COMPASS DIVERSIFIED HOLDINGS
301 RIVERSIDE AVENUE • SECOND FLOOR • WESTPORT, CT 06880
COMPASSDIVERSIFIEDHOLDINGS.COM
CODI 2017
COMPANY HEADQUARTERS
301 RIVERSIDE AVENUE, SECOND FLOOR
WESTPORT, CT 06880, (203) 221-1703
INDEPENDENT AUDITORS
GRANT THORNTON LLP, NEW YORK, NY
COMMON STOCK LISTING
NYSE TICKER: CODI
BROADRIDGE CORPORATE ISSUER SOLUTIONS
TRANSFER AGENT
P.O. BOX 1342
BRENTWOOD, NY 11717
INVESTOR RELATIONS CONTACT
LEON BERMAN, THE IGB GROUP
(212) 477-8438, LBERMAN@IGBIR.COM
ANNUAL MEETING OF SHAREHOLDERS
MAY 30, 2018, 9:00 A.M., EST
301 RIVERSIDE AVENUE, SECOND FLOOR
WESTPORT, CT 06880
WEBSITE
WWW.COMPASSDIVERSIFIEDHOLDINGS.COM
2017
1
2
2017
HIGHLIGHTS
LETTER TO
SHAREHOLDERS
4
OUR
COMPANIES
14
CODI
GOVERNANCE
16
17
CODI
INFORMATION
FINANCIAL
REVIEW
CODI
Compass Diversified Holdings (“CODI”) offers shareowners an opportunity to own profitable
middle market businesses with leading market positions in the branded products and niche
industrial industries.
We own controlling interests in ALL of our subsidiaries, enabling us to take a focused
and proactive approach to managing THEM in order to create value for our shareowners.
We are exceedingly disciplined with respect to due diligence, valuation, terms and niche
market leadership when identifying potential new subsidiaries.
Our shareowners deserve – AND we deliver – an extraordinarily high level of transparency
in our financial reporting and governance processes.
As of December 31, 2017, CODI’s branded products group consisted of five subsidiaries
and our niche industrial products group consisted of four subsidiaries. We believe that
these businesses will continue to produce stable and growing cash flows, allowing us to
invest in their long-term growth and to make cash distributions to our shareowners.
2017
HIGHLIGHTS
ACQUIRED
CROSMAN
FOR $150 MILLION
IN JUNE
SOLD FOXF SHARES
GENERATING
$136.1 MILLION
IN PROCEEDS
COMPLETED
3 ADD-ON
ACQUISITIONS
LETTER TO SHAREHOLDERS
Dear Fellow Shareowners,
Compass Diversified Holdings is pleased
to report that in 2017 we continued to
successfully generate strong cash flow
allowing for meaningful distributions to our
shareowners by patiently allocating capital,
investing in and growing our subsidiary
companies, and opportunistically divesting
subsidiaries. We are confident that our
proven business model and strategy will
continue to be effective in creating value for
our shareowners over a long period of time.
Our subsidiaries generated stable results but
also faced some challenges in 2017. Pro forma
consolidated revenue increased 2.2% while
EBITDA decreased by 1.9%, versus 2016.
Revenue growth was due primarily to the
contributions of our acquisition of a new
Branded Products group subsidiary, Crosman
Corporation, as well as the add-on acquisitions
completed by Clean Earth, Crosman and
Sterno. However, consolidated EBITDA was
adversely impacted by the bankruptcy of two
national retailers, a complicated ERP system
implementation at 5.11, margin deterioration
at Arnold Magnetics and a historically low
level of activity in the dredge line of business
at Clean Earth. Our Niche Industrials group
posted combined revenue increases of 4.8%
and a slight decrease in EBITDA of 0.9%,
versus the prior year. Notably, Clean Earth
and Sterno saw increases in revenue and
EBITDA versus the prior year, fueled by their
2
LETTER TO SHAREHOLDERS
acquisitions of AERC Recycling Solutions and sevenOKs, respectively, offset by the challenges at Arnold and Clean Earth’s dredge
business. Revenue was flat and EBITDA declined 2.9% for our Branded Products group versus the prior year. The dynamic
changes within the retail industry adversely impacted the results of the group, as the previously mentioned bankruptcies of two
large national retailers led to sales disruptions and receivable write offs at three of our subsidiaries. Although changes to the
retail landscape are ongoing, we believe that our subsidiaries have strategies in place to address these changes and are well
positioned for future success. Despite the aforementioned headwinds, we are extremely pleased that on a consolidated basis
we generated cash flow that was greater than prior year and in excess of our distributions. In addition, we are optimistic that
both groups are poised to grow in 2018.
The dynamics within the middle market have remained consistent for several years, as competition among potential acquirers
and high prices for assets persisted in 2017. Abundant debt and equity capital to support these transactions continued to
be available, and as a result it remained a challenge to acquire new subsidiary companies at attractive values. However,
we maintained our disciplined and patient approach and successfully acquired a new subsidiary, Crosman Corporation, in
June. Crosman is the world’s leading designer, manufacturer and marketer of airguns, archery products, optics and related
accessories under the Crosman, Benjamin and CenterPoint brands. Crosman subsequently acquired the commercial
business of LaserMax, Inc., a leading designer and manufacturer of laser aiming devices, further expanding its product
offerings for the outdoor recreation market. Similar to all of our subsidiaries, we believe that Crosman possesses all of the
attributes that we seek, as it is a niche market leader with a stellar management team, has a history of stable and growing cash
flow, and owns a leading portfolio of brands. In addition, our subsidiaries completed several add-on acquisitions, with Clean
Earth acquiring AERC Recycling Solutions, a universal waste and electronic waste recycling company, and Sterno acquiring
sevenOKs, a leading provider of insulated food carriers for the foodservice and retail markets, which has been rebranded as
Sterno Delivery. We believe that the subsidiary and add-on acquisitions were completed at favorable valuations that will provide
our shareowners with an appropriate risk-adjusted return, will be accretive, and will amplify our growth prospects.
Complementing our successful acquisitions in 2017, we also monetized our remaining interest in our former subsidiary, Fox Factory
Holding Corp. Opportunistically divesting subsidiaries in order to create value for our shareowners remains an important part of
our strategy, and with this final divestiture we achieved total net proceeds in excess of $136 million dollars which has provided
us with liquidity to redeploy capital into add-on and new subsidiary acquisitions that we believe will provide growth in cash flow
and create future value.
We continued to manage the business conservatively, and we enter 2018 with balance sheet strength and strong liquidity.
2017 marked the first time that we accessed the preferred shares market, adding another source of liquidity to our capital
structure. We completed a 4.0 million Series A preferred share offering that generated net proceeds of approximately $96
million. We are pleased that the equity capital markets continue to support us, and are excited to add this new component
to our capital structure as it is non-dilutive to common shareowners. Looking towards 2018, we anticipate that our capital
structure will continue to evolve as we address our long-term growth plans and debt maturities in 2019. We expect to reduce
leverage – as we always have – post our active deployment in 2017, which will provide us with the capital to drive our growth
and support our ability to create value for and make cash distributions to our shareowners.
CODI shares did not perform well in 2017. For the first time in our history, CODI shares underperformed all of the major indices
on a total return basis. Despite these headwinds, our distributions to our shareowners remained consistent, delivering $1.44
per share and bringing our cumulative distributions paid to $16.08 per share since our 2006 initial public offering. The share
price performance in 2017 was certainly disappointing, but we believe that executing upon our strategy of investing in and
growing the cash flows of our subsidiaries, allocating capital with discipline and patience, and opportunistically divesting our
subsidiaries will fuel future value creation for our shareowners.
We are confident that our diversified group of subsidiary companies are poised for strong performance in 2018, and we
anticipate growth in revenues and EBITDA on a consolidated basis. Our commitment to our strategy is unwavering, and we
believe that we have an incredibly talented group of colleagues across our entire organization to successfully execute our
strategy and profitably grow the company.
It is a true honor to work with the extraordinarily capable and dedicated group of employees, subsidiary company management
teams and their workforces, as well as our board of directors. We are extremely appreciative of their unrivaled commitment to
create value for our shareowners and build our company. We are sincerely grateful to Alan for his service as CEO and for the
numerous contributions he has made to our organization over the past several years. Although our leadership is changing, our
mission for the company remains unchanged. We are fortunate to have a successor CEO who has been with the company
since its inception. We are excited for our future and continued success under Elias’ leadership as CEO. We are thankful for
the support and trust of our shareowners. It is our privilege to work on your behalf.
Very Truly Yours,
Alan B. Offenberg
Chief Executive Officer
Ryan J. Faulkingham
Chief Financial Officer
Elias J. Sabo
Founding Partner
3
OUR COMPANIES
Advanced Circuits/John Yacoub, CEO
Ergobaby/Margaret Hardin, CEO
Arnold Magnetic Technologies/Dan Miller, CEO
Liberty Safe/Kim Waddoups, CEO
Clean Earth/Chris Dods, CEO
Manitoba Harvest/Bill Chiasson, CEO
Crosman/Robert Beckwith, CEO
Sterno Products/Don Hinshaw, CEO
5.11 Tactical/Tom Davin, CEO
4
Headquartered in Los Angeles,
California, and founded in 2003,
Ergobaby is a premier designer,
marketer and distributor of
wearable baby carriers, blankets
and swaddlers, nursing pillows,
and related baby wearing
products, under the Ergobaby
and Tula brand names. Ergobaby
products are sold in the United
States and throughout the
world. Ergobaby’s reputation
for product innovation, reliability
and safety has led to numerous
awards and accolades.
TO LEARN MORE ABOUT ERGOBABY,
PLEASE VISIT:
WWW.ERGOBABY.COM
5
Headquartered in East
Bloomfield, NY, Crosman is
the world’s leading designer,
manufacturer and marketer
of airguns, archery products,
optics and related accessories.
Crosman serves over 425
customers worldwide, including
mass merchants, sporting
goods retailers, online channels
and distributors serving
smaller specialty stores and
international markets. The
company’s diversified product
portfolio includes the widely
known Crosman, Benjamin and
CenterPoint brands.
6
TO LEARN MORE ABOUT CROSMAN,
PLEASE VISIT:
WWW.CROSMAN.COM
Headquartered in Payson,
Utah, and founded in 1988,
Liberty Safe is a designer and
manufacturer of premium home
and gun safes and accessories.
Products are marketed under
the Liberty® brand, as well
as a portfolio of licensed and
private label brands, including
Cabela’s® and John Deere®.
Liberty Safe’s products are the
market share leader and are
sold in various sporting goods,
and farm and fleet retailers.
Liberty also has the largest
independent dealer network in
the industry.
7
TO LEARN MORE ABOUT LIBERTY SAFE,
PLEASE VISIT:
WWW.LIBERTYSAFE.COM
Headquartered in Irvine, CA,
and founded in 2003. 5.11 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.
8
TO LEARN MORE ABOUT 5.11,
PLEASE VISIT:
WWW.511TACTICAL.COM
Headquartered in Winnipeg,
Manitoba, and founded in 1998,
Manitoba Harvest is a pioneer
and global leader in branded,
hemp-based foods. The
company is the world’s largest
vertically-integrated hemp food
manufacturer and is strategically
located near its supply base in
Canada. Manitoba Harvest’s
100% all-natural product lineup
includes hemp hearts, hemp
protein powder and hemp
snacks and are currently carried
in about 7,000 retail locations
across the U.S. and Canada.
9
TO LEARN MORE ABOUT MANITOBA HARVEST,
PLEASE VISIT:
WWW.MANITOBAHARVEST.COM
Headquartered in Hatboro,
Pennsylvania, and founded in
1990, Clean Earth is a provider
of environmental services
for a variety of contaminated
materials including soils, dredged
material and hazardous waste.
Clean Earth analyzes, treats,
documents and recycles
waste streams generated in
end-markets such as power,
construction, oil & gas,
infrastructure, industrial and
dredging. Clean Earth operates
18 permitted facilities in the
eastern U.S.
10
TO LEARN MORE ABOUT CLEAN EARTH,
PLEASE VISIT:
WWW.CLEANEARTHINC.COM
Headquartered in Corona, CA,
Sterno Products is a manufacturer
and marketer of portable food
warming fuel and creative
table lighting solutions for the
foodservice industry, as well as
flameless candles and outdoor
lighting products for consumers.
Sterno Products line includes
wick and gel chafing fuels,
butane stoves and accessories,
liquid and traditional wax candles,
flameless candles, outdoor
lighting products, catering
equipment and lamps. For over
100 years, the iconic “Sterno”
brand has been synonymous
with quality canned heat.
11
TO LEARN MORE ABOUT STERNO PRODUCTS,
PLEASE VISIT:
WWW.STERNOPRODUCTS.COM
Headquartered in Rochester, N.Y.,
Arnold Magnetic Technologies
is a global manufacturer of high
performance magnets, precision
magnetic assemblies and thin
metals. High performance
materials from Arnold support
motor systems that are smaller,
lighter and more efficient while
operating in high speed, high heat
environments. Arnold ‘s advanced
materials and magnetic
assemblies serve a wide range
of industries including aerospace
& defense, automotive &
motorsports, consumer &
industrial, oil & gas, medical,
and more.
12
TO LEARN MORE ABOUT ARNOLD,
PLEASE VISIT:
WWW.ARNOLDMAGNETICS.COM
Headquartered in Aurora,
Colorado, and founded in
1989, Advanced Circuits is the
preeminent North American
manufacturer of quick-turn,
small-run and production rigid
printed circuit boards (“PCBs”).
Customers include research
and development professionals
from corporations and academic
institutions in the United States
and Canada. Advanced Circuits
is able to meet its over 10,000
customers’ demands for
responsiveness, quality and
timely delivery by shipping high
quality, custom PCBs in as little
as 24 hours.
13
TO LEARN MORE ABOUT ADVANCED CIRCUITS,
PLEASE VISIT:
WWW.4PCB.COM
CODI GOVERNANCE
Board of Directors
C. Sean Day has served as chairman of the Board since April 2006.
Ingredients, Inc., a NYSE listed company. Mr. Ewing also serves on
Mr. Day has been the president of Seagin International, since 1999,
an advisory board to the Gatton College of Business & Economics at
and he was the chairman of our Manager’s predecessor from 1999
the University of Kentucky. Mr. Ewing is a graduate of the University
to 2006. Previously, Mr. Day was with Navios Corporation and Citicorp
of Kentucky.
Venture Capital. Mr. Day served as the chairman of the boards of
Teekay Tankers Ltd. from 2007 to 2013, Teekay GP L.L.C. from
Sarah G. McCoy has served as a director of the Company since
2004 to 2015, Teekay Offshore Partners L.P. from 2006 to 2017, and
January 2017. Previously, Ms. McCoy was the president and chief
Teekay Corporation from 1999 to 2017. Mr. Day currently serves on
executive officer of CamelBak Products, LLC, a former subsidiary of
the boards of directors of Teekay Corporation, Teekay GP L.L.C., the
the Company, from November 2006 through January of 2016. Prior
general partner of Teekay LNG Partners L.P., and Kirby Corporation,
to that, Ms. McCoy was a co-founder of Silver Steep Partners, a
all NYSE listed companies. Mr. Day is a graduate of the University of
leading investment banking firm catering exclusively to companies
Capetown and Oxford University.
in the outdoor and active lifestyle industries. Before Silver Steep, Ms.
McCoy served as president of Sierra Designs and Ultimate Direction
James J. Bottiglieri has served as a director of the Company since
and as vice president at The North Face. Ms. McCoy has served as
December 2005. Mr. Bottiglieri was the Company’s chief financial
a director and as lead independent director for Zumiez, a NASDAQ
officer and an executive vice president of the Company’s Manager
listed company, since 2010. Ms. McCoy also serves on the board
from 2005 to 2013. Previously, Mr. Bottiglieri was the senior vice
of directors of The Outdoor Foundation a not-for-profit foundation
president and controller of WebMD Corporation. Prior to that, Mr.
established by Outdoor Industry Association to inspire and grow
Bottiglieri was with Star Gas Corporation and a predecessor firm to
future generations of outdoor enthusiasts. Ms. McCoy is a graduate
KPMG LLP. Mr. Bottiglieri serves on the board of directors of Horizon
of Dartmouth College.
Technology Finance Corporation, a NASDAQ listed company. Mr.
Bottiglieri is a graduate of Pace University.
Alan B. Offenberg has served as a director and chief executive
officer of the Company since February 2011. Mr. Offenberg has also
Gordon M. Burns has served as a director of the Company since
been a partner of our Manager and its predecessor since 1998.
May 2008. Mr. Burns has been a private investor since 1998.
Previously, Mr. Offenberg was with Trigen Energy, Creditanstalt-
Previously, he was responsible for investment banking at UBS
Bankverein and GE Capital. Mr. Offenberg currently serves as
Securities and before that was a managing director at Salomon
chairman of CEI Holdings, Inc. (doing business as Clean Earth),
Brothers Inc. Mr. Burns served on the board of directors of Aztar
and as a director for each of Arnold Magnetic Technologies
Corporation, a NYSE listed company, from 1998 through 2007. Mr.
Corporation, Crosman Corporation, and Sterno Products LLC,
Burns is a graduate of Yale University and the Harvard Business School.
which are all subsidiaries of the Company. Mr. Offenberg is a
graduate of Tulane University and the Northeastern University
Harold S. Edwards has served as a director of the Company since
Graduate School of Business.
April 2006. Mr. Edwards has been the president and chief executive
officer of Limoneira Company, a NASDAQ listed company, since
Elias J. Sabo will assume the role of chief executive officer of
November 2003. Previously, Mr. Edwards was the president of Puritan
the Company on May 3, 2018 and will be appointed as a director
Medical Products, a division of Airgas Inc. Prior to that, Mr. Edwards
by the Allocation Member as of that same date. Mr. Sabo joined
held management positions with Fisher Scientific International, Inc.,
the Company’s Manager in 1998 as one of the founding partners.
Cargill, Inc., Agribrands International and the Ralston Purina Company.
For the past 20 years, he has been a member of the Investment
Mr. Edwards served as a director for Inventure Foods Inc., a NASDAQ
Committee and, alongside Mr. Offenberg, has played a central role
listed company, from April 2014 to May 2017. Mr. Edwards is currently
in directing the Company’s strategy. Mr. Sabo also currently serves
a member of the boards of directors of Limoneira Company, and
as a director for a number of the Company’s current subsidiaries,
Calavo Growers, Inc., both NASDAQ listed companies. Mr. Edwards
including 5.11 Tactical, Advanced Circuits, Arnold Magnetic
is a graduate of Lewis and Clark College and The Thunderbird School
Technologies, and Fresh Hemp Foods, Ltd. (doing business as
of Global Management at Arizona State University.
Manitoba Harvest). He previously served as the chairman of Fox
D. Eugene Ewing has served as a director of the Company since
the Company. Prior to joining the Company’s Manager, Mr. Sabo
April 2006. Mr. Ewing has been the managing member of Deeper
worked in the acquisition department of Colony Capital, LLC,
Factory Holding Corp. (NASDAQ: FOXF), a former subsidiary of
Water Consulting, LLC, a private
wealth and business consulting
company since March 2004.
Previously, Mr. Ewing
was with the Fifth Third
Bank. Prior to that, Mr.
Ewing was a partner
in Arthur Andersen
LLP. Mr. Ewing is a
member of the board
of directors of Darling
14
a Los Angeles-based real estate
private equity firm, from 1992
to 1996, and as a healthcare
investment banker for CIBC
World Markets (formerly
Oppenheimer & Co.)
from 1996 to 1998.
Mr. Sabo is a graduate of
Rensselaer Polytechnic
Institute. Graduate School
of Business.
COMMITTEES
The Company’s operating
agreement gives our
board the authority
to delegate its powers to
committees appointed
by the board. All of our
standing committees
are comprised solely of
independent directors.
We have three standing
committees - the
audit committee, the
compensation committee
and the nominating and
corporate governance
committee.
The Audit Committee is comprised entirely of independent directors who meet the
independence requirements of the New York Stock Exchange and includes at least one “audit
committee financial expert,” as required by applicable SEC regulations. The audit committee is
responsible for, among other things:
• retaining and overseeing our independent accountants;
• assisting the Company’s board of directors in its oversight of the integrity of our
financial statements, the qualifications, independence and performance of our
independent auditors and our compliance with legal and regulatory requirements;
• reviewing and approving the plan and scope of the internal and external audit;
• pre-approving any non-audit services provided by our independent auditors;
• approving the fees to be paid to our independent auditors;
• reviewing with our chief executive officer and chief financial officer and independent auditors
the adequacy and effectiveness of our internal controls;
• preparing the audit committee report to be filed with the SEC; reviewing hedging transactions;
• reviewing and assessing annually the audit committee’s performance and the
adequacy of its charter, and
•
reviewing and approving the calculation of all profit allocation payments made to the
Company’s Allocation Member.
Messrs. Burns, Ewing, and Edwards serve on our audit committee, and the board has determined
that Mr. Ewing qualifies as an audit committee financial expert as defined by the SEC. Mr. Ewing is
the chairman of our audit committee.
The Compensation Committee is comprised entirely of independent directors who meet
the independence requirements of the New York Stock Exchange. The responsibilities of the
compensation committee include:
• reviewing our manager’s performance of its obligations under the management
services agreement;
• reviewing the remuneration of our manager and approving the reimbursement paid to our
manager for the compensation of its financial staff;
• determining the compensation of our independent directors;
• granting rights to indemnification and reimbursement of expenses to our manager; and
• making recommendations to the Board regarding equity-based and incentive
compensation plans, policies and programs.
Messrs. Edwards, Ewing and Burns serve on our compensation committee. Mr. Edwards is the
chairman of our compensation committee.
The Nominating & Corporate Governance Committee is comprised entirely of independent
directors who meet the independence requirements of the New York Stock Exchange. The
nominating and corporate governance committee is responsible for, among other things:
• recommending the number of directors to comprise the board of directors;
•
identifying and evaluating individuals qualified to become members of the board of directors
and soliciting recommendations for director nominees, including from the chairman and chief
executive officer of the company;
• recommending to the board of directors the directors’ nominees for each annual
shareholders’ meeting;
• recommending to the board of directors the candidates for filling vacancies that may occur
between annual shareholders’ meetings;
• reviewing independent director compensation and board processes, self-evaluations and polices;
• overseeing compliance with our code of ethics, anti-corruption policy, and conduct by our
officers and directors; and
• monitoring developments in the law and practice of corporate governance.
Messrs. Burns, Ewing and Edwards serve on our nominating and corporate governance
committee. Mr. Burns is the chairman of our nominating and corporate governance committee.
15
CODI INFORMATION
Distributions Paid Since IPO
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Distributions Paid Per Year
Cumulative Distributions Paid
Trading
Our stock trades on the NYSE under the symbol “CODI”. During fiscal year 2017, the highest and lowest trading
prices per share were $18.35 and $15.90, respectively. As of December 31, 2017, we had 59,900,000 shares
outstanding that were held by approximately 34,000 beneficial holders.
Distributions
Our board of directors declared distributions of $1.44 per share for the year ended December 31, 2017. The
declaration and payment of any distribution is subject to a decision by our board of directors. In making such
a decision, our board will take into account such matters as general business conditions, our specific financial
condition, results of operations and capital requirements, as well as any other factors that it deems relevant.
Tax Reporting
CODI shareholders receive their tax information on a Form K-1. We endeavor to provide this tax information as
early as possible, and made information for tax year 2017 available for our shareholders as of February 23, 2018.
Tax information is both mailed to shareholders and is available on our website. We expect the items of income
reported on Form K-1 to our shareholders to remain fairly limited, and to include interest income, dividend income,
capital gains, interest expense and other expense.
Website
CODI’s website is www.compassdiversifiedholdings.com. On our website, shareholders can find our press
releases, documents filed with the SEC, investor events, and tax reporting, as well as information on our corporate
governance policies and procedures, subsidiary companies, and board of directors.
16
FINANCIAL INFORMATION
17
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Form 10-K
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-34927
Compass Diversified Holdings
(Exact name of registrant as specified in its charter)
Delaware
(Jurisdiction of incorporation or organization)
57-6218917
(I.R.S. Employer Identification No.)
Commission File Number: 001-34926
Compass Group Diversified Holdings LLC
(Exact name of registrant as specified in its charter)
Delaware
(Jurisdiction of incorporation or organization)
20-3812051
(I.R.S. Employer Identification No.)
301 Riverside Avenue
Second Floor
Westport, CT
(Address of principal executive offices)
06880
(Zip Code)
(203) 221-1703
(Registrants’ telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Shares representing beneficial interests in Compass
Diversified Holdings (“common shares”)
Series A Preferred Shares representing Series A Trust
Preferred Interest in Compass Diversified Holdings ("Series A
Preferred Shares")
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrants are collectively a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
Indicate by check mark if the registrants are collectively not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have
been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrants were required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrants are collectively 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. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrants have 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 registrants are collectively a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the outstanding common shares of trust stock held by non-affiliates of Compass Diversified Holdings
at June 30, 2017 was $880,939,012 based on the closing price on the New York Stock Exchange on that date. For purposes of the foregoing
calculation only, all directors and officers of the registrant have been deemed affiliates. There were 59,900,000 common shares of trust
stock without par value outstanding at February 23, 2018.
Certain information in the registrant’s definitive proxy statement to be filed with the Commission relating to the registrant’s 2018
Annual Meeting of Shareholders is incorporated by reference into Part III.
Documents Incorporated by Reference
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, and Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
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F-1
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
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In reading this Annual Report on Form 10-K, references to:
NOTE TO READER
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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” all 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 “2011 Credit Facility” refer to the Credit Facility with a group of lenders led by TD Securities (USA) LLC (“TD
Securities”) which provided for the 2011 Revolving Credit Facility and the 2011 Term Loan Facility;
the "2014 Credit Facility" refer to the credit agreement 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 "2014 Revolving Credit Facility" refer to the $550 million Revolving Credit Facility provided by the 2014 Credit
Facility that matures in June 2019;
the "2014 Term Loan" refer to the $325 million Term Loan Facility, provided by the 2014 Credit Facility that
matures in June 2021;
the "2016 Incremental Term Loan" refer to the $250 million Tranche B Term Facility provided by the 2014 Credit
Facility (together with the 2014 Term Loan, the "Term Loans");
the “LLC Agreement” refer to the fifth amended and restated operating agreement of the Company dated as of
December 6, 2016;
“we”, “us” and “our” refer to the Trust, the Company and the businesses together.
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Statement Regarding Forward-Looking Disclosure
This Annual Report on Form 10-K, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. We may, in some
cases, use words such as “project,” “predict,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,”
“could,” “potentially,” or “may” or other words that convey uncertainty of future events or outcomes to identify these forward-
looking statements. Forward-looking statements in this Annual Report on Form 10-K are subject to a number of risks and
uncertainties, some of which are beyond our control, including, among other things:
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our ability to successfully operate our businesses on a combined basis, and to effectively integrate and improve any
future acquisitions;
our ability to remove our Manager and our Manager’s right to resign;
our trust and 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 our ability to make distributions in the future to our shareholders;
our ability to pay the management fee, and profit allocation 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 our Manager’s ability to retain or replace qualified employees of our businesses and our Manager;
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. A description of some of the risks that could cause our actual results to differ appears under the
section “Risk Factors”. 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 Annual Report on Form 10-K may not occur. These forward-looking statements
are made as of the date of this Annual Report. We undertake no obligation to publicly update or revise any forward-looking
statements to reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise,
except as required by law.
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PART I
ITEM 1. BUSINESS
Compass Diversified Holdings, a Delaware statutory trust (“Holdings”, or the “Trust”), was incorporated in Delaware on
November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company (the “Company”), was
also formed on November 18, 2005. The Trust and the Company (collectively “CODI”) were formed to acquire and manage
a group of small and middle-market businesses headquartered in North America. The Trust is the sole owner of 100% of the
Trust Interests, as defined in our LLC Agreement, of the Company. Pursuant to the LLC Agreement, the Trust owns an
identical number of Trust Interests in the Company as exist for the number of outstanding shares of the Trust. Accordingly,
our shareholders are treated as beneficial owners of Trust Interests in the Company and, as such, are subject to tax under
partnership income tax provisions.
The Company is the operating entity with a board of directors whose corporate governance responsibilities are similar to
that of a Delaware corporation. The Company’s board of directors oversees the management of the Company and our
businesses and the performance of Compass Group Management LLC (“CGM” or our “Manager”). Certain persons who
are employees and partners of our Manager receive a profit allocation as beneficial owners of 60.4% through Sostratus LLC
of the Allocation Interests in us, as defined in our LLC Agreement.
Overview
We acquire controlling interests in and actively manage businesses that we believe (i) operate in industries with long-term
macroeconomic growth opportunities, (ii) have positive and stable cash flows, (iii) face minimal threats of technological or
competitive obsolescence, and (iv) have strong management teams largely in place.
Our unique public structure provides investors with an opportunity to participate in the ownership and growth of companies
which have historically been owned by private equity firms, wealthy individuals or families. Through the acquisition of a
diversified group of businesses with these characteristics, we believe we offer investors an opportunity to diversify their
own portfolio risk while participating in the ongoing cash flows of those businesses through the receipt of quarterly
distributions.
Our disciplined approach to our target market provides opportunities to methodically purchase attractive businesses at
values that are accretive to our shareholders. For sellers of businesses, our unique financial structure allows us to acquire
businesses efficiently with little or no third party financing contingencies and, following acquisition, to provide our businesses
with substantial access to growth capital.
We believe that private company operators and corporate parents looking to sell their business units may consider us an
attractive purchaser because of our ability to:
provide ongoing strategic and financial support for their businesses;
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• maintain a long-term outlook as to the ownership of those businesses where such an outlook is required for
maximization of our shareholders’ return on investment; and
consummate transactions efficiently without being dependent on third-party transaction financing.
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In particular, we believe that our outlook on length of ownership and active management on our part may alleviate the
concern that many private company operators and parent companies may have with regard to their businesses going
through multiple sale processes in a short period of time. We believe this outlook reduces both the risk that businesses may
be sold at unfavorable points in the overall market cycle and enhances our ability to develop a comprehensive strategy to
grow the earnings and cash flows of each of our businesses, which we expect will better enable us to meet our long-term
objective of continuing to pay distributions to our shareholders while increasing shareholder value. Finally, it has been our
experience, that our ability to acquire businesses without the cumbersome delays and conditions typical of third party
transactional financing is appealing to sellers of businesses who are interested in confidentiality and certainty to close.
We believe our management team’s strong relationships with industry executives, accountants, attorneys, business brokers,
commercial and investment bankers, and other potential sources of acquisition opportunities offer us substantial opportunities
to assess small to middle market businesses available for acquisition. In addition, the flexibility, creativity, experience and
expertise of our management team in structuring transactions allows us to consider non-traditional and complex transactions
tailored to fit a specific acquisition target.
In terms of the businesses in which we have a controlling interest as of December 31, 2017, we believe that these businesses
have strong management teams, operate in strong markets with defensible market niches and maintain long-standing
customer relationships.
We categorize the businesses we own into two separate groups of businesses (i) branded consumer businesses and,
(ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we believe
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capitalize on a valuable brand name in their respective market sector. We believe that our branded consumer businesses
are leaders in their particular product category. Niche industrial businesses are characterized as those businesses that
focus on manufacturing and selling particular products and industrial services within a specific market sector. We believe
that our niche industrial businesses are leaders in their specific market sector.
The following is a brief summary of the businesses in which we own a controlling interest at December 31, 2017:
Branded Consumer Businesses
5.11
5.11 ABR Corp. ("5.11 Tactical" or "5.11") 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. We made loans to and
purchased a controlling interest in 5.11 Tactical for approximately $408.2 million in August 2016. We currently own 97.5%
of the outstanding stock of 5.11 on a primary basis and 85.5% on a fully diluted basis.
Crosman
Crosman Corp. ("Crosman") is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming
devices, and related accessories. Crosman offers its products under the highly recognizable Crosman, Benjamin and
CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks.
Crosman is headquartered in Bloomfield, New York. We made loans to, and purchased a controlling interest in, Crosman
on June 2, 2017 for approximately $150.4 million. We currently own 98.8% of the outstanding stock of Crosman on a primary
basis and 89.2% on a fully diluted basis.
Ergobaby
Ergobaby Carrier, Inc. (“Ergobaby”), headquartered in Los Angeles, California, is dedicated to building a global community
of confident parents with smart, ergonomic solutions that enable and encourage bonding between parents and babies.
Ergobaby offers a broad range of award-winning baby carriers, strollers, car seats, swaddlers, nursing pillows, and related
products that fit into families’ daily lives seamlessly, comfortably and safely. We made loans to, and purchased a controlling
interest in, Ergobaby on September 16, 2010 for approximately $85.2 million. We currently own 82.7% of the outstanding
stock of Ergobaby on a primary basis and 76.6% on a fully diluted basis.
Liberty Safe
Liberty Safe and Security Products, Inc. (“Liberty Safe” or “Liberty”), headquartered in Payson, Utah, is a designer,
manufacturer and marketer of premium home, office and gun 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. We made loans to, and purchased a controlling interest in, Liberty Safe on March 31, 2010 for approximately
$70.2 million. We currently own 88.6% of the outstanding stock of Liberty Safe on a primary basis and 84.7% on a fully
diluted basis.
Manitoba Harvest
Manitoba Harvest ("Manitoba Harvest" or "Manitoba"), headquartered in Winnipeg, Manitoba, is a pioneer and leader in the
manufacture and distribution of branded, hemp-based foods and hemp-based ingredients. Manitoba Harvest’s products,
which include Hemp Hearts™, Hemp Heart Bites™, and Hemp protein powders, are currently carried in approximately
13,000 retail stores across the United States and Canada. We made loans to, and purchased a controlling interest in,
Manitoba Harvest on July 10, 2015 for approximately $102.7 million (C$130.3 million). We currently own 76.6% of the
outstanding stock of Manitoba Harvest on a primary basis and 67.0% on a fully diluted basis.
Niche Industrial Businesses
Advanced Circuits
Compass AC Holdings, Inc. (“Advanced Circuits” or “ACI”), headquartered in Aurora, Colorado, is a provider of small-run,
quick-turn and volume production rigid printed circuit boards, or “PCBs”, throughout the United States. PCBs are a vital
component of virtually all electronic products. The small-run and quick-turn portions of the PCB industry are characterized
by customers requiring high levels of responsiveness, technical support and timely delivery. We made loans to, and
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purchased a controlling interest in, Advanced Circuits, on May 16, 2006 for approximately $81.0 million. We currently own
69.4% of the outstanding stock of Advanced Circuits on a primary basis and 69.2% on a fully diluted basis.
Arnold
AMT Acquisition Corporation (“Arnold” or “Arnold Magnetics”), headquartered in Rochester, New York, with nine additional
facilities worldwide, is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications
and end-markets, including aerospace and defense, motorsport/automotive, oil and gas, medical, general industrial, electric
utility, reprographics and advertising specialty markets. Arnold Magnetics produces high performance permanent magnets
(PMAG), 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 customers worldwide. We made loans to, and purchased
a controlling interest in, Arnold on March 5, 2012 for approximately $128.8 million. We currently own 96.7% of the outstanding
stock of Arnold on a primary basis and 84.7% on a fully diluted basis.
Clean Earth
Clean Earth Holdings, Inc. ("Clean Earth"), headquartered in Hatboro, Pennsylvania, 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 power, construction, commercial development, oil
and gas, medical, infrastructure, industrial and dredging. We made loans to, and purchased a controlling interest in, Clean
Earth on August 26, 2014 for approximately $251.4 million. We currently own 97.5% of the outstanding stock of Clean Earth
on a primary basis and 79.8% on a fully diluted basis.
Sterno
Candle Lamp Company, LLC ("Sterno"), headquartered in Corona, California, is a leading manufacturer and marketer of
portable food warming devices and creative table lighting solutions for the food service industry and flameless candles and
outdoor lighting products for consumers. Sterno's product line includes wick and chafing fuels, butane stoves and
accessories, liquid and traditional wax candles, catering equipment and lamps. We made loans to, and purchased all of
the equity interests in, Sterno on October 10, 2014 for approximately $160.0 million. We currently own 100.0% of the
outstanding stock of Sterno on a primary basis and 89.5% on a fully diluted basis.
Our businesses also represent our operating segments. See “Our Businesses” and “Note E – Operating Segment Data” to
our Consolidated Financial Statements for further discussion of our businesses as our operating segments, including
information related to geographies.
2017 Highlights and Recent Events
Trust Preferred Share Issuance
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares")
for gross proceeds of $100.0 million, or $96.4 million net of underwriters' discount and issuance costs.
Acquisition of Crosman
On June 2, 2017, through a wholly owned subsidiary, Crosman Acquisition Corp., we acquired 98.9% of the outstanding
equity of Bullseye Acquisition Corporation, which is the sole owner of Crosman Corp. ("Crosman"). Crosman is a designer,
manufacturer and marketer of airguns, archery products and related accessories. Headquartered in Bloomfield, New York,
Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channels and
distributors serving smaller specialty stores and international markets. Its diversified product portfolio includes the widely
known Crosman, Benjamin and CenterPoint brands. The purchase price, including proceeds from noncontrolling interests
and net of transaction costs, was approximately $150.4 million. Crosman management invested in the transaction along
with the Company, representing approximately 1.1% of the initial noncontrolling interest.
Divestiture of FOX shares
On March 13, 2017, Fox Factory Holding Corp. ("FOX") closed on a secondary public offering of 5,108,718 shares of FOX
common stock held by CODI, which represented CODI's remaining investment in FOX. CODI received $136.1 million in
net proceeds as a result of the sale. As a result of this secondary public offering, the Company no longer holds an ownership
interest in FOX.
2017 Distributions
Common shares - For the 2017 fiscal year we declared distributions to our common shareholders totaling $1.44 per share.
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Preferred shares - For the 2017 fiscal year we declared distributions to our preferred shareholders totaling $1.067 per share
on our Series A Preferred Shares
Subsequent Events
Acquisition of Foam Fabricators
In January 2018, we entered into an agreement to acquire Foam Fabricators, Inc. (“Foam Fabricators”) for a purchase price
of $247.5 million (excluding working capital and certain other adjustments upon closing). Headquartered in Scottsdale,
Arizona, Foam Fabricators is a leading designer and manufacturer of custom molded protective foam solutions and OEM
components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP).
Founded in 1957, the Foam Fabricators operates 13 state-of-the-art molding and fabricating facilities across North America.
Foam Fabricators provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals,
health and wellness, automotive, and building products. For the trailing twelve months ended November 30, 2017, Foam
Fabricators reported net revenue of approximately $126 million. The acquisition of Foam Fabricators closed on February
15, 2018, with the Company funding the acquisition through a draw on our 2014 Revolving Credit Facility.
Acquisition of Rimports
In January 2018, our Sterno business entered into an agreement to acquire Rimports, Inc. ("Rimports") for a purchase price
of approximately $145 million, excluding working capital and other adjustments upon closing, plus a potential earn-out of
up to $25 million based on future financial performance of Rimports. Rimports is a manufacturer and distributor of branded
and private label scented, wickless candle products used for home decor and fragrance. Headquartered in Provo, Utah,
Rimports offers an extensive line of ceramic wax warmers, scented wax cubes, essential oils and diffusers through the
mass retail channel. For the trailing twelve months ended November 30, 2017, Rimports reported net revenue of $155.4
million. The acquisition of Rimports closed on February 26, 2018, with the Company funding the acquisition through a draw
on our 2014 Revolving Credit Facility.
Tax Reporting
Information returns will be filed by the Trust and the Company with the Internal Revenue Service ("IRS"), as required, with
respect to income, gain, loss, deduction and other items derived from the Company’s activities. The Company has and will
file a partnership return with the IRS and intends to issue a Schedule K-1 to the trustee. The trustee intends to provide
information to each holder of shares using a monthly convention as the calculation period. For 2017 and future years, the
Trust will continue to file a Form 1065 and issue Schedule K-1 to shareholders. For 2017, we delivered the Schedule K-1
to shareholders within the same time frame as we delivered the schedule to shareholders for the 2016 and 2015 taxable
years. The relevant and necessary information for tax purposes is readily available electronically through our website. Each
holder will be deemed to have consented to provide relevant information, and if the shares are held through a broker or
other nominee, to allow such broker or other nominee to provide such information as is reasonably requested by us for
purposes of complying with our tax reporting obligations.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file reports with the Securities and Exchange Commission (the "SEC" or the "Commission"), including Forms S-1 and
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), and Forms 10-K, 10-Q, and 8-K under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which include exhibits, schedules and amendments to those
reports. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. In addition,
copies of such reports are available free of charge through our website at http://www.compassdiversifiedholdings.com as
soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.
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Organizational Structure (1)
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5)
The percentage holdings shown in respect to the trust reflect the ownership of the Trust common shares as of December 31,
2017.
Our non-affiliated holders of common shares own approximately 84.2% of the Trust common shares and CGI Maygar Holdings,
LLC owns approximately 13.2% of the Trust common shares and is our single largest holder. Path Spirit Limited is the ultimate
controlling person of CGI Maygar LLC. Mr. Offenberg, our Chief Executive Officer, is not a director, officer or member of CGI
or any of its affiliates. The remaining 2.6% of Trust common shares are owned by our Directors and Officers.
63.4% beneficially owned by certain persons who are employees and partners of our Manager. C. Sean Day, the Chairman
of our Board of Directors, CGI and the former founding partner of the Manager, are non-managing members.
Mr. Offenberg is a partner of this entity.
The Allocation Interests, which carry the right to receive a profit allocation, represent less than 0.1% equity interest in the
Company.
Our Manager
Our Manager, CGM, has been engaged to manage the day-to-day operations and affairs of the Company and to execute
our strategy, as discussed below. Our management team has worked together since 1998. Collectively, our management
team has extensive experience in acquiring and managing small and middle market businesses. We believe our Manager
is unique in the marketplace in terms of the success and experience of its employees in acquiring and managing diverse
businesses of the size and general nature of our businesses. We believe this experience will provide us with an advantage
in executing our overall strategy. Our management team devotes a majority of its time to the affairs of the Company.
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We have entered into a management services agreement, (the “Management Services Agreement” or “MSA”) pursuant to
which our Manager manages the day-to-day operations and affairs of the Company and oversees the management and
operations of our businesses. We pay our Manager a quarterly management fee for the services it performs on our behalf.
In addition, certain persons who are employees and partners of our Manager receive a profit allocation with respect to its
Allocation Interests in us. All of the Allocation Interests in us are owned by Sostratus LLC. See Part III, Item 13 “Certain
Relationships and Related Transactions” for further descriptions of the management fees and profit allocations.
The Company’s Chief Executive Officer and Chief Financial Officer are employees of our Manager and have been seconded
to us. Neither the Trust nor the Company has any other employees. Although our Chief Executive Officer and Chief Financial
Officer are employees of our Manager, they report directly to the Company’s board of directors. The management fee paid
to our Manager covers all expenses related to the services performed by our Manager, including the compensation of our
Chief Executive Officer and other personnel providing services to us. The Company reimburses our Manager for the
compensation and related costs and expenses of our Chief Financial Officer and his staff, who dedicate substantially all of
their time to the affairs of the Company.
See Part III, Item 13, “Certain Relationships and Related Party Transactions and Director Independence.”
Market Opportunity
We acquire and actively manage small and middle market businesses. We characterize small to middle market businesses
as those that generate annual cash flows of up to $60 million. We believe that the merger and acquisition market for small
to middle market businesses is highly fragmented and provides opportunities to purchase businesses at attractive prices.
We believe that the following factors contribute to lower acquisition multiples for small and middle market businesses:
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there are fewer potential acquirers for these businesses;
third-party financing generally is less available for these acquisitions;
sellers of these businesses frequently consider non-economic factors, such as continuing board membership or the
effect of the sale on their employees; and
these businesses are less frequently sold pursuant to an auction process.
Frequently, opportunities exist to augment existing management at such businesses and improve the performance of these
businesses upon their acquisition. In the past, our management team has acquired businesses that were owned by
entrepreneurs or large corporate parents. In these cases, our management team has frequently found that there have been
opportunities to further build upon the management teams of acquired businesses beyond those that existed at the time of
acquisition. In addition, our management team has frequently found that financial reporting and management information
systems of acquired businesses may be improved, both of which can lead to improvements in earnings and cash flow. Finally,
because these businesses tend to be too small to have their own corporate development efforts, opportunities frequently
exist to assist these businesses as they pursue organic or external growth strategies that were often not pursued by their
previous owners.
Our Strategy
We have two primary strategies that we use in order to provide distributions to our shareholders and increase shareholder
value. First, we focus on growing the earnings and cash flow from our acquired businesses. We believe that the scale and
scope of our businesses give us a diverse base of cash flow upon which to further build. Second, we identify, perform due
diligence on, negotiate and consummate additional platform acquisitions of small to middle market businesses in attractive
industry sectors in accordance with acquisition criteria established by the board of directors
Management Strategy
Our management strategy involves the proactive financial and operational management of the businesses we own in order
to increase cash flow, pay distributions to our shareholders and increase shareholder value. Our Manager oversees and
supports the management teams of each of our businesses by, among other things:
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recruiting and retaining talented managers to operate our businesses using structured incentive compensation
programs, including non-controlling equity ownership, tailored to each business;
regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting
management in the development and implementation of information systems to effectively achieve these goals;
assisting management in their analysis and pursuit of prudent organic growth strategies;
identifying and working with management to execute attractive external growth and acquisition opportunities;
assisting management in controlling and right-sizing overhead costs; and
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forming strong subsidiary level boards of directors to supplement management in their development and
implementation of strategic goals and objectives.
Specifically, while our businesses have different growth opportunities and potential rates of growth, we expect our Manager
to work with the management teams of each of our businesses to increase the value of, and cash generated by, each business
through various initiatives, including:
• making selective capital investments to expand geographic reach, increase capacity, or reduce manufacturing costs
of our businesses;
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investing in product research and development for new products, processes or services for customers;
improving and expanding existing sales and marketing programs;
pursuing reductions in operating costs through improved operational efficiency or outsourcing of certain processes
and products; and
consolidating or improving management of certain overhead functions.
Our businesses typically acquire and integrate complementary businesses. We believe that complementary add-on
acquisitions improve our overall financial and operational performance by allowing us to:
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leverage manufacturing and distribution operations;
leverage branding and marketing programs, as well as customer relationships;
add experienced management or management expertise;
increase market share and penetrate new markets; and
realize cost synergies by allocating the corporate overhead expenses of our businesses across a larger number of
businesses and by implementing and coordinating improved management practices.
We incur third party debt financing almost entirely at the Company level, which we use, in combination with our equity capital,
to provide debt financing to each of our businesses and to acquire additional businesses. We believe this financing structure
is beneficial to the financial and operational activities of each of our businesses by aligning our interests as both equity
holders of, and lenders to, our businesses, in a manner that we believe is more efficient than each of our businesses borrowing
from third-party lenders.
Acquisition Strategy
Our acquisition strategy involves the acquisition of businesses that we expect to produce stable and growing earnings and
cash flow. In this respect, we expect to make acquisitions in industries other than those in which our businesses currently
operate if we believe an acquisition presents an attractive opportunity. We believe that attractive opportunities will continue
to present themselves, as private sector owners seek to monetize their interests in long-standing and privately-held businesses
and large corporate parents seek to dispose of their “non-core” operations.
Our ideal acquisition candidate has the following characteristics:
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is an established North American based company;
• maintains a significant market share in defensible industry niche (i.e., has a “reason to exist”);
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has a solid and proven management team with meaningful incentives;
has low technological and/or product obsolescence risk; and
• maintains a diversified customer and supplier base.
We benefit from our Manager’s ability to identify potential diverse acquisition opportunities in a variety of industries. In addition,
we rely upon our management team’s experience and expertise in researching and valuing prospective target businesses,
as well as negotiating the ultimate acquisition of such target businesses. In particular, because there may be a lack of
information available about these target businesses, which may make it more difficult to understand or appropriately value
such target businesses, on our behalf, our Manager:
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engages in a substantial level of internal and third-party due diligence;
critically evaluates the target management team;
identifies and assesses any financial and operational strengths and weaknesses of the target business;
analyzes comparable businesses to assess financial and operational performances relative to industry competitors;
actively researches and evaluates information on the relevant industry; and
thoroughly negotiates appropriate terms and conditions of any acquisition.
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The process of acquiring new businesses is both time-consuming and complex. Our management team historically has taken
from two to twenty-four months to perform due diligence, negotiate and close acquisitions. Although our management team
is always at various stages of evaluating several transactions at any given time, there may be periods of time during which
our management team does not recommend any new acquisitions to us. Even if an acquisition is recommended by our
management team, our board of directors may not approve it.
A component of our acquisition financing strategy that we utilize in acquiring the businesses we own and manage is to provide
both equity capital and debt capital, raised at the parent company level largely through our existing credit facility, to close
acquisitions. We believe, and it has been our experience, that having the ability to finance our acquisitions with capital
resources raised by us, rather than negotiating separate third party financing, provides us with an advantage in successfully
acquiring attractive businesses by minimizing delay and closing conditions that are often related to acquisition-specific
financings. In addition, our strategy of providing this intercompany debt financing within the capital structure of the businesses
we acquire and manage allows us the ability to distribute cash to the parent company through monthly interest payments
and amortization of principle on these intercompany loans.
Upon acquisition of a new business, we rely on our Manager’s experience and expertise to work efficiently and effectively
with the management of the new business to jointly develop and execute a successful business plan.
We believe our financing structure, in which both equity and debt capital are raised at the Company level, allows us to acquire
businesses without transaction specific financing and is conducive to our ability to consummate transactions that may be
attractive in both the short and long-term.
In addition to acquiring businesses, we sell those businesses that we own from time to time when attractive opportunities
arise that outweigh the future growth and value that we believe we will be able to bring such businesses consistent with our
long-term investment strategy. As such, our decision to sell a business is based on our belief that doing so will increase
shareholder value to a greater extent than through our continued ownership of that business. Upon the sale of a business,
we may use the proceeds to retire debt or retain proceeds for acquisitions or general corporate purposes. We do not expect
to make special distributions at the time of a sale of one of our businesses; instead, we expect to pay shareholder distributions
over time solely through the earnings and cash flows of our businesses.
Since our inception in May 2006, we have recorded net gains on sales of our businesses of approximately $772 million. We
sold Crosman Acquisition Company (“Crosman”) in January 2007, Aeroglide Company (“Aeroglide”) and Silvue Technologies
Group, Inc. (“Silvue”) in June 2008, Staffmark Holdings Inc. (“Staffmark”) in October 2011, HALO Branded Solutions (“HALO”)
in May 2012, CamelBak Products, LLC ("CamelBak") in August 2015, American Furniture Manufacturing, Inc. ("American
Furniture") in October 2015, and Tridien Medical Inc. ("Tridien") in September 2016. In addition, we sold our FOX subsidiary
through an initial public offering and secondary issuances from August 2013 through March 2017.
Investment in FOX
We owned approximately 14% of the Fox Factory Holding Corp. (NASDAQ - FOXF) as of January 1, 2017. We made loans
to and purchased a controlling interest in FOX on January 4, 2008, for approximately $80.4 million. In August 2013, FOX
completed an initial public offering of its common stock. As a result of the initial public offering, our ownership interest in
FOX was reduced to approximately 53.9%. No gain was reflected as a result of the sale of our FOX shares in the initial
public offering because our majority classification of FOX did not change. FOX used a portion of their net proceeds received
from the sale of their shares as well as proceeds from a new external FOX credit facility to repay $61.5 million in outstanding
indebtedness to us under their existing credit facility with us. In July 2014, through a secondary offering, our ownership in
FOX was lowered from approximately 53% to approximately 41%, and as a result we deconsolidated FOX as of July 10,
2014. In March and August 2016, through two more secondary offerings and a share repurchase by FOX, our ownership
in the outstanding common stock of FOX was further lowered to approximately 23% as of September 30, 2016. In November
2016, through another secondary offering, our ownership in the outstanding common stock of FOX was further lowered to
approximately 14%. On March 13, 2017, FOX closed on a secondary public offering of 5,108,718 shares of FOX common
stock held by CODI, which represented CODI's remaining investment in FOX. CODI received $136.1 million in net proceeds
as a result of the sale. We recognized total net proceeds from the sales of our FOX shares of approximately $465.1 million,
and a total gain of $428.7 million.
Strategic Advantages
Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are
well-positioned to acquire additional businesses. Our management team has strong relationships with business brokers,
investment and commercial bankers, accountants, attorneys and other potential sources of acquisition opportunities. In
addition, our management team also has a successful track record of acquiring and managing small to middle market
businesses in various industries. In negotiating these acquisitions, we believe our management team has been able to
12
successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned
businesses, management buy-outs and reorganizations.
Our management team has a large network that we estimate to be approximately 2,000 deal intermediaries who we expect
to expose us to potential acquisitions. Through this network, as well as our management team’s proprietary transaction
sourcing efforts, we have a substantial pipeline of potential acquisition targets. Our management team also has a well-
established network of contacts, including professional managers, attorneys, accountants and other third-party consultants
and advisors, who may be available to assist us in the performance of due diligence and the negotiation of acquisitions, as
well as the management and operation of our acquired businesses.
Finally, because we intend to fund acquisitions through the utilization of our 2014 Revolving Credit Facility, we expect to
minimize the delays and closing conditions typically associated with transaction specific financing, as is typically the case
in such acquisitions. We believe this advantage can be a powerful one, especially in a tight credit environment, and is highly
unusual in the marketplace for acquisitions in which we operate.
Valuation and Due Diligence
When evaluating businesses or assets for acquisition, our management team performs a rigorous due diligence and financial
evaluation process. In doing so, we evaluate the operations of the target business as well as the outlook for the industry in
which the target business operates. While valuation of a business is, by definition, a subjective process, we define valuations
under a variety of analyses, including:
•
•
•
•
discounted cash flow analyses;
evaluation of trading values of comparable companies;
expected value matrices; and
examination of comparable recent transactions.
One outcome of this process is a projection of the expected cash flows from the target business. A further outcome is an
understanding of the types and levels of risk associated with those projections. While future performance and projections
are always uncertain, we believe that with detailed due diligence, future cash flows will be better estimated and the prospects
for operating the business in the future better evaluated. To assist us in identifying material risks and validating key assumptions
in our financial and operational analysis, in addition to our own analysis, we engage third-party experts to review key risk
areas, including legal, tax, regulatory, accounting, insurance and environmental. We also engage technical, operational or
industry consultants, as necessary.
A further critical component of the evaluation of potential target businesses is the assessment of the capability of the existing
management team, including recent performance, expertise, experience, culture and incentives to perform. Where necessary,
and consistent with our management strategy, we actively seek to augment, supplement or replace existing members of
management who we believe are not likely to execute our business plan for the target business. Similarly, we analyze and
evaluate the financial and operational information systems of target businesses and, where necessary, we enhance and
improve those existing systems that are deemed to be inadequate or insufficient to support our business plan for the target
business.
Financing
We have a credit facility with a group of lenders led by Bank of America N.A. that we entered into on June 6, 2014. The
2014 Credit Facility provided for (i) revolving loans, swing line loans and letters of credit up to a maximum aggregate amount
of $400 million, and (ii) a $325 million term loan. On August 15, 2016, the Company amended the 2014 Credit Facility to,
among other things, increase the aggregate amount of the 2014 Credit Facility by $400 million. On August 31, 2016, the
Company entered into an Incremental Facility Amendment to the 2014 Credit Agreement (the "Incremental Facility
Amendment"). As a result of the Incremental Facility Amendment, the 2014 Credit Facility currently provides for (i) a revolving
credit facility of $550 million (as amended from time to time, the "2014 Revolving Credit Facility"), (ii) a $325 million term
loan (the "2014 Term Loan Facility"), and (iii) a $250 million incremental term loan (the "2016 Incremental Term Loan"). The
2014 Term Loan and 2016 Incremental Term Loan expire in June 2021.
At December 31, 2017, we had $560.0 million outstanding on the 2014 Term Loan and 2016 Incremental Term Loan, and
$42.0 million outstanding on our 2014 Revolving Credit Facility. All amounts outstanding under the 2014 Revolving Credit
Facility will become due on June 6, 2019, which is the maturity date of loans advanced under the 2014 Revolving Credit
Facility and the termination date of the revolving loan commitment. The 2014 Credit Facility also permits us, prior to the
applicable maturity date, to increase the revolving loan commitment and/or obtain additional term loans in an aggregate
amount of up to $200 million subject to certain restrictions and conditions.
13
The 2014 Credit Facility provides for letters of credit under the 2014 Revolving Credit Facility in an aggregate face amount
not to exceed $100 million outstanding at any time, as well as swing line loans of up to $25 million outstanding at one time.
At no time may the (i) aggregate principal amount of all amounts outstanding under the Revolving Credit Facility, plus (ii) the
aggregate amount of all outstanding letters of credit and swing line loans, exceed the borrowing availability under the 2014
Credit Facility. At December 31, 2017, we had outstanding letters of credit totaling approximately $0.6 million. The borrowing
availability under the 2014 Revolving Credit Facility at December 31, 2017 was approximately $507.4 million.
The 2014 Credit Facility and 2016 Incremental Facility are secured by all of the assets of the Company, including all of its
equity interests in, and loans to, its consolidated subsidiaries. (See "Note J - Debt" to the consolidated financial statements
for more detail regarding our 2014 Credit Facility and 2016 Incremental Facility).
We intend to finance future acquisitions through our 2014 Revolving Credit Facility, cash on hand and, if necessary, additional
equity and debt financings. We believe, and it has been our experience, that having the ability to finance our acquisitions
with the capital resources raised by us, rather than negotiating separate third party financing specifically related to the
acquisition of individual businesses, provides us with an advantage in acquiring attractive businesses by minimizing delay
and closing conditions that are often related to acquisition-specific financings. In this respect, we believe that in the future,
we may need to pursue additional debt or equity financings, or offer equity in Holdings or target businesses to the sellers of
such target businesses, in order to fund multiple future acquisitions. For example, in light of our recently announced acquisitions
of Foam Fabricators and Rimports, we are considering, subject to market conditions among other factors, appropriate debt and
other instruments to provide medium and longer term financing for acquisitions.
Our Businesses
We categorize the businesses we own into two separate groups of businesses (i) branded consumer businesses, and (ii) niche
industrial businesses. Branded consumer businesses are characterized as those businesses that we believe capitalize on
a valuable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in
their particular product category. Niche industrial businesses are characterized as those businesses that focus on
manufacturing and selling particular products and industrial services within a specific market sector. We believe that our
niche industrial businesses are leaders in their specific market sector.
The following table represents the percentage of net revenue and operating income each of our businesses contributed to
our consolidated results since the date of acquisition for the years ended December 31, 2017, 2016 and 2015, and the total
assets of each of our businesses as a percentage of the consolidated total as of December 31, 2017 and 2016.
Year ended December 31,
Year ended December 31,
Year ended December 31,
2017
2016
2015
Net Revenue
2017
2016
Operating Income (1)
2015
Branded Consumer:
5.11
Crosman
Ergobaby
Liberty Safe
Manitoba Harvest
Niche Industrial:
Advanced Circuits
Arnold Magnetics
Clean Earth
Sterno
Corporate
24.4%
11.2%
6.2%
8.1%
7.2%
4.4%
n/a
10.6%
10.6%
6.1%
n/a
n/a
11.9%
13.9%
(10.5)%
(17.8)%
1.9 %
n/a
n/a
n/a
36.1 %
30.0 %
26.4 %
13.9 %
23.2 %
14.1 %
2.4%
(13.7)%
0.6 %
(7.3)%
50.3%
38.5%
28.2%
27.7 %
36.0 %
33.2 %
6.9%
8.3%
16.6%
17.8%
49.7%
—
8.8%
11.1%
19.3%
22.4%
61.5%
—
12.0%
16.5%
24.1%
19.2%
71.8%
34.7 %
39.8 %
28.8 %
(8.4)%
(22.6)%
9.0 %
17.7 %
13.9 %
13.1 %
28.2 %
32.9 %
15.8 %
72.3 %
64.0 %
66.8 %
—
—
—
—
2017
2016
Total Assets
26.1%
10.9%
9.8%
4.0%
7.8%
58.6%
4.4%
6.0%
19.4%
11.2%
41.0%
0.4%
25.4%
—%
10.4%
4.1%
8.4%
48.2%
4.6%
6.5%
20.0%
12.0%
43.1%
8.7%
100.0%
100.0%
100.0%
100.0 %
100.0 %
100.0 %
100.0%
100.0%
(1) Operating income (loss) reflected is as a percentage of the total contributed by the businesses and does not include expenses
incurred at the corporate level.
14
5.11
Overview
Branded Consumer Businesses
5.11 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 committed to product innovation, and works directly with
end users to create 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. 5.11 products are widely distributed in law enforcement dealers, uniform stores, military exchanges, outdoor
retail stores, company owned retail stores and online.
History of 5.11
5.11 was formed in 2003 after spinning out of outdoor apparel company, Royal Robbins®. The roots of 5.11, however, trace
back to 1975, when American rock climber Royal Robbins designed the 5.11® Pant; named after the difficulty level in the
Yosemite Decimal System rating scale for rock climbing. With difficulty levels ranging at the time from 5.0 (easy) to 5.10
(difficult), 5.11 was then described: “After thorough inspection, you conclude this move is impossible; however, occasionally
someone actually accomplishes it.”
A product designed for people who were pushing the limits of what was possible, the 5.11® Pant was a success among
climbers and outdoor enthusiasts. In 1992, the FBI Academy, in Quantico, Virginia adopted the original 5.11® Pant as its
primary training pant, forging a decades-long relationship that supports 5.11’s commitment to the public safety and the first
responder communities.
In 2011, 5.11’s corporate headquarters was relocated from Modesto, California to Irvine, California. In 2012, 5.11 acquired
Beyond Clothing LLC, a technical survival systems outerwear company located in Seattle, Washington. We acquired a
majority interest in 5.11 on August 31, 2016.
Industry
5.11 participates in the global professional and consumer soft goods market for tactical gear and apparel; the addressable
global soft goods market is estimated by management to be approximately $79 billion.
The domestic professional public safety market for tactical soft goods is estimated by management to be a $1.7 billion market
consisting of sales to active-duty military, law enforcement, private security, fire, corrections officers and EMS. The
addressable domestic work wear and consumer wear markets are estimated by management to be $4.3 billion and $13.2
billion, respectively.
The international professional public safety market for tactical soft goods is estimated by management to be a $11.7 billion
market. The addressable international work wear and consumer wear markets are estimated by management to be $11.4
billion and $36.3 billion, respectively.
Products and Services
5.11 offers a portfolio of unique head-to-toe tactical gear with patented functional features for both professional and consumer
use. No individual product style accounts for more than 7% of total sales, and most product styles tend to have multi-year
lifecycles. 5.11 focuses its product offering through six major categories: tactical apparel, bags and packs, footwear, special
make ups/uniforms, accessories, and Beyond Clothing Systems (“Beyond”).
Tactical apparel represents 5.11’s largest product category. Within this category, 5.11 offers a broad assortment of men’s
and women’s pants, shorts, shirts, outerwear and base layers. Apparel is offered in a variety of styles and fits intended to
enhance comfort and mobility. 5.11 has historically designed and developed innovative “families” of products around
proprietary fabrics that the company has created to meet the needs of its unique target market. These product “families”
typically start with a pant and then expand into other products. Today, 5.11 offers five distinct pant lines, which anchor five
different apparel families: the Defender Flex Pant, the Apex™ Pant, the 5.11 Stryke™ Pant, the Taclite® Pro Pant, and the
5.11® Tactical Pant.
5.11 bags and packs provide reliable, multifunctional storage options designed to excel in a wide range of operational and
recreational settings. This category includes backpacks, cases, load-bearing equipment, range bags and duffels. In addition
to bags/packs and apparel, 5.11 sells footwear, including boots, low-profile tactical shoes, socks and accessories, as well
as special make ups or customized uniforms for public safety agencies. 5.11 also offers a wide selection of accessories
including belts, hats, flashlights, gloves, knives, eyewear, watches, patches, slings and holsters.
15
Beyond, a wholly-owned subsidiary of 5.11, offers technical survival outerwear systems engineered specifically for missions
in extreme temperatures. Products are marketed under the Beyond brand name and include base layers and briefs, pullovers,
softshell jackets, wind pants, rain pants and jackets made of advanced fabrics. Virtually all Beyond products are manufactured
in the United States to comply with the Berry Amendment.
5.11’s core product offerings and suggested average retail prices are listed below:
• Pants and Shorts (Men’s and Women’s) - $49.99 to $269.99
• Woven Tops (Men’s and Women’s) - $39.99 to $229.99
• Outerwear (Men’s and Women’s) - $69.99 to $119.99
•
Footwear (Men’s and Women’s) - $99.99 to $149.99
• Bags and Packs - $59.99 to $249.99
• Accessories - $19.99 to $79.99
Competitive Strengths
Leading Brand Recognition and Market Share - 5.11 is a leader in the tactical apparel market. 5.11 enjoys strong brand
awareness and affinity in the public safety market given its long history of creating high performance and innovative products
for public safety operators. 5.11’s heritage of developing purpose-built clothing and gear for law enforcement, firefighters,
EMS, and military special operations has imbued the 5.11 brand with unrivaled authenticity in the tactical apparel and gear
markets.
Diverse Customer Base - 5.11 has direct relationships with over 12,500 governmental departments and agencies, and
utilizes an established network of over 1,500 dealers in over 90 countries. 5.11 wins a significant amount of business in the
public safety channel through the achievement of “specified” product in thousands of individual contracts with governmental
departments and agencies, providing for a broad base of long-term relationships.
Product Breadth and “At-Once” Availability - Requirements of outfitting entire agencies or departments necessitates
carrying numerous, often infrequently used, sizes and colors of a given product. These requirements, coupled with “at-once”
product fulfillment demands and often poorly capitalized dealer customers carrying low levels of inventory, makes 5.11 the
go-to provider of tactical gear and apparel. 5.11’s significant investment in inventory provides a competitive advantage versus
its smaller less well capitalized competitors.
Business Strategies
Further Expand into Consumer Market - 5.11 is well-positioned to continue investing in retail locations throughout the
United States. 5.11 currently has twenty-seven company-owned retail locations, and management believes that there are
significant opportunities to increase this footprint. 5.11 also sells to many outdoor specialty retailers and management
believes there are opportunities to expand sales through increased penetration and improved merchandising.
Continue Penetration of Domestic Professional Channel - 5.11 continues to benefit from the domestic professional public
safety market, which provides a stable base of recurring growth. Going forward, 5.11 will continue to grow within the domestic
professional public safety channel through (i) continued conversion of institutional contract opportunity pipeline; and (ii)
market share gains from continued product innovation and improved merchandising.
International Market Expansion - The international market remains an underpenetrated opportunity for 5.11. 5.11 will
continue international sales development through building country-specific sales and operations infrastructure, executing on
both near and medium term large foreign government contract opportunities, and expanding consumer awareness of the
5.11 brand.
Customers and Distribution Channels
5.11 services a wide range of customers including first responders, the military, and outdoors enthusiasts in over 90 countries.
The primary distribution channels can be segmented into two categories: professional and consumer. 5.11's working capital
needs do not differ substantially from those of its competitors in the industry and generally reflect the need to carry significant
amounts of inventory to meet the requirements of its customers.
The domestic professional channel is characterized by thousands of unique “specified” product contracts with individual
public safety departments, serviced through a network of more than one-thousand local third party dealers. Public safety
departments include federal, state, county, city and local law enforcement, firefighters, and EMS. Similar to the domestic
professional channel, the international professional channel also consists of many unique “specified” product contracts with
individual foreign governmental departments, serviced either directly by 5.11 or through a network of international dealers.
Large contracts with government agencies are referred to as Direct-to-Agency (“DTA”). A typical DTA sales process is driven
primarily by lengthy governmental approval processes and can take upwards of 18 to 36 months.
16
Within the consumer segment, the consumer wholesale channel is comprised of (i) outdoor specialty retailers, (ii) military
exchanges, and (iii) online. The consumer direct channel is comprised of (i) e-commerce sales directly through the 5.11
website, www.511tactical.com, and (ii) company-owned retail stores. At the end of 2017, 5.11 operated twenty-seven
company-owned retail locations in fourteen states. During 2017, 5.11 opened seventeen retail stores in twelve states.
For the year ending December 31, 2017, professional channel sales accounted for approximately 64% of total sales;
approximately 7% of total sales were in the form of DTA sales. The consumer channel accounted for approximately 29% of
total sales.
5.11’s top 10 customers comprised approximately 26%, 27% and 29% of total sales in the years ended December 31, 2017,
2016 and 2015, respectively.
Sales and Marketing
5.11’s sales organization consists of a mix of direct employees, independent contractors and sales agencies. The domestic
salesforce develops direct relationships with thousands of individual public safety departments around the U.S. and
participates in thousands of requests for proposal (RFP) processes annually. The salesforce works directly with over 900
local dealers to service local public safety departments once a 5.11 product receives “spec” as part of the RFP process.
The international salesforce covers three primary regions: Asia Pacific, Europe, Middle East and Africa ("EMEA") and Latin
America. While the company does fulfill some orders directly to international customers through its 5.11 website, most sales
are serviced through third party distributors and dealers in foreign jurisdictions.
5.11 has implemented a multi-pronged marketing plan including investments in (i) professional and consumer product
catalogues; (ii) print media; (iii) tradeshows; (iv) shop-in-shop retail concepts; and (v) digital and social media content.
5.11 had a backlog of $26.4 million and $1.7 million at December 31, 2017 and 2016, respectively.
Suppliers
5.11 operates an efficient, low-cost supply chain, sourcing most its products through contract manufacturers in the Asia
Pacific region. Production from Vietnam accounted for approximately 35% of 5.11’s purchases for the year ending December
31, 2017 and represented 5.11’s largest sourcing region. No single core product is 100% sourced by any one vendor.
Management believes that 5.11’s principal manufacturers have the additional capacity to accommodate future growth.
Production of Beyond products occurs primarily through domestic subcontract facilities in the U.S. and through the brand’s
headquarters in Seattle, Washington.
To ensure vendor reliability and quality, 5.11 established a sourcing office in Hong Kong. The office employs approximately
50 individuals whose primary functions include vendor management, commercialization, product development, production
planning, vendor compliance, quality assurance and compliance.
Intellectual Property
5.11 relies on brand name recognition and a combination of trademarks and patents in order to differentiate itself from the
competition. 5.11 currently has 18 utility patents and 10 design patents issued, in addition to 17 utility and 3 design patents
pending registration. 5.11 currently owns 319 registered trademarks including 3 trade dress registrations. The company
has in-house general counsel that manages the registration and defense of 5.11 intellectual property.
Regulatory Environment
Management is not aware of any existing, pending, or contingent liabilities that could have a material adverse effect on 5.11’s
business. 5.11 is proactive regarding regulatory issues and is in compliance with all relevant regulations. Management is
not aware of any potential environmental issues.
Employees
As of December 31, 2017, 5.11 employed a total of 588 non-unionized, full-time employees, 45 independent contractors,
and 234 temporary workers. None of 5.11’s employees are subject to collective bargaining agreements. Management
believes that 5.11 has an excellent relationship with its employees.
Crosman
Overview
Crosman, headquartered in Bloomfield, New York, is a leading designer, manufacturer, and marketer of airguns, archery
products, laser aiming devices and related accessories. Crosman offers its products under the highly recognizable Crosman,
17
Benjamin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor
networks. Airguns historically represent Crosman's largest product category, with more than 50% of gross sales. The airgun
product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Crosman's
other primary product categories are archery, with products including CenterPoint crossbows and the Pioneer Airbow,
consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, and airsoft products. We made loans
to, and purchased a controlling interest in, Crosman for a net purchase price of $150.4 million in June 2017, representing
approximately 98.9% of the initial outstanding equity of Crosman Corp.
History of Crosman
Crosman was founded in 1923 as Crosman Rifle Company and was one of the first manufacturers of recreational airguns
in the United States. Crosman acquired Visible Impact Target Company in 1991 and Benjamin Sheridan Corporation in
1992. Benjamin has continued as a dominant U.S. manufacturer of high-end pneumatic and CO2 powered airguns while
Sheridan was one of the world’s foremost manufacturers of high quality paintball markers. In 2007, Crosman expanded its
offerings outside the traditional airgun category with the debut of its new optics division, CenterPoint Precision Optics. In
2008, Crosman diversified further by adding Crosman Archery to its list of branded products and introduced two new hunting
crossbows in addition to youth archery products. In 2016, Crosman debuted its CenterPoint line of crossbows and the
Benjamin Pioneer Airbow, the first ever mass-produced air powered archery device. In 2017, Crosman acquired the
commercial product line of LaserMax, a leading designer and manufacturer of gun-mounted laser aiming devices.
Today, Crosman is an international designer, manufacturer and marketer of Crosman and Benjamin airguns including related
ammunition and accessories, airsoft rifles, pistols, and ammunition, archery products, laser aiming devices, and precision
optics.
Industry
Crosman primarily competes within the airgun and archery sub-segments of the broader outdoor recreational products
industry, which together management estimates constitute approximately $1.0 billion of annual retail revenue. Both categories
share certain common characteristics, including consumer demand for innovation, similar sales channels, and unique
regulatory frameworks.
The airgun industry is estimated by management to constitute approximately $275 million to $325 million of annual retail
revenue, excluding consumables and accessories. With a history stretching back over a century, the industry is generally
considered to be a mature sector, with stable growth rates in the low single digits. Airgun products are largely sold through
mass merchants and national retailers, with each accounting for roughly 40% of purchases. Independent dealers and online
platforms account for approximately 9% and 8% of purchases, respectively, while the balance is purchased directly from the
manufacturer. Airguns are less seasonal than archery because there is no defined hunting season, although sales spike
somewhat around holidays.
The archery equipment market is estimated by management to constitute between $750 million and $850 million of annual
retail sales, of which $400-$450 million is attributable to bows and $350-$400 million is attributable to related archery
accessories. Vertical and compound bows are the most prolific type of bow, comprising about half of the category sales,
while crossbows make up approximately 35% and youth bows account for the remaining 15%. Outdoor retailers comprise
the largest sales channel, accounting for approximately 45% of consumer purchases, while independent archery stores and
big box retailers constitute 25% and 13% of total purchases, respectively. E-commerce has grown to hold a 15% share,
primarily at the expense of independent archery retailers and big box stores while 2% are direct from the manufacturer.
Products and Services
Crosman designs, manufacturers and markets five categories of products: (i) airguns, (ii) archery products, (iii) consumables,
or pellets, BBs and CO2 cartridges, (iv) optics, and (v) airsoft. Crosman’s product strategy encompasses producing high
quality, feature-rich products recognized by consumers for their craftsmanship and value, and building on a rich history to
introduce innovative new products.
