The Compass Group
Compass Diversified Holdings (Form: 10-Q, Received: 11/08/2017 16:22:24)
 
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, 2017
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)
 
3 01 Riverside Avenue
Second Floor
Westport, CT 06880
(203) 221-1703
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    ý      No    ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    ý      No    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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
 
¨
 
 
 
 
Emerging growth company
 
¨

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

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

As of November 1, 2017, there were 59,900,000 Trust common shares of Compass Diversified Holdings outstanding.
 



COMPASS DIVERSIFIED HOLDINGS
QUARTERLY REPORT ON FORM 10-Q
For the period ended September 30, 2017
TABLE OF CONTENTS
 
 
 
 
Page
Number
 
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
ITEM 3.
 
 
 
 
 
 
 
ITEM 4.
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 1A.
 
 
 
 
 
 
 
ITEM 6.
 
 
 
 
 
 
 
 
 


2


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

the "Trust" and "Holdings" refer to Compass Diversified Holdings;
"businesses," "operating segments," "subsidiaries" and "reporting units" refer to, collectively, the businesses controlled by the Company;
the "Company" refer to Compass Group Diversified Holdings LLC;
the "Manager" refer to Compass Group Management LLC ("CGM");
the "Trust Agreement" refer to the Second Amended and Restated Trust Agreement of the Trust dated as of December 6, 2016;
the "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 a Revolving Credit Facility and a Term Loan;
the "2014 Revolving Credit Facility" refer to the $550 million Revolving Credit Facility provided by the 2014 Credit Facility that matures in June 2019;
the "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 fifth amended and restated operating agreement of the Company dated as of December 6, 2016; and
"we," "us" and "our" refer to the Trust, the Company and the businesses together.


3


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

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


4


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
41,487

 
$
39,772

Accounts receivable, net
198,111

 
181,191

Inventories
242,817

 
212,984

Prepaid expenses and other current assets
27,145

 
18,872

Total current assets
509,560

 
452,819

Property, plant and equipment, net
170,827

 
142,370

Investment in FOX (refer to Note F)

 
141,767

Goodwill
539,925

 
491,637

Intangible assets, net
591,878

 
539,211

Other non-current assets
8,616

 
9,351

Total assets
$
1,820,806

 
$
1,777,155

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
77,417

 
$
61,512

Accrued expenses
105,058

 
91,041

Due to related party
7,553

 
20,848

Current portion, long-term debt
5,685

 
5,685

Other current liabilities
15,493

 
23,435

Total current liabilities
211,206

 
202,521

Deferred income taxes
122,033

 
110,838

Long-term debt
569,755

 
551,652

Other non-current liabilities
18,570

 
17,600

Total liabilities
921,564

 
882,611

Stockholders’ equity
 
 
 
Trust preferred shares, 50,000 authorized; 4,000 shares issued and outstanding at September 30, 2017
96,417

 

Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding at September 30, 2017 and December 31, 2016
924,680

 
924,680

Accumulated other comprehensive loss
(2,184
)
 
(9,515
)
Accumulated deficit
(167,297
)
 
(58,760
)
Total stockholders’ equity attributable to Holdings
851,616

 
856,405

Noncontrolling interest
47,626

 
38,139

Total stockholders’ equity
899,242

 
894,544

Total liabilities and stockholders’ equity
$
1,820,806

 
$
1,777,155

See notes to condensed consolidated financial statements.

5


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
(in thousands, except per share data)
2017
 
2016
 
2017
 
2016
Net sales
$
268,281

 
$
200,770

 
$
767,960

 
$
525,713

Service revenues
55,676

 
51,515

 
153,370

 
134,035

Total net revenues
323,957

 
252,285

 
921,330

 
659,748

Cost of sales
166,445

 
133,006

 
488,913

 
340,576

Cost of service revenues
39,787

 
36,864

 
110,639

 
95,968

Gross profit
117,725

 
82,415

 
321,778

 
223,204

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expense
80,804

 
53,648

 
239,102

 
140,702

Management fees
8,277

 
8,435

 
24,308

 
21,394

Amortization expense
14,167

 
8,423

 
39,256

 
23,966

Impairment expense

 

 
8,864

 

Loss on disposal of assets

 
551

 

 
7,214

Operating income
14,477

 
11,358

 
10,248

 
29,928

Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(6,945
)
 
(4,376
)
 
(22,499
)
 
(23,204
)
Amortization of debt issuance costs
(1,004
)
 
(687
)
 
(2,940
)
 
(1,827
)
Gain (loss) on investment in FOX

 
50,414

 
(5,620
)
 
58,680

Other income (expense), net
2,020

 
(3,271
)
 
2,950

 
(1,852
)
Income (loss) from continuing operations before income taxes
8,548

 
53,438

 
(17,861
)
 
61,725

Provision (benefit) for income taxes
192

 
4,894

 
(2,002
)
 
9,778

Income (loss) from continuing operations
8,356

 
48,544

 
(15,859
)
 
51,947

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

 
(455
)
 

 
473

Gain on sale of discontinued operations, net of income tax

 
2,134

 
340

 
2,134

Net income (loss)
8,356

 
50,223

 
(15,519
)
 
54,554

Less: Net income attributable to noncontrolling interest
650

 
682

 
2,492

 
1,749

Less: Net loss from discontinued operations attributable to noncontrolling interest

 
(164
)
 

 
(116
)
Net income (loss) attributable to Holdings
$
7,706

 
$
49,705

 
$
(18,011
)
 
