Business Context and Reporting Period
Company: Compass Diversified Holdings (Holdings) and Compass Group Diversified Holdings LLC (Company).
Filing Type: Form 10-Q (Quarterly Report).
Period Ended: June 30, 2010.
Business Overview: The Company acquires and manages a group of small and middle-market businesses in North America. As of June 30, 2010, it operated seven reportable segments: Advanced Circuits (ACI), American Furniture (AFM), Fox Factory (Fox), HALO, Liberty Safe, Staffmark, and Tridien Medical.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2010 |
Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
|---|---|---|---|
| Total Revenues | $404,322 | $757,941 | $562,442 |
| Gross Profit | $85,692 | $156,718 | $121,775 |
| Operating Income (Loss) | $9,086 | $(6,089) | $(59,021) |
| Net Loss | $(743) | $(16,030) | $(42,383) |
| Net Loss Attributable to Holdings | $(1,460) | $(17,429) | $(26,691) |
| Cash Flow from Operations | N/A | $7,569 | $16,772 |
| Cash and Cash Equivalents | $15,112 | $15,112 | $97,473 (Beginning) |
| Total Debt (Revolving + Term) | $88,200 | $88,200 | $75,500 (Approx.) |
Note: Debt figures include $13.2 million in Revolver borrowings and $75.0 million in Term Loan borrowings as of June 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 40.6% year-over-year for the six months ended June 30, 2010 ($757.9M vs. $562.4M). This was driven primarily by significant growth in Staffmark (temporary staffing) and Advanced Circuits, as well as the inclusion of Liberty Safe (acquired March 31, 2010).
- Profitability Improvement: Operating loss narrowed significantly to $(6.1) million for the six months ended June 30, 2010, compared to a $(59.0) million loss in the prior year period. The 2009 loss included a $50.0 million goodwill impairment charge at Staffmark, which did not recur in 2010.
- Supplemental Put Expense: A non-cash charge of $17.0 million was recorded for the six months ended June 30, 2010, related to the increase in fair value of the Supplemental Put obligation to the Manager. This contrasts with a reversal of $8.4 million in the same period in 2009.
- Acquisitions: The Company acquired Liberty Safe (approx. $69.6M) and Circuit Express (approx. $16.1M) in the first half of 2010, contributing to asset growth and revenue increases.
Guidance, Outlook, and Risks
- Outlook: Management is "cautiously optimistic" regarding continued growth in sales and operating income for the remainder of 2010, citing GDP increases and economic recovery. However, they note that Liberty Safe sales are expected to be lower in 2010 compared to 2009 due to a specific customer's low demand for private label products.
- Liquidity: The Company maintains a $340 million Revolving Credit Facility with approximately $198.2 million in borrowing base availability as of June 30, 2010. They believe they have sufficient resources to meet obligations and fund distributions for the next 12 months.
- Capital Allocation: Proceeds from a $75.0 million equity offering in April 2010 were used to pay down the Revolving Credit Facility. The Company intends to use available credit and cash for future acquisitions.
- Risks: Key risks include the ability to service indebtedness, the impact of the Supplemental Put obligation on cash flow, seasonality in certain segments (e.g., HALO, Staffmark), and general economic conditions. The Supplemental Put liability increased to $29.1 million as of June 30, 2010.
Investor Verification Checklist
- Supplemental Put Liability: Verify the valuation assumptions and potential cash impact of the $29.1 million Supplemental Put obligation to the Manager.
- Liberty Safe Performance: Monitor Liberty Safe's sales trends, specifically the impact of the key customer with reduced demand for private label safes.
- Debt Covenants: Confirm continued compliance with credit agreement covenants (Fixed Charge Coverage, Interest Coverage, Debt/EBITDA), which were met as of June 30, 2010.
- Staffmark Margins: Review the impact of rising unemployment taxes on Staffmark's gross profit margins, which decreased from 15.3% in 2009 to 13.9% in 2010.
- Seasonality: Assess the timing of cash flows given the seasonal nature of HALO (Q4 heavy) and Staffmark (Q1 typically lower).