Quarterly Report (10-q)

Date : 05/01/2019 @ 9:11PM
Source : Edgar (US Regulatory)
Stock : Compass Diversified Holdings Shares of Beneficial Interest (CODI)
Quote : 18.9993  -0.2407 (-1.25%) @ 4:23PM

Quarterly Report (10-q)

 
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 March 31, 2019
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 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
 
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 April 30, 2019, 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, 2019
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 that matures in June 2021;
the "LLC Agreement" refer to the fifth amended and restated operating agreement of the Company dated as of December 6, 2016; and
"we," "us" and "our" refer to the Trust, the Company and the businesses together.


3


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

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


4


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2019
 
December 31,
2018
(in thousands)
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
39,837

 
$
50,749

Accounts receivable, net
263,494

 
265,234

Inventories
313,910

 
307,437

Prepaid expenses and other current assets
87,964

 
35,810

Current assets of discontinued operations

 
21,955

Total current assets
705,205

 
681,185

Property, plant and equipment, net
203,549

 
208,661

Operating lease right-of-use assets
103,442

 

Goodwill
611,883

 
615,893

Intangible assets, net
733,347

 
745,121

Other non-current assets
12,200

 
12,008

Non-current assets of discontinued operations

 
109,467

Total assets
$
2,369,626

 
$
2,372,335


5


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2019
 
December 31,
2018
(in thousands)
(Unaudited)
 
 
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
91,341

 
$
103,304

Accrued expenses
115,824

 
123,120

Due to related party
10,609

 
11,093

Current portion, long-term debt
5,000

 
5,000

Current portion, operating lease liabilities
19,574

 

Other current liabilities
7,764

 
7,334

Current liabilities of discontinued operations

 
9,429

Total current liabilities
250,112

 
259,280

Deferred income taxes
61,023

 
62,284

Long-term debt
955,395

 
1,098,871

Operating lease liabilities
90,701

 

Other non-current liabilities
11,614

 
17,790

Non-current liabilities of discontinued operations

 
14,768

Total liabilities
1,368,845

 
1,452,993

 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
Stockholders’ equity
 
 
 
Trust preferred shares, 50,000 authorized; 8,000 shares issued and outstanding at March 31, 2019 at December 31, 2018
 
 
 
Series A preferred shares, no par value; 4,000 shares issued and outstanding at March 31, 2019 and December 31, 2018
96,417

 
96,417

Series B preferred shares, no par value; 4,000 shares issued and outstanding at March 31, 2019 and December 31, 2018
96,504

 
96,504

Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding at March 31, 2019 and December 31, 2018
924,680

 
924,680

Accumulated other comprehensive loss
(3,517
)
 
(8,776
)
Accumulated deficit
(165,490
)
 
(249,453
)
Total stockholders’ equity attributable to Holdings
948,594

 
859,372

Noncontrolling interest
52,187

 
48,810

Noncontrolling interest of discontinued operations

 
11,160

Total stockholders’ equity
1,000,781

 
919,342

Total liabilities and stockholders’ equity
$
2,369,626

 
$
2,372,335



See notes to condensed consolidated financial statements.

6


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended March 31,
(in thousands, except per share data)
2019
 
2018
Net revenues
$
402,489

 
$
344,352

Cost of revenues
266,300

 
225,186

Gross profit
136,189

 
119,166

Operating expenses:
 
 
 
Selling, general and administrative expense
93,199

 
91,300

Management fees
11,082

 
10,762

Amortization expense
17,040

 
11,537

Operating income
14,868

 
5,567

Other income (expense):
 
 
 
Interest expense, net
(18,582
)
 
(6,182
)
Loss on sale of securities (refer to Note C)
(5,300
)
 

Amortization of debt issuance costs
(927
)
 
(1,098
)
Other income (expense), net
(571
)
 
(1,374
)
Loss from continuing operations before income taxes
(10,512
)
 
(3,087
)
Provision (benefit) for income taxes
403

 
(1,860
)
Loss from continuing operations
(10,915
)
 
(1,227
)
Loss from discontinued operations, net of income tax
(586
)
 
(394
)
Gain on sale of discontinued operations
121,659

 

Net income (loss)
110,158

 
(1,621
)
Less: Net income from continuing operations attributable to noncontrolling interest
1,300

 
359

Less: Net income (loss) from discontinued operations attributable to noncontrolling interest
(450
)
 
361

Net income (loss) attributable to Holdings
$
109,308

 
$
(2,341
)
 
 
 
 
Amounts attributable to Holdings
 
 
 
Loss from continuing operations
$
(12,215
)
 
$
(1,586
)
Loss from discontinued operations, net of income tax
$
(136
)
 
$
(755
)
Gain on sale of discontinued operations, net of income tax
121,659

 

Net income (loss) attributable to Holdings
$
109,308

 
$
(2,341
)
Basic income (loss) per common share attributable to Holdings (refer to Note J)

 


Continuing operations
$
(0.31
)
 
$
(0.08
)
Discontinued operations
2.03

 
(0.01
)
 
$
1.72

 
$
(0.09
)
 
 
 
 
Basic weighted average number of shares of common shares outstanding
59,900

 
59,900

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

 
$
0.36






See notes to condensed consolidated financial statements.

7


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

 
Three months ended March 31,
(in thousands)
2019
 
2018
 
 
 
 
Net income (loss)
$
110,158

 
$
(1,621
)
Other comprehensive income (loss)
 
 
 
Foreign currency translation adjustments
577

 
(1,023
)
Foreign currency amounts reclassified from accumulated other comprehensive income (loss) that increase (decrease) net income:
 
 
 
   Disposition of Manitoba Harvest
4,791

 

Pension benefit liability, net
(109
)
 
441

Other comprehensive income (loss)
5,259

 
(582
)
Total comprehensive income (loss), net of tax
$
115,417

 
$
(2,203
)
Less: Net income attributable to noncontrolling interests
850

 
720

Less: Other comprehensive income attributable to noncontrolling interests
2

 
354

Total comprehensive income (loss) attributable to Holdings, net of tax
$
114,565

 
$
(3,277
)

See notes to condensed consolidated financial statements.


