Document
 
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, 2018
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)
 
301 Riverside Avenue
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, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
 
Smaller Reporting Company
 
¨
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

As of May 1, 2018, there were 59,900,000 Trust common shares of Compass Diversified Holdings outstanding.
 



COMPASS DIVERSIFIED HOLDINGS
QUARTERLY REPORT ON FORM 10-Q
For the period ended March 31, 2018
TABLE OF CONTENTS
 
 
 
 
Page
Number
 
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
ITEM 3.
 
 
 
 
 
 
 
ITEM 4.
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 1A.
 
 
 
 
 
 
 
ITEM 6.
 
 
 
 
 
 
 
 
 


2


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 "Trust Agreement" refer to the Second Amended and Restated Trust Agreement of the Trust dated as of December 6, 2016;
the "2014 Credit Facility" refer to the credit agreement, as amended 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 a Revolving Credit Facility and a Term Loan;
the "2018 Credit Facility" refer to the amended and restated credit agreement entered into on April 18, 2018 among the Company, the Lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto.
the "2014 Revolving Credit Facility" refer to the $550 million Revolving Credit Facility provided by the 2014 Credit Facility that matures in June 2019;
the "2014 Term Loan" refer to the $325 million Term Loan Facility, provided by the 2014 Credit Facility that matures in June 2021;
the "2016 Incremental Term Loan" refer to the $250 million Tranche B Term Facility provided by the 2014 Credit Facility (together with the 2014 Term Loan, the "Term Loans");
the "LLC Agreement" refer to the fifth amended and restated operating agreement of the Company dated as of December 6, 2016; and
"we," "us" and "our" refer to the Trust, the Company and the businesses together.


3


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," "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.


4


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2018
 
December 31,
2017
(in thousands)
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
46,325

 
$
39,885

Accounts receivable, net
256,807

 
215,108

Inventories
294,736

 
246,928

Prepaid expenses and other current assets
34,686

 
24,897

Total current assets
632,554

 
526,818

Property, plant and equipment, net
200,230

 
173,081

Goodwill
728,276

 
531,689

Intangible assets, net
687,622

 
580,517

Other non-current assets
9,064

 
8,198

Total assets
$
2,257,746

 
$
1,820,303

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
85,295

 
$
84,538

Accrued expenses
108,889

 
106,873

Due to related party
10,299

 
7,796

Current portion, long-term debt
5,685

 
5,685

Other current liabilities
5,873

 
7,301

Total current liabilities
216,041

 
212,193

Deferred income taxes
76,538

 
81,049

Long-term debt
932,299

 
584,347

Other non-current liabilities
39,577

 
16,715

Total liabilities
1,264,455

 
894,304

Stockholders’ equity
 
 
 
Trust preferred shares, 50,000 authorized; 8,000 shares issued and outstanding at March 31, 2018 and 4,000 shares issued and outstanding at December 31, 2017
 
 
 
Series A preferred shares, no par value; 4,000 shares issued and outstanding at March 31, 2018 and December 31, 2017
96,417

 
96,417

Series B preferred shares, no par value; 4,000 shares issued and outstanding at March 31, 2018
96,713

 

Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding at March 31, 2018 and December 31, 2017
924,680

 
924,680

Accumulated other comprehensive loss
(3,155
)
 
(2,573
)
Accumulated deficit
(171,034
)
 
(145,316
)
Total stockholders’ equity attributable to Holdings
943,621

 
873,208

Noncontrolling interest
49,670

 
52,791

Total stockholders’ equity
993,291

 
925,999

Total liabilities and stockholders’ equity
$
2,257,746

 
$
1,820,303

See notes to condensed consolidated financial statements.

5


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended March 31,
(in thousands, except per share data)
2018
 
2017
Net revenues
$
360,693

 
$
289,992

Cost of revenues
234,582

 
195,659

Gross profit
126,111

 
94,333

Operating expenses:
 
 
 
Selling, general and administrative expense
97,865

 
78,723

Management fees
10,849

 
7,848

Amortization expense
12,699

 
10,310

Impairment expense

 
8,864

Operating income (loss)
4,698

 
(11,412
)
Other income (expense):
 
 
 
Interest expense, net
(6,186
)
 
(7,136
)
Amortization of debt issuance costs
(1,098
)
 
(933
)
Loss on investment in FOX

 
(5,620
)
Other income (expense), net
(1,381
)
 
(22
)
Loss from continuing operations before income taxes
(3,967
)
 
(25,123
)
Benefit for income taxes
(2,346
)
 
(3,648
)
Loss from continuing operations
(1,621
)
 
(21,475
)
Gain on sale of discontinued operations, net of income tax

 
340

Net loss
(1,621
)
 
(21,135
)
Less: Net income attributable to noncontrolling interest
720

 
470

Net loss attributable to Holdings
$
(2,341
)
 
$
(21,605
)
Less: Distributions paid - Allocation Interests

 
13,354

Less: Distributions paid - Preferred Shares
1,813

 

Net income (loss) attributable to common shares of Holdings
$
(4,154
)
 
$
(34,959
)
 
 
 
 
Amounts attributable to common shares of Holdings
 
 
 
Loss from continuing operations
$
(4,154
)
 
$
(35,299
)
Gain on sale of discontinued operations, net of income tax

 
340

Net loss attributable to Holdings
$
(4,154
)
 
$
(34,959
)
Basic and fully diluted income (loss) per common share attributable to Holdings (refer to Note L)

 


Continuing operations
$
(0.09
)
 
$
(0.61
)
Discontinued operations

 
0.01

 
$
(0.09
)
 
$
(0.60
)
Weighted average number of shares of common shares outstanding – basic and fully diluted
59,900

 
59,900

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

 
$
0.36


See notes to condensed consolidated financial statements.

6


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three months ended March 31,
(in thousands)
2018
 
2017
 
 
 
 
Net loss
$
(1,621
)
 
$
(21,135
)
Other comprehensive income (loss)
 
 
 
Foreign currency translation adjustments
(1,023
)
 
1,031

Pension benefit liability, net
441

 
56

Other comprehensive income (loss)
(582
)
 
1,087

Total comprehensive loss, net of tax
(2,203
)
 
(20,048
)
Less: Net income attributable to noncontrolling interests
720

 
470

Less: Other comprehensive income attributable to noncontrolling interests
354

 
185

Total comprehensive loss attributable to Holdings, net of tax
$
(3,277
)
 
$
(20,703
)
See notes to condensed consolidated financial statements.


7


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)

(in thousands)
Trust Preferred Shares
 
Trust Common Shares
 
Accumulated Deficit
 
Accumulated Other
Comprehensive
Loss
 
Stockholders' Equity Attributable
to Holdings
 
Non-
Controlling
Interest
 
Total
Stockholders’
Equity
 
Series A
 
Series B
 
 
 
 
 
 
Balance — January 1, 2018
$
96,417

 

 
$
924,680

 
$
(145,316
)
 
$
(2,573
)
 
$
873,208

 
$
52,791

 
$
925,999

Net income (loss)

 

 

 
(2,341
)
 

 
(2,341
)
 
720

 
(1,621
)
Total comprehensive income, net

 

 

 

 
(582
)
 
(582
)
 

 
(582
)
Issuance of Trust preferred shares, net of offering costs

 
96,713

 

 

 

 
96,713

 

 
96,713

Option activity attributable to noncontrolling shareholders

 

 

 

 

 

 
2,551

 
2,551

Effect of subsidiary stock option exercise

 

 

 

 

 

 
(6,392
)
 
(6,392
)
Distributions paid - Trust Common Shares

 

 

 
(21,564
)
 

 
(21,564
)
 

 
(21,564
)
Distributions paid - Trust Preferred Shares

 

 

 
(1,813
)
 

 
(1,813
)
 

 
(1,813
)
Balance — March 31, 2018
$
96,417

 
$
96,713

 
$
924,680

 
$
(171,034
)
 
$
(3,155
)
 
$
943,621

 
$
49,670

 
$
993,291

See notes to condensed consolidated financial statements.