$
52,921

Amounts attributable to Holdings
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
7,706

 
$
47,862

 
$
(18,351
)
 
$
50,198

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

 
(291
)
 

 
589

Gain on sale of discontinued operations, net of income tax

 
2,134

 
340

 
2,134

Net income (loss) attributable to Holdings
$
7,706

 
$
49,705

 
$
(18,011
)
 
$
52,921

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

 


 
 
 
 
Continuing operations
$
0.10

 
$
0.72

 
$
(1.03
)
 
$
0.59

Discontinued operations

 
0.03

 
0.01

 
0.05

 
$
0.10

 
$
0.75

 
$
(1.02
)
 
$
0.64

Weighted average number of shares of common shares outstanding – basic and fully diluted
59,900

 
54,300

 
59,900

 
54,300

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

 
$
0.36

 
$
1.08

 
$
1.08


See notes to condensed consolidated financial statements.

6


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

 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income (loss)
$
8,356

 
$
50,223

 
$
(15,519
)
 
$
54,554

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
3,370

 
(1,945
)
 
6,955

 
3,275

Pension benefit liability, net
(4
)
 
(765
)
 
376

 
(1,288
)
Other comprehensive income (loss)
3,366

 
(2,710
)
 
7,331

 
1,987

Total comprehensive income (loss), net of tax
11,722

 
47,513

 
(8,188
)
 
56,541

Less: Net income attributable to noncontrolling interests
650

 
518

 
2,492

 
1,633

Less: Other comprehensive income (loss) attributable to noncontrolling interests
675

 
(268
)
 
1,336

 
929

Total comprehensive income (loss) attributable to Holdings, net of tax
$
10,397

 
$
47,263

 
$
(12,016
)
 
$
53,979

See notes to condensed consolidated financial statements.


7


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

(in thousands)
Trust Preferred Shares
 
Trust Common Shares
 
Accumulated Deficit
 
Accumulated Other
Comprehensive
Loss
 
Stockholders' Equity Attributable
to Holdings
 
Non-
Controlling
Interest
 
Total
Stockholders’
Equity
Balance — January 1, 2017
$

 
$
924,680

 
$
(58,760
)
 
$
(9,515
)
 
$
856,405

 
$
38,139

 
$
894,544

Net income (loss)

 

 
(18,011
)
 

 
(18,011
)
 
2,492

 
(15,519
)
Total comprehensive income, net

 

 

 
7,331

 
7,331

 

 
7,331

Issuance of Trust preferred shares, net of offering costs
96,417

 

 

 

 
96,417

 

 
96,417

Option activity attributable to noncontrolling shareholders

 

 

 

 

 
4,952

 
4,952

Effect of subsidiary stock option exercise

 

 

 

 

 
1,222

 
1,222

Effect of issuance of subsidiary stock

 

 

 

 

 
40

 
40

Acquisition of Crosman

 

 

 

 

 
781

 
781

Distributions paid - Allocation Interests (refer to Note L)

 

 
(25,834
)
 

 
(25,834
)
 

 
(25,834
)
Distributions paid - Trust Common Shares

 

 
(64,692
)
 

 
(64,692
)
 

 
(64,692
)
Balance — September 30, 2017
$
96,417

 
$
924,680

 
$
(167,297
)
 
$
(2,184
)
 
$
851,616

 
$
47,626

 
$
899,242

See notes to condensed consolidated financial statements.


8


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
Nine months ended September 30,
(in thousands)
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(15,519
)
 
$
54,554

Income from discontinued operations

 
473

Gain on sale of discontinued operations, net
340

 
2,134

Net income (loss) from continuing operations
(15,859
)
 
51,947

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

 

Depreciation expense
24,505

 
19,481

Amortization expense
64,154

 
32,691

Impairment expense
8,864

 

Loss on disposal of assets

 
7,214

Amortization of debt issuance costs and original issue discount
3,721

 
2,363

Unrealized loss on interest rate swap
1,178

 
8,322

Noncontrolling stockholder stock based compensation
4,952

 
3,011

Excess tax benefit from subsidiary stock options exercised
(417
)
 
(366
)
Loss (gain) on investment in FOX
5,620

 
(58,680
)
Provision for loss on receivables
4,310

 
59

Deferred taxes
(17,937
)
 
(4,479
)
Other
494

 
325

Changes in operating assets and liabilities, net of acquisition:

 

Increase in accounts receivable
(1,015
)
 
(8,797
)
(Increase) decrease in inventories
(24,222
)
 
440

(Increase) decrease in prepaid expenses and other current assets
(4,501
)
 
2,081

Increase in accounts payable and accrued expenses
5,389

 
1,296

Net cash provided by operating activities - continuing operations
59,236

 
56,908

Net cash provided by operating activities - discontinued operations

 
3,686

Cash provided by operating activities
59,236

 
60,594

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(164,742
)
 
(528,642
)
Purchases of property and equipment
(30,955
)
 
(15,528
)
Net proceeds from sale of equity investment
136,147

 
110,685

Payment of interest rate swap
(3,050
)
 
(3,114
)
Purchase of noncontrolling interest

 
(1,476
)
Proceeds from sale of business
340

 
11,249

Other investing activities
(696
)
 
350

Net cash used in investing activities - continuing operations
(62,956
)
 
(426,476
)
Net cash provided by investing activities - discontinued operations

 
9,192

Cash used in investing activities
(62,956
)
 
(417,284
)

9


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine months ended September 30,
(in thousands)
2017
 
2016
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of Trust preferred shares, net
96,417