Airguns
Airguns represent Crosman’s largest product category, with gross sales comprising approximately 55% of 2017 sales. The
airgun product line consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Crosman’s
airguns are designed to be multi-purpose, multi-occasion products, for use in recreational plinking and target shooting, pest
control, and hunting. The Company offers a “good, better, best” array of airguns under the Crosman and Benjamin brands.
The Crosman brand is known for high value at an accessible price, where the Benjamin brand is typically associated with
premium products falling within the mid- to high-price point. Additionally, Crosman rounds out its offering with mid-level
products produced under an exclusive licensing agreement with Remington for its Remington, Marlin, DPMS, and Bushmaster
brands.
18
Archery Products
Crosman re-entered the archery market in 2015 with a product line anchored by the CenterPoint crossbow and the first-of-
its-kind Pioneer Airbow. The Company’s archery segment comprised 15% of 2017 gross sales. CenterPoint has grown rapidly
since it was launched to become the second largest player in the crossbow category. The CenterPoint Sniper 370 is the
top-selling SKU in the crossbow market, with more than twice the volume of its nearest competitor. CenterPoint acquired
market share by offering features like an aluminum frame, higher shooting velocity, integrated string stops, a 4x32mm scope
and shoulder sling at very competitive retail prices.
Concurrent with the launch of the CenterPoint line of crossbows, Crosman also introduced the Pioneer Airbow under the
Benjamin brand. The Pioneer Airbow created a new sportsman category as the first ever mass-produced air-powered archery
device, effectively bridging the gap between airguns and archery. Management has worked with state regulators to develop
regulatory frameworks for the Airbow, which is currently legal to use for whitetail hunting in eight states and predator hunting
in 30 states.
Consumables
Crosman’s consumables segment consists of steel and plastic BBs, various styles of lead pellets, and single-use CO2
cartridges used to power airguns. BBs are typically used for plinking, training, or target shooting at a more affordable cost,
while different pellet styles are designed either for accuracy, maximum penetration, or a combination of the two. Crosman
is the world’s largest provider and only domestic manufacturer of CO2 cartridges, having first introduced the use of C02 as
an airgun propellant in 1961. Consumables are produced under the Crosman, Benjamin, and Copperhead brand names.
The consumables product line comprised approximately 17% of 2017 Crosman’s gross sales.
Optics
Launched in 2006, Crosman’s line of optics products offers high-performance, value-priced optics under the CenterPoint
brand. The scopes, sights, binoculars, lights, and lasers are marketed for traditional firearms, in addition to select airgun and
crossbow offerings. In 2017, Crosman added to their optics product line with the acquisition of the commercial division of
LaserMax. LaserMax is a global leader in hardened and miniaturized laser systems, offering a comprehensive line of premium
laser sights for home defense, personal protection and training use. LaserMax’s commercial business provides laser sighting
solutions and tactical lights to the firearm original equipment manufacturers ("OEM") and retail channels. Management
believes that the addition of the LaserMax products will enable Crosman to reach a wider range of new customers across
retail channels. Crosman’s line of high-quality optics represented 5% of gross sales in 2017.
Airsoft
Airsoft guns are a class of air, CO2, gas, or electric-powered guns that are typically made from high-impact plastics and are
engineered with recreation in mind to fire safe, plastic BBs quickly and accurately. Airsoft products are most often used for
recreational purposes by a younger demographic and a strong user base amongst military and law enforcement customers.
Crosman offers a broad portfolio of airsoft rifles and pistols under its owned Crosman Elite and Game Face brands, as well
as the licensed U.S. Marines brand. Sales of airsoft products comprised approximately 8% of Crosman’s gross sales in
2017.
Competitive Conditions
Airguns
Crosman’s airgun line competes with offerings from several airgun manufacturers, including Daisy Outdoor Products, Gamo
Outdoor USA (which acquired Daisy in July 2016 but remains separately branded), Germany-based Umarex, and more
recently Sig-Sauer, which has begun to produce its own line of airguns to complement its powdered firearms offering. The
market for airguns is relatively concentrated, led by Crosman, Daisy, Gamo, and Umarex, according to Sports OneSource
data. Key determinants in consumer purchasing decisions include product performance, quality, and brand loyalty.
Archery
The archery market competes within a “good, better, best” spectrum. Crosman’s CenterPoint product line, as a value-for-
price, entry to mid-level brand, tends to lie between the “good” and “better” segments, competing with Barnett Outdoors,
Bear Archery, and PSE technologies, among others. Consumers tend to make purchasing decisions based on brand
awareness, reliability, customer service, and pricing. Although CenterPoint is a recent entry into the archery market, the
brand has been able to outpace more established brands on the reliability, pricing, and service aspects to win market share.
The crossbow category within the archery market is slightly less concentrated than the airgun segment, with four brands
holding notable market shares: TenPoint, Barnett, CenterPoint, and PSE.
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Business Strategies
Continued Innovation in Existing Product Categories
Crosman plans to continue to build on its successful history of bringing new, technically superior products to market through
leveraging its stringent new product development process, internal manufacturing capabilities, and a flexible supply chain.
The Company has near-term new product launches and existing product updates planned across all categories, including
the highlights below.
Airguns - Crosman is still in the early stages of rolling out its new Silencing Barrel Device (“SBD”) technology, a patent-
pending asymmetrical barrel design that limits air rifle firing noise to one-third of a non-silenced air rifle. Developed in
2016 and launched in 2017, management believes the SBD will serve as a point of differentiation from the competition,
particularly in the break-barrel segment, over the next several years. Additionally, the Company is in the process of
gradually upgrading break barrel models with a more effective hydraulic pressure device. More broadly, Crosman began
releasing new products under its revitalized licensing agreement with Remington in 2017, enabling the Company to
capture additional market share at the mid-level price point between the Crosman and Benjamin brands.
Archery - On the heels of the successful 2016 launch of the CenterPoint crossbow line, the Company has introduced
new crossbow models at higher price point segments of the market, while continuing to build out its archery product line
to include accessories and inclusive “ready-to-hunt” kits.
Optics - In addition to the recently launched three-model CenterPoint Spectrum First Focal Plane series of scopes, the
Company has plans to expand the CenterPoint optics offering to include binoculars and scope adapters. Additionally,
the Company launched its GripSense lasers in 2017, the only firearm laser that is activated simply by a person's grip.
Expand into Adjacent Product Categories
Management believes that the Company can leverage in-house manufacturing and sourcing partners to develop products
in new categories that utilize Crosman’s existing distribution network and brand strength. Most notably, within the archery
segment, the Company is in the early stages of rolling out a line of vertical bow SKUs as well as an accessory offering
including arrows, scopes, bags, and rope cockers.
Further Penetration of Existing Customer Accounts
Management has identified several strategies for further penetrating its existing customer accounts. First, Crosman has
identified opportunities to leverage its existing relationships with retailers to drive expanded SKU offerings across categories.
For example, only 5 of Crosman’s top 10 customers listed CenterPoint crossbows in calendar year 2016. Management has
already attained listings with several of the remaining retailers who did not previously list Crosman archery products.
Additionally, management believes the Company can cross-sell airguns into the archery category, building on the recent
success and credibility established by the Airbow product. Furthermore, management believes that the Company is well
positioned to grow as its brick-and-mortar customers adapt to a changing retail landscape. Crosman can leverage its structured
analytical sales approach and new marketing initiatives to assist retailers with enhancing their online sales, similar to the
strategies it already employs working with pure e-commerce customers like Amazon and PyramydAir.
Consolidation Platform
With a well-developed global supply chain, refined manufacturing capabilities, sophisticated management systems
infrastructure, and extensive network of relevant relationships, Crosman sees itself as a platform for consolidation within
both the broader outdoor recreational goods space and the archery space specifically. Management has identified a pipeline
of potential acquisition targets that would help Crosman strengthen and expand its product offering and address new market
segments.
International Growth
Crosman is exploring opportunities to grow international sales and increase market share by pursuing new international
distributor relationships. Management has recently focused its efforts on key markets within Latin America. However, with a
more fulsome archery product line in development, the Company is well positioned to expand into key international bowhunting
markets such as Europe, Australia, New Zealand, and South Africa.
New Product Development
Crosman has developed a repeatable, structured product development process that integrates all areas of the business,
including sales, marketing, engineering, purchasing, production and finance. New products must pass a 6 to 18 month, stage
gating process designed to ensure engineering and commercial viability. Once a product idea is identified, a five-phase step-
by-step process is used to either (a) refine the idea into a producible, marketable good, or (b) identify contradicting data that
may warrant the project being tabled or canceled altogether. A Product Development Committee must approve the
advancement of a new product from one phase to the next. To balance the Company’s new product pipeline, aging and
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underperforming SKUs are regularly culled. This intentional focus on constant innovation and consumer feedback has helped
Crosman establish a portfolio of highly-regarded brands across several product categories.
Customers
Crosman sells its products through nearly all major domestic mass merchants and sporting goods retailers, and has
established a strong e-commerce platform to allow for flexibility in a changing retail environment. The three largest customers
represent 47% of gross sales in 2017 and three major sales channels; mass merchant, e-commerce, and regional retail.
Seasonality
Crosman typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday seasons,
respectively.
Sales and Marketing
Crosman’s products are sold through over 425 customers across a mix of sales channels, including mass merchants, national
retailers, distributors/dealers/regional chains, international distributors, and e-commerce. Over the last 5 years, Management
has successfully diversified both its sales channel composition and customer mix.
Crosman sells its products through nearly all major domestic mass merchants and sporting goods retailers currently selling
airguns, and has established a strong e-commerce platform to allow for flexibility in a changing retail environment. The
Company has been selling to many of its customers for over 20 years, maintaining close relationships with key purchasing
personnel through high-touch customer service. Crosman is one of the only players in the sportsman category offering
category management services, product assortment, and SKU optimization feedback typical of larger multinational consumer
products companies. This data-sharing has resulted in higher retailer sell-through and margin enhancement, more accurate
sales forecasting, and a 98% fulfillment rate, all of which are key components in maintaining status as a vendor of choice.
Crosman maintains an internal sales team responsible for covering 45 of the Company’s top 50 customer relationships, or
approximately 90% of total sales. Furthermore, Crosman supplements its in-house team with four independent sales
representative organizations, providing coverage for approximate 375 additional customers across their respective
geographic territories. International sales efforts are handled by four Crosman-employed account executives who work
through local distributors in order to ensure that products conform to local regulatory standards.
Crosman had a backlog of $12.1 million at December 31, 2017.
Manufacturing and Distribution Channels
Crosman’s product manufacturing is based on a dual strategy of in-house manufacturing and strategic alliances with select
sub-contractors and vendors. Crosman conducts its domestic manufacturing operations in a 225,000 square foot facility on
a Company-owned 49 acre campus located in East Bloomfield, New York, approximately 30 miles southeast of Rochester.
In addition, the Company utilizes approximately 144,000 square feet of leased warehouse space in nearby Farmington, New
York, five miles from the East Bloomfield facility.
Intellectual Property
Crosman currently has a global portfolio of more than 100 registered trademarks. Additionally, the Company has a global
portfolio of more than 20 issued patents and many more pending. Management believes that patents are useful in maintaining
the Company’s competitive position, but it considers its trademarked brand names, preeminent name recognition, ability to
design innovative products, and technical and marketing expertise to be its primary competitive advantages.
Regulatory Environment
Airguns
Airguns enjoy a relatively unrestrictive federal regulatory framework, with most regulations determined at the state level.
Although there are no federal laws regulating their transfer, possession or use, non-powder guns are subject to oversight
from the Consumer Product Safety Commission (“CSPC”). Therefore, airguns are subject to generalized statutory limitations
involving “substantial product hazard” and articles that pose a substantial risk of injury to children, though the CSPC has not
adopted specific mandatory regulations in this area. Federal law prevents states from prohibiting the sale of airguns, but
allows for state-by-state restrictions on sales of airguns to minors. Thirteen states have imposed such restrictions. Historically,
there have not been attempts to grandfather the regulation of airguns into that of traditional powdered firearms, as legislative
efforts have largely focused on responding to and refining the existing regulatory frameworks for each respective category
rather than overhauling the coordination or transfer of enforcement duties across agencies.
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Archery
Crossbow hunting restrictions have become less stringent over the last ten years. Since 2006, 12 states, including populous
hunting states like Wisconsin, Pennsylvania, and North Carolina, have legalized crossbow hunting, while many others moved
to relax restrictions through the opening of limited seasons or creation of exceptions to hunting restrictions for those with
disabilities. Today, only Oregon classifies crossbows as illegal. As of 2017, nearly 90% of all hunting permits are filed in
states that currently allow crossbow hunting for at least part of the season. Although continued deregulation is expected, it
likely will not continue to be a large driver for the crossbow category moving forward.
Employees
Crosman had 263 employees at December 31, 2017. Crosman’s labor force is non-union. Management believes that
Crosman has an excellent relationship with its employees.
Ergobaby
Overview
Ergobaby is dedicated to building a global community of confident parents with smart, ergonomic solutions that enable and
encourage bonding between parents and babies. Ergobaby offers a broad range of award-winning baby carriers, blankets
and swaddlers, nursing pillows, and related products that fit into families’ daily lives seamlessly, comfortably and safely.
Ergobaby is headquartered in Los Angeles, California.
History of Ergobaby
Ergobaby was founded in 2003 by Karin Frost, who designed her first baby carrier following the birth of her son. The baby
carrier product line has since expanded into 3-position and 4-position carriers, with multiple style variations. In its second
year of operations, Ergobaby sold 10,500 baby carriers and by 2017 sold over 1.1 million in the year. In order to support
the rapid growth, in 2007, Ergobaby made a strategic decision to establish an operating subsidiary (“EBEU”) in Hamburg,
Germany. We purchased a majority interest in Ergobaby on September 16, 2010.
On November 18, 2011 Ergobaby acquired Orbit Baby for approximately $17.5 million. Founded in 2004 and based in
Newark, California, Orbit Baby produced and marketed a luxury line of strollers and car seats that utilized a patented hub
ring to allow parents to easily move car seats from car seat bases to stroller frames in an instant without the need for any
additional components. During the second quarter of 2016, Ergobaby's board of directors approved a plan to dispose of the
Orbit Baby product line and in the fourth quarter of 2016, most of the Orbit Baby tooling and intellectual property was sold
to Orbit Baby’s Korean distributor.
On May 12, 2016, Ergobaby acquired membership interests of New Baby Tula LLC (“Baby Tula”) for approximately $73.8
million, excluding a potential earn-out payment. Baby Tula designs, markets and distributes premium baby carriers and
accessories and focuses its efforts on both the ergonomics and fashion of its products.
In 2013, Ergobaby expanded its portfolio into the sleep category. The launch of the Ergobaby Swaddler which focused on
a unique, method of swaddling newborns while retaining healthy hip and arm positioning, was the first significant category
expansion outside of baby carriers for the Ergobaby brand. In 2016, Ergobaby expanded its offering in the sleep category
with the launch of its Baby Sleeping Bag. Baby Tula is also in the sleep category with its blanket offering, focusing on limited
edition fashion prints.
In 2014, Ergobaby launched the Ergobaby Four-Position 360 Baby Carrier which expanded on Ergobaby’s leadership in the
baby carrier category by offering an ergonomic, outward forward facing position for the baby and comfort for the parent. The
Ergobaby 360 Carrier won the 2014 JPMA Innovation award in the baby carrier category. In 2016, Ergobaby launched the
3-Position Adapt Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs) and offers some unique parent comfort
features including lumbar support and crossable shoulder straps, as well as the benefit of being an all-in-one carrier with no
need for an infant insert accessory (for babies 7-12lbs.). In 2017, Ergobaby launched the All Position, All-in-One Omni 360
Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs) and includes all of Ergobaby’s parent & baby comfort
features from the 360 and Adapt Baby Carriers, as well as the same consumer benefit of no infant insert accessory needed.
In the past four years, the 360 Baby Carrier ($160 MSRP), Adapt Baby Carrier ($140 MSRP) and Omni 360 Baby Carrier
($180 MSRP) have all successfully traded up consumers globally who appreciate the comfort and innovation that Ergobaby
has brought to the category from its Original Baby Carrier ($115 MSRP).
Industry
Ergobaby competes in the large and expanding infant and juvenile products industry. The industry exhibits little seasonality
and is somewhat insulated from overall economic trends, as parents view spending on children as largely non-discretionary
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in nature. Consequently, parents spend consistently on their children, particularly on durable items, such as car seats,
strollers, baby carriers, and related items that are viewed as necessities. Further, an emotional component is often a factor
in parents’ purchasing decisions, as parents’ desire to purchase the best and safest products for their children. As a result,
according to the USDA’s most recent report on Expenditures on Children by Families 2013 (released in August 2014), parents
on average, spend between $9,130 and $25,700 on their child on an annual basis for related housing, food, transportation,
clothes, healthcare, daycare and other items, depending on age of the child and annual income. The amount spent by parents
in the highest income group (before tax income greater than $106,540) was more than twice the amounts spent by parents
in the lowest income group (before tax income of less than $61,530). On average, households spent between 14 - 25% of
their before-tax income on a child. Similar patterns are seen in other counties around the world.
Demand drivers fueling the growing spending on infant and juvenile products include favorable demographic trends, such
as (i) an increasing number of births worldwide; (ii) a high percentage of first time births; (iii) an increasing age of first time
mothers and a large percentage of working mothers with increased disposable income; and (iv) an increasing percentage
of single child households and two-family households.
In purchases of baby durables, parents often seek well-known and trusted brands that offer a sense of comfort regarding a
product’s reliability and safety. As a result, brand name, comfort and safety certifications can serve as a barrier to entry for
competition in the market, as well as allow well-known brands such as Ergobaby and Baby Tula to compete in a growing
premium segment.
Products and Services
Baby Carriers
Ergobaby has two main baby carrier product lines: baby carriers and related carrier accessories, sold under both the Ergobaby
and Tula brands. Ergobaby’s baby carrier designs supports a natural, ergonomic ("M" shaped) sitting position for babies,
eliminating compression of the spine and hips that can be caused by unsupported suspension. The baby carrier also distributes
the baby’s weight evenly between parents’ hips and shoulders, and alleviates physical stress for the parent. Both Ergobaby’s
3-Position and 4-Position baby carriers have been recognized by the International Hip Dysplasia Institute as being “hip
healthy”. Additional accessories are provided to complement the baby carriers including the popular Infant Insert.
Within the Ergobaby Baby Carrier product line, Ergo sells 3-Position and 4-Position baby carriers in a variety of style and
color variations and Baby Tula sells 3-Position, Standard, Toddler and Wrap Conversion fashion-oriented baby carriers. Baby
Carrier sales were approximately $96.0 million, $84.0 million and $68.6 million in the years ended December 31, 2017, 2016,
and 2015, respectively, and represented approximately 88%, 81% and 79%, of total sales in 2017, 2016, and 2015,
respectively.
Within the baby carrier accessories category, the Infant Insert is the largest sales component of the accessory category,
representing more than half of total accessory sales for 2017, 2016, and 2015. Accessory sales were $8.6 million, $10.5
million, and $9.1 million, in 2017, 2016, and 2015, respectively and represented approximately 8.4% in 2017, 10% in 2016
and 11% in 2015, of total sales.
Ergobaby’s core Baby Carrier product offerings with average retail prices are summarized below:
Ergo
•
•
Tula
•
•
4 styles of baby carriers - $115 - $180
3 styles of Infant Inserts - $25 - $38
3 styles of baby carriers - $149 - $900
1 styles of Infant Inserts - $40
Competitive Strengths
Ergobaby innovation - Ergobaby Carriers are known for their unsurpassed comfort. Ergobaby’s superior design results in
improved comfort for both parent and baby. Parents are comfortable because baby’s weight is evenly distributed between
the hips and shoulders while baby sits ergonomically in a natural ("M" shaped) sitting position. The concept of baby carrying
has increased in popularity in the U.S. as parents recognize the emotional and functional benefits of carrying their baby.
Consumers continually cite the comfort, design, and convenient “hands free” mobility the Ergobaby carrier offers as key
purchasing criteria. Ergobaby is also recognized as an industry leader in innovation. With the launch of the Ergo 4-Position
360 Carrier in 2014, the launch of the 3-Position ADAPT carrier in 2016, and the launch of the All Position Omni 360 carrier
in 2017, Ergobaby continues to innovate in the baby carrier segment on a regular basis.
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Baby Tula Community - Tula enjoys an active and enthusiastic community who are vocal advocates for the brand. The
Tula community acts as both an avid source of feedback on new product launches, which influence future product and
patterns, as well as brand influencers to the broader new parenting community.
Business Strategies
Increase Penetration of Current U.S. Distribution Channels - Ergobaby continues to benefit from steady expansion of
the market for wearable baby carriers and related accessories in the U.S. and internationally. Going forward, Ergobaby will
continue to leverage and expand the awareness of its outstanding brands (both Ergobaby and Baby Tula) in order to capture
additional market share in the U.S., as parents increasingly recognize the enhanced mobility, convenience, and the ability
to remain close to the child that all Ergobaby carriers enable. Ergobaby currently markets its products to consumers in the
U.S. through brick-and-mortar retailers, national chain stores; online retailers; and directly through Ergobaby.com and
Babytula.com websites.
International Market Expansion - Testimony to the global strength of its lifestyle brand, Ergobaby derives approximately
61% of its sales from international markets. Like it has in the U.S., Ergobaby can continue to leverage the Ergo and Tula
brand equity in the international markets it currently serves to aggressively drive future growth, as well as expand its
international presence into new regions. The market for Ergobaby’s products abroad continues to grow rapidly, in part due
to the growth in the number of births worldwide and the fact that in many parts of Europe and Asia, the concept of baby
wearing is a culturally entrenched form of infant and child transport.
New Product Development - Management believes Ergobaby has an opportunity to leverage its unique, authentic lifestyle
brands and expand its product line. Since its founding in 2003, Ergobaby has successfully introduced new carrier products
to maintain innovation, uniqueness, and freshness within its baby carrier and travel system product lines. In addition to
expanding into new product carriers like swaddling and nursing pillows, Ergobaby has become the baby carrier industry
leader with the launch of the 4-Position 360 baby carrier and looks to continue its leadership position with new product
launches in 2018.
Customers and Distribution Channels
Ergobaby primarily sells its products through brick-and-mortar retailers, national chain stores, online retailers and distributors
and derives approximately 61% of its sales from outside of the U.S. In Europe, Ergobaby products are sold through its
German based subsidiary, which services brick-and-mortar retailers and online retailers in Germany and France; it’s United
Kingdom based subsidiary; and its Tula subsidiary in Poland; as well as a network of distributors located in Finland, Russia,
Belgium, the Netherlands, Sweden, Norway, Spain, Denmark, Italy, Turkey and the Ukraine. Customers in Canada are
predominately serviced by Ergobaby’s Canadian subsidiary. Sales to customers outside of the U.S. and European markets
are predominantly serviced through distributors granted rights, though not necessarily exclusive, to sell within a specific
geographic region.
Sales and Marketing
Within the U.S., Ergobaby directly employ sales professionals and utilizes independent sales representatives assigned to
differing U.S. territories managed by in-house sales professionals. Independent salespeople in the U.S. are paid on a
commission basis based on customer type and sales territory. In Europe, Ergobaby directly employs its salespeople and
salespeople are paid a base salary and a commission on their sales, which is standard in that territory.
Ergobaby has implemented a multi-faceted marketing plan which includes (i) online marketing efforts, including online
advertisement, search engine optimization and social networking efforts; (ii) increasing tradeshow attendance at consumer
and medical professional shows; and (iii) increasing promotional activities.
Ergobaby had approximately $9.2 million and $12.8 million in firm backlog orders at December 31, 2017 and 2016,
respectively.
Competition
The infant and juvenile products market is fragmented, with a few larger manufacturers and marketers with portfolios of
brands and a multitude of smaller, private companies with relatively targeted product offerings.
Within the infant and juvenile products market, Ergobaby’s baby carriers primarily compete with companies that market
wearable baby carriers. Within the wearable baby carrier market, several distinct segments exist, including (i) slings and
wraps; (ii) soft-structured baby carriers; and (iii) hard frame baby carriers.
The primary global competitors in this segment are BabyBjorn, Chicco, Britax and Manduca, which also market products in
the premium price range. Especially in the U.S., Ergobaby brands also compete with several smaller companies that have
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developed wearable carriers, such as Infantino, Boba, and Lillebaby. Within the soft-structured baby carrier segment,
Ergobaby benefits from strong distribution, good word of mouth, and the functionality of the design.
Suppliers
During 2017, Ergobaby sourced its Ergo carrier and carrier accessory products from Vietnam and India, and manufactured
its stroller systems and accessory products in China. Baby Tula products predominantly were produced from factories in
India, Poland and Mexico and were also produced in its own facility located in Poland. In 2012, Ergobaby began sourcing
carriers and accessories from a manufacturing facility in Vietnam and in 2009, Ergobaby partnered with a manufacturer
located in India. More than 50% of Ergobaby’s carriers and accessories came from Vietnam in 2017. Baby Tula sourced its
carrier, accessories and blanket products from Mexico, Poland, Vietnam, India and Turkey, with purchases from these
locations accounted for approximately 16% of total Ergobaby purchases. Management believes its manufacturing partners
have the additional capacity to accommodate Ergobaby’s projected growth.
Intellectual Property
Ergobaby maintains and defends a U.S. and international patent portfolio on some of its various products, including its 3-
position and 4-position carriers. Currently, it has 18 patents (including allowances) and 13 patents pending in the U.S. and
other countries. Ergobaby also depends on brand name recognition and premium product offering to differentiate itself from
competition.
Regulatory Environment
Management is not aware of any existing, pending, or contingent liabilities that could have a material adverse effect on
Ergobaby’s business. Ergobaby is proactive regarding regulatory issues and is in compliance with all relevant regulations.
Ergobaby maintains adequate product liability insurance coverage and to date has not incurred any losses. Management is
not aware of any potential environmental issues.
Employees
As of December 31, 2017, Ergobaby employed 208 persons in 6 locations. None of Ergobaby’s employees are subject to
collective bargaining agreements. We believe that Ergobaby’s relationship with its employees is good.
Liberty Safe
Overview
Liberty Safe, headquartered in Payson, Utah and founded in 1988, is the premier designer, manufacturer, and marketer of
home, gun and office safes in North America. From its over 300,000 square foot manufacturing facility, Liberty Safe produces
a wide range of home, office and gun safe models in a broad assortment of sizes, features and styles ranging from an entry
level product to good, better and best products. Products are marketed under the Liberty Safe brand, as well as a portfolio
of licensed and private label brands, including Cabela’s, Case IH, and John Deere. Liberty Safe’s products are the market
share leader and are sold through an independent dealer network (“Dealer sales”) in addition to various sporting goods, farm
and fleet, and home improvement retail outlets (“Non-Dealer sales” or “National sales”). Liberty Safe has the largest
independent dealer network in the industry, with more than 50% of Liberty's sales in the last two years coming from the
dealer network.
History of Liberty Safe
The Liberty Safe brand and its leading market share has been built over a 29 year history of superior product quality,
engineering and design innovation, and leading customer service and sales support. Liberty Safe has a long history of
continuous improvement and innovative approaches to sales and marketing, product development and manufacturing
processes. Significant investments over the last five years have solidified Liberty Safe’s reputation for providing substantial
value to retailers and enhanced its long-standing position as the leading producer of premium home, office and gun safes.
Liberty Safe commenced operations in 1988 and in 2001 opened its current state-of-the-art facility in Payson, Utah. The
new facility allowed Liberty Safe to consolidate all of its manufacturing and distribution operations to a centralized location.
As the only facility in the industry utilizing significant automation and a streamlined roll-form manufacturing process, it
represented a significant step forward when compared to the production capabilities of its competitors. Incremental
investments following the consolidation have solidified Liberty Safe’s position as the preeminent low-cost and most efficient
domestic manufacturer.
During 2011, Liberty Safe constructed a new production line that allowed Liberty to build entry level safe products in-house.
This production line produces home and gun safe models that were previously completely sourced through foreign
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manufacturers. This investment in production capacity makes Liberty Safe the largest manufacturer of home, office and gun
safes in the world. This added investment in capacity in the U.S. allowed Liberty Safe to provide shorter lead times and more
competitive pricing to its North American customer base.
We purchased a majority interest in Liberty Safe on March 31, 2010.
Industry
Liberty Safe competes in the broadly defined North American safe and vault industry which includes fire and document safes,
media and data safes, depository safes, gun safes and cabinets, home safes and hotel safes. According to Technavio's
2016 global safes and vaults market report, the global safe market was estimated to be approximately $2.9 billion in 2015,
and is projected to grow at a CAGR of 5.5% through 2020. Gun safes and vaults comprise approximately 16.5% of the global
safe market and it is expected that percentage will remain consistent through 2020. Domestically, demand for safes depends
on several key factors, including per capita disposable income since safes are largely considered a discretionary purchase
in most households. The gun safe segment of the industry typically sees demand that closely correlates to the demand from
guns and ammunition manufacturers. When gun sales increase, the potential market for gun safes typically also increases.
Increased fears surrounding violence in the country along with political uncertainty concerning gun ownership laws play a
part in changes in gun ownership and subsequently, demand for gun safes. The profitability of individual companies depends
on efficient operations and effective marketing, with large companies able to take advantage of economies of scale in
production and distribution, while smaller companies compete through specialty products.
The domestic safe industry continues to see increased competition from imports, particularly those sourced from China.
Imported safes were expected to comprise approximately one-third of the domestic sales in 2017, with competition from
imports highest in the small safe product group, which are targeted at households. Imported safes compete on price, with
foreign manufacturers passing along savings from operational efficiencies, lower cost labor and raw materials to the end
consumer. The competition from imported safes may make it harder to pass increasing costs, including the cost of steel, to
the end consumer.
Products and Services
Liberty Safe offers home, office and gun safes with retail prices ranging from $400 to $8,000. Liberty Safe produces 32
home and gun safe models with the most varied assortment of sizes, feature upgrades, accessories and styling options in
the industry. Liberty Safe’s premium home and gun safe product line covers sizes from 12 cu. ft. to 50 cu. ft. with smaller
sizes available for its personal home safe. Liberty Safe markets its products under Company-owned brands and a portfolio
of licensed and private label brands, including Cabela’s, Case IH, Colt and John Deere. Liberty Safe also sells commercial
safes, vault doors, handgun vaults, and a number of accessories and options. The overwhelming majority of revenue is
derived from the sales of safes.
Competitive Strengths
#1 Premium Home and Gun Safe Brand with Strong Momentum in the Market - Liberty Safe achieved the status of #1
selling safe company in America in 1994 (per statistics provided by Sargent & Greenleaf, the primary lock supplier to the
industry) and maintains this prominent position today. Liberty Safe continues to gain market share from the various smaller
participants who lack the distribution and sales and marketing capabilities of Liberty Safe.
State-of-the-Art and Scalable Operations - Liberty's management has constructed a highly scalable operational platform
and infrastructure that has positioned Liberty Safe for substantial sales growth and enhanced profitability in the coming years.
Liberty Safe transitioned itself from a manufacturing oriented operating culture to a demand-based, sales-oriented
organization. Its strategic transition required the implementation of a demand-based sales and operating platform, which
included (i) new equipment to drive automation and capacity improvements; (ii) re-engineered product lines and production
processes to drive efficiency through greater standardization in production; and (iii) new employee incentives tied to labor
efficiency, which has improved worker performance as well as employee attitude. These initiatives are enhanced by an
experienced senior executive team, a balanced sourcing and in-house manufacturing production strategy, advanced
distribution capabilities and sophisticated IT systems. Liberty has combined its demand-based sales and operating initiatives
with upgraded production equipment to drive multiple operational improvements. These initiatives combined with Liberty’s
cumulative historical investments in operational capabilities have created a lasting competitive advantage over its smaller
competitors, who utilize labor-intensive operations and lack the company’s lean manufacturing culture. For the past seventeen
years, Liberty Safe has leased a manufacturing and distribution facility in Payson, Utah that management believes represents
the most scalable domestic facility in the industry. Liberty Safe’s multi-faceted production capabilities allow for substantial
flexibility and scalable capacity, thus assuring a level of supply chain execution far superior to any of its competitors.
Historically, Liberty Safe maintained an optimal mix of in-house and Asian-sourced manufacturing in order to improve its
ability to meet customer inventory needs. Beginning in 2012, Liberty Safe began manufacturing entry level safes that were
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previously completely sourced from an Asian manufacturer, on its new production line. In 2017, only about 3% of safes sold
by Liberty were sourced in Asia.
Reputation for High Quality Products - Liberty Safe offers only the highest quality products on a consistent basis, which
over the years has gained it an enviable reputation and a key point of differentiation from its competitors. Liberty Safe
distinguishes its products through tested security and fire protection features and industry leading design focused on
functionality and aesthetics. The design of its safes meet rigorous internal benchmarks for security and fire protection, with
most receiving certification from Underwriters Laboratory, Inc. (“UL”), the leading product safety standard certification, for
its security capabilities. Additionally, Liberty Safe’s investment in accessories and feature options have made Liberty safes
the most visually appealing and functional in the industry, while providing more customized solutions for retailers and
consumers.
Trusted Supplier to National Retailer and Dealer Accounts - Liberty Safe’s comprehensive, high-quality product offering
and sophisticated sales and marketing programs have made it a critical supplier to a diverse group of national accounts and
dealers. Initially a key supplier primarily to the dealer channel, it has expanded its business with national accounts, such as
Cabela’s and John Deere. Liberty Safe provides a superior value proposition as a supplier for its national retailers and
dealers via its well-recognized brands, lifetime product warranty, tailored merchandising, category management solutions
and superior supply chain execution. Further, Liberty Safe’s products generate more profitable floor-space, with both high
absolute gross profit and retail margins over 30%. High retail profitability plus increased inventory turns has entrenched
Liberty Safe as a key partner in customers’ success in the safe category. As a core element of building its relationships,
Liberty Safe has invested significantly in making its retailers better salespeople through a proprietary suite of training tools,
including in-store training, new product demonstrations, online education programs and sales strategy literature.
Business Strategies
Liberty Safe has experienced strong historical growth while executing on multiple new sales and operational initiatives,
positioning it to continue to increase its scale and improve profitability. Liberty’s growth strategy is rooted in the sales and
marketing and operational initiatives that have spurred its expansion into new accounts and increased penetration of existing
accounts. Liberty has significant opportunity in its existing channels to continue to build upon its already strong market share.
In addition to growth within its current channels, Liberty’s core competencies can be successfully applied to ventures in the
broader security equipment market. Liberty has explored certain of these opportunities, but due to the prioritization of
operational initiatives and expansion opportunities within existing channels, they have not been aggressively pursued.
Potential near-to-medium term areas for expansion of Liberty’s platform include:
• Expand Liberty’s product line into the broader home and office safe market through current customers or new
•
distribution strategies;
Further develop international distribution by entering new countries and expanding current limited presence in
Canada, Mexico and Europe;
• Enter the residential security market through a strategic partnership with a provider of residential security service
solutions to provide a more complete physical and electronic security solution;
• Acquire businesses within the premium home and gun safe industry and/or leverage Liberty’s platform into new
products or channels; and
• Offer additional accessory products to existing distribution networks.
Research and Development
Liberty Safe is the engineering and design leader in its sector, due to a history of first-to-market features and standard-setting
design improvements. Liberty’s proactive solicitation of feedback and constant interaction with consumers and retail
customers across diverse channels and geographies enables Liberty Safe to stay at the forefront of customer demands.
Liberty’s approach to product development increases the likelihood of market acceptance by creating products that are more
relevant to consumers’ demands. Research and development costs were $0.5 million in 2017, $0.3 million in 2016, and
$0.6 million in 2015.
In addition to product enhancements, new products, such as the plate-door National Security Classic, and a new, 6-SKU
line of handgun vaults were launched in 2015 from Liberty’s commitment to R&D. In 2016, Liberty introduced a new 3-
section “Extreme” interior design, new safe covers, new handgun vault designs, and several0 new safe sizes.
Customers and Distribution Channels
Liberty Safe has fostered long-term relationships with leading national retailers (National or Non-Dealer) as well as numerous
Dealers, enabling Liberty Safe to achieve considerable brand awareness and channel exposure. Through significant
investment in its national accounts sales and marketing efforts, Liberty Safe has also become a leading supplier to National
accounts. Expansion into National accounts is part of Liberty Safe’s strategy to reach a broader customer base and more
varied demographics. National account customers include sporting goods retailers, farm and fleet retailers, and home
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improvement retailers. As of December 31, 2017, 2016 and 2015, Liberty Safe had 16, 13 and 15 Non-Dealer account
customers, respectively, that are estimated to have accounted for approximately 46%, 50% and 55% of net sales, respectively.
Dealer customers include local hunting and fishing stores, hardware stores and numerous other local, independent store
models. As of December 31, 2017, 2016 and 2015, there were 406, 392 and 356 Dealers that accounted for 54%, 50% and
45% of net sales, respectively.
Liberty Safe’s two largest customers accounted for approximately 32.6%, 36.5% and 37.1% of net sales in 2017, 2016 and
2015, respectively.
Seasonality
Liberty Safe typically experiences its lowest earnings in the second quarter due to lower demand for safes at the onset of
summer.
Sales and Marketing
Liberty Safe possesses robust sales and marketing capabilities in the safe industry. Liberty Safe utilizes separate sales
teams for National accounts and Dealers, which enables it to provide more focused and effective strategies to manage and
develop relationships within different channels. Liberty Safe has made significant recent investments in the development of
a comprehensive sales and marketing program including merchandising, sales training and tools, promotions and supply
chain management. Through these various initiatives, Liberty Safe offers highly adaptable programs to suit the varying needs
of its retailers. This has enabled Liberty Safe to become a key supplier across diverse channels. Liberty Safe began advertising
nationally on the Glenn Beck radio show in the second half of 2010. This advertising has been highly successful and Liberty
has continued this advertising in each of the following years and intends on continuing this advertisement in the future.
Liberty also began advertising nationally with Sean Hannity during the last few months of 2016, and continued that campaign
throughout 2017 and into 2018.
Liberty Safe’s comprehensive service offering makes it uniquely suited to service national retailers in a variety of channels.
Liberty Safe has designed a Store-within-a-Store program and a more comprehensive Safe Category Management program
to build relationships and increase its importance to retailers. Primarily utilized with sporting goods retailers, the Store-within-
a-Store concept successfully integrates the effective sales strategies of its dealers for selling a high-price point, niche product
into a larger store format. Centered on communicating the benefits of its products to customers, the program enables retailers
to more effectively up-sell customers through a good-better-best merchandising platform, increasing margin and inventory
turns for its retailers. Liberty’s Safe Category Management program builds on the Store-within-a-Store concept to provide
greater sales and marketing control and more complete inventory management solutions. This program facilitates Liberty
Safe becoming the sole supplier to retailers, providing large incremental expansion and stronger relationships at accounts.
No other market participant has the capabilities to provide a comprehensive suite of customer service solutions to national
retailers, such as customized SKU programs, a Store-within-a-Store program and a Safe Category Management program.
Competition
Liberty Safe is the premier brand in the premium home and gun safe industry, with an estimated 34% market share in the
category. Liberty is in a class by itself when it comes to manufacturing technology and efficiency and supply chain capabilities.
Competitors are generally more heavily focused on either smaller, sourced safes or large, domestically produced safes.
Competitive domestic manufacturers run “blacksmith” type factories that are small, inefficient and require a tremendous
amount of manual labor that produces inconsistent product. In addition, many of Liberty’s competitors are directly tied to a
third-party brand, such as Browning, Winchester or RedHead / Bass Pro.
Liberty competes with other safe manufacturers based on price, breadth of product line, technology, product supply chain
capabilities and marketing capabilities.
Channel diversity in the premium home and gun safe industry is rare, with most companies having greater concentration in
either the dealer channel or national accounts, but rarely having the supply chain capabilities or sales and marketing programs
to service both channels effectively such as Liberty Safe does. Major competitors have limited sales and marketing
departments and programs, making it difficult for them to expand sales and gain market share.
Suppliers
Liberty’s primary raw materials are steel, sheetrock, wood, locks, handles and fabric, for which it receives multiple shipments
per week. Materials, on average, account for approximately 60% of the total cost of a safe, with steel accounting for
approximately 40% of material costs. Liberty purchases its materials from a combination of domestic and foreign suppliers.
Historically, Liberty Safe has been able to pass on raw material price increases to its customers.
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Liberty purchased approximately 22 million pounds of steel in 2017 primarily from domestic suppliers, using contracts that
lock in prices two fiscal quarters in advance. Liberty Safe purchases coiled and flat steel in gauges from four to fourteen.
Liberty Safe specifies rigorous requirements related to surface and edge finish and grain direction. All steel products are
checked to ASTM specification and dimensional tolerances before entering the production process.
Liberty Safe had approximately $6.2 million and $8.4 million in firm backlog orders at December 31, 2017 and 2016,
respectively.
Intellectual Property
Liberty Safe relies upon a combination of patents and trademarks in order to secure and protect its intellectual property
rights. Liberty Safe currently owns 32 trademarks and 4 patents on proprietary technologies for safe products.
Regulatory Environment
Liberty Safe's management believes that Liberty Safe is in compliance with applicable environmental and occupational health
and safety laws and regulations. Liberty Safe has recently moved to a powder paint application in order to reduce hazardous
VOC emissions.
Employees
As of December 31, 2017, Liberty Safe had 343 full-time employees and 28 temporary employees. Liberty’s labor force is
non-union. Management believes that Liberty Safe has an excellent relationship with its employees.
Manitoba Harvest
Overview
Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and leader in branded, hemp-based foods. Manitoba
Harvest’s products, which Management believes are among the fastest growing in the natural foods industry, are currently
carried in approximately 13,000 retail stores across the United States and Canada. Manitoba Harvest’s hemp-based, all
natural product lineup includes hemp hearts, protein powder, hemp oil and snacks. As the world’s largest vertically-integrated
hemp food manufacturer, Manitoba Harvest is involved in every aspect of the hemp production process, from “seed-to-shelf.”
All of Manitoba Harvest’s products are an excellent source of plant-based protein and essential fatty acids, including omega-3,
gamma-linolenic acid and stearidonic acid. The hemp-based food market is rapidly growing as consumers become aware
of the unique combination of great taste and nutritional benefits of hemp-based foods.
We purchased a majority interest in Manitoba Harvest on July 10, 2015.
History of Manitoba Harvest
Founded in 1998 following the legalization of industrial hemp production in Canada, Manitoba Harvest has been the industry
leader in the manufacture of the highest quality hemp food products while educating people on the benefits of hemp nutrition.
Manitoba Harvest initially sold the company’s raw hemp seed and oil products in natural food stores with distribution and
marketing efforts focused on promotion of consumer acceptance of hemp seeds as a food product. In 2001, Manitoba
Harvest began selling their products at Whole Foods and Loblaws, one of Canada’s largest supermarket chains, which
allowed for expansion beyond natural food stores. As hemp food products continued to gain mainstream acceptance,
Manitoba Harvest launched additional hemp-based products, including a hemp protein powder line, a hemp smoothie line
and hemp-based snacks. Manitoba Harvest’s facility in Winnipeg achieved organic certification in 2004 and non-GMO
verification in 2009. Manitoba Harvest has the highest level of global certification in food safety and quality and is the first
and only hemp-based food company to achieve British Retail Consortium Global Food Safety Initiative (“BRC”) certification.
Leveraging its proven innovation capabilities and position as an industry leader, Manitoba Harvest is currently introducing
new product formats with broad appeal, and expanding its retail channels, particularly grocery channels, to capitalize on
strong demand from existing customers and to broaden its appeal to reach mainstream consumers.
On December 15, 2015, Manitoba Harvest acquired all the outstanding stock of Hemp Oil Canada Inc. (“HOCI”). HOCI is
a wholesale supplier and a private label packager of hemp food products and ingredients. With the acquisition of HOCI,
Manitoba Harvest has added a leading manufacturer and supplier of hemp food products and ingredients for a global customer
base.
Industry
Hemp is the distinct oilseed and fiber varieties of the plant species Cannabis sativa L., a tall fibrous plant that has been
cultivated worldwide for more than 10,000 years. The hemp crop was introduced to North American in the early 1600s, and
it played an integral part in North America’s early history as it was used as a material for various products including riggings
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and sails on naval ships, paper and fuel oil. Hemp is versatile, with diverse uses from food products to clothing, building
materials, fuel and various other applications. As a food product, hemp is packed with essential nutrients such as protein,
healthy fats, fiber, magnesium and all 10 essential amino acids.
As a crop, hemp is a low impact and environmentally sustainable resource that can be grown without pesticides or agricultural
chemicals. Hemp is beneficial to the agricultural supply chain, aiding in weed suppression and soil building, making it a
favored rotation crop. Hemp comes from the Cannabis sativa L. subspecies sativa, which is a different subspecies from that
grown to produce marijuana, subspecies indica. Hemp contains 0.001% Tetrahydrocannabinol (“THC”). Although it is
completely legal to further process and consume hemp-based food products in the U.S., it is currently illegal to cultivate
hemp or process live seeds. As a result, U.S. marketers of hemp-based products must import 100% of the hemp seed, oil
and fiber that they need. However, the regulatory environment in the U.S. is slowly changing. The U.S. Agriculture Act of
2014 defined industrial hemp as distinct from marijuana and authorized institutions of higher learning and state agriculture
departments to grow industrial hemp for research and agricultural pilot programs, leading to certain states that have legalized
hemp cultivation and have begun to authorize farmers to plant and grow hemp for experimental purposes.
In Canada, the commercial cultivation of hemp was authorized in 1998 with the implementation of the Canadian Industrial
Hemp Regulations, which governs the cultivation, processing, transportation, sale, import and export of industrial hemp.
Since its legalization, hemp has garnered significant interest among Canadian farmers and the Canadian government has
supported the industry through market development funding and a favorable regulatory environment. The Canadian
agricultural industry views hemp as a valuable alternative crop that complements prairie crop production rotations and offers
significant economic opportunity due to its numerous end uses.
Hemp-based foods are considered a superfood that are rich in healthy fats and other important minerals; furthermore, hemp
seeds are an excellent dietary source of easily digestible plant based protein. The unique nutritional profile of hemp foods
appeals to a broad base of modern diet trends, ranging from paleo to vegetarian diets. Manitoba Harvest broadly competes
in the Nuts & Seeds and Protein Powder categories, which Nielsen estimates to be $4.4 billion and $540 million at retail,
respectively. The Hemp Industries Association estimates that retail sales of hemp food and body care products in the United
States totaled $283 million in 2015.
Products
Manitoba Harvest is a global leader in branded, hemp-based foods. The Company’s products are the fastest growing products
in the hemp food market and among the fastest growing in the entire natural foods industry. The Company’s hemp-exclusive,
consumer-facing 100% all-natural product lineup includes Hemp Hearts, protein powder, and snacks. HOCI processes
natural and organic hemp seed which are sold as hulled seed, hemp oil, hemp protein, toasted hemp seed and coarse hemp
powder.
Hemp Hearts - Hemp Hearts are raw shelled hemp seeds and have a slightly nutty taste, similar to that of a sunflower seed
or a pine nut. Hemp Hearts contain 10 grams of plant-based protein and 10 grams of omega essential fatty acids per 30
gram serving. Hemp Hearts can be used as a topping for yogurt, salads, cereal, as a component for smoothies and other
meals, or eaten directly from the package. Manitoba Harvest offers Hemp Hearts in all-natural and organic varieties through
a number of SKUs. Hemp Hearts are all-natural and non-GMO verified. Hemp Hearts represented approximately 67% of
Manitoba Harvest’s gross revenues in 2017.
Hemp Protein Powder - Manitoba Harvest offers a variety of plant based proteins that serve a multitude of culinary and
dietary needs including Hemp Pro 70®, Hemp Pro 50®, Hemp Pro Fiber® and Hemp Protein Smoothie. Hemp Pro 70® is
a hemp protein concentrate that is 65% protein by weight and high in omega essential fatty acids. Hemp Pro 70® is available
in several flavors including vanilla and chocolate, which were introduced in 2014 as an extension of the protein powder
product line. Hemp Pro 50® is a raw hemp protein powder that is 50% protein by weight and features a balance of protein
and fiber. Hemp Pro 70 and Hemp Pro 50 are plant-based products that are great complements to fruit smoothies, while
Hemp Pro Fiber is a great source of protein, essential fatty acids and other nutrients that also offers a high amount of fiber
per serving. Hemp Pro Fiber® is raw hemp protein powder, but also offers 52% of the daily recommended fiber intake.
Hemp Pro Fiber is a versatile product that can be blended into smoothies, added to yogurt and hot cereal, or incorporated
into baking products. Hemp Protein Smoothie was launched in 2015 and is a plant-based nutritional powder that includes
15 grams of protein and 2.6 grams of omega essential fatty acids per 30 gram serving, and is designed to mix easily into
smoothies and other drinks. Manitoba Harvest offers hemp protein products in all-natural and organic varieties, and all
protein powders are non-GMO verified. Hemp protein powders represent approximately 16% of Manitoba Harvest’s gross
revenues in 2017.
Hemp Snacks and Other Products - During 2015, Manitoba Harvest expanded their product lines with the introduction of
Hemp Heart Bites, a convenient, bite sized crunchy snack product, which appeal to the mainstream consumer by featuring
a simple and clean ingredient list that contains 10.5 grams of plant based protein and 10 grams of omega essential fatty
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acids per 45 gram serving. Hemp Heart Bites were launched in response to demand from existing consumers for a convenient,
hemp-based food product. Manitoba Harvest’s other products include Hemp Oil, in both liquid and soft-gel formats, and
Hemp Bliss, an organic non-dairy beverage. Hemp oil is a cold-pressed oil with no preservatives or artificial colors and is
commonly used as a low heat culinary oil or as an ingredient in dressings or sauces. Hemp snacks, Hemp oil and Hemp
Bliss comprised approximately 17% of Manitoba Harvest's gross revenues in 2017.
Competitive Strengths
Leading Brand Recognition & Market Share - Manitoba Harvest is an award winning pioneer and global leader in branded,
hemp-based foods. Consumer awareness of hemp-based foods and the Manitoba Harvest brand continues to grow rapidly.
Manitoba Harvest has developed considerable brand equity with a growing, highly-loyal, and very passionate consumer
following. Consumers tend to be extremely loyal after incorporating Manitoba Harvest’s hemp foods into their lifestyle.
Management believes that Manitoba Harvest holds more than 50% of the market share of hemp heart seed sales and hemp
protein powder sales in North America.
Strong Core Consumer Base - Manitoba Harvest’s core consumers are those who generally prefer all-natural products
and focus on practicing a lifestyle of health and sustainability. Among its core consumer base, hemp-based foods have a
high level of awareness and Manitoba Harvest possesses a high level of brand recognition among this consumer segment.
Consumers tend to be extremely loyal after incorporating Manitoba Harvest’s hemp foods into their lifestyle. Consumers
develop a bond with the Manitoba Harvest brand and appreciate that Manitoba Harvest seeks to positively impact the
community and the environment with its actions. Manitoba Harvest is committed to having a material positive impact on
society and the environment. The company takes this commitment very seriously, and communicates this to consumers, in
part, by maintaining certification as a registered “B-Corporation”. Through its actions, Manitoba Harvest inspires consumers
to “live the brand” and lead happier and healthier lives.
Vertically-Integrated Supply Chain with Long-Term Relationships with Suppliers - Manitoba Harvest enjoys strong
relationships with hemp producers, some dating back to their inception in 1998. Manitoba Harvest has a rigorous qualification
process for its suppliers which includes an ongoing supplier scorecard and chooses to purchase hemp seeds from only the
highest quality growers. With limited exception, farmers working with Manitoba Harvest are exclusive to them. In North
America, hemp is only grown commercially in Canada and Manitoba Harvest accounts for more than 60% of the hemp supply,
minimizing risk and ensuring quality hemp seeds for their product. The majority of Canada’s hemp supply outside of Manitoba
Harvest’s business goes into ingredient and wholesale markets, making Manitoba Harvest the only vertically-integrated,
branded hemp-based food company in North America.
Business Strategies
Manitoba Harvest’s management believes it is well positioned for continued topline growth. As consumer awareness of and
demand for hemp-based foods increases, Manitoba Harvest will continue to leverage its market leadership and strong brand
awareness to grow through existing customers, broadened distribution, new product launches, and expanded ingredients
business.
Increasing consumer awareness - Manitoba Harvest was founded with the mission to educate consumers on the health
and environmental benefits of hemp-based food products and has taken a grassroots approach to educating consumers.
Management estimates that its team interacted directly with more than half a million consumers and distributed more
than two million samples to consumers in 2017. Public relations outreach yielded more than 50 million impressions
in 2017 in a variety of national publications. In addition to sampling, Manitoba Harvest is driving consumer awareness
through media outreach, a growing social media community, digital media and network of brand ambassadors.
Manitoba Harvest is increasing its investment in signage, coupons, in-store displays and product demos at key retailers
in the United States. Educating shoppers in the U.S., many of whom are unaware of the benefits of hemp foods, will
continue to drive sales among shoppers and build relationships at accounts. Manitoba Harvest is also a co-sponsor
of Hemp History Week, an annual event that features hundreds of product demos and promotional events at major
retailers throughout the U.S., including Whole Foods Market.
Continued growth with existing customers - Manitoba Harvest expects to grow same store sales with existing customers
by expanding the presence of their products on the shelf throughout stores through the introduction of new formats, improved
retail product placement and increased investment in merchandising. Manitoba Harvest also partners with its retail customers
to develop new, consumer-centric products, such as the 2015 introduction of the hemp protein smoothie at a large Canadian
retailer. In 2016, the hemp protein smoothies were expanded into all channels in Canada and in the United States.
Expansion into new customers - Management believes it has significant opportunity to enter new grocery customers in
the mainstream grocery channel, both in Canada and the United States. The grocery channels in both the United States
and Canada have experienced significant sales growth in all-natural and organic product categories while sales in traditional
product categories have been flat or decreased. Manitoba Harvest recently expanded its direct sales team to improve access
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and engagement with key retail accounts, adding additional brand ambassadors and territory managers to expand distribution
with mainstream U.S. grocery chains by capitalizing on traditional US grocer emphasis on selling products that align with
broad based consumer demand for healthy eating.
Continued innovation and new product development - In 2016, the company introduced Hemp Heart Toppers, and two
new flavors of Hemp Heart Bites. Additionally, a new portable, single serve format was introduced for Hemp Protein Smoothie
and Hemp Heart Bites. Management plans to continue to innovate on existing product lines through new formats and flavors
as well as continued development of new product categories to broaden customer appeal and increase the number of hemp
food usage occasions.
Expanded ingredient business - With the acquisition of HOCI in December 2015, Manitoba Harvest added a leading
manufacturer and supplier of hemp food products and ingredients. As hemp-based food usage continues to become more
widely adopted, management believes the strategic acquisition of HOCI has positioned the company to capitalize on the
growing opportunity to be the ingredient supplier of choice to other leading food manufacturers in complementary food product
categories.
Research and Development
Manitoba Harvest competes in the natural products industry, which is characterized by research and development and which
yields food product innovations that contribute to human wellness and sustainable development. The scope of research
and development is focused on new product development, product enhancement, process design and improvement,
packaging, and meeting the needs of the expanding international business. Additionally, management utilizes analytics to
manage the evolution of its relationships with its customers, and conducts consumer research during early stages of new
product development initiatives in order to identify key success factors. Manitoba Harvest spent approximately $0.7 million
on research and development in 2017, $0.3 million on research and development in 2016, and $0.1 million on research and
development during 2015 (post-acquisition).
Customers and Distributions Channels
Manitoba Harvest sells its products through four primary retail channels: natural foods, club, conventional grocery, and e-
commerce. After initially establishing the authenticity of its brand and products in the natural channel at retailers such as
Whole Foods Markets and Sprouts, Manitoba Harvest expanded into the club and grocery channel, initially in Canada, and
then in the United States and internationally. In addition, the company sells their hemp food products and ingredients to
value-added manufacturers to be used in hemp cereals, hemp milk, nutrition and protein bars and powders, baked goods
and salad dressings.
Manitoba Harvest's three largest customers accounted for approximately 36% of total sales in 2017, 47% of total sales in
2016, and approximately 63% of total sales during 2015 (post acquisition). In 2017, approximately 57% of Manitoba Harvest's
gross sales were to customers in the United States and approximately 38% were to customers in Canada. The remaining
5% were primarily to customers in a broad range of international locations. In 2016, approximately 53% of Manitoba Harvest's
gross sales were to customers in the United Sates and approximately 36% of gross sales were to customers within Canada.
The remaining 11% of gross sales were primarily to customers in Asia.
Sales and Marketing
Manitoba Harvest grows sales within existing retail partners by educating and engaging potential customers through in-store
demos, consumer events and sampling.
In addition to partnering with national natural food channel brokers, Manitoba Harvest’s sales organization consists of sales
professionals with direct sales coverage of over 1,000 retail locations. The sales force is led by the Senior Vice President
of Sales and consists of sales managers, territory managers and brand ambassadors dedicated to specific regions in Canada
and the United States. Manitoba Harvest’s sales force is focused on the natural, club and grocery channels, through direct
key account coverage and winning sales through a focus on data for category and customer management. In addition to
direct sales, the company uses a network of distributors to service many of its customers.
Manitoba Harvest focuses the majority of sales spending in three key areas: demonstrations/sampling, fixed trade spending
and promotions. Successful product demonstrations within the club and grocery channels have helped drive increased sales
productivity. Manitoba Harvest utilizes fixed trade spending to secure end-cap positions, ad space and off-shelf displays at
various retailers. Additionally, they strategically utilize promotions to position its products in prime display space at retailers.
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Competition
The emerging hemp foods category has a limited number of participants that offer a minimal number of hemp-based products
while focusing on a broader assortment of food items. While increasing, competition remains limited due to restricted raw
hemp seed access in the United States. Manitoba Harvest’s strong supplier relationships, regulated access to hemp seeds
and deep knowledge of the growing and harvesting of hemp afford the company with a unique competitive advantage.
Manitoba Harvest has the highest level of global certification in food safety and quality and is the first and only hemp-based
food company to achieve British Retail Consortium (“BRC”) Global Food Safety Initiative certification.
Suppliers
Manitoba Harvest is strategically located near their supply of hemp in Canada. The commercial cultivation of hemp was
authorized in Canada in 1998 with the implementation of the Canadian Industrial Hemp Regulations. This governs the
cultivation, processing, transportation, sale, import and export of industrial hemp. Industrial hemp is viewed by the Canadian
and agricultural industry as a valuable new alternative crop that complements crop production rotations and offers significant
economic opportunity through numerous end uses. The prairie provinces of Manitoba, Saskatchewan and Alberta have
emerged as a leading region for growing hemp due to the ideal agricultural characteristics: a long growing season, sufficient
moisture levels, and supportive local governments that view hemp as a strategic crop. The adaptability of hemp makes it
ideal for areas of the provinces that have limited cropping options and where high value crops such as edible beans and
sunflowers are considered high risk.
Based on its proximity to many of its growers, Manitoba Harvest has developed long-standing relationships with hemp
suppliers and currently maintains relationships that provide access to over 60% of the hemp acreage in Canada. Manitoba
Harvest has a rigorous qualification process for its suppliers - maintaining an ongoing supplier scorecard and choosing to
purchase hemp from high quality growers. With limited exception, farmers working with Manitoba Harvest are exclusive to
them. Manitoba Harvest works with approximately 110 conventional hemp growers (48,750 acres), approximately 20 organic
growers (18,000 acres), and 7 hemp seed cleaners. As early leaders of the hemp legalization movement, Manitoba Harvest’s
founders have developed in-house expertise on the plant, which they share with their hemp grower partners to help them
achieve optimal yield and quality harvests.
Manitoba Harvest processes 100% of its Hemp Hearts, hemp oil and protein powder at its dedicated hemp food products
manufacturing facility. Manitoba Harvest has leveraged nearly two decades of hemp food manufacturing expertise and has
worked with research scientists to develop proprietary processing technology that is specific to hemp. Their facility in Winnipeg
is 32,000 square feet and has an annual processing capacity of 35 million pounds of hemp seed. With the acquisition of
HOCI in December 2015, Manitoba Harvest added a newly constructed 37,000 square foot facility capable of processing 50
million pounds of hemp seed.
Intellectual Property
Manitoba Harvest relies on brand name recognition and premium natural and organic offerings in the hemp food market to
differentiate itself from the competition. Manitoba Harvest holds several trademark registrations in multiple jurisdictions,
primarily the United States and Canada.
Regulatory Environment
Management is not aware of any existing, pending or contingent liabilities that could have a material adverse effect on
Manitoba Harvest’s business. Manitoba Harvest is proactive regarding regulatory issues and is in compliance with all relevant
regulations. Management is not aware of any potential environmental issues.
Employees
As of December 31, 2017, Manitoba Harvest employed approximately 140 persons. None of Manitoba Harvest's employees
are subject to collective bargaining agreements. Manitoba Harvest believes its relationship with its employees is good.
33
Niche Industrial Businesses
Advanced Circuits
Overview
Advanced Circuits, headquartered in Aurora, Colorado, is a provider of small-run, quick-turn and production rigid PCBs,
throughout the United States. Advanced Circuits also provides its customers with assembly services in order to meet its
customers’ complete PCB needs. The small-run and quick-turn portions of the PCB industry are characterized by customers
requiring high levels of responsiveness, technical support and timely delivery. Due to the critical roles that PCBs play in the
research and development process of electronics, customers often place more emphasis on the turnaround time and quality
of a customized PCB than on the price. Advanced Circuits meets this market need by manufacturing and delivering custom
PCBs in as little as 24 hours, providing customers with over 98% error-free production and real-time customer service and
product tracking 24 hours per day.
History of Advanced Circuits
Advanced Circuits commenced operations in 1989 through the acquisition of a small Denver-based PCB manufacturer.
During its first years of operations, Advanced Circuits focused exclusively on manufacturing high volume, production run
PCBs with a small group of proportionately large customers. After the loss of a significant customer in the early 1990s,
Advanced Circuits began focusing on developing a diverse customer base, and in particular, on meeting the demands of
equipment manufacturers with low-volume, high-margin, customized small-run and quick-turn PCBs.
We purchased a controlling interest in Advanced Circuits on May 16, 2006. Since our acquisition, Advanced Circuits has
completed several add-on acquisitions that expanded their customer base in various industries and sectors, including the
aerospace and defense industry and the long-lead sector. Over 50% of Advanced Circuits’ sales are derived from highly
profitable small-run and quick-turn production PCBs. Advanced Circuits’ success is demonstrated by its broad base of over
11,000 customers with which it does business throughout the year.
Industry
The PCB industry, which consists of both large global PCB manufacturers and small regional PCB manufacturers, is a vital
component to all electronic equipment supply chains, as PCBs serve as the foundation for virtually all electronic products,
including cellular telephones, appliances, personal computers, routers, switches and network servers. PCBs are used by
manufacturers of these types of electronic products, as well as by persons and teams engaged in research and development
of new types of equipment and technologies.
Several significant trends are present within the PCB manufacturing industry. Production of PCBs in North America has
declined in recent years due to increased competition for volume production of PCBs from Asian competitors benefiting from
both lower labor costs and less restrictive waste and environmental regulations. Asian based manufacturers of PCBs are
capitalizing on their lower labor costs and increasing their market share of volume production PCBs, which are used in high
volume consumer electronics application such as computers and cell phones. This “offshoring” of high-volume production
orders has placed increased pricing pressure and margin compression on many small domestic manufacturers that are no
longer operating at full capacity. Many of these small producers are choosing to cease operations, rather than operate at a
loss, as their scale, plant design and customer relationships do not allow them to focus profitably on the small-run and quick-
turn sectors of the market. While Asian manufacturers have made large market share gains in the PCB industry overall,
small-run and quick-turn production, some of the more complex volume production, and military production have remained
strong in the United States. Rapid advances in technology are significantly shortening product life-cycles and placing
increased pressure on original equipment manufacturers ("OEMs") to develop new products in shorter periods of time. In
response to these pressures, OEMs invest heavily in research and development, which results in a demand for PCB
companies that can offer engineering support and quick-turn production services to minimize the product development
process. Additionally, increased complexity of electronic equipment requires maintaining the production infrastructure
necessary to manufacture PCBs of increasing complexity. This often requires significant capital expenditures and has acted
to reduce the competitiveness of local and regional PCB manufacturers lacking the scale to make such investments.
Both globally and domestically, the PCB market can be separated into three categories based on required lead time and
order volume:
• Small-run PCBs — These PCBs are typically manufactured for customers in research and development
departments of OEMs, and academic institutions. Small-run PCBs are manufactured to the specifications of the
customer, within certain manufacturing guidelines designed to increase speed and reduce production costs.
Prototyping is a critical stage in the research and development of new products. These small-runs are used in the
design and launch of new electronic equipment and are typically ordered in volumes of 1 to 50 PCBs. Because the
small-run is used primarily in the research and development phase of a new electronic product, the life cycle is
relatively short and requires accelerated delivery time frames of usually less than five days and very high, error-free
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quality. Order, production and delivery time, as well as responsiveness with respect to each, are key factors for
customers as PCBs are indispensable to their research and development activities.
• Quick-Turn Production PCBs — These PCBs are used for intermediate stages of testing for new products prior
to full scale production. After a new product has successfully completed the small-run phase, customers undergo
test marketing and other technical testing. This stage requires production of larger quantities of PCBs in a short
period of time, generally 10 days or less, while it does not yet require high production volumes. This transition stage
between low-volume small-run production and volume production is known as quick-turn production. Manufacturing
specifications conform strictly to end product requirements and order quantities are typically in volumes of 10 to
500. Similar to small-run PCBs, response time remains crucial as the delivery of quick-turn PCBs can be a gating
item in the development of electronic products. Orders for quick-turn production PCBs conform specifically to the
customer’s exact end product requirements.
• Volume Production PCBs — These PCBs, which we sometimes refer to as “long lead” and “sub-contract” are used
in the full scale production of electronic equipment and specifications conform strictly to end product requirements.
Volume Production PCBs are ordered in large quantities, usually over 100 units, and response time is less important,
ranging between 15 days to 10 weeks or more.
These categories can be further distinguished based on board complexity, with each portion facing different competitive
threats. Advanced Circuits competes largely in the small-run and quick-turn production portions of the North American market,
which have not been significantly impacted by Asian-based manufacturers due to the quick response time required for these
products. Management believes the North American PCB market was estimated to be approximately $3.5 billion in 2017.
Products and Services
A PCB is comprised of layers of laminate and contains patterns of electrical circuitry to connect electronic components.
Advanced Circuits typically manufactures 2 to 20 layer PCBs, and has the capability to manufacture even higher layer PCBs.
The level of PCB complexity is determined by several characteristics, including size, layer count, density (line width and
spacing), materials and functionality. Beyond complexity, a PCB’s unit cost is determined by the quantity of identical units
ordered, as engineering and production setup costs per unit decrease with order volume, and required production time, as
longer times often allow increased efficiencies and better production management. Advanced Circuits primarily manufactures
lower complexity PCBs.
Advanced Circuits assists its customers throughout the life-cycle of their products, from product conception through volume
production. Advanced Circuits works closely with customers throughout each phase of the PCB development process,
beginning with the PCB design verification stage using its unique online FreeDFM.com tool, FreeDFM.com™, which enables
customers to receive a free manufacturability assessment report within minutes, resolving design problems that would prohibit
manufacturability before the order process is completed and manufacturing begins. The combination of Advanced Circuits’
user-friendly website and its design verification tool reduces the amount of human labor involved in the manufacture of each
order as PCBs move from Advanced Circuits’ website directly to its computer numerical control, or CNC, machines for
production, saving Advanced Circuits and customers cost and time. As a result of its ability to rapidly and reliably respond
to the critical customer requirements, Advanced Circuits receives a premium for their small-run and quick-turn PCBs as
compared to volume production PCBs.
Advanced Circuits manufactures all high margin small-runs and quick-turn orders internally and occasionally utilizes external
partners to manufacture production orders that do not fit within its capabilities or capacity constraints at a given time. As a
result, Advanced Circuits constantly adjusts the portion of volume production PCBs produced internally to both maximize
profitability and ensure that internal capacity is fully utilized.
The following table shows Advanced Circuits’ gross revenue by products and services for the periods indicated:
Gross Sales by Products and Services (1)
Small-run Production
Quick-Turn Production
Volume Production (including assembly)
Third Party
Total
Year Ended December 31,
2017
2016
2015
20.4%
33.0%
44.8%
1.8%
21.8%
31.8%
45.2%
1.2%
22.5%
31.0%
46.0%
0.5%
100.0%
100.0%
100.0%
(1) As a percentage of gross sales, exclusive of sale discounts.
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Competitive Strengths
Advanced Circuits has established itself as a leading provider of small-run and quick-turn PCBs in North America and focuses
on satisfying customer demand for on-time delivery of high-quality PCBs. Advanced Circuits’ management believes the
following factors differentiate it from many industry competitors:
• Numerous Unique Orders Per Day — Advanced Circuits receives on average over 300 customer orders per day.
Due to the large quantity of orders received, Advanced Circuits is able to combine multiple orders in a single panel
design prior to production. Through this process, Advanced Circuits is able to reduce the number of costly, labor
intensive equipment set-ups required to complete several manufacturing orders. As labor represents the single
largest cost of production, management believes this capability gives Advanced Circuits a unique advantage over
other industry participants.
• Diverse Customer Base — Advanced Circuits possesses a customer base with little industry or customer
concentration exposure. For each of the years ended December 31, 2017, 2016 and 2015, no customer represented
more than 2% of net sales.
• Highly Responsive Culture and Organization — A key strength of Advanced Circuits is its ability to quickly respond
to customer orders and complete the production process. In contrast to many competitors that require a day or more
to offer price quotes on small-run or quick-turn production, Advanced Circuits offers its customers quotes within
seconds and the ability to place or track orders any time of day. In addition, Advanced Circuits’ production facility
operates three shifts per day and is able to ship a customer’s product within 24 hours of receiving its order.
• Proprietary FreeDFM.comTM Software — Advanced Circuits offers its customers unique design verification
services through its online FreeDFM.com tool. This tool enables customers to receive a free manufacturability
assessment report, within minutes, resolving design problems before customers place their orders. The service is
relied upon by many of Advanced Circuits’ customers to reduce design errors and minimize production costs. Beyond
improved customer service, FreeDFM.comTM has the added benefit of improving the efficiency of Advanced Circuits’
engineers, as many routine design problems, which typically require an engineer’s time and attention to identify, are
identified and sent back to customers automatically.
• Established Partner Network — Advanced Circuits has established third party production relationships with PCB
manufacturers in North America and Asia. Through these relationships, Advanced Circuits is able to offer its
customers a complete suite of products including those outside of its core production capabilities. Additionally, these
relationships allow Advanced Circuits to outsource orders for volume production and focus internal capacity on
higher margin, short lead time, production and quick-turn manufacturing.
Business Strategies
Advanced Circuits’ management is focused on strategies to increase market share and further improve operating efficiencies.
The following is a discussion of these strategies:
Increase Portion of Revenue from Small-run and Quick-Turn Production — Advanced Circuits’ management believes
it can grow revenues and cash flow by continuing to leverage its core small-run and quick-turn capabilities. Over its history,
Advanced Circuits has developed a suite of capabilities that management believes allow it to offer a combination of price
and customer service unequaled in the market. Though reductions in military spending have created headwinds in recent
years, Advanced Circuits intends to leverage this factor, as well as its core skill set, to increase net sales derived from higher
margin small-run and quick-turn production PCBs.
Acquire Customers from Local and Regional Competitors — Advanced Circuits’ management believes the majority of
its competition for small-run and quick-turn PCB orders comes from smaller scale local and regional PCB manufacturers.
Advanced Circuits continues to enter into small-run and quick-turn manufacturing relationships with several subscale local
and regional PCB manufacturers. Management believes that while many of these manufacturers maintain strong, long-
standing customer relationships, they are unable to produce PCBs with short turn-around times at competitive prices. As a
result, Advanced Circuits sees an opportunity for growth by providing production support to these manufacturers or direct
support to the customers of these manufacturers, whereby the manufacturers act more as a broker for the relationship.
Remain Committed to Customers and Employees — Advanced Circuits has remained focused on providing the highest
quality products and services to its customers. Management believes this focus has allowed Advanced Circuits to achieve
its outstanding delivery and quality record. Advanced Circuits’ management believes this reputation is a key competitive
differentiator and is focused on maintaining and building upon it. Similarly, management believes its committed base of
employees is a key differentiating factor. Management believes that Advanced Circuits’ emphasis on sharing rewards and
creating a positive work environment has led to increased loyalty. Advanced Circuits plans to continue to focus on similar
programs to maintain this competitive advantage.
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Opportunistically Acquire Smaller PCB Manufacturers — Historically, Advanced Circuits has selectively made tuck-in
acquisitions of regional PCB manufacturers. Management will continue to seek tuck-in acquisitions of smaller PCB
manufacturers where sales and operational efficiencies can be realized, or strategic technical capabilities expanded.
Research and Development
Advanced Circuits engages in continual research and development activities in the ordinary course of business to update
or strengthen its order processing, production and delivery systems. By engaging in these activities, Advanced Circuits
expects to maintain and build upon the competitive strengths from which it benefits currently. Research and development
expenses were not material in each of the last three years.
Customers and Distribution Channels
Advanced Circuits’ focus on customer service and product quality has resulted in a broad base of customers in a variety of
end markets, including industrial, consumer, telecommunications, aerospace/defense, biotechnology and electronics
manufacturing. These customers range in size from large, blue-chip manufacturers to small, not-for-profit university
engineering departments. The following table sets forth management’s estimate of Advanced Circuits’ approximate customer
breakdown by industry sector for the fiscal years ended December 31, 2017, 2016 and 2015:
Industry Sector
Electrical Equipment and Components
Measuring Instruments
Electronics Manufacturing Services
Engineer Services
Industrial and Commercial Machinery
Business Services
Wholesale Trade-Durable Goods
Educational Institutions
Transportation Equipment
All Other Sectors Combined
Total
Customer Distribution
2016
2015
2017
24%
5%
24%
3%
15%
1%
1%
10%
8%
9%
22%
4%
21%
4%
12%
2%
1%
17%
12%
5%
23%
6%
25%
3%
10%
1%
1%
15%
10%
6%
100%
100%
100%
Management estimates that over 75% of its orders are generated from existing customers. Moreover, more than half of
Advanced Circuits’ orders in each of the years 2017, 2016 and 2015 were delivered within five days (not including long-lead
orders). In a typical year, no single customer represents more than 2% of Advanced Circuits’ sales.