8


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
 
 
 
 
 
 
 
Balance — January 1, 2018
$
96,417

 
$

 
$
924,680

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

 
$
41,066

 
$
11,725

 
$
925,999

Net income (loss)

 

 

 
(2,341
)
 

 
(2,341
)
 
359

 
361

 
(1,621
)
Total comprehensive loss, net

 

 

 

 
(582
)
 
(582
)
 

 

 
(582
)
Issuance of Trust preferred shares, net of offering costs

 
96,713

 

 

 

 
96,713

 

 

 
96,713

Option activity attributable to noncontrolling shareholders

 

 

 

 

 

 
2,551

 

 
2,551

Effect of subsidiary stock option exercise

 

 

 

 

 

 
(6,392
)
 

 
(6,392
)
Distributions paid - Trust Common Shares

 

 

 
(21,564
)
 

 
(21,564
)
 

 

 
(21,564
)
Distributions paid - Trust Preferred Shares

 

 

 
(1,813
)
 

 
(1,813
)
 

 

 
(1,813
)
Balance — March 31, 2018
$
96,417

 
$
96,713

 
$
924,680

 
$
(171,034
)
 
$
(3,155
)
 
$
943,621

 
$
37,584

 
$
12,086

 
$
993,291

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance — January 1, 2019
$
96,417

 
$
96,504

 
$
924,680

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

 
$
48,810

 
$
11,160

 
$
919,342

Net income (loss)

 

 

 
109,308

 

 
109,308

 
1,300

 
(450
)
 
110,158

Total comprehensive income, net

 

 

 

 
5,259

 
5,259

 

 

 
5,259

Option activity attributable to noncontrolling shareholders

 

 

 

 

 

 
2,116

 
89

 
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

 
$
52,187

 
$

 
$
1,000,781

See notes to condensed consolidated financial statements.


9


    


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
Three months ended March 31,
(in thousands)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
110,158

 
$
(1,621
)
Loss from discontinued operations, net of income tax
(586
)
 
(394
)
Gain on sale of discontinued operations
121,659

 

Net loss from continuing operations
(10,915
)
 
(1,227
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

Depreciation expense
10,581

 
9,104

Amortization expense
17,040

 
12,208

Amortization of debt issuance costs and original issue discount
1,079

 
1,353

Unrealized (gain) loss on interest rate swap
1,099

 
(2,901
)
Noncontrolling stockholder stock based compensation
2,116

 
2,340

Provision for loss on receivables
696

 
328

Deferred taxes
(1,626
)
 
(3,644
)
Other
392

 
(228
)
Changes in operating assets and liabilities, net of acquisitions:

 

Accounts receivable
958

 
(3,314
)
Inventories
(6,624
)
 
(5,465
)
Other current and non-current assets
(2,735
)
 
(4,644
)
Accounts payable and accrued expenses
(20,969
)
 
2,879

Cash provided by (used in) operating activities - continuing operations
(8,908
)
 
6,789

Cash used in operating activities - discontinued operations
(28
)
 
(146
)
Cash provided by (used in) operating activities
(8,936
)
 
6,643

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(878
)
 
(402,770
)
Purchases of property and equipment
(7,528
)
 
(12,128
)
Payment of interest rate swap
(94
)
 
(706
)
Proceeds from sale of business
124,166

 

Other investing activities
1,777

 
68

Cash provided by (used in) investing activities - continuing operations
117,443

 
(415,536
)
Cash provided by (used in) investing activities - discontinued operations
51,501

 
(92
)
Cash provided by (used in) investing activities
168,944

 
(415,628
)

10


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three months ended March 31,
(in thousands)
2019
 
2018
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of Trust preferred shares, net

 
96,713

Borrowings under credit facility
49,000

 
465,500

Repayments under credit facility
(193,250
)
 
(118,421
)
Distributions paid - common shares
(21,564
)
 
(21,564
)
Distributions paid - preferred shares
(3,781
)
 
(1,813
)
Repurchase of subsidiary stock

 
(6,392
)
Purchase of noncontrolling interest
(39
)
 

Debt issuance costs

 
(138
)
Other
(2,814
)
 
(467
)
Net cash provided by (used in) financing activities
(172,448
)
 
413,418

Foreign currency impact on cash
(1,049
)
 
2,007

Net increase (decrease) in cash and cash equivalents
(13,489
)
 
6,440

Cash and cash equivalents — beginning of period (1)
53,326

 
39,885

Cash and cash equivalents — end of period
$
39,837

 
$
46,325

(1) Includes cash from discontinued operations of $2.6 million at January 1, 2019 and $1.3 million at January 1, 2018.











See notes to condensed consolidated financial statements.

11


COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2019

Note A - Presentation and Principles of Consolidation
Compass Diversified Holdings, a Delaware statutory trust (the "Trust" or "Holdings") and Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the "Company" or "CODI"), were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. In accordance with the second amended and restated Trust Agreement, dated as of December 6, 2016 (as amended and restated, the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s fifth amended and restated operating agreement, dated as of December 6, 2016 (as amended and restated, the "LLC Agreement")) of the Company and, pursuant to the LLC Agreement, the Company has, outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of nine businesses, or reportable operating segments, at March 31, 2019 . The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), 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"), Clean Earth Holdings, Inc. ("Clean Earth"), FFI Compass Inc. ("Foam Fabricators" or "Foam") and The Sterno Group, LLC ("Sterno"). 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").
Basis of Presentation
The condensed consolidated financial statements for the three month periods ended March 31, 2019 and March 31, 2018 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, 2018 .
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 Fresh Hemp Foods Ltd. ("Manitoba Harvest"). The results of operations of Manitoba Harvest are reported as discontinued operations in the condensed consolidated statements of operations for the three months ended March 31, 2019 . Refer to Note C - "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.

