Business Context and Reporting Period
Company: Compass Diversified Holdings (a Delaware statutory trust) and Compass Group Diversified Holdings LLC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company acquires and manages a group of small and middle-market businesses in North America. As of June 30, 2009, it operated six reportable segments: Advanced Circuits (PCBs), American Furniture (upholstered furniture), Anodyne (medical support surfaces), Fox Factory (suspension products), HALO (promotional products), and Staffmark (temporary staffing). The Company is an accelerated filer and is not a shell company.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $562,442 | $750,045 |
| Gross Profit | $121,775 | $162,669 |
| Operating Income (Loss) | $(59,021) | $5,555 |
| Net Income (Loss) Attributable to Holdings | $(26,691) | $71,808 |
| Net Cash Provided by Operating Activities | $16,772 | $25,054 |
| Cash and Cash Equivalents (End of Period) | $58,152 | $100,221 |
| Total Debt Outstanding | $77.5 million | $153.0 million |
| Revolving Credit Facility Availability | $183.3 million | N/A |
Dividends: Cash distributions declared per share were $0.68 for the six months ended June 30, 2009, compared to $0.65 in the prior year period.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately $187.6 million (25%) compared to the prior year period. This was driven principally by a $204.9 million decrease in Staffmark service revenues due to the economic downturn and reduced demand for temporary staffing. Other segments (Advanced Circuits, Fox, HALO) also reported declines, partially offset by growth in American Furniture and Anodyne.
- Significant Impairment Charges: The Company recorded a total impairment expense of $59.8 million for the six months ended June 30, 2009. This included a $50.0 million goodwill impairment charge and a $9.8 million intangible asset impairment charge related to the Staffmark segment. No such charges were recorded in the comparable 2008 period.
- Debt Reduction: In February 2009, the Company repaid $75.0 million of its Term Loan Facility using cash on hand. Consequently, total long-term debt decreased significantly from $151.0 million at year-end 2008 to $75.0 million at June 30, 2009 (excluding current portion).
- Equity Issuance: In June 2009, the Company completed a secondary offering of 5.1 million Trust shares, raising net proceeds of approximately $42.1 million.
- Discontinued Operations: The 2008 period included significant income from discontinued operations ($72.3 million gain on sale of Aeroglide and Silvue), which was not present in the 2009 period.
Guidance, Outlook, and Risks
Management Commentary: Management expects revenues to remain depressed through fiscal 2009 due to the global economic crisis. The Company is focusing on cost reduction, workforce reductions, and maximizing liquidity. While deal flow has seen a slight uptick, it remains significantly below prior years. Management believes the Company is well-positioned to participate in a market recovery when it occurs.
Outlook: The Company does not provide specific numerical guidance for future periods but anticipates continued pressure on the Staffmark segment until sustained job creation resumes. Other segments are expected to track lower than 2008 levels for the remainder of the year.
Risks and Contingencies:
- Economic Conditions: Continued weakness in the macroeconomic environment poses a risk to all segments, particularly Staffmark and Fox Factory.
- Goodwill Impairment: While other reporting units passed impairment testing, management noted that if economic conditions persist or deteriorate, further impairment charges may be necessary.
- Liquidity: The Company relies on cash flows from its businesses to meet obligations, including management fees and distributions. While current liquidity is deemed sufficient for the next 12 months, adverse conditions could impact the ability to make distributions.
- Supplemental Put Obligation: The Company has a liability related to a Supplemental Put Agreement with its Manager (CGM), estimated at $5.0 million as of June 30, 2009.
Key Facts for Investor Verification
- Staffmark Impairment: Verify the assumptions used in the $59.8 million impairment charge, specifically the projected revenue and profit declines for the Staffmark segment.
- Debt Covenants: Confirm continued compliance with the Credit Agreement covenants, particularly given the significant reduction in operating income.
- Cash Flow Sustainability: Assess whether the $16.8 million in operating cash flow is sufficient to cover the $21.4 million in distributions paid and ongoing management fees without further equity dilution or asset sales.
- Seasonality: Note that HALO and American Furniture have significant seasonality (peaking in Q4 and Q1 respectively), which may distort interim performance comparisons.
- Noncontrolling Interest: Review the impact of the Staffmark recapitalization (debt-for-equity swap) on the Company's ownership percentage and noncontrolling interest calculations.