The Compass Group
Compass Diversified Holdings (Form: 10-Q, Received: 11/02/2016 16:40:22)
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 September 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 November 1, 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 September 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 $550 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 2014 Credit Facility that matures in June 2021;
the "2016 Incremental Term Loan" refer to the $250 million Tranche B Term Facility provided by the 2014 Credit Facility (together with the 2014 Term Loan, the "Term Loans");
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.


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Table of Contents

PART I
FINANCIAL INFORMATION
ITEM 1. — FINANCIAL STATEMENTS

Compass Diversified Holdings
Condensed Consolidated Balance Sheets
(in thousands)
September 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
26,389

 
$
85,240

Accounts receivable, net
173,921

 
105,910

Inventories
231,987

 
59,905

Prepaid expenses and other current assets
22,893

 
21,536

Current assets of discontinued operations

 
18,772

Total current assets
455,190

 
291,363

Property, plant and equipment, net
145,447

 
115,948

Equity method investment (refer to Note F)
197,742

 
249,747

Goodwill
485,054

 
390,655

Intangible assets, net
549,014

 
350,687

Other non-current assets
13,307

 
9,819

Non-current assets of discontinued operations

 
12,823

Total assets
$
1,845,754

 
$
1,421,042

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
55,111

 
$
46,140

Accrued expenses
84,110

 
43,767

Due to related party
8,236

 
5,863

Current portion, long-term debt
5,685

 
3,250

Other current liabilities
13,024

 
9,004

Current liabilities of discontinued operations

 
8,455

Total current liabilities
166,166

 
116,479

Deferred income taxes
103,898

 
103,635

Long-term debt
714,954

 
308,639

Other non-current liabilities
26,711

 
18,960

Non-current liabilities of discontinued operations

 
110

Total liabilities
1,011,729

 
547,823

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

 
825,321

Accumulated other comprehensive loss
(7,817
)
 
(9,804
)
Accumulated (deficit) earnings
(19,706
)
 
10,567

Total stockholders’ equity attributable to Holdings
797,798

 
826,084

Noncontrolling interest
36,227

 
46,219

Noncontrolling interest of discontinued operations

 
916

Total stockholders’ equity
834,025

 
873,219

Total liabilities and stockholders’ equity
$
1,845,754

 
$
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 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2015
 
2016

2015
(in thousands, except per share data)
 
 
 
 
 
 
 
Net sales
$
200,770

 
$
140,738

 
$
525,713

 
$
405,524

Service revenues
51,515

 
44,092

 
134,035

 
122,923

Total net revenues
252,285

 
184,830

 
659,748

 
528,447

Cost of sales
133,006

 
91,589

 
340,576

 
267,059

Cost of service revenues
36,864

 
28,671

 
95,968

 
88,430

Gross profit
82,415

 
64,570

 
223,204

 
172,958

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expense
53,648

 
36,310

 
140,702

 
98,385

Management fees
8,435

 
6,373

 
21,394

 
19,597

Amortization expense
8,423

 
7,259

 
23,966

 
21,455

Loss on disposal of assets
551

 

 
7,214

 

Operating income
11,358

 
14,628

 
29,928

 
33,521

Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(4,376
)
 
(11,205
)
 
(23,204
)
 
(24,047
)
Amortization of debt issuance costs
(687
)
 
(561
)
 
(1,827
)
 
(1,651
)
Gain on equity method investment
50,414

 
11,784

 
58,680

 
9,518

Other expense, net
(3,271
)
 
(949
)
 
(1,852
)
 
(983
)
Income from continuing operations before income taxes
53,438

 
13,697

 
61,725

 
16,358

Provision for income taxes
4,894

 
3,688

 
9,778

 
9,206

Income from continuing operations
48,544

 
10,009

 
51,947

 
7,152

Income (loss) from discontinued operations, net of income tax
(455
)
 
4,934

 
473

 
9,079

Gain on sale of discontinued operations, net of income tax
2,134

 
151,075

 
2,134

 
151,075

Net income
50,223

 
166,018

 
54,554

 
167,306

Less: Net income attributable to noncontrolling interest
682

 
1,272

 
1,749

 
4,006

Less: Income (loss) from discontinued operations attributable to noncontrolling interest
(164
)
 
246

 
(116
)
 
