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 March 31, 2016
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 April 29, 2016, 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, 2016
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 Sterno Products;
the "2015 acquisition" refer to the acquisition of Fresh Hemp Foods Ltd. ("Manitoba Harvest")
the "2015 dispositions" refer to, collectively, the sales of CamelBak Acquisition Corp. ("CamelBak") and AFM Holding Corp. ("American Furniture" or "AFM")
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 "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)
March 31,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
72,567

 
$
85,869

Accounts receivable, net
127,432

 
114,320

Inventories
78,994

 
68,371

Prepaid expenses and other current assets
20,610

 
22,803

Total current assets
299,603

 
291,363

Property, plant and equipment, net
118,085

 
118,050

Equity method investment (refer to Note F)
191,439

 
249,747

Goodwill
413,735

 
398,488

Intangible assets, net
358,373

 
353,404

Other non-current assets
11,004

 
9,990

Total assets
$
1,392,239

 
$
1,421,042

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
52,651

 
$
50,403

Accrued expenses
43,301

 
47,959

Due to related party
250

 
5,863

Current portion, long-term debt
3,250

 
3,250

Other current liabilities
9,974

 
9,004

Total current liabilities
109,426

 
116,479

Deferred income taxes
105,608

 
103,745

Long-term debt
308,208

 
308,639

Other non-current liabilities
27,441

 
18,960

Total liabilities
550,683

 
547,823

Stockholders’ equity
 
 
 
Trust shares, no par value, 500,000 authorized; 54,300 shares issued and outstanding at March 31, 2016 and December 31, 2015
823,736

 
825,321

Accumulated other comprehensive loss
(5,107
)
 
(9,804
)
Accumulated (deficit) earnings
(25,004
)
 
10,567

Total stockholders’ equity attributable to Holdings
793,625

 
826,084

Noncontrolling interest
47,931

 
47,135

Total stockholders’ equity
841,556

 
873,219

Total liabilities and stockholders’ equity
$
1,392,239

 
$
1,421,042

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,
 
2016
 
2015
(in thousands, except per share data)
 
 
 
Net sales
$
169,761

 
$
144,296

Service revenues
38,286

 
35,129

Total net revenues
208,047

 
179,425

Cost of sales
112,235

 
99,032

Cost of service revenues
29,551

 
27,823

Gross profit
66,261

 
52,570

Operating expenses:
 
 
 
Selling, general and administrative expense
44,473

 
33,026

Management fees
6,458

 
6,733

Amortization expense
7,826

 
7,822

Impairment expense

 
8,907

Operating income (loss)
7,504

 
(3,918
)
Other income (expense):
 
 
 
Interest expense, net
(11,462
)
 
(9,717
)
Amortization of debt issuance costs
(570
)
 
(545
)
Loss on equity method investment
(10,623
)
 
(13,447
)
Other income, net
3,420

 
10

Loss from continuing operations before income taxes
(11,731
)
 
(27,617
)
Provision for income taxes
3,296

 
2,393

Loss from continuing operations
(15,027
)
 
(30,010
)
Income from discontinued operations, net of income tax

 
4,723

Net loss
(15,027
)
 
(25,287
)
Less: Net income (loss) attributable to noncontrolling interest
996

 
(526
)
Less: Income from discontinued operations attributable to noncontrolling interest

 
141

Net loss attributable to Holdings
$
(16,023
)
 
$
(24,902
)
Amounts attributable to Holdings
 
 
 
Loss from continuing operations
(16,023
)
 
(29,484
)
Income from discontinued operations, net of income tax

 
4,582

Net loss attributable to Holdings
$
(16,023
)
 
$
(24,902
)
Basic and fully diluted income (loss) per share attributable to Holdings (refer to Note L)

 


Continuing operations
$
(0.31
)
 
$
(0.55
)
Discontinued operations

 
0.08

 
$
(0.31
)
 
$
(0.47
)
Weighted average number of shares of trust stock outstanding – basic and fully diluted
54,300

 
54,300

Cash distributions declared per share (refer to Note L)
$
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,
 
2016
 
2015
(in thousands)
 
 
 
Net loss
$
(15,027
)
 
$
(25,287
)
Other comprehensive income (loss)
 
 
 
Foreign currency translation adjustments
5,220

 
(90
)
Pension benefit liability, net
(523
)
 
(60
)
Other comprehensive income (loss)
4,697

 
(150
)
Total comprehensive income, net of tax
(10,330
)
 
(25,437
)
Less: Net income (loss) attributable to noncontrolling interests
996

 
(385
)
Less: Other comprehensive income (loss) attributable to noncontrolling interests
1,226

 
(5
)
Total comprehensive loss attributable to Holdings, net of tax
$
(12,552
)
 
$
(25,047
)
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 Earnings (Deficit)
 
Accumulated Other
Comprehensive
Loss
 
Stockholders' Equity Attributable
to Holdings
 
Non-
Controlling
Interest
 
Total
Stockholders’
Equity
Balance — January 1, 2016
54,300

 
$
825,321

 
$
10,567

 
$
(9,804
)
 
$
826,084

 
$
47,135

 
$
873,219

Net income (loss)

 

 
(16,023
)
 

 
(16,023
)
 
996

 
(15,027
)
Total comprehensive income, net

 

 

 
4,697

 
4,697

 

 
4,697

Option activity attributable to noncontrolling shareholders

 

 

 

 

 
1,189

 
1,189

Effect of subsidiary stock options exercise

 
(578
)
 

 

 
(578
)
 
4,333

 
3,755

Purchase of noncontrolling interest - Liberty (refer to Note N)

 
(1,007
)
 

 

 
(1,007
)
 
(469
)
 
(1,476
)
Distributions to noncontrolling shareholders - Liberty (refer to Note N)

 

 

 

 

 
(5,253
)
 
(5,253
)
Distributions paid

 

 
(19,548
)
 

 
(19,548
)
 

 
(19,548
)
Balance — March 31, 2016
54,300

 
$
823,736

 
$
(25,004
)
 
$
(5,107
)
 
$
793,625

 
$
47,931

 
$
841,556

See notes to condensed consolidated financial statements.


