10-Q
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 September 30, 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 November 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 September 30, 2015
TABLE OF CONTENTS
 
 
 
 
Page
Number
 
 
 
Part I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
Part II
 
 
Item 1.
 
 
Item 1A.
 
 
Item 6.
 
 
 
 
 


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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 provided for the 2011 Revolving Credit Facility and the 2011 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, as amended from time to time, entered into on June 6, 2014 with a group of lenders led by Bank of America N.A. as administrative agent, which provides for the 2014 Revolving Credit Facility and the 2014 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.


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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)
September 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
88,725

 
$
21,946

Accounts receivable, net
124,240

 
118,852

Inventories
74,296

 
58,308

Prepaid expenses and other current assets
24,363

 
23,357

Current assets held for sale
46,097

 
98,336

Total current assets
357,721

 
320,799

Property, plant and equipment, net
109,640

 
106,981

Equity method investment (refer to Note F)
254,733

 
245,214

Goodwill
376,064

 
353,634

Intangible assets, net
361,660

 
324,091

Deferred debt issuance costs, less accumulated amortization of $2,923 at September 30, 2015 and $1,233 at December 31, 2014
9,887

 
11,197

Other non-current assets
6,431

 
5,687

Non-current assets held for sale

 
179,827

Total assets
$
1,476,136

 
$
1,547,430

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
50,602

 
$
49,201

Accrued expenses
45,902

 
52,028

Due to related party
6,374

 
6,068

Current portion, long-term debt
3,250

 
3,250

Other current liabilities
6,268

 
6,311

Current liabilities held for sale
22,396

 
24,373

Total current liabilities
134,792

 
141,231

Deferred income taxes
101,067

 
91,616

Long-term debt, less original issue discount
313,888

 
485,547

Other non-current liabilities
21,354

 
14,039

Non-current liabilities held for sale

 
6,663

Total liabilities
571,101

 
739,096

Stockholders’ equity
 
 
 
Trust shares, no par value, 500,000 authorized; 54,300 shares issued and outstanding at September 30, 2015 and December 31, 2014
825,321

 
825,321

Accumulated other comprehensive loss
(6,973
)
 
(2,542
)
Accumulated earnings (deficit)
50,063

 
(55,348
)
Total stockholders’ equity attributable to Holdings
868,411

 
767,431

Noncontrolling interest
36,624

 
25,711

Noncontrolling interest of discontinued operations

 
15,192

Total stockholders’ equity
905,035

 
808,334

Total liabilities and stockholders’ equity
$
1,476,136

 
$
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 
 September 30,
 
Nine months ended 
 September 30,
 
2015
 
2014
 
2015

2014
(in thousands, except per share data)
 
 
 
 
 
 
 
Net sales
$
164,056

 
$
120,975

 
$
464,375

 
$
488,967

Service revenues
44,092

 
20,318

 
122,923

 
20,318

Total net revenues
208,148

 
141,293

 
587,298

 
509,285

Cost of sales
110,498

 
81,133

 
314,102

 
330,928

Cost of service revenues
28,671

 
14,120

 
88,430

 
14,120

Gross profit
68,979

 
46,040

 
184,766

 
164,237

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expense
38,975

 
29,227

 
105,946

 
101,235

Management fees
6,461

 
5,751

 
19,860

 
15,259

Amortization expense
7,731

 
4,577

 
22,777

 
15,222

Impairment expense

 

 
9,165

 

Operating income
15,812

 
6,485

 
27,018

 
32,521

Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(11,205
)
 
(7,059
)
 
(24,047
)
 
(16,436
)
Amortization of debt issuance costs
(561
)
 
(545
)
 
(1,651
)
 
(1,698
)
Loss on debt extinguishment

 

 

 
(2,143
)
Gain on equity method investment
11,784

 

 
9,518

 

Gain on deconsolidation of subsidiary

 
264,325

 

 
264,325

Other income, net
(950
)
 
(425
)
 
(983
)
 
(177
)
Income from continuing operations before income taxes
14,880

 
262,781

 
9,855

 
276,392

Provision for income taxes
3,756

 
3,676

 
9,274

 
8,485

Income from continuing operations
11,124

 
259,105

 
581

 
267,907

Income from discontinued operations, net of income tax
3,819

 
3,425

 
15,650

 
14,315

Gain on sale of discontinued operations, net of income tax
165,337

 