(755
)
Net income attributable to Holdings
$
49,705

 
$
164,500

 
$
52,921

 
$
164,055

Amounts attributable to Holdings
 
 
 
 
 
 
 
Income from continuing operations
47,862

 
8,737

 
50,198

 
3,146

Income (loss) from discontinued operations, net of income tax
(291
)
 
4,688

 
589

 
9,834

Gain on sale of discontinued operations, net of income tax
2,134

 
151,075

 
2,134

 
151,075

Net income attributable to Holdings
$
49,705

 
$
164,500

 
$
52,921

 
$
164,055

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

 


 

 

Continuing operations
$
0.72

 
$
0.14

 
$
0.59

 
$
0.01

Discontinued operations
0.03

 
2.87

 
0.05

 
2.96

 
$
0.75

 
$
3.01

 
$
0.64

 
$
2.97

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

 
$
1.08

 
$
1.08


See notes to condensed consolidated financial statements.

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Table of Contents

Compass Diversified Holdings
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
(in thousands)
 
 
 
 
 
 
 
Net income
$
50,223

 
$
166,018

 
$
54,554

 
$
167,306

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,945
)
 
(5,145
)
 
3,275

 
(4,772
)
Pension benefit liability, net
(765
)
 
12

 
(1,288
)
 
341

Other comprehensive income (loss)
(2,710
)
 
(5,133
)
 
1,987

 
(4,431
)
Total comprehensive income, net of tax
47,513

 
160,885

 
56,541

 
162,875

Less: Net income attributable to noncontrolling interests
518

 
1,518

 
1,633

 
3,251

Less: Other comprehensive income (loss) attributable to noncontrolling interests
(268
)
 
(612
)
 
929

 
(589
)
Total comprehensive income attributable to Holdings, net of tax
$
47,263

 
$
159,979

 
$
53,979

 
$
160,213

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
 
Non-Controlling Interest Attributable to Disc. Ops.
 
Total
Stockholders’
Equity
Balance — January 1, 2016
54,300

 
$
825,321

 
$
10,567

 
$
(9,804
)
 
$
826,084

 
$
46,219

 
$
916

 
$
873,219

Net income

 

 
52,921

 

 
52,921

 
1,749

 
(116
)
 
54,554

Total comprehensive income, net

 

 

 
1,987

 
1,987

 

 

 
1,987

Option activity attributable to noncontrolling shareholders

 

 

 

 

 
3,011

 
1

 
3,012

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
)
Acquisition of 5.11

 

 

 

 

 
5,718

 

 
5,718

Disposition of Tridien

 

 

 

 

 

 
(801
)
 
(801
)
Distribution to Allocation Interest holders (refer to Note L)

 

 
(16,829
)
 

 
(16,829
)
 

 

 
(16,829
)
Distributions paid

 

 
(58,644
)
 

 
(58,644
)
 

 

 
(58,644
)
Balance — September 30, 2016
54,300

 
$
825,321

 
$
(19,706
)
 
$
(7,817
)
 
$
797,798

 
$
36,227

 
$

 
$
834,025

See notes to condensed consolidated financial statements.


8


Compass Diversified Holdings
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Nine months ended September 30,
(in thousands)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
54,554

 
$
167,306

Income from discontinued operations
473

 
9,079

Gain on sale of discontinued operations, net
2,134

 
151,075

Net income from continuing operations
51,947

 
7,152

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation expense
19,481

 
15,797

Amortization expense
32,691

 
24,566

Loss on disposal of assets
7,214

 

Amortization of debt issuance costs and original issue discount
2,363

 
2,154

Unrealized loss on interest rate swap
8,322

 
8,044

Noncontrolling stockholder stock based compensation
3,011

 
2,063

Excess tax benefit from subsidiary stock options exercised
(366
)
 

Gain on equity method investment
(58,680
)
 
(9,518
)
Deferred taxes
(4,479
)
 
(4,352
)
Other
384

 
259

Changes in operating assets and liabilities, net of acquisition:

 

(Increase) decrease in accounts receivable
(8,797
)
 
4,735

Decrease (increase) in inventories
440

 
(8,730
)
Increase in prepaid expenses and other current assets
2,081

 
953

Increase (decrease) in accounts payable and accrued expenses
1,296

 
(11,290
)
Net cash provided by operating activities - continuing operations
56,908