8


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
Three months ended March 31,
(in thousands)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(1,621
)
 
$
(21,135
)
Gain on sale of discontinued operations, net

 
340

Net loss from continuing operations
(1,621
)
 
(21,475
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 

Depreciation expense
9,590

 
8,046

Amortization expense
13,343

 
23,349

Impairment expense

 
8,864

Amortization of debt issuance costs and original issue discount
1,353

 
1,199

Unrealized gain on interest rate swap
(2,901
)
 
(229
)
Noncontrolling stockholder stock based compensation
2,551

 
1,452

Loss on investment in FOX

 
5,620

Provision for loss on receivables
328

 
3,318

Deferred taxes
(4,311
)
 
(7,634
)
Other
(177
)
 
318

Changes in operating assets and liabilities, net of acquisition:

 

(Increase) decrease in accounts receivable
(4,455
)
 
5,710

(Increase) in inventories
(7,164
)
 
(8,076
)
(Increase) in prepaid expenses and other current assets
(4,839
)
 
(967
)
Increase (decrease) in accounts payable and accrued expenses
4,946

 
(20,909
)
Cash provided by (used in) operating activities
6,643

 
(1,414
)
Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired
(402,770
)
 
(6,721
)
Purchases of property and equipment
(12,214
)
 
(8,693
)
Net proceeds from sale of equity investment

 
136,147

Payment of interest rate swap
(706
)
 
(1,089
)
Proceeds from sale of business

 
340

Other investing activities
62

 
31

Cash (used in) provided by investing activities
(415,628
)
 
120,015


9


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three months ended March 31,
(in thousands)
2018
 
2017
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of Trust preferred shares, net
96,713

 

Borrowings under credit facility
465,500

 
51,500

Repayments under credit facility
(118,421
)
 
(57,321
)
Distributions paid - common shares
(21,564
)
 
(21,564
)
Distributions paid - preferred shares
(1,813
)
 

Net proceeds provided by noncontrolling shareholders

 
40

Distributions paid to allocation interest holders (refer to Note L)

 
(13,354
)
Repurchase of subsidiary stock
(6,392
)
 

Debt issuance costs
(138
)
 
(1,414
)
Other
(467
)
 
(783
)
Net cash provided by (used in) financing activities
413,418

 
(42,896
)
Foreign currency impact on cash
2,007

 
(196
)
Net increase in cash and cash equivalents
6,440

 
75,509

Cash and cash equivalents — beginning of period
39,885

 
39,772

Cash and cash equivalents — end of period
$
46,325

 
$
115,281













See notes to condensed consolidated financial statements.

10


COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2018

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 second amended and restated Trust Agreement, dated as of December 6, 2016 (the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s fifth amended and restated operating agreement, dated as of December 6, 2016 (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 ten businesses, or reportable operating segments, at March 31, 2018. The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), Crosman Corp. ("Crosman"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Fresh Hemp Foods Ltd. ("Manitoba Harvest"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold" or "Arnold Magnetics"), Clean Earth Holdings, Inc. ("Clean Earth"), FFI Compass Inc. ("Foam Fabricators" or "Foam") and Sterno Products, LLC ("Sterno"). Refer to Note E - "Operating Segment Data" for further discussion of the operating segments. Compass Group Management LLC, a Delaware limited liability company ("CGM" or the "Manager"), manages the day to day operations of the Company and oversees the management and operations of our businesses pursuant to a management services agreement ("MSA").
Note B - Presentation and Principles of Consolidation
The condensed consolidated financial statements for the three month periods ended March 31, 2018 and March 31, 2017, 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" or "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, 2017.
Seasonality
Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Crosman typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday seasons. Earnings from Clean Earth are typically lower during the winter months due to the limits on outdoor construction and development activity because of the colder weather in the Northeastern United States. Sterno typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer and holiday seasons, respectively.
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.
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB issued a comprehensive new revenue recognition standard. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In addition, the standard

11


requires disclosure of the amount, timing and uncertainty of cash flows arising from contracts with customers. The new standard, and all related amendments, was effective for the Company beginning January 1, 2018 and was adopted using the modified retrospective method for all contracts not completed as of the date of adoption.
The reported results for reporting periods after January 1, 2018 are presented under the new revenue recognition guidance while prior period amounts were prepared under the previous revenue guidance which is also referred to herein as the "previous guidance". The Company determined that the impact from the new standard is immaterial to our revenue recognition model since the vast majority of our recognition is based on point in time control. Accordingly, the Company has not made any adjustments to opening retained earnings.
The adoption of the new revenue guidance represents a change in accounting principle that will more closely align revenue recognition with the transfer of control of the Company's goods and services and will provide financial statement readers with enhanced disclosures. In accordance with the new revenue guidance, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities. The impacts from the adoption of the new revenue guidance primarily relates to the timing of revenue recognition for variable consideration received, consideration payable to a customer and recording right of return assets. Although these differences have been identified, the total impact to each reportable segment will not be material to the consolidated financial statements. In addition the accounting for the estimate of variable consideration in our contracts is not materially different compared to our current practice. The Company has established monitoring controls to identify new sales arrangements and changes in our business environment that could impact our current accounting assessment.
Performance Obligations - For 5.11, Crosman, Ergobaby, Liberty Safe, Manitoba Harvest, Sterno, Arnold and Foam Fabricators, revenues are recognized when control of the promised goods or service is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Each product or service represents a separate performance obligation. For contracts that contain multiple products, the Company will evaluate those products to determine if they represent performance obligations based on whether those goods or services are distinct (by themselves or as part of a bundle of products). Further, the Company evaluated if the products were separately identifiable from other products in the contract. The Company concluded that the products are distinct and separately identifiable from other products in the contracts. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. The standalone selling price is directly observable as it is the price at which the Company sells its products separately to the customer. As the Company does not meet any of the requirements for over time recognition for any of its products at these operating segments, it will recognize revenue based on the point in time criteria based on the definition of control, which is generally upon shipment terms for products and when the service is performed for services. Transfer of control for Advanced Circuit’s products qualify for over time revenue recognition because the products represent assets with no alternative use and the contracts include an enforceable right to payment for work completed to date. Advanced Circuits has selected the cost to cost input method of measuring progress to recognize revenue over time, based on the status of the work performed. The cost to cost method is representative of the value provided to the customer as it represents the Company’s performance completed to date. However, due to the short-term nature of Advanced Circuit's production cycle, there is an immaterial difference between revenue recognition under the previous guidance and the new revenue recognition guidance. Clean Earth’s arrangements qualify for over time revenue recognition as the customer simultaneously receives and consumes the benefits provided by the Company’s performance. As the Company performs the service, another party would not need to re-perform any of the work completed by the Company to date. Clean Earth has elected to apply the as-invoiced practical expedient to record revenue as the services are provided, given the nature of the services provided and the frequency of billing under the customer contracts.
Shipping and handling costs - Costs associated with shipment of products to a customer are accounted for as a fulfillment cost and are included in cost of revenues. The Company has elected to apply the practical expedient for shipping costs under the new revenue guidance and will account for shipping and handling activities performed after control of a good has been transferred to the customer as a fulfillment cost and not a performance obligation. Therefore, both revenue and costs of shipping and handling will be recorded at the same time. As a result, any consideration (including freight and landing costs) related to these activities will be included as a component of the overall transaction consideration and allocated to the performance obligations of the contract.
Warranty - For product sales, the Company provides standard assurance-type warranties as the Company only warrants its products against defects in materials and workmanship (i.e., manufacturing flaws). Although the warranties are not required by law, the tasks performed over the warranty period are only to remediate instances when products do not meet the promised specifications. Customers do not have the option to purchase warranties separately. The

