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3Dear Fellow Shareowners,We are pleased to report that in 2018 Compass Diversified Holdings continued to execute on its proven business model of acquiring, managing and opportunistically divesting middle-market companies in both the branded consumer and niche industrial markets. This strategy, typically employed by private equity investors, is not unique, however, we believe our permanent capital structure allows us to deliver superior performance. Unlike many of those with whom we compete for transactions, our structure enables us to be both patient with respect to acquisitions and opportunistic divestitures and allows us to take a longer-term perspective in building our businesses through strategic investments in people, processes and infrastructure.Since going public in 2006, we have been strong advocates for rewarding our shareholders by returning capital through a consistent and stable distribution. Our portfolio of leading, high free cash flow-generating middle market companies allowed us to pay $1.44 per share in distributions in 2018, marking the seventh consecutive year of this distribution amount. Since our initial public offering, we have cumulatively returned $17.52 per share, or roughly 117% of the initial public offering price of our common shares. Importantly we have never reduced our distribution, including during the financial crisis of 2008 and 2009.2018 marked one of our busiest years and has positioned us to continue to deliver superior value creation for our shareholders for years to come. During the year we acquired one platform company, refinanced our balance sheet and, subsequent to year end, sold one of our subsidiary companies, as follows:• In February we acquired Foam Fabricators for a purchase price of $247.5 million. 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). For the full year of 2018, as if we had acquired the company on January 1, 2017, it produced $29.4 million of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and expended $2.2 million on capital expenditures, generating $27.2 million of what we term operating cash flow, or OCF. The purchase price represented a 9.1x OCF multiple, which we believe to be highly attractive in this market for a company with the competitive positioning and cash flow profile of Foam Fabricators. The acquisition was treated as an asset purchase for tax purposes, creating significant tax asset value for our shareholders.• In March we issued $100 million of Series B Perpetual Preferred Stock. Our Series B Perpetual Preferred Stock pays a cumulative distribution rate of 7.875% and floats ten years from the issuance date.• In April we refinanced our balance sheet, relaxing our financial covenants, increasing our availability and extending our maturities. Our new debt facility includes a $600 million revolving credit facility, a $500 million Term B loan and a new $400 million 8% fixed rate unsecured bond. With the inclusion of the unsecured bond, the weighted average interest rate on our loans increased, however, we increased our available debt capital by approximately $375 million and relaxed our maximum total leverage covenant from 3.5x (with a temporary step up to 4.25x) to 5.0x, providing us with an almost 50% increase in our total leverage covenant. This refinancing, along with the issuance of the Series B Perpetual Preferred Stock, has materially lowered our cost of capital and we believe will provide significant benefits to our shareholders for years to come.• In February of 2019, we closed on the divestiture of Manitoba Harvest for up to Cd $419 million to Tilray Corporation. For 2018, Manitoba Harvest generated Cd $7.1 million of EBITDA and expended Cd $0.9 million on capital expenditures, producing Cd $6.2 million of OCF. This sale price equates to an OCF multiple greater than 65x. The first round of proceeds from the sale were used to repay borrowings on our revolving line of credit. Not only did the sale of Manitoba Harvest produce a significant gain for our shareholders, it also deleveraged our balance sheet and, we believe, lowered our financial risk profile. This sale is expected to be Cash Flow neutral, or slightly Cash Flow positive, for 2019.Throughout 2018, we continued to work diligently to create value in our subsidiary companies, consummating five add-on acquisitions and investing significant resources into our 5.11 subsidiary. 2018 marked our most active year ever for add-on acquisitions. With the M&A markets continuing to exhibit strong pricing trends for large scale opportunities, we 4
of inventory in the supply chain. In early 2018, one of Ergobaby’s largest domestic customers sought bankruptcy relief under Chapter 7 and liquidated its assets. Also in 2018, Ergobaby’s largest distributor significantly reduced its inventory position, causing sales to temporarily decline. We believe the supply chain reduction was a temporary headwind and as a result we maintained Ergobaby’s operating cost structure, causing margins to drop substantially. Despite a difficult 2018, we expect our branded consumer companies as a whole will produce earnings growth in 2019.Our niche industrial businesses continued to perform above our expectations in 2018. On a pro forma basis, as if we acquired our acquisitions as of January 1, 2017, our niche industrial businesses generated $1.0 billion in revenue in 2018, up 10.6% from 2017. Our pro forma adjusted EBITDA increased by 9.4% to $185 million. In 2018, all five of our niche industrial businesses produced revenue and EBITDA growth over 2017 with our Advanced Circuits, Arnold and Clean Earth subsidiaries posting double digit EBITDA growth. Our niche industrial businesses remain extremely well positioned and we expect continued growth in 2019.The dynamics within the middle market have remained consistent for several years as competition among potential acquirers and high prices for assets persisted in 2018. 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. In light of these challenges, we maintained our disciplined and patient approach, consummating acquisitions only when we saw value for our shareholders. We purchased Foam Fabricators in February, and our subsidiary companies consummated five add-on acquisitions. With asset prices remaining elevated we will continue to focus on add-on opportunities. We believe these typically smaller transactions can be completed at favorable valuations and can exceed our weighted average cost of capital, which will drive incremental shareholder value creation. We will also continue to consider opportunistic divestitures of our subsidiary companies.In early 2019, we divested our Manitoba Harvest subsidiary at a very attractive valuation for our shareholders. The Manitoba Harvest acquisition was highly successful for us and we would like to thank our management team and employees at Manitoba Harvest and wish them great success in their future endeavors as part of Tilray Corporation.With the divestiture of Manitoba Harvest in early 2019, we begin the year with a strong balance sheet and ample liquidity. The initial proceeds from the divestiture were used to repay our revolving line of credit, and we anticipate using the future proceeds to further repay our revolving line of credit. Once we receive all of the proceeds from the Manitoba Harvest sale, we anticipate in excess of $550 million in availability, representing close to the highest liquidity level in our history.We are confident that our diversified group of subsidiary companies are poised for strong performance in 2019, 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 Compass Diversified Holdings’ 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 thankful for the support and trust of our shareowners. It is our privilege to work on your behalf.Very Truly Yours,Elias J. Sabo Ryan J. Faulkingham Chief Executive Officer Chief Financial Officer Compass Diversified Holdings, LLC Compass Diversified Holdings, LLC5 6
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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, 2018
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")
Series B Preferred Shares representing Series B Trust
Preferred Interest in Compass Diversified Holdings ("Series B
Preferred Shares")
Name of Each Exchange on Which Registered
New York Stock Exchange
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 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, 2018 was $878,535,519 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 22, 2019.
Certain information in the registrant’s definitive proxy statement to be filed with the Commission relating to the registrant’s 2019
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, 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
Form 10-K Summary
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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.
Item 16.
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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 "2014 Credit Facility" refer to the credit agreement, as amended, entered into on June 14, 2014 with a
group of lenders led by Bank of America N.A. as administrative agent, as amended from time to time, which
provides for a Revolving Credit Facility and a Term Loan;
the "2018 Credit Facility" refer to the amended and restated credit agreement entered into on April 18, 2018
among the Company, the Lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto.
the "2018 Revolving Credit Facility" refers to the $600 million in revolving loans, swing line loans and letters
of credit provided by the 2018 Credit Facility that matures in 2023;
the "2018 Term Loan" refer to the $500 million term loan provided by the 2018 Credit Facility that matures in
June 2021;
the “LLC Agreement” refer to the fifth amended and restated operating agreement of the Company dated as
of December 6, 2016;
“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 49.0% 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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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.
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In terms of the businesses in which we have a controlling interest as of December 31, 2018, 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
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, 2018:
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 88.7% 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 81.9% of the outstanding stock of Ergobaby on a primary basis and 76.4% 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 85.2% on a fully diluted basis.
Manitoba Harvest
Fresh Hemp Foods Ltd. ("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 68.1% on a fully diluted
basis.
Velocity Outdoor
Velocity Outdoor Inc. ("Velocity Outdoor" or "Velocity") (formerly Crosman Corp.) is a leading designer, manufacturer,
and marketer of airguns, archery products, laser aiming devices and related accessories. Velocity Outdoor offers its
products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin and CenterPoint brands that are
available through national retail chains, mass merchants, dealer and distributor networks. The airgun product category
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consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity Outdoor'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, lasers for firearms, and airsoft
products. We made loans to, and purchased a controlling interest in, Velocity Outdoor on June 2, 2017 for
approximately $150.4 million. In September 2018, Velocity acquired Ravin Crossbows LLC ("Ravin" or "Ravin
Crossbows"), a manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-
end segment of the crossbow market and has developed significant intellectual property related to the advancement
of crossbow technology. Velocity Outdoor is headquartered in Bloomfield, New York. We currently own 99.2% of the
outstanding stock of Velocity Outdoor on a primary basis and 91.0% 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 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 Corp. ("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 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. Arnold has expanded globally and built strong
relationships with our customers worldwide. Arnold is the largest and, we believe, the most technically advanced
U.S. manufacturer of engineered magnetic systems. Arnold is headquartered in Rochester, New York. 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 79.4% 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 utilities, infrastructure, chemicals,
aerospace and defense, non-public/ private development, medical, 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.
Foam Fabricators
Foam Fabricators Inc. ("Foam Fabricators"), headquartered in Scottsdale, Arizona, is a designer and manufacturer
of custom molded protective foam solutions and OEM components made from expanded polystyrene (EPS) and other
expanded polymers. Foam Fabricators provides products to a variety of end-markets, including appliances and
electronics, pharmaceuticals, health and wellness, automotive, building products and others. Foam Fabricators’
molded foam solutions offer shock and vibration protection, surface protection, temperature control, resistance to
water absorption and vapor transmission and other protective properties critical for shipping small, delicate items,
heavy equipment or temperature-sensitive goods. Foam Fabricators operates 13 molding and fabricating facilities
across North America, creating a geographic footprint of strategically located manufacturing plants to efficiently serve
national customer accounts. We acquired Foam Fabricators on February 15, 2018 for a purchase price of
approximately $253.4 million. We currently own 100.0% of the outstanding stock of Foam Fabricators on a primary
basis and 91.5% on a fully diluted basis.
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Sterno
The Sterno Group LLC ("Sterno"), headquartered in Corona, California, is the parent company of Sterno Products,
LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and Rimports, LLC. Sterno is a leading manufacturer
and marketer of of portable food warming fuels for the hospitality and consumer markets, flameless candles and
house and garden lighting for the home decor market, and wickless candle products used for home decor and fragrance
systems. We made loans to, and purchased all of the equity interests in, Sterno on October 10, 2014 for approximately
$160.0 million. 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, and in February 2018, Sterno acquired Rimports, Inc. ("Rimports"), which is a
manufacturer and distributor of branded and private label scented wax cubes and warmer products used for home
decor and fragrance systems. We currently own 100.0% of the outstanding stock of Sterno on a primary basis and
88.9% 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.
2018 Highlights and Recent Events
2018 Acquisitions
Acquisition of Foam Fabricators
On February 15, 2018, the Company, through our wholly owned subsidiary FFI Compass, Inc., acquired all of the
issued and outstanding capital stock of Foam Fabricators, Inc., a Delaware corporation (“Foam Fabricators”), for a
purchase price of approximately $253.4 million. 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
and expanded polypropylene. Founded in 1957 and headquartered in Scottsdale, Arizona, it operates 13 molding
and fabricating facilities across North America and provides products to a variety of end-markets, including appliances
and electronics, pharmaceuticals, health and wellness, automotive, building products and others.
Acquisition of Rimports
On February 26, 2018, our Sterno subsidiary acquired all of the issued and outstanding capital stock of Rimports,
Inc., a Utah corporation, pursuant to a Stock Purchase Agreement, dated January 23, 2018. Sterno purchased a
100% controlling interest in Rimports. Headquartered in Provo, Utah, Rimports is a manufacturer and distributor of
branded and private label scented wickless candle products used for home décor and fragrance. Rimports offers an
extensive line of wax warmers, scented wax cubes, essential oils and diffusers, and other home fragrance systems,
through the mass retailer channel. The purchase price, net of transaction costs, was approximately $154.4 million.
The purchase price of Rimports includes a potential earn-out of up to $25 million contingent on the attainment of
certain future performance criteria of Rimports. Sterno funded the acquisition through their intercompany credit facility
with the Company.
Acquisition of ESMI
On May 23, 2018, Clean Earth acquired all of the outstanding capital stock of Environmental Soil Management, Inc.
(“ESMI”), located in Fort Edward, New York and Loudon, New Hampshire. The acquisition provided Clean Earth the
opportunity to geographically expand their soil and hazardous waste solutions in the New York and New England
market. The purchase price was approximately $31.0 million.
Acquisition of Ravin Crossbows
On September 4, 2018, Velocity Outdoor (formerly "Crosman Corp.") acquired all of the outstanding membership
interests in Ravin for a purchase price of approximately $98.0 million, net of transaction costs, plus a potential earn-
out of up to $25.0 million based on gross profit levels as of December 31, 2018. Headquartered in Superior, Wisconsin,
Ravin Crossbows is a leading designer, manufacturer and innovator of crossbows and accessories. Ravin primarily
focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related
to the advancement of crossbow technology. The acquisition of Ravin positions Velocity Outdoor to more fully capitalize
on the sizeable crossbow market, further diversify its customer base and take advantage of the product and market
expertise inside of Ravin.
8
Senior Notes and 2018 Credit Facility
On April 18, 2018, we consummated the issuance and sale of $400 million aggregate principal amount of our 8.000%
Senior Notes due 2026 (the “Notes” or "Senior Notes") offered pursuant to a private offering. We used the net proceeds
from the sale of the Notes to repay debt under our existing credit facilities in connection with a concurrent refinancing
of our 2014 Credit Facility. The Notes will bear interest at the rate of 8.000% per annum and will mature on May 1,
2026. Interest on the Notes is payable in cash on May 1st and November 1st of each year, beginning on November
1, 2018. The Notes are general senior unsecured obligations and are not guaranteed by our subsidiaries.
Concurrent with the issuance of the Notes, we entered into an Amended and Restated Credit Agreement (the "2018
Credit Facility") to amend and restate the 2014 Credit Facility, originally dated as of June 6, 2014 (as previously
amended) among the Company, the lenders from time to time party thereto (the “Lenders”), and Bank of America,
N.A., as Administrative Agent. The 2018 Credit Facility provides for (i) revolving loans, swing line loans and letters
of credit (the “2018 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million, and (ii) a $500
million term loan (the “2018 Term Loan”). The 2018 Term Loan was issued at an original issuance discount of 99.75%.
We used the proceeds from the 2018 Credit Facility and the proceeds from the Notes offering to pay all amounts
outstanding under our existing credit agreement and to pay the fees, original issue discount and expenses incurred
in connection with the 2018 Credit Facility and Notes.
Trust Preferred Share Issuance
On March 13, 2018, the Trust issued 4,000,000 7.875% Series B Preferred Shares (the "Series B Preferred Shares")
for gross proceeds of $100.0 million, or $96.5 million net of underwriters' discount and issuance costs. Distributions
on the Series B Preferred Shares will be payable quarterly in arrears, when and as declared by the Company's board
of directors on January 30, April 30, July 30, and October 30 of each year, beginning on July 30, 2018. Distributions
on the Series B Preferred Shares are cumulative.
2018 Distributions
Common shares - For the 2018 fiscal year we declared distributions to our common shareholders totaling $1.44 per
share.
Preferred shares - For the 2018 fiscal year we declared distributions to our preferred shareholders totaling $1.8125
per share on our Series A Preferred Shares and $1.724375 per share on our Series B Preferred Shares.
Subsequent Events
Manitoba Harvest
On February 19, 2019, we entered into a definitive agreement (the "Agreement") with Tilray, Inc. ("Tilray") and a
wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, Inc., through Tilray Subco, all
of the issued and outstanding securities of Manitoba Harvest for total consideration of up to C$419 million. Subject
to certain customary adjustments, the shareholders of Manitoba Harvest, including the Company, may receive the
following from Tilray as consideration for their shares of Manitoba Harvest: (i) C$150 million in cash to the holders of
preferred shares of Manitoba Harvest and the holders of common shares of Manitoba Harvest (“Common Holders”)
and C$127.5 million in shares of class 2 Common Stock of Tilray (“Common Stock”) to the Common Holders on the
closing date of the sale (the “Closing Date Consideration”), (ii) C$50 million in cash and C$42.5 million in Common
Stock to the Common Holders on the date that is six months after the closing date of the Arrangement (the “Deferred
Consideration”) and (iii) C$49 million in Common Stock to the Common Holders, which amount may be reduced,
potentially to zero, if Manitoba Harvest fails to attain certain levels of U.S. branded gross sales of edible or topical
products containing broad spectrum hemp extracts or cannabidiols prior to December 31, 2019. The cash portion of
the Closing Date Consideration will be reduced by the amount of the net indebtedness of Manitoba Harvest on the
closing date and transaction expenses expected to be approximately $5 million. The Common Stock consideration
is expected to be issued in reliance on the exemption from the registration requirements of the U.S. Securities Act
and pursuant to exemptions from applicable securities laws of any state of the United States, such that any shares
of Common Stock received by the Common Holders will be freely tradeable. The sale of Manitoba Harvest will occur
pursuant to a plan of arrangement under the Business Operations Act (British Columbia). The completion of the plan
of arrangement is subject to approval by the British Columbia Supreme Court. The sale is expected to close as soon
as practicable following receipt of court approval.
9
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
2018 and future years, the Trust will continue to file a Form 1065 and issue Schedule K-1 to shareholders. For 2018,
we delivered the Schedule K-1 to shareholders within the same time frame as we delivered the schedule to
shareholders for the 2017 and 2016 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, as well as other filings required by the SEC. 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.
10
Organizational Structure (1)
1)
2)
3)
4)
5)
The percentage holdings shown in respect to the trust reflect the ownership of the Trust common shares as of December 31,
2018.
Our non-affiliated holders of common shares own approximately 84.0% of the Trust common shares and CGI Maygar Holdings,
LLC owns approximately 13.4% of the Trust common shares and is our single largest holder. Path Spirit Limited is the ultimate
controlling person of CGI Maygar LLC. Mr. Sabo, 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.
49.0% 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 partners of the Manager, are non-managing members.
Mr. Sabo 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. 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.
11
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:
•
•
•
•
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:
•
recruiting and retaining talented managers to operate our businesses using structured incentive compensation
programs, including non-controlling equity ownership, tailored to each business;
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•
•
•
•
•
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
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;
•
•
•
•
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:
•
•
•
•
•
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:
•
is an established North American based company;
• maintains a significant market share in defensible industry niche (i.e., has a “reason to exist”);
•
•
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:
13
•
•
•
•
•
•
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.
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 Factory Holding Corp. ("FOX") subsidiary through an initial public offering and secondary
issuances from August 2013 through March 2017. We sold our Manitoba Harvest Business in February 2019 and
anticipate recording a gain on sale during the first quarter of 2019.
Investment in FOX
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
14
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 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
Credit Facility
In April 2018, we entered into the 2018 Credit Facility to amend and restate the 2014 Credit Facility, originally dated
as of June 6, 2014. The 2018 Credit Facility provides for (i) revolving loans, swing line loans and letters of credit up
15
to a maximum aggregate amount of $600 million (the “2018 Revolving Loan Commitment”), and (ii) a $500 million term
loan.
At December 31, 2018, we had $496.3 million outstanding on the 2018 Term Loan and $228.0 million outstanding on
our 2018 Revolving Credit Facility. All amounts outstanding under the 2018 Revolving Credit Facility will become due
on April 18, 2023, which is the maturity date of loans advanced under the 2018 Revolving Credit Facility and the
termination date of the revolving loan commitment. The 2018 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 $250 million subject to certain restrictions and conditions.
The 2018 Credit Facility provides for letters of credit under the 2018 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, 2018, we had outstanding letters of credit totaling
approximately $0.3 million. The borrowing availability under the 2018 Revolving Credit Facility at December 31, 2018
was approximately $371.7 million.
The 2018 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans
to, its consolidated subsidiaries. (See "Note H - Debt" to the consolidated financial statements for more detail regarding
our 2018 Credit Facility).
Senior Notes
On April 18, 2018, we consummated the issuance and sale of $400 million aggregate principal amount of our Senior
Notes offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the
Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. We used the net proceeds from
the sale of the Notes to repay debt under our existing credit facilities in connection with a concurrent refinancing
transaction described above. The Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the
“Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes will bear interest at
the rate of 8.000% per annum and will mature on May 1, 2026. Interest on the Notes is payable in cash on May 1st
and November 1st of each year, beginning on November 1, 2018. The Notes are general senior unsecured obligations
of the Company and are not guaranteed by our subsidiaries.
We intend to finance future acquisitions through our 2018 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.
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, 2018, 2017 and 2016, and
the total assets of each of our businesses as a percentage of the consolidated total as of December 31, 2018 and
2017.
16
Year ended December 31,
Year ended December 31,
Year ended December 31,
2018
2017
2016
Net Revenue
2018
2017
Operating Income (1)
2016
Branded Consumer:
5.11
Ergobaby
Liberty Safe
Manitoba Harvest
Velocity Outdoor
Niche Industrial:
Advanced Circuits
Arnold Magnetics
Clean Earth
Foam Fabricators
Sterno
Corporate
20.6%
24.4%
5.4%
4.9%
4.0%
7.8%
8.1%
7.2%
4.4%
6.2%
11.2%
10.6%
10.6%
3.2 %
(10.5)%
(17.8)%
9.4 %
4.8 %
36.1 %
30.0 %
13.9 %
23.2 %
6.1%
(1.4)%
(13.7)%
0.6 %
n/a
4.0 %
1.9 %
n/a
42.6%
50.3%
38.5%
20.0 %
27.7 %
36.0 %
5.5%
7.0%
6.9%
8.3%
15.8%
16.6%
6.7%
22.5%
57.4%
—
n/a
17.8%
49.7%
—
8.8%
21.5 %
34.7 %
39.8 %
11.1%
19.3%
6.1 %
(8.4)%
(22.6)%
11.8 %
17.7 %
13.9 %
n/a
9.0 %
n/a
n/a
22.4%
61.5%
31.7 %
28.2 %
32.9 %
80.0 %
72.3 %
64.0 %
—
—
—
—
2018
2017
Total Assets
19.8%
7.2%
3.0%
5.5%
12.3%
47.8%
3.4%
4.6%
17.2%
10.6%
15.9%
51.8%
0.4%
26.1%
9.8%
4.0%
7.8%
10.9%
58.6%
4.4%
6.0%
19.4%
n/a
11.2%
41.0%
0.5%
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.
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.
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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.
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
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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 forty-five 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 under-penetrated 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.
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 2018, 5.11 operated forty-
five company-owned retail locations in twenty-two states.
For the year ended December 31, 2018, professional channel sales accounted for approximately 64% of total sales;
approximately 1% of total sales were in the form of DTA sales. The consumer channel accounted for approximately
35% of total sales.
5.11’s top 10 customers comprised approximately 21%, 26% and 27% of total sales in the years ended December 31,
2018, 2017 and 2016, 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.
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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 $17.3 million and $26.4 million at December 31, 2018 and 2017, 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 ended
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, 2018, 5.11 employed a total of 629 non-unionized, full-time employees, 47 independent contractors,
and 132 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.
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 today sells over 1 million a 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 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.
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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 2018, Ergobaby entered into the stroller category with 2 new models. The first product launched was a full-size
option called the 180 Reversible Stroller. This was followed later in the year by a premium compact option, the Metro
Compact City Stroller.
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 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 (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 $85.7 million, $96.0 million and $84.0 million in the years ended
21
December 31, 2018, 2017, and 2016, respectively, and represented approximately 89%, 88% and 81%, of total sales
in 2018, 2017, and 2016, respectively.
Within the baby carrier accessories category, the Infant Insert is the largest sales component of the accessory category.
Accessory sales were $6.7 million, $8.6 million, and $10.5 million, in 2018, 2017, and 2016, respectively, and
represented approximately 7.0% in 2018, 8.4% in 2017 and 10% in 2016, 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 style 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.
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 has historically
derived approximately 60% 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 and has become the baby carrier industry leader with the launch of the 4-Position 360 baby carrier. In addition
to expanding into new product carriers like swaddling and nursing pillows, in 2018, Ergobaby entered the stroller
category by introducing a new premium compact stroller (Metro Compact City Stroller) and a full-size stroller (180
Reversible Stroller).
22
Customers and Distribution Channels
Ergobaby primarily sells its products through brick-and-mortar retailers, national chain stores, online retailers and
distributors. 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 employs 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 $11.9 million and $9.2 million in firm backlog orders at December 31, 2018 and 2017,
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 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 2018, 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 and Poland 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
2018. Baby Tula sourced its carrier, accessories and blanket products from Poland, Vietnam and India, with purchases
from these locations accounted for approximately 11% 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 24 patents (including allowances) and 17 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.
23
Employees
As of December 31, 2018, Ergobaby employed 171 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 30-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 manufacturers. This investment in production capacity makes Liberty Safe one of 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 2018, with competition
24
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 previously completely sourced from an Asian manufacturer, on its new production line. In 2018, only 4% of
safes (excluding handgun 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
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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 $0.2 million in 2018,
$0.5 million in 2017, and $0.3 million in 2016.
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 several new safe sizes.
In 2018, Liberty introduced a new flat pin design (patent pending) in all of its large safes. This new design provides a
much higher level of security against pry-attacks.
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 improvement retailers. As of December 31, 2018, 2017 and 2016, Liberty Safe had 20, 16
and 13 Non-Dealer account customers, respectively, that are estimated to have accounted for approximately 40%,
46% and 50% 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, 2018, 2017 and 2016, there were 405, 406 and 392 Dealers that accounted for
60%, 54% and 50% of net sales, respectively.
Liberty Safe’s two largest customers accounted for approximately 29.5%, 32.6% and 36.5% of net sales in 2018, 2017
and 2016, respectively.
Seasonality
Liberty Safe typically experiences its lowest earnings in the second quarter due to lower demand for safes at the onset
of summer.
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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 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 or Winchester.
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 45% 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.
Liberty purchased approximately 18 million pounds of steel in 2018 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 $6.0 million and $6.2 million in firm backlog orders at December 31, 2018 and 2017,
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.
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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, 2018, Liberty Safe had 344 full-time employees and 6 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 16,500 retail stores across the United States and Canada. Manitoba Harvest’s
hemp-based, all-natural product lineup includes hemp hearts, protein powder, hemp oil, hemp milk substitute, 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, and we sold Manitoba Harvest subsequent
to year-end in the first quarter of 2019.
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”) AA+ 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 presence in retail channels, particularly grocery channels and e-commerce, 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 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
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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., until
recently there have been legal restrictions against cultivation of hemp or the processing of live seeds. As a result,
U.S. marketers of hemp-based products were required to import essentially all 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.
Further, the U.S. Farm Bill passed December 2018 fully legalized the cultivation and sale of industrial hemp at the
federal level, effective January 1, 2019.
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 QYR Food and Beverages Research Center estimated hemp-based food and
personal care revenue for the United States and Canada at just under USD $372 million in 2017.
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.
Manitoba Harvest 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 12 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 72% of Manitoba Harvest’s gross revenues in 2018.
Hemp Protein Powder - Manitoba Harvest offers a variety of plant-based proteins that serve a multitude of culinary
and dietary needs including HempYeah! Plant Protein Blends in three flavors, HempYeah! Max Protein, Hemp Yeah!
Balanced Protein + Fiber, and HempYeah! Max Fiber in three flavors. Manitoba Harvest protein powders are plant-
based products that are great complements to fruit smoothies, added to yogurt, hot cereal, or incorporated into baking
products. 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 15% of Manitoba Harvest’s gross revenues
in 2018.
Hemp Oil, Hemp Bliss and Other Products - Manitoba Harvest’s other products include Hemp Oil, in both liquid and
soft-gel formats, and Hemp Bliss, a 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 13% of Manitoba Harvest's gross revenues in 2018.
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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. 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 is working to drive awareness with consumers
on multiple fronts. 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 digital
media, coupons, in-store displays, and product demos at key retailers in the United States and Canada. 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.
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 continues to invest in its sales
capabilities to improve access and engagement with key retail accounts in order to capitalize on consumer demand
for healthy eating.
Continued innovation and new product development - In 2018, the company introduced a new line of plant protein
blends under the newly created HempYeah! Brand. In addition, all hemp protein powders were renovated under the
HempYeah! Brand with clearer consumer positing and updated packaging. 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.
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Expanded ingredient business - With the acquisition of HOCI in 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 $0.6 million, $0.7 million and $0.3 million, respectively, on research and development in 2018,
2017, and 2016. In 2018, hemp seeds, oils and protein powders received GRAS (Generally Regarded As Safe) status
from the FDA.
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 40% of total sales in 2018, 36% of total sales
in 2017, and approximately 47% of total sales during 2016. In 2018, approximately 69% of Manitoba Harvest's gross
sales were to customers in the United States and approximately 28% were to customers in Canada. The remaining
3% were primarily to customers in a broad range of international locations. In 2017, approximately 57% of Manitoba
Harvest's gross sales were to customers in the United Sates and approximately 38% of gross sales were to customers
within Canada. The remaining 5% were primarily to customers in a broad range of international locations.
Sales and Marketing
Manitoba Harvest grows sales within existing retail partners by educating and engaging potential consumers 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.
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.
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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”) AA+ 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 130 conventional and organic hemp
growers in Western Canada and the province of Quebec, and 5 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 facilities. 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 two hemp manufacturing facilities in the province of Manitoba can produce up to 65 million pounds of
hemp seed annually. The Winnipeg facility is 25,700 square feet and the St. Agathe facility is 37,000 square feet.
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, 2018, Manitoba Harvest employed approximately 157 persons. None of Manitoba Harvest's
employees are subject to collective bargaining agreements. Manitoba Harvest believes its relationship with its
employees is good.