 

Borrowings under credit facility
214,500

 
633,798

Repayments under credit facility
(197,664
)
 
(221,719
)
Distributions paid
(64,692
)
 
(58,644
)
Net proceeds provided by noncontrolling shareholders
821

 
9,473

Distributions paid to noncontrolling shareholders

 
(23,630
)
Distributions paid to allocation interest holders (refer to Note L)
(39,188
)
 
(16,829
)
Repurchase of subsidiary stock

 
(15,407
)
Excess tax benefit from subsidiary stock options exercised
417

 
366

Debt issuance costs
(1,433
)
 
(5,993
)
Other
(1,316
)
 
(1,008
)
Net cash provided by financing activities
7,862

 
300,407

Foreign currency impact on cash
(2,427
)
 
(3,197
)
Net increase (decrease) in cash and cash equivalents
1,715

 
(59,480
)
Cash and cash equivalents — beginning of period (1)
39,772

 
85,869

Cash and cash equivalents — end of period
$
41,487

 
$
26,389

(1) Includes cash from discontinued operations of $0.6 million at January 1, 2016.












See notes to condensed consolidated financial statements.

10


COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2017

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 December 6, 2016 (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 December 6, 2016 (as amended and restated, the "LLC Agreement")) of the Company and, pursuant to the LLC Agreement, the Company has, outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of nine businesses, or reportable operating segments, at September 30, 2017 . The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), Crosman Corp. ("Crosman"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Fresh Hemp Foods Ltd. ("Manitoba Harvest"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold" or "Arnold Magnetics"), Clean Earth Holdings, Inc. ("Clean Earth"), and Sterno Products, LLC ("Sterno" or "Sterno Products"). Refer to Note E - "Operating Segment Data" for further discussion of the operating segments. Compass Group Management LLC, a Delaware limited liability company ("CGM" or the "Manager"), manages the day to day operations of the Company and oversees the management and operations of our businesses pursuant to a management services agreement ("MSA").
Note B - Presentation and Principles of Consolidation
The condensed consolidated financial statements for the three and nine month periods ended September 30, 2017 and September 30, 2016 , are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or "GAAP") and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Seasonality
Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Crosman typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday seasons. Earnings from Clean Earth are typically lower during the winter months due to the limits on outdoor construction and development activity because of the colder weather in the Northeastern United States. Sterno Products typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer and holiday seasons, respectively.
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"). 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. Refer to Note D - "Discontinued Operations" 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 January 2017, the FASB issued new accounting guidance to simplify the accounting for goodwill impairment. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not

11


to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. Entities will continue to have the option to perform a qualitative test to determine if a quantitative test is necessary. The guidance is effective for fiscal years and interim periods within those years, after December 31, 2019, with early adoption permitted for any goodwill impairment tests performed after January 1, 2017 and will be applied prospectively. The Company adopted this guidance early, effective January 1, 2017, on a prospective basis, and will apply the guidance as necessary to annual and interim goodwill testing performed subsequent to January 1, 2017.
Recently Issued Accounting Pronouncements
In March 2017, the FASB issued new guidance that will require employers that sponsor defined benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period, and requires the other components of net periodic pension cost to be presented in the income statement separately from the service component cost and outside a subtotal of income from operations. The new guidance shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company's Arnold business segment has a defined benefit plan covering substantially all of Arnold's employees at its Switzerland location. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.
In January 2017, the FASB issued new guidance that changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the set of transferred asset and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognition guidance. The new standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.
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. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
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 the impact of the new standard on our consolidated financial statements.
In May 2014, the FASB issued a comprehensive new revenue recognition standard. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The 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. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard is designed to create greater comparability for financial statement users across industries, jurisdictions and capital markets and also requires enhanced disclosures. The new standard will be effective for the Company beginning January 1, 2018. The FASB issued four subsequent standards in 2016 containing implementation guidance related to the new standard. These standards provide additional guidance related to principal versus agent considerations, licensing, and identifying performance obligations. Additionally, these standards provide narrow-scope improvements and practical expedients as well as technical corrections and improvements.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company will be adopting the standard using the modified retrospective method effective January 1, 2018.
The Company has developed implementation procedures specific to each of its reportable segments. The Company has designed these procedures to assess the impact that the new revenue standard will have on the Company’s financial

12


statements and to make any changes necessary to its current accounting practices and internal controls over financial reporting. The Company expects to complete the implementation procedures during the fourth quarter of 2017. The Company has identified certain differences as it relates to the concepts of variable consideration, consideration payable to a customer and the focus on control to determine when and how revenue should be recognized (i.e. point in time versus over time) during the implementation process. Although certain differences have been identified around variable consideration and consideration payable to a customer, the total impact on each reportable segment will not be material to the financial statements. The Company has identified two reportable segments where revenue recognition will change to over time recognition from historical point in time revenue recognition. Although the timing of revenue recognition for these two reportable segments will change, these changes will not have a material impact on the Company’s financial statements. The Company expects to adopt certain practical expedients and make certain policy elections related to the accounting for significant financing components, sales taxes, shipping and handling, costs to obtain a contract and immaterial promised goods or services which mitigates any potential differences. In addition, the Company is currently analyzing our internal control over financial reporting framework to determine if controls should be added or modified as a result of adopting this standard, and reviewing the tax impact, if any, the option of the new standard may have. We also expect that the adoption of the new standard will result in expanded and disaggregated disclosure requirements.

