CODI 03.31.2015-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 
COMPASS DIVERSIFIED HOLDINGS
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-34927
 
57-6218917
 
 
(State or other jurisdiction of
incorporation or organization)
 
(Commission
file number)
 
(I.R.S. employer
identification number)
 
 
COMPASS GROUP DIVERSIFIED HOLDINGS LLC
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
001-34926
 
20-3812051
 
 
(State or other jurisdiction of
incorporation or organization)
 
(Commission
file number)
 
(I.R.S. employer
identification number)
 
Sixty One Wilton Road
Second Floor
Westport, CT 06880
(203) 221-1703
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company’ in Rule 12b-2 of the Exchange Act
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
 
Smaller Reporting Company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

As of May 1, 2015, there were 54,300,000 shares of Compass Diversified Holdings outstanding.
 


Table of Contents

COMPASS DIVERSIFIED HOLDINGS
QUARTERLY REPORT ON FORM 10-Q
For the period ended March 31, 2015
TABLE OF CONTENTS
 
 
 
 
Page
Number
 
 
 
Part I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
Part II
 
 
Item 1.
 
 
Item 1A.
 
 
Item 6.
 
 
 
 
 


2

Table of Contents

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

the “Trust” and “Holdings” refer to Compass Diversified Holdings;
“businesses,” “operating segments,” “subsidiaries” and “reporting units” refer to, collectively, the businesses controlled by the Company;
the “Company” refer to Compass Group Diversified Holdings LLC;
the “Manager” refer to Compass Group Management LLC (“CGM”);
the “initial businesses” refer to, collectively, Staffmark Holdings, Inc. (“Staffmark”), Crosman Acquisition Corporation, Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”) and Silvue Technologies Group, Inc.;
the "2014 acquisitions" refer to, collectively, the acquisitions of Clean Earth Holdings, Inc. and SternoCandleLamp;
the “Trust Agreement” refer to the amended and restated Trust Agreement of the Trust dated as of November 1, 2010;
the “2011 Credit Facility” refer to a credit agreement (as amended) with a group of lenders led by Toronto Dominion (Texas) LLC, as agent, which provides for the Revolving Credit Facility and the Term Loan Facility;
the “2011 Revolving Credit Facility” refer to the $320 million Revolving Credit Facility provided by the 2011 Credit Facility;
the "2011 Term Loan Facility" refer to the Term Loan Facility provided by the 2011 Credit Facility;
the "2014 Credit Facility" refer to the credit agreement entered into on June 6, 2014 with a group of lenders led by Bank of America N.A. as administrative agent, which provides for a Revolving Credit Facility and a Term Loan Facility;
the “2014 Revolving Credit Facility” refer to the $400 million Revolving Credit Facility provided by the 2014 Credit Facility that matures in June 2019;
the “2014 Term Loan” refer to the $325 million Term Loan Facility, provided by the Credit Facility that matures in June 2021;
the “LLC Agreement” refer to the fourth amended and restated operating agreement of the Company dated as of January 1, 2012; and
“we,” “us” and “our” refer to the Trust, the Company and the businesses together.


3

Table of Contents

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

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


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Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1. — FINANCIAL STATEMENTS

Compass Diversified Holdings
Condensed Consolidated Balance Sheets

(in thousands)
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,450

 
$
23,703

Accounts receivable, less allowances of $5,044 at March 31, 2015 and $5,200 at December 31, 2014
153,511

 
157,535

Inventories
114,166

 
111,214

Prepaid expenses and other current assets
28,166

 
28,347

Total current assets
316,293

 
320,799

Property, plant and equipment, net
113,613

 
115,871

Equity method investment (refer to Note E)
231,767

 
245,214

Goodwill
351,496

 
359,180

Intangible assets, net
477,217

 
487,220

Deferred debt issuance costs, less accumulated amortization of $1,731 at March 31, 2015 and $1,233 at December 31, 2014
10,699

 
11,197

Other non-current assets
7,770

 
7,949

Total assets
$
1,508,855

 
$
1,547,430

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
58,981

 
$
62,099

Accrued expenses
49,610

 
63,378

Due to related party
6,146

 
6,193

Current portion, long-term debt
3,250

 
3,250

Other current liabilities
6,044

 
6,311

Total current liabilities
124,031

 
141,231

Deferred income taxes
97,642

 
97,731

Long-term debt, less original issue discount
504,177

 
485,547

Other non-current liabilities
18,636

 
14,587

Total liabilities
744,486

 
739,096

Stockholders’ equity
 
 
 
Trust shares, no par value, 500,000 authorized; 54,300 shares issued and outstanding at March 31, 2015 and December 31, 2014
825,321

 
825,321

Accumulated other comprehensive income (loss)
(2,692
)
 
(2,542
)
Accumulated deficit
(99,798
)
 
(55,348
)
Total stockholders’ equity attributable to Holdings
722,831

 
767,431

Noncontrolling interest
41,538

 
40,903

Total stockholders’ equity
764,369

 
808,334

Total liabilities and stockholders’ equity
$
1,508,855

 
$
1,547,430

See notes to condensed consolidated financial statements.

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Table of Contents

Compass Diversified Holdings
Condensed Consolidated Statements of Operations
(unaudited)
 
Three months ended 
 March 31,
 
2015
 
2014
(in thousands, except per share data)
 
 
 
Net sales
$
222,142

 
$
246,048

Service revenues
35,129

 

Total net revenues
257,271

 
246,048

Cost of sales
157,532

 
169,696

Cost of service revenues
27,823

 

Gross profit
71,916

 
76,352

Operating expenses:
 
 
 
Selling, general and administrative expense
44,028

 
46,173

Management fees
6,858

 
4,735

Amortization expense
10,013

 
7,349

Impairment expense
8,907

 

Operating income
2,110

 
18,095

Other income (expense):
 
 
 
Interest expense, net
(9,718
)
 
(4,572
)
Amortization of debt issuance costs
(545
)
 
(570
)
Loss on equity method investment
(13,447
)
 

Other income (expense), net
(307
)
 
184

Income (loss) before income taxes
(21,907
)
 
13,137

Provision for income taxes
3,380

 
5,764

Net income (loss)
(25,287
)
 
7,373

Less: Net income (loss) attributable to noncontrolling interest
(385
)
 
2,714

Net income (loss) attributable to Holdings
$
(24,902
)
 
$
4,659

Basic and fully diluted income (loss) per share attributable to Holdings (refer to Note K)
$
(0.47
)
 
$
0.08

Weighted average number of shares of trust stock outstanding – basic and fully diluted
54,300

 
48,300

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

 
$
0.36

See notes to condensed consolidated financial statements.


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Table of Contents

Compass Diversified Holdings
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
 
Three months ended 
 March 31,
 
2015
 
2014
(in thousands)
 
 
 
Net income (loss)
$
(25,287
)
 
$
7,373

Other comprehensive income (loss)
 
 
 
Foreign currency translation and other
(150
)
 
(9
)
Total comprehensive income (loss), net of tax
$
(25,437
)
 
$
7,364

See notes to condensed consolidated financial statements.


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Table of Contents

Compass Diversified Holdings
Condensed Consolidated Statement of Stockholders’ Equity
(unaudited)
(in thousands)
Number of
Shares
 
Amount
 
Accumulated
Deficit
 
Accum. Other
Comprehensive
Income (Loss)
 
Stockholders’
Equity Attrib.
to Holdings
 
Non-
Controlling
Interest
 
Total
Stockholders’
Equity
Balance — January 1, 2015
54,300

 
$
825,321

 
$
(55,348
)
 
$
(2,542
)
 
$
767,431

 
$
40,903

 
$
808,334

Net loss

 

 
(24,902
)
 

 
(24,902
)
 
(385
)
 
(25,287
)
Other comprehensive loss – foreign currency translation and other

 

 

 
(150
)
 
(150
)
 

 
(150
)
Option activity attributable to noncontrolling shareholders

 

 

 

 

 
1,020

 
1,020

Distributions paid

 

 
(19,548
)
 

 
(19,548
)
 

 
(19,548
)
Balance — March 31, 2015
54,300

 
$
825,321

 
$
(99,798
)
 
$
(2,692
)
 
$
722,831

 
$
41,538

 
$
764,369

See notes to condensed consolidated financial statements.


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Table of Contents

Compass Diversified Holdings
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Three months ended 
 March 31,
(in thousands)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(25,287
)
 
$
7,373

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

 

Depreciation expense
6,522

 
4,636

Amortization expense
10,013

 
7,349

Impairment expense
8,907

 

Amortization of debt issuance costs and original issue discount
713

 
864

Unrealized (gain) loss on interest rate swap
4,314

 
92

Noncontrolling stockholder stock based compensation
1,024

 
1,365

Loss on equity method investment
13,447

 

Excess tax benefit from subsidiary stock options exercised

 
(1,061
)
Deferred taxes
(806
)
 
(594
)
Other
427

 
(53
)
Changes in operating assets and liabilities, net of acquisition:

 

Decrease (increase) in accounts receivable
5,370

 
(15,652
)
Increase in inventories
(2,952
)
 
(7,063
)
Decrease (increase) in prepaid expenses and other current assets
115

 
(3,274
)
Decrease in accounts payable and accrued expenses
(18,520
)
 
(22
)
Net cash provided by (used in) operating activities
3,287

 
(6,040
)
Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired

 
(42,297
)
Purchases of property and equipment
(4,790
)
 
(3,631
)
Payment of interest rate swap
(495
)
 
(495
)
Other investing activities
125

 
7

Net cash used in investing activities
(5,160
)
 
(46,416
)
Cash flows from financing activities:
 
 
 
Borrowings under credit facility
35,500

 
59,000

Repayments under credit facility
(17,038
)
 
(17,713
)
Distributions paid
(19,548
)
 
(17,388
)
Net proceeds provided by noncontrolling shareholders

 
1,156

Debt issuance costs

 
(278
)
Excess tax benefit from subsidiary stock options exercised

 
1,061

Other
(227
)
 

Net cash (used in) provided by financing activities
(1,313
)
 
25,838

Foreign currency impact on cash
(67
)
 
11

Net decrease in cash and cash equivalents
(3,253
)
 
(26,607
)
Cash and cash equivalents — beginning of period
23,703

 
113,229

Cash and cash equivalents — end of period
$
20,450

 
$
86,622

See notes to condensed consolidated financial statements.

