 
$
52,791

 
$
925,999

Net income (loss)

 

 

 
(3,249
)
 

 
(3,249
)
 
2,161

 
(1,088
)
Total comprehensive loss, net

 

 

 

 
(3,418
)
 
(3,418
)
 

 
(3,418
)
Issuance of Trust preferred shares, net of offering costs

 
96,504

 

 

 

 
96,504

 

 
96,504

Option activity attributable to noncontrolling shareholders

 

 

 

 

 

 
5,165

 
5,165

Effect of subsidiary stock option exercise

 

 

 

 

 

 
(6,377
)
 
(6,377
)
Distributions paid - Trust Common Shares

 

 

 
(43,128
)
 

 
(43,128
)
 

 
(43,128
)
Distributions paid - Trust Preferred Shares

 

 

 
(3,625
)
 

 
(3,625
)
 

 
(3,625
)
Balance — June 30, 2018
$
96,417

 
$
96,504

 
$
924,680

 
$
(195,318
)
 
$
(5,991
)
 
$
916,292

 
$
53,740

 
$
970,032

See notes to condensed consolidated financial statements.


8


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
Six months ended June 30,
(in thousands)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(1,088
)
 
$
(23,875
)
Gain on sale of discontinued operations, net
1,165

 
340

Net loss from continuing operations
(2,253
)
 
(24,215
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 

Depreciation expense
20,132

 
15,761

Amortization expense
36,999

 
46,821

Impairment expense

 
8,864

Amortization of debt issuance costs and original issue discount
2,324

 
2,460

Unrealized (gain) loss on interest rate swap
(3,900
)
 
1,268

Noncontrolling stockholder stock based compensation
5,165

 
3,250

Loss on investment in FOX

 
5,620

Provision for loss on receivables
98

 
3,327

Deferred taxes
(3,242
)
 
(11,940
)
Other
135

 
704

Changes in operating assets and liabilities, net of acquisition:

 

Accounts receivable
(12,261
)
 
2,201

Inventories
(13,821
)
 
(12,072
)
Other current and non-current assets
(8,263
)
 
(3,751
)
Accounts payable and accrued expenses
14,199

 
(2,430
)
Cash provided by operating activities
35,312

 
35,868

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(424,895
)
 
(158,980
)
Purchases of property and equipment
(28,778
)
 
(19,561
)
Net proceeds from sale of equity investment

 
136,147

Payment of interest rate swap
(1,086
)
 
(2,115
)
Proceeds from sale of business

 
340

Other investing activities
44

 
(217
)
Cash used in investing activities
(454,715
)
 
(44,386
)

9


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six months ended June 30,
(in thousands)
2018
 
2017
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of Trust preferred shares, net
96,504

 
96,577

Borrowings under credit facility
1,093,750

 
171,500

Repayments under credit facility
(1,106,223
)
 
(175,093
)
Issuance of senior notes
400,000

 

Distributions paid - common shares
(43,128
)
 
(43,128
)
Distributions paid - preferred shares
(3,625
)
 

Net proceeds provided by noncontrolling shareholders
14

 
734

Distributions paid to allocation interest holders (refer to Note I)

 
(39,188
)
Repurchase of subsidiary stock
(6,392
)
 

Debt issuance costs
(14,860
)
 
(1,433
)
Other
(682
)
 
(1,437
)
Net cash provided by financing activities
415,358

 
8,532

Foreign currency impact on cash
1,616

 
(499
)
Net decrease in cash and cash equivalents
(2,429
)
 
(485
)
Cash and cash equivalents — beginning of period
39,885

 
39,772

Cash and cash equivalents — end of period
$
37,456

 
$
39,287













See notes to condensed consolidated financial statements.

10


COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2018

Note A - Presentation and Principles of Consolidation
Compass Diversified Holdings, a Delaware statutory trust (the "Trust" or "Holdings") and Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the "Company" or "CODI"), were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. In accordance with the second amended and restated Trust Agreement, dated as of December 6, 2016 (as amended and restated, the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s fifth amended and restated operating agreement, dated as of December 6, 2016 (as amended and restated, the "LLC Agreement")) of the Company and, pursuant to the LLC Agreement, the Company has, outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of ten businesses, or reportable operating segments, at June 30, 2018. The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), Crosman Corp. ("Crosman"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Fresh Hemp Foods Ltd. ("Manitoba Harvest"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold"), Clean Earth Holdings, Inc. ("Clean Earth"), FFI Compass Inc. ("Foam Fabricators" or "Foam") and Sterno Products, LLC ("Sterno"). Refer to Note D - "Operating Segment Data" for further discussion of the operating segments. Compass Group Management LLC, a Delaware limited liability company ("CGM" or the "Manager"), manages the day to day operations of the Company and oversees the management and operations of our businesses pursuant to a management services agreement ("MSA").
Basis of Presentation
The condensed consolidated financial statements for the three and six month periods ended June 30, 2018 and June 30, 2017, are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or "GAAP") and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Consolidation
The condensed consolidated financial statements include the accounts of Holdings and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Discontinued Operations
On September 21, 2016, the Company sold its Tridien subsidiary based on an enterprise value of $25 million. After the allocation of proceeds to non-controlling interest holders and the payment of transaction expenses, the Company received approximately $22.7 million in net proceeds related to debt and equity interests in Tridien. The Company recognized a gain of $1.7 million in September 2016 as a result of the sale of Tridien. Approximately $1.6 million of the proceeds received by the Company from the sale of Tridien were reserved as support for the Company's indemnification obligations for future claims against Tridien that the Company may have been liable for under the terms of the Tridien sale agreement. In the second quarter of 2018, all indemnification claims had been settled, and the Company recognized an additional $1.2 million in gain on the sale of Tridien.
Seasonality
Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Crosman typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday seasons. Earnings from Clean Earth are typically lower during the winter months due to the limits on outdoor construction and development activity because