12


Recently Adopted Accounting Pronouncements
Leases
As of January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases ("Topic 842"). The new standard requires 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. In July 2018, the Financial Accounting Standards Board ("FASB") issued two updates to Topic 842 to clarify how to apply certain aspects of the new lease standard, and to give entities another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows entities to not apply the new lease standard in the comparative periods presented in the financial statements in the year of adoption. The Company adopted the new standard using the optional transition method. The reported results for reporting periods after January 1, 2019 are presented under the new lease guidance while prior period amounts were prepared under the previous lease guidance.
The new standard provides a number of optional practical expedients in transition. The Company elected to use the package of practical expedients that allows us to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. We additionally elected to use the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component and the practical expedient pertaining to land easements. In addition, the new standard provides for an accounting election that permits a lessee to elect not to apply the recognition requirements of Topic 842 to short-term leases by class of underlying asset. The Company adopted this accounting election for all classes of assets.
The Company has performed an assessment of the impact of the adoption of Topic 842 on the Company's consolidated financial position and results of operations for the Company's leases, which consist of manufacturing facilities, warehouses, office facilities, retail stores, equipment and vehicle leases. The adoption of the new lease standard on January 1, 2019 resulted in the recognition of right-of-use assets of approximately $106.9 million and lease liabilities for operating leases of approximately $115.4 million on our Consolidated Balance Sheets, with no material impact to its Consolidated Statements of Operations or Consolidated Statement of Cash Flows. We implemented processes and a lease accounting system to ensure adequate internal controls were in place to assess our leasing arrangements and enable proper accounting and reporting of financial information upon adoption. No cumulative effect adjustment was recognized as the amount was not material. Refer to " Note O - Commitments and Contingencies " for additional information regarding the Company's adoption of Topic 842.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses, which will require companies to present assets held at amortized cost and available for sale debt securities 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 will be effective for fiscal years and interim periods beginning after December 15, 2019 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 — Acquisitions
Acquisition of Foam Fabricators
On February 15, 2018, pursuant to an agreement entered into on January 18, 2018, the Company, through a wholly owned subsidiary, FFI Compass, Inc. (“Buyer”), entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Warren F. Florkiewicz (“Seller”) pursuant to which Buyer acquired all of the issued and outstanding capital stock of Foam Fabricators, Inc., a Delaware corporation (“Foam Fabricators”). Foam Fabricators is a leading designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer ("OEM") components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP). Founded in 1957 and headquartered in Scottsdale, Arizona, it operates 13 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products.

13


The Company made loans to, and purchased a 100% controlling interest in Foam Fabricators. The final purchase price, after the working capital settlement and net of transaction costs, was approximately $253.4 million . The Company funded the acquisition through a draw on the 2014 Revolving Credit Facility. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and provided integration services during the first year of the Company's ownership. CGM received integration service fees of $2.25 million payable over a twelve month period as services were rendered. The Company incurred $1.6 million of transaction costs in conjunction with the Foam Fabricators acquisition, which was included in selling, general and administrative expense in the consolidated results of operations in the quarter ended March 31, 2018. The results of operations of Foam Fabricators have been included in the consolidated results of operations since the date of acquisition. Foam Fabricator's results of operations are reported as a separate operating segment.
The allocation of the purchase price, which was finalized during the fourth quarter of 2018, 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 tradename was valued at $4.2 million using a relief from royalty methodology, in which an asset is valuable to the extent that the ownership of the asset relieves the company from the obligation of paying royalties for the benefits generated by the asset. The customer relationships intangible asset was valued at $114.1 million using an excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The customer relationships intangible asset was derived using a risk adjusted discount rate.
Acquisition of Rimports
On February 26, 2018, the Company's Sterno subsidiary acquired all of the issued and outstanding capital stock of Rimports, Inc., a Utah corporation (“Rimports”), pursuant to a Stock Purchase Agreement, dated January 23, 2018, by and among Sterno and Jeffery W. Palmer, individually and in his capacity as Seller Representative, the Jeffery Wayne Palmer Dynasty Trust dated December 26, 2011, the Angela Marie Palmer Irrevocable Trust dated December 26, 2011, the Angela Marie Palmer Charitable Lead Trust, the Fidelity Investments Charitable Gift Fund, the TAK Irrevocable Trust dated June 7, 2012, and the SAK Irrevocable Trust dated June 7, 2012. Headquartered in Provo, Utah, Rimports is a manufacturer and distributor of branded and private label scented wickless candle products used for home décor and fragrance. Rimports offers an extensive line of wax warmers, scented wax cubes, essential oils and diffusers, and other home fragrance systems, through the mass retailer channel.
Sterno purchased a 100% controlling interest in Rimports. The purchase price, after the working capital settlement and net of transaction costs, was approximately $154.4 million . The purchase price of Rimports included a potential earn-out of up to $25 million contingent on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019. The fair value of the contingent consideration was estimated at $4.8 million . Sterno funded the acquisition through their intercompany credit facility with the Company. The transaction was accounted for as a business combination. Sterno incurred $0.6 million of transaction costs in conjunction with the acquisition of Rimports, which was included in selling, general and administrative expense in the consolidated results of operations in the quarter ended March 31, 2018. The results of operations of Rimports have been included in the consolidated results of operations since the date of acquisition. Rimport's results of operations are included in the Sterno operating segment.
The allocation of the purchase price, which was finalized during the fourth quarter of 2018, 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 tradename was valued at $6.6 million using a relief from royalty methodology, in which an asset is valuable to the extent that the ownership of the asset

14


relieves the company from the obligation of paying royalties for the benefits generated by the asset. The customer relationships intangible asset was valued at $79.1 million using an excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The customer relationships intangible asset was derived using a risk adjusted discount rate.
Unaudited pro forma information
The following unaudited pro forma data for the three months ended March 31, 2018 gives effect to the acquisition of Foam Fabricators and Sterno's acquisition of Rimports, as described above, and the disposition of Manitoba Harvest, as if these transactions had been completed as of January 1, 2018. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies and should not be construed as representing results for any future period.
(in thousands)
 