 
165,337

 

Loss on classification as held for sale
(14,262
)
 

 
(14,262
)
 

Net income
166,018

 
262,530

 
167,306

 
282,222

Less: Net income attributable to noncontrolling interest
1,428

 
1,388

 
2,622

 
10,364

Less: Income from discontinued operations attributable to noncontrolling interest
90

 
44

 
629

 
382

Net income attributable to Holdings
$
164,500

 
$
261,098

 
$
164,055

 
$
271,476

Amounts attributable to Holdings
 
 
 
 
 
 
 
Income (loss) from continuing operations
9,696

 
257,717

 
(2,041
)
 
257,543

Income from discontinued operations, net of income tax
3,729

 
3,381

 
15,021

 
13,933

Gain on sale of discontinued operations, net of income tax
151,075

 

 
151,075

 

Net income attributable to Holdings
$
164,500

 
$
261,098

 
$
164,055

 
$
271,476

Basic and fully diluted income (loss) per share attributable to Holdings (refer to Note L)

 


 

 

Continuing operations
$
0.16

 
$
5.08

 
$
(0.09
)
 
$
5.05

Discontinued operations
2.85

 
0.07

 
3.06

 
0.29

 
$
3.01

 
$
5.15

 
$
2.97

 
$
5.34

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

 
48,300

 
54,300

 
48,300

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

 
$
0.36

 
$
1.08

 
$
1.08

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 
 September 30,
 
Nine months ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
(in thousands)
 
 
 
 
 
 
 
Net income
$
166,018

 
$
262,530

 
$
167,306

 
$
282,222

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(5,145
)
 
(921
)
 
(4,772
)
 
(783
)
Pension benefit liability, net
12

 
(21
)
 
341

 
(64
)
Total comprehensive income, net of tax
$
160,885

 
$
261,588

 
$
162,875

 
$
281,375

See notes to condensed consolidated financial statements.


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

 
$
825,321

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

 
$
25,711

 
$
15,192

 
$
808,334

Net income (loss)

 

 
164,055

 

 
164,055

 
2,622

 
629

 
167,306

Total comprehensive income, net

 

 

 
(4,431
)
 
(4,431
)
 

 

 
(4,431
)
Option activity attributable to noncontrolling shareholders

 

 

 

 

 
2,063

 
564

 
2,627

Effect of subsidiary stock options exercise

 

 

 

 

 
500

 

 
500

Acquisition of Manitoba Harvest

 

 

 

 

 
5,728

 

 
5,728

Disposition of CamelBak

 

 

 

 

 

 
(16,101
)
 
(16,101
)
Effect of classification of American Furniture as held for sale

 

 

 

 

 

 
(284
)
 
(284
)
Distributions paid

 

 
(58,644
)
 

 
(58,644
)
 

 

 
(58,644
)
Balance — September 30, 2015
54,300

 
$
825,321

 
$
50,063

 
$
(6,973
)
 
$
868,411

 
$
36,624

 
$

 
$
905,035

See notes to condensed consolidated financial statements.


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Table of Contents

Compass Diversified Holdings
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Nine months ended 
 September 30,
(in thousands)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
167,306

 
$
282,222

Income from discontinued operations
15,650

 
14,315

Gain on sale of discontinued operations, net
151,075

 

Net income from continuing operations
581

 
267,907

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation expense
16,310

 
10,308

Amortization expense
25,888

 
15,222

Impairment expense
9,165

 

Amortization of debt issuance costs and original issue discount
2,154

 
2,412

Loss on debt extinguishment

 
2,143

Unrealized loss on interest rate swap
8,044

 
2,809

Noncontrolling stockholder stock based compensation
2,063

 
2,883

Loss on equity method investment
(9,518
)
 

Net gain on deconsolidation of subsidiary

 
(264,325
)
Excess tax benefit from subsidiary stock options exercised

 
(1,662
)
Deferred taxes
(5,220
)
 
(3,460
)
Other
287

 
270

Changes in operating assets and liabilities, net of acquisition:

 

Increase in accounts receivable
(276
)
 
(11,348
)
(Increase) decrease in inventories
(10,772
)
 
10,289

 Decrease (increase)in prepaid expenses and other current assets
1,345

 
(5,917
)
Decrease in accounts payable and accrued expenses
(7,902
)
 
