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CODI > SEC Filings for CODI > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for COMPASS DIVERSIFIED HOLDINGS

Form 10-Q for COMPASS DIVERSIFIED HOLDINGS


8-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Item 2 contains forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the sections entitled "Forward-Looking Statements" included elsewhere in this Quarterly Report as well as those risk factors discussed in the section entitled "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2012.

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 100% 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 to middle market businesses as those that generate annual cash flows of up to $60 million. We focus on companies of this size because of our belief that these companies are often more able to achieve growth rates above those of their relevant industries and are also frequently more susceptible to efforts to improve earnings and cash flow.

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

North American base of operations;

stable and growing earnings and cash flow;

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

solid and proven management team with meaningful incentives;

low technological and/or product obsolescence risk; and

a diversified customer and supplier base.

Our management team's strategy for our businesses involves:

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

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

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

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

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


Table of Contents

We are dependent on the earnings of, and cash receipts from our businesses to meet our corporate overhead and management fee expenses and to pay distributions. These earnings and distributions, net of any minority interests in these businesses, are generally available:

first, to meet capital expenditure requirements, management fees and corporate overhead expenses;

second, to fund distributions from the businesses to the Company; and

third, to be distributed by the Trust to shareholders.

2013 First Half Highlights

Debt Re-pricing

On April 3, 2013, we exercised an option to increase the Term Loan Facility by $30 million. Net proceeds from this incremental term loan were used to reduce outstanding loans on the Revolving Credit Facility. In connection with the increase, we amended the pricing of the Credit Facility wherein borrowings under the Term Loan Facility now bear interest at LIBOR plus 4.0% with a floor of 1.0% and borrowings under the Revolving Credit Facility now bear interest at LIBOR plus 1.5% - 2.0%. In addition, the amendment provides for a reduction in commitment fees on revolving loan availability to 0.75% and extended the maturity date on the Revolving Credit Facility to April 2017. All other material terms of the Credit Facility remain unchanged. We incurred fees of approximately $1.9 million.

FOX IPO

FOX filed a registration statement on Form S-1 on July 8, 2013 with the Securities and Exchange Commission for a proposed IPO of FOX's common stock. We estimate that FOX and certain of its shareholders will sell 2,857,143 shares and 5,714,286 shares (including 4,734,889 shares held by CODI) of FOX common stock, respectively, assuming no exercise of the option to purchase additional shares granted to the underwriters.

Additionally, assuming the IPO closes as expected FOX intends to use the proceeds from the IPO and anticipated borrowings under a new credit facility with a third-party lender to repay its outstanding indebtedness under its existing credit facility with us, which facility had an outstanding balance of $65.5 million as of June 30, 2013.

Upon completion of the IPO, we estimate that we will own approximately 56.8% of the outstanding shares of FOX common stock, assuming no exercise of the option to purchase additional shares granted to the underwriters, or approximately 53.9%, assuming full exercise of the option granted to the underwriters.

Outlook

Net sales during the first half of 2013 increased at six of our eight businesses when compared to the first half of 2012 net sales. The preliminary estimate of U.S. gross domestic product ("GDP"), a measure of the total production of goods and services in the United States, increased during the second quarter of 2013 at the seasonally adjusted annualized rate of 1.7%, compared to 1.1% in the first quarter of 2013. The increased rate of growth has been primarily fueled by consumer spending, which positively impacted the sales and earnings of three of our branded products businesses consisting of Ergobaby, Fox and Liberty Safe. Continued growth in consumer spending, we believe, will positively impact growth in these businesses during the remainder of the year. Alternatively, Department of Defense cutbacks and the continued reduction in troop deployment has had a negative impact on revenues and earnings in the first half of 2013 at Advanced Circuits and Arnold, two of our industrial niche businesses, and CamelBak. Our significant liquidity provides us the opportunity to reinvest in our existing businesses and pursue additional platform and add-on acquisitions through the remainder of fiscal 2013.

Middle market deal flow in the first half of 2013 was slower than typical, in part due to a high level of tax-driven transactions in the fourth quarter of 2012 resulting in a reduced deal pipeline. We are experiencing a slight uptick in deal activity and are cautiously optimistic that deal flow will increase over the balance of this year. Valuation levels remain relatively high for high quality companies, driven by the continued availability of debt capital with attractive terms and financial and strategic buyers seeking to deploy equity capital.

We are dependent on the earnings of, and cash receipts from, the businesses that we own to meet our corporate overhead and management fee expenses and to pay distributions. These earnings and distributions, net of any minority interests in these businesses, will be available:

First, to meet capital expenditure requirements, management fees and corporate overhead expenses;

Second, to fund distributions from the businesses to the Company; and

Third, to be distributed by the Trust to shareholders.


Table of Contents

Results of Operations

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



   May 16, 2006      August 1, 2006     August 31, 2007     January 4, 2008   March 31, 2010
Advanced Circuits        Tridien       American Furniture         Fox          Liberty Safe

September 16, 2010   August 24, 2011     March 5, 2012
     ERGObaby           CamelBak        Arnold Magnetics

In the following results of operations, we provide (i) actual consolidated results of operations for the three and six months ended June 30, 2013 and 2012, which includes the historical results of operations of our businesses (operating segments) from the date of acquisition and, (ii) comparative results of operations for each of our businesses on a stand-alone basis for the three and six months ended June 30, 2013 and 2012 which include relevant pro-forma adjustments to historical results of operations and explanations, where appropriate, for the 2012 acquisition.

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