Three months ended March 31, 2018
Net revenues
 
$
384,180

Gross profit
 
129,584

Operating income
 
8,697

Net loss
 
(2,847
)
Net loss attributable to Holdings
 
(3,206
)
Basic and fully diluted net loss per share attributable to Holdings
 
$
(0.11
)
Other acquisitions
Clean Earth
ESMI - On May 23, 2018, Clean Earth acquired all of the outstanding capital stock of Environmental Soil Management, Inc. (“ESMI”), located in Fort Edward, New York and Loudon, New Hampshire. The acquisition provided Clean Earth the opportunity to geographically expand their soil and hazardous waste solutions in the New York and New England market. The purchase price was approximately $31.0 million . In connection with the acquisition, Clean Earth recorded a purchase price allocation of approximately $12.5 million in goodwill, and $10.4 million in intangible assets. The Company finalized the purchase price in the fourth quarter of 2018.
DART - On September 5, 2018, Clean Earth acquired the assets of Disposal and Recycling Technologies, Inc. ("DART"), for a purchase price of approximately $18.7 million . DART has a RCRA Part B hazardous waste site in Charlotte, North Carolina and a water waste treatment facility in Detroit, Michigan. The acquisition of DART expands Clean Earth's geographical reach in the Midwest and Mid-Atlantic hazardous and non-hazardous waste markets and represents Clean Earth's first water waste treatment facility. In connection with the acquisition, Clean Earth recorded $5.0 million in intangible assets and $8.3 million in goodwill.
Velocity Outdoor
Ravin Crossbows - On September 4, 2018, Velocity Outdoor (formerly Crosman Corp.) acquired all of the outstanding membership interests in Ravin Crossbows, LLC ("Ravin" or "Ravin Crossbows") for a purchase price of approximately $98.0 million , net of transaction costs, plus a potential earn-out of up to $25.0 million based on gross profit levels for the trailing twelve month period ending December 31, 2018. Velocity funded the acquisition and payment of related transaction costs through the issuance of an additional $38.9 million in intercompany loans and the issuance of additional equity to the Company of $60.6 million . Velocity recorded a purchase price allocation for Ravin comprised of $67.5 million in intangible assets ( $14.1 million in finite lived trade name, $42.6 million in technologies valued using an excess earnings methodology, and $10.8 million in customer relationships), $2.5 million in inventory step-up, and $13.3 million in goodwill which is expected to be deductible for income tax purposes. The remainder of the purchase consideration was allocated to net assets acquired. The potential earn-out was valued at $4.7 million as part of the purchase price allocation. Velocity incurred transaction costs of $1.4 million related to the Ravin acquisition, which were recorded as selling, general and administrative costs in the accompanying statement of operations as of December 31, 2018. The purchase price allocation was finalized during the first quarter of 2019.

15


Note C — Discontinued Operations
Sale of Manitoba Harvest
On February 19, 2019, the Company, as majority shareholder of Manitoba Harvest and as Shareholder Representative, entered into a definitive agreement (the “Arrangement Agreement”) with Tilray, Inc. ("Tilray"), the other shareholders of Manitoba Harvest and a wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, Inc., through Tilray Subco, all of the issued and outstanding securities of Manitoba Harvest.

On February 28, 2019, Tilray Subco completed the acquisition of all the issued and outstanding securities of Manitoba Harvest pursuant to the Arrangement Agreement. Subject to certain customary adjustments, the shareholders of Manitoba Harvest, including the Company, received or will receive 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 to the Common Holders on the date that is six months after the closing date of the arrangement (the “Deferred Consideration”). The sale consideration also includes a potential earnout of up to C$49 million in Tilray Common Stock to the Common Holders, if Manitoba Harvest achieves 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 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. We recorded a receivable of $48.0 million as of March 31, 2019 related to the Deferred Consideration portion of the proceeds. The Company recognized a gain on the sale of Manitoba Harvest of $121.7 million in the three months ended March 31, 2019. No amount has been recorded related to the potential earnout as of March 31, 2019 based on an assessment of probability at the end of the quarter.
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 during March 2019, recognizing a net loss of $5.3 million in Other income/ (expense) during the quarter ended March 31, 2019.
Summarized results of operations of Manitoba Harvest for the three months ended March 31, 2019 and 2018 through the date of disposition are as follows (in thousands):
 
 
For the period January 1, 2019 through disposition
 
Three months ended 
 March 31, 2018
Net revenues
 
$
10,024

 
$
16,341

Gross profit
 
4,874

 
6,945

Operating loss
 
(1,118
)
 
(869
)
Loss before income taxes
 
(1,127
)
 
(880
)
Provision (benefit) for income taxes
 
(541
)
 
(486
)
Loss from discontinued operations (1)
 
$
(586
)
 
$
(394
)
(1) The results of operations for the periods from January 1, 2019 through date of disposition and the three months ended March 31, 2018 exclude $1.0 million and $1.2 million , respectively, of intercompany interest expense.


16


The following table presents summary balance sheet information of the Manitoba Harvest business that is presented as discontinued operations as of December 31, 2018 (in thousands):
 
December 31, 2018
Assets:
 
   Cash and cash equivalents
$
2,577

   Accounts receivable, net
7,169

   Inventories
11,436

   Prepaid expenses and other current assets
773

   Current assets of discontinued operations
$
21,955

   Property, plant and equipment, net
18,157

   Goodwill
37,777

   Intangible assets, net
53,533

   Non-current assets of discontinued operations
$
109,467

Liabilities:
 
   Accounts payable
4,259

   Accrued expenses
4,313

   Due to related party
350

   Other current liabilities
507

   Current liabilities of discontinued operations
$
9,429

   Deferred income taxes
12,675

   Other non-current liabilities
2,093

   Non-current liabilities of discontinued operations
$
14,768

Noncontrolling interest of discontinued operations
$
11,160


Note D — Revenue
Effective January 1, 2018, the Company adopted the provisions of Revenue from Contracts with Customers, or ASC 606. The adoption of the new revenue guidance represents a change in accounting principle that will more closely align revenue recognition with the transfer of control of the Company's goods and services and will provide financial statement readers with enhanced disclosures. In accordance with the new revenue guidance, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and 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.