(7,382
)
Net cash provided by operating activities - continuing operations
32,149

 
20,149

Net cash provided by operating activities - discontinued operations
14,322

 
26,011

Cash provided by operating activities
46,471

 
46,160

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(98,816
)
 
(292,223
)
Purchases of property and equipment
(12,079
)
 
(6,980
)
Payment of interest rate swap
(1,502
)
 
(1,502
)
Proceeds from sale of business
244,269

 
517

Proceeds from FOX stock offering

 
65,528

Other investing activities
256

 
(58
)
Net cash provided by (used in) investing activities - continuing operations
132,128

 
(234,718
)
Net cash provided by (used in) investing activities - discontinued operations
114,466

 
(3,181
)
Cash provided by (used in) investing activities
246,594

 
(237,899
)

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Compass Diversified Holdings
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Nine months ended 
 September 30,
(in thousands)
2015
 
2014
Cash flows from financing activities:
 
 
 
Borrowings under credit facility
197,000

 
476,000

Repayments under credit facility
(369,163
)
 
(307,813
)
Distributions paid
(58,644
)
 
(52,164
)
Net proceeds provided by noncontrolling shareholders
6,228

 
4,025

Distributions paid to noncontrolling shareholders

 
(11,870
)
Debt issuance costs
(295
)
 
(7,370
)
Excess tax benefit from subsidiary stock options exercised

 
1,662

Other
(576
)
 
(139
)
Net cash (used in) provided by financing activities
(225,450
)
 
102,331

Foreign currency impact on cash
(2,593
)
 
(552
)
Net increase (decrease) in cash and cash equivalents
65,022

 
(89,960
)
Cash and cash equivalents — beginning of period (1)
23,703

 
113,229

Cash and cash equivalents — end of period (2)
$
88,725

 
$
23,269

(1) Includes cash from discontinued operations of $1.8 million at January 1, 2015 and $2.6 million at January 1, 2014.
(2) Includes cash from discontinued operations of $2.3 million at September 30, 2014.













See notes to condensed consolidated financial statements.

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Compass Diversified Holdings
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 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 eight businesses, or reportable operating segments, at September 30, 2015. The segments are as follows: The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Fresh Hemp Foods Ltd. ("Manitoba Harvest"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), 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 E 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 and nine month periods ended September 30, 2015 and September 30, 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 Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. 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.

Discontinued Operations
The Company completed the sale of its majority owned subsidiary, CamelBak Products, LLC ("CamelBak") during the third quarter of 2015. In October 2015, the Company sold its majority owned subsidiary, American Furniture Manufacturing, Inc. ("AFM" or "American Furniture") which met the criteria to be classified as a discontinued operation as of September 30, 2015. As a result, the Company reported the results of operations of CamelBak and American Furniture as discontinued operations in

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the condensed consolidated statements of operations for all periods presented. In addition, the assets and liabilities associated with these businesses have been reclassified as discontinued operations in the condensed consolidated balance sheets. Refer to Note D for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.

Recently Adopted Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("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.

Recently Issued Accounting Pronouncements

In September 2015, the FASB issued an accounting standard to simplify the accounting for measurement period adjustments in connection with business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard update is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The standard update is to be applied prospectively to adjustments of provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. We do not expect the adoption of this standard to have an impact on our condensed consolidated financial statements.

In July 2015, the FASB issued an accounting standard update intended to simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The new guidance applies only to inventory that is determined by methods other than last-in-first-out and the retail inventory method. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements. The guidance is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of the guidance is permitted.

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.

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. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.



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Note C — Acquisitions
Acquisition of Manitoba Harvest

On July 10, 2015, FHF Holdings Ltd., a majority owned subsidiary of the Company, and 1037269 B.C. Ltd., a wholly owned subsidiary of FHF Holdings Ltd. (together, the "Buyer"), closed on the acquisition of all the issued and outstanding capital stock of Fresh Hemp Foods Ltd. ("Manitoba Harvest") pursuant to a stock purchase agreement (the "Manitoba Harvest Purchase Agreement") among the Buyer, Manitoba Harvest, Mike Fata, as the Stockholders’ Representative and the Signing Stockholders (as such term is defined in the Manitoba Harvest Purchase Agreement), entered into previously on June 5, 2015. Subsequent to the closing, 1037269 B.C. Ltd. merged with and into Manitoba Harvest.

Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a pioneer and global leader in branded, hemp-based foods. Manitoba Harvest’s products are currently carried in approximately 7,000 retail stores across the U.S. and Canada. The Company’s hemp-exclusive, 100% all-natural product lineup includes hemp hearts, hemp oil and protein powder.

The Company made loans to and purchased an 87% controlling interest in Manitoba Harvest. The purchase price, including proceeds from noncontrolling interest, was approximately $101.4 million (C$128.6 million). The Company funded its portion of the acquisition price through drawings on its 2014 Revolving Credit Facility. Manitoba Harvest management and a minority shareholder invested in the transaction along with the Company representing approximately 13% initial noncontrolling interest on a primary basis. The fair value of the noncontrolling interest was determined based on enterprise value of the acquired entity multiplied by the ratio number of shares acquired by the minority shareholders to total shares, less a discount applied to account for the lack of marketability of the minority holders' 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 Manitoba Harvest. CGM will receive integration services fees of $1.0 million which is payable quarterly during the twelve month period subsequent to acquisition as services are rendered.

The results of operations of Manitoba Harvest have been included in the consolidated results of operations since the date of acquisition. Manitoba Harvest's results of operations are reported as a separate operating segment. The estimated fair value of the assets acquired and liabilities assumed presented in the table below are provisional and are based on the information that was available as of the acquisition date. The amounts recorded for property, plant and equipment, intangible assets, goodwill and deferred tax liabilities are preliminary pending finalization of our valuation efforts. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date.


Manitoba Harvest
 
 
(in thousands)
 
 
Assets:
 
 
Cash
 
$
164

Accounts receivable
 
3,787

Inventory (1)
 
8,743

Property, plant and equipment
 
8,203

Goodwill
 
32,568

Intangible assets
 
63,765

Other current and noncurrent assets
 
1,131

      Total assets
 
$
118,361

 
 
 
Liabilities and noncontrolling interest:
 
 
Current liabilities
 
$
2,386

Deferred tax liabilities
 
13,822

Other liabilities
 
24,120

Noncontrolling interest
 
5,728

      Total liabilities and noncontrolling interest
 
$
46,056

 
 
 

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Net assets acquired
 
$
72,305

Noncontrolling interest
 
5,728

Intercompany loans to business
 
24,494

 
 
$
102,527

Acquisition Consideration
 
 
Purchase price
 
$
102,527

Working capital adjustment
 

Total purchase consideration
 
$
102,527

Less: Transaction costs
 
1,145

Purchase price, net
 
$
101,382


(1) Includes $3.1 million of step-up in the basis of inventory.

The Company incurred $1.1 million of transaction costs in conjunction with the acquisition of Manitoba Harvest during the three and nine months ended September 30, 2015 which are included in selling, general and administrative expenses in the consolidated statements of income. The goodwill of $32.6 million, which is not expected to be deductible for tax purposes, reflects the strategic fit of Manitoba Harvest into the Company's branded products businesses.

The values assigned to the identified intangible assets were determined by discounting estimated future cash flows associated with these assets to their present value. The intangible assets recorded in connection with the Manitoba Harvest acquisition are as follows (in thousands):

Intangible assets
 
Amount
 
Estimated Useful Life
Tradename (unamortizable)
 
$
13,636

 
N/a
Technology and processes
 
9,616

 
10 years
Customer relationships
 
40,513

 
15 years
 
 
$
63,765

 
 


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

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of the Company's ownership of Clean Earth. CGM received integration service fees of approximately $2.5 million which was payable quarterly during a twelve month period as services were rendered beginning in the quarter ended December 31, 2014.
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.


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.

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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 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 received integration service fees of $1.5 million which was payable quarterly over a twelve month period as services were rendered beginning in the quarter ending December 31, 2014.
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)
 
 
Assets:
 
 
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


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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.

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 nine months ended September 30, 2015 and September 30, 2014 gives effect to the acquisition of Clean Earth, SternoCandleLamp, and Manitoba Harvest, as described above, as if the acquisition had been completed as of January 1, 2014, and the sale of CamelBak and AFM as if the dispositions had been completed on January 1, 2014. The unaudited pro forma data for the three and nine months ended September 30, 2015 gives effect to the acquisition of Manitoba Harvest 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.