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Compass Diversified Holdings
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Three months ended March 31,
(in thousands)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(15,027
)
 
$
(25,287
)
Income from discontinued operations

 
4,723

Net loss from continuing operations
(15,027
)
 
(30,010
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 

Depreciation expense
5,859

 
5,549

Amortization expense
9,049

 
7,822

Impairment expense

 
8,907

Amortization of debt issuance costs and original issue discount
738

 
713

Unrealized loss on interest rate swap
7,228

 
4,314

Noncontrolling stockholder stock based compensation
1,189

 
795

Loss on equity method investment
10,623

 
13,447

Deferred taxes
214

 
(1,095
)
Other
(61
)
 
390

Changes in operating assets and liabilities, net of acquisition:

 

Decrease in accounts receivable
6,307

 
10,159

Increase in inventories
(1,170
)
 
(1,769
)
Decrease (increase) in prepaid expenses and other current assets
(610
)
 
418

Decrease in accounts payable and accrued expenses
(18,314
)
 
(21,285
)
Net cash provided by (used in) operating activities - continuing operations
6,025

 
(1,645
)
Net cash provided by operating activities - discontinued operations

 
4,932

Cash provided by operating activities
6,025

 
3,287

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(35,553
)
 

Purchases of property and equipment
(4,406
)
 
(3,657
)
Net proceeds from sale of equity investment
47,685

 

Payment of interest rate swap
(500
)
 
(495
)
Purchase of noncontrolling interest (refer to Note N)
(1,476
)
 

Other investing activities
97

 
125

Net cash provided by (used in) investing activities - continuing operations
5,847

 
(4,027
)
Net cash used in investing activities - discontinued operations

 
(1,133
)
Cash provided by (used in) investing activities
5,847

 
(5,160
)

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Table of Contents

Compass Diversified Holdings
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
Three months ended March 31,
(in thousands)
2016
 
2015
Cash flows from financing activities:
 
 
 
Borrowings under credit facility

 
35,500

Repayments under credit facility
(813
)
 
(17,038
)
Distributions paid
(19,548
)
 
(19,548
)
Net proceeds provided by noncontrolling shareholders (refer to Note N)
3,755

 

Distributions paid to noncontrolling shareholders (refer to Note N)
(5,253
)
 

Other
(282
)
 
(227
)
Net cash used in financing activities
(22,141
)
 
(1,313
)
Foreign currency impact on cash
(3,033
)
 
(67
)
Net decrease in cash and cash equivalents
(13,302
)
 
(3,253
)
Cash and cash equivalents — beginning of period (1)
85,869

 
23,703

Cash and cash equivalents — end of period (2)
$
72,567

 
$
20,450

(1) Includes cash from discontinued operations of $1.8 million at January 1, 2015.
(2) Includes cash from discontinued operations of $3.1 million at March 31, 2015.













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, 2016

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 March 31, 2016. 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 ("Sterno Products") 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 33.1% 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, 2016 and March 31, 2015, 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, 2015.
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. Sterno Products typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer season and the holiday season.
Consolidation
The condensed consolidated financial statements include the accounts of Holdings and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Discontinued Operations
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 the condensed consolidated statements of operations for the three months ended March 31, 2015. Refer to Note D for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.

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Recently Adopted Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standard update to simplify the presentation of deferred taxes by requiring companies to classify all deferred tax assets and liabilities, along with any related valuation allowances, as noncurrent on the balance sheet. Adoption of this standard is required for annual periods beginning after December 15, 2016 and early adoption is permitted. The Company adopted this guidance early, effective as of January 1, 2016, on a prospective basis, which is permitted under the standard. At January 1, 2016, the Company had $6.1 million classified as current deferred tax assets which was reclassified to long-term deferred tax assets, and no amount classified as current deferred tax liabilities.
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. The adoption of this standard did not have a significant impact on our condensed consolidated financial statements. The amendment was effective for the Company on January 1, 2016.

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. In August 2015, the FASB issued additional guidance which addresses the Security and Exchange Commission's ("SEC") comments related to the absence of authoritative guidance within the accounting standard update related to line-of-credit arrangements. The SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings under the line of credit arrangement. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Retrospective adoption is required. The Company adopted this guidance on January 1, 2016 and has reclassified debt issuance costs associated with the Company's term debt of $4.4 million and $4.6 million as of March 31, 2016 and December 31, 2015, respectively, from long-term assets to long-term debt. Deferred debt issuance costs incurred in connection with the Company's revolving credit facility of $4.5 million and $4.9 million at March 31, 2016 and December 31, 2015, respectively, continue to be classified as long-term assets.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued an accounting standard update related to the accounting for leases which will require an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The standard update offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires modified retrospective adoption, with early adoption permitted. Accordingly, this standard is effective for the Company on January 1, 2019. The Company is currently assessing impact of the new standard on our 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 does not believe that the adoption of this new accounting guidance will have a significant impact 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 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

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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.

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"). Subsequent to the closing, 1037269 B.C. Ltd. merged with and into Manitoba Harvest. Headquartered in Winnipeg, Manitoba, Manitoba Harvest is a global leader in branded, hemp-based foods.

The Company made loans to and purchased an 87% controlling interest in Manitoba Harvest. The purchase price, including proceeds from noncontrolling interest, was approximately $102.7 million (C$130.3 million). 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. 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 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
 
37,882

Intangible assets
 
63,687

Other current and noncurrent assets
 
986

      Total assets
 
$
123,452

 
 
 
Liabilities and noncontrolling interest:
 
 
Current liabilities
 
$
3,267

Deferred tax liabilities
 
16,593

Other liabilities
 
23,332

Noncontrolling interest
 
7,638

      Total liabilities and noncontrolling interest
 
$
50,830

 
 
 
Net assets acquired
 
$
72,622

Noncontrolling interest
 
7,638

Intercompany loans to business
 
23,593

 
 
$
103,853


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Acquisition Consideration
 
 
Purchase price
 
$
104,437

Working capital adjustment
 
(584
)
Total purchase consideration
 
$
103,853

Less: Transaction costs
 
1,145

Purchase price, net
 
$
102,708


(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 2015 which were included in selling, general and administrative expenses in the consolidated statements of income during the year ended December 31, 2015. The goodwill of $37.9 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)
 