11


of the colder weather in the Northeastern United States. Sterno typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer and holiday seasons, respectively.
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
As of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) ("ASC 606"). The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The underlying principle of the new standard is that a company will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires disclosure of the amount, timing and uncertainty of cash flows arising from contracts with customers. The Company adopted the standard using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for reporting periods after January 1, 2018 are presented under the new revenue recognition guidance while prior period amounts were prepared under the previous revenue guidance which is also referred to herein as the "previous guidance". The Company determined that the impact from the new standard is immaterial to our revenue recognition model since the vast majority of our recognition is based on point in time control. Accordingly, the Company has not made any adjustments to opening retained earnings. Refer to Note C - "Revenue" for additional information regarding the Company's adoption of ASC 606.
Improving the Presentation of Net Periodic Pension Costs
In March 2017, the Financial Accounting Standards Board ("FASB") issued new guidance that will require employers that sponsor defined benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period, and requires the other components of net periodic pension cost to be presented in the income statement separately from the service component cost and outside a subtotal of income from operations. The new guidance shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company's Arnold business segment has a defined benefit plan covering substantially all of Arnold's employees at its Switzerland location. The adoption of this guidance on January 1, 2018 did not have a material impact upon our financial condition or results of operations.
Changes to the Definition of a Business
In January 2017, the FASB issued new guidance that changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the set of transferred asset and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognition guidance. The new standard was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The adoption of this guidance did not have a material impact upon our financial condition or results of operations.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued an accounting standard update which updates the guidance as to how certain cash receipts and cash payments should be presented and classified within the statement of cash flows. The amended guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. The adoption of this guidance on January 1, 2018 did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Leases
In February 2016, the FASB issued an accounting standard update related to the accounting for leases which will require an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The standard update offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, the new standard is effective for annual reporting periods

12


beginning after December 15, 2018, including interim periods within that reporting period, and requires modified retrospective adoption, with early adoption permitted. Accordingly, this standard is effective for the Company on January 1, 2019. The Company is currently evaluating the effects of adoption of this new standard on the Company’s consolidated financial statements.  This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, and analyzing the practical expedients available. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on the consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
Note B — Acquisitions
Acquisition of Foam Fabricators
On February 15, 2018, pursuant to an agreement entered into on January 18, 2018, the Company, through a wholly owned subsidiary, FFI Compass, Inc. (“Buyer”), entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Warren F. Florkiewicz (“Seller”) pursuant to which Buyer acquired all of the issued and outstanding capital stock of Foam Fabricators, Inc., a Delaware corporation (“Foam Fabricators”). Foam Fabricators is a leading designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer ("OEM") components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP). Founded in 1957 and headquartered in Scottsdale, Arizona, it operates 13 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products.
The Company made loans to, and purchased a 100% controlling interest in Foam Fabricators. The final purchase price, after the working capital settlement and net of transaction costs, was approximately $253.4 million. The Company funded the acquisition through a draw on the 2014 Revolving Credit Facility. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership. CGM will receive integration service fees of $2.25 million payable over a twelve month period as services are rendered.
The results of operations of Foam Fabricators have been included in the consolidated results of operations since the date of acquisition. Foam Fabricator's results of operations are reported as a separate operating segment. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date.

 
 
Preliminary Purchase Allocation
 
Measurement Period Adjustments
 
Preliminary Purchase Price Allocation
(in thousands)
 
As of 2/15/18
 
 
 
As of 6/30/18
Assets:
 
 
 
 
 
 
Cash
 
$
6,282

 
$

 
$
6,282

Accounts receivable (1)
 
19,058

 

 
19,058

Inventory (2)
 
13,218

 
(6
)
 
13,212

Property, plant and equipment (3)
 
23,485

 
4,885

 
28,370

Intangible assets
 
121,392

 
(3,050
)
 
118,342

Goodwill
 
71,489

 
1,219

 
72,708

Other current and noncurrent assets
 
2,945

 

 
2,945

Total assets
 
257,869

 
3,048

 
260,917

 
 