12


Company’s warranty periods generally range from 90 days to three years depending on the nature of the product and are consistent with industry standards. The periods are reasonable to assure that products conform to specifications. The Company does not have a history of performing activities outside the scope of the standard warranty.
Significant Judgments - The Company’s contracts with customers often include promises to transfer multiple products to a customer. Determining whether the promises are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Once the performance obligations are identified, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The corresponding revenues are recognized as the related performance obligations are satisfied as discussed above. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately and therefore observable.
Variable Consideration - Upon adoption of the new revenue guidance, the Company’s policy around estimating variable consideration related to sales incentives (early pay discounts, rights of return, rebates, chargebacks, and other discounts) included in certain customer contracts remained consistent with previous guidance. These incentives are recorded as a reduction in the transaction price. Under the new guidance, variable consideration is estimated and included in total consideration at contract inception based on either the expected value method or the most likely outcome method. The method was applied consistently among each type of variable consideration and the Company applies the expected value method to estimate variable consideration. These estimates are based on historical experience, anticipated performance and the Company’s best judgment at the time and as a result, reflect applicable constraints. The Company includes in the transaction price an amount of variable consideration estimated in accordance with the new guidance only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
In certain of the Company’s arrangements related to product sales, a right of return exists, which is included in the transaction price. For these right of return arrangements, an asset (and corresponding adjustment to cost of sale) for its right to recover the products from the customers is recorded. The asset recognized will be the carrying amount of the product (for example, inventory) less any expected costs to recover the products (including potential decreases in the value to the Company of the returned product). Additionally, the Company records a refund liability for the amount of consideration that it does not expect to be entitled. The amounts associated with right of return arrangements are not material to the Company's statement of position or operating results.
Sales and Other Similar Taxes - The Company notes that under its contracts with customers, the customer is responsible for all sales and other similar taxes, which the Company will invoice the customer for if they are applicable. The new revenue guidance allows entities to make an accounting policy election to exclude sales taxes and other similar taxes from the measurement of the transaction price. The scope of this accounting policy election is the same as the scope of the policy election in the previous guidance. As the Company presents taxes on a net basis under the previous guidance there will be no change to the current presentation (net) as a result.
Practical Expedients - The Company has elected to make the following accounting policy elections through the adoption of the following practical expedients:
Right to Invoice (Clean Earth) - The Company will record the consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date (for example, in a service contract where 25% of the service has been performed, the Company would recognized 25% of the revenue), the entity may recognize revenue in the amount to which the entity has a right to invoice.
Sales and Other Similar Taxes - The Company will exclude sales taxes and similar taxes from the measurement of transaction price and will ensure that it complies with the disclosure requirements of applicable accounting guidance.
Cost to Obtain a Contract - The Company will recognize the incremental costs of obtaining a contract as an expense when incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less.
Promised Goods or Services that are Immaterial in the Context of a Contract - The Company has elected to assess promised goods or services as performance obligations that are deemed to be immaterial in the context of a contract. As such, the Company will not aggregate and assess immaterial items at the entity level. That is, when determining whether a good or service is immaterial in the context of a contract, the assessment will be made based on the application of the new revenue guidance at the contract level.

13


Disaggregated Revenue - Revenue Streams & Timing of Revenue Recognition - The Company disaggregates revenue by strategic business unit and by geography for each strategic business unit which are categories that depict how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors. This disaggregation also represents how the Company evaluates its financial performance, as well as how the Company communicates its financial performance to the investors and other users of its financial statements. Each strategic business unit represents the Company’s reportable segments and offers different products and services. Refer to Note E - Operating Segment Data for disaggregation of revenue by reportable segment geography.
Improving the Presentation of Net Periodic Pension Costs
In March 2017, the FASB issued new guidance that will require employers that sponsor defined benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period, and requires the other components of net periodic pension cost to be presented in the income statement separately from the service component cost and outside a subtotal of income from operations. The new guidance shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company's Arnold business segment has a defined benefit plan covering substantially all of Arnold's employees at its Switzerland location. The adoption of this guidance on January 1, 2018 did not have a material impact upon our financial condition or results of operations.
Changes to the Definition of a Business
In January 2017, the FASB issued new guidance that changes the definition of a business to assist entities in evaluating when a set of transferred assets and activities constitutes a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the set of transferred asset and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognition guidance. The new standard was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The adoption of this guidance did not have a material impact upon our financial condition or results of operations.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued an accounting standard update which updates the guidance as to how certain cash receipts and cash payments should be presented and classified within the statement of cash flows. The amended guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period. The adoption of this guidance on January 1, 2018 did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Leases
In February 2016, the FASB issued an accounting standard update related to the accounting for leases which will require an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The standard update offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires modified retrospective adoption, with early adoption permitted. Accordingly, this standard is effective for the Company on January 1, 2019. The Company is currently assessing the impact of the new standard on our consolidated financial statements.
Note C — Acquisitions
Acquisition of Foam Fabricators
On February 15, 2018, pursuant to a stock purchase agreement entered into on January 18, 2018, the Company, through a wholly owned subsidiary, FFI Compass, Inc. (“Buyer”), entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Warren F. Florkiewicz (“Seller”) pursuant to which Buyer acquired all of the issued and outstanding capital stock of Foam Fabricators, Inc., a Delaware corporation (“Foam Fabricators”). Foam Fabricators is a leading designer and manufacturer of custom molded protective foam solutions and original equipment

14


manufacturer ("OEM") components made from expanded polymers such as expanded polystyrene (EPS) and expanded polypropylene (EPP). Founded in 1957 and headquartered in Scottsdale, Arizona, it operates 13 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products.
The Company made loans to, and purchased a 100% controlling interest in Foam Fabricators. The purchase price, net of transaction costs, was approximately $250.3 million, subject to any working capital adjustment. The Company funded the acquisition through a draw on the 2014 Revolving Credit Facility. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership. CGM will receive integration service fees of $2.25 million payable over a twelve month period as services are rendered.
The results of operations of Foam Fabricators have been included in the consolidated results of operations since the date of acquisition. Foam Fabricator's results of operations are reported as a separate operating segment. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date.
 