$
13,005

 
N/a
Technology and processes
 
9,616

 
10 years
Customer relationships
 
41,066

 
15 years
 
 
$
63,687

 
 

Unaudited pro forma information
The following unaudited pro forma data for the three months ended March 31, 2015 gives effect to the acquisition of Manitoba Harvest, as described above, as if the acquisition had been completed as of January 1, 2015, and the sale of CamelBak and AFM as if the dispositions had been completed on January 1, 2015. 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, 2015
Net sales
 
$
190,055

Operating loss
 
(3,870
)
Net loss
 
(30,643
)
Net loss attributable to Holdings
 
(30,152
)
Basic and fully diluted net loss per share attributable to Holdings
 
$
(0.57
)

Other acquisitions
Sterno Products
On January 22, 2016, Sterno Products, a wholly owned subsidiary of the company, acquired all of the outstanding stock of Northern International, Inc. (NII), for a total purchase price of approximately $35.8 million (C$50.6 million), plus a potential earn-out opportunity payable over the next two years up to a maximum amount of $1.8 million (C$2.5 million), and is subject to working

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capital adjustments. The contingent consideration was fair valued on a preliminary basis at $1.5 million, based on probability weighted models of the achievement of certain performance based financial targets. Refer to Note K - "Fair Value Measurements." for a description of the valuation technique used to fair value the contingent consideration. Headquartered in Coquitlam, British Columbia, Canada, NII sells flameless candles and outdoor lighting products through the retail segment. Sterno Products financed the acquisition and payment of the related transaction costs through the issuance of an additional $37.0 million in inter-company loans with the Company.
In connection with the acquisition, Sterno recorded a preliminary purchase price allocation of $11.6 million of goodwill, which is not expected to be deductible for income tax purposes, $8.8 in intangible assets and $1.2 million in inventory step-up. In addition, the earn-out provision of the purchase price was allocated a fair value of $1.5 million. The remainder of the purchase consideration was allocated to net assets acquired less net liabilities assumed. Sterno Products incurred $0.4 million in acquisition related costs in connection with the NII acquisition. The Company expects to finalize the purchase price allocation for NII during 2016 within the measurement period.
Manitoba Harvest
On December 15, 2015, the Company's Manitoba Harvest subsidiary completed the acquisition of Hemp Oil Canada, Inc. (HOCI), for a purchase price of $30.8 million (C$42.0 million). HOCI is a bulk wholesale producer, private label packager and custom processor of hemp food product ingredients, located in Ste. Agathe, Manitoba. Manitoba Harvest incurred $0.4 million (C$0.5 million) of acquisition related costs for the HOCI acquisition which are recorded in selling, general and administrative expenses in the consolidated results of operation for the year ending December 31, 2015. The purchase price is subject to standard working capital adjustments. In connection with the acquisition of HOCI, certain of the selling shareholders of HOCI invested $6.8 million (C$9.3 million) in Manitoba Harvest in exchange for approximately 11% noncontrolling interest in Manitoba Harvest. The Company has not completed the preliminary allocation of the purchase price and has recorded the excess of the purchase price over the assets acquired as goodwill at March 31, 2016. The Company expects to finalize the purchase price allocation for HOCI during 2016 within the measurement period.

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 $164.0 million, net of tax, during 2015 as a result of the sale of CamelBak.

Sale of AFM

On October 5, 2015, the Company sold its majority owned subsidiary, American Furniture, for a sale price of $24.1 million. The Company received approximately $23.5 million in net proceeds related to its debt and equity interests in American Furniture after payment of all transaction expenses. The Company recognized a loss on the sale of American Furniture of $14.3 million during 2015.

Summarized operating results of discontinued operations for the three months ended March 31, 2015 are as follows:


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Three months ended March 31, 2015
(in thousands)
 
CamelBak
 
American Furniture
 
Total discontinued operations
Net sales
 
$
36,922

 
$
40,925

 
$
77,847

Gross profit
 
15,232

 
4,115

 
19,347

Operating income
 
4,351

 
1,676

 
6,027

Income from continuing operations before income taxes
 
4,029

 
1,681

 
5,710

Provision for income taxes
 
987

 

 
987

Income from discontinued operations (1)
 
$
3,042

 
$
1,681

 
$
4,723


(1) The results for the three months ended March 31, 2015 exclude $2.2 million of intercompany interest expense.

    
Note E — Operating Segment Data
At March 31, 2016, 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, gun and office 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. 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.

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


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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.
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, 2016 and 2015 is presented below (in thousands):

Net sales of operating segments
 
Three months ended 
 March 31,
 
 
2016
 
2015
Ergobaby
 
$
19,415

 
$
20,668

Liberty
 
29,000

 
25,854

Manitoba Harvest
 
13,717

 

ACI
 
21,517

 
21,418

Arnold Magnetics
 
27,383

 
31,188

Clean Earth
 
38,286

 
35,129

Sterno Products
 
43,969

 
28,604

Tridien
 
14,760

 
16,564

Total
 
208,047

 
179,425

Reconciliation of segment revenues to consolidated revenues:
 

 

Corporate and other
 

 

Total consolidated revenues
 
$
208,047

 
$
179,425




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Profit (loss) of operating segments (1)
 
Three months ended 
 March 31,
 
 
2016
 
2015
Ergobaby
 
$
4,090

 
$
5,406

Liberty
 
4,841

 
1,404

Manitoba Harvest
 
363

 

ACI
 
5,832

 
5,721

Arnold Magnetics
 
626

 
1,754

Clean Earth
 
(958
)
 
(1,554
)
Sterno Products
 
2,412

 
1,656

Tridien
 
(577
)
 
(8,692
)
Total
 
16,629

 
5,695

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

 

Interest expense, net
 
(11,462
)
 
(9,717
)
Other income, net
 
3,420

 
10

Loss on equity method investment
 
(10,623
)
 
(13,447
)
Corporate and other (2)
 
(9,695
)
 