 
 
 
 
 

13


Liabilities:
 
 
 
 
 
 
Current liabilities
 
5,968

 

 
5,968

Other liabilities
 
115,033

 
 
 
115,033

Total liabilities
 
121,001

 

 
121,001

 
 
 
 
 
 
 
Net assets acquired
 
136,868

 
3,048

 
139,916

Intercompany loans to business
 
115,033

 

 
115,033

 
 
$
251,901

 
$
3,048

 
$
254,949

Acquisition Consideration
 
 
 
 
 
 
Purchase price
 
$
247,500

 
$

 
$
247,500

Cash acquired
 
3,646

 
2,433

 
3,188

Working capital adjustment
 
755

 
615

 
4,261

Total purchase consideration
 
$
251,901

 
$
3,048

 
$
254,949

Less: Transaction costs
 
1,552

 

 
1,552

Purchase price, net
 
$
250,349

 
$
3,048

 
$
253,397


(1) Includes $19.4 million of gross contractual accounts receivable of which $0.03 million is not expected to be collected. The fair value of accounts receivable approximated book value acquired.
(2) Includes $0.7 million in inventory basis step-up, which was charged to cost of goods sold in the first quarter of 2018.
(3) Includes $20.0 million of property, plant and equipment basis step-up.
The Company incurred $1.6 million of transaction costs in conjunction with the Foam Fabricators acquisition, which was included in selling, general and administrative expense in the consolidated results of operations in the quarter ended March 31, 2018. The allocation of the purchase price presented above is based on 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 valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired 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 goodwill of $72.7 million reflects the strategic fit of Foam Fabricators in the Company's niche industrial business. Foam Fabricators was an S corporation under Section 1362 of the Internal Revenue Code, and accordingly, taxable income of Foam Fabricators flowed through to its stockholder. The Company and the selling shareholder have agreed to make a joint Section 338(h)(10) election which will treat the acquisition as a deemed asset purchase for United States Federal income tax purposes and accordingly the goodwill is expected to be deductible for income tax purposes. The purchase accounting for Foam Fabricators is preliminary and is expected to be finalized during the third quarter of 2018.
The intangible assets recorded on a preliminary basis related to the Foam Fabricators acquisition are as follows (in thousands):
Intangible assets
 
Amount
 
Estimated Useful Life
Tradename
 
$
4,215

 
10 years
Customer Relationships
 
114,127

 
15 years
 
 
$
118,342

 
 
The tradename was valued at $4.2 million using a relief from royalty methodology, in which an asset is valuable to the extent that the ownership of the asset relieves the company from the obligation of paying royalties for the benefits generated by the asset. The customer relationships intangible asset was valued at $114.1 million using an excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of

14


the required returns on the other assets utilized in the business. The customer relationships intangible asset was derived using a risk adjusted discount rate.
Acquisition of Rimports
On February 26, 2018, the Company's Sterno subsidiary acquired all of the issued and outstanding capital stock of Rimports, Inc., a Utah corporation (“Rimports”), pursuant to a Stock Purchase Agreement, dated January 23, 2018, by and among Sterno and Jeffery W. Palmer, individually and in his capacity as Seller Representative, the Jeffery Wayne Palmer Dynasty Trust dated December 26, 2011, the Angela Marie Palmer Irrevocable Trust dated December 26, 2011, the Angela Marie Palmer Charitable Lead Trust, the Fidelity Investments Charitable Gift Fund, the TAK Irrevocable Trust dated June 7, 2012, and the SAK Irrevocable Trust dated June 7, 2012. Headquartered in Provo, Utah, Rimports is a manufacturer and distributor of branded and private label scented wickless candle products used for home décor and fragrance. Rimports offers an extensive line of wax warmers, scented wax cubes, essential oils and diffusers, and other home fragrance systems, through the mass retailer channel.
Sterno purchased a 100% controlling interest in Rimports. The purchase price, after the working capital settlement and net of transaction costs, was approximately $154.4 million, subject to any working capital adjustment. The purchase price of Rimports includes a potential earn-out of up to $25 million contingent on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019. The fair value of the contingent consideration was estimated at $4.1 million. Sterno funded the acquisition through their intercompany credit facility with the Company. The transaction was accounted for as a business combination.
The results of operations of Rimports have been included in the consolidated results of operations since the date of acquisition. Rimport's results of operations are included in the Sterno operating segment. The table below provides the preliminary recording of assets acquired and liabilities assumed as of the acquisition date. The goodwill resulting from the purchase price allocation is expected to be deductible for income tax purposes since Rimports was previously an S-Corporation for Federal income tax purposes and the Company and the selling shareholders have agreed to make a joint Section 338(h)(10) election which will treat the acquisition as a deemed asset purchase for United States Federal income tax purposes.