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Table of Contents

(in thousands)
 
Nine months ended 
 September 30,
 
 
2015
 
2014
Net sales
 
$
610,511

 
$
731,463

Operating income
 
28,686

 
38,023

Net income
 
381

 
258,932

Net income attributable to Holdings
 
(2,719
)
 
248,056

Basic and fully diluted net income per share attributable to Holdings
 
$
(0.10
)
 
$
4.85


Other acquisitions
Clean Earth
On December 15, 2014, the Company's Clean Earth subsidiary completed the acquisition of American Environmental Services, Inc. ("AES") for a purchase price of approximately $16.1 million after the settlement of the working capital adjustment related to the acquisition of $0.5 million during the second quarter of 2015. 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.

Note D - Discontinued operations

Sale of CamelBak

On August 3, 2015, the Company sold its majority owned subsidiary, CamelBak, based on a total enterprise value of $412.5 million. The CamelBak purchase agreement contains customary representations, warranties, covenants and indemnification provisions, and the transaction is subject to customary working capital adjustments.

The Company received approximately $367.8 million in cash related to its debt and equity interests in CamelBak after payments to noncontrolling shareholders and payment of all transaction expenses. The Company recognized a gain of $165.3 million for the three and nine months ended September 30, 2015 as a result of the sale of CamelBak.

Summarized operating results for the three and nine months ended September 30, 2015 and 2014 through the date of disposition are as follows (in thousands):

(in thousands)
 
For the period July 1, 2015 through disposition
 
Three months ended September 30, 2014
 
For the period Jan. 1, 2015 through disposition
 
Nine months ended September 30, 2014
Net sales
 
$
17,023

 
$
33,496

 
$
96,519

 
$
113,145

Gross profit
 
7,282

 
13,732

 
41,415

 
48,016

Operating income
 
2,713

 
2,833

 
14,348

 
14,517

Income from continuing operations before income taxes
 
4,315

 
3,275

 
16,607

 
14,995

Provision for income taxes
 
1,355

 
251

 
5,010

 
3,218

Income from discontinued operations (1)
 
$
2,960

 
$
3,024

 
$
11,597

 
$
11,777


(1) The results for the periods from July 1, 2015 through disposition and January 1, 2015 through disposition, and the three and nine months ended September 30, 2014, exclude $0.6 million, $3.9 million, $2.6 million and $8.0 million, respectively, of intercompany interest expense.


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Table of Contents

Sale of AFM

On October 5, 2015, the Company sold its majority owned subsidiary, American Furniture, for a sale price of $24.1 million. The Company received approximately $23.5 million in net proceeds related to its debt and equity interests in American Furniture after payment of all transaction expenses. The sale of American Furniture met the criteria for the assets to be classified as held for sale as of September 30, 2015, and American Furniture is presented as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented. The Company recognized a loss on the sale of American Furniture of $14.3 million. This loss was recognized during the quarter ended September 30, 2015 based on the initial write-down of American Furniture's carrying amounts to fair value. The fair value of the assets and liabilities of American Furniture have been classified as current at September 30, 2015.


Summarized operating results for the three and nine months ended September 30, 2015 and 2014 through the date of classification as held for sale at September 30, 2015 are as follows (in thousands):
(in thousands)
 
Three months ended September 30, 2015
 
Three months ended September 30, 2014
 
Nine months ended September 30, 2015
 
Nine months ended September 30, 2014
Net sales
 
$
39,068

 
$
28,351

 
$
122,420

 
$
95,842

Gross profit
 
3,656

 
2,278

 
11,613

 
8,691

Operating income
 
901

 
401

 
4,126

 
2,538

Income from continuing operations before income taxes
 
902

 
401

 
4,134

 
2,538

Provision for income taxes
 
43

 

 
81

 

Income from discontinued operations (1)
 
$
859

 
$
401

 
$
4,053

 
$
2,538


(1) The results for the three and nine months ended September 30, 2015, and the three and nine months ended September 30, 2014, exclude $0.5 million, $1.5 million, $0.6 million and $1.7 million, respectively, of intercompany interest expense.