(10,158
)
Total consolidated loss before income taxes
 
$
(11,731
)
 
$
(27,617
)

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

 
Accounts Receivable
 
Identifiable Assets
 
Depreciation and Amortization Expense
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
Three months ended 
 March 31,
 
2016
 
2015
 
2016 (1)
 
2015 (1)
 
2016
 
2015
Ergobaby
$
11,130

 
$
8,076

 
$
59,417

 
$
62,436

 
$
835

 
$
850

Liberty
12,783

 
12,941

 
29,255

 
31,395

 
656

 
1,592

Manitoba Harvest
8,262

 
5,512

 
88,769

 
88,541

 
1,314

 

ACI
6,747

 
5,946

 
18,421

 
17,275

 
841

 
757

Arnold Magnetics
18,006

 
15,083

 
69,013

 
72,310

 
2,237

 
2,194

Clean Earth
33,927

 
42,291

 
180,962

 
185,087

 
4,955

 
5,392

Sterno Products
33,922

 
19,508

 
142,403

 
121,910

 
3,451

 
1,464

Tridien
6,301

 
8,571

 
14,421

 
15,526

 
619

 
619

Allowance for doubtful accounts
(3,646
)
 
(3,608
)
 

 

 

 

Total
127,432

 
114,320

 
602,661

 
594,480

 
14,908

 
12,868

Reconciliation of segment to consolidated total:
 
 
 
 

 

 

 

Corporate and other identifiable assets

 

 
56,973

 
64,007

 

 
503

Equity method investment

 

 
191,439

 
249,747

 

 

Amortization of debt issuance costs and original issue discount

 

 

 

 
738

 
713

Total
$
127,432

 
$
114,320

 
$
851,073

 
$
908,234

 
$
15,646

 
$
14,084


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



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Geographic Information
International Revenues
 
Three months ended 
 March 31,
 
 
2016
 
2015
Ergobaby
 
$
10,377

 
$
10,956

Manitoba Harvest
 
6,130

 

Arnold Magnetics
 
10,799

 
12,369

Sterno Products
 
5,192

 
684

 
 
$
32,498

 
$
24,009



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 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 41.2%, 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.
On March 15, 2016, the Company sold 2,500,000 of its FOX shares through a secondary offering at a price of $15.895 per share, which represented an underwriter's discount of 8.5% from the FOX share closing price on the date the offering was priced. Concurrently with the offering, FOX purchased 500,000 shares of their shares directly from the Company, also at a price of $15.895 per share. As a result of the sale of shares through the offering and the repurchase of shares by FOX, the Company sold a total of 3,000,000 shares of FOX common stock, with total net proceeds of approximately $47.7 million. Upon completion of the offering and repurchase of shares by FOX, the Company's ownership interest in FOX was reduced from approximately 41.2% to 33.1%. The Company currently owns approximately 12.1 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 $191.4 million on March 31, 2016 based on the closing price of FOX shares on that date. The Company recognized a loss of $10.6 million for the three months ended March 31, 2016 due to the change in the fair value of the FOX investment and the effect of the underwriter's discount on the sale of FOX shares.


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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, 2016
 
December 31, 2015
Current assets
 
$
132,712

 
$
131,941

Non-current assets
 
149,688

 
145,775

 
 
$
282,400

 
$
277,716

 
 
 
 
 
Current liabilities
 
$
71,809

 
$
73,970

Non-current liabilities
 
60,766

 
51,486

Stockholders' equity
 
149,825

 
152,260

 
 
$
282,400

 
$
277,716

 
 
 
 
 
Condensed Results of Operations
 
 
 
 
 
 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
Net revenue
 
$
80,217

 
$
67,788

Gross profit
 
25,118

 
18,783

Operating income
 
5,694

 
1,539

Net income
 
$
3,262

 
$
770



Note G — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at March 31, 2016 and December 31, 2015 (in thousands):

 
March 31, 2016
 
December 31, 2015
Machinery and equipment
$
137,866

 
$
135,357

Office furniture, computers and software
10,302

 
9,500

Leasehold improvements
9,419

 
8,706

Buildings and land
32,767

 
31,856

 
190,354

 
185,419

Less: accumulated depreciation
(72,269
)
 
(67,369
)
Total
$
118,085

 
$
118,050

Depreciation expense was $5.9 million for the three months ended March 31, 2016, and $5.5 million for the three months ended March 31, 2015.

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Inventory
Inventory is comprised of the following at March 31, 2016 and December 31, 2015 (in thousands):

 
March 31, 2016
 
December 31, 2015
Raw materials and supplies
$
30,547

 
$
29,809

Work-in-process
10,085

 
9,035

Finished goods
43,018

 
33,653

Less: obsolescence reserve
(4,656
)
 
(4,126
)
Total
$
78,994

 
$
68,371



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
2016 Annual goodwill impairment testing
The Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment testing. The qualitative factors we consider include, in part, the general macroeconomic environment, industry and market specific conditions for each reporting unit, financial performance including actual versus planned results and results of relevant prior periods, operating costs and cost impacts, as well as issues or events specific to the reporting unit. At March 31, 2016, we determined that the Tridien reporting unit required further quantitative testing (step 1) because we could not conclude that the fair value of the reporting unit exceeds its carrying value based on qualitative factors alone. For the reporting units that were tested qualitatively, the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value. The Company expects to conclude the goodwill impairment testing during the quarter ended June 30, 2016.
2015 Interim goodwill impairment testing

In January 2015, one of Tridien's largest customers informed Tridien that they would not renew their purchase agreement when it expired in the fourth quarter of 2015. The expected lost sales and net income from this customer were significant enough to trigger an interim goodwill impairment analysis in the first quarter of 2015, which resulted in an impairment of the carrying amount of Tridien's goodwill of $8.9 million.