 
 
Preliminary Purchase Allocation
 
Measurement Period Adjustments
 
Preliminary Purchase Allocation
(in thousands)
 
As of 2/26/18
 
 
 
As of 6/30/18
Assets:
 
 
 
 
 
 
Cash
 
$
10,025

 
$

 
$
10,025

Accounts receivable (1)
 
21,431

 

 
21,431

Inventory
 
29,691

 
2,666

 
32,357

Property, plant and equipment
 
1,493

 
1,886

 
3,379

Intangible assets
 

 
86,900

 
86,900

Goodwill
 
121,364

 
(107,711
)
 
13,653

Other current and noncurrent assets
 
446

 

 
446

Total assets
 
184,450

 
(16,259
)
 
168,191

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Current liabilities
 
9,034

 

 
9,034

Other liabilities (2)
 
25,000

 
(20,900
)
 
4,100

Total liabilities
 
34,034

 
(20,900
)
 
13,134

 
 
 
 
 
 
 
Net assets acquired
 
$
150,416

 
$
4,641

 
$
155,057



15


Acquisition Consideration
 
 
 
 
 
 
Purchase price
 
$
145,000

 
$

 
$
145,000

Cash acquired
 
9,500

 
525

 
10,025

Working capital adjustment
 
(4,084
)
 
4,116

 
32

Total purchase consideration
 
150,416

 
4,641

 
155,057

Less: Transaction costs
 
632

 

 
632

Purchase price, net
 
$
149,784

 
$
4,641

 
$
154,425


(1) Includes $23.8 million of gross contractual accounts receivable of which $2.4 million is not expected to be collected. The fair value of accounts receivable approximated book value acquired.
(2) The purchase price of Rimports includes a potential earn-out of up to $25 million contingent on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019. The earn-out was valued at $4.1 million using a probability weighted model.
The intangible assets recorded on a preliminary basis related to the Rimports acquisition are as follows (in thousands):
Intangible assets
 
Amount
 
Estimated Useful Life
Tradename
 
$
6,600

 
8 years
Customer Relationships
 
80,300

 
9 years
 
 
$
86,900

 
 

Sterno incurred $0.6 million of transaction costs in conjunction with the acquisition of Rimports, which was included in selling, general and administrative expense in the consolidated results of operations in the quarter ended March 31, 2018. The allocation of the purchase price presented above is based on 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 liabilities are valued at historical carrying values. Property, plant and equipment was valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired 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.

Acquisition of Crosman
On June 2, 2017, CBCP Acquisition Corp. (the "Buyer"), a wholly owned subsidiary of the Company, entered into an equity purchase agreement pursuant to which it acquired all of the outstanding equity interests of Bullseye Acquisition Corporation, the indirect owner of the equity interests of Crosman Corp. ("Crosman"). Crosman is a designer, manufacturer and marketer of airguns, archery products, laser aiming devices and related accessories. Headquartered in Bloomfield, New York, Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channels and distributors serving smaller specialty stores and international markets. Its diversified product portfolio includes the widely known Crosman, Benjamin and CenterPoint brands.
The Company made loans to, and purchased an initial 98.9% controlling interest in Crosman. The purchase price, including proceeds from noncontrolling interests and net of transaction costs, was approximately $150.4 million. Crosman management invested in the transaction along with the Company, representing approximately 1.1% of the initial noncontrolling interest on a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership of Crosman. CGM will receive integration service fees of $1.5 million payable quarterly over a twelve month period as services are rendered beginning in the quarter ended September 30, 2017. The Company incurred $1.5 million of transaction costs in conjunction with the Crosman acquisition, which was included in selling, general and administrative expense in the consolidated results of operations in the second quarter of 2017.

16


The results of operations of Crosman have been included in the consolidated results of operations since the date of acquisition. Crosman's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date.

 
 
Preliminary Purchase Allocation
 
Measurement Period Adjustments
 
Final Purchase Allocation
(in thousands)
 
As of 6/2/2017
 
 
December 31, 2017
Assets:
 
 
 
 
 
 
Cash
 
$
429

 
$
781

 
$
1,210

Accounts receivable (1)
 
16,751

 

 
16,751

Inventory
 
25,598

 
3,275

 
28,873

Property, plant and equipment
 
10,963

 
4,051

 
15,014

Intangible assets
 

 
84,594

 
84,594

Goodwill
 
139,434

 
(90,675
)
 
48,759

Other current and noncurrent assets
 
2,348

 

 
2,348

Total assets
 
$
195,523

 
$
2,026

 
$
197,549

 
 
 
 
 
 
 
Liabilities and noncontrolling interest:
 
 
 
 
 
 
Current liabilities
 
$
15,502

 
$
781

 
$
16,283

Other liabilities
 
91,268

 
354

 
91,622

Deferred tax liabilities
 
27,286

 
1,229

 
28,515

Noncontrolling interest
 
694

 

 
694

Total liabilities and noncontrolling interest
 
$
134,750

 
$
2,364

 
$
137,114

 
 
 
 
 
 
 
Net assets acquired
 
$
60,773

 
$
(338
)
 
$
60,435

Noncontrolling interest
 
694

 