Velocity Outdoor
Overview
Velocity Outdoor, headquartered in Bloomfield, New York, is a leading designer, manufacturer, and marketer of airguns,
archery products, laser aiming devices and related accessories. We acquired a majority interest in Velocity Outdoor
for a net purchase price of $150.4 million in June 2017. Velocity Outdoor offers its products under the highly recognizable
Crosman, Benjamin, LaserMax, Ravin and CenterPoint brands that are available through national retail chains, mass
merchants, dealer and distributor networks. Airguns historically represent Velocity Outdoor's largest product category.
The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and
cases. Velocity Outdoor'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, lasers
for firearms, and airsoft products. In September 2018, Velocity acquired Ravin Crossbows, a manufacturer and
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innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market
and has developed significant intellectual property related to the advancement of crossbow technology.
History of Velocity Outdoor
Velocity was founded in 1923 as Crosman Rifle Company and was one of the first manufacturers of recreational airguns
in the United States. Velocity Outdoor acquired Visible Impact Target Company in 1991 and Benjamin Sheridan
Corporation in 1992. Benjamin was, and continues to be, a dominant U.S. producer 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, Velocity expanded its offerings outside the traditional airgun category with the debut of its new optics division,
CenterPoint Precision Optics. In 2008, Velocity 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, Velocity debuted
its CenterPoint line of crossbows and the Benjamin Pioneer Airbow, the first ever mass-produced air powered archery
device and with the 2018 acquisition of Ravin Crossbows, Velocity expanded their archery product line into the higher-
end segment of the crossbow market. In 2017, Velocity acquired the commercial product line of LaserMax, a leading
designer and manufacturer of gun-mounted laser aiming devices.
Today, Velocity Outdoor is an international designer, manufacturer and marketer of Crosman and Benjamin airguns
including related ammunition and accessories, archery products including the Ravin and CenterPoint crossbows, airsoft
rifles, pistols, and ammunition, laser aiming devices, and precision optics.
Industry
Velocity Outdoor 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
Velocity 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. Velocity'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 Velocity's largest product category. The airgun product line consists of air rifles, air pistols and a
range of accessories including targets, holsters and cases. Velocity's airguns are designed to be multi-purpose, multi-
occasion products, for use in recreational plinking and target shooting, pest control, and hunting. Velocity 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, Velocity rounds out its offering with mid-level products produced under an
exclusive licensing agreement with Remington for its Remington, Marlin, DPMS, and Bushmaster brands.
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Archery Products
Velocity re-entered the archery market in 2016 with a product line anchored by the CenterPoint crossbow and the first-
of-its-kind Pioneer Airbow. 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, Velocity also introduced the Pioneer Airbow. 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. Velocity acquired Ravin Crossbows in 2018, further expanding
its product line in the archery market. Ravin Crossbows is a leading designer, manufacturer and innovator of crossbows
and accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed
significant intellectual property related to the advancement of crossbow technology.
Consumables
Velocity'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.
Velocity 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.
Optics
Launched in 2006, Velocity'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, Velocity 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 enables Velocity to reach a wider range
of new customers across retail channels.
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. Velocity 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.
Competitive Conditions
Airguns
Velocity'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. Velocity'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, Killer Instinct, 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 Ravin product line has a higher price point and falls within the "best" segment for crossbows,
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competing with the higher end Tenpoint crossbows. Ravin entered the market in 2017 and has since become the
number one selling brand as measured by retail dollars.
Business Strategies
Continued Innovation in Existing Product Categories
Velocity 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 - Building on the Silencing Barrel Device (SBD) technology, Velocity is introducing a line of multi-shot
break-barrel models that feature a 10 shot clip that advances automatically. Velocity is also enjoying success with
licensed products under the Remington, DPMS, and Bushmaster brands.
Archery - On the heels of the successful 2016 launch of the CenterPoint crossbow line,Velocity 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. Ravin recently introduced two new crossbow models
that offer the same speed and accuracy as the current products in a lighter and shorter profile.
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, following the launch of the grip activated GripSense lasers in 2017, the company has introduced a
universal rail mounted laser featuring the same activation technology.
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 Velocity's existing distribution network and brand strength.
Further Penetration of Existing Customer Accounts
Management has identified several strategies for further penetrating its existing customer accounts. First, Velocity has
identified opportunities to leverage its existing relationships with retailers to drive expanded SKU offerings across
categories. Additionally, management believes the company can expand the CenterPoint brand into the dealer network
due to the acquisition of Ravin. Furthermore, management believes that the company is well positioned to grow as its
brick-and-mortar customers adapt to a changing retail landscape. Velocity 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 Pyramyd Air.
Consolidation Platform
With a well-developed global supply chain, refined manufacturing capabilities, sophisticated management systems
infrastructure, and extensive network of relevant relationships, Velocity 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 Velocity strengthen and expand its product offering and address
new market segments.
International Growth
Velocity 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
Velocity 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 underperforming SKUs are regularly culled. This intentional focus on constant innovation and
35
consumer feedback has helped Velocity establish a portfolio of highly-regarded brands across several product
categories.
Customers
Velocity 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 four largest
customers represent 44% of gross sales in 2018. Three represent the major sales channels; mass merchant, e-
commerce, and regional retail, while the fourth represents the Junior Reserves Officers Training Corps (JROTC)
contract award.
Seasonality
Velocity typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday seasons,
respectively.
Sales and Marketing
Velocity'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.
Velocity 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. Velocity 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.
Velocity maintains an internal sales team responsible for covering the vast majority of its customer relationships, or
approximately 90% of total sales. Furthermore, Velocity 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 Velocity-employed account executives who work
through local distributors in order to ensure that products conform to local regulatory standards.
Velocity had a backlog of $3.5 million and $12.1 million, respectively, at December 31, 2018 and 2017.
Manufacturing and Distribution Channels
Velocity's product manufacturing is based on a dual strategy of in-house manufacturing and strategic alliances with
select sub-contractors and vendors. Velocity conducts its domestic manufacturing operations in two locations. The
first is 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. The second is an 85,000 square foot leased facility in Superior,
Wisconsin. 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
Velocity Outdoor currentlyholds a global portfolio of more than 100 registered trademarks and a global patent portfolio
of more than 50 issued patents with many more pending. Management considers its patent holdings, 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
36
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.
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
Velocity had 333 employees at December 31, 2018. Velocity’s labor force is non-union. Management believes that
Velocity has an excellent relationship with its employees.
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
37
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 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 2018.
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
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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
(1) As a percentage of gross sales, exclusive of sale discounts.
Competitive Strengths
Year Ended December 31,
2018
2017
2016
18.9%
33.0%
45.4%
2.7%
20.4%
33.0%
44.8%
1.8%
21.8%
31.8%
45.2%
1.2%
100.0%
100.0%
100.0%
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, 2018, 2017 and 2016, 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.
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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. 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.
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, 2018, 2017 and 2016:
40
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
2017
2016
2018
25%
3%
21%
2%
16%
1%
1%
12%
7%
12%
24%
5%
24%
3%
15%
1%
1%
10%
8%
9%
22%
4%
21%
4%
12%
2%
1%
17%
12%
5%
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 2018, 2017 and 2016 were delivered within five days (not including
long-lead orders). In a typical year, no single customer represents more than 3% 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, 2018 and 2017.
Competition
There are currently an estimated 165 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 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
41
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 23%, 21% and 19% of
net sales for each of the fiscal years ended December 31, 2018, 2017 and 2016, 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 for seven of the last ten years.
Employees
As of December 31, 2018, Advanced Circuits employed 474 persons. None of Advanced Circuits’ employees are
subject to collective bargaining agreements. Advanced Circuits believes its relationship with its employees is good.
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 leads the way in our chosen industries with
new materials and solutions that empower our customers to develop next generation technologies. Arnold is the largest
42
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, mainly used for rotating electrical machinery such as motor and generators.
Industries include aerospace and defense, energy exploration, industrial, medical and motorsport.
• Precision Thin Metals - Produces thin and ultra-thin alloys that improve the power density electrical systems
such as motors, generators, and transformers along with thin foils for other applications such as electromagnetic
shielding, lightweight structures, and implantable structures. Industries include aerospace and defense, energy
exploration, industrial, medical, and motorsport.
• Flexmag™ - The highest quality flexible magnetic sheet and strip, Flexmag products not only are magnetic
but their processing capabilities allow for loading of a variety of materials into their flexible sheet products.
Industries include industrial, medical, defense, marketing, and automotive.
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 machined metal components, 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, lightweight structures, shielding, and composite structures. They have the unique
processing capability to roll foils as thin as 2.5 microns while providing critical heat treatment maintaining competitive
material properties. Once completed the product is coated if necessary and is slit to the application width.
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). Other applications include
Electromagnetic or Radio Frequency Shielding for high end electronics.
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 74% 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 and defense, oil and gas exploration, energy recovery systems, power dense
medical equipment, and under the hood automotive
• Sealed pump couplings
• Beam focusing assemblies such as traveling wave tubes
• Oil & Gas exploration 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, 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
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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 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
• Electromagnetic and Radio Frequency Shielding
•
•
Lightweight 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 18% 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
• Electromagnetic and Radio Frequency Shielding
• 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
45
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 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, lightweight 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
high speed, high power 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 electric submersible pumps, oil well shutoff valves, down-hole logging while
46
drilling tooling, 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. Its Precision
Thin Metals business unit is providing a specialty alloy for advanced breast cancer treatment. They also provide
precision titanium used for implantable devices.
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.
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 with extensive 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, 2018, 2017 and 2016:
Industry Sector
Aerospace and Defense
General Industrial
Advertising specialties
Motorsport/ automotive
Reprographic
Oil and Gas
Energy
Medical
All Other Sectors Combined
Total
Customer Distribution
2018
2017
2016
31%
26%
12%
11%
6%
5%
4%
3%
2%
25%
28%
13%
13%
7%
4%
4%
3%
3%
28%
24%
13%
12%
11%
2%
3%
3%
4%
100%
100%
100%
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Arnold has a large and diverse, blue-chip customer base. Sales to Arnold’s top ten customers were 26% of total sales
for the year ended December 31, 2018, 24% of total sales for the year ended December 31, 2017, and 29% of total
sales for the year ended December 31, 2016. No customer represented greater that 10% of Arnold’s net revenues in
2018.
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.
Arnold had firm backlog orders totaling approximately $48.3 million and $43.7 million, respectively, at December 31,
2018 and 2017.
Competition
Management believes the following companies represent Arnold’s top competitors:
• Vacuumschmelze Gruner
• Dexter Magnetic Technologies
• Electron Energy Corp
• Magnum Magnetics Corporation
• 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
48
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 employed approximately 702 hourly and salaried employees located
throughout North America, Europe and Asia at December 31, 2018. 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 71 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.
Clean Earth
Overview
Headquartered in Hatboro, Pennsylvania, Clean Earth provides 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 multiple end markets such as utilities, infrastructure, chemicals, aerospace and defense,
non-public/ private development, medical, 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 infrastructure projects, commercial
redevelopment or daily landfill cover and capping where the materials will be sent after they are treated. Clean Earth
operates 29 permitted facilities in the Eastern United States. Revenues from the environmental processing 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 hazardous waste, dredged material, coal ash and hazardous wastewater.
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 and hazardous waste 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 New Hampshire to Florida, and with its
recent acquisitions, Clean Earth has expanded its footprint of permitted facilities to Kentucky, West Virginia, Alabama,
California, Virginia, Georgia, New York, Michigan, New Hampshire and North Carolina.
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
contaminated materials treatment 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.
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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.
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 materials 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.
In addition to hazardous waste generated by industrial activity, improper handling and disposal of hazardous materials
and waste, accidents, spills, and leaks 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 2015, according to the EPA. These wastes come primarily from three
sources, routine business, increasingly expanding waste regulations and Superfund sites.
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.
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 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.
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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 hazardous waste water 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.
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
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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, 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 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 utilities,
infrastructure and industrial industries.
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 is a significant
number of hazardous waste generators in the U.S. that are located in New York and New Jersey and Clean Earth
operates one of the two commercial RCRA Part B permitted TSDFs in the New York metro area. Clean Earth is currently
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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, Morgantown, WV, Glencoe, AL,
Doraville, GA and Charlotte, NC.
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), California (acquired),
Virginia (acquired), New Hampshire (acquired), upstate New York (acquired), Pennsylvania (acquired), and North
Carolina (acquired) and Michigan (acquired).
The market for waste management services is highly fragmented, with many companies operating a single facility.
Accordingly, there are many 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 2018, 2017 and 2016, the top 10 customers accounted for approximately 27%, 29% and 27% of net sales, respectively.
While Clean Earth works with certain customers that have recurring needs for disposal and recycling solutions, its
revenue per customer changes frequently.
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.
Hazardous waste treatment services are managed both directly with generators and through broker networks.
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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 220 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 - Clean Earth’s extensive network of 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, with applicable environmental and occupational
health and safety laws and regulations.
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 employed approximately 624 hourly and salaried employees located throughout the United States at
December 31, 2018. 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 15 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.
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Foam Fabricators
Overview
Foam Fabricators, headquartered in Scottsdale, Arizona, is a designer and manufacturer of custom molded protective
foam solutions and OEM components made from expanded polystyrene (EPS) and other expanded polymers. Foam
Fabricators provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals,
health and wellness, automotive, building products and others. Foam Fabricators’ molded foam solutions offer shock
and vibration protection, surface protection, temperature control, resistance to water absorption and vapor transmission
and other protective properties critical for shipping small, delicate items, heavy equipment or temperature-sensitive
goods. Foam Fabricators operates 13 molding and fabricating facilities across North America, creating a geographic
footprint of strategically located manufacturing plants to efficiently serve national customer accounts.
History of Foam Fabricators
Foam Fabricators was founded in 1957 and began its operations as a single plant in St. Louis, MO, dedicated to the
manufacture of rigid foam plastics. In 1959, Foam Fabricators expanded its product range to include ice chests,
packaging and swim toys. In the 1970s and 1980s, Foam Fabricators expanded its geographic footprint, adding six
more shape molding plants. In 1983, Texstyrene Plastics, a publicly-traded competitor and manufacturer of polystyrene
products, acquired Foam Fabricators. Shortly thereafter, Foam Fabricators added three new plants to its operation.
In 1989, Texstyrene split off its various business divisions and sold Foam Fabricators to the then current management
team of Texstyrene. Through the 1990s and early 2000s, Foam Fabricators grew partially through acquisitions
purchasing four competitors. Foam Fabricators also opened two greenfield plants in Mexico to better serve their
multinational manufacturing customers. Today, Foam Fabricators operates out of its corporate headquarters in
Scottsdale, Arizona and 13 manufacturing facilities across North America.
We purchased Foam Fabricators on February 15, 2018.
Industry
Foam Fabricators competes in the broadly defined global protective packaging market which was valued at $23.5
billion in 2017. On the basis of product type, this market is segmented into rigid protective, flexible protective, and
foam protective applications. Foam Fabricators primarily competes in the North American foam protective packaging
market which was valued at $6.2 billion in 2017 and includes expanded polyurethane foams, loose fills, foam in place
polyurethane, and molded foams products. Producers of molded foam products generally fall into two categories: block
molders and shape molders. Block molders manufacture large blocks of EPS foam that are typically used as insulation
in building products such as walls, roofs and floors and are closely tied to the construction market. Shape molders,
such as Foam Fabricators, manufacture customized molded foam solutions for protective packaging applications,
insulated shipping containers and internal parts and components for OEMs. Products made of EPS foam have broad
applications across various end markets due to a unique combination of performance characteristics. The superior
cushioning and barrier properties paired with insulating and hydrophobic properties make it an ideal material for
protective packaging of heavy or valuable goods as well as insulated shipping containers for temperature and moisture
sensitive products.
Products and Services
Foam Fabricators designs and manufactures a broad array of custom molded protective foam solutions and OEM
components serving various end markets. Foam Fabricators’ molded foam products are predominately made of
expandable polystyrene (EPS), which is a rigid, closed-cell foam. EPS is comprised of polystyrene, a thermoplastic
derived from the styrene monomer and benzene, and an added expansion agent, usually pentane. The final shape
mold finished product is 98% air and is created in a low-pressure press which heats EPS beads that expand and fill
a customer-specific mold. Foam Fabricators also uses other moldable materials including expandable polypropylene
(EPP) and expandable polyethylene (EPE) depending on project and customer requirements. EPS foam is an
environmentally friendly material that is fully recyclable, uses less energy to produce, generates fewer emissions and
has less environmental impact than most competitive material options.
Foam Fabricators’ custom-engineered molded foam products fall into four major categories: protective packaging,
insulated shipping containers, OEM parts and componentry and fabricated foam. These products are used across a
variety of end markets including consumer electronics, appliances, temperature-sensitive pharmaceuticals and food,
automotive, home and office furnishings and building products among others.
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Protective Packaging - Foam Fabricators creates custom molded corner pads, edge pads, “clear-view” packages
and other protective foam packaging solutions for durable goods such as large and counter-top appliances, furniture,
consumer electronics and military applications. Molded foam is an ideal protective packaging choice because it can
be shaped into almost any form at tight tolerances and provides lightweight yet strong cushioning during product
shipment.
Insulated Shipping Containers - Transporting healthcare and pharmaceutical products requires complex logistical
processes, specific equipment, storage facilities and special handling procedures to maintain product integrity. These
requirements make EPS foam an ideal material to be used in insulated shipping containers due to its thermal insulation,
water impermeability and shock absorbing properties. Similar to its uses in the healthcare industry, Foam Fabricators
manufactures insulated shipping containers for online grocers and meal delivery services to transport prepared meals
and perishable food and beverage products that must be shipped in a temperature-controlled environment.
OEM Parts and Componentry - Foam Fabricators manufactures a variety of internal components used by OEMs as
replacements for injection molded plastic or sheet metal parts across various end-markets. Compared to traditional
plastic parts, foam offers vibration protection, insulation benefits, lower tooling costs and shorter lead times. Foam
Fabricators offers thin-wall molded air ducts and other internal components for household appliances such as
refrigerators and air conditioners. In the automotive sector, Foam Fabricators manufactures foam door panels, trunk
liners, bumper components, instrument panels, center consoles, side pillars, seat components and head rests. Foam
is increasingly being used in new vehicle designs because it offers equivalent impact strength and toughness to
traditional chassis materials with 10 to 40% less weight. Foam Fabricators also makes products used in personal
watercraft floatation and seating parts as well as recreational vehicle roof panels and core laminates that go underneath
aluminum outer skins. Lastly, Foam Fabricators produces building products for the construction market including
insulated concrete forms. Insulated concrete forms are hollow sections of molded foam that construction crews stack
into the shape of the walls of a building and fill with concrete to create the permanent structure.
Fabricated Foam - Foam Fabricators also uses a variety of methods including die cutting, saw cutting, hot wire slicing
and pressure cutting to create fabricated foam shapes as opposed to molded shapes. These products do not require
tooling or dies so there is less upfront costs for the customer and are usually best suited for medium to low volume
projects. Fabricated foam products represent a small portion of Foam Fabricators overall net sales.
Competitive Strengths
National Scale and Proximity to Customers - Foam Fabricators maintains a national footprint of 13 manufacturing
locations across North America. Facilities are strategically located near customers’ production locations enabling Foam
Fabricators to be one of only a few foam molders capable of serving large national accounts. Due to foam’s high
volume-to-weight ratio, foam manufacturers generally confine product shipments to a 300-mile radius in which shipping
costs are economically viable. Thus, Foam Fabricators is uniquely positioned to provide multi-facility support to its
largest customers who often have multiple manufacturing or distribution locations.
Engineering and Design Capabilities - Foam Fabricators has five coordinated design and testing centers with
experienced packaging and mechanical engineers that work closely with customers to support packaging design
needs. Engineering services include optimizing molds to meet customer needs and address complex design
requirements, identifying pre-manufacturing challenges, solving post-manufacturing issues, improving packaging
processes and laboratory testing final designs. Early customer involvement and collaboration to develop packaging
solutions has resulted in increased project win rates and better visibility into product development pipelines.
Barriers to Entry
• High Customer Switching Costs - The operational risk and disruption associated with switching existing molds
to operate on a competitor’s press makes shifting or splitting business between different shape molders difficult
and infrequent. In general, most customers pay for their own molds, which are custom built for a specific
molders’ presses. The financial cost of retooling is estimated to be $5,000 - $25,000 per mold, making it cost
prohibitive to change molders on existing projects.
• Favorable Cost-to-value Proposition - The high cost of failure, relatively low proportionate cost of foam to the
final product being protected, and sometimes lengthy testing and qualification process represent significant
barriers to customers changing solution providers or packaging material choices.
• Equipment and Processing Infrastructure - Foam Fabricators’ existing base of production equipment has a
significant estimated replacement cost. Management estimates the cost of opening a new shape molding
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facility at approximately $5 million, excluding real estate, and must meet stringent environmental standards.
A new entrant could require as much as 1-2 years of lead time to match the process performance requirements,
customization of equipment and material formulations necessary to effectively compete in the molded foam
industry. Moreover, Foam Fabricators has a strong preventive maintenance program and in-house equipment
division that is responsible for repairing and rebuilding presses. This allows Foam Fabricators to significantly
extend the average useful life of its machinery and reduce the ongoing capital investment requirements,
creating an advantage over competitors.
Business Strategies
Defend Market Position - As a leading supplier of custom molded foam solutions, management believes Foam
Fabricators enjoys strong brand awareness and a reputation for superior quality and service in the industry. In a market
characterized by fragmented competition, Foam Fabricators will continue to focus on providing a best in class suite
of products and capabilities.
Remain Committed to Customers - Functional and error-free products are key considerations for its customers and
Foam Fabricators has maintained a disciplined approach to ensure its products meet the highest standard of quality.
Utilizing a balanced scorecard, Foam Fabricators has achieved a 99.0% 1st piece acceptance rate, less than 2
complaints per 1000 shipments and a less than 0.05% rejection rate. As a result of this system of checks, Foam
Fabricators has had little customer attrition.
Pursue Selective Acquisitions - Foam Fabricators views acquisitions as a potentially attractive means to expand its
national footprint or broaden its current product offering. Management will continue to seek tuck-in acquisitions of
regional foam molders and other packaging suppliers where sales and operational efficiencies can be realized, or to
diversify into packaging products other than molded foam.
Customers
Foam Fabricators maintains a broad base of over 300 customers across a wide variety of end-markets, including
appliances, pharmaceuticals, food and beverage, consumer electronics, automotive, furniture, building products and
logistics. Foam Fabricators’ products are sold primarily direct to the customer or through third-party packaging
distributors. Foam Fabricators has maintained long-standing relationships with its top customers, often averaging ten
or more years. Foam Fabricators three largest customers comprised approximately 40%, 37%, 35% of sales in the
year ended December 31, 2018, 2017 and 2016, respectively.
Foam Fabricators often maintains resin cost pass-through provisions with its contracted customers, allowing them to
pass-through material resin price changes - resin constitutes their primary raw material cost.
The following table sets forth Foam Fabricator's customer breakdown by sector for the fiscal years ended December 31,
2018, 2017 and 2016:
Appliance
Insulated shipping containers
Automotive
Protective packaging
Office furniture
Construction
Other
2018
2017
2016
37.8%
33.9%
4.8%
7.8%
3.8%
2.9%
9.0%
100%
37.6%
33.9%
6.0%
7.9%
3.9%
3.0%
7.7%
100%
36.2%
32.9%
6.5%
9.1%
3.5%
3.3%
8.5%
100%
Sales and Marketing
Foam Fabricators sales and marketing efforts are decentralized and generally carried out by one or two full-time
salespeople who are typically also engineers at each of the manufacturing facilities. The dedicated sales team report
to regional managers and vice presidents, who are collectively responsible for driving overall sales activities in their
respective markets. Key customer accounts are directly managed by senior management, who coordinate efforts
between manufacturing facilities to fulfill orders.
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Foam Fabricators spends less than 1% of net sales each year on traditional marketing, which consists of targeted
brochure advertising and maintaining its website which new customers use to make product inquiries.
Manufacturing and Distribution
Foam Fabricators maintains 13 manufacturing facilities across North America with 11 located in the U.S. and two in
Mexico, as well as one non-manufacturing corporate headquarters. Given the high volume, low density nature of foam,
Foam Fabricators’ manufacturing facilities are strategically located near its largest customers’ production locations to
minimize freight and logistics costs. Foam Fabricators geographic footprint covers a large portion of the continental
U.S. and Mexico. Each plant has a warehouse space for raw materials, supplies and finished goods. Several plants
also use third-party warehousing to store excess inventory. Foam Fabricators uses common carriers to deliver finished
product and in certain cases, some customers pick up directly from the plants.
Suppliers
The primary raw materials that are used in production are plastic resins, such as expandable polystyrene (EPS),
expandable polypropylene (EPP) and expandable polyethylene (EPE). In addition to plastic resins, Foam Fabricators
also purchases fabricating material including blocks of EPE and EPP foam, polyethylene and urethane, as well as
other packaging materials including corrugate, boxes, paperboard, tape and plastic film. Foam Fabricators purchases
its materials from a combination of domestic and foreign suppliers and has maintained strong relationships with key
resin suppliers for over 30 years. Adequate amounts of all raw materials have been available in the past, and Foam
Fabricators’ management believes this will continue in the foreseeable future.
Regulatory Environment
Foam Fabricators’ manufacturing operations and facilities are subject to 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 materials. Management believes
that Foam Fabricators is in compliance, in all material respects, with applicable environmental and occupational health
and safety laws and regulations.
Employees
As of December 31, 2018, Foam Fabricators employed 563 full-time employees in 14 locations. None of Foam
Fabricators’ U.S.-based employees are subject to collective bargaining agreements. Under Mexican Federal Labor
Law, 137 employees at the two Mexican manufacturing facilities are unionized. Foam Fabricators believes its
relationship with its employees is good.
Sterno
Overview
The Sterno Group LLC ("Sterno"), headquartered in Corona, California, is the parent company of Sterno Products,
LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and Rimports, LLC ("Rimports"). Sterno operates via
three product divisions:
• Sterno Products - Sterno Products offers a broad range of wick and gel chafing fuels, liquid and traditional
wax candles, butane stoves and accessories, and catering equipment and lamps for restaurants, hotel and
home entertainment uses, selling both Sterno Brand and private label. 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.
• Sterno Home - Sterno Home's product offerings include 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.
• Rimports - Rimports is a manufacturer and distributor of branded and private label wickless candle products
used for home decor and fragrance systems under the ScentSationals, Better Home & Garden, AmbiEscents,
Oak & Rye, Estate and Ador brands. The company offers unique lines of wickless candle products including
ceramic wax warmers, scented wax cubes and essential oil and diffusers. Sterno acquired Rimports in February
2018.
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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. We purchased Sterno on October 10, 2014.
In January 2016, Sterno expanded their product offering with the acquisition of Northern International Inc. ("Sterno
Home"). 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.
In February 2018, Sterno acquired Rimports. Rimports is a manufacturer and distributor of branded and private label
wickless candle products used for home decor and fragrance systems under the ScentSationals, Better Home &
Garden, AmbiEscents, Oak & Rye, Estate and Ador brands. Rimports offers unique lines of wickless candle products
including ceramic wax warmers, scented wax cubes and essential oil and diffusers.
Today, Sterno operates out of its corporate headquarters in Corona California, two manufacturing facilities in Texarkana,
Texas and Memphis, Tennessee, and the Rimports facility in Provo, Utah.
Industry
Sterno Products competes in the broadly defined U.S. foodservice industry where 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 Products product offerings focus 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.
Rimports operates in the broad U.S. home decor space (retail) which is heavily correlated to general consumer spending.
Flameless and reusable wax products have seen increased adoption by younger consumers who prioritize economical
and environmentally friendly products. Within the home decor space, Rimports competes in the U.S. candle space
and the U.S. home fragrance space.
Products and Services
Sterno is a “full-line” supplier offering a broad array of portable chafing fuels, table lighting, outdoor lighting products,
wickless candles and fragrance products with approximately 4000 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, and wax cubes and warmer products through its acquisition of Rimports. Sterno’s products
fall into six major categories: canned heat, catering equipment and butane products, table lighting, flameless candles
and outdoor lighting, wickless candle and fragrance 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
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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.
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.
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
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
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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.
Wickless Candle and Fragrance Products
WaxWarmers and Scented Wax Cubes
The wax and wax warmer line is composed of a large variety of fragrance and warmer design choices for consumers.
The wax cubes are long-lasting and consistently release strong fragrance. The consumer likes the product because
the scented wax cubes are an impulse item ($2~ price range) and this product makes it easy and quick for the customer
to change fragrance. The flameless feature is a plus in that it is very safe. The proprietary formula and world-class
fragrances add to the high quality of the domestically-made products. Ongoing research ensures consumer loyalty,
superior quality, and well-rounded fragrance programs. The wax warmers are made up of quality materials including
wood, metal, ceramic, and glass.
Essential Oils and Diffusers
The 100% Pure Essential Oil lines and brands consists of Peppermint, Lavender, Lemon, Eucalyptus, Sweet Orange,
Grapefruit, Tea tree, Cinnamon, etc. Customers are attracted to high quality, 100 percent pure oil products with no
additives or fillers. Attractively designed diffusers appeal to consumers in the Aromatherapy Home Fragrance section.
ScentCharms
ScentCharms is Rimports’ newest product category. With various interchangeable high-quality fragrance oils and plug-
in designs, consumers enjoy a personalized experience. The product is designed to be no spill, no mess, clutter-free,
and long-lasting.
Aromatherapy Products
The aromatherapy line consists of room sprays, liquid hand soaps, foaming hand soaps, hand sanitizers, body lotions,
and body scrubs, etc. The five unique fragrance combinations - lavender and chamomile, eucalyptus and rosemary,
orange and vanilla, lemon and grapefruit, and peppermint and geranium - are made with 100 percent pure essential
oils.
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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, 2018, 2017 and 2016:
Gross sales by product (1)
Canned Heat
Wickless Candle Products
Flameless Candle and Outdoor Lighting
Diffusers and Essential Oils
Table Lighting
Other
2018
2017
2016
28%
27%
24%
6%
5%
10%
100%
46%
—%
34%
—%
6%
14%
100%
47%
—%
35%
—%
6%
12%
100%
(1) As a percentage of gross sales, exclusive of sale discounts.