A summary of the net carrying value of goodwill at March 31, 2016 and December 31, 2015, is as follows (in thousands):
 
Three months ended March 31, 2016
 
Year ended 
 December 31, 2015
Goodwill - gross carrying amount
475,566

 
460,319

Accumulated impairment losses
(61,831
)
 
(61,831
)
Goodwill - net carrying amount
$
413,735

 
$
398,488


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The following is a reconciliation of the change in the carrying value of goodwill for the three months ended March 31, 2016 by operating segment (in thousands):
 
 
Corporate (1)
 
Ergobaby
 
Liberty
 
Manitoba Harvest
 
ACI
 
Arnold (2)
 
Clean Earth
 
Sterno
 
Tridien
 
Total
Balance as of January 1, 2016
 
$
8,649

 
$
41,664

 
$
32,828

 
$
52,672

 
$
58,019

 
$
51,767

 
$
111,339

 
$
33,716

 
$
7,834

 
$
398,488

Acquisition of Northern International Inc. (3)
 

 

 

 

 

 

 

 
11,556

 

 
11,556

Foreign currency translation
 

 

 

 
3,691

 

 

 

 

 

 
3,691

Balance as of March 31, 2016
 
$
8,649

 
$
41,664

 
$
32,828

 
$
56,363

 
$
58,019

 
$
51,767

 
$
111,339

 
$
45,272

 
$
7,834

 
$
413,735


(1)
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.

(2)
Arnold Magnetics has three reporting units PMAG, FlexMag and Precision Thin Metals with goodwill balances of $40.4 million, $4.8 million and $6.5 million, respectively.

(3) 
The goodwill related to the acquisition of NII by Sterno Products in the first quarter of 2016 is based on a preliminary purchase price allocation.
Other intangible assets
2016 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 2016. 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 during the fourth quarter of 2015 triggered an interim goodwill impairment which resulted in Tridien recognizing impairment of both the goodwill and the technology and patent intangible asset. The Company completed the interim impairment testing during the second quarter of 2015 and recognized $0.2 million of impairment expense related to the technology and patent intangible asset during the three months ended June 30, 2015 in the condensed consolidated statements of operations.

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Other intangible assets are comprised of the following at March 31, 2016 and December 31, 2015 (in thousands):

 
 
March 31, 2016
 
December 31, 2015
 
Weighted
Average
Useful Lives
Customer relationships
 
$
232,636

 
$
226,722

 
12
Technology and patents
 
44,662

 
41,001

 
9
Trade names, subject to amortization
 
27,563

 
25,130

 
17
Licensing and non-compete agreements
 
6,786

 
6,686

 
5
Permits and airspace
 
98,673

 
98,673

 
13
Distributor relations and other
 
606

 
606

 
5
 
 
410,926

 
398,818

 
 
Accumulated amortization:
 

 

 
 
Customer relationships
 
(78,665
)
 
(74,519
)
 
 
Technology and patents
 
(20,118
)
 
(19,032
)
 
 
Trade names, subject to amortization
 
(5,127
)
 
(4,697
)
 
 
Licensing and non-compete agreements
 
(6,586
)
 
(6,575
)
 
 
Permits and airspace
 
(14,611
)
 
(12,313
)
 
 
Distributor relations and other
 
(606
)
 
(606
)
 
 
Total accumulated amortization
 
(125,713
)
 
(117,742
)
 
 
Trade names, not subject to amortization
 
73,160

 
72,328

 
 
Total intangibles, net
 
$
358,373

 
$
353,404

 
 

Amortization expense related to intangible assets was $7.8 million and $7.8 million for the three months ended March 31, 2016 and 2015, respectively. Estimated charges to amortization expense of intangible assets over the next five years, is as follows (in thousands):

April 1, 2016 through Dec. 31, 2016
 
$
22,317

2017
 
27,874

2018
 
26,902

2019
 
25,561

2020
 
25,315

 
 
$
127,969


Note I — 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 (as amended from time to time, 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. The Company amended the 2014 Credit Facility in June 2015, primarily to allow for intercompany loans to, and the acquisition of, Canadian-based companies on an unsecured basis, and to modify provisions that would allow for early termination of a "Leverage Increase Period," thereby providing additional flexibility as to the timing of subsequent acquisitions.


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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 $0.8 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.

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

Deferred debt issuance costs represent the costs associated with the entering into the 2014 Credit Facility and are amortized over the term of the related debt instrument. The Company's 2014 Credit Facility is comprised of the 2014 Revolving Credit Facility and the 2014 Term Loan Facility. Since the Company can borrow, repay and reborrow principal under the 2014 Revolving Credit Facility, the debt issuance costs associated with this facility have been classified as other non-current assets in the accompanying consolidated balance sheet. The debt issuance costs associated with the 2014 Term Loan are classified as a reduction of long-term debt in the accompanying consolidated balance sheet. The following table summarizes debt issuance costs at March 31, 2016 and December 31, 2015, and the balance sheet classification in each of the periods presents (in thousands):

 
March 31, 2016
 
December 31, 2015
Deferred debt issuance costs
$
12,973

 
$
12,973

Accumulated amortization
(4,054
)
 
(3,508
)
Deferred debt issuance costs, less accumulated amortization
$
8,919

 
$
9,466

 
 
 
 
Balance Sheet classification:
 
 
 
Other non-current assets
$
4,529

 
$
4,863

Long-term debt
4,390

 
4,603

 
$
8,919

 
$
9,466



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The following table provides the Company’s debt holdings at March 31, 2016 and December 31, 2015 (in thousands):
 
March 31, 2016
 
December 31, 2015
Revolving Credit Facility
$

 
$

Term Loan
319,313

 
320,125

Original issue discount
(3,465
)
 
(3,633
)
Debt issuance costs - term loan
(4,390
)
 
(4,603
)
Total debt
$
311,458

 
$
311,889

Less: Current portion, term loan facilities
(3,250
)
 
(3,250
)
Long term debt
$
308,208

 
$
308,639

Net availability under the 2014 Revolving Credit Facility was approximately $395.5 million at March 31, 2016. Letters of credit outstanding at March 31, 2016 totaled approximately $4.5 million. At March 31, 2016, the Company was in compliance with all covenants as defined in the 2014 Credit Facility.


