# Compass Diversified Holdings: Form 10-Q for the period ended Mar 31, 2013

- Company: [Compass Diversified Holdings](/companies/codi.md) (CIK 1345126)
- Form: 10-Q
- Filed: 2013-05-07
- Accepted by EDGAR: May 7, 2013, 16:08 ET
- Period: 2013-03-31
- Accession: 0001193125-13-204397
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1345126/000119312513204397/d502186d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1345126/000119312513204397/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-01-01 to 2013-03-31 | $241.6m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2013-01-01 to 2013-03-31 | $165.2m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2013-01-01 to 2013-03-31 | $76.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2013-01-01 to 2013-03-31 | $41.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-01-01 to 2013-03-31 | $16.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-01-01 to 2013-03-31 | $5.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-01-01 to 2013-03-31 | $7.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-01-01 to 2013-03-31 | $1.6m | us-gaap:NetIncomeLoss |
| Operating cash flow | 3 months, 2013-01-01 to 2013-03-31 | $20.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2013-01-01 to 2013-03-31 | $3.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-03-31 | $16.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-03-31 | $285.6m | us-gaap:AssetsCurrent |
| Total assets | at 2013-03-31 | $965.5m | us-gaap:Assets |
| Current liabilities | at 2013-03-31 | $132.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-03-31 | $525.6m | us-gaap:Liabilities |
| Long-term debt | at 2013-03-31 | $269.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2013-03-31 | $2.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2013-03-31 | $398.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 79,060 characters.

***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” 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.***

### Overview

Compass Diversified Holdings, a Delaware statutory trust, was incorporated 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 100% 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;
- maintains a 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 businesses 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.

We are dependent on the earnings of, and cash receipts from our businesses 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, are generally 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.

### 2013 Highlights

#### Debt Re-pricing

On April 3, 2013, we exercised an option to increase the Term Loan Facility by $30.0 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 4.00% with a floor of 1.00% and borrowings under the Revolving Credit Facility now bear interest at LIBOR plus 1.50% – 2.50%. 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 and expenses of approximately $1.9 million.

#### Outlook

Net sales during the first quarter of 2013 increased at seven of our eight businesses when compared to the first quarter of 2012 net sales. The preliminary 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 first quarter of 2013 at the seasonally adjusted annualized rate of 2.5%, compared to 0.4% in the fourth quarter of 2012. The increased rate of growth was fueled by consumer spending, which positively impacted sales and earnings of our branded products businesses consisting of CamelBak, Ergobaby, Fox and Liberty Safe. Continued growth in consumer will positively impact growth in these businesses. Alternatively, Department of Defense cutbacks had a negative impact on revenues and earnings in the first quarter of 2013 at Advanced Circuits and Arnold, two of our industrial niche businesses. Our significant liquidity allows us the opportunity to reinvest in our existing businesses and pursue additional platform and bolt-on acquisitions through the remainder of fiscal 2013.

Middle market deal flow in the first quarter of 2013 was slower than typical, in part due to a high level of tax-driven transactions in the fourth quarter of 2012 resulting in a reduced deal pipeline at the start of the year. We have recently experienced a slight uptick in the early stages of 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.

### 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 |

23

In the following results of operations, we provide (i) our actual consolidated results of operations for the three-months ended March 31, 2013 and 2012, which includes the historical results of operations of our businesses (operating segments) from the date of acquisition and (ii) comparative results of operations for each of our businesses on a stand-alone basis for the three-months ended March 31, 2013 and 2012 which include relevant pro-forma adjustments to historical results and explanations, where appropriate, for the 2012 acquisition.

### Consolidated Results of Operations – Compass Diversified Holdings and Compass Group Diversified Holdings LLC

*(in thousands)*

|  | Three months ended March 31, 2013 | Three months ended March 31, 2012 |
| --- | ---: | ---: |
| Net sales | $241,567 | $195,327 |
| Cost of sales | 165,194 | 133,640 |
| Gross profit | 76,373 | 61,687 |
| Selling, general and administrative expense | 41,209 | 40,433 |
| Fees to Manager | 4,316 | 4,532 |
| Supplemental put expense (reversal) | 6,396 | (1,540) |
| Amortization of intangibles | 7,630 | 7,176 |
| Impairment expense | — | — |
| Operating income | $16,822 | $11,086 |

#### Net sales

On a consolidated basis, net sales for the first quarter of 2013 increased by approximately $46.2 million or 23.7% when compared to last year’s first quarter. Incremental sales from Arnold, our 2012 acquisition, account for $19.1 million of the increase while sales increases at our other businesses, particularly Fox ($9.2 million) and Liberty ($8.6 million) account for most of the remainder of the increase. Refer to “Results of Operations – Our Businesses” for a more detailed analysis of net sales by business segment.

