The Compass Group
Compass Diversified Holdings (Form: 10-Q, Received: 08/03/2016 16:39:43)
Table of Contents

 
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, 2016
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)
 
Sixty One Wilton Road
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, or a non-accelerated filer. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company’ in Rule 12b-2 of the Exchange Act
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
 
Smaller Reporting Company
 
¨
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 July 29, 2016, there were 54,300,000 shares of Compass Diversified Holdings outstanding.
 


Table of Contents

COMPASS DIVERSIFIED HOLDINGS
QUARTERLY REPORT ON FORM 10-Q
For the period ended June 30, 2016
TABLE OF CONTENTS
 
 
 
 
Page
Number
 
 
 
Part I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
Part II
 
 
Item 1.
 
 
Item 1A.
 
 
Item 6.
 
 
 
 
 


2

Table of Contents

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 "initial businesses" refer to, collectively, Staffmark Holdings, Inc. ("Staffmark"), Crosman Acquisition Corporation, Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits") and Silvue Technologies Group, Inc.;
the "2014 acquisitions" refer to, collectively, the acquisitions of Clean Earth Holdings, Inc. and Sterno Products;
the "2015 acquisition" refer to the acquisition of Fresh Hemp Foods Ltd. ("Manitoba Harvest")
the "2015 dispositions" refer to, collectively, the sales of CamelBak Acquisition Corp. ("CamelBak") and AFM Holding Corp. ("American Furniture" or "AFM")
the "Trust Agreement" refer to the amended and restated Trust Agreement of the Trust dated as of November 1, 2010;
the "2011 Credit Facility" refer to a credit agreement (as amended) with a group of lenders led by Toronto Dominion (Texas) LLC, as agent, which provided for the 2011 Revolving Credit Facility and the 2011 Term Loan Facility;
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 the 2014 Revolving Credit Facility and the 2014 Term Loan Facility;
the "2014 Revolving Credit Facility" refer to the $400 million Revolving Credit Facility provided by the 2014 Credit Facility that matures in June 2019;
the "2014 Term Loan" refer to the $325 million Term Loan Facility, provided by the Credit Facility that matures in June 2021;
the "LLC Agreement" refer to the fourth amended and restated operating agreement of the Company dated as of January 1, 2012; and
"we," "us" and "our" refer to the Trust, the Company and the businesses together.


3

Table of Contents

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," or "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

Table of Contents

PART I
FINANCIAL INFORMATION
ITEM 1. — FINANCIAL STATEMENTS

Compass Diversified Holdings
Condensed Consolidated Balance Sheets
(in thousands)
June 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
21,160

 
$
85,869

Accounts receivable, net
125,314

 
114,320

Inventories
81,813

 
68,371

Prepaid expenses and other current assets
19,274

 
22,803

Total current assets
247,561

 
291,363

Property, plant and equipment, net
124,474

 
118,050

Equity method investment (refer to Note F)
210,328

 
249,747

Goodwill
488,990

 
398,488

Intangible assets, net
365,169

 
353,404

Other non-current assets
13,209

 
9,990

Total assets
$
1,449,731

 
$
1,421,042

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
54,383

 
$
50,403

Accrued expenses
50,622

 
47,959

Due to related party
6,087

 
5,863

Current portion, long-term debt
3,250

 
3,250

Other current liabilities
10,253

 
9,004

Total current liabilities
124,595

 
116,479

Deferred income taxes
104,433

 
103,745

Long-term debt
385,776

 
308,639

Other non-current liabilities
27,897

 
18,960

Total liabilities
642,701

 
547,823

Stockholders’ equity
 
 
 
Trust shares, no par value, 500,000 authorized; 54,300 shares issued and outstanding at June 30, 2016 and December 31, 2015
825,321

 
825,321

Accumulated other comprehensive loss
(6,452
)
 
(9,804
)
Accumulated (deficit) earnings
(41,667
)
 
10,567

Total stockholders’ equity attributable to Holdings
777,202

 
826,084

Noncontrolling interest
29,828

 
47,135

Total stockholders’ equity
807,030

 
873,219

Total liabilities and stockholders’ equity
$
1,449,731

 
$
1,421,042

See notes to condensed consolidated financial statements.

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Table of Contents

Compass Diversified Holdings
Condensed Consolidated Statements of Operations
(unaudited)
 
Three months ended 
 June 30,
 
Six months ended 
 June 30,
 
2016
 
2015
 
2016

2015
(in thousands, except per share data)
 
 
 
 
 
 
 
Net sales
$
185,154

 
$
156,023

 
$
354,915

 
$
300,319

Service revenues
44,234

 
43,702

 
82,520

 
78,831

Total net revenues
229,388

 
199,725

 
437,435

 
379,150

Cost of sales
120,614

 
104,572

 
232,849

 
203,604

Cost of service revenues
29,553

 
31,936

 
59,104

 
59,759

Gross profit
79,221

 
63,217

 
145,482

 
115,787

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expense
46,738

 
33,945

 
91,211

 
66,971

Management fees
6,676

 
6,666

 
13,134

 
13,399

Amortization expense
8,609

 
7,224

 
16,435

 
15,046

Impairment expense

 
258

 

 
9,165

Loss on disposal of assets
6,663

 

 
6,663

 

Operating income
10,535

 
15,124

 
18,039

 
11,206

Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(7,366
)
 
(3,125
)
 
(18,828
)
 
(12,842
)
Amortization of debt issuance costs
(570
)
 
(545
)
 
(1,140
)
 
(1,090
)
Gain (loss) on equity method investment
18,889

 
11,181

 
8,266

 
(2,266
)
Other income (expense), net
(542
)
 
(43
)
 
2,878

 
(33
)
Income (loss) from continuing operations before income taxes
20,946

 
22,592

 
9,215

 
(5,025
)
Provision for income taxes
1,588

 
3,125

 
4,884

 
5,518

Income (loss) from continuing operations
19,358

 
19,467

 
4,331

 
(10,543
)
Income from discontinued operations, net of income tax

 
7,108

 

 
11,831

Net income
19,358

 
26,575

 
4,331

 
1,288

Less: Net income attributable to noncontrolling interest
119

 
1,720

 
1,115

 
1,194

Less: Income from discontinued operations attributable to noncontrolling interest

 
398

 

 
539

Net income (loss) attributable to Holdings
$
19,239

 
$
24,457

 
$
3,216

 
$
(445
)
Amounts attributable to Holdings
 
 
 
 
 
 
 
Income (loss) from continuing operations
19,239

 
17,747

 
3,216

 
(11,737
)
Income from discontinued operations, net of income tax

 
6,710

 

 
11,292

Net income (loss) attributable to Holdings
$
19,239

 
$
24,457

 
$
3,216

 
$
(445
)
Basic and fully diluted income (loss) per share attributable to Holdings (refer to Note L)

 


 

 

Continuing operations
$
0.33

 
$
0.29

 
$
0.03

 
$
(0.25
)
Discontinued operations

 
0.11

 

 
0.19

 
$
0.33

 
$
0.40

 
$
0.03

 
$
(0.06
)
Weighted average number of shares of trust stock outstanding – basic and fully diluted
54,300

 
54,300

 
54,300

 
54,300

Cash distributions declared per share (refer to Note L)
$
0.36

 
$
0.36

 
$
0.72

 
$
0.72


See notes to condensed consolidated financial statements.