17


The following tables provide disaggregation of revenue by reportable segment geography for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three months ended March 31, 2019
 
5.11
 
Ergo
 
Liberty
 
Velocity
 
ACI
 
Arnold
 
Clean Earth
 
Foam
 
Sterno
 
Total
United States
$
70,477

 
$
7,335

 
$
21,736

 
$
26,164

 
$
23,069

 
$
17,916

 
$
63,632

 
$
26,137

 
$
85,134

 
$
341,600

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

 
$
63,632

 
$
30,682

 
$
91,196

 
$
402,489

 
Three months ended March 31, 2018
 
5.11
 
Ergo
 
Liberty
 
Velocity
 
ACI
 
Arnold
 
Clean Earth
 
Foam
 
Sterno
 
Total
United States
$
64,452

 
$
8,203

 
$
22,757

 
$
20,085

 
$
22,063

 
$
17,282

 
$
58,221

 
13,486

 
$
60,259

 
$
286,808

Canada
2,017

 
765

 
697

 
1,353

 

 
368

 

 

 
3,941

 
9,141

Europe
8,558

 
7,158

 

 
1,508

 

 
10,146

 

 

 
840

 
28,210

Asia Pacific
4,241

 
5,692

 

 
330

 

 
911

 

 

 
163

 
11,337

Other international
4,689

 
344

 

 
1,131

 

 
692

 

 
1,971

 
29

 
8,856

 
$
83,957

 
$
22,162

 
$
23,454

 
$
24,407

 
$
22,063

 
$
29,399

 
$
58,221

 
$
15,457

 
$
65,232

 
$
344,352


Note E — Operating Segment Data
At March 31, 2019 , 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.
Ergobaby is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, and related products.  Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than 50% of its sales from outside of the United States. Ergobaby is headquartered in Los Angeles, California.
Liberty Safe is a designer, manufacturer and marketer of premium home, gun and office safes in North America. From its over 300,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.
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.

18


Advanced Circuits is an electronic components manufacturing company that provides small-run, quick-turn and volume production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers primarily in North America. ACI is headquartered in Aurora, Colorado.
Arnold is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, motorsport/automotive, oil and gas, medical, general industrial, electric utility, reprographics and advertising specialty markets. Arnold produces high performance permanent magnets (PMAG), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide. Arnold is headquartered in Rochester, New York.
Clean Earth is a provider of environmental services for a variety of contaminated materials. Clean Earth provides a one-stop shop solution that analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as utilities, infrastructure, chemicals, aerospace and defense, non-public/ private development, medical, industrial and dredging. Clean Earth is headquartered in Hatboro, Pennsylvania.
Foam Fabricators is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer components made from expanded polystyrene and expanded polypropylene. Foam Fabricators provides products to a variety of end markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products. Foam Fabricators is headquartered in Scottsdale, Arizona and operates 13 molding and fabricating facilities across North America.
Sterno is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry and flameless candles, outdoor lighting products, scented wax cubes and warmer products for consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, scented wax cubes and warmer products used for home decor and fragrance systems, catering equipment and outdoor lighting products. Sterno is headquartered in Corona, California.
The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The results of operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. There were no significant inter-segment transactions.
Summary of Operating Segments
Net Revenues
Three months ended March 31,
(in thousands)
2019
 
2018
 
 
 
 
5.11 Tactical
$
88,089

 
$
83,957

Ergobaby
22,452

 
22,162

Liberty
22,204

 
23,454

Velocity Outdoor
31,137

 
24,407

ACI
23,069

 
22,063

Arnold
30,028

 
29,399

Clean Earth
63,632

 
58,221

Foam Fabricators
30,682

 
15,457

Sterno
91,196

 
65,232

Total segment revenue
402,489

 
344,352

Corporate and other

 

Total consolidated revenues
$
402,489

 
$
344,352




19


Segment profit (loss) (1)
Three months ended March 31,
(in thousands)
2019
 
2018
 
 
 
 
5.11 Tactical
$
2,338

 
$
(617
)
Ergobaby
3,136

 
2,340

Liberty
1,415

 
2,815

Velocity Outdoor
341

 
273

ACI
6,481

 
5,932

Arnold
1,477

 
1,725

Clean Earth
1,256

 
759

Foam Fabricators
3,506

 
725

Sterno
7,982

 
4,751

Total
27,932

 
18,703

Reconciliation of segment profit (loss) to consolidated income (loss) before income taxes:
 
 
 
Interest expense, net
(18,582
)
 
(6,182
)
Other income (expense), net
(5,871
)
 
(1,374
)
Corporate and other (2)
(13,991
)
 
(14,234
)
Total consolidated income (loss) before income taxes
$
(10,512
)
 
$
(3,087
)

(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 March 31,
(in thousands)
2019
 
2018
 
 
 
 
5.11 Tactical
$
5,157

 
$
5,372

Ergobaby
2,111

 
2,042

Liberty
407

 
343

Velocity Outdoor
3,251

 
1,991

ACI
669

 
804

Arnold
1,622

 
1,516

Clean Earth
6,035

 
5,460

Foam Fabricators
2,997

 
885

Sterno
5,372

 
2,899

Total
27,621

 
21,312

Reconciliation of segment to consolidated total:
 
 
 
Amortization of debt issuance costs and original issue discount
1,079

 
1,353

Consolidated total
$
28,700

 
$
22,665




20


 
Accounts Receivable
 
Identifiable Assets
 
March 31,
 
December 31,
 
March 31,
 
December 31,
(in thousands)
2019
 
2018
 
2019 (1)
 
2018 (1)
5.11 Tactical
$
53,161

 
$
52,069

 
$
349,336

 
$
319,583

Ergobaby
13,914

 
11,361

 
101,686

 
100,679

Liberty
11,937

 
10,416

 
36,871

 
27,881

Velocity Outdoor
20,025

 
21,881

 
208,809

 
209,398

ACI
8,394

 
9,193

 
18,493

 
13,407

Arnold
18,393

 
16,298

 
78,319

 
66,744

Clean Earth
58,558

 
60,317

 
222,773

 
204,316

Foam Fabricators
24,024

 
23,848

 
166,255

 
155,504

Sterno
68,286

 
72,361

 
259,332

 
253,637

Allowance for doubtful accounts
(13,198
)
 
(12,510
)
 

 

Total
263,494

 
265,234

 
1,441,874

 
1,351,149

Reconciliation of segment to consolidated total:
 
 
 
 

 

Corporate and other identifiable assets

 

 
52,375

 
8,357

Assets of discontinued operations

 

 

 
131,702

Total
$
263,494

 
$
265,234

 
$
1,494,249

 
$
1,491,208


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

Note F — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
Machinery and equipment
$
238,754

 
$
234,083

Furniture, fixtures and other
35,650

 
34,149

Leasehold improvements
34,873

 
35,458

Buildings and land
41,945

 
39,973

Construction in process
8,828

 
11,189

 
360,050

 
354,852

Less: accumulated depreciation
(156,501
)
 
(146,191
)
Total
$
203,549

 
$
208,661

Depreciation expense was $10.6 million and $9.1 million and for the three months ended March 31, 2019 and March 31, 2018 , respectively.