Note J — 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, 2016 and December 31, 2015, this Swap had a fair value loss of $20.2 million and $13.0 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 December 31, 2015, the Swap had a fair value loss of $0.5 million. A final payment under the Swap of $0.5 million was made on March 31, 2016 when the Swap contract ended.
The 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.
The following table reflects the classification of the Company's interest rate swaps on the consolidated Balance Sheets at March 31, 2016 and December 31, 2015 (in thousands):
 
March 31, 2016
 
December 31, 2015
Other current liabilities
$
4,967

 
$
3,914

Other noncurrent liabilities
15,243

 
9,569

Total fair value
$
20,210

 
$
13,483



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Note K — Fair Value Measurement
The following table provides the assets and liabilities carried at fair value measured on a recurring basis at March 31, 2016 and December 31, 2015 (in thousands):
 
Fair Value Measurements at March 31, 2016
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
  Equity method investment - FOX
$
191,439

 
$
191,439

 
$

 
$

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

 

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

 

 
(50
)
Contingent consideration - acquisition (3)
(1,500
)
 

 

 
(1,500
)
Interest rate swap
(20,210
)
 

 
(20,210
)
 

Total recorded at fair value
$
169,654

 
$
191,439

 
$
(20,210
)
 
$
(1,575
)

(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.
(3) 
Represents potential earn-out payable by Sterno Products for the acquisition of NII.

 
Fair Value Measurements at December 31, 2015
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Equity method investment - FOX
$
249,747

 
$
249,747

 
$

 
$

Liabilities:

 

 

 

Call option of noncontrolling shareholder
(25
)
 

 

 
(25
)
Put option of noncontrolling shareholders
(50
)
 

 

 
(50
)
Interest rate swaps
(13,483
)
 

 
(13,483
)
 

Total recorded at fair value
$
236,189

 
$
249,747

 
$
(13,483
)
 
$
(75
)
Reconciliations of the change in the carrying value of the Level 3 fair value measurements from January 1, 2016 through March 30, 2016 are as follows (in thousands):

 
2016
Balance at January 1st
$
(75
)
Contingent consideration - acquisition
(1,500
)
Balance at March 31st
$
(1,575
)
Valuation Techniques
Contingent Consideration:
Sterno Products entered into a contingent consideration arrangement associated with the purchase of NII in January 2016. The earnout provision provides for payments up to $1.8 million over a two year period subsequent to acquisition. Earnings before interest, taxes, depreciation and amortization ("EBITDA") is the performance target defined and measured to determine the earnout payment due, if any, after each defined measurement period. The contingent consideration was valued at $1.5 million using probability weighted models.



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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, 2015.

2014 Term Loan

At March 31, 2016, the carrying value of the principal under the Company’s outstanding 2014 Term Loan, including the current portion, was $319.3 million, which approximates fair value because it has a variable interest rate that reflects market changes in interest rates and changes in the Company's net leverage ratio. The estimated fair value of the outstanding 2014 Term Loan is 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 December 31, 2015. There were no assets carried at fair value measurement on a non-recurring basis as of March 31, 2016.

 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements at December 31, 2015
 
Year ended
(in thousands)
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
Technology (1)
$
220

 
$

 
$

 
$
220

 
$
237

Goodwill (1)
$
7,834

 
$

 
$

 
$
7,834

 
$
8,928


(1) Represents the fair value of the respective assets at the Tridien business segment subsequent to the goodwill and long-lived asset impairment charge recognized during 2015.


Note L — 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.
Profit Allocation Interests
The Allocation Interests represent the original equity interest in the Company. The holders of the Allocation Interests ("Holders") are entitled to receive distributions pursuant to a profit allocation formula upon the occurrence of certain events. The distributions of the profit allocation are paid upon the occurrence of the sale of a material amount of capital stock or assets of one of the Company’s businesses ("Sale Event") or, at the option of the Holders, at each five year anniversary date of the acquisition of one of the Company’s businesses ("Holding Event"). The Company records distributions of the profit allocation to the Holders upon occurrence of a Sale Event or Holding Event as distributions declared on Allocation Interests to stockholders’ equity when they are approved by the Company’s board of directors. The sale of FOX shares in March 2016 (refer to "Note F - Equity Method Investment") qualified as a Sale Event under the Company's LLC Agreement. As a result, in April 2016, the Company's board of directors approved and declared a profit allocation payment totaling $8.6 million profit allocation payment that will be paid to Holders during the second quarter of 2016.
Earnings per share
The Company calculates basic and diluted earnings per share 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, 2016 and 2015 reflects the incremental increase during the period in the profit allocation distribution to Holders related to Holding Events.

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Basic and diluted earnings per share for the three months ended March 31, 2016 and 2015 attributable to Holdings is calculated as follows:
 
Three months ended March 31,
 
2016
 
2015
Loss from continuing operations attributable to Holdings
$
(16,023
)
 
$
(29,484
)
Less: Effect of contribution based profit - Holding Event
850

 
618

Loss from continuing operation attributable to Trust shares
$
(16,873
)
 
$
(30,102
)
 
 
 
 
Income from discontinued operations attributable to Holdings
$

 
$
4,582

Less: Effect of contribution based profit

 
180

Income from discontinued operations attributable to Trust shares
$

 
$
4,402

 
 
 
 
Basic and diluted weighted average shares outstanding
54,300

 
54,300

 
 
 
 
Basic and fully diluted income (loss) per share attributable to Holdings
 
 
 
Continuing operations
$
(0.31
)
 
$
(0.55
)
Discontinued operations

 
0.08

 
$
(0.31
)
 
$
(0.47
)


Distributions

On January 28, 2016, the Company paid a distribution of $0.36 per share to holders of record as of January 21, 2016. This distribution was declared on January 7, 2016.
On April 28, 2016, the Company paid a distribution of $0.36 per share to holders of record as of April 21, 2016. This distribution was declared on April 7, 2016.