 
31,833

Net cash provided by operating activities - discontinued operations
3,686

 
14,638

Cash provided by operating activities
60,594

 
46,471

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(528,642
)
 
(98,816
)
Purchases of property and equipment
(15,528
)
 
(11,369
)
Net proceeds from sale of equity investment
110,685

 

Payment of interest rate swap
(3,114
)
 
(1,502
)
Purchase of noncontrolling interest (refer to Note N)
(1,476
)
 

Proceeds from sale of business
11,249

 
244,269

Other investing activities
350

 
256

Net cash (used in) provided by investing activities - continuing operations
(426,476
)
 
132,838

Net cash provided by investing activities - discontinued operations
9,192

 
113,756

Cash used in investing activities
(417,284
)
 
246,594


9


Compass Diversified Holdings
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Nine months ended September 30,
(in thousands)
2016
 
2015
Cash flows from financing activities:
 
 
 
Borrowings under credit facility
633,798

 
197,000

Repayments under credit facility
(221,719
)
 
(369,163
)
Distributions paid
(58,644
)
 
(58,644
)
Net proceeds provided by noncontrolling shareholders (refer to Note N)
9,473

 
6,228

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

Distributions paid to allocation interest holders (refer to Note L)
(16,829
)
 

Repurchase of subsidiary stock (refer to Note L)
(15,407
)
 

Excess tax benefit from subsidiary stock options exercised
366

 

Debt issuance costs
(5,993
)
 
(295
)
Other
(1,008
)
 
(576
)
Net cash provided by (used in) financing activities
300,407

 
(225,450
)
Foreign currency impact on cash
(3,197
)
 
(2,593
)
Net (decrease) increase in cash and cash equivalents
(59,480
)
 
65,022

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

 
23,703

Cash and cash equivalents — end of period (2)
$
26,389

 
$
88,725

(1) Includes cash from discontinued operations of $0.6 million at January 1, 2016 and $1.8 million at January 1, 2015.
(2) Does not include any cash from discontinued operations at September 30, 2015 because Tridien had no cash balance as of that date.











See notes to condensed consolidated financial statements.

10


Compass Diversified Holdings
Notes to Condensed Consolidated Financial Statements (unaudited)
September 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 September 30, 2016 . The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), 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"), and Sterno Products, LLC ("Sterno Products"). Refer to Note E for further discussion of the operating segments. The Company also owns a non-controlling interest of approximately 23.3% 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 nine month periods ended September 30, 2016 and September 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
During the third quarter of 2016, the Company completed the sale of Tridien Medical, Inc. ("Tridien"), and during the third quarter of 2015, the Company completed the sale of its subsidiary, CamelBak Products, LLC ("CamelBak"). Additionally, in October 2015, the Company sold its 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 of these sales, the results of operations of Tridien are reported as discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015, and the results of operations of CamelBak and American Furniture are reported as discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September

11


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.

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 $5.2 million and $4.9 million at September 30, 2016 and December 31, 2015, respectively, continue to be classified as long-term assets.

Recently Issued Accounting Pronouncements
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 is 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.
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.


12


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 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 5.11 Tactical
On August 31, 2016, 5.11 ABR Merger Corp. ("Merger Sub"), a wholly owned subsidiary of 5.11 ABR Corp. ("Parent"), which in turn is a wholly owned subsidiary of the Company, merged with and into 5.11 Tactical, with 5.11 Tactical as the surviving entity, pursuant to an agreement and plan of merger among Merger Sub, Parent, 5.11 Tactical, and TA Associates Management L.P. entered into on July 29, 2016.

5.11 Tactical is a leading provider of purpose-built tactical apparel and gear crafted 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.

The Company made loans to, and purchased a 97.5% controlling interest in 5.11 ABR Corp.. The purchase price, including proceeds from noncontrolling interest and net of transaction costs, was approximately $405.1 million . The Company funded its portion of the acquisition through an amendment to the 2014 Credit Facility that allowed for an increase in the 2014 Revolving Credit Facilty and the 2016 Incremental Term Loan (refer to Note I - Debt ). 5.11 management invested in the transaction along with the Company, representing approximately 2.5% 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 5.11. CGM will receive integration service fees of $3.5 million payable quarterly over a twelve month period as services are rendered beginning in the quarter ended December 31, 2016.