6

Table of Contents

Compass Diversified Holdings
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
 
Three months ended 
 June 30,
 
Six months ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
(in thousands)
 
 
 
 
 
 
 
Net income
$
19,358

 
$
26,575

 
$
4,331

 
$
1,288

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(632
)
 
447

 
4,588

 
373

Pension benefit liability, net
(713
)
 
405

 
(1,236
)
 
329

Other comprehensive income (loss)
(1,345
)
 
852

 
3,352

 
702

Total comprehensive income, net of tax
18,013

 
27,427

 
7,683

 
1,990

Less: Net income attributable to noncontrolling interests
119

 
2,118

 
1,115

 
1,733

Less: Other comprehensive income (loss) attributable to noncontrolling interests
(29
)
 
28

 
1,197

 
23

Total comprehensive income attributable to Holdings, net of tax
$
17,923

 
$
25,281

 
$
5,371

 
$
234

See notes to condensed consolidated financial statements.


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Table of Contents

Compass Diversified Holdings
Condensed Consolidated Statement of Stockholders’ Equity
(unaudited)

(in thousands)
Number of
Shares
 
Amount
 
Accumulated Earnings (Deficit)
 
Accumulated Other
Comprehensive
Loss
 
Stockholders' Equity Attributable
to Holdings
 
Non-
Controlling
Interest
 
Total
Stockholders’
Equity
Balance — January 1, 2016
54,300

 
$
825,321

 
$
10,567

 
$
(9,804
)
 
$
826,084

 
$
47,135

 
$
873,219

Net income

 

 
3,216

 

 
3,216

 
1,115

 
4,331

Total comprehensive income, net

 

 

 
3,352

 
3,352

 

 
3,352

Option activity attributable to noncontrolling shareholders

 

 

 

 

 
2,048

 
2,048

Effect of subsidiary stock options exercise - Liberty

 

 
(578
)
 

 
(578
)
 
4,333

 
3,755

Excess tax benefit on stock compensation - Liberty

 

 

 

 

 
366

 
366

Issuance of subsidiary shares - Ergo (refer to Note N)

 

 
4,809

 

 
4,809

 
3,392

 
8,201

Repurchase of subsidiary shares - Ergo (refer to Note N)

 

 
(10,945
)
 

 
(10,945
)
 
(4,462
)
 
(15,407
)
Purchase of noncontrolling interest - Liberty (refer to Note N)

 

 
(1,007
)
 

 
(1,007
)
 
(469
)
 
(1,476
)
Distributions to noncontrolling shareholders - Liberty (refer to Note N)

 

 

 

 

 
(5,253
)
 
(5,253
)
Distributions to noncontrolling shareholders - ACI (refer to Note N)

 

 

 

 

 
(18,377
)
 
(18,377
)
Distribution to Allocation Interest holders (refer to Note L)

 

 
(8,633
)
 

 
(8,633
)
 

 
(8,633
)
Distributions paid

 

 
(39,096
)
 

 
(39,096
)
 

 
(39,096
)
Balance — June 30, 2016
54,300

 
$
825,321

 
$
(41,667
)
 
$
(6,452
)
 
$
777,202

 
$
29,828

 
$
807,030

See notes to condensed consolidated financial statements.


8


Compass Diversified Holdings
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Six months ended June 30,
(in thousands)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
4,331

 
$
1,288

Income from discontinued operations

 
11,831

Net income (loss) from continuing operations
4,331

 
(10,543
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

Depreciation expense
11,832

 
10,793

Amortization expense
18,088

 
15,048

Impairment expense

 
9,165

Loss on disposal of assets
6,663

 

Amortization of debt issuance costs and original issue discount
1,475

 
1,425

Unrealized loss on interest rate swap
9,983

 
1,867

Noncontrolling stockholder stock based compensation
2,048

 
1,409

Excess tax benefit from subsidiary stock options exercised
(366
)
 

(Gain) loss on equity method investment
(8,266
)
 
2,266

Deferred taxes
(5,991
)
 
(2,749
)
Other
282

 
498

Changes in operating assets and liabilities, net of acquisition:

 

Decrease in accounts receivable
10,750

 
8,555

Increase in inventories
(505
)
 
(5,016
)
Increase in prepaid expenses and other current assets
(2
)
 
(372
)
Decrease in accounts payable and accrued expenses
(4,788
)
 
(8,757
)
Net cash provided by operating activities - continuing operations
45,534

 
23,589

Net cash provided by operating activities - discontinued operations

 
8,678

Cash provided by operating activities
45,534

 
32,267

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(133,430
)
 
517

Purchases of property and equipment
(10,789
)
 
(7,079
)
Net proceeds from sale of equity investment
47,685

 

Payment of interest rate swap
(1,794
)
 
(995
)
Purchase of noncontrolling interest (refer to Note N)
(1,476
)
 

Other investing activities
215

 
268

Net cash used in investing activities - continuing operations
(99,589
)
 
(7,289
)
Net cash used in investing activities - discontinued operations

 
(1,960
)
Cash used in investing activities
(99,589
)
 
(9,249
)

9


Compass Diversified Holdings
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Six months ended June 30,
(in thousands)
2016
 
2015
Cash flows from financing activities:
 
 
 
Borrowings under credit facility
187,200

 
71,000

Repayments under credit facility
(110,825
)
 
(53,350
)
Distributions paid
(39,096
)
 
(39,096
)
Net proceeds provided by noncontrolling shareholders (refer to Note N)
3,755

 
500

Distributions paid to noncontrolling shareholders (refer to Note N)
(23,630
)
 

Distributions paid to allocation interest holders (refer to Note L)
(8,633
)
 

Repurchase of subsidiary stock
(15,407
)
 

Excess tax benefit from subsidiary stock options exercised
366

 

Debt issuance costs

 
(295
)
Other
(561
)
 
(419
)
Net cash used in financing activities
(6,831
)
 
(21,660
)
Foreign currency impact on cash
(3,823
)
 
318

Net (decrease) increase in cash and cash equivalents
(64,709
)
 
1,676

Cash and cash equivalents — beginning of period (1)
85,869

 
23,703

Cash and cash equivalents — end of period (2)
$
21,160

 
$
25,379

(1) Includes cash from discontinued operations of $1.8 million at January 1, 2015.
(2) Includes cash from discontinued operations of $3.0 million at June 30, 2015.