Sales and Marketing
Advanced Circuits has established a “consumer products” marketing strategy to both acquire new customers and retain
existing customers. Advanced Circuits uses initiatives such as direct mail postcards, web banners, aggressive pricing specials
and proactive outbound customer call programs as part of this strategy. Advanced Circuits spends approximately 1% of net
sales each year on its marketing initiatives and advertising and has employees organized geographically throughout North
America dedicated to its marketing and sales efforts. The sales team takes a systematic approach to placing sales calls
and receiving inquiries and, on average, will place over 200 outbound sales calls and receive approximately 140 inbound
phone inquiries per day. Beyond proactive customer acquisition initiatives, management believes a substantial portion of
new customers are acquired through referrals from existing customers. In addition, other customers are acquired on-line
where Advanced Circuits generates over 90% of its orders from its website. Substantially all revenue is derived from sales
within the United States.
Advanced Circuits, due to the volume of small-run and quick turn sales, had a negligible amount in firm backlog orders at
December 31, 2017 and 2016.
Competition
There are currently an estimated 170 active domestic PCB manufacturers. Advanced Circuits’ competitors differ amongst
its products and services.
Competitors in the small-run and quick-turn PCBs production industry include larger companies as well as small domestic
manufacturers. The largest independent domestic small-run and quick-turn PCB manufacturer in North America is TTM
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Technologies, Inc. Though this company produces small-run PCBs to varying degrees, in many ways it is not a direct
competitor with Advanced Circuits. In recent years, larger competitors have primarily focused on producing boards with
greater complexity in response to the offshoring of low and medium layer count technology to Asia. Compared to Advanced
Circuits, small-run and quick-turn PCB production accounts for much smaller portions of larger competitors revenues. Further,
these competitors often have much greater customer concentrations and a greater portion of sales through large electronics
manufacturing services intermediaries. Beyond large, public companies, Advanced Circuits’ competitors include numerous
small, local and regional manufacturers, often with revenues under $20 million that have long-term customer relationships
and typically produce both small-run and quick-turn PCBs and production PCBs for small OEMs and EMS companies. The
competitive factors in small-run and quick-turn production PCBs are response time, quality, error-free production and customer
service. Competitors in the long lead-time production PCBs generally include large companies, including Asian manufacturers,
where price is the key competitive factor.
New market entrants into small-run and quick-turn production PCBs confront substantial barriers including significant
investments in equipment, highly skilled workforce with extensive engineering knowledge and compliance with environmental
regulations. Beyond these tangible barriers, Advanced Circuits’ management believes that its network of customers,
established over the last two decades, would be very difficult for a competitor to replicate.
Suppliers
Advanced Circuits’ raw materials inventory is small relative to sales and must be regularly and rapidly replenished. Advanced
Circuits uses a just-in-time procurement practice to maintain raw materials inventory at low levels. Additionally, Advanced
Circuits has established consignment relationships with several vendors allowing it to pay for raw materials as used. Because
it provides primarily lower-volume quick-turn services, this inventory policy does not hamper its ability to complete customer
orders. Raw material costs constituted approximately 21%, 19% and 20% of net sales for each of the fiscal years ended
December 31, 2017, 2016 and 2015, respectively.
The primary raw materials that are used in production are core materials, such as copper clad layers of glass and chemical
solutions, and copper and gold for plating operations, photographic film and carbide drill bits. Multiple suppliers and sources
exist for all materials. Adequate amounts of all raw materials have been available in the past, and Advanced Circuits’
management believes this will continue in the foreseeable future. Advanced Circuits works closely with its suppliers to
incorporate technological advances in the raw materials they purchase. Advanced Circuits does not believe that it has
significant exposure to fluctuations in raw material prices. The fact that price is not the primary factor affecting the purchase
decision of many of Advanced Circuits’ customers has allowed management to historically pass along a portion of raw material
price increases to its customers. Advanced Circuits does not knowingly purchase material originating in the Democratic
Republic of the Congo or adjoining countries.
Intellectual Property
Advanced Circuits seeks to protect certain proprietary technology by entering into confidentiality and non-disclosure
agreements with its employees, consultants and customers, as needed, and generally limits access to and distribution of its
proprietary information and processes. Advanced Circuits’ management does not believe that patents are critical to protecting
Advanced Circuits’ core intellectual property, but, rather, its effective and quick execution of fabrication techniques, its website
FreeDFM.com™ and its highly skilled workforce are the primary factors in maintaining its competitive position.
Advanced Circuits uses the following brand names: FreeDFM.com™, 4pcb.com™, 4PCB.com™, 33each.com™,
barebonespcb.com™ and Advanced Circuits™. These trade names have strong brand equity and are material to Advanced
Circuits’ business.
Regulatory Environment
Advanced Circuits’ manufacturing operations and facilities are subject to evolving federal, state and local environmental and
occupational health and safety laws and regulations. These include laws and regulations governing air emissions, wastewater
discharge and the storage and handling of chemicals and hazardous substances. Management believes that Advanced
Circuits is in compliance, in all material respects, with applicable environmental and occupational health and safety laws and
regulations. New requirements, more stringent application of existing requirements, or discovery of previously unknown
environmental conditions may result in material environmental expenditures in the future. Advanced Circuits has been
recognized three times for exemplary environmental compliance and it was awarded the Denver Metro Wastewater
Reclamation District Gold Award the seven of the last ten years.
Employees
As of December 31, 2017, Advanced Circuits employed 523 persons. None of Advanced Circuits’ employees are subject
to collective bargaining agreements. Advanced Circuits believes its relationship with its employees is good.
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Arnold
Overview
Headquartered in Rochester, New York, Arnold serves a variety of markets including aerospace and defense, motorsport/
automotive, oil and gas, medical, general industrial, energy, reprographics and advertising specialties. Over the course of
100+ years, Arnold has successfully evolved and adapted our products, technologies, and manufacturing presence to meet
the demands of current and emerging markets. Arnold has expanded globally and built strong relationships with our customers
worldwide. As a result, Arnold has led the way in our chosen industries with new materials and solutions that empower our
customers to develop next generation technologies. Arnold is the largest and, we believe, the most technically advanced
U.S. manufacturer of engineered magnetic systems. Arnold is one of two domestic producers to design, engineer and
manufacture rare earth magnetic solutions. Arnold serves customers and generates revenues via three business units:
• PMAG - Permanent Magnets and Assemblies Group- Arnold’s high performance permanent magnets have a wide
variety of applications, from electric motors on military ships, military and commercial aircraft, and motorsport to
pump couplings, batteries, solar panels and NMR Equipment.
• Precision Thin Metals - Produces thin and ultra-thin alloys that improve the power density of motors, transformers,
batteries and many other applications in automotive, aerospace, energy exploration, industrial and medical markets.
•
Flexmag™ - The highest quality flexible magnetic sheet and strip for over a quarter of a century, Flexmag products
cover a wide range of applications, from industrial, automotive and medical applications to signage, displays and
novelty items.
Arnold operates 9 manufacturing facilities worldwide split under the three business units shown above but functions as one
company and one team.
History of Arnold
Arnold was founded in 1895 as the Arnold Electric Power Station Company. Arnold began producing AlNiCo permanent
magnets in its Marengo, Illinois facility in the mid-1930s. In 1946, Allegheny Ludlum Steel Corporation (Allegheny) purchased
Arnold, and over the next few years began production of several additional magnetic product lines under license agreement
with the Western Electric Company. In 1970, Arnold acquired Ogallala Electronics, which manufactured high power coils
and electromagnets.
SPS Technologies (SPS), at the time a publicly traded company, purchased Arnold Engineering Company from Allegheny
in 1986. Under SPS, Arnold made a series of acquisitions and partnerships to expand its portfolio and geographic reach. In
2003, Precision Castparts, also a publicly traded company, acquired SPS. In January 2005, Audax, a Boston-based private
equity firm acquired Arnold from Precision Castparts.
In February 2007, Arnold Magnetic Technologies completed the acquisition of Precision Magnetics, which expanded its
geographic footprint to include operations in Sheffield, England and Lupfig, Switzerland. In addition, Arnold’s Lupfig,
Switzerland operation is a joint venture partner with a Chinese rare earth producer. The joint venture manufactures RECOMA®
Samarium Cobalt blocks for select markets.
In 2016 Arnold developed and launched the world’s strongest Samarium Cobalt magnet grade, RECOMA 35E, that enables
significant opportunity for increased performance in smaller packages, and at higher temperatures, with no trade off in stability.
We purchased a majority interest in Arnold on March 5, 2012. With the support of CODI, Arnold has made significant
investment to support future growth strategies.
Industry
Permanent Magnets
There exists a broad range of permanent magnets which include Rare Earth Magnets and magnets made from specialty
magnetic alloys. Magnets produced from these materials may be sliced, ground, coated and magnetized to customer
requirements. Those industry players with the broadest portfolio of these magnets, such as Arnold, maintain a significant
competitive advantage over competitors as they are able to offer one-stop shop capabilities to customers. Management
believes that being a manufacturer of these magnets, subject to patent rights, is another critical market advantage.
Magnetic Assemblies- Arnold offers complex, customized value added magnetic assemblies. These assemblies are used in
devices such as motors, generators, beam focusing arrays, sensors, and solenoid actuators. Magnetic assembly production
capabilities include magnet fabrication, machining, encapsulation or sleeving, balancing, and field mapping.
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Precision Strip and Foil
Precision rolled thin metal foil products are manufactured from a wide range of materials for use in applications such as
transformers, motor laminations, honeycomb structures, shielding, and composite structures. These products are commonly
found in security tags, medical implants, aerospace structures, batteries and speaker domes. Arnold has the expertise and
capability to roll, anneal, slit and coat a wide range of materials to extremely thin gauges (2.5 microns) and exacting tolerances.
Flexible Magnets
Flexible magnet products span the range of applications from advertising (refrigerator magnets and displays) to medical
applications (needle counters) to sealing and holding applications (door gaskets).
Products and Services
Permanent Magnets and Assemblies Group
Arnold’s Permanent Magnets and Assemblies Group (PMAG) segment is a leading global manufacturer of precision magnetic
assemblies and high-performance magnets. The segment’s products include tight tolerance assemblies consisting of many
dozens of components and employing RECOMA® SmCo, Neo, and AlNiCo magnets. These products are sold to a wide
range of industries including aerospace and defense, motorsport/ automotive, oil and gas, medical, general industrial, energy
and reprographics. Arnold has established a reputation in the magnetic industry as the engineering solutions provider,
assisting customers to ensure their critical assemblies meet expectations.
PMAG is Arnold’s largest business unit representing approximately 72% of Arnold sales on an annualized basis (including
Reprographics) with a global footprint including manufacturing facilities in the U.S., U.K., Switzerland, and China.
PMAG—Products and Applications:
• High precision magnetic rotors for use in electric motors and generators. Typically used in demanding applications
such as aerospace, oil and gas exploration, energy recovery systems and under the hood automotive
• Sealed pump couplings
• Beam focusing assemblies such as traveling wave tubes
• Oil & Gas NMR tools as well as pipeline inspection and down hole power generation
•
Linear positioning Hall effect sensor systems
Rare Earth Magnets
• Samarium Cobalt (SmCo) - SmCo magnets are typically used in critical applications that require corrosion resistance
or high temperature stability, such as motors, generators, actuators and sensors. Arnold markets its SmCo magnets
under the trade name of RECOMA ®, and is DFARS (Defense Federal Acquisition Regulation) compliant.
• Neodymium (Neo) - Neo magnets offer the highest magnetic energy level of any material in the market. Applications
include motors and generators, VCM’s, magnetic resonance imaging, magnetic inspection systems, sensors and
loudspeakers.
Other Permanent Magnet Types
• AlNiCo - The AlNiCo family of magnets remains a preferred material for many mission critical applications. Its
favorable linear temperature characteristics, high magnetic flux density and good corrosion resistance are ideally
suited for use in applications requiring magnetic stability. This material is manufactured by Arnold in the United
States, making it a DFARS compliant material.
• Hard Ferrite - Hard ferrite (ceramic) magnets were developed as a low cost alternative to metallic magnets (steel
and AlNiCo). Although they exhibit lower energy when compared to other materials available today and are relatively
brittle, ferrite magnets have gained acceptance due to their low price per magnetic output.
•
Injection Molded - Injection molded magnets are a composite of various types of resin and magnetic powders. The
physical and magnetic properties of the product depend on the raw materials, but are generally lower in magnetic
strength and resemble plastics in their physical properties. However, a major benefit of the injection molding process
is that magnet material can be injection or over-molded, eliminating subsequent manufacturing steps.
Precision Thin Metals
Arnold’s precision thin metals segment manufactures precision thin strip and foil products from an array of materials and
represents approximately 8% of Arnold sales on an annualized basis. The Precision Thin Metals segment serves the
aerospace and defense, power transmission, alternative energy (hybrids, wind, battery, solar), medical, security, and general
industrial end-markets. With top-of-the-line equipment and superior engineering, Precision Thin Metals has developed unique
40
processing capabilities that allow it to produce foils and strip with precision and quality that are unmatched in the industry
(down to 1/10th thickness of a human hair). In addition, the segment’s facility is capable of increasing production from current
levels with its existing equipment and is, we believe, well-positioned to realize future growth.
Precision Thin Metals—Products and Applications:
• Electrical steels for hybrid propulsion systems, electric motors, and micro turbines
• Security and product ID tags
• Honeycomb structures for aerospace applications
•
Irradiation windows
• Batteries
• Military countermeasures
Flexmag
Arnold is one of two North American manufacturers of flexible rubber magnets for specialty advertising, medical, and
reprographic applications. Flexmag represents approximately 20% of Arnold sales on an annualized basis. It primarily sells
its products to specialty advertisers and original equipment manufacturers. With highly automated manufacturing processes,
Flexmag can accommodate customers required short lead times. Flexmag benefits from a loyal customer base and significant
barriers to entry in the industry. Flexmag’s success is driven by superior customer service, and proprietary formulations
offering enhanced product performance.
Flexmag—Products and Applications:
• Extruded and calendared flexible rubber magnets with optional laminated printable substrates
• Retail displays
•
Theft detection/ security
• Seals and enclosures
• Signage for various advertising and promotions
Competitive Strengths
Competitive Landscape
The specialty magnetic systems industry is highly fragmented, creating a competitive landscape with a variety of magnetic
component manufacturers. However, few have the breadth of capabilities that Arnold possesses. Manufacturers compete
on the basis of technical innovation, co-development capabilities, time-to-market, quality, geographic reach and total cost of
ownership. Industry competitors relevant to Arnold’s served markets range from large multinational manufacturers to small,
regional participants. Given these dynamics, we believe the industry will likely favor players that are able to achieve vertical
integration and a diversification of offerings across a breadth of products along with magnet engineering and design expertise.
The focus will be engineering solutions together with our customers.
Barriers to Entry
•
Low Substitution Risk – Arnold’s solutions are typically specified into its customers’ program designs through a co-
development and qualification process that often takes 6-18 months. Arnold’s customers are typically contractors
and component manufacturers whose products are integrated into end-customers’ applications. The high cost of
failure, relatively low proportionate cost of magnets to the final product, sometimes lengthy testing and qualification
process, and substantial upfront co-engineering investment required, represent significant barriers to customers
changing solution providers such as Arnold.
• Equipment and Processing – Arnold’s existing base of production equipment has a significant estimated replacement
cost. A new entrant could require as much as 2-3 years of lead time to match the process performance requirements,
customization of equipment and material formulations necessary to effectively compete in the specialty magnet
industry. Further, given the program nature of a majority Arnold’s sales, management estimates that it could take
5-10 years to build a sufficient book of business and base of institutional knowledge to generate positive cash flow
out of a new manufacturing plant.
Business Strategies
Engineering and Product Development
Arnold’s engineers work closely with the customer to provide system solutions, representing a significant competitive
advantage. Arnold’s engineering expertise is leveraged with state-of-the-art technology across the various business units
located in North America, Europe and Asia Pacific. Arnold’s engineers work with customers on a global basis to optimize
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designs, guide material choices, and create magnetic models resulting in Arnold’s products being specified into customer
designs.
Arnold has a talented and experienced engineering staff of design and application experts, quality personnel and technicians.
Included in this team are engineers with backgrounds in materials science, physics, and metallurgical engineering. Other
members of the team bring backgrounds in ceramics, mechanical engineering, chemical engineering and electrical
engineering.
Arnold continues to be an industry leader with regard to new product formulations and innovations. As evidence of this,
Arnold currently relies on a deep portfolio of “trade secrets” and internal intellectual property. Arnold continuously endeavors
to introduce magnet solutions that exceed the performance of current offerings and meet customer design specifications.
Growth in Arnold’s business is primarily focused in three areas:
(i) Growing market share in existing end-markets and geographies, with a focus on aerospace and defense, medical
and niche industrial systems;
(ii) Vertical integration through new products and technologies;
(iii) Completing opportunistic acquisitions and partnerships to reduce product introduction and market penetration
time.
Existing End-Markets and Geographies
Aerospace and Defense
In the aerospace and defense sector, Arnold is selling magnets, magnetic assemblies and ultra-thin foil solutions. Specifically,
in the aerospace industry, Arnold’s assemblies have been designed into products, which enables Arnold to benefit from the
market growth and a healthy flow of business based on current airframe orders. Through its OEM customers, essentially all
new commercial aircraft placed in service contain assemblies produced by Arnold. Arnold’s sales to large aerospace and
defense manufacturers includes magnetic assemblies used in applications such as motors and generators, actuators, trigger
mechanisms, and guidance systems, as well as magnets for these and other uses. In addition, it sells its ultra-thin foil for
use in military countermeasures, honeycomb structures, brazing alloys, and motor laminations.
Motorsport / Automotive
Arnold produces high performance motor components and sub-assemblies for motorsport and automotive applications, such
as Kinetic Energy Recovery System, which includes a composite sleeved RECOMA® SmCo magnet rotor for a 50,000+
RPM, 100KW+ system and Electric Turbo Chargers that operate at > 100,000 RPM. Further emerging magnetic applications
include electric traction drives, regenerative braking systems, starter generators, and electric turbo charging. As much of
this technology utilizes magnetic systems, Arnold expects to benefit from this trend.
Oil and Gas
Arnold currently provides magnets and precision assemblies for use in oil and gas exploration and production, applications
which typically require exceptional collaboration and co-development with its customers. Arnold supplies products used in
applications such as a new oil well shutoff valve, a new down-hole logging while drilling tool, and a down-hole magnetic
transfer coupling. Other applications for which Arnold is actively involved include pipeline inspection, wireless tomography
tools, and chip collection.
Medical
Within the medical sector, Arnold provides magnetic assemblies, magnets, flexible magnets, and ultrathin foils. Its magnet
assemblies and magnets are critical parts of motor systems for dental instruments as well as saws and grinders. Magnet
assemblies are also provided for skin expansion systems, shunt valves, and position sensors. In addition, its Precision Thin
Metals business unit is providing a specialty alloy for advanced breast cancer treatment.
General Industrial
Within the industrial sector, Arnold provides magnet assemblies as well as magnets for custom made motor systems. These
include stepper motors, pick and place robotic systems, and new designs that are increasingly being required by regulation
to meet energy efficiency standards. An example is a motor utilizing Arnold’s bonded magnets for use in commercial
refrigeration systems. Arnold also produces magnetic couplings for seal-less pumps used in chemical and oil & gas
applications that allow chemical companies to meet environmental requirements.
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Energy
Arnold’s Precision Thin Metals segment supplies grain-oriented silicon steel produced with proprietary methods for use in
transformers and inductors. These cores allow for the production of very efficient transformers and inductors while minimizing
size. In addition, Arnold’s magnet solutions can be found in advanced automatic circuit re-closer solutions that substantially
reduce the stress on system components on the grid. Arnold’s solutions are also present in new power storage systems.
The permanent magnet bearings used in new designs improve the efficiency of the flywheel energy storage system.
Research and Development
Arnold has a core research and development team, which has collectively over 120 years of combined industry experience.
In addition to the core engineering group, a large number of other Arnold staff members assigned to the business units
contribute to the research and development effort at various stages. Product development also includes collaborating with
customers and field testing. This feedback helps ensure products will meet Arnold’s demanding standards of excellence as
well as the constantly changing needs of end users. Arnold’s research and development activities are supported by state-
of-the-art engineering software design tools, integrated manufacturing facilities and a performance testing center equipped
to ensure product safety, durability and superior performance.
Customers and Distribution Channels
Arnold’s focus on customer service and product quality has resulted in a broad base of customers in a variety of end markets.
Products are used in applications such as aerospace and defense, motorsport / automotive, oil and gas, medical, general
industrial, energy, reprographics ,and advertising specialties.
The following table sets forth management’s estimate of Arnold’s approximate customer breakdown by industry sector for
the fiscal years ended December 31, 2017, 2016 and 2015:
Industry Sector
Aerospace and Defense
Motorsport/ automotive
Oil and Gas
Medical
General Industrial
Energy
Reprographic
Advertising specialties
All Other Sectors Combined
Total
Customer Distribution
2017
2016
2015
25%
13%
4%
3%
28%
4%
7%
13%
3%
28%
12%
2%
3%
24%
3%
11%
13%
4%
23%
9%
6%
3%
24%
7%
11%
13%
4%
100%
100%
100%
Arnold has a large and diverse, blue-chip customer base. Sales to Arnold’s top ten customers were 24% of total sales for
the year ended December 31, 2017, 29% of total sales for the year ended December 31, 2016, and 33% of total sales for
the year ended December 31, 2015. No customer represented greater that 10% of Arnold’s annual revenue in 2017.
Sales and Marketing
Arnold has a global team of direct sales and marketing professionals and critical design and application engineers for each
of its product lines. The Arnold sales force is organized for regional coverage with a focus on sales in the U.S., Europe, and
Asia-Pacific. The majority of revenues for each business unit are project based, and Arnold’s highly-qualified application
engineers are often integrated into its customers’ product design, planning, and implementation phases, offering the most
cost-effective solution for demanding clients.
The following table sets forth Arnold’s net sales by geographic location for the fiscal years ended December 31, 2017, 2016
and 2015:
Geographic location
North America
Europe
Asia Pacific
Total
2017
2016
2015
63%
32%
5%
100%
66%
28%
6%
100%
66%
28%
6%
100%
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Arnold had firm backlog orders totaling approximately $43.7 million and $28.1 million, respectively, at December 31, 2017
and 2016.
Competition
Management believes the following companies represent Arnold’s top competitors:
• Magnum Magnetics Corporation
• Dexter Magnetic Technologies
• Electron Energy Corp
• Vacuumschmelze Gruner
•
Thomas & Skinner
Suppliers
Raw materials utilized by Arnold include nickel and cobalt, stainless steel shafts, Inconel sleeves, adhesives, laminates,
aluminum extrusions and binders. Although Arnold considers its relationships with vendors to be strong, Arnold’s management
team also maintains a variety of alternative sources of comparable quality, quantity and price. The management team therefore
believes that it is not dependent upon any single vendor to meet its sourcing needs. Arnold is generally able to pass through
material costs to its customers and believes that in the event of significant price increases by vendors that it could pass the
increases to its customers.
Intellectual Property
Arnold currently relies on a deep portfolio of “trade secrets” and internal intellectual property.
Patents
Arnold currently has 1 patent in force in the United States. Arnold also has one pending patent application in the United
States and corresponding pending applications in Europe and Japan.
Trademarks
Arnold currently has 86 trademarks, 12 of which are in the U.S. The most notable trademarked items are the following:
“RECOMA”, “PLASTIFORM”, “FLEXMAG” & “ARNOLD”. Application dates for various trademarks date back to as early as
1960.
Regulatory Environment
Arnold’s domestic manufacturing and assembly operations and its facilities are subject to evolving Federal, state and local
environmental and occupational health and safety laws and regulations. These include laws and regulations governing air
emissions, wastewater discharge and the storage and handling of chemicals and hazardous substances. Arnold’s foreign
manufacturing and assembly operations are also subject to local environmental and occupational health and safety laws
and regulations. Management believes that Arnold is in compliance, in all material respects, with applicable environmental
and occupational health and safety laws and regulations. New requirements, more stringent application of existing
requirements, or discovery of previously unknown environmental conditions could result in material environmental
expenditures in the future.
Arnold is a major producer of both Samarium Cobalt permanent magnets under its brand name RECOMA® and Alnico (in
both cast and sintered forms). Both materials from Arnold meet the current Berry Amendment or Defense Federal Acquisition
Regulations Systems (DFARS) requirements per clause 252.225.7014 further described under 10 U.S.C. 2533b. This
provision covers the protection of strategic materials critical to national security. These magnet types are considered “specialty
metals” under these regulations.
Employees
Arnold is led by a capable management team of industry veterans that possess a balanced combination of industry experience
and operational expertise. Arnold employs approximately 660 hourly and salaried employees located throughout North
America, Europe and Asia. Arnold’s employees are compensated at levels commensurate with industry standards, based
on their respective position and job grade.
Arnold’s workforce is non-union except for approximately 61 hourly employees at its Marengo, Illinois facilities, which are
represented by the International Association of Machinists (IAM). Arnold enjoys good labor relations with its employees and
union and has a three year contract in place with the IAM, which will expire in June 2019.
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Clean Earth
Overview
Headquartered in Hatboro, Pennsylvania, Clean Earth provides environmental services for a variety of contaminated materials
including soils, dredged material, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles
waste streams generated in multiple end markets such as power, construction, oil and gas, medical, infrastructure, industrial
and dredging. Treatment includes thermal desorption, dredged material stabilization, bioremediation, physical treatment/
screening and chemical fixation. Before the company accepts contaminated materials, it identifies a third party “beneficial
reuse” site such as commercial redevelopment or landfill capping where the materials will be sent after they are treated.
Clean Earth operates 24 permitted facilities in the Eastern United States. Revenues from the environmental recycling facilities
are generally recognized at the time of receipt.
History of Clean Earth
Clean Earth was founded in 1990 with the establishment of a contaminated material treatment facility in New Castle, Delaware
focused on processing soils. The treatment of contaminated materials has diversified significantly over the years as Clean
Earth now also processes dredged material, coal ash, hazardous waste and drill cuttings. Clean Earth has been able to grow
consistently via both organic initiatives and acquisition. In 1997, the Company opened Clean Earth of Carteret, which was
the first “fixed-based” bioremediation facility permitted in the State of New Jersey. In 1998, Clean Earth started offering
hazardous waste treatment after acquiring S&W Waste, now Clean Earth of North Jersey, a fully permitted commercial
Resource Conservation and Recovery Act (“RCRA”) Part B Treatment, Storage & Disposal Facility (“TSDF”). That same
year, Clean Earth also expanded services into the treatment of dredged material through the acquisition of Consolidated
Technologies Inc. (now Clean Earth Dredging Technologies). Today, Clean Earth is one of the largest providers of
contaminated materials treatment in the East. In addition to diversifying the number of contaminated materials it handles,
Clean Earth has also significantly expanded its geography. The Company now operates permitted facilities from Connecticut
to Florida, and with its recent acquisitions, Clean Earth has expanded their footprint of permitted facilities to Kentucky, West
Virginia and Alabama.
We purchased a majority interest in Clean Earth on August 26, 2014.
Industry
Overview
The U.S. environmental services industry is highly fragmented, with Clean Earth most closely correlated with the remediation
and hazardous waste management segments of the industry. Historically, growth in these sectors has been primarily driven
by increasing regulations and growing volume of waste generated, and is now positively affected by increases in waste
disposal costs and resulting landfill avoidance trends. Other trends driving growth include increasing concern in corporate
America regarding environmental liabilities and a push by companies to outsource a larger amount of environmental services
to a smaller number of service providers due to increasing compliance costs.
Contaminated Materials
Contamination of soils and other materials is prevalent and often caused by the introduction of chemicals, petroleum
hydrocarbons, solvents, pesticides, lead and other heavy metals into the earth. These contaminants are common in areas
of industrialization and severely impact the environment as a result of inadequate containment or improper disposal. As a
result of their prevalence and impact, these contaminates are subject to ever more stringent environmental regulations which
now govern the handling, treatment, and disposal of these contaminants. As a result, when soil or other materials are removed
from a site, they must be tested. The strong likelihood that materials will contain some level of contamination generates
consistent demand for treatment and beneficial reuse solutions. Contaminated materials are routinely associated with
infrastructure, commercial development, and other excavation projects, heavy industrial activity, spill clean-up or
environmental remediation projects, locations with former manufactured gas plants (“MGP”), underground storage tanks
(“UST”) or aboveground storage tanks, and a wide variety of increasingly regulated waste streams.
Dredge Market
Dredging is the act of removing sediment from the bottom of waterways, both inland (rivers and canals) and ocean (floors,
harbors, channels, etc.), and is performed for both navigational and environmental purposes. Like soil, most dredged material
largely contains some level of contamination, particularly in current or historically industrially active areas. Accordingly, the
Environmental Protection Agency (the "EPA") has established regulations that govern the disposal methods of dredged
material, including the Marine Protection, Research and Sanctuaries Act (“MPRSA”), and the Federal Water Pollution Control
Act, or the Clean Water Act.
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The treatment and beneficial reuse of dredged material began in 1995, when various government entities in New Jersey
and New York permitted a unique project to demonstrate the feasibility of using treated and processed dredged material to
reclaim a former landfill and repurpose it for a new building project. Regulations require contaminated dredge spoils to be
taken upland for treatment or disposal in accordance with Title 33 as administered by the United States Army Corps of
Engineers and the EPA. Once treated, dredged material is used for structural fill and development purposes.
Hazardous Waste
The hazardous waste services industry encompasses the generation, collection, treatment, and ultimate disposal of wastes
classified as hazardous by RCRA. RCRA, the primary law governing the disposal of solid and hazardous waste, was passed
by Congress in 1976 to address increasing problems associated with growing volumes of municipal and industrial waste.
Accidents, spills, leaks, and improper handling and disposal of hazardous materials and waste have resulted in the
contamination of land, water and air in the U.S. The U.S. generated 34 million tons of hazardous waste in 2011, according
to the EPA. These wastes come primarily from three sources, Superfund sites, routine business and the increasingly expanding
waste regulations.
In order to address these environmental hazards, the EPA established a program known as the Superfund, which allows the
EPA to clean up such sites, or to compel responsible parties to perform clean-ups or reimburse the EPA for its clean-up
expenses. This includes regulatory requirements that raise both the monetary and reputational costs for non-compliance.
The Superfund program has identified tens of thousands of sites that require treatment over its more than 20-year history.
Outside of the known Superfund sites, hazardous waste is also generated during the routine course of business and
manufacturing, requiring the same care of handling by a specialized treatment facility. The generation of hazardous waste
is common throughout the chemicals and petrochemical, steel, general manufacturing, government, aerospace and public
utilities industries. Within the U.S., the Northeast region is one of the most densely concentrated areas for generators of
hazardous waste.
In addition to hazardous waste generated by industrial activity, increasingly complex regulations have expanded the scope
of what is considered hazardous waste from non-traditional sources, such as retailers and households. For instance,
environmental regulations require large quantity generators such as big box retailers to dispose of all returned or damaged
products that include pesticides, aerosols, fertilizers and cleaners through a permitted hazardous waste disposal program.
Similarly, household products, such as paints, oils, batteries, fluorescent light bulbs and pesticides, which contain potentially
hazardous ingredients, require special treatment and disposal.
Growing and Increasingly Regulated Waste Streams
Federal, state and local regulators have continuously expanded legal guidelines to include additional waste streams,
becoming increasingly vigilant to ensure the proper treatment and disposal of an ever-increasing number of contaminants.
Two of the most prevalent increasingly regulated waste streams include drill cuttings from natural gas drilling and coal ash,
a byproduct of fossil fuel power plants.
Services
Clean Earth provides services to a variety of customers handling numerous unique sites that often require a range of custom
solutions based upon project-specific factors. Clean Earth provides its core material treatment capabilities and complementary
services. In addition to its treatment offerings, Clean Earth also provides turnkey services that include proper identification
of waste services, management of all transportation and logistics, appropriate testing and analytics, manifesting/
documentation and environmentally compliant placement of treated materials at backend locations.
Site Planning and Sampling
Before work commences, Clean Earth has the ability to conduct waste characterization services consisting of field sampling,
contaminated material collection and laboratory analysis. Properly identifying waste contaminants upfront can be important,
as misclassification leads to mishandling of the waste, which can be costly in terms of fines, penalties, reduced recycling
rates (increased disposal fees), and lost project time. Results are analyzed to assess time, cost and logistics, which give
Clean Earth the ability to provide customers with a disposal recommendation and a cost-effective solution.
Testing and Analytics
Clean Earth utilizes internal and external, fully-certified and approved laboratories that perform field sampling and
contaminated material collection, laboratory analysis, site sampling plans and sampling location diagrams. Laboratory testing
is customizable, and Clean Earth determines appropriate testing methods to assess the quantity and type of contaminant
in the material. Clean Earth analyzes the results to determine an appropriate treatment and beneficial reuse plan specific to
each material. Clean Earth maintains a state-certified hazardous waste laboratory in the New York metropolitan area at its
Kearny, New Jersey facility.
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Transportation and Logistics
Clean Earth operates an asset-light business model in which it arranges for transportation of the materials on behalf of its
customers via pre-qualified independent hauling companies for the vast majority of its volume. Due to Clean Earth’s ability
to provide year-round work for transportation companies and its consistent payment practices, it has developed very strong
and long-standing relationships with its vendors, providing a large pool of available trucks to complete projects efficiently.
Manifesting and Documentation
Clean Earth provides uniform manifests for customer projects that can be used throughout its network of facilities. These
manifests provide tracking of all material moved from a customer site to its facilities and eventually to the final beneficial use
site. Furthermore, these documents are maintained and submitted to regulatory agencies such as the EPA for their review.
Treatment
Clean Earth offers several processes to treat, stabilize and/or decharacterize waste material and subsequently avoid costly
landfill disposal and meet strict regulatory and site-specific requirements before being beneficially reused.
•
Thermal Desorption
Primarily used to treat soil with high levels of volatile contaminants by heating it in a rotating dryer to volatilize and
then subsequently destroy the contaminants
The treated material then enters a soil conditioner (called a pugmill), where it is cooled and rehydrated
Finally, the cooled soil is stockpiled, sampled, and tested by an independent certified laboratory to ensure effective
treatment and fulfillment of reuse standards
This treatment method is primarily used for soils that contain high levels of contaminants, such as soil from
manufactured gas plant sites
• Stabilization of Dredged Material
Dredged sediments are screened to remove large objects and excess water
The remaining material is fed through a conveyor belt to a pugmill mixing system, where proprietary reagent
admixtures are introduced
The resulting material is valued for its geotechnical properties and is beneficially reused as fill material
• Bioremediation
Used to treat soil that is contaminated with petroleum hydrocarbons
Involves inoculating the contaminated material with engineered bacteria and nutrients to break down the
contaminants
The bacteria consume and process the nutrients and the hydrocarbons thereby remediating the contaminants
• Chemical Fixation
Used for light to medium hydrocarbon and/or contaminated material impacted by light or heavy metals
Soil is screened, and paired with chemical additives to formulate a chemically stable and geotechnically desirable
material
• Physical Treatment/Screening
Special sizing and segregation processes remove unsuitable materials from inbound materials to meet site-specific
geotechnical specifications
The segregated material, often rock, can be mixed with other material for reuse or crushed to create aggregate
material for resale
Placement at Backend Sites
Clean Earth maintains a vast network of permitted, active backend locations owned by third parties that utilize its treated
materials to achieve site specifications and/or meet regulatory obligations. Clean Earth operates a system in which before
accepting any material it identifies which specific backend site will accept it and how much it will cost to treat, transport, and
place. Its beneficial reuse solutions serve as an alternative to permitted landfill disposal and incineration. In order to ensure
sufficient capacity for any future project, the Clean Earth continuously seeks to add backend sites to its network.
Business Strategies
Growth in Clean Earth’s business is primarily focused in five areas:
Continued participation in large and growing end markets
Within the U.S. environmental services market, Clean Earth primarily operates within the remediation and hazardous waste
management segments. Growth in the industry will be driven by numerous secular trends, including an increasing national
47
awareness and dedication to environmental stewardship, regulatory guidelines for a growing number of contaminated waste
streams, and increasing prevalence of and preference for cost-effective landfill avoidance and recycling strategies. As a
result of these market trends, generators or those responsible for contaminated waste streams will likely seek to utilize
service providers like Clean Earth that can offer environmentally compliant and cost-effective solutions for their treatment
and disposal needs.
Contaminated Materials
Clean Earth’s operations are diversified across a variety of stable end markets focused primarily in the power, oil & gas,
infrastructure and industrial industries. Clean Earth has also positioned itself to capitalize on future increases in the commercial
development sector.
Dredged Material
Clean Earth has maintained a strong position in the New York and New Jersey harbors for its dredged material management
and recycling services. Demand for Clean Earth’s services has grown such that it constructed a second dredge processing
facility in 2009. Outside of the New York and New Jersey harbors, increased demand for maintenance projects is expected
to be driven largely by the increasing size of heavy shipping vessels and expansion of the Panama Canal. As waterways
are deepened, sediment accumulates in greater volume, which must be regularly removed to maintain the new depth.
Hazardous Waste
Clean Earth maintains unique hazardous waste operations in an active region of the United States. There are significant
number of hazardous waste generators in the U.S. that are located in New York and New Jersey and Clean Earth operates
one the few commercial RCRA Part B permitted TSDFs in the New York metro area. Clean Earth is currently able to accept
hazardous liquids, solids and gasses, as well as a variety of other specialty waste classes, including lab-packs, electronic
waste, universal waste, wastewater, household hazardous waste, medical waste, used oils and antifreeze. Clean Earth can
also accept nonhazardous waste at this facility. In addition to its hazardous waste facility in New Jersey, Clean Earth also
operates RCRA Part B facilities in Calvert City, KY and Morgantown, WV.
Increasing share in existing markets
Clean Earth has historically increased the volume of materials processed at its existing facilities by expanding the scope of
its existing permits and developing new treatment and processing techniques. The permitting expertise of its environmental,
health, and safety organization allows Clean Earth to be proactive in seeking additional waste streams and adaptable to
changing contaminants found in the materials it manages, as well as in newly regulated materials.
Numerous dynamics have made the market increasingly beneficial for Clean Earth in its core markets. These dynamics
include stricter regulations, increasing levels of enforcement and a more discerning customer base.
Accelerating participation in increasingly regulated end markets
Within its current footprint, there are opportunities for Clean Earth to continue to expand the scope of its service offering by
adding additional specialty waste streams.
Continued tuck-in acquisition growth
Since 2011, Clean Earth has expanded its footprint and technical capabilities by launching operations in Florida (acquired),
the Marcellus Shale (greenfield), Georgia (acquired), Kentucky (acquired), West Virginia (acquired), Greater Washington,
D.C. region (acquired and repurposed) Connecticut (acquired), Alabama (acquired) and Pennsylvania (acquired).
The market for waste management services is highly fragmented, with many companies operating a single facility. Accordingly,
there are several tuck-in acquisition opportunities in Clean Earth’s marketplace that would enable it to continue growing in
existing and adjacent markets, as well as in new geographies.
Platform expansion opportunities
While Clean Earth has historically remained focused on its core markets, many opportunities exist to diversify and augment
its environmental service offering using Clean Earth as a platform. Clean Earth can acquire select competitors and industrial
services companies, as well as pursue vertical integration prospects and new treatment technologies.
Customers
Clean Earth serves approximately 1,700 customers at more than 6,300 discrete sites. The Company maintains strong
relationships with customers at various levels of the decision and supply chain, including public and private corporations
and property owners, as well as environmental consultants, brokers, construction firms, municipalities, and regulatory
agencies, among others.
In 2017, 2016 and 2015, the top 10 customers accounted for approximately 29%, 27% and 28% of net sales, respectively.
While Clean Earth works with certain customers that have recurring needs for disposal and recycling solutions, its revenue
48
per customer changes frequently. Many of the Clean Earth's customers are long-time customers, but do not generate a
consistent amount of revenue year in, year out. Consequently, Clean Earth is more focused on winning specific “projects”
as opposed to winning the business of a particular customer.
Seasonality
Clean Earth typically has lower earnings in the winter months due to limits on outdoor construction due to colder weather
and dredging due to environmental restrictions in certain waterways in the Northeastern United States.
Sales and Marketing
Clean Earth’s team is comprised of sales and marketing professionals that are primarily focused on direct selling to customers.
Clean Earth is focused on servicing customers at various levels of the decision and supply chain, including waste generators,
environmental service companies, consultants, construction and engineering firms, commercial developers, municipalities
and government-sponsored organizations, and regulatory agencies, among others. Clean Earth has spent years developing
direct relationships with its clients, many of whom routinely generate large volumes of waste and demand treatment and
disposal solutions at various sites and locations.
The large dredging contractors manage the vast majority of the dredging activity. Clean Earth has built relationships with
these contractors to ensure it is well-positioned to serve as many of the large or small dredging projects in the New York/
New Jersey harbor and surrounding waterways, as possible.
Competition
Competitive Landscape
The environmental services market is highly fragmented with numerous participants. However, a majority of these companies
specialize in a narrower scope of services or treatment capabilities. Industry competitors relevant to Clean Earth’s served
markets range from large public companies to small, single-service participants. Competition primarily includes processors
of contaminated soils, dredging companies (to a limited extent), waste treatment providers and waste management
companies. In Clean Earth’s core markets, competition tends to be primarily comprised of regional services providers or
single-service companies with limited scale. Given these dynamics, we believe the industry will likely favor players such as
Clean Earth that have large scale and management teams with many years of experience and extensive familiarity with the
regulatory landscape.
Barriers to Entry
• Permits - Clean Earth maintains an extensive portfolio of regulatory permits, including approximately 180 active
permits and 200 permit modifications. Each facility maintains various local, state, and federal authorizations for the
acceptance, treatment, and beneficial reuse of a wide variety of hazardous and nonhazardous materials, as well
as all necessary air and water discharge permits required for operation. These permits are extremely difficult to
obtain due to the complex navigation of multiple layers of regulation, lengthy and costly public review periods and
typical public NIMBY opposition. Clean Earth maintains a large team of environmental, health and safety experts
that have developed trusted relationships and credibility with local, state and federal regulatory agencies over the
last 25 years.
• Extensive Network - The Company’s extensive network of 24 permitted facilities is strategically located near major
waste generation centers with an abundance of regulations governing waste treatment and disposal. Given
transportation costs, the proximity of Clean Earth’s facilities to key markets and convenient access to rail, barge,
and trucking transportation are significant competitive advantages that drive profitability. Furthermore, its
maintenance of multiple backend beneficial reuse sites provides flexibility to direct volume to the most appropriate
facilities based on available processing and placement capacity.
Regulatory Environment
Clean Earth’s facility operations are subject to various local, state, and federal authorizations for the acceptance, treatment,
and beneficial reuse of a wide variety of hazardous and nonhazardous materials, as well as all necessary air and water
discharge permits required for operation. These permits are extremely difficult to obtain due to the complex navigation of
multiple layers of regulation, lengthy and costly public review periods, and typical public NIMBY opposition. Clean Earth
maintains a large team of environmental, health, and safety experts that have developed trusted relationships and credibility
with local, state, and federal regulatory agencies over the last 25 years. Management believes that Clean Earth is in
compliance, in all material respects, w ith applicable environmental and occupational health and safety laws and regulations.
49
Employees
Clean Earth is led by a capable management team of industry veterans that possess a balanced combination of industry
experience and operational expertise. The current senior management team has over 150 years of cumulative experience
with an average tenure of approximately 10 years at Clean Earth. Current management has implemented numerous
operational, strategic, and financial initiatives over the past several years. In addition to the senior management team, there
are operational managers that hold significant responsibilities across the business and work closely with management on a
daily basis.
Clean Earth employs approximately 522 hourly and salaried employees located throughout the United States. Clean Earth’s
employees are compensated at levels commensurate with industry standards, based on their respective position and job
grade.
Clean Earth’s workforce is non-union except for approximately 19 hourly employees at its dredge facilities, who are
represented by International Union of Operating Engineers Local No. 825 (IUOE Local 825). Clean Earth enjoys good labor
relations with its employees and union and has a three year contract in place with the IUOE Local 825, which will expire in
July 2019.
Sterno
Overview
Sterno, headquartered in Corona, California, is a manufacturer and marketer of portable food warming fuel and creative
table lighting solutions for the foodservice industry. Through its two divisions, Sterno Products and Sterno Home, Sterno
offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid wax, traditional wax and flameless
candles, catering equipment and lamps. For over 100 years, the iconic "Sterno" brand has been synonymous with quality
canned heat. The heritage of reliability and innovation continues today, as Sterno continues to bring to market new products
that give foodservice industry professionals greater control over food quality and décor. As the leading supplier of canned
heat to foodservice distributors and foodservice group purchasing organizations, Sterno is always pursuing end-user solutions
and innovations to strengthen its position in the marketplace.
In January 2016, Sterno acquired all of the outstanding stock of Northern International, Inc. ("Sterno Home"). Sterno Home
markets and manufactures a complete array of outdoor and indoor lighting products aimed at the Home Improvement / Home
Decor Market. Sterno Home's product offerings includes a full line of innovative patented flameless candles, traditional house
and garden lighting including path lights, spotlights, bollards, coach and security lights as well as emerging décor categories
of illuminated products such as post caps, deck, patio and fence lighting and other popular novelty products including stick
lights, string lights, baskets and lanterns. The flameless candles and novelty lighting are powered by solar or battery power
and the more traditional outdoor lighting fixtures are driven via solar power or low voltage technologies. Sterno Home brands
include Candle Impressions®, Mirage®, Night Splendor® and Inglow® for flameless candles as well as Paradise Garden
Lighting®, Manor House®, Style Line® and Lumabrite® for outdoor décor and security lighting.
History of Sterno
Sterno’s history dates back to 1893 when S. Sternau & Co. began making chafing dishes and coffee percolators in Tenafly,
New Jersey. In 1914, S. Sternau & Co. introduced “canned heat” with the launch of its gelled ethanol product under the
“Sterno” brand. Since then, the Sternau and Sterno names have been the most well-known names in portable food warming
fuel. In 1917, S. Sternau & Co. was renamed The Sterno Corporation. During World War I, Sterno portable stoves were
promoted as an essential gift for soldiers going to fight in the trenches of Europe. Sterno stoves heated water and rations,
sterilized surgical instruments, and provided light and warmth in bunkers and foxholes. During World War II, Sterno produced
ethanol and methanol chafing fuels under contract with the U.S. military. Sterno's production facilities were moved from New
Jersey to Texarkana, Texas in the early 1980s. In 2012, Sterno merged with the Candle Lamp Company, LLC ("CandleLamp").
CandleLamp was founded in Riverside, California in 1978, focusing initially on the liquid wax candle market. Over the next
several decades, CandleLamp began to supply chafing fuel in addition to lighting products. Today, Sterno operates out of
its corporate headquarters in Corona California and two manufacturing facilities in Texarkana, Texas and Memphis,
Tennessee.
Sterno Home was formed in 1997 by its three founding partners who had been in the import and product development
business since 1979. The success in the outdoor lighting an innovative use of LED technology evolved into the development
of patented flameless candle product line. Sterno Home's flameless candle evolved the battery operated candle market
from a functional safety oriented product into an attractive décor piece meant to enhance the beauty of consumer’s homes.
We purchased Sterno on October 10, 2014.
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Industry
Sterno competes in the broadly defined U.S. foodservice industry and the flameless candle and outdoor lighting home décor
industry. In the foodservice industry, restaurant, catering and hospitality sales account for approximately 67% of the market
with the remainder comprised of the travel and leisure, education and healthcare related sales. The Sterno Product line
focuses on safe, portable fire solutions for cooking and warming, as well as tabletop lighting décor.
Sterno Home competes in the outdoor lighting and home decor industry. Sterno Home's sales are concentrated in the United
States and Canada, with a small percentage of sales coming through global retailers with locations in Japan, Taiwan, the
United Kingdom and Australia. Management believes that a rise in demand from high-income households and businesses
will bolster growth, with consumers spending more money on the cocooning trend and specifically on beautifying their indoor
and outdoor home, changing out trendy accent items more frequently and investing in more spacious and comfortable outdoor
spaces with many equivalent amenities of their indoor spaces.
Products and Services
Sterno Products is a “full-line” supplier offering a broad array of portable chafing fuels, table lighting and outdoor lighting
products with approximately 400 SKUs serving the foodservice and retail markets. Sterno originally focused on chafing fuel
(“canned heat”) products and later expanded its offerings to include table ambiance products such as liquid wax, wax candles
and votive lamp, as well as outdoor lighting with the acquisition of Sterno Home in 2016. Sterno’s products fall into five major
categories: canned heat, table lighting, flameless candles and outdoor lighting, catering equipment and butane products.
Canned Heat - The canned heat product line is composed of various chafing fuels packaged in small, portable cans. The
portable warming (canned heat) line is composed of wick-based and gel-based chafing fuels packaged in steel cans. These
products are used by foodservice professionals in a variety of food serving and holding applications and are designed to
keep food products at an optimal food-safe serving temperature of 140-165 Fahrenheit. The canned heat product line is
composed of two subcategories: wick chafing fuel and gel chafing fuel. The subcategories are distinguished based on the
type of chafing fuel being used; the four primary chafing fuels are diethylene glycol (“DEG”), propylene glycol, ethanol and
methanol. Each fuel contains unique characteristics and properties that allow the Company to offer a broad array of
configurations to suit varying user requirements.
Wick chafing Fuel
The wick chafing fuel line (“Wick”) is composed of either DEG or propylene glycol chafing fuel. DEG and propylene glycol
chafing fuels with advance wick technology have higher heat output than alternatives such as ethanol and methanol. The
liquid Wick products feature a variety of wick types and burn times to meet the specific needs of the user. Wick fuels are
clean burning, biodegradable, nonflammable if spilled (will not ignite without a wick) and the can stays cool to the touch when
lit.
Gel Chafing Fuel
The gel chafing fuel line (“Gel”) is composed of either gelled ethanol or gelled methanol chafing fuel. Ethanol chafing fuel
has a higher heat output than methanol fuel; both ethanol and methanol fuels have lower heat output than some DEG and
propylene glycol products. The Gel product line tends to have shorter burn times than the Wick product.
For an Environmentally preferred chafing fuel, the Company offers a patented line of “Green” chafing fuels featuring USDA
Certified Biobased Product formulas that are also endorsed by the Green Restaurant Association. The “Green Heat” and
“Green Wick” products perform similar to the Wick and Gel chafing fuels, but are made from renewable resources that are
biodegradable and more environmentally friendly.
Table Lighting - Sterno sells a variety of items designed to enhance lighting and ambiance at meal settings which are critical
to a customer’s experience. Products include liquid wax, traditional hard wax and flameless electronic candles, as well as
votive lamps, shaded lamps and accent lamps.
Flameless Candles and Outdoor Lighting - Through Sterno Home, Sterno offers a wide selection of lighting for your home,
garden, patio and yard with over 1000 SKUS available in our retail markets. Sterno Home first delved into lighting with lighting
fixtures for illuminating front and backyard pathways. Sterno Home quickly expanded its line to include other types of home
lighting products, most notably bollards, shepherd hook lights and line voltage powered coach lights and street lights. Sterno
Home’s 20-year history of providing high quality, low cost consumer-directed lighting has cemented it as a top tier supplier
in both the flameless candle and outdoor lighting categories. All of Sterno Home’s products are powered by one of the
following:
• Solar - solar panel with rechargeable power source - usually a rechargeable battery
• Battery - battery operated
• Plug-in - plugs directly into a regular wall socket either with 2 or 3 prong plug and with or without included and
attached transformer
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•
Low Voltage - part of a set which includes a stand-alone transformer. Fixtures connect through a stand-alone wire
via clip connectors
Line Voltage - hardwired into a home's electrical circuitry
•
• Rechargeable - product is recharged when empty usually through a plug in wire and an onboard rechargeable power
source
Flameless Candles
The flameless candle product line is made up of various types and sizes of candles with all of them sharing the one main
attribute: their glow is powered by an artificial power source, most often battery. This makes them inherently safer than
traditional candles as there is no flame or even heat generated to cause any type of accidents. Although pillar type candles
are the most common shape, Sterno Home also designs and manufactures votives, tealights, tapers as well as specialty
molded candles. Sterno Home was also the first to introduce the timer function to their flameless candle line. Sterno Home’s
candles stand out from the competition as they are the only manufacturer that offers the patented black wick. Sterno Home
also developed its unique algorithm-based light circuit which gives the candle a naturally random flicker and glow.
Landscape Lighting
The landscape lighting category was Sterno Home’s first offering. Starting with simple low voltage path lights, Sterno Home
quickly expanded its offering to reflect the growing needs of the DIY and home décor consumer. Landscape lighting is lighting
that promotes and accentuates elements of a consumer’s home, yard or garden so its beauty can be enjoyed both in daytime
and nighttime. Another benefit of landscape lighting is added safety as it is easier to navigate around a home at night when
it is reasonably well-lit. Landscape lighting was originally most commonly powered through a low voltage setup but as solar
technologies have rapidly developed, many of these fixtures can achieve their lighting purposes with only a solar panel as
power generation. Consumers with higher and more consistent lighting requirements most often opt for low voltage kits using
wire and transformers to light their fixtures. Solar powered fixtures are advantageous for those consumers looking for cheaper
and quicker to set up lighting solutions even if it often means lesser lumens and light. Another notable technology has been
the development of LED lighting. LED’s more efficient power generation technology has allowed for advantageous fixture
designs and a higher level of power generation which were not easy or as cost effective to achieve as with legacy lighting
technologies such as incandescent or halogen. LEDs also last longer and are generally more robust than older technologies.
Décor Lighting
Décor lighting is Sterno Home’s newest category. Décor lighting has similar functions to landscape lighting but is usually
less about safety and functionality and more about accenting an area of the outside home with ornamentation of some sort.
With a décor piece, the light the piece gives off and the item itself together become elements of beauty in the setting. Because
these items are very trend driven, consumers are more apt to switch them out more often therefore increasing repeat purchase
potential and other recurrent sales opportunities for Sterno Home. Some of the most common categories of décor lighting
are lanterns and baskets and string lighting.
Catering Equipment - Catering equipment products are designed to provide a complete commercial catering solution
whether indoor or outdoor. Products include chafing dish frames and lids, wind guards and buffet sets.
Butane - Sterno produces a full line of professional quality portable butane stoves, ideal for action stations, made-to-order
omelet lines, tableside and off-site cooking, outdoor events and more. Products also include select butane accessories for
special culinary applications such as the culinary torch. Sterno butane fuel comes with an additional safety feature called
Countersink Release Vent (CRV) Technology.
Sterno sells into Foodservice, Retail and OEM markets. The following table sets forth Sterno’s gross revenue by product
for the fiscal years ended December 31, 2017, 2016 and 2015:
Gross sales by product (1)
Canned Heat
Flameless Candle and Outdoor Lighting
Table Lighting
Other
(1) As a percentage of gross sales, exclusive of sale discounts.
2017
2016
2015
47%
35%
6%
12%
100%
72%
—%
10%
18%
100%
46%
34%
6%
14%
100%
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Competitive Strengths
Leading Brand Recognition & Market Share - Sterno is the market share leader in the canned chafing fuel market.
Management believes Sterno enjoys outstanding brand awareness and a reputation for superior quality and performance
with distributors, caterers, hotels and other end users. Sterno Home offers a wide variety of products to a cross section of
North American retail and our diversity gives us a unique standing in this marketplace. Most of Stern Home's competitors
specialize in one aspect of fulfilling the market. They either only sell to a few retailers or only actively develop few or even
only one category of product. This exposes them to major financial challenges when they lose that account or when that
product is beat out by a competitor or starts to wane in the marketplace.
Low Cost versus Alternatives - Sterno's customers are typically caterers, hotels or restaurants who utilize canned chafing
fuel to maintain prepared food at a safe and enjoyable serving temperature. The risk of ruining a dining experience and the
low proportionate cost of canned chafing fuel relative to the cost of a catered event represent significant barriers to customers
switching out of Sterno’s canned chafing fuel products. Additionally, management believes that there is no other technology
available today that offers the portability, reliability and low cost of the Sterno canned chafing fuel products.
Business Strategies
Defend Leading Market Position - As a leading supplier of canned fuels, flameless candles and outdoor lighting, Sterno’s
places great value delivering unmatched customer service and product selection. In a market characterized by fragmented
categories and competition, Sterno will continue to focus on providing the best in class service to its customers. Sterno has
been the recipient of numerous vendor awards for its high degree of customer service.
Pursue Selective Acquisitions - Sterno views acquisitions as a potentially attractive means to expand its product offerings
in the foodservice and retail channels as well as enter new international markets.
Expand Retail Distribution - Sterno’s management believes that there is an opportunity to leverage the iconic nature of
the “Sterno Products” brand to expand its retail product offering and to expand distribution into additional retailers.
Customers and Distribution Channels
Sterno's products are sold primarily through the foodservice and consumer retail channels. Sterno’s product distribution
network is comprised of long-standing, entrenched relationships with a diversified set of customers. Sterno’s top ten customers
comprised approximately 68%, 59%, 69% of gross sales in the year ended December 31, 2017, 2016 and 2015, respectively.
Foodservice - The foodservice channel consists of multiple layers of distribution comprised of broadline distributors,
equipment and supply dealers and cash and carry dealers. Within the foodservice channel, Sterno’s products are
predominantly used in the restaurant, lodging/hospitality and catering markets.
Retail - The retail channel consists of club stores, mass merchants, specialty retailers, grocers and national and regional
DIY stores. The Company’s retail products are used in home, camping and emergency applications. The Company’s retail
products appeal to a wide variety of consumers, from home entertainers to recreational campers and extreme outdoorsmen.
Online retail sales are also an important channel for Sterno Home. With an online dynamic, it is also much easier to showcase
how Sterno Home’s products look in actual dark use conditions, directly addressing Sterno Home product’s primary
merchandising challenge.
Sterno had approximately $28.7 million and $25.3 million in firm backlog orders at December 31, 2017 and 2016, respectively.
Seasonality
Sterno typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer season and
the holiday season.
Sales and marketing
Within the foodservice channel, Sterno directly employ sales professionals and utilizes a broad network of independent sales
representative firms assigned to differing U.S. territories managed by in-house sales management professionals. The
independent sales representatives have long-standing relationships with distributors and end-users and typically represent
10 to 20 of the best non-food product lines alongside the Company’s products. The independent sales representatives are
used primarily to manage the day to day order fulfillment and customer relationships. The independent sales representative
firms are paid on a commission basis based on customer type and sales territory.
Within the retail channel, Sterno directly employ sales professionals and utilizes a network of independent retail sales broker
firms. The independent retail sales brokers are paid on a commission basis based on customer type and sales territory.
Sterno maintains direct sales relationships with many key customers. Sterno Home also utilizes a broad network of
independent sales representative firms and retail-linked agencies. These agents and firms are managed by Sterno Home's
in-house sales management professionals.
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Sterno has implemented a multi-faceted marketing plan which includes (i) targeted print advertising; (ii) tradeshows; (iii)
increasing online education through the Sterno Products University and the Sterno Home websites; and (iv) social media.
Suppliers
Sterno's product manufacturing is based on a dual strategy of in-house manufacturing and strategic alliances with
select vendors. Sterno operates an efficient, low-cost supply chain, sourcing materials and employing contract manufacturers
from across the Asia-Pacific region and the U.S.
Sterno’s primary raw materials are Diethylene glycol, ethanol, liquid paraffin and steel cans for which it receives multiple
shipments per month. Sterno Products purchases its materials from a combination of domestic and foreign suppliers.
Sterno Home sources all their entire inventory from China. Sterno Home operates an efficient supply chain with emphasis
on quality production and low cost. Sterno Home’s China-based support team in the Yuyao office permits Sterno Home to
be more hands on in the factories reporting proactively on potential issues and working to implement practical solutions when
required.
Intellectual Property
Sterno relies upon a combination of trademarks and patents in order to secure and protect its intellectual property rights.
Sterno currently owns approximately 218 registered trademarks and 101 patents globally, and has 26 applications for pending.
Regulatory Environment
Sterno is proactive regarding regulatory issues and is in compliance with all relevant regulations. Sterno maintains adequate
product liability insurance coverage. Management believes that Sterno is in compliance, in all material respects, with
applicable environmental and occupational health and safety laws and regulations.
Employees
As of December 31, 2017 Sterno Products employed approximately 580 persons in 8 locations. None of Sterno’s employees
are subject to collective bargaining agreements. We believe that Sterno’s relationship with its employees is good.
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ITEM 1A. RISK FACTORS
Our business, operations and financial condition are subject to various risks and uncertainties. The following discussion of
risk factors should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) section and the consolidated financial statements and related notes. In addition to the factors affecting
our specific operating segments identified in connection with the descriptions of these segments and the financial results of
the operations of these operating segments elsewhere in this report, the most significant factors affecting our operations
include the following:
Risks Related to Our Business and Structure
Our future success is dependent on the employees of our Manager and the management teams of our businesses,
the loss of any of whom could materially adversely affect our financial condition, business and results of operations.
Our future success depends, to a significant extent, on the continued services of the employees of our Manager, most of
whom have worked together for a number of years. While our Manager will have employment agreements with certain of its
employees, including our Chief Financial Officer, these employment agreements may not prevent our Manager’s employees
from leaving or from competing with us in the future. Our Manager does not have an employment agreement with our Chief
Executive Officer.
The future success of our businesses also depends on their respective management teams because we operate our
businesses on a stand-alone basis, primarily relying on existing management teams for management of their day-to-day
operations. Consequently, their operational success, as well as the success of our internal growth strategy, will be dependent
on the continued efforts of the management teams of the businesses. We provide such persons with equity incentives in
their respective businesses and have employment agreements and/or non-competition agreements with certain persons we
have identified as key to their businesses. However, these measures may not prevent the departure of these managers. The
loss of services of one or more members of our management team or the management team at one of our businesses could
materially adversely affect our financial condition, business and results of operations.
We face risks with respect to the evaluation and management of future platform or add-on acquisitions.
A component of our strategy is to continue to acquire additional platform subsidiaries, as well as add-on businesses for our
existing businesses. Generally, because such acquisition targets are held privately, we may experience difficulty in evaluating
potential target businesses as the information concerning these businesses is not publicly available. In addition, we and our
subsidiary companies may have difficulty effectively managing or integrating acquisitions. We may experience greater than
expected costs or difficulties relating to such acquisition, in which case, we might not achieve the anticipated returns from
any particular acquisition, which may have a material adverse effect on our financial condition, business and results of
operations.
We may not be able to successfully fund future acquisitions of new businesses due to the lack of availability of
debt or equity financing at the Company level on acceptable terms, which could impede the implementation of our
acquisition strategy and materially adversely impact our financial condition, business and results of operations.
In order to make future acquisitions, we intend to raise capital primarily through debt financing at the Company level, additional
equity offerings, the sale of stock or assets of our businesses, and by offering equity in the Trust or our businesses to the
sellers of target businesses or by undertaking a combination of any of the above. Since the timing and size of acquisitions
cannot be readily predicted, we may need to be able to obtain funding on short notice to benefit fully from attractive acquisition
opportunities. Such funding may not be available on acceptable terms. In addition, the level of our indebtedness may impact
our ability to borrow at the Company level. Another source of capital for us may be the sale of additional shares, subject to
market conditions and investor demand for the shares at prices that we consider to be in the interests of our shareholders.
These risks may materially adversely affect our ability to pursue our acquisition strategy successfully and materially adversely
affect our financial condition, business and results of operations.
While we intend to make regular cash distributions to our shareholders, the Company’s board of directors has full
authority and discretion over the distributions of the Company, other than the profit allocation, and it may decide
to reduce or eliminate distributions at any time, which may materially adversely affect the market price for our
shares.
To date, we have declared and paid quarterly distributions, and although we intend to pursue a policy of paying regular
distributions, the Company’s board of directors has full authority and discretion to determine whether or not a distribution by
the Company should be declared and paid to the Trust and in turn to our shareholders, as well as the amount and timing of
any distribution. In addition, the management fee and profit allocation will be payment obligations of the Company and, as
a result, will be paid, along with other Company obligations, prior to the payment of distributions to our shareholders. The
Company’s board of directors may, based on their review of our financial condition and results of operations and pending
55
acquisitions, determine to reduce or eliminate distributions, which may have a material adverse effect on the market price
of our shares.
We will rely entirely on receipts from our businesses to make distributions to our shareholders.
The Trust’s sole asset is its interest in the Company, which holds controlling interests in our businesses. Therefore, we are
dependent upon the ability of our businesses to generate earnings and cash flow and distribute them to us in the form of
interest and principal payments on indebtedness and, from time to time, dividends on equity to enable us, first, to satisfy our
financial obligations and second to make distributions to our shareholders. This ability may be subject to limitations under
laws of the jurisdictions in which they are incorporated or organized. If, as a consequence of these various restrictions, we
are unable to generate sufficient receipts from our businesses, we may not be able to declare, or may have to delay or cancel
payment of, distributions to our shareholders.
We do not own 100% of our businesses. While we receive cash payments from our businesses which are in the form of
interest payments, debt repayment and dividends, if any dividends were to be paid by our businesses, they would be shared
pro rata with the minority shareholders of our businesses and the amounts of dividends made to minority shareholders would
not be available to us for any purpose, including Company debt service or distributions to our shareholders. Any proceeds
from the sale of a business will be allocated among us and the non-controlling shareholders of the business that is sold.
The Company’s board of directors has the power to change the terms of our shares in its sole discretion in ways
with which you may disagree.
As an owner of our shares, you may disagree with changes made to the terms of our shares, and you may disagree with
the Company’s board of directors’ decision that the changes made to the terms of the shares are not materially adverse to
you as a shareholder or that they do not alter the characterization of the Trust. Your recourse, if you disagree, will be limited
because our Trust Agreement gives broad authority and discretion to our board of directors. However, the Trust Agreement
does not relieve the Company’s board of directors from any fiduciary obligation that is imposed on them pursuant to applicable
law. In addition, we may change the nature of the shares to be issued to raise additional equity and remain a fixed-investment
trust for tax purposes.
Certain provisions of the LLC Agreement of the Company and the Trust Agreement make it difficult for third parties
to acquire control of the Trust and the Company and could deprive you of the opportunity to obtain a takeover
premium for your shares.
The amended and restated LLC Agreement of the Company, which we refer to as the LLC Agreement, and the amended
and restated Trust Agreement of the Trust, which we refer to as the Trust Agreement, contain a number of provisions that
could make it more difficult for a third party to acquire, or may discourage a third party from acquiring, control of the Trust
and the Company. These provisions include, among others:
•
•
•
•
•
•
•
•
restrictions on the Company’s ability to enter into certain transactions with our major shareholders, with the exception
of our Manager, modeled on the limitation contained in Section 203 of the Delaware General Corporation Law, or
DGCL;
allowing only the Company’s board of directors to fill newly created directorships, for those directors who are elected
by our shareholders, and allowing only our Manager, as holder of a portion of the Allocation Interests, to fill vacancies
with respect to the class of directors appointed by our Manager;
requiring that directors elected by our shareholders be removed, with or without cause, only by a vote of 85% of our
shareholders;
requiring advance notice for nominations of candidates for election to the Company’s board of directors or for
proposing matters that can be acted upon by our shareholders at a shareholders’ meeting;
having a substantial number of additional authorized but unissued shares that may be issued without shareholder
action;
providing the Company’s board of directors with certain authority to amend the LLC Agreement and the Trust
Agreement, subject to certain voting and consent rights of the holders of trust interests and Allocation Interests;
providing for a staggered board of directors of the Company, the effect of which could be to deter a proxy contest
for control of the Company’s board of directors or a hostile takeover; and
limitations regarding calling special meetings and written consents of our shareholders.
These provisions, as well as other provisions in the LLC Agreement and Trust Agreement may delay, defer or prevent a
transaction or a change in control that might otherwise result in you obtaining a takeover premium for your shares.
56
We may have conflicts of interest with the noncontrolling shareholders of our businesses.
The boards of directors of our respective businesses have fiduciary duties to all their shareholders, including the Company
and noncontrolling shareholders. As a result, they may make decisions that are in the best interests of their shareholders
generally but which are not necessarily in the best interest of the Company or our shareholders. In dealings with the Company,
the directors of our businesses may have conflicts of interest and decisions may have to be made without the participation
of directors appointed by the Company, and such decisions may be different from those that we would make.
Our third party credit facility exposes us to additional risks associated with leverage and inhibits our operating
flexibility and reduces cash flow available for distributions to our shareholders.
At December 31, 2017, we had approximately $560.0 million outstanding under our 2014 Term Loan and 2016 Incremental
Term Loan Facility and $42.6 million outstanding under our 2014 Revolving Credit Facility (representing the outstanding
revolver balance and outstanding letters of credit). We expect to increase our level of debt in the future. The terms of our
2014 Revolving Credit Facility contains a number of affirmative and restrictive covenants that, among other things, require
us to:
• maintain a minimum level of cash flow;
•
•
• make acquisitions that satisfy certain specified minimum criteria.
leverage new businesses we acquire to a minimum specified level at the time of acquisition;
keep our total debt to cash flow at or below a ratio of 3.5 to 1; and
If we violate any of these covenants, our lender may accelerate the maturity of any debt outstanding and we may be prohibited
from making any distributions to our shareholders. Such debt is secured by all of our assets, including the stock we own in
our businesses and the rights we have under the loan agreements with our businesses. Our ability to meet our debt service
obligations may be affected by events beyond our control and will depend primarily upon cash produced by our businesses.
Any failure to comply with the terms of our indebtedness could materially adversely affect us.
Changes in interest rates could materially adversely affect us.
Our Credit Facility bears interest at floating rates which will generally change as interest rates change. We bear the risk that
the rates we are charged by our lender will increase faster than the earnings and cash flow of our businesses, which could
reduce profitability, adversely affect our ability to service our debt, cause us to breach covenants contained in our Revolving
Credit Facility and reduce cash flow available for distribution, any of which could materially adversely affect us.
We may engage in a business transaction with one or more target businesses that have relationships with our
officers, our directors, our Manager or CGI, which may create potential conflicts of interest.
We may decide to acquire one or more businesses with which our officers, our directors, our Manager or CGI have a
relationship. While we might obtain a fairness opinion from an independent investment banking firm, potential conflicts of
interest may still exist with respect to a particular acquisition, and, as a result, the terms of the acquisition of a target business
may not be as advantageous to our shareholders as it would have been absent any conflicts of interest.
CGI may exercise significant influence over the Company.
CGI, through a wholly owned subsidiary, owns 7,931,000 or approximately 13.2% of our common shares and may have
significant influence over the election of directors in the future.
We could be negatively impacted by cybersecurity attacks.
We, and our businesses, use a variety of information technology systems in the ordinary course of business, which are
potentially vulnerable to unauthorized access, computer viruses and cybersecurity attacks, including cybersecurity attacks
to our information technology infrastructure and attempts by others to gain access to our propriety or sensitive information,
and ranging from individual attempts to advanced persistent threats. The procedures and controls we use to monitor these
threats and mitigate our exposure may not be sufficient to prevent cybersecurity incidents. The results of these incidents
could include misstated financial data, theft of trade secrets or other intellectual property, liability for disclosure of confidential
customer, supplier or employee information, increased costs arising from the implementation of additional security protective
measures, litigation and reputational damage, which could materially adversely affect our financial condition, business and
results of operations. Any remedial costs or other liabilities related to cybersecurity incidents may not be fully insured or
indemnified by other means.
If, in the future, we cease to control and operate our businesses, we may be deemed to be an investment company
under the Investment Company Act of 1940, as amended.
Under the terms of the LLC Agreement, we have the latitude to make investments in businesses that we will not operate or
control. If we make significant investments in businesses that we do not operate or control or cease to operate and control
57
our businesses, we may be deemed to be an investment company under the Investment Company Act of 1940, as amended,
or the Investment Company Act. If we were deemed to be an investment company, we would either have to register as an
investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our investments
or organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an
investment company could, among other things, cause us to lose our status as an exempt publicly traded partnership for
federal income tax purposes, materially adversely affect our financial condition, business and results of operations, materially
limit our ability to borrow funds or engage in other transactions involving leverage and require us to add directors who are
independent of us or our Manager and otherwise will subject us to additional regulation that will be costly and time-consuming.
Risks Related to the Series A Preferred Shares
Distributions on the Series A Preferred Shares are discretionary and non-cumulative.
Distributions on the Series A Preferred Shares are discretionary and non-cumulative. Holders of the Series A Preferred
Shares will only receive distributions of the Series A Preferred Shares when, as and if declared by the board of directors of
the Company. Consequently, if the board of directors of the Company does not authorize and declare a distribution for a
distribution period, holders of the Series A Preferred Shares would not be entitled to receive any distribution for such distribution
period, and such unpaid distribution will not be payable in such distribution period or in later distribution periods. We will
have no obligation to pay distributions for a distribution period if the board of directors of the Company does not declare such
distribution before the scheduled record date for such period, whether or not distributions are declared or paid for any
subsequent distribution period with respect to the Series A Preferred Shares, or any other preferred shares we may issue
or our common shares. This may result in holders of the Series A Preferred Shares not receiving the full amount of distributions
that they expect to receive, or any distributions, and may make it more difficult to resell Series A Preferred Shares or to do
so at a price that the holder finds attractive.
The board of directors of the Company may, in its sole discretion, determine to suspend distributions on the Series A Preferred
Shares, which may have a material adverse effect on the market price of the Series A Preferred Shares. There can be no
assurances that our operations will generate sufficient cash flows to enable us to pay distributions on the Series A Preferred
Shares. Our financial and operating performance is subject to prevailing economic and industry conditions and to financial,
business and other factors, some of which are beyond our control.
Risks Relating to Our Manager
Our Chief Executive Officer, directors, Manager and management team may allocate some of their time to other
businesses, thereby causing conflicts of interest in their determination as to how much time to devote to our affairs,
which may materially adversely affect our operations.
While the members of our management team anticipate devoting a substantial amount of their time to the affairs of the
Company, only Mr. Ryan Faulkingham, our Chief Financial Officer, devotes substantially all of his time to our affairs. Our
Chief Executive Officer, directors, Manager and members of our management team may engage in other business activities.
This may result in a conflict of interest in allocating their time between our operations and our management and operations
of other businesses. Their other business endeavors may be related to CGI, which will continue to own several businesses
that were managed by our management team prior to our initial public offering, or affiliates of CGI as well as other parties.
Conflicts of interest that arise over the allocation of time may not always be resolved in our favor and may materially adversely
affect our operations. See the section entitled “Certain Relationships and Related Party Transactions” for the potential conflicts
of interest of which you should be aware.
Our Manager and its affiliates, including members of our management team, may engage in activities that compete
with us or our businesses.