21


Inventory
Inventory is comprised of the following at March 31, 2019 and December 31, 2018 (in thousands) :
 
March 31, 2019
 
December 31, 2018
Raw materials
$
60,694

 
$
60,788

Work-in-process
14,297

 
12,915

Finished goods
260,028

 
253,982

Less: obsolescence reserve
(21,109
)
 
(20,248
)
Total
$
313,910

 
$
307,437



Note G — 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. The Arnold business previously comprised three reporting units when it was acquired in March 2012, but as a result of changes implemented by Arnold management during 2016 and 2017, the Company reassessed the reporting units at Arnold as of the annual impairment testing date in 2018. After evaluating changes in the operation of the reporting units that led to increased integration and altered how the financial results of the Arnold operating segment were assessed by Arnold management, the Company determined that the previously identified reporting units no longer operate in the same manner as they did when the Company acquired Arnold. As a result, the separate Arnold reporting units were determined to only comprise one reporting unit at the Arnold operating segment level as of March 31, 2018. As part of the exercise of combining the separate Arnold reporting units into one reporting unit, the Company performed "before" and "after" goodwill impairment testing, whereby we performed the annual impairment testing for each of the existing reporting units of Arnold and then subsequent to the completion of the annual impairment testing of the separate reporting units, we performed a quantitative impairment test of the Arnold operating segment, which will represent the reporting unit for future impairment tests.
Goodwill
2019 Annual 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 quantitative goodwill impairment testing. All of the Company's reporting units except Liberty were tested qualitatively at March 31, 2019. We determined that the Liberty reporting unit required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on qualitative factors alone. We expect to conclude the goodwill impairment testing during the quarter ended June 30, 2019. For the reporting units that were tested qualitatively for the 2019 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded their carrying value.
2018 Annual Impairment Testing
For the reporting units that were tested qualitatively for the 2018 annual impairment testing, the results of the qualitative analysis indicated that the fair value exceeded their carrying value. At March 31, 2018, we determined that the Flexmag reporting unit of Arnold required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on qualitative factors alone. For the quantitative impairment test of Flexmag, we estimated the fair value of the reporting unit using an income approach, whereby we estimate the fair value of the 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 conditions. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. The discount rate used in the income approach for Flexmag was 12.4% .

22


For the reporting unit change at Arnold, a quantitative impairment test was performed of the Arnold business at March 31, 2018 using an income approach. The discount rate used in the income approach was 12.6% . The results of the quantitative impairment testing indicated that the fair value of the Arnold reporting unit exceeded the carrying value.
A summary of the net carrying value of goodwill at March 31, 2019 and December 31, 2018 , is as follows (in thousands) :
 
Three months ended March 31, 2019
 
Year ended 
 December 31, 2018
Goodwill - gross carrying amount
$
643,036

 
$
647,046

Accumulated impairment losses
(31,153
)
 
(31,153
)
Goodwill - net carrying amount
$
611,883

 
$
615,893

The following is a reconciliation of the change in the carrying value of goodwill for the three months ended March 31, 2019 by operating segment (in thousands) :
 
 
Balance at January 1, 2019
 
Acquisitions (1)
 
Goodwill Impairment
 
Other
 
Balance at March 31, 2019
5.11
 
$
92,966

 
$

 
$

 
$

 
$
92,966

Ergobaby
 
61,031

 

 

 

 
61,031

Liberty
 
32,828

 

 

 

 
32,828

Velocity Outdoor
 
62,675

 
284

 

 

 
62,959

ACI
 
58,019

 

 

 

 
58,019

Arnold (2)
 
26,903

 

 

 

 
26,903

Clean Earth
 
144,778

 
(4,294
)
 

 

 
140,484

Foam Fabricators
 
72,708

 

 

 

 
72,708

Sterno
 
55,336

 

 

 

 
55,336

Corporate (3)
 
8,649

 

 

 

 
8,649

Total
 
$
615,893

 
$
(4,010
)
 
$

 
$

 
$
611,883


(1)
Clean Earth's acquisition of DART and Velocity's acquisition of Ravin were finalized during the first quarter of 2019.
(2)
Arnold had three reporting units which were combined into one reporting unit effective March 31, 2018.
(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.
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 indefinite lived intangible asset in connection with the annual impairment testing for 2019 and 2018 . Results of the qualitative analysis indicate that it is more likely than not that the fair value of the reporting units that maintain indefinite lived intangible assets exceeded the carrying value.

23


Other intangible assets are comprised of the following at March 31, 2019 and December 31, 2018 (in thousands) :
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer relationships
$
500,358

 
$
(139,413
)
 
$
360,945

 
$
500,358

 
$
(130,157
)
 
$
370,201

Technology and patents
79,707

 
(24,772
)
 
54,935

 
79,646

 
(23,409
)
 
56,237

Trade names, subject to amortization
208,161

 
(40,808
)
 
167,353

 
208,074

 
(36,912
)
 
171,162

Licensing and non-compete agreements
8,205

 
(7,104
)
 
1,101

 
8,205

 
(6,972
)
 
1,233

Permits and airspace
132,409

 
(43,769
)
 
88,640

 
127,146

 
(41,291
)
 
85,855

Distributor relations and other
726

 
(726
)
 

 
726

 
(726
)
 

Total
929,566

 
(256,592
)
 
672,974

 
924,155

 
(239,467
)
 
684,688

Trade names, not subject to amortization
60,373

 

 
60,373

 
60,433

 

 
60,433

Total intangibles, net
$
989,939

 
$
(256,592
)
 
$
733,347

 
$
984,588

 
$
(239,467
)
 