Competitive Strengths
Leading Brand Recognition & Market Share - Sterno Products is the market share leader in the canned chafing
fuel market. Management believes Sterno Products 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.
Rimports is the market share leader in fragrance systems, particularly the wickless candle market, and growing in the
essential oils and diffusers and plug-in liquid fragrance markets. Rimports offers a large variety of products to retailers
in North America, Canada, China, and the United Kingdom.
Low Cost versus Alternatives - Sterno Product'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. Rimports’ ultimate consumers seek high quality products in the Home Fragrance section.
This high value strength ensures consumer loyalty and satisfaction.
Business Strategies
Defend Leading Market Position - As a leading supplier of canned fuels, flameless candles and outdoor lighting,
wickless candles and fragrance products, 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 Products 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.
Create Innovative Products - Having innovative design, marketing, and production teams enables Rimports to expand
into new fragrance systems markets, as it has done with Essential Oil Diffusers and ScentCharms (Decorative Liquid
plug-in fragrance units). Rimports will continue to focus on providing the best quality products and low prices to retailers
and end-users.
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
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customers comprised approximately 79%, 68%, 59% of gross sales in the year ended December 31, 2018, 2017 and
2016, 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 and Rimports. With an
online dynamic, it is also much easier to showcase how Sterno Home’s and Rimport's products look in actual dark use
conditions, directly addressing their primary merchandising challenge.
Sterno had approximately $26.5 million and $28.7 million in firm backlog orders at December 31, 2018 and 2017,
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. Rimports typically has higher sales in the third and fourth quarter of each year, reflecting 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. Rimports’ sales representatives have long-standing
relationships with distributors and end-users. The sales team works closely with the marketing, design, and production
teams to ensure priority customer service and satisfaction.
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 Products' 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.
Rimports sources raw materials from and outsources manufacturing processes to companies in the U.S. and China.
Raw materials include wax, fragrances, and color dye for waxes; essential oils; wood, metal, ceramic, and glass for
warmers and diffusers; and packaging supplies. Products are shipped to retailers from outsourced manufacturing
warehouses and Rimports’ two Utah warehouses.
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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 230 registered trademarks and 85 patents globally, and has 53 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, 2018 Sterno employed approximately 773 persons in 11 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
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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 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;
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•
•
•
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.
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 financing arrangements expose 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, 2018, we had approximately $1.1 billion of consolidated debt outstanding. This level of consolidated
debt could have important consequences, such as (i) limiting our ability to obtain additional financing to fund our
potential growth; (ii) increasing the cost of future borrowings; (iii) limiting our ability to use operating cash flow in our
other areas of our business because of cash requirements to service our debt; and (iv) increasing our vulnerability to
adverse economic conditions. Our financing arrangements subject the Company to certain customary affirmative and
restrictive covenants. If we violate any of these covenants, our lender may accelerate the maturity of any debt
outstanding under our 2018 Credit Facility. 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 8,053,000 or approximately 13.4% 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
67
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 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 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.
The Series A and Series B Preferred Shares are equity securities and are subordinated to our existing and
future indebtedness.
The Series A and Series B Preferred Shares are our equity interests and do not constitute indebtedness. This means
that the Series A and Series B Preferred Shares rank junior to all of our indebtedness and to other non-equity claims
on us and our assets available to satisfy claims on us, including claims in our liquidation. In addition, the rights allocated
to the Company’s allocation interests may reduce the amount available for distribution by the trust upon its liquidation,
dissolution or winding up. Further, the Series A and Series B Preferred Shares place no restrictions on our business
or operations or on our ability to incur indebtedness or engage in any transactions, subject only to the limited voting
rights.
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
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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 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
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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, 2018 was $44.3 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.
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
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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’’), 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.”
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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 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:
•
significant under performance relative to historical or projected future operating results;
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•
•
•
•
•
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, 2018, we had identified indefinite lived intangible assets with a carrying value in our financial
statements of $70.4 million, and goodwill of $653.7 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 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
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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 Velocity, 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.
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
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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.
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
75
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.
Arnold's operations and the prior operations of predecessor companies expose it to the risk of material
environmental liabilities, which could have a negative effect on its financial condition or results of operations.
Arnold may be subject to potential liabilities related to the remediation of environmental hazards and to claims of
personal injuries or property damages that may be caused by hazardous substance releases and exposures, mainly
because of past operations and the operations of predecessor companies. We continue to incur remedial response
and voluntary clean-up costs for site contamination, even though we are indemnified for such costs, and are a party
to lawsuits and claims associated with environmental and safety matters, including past production of products
containing hazardous materials. Arnold also may become party to various legal proceedings relating to alleged impacts
from pollutants released into the environment. Various federal, state, local and foreign governments regulate the
discharge of materials into the environment and can impose substantial fines and criminal sanctions for violations. In
addition, changes in laws, regulations and enforcement of policies, the discovery of previously unknown contamination
or information related to individual sites, the establishment of stricter state or federal toxicity standards with respect
to certain contaminants, or the imposition of new clean-up requirements or remedial techniques could require Arnold
to incur additional costs in the future that would have a negative effect on its financial condition or 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 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 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.
76
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 at the federal, state, and local levels, demand for Clean Earth’s services could
materially decrease and its revenues and earnings could be significantly reduced.
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.
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 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.
Risks Related to Velocity Outdoor
Velocity’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, Velocity is involved in various litigation matters that
occur in the ordinary course of business. Although Velocity 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.
77
If any unresolved lawsuits or claims are determined adversely, they could have a material adverse effect on Velocity,
its financial condition, business and results of operations. As more of Velocity’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 Velocity 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
NONE
ITEM 2. PROPERTIES
The following is a summary as of December 31, 2018 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
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
Sao Paolo, Brazil
21,807
Office
1,073
4,381
Office
Office
400,000
Warehouse
1,100
Office
11,340
Office
4,628
Office
10,387
Office
6,049
Office
17,759
Office
1,951
1,798
Office
Office
In addition, at December 31, 2018, 5.11 leased space for 46 retail stores, ranging in size from 3,250 square feet to
8,375 square feet.
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 Europe
Hamburg, Germany
Ergobaby France
Paris, France
Ergobaby UK
Swinden, United Kingdom
78
16,378
3,292
3,550
2,410
4,680
251
Tula
Tula
San Diego, CA
Bialystok, Poland
4,915
9,688
Liberty Safe
Liberty Safe is headquartered in Payson, Utah. Liberty leases office and warehouse facilities in Payson, Utah, where
it is headquartered. The corporate headquarters and manufacturing facility are located in a 312,000 square foot building.
Liberty leases an additional warehouse facility totaling approximately 13,000 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 20,000 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.
Location
Marengo, IL
Marietta, OH
Marengo, IL
Norfolk, NE
Rochester, NY
Ogallala, NE
Guangdong Province, China
Sheffield, England
Lupfig, Switzerland
Saint-Martin, France
Algonquin, IL
Madison, WI
Square Feet
Use
94,220
Office/Warehouse
81,000
Office/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
52,937
Office/Warehouse
1,528
Office
~750
Corporate
~1277
Research
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
Montgomery, PA
Corporate Headquarters
Offices
Fixed Base Remediation
Butler, PA
Middlesex, NJ
Hudson, NJ
Hudson, NJ
16,669 sq. ft.
7,525 sq. ft.
~ 16 acres
Leased
Leased
Leased
Leased
Dredged Material Processing and Beneficial Reuse
~ 7 acres
RCRA TSDF
~ 14.5 acres
Owned/ Leased
79
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
Hayward, CA
Modesto, CA
DeKalb, GA
DeKalb, GA
Washington, NY
Merrimack, NH
Wayne, MI
Mecklenburg, NC
Foam Fabricators
DTSC RCRA Permit For Mercury (D009)
Registered U & E Waste Handler
RCRA Part B Permitted Hazardous Waste TSDF
~ 1 acres
RCRA Part B Permitted Hazardous Waste TSDF,
Storage
Thermal Desorption
Thermal Desorption
Non Hazardous Waste Water Treatment
RCRA PART B Permitted Hazardous Waste TSDF
and Waste Water Treatment
~ 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.
13,000 sq. ft.
6,892 sq. ft.
25,992 sq. ft.
~ 1 acres
16.7 acres
21.6 acres
2.4 acres
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Owned
Owned
3.3 acres
Owned
Foam Fabricators is headquartered in Scottsdale, Arizona and operates 13 molding and fabricating facilities across
North America.
Location
Anderson, South Carolina
Compton, California
Erie, Pennsylvania
Fort Madison, Iowa
Jackson, Tennessee
Jefferson, Georgia
Keller, Texas
Modesto, California
El Dorado Springs, Missouri
New Albany, Indiana
Square Feet
Leased or Owned
133,250
Leased
44,000
Leased
199,962
Leased
80,000
Leased
55,000
Leased
60,000
Leased
131,073
Leased
79,000
Leased
38,000
Owned
65,000
Owned
80
Bloomsburg, Pennsylvania
Tijuana, Mexico
Queretaro, Mexico
Scottsdale, Arizona
Louisville, Kentucky
54,000
Owned
60,000
Leased
100,000
Leased
7,000
3,000
Leased
Leased
Sterno
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
Delta, Canada
La Porte, IN
Toronto, Canada
Vancouver, Canada
Vancouver, Canada
Montreal, Canada
Montreal, Canada
Atlanta, GA
Las Vegas, NV
Yuyao, China
Yuyao, China
Shunde, China
Provo, UT
Spanish Fork, UT
Bentonville, AR
Calgary, Canada
12,330
Corporate Office
103,500
Manufacturing
214,080
Manufacturing
45,000 Warehouse
15,000
Office
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
171,361
Office/Warehouse
313,719 Warehouse
3,000
Office
15,961
Office/Warehouse
Velocity Outdoor
Velocity Outdoor is headquartered in Bloomfield, New York. Velocity 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. Velocity's Ravin subsidiary operates an 80,000 square foot manufacturing facility
in Superior, Wisconsin.
Our corporate offices are located in Westport, Connecticut, and Irvine, California, where we utilize space provided by
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.
81
Arnold
Our Arnold subsidiary, was named as co-defendant, together with 300 West LLC (“300 West”), in a suit filed in the
Twenty-Second Judicial Circuit, McHenry County, Illinois, Chancery Division (Case No. 13CH1046) in 2013 by the
State of Illinois (the “Marengo Litigation”). Arnold leases a site in Marengo, McHenry County, Illinois (the “Site”) from
300 West. Since 2008, Arnold and 300 West have been a part of the Illinois Remediation Program with respect to the
Site. In the Marengo Litigation, the plaintiff claimed that 300 West and Arnold discharged Chlorinated VOCs into the
groundwater on-Site, which has since migrated off-Site into private drinking wells. The State has sought injunctive
relief and civil penalties. Any damages incurred by Arnold in connection with the Marengo Litigation are subject to
indemnification pursuant to the Stock Purchase Agreement, among SPS Technologies, LLC (“SPS”), SPS Technologies
Limited (“SPS Ltd.”), Precision Castparts Corp. (collectively with SPS and SPS Ltd., the “SPS Entities”), Arnold and
Audax Private Equity Fund, L.P., dated December 20, 2004, and prior consents to indemnification given by the SPS
Entities. Arnold has cooperated with the governmental agencies in the Marengo Litigation investigations and
proceedings. CODI does not believe that the outcome of the Marengo Litigation will have a material adverse effect on
its financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
82
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.”
Common Stock Holders
On December 31, 2018 there were 16 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.
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, 2018. The
graph sets the beginning value of common 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.
83
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
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,
2014
June 30,
2014
September 30,
2014
December 31,
2014
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
218.56
188.37
115.15
73.30
125.52
March 31,
2015
206.87
219.86
121.74
75.83
129.94
March 31,
2016
198.47
218.46
114.30
68.25
121.70
March 31,
2017
219.71
265.2
138.49
83.03
137.02
March 31,
2018
225.63
316.87
167.07
90.71
148.46
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
212.14
197.75
114.94
75.02
130.90
June 30,
2015
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
June 30,
2018
238.79
336.92
169.96
89.54
149.08
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
206.95
201.58
113.84
74.39
127.60
September 30,
2015
199.51
207.26
112.03
70.13
116.84
September 30,
2016
225.44
238.30
123.62
71.76
127.83
September 30,
2017
239.93
291.41
155.32
89.52
145.56
September 30,
2018
251
360.96
169.04
91.81
155.98
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
194.20
212.46
117.29
77.17
129.23
December 31,
2015
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
December 31,
2018
172.49
297.66
146.99
79.68
135.61
84
Distributions
For the years 2018, 2017 and 2016, we have declared and paid quarterly cash distributions to holders of record of our
common shares as follows:
Quarter Ended
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
Declaration Date
Payment Date
Distribution Per Share
January 3, 2019
October 4, 2018
July 5, 2018
April 5, 2018
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 24, 2019
October 25, 2018
July 26, 2018
April 26, 2018
January 25, 2018
October 26, 2017
July 27, 2017
April 27, 2017
January 26, 2017
October 27, 2016
July 28, 2016
April 28, 2016
$
$
$
$
$
$
$
$
$
$
$
$
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 2019. 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 Purchasers
None.
85
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, 2018, 2017, 2016, 2015, and 2014.
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, and 2014 are reflected as discontinued operations in the table below
and are not included in continuing operations. The operating results of CamelBak and American Furniture in 2015
and 2014 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.
(in thousands, except per share data)
2018 (1)
Year ended December 31,
2016 (1)
2015 (1)
2017 (1)
2014 (1)
Statements of Operations Data:
Net sales
Gross profit
Management fees
Impairment expense/ loss on disposal of assets
Operating income
Gain on deconsolidation of subsidiary
Income (loss) from continuing operations
Income and gain from discontinued operations
$1,691,673
$1,269,729
$ 978,309
$ 727,978
$ 636,675
574,188
447,709
326,570
240,736
205,017
44,294
—
69,318
—
32,693
17,325
27,204
—
29,406
25,204
19,061
—
25,658
21,872
—
—
49,918
31,892
—
264,325
(3,048)
33,272
53,749
8,991
270,077
1,258
340
2,781
156,779
21,078
Net income (loss)
$
(1,790) $
33,612
$
56,530
$ 165,770
$ 291,155
Net income from continuing operations—noncontrolling
interest
Net income (loss) from discontinued operations—
noncontrolling interest
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
Cash distribution declared per common share
Cash Flow Data:
Depreciation and amortization
Cash provided by operating activities
Acquisitions of businesses
Cash (used in) provided by investing activities
3,912
5,621
1,961
5,133
11,661
—
—
(116)
(1,201)
659
$
(5,702) $
27,991
$
54,685
$ 161,838
$ 278,835
$
$
$
(0.44) $
(0.45) $
0.46
$
(0.30) $
0.02
0.01
0.05
(0.42) $
(0.44) $
0.51
1.44
$
1.44
$
1.44
2.91
2.61
1.44
$
$
$
$
4.98
0.40
5.38
1.44
$ 120,575
$ 110,051
$
85,608
$
53,075
$
39,751
114,452
81,771
111,372
84,548
70,695
(552,062)
(164,950)
(536,175)
(130,292)
(474,657)
(604,080)
(77,278)
(363,021)
233,880
(424,753)
86
(in thousands, except per share data)
Net amounts borrowed (repaid)
Cash (used in) provided by financing activities
2018 (1)
121,028
500,111
Year ended December 31,
2016 (1)
2015 (1)
2017 (1)
2014 (1)
31,915
248,058
(172,975)
250,725
(2,588)
208,726
(254,357)
265,487
Balance Sheet Data:
Current assets
Total assets
Current liabilities
Long-term debt
Noncontrolling interests
Shareholders’ equity attributable to Holdings
$ 681,185
$ 526,818
$ 452,819
$ 291,363
$ 320,799
2,372,335
1,820,303
1,777,155
1,421,042
1,547,430
259,280
212,193
202,521
116,479
141,231
1,098,871
584,347
551,652
308,639
485,547
59,970
52,791
38,139
47,135
40,903
859,372
873,208
856,405
826,084
767,431
(1) Includes the effect of material business acquisitions as follows:
•
•
•
•
•
The year ended December 31, 2018 includes the operating results of Foam Fabricators, acquired on February 15,
2018, and Rimports, acquired by our Sterno subsidiary on February 26, 2018.
The year ended December 31, 2017 includes the operating results of Velocity Outdoor, acquired on June 2, 2017.
The year ended December 31, 2016 includes the operating results of 5.11 Tactical, acquired on August 31, 2016.
The year ended December 31, 2015 includes the operating results of Manitoba Harvest, acquired on July 10, 2015.
The year ended December 31, 2014 includes the operating results of Clean Earth, acquired on August 7, 2014 and
Sterno, acquired on October 10, 2014.
87
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.
88
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.
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, 2018, we purchased nineteen 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, 2018 (in thousands):
Acquisitions
Ownership Interest -
December 31, 2018
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) (4)
Manitoba Harvest (3)
5.11
Velocity Outdoor (3) (5)
Foam Fabricators
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
February 15, 2018
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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%
81.9%
N/a
96.7%
97.5%
314,400
100.0%
102,700
408,200
150,400
253,400
76.6%
97.5%
99.2%
100%
N/a
N/a
N/a
N/a
N/a
N/a
85.2%
76.4%
N/a
79.4%
79.8%
88.9%
68.1%
88.7%
91%
91.5%
(1) The total purchase price for CBS Holdings includes the acquisition of Staffmark Investment LLC in January 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
unless indicated.
(4) The total purchase price of Sterno includes the acquisition of Rimports, Inc. in February 2018 for a purchase price of $154.4
million.
89
(5) Velocity Outdoor (formerly "Crosman Corp.") was purchased by the Company in May 2006 and subsequently sold in January
2007. We reacquired Velocity Outdoor in June 2017.
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.
2018 Highlights and Recent Events
Acquisition of Foam Fabricators
On February 15, 2018, the Company, through a wholly owned subsidiary FFI Compass, Inc., acquired all of the issued
and outstanding capital stock of Foam Fabricators, Inc., a Delaware corporation (“Foam Fabricators”), for a purchase
price of approximately $253.4 million. 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 and
expanded polypropylene. Founded in 1957 and headquartered in Scottsdale, Arizona, it operates 13 molding and
fabricating facilities across North America and provides products to a variety of end-markets, including appliances and
90
electronics, pharmaceuticals, health and wellness, automotive, building products and others. We funded our acquisition
of Foam Fabricators with a draw on our 2014 Revolving Credit Facility.
Acquisition of Rimports
On February 26, 2018, our Sterno subsidiary acquired all of the issued and outstanding capital stock of Rimports, Inc.,,
pursuant to a Stock Purchase Agreement, dated January 23, 2018. Sterno purchased a 100% controlling interest in
Rimports. Headquartered in Provo, Utah, Rimports is a manufacturer and distributor of branded and private label
scented wickless candle products used for home décor and fragrance. Rimports offers an extensive line of wax warmers,
scented wax cubes, essential oils and diffusers, and other home fragrance systems, through the mass retailer channel.
The purchase price, net of transaction costs, was approximately $154.4 million, subject to any working capital
adjustment. The purchase price of Rimports includes a potential earn-out of up to $25 million contingent on the
attainment of certain future performance criteria of Rimports. At December 31, 2018, the earn-out was not expected
to be paid. Sterno funded the acquisition through their intercompany credit facility with the Company.
Acquisition of ESMI
On May 23, 2018, Clean Earth acquired all of the outstanding capital stock of Environmental Soil Management, Inc.
(“ESMI”), located in Fort Edward, New York and Loudon, New Hampshire. The acquisition provided Clean Earth the
opportunity to geographically expand their soil and hazardous waste solutions in the New York and New England
market. The purchase price was approximately $31.0 million.
Acquisition of Ravin
On September 4, 2018, Velocity Outdoor (formerly "Crosman Corp.") acquired all of the outstanding membership
interests in Ravin for a purchase price of approximately $98.0 million, net of transaction costs, plus a potential earn-
out of up to $25.0 million based on gross profit levels as of December 31, 2018. Headquartered in Superior, Wisconsin,
Ravin Crossbows is a leading designer, manufacturer and innovator of crossbows and accessories. Ravin primarily
focuses on the higher-end segment of the crossbow market and has developed significant intellectual property related
to the advancement of crossbow technology. The acquisition of Ravin positions Velocity Outdoor to more fully capitalize
on the sizeable crossbow market, further diversify its customer base and take advantage of the product and market
expertise inside of Ravin.
Trust Preferred Share Issuance
On March 13, 2018, the Trust issued 4,000,000 Series B Preferred Shares for gross proceeds of $100.0 million, or
$96.5 million net of underwriters' discount and issuance costs. Distributions on the Series B Preferred Shares will be
payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July
30, and October 30 of each year, beginning on July 30, 2018. Distributions on the Series B Preferred Shares are
cumulative.
Senior Notes and 2018 Credit Facility
On April 18, 2018, we consummated the issuance and sale of $400.0 million aggregate principal amount of our 8.000%
Senior Notes due 2026 (the “Notes” or "Senior Notes") offered pursuant to a private offering. We used the net proceeds
from the sale of the Notes to repay debt under our existing credit facilities in connection with a concurrent refinancing
of our 2014 Credit Facility. The Notes will bear interest at the rate of 8.000% per annum and will mature on May 1,
2026. Interest on the Notes is payable in cash on May 1st and November 1st of each year, beginning on November
1, 2018. The Notes are general senior unsecured obligations and are not guaranteed by our subsidiaries.
Concurrent with the issuance of the Notes, we entered into an Amended and Restated Credit Agreement (the "2018
Credit Facility") to amend and restate the 2014 Credit Facility, originally dated as of June 6, 2014 (as previously
amended) among the Company, the lenders from time to time party thereto (the “Lenders”), and Bank of America,
N.A., as Administrative Agent. The 2018 Credit Facility provides for (i) revolving loans, swing line loans and letters of
credit (the “2018 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million, and (ii) a $500 million
term loan (the “2018 Term Loan”). The 2018 Term Loan was issued at an original issuance discount of 99.75%. We
used the proceeds from the 2018 Credit Facility and the proceeds from the Notes offering to pay all amounts outstanding
under our existing credit agreement and to pay the fees, original issue discount and expenses incurred in connection
with the 2018 Credit Facility and Notes.
91
2018 Distributions
Common shares - For the 2018 fiscal year we declared distributions to our common shareholders totaling $1.44 per
share.
Preferred shares - For the 2018 fiscal year we declared distributions to our preferred shareholders totaling $1.8125
per share on our Series A Preferred Shares and $1.724375 on our Series B Preferred Shares.
Subsequent Event
Manitoba Harvest
On February 19, 2019, we entered into a definitive agreement (the "Agreement") with Tilray, Inc. ("Tilray") and a wholly-
owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, Inc., through Tilray Subco, all of the
issued and outstanding securities of Manitoba Harvest for total consideration of up to C$419 million. Subject to certain
customary adjustments, the shareholders of Manitoba Harvest, including the Company, may receive the following from
Tilray as consideration for their shares of Manitoba Harvest: (i) C$150 million in cash to the holders of preferred shares
of Manitoba Harvest and the holders of common shares of Manitoba Harvest (“Common Holders”) and C$127.5 million
in shares of class 2 Common Stock of Tilray (“Common Stock”) to the Common Holders on the closing date of the
sale (the “Closing Date Consideration”), (ii) C$50 million in cash and C$42.5 million in Common Stock to the Common
Holders on the date that is six months after the closing date of the Arrangement (the “Deferred Consideration”) and
(iii) C$49 million in Common Stock to the Common Holders, which amount may be reduced, potentially to zero, if
Manitoba Harvest fails to attain certain levels of U.S. branded gross sales of edible or topical products containing broad
spectrum hemp extracts or cannabidiols prior to December 31, 2019. The cash portion of the Closing Date Consideration
will be reduced by the amount of the net indebtedness of Manitoba Harvest on the closing date and transaction expenses
expected to be approximately $5 million. The Common Stock consideration is expected to be issued in reliance on
the exemption from the registration requirements of the U.S. Securities Act and pursuant to exemptions from applicable
securities laws of any state of the United States, such that any shares of Common Stock received by the Common
Holders will be freely tradeable. The sale of Manitoba Harvest will occur pursuant to a plan of arrangement under the
Business Operations Act (British Columbia). The completion of the plan of arrangement was subject to approval by
the British Columbia Supreme Court, which occurred on February 21, 2019. The sale is expected to close as soon as
practicable following receipt of court approval.
2019 Outlook and Significant Trends
During 2018, the middle market continued to be an active segment for deal flow, with further acceleration of deal flow
expected in 2019. 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 believe that companies will focus on
expanding their customer bases by diversifying their products and services in existing geographic areas during 2019.
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.
Business Outlook
For 2019, we anticipate our niche industrial companies, combined as a whole, will continue to grow revenue and
earnings as a result of the overall health of the economy. Our branded consumer companies, combined as a whole,
may be impacted in 2019 by the continued weakening in the U.S. retail landscape, specifically, lower consumer foot
traffic in brick and mortar retail, and the related shift to more online shopping. We believe our branded consumer
companies’ combined as a whole, with their strong positions in their respective markets and powerful brands, remain
well positioned to grow revenue and earnings in 2019, notwithstanding this difficult landscape.
The areas of focus for 2019, 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;
• Continuing to pursue expense reduction and cost savings in lower margin business lines or in response to
lower production volume;
92
• 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.
93
Results of Operations
The following discussion reflects a comparison of the historical results of operations of our consolidated business for
the years ended December 31, 2018, 2017 and 2016, and components of the results of operations as well as those
components presented as a percent of net revenues, for each of our businesses on a stand-alone basis.
We acquired Foam Fabricators in February 2018, Velocity Outdoor in June 2017, 5.11 in August 2016 and our Sterno
business acquired Rimports in February 2018. In the following results of operations, we provide (i) our actual
Consolidated Results of Operations for the years ended December 31, 2018, 2017 and 2016, which includes the
historical results of operations of each of our businesses (operating segments) from the date of acquisition in accordance
with generally accepted accounting principles in the United States ("GAAP") and (ii) comparative historical components
of the 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, 2018, 2017 and 2016, where all years presented include relevant pro-forma
adjustments for pre-acquisition periods and explanations where applicable. For the 2018 acquisitions of Foam
Fabricators and Rimports, the pro forma results of operations have been prepared as if we purchased these businesses
on January 1, 2017. The historical operating results of Rimports have been added to the previously reported Sterno
results of operations for the year ended December 31, 2017 and the Sterno results of operations for the 2018 period
prior to acquisition by Sterno. For the 2017 acquisition of Velocity Outdoor and the 2016 acquisition of 5.11, the pro
forma results of operations have been prepared as if we purchased these businesses on January 1, 2016. We believe
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.
All dollar amounts in the financial tables are presented in thousands. References in the financial tables to percentage
changes that are not meaningful are denoted by "NM."
Consolidated Results of Operations — Compass Diversified Holdings
Year Ended December 31,
2018
2017
2016
Net revenues
Cost of revenues
Gross profit
Selling, general and administrative expense
Management fees
Amortization of intangibles
Asset impairment / Loss on disposal of assets
Operating income
Interest expense
Amortization of debt issuance costs
Other income (expense)
Income (loss) from continuing operations before income taxes
Provision (benefit) for income taxes
$
1,691,673
$
1,269,729
$
1,117,485
574,188
392,501
44,294
68,076
—
69,317
(55,577)
(3,905)
(6,335)
3,500
6,548
822,020
447,709
318,484
32,693
52,003
17,325
27,204
(27,623)
(4,002)
(2,986)
(7,407)
(40,679)
Income (loss) from continuing operations
$
(3,048) $
33,272
$
978,309
651,739
326,570
217,830
29,406
35,069
25,204
19,061
(24,651)
(2,763)
71,571
63,218
9,469
53,749
Year ended December 31, 2018 compared to the Year ended December 31, 2017
Net revenues
Net revenues for the year ended December 31, 2018 increased by approximately $421.9 million or 33.2% compared
to the corresponding period in 2017. Our acquisitions of Foam Fabricators and Rimports in February 2018 contributed
$113.4 million and $145.6 million, respectively, to the increase in revenue, while our acquisition of Velocity Outdoor in
June 2017 contributed $52.9 million to the increase, reflecting a full year of ownership compared to the corresponding
period in 2017, as well as the acquisition of Ravin in September 2018. We also saw notable sales increases at Clean
94
Earth ($55.7 million), 5.11 ($37.9 million), Manitoba ($11.7 million), Arnold ($12.3 million) and our legacy Sterno business
exclusive of Rimports ($9.4 million). These increases in revenue were partially offset by decreases in net revenue at
Liberty ($9.3 million) and Ergo ($12.4 million) in 2018 as compared to 2017. Refer to "Results of Operations - Our
Businesses" for a more detailed analysis of net revenue 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 revenues
On a consolidated basis, cost of revenues increased approximately $295.5 million during the year ended December
31, 2018, compared to the corresponding period in 2017. Our acquisitions of Foam Fabricators and Rimports in
February 2018 contributed $82.6 million and $110.5 million, respectively, to the increase in cost of revenues, while our
acquisition of Velocity Outdoor in June 2017 contributed $35.3 million to the increase, reflecting a full year of ownership
compared to the corresponding period in 2017, as well as the acquisition of Ravin in September 2018. Clean Earth's
cost of revenue increased $41.4 million, in line with the increase in revenues during 2018, while our legacy Sterno
business exclusive of Rimports had an increase in cost of revenues of $9.3 million, Manitoba Harvest ($8.0 million)
and Arnold had an increase in cost of revenues of $8.6 million, both in line with the increase in revenues at these
entities. These increases were offset by decreases in cost of revenues at other operating segments, particularly Ergo
($3.1 million decrease) and Liberty ($3.3 million decrease).