Note C — Acquisitions

Acquisition of Crosman
On June 2, 2017, CBCP Acquisition Corp. (the "Buyer"), a wholly owned subsidiary of the Company, entered into an equity purchase agreement pursuant to which it acquired all of the outstanding equity interests of Bullseye Acquisition Corporation, the indirect owner of the equity interests of Crosman Corp. ("Crosman"). Crosman is a designer, manufacturer and marketer of airguns, archery products, laser aiming devices and related accessories. Headquartered in Bloomfield, New York, Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channels and distributors serving smaller specialty stores and international markets. Its diversified product portfolio includes the widely known Crosman, Benjamin and CenterPoint brands.

The Company made loans to, and purchased a 98.9% controlling interest in, Crosman. The purchase price, including proceeds from noncontrolling interests and net of transaction costs, was approximately $150.4 million . Crosman management invested in the transaction along with the Company, representing approximately 1.1% of the initial noncontrolling interest on a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership of Crosman. CGM will receive integration service fees of $1.5 million payable quarterly over a twelve month period as services are rendered beginning in the quarter ended September 30, 2017. The Company incurred $1.5 million of transaction costs in conjunction with the Crosman acquisition, which was included in selling, general and administrative expense in the consolidated statements of income during the second quarter of 2017.

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

 
 
Preliminary Allocation
 
Measurement Period Adjustments
 
Revised Preliminary Allocation
(in thousands)
 
As of 6/2/2017
 
 
As of 9/30/17
Assets:
 
 
 
 
 
 
Cash
 
$
429

 
$
781

 
$
1,210

Accounts receivable (1)
 
16,751

 

 
16,751

Inventory
 
25,598

 
3,166

 
28,764

Property, plant and equipment
 
10,963

 
6,610

 
17,573

Intangible assets
 

 
82,773

 
82,773

Goodwill
 
139,434

 
(91,316
)
 
48,118

Other current and noncurrent assets
 
2,348

 

 
2,348

Total assets
 
$
195,523

 
$
2,014

 
$
197,537

 
 
 
 
 
 
 

13


Liabilities and noncontrolling interest:
 
 
 
 
 
 
Current liabilities
 
$
15,502

 
$
781

 
$
16,283

Other liabilities
 
91,268

 
189

 
91,457

Deferred tax liabilities
 
27,286

 
1,382

 
28,668

Noncontrolling interest
 
694

 

 
694

Total liabilities and noncontrolling interest
 
$
134,750

 
$
2,352

 
$
137,102

 
 
 
 
 
 
 
Net assets acquired
 
$
60,773

 
$
(338
)
 
$
60,435

Noncontrolling interest
 
694

 

 
694

Intercompany loans to business
 
90,742

 

 
90,742

 
 
$
152,209

 
$
(338
)
 
$
151,871

Acquisition Consideration
 
 
 
 
 
 
Purchase price
 
$
151,800

 
$

 
$
151,800

Cash acquired
 
1,417

 
(207
)
 
1,210

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

 
(338
)
 
151,871

Less: Transaction costs
 
1,397

 
76

 
1,473

Purchase price, net
 
$
150,812

 
$
(414
)
 
$
150,398

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

The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including income, cost and market approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $48.1 million reflects the strategic fit of Crosman in the Company's branded consumer business and is not expected to be deductible for income tax purposes. The purchase accounting for Crosman is expected to be finalized during the fourth quarter of 2017.

The intangible assets recorded related to the Crosman acquisition are as follows (in thousands):
Intangible Assets
 
Amount
 
Estimated Useful Life
Tradename
 
$
51,642

 
20 years
Customer relationships
 
28,718

 
15 years
Technology
 
2,413

 
15 years
 
 
$
82,773

 
 

The tradename was valued at $51.6 million using a multi-period excess earnings methodology. The customer relationships intangible asset was valued at $28.7 million using the distributor method, a variation of the multi-period excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The technology was valued at $2.4 million using a relief from royalty method.

14


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 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 $408.2 million . 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 received 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 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 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 the year of acquisition. The allocation of the purchase price, which was finalized during the fourth quarter of 2016, was 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 were 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 were estimated at their historical carrying values. Property, plant and equipment was valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives. Goodwill was 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 $93.0 million reflects the strategic fit of 5.11 in the Company's branded consumer business and is not expected to be deductible for income tax purposes.
The customer relationships intangible asset was valued at $75.2 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. The tradename intangible asset ( $48.7 million ) and the design patent technology asset ( $4.0 million ) 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.
Unaudited pro forma information
The following unaudited pro forma data for the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016 gives effect to the acquisition of Crosman and 5.11 Tactical, as described above, as if the acquisitions had been completed as of January 1, 2016, and the sale of Tridien as if the disposition had been completed on January 1, 2016. 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.

