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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 
COMPASS DIVERSIFIED HOLDINGS
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-34927
 
57-6218917
 
 
(State or other jurisdiction of
incorporation or organization)
 
(Commission
file number)
 
(I.R.S. employer
identification number)
 
 
COMPASS GROUP DIVERSIFIED HOLDINGS LLC
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-34926
 
20-3812051
 
 
(State or other jurisdiction of
incorporation or organization)
 
(Commission
file number)
 
(I.R.S. employer
identification number)
 
301 Riverside Avenue, Second Floor, Westport, CT 06880
(203) 221-1703
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Shares representing beneficial interests in Compass Diversified Holdings
 
CODI
 
New York Stock Exchange
Series A Preferred Shares representing Series A Trust Preferred Interest in Compass Diversified Holdings
 
CODI PR A
 
New York Stock Exchange
Series B Preferred Shares representing Series B Trust Preferred Interest in Compass Diversified Holdings
 
CODI PR B
 
New York Stock Exchange
Series C Preferred Shares representing Series C Trust Preferred Interest in Compass Diversified Holdings
 
CODI PR C
 
New York Stock Exchange

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 every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
 
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 April 28, 2020, 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 March 31, 2020
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;
the "Company" refer to Compass Group Diversified Holdings LLC;
"businesses," "operating segments," "subsidiaries" and "reporting units" refer to, collectively, the businesses controlled by the Company;
the "Manager" refer to Compass Group Management LLC ("CGM");
the "Trust Agreement" refer to the Second Amended and Restated Trust Agreement of the Trust dated as of December 6, 2016;
the "2014 Credit Facility" refer to the credit agreement, as amended, entered into on June 14, 2014 with a group of lenders led by Bank of America N.A. as administrative agent, as amended from time to time, which provides for a Revolving Credit Facility and a Term Loan;
the "2018 Credit Facility" refer to the amended and restated credit agreement entered into on April 18, 2018 among the Company, the Lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto.
the "2018 Revolving Credit Facility" refers to the $600 million in revolving loans, swing line loans and letters of credit provided by the 2018 Credit Facility that matures in 2023;
the "2018 Term Loan" refer to the $500 million term loan provided by the 2018 Credit Facility;
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 include statements about our expectations for adjusted EBITDA in the second quarter and the sufficiency of our capital resources. 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:
the adverse impact on the U.S. and global economy, including the markets in which we operate, of the novel coronavirus, which causes the Coronavirus disease 2019 (COVID-19) global pandemic, and the impact in the near, medium and long-term on our business, results of operations, financial position, liquidity or cash flows;
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
 
 
March 31,
2020
 
December 31,
2019
(in thousands)
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
291,013

 
$
100,314

Accounts receivable, net
 
184,103

 
191,405

Inventories
 
305,636

 
317,306

Prepaid expenses and other current assets
 
33,711

 
35,247

Total current assets
 
814,463

 
644,272

Property, plant and equipment, net
 
143,799

 
146,428

Goodwill
 
438,519

 
438,519

Intangible assets, net
 
548,730

 
561,946

Other non-current assets
 
99,986

 
100,727

Total assets
 
$
2,045,497

 
$
1,891,892

 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
63,069

 
$
70,089

Accrued expenses
 
102,743

 
108,768

Due to related party
 
7,973

 
8,049

Other current liabilities
 
21,795

 
22,573

Total current liabilities
 
195,580

 
209,479

Deferred income taxes
 
31,726

 
33,039

Long-term debt
 
594,664

 
394,445

Other non-current liabilities
 
88,444

 
89,054

Total liabilities
 
910,414

 
726,017

 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ equity
 
 
 
 
Trust preferred shares, 50,000 authorized; 12,600 shares issued and outstanding at March 31, 2020 and December 31, 2019
 
 
 
 
Series A preferred shares, no par value; 4,000 shares issued and outstanding at March 31, 2020 and December 31, 2019
 
96,417

 
96,417

Series B preferred shares, no par value; 4,000 shares issued and outstanding at March 31, 2020 and December 31, 2019
 
