This item 7 contains forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K are subject to a number of risks and uncertainties, some of which are beyond our control. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the sections entitled "Forward-Looking Statements" and "Risk Factors" included elsewhere in this Annual Report.

Overview

Compass Diversified Holdings, a Delaware statutory trust, was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company, was also formed on November 18, 2005. In accordance with the Trust Agreement, the Trust is sole owner of 100% of the Trust Interests (as defined in the LLC Agreement) of the Company and, pursuant to the LLC Agreement, the Company has outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Manager is the sole owner of the Allocation Interests of the Company. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.

The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. We characterize small and middle market businesses as those that generate annual cash flows of up to $60 million. We focus on companies of this size because we believe that these companies are more able to achieve growth rates above those of their relevant industries and are also frequently more susceptible to efforts to improve earnings and cash flow.

In pursuing new acquisitions, we seek businesses with the following characteristics:

• North American base of operations;

• stable and growing earnings and cash flow;

• maintains a significant market share in defensible industry niche (i.e., has a "reason to exist");

• solid and proven management team with meaningful incentives;

• low technological and/or product obsolescence risk; and

• a diversified customer and supplier base.

Our management team's strategy for our subsidiaries involves:

• utilizing structured incentive compensation programs tailored to each business in order to attract, recruit and retain talented managers to operate our businesses;

• regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;

• assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue and cost related);

• identifying and working with management to execute attractive external growth and acquisition opportunities; and

• forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.

Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are well positioned to acquire additional attractive businesses. Our management team has a large network of approximately 2,000 deal intermediaries to whom it actively markets and who we expect to expose us to potential acquisitions. Through this network, as well as our management team's active proprietary transaction sourcing efforts, we typically have a substantial pipeline of potential acquisition targets. In consummating transactions, our management team has, in the past, been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned businesses, management buy-outs and reorganizations. We believe the flexibility, creativity, experience and expertise of our management team in structuring transactions provides us with a strategic advantage by allowing us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.

In addition, because we intend to fund acquisitions through the utilization of our Revolving Credit Facility, we do not expect to be subject to delays in or conditions by closing acquisitions that would be typically associated with transaction specific financing, as is typically the case in such acquisitions. We believe this advantage is a powerful one and is highly unusual in the marketplace for acquisitions in which we operate.

Initial public offering and Company formation

On May 16, 2006, we completed our initial public offering of 13,500,000 shares of the Trust at an offering price of $15.00 per share (the "IPO"). Subsequent to the IPO the Company's board of directors engaged our Manager to externally manage the day-to-day operations and affairs of the Company, oversee the management and operations of the businesses and to perform those services customarily performed by executive officers of a public company.

From May 16, 2006 through December 31, 2012, we purchased thirteen businesses (each of our businesses is treated as a separate operating segment) and disposed of five as follows:

Acquisitions

• On May 16, 2006, we made loans to and purchased a controlling interest in CBS Personnel Holdings for $55 million and later Staffmark Holdings, Inc., which we refer to as Staffmark, for approximately $129 million.

• On May 16, 2006, we made loans to and purchased a controlling interest in Crosman for approximately $73 million.

• On May 16, 2006, we made loans to and purchased a controlling interest in Advanced Circuits for approximately $81 million. As of December 31, 2012, we own approximately 69.4% of the common stock on a primary basis and 69.4% fully diluted basis.

• On May 16, 2006, we made loans to and purchased a controlling interest in Silvue for approximately $36 million.

• On August 1, 2006, we made loans to and purchased a controlling interest in Tridien for approximately $31 million. As of December 31, 2012, we own approximately 81.3% of the common stock on a primary basis and 67.4% on a fully diluted basis.

• On February 28, 2007, we made loans to and purchased a controlling interest in Aeroglide for approximately $58 million.

• On February 28, 2007, we made loans to and purchased a controlling interest in HALO for approximately $62 million.