The results of operations of 5.11 Tactical have been included in the consolidated results of operations since the date of acquisition. 5.11's results of operations are reported as a separate operating segment. The table below provides the preliminary recording of assets acquired and liabilities assumed as of the acquisition date.

5.11 Tactical
 
 
(in thousands)
 
 
Amounts recognized as of the acquisition date
 
 
Assets:
 
 
Cash
 
$
12,581

Accounts receivable (1)
 
38,323

Inventory (2)
 
163,507

Property, plant and equipment (3)
 
22,723

Intangible assets
 
127,706

Goodwill
 
76,186

Other current and noncurrent assets
 
5,316

      Total assets
 
446,342


13


 
 
 
Liabilities and noncontrolling interest:
 
 
Current liabilities
 
$
38,229

Other liabilities
 
180,231

Deferred tax liabilities
 

Noncontrolling interest
 
5,568

      Total liabilities and noncontrolling interest
 
224,028

 
 
 
Net assets acquired
 
222,314

Noncontrolling interest
 
5,568

Intercompany loans to business
 
179,237

 
 
$
407,119

 
 
 
Acquisition Consideration
 
 
Purchase price
 
$
400,000

Working capital adjustment
 
(910
)
Cash
 
8,029

Total purchase consideration
 
$
407,119

Less: Transaction costs
 
2,063

Purchase price, net
 
$
405,056


(1) Includes $40.1 million of gross contractual accounts receivable of which $1.7 million was not expected to be collected. The fair value of accounts receivable approximated book value acquired.
(2) Includes $42.3 million in inventory basis step-up, which will be charged to cost of goods sold over the inventory turns of the acquired entity.

(3) Includes $7.6 million of property, plant and equipment basis step-up.

The Company incurred $2.1 million of transaction costs in conjunction with the 5.11 acquisition, which was included in selling, general and administrative expense in the consolidated statements of income during that period. The preliminary allocation of the purchase price presented above is based upon management's estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are estimated at their historical carrying values. Property, plant and equipment is valued through a preliminary purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $76.2 million reflects the strategic fit of 5.11 in the Company's branded products business and is not expected to be deductible for income tax purposes.

The intangible assets recorded related to the 5.11 acquisition are as follows ( in thousands ):

Intangible assets
 
Amount
 
Estimated Useful Life
Trade name
 
$
48,665

 
20 years
Customer relationships
 
74,343

 
10 - 15 years
Technology
 
4,698

 
10 years
 
 
$
127,706

 
 

14



The customer relationships intangible asset was valued at $74.3 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 the required returns on and of the other assets utilized in the business. Customer relationships intangible asset was derived using a risk-adjusted discount rate. The tradename intangible asset and the design patent technology asset were valued using a royalty savings 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.
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)
 
 
Amounts recognized as of the acquisition date
 
 
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


15



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 nine months ended September 30, 2016 and September 30, 2015 gives effect to the acquisition of Manitoba Harvest and 5.11 Tactical, as described above, as if the acquisitions had been completed as of January 1, 2015, and the sale of CamelBak, AFM and Tridien 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.
 
Three months ended
 
Nine months ended
(in thousands)
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Net sales
$
299,737

 
$
271,488

 
$
845,212

 
$
766,929

Operating income
11,769

 
20,913

 
29,603

 
42,755

Net income (loss)
46,468

 
9,284

 
38,989

 
(1,163
)
Net income (loss) attributable to Holdings
45,795

 
8,033

 
37,271

 
(5,515
)
Basic and fully diluted net income (loss) per share attributable to Holdings
$
0.68

 
$
0.13

 
$
0.40

 
$
(0.15
)

