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: September 30, 2009
Business Overview: The Company acquires and manages a group of small and middle-market businesses in North America. As of September 30, 2009, it operated six reportable segments: Advanced Circuits (ACI), American Furniture (AFM), Anodyne Medical Device (AMD), Fox Factory (Fox), HALO, and Staffmark (temporary staffing). The Company is managed by Compass Group Management LLC (CGM).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2008 |
|---|---|---|---|
| Total Revenues | $324,239 | $886,681 | $1,163,646 |
| Gross Profit | $71,064 | $192,839 | $253,664 |
| Operating Income (Loss) | $7,902 | $(51,119) | $18,917 |
| Net Income (Loss) Attributable to Holdings | $2,101 | $(24,590) | $77,066 |
| Cash and Cash Equivalents | $46,997 | $46,997 (End of Period) | $97,473 (Beginning of Period) |
| Long-Term Debt | $74,500 | $74,500 (End of Period) | $151,000 (Beginning of Period) |
| Net Cash Provided by Operating Activities | N/A | $21,434 | $25,856 |
Margins (Nine Months 2009): Gross Margin was approximately 21.7% ($192.8M / $886.7M). Operating Margin was negative 5.8% due to impairment charges.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by 23.8% for the nine months ended September 30, 2009, compared to the same period in 2008. This was driven principally by significant revenue declines at Staffmark (down 34.5% pro forma), Fox, HALO, ACI, and Anodyne, partially offset by growth at American Furniture.
- Impairment Charges: The Company recorded a total impairment expense of $59.8 million for the nine months ended September 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, attributed to depressed macroeconomic conditions and downward employment trends.
- Net Loss: The Company reported a net loss attributable to Holdings of $24.6 million for the nine months ended September 30, 2009, compared to net income of $77.1 million in the prior year period. The loss was primarily due to the impairment charges and reduced operating income.
- Debt Reduction: In February 2009, the Company repaid $75.0 million of its Term Loan Facility using cash on hand. Total long-term debt decreased from $151.0 million at December 31, 2008, to $74.5 million at September 30, 2009.
- 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.
Guidance, Outlook, and Risks
Management Commentary: Management expects revenues to remain depressed through fiscal 2009 due to the global economic downturn. The Company is focusing on cost reduction, expense management, and maintaining liquidity. While deal flow has been slow, there is a recent uptick in activity. Management believes the Company is well-positioned to participate in a market recovery.
Liquidity and Capital Resources: As of September 30, 2009, the Company had $47.0 million in cash and cash equivalents and approximately $155.9 million in borrowing base availability under its Revolving Credit Facility. Management believes these resources are sufficient to meet obligations and fund distributions for the next twelve months.
Risks and Contingencies:
- Economic Conditions: Continued weakness in the economy and credit markets negatively impacts all segments, particularly Staffmark and promotional products (HALO).
- Goodwill Impairment: If economic conditions persist or deteriorate, further impairment charges may be necessary for other reporting units.
- Supplemental Put Obligation: The Company has an estimated liability of $4.9 million related to a Supplemental Put Agreement with its Manager (CGM), which could require significant cash outflows if the agreement is terminated.
- Seasonality: Cash flows are seasonal for several segments (e.g., HALO peaks in Q4; Staffmark is lower in Q1).
Key Facts for Investor Verification
- Staffmark Performance: Verify the sustainability of the $50 million goodwill impairment and the trajectory of temporary staffing demand as a leading indicator for the Company's largest segment.
- Liquidity Position: Confirm the $155.9 million borrowing base availability under the Revolving Credit Facility and the Company's ability to maintain covenant compliance given the recent revenue declines.
- Dividend Coverage: Assess the ability to maintain the $0.34 per share quarterly distribution given the net loss and reduced operating cash flow ($21.4M for nine months vs. $33.9M in distributions paid).
- Supplemental Put Liability: Monitor the $4.9 million liability associated with the Manager's put option and the potential for valuation changes to impact earnings.
- Segment Recovery: Evaluate the specific recovery plans and cost-cutting measures implemented at Staffmark, HALO, and Fox to stabilize margins.