• On August 31, 2007, we made loans to and purchased a controlling interest in American Furniture for approximately $97 million. As of December 31, 2012, we own approximately 99.9% of the common stock on a primary basis and 99.9% on a fully diluted basis.

• On March 31, 2010, we made loans to and purchased a controlling interest in Liberty Safe for approximately $70.2 million. As of December 31, 2012 we own approximately 96.2% on a primary basis and 86.7% on a fully diluted basis.

• On September 16, 2010, we made loans to and purchased a controlling interest in Ergobaby for approximately $85.2 million. As of December 31, 2012, we own approximately 81.1% on a primary basis and 77.1% on a fully diluted basis.

• On August 24, 2011, we made loans to and purchased a controlling interest in CamelBak for approximately $258.6 million. As of December 31, 2012, we own approximately 89.9% on a primary basis and 79.7% on a fully diluted basis.

• On March 5, 2012, we made loans to and purchased a controlling interest in Arnold Magnetics for approximately $130.5 million. As of December 31, 2012, we own approximately 96.7% on a primary basis and 87.6% on a fully diluted basis.

Dispositions

• On January 5, 2007, we sold all of our interest in Crosman, for approximately $143 million. We recorded a gain on the sale in the first quarter of 2007 of approximately $36 million.

• On June 24, 2008, we sold all of our interest in Aeroglide, for approximately $95 million. We recorded a gain on the sale in the second quarter of 2008 of approximately $34 million.

• On June 25, 2008, we sold all of our interest in Silvue, for approximately $95 million. We recorded a gain on the sale in the second quarter of 2008 of approximately $39 million.

• On October 17, 2011, we sold our interest in Staffmark for approximately $217.2 million. We recorded a gain on the sale in the fourth quarter of 2011 of approximately $89 million.

• On May 1, 2012 we sold our interest in HALO for approximately $66.0 million. We recorded a loss on the sale of $0.5 million in 2012.

We are dependent on the earnings of, and cash receipts from, the businesses that we own in order to meet our corporate overhead and management fee expenses and to pay distributions. These earnings and distributions, net of any non-controlling interest in these businesses, are available to:

• meet capital expenditure requirements, management fees and corporate overhead charges;

• fund distributions from the businesses to the Company; and

• be distributed by the Trust to shareholders.

2012 Highlights

Acquisition of Arnold Magnetics

On March 5, 2012, we purchased a controlling interest in Arnold Magnetics, with headquarters in Rochester, NY. Arnold Magnetics has an operating history of more than 100 years and 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. From its nine manufacturing facilities located in the United States, the United Kingdom, Switzerland and China, the company produces high performance permanent magnets, flexible magnets and precision foil products that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold Magnetics has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide.

The purchase price, including proceeds from non-controlling interests, was approximately $130.5 million (excluding acquisition-related costs), was based on a total enterprise value of $124.2 million, and included

approximately $6.3 million in cash and working capital. Acquisition related costs were approximately $4.8 million. We funded the acquisition through available cash on hand and a draw of $25 million on our Revolving Credit Facility. Arnold's management and certain other investors invested in the transaction alongside us, collectively representing approximately 3.4% in initial non-controlling interest on a primary and fully diluted basis. CGM acted as an advisor to the Company in the transaction and received fees and expense payments totaling approximately $1.2 million.

Preferred Stock Redemption

On March 6, 2012, we redeemed CamelBak's 11% convertible preferred stock for $45.3 million plus accrued dividends of $2.7 million, from an affiliate of CGI Magyar Holdings LLC, CODI's largest shareholder. The redemption was funded with available cash on hand.