We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income on the investment of available funds, but we expect such earnings to be minimal. Our investment in our businesses is typically in the form of loans from the Company to such businesses, as well as equity interests in those companies. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and, in the future, potentially, dividends on our equity ownership. However, on a consolidated basis these items will be eliminated.

#### Cost of sales

On a consolidated basis, cost of sales increased approximately $31.6 million during the three month period ended March 31, 2013 compared to the corresponding period in 2012. This increase is due almost entirely to the corresponding increase in net sales referred to above. Gross profit as a percentage of sales was approximately 31.6% in each of the three-month periods ended March 31, 2013 and 2012. Refer to “Results of Operations – Our Businesses” below for a more detailed analysis of cost of sales by business segment.

#### Selling, general and administrative expense

On a consolidated basis, selling, general and administrative expense increased approximately $0.8 million during the three month period ended March 31, 2013 compared to the corresponding period in 2012. This increase is due primarily to increased employee related costs at those businesses which experienced top line sales growth in the first quarter of 2013 and the inclusion of Arnold’s (acquired March 5, 2012) results of operations for three months in 2013 compared to only one month in 2012, offset in part by $4.3 million in acquisition transaction costs recorded in the first quarter of 2012 . No acquisition transaction costs were recorded in the first quarter of 2013. Refer to “Results of Operations – Our Businesses” for a more detailed analysis of selling, general and administrative expense by business segment. At the corporate level, selling, general and administrative expense decreased $0.1 million during the three months ended March 31, 2013 compared to the same period in 2012.

#### Fees to manager

Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the three-months ended March 31, 2013, we incurred approximately $4.3 million in expense for these fees compared to $4.5 million for the corresponding period in 2012. The decrease is due to the decrease in adjusted net assets as of March 31, 2013 compared to 2012 resulting from the decrease in adjusted net assets resulting from the sale of Halo in May 2012.

#### Supplemental put expense

Concurrent with our initial public offering in 2006, we entered into a Supplemental Put Agreement with our Manager pursuant to which our Manager has the right to cause us to purchase the Allocation Interests then owned by them upon termination of the Management Services Agreement. This charge represents the estimated increase/decrease in the value of our businesses over our basis in those businesses together with the increase/decrease in the contribution portion of the profit allocation that our Manager would be entitled to if the Management Services Agreement were terminated. During the three months ended March 31, 2013, we incurred approximately $6.4 million in supplemental put expense based principally on the positive results of operations of Fox, CamelBak and Liberty during the three-months ended March 31, 2013. During the three months ended March 31, 2012, we reversed approximately $1.5 million in supplemental put expense based on lower overall valuations attributed to our subsidiaries compared to valuations determined as of December 31, 2011.

#### Amortization of intangibles

Amortization of intangible assets increased approximately $0.5 million in the three months ended March 31, 2013 compared to the same period in 2012 due to the inclusion of Arnold (acquired March 1, 2012) results of operations for three months in 2013 compared to only one month in 2012.

### Results of Operations — Our Businesses

The following discussion reflects a comparison of the historical results of operations of each of our businesses for the three-month periods ending March 31, 2013 and March 31, 2012 on a stand-alone basis. The results of operations for the 2012 acquisition include appropriate pro-forma adjustments and explanations. We believe this is the most meaningful comparison of the operating results for each of our business segments. The following results of operations at each our businesses are not necessarily indicative of the results to be expected for a full year.

### Advanced Circuits

### Overview

Advanced Circuits is a provider of prototype, quick-turn and volume production printed circuit boards (‘PCBs”) to customers throughout the United States. Prototype and quick-turn PCBs typically command higher margins than volume production PCBs given that customers require higher levels of responsiveness, technical support and timely delivery of prototype and quick-turn PCBs and are willing to pay a premium for them. Advanced Circuits is able to meet its customers’ demands by manufacturing custom PCBs in as little as 24 hours, while maintaining over 98.0% error-free production rates and real-time customer service and product tracking 24 hours per day.

