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CODI > SEC Filings for CODI > Form 10-Q on 6-Nov-2013All Recent SEC Filings




Quarterly Report


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" and "Risk Factors" 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.


Compass Diversified Holdings, a Delaware statutory trust, was formed 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 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;

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 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

2013 Nine-Months 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.

Increase in Revolving Credit Facility

On August 6, 2013, we exercised an option under our credit agreement to expand our Revolving Credit Facility by $30 million, increasing the total amount available under the facility to $320 million subject to borrowing base restrictions. We intend to utilize the incremental borrowing capacity under the Revolving Credit Facility to fund future growth opportunities and provide for working capital and general corporate purposes.


On August 13, 2013 FOX completed an initial public offering of its common stock pursuant to a registration statement on Form S-1. In the FOX IPO, FOX sold 2,857,143 shares and certain of its shareholders sold 7,000,000 shares (including 5,800,238 shares held by CODI) at an initial offering price of $15.00 per share. FOX trades on the NASDAQ stock market under the ticker "FOXF". We received approximately $80.9 million in net proceeds from the sale of our FOX shares. Fox used a portion of their net proceeds received from the sale of their shares as well as proceeds from a new credit facility with a third party lender to repay $61.5 million in outstanding indebtedness to us under their existing credit facility with the us.

As a result of the IPO, we currently own approximately 53.9% of the outstanding shares of FOX common stock.


Net sales during the nine months ended September 30, 2013 increased at six of our eight businesses when compared to the same period of 2012 net sales. The preliminary consensus 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 third quarter of 2013 at the seasonally adjusted annualized rate of 2.0%, compared to the revised estimate of 2.5% growth in the second quarter of 2013. The positive rate of growth, albeit down slightly from the second quarter, 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 had a negative impact on revenues and earnings in the first nine months of 2013 at Advanced Circuits and Arnold, two of our industrial niche businesses, and CamelBak.

Middle market deal flow during the nine months ended September 30, 2013 was slower than normal, 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.

Our significant liquidity position continues to provide us with the opportunity to reinvest in our existing businesses while we pursue additional platform and add-on acquisitions through the remainder of fiscal 2013.

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 nine months ended September 30, 2013 and 2012, which includes the historical results of operations of our businesses (operating segments) from the date of acquisition and recasts prior period reporting for businesses sold during the periods presented (Halo) and
(ii) comparative results of operations for each of our businesses on a stand-alone basis for the three and nine-months ended September 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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