Debt Re-pricing

On April 2, 2012, we exercised our option for an incremental term loan in the amount of $30 million. The incremental term loan was issued at 99% of par value and increased the term loans outstanding under the Credit Facility from approximately $224.4 million to approximately $254.4 million. In addition, in connection with the option we reduced the margin on Term Loan Facility LIBOR Loans from 6.00% to 5.00%, Base Rate Loans from 5.00% to 4.00% and reduced the LIBOR floor from 1.50% to 1.25%. We paid an amendment fee of approximately $2.2 million, and incurred additional fees and expenses of approximately $0.6 million. Net proceeds from this incremental term loan were used to reduce outstanding loans on the Revolving Credit Facility.

Sale of Halo

On May 1, 2012, we sold all of the issued and outstanding capital stock of HALO to Candlelight Investment Holdings, Inc. The total enterprise value received for HALO was approximately $76.5 million. At the closing, we received approximately $66.0 million in cash in respect of our debt and equity interests in HALO and for the payment of accrued interest and fees after payments to non-controlling shareholders and payment of all transaction expenses. The net proceeds were used to repay outstanding debt under our Revolving Credit Facility. We recorded a loss on the sale of HALO of $0.5 million.

2012 Distributions

For the 2012 fiscal year we declared distributions to our shareholders totaling $1.44 per share.

Areas of focus in 2012

The areas of focus for 2012, which are generally applicable to each of our businesses, include:

• Taking advantage, where possible to increase market share in each of our market niche leading companies at the expense of less well capitalized competitors;

• Achieving sales growth, technological excellence and manufacturing capability through global expansion;

• Continuing to grow through disciplined, strategic acquisitions and rigorous integration processes;

• Continuing to pursue expense reduction and cost savings through contraction in discretionary spending, and reductions in workforce and production levels in response to lower production volume; and

• Driving free cash flow through increased net income and effective working capital management enabling continued investment in our businesses, strategic acquisitions, and enabling us to return value to our shareholders.

Middle market deal flow during 2012 was mixed, with tax-driven transactions increasing offset by the impact that uncertain macroeconomic and political environments had on potential sellers. Valuation levels for high quality acquisitions were robust due to well capitalized strategic and financial buyers seeking to deploy equity capital coupled with the availability of debt financing with attractive terms. Despite current softness, we are cautiously optimistic that 2013 will reverse this trend of fewer transactions and believe that acquisition opportunities may increase for us in the latter half of 2013 as the overall acquisition environment improves, as well as due to certain marketing initiatives we are currently undertaking.

Results of Operations

We were formed on November 18, 2005 and acquired our existing businesses (segments) as follows:

  May 16, 2006      August 1, 2006    August 31,    January 4, 2008   March 31, 2010   September 16, 2010
                                         2007

Advanced Circuits      Tridien         American           Fox          Liberty Safe         Ergobaby
                                      Furniture

Fiscal 2012, 2011 and 2010 each represent a full year of operating results included in our consolidated results of operations for four of our businesses. The remaining four businesses were acquired during fiscal 2012, 2011 and 2010 (see table above). As a result, we cannot provide a meaningful comparison of our actual historical consolidated results of operations for the year ended December 31, 2012 with the two prior years. In the following results of operations, we provide (i) our actual consolidated results of operations for the years ended December 31, 2012, 2011 and 2010, which includes the historical results of operations of each of our businesses (operating segments) from the date of acquisition and (ii) comparative historical results of operations for each of our businesses on a stand-alone basis ("Results of Operations - Our Businesses"), for each of the years ended December 31, 2012, 2011 and for the seven businesses purchased prior to January 1, 2012, we include a comparative 2010 fiscal year as well. All years presented include relevant pro-forma adjustments and explanations where appropriate. The results below do not include the results of HALO, as this operating business was sold in May 2012 and its results of operations for all years is reflected as a component of discontinued operations.