We purchased a controlling interest in Advanced Circuits on May 16, 2006.

On May 23, 2012 Advanced Circuits acquired Universal Circuits for approximately $2.3 million. Universal Circuits supplies PCBs to major military, aerospace, and medical original equipment manufacturers and contract manufacturers. Universal Circuits’ Minnesota facility meets certain Department of Defense clearance requirements and is noted for custom and advanced technologies. Universal Circuits’ sales are primarily in the long-lead sector. For the three-months ended March 31, 2013, the consolidated results of operations of Advanced Circuits includes net sales of Universal Circuits aggregating $3.5 million and gross profit of Universal Circuits aggregating $0.8 million.

### Results of Operations

The table below summarizes the income from operations data for Advanced Circuits for the three-month periods ended March 31, 2013 and March 31, 2012.

*(in thousands)*

|  | Three-months ended March 31, 2013 | March 31, 2012 |
| --- | ---: | ---: |
| Net sales | $21,764 | $19,445 |
| Cost of sales | 11,595 | 9,211 |
| Gross profit | 10,169 | 10,234 |
| Selling, general and administrative expense | 3,370 | 3,196 |
| Fees to manager | 125 | 125 |
| Amortization of intangibles | 767 | 757 |
| Income from operations | $5,907 | $6,156 |

### Three months ended March 31, 2013 compared to the three months ended March 31, 2012

#### Net sales

Net sales for the three months ended March 31, 2013 increased approximately $2.3 million or 11.9% over the corresponding three month period ended March 31, 2012. The increase in net sales is primarily the result of an increase in gross sales in long-lead time PCBs ($2.7 million) and a decrease in sales promotions and discounts ($0.8 million) in the three-months ended March 31, 2013 compared to the same period in 2012, offset by a decrease in sales of quick-turn production and prototype PCBs ($1.0 million). The increase in long-lead sales in the first quarter of 2013 compared to the same period in 2012 is the result of incremental sales attributable to the Universal Circuits operation acquired in May 2012. The decrease in sales of quick-turn and prototype PCBs in first quarter of 2013 compared to 2012 is primarily the result of a decline in orders from Department of Defense contractors. Sales from quick-turn and prototype PCBs represented approximately 56.1% of gross sales in the first quarter of 2013 compared to 64.6% during the same period of 2012.

#### Cost of sales

Cost of sales for the three months ended March 31, 2013 increased approximately $2.4 million compared to the comparable period in 2012. Gross profit as a percentage of sales decreased during the three months ended March 31, 2013 (46.7% at March 31, 2013 as compared to 52.6% at March 31, 2012). This decrease in gross margin is the principally the result of greater proportion of long-lead sales to total sales in the 2013 period compared to 2012. Long lead PCB sales carry a significantly lower gross margin when compared to prototype or quick-turn PCB sales.

#### Selling, general and administrative expense

Selling, general and administrative expense increased approximately $0.2 million during the three months ended March 31, 2013 compared to the same period in 2012 due principally to incremental costs incurred at its Universal Circuits production facility in Minnesota.

#### Income from operations

Operating income for the three months ended March 31, 2013 was approximately $5.9 million compared to $6.2 million earned in the same period in 2012, a decrease of approximately $0.2 million, principally as a result of those factors described above.

### American Furniture

### Overview

Founded in 1998 and headquartered in Ecru, Mississippi, American Furniture is a leading U.S. manufacturer of upholstered furniture, focused exclusively on the promotional segment of the furniture industry. American Furniture offers a broad product line of stationary and motion furniture, including sofas, loveseats, sectionals, recliners and complementary products, sold primarily at retail price points ranging between $199 and $1,399. American Furniture is a low-cost manufacturer and is able to ship most products in its line to over 800 customers within 48 hours of receiving an order.

American Furniture’s products are adapted from established designs in the following categories: (i) motion and recliner; (ii) stationary; (iii) occasional chair, and; (iv) accent tables.

We purchased a controlling interest in American Furniture in August 2007.

### Results of Operations

The table below summarizes the income (loss) from operations data for American Furniture for the three-month periods ended March 31, 2013 and March 31, 2012.