15


 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
(in thousands)
 
2016
 
2017
 
2016
Net sales
 
$
331,829

 
$
962,976

 
$
928,157

Gross profit
 
111,811

 
332,682

 
326,936

Operating income
 
13,463

 
11,924

 
36,424

Net income (loss)
 
46,054

 
(12,581
)
 
52,461

Net income (loss) attributable to Holdings
 
45,381

 
(15,073
)
 
50,743

Basic and fully diluted net income (loss) per share attributable to Holdings
 
$
0.67

 
$
(0.97
)
 
$
0.60


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 intercompany loans with the Company, and the issuance of $8.2 million in Ergobaby shares to the selling shareholders. Ergobaby recorded a 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, $0.7 million in customer relationships, and $4.8 million in inventory step-up. 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. The Company finalized the purchase price for the Baby Tula acquisition 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 intercompany 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. In connection with the acquisition, Clean Earth recorded a purchase price allocation of $ 3.6 million in goodwill and $12.1 million in intangible assets.
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, Connecticut 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 increased Clean Earth's soil treatment capabilities and expanded its geographic footprint into New England. Clean Earth financed the acquisition and payment of related transaction costs through the issuance of additional intercompany loans with the Company. In connection with the acquisition, Clean Earth recorded a purchase price allocation of $3.2 million in goodwill and $5.6 million in intangible assets.
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 at $1.5 million , based on probability weighted models of the achievement of certain performance based financial targets. 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 intercompany 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 was allocated to net assets acquired. Sterno Products incurred $0.4 million in acquisition related costs in connection with the NII acquisition.


16


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 noncontrolling 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 $1.7 million for the year ended December 31, 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.

Operating results of discontinued operations
Summarized operating results of Tridien for the three and nine months ended September 30, 2016 are as follows:
(in thousands)
Three months ended September 30, 2016
 
Nine months ended September 30, 2016
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 (1)
$
(455
)
 
$
473


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

Gain on sale of businesses
During the first quarter of 2017, the Company settled the remaining outstanding escrow items related to the sale of American Furniture Manufacturing, Inc. in 2015, and received a settlement related to the CamelBak Products, LLC business, which was also sold in 2015. As a result of these transactions, the Company recognized a gain on sale of discontinued operations of $0.3 million for the nine months ended September 30, 2017.

Note E — Operating Segment Data
At September 30, 2017 , the Company had nine reportable operating segments. Each operating segment represents a platform acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:

5.11 Tactical is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide.   Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.

Crosman is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Crosman offers its products under the highly recognizable Crosman, Benjamin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. Crosman is headquartered in Bloomfield, New York.

Ergobaby is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, and related products.  Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives approximately 57% of its sales from outside of the United States. Ergobaby is headquartered in Los Angeles, California.


17


Liberty Safe is a designer, manufacturer and marketer of premium home, gun and office safes in North America. From its over 300,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.

Manitoba Harvest is a pioneer and leader in the manufacture and distribution of branded, hemp-based foods and hemp-based ingredients. Manitoba Harvest’s products, which include Hemp Hearts™, Hemp Heart Bites™, and Hemp protein powders, are currently carried in over 13,000 retail stores across the United States and Canada. Manitoba Harvest is headquartered in Winnipeg, Manitoba.

Advanced Circuits is an electronic components manufacturing company that provides small-run, quick-turn and volume production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers primarily in North America. ACI is headquartered in Aurora, Colorado.

Arnold Magnetics is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, motorsport/automotive, oil and gas, medical, general industrial, electric utility, reprographics and advertising specialty markets. Arnold Magnetics produces high performance permanent magnets (PMAG), flexible magnets (Flexmag) and precision foil products (Precision Thin Metals or "PTM") 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 18 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'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.
Summary of Operating Segments
Net Revenues
Three months ended September 30,
 
Nine months ended 
 September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
5.11 Tactical
$
72,005

 
$
27,203

 
$
228,471

 
$
27,203

Crosman
34,449

 

 
44,202

 

Ergobaby
27,835

 
29,664

 
77,737

 
75,048

Liberty
18,423

 
23,810

 
66,008

 
74,713

Manitoba Harvest
13,948

 
15,920

 
42,625

 
44,321

ACI
22,436

 
21,679

 
66,404

 
64,945

Arnold Magnetics
26,489

 
26,912

 
79,421

 
82,791

Clean Earth
55,676

 
51,515

 
153,370

 
134,035

Sterno Products
52,696

 
55,582

 
163,092

 
156,692

Total segment revenue
323,957

 
252,285

 
921,330

 
659,748

Corporate and other

 

 

 

Total consolidated revenues
$
323,957

 
$
252,285

 
$
921,330

 
$
659,748




18


Segment profit (loss) (1)
Three months ended September 30,
 
Nine months ended 
 September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
5.11 Tactical
$
(253
)
 
$
(1,794
)
 
$
(14,542
)
 
$
(1,794
)
Crosman
(1,388
)
 

 
(1,587
)
 

Ergobaby
5,884

 
4,671

 
14,728

 
9,101

Liberty
2,050

 
2,417

 
6,900

 
9,879

Manitoba Harvest
(169
)
 
554

 
75

 
(865
)
ACI
6,191

 
5,759

 
18,106

 
17,241

Arnold Magnetics
2,000

 
851

 
(4,551
)
 
3,828

Clean Earth
5,592

 
3,593

 
7,597

 
5,860

Sterno Products
4,411

 
5,536

 
13,383

 
14,095

Total
24,318

 
21,587

 
40,109

 
57,345

Reconciliation of segment profit (loss) to consolidated income (loss) before income taxes:
 
 
 
 
 
 
 
Interest expense, net
(6,945
)
 
(4,376
)
 
(22,499
)
 
(23,204
)
Other income (expense), net
2,020

 
(3,271
)
 
2,950

 
(1,852
)
Gain (loss) on equity method investment

 
50,414

 
(5,620
)
 
58,680

Corporate and other (2)
(10,845
)
 
(10,916
)
 
(32,801
)
 
(29,244
)
Total consolidated income (loss) before income taxes
$
8,548

 
$
53,438

 
$
(17,861
)
 