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Table of Contents

Compass Diversified Holdings
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 2015

Note A — Organization and Business Operations
Compass Diversified Holdings, a Delaware statutory trust (the "Trust” or "Holdings"), was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the “Company” or "CODI"), was also formed on November 18, 2005 with equity interests which were subsequently reclassified as the “Allocation Interests”. The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. In accordance with the amended and restated Trust Agreement, dated as of 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 shares of the Trust. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of nine businesses, or reportable operating segments, at March 31, 2015. The segments are as follows: CamelBak Acquisition Corp. (“CamelBak”), The Ergo Baby Carrier, Inc. (“Ergobaby”), Liberty Safe and Security Products, Inc. (“Liberty Safe” or “Liberty”), Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”), American Furniture Manufacturing, Inc. (“AFM” or “American Furniture”), AMT Acquisition Corporation (“Arnold” or “Arnold Magnetics”), Clean Earth Holdings, Inc. ("Clean Earth"), Candle Lamp Company, LLC ("SternoCandleLamp") and Tridien Medical, Inc. (“Tridien”). Refer to Note D for further discussion of the operating segments. The Company also owns a non-controlling interest of approximately 41% in Fox Factory Holding Corp. (“FOX”) which is accounted for as an equity method investment. Compass Group Management LLC, a Delaware limited liability company (“CGM” or the “Manager”), manages the day to day operations of the Company and oversees the management and operations of our businesses pursuant to a management services agreement (“MSA”).

Note B — Presentation and Principles of Consolidation
The condensed consolidated financial statements for the three month periods ended March 31, 2015 and March 31, 2014, are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Seasonality
Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from CamelBak are typically higher in the spring and summer months as this corresponds with warmer weather in the Northern Hemisphere and an increase in hydration related activities. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Earnings from AFM are typically highest in the months of January through April of each year, coinciding with homeowners’ tax refunds. Earnings from Clean Earth are typically lower in the winter months due to reduced levels of construction and development activity in the Northeastern United States.
Consolidation
The condensed consolidated financial statements include the accounts of Holdings and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The results of operations of FOX are included in the Company's historical condensed consolidated results of operations through July 10, 2014, the date on which our investment in FOX fell below 50% and the FOX entity was deconsolidated.


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Recently Adopted Accounting Pronouncements
In April 2014, the FASB issued an accounting standard update related to reporting discontinued operations and disclosures of disposals of components of an entity which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The new standard applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The amendment was effective for the Company on January 1, 2015. The adoption of this standard is not expected to change the manner in which the Company currently presents discontinued operations in the consolidated financial statements.


Recently Issued Accounting Pronouncements

In May 2014, the FASB issued a comprehensive new revenue recognition standard. The new standard outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries, jurisdictions and capital markets and also requires enhanced disclosures. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In April 2015, the FASB issued an accounting standard update intended to simplify the presentation of debt issuance costs in the balance sheet. The new guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as an asset. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Accordingly, the standard is effective for the Company on January 1, 2016.


Note C — Acquisitions
Acquisition of Clean Earth Holdings, Inc.
On August 26, 2014, CEHI Acquisition Corp., a subsidiary of the Company, closed on the acquisition of all the issued and outstanding capital stock of Clean Earth Holdings, Inc. pursuant to a stock purchase agreement among CEHI Acquisition Corp., Clean Earth, holders of stock and options in Clean Earth and Littlejohn Fund III, L.P., entered into on August 7, 2014.

Headquartered in Hatboro, Pennsylvania, Clean Earth provides environmental services for a variety of contaminated materials including soils, dredged material, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as power, construction, oil and gas, infrastructure, industrial and dredging. Treatment includes thermal desorption, dredged material stabilization, bioremediation, physical treatment/screening and chemical fixation. Before the company accepts contaminated materials, it identifies a third party “beneficial reuse” site such as commercial redevelopment or landfill capping where the materials will be sent after they are treated. Clean Earth holds the largest market share in the contaminated materials and dredged material management market and operates 14 permitted facilities in the Eastern U.S. Revenues from the environmental recycling facilities are generally recognized at the time of treatment.
The Company made loans to and purchased a 98% controlling interest in Clean Earth. The purchase price, including proceeds from noncontrolling interest, was approximately $251.4 million. The Company funded its portion of the acquisition through drawings on its 2014 Revolving Credit Facility and cash on hand. Clean Earth management invested in the transaction along with the Company representing an approximate 2% 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 Clean Earth. CGM will receive integration service fees of approximately $2.5 million which is payable quarterly as services are rendered beginning in the quarter ended December 31, 2014.

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The results of operations of Clean Earth have been included in the consolidated results of operations since the date of acquisition. Clean Earth'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.

Clean Earth
 
 
(in thousands)
 
 
Amounts recognized as of the acquisition date
 
 
Assets:
 
 
Cash
 
$
3,683

Accounts receivable (1)
 
41,821

Property, plant and equipment (2)
 
43,437

Intangible assets
 
135,939

Goodwill
 
109,738

Other current and noncurrent assets
 
8,697

      Total assets
 
$
343,315

 
 

Liabilities and noncontrolling interest:
 

Current liabilities
 
$
27,205

Other liabilities
 
149,760

Deferred tax liabilities
 
61,299

Noncontrolling interest
 
2,275

      Total liabilities and noncontrolling interest
 
$
240,539

 
 

Net assets acquired
 
$
102,776

Noncontrolling interest
 
2,275

Intercompany loans to business
 
148,248

 
 
$
253,299

Acquisition Consideration
 
 
 
 
 
Purchase price
 
$
243,000

Working capital adjustment
 
6,616

Cash
 
3,683

Total purchase consideration
 
$
253,299

Less: Transaction costs
 
1,935

Purchase price, net
 
$
251,364


(1)
Includes $42.5 million of gross contractual accounts receivable of which $0.6 million was not expected to be collected. The fair value of accounts receivable approximated book value acquired.

(2)
Includes $20.9 million of property, plant and equipment basis step-up.








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The Company incurred $1.9 million of transaction costs in conjunction with the Clean Earth acquisition during the year ended December 31, 2014 which was included in selling, general and administrative expense in the consolidated statements of income in 2014. The goodwill of $109.7 million reflects the strategic fit of Clean Earth into the Company's niche industrial businesses. The goodwill is not expected to be deductible for tax purposes.
The values assigned to the identified intangible assets were determined by discounting the estimated future cash flows associated with these assets to their present value. The intangible assets recorded in connection with the Clean Earth acquisition are as follows (in thousands):
Intangible assets
 
Amount
 
Estimated Useful Life
Customer relationships
 
$
25,730

 
15 years
Permits and Airspace
 
93,209

 
10 - 20 years
Trade name
 
17,000

 
20 years
 
 
$
135,939

 
 



Acquisition of SternoCandleLamp
On October 10, 2014, the Company, through its wholly owned subsidiary business, Sternocandlelamp Holdings, Inc., entered into a membership interest purchase agreement (the “Sterno Purchase Agreement”) with Candle Lamp Holdings, LLC (the “Seller”), and Candle Lamp Company, LLC (“SternoCandleLamp”) pursuant to which the Sternocandlelamp Holdings, Inc. acquired all of the issued and outstanding equity of SternoCandleLamp (the “Acquisition”). Headquartered in Corona, California, SternoCandleLamp is the leading manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry. SternoCandleLamp’s product line includes wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps. The purchase price was approximately $160.0 million. In addition to its equity investment in SternoCandleLamp, the Company provided loans totaling approximately $91.6 million to SternoCandleLamp as part of the transaction. The transaction is 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 SternoCandleLamp. CGM will receive integration service fees of $1.5 million which is payable quarterly as services are rendered beginning in the quarter ending December 31, 2014.

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The results of operations of SternoCandleLamp have been included in the consolidated results of operations since the date of acquisition. SternoCandleLamp'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.

SternoCandleLamp
 
 
(in thousands)
 
 
Amounts recognized as of the acquisition date
 
 
Accounts receivable (1)
 
$
18,534

Inventory (2)
 
19,932

Property, plant and equipment (3)
 
18,004

Intangible assets
 
90,950

Goodwill
 
33,717

Other current and non-current assets
 
1,734

      Total assets
 
$
182,871

Liabilities:
 
 
Current liabilities
 
20,120

Other liabilities
 
91,647

      Total liabilities
 
$
111,767

 
 
 
Net assets acquired
 
71,104

Intercompany loans to business
 
91,647

 
 
$
162,751

Acquisition Consideration
 
 
Purchase price
 
$
161,500

Working capital adjustment
 
1,251

Total purchase consideration
 
$
162,751

Less: Transaction costs
 
2,765

Purchase price, net
 
$
159,986


(1) 
Includes $18.8 million of gross contractual accounts receivable of which $0.2 million was not expected to be collected. The fair value of accounts receivable approximates book value acquired.

(2) 
Includes $2.0 million in inventory basis step-up, which was charged to cost of goods sold during the year ended December 31, 2014.