16


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 , net of transaction costs, 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 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 fair value calculation 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 recorded a preliminary purchase price allocation of $13.2 million in goodwill, which is expected to be deductible for income tax purposes, $55.3 million in intangible assets comprised of $52.9 million in finite lived tradenames, $1.7 million in non-compete agreements; and $0.7 million in customer relationships, and $4.8 million in inventory step-up. $3.7 million of the inventory step-up has been charged to cost of goods sold during the quarter ended September 30, 2016, and the remaining amount will be charged to cost of goods sold during the fourth quarter of 2016. In addition, the earn-out provision of the purchase price was allocated a fair value of $3.8 million . The remainder of the purchase consideration was allocated to net assets acquired. Ergobaby paid $0.7 million in transaction costs related to the acquisition of Baby Tula. The Company expects to finalize the purchase price during the fourth quarter of 2016.
Clean Earth
On June 1, 2016, the Company's Clean Earth subsidiary acquired certain of the assets and liabilities of EWS Alabama, Inc. ("EWS"). 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. In connection with the acquisition, Clean Earth recorded a preliminary purchase price allocation of $3.3 million in goodwill and $12.1 million in intangible assets. The Company expects to finalize the purchase price during the fourth quarter of 2016.
On April 15, 2016, Clean Earth acquired certain assets of Phoenix Soil, LLC ("Phoenix Soil") and WIC, LLC (together with Phoenix Soil, the "Sellers"). 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 additional 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 fourth 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 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

17


was allocated to net assets acquired. Sterno Products incurred $0.4 million in acquisition related costs in connection with the NII acquisition.
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.
Manitoba Harvest recorded a 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.

Note D - Discontinued operations

Sale of Tridien

On September 21, 2016, the Company sold its majority owned subsidiary, Tridien, based on an enterprise value of $25 million . After the allocation of the sale proceeds to non-controlling equity holders and the payment of transaction expenses, the Company received approximately $22.7 million in net proceeds at closing related to its debt and equity interests in Tridien. The Company recognized a gain of $1.5 million for the three and nine months ended September 30, 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 have been reserved to support the Company’s indemnification obligations for future claims against Tridien that the Company may be liable for under the terms of the Tridien sale agreement.

The following table presents summary balance sheet information of the Tridien business that is presented as discontinued operations as of December 31, 2015 (in thousands):

 
 
 
December 31, 2015
Assets:
 
 
 
Cash
 
$
629

 
Accounts receivable
 
8,410

 
Inventories
 
8,466

 
Prepaid expenses and current assets
 
1,267

 
Current assets of discontinued operations
 
$
18,772

 
Property, plant and equipment, net
 
2,103

 
Goodwill
 
7,833

 
Intangible assets, net
 
2,717

 
Other noncurrent assets
 
170

 
Noncurrent assets of discontinued operations
 
$
12,823

Liabilities
 
 
 
Accounts payable
 
4,263

 
Accrued expenses and other current liabilities
 
4,192

 
Current liabilities of discontinued operations
 
$
8,455

 
Noncurrent liabilities of discontinued operations
 
$
110

Noncontrolling interest of discontinued operations
 
$
916




18


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. During the third quarter of 2016, the Company settled the outstanding working capital adjustments related to CamelBak, resulting in the recognition of additional gain on the sale of business of $0.6 million during the quarter ended September 30, 2016.

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.

Operating results of discontinued operations

Summarized operating results of discontinued operations for the three and nine months ended September 30, 2016 and 2015 are as follows:
 
Three months ended September 30, 2016 (1)
 
Nine months ended September 30, 2016 (1)
(in thousands)
Tridien
 
Tridien
Net sales
$
15,978

 
$
45,951

Gross profit
3,223

 
7,917

Operating income
967

 
437

Income (loss) from continuing operations before income taxes
(440
)
 
488

Provision for income taxes
15

 
15

Income (loss) from discontinued operations (2)
$
(455
)
 
$
473


(1) The results of operations of Triden for the three and nine months ended September 30, 2016 include the results from July 1, 2016 through the date of disposition and January 1, 2016 through the date of disposition, respectively.

(2) The results for the three and nine months ended September 30, 2016 exclude $0.4 million and $1.1 million of intercompany interest expense.

 
Three months ended September 30, 2015
 
Nine months ended September 30, 2015
(in thousands)
CamelBak (1)
 
American Furniture
 
Tridien
 
Total discontinued operations
 
CamelBak (1)
 
American Furniture
 
Tridien
 
Total discontinued operations
Net sales
$
17,023

 
$
39,068

 
$
23,318

 
$
79,409

 
$
96,519

 
$
122,420

 
$
58,850

 
$
277,789

Gross profit
7,282

 
3,656

 
4,409

 
15,347

 
41,415

 
11,613

 
11,807

 
64,835

Operating income (loss)
2,713

 
901

 
1,183

 
4,797

 
14,348

 
4,126

 
(6,504
)
 
11,970

Income (loss) from continuing operations before income taxes
4,315

 
902

 
1,183

 
6,400

 
16,607

 
4,134

 
(6,503
)
 
14,238

Provision for income taxes
1,355

 
43

 
68

 
1,466

 
5,010

 
81

 
68

 
5,159

Income (loss) from discontinued operations (2)
$
2,960

 
$
859

 
$
1,115

 
$
4,934

 
$
11,597

 
$
4,053

 
$
(6,571
)
 
$
9,079


(1) The results of operations of Camelbak for the three and nine months ended September 30, 2015 include the results from July 1, 2015 through the date of disposition and January 1, 2015 through the date of disposition, respectively.