 
Preliminary Purchase Allocation
(in thousands)
 
As of 2/15/18
Assets:
 
 
Cash
 
$
6,282

Accounts receivable (1)
 
19,058

Inventory (2)
 
13,218

Property, plant and equipment (3)
 
23,485

Intangible assets
 
121,392

Goodwill
 
71,489

Other current and noncurrent assets
 
2,945

Total assets
 
257,869

 
 
 
Liabilities:
 
 
Current liabilities
 
5,968

Other liabilities
 
115,033

Total liabilities
 
121,001

 
 
 
Net assets acquired
 
136,868

Intercompany loans to business
 
115,033

 
 
$
251,901

Acquisition Consideration
 
 
Purchase price
 
$
247,500

Cash acquired
 
3,646

Working capital adjustment
 
755

Total purchase consideration
 
$
251,901

Less: Transaction costs
 
1,552

Purchase price, net
 
$
250,349


(1) Includes $19.4 million of gross contractual accounts receivable of which $0.3 million is not expected to be collected. The fair value of accounts receivable approximated book value acquired.
(2) Includes $0.7 million in inventory basis step-up, which was charged to cost of goods sold in the first quarter of 2018.
(3) Includes $15.6 million of property, plant and equipment basis step-up.
The Company incurred $1.6 million of transaction costs in conjunction with the Foam Fabricators acquisition, which is included in selling, general and administrative expense in the consolidated results of operations in the quarter ended

15


March 31, 2018. The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $71.5 million reflects the strategic fit of Foam Fabricators in the Company's niche industrial business and is expected to be deductible for income tax purposes. The purchase accounting for Foam Fabricators is preliminary and is expected to be finalized during the second quarter of 2018.
The intangible assets recorded on a preliminary basis related to the Foam Fabricators acquisition are as follows (in thousands):
Intangible assets
 
Amount
 
Estimated Useful Life
Tradename
 
$
4,215

 
10 years
Customer Relationships
 
117,177

 
15 years
 
 
$
121,392

 
 
The tradename was valued at $4.2 million using a relief from royalty methodology, in which an asset is valuable to the extent that the ownership of the asset relieves the company from the obligation of paying royalties for the benefits generated by the asset. The customer relationships intangible asset was valued at $117.2 million using an excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The customer relationships intangible asset was derived using a risk adjusted discount rate.
Acquisition of Rimports
On February 26, 2018, the Company's Sterno subsidiary acquired all of the issued and outstanding capital stock of Rimports, Inc., a Utah corporation (“Rimports”), pursuant to a Stock Purchase Agreement, dated January 23, 2018, by and among Sterno and Jeffery W. Palmer, individually and in his capacity as Seller Representative, the Jeffery Wayne Palmer Dynasty Trust dated December 26, 2011, the Angela Marie Palmer Irrevocable Trust dated December 26, 2011, the Angela Marie Palmer Charitable Lead Trust, the Fidelity Investments Charitable Gift Fund, the TAK Irrevocable Trust dated June 7, 2012, and the SAK Irrevocable Trust dated June 7, 2012. Headquartered in Provo, UT, Rimports is a manufacturer and distributor of branded and private label scented wickless candle products used for home décor and fragrance. Rimports offers an extensive line of wax warmers, scented wax cubes, essential oils and diffusers, and other home fragrance systems, through the mass retailer channel.
Sterno purchased a 100% controlling interest in Rimports. The purchase price, net of transaction costs, was approximately $149.8 million, subject to any working capital adjustment. The purchase price of Rimports includes a potential earn-out of up to $25 million contingent on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019. The fair value of the contingent consideration related to the earn-out has not yet been determined therefore the contingent consideration is reflected in the condensed consolidated balance sheet at the full settlement amount. Sterno funded the acquisition through their intercompany credit facility with the Company. The transaction was accounted for as a business combination.
The results of operations of Rimports have been included in the consolidated results of operations since the date of acquisition. Rimport's results of operations are included in the Sterno operating segment. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date. A full and detailed valuation of the assets and liabilities of Rimports is in process and the information related to the purchase price allocation remains pending at this time. The purchase price allocation for Rimports is expected to result in a step up in the fair value of the inventory and property, plant and equipment, as well as a portion of the purchase price allocated to intangible assets. Goodwill will be calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill resulting from the purchase price allocation is expected to be deductible

16


for income tax purposes.

 
 
Preliminary Purchase Allocation
(in thousands)
 
As of 2/26/18
Assets:
 
 
Cash
 
$
10,025

Accounts receivable (1)
 
21,431

Inventory
 
29,691

Property, plant and equipment
 
1,493

Intangible assets
 

Goodwill
 
121,364

Other current and noncurrent assets
 
446

Total assets
 
184,450

 
 
 
Liabilities
 
 
Current liabilities
 
9,034

Other liabilities (2)
 
25,000

Total liabilities
 
34,034

 
 
 
Net assets acquired
 
$
150,416


Acquisition Consideration
 
 
Purchase price
 
$
145,000

Cash acquired
 
9,500

Working capital adjustment
 
(4,084
)
Total purchase consideration
 
150,416

Less: Transaction costs
 
632

Purchase price, net
 
$
149,784


(1) Includes $23.8 million of gross contractual accounts receivable of which $2.4 million is not expected to be collected. The fair value of accounts receivable approximated book value acquired.
(2) The purchase price of Rimports includes a potential earn-out of up to $25 million contingent on the attainment of certain future performance criteria of Rimports for the twelve-month period from May 1, 2017 to April 30, 2018 and the fourteen month period from March 1, 2018 to April 30, 2019.

Sterno incurred $0.6 million of transaction costs in conjunction with the acquisition of Rimports, which was included in selling, general and administrative expense in the consolidated results of operations in the quarter ended March 31, 2018.

Acquisition of Crosman
On June 2, 2017, CBCP Acquisition Corp. (the "Buyer"), a wholly owned subsidiary of the Company, entered into an equity purchase agreement pursuant to which it acquired all of the outstanding equity interests of Bullseye Acquisition Corporation, the indirect owner of the equity interests of Crosman Corp. ("Crosman"). Crosman is a designer, manufacturer and marketer of airguns, archery products, laser aiming devices and related accessories. Headquartered in Bloomfield, New York, Crosman serves over 425 customers worldwide, including mass merchants, sporting goods retailers, online channels and distributors serving smaller specialty stores and international markets. Its diversified product portfolio includes the widely known Crosman, Benjamin and CenterPoint brands.
The Company made loans to, and purchased a 98.9% controlling interest in, Crosman. The purchase price, including proceeds from noncontrolling interests and net of transaction costs, was approximately $150.4 million. Crosman

17


management invested in the transaction along with the Company, representing approximately 1.1% of the initial noncontrolling interest on a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and will continue to provide integration services during the first year of the Company's ownership of Crosman. CGM will receive integration service fees of $1.5 million payable quarterly over a twelve month period as services are rendered beginning in the quarter ended September 30, 2017. The Company incurred $1.5 million of transaction costs in conjunction with the Crosman acquisition, which was included in selling, general and administrative expense in the consolidated results of operations in the second quarter of 2017.

The results of operations of Crosman have been included in the consolidated results of operations since the date of acquisition. Crosman's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the recording of assets acquired and liabilities assumed as of the acquisition date.