(3) 
Includes $6.9 million of property, plant and equipment basis step-up.


The Company incurred $2.8 million of transaction costs in conjunction with the SternoCandleLamp acquisition during the year ended December 31, 2014, which was included in selling, general and administrative expense in the consolidated statements of income during that period. The goodwill of $33.7 million reflects strategic fit of SternoCandleLamp into the Company's niche industrial businesses. The goodwill is expected to be deductible for tax purposes.


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The values assigned to the identified intangible assets were determined by discounting the estimated future cash flows associated with these assets to their present value. The intangible assets recorded in connection with the SternoCandleLamp acquisition are as follows (in thousands):
Intangible assets
 
Amount
 
Estimated Useful Life
Customer relationships
 
$
60,140

 
10 years
Trade name
 
30,810

 
Indefinite
 
 
$
90,950

 
 

Unaudited pro forma information
The following unaudited pro forma data for the three months ended March 31, 2014 gives effect to the acquisition of Clean Earth and SternoCandleLamp, as described above, as if the acquisition had been completed as of January 1, 2014. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period.
(in thousands)
Three Months Ended 
 March 31, 2014
Net sales
$
306,667

Operating income
18,107

Net income
5,851

Net income attributable to Holdings
3,148

Basic and fully diluted net income per share attributable to Holdings
$
0.05


Other acquisitions
Clean Earth
On December 15, 2014, the Company's Clean Earth subsidiary completed the acquisitions of American Environmental Services, Inc. ("AES") for a purchase price of approximately $16.6 million. AES provides environmental services, managing hazardous and nonhazardous waste from off-site generators. AES has two fully permitted hazardous waste facilities located in Calvert City, Kentucky and Morgantown, West Virginia, serving industrial and government customers across the region. The acquisition expands Clean Earth's customer base and geographic market penetration. The purchase price of AES was allocated to the assets acquired and liabilities assumed based on the estimated fair value as of December 15, 2014, with the excess purchase price allocated to goodwill.

FOX
On March 31, 2014, the Company’s majority owned subsidiary, FOX, acquired certain assets and assumed certain liabilities of Sport Truck USA, Inc. (“Sport Truck”) a privately held global distributor, primarily of its own branded aftermarket suspension solutions and a reseller of FOX products. The transaction was accounted for as a business combination. FOX paid cash consideration of approximately $40.8 million, which is subject to certain working capital adjustments in accordance with the asset purchase agreement. The purchase price of Sport Truck was allocated to the assets acquired and liabilities assumed based on their estimated respective fair values as of March 31, 2014 with the excess purchase price allocated to goodwill.
The net assets acquired in the Sport Truck acquisition were included in the balance of FOX that were deconsolidated as a result of the Company's ownership interest in FOX falling to 41% on July 10, 2014.


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Note D — Operating Segment Data
At March 31, 2015, the Company had nine reportable operating segments. Each operating segment represents a platform acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:

CamelBak is a diversified hydration and personal protection platform, offering products for outdoor, recreation and military applications. CamelBak offers a broad range of recreational / military hydration packs, reusable water bottles, specialized military gloves and performance accessories. Through its global distribution network, CamelBak products are available in more than 65 countries worldwide. CamelBak is headquartered in Petaluma, California.

Ergobaby is a premier designer, marketer and distributor of wearable baby carriers and related baby wearing products, as well as infant travel systems (strollers, car seats and accessories). Ergobaby offers a broad range of wearable baby carriers, infant travel systems and related products that are sold through more than 450 retailers and web shops in the United States and throughout the world. Ergobaby has two main product lines: baby carriers (baby carriers and accessories) and infant travel systems (strollers, car seats and accessories). Ergobaby is headquartered in Los Angeles, California.

Liberty Safe is a designer, manufacturer and marketer of premium home and gun safes in North America. From it’s over 314,000 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.

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.

American Furniture is a low cost manufacturer of upholstered furniture sold to major and mid-sized retailers. American Furniture operates in the promotional-to-moderate priced upholstered segment of the furniture industry, which is characterized by affordable prices, fresh designs and fast delivery to the retailers. American Furniture was founded in 1998 and focuses on 3 product categories: (i) stationary, (ii) motion (reclining sofas/loveseats) and (iii) recliners. AFM is headquartered in Ecru, Mississippi and its products are sold in the United States.

Arnold Magnetics is a leading global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including energy, medical, aerospace and defense, consumer electronics, general industrial and automotive. Arnold Magnetics produces high performance permanent magnets (PMAG), flexible magnets (FlexMag) and precision foil products (Precision Thin Metals) that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide. Arnold Magnetics is headquartered in Rochester, New York.

Clean Earth provides environmental services for a variety of contaminated materials including soils, dredged material, hazardous waste and drill cuttings. Clean Earth analyzes, treats, documents and recycles waste streams generated in multiple end-markets such as power, construction, oil and gas, infrastructure, industrial and dredging. Clean Earth is headquartered in Hatboro, Pennsylvania and operates 14 facilities in the eastern United States.

SternoCandleLamp is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry. SternoCandleLamp's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps. SternoCandleLamp is headquartered in Corona, California.

Tridien is a leading designer and manufacturer of powered and non-powered medical therapeutic support surfaces and patient positioning devices serving the acute care, long-term care and home health care markets. Tridien is headquartered in Coral Springs, Florida and its products are sold primarily in North America.

The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The results of operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. FOX was an operating segment of the Company until July 10, 2014, when FOX was deconsolidated and became an equity method investment. The results of operations of FOX are included in the disaggregated and other financial data presented for the three months ended March 31, 2014.

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Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business. Segment profit excludes certain charges from the acquisitions of the Company’s initial businesses not pushed down to the segments which are reflected in the Corporate and other line item. There were no significant inter-segment transactions.
A disaggregation of the Company’s consolidated revenue and other financial data for the three months ended March 31, 2015 and 2014 is presented below (in thousands):

Net sales of operating segments
Three months ended March 31,
 
2015
 
2014
CamelBak
$
36,922

 
$
38,770

Ergobaby
20,668

 
19,572

FOX

 
56,108

Liberty
25,853

 
28,895

ACI
21,418

 
20,862

American Furniture
40,925

 
34,840

Arnold Magnetics
31,188

 
30,679

Clean Earth
35,129

 

SternoCandleLamp
28,604

 

Tridien
16,564

 
16,322

Total
257,271

 
246,048

Reconciliation of segment revenues to consolidated revenues:

 

Corporate and other

 

Total consolidated revenues
$
257,271

 
$
246,048



International Revenues
Three months ended March 31,
 
2015
 
2014
CamelBak
$
9,722

 
$
10,191

Ergobaby
10,956

 
11,105

FOX

 
32,075

Arnold Magnetics
12,369

 
14,268

 
$
33,047

 
$
67,639



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Profit (loss) of operating segments (1)
Three months ended March 31,
 
2015
 
2014
CamelBak
$
4,351

 
$
5,855

Ergobaby
5,406

 
4,330

FOX

 
4,747

Liberty
1,404

 
1,710

ACI
5,721

 
5,402

American Furniture
1,676

 
1,120

Arnold Magnetics
1,754

 
1,424

Clean Earth
(1,554
)
 

SternoCandleLamp
1,656

 

Tridien
(8,692
)
 
635

Total
11,722

 
25,223

Reconciliation of segment profit to consolidated income (loss) before income taxes:

 

Interest expense, net
(9,718
)
 
(4,572
)
Other income (loss), net
(307
)
 
184

Loss on equity method investment
(13,447
)
 

Corporate and other (2)
(10,157
)
 
(7,698
)
Total consolidated income (loss) before income taxes
$
(21,907
)
 
$
13,137


(1) 
Segment profit (loss) represents operating income (loss).
(2) 
Primarily relates to management fees expensed and payable to CGM and corporate overhead expenses during 2015 and 2014.

Accounts receivable
March 31, 2015
 
December 31, 2014
CamelBak
$
25,311

 
$
23,346

Ergobaby
10,688

 
9,671

Liberty
15,003

 
11,376

ACI
6,166

 
5,730

American Furniture
19,196

 
16,641

Arnold Magnetics
17,882

 
15,664

Clean Earth
40,251

 
52,059

SternoCandleLamp
15,776

 
21,113

Tridien
8,282

 
7,135

Total
158,555

 
162,735

Reconciliation of segment to consolidated totals:

 

Corporate and other

 

Total
158,555

 
162,735

Allowance for doubtful accounts
(5,044
)
 
(5,200
)
Total consolidated net accounts receivable
$
153,511

 
$
157,535




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Goodwill
March 31,
 
Goodwill
Dec. 31,
 
Identifiable
Assets
March 31,
 
Identifiable
Assets
Dec. 31,
 
Depreciation and Amortization
Expense
Three months ended March 31,
 
2015
 
2014
 
2015 (1)
 
2014 (1)
 
2015
 
2014
Goodwill and identifiable assets of operating segments
 
 
 
 
 
 
 
 
 
 
 
CamelBak
$
5,546

 
$
5,546

 
$
207,894

 
$
207,831

 
$
3,108

 
$
3,374

Ergobaby
41,664

 
41,664

 
66,066

 
65,309

 
850

 
949

FOX

 

 

 

 

 
2,038

Liberty
32,828

 
32,828

 
29,510

 
34,139

 
1,592

 
1,524

ACI
57,615

 
57,615

 
18,441

 
19,334

 
757

 
1,280

American Furniture

 

 
28,649

 
27,810

 
56

 
59

Arnold Magnetics
51,767

 
51,767

 
76,239

 
77,610

 
2,194

 
2,098

Clean Earth
111,856

 
110,633

 
194,903

 
203,938

 
5,392

 

SternoCandleLamp
33,716

 
33,716

 
128,146

 
126,302

 
1,464

 

Tridien
7,855

 
16,762

 
14,885

 
14,844

 
619

 
663

Total
342,847

 
350,531

 
764,733

 
777,117

 
16,032

 
11,985

Reconciliation of segment to consolidated total:

 

 

 

 

 

Corporate and other identifiable assets

 

 
239,115

 
253,599

 
503

 

Amortization of debt issuance costs and original issue discount

 

 

 

 
713

 
864

Goodwill carried at Corporate level (2)
8,649

 
8,649

 

 

 

 

Total
$
351,496

 
$
359,180

 
$
1,003,848

 
$
1,030,716

 
$
17,248

 
$
12,849


(1) 
Does not include accounts receivable balances per schedule above.