While our management team intends to devote a substantial majority of their time to the affairs of the Company, and while
our Manager and its affiliates currently do not manage any other businesses that are in similar lines of business as our
businesses, and while our Manager must present all opportunities that meet the Company’s acquisition and disposition
criteria to the Company’s board of directors, neither our management team nor our Manager is expressly prohibited from
investing in or managing other entities, including those that are in the same or similar line of business as our businesses. In
this regard, the management services agreement and the obligation to provide management services will not create a mutually
exclusive relationship between our Manager and its affiliates, on the one hand, and the Company, on the other.
Our Manager need not present an acquisition or disposition opportunity to us if our Manager determines on its own
that such acquisition or disposition opportunity does not meet the Company’s acquisition or disposition criteria.
Our Manager will review any acquisition or disposition opportunity presented to the Manager to determine if it satisfies the
Company’s acquisition or disposition criteria, as established by the Company’s board of directors from time to time. If our
Manager determines, in its sole discretion, that an opportunity fits our criteria, our Manager will refer the opportunity to the
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Company’s board of directors for its authorization and approval prior to the consummation thereof; opportunities that our
Manager determines do not fit our criteria do not need to be presented to the Company’s board of directors for consideration.
If such an opportunity is ultimately profitable, we will have not participated in such opportunity. Upon a determination by the
Company’s board of directors not to promptly pursue an opportunity presented to it by our Manager in whole or in part, our
Manager will be unrestricted in its ability to pursue such opportunity, or any part that we do not promptly pursue, on its own
or refer such opportunity to other entities, including its affiliates.
We cannot remove our Manager solely for poor performance, which could limit our ability to improve our performance
and could materially adversely affect the market price of our shares.
Under the terms of the management services agreement, our Manager cannot be removed as a result of under-performance.
Instead, the Company’s board of directors can only remove our Manager in certain limited circumstances or upon a vote by
the majority of the Company’s board of directors and the majority of our shareholders to terminate the management services
agreement. This limitation could materially adversely affect the market price of our shares.
Our Manager can resign on 180 days’ notice and we may not be able to find a suitable replacement within that time,
resulting in a disruption in our operations that could materially adversely affect our financial condition, business
and results of operations as well as the market price of our shares.
Our Manager has the right, under the management services agreement, to resign at any time on 180 days’ written notice,
whether we have found a replacement or not. If our Manager resigns, we may not be able to contract with a new manager
or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms
within 90 days, or at all, in which case our operations are likely to experience a disruption, our financial condition, business
and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of
our shares may decline. In addition, the coordination of our internal management, acquisition activities and supervision of
our businesses is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of
executives having the expertise possessed by our Manager and its affiliates. Even if we are able to retain comparable
management, whether internal or external, the integration of such management and their lack of familiarity with our businesses
may result in additional costs and time delays that could materially adversely affect our financial condition, business and
results of operations.
We must pay our Manager the management fee regardless of our performance.
Our Manager is entitled to receive a management fee that is based on our adjusted consolidated net assets, as defined in
the management services agreement, regardless of the performance of our businesses. The calculation of the management
fee is unrelated to the Company’s net income. As a result, the management fee may incentivize our Manager to increase
the amount of our assets, for example, the acquisition of additional assets or the incurrence of third party debt rather than
increase the performance of our businesses.
We cannot determine the amount of the management fee that will be paid over time with any certainty.
The management fee paid to CGM for the year ended December 31, 2017 was $32.7 million. The management fee is
calculated by reference to the Company’s adjusted net assets, which will be impacted by the acquisition or disposition of
businesses, which can be significantly influenced by our Manager, as well as the performance of our businesses and other
businesses we may acquire in the future. Changes in adjusted net assets and in the resulting management fee could be
significant, resulting in a material adverse effect on the Company’s results of operations. In addition, if the performance of
the Company declines, assuming adjusted net assets remains the same, management fees will increase as a percentage
of the Company’s net income.
We cannot determine the amount of profit allocation that will be paid over time with any certainty.
We cannot determine the amount of profit allocation that will be paid over time with any certainty. Such determination would
be dependent on the potential sale proceeds received for any of our businesses and the performance of the Company and
its businesses over a multi-year period of time, among other factors that cannot be predicted with certainty at this time. Such
factors may have a significant impact on the amount of any profit allocation to be paid. Likewise, such determination would
be dependent on whether certain hurdles were surpassed giving rise to a payment of profit allocation. Any amounts paid in
respect of the profit allocation are unrelated to the management fee earned for performance of services under the management
services agreement.
The fees to be paid to our Manager pursuant to the management services agreement, the offsetting management
services agreements and integration services agreements and the profit allocation to be paid to certain persons
who are employees and partners of our Manager, as holders of the Allocation Interests, pursuant to the LLC
Agreement may significantly reduce the amount of cash available for distribution to our shareholders.
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Under the management services agreement, the Company will be obligated to pay a management fee to and, subject to
certain conditions, reimburse the costs and out-of-pocket expenses of our Manager incurred on behalf of the Company in
connection with the provision of services to the Company. Similarly, our businesses will be obligated to pay fees to and
reimburse the costs and expenses of our Manager pursuant to any offsetting management services agreements entered
into between our Manager and one of our businesses, or any integration services agreements to which such businesses are
a party. In addition, Sostratus LLC, as holder of the Allocation Interests, will be entitled to receive profit allocations. While it
is difficult to quantify with any certainty the actual amount of any such payments in the future, we do expect that such amounts
could be substantial. See the section entitled “Certain Relationships and Related Party Transactions” for more information
about these payment obligations of the Company. The management fee and profit allocation will be payment obligations of
the Company and, as a result, will be paid, along with other Company obligations, prior to the payment of distributions to
shareholders. As a result, the payment of these amounts may significantly reduce the amount of cash flow available for
distribution to our shareholders.
Our Manager’s influence on conducting our operations, including on our conducting of transactions, gives it the
ability to increase its fees, which may reduce the amount of cash flow available for distribution to our shareholders.
Under the terms of the management services agreement, our Manager is paid a management fee calculated as a percentage
of the Company’s adjusted net assets for certain items and is unrelated to net income or any other performance base or
measure. Our Manager, controls, may advise us to consummate transactions, incur third party debt or conduct our operations
in a manner that, in our Manager’s reasonable discretion, are necessary to the future growth of our businesses and are in
the best interests of our shareholders. These transactions, however, may increase the amount of fees paid to our Manager.
Our Manager’s ability to increase its fees, through the influence it has over our operations, may increase the compensation
paid by our Manager. Our Manager’s ability to influence the management fee paid to it by us could reduce the amount of
cash flow available for distribution to our shareholders.
Fees paid by the Company and our businesses pursuant to integration services agreements do not offset fees
payable under the management services agreement and will be in addition to the management fee payable by the
Company under the management services agreement.
The management services agreement provides that our businesses may enter into integration services agreements with our
Manager pursuant to which our businesses will pay fees to our Manager for services provided by our Manager relating to
the integration of a business’s financial reporting, computer systems and decision making and management processes into
our operations following an acquisition of such business. See the section entitled “Certain Relationships and Related Party
Transactions” for more information about these agreements. Unlike fees paid under the offsetting management services
agreements, fees that are paid pursuant to such integration services agreements will not reduce the management fee payable
by the Company. Therefore, such fees will be in excess of the management fee payable by the Company.
The fees to be paid to our Manager pursuant to these integration service agreements will be paid prior to any principal,
interest or dividend payments to be paid to the Company by our businesses, which will reduce the amount of cash flow
available for distributions to shareholders.
Our profit allocation may induce our Manager to make suboptimal decisions regarding our operations.
Sostratus LLC, as holder of our Allocation Interests, will receive a profit allocation based on ongoing cash flows and capital
gains in excess of a hurdle rate. Certain persons who are employees and partners of our Manager are owners of Sostratus
LLC. In this respect, a calculation and payment of profit allocation may be triggered upon the sale of one of our businesses.
As a result, our Manager may be incentivized to recommend the sale of one or more of our businesses to the Company’s
board of directors at a time that may not be optimal for our shareholders.
The obligations to pay the management fee and profit allocation may cause the Company to liquidate assets or
incur debt.
If we do not have sufficient liquid assets to pay the management fee and profit allocation when such payments are due, we
may be required to liquidate assets or incur debt in order to make such payments. This circumstance could materially adversely
affect our liquidity and ability to make distributions to our shareholders.
Risks Related to Taxation
Our shareholders will be subject to tax on their share of the Company’s taxable income, which taxes or taxable
income could exceed the cash distributions they receive from the Trust.
For so long as the Company or the Trust (if it is treated as a tax partnership) would not be required to register as an investment
company under the Investment Company Act of 1940 and at least 90% of our gross income for each taxable year constitutes
‘‘qualifying income’’ within the meaning of Section 7704(d) of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’),
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on a continuing basis, we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association
or a publicly traded partnership taxable as a corporation. In that case our shareholders will be subject to U.S. federal income
tax and, possibly, state, local and foreign income tax, on their share of the Company’s taxable income, which taxes or taxable
income could exceed the cash distributions they receive from the Trust. There is, accordingly, a risk that our shareholders
may not receive cash distributions equal to that portion of our taxable income or sufficient in amount even to satisfy their
personal tax liability that results from that income. This may result from gains on the sale or exchange of stock or debt of
subsidiaries that will be allocated to shareholders who hold (or are deemed to hold) shares on the day such gains were
realized if there is no corresponding distribution of the proceeds from such sales, or where a shareholder disposes of shares
after an allocation of gain but before proceeds (if any) are distributed by the Company. Shareholders may also realize income
in excess of distributions due to the Company’s use of cash from operations or sales proceeds for uses other than to make
distributions to shareholders, including funding acquisitions, satisfying short- and long-term working capital needs of our
businesses, or satisfying known or unknown liabilities. In addition, certain financial covenants with the Company’s lenders
may limit or prohibit the distribution of cash to shareholders. The Company’s board of directors is also free to change the
Company’s distribution policy. The Company is under no obligation to make distributions to shareholders equal to or in excess
of their portion of our taxable income or sufficient in amount even to satisfy the tax liability that results from that income.
All of the Company’s income could be subject to an entity-level tax in the United States, which could result in a
material reduction in cash flow available for distribution to holders of shares of the Trust and thus could result in
a substantial reduction in the value of the shares.
We do not expect the Company to be characterized as a corporation so long as it would not be required to register as an
investment company under the Investment Company Act of 1940 and 90% or more of its gross income for each taxable year
constitutes “qualifying income.” The Company expects to receive more than 90% of its gross income each year from dividends,
interest and gains on sales of stock or debt instruments, including principally from or with respect to stock or debt of corporations
in which the Company holds a majority interest. The Company intends to treat all such dividends, interest and gains as
“qualifying income.”
If the Company fails to satisfy this “qualifying income” exception, the Company will be treated as a corporation for U.S. federal
(and certain state and local) income tax purposes, and would be required to pay income tax at regular corporate rates on
its income. Taxation of the Company as a corporation could result in a material reduction in distributions to our shareholders
and after-tax return and, thus, could likely result in a reduction in the value of, or materially adversely affect the market price
of, the shares of the Trust.
A shareholder may recognize a greater taxable gain (or a smaller tax loss) on a disposition of shares than expected
because of the treatment of debt under the partnership tax accounting rules.
We may incur debt for a variety of reasons, including for acquisitions as well as other purposes. Under partnership tax
accounting principles (which apply to the Company), debt of the Company generally will be allocable to our shareholders,
who will realize the benefit of including their allocable share of the debt in the tax basis of their investment in shares. At the
time a shareholder later sells shares, the selling shareholder’s amount realized on the sale will include not only the sales
price of the shares but also the shareholder’s portion of the Company’s debt allocable to his shares (which is treated as
proceeds from the sale of those shares). Depending on the nature of the Company’s activities after having incurred the debt,
and the utilization of the borrowed funds, a later sale of shares could result in a larger taxable gain (or a smaller tax loss)
than anticipated.
Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority
may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing
interpretations, possibly on a retroactive basis.
The U.S. federal income tax treatment of holders of the Shares depends in some instances on determinations of fact and
interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available.
You should be aware that the U.S. federal income tax rules are constantly under review by persons involved in the legislative
process, the IRS, and the U.S. Treasury Department, frequently resulting in revised interpretations of established concepts,
statutory changes, revisions to regulations and other modifications and interpretations. The IRS pays close attention to the
proper application of tax laws to partnerships. The present U.S. federal income tax treatment of an investment in the Shares
may be modified by administrative, legislative or judicial interpretation at any time, and any such action may affect investments
and commitments previously made. For example, changes to the U.S. federal tax laws and interpretations thereof could
make it more difficult or impossible to meet the qualifying income exception for us to be treated as a partnership for U.S.
federal income tax purposes that is not taxable as a corporation, affect or cause us to change our investments and
commitments, affect the tax considerations of an investment in us and adversely affect an investment in our Shares. Our
organizational documents and agreements permit the Board of Directors to modify our operating agreement from time to
time, without the consent of the holders of Shares, in order to address certain changes in U.S. federal income tax regulations,
legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all of
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the holders of our Shares. Moreover, we will apply certain assumptions and conventions in an attempt to comply with applicable
rules and to report income, gain, deduction, loss and credit to holders in a manner that reflects such holders’ beneficial
ownership of partnership items, taking into account variation in ownership interests during each taxable year because of
trading activity. However, these assumptions and conventions may not be in compliance with all aspects of applicable tax
requirements. It is possible that the IRS will assert successfully that the conventions and assumptions used by us do not
satisfy the technical requirements of the Code and/or Treasury regulations and could require that items of income, gain,
deductions, loss or credit, including interest deductions, be adjusted, reallocated, or disallowed, in a manner that adversely
affects holders of the Shares.
Risks Relating Generally to Our Businesses
Impairment of our goodwill, indefinite-lived intangible assets or other long-lived assets could result in significant
charges that would adversely impact our future operating results.
A significant portion of our long-term assets are comprised of intangible assets, including goodwill and indefinite lived intangible
assets recorded as a result of past acquisitions. We assess the potential impairment of goodwill and indefinite lived intangible
assets on an annual basis, as well as whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. If our analysis indicates that an individual asset’s carrying value exceeds its fair market value, we will
record a loss equal to the excess of the individual asset’s carrying value over its fair value. The impairment testing steps
require significant amounts of judgment and subjectivity.
Factors that could trigger impairment include the following:
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significant under performance relative to historical or projected future operating results;
significant changes in the manner of or use of the acquired assets or the strategy for our overall business;
significant negative industry or economic trends;
significant decline in our stock price for a sustained period;
changes in our organization or management reporting structure could result in additional reporting units, which may
require alternative methods of estimating fair values or greater desegregation or aggregation in our analysis by
reporting unit; and
a decline in our market capitalization below net book value.
As of December 31, 2017, we had identified indefinite lived intangible assets with a carrying value in our financial statements
of $71.3 million, and goodwill of $531.7 million.
Our businesses are subject to unplanned business interruptions which may adversely affect our performance.
Operational interruptions and unplanned events at one or more of our production facilities, such as explosions, fires, inclement
weather, natural disasters, accidents, transportation interruptions and supply could cause substantial losses in our production
capacity. Furthermore, because customers may be dependent on planned deliveries from us, customers that have to
reschedule their own operations due to our delivery delays may be able to pursue financial claims against us, and we may
incur costs to correct such problems in addition to any liability resulting from such claims. Such interruptions may also harm
our reputation among actual and potential customers, potentially resulting in a loss of business. To the extent these losses
are not covered by insurance, our financial position, results of operations and cash flows may be adversely affected by such
events.
Our businesses rely and may rely on their intellectual property and licenses to use others’ intellectual property, for
competitive advantage. If our businesses are unable to protect their intellectual property, are unable to obtain or
retain licenses to use other’s intellectual property, or if they infringe upon or are alleged to have infringed upon
others’ intellectual property, it could have a material adverse effect on their financial condition, business and results
of operations.
Each business's success depends in part on their, or licenses to use others’, brand names, proprietary technology and
manufacturing techniques. These businesses rely on a combination of patents, trademarks, copyrights, trade secrets,
confidentiality procedures and contractual provisions to protect their intellectual property rights. The steps they have taken
to protect their intellectual property rights may not prevent third parties from using their intellectual property and other
proprietary information without their authorization or independently developing intellectual property and other proprietary
information that is similar. In addition, the laws of foreign countries may not protect our businesses’ intellectual property rights
effectively or to the same extent as the laws of the United States.
Stopping unauthorized use of their proprietary information and intellectual property, and defending claims that they have
made unauthorized use of others’ proprietary information or intellectual property, may be difficult, time-consuming and costly.
The use of their intellectual property and other proprietary information by others, and the use by others of their intellectual
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property and proprietary information, could reduce or eliminate any competitive advantage they have developed, cause them
to lose sales or otherwise harm their business.
Our businesses may become involved in legal proceedings and claims in the future either to protect their intellectual property
or to defend allegations that they have infringed upon others’ intellectual property rights. These claims and any resulting
litigation could subject them to significant liability for damages and invalidate their property rights. In addition, these lawsuits,
regardless of their merits, could be time consuming and expensive to resolve and could divert management’s time and
attention. The costs associated with any of these actions could be substantial and could have a material adverse effect on
their financial condition, business and results of operations.
Our businesses could experience fluctuations in the costs of raw materials as a result of inflation and other economic
conditions, which fluctuations could have a material adverse effect on their financial condition, business and results
of operations.
Changes in inflation could materially adversely affect the costs and availability of raw materials used in our manufacturing
businesses, and changes in fuel costs likely will affect the costs of transporting materials from our suppliers and shipping
goods to our customers, as well as the effective areas from which we can recruit temporary staffing personnel. For example,
for Advanced Circuits, the principal raw materials consist of copper and glass and typically represent approximately 20% of
net sales. Prices for these key raw materials may fluctuate during periods of high demand. The ability by these businesses
to offset the effect of increases in raw material prices by increasing their prices is uncertain. If these businesses are unable
to cover price increases of these raw materials, their financial condition, business and results of operations could be materially
adversely affected.
Certain of our businesses are dependent on a limited number of customers to derive a large portion of their revenue,
and the loss of one of these customers may adversely affect the financial condition, business and results of
operations of these businesses.
Our Crosman, Liberty, Manitoba Harvest and Sterno businesses derive a significant amount of revenue from a concentrated
number of retailers and distributors. Any negative change involving these retailers or distributors, including industry
consolidation, store closings, reduction in purchasing levels or bankruptcies, could negatively impact the sales of these
businesses and may have a material adverse effect on the results of operations, financial condition and cash flows of these
businesses.
Our businesses do not have and may not have long-term contracts with their customers and clients and the loss
of customers and clients could materially adversely affect their financial condition, business and results of
operations.
Our businesses are and may be, based primarily upon individual orders and sales with their customers and clients. Our
businesses historically have not entered into long-term supply contracts with their customers and clients. As such, their
customers and clients could cease using their services or buying their products from them at any time and for any reason.
The fact that they do not enter into long-term contracts with their customers and clients means that they have no recourse
in the event a customer or client no longer wants to use their services or purchase products from them. If a significant number
of their customers or clients elect not to use their services or purchase their products, it could materially adversely affect
their financial condition, business and results of operations.
Our businesses are and may be subject to federal, state and foreign environmental laws and regulations that expose
them to potential financial liability. Complying with applicable environmental laws requires significant resources,
and if our businesses fail to comply, they could be subject to substantial liability.
Some of the facilities and operations of our businesses are and may be subject to a variety of federal, state and foreign
environmental laws and regulations including laws and regulations pertaining to the handling, storage and transportation of
raw materials, products and wastes, which require and will continue to require significant expenditures to remain in compliance
with such laws and regulations currently in place and in the future. Compliance with current and future environmental laws
is a major consideration for our businesses as any material violations of these laws can lead to substantial liability, revocations
of discharge permits, fines or penalties. Because some of our businesses use hazardous materials and generate hazardous
wastes in their operations, they may be subject to potential financial liability for costs associated with the investigation and
remediation of their own sites, or sites at which they have arranged for the disposal of hazardous wastes, if such sites become
contaminated. Even if they fully comply with applicable environmental laws and are not directly at fault for the contamination,
our businesses may still be liable. Our businesses may also be held liable for damages caused by environmental and other
conditions that existed prior to our acquisition the assets, business or operations involved, whether or not such damages
are subject to indemnification from a prior owner. Costs associated with these risks could have a material adverse effect on
our financial condition, business and results of operations.
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Defects in the products provided by our companies could result in financial or other damages to their customers,
which could result in reduced demand for our companies’ products and/or liability claims against our companies.
As manufacturers and distributors of consumer products, certain of our companies are subject to various laws, rules and
regulations, which may empower governmental agencies and authorities to exclude from the market products that are found
to be unsafe or hazardous. Under certain circumstances, a governmental authority could require our companies to repurchase
or recall one or more of their products. Additionally, laws regulating certain consumer products exist in some cities and states,
as well as in other countries in which they sell their products, where more restrictive laws and regulations exist or may be
adopted in the future. Any repurchase or recall of such products could be costly and could damage the reputation of our
companies. If any of our companies were required to remove, or voluntarily remove, their products from the market, their
reputation may be tarnished and they may have large quantities of finished products that they cannot sell. Additionally, our
companies may be subject to regulatory actions that could harm their reputations, adversely impact the values of their brands
and/or increase the cost of production.
Our companies also face exposure to product liability claims in the event that one of their products is alleged to have resulted
in property damage, bodily injury or other adverse effects. Defects in products could result in customer dissatisfaction or a
reduction in, or cancellation of, future purchases or liability claims against our companies. If these defects occur frequently,
our reputation may be impaired permanently. Defects in products could also result in financial or other damages to customers,
for which our companies may be asked or required to compensate their customers, in the form of substantial monetary
judgments or otherwise. While our companies take the steps deemed necessary to comply with all laws and regulations,
there can be no assurance that rapidly changing safety standards will not render unsaleable products that complied with
previously-applicable safety standards. As a result, these types of claims could have a material adverse effect on our
businesses, results of operations and financial condition.
Some of our businesses are subject to certain risks associated with the movement of businesses offshore.
Some of our businesses are potentially at risk of losing business to competitors operating in lower cost countries. An additional
risk is the movement offshore of some of our businesses’ customers, leading them to procure products or services from more
closely located companies. Either of these factors could negatively impact our financial condition, business and results of
operations.
Our businesses are subject to certain risks associated with their foreign operations or business they conduct in
foreign jurisdictions.
Some of our businesses have and may have operations or conduct business outside the United States. Certain risks are
inherent in operating or conducting business in foreign jurisdictions, including exposure to local economic conditions;
difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; longer payment cycles
for foreign customers; adverse currency exchange controls; exposure to risks associated with changes in foreign exchange
rates; potential adverse changes in political environments; withholding taxes and restrictions on the withdrawal of foreign
investments and earnings; export and import restrictions; difficulties in enforcing intellectual property rights; and required
compliance with a variety of foreign laws and regulations. These risks individually and collectively have the potential to
negatively impact our financial condition, business and results of operations.
Regulations related to conflict minerals may force certain of our businesses to incur additional expenses, may make
the supply chain of such businesses more complex and may result in damage to the customer relationships of such
businesses.
In August 2012, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Securities
and Exchange Commission promulgated final rules regarding disclosure of the use of certain minerals and their derivatives,
including tin, tantalum, tungsten and gold, known as “conflict minerals,” if these minerals are necessary to the functionality
or production of the company’s products. These regulations require such issuers to report annually whether or not such
minerals originate from the Democratic Republic of Congo (DRC) and adjoining countries and in some cases to perform
extensive due diligence on their supply chains for such minerals.
Our businesses have incurred and will continue to incur additional costs to comply with the disclosure requirements, including
costs related to determining the source of any of the relevant minerals used in the products of certain of our businesses.
These requirements could adversely affect the sourcing, availability and pricing of conflict minerals used in the manufacturing
processes for certain products of our businesses. We have determined that certain of our subsidiaries’ products contain
conflict minerals and we have developed a process to identify where such minerals originated. As of the date of our conflict
minerals report for the 2015 calendar year, we were unable to determine whether or not such minerals originated in the DRC
or its adjoining countries. We may continue to face difficulties in gathering this information in the future since the supply chain
of certain of our businesses is complex, and we may not be able to ascertain the origins for these minerals or determine that
these minerals are DRC conflict-free, which may harm the reputation of some of our businesses. Our pool of suppliers from
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which some of our businesses source these minerals may be limited, and we may be unable to obtain conflict-free minerals
at competitive prices, which could increase costs and adversely affect the manufacturing operations and profitability of certain
of our businesses. Any one or a combination of these various factors could negatively impact our financial condition, business
and results of operations.
Risks Related to Advanced Circuits
Advanced Circuits’ customers operate in industries that experience rapid technological change resulting in short
product life cycles and as a result, if the product life cycles of its customers slow materially, and research and
development expenditures are reduced, its financial condition, business and results of operations will be materially
adversely affected.
Advanced Circuits’ customers compete in markets that are characterized by rapidly changing technology, evolving industry
standards and continuous improvement in products and services. These conditions frequently result in short product life
cycles. As professionals operating in research and development departments represent the majority of Advanced Circuits’
net sales, the rapid development of electronic products is a key driver of Advanced Circuits’ sales and operating performance.
Any decline in the development and introduction of new electronic products could slow the demand for Advanced Circuits’
services and could have a material adverse effect on its financial condition, business and results of operations.
Electronics manufacturing services corporations are increasingly acting as intermediaries, positioning themselves
between PCB manufacturers and OEMS, which could reduce operating margins.
Advanced Circuits’ OEM customers are increasingly outsourcing the assembly of equipment to third party manufacturers.
These third party manufacturers typically assemble products for multiple customers and often purchase circuit boards from
Advanced Circuits in larger quantities than OEM manufacturers. The ability of Advanced Circuits to sell products to these
customers at margins comparable to historical averages is uncertain. Any material erosion in margins could have a material
adverse effect on Advanced Circuits’ financial condition, business and results of operations.
Risks Related to Arnold
Changes in the cost and availability of certain rare earth minerals and magnets could materially harm Arnold’s
business, financial condition and results of operations.
Arnold manufactures precision magnetic assemblies and high-performance rare earth magnets including Samarium Cobalt
magnets. Arnold is especially susceptible to changes in the price and availability of certain rare earth materials. The price
of these materials has fluctuated significantly in recent years and we believe price fluctuations are likely to occur in the future.
Arnold’s need to maintain a continuing supply of rare earth materials makes it difficult to resist price increases and surcharges
imposed by its suppliers. Arnold’s ability to pass increases in costs for such materials through to its customers by increasing
the selling prices of its products is an important factor in Arnold’s business. We cannot guarantee that Arnold will be able to
maintain an appropriate differential at all times. If costs for rare earth materials increase, and if Arnold is unable to pass
along, or is delayed in passing along, those increases to its customers, Arnold will experience reduced profitability. Rare
earth minerals and magnets are available from a limited number of suppliers, primarily in China. Political and civil instability
and unexpected adverse changes in laws or regulatory requirements, including with respect to export duties, quotas or
embargoes, may affect the market price and availability of rare earth materials, particularly from China. If a substantial
interruption should occur in the supply of rare earth materials, Arnold may not be able to obtain other sources of supply in a
timely fashion, at a reasonable price or as would be necessary to satisfy its requirements. Accordingly, a change in the supply
of, or price for, rare earth minerals and magnets could materially harm Arnold’s business, financial condition and results of
operations.
Risks Related to Clean Earth
If Clean Earth is unable to renew its operating permits or lease agreements with regulatory bodies, its business
would be adversely affected.
Clean Earth’s facilities operate using permits and licenses issued by various regulatory bodies at various local, state and
federal government levels. Failure to renew its permits and licenses necessary to operate Clean Earth’s facilities on a timely
basis or failure to renew or maintain compliance with its permits and site lease agreements on a timely basis could prevent
or restrict its ability to provide certain services, resulting in a material adverse effect on its business. There can be no assurance
that Clean Earth will continue to be successful in obtaining timely permit or license applications approval, maintaining
compliance with its permits and lease agreements and obtaining timely lease renewals.
Clean Earth operates eighteen facilities that accept, process and/or treat materials provided by its customers. These
facilities may be inherently dangerous workplaces. If Clean Earth fails to maintain safe worksites, it may be subject
65
to significant operating risks and hazards that could result in injury or death to persons, which could result in losses
or liabilities to it.
Clean Earth’s safety record is an important consideration for it and its customers. If serious accidents or fatalities occur or
its safety record was to deteriorate, it may be ineligible to bid on certain work, and existing service arrangements could be
terminated. Further, regulatory changes implemented by OSHA could impose additional costs on Clean Earth. Adverse
experience with hazards and claims could have a negative effect on Clean Earth’s reputation with its existing or potential
new customers and its prospects for future work.
If Clean Earth fails to comply with applicable environmental laws and regulations, its business could be adversely
affected.
The changing regulatory framework governing Clean Earth’s business creates significant risks. Clean Earth could be held
liable if its operations cause contamination of air, groundwater or soil or expose its employees or the public to contamination.
Under current law, Clean Earth may be held liable for damage caused by conditions that existed before it acquired the assets,
business or operations involved. Also, it may be liable if it arranges for the transportation, disposal or treatment of hazardous
substances that cause environmental contamination at facilities operated by others, or if a predecessor made such
arrangements and Clean Earth is a successor. Liability for environmental damage could have a material adverse effect on
Clean Earth’s financial condition, results of operations and cash flows.
Stringent regulations of federal, state or provincial governments have a substantial impact on Clean Earth’s contaminated
soil, dredge material and solid and hazardous waste treatment, storage, disposal and beneficial use activities. Local
government controls may also apply. Many complex laws, rules, orders and regulatory interpretations govern environmental
protection, health, safety, noise, visual impact, odor, land use, zoning, transportation and related matters. Clean Earth also
may be subject to laws concerning the protection of certain marine and bird species, their habitats, and wetlands. It may
incur substantial costs in order to conduct its operations in compliance with these environmental laws and regulations.
Changes in environmental laws or regulations or changes in the enforcement or interpretation of existing laws, regulations
or permitted activities may require Clean Earth to make significant capital or other expenditures, to modify existing operating
licenses or permits, or obtain additional approvals or limit operations. New environmental laws or regulations that raise
compliance standards or require changes in operating practices or technology may impose significant costs and/or limit
Clean Earth’s operations.
Clean Earth’s revenue is primarily generated as a result of requirements imposed on our customers under federal, state,
and provincial laws and regulations to protect public health and the environment. If requirements to comply with laws and
regulations governing management of contaminated soils, dredge material, and hazardous wastes were relaxed or less
vigorously enforced, demand for Clean Earth’s services could materially decrease and its revenues and earnings could be
significantly reduced.
Risks Related to Crosman
Crosman’s products are subject to product safety and liability lawsuits, which could materially adversely affect its
financial condition, business and results of operations.
As a manufacturer of recreational airguns and archery products, Crosman is involved in various litigation matters that occur
in the ordinary course of business. Although Crosman provides information regarding safety procedures and warnings with
all of its product packaging, not all users of its products will observe all proper safety practices. Failure to observe proper
safety practices may result in injuries that give rise to product liability and personal injury claims and lawsuits, as well as
claims for breach of contract, loss of profits and consequential damages.
If any unresolved lawsuits or claims are determined adversely, they could have a material adverse effect on Crosman, its
financial condition, business and results of operations. As more of Crosman’s products are sold to and used by its consumers,
the likelihood of product liability claims being made against it increases. In addition, the running of statutes of limitations in
the United States for personal injuries to minor children may be suspended during the child’s legal minority. Therefore, it is
possible that accidents resulting in injuries to minors may not give rise to lawsuits until a number of years later.
While Crosman maintains product liability insurance to insure against potential claims, there is a risk such insurance may
not be sufficient to cover all liabilities incurred in connection with such claims and the financial consequences of these claims
and lawsuits will have a material adverse effect on its business, financial condition, liquidity and results of operations.
Risks Related to Manitoba Harvest
Reduced availability of raw materials and other inputs, as well as increased costs for our raw materials and other
inputs, could adversely affect us.
66
Manitoba Harvest's business depends heavily on raw materials and other inputs used in the production of our products,
particularly raw hemp seeds and organic raw hemp seeds. The raw materials are generally sourced from third-party farmers,
and we are not assured of continued supply or pricing. In addition, a substantial portion of our raw materials are agricultural
products, which are vulnerable to adverse weather conditions and natural disasters, such as severe rains, floods, droughts,
frost, earthquakes, and pestilence. Adverse weather conditions and natural disasters also can lower hemp seeds crop yields
and reduce supplies of this ingredient or increase its prices. Incremental costs, including transportation, may also be incurred
if we need to find alternate short-term supplies of hemp seeds from other growers. These factors can increase costs, decrease
revenues and lead to additional charges to earnings, which may have a material adverse effect on our business, results of
operations and financial condition.
Cost increases in raw materials and other inputs could cause our profits to decrease significantly compared to prior periods,
as we may be unable to increase our prices to offset the increased cost of these raw materials and other inputs. If we are
unable to obtain raw materials and other inputs for our products or offset any increased costs for such raw materials and
inputs, our business could be negatively affected.
Risks Related to Sterno
Sterno's products operate at high temperatures and use flammable fuels, each of which could subject our business
to product liability claims.
Sterno products expose it to potential product liability claims typical of fuel based heating products. The fuels Sterno uses
in its products are flammable and may be toxic if ingested. Although Sterno products have comprehensive labeling and it
follows government and third party based standards and protocols, it cannot guarantee there will not be accidents due to
misuse or otherwise. Accidents involving Sterno products may have an adverse effect on its reputation and reduce demand
for its products. In addition, Sterno Products may be held responsible for damages beyond its insurance coverage and there
can be no guarantee that it will be able to produce adequate insurance coverage in the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
NONE
ITEM 2. PROPERTIES
The following is a summary as of December 31, 2017 of the properties owned or leased by our business.
5.11
5.11 is headquartered in Irvine, California and leases offices and warehouse space in locations worldwide. The summary
below outlines 5.11's leased offices and warehouse space.
Location
Square Feet
Use
Lathrop, CA
Modesto, CA
Irvine, CA
Irvine, CA
Irvine, CA
Manteca, CA
Penrose Place, CO
Seattle, WA
Mexico City, Mexico
Bankstown, Australia
Malmo, Sweden
Kowloon Bay, Hong Kong
Dubai, UAE
221,893
Warehouse
66,545
Warehouse/Office
21,807
Office
1,073
4,381
Office
Office
400,000
Warehouse
1,100
Office
11,340
Office
2,583
Office
10,387
Office
6,049
Office
13,613
Office
1,951
Office
In addition, at December 31, 2017, 5.11 leased space for 31 retail stores, ranging in size from 3,250 square feet to 8,375
square feet.
67
Crosman
Crosman is headquartered in Bloomfield, New York. Crosman owns a 225,000 square foot manufacturing facility in Bloomfield,
New York that also holds their corporate offices, and leases a 144,000 square foot finished goods warehouse in Farmington,
New York.
Ergobaby
Ergobaby is headquartered in Los Angeles, California and has four other office locations worldwide. The summary below
outlines Ergobaby's property locations. All locations are leased.
Location
Square Feet
Ergobaby - Corporate
Los Angeles, CA
Ergobaby - Office
Los Angeles, CA
Ergobaby - Office
Salt Lake City, Utah
Ergobaby
Pukalani, HI
Ergobaby Europe
Hamburg, Germany
Ergobaby France
Paris, France
Ergobaby UK
Surrey, United Kingdom
Tula
Tula
San Diego, CA
Bialystok, Poland
16,378
3,292
3,550
2,907
2,410
4,680
251
4,915
9,688
Liberty Safe
Liberty Safe is headquartered in Payson, Utah. Liberty leases offices and warehouse facilities at two locations in Payson,
Utah, where it is headquartered. The corporate headquarters and manufacturing facility are located in a 314,000 square foot
building. Liberty leases an additional warehouse facility totaling approximately 30,000 square feet.
Manitoba Harvest
Manitoba Harvest is headquartered in Winnipeg, Manitoba. Manitoba Harvest leases office and warehouse facilities at two
locations in a connected building in Winnipeg, Manitoba. The manufacturing and warehouse facility are located in a facility
totaling approximately 14,700 square feet, and its customer experience center and additional warehouse space are located
in a facility that total approximately 11,000 square feet. Manitoba Harvest's subsidiary, HOCI, owns a recently built facility
on seven acres of land in St. Agathe, Manitoba. The facility is approximately 35,000 square feet and comprises manufacturing,
warehouse and office space. Manitoba Harvest also leases a corporate office in Minneapolis, Minnesota which opened in
2017.
Advanced Circuits
Advanced Circuits' operations are located in an 113,000 square foot building in Aurora, Colorado, a 30,000 square foot
building in Tempe, Arizona, and a 50,000 square foot building in Maple Grove, Minnesota. These facilities are leased and
comprise both the factory and office space. The lease terms are for approximately 15 years with a renewal option at the
Aurora, Colorado location for an additional 10 years.
Arnold
Arnold is headquartered in Rochester, New York and has nine manufacturing facilities. The summary below outlines Arnold’s
property locations. Arnold owns the Ogallala, Nebraska location and the other locations are leased.
68
Location
Marengo, IL
Marietta, OH
Marietta, OH
Marengo, IL
Norfolk, NE
Rochester, NY
Ogallala, NE
Guangdong Province, China
Sheffield, England
Lupfig, Switzerland
Hanau, Germany
Crolles, France
Algonquin, IL
Square Feet
Use
94,220
Office/Warehouse
81,000
Office/Warehouse
22,646 Warehouse
55,200
Office/Warehouse
109,000
Office/Warehouse
73,000
Office/Warehouse
25,000
Office/Warehouse
154,210
Office/Warehouse
25,000
Office/Warehouse
58,405
Office/Warehouse
1,092
215
Office
Office
~750
Corporate
Clean Earth
Clean Earth is headquartered in Hatboro, Pennsylvania and has eighteen permitted facilities as well as several offices. The
summary below outlines Clean Earth's property locations.
Location (County, State)
Operation
Size
Leased or Owned
Dredged Material Processing and Beneficial Reuse
~ 7 acres
RCRA TSDF
~ 14.5 acres
Owned/ Leased
Montgomery, PA
Corporate Headquarters
Offices
Fixed Base Remediation
Butler, PA
Middlesex, NJ
Hudson, NJ
Hudson, NJ
Hudson, NJ
Dredging Services and Beneficial Reuse
Philadelphia, PA
Med. Temperature Thermal Desorption
Bucks, PA
Lycoming, PA
Med. Temperature Thermal Desorption
Drill Cuttings Stabilization
New Castle, DE
Med. Temperature Thermal Desorption
Prince Georges, MD
Chemical Stabilization
Washington, MD
Chemical Stabilization
Glades, FL
Camden, GA
Marshall, KY
Med. Temperature Thermal Desorption
Med. Temperature Thermal Desorption
RCRA TSDF
Monongalia, WV
RCRA TSDF - Aerosol Recycling
Butler, PA
Transportation facility
Newport News, VA
Office & Warehouse
Hartford, CT
Etowah, AL
Allentown, PA
Allentown, PA
Richmond, VA
Thermal Desorption
RCRA Part B Permitted Hazardous Waste TSDF
PADEP Solid Waste permit Handler
PADEP RCRA Part B Mercury (D009) PCB
Capacitors
Universal waste/Electronic Waste/10-day In-transit
Storage
West Melbourne, FL
FLDEP U&E Waste Handler
West Melbourne, FL
RCRA PART B Mercury/PCB's/10-=day In-transit
Storage
69
16,669 sq. ft.
7,525 sq. ft.
~ 16 acres
Leased
Leased
Leased
Leased
~ 20 acres
8.5 acres
7.8 acres
~ 2 acres
7.6 acres
42.49 acres
13.67 acres
11.29 acres
2.92 acres
~ 25.2 acres
~ 1 acres
1,500 sq. ft.
3,200 sq. ft.
16 acres
42 acres
32,000 sq. ft.
Lease
Owned
Owned
Leased
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Owned
Owned
Leased
32,132 sq. ft.
Leased
10,625 sq. ft.
15,000 sq. ft.
Leased
Leased
13,000 sq. ft.
Leased
Hayward, CA
Modesto, CA
Sterno
DTSC RCRA Permit For Mercury (D009)
Registerd U & E Waste Handler
6,892 sq. ft.
25,992 sq. ft.
Leased
Leased
Sterno is headquartered in Corona, California. Sterno owns a 103,500 square foot manufacturing and production facility in
Memphis, Tennessee, a 214,000 square foot manufacturing and production facility in Texarkana, Texas, and a 15,000 square
foot facility La Porte County, Indiana. All other properties are leased.
Location
Square Feet
Use
Corona, CA
Memphis, TN
Texarkana, TX
Texarkana, TX
Des Plaines, IL
Toronto, Canada
Vancouver, Canada
Vancouver, CA
Montreal, CA
Montreal, Canada
Atlanta, GA
Las Vegas, NV
Yuyao, China
Yuyao, China
Shunde, China
12,330
Corporate Office
103,500
Manufacturing
214,000
Manufacturing
16,000 Warehouse
11,400
Office (subleased)
13,867
Office
50,372
Office
33,711 Warehouse
2,100 Warehouse
12,500
Office
1,235
Showroom
342
Showroom
2,982
Office
323
343
Office
Office
Our corporate offices are located in Westport, Connecticut, where we lease approximately 4,800 square feet from our
Manager. We believe that our properties and the terms of their leases at each of our businesses are sufficient to meet our
present needs and we do not anticipate any difficulty in securing additional space, as needed, on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are involved in various claims and legal proceedings. While the ultimate resolution of
these matters has yet to be determined, we do not believe that their outcome will have a material adverse effect on our
financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
70
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF SECURITIES
Market Information
Our common shares of Trust stock has traded on the New York Stock Exchange (the “NYSE”) under the symbol “CODI”
since November 1, 2011. Previously, our stock was traded on the NASDAQ Global Select Market under the symbol “CODI.”
The following table sets forth the intraday high and low sales prices per share as reported on the NYSE for the periods
indicated:
Quarter Ended
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
Common Stock Holders
High
Low
Distribution
Declared
$
18.35
$
16.30
$
17.90
17.45
18.40
19.50
17.58
17.00
16.09
16.50
15.95
15.90
16.95
16.51
15.41
13.65
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
On December 31, 2017 there were 19 registered holders of our common stock. The number of registered holders includes
banks and brokers who act as nominees, each of whom may represent more than one shareholder.
Securities Authorized for Issuance under Equity Compensation Plans
There are no securities currently authorized for issuance under an equity compensation plan.
COMPARATIVE PERFORMANCE OF SHARES OF TRUST COMMON STOCK
The performance graph shown below compares the change in cumulative total shareholder return on common shares of
Trust stock with the NASDAQ Stock Market Index, the NASDAQ Other Finance Index, the NYSE Composite Index and the
NYSE Financial Sector Index for the previous five years, through the quarter ended December 31, 2017. The graph sets the
beginning value of shares of Trust stock and the indices at $100, and assumes that all quarterly dividends were reinvested
at the time of payment. This graph does not forecast future performance of common shares of Trust stock.
71
Data
Compass Diversified Holdings
NASDAQ Stock Market Index
NASDAQ Other Finance Index
NYSE Financial Sector Index
NYSE Composite Index
Data
Compass Diversified Holdings
NASDAQ Stock Market Index
NASDAQ Other Finance Index
NYSE Financial Sector Index
NYSE Composite Index
March 31,
2013
June 30,
2013
September 30,
2013
December 31,
2013
$
$
$
$
$
$
$
$
$
$
174.98
146.58
98.41
63.14
108.58
March 31,
2014
218.56
188.37
115.15
73.30
125.52
$
$
$
$
$
$
$
$
$
$
195.86
152.67
102.70
65.10
108.65
June 30,
2014
212.14
197.75
114.94
75.02
130.90
$
$
$
$
$
$
$
$
$
$
201.45
169.19
106.62
68.66
114.71
September 30,
2014
206.95
201.58
113.84
74.39
127.60
$
$
$
$
$
$
$
$
$
$
224.45
187.36
117.93
73.10
124.00
December 31,
2014
194.20
212.46
117.29
77.17
129.23
72
Data
Compass Diversified Holdings
NASDAQ Stock Market Index
NASDAQ Other Finance Index
NYSE Financial Sector Index
NYSE Composite Index
Data
Compass Diversified Holdings
NASDAQ Stock Market Index
NASDAQ Other Finance Index
NYSE Financial Sector Index
NYSE Composite Index
Data
Compass Diversified Holdings
NASDAQ Stock Market Index
NASDAQ Other Finance Index
NYSE Financial Sector Index
NYSE Composite Index
Distributions
March 31,
2015
June 30,
2015
September 30,
2015
December 31,
2015
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
206.87
219.86
121.74
75.83
129.94
March 31,
2016
198.47
218.46
114.3
68.25
121.7
March 31,
2017
219.71
265.2
138.49
83.03
137.02
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
200.67
223.71
121.61
76.67
128.82
June 30,
2016
212.87
217.24
117.57
67.88
125.06
June 30,
2017
233.46
275.46
148.74
85.93
140.23
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
199.51
207.26
112.03
70.13
116.84
September 30,
2016
225.44
238.3
123.62
71.76
127.83
September 30,
2017
239.93
291.41
155.32
89.52
145.56
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
198.94
224.64
115.43
72.55
120.93
December 31,
2016
234.50
241.49
133.75
80.10
131.82
December 31,
2017
231.39
309.69
164.29
94.76
152.71
For the years 2017, 2016 and 2015, we have declared and paid quarterly cash distributions to holders of record of our
common shares as follows:
Quarter Ended
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
Declaration Date
Payment Date
Distribution Per Share
January 4, 2018
October 5, 2017
July 6, 2017
April 6, 2017
January 5, 2017
October 6, 2016
July 7, 2016
April 7, 2016
January 7, 2016
October 7, 2015
July 9, 2015
April 9, 2015
January 25, 2018
October 26, 2017
July 27, 2017
April 27, 2017
January 26, 2017
October 27, 2016
July 28, 2016
April 28, 2016
January 28, 2016
October 29, 2015
July 29, 2015
April 29, 2015
$
$
$
$
$
$
$
$
$
$
$
$
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
We currently intend to continue to declare and pay regular quarterly cash distributions on all outstanding common shares
through fiscal year 2018. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Liquidity and Capital Resources” in Part II, Item 7.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by Issuer and Affiliated Partners
None.
73
ITEM 6. – SELECTED FINANCIAL DATA
The following table sets forth selected historical and other data of the Company and should be read in conjunction with the
more detailed consolidated financial statements included elsewhere in this Annual Report. Selected financial data below
includes the results of operations, cash flow and balance sheet data of the Company for the years ended December 31,
2017, 2016, 2015, 2014, and 2013.
The Company sold 5,800,238 shares of FOX during FOX's initial public offering in August 2013, and an additional 4,466,569
shares during a FOX secondary offering in July 2014, resulting in the Company holding approximately 41% ownership interest
in FOX at December 31, 2015 and 2014. Effective July 11, 2014, the date that the Company's ownership interest in FOX
fell below 50%, the Company began accounting for the investment in FOX as an equity method investment at fair value.
FOX's results of operations and cash flows are included in the consolidated results of operations and cash flows of the
Company from the date of acquisition through July 10, 2014, the date at which the Company began accounting for the
investment in FOX using the equity method of accounting. In March 2017, we sold our remaining ownership interest in FOX.
The operating results for Tridien in 2016, 2015, 2014 and 2013 are reflected as discontinued operations in each of the years
presented in the table below and are not included in continuing operations. The operating results of CamelBak and American
Furniture in 2015, 2014, and 2013 are reflected as discontinued operations and are not included in the continuing operations
data below. Data included below only includes activity in our operating subsidiaries from their respective dates of acquisition.
Statements of Operations Data:
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Supplemental put expense (reversal)
Management fees
Amortization expense
Impairment expense/ loss on disposal of assets
Operating income
Gain on deconsolidation of subsidiary
(Loss) gain on equity method investment
Income from continuing operations
Income and gain from discontinued operations
Net income
Net income from continuing operations—noncontrolling
interest
Net income (loss) from discontinued operations—
noncontrolling interest
Net income attributable to Holdings
Basic and fully diluted income (loss) per share
attributable to Holdings:
Continuing operations
Discontinued operations
Basic and fully diluted income (loss) per share attributable to
Holdings
Year ended December 31,
2017
2016
2015
2014
2013
$1,269,729
$ 978,309
$ 727,978
$ 636,675
$ 680,639
822,020
651,739
487,242
431,658
457,913
447,709
326,570
240,736
205,017
222,726
318,484
217,830
136,399
128,190
116,549
—
32,693
52,003
17,325
27,204
—
(5,620)
33,272
—
29,406
35,069
25,204
19,061
—
74,490
53,749
—
25,658
28,761
—
—
(45,995)
21,872
23,063
—
17,782
19,350
—
49,918
31,892
115,040
—
264,325
4,533
8,991
11,029
270,077
—
—
71,052
7,764
78,816
340
2,781
156,779
21,078
33,612
56,530
165,770
291,155
5,621
1,961
5,133
11,661
12,124
—
(116)
(1,201)
659
(1,372)
$
27,991
$
54,685
$ 161,838
$ 278,835
$
68,064
(0.45) $
0.46
$
(0.30) $
4.98
$
0.01
0.05
2.91
0.40
0.86
0.19
(0.44) $
0.51
$
2.61
$
5.38
$
1.05
$
$
74
Cash distribution declared per common share
$
1.44
$
1.44
$
1.44
$
1.44
$
1.44
Cash Flow Data:
Cash provided by operating activities
Cash (used in) provided by investing activities
Cash (used in) provided by financing activities
Foreign currency impact on cash
$
81,771
$ 111,372
$
84,548
$
70,695
$
72,374
(77,278)
(363,021)
233,880
(424,753)
66,286
(2,588)
208,726
(254,357)
265,487
(44,122)
(1,792)
(3,174)
(1,905)
(955)
450
Net increase (decrease) in cash and cash equivalents
$
113
$
(46,097) $
62,166
$
(89,526) $
94,988
Balance Sheet Data:
Current assets
Total assets
Current liabilities
Long-term debt
Total liabilities
Noncontrolling interests
Shareholders’ equity attributable to Holdings
2017
2016
2015
2014
2013
December 31,
$ 526,818
$ 452,819
$ 291,363
$ 320,799
$ 399,133
1,820,303
1,777,155
1,421,042
1,547,430
1,044,913
212,193
202,521
116,479
141,231
130,130
584,347
551,652
308,639
485,547
280,389
894,304
882,611
547,823
739,096
475,978
52,791
38,139
47,135
40,903
95,550
873,208
856,405
826,084
767,431
473,385
75
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Item 7 contains forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K
are subject to a number of risks and uncertainties, some of which are beyond our control. 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, including those discussed in the sections entitled “Forward-Looking
Statements” and “Risk Factors” included elsewhere in this Annual Report.
Overview
Compass Diversified Holdings, a Delaware statutory trust, was incorporated in Delaware on November 18, 2005. Compass
Group Diversified Holdings, LLC, a Delaware limited liability Company, was also formed on November 18, 2005. In accordance
with the Trust Agreement, the Trust is sole owner of 100% of the Trust Interests (as defined in 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. Sostratus LLC owns all of our Allocation Interests. The Company is the
operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware
corporation.
The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses
headquartered in North America. We characterize small and middle market businesses as those that generate annual cash
flows of up to $60 million. We focus on companies of this size because we believe that these companies are more able to
achieve growth rates above those of their relevant industries and are also frequently more susceptible to efforts to improve
earnings and cash flow.
In pursuing new acquisitions, we seek businesses with the following characteristics:
• North American base of operations;
•
stable and growing earnings and cash flow;
• maintains a significant market share in defensible industry niche (i.e., has a “reason to exist”);
•
•
•
solid and proven management team with meaningful incentives;
low technological and/or product obsolescence risk; and
a diversified customer and supplier base.
Our management team’s strategy for our subsidiaries involves:
•
•
•
•
•
utilizing structured incentive compensation programs tailored to each business in order to attract, recruit and retain
talented managers to operate our businesses;
regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting
management in the development and implementation of information systems to effectively achieve these goals;
assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue
and cost related);
identifying and working with management to execute attractive external growth and acquisition opportunities; and
forming strong subsidiary level boards of directors, including independent directors, to supplement management in
their development and implementation of strategic goals and objectives.
Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are
well- positioned to acquire additional attractive businesses. Our management team has a large network of approximately
2,000 deal intermediaries to whom it actively markets and who we expect to expose us to potential acquisitions. Through
this network, as well as our management team’s active proprietary transaction sourcing efforts, we typically have a substantial
pipeline of potential acquisition targets. In consummating transactions, our management team has, in the past, been able
to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-
owned businesses, management buy-outs and reorganizations. We believe the flexibility, creativity, experience and expertise
of our management team in structuring transactions provides us with a strategic advantage by allowing us to consider non-
traditional and complex transactions tailored to fit a specific acquisition target.
In addition, because we intend to fund acquisitions through the utilization of our Revolving Credit Facility, we do not expect
to be subject to delays in or conditions by closing acquisitions that would be typically associated with transaction specific
financing, as is typically the case in such acquisitions. We believe this advantage is a powerful one and is highly unusual in
the marketplace for acquisitions in which we operate.
76
Initial public offering and Company formation
On May 16, 2006, we completed our initial public offering of 13,500,000 shares of the Trust at an offering price of $15.00
per share (the “IPO”). Subsequent to the IPO the Company’s board of directors engaged our Manager to externally manage
the day-to-day operations and affairs of the Company, oversee the management and operations of the businesses and to
perform those services customarily performed by executive officers of a public company.
From May 16, 2006 through December 31, 2017, we purchased seventeen businesses (each of our businesses is treated
as a separate operating segment) and disposed of seven businesses. The tables below reflect summarized information
relating to our acquisitions and dispositions from the date of our IPO through December 31, 2017 (in thousands):
Acquisitions
Ownership Interest -
December 31, 2017
Primary
Diluted
N/a
N/a
N/a
N/a
69.4%
69.2%
Business
Acquisition Date
CBS Holdings (Staffmark) (1)
Crosman (4)
Advanced Circuits (3)
Silvue
Tridien (3)
Aeroglide
Halo
American Furniture
FOX (2)
Liberty Safe (3)
Ergobaby (3)
CamelBak
Arnold Magnetics
Clean Earth (3)
Sterno (3)
Manitoba Harvest (3)
5.11
Crosman (3) (4)
May 16, 2006
May 16, 2006
May 16, 2006
May 16, 2006
August 1, 2006
February 28, 2007
February 28, 2007
August 31, 2007
January 4, 2008
March 31, 2010
September 16, 2010
August 24, 2011
March 5, 2012
August 7, 2014
October 10, 2014
July 10, 2015
August 31, 2016
June 2, 2017
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
CODI Purchase
Price
183,200
72,600
81,000
36,000
31,000
58,200
62,300
97,000
80,400
70,200
85,200
251,400
128,800
251,400
N/a
N/a
N/a
N/a
N/a
N/a
88.6%
82.7%
N/a
96.7%
97.5%
160,000
100.0%
102,700
408,200
150,400
76.6%
97.5%
98.8%
N/a
N/a
N/a
N/a
N/a
N/a
84.7%
76.6%
N/a
84.7%
79.8%
89.5%
67%
85.5%
89.2%
(1) The total purchase price for CBS Holdings includes the acquisition of Staffmark Investment LLC on January 21, 2008 for a
purchase price of $128.6 million. The Company renamed its CBS Personnel business Staffmark subsequent to the acquisition.
(2) FOX completed an IPO of its common stock in August 2013 in which we sold a 22% interest in FOX, reducing our ownership
interest to 53%. In July 2014, FOX completed a secondary offering in which we sold a 12% interest in FOX, reducing our ownership
interest to 41% and resulting in the deconsolidation of FOX from our financial results. We subsequently sold our remaining shares
of FOX and now hold no ownership interest in FOX. We recognized total net proceeds from the sale of our FOX shares of
approximately $465.1 million.
(3) The total purchase price does not reflect add-on acquisitions made by our businesses subsequent to their purchase by CODI.
(4) Crosman was purchased by the Company in May 2006 and subsequently sold in January 2007. We reacquired Crosman in
June 2017.
77
Dispositions
Business
Date of Disposition
Sale Price
CODI Proceeds from
Disposition (1)
Gain (loss)
recognized (2)
Crosman
Aeroglide
Silvue
Staffmark
Halo
CamelBak
American Furniture
Tridien
FOX
January 5, 2007
June 24, 2008
June 25, 2008
October 17, 2011
May 1, 2012
August 3, 2015
October 5, 2015
September 21, 2016
*
$
$
$
$
$
$
$
$
143,000
95,000
95,000
295,000
76,500
412,500
24,100
25,000
*
$
$
$
$
$
$
$
$
$
109,600
78,500
63,600
216,000
66,500
367,800
23,500
22,700
526,600
$
$
$
$
$
$
$
$
$
35,800
33,700
39,600
88,500
(300)
158,300
(14,100)
1,700
428,700
(1) CODI portion of the net proceeds from disposition includes debt and equity proceeds and reflects the accounting for the redemption
of the sold business's minority shareholders and transaction expenses.
(2) Gain (loss) recognized on sale of our businesses is calculated by deducting our total invested capital from the net sale proceeds
received.
* We made loans to and purchased a controlling interest in FOX on January 4, 2008, for approximately $80.4 million. In
August 2013, FOX completed an initial public offering of its common stock. As a result of the initial public offering, our
ownership interest in FOX was reduced to approximately 53.9%. No gain was reflected as a result of the sale of our FOX
shares in the initial public offering because our majority classification of FOX did not change. FOX used a portion of their
net proceeds received from the sale of their shares as well as proceeds from a new external FOX credit facility to repay
$61.5 million in outstanding indebtedness to us under their existing credit facility with us. In July 2014, through a secondary
offering, our ownership in FOX was lowered from approximately 53% to approximately 41%, and as a result we deconsolidated
FOX as of July 10, 2014. In March and August 2016, through two more secondary offerings and a share repurchase by
FOX, our ownership in the outstanding common stock of FOX was further lowered to approximately 23% as of September
30, 2016. In November 2016, through another secondary offering, our ownership in the outstanding common stock of FOX
was further lowered to approximately 14%. On March 13, 2017, FOX closed on a secondary public offering of 5,108,718
shares of FOX common stock held by CODI, which represented CODI's remaining investment in FOX. We recognized total
net proceeds from the sales of our FOX shares of approximately $465.1 million, plus proceeds from the repayment of the
FOX credit facility of $61.5 million upon completion of their initial public offering, and a total gain of $428.7 million.
We are dependent on the earnings of, and cash receipts from, the businesses that we own in order to meet our corporate
overhead and management fee expenses and to pay distributions. The earnings and distributions of our businesses are
generally lowest in the first quarter, and strongest in the third and fourth quarter, of each fiscal year. These earnings and
distributions, net of any non-controlling interest in these businesses, are available to:
• meet capital expenditure requirements, management fees and corporate overhead charges;
•
•
fund distributions from the businesses to the Company; and
be distributed by the Trust to shareholders.
2017 Highlights and Recent Events
Acquisition of Crosman
On June 2, 2017, through a wholly owned subsidiary, Crosman Acquisition Corp., we acquired 98.9% of the outstanding
equity of Bullseye Acquisition Corporation, which is the sole owner of Crosman Corp. ("Crosman"). Crosman is a designer,
manufacturer and marketer of airguns, archery products, laser aiming devices, and related accessories. Headquartered in
Bloomfield, New York, Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers,
online channels and distributors serving smaller specialty stores and international markets. Its diversified product portfolio
includes the widely known Crosman, Benjamin and CenterPoint brands. The purchase price, including proceeds from
noncontrolling interests and net of transaction costs, was approximately $150.4 million. Crosman management invested in
the transaction along with the Company, representing approximately 1.1% of the initial noncontrolling interest.
78
Divestiture of FOX shares
On March 13, 2017, Fox Factory Holding Corp. ("FOX") closed on a secondary public offering of 5,108,718 shares of FOX
common stock held by CODI, which represented CODI's remaining investment in FOX. CODI received $136.1 million in net
proceeds as a result of the sale. As a result of this secondary public offering, the Company no longer holds an ownership
interest in FOX. We recognized total net proceeds from the sales of our FOX shares of approximately $465.1 million.
This sale of the portion of our FOX shares in March 2017 qualified as a Sale Event under the Company's LLC Agreement.
During the second quarter of 2017, our board of directors declared a distribution to the Holders of the Allocation Interests of
$25.8 million in connection with the Sale Event of FOX. The profit allocation payment was made during the quarter ended
June 30, 2017.
Trust Preferred Share Issuance
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Trust Preferred Shares (the "Series A Preferred Shares") for
gross proceeds of $100.0 million, or $96.4 million net of underwriters' discount and issuance costs.
2017 Distributions
Common shares - For the 2017 fiscal year we declared distributions to our common shareholders totaling $1.44 per share.
Preferred shares - For the 2017 fiscal year we declared distributions to our preferred shareholders totaling $1.067 per share
on our Series A Preferred Shares.
Subsequent Events
Acquisition of Foam Fabricators
In January 2018, we entered into an agreement to acquire Foam Fabricators, Inc. (“Foam Fabricators”) for a purchase price
of $247.5 million (excluding working capital and certain other adjustments upon closing). Headquartered in Scottsdale,
Arizona, Foam Fabricators is a leading designer and manufacturer of custom molded protective foam solutions and OEM
components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP).
Founded in 1957, the Foam Fabricators operates 13 state-of-the-art molding and fabricating facilities across North America.
Foam Fabricators provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals,
health and wellness, automotive, and building products. For the trailing twelve months ended November 30, 2017, Foam
Fabricators reported net revenue of approximately $126 million. The acquisition of Foam Fabricators closed on February
15, 2018, with the Company funding the acquisition through a draw on our 2014 Revolving Credit Facility.
Acquisition of Rimports
In January 2018, our Sterno business entered into an agreement to acquire Rimports, Inc. ("Rimports") for a purchase price
of approximately $145 million, excluding working capital and other adjustments upon closing, plus a potential earn-out of up
to $25 million based on future financial performance of Rimports. Rimports is a manufacturer and distributor of branded and
private label scented, wickless candle products used for home decor and fragrance. Headquartered in Provo, Utah, Rimports
offers an extensive line of ceramic wax warmers, scented wax cubes, essential oils and diffusers through the mass retail
channel. For the trailing twelve months ended November 30, 2017, Rimports reported net revenue of $155.4 million. The
acquisition of Rimports closed on February 26, 2018, with the Company funding the acquisition through a draw on our 2014
Revolving Credit Facility.
2018 Outlook
Middle market deal flow remained steady in 2017 relative to 2016, in part due to continued attractive valuations for sellers.
High valuation levels continue to be driven by the availability of debt capital with favorable terms and financial and strategic
buyers seeking to deploy available equity capital.
We remain focused on marketing the Company’s attractive ownership and management attributes to potential sellers of
middle market businesses and intermediaries. In addition, we continue to pursue opportunities for add-on acquisitions by
certain of our existing subsidiary companies, which can be particularly attractive from a strategic perspective.
The areas of focus for 2018, which are generally applicable to each of our businesses, include:
• Achieving sales growth through a combination of new product development, increasing distribution and international
•
expansion;
Taking market share, where possible, in each of our niche market leading companies, generally at the expense of
less well capitalized competitors;
• Striving for excellence in supply chain management, manufacturing and technological capabilities;
79
• Continuing to pursue expense reduction and cost savings in lower margin business lines or in response to lower
production volume;
• Continuing to grow through disciplined, strategic acquisitions and rigorous integration processes; and
• Driving free cash flow through increased net income and effective working capital management, enabling continued
investment in our businesses, strategic acquisitions, and distributions to our shareholders.
80
Results of Operations
We were formed on November 18, 2005 and acquired our existing businesses (segments) as follows:
May 16, 2006
Advanced Circuits
March 31, 2010
September 16, 2010
March 5, 2012
Liberty Safe
Ergobaby
Arnold
August 26, 2014
Clean Earth
October 10, 2014
July 10, 2015
August 31, 2016
June 2, 2017
Sterno
Manitoba Harvest
5.11
Crosman
Fiscal years 2017, 2016 and 2015 each represent a full year of operating results included in our consolidated results of
operations for six of our businesses. We acquired Crosman in June 2017, 5.11 in August 2016, and Manitoba Harvest in
July 2015. In the following results of operations, we provide (i) our actual Consolidated Results of Operations for the years
ended December 31, 2017, 2016 and 2015, which includes the historical results of operations of each of our businesses
(operating segments) from the date of acquisition and (ii) comparative historical results of operations for each of our
businesses on a stand-alone basis (“Results of Operations – Our Businesses”), for each of the years ended December 31,
2017, 2016 and 2015, where all years presented include relevant pro-forma adjustments for pre-acquisition periods and
explanations where applicable.
Consolidated Results of Operations — Compass Diversified Holdings
(in thousands)
Net revenues
Cost of sales
Gross profit
Selling, general and administrative expense
Management fees
Amortization of intangibles
Impairment expense
Loss on disposal of assets
Operating income
Year Ended December 31,
2017
2016
2015
$
1,269,729
$
978,309
$
822,020
447,709
318,484
32,693
52,003
17,325
—
651,739
326,570
217,830
29,406
35,069
16,000
9,204
727,978
487,242
240,736
136,399
25,658
28,761
—
—
$
27,204
$
19,061
$
49,918
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 increased by approximately $291.4 million or 29.8% compared to the
corresponding period in 2016. Crosman sales since the date of acquisition were $78.4 million, while $200.0 million of the
increase reflects a full year of net sales at 5.11 in 2017 as compared to 2016. We also saw notable sales increases at Clean
earth ($22.3 million, primarily due to two acquisitions in 2016 and one acquisition in 2017) and Sterno ($7.3 million, primarily
due to the acquisition of Sterno Home in January 2016), offset by decreases in sales at Liberty ($11.9 million) and Manitoba
Harvest ($3.6 million) in 2017 as compared to 2016. Refer to "Results of Operations - Our Businesses" for a more detailed
analysis of net sales by business segment.
We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income
on the investment of available funds, but expect such earnings to be minimal. Our investment in our businesses is typically
in the form of loans from the Company to such businesses, as well as equity interests in those businesses. Cash flows
coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and,
in some cases, dividends on our equity ownership. However, on a consolidated basis these items will be eliminated.
Cost of sales
On a consolidated basis, cost of sales increased approximately $170.3 million during the year ended December 31, 2017,
compared to the corresponding period in 2016. Crosman cost of sales since the date of acquisition were $61.7 million, while
5.11 Tactical accounted for $103.5 million of the increase, reflecting a full year of ownership in 2017. The remaining amount
of the increase was primarily due to add-on acquisitions made during 2016 at Clean Earth, Sterno and Ergobaby. Gross
81
profit as a percentage of sales was approximately 35.3% in year ended December 31, 2017 compared to 33.4% in 2016.
Refer to "Results of Operations - Our Businesses" for a more detailed analysis of cost of sales by business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $100.7 million during the year ended
December 31, 2017, compared to the corresponding period in 2016. The increase in expenses in 2017 compared to 2016
is principally the result of the acquisition of Crosman in June 2017 ($12.3 million in selling, general and administrative
expenses, including $1.8 million in acquisition costs for Crosman and the add-on acquisition of Lasermax in July 2017), and
a full year of ownership of 5.11 ($125.0 million in selling, general and administrative expenses in 2017 compared to $38.1
million in 2016). Refer to "Results of Operations - Our Businesses" for a more detailed analysis of selling, general and
administrative expense by business segment. At the corporate level, general and administrative expense increased from
$12.3 million in 2016 to $12.7 million in 2017, primarily due to increased professional fees associated with compliance costs.
Fees to manager
Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually)
of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the year ended
December 31, 2017, we incurred approximately $32.7 million in expense for these fees compared to $29.4 million for the
corresponding period in 2016. The $3.3 million increase in the year ended December 31, 2017 is principally due to the
increase in consolidated net assets resulting from the acquisition of Crosman in June 2017, 5.11 in August 2016, and the
add-on acquisitions by our businesses that occurred throughout 2016.
Amortization expense
Amortization expense for the year ended December 31, 2017 increased $16.9 million to $52.0 million as compared to the
prior year, primarily as a result of the acquisition of Crosman in June 2017 and 5.11 in August 2016.
Impairment expense
Manitoba Harvest performed an interim impairment test of goodwill and its indefinite lived trade name in the fourth quarter
of 2017, which resulted in the recording of preliminary impairment expense of $8.5 million. $6.2 million of the impairment
expense related to goodwill, and $2.3 million of the impairment expense related to the Manitoba Harvest trade name. We
expect to finalize the impairment test in the first quarter of 2018.
Arnold performed an interim impairment test at each of its reporting units in the fourth quarter of 2016, which resulted in the
recording of preliminary impairment expense of the PMAG reporting unit of $16.0 million as of December 31, 2016. In the
first quarter of 2017, Arnold completed the impairment testing of the PMAG reporting unit and recorded an additional $8.9
million impairment expense based on the results of the Step 2 impairment testing.
Year ended December 31, 2016 compared to the Year ended December 31, 2015
Net sales
On a consolidated basis, net sales for the year ended December 31, 2016 increased by approximately $250.3 million or
34.4% compared to the corresponding period in 2015. 5.11 sales since the date of acquisition were $109.8 million, while
$41.9 million of the increase reflects a full year of net sales at Manitoba Harvest in 2016 as compared to 2015. The remaining
amount of the increase was primarily due to add-on acquisitions made during 2016, specifically the Ergobaby acquisition of
Baby Tula in May 2016 ($16.3 million in net sales from date of acquisition), and the Sterno acquisition of Sterno Home in
January 2016 ($77.9 million in Sterno Home sales from the date of acquisition). Refer to "Results of Operations - Our
Businesses" for a more detailed analysis of net sales by business segment.
We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income
on the investment of available funds, but expect such earnings to be minimal. Our investment in our businesses is typically
in the form of loans from the Company to such businesses, as well as equity interests in those businesses. Cash flows
coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and,
in some cases, dividends on our equity ownership. However, on a consolidated basis these items will be eliminated.
Cost of sales
On a consolidated basis, cost of sales increased approximately $164.5 million during the year ended December 31, 2016,
compared to the corresponding period in 2015. 5.11 cost of sales since the date of acquisition were $78.8 million, while
$20.9 million of the increase reflects a full year of cost of sales at Manitoba Harvest in 2016 as compared to 2015. The
remaining amount of the increase was primarily due to add-on acquisitions made during 2016, specifically the Ergobaby
acquisition of Baby Tula in May 2016 ($4.7 million in cost of sales from date of acquisition), and the Sterno acquisition of
Sterno Home in January 2016 ($58.1 million in net sales from the date of acquisition). Gross profit as a percentage of sales
82
was approximately 35.3% in the year ended December 31, 2016 compared to 33.1% in 2015. Refer to "Results of Operations
- Our Businesses" for a more detailed analysis of cost of sales by business segment.
Selling, general and administrative expense
On a consolidated basis, selling, general and administrative expense increased approximately $81.4 million during the year
ended December 31, 2016, compared to the corresponding period in 2015. The increase in expenses in 2016 compared to
2015 is principally the result of the acquisition of 5.11 in August 2016 ($38.1 million in selling, general and administrative
expenses, including $2.1 million in acquisition costs), a full year of expense related to our 2015 acquisition, Manitoba Harvest,
($11.5 million), and the add on acquisitions of Baby Tula by Ergobaby and Sterno Home by Sterno ($3.9 million and $18.6
million, respectively, in selling, general and administrative expense). Refer to "Results of Operations - Our Businesses" for
a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, general
and administrative expense increased from $10.6 million in 2015 to $12.3 million in 2016.
Fees to manager
Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually)
of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the year ended
December 31, 2016, we incurred approximately $32.7 million in expense for these fees compared to $25.7 million for the
corresponding period in 2015. The $3.7 million increase in the year ended December 31, 2016 is principally due to the
increase in consolidated net assets resulting from the acquisition of 5.11 in August 2016, and the add-on acquisitions by our
businesses that occurred throughout 2016.
Amortization expense
Amortization expense increased $6.3 million, from $25.7 million for the year ended December 31, 2015 to $35.1 million for
the year ended December 31, 2016. The increase primarily relates to our acquisition of 5.11 in August 2016 ($2.8 million),
a full year of amortization at Manitoba Harvest in 2016, and the amortization of intangible assets for the 2016 add-on
acquisitions.
Impairment expense
The Company performed interim goodwill impairment testing on the three reporting units of Arnold as of December 31, 2016.
The results of the impairment test (Step 1) indicated that the goodwill associated with the PMAG reporting unit was impaired.
The Company developed an estimated range of the potential goodwill impairment at PMAG of between $14 million and $19
million, and recorded impairment expense of $16 million at December 31, 2016. The result of the Step 2 analysis was
completed during the first quarter of 2017, resulting in additional impairment expense of $8.9 million.
Loss on disposal of assets
Both the Ergobaby and Clean Earth businesses recognized losses on disposal of assets during 2016. Ergobaby recorded
a $5.9 million loss on disposal of assets during the year ended December 31, 2016 related to its decision to dispose of the
Orbit Baby product line. The loss is comprised of the write-off of intangible assets of $5.5 million, property, plant and equipment
of $0.4 million, and other assets of $1.0 million. In October 2016, Ergobaby sold a majority of the Orbit Baby intellectual
property and tooling assets. The proceeds of the sale reduced the loss recorded on disposal of assets by approximately
$1.0 million in the fourth quarter of 2016. Clean Earth recognized a loss on disposal of assets of $0.0 million during the
fourth quarter of 2016 related to the closure of the Company’s Williamsport, Pennsylvania site which processed drill cuttings.
The loss was comprised of intangible assets specific to the Williamsport location, as well as equipment that could not be
repurposed to other sites at the time of the closing of the facility.
Results of Operations — Our Businesses
As previously discussed, we acquired our businesses on various acquisition dates beginning May 16, 2006. As a result, our
consolidated operating results only include the results of operations since the acquisition date associated with each of our
businesses in accordance with generally accepted accounting principles in the United States ("GAAP"). The following
discussion reflects a comparison of the historical results of operations for each of our businesses (segments) for the complete
fiscal years ending December 31, 2017, 2016 and 2015. For Crosman, which we acquired in June 2017, the following
discussion reflects comparative pro forma results as if we had acquired the business on January 1, 2016. For 5.11, which
we acquired in August 2016, the following discussion reflects the historical results of operations for the fiscal year ended
December 31, 2017, and the comparative pro forma results of operations for the fiscal years ended December 31, 2016 and
2015 as if we had acquired the business on January 1, 2015. For Manitoba Harvest, which was acquired in July 2015, the
following discussion reflects the historical operations for the years ended December 31, 2017 and 2016, and comparative
pro forma results of operation for the fiscal year ending December 31, 2015 as if we had acquired the business January 1,
2015. Where appropriate, relevant pro forma adjustments are reflected as part of the historical operating results. We believe
83
this presentation enhances the discussion and provides a more meaningful comparison of operating results. The following
operating results of our businesses are not necessarily indicative of the results to be expected for a full year, going forward.