96,504

 
96,504

Series C preferred shares, no par value; 4,600 shares issued and outstanding at March 31, 2020 and December 31, 2019
 
110,997

 
110,997

Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding at March 31, 2020 and December 31, 2019
 
924,680

 
924,680

Accumulated other comprehensive loss
 
(5,457
)
 
(3,933
)
Accumulated deficit
 
(141,866
)
 
(109,338
)
Total stockholders’ equity attributable to Holdings
 
1,081,275

 
1,115,327

Noncontrolling interest
 
53,808

 
50,548

Total stockholders’ equity
 
1,135,083

 
1,165,875

Total liabilities and stockholders’ equity
 
$
2,045,497

 
$
1,891,892

See notes to condensed consolidated financial statements.

5


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended 
 March 31,
(in thousands, except per share data)
 
2020
 
2019
Net revenues
 
$
333,449

 
$
338,857

Cost of revenues
 
213,961

 
219,302

Gross profit
 
119,488

 
119,555

Operating expenses:
 
 
 

Selling, general and administrative expense
 
83,800

 
81,397

Management fees
 
8,620

 
10,957

Amortization expense
 
13,505

 
13,590

Operating income
 
13,563

 
13,611

Other income (expense):
 
 
 
 
Interest expense, net
 
(8,597
)
 
(18,454
)
Loss on sale of securities (refer to Note B)
 

 
(5,300
)
Amortization of debt issuance costs
 
(525
)
 
(927
)
Other income (expense), net
 
661

 
(434
)
Income (loss) from continuing operations before income taxes
 
5,102

 
(11,504
)
Provision for income taxes
 
222

 
1,424

Income (loss) from continuing operations
 
4,880

 
(12,928
)
Income from discontinued operations, net of income tax
 

 
1,427

Gain on sale of discontinued operations
 

 
121,659

Net income
 
4,880

 
110,158

Less: Net income from continuing operations attributable to noncontrolling interest
 
1,215

 
1,368

Less: Net loss from discontinued operations attributable to noncontrolling interest
 

 
(518
)
Net income attributable to Holdings
 
$
3,665

 
$
109,308

 
 
 
 
 
Amounts attributable to Holdings
 
 
 
 
Income (loss) from continuing operations
 
$
3,665

 
$
(14,296
)
Income from discontinued operations, net of income tax
 

 
1,945

Gain on sale of discontinued operations, net of income tax
 

 
121,659

Net income attributable to Holdings
 
$
3,665

 
$
109,308

 
 
 
 
 
Basic income (loss) per common share attributable to Holdings (refer to Note I)
 
 
 
 
Continuing operations
 
$
(0.26
)
 
$
(0.34
)
Discontinued operations
 

 
2.06

 
 
$
(0.26
)
 
$
1.72

 
 
 
 
 
Basic weighted average number of shares of common shares outstanding
 
59,900

 
59,900

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

 
$
0.36





See notes to condensed consolidated financial statements.

6


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

 
 
Three months ended 
 March 31,
(in thousands)
 
2020
 
2019
 
 
 
 
 
Net income
 
$
4,880

 
$
110,158

Other comprehensive income (loss)
 
 
 
 
Foreign currency translation adjustments
 
(2,118
)
 
577

Foreign currency amounts reclassified from accumulated other comprehensive income (loss) that increase net income:
 
 
 
 
  Disposition of Manitoba Harvest
 

 
4,791

Pension benefit liability, net
 
594

 
(109
)
Other comprehensive income (loss)
 
(1,524
)
 
5,259

Total comprehensive income, net of tax
 
3,356

 
115,417

Less: Net income attributable to noncontrolling interests
 
1,215

 
850

Less: Other comprehensive income (loss) attributable to noncontrolling interests
 
(17
)
 
2

Total comprehensive income attributable to Holdings, net of tax
 
$
2,158

 
$
114,565


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
 
Non-
Controlling
Interest Attributable to Disc. Ops.
 