See notes to condensed consolidated financial statements.

10


Compass Diversified Holdings
Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 2016

Note A — Organization and Business Operations
Compass Diversified Holdings, a Delaware statutory trust (the "Trust" or "Holdings"), was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the "Company" or "CODI"), was also formed on November 18, 2005 with equity interests which were subsequently reclassified as the "Allocation Interests". The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. In accordance with the amended and restated Trust Agreement, dated as of April 25, 2006 (the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s amended and restated operating agreement, dated as of April 25, 2006 (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 eight businesses, or reportable operating segments, at June 30, 2016 . The segments are as follows: 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" or "Arnold Magnetics"), Clean Earth Holdings, Inc. ("Clean Earth"), Sterno Products, LLC ("Sterno Products") and Tridien Medical, Inc. ("Tridien"). Refer to Note E for further discussion of the operating segments. The Company also owns a non-controlling interest of approximately 33.1% in Fox Factory Holding Corp. ("FOX") which is accounted for as an equity method investment. 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").

Note B — Presentation and Principles of Consolidation
The condensed consolidated financial statements for the three and six month periods ended June 30, 2016 and June 30, 2015 , 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") 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, 2015.
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. Earnings from Clean Earth are typically lower in the winter months due to reduced levels of construction and development activity in the Northeastern United States. Sterno Products typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer season and the holiday season.
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
The Company completed the sale of its majority owned subsidiary, CamelBak Products, LLC ("CamelBak") during the third quarter of 2015. In October 2015, the Company sold its majority owned subsidiary, American Furniture Manufacturing, Inc. ("AFM" or "American Furniture") which met the criteria to be classified as a discontinued operation as of September 30, 2015. As a result, the Company reported the results of operations of CamelBak and American Furniture as discontinued operations in the condensed consolidated statements of operations for the three and six months ended June 30, 2015. Refer to Note D for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.

11


Recently Adopted Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standard update to simplify the presentation of deferred taxes by requiring companies to classify all deferred tax assets and liabilities, along with any related valuation allowances, as noncurrent on the balance sheet. Adoption of this standard is required for annual periods beginning after December 15, 2016 and early adoption is permitted. The Company adopted this guidance early, effective as of January 1, 2016, on a prospective basis, which is permitted under the standard. At January 1, 2016, the Company had $6.1 million classified as current deferred tax assets which was reclassified to long-term deferred tax assets, and no amount classified as current deferred tax liabilities.
In September 2015, the FASB issued an accounting standard to simplify the accounting for measurement period adjustments in connection with business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard update is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The standard update is to be applied prospectively to adjustments of provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The adoption of this standard did not have a significant impact on our condensed consolidated financial statements. The amendment was effective for the Company on January 1, 2016.

In April 2015, the FASB issued an accounting standard update intended to simplify the presentation of debt issuance costs in the balance sheet. The new guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as an asset. In August 2015, the FASB issued additional guidance which addresses the Security and Exchange Commission's ("SEC") comments related to the absence of authoritative guidance within the accounting standard update related to line-of-credit arrangements. The SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings under the line of credit arrangement. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Retrospective adoption is required. The Company adopted this guidance on January 1, 2016 and has reclassified debt issuance costs associated with the Company's term debt of $4.6 million as of December 31, 2015, from long-term assets to long-term debt. Deferred debt issuance costs incurred in connection with the Company's revolving credit facility of $4.2 million and $4.9 million at June 30, 2016 and December 31, 2015, respectively, continue to be classified as long-term assets.

Recently Issued Accounting Pronouncements

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 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 assessing impact of the new standard on our consolidated financial statements.

In July 2015, the FASB issued an accounting standard update intended to simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The new guidance applies only to inventory that is determined by methods other than last-in-first-out and the retail inventory method. The Company does not believe that the adoption of this new accounting guidance will have a significant impact on its consolidated financial statements. The guidance is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of the guidance is permitted.

In May 2014, the FASB issued a comprehensive new revenue recognition standard. The new standard outlines a new, 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 core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries, jurisdictions and capital markets and also requires enhanced disclosures. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date

12


of December 15, 2016. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

Note C — Acquisitions
Acquisition of Manitoba Harvest

On July 10, 2015, FHF Holdings Ltd., a majority owned subsidiary of the Company, and 1037269 B.C. Ltd., a wholly owned subsidiary of FHF Holdings Ltd. (together, the "Buyer"), closed on the acquisition of all the issued and outstanding capital stock of Fresh Hemp Foods Ltd. ("Manitoba Harvest"). Subsequent to the closing, 1037269 B.C. Ltd. merged with and into Manitoba Harvest. Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a global leader in branded, hemp-based foods.

The Company made loans to and purchased an 87% controlling interest in Manitoba Harvest. The purchase price, including proceeds from noncontrolling interest, was approximately $102.7 million ( C$130.3 million ). Manitoba Harvest management and a minority shareholder invested in the transaction along with the Company representing approximately 13% initial noncontrolling interest on a primary basis. The fair value of the noncontrolling interest was determined based on enterprise value of the acquired entity multiplied by the ratio number of shares acquired by the minority shareholders 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 Manitoba Harvest. CGM received integration services fees of $1.0 million which were payable quarterly during the twelve month period subsequent to acquisition as services are rendered.

The results of operations of Manitoba Harvest have been included in the consolidated results of operations since the date of acquisition. Manitoba Harvest'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.