Gross profit as a percentage of net revenues was approximately 33.9% in year ended December 31, 2018 compared
to 35.3% in 2017. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of gross profit by
business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $74.0 million during the year ended
December 31, 2018, compared to the corresponding period in 2017. The increase in expenses in 2018 compared to
2017 is principally the result of the acquisition of Foam Fabricators ($12.3 million including $1.6 million in acquisition
costs), Rimports ($4.0 million, including $0.6 million in acquisition costs) and Velocity Outdoor ($10.4 million) reflecting
a full year of ownership compared to the corresponding period in 2017, as well as the acquisition of Ravin in September
2018 and acquisition costs related to Ravin of $1.4 million. We also saw notable increases in selling, general and
administrative year-over-year at 5.11 ($22.2 million) and Clean Earth ($10.8 million). 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 $12.7 million in 2017 to $14.3 million in
2018, primarily due to increased professional fees associated with governance and compliance costs related to the
implementation of new accounting standards.
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, 2018, we incurred approximately $44.3 million in expense for these fees compared to $32.7
million for the corresponding period in 2017. The $11.6 million increase in the year ended December 31, 2018 is
principally due to the increase in consolidated net assets resulting from the acquisition of Foam Fabricators in February
2018, and the add-on acquisitions by our businesses that occurred throughout 2018.
Amortization expense
Amortization expense for the year ended December 31, 2018 increased $16.1 million to $68.1 million as compared to
the prior year, primarily as a result of the acquisitions of Foam Fabricators and Rimports in February 2018.
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 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.
95
Interest Expense
We recorded interest expense totaling $55.6 million for the year ended December 31, 2018 compared to $27.6 million
for the comparable period in 2017, an increase of $28.0 million. The increase in interest expense primarily reflects the
interest associated with the issuance of our Senior Notes in April 2018 and the increase in the amount outstanding on
our revolving credit facility in the current year. We recorded $22.5 million in interest expense for the period from the
date of issuance through December 31, 2018 related to the Senior Notes. The average amount outstanding on our
revolving credit facility in 2017 was $33.6 million, while the average amount outstanding during 2018 was $205.1
million as a result of our add-on acquisitions that occurred in 2018. Our interest expense also reflects the effect of the
unrealized gains or losses on our interest rate swap. In 2018 and 2017, we recognized unrealized gains of $2.3 million
and $0.6 million, respectively, which reduced our interest expense.
Income Taxes
We had income tax expense of $6.5 million with an effective income tax rate of 187.1% during the year ended December
31, 2018 compared to income tax benefit of $40.7 million with an effective income tax rate of (549.2%) during the same
period in 2017. The effective tax rate for the years ended December 31, 2018 and 2017 includes a loss at our parent
company, which is taxed as a partnership. In December 2017, the U.S. government enacted the Tax Cuts and Jobs
Act of 2017 (the "Tax Act") which made broad and complex changes to the U.S. tax code. Among other changes of
the Tax Act, the tax rate on corporations was reduced from from 35% to 21%; a limitation on the deduction of interest
expense was enacted, certain tangible property acquired after September 2017 will qualify for 100% expensing, U.S
federal income tax on foreign earnings was eliminated (subject to certain exceptions) and a new base erosion anti-
tax abuse tax were added. Although the Company is treated as a partnership for U.S. federal income tax purposes,
each of our businesses was affected by the Tax Act, and the resulting impact significantly affected the calculation of
our year-to-date consolidated income tax provision in 2018 and 2017. Additionally, in the current year, the effect of
the recapitalization at Sterno and state income taxes as well as the geographic mix of income had a significant impact
on our effective tax rate. In the prior year, the impairment expense at our Arnold business and non-deductible costs
at the corporate level, including the effect of the loss on our equity investment of FOX prior to the sale of our remaining
FOX shares in the first quarter of 2017, account for the majority of the remaining difference in our effective income tax
rates year over year.
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net revenues
On a consolidated basis, net revenues for the year ended December 31, 2017 increased by approximately $291.4
million or 29.8% compared to the corresponding period in 2016. Velocity Outdoor 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 revenues 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 revenues
On a consolidated basis, cost of revenues increased approximately $170.3 million during the year ended December
31, 2017, compared to the corresponding period in 2016. Velocity 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 profit as a percentage of net revenues 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 gross profit by business segment.
96
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 Velocity in June 2017 ($12.3 million in selling, general and
administrative expenses, including $1.8 million in acquisition costs for Velocity 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 Velocity 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 Velocity in June 2017 and 5.11 in August 2016.
Impairment expense and Loss on disposal of assets
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.
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.
Interest expense
We recorded interest expense totaling $27.6 million in the year ended December 31, 2017, an increase of $3.0 million
compared to the prior year. The increase was a result of a full year of interest on our 2016 Incremental Term Loan,
which we entered into in August 2016, as well as an increase in the unused fee we pay on our Revolving Credit Facility.
The average amount outstanding on our revolving credit facility in 2017 was $29.1 million, while the average outstanding
amount in 2016 was $27.4 million.
Income Taxes
We recorded an income tax benefit of $40.7 million with an effective tax rate of (549.2%) for the year ended December
31, 2017 and $9.5 million of income tax expense with an effective tax rate of 15% for the year ended December 31,
2016. In December 2017, the U.S. government enacted comprehensive tax legislation which made broad changes
to the U.S. tax code, including a reduction in the tax rate on corporations from 35% to 21%, a limitation on the deduction
of interest expense, U.S. federal income taxes on foreign earnings was eliminated (subject to several exceptions) and
new provisions designed to tax currently global intangible low taxed income and a new base erosion anti-abuse tax
were added. Although the Trust and the Company are treated as partnerships for U.S. income tax purposes and are
therefore not subject to net income taxes, we consolidate the results of the businesses in which we own or control
more than a 50% share of the voting interest. The income tax benefit in 2017 reflects the accounting for the effect of
the changes resulting from the new tax legislation at our consolidated subsidiaries.
Results of Operations — 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
97
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. 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.
Results of Operations
In the following results of operations, we provide (i) the actual consolidated results of operations for 5.11 for the years
ended December 31, 2018 and 2017, and (ii) comparative results of operations for 5.11 for the year ended December
31, 2016, as if we had acquired the business on January 1, 2016, including relevant pro forma adjustments for the
pre-acquisition period and explanations where applicable.
(in thousands)
2018
2017
Year ended December 31,
2016
(Pro forma)
Net sales
Gross profit (1)
Selling, general and administrative expense (2)
Operating income (loss)
$
$
$
$
347,921
100.0% $
309,999
100.0 % $
295,256
100.0 %
160,798
147,137
46.2% $
127,708
41.2 % $
112,800
42.3% $
124,970
40.3 % $
107,149
3,916
1.1% $
(7,121)
(2.3)% $
(3,852)
38.2 %
36.3 %
(1.3)%
Pro forma results of operations for 5.11 for the annual period ended December 31, 2016 include the following pro forma adjustments
applied to historical results:
(1) Gross profit was increased by $0.1 million for the year ended December 31, 2016 to reflect the increase in the depreciable lives
for machinery and equipment.
(2) Selling, general and administrative expense was increased by approximately $0.9 million in the year ended December 31, 2016
related to stock compensation expense for stock options that were granted to 5.11 employees as a result of the acquisition.
Year ended December 31, 2018 compared to the Year ended December 31, 2017
Net sales
Net sales for the year ended December 31, 2018 were $347.9 million, an increase of $37.9 million, or 12.2%, compared
to the same period in 2017. This increase is due primarily to retail and e-commerce sales growth of $25.4 million or
51%, driven by growing demand in direct to consumer channels. Retail sales grew largely due to eighteen new retail
store openings since December 2017 (bringing the total store count to forty-five as of December 31, 2018). The
increase in net sales for the year ended December 31, 2018 as compared to the corresponding period in the prior year
was offset by a $17.6 million decline in Direct-to-Agency sales. Direct-to-agency sales represent large contracts
consisting primarily of SMU (special make-up) custom uniform product designed for large law enforcement divisions.
The Direct-to-agency contract process is driven primarily by lengthy governmental approval processes and can take
upwards of 18 to 36 months, therefore revenue streams are not consistent year-over-year.
Gross Profit
Gross profit as a percentage of net sales increased from 41.2% in the year ended December 31, 2017 to 46.2% in the
year ended December 31, 2018. Cost of sales for the year ended December 31, 2017 included $21.7 million in expense
related to a $39.1 million inventory step-up resulting from the acquisition purchase price allocation. The total inventory
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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 2017, gross profit for the year ended
December 31, 2017 was 48.2%. The decrease in gross profit percentage in the year ended December 31, 2018 was
primarily due to a higher level of chargebacks incurred and discretionary discounts granted to customers while working
through the backlog associated with challenges experienced while implementing a new Enterprise Resource Planning
(ERP) system.
Selling, general and administrative expense
Selling, general and administrative expenses for the year ended December 31, 2018 increased to $147.1 million or
42.3% of net sales compared to $125.0 million or 40.3% of net sales in the same period in 2017. This increase in
selling, general and administrative expense as a percentage of net sales was primarily due to eighteen new retail
stores that were not open in the prior comparable period, higher temporary labor costs associated with the ERP
implementation, higher software maintenance costs related to the ERP system and costs to move into 5.11’s new
Manteca warehouse facility, which occurred in the second quarter of 2018.
Income (loss) from operations
Income from operations for the year ended December 31, 2018 was $3.9 million, an increase of $11.0 million when
compared to the same period in 2017, primarily due to the amortization of the inventory step-up resulting from the
purchase price allocation and the increase in selling, general and administrative expense as noted above.
Year ended December 31, 2017 compared to 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 (special make-up) custom 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.
Gross Profit
Gross profit as a percentage of net 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 net 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).
99
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.
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 more than half of its sales from outside of the United States.
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.
Results of Operations
(in thousands)
Net sales
Gross profit
Selling, general and administrative expense
Income from operations
Year ended December 31,
2018
2017
2016
$
$
$
$
90,566
100.0% $
102,969
100.0% $
103,348
100.0%
59,686
40,215
11,522
65.9% $
68,945
67.0% $
63,386
44.4% $
33,359
32.4% $
37,703
12.7% $
24,503
23.8% $
17,151
61.3%
36.5%
16.6%
Year ended December 31, 2018 compared to the Year ended December 31, 2017
Net sales
Net sales for the year ended December 31, 2018 were $90.6 million, a decrease of $12.4 million or 12.0% compared
to the same period in 2017. Net sales from Baby Tula for the year ended December 31, 2018 were $19.4 million,
compared to $22.4 million in net sales in the year ended December 31, 2017. During the year ended December 31,
2018, international sales were approximately $58.0 million, representing a decrease of $4.6 million over the
corresponding period in 2017. Baby Tula international sales during the year ended December 31, 2018 increased
$1.0 million from the corresponding period in 2017. Domestic sales were $32.6 million during the year ended
December 31, 2018, reflecting a decrease of $7.8 million compared to the corresponding period in 2017. The decrease
in domestic sales was primarily the result of the disruption in the retail landscape during 2018, including the continuing
effect of the liquidation of a large U.S. retail customer.
Cost of sales
Gross profit as a percentage of net sales was 65.9% for the year ended December 31, 2018 compared to 67.0% for
the same period in 2017. The decrease in gross profit as a percentage of net sales in the year ended December 31,
2018 compared to the year ended December 31, 2017 was due to changes in product mix and increased production
costs as a result of the launch of a new stroller product.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2018 increased to approximately $40.2
million or 44.4% of net sales compared to $33.4 million or 32.4% of net sales for the same period of 2017. Selling,
general and administrative expense in the prior year included the reversal of the fair value of the contingent consideration
related to Ergobaby's acquisition of Baby Tula of $3.8 million. Eliminating the effect of the contingent consideration, the
increase in Ergobaby's selling, general and administrative expense for the year ended December 31, 2018 compared
to the same period in 2017 was primarily due to increases in employee related costs, additional marketing for the new
stroller product category launch, additional expense related to the closure of a large retail account, higher distribution
and fulfillment costs, commissions due to the mix of sales, as well as the impact of foreign exchange rates.
100
Income from operations
Income from operations for the year ended December 31, 2018 decreased $13.0 million, to $11.5 million, compared
to $24.5 million for the same period of 2017, primarily as a result of the factors described above.
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.
Gross Profit
Gross profit as a percentage of net sales was 67.0% for the year ended December 31, 2017 compared to 61.3% for
the same period in 2016. Gross profit 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. 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.
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 a $5.9 million loss on disposal of assets recorded
during the year ended December 31, 2016 related to its decision to dispose of the Orbit Baby product line.
Liberty Safe
Overview
Founded in 1988 and based in Payson, Utah, Liberty Safe is the premier designer, manufacturer and marketer of
home and gun safes in North America. From its over 300,000 square foot manufacturing facility, Liberty Safe produces
a wide range of home 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, Colt 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 has the largest
independent dealer network in the industry.
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Results of Operations
(in thousands)
Net sales
Gross profit
Selling, general and administrative expense
Income from operations
Year ended December 31,
2018
2017
2016
$
$
$
$
82,658
100.0% $
91,956
100.0% $
103,812
100.0%
19,634
13,158
5,906
23.8% $
25,645
27.9% $
29,507
15.9% $
15,361
16.7% $
14,737
7.1% $
9,475
10.3% $
13,234
28.4%
14.2%
12.7%
Year ended December 31, 2018 compared to the Year ended December 31, 2017
Net sales
Net sales for the year ended December 31, 2018 decreased approximately $9.3 million or 10.1%, to $82.7 million,
compared to the corresponding period ended December 31, 2017. Non-Dealer sales were approximately $32.9 million
in 2018 compared to $42.3 million in 2017, representing a decrease of $9.4 million or 22.2%. Dealer sales totaled
approximately $49.7 million in the year ended December 31, 2018 compared to $49.5 million in the same period in
2017, representing an increase of $0.2 million or 0.4%. Liberty continues to face negative trends in the U.S. outdoor
retail market, including the bankruptcy filing by a national retailer in the prior year, slower ordering and reductions of
inventory levels as a result of the merger of two major outdoor retailers and softer sales at retailers dealing in sporting
goods. Liberty Safe’s sales backlog was approximately $6.0 million at December 31, 2018 compared to approximately
$6.2 million at December 31, 2017.
Gross Profit
Gross profit as a percentage of net sales totaled approximately 23.8% in 2018 compared to 27.9% in 2017. The
decrease in gross profit as a percentage of sales during the year ended December 31, 2018 compared to the same
period in 2017 is attributable primarily to cost increases in raw materials. Liberty has continued to see a rise in raw
material costs, particularly the cost of steel, during 2018 as the tariffs on imported steel has led to rising domestic steel
prices. On average, materials account for approximately 60% of the total costs of a safe, with steel accounting for
45% of material costs.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2018 decreased to approximately $13.2
million or 15.9% of net sales compared to $15.4 million or 16.7% of net sales for the same period of 2017. The $2.2
million decrease is primarily attributable to a nonrecurring $1.9 million reserve recorded in the first quarter of 2017
against the outstanding accounts receivable of a retail customer that filed for bankruptcy.
Income from operations
Income from operations decreased $3.6 million during the year ended December 31, 2018 to $5.9 million compared
to income from operations of $9.5 million during the same period in 2017, principally as a result of the decrease in
sales and gross profit in 2018, as described above.
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.
102
Gross Profit
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 net 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.
Manitoba Harvest
Overview
Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and leader in branded, hemp-based foods and
ingredients. 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 16,500
retail stores across the United States and Canada. The company’s hemp-based, 100% all-natural consumer products
include hemp hearts, protein powder, hemp oil and snacks.
Results of Operations
(in thousands)
Net sales
Gross profit
Selling, general and administrative expense
Income (loss) from operations
Year ended December 31,
2018
2017
2016
$
$
$
$
67,437
100.0 % $
55,699
100.0 % $
59,323
100.0%
28,877
25,741
42.8 % $
25,101
45.1 % $
26,505
38.2 % $
21,092
37.9 % $
21,326
(1,754)
(2.6)% $
(9,332)
(16.8)% $
321
44.7%
35.9%
0.5%
Year ended December 31, 2018 compared to the Year ended December 31, 2017
Net sales
Net sales for the year ended December 31, 2018 were approximately $67.4 million, an increase of $11.7 million, or
21.1%, compared to the same period in 2017. During 2018, Manitoba Harvest experienced strong growth across both
the branded and ingredient product lines. Consumer awareness programs, new distribution gains, and consumer
demand for plant-based protein continue to drive sales of their shelled hemp seed and hemp oil products.
Gross Profit
Gross profit for the year ending December 31, 2018 was $28.9 million, an increase of $3.8 million compared to the
prior year. Gross profit as a percentage of net sales was 42.8% for the year ended December 31, 2018 as compared
to 45.1% for the year ended December 31, 2017. The decrease in gross profit as a percentage of net sales in the
current year was primarily driven by protein powder work in process inventory adjustments, incremental third party
warehousing to support customer service and consumer demand, and costs related to the realignment of logistics
between our Winnipeg and St. Agathe facilities.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2018 increased to approximately $25.7
million or 38.2% of net sales compared to $21.1 million or 37.9% of net sales for the same period of 2017. The $4.6
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million increase in 2018 compared to 2017 is primarily due to ongoing investments in key operating capability initiatives
such as creative production, digital media, public relations, creative production, field sales and research and
development.
Loss from operations
Loss from operations for the year ended December 31, 2018 was approximately $1.8 million, as compared to a loss
from operations of $9.3 million for the same period in 2017. 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 impairment
expense of $8.5 million. Approximately $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. While Manitoba Harvest saw a significant
increase in net sales and gross profit compared to the prior year, the ongoing investment in their business has led to
an offsetting increase in selling, general and administrative expense in the current year, resulting in the loss from
operations.
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.
Gross Profit
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.
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. 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 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. The impairment expense recognized in 2017 was the primary factor contributing to the loss from
operations.
Velocity Outdoor
Overview
Velocity Outdoor is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices
and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin,
LaserMax, Ravin and CenterPoint brands that are available through national retail chains, mass merchants, dealer
and distributor networks. Airguns historically represent Velocity Outdoor's largest product category. The airgun product
category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity
Outdoor's other primary product categories are archery, with products including CenterPoint and Ravin crossbows,
consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft
products. In September 2018, Velocity acquired Ravin Crossbows, a manufacturer and innovator of crossbows and
accessories. Ravin primarily focuses on the higher-end segment of the crossbow market and has developed significant
intellectual property related to the advancement of crossbow technology.
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Results of Operations
Velocity Outdoor was acquired in June 2017. In the following results of operations, we provide the actual results of
operations for the year ended December 31, 2018, as well as comparative results of operations for Velocity 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.
Year ended December 31,
2018
2017
2016
(in thousands)
(Pro forma)
(Pro forma)
Net sales
Gross profit (1)
Selling, general and administrative expense (2)
Income from operations
$
$
$
$
131,296
100.0% $
120,033
100.0% $
118,736
100.0%
34,372
22,761
4,850
26.2% $
27,641
23.0% $
31,727
17.3% $
18,636
15.5% $
15,660
3.7% $
3,756
3.1% $
10,909
26.7%
13.2%
9.2%
Pro forma results of operations of Velocity 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 Velocity on January 1, 2016:
(1) Gross profit 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.
(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 were granted to Velocity employees
as a result of the acquisition.
Year ended December 31, 2018 compared to the Pro Forma Year ended December 31, 2017
Net sales
Net sales for the year ended December 31, 2018 were $131.3 million compared to net sales of $120.0 million for the
year ended December 31, 2017, an increase of $11.3 million or 9.4%. The increase in net sales for the year ended
December 31, 2018 is primarily due to add-on acquisitions in the third quarters of 2017 and 2018.
Gross Profit
Gross profit as a percentage of net sales was 26.2% for the year ended December 31, 2018 as compared to 23.0%
in the year December 31, 2017. Cost of sales for the year ended December 31, 2018 included $2.5 million in expense
related to the inventory step-up resulting from the purchase price allocation for Ravin, while cost of sales for the year
ended December 31, 2017 included $3.3 million in expense related to the inventory step-up resulting from the purchase
price allocation for Velocity. Excluding the effect of the inventory step-ups, gross profit as a percentage of net sales
was 28.1% for the year ended December 31, 2018 as compared to 25.8% for the year ended December 31, 2017 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, 2018 was $22.8 million, or 17.3% of
net sales compared to $18.6 million, or 15.5% of net sales, for the year ended December 31, 2017. The selling, general
and administrative expense for the year ended December 31, 2018 included $1.3 million in acquisition costs related
to our acquisition of Ravin in September 2018. Selling, general and administrative expense for the year ended December
31, 2017 included $1.8 million in transaction costs paid in relation to the acquisition of Velocity in June 2017 and an
add-on acquisition at Velocity completed during the third quarter of 2017. The balance of the expense growth in 2018
is related to increased sales support, marketing spend and the impact from the 2017 and 2018 add-on acquisitions.
Income from operations
Income from operations for the year ended December 31, 2018 was $4.9 million, an increase of $1.1 million when
compared to income from operations of $3.8 million for the comparable period in 2017, based on the factors described
above.
105
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.
Gross Profit
Gross profit as a percentage of net sales was 23.0% for the year ended December 31, 2017 compared to 26.7% for the year
ended December 31, 2016. Cost of sales for the year ended December 31, 2017 included $3.3 million in expense related
to the inventory step-up resulting from the purchase price allocation for Velocity. Excluding the effect of the inventory step-
up, gross profit as a percentage of net 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 Velocity in June 2017 and an add-on acquisition at Velocity 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.
Advanced Circuits
Overview
Niche Industrial Businesses
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
(in thousands)
Net sales
Gross profit
Selling, general and administrative expense
Income from operations
Year Ended December 31,
2018
2017
2016
$
$
$
$
92,511
43,166
15,108
26,335
100.0% $
87,782
100.0% $
86,041
100.0%
46.7% $
39,884
45.4% $
38,044
16.3% $
14,565
16.6% $
13,579
28.5% $
23,575
26.9% $
22,718
44.2%
15.8%
26.4%
Year ended December 31, 2018 compared to the Year ended December 31, 2017
Net sales
Net sales for the year ended December 31, 2018 were approximately $92.5 million compared to approximately $87.8
million for the same period in 2017, an increase of approximately $4.7 million or 5.4%. The increase in net sales was
due to increased sales in Quick-Turn Production PCBs by approximately $1.3 million, Long-Lead Time PCBs by
approximately $2.4 million, Subcontract by approximately $1.0 million, and decreased Promotion by approximately
106
$0.8 million. This was partially offset by decreases in Assembly sales by approximately $0.1 million and Quick-Turn
Small-Run PCBs by approximately $0.7 million. On a consolidated basis at ACI, Quick-Turn Small-Run PCBs comprised
approximately 18.9% of gross sales and Quick-Turn Production PCBs represented approximately 33.0% of gross sales
for the year ended December 31, 2018. 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 year ended December 31,
2017.
Gross profit
Gross profit as a percentage of net sales increased 130 basis points during the year ended December 31, 2018 (46.7%
in 2018 compared to 45.4% in 2017) primarily as a result of sales mix.
Selling, general and administrative expense
Selling, general and administrative expenses were approximately $15.1 million in the year ended December 31, 2018
as compared to $14.6 million in the year ended December 31, 2017, an increase of approximately $0.5 million. The
increase in selling, general and administrative expense is primarily due to increased commissions from higher sales
and a full year of expense for the financial, sales, and production management added in 2017. Selling, general and
administrative expenses represented 16.3% of net sales for the year ended December 31, 2018 compared to 16.6%
of net sales in 2017.
Income from operations
Income from operations for the year ended December 31, 2018 was approximately $26.3 million compared to $23.6
million in the same period in 2017, an increase of approximately $2.8 million, as a result of the factors described above.
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 $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.
Gross Profit
Gross profit as a percentage of net 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.
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.
107
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 leads 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, Permanent Magnets and Assemblies Group ("PMAG"), Precision
Thin Metals ("PTM") and Flexmag.
Results of Operations
(in thousands)
Net sales
Gross profit
Selling, general and administrative expense
Impairment expense
Income (loss) from operations
2018
Year ended December 31,
2017
2016
$ 117,860
100.0% $ 105,580
100.0 % $ 108,179
100.0 %
$
$
$
$
30,381
19,036
25.8% $
26,717
25.3 % $
23,704
16.2% $
19,583
18.5 % $
16,602
—
—% $
8,864
8.4 % $
16,000
21.9 %
15.3 %
14.8 %
7,416
6.3% $
(5,693)
(5.4)% $
(12,921)
(11.9)%
Year ended December 31, 2018 compared to the Year ended December 31, 2017
Net sales
Net sales for the year ended December 31, 2018 were approximately $117.9 million, an increase of $12.3 million
compared to the same period in 2017. The increase in net sales is primarily a result of increased demand across
various product sectors and markets. PMAG sales represented 74% of net sales in the year ended December 31,
2018 and 72% of net sales in the year ended December 31, 2017. International sales were $47.8 million and $42.3
million for the years ended December 31, 2018 and 2017, respectively, an increase of $5.5 million, primarily as a result
of the increased sales at PMAG.
Gross Profit
Gross profit was $30.4 million for the year ended December 31, 2018 as compared to $26.7 million for the same period
in 2017. Gross profit as a percentage of net sales increased from 25.3% in 2017 to 25.8% in 2018. The increase is
principally attributable to an increase in sales volume and manufacturing efficiencies.
Selling, general and administrative expense
Selling, general and administrative expense in the year ended December 31, 2018 was $19.0 million as compared to
approximately $19.6 million for the year ended December 31, 2017. The decrease in expense is primarily attributable
to non-recurring legal and environmental expenses and reduced consulting fees. Selling, general and administrative
expense represented 16.2% of net sales for the year ended December 31, 2018 as compared to 18.5% for the same
period in 2017.
Income (loss) from operations
Arnold had income from operations of approximately $7.4 million for the year ended December 31, 2018, as compared
to a loss from operations of $5.7 million for the year ended December 31, 2017, with the loss in the prior year primarily
as a result of the impairment expense.
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 $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.
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Gross Profit
Gross profit as a percentage of net 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.
Clean Earth
Overview
Founded in 1990, Clean Earth is a provider of environmental services for a variety of contaminated materials. Clean
Earth provides a one-stop shop solution that analyzes, treats, documents and recycles waste streams generated in
multiple end-markets such as utilities, infrastructure, chemicals, aerospace and defense, non-public/ private
development, medical, industrial and dredging. Historically, the majority of Clean Earth’s revenues have been generated
by contaminated soils, which includes environmentally impacted soils and other materials which are treated at one of
its eleven permitted soil treatment facilities. Clean Earth also operates six RCRA Part B hazardous waste facilities,
and a water waste treatment facility. 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 infrastructure projects, daily
landfill cover, industrial and brownfield redevelopment projects.
Results of Operations
(in thousands)
Net revenues
Gross profit
Selling, general and administrative expense
Income from operations
Year ended December 31,
2018
2017
2016
$ 266,916
100.0% $ 211,247
100.0% $ 188,997
100.0%
$
$
$
75,470
46,677
14,443
28.3% $
61,219
29.0% $
54,330
17.5% $
35,875
17.0% $
30,018
5.4% $
12,037
5.7% $
7,929
28.7%
15.9%
4.2%
Year ended December 31, 2018 compared to the Year ended December 31, 2017
Net revenues
Net revenues for the year ended December 31, 2018 were approximately $266.9 million, an increase of $55.7 million
or 26.4% compared to the same period in 2017. Contaminated soil revenue increased 20% as compared to the same
period last year, which is principally attributable to large project awards and the impact of recent acquisitions. Hazardous
waste revenue increased 21% in the current year as compared to the prior year as a result of recent acquisitions and
growth in the base business. Net revenues from dredge increased $14.3 million in 2018 as compared to the prior
year, due to the timing of projects. Contaminated soils represented approximately 53% of net revenues for the year
ended December 31, 2018 and 55% of net revenues for the year ended December 31, 2017.
109
Gross profit
Gross profit for the year ended December 31, 2018 was approximately $75.5 million compared to approximately $61.2
million in the same period of 2017, an increase of $14.3 million, primarily as a result of increases in the gross profit at
each of Clean Earths' service lines. Gross profit as a percentage of net revenues decreased from 29.0% for the year
ended December 31, 2017 to 28.3% for the year ended December 31, 2018. The decrease in gross profit as a
percentage of net revenues is due to increased back-end costs for certain soil facilities.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2018 increased to approximately $46.7
million or 17.5% of net revenues compared to $35.9 million or 17.0% of net revenues for the same period in 2017.
The $10.8 million increase in selling, general and administrative expenses in the year ended December 31, 2018
compared to 2017 is primarily attributable to Clean Earth's recent acquisitions.
Income from operations
Income from operations for the year ended December 31, 2018 was approximately $14.4 million as compared to
income from operations of $12.0 million for the year ended December 31, 2017, an increase of $2.4 million, primarily
as a result of those factors described above.
Year ended December 31, 2017 compared to the Year ended December 31, 2016
Net revenues
Net 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 revenues for both the years ended December 31, 2017 and 2016.
Gross profit
Gross profit for the year ended December 31, 2017 were approximately $61.2 million compared to approximately $54.3
million in the same period of 2017, an increase of $6.9 million, primarily as a result of the two acquisitions in 2016 and
one acquisition in 2017. Gross profit as a percentage of net revenues 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.
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 a loss on disposal of assets of $3.3 million in the prior year related to the closure of Clean Earth's
Williamsport site.
Foam Fabricators
Overview
Founded in 1957 and headquartered in Scottsdale, Arizona, Foam Fabricators is a designer and manufacturer of
custom molded protective foam solutions and original equipment manufacturer (OEM) components made from
expanded polystyrene (EPS) and expanded polypropylene (EPP). Foam Fabricators operates 13 molding and
fabricating facilities across North America and provides products to a variety of end-markets, including appliances and
electronics, pharmaceuticals, health and wellness, automotive, building products and others.
110
Results of Operations
Foam Fabricators was acquired in February 2018. In the following results of operations, we provide comparative
results of operations for Foam Fabricators for the years ended December 31, 2018 and 2017 as if we had acquired
the business on January 1, 2017, including relevant pro forma adjustments for pre-acquisition periods and explanations
where applicable.