 
694

Intercompany loans to business
 
90,742

 

 
90,742

 
 
$
152,209

 
$
(338
)
 
$
151,871

Acquisition Consideration
 
 
 
 
 
 
Purchase price
 
$
151,800

 
$

 
$
151,800

Cash acquired
 
1,417

 
(207
)
 
1,210

Working capital adjustment
 
(1,008
)
 
(131
)
 
(1,139
)
Total purchase consideration
 
152,209

 
(338
)
 
151,871

Less: Transaction costs
 
1,397

 
76

 
1,473

Purchase price, net
 
$
150,812

 
$
(414
)
 
$
150,398

(1) Includes $18.0 million of gross contractual accounts receivable of which $1.2 million was not expected to be collected. The fair value of accounts receivable approximated book value acquired.

The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including income, cost and market approach. 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 valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired 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 goodwill of $48.8 million reflects the strategic fit of Crosman in the Company's branded

17


consumer business and is not expected to be deductible for income tax purposes. The purchase accounting for Crosman was finalized during the fourth quarter of 2017.
The intangible assets recorded related to the Crosman acquisition are as follows (in thousands):
Intangible Assets
 
Amount
 
Estimated Useful Life
Tradename
 
$
53,463

 
20 years
Customer relationships
 
28,718

 
15 years
Technology
 
2,413

 
15 years
 
 
$
84,594

 
 

The tradename was valued at $53.5 million using a multi-period excess earnings methodology. The customer relationships intangible asset was valued at $28.7 million using the distributor method, a variation of the multi-period excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The technology was valued at $2.4 million using a relief from royalty method.
Unaudited pro forma information
The following unaudited pro forma data for the six months ended June 30, 2018 and the three and six months ended June 30, 2017 gives effect to the acquisition of Crosman, Foam Fabricators and Sterno's acquisition of Rimports, as described above, as if the acquisitions had been completed as of January 1, 2017. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies and should not be construed as representing results for any future period.
 
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
 
2017
 
2018
 
2017
Net sales
 
$
384,203

 
$
830,278

 
$
759,702

Gross profit
 
130,991

 
287,211

 
249,900

Operating income
 
12,063

 
28,114

 
7,826

Net loss
 
(3,765
)
 
(3,836
)
 
(23,471
)
Net loss attributable to Holdings
 
(5,137
)
 
(5,997
)
 
(25,313
)
Basic and fully diluted net loss per share attributable to Holdings
 
$
(0.55
)
 
$
(0.23
)
 
$
(1.13
)
Other acquisitions
Clean Earth
On May 23, 2018, Clean Earth acquired all of the outstanding capital stock of Environmental Soil Management, Inc. (“ESMI”), located in Fort Edward, New York and Loudon, New Hampshire. The acquisition provided Clean Earth the opportunity to geographically expand their soil and hazardous waste solutions in the New York and New England market. The purchase price was approximately $30.7 million. Clean Earth has not completed the preliminary purchase price allocation for ESMI and therefore has recorded the excess amount of the purchase price over assets acquired less liabilities assumed as goodwill at June 30, 2018.
Note C — Revenue
Effective January 1, 2018, the Company adopted the provisions of Revenue from Contracts with Customers, or ASC 606. The adoption of the new revenue guidance represents a change in accounting principle that will more closely align revenue recognition with the transfer of control of the Company's goods and services and will provide financial statement readers with enhanced disclosures. In accordance with the new revenue guidance, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and