Manitoba Harvest
 
 
(in thousands)
 
 
Assets:
 
 
Cash
 
$
164

Accounts receivable
 
3,787

Inventory (1)
 
8,743

Property, plant and equipment
 
8,203

Goodwill
 
37,882

Intangible assets
 
63,687

Other current and noncurrent assets
 
986

      Total assets
 
$
123,452

 
 
 
Liabilities and noncontrolling interest:
 
 
Current liabilities
 
$
3,267

Deferred tax liabilities
 
16,593

Other liabilities
 
23,332

Noncontrolling interest
 
7,638

      Total liabilities and noncontrolling interest
 
$
50,830

 
 
 
Net assets acquired
 
$
72,622

Noncontrolling interest
 
7,638

Intercompany loans to business
 
23,593

 
 
$
103,853


13



Acquisition Consideration
 
 
Purchase price
 
$
104,437

Working capital adjustment
 
(584
)
Total purchase consideration
 
$
103,853

Less: Transaction costs
 
1,145

Purchase price, net
 
$
102,708


(1) Includes $3.1 million of step-up in the basis of inventory.

The Company incurred $1.1 million of transaction costs in conjunction with the acquisition of Manitoba Harvest during 2015 which were included in selling, general and administrative expenses in the consolidated statements of income during the year ended December 31, 2015. The goodwill of $37.9 million , which is not expected to be deductible for tax purposes, reflects the strategic fit of Manitoba Harvest into the Company's branded products businesses.

The values assigned to the identified intangible assets were determined by discounting estimated future cash flows associated with these assets to their present value. The intangible assets recorded in connection with the Manitoba Harvest acquisition are as follows (in thousands):

Intangible assets
 
Amount
 
Estimated Useful Life
Tradename (unamortizable)
 
$
13,005

 
N/A
Technology and processes
 
9,616

 
10 years
Customer relationships
 
41,066

 
15 years
 
 
$
63,687

 
 

Unaudited pro forma information
The following unaudited pro forma data for the three and six months ended June 30, 2015 gives effect to the acquisition of Manitoba Harvest, as described above, as if the acquisition had been completed as of January 1, 2015, and the sale of CamelBak and AFM as if the dispositions had been completed on January 1, 2015. 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.
(in thousands)
 
Three months ended June 30, 2015
 
Six months ended June 30, 2015
Net sales
 
$
211,671

 
$
401,726

Operating income
 
15,013

 
11,144

Net income (loss)
 
18,523

 
(12,119
)
Net income (loss) attributable to Holdings
 
16,800

 
(13,352
)
Basic and fully diluted net income (loss) per share attributable to Holdings
 
$
0.27

 
$
(0.28
)

Other acquisitions
Ergobaby
On May 11, 2016, the Company's Ergobaby subsidiary acquired all of the outstanding membership interests in New Baby Tula LLC ("Baby Tula"), a maker of premium baby carriers, toddler carriers, slings, blankets and wraps. The purchase price was $73.8 million , plus a potential earn-out of $8.2 million based on 2017 financial performance. Ergobaby paid $0.8 million in transaction costs in connection with the acquisition. Ergobaby funded the acquisition and payment of related transaction costs through the

14


issuance of an additional $68.2 million in inter-company loans with the Company, and the issuance of $8.2 million in Ergobaby shares to the selling shareholders. The fair value of the Ergobaby shares issued to the selling shareholders was determined based on a model that multiplies the trailing twelve months earnings before interest, taxes, depreciation and amortization by an estimated enterprise value multiple to determine an estimated fair value. The Company then assumes proceeds from the conversion of outstanding stock options, deducts the carrying value of debt at Ergobaby and estimated selling costs of the entity, and divides the resulting amount by the total number of outstanding shares, including converted stock options, to determine a per share value for the stock issued. The Company funded the additional inter-company loans used for the acquisition with available cash on the balance sheet and a draw on the 2014 Revolving Credit Facility. Ergobaby has not yet completed the preliminary allocation of the purchase price and has recorded the excess of the purchase price, including the potential earn-out, over the assets acquired as goodwill at June 30, 2016. The Company expects to finalize the purchase price during 2016 within the measurement period.
Clean Earth
On June 1, 2016, the Company's Clean Earth subsidiary acquired certain of the assets and liabilities of EWS Alabama, Inc. ("EWS") for a purchase price of $20.2 million . Clean Earth funded the acquisition and the related transaction costs through the issuance of additional inter-company debt with the Company. Based in Glencoe, Alabama, EWS provides a range of hazardous and non-hazardous waste management services from a fully permitted hazardous waste RCRA Part B facility. The Company funded the additional inter-company loans with Clean Earth through a draw on its 2014 Revolving Credit Facility. Clean Earth has not yet completed the preliminary allocation of the purchase price and has recorded the excess of the purchase price over the assets acquired as goodwill at June 30, 2016. The Company expects to finalize the purchase price during 2016 within the measurement period.
On April 15, 2016, Clean Earth acquired certain assets of Phoenix Soil, LLC ("Phoenix Soil") and WIC, LLC (together with Phoenix Soil, the "Sellers") for a purchase price of $13.7 million . Phoenix Soil is based in Plainville, CT and provides environmental services for nonhazardous contaminated soil materials with a primary focus on soil. Phoenix Soil recently completed its transition to a new 58,000 square foot thermal desorption facility owned by WIC, LLC. The acquisition increases Clean Earth's soil treatment capabilities and expand its geographic footprint into New England. Clean Earth financed the acquisition and payment of related transaction costs through the issuance of an additional $13.7 million in inter-company loans with the Company. The Company used cash on hand to fund the purchase price of Phoenix Soil. In connection with the acquisition, Clean Earth recorded a preliminary purchase price allocation of $3.2 million in goodwill and $5.6 million in intangible assets in the second quarter of 2016. The Company expects to finalize the purchase price during the third quarter of 2016.
Sterno Products
On January 22, 2016, Sterno Products, a wholly owned subsidiary of the company, acquired all of the outstanding stock of Northern International, Inc. (NII), for a total purchase price of approximately $35.8 million (C $50.6 million ), plus a potential earn-out opportunity payable over the next two years up to a maximum amount of $1.8 million (C $2.5 million ), and is subject to working capital adjustments. The contingent consideration was fair valued on a preliminary basis at $1.5 million , based on probability weighted models of the achievement of certain performance based financial targets. Refer to Note K - "Fair Value Measurements." for a description of the valuation technique used to fair value the contingent consideration. Headquartered in Coquitlam, British Columbia, Canada, NII sells flameless candles and outdoor lighting products through the retail segment. Sterno Products financed the acquisition and payment of the related transaction costs through the issuance of an additional $37.0 million in inter-company loans with the Company.
In connection with the acquisition, Sterno recorded a preliminary purchase price allocation of $6.0 million of goodwill, which is not expected to be deductible for income tax purposes, $12.7 million in intangible assets and $1.2 million in inventory step-up. In addition, the earn-out provision of the purchase price was allocated a fair value of $1.5 million . The remainder of the purchase consideration was allocated to net assets acquired. Sterno Products incurred $0.4 million in acquisition related costs in connection with the NII acquisition. The Company expects to finalize the purchase price allocation for NII during 2016 within the measurement period.
Manitoba Harvest
On December 15, 2015, the Company's Manitoba Harvest subsidiary completed the acquisition of Hemp Oil Canada, Inc. (HOCI), for a purchase price of $30.4 million (C $41.5 million ). The final purchase price was reduced by $0.4 million ( C$0.5 million ) after the settlement of the working capital adjustment during the second quarter of 2016. HOCI is a bulk wholesale producer, private label packager and custom processor of hemp food product ingredients, located in Ste. Agathe, Manitoba. Manitoba Harvest incurred $0.4 million (C $0.5 million ) of acquisition related costs for the HOCI acquisition which are recorded in selling, general and administrative expenses in the consolidated results of operation for the year ending December 31, 2015. In connection with the acquisition of HOCI, certain of the selling shareholders of HOCI invested $6.8 million (C $9.3 million ) in Manitoba Harvest in exchange for approximately 11% noncontrolling interest in Manitoba Harvest.