(in thousands)
Net sales
Gross profit
Selling, general and administrative expense
Income from operations
Year ended December 31,
2018
2017
(Pro forma)
(Pro forma)
$
$
$
$
128,465
100.0% $
126,389
100.0%
34,839
14,028
12,196
27.1% $
10.9% $
9.5% $
38,959
12,722
17,457
30.8%
10.1%
13.8%
Pro forma financial information for Foam Fabricators for the years ended December 31, 2018 and 2017 includes pre-acquisition results of
operations for the period from January 1, 2017 through December 31, 2017, and January 1, 2018 through February 15, 2018, the acquisition
date of Foam Fabricators, for comparative purposes. The historical results of Foam Fabricators for the year ended December 31, 2017
and the period from January 1, 2018 through February 15, 2018 have been adjusted to reflect the purchase accounting adjustments
recorded in connection with the acquisition. In the year ended December 31, 2017, we recorded $1.0 million in stock compensation expense,
$0.2 million reduction in depreciation expense and $8.0 million in amortization expense, as well as $0.8 million in management fees that
would have been incurred by Foam Fabricators if we owned the company during this period. The historical results of Foam Fabricators for
the period from January 1, 2018 through February 15, 2018 have been adjusted to reflect $0.2 million in stock compensation expense,
$0.1 million in depreciation expense, and $1.0 million in amortization expense, as well as $0.1 million in management fees that would have
been incurred by Foam Fabricators if we owned the company during this period.
Pro Forma Year ended December 31, 2018 compared to the Pro Forma Year ended December 31, 2017
Net sales
Net sales for the year ended December 31, 2018 were $128.5 million, an increase of $2.1 million, or 1.6%, compared
to the year ended December 31, 2017. The increase in net sales was due to organic growth with the existing customer
base, primarily related to the appliance and other packaging categories.
Gross profit
Gross profit as a percentage of net sales was 27.1% and 30.8%, respectively, for the years ended December 31, 2018
and 2017. The cost of sales for the year ended December 31, 2018 includes $0.7 million related to the inventory step-
up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross
profit as a percentage of net sales for the year ended December 31, 2018 was 27.6%, a decrease of 320 basis points
compared to the comparable period in the prior year. The decrease in gross profit percentage was primarily due to
due to increased raw material costs and, to a lesser degree, increased compensation, benefits and other plant expenses.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2018 was $14.0 million as compared
to $12.7 million for the year ended December 31, 2017, an increase of $1.3 million. Selling, general and administrative
expense for the year ended December 31, 2018 includes $2.0 million in integration service fees paid to CGM and $1.5
million in transaction costs paid in relation to the acquisition of Foam Fabricators. Excluding the integration fees and
transaction costs, selling, general and administrative expense for the year ended December 31, 2018 was $2.2 million
lower than the comparable period in the prior year due to lower management bonus expenses and nonrecurring
expenses related to the compensation of the previous owner.
Income from operations
Income from operations was $12.2 million for the year ended December 31, 2018 as compared to $17.5 million for
the year ended December 31, 2017, a decrease of $5.3 million based on the factors noted above.
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Sterno
Overview
Sterno is a manufacturer and marketer of portable food warming fuel and creative ambience solutions for the hospitality
and consumer markets. 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, and in February 2018 Sterno acquired Rimports, which is a manufacturer and
distributor of branded and private label scented wax cubes and warmer products used for home decor and fragrance
systems.
Results of Operations
The table below summarizes the results of operations for Sterno for the fiscal years ended December 31, 2018, 2017
and 2016. The historical operating results of Rimports have been added to the previously reported Sterno results of
operations for the year ended December 31, 2017 and the Sterno results of operations for the 2018 period prior to
acquisition by Sterno, as if Sterno had acquired Rimports on January 1, 2017, including relevant pro forma adjustments
for pre-acquisition periods and explanations where applicable. The historical results of operations of Sterno for the
year ended December 31, 2017 are presented in the table below as previously reported in the December 31, 2017
10-K as well for purposes of comparison to the year ended December 31, 2016.
(in thousands)
Net sales
Gross profit
Selling, general and administrative
expense
Income from operations
2018
2017
2017
2016
Year ended December 31,
Pro Forma
Pro Forma
$ 405,870
100.0% $ 383,401
100.0% $ 226,110
100.0% $ 218,817
100.0%
$
$
$
97,381
24.0% $
99,201
25.9% $ 55,755
24.7% $ 60,095
27.5%
37,131
9.1% $
37,891
9.9% $ 28,662
12.7% $ 34,362
15.7%
42,500
10.5% $
43,797
11.4% $ 19,194
8.5% $ 18,799
8.6%
Pro forma financial information for Sterno for the years ended December 31, 2018 and 2017 includes pre-acquisition results of operations
of Rimports for the period from January 1, 2017 through December 31, 2017, and January 1, 2018 through February 28, 2018, the acquisition
date of Rimports, for comparative purposes. The historical results of Sterno for the year ended December 31, 2017 and the period from
January 1, 2018 through February 28, 2018 have been adjusted to reflect the purchase accounting adjustments recorded in connection
with the acquisition. In the year ended December 31, 2017, $0.1 million reduction in depreciation expense and $9.6 million in amortization
expense. The historical results of Sterno for the period from January 1, 2018 through February 15, 2018 have been adjusted to reflect
$0.1 million in depreciation expense, and $1.6 million in amortization expense.
Pro Forma Year ended December 31, 2018 compared to the Pro Forma Year ended December 31, 2017
Net sales
Net sales for the year ended December 31, 2018 were approximately $405.9 million, an increase of $22.5 million or
5.9% compared to the same period in 2017. The net sales variance reflects increased Rimports sales relating to
harvest promotions, scented wax products and essential oils, as well as stronger Sterno Home candle and outdoor
sales.
Gross Profit
Gross profit as a percentage of net sales decreased from 25.9% for the year ended December 31, 2017 to 24.0% for
the same period ended December 31, 2018. Sterno recognized $4.6 million in cost of goods sold in the second quarter
of 2018 and $2.0 million in the third quarter of 2018 related to the amortization of the inventory step-up resulting from
the purchase price allocation of the Rimports acquisition. After eliminating the effect of the inventory step-up, gross
profit as a percentage of net sales was 25.6% for the year ended December 31, 2018. The decrease in gross profit
percentage during the year ended December 31, 2018 primarily reflects an increase in chemical and other material
costs, as well as higher freight and carrier costs.
112
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2018 was approximately $37.1 million
as compared to $37.9 million in the year ended December 31, 2017, a decrease of $0.8 million or 2.0%. Selling, general
and administrative expense represented 9.1% of net sales for the year ended December 31, 2018 as compared to
9.9% of net sales for the same period in 2017. The decrease as a percentage of net sales in 2018 as compared to
the same period in 2017 reflects the reversal of the fair value of the contingent consideration related to the acquisition of
Rimports of $4.8 million, the increase in sales during the current period, and lower marketing costs, commissions, and
development expense.
Income from operations
Income from operations for the year ended December 31, 2018 was approximately $42.5 million, a decrease of $1.3
million when compared to the same period in 2017, due primarily to the increased costs associated with the Rimports
acquisition, including the inventory step-up expense noted above.
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.
Gross Profit
Gross profit as a percentage of net 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
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 in 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.
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Liquidity and Capital Resources
The change in cash and cash equivalents is as follows:
(in thousands)
Cash provided by operating activities
Cash used in investing activities
Cash provided by (used in) financing activities
Effect of exchange rates on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Year ended December 31,
2018
2017
2016
$
$
114,452
$
81,771
$
(604,080)
500,111
2,958
(77,278)
(2,588)
(1,792)
13,441
$
113
$
111,372
(363,021)
208,726
(3,174)
(46,097)
Cash Flow from Operating Activities
2018
Cash flows provided by operating activities totaled approximately $114.5 million for the year ended December 31,
2018, which represents an increase of $32.7 million compared to cash flow from operating activities of $81.8 million
for the year ended December 31, 2017. Cash used in operating activities for working capital for the year ended
December 31, 2018 was $6.3 million as compared to cash used for working capital of $40.4 million for the year ended
December 31, 2017. Our working capital cash flows in the current year reflect a significant decrease in the cash flows
from accounts receivable as well as a significant increase in cash flows from accounts payable and accrued expenses
compared to the prior year, resulting in an overall decrease in the cash used for working capital. This decrease mostly
reflects timing of collections and payments in the current year.
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 Velocity 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.
Cash Flow from Investing Activities
2018
Cash flows used in investing activities totaled approximately $604.1 million, compared to $77.3 million used in investing
activities during the year ended December 31, 2017, an increase of $526.8 million. In the current year, we had a
platform acquisition in the first quarter, Foam Fabricators, and several add-on acquisitions at our subsidiaries. Sterno
acquired Rimports in February 2018, Clean Earth has had several add-on acquisitions throughout the year, and our
Velocity Outdoor subsidiary acquired Ravin in September 2018. The total total cash paid for these current year
acquisitions was $552.1 million, while in the prior year, we spent approximately $165.0 million related to our acquisition
of Velocity Outdoor and two smaller add-on acquisitions. Capital expenditures in the year ended December 31, 2018
increased $5.5 million, due primarily to expenditures at our 5.11 business related to investments in various infrastructure
114
and systems projects to position them for future growth. We expect capital expenditures for fiscal year 2019 to be
approximately $45 million to $55 million.
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 Velocity Outdoor 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. 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.
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.
Cash Flow from Financing Activities
2018
Cash flows provided by financing activities totaled approximately $500.1 million for the year ended December 31,
2018, as compared to cash flows used in financing activities of $2.6 million for the year ended December 31, 2017.
Our financing cash flows in 2018 primarily related to the financing of our acquisitions of Foam Fabricators and Rimports
in February 2018, which were financed through draws on our 2014 Revolving Credit Facility, partially offset by net
proceeds of $96.5 million from the Series B Preferred Shares offering in March 2018 which was used to repay a portion
of the outstanding amount on the 2014 Revolving Credit Facility. In April 2018, we issued $400 million in Senior Notes
and amended our credit facility. The proceeds from the issuance of the Senior Notes were used to pay down outstanding
amounts under our credit facility. Concurrently with the issuance of our Senior Notes, we refinanced our 2014 Credit
Facility and reduced the amount outstanding on our term loan from $558.6 million to $500 million. In addition to activity
on our credit facility, financing activities reflect the payment of our quarterly common share distributions ($86.3 million
in 2018 and 2017) and preferred share distributions ($12.2 million in 2018 and $2.5 million in 2017).
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.
115
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.
•
On January 24, 2019, we paid our fourth quarter 2018 common share distribution to our shareholders of $21.6 million,
and on January 30, 2019 we paid our fourth quarter 2018 distributions for our Series A and Series B Preferred Shares
of $3.8 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, 2018:
(in thousands)
5.11
Ergobaby
Liberty
Manitoba Harvest
Velocity Outdoor
Advanced Circuits
Arnold
Clean Earth
Foam Fabricators
Sterno
Total
Corporate and eliminations
Intercompany
Loans
Total Liabilities
$
203,702
$
265,089
54,780
46,539
48,062
124,919
76,638
72,830
207,672
101,225
263,498
71,317
56,750
73,100
163,512
96,776
97,863
286,062
110,307
322,375
$
$
1,199,865
$
1,543,151
(1,199,865)
(90,158)
— $
1,452,993
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.
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,
116
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 options, 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 C - Acquisition of Businesses" 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.
In the first quarter of 2018, we amended the credit facility with Arnold whereby the maturity date of the Term A loan
was extended to February 2024, the maturity date of the Term B loan was extended to February 2025, and the financial
covenants were updated to reflect changes in the company subsequent to acquisition in March 2012. 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 as of 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. We further amended the 5.11 intercompany debt agreement during 2018
to allow for an additional $5.0 million outstanding debt to be permitted under 5.11's Term B loan. 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 the quarter
ended December 31, 2018. Subsequent to the third quarter of 2018, we amended the Sterno Loan Agreement to
increase the amount available to Sterno under their intercompany revolving credit facility. Liberty was not in compliance
with the financial covenants under their intercompany loan agreement at December 31, 2018, and we amended the
Liberty intercompany debt agreement to grant a waiver to them through the quarter ended December 31, 2019. Clean
Earth was not in compliance with the financial covenants under their intercompany loan agreement at December 31,
2018 as a result of financing various add-on acquisitions during the year, and we amended the Clean Earth intercompany
debt agreement to grant a waiver to them through the quarter ended December 31, 2019. Except as previously noted,
all of our subsidiaries were in compliance with the financial covenants included within their intercompany credit
arrangements at December 31, 2018.
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.
We believe that we currently have sufficient liquidity and capital resources to meet our existing obligations, including
quarterly distributions to our shareholders, as approved by our board of directors, over the next twelve months.
Financing Arrangements
2018 Credit Facility
In April 2018, we entered into an Amended and Restated Credit Agreement to amend and restate the 2014 Credit
Facility. The 2018 Credit Facility provides for (i) revolving loans, swing line loans and letters of credit (the “2018
Revolving Credit Facility”) up to a maximum aggregate amount of $600 million, and (ii) a $500 million term loan.
Under the 2018 Term Loan, advances under term loans can be either Eurodollar rate loans or base rate loans. Eurodollar
rate term loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum
based on the Eurodollar Rate for such interest period plus a margin of either 2.25% or 2.50%, based on the Consolidated
Total Leverage Ratio. Base rate term loans bear interest on the outstanding principal amount thereof from the applicable
borrowing date at a rate per annum equal to the Base Rate plus either 1.25% or 1.50%, based on the Consolidated
Total Leverage Ratio. The initial 2018 Term Loan was advanced as a Eurodollar rate loan. Advances under the 2018
Revolving Line of Credit can be either Eurodollar rate loans or base rate loans. Eurodollar rate revolving loans bear
interest on the outstanding principal amount thereof for each interest period at a rate per annum based on the London
Interbank Offered Rate approved by the Agent (the “Eurodollar Rate”) for such interest period plus a margin ranging
from 1.50% to 2.50%, based on the ratio of consolidated net indebtedness to adjusted consolidated earnings before
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interest expense, tax expense, and depreciation and amortization expenses for such period (the “Consolidated Total
Leverage Ratio”). Base rate revolving loans bear interest on the outstanding principal amount thereof at a rate per
annum equal to the highest of (i) Federal Funds rate plus 0.50%, (ii) the rate of interest in effect for such day as publicly
announced from time to time by the Agent as its “prime rate”, and (iii) Eurodollar Rate plus 1.0% (the “Base Rate”),
plus a margin ranging from 0.50% to 1.50%, based on its Consolidated Total Leverage Ratio.
(Refer to "Note H - Debt" of the consolidated financial statements for a complete description of our 2018 Credit Facility.)
At December 31, 2018, we had Letters of Credit totaling $0.3 million outstanding under the 2018 Revolving Credit
Facility. We had approximately $371.7 million in borrowing base availability under this facility at December 31, 2018.
2014 Credit Facility
The 2014 Credit Facility, as amended, provided for (i) a revolving credit facility of $550 million, (ii) a $325 million term
loan (the "2014 Term Loan"), and (iii) a $250 million incremental term loan. The 2018 Credit Facility amended and
restated the 2014 Credit Facility.
Senior Notes
On April 18, 2018, we consummated the issuance and sale of $400 million aggregate principal amount of our Senior
Notes offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the
Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. We used the net proceeds from
the sale of the Notes to repay debt under our existing credit facilities in connection with a concurrent refinancing
transaction described above. The Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the
“Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes will bear interest at
the rate of 8.000% per annum and will mature on May 1, 2026. Interest on the Notes is payable in cash on May 1st
and November 1st of each year, beginning on November 1, 2018. The Notes are general senior unsecured obligations
of the Company and are not guaranteed by our subsidiaries.
The Indenture contains several restrictive covenants including, but not limited to, limitations on the following: (i) the
incurrence of additional indebtedness, (ii) restricted payments, (iii) dividends and other payments affecting restricted
subsidiaries, (iv) the issuance of preferred stock of restricted subsidiaries, (v) transactions with affiliates, (vi) asset
sales and mergers and consolidations, (vii) future subsidiary guarantees and (viii) liens, subject in each case to certain
exceptions.
The following table reflects required and actual financial ratios as of December 31, 2018 included as part of the
affirmative covenants in our 2018 Credit Facility:
Description of Required Covenant Ratio
Covenant Ratio Requirement
Actual Ratio
Fixed Charge Coverage Ratio
Greater than or equal to 1.50:1.00
Total Secured Debt to EBITDA Ratio
Less than or equal to 3.50:1.00
Total Debt to EBITDA Ratio
Less than or equal to 5.00:1.00
2.81:1.00
2.54:1.00
3.96:1.00
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 2018 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 16, 2014, we purchased an interest rate swap (“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, 2018, the Swap had a fair value loss of $2.1
million, principally reflecting the present value of future payments and receipts under the agreement. $0.6 million of
Swap is reflected as a component of current liabilities and $1.5 million is reflected as a component of noncurrent
liabilities in the consolidated balance sheet at December 31, 2018.
118
Interest Expense
We incurred interest expense totaling $55.6 million in the year ended December 31, 2018, as compared to $27.6 million
in the year ended December 31, 2017 and $24.7 million for the year ended December 31, 2016. The components of
interest expense on our outstanding debt are as follows (in thousands):
Interest on credit facilities
Interest on Senior Notes
Unused fee on Revolving Credit Facility
Amortization of original issue discount
Unrealized (gain) loss on interest rate derivatives (1)
Letter of credit fees
Other, net
Interest expense, net
Average daily balance outstanding - credit facilities
Effective interest rate - credit facilities
Years ended December 31,
2018
2017
2016
$
32,414
$
23,940
$
19,861
22,489
1,630
729
(2,251)
8
558
—
2,856
1,037
(648)
70
368
—
1,947
802
1,539
108
394
55,577
$
27,623
$
24,651
721,643
$
597,114
$
477,656
4.6%
4.7%
5.2%
$
$
In the above table, we provide the effective interest rate on our credit facilities, including the effect of the Swap, and
excluding the interest on our Senior Notes, which is at a fixed 8.000%.
(1) On September 16, 2014, we purchased an interest rate swap (the “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.
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, state and in some cases, foreign income taxes. On December 22, 2017, the U.S. government
enacted the Tax Act. The Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21% and required
companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred
and created new taxes on certain foreign sourced earnings. The Company made a reasonable estimate of the effects
of the Tax Act on its existing deferred tax balances and the one-time transition tax as of December 31, 2017. The
Company 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 included provisional tax expense of $4.9 million related
to the one-time transition tax liability of our foreign subsidiaries. The Company completed the calculation of the total
E&P for these foreign subsidiaries during 2018 and recorded additional adjustments to the provisional amounts of $0.4
million that is recognized as a component of the provision for income taxes in the year ended December 31, 2018.
The Tax Act also subjects the Company to tax on global intangible low-taxed income ("GILTI") earned by certain foreign
subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that
an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences
expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is
incurred as a period expense. The Company has elected to account for GILTI as a period cost in the year the tax is
incurred.
We recorded an income tax provision of $6.5 million with an annual effective rate of 187.1% during the year ended
December 31, 2018, an income tax benefit of $40.7 million with an annual effective tax rate of (549.2)% during the
year ended December 31, 2017, and $9.5 million in income tax expense with an effective tax rate of 15% during the
year ended December 31, 2016. 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.
119
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, 2018, 2017 and 2016 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 - GILTI tax
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,
2018
2017
2016
21.0%
(22.0)
23.0
84.6
—
—
1.7
—
3.1
—
27.9
—
(15.9)
49.5
0.5
10.0
3.7
(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%
0.6
1.5
3.6
—
(41.2)
1.3
(0.9)
1.9
4.2
3.6
—
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—
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6.1
187.1%
(549.2)%
15.0%
(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 a loss of $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 or US 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”).
120
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):
121
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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 (loss)
Adjustment to reconcile net income (loss) 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 (4)
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 (5)
Maintenance capital expenditures: (6)
Compass Group Diversified Holdings LLC
5.11
Advanced Circuits
125
Year ended December 31,
2018
2017
2016
$
(1,790) $
33,612
$
56,530
120,575
—
(1,258)
4,483
(2,251)
8,975
—
—
433
(9,472)
1,007
(6,250)
114,452
1,630
—
5,343
2,719
4,083
—
5,181
6,250
—
1,783
4,800
—
—
—
2,322
1,588
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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40,394
—
3,964
4,736
3,315
3,586
—
2,934
628
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
—
394
421
—
18,484
4,303
—
1,327
—
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1,838
2,931
Arnold
Clean Earth
Ergobaby
Foam Fabricators
Liberty
Manitoba Harvest
Sterno
Tridien (divested September 2016)
Velocity
Preferred share distributions
4,708
8,023
737
1,795
1,130
481
2,694
—
3,768
12,179
4,851
5,289
1,041
—
706
647
2,343
—
1,831
2,457
3,801
6,202
826
—
1,098
1,495
1,787
385
—
—
Estimated cash flow available for distribution and reinvestment $
93,650
$
92,243
$
76,375
Distribution paid in April 2018/2017/2016
Distribution paid in July 2018/2017/2016
Distribution paid in October 2018/2017/2016
Distribution paid in January 2019/2018/2017
$
$
(21,564) $
(21,564) $
(21,564)
(21,564)
(21,564)
(21,564)
(21,564)
(21,564)
(86,256) $
(86,256) $
(19,548)
(19,548)
(19,548)
(21,564)
(80,208)
(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
statement of operations.
(4)
(5)
Includes $4.2 million in additional reserves recorded in the fourth quarter of 2018 for slow moving inventory acquired prior to
our ownership of 5.11.
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.
(6) Represents maintenance capital expenditures that were funded from operating cash flow and excludes growth capital
expenditures of approximately $22.5 million, $24.3 million and $3.4 million incurred during the years ended December 31,
2018, 2017 and 2016, respectively.
Seasonality
The following table presents the net sales by quarter as a percentage of our annual net sales.
Quarter Ended
2018
2017
2016
Year Ended December 31,
March 31
June 30
September 30
December 31
21.3%
25.4%
26.5%
26.8%
22.8%
24.2%
25.5%
27.4%
19.8%
21.9%
25.8%
32.6%
Earnings of certain of our operating segments are seasonal in nature due to various recurring events, holidays and
seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and
fourth quarter produce the highest net sales during our fiscal year.
Related Party Transactions and Certain Transactions Involving our Businesses
We have entered into related party transactions with our Manager, CGM including the following:
• Management Services Agreement
•
LLC Agreement
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•
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, 2018, 2017, and 2016, we incurred $44.3 million, $32.7 million, and $29.4 million, respectively, in
management fees to CGM (excludes offsetting fees paid by Tridien in 2016).
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 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. During the current year, the Company
paid CGM $0.4 million representing the management fee due from Manitoba Harvest in 2018. At December 31, 2018,
Manitoba Harvest has accrued $0.4 million due to the Company to reimburse us for the management fee paid on their
behalf. Additionally, during the third quarter of 2018, CGM waived $0.6 million in management fees attributable to the
assets acquired in September related to the acquisitions by Velocity Outdoor and Clean Earth.
LLC Agreement
As distinguished from its provision of providing management services to us, pursuant to the amended MSA, members
of CGM are owners of 49.0% 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. No Sale or
Holding Events occurred during 2018.
Certain persons who are employees and partners of the Manager, including the Company’s Chief Executive Officer
and Chief Financial Officer, beneficially own 49.0% of the Allocation Interests, through Sostratus LLC, at December
31, 2018. Of the remaining 51.0% 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 41.0% is held by
the former founding partners 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. Foam Fabricators, which was acquired in 2018, Velocity Outdoor, which was acquired
in June 2017, and 5.11, which was acquired in 2016, each 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. Foam paid or will pay CGM a total integration service fee of $2.3 million, with $2.0 million
paid in 2018, and the remainder to be paid in the first quarter of 2019. Velocity paid CGM a total integration service
fee of $1.5 million, with $0.75 million paid in 2017, and $0.75 million 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.
Consulting Agreement
During 2018, one of our directors was engaged by our Manager to provide certain consulting services to our Manager.
The director was paid $0.2 million by our Manager for the provision of such services to our Manager. Our Manager is
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entitled to receive certain payments from us as set forth in our Management Services Agreement. The Company did
not pay the Manager for any payments to the director and was not a participant in the transaction.
Cost Reimbursement and Fees
We reimbursed CGM approximately $4.1 million, $3.8 million, and $3.8 million, principally for occupancy and staffing
costs incurred by CGM on our behalf during the years ended December 31, 2018, 2017 and 2016, 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.
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, 2018 and 2017, 5.11 purchased approximately $5.0 million and $5.6 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,
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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, 2018, 2017 and 2016, Liberty purchased approximately $2.1 million, $2.5 million
and $3.3 million, respectively, in raw materials from the two vendors.
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, 2018:
(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
More than
5 Years
$
1,505,430
$
68,129
$
122,813
$
350,019
$
964,469
153,208
862,448
28,069
248,537
48,743
317,760
32,009
296,066
44,387
85
$
2,521,086
$
344,735
$
489,316
$
678,094
$
1,008,941
(1) Reflects commitment fees and letter of credit fees under our Revolving Credit Facility and amounts due, together with
interest on our Term Loan Facility and Senior Notes.
(2) Reflects various operating leases for office space, manufacturing facilities and equipment from third parties.
(3) Reflects non-cancelable commitments as of December 31, 2018, including: (i) shareholder distributions of $101.4 million;
(ii) estimated management fees of $46.6 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.
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(4) The contractual obligation table does not include approximately $1.1 million in liabilities associated with unrecognized tax
benefits as of December 31, 2018 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.
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board ("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. In addition, the standard requires disclosure of the amount, timing and uncertainty of cash flows arising
from contracts with customers. The new standard, and all related amendments, was effective for us beginning January
1, 2018 and was adopted using the modified retrospective method for all contracts not completed as of the date of
adoption.
The adoption of the new revenue guidance represents a change in accounting principle that will more closely align
revenue recognition with the transfer of control of our goods and services and will provide financial statement readers
with enhanced disclosures. In accordance with the new revenue guidance, revenue is recognized when a customer
obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which
we expect to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or
taxes collected from customers which are subsequently remitted to government authorities.
The Company’s contracts with customers often include promises to transfer multiple products to a customer.
Determining whether the promises are considered distinct performance obligations that should be accounted for
separately versus together may require significant judgment. Once the performance obligations are identified, the
Company determines the transaction price, which includes estimating the amount of variable consideration to be
included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation
in the contract based on a relative stand-alone selling price method. The corresponding revenues are recognized as
the related performance obligations are satisfied as discussed above. Judgment is required to determine the standalone
selling price for each distinct performance obligation. The Company determines standalone selling prices based on
the price at which the performance obligation is sold separately and therefore observable.
Upon adoption of the new revenue guidance, the Company’s policy around estimating variable consideration related
to sales incentives (early pay discounts, rights of return, rebates, chargebacks, and other discounts) included in certain
customer contracts remained consistent with previous guidance. These incentives are recorded as a reduction in the
transaction price. Under the new guidance, variable consideration is estimated and included in total consideration at
contract inception based on either the expected value method or the most likely outcome method. The method was
applied consistently among each type of variable consideration and the Company applies the expected value method
to estimate variable consideration. These estimates are based on historical experience, anticipated performance and
the Company’s best judgment at the time and as a result, reflect applicable constraints. The Company includes in the
transaction price an amount of variable consideration estimated in accordance with the new guidance only to the extent
that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is subsequently resolved.
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
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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 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 we determined comprised three reporting units when it was acquired in March 2012. As a result
of changes implemented by Arnold management during 2016 and 2017, we reassessed the reporting units at Arnold
as of the annual impairment testing date in 2018. After evaluating changes in the operation of the reporting units that
led to increased integration and altered how the financial results of the Arnold operating segment were assessed by
Arnold management, the Company determined that the previously identified reporting units no longer operate in the
same manner as they did when the Company acquired Arnold. As a result, the separate Arnold reporting units were
determined to only comprise one reporting unit at the Arnold operating segment level as of March 31, 2018. As part
of the exercise of combining the separate Arnold reporting units into one reporting unit, we performed "before" and
"after" goodwill impairment testing, whereby we performed the annual impairment testing for each of the existing
reporting units of Arnold and then subsequent to the completion of the annual impairment testing of the separate
reporting units, we performed a quantitative impairment test of the Arnold operating segment, which will represent the
reporting unit for future impairment tests.
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, operating costs
and cost impacts, as well as issues or events specific to the reporting unit. As part of the assessment of the Arnold
reporting units at March 31, 2018, we performed impairment testing on the three separate reporting units. Two of the
Arnold reporting units, PMAG and PTM, were tested qualitatively, while a quantitative impairment test was performed
on the Flexmag reporting unit because we could not determine that it was more-likely than-not that the fair value of a
reporting unit exceeded its carrying value. We then performed a quantitative impairment test of the Arnold operating
segment, which combined the three reporting units. The results of the quantitative impairment testing of the Arnold
reporting unit indicated that the fair value of the Arnold reporting unit exceeded the carrying value by 254%. For the
reporting units that were tested qualitatively, the results of the qualitative analysis indicated that the fair value exceeded
their carrying value.
Indefinite-lived intangible assets
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 $70.4 million. The Manitoba Harvest
trade name was tested for impairment as part of the interim impairment testing for Manitoba Harvest at December 31,
2017 as noted above. The results of the qualitative analysis of our other reporting unit's indefinite-lived intangible
assets, which we completed as of March 31, 2018, indicated that the fair value of the indefinite lived intangible assets
exceeded their carrying value.
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.
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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.
Income taxes
On December 22, 2017, the U.S. government enacted the Tax Act. 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; 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 were eliminated (subject to several important
exceptions), and new provisions designed to tax currently global intangible low taxed income ("GILTI") 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. The provision will not limit the deduction of
interest by the Company but it may have an impact the deduction for certain of the portfolio companies.