$
745,121

Amortization expense related to intangible assets was $17.0 million and $11.5 million for the three months ended March 31, 2019 and 2018 , respectively. Estimated charges to amortization expense of intangible assets for the remainder of 2019 and the next four years, is as follows (in thousands) :
2019
 
2020
 
2021
 
2022
 
2023
 
 
 
 
 
 
 
 
 
 
 
$
54,121

 
$
67,560

 
$
66,990

 
$
65,451

 
$
65,062

 
Note H — Warranties
The Company’s Velocity Outdoor, Ergobaby and Liberty operating segments estimate their exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty liability quarterly and adjusts the amount as necessary. A reconciliation of the change in the carrying value of the Company’s warranty liability for the three months ended March 31, 2019 and the year ended December 31, 2018 is as follows ( in thousands ):
 
Three months ended March 31, 2019
 
Year ended 
 December 31, 2018
Warranty liability:
 
 
 
Beginning balance
$
1,624

 
$
2,197

Provision for warranties issued during the period
676

 
3,531

Fulfillment of warranty obligations
(836
)
 
(4,258
)
Other (1)

 
154

Ending balance
$
1,464

 
$
1,624

(1) Represents the warranty liability recorded in relation to acquisitions. Warranty liabilities of acquisitions are recorded at fair value as of the date of acquisition.

Note I — Debt
2018 Credit Facility
On April 18, 2018, the Company entered into an Amended and Restated Credit Agreement (the "2018 Credit Facility") to amend and restate the 2014 Credit Facility, originally dated as of June 6, 2014 (as previously amended) among the Company, the lenders from time to time party thereto (the “Lenders”), and Bank of America, N.A., as Administrative Agent. The 2018 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 2018 Credit Facility provides for (i) revolving loans, swing line loans and letters of credit (the “2018 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million , and (ii) a $500 million term loan (the “2018 Term

24


Loan”). The 2018 Term Loan was issued at an original issuance discount of 99.75% . The 2018 Term Loan requires quarterly payments of $1.25 million commencing June 30, 2018, with a final payment of all remaining principal and interest due on April 18, 2025, the maturity date of the 2018 Term Loan. All amounts outstanding under the 2018 Revolving Credit Facility will become due on April 18, 2023, which is the maturity date of loans advanced under the 2018 Revolving Credit Facility. The 2018 Credit Facility also permits the Company, prior to the applicable maturity date, to increase the 2018 Revolving Loan Commitment and/or obtain additional term loans in an aggregate amount of up to $250 million (the “Incremental Loans”), subject to certain restrictions and conditions.
The Company may borrow, prepay and reborrow principal under the 2018 Revolving Credit Facility from time to time during its term. Advances under the 2018 Revolving Credit Facility can be either Eurodollar rate loans or base rate loans. Eurodollar rate revolving loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum based on the London Interbank Offered Rate (the “Eurodollar Rate”) for such interest period plus a margin ranging from 1.50% to 2.50% , based on the ratio of consolidated net indebtedness to adjusted consolidated earnings before interest expense, tax expense, and depreciation and amortization expenses for such period (the “Consolidated Total Leverage Ratio”). Base rate revolving loans bear interest on the outstanding principal amount thereof at a rate per annum equal to the highest of (i) Federal Funds rate plus 0.50%, (ii) the “prime rate”, and (iii) Eurodollar Rate plus 1.0% (the “Base Rate”), plus a margin ranging from 0.50% to 1.50% , based on the Company's Consolidated Total Leverage Ratio.
Under the 2018 Revolving Credit Facility, an aggregate amount of up to $100 million in letters of credit may be issued, as well as swing line loans of up to $25 million outstanding at one time. The issuance of such letters of credit and the making of any swing line loan would reduce the amount available under the 2018 Revolving Credit Facility.
2014 Credit Facility
The 2014 Credit Facility, as amended, provided for (i) a revolving credit facility of $550 million , (ii) a $325 million term loan (the "2014 Term Loan"), and (iii) a $250 million incremental term loan. The 2018 Credit Facility amended and restated the 2014 Credit Facility.
Senior Notes
On April 18, 2018, the Company consummated the issuance and sale of $400 million aggregate principal amount of its 8.000% Senior Notes due 2026 (the “Notes” or "Senior Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The Company used the net proceeds from the sale of the Notes to repay debt under its existing credit facilities in connection with a concurrent refinancing transaction described above. The Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee.
The Notes will bear interest at the rate of 8.000% per annum and will mature on May 1, 2026. Interest on the Notes is payable in cash on May 1st and November 1st of each year, beginning on November 1, 2018. The Notes are general senior unsecured obligations of the Company and are not guaranteed by the subsidiaries through which the Company currently conducts substantially all of its operations. The Notes rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness, and rank senior in right of payment to all of the Company’s future subordinated indebtedness, if any. The Notes will be effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, including the indebtedness under the Company’s credit facilities described above.
The Indenture contains several restrictive covenants including, but not limited to, limitations on the following: (i) the incurrence of additional indebtedness, (ii) restricted payments, (iii) dividends and other payments affecting restricted subsidiaries, (iv) the issuance of preferred stock of restricted subsidiaries, (v) transactions with affiliates, (vi) asset sales and mergers and consolidations, (vii) future subsidiary guarantees and (viii) liens, subject in each case to certain exceptions.

25


The following table provides the Company’s debt holdings at March 31, 2019 and December 31, 2018 (in thousands) :
 
March 31, 2019
 
December 31, 2018
Senior Notes
400,000

 
400,000

Revolving Credit Facility
$
85,000

 
$
228,000

Term Loan
495,000

 
496,250

Less: unamortized discounts and debt issuance costs
(19,605
)
 
(20,379
)
Total debt
$
960,395

 
$
1,103,871

Less: Current portion, term loan facilities
(5,000
)
 
(5,000
)
Long term debt
$
955,395

 
$
1,098,871

Net availability under the 2018 Revolving Credit Facility was approximately $514.8 million at March 31, 2019 . Letters of credit outstanding at March 31, 2019 totaled approximately $0.3 million . At March 31, 2019 , the Company was in compliance with all covenants as defined in the 2018 Credit Facility.
At March 31, 2019 , the carrying value of the principal under the Company’s outstanding Term Loan, including the current portion, was $495.0 million , which approximates fair value because it has a variable interest rate that reflects market changes in interest rates and changes in the Company's net leverage ratio. The estimated fair value of the outstanding 2018 Term Loan is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 in the fair value hierarchy. The Company's Senior Notes consisted of the following carrying value and estimated fair value (in thousands):
 