15


Manitoba Harvest recorded a preliminary purchase price allocation of $7.3 million in goodwill, which is expected to be deductible for income tax purposes, $10.8 million of intangible assets, and $0.3 million in inventory step-up. The remainder of the purchase consideration was allocated to net assets acquired. The Company expects to finalize the purchase price for HOCI during the third quarter of 2016.

Note D - Discontinued operations

Sale of CamelBak

On August 3, 2015, the Company sold its majority owned subsidiary, CamelBak, based on a total enterprise value of $412.5 million . The CamelBak purchase agreement contains customary representations, warranties, covenants and indemnification provisions, and the transaction is subject to customary working capital adjustments.

The Company received approximately $367.8 million in cash related to its debt and equity interests in CamelBak after payments to noncontrolling shareholders and payment of all transaction expenses. The Company recognized a gain of $164.0 million , net of tax, during 2015 as a result of the sale of CamelBak.

Sale of AFM

On October 5, 2015, the Company sold its majority owned subsidiary, American Furniture, for a sale price of $24.1 million . The Company received approximately $23.5 million in net proceeds related to its debt and equity interests in American Furniture after payment of all transaction expenses. The Company recognized a loss on the sale of American Furniture of $14.3 million during 2015.

Summarized operating results of discontinued operations for the three and six months ended June 30, 2015 are as follows:

 
 
Three months ended June 30, 2015
 
Six months ended June 30, 2015
(in thousands)
 
CamelBak
 
American Furniture
 
Total discontinued operations
 
CamelBak
 
American Furniture
 
Total discontinued operations
Net sales
 
$
42,574

 
$
42,427

 
$
85,001

 
$
79,496

 
$
83,352

 
$
162,848

Gross profit
 
18,900

 
3,842

 
22,742

 
34,132

 
7,957

 
42,089

Operating income
 
7,284

 
1,549

 
8,833

 
11,635

 
3,225

 
14,860

Income from continuing operations before income taxes
 
8,263

 
1,552

 
9,815

 
12,292

 
3,233

 
15,525

Provision for income taxes
 
2,669

 
38

 
2,707

 
3,656

 
38

 
3,694

Income from discontinued operations (1)
 
$
5,594

 
$
1,514

 
$
7,108

 
$
8,636

 
$
3,195

 
$
11,831


(1) The results for the three and six months ended June 30, 2015 exclude $2.2 million and $4.3 million of intercompany interest expense.

    
Note E — Operating Segment Data
At June 30, 2016 , the Company had eight 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:

Ergobaby is a premier designer, marketer and distributor of wearable baby carriers and related baby wearing products, as well as infant travel systems (strollers, car seats and accessories). Ergobaby offers a broad range of wearable baby carriers, infant travel systems and related products that are sold through more than 450 retailers and web shops in the United States and throughout the world. Ergobaby has two main product lines: baby carriers (baby carriers and accessories) and infant travel systems (strollers, car seats and accessories). Ergobaby is headquartered in Los Angeles, California.


16


Liberty Safe is a designer, manufacturer and marketer of premium home, gun and office safes in North America. From it’s over 314,000 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™, Hemp Heart Bars™, and Hemp protein powders, are currently carried in over 7,000 retail stores across the U.S. and Canada. Manitoba Harvest is headquartered in Winnipeg, Manitoba.

Advanced Circuits, an electronic components manufacturing company, is a provider of 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 Magnetics is a leading global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including energy, medical, aerospace and defense, consumer electronics, general industrial and automotive. Arnold Magnetics produces high performance permanent magnets (PMAG), flexible magnets (FlexMag) and precision foil products (Precision Thin Metals) 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 Magnetics 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 16 facilities in the eastern United States.

Sterno Products is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry and flameless candles and outdoor lighting products for consumers. Sterno Products's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and outdoor lighting products. Sterno Products is headquartered in Corona, California.

Tridien is a leading designer and manufacturer of powered and non-powered medical therapeutic support surfaces and patient positioning devices serving the acute care, long-term care and home health care markets. Tridien is headquartered in Coral Springs, Florida and its products are sold primarily in North America.

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.

17


A disaggregation of the Company’s consolidated revenue and other financial data for the three and six months ended June 30, 2016 and 2015 is presented below (in thousands) :

Net sales of operating segments
Three months ended 
 June 30,
 
Six months ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Ergobaby
$
25,969

 
$
21,492

 
$
45,384

 
$
42,160

Liberty
21,903

 
24,756

 
50,903

 
50,609

Manitoba Harvest
14,684

 

 
28,401

 

ACI
21,749

 
23,082

 
43,266

 
44,500

Arnold Magnetics
28,496

 
29,360

 
55,879

 
60,548

Clean Earth
44,234

 
43,702

 
82,520

 
78,831

Sterno Products
57,141

 
38,365

 
101,110

 
66,970

Tridien
15,212

 
18,968

 
29,972

 
35,532

Total
229,388

 
199,725

 
437,435

 
379,150

Reconciliation of segment revenues to consolidated revenues:
 
 
 
 

 

Corporate and other

 

 

 

Total consolidated revenues
$
229,388

 
$
199,725

 
$
437,435

 
$
379,150



Profit (loss) of operating segments   (1)
Three months ended 
 June 30,
 
Six months ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Ergobaby
$
342

 
$
5,641

 
$
4,432

 
$
11,047

Liberty
2,621

 
2,764

 
7,462

 
4,168

Manitoba Harvest
(1,782
)
 