Consolidated Results of Operations - Compass Diversified Holdings



                                                         Years Ended December 31,
                                                    2012          2011           2010
                                                              (in thousands)
Net sales                                         $ 884,721     $ 606,644      $ 504,659
Cost of sales (1)                                   605,867       427,500        366,297

Gross profit                                        278,854       179,144        138,362

Selling, general and administrative expense (1)     161,141       110,031         81,585
Management fees                                      17,633        16,283         14,576
Supplemental put expense                             15,995        11,783         32,516
Amortization of intangibles                          30,268        22,072         17,023
Impairment expense                                       -         27,769         38,835

Operating income (loss)                           $  53,817     $  (8,794 )    $ (46,173 )

(1) We reclassified certain costs from selling, general and administrative expense to cost of sales totaling $6.6 million in 2011 and 2010 related to AFM's revaluation of its standard costing system. Refer to AFM's Results of Operations discussion that follows for more information.

Net sales

On a consolidated basis, net sales increased $278.1 million for the year ended December 31, 2012 compared to 2011, and $102.0 million for the year ended December 31, 2011 compared to 2010. The increases for both years are due principally to increased revenues (and in the case of Arnold Magnetics and CamelBak, incremental revenues) at each of our segments with the exception of American Furniture and Tridien. We realized revenues in the year ended December 31, 2012 totaling approximately $104.2 million and $157.6 million at Arnold Magnetics and CamelBak, respectively, which we acquired in March 2012 and August 2011, respectively, compared to $42.6 million in revenues recognized at CamelBak over the last four months of 2011. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of net sales for each business segment.

We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income on the investment of available funds, but expect such earnings to be minimal. Our investment in our businesses is typically in the form of loans from the Company to such businesses, as well as equity interests in those businesses. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and, in some cases, dividends on our equity ownership. However, on a consolidated basis these items will be eliminated.

Cost of sales

On a consolidated basis, cost of sales increased approximately $178.4 million for the year ended December 31, 2012, compared to 2011, and increased approximately $61.2 million for the year ended December 31, 2011 compared to 2010. These increases are due almost entirely to the corresponding increase in net sales. Gross profit as a percentage of net sales totaled approximately 31.5% and 29.5% for the years ended December 31, 2012 and 2011, respectively. Gross profit as a percentage of net sales totaled approximately 27.4% for the year ended December 31, 2010. The increase in gross profit as a percentage of sales for both the year ended December 31, 2012 compared to the same period in 2011 and the year ended December 31, 2011 compared to the same period in 2010 is principally attributable to the inclusion of the incremental CamelBak net sales in 2012 and 2011 and the inclusion of twelve months of Ergobaby net sales in 2011 compared to three months in 2010. CamelBak gross profit margin during the year ended December 31, 2012 was approximately 46% and ErgoBaby's gross profit margin in 2011 was approximately 65%. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of cost of sales for each business segment.

Selling, general and administrative expense

On a consolidated basis, selling, general and administrative expense increased approximately $51.1 million for the year ended December 31, 2012, compared to the same period in 2011, and increased approximately $28.4 million for the year ended December 31, 2011 compared to the same period in 2010. The majority of these increases are due to increases in costs directly tied to sales, such as commissions and direct customer support services, and incremental selling, general and administrative costs over the prior year at Ergobaby's Orbit Baby segment, Arnold Magnetics and CamelBak during 2012 ($44.6 million) and CamelBak and Ergobaby during 2011 over the prior year ($27.0 million). At the corporate level, general and administrative costs increased approximately $2.3 million for the year ended December 31, 2012 compared to the same period in 2011 and decreased approximately $1.1 million for the year ended December 31, 2011 compared to the same period in 2010. The year over year increase in 2012 is due principally to (i) a non-cash charge totaling approximately $1.2 million related to the decrease in the fair value of a call option granted to the former CEO of Tridien during 2011; (ii) increased audit fees in connection with the Arnold acquisition ($0.7 million); and increased salaries and wages ($0.3 million). The year over year decrease in 2011 of approximately $1.1 million is due principally to a non-cash charge totaling approximately $1.2 million related to the decrease in the fair value of a call option granted to the former CEO of Tridien written down in 2011. -Refer to "Results of Operations - Our Businesses", for a more detailed analysis of selling, general and administrative expense by segment.