The following table presents summary balance sheet information of the CamelBak and American Furniture businesses held for sale as of September 30, 2015 and December 31, 2014 (in thousands):


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Table of Contents

 
 
 
September 30, 2015

 
December 31, 2014
 
 
 
American Furniture
 
CamelBak
 
American Furniture
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Cash
 
$
1,879

 
$
975

 
$
781

 
$
1,756

 
Accounts receivable, net
 
17,666

 
22,492

 
16,191

 
38,683

 
Inventories
 
26,552

 
27,511

 
25,395

 
52,906

 
Prepaid expenses and other current assets
 

 
4,627

 
364

 
4,991

 
Current assets held for sale
 
$
46,097

 
$
55,605

 
$
42,731

 
$
98,336

 
Property, plant and equipment, net
 

 
7,987

 
903

 
8,890

 
Goodwill
 

 
5,546

 

 
5,546

 
Intangible assets, net
 

 
162,761

 
368

 
163,129

 
Other non-current assets
 

 
2,262

 

 
2,262

 
Noncurrent assets held for sale
 
$

 
$
178,556

 
$
1,271

 
$
179,827

Liabilities:
 
 
 
 
 
 
 

 
Accounts payable
 
19,976

 
6,431

 
6,468

 
12,899

 
Accrued expenses and other current liabilities
 
2,420

 
9,834

 
1,640

 
11,474

 
Current liabilities held for sale
 
$
22,396

 
$
16,265

 
$
8,108

 
$
24,373

 
Deferred income taxes
 

 
6,115

 

 
6,115

 
Other noncurrent liabilities
 

 
548

 

 
548

 
Noncurrent liabilities held for sale
 
$

 
$
6,663

 
$

 
$
6,663

Noncontrolling interest of discontinued operations
 
$
284

 
$
14,932

 
$
260

 
$
15,192


    
Note E — Operating Segment Data
At September 30, 2015, the Company had eight reportable operating segments. Each operating segment represents a platform acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:

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.

Manitoba Harvest is a pioneer and leader in the manufacture and distribution of branded, hemp-based foods. Manitoba Harvest’s products, which include Hemp Hearts™, Hemp Heart Bites™, Hemp Heart Bars™, and Hemp protein powders, are currently carried in over 7,000 retail stores across the U.S. and Canada. Manitoba Harvest is headquartered in Winnipeg, Manitoba.

Advanced Circuits, an electronic components manufacturing company, is a provider of small-run, quick-turn and volume production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers primarily in North America. ACI is headquartered in Aurora, Colorado.

Arnold 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.

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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 and nine months ended September 30, 2014.
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 and nine months ended September 30, 2015 and 2014 is presented below (in thousands):

Net sales of operating segments
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Ergobaby
$
21,944

 
$
22,429

 
$
64,104

 
$
61,468

FOX

 
7,514

 

 
149,995

Liberty
23,404

 
19,916

 
74,013

 
67,768

Manitoba Harvest
8,856

 

 
8,856

 

ACI
22,234

 
22,027

 
66,734

 
64,175

Arnold Magnetics
32,590

 
31,456

 
93,138

 
94,902

Clean Earth
44,092

 
20,318

 
122,923

 
20,318

SternoCandleLamp
31,710

 

 
98,680

 

Tridien
23,318

 
17,633

 
58,850

 
50,659

Total
208,148

 
141,293

 
587,298

 
509,285

Reconciliation of segment revenues to consolidated revenues:

 

 

 

Corporate and other

 

 

 

Total consolidated revenues
$
208,148

 
$
141,293

 
$
587,298

 
$
509,285




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International Revenues
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Ergobaby
$
12,829

 
$
13,319

 
$
36,059

 
$
35,013

FOX

 

 

 
79,306

Manitoba Harvest
5,206

 

 
5,206

 

Arnold Magnetics
10,798

 
14,415

 
33,812

 
44,003

 
$
28,833

 
$
27,734

 
$
75,077

 
$
158,322


Profit (loss) of operating segments (1)
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Ergobaby
$
5,717

 
$
4,881

 
$
16,764

 
$
13,439

FOX

 
811

 

 
17,294

Liberty
3,545

 
(1,692
)
 
7,713

 
(2,229
)
Manitoba Harvest
(3,955
)
 

 
(3,955
)
 

ACI
6,295

 
5,826

 
18,782

 
16,407

Arnold Magnetics
3,058

 
2,146

 
6,532

 
6,206

Clean Earth
4,893

 
1,029

 
4,933

 
1,029

SternoCandleLamp
2,707

 

 
8,286

 