We categorize the businesses we own into two separate groups of businesses (i) branded consumer businesses, and (ii) niche
industrial businesses. Branded consumer businesses are characterized as those businesses that we believe capitalize on
a valuable brand name in their respective market sector. We believe that our branded consumer businesses are leaders in
their particular category. Niche industrial businesses are characterized as those businesses that focus on manufacturing
and selling particular products or services within a specific market sector. We believe that our niche industrial businesses
are leaders in their specific market sector.
Branded Consumer Businesses
5.11
Overview
5.11 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.
We made loans to and purchased a controlling interest in 5.11 for a net purchase price of $408.2 million in August 2016,
representing approximately 97.5% of the initial outstanding equity of 5.11 ABR Corp.
Results of Operations
In the following results of operations, we provide (i) the actual consolidated results of operations for 5.11 for the year ended
December 31, 2017, and (ii) comparative results of operations for 5.11 for the years ended December 31, 2016 and 2015,
as if we had acquired the business on January 1, 2015, including relevant pro-forma adjustments for pre-acquisition periods
and explanations where applicable.
(in thousands)
Net sales
Cost of sales (1)
Gross profit
Selling, general and administrative expenses (2)
Management fees (3)
Amortization of intangibles (4)
Year ended December 31,
2017
2016
2015
(Pro forma)
(Pro forma)
$
309,999
$
295,256
$
182,291
127,708
124,970
1,000
8,859
182,456
112,800
107,149
1,000
8,503
284,471
161,785
122,686
97,953
1,000
8,189
15,544
(Loss) income from operations
$
(7,121) $
(3,852) $
Pro forma results of operations for 5.11 for the annual periods ended December 31, 2016 and 2015 include the following pro forma
adjustments applied to historical results:
(1) Cost of sales was decreased by $0.1 million and $0.2 million, for the years ended December 31, 2016 and 2015, respectively, to reflect
the increase in the depreciable lives for machinery and equipment.
(2) Selling, general and administrative expenses were increased by approximately $0.9 million and $1.1 million in the years ended December
31, 2016 and 2015, respectively, as a result of stock compensation expense related to stock options that have been granted to 5.11
employees as a result of the acquisition.
(3) Represents management fees that would have been payable to the Manager in each period presented.
(4) Represents amortization of intangible assets for the years ended December 31, 2016 and 2015, respectively, for amortization expense
associated with the allocation of the fair value of intangible assets resulting from the final purchase price allocation in connection with our
acquisition.
84
Year ended December 31, 2017 compared to the Pro Forma Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were $310.0 million, an increase of $14.7 million, or 5.0%, compared to
the same period in 2016. This increase is due primarily to an $8.2 million increase in international direct-to-agency business,
and increased retail and e-commerce sales. Direct-to-agency sales represent large non-recurring contracts consisting
primarily of SMU uniform product designed for large law enforcement divisions. Retail and e-commerce sales grew $16.3
million, or 50%, driven by growing demand in direct to consumer channels. Retail sales grew largely due to seventeen new
retail store openings in 2017 (bringing the total store count to 27 as of December 31, 2017). The consumer wholesale
channel experienced a $4.6 million decrease due primarily to the bankruptcy of a large outdoor retail customer. 5.11
implemented a new Enterprise Resource Planning (ERP) system and as part of the go-live process 5.11 shut down its warehouse
as planned on September 28, 2017 to begin the cut-over activities. Upon reopening the warehouse on October 9, 2017, 5.11
encountered shipping challenges due to the ERP system not functioning as designed. This resulted in lost orders and an order
backlog that reached over $20.0 million as of December 31, 2017. This backlog carried forward and will ship in January and
February of 2018 as 5.11 has resolved most of its ERP system challenges and has resumed normal shipping operations.
Cost of sales
Cost of sales for the year ended December 31, 2017 were $182.3 million compared to $182.5 million for the year ended
December 31, 2016. Gross profit as a percentage of sales increased from 38.2% in the year ended December 31, 2016 to
41.2% in the year ended December 31, 2017. Cost of sales for the year ended December 31, 2017 includes $21.7 million
in expense related to a $39.1 million inventory step-up resulting from the acquisition purchase price allocation, while cost of
sales for the year ended December 31, 2016 includes $17.4 million in expense related to the purchase price allocation. The
total inventory step-up amount of $39.1 million was expensed to cost of goods sold over the expected turns of 5.11's inventory.
Excluding the effect of the expense associated with the inventory step-up in both periods, gross profit as a percentage of
sales increased 420 basis points to 48.2% for the year ended December 31, 2017 compared to 44.0% for the year ended
December 31, 2016. This increase in gross profit percentage is due to lower product costs from efficiency in sourcing
operations, improved gross margins on new product introductions, and a larger proportion of revenues from the higher margin
retail and e-commerce distribution channels as compared to the same period in 2016.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2017 increased to $125.0 million or 40.3%
of net sales compared to $107.1 million or 36.3% of net sales in the same period in 2016. This increase in selling, general
and administrative expenses was primarily attributable to seventeen new retail stores that were not open in the prior
comparable period, strategic investments into sales and marketing, and integration service fees billed by CGM to 5.11 ($1.2
million in 2016 compared to $2.3 million in 2017).
Loss from operations
Loss from operations for the year ended December 31, 2017 was $7.1 million, a decrease of $3.3 million when compared
to the same period in 2016, primarily due to the amortization of the inventory step-up resulting from the purchase price
allocation, as well as the other factors noted above.
Pro Forma Year ended December 31, 2016 compared to Pro Forma Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were $295.3 million, an increase of $10.8 million, or 3.8%, compared to
the same period in 2015. Base revenues, which are considered all revenues outside of direct-to-agency business, increased
$15.8 million, or 6% over the comparable period. This increase was driven primarily by growing demand in the consumer
wholesale channel, which increased 11% due to strong sell-through in the outdoor and sporting goods accounts. Retail and
e-commerce revenues grew 131% and 20%, respectively. Retail revenues grew due to six new store openings since January
2015 (bringing the total store count to ten as of December 31, 2016), and a comparable store sales increase of 16%. Direct-
to-agency sales decreased $5.7 million in fiscal year 2016 compared to 2015, primarily as a result of a significant contract
that shipped in the third quarter of 2015 but did not recur in 2016.
Cost of sales
Cost of sales for the year ended December 31, 2016 were $182.5 million compared to $161.8 million for the year ended
December 31, 2015. Gross profit as a percentage of sales decreased from 43.1% in the year ended December 31, 2015
to 38.2% in the year ended December 31, 2016. Cost of sales for the year ended December 31, 2016 includes $17.4 million
in expense related to a $39.1 million inventory step-up resulting from the acquisition purchase price allocation. The total
inventory step-up amount of $39.1 million will be expensed to cost of goods sold over the expected turns of 5.11's inventory,
with the remaining amount of $21.7 million at December 31, 2016 recognized during the first half of 2017. Excluding the
85
effect of $17.4 million of expense associated with the inventory step-up, gross profit as a percentage of sales increased from
43.1% for the year ended December 31, 2015 to 44.1% for the year ended December 31, 2016. The gross profit as a
percentage of sales increased 100 bps due to lower discounts and promotional activity and a larger proportion of revenues
from the higher margin retail and e-commerce distribution channels as compared to the prior year period. During the year
ended December 31, 2015, 5.11 incurred unusually high levels of discounts and promotional activity caused by the West
Coast Port slowdown. These unusually high levels of discounts and promotional activity did not recur in the year ended
December 31, 2016.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2016 increased to $107.1 million or 36.3%
of net sales compared to $98.0 million or 34.4% of net sales in the same period in 2015. This increase in selling, general
and administrative expenses was primarily attributable to increases in employee related costs including wage increases and
slightly increased staffing levels, as well as six new retail stores that were not open in the prior year comparable period.
Selling, general and administrative expense for the year ended December 31, 2016 also includes $1.2 million in integration
fees paid to CGM and $2.1 million in one-time buyer transaction costs incurred in August 2016 related to the 5.11 acquisition
by the Company.
(Loss) income from operations
Loss from operations for the year ended December 31, 2016 was $3.9 million, a decrease of $19.4 million when compared
to the same period in 2015, primarily due to the amortization of the inventory step-up resulting from the purchase price
allocation, transaction related costs resulting from the acquisition, as well as the other factors noted above.
Crosman
Overview
Crosman, headquartered in Bloomfield, New York, is a leading designer, manufacturer, and marketer of airguns, archery
products, laser aiming devices and related accessories. Crosman offers its products under the highly recognizable Crosman,
Benjamin and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor
networks. Airguns historically represent Crosman's largest product category, with more than 50% of gross sales. The airgun
product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Crosman's
other primary product categories are archery, with products including CenterPoint crossbows and the Pioneer Airbow,
consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, and airsoft products.
We made loans to, and purchased a controlling interest in, Crosman for a net purchase price of $150.4 million in June 2017,
representing approximately 98.9% of the initial outstanding equity of Crosman Corp.
Results of Operations
In the following results of operations, we provide comparative results of operations for Crosman for the years ended December
31, 2017 and 2016 as if we had acquired the business on January 1, 2016, including relevant pro-forma adjustments for
pre-acquisition periods and explanations where applicable.
(in thousands)
Net sales
Cost of sales (1)
Gross profit
Selling, general and administrative expenses (2)
Management fees (3)
Amortization of intangibles (4)
Year ended December 31,
2017
2016
(Pro forma)
(Pro forma)
$
120,033
$
118,736
92,392
27,641
18,636
500
4,749
87,009
31,727
15,660
500
4,658
10,909
Income from operations
$
3,756
$
Pro forma results of operations of Crosman for the years ended December 31, 2017 and December 31, 2016 include the following pro
forma adjustments, applied to historical results as if we had acquired Crosman on January 1, 2016:
(1) Cost of sales was decreased by $0.2 million for the year ended December 31, 2017, and $0.6 million for the year ended December 31,
2016, to reflect the increase in the depreciable lives for machinery and equipment.
86
(2) Selling, general and administrative expense was increased by $0.4 million for the year ended December 31, 2017, and $0.8 million for
the year ended December 31, 2016, to reflect stock compensation expense related to profit interests that have been granted to Crosman
employees as a result of the acquisition.
(3) Represents management fees that would have been payable to the Manager in the years ended December 31, 2017 and 2016.
(4) Represents amortization of intangible assets in the years ended December 31, 2017 and 2016 associated with the allocation of the fair
value of intangible assets resulting from the purchase price allocation in connection with our acquisition.
Pro Forma Year ended December 31, 2017 compared to the Pro Forma Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were $120.0 million compared to net sales of $118.7 million for the year
ended December 31, 2016, an increase of $1.3 million or 1.1%. The increase in net sales for the year ended December 31,
2017 is primarily due to growth in the archery products category and an add-on acquisition during the third quarter of 2017.
Cost of sales
Cost of sales for the year ended December 31, 2017 were $92.4 million, an increase of $5.4 million as compared to the
comparable period in 2016. Cost of sales for the year ended December 31, 2017 includes $3.3 million in expense related
to the inventory step-up resulting from the purchase price allocation for Crosman. Excluding the effect of the inventory step-
up, gross profit as a percentage of sales was 25.8% for the year ended December 31, 2017 as compared to 26.7% for the
year ended December 31, 2016 due to the mix of products sold during the two periods.
Selling general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2017 was $18.6 million, or 15.5% of net sales
compared to $15.7 million, or 13.2% of net sales, for the year ended December 31, 2016. Selling, general and administrative
expense for the year ended December 31, 2017 includes $1.8 million in transaction costs paid in relation to the acquisition
of Crosman in June 2017 and an add-on acquisition at Crosman completed during the third quarter of 2017, as well as $0.7
million in integration services fees paid or payable to CGM. Excluding the transaction costs and integration services fee
from the selling, general and administrative expense, there was no material change in expense items.
Income from operations
Income from operations for the year ended December 31, 2017 was $3.8 million, a decrease of $7.2 million when compared
to income from operations of $10.9 million for the comparable period in 2016, based on the factors described above.
Ergobaby
Overview
Ergobaby, headquartered in Los Angeles, California, is a designer, marketer and distributor of wearable baby carriers and
accessories, blankets and swaddlers, nursing pillows, and related products. Ergobaby primarily sells its Ergobaby and Baby
Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and
distributors and derives approximately 61% of its sales from outside of the United States.
On November 18, 2011, Ergobaby acquired Orbit Baby for approximately $17.5 million. Orbit Baby produced and marketed
a luxury line of strollers and car seats that utilized a patented hub ring to allow parents to easily move car seats from car
seat bases to stroller frames in an instant without the need for any additional components. During the second quarter of
2016, Ergobaby's board of directors approved a plan to dispose of the Orbit Baby product line and in the fourth quarter of
2016, most of the Orbit Baby tooling and intellectual property was sold to Orbit Baby’s Korean distributor. Ergobaby recognized
a net loss on the disposal of the Orbit Baby assets of $5.9 million during 2016.
On May 12, 2016, Ergobaby acquired membership interests of New Baby Tula LLC (“Baby Tula”) for approximately $73.8
million, excluding a potential earn-out payment. Baby Tula designs, markets and distributes baby carriers and accessories.
The results of operations of Baby Tula are included from the date of acquisition.
87
Results of Operations
The table below summarizes the results of operations for Ergobaby for the fiscal years ended December 31, 2017, 2016
and 2015.
(in thousands)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Management fees
Amortization of intangibles
Loss on disposal of assets
Income from operations
Year ended December 31,
2017
2016
2015
$
102,969
$
103,348
$
34,024
68,945
33,359
500
10,583
—
39,962
63,386
37,703
500
2,133
5,899
86,506
30,070
56,436
31,296
500
2,483
—
$
24,503
$
17,151
$
22,157
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were $103.0 million, a decrease of $0.4 million or 0.4% compared to the
same period in 2016. Net sales from Baby Tula for the year ended December 31, 2017 were $22.4 million, compared to
$16.3 million in sales in the post-May acquisition period in 2016. During the year ended December 31, 2017, international
sales were approximately $62.6 million, representing an increase of $5.2 million over the corresponding period in 2016.
International sales of baby carriers and accessories increased by approximately $7.2 million and international sales of infant
travel systems decreased by approximately $1.4 million during the year ended December 31, 2017 as compared to the
comparable period in 2016. Baby Tula international sales during the year ended December 31, 2017 increased $3.3 million
from the corresponding period in 2016. Domestic sales were $40.4 million during the year ended December 31, 2017,
reflecting a decrease of $6.4 million compared to the corresponding period in 2016. The decrease in domestic sales is
attributable to a $6.1 million decrease in domestic infant travel systems and accessories sales, a $2.1 million decrease in
sales of Ergo branded baby carrier and accessories to national and specialty retail accounts, partially offset by a $1.8 million
increase in Baby Tula domestic sales. The decrease in baby carrier and accessories sales was attributable to the overall
weakness in the U.S. retail market during 2017, as well as the bankruptcy of a large national retailer. The decrease in infant
travel systems and accessories sales was primarily attributable to exiting the Orbit Baby business during 2016. Baby carriers,
sleep products and accessories represented 100% of sales in 2017 compared to 93% in 2016.
Cost of sales
Cost of sales was approximately $34.0 million for the year ended December 31, 2017 as compared to $40.0 million for the
year ended December 31, 2016, a decrease of $5.9 million. Cost of sales for the year ended December 31, 2016 included
expense of $4.7 million related to the inventory step-up at Baby Tula resulting from the purchase price allocation. Gross
profit as a percentage of sales was 67.0% for the year ended December 31, 2017 compared to 61.3% for the same period
in 2016. Excluding the step-up in inventory at Baby Tula 2016, gross margin would have been 66.0% in the prior year.
Selling, general and administrative expenses
Selling, general and administrative expense for the year ended December 31, 2017 decreased to approximately $33.4 million
or 32.4% of net sales compared to $37.7 million or 36.5% of net sales for the same period of 2016. The $4.3 million decrease
in the year ended December 31, 2017 compared to the same period in 2016 was primarily attributable to the reversal of the
fair value of the contingent consideration related to Ergobaby's acquisition of Baby Tula. The contingent consideration related
to the acquisition of Baby Tula had a fair value of $3.8 million and was reversed as of December 31, 2017, when the metrics
related to the earnout were not met. The decrease in expense was also due to lower professional fees and marketing
expenses, due to the timing of marketing spend, and to lower acquisition costs, related to the 2016 Baby Tula acquisition.
Amortization of intangible assets
Amortization of intangible assets increased $8.5 million for the year ended December 31, 2017 as compared to the year
ended December 31, 2016 due primarily to the amortization of intangible assets associated with the acquisition of Baby Tula
in the prior year.
88
Loss on disposal of assets
Ergobaby recorded a $5.9 million loss on disposal of assets during the year ended December 31, 2016 related to its decision
to dispose of the Orbit Baby product line. The loss is comprised of the write-off of intangible assets of $5.5 million, property,
plant and equipment of $0.4 million, and other assets of $1.0 million. In October 2016, Ergobaby sold a majority of the Orbit
Baby intellectual property and tooling assets. The proceeds of the sale reduced the loss recorded on disposal of assets by
approximately $1.0 million in the fourth quarter of 2016.
Income from operations
Income from operations for the year ended December 31, 2017 increased $7.4 million, to $24.5 million, compared to $17.2
million for the same period of 2016, primarily as a result of the factors described above, and the prior year loss on disposal
of assets.
Year ended December 31, 2016 compared to the Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were $103.3 million, an increase of $16.8 million or 19.5% compared to
the same period in 2015. Net sales for Baby Tula subsequent to the acquisition were $16.3 million. During the year ended
December 31, 2016, international sales were approximately $57.4 million, representing an increase of $9.2 million over the
corresponding period in 2015. International sales of baby carriers, accessories and product adjacencies (sleep and nursing)
increased by approximately $10.7 million and international sales of infant travel systems decreased by approximately $1.5
million during the year ended December 31, 2016 as compared to the year ended December 31, 2015. Baby Tula international
sales represent an increase of $5.2 million. During 2016, Ergobaby moved to a direct sales model from a distributor model
in Canada, the United Kingdom and Switzerland, which negatively impacted the year-over-year international sales
comparison. Domestic sales were $45.9 million during the year ended December 31, 2016, reflecting an increase of $7.7
million compared to the corresponding period in 2015. Domestic sales of baby carriers, accessories and product adjacencies
(sleep and nursing) increased $10.3 million and domestic sales of infant travel systems and accessories decreased $2.6
million during the year ended December 31, 2016 compared to the same period in 2015. Baby Tula domestic sales represent
an increase of $11.1 million. The decrease in domestic infant travel systems and accessories was primarily attributable to
lower demand of travel systems and the decision to exit the Orbit Baby brand. Baby carriers, accessories and product
adjacencies (sleep and nursing) represented 93% of sales in the year ended December 31, 2016 compared to 87% in the
same period in 2015.
Cost of sales
Cost of sales was approximately $40.0 million for the year ended December 31, 2016 as compared to $30.1 million for the
year ended December 31, 2015. Cost of sales for Baby Tula were approximately $10.1 million, and includes $4.7 million in
expense associated with the inventory step-up recorded in connection with the purchase price allocation for Baby Tula. The
increase in cost of sales was primarily attributable to higher sales compared to the prior period. Gross profit as a percentage
of sales was 61.3% for the year ended December 31, 2016 compared to 65.2% for the same period in 2015. Excluding the
impact of the inventory step-up expense on cost of sales, gross profit as a percentage of sales was 65.9% for the year ended
December 31, 2016.
Selling, general and administrative expenses
Selling, general and administrative expense for the year ended December 31, 2016 increased to approximately $37.7 million
or 36.5% of net sales compared to $31.3 million or 36.2% of net sales for the same period of 2015. The $6.4 million increase
in the year ended December 31, 2016 compared to the same period in 2015 was primarily attributable to the acquisition
costs and additional selling, general and administrative expenses related to Baby Tula, higher marketing spend, increases
in employee related costs due to increased staffing levels, and increased legal fees, partially offset by decreased variable
expenses, such as distribution and fulfillment and commissions.
Loss on disposal of assets
Ergobaby recorded a $5.9 million loss on disposal of assets during the year ended December 31, 2016 related to its decision
to dispose of the Orbit Baby product line. The loss is comprised of the write-off of intangible assets of $5.5 million, property,
plant and equipment of $0.4 million, and other assets of $1.0 million. In October 2016, Ergobaby sold a majority of the Orbit
Baby intellectual property and tooling assets. The proceeds of the sale reduced the loss recorded on disposal of assets by
approximately $1.0 million in the fourth quarter of 2016.
Income from operations
Income from operations for the year ended December 31, 2016 decreased $5.0 million, to $17.2 million, compared to $22.2
million for the same period of 2015, primarily as a result of the loss on disposal of assets.
89
Liberty Safe
Overview
Based in Payson, Utah and founded in 1988, Liberty Safe is the premier designer, manufacturer and marketer of home,
office and gun safes in North America. From its over 314,000 square foot manufacturing facility, Liberty Safe produces a
wide range of home, office and gun safe models in a broad assortment of sizes, features and styles ranging from an entry
level product to good, better and best products. Products are marketed under the Liberty brand, as well as a portfolio of
licensed and private label brands, including Cabela’s, Case IH and John Deere. Liberty Safe’s products are the market
share leader and are sold through an independent dealer network (“Dealer sales”) in addition to various sporting goods, farm
and fleet and home improvement retail outlets (“Non-Dealer Sales”). Liberty Safe has the largest independent dealer network
in the industry, with more than 50% of Liberty's sales in the last two years coming from the Dealer network.
Results of Operations
The table below summarizes the results of operations for Liberty Safe for the full fiscal years ended December 31, 2017,
and 2016 and 2015.
(in thousands)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Management fees
Amortization of intangibles
Income from operations
Year ended December 31,
2017
2016
2015
$
91,956
$
103,812
$
101,146
66,311
25,645
15,361
500
309
74,305
29,507
14,737
500
1,036
$
9,475
$
13,234
$
73,935
27,211
13,081
500
1,772
11,858
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 decreased approximately $11.9 million or 11.4%, to $92.0 million, compared
to the corresponding period ended December 31, 2016. Non-Dealer sales were approximately $42.3 million in 2017 compared
to $52.5 million in 2016, representing a decrease of $10.2 million or 19.4%. Dealer sales totaled approximately $49.5 million
in the year ended December 31, 2017 compared to $51.3 million in the same period in 2016, representing a decrease of
$1.8 million or 3.5%. The decrease in sales is attributable to lower overall market demand during the current year as compared
to 2016, when uncertainty surrounding the 2016 domestic elections and regulatory environment led to an increased level of
demand for safes. The non-dealer channel also saw a decrease in sales due to the bankruptcy of a large outdoor retailer
in the first quarter of 2017. Liberty Safe’s sales backlog was approximately $6.2 million at December 31, 2017 compared
to approximately $8.4 million at December 31, 2016.
Cost of sales
Cost of sales for the year ended December 31, 2017 decreased approximately $8.0 million when compared to the same
period in 2016. Gross profit as a percentage of net sales totaled approximately 27.9% in 2017 compared to 28.4% in 2016.
The decrease in gross profit as a percentage of sales during the year ended December 31, 2017 compared to the same
period in 2016 is attributable primarily to higher material costs related to the cost of steel, which is Liberty's primary raw
material, partially offset by gains in manufacturing efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2017 increased to approximately $15.4 million
or 16.7% of net sales compared to $14.7 million or 14.2% of net sales for the same period of 2016. The $0.6 million increase
is primarily attributable to a $1.9 million reserve established against the outstanding accounts receivable of a retail customer
that filed for bankruptcy in the first quarter of 2017, offset by a reduction in administrative expenses.
Income from operations
Income from operations decreased $3.8 million during the year ended December 31, 2017 to $9.5 million compared to income
from operations of $13.2 million during the same period in 2016, principally as a result of the decrease in sales and gross
profit in 2017, as described above.
90
Year ended December 31, 2016 compared to the Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 increased approximately $2.7 million or 2.6%, to $103.8 million, compared
to the corresponding period ended December 31, 2015. Non-Dealer sales were approximately $52.5 million in 2016 compared
to $55.2 million in 2015, representing a decrease of $2.7 million or 5.0%. Dealer sales totaled approximately $51.3 million
in the year ended December 31, 2016 compared to $45.9 million in the same period in 2015, representing an increase of
$5.4 million or 11.8 %. The increase in sales is attributable to good overall market demand during the year, particularly in
the first quarter of 2016, and Liberty’s increased ability to meet that demand with pre-built inventory and increased production
capacity. 2016 also saw significant growth in Liberty's handgun vault business. Liberty Safe’s sales backlog was approximately
$8.4 million at December 31, 2016 compared to approximately $7.1 million at December 31, 2015.
Cost of sales
Cost of sales for the year ended December 31, 2016 increased approximately $0.4 million when compared to the same
period in 2015. Gross profit as a percentage of net sales totaled approximately 28.4% in 2016 compared to 26.9% in 2015.
The increase in gross profit as a percentage of sales during the year ended December 31, 2016 compared to the same
period in 2015 is attributable primarily to favorable material costs related to the cost of steel, which is Liberty's primary raw
material.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2016 increased to approximately $14.7 million
or 14.2% of net sales compared to $13.1 million or 12.9% of net sales for the same period of 2015. The $1.7 million increase
is primarily attributable to increased spending on radio and other advertising media, higher sales commission expense, and
additional expenses related to accelerated vesting of employee stock options and legal fees associated with the
recapitalization of Liberty in March 2016.
Income from operations
Income from operations increased $1.4 million during the year ended December 31, 2016 to $13.2 million compared to
income from operations of $11.9 million during the same period in 2015, principally as a result of the increase in sales and
gross profit, as described above.
Manitoba Harvest
Overview
Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and leader in branded, hemp-based foods. Manitoba
Harvest’s products, which management believes are one of the fastest growing in the hemp food market and among the
fastest growing in the natural foods industry, are currently carried in approximately 13,000 retail stores across the U.S. and
Canada. The Company’s hemp-exclusive, consumer-facing 100% all-natural product lineup includes hemp hearts, protein
powder, hemp oil and snacks.
We made loans to and purchased a controlling interest in Manitoba Harvest for approximately $102.7 million in July 2015
representing approximately 87% of the equity in Manitoba Harvest. On December 15, 2015, Manitoba Harvest acquired all
of the outstanding stock of Hemp Oil Canada Inc. (“HOCI”) for approximately $32.7 million. HOCI is a wholesale supplier
and a private label packager of hemp food products and ingredients.
Results of Operations
The table below summarizes the results of operations for Manitoba Harvest for the years ended December 31, 2017 and
2016, and the pro forma results of operations for Manitoba Harvest for the full fiscal year ended December 31, 2015.
91
(in thousands)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expense (1)
Fees to manager (2)
Amortization of intangibles (3)
Impairment expense
Income (loss) from operations
Year ended December 31,
2017
2016
2015
(Pro forma)
$
55,699
$
59,323
$
30,598
25,101
21,092
350
4,530
8,461
32,818
26,505
21,326
350
4,508
—
40,586
20,268
20,318
19,425
350
3,676
—
$
(9,332) $
321
$
(3,133)
Pro forma results of operations of Manitoba Harvest for the year ended December 31, 2015 include the following pro forma adjustments,
applied to historical results as if we had acquired Manitoba Harvest January 1, 2015:
(1) Selling, general and administrative expenses were increased by $0.6 million in the year ended December 31, 2015 to reflect stock
compensation expense for stock options granted to Manitoba Harvest employees as of the date of acquisition.
(2) Represents Management fees that would have been payable to the Manager in each of the periods presented.
(3) Represents an increase in amortization expense totaling approximately $2.0 million in the year ended December 31, 2015 for amortization
expense associated with the allocation of the purchase price for Manitoba Harvest to definite lived intangible assets.
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were approximately $55.7 million, a decrease of $3.6 million, or 6.1%,
compared to the same period in 2016. Manitoba Harvest experienced declines in bulk hemp seed ingredient sales to
international markets in the current year, which was partially offset by growth in their Canadian retail, U.S. club and online
businesses, driven by sales of branded hemp heart products and hemp oil.
Cost of sales
Cost of sales for the year ended December 31, 2017 were approximately $30.6 million compared to approximately $32.8
million for the year ended December 31, 2016. Gross profit as a percentage of sales increased to 45.1% for the year ended
December 31, 2017 from 44.7% for the year ended December 31, 2016, primarily due to the decrease in sales of ingredients,
which have historically had lower margins than the branded Manitoba Harvest products. Gross profit margins in our branded
business increased due to improving product mix and lower material costs. Gross profit margins in our ingredient business
declined due to a more competitive pricing environment and less fixed cost leverage.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2017 decreased to approximately $21.1 million
or 37.9% of net sales compared to $21.3 million or 35.9% of net sales for the same period of 2016. The $0.2 million decrease
in 2017 compared to 2016 is primarily due to lower customer shipping costs, and more efficient field selling operations.
Impairment expense
Manitoba Harvest performed an interim impairment test of goodwill and its indefinite lived trade name in the fourth quarter
of 2017, which resulted in the recording of preliminary impairment expense of $8.5 million. $6.2 million of the impairment
expense related to goodwill, and $2.3 million of the impairment expense related to the Manitoba Harvest trade name. We
expect to finalize the impairment test in the first quarter of 2018.
Income (loss) from operations
Loss from operations for the year ended December 31, 2017 was approximately $9.3 million, as compared to income of $0.3
million for the same period in 2016, based on the factors described above.
92
Year ended December 31, 2016 compared to the Pro forma Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were approximately $59.3 million, an increase of $18.7 million, or 46.2%,
compared to the same period in 2015. Net sales of HOCI for the year ended December 31, 2016 were $20.7 million. Manitoba
Harvest on a stand-alone basis had a decrease in net sales of $2.2 million, or an increase of $0.9 million on a constant
currency basis, primarily due to a shift in product sales mix, increases in sales discounts and promotion expenses, the lack
of availability of organic hemp seed during most of 2016, and a decrease in private label sales for the first quarter of 2016
versus the comparable prior year period. In the first quarter of 2015, one of Manitoba Harvest's private label customers
expanded distribution into additional stores, resulting in a higher level of private label sales versus the current period.
Cost of sales
Cost of sales for the year ended December 31, 2016 were approximately $32.8 million compared to approximately $20.3
million for the year ended December 31, 2015. Gross profit as a percentage of sales decreased to 44.7% for the year ended
December 31, 2016 from 50.1% for the year ended December 31, 2015, primarily as a result of the gross margins at HOCI,
which are historically lower since HOCI is a wholesale provider of ingredients. After removing the effect of HOCI from gross
margins, Manitoba Harvest's gross margin at 45.7% is down 4% compared to the prior year, primarily as a result of the lack
of availability of organic hemp seed, which has higher gross margins, sales deduction, additional reserves recorded for slow
moving inventory, and higher discounts and promotions expense in the current year as compared to 2015.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2016 increased to approximately $21.3 million
or 35.9% of net sales compared to $19.4 million or 47.9% of net sales for the same period of 2015. The $1.9 million increase
in 2016 compared to 2015 is primarily due to additional selling and administrative expenses attributable to HOCI ($2.0 million),
increases in employee related costs due to increased headcount, and higher expenses to support retail advertising, product
demonstrations, marketing expenditures, as well as costs associated with the integration of HOCI post-acquisition. The
2015 costs include one-time buyer transaction costs incurred in July 2015 related to the acquisition of Manitoba Harvest,
and December 2015 related to the acquisition of HOCI ($1.5 million).
Income (loss) from operations
Income from operations for the year ended December 31, 2016 was approximately $0.3 million, as compared to a loss of
$3.1 million for the same period in 2015, based on the factors described above.
Niche Industrial Businesses
Advanced Circuits
Overview
Advanced Circuits is a provider of small-run, quick-turn and volume production PCBs to customers throughout the United
States. Historically, small-run and quick-turn PCBs have represented approximately 50% to 54% of Advanced Circuits’ gross
revenues. Small-run and quick-turn PCBs typically command higher margins than volume production PCBs given that
customers require high levels of responsiveness, technical support and timely delivery of small-run and quick-turn PCBs
and are willing to pay a premium for them. Advanced Circuits is able to meet its customers’ demands by manufacturing
custom PCBs in as little as 24 hours, while maintaining over 98.0% error-free production rates and real-time customer service
and product tracking 24 hours per day.
Results of Operations
The table below summarizes the statement of operations for Advanced Circuits for the fiscal years ending December 31,
2017, 2016 and 2015.
93
(in thousands)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Management fees
Amortization of intangibles
Income from operations
Year Ended December 31,
2017
2016
2015
$
87,782
$
86,041
$
47,898
39,884
14,565
500
1,244
47,997
38,044
13,579
500
1,247
$
23,575
$
22,718
$
87,532
48,201
39,331
13,636
500
1,051
24,144
Year ended December 31, 2017 compared to Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were approximately $87.8 million compared to approximately $86.0 million
for the same period in 2016, an increase of approximately $1.7 million or 2.0%. The increase in net sales during the year
ended December 31, 2017 was due to increased sales in Quick-Turn Production PCBs by approximately $1.5 million, Long-
Lead Time PCBs by approximately $0.5 million, Subcontract by approximately $0.6 million, and a decrease in promotions
by approximately $0.4 million. This was partially offset by decreases in Assembly by approximately $0.3 million and Quick-
Turn Small-Run PCBs by approximately $1.0 million. On a consolidated basis, Quick-Turn Small-Run PCBs comprised
approximately 20.4% of gross sales and Quick-Turn Production PCBs represented approximately 33.0% of gross sales for
the twelve months ended December 31, 2017. Quick-Turn Small-Run PCBs comprised approximately 21.8% of gross sales
and Quick-Turn Production PCBs represented approximately 31.8% of gross sales for the twelve months ended December
31, 2016.
Cost of sales
Cost of sales for the year ended December 31, 2017 decreased approximately $0.1 million compared to the comparable
period in 2016. Gross profit as a percentage of sales increased 120 basis points during the year ended December 31, 2017
(45.4% in 2017 compared to 44.2% in 2016) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expenses were approximately $14.6 million in the year ended December 31, 2017 as
compared to $13.6 million in the year ended December 31, 2016, an increase of approximately $1.0 million. The increase
in selling, general and administrative expense is primarily due to growth within financial, sales, and production management
in the current year. Selling, general and administrative expenses represented 16.6% of net sales for the year ended December
31, 2017 compared to 15.8% of net sales in 2016.
Income from operations
Income from operations for the year ended December 31, 2017 was approximately $23.6 million compared to $22.7 million
in the same period in 2016, an increase of approximately $0.9 million, as a result of the factors described above.
Year ended December 31, 2016 compared to Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were approximately $86.0 million compared to approximately $87.5 million
for the same period in 2015, a decrease of approximately $1.5 million or 1.7%. The decrease in net sales was due to
decreased sales in Long-Lead Time PCBs by approximately $3.5 million, and Quick-Turn Small-Run PCBs by approximately
$1.0 million. This was partially offset by increases in Quick-Turn Production PCBs sales by approximately $0.3 million,
Assembly sales by approximately $2.0 million, Subcontract sales by approximately $0.6 million, and decreased promotion
expense by approximately $0.1 million. On a consolidated basis, Quick-Turn Small-Run comprised approximately 21.8% of
gross sales and Quick-Turn Production PCBs represented approximately 31.8% of gross sales for the twelve months ended
December 31, 2016. Quick-Turn Small-Run comprised approximately 22.5% of gross sales and Quick-Turn Production
PCBs represented approximately 31.0% of gross sales for the twelve months ended December 31, 2015.
94
Cost of sales
Cost of sales for the year ended December 31, 2016 decreased approximately $0.2 million compared to the comparable
period in 2015. Gross profit as a percentage of sales decreased 70 basis points during the year ended December 31, 2016
(44.2% in 2016 compared to 44.9% in 2015) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expenses were approximately $13.6 million in both the year ended December 31, 2016
and 2015. Selling, general and administrative expenses represented 15.8% of net sales for the year ended December 31,
2016 compared to 15.6% of net sales in 2015.
Income from operations
Income from operations for the year ended December 31, 2016 was approximately $22.7 million compared to $24.1 million
in the same period in 2015, a decrease of approximately $1.4 million, as a result of the factors described above.
Arnold
Overview
Headquartered in Rochester, New York, Arnold serves a variety of markets including aerospace and defense, motorsport/
automotive, oil and gas, medical, general industrial, energy, reprographics and advertising specialties. Over the course of
100+ years, Arnold has successfully evolved and adapted our products, technologies, and manufacturing presence to meet
the demands of current and emerging markets. Arnold has expanded globally and built strong relationships with our customers
worldwide. As a result, Arnold has led the way in our chosen industries with new materials and solutions that empower our
customers to develop next generation technologies. Arnold is the largest and, we believe, the most technically advanced
U.S. manufacturer of engineered magnetic systems. Arnold is one of two domestic producers to design, engineer and
manufacture rare earth magnetic solutions. Arnold serves customers and generates revenues via three business units:
• PMAG - Permanent Magnet and Assemblies Group- Arnold’s high performance permanent magnets have a wide
variety of applications, from electric motors on military ships, military and commercial aircraft, and motorsport to
pump couplings, batteries, solar panels and NMR Equipment.
• Precision Thin Metals - Produces thin and ultra-thin alloys that improve the power density of motors,
transformers, batteries and many other applications in automotive, aerospace, energy exploration, industrial and
medical markets.
•
Flexmag™ - The highest quality flexible magnetic sheet and strip for over a quarter of a century. Flexmag
products cover a wide range of applications, from industrial, automotive and medical applications to signage and
displays, to novelty items.
Arnold is also a 50% partner in a China rare earth mine-to-magnet joint venture. Arnold accounts for its activity in the joint
venture utilizing the equity method of accounting. Gains and losses from the joint venture were not material during the years
ended December 31, 2017, 2016, or 2015.
Arnold operates 9 manufacturing facilities worldwide split under the three business units shown above but functions as one
company and one team.
Results of Operations
The table below summarizes the results of operations for Arnold for the fiscal years ending December 31, 2017, 2016 and
2015.
(in thousands)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Management fees
Amortization of intangibles
Impairment expense
2017
Year ended December 31,
2016
2015
$
105,580
$
108,179
$
119,994
78,863
26,717
19,583
500
3,463
8,864
84,475
23,704
16,602
500
3,523
16,000
93,559
26,435
14,828
500
3,523
—
7,584
(Loss) income from operations
$
(5,693) $
(12,921) $
95
Year ended December 31, 2017 compared to Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were approximately $105.6 million, a decrease of $2.6 million compared
to the same period in 2016. The decrease in net sales is primarily a result of decreases in the PMAG ($2.1 million), and
Flexmag ($1.5 million) product sectors. PMAG sales represented 72% of net sales in each of the years ended December
31, 2017 and 2016. The decrease in PMAG sales is mainly attributable to lower sales of reprographic products. The decrease
in Flexmag sales during the year ended December 31, 2017 compared to the same period in 2016 is largely due to decreased
customer demand. International sales were $42.3 million and $42.0 million for the years ended December 31, 2017 and
2016, respectively.
Cost of sales
Cost of sales for the year ended December 31, 2017 were approximately $78.9 million compared to approximately $84.5
million in the same period of 2016. Gross profit as a percentage of sales increased from 21.9% in 2016 to 25.3% in 2017
despite lower sales. The increase is principally attributable to an increase in Precision Thin Metals margins partially offset
by the impact of PMAG volume reductions. Flexmag margin in 2017 was consistent with 2016.
Selling, general and administrative expense
Selling, general and administrative expense in the year ended December 31, 2017 was $19.6 million as compared to
approximately $16.6 million for the year ended December 31, 2016. The increase in expense is primarily attributable to a
one-time increase in legal, professional and environmental fees.
Impairment expense
Arnold performed an interim impairment test at each of its reporting units in the fourth quarter of 2016, which resulted in the
recording of preliminary impairment expense of the PMAG reporting unit of $16.0 million. In the first quarter of 2017, Arnold
completed the impairment testing of the PMAG reporting unit and recorded an additional $8.9 million impairment expense
based on the results of the Step 2 impairment testing.
Loss from operations
Arnold had a loss from operations for the year ended December 31, 2017 of approximately $5.7 million, as compared to a
loss from operations of $12.9 million for the year ended December 31, 2016, with the loss in both years primarily as a result
of the impairment expense.
Year ended December 31, 2016 compared to Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were approximately $108.2 million, a decrease of $11.8 million compared
to the same period in 2015. The decrease in net sales is a result of decreases in the PMAG ($7.9 million), Precision Thin
Metals ($2.4 million) and Flexmag ($1.5 million) product sectors. PMAG sales represented 72% of net sales for the year
ended December 31, 2016, compared to 71% for the year ended December 31, 2015. The decrease in PMAG sales is
mainly attributable to weakness in the oil and gas sector and lower sales of reprographic products. The decrease in Precision
Thin Metals and Flexmag sales during the year ended December 31, 2016 compared to the same period in 2015 is largely
due to decreased customer demand. International sales were $42.0 million during the year ended December 31, 2016
compared to $44.2 million during the same period in 2015, a decrease of $2.2 million or 4.9%. The decrease in international
sales is due to a decrease in sales in the PMAG sector as noted above.
Cost of sales
Cost of sales for the year ended December 31, 2016 were approximately $84.5 million compared to approximately $93.6
million in the same period of 2015. Gross profit as a percentage of sales decreased from 22.0% in 2015 to 21.9% in 2016.
The decrease is principally attributable to a slight decrease in the PMAG sector due to volume reductions and customer mix,
partially offset by an increase in margin in the Precision Thin Metals sector due to customer mix. Flexmag margin in 2016
was consistent with 2015.
Selling, general and administrative expense
Selling, general and administrative expense in the year ended December 31, 2016 was $16.6 million as compared to
approximately $14.8 million for the year ended December 31, 2015. The increase in expense is primarily attributable to
severance related to changes within management and a one-time expense related to the Swiss pension.
96
Impairment expense
The Company performed interim goodwill impairment testing on the three reporting units of Arnold as of December 31, 2016.
The results of the impairment test (step 1) indicated that the goodwill associated with the PMAG reporting unit was impaired.
The Company developed an estimated range of the potential goodwill impairment at PMAG of between $14 million and $19
million, and has recorded impairment expense of $16 million at December 31, 2016. The result of the Step 2 analysis was
recorded in the first quarter of 2017.
(Loss) income from operations
Arnold had a loss from operations for the year ended December 31, 2016 of approximately $12.9 million, as compared to
income from operations of $7.6 million for the year ended December 31, 2015. This decrease of $20.5 million is primarily
the result of the impairment expense as well as the overall decrease in net sales, as described above.
Clean Earth
Overview
Founded in 1990 and headquartered in Hatboro, Pennsylvania, 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 power, construction, commercial development, oil and
gas, medical, infrastructure, industrial and dredging. Historically, the majority of Clean Earth’s revenues have been generated
by contaminated soils, which includes environmentally impacted soils, drill cuttings and other materials which are treated at
one of its nine permitted soil treatment facilities. Clean Earth also operates four RCRA Part B hazardous waste facilities.
The remaining revenue has been generated by dredge material, which consists of sediment removed from the floor of a
body of water for navigational purposes and/or environmental remediation of contaminated waterways and is treated at one
of its two permitted dredge processing facilities. Approximately 98% of the material processed by Clean Earth is beneficially
reused for such purposes as daily landfill cover, industrial and brownfield redevelopment projects.
Clean Earth completed two add-on acquisitions during the second quarter of 2016, Phoenix Soil and EWS, and a small add-
on acquisition in March 2017, AERC. The results of operations for the add-on acquisitions have been included in Clean
Earth's results from the date of acquisition through the end of the reporting period.
Results of Operations
The table below summarizes the results of operations for Clean Earth for the fiscal years ended December 31, 2017, 2016
and 2015.
(in thousands)
Net service revenues
Cost of revenues
Gross profit
Selling, general and administrative expenses
Management fees
Amortization of intangibles
Loss on disposal of assets
Income from operations
Year ended December 31,
2017
2016
2015
$
211,247
$
188,997
$
150,028
134,667
61,219
35,875
500
12,807
—
54,330
30,018
500
12,578
3,305
$
12,037
$
7,929
$
175,386
125,178
50,208
26,512
500
12,183
—
11,013
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Service revenues
Service revenues for the year ended December 31, 2017 were approximately $211.2 million, an increase of $22.3 million
or 11.8% compared to the same period in 2016. The increase in service revenues is principally due to two acquisitions in
2016 and one in 2017. For the year ended December 31, 2017, contaminated soil volumes increased 11% as compared to
the same period last year principally attributable to commercial development activity in the New York City area, and the
acquisition of Phoenix Soil in April 2016. Revenue from dredged material decreased during 2017 as compared to 2016 due
to the timing and flow of new maintenance contracts in our core markets. Contaminated soils represented approximately
55% of net sales for both the years ended December 31, 2017 and 2016.
97
Cost of revenues
Cost of services for the year ended December 31, 2017 were approximately $150.0 million compared to approximately
$134.7 million in the same period of 2016, an increase of $15.4 million, primarily as a result of the two acquisitions in 2016
and one acquisition in 2017. Gross profit as a percentage of sales increased from 28.7% for the year ended December 31,
2016 to 29.0% for the year ended December 31, 2017.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2017 increased to approximately $35.9 million
or 17.0% of service revenues compared to $30.0 million or 15.9% of service revenues for the same period in 2016. The
$5.9 million increase in selling, general and administrative expenses in the year ended December 31, 2017 compared to
2016 is primarily attributable to Clean Earth's recent acquisitions.
Amortization expense
Amortization expense for the year ended December 31, 2017 was $12.8 million, an increase of $0.2 million compared to
2016.
Loss on disposal of assets
Clean Earth recognized a loss on disposal of assets of $3.3 million during the fourth quarter of 2016 related to the closure
of the Company’s Williamsport, Pennsylvania site which processed drill cuttings. The loss was comprised of intangible assets
specific to the Williamsport location, as well as equipment that could not be repurposed to other sites at the time of the closing
of the facility.
Income from operations
Income from operations for the year ended December 31, 2017 was approximately $12.0 million as compared to income
from operations of $7.9 million for the year ended December 31, 2016, an increase of $4.1 million, primarily as a result of
the loss on disposal of assets related to the closure of Clean Earth's Williamsport site.
Year ended December 31, 2016 compared to the Year ended December 31, 2015
Service revenues
Service revenues for the year ended December 31, 2016 were approximately $189.0 million, an increase of $13.6 million
or 7.8% compared to the same period in 2015. The increase in service revenues is principally due to two acquisitions in
2016. For the year ended December 31, 2016, contaminated soil volumes increased 4% as compared to the same period
last year principally attributable to commercial development activity in the New York City area, and its acquisition of Phoenix
Soil in April 2016. Revenue from dredged material decreased during 2016 as compared to 2015 due to the timing and flow
of new maintenance contracts in our core markets. Contaminated soils represented approximately 55% and 58%,
respectively, of net sales for the years ended December 31, 2016 and 2015.
Cost of revenues
Cost of services for the year ended December 31, 2016 were approximately $134.7 million compared to approximately
$125.2 million in the same period of 2015, an increase of $9.5 million, primarily as a result of the two acquisitions made in
2016. Gross profit as a percentage of sales increased from 28.6% for the year ended December 31, 2015 to 28.7% for the
year ended December 31, 2016.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2016 increased to approximately $30.0 million
or 15.9% of service revenues compared to $26.5 million or 15.1% of service revenues for the same period in 2015. The
$3.5 million increase in selling, general and administrative expenses in the year ended December 31, 2016 compared to
2015 is primarily attributable to Clean Earth's recent acquisitions.
Amortization expense
Amortization expense for the year ended December 31, 2016 was $12.6 million, an increase of $0.4 million compared to
2015. The increase is due to additional amortization expense in 2016 from the amortization of airspace, which is recognized
based on usage rather than over the estimated useful life of the asset.
Loss on disposal of assets
Clean Earth recognized a loss on disposal of assets of $3.3 million during the fourth quarter of 2016 related to the closure
of the Company’s Williamsport, Pennsylvania site which processed drill cuttings. The loss was comprised of intangible assets
98
specific to the Williamsport location, as well as equipment that could not be repurposed to other sites at the time of the closing
of the facility.
Income from operations
Income from operations for the year ended December 31, 2016 was approximately $7.9 million as compared to income from
operations of $11.0 million for the year ended December 31, 2015, a decrease of $3.1 million, primarily as a result of the
loss on disposal of assets related to the closure of Clean Earth's Williamsport site.
Sterno
Overview
Sterno, headquartered in Corona, California, is a manufacturer and marketer of portable food warming fuel and creative
table lighting solutions for the food service industry. Sterno offers a broad range of wick and gel chafing fuels, butane stoves
and accessories, liquid and traditional wax candles, catering equipment and lamps through their Sterno Products division.
In January 2016, Sterno acquired Northern International, Inc. ("Sterno Home"), which sells flameless candles and outdoor
lighting products through the retail segment.
Results of Operations
The table below summarizes the results of operations for Sterno for the fiscal years ended December 31, 2017, 2016 and
2015.
(in thousands)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Management fee
Amortization of intangibles
Income from operations
Year ended December 31,
2017
2016
2015
$
226,110
$
218,817
$
170,355
158,722
55,755
28,662
500
7,399
60,095
34,362
500
6,434
$
19,194
$
18,799
$
139,991
104,372
35,619
16,596
500
5,323
13,200
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net sales
Net sales for the year ended December 31, 2017 were approximately $226.1 million, an increase of $7.3 million or 3.3%
compared to the same period in 2016. The increase in net sales is a result of the acquisition of Sterno Home in January
2016, partially offset by sales shortfall at Sterno Home's candle division due to reduced demand and non-repeating orders.
Sterno Home had net sales of $9.0 million in the period prior to acquisition in January 2016.
Cost of sales
Cost of sales for the year ended December 31, 2017 were approximately $170.4 million compared to approximately $158.7
million in the same period of 2016. Gross profit as a percentage of sales decreased from 27.5% for the year ended December
31, 2016 to 24.7% for the same period ended December 31, 2017. The decrease in gross margin during 2017 primarily
reflects an increase in chemical material costs, and a reclassification of certain expenses at Sterno Home from selling,
general and administrative expense to cost of goods sold. The reclassification was approximately $3.2 million and was
made to align costs related to quality assurance and engineering with the classification used by Sterno Products.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2017 was approximately $28.7 million as
compared to $34.4 million in the year ended December 31, 2016, a decrease of $5.7 million or 16.6%. Selling, general and
administrative expense represented 12.7% of net sales for the year ended December 31, 2017 as compared to 15.7% of
net sales for the same period in 2016. The decrease as a percentage of net sales in 2017 as compared to the same period
in 2016 reflects the increase in sales during the period and Sterno Home reorganization efforts to reduce staff, as well as
the reclassification of certain expenses related to Sterno Home from selling, general and administrative expense to cost of
99
goods sold. The reclassification was approximately $3.2 million and was made to align costs related to quality assurance
and engineering with the classification used by Sterno Products. Sterno also recognized a reversal of the fair value of the
contingent consideration related to the acquisition of Sterno Home $1.0 million n the fourth quarter of 2017.
Income from operations
Income from operations for the year ended December 31, 2017 was approximately $19.2 million, a decrease of $0.4 million
when compared to the same period in 2016, due primarily to the increase in material costs in 2017 as described above.
Year ended December 31, 2016 compared to the Year ended December 31, 2015
Net sales
Net sales for the year ended December 31, 2016 were approximately $218.8 million, an increase of $78.8 million or 56.3%
compared to the same period in 2015. The increase in net sales is a result of the acquisition of Sterno Home in January
2016 ($74.6 million in net sales), offset by the timing of stocking programs of key Sterno customers.
Cost of sales
Cost of sales for the year ended December 31, 2016 were approximately $158.7 million compared to approximately $104.4
million in the same period of 2015. The increase in cost of sales was primarily due to the acquisition of Sterno Home. Gross
profit as a percentage of sales increased from 25.4% for the year ended December 31, 2015 to 27.5% for the same period
ended December 31, 2016. The increase in gross margin during the year ended December 31, 2016 primarily reflects a
favorable margin mix with the acquisition of Sterno Home, manufacturing efficiencies resulting from investment in automation
and favorable trends in global commodity prices.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2016 and 2015 was approximately $34.4
million and $16.6 million, respectively. Selling, general and administrative expense represented 15.7% of net sales for the
year ended December 31, 2016 as compared to 11.9% of net sales for the same period in 2015. The increase in selling,
general and administrative expenses during the year ended December 31, 2016 reflects the acquisition of Sterno Home,
which has historically had a higher selling, general and administrative expense as a percentage of revenue, as well as an
increase in staffing to strengthen sales and marketing, and increased professional service costs associated with the acquisition
of Sterno Home.
Income from operations
Income from operations for the year ended December 31, 2016 was approximately $18.8 million, an increase of $5.6 million
when compared to the same period in 2015, due to those factors described above.
100
Liquidity and Capital Resources
The change in cash and cash equivalents is as follows:
(in thousands)
Cash provided by operating activities
Cash (used in) provided by investing activities
Cash provided by (used in) financing activities
Effect of exchange rates on cash and cash equivalents
(Decrease) increase in cash and cash equivalents
Year ended December 31,
2017
2016
2015
$
$
81,771
$
111,372
$
(77,278)
(2,588)
(1,792)
(363,021)
208,726
(3,174)
113
$
(46,097) $
84,548
233,880
(254,357)
(1,905)
62,166
Cash Flow from Operating Activities
2017
Cash flows provided by operating activities totaled approximately $81.8 million for the year ended December 31, 2017, which
represents a decrease of $29.6 million compared to cash flow from operating activities of $111.4 million for the year ended
December 31, 2016. Cash used in operating activities for working capital for the year ended December 31, 2017 was $40.4
million as compared to cash provided by working capital of $18.5 million for the year ended December 31, 2016. The increase
was primarily due to cash used for inventory by our branded consumer businesses during 2017, as well as a full year of
operations at 5.11 (acquired in August 2016) and the acquisition of Crosman in June 2017. The change in cash used to
purchase inventory in 2017 was approximately $31.1 million as compared to the prior year, with $29.8 million of the variance
related to the branded consumer businesses.
2016
For the year ended December 31, 2016, cash flows provided by operating activities (from both continuing and discontinued
operations) totaled approximately $111.4 million, which represents a $26.8 million increase compared to cash flow from
operating activities of $84.5 million during the year ended December 31, 2015. Net cash provided by discontinued operations
totaled $3.7 million in 2016 as compared to $15.5 million in 2015, with the decrease due to the number of dispositions
reflected in each year as well as the timing of the dispositions. The increase in net cash provided by operating activities of
continuing operations of $38.7 million, which is principally the result of higher net income in 2016 and changes in cash
provided by working capital in the year ended December 31, 2016 as compared to the same period in 2015 (an increase of
$13.2 million), as a result of the acquisitions completed during 2016.
2015
For the year ended December 31, 2015, on a consolidated basis, cash flows provided by operating activities (from both
continuing and discontinued operations) totaled $84.5 million, which represents a $13.9 million increase compared to the
year ended December 31, 2014. Cash from operating activities of continuing operations was $69.0 million in 2015 compared
to $36.2 million in 2014. Cash from operating activities of discontinued operations was $15.5 million in 2015 compared to
$34.4 million in 2014. The increase in cash from operating activity of continuing activities is principally the result of changes
in working capital primarily resulting from our 2014 acquisitions of Clean Earth and Sterno in the third and fourth quarter of
2014, respectively, and the acquisition of Manitoba Harvest in July 2015, and the increased operating income year over year
as a result of these acquisitions.
Cash Flow from Investing Activities
2017
Cash flows used in investing activities totaled approximately $77.3 million, compared to $363.0 million used in investing
activities during the year ended December 31, 2016, a decrease of $285.7 million. During 2016, we completed our acquisition
of 5.11 in August, and several add-on acquisitions including the acquisition of Baby Tula by Ergobaby and Sterno Home by
Sterno for a total of $536.2 million in cash investment, while in 2017, our total cash paid for acquisitions of $165.0 million
related to our acquisition of Crosman and two smaller add-on acquisitions. Capital expenditures in the year ended December
31, 2017 increased $20.8 million, due primarily to expenditures at our 5.11 business related to investments in various
infrastructure and systems projects to position them for future growth. We expect capital expenditures for fiscal year 2018
to be approximately $45 million to $55 million. The cash paid for acquisitions and capital expenditures was offset in both
years by proceeds from the sale of our investment in FOX, $136.1 million in 2017 and $182.5 million in 2016, as well as the
sale of our Tridien business in 2016. The sale of our FOX shares in 2017 represented our remaining investment in FOX.
101
2016
Cash flows used in investing activities for the year ended December 31, 2016 totaled approximately $363.0 million, compared
to $233.9 million provided by investing activities in the same period of 2015. The 2016 investing activities primarily reflect
the acquisition of 5.11 in the third quarter and the add-on acquisition of Sterno Home, Baby Tula, Phoenix Soil and EWS
($536.2 million) and net proceeds from the sale of Tridien in September 2016 ($11.2 million in net proceeds). Capital
expenditures from continuing operations in the year ended December 31, 2016 increased approximately $8.3 million, from
$15.7 million in 2015 to $24.0 million in 2016. The increase in capital expenditures is attributable to our acquisition of 5.11
in August 2016, and additional investment in Sterno, Advanced Circuits and Liberty during 2016 compared to the prior year.
The 2016 investing activities also reflect proceeds from the sale of FOX shares during the year of $182.5 million.
2015
Cash flows provided by investing activities for the year ended December 31, 2015 was $233.9 million compared to $424.8
million used in investing activities in the same period of 2014. The 2015 investing activities reflect the acquisition of Manitoba
Harvest in the third quarter and the add-on acquisition of HOCI in the fourth quarter of 2015 ($130.3 million) and net proceeds
from the sale of CamelBak in August 2015 and American Furniture in October 2015 ($385.5 million in the aggregate). Capital
expenditures from continuing operations in the year ended December 31, 2015 increased approximately $5.7 million, from
$15.7 million in 2014 to $24.0 million in 2015, with the increase primarily due to capital expenditures from our 2014 acquisitions,
Clean Earth and Sterno.
Cash Flow from Financing Activities
2017
Cash flows used in financing activities totaled approximately $2.6 million for the year ended December 31, 2017, as compared
to cash flows provided by financing activities of $208.7 million. Our financing cash flows in 2017 principally reflect the
following:
•
The payments of our shareholder distributions of $86.3 million related to our common shares and $2.5 million related
to our Series A Preferred Shares;
• Distributions of $39.2 million paid during 2017 to Holders of the allocation interest related to the sale of our FOX
shares;
• Proceeds of $96.4 million from a preferred stock offering completed in June 2017; and
• Net borrowings during the year of $31.9 million under our 2014 Credit Facility.
The decrease in cash flows from financing activities in 2017 as compared to 2016 is primarily due to the borrowings in the
prior year related to the amendment of our credit facility, including borrowings under our 2016 Incremental Term Loan of
$250 million, which was used to fund the acquisition of 5.11.
2016
Cash flows provided by financing activities totaled approximately $208.7 million during the year ended December 31, 2016
principally reflecting the following:
The payments of our shareholder distributions of $78.2 million in the year ended December 31, 2016;
•
• Distributions of $23.6 million paid during 2016 to noncontrolling shareholders as a result of the Liberty and ACI
recapitalizations;
• Net borrowings during the year ended December 31, 2016 under our 2014 Credit Facility totaled $248.1 million,
including borrowings under our 2016 Incremental Term Loan, which was used to fund the acquisitions of 5.11 during
the third quarter, EWS and Baby Tula during the second quarter, and the repurchase of Ergobaby common stock
from noncontrolling shareholders during the third quarter;
• Distributions of $23.8 million to the Holders of the allocation interest related to Sale Events (March and August
Offerings of FOX, and September Disposition of Tridien) and a Holding Event (ACI); and
Issuance of Trust common shares for net proceeds of $99.4 million.
•
2015
Cash flows used in financing activities for the year ended December 31, 2015 was $208.7 million, principally reflecting:
•
•
•
payment of our shareholder distribution ($78.2 million);
the payment of profit allocation to our Allocation Interest Holders of $17.7 million; and
the repayment of our 2014 Revolving Credit Facility using the net proceeds from the sale of CamelBak in the third
quarter of 2015.
At December 31, 2017, we had approximately $39.9 million of cash and cash equivalents on hand. The majority of the cash
held at corporate was held in checking and money market accounts at December 31, 2017. At the corporate level, cash
102
balances are maintained in accordance with the Company’s investment policy, which identifies allowable investments and
specifies credit quality standards. The primary objective of our investment activities is the preservation of principal and
minimizing risk. We do not hold any investments for trading purposes.
On January 25, 2018, we paid our fourth quarter 2017 common share distribution to our shareholders of $21.6 million, and
on January 30, 2018 we paid our fourth quarter 2017 preferred share distribution of $1.8 million.
Total Liabilities and Intercompany loans to our businesses
The following table summarizes the total liabilities and intercompany debt of our business as of December 31, 2017:
(in thousands)
5.11
Crosman
Ergobaby
Liberty
Manitoba Harvest
Advanced Circuits
Arnold
Clean Earth
Sterno
Total
Corporate and eliminations
Intercompany
Loans
Total Liabilities
$
199,452
$
93,415
66,648
48,787
48,507
91,418
70,465
168,575
64,127
259,168
127,204
83,411
59,724
73,550
110,977
95,614
232,004
107,514
$
$
851,394
$
1,149,166
(851,394)
— $
(254,862)
894,304
Each loan has a scheduled maturity and each business is entitled to repay all or a portion of the principal amount of the
outstanding loans, without penalty, prior to maturity. A component of our acquisition financing strategy that we utilize in
acquiring the businesses we own and manage is to provide both equity capital and debt capital, raised at the parent level
through our existing credit facility. Our strategy of providing intercompany debt financing within the capital structure of the
businesses that we acquire and manage allows us the ability to distribute cash to the parent company through monthly
interest payments and amortization of the principle on these intercompany loans. Each loan to our businesses has a scheduled
maturity and each business is entitled to repay all or a portion of the principal amount of the outstanding loans, without
penalty, prior to maturity. Certain of our businesses have paid down their respective intercompany debt balances through
the cash flow generated by these businesses and we have recapitalized, and expect to continue to recapitalize, these
businesses in the normal course of our business. The recapitalization process involves funding the intercompany debt using
either cash on hand at the parent or our revolving credit facility, and serves the purpose of optimizing the capital structure
at our subsidiaries and providing the noncontrolling shareholders with a distribution on their ownership interest in a cash
flow positive business.
During the second quarter of 2016, we completed a recapitalization at Advanced Circuits whereby the Company entered
into an amendment to the intercompany loan agreement with Advanced Circuits (the "ACI Loan Agreement"). The ACI loan
agreement was amended to provide for additional term loan borrowings of $60.1 million and to extend the maturity date for
the term loans. The ACI noncontrolling shareholders received approximately $18.6 million in distributions as a result of the
recapitalization.
During the first quarter of 2016, we completed a recapitalization at Liberty whereby we entered into an amendment to the
intercompany loan agreement with Liberty (the “Liberty Loan Agreement”). The Liberty Loan Agreement was amended to (i)
provide for term loan borrowings of $38.0 million and revolving credit facility borrowings of $5.0 million to fund cash distributions
totaling $35.3 million to its shareholders, including the Company, and (ii) extend the maturity dates of the term loans and
revolving credit facility. Liberty’s noncontrolling shareholders received approximately $5.3 million in distributions as a result
of the recapitalization. Certain members of Liberty's management also exercised stock option immediately prior to the
recapitalization, resulting in net proceeds from stock options at Liberty of $3.8 million. The Company then purchased $1.5
million in shares from members of Liberty management, resulting in Liberty's noncontrolling shareholders holding 11.4% of
Liberty's outstanding shares subsequent to the recapitalization.
Subsequent to year end in January 2018, the Company completed a recapitalization at Sterno whereby the Company entered
into an amendment to the intercompany loan agreement with Sterno (the "Sterno Loan Agreement"). The Sterno Loan
103
Agreement was amended to (i) provide for term loan borrowings of $56.8 million to fund a distribution to the Company, which
owned 100% of the outstanding equity of Sterno at the time of the recapitalization, and (ii) extend the maturity dates of the
term loans. In connection with the recapitalization, Sterno's management team exercised all of their vested stock options,
which represented 58,000 shares of Sterno. The Company then used a portion of the distribution to repurchase the 58,000
shares from management for a total purchase price of $6.0 million. In addition, Sterno issued new stock options to replace
the exercised option, thus maintaining the same percentage of fully diluted non-controlling interest that existed prior to the
recapitalization. In February 2018, Sterno completed the acquisition of Rimports (refer to "Note T - Subsequent Events" for
a description of the transaction) for a purchase price of approximately $145 million. Concurrent with the closing of the
acquisition of Rimports, we amended the Sterno Loan Agreement to provide for the advance of additional term loans in the
aggregate amount of $136 million, and revolving loans in the amount of $10 million.
During 2017, we granted three of our subsidiaries waivers or amendments to their intercompany credit agreement that waived
certain financial covenants that the subsidiaries were in violation of under their intercompany credit agreements. As a result
of significant investment in operational improvements to enhance its competitive position, including planned capital
expenditures to reposition Arnold for future growth, we granted Arnold an amendment to their intercompany debt agreement
effective the quarter ended June 30, 2017 that waived the default of their fixed charge coverage ratio and amended the
covenant compliance levels through December 31, 2017. Additionally, due to significant capital expenditures related to the
implementation of a new ERP system, warehouse expansion and retail roll out, we have granted 5.11 waivers under their
intercompany debt agreement effective the quarter ended September 30, 2017 through December 31, 2018. The waivers
permit 5.11 to increase its allowable capital expenditure limits and exclude certain capital expenditures associated with the
ERP system and warehouse expansion from the calculation of the fixed charge coverage ratio. Manitoba Harvest was not
in compliance with the financial covenants under their intercompany loan agreement at December 31, 2017, and we amended
the Manitoba Harvest intercompany debt agreement to grant a waiver to them through December 31, 2018. Except as
previously noted, all of our subsidiaries were in compliance with the financial covenants included within their intercompany
credit arrangements at December 31, 2017.
Our primary source of cash is from the receipt of interest and principal on our outstanding loans to our businesses. Accordingly,
we are dependent upon the earnings and cash flow of these businesses, which are available for (i) operating expenses;
(ii) payment of principal and interest under our Credit Facility; (iii) payments to CGM due or potentially due pursuant to the
revised MSA and the LLC Agreement; (iv) cash distributions to our shareholders; and (v) investments in future acquisitions.
Payments made under (i) through (iii) above are required to be paid before distributions to shareholders and may be significant
and exceed the funds held by us, which may require us to dispose of assets or incur debt to fund such expenditures.
Investment in FOX
FOX is a designer, manufacturer and marketer of high performance suspension products used primarily on mountain bikes,
off-road vehicles and trucks, snowmobiles and motorcycles. We purchased a controlling interest in FOX on January 4, 2008
for approximately $80.4 million. In August 2013, FOX completed an initial public offering of its common stock. FOX trades
on the NASDAQ stock market under the ticker “FOXF”. We retained approximately 53% of the outstanding shares of FOX
immediately subsequent to their initial public offering. After our sale of FOX common shares through an additional secondary
offering of FOX in July 2014, our ownership interest in FOX decreased to 41%. As a result of the decrease in ownership
interest, we deconsolidated FOX and we began accounting for the investment in FOX at fair value using the equity method
of accounting, with unrealized investment gains and losses reported in the consolidated statement of operations as gain
(loss) from equity method investment. We sold additional common shares of FOX through FOX secondary offerings in March,
August and November 2016. Subsequent to the November 2016 secondary offering, our ownership in FOX decreased to
approximately 14%, and we no longer account for the investment in FOX as an equity method investment. We recorded an
unrealized loss on the equity method investment of $5.6 million for the year ended December 31, 2016. The investment in
FOX had a fair value of $141.8 million at December 31, 2016. On March 13, 2017, FOX closed on a secondary public offering
of 5,108,718 shares of FOX common stock held by CODI, which represented CODI's remaining investment in FOX. CODI
received $136.1 million in net proceeds as a result of the sale. We acquired a controlling interest in FOX in January 2008
for approximately $80.4 million. Our total net proceeds from the sale of shares of FOX was approximately $465.1 million.
Credit Facility
On June 6, 2014 we entered in a new credit facility, the 2014 Credit Facility, which replaced our then existing 2011 Credit
Facility entered into in October 2011. On August 31, 2016, we entered into an Incremental Facility Amendment to the 2014
Credit Agreement. The Incremental Facility Amendment provided an increase to the 2014 Revolving Credit Facility of $150.0
million, and the 2016 Incremental Term Loan in the amount of $250.0 million. The 2014 Credit Facility now provides for (i)
revolving loans, swing line loans and letters of credit up to a maximum aggregate amount of $550 million and matures in
June 2019, (ii) a $325 million term loan, and (iii) a $250 million incremental term loan. Our 2014 Term Loan requires quarterly
payments with a final payment of the outstanding principal balance due in June 2021. (Refer to Note J - Debt in the
consolidated financial statements for a complete description of our 2014 Credit Facility.)
104
In connection with the 2016 Incremental Facility Amendment, we incurred $5.9 million in additional debt issuance costs which
will be recognized as expense during the remaining term of the related 2014 Revolving Credit Facility and 2014 Term Loan
and the 2016 Incremental Term Loan. The Incremental Facility Amendment did not change the due dates or applicable
interest rates of the 2014 Credit Agreement. The quarterly payments for the term loan advances under the 2014 Credit
Facility increased to approximately $1.4 million per quarter. We used the proceeds from the Incremental Facility Amendment
to fund the acquisition of 5.11 Tactical.
In March 2017, we amended the 2014 Credit Facility (the "Fourth Amendment") to reduce the applicable rate of interest for
the 2014 Term Loan and 2016 Incremental Term Loan. Under the Fourth Amendment, outstanding LIBOR loans bear interest
at LIBOR plus an applicable rate of 2.75% and outstanding Base Rate loans bear interest at Base Rate plus 1.75%. Prior
to the amendment, the outstanding term loans bore interest at LIBOR plus 3.25% or Base Rate plus 2.25%.
In October 2017, the Company further amended the 2014 Credit Facility (the "First Refinancing Amendment") to, in effect,
refinance the 2014 Term Loan and the 2016 Incremental Term Loan (together, the “Term Loans”). Pursuant to the First
Refinancing Amendment, outstanding Term Loans at LIBOR Rate bear interest at LIBOR plus an applicable rate of 2.25%
and outstanding Term Loans at Base Rate bear interest at Base Rate plus 1.25%. Prior to this amendment, the outstanding
Term Loans bore interest at LIBOR plus 2.75% or Base Rate plus 1.75%.
At December 31, 2017, we had Letters of Credit totaling $0.6 million outstanding under the 2014 Revolving Credit Facility.
We had approximately $507.4 million in borrowing base availability under this facility at December 31, 2017. Subsequent
to year end, we completed the acquisitions of Foam Fabricators, Inc. on February 15, 2018 and Rimports, Inc. on February
26, 2018. We utilized our 2014 Revolving Credit Facility to finance the acquisitions, resulting in a borrowing base of availability
of between $50 million and $75 million after completion of the acquisitions.
The following table reflects required and actual financial ratios as of December 31, 2017 included as part of the affirmative
covenants in our 2014 Credit Facility:
Description of Required Covenant Ratio
Fixed Charge Coverage Ratio
Total Debt to EBITDA Ratio
Covenant Ratio Requirement
greater than or equal to 1.5:1.0
less than or equal to 3.50:1.0
Actual Ratio
2.82:1.00
3.00:1.00
We intend to use the availability under our Credit Facility and cash on hand to pursue acquisitions of additional businesses,
to fund distributions and to provide for other working capital needs. We believe that we currently have sufficient liquidity and
capital resources, which include amounts available under our 2014 Revolving Credit Facility, to meet our existing obligations,
including quarterly distributions to our shareholders, as approved by our board of directors, over the next twelve months.
On September 12, 2014, we purchased an interest rate swap (“New Swap”) with a notional amount of $220 million effective
April 1, 2016 through June 6, 2021. The agreement requires us to pay interest on the notional amount at the rate of 2.97%
in exchange for the three-month LIBOR rate. At December 31, 2017, the New Swap had a fair value loss of $6.1 million,
principally reflecting the present value of future payments and receipts under the agreement. $2.5 million of New Swap is
reflected as a component of current liabilities and $3.6 million is reflected as a component of noncurrent liabilities in the
consolidated balance sheet at December 31, 2017.
Interest Expense
We incurred interest expense totaling $27.8 million in the year ended December 31, 2017, as compared to $24.7 million in
the year ended December 31, 2016 and $25.9 million for the year ended December 31, 2015. The components of interest
expense in each of the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
Interest on credit facilities
Unused fee on Revolving Credit Facility
Amortization of original issue discount
Unrealized (gains) losses on interest rate derivatives (1)
Letter of credit fees
Other
Interest expense
Average daily balance of debt outstanding
Effective interest rate
Years ended December 31,
2017
2016
2015
$
23,940
$
19,861
$
17,590
2,856
1,037
(648)
70
538
1,947
802
1,539
108
415
1,612
671
5,662
121
286
27,793
597,114
$
$
24,672
477,656
$
$
25,942
443,348
4.7%
5.2%
5.9%
$
$
105
(1) On September 14, 2014, we purchased an interest rate swap (the “New Swap”) with a notional amount of $220 million
effective April 1, 2016 through June 6, 2021. The agreement requires us to pay interest on the notional amount at the rate
of 2.97% in exchange for the three-month LIBOR rate. At December 31, 2016 and 2015, this New Swap had a fair value of
negative $10.7 million and $13.0 million, respectively, essentially reflecting the present value of future payments and receipts
under the agreement and is reflected as a component of interest expense and other non-current liabilities. In the above
table, we provide the effective interest rate on outstanding debt, which includes the mark-to-market loss on the New Swap.
Refer to Note K - Derivative Instruments and Hedging Activities of the consolidated financial statements.
Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code which may impact, positively
or negatively, the Company and our portfolio companies for taxable years ended December 31, 2017 and thereafter. The
impact of many provisions of the Tax Act are unclear and subject to interpretation pending further guidance from the Internal
Revenue Service. The ultimate impact of the Tax Act on the Company and its portfolio companies is dependent on ongoing
review and analysis.