18


excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities. The impacts from the adoption of the new revenue guidance primarily relates to the timing of revenue recognition for variable consideration received, consideration payable to a customer and recording right of return assets. Although these differences have been identified, the total impact to each reportable segment was not material to the consolidated financial statements. In addition, the accounting for the estimate of variable consideration in our contracts is not materially different compared to our current practice. The Company has established monitoring controls to identify new sales arrangements and changes in our business environment that could impact our current accounting assessment.
Performance Obligations - For 5.11, Crosman, Ergobaby, Liberty Safe, Manitoba Harvest, Sterno, Arnold and Foam Fabricators, revenues are recognized when control of the promised goods or service is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Each product or service represents a separate performance obligation. For contracts that contain multiple products, the Company will evaluate those products to determine if they represent performance obligations based on whether those goods or services are distinct (by themselves or as part of a bundle of products). Further, the Company evaluated if the products were separately identifiable from other products in the contract. The Company concluded that the products are distinct and separately identifiable from other products in the contracts. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. The standalone selling price is directly observable as it is the price at which the Company sells its products separately to the customer. As the Company does not meet any of the requirements for over time recognition for any of its products at these operating segments, it will recognize revenue based on the point in time criteria based on the definition of control, which is generally upon shipment terms for products and when the service is performed for services. Transfer of control for Advanced Circuit’s products qualify for over time revenue recognition because the products represent assets with no alternative use and the contracts include an enforceable right to payment for work completed to date. Advanced Circuits has selected the cost to cost input method of measuring progress to recognize revenue over time, based on the status of the work performed. The cost to cost method is representative of the value provided to the customer as it represents the Company’s performance completed to date. However, due to the short-term nature of Advanced Circuit's production cycle, there is an immaterial difference between revenue recognition under the previous guidance and the new revenue recognition guidance. Clean Earth’s arrangements qualify for over time revenue recognition as the customer simultaneously receives and consumes the benefits provided by the Company’s performance. As the Company performs the service, another party would not need to re-perform any of the work completed by the Company to date. Clean Earth has elected to apply the as-invoiced practical expedient to record revenue as the services are provided, given the nature of the services provided and the frequency of billing under the customer contracts.
Shipping and handling costs - Costs associated with shipment of products to a customer are accounted for as a fulfillment cost and are included in cost of revenues. The Company has elected to apply the practical expedient for shipping costs under the new revenue guidance and will account for shipping and handling activities performed after control of a good has been transferred to the customer as a fulfillment cost and not a performance obligation. Therefore, both revenue and costs of shipping and handling will be recorded at the same time. As a result, any consideration (including freight and landing costs) related to these activities will be included as a component of the overall transaction consideration and allocated to the performance obligations of the contract.
Warranty - For product sales, the Company provides standard assurance-type warranties as the Company only warrants its products against defects in materials and workmanship (i.e., manufacturing flaws). Although the warranties are not required by law, the tasks performed over the warranty period are only to remediate instances when products do not meet the promised specifications. Customers do not have the option to purchase warranties separately. The Company’s warranty periods generally range from 90 days to three years depending on the nature of the product and are consistent with industry standards. The periods are reasonable to assure that products conform to specifications. The Company does not have a history of performing activities outside the scope of the standard warranty.
Significant Judgments - The Company’s contracts with customers often include promises to transfer multiple products to a customer. Determining whether the promises are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once the performance obligations are identified, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The corresponding revenues are recognized as the related performance obligations are satisfied as discussed above. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately and therefore observable.

19


Variable Consideration - Upon adoption of the new revenue guidance, the Company’s policy around estimating variable consideration related to sales incentives (early pay discounts, rights of return, rebates, chargebacks, and other discounts) included in certain customer contracts remained consistent with previous guidance. These incentives are recorded as a reduction in the transaction price. Under the new guidance, variable consideration is estimated and included in total consideration at contract inception based on either the expected value method or the most likely outcome method. The method was applied consistently among each type of variable consideration and the Company applies the expected value method to estimate variable consideration. These estimates are based on historical experience, anticipated performance and the Company’s best judgment at the time and as a result, reflect applicable constraints. The Company includes in the transaction price an amount of variable consideration estimated in accordance with the new guidance only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
In certain of the Company’s arrangements related to product sales, a right of return exists, which is included in the transaction price. For these right of return arrangements, an asset (and corresponding adjustment to cost of sale) for its right to recover the products from the customers is recorded. The asset recognized will be the carrying amount of the product (for example, inventory) less any expected costs to recover the products (including potential decreases in the value to the Company of the returned product). Additionally, the Company records a refund liability for the amount of consideration that it does not expect to be entitled. The amounts associated with right of return arrangements are not material to the Company's statement of position or operating results.
Sales and Other Similar Taxes - The Company notes that under its contracts with customers, the customer is responsible for all sales and other similar taxes, which the Company will invoice the customer for if they are applicable. The new revenue guidance allows entities to make an accounting policy election to exclude sales taxes and other similar taxes from the measurement of the transaction price. The scope of this accounting policy election is the same as the scope of the policy election in the previous guidance. As the Company presents taxes on a net basis under the previous guidance there will be no change to the current presentation (net) as a result.
Practical Expedients - The Company has elected to make the following accounting policy elections through the adoption of the following practical expedients:
Right to Invoice (Clean Earth) - The Company will record the consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date (for example, in a service contract where 25% of the service has been performed, the Company would recognize 25% of the revenue), the entity may recognize revenue in the amount to which the entity has a right to invoice.
Sales and Other Similar Taxes - The Company will exclude sales taxes and similar taxes from the measurement of transaction price and will ensure that it complies with the disclosure requirements of applicable accounting guidance.
Cost to Obtain a Contract - The Company will recognize the incremental costs of obtaining a contract as an expense when incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less.
Promised Goods or Services that are Immaterial in the Context of a Contract - The Company has elected to assess promised goods or services as performance obligations that are deemed to be immaterial in the context of a contract. As such, the Company will not aggregate and assess immaterial items at the entity level. That is, when determining whether a good or service is immaterial in the context of a contract, the assessment will be made based on the application of the new revenue guidance at the contract level.
Disaggregated Revenue - Revenue Streams & Timing of Revenue Recognition - The Company disaggregates revenue by strategic business unit and by geography for each strategic business unit which are categories that depict how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors. This disaggregation also represents how the Company evaluates its financial performance, as well as how the Company communicates its financial performance to the investors and other users of its financial statements. Each strategic business unit represents the Company’s reportable segments and offers different products and services.