Total
Stockholders’
Equity
 
Series A
 
Series B
 
Series C
 
 
 
 
 
 
 
Balance — January 1, 2019
$
96,417

 
$
96,504

 
$

 
$
924,680

 
$
(249,453
)
 
$
(8,776
)
 
$
859,372

 
$
39,922

 
$
20,048

 
$
919,342

Net income (loss)

 

 

 

 
109,308

 

 
109,308

 
1,368

 
(518
)
 
110,158

Total comprehensive income, net

 

 

 

 

 
5,259

 
5,259

 

 

 
5,259

Option activity attributable to noncontrolling shareholders

 

 

 

 

 

 

 
1,728

 
477

 
2,205

Purchase of noncontrolling interest

 

 

 

 

 

 

 
(39
)
 

 
(39
)
Disposition of Manitoba Harvest

 

 

 

 

 

 

 

 
(10,799
)
 
(10,799
)
Distributions paid - Trust Common Shares

 

 

 

 
(21,564
)
 

 
(21,564
)
 

 

 
(21,564
)
Distributions paid - Trust Preferred Shares

 

 

 

 
(3,781
)
 

 
(3,781
)
 

 

 
(3,781
)
Balance — March 31, 2019
$
96,417

 
$
96,504

 
$

 
$
924,680

 
$
(165,490
)
 
$
(3,517
)
 
$
948,594

 
$
42,979

 
$
9,208

 
$
1,000,781

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance — January 1, 2020
$
96,417

 
$
96,504

 
$
110,997

 
$
924,680

 
$
(109,338
)
 
$
(3,933
)
 
$
1,115,327

 
$
50,548

 
$

 
$
1,165,875

Net income

 

 

 

 
3,665

 

 
3,665

 
1,215

 

 
4,880

Total comprehensive loss, net

 

 

 

 

 
(1,524
)
 
(1,524
)
 

 

 
(1,524
)
Option activity attributable to noncontrolling shareholders

 

 

 

 

 

 

 
2,055

 

 
2,055

Effect of subsidiary stock option exercise

 

 

 

 

 

 

 
73

 

 
73

Purchase of noncontrolling interest

 

 

 

 

 

 

 
(83
)
 

 
(83
)
Distributions paid - Allocation Interests

 

 

 

 
(9,087
)
 

 
(9,087
)
 

 

 
(9,087
)
Distributions paid - Trust Common Shares

 

 

 

 
(21,564
)
 

 
(21,564
)
 

 

 
(21,564
)
Distributions paid - Trust Preferred Shares

 

 

 

 
(5,542
)
 

 
(5,542
)
 

 

 
(5,542
)
Balance — March 31, 2020
$
96,417

 
$
96,504

 
$
110,997

 
$
924,680

 
$
(141,866
)
 
$
(5,457
)
 
$
1,081,275

 
$
53,808

 
$

 
$
1,135,083

See notes to condensed consolidated financial statements.


8


    


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
Three months ended March 31,
(in thousands)
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
4,880

 
$
110,158

Income from discontinued operations, net of income tax

 
1,427

Gain on sale of discontinued operations

 
121,659

Income (loss) from continuing operations
4,880

 
(12,928
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation expense
8,301

 
7,996

Amortization expense
13,505

 
13,590

Amortization of debt issuance costs and original issue discount
525

 
1,079

Unrealized loss on interest rate swap

 
1,099

Noncontrolling stockholder stock based compensation
2,055

 
1,728

Provision for loss on receivables
883

 
791

Deferred taxes
(2,692
)
 
(2,031
)
Other
(515
)
 
256

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
6,695

 
(801
)
Inventories
11,773

 
(6,624
)
Other current and non-current assets
(999
)
 
(1,370
)
Accounts payable and accrued expenses
(10,425
)
 
(10,145
)
Cash provided by (used in) operating activities - continuing operations
33,986

 
(7,360
)
Cash used in operating activities - discontinued operations

 
(1,576
)
Cash provided by (used in) operating activities
33,986

 
(8,936
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(6,603
)
 
(5,426
)
Payment of interest rate swap

 
(94
)
Proceeds from sale of businesses

 
124,210

Other investing activities
(43
)
 
1,802

Cash (used in) provided by investing activities - continuing operations
(6,646
)
 
120,492

Cash provided by investing activities - discontinued operations

 
48,452

Cash (used in) provided by investing activities
(6,646
)
 