 
(1,419
)
 

ACI
5,650

 
6,766

 
11,482

 
12,487

Arnold Magnetics
2,351

 
1,720

 
2,977

 
3,474

Clean Earth
3,225

 
1,594

 
2,267

 
40

Sterno Products
6,147

 
3,923

 
8,559

 
5,579

Tridien
47

 
1,005

 
(530
)
 
(7,687
)
Total
18,601

 
23,413

 
35,230

 
29,108

Reconciliation of segment profit to consolidated income (loss) before income taxes:
 
 
 
 

 

Interest expense, net
(7,366
)
 
(3,125
)
 
(18,828
)
 
(12,842
)
Other income, net
(542
)
 
(43
)
 
2,878

 
(33
)
Loss on equity method investment
18,889

 
11,181

 
8,266

 
(2,266
)
Corporate and other (2)
(8,636
)
 
(8,834
)
 
(18,331
)
 
(18,992
)
Total consolidated loss before income taxes
$
20,946

 
$
22,592

 
$
9,215

 
$
(5,025
)

(1)  
Segment profit (loss) represents operating income (loss).
(2)  
Primarily relates to management fees expensed and payable to CGM, and corporate overhead expenses.


18


 
Accounts Receivable
 
Identifiable Assets
 
Depreciation and Amortization Expense
 
June 30,
 
December 31,
 
June 30,
 
December 31,
 
Three months ended 
 June 30,
 
Six months ended 
 June 30,
 
2016
 
2015
 
2016 (1)
 
2015 (1)
 
2016
 
2015
 
2016
 
2015
Ergobaby
$
11,473

 
$
8,076

 
$
62,868

 
$
62,436

 
$
802

 
$
870

 
$
1,637

 
$
1,720

Liberty
11,302

 
12,941

 
29,249

 
31,395

 
653

 
640

 
1,309

 
2,232

Manitoba Harvest
6,223

 
5,512

 
103,801

 
88,541

 
2,154

 

 
3,468

 

ACI
6,758

 
5,946

 
19,881

 
17,275

 
859

 
724

 
1,700

 
1,481

Arnold Magnetics
16,262

 
15,083

 
67,031

 
72,310

 
2,273

 
2,185

 
4,510

 
4,378

Clean Earth
39,788

 
42,291

 
185,753

 
185,087

 
5,075

 
5,067

 
10,030

 
10,459

Sterno Products
31,115

 
19,508

 
142,131

 
121,910

 
2,580

 
2,156

 
6,031

 
3,620

Tridien
6,567

 
8,571

 
14,151

 
15,526

 
616

 
574

 
1,235

 
1,194

Allowance for doubtful accounts
(4,174
)
 
(3,608
)
 

 

 

 

 

 

Total
125,314

 
114,320

 
624,865

 
594,480

 
15,012

 
12,216

 
29,920

 
25,084

Reconciliation of segment to consolidated total:
 
 
 
 

 

 

 

 
 
 
 
Corporate and other identifiable assets

 

 
234

 
64,007

 

 
252

 

 
757

Equity method investment

 

 
210,328

 
249,747

 

 

 

 

Amortization of debt issuance costs and original issue discount

 

 

 

 
737

 
712

 
1,475

 
1,425

Total
$
125,314

 
$
114,320

 
$
835,427

 
$
908,234

 
$
15,749

 
$
13,180

 
$
31,395

 
$
27,266


(1)  
Does not include accounts receivable balances per schedule above or goodwill balances - refer to "Note H - Goodwill and Other Intangible Assets".


Geographic Information
International Revenues
Three months ended 
 June 30,
 
Six months ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Ergobaby
$
13,582

 
$
12,274

 
$
23,959

 
$
23,230

Manitoba Harvest
6,280

 

 
12,410

 

Arnold Magnetics
10,647

 
10,645

 
21,446

 
23,014

Sterno Products
4,847

 
1,681

 
10,039

 
997

 
$
35,356

 
$
24,600

 
$
67,854

 
$
47,241



Note F - Equity Method Investment

Investment in FOX

FOX, a former majority owned subsidiary of the Company that is publicly traded on the NASDAQ Stock Market under the ticker "FOXF," is a designer, manufacturer and marketer of high-performance ride dynamic products used primarily for bicycles, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. FOX’s products offer innovative design, performance, durability and reliability that enhance ride dynamics by improving performance and control. FOX is headquartered in Scotts Valley, California. In July 2014, FOX used a registration statement on Form S-1 under the Securities Act filed with the Securities and Exchange Commission for a public offering of its common stock (the "FOX Secondary Offering"). CODI sold 4,466,569 shares of FOX common stock in connection with the FOX Secondary Offering. As a result of the sale of the shares by the Company in the FOX Secondary Offering, the Company’s ownership interest in FOX decreased to approximately 41.2% , which resulted in the

19


deconsolidation of the FOX operating segment in the Company’s consolidated financial statements effective as of the date of the FOX Secondary Offering.
On March 15, 2016, the Company sold 2,500,000 of its FOX shares through a secondary offering at a price of $15.895 per share, which represented an underwriter's discount of 8.5% from the FOX share closing price on the date the offering was priced. Concurrently with the offering, FOX purchased 500,000 shares of their shares directly from the Company, also at a price of $15.895 per share. As a result of the sale of shares through the offering and the repurchase of shares by FOX, the Company sold a total of 3,000,000 shares of FOX common stock, with total net proceeds of approximately $47.7 million . Upon completion of the offering and repurchase of shares by FOX, the Company's ownership interest in FOX was reduced from approximately 41.2% to 33.1% . The Company currently owns approximately 12.1 million shares of FOX common stock.

The Company has elected to account for its investment in FOX at fair value using the equity method beginning on the date the investment became subject to the equity method of accounting. The Company uses the equity method of accounting when it has the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. For equity method investments which the Company has elected to measure at fair value, unrealized gains and losses are reported in the consolidated statement of operations as gain (loss) from equity method investments. The equity method investment in FOX had a fair value of $210.3 million on June 30, 2016 based on the closing price of FOX shares on that date. The Company recognized a gain of $18.9 million and $8.3 million , respectively, for the three and six months ended June 30, 2016 due to the change in the fair value of the FOX investment and the effect of the underwriter's discount on the sale of FOX shares.