20


The following tables provide disaggregation of revenue by reportable segment geography for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three months ended June 30, 2018
 
5.11
 
Crosman
 
Ergo
 
Liberty
 
Manitoba Harvest
 
ACI
 
Arnold
 
Clean Earth
 
Foam
 
Sterno
 
Total
United States
$
65,845

 
$
30,682

 
$
9,397

 
$
20,107

 
$
13,752

 
$
22,967

 
$
18,933

 
$
70,241

 
$
28,740

 
$
84,520

 
$
365,184

Canada
2,456

 
1,703

 
815

 
309

 
5,437

 

 
346

 

 

 
2,875

 
13,941

Europe
7,905

 
1,638

 
6,675

 

 
253

 

 
9,529

 

 

 
122

 
26,122

Asia Pacific
4,184

 
273

 
6,845

 

 
(12
)
 

 
1,581

 

 

 
209

 
13,080

Other international
4,333

 
1,274

 
222

 

 
97

 

 
807

 

 
4,454

 
243

 
11,430

 
$
84,723

 
$
35,570

 
$
23,954

 
$
20,416

 
$
19,527

 
$
22,967

 
$
31,196

 
$
70,241

 
$
33,194

 
$
87,969

 
$
429,757

 
Three months ended June 30, 2017
 
5.11
 
Crosman
 
Ergo
 
Liberty
 
Manitoba Harvest
 
ACI
 
Arnold
 
Clean Earth
 
Sterno
 
Total
United States
$
59,369

 
$
7,883

 
$
10,858

 
$
19,607

 
$
12,186

 
$
22,508

 
$
16,369

 
$
50,418

 
$
53,774

 
$
252,972

Canada
1,875

 
641

 
867

 

 
2,811

 

 
277

 

 
3,247

 
9,718

Europe
6,225

 
768

 
5,965

 

 
257

 

 
7,994

 

 
410

 
21,619

Asia Pacific
4,289

 
122

 
9,205

 

 
143

 

 
897

 

 
392

 
15,048

Other international
6,195

 
339

 
394

 

 
152

 

 
899

 

 
45

 
8,024

 
$
77,953

 
$
9,753

 
$
27,289

 
$
19,607

 
$
15,549

 
$
22,508

 
$
26,436

 
$
50,418

 
$
57,868

 
$
307,381

 
Six months ended June 30, 2018
 
5.11
 
Crosman
 
Ergo
 
Liberty
 
Manitoba Harvest
 
ACI
 
Arnold
 
Clean Earth
 
Foam
 
Sterno
 
Total
United States
$
130,297

 
$
50,767

 
$
17,600

 
$
42,863

 
$
24,767

 
$
45,030

 
$
36,215

 
$
128,462

 
$
42,226

 
$
144,779

 
$
663,006

Canada
4,473

 
3,056

 
1,580

 
1,006

 
9,951

 

 
714

 

 

 
6,816

 
27,596

Europe
16,463

 
3,146

 
13,833

 

 
785

 

 
19,675

 

 

 
962

 
54,864

Asia Pacific
8,425

 
603

 
12,537

 

 
258

 

 
2,492

 

 

 
372

 
24,687

Other international
9,022

 
2,405

 
566

 

 
108

 

 
1,499

 

 
6,425

 
272

 
20,297

 
$
168,680

 
$
59,977

 
$
46,116

 
$
43,869

 
$
35,869

 
$
45,030

 
$
60,595

 
$
128,462

 
$
48,651

 
$
153,201

 
$
790,450

 
Six months ended June 30, 2017
 
5.11
 
Crosman
 
Ergo
 
Liberty
 
Manitoba Harvest
 
ACI
 
Arnold
 
Clean Earth
 
Sterno
 
Total
United States
$
112,616

 
$
7,883

 
$
20,673

 
$
47,585

 
$
19,418

 
$
43,968

 
$
31,811

 
$
97,694

 
$
99,791

 
$
481,439

Canada
3,404

 
641

 
1,529

 

 
7,897

 

 
604

 

 
8,277

 
22,352

Europe
11,040

 
768

 
11,232

 

 
970

 

 
16,558

 

 
1,469

 
42,037

Asia Pacific
5,352

 
122

 
15,684

 

 
240

 

 
2,527

 

 
727

 
24,652

Other international
24,054

 
339

 
784

 

 
152

 

 
1,432

 