Among other important changes in the Tax Act, the tax rate on corporations was reduced from 35% to 21%; a limitation on
the deduction of interest expense was enacted; certain tangible property acquired after September 27, 2017 will qualify for
100% expensing; gain from the sale of a partnership interest by a foreign person will be subject to U.S. tax to the extent that
the partnership is engaged in a trade or business; a special deduction for qualified business income from pass-through
entities was added; U.S. federal income taxes on foreign earnings was eliminated (subject to several important exceptions),
and new provisions designed to tax currently global intangible low taxed income and a new base erosion anti-abuse tax were
added.
For taxable years beginning after December 31, 2017, a deduction for interest will generally be allowed for any entity only
up to 30% of adjusted taxable income (determined without regard to interest income or expense) plus the amount of interest
income. Only interest income and expense incurred in a trade or business is taken into account, i.e., investment interest
income and deductions are ignored. For partnerships, the limitation is applied at the partnership level and then adjustments
are made at the partner level to avoid double counting and to allow an owner to use any excess income in calculating the
interest deduction at his or her level. It is not expected that the provision will limit the deduction of interest by the Company
for 2018 but it may impact the deduction for certain of the portfolio companies.
Although the Trust and the Company are treated as partnerships for U.S. federal income tax purposes, and therefore not
subject to net income tax, for U.S. GAAP purposes, we consolidate the results of our businesses in which we own or control
more than a 50% share of the voting interest. We have made a reasonable estimate of the effects of the Tax Act on the
existing deferred tax balances and the one-time transition tax. We have substantially completed our accounting for the
revaluation of our net U.S. federal deferred tax liabilities and recorded a tax benefit of approximately $34.7 million in the
fourth quarter of 2017. The one-time transition tax under the Tax Act is based on earnings and profits ("E&P") that were
previously deferred from U.S. income taxes. For the year ended December 31, 2017, the provision for income taxes includes
provisional tax expense of $4.9 million related to the one-time transition tax liability of our foreign subsidiaries. We have not
completed the calculation of the total E&P for these foreign subsidiaries and expect to refine our calculations as additional
analysis is completed. In addition, the Company's estimates may be affected as additional regulatory guidance is issued
with respect to the Tax Act. Any adjustments to the provisional amounts will be recognized as a component of the provision
for income taxes in the period in which such adjustments are determined within the annual period following the enactment
of the Tax Act.
We recorded an income tax benefit of $40.7 million with an annual effective rate of (549.2)% during the year ended
December 31, 2017, $9.5 million in income tax expense with an annual effective tax rate of 15% during the year ended
December 31, 2016, and $15.0 million in income tax expense with an effective tax rate of 62.5% during the year ended
December 31, 2015. Our gains and losses incurred at the Company's parent, which is an LLC, are not tax deductible at the
corporate level as those costs are passed through to the shareholders. During 2015, the effective rate is therefore increased
as a result of the gain on sale of businesses.
106
The components of our income tax (benefit) expense as a percentage of income from continuing operations before income
taxes for the years ended December 31, 2017, 2016 and 2015 are as follows:
United States Federal Statutory Rate
State income taxes (net of Federal benefits)
Foreign income taxes
Expenses of Compass Group Diversified Holdings, LLC
representing a pass through to shareholders (1)
Impairment expense
Effect of gain on investment in FOX
Impact of subsidiary employee stock options
Domestic production activities deduction
Non-deductible acquisition costs
Effect of undistributed foreign earnings
Non-recognition of NOL carryforwards at subsidiaries
Adjustments to uncertain tax positions (2)
Utilization of tax credits
Effect of Tax Act - remeasurement of deferred tax assets and liabilities (3)
Effect of Tax Act - transition tax on non-U.S. subsidiaries' earnings (3)
Other
Effective income tax rate
Year ended December 31,
2017
2016
2015
(35.0)%
(6.5)
(18.4)
(3.3)
69.4
26.6
9.9
(8.4)
4.6
(18.7)
(18.1)
(124.0)
(40.1)
(468.0)
65.6
15.2
35.0%
35.0%
0.6
1.5
3.6
—
(41.2)
1.3
(0.9)
1.9
4.2
3.6
—
(0.7)
—
—
6.1
6.5
1.2
29.1
—
(6.6)
1.3
(3.2)
—
—
(6.1)
—
(1.1)
—
—
6.4
(549.2)%
15.0%
62.5%
(1) The effective income tax rate for each of the years presented includes losses at the Company’s parent, which is taxed as a
partnership.
(2) Represents the effect of the reversal of an uncertain tax position at our 5.11 business that existed as of the acquisition date
and was settled during the fourth quarter of 2017, resulting in a tax benefit of $9.2 million in our 2017 tax provision.
(3) The effect of the enactment of the Tax Act on our tax provision for the year ended December 31, 2017 was a benefit of $34.7
million related to the reduction in the U.S. federal corporate income tax rate from 35% to 21%, and tax expense of $4.9
million related to the one-time transition tax liability of our foreign subsidiaries. Our income before income taxes for
2017 was $7.4 million, and as a result, the effect from the Tax Act on the reconciliation in the table above was significant.
Reconciliation of Non-GAAP Financial Measures
From time to time we may publicly disclose certain “non-GAAP” financial measures in the course of our investor presentations,
earnings releases, earnings conference calls or other venues. A non-GAAP financial measure is a numerical measure of
historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments that
effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with
GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that
effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented.
GAAP refers to generally accepted accounting principles in the United States.
Non-GAAP financial measures are provided as additional information to investors in order to provide them with an alternative
method for assessing our financial condition and operating results. These measures are not meant to be a substitute for
GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.
The tables below reconcile the most directly comparable GAAP financial measures to EBITDA, Adjusted EBITDA and Cash
Flow Available for Distribution and Reinvestment (“CAD”).
107
Reconciliation of Net income (loss) to EBITDA and Adjusted EBITDA
EBITDA – Earnings before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”) is calculated as net income
(loss) before interest expense, income tax expense (benefit), depreciation expense and amortization expense. Amortization
expenses consist of amortization of intangibles and debt charges, including debt issuance costs, discounts, etc.
Adjusted EBITDA – Is calculated utilizing the same calculation as described above in arriving at EBITDA further adjusted
by: (i) non-controlling shareholder compensation, which generally consists of non-cash stock option expense; (ii) successful
acquisition costs, which consist of transaction costs (legal, accounting, due diligences, etc.) incurred in connection with the
successful acquisition of a business expensed during the period in compliance with ASC 805; (iii) management fees, which
reflect fees due quarterly to our Manager in connection with our MSA; (iv) impairment charges, which reflect write downs to
goodwill or other intangible assets; (v) gains or losses recorded in connection with changes in the fair value of our investment
in FOX; (vi) gains or losses recorded in connection with the sale of fixed assets; and (vii) gains or losses recognized upon
the sale of a business.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors and reflect important financial measures
as they exclude the effects of items which reflect the impact of long-term investment decisions, rather than the performance
of near term operations. When compared to net income (loss) these financial measures are limited in that they do not reflect
the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated
with impairments. This presentation also allows investors to view the performance of our businesses in a manner similar to
the methods used by us and the management of our businesses, provides additional insight into our operating results and
provides a measure for evaluating targeted businesses for acquisition.
We believe these measurements are also useful in measuring our ability to service debt and other payment obligations.
EBITDA and Adjusted EBITDA are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent
with non-GAAP financial measures used by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss), which we consider to be the most
comparable GAAP financial measure (in thousands):
108
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Cash Flow Available for Distribution and Reinvestment
The table below details cash receipts and payments that are not reflected on our income statement in order to provide an
additional measure of management’s estimate of cash CAD. CAD is a non-GAAP measure that we believe provides additional
information to our shareholders in order to enable them to evaluate our ability to make anticipated quarterly distributions.
Because other entities do not necessarily calculate CAD the same way we do, our presentation of CAD may not be comparable
to similarly titled measures provided by other entities. We believe that our historic and future CAD, together with our cash
balances and access to cash via our debt facilities, will be sufficient to meet our anticipated distributions over the next twelve
months. The table below reconciles CAD to net income and to cash flow provided by operating activities, which we consider
to be the most directly comparable financial measure calculated and presented in accordance with GAAP.
(in thousands)
Net income
Adjustment to reconcile net income to cash provided by
operating activities:
Depreciation and amortization
Impairment expense/ Loss on disposal of assets
Gain on sale of businesses
Amortization of debt issuance costs and original issue
discount
Unrealized (gain) loss on interest rate hedges
Noncontrolling stockholders charges
Loss (gain) on equity method investment
Excess tax benefit on stock compensation
Provision for loss on receivables
Deferred taxes
Other
Changes in operating assets and liabilities
Net cash provided by operating activities
Plus:
Unused fee on revolving credit facility
Excess tax benefit from subsidiary stock option exercise
Successful acquisition expense
Integration services agreement (1)
Realized loss from foreign currency effect (2)
Earnout provision adjustment (3)
Other
Changes in operating assets and liabilities
Less:
Changes in operating assets and liabilities
Payment on interest rate swap
Earnout provision adjustment (3)
Realized gain from foreign currency effect (2)
Other (4)
Maintenance capital expenditures: (5)
Compass Group Diversified Holdings LLC
5.11
Advanced Circuits
American Furniture (divested October 2015)
112
Year ended December 31,
2017
2016
2015
$
33,612
$
56,530
$
165,770
110,051
17,325
(340)
5,007
(648)
7,027
5,620
(417)
3,964
(59,429)
393
(40,394)
81,771
2,856
417
2,050
3,083
—
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3,964
4,736
3,315
3,586
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628
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87,405
25,204
(2,308)
3,565
1,539
4,382
(74,490)
(1,163)
407
(9,669)
1,486
18,484
111,372
1,947
1,163
3,888
1,667
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421
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4,303
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1,327
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2,931
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9,165
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2,883
5,662
3,737
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(3,131)
82
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84,548
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311
Arnold
CamelBak (divested August 2015)
Clean Earth
Crosman
Ergobaby
Liberty
Manitoba Harvest
Sterno
Tridien (divested September 2016)
Preferred share distributions
4,851
—
5,289
1,831
1,041
706
647
2,343
—
2,457
3,801
—
6,202
—
826
1,098
1,495
1,787
385
—
2,618
1,295
6,295
—
1,543
1,158
594
1,928
927
—
Estimated cash flow available for distribution and reinvestment $
92,243
$
76,375
$
82,359
Distribution paid in April 2017/2016/2015
Distribution paid in July 2017/2016/2015
Distribution paid in October 2017/2016/2015
Distribution paid in January 2018/2017/2016
$
$
(21,564) $
(19,548) $
(21,564)
(21,564)
(21,564)
(19,548)
(19,548)
(21,564)
(86,256) $
(80,208) $
(19,548)
(19,548)
(19,548)
(19,548)
(78,192)
(1) Represents fees paid by newly acquired companies to the Manager for integration services performed during the first year of
ownership, payable quarterly.
(2) Represents the foreign currency transaction gain or loss resulting from the Canadian dollar intercompany loans issued to
Manitoba Harvest.
(3) Earnout provision adjustment related to the change in estimate of contingent consideration that was recorded in the consolidated
(4)
statement of operations.
Includes amounts for the establishment of accounts receivable reserves related to two retail customers who filed bankruptcy
during the first and third quarters of 2017.
(5) Represents maintenance capital expenditures that were funded from operating cash flow and excludes growth capital
expenditures of approximately $24.3 million, $3.4 million and $1.0 million incurred during the years ended December 31, 2017,
2016 and 2015, respectively.
Seasonality
Earnings of certain of our operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second
quarter due to lower demand for safes at the onset of summer. Crosman typically has higher sales in the third and fourth
quarter each year, reflecting the hunting and holiday seasons. Earnings from Clean Earth are typically lower during the
winter months due to the limits on outdoor construction and development activity because of the colder weather in the
Northeastern United States. Sterno typically has higher sales in the second and fourth quarter of each year, reflecting the
outdoor summer and holiday seasons, respectively.
Related Party Transactions and Certain Transactions Involving our Businesses
We have entered into the following related party transactions with our Manager, CGM:
• Management Services Agreement
LLC Agreement
•
•
Integration Services Agreement
• Cost Reimbursement and Fees
Management Services Agreement
We entered into the MSA with CGM effective May 16, 2006. The MSA provides for, among other things, CGM to perform
services for us in exchange for a management fee paid quarterly and equal to 0.5% of our adjusted net assets. The
management fee is required to be paid prior to the payment of any distributions to shareholders. For the years ended
December 31, 2017, 2016, and 2015, we incurred $32.7 million, $29.4 million, and $25.7 million, respectively, in management
fees to CGM (excludes offsetting fees paid by CamelBak in 2015 and Tridien in 2016 and 2015).
Pursuant to the MSA, CGM is entitled to enter into off-setting management service agreements with each of our segments.
The amount of the fee is negotiated between CGM and the operating management of each segment and is based upon the
113
value of the services to be provided. The fees paid directly to CGM by the segments offset on a dollar for dollar basis the
amount due to CGM by the Company under the MSA.
LLC Agreement
As distinguished from its provision of providing management services to us, pursuant to the amended MSA, members of
CGM are owners of 60.4% of the Allocation Interests in us through their ownership in Sostratus LLC. The LLC agreement
gives the holders of Allocation Interests the right to distributions pursuant to a profit allocation formula upon the occurrence
of a Sale Event or a Holding Event. The Allocation Interest Holders are entitled to receive and as such can elect to receive
the positive contribution-based profit allocation payment for each of the business acquisitions during the 30-day period
following the fifth anniversary of the date upon which we acquired a controlling interest in that business (Holding Event) and
upon the sale of the business (Sale Event). During the year ended December 31, 2017, Holders received $39.2 million in
distributions related to Sale Events in November 2016 and March 2017 of FOX shares. At December 31, 2016, we accrued
a distribution payable to the Allocation Interest Holders of $13.4 million related to our November 2016 sale of FOX shares.
This distribution was paid in the first quarter of 2017. Holders received $25.8 million related to the March 2017 sale of FOX
shares. During the year ended December 31, 2016, Holders received $23.8 million in total distributions related to Sale
Events of FOX shares in March and August 2016, a fifth year anniversary Holding Event of our ACI business, and the sale
of Tridien in September 2016. During the year ended December 31, 2015, Holders were paid $14.6 million related to the
sale of CamelBak and American Furniture (Sale Events) and $3.1 million related to the five year holding event for Ergobaby
(Holding Event).
Certain persons who are employees and partners of the Manager, including the Company’s Chief Executive Officer and
Chief Financial Officer, beneficially own 60.4% of the Allocation Interests, through Sostratus LLC, at December 31, 2017
and 2016, and 58.8% at December 31, 2015. Of the remaining 39.6% non-voting ownership of the Allocation Interests, 5.0%
is held by CGI Diversified Holdings LP, 5.0% is held by the Chairman of the Company’s Board of Directors, and the remaining
29.6% is held by the former founding partner of the Manager.
Integration Services Agreement
Integration services represent fees paid by newly acquired companies to the Manager for integration services performed during
the first year of ownership. Crosman, which was acquired in June 2017, 5.11, which was acquired in 2016, and Manitoba Harvest,
which was acquired in 2015, entered into Integration Services Agreements ("ISA") with CGM. The ISA provides for CGM to
provide services for new platform acquisitions to, amongst other things, assist the management at the acquired entities in
establishing a corporate governance program, including the retention of independent board members to serve on their board
of directors, implement compliance and reporting requirements of the Sarbanes-Oxley Act of 2002, as amended (the
"Sarbanes-Oxley Act") and align the acquired entity's policies and procedures with our other subsidiaries. Each ISA is for
the twelve month period subsequent to the acquisition and is payable quarterly. Crosman will pay CGM a total integration
service fee of $1.5 million, with $0.75 million paid in 2017, and $0.75 to be paid in 2018. 5.11 paid CGM $3.5 million under
the agreement, with $1.2 million paid in 2016, and $2.3 million paid in 2017. Manitoba Harvest paid CGM $1.0 million in
integration services fees under the agreement.
Cost Reimbursement and Fees
We reimbursed CGM approximately $3.8 million, $3.8 million, and $3.5 million, principally for occupancy and staffing costs
incurred by CGM on our behalf during the years ended December 31, 2017, 2016 and 2015, respectively.
Investment in FOX
As of July 10, 2014, our ownership interest in FOX decreased from 53% to approximately 41% after we sold shares in a
secondary offering by FOX. Since we no longer held a majority interest in FOX, we began accounting for our investment in
FOX at fair value utilizing the equity method of accounting. We elected to measure our investment in FOX using the fair
value option fair value, with unrealized gains and losses reflected in the consolidated statement of operations as income
(loss). In November 2016, our ownership interest in FOX decreased to approximately 14%. In March 2017, FOX closed on
a secondary offering through which we sold our remaining 5,108,718 shares in FOX for total net proceeds of $136.1 million,
after the underwriter's discount of $8.9 million. Subsequent to the sale of FOX shares in March 2017, we no longer hold an
ownership interest in FOX.
114
The following table reflects the 2017 and 2016 activity from our investment in FOX (in thousands):
Balance January 1st
Proceeds from sale of FOX shares, net - March
Proceeds from sale of FOX shares, net - August
Proceeds from sale of FOX shares, net - November
Mark-to-market adjustment - investment (1)
Balance December 31st
Year ended December 31,
2017
2016
$
$
141,767
$
(136,147)
—
—
(5,620)
— $
249,747
(47,685)
(63,000)
(71,785)
74,490
141,767
(1) The mark-to-market adjustment represents the change in the fair value of the FOX common shares for the period indicated.
The 2017 mark-to-market adjustment represents the unrealized loss on the investment in FOX as of the date of the FOX
secondary offering through which we sold our remaining shares in FOX.
The Company and its businesses have the following significant related party transactions:
5.11
Related Party Vendor Purchases - 5.11 purchases inventory from a vendor who is a related party to 5.11 through one of the
executive officers of 5.11 via the executive's 40% ownership interest in the vendor. During the years ended December 31,
2017 and 2016 (from the date of acquisition) 5.11 purchased approximately $5.6 million and $2.3 million, respectively, in
inventory from the vendor.
ACI
Recapitalization - During the second quarter of 2016, the Company completed a recapitalization at ACI whereby the Company
entered into an amendment to the intercompany debt agreement with ACI (the "ACI Loan Agreement"). The ACI loan
agreement was amended to provide for additional term loan borrowings of $61.0 million to fund a cash distribution to
shareholders totaling $60.1 million. Minority interest shareholders of Advanced Circuits, including certain members of
management at Advanced Circuits, received total distribution proceeds of $18.4 million. The Company used cash on hand
to fund the distribution to minority shareholders.
Liberty
Recapitalization - During the first quarter of 2016, we completed a recapitalization at Liberty whereby we entered into an
amendment to the intercompany loan agreement with Liberty (the “Liberty Loan Agreement”). The Liberty Loan Agreement
was amended to (i) provide for term loan borrowings of $38.0 million and revolving credit facility borrowings of $5.0 million
to fund cash distributions totaling $35.3 million to its shareholders, including the Company, and (ii) extend the maturity dates
of the term loans and revolving credit facility. Liberty’s noncontrolling shareholders received approximately $5.3 million in
distributions as a result of the recapitalization. Immediately prior to the recapitalization, management exercised stock options
for 75,095 shares of Liberty common shares, resulting in net proceeds from stock options at Liberty of $3.8 million. Liberty
recognized $0.3 million in compensation expense related to the accelerated vesting of a portion of management's stock
options at the time of exercise. We then purchased $1.5 million in Liberty common shares from members of Liberty
management, resulting in Liberty's noncontrolling shareholders holding 11.4% of Liberty's outstanding shares subsequent
to the recapitalization. The purchase of the Liberty common stock from noncontrolling shareholders and issuance of Liberty
common stock related to the exercise of stock options by noncontrolling shareholders were at fair value and resulted in no
change in control of Liberty. The difference between the consideration paid for the noncontrolling interest and the adjustment
to the carrying amount of our noncontrolling interest in Liberty was recognized in our equity. Subsequent to the purchase
of Liberty common shares and the exercise of the options, we own 88.6% of Liberty on a primary basis and 84.7% on a fully
diluted basis.
Liberty Related Party Vendor Purchases - Liberty purchases inventory raw materials from two vendors who are related parties
to Liberty through two of the executive officers of Liberty via the employment of family members at the vendors. During the
years ended December 31, 2017, 2016 and 2015, Liberty purchased approximately $2.1 million, $2.5 million and $3.3 million,
respectively, in raw materials from the two vendors.
FOX
In September 2014, the Company and FOX entered into an agreement for the provision of services to FOX for assistance
in complying the Sarbanes-Oxley Act of 2002, as amended (the “Services Agreement”). The Services Agreement terminated
115
on March 31, 2016. A statement of work was agreed to in connection with the Service Agreement, which provided that the
Company’s internal audit team will assist FOX with various tasks, including, but not limited to, the development of internal
control policies and procedures, risk and control matrices and the evaluation of internal controls. Services provided in
accordance with the Services Agreement were billed on a time and materials basis. Fees paid for services provided in 2016
and 2015 were approximately $72,000 and $135,000, respectively.
Sterno
Recapitalization - In January 2018, the Company completed a recapitalization at Sterno whereby the Company entered into
an amendment to the intercompany loan agreement with Sterno (the "Sterno Loan Agreement"). The Sterno Loan Agreement
was amended to (i) provide for term loan borrowings of $56.8 million to fund a distribution to the Company, which owned
100% of the outstanding equity of Sterno at the time of the recapitalization, and (ii) extend the maturity dates of the term
loans. In connection with the recapitalization, Sterno's management team exercised all of their vested stock options, which
represented 58,000 shares of Sterno. The Company then used a portion of the distribution to repurchase the 58,000 shares
from management for a total purchase price of $6.0 million. In addition, Sterno issued new stock options to replace the
exercised option, thus maintaining the same percentage of fully diluted non-controlling interest that existed prior to the
recapitalization.
Clean Earth
In January 2018, Clean Earth purchased a permit and some tangible property consisting primarily of machinery and equipment
from an officer of the company for approximately $2 million.
Off-Balance Sheet Arrangements
We have no special purpose entities or off balance sheet arrangements, other than operating leases entered into in the
ordinary course of business.
Contractual Obligations
Long-term contractual obligations, except for our long-term debt obligations, are generally not recognized in our consolidated
balance sheet. Non-cancelable purchase obligations are obligations we incur during the normal course of business, based
on projected needs.
The table below summarizes the payment schedule of our contractual obligations at December 31, 2017 (in thousands):
Long-term debt obligations (1)
Operating lease obligations (2)
Purchase obligations (3)
Total (4)
Total
Less than
1 Year
1-3 Years
3-5 Years
$
689,062
$
33,760
$
102,186
$
553,116
$
106,867
382,377
17,858
213,544
26,198
96,033
21,220
72,800
More than
5 Years
—
41,591
—
$
1,178,306
$
265,162
$
224,417
$
647,136
$
41,591
(1) Reflects commitment fees and letter of credit fees under our Revolving Credit Facility and amounts due, together with
interest on our Revolving Credit Facility and Term Loan Facility.
(2) Reflects various operating leases for office space, manufacturing facilities and equipment from third parties.
(3) Reflects non-cancelable commitments as of December 31, 2017, including: (i) shareholder distributions of $93.5 million;
(ii) estimated management fees of $36.4 million per year over the next five years; and (iii) other obligations, including
amounts due under employment agreements. Distributions to our shareholders are approved by our board of directors each
fiscal quarter. The amount approved for future quarters may differ from the amount included in this schedule.
(4) The contractual obligation table does not include approximately $1.1 million in liabilities associated with unrecognized tax
benefits as of December 31, 2017 as the timing of the recognition of this liability is not certain. The amount of the liability is
not expected to significantly change in the next twelve months.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with GAAP requires management to adopt accounting policies and
make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. Such
estimates and judgments may involve varying degrees of uncertainty. Actual results could differ from these estimates under
different assumptions and changes in other facts and circumstances, and potentially could result in materially different results.
Our critical accounting estimates are discussed below. For a summary of our significant accounting policies, including those
policies discussed below, refer to "Note B - Summary of Significant Accounting Policies" to our consolidated financial
statements.
116
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned
when it has persuasive evidence of an arrangement, the product has been shipped or the services have been provided to
the customer, the sales price is fixed or determinable and collectability is reasonably assured. Provisions for customer
returns and other allowances based on historical experience are recognized at the time the related sale is recognized.
Revenue from the Company's Clean Earth business is recognized as services are rendered, generally when material is
received at Clean Earth's facilities.
Business Combinations
The acquisitions of our businesses are accounted for under the acquisition method of accounting. Accounting for business
combinations requires the use of estimates and assumptions in determining the fair value of assets acquired and liabilities
assumed in order to allocate the purchase price. The estimates of fair value of the assets acquired and liabilities assumed
are based upon assumptions believed to be reasonable using established valuation methods, taking into consideration
information supplied by the management of the acquired entities and other relevant information. The determination of fair
values requires significant judgment both by our management team and, when appropriate, valuations by independent third-
party appraisers. We amortize intangible assets, such as trademarks and customer relationships, as well as property, plant
and equipment, over their economic useful lives, unless those lives are indefinite. We consider factors such as historical
information, our plans for the asset and similar assets held by our previously acquired portfolio companies. The impact could
result in either higher or lower amortization and/or depreciation expense.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the assets acquired. We are required to perform
impairment reviews at least annually and more frequently in certain circumstances. The estimates of future earnings and
other market assumptions used to derive and test the fair value at each of our reporting units requires judgment on the part
of management. Even minor adjustments to those values used and assumptions made can lead to significantly different
results.
Goodwill and Indefinite Lived Intangible Assets
Goodwill represents the excess amount of the purchase price over the fair value of the assets acquired. Our goodwill and
indefinite lived intangible assets are tested for impairment on an annual basis as of March 31st, and if current events or
circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which are generally an operating
segment or one level below the operating segment. Each of our businesses represents a reporting unit except Arnold, which
is comprised of three reporting units, and each reporting unit was included in our annual impairment test at March 31, 2017.
We use a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it
is more-likely than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether
it is necessary to perform the two-step goodwill impairment testing. The qualitative factors we consider include, in part, the
general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance
including actual versus planned results and results of relevant prior periods for operating income, net income and adjusted
EBITDA, operating costs and cost impacts, as well as issues or events specific to the reporting unit. At March 31, 2017, we
determined that the Manitoba Harvest reporting unit required further quantitative testing (Step 1) because we could not
conclude that the fair value of the reporting unit exceeds its carrying value based on qualitative factors alone. For the Step
1 quantitative impairment test at Manitoba, the Company utilized an income approach. The weighted average cost of capital
used in the income approach at Manitoba was 12.0%. Results of the Step 1 quantitative testing of Manitoba Harvest indicated
that the fair value of Manitoba Harvest exceeded its carrying value. For the reporting units that were tested qualitatively, the
results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value.
2017 Interim Impairment Testing
As a result of operating results that were below forecasted amounts, as well as a failure of the financial covenants associated
with the intercompany credit facility, we determined that a triggering event had occurred at Manitoba Harvest in the fourth
quarter of 2017. We performed impairment testing of the goodwill and the indefinite lived tradename at Manitoba Harvest
as of December 31, 2017. For the quantitative impairment test at Manitoba, we utilized an income approach. The weighted
average cost of capital used in the income approach at Manitoba was 11.7%. Under the new guidance, a goodwill impairment
will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount
of goodwill. Results of the quantitative testing of Manitoba Harvest indicated that the carrying value of Manitoba Harvest
exceeded its fair value by $6.3 million, and we recorded $6.2 million (after the effect of foreign currency translation) as
impairment expense at December 31, 2017. For the indefinite lived trade name, quantitative testing of the Manitoba Harvest
tradename indicated that the carrying value exceeded its fair value by $2.3 million, and we recorded $2.3 million (after the
effect of foreign currency translation) of impairment expense at December 31, 2017. We expect to finalize the Manitoba
Harvest impairment testing during the first quarter of 2018.
117
2016 Interim Impairment Testing
As a result of decreases in forecasted revenue, operating income and cash flows at Arnold, as well as a shortfall in revenue
and operating income during the latter half of 2016 as compared to budgeted amounts, we determined that it was necessary
to perform interim goodwill impairment testing on each of the three reporting units at Arnold. We performed Step 1 of the
goodwill impairment assessment at December 31, 2016. For purposes of Step 1 for the Arnold reporting units, we estimated
the fair value of the reporting unit using only an income approach, whereby we estimate the fair value of a reporting unit
based on the present value of future cash flows. We do not believe that the market approach results in relevant data points
for market multiples or comparative data from comparable public companies since most of Arnold's competitors are privately
held and do not publish data that can be used in a market approach. In the income approach, we used a weighted average
cost of capital of 12.5% for PMAG, 12.0% for Flexmag and 13.0% for PTM. Results of the Step 1 testing for Arnold's Flexmag
and PTM reporting units indicated that the fair value of these reporting units exceeded their carrying value by 34% and 38%,
respectively. The results of the Step 1 test for the PMAG unit indicated a potential impairment of goodwill and the Company
performed the second step of goodwill impairment testing (Step 2) to determine the amount of impairment of the PMAG
reporting unit.
We had not completed the Step 2 testing for PMAG at December 31, 2016, and recorded an estimated impairment loss for
PMAG of $16 million based on a range of impairment loss. During the first quarter of 2017, we recorded an additional $8.9
million of goodwill impairment after the results of the Step 2 indicated total goodwill impairment of the PMAG reporting unit
of $24.9 million. The Step 2 impairment was higher than the initial estimate at December 31, 2016 due primarily to the
valuation of PMAG's property, plant and equipment during the Step 2 exercise.
In connection with the annual goodwill impairment testing, we test other indefinite-lived intangible assets (trade names) at
our reporting units. We are permitted to make a qualitative assessment of whether it is more likely than not that the fair value
of an individual reporting unit's indefinite lived assets exceeds its carrying amount before applying a quantitative analysis.
If a company concludes that it is not more likely than not that the fair value of a reporting unit’s indefinite-lived assets exceeds
its carrying amount it is not required to perform a quantitative test for that reporting unit. At March 31, 2017, we elected to
use the qualitative assessment alternative to test indefinite-lived assets for impairment for each of our reporting units that
record indefinite lived assets except Manitoba Harvest, where we performed a Step 1. At that time, it was determined that
the fair value of indefinite lived assets at each of our reporting units exceeded its carrying amount.
Definite-Lived Intangible Assets
Long-lived intangible assets subject to amortization, including customer relationships, non-compete agreements, permits
and technology are amortized using the straight-line method over the estimated useful lives of the intangible assets, which
we determine based on the consideration of several factors including the period of time the asset is expected to remain in
service. We evaluate long-lived assets for potential impairment whenever events occur or circumstances indicate that the
carrying amount of the assets may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If
the carrying amount of a long-lived asset is not recoverable and is greater than its fair value, the asset is impaired and an
impairment loss must be recognized. Both the Ergobaby and Clean Earth businesses recognized losses on disposal of
assets during 2016. Ergobaby recorded a $5.9 million loss on disposal of assets during the year ended December 31, 2016
related to its decision to dispose of the Orbit Baby product line. The loss is comprised of the write-off of intangible assets
of $5.5 million, property, plant and equipment of $0.4 million, and other assets of $1.0 million. In October 2016, Ergobaby
sold a majority of the Orbit Baby intellectual property and tooling assets. The proceeds of the sale reduced the loss recorded
on disposal of assets by approximately $1.0 million in the fourth quarter of 2016. Clean Earth recognized a loss on disposal
of assets of $3.3 million during the fourth quarter of 2016 related to the closure of the Company’s Williamsport, Pennsylvania
site which processed drill cuttings. The loss was comprised of intangible assets specific to the Williamsport location, as well
as equipment that could not be repurposed to other sites at the time of the closing of the facility.
The determination of fair values and estimated useful lives requires significant judgment both by our management team and
by outside experts engaged to assist in this process. This judgment could result in either a higher or lower value assigned
to our reporting units and intangible assets. The impact could result in either higher or lower amortization and/or the incurrence
of an impairment charge.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts on an entity-by-entity basis with consideration for historical loss experience,
customer payment patterns and current economic trends. The Company reviews the adequacy of the allowance for doubtful
accounts on a periodic basis and adjusts the balance, if necessary. The determination of the adequacy of the allowance for
doubtful accounts requires significant judgment by management. The impact of either over or under estimating the allowance
could have a material effect on future operating results. The consolidated allowance for doubtful accounts is approximately
$10.0 million at December 31, 2017.
118
Income taxes
On December 22, 2017, the U.S. government enacted the Tax Act which significantly revises the U.S. corporate income tax
law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a partial territorial tax system,
imposing a one-time tax on foreign unremitted earnings and setting limitations on the deductibility of certain costs. Due to
the complexities of accounting for the effect of the Tax Act, the U.S. Securities and Exchange Commission issued guidance
that requires companies to include in their financial statements a reasonable estimate of the impact of the Tax Act on earnings
to the extent such reasonable estimate has been determined. The Company has made a reasonable estimate of the effects
of the Tax Act on its existing deferred tax balances and the one-time transition tax. The Company has substantially completed
its accounting for the revaluation of its net U.S. federal deferred tax liabilities and recorded a tax benefit of approximately $34.7
million in the fourth quarter of 2017. The one-time transition tax under the Tax Act is based on earnings and profits ("E&P)
that were previously deferred from U.S. income taxes. For the year ended December 31, 2017, the provision for income
taxes includes provisional tax expense of $4.9 million related to the one-time transition tax liability of our foreign subsidiaries.
The Company has not completed the calculation of the total E&P for these foreign subsidiaries and expects to refine its
calculations as additional analysis is completed. In addition, the Company's estimates may be affected as additional regulatory
guidance is issued with respect to the Tax Act. Any adjustments to the provisional amounts will be recognized as a component
of the provision for income taxes in the period in which such adjustments are determined within the annual period following
the enactment of the Tax Act.
Several of our majority owned subsidiaries have deferred tax assets recorded at December 31, 2017 which in total amount
to approximately $38.9 million. This deferred tax asset is net of $5.9 million of valuation allowance primarily associated with
5.11 and Arnold related to an expected inability to utilize foreign tax credits. These deferred tax assets are comprised primarily
of reserves not currently deductible for tax purposes. The temporary differences that have resulted in the recording of these
tax assets may be used to offset taxable income in future periods, reducing the amount of taxes we might otherwise be
required to pay. Realization of the deferred tax assets is dependent on generating sufficient future taxable income. Based
upon the expected future results of operations, we believe it is more likely than not that we will generate sufficient future
taxable income to realize the benefit of existing temporary differences, although there can be no assurance of this. The
impact of not realizing these deferred tax assets would result in an increase in income tax expense for such period when
the determination was made that the assets are not realizable. (Refer to "Note L – “Income Taxes" in the notes to consolidated
financial statements.)
Profit Allocation Interests
At the time of our Initial Public Offering, we issued Allocation Interests governed by our LLC agreement that entitle the holders
(the "Holders") to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The
Holders are entitled to receive and as such can elect to receive the positive contribution based profit allocation payment for
each of the business acquisitions during the 30-day period following the fifth anniversary of the date upon which we acquired
a controlling interest in that business (Holding Event) and upon the sale of that business (Sale Event).
Recent Accounting Pronouncements
Refer to "Note B - Summary of Significant Accounting Policies" to our consolidated financial statements for a discussion of
recent accounting pronouncements.
ITEM 7A. – Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
At December 31, 2017, we were exposed to interest rate risk primarily through borrowings under our 2014 Credit Facility
because borrowings under this agreement are subject to variable interest rates. We had $560.0 million outstanding under
the 2014 Term Loan Facility and 2016 Incremental Term Loan at December 31, 2017. On September 16, 2014, we purchased
an interest rate swap with a notional amount of $220 million. This swap is effective April 1, 2016 through June 6, 2021, the
termination date of our 2014 Term Loan, and requires us to pay interest at rates on the notional amount at 2.97% in exchange
for the three-month LIBOR rate.
Interest on our 2014 Term Loan Facility and 2016 Incremental Term Loan is subject to a LIBOR floor of 1.0% and three-
month LIBOR is approximately 169 basis points at December 31, 2017. We currently estimate that a 100 basis point increase
in LIBOR would not have a material impact on our results of operations, cash flows or financial condition.
We expect to borrow under our Revolving Credit Facility in the future in order to finance our short term working capital needs
and future acquisitions. These borrowings will be subject to variable interest rates.
119
Foreign Exchange Rate Sensitivity
During fiscal year 2015, we acquired a Canadian subsidiary, Manitoba Harvest, and we are exposed to transactional foreign
currency exposure related to the issuance of intercompany loans in the Canadian dollar, the functional currency of Manitoba
Harvest. At December 31, 2017, the outstanding amount of intercompany loans with Manitoba Harvest was $48.5 million
(C$60.9 million). We recognized foreign exchange gains of approximately $3.3 million during 2017 related to changes in
the Canadian dollar. A 10% decrease/ increase in the exchange rate would result in approximately $4.6 million additional
expense/ income based on our current amount of intercompany loans outstanding. We also have translation exposure
resulting from translating the financial statements of Manitoba Harvest into the U.S. Dollar.
Credit Risk
We are exposed to credit risk associated with cash equivalents, investments, and trade receivables. We do not believe that
our cash equivalents or investments present significant credit risks because the counterparties to the instruments consist of
major financial institutions and we manage the notional amount of contracts entered into with any one counterparty. Our
cash and cash equivalents at December 31, 2017 consists principally of (i) treasury backed securities, (ii) insured prime
money market funds, (iii) FDIC insured Certificates of Deposit, and (iv) cash balances in several non-interest bearing checking
accounts. Substantially all trade receivable balances of our businesses are unsecured. The concentration of credit risk with
respect to trade receivables is limited by the large number of customers in our customer base and their dispersion across
various industries and geographic areas. Although we have a large number of customers who are dispersed across different
industries and geographic areas, a prolonged economic downturn could increase our exposure to credit risk on our trade
receivables. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses.
120
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial statement schedules referred to in the index contained on page F-1 of
this report are incorporated herein by reference.
121
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
NONE
122
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
(a) Management’s Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the
period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
have concluded that, as of December 31, 2017, the Company’s disclosure controls and procedures were effective in recording,
processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act and in ensuring that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely discussions regarding required disclosure.
(b) Information with respect to Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-
Integrated Framework (2013 framework). Based on our assessment under this framework, our management concluded that
our internal control over financial reporting was effective as of December 31, 2017.
The audited financial statements of the Company included in this Annual Report on 10-K include the results of acquisitions
from their respective dates of acquisition. Management's assessment of internal control over financial reporting for the year
ended December 31, 2017 does not include an assessment of Crosman, a majority owned subsidiary of the Company that
was acquired during the year ended December 31, 2017. The financial statements of Crosman reflect total assets and
revenues constituting 11% and 6%, respectively, of the related consolidated financial statement amounts as of and for the
year ended December 31, 2017. Refer to "Note C - Acquisition of Businesses" for a description of the acquisition of Crosman.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Grant Thornton
LLP, an independent registered public accounting firm, as stated in their report that is included herein.
(c) Information with respect to Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting is contained on page F-2 of this Annual Report on Form 10-K and is incorporated herein by reference.
(d) Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter to which this Annual Report on Form 10-K
relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
NONE
123
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our executive officers is incorporated herein by reference to information included in the Proxy
Statement for our 2018 Annual Meeting of Shareholders.
Information with respect to our directors and the nomination process is incorporated herein by reference to information
included in the Proxy Statement for our 2018 Annual Meeting of Shareholders.
Information regarding our audit committee and our audit committee financial experts is incorporated herein by reference to
information included in the Proxy Statement for our 2018 Annual Meeting of Shareholders.
Information required by Item 405 of Regulation S-K is incorporated herein by reference to information included in the Proxy
Statement for our 2018 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by reference to information included in the Proxy
Statement for our 2018 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by
reference to information included in the Proxy Statement for our 2018 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to such contractual relationships and independence is incorporated herein by reference to the
information in the Proxy Statement for our 2018 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to principal accountant fees and services and pre-approval policies are incorporated herein by
reference to information included in the Proxy Statement for our 2018 Annual Meeting of Shareholders.
124
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
For the Registrant, see “Index to Consolidated Financial Statements and Supplemental Financial Data” set
forth on page F-1.
2. Financial Statement Schedule
For the Registrant, see “Index to Consolidated Financial Statements and Supplemental Financial Data” set
forth on page F-1.
3. Exhibits
For the Registrant, see “Index to Exhibits” set forth on page E-1.
125
Exhibit
Number
INDEX TO EXHIBITS
Description
2.1
2.2
2.3
2.4
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
Stock and Note Purchase Agreement dated as of July 31, 2006, among Compass Group Diversified Holdings
LLC, Compass Group Investments, Inc. and Compass Medical Mattress Partners, LP (incorporated by reference
to Exhibit 2.1 of the Form 8-K filed on August 1, 2006 (File No. 000-51937)).
Stock Purchase Agreement dated June 24, 2008, among Compass Group Diversified Holdings LLC and the other
shareholders party thereto, Compass Group Diversified Holdings LLC, as Sellers’ Representative, Aeroglide
Holdings, Inc. and Bühler AG (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on June 26, 2008
(File No. 000-51937)).
Stock Purchase Agreement, dated October 17, 2011, by and among Recruit Co., LTD. and RGF Staffing USA,
Inc., as Buyers, the shareholders of Staffmark Holdings, Inc., as Sellers, Staffmark Holdings, Inc. and Compass
Group Diversified Holdings LLC as Seller Representative (incorporated by reference to Exhibit 2.1 of the Form 8-
K filed on October 18, 2011 (File No. 001-34927)).
Stock Purchase Agreement dated May 1, 2012, among Candlelight Investment Holdings, Inc., Halo Holding
Corporation, Halo Lee Wayne, LLC and each of the holders of equity interests of Halo Lee Wayne, LLC listed on
Exhibit A thereto (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on May 2, 2012 (File No.
001-34927)).
Certificate of Trust of Compass Diversified Trust (incorporated by reference to Exhibit 3.1 of the Form S-1 filed on
December 14, 2005 (File No. 333-130326)).
Certificate of Amendment to Certificate of Trust of Compass Diversified Trust (incorporated by reference to Exhibit
3.1 of the Form 8-K filed on September 13, 2007 (File No. 000-51937)).
Certificate of Formation of Compass Group Diversified Holdings LLC (incorporated by reference to Exhibit 3.3 of
the Form S-1 filed on December 14, 2005 (File No. 333-130326)).
Amended and Restated Trust Agreement of Compass Diversified Trust (incorporated by reference to Exhibit 3.5
of the Amendment No. 4 to the Form S-1 filed on April 26, 2006 (File No. 333-130326)).
Amendment No. 1 to the Amended and Restated Trust Agreement, dated as of April 25, 2006, of Compass
Diversified Trust among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York
(Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit
4.1 of the Form 8-K filed on May 29, 2007 (File No. 000-51937)).
Second Amendment to the Amended and Restated Trust Agreement, dated as of April 25, 2006, as amended on
May 23, 2007, of Compass Diversified Trust among Compass Group Diversified Holdings LLC, as Sponsor, The
Bank of New York (Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by
reference to Exhibit 3.2 of the Form 8-K filed on September 13, 2007 (File No. 000-51937)).
Third Amendment to the Amended and Restated Trust Agreement dated as of April 25, 2006, as amended on
May 25, 2007 and September 14, 2007, of Compass Diversified Holdings among Compass Group Diversified
Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware Trustee, and the Regular Trustees
named therein (incorporated by reference to Exhibit 4.1 of the Form 8-K filed on December 21, 2007 (File No.
000-51937)).
Fourth Amendment dated as of November 1, 2010 to the Amended and Restated Trust Agreement, as amended
effective November 1, 2010, of Compass Diversified Holdings, originally effective as of April 25, 2006, by and
among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware
Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit 3.1 of the Form 10-Q filed
on November 8, 2010 (File No. 001-34927)).
Second Amended and Restated Trust Agreement of the Trust (incorporated by reference to Exhibit 3.1 of the
Form 8-K filed on December 7, 2016 (File No. 001-34927)).
Second Amended and Restated Operating Agreement of Compass Group Diversified Holdings, LLC dated
January 9, 2007 (incorporated by reference to Exhibit 10.2 of the Form 8-K filed on January 10, 2007 (File No.
000-51937)).
Third Amended and Restated Operating Agreement of Compass Group Diversified Holdings, LLC dated
November 1, 2010 (incorporated by reference to Exhibit 3.2 of the Form 10-Q filed on November 8, 2010 (File No.
001-34927)).
Fourth Amended and Restated Operating Agreement of Compass Group Diversified Holdings LLC, dated
January 1, 2012 (incorporated by reference to Exhibit 3.1 of the Form 10-Q filed on May 7, 2013 (File No.
001-34927)).
Fifth Amended and Restated Operating Agreement of the Company (incorporated by reference to Exhibit 3.2 of
the Form 8-K filed on December 7, 2016 (File No. 001-34927)).
Compass Diversified Holdings Share Designation of Series A Preferred Shares (incorporated by reference to
Exhibit 3.1 of the Form 8-K filed on June 28, 2017 (File No. 001-34927)).
126
Exhibit
Number
3.15
4.1
4.2
4.3
10.1
10.2
Compass Group Diversified Holdings LLC Trust Interest Designation of Series A Trust Preferred Interests
(incorporated by reference to Exhibit 3.2 of the Form 8-K filed on June 28, 2017 (File No. 001-34927)).
Specimen Certificate evidencing a share of trust of Compass Diversified Holdings (incorporated by reference to
Exhibit 4.1 of the Form S-3 filed on November 7, 2007 (File No. 333-147218)).
Description
Specimen LLC Interest Certificate evidencing an interest of Compass Group Diversified Holdings LLC
(incorporated by reference to Exhibit A of Exhibit 10.2 of the Form 8-K filed on January 10, 2007 (File No.
000-51937)).
Form of 7.250% Series A Preferred Share Certificate (incorporated by reference to Exhibit 4.1 of the Form 8-K
filed on June 28, 2017 (File No. 001-34927)).
Form of Registration Rights Agreement by and among Compass Group Diversified Holdings LLC, Compass
Diversified Trust and Certain Shareholders (incorporated by reference to Exhibit 10.3 of the Amendment No. 5 to
the Form S-1 filed on May 5, 2006 (File No. 333-130326)).
Form of Supplemental Put Agreement by and between Compass Group Management LLC and Compass Group
Diversified Holdings LLC (incorporated by reference to Exhibit 10.4 of the Amendment No. 4 to the Form S-1 filed
on April 26, 2006 (File No. 333-130326)).
10.3†
Amended and Restated Employment Agreement dated as of December 1, 2008 by and between James J.
Bottiglieri and Compass Group Management LLC (incorporated by reference to Exhibit 10.1 of the Form 8-K filed
on December 3, 2008 (File No. 000-51937)).
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15†
Form of Share Purchase Agreement by and between Compass Group Diversified Holdings LLC, Compass
Diversified Trust and CGI Diversified Holdings, LP (incorporated by reference to Exhibit 10.6 of the Amendment
No. 5 to the Form S-1 filed on May 5, 2006 (File No. 333-130326)).
Form of Share Purchase Agreement by and between Compass Group Diversified Holdings LLC, Compass
Diversified Trust and Pharos I LLC (incorporated by reference to Exhibit 10.7 of the Amendment No. 5 to the Form
S-1 filed on May 5, 2006 (File No. 333-130326)).
Amended and Restated Management Services Agreement by and between Compass Group Diversified Holdings
LLC, and Compass Group Management LLC, dated as of December 20, 2011 and originally effective as of
May 16, 2006 (incorporated by reference to Exhibit 10.06 of the Form 10-K filed on March 7, 2012 (File No.
001-34927)).
Registration Rights Agreement by and among Compass Group Diversified Holdings LLC, Compass Diversified
Trust and CGI Diversified Holdings, LP, dated as of April 3, 2007 (incorporated by reference to Exhibit 10.3 of the
Amendment No. 1 to the Form S-1 filed on April 20, 2007 (File No. 333-141856)).
Share Purchase Agreement by and between Compass Group Diversified Holdings LLC, Compass Diversified
Trust and CGI Diversified Holdings, LP, dated as of April 3, 2007 (incorporated by reference to Exhibit 10.16 of the
Amendment No. 1 to the Form S-1 filed on April 20, 2007 (File No. 333-141856)).
Subscription Agreement dated August 24, 2011, by and among Compass Group Diversified Holdings LLC,
Compass Diversified Holdings and CGI Magyar Holdings, LLC (incorporated by reference to Exhibit 10.1 of the
Form 8-K filed on August 25, 2011 (File No. 001-34927)).
Registration Rights Agreement dated August 24, 2011, by and among Compass Group Diversified Holdings LLC,
Compass Diversified Holdings and CGI Magyar Holdings, LLC (incorporated by reference to Exhibit 10.2 of the
Form 8-K filed on August 25, 2011 (File No. 001-34927)).
Credit Agreement among Compass Group Diversified Holdings LLC, the financial institutions party thereto and
Bank of America, N.A., dated as of June 6, 2014 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed
on June 9, 2014 (File No. 001-34927)).
First Amendment to Credit Agreement dated June 29, 2015, by and among Compass Group Diversified Holdings
LLC, the Lenders signatory thereto, U.S. Bank National Association and Bank of America, N.A. (incorporated by
reference to Exhibit 10.1 of the Form 8-K filed on July 2, 2015 (File No. 001-34927)).
Second Amendment to Credit Agreement, dated December 15, 2015, by and among Compass Group Diversified
Holdings LLC, the Lenders signatory thereto and Bank of America, N.A. (incorporated by reference to Exhibit
10.13 of the Form 10-K filed on February 29, 2016 (File No. 001-34927)).
Sixth Amended and Restated Management Service Agreement by and between Compass Group Diversified
Holdings LLC, and Compass Group Management LLC, dated as of September 30, 2014 and originally effective
as of May 16, 2006 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on October 7, 2014 (File No.
001-34927)).
Employment Agreement dated July 11, 2013, between Compass Group Management LLC and Ryan J.
Faulkingham (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on July 11, 2013 (File No.
001-34927)).
127
10.16
10.17
10.18
10.19
10.20
10.21
10.22*
12.1*
21.1*
23.1*
31.1*
31.2*
32.1*+
32.2*+
99.1
99.2
99.3
99.4
99.5
99.6
99.7
99.8
Stock Purchase Agreement dated as of July 24, 2015, by and among Vista Outdoor Inc., CBAC Holdings, LLC
and CamelBak Acquisition Corp. (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on July 27, 2015
(File No. 001-34927)).
Commitment Letter, dated August 1, 2016, from Bank of America, N.A. Merrill Lynch, Pierce, Fenner & Smith
Incorporated (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on August 1, 2016 (File No.
001-34927)).
Third Amendment to the Credit Agreement, dated August 15, 2016, by and among Compass Group Diversified
Holdings LLC, the Lenders identified thereto and Bank of America, N.A., (incorporated by reference to Exhibit
10.1 of the Form 8-K filed on August 19, 2016 (File No. 001-34927)).
First Incremental Facility Amendment, dated August 31, 2016, by and among Compass Diversified Holdings LLC,
Bank of America, N.A., and the lenders thereto (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on
August 31, 2016 (File No. 001-34927)).
Fourth Amendment to Credit Agreement, dated March 16, 2017, by and among Compass Group Diversified
Holdings LLC, the Lenders identified thereto and Bank of America, N.A. (incorporated by reference to Exhibit
10.1 of the Form 10-Q filed on May 3, 2017 (File No. 001-34927)).
First Refinancing Amendment to the Credit Agreement, dated October 25, 2017, among Compass Group
Diversified Holdings LLC, the Refinancing Lenders and Bank of America, N.A. (incorporated by reference to
Exhibit 10.1 of the Form 10-Q filed on November 8, 2017 (File No. 001-34927)).
Fifth Amendment to Credit Agreement, dated February 14, 2017, by and among Compass Group Diversified
Holdings LLC, the Lenders identified thereto and Bank of America, N.A.
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Distributions
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm with respect to the Registrant's consolidated financial
statements
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Registrant
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Registrant
Section 1350 Certification of Chief Executive Officer of Registrant
Section 1350 Certification of Chief Financial Officer of Registrant
Note Purchase and Sale Agreement dated as of July 31, 2006 among Compass Group Diversified Holdings LLC,
Compass Group Investments, Inc. and Compass Medical Mattress Partners, LP (incorporated by reference to
Exhibit 99.1 of the Form 8-K filed on August 1, 2006 (File No. 000-51937)).
Share Purchase Agreement dated January 4, 2008, among Fox Factory Holding Corp., Fox Factory, Inc. and
Robert C. Fox, Jr. (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on January 8, 2008 (File No.
000-51937)).
Stock Purchase Agreement dated May 8, 2008, among Mitsui Chemicals, Inc., Silvue Technologies Group, Inc.,
the stockholders of Silvue Technologies Group, Inc. and the holders of Options listed on the signature pages
thereto, and Compass Group Management LLC, as the Stockholders Representative (incorporated by reference
to Exhibit 99.1 of the Form 8-K filed on May 9, 2008 (File No. 000-51937)).
Stock Purchase Agreement dated March 31, 2010 by and among Gable 5, Inc., Liberty Safe and Security
Products, LLC and Liberty Safe Holding Corporation (incorporated by reference to Exhibit 99.1 of the Form 8-K
filed on April 1, 2010 (File No. 000-51937)).
Stock Purchase Agreement dated September 16, 2010, by and among ERGO Baby Intermediate Holding
Corporation, The ERGO Baby Carrier, Inc., Karin A. Frost, in her individual capacity and as Trustee of the
Revocable Trust of Karin A. Frost dated February 22, 2008 and as Trustee of the Karin A. Frost 2009 Qualified
Annuity Trust u/a/d 12/21/2009 (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on September 17,
2010 (File No. 000-51937)).
Securities Purchase Agreement dated August 24, 2011, by and among CBK Holdings, LLC, CamelBak Products,
LLC, CamelBak Acquisition Corp., for purposes of Section 6.15 and Articles 10 only, Compass Group Diversified
Holdings LLC, and for purposes of Section 6.13 and Article 10 only, IPC/CamelBak LLC (incorporated by
reference to Exhibit 99.1 of the Form 8-K filed on August 25, 2011 (File No. 001-34927)).
Stock Purchase Agreement dated as of March 5, 2012, by and among Arnold Magnetic Technologies Holdings
Corporation, Arnold Magnetic Technologies, LLC and AMT Acquisition Corp. (incorporated by reference to Exhibit
99.1 of the Form 8-K filed on March 6, 2012 (File No. 001-34927)).
Stock Purchase Agreement dated as of August 7, 2014, by and among CEHI Acquisition Corporation, Clean Earth
Holdings, Inc., the holders of stock and options in Clean Earth Holdings, Inc. and Littlejohn Fund III, L.P.
(incorporated by reference to Exhibit 99.1 of the Form 8-K filed on August 8, 2014 (File No. 001-34927)).
128
99.9
99.10
99.11
99.12
99.13
99.14
Membership Interest Purchase Agreement dated as of October 10, 2014, by and among Candle Lamp Holdings,
LLC, Candle Lamp Company, LLC and Sternocandlelamp Holdings, Inc. (incorporated by reference to Exhibit
99.1 of the Form 8-K filed October 14, 2014 (File No. 001-34927)).
Stock Purchase Agreement dated as of June 5, 2015, by and among Fresh Hemp Foods Ltd., 1037270 B.C. Ltd.,
1037269 B.C. Ltd., the Stockholders’ Representative and the Signing Stockholders (incorporated by reference to
Exhibit 99.1 of the Form 8-K filed on June 8, 2015 (File No. 001-34927)).
Agreement and Plan of Merger, dated as of July 29, 2016, by and among 5.11 ABR Corp., 5.11 ABR Merger
Corp., 5.11 Acquisition Corp., TA Associates Management, L.P., as the agent and attorney in fact of the holders of
stock and options in 5.11 Acquisition Corp. (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on
August 1, 2016 (File No. 001-34927)).
Equity Purchase Agreement, dated June 2, 2017, by and among Bullseye Holding Company LLC, Bullseye
Acquisition Corporation, CBCP Acquisition Corp. and Wellspring Capital Partners IV, L.P. (incorporated by
reference to Exhibit 99.1 of the Form 8-K filed on June 5, 2017 (File No. 001-34927)).
Stock Purchase Agreement, dated January 18, 2018, between Warren F. Florkiewicz and FFI Compass, Inc.
(incorporated by reference to Exhibit 99.1 of the Form 8-K filed on January 18, 2018 (File No. 001-34927)).
Stock Purchase Agreement, dated January 23, 2018, by and among Rimports Inc., Jeffery W. Palmer, 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, Todd
Knapp and Signe Knapp, and Sterno Products, LLC (incorporated by reference to Exhibit 99.1 of the Form 8-K
filed on January 24, 2018 (File No. 001-34927)).
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
*
†
+
Filed herewith.
Denotes management contracts and compensatory plans or arrangements.
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule:
Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic
Reports, the certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not
be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated
by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
129
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURE
Date: 2/28/2018
COMPASS GROUP DIVERSIFIED HOLDINGS LLC
By:
/s/ Alan B. Offenberg
Alan B. Offenberg
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Alan B. Offenberg and Ryan J. Faulkingham, and each of them, as his or her true and lawful attorneys-in-fact and agents,
with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith,
with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully
to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, and either of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Alan B. Offenberg
Alan B. Offenberg
/s/ Ryan J. Faulkingham
Ryan J. Faulkingham
/s/ C. Sean Day
C. Sean Day
/s/ D. Eugene Ewing
D. Eugene Ewing
/s/ Harold S. Edwards
Harold S. Edwards
/s/ Gordon Burns
Gordon Burns
/s/ James J. Bottiglieri
James J. Bottiglieri
/s/ Sarah G. McCoy
Sarah G. McCoy
Title
Chief Executive Officer
(Principal Executive Officer)
and Director
Date
February 28, 2018
Chief Financial Officer
February 28, 2018
(Principal Financial and Accounting Officer)
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
Director
Director
Director
Director
Director
Director
130
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURE
COMPASS DIVERSIFIED HOLDINGS
Date: 2/28/2018
By:
/s/ Ryan J. Faulkingham
Ryan J. Faulkingham
Regular Trustee
131
COMPASS DIVERSIFIED HOLDINGS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL FINANCIAL DATA
Historical Financial Statements:
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Supplemental Financial Data:
The following supplementary financial data of the registrant and its subsidiaries required to be included in
Item 15(a) (2) of Form 10-K are listed below:
Schedule II – Valuation and Qualifying Accounts
All other schedules not listed above have been omitted as not applicable or because the required
information is included in the Consolidated Financial Statements or in the notes thereto.
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-10
F-12
S-1
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders'
Compass Diversified Holdings
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Compass Diversified Holdings (a Delaware trust) and
subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in the 2013 Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by
COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31,
2017, and our report dated February 28, 2018 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report
of Management on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal
control over financial reporting of Crosman Corp., a majority-owned subsidiary, whose financial statements reflect
total assets and revenues constituting 11 and 6 percent, respectively, of the related consolidated financial statement
amounts as of and for the year ended December 31, 2017. As indicated in Management’s Report, Crosman Corp. was
acquired during 2017. Management’s assertion on the effectiveness of the Company’s internal control over financial
reporting excluded internal control over financial reporting of Crosman Corp.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
F-2
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ GRANT THORNTON LLP
New York, New York
February 28, 2018
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders'
Compass Diversified Holdings
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Compass Diversified Holdings (a Delaware trust)
and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations,
comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December
31, 2017, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria
established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”), and our report dated February 28, 2018 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
New York, New York
February 28, 2018
F-4
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Investment in FOX (refer to Note F)
Goodwill
Intangible assets, net
Other non-current assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses
Due to related parties (refer to Note R)
Current portion, long-term debt
Other current liabilities
Total current liabilities
Deferred income taxes
Long-term debt
Other non-current liabilities
Total liabilities
Commitments and contingencies (Note P)
Stockholders’ equity
Trust preferred shares, no par value, 50,000 authorized; 4,000 shares issued and outstanding at
December 31, 2017 and none issued at December 31, 2016
Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding
at December 31, 2017 and December 31, 2016
Accumulated other comprehensive loss
Accumulated earnings (deficit)
Total stockholders’ equity attributable to Holdings
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
F-5
December 31,
2017
December 31,
2016
$
39,885
$
215,108
246,928
24,897
526,818
173,081
—
531,689
580,517
8,198
39,772
181,191
212,984
18,872
452,819
142,370
141,767
491,637
539,211
9,351
$
$
1,820,303
$
1,777,155
84,538
$
106,873
7,796
5,685
7,301
212,193
81,049
584,347
16,715
894,304
61,512
91,041
20,848
5,685
23,435
202,521
110,838
551,652
17,600
882,611
96,417
—
924,680
(2,573)
(145,316)
873,208
52,791
925,999
924,680
(9,515)
(58,760)
856,405
38,139
894,544
$
1,820,303
$
1,777,155
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2017
2016
2015
$
1,269,729
$
978,309
$
822,020
447,709
651,739
326,570
(in thousands, except per share data)
Net revenues
Cost of revenues
Gross profit
Operating expenses:
Selling, general and administrative expense
318,484
217,830
Management fees
Amortization expense
Impairment expense
Loss on disposal of assets
Operating income
Other income (expense):
Interest expense, net
Gain (loss) on investment (refer to Note F)
Amortization of debt issuance costs
Other income (expense), net
Income (loss) from continuing operations before income taxes
Provision (benefit) for income taxes
Income from continuing operations
Income from discontinued operations, net of income tax
Gain on sale of discontinued operations, net of income tax
Net income
Less: Income from continuing operations attributable to noncontrolling interest
Less: Income (loss) from discontinued operations attributable to noncontrolling
interest
Net income attributable to Holdings
Less: Distributions paid - Allocation Interests
Less: Distributions paid - Preferred Shares
Net income (loss) attributable to common shares of Holdings
Amounts attributable to common shares of Holdings:
Income (loss) from continuing operations
Income from discontinued operations, net of income tax
Gain on sale of discontinued operations, net of income tax
Net income (loss) attributable to Holdings
Basic and fully diluted income (loss) per share attributable to Holdings (refer to
Note N)
Continuing operations
Discontinued operations
Weighted average number of shares outstanding - basic and fully diluted
Cash distribution declared per share (refer to Note N)
727,978
487,242
240,736
136,399
25,658
28,761
—
—
49,918
(25,924)
4,533
(2,212)
(2,323)
23,992
15,001
8,991
6,981
149,798
165,770
5,133
(1,201)
161,838
17,731
—
32,693
52,003
17,325
—
27,204
(27,623)
(5,620)
(4,002)
2,634
(7,407)
(40,679)
33,272
—
340
33,612
5,621
—
27,991
39,188
2,457
29,406
35,069
16,000
9,204
19,061
(24,651)
74,490
(2,763)
(2,919)
63,218
9,469
53,749
473
2,308
56,530
1,961
(116)
54,685
23,779
—
$
$
$
$
$
$
(13,654) $
30,906
$
144,107
(13,994) $
28,009
$
(13,873)
—
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2,308
(13,654) $
30,906
$
8,182
149,798
144,107
(0.45) $
0.01
(0.44) $
0.46
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0.51
$
(0.30)
2.91
2.61
59,900
54,591
54,300
1.44
$
1.44
$
1.44
See notes to consolidated financial statements.
F-6
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income (loss)
Foreign currency translation adjustments
Pension benefit liability, net
Total comprehensive income, net of tax
Less: Net income attributable to noncontrolling interests
Less: Other comprehensive income (loss) attributable to noncontrolling
interests
Year ended December 31,
2016
2015
2017
$
33,612
$
56,530
$
165,770
6,533
409
40,554
5,621
1,223
615
(326)
56,819
1,845
(7,733)
471
158,508
3,932
516
(1,624)
Total comprehensive income attributable to Holdings, net of tax
$
33,710
$
54,458
$
156,200
See notes to consolidated financial statements.
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B
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Income from discontinued operations
Gain on sale of discontinued operations
Net income from continuing operations
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation expense
Amortization expense
Amortization of debt issuance costs and original issue discount
Impairment expense
Loss on disposal of assets
Unrealized (gain) loss on interest rate swap
Noncontrolling stockholder stock based compensation
Excess tax benefit from subsidiary stock options exercised
Loss (gain) on equity method investment
Provision for loss on receivables
Deferred taxes
Other
Changes in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable
(Increase) decrease in inventories
(Increase) decrease in prepaid expenses and other current assets
Increase (decrease) in accounts payable and accrued expenses
Net cash provided by operating activities - continuing operations
Net cash provided by operating activities - discontinued operations
Net cash provided by operations
Cash flows from investing activities:
Acquisitions, net of cash acquired
Purchases of property and equipment
Proceeds from FOX stock offerings
Proceeds from sale of businesses
Purchase of noncontrolling interest
Payment of interest rate swap
Other investing activities
Year ended December 31,
2017
2016
2015
$
33,612
$
56,530
$
165,770
—
340
33,272
33,041
77,010
5,007
17,325
—
(648)
7,028
(417)
5,620
3,964
(59,429)
392
(17,581)
(28,247)
(3,312)
8,746
81,771
—
81,771
(164,950)
(44,767)
136,147
340
—
(3,964)
(84)
473
2,308
53,749
26,853
58,752
3,565
16,000
9,204
1,539
4,382
(1,163)
(74,490)
448
(9,868)
1,420
(15,596)
2,893
4,850
25,148
107,686
3,686
111,372
(536,175)
(23,969)
182,470
11,249
(1,475)
(4,303)
(10)
6,981
149,798
8,991
21,231
31,844
2,883
—
—
5,662
3,171
—
(4,533)
(69)
(4,333)
25
13,243
(1,810)
805
(8,108)
69,002
15,546
84,548
(130,292)
(15,661)
—
385,510
—
(2,007)
(104)
Net cash (used in) provided by investing activities - continuing
operations
Net cash provided by (used in) investing activities - discontinued
operations
Net cash (used in) provided by investing activities
(77,278)
(372,213)
237,446
—
9,192
(77,278)
(363,021)
(3,566)
233,880
F-10
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from financing activities:
Proceeds from the issuance of Trust common shares, net
Proceeds from the issuance of Trust preferred shares, net
Borrowings under credit facility
Repayments under credit facility
Distributions paid - common shares
Distributions paid - preferred shares
Net proceeds provided by noncontrolling shareholders
Distributions paid to noncontrolling shareholders
Distributions paid - Allocation Interests
Repurchase of subsidiary stock
Debt issuance costs
Excess tax benefit on stock-based compensation
Other
Net cash (used in) provided by financing activities
Foreign currency impact on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents — beginning of period (1)
Cash and cash equivalents — end of period
Year ended December 31,
2017
2016
2015
—
96,417
260,500
(228,585)
(86,256)
(2,457)
822
—
(39,188)
—
(2,899)
417
(1,359)
(2,588)
(1,792)
113
39,772
99,359
—
671,298
(423,240)
(78,192)
—
8,887
(23,630)
(23,779)
(15,407)
(5,986)
1,163
(1,747)
208,726
(3,174)
(46,097)
85,869
$
39,885
$
39,772
$
—
—
197,000
(369,975)
(78,192)
—
14,949
—
(17,731)
—
(440)
—
32
(254,357)
(1,905)
62,166
23,703
85,869
(1) Includes cash from discontinued operations of $0.6 million at January 1, 2016, and $1.8 million at January 1, 2015.
See notes to consolidated financial statements.
F-11
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note A — Organization and Business Operations
Compass Diversified Holdings, a Delaware statutory trust (“the Trust”), was incorporated in Delaware on November 18, 2005.
Compass Group Diversified Holdings, LLC, a Delaware limited liability Company (the “Company”), was also formed on
November 18, 2005 with equity interests which were subsequently reclassified as the “Allocation Interests”. The Trust and
the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North
America. In accordance with the amended and restated Trust Agreement, dated as of April 25, 2006 (the “Trust Agreement”),
the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s amended and restated operating agreement,
dated as of April 25, 2006 (as amended and restated, the “LLC Agreement”)) of the Company and, pursuant to the LLC
Agreement, the Company has, outstanding, the identical number of Trust Interests as the number of outstanding common
shares of the Trust. Compass Group Diversified Holdings, LLC, a Delaware limited liability 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 operating segments at December 31, 2017. The segments are
as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), Crosman Corp. ("Crosman"), The Ergo Baby Carrier, Inc.
(“Ergobaby”), Liberty Safe and Security Products, Inc. (“Liberty Safe” or “Liberty”), Fresh Hemp Foods Ltd. ("Manitoba
Harvest" or "Manitoba"), Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”), AMT Acquisition Corporation (“Arnold”),
Clean Earth Holdings, Inc. ("Clean Earth"), and Sterno Products, LLC (“Sterno”). The segments are referred to interchangeably
as “businesses”, “operating segments” or “subsidiaries” throughout the financial statements. Refer to Note E - "Operating
Segment Data" for further discussion of the operating segments. Compass Group Management LLC, a Delaware limited
liability Company (“CGM” or the “Manager”), manages the day to day operations of the Company and oversees the
management and operations of our businesses pursuant to a management services agreement (“MSA”).
Note B — Summary of Significant Accounting Policies
Accounting principles
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted
in the United States of America (US GAAP).
Basis of presentation
The results of operations for the years ended December 31, 2017, 2016 and 2015 represent the results of operations of the
Company’s acquired businesses from the date of their acquisition by the Company, and therefore are not indicative of the
results to be expected for the full year.
Principles of consolidation
The consolidated financial statements include the accounts of the Trust and the Company, as well as the businesses acquired
as of their respective acquisition date. All significant intercompany accounts and transactions have been eliminated in
consolidation. Discontinued operating entities are reflected as discontinued operations in the Company’s results of operations
and statements of financial position.
The acquisition of businesses that the Company owns or controls more than a 50% share of the voting interest are accounted
for under the acquisition method of accounting. The amount assigned to the identifiable assets acquired and the liabilities
assumed is based on the estimated fair values as of the date of acquisition, with the remainder, if any, recorded as goodwill.
Discontinued Operations
The Company completed the sale of its majority owned subsidiary, Tridien Medical, Inc. ("Tridien") during the third quarter
of 2016, the sale of its majority owned subsidiary CamelBak Products, LLC ("CamelBak") in the third quarter of 2015 and
the sale of its majority owned subsidiary, American Furniture Manufacturing, Inc. ("AFM" or "American Furniture"), during
the fourth quarter of 2015. The results of operations of Tridien are presented as discontinued operations in the consolidated
statements of operations for the years ended December 31, 2016 and 2015. The results of operations of CamelBak and
American Furniture are presented as discontinued operations in the consolidated statements of operations for the year ended
December 31, 2015. Refer to "Note D - Discontinued Operations" for additional information. Unless otherwise indicated,
the disclosures accompanying the consolidated financial statements reflect the Company's continuing operations.
F-12
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These
estimates are based on management’s best knowledge of current events and actions the Company may undertake in the
future. It is possible that in 2018 actual conditions could be better or worse than anticipated when the Company developed
the estimates and assumptions, which could materially affect the results of operations and financial position in the future.
Such changes could result in future impairment of goodwill, intangibles and long-lived assets, inventory obsolescence,
establishment of valuation allowances on deferred tax assets and increased tax liabilities, among other things. Actual results
could differ from those estimates.
Profit Allocation Interests
At the time of the Company's Initial Public Offering, the Company issued Allocation Interests governed by the LLC agreement
that entitle the holders (the "Holders") to receive distributions pursuant to a profit allocation formula upon the occurrence of
certain events. The Holders are entitled to receive and as such can elect to receive the positive contribution based profit
allocation payment for each of the business acquisitions during the 30-day period following the fifth anniversary of the date
upon which the Company acquired a controlling interest in that business (Holding Event) and upon the sale of that business
(Sale Event). Payments of profit allocation to the Holders are accounted for as dividends declared on Allocation Interests
and recorded in stockholders' equity once they are approved by our Board of Directors.
Revenue recognition
The Company records revenue for goods and services when persuasive evidence of an arrangement exists, delivery of the
product or performance of services has occurred, and collectability of the fixed or determinable sales price is reasonably
assured. Revenue is recognized upon shipment of product to the customer or performance of services for a customer, net
of sales returns and allowances. Appropriate reserves are established for anticipated returns and allowances based on
historical experience. Shipping and handling costs are charged to operations when incurred and are generally classified as
a component of cost of sales. Taxes collected from customers and remitted to governmental authorities are presented on
a net basis in the accompanying Consolidated Statements of Operations. Revenue is typically recorded at F.O.B. shipping
point for our businesses. Revenue from the Company's Clean Earth business is recognized as services are rendered,
generally when material is received at Clean Earth's facilities.
Cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
At December 31, 2017 and 2016, the amount of cash and cash equivalents held by our subsidiaries in foreign bank accounts
was $16.0 million and $16.7 million, respectively.
Allowance for doubtful accounts
The Company uses estimates to determine the amount of the allowance for doubtful accounts in order to reduce accounts
receivable to their estimated net realizable value. The Company estimates the amount of the required allowance by reviewing
the status of past-due receivables and analyzing historical bad debt trends. The Company’s estimate also includes analyzing
existing economic conditions. When the Company becomes aware of circumstances that may impair a specific customer’s
ability to meet its financial obligations subsequent to the original sale, the Company will record an allowance against amounts
due, and thereby reduce the net receivable to the amount it reasonably believes will be collectible. Balances that remain
outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation
allowance and a credit to accounts receivable.
Inventories
Inventories consist of raw materials, work-in-process, manufactured goods and purchased goods acquired for resale.
Inventories are stated at the lower of cost or market, determined on the first-in, first-out method. Cost includes raw materials,
direct labor, manufacturing overhead and indirect overhead. Market value is based on current replacement cost for raw
materials and supplies and on net realizable value for finished goods.
Property, plant and equipment
Property, plant and equipment is recorded at cost. The cost of major additions or betterments is capitalized, while maintenance
and repairs that do not improve or extend the useful lives of the related assets are expensed as incurred.
Depreciation is provided principally on the straight-line method over estimated useful lives. Leasehold improvements are
amortized over the life of the lease or the life of the improvement, whichever is shorter.
F-13
The ranges of useful lives are as follows:
Buildings and improvements
Machinery and equipment
Office furniture, computers and software
6 to 25 years
2 to 20 years
2 to 8 years
Leasehold improvements
Shorter of useful life or lease term
Property, plant and equipment and other long-lived assets that have definitive lives are evaluated for impairment when events
or changes in circumstances indicate that the carrying value of the assets may not be recoverable (‘triggering event’). Upon
the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected
from the use of the asset plus residual value from the ultimate disposal exceeds the carrying value of the asset. If the carrying
value exceeds the estimated recoverable amounts, the asset is written down to its fair value.