19



(2) The results for the three and nine months ended September 30, 2015 exclude $2.9 million and $7.7 million of intercompany interest expense.

    
Note E — Operating Segment Data
At September 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:

5.11 Tactical is a leading provider of purpose-built tactical apparel and gear crafted 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.

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.

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.

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.

20


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

Net sales of operating segments
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
5.11 Tactical
$
27,203

 
$

 
$
27,203

 
$

Ergobaby
29,664

 
21,944

 
75,048

 
64,104

Liberty
23,810

 
23,404

 
74,713

 
74,013

Manitoba Harvest
15,920

 
8,856

 
44,321

 
8,856

ACI
21,679

 
22,234

 
64,945

 
66,734

Arnold Magnetics
26,912

 
32,590

 
82,791

 
93,138

Clean Earth
51,515

 
44,092

 
134,035

 
122,922

Sterno Products
55,582

 
31,710

 
156,692

 
98,680

Total
252,285

 
184,830

 
659,748

 
528,447

Reconciliation of segment revenues to consolidated revenues:
 
 
 
 

 

Corporate and other

 

 

 

Total consolidated revenues
$
252,285

 
$
184,830

 
$
659,748

 
$
528,447



Profit (loss) of operating segments   (1)
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
5.11 Tactical
$
(1,794
)
 
$

 
$
(1,794
)
 
$

Ergobaby
4,671

 
5,717

 
9,101

 
16,764

Liberty
2,417

 
3,545

 
9,879

 
7,713

Manitoba Harvest
554

 
(3,955
)
 
(865
)
 
(3,955
)
ACI
5,759

 
6,295

 
17,241

 
18,782

Arnold Magnetics
851

 
3,058

 
3,828

 
6,532

Clean Earth
3,593

 
4,893

 
5,860

 
4,933

Sterno Products
5,536

 
2,707

 
14,095

 
8,286

Total
21,587

 
22,260

 
57,345

 
59,055

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

 

Interest expense, net
(4,376
)
 
(11,205
)
 
(23,204
)
 
(24,047
)
Other income, net
(3,271
)
 
(949
)
 
(1,852
)
 
(983
)
Gain on equity method investment
50,414

 
11,784

 
58,680

 
9,518

Corporate and other (2)
(10,916
)
 
(8,193
)
 
(29,244
)
 
(27,185
)
Total consolidated loss before income taxes
$
53,438

 
$
13,697

 
$
61,725

 
$
16,358


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


21


 
Accounts Receivable
 
Identifiable Assets
 
Depreciation and Amortization Expense
 
Sept. 30,
 
December 31,
 
Sept. 30,
 
December 31,
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2015
 
2016 (1)
 
2015 (1)
 
2016
 
2015
 
2016
 
2015
5.11 Tactical
$
45,321

 
$

 
$
322,200

 
$

 
$
5,192

 
$

 
$
5,192

 
$

Ergobaby
11,768

 
8,076

 
116,660

 
62,436

 
4,409

 
876

 
6,046

 
2,596

Liberty
13,000

 
12,941

 
27,931

 
31,395

 
616

 
648

 
1,925

 
2,880

Manitoba Harvest
8,249

 
5,512

 
100,833

 
88,541

 
1,732

 
4,011

 
5,200

 
4,048

ACI
6,166

 
5,946

 
18,298

 
17,275

 
885

 
726

 
2,585

 
2,207

Arnold Magnetics
16,269

 
15,083

 
64,987

 
72,310

 
2,268

 
2,182

 
6,778

 
6,561

Clean Earth
44,705

 
42,291

 
199,621

 
185,087

 
5,989

 
5,082

 
16,019

 
15,541

Sterno Products
34,373

 
19,508

 
137,780

 
121,910

 
2,396

 
2,155

 
8,427

 
5,775

Allowance for doubtful accounts
(5,930
)
 