$
61,725


(1)  
Segment profit (loss) represents operating income (loss).
(2)  
Primarily relates to management fees expensed and payable to CGM, and corporate overhead expenses.
Depreciation and Amortization Expense
Three months ended September 30,
 
Nine months ended 
 September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
5.11 Tactical
$
4,338

 
$
5,192

 
$
34,882

 
$
5,192

Crosman
5,593

 

 
5,842

 

Ergobaby
3,068

 
4,409

 
9,386

 
6,046

Liberty
358

 
616

 
1,295

 
1,925

Manitoba Harvest
1,891

 
1,732

 
4,922

 
5,200

ACI
817

 
885

 
2,517

 
2,585

Arnold Magnetics
1,452

 
2,268

 
4,962

 
6,778

Clean Earth
5,687

 
5,989

 
16,140

 
16,019

Sterno Products
2,873

 
2,396

 
8,713

 
8,427

Total
26,077

 
23,487

 
88,659

 
52,172

Reconciliation of segment to consolidated total:
 
 
 
 
 
 
 
Amortization of debt issuance costs and original issue discount
1,261

 
888

 
3,721

 
2,363

Consolidated total
$
27,338

 
$
24,375

 
$
92,380

 
$
54,535




19


 
Accounts Receivable
 
Identifiable Assets
 
September 30,
 
December 31,
 
September 30,
 
December 31,
(in thousands)
2017
 
2016
 
2017 (1)
 
2016 (1)
5.11 Tactical
$
46,112

 
$
49,653

 
$
313,072

 
$
311,560

Crosman
24,904

 

 
134,047

 

Ergobaby
11,140

 
11,018

 
105,627

 
113,814

Liberty
13,708

 
13,077

 
27,901

 
26,344

Manitoba Harvest
5,251

 
6,468

 
100,330

 
97,977

ACI
7,010

 
6,686

 
15,847

 
16,541

Arnold Magnetics
15,407

 
15,195

 
69,154

 
64,209

Clean Earth
47,659

 
45,619

 
187,460

 
193,250

Sterno Products
37,389

 
38,986

 
126,135

 
134,661

Allowance for doubtful accounts
(10,469
)
 
(5,511
)
 

 

Total
198,111

 
181,191

 
1,079,573

 
958,356

Reconciliation of segment to consolidated total:
 
 
 
 

 

Corporate and other identifiable assets (2)

 

 
3,197

 
145,971

Total
$
198,111

 
$
181,191

 
$
1,082,770

 
$
1,104,327


(1)  
Does not include accounts receivable balances per schedule above or goodwill balances - refer to Note H - "Goodwill and Other Intangible Assets" .
(2)  
Corporate and other identifiable assets for the year ended December 31, 2016 includes the Company's investment in FOX, which was sold during the first quarter of 2017 - refer to Note F - "Investment in FOX" .

Geographic Information
International Revenues
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
5.11 Tactical
$
19,238

 
$
6,141

 
$
63,088

 
$
6,141

Crosman
4,542

 

 
6,412

 

Ergobaby
17,048

 
16,701

 
46,277

 
40,660

Manitoba Harvest
10,720

 
8,573

 
19,979

 
20,983

Arnold Magnetics
10,556

 
12,208

 
31,677

 
33,654

Sterno Products
5,809

 
6,327

 
16,265

 
16,366

 
$
67,913

 
$
49,950

 
$
183,698

 
$
117,804


Note F - Investment in FOX

Fox Factory Holdings Corp. ("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. The Company held a 41% , ownership interest in FOX as of January 1, 2016, and a 14% ownership interest as of January 1, 2017. The investment in FOX was accounted for using the fair value option.
In March 2016, FOX closed on a secondary public offering (the "March 2016 Offering") of 2,500,000 FOX common shares held by the Company. Concurrently with the closing of the March 2016 Offering, FOX repurchased 500,000 shares of FOX common shares directly from the Company. As a result of the sale of shares through the March 2016 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 2016 Offering and repurchase of shares by FOX, the Company's ownership interest in FOX was reduced from approximately 41% to 33% .

20


In August 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% .
In November 2016, FOX closed on a secondary public offering (the "November Offering") of 3,500,000 shares of FOX common stock held by the Company, for total net proceeds of $71.8 million . Upon completion of the November Offering, the Company's ownership of FOX decreased from approximately 23% to approximately 14% . The Company's investment in FOX had a fair value of $141.8 million on December 31, 2016 based on the closing price of FOX shares on that date.
In March 2017, FOX closed on a secondary public offering (the "March 2017 Offering") through which the Company sold their remaining 5,108,718 shares in FOX for total net proceeds of $136.1 million . Subsequent to the March 2017 Offering, the Company no longer holds an ownership interest in FOX.

Note G — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at September 30, 2017 and December 31, 2016 (in thousands) :
 
September 30, 2017
 
December 31, 2016
Machinery and equipment
$
168,621

 
$
155,591

Furniture, fixtures and other
27,005

 
13,737

Leasehold improvements
18,337

 
14,156

Buildings and land
39,964

 
35,392

Construction in process
24,699

 
8,308

 
278,626

 
227,184

Less: accumulated depreciation
(107,799
)
 
(84,814
)
Total
$
170,827

 
$
142,370

Depreciation expense was $8.7 million and $24.5 million for the three and nine months ended September 30, 2017 , and $7.3 million and $19.5 million for the three and nine months ended September 30, 2016 , respectively.
Inventory
Inventory is comprised of the following at September 30, 2017 and December 31, 2016 (in thousands) :
 
September 30, 2017
 
December 31, 2016
Raw materials
$
38,388

 
$
29,708

Work-in-process
12,294

 
8,281

Finished goods
201,348

 
182,886

Less: obsolescence reserve
(9,213
)
 
(7,891
)
Total
$
242,817

 
$
212,984



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. 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 represent a reporting unit, except Arnold, which comprises three reporting units.