Tridien
1,183

 
574

 
(6,504
)
 
1,732

Total
23,443

 
13,575

 
52,551

 
53,878

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

 

 

 

Interest expense, net
(11,205
)
 
(7,059
)
 
(24,047
)
 
(16,436
)
Other income, net
(950
)
 
(425
)
 
(983
)
 
(177
)
Gain (loss) on equity method investment
11,784

 

 
9,518

 

Corporate and other (2)
(8,192
)
 
256,690

 
(27,184
)
 
239,127

Total consolidated income before income taxes
$
14,880

 
$
262,781

 
$
9,855

 
$
276,392


(1) 
Segment profit (loss) represents operating income (loss).
(2) 
Primarily relates to management fees expensed and payable to CGM, corporate overhead expenses during 2015 and 2014, and the gain on deconsolidation of FOX in 2014.


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Accounts receivable
September 30, 2015
 
December 31, 2014
Ergobaby
$
10,456

 
$
9,671

Liberty
13,340

 
11,376

Manitoba Harvest
5,546

 

ACI
6,804

 
5,730

Arnold Magnetics
20,891

 
15,664

Clean Earth
41,855

 
52,059

SternoCandleLamp
16,959

 
21,113

Tridien
12,146

 
7,135

Total
127,997

 
122,748

Reconciliation of segment to consolidated totals:

 

Corporate and other

 

Total
127,997

 
122,748

Allowance for doubtful accounts
(3,757
)
 
(3,896
)
Total consolidated net accounts receivable
$
124,240

 
$
118,852



 
Goodwill
 
Identifiable Assets
 
Depreciation and Amortization Expense
 
Sept. 30,
 
December 31,
 
Sept. 30,
 
December 31,
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2015
 
2014
 
2015 (1)
 
2014 (1)
 
2015
 
2014
 
2015
 
2014
Goodwill and identifiable assets of operating segments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ergobaby
$
41,664

 
$
41,664

 
$
62,277

 
$
65,309

 
$
876

 
$
950

 
$
2,596

 
$
2,867

FOX

 

 

 

 

 
252

 

 
4,785

Liberty
32,828

 
32,828

 
30,746

 
34,139

 
648

 
1,582

 
2,880

 
4,663

Manitoba Harvest
30,652

 

 
76,889

 

 
4,011

 

 
4,011

 

ACI
57,615

 
57,615

 
16,426

 
19,334

 
726

 
1,278

 
2,207

 
3,836

Arnold Magnetics
51,767

 
51,767

 
74,318

 
77,610

 
2,182

 
2,152

 
6,561

 
6,363

Clean Earth
111,339

 
110,633

 
191,547

 
203,938

 
5,082

 
1,116

 
15,541

 
1,116

SternoCandleLamp
33,716

 
33,716

 
126,366

 
126,302

 
2,155

 

 
5,775

 

Tridien
7,834

 
16,762

 
15,680

 
14,844

 
641

 
604

 
1,835

 
1,900

Total
367,415

 
344,985

 
594,249

 
541,476

 
16,321

 
7,934

 
41,406

 
25,530

Reconciliation of segment to consolidated total:

 

 

 

 

 

 
 
 
 
Corporate and other identifiable assets

 

 
335,486

 
255,305

 

 

 
755

 

Amortization of debt issuance costs and original issue discount

 

 

 

 
729

 
713

 
2,154

 
2,412

Goodwill carried at Corporate level (2)
8,649

 
8,649

 

 

 

 

 

 

Assets of discontinued operations

 

 
46,097

 
278,163

 

 

 

 

Total
$
376,064

 
$
353,634

 
$
975,832

 
$
1,074,944

 
$
17,050

 
$
8,647

 
$
44,315

 
$
27,942


(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 segment for purposes of goodwill impairment testing.


Note F - Equity Method Investment

Investment in FOX

FOX is a designer, manufacturer and marketer of high-performance ride dynamic products used primarily for bicycles, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. 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. The Company currently 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 $254.7 million on September 30, 2015 based on the closing price of FOX shares on that date. The Company

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recognized a gain of $11.8 million for the three months ended September 30, 2015, and a gain of $9.5 million for the nine months ended September 30, 2015, respectively, due to the change in the fair value of the FOX investment.