(2) 
Represents goodwill resulting from purchase accounting adjustments not “pushed down” to the ACI segment. This amount is allocated back to the respective segments for purposes of goodwill impairment testing.


Note E - Equity Method Investment

Investment in FOX

FOX is a designer, manufacturer and marketer of high-performance suspension products used primarily on mountain bikes, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, or ATVs, snowmobiles, specialty vehicles and applications, and motorcycles. FOX’s products offer innovative design, performance, durability and reliability that enhance ride dynamics by improving performance and control. FOX is headquartered in Scotts Valley, California. In July 2014, FOX, a former majority owned subsidiary of the Company that is publicly traded on the NASDAQ Stock Market under the ticker “FOXF,” used a registration statement on Form S-1 under the Securities Act filed with the Securities and Exchange Commission (the "SEC") for a public offering of its common stock (the "FOX Secondary Offering"). CODI sold 4,466,569 shares of FOX common stock in connection with the FOX Secondary Offering. As a result of the sale of the shares by the Company in the FOX Secondary Offering, the Company’s ownership interest in FOX decreased to approximately 41%, which resulted in the deconsolidation of the FOX operating segment in the Company’s consolidated financial statements effective as of the date of the FOX Secondary Offering. Subsequent to the sale of the shares of FOX common stock by the Company, the Company owns approximately 15.1 million shares of FOX common stock.

The Company has elected to account for its investment in FOX at fair value using the equity method beginning on the date the investment became subject to the equity method of accounting. The Company uses the equity method of accounting when it has the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. For equity method investments which the Company has elected to measure at fair value, unrealized gains and losses are reported in the consolidated statement of operations as gain (loss) from equity method investments. The equity method investment in FOX had a fair value of $231.8 million on March 31, 2015 based on the closing price of FOX shares on that date. The Company recognized

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a loss of $13.4 million for the quarter ended March 31, 2015 due to a decrease in the fair value of the FOX investment during the quarter.

The condensed balance sheet information and results of operations of the Company's FOX investment are summarized below (in thousands):

Condensed Balance Sheet information
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
Current assets
 
$
120,853

 
$
112,609

Non-current assets
 
144,334

 
145,828

 
 
$
265,187

 
$
258,437

 
 
 
 
 
Current liabilities
 
$
70,324

 
$
60,825

Non-current liabilities
 
67,729

 
68,806

Stockholders' equity
 
127,134

 
128,806

 
 
$
265,187

 
$
258,437

 
 
 
 
 
Condensed Results of Operations (1)
 
 
 
 
 
 
Three months ended March 31, 2015
 
 
Net revenue
 
$
67,788

 
 
Gross profit
 
18,783

 
 
Operating income
 
1,539

 
 
Net income
 
$
770

 
 

(1) 
The results of operations for FOX for the period from January 1, 2014 to March 31, 2014 are included in the results of operations of the Company in the accompanying condensed consolidation statements of income as FOX did not become accounted for as an equity method investment until July 10, 2014, the date that the Company's ceased holding a majority ownership interest in FOX.

Note F — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at March 31, 2015 and December 31, 2014 (in thousands):

 
March 31, 2015
 
December 31, 2014
Machinery and equipment
$
132,940

 
$
127,035

Office furniture, computers and software
13,454

 
12,322

Leasehold improvements
9,447

 
10,419

Buildings and land
23,463

 
25,271

 
179,304

 
175,047

Less: accumulated depreciation
(65,691
)
 
(59,176
)
Total
$
113,613

 
$
115,871

Depreciation expense was $6.5 million and $4.6 million for the three months ended March 31, 2015 and March 31, 2014, respectively.

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Inventory
Inventory is comprised of the following at March 31, 2015 and December 31, 2014 (in thousands):

 
March 31, 2015
 
December 31, 2014
Raw materials and supplies
$
46,742

 
$
49,727

Work-in-process
12,262

 
10,632

Finished goods
63,412

 
59,442

Less: obsolescence reserve
(8,250
)
 
(8,587
)
Total
$
114,166

 
$
111,214


Note G — Goodwill and Other Intangible Assets

As a result of acquisitions in prior years, the Company has significant intangible assets on its balance sheet that include goodwill and indefinite-lived intangibles (primarily trade names). Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Indefinite lived intangible assets are not amortized unless their useful life is determined to be finite. Long-lived intangible assets are subject to amortization using the straight-line method. 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 represents a reporting unit, except Arnold, which comprises three reporting units.

Goodwill

2015 Interim goodwill impairment testing
In January 2015, one of Tridien's largest customer's informed the company that they would not renew their existing purchase agreement when it expires on September 30, 2015. This customer represented 20% of Tridien's sales in 2014. The expected lost sales and net income were significant enough to trigger an interim goodwill and indefinite-lived intangible asset impairment analysis. The result of the first step of the impairment test indicated that the fair value of Tridien was less than its carrying value; therefore, it was necessary to perform the second step of the impairment test. The Company estimated the fair value of the Tridien reporting unit using a weighted average of an income and market approach. The income approach was based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital ("WACC") of 15.7%. The market approach was based on earnings multiple data and guideline public companies. Based on the second step of the impairment test, the Company concluded on a preliminary basis that the implied fair value of goodwill for Tridien was less than its carrying amount, resulting in impairment of the carrying amount of Tridien's goodwill of $8.9 million as of January 31, 2015. The Company expects to complete the interim goodwill impairment testing of Tridien during the three months ended June 30, 2015.

2015 Annual goodwill impairment testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step evaluation including, in part, the macroeconomic environment, industry and market specific conditions, financial performance, operating costs and cost impacts, as well as issues or events specific to the reporting unit. The Company is currently in the process of evaluating the qualitative factors of each reporting unit to determine if the fair values of the reporting units exceed their respective carrying values for the 2015 annual goodwill impairment testing. The Company determined that Liberty and two of Arnold’s three reporting units, Precision Magnets and Assemblies ("PMAG") and Flexible Magnets ("Flexmag"), required further quantitative testing (Step 1) since the Company could not conclude that the fair value of the Liberty and the two Arnold reporting units exceeded their carrying values based solely on qualitative factors.

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A reconciliation of the change in the carrying value of goodwill for the three months ended March 31, 2015 and the year ended December 31, 2014, is as follows (in thousands):
 
Three months ended March 31, 2015
 
Year ended 
 December 31, 2014
Beginning balance:
 
 
 
Goodwill
$
412,083

 
$
299,514

Accumulated impairment losses
(52,903
)
 
(52,903
)
 
359,180

 
246,611

Impairment losses (1)
(8,907
)
 

Acquisition of businesses (2)

 
157,864

Adjustments to purchase accounting (3)
1,223

 

Deconsolidation of subsidiary (4)

 
(45,295
)
Total adjustments
(7,684
)
 
112,569

Ending balance:

 

Goodwill
413,306

 
412,083

Accumulated impairment losses
(61,810
)
 
(52,903
)
 
$
351,496

 
$
359,180


(1) 
Impairment loss relates to the impairment of the Tridien goodwill during the quarter ended March 31, 2015.

(2) 
Acquisition of businesses relates to the acquisition of Clean Earth in August 2014, SternoCandleLamp in October 2014 and the add-on acquisition of Sport Truck by FOX in March 2014. The $12.0 million of goodwill from the Sport Truck acquisition is included in the amount of $45.3 million that was deconsolidated during the year ended December 31, 2014.

(3) 
The $1.2 million in purchase accounting adjustments relate to adjustments made to the final purchase price allocation for Clean Earth during the first quarter of 2015 to record deferred tax amounts based on the state tax rate in effect for the state in which each of the intangible assets is utilized ($1.0 million), and adjustments to the purchase price allocation of AES during the first quarter of 2015 ($0.2 million).

(4) 
As a result of the sale of the shares by the Company in the FOX Secondary Offering, the Company’s ownership interest in FOX decreased to approximately 41%, which resulted in the deconsolidation of the FOX operating segment in the Company’s consolidated financial statements effective July 10, 2014.
Other intangible assets
2015 Annual indefinite lived impairment testing
The Company uses a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. The Company is currently in the process of evaluating the qualitative factors of each reporting unit that maintains indefinite lived intangible assets in connection with the annual impairment testing for 2015. Preliminary results of the qualitative analysis indicate that the carrying value of the Company’s indefinite lived intangible assets did not exceed their fair value. The Company expects to conclude on the indefinite-lived intangible asset impairment testing during the second quarter of 2015.