 
 
 
 
 
Fair Value Hierarchy Level
 
March 31, 2019
 
 
Maturity Date
 
Rate
 
 
Carrying Value
 
Fair Value
Senior Notes
 
May 1, 2026
 
8.000
%
 
2
 
400,000

 
419,000

 
 
 
 
 
 
 
 
 
 
 
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the issuance of the Company's financing arrangements. The Company paid $7.0 million in debt issuance costs related to the Senior Notes issuance, comprised of bank fees, rating agency fees and professional fees. The 2018 Credit Facility was categorized as a debt modification, and the Company incurred $8.4 million of debt issuance costs, $7.8 million of which were capitalized and will be amortized over the life of the related debt instrument, and $0.6 million that were expensed as costs incurred. The Company recorded additional debt modification expense of $0.6 million to write off previously capitalized debt issuance costs. Since the Company can borrow, repay and reborrow principal under the 2018 Revolving Credit Facility, the debt issuance costs associated with the 2014 and 2018 Revolving Credit Facility of $4.9 million and $5.3 million at March 31, 2019 and December 31, 2018 , respectively, have been classified as other non-current assets in the accompanying consolidated balance sheet. The original issue discount and the debt issuance costs associated with the 2018 Term Loan and Senior Notes are classified as a reduction of long-term debt in the accompanying consolidated balance sheet.
Interest Rate Swap
In September 2014, the Company purchased an interest rate swap (the "Swap") with a notional amount of $220 million . The Swap is effective April 1, 2016 through June 6, 2021, the original termination date of the 2014 Term Loan. The agreement requires the Company to pay interest on the notional amount at the rate of 2.97% in exchange for the three -month LIBOR rate. At March 31, 2019 and December 31, 2018 , the Swap had a fair value loss of $3.1 million and $2.1 million , respectively, principally reflecting the present value of future payments and receipts under the agreement.
The following table reflects the classification of the Company's Swap on the consolidated balance sheets at March 31, 2019 and December 31, 2018 ( in thousands ):
 
March 31, 2019
 
December 31, 2018
Other current liabilities
$
1,041

 
$
582

Other noncurrent liabilities
2,036

 
1,490

Total fair value
$
3,077

 
$
2,072


26


Note J — Stockholders’ Equity
Trust Common Shares
The Trust is authorized to issue 500,000,000 Trust shares and the Company is authorized to issue a corresponding number of LLC interests. The Company will at all times have the identical number of LLC interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each Trust share is entitled to one vote per share on any matter with respect to which members of the Company are entitled to vote.
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 Trust preferred shares and the Company is authorized to issue a corresponding number of trust preferred interests.
Series B Preferred Shares
On March 13, 2018, the Trust issued 4,000,000 7.875% Series B Trust Preferred Shares (the "Series B Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million , or $96.5 million net of underwriters' discount and issuance costs. Distributions on the Series B Preferred Shares will be payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30, and October 30 of each year, beginning on July 30, 2018, at a rate per annum of 7.875%. Distributions on the Series B Preferred Shares are cumulative. Unless full cumulative distributions on the Series B Preferred Shares have been or contemporaneously are declared and set apart for payment of the Series B Preferred Shares for all past distribution periods, no distribution may be declared or paid for payment on the Trust common shares. The Series B Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the preferred shares. The Series B Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after April 30, 2028, at a price of $25.00 per share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding, the redemption date. Holders of Series B Preferred Shares will have no right to require the redemption of the Series B Preferred Shares and there is no maturity date.
Series A Preferred Shares
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million , or $96.4 million net of underwriters' discount and issuance costs. When, and if declared by the Company's board of directors, distribution on the Series A Preferred Shares will be payable quarterly on January 30, April 30, July 30, and October 30 of each year, beginning on October 30, 2017, at a rate per annum of 7.250%. Distributions on the Series A Preferred Shares are discretionary and non-cumulative. The Company has no obligation to pay distributions for a quarterly distribution period if the board of directors does not declare the distribution before the scheduled record of date for the period, whether or not distributions are paid for any subsequent distribution periods with respect to the Series A Preferred Shares, or the Trust common shares. If the Company's board of directors does not declare a distribution for the Series A Preferred Shares for a quarterly distribution period, during the remainder of that quarterly distribution period the Company cannot declare or pay distributions on the Trust common shares. The Series A Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after July 30, 2022, at a price of $25.00 per share, plus any declared and unpaid distributions. Holders of Series A Preferred Shares will have no right to require the redemption of the Series A Preferred Shares and there is no maturity date. The Series A Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation for the preferred shares.
Profit Allocation Interests
The Allocation Interests represent the original equity interest in the Company. The holders of the Allocation Interests ("Holders") are entitled to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The distributions of the profit allocation are paid upon the occurrence of the sale of a material amount of capital stock or assets of one of the Company’s businesses ("Sale Event") or, at the option of the Holders, at each five-year anniversary date of the acquisition of one of the Company’s businesses ("Holding Event"). The Company records distributions of the profit allocation to the Holders upon occurrence of a Sale Event or Holding Event as distributions declared on Allocation Interests to stockholders’ equity when they are approved by the Company’s board of directors.

27


Sale Event
The sale of Manitoba Harvest in February 2019 qualified as a Sale Event under the Company's LLC Agreement. During the second quarter of 2019, the Company declared a distribution to the Allocation Member of $7.7 million which will be paid in the second quarter of 2019. The profit allocation distribution was calculated based on the portion of the gain on sale related to the Closing Date Consideration, less the loss on sale of shares that were received as part of the Closing Consideration. An additional profit allocation distribution related to the Sale Event of Manitoba Harvest will be declared subsequent to receipt of the Deferred Consideration in August 2019.
Reconciliation of net income (loss) available to common shares of Holdings
The following table reconciles net loss attributable to Holdings to net loss attributable to the common shares of Holdings ( in thousands ):
 
 
Three months ended March 31,
 
 
2019