Fair value of financial instruments
The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and
accounts payable approximate their fair value due to their short term nature. Term Debt with a carrying value of $556.5
million, net of original issue discount, at December 31, 2017 approximated fair value. The fair value is based on interest
rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. If measured
at fair value in the financial statements, the Term Debt would be classified as Level 2 in the fair value hierarchy.
Business combinations
The Company allocates the amount it pays for each acquisition to the assets acquired and liabilities assumed based on their
fair values at the date of acquisition, including identifiable intangible assets which arise from a contractual or legal right or
are separable from goodwill. The Company bases the fair value of identifiable intangible assets acquired in a business
combination on detailed valuations that use information and assumptions provided by management, which consider
management’s best estimates of inputs and assumptions that a market participant would use. The Company allocates any
excess purchase price that exceeds the fair value of the net tangible and identifiable intangible assets acquired to goodwill.
The use of alternative valuation assumptions, including estimated growth rates, cash flows, discount rates and estimated
useful lives could result in different purchase price allocations and amortization expense in current and future periods.
Transaction costs associated with these acquisitions are expensed as incurred through selling, general and administrative
expense on the consolidated statement of operations. In those circumstances where an acquisition involves a contingent
consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments expected
to be made as of the acquisition date. The Company re-measures this liability each reporting period and records changes
in the fair value through operating income within the consolidated statements of operations.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The
Company is required to perform impairment reviews at each of its reporting units annually and more frequently in certain
circumstances. In accordance with accounting guidelines, the Company is able to make a qualitative assessment of whether
it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the quantitative
goodwill impairment test.
In January 2017, the FASB issued new accounting guidance to simplify the accounting for goodwill impairment. The guidance
removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new
guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not
to exceed the carrying amount of goodwill. The Company adopted this guidance early, effective January 1, 2017, on a
prospective basis, and applied the guidance as necessary to annual and interim goodwill testing performed subsequent to
January 1, 2017.
The first step of the process after the qualitative assessment fails is estimating the fair value of each of its reporting units
based on a discounted cash flow (“DCF”) model using revenue and profit forecast and a market approach which compares
peer data and earnings multiples. The Company then compares those estimated fair values with the carrying values, which
include allocated goodwill. If the estimated fair value is less than the carrying value, then a goodwill impairment is recorded.
The Company cannot predict the occurrence of certain future events that might adversely affect the implied value of goodwill
and/or the fair value of intangible assets. Such events include, but are not limited to, strategic decisions made in response
to economic and competitive conditions, the impact of the economic environment on its customer base, and material adverse
effects in relationships with significant customers. The impact of over-estimating or under-estimating the implied fair value
of goodwill at any of the reporting units could have a material effect on the results of operations and financial position. In
F-14
addition, the value of the implied goodwill is subject to the volatility of the Company’s operations which may result in significant
fluctuation in the value assigned at any point in time.
Refer to "Note H - Goodwill and Intangible Assets" for the results of the annual impairment tests.
Deferred debt issuance costs
Deferred debt issuance costs represent the costs associated with the issuance of debt instruments and are amortized over
the life of the related debt instrument. The Company adopted new guidance effective January 1, 2016 that requires debt
issuance costs to be presented in the balance sheet as a deduction from the carrying value of the associated debt liability
rather than as an asset.
Product Warranty Costs
The Company recognizes warranty costs based on an estimate of the amounts required to meet future warranty obligations.
The Company accrues an estimated liability for exposure to warranty claims at the time of a product sale based on both
current and historical claim trends and warranty costs incurred. Warranty reserves are included within "Accrued expenses"
in the Company's consolidated balance sheets.
Foreign currency
Certain of the Company’s segments have operations outside the United States, and the local currency is typically the functional
currency. The financial statements are translated into U.S. dollars using exchange rates in effect at year-end for assets and
liabilities and average exchange rates during the year for results of operations. The resulting translation gain or loss is
included in stockholders' equity as other comprehensive income or loss.
In 2015, the Company acquired a Canadian subsidiary, Manitoba Harvest, and is exposed to transactional foreign currency
gains and losses related to the issuance of intercompany loans in the Canadian dollar, the functional currency of Manitoba
Harvest. Foreign currency transactional gains and losses are included in the results of operations and are generally classified
as Other Income (Expense).
Derivatives and hedging
The Company utilizes interest rate swaps to manage risks related to interest rates on the term loan portion of their Credit
Facility. The Company has not elected hedge accounting treatment for the existing interest rate derivatives entered into as
part of the Credit Facility. Refer to "Note J - Debt" for more information on the Company’s Credit Facility.
Noncontrolling interest
Noncontrolling interest represents the portion of a majority-owned subsidiary’s net income that is owned by noncontrolling
shareholders. Noncontrolling interest on the balance sheet represents the portion of equity in a consolidated subsidiary
owned by noncontrolling shareholders.
Income taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code which may impact, positively
or negatively, the Company and our portfolio companies for taxable years ended December 31, 2017 and thereafter. The
impact of many provisions of the Tax Act are unclear and subject to interpretation pending further guidance from the Internal
Revenue Service. The ultimate impact of the Tax Act on the Company and its portfolio companies is dependent on ongoing
review and analysis.
Among other important changes in the Tax Act, the tax rate on corporations was reduced from 35% to 21%; a limitation on
the deduction of interest expense was enacted; certain tangible property acquired after September 27, 2017 will qualify for
100% expensing; gain from the sale of a partnership interest by a foreign person will be subject to U.S. tax to the extent that
the partnership is engaged in a trade or business; a special deduction for qualified business income from pass-through
entities was added; U.S. federal income taxes on foreign earnings was eliminated (subject to several important exceptions),
and new provisions designed to tax currently global intangible low taxed income and a new base erosion anti-abuse tax were
added.
F-15
For taxable years beginning after December 31, 2017, a deduction for interest will generally be allowed for any entity only
up to 30% of adjusted taxable income (determined without regard to interest income or expense) plus the amount of interest
income. Only interest income and expense incurred in a trade or business is taken into account, i.e., investment interest
income and deductions are ignored. For partnerships, the limitation is applied at the partnership level and then adjustments
are made at the partner level to avoid double counting and to allow an owner to use any excess income in calculating the
interest deduction at his or her level. It is not expected that the provision will limit the deduction of interest by the Company
for 2018 but it may impact the deduction for certain of the portfolio companies.
Although the Trust and the Company are treated as partnerships for U.S. federal income tax purposes, and therefore not
subject to net income tax, for U.S. GAAP purposes, we consolidate the results of our businesses in which we own or control
more than a 50% share of the voting interest. The Company has made a reasonable estimate of the effects of the Tax Act
on its existing deferred tax balances and the one-time transition tax. The Company has substantially completed its accounting
for the revaluation of its net U.S. federal deferred tax liabilities and recorded a tax benefit of approximately $34.7 million in
the fourth quarter of 2017. The one-time transition tax under the Tax Act is based on earnings and profits ("E&P) that were
previously deferred from U.S. income taxes. For the year ended December 31, 2017, the provision for income taxes includes
provisional tax expense of $4.9 million related to the one-time transition tax liability of our foreign subsidiaries. The Company
has not completed the calculation of the total E&P for these foreign subsidiaries and expects to refine its calculations as
additional analysis is completed. In addition, the Company's estimates may be affected as additional regulatory guidance is
issued with respect to the Tax Act. Any adjustments to the provisional amounts will be recognized as a component of the
provision for income taxes in the period in which such adjustments are determined within the annual period following the
enactment of the Tax Act.
Deferred income taxes are calculated under the asset and liability method. Deferred income taxes are provided for the
differences between the basis of assets and liabilities for financial reporting and income tax purposes at the enacted tax
rates. A valuation allowance is established when necessary to reduce deferred tax assets to the amount that is expected to
more likely than not be realized. Several of the Company’s majority owned subsidiaries have deferred tax assets recorded
at December 31, 2017 which in total amount to approximately $38.9 million. This deferred tax asset is net of $5.9 million of
valuation allowance primarily associated with net operating losses and foreign tax credits at Arnold and 5.11. These deferred
tax assets are comprised primarily of reserves not currently deductible for tax purposes. The temporary differences that have
resulted in the recording of these tax assets may be used to offset taxable income in future periods, reducing the amount of
taxes required to be paid. Realization of the deferred tax assets is dependent on generating sufficient future taxable income
at those subsidiaries with deferred tax assets. Based upon the expected future results of operations, the Company believes
it is more likely than not that those subsidiaries with deferred tax assets will generate sufficient future taxable income to
realize the benefit of existing temporary differences, although there can be no assurance of this. The impact of not realizing
these deferred tax assets would result in an increase in income tax expense for such period when the determination was
made that the assets are not realizable.
Earnings per common share
Basic and fully diluted earnings per Trust common share is computed using the two-class method which requires companies
to allocate participating securities that have rights to earnings that otherwise would have been available only to common
shareholders as a separate class of securities in calculating earnings per share. The Company has granted Allocation
Interests that contain participating rights to receive profit allocations upon the occurrence of a Holding Event or a Sale Event,
and has issued preferred shares that have rights to distributions when, and if, declared by the Company's board of directors.
The calculation of basic and fully diluted earnings per common share is computed by dividing income available to common
share holders by the weighted average number of Trust common shares outstanding during the period. Earnings per common
share reflects the effect of distributions that were declared and paid to the Holders and distributions that were paid on preferred
shares during the period.
The weighted average number of Trust common shares outstanding for fiscal year 2017 was computed based on 59,900,000
shares outstanding for the period from January 1st through December 31st. The weighted average number of Trust common
shares outstanding for fiscal year 2016 was computed based on 54,300,000 shares outstanding for the period from January 1st
through December 13th and 5,600,000 additional shares outstanding for the period from December 13th through
December 31st. The weighted average number of Trust common shares outstanding for fiscal 2015 was computed based
on 54,300,000 shares outstanding for the period from January 1st through December 31st.
The Company did not have any stock option plans or any other potentially dilutive securities outstanding during the years
ended December 31, 2017, 2016 and 2015.
F-16
Advertising costs
Advertising costs are expensed as incurred and included in selling, general and administrative expense in the consolidated
statements of operations. Advertising costs were $17.8 million, $15.6 million and $11.8 million during the years ended
December 31, 2017, 2016 and 2015, respectively.
Research and development
Research and development costs are expensed as incurred and included in selling, general and administrative expense in
the consolidated statements of operations. The Company incurred research and development expense of $1.9 million, $1.7
million and $2.1 million during the years ended December 31, 2017, 2016 and 2015, respectively.
Employee retirement plans
The Company and many of its segments sponsor defined contribution retirement plans, such as 401(k) plans. Employee
contributions to the plan are subject to regulatory limitations and the specific plan provisions. The Company and its segments
may match these contributions up to levels specified in the plans and may make additional discretionary contributions as
determined by management. The total employer contributions to these plans were $3.4 million, $2.2 million and $1.8 million
for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company’s Arnold subsidiary maintains a defined benefit plan for certain of its employees which is more fully described
in "Note M - Defined Benefit Plan". Accounting guidelines require employers to recognize the overfunded or underfunded
status of defined benefit pension and postretirement plans as assets or liabilities in their consolidated balance sheets and
to recognize changes in that funded status in the year in which the changes occur as a component of comprehensive income.
Seasonality
Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from Liberty are typically lowest
in the second quarter due to lower demand for safes at the onset of summer. Crosman typically has higher sales in the third
and fourth quarter each year, reflecting the hunting and holiday seasons. Earnings from Clean Earth are typically lower
during the winter months due to the limits on outdoor construction and development activity because of the colder weather
in the Northeastern United States. Sterno typically has higher sales in the second and fourth quarter of each year, reflecting
the outdoor summer and holiday seasons, respectively.
Stock based compensation
The Company does not have a stock based compensation plan; however, all of the Company’s subsidiaries maintain stock
based compensation plans. During the years ended December 31, 2017, 2016 and 2015, $7.0 million, $4.4 million, and
$3.2 million of stock based compensation expense was recorded to each expense category that included related salary
expense in the consolidated statements of operations. As of December 31, 2017, the amount to be recorded for stock-based
compensation expense in future years for unvested options is approximately $27.2 million.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued new accounting guidance to simplify the accounting for goodwill impairment. The guidance
removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new
guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not
to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. Entities will
continue to have the option to perform a qualitative test to determine if a quantitative test is necessary. The guidance is
effective for fiscal years and interim periods within those years, after December 31, 2019, with early adoption permitted for
any goodwill impairment tests performed after January 1, 2017 and will be applied prospectively. The Company adopted this
guidance early, effective January 1, 2017, on a prospective basis, and will apply the guidance as necessary to annual and
interim goodwill testing performed subsequent to January 1, 2017.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued an accounting standard update intended to simplify the subsequent measurement of inventory
by requiring inventory to be measured at the lower of cost and net realizable value. The new guidance applies only to
inventory that is determined by methods other than last-in-first-out and the retail inventory method. The guidance was
effective for the Company as of January 1, 2017. Adoption of this new accounting guidance did not have a significant impact
on the Company's consolidated financial statements.
F-17
Recently Issued Accounting Pronouncements
Improving the Presentation of Net Periodic Pension Costs
In March 2017, the FASB issued guidance that requires presentation of all components of net periodic pension and
postretirement benefit costs, other than service costs, in an income statement line item outside of a subtotal of income from
operations. The service cost component will continue to be presented in the same line items as other employee compensation
costs. The new guidance is effective January 1, 2018 for the Company's Arnold business, which has a defined benefit plan
covering substantially all of Arnold’s employees at its Lupfig, Switzerland location (refer to "Note M - Defined Benefit Plan").
The guidance is required to be adopted retrospectively with respect to the income statement presentation requirement. See
"Note M - Defined Benefit Plan" for the amount of each component of net periodic pension and postretirement benefit costs
that Arnold has reported historically. These amounts of net periodic pension and postretirement benefit costs are not
necessarily indicative of future amounts that may arise in years following implementation of the new accounting
pronouncement.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued an accounting standard update which updates the guidance as to how certain cash receipts
and cash payments should be presented and classified within the statement of cash flows. The guidance eliminates the
diversity in practice related to the classification of certain cash receipts and payments for debt prepayments or extinguishment
costs, the maturing of zero coupon bonds, contingent consideration payments made after a business combination, proceeds
from the settlement of insurance claims and distributions received from equity method investees. The amended guidance
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption
permitted. The adoption of this guidance is not expected to have a significant impact on the Company's consolidated financial
statements.
Leases
In February 2016, the FASB issued an accounting standard update related to the accounting for leases which will require
an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing
arrangements. The standard update offers specific accounting guidance for a lessee, a lessor and sale and leaseback
transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements
to enable a user of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For
public companies, the new standard is effective for annual reporting periods beginning after December 15, 2018, including
interim periods within that reporting period, and requires modified retrospective adoption, with early adoption permitted.
Accordingly, this standard is effective for the Company on January 1, 2019. The Company is currently assessing the impact
of the new standard on our consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued a comprehensive new revenue recognition standard. The new standard outlines a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is
that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the
standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers. The standard is designed to create greater comparability for financial statement users across industries,
jurisdictions and capital markets and also requires enhanced disclosures. The new standard will be effective for the Company
beginning January 1, 2018. The FASB issued four subsequent standards in 2016 containing implementation guidance related
to the new standard. These standards provide additional guidance related to principal versus agent considerations, licensing,
and identifying performance obligations. Additionally, these standards provide narrow-scope improvements and practical
expedients as well as technical corrections and improvements.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective
method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial
application (the modified retrospective method). The Company will be adopting the standard as of January 1, 2018, using
the modified retrospective method applied to contracts which were not completed as of that date. We expect that the adoption
of Topic 606 will not have a material impact to our consolidated financial statements, including the presentation of revenues
in our Consolidated Statements of Operations.
The impact to the Company’s future results are not expected to be material based on the analysis of revenue streams and
contracts under the new revenue recognition guidance which supports revenue recognition at a point in time for seven out
of nine of our reportable segments. For the seven reportable segments, this is consistent with the Company’s previous
revenue recognition model whereby the majority of revenue was recognized based on the Company’s shipping terms. The
Company has identified two reportable segments where revenue recognition will change to over time recognition from
F-18
historical point in time revenue recognition. Although the timing of revenue recognition for these two reportable segments
will change, these changes will not have a material impact on the Company’s consolidated financial statements due to the
over time recognition being closely aligned with point in time recognition.
The impacts from the adoption of the revenue standard update primarily relate to the timing of revenue recognition for variable
consideration received, consideration payable to a customer and recording right of return assets. Although these differences
have been identified, the total impact to each reportable segment will not be material to the consolidated financial statements.
In addition the accounting for the estimate of variable consideration in our contracts is not materially different compared to
our current practice.
The Company will adopt practical expedients and make policy elections related to the accounting for sales taxes, shipping
and handling, costs to obtain a contract and immaterial promised goods or services which mitigates any potential differences.
The Company is not expecting significant changes in the internal controls over financial reporting that will have a material
effect to our internal controls over financial reporting.
Note C — Acquisition of Businesses
Acquisition of Crosman
On June 2, 2017, CBCP Acquisition Corp. (the "Buyer"), a wholly owned subsidiary of the Company, entered into an equity
purchase agreement pursuant to which it acquired all of the outstanding equity interests of Bullseye Acquisition Corporation,
the indirect owner of the equity interests of Crosman Corp. ("Crosman"). Crosman is a designer, manufacturer and marketer
of airguns, archery products, laser aiming devices and related accessories. Headquartered in Bloomfield, New York, Crosman
serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channels and distributors
serving smaller specialty stores and international markets. Its diversified product portfolio includes the widely known Crosman,
Benjamin and CenterPoint brands.
The Company made loans to, and purchased a 98.9% controlling interest in, Crosman. The purchase price, including
proceeds from noncontrolling interests and net of transaction costs, was approximately $150.4 million. Crosman management
invested in the transaction along with the Company, representing approximately 1.1% of the initial noncontrolling interest on
a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value
of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The
transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and
will continue to provide integration services during the first year of the Company's ownership of Crosman. CGM will receive
integration service fees of $1.5 million payable quarterly over a twelve month period as services are rendered beginning in
the quarter ended September 30, 2017. The Company incurred $1.5 million of transaction costs in conjunction with the
Crosman acquisition, which was included in selling, general and administrative expense in the consolidated statements of
income during the second quarter of 2017.
The results of operations of Crosman have been included in the consolidated results of operations since the date of acquisition.
Crosman's results of operations are reported as a separate operating segment as a branded consumer business. The table
below provides the recording of assets acquired and liabilities assumed as of the acquisition date.
(in thousands)
Assets:
Cash
Accounts receivable (1)
Inventory
Property, plant and equipment
Intangible assets
Goodwill
Other current and noncurrent assets
Preliminary
Allocation
As of 6/2/17
Measurement
Period
Adjustments
Final Purchase
Allocation
As of 12/31/17
$
429
$
781
$
16,751
25,598
10,963
—
139,434
2,348
—
3,275
4,051
84,594
(90,675)
—
1,210
16,751
28,873
15,014
84,594
48,759
2,348
Total assets
$
195,523
$
2,026
$
197,549
F-19
Liabilities and noncontrolling interest:
Current liabilities
Other liabilities
Deferred tax liabilities
Noncontrolling interest
Total liabilities and noncontrolling interest
Net assets acquired
Noncontrolling interest
Intercompany loans to business
Acquisition Consideration
Purchase price
Cash acquired
Working capital adjustment
Total purchase consideration
Less: Transaction costs
Purchase price, net
$
$
$
$
$
$
$
15,502
$
91,268
27,286
694
$
781
354
1,229
—
16,283
91,622
28,515
694
134,750
$
2,364
$
137,114
60,773
694
90,742
152,209
(338) $
—
—
(338) $
60,435
694
90,742
151,871
151,800
$
— $
151,800
1,417
(1,008)
(207)
(131)
1,210
(1,139)
152,209
$
(338) $
151,871
1,397
76
1,473
150,812
$
(414) $
150,398
(1) Includes $18.0 million of gross contractual accounts receivable of which $1.2 million was not expected to be collected. The fair
value of accounts receivable approximated net book value acquired.
The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation
techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed
liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future
growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at
historical carrying values, which approximates fair value. Property, plant and equipment is valued through a purchase price
appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. The
inventory was valued at fair value, resulting in a basis step-up of $3.3 million, which was charged to cost of goods sold over
the inventory turns of the acquired entity. Goodwill is calculated as the excess of the consideration transferred over the fair
value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other
intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual
relationships, as well as expected future synergies. The goodwill of $48.8 million reflects the strategic fit of Crosman in the
Company's branded consumer business and is not expected to be deductible for income tax purposes. The purchase
accounting for Crosman was finalized during the fourth quarter of 2017.
The intangible assets recorded related to the Crosman acquisition are as follows (in thousands):
Intangible Assets
Tradename
Customer relationships
Technology
Amount
53,463
28,718
2,413
84,594
$
$
Estimated
Useful Life
20 years
15 years
15 years
The tradename was valued at $53.5 million using a multi-period excess earnings methodology. The customer relationships
intangible asset was valued at $28.7 million using the distributor method, a variation of the multi-period excess earnings
methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required
returns on the other assets utilized in the business. The technology was valued at $2.4 million using a relief from royalty
method.
F-20
Acquisition of 5.11 Tactical
On August 31, 2016, 5.11 ABR Merger Corp. ("Merger Sub"), a wholly owned subsidiary of 5.11 ABR Corp. ("Parent"), which
in turn is a wholly owned subsidiary of the Company, merged with and into 5.11 Tactical, with 5.11 Tactical as the surviving
entity, pursuant to an agreement and plan of merger among Merger Sub, Parent, 5.11 Tactical, and TA Associates Management
L.P. entered into on July 29, 2016. 5.11 Tactical is a leading provider of purpose-built tactical apparel and gear for law
enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand
known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed
to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered
in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in
uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
The Company made loans to, and purchased a 97.5% controlling interest in 5.11 ABR Corp. The purchase price, including
proceeds from noncontrolling interest and net of transaction costs, was approximately $408.2 million after final settlement
of the working capital in the fourth quarter of 2016. The Company funded its portion of the acquisition through an amendment
to the 2014 Credit Facility that allowed for an increase in the 2014 Revolving Credit Facility and the 2016 Incremental Term
Loan (refer to Note J - Debt). 5.11 management invested in the transaction along with the Company, representing
approximately 2.5% initial noncontrolling interest on a primary and fully diluted basis. The fair value of the noncontrolling
interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares
acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted
as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the
Company's ownership of 5.11. CGM received integration service fees of $3.5 million payable quarterly over a twelve month
period as services were rendered beginning in the quarter ended December 31, 2016.
The results of operations of 5.11 have been included in the consolidated results of operations since the date of acquisition.
5.11's results of operations are reported as a separate operating segment. The table below provides the recording of assets
acquired and liabilities assumed as of the acquisition date.
5.11 Tactical
(in thousands)
Assets:
Cash
Accounts receivable (1)
Inventory (2)
Property, plant and equipment (3)
Intangible assets
Goodwill
Other current and noncurrent assets
Total assets
Liabilities and noncontrolling interest:
Current liabilities
Other liabilities
Deferred tax liabilities
Noncontrolling interest
Total liabilities and noncontrolling interest
Net assets acquired
Noncontrolling interest
Intercompany loans to business
F-21
$
$
$
$
$
$
12,581
38,323
160,304
22,723
127,890
92,966
4,884
459,671
38,229
180,231
10,163
5,568
234,191
225,480
5,568
179,237
410,285
Acquisition Consideration
Purchase price
Working capital adjustment
Cash
Total purchase consideration
Less: Transaction costs
Purchase price, net
$
$
$
400,000
(2,296)
12,581
410,285
2,063
408,222
(1) Includes $40.1 million of gross contractual accounts receivable of which $1.7 million was not expected to be collected.
The fair value of accounts receivable approximated book value acquired.
(2) Includes $39.1 million in inventory basis step-up, which was charged to cost of goods sold over the inventory turns of
the acquired entity.
(3) Includes $7.6 million of property, plant and equipment basis step-up.
The Company incurred $2.1 million of transaction costs in conjunction with the 5.11 acquisition, which was included in selling,
general and administrative expense in the consolidated statements of operations in the year of acquisition. The allocation
of the purchase price presented above is based upon management's estimate of the fair values using valuation techniques
including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities,
the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth
rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are estimated at their
historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated
on a straight-line basis over the respective remaining useful lives. Goodwill is calculated as the excess of the consideration
transferred over the fair value of the identifiable net assets and represents the future economic benefits expected to arise
from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-
contractual relationships, as well as expected future synergies. The goodwill of $93.0 million reflects the strategic fit of 5.11
in the Company's branded products business and is not expected to be deductible for income tax purposes. The purchase
accounting for 5.11 was finalized during the fourth quarter of 2016, with the changes from the provisional purchase price
allocation related to the settlement of working capital and the recording of a change in the deferred taxes related to a reduction
of net operating loss carryforwards.
The intangible assets recorded related to the 5.11 acquisition are as follows (in thousands):
Intangible assets
Trade name
Customer relationships
Technology
Amount
48,665
75,218
4,007
127,890
$
$
Estimated
Useful Life
15 years
15 years
10 years
The customer relationships intangible asset was valued at $75.2 million using an excess earnings methodology, in which an
asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on and of the other
assets utilized in the business. Customer relationships intangible asset was derived using a risk-adjusted discount rate. The
tradename intangible asset and the design patent technology asset were valued using a royalty savings methodology, in
which an asset is valuable to the extent that the ownership of the asset relieves the company from the obligation of paying
royalties for the benefits generated by the asset.
Unaudited pro forma information
The following unaudited pro forma data for the years ended December 31, 2017 and 2016 gives effect to the acquisition of
Crosman and 5.11 Tactical, as described above, as if the acquisitions had been completed as of January 1, 2016, and the
sale of Tridien as if the disposition had been completed as of January 1, 2016. The pro forma data gives effect to historical
operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related
tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results
that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of
future operating results of the consolidated companies, and should not be construed as representing results for any future
period.
F-22
(in thousands)
Net revenues
Gross profit
Operating income
Net income from continuing operations
Net income from continuing operations attributable to Holdings
Basic and fully diluted net income (loss) per share attributable to
Holdings
Year Ended December 31,
2017
2016
$
1,311,375
$
1,282,509
458,613
440,095
28,920
36,590
30,969
(0.39)
29,004
50,591
48,632
0.40
Other acquisitions
Ergobaby
On May 11, 2016, the Company's Ergobaby subsidiary acquired all of the outstanding membership interests in New Baby
Tula LLC ("Baby Tula"), a maker of premium baby carriers, toddler carriers, slings, blankets and wraps. The purchase price
was $73.8 million, net of transaction costs, plus a potential earn-out of $8.2 million based on 2017 financial performance.
Ergobaby paid $0.8 million in transaction costs in connection with the acquisition. Ergobaby funded the acquisition and
payment of related transaction costs through the issuance of an additional $68.2 million in intercompany loans with the
Company, and the issuance of $8.2 million in Ergobaby shares to the selling shareholders. The fair value of the Ergobaby
shares issued to the selling shareholders was determined based on a model that multiplies the trailing twelve months earnings
before interest, taxes, depreciation and amortization by an estimated enterprise value multiple to determine an estimated
fair value. The fair value calculation assumes proceeds from the conversion of outstanding stock options, deducts the
carrying value of debt at Ergobaby and estimated selling costs of the entity, and divides the resulting amount by the total
number of outstanding shares, including converted stock options, to determine a per share value for the stock issued. The
Company funded the additional intercompany loans used for the acquisition with available cash on the balance sheet and
a draw on the 2014 Revolving Credit Facility. Ergobaby recorded a purchase price allocation of $13.2 million in goodwill,
which is expected to be deductible for income tax purposes, $55.3 million in intangible assets comprised of $52.9 million in
finite lived tradenames, $1.7 million in non-compete agreements; and $0.7 million in customer relationships, and $4.8 million
in inventory step-up. The inventory step-up has been charged to cost of goods sold during the third and fourth quarters of
2016. In addition, the earn-out provision of the purchase price was allocated a fair value of $3.8 million. The remainder of
the purchase consideration was allocated to net assets acquired. The Company finalized the purchase accounting for the
Baby Tula acquisition during the fourth quarter of 2016. In the fourth quarter of 2017, Ergobaby determined that the earn-
out related to the Baby Tula acquisition would not be paid out and reversed the fair value of the earn-out, recording the
reversal in operating income.
Clean Earth
On June 1, 2016, the Company's Clean Earth subsidiary acquired certain of the assets and liabilities of EWS Alabama, Inc.
("EWS"). Clean Earth funded the acquisition and the related transaction costs through the issuance of additional intercompany
debt with the Company. Based in Glencoe, Alabama, EWS provides a range of hazardous and non-hazardous waste
management services from a fully permitted hazardous waste RCRA Part B facility. The Company funded the additional
intercompany loans with Clean Earth through a draw on its 2014 Revolving Credit Facility. In connection with the acquisition,
Clean Earth recorded a purchase price allocation of $3.6 million in goodwill and $12.1 million in intangible assets. The
Company finalized the purchase price during the fourth quarter of 2016.
On April 15, 2016, Clean Earth acquired certain assets of Phoenix Soil, LLC ("Phoenix Soil") and WIC, LLC (together with
Phoenix Soil, the "Sellers"). Phoenix Soil is based in Plainville, CT and provides environmental services for nonhazardous
contaminated soil materials with a primary focus on soil. Phoenix Soil recently completed its transition to a new 58,000
square foot thermal desorption facility owned by WIC, LLC. The acquisition increases Clean Earth's soil treatment capabilities
and expand its geographic footprint into New England. Clean Earth financed the acquisition and payment of related transaction
costs through the issuance of additional intercompany loans with the Company. The Company used cash on hand to fund
the purchase price of Phoenix Soil. In connection with the acquisition, Clean Earth recorded a purchase price allocation of
$3.2 million in goodwill and $5.6 million in intangible assets in the second quarter of 2016. The Company finalized the
purchase price during the fourth quarter of 2016.
Sterno
On January 22, 2016, Sterno, a wholly owned subsidiary of the company, acquired all of the outstanding stock of Northern
International, Inc. ("Sterno Home"), for a total purchase price of approximately $35.8 million (C$50.6 million), plus a potential
F-23
earn-out opportunity payable over the next two years up to a maximum amount of $1.8 million (C$2.5 million). The contingent
consideration was fair valued at $1.5 million, based on probability weighted models of the achievement of certain performance
based financial targets. Refer to Note I - "Fair Value Measurement" for a description of the valuation technique used to fair
value the contingent consideration. Headquartered in Coquitlam, British Columbia, Canada, Sterno Home sells flameless
candles and outdoor lighting products through the retail segment. Sterno financed the acquisition and payment of the related
transaction costs through the issuance of an additional $37.0 million in intercompany loans with the Company.
In connection with the acquisition, Sterno recorded a purchase price allocation of $6.0 million of goodwill, which is not
expected to be deductible for income tax purposes, $12.7 million in intangible assets and $1.2 million in inventory step-up.
In addition, the earn-out provision of the purchase price was allocated a fair value of $1.5 million. The remainder of the
purchase consideration was allocated to net assets acquired. Sterno incurred $0.4 million in acquisition related costs in
connection with the Sterno Home acquisition.
Note D — Discontinued Operations
Sale of Tridien
On September 21, 2016, the Company sold its majority owned subsidiary, Tridien, based on an enterprise value of $25
million. After the allocation of sale proceeds to non-controlling interest holders and the payment of transaction expenses,
the Company received approximately $22.7 million in net proceeds related to its debt and equity interests in Tridien. The
Company recognized a gain of $1.7 million in September 2016 as a result of the sale of Tridien. Approximately $1.6 million
of the proceeds received by the Company from the sale of Tridien have been reserved as support for the Company's
indemnification obligations for future claims against Tridien that the Company may be liable for under the terms of the Tridien
sale agreement.
Summarized operating results for Tridien for the previous years through the date of disposition were as follows (in thousands):
(in thousands)
Net sales
Gross profit
Operating income
Income from continuing operations before income taxes
Provision for income taxes
Income from discontinued operations (1)
For the period
January 1, 2016
through
disposition
Year ended
December 31, 2015
$
$
45,951
$
7,917
437
488
15
473
$
77,406
13,137
(8,703)
(8,696)
(27)
(8,669)
(1) The results of operations for the period from January 1, 2016 through the date of disposition, and for the year ended
December 31, 2015 exclude $1.1 million and $1.1 million, respectively, of intercompany interest expense.
Sale of CamelBak
On August 3, 2015, the Company sold its majority owned subsidiary, CamelBak, based on a total enterprise value of $412.5
million. The CamelBak purchase agreement contains customary representations, warranties, covenants and indemnification
provisions, and the transaction was subject to customary working capital adjustments.
The Company received approximately $367.8 million in cash related to its debt and equity interests in CamelBak after
payments to noncontrolling shareholders and payment of all transaction expenses. Under the terms of the LLC agreement,
the Allocation Member has the right to defer a portion of the distribution for the CamelBak sale. The Allocation member
deferred the profit allocation from the sale of CamelBak and the loss from the sale of American Furniture was used to net
the calculation of the high water mark from the Camelback sale. The result was a net distribution of $14.6 million that was
paid during the fourth quarter of 2015. (Refer to "Note N - Stockholders' Equity" for a discussion of the profit allocation paid
as a result of the sale of CamelBak.) The Company recognized a gain of $164.0 million, net of tax, during 2015 as a result
of the sale of CamelBak, which was subject to final settlement during 2016. During the third quarter of 2016, the Company,
settled the outstanding working capital adjustments related to CamelBak, resulting in the recognition of additional gain on
the sale of business of $0.6 million during the quarter ended September 30, 2016.
F-24
Summarized operating results for CamelBak through the date of disposition were as follows (in thousands):
(in thousands)
Net sales
Gross profit
Operating income
Income from continuing operations before income taxes
Provision for income taxes
Income from discontinued operations (1)
For the period
January 1, 2015
through disposition
$
$
96,519
41,415
14,348
16,607
5,010
11,597
(1) The results for the period from January 1, 2015 through disposition exclude $5.4 million of intercompany interest expense.
Sale of AFM
On October 5, 2015, the Company sold its majority owned subsidiary, American Furniture, for a sale price of $24.1 million.
The Company received approximately $23.5 million in net proceeds related to its debt and equity interests in American
Furniture after payment of all transaction expenses. The Company recognized a loss on the sale of American Furniture of
$14.3 million. This loss was recognized during the quarter ended September 30, 2015 based on the initial write-down of
American Furniture's carrying amounts to fair value.
Summarized operating results for American Furniture for the previous years through the date of disposition were as follows
(in thousands):
(in thousands)
Net sales
Gross profit
Operating income
Income from continuing operations before income taxes
Provision for income taxes
Income from discontinued operations (1)
For the period
January 1, 2015
through
disposition
$
$
122,420
11,613
4,126
4,134
81
4,053
(1) The results for the period from January 1, 2015 through disposition exclude $1.5 million of intercompany interest expense.
Note E — Operating Segment Data
At December 31, 2017, the Company had nine reportable operating segments. Each operating segment represents a platform
acquisition. The Company’s operating segments are strategic business units that offer different products and services. They
are managed separately because each business requires different technology and marketing strategies. A description of
each of the reportable segments and the types of products from which each segment derives its revenues is as follows:
•
5.11 is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and
military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and
authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the
safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. Headquartered in
Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed
in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
• Crosman is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and
related accessories. Crosman offers its products under the highly recognizable Crosman, Benjamin and CenterPoint
brands that are available through national retail chains, mass merchants, dealer and distributor networks. Crosman
is headquartered in Bloomfield, New York.
• Ergobaby, headquartered in Los Angeles, California, is a designer, marketer and distributor of wearable baby carriers
and accessories, blankets and swaddlers, nursing pillows, and related products. Ergobaby primarily sells its
F-25
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.
•
Liberty Safe is a designer, manufacturer and marketer of premium home, office and gun safes in North America.
From its over 300,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe
models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.
• Manitoba Harvest is a pioneer and leader in the manufacture and distribution of branded, hemp-based foods and
hemp-based ingredients. Manitoba Harvest’s products, which include Hemp Hearts™, Hemp Heart Bites™, and
Hemp protein powders, are currently carried in over 13,000 retail stores across the U.S. and Canada. Manitoba
Harvest is headquartered in Winnipeg, Manitoba.
• Advanced Circuits, an electronic components manufacturing company, is a provider of small-run, quick-turn and
volume production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to
customers primarily in North America. ACI is headquartered in Aurora, Colorado.
• Arnold 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 provides environmental services for a variety of contaminated materials including soils dredged
materials, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles waste streams
generated in multiple end markets such as power, construction, oil and gas, medical, infrastructure, industrial and
dredging. Clean Earth is headquartered in Hatsboro, Pennsylvania and operates 18 facilities in the eastern United
States.
• Sterno is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the
food service industry and flameless candles and outdoor lighting products for consumers. Sterno's products include
wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment
and outdoor lighting products. Sterno 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 operations of each of the operating segments are included in consolidated operating
results as of their date of acquisition. Segment profit is determined based on internal performance measures used by the
Chief Executive Officer to assess the performance of each business. All our operating segments are deemed reporting units
for purposes of annual or event-driven goodwill impairment testing, with the exception of Arnold which has three reporting
units (PMAG, Precision Thin Metals and Flexmag). There were no significant inter-segment transactions.
Summary of Operating Segments
Net Revenues
(in thousands)
5.11
Crosman
Ergobaby
Liberty
Manitoba Harvest
ACI
Arnold
Clean Earth
Sterno
Total
Year ended December 31,
2017
2016
2015
$
309,999
$
109,792
$
78,387
102,969
91,956
55,699
87,782
105,580
211,247
226,110
1,269,729
—
103,348
103,812
59,323
86,041
108,179
188,997
218,817
978,309
—
—
86,506
101,146
17,423
87,532
119,994
175,386
139,991
727,978
Reconciliation of segment revenues to consolidated revenues:
Corporate and other
Total consolidated revenues
—
—
—
$
1,269,729
$
978,309
$
727,978
F-26
Segment Profit (Loss) (1)
(in thousands)
5.11 (2)
Crosman (3)
Ergobaby
Liberty
Manitoba Harvest (4)
ACI
Arnold (5)
Clean Earth
Sterno
Total
Reconciliation of segment profit (loss) to consolidated income from
continuing operations before income taxes:
Interest expense, net
Other income (expense), net
Gain (loss) on equity method investment
Corporate and other
Year ended December 31,
2017
2016
2015
$
(7,121) $
(10,153) $
1,308
24,503
9,475
(9,332)
23,575
(5,693)
12,037
19,194
67,946
(27,623)
2,634
(5,620)
(44,744)
—
17,151
13,234
321
22,718
(12,921)
7,929
18,799
57,078
(24,651)
(2,919)
74,490
(40,780)
—
—
22,157
11,858
(6,150)
24,144
7,584
11,013
13,200
83,806
(25,924)
(2,323)
4,533
(36,100)
Total consolidated (loss) income from continuing operations before
income taxes
$
(7,407) $
63,218
$
23,992
(1) Segment profit (loss) represents operating income (loss).
(2) 5.11 - The year ended December 31, 2017 includes $21.7 million cost of goods sold expense related to the amortization
of the step-up in inventory basis resulting from the purchase price allocation of 5.11, and $2.3 million in integration
services fees paid to CGM. The year ended December 31, 2016 includes $2.1 million of acquisition related costs incurred
in connection with the acquisition of 5.11, $17.4 million of cost of goods sold expense related to the amortization of the
step-up in inventory basis resulting from the purchase price allocation of 5.11, and $1.2 million in integration services
fees paid to CGM.
(3) Crosman - The year ended December 31, 2017 includes $1.8 million in acquisition related costs, $3.3 million cost
of goods sold expense related to the amortization of the step-up in inventory basis resulting from the purchase price
allocation of Crosman, and $0.75 million in integration services fees paid to CGM.
(4) Manitoba Harvest - The year ended December 31, 2017 includes $8.5 million in impairment expense related to goodwill
and the Manitoba Harvest tradename. The year ended December 31, 2016 includes $0.5 million in integration services
fees paid to CGM. Results from the year ended December 31, 2015 include $1.5 million of acquisition related costs,
$3.1 million of cost of goods sold expense related to the amortization of the step-up in inventory basis resulting from the
purchase price allocation of Manitoba Harvest, and $0.5 million in integration service fees paid to CGM.
(5) Arnold - Operating loss from Arnold for the years ended December 31, 2017 and 2016 includes $8.9 million and $16.0
million, respectively, in goodwill impairment expense related to the PMAG reporting unit. Refer to "Note H - Goodwill
and Intangible Assets."
F-27
5.11
Crosman
Ergobaby
Liberty
Manitoba Harvest
ACI
Arnold
Clean Earth
Sterno
Sales allowance accounts
Total
Accounts Receivable
Identifiable Assets
Depreciation and Amortization
December 31,
December 31
Year ended December 31,
2017
2016
2017 (1)
2016 (1)
2017
2016
2015
$
60,481
$
49,653
$ 324,068
$ 311,560
$
39,934
$
23,414
$
20,396
12,869
13,679
5,663
6,525
14,804
50,599
40,087
—
129,033
—
11,018
13,077
6,468
6,686
15,195
45,619
38,986
105,672
113,814
26,715
95,046
14,522
66,979
26,344
97,977
16,541
64,209
183,508
193,250
125,937
134,661
(9,995)
(5,511)
—
—
7,726
11,419
1,657
6,344
3,323
6,428
21,647
11,573
—
—
7,769
2,758
6,403
3,476
9,079
21,157
11,549
—
—
—
3,475
3,518
5,192
2,996
8,766
20,410
7,963
—
215,108
181,191
1,071,480
958,356
110,051
85,605
52,320
Reconciliation of segment to consolidated totals:
Corporate and other identifiable assets
Amortization of debt issuance costs and
original issue discount
—
—
—
—
2,026
145,971
—
—
755
—
—
5,007
3,565
2,883
Total
$ 215,108
$ 181,191
$ 1,073,506
$ 1,104,327
$ 115,058
$
89,170
$
55,958
(1) Does not include goodwill balances - refer to "Note H - Goodwill and Other Intangible Assets" for a schedule of goodwill
by segment.
Geographic Information
Net Revenues
The segments in the table below had revenues from geographic locations outside the United States in each of the periods
presented. Revenue attributable to Canada represented approximately 22.4% of total international revenue in 2017, 24.0%
of total international revenue in 2016 and 14.6% of total international revenue in 2015. Revenue attributable to any other
individual foreign country was not material in 2017, 2016 or 2015.
Net Revenues
United States
Canada
Europe
Asia Pacific
Other international
Total net revenues
Identifiable Assets
Year ended December 31,
2017
2016
2015
$
1,020,948
$
798,671
$
623,246
55,556
89,661
55,082
48,482
42,241
58,730
52,612
26,055
14,310
46,431
40,872
3,119
$
1,269,729
$
978,309
$
727,978
The Company's Manitoba Harvest segment is based in Canada, and several of the Company's operating segments have
subsidiaries with assets located outside of the United States. The following table presents identifiable assets by geographic
area:
Identifiable Assets
United States
Canada
Europe
Other international
Total identifiable assets
December 31,
2017
2016
$
878,322
$
130,033
47,574
17,577
890,537
145,032
41,285
27,473
$
1,073,506
$
1,104,327
F-28
Note F — Investment
Investment in FOX
Fox Factory Holdings Corp. ("FOX"), a former majority owned subsidiary of the Company that is publicly traded on the
NASDAQ Stock Market under the ticker "FOXF," is a designer, manufacturer and marketer of high-performance ride dynamic
products used primarily for bicycles, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and
trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. The Company held a 41%,
ownership interest in FOX as of January 1, 2016, and a 14% ownership interest as of January 1, 2017. The investment in
FOX was accounted for using the fair value option.
In March 2016, FOX closed on a secondary public offering of 2,500,000 shares of FOX common shares held by the Company.
Concurrently with the closing of the March Offering, FOX repurchased 500,000 shares of FOX common stock held by the
Company. As a result of the sale of shares through the March Offering and the repurchase of shares by FOX, the Company
sold a total of 3,000,000 shares of FOX common stock, with total net proceeds of approximately $47.7 million. Upon completion
of the March Offering and repurchase of shares by FOX, the Company's ownership interest in FOX was reduced from
approximately 41% to 33%.
In August 2016, FOX closed on a secondary public offering of 4,025,000 shares held by certain FOX shareholders, including
the Company. The Company sold a total of 3,500,000 shares of FOX common stock in the August Offering, for total net
proceeds of $63.0 million. Upon completion of the August offering, the Company's ownership of FOX decreased from
approximately 33% to approximately 23%.
In November 2016, FOX closed on a secondary offering of 3,500,000 shares of FOX common stock held by the Company,
for total net proceeds of $71.8 million. Upon completion of the August offering, our ownership of FOX decreased from
approximately 23% to approximately 14%.
In March 2017, FOX closed on a secondary public offering (the "March 2017 Offering") through which the Company sold
their remaining 5,108,718 shares in FOX for total net proceeds of $136.1 million. Subsequent to the March 2017 Offering,
the Company no longer holds an ownership interest in FOX.
The sale of a portion of the Company's FOX shares in March 2016, August 2016, November 2016 and March 2017 qualified
as a Sale Event under the Company's LLC Agreement. During the second quarter, the Company's board of directors declared
a distribution to the Holders of the Allocation Interests of $8.6 million in connection with the sale of FOX shares in March
2016. The profit allocation payment was made during the quarter ended June 30, 2016. The Company's board of directors
declared a distribution to the Holders of the Allocation Interests of $11.6 million in connection with the sale of FOX shares in
August 2016. That payment was made, offset by negative profit allocation related to the Sale Event from the Tridien disposition,
in the fourth quarter of 2016. The Company's board of directors declared a distribution to the Holders of the Allocation
Interests of $13.4 million related to the November 2016 sale of FOX shares in the fourth quarter of 2016. The amount of the
distribution was accrued at December 31, 2016 in the line Due to Related Party in the consolidated Balance Sheet, and paid
in January 2017. The sale of FOX shares in March 2017 qualified as a Sale Event under the Company's LLC Agreement.
In April 2017, with respect to the March 2017 Offering, the Company's board of directors approved and declared a profit
allocation payment totaling $25.8 million that was paid in the second quarter of 2017.
The following table reflects the year to date activity from our investment in FOX for 2017 and 2016:
Year ended December 31,
2017
2016
Balance January 1st
Proceeds from sale of FOX shares, net - March 2017 and 2016
Proceeds from sale of FOX shares, net - August 2016
Proceeds from sale of FOX shares, net - November 2016
Mark to market adjustment on investment (1)
Balance December 31st
$
$
141,767
$
(136,147)
—
—
(5,620)
— $
249,747
(47,685)
(63,000)
(71,785)
74,490
141,767
(1) The mark-to-market adjustment is the result of the fair value changes of the FOX investment during the year. The 2017
mark-to-market adjustment represents the unrealized loss on the investment in FOX as of the date of the FOX secondary
offering through which the Company sold our remaining shares in FOX.
F-29
Arnold Joint Venture
Arnold is a 50% partner in a China rare earth mine-to-magnet joint venture. Arnold accounts for its activity in the joint venture
utilizing the equity method of accounting. Gains and losses from the joint venture were not material for the years ended
December 31, 2017, 2016 and 2015.
Note G - Inventory and Property, Plant, and Equipment
Inventory
Inventory is comprised of the following (in thousands):
Raw materials and supplies
Work-in-process
Finished goods
Less: obsolescence reserve
Total
Property, plant and equipment
Property, plant and equipment is comprised of the following (in thousands):
Machinery and equipment
Office furniture, computers and software
Leasehold improvements
Construction in process
Buildings and land
Less: accumulated depreciation
Total
December 31,
2017
December 31,
2016
$
36,124
$
13,921
205,512
255,557
(8,629)
29,708
8,281
182,886
220,875
(7,891)
$
246,928
$
212,984
December 31,
2017
December 31,
2016
$
178,187
$
155,591
28,824
20,630
18,153
40,015
285,809
(112,728)
$
173,081
$
13,737
14,156
8,308
35,392
227,184
(84,814)
142,370
Depreciation expense was approximately $33.0 million, $26.9 million and $21.2 million for the years ended December 31,
2017, 2016 and 2015, respectively.
Note H — Goodwill and Other Intangible Assets
Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions.
Indefinite lived intangible assets, representing trademarks and trade names, are not amortized unless their useful life is
determined to be finite. Long-lived intangible assets are subject to amortization using the straight-line method. Goodwill and
indefinite lived intangible assets are tested for impairment annually as of March 31st of each year and more often if a triggering
event occurs, by comparing the fair value of each reporting unit to its carrying value. Each of the Company’s businesses
represents a reporting unit except Arnold, which is comprised of three reporting units.
2017 Interim Impairment Testing
Manitoba Harvest
The Company performed Step 1 testing during the 2017 annual impairment testing for Manitoba Harvest. As a result of
operating results that were below forecasted amounts, as well as a failure of the financial covenants associated with the
intercompany credit facility, we determined that a triggering event had occurred at Manitoba Harvest in the fourth quarter of
2017. We performed impairment testing of the goodwill and indefinite lived tradename at December 31, 2017. For the
quantitative impairment test at Manitoba, we utilized an income approach. The weighted average cost of capital used in the
income approach at Manitoba was 11.7%. Under the new guidance, a goodwill impairment will now be the amount by which
a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Results of the quantitative
testing of Manitoba Harvest indicated that the carrying value of Manitoba Harvest exceeded its fair value by $6.3 million, and
the Company recorded $6.2 million (after the effect of foreign currency translation) as impairment expense at December 31,
F-30
2017. For the indefinite lived trade name, quantitative testing of the Manitoba Harvest tradename indicated that the carrying
value exceeded its fair value by $2.3 million, and the Company recorded $2.3 million (after the effect of foreign currency
translation) of impairment expense at December 31, 2017. The Company expects to finalize the Manitoba Harvest impairment
testing during the first quarter of 2018.
2017 Annual Goodwill Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine
whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to perform the two-step goodwill impairment testing. The qualitative factors we consider include, in
part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial
performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts,
as well as issues or events specific to the reporting unit. At March 31, 2017, we determined that the Manitoba Harvest
reporting unit required further quantitative testing (Step 1) because we could not conclude that the fair value of the reporting
unit exceeds its carrying value based on qualitative factors alone. The Company utilized an income approach to perform
the Step 1 testing at Manitoba Harvest. The weighted average cost of capital used in the income approach for Manitoba
Harvest was 12.0%. Results of the Step 1 quantitative testing of Manitoba Harvest indicated that the fair value of Manitoba
Harvest exceeded its carrying value by 15.0%. Manitoba Harvest's goodwill balance as of the date of the annual impairment
testing was approximately $44.5 million. For the reporting units that were tested qualitatively, the Company concluded that
the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value and
that a quantitative analysis was not necessary.
2017 Indefinite Lived Intangible Asset Impairment Testing
The Company used a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative
factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as
a basis for determining whether it is necessary to perform quantitative impairment testing. The Company evaluated the
qualitative factors of each reporting unit that maintains indefinite lived intangible assets in connection with the annual
impairment testing for 2017. Our indefinite lived intangible assets consist of trade names with a carrying value of approximately
$71.3 million at December 31, 2017. The results of the qualitative analysis of our indefinite lived intangible assets, which
we completed during the quarter ended June 30, 2017, indicated that the fair value of the indefinite lived intangible assets
exceeded their carrying value. The indefinite lived trade name of Manitoba Harvest was tested in connection with the Step
1 test at March 31, 2017 - refer to above.
2016 Interim Goodwill Impairment Testing
Arnold
As a result of decreases in forecasted revenue, operating income and cash flows at Arnold, as well as a shortfall in revenue
and operating income during the latter half of 2016 as compared to budgeted amounts, the Company determined that it was
necessary to perform interim goodwill impairment testing on each of the three reporting units at Arnold. The Company
performed the first step ("Step 1") of the goodwill impairment assessment at December 31, 2016. In Step 1 of the goodwill
impairment test, the Company compared the fair value of the reporting units to the carrying amount. Based on the results
of the valuation, the fair value of the Flexmag and PTM reporting units exceeded the carrying amount, therefore no additional
goodwill testing was required. The results of the Step 1 test for the PMAG unit indicated a potential impairment of goodwill
and the Company performed the second step of goodwill impairment testing (Step 2) to determine the amount of impairment
of the PMAG reporting unit.
In the first test of goodwill impairment testing, we compare the fair value of each reporting unit to its carrying amount. For
purposes of the Step 1 for the Arnold reporting units, we estimated the fair value of the reporting unit using an income
approach, whereby we estimate the fair value of a reporting unit based on the present value of future cash flows. Cash flow
projections are based on Management's estimate of revenue growth rates and operating margins and take into consideration
industry and market conditions as well as company and reporting unit specific economic factors. The discount rate used is
based on the weighted average cost of capital adjusted for the relevant risk associated with the business specific
characteristics and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows. For
the Step 1 quantitative impairment testing for Arnold's reporting units, we used only an income approach because we
determined that the guideline public company comparables for PMAG, PTM, and Flexmag were not representative of these
reporting three reporting units. In the income approach, we used a weighted average cost of capital of 12.5% for PMAG,
13.0% for PTM and 12% for Flexmag.
The Company had not completed the Step 2 testing for PMAG at December 31, 2016, and recorded an estimated impairment
loss for PMAG of $16 million based on a range of impairment loss. During the first quarter of 2017, the Company recorded
an additional $8.9 million of goodwill impairment after the results of the Step 2 indicated total goodwill impairment of the
PMAG reporting unit of $24.9 million. The Step 2 impairment was higher than the initial estimate at December 31, 2016 due
primarily to the valuation of PMAG's property, plant and equipment during the Step 2 exercise.
F-31
2016 Annual Goodwill Impairment Testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine
whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to perform the two-step goodwill impairment testing. The qualitative factors we consider include, in
part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial
performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts,
as well as issues or events specific to the reporting unit. At March 31, 2016, we determined that the Tridien reporting unit
(which is reported as a discontinued operations in the accompanying financial statements after the sale of the reporting unit
in September 2016) required further quantitative testing (Step 1) because we could not conclude that the fair value of the
reporting unit exceeds its carrying value based on qualitative factors alone. Results of the Step 1 quantitative testing of
Tridien indicated that the fair value of Tridien exceeded its carrying value. For the reporting units that were tested qualitatively,
the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value.
2016 Indefinite Lived Intangible Asset Impairment Testing
The Company uses a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative
factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as
a basis for determining whether it is necessary to perform quantitative impairment testing. The Company evaluated the
qualitative factors of each reporting unit that maintains indefinite lived intangible assets in connection with the annual
impairment testing for 2016. Our indefinite-lived intangible assets consist of trade names with a carrying value of approximately
$72.2 million at December 31, 2016. The results of the qualitative analysis of our indefinite lived intangible assets, which
we completed during the quarter ended June 30, 2016, indicated that the fair value of the indefinite lived intangible assets
exceeded their carrying value.
2015 Annual goodwill impairment testing
The Company used a qualitative approach to test goodwill for impairment for the 2015 annual impairment test. At March 31,
2015, we determined that Liberty and two of the three reporting units at Arnold, PMAG and Flexmag, required further
quantitative testing (Step 1) because we could not conclude that the fair value of the reporting units exceeds their carrying
value based on qualitative factors alone. For the reporting units that were tested qualitatively, the results of the qualitative
analysis indicated that the fair value of those reporting units exceeded their carrying value.
In the first step of the goodwill impairment test, we compare the fair value of each reporting unit to its carrying amount. We
estimate the fair value of our reporting units using either an income approach or a market approach, or, where applicable, a
weighting of the two methods. Under the income approach, we estimate the fair value of a reporting unit based on the present
value of future cash flows. Cash flow projections are based on Management's estimate of revenue growth rates and operating
margins and take into consideration industry and market conditions as well as company specific economic factors. The
discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with the business
specific characteristics and the uncertainty associated with the reporting unit's ability to execute on the projected cash flows.
Under the market approach, we estimate fair value based on market multiples of revenue and earnings derived from
comparable public companies with operating and investment characteristics that are similar to the reporting unit. We weigh
the fair value derived from the market approach depending on the level of comparability of these public companies to the
reporting unit. When market comparables are not meaningful or available, we estimate the fair value of the reporting unit
using only the income approach. For the Step 1 quantitative impairment test at Liberty, we utilized both the income approach
and the market approach, with a 50% weighting assigned to each method. The weighted average cost of capital used in the
income approach at Liberty was 13.8%. For the Step 1 quantitative impairment test at the PMAG and Flexmag reporting
units of Arnold, we used only an income approach as we determined that the guideline public company comparables for both
units were not representative of these reporting units' markets. In the income approach, we used a weighted average cost
of capital of 13.6% for PMAG and 14.6% for Flexmag. Results of the quantitative testing of the Liberty reporting unit and
Arnold's PMAG and Flexmag reporting units indicated that the fair value of these reporting units exceeded their carrying
value.
2015 Indefinite Lived Intangible Asset Impairment Testing
We use 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. Our indefinite lived intangible assets
consist of trade names with a carrying value of approximately $72.2 million at December 31, 2015. Results of the qualitative
analysis indicate that the carrying value of the Company’s indefinite lived intangible assets did not exceed their fair value.
F-32
Long lived assets
Orbit Baby
During the second quarter of 2016, Ergobaby's board of directors approved a plan to dispose of the Orbit Baby product line.
Ergobaby determined at the time the plan was approved that the carrying value of the long lived assets associated with the
Orbit Baby product line was not recoverable, and therefore, Ergobaby recorded a loss on disposal of assets of $5.9 million
related to the write off of the long-lived assets of Orbit Baby. The loss is comprised of the write-off of intangible assets of
$5.5 million, property, plant and equipment of $0.4 million. Ergobaby received approximately $1.0 million during the fourth
quarter of 2016 related to the sale of certain assets of the Orbit Baby product line, which reduced the loss on disposal.
Clean Earth
Clean Earth recognized a loss on disposal of assets of $3.3 million during the fourth quarter of 2016 related to the closure
of the Clean Earth’s Williamsport, Pennsylvania site which processed drill cuttings. The loss was comprised of intangible
assets specific to the Williamsport location ($1.9 million), as well as equipment ($1.4 million) that could not be repurposed
to other sites at the time of the closing of the facility.
The following is a summary of the net carrying amount of goodwill at December 31, 2017 and 2016 (in thousands):
December 31, 2017
December 31, 2016
Goodwill - gross carrying amount
Accumulated impairment losses
Goodwill - net carrying amount
$
$
562,842
$
(31,153)
531,689
$
507,637
(16,000)
491,637
A reconciliation of the change in the carrying value of goodwill for the years ended December 31, 2017 and 2016 are as
follows (in thousands):
5.11
Crosman
Ergobaby
Liberty
Manitoba Harvest
ACI
Arnold (2)
Clean Earth
Sterno
Corporate (3)
Total
Balance at
January 1, 2017
Acquisitions (1)
Goodwill
Impairment
Foreign
currency
translation
Other (4)
Balance at
December 31, 2017
$
92,966
$
— $
— $
— $
— $
—
61,031
32,828
44,171
58,019
35,767
118,224
39,982
8,649
49,352
—
—
—
—
—
875
1,689
—
—
—
—
(6,289)
—
(8,864)
—
—
—
—
—
—
3,142
—
—
—
—
—
—
—
—
—
—
—
—
147
—
92,966
49,352
61,031
32,828
41,024
58,019
26,903
119,099
41,818
8,649
$
491,637
$
51,916
$
(15,153) $
3,142
$
147
$
531,689
(1) Acquisition of businesses during the year ended December 31, 2017 includes the acquisition of Crosman by the Company in
June 2017, and add-on acquisitions at Clean Earth in March 2017, Crosman in July 2017 and Sterno in August 2017.
(2) Arnold has three reporting units PMAG, Precision Thin Metals and Flexmag with goodwill balances of $15.6 million, $6.5 million
and $4.8 million, respectively.
(3) Represents goodwill resulting from purchase accounting adjustments not “pushed down” to the ACI segment. This amount is
allocated back to the ACI segment for purposes of goodwill impairment testing.
(4) Represents the final settlement related to Sterno's acquisition of Sterno Home Inc. ("Sterno Home", formerly NII).
F-33
5.11
Ergobaby
Liberty
Manitoba Harvest
ACI
Arnold (2)
Clean Earth
Sterno
Corporate (3)
Total
Balance at
January 1, 2016
Acquisitions (1)
Goodwill
Impairment
Foreign
currency
translation
Other (4)
Balance at
December 31, 2016
$
— $
92,966
$
— $
— $
— $
41,664
32,828
52,673
58,019
51,767
111,339
33,716
8,649
19,367
—
—
—
—
6,885
6,266
—
—
—
—
—
(16,000)
—
—
—
—
—
—
—
2,077
(10,579)
—
—
—
—
—
—
—
—
—
—
92,966
61,031
32,828
44,171
58,019
35,767
118,224
39,982
8,649
$
390,655
$
125,484
$
(16,000) $
2,077
$
(10,579) $
491,637
(1) Acquisition of businesses during the year ended December 31, 2016 includes the acquisition of 5.11 by the Company in August
2016, and the add-on acquisitions by Sterno in January 2016, Clean Earth in April and June 2016, and Ergobaby in May 2016.
(2) Arnold has three reporting units PMAG, Precision Thin Metals and Flexmag with goodwill balances of $24.4 million, $6.5 million
and $4.8 million, respectively.
(3) Represents goodwill resulting from purchase accounting adjustments not “pushed down” to the ACI segment. This amount is
allocated back to the ACI segment for purposes of goodwill impairment testing.
(4) Purchase accounting adjustments related to the Manitoba acquisition of HOCI in December 2015. The purchase accounting
for HOCI was finalized in the first quarter of 2016.
Approximately $91.1 million of goodwill is deductible for income tax purposes at December 31, 2017.
Other intangible assets subject to amortization are comprised of the following (in thousands):
December 31, 2017
December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Weighted
Average
Useful Lives
Customer relationships
Technology and patents
Trade names, subject to
amortization
Licensing and non-compete
agreements
Permits and airspace (1)
Distributor relations and other
Trade names, not subject to
amortization
$ 338,719
$
(102,271) $ 236,448
$ 304,751
$
(79,607)
$ 225,144
49,075
(22,492)
26,583
44,710
(18,290)
26,420
182,976
(22,518)
160,458
128,675
(6,833)
121,842
7,965
115,230
726
(6,488)
(31,026)
(646)
1,477
84,204
80
7,845
113,295
606
(5,987)
(21,531)
(606)
1,858
91,764
—
694,691
(185,441)
509,250
599,882
(132,854)
467,028
71,267
—
71,267
72,183
—
72,183
Total intangibles, net
$ 765,958
(185,441)
580,517
$ 672,065
$
(132,854)
$ 539,211
13
9
15
4
13
5
(1) Permits and airspace intangible assets relate to the Company's Clean Earth business. Permits are obtained by Clean Earth
for the treatment of soil and solid waste from various government municipalities and are amortized over the estimated life of
the permit. Modifications of existing permits to accept new waste streams, alterations of existing permits to enhance the permit
limitations, and new permits, as well as the related costs associated with obtaining, modifying or renewing the permits, are
capitalized and amortized over the estimated life of the permit.
F-34
Estimated charges to amortization expense of intangible assets over the next five years, is as follows, (in thousands):
2018
2019
2020
2021
2022
$
62,983
61,930
52,308
42,596
40,917
$
260,734
The Company’s amortization expense of intangible assets for the years ended December 31, 2017, 2016 and 2015
totaled $52.0 million, $35.1 million and $28.8 million, and respectively.
Note I — Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of
December 31, 2017 and 2016 (in thousands):
Liabilities:
Put option of noncontrolling shareholders (1)
Interest rate swap
Total recorded at fair value
Fair Value Measurements at December 31, 2017
Carrying
Value
Level 1
Level 2
Level 3
(178)
(6,107)
—
—
—
(6,107)
$
(6,285) $
— $
(6,107) $
(178)
—
(178)
(1) Represents put options issued to noncontrolling shareholders in connection with the Liberty acquisition in 2010
and the 5.11 acquisition in 2016.
Assets:
Equity method investment - FOX
Liabilities:
Put option of noncontrolling shareholders (3)
Contingent consideration - acquisitions (2)
Interest rate swap
Total recorded at fair value
Fair Value Measurements at December 31, 2016
Carrying
Value
Level 1
Level 2
Level 3
$
141,767
$
141,767
$
— $
—
(180)
(4,830)
(10,719)
—
—
—
—
—
(10,719)
(180)
(4,830)
—
$
126,038
$
141,767
$
(10,719) $
(5,010)
(1) Represents put options issued to noncontrolling shareholders in connection with the Liberty acquisition in 2010
and the 5.11 acquisition in 2016.
(2) Represents potential earn-outs payable as additional purchase price consideration by Sterno in connection with
the acquisition of Sterno Home and Ergobaby in connection with the acquisition of Baby Tula.
(3) Represents put options issued to noncontrolling shareholders in connection with the Liberty acquisition.
F-35
A reconciliation of the change in the carrying value of the Company’s Level 3 fair value measurements for the year ended
December 31, 2017 and 2016 is as follows (in thousands):
2017
2016
Balance at January 1st
Contingent consideration - Sterno Home
Contingent consideration - Baby Tula
Put option issued to noncontrolling shareholder - 5.11
Payment of contingent consideration - Sterno Home
(Increase) decrease in the fair value of put option of
noncontrolling shareholders - Liberty
Increase in the fair value of put option of noncontrolling
shareholder - 5.11
Reversal of contingent consideration - Baby Tula
Reversal of contingent consideration - Sterno Home
$
(5,010) $
(382)
—
—
475
8
(5)
3,780
956
(50)
(1,500)
(3,780)
(50)
450
(80)
—
—
—
Balance at December 31st
$
(178) $
(5,010)
Valuation Techniques
Options of noncontrolling shareholders
The put options of noncontrolling shareholders were determined based on inputs that were not readily available in public
markets or able to be derived from information available in publicly quoted markets. As such, the Company categorized the
put options of the noncontrolling shareholders as Level 3. The primary inputs associated with this valuation are earnings
before interest, taxes amortization and depreciation times a multiple established in the shareholder put option agreement,
which is used to determine a per share equity value for the shares that can be put back to the Company. The per share
equity value of the Liberty put option is discounted for liquidity and marketability, as well as the probability of a triggering
event. An increase or decrease in these primary inputs would not have a material impact on the determination of the fair
value of these put options. As a result of the Liberty recapitalization (refer to "Note O - Noncontrolling Interest" for a description
of the transaction), the number of shares that can be put back to the Company by the noncontrolling shareholders increased,
resulting in an increase in the fair value of the put option.
Interest rate swap
The Company’s derivative instruments at December 31, 2017 consisted of an over-the-counter interest rate swap contract
which is not traded on a public exchange. The fair value of the Company’s interest rate swap contract was determined based
on inputs that were readily available in public markets or could be derived from information available in publicly quoted
markets. As such, the Company categorized the swap as Level 2. Changes in the fair value of the interest rate swap liability
during the year ended December 31, 2017 were expensed to interest expense on the consolidated statement of operations.
Refer to "Note K - Derivative Instruments and Hedging Activities" for further information.
Contingent Consideration
Sterno entered into a contingent consideration arrangement associated with the purchase of Sterno Home (formerly NII) in
January 2016. The earnout provision provides for payments up to $1.8 million over a two year period subsequent to acquisition.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is the performance target defined and measured
to determine the earnout payment due, if any, after each defined measurement period. The contingent consideration was
valued at $1.5 million using probability weighted models. During the quarter ended September 30, 2016, Sterno paid $0.5
million of the contingent consideration. At December 31, 2016, Sterno determined that it was more likely than not that the
full amount of the contingent consideration would be paid out, and recorded an additional $0.4 million in earnout, which was
recorded though the statement of operations. Sterno paid an additional $0.5 million in the first quarter of 2017 related to an
earnout milestone as of December 31, 2016. At December 31, 2017, Sterno determined that the final earnout milestone
had not been met, and reversed the remaining contingent consideration liability.
In connection with the acquisition of Baby Tula in May 2016, Ergobaby entered into a contingent consideration arrangement
with the sellers. The earnout provision provides for additional consideration of $8.2 million if the gross profit for Baby Tula
for the 2017 fiscal year exceeds a specified level. No earnout amount will be paid if the specified gross profit level is not
met. Ergobaby valued the contingent consideration at a fair value of $3.8 million using a probability weighted option pricing
model. At December 31, 2017, Ergobaby determined that the earnout provision would not be met and reversed the fair value
of the liability.
F-36
2014 Term Loan and 2016 Incremental Term Loan
At December 31, 2017, the carrying value of the principal under the Company's outstanding 2014 Term Loan, including the
current portion, was $560.0 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 2014
Term Loan is classified as Level 2 in the fair value hierarchy.
Nonrecurring Fair Value Measurements
The following tables provide the assets and liabilities carried at fair value measured on a non-recurring basis as of
December 31, 2017 and 2016 (in thousands). Refer to "Note H – Goodwill and Intangibles", for a description of the valuation
techniques used to determine fair value of the assets measured on a non-recurring basis in the table below. There were no
assets and liabilities carried at fair value measured on a non-recurring basis as of December 31, 2015.
(in thousands)
Goodwill - Arnold
Fair Value Measurements at December 31, 2017
Year ended
Carrying
Value
Level 1
Level 2
Level 3
December 31,
2017
Expense
$
26,903
$
— $
— $
26,903
$
Goodwill - Manitoba Harvest
Tradename - Manitoba
41,024
10,834
—
—
—
—
41,024
11,550
$
8,864
6,188
2,273
17,325
Expense
Fair Value Measurements at December 31, 2016
Year ended
(in thousands)
Goodwill - Arnold
Property, plant and equipment (1)
Tradename (1)
Technology (1)
Customer relationships (1)
Permits (1)
$
$
$
$
$
$
Carrying
Value
35,767
$
— $
— $
— $
— $
— $
Level 1
Level 2
Level 3
December 31,
2016
— $
— $
— $
— $
— $
— $
— $
35,767
$
16,000
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
1,824
317
3,460
2,426
1,177
(1) Represents the fair value of the respective assets at the Orbit Baby product line, and the Clean Earth Williamsport site.
Refer to "Note H - Goodwill and Other Intangible Assets" for further discussion regarding the impairment and valuation
techniques applied.
Note J – Debt
2014 Credit Agreement
On June 6, 2014, the Company obtained a $725 million credit facility from a group of lenders (the “2014 Credit Facility”) led
by Bank of America N.A. as Administrative Agent. The 2014 Credit Facility provides for (i) a revolving credit facility of $400
million (the “2014 Revolving Credit Facility”) and (ii) a $325 million term loan (the “2014 Term Loan Facility”). The 2014
Credit Facility permits the Company to increase the 2014 Revolving Credit Facility commitment and/ or obtain additional
term loans in an aggregate of up to $200 million. The 2014 Credit Agreement is secured by all of the assets of the Company,
including all of its equity interests in, and loans to, its consolidated subsidiaries. The 2014 Credit Facility was amended in
June 2015, primarily to allow for intercompany loans to, and the acquisition of, Canadian-based companies on an unsecured
basis, and to modify provisions that would allow for early termination of a "Leverage Increase Period," thereby providing
additional flexibility as to the timing of subsequent acquisitions. On August 15, 2016, the Company amended the 2014 Credit
Facility to, among other things, increase the aggregate amount of the 2014 Credit Facility by $400 million. On August 31,
2016, the Company entered into an Incremental Facility Amendment to the 2014 Credit Agreement (the "Incremental Facility
Amendment"). The Incremental Facility Amendment provided for an increase to the 2014 Revolving Credit Facility of $150
million, and the 2016 Incremental Term Loan, in the amount of $250 million. As a result of the Incremental Facility Amendment,
the 2014 Credit Facility currently provides for (i) a revolving credit facility of $550 million (as amended from time to time, the
"2014 Revolving Credit Facility"), (ii) a $325 million term loan (the "2014 Term Loan Facility"), and (iii) a $250 million incremental
term loan "the "2016 Incremental Term Loan").
F-37
2014 Revolving Credit Facility
The 2014 Revolving Credit Facility will become due in June 2019. The Company can borrow, prepay and re-borrow principal
under the 2014 Revolving Credit Facility from time to time during its term. Advances under the 2014 Revolving Credit Facility
can be either LIBOR rate loans or base rate loans. LIBOR rate revolving loans bear interest at a rate per annum equal to
the London Interbank Offered Rate (the “LIBOR Rate”) plus a margin ranging from 2.00% to 2.75% based on the ratio of
consolidated net indebtedness to adjusted consolidated earnings before interest expense, tax expense and depreciation
and amortization expenses (the “Consolidated Leverage Ratio”). Base rate revolving loans bear interest at a fluctuating
rate per annum equal to the greatest of (i) the prime rate of interest, or (ii) the Federal Funds Rate plus 0.5% (the “Base
Rate”), plus a margin ranging from 1.00% to 1.75% based upon the Consolidated Leverage Ratio.
2014 Term Loan Facility
The 2014 Term Loan Facility expires in June 2021 and requires quarterly payments that commenced September 30, 2014,
with a final payment of all remaining principal and interest due on June 6, 2021. The 2014 Term Loan Facility was issued
at an original issue discount of 99.5% of par value and bears interest at either the applicable LIBOR Rate plus 3.25% per
annum, or Base Rate plus 2.25% per annum. The LIBOR Rate applicable to both base rate loans and LIBOR rate loans
shall in no event be less than 1.00% at any time.
2016 Incremental Term Loan
The 2016 Incremental Term Loan was issued at an original issue discount of 99.25% of par value. The Company incurred
$6.0 million in additional debt issuance costs related to the Incremental Credit Facility, which will be recognized as expense
during the remaining term of the related 2014 Revolving Credit Facility, and 2014 Term Loan and 2016 Incremental Term
Loan. The Incremental Facility Amendment did not change the due dates or applicable interest rates of the 2014 Credit
Agreement. The quarterly payments for the term advances under the 2014 Credit Agreement increased to approximately
$1.4 million per quarter. The Company used the proceeds from the Incremental Facility Amendment to fund the acquisition
of 5.11 Tactical (refer to "Note C - Acquisition of Businesses"").
In March 2017, the Company amended the 2014 Credit Facility (the "Fourth Amendment") to reduce the applicable rate of
interest for the 2014 Term Loan and 2016 Incremental Term Loan. Under the Fourth Amendment, outstanding LIBOR loans
bear interest at LIBOR plus an applicable rate of 2.75% and outstanding Base Rate loans bear interest at Base Rate plus
1.75%. Prior to the amendment, the outstanding term loans bore interest at LIBOR plus 3.25% or Base Rate plus 2.25%.