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Other intangible assets are comprised of the following at March 31, 2015 and December 31, 2014 (in thousands):

 
March 31, 2015
 
December 31,
2014
 
Weighted
Average
Useful Lives
Customer relationships
$
266,976

 
$
266,976

 
12
Technology and patents
56,731

 
56,731

 
8
Trade names, subject to amortization (1)
24,722

 
7,595

 
17
Licensing and non-compete agreements
7,856

 
7,856

 
5
Permits and airspace
98,406

 
98,406

 
13
Distributor relations and other
606

 
606

 
5
 
455,297

 
438,170

 
 
Accumulated amortization:

 

 
 
Customer relationships
(81,886
)
 
(75,813
)
 
 
Technology and patents
(28,570
)
 
(26,906
)
 
 
Trade names, subject to amortization
(3,505
)
 
(3,763
)
 
 
Licensing and non-compete agreements
(7,603
)
 
(7,499
)
 
 
Permits and airspace
(5,535
)
 
(3,104
)
 
 
Distributor relations and other
(606
)
 
(606
)
 
 
Total accumulated amortization
(127,705
)
 
(117,691
)
 
 
Trade names, not subject to amortization (1)
149,625

 
166,741

 
 
Total intangibles, net
$
477,217

 
$
487,220

 
 

(1) The trade name for Clean Earth was determined to be subject to amortization, resulting in a reclass from trade names not subject to amortization during the first quarter of 2015 as part of the finalization of the purchase price allocation for Clean Earth.
Amortization expense related to intangible assets was $10.0 million and $7.3 million for the three months ended March 31, 2015 and 2014, respectively. Estimated charges to amortization expense of intangible assets over the next five years, is as follows (in thousands):

April 1, 2015 through Dec. 31, 2015
 
$
30,442

2016
 
38,368

2017
 
35,451

2018
 
32,974

2019
 
31,556

 
 
$
168,791


Note H — Debt

2014 Credit Agreement

On June 6, 2014, the Company obtained a $725 million credit facility from a group of lenders (the “2014 Credit Facility”) led by Bank of America N.A. as Administrative Agent. The 2014 Credit Facility provides for (i) a revolving credit facility of $400 million (the “2014 Revolving Credit Facility”) and (ii) a $325 million term loan (the “2014 Term Loan Facility”). The 2014 Credit Facility permits the Company to increase the 2014 Revolving Credit Facility commitment and/ or obtain additional term loans in an aggregate of up to $200 million. The 2014 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries.


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2014 Revolving Credit Facility

The 2014 Revolving Credit Facility will become due in June 2019. The Company can borrow, prepay and reborrow principal under the 2014 Revolving Credit Facility from time to time during its term. Advances under the 2014 Revolving Credit Facility can be either LIBOR rate loans or base rate loans. LIBOR rate revolving loans bear interest at a rate per annum equal to the London Interbank Offered Rate (the “LIBOR Rate”) plus a margin ranging from 2.00% to 2.75% based on the ratio of consolidated net indebtedness to adjusted consolidated earnings before interest expense, tax expense and depreciation and amortization expenses (the “Consolidated Leverage Ratio”). Base rate revolving loans bear interest at a fluctuating rate per annum equal to the greatest of (i) the prime rate of interest, or (ii) the Federal Funds Rate plus 0.50% (the “Base Rate”), plus a margin ranging from 1.00% to 1.75% based upon the Consolidated Leverage Ratio.

2014 Term Loan Facility
 
The 2014 Term Loan Facility expires in June 2021 and requires quarterly payments of approximately $0.81 million that commenced September 30, 2014, with a final payment of all remaining principal and interest due on June 6, 2021. The 2014 Term Loan Facility was issued at an original issue discount of 99.5% of par value and bears interest at either the applicable LIBOR Rate plus 3.25% per annum, or Base Rate plus 2.25% per annum. The LIBOR Rate applicable to both base rate loans and LIBOR rate loans shall in no event be less than 1.00% at any time.

Use of Proceeds
The proceeds of the 2014 Term Loan Facility and advances under the 2014 Revolving Credit Facility were/will be used to (i) refinance existing indebtedness of the Company, (ii) pay fees and expense, (iii) fund acquisitions of additional businesses, (iv) fund working capital needs and (v) to fund permitted distributions. The Company used approximately $290.0 million of the 2014 Term Loan Facility proceeds to pay all amounts outstanding under the 2011 Credit Agreement and to pay the closing costs. In addition, approximately $1.2 million of the 2014 Revolving Credit Facility commitment was utilized in connection with the issuance of letters of credit.

Other

The 2014 Credit Facility provides for sub-facilities under the 2014 Revolving Credit Facility pursuant to which an aggregate amount of up to $100.0 million in letters of credit may be issued, as well as swing line loans of up to $25.0 million outstanding at one time. The issuance of such letters of credit and the making of any swing line loan reduces the amount available under the 2014 Revolving Credit Facility. The Company will pay (i) commitment fees on the unused portion of the 2014 Revolving Credit Facility ranging from 0.45% to 0.60% per annum based on its Consolidated Leverage Ratio, (ii) quarterly letter of credit fees, and (iii) administrative and agency fees.

Debt Issuance Costs

In connection with entering into the 2014 Credit Facility in which the loan syndication consisted of previous members of the syndicate under the 2011 Credit Facility who either maintained or increased their position as well as new syndication members, the debt issuance costs associated with the 2011 Credit Facility and the 2014 Credit Facility have been classified as either debt modification costs which have been capitalized and will be amortized over the term of the 2014 Credit Facility, or debt extinguishment costs which have been recorded as an expense in the accompanying condensed consolidated statement of operations. The Company paid debt issuance costs of $7.3 million in connection with the 2014 Credit Facility (of which $0.2 million was expensed as debt modification and extinguishment costs and $7.1 million is being amortized over the term of the related debt in the 2014 Credit Facility) and recorded additional debt modification and extinguishment costs of $2.1 million to write-off previously capitalized debt issuance costs.


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2011 Credit Agreement
On October 27, 2011, the Company entered into the 2011 Credit Facility with a group of lenders led by TD Securities for a $515 million credit facility, with an optional $135 million increase (the "2011 Credit Facility"). The 2011 Credit Facility provided for (i) a revolving line of credit of $290 million which was subsequently increased to $320 million (the "2011 Revolving Credit Facility"), and (ii) a $225 million term loan which was subsequently increased to $279 million (the "2011 Term Loan Facility"). The 2011 Term Loan Facility was issued at an original issuance discount of 96%. Amounts borrowed under the 2011 Revolving Credit Facility bore interest based on a leverage ratio defined in the credit agreement at either LIBOR plus a margin ranging from 2.50% to 3.50%, or base rate plus a margin ranging from 1.50% to 2.50%. Amounts outstanding under the 2011 Term Loan Facility bore interest at LIBOR plus 4.00% with a LIBOR floor of 1.00%, or base rate plus a margin ranging from 1.50% to 2.50%. The 2011 Revolving Credit Facility was set to mature in October 2016, and the 2011 Term Loan Facility required quarterly payments of approximately $0.71 million, with the final payment of all remaining outstanding principle and interest due in October 2017. The Company was required to pay commitment fees of 1% per annum of the unused portion of the 2011 Revolving Credit Facility. The 2011 Credit Facility was terminated in June 2014.

Availability under the 2014 Revolving Credit Facility was approximately $206.6 million at March 31, 2015. Letters of credit outstanding at March 31, 2015 totaled approximately $4.4 million. At March 31, 2015, the Company was in compliance with all covenants as defined in the 2014 Credit Facility.
The following table provides the Company’s debt holdings at March 31, 2015 and December 31, 2014 (in thousands):

 
March 31, 2015
 
December 31, 2014
Revolving Credit Facility
$
189,000

 
$
169,725

Term Loan
322,563

 
323,375

Original issue discount
(4,136
)
 
(4,303
)
Total debt
$
507,427

 
$
488,797

Less: Current portion, term loan facilities
(3,250
)
 
(3,250
)
Long term debt
$
504,177

 
$
485,547



Note I — Derivative Instruments and Hedging Activities
On September 16, 2014, the Company purchased an interest rate swap (“New Swap”) with a notional amount of $220 million. The New Swap is effective April 1, 2016 through June 6, 2021, the termination date of the 2014 Term Loan. The agreement requires the Company to pay interest on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. At March 31, 2015 and December 31, 2014, this Swap had a fair value loss of $11.6 million and $7.4 million, respectively, principally reflecting the present value of future payments and receipts under the agreement.
On October 31, 2011, the Company purchased a three-year interest rate swap (the “Swap”) with a notional amount of $200 million effective January 1, 2014 through March 31, 2016. The agreement requires the Company to pay interest on the notional amount at the rate of 2.49% in exchange for the three-month LIBOR rate, with a floor of 1.5%. At March 31, 2015 and December 31, 2014, the Swap had a fair value loss of $2.0 million and $2.5 million, respectively.
At March 31, 2015 the Company's interest rate swaps had a fair value loss of $13.6 million, of which $2.0 million was included in current liabilities and $11.6 million was included in other non-current liabilities in the condensed consolidated balance sheet, with its periodic mark-to-market value reflected as a component of interest expense.
The Company did not elect hedge accounting for the above derivative transactions and as a result, periodic mark-to-market changes in fair value are reflected as a component of interest expense in the consolidated statement of operations.


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Note J — Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis at March 31, 2015 and December 31, 2014 (in thousands):
 
Fair Value Measurements at March 31, 2015
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
  Equity method investment - FOX
$
231,767

 
$
231,767

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
Call option of noncontrolling shareholder (1)
(25
)
 

 

 
(25
)
Put option of noncontrolling shareholders (2)
(50
)
 

 

 
(50
)
Interest rate swaps
(13,648
)
 

 
(13,648
)
 

Total recorded at fair value
$
218,044

 
$
231,767

 
$
(13,648
)
 
$
(75
)

(1) 
Represents a noncontrolling shareholder’s call option to purchase additional common stock in Tridien.

(2) 
Represents put options issued to noncontrolling shareholders in connection with the Liberty acquisition.