168,944



9


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three months ended March 31,
(in thousands)
2020
 
2019
Cash flows from financing activities:
 
 
 
Borrowings under credit facility
200,000

 
49,000

Repayments under credit facility

 
(193,250
)
Distributions paid - common shares
(21,564
)
 
(21,564
)
Distributions paid - preferred shares
(5,542
)
 
(3,781
)
Distributions paid - allocation interests
(9,087
)
 

Net proceeds provided by noncontrolling shareholders
73

 

Purchase of noncontrolling interest
(83
)
 
(39
)
Other
588

 
(2,814
)
Net cash provided (used in) by financing activities
164,385

 
(172,448
)
Foreign currency impact on cash
(1,026
)
 
(1,049
)
Net increase (decrease) in cash and cash equivalents
190,699

 
(13,489
)
Cash and cash equivalents — beginning of period (1)
100,314

 
53,326

Cash and cash equivalents — end of period
$
291,013

 
$
39,837


(1) Includes cash from discontinued operations of $4.6 million at January 1, 2019.











See notes to condensed consolidated financial statements.

10


COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2020

Note A - Presentation and Principles of Consolidation
Compass Diversified Holdings, a Delaware statutory trust (the "Trust" or "Holdings") and Compass Group Diversified Holdings LLC, a Delaware limited liability company (the "Company"), were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. In accordance with the second amended and restated Trust Agreement, dated as of December 6, 2016 (as amended and restated, the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s fifth amended and restated operating agreement, dated as of December 6, 2016 (as amended and restated, the "LLC Agreement")) of the Company and, pursuant to the LLC Agreement, the Company has, outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of eight businesses, or reportable operating segments, at March 31, 2020. The segments are as follows: 5.11 Acquisition Corp. ("5.11"), Velocity Outdoor, Inc. (formerly Crosman Corp.) ("Velocity Outdoor" or "Velocity"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold"), FFI Compass, Inc. ("Foam Fabricators" or "Foam") and The Sterno Group, LLC ("Sterno"). Refer to Note D - "Operating Segment Data" for further discussion of the operating segments. Compass Group Management LLC, a Delaware limited liability company ("CGM" or the "Manager"), manages the day to day operations of the Company and oversees the management and operations of our businesses pursuant to a Management Services Agreement ("MSA").
Basis of Presentation
The condensed consolidated financial statements for the three month periods ended March 31, 2020 and March 31, 2019 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, 2019.
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 first quarter of 2019, the Company completed the sale of FHF Holdings Ltd. ("Manitoba Harvest"), the parent company of Fresh Hemp Foods Ltd. Additionally, during the second quarter of 2019, the Company completed the sale of CEHI Acquisition Corp. ("Clean Earth"), the parent company of Clean Earth Holdings, Inc. and Clean Earth Inc. The results of operations of Manitoba Harvest and Clean Earth are reported as discontinued operations in the condensed consolidated statements of operations for the three months ended March 31, 2019. Refer to Note B - "Discontinued Operations" for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.
Seasonality
Earnings of certain of our operating segments are seasonal in nature due to various recurring events, holidays and seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and fourth quarter produce the highest net sales during our fiscal year.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments—Credit Losses, which requires companies to present assets held at amortized cost and available for sale debt securities

11


net of the amount expected to be collected. The guidance requires the measurement of expected credit losses to be based on relevant information from past events, including historical experiences, current conditions and reasonable and supportable forecasts that affect collectibility. The guidance was effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted. The adoption of this guidance on January 1, 2020 did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2021 and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
Note B — Discontinued Operations
Sale of Clean Earth
On May 8, 2019, the Company, as majority stockholder of CEHI Acquisition Corporation ("Clean Earth" or “CEHI”) and as Sellers’ Representative, entered into a definitive Stock Purchase Agreement (the “Purchase Agreement”) with Calrissian Holdings, LLC (“Buyer”), CEHI, the other holders of stock and options of CEHI and, as Buyer’s guarantor, Harsco Corporation, pursuant to which Buyer would acquire all of the issued and outstanding securities of CEHI, the parent company of the operating entity, Clean Earth, Inc.
On June 28, 2019, Buyer completed the acquisition of all of the issued and outstanding securities of CEHI pursuant to the Purchase Agreement. The sale price for Clean Earth was based on an aggregate total enterprise value of $625 million and is subject to customary working capital adjustments. After the allocation of the sale proceeds to Clean Earth non-controlling equity holders, the repayment of intercompany loans to the Company (including accrued interest) of $224.6 million, and the payment of transaction expenses of approximately $10.7 million, the Company received approximately $327.3 million of total proceeds at closing related to our equity interests in Clean Earth. The Company recognized a gain on the sale of Clean Earth of $209.3 million during the year ended December 31, 2019.
Summarized results of operations of Clean Earth for the three months ended March 31, 2019 are as follows (in thousands):
 