Note M — Warranties
The Company’s 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, 2016 and the year ended December 31, 2015 is as follows (in thousands):

 
Three months ended March 31, 2016
 
Year ended 
 December 31, 2015
Warranty liability:
 
 
 
Beginning balance
$
2,771

 
$
1,984

Accrual
134

 
1,194

Warranty payments
(72
)
 
(407
)
Ending balance
$
2,833

 
$
2,771




Note N — 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, 2016 and December 31, 2015:


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% Ownership (1)
March 31, 2016
 
% Ownership (1)
December 31, 2015
 
Primary
 
Fully
Diluted
 
Primary
 
Fully
Diluted
Ergobaby
81.0
 
74.2
 
81.0
 
74.2
Liberty
88.6
 
84.7
 
96.2
 
84.6
Manitoba Harvest
76.6
 
65.6
 
76.6
 
65.6
ACI
69.4
 
69.3
 
69.4
 
69.3
Arnold Magnetics
96.7
 
86.9
 
96.7
 
87.3
Clean Earth
97.5
 
86.2
 
97.5
 
86.2
Sterno Products
100.0
 
89.7
 
100.0
 
89.7
Tridien
81.3
 
67.3
 
81.3
 
67.3

(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, 2016
 
December 31, 2015
Ergobaby
18,353

 
17,754

Liberty
1,937

 
2,934

Manitoba Harvest
14,114

 
14,071

ACI
5,237

 
4,295

Arnold Magnetics
2,117

 
2,113

Clean Earth
4,519

 
4,308

Sterno Products
778

 
644

Tridien
776

 
916

Allocation Interests
100

 
100

 
$
47,931

 
$
47,135


Liberty Recapitalization

During the first quarter of 2016, the Company completed a recapitalization at Liberty whereby the Company entered into an amendment to the intercompany loan agreement with Liberty (the “Liberty Loan Agreement”). The Liberty Loan Agreement was amended to (i) provide for term loan borrowings of $38.0 million and revolving credit facility borrowings of $5.0 million to fund cash distributions totaling $35.3 million to its shareholders, including the Company, and (ii) extend the maturity dates of the term loans and revolving credit facility. Liberty’s noncontrolling shareholders received approximately $5.3 million in distributions as a result of the recapitalization. Immediately prior to the recapitalization, management exercised stock options for 75,095 shares of Liberty common shares, resulting in net proceeds from stock options at Liberty of $3.8 million. Liberty recognized $0.3 million in compensation expense related to the accelerated vesting of a portion of management's stock options at the time of exercise. The Company then purchased $1.5 million in Liberty common shares from members of Liberty management, resulting in Liberty's noncontrolling shareholders holding 11.4% of Liberty's outstanding shares subsequent to the recapitalization. The purchase of the Liberty common stock from noncontrolling shareholders and issuance of Liberty common stock related to the exercise of stock options by noncontrolling shareholders were at fair value and resulted in no change in control of Liberty. The difference between the consideration paid for the noncontrolling interest and the adjustment to the carrying amount of the Company's noncontrolling interest in Liberty was recognized in the Company's equity. Subsequent to the purchase of Liberty common shares and the exercise of the options, the Company owns 88.6% of Liberty on a primary basis and 84.7% on a fully diluted basis.

Note O — 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.

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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.
The reconciliation between the Federal Statutory Rate and the effective income tax rate for the three months ended March 31, 2016 and 2015 are as follows:

 
Three months ended March 31,
 
2016
 
2015
United States Federal Statutory Rate
(35.0
)%
 
(35.0
)%
State income taxes (net of Federal benefits)
1.9

 
0.1

Foreign income taxes
7.6

 
(0.1
)
Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders (1)
19.9

 
10.5

Effect of loss on equity method investment (2)
31.7

 
17.0

Impact of subsidiary employee stock options
1.1

 
0.1

Domestic production activities deduction
(2.2
)
 
(0.6
)
Effect of impairment expense

 
9.7

Non-recognition of NOL carryforwards at subsidiaries
2.4

 
0.2

Other
0.7

 
6.7

Effective income tax rate
28.1
 %
 
8.6
 %

(1)
The effective income tax rate for the three months ended March 31, 2016 and 2015 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 P — 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 $3.8 million is recognized in the consolidated balance sheet as a component of other non-current liabilities at March 31, 2016. Net periodic benefit cost consists of the following for the three months ended March 31, 2016 and 2015 (in thousands):

 
Three months ended March 31,
 
2016
 
2015
Service cost
$
109

 
$
162

Interest cost
34

 
47

Expected return on plan assets
5

 
(49
)
Net periodic benefit cost
$
148

 
$
160


During the first quarter of 2016, Arnold recognized an increase in the unfunded pension liability primarily as a result of a decrease in the discount rate used to measure the pension benefit obligation. The discount rate decreased from 1.00% at December 31, 2015 to 0.45% at March 31, 2016, resulting in an increase to the pension benefit obligation at March 31, 2016.

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During the three months ended March 31, 2016, per the terms of the pension agreement, Arnold contributed $0.1 million to the plan. For the remainder of 2016, the expected contribution to the plan will be approximately $0.4 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, 2016 were considered Level 3.

Note Q - 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.  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 foregoing allegations and will continue to vigorously defend against the claims.  In addition, in July 2015, the California District Attorney's Office for the County of Riverside filed a criminal complaint against Tridien/AMF in Superior Court of California, County of Riverside, alleging violations of the California Labor Code and Penal Code in connection with the above described industrial accident.  In March 2016, Tridien/AMF pled no contest to a 6423(a) misdemeanor charge.  As required by the sentence imposed by the court, in April 2016, Tridien made payments totaling $750,000 for fines, penalties, and assessments to the Riverside Superior Court and certain other agencies as directed by the court.  Concurrently, Tridien made a payment of $49,875 to the California Division of Occupational Safety and Health Bureau of Investigations ("CAL OSHA") pursuant to a Stipulated Settlement Agreement (admitting no fault or liability) entered into by and between Tridien and CAL OSHA to end the appeal of seven OSHA citations issued by CAL OSHA related to the aforementioned accident.   Tridien had previously accrued $750,000 for legal fees, costs and potential fines related to foregoing criminal matter.  