 
Fair Value Measurements at December 31, 2014
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Equity method investment - FOX
$
245,214

 
$
245,214

 
$

 
$

Liabilities:

 

 

 

Call option of noncontrolling shareholder (1)
(25
)
 

 

 
(25
)
Put option of noncontrolling shareholders (2)
(50
)
 

 

 
(50
)
Interest rate swaps
(9,828
)
 

 
(9,828
)
 

Total recorded at fair value
$
235,311

 
$
245,214

 
$
(9,828
)
 
$
(75
)
Reconciliations of the change in the carrying value of the Level 3 fair value measurements from January 1, 2015 through March 31, 2015 and from January 1, 2014 through March 31, 2014 are as follows (in thousands):

 
2015
 
2014
Balance at January 1
$
(75
)
 
$
(75
)
Contingent consideration - Sport Truck (1)

 
(19,035
)
Balance at March 31
$
(75
)
 
$
(19,110
)

(1) 
As a result of the sale of the shares by the Company in the FOX Secondary Offering, the Company’s ownership interest in FOX decreased to approximately 41%, which resulted in the deconsolidation of the FOX operating segment in the Company’s consolidated financial statements effective July 10, 2014.
Valuation Techniques
The Company has not changed its valuation techniques in measuring the fair value of any of its other financial assets and liabilities during the period. For details of the Company’s fair value measurement policies under the fair value hierarchy, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

2014 Term Loan
At March 31, 2015, the carrying value of the principal under the Company’s outstanding 2014 Term Loan, including the current portion, was $322.6 million, which approximates fair value because it has a variable interest rate that reflects market changes in

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interest rates and changes in the Company's net leverage ratio. The estimated fair value of the outstanding 2014 Term Loan is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 in the fair value hierarchy.


Nonrecurring Fair Value Measurements

The following table provides the assets carried at fair value measured on a non-recurring basis as of March 31, 2015. There were no assets carried at fair value measured on a non-recurring basis as of December 31, 2014.

 
 
 
 
 
 
 
 
 
Expense
 
Fair Value Measurements at March 31, 2015
 
Three months ended
(in thousands)
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
March 31, 2015
 
 
 
 
 
 
 
 
 
 
Goodwill (1)
$
7,855

 
$

 
$

 
$
7,855

 
$
8,907


(1) Represents the fair value of the goodwill at the Tridien business segment subsequent to the goodwill impairment charge recognized during the three months ended March 31, 2015. Refer to "Note G - Goodwill and Other Intangible Assets" for further discussion regarding the impairment and valuation techniques applied.

Note K — Stockholders’ Equity
Trust Shares
The Trust is authorized to issue 500,000,000 Trust shares and the Company is authorized to issue a corresponding number of LLC interests. The Company will at all times have the identical number of LLC interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each Trust share is entitled to one vote per share on any matter with respect to which members of the Company are entitled to vote.
Allocation Interests
The Allocation Interests represent the original equity interest in the Company. The holders of the Allocation Interests (“Holders”) are entitled to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The distributions of the profit allocation is paid upon the occurrence of the sale of a material amount of capital stock or assets of one of the Company’s businesses (“Sale Event”) or, at the option of the Holders, at each five year anniversary date of the acquisition of one of the Company’s businesses (“Holding Event”). The Manager, as the original holder of the Allocation Interests, previously had the right to cause the Company to purchase the Allocation Interests upon termination of the MSA in accordance with a Supplemental Put Agreement. On July 1, 2013, the Company and the Manager amended the MSA to provide for certain modifications related to the Manager’s registration as an investment advisor under the Investment Advisor’s Act of 1940, as amended (the “Advisor’s Act”). In connection with the amendment resulting from the Managers’ registration as an investment advisor under the Advisor’s Act, the Company and the Manager agreed to terminate the Supplemental Put Agreement. The Company historically recorded the obligation associated with the Supplemental Put agreement as a liability that represented the amount the Company would have to pay to physically settle the purchase of the Allocation Interests upon termination of the MSA. As a result of the termination of the Supplemental Put Agreement, the Company currently 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.
Earnings per share
Prior to the termination of the Supplemental Put Agreement, basic and diluted earnings per share attributable to Holdings were calculated on a weighted average basis. Since the termination of the Supplemental Put Agreement, basic and diluted earnings per share is calculated using the two-class method which requires the Company to allocate participating securities that have rights to earnings that otherwise would have been available only to Trust shareholders as a separate class of securities in calculating earnings per share. The Allocation Interests are considered participating securities that contain participating rights to receive profit allocations upon the occurrence of a Holding Event or Sale Event. The calculation of basic and diluted earnings per share for the three months ended March 31, 2015 and 2014 reflects the incremental increase during the period in the profit allocation distribution to Holders related to Holding Events.

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Table of Contents

Basic and diluted earnings per share for the three months ended March 31, 2015 and 2014 is calculated as follows:

 
 
Three months ended March 31,
 
 
2015
 
2014
Net income (loss) attributable to Holdings
 
$
(24,902
)
 
$
4,659

Less: Effect of contribution based profit - Holding Event
 
798

 
804

Net income from Holdings attributable to Trust shares
 
$
(25,700
)
 
$
3,855

Basic and diluted weighted average shares outstanding
 
54,300

 
48,300

Net income (loss) per share - basic and fully diluted
 
$
(0.47
)
 
$
0.08


Distributions

On January 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of January 22, 2015. This distribution was declared on January 8, 2015.
On April 29, 2015, the Company paid a distribution of $0.36 per share to holders of record as of April 22, 2015. This distribution was declared on April 9, 2015.

Note L — Warranties
The Company’s CamelBak, Ergobaby, Liberty and Tridien operating segments estimate their exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty liability quarterly and adjusts the amount as necessary. A reconciliation of the change in the carrying value of the Company’s warranty liability for the three months ended March 31, 2015 and the year ended December 31, 2014 is as follows (in thousands):

 
Three months ended 
 March 31, 2015
 
Year ended 
 December 31, 2014
Warranty liability:
 
 
 
Beginning balance
$
2,540

 
$
5,815

Accrual
243

 
3,025

Warranty payments
(282
)
 
(2,420
)
Deconsolidation of subsidiary (1)

 
(3,880
)
Ending balance
$
2,501

 
$
2,540




Note M — Noncontrolling Interest

Noncontrolling interest represents the portion of the Company’s majority-owned subsidiary’s net income (loss) and equity that is owned by noncontrolling shareholders. The following tables reflect the Company’s ownership percentage of its majority owned operating segments and related noncontrolling interest balances as of March 31, 2015 and December 31, 2014:


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% Ownership (1)
March 31, 2015
 
% Ownership (1)
December 31, 2014
 
Primary
 
Fully
Diluted
 
Primary
 
Fully
Diluted
CamelBak
89.9
 
79.7
 
89.9
 
79.7
Ergobaby
81.0
 
74.2
 
81.0
 
74.3
Liberty
96.2
 
84.6
 
96.2
 
84.8
ACI
69.4
 
69.3
 
69.4
 
69.3
American Furniture
99.9
 
89.7
 
99.9
 
99.9
Arnold Magnetics
96.7
 
87.3
 
96.7
 
87.5
Clean Earth
97.9
 
86.2
 
97.9
 
86.2
SternoCandleLamp
100.0
 
91.3
 
100.0
 
91.7
Tridien
81.3
 
65.4
 
81.3
 
65.4

(1)
The principal difference between primary and diluted percentages of our operating segments is due to stock option issuances of operating segment stock to management of the respective businesses.



 
Noncontrolling Interest Balances
(in thousands)
March 31, 2015
 
December 31,
2014
CamelBak
$
15,303

 
$
14,932

Ergobaby
15,446

 
14,783

Liberty
2,648

 
2,547

ACI
1,534

 
790

American Furniture
260

 
260

Arnold Magnetics
1,982

 
1,950

Clean Earth
2,946

 
2,672

SternoCandleLamp
249

 
125

Tridien
1,070

 
2,744

Allocation Interests
100

 
100

 
$
41,538

 
$
40,903


Note N — Income taxes
Each fiscal quarter the Company estimates its annual effective tax rate and applies that rate to its interim pre-tax earnings. In this regard, the Company reflects the full year’s estimated tax impact of certain unusual or infrequently occurring items and the effects of changes in tax laws or rates in the interim period in which they occur.
The computation of the annual estimated effective tax rate in each interim period requires certain estimates and significant judgment, including the projected operating income for the year, projections of the proportion of income earned and taxed in other jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, as additional information is obtained or as the tax environment changes.

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Table of Contents

The reconciliation between the Federal Statutory Rate and the effective income tax rate for the three months ended March 31, 2015 and 2014 are as follows:

 
Three months ended March 31,
 
2015
 
2014
United States Federal Statutory Rate
(35.0
)%
 
35.0
 %
Foreign and State income taxes (net of Federal benefits)
0.3

 
1.0

Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders (1)
9.8

 
6.2

Effect of loss on equity method investment (2)
21.5

 

Impact of subsidiary employee stock options
0.5

 
0.4

Domestic production activities deduction
(0.8
)
 
(2.4
)
Effect of impairment expense
12.2

 

Non-recognition of NOL carryforwards at subsidiaries
5.1

 
(1.2
)
Other
1.8

 
4.9

Effective income tax rate
15.4
 %
 
43.9
 %

(1)
The effective income tax rate for the three months ended March 31, 2015 and 2014 includes a significant loss at the Company's parent, which is taxed as a partnership.

(2)
The equity method investment in FOX is held at the Company's parent, which is taxed as a partnership, resulting in the gain or loss on the investment as a reconciling item in deriving the effective tax rate.