Three months ended 
 March 31, 2019
Net sales
$
63,632

Gross profit
16,633

Operating income
1,256

Income from continuing operations before income taxes
991

Benefit for income taxes
(1,022
)
Income from discontinued operations (1)
$
2,013

(1) The results of operations for the three months ended March 31, 2019, excludes $4.7 million of intercompany interest expense.
Sale of Manitoba Harvest
On February 19, 2019, the Company entered into a definitive agreement with Tilray, Inc. ("Tilray") and a wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, through Tilray Subco, all of the issued and outstanding securities of our majority owned subsidiary, Manitoba Harvest, for total consideration of up to C$419 million. The completion of the sale of Manitoba Harvest was subject to approval by the British Columbia Supreme Court, which occurred on February 21, 2019. The sale closed on February 28, 2019. Subject to certain customary adjustments, the shareholders of Manitoba Harvest, including the Company, received the following from Tilray as consideration for their shares of Manitoba Harvest: (i) C$150 million in cash to the holders of preferred shares of Manitoba Harvest and the holders of common shares of Manitoba Harvest (“Common Holders”) and C$127.5 million in shares of class 2 Common Stock of Tilray (“Tilray Common Stock”) to the Common Holders on the closing date of the sale (the “Closing Date Consideration”), and (ii) C$50 million in cash and C$42.5 million in Tilray Common Stock

12


to the Common Holders on the date that was six months after the closing date of the arrangement (the “Deferred Consideration”). The sale consideration also included a potential earnout of up to C$49 million in Tilray Common Stock to the Common Holders, if Manitoba Harvest achieved certain levels of U.S. branded gross sales of edible or topical products containing broad spectrum hemp extracts or cannabidiols prior to December 31, 2019. The threshold for the earnout was not achieved and no additional amount was recorded related to sale of Manitoba Harvest at December 31, 2019.
The cash portion of the Closing Date Consideration was reduced by the amount of the net indebtedness (including accrued interest) of Manitoba Harvest on the closing date of C$71.3 million ($53.7 million) and transaction expenses of approximately C$5.0 million. The Company's share of the net proceeds after accounting for the redemption of the noncontrolling shareholders and the payment of net indebtedness of Manitoba Harvest and transaction expenses was approximately $124.2 million in cash proceeds and in Tilray Common Stock. The Company recognized a gain on the sale of Manitoba Harvest of $121.7 million in the first quarter of 2019. In August 2019, the Company received the Deferred Consideration related to the sale. The Company's portion of the Deferred Consideration totaled $28.4 million in cash proceeds and $19.6 million in Tilray Common Stock.
The Tilray Common Stock consideration was issued in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and pursuant to exemptions from applicable securities laws of any state of the United States, such that any shares of Tilray Common Stock received by the Common Holders were freely tradeable. The Company sold the Tilray Common Stock received as part of the Closing Consideration during March 2019, recognizing a net loss of $5.3 million in Other income/ (expense) during the quarter ended March 31, 2019. In August 2019, the Company sold the Tilray Common Stock received as part of the Deferred Consideration, recognizing a loss of $4.9 million in Other income/ (expense) during the quarter ended September 30, 2019.
Summarized results of operations of Manitoba Harvest for the period from January 1, 2019 through the date of disposition are as follows (in thousands):
 
For the period January 1, 2019 through disposition
Net revenues
$
10,024

Gross profit
4,874

Operating loss
(1,118
)
Loss before income taxes
(1,127
)
Benefit for income taxes
(541
)
Income (loss) from discontinued operations (1)
$
(586
)
(1) The results of operations for the period from January 1, 2019 through the date of disposition excludes $1.0 million of intercompany interest expense.

