Business Context and Reporting Period
Company: Compass Diversified Holdings (CODI)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: CODI is a Delaware statutory trust that acquires and manages a diversified portfolio of small and middle-market businesses in North America. As of December 31, 2009, the portfolio consisted of six operating segments: Advanced Circuits (PCBs), American Furniture (promotional furniture), Anodyne (medical support surfaces), Fox (suspension products), HALO (promotional products), and Staffmark (temporary staffing). The company operates under a management services agreement with Compass Group Management LLC (CGM).
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Sales | $1,248.7 million | $1,538.5 million |
| Gross Profit | $271.7 million | $342.3 million |
| Operating Income (Loss) | $(44.7) million | $27.9 million |
| Net Income (Loss) Attributable to Holdings | $(26.3) million | $78.3 million |
| Cash Flow from Operating Activities | $20.2 million | $40.5 million |
| Long-Term Debt Outstanding | $76.0 million | $151.0 million |
| Cash and Cash Equivalents | $31.5 million | $97.5 million |
| Distributions Declared Per Share | $1.36 | $1.33 |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net sales decreased by approximately $289.7 million (18.8%) compared to 2008. This was primarily driven by a $261.0 million decrease in Staffmark revenues due to the economic downturn in the temporary staffing industry, as well as declines at Advanced Circuits, Anodyne, Fox, and HALO. American Furniture was the only segment to report increased sales.
- Operating Loss: The company reported an operating loss of $44.7 million in 2009, a reversal from the $27.9 million operating income in 2008. This shift was significantly impacted by a $59.8 million impairment charge (detailed below) and reduced operating income across most segments.
- Debt Reduction: On February 18, 2009, the company repaid $75.0 million of its Term Loan Facility using cash on hand, reducing total long-term debt from $151.0 million to $76.0 million.
- Equity Offering: In June 2009, the company completed a public offering of 5.1 million shares, raising approximately $42.1 million in net proceeds.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items
- Impairment Charges: The company recorded a total impairment expense of $59.8 million in 2009. This consisted of a $50.0 million goodwill impairment charge at the Staffmark reporting unit and a $9.8 million impairment of the CBS Personnel trade name due to rebranding. These charges were non-cash but significantly impacted net income.
- Supplemental Put Reversal: The company recorded a $1.3 million reversal of expense related to the Supplemental Put Agreement with its Manager, compared to expenses of $6.4 million and $7.4 million in 2008 and 2007, respectively.
Outlook and Management Commentary
- 2010 Focus: Management plans to leverage the economic downturn to gain market share, pursue disciplined strategic acquisitions, and continue cost reduction initiatives. The company expects modest sales increases in 2010 for Advanced Circuits and Anodyne.
- Liquidity: Management believes current liquidity, including $31.5 million in cash and $136.8 million in availability under the Revolving Credit Facility, is sufficient to meet obligations and fund distributions for the next 12 months.
- Dividend Policy: The company maintained a quarterly distribution of $0.34 per share throughout 2009 and intends to continue regular quarterly distributions.
Risks and Contingencies
- Economic Sensitivity: The temporary staffing segment (Staffmark) remains highly sensitive to macroeconomic conditions and employment trends. While job losses slowed in late 2009, significant uncertainty remains.
- Goodwill Impairment Risk: Two reporting units (American Furniture and HALO) had fair values exceeding carrying values by less than 10% as of the last testing date. Adverse changes in conditions could trigger future impairment charges.
- Manager Compensation: The company is obligated to pay management fees and potential profit allocations to CGM prior to shareholder distributions. The Supplemental Put Agreement creates a contingent liability based on the fair value of the businesses.
Key Facts for Investor Verification
- Staffmark Performance: Verify the recovery trajectory of the Staffmark segment, which contributed to the majority of the revenue decline and the $50 million goodwill impairment.
- Debt Covenants: Confirm continued compliance with credit agreement covenants, specifically the Total Debt to Consolidated EBITDA ratio (actual 1.65:1 vs. required max 3.5:1) and Fixed Charge Coverage Ratio (actual 3.09:1 vs. required min 1.5:1).
- Impairment Testing: Monitor the next annual goodwill impairment test (scheduled for March 31, 2010) given the narrow margin of safety for American Furniture and HALO.
- Cash Flow vs. Distributions: Assess the sustainability of the $1.36 per share distribution rate given the net loss and the reduction in operating cash flow to $20.2 million.
- Supplemental Put Liability: Review the fair value assumptions used to calculate the $12.1 million liability associated with the Supplemental Put Agreement, as fluctuations can impact earnings.