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

Condensed Balance Sheet information
 
 
 
 
 
 
September 30, 2015
 
December 31, 2014
Current assets
 
$
160,250

 
$
112,609

Non-current assets
 
145,345

 
145,828

 
 
$
305,595

 
$
258,437

 
 
 
 
 
Current liabilities
 
$
89,813

 
$
60,825

Non-current liabilities
 
71,197

 
68,806

Stockholders' equity
 
144,585

 
128,806

 
 
$
305,595

 
$
258,437

 
 
 
 
 
Condensed Results of Operations (1)
 
 
 
 
 
 
Three months ended September 30, 2015
 
Nine months ended 
 September 30, 2015
Net revenue
 
$
106,171

 
$
271,130

Gross profit
 
34,786

 
83,437

Operating income
 
13,821

 
25,897

Net income
 
$
10,591

 
$
18,124


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

Note G — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at September 30, 2015 and December 31, 2014 (in thousands):

 
September 30, 2015
 
December 31, 2014
Machinery and equipment
$
130,024

 
$
114,797

Office furniture, computers and software
8,837

 
6,653

Leasehold improvements
8,579

 
6,476

Buildings and land
24,239

 
25,096

 
171,679

 
153,022

Less: accumulated depreciation
(62,039
)
 
(46,041
)
Total
$
109,640

 
$
106,981

Depreciation expense was $5.5 million and $16.3 million for the three and nine months ended September 30, 2015, and $3.4 million and $10.3 million for the three and nine months ended September 30, 2014, respectively.

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Inventory
Inventory is comprised of the following at September 30, 2015 and December 31, 2014 (in thousands):

 
September 30, 2015
 
December 31, 2014
Raw materials and supplies
$
29,159

 
$
25,826

Work-in-process
9,961

 
7,147

Finished goods
39,496

 
30,315

Less: obsolescence reserve
(4,320
)
 
(4,980
)
Total
$
74,296

 
$
58,308



Note H — Goodwill and Other Intangible Assets

As a result of acquisitions of various businesses, the Company has significant intangible assets on its balance sheet that include goodwill and indefinite-lived intangibles (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 in the fourth quarter of 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 during the quarter ended March 31, 2015 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 completed the interim goodwill impairment testing of Tridien during the three months ended June 30, 2015 and recorded additional impairment expense of $0.2 million related to the Tridien technology and patent intangible assets.

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 evaluated 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, Permanent 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. Results of the quantitative analysis indicated that the fair value of these reporting units exceeds their carrying value.

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A reconciliation of the change in the carrying value of goodwill for the nine months ended September 30, 2015 and the year ended December 31, 2014, is as follows (in thousands):
 
Nine months ended September 30, 2015
 
Year ended 
 December 31, 2014
Beginning balance:
 
 
 
Goodwill
$
406,537

 
$
293,968

Accumulated impairment losses
(52,903
)
 
(52,903
)
 
353,634

 
241,065

Impairment losses (1)
(8,928
)
 

Acquisition of businesses (2)
32,568

 
157,864

Foreign currency translation
(1,916
)
 

Adjustments to purchase accounting (3)
706

 

Deconsolidation of subsidiary (4)

 
(45,295
)
Total adjustments
22,430

 
112,569

Ending balance:

 

Goodwill
437,895

 
406,537

Accumulated impairment losses
(61,831
)
 
(52,903
)
 
$
376,064

 
$
353,634


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

(2) 
Acquisition of businesses during the year ended December 31, 2014 relates to the acquisition of Clean Earth in August 2014, SternoCandleLamp in October 2014, and the add-on acquisition of AES by Clean Earth in December 2014. Acquisition of businesses during the nine months ended September 30, 2015 relates to the acquisition of Manitoba Harvest in July 2015.

(3) 
The $0.7 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 and second quarter of 2015 ($0.3 million, including the final settlement of working capital of $0.5 million received by Clean Earth).

(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 evaluated the qualitative factors of each reporting unit that maintains indefinite lived intangible assets in connection with the annual impairment testing for 2015. Results of the qualitative analysis indicate that the carrying value of the Company’s indefinite lived intangible assets did not exceed their fair value.

2015 long-lived asset impairment
The Company evaluates long-lived assets for potential impairment whenever events occur or circumstances indicate that the carrying amount of the assets may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. As noted above, Tridien's expected loss of a large customer at the end of the third quarter of 2015 triggered an interim goodwill impair