The condensed balance sheet information and results of operations of the Company's FOX investment are summarized below ( in thousands ):

Condensed Balance Sheet information
 
 
 
 
July 1, 2016
 
December 31, 2015
Current assets
 
$
163,342

 
$
131,941

Non-current assets
 
155,435

 
145,775

 
 
$
318,777

 
$
277,716

 
 
 
 
 
Current liabilities
 
$
88,585

 
$
73,970

Non-current liabilities
 
70,515

 
51,486

Stockholders' equity
 
159,677

 
152,260

 
 
$
318,777

 
$
277,716


Condensed Results of Operations
 
 
 
 
 
 
 
 
Three months ended
 
Six months ended
 
 
July 1, 2016
 
June 30, 2015
 
July 1, 2016
 
June 30, 2015
Net revenue
 
$
102,294

 
$
97,171

 
$
182,511

 
$
164,959

Gross profit
 
32,327

 
29,868

 
57,445

 
48,651

Operating income
 
11,278

 
10,357

 
16,971

 
12,076

Net income
 
$
8,917

 
$
6,763

 
$
12,178

 
$
7,533




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Note G — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at June 30, 2016 and December 31, 2015 (in thousands) :

 
June 30, 2016
 
December 31, 2015
Machinery and equipment
$
144,940

 
$
135,357

Office furniture, computers and software
10,636

 
9,500

Leasehold improvements
8,768

 
8,706

Buildings and land
36,520

 
31,856

 
200,864

 
185,419

Less: accumulated depreciation
(76,390
)
 
(67,369
)
Total
$
124,474

 
$
118,050

Depreciation expense was $6.0 million and $11.8 million for the three and six months ended June 30, 2016 , and $5.2 million and $10.8 million for the three and six months ended June 30, 2015 .
Inventory
Inventory is comprised of the following at June 30, 2016 and December 31, 2015 (in thousands) :

 
June 30, 2016
 
December 31, 2015
Raw materials and supplies
$
30,870

 
$
29,809

Work-in-process
9,491

 
9,035

Finished goods
47,495

 
33,653

Less: obsolescence reserve
(6,043
)
 
(4,126
)
Total
$
81,813

 
$
68,371



Note H — Goodwill and Other Intangible Assets

As a result of acquisitions of various businesses, the Company has significant intangible assets on its balance sheet that include goodwill and indefinite-lived intangibles (primarily trade names). Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Indefinite lived intangible assets are not amortized unless their useful life is determined to be finite. Long-lived intangible assets are subject to amortization using the straight-line method. The Company’s goodwill and indefinite-lived intangibles are tested and reviewed for impairment annually as of March 31st or more frequently if facts and circumstances warrant by comparing the fair value of each reporting unit to its carrying value. Each of the Company’s businesses represents a reporting unit, except Arnold, which comprises three reporting units.

Goodwill
2016 Annual goodwill impairment testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment testing. The qualitative factors we consider include, in part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts, as well as issues or events specific to the reporting unit. At March 31, 2016, we determined that the Tridien reporting unit required further quantitative testing (step 1) because we could not conclude that the fair value of the reporting unit exceeds its carrying value based on qualitative factors alone. For the step 1 quantitative impairment test at Tridien, the Company utilized both the market approach and the income approach, with a 50% weighting assigned to each method. The weighted average cost of capital used in the income approach at Tridien was 14.1%. Results of the step 1 quantitative testing of Tridien indicated that the fair value of Tridien exceeded

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its carrying value. For the reporting units that were tested qualitatively, the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value.
2015 Interim goodwill impairment testing

In January 2015, one of Tridien's largest customers informed Tridien that they would not renew their purchase agreement when it expired in the fourth quarter of 2015. The expected lost sales and net income from this customer were significant enough to trigger an interim goodwill impairment analysis in the first quarter of 2015, which resulted in an impairment of the carrying amount of Tridien's goodwill of $8.9 million .

A summary of the net carrying value of goodwill at June 30, 2016 and December 31, 2015, is as follows (in thousands) :
 
Six months ended June 30, 2016
 
Year ended 
 December 31, 2015
Goodwill - gross carrying amount
550,821

 
460,319

Accumulated impairment losses
(61,831
)
 
(61,831
)
Goodwill - net carrying amount
$
488,990

 
$
398,488


The following is a reconciliation of the change in the carrying value of goodwill for the six months ended June 30, 2016 by operating segment (in thousands) :
 
Corporate (1)
 
Ergobaby
 
Liberty
 
Manitoba Harvest
 
ACI
 
Arnold (2)
 
Clean Earth
 
Sterno
 
Tridien
 
Total
Balance as of January 1, 2016
$
8,649

 
$
41,664

 
$
32,828

 
$
52,672

 
$
58,019

 
$
51,767

 
$
111,339

 
$
33,716

 
$
7,834

 
$
398,488

Purchase adjustments - Northern International Inc. (3)

 

 

 

 

 

 

 
6,006

 

 
6,006

Acquisition of Phoenix Soil (3)

 

 

 

 

 

 
3,212

 

 

 
3,212

Acquisition of EWS (4)

 

 

 

 

 

 
19,177

 

 

 
19,177

Acquisition of BabyTula (4)

 
68,946

 

 

 

 

 

 

 

 
68,946

Purchase adjustments - HOCI (3)

 

 

 
(10,579
)
 

 

 

 

 

 
(10,579
)
Foreign currency translation

 

 

 
3,740

 

 

 

 

 

 
3,740

Balance as of June 30, 2016
$
8,649

 
$
110,610

 
$
32,828

 
$
45,833

 
$
58,019

 
$
51,767

 
$
133,728

 
$
39,722

 
$
7,834

 
$
488,990


(1)
Represents goodwill resulting from purchase accounting adjustments not "pushed down" to the ACI segment. This amount is allocated back to the respective segment for purposes of goodwill impairment testing.

(2)
Arnold Magnetics has three reporting units PMAG, FlexMag and Precision Thin Metals with goodwill balances of $40.4 million , $4.8 million and $6.5 million , respectively.

(3)  
The goodwill related to the acquisition of HOCI by Manitoba Harvest, NII by Sterno Products and Phoenix Soil by Clean Earth is based on a preliminary purchase price allocation.

(4)
The preliminary purchase price allocation related to the acquisition of EWS by Clean Earth and Baby Tula by Ergobaby has not yet been prepared. The goodwill related to these acquisitions represents the excess of the purchase price over the net assets acquired.
Long lived assets
Orbitbaby
During the second quarter of 2016, Ergobaby's board of directors approved a plan to dispose of the Orbitbaby product line. Ergobaby determined at the time the plan was approved that the carrying value of the long lived assets associated with the Orbitbaby product line was not recoverable, and therefore, Ergobaby recorded a loss on disposal of assets of $6.7 million related to the write off of the long-lived assets of Orbitbaby. The loss is comprised of the write-off of intangible assets of $5.5 million , property, plant and

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equipment of $0.4 million , and other assets of $0.8 million . Ergobaby will continue to sell the remaining Orbitbaby inventory through the end of 2016.