Several of our majority owned subsidiaries have deferred tax assets recorded at December 31, 2018 which in total
amount to approximately $55.2 million. This deferred tax asset is net of $6.9 million of valuation allowance primarily
associated with net operating losses and foreign tax credits and the limitation on the deduction of interest expense 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. (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, 2018, we were exposed to interest rate risk primarily through borrowings under our 2018 Credit
Facility because borrowings under this agreement are subject to variable interest rates. We had $496.3 million
outstanding under the 2018 Term Loan at December 31, 2018. On September 16, 2014, we purchased an interest
rate swap (the "Swap") with a notional amount of $220 million. The Swap is effective April 1, 2016 through June 6,
2021, and requires us to pay interest at rates on the notional amount at 2.97% in exchange for the three-month LIBOR
rate.
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The three-month LIBOR is approximately 280 basis points at December 31, 2018. 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.
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, 2018, the outstanding amount of intercompany loans with Manitoba Harvest
was $48.1 million (C$65.5 million). We recognized foreign exchange losses of approximately $4.1 million during 2018
related to changes in the Canadian dollar. We are also exposed to foreign currency exchange rate risk arising from
transactions in the normal course of business at certain of our subsidiaries, such as sales to third party customers,
foreign plant operations, and purchases from suppliers. We may also experience foreign currency exchange rate
exposure as a result of the volatility and uncertainty that may arise as a result of the United Kingdom's process for
exiting the European Union.
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, 2018 consists principally of (i) treasury backed securities,
(ii) insured prime money market funds, and (iii) 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.
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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.
134
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
135
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 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, 2018, 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, 2018. 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, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 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
136
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 2019 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 2019 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 2019 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 2019 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 2019 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 2019 Annual Meeting of Shareholders.
Securities Authorized for Issuance under Equity Compensation Plans
There are no securities currently authorized for issuance under an equity compensation plan.
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 2019 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 2019 Annual Meeting of Shareholders.
137
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 S-1.
3. Exhibits
For the Registrant, see “Index to Exhibits” set forth on page E-1.
ITEM 16. FORM 10-K SUMMARY
NONE
138
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)).
139
Exhibit
Number
3.15
Description
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)).
3.16
3.17
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3†
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Share Designation of Compass Diversified Holdings with respect to Series B Preferred Shares (incorporated by
(File No. 001-34927)).
reference
filed on March 13, 2018
to Exhibit 3.1 of
the Form 8-K
Trust Interest Designation of Compass Group Diversified Holdings LLC with respect to Series B Trust Preferred
Interests (incorporated by reference to Exhibit 3.2 of the Form 8-K filed on March 13, 2018 (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)).
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 7.875% Series B Fixed-to-Floating Rate Cumulative Preferred Share Certificate (incorporated by
reference to Exhibit 4.1 of the Form 8-K filed on March 13, 2018 (File No. 001-34927)).
Indenture between Compass Group Diversified Holdings LLC and U.S. Bank National Association, dated as of April
18, 2018 (incorporated by reference to Exhibit 4.1 of the Form 8-K filed on April 18, 2018 (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)).
140
Exhibit
Number
10.13
10.14
10.15†
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
21.1*
23.1*
31.1*
31.2*
32.1*+
32.2*+
99.1
99.2
99.3
99.4
99.5
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)).
Description
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)).
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. (incorporated by reference to Exhibit 10.22 of the
Form 10-K filed on February 28, 2018 (File No. 001-34927)).
Amended and Restated Credit Agreement among Compass Group Diversified Holdings LLC, the financial institutions
party thereto and Bank of America, N.A., dated as of April 18, 2018 (incorporated by reference to Exhibit 10.1 of the
Form 8-K filed on April 18, 2018 (File No. 001-34927)).
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)).
141
99.6
99.7
99.8
99.9
99.10
99.11
99.12
99.13
99.14
101.INS*
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 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)).
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.
142
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
Date: 2/27/2019
COMPASS GROUP DIVERSIFIED HOLDINGS LLC
By:
/s/ Elias J. Sabo
Elias J. Sabo
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Elias J. Sabo 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/ Elias J. Sabo
Elias J. Sabo
/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 27, 2019
Chief Financial Officer
February 27, 2019
(Principal Financial and Accounting Officer)
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
Director
Director
Director
Director
Director
Director
143
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: 2/27/2019
By:
/s/ Ryan J. Faulkingham
Ryan J. Faulkingham
Regular Trustee
144
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-3
F-4
F-5
F-6
F-7
F-9
F-11
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, 2018, 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, 2018, 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, 2018, and our report dated February 27, 2019 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.
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 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 27, 2019
F-2
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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2018, 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, 2018, 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 27, 2019 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 27, 2019
F-3
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
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 S)
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 (refer to Note R)
Stockholders’ equity
Trust preferred shares, 50,000 authorized; 8,000 shares issued and outstanding at December
31, 2018 and 4,000 issued and outstanding at December 31, 2017
Series A preferred shares, no par value, 4,000 shares issued and outstanding at December
31, 2018 and December 31, 2017
Series B preferred shares, no par value, 4,000 shares issued and outstanding at December
31, 2018 and none issued at December 31, 2017
Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding
at December 31, 2018 and December 31, 2017
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity attributable to Holdings
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
F-4
December 31,
2018
December 31,
2017
$
53,326
$
272,403
318,873
36,583
681,185
226,817
653,670
798,654
12,009
39,885
215,108
246,928
24,897
526,818
173,081
531,689
580,517
8,198
$
2,372,335
$
1,820,303
$
107,563
$
127,433
11,443
5,000
7,841
259,280
74,959
1,098,871
19,883
1,452,993
84,538
106,873
7,796
5,685
7,301
212,193
81,049
584,347
16,715
894,304
96,417
96,504
924,680
(8,776)
96,417
—
924,680
(2,573)
(249,453)
(145,316)
859,372
59,970
919,342
873,208
52,791
925,999
$
2,372,335
$
1,820,303
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Net revenues
Cost of revenues
Gross profit
Operating expenses:
Selling, general and administrative expense
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 P)
Amortization of debt issuance costs
Other income (expense), net
Income (loss) from continuing operations before income taxes
Provision (benefit) for income taxes
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)
Less: Income from continuing operations attributable to noncontrolling
interest
Less: Loss from discontinued operations attributable to noncontrolling
interest
Net income (loss) attributable to 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 K)
Continuing operations
Discontinued operations
Weighted average number of shares outstanding - basic and fully diluted
Cash distribution declared per share (refer to Note K)
$
$
$
$
$
$
Year ended December 31,
2017
2016
2018
$
1,691,673
$
1,269,729
$
1,117,485
574,188
822,020
447,709
978,309
651,739
326,570
318,484
217,830
392,500
44,294
68,076
—
—
69,318
32,693
52,003
17,325
—
27,204
(55,577)
(27,623)
—
(3,905)
(6,336)
3,500
6,548
(3,048)
—
1,258
(1,790)
3,912
—
(5,620)
(4,002)
2,634
(7,407)
(40,679)
33,272
—
340
33,612
5,621
—
(5,702) $
27,991
$
(6,960) $
27,651
$
—
1,258
—
340
(5,702) $
27,991
$
(0.44) $
0.02
(0.42) $
(0.45) $
0.01
(0.44) $
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
51,788
589
2,308
54,685
0.46
0.05
0.51
59,900
59,900
54,591
1.44
$
1.44
$
1.44
See notes to consolidated financial statements.
F-5
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income (loss)
Other comprehensive income (loss)
Foreign currency translation adjustments
Pension benefit liability, net
Total comprehensive income (loss), net of tax
Less: Net income attributable to noncontrolling interests
Less: Other comprehensive income (loss) attributable to noncontrolling
interests
Year ended December 31,
2017
2016
2018
$
(1,790) $
33,612
$
56,530
(6,630)
427
(7,993)
3,912
(1,247)
6,533
409
40,554
5,621
1,223
615
(326)
56,819
1,845
516
54,458
Total comprehensive income (loss) attributable to Holdings, net of tax
$
(10,658) $
33,710
$
See notes to consolidated financial statements.
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P
COMPASS DIVERSIFIED HOLDINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income (loss)
Income from discontinued operations
Gain on sale of discontinued operations
Net income (loss) from continuing operations
Adjustments to reconcile net income (loss) 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 in accounts receivable
(Increase) decrease in inventories
(Increase) decrease in prepaid expenses and other current assets
Increase 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
Net cash used in investing activities - continuing operations
Net cash provided by investing activities - discontinued operations
Year ended December 31,
2018
2017
2016
$
(1,790) $
33,612
$
—
1,258
(3,048)
42,679
77,896
4,483
—
—
(2,251)
8,975
—
—
433
(9,472)
1,007
(875)
(20,948)
(8,348)
23,921
114,452
—
114,452
(552,062)
(50,315)
—
94
—
(1,783)
(14)
(604,080)
—
—
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)
(77,278)
—
56,530
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)
(372,213)
9,192
Net cash used in investing activities
(604,080)
(77,278)
(363,021)
F-9
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
Issuance of Senior Notes
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 provided by (used in) 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,
2018
2017
2016
—
96,504
1,307,250
(1,186,222)
400,000
(86,256)
(12,179)
404
—
—
(6,112)
(14,887)
—
1,609
500,111
2,958
13,441
39,885
—
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
$
53,326
$
39,885
$
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
39,772
(1) Includes cash from discontinued operations of $0.6 million at January 1, 2016
See notes to consolidated financial statements.
F-10
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
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. The Company is the operating
entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of ten businesses, or operating segments at December 31, 2018. The segments
are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), The Ergo Baby Carrier, Inc. (“Ergobaby”), Liberty Safe
and Security Products, Inc. (“Liberty Safe” or “Liberty”), Fresh Hemp Foods Ltd. ("Manitoba Harvest" or "Manitoba"),
Velocity Outdoor, Inc. (formerly "Crosman Corp.") ("Velocity Outdoor" or "Velocity"), Compass AC Holdings, Inc. (“ACI”
or “Advanced Circuits”), AMT Acquisition Corporation (“Arnold”), Clean Earth Holdings, Inc. ("Clean Earth"), FFI
Compass Inc. ("Foam Fabricators" or "Foam") and 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 (the "Management Services Agreement" or “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 ("GAAP" or "US GAAP").
Basis of presentation
The results of operations for the years ended December 31, 2018, 2017 and 2016 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 results of operations of Tridien are presented as discontinued operations in the consolidated
statements of operations for the year ended December 31, 2016. Refer to "Note Q - Discontinued Operations" for
additional information. Unless otherwise indicated, the disclosures accompanying the consolidated financial statements
reflect the Company's continuing operations.
F-11
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 2019 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
Effective January 1, 2018, the Company adopted the provisions of Revenue from Contracts with Customers, or ASC
606. In accordance with the new revenue guidance, revenue is recognized when a customer obtains control of promised
goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be
entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from
customers which are subsequently remitted to government authorities. Refer to "Note D - Revenue" for a detailed
description of the Company's revenue recognition policies.
Cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash
equivalents. At December 31, 2018 and 2017, the amount of cash and cash equivalents held by our subsidiaries in
foreign bank accounts was $18.8 million and $16.0 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.
F-12
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.
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
$492.4 million, net of original issue discount, at December 31, 2018 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. Senior Notes with a fair value of $396 million have a carrying value of $400 million. If measured at fair
value in the financial statements, the Term Debt and Senior Notes 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 Financial Accounting Standard Board ("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.
F-13
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 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 G - 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. Deferred debt issuance costs are presented in the balance sheet as a
deduction from the carrying value of the associated debt liability.
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 H - 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 of 2017 (the "Tax Act"). 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; 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 ("GILTI") and a new base erosion anti-abuse tax were
added.
F-14
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. The provision will not limit the deduction of
interest by the Company for 2018 but it did have an impact the deduction for certain of the portfolio companies, resulting
in an additional valuation allowance for deferred tax assets of $2.1 million.
Provisional Amounts
In March 2018, the FASB issued ASU 2018-05, "Income Taxes - Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118" ("SAB 118"). The guidance provided for a provisional one-year measurement period
for entities to finalize their accounting for certain tax effects related to the Tax Act. The Tax Act required companies to
pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates
new taxes on certain foreign sourced earnings. 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 included provisional tax expense of $4.9 million related to the one-time transition tax
liability of our foreign subsidiaries. The Company has completed the calculation of the total E&P for these foreign
subsidiaries although the Company's estimates may be affected as additional regulatory guidance is issued with respect
to the Tax Act. Adjustments to the provisional amounts of $0.4 million were recognized as a component of the provision
for income taxes in the year-ending December 31, 2018.
Deferred Income Taxes
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, 2018 which in total amount to approximately $55.2 million. This deferred tax asset
is net of $6.9 million of valuation allowance primarily associated with net operating losses and foreign tax credits and
the limitation on the deduction of interest expense 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 shareholders 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 years 2018 and 2017 were 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.
F-15
The Company did not have any stock option plans or any other potentially dilutive securities outstanding during the
years ended December 31, 2018, 2017 and 2016.
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 $21.1 million, $17.8 million and $15.6 million during
the years ended December 31, 2018, 2017 and 2016, 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 $1.6
million, $1.9 million and $1.7 million during the years ended December 31, 2018, 2017 and 2016, 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 $4.8 million, $3.4
million and $2.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company’s Arnold subsidiary maintains a defined benefit plan for certain of its employees which is more fully
described in "Note J - 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 our operating segments are seasonal in nature due to various recurring events, holidays and
seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and
fourth quarter produce the highest net sales during our fiscal year.
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, 2018, 2017 and 2016, $9.0 million, $7.0
million, and $4.4 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, 2018, the amount to be
recorded for stock-based compensation expense in future years for unvested options is approximately $22.8 million.
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
As of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) ("ASC 606"). 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
underlying principle of the new standard is that a company will recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or
services. The standard also requires disclosure of the amount, timing and uncertainty of cash flows arising from
contracts with customers. The Company adopted the standard using the modified retrospective method for all contracts
not completed as of the date of adoption. The reported results for reporting periods after January 1, 2018 are presented
under the new revenue recognition guidance while prior period amounts were prepared under the previous revenue
guidance which is also referred to herein as the "previous guidance". The Company determined that the impact from
the new standard is immaterial to our revenue recognition model since the vast majority of our recognition is based
on point in time control. Accordingly, the Company has not made any adjustments to opening retained earnings. Refer
to "Note D - Revenue" for additional information regarding the Company's adoption of ASC 606.
F-16
Improving the Presentation of Net Periodic Pension Costs
In March 2017, the FASB issued new guidance that will require employers that sponsor defined benefit plans to present
the service cost component of net periodic benefit cost in the same income statement line item as other employee
compensation costs arising from services rendered during the period, and requires the other components of net periodic
pension cost to be presented in the income statement separately from the service component cost and outside a
subtotal of income from operations. The new guidance shall be applied retrospectively for the presentation of the
service cost component and the other components of net periodic pension cost. The amended guidance is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company's Arnold
business segment has a defined benefit plan covering substantially all of Arnold's employees at its Switzerland location
(refer to "Note J - Defined Benefit Plan"). The adoption of this guidance on January 1, 2018 did not have a material
impact upon our financial condition or results of operations.
Changes to the Definition of a Business
In January 2017, the FASB issued new guidance that changes the definition of a business to assist entities in evaluating
when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if
substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of
similar identifiable assets. If so, the set of transferred asset and activities is not a business. The guidance also requires
a business to include at least one substantive process and narrows the definition of outputs by more closely aligning
it with how outputs are described in the new revenue recognition guidance. The new standard was effective for fiscal
years, and interim periods within those years, beginning after December 15, 2017. The adoption of this guidance did
not have a material impact upon our financial condition or results of operations.
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 amended
guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017,
with early adoption permitted, including adoption in an interim period. The adoption of this guidance on January 1,
2018 did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Leases
In February 2016, the FASB issued an accounting standard update related to the accounting for leases (Leases "Topic
842") 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. 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. Presentation of leases within the consolidated statements of operations
and consolidated statements of cash flows will be generally consistent with the current lease accounting guidance.
For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2018,
including interim periods within that reporting period. In July 2018, the FASB issued two updates to Topic 842 to clarify
how to apply certain aspects of the new lease standard, and to give entities another option for transition and to provide
lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition
option allows entities to not apply the new lease standard in the comparative periods presented in the financial
statements in the year of adoption. The Company will adopt the new standard using the optional transition method
effective January 1, 2019.
The new standard provides a number of optional practical expedients in transition. The Company will elect to use the
package of practical expedients that allows us to not reassess: (i) whether any expired or existing contracts are or
contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or
existing leases. We additionally will elect to use the practical expedient that allows lessees to treat the lease and non-
lease components of leases as a single lease component and the practical expedient pertaining to land easements.
In addition, the new standard provides for an accounting election that permits a lessee to elect not to apply the
recognition requirements of Topic 842 to short-term leases by class of underlying asset. The Company will adopt this
accounting election for all classes of assets.
The Company has performed an assessment of the impact of the adoption of Topic 842 on the Company's consolidated
financial position and results of operations for the Company's leases, which consist of manufacturing facilities,
warehouses, office facilities, retail stores, equipment and vehicle leases. The adoption of the new lease standard is
F-17
not expected to have a material effect on our consolidated statement of operations or consolidated statement of cash
flows, our liquidity or our covenant compliance.
Note C — Acquisition of Businesses
Acquisition of Foam Fabricators
On February 15, 2018, pursuant to an agreement entered into on January 18, 2018, the Company, through a wholly
owned subsidiary, FFI Compass, Inc. (“Buyer”), entered into a Stock Purchase Agreement (the “Purchase Agreement”)
with Warren F. Florkiewicz (“Seller”) pursuant to which Buyer acquired all of the issued and outstanding capital stock
of Foam Fabricators, Inc., a Delaware corporation (“Foam Fabricators”). Foam Fabricators is a leading designer and
manufacturer of custom molded protective foam solutions and original equipment manufacturer ("OEM") components
made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP). Founded
in 1957 and headquartered in Scottsdale, Arizona, it operates 13 molding and fabricating facilities across North America
and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and
wellness, automotive, building and other products.
The Company made loans to, and purchased a 100% controlling interest in Foam Fabricators. The final purchase
price, after the working capital settlement and net of transaction costs, was approximately $253.4 million. The Company
funded the acquisition through a draw on the 2014 Revolving Credit Facility. The transaction was accounted for as a
business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide
integration services during the first year of the Company's ownership. CGM will receive integration service fees of
$2.25 million payable over a twelve month period as services are rendered.
The results of operations of Foam Fabricators have been included in the consolidated results of operations since the
date of acquisition. Foam Fabricator's results of operations are reported as a separate operating segment. The table
below provides the recording of assets acquired and liabilities assumed as of the acquisition date.
(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:
Current liabilities
Other liabilities
Total liabilities
Net assets acquired
Intercompany loans to business
Preliminary
Purchase
Allocation
As of 2/15/18
Measurement
Period
Adjustments
Final Purchase
Allocation
$
6,282
$
19,058
13,218
23,485
121,392
71,489
2,945
257,869
5,968
115,033
121,001
136,868
115,033
— $
—
(6)
4,885
(3,050)
1,219
—
3,048
—
—
3,048
—
$
251,901
$
3,048
$
6,282
19,058
13,212
28,370
118,342
72,708
2,945
260,917
5,968
115,033
121,001
139,916
115,033
254,949
F-18
Acquisition Consideration
Purchase price
Working capital adjustment
Cash acquired
Total purchase consideration
Less: Transaction costs
Purchase price, net
$
$
$
247,500
$
— $
247,500
755
3,646
615
2,433
1,370
6,079
251,901
$
3,048
$
254,949
1,552
—
1,552
250,349
$
3,048
$
253,397
(1) Includes $19.4 million of gross contractual accounts receivable of which $0.03 million is not expected to be collected. The
fair value of accounts receivable approximated book value acquired.
(2) Includes $0.7 million in inventory basis step-up, which was charged to cost of goods sold in the first quarter of 2018.
(3) Includes $20.0 million of property, plant and equipment basis step-up.
The Company incurred $1.6 million of transaction costs in conjunction with the Foam Fabricators acquisition, which
was included in selling, general and administrative expense in the consolidated results of operations in the quarter
ended March 31, 2018. The 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. Property, plant and equipment is valued through
a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives
of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable
net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired
that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well
as expected future synergies. The goodwill of $72.7 million reflects the strategic fit of Foam Fabricators in the Company's
niche industrial business. Foam Fabricators was an S corporation under Section 1362 of the Internal Revenue Code,
and accordingly, taxable income of Foam Fabricators flowed through to its stockholder. The Company and the selling
shareholder have agreed to make a joint Section 338(h)(10) election which will treat the acquisition as a deemed asset
purchase for United States Federal income tax purposes and accordingly the goodwill is expected to be deductible
for income tax purposes.
The intangible assets recorded related to the Foam Fabricators acquisition are as follows (in thousands):
Intangible assets
Tradename
Customer Relationships
Amount
4,215
114,127
118,342
$
$
Estimated
Useful Life
10 years
15 years
Acquisition of Rimports
On February 26, 2018, the Company's Sterno subsidiary acquired all of the issued and outstanding capital stock of
Rimports, Inc., a Utah corporation (“Rimports”), pursuant to a Stock Purchase Agreement, dated January 23, 2018,
by and among Sterno and Jeffery W. Palmer, individually and in his capacity as Seller Representative, the Jeffery
Wayne Palmer Dynasty Trust dated December 26, 2011, the Angela Marie Palmer Irrevocable Trust dated December
26, 2011, the Angela Marie Palmer Charitable Lead Trust, the Fidelity Investments Charitable Gift Fund, the TAK
Irrevocable Trust dated June 7, 2012, and the SAK Irrevocable Trust dated June 7, 2012. Headquartered in Provo,
Utah, Rimports is a manufacturer and distributor of branded and private label scented wickless candle products used
for home décor and fragrance. Rimports offers an extensive line of wax warmers, scented wax cubes, essential oils
and diffusers, and other home fragrance systems, through the mass retailer channel.
Sterno purchased a 100% controlling interest in Rimports. The purchase price, after the working capital settlement
and net of transaction costs, was approximately $154.4 million. The purchase price of Rimports included a potential
earn-out of up to $25 million contingent on the attainment of certain future performance criteria of Rimports for the
twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April
30, 2019. The fair value of the contingent consideration was estimated at $4.8 million as part of the purchase price
allocation. Sterno funded the acquisition through their intercompany credit facility with the Company. The transaction
F-19
was accounted for as a business combination.
The results of operations of Rimports have been included in the consolidated results of operations since the date of
acquisition. Rimport's results of operations are included in the Sterno operating segment. The table below provides
the recording of assets acquired and liabilities assumed as of the acquisition date. The goodwill resulting from the
purchase price allocation is expected to be deductible for income tax purposes since Rimports was previously an S-
Corporation for Federal income tax purposes and the Company and the selling shareholders have agreed to make a
joint Section 338(h)(10) election which will treat the acquisition as a deemed asset purchase for United States Federal
income tax purposes.
(in thousands)
Assets:
Cash
Accounts receivable (1)
Inventory (2)
Property, plant and equipment
Intangible assets
Goodwill
Other current and noncurrent assets
Total assets
Liabilities
Current liabilities
Other liabilities (3)
Total liabilities
Net assets acquired
Acquisition Consideration
Purchase price
Cash acquired
Working capital adjustment
Total purchase consideration
Less: Transaction costs
Purchase price, net
Preliminary
Purchase
Allocation
As of 2/26/18
Measurement
Period
Adjustments
Final Purchase
Allocation
As of 12/31/18
$
10,025
$
— $
21,431
29,691
1,493
—
121,364
446
184,450
9,034
25,000
34,034
—
4,701
1,886
85,700
(107,846)
—
10,025
21,431
34,392
3,379
85,700
13,518
446
(15,559)
168,891
—
(20,200)
(20,200)
9,034
4,800
13,834
$
$
150,416
$
4,641
$
155,057
145,000
$
— $
9,500
(4,084)
150,416
632
525
4,116
4,641
—
145,000
10,025
32
155,057
632
$
149,784
$
4,641
$
154,425
(1) Includes $23.8 million of gross contractual accounts receivable of which $2.4 million is not expected to be collected. The fair
value of accounts receivable approximated book value acquired.
(2) Includes $6.7 million in inventory basis step-up, which was charged to cost of goods sold in the second and third quarter of 2018.
(3) The purchase price of Rimports includes a potential earn-out of up to $25 million contingent on the attainment of certain future
performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period
from March 1, 2018 to April 30, 2019. The earn-out was valued at $4.8 million using a probability weighted model.
The intangible assets recorded related to the Rimports acquisition are as follows (in thousands):
Intangible assets
Tradename
Customer Relationships
Amount
6,600
79,100
85,700
Estimated
Useful Life
8 years
9 years
$
$
F-20
Sterno incurred $0.6 million of transaction costs in conjunction with the acquisition of Rimports, which was included
in selling, general and administrative expense in the consolidated results of operations in the quarter ended March
31, 2018. The 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
liabilities are valued at historical carrying values. Property, plant and equipment was valued through a purchase price
appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets.
Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets
acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do
not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as
expected future synergies.
Acquisition of Velocity Outdoor (formerly Crosman Corp.)
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. which is now known as Velocity Outdoor.
Velocity Outdoor is a designer, manufacturer and marketer of airguns, archery products, laser aiming devices and
related accessories. Headquartered in Bloomfield, New York, Velocity Outdoor serves over 425 customers worldwide,
including mass merchants, sporting goods retailers, online channels and distributors serving smaller specialty stores
and international markets.
The Company made loans to, and purchased a 98.9% controlling interest in, Velocity. The purchase price, including
proceeds from noncontrolling interests and net of transaction costs, was approximately $150.4 million. Velocity
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 Velocity Outdoor. CGM received integration service fees of $1.5 million payable quarterly
over a twelve month period as services were rendered beginning in the quarter ended September 30, 2017. The
Company incurred $1.5 million of transaction costs in conjunction with the Velocity 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 Velocity have been included in the consolidated results of operations since the date of
acquisition. Velocity'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.
Final Purchase
Allocation
As of 12/31/17
$
1,210
16,751
28,873
15,014
84,594
48,759
2,348
$
197,549
(in thousands)
Assets:
Cash
Accounts receivable (1)
Inventory
Property, plant and equipment
Intangible assets
Goodwill
Other current and noncurrent assets
Total assets
F-21
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
$
$
$
$
$
$
$
16,283
91,622
28,515
694
137,114
60,435
694
90,742
151,871
151,800
1,210
(1,139)
151,871
1,473
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 Velocity in the Company's branded consumer business and is
not expected to be deductible for income tax purposes. The purchase accounting for Velocity was finalized during the
fourth quarter of 2017.
The intangible assets recorded related to the Velocity 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
F-22
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.
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. 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 H - 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-23
$
$
$
$
$
$
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.
F-24
Unaudited pro forma information
The following unaudited pro forma data for the years ended December 31, 2018 and 2017 gives effect to the acquisition
of Foam Fabricators, Rimports and Velocity Outdoor, as described above, as if the acquisitions had been completed
as of January 1, 2017. The pro forma data gives effect to historical operating results with adjustments to interest
expense, amortization and depreciation expense, management fees and related tax effects. The information is provided
for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the
transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of
the consolidated companies, and should not be construed as representing results for any future period.
(in thousands)
Net revenues
Gross profit
Operating income
Net income (loss) from continuing operations
Net income (loss) from continuing operations attributable to Holdings
Basic and fully diluted net income (loss) per share attributable to
Holdings
Year Ended December 31,
2018
2017
$
1,731,501
$
1,595,055
584,606
541,018
72,447
(4,668)
(756)
63,278
49,027
43,406
(0.34)
(0.18)
Other acquisitions
Velocity Outdoor
Ravin Crossbows - On September 4, 2018, Velocity Outdoor (formerly "Crosman Corp.") acquired all of the outstanding
membership interests in Ravin Crossbows, LLC ("Ravin" or "Ravin Crossbows") for a purchase price of approximately
$98.0 million, net of transaction costs, plus a potential earn-out of up to $25.0 million based on gross profit levels for
the trailing twelve month period ending December 31, 2018. Velocity funded the acquisition and payment of related
transaction costs through the issuance of an additional $38.9 million in intercompany loans and the issuance of additional
equity to the Company of $60.6 million. Velocity has recorded a preliminary purchase price allocation for Ravin as of
December 31, 2018 comprised of $67.5 million in intangible assets ($14.1 million in finite lived trade name, $42.6
million in technologies valued using an excess earnings methodology, and $10.8 million in customer relationships),
$2.5 million in inventory step-up, and $13.3 million in goodwill which is expected to be deductible for income tax
purposes. The remainder of the purchase consideration was allocated to net assets acquired. The potential earn-out
was valued at $4.7 million as part of the purchase price allocation. Velocity incurred transaction costs of $1.4 million
related to the Ravin acquisition, which are recorded as selling, general and administrative costs in the accompanying
statement of operations as of December 31, 2018. The purchase price allocation is expected to be finalized during
the first quarter of 2019.
Ergobaby
Baby Tula - 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,
F-25
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
ESMI - On May 23, 2018, Clean Earth acquired all of the outstanding capital stock of Environmental Soil Management,
Inc. (“ESMI”), located in Fort Edward, New York and Loudon, New Hampshire. The acquisition provided Clean Earth
the opportunity to geographically expand their soil and hazardous waste solutions in the New York and New England
market. The purchase price was approximately $31.0 million. In connection with the acquisition, Clean Earth recorded
a purchase price allocation of approximately $12.5 million in goodwill, and $10.4 million in intangible assets. The
Company finalized the purchase price in the fourth quarter of 2018.
DART - On September 5, 2018, Clean Earth acquired the assets of Disposal and Recycling Technologies, Inc. ("DART"),
for a purchase price of approximately $18.7 million. DART has a RCRA Part B hazardous waste site in Charlotte,
North Carolina and a water waste treatment facility in Detroit, Michigan. The acquisition of DART expands Clean
Earth's geographical reach in the Midwest and Mid-Atlantic hazardous and non-hazardous waste markets and
represents Clean Earth's first waste water treatment facility. In connection with the acquisition, Clean Earth recorded
$5.0 million in intangible assets and $8.3 million in goodwill.