Note O — Defined Benefit Plan
In connection with the acquisition of Arnold, the Company has a defined benefit plan covering substantially all of Arnold’s employees at its Lupfig, Switzerland location. The benefits are based on years of service and the employees’ highest average compensation during the specific period.
The unfunded liability of $3.4 million is recognized in the consolidated balance sheet as a component of other non-current liabilities at March 31, 2015. Net periodic benefit cost consists of the following for the three months ended March 31, 2015 and 2014:

 
Three months ended March 31,
 
2015
 
2014
Service cost
$
162

 
$
118

Interest cost
47

 
76

Expected return on plan assets
(49
)
 
(198
)
Net periodic benefit cost
$
160

 
$
(4
)
During the three months ended March 31, 2015, per the terms of the pension agreement, Arnold contributed $0.1 million to the plan. For the remainder of 2015, the expected contribution to the plan will be approximately $0.5 million.
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 March 31, 2015 were considered Level 3.


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Table of Contents

Note P - Commitments and Contingencies
Legal Proceedings
Tridien
Tridien's subsidiary, AMF Support Services, Inc. ("AMF") is subject to a workers' compensation claim in the State of California, being adjudicated by the Riverside County Workers' Compensation Appeals Board.  Tridien is a majority owned subsidiary of the Company. The claim is the result of an industrial accident that occurred on March 2, 2013, and the injuries sustained by a contract employee working at Tridien's Corona, California facility.  The employee is seeking workers' compensation benefits from AMF, as the special employer, and the staffing company who employed the worker, as the general employer.  The employee has also alleged that the employee's injuries are the result of the employer's "serious and willful misconduct", and has made a claim under California Labor Code § 4553 for damages.  If proven, the "serious and willful" penalty is fixed by statute at either $0 or 50% of the value of all workers' compensation benefits paid as a result of the injury and is not insurable. The underlying workers' compensation claims are still being adjudicated. At this stage, it is not feasible to predict the outcome of or a range of loss, should a loss occur, from these proceedings. Accordingly, no amounts in respect of this matter have been provided in the Company's accompanying financial statements.  The Company believes it has meritorious defenses to the allegations and will continue to vigorously defend against the claims.

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.


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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Item 2 contains forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control. 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” included elsewhere in this Quarterly Report as well as those risk factors discussed in the section entitled “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2014.
Overview
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 owners of 58.8% of the Allocation Interests in us, as defined in our LLC Agreement.
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 to middle market businesses as those that generate annual cash flows of up to $60 million. We focus on companies of this size because of our belief that these companies are often 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 businesses involves:
utilizing structured incentive compensation programs tailored to each business 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 to supplement management in their development and implementation of strategic goals and objectives.
We are dependent on the earnings of, and cash receipts from our businesses to meet our corporate overhead and management fee expenses and to pay distributions. These earnings and distributions, net of any minority interests in these businesses, are generally available:
first, to meet capital expenditure requirements, management fees and corporate overhead expenses;
second, to fund distributions from the businesses to the Company; and
third, to be distributed by the Trust to shareholders.


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Table of Contents

2015 Outlook

Middle market deal flow in the three months ended March 31, 2015 increased relative to 2014, both in terms of quantity and quality, in part due to attractive valuations for sellers. High valuation levels continue to be driven by the availability of debt capital with favorable terms and financial and strategic buyers seeking to deploy available equity capital.


Results of Operations
We were formed on November 18, 2005 and acquired our existing businesses (segments) as follows:
 
 
 
 
 
 
 
 
 
 
May 16, 2006
 
August 1, 2006
  
August 31, 2007
  
March 31, 2010
  
September 16, 2010
 
 
 
 
 
Advanced Circuits
 
Tridien
  
American Furniture
  
Liberty Safe
  
Ergobaby
 
 
 
 
 
 
 
 
 
August 24, 2011
  
March 5, 2012
  
August 26, 2014
 
October 10, 2014
  
 
 
 
 
 
 
 
 
 
 
CamelBak
  
Arnold Magnetics
  
Clean Earth
 
SternoCandleLamp
  
 

In the following results of operations, we provide (i) our actual consolidated results of operations for the three months ended March 31, 2015 and 2014, which includes the historical results of operations of our businesses (operating segments) from the date of acquisition and (ii) comparative results of operations for each of our businesses on a stand-alone basis for the three months ended March 31, 2015 and 2014. On July 10, 2014 our ownership interest in FOX decreased to 41% and as a result, beginning July 10, 2014 FOX no longer met the requirements for inclusion in our consolidated Results of Operations.

In the table below we remove the results of operations of FOX that are included in our historical condensed consolidated results of operations through July 10, 2014, in order to provide a meaningful comparison of the combined results of operations of our majority-owned businesses for the three month periods ended March 31, 2015 and 2014.
Consolidated Results of Operations – Compass Diversified Holdings and Compass Group Diversified Holdings LLC
 
(in thousands)
Three Months Ended 
 March 31, 2015
 
Three Months Ended 
March 31, 2014
 
Consolidated Results of Operations

Consolidated Results of Operations

Less: FOX (three months)
 
Consolidated Results less FOX
 
 
 
 
 
 
 
 
Net sales
$
257,271

 
$
246,048

 
$
56,108

 
$
189,940

Cost of sales
185,355

 
169,696

 
39,091

 
130,605

Gross profit
71,916

 
76,352

 
17,017

 
59,335

Selling, general and administrative expense
44,028

 
46,173

 
10,909

 
35,264

Fees to manager
6,858

 
4,735

 

 
4,735

Amortization of intangibles
10,013

 
7,349

 
1,361

 
5,988

Impairment expense
8,907

 

 

 

Operating income
$
2,110

 
$
18,095

 
$
4,747

 
$
13,348






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Net sales
On a consolidated basis, net of FOX, net sales for the three months ended March 31, 2015 increased by approximately $67.3 million or 35.4%.  Our acquisitions of Clean Earth and SternoCandleLamp in August and October 2014, respectively, contributed $63.7 million of the total increase. During the three months ended March 31, 2015 compared to 2014, we also saw notable sales increases at American Furniture ($6.1 million), and Ergobaby ($1.1 million) offset in part by decreased sales at Liberty Safe ($3.0 million) and CamelBak ($1.8 million). Refer to “Results of Operations - Our Businesses” for a more detailed analysis of net sales by business segment.

We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income on the investment of available funds, but we 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 companies. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and dividends on our equity ownership. However, on a consolidated basis these items will be eliminated.

Cost of sales
On a consolidated basis, net of FOX, cost of sales increased approximately $54.8 million during the three month period ended March 31, 2015, compared to the corresponding period in 2014. The 2014 acquisitions had cost of sales of $50.2 million during the three months ended March 31, 2015. Gross profit as a percentage of sales was approximately 28.0% in the three months ended March 31, 2015 compared to 31.2% in 2014. Refer to “Results of Operations - Our Businesses” for a more detailed analysis of cost of sales by business segment.

Selling, general and administrative expense
On a consolidated basis, net of FOX, selling, general and administrative expense increased approximately $8.8 million during the three month period ended March 31, 2015, compared to the corresponding period in 2014. The increase in expenses in the 2015 quarter compared to 2014 is principally the result of including the expenses from our 2014 acquisitions ($9.0 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, selling, general and administrative expense increased $0.1 million in the three months ended March 31, 2015, compared to the same period in 2014.

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 three months ended March 31, 2015, we incurred approximately $6.9 million in expense for these fees compared to $4.7 million for the corresponding period in 2014. The $2.1 million increase in the three months ended March 31, 2015 is principally due to the increase in consolidated net assets resulting from the acquisitions of Clean Earth and SternoCandleLamp during the third and fourth quarter of 2014.

Impairment expense

In January 2015, one of Tridien's largest customers informed the Company that they would not renew their purchase agreement when it expires on September 30, 2015. This customer represented 20% of Tridien's sales in 2014. The expected lost sales and net income were significant enough to trigger an interim goodwill and indefinite-lived asset impairment analysis which resulted in impairment of the Tridien goodwill of $8.9 million during the first quarter of 2015.


Results of Operations — Our Businesses

We categorize the businesses we own into two separate groups of businesses (i) branded products businesses and, (ii) niche industrial businesses. Branded products 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 products businesses are leaders in their particular category. Niche industrial businesses are characterized as those businesses that focus on manufacturing, servicing and selling particular products within a specific market sector. We believe that our niche industrial businesses are leaders in their specific market sector.

The following discussion reflects a comparison of the historical results of operations of each of our businesses for the three month periods ending March 31, 2015 and March 31, 2014 on a stand-alone basis. For the 2014 acquisitions, the following discussion reflects pro forma results of operations for the three months ended March 31, 2014 as if we had acquired the businesses on January 1, 2014. Where appropriate, relevant pro forma adjustments are reflected as part of the historical operating results. We believe this is the most meaningful comparison of the operating results for each of our business segments. The following results of operations at each our businesses are not necessarily indicative of the results to be expected for a full year.

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Branded Products Businesses
CamelBak
Overview
CamelBak, headquartered in Petaluma, California, is a premier designer and manufacturer of personal hydration products for outdoor, recreation and military applications. CamelBak offers a broad range of recreational and military personal hydration packs, reusable water bottles, specialty military gloves and performance accessories.

As the leading supplier of hydration products to specialty outdoor, cycling and military retailers, CamelBak maintains the leading market share position in recreational markets for hands-free hydration packs and the leading market share position for reusable water bottles in specialty channels. CamelBak is also the dominant supplier of hydration packs to the military, with a leading market share in post-issue hydration packs. Over its more than 25-year history, CamelBak has developed a reputation as the preferred supplier for the hydration needs of the most demanding athletes and warfighters. Across its markets, CamelBak is respected for its innovation, leadership and authenticity.
Historical Financial Performance
On August 24, 2011, we made loans to, and purchased a controlling interest in, CamelBak for approximately $258.6 million, representing approximately 90% of the equity in CamelBak.
Results of Operations
The table below summarizes the income from operations data for CamelBak for the three month periods ended March 31, 2015 and March 31, 2014.
 