Note C — Revenue
The Company recognizes revenue in accordance with the provisions of Revenue from Contracts with Customers, or ASC 606. Revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities.
Disaggregated Revenue - Revenue Streams and Timing of Revenue Recognition - The Company disaggregates revenue by strategic business unit and by geography for each strategic business unit which are categories that depict how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors. This disaggregation also represents how the Company evaluates its financial performance, as well as how the Company communicates its financial performance to the investors and other users of its financial statements. Each strategic business unit represents the Company’s reportable segments and offers different products and services.

13


The following tables provide disaggregation of revenue by reportable segment geography for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three months ended March 31, 2020
 
5.11
 
Ergo
 
Liberty
 
Velocity
 
ACI
 
Arnold
 
Foam
 
Sterno
 
Total
United States
$
72,427

 
$
6,258

 
$
24,657

 
$
25,879

 
$
21,696

 
$
18,563

 
$
23,587

 
$
80,016

 
$
273,083

Canada
1,474

 
700

 
303

 
1,920

 

 
156

 

 
2,927

 
7,480

Europe
6,307

 
5,787

 

 
1,698

 

 
8,328

 

 
58

 
22,178

Asia Pacific
3,511

 
5,903

 

 
246

 

 
1,395

 

 
28

 
11,083

Other international
12,062

 
1,001

 

 
647

 

 
1,116

 
4,796

 
3

 
19,625

 
$
95,781

 
$
19,649

 
$
24,960

 
$
30,390

 
$
21,696

 
$
29,558

 
$
28,383

 
$
83,032

 
$
333,449

 
Three months ended March 31, 2019
 
5.11
 
Ergo
 
Liberty
 
Velocity
 
ACI
 
Arnold
 
Foam
 
Sterno
 
Total
United States
$
70,477

 
$
7,335

 
$
21,736

 
$
26,164

 
$
23,069

 
$
17,916

 
$
26,137

 
$
85,134

 
$
277,968

Canada
1,664

 
819

 
468

 
1,477

 

 
179

 

 
5,032

 
9,639

Europe
7,282

 
6,531

 

 
2,201

 

 
9,770

 

 
683

 
26,467

Asia Pacific
3,414

 
7,306

 

 
229

 

 
1,260

 

 
290

 
12,499

Other international
5,252

 
461

 

 
1,066

 

 
903

 
4,545

 
57

 
12,284

 
$
88,089

 
$
22,452

 
$
22,204

 
$
31,137

 
$
23,069

 
$
30,028

 
$
30,682

 
$
91,196

 
$
338,857



Note D — Operating Segment Data
At March 31, 2020, 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 is a leading provider of purpose-built technical 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.
Ergobaby is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, strollers and related products.  Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than 50% of its sales from outside of the United States. Ergobaby is headquartered in Los Angeles, California.
Liberty Safe is a designer, manufacturer and marketer of premium home, gun and office safes in North America. From its over 300,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.
Velocity Outdoor is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, Ravin, LaserMax and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. Velocity Outdoor is headquartered in Bloomfield, New York.

14


Advanced Circuits is an electronic components manufacturing company that provides small-run, quick-turn and volume production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers primarily in North America. ACI is headquartered in Aurora, Colorado.
Arnold is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, general industrial, motorsport/automotive, oil and gas, medical, energy, reprographics and advertising specialties. Arnold produces high performance permanent magnets (PMAG), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide. Arnold is headquartered in Rochester, New York.
Foam Fabricators is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer components made from expanded polystyrene and expanded polypropylene. Foam Fabricators provides products to a variety of end markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products. Foam Fabricators is headquartered in Scottsdale, Arizona and operates 13 molding and fabricating facilities across North America.
Sterno is a manufacturer and marketer of portable food war