EWS - 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.
Phoenix Soil - 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
Sterno Home - 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 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 M - "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.
F-26
Note D - Revenue
Effective January 1, 2018, the Company adopted the provisions of Revenue from Contracts with Customers, or ASC
606. The adoption of the new revenue guidance represents a change in accounting principle that will more closely
align revenue recognition with the transfer of control of the Company's goods and services and will provide financial
statement readers with enhanced disclosures. In accordance with the new revenue guidance, revenue is recognized
when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the
consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and
excludes any sales incentives or taxes collected from customers which are subsequently remitted to government
authorities. The impacts from the adoption of the new revenue guidance primarily relates 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 was not 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 has established monitoring controls
to identify new sales arrangements and changes in our business environment that could impact our current accounting
assessment.
Performance Obligations - For 5.11, Velocity Outdoor, Ergobaby, Liberty Safe, Manitoba Harvest, Sterno, Arnold and
Foam Fabricators, revenues are recognized when control of the promised goods or service is transferred to the
customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those
goods and services. Each product or service represents a separate performance obligation. For contracts that contain
multiple products, the Company will evaluate those products to determine if they represent performance obligations
based on whether those goods or services are distinct (by themselves or as part of a bundle of products). Further,
the Company evaluated if the products were separately identifiable from other products in the contract. The Company
concluded that the products are distinct and separately identifiable from other products in the contracts. The Company
determines standalone selling prices based on the price at which the performance obligation is sold separately. The
standalone selling price is directly observable as it is the price at which the Company sells its products separately to
the customer. As the Company does not meet any of the requirements for over time recognition for any of its products
at these operating segments, it will recognize revenue based on the point in time criteria based on the definition of
control, which is generally upon shipment terms for products and when the service is performed for services. Transfer
of control for Advanced Circuit’s products qualify for over time revenue recognition because the products represent
assets with no alternative use and the contracts include an enforceable right to payment for work completed to date.
Advanced Circuits has selected the cost to cost input method of measuring progress to recognize revenue over time,
based on the status of the work performed. The cost to cost method is representative of the value provided to the
customer as it represents the Company’s performance completed to date. However, due to the short-term nature of
Advanced Circuit's production cycle, there is an immaterial difference between revenue recognition under the previous
guidance and the new revenue recognition guidance. Clean Earth’s arrangements qualify for over time revenue
recognition as the customer simultaneously receives and consumes the benefits provided by the Company’s
performance. As the Company performs the service, another party would not need to re-perform any of the work
completed by the Company to date. Clean Earth has elected to apply the as-invoiced practical expedient to record
revenue as the services are provided, given the nature of the services provided and the frequency of billing under the
customer contracts.
Shipping and handling costs - Costs associated with shipment of products to a customer are accounted for as a
fulfillment cost and are included in cost of revenues. The Company has elected to apply the practical expedient for
shipping costs under the new revenue guidance and will account for shipping and handling activities performed after
control of a good has been transferred to the customer as a fulfillment cost and not a performance obligation. Therefore,
both revenue and costs of shipping and handling will be recorded at the same time. As a result, any consideration
(including freight and landing costs) related to these activities will be included as a component of the overall transaction
consideration and allocated to the performance obligations of the contract.
Warranty - For product sales, the Company provides standard assurance-type warranties as the Company only
warrants its products against defects in materials and workmanship (i.e., manufacturing flaws). Although the warranties
are not required by law, the tasks performed over the warranty period are only to remediate instances when products
do not meet the promised specifications. Customers do not have the option to purchase warranties separately. The
Company’s warranty periods generally range from 90 days to three years depending on the nature of the product and
are consistent with industry standards. The periods are reasonable to assure that products conform to specifications.
The Company does not have a history of performing activities outside the scope of the standard warranty.
Significant Judgments - The Company’s contracts with customers often include promises to transfer multiple products
to a customer. Determining whether the promises are considered distinct performance obligations that should be
F-27
accounted for separately versus together may require significant judgment. Once the performance obligations are
identified, the Company determines the transaction price, which includes estimating the amount of variable
consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each
performance obligation in the contract based on a relative stand-alone selling price method. The corresponding
revenues are recognized as the related performance obligations are satisfied as discussed above. Judgment is required
to determine the standalone selling price for each distinct performance obligation. The Company determines standalone
selling prices based on the price at which the performance obligation is sold separately and therefore observable.
Variable Consideration - Upon adoption of the new revenue guidance, the Company’s policy around estimating
variable consideration related to sales incentives (early pay discounts, rights of return, rebates, chargebacks, and
other discounts) included in certain customer contracts remained consistent with previous guidance. These incentives
are recorded as a reduction in the transaction price. Under the new guidance, variable consideration is estimated and
included in total consideration at contract inception based on either the expected value method or the most likely
outcome method. The method was applied consistently among each type of variable consideration and the Company
applies the expected value method to estimate variable consideration. These estimates are based on historical
experience, anticipated performance and the Company’s best judgment at the time and as a result, reflect applicable
constraints. The Company includes in the transaction price an amount of variable consideration estimated in
accordance with the new guidance only to the extent that it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is
subsequently resolved.
In certain of the Company’s arrangements related to product sales, a right of return exists, which is included in the
transaction price. For these right of return arrangements, an asset (and corresponding adjustment to cost of sale) for
its right to recover the products from the customers is recorded. The asset recognized will be the carrying amount of
the product (for example, inventory) less any expected costs to recover the products (including potential decreases
in the value to the Company of the returned product). Additionally, the Company records a refund liability for the
amount of consideration that it does not expect to be entitled. The amounts associated with right of return arrangements
are not material to the Company's statement of position or operating results.
Sales and Other Similar Taxes - The Company notes that under its contracts with customers, the customer is
responsible for all sales and other similar taxes, which the Company will invoice the customer for if they are applicable.
The new revenue guidance allows entities to make an accounting policy election to exclude sales taxes and other
similar taxes from the measurement of the transaction price. The scope of this accounting policy election is the same
as the scope of the policy election in the previous guidance. As the Company presents taxes on a net basis under
the previous guidance there will be no change to the current presentation (net) as a result.
Practical Expedients - The Company has elected to make the following accounting policy elections through the
adoption of the following practical expedients:
Right to Invoice (Clean Earth) - The Company will record the consideration from a customer in an amount that
corresponds directly with the value to the customer of the Company’s performance completed to date (for example,
in a service contract where 25% of the service has been performed, the Company would recognize 25% of the revenue),
the entity may recognize revenue in the amount to which the entity has a right to invoice.
Sales and Other Similar Taxes - The Company will exclude sales taxes and similar taxes from the measurement of
transaction price and will ensure that it complies with the disclosure requirements of applicable accounting guidance.
Cost to Obtain a Contract - The Company will recognize the incremental costs of obtaining a contract as an expense
when incurred as the amortization period of the asset that the Company otherwise would have recognized is one year
or less.
Promised Goods or Services that are Immaterial in the Context of a Contract - The Company has elected to assess
promised goods or services as performance obligations that are deemed to be immaterial in the context of a contract.
As such, the Company will not aggregate and assess immaterial items at the entity level. That is, when determining
whether a good or service is immaterial in the context of a contract, the assessment will be made based on the
application of the new revenue guidance at the contract level.
Disaggregated Revenue - Revenue Streams & Timing of Revenue Recognition - The Company disaggregates
revenue by strategic business unit and by geography for each strategic business unit which are categories that depict
how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors. This disaggregation
also represents how the Company evaluates its financial performance, as well as how the Company communicates
its financial performance to the investors and other users of its financial statements. Each strategic business unit
represents the Company’s reportable segments and offers different products and services.
F-28
The following tables provide disaggregation of revenue by reportable segment geography for the years ended December
31, 2018, 2017 and 2016 (in thousands):
United
States
Canada
Europe
5.11
Ergo
Liberty
Manitoba
Harvest
Velocity
ACI
Arnold
Clean
Earth
Foam
Sterno
Total
Year ended December 31, 2018
$ 265,306
$32,558
$ 80,334
$ 46,703
$113,915
$92,511
$ 70,049
$266,916
$ 97,118
$365,403
$ 1,430,813
7,808
3,076
2,324
18,827
31,026
28,482
Asia Pacific
16,168
25,488
Other
international
27,614
962
—
—
—
6,162
5,574
1,200
1,072
536
299
4,445
1,177
38,536
5,176
2,922
—
—
—
—
—
—
—
—
—
—
16,314
13,304
52,678
1,218
105,908
169
981
48,737
53,537
$ 347,922
$90,566
$ 82,658
$ 67,437
$131,296
$92,511
$117,860
$266,916
$113,432
$381,075
$ 1,691,673
5.11
Ergo
Liberty
Manitoba
Harvest
Velocity
ACI
Arnold
Clean
Earth
Sterno
Total
Year ended December 31, 2017
United States
$224,141
$ 40,870
$ 89,969
$ 31,169
$ 68,393
$ 87,782
$ 62,667
$211,247
$ 204,710
$ 1,020,948
Canada
Europe
Asia Pacific
Other
international
6,180
3,473
1,987
21,359
24,552
25,973
14,800
32,617
40,326
36
—
—
—
4,070
3,066
756
1,647
689
835
2,102
—
—
—
—
1,237
32,101
4,976
4,599
—
—
—
—
17,250
2,322
1,244
55,556
89,661
55,082
584
48,482
$309,999
$102,969
$ 91,956
$ 55,699
$ 78,387
$ 87,782
$105,580
$211,247
$ 226,110
$ 1,269,729
5.11
Ergo
Liberty
Manitoba
Harvest
ACI
Arnold
Clean
Earth
Sterno
Total
Year ended December 31, 2016
United States
$ 79,429
$ 47,509
$ 103,812
$ 27,725
$ 86,041
$ 66,161
$188,997
$ 198,997
$
798,671
Canada
Europe
1,732
2,436
7,816
17,538
Asia Pacific
4,400
33,599
Other international
16,415
2,266
—
—
—
—
21,344
—
6,837
3,417
—
—
—
—
1,235
31,172
6,366
3,245
—
—
—
—
15,494
2,204
1,410
42,241
58,730
52,612
712
26,055
$109,792
$ 103,348
$ 103,812
$ 59,323
$ 86,041
$108,179
$188,997
$ 218,817
$
978,309
Note E — Operating Segment Data
At December 31, 2018, the Company had ten 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.
F-29
• 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 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.
• Velocity Outdoor is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming
devices and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman,
Benjamin, Ravin, LaserMax and CenterPoint brands that are available through national retail chains, mass
merchants, dealer and distributor networks. Velocity Outdoor is headquartered in Bloomfield, New York.
• 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, energy, reprographics and advertising specialties. Arnold produces high performance permanent
magnets (PMAG), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™)
that are mission critical in motors, generators, sensors and other systems and components. Based on its long-
term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 clients
worldwide. Arnold is headquartered in Rochester, New York.
• Clean Earth provides environmental services for a variety of contaminated materials including soils, hazardous
waste and dredged materials. Clean Earth analyzes, treats, documents and recycles waste streams generated
in multiple end markets such as utilities, infrastructure, chemicals, aerospace and defense, non-public/ private
development, medical, industrial and dredging. Clean Earth is headquartered in Hatboro, Pennsylvania and
operates 27 facilities in the eastern United States.
• Foam Fabricators is a designer and manufacturer of custom molded protective foam solutions and original
equipment manufacturer components made from expanded polystyrene and expanded polypropylene. Foam
Fabricators provides products to a variety of end markets, including appliances and electronics,
pharmaceuticals, health and wellness, automotive, building and other products. Foam Fabricators is
headquartered in Scottsdale, Arizona and operates 13 molding and fabricating facilities across North America.
• Sterno is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for
the food service industry and flameless candles, outdoor lighting products, scented wax cubes and warmer
products for consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories,
liquid and traditional wax candles, scented wax cubes and warmer products used for home decor and fragrance
systems, catering equipment and outdoor lighting products. Sterno is headquartered in Corona, California.
The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected
in the consolidated financial statements. The 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. There were no significant inter-
segment transactions.
F-30
Summary of Operating Segments
Net Revenues
(in thousands)
5.11
Ergobaby
Liberty
Manitoba Harvest
Velocity Outdoor
ACI
Arnold
Clean Earth
Foam Fabricators
Sterno
Total
Year ended December 31,
2018
2017
2016
$
347,922
$
309,999
$
90,566
82,658
67,437
131,296
92,511
117,860
266,916
113,432
381,075
1,691,673
102,969
91,956
55,699
78,387
87,782
105,580
211,247
—
226,110
1,269,729
109,792
103,348
103,812
59,323
—
86,041
108,179
188,997
—
218,817
978,309
Reconciliation of segment revenues to consolidated revenues:
Corporate and other
Total consolidated revenues
—
—
—
$
1,691,673
$
1,269,729
$
978,309
Segment Profit (Loss) (1)
(in thousands)
5.11 (2)
Ergobaby
Liberty
Manitoba Harvest (3)
Velocity Outdoor (4)
ACI
Arnold (5)
Clean Earth
Foam Fabricators
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,
2018
2017
2016
$
3,916
$
(7,121) $
(10,153)
11,522
5,906
(1,754)
4,850
26,335
7,416
14,443
10,998
38,730
122,362
(55,577)
(6,336)
—
(56,949)
24,503
9,475
(9,332)
1,308
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)
Total consolidated income from continuing operations before income
taxes
$
3,500
$
(7,407) $
63,218
(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) 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.
F-31
(in thousands)
5.11 Tactical
Ergobaby
Liberty
Manitoba Harvest
Velocity Outdoor
ACI
Arnold
Clean Earth
Foam Fabricators
Sterno
Total
(4) Velocity Outdoor - 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 Velocity, and $0.75 million in integration services 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 G - Goodwill
and Intangible Assets."
Depreciation and Amortization Expense
Year ended December 31,
2018
2017
2016
$
21,477
$
39,934
$
23,414
8,493
1,541
6,192
12,119
3,160
6,229
23,683
10,712
26,969
120,575
11,419
1,657
6,344
7,726
3,323
6,428
21,647
—
11,573
110,051
7,769
2,758
6,403
—
3,476
9,079
21,157
—
11,549
85,605
3,565
89,170
Reconciliation of segment to consolidated total:
Amortization of debt issuance costs and original issue discount
4,483
5,007
Consolidated total
$
125,058
$
115,058
$
(in thousands)
5.11
Ergobaby
Liberty
Manitoba Harvest
Velocity
ACI
Arnold
Clean Earth
Foam Fabricators
Sterno
Sales allowance accounts
Total
Reconciliation of segment to consolidated totals:
Corporate and other identifiable assets
Amortization of debt issuance costs and original issue discount
Accounts Receivable
Identifiable Assets
December 31,
2018
2017
December 31
2018 (1)
2017 (1)
$
52,069
$
60,481
$
319,583
$
324,068
11,361
10,416
7,276
21,881
9,193
16,298
60,317
23,848
72,361
(12,617)
272,403
—
—
12,869
13,679
5,663
20,396
6,525
14,804
50,599
—
40,087
(9,995)
100,679
27,881
86,756
209,398
13,407
66,744
204,316
155,504
253,637
—
105,672
26,715
95,046
129,033
14,522
66,979
183,508
—
125,937
—
215,108
1,437,905
1,071,480
—
—
8,357
—
2,026
—
Total
$
272,403
$
215,108
$
1,446,262
$
1,073,506
(1) Does not include goodwill balances - refer to "Note G - Goodwill and Intangible Assets" for a schedule of goodwill by
segment.
F-32
Geographic Information
Net Revenues
Revenue attributable to Canada represented approximately 20.2% of total international revenues in 2018, 22.4% of
total international revenues in 2017, and 24.0% of total international revenues in 2016. Revenue attributable to any
other individual foreign country was not material in 2018, 2017 or 2016.
Identifiable Assets
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
(in thousands)
United States
Canada
Europe
Other international
Total identifiable assets
December 31,
2018
2017
$
1,259,089
$
125,631
37,286
24,256
878,322
130,033
47,574
17,577
$
1,446,262
$
1,073,506
Note F - Inventory and Property, Plant, and Equipment
Inventory
(in thousands)
Raw materials and supplies
Work-in-process
Finished goods
Less: obsolescence reserve
Total
Property, plant and equipment
(in thousands)
Machinery and equipment
Office furniture, computers and software
Leasehold improvements
Construction in process
Buildings and land
Less: accumulated depreciation
Total
December 31,
2018
2017
$
64,441
$
16,048
259,553
340,042
(21,169)
36,124
13,921
205,512
255,557
(8,629)
$
318,873
$
246,928
December 31,
2018
2017
$
245,046
$
178,187
35,848
36,768
12,715
47,774
378,151
(151,334)
28,824
20,630
18,153
40,015
285,809
(112,728)
$
226,817
$
173,081
Depreciation expense was approximately $42.7 million, $33.0 million and $26.9 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
F-33
Note G — Goodwill and Intangible Assets
Goodwill
As a result of acquisitions of various businesses, the Company has significant intangible assets on its balance sheet
that include goodwill and indefinite-lived intangibles. The Company’s goodwill and indefinite-lived intangibles are tested
and reviewed for impairment annually as of March 31st or more frequently if facts and circumstances warrant by
comparing the fair value of each reporting unit to its carrying value. Each of the Company’s businesses represent a
reporting unit. The Arnold business previously comprised three reporting units when it was acquired in March 2012,
but as a result of changes implemented by Arnold management during 2016 and 2017, the Company reassessed the
reporting units at Arnold as of the annual impairment testing date in 2018. After evaluating changes in the operation
of the reporting units that led to increased integration and altered how the financial results of the Arnold operating
segment were assessed by Arnold management, the Company determined that the previously identified reporting units
no longer operate in the same manner as they did when the Company acquired Arnold. As a result, the separate
Arnold reporting units were determined to only comprise one reporting unit at the Arnold operating segment level as
of March 31, 2018. As part of the exercise of combining the separate Arnold reporting units into one reporting unit,
the Company performed "before" and "after" goodwill impairment testing, whereby we performed the annual impairment
testing for each of the existing reporting units of Arnold and then subsequent to the completion of the annual impairment
testing of the separate reporting units, we performed a quantitative impairment test of the Arnold operating segment,
which will represent the reporting unit for future impairment tests.
A reconciliation of the change in the carrying value of goodwill by segment for the years ended December 31, 2018
and 2017 are as follows (in thousands):
Balance at
January 1, 2018
Acquisitions (1)
Goodwill
Impairment
Foreign
currency
translation
Other
Balance at
December 31, 2018
5.11
Ergobaby
Liberty
Manitoba Harvest
Velocity Outdoor
ACI
Arnold (2)
Clean Earth
Foam Fabricators
Sterno
Corporate (3)
$
92,966
$
— $
— $
— $
— $
61,031
32,828
41,024
49,352
58,019
26,903
119,099
—
41,818
8,649
—
—
—
13,253
—
—
25,679
72,708
13,518
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,247)
—
—
—
—
—
—
—
—
—
—
70
—
—
—
—
—
—
92,966
61,031
32,828
37,777
62,675
58,019
26,903
144,778
72,708
55,336
8,649
Total
$
531,689
$
125,158
$
— $
(3,247)
$
70
$
653,670
(1) Acquisition of businesses during the year ended December 31, 2018 includes the acquisition of Foam Fabricators by the
Company, Sterno's acquisition of Rimports, Clean Earth's acquisitions of ESMI and DART and Velocity's acquisition of Ravin.
(2) Arnold had three reporting units which were combined into one reporting unit effective March 31, 2018.
(3)
Represents goodwill resulting from purchase accounting adjustments not "pushed down" to the ACI segment. This amount is
allocated back to the ACI segment for purposes of goodwill impairment testing.
F-34
Balance at
January 1, 2017
Acquisitions (1)
Goodwill
Impairment
Foreign
currency
translation
Other (4)
Balance at
December 31, 2017
5.11
Ergobaby
Liberty
Manitoba Harvest
Velocity Outdoor
ACI
Arnold (2)
Clean Earth
Sterno
Corporate (3)
Total
$
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)
3,142
—
—
(8,864)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
147
—
$
491,637
$
51,916
$
(15,153)
$
3,142
$
147
$
92,966
61,031
32,828
41,024
49,352
58,019
26,903
119,099
41,818
8,649
531,689
(1) Acquisition of businesses during the year ended December 31, 2017 includes the acquisition of Velocity by the Company in
June 2017, and add-on acquisitions at Clean Earth in March 2017, Velocity Outdoor in July 2017 and Sterno in August 2017.
(2) Arnold had 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).
Approximately $112.6 million of goodwill is deductible for income tax purposes at December 31, 2018.
2018 Annual Impairment Testing
For the reporting units that were tested qualitatively for the 2018 annual impairment testing, the results of the qualitative
analysis indicated that the fair value exceeded their carrying value. At March 31, 2018, we determined that the Flexmag
reporting unit of Arnold required additional quantitative testing because we could not conclude that the fair value of
the reporting unit exceeded its carrying value based on qualitative factors alone. For the quantitative impairment test
of Flexmag, we estimated the fair value of the reporting unit using an income approach, whereby we estimate the fair
value of the reporting unit based on the present value of future cash flows. Cash flow projections are based on
management's estimate of revenue growth rates and operating margins and take into consideration industry and market
conditions as well as company and reporting unit specific economic conditions. The discount rate used is based on
the weighted average cost of capital adjusted for the relevant risk associated with the business and the uncertainty
associated with the reporting unit's ability to execute on the projected cash flows. The discount rate used in the income
approach for Flexmag was 12.4%.
For the reporting unit change at Arnold, a quantitative impairment test was performed of the Arnold business at March
31, 2018 using an income approach. The discount rate used in the income approach was 12.6%. The results of the
impairment testing indicated that the fair value of the Arnold reporting unit exceeded the carrying value.
2017 Interim Impairment Testing
Manitoba Harvest
The Company performed quantitative 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%. 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, 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.
F-35
2017 Annual Goodwill Impairment Testing
For the reporting units that were tested qualitatively for the 2017 annual impairment testing, the results of the qualitative
analysis indicated that the fair value exceeded their carrying value. At March 31, 2017, we determined that the Manitoba
Harvest reporting unit required further quantitative testing 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 quantitative 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.
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 at December 31, 2016. 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 quantitative
test for the PMAG unit indicated a potential impairment of goodwill and the Company performed the second step of
goodwill impairment testing to determine the amount of impairment of the PMAG reporting unit.
In the first test of goodwill impairment testing, we compared the fair value of each reporting unit to its carrying amount.
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 was 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 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 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 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 testing indicated total goodwill
impairment of the PMAG reporting unit of $24.9 million. The 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 valuation exercise.
2016 Annual Goodwill Impairment Testing
For the reporting units that were tested qualitatively for the 2017 annual impairment testing, the results of the qualitative
analysis indicated that the fair value exceeded their carrying value. 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 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 quantitative
testing of Tridien indicated that the fair value of Tridien exceeded its carrying value.
The following is a summary of the net carrying amount of goodwill at December 31, 2018 and 2017 (in thousands):
December 31, 2018
December 31, 2017
Goodwill - gross carrying amount
Accumulated impairment losses
Goodwill - net carrying amount
$
$
684,823
$
(31,153)
653,670
$
562,842
(31,153)
531,689
F-36
Intangible Assets
Intangible assets are comprised of the following (in thousands):
December 31, 2018
December 31, 2017
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
$ 545,471
$
(140,395) $ 405,076
$ 338,719
$
(102,271)
$ 236,448
91,676
(27,454)
64,222
49,075
(22,492)
26,583
209,080
(37,222)
171,858
182,976
(22,518)
160,458
8,205
127,146
726
(6,972)
(41,291)
(726)
1,233
85,855
—
7,965
115,230
726
(6,488)
(31,026)
(646)
1,477
84,204
80
982,304
(254,060)
728,244
694,691
(185,441)
509,250
70,410
—
70,410
71,267
—
71,267
Total intangibles, net
$1,052,714
(254,060)
798,654
$ 765,958
$
(185,441)
$ 580,517
13
13
15
5
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.
The Company’s amortization expense of intangible assets for the years ended December 31, 2018, 2017 and 2016
totaled $68.1 million, $52.0 million and $35.1 million, and respectively.
Estimated charges to amortization expense of intangible assets over the next five years, is as follows, (in thousands):
2019
2020
2021
2022
2023
$
73,322
72,121
71,458
69,796
69,399
$
356,096
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 hazardous waste water. 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.
F-37
Note H – Debt
Financing Arrangements
2018 Credit Facility
On April 18, 2018, the Company entered into an Amended and Restated Credit Agreement to amend and restate the
2014 Credit Facility, originally dated as of June 6, 2014 (as previously amended) among the Company, the lenders
from time to time party thereto (the “Lenders”), and Bank of America, N.A., as Administrative Agent. The 2018 Credit
Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated
subsidiaries.
The 2018 Credit Facility provides for (i) revolving loans, swing line loans and letters of credit (the “2018 Revolving
Credit Facility”) up to a maximum aggregate amount of $600 million, and (ii) a $500 million term loan (the “2018 Term
Loan”). The 2018 Term Loan was issued at an original issuance discount of 99.75%. The 2018 Term Loan requires
quarterly payments of $1.25 million commencing June 30, 2018, with a final payment of all remaining principal and
interest due on April 18, 2025, the maturity date of the 2018 Term Loan. All amounts outstanding under the 2018
Revolving Credit Facility will become due on April 18, 2023, which is the maturity date of loans advanced under the
2018 Revolving Credit Facility. The 2018 Credit Facility also permits the Company, prior to the applicable maturity
date, to increase the 2018 Revolving Loan Commitment and/or obtain additional term loans in an aggregate amount
of up to $250 million (the “Incremental Loans”), subject to certain restrictions and conditions.
The Company may borrow, prepay and reborrow principal under the 2018 Revolving Credit Facility from time to time
during its term. Advances under the 2018 Revolving Credit Facility can be either Eurodollar rate loans or base rate
loans. Eurodollar rate revolving loans bear interest on the outstanding principal amount thereof for each interest period
at a rate per annum based on the London Interbank Offered Rate (the “Eurodollar Rate”) for such interest period plus a
margin ranging from 1.50% to 2.50%, based on the ratio of consolidated net indebtedness to adjusted consolidated
earnings before interest expense, tax expense, and depreciation and amortization expenses for such period (the
“Consolidated Total Leverage Ratio”). Base rate revolving loans bear interest on the outstanding principal amount
thereof at a rate per annum equal to the highest of (i) Federal Funds rate plus 0.50%, (ii) the “prime rate”, and
(iii) Eurodollar Rate plus 1.0% (the “Base Rate”), plus a margin ranging from 0.50% to 1.50%, based on the Company's
Consolidated Total Leverage Ratio.
Under the 2018 Revolving Credit Facility, an aggregate amount of up to $100.0 million in letters of credit may be issued,
as well as swing line loans of up to $25 million outstanding at one time. The issuance of such letters of credit and the
making of any swing line loan would reduce the amount available under the 2018 Revolving Credit Facility. The
Company will pay (i) commitment fees on the unused portion of the 2018 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.
2014 Credit Facility
The 2014 Credit Facility, as amended, provided for (i) a revolving credit facility of $550 million (the “2014 Revolving
Credit Facility”), (ii) a $325 million term loan (the “2014 Term Loan Facility”) and iii) a $250 million incremental term
loan.
Senior Notes
On April 18, 2018, the Company consummated the issuance and sale of $400 million aggregate principal amount of
its 8.000% Senior Notes due 2026 (the “Notes” or "Senior Notes") offered pursuant to a private offering to qualified
institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”),
and to non-U.S. persons under Regulation S under the Securities Act. The Company used the net proceeds from the
sale of the Notes to repay debt under its existing credit facilities in connection with a concurrent refinancing transaction
described above. The Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the “Indenture”), between
the Company and U.S. Bank National Association, as trustee.
The Notes will bear interest at the rate of 8.000% per annum and will mature on May 1, 2026. Interest on the Notes
is payable in cash on May 1st and November 1st of each year, beginning on November 1, 2018. The Notes are general
senior unsecured obligations of the Company and are not guaranteed by the subsidiaries through which the Company
currently conducts substantially all of its operations. The Notes rank equal in right of payment with all of the Company’s
existing and future senior unsecured indebtedness, and rank senior in right of payment to all of the Company’s future
subordinated indebtedness, if any. The Notes will be effectively subordinated to the Company’s existing and future
F-38
secured indebtedness, to the extent of the value of the assets securing such indebtedness, including the indebtedness
under the Company’s credit facilities described below.
The Indenture contains several restrictive covenants including, but not limited to, limitations on the following: (i) the
incurrence of additional indebtedness, (ii) restricted payments, (iii) dividends and other payments affecting restricted
subsidiaries, (iv) the issuance of preferred stock of restricted subsidiaries, (v) transactions with affiliates, (vi) asset
sales and mergers and consolidations, (vii) future subsidiary guarantees and (viii) liens, subject in each case to certain
exceptions.
The following table provides the Company’s debt holdings at December 31, 2018 and December 31, 2017:
(in thousands):
Senior Notes
Revolving Credit Facility
Term Loan Facility
Less: unamortized discounts and debt issuance costs
Total debt
Less: Current portion, term loan facilities
Long-term debt
December 31,
2018
2017
$
$
$
400,000
$
228,000
496,250
(20,379)
1,103,871
(5,000)
1,098,871
$
$
—
42,000
559,973
(11,941)
590,032
(5,685)
584,347
Annual maturities of the Company's debt obligations are as follows (in thousands):
2019
2020
2021
2022
2023
2024 and thereafter
$
5,000
5,000
5,000
5,000
233,000
867,419
$
1,120,419
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the issuance of the Company's financing
arrangements. The Company paid $7.0 million in debt issuance costs related to the Senior Notes issuance, comprised
of bank fees, rating agency fees and professional fees. The 2018 Credit Facility was categorized as a debt modification,
and the Company incurred $8.4 million of debt issuance costs, $7.8 million of which were capitalized and will be
amortized over the life of the related debt instrument, and $0.6 million that were expensed as costs incurred. The
Company recorded additional debt modification expense of $0.6 million to write off previously capitalized debt issuance
costs. Since the Company can borrow, repay and reborrow principal under the 2018 Revolving Credit Facility, the debt
issuance costs associated with the 2014 and 2018 Revolving Credit Facility have been classified as other non-current
assets in the accompanying consolidated balance sheet. The original issue discount and the debt issuance costs
associated with the 2018 Term Loan and Senior Notes are classified as a reduction of long-term debt in the
accompanying consolidated balance sheet.