In the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that any unfavorable outcomes will have a material adverse effect on the Company's consolidated financial position or results of operations.
Note R - Subsequent Events

Allocation Interests - Profit Allocation Payments
Sale Event
The sale of a portion of the Company's FOX shares in March 2016 qualified as a Sale Event under the Company's LLC Agreement. During the second quarter, the Company's Board of Directors declared a distribution to the Holders of the Allocation Interests of $8.6 million in connection with the Sale Event of FOX. The profit allocation payment will be made during the quarter ended June 30, 2016.
Acquisition
Clean Earth add-on
On April 15, 2016, the Company's Clean Earth subsidiary acquired certain assets of Phoenix Soil, LLC ("Phoenix Soil") and WIC, LLC (together with Phoenix Soil, the "Sellers") for a purchase price of $13.3 million. Phoenix Soil is based in Plainville, CT and provides environmental services for nonhazardous contaminated soil materials with a primary focus on soil. Phoenix Soil recently completed its transition to a new 58,000 square foot thermal desorption facility owned by WIC, LLC. The acquisition will increase Clean Earth's soil treatment capabilities and expand its geographic footprint into New England. Clean Earth financed the acquisition

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and payment of related transaction costs through the issuance of an additional $13.7 million in inter-company loans with the Company. The Company used cash on hand to fund the purchase price of Phoenix Soil.

Recapitalization of Advanced Circuits
During the second quarter of 2016, the Company completed a recapitalization at Advanced Circuits whereby the Company entered into an amendment to the inter-company loan agreement with Advanced Circuits (the "ACI Loan Agreement"). The ACI loan agreement was amended to provide for additional term loan borrowings of $61.0 million to fund a cash distributions to shareholders totaling $60.1 million. Minority interest shareholders of Advanced Circuits, including certain members of management at Advanced Circuits, received total distribution proceeds of $18.4 million. The Company used cash on hand to fund the distribution to minority shareholders.






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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, 2015 and Item 1A. Risk Factors in Part II of this quarterly report.
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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Recent Events
Acquisition of Northern International Inc.
On January 22, 2016, Sterno Products, a wholly owned subsidiary of the company, acquired all of the outstanding stock of Northern International, Inc. (NII), for a purchase price of approximately $35.8 million (C$50.6 million). The purchase price includes an earn-out payable over two years of up to a maximum amount of $1.8 million (C$2.5 million), and is subject to working capital adjustments. Headquartered in Coquitlam, British Columbia, Canada, NII sells flameless candles and outdoor lighting products through the retail segment. Sterno Products financed the acquisition and payment of the related transaction costs through the issuance of an additional $37.0 million in inter-company loans with the Company.
Partial Divestiture of FOX shares
During the first quarter of 2016, our equity method investment, FOX, closed on a secondary public offering of 2,500,000 shares of FOX common shares held by the Company. Concurrently with the closing of the offering, FOX repurchased 500,000 shares of FOX common stock held by the Company. As a result of the sale of shares through the offering and the repurchase of shares by FOX, we sold a total of 3,000,000 shares of FOX common stock, with total net proceeds of approximately $47.7 million. Upon completion of the offering and repurchase of shares by FOX, our ownership interest in FOX was reduced from approximately 41% to 33%. The sale of the portion of our FOX shares in March 2016 qualified as a Sale Event under the Company's LLC Agreement. During the second quarter, our Board of Directors declared a distribution to the Holders of the Allocation Interests of $8.6 million in connection with the Sale Event of FOX. The profit allocation payment will be made during the quarter ended June 30, 2016.

2016 Outlook

Middle market deal flow in the first quarter was down compared to both the first and fourth quarter of 2015, as purchase price multiples continue to increase.  High valuation levels continue to be driven by the availability of debt capital with favorable terms and financial and strategic buyers seeking to deploy available equity capital.

We remain focused on marketing the Company’s attractive ownership and management attributes to potential sellers of middle market businesses and intermediaries.  In addition, we continue to pursue opportunities for add-on acquisitions by certain of our existing subsidiary companies, which can be particularly attractive from a strategic perspective. We completed an add-on acquisition at our Sterno Products subsidiary in the first quarter of 2016, and additional add-on acquisition at our Clean Earth subsidiary subsequent to the end of the first quarter.

Discontinued Operations

The results of operations for CamelBak and American Furniture for the three months ended March 31, 2015 are presented as discontinued operations in our consolidated financial statements as a result of the sale of these operating segments in August and October 2015, respectively. See Note D - "Discontinued Operations", to our consolidated financial statements for further discussion of the operating results of our discontinued businesses.

Non-GAAP Financial Measures

U.S. GAAP refers to generally accepted accounting principles in the United States. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented. Our Manitoba Harvest acquisition uses the Canadian Dollar as its functional currency. We will periodically refer to net sales and net sales growth rates in the Manitoba Harvest management's discussion and analysis on a "constant currency" basis so that the business results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of Manitoba Harvest's business performance. "Constant currency" net sales results are calculated by translating current period net sales in local currency using the prior year’s currency conversion rate. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. "Constant currency" measured net sales is not a measure of net sales presented in accordance with U.S. GAAP.

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Table of Contents



Results of Operations
We were formed on November 18, 2005 and acquired our existing businesses (segments) at March 31, 2016 as follows:
 
 
 
 
 
 
 
 
May 16, 2006
 
August 1, 2006
  
March 31, 2010
  
September 16, 2010
 
 
 
 
 
 
 
Advanced Circuits
 
Tridien
  
Liberty Safe
  
Ergobaby
 
 
 
 
 
 
 
March 5, 2012
  
August 26, 2014
 
October 10, 2014
 
July 10, 2015
 
 
 
 
 
 
 
Arnold Magnetics
  
Clean Earth
 
Sterno Products
 
Manitoba Harvest

In the following results of operations, we provide (i) our actual consolidated results of operations for the three months ended March 31, 2016 and 2015, 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, 2016 and 2015.

Consolidated Results of Operations – Compass Diversified Holdings and Compass Group Diversified Holdings LLC
 
 
Consolidated Results of Operations
 
Three Months Ended 
 March 31, 2016
 
Three Months Ended 
 March 31, 2015
(in thousands)
 


Net sales
$
208,047

 
$
179,425

Cost of sales
141,786

 
126,855

Gross profit
66,261

 
52,570

Selling, general and administrative expense
44,473

 
33,026

Fees to manager
6,458