 
 
Preliminary Purchase Allocation
 
Measurement Period Adjustments
 
Final Purchase Allocation
(in thousands)
 
As of 6/2/2017
 
 
December 31, 2017
Assets:
 
 
 
 
 
 
Cash
 
$
429

 
$
781

 
$
1,210

Accounts receivable (1)
 
16,751

 

 
16,751

Inventory
 
25,598

 
3,275

 
28,873

Property, plant and equipment
 
10,963

 
4,051

 
15,014

Intangible assets
 

 
84,594

 
84,594

Goodwill
 
139,434

 
(90,675
)
 
48,759

Other current and noncurrent assets
 
2,348

 

 
2,348

Total assets
 
$
195,523

 
$
2,026

 
$
197,549

 
 
 
 
 
 
 
Liabilities and noncontrolling interest:
 
 
 
 
 
 
Current liabilities
 
$
15,502

 
$
781

 
$
16,283

Other liabilities
 
91,268

 
354

 
91,622

Deferred tax liabilities
 
27,286

 
1,229

 
28,515

Noncontrolling interest
 
694

 

 
694

Total liabilities and noncontrolling interest
 
$
134,750

 
$
2,364

 
$
137,114

 
 
 
 
 
 
 
Net assets acquired
 
$
60,773

 
$
(338
)
 
$
60,435

Noncontrolling interest
 
694

 

 
694

Intercompany loans to business
 
90,742

 

 
90,742

 
 
$
152,209

 
$
(338
)
 
$
151,871

Acquisition Consideration
 
 
 
 
 
 
Purchase price
 
$
151,800

 
$

 
$
151,800

Cash acquired
 
1,417

 
(207
)
 
1,210

Working capital adjustment
 
(1,008
)
 
(131
)
 
(1,139
)
Total purchase consideration
 
152,209

 
(338
)
 
151,871

Less: Transaction costs
 
1,397

 
76

 
1,473

Purchase price, net
 
$
150,812

 
$
(414
)
 
$
150,398

(1) Includes $18.0 million of gross contractual accounts receivable of which $1.2 million was not expected to be collected. The fair value of accounts receivable approximated book value acquired.


18


The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including income, cost and market approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $48.8 million reflects the strategic fit of Crosman in the Company's branded consumer business and is not expected to be deductible for income tax purposes. The purchase accounting for Crosman was finalized during the fourth quarter of 2017.

The intangible assets recorded related to the Crosman acquisition are as follows (in thousands):
Intangible Assets
 
Amount
 
Estimated Useful Life
Tradename
 
$
53,463

 
20 years
Customer relationships
 
28,718

 
15 years
Technology
 
2,413

 
15 years
 
 
$
84,594

 
 

The tradename was valued at $53.5 million using a multi-period excess earnings methodology. The customer relationships intangible asset was valued at $28.7 million using the distributor method, a variation of the multi-period excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The technology was valued at $2.4 million using a relief from royalty method.
Unaudited pro forma information
The following unaudited pro forma data for the three months ended March 31, 2018 and March 31, 2017 gives effect to the acquisition of Crosman, Foam Fabricators and Sterno's acquisition of Rimports, as described above, as if the acquisitions had been completed as of January 1, 2017. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period. The preliminary purchase price for Rimports has not yet been completed and the pro forma data does not include the expected effect of intangible amortization and depreciation of the step-up in basis of property, plant and equipment.
 
 
Three months ended March 31,
(in thousands)
 
2018
 
2017
Net sales
 
$
400,521

 
$
375,499

Gross profit
 
136,457

 
118,870

Operating income (loss)
 
8,423

 
(2,056
)
Net loss
 
(3,240
)
 
(8,701
)
Net loss attributable to Holdings
 
(3,960
)
 
(9,171
)
Basic and fully diluted net loss per share attributable to Holdings
 
$
(0.12
)
 
$
(0.40
)

Note D — Property, Plant and Equipment and Inventory
Property, plant and equipment
Property, plant and equipment is comprised of the following at March 31, 2018 and December 31, 2017 (in thousands):

19


 
March 31, 2018
 
December 31, 2017
Machinery and equipment
$
194,651

 
$
178,187

Furniture, fixtures and other
39,954

 
28,824

Leasehold improvements
23,422

 
20,630

Buildings and land
42,893

 
40,015

Construction in process
25,625

 
18,153

 
326,545

 
285,809

Less: accumulated depreciation
(126,315
)
 
(112,728
)
Total
$
200,230

 
$
173,081

Depreciation expense was $9.6 million for the three months ended March 31, 2018, and $8.0 million for the three months ended March 31, 2017.
Inventory
Inventory is comprised of the following at March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Raw materials
$
55,636

 
$
36,124

Work-in-process
16,357

 
13,921

Finished goods
237,364

 
205,512

Less: obsolescence reserve
(14,621
)
 
(8,629
)
Total
$
294,736

 
$
246,928



Note E — Operating Segment Data
At March 31, 2018, the Company had ten reportable operating segments. Each operating segment represents a platform acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:

5.11 Tactical is a leading provider of purpose-built tactical apparel and gear for law enforcement, firefighters, EMS, and military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and authenticity, and works directly with end users to create purpose-built apparel and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide.   Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
Crosman is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Crosman offers its products under the highly recognizable Crosman, Benjamin, LaserMax and CenterPoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. Crosman is headquartered in Bloomfield, New York.
Ergobaby is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, and related products.  Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than 50% of its sales from outside of the United States. 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 its over 300,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.

20


Manitoba Harvest is a pioneer and leader in the manufacture and distribution of branded, hemp-based foods and hemp-based ingredients. Manitoba Harvest’s products, which include Hemp Hearts™, Hemp Heart Bites™, and Hemp protein powders, are currently carried in over 13,000 retail stores across the United States and Canada. Manitoba Harvest is headquartered in Winnipeg, Manitoba.
Advanced Circuits is an electronic components manufacturing company that provides 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 global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, motorsport/automotive, oil and gas, medical, general industrial, electric utility, reprographics and advertising specialty markets. Arnold Magnetics produces high performance permanent magnets (PMAG), flexible magnets (Flexmag) and precision foil products (Precision Thin Metals or "PTM") 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 24 facilities in the eastern United States.
Foam Fabricators is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer components made from expanded polystyrene and expanded polypropylene. Foam Fabricators provides products to a variety of end markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products. Foam Fabricators is headquartered in Scottsdale, Arizona and operates 13 molding and fabricating facilities across North America.
Sterno is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry and flameless candles, outdoor lighting products, scented wax cubes and warmer products for consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, scented wax cubes and warmer products used for home decor and fragrance systems, catering equipment and outdoor lighting products. Sterno is headquartered in Corona, California.
The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The results of operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. There were no significant inter-segment transactions.
Summary of Operating Segments
Net Revenues
Three months ended March 31,
(in thousands)
2018
 
2017
 
 
 
 
5.11 Tactical
$
83,957

 
$
78,513

Crosman
24,407

 

Ergobaby
22,162

 
22,613

Liberty
23,453

 
27,978

Manitoba Harvest
16,342

 
13,128

ACI
22,063

 
21,460

Arnold Magnetics
29,399

 
26,496

Clean Earth
58,221

 
47,276

Foam Fabricators
15,457

 

Sterno
65,232

 
52,528

Total segment revenue
360,693

 
289,992

Corporate and other

 

Total consolidated revenues
$
360,693

 
$
289,992



21



Segment profit (loss) (1)
Three months ended March 31,
(in thousands)
2018
 
2017
 
 
 
 
5.11 Tactical
$
(617
)
 
$
(9,485
)
Crosman
273

 

Ergobaby
2,340

 
5,200

Liberty
2,815

 
2,480

Manitoba Harvest
(869
)
 
223

ACI
5,932

 
5,640

Arnold Magnetics
1,725

 
(8,397
)
Clean Earth
759

 
(446
)
Foam Fabricators
725

 

Sterno
4,751

 
3,652

Total
17,834

 
(1,133
)
Reconciliation of segment profit (loss) to consolidated income (loss) before income taxes:
 
 
 
Interest expense, net
(6,186
)
 
(7,136
)
Other expense, net
(1,381
)
 