F-39
The following table summarizes debt issuance costs at December 31, 2018 and December 31, 2017, 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,
2018
2017
24,609
$
(2,807)
21,802
$
5,254
$
16,548
21,802
$
21,491
(10,250)
11,241
2,784
8,458
11,241
$
$
$
$
Covenants
The Company is subject to certain customary affirmative and restrictive covenants arising under the 2018 Credit Facility.
The following table reflects required and actual financial ratios as of December 31, 2018 included as part of the
affirmative covenants in the 2018 Credit Facility:
Description of Required Covenant Ratio
Covenant Ratio Requirement
Actual Ratio
Fixed Charge Coverage Ratio
Total Secured Debt to EBITDA Ratio
Total Debt to EBITDA Ratio
Greater than or equal to 1.50: 1.00
Less than or equal to 3.50: 1.00
Less than or equal to 5.00: 1.00
2.81:1.00
2.54:1.00
3.96:1.00
A breach of any of these covenants will be an event of default under the 2018 Credit Facility. Upon the occurrence of
an event of default under the 2018 Credit Facility, the 2018 Revolving Credit Facility may be terminated, the 2018 Term
Loan Facility and all outstanding loans and other obligations under the 2018 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 2018 Credit Facility. Any such event
would materially impair the Company’s ability to conduct its business. As of December 31, 2018, the Company was
in compliance with all covenants as defined in the 2018 Credit Agreement.
Letters of credit
The 2018 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, 2018 totaled $0.3 million and at December 31, 2017 totaled $0.6 million. Letter
of credit fees recorded to interest expense were immaterial in 2018 and totaled $0.1 million in each of the years ended
December 31, 2017 and 2016.
Interest hedge
The Company entered into an interest rate swap on $220 million of outstanding debt on our Term Loan Facility for a
period from April 2016 through June 2021. Refer to "Note I - Derivative Instruments and Hedging Activities" for further
information on the interest rate derivative entered into as part of the Term Loan Facility.
F-40
Interest expense
The following details the components of interest expense in each of the years ended December 31, 2018, 2017 and
2016:
(in thousands)
Interest on credit facilities
Interest on Senior Notes
Unused fee on Revolving Credit Facility
Amortization of original issue discount
Unrealized (gains) losses on interest rate derivatives
Letter of credit fees
Other, net
Interest expense, net
Average daily balance outstanding - credit facilities
Effective interest rate - credit facilities
Year ended December 31,
2017
2016
2018
$
32,414
$
23,940
$
19,861
22,489
1,630
729
(2,251)
8
558
55,577
721,643
$
$
—
2,856
1,037
(648)
70
368
27,623
597,114
$
$
—
1,947
802
1,539
108
394
24,651
477,656
4.6%
4.7%
5.2%
$
$
Note I — Derivative Instruments and Hedging Activities
Interest Rate Swap
On September 16, 2014, the Company purchased an interest rate swap (the "Swap") with a notional amount of $220
million. The Swap is effective April 1, 2016 through June 6, 2021, the original termination date of 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, 2018 and 2017, the Swap had a fair value loss
of $2.1 million and $6.1 million, respectively, principally reflecting the present value of future payments and receipts
under the agreement.
The following table reflects the classification of the Swap on the Consolidated Balance Sheets at December 31, 2018
and 2017 (in thousands):
Year ended December 31,
2018
2017
Other current liabilities
Other non-current liabilities
Total fair value
$
$
582
1,490
2,072
$
$
2,468
3,639
6,107
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, 2018, 2017
or 2016. At December 31, 2017, these contracts had notional values of €0.3 million, and maturity dates within three
months of year end. At December 31, 2018, Arnold had no currency contracts outstanding.
Note J – 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.
F-41
The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated balance
sheets at December 31, 2018 and 2017:
(in thousands)
Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial (gain)/loss
Plan amendment
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
December 31,
2018
2017
$
14,753
$
13,804
536
96
(239)
(21)
365
(417)
(56)
534
94
(59)
—
319
(555)
616
$
$
15,017
$
14,753
11,132
$
10,549
224
4
365
(417)
(56)
11,252
$
(3,765) $
348
7
319
(555)
464
11,132
(3,621)
The unfunded liability of $3.8 million and $3.6 million at December 31, 2018 and 2017, 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,
2018
2017
2016
536
$
534
$
96
(156)
197
673
$
94
(155)
250
723
$
409
130
(147)
165
557
$
$
Assumptions used to determine the benefit obligations and components of the net periodic benefit cost at December 31,
2018 and 2017:
Discount rate
Expected return on plan assets
Rate of compensation increase
December 31,
2018
2017
0.88%
1.20%
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.
Arnold expects to contribute approximately $0.4 million to the defined benefit plan in 2019.
F-42
The following presents the benefit payments which are expected to be paid for the plan in each year indicated (in
thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
809
1,323
740
662
538
3,905
7,977
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, 2018:
Certificates of deposit and cash and cash equivalents
Fixed income bonds and securities
Equities and investment funds
Real estate
Other investments
62%
8%
12%
17%
1%
100%
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, 2018 and 2017 were considered Level 3.
Note K — 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.
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 Trust preferred shares and the Company is authorized to issue a
corresponding number of Trust Interests.
Series B Preferred Shares
On March 13, 2018, the Trust issued 4,000,000 7.875% Series B Preferred Shares (the "Series B Preferred Shares")
with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.5 million net of
underwriters' discount and issuance costs. Distributions on the Series B Preferred Shares will be payable quarterly
in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30, and October
30 of each year, beginning on July 30, 2018, at a rate per annum of 7.875%. Distributions on the Series B Preferred
Shares are cumulative and at December 31, 2018, $1.3 million of Series B distributions are accumulated and unpaid.
Unless full cumulative distributions on the Series B Preferred Shares have been or contemporaneously are declared
and set apart for payment of the Series B Preferred Shares for all past distribution periods, no distribution may be
declared or paid for payment on the Trust common shares. The Series B Preferred Shares are not convertible into
F-43
Trust common shares and have no voting rights, except in limited circumstances as provided for in the share designation
for the Series B Preferred Shares. The Series B Preferred Shares may be redeemed at the Company's option, in
whole or in part, at any time after April 30, 2028, at a price of $25.00 per share, plus any accumulated and unpaid
distributions (thereon whether authorized or declared) to, but excluding, the redemption date. Holders of Series B
Preferred Shares will have no right to require the redemption of the Series B Preferred Shares and there is no maturity
date.
If a certain tax redemption event occurs prior to April 30, 2028, the Series B 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 accumulated and unpaid distributions to, but excluding, the
redemption date. If a certain fundamental change related to the Series B Preferred Shares or the Company occurs
(whether before, on or after April 30, 2028), the Company will be required to repurchase the Series B Preferred Shares
at a price of $25.25 per share, plus accumulated and unpaid distributions to, but excluding, the date of purchase. 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 B Preferred Shares, the distribution rate per annum on the Series B
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 B 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 B Preferred Shares.
Series A Preferred Shares
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”).
F-44
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.
There were no allocation payments made to the Allocation Interest Holders in 2018. 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 and 2016:
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
P - "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 P - "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 P - 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 P - Investment") and the sale of Tridien in September 2016 (refer to "Note Q - 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;
Reconciliation of net income (loss) available to common shares of Holdings
The following table reconciles net loss attributable to Holdings to net loss attributable to the common shares of Holdings:
(in thousands)
Year ended December 31,
2018
2017
2016
Net income (loss) from continuing operations attributable to Holdings
$
(6,960) $
27,651
$
51,788
Less: Distributions paid - Allocation Interests
Less: Distributions paid - Preferred Shares
Less: Accrued distributions - Preferred Shares
—
12,179
1,334
39,188
2,457
—
23,779
—
—
Net income (loss) from continuing operations attributable to common
shares of Holdings
$
(20,473) $
(13,994) $
28,009
Earnings per share
Basic and diluted earnings per share for the fiscal year ended December 31, 2018, 2017 and 2016 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
2018
2017
2016
$
$
$
(20,473) $
(13,994) $
5,893
12,726
(26,366) $
(26,720) $
1,258
$
—
340
$
—
28,009
2,862
25,147
2,898
—
F-45
Income from discontinued operations of Holdings attributable to common
shares
$
1,258
$
340
$
2,898
Basic and diluted weighted average common shares of Holdings
outstanding
59,900
59,900
54,591
Basic and fully diluted income (loss) per common share attributable to
Holdings
Continuing operations
Discontinued operations
Distributions
$
$
$
(0.44) $
0.02
$
(0.42) $
(0.45) $
0.01
$
(0.44) $
0.46
0.05
0.51
The following table summarizes information related to our quarterly cash distributions on our Trust common and
preferred shares:
Period
Cash Distribution
per Share
Total Cash
Distributions
(in thousands)
Record Date
Payment Date
Trust Common Shares:
October 1, 2018 - December 31, 2018 (1)
July 1, 2018 - September 30, 2018
April 1, 2018 - June 30, 2018
January 1, 2018 - March 31, 2018
October 1, 2017 - December 31, 2017
July 1, 2017 - September 30, 2017
April 1, 2017 - June 30, 2017
January 1, 2017 - March 31, 2017
October 1, 2016 - December 31, 2016
July 1, 2016 - September 30, 2016
April 1, 2016 - June 30, 2016
January 1, 2016 - March 31, 2016
Series A Preferred Shares:
October 30, 2018 - January 29, 2019 (1)
July 30, 2018 - October 29, 2018
April 30, 2018 - July 29, 2018
January 30, 2018 - April 29, 2018
October 30, 2017 - January 29, 2017
June 28, 2017 - October 29, 2017
Series B Preferred Shares:
October 30, 2018 - January 29, 2019 (1)
July 30, 2018 - October 29, 2018
March 13, 2018 - July 29, 2018
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.36
0.453125
0.453125
0.453125
0.453125
0.453125
0.61423611
0.4921875
0.4921875
0.74
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1)
This distribution was
declared on January 3, 2019.
F-46
21,564
January 17, 2019
January 24, 2019
21,564
October 18, 2018
October 25, 2018
21,564
21,564
July 19, 2018
July 26, 2018
April 19, 2018
April 26, 2018
21,564
January 19, 2018
January 25, 2018
21,564
October 19, 2017
October 26, 2017
21,564
21,564
July 20, 2017
July 27, 2017
April 20, 2017
April 27, 2017
21,564
January 19, 2017
January 26, 2017
21,564
October 20, 2016
October 27, 2016
21,564
21,564
July 21, 2016
July 28, 2016
April 22, 2016
April 28, 2016
1,813
January 15, 2019
January 30, 2019
1,813
October 15, 2018
October 30, 2018
1,813
1,813
July 16, 2018
July 30, 2018
April 15, 2018
April 30, 2018
1,813
January 15, 2018
January 30, 2018
2,457
October 15, 2017
October 30, 2017
1,969
January 15, 2019
January 30, 2019
1,969
October 15, 2018
October 30, 2018
2,960
July 16, 2018
July 30, 2018
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, state and in some cases, foreign income taxes. On December 22, 2017, the U.S. government
enacted the Tax Act. The Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21% and required
companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred
and created new taxes on certain foreign sourced earnings. The Company made a reasonable estimate of the effects
of the Tax Act on its existing deferred tax balances and the one-time transition tax as of December 31, 2017. The
Company 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 included provisional tax expense of $4.9 million related
to the one-time transition tax liability of our foreign subsidiaries. The Company completed the calculation of the total
E&P for these foreign subsidiaries during 2018 and recorded additional adjustments to the provisional amounts of $0.4
million that is recognized as a component of the provision for income taxes in the year ended December 31, 2018.
The Tax Act also subjects the Company to tax on global intangible low-taxed income ("GILTI") earned by certain foreign
subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that
an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences
expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is
incurred as a period expense. The Company has elected to account for GILTI as a period cost in the year the tax is
incurred.
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,
2018
2017
2016
$
$
(4,118) $
(13,276) $
63,782
7,618
5,869
(564)
3,500
$
(7,407) $
63,218
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,
2017
2016
2018
$
8,501
$
10,293
$
12,994
2,684
4,835
16,020
(3,493)
(3,032)
(2,947)
(9,472)
2,221
6,236
18,750
(55,299)
(1,712)
(2,418)
(59,429)
$
6,548
$
(40,679) $
2,486
3,857
19,337
(5,816)
(1,357)
(2,695)
(9,868)
9,469
F-47
The tax effects of temporary differences that have resulted in the creation of deferred tax assets and deferred tax
liabilities at December 31, 2018 and 2017 are as follows:
(in thousands)
Deferred tax assets:
Tax credits
Accounts receivable and allowances
Net operating loss carryforwards
Accrued expenses
Interest expense limitation carryforwards
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,
2018
2017
$
4,369
$
1,676
33,355
7,311
6,190
9,168
62,069
$
(6,904)
55,165
$
5,035
1,134
27,631
5,789
—
5,174
44,763
(5,912)
38,851
(101,539) $
(102,581)
(27,539)
(38)
(1,008)
(17,060)
(68)
(191)
(130,124) $
(119,900)
(74,959) $
(81,049)
$
$
$
$
$
(1) Primarily relates to the 5.11 and Arnold operating segments.
For the years ending December 31, 2018 and 2017, the Company recognized approximately $130.1 million and $119.9
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 the limitation on the deduction of interest
expense of $6.9 million was provided at December 31, 2018 and a valuation allowance related to the realization of
foreign tax credits of $5.9 million was provided at December 31, 2017. A valuation allowance is provided whenever it
is more likely than not that some or all of deferred assets recorded may not be realized. 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. The
provision will not limit the deduction of interest by the Company for 2018 but it did have an impact the deduction for
certain of the portfolio companies, resulting in an additional valuation allowance for deferred tax assets of $2.1 million.
F-48
The reconciliation between the Federal Statutory Rate and the effective income tax rate for 2018, 2017 and 2016 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 - GILTI tax
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
2018
21.0%
(22.0)
23.0
84.6
—
1.7
—
3.1
—
—
27.9
—
(15.9)
49.5
0.5
10.0
3.7
(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
187.1%
(549.2)%
15.0%
(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 for the year ended
December 31, 2017 was significant.
A reconciliation of the amount of unrecognized tax benefits for 2018, 2017 and 2016 are as follows (in thousands):
Balance at January 1, 2016
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
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
F-49
$
$
$
389
64
10,150
(16)
—
(87)
10,500
96
23
(9,397)
—
(87)
1,135
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, 2018
50
4
(18)
—
(99)
$
1,072
(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, 2018 and 2017 is $1.1 million and $1.0 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, 2018, 2017 and 2016 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. 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 2014 through 2018 tax years generally remain subject to examinations by the taxing
authorities.
Note M — Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of
December 31, 2018 and 2017 (in thousands):
Liabilities:
Put option of noncontrolling shareholders (1)
Contingent consideration - acquisitions (2)
Interest rate swap
Total recorded at fair value
Fair Value Measurements at December 31, 2018
Carrying
Value
Level 1
Level 2
Level 3
(173)
(4,374)
(2,072)
—
—
—
—
—
(2,072)
(173)
(4,374)
—
$
(6,619) $
— $
(2,072) $
(4,547)
(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-out payable as additional purchase price consideration by Velocity Outdoor in connection
with the acquisition of Ravin.
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.
F-50
A reconciliation of the change in the carrying value of the Company’s Level 3 fair value measurements is as follows:
Year ended December 31,
2018
2017
(in thousands)
Balance at January 1st
Contingent consideration - Sterno Home
Contingent consideration - Rimports
Contingent consideration - Ravin
Payment of contingent consideration - Sterno Home
(Increase) decrease in the fair value of put option of
noncontrolling shareholders - Liberty
(Increase) decrease in the fair value of put option of
noncontrolling shareholder - 5.11
Adjustment to Ravin contingent consideration
Reversal of contingent consideration - Rimports
Reversal of contingent consideration - Baby Tula
Reversal of contingent consideration - Sterno Home
$
(178) $
—
(4,800)
(4,734)
—
—
5
360
4,800
—
—
Balance at December 31st
$
(4,547) $
(5,010)
(382)
—
—
475
8
(5)
—
—
3,780
956
(178)
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 N - 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, 2018 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, 2018 were expensed to interest expense on the
consolidated statement of operations. Refer to "Note I - Derivative Instruments and Hedging Activities" for further
information.
Contingent Consideration
For certain acquisition of businesses that the Company or its subsidiaries make, a portion of the acquisition price will
be contingent consideration. The following is a summary of the contingent consideration arrangements entered into
by the Company's subsidiaries in the prior three years and the valuation methodologies:
• Sterno entered into a contingent consideration arrangement in connection with their purchase of Rimports in
February 2018. The purchase price of Rimports includes a potential earn-out of up to$25 million contingent
on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1,
2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019. The fair value of
the contingent consideration was estimated at $4.8 million at acquisition date and was calculated as the present
value of a probability adjusted earnout payment based on the expected term of the payment and a risk-adjusted
F-51
discount rate. At December 31, 2018, the Company determined that the probability of achieving the earn-out
was zero and therefore reversed the amount that was recorded as part of the purchase consideration.
• Velocity Outdoor entered into a contingent consideration arrangement in connection with their purchase of
Ravin Crossbows in September 2018. The purchase price of Ravin includes a potential earn-out of up to
$25.0 million based on gross profit levels for the trailing twelve month period ending December 31, 2018. The
fair value of the contingent consideration was estimated at $4.7 million at acquisition date and was calculated
using a risk-adjusted option pricing model. The earnout was adjusted to $4.3 million at December 31, 2018
based on actual results to date. The earn-out is expected to be paid in the second quarter of 2019.
• 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.
2018 Term Loan
At December 31, 2018, the carrying value of the principal under the Company's outstanding 2018 Term Loan, including
the current portion, net of original issue discount, was $492.4 million, which approximates fair value because it has a
variable interest rate that reflects market changes in interest rates and changes in the Company's net leverage ratio.
The estimated fair value of the outstanding 2018 Term Loan is classified as Level 2 in the fair value hierarchy.
Senior Notes
The Company's Senior Notes consisted of the following carrying value and estimated fair value (in thousands):
Maturity Date
Rate
Fair Value
Hierarchy
Level
December 31, 2018
Carrying Value
Fair Value
Senior Notes
May 1, 2026
8.000%
2
400,000
396,000
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. Refer to "Note G – Goodwill and Intangible Assets", 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, 2018.
F-52
(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 G - Goodwill and Intangible Assets" for further discussion regarding the impairment and valuation techniques
applied.
Note N — Noncontrolling Interest
Noncontrolling interest represents the portion of a majority-owned subsidiary’s net income and equity that is owned
by noncontrolling shareholders.
The following tables reflect the Company’s percentage ownership of its businesses, as of December 31, 2018, 2017
and 2016 and related noncontrolling interest balances as of December 31, 2018 and 2017:
5.11 Tactical
Ergobaby
Liberty
Manitoba Harvest
Velocity
ACI
Arnold
Clean Earth
Foam Fabricators
Sterno
% Ownership (1)
December 31, 2018
% Ownership (1)
December 31, 2017
% Ownership (1)
December 31, 2016
Primary
Fully
Diluted
Primary
Fully
Diluted
Primary
Fully
Diluted
97.5
81.9
88.6
76.6
99.2
69.4
96.7
97.5
100.0
100.0
88.7
76.4
85.2
68.1
91.0
69.2
79.4
79.8
91.5
88.9
97.5
82.7
88.6
76.6
98.8
69.4
96.7
97.5
N/a
100.0
85.5
76.6
84.7
67.0
89.2
69.2
84.7
79.8
N/a
89.5
97.5
83.5
88.6
76.6
n/a
69.4
96.7
97.5
N/a
100.0
85.1
76.9
84.7
65.6
n/a
69.3
84.7
79.8
N/a
89.5
(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.
F-53
(in thousands)
5.11 Tactical
Velocity
Ergobaby
Liberty
Manitoba Harvest
ACI
Arnold
Clean Earth
Foam Fabricators
Sterno
Allocation Interests
Noncontrolling Interest Balances
December 31,
2018
December 31,
2017
$
9,873
$
2,523
25,362
3,349
11,154
(1,236)
1,176
8,888
848
(2,067)
100
8,003
1,373
23,416
3,254
11,725
(5,850)
1,368
7,357
—
2,045
100
$
59,970
$
52,791
The Company's businesses had the following transactions with minority shareholders during the years ended
December 31, 2018, 2017 and 2016:
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 $57.7 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 options, thus maintaining the same percentage of fully diluted non-controlling
interest that existed prior to the recapitalization.
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 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.
F-54
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 O — 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
(1) Represents warranty liabilities of acquired businesses.
F-55
December 31,
2018
2017
$
29,368
$
23,905
6,156
5,788
5,773
11,739
1,528
38,177
3,777
25,127
3,441
6,873
221
13,516
2,197
32,810
4,985
18,925
$
127,433
$
106,873
Year ended December 31,
2018
2017
$
$
2,197
$
3,531
(4,258)
154
1,624
$
1,258
1,982
(1,552)
509
2,197
Supplemental Statement of Operations Data (in thousands):
Other income (expense), net
Year ended December 31,
Foreign currency gain (loss)
Gain (loss) on sale of capital assets
Other income (expense)
2018
2017
2016
$
$
(5,355) $
3,268
$
(605)
(376)
47
(681)
(6,336) $
2,634
$
(1,386)
(1,249)
(284)
(2,919)
Supplemental Cash Flow Statement Data (in thousands):
Interest paid
Taxes paid
Note P - Investment
Investment in FOX
Year ended December 31,
2018
2017
2016
$
$
51,697
16,518
$
$
27,754
19,326
$
$
22,840
15,324
Fox Factory Holding 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
F-56
line Due to Related Party in the Consolidated Balance Sheets 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.
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, 2018, 2017 and 2016.
Note Q — 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 were reserved as support
for the Company's indemnification obligations for future claims against Tridien that the Company may have been liable
for under the terms of the Tridien sale agreement. In the second quarter of 2018, all indemnification claims had been
settled, and the Company recognized an additional $1.3 million in gain on the sale of Tridien.
Summarized operating results for Tridien for the 2016 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
$
$
45,951
7,917
437
488
15
473
(1) The results of operations for the period from January 1, 2016 through the date of disposition, excludes $1.1 million of
intercompany interest expense.
Note R — 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.
F-57
The future minimum rental commitments at December 31, 2018 under operating leases having an initial or remaining
non-cancelable term of one year or more are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
$
28,070
26,090
22,652
18,952
13,058
44,386
$
153,208
The Company’s rent expense for the fiscal years ended December 31, 2018, 2017 and 2016 totaled $33.8 million,
$23.5 million and $15.9 million, respectively.
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 S — Related Party Transactions
The Company has entered into related party transactions with its Manager, CGM, including the following:
• 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. During the current year, the
Company paid CGM $0.4 million representing the management fee due from Manitoba Harvest in 2018. At December
31, 2018, Manitoba Harvest has accrued $0.4 million due to the Company to reimburse us for the management fee
paid on their behalf. Additionally, during the third quarter of 2018, CGM waived $0.6 million in management fees
attributable to the assets acquired in September related to the acquisitions by Velocity Outdoor and Clean Earth.
F-58
For the year ended December 31, 2018, 2017 and 2016, the Company incurred the following management fees to
CGM, by entity:
(in thousands)
5.11
Ergobaby
Liberty
Manitoba Harvest
Velocity
Advanced Circuits
Arnold
Clean Earth
Foam Fabricators
Sterno
Corporate
Year ended December 31,
2018
2017
2016
$
1,000
$
1,000
$
500
500
350
500
500
500
500
658
500
500
500
350
290
500
500
500
n/a
500
333
500
500
350
n/a
500
500
500
n/a
500
38,786
28,053
$
44,294
$
32,693
$
25,723
29,406
Not included in the table above are management fees paid to CGM by Tridien of $0.2 million in the year ended December
31, 2016. This amount is included in income (loss) from discontinued operations on the consolidated statements of
operations.
Approximately $11.4 million and $7.8 million of the management fees incurred were unpaid as of December 31, 2018
and 2017, 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 $63.0 million in distributions related to Sale and Holding
Events that occurred during 2017 and 2016. Refer to "Note K - Stockholders' Equity" for a description of the 2017 and
2016 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) 49.0% of the Allocation Interests at December 31, 2018, and 60.4% of the
Allocation Interests at December 31, 2017 and 2016. Of the remaining 51.0% at December 31, 2018, 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
41% is held by the former founding partners of the Manager. Of the remaining 39.6% non-voting ownership of the
Allocation Interests at December 31, 2017 and 2016, 5.0% was held by CGI Diversified Holdings LP, 5.0% was held
by the Chairman of the Company’s Board of Directors, and the remaining 29.6% was held by the former founding
partner of the Manager.
Integrations Services Agreements
Foam Fabricators, which was acquired in 2018, Velocity, which was acquired in 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, 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.
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). Velocity paid CGM $0.75 million in integration services fees during 2017 and $0.75 million in integration
services fees in 2018. Foam Fabricators paid or will pay CGM $2.3 million over the term of the ISA, ($2.0 million in
integration service fees in 2018 and $0.3 million in 2019) During the year ended December 31, 2018, 2017 and 2016,
CGM received $2.7 million, $3.1 million, and $1.7 million, respectively, in total integration service fees.
F-59
Cost Reimbursement and Fees
The Company reimbursed its Manager, CGM, approximately $4.1 million, $3.8 million, and $3.8 million, principally for
occupancy and staffing costs incurred by CGM on the Company’s behalf during the years ended December 31, 2018,
2017 and 2016, 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 P - Investment" for additional information related to the
Company's investment in FOX.
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, 2018, 2017 and 2016 (from the date of acquisition) 5.11 purchased approximately $5.0 million, $5.6
million, and $2.3 million, respectively, in inventory from the vendor.
Liberty
Liberty Recapitalization - Refer to "Note N - 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, 2018, 2017 and 2016, Liberty purchased approximately $2.1 million, $2.1 million and
$2.5 million, respectively, in raw materials from the two vendors.
Advanced Circuits
Advanced Circuits Recapitalization - Refer to "Note N - 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.
Sterno
Sterno Recapitalization - Refer to "Note N - Noncontrolling Interest" for additional details with regards to the Sterno
recapitalization.
Note T – 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
F-60
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,
2018
September 30,
2018
June 30,
2018
March 31,
2018
$
452,523
$
448,700
$
429,757
$
147,691
20,121
(6,561)
93
(7,179)
149,704
24,254
5,766
—
4,726
150,682
20,245
(632)
1,165
(908)
$
$
(0.25) $
— $
(0.07) $
— $
(0.12) $
— $
(0.25)
(0.07)
(0.12)
360,693
126,111
4,698
(1,621)
—
(2,341)
(0.09)
—
(0.09)
(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.
Note U - Subsequent Event
Manitoba Harvest
On February 19, 2019, the Company entered into a definitive agreement (the "Agreement") with Tilray, Inc. ("Tilray")
and a wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, Inc., through Tilray Subco,
all of the issued and outstanding securities of Manitoba Harvest for total consideration of up to C$419 million. Subject
to certain customary adjustments, the shareholders of Manitoba Harvest, including the Company, may receive the
following from Tilray as consideration for their shares of Manitoba Harvest: (a) C$150 million in cash to the holders of
F-61
preferred shares of Manitoba Harvest and the holders of common shares of Manitoba Harvest (“Common Holders”)
and C$127.5 million in shares of class 2 Common Stock of Tilray (“Common Stock”) to the Common Holders on the
closing date of the sale (the “Closing Date Consideration”), (b) C$50 million in cash and C$42.5 million in Common
Stock to the Common Holders on the date that is six months after the closing date of the Arrangement (the “Deferred
Consideration”) and (c) C$49 million in Common Stock to the Common Holders, which amount may be reduced,
potentially to zero, if Manitoba Harvest fails to attain certain levels of U.S. branded gross sales of edible or topical
products containing broad spectrum hemp extracts or cannabidiols prior to December 31, 2019. The cash portion of
the Closing Date Consideration will be reduced by the amount of the net indebtedness of Manitoba Harvest on the
closing date and transaction expenses expected to be approximately $5 million. The Common Stock consideration
is expected to be issued in reliance on the exemption from the registration requirements of the U.S. Securities Act and
pursuant to exemptions from applicable securities laws of any state of the United States, such that any shares of
Common Stock received by the Common Holders will be freely tradeable. The sale of Manitoba Harvest will occur
pursuant to a plan of arrangement under the Business Operations Act (British Columbia). The completion of the plan
of arrangement was subject to approval by the British Columbia Supreme Court, which occurred on February 21, 2019.
The sale is expected to close as soon as practicable following receipt of court approval.
F-62
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Sales allowance accounts - 2018
Sales allowance accounts - 2017
Sales allowance accounts - 2016
Valuation allowance for deferred tax assets - 2018
Valuation allowance for deferred tax assets - 2017
Valuation allowance for deferred tax assets - 2016
Additions
Balance at
beginning
of Year
Charge to costs
and expense
Other (1)
Deductions
Balance at
end of Year
$
$
$
$
$
$
9,995
5,511
3,445
5,912
7,256
1,308
$
$
$
$
$
$
3,974
15,612
4,775
1,108
625
2,266
$
$
$
$
$
$
2,965
1,164
2,105
$
$
$
— $
— $
3,692
$
4,317
12,292
4,814
116
1,969
10
$
$
$
$
$
$
12,617
9,995
5,511
6,904
5,912
7,256
(1) Represents opening allowance balances related to acquisitions made during the period indicated.
S-1