(3,447
)
 

 

 

 

 

 

Total
173,921

 
105,910

 
988,310

 
578,954

 
23,487

 
15,680

 
52,172

 
39,608

Reconciliation of segment to consolidated total:
 
 
 
 

 

 

 

 
 
 
 
Corporate and other identifiable assets

 

 
727

 
64,180

 

 

 

 
755

Equity method investment

 

 
197,742

 
249,747

 

 

 

 

Amortization of debt issuance costs and original issue discount

 

 

 

 
888

 
729

 
2,363

 
2,154

Assets of discontinued operations

 

 

 
31,596

 

 

 

 

Total
$
173,921

 
$
105,910

 
$
1,186,779

 
$
924,477

 
$
24,375

 
$
16,409

 
$
54,535

 
$
42,517


(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 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
5.11 Tactical
$
6,141

 
$

 
$
6,141

 
$

Ergobaby
16,701

 
12,829

 
40,660

 
36,059

Manitoba Harvest
8,573

 
5,206

 
20,983

 
5,206

Arnold Magnetics
12,208

 
10,798

 
33,654

 
33,812

Sterno Products
6,327

 
883

 
16,366

 
2,564

 
$
49,950

 
$
29,716

 
$
117,804

 
$
77,641



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

22


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 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 (the "March 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 March 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 March 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 March Offering and repurchase of shares by FOX, the Company's ownership interest in FOX was reduced from approximately 41.2% to 33.1% . During the third quarter of 2016, FOX closed on a secondary public offering (the "August Offering") of 4,025,000 shares held by certain FOX shareholders, including the Company. The Company sold a total of 3,500,000 shares of FOX common stock in the August Offering, for total net proceeds of $63.0 million . Upon completion of the August Offering, the Company's ownership of FOX decreased from approximately 33% to approximately 23% . The Company currently owns approximately 8.6 million shares of FOX common stock.
The sale of the FOX shares in the March Offering and August Offering qualified as a Sale Event under the Company's LLC Agreement. The Company's Board of Directors declared a distribution to the Holders of the Allocation Interests of $8.6 million and $11.6 million , respectively, in connection with the Sale Events of FOX. The profit allocation payment related to the March Offering was made in the quarter ended June 30, 2016, and the profit allocation related to the August Offering will be made during the quarter ended December 31, 2016. The profit allocation for the August Offering will total a net distribution to Holders of $7.0 million after the effect of the Sale Event related to Tridien is used to offset this payment.

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 $197.7 million on September 30, 2016 based on the closing price of FOX shares on that date. The Company recognized a gain of $50.4 million and $58.7 million , respectively, for the three and nine months ended September 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
 
 
 
 
September 30, 2016
 
December 31, 2015
Current assets
 
$
170,837

 
$
131,941

Non-current assets
 
153,738

 
145,775

 
 
$
324,575

 
$
277,716

 
 
 
 
 
Current liabilities
 
$
80,795

 
$
73,970

Non-current liabilities
 
69,562

 
51,486

Stockholders' equity
 
174,218

 
152,260

 
 
$
324,575

 
$
277,716



23


Condensed Results of Operations
 
 
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Net revenue
 
$
109,011

 
$
106,171

 
$
291,522

 
$
271,130

Gross profit
 
34,886

 
34,786

 
92,331

 
83,437

Operating income
 
15,086

 
13,821

 
32,057

 
25,897

Net income
 
$
13,684

 
$
10,591

 
$
25,862

 
$
18,124



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

 
September 30, 2016
 
December 31, 2015
Machinery and equipment
$
152,757

 
$
126,850

Office furniture, computers and software
12,813

 
8,771

Leasehold improvements
13,232

 
7,582

Buildings and land
43,008

 
31,856

 
221,810

 
175,059

Less: accumulated depreciation
(76,363
)
 
(59,111
)
Total
$
145,447

 
$
115,948

Depreciation expense was $7.3 million and $19.5 million for the three and nine months ended September 30, 2016 , and $5.2 million and $15.8 million for the three and nine months ended September 30, 2015 .
Inventory
Inventory is comprised of the following at September 30, 2016 and December 31, 2015 (in thousands) :

 
September 30, 2016