(22
)
Loss on equity method investment

 
(5,620
)
Corporate and other (2)
(14,234
)
 
(11,212
)
Total consolidated loss before income taxes
$
(3,967
)
 
$
(25,123
)

(1) 
Segment profit (loss) represents operating income (loss).
(2) 
Primarily relates to management fees expensed and payable to CGM, and corporate overhead expenses.
Depreciation and Amortization Expense
Three months ended March 31,
(in thousands)
2018
 
2017
 
 
 
 
5.11 Tactical
$
5,372

 
$
17,532

Crosman
1,991

 

Ergobaby
2,042

 
653

Liberty
343

 
599

Manitoba Harvest
1,621

 
1,510

ACI
804

 
873

Arnold Magnetics
1,516

 
2,045

Clean Earth
5,460

 
5,227

Foam Fabricators
885

 

Sterno
2,899

 
2,956

Total
22,933

 
31,395

Reconciliation of segment to consolidated total:
 
 
 
Amortization of debt issuance costs and original issue discount
1,353

 
1,199

Consolidated total
$
24,286

 
$
32,594




22


 
Accounts Receivable
 
Identifiable Assets
 
March 31,
 
December 31,
 
March 31,
 
December 31,
(in thousands)
2018
 
2017
 
2018 (1)
 
2017 (1)
5.11 Tactical
$
62,088

 
$
60,481

 
$
313,859

 
$
324,068

Crosman
15,922

 
20,396

 
131,709

 
129,033

Ergobaby
12,265

 
12,869

 
106,142

 
105,672

Liberty
13,083

 
13,679

 
28,175

 
26,715

Manitoba Harvest
6,704

 
5,663

 
92,841

 
95,046

ACI
6,591

 
6,525

 
15,365

 
14,522

Arnold Magnetics
17,658

 
14,804

 
67,204

 
66,979

Clean Earth
51,137

 
50,599

 
182,611

 
183,508

Foam Fabricators
20,596

 

 
165,490

 

Sterno
62,619

 
40,087

 
164,315

 
125,937

Allowance for doubtful accounts
(11,856
)
 
(9,995
)
 

 

Total
256,807

 
215,108

 
1,267,711

 
1,071,480

Reconciliation of segment to consolidated total:
 
 
 
 

 

Corporate and other identifiable assets

 

 
4,952

 
2,026

Total
$
256,807

 
$
215,108

 
$
1,272,663

 
$
1,073,506


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

Geographic Information
Net Revenues
Three months ended March 31,
(in thousands)
2018
 
2017
United States
$
297,822

 
$
228,467

Canada
13,655

 
12,634

Europe
28,742

 
20,418

Asia Pacific
11,607

 
12,133

Other international
8,867

 
16,340

 
$
360,693

 
$
289,992


The following tables provide disaggregation of revenue by reportable segment geography:

 
Three months ended March 31, 2018
 
5.11
 
Crosman
 
Ergo
 
Liberty
 
Manitoba Harvest
 
ACI
 
Arnold
 
Clean Earth
 
Foam
 
Sterno
 
Total
United States
$
64,452

 
$
20,085

 
$
8,203

 
$
22,756

 
$
11,015

 
$
22,063

 
$
17,282

 
$
58,221

 
$
13,486

 
$
60,259

 
$
297,822

Canada
2,017

 
1,353

 
765

 
697

 
4,514

 

 
368

 

 

 
3,941

 
13,655

Europe
8,558

 
1,508

 
7,158

 

 
532

 

 
10,146

 

 

 
840

 
28,742

Asia Pacific
4,241

 
330

 
5,692

 

 
270

 

 
911

 

 

 
163

 
11,607

Other international
4,689

 
1,131

 
344

 

 
11

 

 
692

 

 
1,971

 
29

 
8,867

 
$
83,957

 
$
24,407

 
$
22,162

 
$
23,453

 
$
16,342

 
$
22,063

 
$
29,399

 
$
58,221

 
$
15,457

 
$
65,232

 
$
360,693




23


 
Three months ended March 31, 2017
 
5.11
 
Ergo
 
Liberty
 
Manitoba Harvest
 
ACI
 
Arnold
 
Clean Earth
 
Sterno
 
Total
United States
$
53,247

 
$
9,815

 
$
27,978

 
$
7,232

 
$
21,460

 
$
15,442

 
$
47,276

 
$
46,017

 
$
228,467

Canada
1,529

 
662

 

 
5,086

 

 
327

 

 
5,030

 
12,634

Europe
4,815

 
5,267

 

 
713

 

 
8,564

 

 
1,059

 
20,418

Asia Pacific
3,592

 
6,479

 

 
97

 

 
1,630

 

 
335

 
12,133

Other international
15,330

 
390

 

 

 

 
533

 

 
87

 
16,340

 
$
78,513

 
$
22,613

 
$
27,978

 
$
13,128

 
$
21,460

 
$
26,496

 
$
47,276

 
$
52,528

 
$
289,992


Note F - Investment in FOX
Fox Factory Holdings Corp. ("FOX"), a former majority owned subsidiary of the Company that is publicly traded on the NASDAQ Stock Market under the ticker "FOXF," is a designer, manufacturer and marketer of high-performance ride dynamic products used primarily for bicycles, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. The Company held a 14% ownership interest as of January 1, 2017. The investment in FOX was accounted for using the fair value option.
In March 2017, FOX closed on a secondary public offering (the "March 2017 Offering") through which the Company sold their remaining 5,108,718 shares in FOX for total net proceeds of $136.1 million. Subsequent to the March 2017 Offering, the Company no longer holds an ownership interest in FOX.

Note G — 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. The Company’s goodwill and indefinite-lived intangibles are tested and reviewed for impairment annually as of March 31st or more frequently if facts and circumstances warrant by comparing the fair value of each reporting unit to its carrying value. Each of the Company’s businesses represent a reporting unit, except Arnold, which the Company determined comprised three reporting units when it was acquired in March 2012. As a result of changes implemented by Arnold management during 2016 and 2017, the Company reassessed the reporting units at Arnold as of the annual impairment testing date in 2018. After evaluating changes in the operation of the reporting units that led to increased integration and altered how the financial results of the Arnold operating segment were assessed by Arnold management, the Company determined that the previously identified reporting units no longer operate in the same manner as they did when the Company acquired Arnold. As a result, the separate Arnold reporting units were determined to only comprise one reporting unit at the Arnold operating segment level as of March 31, 2018. As part of the exercise of combining the separate Arnold reporting units into one reporting unit, the Company will perform "before" and "after" goodwill impairment testing whereby we will preform the annual impairment testing for each of the existing reporting units of Arnold and then subsequent to the completion of the annual impairment testing of the separate reporting units, we will perform a quantitative impairment test of the Arnold operating segment, which will represent the reporting unit for future impairment tests. We expect to conclude the goodwill impairment testing during the quarter ended June 30, 2018.
Goodwill
2018 Annual 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 quantitative 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. For the reporting units that were tested qualitatively, the results of the qualitative analysis indicated that the fair value exceeded their carrying value. At March 31, 2018, we determined that the Flexmag reporting unit required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on