2016 Annual indefinite lived impairment testing

The Company uses a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. The Company evaluated the qualitative factors of each reporting unit that maintains indefinite lived intangible assets in connection with the annual impairment testing for 2016. Results of the qualitative analysis indicate that the carrying value of the Company’s indefinite lived intangible assets did not exceed their fair value.

2015 long-lived asset impairment
The Company evaluates long-lived assets for potential impairment whenever events occur or circumstances indicate that the carrying amount of the assets may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. As noted above, Tridien's expected loss of a large customer during the fourth quarter of 2015 triggered an interim goodwill impairment which resulted in Tridien recognizing impairment of both the goodwill and the technology and patent intangible asset. The Company completed the interim impairment testing during the second quarter of 2015 and recognized $0.2 million of impairment expense related to the technology and patent intangible asset during the three months ended June 30, 2015 in the condensed consolidated statements of operations.
Other intangible assets are comprised of the following at June 30, 2016 and December 31, 2015 (in thousands) :

 
 
June 30, 2016
 
December 31, 2015
 
Weighted
Average
Useful Lives
Customer relationships
 
$
247,011

 
$
226,722

 
12
Technology and patents
 
50,119

 
41,001

 
9
Trade names, subject to amortization
 
27,309

 
25,130

 
16
Licensing and non-compete agreements
 
7,375

 
6,686

 
5
Permits and airspace
 
99,914

 
98,673

 
13
Distributor relations and other
 
606

 
606

 
5
 
 
432,334

 
398,818

 
 
Accumulated amortization:
 

 

 
 
Customer relationships
 
(85,156
)
 
(74,519
)
 
 
Technology and patents
 
(24,932
)
 
(19,032
)
 
 
Trade names, subject to amortization
 
(5,624
)
 
(4,697
)
 
 
Licensing and non-compete agreements
 
(7,094
)
 
(6,575
)
 
 
Permits and airspace
 
(16,945
)
 
(12,313
)
 
 
Distributor relations and other
 
(606
)
 
(606
)
 
 
Total accumulated amortization
 
(140,357
)
 
(117,742
)
 
 
Trade names, not subject to amortization
 
73,192

 
72,328

 
 
Total intangibles, net
 
$
365,169

 
$
353,404

 
 

Amortization expense related to intangible assets was $8.6 million and $16.4 million for the three and six months ended June 30, 2016, and $7.2 million and $15.0 million for the three and six months ended June 30, 2015, respectively. Estimated charges to amortization expense of intangible assets over the next five years, is as follows (in thousands) :


23


July 1, 2016 through Dec. 31, 2016
 
$
16,403

2017
 
31,045

2018
 
30,027

2019
 
28,682

2020
 
28,436

 
 
$
134,593


Note I — Debt

2014 Credit Agreement

On June 6, 2014, the Company obtained a $725 million credit facility from a group of lenders (the "2014 Credit Facility") led by Bank of America N.A. as Administrative Agent. The 2014 Credit Facility provides for (i) a revolving credit facility of $400 million (as amended from time to time, the "2014 Revolving Credit Facility") and (ii) a $325 million term loan (the "2014 Term Loan Facility"). The 2014 Credit Facility permits the Company to increase the 2014 Revolving Credit Facility commitment and/ or obtain additional term loans in an aggregate of up to $200 million . The 2014 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. The Company amended the 2014 Credit Facility in June 2015, primarily to allow for intercompany loans to, and the acquisition of, Canadian-based companies on an unsecured basis, and to modify provisions that would allow for early termination of a "Leverage Increase Period," thereby providing additional flexibility as to the timing of subsequent acquisitions.

2014 Revolving Credit Facility

The 2014 Revolving Credit Facility will become due in June 2019. The Company can borrow, prepay and reborrow principal under the 2014 Revolving Credit Facility from time to time during its term. Advances under the 2014 Revolving Credit Facility can be either LIBOR rate loans or base rate loans. LIBOR rate revolving loans bear interest at a rate per annum equal to the London Interbank Offered Rate (the "LIBOR Rate") plus a margin ranging from 2.00% to 2.75% based on the ratio of consolidated net indebtedness to adjusted consolidated earnings before interest expense, tax expense and depreciation and amortization expenses (the "Consolidated Leverage Ratio"). Base rate revolving loans bear interest at a fluctuating rate per annum equal to the greatest of (i) the prime rate of interest, or (ii) the Federal Funds Rate plus 0.50% (the "Base Rate"), plus a margin ranging from 1.00% to 1.75% based upon the Consolidated Leverage Ratio.

2014 Term Loan Facility
 
The 2014 Term Loan Facility expires in June 2021 and requires quarterly payments of approximately $0.8 million that commenced September 30, 2014, with a final payment of all remaining principal and interest due on June 6, 2021. The 2014 Term Loan Facility was issued at an original issue discount of 99.5% of par value and bears interest at either the applicable LIBOR Rate plus 3.25% per annum, or Base Rate plus 2.25% per annum. The LIBOR Rate applicable to both base rate loans and LIBOR rate loans shall in no event be less than 1.00% at any time.

Other

The 2014 Credit Facility provides for sub-facilities under the 2014 Revolving Credit Facility pursuant to which an aggregate amount of up to $100.0 million in letters of credit may be issued, as well as swing line loans of up to $25.0 million outstanding at one time. The issuance of such letters of credit and the making of any swing line loan reduces the amount available under the 2014 Revolving Credit Facility. The Company will pay (i) commitment fees on the unused portion of the 2014 Revolving Credit Facility ranging from 0.45% to 0.60% per annum based on its Consolidated Leverage Ratio, (ii) quarterly letter of credit fees, and (iii) administrative and agency fees.

Debt Issuance Costs

Deferred debt issuance costs represent the costs associated with the entering into the 2014 Credit Facility and are amortized over the term of the related debt instrument. The Company's 2014 Credit Facility is comprised of the 2014 Revolving Credit Facility and the 2014 Term Loan Facility. Since the Company can borrow, repay and reborrow principal under the 2014 Revolving Credit Facility, the debt issuance costs associated with this facility have been classified as other non-current assets in the accompanying consolidated balance sheet. The debt issuance costs associated with the 2014 Term Loan are classified as a reduction of long-

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