 
132

 
26,893

 
$
156,466

 
$
9,753

 
$
49,902

 
$
47,585

 
$
28,677

 
$
43,968

 
$
52,932

 
$
97,694

 
$
110,396

 
$
597,373



21


Note D — Operating Segment Data
At June 30, 2018, the Company had ten reportable operating segments. Each operating segment represents a platform acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:
5.11 Tactical is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide.  Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
Crosman is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Crosman offers its products under the highly recognizable Crosman, Benjamin, LaserMax and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. Crosman is headquartered in Bloomfield, New York.
Ergobaby is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, and related products.  Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than 50% of its sales from outside of the United States. Ergobaby is headquartered in Los Angeles, California.
Liberty Safe is a designer, manufacturer and marketer of premium home, gun and office safes in North America. From its over 300,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.
Manitoba Harvest is a pioneer and leader in the manufacture and distribution of branded, hemp-based foods and hemp-based ingredients. Manitoba Harvest’s products, which include Hemp Hearts™, Hemp Heart Bites™, and Hemp protein powders, are currently carried in over 13,000 retail stores across the United States and Canada. Manitoba Harvest is headquartered in Winnipeg, Manitoba.
Advanced Circuits is an electronic components manufacturing company that provides small-run, quick-turn and volume production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers primarily in North America. ACI is headquartered in Aurora, Colorado.
Arnold is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, motorsport/automotive, oil and gas, medical, general industrial, electric utility, reprographics and advertising specialty markets. Arnold produces high performance permanent magnets (PMAG), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide. Arnold is headquartered in Rochester, New York.
Clean Earth provides environmental services for a variety of contaminated materials including soils, dredged material, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as power, construction, oil and gas, infrastructure, industrial and dredging. Clean Earth is headquartered in Hatboro, Pennsylvania and operates 26 facilities in the eastern United States.
Foam Fabricators is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer components made from expanded polystyrene and expanded polypropylene. Foam Fabricators provides products to a variety of end markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products. Foam Fabricators is headquartered in Scottsdale, Arizona and operates 13 molding and fabricating facilities across North America.
Sterno is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry and flameless candles, outdoor lighting products, scented wax cubes and warmer products

22


for consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, scented wax cubes and warmer products used for home decor and fragrance systems, catering equipment and outdoor lighting products. Sterno is headquartered in Corona, California.
The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The results of operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. There were no significant inter-segment transactions.
Summary of Operating Segments
Net Revenues
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
5.11 Tactical
$
84,723

 
$
77,953

 
$
168,680

 
$
156,466

Crosman
35,570

 
9,753

 
59,977

 
9,753

Ergobaby
23,954

 
27,289

 
46,116

 
49,902

Liberty
20,416

 
19,607

 
43,869

 
47,585

Manitoba Harvest
19,527

 
15,549

 
35,869

 
28,677

ACI
22,967

 
22,508

 
45,030

 
43,968

Arnold
31,196

 
26,436

 
60,595

 
52,932

Clean Earth
70,241

 
50,418

 
128,462

 
97,694

Foam Fabricators
33,194

 

 
48,651

 

Sterno
87,969

 
57,868

 
153,201

 
110,396

Total segment revenue
429,757

 
307,381

 
790,450

 
597,373

Corporate and other

 

 

 

Total consolidated revenues
$
429,757

 
$
307,381

 
$
790,450

 
$
597,373



Segment profit (loss) (1)
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
5.11 Tactical
$
2,020

 
$
(4,804
)
 
$
1,403

 
$
(14,289
)
Crosman
3,019

 
(199
)
 
3,292

 
(199
)
Ergobaby
3,575

 
3,644

 
5,915

 
8,844

Liberty
1,612

 
2,370

 
4,427

 
4,850

Manitoba Harvest
1,084

 
21

 
215

 
244

ACI
6,368

 
6,275

 
12,300

 
11,915

Arnold
2,945

 
1,846

 
4,670

 
(6,551
)
Clean Earth
7,458

 
2,451

 
8,217

 
2,005

Foam Fabricators
3,031

 

 
3,756

 

Sterno
2,728

 
5,320

 
7,479

 
8,972

Total
33,840

 
16,924

 
51,674

 
15,791

Reconciliation of segment profit (loss) to consolidated income (loss) before income taxes:
 
 
 
 
 
 
 
Interest expense, net
(13,580
)
 
(8,418
)
 
(19,766
)
 
(15,554
)
Other income (expense), net
(2,205
)
 
952

 
(3,586
)
 
930

Loss on equity method investment

 

 

 
(5,620
)
Corporate and other (2)
(14,548
)
 
(10,744
)
 
(28,782
)
 
(21,956
)
Total consolidated income (loss) before income taxes
$
3,507

 
$
(1,286
)
 
$
(460
)
 
$
(26,409
)


23


(1) 
Segment profit (loss) represents operating income (loss).
(2) 
Primarily relates to management fees expensed and payable to CGM, and corporate overhead expenses.
Depreciation and Amortization Expense
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
5.11 Tactical
$
5,187

 
$
13,012

 
$
10,559

 
$
30,544

Crosman
2,013

 
249

 
4,004

 
249

Ergobaby
2,246

 
5,665

 
4,288

 
6,318

Liberty
373

 
338

 
716

 
937

Manitoba Harvest
1,580

 
1,521

 
3,201

 
3,031

ACI
794

 
827

 
1,598

 
1,700

Arnold
1,568

 
1,465

 
3,084

 
3,510

Clean Earth