24


qualitative factors alone. We expect to conclude the goodwill impairment testing during the quarter ended June 30, 2018.
2017 Interim Impairment Testing
Manitoba Harvest
The Company performed quantitative testing during the 2017 annual impairment testing for Manitoba Harvest, the results of which indicated that the fair value of Manitoba Harvest exceeded the carrying value. As a result of operating results that were below forecasted amounts, as well as a failure of the financial covenants associated with the intercompany credit facility, we determined that a triggering event had occurred at Manitoba Harvest in the fourth quarter of 2017. We performed impairment testing of the goodwill and indefinite lived tradename at December 31, 2017. For the quantitative impairment test at Manitoba Harvest, we utilized an income approach. The weighted average cost of capital used in the income approach at Manitoba Harvest was 11.7%. Under the new guidance, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Results of the quantitative testing of Manitoba Harvest indicated that the carrying value of Manitoba Harvest exceeded its fair value by $6.3 million, and the Company recorded $6.2 million (after the effect of foreign currency translation) as impairment expense at December 31, 2017. For the indefinite lived trade name, quantitative testing of the Manitoba Harvest tradename indicated that the carrying value exceeded its fair value by $2.3 million, and the Company recorded $2.3 million (after the effect of foreign currency translation) of impairment expense at December 31, 2017. The Company finalized the Manitoba Harvest impairment testing during the first quarter of 2018 with no changes to the impairment expense recorded as of December 31, 2017.
2017 Annual Goodwill Impairment Testing
At March 31, 2017, we determined that the Manitoba Harvest reporting unit required further quantitative testing because we could not conclude that the fair value of the reporting unit exceeds its carrying value based on qualitative factors alone. The Company utilized an income approach to perform the Step 1 testing at Manitoba Harvest. The weighted average cost of capital used in the income approach for Manitoba Harvest was 12.0%. Results of the Step 1 quantitative testing of Manitoba Harvest indicated that the fair value of Manitoba Harvest exceeded its carrying value by 15.0%. Manitoba Harvest's goodwill balance as of the date of the annual impairment testing was approximately $44.5 million. For the reporting units that were tested qualitatively, the Company concluded that the results of the qualitative analysis indicated that the fair value of those reporting units exceeded their carrying value and that a quantitative analysis was not necessary.
2016 Interim goodwill impairment testing
Arnold
As a result of decreases in forecasted revenue, operating income and cash flows at Arnold, as well as a shortfall in revenue and operating income during the latter half of 2016 as compared to budgeted amounts, the Company performed interim goodwill impairment testing on each of the three reporting units at Arnold. Based on the results of the impairment, the fair value of the Flexmag and PTM reporting units exceeded the carrying amount, therefore, no additional goodwill testing was required. The results of the impairment test for the PMAG unit indicated a potential impairment of goodwill and the Company performed additional impairment testing to determine the amount of impairment of the PMAG reporting unit.
The Company had not completed the impairment analysis of PMAG as of December 31, 2016, and therefore estimated a range of impairment loss of $14 million to $19 million based on the value of the total invested capital of the PMAG unit as well as the results of the testing of the fair value of PMAG. The Company recorded an estimated impairment loss for PMAG of $16 million at December 31, 2016 based on that range. The Company completed the goodwill impairment test of the PMAG reporting unit in the first quarter of 2017, and the results indicated total impairment of the goodwill of the PMAG reporting unit of $24.9 million. The impairment was higher than the initial estimate at December 31, 2016 due primarily to the valuation of PMAG's property, plant and equipment during the impairment exercise. The Company recorded the additional impairment loss of $8.9 million in the first quarter of 2017.

25


A summary of the net carrying value of goodwill at March 31, 2018 and December 31, 2017, is as follows (in thousands):
 
Three months ended March 31, 2018
 
Year ended 
 December 31, 2017
Goodwill - gross carrying amount
$
759,429

 
$
562,842

Accumulated impairment losses
(31,153
)
 
(31,153
)
Goodwill - net carrying amount
$
728,276

 
$
531,689

The following is a reconciliation of the change in the carrying value of goodwill for the three months ended March 31, 2018 by operating segment (in thousands):
 
 
Balance at January 1, 2018
 
Acquisitions (1)
 
Goodwill Impairment
 
Foreign currency translation
 
Other
 
Balance at March 31, 2018
5.11
 
$
92,966

 
$

 
$

 
$

 
$

 
$
92,966

Crosman
 
49,352

 

 

 

 
70

 
49,422

Ergobaby
 
61,031

 

 

 

 

 
61,031

Liberty
 
32,828

 

 

 

 

 
32,828

Manitoba Harvest
 
41,024

 

 

 
(1,114
)
 

 
39,910

ACI
 
58,019

 

 

 

 

 
58,019

Arnold (2)
 
26,903

 

 

 

 

 
26,903

Clean Earth
 
119,099

 
4,778

 

 

 

 
123,877

Foam Fabricators
 

 
71,489

 

 

 

 
71,489

Sterno
 
41,818

 
121,364

 

 

 

 
163,182

Corporate (3)
 
8,649

 

 

 

 

 
8,649

Total
 
$
531,689

 
$
197,631

 
$

 
$
(1,114
)
 
$
70

 
$
728,276


(1)
The purchase price allocation for Foam Fabricators is preliminary and is expected to be completed during the second quarter of 2018. Clean Earth and Sterno each completed add-on acquisitions during 2018. The goodwill related to the Clean Earth acquisition is based on a preliminary purchase price allocation. The preliminary purchase price allocations for the Sterno add-on acquisition has not been prepared yet. The goodwill related to this add-on acquisitions represents the excess of purchase price over net assets acquired at March 31, 2018.
(2)
Arnold Magnetics had three reporting units at March 31, 2018, PMAG, Flexmag and Precision Thin Metals with goodwill balances of $15.6 million, $4.8 million and $6.5 million, respectively.
(3) 
Represents goodwill resulting from purchase accounting adjustments not "pushed down" to the ACI segment. This amount is allocated back to the ACI segment for purposes of goodwill impairment testing.
Long lived assets
Annual indefinite lived impairment testing
The Company used a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite lived intangible asset is impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. The Company evaluated the qualitative factors of each reporting unit that maintains indefinite lived intangible assets in connection with the annual impairment testing for 2018 and 2017. Results of the qualitative analysis indicate that the carrying value of the Company’s indefinite lived intangible assets did not exceed their fair value. The Manitoba Harvest trade name was tested for impairment as part of the interim impairment testing for Manitoba Harvest at December 31, 2017 as noted above, resulting in impairment expense of $2.3 million at December 31, 2017.

26


Other intangible assets are comprised of the following at March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer relationships
$
454,562

 
$
(107,882
)
 
$
346,680

 
$
338,719

 
$
(102,271
)
 
$
236,448

Technology and patents
48,760

 
(23,386
)
 
25,374

 
49,075

 
(22,492
)
 
26,583

Trade names, subject to amortization
187,275

 
(25,783
)
 
161,492

 
182,976

 
(22,518
)
 
160,458

Licensing and non-compete agreements
7,965

 
(6,600
)
 
1,365

 
7,965

 
(6,488
)
 
1,477

Permits and airspace
115,230

 
(33,482
)
 
81,748

 
115,230

 
(31,026
)
 
84,204

Distributor relations and other
726

 
(676
)
 
50

 
726

 
(646
)
 
80

Total
814,518

 
(197,809
)
 
616,709

 
694,691

 
(185,441
)
 
509,250

Trade names, not subject to amortization
70,913

 

 
70,913

 
71,267

 

 
71,267

Total intangibles, net
$
885,431

 
$
(197,809
)
 
$
687,622

 
$
765,958

 
$
(185,441
)
 
$
580,517

Amortization expense related to intangible assets was $12.7 million for the three months ended March 31, 2018, and $10.3 million for the three months ended March 31, 2017, respectively. Estimated charges to amortization expense of intangible assets over the next five years, is as follows (in thousands):
  April 1, through Dec. 31, 2018
 
$
53,412

2019
 
70,163

2020
 
60,542

2021
 
50,829

2022
 
49,150

 
 
$
284,096


Note H — Warranties
The Company’s Crosman, Ergobaby and Liberty 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, 2018 and the year ended December 31, 2017 is as follows (in thousands):
 
Three months ended March 31, 2018
 
Year ended 
 December 31, 2017
Warranty liability:
 
 
 
Beginning balance
$
2,197

 
$
1,258

Provision for warranties issued during the period
602

 
1,982

Fulfillment of warranty obligations
(888
)
 
(1,552
)
Other (1)

 
509

Ending balance
$
1,911

 
$
2,197

(1) Represents the warranty liability recorded in relation to the Crosman acquisition in June 2017 and an add-on acquisition by Crosman in July 2017.