Management fees

Pursuant to the Management Services Agreement ("MSA"), we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the years ended December 31, 2012, 2011 and 2010 we incurred approximately $17.6 million, $16.3 million and $14.6 million respectively, in expense for these fees. The increase in management fees for the year ended December 31, 2012 compared to the same period in 2011 is due principally to the increase in consolidated adjusted net assets as of December 31, 2012 in connection with the Arnold Magnetics acquisition in March 2012. The increase in management fees in 2011 compared to 2010 is due principally to the inclusion of the 2011 acquisition of CamelBak in our consolidated adjusted net assets, offset in part by the $27.8 million impairment charge at American Furniture. Refer to - "Related Party Transactions and Certain Transactions Involving our Businesses" for more information about the MSA.

Supplemental put expense

In 2006, we entered into a Supplemental Put Agreement with our Manager pursuant to which our Manager has the right to cause us to purchase the Allocation Interests then owned by them upon termination of the MSA. The Company accrued approximately $16.0 million, $11.8 million and $32.5 million in expense during the years ended December 31, 2012, 2011 and 2010, respectively. This expense represents that portion of the estimated increase/decrease in the fair value of our businesses over our original basis in those businesses that our Manager is entitled to if the MSA were terminated or those businesses were sold. The annual charges in each of the years 2012, 2011, and 2010 reflect a net increase in fair value of our majority owned subsidiaries compared to the previous year. - Please refer to "Related Party Transactions and Certain Transactions Involving our Businesses" and "Critical Accounting Estimates" for more information about the Supplemental Put Agreement.

Impairment expense

We incurred an impairment charge at American Furniture in the years ended December 31, 2011 and December 31, 2010 totaling approximately $27.8 million and $38.8 million, respectively. American Furniture incurred an impairment charge to its goodwill ($5.9 million), trade name ($2.4 million), and long-lived assets ($18.4 million) aggregating $26.7 million during the year ended December 31, 2011, which was triggered based on results of operations which had deteriorated significantly during the year. In addition, in connection with the cessation and outsourcing of AFM's internal trucking operations we reclassified a number of trucks, trailers and a warehouse from property, plant and equipment to assets held for sale. In connection with this we wrote these assets down from their net book value to an amount equal to their net realizable value less disposal costs with the difference, aggregating approximately $1.1 million, being charged to impairment expense. During the year ended 2010 we wrote down the value of goodwill by $35.5 million and the value of its trade name by $3.3 million. In all cases the write downs were triggered by a significant deterioration in American Furniture's operations and profitability caused by an unprecedented drop in the promotional furniture market and demand for its product. The combination of increased unemployment, together with significant decreases in home purchases and availability of consumer credit has created the worst market for promotional furniture sales over the last two years that has been experienced over the last two decades. The remaining noncurrent asset subject to fair value testing at American Furniture is its trade name totaling approximately $0.6 million and property and equipment totaling $0.5 million. We do not anticipate any further write downs to American Furniture's assets going forward.

We completed our annual impairment analysis of goodwill as of March 31, 2012 and there was no indication of goodwill impairment at any of our reporting units.

Results of Operations - Our Businesses

As previously discussed, we acquired our businesses on various acquisition dates beginning May 16, 2006 (see table above). As a result, our consolidated operating results only include the results of operations since the acquisition date associated with each of our businesses. The following discussion reflects a comparison of the historical results of operations for each of our initial businesses (segments), the 2007, 2008, 2010 and 2011 acquisitions for the complete fiscal years ending December 31, 2012, 2011 and 2010. For the 2012 acquisition, the following discussion reflects comparative pro-forma results of operations for the entire fiscal years ending December 31, 2012 and 2011 as if we had acquired the businesses on January 1, 2011. Where appropriate, relevant . . .