Goodwill
2017 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

21


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, 2017, we determined that the Manitoba Harvest 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. The Company utilized an income approach to perform the Step 1 testing at Manitoba Harvest. The weighted average cost of capital used in the income approach for Manitoba Harvest was 12.0% . Results of the Step 1 quantitative testing of Manitoba Harvest indicated that the fair value of Manitoba Harvest exceeded its carrying value by 15.0% . Manitoba Harvest's goodwill balance as of the date of the annual impairment testing was approximately $44.5 million. For the reporting units that were tested qualitatively, the Company concluded that the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value and that a quantitative analysis was not necessary.
Manitoba Harvest
The Company performed Step 1 testing during the 2017 annual impairment testing for Manitoba Harvest. Subsequent to the annual impairment test, the Company has compared the Manitoba Harvest operating results to the forecasts used in the Step 1 testing and has noted no material variances in the results. However, there is a significant degree of uncertainty inherent in the assumptions used to develop the forecast amounts used in the annual impairment test given the changing nature of consumer tastes, particularly related to future years. Therefore, the results of the forecast process for 2018, which are expected to be finalized in the fourth quarter of 2017, may make it necessary to perform interim goodwill impairment testing at Manitoba Harvest at December 31, 2017.
2016 Interim goodwill impairment testing
Arnold
As a result of decreases in forecasted revenue, operating income and cash flows at Arnold, as well as a shortfall in revenue and operating income during the latter half of 2016 as compared to budgeted amounts, the Company determined that it was necessary to perform interim goodwill impairment testing on each of the three reporting units at Arnold. The Company performed Step 1 of the goodwill impairment assessment at December 31, 2016. In Step 1 of the goodwill impairment test, the Company compared the fair value of the reporting units to the carrying amount. Based on the results of the valuation, the fair value of the Flexmag and PTM reporting units exceeded the carrying amount, therefore, no additional goodwill testing was required. The results of the Step 1 test for the PMAG unit indicated a potential impairment of goodwill and the Company performed the second step of goodwill impairment testing (Step 2) to determine the amount of impairment of the PMAG reporting unit.
In the first test of goodwill impairment testing, we compare the fair value of each reporting unit to its carrying amount. For purposes of the Step 1 for the Arnold reporting units, we estimated the fair value of the reporting unit using an income approach, whereby we estimate the fair value of a reporting unit based on the present value of future cash flows. Cash flow projections are based on management's estimate of revenue growth rates and operating margins and take into consideration industry and market conditions as well as company and reporting unit specific economic factors. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business specific characteristics and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. For the Step 1 quantitative impairment testing for Arnold's reporting units, we used only an income approach because we determined that the guideline public company comparables for PMAG, Flexmag and PTM were not representative of these three reporting units. In the income approach, we used a weighted average cost of capital of 12.5% for PMAG, 12.0% for Flexmag and 13.0% for PTM.
The Company had not completed the Step 2 analysis as of December 31, 2016, and therefore estimated a range of impairment loss of $14 million to $19 million based on the value of the total invested capital of the PMAG unit as well as the results of the Step 1 testing of the fair value of PMAG. The Company recorded an estimated impairment loss for PMAG of $16 million at December 31, 2016 based on that range. The Company completed the Step 2 goodwill impairment test of the PMAG reporting unit in the first quarter of 2017, and the results indicated total impairment of the goodwill of the PMAG reporting unit of $24.9 million . The Step 2 impairment was higher than the initial estimate at December 31, 2016 due primarily to the valuation of PMAG's property, plant and equipment during the Step 2 exercise. The Company recorded the additional impairment loss of $8.9 million in the first quarter of 2017.
2016 Annual goodwill impairment testing
At March 31, 2016, we determined that the Tridien reporting unit (which is reported as a discontinued operation in the accompanying financial statements after the sale of the reporting unit in September 2016) 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. Results of the Step 1 quantitative testing of Tridien indicated that the fair value of Tridien exceeded 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.

22


A summary of the net carrying value of goodwill at September 30, 2017 and December 31, 2016, is as follows (in thousands) :
 
Nine months ended September 30, 2017
 
Year ended 
 December 31, 2016
Goodwill - gross carrying amount
$
564,789

 
$
507,637

Accumulated impairment losses
(24,864
)
 
(16,000
)
Goodwill - net carrying amount
$
539,925

 
$
491,637

The following is a reconciliation of the change in the carrying value of goodwill for the nine months ended September 30, 2017 by operating segment (in thousands) :
 
 
Balance at January 1, 2017
 
Acquisitions (1)
 
Goodwill Impairment
 
Foreign currency translation
 
Other (4)
 
Balance at September 30, 2017
5.11
 
$
92,966

 
$

 
$

 
$

 
$

 
$
92,966

Crosman
 

 
49,880

 

 

 

 
49,880

Ergobaby
 
61,031

 

 

 

 

 
61,031

Liberty
 
32,828

 

 

 

 

 
32,828

Manitoba Harvest
 
44,171

 

 

 
3,425

 

 
47,596

ACI
 
58,019

 

 

 

 

 
58,019

Arnold (2)
 
35,767

 

 
(8,864
)
 

 

 
26,903

Clean Earth
 
118,224

 
802

 