27


Note I — Debt

2014 Credit Facility
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. On August 15, 2016, the Company amended the 2014 Credit Facility to, among other things, increase the aggregate amount of the 2014 Credit Facility by $400 million. On August 31, 2016, the Company entered into an Incremental Facility Amendment to the 2014 Credit Agreement (the "Incremental Facility Amendment"). The Incremental Facility Amendment provided for an increase to the 2014 Revolving Credit Facility of $150 million, and the 2016 Incremental Term Loan, in the amount of $250 million. As a result of the Incremental Facility Amendment, the 2014 Credit Facility currently provides for (i) a revolving credit facility of $550 million (as amended from time to time, the "2014 Revolving Credit Facility"), (ii) a $325 million term loan (the "2014 Term Loan Facility"), and (iii) a $250 million incremental term loan (the "2016 Incremental Term Loan").
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 (as defined below) 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.
Term Loans
2014 Term Loan Facility
The 2014 Term Loan Facility expires in June 2021 and requires quarterly payments that commenced September 30, 2014, with a final payment of all remaining principal and interest due on June 6, 2021. The 2014 Term Loan Facility was issued at an original issue discount of 99.5% of par value.
2016 Incremental Term Loan
The 2016 Incremental Term Loan was issued at an original issue discount of 99.25% of par value. The Company incurred $6.0 million in additional debt issuance costs related to the Incremental Credit Facility, which will be recognized as expense during the remaining term of the related 2014 Revolving Credit Facility, and 2014 Term Loan and 2016 Incremental Term Loan. The Incremental Facility Amendment did not change the due dates or applicable interest rates of the 2014 Credit Agreement. The quarterly payments for the term advances under the 2014 Credit Agreement increased to approximately $1.4 million per quarter. The additional advances under the Incremental Credit Facility was a loan modification for accounting purposes. Consequently, the Company capitalized debt issuance costs of $6.0 million associated with fees charged by lenders of the Incremental Credit Facility. The capitalized debt issuance costs will be amortized over the remaining period of the 2014 Credit Facility.
In March 2017, the Company amended the 2014 Credit Facility (the "Fourth Amendment") to reduce the applicable rate of interest for the 2014 Term Loan and 2016 Incremental Term Loan. Under the Fourth Amendment, outstanding LIBOR loans bear interest at LIBOR plus an applicable rate of 2.75% and outstanding Base Rate loans bear interest at Base Rate plus 1.75%. Prior to the amendment, the outstanding term loans bore interest at LIBOR plus 3.25% or Base Rate plus 2.25%. In connection with the Fourth Amendment, the Company capitalized debt issuance costs of $1.2 million associated with fees charged by term loan lenders.
In October 2017, the Company further amended the 2014 Credit Facility (the "First Refinancing Amendment") to, in effect, refinance the 2014 Term Loan and the 2016 Incremental Term Loan (together, the “Term Loans”). Pursuant to the First Refinancing Amendment, outstanding Term Loans at LIBOR Rate bear interest at LIBOR plus an applicable rate of 2.25% and outstanding Term Loans at Base Rate bear interest at Base Rate plus 1.25%. Prior to the amendment, the outstanding Term Loans bore interest at LIBOR plus 2.75% or Base Rate plus 1.75%. In connection with the First Refinancing Amendment, the Company incurred $1.4 million of debt issuance costs associated with fees charged by term loan lenders.

28


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 million in letters of credit may be issued, as well as swing line loans of up to $25 million outstanding at one time. The issuance of such letters of credit and the making of any swing line loan would reduce the amount available under the 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.
The following table provides the Company’s debt holdings at March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Revolving Credit Facility
$
390,500

 
$
42,000

Term Loan
558,551

 
559,973

Original issue discount
(3,228
)
 
(3,483
)
Debt issuance costs - term loan
(7,839
)
 
(8,458
)
Total debt
$
937,984

 
$
590,032

Less: Current portion, term loan facilities
(5,685
)
 
(5,685
)
Long term debt
$
932,299

 
$
584,347

Net availability under the 2014 Revolving Credit Facility was approximately $159.2 million at March 31, 2018. Letters of credit outstanding at March 31, 2018 totaled approximately $0.3 million. At March 31, 2018, the Company was in compliance with all covenants as defined in the 2014 Credit Facility.
Debt Issuance Costs
Deferred debt issuance costs represent the costs associated with the entering into the 2014 Credit Facility as well as amendments to the 2014 Credit Facility, and are amortized over the term of the related debt instrument. 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 and 2016 Incremental 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, 2018 and December 31, 2017, and the balance sheet classification in each of the periods presents (in thousands):
 
March 31, 2018
 
December 31, 2017
Deferred debt issuance costs
$
21,628

 
$
21,491

Accumulated amortization
(11,347
)
 
(10,250
)
Deferred debt issuance costs, less accumulated amortization
$
10,281

 
$
11,241

 
 
 
 
Balance Sheet classification:
 
 
 
Other non-current assets
$
2,441

 
$
2,783

Long-term debt
7,840

 
8,458

 
$
10,281

 
$
11,241


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, 2018 and December 31, 2017, the New Swap had a fair value loss of $2.5 million and $6.1 million, respectively, principally reflecting the present value of future payments and receipts under the agreement.

29


The Company did not elect hedge accounting for the above derivative transaction 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 swap on the consolidated balance sheets at March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Other current liabilities
$
1,334

 
$
2,468

Other noncurrent liabilities
1,165

 
3,639

Total fair value
$
2,499

 
$
6,107


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, 2018 and December 31, 2017 (in thousands):
 
Fair Value Measurements at March 31, 2018
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Put option of noncontrolling shareholders (1)
$
(178
)
 
$

 
$

 
$
(178
)
Contingent consideration - acquisitions (2)
(25,000
)
 

 

 
(25,000
)
Interest rate swap
(2,499
)
 

 
(2,499
)
 

Total recorded at fair value
$
(27,677
)
 
$

 
$
(2,499
)
 
$
(25,178
)

(1) 
Represents put option issued to noncontrolling shareholders in connection with the 5.11 Tactical and Liberty acquisitions.
(2) 
Represents potential earn-out payable by Sterno for the acquisition of Rimports. The preliminary purchase allocation of Rimports has not been prepared, therefore the earn out has been recorded at the settlement amount at March 31, 2018.
 
Fair Value Measurements at December 31, 2017
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Put option of noncontrolling shareholders
$
(178
)
 

 

 
$
(178
)
Interest rate swap
(6,107
)
 

 
(6,107
)
 

Total recorded at fair value