 
Three months ended
(in thousands)
March 31, 2015

March 31, 2014
Net sales
$
36,922


$
38,770

Cost of sales
21,690


21,865

Gross profit
15,232


16,905

Selling, general and administrative expense
8,578


8,747

Fees to manager
125


125

Amortization of intangibles
2,178


2,178

Income from operations
$
4,351


$
5,855

Three months ended March 31, 2015 compared to the three months ended March 31, 2014

Net sales
Net sales for the three months ended March 31, 2015 were approximately $36.9 million, a decrease of $1.8 million, or 4.8%, compared to the same period in 2014. The decrease in net sales is a result of a decrease in gross sales in Hydration systems ($2.6 million), offset in part by an increase in gross sales in Bottles ($0.8 million), and Accessories ($0.4 million). The increase in Bottle sales during the three months ended March 31, 2015 compared to the same period in 2014 is primarily attributable to an increase in international and domestic bottle sales including, eddyTM, the Podium line of insulated bottles, Chute, an ergonomic high-flow water bottle, and the continued expansion in its customer base, including new and existing customers, for all existing product lines. The decrease in sales of Hydration systems during the three months ended March 31, 2015 compared to 2014 is due to the timing of shipments for certain pack models, reduced military demand due to troop downsizing and reduced inventory available for sale due to the West Coast port congestion in the United States.

Sales of Hydration systems and Bottles represented approximately 86% of gross sales for the three months ended March 31, 2015 compared to 87% for the same period in 2014. Military sales were approximately 19% of gross sales for the three months ended March 31, 2015 compared to 20% for the same period in 2014. International sales were approximately 26% of gross sales for the

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both the three months ended March 31, 2015 and 2014. The decrease in Military sales is attributable to the decrease in demand as a result of the drawdown of U.S. combat troops.

Cost of sales
Cost of sales for the three months ended March 31, 2015 was approximately $21.7 million compared to approximately $21.9 million in the same period of 2014. Gross profit as a percentage of sales decreased to 41.3% for the quarter ended March 31, 2015 from 43.6% in the quarter ended March 31, 2014. The decrease is principally attributable to the strengthening of the U.S. dollar versus the Euro and the British Pound, as well as increased freight costs due to expediting shipments via air freight to mitigate the impact of the West Coast port congestion.

Selling, general and administrative expense
Selling, general and administrative expense for the three months ended March 31, 2015 decreased to approximately $8.6 million or 23.2% of net sales compared to $8.7 million or 22.6% of net sales for the same period of 2014. This decrease is primarily attributable to the reduction in sales for the 2015 quarter as compared to the same period in 2014.

Income from operations
Income from operations for the three months ended March 31, 2015 was approximately $4.4 million, a decrease of $1.5 million when compared to the same period in 2014, based on the factors described above.


Ergobaby
Overview
Ergobaby, headquartered in Los Angeles, California, is a premier designer, marketer and distributor of wearable baby carriers and related baby wearing products, as well as infant travel systems consisting of strollers, car seats and accessories. Ergobaby offers a broad range of wearable baby carriers, infant travel systems and related products that are sold through more than 450 retailers and web shops in the United States and throughout the world. Ergobaby has two main product lines: baby carriers (baby carriers and accessories) and infant travel systems (strollers, car seats and accessories).
On September 16, 2010, we made loans to and purchased a controlling interest in Ergobaby for approximately $85.2 million, representing approximately 84% of the equity in Ergobaby.
On November 18, 2011, Ergobaby acquired all the outstanding stock of Orbit Baby for $17.5 million. Orbit Baby produces and markets a premium line of infant travel systems. Orbit Baby’s high-quality products include stroller frames, seats, car seats and bassinets that are interchangeable using a patented hub ring.
Results of Operations
The table below summarizes the income from operations data for Ergobaby for the three month periods ended March 31, 2015 and March 31, 2014.
 
 
Three months ended
(in thousands)
March 31, 2015
 
March 31, 2014
Net sales
$
20,668


$
19,572

Cost of sales
7,155


7,182

Gross profit
13,513


12,390

Selling, general and administrative expense
7,339


7,179

Fees to manager
125


125

Amortization of intangibles
643


755

Income from operations
$
5,406


$
4,331


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Three months ended March 31, 2015 compared to the three months ended March 31, 2014

Net sales
Net sales for the three months ended March 31, 2015 were $20.7 million, an increase of $1.1 million or 5.6% compared to the same period in 2014. During the three months ended March 31, 2015, international sales were approximately $11.0 million, representing a decrease of $0.1 million over the corresponding period in 2014. International baby carrier and accessory sales decreased by approximately $0.4 million, offset by an increase in international infant travel systems sales of approximately $0.3 million. Domestic sales were $9.7 million in the first quarter of 2015 reflecting an increase of $1.2 million over the corresponding period in 2014. The growth in domestic sales in the first quarter of 2015 compared to the same period in 2014 is attributable to increased sales of baby carrier and accessories ($2.7 million) to national and specialty retail accounts, offset by a decrease in domestic revenues for infant travel systems and accessories ($1.4 million). The increase in baby carrier sales was attributable to the demand for the Ergobaby’s 360 four position carrier, which was launched in April 2014. The decrease in infant travel systems and accessories sales was primarily attributable to higher revenues in the three month period ended March 31, 2014 in which Ergobaby launched the new Orbit Baby G3 infant travel system, which includes stroller bases, various seats and accessories, into the domestic market These launch orders were higher than the subsequent reorder revenues. Baby carriers and accessories represented 85.5% of sales in the three months ended March 31, 2015 compared to 78.8% in the same period in 2014.

Cost of sales
Cost of sales was approximately $7.2 million for both the three months ended March 31, 2015 and March 31, 2014. The increase in gross profit was primarily attributable to higher sales compared to the prior period. Gross profit as a percentage of sales was 65.4% for the quarter ended March 31, 2015 compared to 63.3% for the same period in 2014. The 210 basis point increase is primarily attributable to a higher percentage of domestic sales and to product sales mix, with a larger percentage of higher margin baby carrier sales as compared to the prior period.

Selling, general and administrative expenses
Selling, general and administrative expense for the three months ended March 31, 2015 increased to approximately $7.3 million or 35.5% of net sales compared to $7.2 million or 36.7% of net sales for the same period of 2014. The $0.2 million increase in the three months ended March 31, 2015 compared to the same period in 2014 was primarily attributable to increases in employee related costs due to increased headcount, an increase in variable distribution expenses due to higher domestic revenues, and an increase in rent expenses as a result of a new office lease.

Income from operations
Income from operations for the three months ended March 31, 2015 increased $1.1 million, to $5.4 million, compared to $4.3 million for the same period of 2014, based on the factors described above.

Liberty Safe
Overview
Based in Payson, Utah and founded in 1988, Liberty Safe is the premier designer, manufacturer and marketer of home and gun safes in North America. From its over 314,000 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 Remington, Cabela’s 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. Historically, approximately 60% of Liberty Safe’s net sales are Non-Dealer sales and 40% are Dealer sales.

We purchased a controlling interest in Liberty Safe in March 2010.

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Results of Operations
The table below summarizes the income from operations data for Liberty Safe for the three month periods ended March 31, 2015 and March 31, 2014.
 
 
Three months ended
(in thousands)
March 31, 2015
 
March 31, 2014
Net sales
$
25,853


$
28,895

Cost of sales
20,083


22,895

Gross profit
5,770


6,000

Selling, general and administrative expense
3,261


3,210

Fees to manager
125


125

Amortization of intangibles
980


955

Income from operations
$
1,404


$
1,710


Three months ended March 31, 2015 compared to the three months ended March 31, 2014

Net sales
Net sales for the quarter ended March 31, 2015 decreased approximately $3.0 million or 10.5% compared to the corresponding quarter ended March 31, 2014. Non-Dealer sales were approximately $14.6 million in the three months ended March 31, 2015 compared to $16.9 million for the three months ended March 31, 2014 representing a decrease of $2.3 million or 13.6%. Dealer sales totaled approximately $11.2 million in the three months ended March 31, 2015 compared to $12.0 million in the same period in 2014, representing a decrease of $0.8 million or 6.7%. The higher level of first quarter 2014 sales reflects increased consumer demand resulting from consumer concerns of more restrictive gun control legislation during 2013 and the first few months of 2014. The increased consumer demand for gun safes began to subside towards the end of the first quarter of 2014, resulting in Liberty reducing production output levels as their customers had excess level of inventories on hand. Although Liberty's customer orders have continued to increase throughout the first quarter of 2015, their production output capabilities did not return to the level of the first quarter of 2014 until late March 2015, resulting in the lower sales despite a significant increase in backlog in the first quarter of 2015 as compared to the same quarter in the prior period. Liberty Safe’s sales backlog was approximately $12.1 million at March 31, 2015 compared to approximately $7.5 million at March 31, 2014.


Cost of sales
Cost of sales for the three months ended March 31, 2015 decreased approximately $2.8 million when compared to the same period in 2014. Gross profit as a percentage of net sales totaled approximately 22.3% and 20.8% for the quarters ended March 31, 2015 and March 31, 2014, respectively. The increase in gross profit as a percentage of sales during the three months ended March 31, 2015 compared to the same period in 2014 is attributable primarily to favorable cost variances as a result of improved labor efficiencies,