 

 

 
119,026

Sterno
 
39,982

 
2,898

 

 

 
147

 
43,027

Corporate (3)
 
8,649

 

 

 

 

 
8,649

Total
 
$
491,637

 
$
53,580

 
$
(8,864
)
 
$
3,425

 
$
147

 
$
539,925


(1)
The purchase price allocation for Crosman is preliminary and is expected to be completed during the fourth quarter of 2017. Clean Earth, Sterno and Crosman each completed add-on acquisitions during 2017. The goodwill related to the Clean Earth acquisition is based on a preliminary purchase price allocation. Crosman and Sterno completed small add-on acquisitions during the third quarter of 2017, and the preliminary purchase price allocations for these add-on acquisitions have not been prepared yet. The goodwill related to these add-on acquisitions represents the excess of purchase price over net assets acquired at September 30, 2017.
(2)
Arnold Magnetics has three reporting units PMAG, Flexmag and Precision Thin Metals with goodwill balances of $15.6 million , $4.8 million and $6.5 million , respectively.
(3)  
Represents goodwill resulting from purchase accounting adjustments not "pushed down" to the ACI segment. This amount is allocated back to the ACI segment for purposes of goodwill impairment testing.
(4)  
Represents the final settlement related to Sterno's acquisition of Sterno Home Inc. ("Sterno Home", formerly NII).
Long lived assets
Annual indefinite lived impairment testing
The Company used 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 2017 and 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.

23


Other intangible assets are comprised of the following at September 30, 2017 and December 31, 2016 (in thousands) :
 
September 30, 2017
 
December 31, 2016
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer relationships
$
338,461

 
$
(96,449
)
 
$
242,012

 
$
304,751

 
$
(79,607
)
 
$
225,144

Technology and patents
48,452

 
(21,502
)
 
26,950

 
44,710

 
(18,290
)
 
26,420

Trade names, subject to amortization
180,565

 
(19,194
)
 
161,371

 
128,675

 
(6,833
)
 
121,842

Licensing and non-compete agreements
7,865

 
(6,365
)
 
1,500

 
7,845

 
(5,987
)
 
1,858

Permits and airspace
115,130

 
(28,612
)
 
86,518

 
113,295

 
(21,531
)
 
91,764

Distributor relations and other
606

 
(606
)
 

 
606

 
(606
)
 

Total
691,079

 
(172,728
)
 
518,351

 
599,882

 
(132,854
)
 
467,028

Trade names, not subject to amortization
73,527

 

 
73,527

 
72,183

 

 
72,183

Total intangibles, net
$
764,606

 
$
(172,728
)
 
$
591,878

 
$
672,065

 
$
(132,854
)
 
$
539,211

Amortization expense related to intangible assets was $14.2 million and $39.3 million for the three and nine months ended September 30, 2017, and $8.4 million and $24.0 million for the three and nine months ended September 30, 2016, respectively. Estimated charges to amortization expense of intangible assets over the next five years, is as follows (in thousands) :
  October 1, through Dec. 31, 2017
 
$
12,689

2018
 
49,367

2019
 
48,077

2020
 
47,592

2021
 
47,288

 
 
$
205,013


Note I — Debt

2014 Credit Facility

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. On August 15, 2016, the Company amended the 2014 Credit Facility to, among other things, increase the aggregate amount of the 2014 Credit Facility by $400 million . On August 31, 2016, the Company entered into an Incremental Facility Amendment to the 2014 Credit Agreement (the "Incremental Facility Amendment"). The Incremental Facility Amendment provided for an increase to the 2014 Revolving Credit Facility of $150 million , and the 2016 Incremental Term Loan, in the amount of $250 million . As a result of the Incremental Facility Amendment, the 2014 Credit Facility currently provides for (i) a revolving credit facility of $550 million (as amended from time to time, the "2014 Revolving Credit Facility"), (ii) a $325 million term loan (the "2014 Term Loan Facility"), and (iii) a $250 million incremental term loan (the "2016 Incremental Term Loan").

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 (as defined below) 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.


24


Term Loans
2014 Term Loan
The 2014 Term Loan Facility expires in June 2021 and requires quarterly payments 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.

2016 Incremental Term Loan
The 2016 Incremental Term Loan was issued at an original issue discount of 99.25% of par value. The Company incurred $6.0 million in additional debt issuance costs related to the Incremental Credit Facility, which will be recognized as expense during the remaining term of the related 2014 Revolving Credit Facility, and 2014 Term Loan and 2016 Incremental Term Loan. The Incremental Facility Amendment did not change the due dates or applicable interest rates of the 2014 Credit Agreement. The quarterly payments for the term advances under the 2014 Credit Agreement increased to approximately $1.4 million per quarter. The additional advances under the Incremental Credit Facility was a loan modification for accounting purposes. Consequently, the Company capitalized debt issuance costs of $6.0 million associated with fees charged by lenders of the Incremental Credit Facility. The capitalized debt issuance costs will be amortized over the remaining period of the 2014 Credit Facility.

In March 2017, the Company amended the 2014 Credit Facility (the "Fourth Amendment") to reduce the applicable rate of interest for the 2014 Term Loan and 2016 Incremental Term Loan. Under the Fourth Amendment, outstanding LIBOR loans bear interest at LIBOR plus an applicable rate of 2.75% and outstanding Base Rate loans bear interest at Base Rate plus 1.75% . Prior to the amendment, the outstanding term loans bore interest at LIBOR plus 3.25% or Base Rate plus