In connection with the Fourth Amendment, the Company capitalized debt issuance costs of $1.2 million associated with fees
charged by term loan lenders.
In October 2017, the Company further amended the 2014 Credit Facility (the "First Refinancing Amendment") to, in effect,
refinance the 2014 Term Loan and the 2016 Incremental Term Loan (together, the “Term Loans”). Pursuant to the First Refinancing
Amendment, outstanding Term Loans at LIBOR Rate bear interest at LIBOR plus an applicable rate of 2.25% and outstanding
Term Loans at Base Rate bear interest at Base Rate plus 1.25%. Prior to the amendment, the outstanding Term Loans bore
interest at LIBOR plus 2.75% or Base Rate plus 1.75%. In connection with the First Refinancing Amendment, the Company
incurred $1.4 million of debt issuance costs associated with fees charged by term loan lenders.
Other
The 2014 Credit Facility provides for sub-facilities under the 2014 Revolving Credit Facility pursuant to which an aggregate
amount of up to $100.0 million in letters of credit may be issued, as well as swing line loans of up to $25.0 million outstanding
at one time. The issuance of such letters of credit and the making of any swing line loan reduces the amount available under
the 2014 Revolving Credit Facility. The Company will pay (i) commitment fees on the unused portion of the 2014 Revolving
Credit Facility ranging from 0.45% to 0.60% per annum based on its Consolidated Leverage Ratio, (ii) quarterly letter of
credit fees, and (iii) administrative and agency fees.
F-38
The following table provides the Company’s debt holdings at December 31, 2017 and December 31, 2016 (in thousands):
Revolving Credit Facility
Term Loan Facility
Original issue discount (1)
Deferred financing costs - term debt
Total debt
Less: Current portion, term loan facilities
Long-term debt
December 31,
2017
December 31,
2016
$
$
$
42,000
$
559,973
(3,483)
(8,458)
590,032
(5,685)
584,347
$
$
4,400
565,658
(4,706)
(8,015)
557,337
(5,685)
551,652
(1) The Company recorded $4.6 million in original issue discount upon issuance of the 2014 Term Loan Facility in June
2014 and $1.9 million in original issue discount upon issuance of the 2016 Incremental Term Loan. This discount is
being amortized over the life of the 2014 Term Loan Facility and 2016 Incremental Term Loan.
Annual maturities of the Company's debt obligations under the 2014 Credit Facility are as follows (in thousands):
2018
2019
2020
2021
5,685
47,685
5,685
539,435
598,490
$
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the entering into the 2014 Credit Facility as well as the
issuance costs associated with the August 2016 Incremental Facility Amendment and are amortized over the term of the
related debt instrument. Since the Company can borrow, repay and re-borrow principal under the 2014 Revolving Credit
Facility, the debt issuance costs associated with this facility have been classified as other non-current assets in the
accompanying consolidated balance sheet. The debt issuance costs associated with the 2014 Term Loan and 2016
Incremental Term Loan are classified as a reduction of long-term debt in the accompanying consolidated balance sheet.
The Company paid debt issuance costs of $7.3 million in connection with the 2014 Credit Facility (of which $0.2 million was
expensed as debt modification and extinguishment costs and $7.1 million is being amortized over the term of the related
debt in the 2014 Credit Facility) and recorded additional debt modification and extinguishment costs of $2.1 million to write-
off previously capitalized debt issuance costs associated with the Company's prior credit facility. The Company paid $6.0
million in debt issuance costs in connection with the 2016 Incremental Facility Amendment.
The following table summarizes debt issuance costs at December 31, 2017 and December 31, 2016, and the balance sheet
classification in each of the periods presents (in thousands):
Deferred debt issuance costs
Accumulated amortization
Deferred debt issuance costs, net
Balance sheet classification:
Other noncurrent assets
Long-term debt
December 31, 2017
December 31, 2016
21,491
$
(10,250)
11,241
$
2,784
$
8,458
11,241
$
18,960
(6,248)
12,712
4,698
8,014
12,712
$
$
$
$
F-39
Covenants
The Company is subject to certain customary affirmative and restrictive covenants arising under the 2014 Credit Facility.
The following table reflects required and actual financial ratios as of December 31, 2017 included as part of the affirmative
covenants in the 2014 Credit Facility:
Description of Required Covenant Ratio
Fixed Charge Coverage Ratio
Total Debt to EBITDA Ratio
Covenant Ratio Requirement
greater than or equal to 1.50: 1.00
less than or equal to 3:50: 1.00
Actual Ratio
2.82:1.00
3.00:1.00
A breach of any of these covenants will be an event of default under the 2014 Credit Facility. Upon the occurrence of an
event of default under the 2014 Credit Facility, the 2014 Revolving Credit Facility may be terminated, the 2014 Term Loan
Facility and all outstanding loans and other obligations under the 2014 Credit Facility may become immediately due and
payable and any letters of credit then outstanding may be required to be cash collateralized, and the Agent and the Lenders
may exercise any rights or remedies available to them under the 2014 Credit Facility. Any such event would materially impair
the Company’s ability to conduct its business. As of December 31, 2017, the Company was in compliance with all covenants
as defined in the 2014 Credit Agreement.
Letters of credit
The 2014 Credit Facility allows for letters of credit in an aggregate face amount of up to $100.0 million. Letters of credit
outstanding at December 31, 2017 totaled $0.6 million and at December 31, 2016 totaled $4.2 million. Letter of credit fees
recorded to interest expense totaled $0.1 million in each of the years ended December 31, 2017, 2016 and 2015.
Interest hedge
The Company entered into an interest rate swap on $220 million of outstanding debt for a period from April 2016 through
June 2021 in connection with the term of our 2014 Term Loan. Refer to "Note K - Derivative Instruments and Hedging
Activities" for further information on the interest rate derivatives entered into as part of the Term Loan Facility.
Interest expense
The following details the components of interest expense in each of the years ended December 31, 2017, 2016 and 2015
(in thousands):
Interest on credit facilities
Unused fee on Revolving Credit Facility
Amortization of original issue discount
Unrealized (gains) losses on interest rate derivatives
Letter of credit fees
Other
Interest expense
Average daily balance of debt outstanding
Effective interest rate
Year ended December 31,
2016
2015
2017
$
23,940
$
19,861
$
17,590
2,856
1,037
(648)
70
538
1,947
802
1,539
108
415
1,612
671
5,662
121
286
$
$
27,793
597,114
$
$
24,672
477,656
$
$
25,942
443,348
4.7%
5.2%
5.9%
Note K — Derivative Instruments and Hedging Activities
Interest Rate Swaps
On September 16, 2014, the Company purchased an interest rate swap ("New Swap") with a notional amount of $220 million.
The New Swap is effective April 1, 2016 through June 6, 2021, the termination date of our 2014 Term Loan. The interest
rate swap agreement requires the Company to pay interest rates on the notional amount at the rate of 2.97% in exchange
for the three-month LIBOR rate. At December 31, 2017 and 2016, the New Swap had a fair value loss of $6.1 million and
$10.7 million, respectively, principally reflecting the present value of future payments and receipts under the agreement.
In October 2011, the Company purchased a three-year interest rate swap (the "Swap") with a notional amount of $200 million
effective January 1, 2012 through March 31, 2016. The interest rate swap agreement required the Company to pay interest
F-40
on the notional amount at the rate of 2.49% in exchange for the three-month LIBOR rate, with a floor of 1.5%. At December 31,
2015, this Swap had a fair value loss of $0.5 million. A final payment under the Swap of $0.5 million was made on March
31, 2016 when the Swap contract ended.
The following table reflects the classification of the Company's Interest Rate Swap on the Consolidated Balance Sheets at
December 31, 2017 and 2016 (in thousands):
Year ended December 31,
2017
2016
Other current liabilities
Other non-current liabilities
Total fair value
$
$
2,468
3,639
6,107
$
$
4,010
6,709
10,719
The Company did not elect hedge accounting for the above derivative transaction associated with the Credit Facility and
changes in fair value are included in interest expense on the consolidated statement of operations.
Foreign Currency Contracts
The Company's Arnold operating segment from time to time will use forward contracts and options to hedge the value of the
Eurodollar against the Swiss Franc or the British Pound Sterling. Mark-to-market gains and losses on these instruments
were not material to the consolidated results during each of the years ended December 31, 2017, 2016 or 2015. At December
31, 2017 and 2016, these contracts had notional values of €0.3 million and €0.8 million, respectively, and maturity dates
within three months of year end.
Note L — Income Taxes
Compass Diversified Holdings and Compass Group Diversified Holdings LLC are classified as partnerships for U.S. Federal
income tax purposes and are not subject to income taxes. Each of the Company’s majority owned subsidiaries are subject
to Federal and state income taxes.
Components of the Company's pretax income (loss) before taxes are as follows (in thousands):
Domestic (including U.S. exports)
Foreign subsidiaries
Year ended December 31,
2017
2016
2015
$
$
(13,276) $
63,782
$
5,869
(564)
(7,407) $
63,218
$
29,432
(5,440)
23,992
Components of the Company’s income tax provision (benefit) are as follows (in thousands):
Current taxes
Federal
State
Foreign
Total current taxes
Deferred taxes:
Federal
State
Foreign
Total deferred taxes
Total tax provision
Year ended December 31,
2016
2015
2017
$
10,293
$
12,994
$
16,079
2,221
6,236
18,750
(55,299)
(1,712)
(2,418)
(59,429)
2,486
3,857
19,337
(5,816)
(1,357)
(2,695)
(9,868)
$
(40,679) $
9,469
$
2,567
688
19,334
(764)
70
(3,639)
(4,333)
15,001
F-41
The tax effects of temporary differences that have resulted in the creation of deferred tax assets and deferred tax liabilities
at December 31, 2017 and 2016 are as follows (in thousands):
Deferred tax assets:
Tax credits
Accounts receivable and allowances
Net operating loss carryforwards
Accrued expenses
Other
Total deferred tax assets
Valuation allowance (1)
Net deferred tax assets
Deferred tax liabilities:
Intangible assets
Property and equipment
Repatriation of foreign earnings
Prepaid and other expenses
Total deferred tax liabilities
Total net deferred tax liability
December 31,
2017
2016
5,035
$
1,134
27,631
5,789
5,174
44,763
$
(5,912)
38,851
$
11,485
1,032
28,896
7,324
3,966
52,703
(7,256)
45,447
(102,581) $
(120,645)
(17,060)
(68)
(191)
(119,900) $
(81,049) $
(19,810)
(8,973)
(6,857)
(156,285)
(110,838)
$
$
$
$
$
$
(1) Primarily relates to the 5.11 and Arnold operating segments.
For the years ending December 31, 2017 and 2016, the Company recognized approximately $119.9 million and $156.3
million, respectively in deferred tax liabilities. A significant portion of the balance in deferred tax liabilities reflects temporary
differences in the basis of property and equipment and intangible assets related to the Company’s purchase accounting
adjustments in connection with the acquisition of certain of its businesses. For financial accounting purposes the Company
has recognized a significant increase in the fair values of the intangible assets and property and equipment in certain of the
businesses it acquired. For income tax purposes the existing, pre-acquisition tax basis of the intangible assets and property
and equipment is utilized. In order to reflect the increase in the financial accounting basis over the existing tax basis, a
deferred tax liability was recorded. This liability will decrease in future periods as these temporary differences reverse but
may be replaced by deferred tax liabilities generated as a result of future acquisitions.
A valuation allowance relating to the realization of foreign tax credits and net operating losses of $5.9 million was provided
at December 31, 2017 and $7.3 million was provided at December 31, 2016. A valuation allowance is provided whenever
it is more likely than not that some or all of deferred assets recorded may not be realized.
F-42
The reconciliation between the Federal Statutory Rate and the effective income tax rate for 2017, 2016 and 2015 are as
follows:
United States Federal Statutory Rate
State income taxes (net of Federal benefits)
Foreign income taxes
Expenses of Compass Group Diversified Holdings, LLC representing a pass
through to shareholders (1)
Effect of (gain) loss on equity method investment
Impact of subsidiary employee stock options
Domestic production activities deduction
Non-deductible acquisition costs
Impairment expense
Effect of undistributed foreign earnings
Non-recognition of NOL carryforwards at subsidiaries
Adjustments to uncertain tax positions (2)
Utilization of tax credits
Effect of Tax Act - remeasurement of deferred tax assets and liabilities (3)
Effect of Tax Act - transition tax on non-U.S. subsidiaries' earnings(3)
Other
Effective income tax rate
Year ended December 31,
2016
2015
2017
(35.0)%
(6.5)
(18.4)
(3.3)
26.6
9.9
(8.4)
4.6
69.4
(18.7)
(18.1)
(124.0)
(40.1)
(468.0)
65.6
15.2
35.0%
0.6
1.5
3.6
(41.2)
1.3
(0.9)
1.9
—
4.2
3.6
—
(0.7)
—
—
6.1
35.0%
6.5
1.2
29.1
(6.6)
1.3
(3.2)
—
—
—
(6.1)
—
(1.1)
—
—
6.4
(549.2)%
15.0%
62.5%
(1) The effective income tax rate for each of the years presented includes losses at the Company’s parent, which is taxed
as a partnership.
(2) Represents the effect of the reversal of an uncertain tax position at our 5.11 business that existed as of the acquisition date
and was settled during the fourth quarter of 2017, resulting in a tax benefit of $9.2 million in our 2017 tax provision.
(3) The effect of the enactment of the Tax Act on our tax provision for the year ended December 31, 2017 was a benefit of $34.7
million related to the reduction in the U.S. federal corporate income tax rate from 35% to 21%, and tax expense of $4.9
million related to the one-time transition tax liability of our foreign subsidiaries. Our loss before income taxes for 2017
was $7.4 million, and as a result, the effect from the Tax Act on the reconciliation in the table above was significant.
A reconciliation of the amount of unrecognized tax benefits for 2017, 2016 and 2015 are as follows (in thousands):
Balance at January 1, 2015
Additions for current years’ tax positions
Additions for prior years’ tax positions
Reductions for prior years’ tax positions
Reductions for settlements
Reductions for expiration of statute of limitations
Balance at December 31, 2015
Additions for current years’ tax positions
Additions for prior years’ tax positions (1)
Reductions for prior years’ tax positions
Reductions for settlements
Reductions for expiration of statute of limitations
Balance at December 31, 2016
F-43
$
$
$
433
73
—
(15)
—
(102)
389
64
10,150
(16)
—
(87)
10,500
Additions for current years’ tax positions
Additions for prior years’ tax positions
Reductions for prior years’ tax positions (1)
Reductions for settlements
Reductions for expiration of statute of limitations
Balance at December 31, 2017
96
23
(9,397)
—
(87)
1,135
$
(1) The increase in prior year tax positions during the year ended December 31, 2016 related to an unrecognized tax benefit
at the Company's 5.11 business, which was acquired in August 2016. The uncertainty was resolved in the fourth quarter of
2017 and the amount was reversed.
Included in the unrecognized tax benefits at December 31, 2017 and 2016 is $1.0 million and $10.4 million, respectively, of
tax benefits that, if recognized, would affect the Company’s effective tax rate. The Company accrues interest and penalties
related to uncertain tax positions. The amounts accrued at December 31, 2017, 2016 and 2015 are not material to the
Company. Such amounts are included in the provision (benefit) for income taxes in the accompanying consolidated statements
of operations. The change in the unrecognized tax benefit during 2017 and 2016 resulted from the acquisition of 5.11. The
change in the unrecognized tax benefit during 2015 was not material. It is expected that the amount of unrecognized tax
benefits will change in the next twelve months. However, we do not expect the change to have a significant impact on the
consolidated results of operations or financial position.
Each of the Company’s businesses file U.S. Federal, state and foreign income tax returns in multiple jurisdictions with varying
statutes of limitations. The 2013 through 2017 tax years generally remain subject to examinations by the taxing authorities.
Note M – Defined Benefit Plan
In connection with the acquisition of Arnold, the Company has a defined benefit plan covering substantially all of Arnold’s
employees at its Lupfig, Switzerland location. The benefits are based on years of service and the employees’ highest average
compensation during the specific period.
The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated balance
sheets at December 31, 2017 and 2016 (in thousands):
Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial (gain)/loss
Employee contributions and transfer
Benefits paid
Foreign currency translation
Benefit obligation
Change in plan assets:
Fair value of assets, beginning of period
Actual return on plan assets
Company contribution
Employee contributions and transfer
Benefits paid
Foreign currency translation
Fair value of assets
Funded status
F-44
December 31,
2017
December 31,
2016
$
13,804
$
13,392
534
94
(59)
319
(555)
616
409
130
817
315
(810)
(449)
$
$
14,753
$
13,804
10,549
$
10,897
348
7
319
(555)
464
11,132
$
(3,621) $
122
390
315
(810)
(365)
10,549
(3,255)
The unfunded liability of $3.6 million and $3.3 million at December 31, 2017 and 2016, respectively, is recognized in the
consolidated balance sheet within other non-current liabilities. Net periodic benefit cost consists of the following (in thousands):
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized loss
Net periodic benefit cost
Year ended December 31,
2017
2016
2015
$
$
534
$
94
(155)
250
723
$
409
130
(147)
165
557
$
$
578
167
310
—
1,055
Assumptions used to determine the benefit obligations and components of the net periodic benefit cost at December 31,
2017 and 2016:
Discount rate
Expected return on plan assets
Rate of compensation increase
December 31,
2017
December 31,
2016
0.65%
1.40%
1.00%
0.65%
1.40%
1.00%
The Company considers the historical level of long-term returns and the current level of expected long-term returns for the
plan assets, as well as the current and expected allocation of assets when developing its expected long-term rate of return
on assets assumption. The assumptions used for the plan are based upon customary rates and practices for the location of
the Company.
The Company, for 2018, will be contributing per the terms of the agreement, and the expected contribution to the plan will
total approximately $0.6 million.
The following presents the benefit payments which are expected to be paid for the plan in each year indicated (in thousands):
2018
2019
2020
2021
2022
Thereafter
$
$
551
963
1,254
706
635
3,692
7,801
Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market
risk and providing adequate liquidity to meet immediate and future benefit payment requirements.
The assets of the plan are reinsured in their entirety with Swiss Life Ltd. (“Swiss Life”) within the framework of the corresponding
contracts with Swiss Life Collective BVG Foundation and Swiss Life Complementary Foundation. The assets are guaranteed
by the insurance company and pooled with the assets of other participating employers. The allocation of pension plan assets
by category in Swiss Life’s group life portfolio is as follows at December 31, 2017:
Certificates of deposit and cash and cash equivalents
Fixed income bonds and securities
Equities and investment funds
Real estate
Other investments
66%
8%
8%
16%
2%
100%
F-45
The plan assets are pooled with assets of other participating employers and are not separable; therefore the fair values of
the pension plan assets at December 31, 2017 and 2016 were considered Level 3.
Note N — Stockholders' Equity
Trust Common Shares
The Trust is authorized to issue 500,000,000 Trust common 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. In December 2016, the
Company completed an offering of 5,600,000 Trust common shares at an offering price of $18.65 per share. The net proceeds
to the Company, after deducting the underwriter's discount and offering costs, totaled approximately $99.4 million.
Trust Preferred Shares
Pursuant to the Trust agreement, 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 Interests. On June 28, 2017, the Trust issued 4,000,000 7.250%
Series A 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 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 Series A Preferred 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 declared and unpaid distribution to, but excluding, the redemption date, without
payment of any undeclared 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.
If a certain tax redemption event occurs prior to July 30, 2022, the Series A Preferred Shares may be redeemed at the
Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of such tax
redemption event, at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding, the redemption
date, without payment of any undeclared distributions. If a certain fundamental change related to the Series A Preferred
Shares or the Company occurs (whether before, on or after July 30, 2022), the Company will be required to repurchase the
Series A Preferred Shares at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding, the date
of purchase, without payment of any undeclared distributions. If (i) a fundamental change occurs and (ii) the Company does
not give notice prior to the 31st day following the fundamental change to repurchase all the outstanding Series A Preferred
Shares, the distribution rate per annum on the Series A Preferred Shares will increase by 5.00%, beginning on the 31st day
following such fundamental change. Notwithstanding any requirement that the Company repurchase all of the outstanding
Series A Preferred Shares, the increase in the distribution rate is the sole remedy to holders in the event the Company fails
to do so, and following any such increase, the Company will be under no obligation to repurchase any Series A Preferred
Shares.
Profit Allocation Interests
The Profit Allocation Interests represent the original equity interest in the Company. The holders of the Allocation Interests
(“Holders”), through Sostratus LLC, are entitled to receive distributions pursuant to a profit allocation formula upon the
occurrence of certain events. The distributions of the profit allocation is 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 dividends declared
on Allocation Interests to stockholders’ equity when they are approved by the Company’s board of directors.
F-46
The following is a summary of the profit allocation payments made to the Allocation Interest Holders during each of the year
ended December 31, 2017, 2016 and 2015:
Year ended December 31, 2017
•
•
The Company's board of directors approved and declared a profit allocation payment in the fourth quarter of 2016
to the Allocation Interest Holders of $13.4 million related to the FOX November Offering (refer to Note F -
"Investment"). This amount was recorded as "Due to related parties" in the accompanying balance sheet at December
31, 2016, and was paid in the first quarter of 2017.
$25.8 million paid in the second quarter of 2017 resulting from the sale of FOX shares in March 2017 (refer to Note
F - "Investment") which qualified as a Sale Event under the Company's LLC Agreement.
Year ended December 31, 2016
•
•
•
$8.6 million paid in the second quarter as a result of a Sale Event related to the sale of FOX shares in March 2016
(refer to "Note F - Investment");
$8.2 million paid in the third quarter as a result of the five year ownership holding period of our ACI business. The
payment is in respect of its positive contribution-based profit during the five years ended June 30, 2016;
$7.0 million paid in the fourth quarter as a result of a Sale Event related to the sale of FOX shares in August 2016
(refer to "Note F - Investment") and the sale of Tridien in September 2016 (refer to "Note D - Discontinued Operations").
Under the terms of the Company's LLC Agreement, the Company offset the profit allocation distribution resulting
from the FOX Sale Event by the negative profit allocation amount from the Tridien Sale Event, resulting in a net
distribution to the Allocation Member;
Year ended December 31, 2015
•
•
$14.6 million paid in the fourth quarter as a result of a Sale Event related to the sale of CamelBak in August 2015
and the sale of Tridien in October 2015 (refer to "Note D - Discontinued Operations"). Under the terms of the
Company's LLC Agreement, the Company offset the profit allocation distribution resulting from the CamelBak Sale
Event by the negative profit allocation amount related to the American Furniture Sale Event, resulting in a net
distribution to the Allocation Member.
$3.1 million paid in the fourth quarter as a result of a Holding Event for our five year ownership holding period of
our Ergobaby business. The payment is in respect of its positive contribution-based profit since our acquisition in
September of 2010.
Earnings per share
Basic and diluted earnings per share for the fiscal year ended December 31, 2017, 2016 and 2015 is calculated as follows:
Income (loss) from continuing operations attributable to common shares
of Holdings
Less: Effect of contribution based profit—Holding Event
Income (loss) from Holdings attributable to common shares
Income from discontinued operations attributable to Holdings
Less: Effect of contribution based profit
Income from discontinued operations of Holdings attributable to common
shares
Basic and diluted weighted average common shares of Holdings
outstanding
Basic and fully diluted income (loss) per common share attributable to
Holdings
Continuing operations
Discontinued operations
$
$
$
$
$
$
$
2017
2016
2015
(13,994) $
28,009
$
12,726
2,862
(26,720) $
25,147
$
(13,873)
2,804
(16,677)
340
$
2,898
$
157,980
—
—
—
340
$
2,898
$
157,980
59,900
54,591
54,300
(0.45) $
0.01
$
(0.44) $
0.46
0.05
0.51
$
$
$
(0.30)
2.91
2.61
F-47
Distributions
During the year ended December 31, 2017, the Company paid the following distributions:
Trust Common Shares
• On January 26, 2017, the Company paid a distribution of $0.36 per share to holders of record as of January 19,
2017. This distribution was declared on January 5, 2017.
• On April 27, 2017, the Company paid a distribution of $0.36 per share to holders of record as of April 20, 2017.
This distribution was declared on April 6, 2017.
• On July 27, 2017, the Company paid a distribution of $0.36 per share to holders of record as of July 20, 2017.
This distribution was declared on July 6, 2017.
• On October 26, 2017, the Company paid a distribution of $0.36 per share to holders of record as of October 19,
2017. This distribution was declared on October 5, 2017.
On January 25, 2018, the Company paid a distribution of $0.36 per share to holders of record as of January 18, 2018.
This distribution was declared on January 4, 2018.
During the year ended December 31, 2016, the Company paid the following distributions:
• On January 28, 2016, the Company paid a distribution of $0.36 per share to holders of record as of January 21,
2016. This distribution was declared on January 7, 2016.
• On April 28, 2016, the Company paid a distribution of $0.36 per share to holders of record as of April 22, 2016.
This distribution was declared on April 7, 2016.
• On July 28, 2016, the Company paid a distribution of $0.36 per share to holders of record as of July 21, 2016.
This distribution was declared on July 7, 2016.
• On October 27, 2016, the Company paid a distribution of $0.36 per share to holders of record as of October 20,
2016. This distribution was declared on October 6, 2016.
During the year ended December 31, 2015, the Company paid the following distributions:
• On January 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of January 22,
2015. This distribution was declared on January 8, 2015.
• On April 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of April 22, 2015.
This distribution was declared on April 9, 2015.
• On July 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of July 22, 2015.
This distribution was declared on July 9, 2015.
• On October 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of October 22,
2015. This distribution was declared on October 7, 2015.
Trust Preferred Shares
• On October 30, 2017, the Company paid a distribution of $0.61423611 per share on the Company’s Series A Preferred
Shares. The distribution on the Series A Preferred Shares covers the period from and including June 28, 2017, the
original issue date of the Series A Preferred Shares, up to, but excluding, October 30, 2017. This distribution was
declared on October 5, 2017 and was payable to holders of record of the Company's Series A Preferred Shares as
of October 15, 2017.
On January 30, 2018, the Company paid a distribution of $0.453125 per share on the Company’s Series A Preferred Shares.
This distribution was declared on January 4, 2018.
Note O — Noncontrolling Interest
Noncontrolling interest represents the portion of a majority-owned subsidiary’s net income and equity that is owned by
noncontrolling shareholders.
F-48
The following tables reflect the Company’s percentage ownership of its businesses, as of December 31, 2017, 2016 and
2015 and related noncontrolling interest balances as of December 31, 2017 and 2016:
5.11 Tactical
Crosman
Ergobaby
Liberty
Manitoba Harvest
ACI
Arnold
Clean Earth
Sterno
% Ownership (1)
December 31, 2017
% Ownership (1)
December 31, 2016
% Ownership (1)
December 31, 2015
Primary
Fully
Diluted
Primary
Fully
Diluted
Primary
Fully
Diluted
97.5
98.8
82.7
88.6
76.6
69.4
96.7
97.5
100.0
85.5
89.2
76.6
84.7
67.0
69.2
84.7
79.8
89.5
97.5
n/a
83.5
88.6
76.6
69.4
96.7
97.5
100.0
85.1
n/a
76.9
84.7
65.6
69.3
84.7
79.8
89.5
n/a
n/a
81.0
96.2
76.6
69.4
96.7
97.5
100.0
n/a
n/a
74.2
84.6
65.6
69.3
87.3
86.2
89.7
(1) The principal difference between primary and fully diluted percentages of our operating segments is due to stock option
issuances of operating segment stock to management of the respective business.
(in thousands)
5.11 Tactical
Crosman
Ergobaby
Liberty
Manitoba Harvest
ACI
Arnold
Clean Earth
Sterno
Allocation Interests
Noncontrolling Interest Balances
December 31,
2017
December 31,
2016
$
8,003
$
1,373
23,416
3,254
11,725
(5,850)
1,368
7,357
2,045
100
$
52,791
$
5,934
—
18,647
2,681
13,687
(11,220)
1,536
5,469
1,305
100
38,139
The Company's businesses had the following transactions with minority shareholders during the year ended
December 31, 2016:
ACI Recapitalization
During the second quarter of 2016, the Company completed a recapitalization at ACI whereby the Company entered into an
amendment to the intercompany debt agreement with ACI (the "ACI Loan Agreement"). The ACI loan agreement was
amended to provide for additional term loan borrowings of $61.0 million to fund a cash distribution to shareholders totaling
$60.1 million. Minority interest shareholders of Advanced Circuits, including certain members of management at Advanced
Circuits, received total distribution proceeds of $18.4 million. The Company used cash on hand to fund the distribution to
minority shareholders.
Liberty Recapitalization
During the first quarter of 2016, the Company completed a recapitalization at Liberty whereby the Company entered into an
amendment to the intercompany loan agreement with Liberty (the “Liberty Loan Agreement”). The Liberty Loan Agreement
was amended to (i) provide for term loan borrowings of $38.0 million and revolving credit facility borrowings of $5.0 million
to fund cash distributions totaling $35.3 million to its shareholders, including the Company, and (ii) extend the maturity dates
of the term loans and revolving credit facility. Liberty’s noncontrolling shareholders received approximately $5.3 million in
distributions as a result of the recapitalization. Immediately prior to the recapitalization, management exercised stock options
for 75,095 shares of Liberty common shares, resulting in net proceeds from stock options at Liberty of $3.8 million. Liberty
F-49
recognized $0.3 million in compensation expense related to the accelerated vesting of a portion of management's stock
options at the time of exercise. The Company then purchased $1.5 million in Liberty common shares from members of
Liberty management, resulting in Liberty's noncontrolling shareholders holding 11.4% of Liberty's outstanding shares
subsequent to the recapitalization. The purchase of the Liberty common stock from noncontrolling shareholders and issuance
of Liberty common stock related to the exercise of stock options by noncontrolling shareholders were at fair value and resulted
in no change in control of Liberty. The difference between the consideration paid for the noncontrolling interest and the
adjustment to the carrying amount of the Company's noncontrolling interest in Liberty was recognized in the Company's
equity. Subsequent to the purchase of Liberty common shares and the exercise of the options, the Company owns 88.6%
of Liberty on a primary basis and 84.7% on a fully diluted basis.
Ergobaby Share Issuance
In connection with the Ergobaby acquisition of Baby Tula in May 2016, Ergobaby issued shares of their stock valued at $8.2
million to the selling shareholders (refer to "Note C - Acquisition of Businesses" for the methodology used to determine the
value of the shares at issuance). Subsequent to the issuance of the shares, the Company's ownership interest in Ergobaby
was 77.9% on a primary basis and 71.2% on a fully diluted basis.
Ergobaby Share Repurchase
In June 2016, Ergobaby repurchased 77,425 shares of Ergobaby common stock from certain noncontrolling shareholders
for a total purchase price of $15.4 million. Ergobaby financed the repurchase of shares with an increase to the intercompany
debt facility with the Company. The difference between the consideration paid for the noncontrolling interest and the
adjustment to the carrying amount of the Company's noncontrolling interest in Ergobaby was recognized in the Company's
equity. Subsequent to the repurchase, the Company's ownership interest in Ergobaby was 83.9% on a primary basis and
76.2% on a fully diluted basis. The repurchased shares have been accounted for as treasury shares by Ergobaby.
Ergobaby Share Issuance and Share Repurchase
In December 2016, an Ergobaby employee exercised stock options resulting in the issuance of 10,989 shares of Ergobaby
common stock. Ergobaby then repurchased 6,204 of these shares from the employee for a total purchase price of $1.4
million. The difference between the consideration paid for the noncontrolling interest and the adjustment to the carrying
amount of the Company's noncontrolling interest in Ergobaby was recognized in the Company's equity. Subsequent to the
option exercise and repurchase, the Company's ownership interest in Ergobaby was 83.5% on a primary basis and 76.9%
on a fully diluted basis. The repurchased shares have been accounted for as treasury shares by Ergobaby.
Note P — Commitments and Contingencies
Leases
The Company and its subsidiaries lease office and manufacturing facilities, computer equipment and software under various
operating arrangements. Certain of the leases are subject to escalation clauses and renewal periods. The Company and its
subsidiaries recognize lease expense, including predetermined fixed escalations, on a straight-line basis over the initial term
of the lease including reasonably assured renewal periods from the time that the Company and its subsidiaries control the
leased property.
The future minimum rental commitments at December 31, 2017 under operating leases having an initial or remaining non-
cancelable term of one year or more are as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
$
17,857
14,005
12,540
11,327
9,595
41,518
$
106,842
The Company’s rent expense for the fiscal years ended December 31, 2017, 2016 and 2015 totaled $23.5 million, $15.9
million and $10.7 million, respectively.
F-50
Legal Proceedings
In the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings.
While the ultimate resolution of these matters has yet to be determined, the Company does not believe that any unfavorable
outcomes will have a material adverse effect on the Company’s consolidated financial position or results of operations.
Note Q — Supplemental Data
Supplemental Balance Sheet Data (in thousands):
Summary of accrued expenses:
Accrued payroll and fringes
Accrued taxes
Income taxes payable
Accrued interest
Accrued rebates
Warranty payable
Accrued inventory
Accrued transportation and disposal costs
Other accrued expenses
Total
Warranty liability:
Beginning balance
Accrual
Warranty payments
Other (1)
Ending balance
December 31,
2017
December 31,
2016
$
23,905
$
22,440
3,441
6,873
221
13,516
2,197
32,810
4,985
18,925
$
106,873
$
5,307
6,232
182
12,289
1,258
20,763
7,324
15,246
91,041
Year ended December 31,
2017
2016
1,258
$
1,259
1,982
(1,552)
509
252
(253)
—
2,197
$
1,258
$
$
(1) Represents warranty liabilities of acquired businesses.
Supplemental Statement of Operations Data (in thousands):
Other income (expense), net:
Foreign currency gain (loss)
Gain (loss) on sale of capital assets
Other income (expense)
December 31,
2017
December 31,
2016
December 31,
2015
$
$
3,268
$
(1,386) $
(2,561)
47
(681)
(1,249)
(284)
(138)
376
2,634
$
(2,919) $
(2,323)
Supplemental Cash Flow Statement Data (in thousands):
Interest paid
Taxes paid
December 31,
2017
December 31,
2016
December 31,
2015
$
$
27,754
19,326
$
$
22,840
15,324
$
$
21,180
6,494
F-51
Note R — Related Party Transactions
The Company has entered into the following related party transactions with its Manager, CGM:
• Management Services Agreement
•
•
• Cost reimbursement and fees
LLC Agreement
Integration Services Agreement
Management Services Agreement
The Company entered into a MSA with CGM effective May 16, 2006, as amended. The MSA provides for, among other
things, CGM to perform services for the Company in exchange for a management fee paid quarterly and equal to 0.5% of
the Company’s adjusted net assets, as defined in the MSA. The management fee is required to be paid prior to the payment
of any distributions to shareholders.
Pursuant to the MSA, CGM is entitled to enter into off-setting management service agreements with each of the operating
segments. The amount of the fee is negotiated between CGM and the operating management of each segment and is based
upon the value of the services to be provided. The fees paid directly to CGM by the segments offset on a dollar for dollar
basis the amount due CGM by the Company under the MSA.
For the year ended December 31, 2017, 2016 and 2015, the Company incurred the following management fees to CGM,
by entity (in thousands):
5.11
Crosman
Ergobaby
Liberty
Manitoba Harvest
Advanced Circuits
Arnold
Clean Earth
Sterno
Corporate
December 31,
2017
December 31,
2016
December 31,
2015
$
1,000
$
290
500
500
350
500
500
500
500
$
333
n/a
500
500
350
500
500
500
500
n/a
n/a
500
500
175
500
500
500
500
28,053
25,723
$
32,693
$
29,406
$
22,483
25,658
Not included in the table above are management fees paid to CGM by Tridien of $0.2 million and $0.4 million in the years
ended December 31, 2016 and 2015, respectively, and CamelBak of $0.3 million in the year ended December 31, 2015.
These amounts are included in income (loss) from discontinued operations on the consolidated statements of operations.
Approximately $7.8 million and $7.4 million of the management fees incurred were unpaid as of December 31, 2017 and
2016, respectively, and are reflected in Due to related party on the consolidated balance sheets.
LLC Agreement
The LLC agreement gives Holders the right to distributions pursuant to a profit allocation formula upon the occurrence of a
Sale Event or a Holding Event. The Holders are entitled to receive and as such can elect to receive the positive contribution-
based profit allocation payment for each of the business acquisitions during the 30-day period following the fifth anniversary
of the date upon which we acquired a controlling interest in that business (Holding Event) and upon the sale of the business
(Sale Event). Holders received $41.5 million in distributions related to Sale and Holding Events that occurred during 2017,
2016 and 2015. Refer to "Note N - Stockholders' Equity" for a description of the 2017, 2016 and 2015 profit allocation
payments.
Certain persons who are employees and partners of the Manager, including the Company’s Chief Executive Officer,
beneficially own (through Sostratus LLC) 60.4% of the Allocation Interests at December 31, 2017 and 2016, and 58.8% of
the Allocation Interests at December 31, 2015. Of the remaining 39.6% non-voting ownership of the Allocation Interests,
5.0% is held by CGI Diversified Holdings LP, 5.0% is held by the Chairman of the Company’s Board of Directors, and the
remaining 29.6% is held by the former founding partner of the Manager.
F-52
Integrations Services Agreements
Crosman, which was acquired in 2017, 5.11, which was acquired in 2016, and Manitoba, which was acquired in 2015, entered
into Integration Services Agreements ("ISA") with CGM. The ISA provides for CGM to provide services for new platform
acquisitions to, amongst other things, assist the management at the acquired entities in establishing a corporate governance
program, implement compliance and reporting requirements of the Sarbanes-Oxley Act and align the acquired entity's policies
and procedures with our other subsidiaries. Each ISA is for the twelve month period subsequent to the acquisition and is
payable quarterly. Manitoba Harvest paid CGM $1.0 million under the agreement ($0.5 million in integration service fees in
2015 and $0.5 million in 2016) and 5.11 Tactical paid CGM $3.5 million under the agreement ($1.2 million in integration
services fees in 2016 and $2.3 million in 2017). Crosman paid CGM $0.75 million in integration services fees during 2017
and will pay $0.75 million in integration services fees in 2018. During the year ended December 31, 2017, 2016 and 2015,
CGM received $3.1 million, $1.7 million, and $3.5 million, respectively, in total integration service fees.
Cost Reimbursement and Fees
The Company reimbursed its Manager, CGM, approximately $3.8 million, $3.8 million, and $3.5 million, principally for
occupancy and staffing costs incurred by CGM on the Company’s behalf during the years ended December 31, 2017, 2016
and 2015, respectively.
The Company and its businesses have the following significant related party transactions:
FOX
Investment in FOX - The Company purchased a controlling interest in FOX on January 4, 2008. On July 10, 2014, 5,750,000
shares of FOX common stock, held by certain FOX shareholders, including us, were sold in a secondary offering. As a
selling shareholder, we sold a total of 4,466,569 shares of FOX common stock. Upon completion of the offering, our ownership
in FOX decreased from approximately 53% to 41%, or 15,108,718 shares of FOX’s common stock. We recorded a gain of
$264.3 million in July 2014 in connection with the Fox deconsolidation. In March, August and November 2016, through three
additional secondary offerings and a share repurchase by FOX, the Company's ownership in the outstanding common stock
of FOX was further reduced to 14.0%. In March 2017, FOX closed on a secondary offering through which we sold our
remaining 5,108,718 shares in FOX for total net proceeds of $136.1 million, after the underwriter's discount of $8.9 million.
Subsequent to the sale of FOX shares in March 2017, we no longer hold an ownership interest in FOX. Refer to "Note F -
Investment" for additional information related to the Company's investment in FOX.
FOX Services Agreement - In September 2014, the Company and FOX entered into an agreement for the provision of
services to FOX for assistance in complying with the Sarbanes-Oxley Act of 2002, as amended (the “Services Agreement”).
The Services Agreement terminated on March 31, 2016. A statement of work was agreed to in connection with the Service
Agreement, which provided that the Company’s internal audit team would assist FOX with various tasks, including, but not
limited to, the development of internal control policies and procedures. Services provided in accordance with the Services
Agreement were billed on a time and materials basis. Fees paid for services provided in 2016 and 2015 were approximately
$72,000 and $135,000, respectively.
5.11
Related Party Vendor Purchases - 5.11 purchases inventory from a vendor who is a related party to 5.11 through one of the
executive officers of 5.11 via the executive's 40% ownership interest in the vendor. During the year ended December 31,
2016 (from the date of acquisition) 5.11 purchased approximately $2.3 million in inventory from the vendor.
Liberty
Liberty Recapitalization - Refer to "Note O - Noncontrolling Interest" for additional details with regards to the Liberty
recapitalization.
Related Party Vendor Purchases - Liberty purchases inventory raw materials from two vendors who are related parties to
Liberty through two of the executive officers of Liberty via the employment of family members at the vendors. During the
years ended December 31, 2017, 2016 and 2015, Liberty purchased approximately $2.1 million, $2.5 million and $3.3 million,
respectively, in raw materials from the two vendors.
Advanced Circuits
Advanced Circuits Recapitalization - Refer to "Note O - Noncontrolling Interest" for additional details with regards to the
Advanced Circuits recapitalization.
Clean Earth
In January 2018, Clean Earth purchased a permit and some tangible property consisting primarily of machinery and equipment
from an officer of the company for approximately $2.0 million.
F-53
Note S – Unaudited Quarterly Financial Data
The following table presents the unaudited quarterly financial data. This information has been prepared on a basis consistent
with that of the audited consolidated financial statements and all necessary material adjustments, consisting of normal
recurring accruals and adjustments, have been included to present fairly the unaudited quarterly financial data. The quarterly
results of operations for these periods are not necessarily indicative of future results of operations. Typically, the first quarter
of each fiscal year has the lower results than the remainder of the year, representing the Company's weakest quarter due
to seasonality at our businesses. The per share calculations for each of the quarters are based on the weighted average
number of shares for each period using the two class method, which requires companies to allocate participating securities
that have rights to earnings that otherwise would have been available only to common shareholders as a separate class of
securities in calculating earnings per share; therefore, the sum of the quarters will not equal to the full year per share amount.
(in thousands)
Total revenues
Gross profit
Operating income
Income (loss) from continuing operations
Gain on sale of discontinued operations, net of tax
Net income (loss) attributable to Holdings
Basic and fully diluted income (loss) per share
attributable to Holdings:
Continuing operations
Discontinued operations
Basic and fully diluted income (loss) per share
attributable to Holdings
$
$
$
December 31,
2017 (1)
September 30,
2017
June 30,
2017
March 31,
2017 (2)
$
348,199
$
323,957
$
307,581
$
289,992
125,931
11,956
44,131
—
117,725
14,477
8,356
—
109,720
12,183
2,260
—
94,333
(11,412)
(21,475)
340
41,002
$
7,706
$
888
$
(21,605)
0.53
$
0.10
$
(0.45) $
—
—
—
(0.61)
0.01
0.53
$
0.10
$
(0.45) $
(0.60)
(1) As a result of Tax Act, the Company recognized a tax benefit of $29.8 million in the fourth quarter, representing the effect of
the reduction in the U.S. federal corporate income tax rate from 35% to 21%, offset by the one-time transition tax liability of
our foreign subsidiaries. The Company also recognized impairment expense related to our Manitoba business of $8.5 million
in the fourth quarter of 2017.
(2) The Company recorded goodwill impairment expense of $8.9 million related to the Arnold business in the first quarter of
2017.
(in thousands)
Total revenues
Gross profit
Operating income
Income from continuing operations
Income from discontinued operations
Gain on sale of discontinued operation, net of tax
Net income attributable to Holdings
December 31,
2016 (1)
September 30,
2016 (2)
June 30,
2016
March 31,
2016
$
318,561
$
252,285
$
214,176
$
193,287
103,366
(10,867)
1,802
—
175
1,764
82,415
11,358
48,544
(455)
2,134
49,705
76,670
10,489
18,017
1,341
—
19,239
64,119
8,081
(14,614)
(413)
—
(16,023)
Basic and fully diluted income (loss) per share
attributable to Holdings:
Continuing operations
Discontinued operations
Basic and fully diluted income per share attributable to
Holdings
$
$
(0.14) $
—
0.72
$
0.03
(0.05) $
0.11
(0.31)
—
(0.14) $
0.75
$
0.06
$
(0.31)
(1) The quarter ended December 31, 2016 includes a full quarter of operating results from 5.11, which the Company acquired
on August 31, 2016, and reflects the goodwill impairment expense of our Arnold business of $16.0 million. The Company
F-54
recognized an additional $0.2 gain on the sale of Tridien in the fourth quarter related to the working capital settlement
with the buyer.
(2) During the three months ended September 30, 2016, the Company sold their Tridien operating segment for a net gain
on sale of approximately $1.5 million. The Company also purchased 5.11 Tactical for a purchase price of approximately
$408.2 million - refer to "Note C - Acquisition of Businesses".
Discontinued Operations
During the quarter ended September 30, 2016, the Company sold its Tridien operating segment and reclassified the historical
operations of Tridien to discontinued operations.
(in thousands)
Total revenue
Gross Profit
Operating income
Income from discontinued operations, net of tax
Note T - Subsequent Events
Acquisition of Foam Fabricators
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
N/a
N/a
N/a
N/a
$
15,978
$
15,212
$
14,760
3,223
967
(455)
2,821
1,107
1,341
2,142
(577)
(413)
In January 2018, the Company entered into an agreement to acquire Foam Fabricators, Inc. (“Foam Fabricators”) for a
purchase price of $247.5 million (excluding working capital and certain other adjustments upon closing). Headquartered in
Scottsdale, AZ, Foam Fabricators is a leading designer and manufacturer of custom molded protective foam solutions and
OEM components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP).
Founded in 1957, the Foam Fabricators operates 13 state-of-the-art molding and fabricating facilities across North America.
Foam Fabricators provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals,
health and wellness, automotive, and building products. For the trailing twelve months ended November 30, 2017, Foam
Fabricators reported net revenue of approximately $126 million. The acquisition of Foam Fabricators closed on February
15, 2018, with the Company funding the acquisition through a draw on the 2014 Revolving Credit Facility.
Acquisition of Rimports
In January 2018, our Sterno business entered into an agreement to acquire Rimports, Inc. (Rimports) for a purchase price
of approximately $145 million, excluding working capital and other adjustments upon closing, plus a potential earn-out of up
to $25 million based on future financial performance of Rimports. Rimports is a manufacturer and distributor of branded and
private label scented, wickless candle products used for home decor and fragrance. Headquartered in Provo, Utah, Rimports
offers an extensive line of ceramic wax warmers, scented wax cubes, essential oils and diffusers through the mass retail
channel. For the trailing twelve months ended November 30, 2017, Rimports reported net revenue of $155.4 million. The
acquisition of Rimports closed on February 26, 2018, with the Company funding the acquisition through a draw on the 2014
Revolving Credit Facility.
Recapitalization
In January 2018, the Company completed a recapitalization at Sterno whereby the Company entered into an amendment
to the intercompany loan agreement with Sterno (the "Sterno Loan Agreement"). The Sterno Loan Agreement was amended
to (i) provide for term loan borrowings of $56.8 million to fund a distribution to the Company, which owned 100% of the
outstanding equity of Sterno at the time of the recapitalization, and (ii) extend the maturity dates of the term loans. In
connection with the recapitalization, Sterno's management team exercised all of their vested stock options, which represented
58,000 shares of Sterno. The Company then used a portion of the distribution to repurchase the 58,000 shares from
management for a total purchase price of $6.0 million. In addition, Sterno issued new stock options to replace the exercised
option, thus maintaining the same percentage of fully diluted non-controlling interest that existed prior to the recapitalization.
F-55
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Sales allowance accounts - 2015
Sales allowance accounts - 2016
Sales allowance accounts - 2017
Valuation allowance for deferred tax assets - 2015
Valuation allowance for deferred tax assets - 2016
Valuation allowance for deferred tax assets - 2017
Additions
Balance at
beginning
of Year
Charge to costs
and expense
Other (1)
Deductions
Balance at
end of Year
$
$
$
$
$
$
3,756
3,445
5,511
2,776
1,308
7,256
$
$
$
$
$
$
3,164
4,775
15,612
1
2,266
625
$
$
$
$
$
$
15
2,105
1,164
$
$
$
— $
3,692
$
— $
3,490
4,814
12,292
1,469
10
1,969
$
$
$
$
$
$
3,445
5,511
9,995
1,308
7,256
5,912
(1) Represents opening allowance balances related to acquisitions made during the period indicated.
S-1
Exhibit
Number
2.1
2.2
2.3
2.4
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
3.15
4.1
INDEX TO EXHIBITS
Description
Stock and Note Purchase Agreement dated as of July 31, 2006, among Compass Group Diversified Holdings LLC, Compass
Group Investments, Inc. and Compass Medical Mattress Partners, LP (incorporated by reference to Exhibit 2.1 of the Form
8-K filed on August 1, 2006 (File No. 000-51937)).
Stock Purchase Agreement dated June 24, 2008, among Compass Group Diversified Holdings LLC and the other
shareholders party thereto, Compass Group Diversified Holdings LLC, as Sellers’ Representative, Aeroglide Holdings, Inc.
and Bühler AG (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on June 26, 2008 (File No. 000-51937)).
Stock Purchase Agreement, dated October 17, 2011, by and among Recruit Co., LTD. and RGF Staffing USA, Inc., as
Buyers, the shareholders of Staffmark Holdings, Inc., as Sellers, Staffmark Holdings, Inc. and Compass Group Diversified
Holdings LLC as Seller Representative (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on October 18, 2011
(File No. 001-34927)).
Stock Purchase Agreement dated May 1, 2012, among Candlelight Investment Holdings, Inc., Halo Holding Corporation,
Halo Lee Wayne, LLC and each of the holders of equity interests of Halo Lee Wayne, LLC listed on Exhibit A thereto
(incorporated by reference to Exhibit 2.1 of the Form 8-K filed on May 2, 2012(File No. 001-34927)).
Certificate of Trust of Compass Diversified Trust (incorporated by reference to Exhibit 3.1 of the Form S-1 filed on
December 14, 2005 (File No. 333-130326)).
Certificate of Amendment to Certificate of Trust of Compass Diversified Trust (incorporated by reference to Exhibit 3.1 of
the Form 8-K filed on September 13, 2007 (File No. 000-51937)).
Certificate of Formation of Compass Group Diversified Holdings LLC (incorporated by reference to Exhibit 3.3 of the Form
S-1 filed on December 14, 2005 (File No. 333-130326)).
Amended and Restated Trust Agreement of Compass Diversified Trust (incorporated by reference to Exhibit 3.5 of the
Amendment No. 4 to the Form S-1 filed on April 26, 2006 (File No. 333-130326)).
Amendment No. 1 to the Amended and Restated Trust Agreement, dated as of April 25, 2006, of Compass Diversified Trust
among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware Trustee,
and the Regular Trustees named therein (incorporated by reference to Exhibit 4.1 of the Form 8-K filed on May 29, 2007
(File No. 000-51937)).
Second Amendment to the Amended and Restated Trust Agreement, dated as of April 25, 2006, as amended on May 23,
2007, of Compass Diversified Trust among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York
(Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit 3.2 of the
Form 8-K filed on September 13, 2007 (File No. 000-51937)).
Third Amendment to the Amended and Restated Trust Agreement dated as of April 25, 2006, as amended on May 25, 2007
and September 14, 2007, of Compass Diversified Holdings among Compass Group Diversified Holdings LLC, as Sponsor,
The Bank of New York (Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by reference
to Exhibit 4.1 of the Form 8-K filed on December 21, 2007 (File No. 000-51937)).
Fourth Amendment dated as of November 1, 2010 to the Amended and Restated Trust Agreement, as amended effective
November 1, 2010, of Compass Diversified Holdings, originally effective as of April 25, 2006, by and among Compass
Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware Trustee, and the Regular
Trustees named therein (incorporated by reference to Exhibit 3.1 of the Form 10-Q filed on November 8, 2010 (File No.
001-34927)).
Second Amended and Restated Trust Agreement of the Trust (incorporated by reference to Exhibit 3.1 of the Form 8-K
filed on December 7, 2016 (File No. 001-34927)).
Second Amended and Restated Operating Agreement of Compass Group Diversified Holdings, LLC dated January 9, 2007
(incorporated by reference to Exhibit 10.2 of the Form 8-K filed on January 10, 2007 (File No. 000-51937)).
Third Amended and Restated Operating Agreement of Compass Group Diversified Holdings, LLC dated November 1, 2010
(incorporated by reference to Exhibit 3.2 of the Form 10-Q filed on November 8, 2010 (File No. 001-34927)).
Fourth Amended and Restated Operating Agreement of Compass Group Diversified Holdings LLC, dated January 1, 2012
(incorporated by reference to Exhibit 3.1 of the Form 10-Q filed on May 7, 2013 (File No. 001-34927)).
Fifth Amended and Restated Operating Agreement of the Company (incorporated by reference to Exhibit 3.2 of the Form
8-K filed on December 7, 2016 (File No. 001-34927)).
Compass Diversified Holdings Share Designation of Series A Preferred Shares (incorporated by reference to Exhibit 3.1
of the Form 8-K filed on June 28, 2017 (File No. 001-34927)).
Compass Group Diversified Holdings LLC Trust Interest Designation of Series A Trust Preferred Interests (incorporated
by reference to Exhibit 3.2 of the Form 8-K filed on June 28, 2017 (File No. 001-34927)).
Specimen Certificate evidencing a share of trust of Compass Diversified Holdings (incorporated by reference to Exhibit 4.1
of the Form S-3 filed on November 7, 2007 (File No. 333-147218)).
E-1
4.2
4.3
10.1
10.2
10.3†
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15†
10.16
10.17
10.18
10.19
Specimen LLC Interest Certificate evidencing an interest of Compass Group Diversified Holdings LLC (incorporated by
reference to Exhibit A of Exhibit 10.2 of the Form 8-K filed on January 10, 2007 (File No. 000-51937)).
Form of 7.250% Series A Preferred Share Certificate (incorporated by reference to Exhibit 4.1 of the Form 8-K filed
on June 28, 2017 (File No. 001-34927)).
Form of Registration Rights Agreement by and among Compass Group Diversified Holdings LLC, Compass Diversified
Trust and Certain Shareholders (incorporated by reference to Exhibit 10.3 of the Amendment No. 5 to the Form S-1 filed
on May 5, 2006 (File No. 333-130326)).
Form of Supplemental Put Agreement by and between Compass Group Management LLC and Compass Group Diversified
Holdings LLC (incorporated by reference to Exhibit 10.4 of the Amendment No. 4 to the Form S-1 filed on April 26, 2006
(File No. 333-130326)).
Amended and Restated Employment Agreement dated as of December 1, 2008 by and between James J. Bottiglieri and
Compass Group Management LLC (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on December 3, 2008
(File No. 000-51937)).
Form of Share Purchase Agreement by and between Compass Group Diversified Holdings LLC, Compass Diversified
Trust and CGI Diversified Holdings, LP (incorporated by reference to Exhibit 10.6 of the Amendment No. 5 to the Form
S-1 filed on May 5, 2006 (File No. 333-130326)).
Form of Share Purchase Agreement by and between Compass Group Diversified Holdings LLC, Compass Diversified
Trust and Pharos I LLC (incorporated by reference to Exhibit 10.7 of the Amendment No. 5 to the Form S-1 filed on May 5,
2006 (File No. 333-130326)).
Amended and Restated Management Services Agreement by and between Compass Group Diversified Holdings LLC,
and Compass Group Management LLC, dated as of December 20, 2011 and originally effective as of May 16, 2006
(incorporated by reference to Exhibit 10.06 of the Form 10-K filed on March 7, 2012 (File No. 001-34927)).
Registration Rights Agreement by and among Compass Group Diversified Holdings LLC, Compass Diversified Trust and
CGI Diversified Holdings, LP, dated as of April 3, 2007 (incorporated by reference to Exhibit 10.3 of the Amendment No.
1 to the Form S-1 filed on April 20, 2007 (File No. 333-141856)).
Share Purchase Agreement by and between Compass Group Diversified Holdings LLC, Compass Diversified Trust and
CGI Diversified Holdings, LP, dated as of April 3, 2007 (incorporated by reference to Exhibit 10.16 of the Amendment No.
1 to the Form S-1 filed on April 20, 2007 (File No. 333-141856)).
Subscription Agreement dated August 24, 2011, by and among Compass Group Diversified Holdings LLC, Compass
Diversified Holdings and CGI Magyar Holdings, LLC (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on
August 25, 2011(File No. 001-34927)).
Registration Rights Agreement dated August 24, 2011, by and among Compass Group Diversified Holdings LLC, Compass
Diversified Holdings and CGI Magyar Holdings, LLC (incorporated by reference to Exhibit 10.2 of the Form 8-K filed on
August 25, 2011(File No. 001-34927)).
Credit Agreement among Compass Group Diversified Holdings LLC, the financial institutions party thereto and Bank of
America, N.A., dated as of June 6, 2014 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on June 9, 2014
(File No. 001-34927)).
First Amendment to Credit Agreement dated June 29, 2015, by and among Compass Group Diversified Holdings LLC,
the Lenders signatory thereto, U.S. Bank National Association and Bank of America, N.A. (incorporated by reference to
Exhibit 10.1 of the Form 8-K filed on July 2, 2015 (File No. 001-34927)).
Second Amendment to Credit Agreement, dated December 15, 2015, by and among Compass Group Diversified
Holdings LLC, the Lenders signatory thereto and Bank of America, N.A. (incorporated by reference to Exhibit 10.13 of
the Form 10-K filed on February 29, 2016 (File No. 001-34927)).
Sixth Amended and Restated Management Service Agreement by and between Compass Group Diversified Holdings
LLC, and Compass Group Management LLC, dated as of September 30, 2014 and originally effective as of May 16, 2006
(incorporated by reference to Exhibit 10.1 of the Form 8-K filed on October 7, 2014 (File No. 001-34927)).
Employment Agreement dated July 11, 2013, between Compass Group Management LLC and Ryan J. Faulkingham
(incorporated by reference to Exhibit 10.1 of the Form 8-K filed on July 11, 2013 (File No. 001-34927)).
Stock Purchase Agreement dated as of July 24, 2015, by and among Vista Outdoor Inc., CBAC Holdings, LLC and
CamelBak Acquisition Corp. (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on July 27, 2015 (File No.
001-34927)).
Commitment Letter, dated August 1, 2016, from Bank of America, N.A. Merrill Lynch, Pierce, Fenner & Smith Incorporated
(incorporated by reference to Exhibit 10.1 of the Form 8-K filed on August 1, 2016 (File No. 001-34927)).
Third Amendment to the Credit Agreement, dated August 15, 2016, by and among Compass Group Diversified Holdings
LLC, the Lenders identified thereto and Bank of America, N.A., (incorporated by reference to Exhibit 10.1 of the Form 8-
K filed on August 19, 2016 (File No. 001-34927)).
First Incremental Facility Amendment, dated August 31, 2016, by and among Compass Diversified Holdings LLC, Bank
of America, N.A., and the lenders thereto (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on August 31,
2016 (File No. 001-34927)).
E-2
10.20
10.21
10.22*
12.1*
21.1*
23.1*
31.1*
31.2*
32.1*+
32.2*+
99.1
99.2
99.3
99.4
99.5
99.6
99.7
99.8
99.9
99.10
99.11
99.12
99.13
Fourth Amendment to Credit Agreement, dated March 16, 2017, by and among Compass Group Diversified Holdings LLC,
the Lenders identified thereto and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 of the Form 10-Q
filed on May 3, 2017 (File No. 001-34927)).
First Refinancing Amendment to the Credit Agreement, dated October 25, 2017, among Compass Group Diversified
Holdings LLC, the Refinancing Lenders and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 of the
Form 10-Q filed on November 8, 2017 (File No. 001-34927)).
Fifth Amendment to Credit Agreement, dated February 14, 2017, by and among Compass Group Diversified Holdings
LLC, the Lenders identified thereto and Bank of America, N.A.
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Distributions
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm with respect to the Registrant's consolidated financial
statements
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Registrant
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Registrant
Section 1350 Certification of Chief Executive Officer of Registrant
Section 1350 Certification of Chief Financial Officer of Registrant
Note Purchase and Sale Agreement dated as of July 31, 2006 among Compass Group Diversified Holdings LLC,
Compass Group Investments, Inc. and Compass Medical Mattress Partners, LP (incorporated by reference to Exhibit
99.1 of the Form 8-K filed on August 1, 2006 (File No. 000-51937)).
Share Purchase Agreement dated January 4, 2008, among Fox Factory Holding Corp., Fox Factory, Inc. and Robert C.
Fox, Jr. (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on January 8, 2008 (File No. 000-51937)).
Stock Purchase Agreement dated May 8, 2008, among Mitsui Chemicals, Inc., Silvue Technologies Group, Inc., the
stockholders of Silvue Technologies Group, Inc. and the holders of Options listed on the signature pages thereto, and
Compass Group Management LLC, as the Stockholders Representative (incorporated by reference to Exhibit 99.1 of
the Form 8-K filed on May 9, 2008 (File No. 000-51937)).
Stock Purchase Agreement dated March 31, 2010 by and among Gable 5, Inc., Liberty Safe and Security Products,
LLC and Liberty Safe Holding Corporation (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on April 1,
2010 (File No. 000-51937)).
Stock Purchase Agreement dated September 16, 2010, by and among ERGO Baby Intermediate Holding Corporation,
The ERGO Baby Carrier, Inc., Karin A. Frost, in her individual capacity and as Trustee of the Revocable Trust of Karin
A. Frost dated February 22, 2008 and as Trustee of the Karin A. Frost 2009 Qualified Annuity Trust u/a/d 12/21/2009
(incorporated by reference to Exhibit 99.1 of the Form 8-K filed on September 17, 2010 (File No. 000-51937)).
Securities Purchase Agreement dated August 24, 2011, by and among CBK Holdings, LLC, CamelBak Products, LLC,
CamelBak Acquisition Corp., for purposes of Section 6.15 and Articles 10 only, Compass Group Diversified Holdings
LLC, and for purposes of Section 6.13 and Article 10 only, IPC/CamelBak LLC (incorporated by reference to Exhibit
99.1 of the Form 8-K filed on August 25, 2011 (File No. 001-34927)).
Stock Purchase Agreement dated as of March 5, 2012, by and among Arnold Magnetic Technologies Holdings
Corporation, Arnold Magnetic Technologies, LLC and AMT Acquisition Corp. (incorporated by reference to Exhibit 99.1
of the Form 8-K filed on March 6, 2012 (File No. 001-34927)).
Stock Purchase Agreement dated as of August 7, 2014, by and among CEHI Acquisition Corporation, Clean Earth
Holdings, Inc., the holders of stock and options in Clean Earth Holdings, Inc. and Littlejohn Fund III, L.P. (incorporated
by reference to Exhibit 99.1 of the Form 8-K filed on August 8, 2014 (File No. 001-34927)).
Membership Interest Purchase Agreement dated as of October 10, 2014, by and among Candle Lamp Holdings, LLC,
Candle Lamp Company, LLC and Sternocandlelamp Holdings, Inc. (incorporated by reference to Exhibit 99.1 of the
Form 8-K filed October 14, 2014 (File No. 001-34927)).
Stock Purchase Agreement dated as of June 5, 2015, by and among Fresh Hemp Foods Ltd., 1037270 B.C. Ltd.,
1037269 B.C. Ltd., the Stockholders’ Representative and the Signing Stockholders (incorporated by reference to
Exhibit 99.1 of the Form 8-K filed on June 8, 2015 (File No. 001-34927)).
Agreement and Plan of Merger, dated as of July 29, 2016, by and among 5.11 ABR Corp., 5.11 ABR Merger Corp., 5.11
Acquisition Corp., TA Associates Management, L.P., as the agent and attorney in fact of the holders of stock and
options in 5.11 Acquisition Corp. (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on August 1, 2016
(File No. 001-34927)).
Equity Purchase Agreement, dated June 2, 2017, by and among Bullseye Holding Company LLC, Bullseye Acquisition
Corporation, CBCP Acquisition Corp. and Wellspring Capital Partners IV, L.P. (incorporated by reference to Exhibit 99.1
of the Form 8-K filed on June 5, 2017 (File No. 001-34927)).
Stock Purchase Agreement, dated January 18, 2018, between Warren F. Florkiewicz and FFI Compass, Inc. (incorporated
(File No. 001-34927)).
by
filed on January 18, 2018
to Exhibit 99.1 of
the Form 8-K
reference
E-3
99.14
Stock Purchase Agreement, dated January 23, 2018, by and among Rimports Inc., Jeffery W. Palmer, 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, Todd Knapp and Signe Knapp, and Sterno
Products, LLC (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on January 24, 2018 (File No. 001-34927)).
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
*
†
+
Filed herewith.
Denotes management contracts and compensatory plans or arrangements.
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management's
Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the
certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed”
for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
E-4
Exhibit 12.1
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Distributions
The following table sets forth our ratio of earnings to combined fixed charges and preferred share distributions for
each of the periods indicated:
Fiscal Years Ended December 31,
2017
2016
2015
2014
2013
(in thousands, except ratio computation)
Earnings:
Income from continuing operations
$
33,272
$
53,749
$
8,991
$ 270,077
$
71,052
Interest
27,623
24,651
25,924
27,060
19,378
Earnings available for fixed charges
$
60,895
$
78,400
$
34,915
$ 297,137
$
90,430
Fixed charges:
Interest
Preferred share distributions
Total fixed charges
$
27,623
$
24,651
$
25,924
$
27,060
$
19,378
2,457
30,080
—
—
—
—
24,651
25,924
27,060
19,378
Ratio of earnings to combined fixed charges and
preferred share distributions (1)
2.2
3.2
1.3
11.0
4.7
List of Subsidiaries at February 12, 2018:
State or Country of Organization:
Exhibit 21.1
5.11 ABR Corp.
5.11 Acquisition Corp.
5.11 TA, Inc.
5.11, Inc.
5.11 International Co?peratief U.A.
5.11 Tactical de Mexico, S. de R.L. de C.V.
5.11 Panama S. de R.L
AlphaOne Holdings Ltd.
5.11 Sourcing, Limited
Beyond Clothing, LLC
Compass AC Holdings, Inc.
Advanced Circuits, Inc.
Circuit Board Express LLC
Advanced Circuits, Inc.
AC Universal Circuits, LLC
EBP Lifestyle Brands Holdings, Inc.
Ergobaby Europe GmBH
Ergobaby France SARL
ERGO Baby Holding Corporation
ERGO Baby Intermediate Holding Corporation
The ERGO Baby Carrier, Inc.
Orbit Baby, Inc.
EBP Lifestyle Brands UK Limited
EBP Lifestyle Brands Canada, Inc.
Baby Tula Poland f/k/a MLV 99SP. Z.O.O
New Baby Tula LLC
Gable 5, Inc.
Liberty Safe Holding Corporation
Liberty Safe & Security Products, Inc.
AMTAC Holdings, LLC
AMT Acquisition Corp.
Arnold Magnetic Technologies Holdings Corporation
Arnold Magnetic Technologies Corporation
Flexmag Industries, Inc.
The Arnold Engineering Co.
Magnetic Technologies Corporation
Precision Magnetics LLC
Arnold Investments, Ltd.
Arnold Magnetic Technologies UK Limited
Arnold Magnetic Technologies UK Partnership, LP
Arnold Magnetic Technologies UK, LLC
Arnold Magnetic Technologies AG
Precision Magnetics (Ganzhou) Co. Ltd.
Arnold Magnetic Technologies Limited
Swift Levick Magnets
Arnold Magnetics Asia Ltd.
Jade Magnetics Limited
.
Delaware
Delaware
Delaware
California
Netherlands
Mexico
Panama
British Virgin Islands
Hong Kong
Delaware
Delaware
Colorado
Delaware
Arizona
Delaware
Delaware
Germany
France
Delaware
Delaware
Hawaii
Delaware
United Kingdom
Canada, British Columbia
Poland
Delaware
Delaware
Delaware
Utah
Delaware
Delaware
Delaware
Delaware
Ohio
Illinois
Delaware
Delaware
Delaware
United Kingdom
United Kingdom
Delaware
Switzerland
China (owns 50%)
United Kingdom (owns one ordinary
share)
United Kingdom
Hong Kong
British Virgin Islands
Arnold Asia LLC
Arnold Magnetics (Shenzhen) Co., Ltd.
CEHI Acquisition Corporation
Clean Earth Holdings, Inc.
Allied Environmental Group, LLC
CEI Holding Corporation
Clean Earth Dredging Technologies, LLC
Clean Earth of Cateret, LLC
Clean Earth of New Castle, LLC
Clean Earth of North Jersey, Inc.
Clean Earth of Southeast Pennsylvania, LLC
Clean Earth of Williamsport, LLC
Clean Earth, Inc.
Advanced Remediation & Disposal Technologies Of Delaware, LLC
Clean Earth Environmental Services, Inc.
Clean Earth of Georgia, LLC
Clean Earth of Greater Washington, LLC
Clean Earth of Maryland, LLC
Clean Earth of Philadelphia, LLC
Clean Earth Of Southern Florida, LLC
Clean Rock Properties, Ltd.
Clean Earth of West Virginia, Inc.
AES Asset Acquisition Corporation
Clean Earth of Alabama, Inc.
Real Property Acquisition LLC
AERC Acquisition Corporation
MKC Acquisition Corporation
Delaware
China
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
New Jersey
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Maryland
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
SternoCandleLamp Holdings, Inc.
Sterno Products, LLC
The Sterno Group LLC
Sterno Home Inc. f/k/a NII Northern International Inc.
NII Northern International Services Inc.
NII Northern International Trading (Ningbo) Co. Ltd.
Sterno Delivery, LLC
SevenOKs, Inc.
FHF Holdings Ltd.
Fresh Hemp Foods Ltd. d/b/a Manitoba Harvest
Manitoba Harvest USA, LLC
CBCP Products, LLC
CBCP Acquisition Corp.
Bullseye Acquisition Corp.
Crosman Corporation
Crosman Europe Aps
FFI Compass, Inc.
Delaware
Delaware
Delaware
Canada, British Columbia
Canada, British Columbia
China
Delaware
Delaware
Canada, British Columbia
Canada, British Columbia
Delaware
Delaware
Delaware
Delaware
Delaware
Denmark
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We have issued our reports dated February 28, 2018, with respect to the consolidated financial statements and internal
control over financial reporting included in the Annual Report of Compass Diversified Holdings and subsidiaries on
Form 10-K for the year ended December 31, 2017. We hereby consent to the incorporation by reference of said reports
in the Registration Statements of Compass Diversified Holdings and subsidiaries on Forms S-3 (File No. 333-147217
and File No. 333-214949).
/s/ GRANT THORNTON LLP
New York, New York
February 28, 2018
Exhibit 31.1
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Alan B. Offenberg, certify that:
1.
I have reviewed this annual report on Form 10-K of Compass Diversified Holdings and Compass Group Diversified
Holdings LLC;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in exchange act rules 13a-15(f) and 15d -15(f) ) for the registrant and have: for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: 2/28/2018
/s/ Alan B. Offenberg
Alan B. Offenberg
Chief Executive Officer
Compass Group Diversified Holdings LLC
Exhibit 31.2
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ryan J. Faulkingham, certify that:
1.
I have reviewed this annual report on Form 10-K of Compass Diversified Holdings and Compass Group Diversified
Holdings LLC;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in exchange act rules 13a-15(f) and 15d -15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: 2/28/2018
/s/ Ryan J. Faulkingham
Ryan J. Faulkingham
Regular Trustee of Compass Diversified Holdings
Chief Financial Officer
Compass Group Diversified Holdings LLC
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Compass Diversified Holdings and Compass Group Diversified Holdings LLC Annual Report on Form
10-K for the period ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, Alan B. Offenberg, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: 2/28/2018
By:
/s/ Alan B. Offenberg
Alan B. Offenberg
Chief Executive Officer
Compass Group Diversified Holdings LLC
The foregoing certification is being furnished to accompany Compass Diversified Holdings and Compass Group Diversified
Holdings LLC’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “Report”) solely pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed as part of the Report or as a separate disclosure
document and shall not be deemed incorporated by reference into any other filing of Compass Diversified Holdings and
Compass Group Diversified Holdings LLC that incorporates the Report by reference. A signed original of this written
certification required by Section 906 has been provided to Compass Diversified Holdings and Compass Group Diversified
Holdings LLC and will be retained by Compass Diversified Holdings and Compass Group Diversified Holdings LLC and
furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Compass Diversified Holdings and Compass Group Diversified Holdings LLC Annual Report on Form
10-K for the period ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), I, Ryan J. Faulkingham, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: 2/28/2018
By:
/s/ Ryan J. Faulkingham
Ryan J. Faulkingham
Regular Trustee of Compass Diversified Holdings
Chief Financial Officer
Compass Group Diversified Holdings LLC
The foregoing certification is being furnished to accompany Compass Diversified Holdings and Compass Group Diversified
Holdings LLC’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “Report”) solely pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed as part of the Report or as a separate disclosure
document and shall not be deemed incorporated by reference into any other filing of Compass Diversified Holdings and
Compass Group Diversified Holdings that incorporates the Report by reference. A signed original of this written certification
required by Section 906 has been provided to Compass Diversified Holdings and Compass Group Diversified Holdings LLC
and will be retained by Compass Diversified Holdings and Compass Group Diversified Holdings LLC and furnished to the
Securities and Exchange Commission or its staff upon request.
COMPANY HEADQUARTERS
301 RIVERSIDE AVENUE, SECOND FLOOR
WESTPORT, CT 06880, (203) 221-1703
INDEPENDENT AUDITORS
GRANT THORNTON LLP, NEW YORK, NY
COMMON STOCK LISTING
NYSE TICKER: CODI
TRANSFER AGENT
BROADRIDGE CORPORATE ISSUER SOLUTIONS
P.O. BOX 1342
BRENTWOOD, NY 11717
INVESTOR RELATIONS CONTACT
LEON BERMAN, THE IGB GROUP
(212) 477-8438, LBERMAN@IGBIR.COM
ANNUAL MEETING OF SHAREHOLDERS
MAY 30, 2018, 9:00 A.M., EST
301 RIVERSIDE AVENUE, SECOND FLOOR
WESTPORT, CT 06880
WEBSITE
WWW.COMPASSDIVERSIFIEDHOLDINGS.COM
2017
1
2
2017
HIGHLIGHTS
LETTER TO
SHAREHOLDERS
4
14
OUR
COMPANIES
CODI
GOVERNANCE
16
17
CODI
INFORMATION
FINANCIAL
REVIEW
COMPASS DIVERSIFIED HOLDINGS
301 RIVERSIDE AVENUE • SECOND FLOOR • WESTPORT, CT 06880
COMPASSDIVERSIFIEDHOLDINGS.COM
CODI 2017