*(in thousands)*

|  | Three-months ended March 31, 2013 | March 31, 2012 |
| --- | ---: | ---: |
| Net sales | $30,816 | $30,286 |
| Cost of sales | 28,128 | 27,658 |
| Gross profit | 2,688 | 2,628 |
| Selling, general and administrative expense | 2,102 | 2,326 |
| Fees to manager | — | — |
| Amortization of intangibles | 13 | 13 |
| Impairment expense | — | — |
| Income from operations | $573 | $289 |

### Three months ended March 31, 2013 compared to the three months ended March 31, 2012

#### Net sales

Net sales for the three months ended March 31, 2013 increased approximately $0.5 million, or 1.8% over the corresponding three months ended March 31, 2012. During the three months ended March 31, 2013, stationary product sales were flat and motion product sales increased approximately $0.8 million compared to the same period in 2012. This increase in motion product sales was due in large part to the introduction of a new power motion product, partially offset by a reduction in sales of other products and a reduction in fuel surcharges during the three-months ended March 31, 2013 compared to the same period of 2012. Historically, net sales are highest during the first quarter of each fiscal year (January – March) compared to the remaining quarters.

#### Cost of sales

Cost of sales increased approximately $0.5 million in the three months ended March 31, 2013 as compared to the same period of 2012. Gross profit as a percentage of sales was 8.7% in each of the three months ended March 31, 2013 and 2012. Slight increases in raw material costs in the first quarter of 2013 were offset by lower labor charges due to a product mix requiring less labor intensive costs.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended March 31, 2013, decreased approximately $0.2 million compared to the same period of 2012 primarily due to decreased costs related to headcount reduction.

#### Income from operations

Income from operations were $0.6 million for the three months ended March 31, 2013 compared to $0.3 million in the three months ended March 31, 2012, principally due to the factors described above.

### Arnold Magnetics

### Overview

Founded in 1895 and headquartered in Rochester, New York, Arnold Magnetics is a manufacturer of engineered, application specific permanent magnets. Arnold Magnetics products are used in applications such as general industrial, reprographic systems, aerospace and defense, advertising and promotional, consumer and appliance, energy, automotive and medical technology. Arnold Magnetics is the largest U.S. manufacturer of engineered magnets as well as only one of two domestic producers to design, engineer and manufacture rare earth magnetic solutions. Arnold operates a 70,000 sq. ft. manufacturing assembly and distribution facility in Rochester, New York with nine additional facilities worldwide, in countries including the United Kingdom, Switzerland and China. Arnold serves customers via three primary product sectors:

- Permanent Magnet and Assemblies and Reprographics (“PMAG”) (approximately 70% of sales) – High performance magnets for precision motor/generator sensors as well as beam focusing applications and reprographic applications;
- Flexmag (approximately 20% of net sales) – Flexible bonded magnets for advertising, consumer and industrial applications, and
- Rolled Products (approximately 10% of net sales) – Ultra thin metal foil products utilizing magnetic and non- magnetic alloys.

On March 5, 2012, we made loans to and purchased a controlling interest in Arnold Magnetics for approximately $131 million, representing approximately 96.6% of the equity in Arnold Magnetics.

### Results of Operations and Pro forma Results of Operations

The table below summarizes the income from operations data for Arnold Magnetics for the three month period ended March 31, 2013 and the pro-forma income from operations data for the three month period ended March 31, 2012.

*(in thousands)*

|  | Three months ended March 31, 2013 | March 31, 2012 (Pro-forma) |
| --- | ---: | ---: |
| Net sales | $30,373 | $34,546 |
| Cost of sales (a) | 23,467 | 26,261 |
| Gross profit | 6,906 | 8,285 |
| Selling, general and administrative expense (b) | 4,297 | 4,428 |
| Fees to manager (c) | 125 | 125 |
| Amortization of intangibles (d) | 874 | 822 |
| Income from operations | $1,610 | $2,910 |

*Pro-forma results of operations of Arnold Magnetics for the three months ended March 31, 2012 includes the following pro-forma adjustments, applied to historical results as if we acquired Arnold Magnetics on January 1, 2012:*

(a) Cost of sales for the three months ended March 31, 2012 does not include $3.2 million of amortization expense associated with the inventory fair value step-up as a result of and derived from the purchase price allocation in connection with our purchase.

(b) Selling, general and administrative expense was reduced by approximately $12.1 million in the three-months ended March 31, 2012 representing an adjustment for one-time transaction costs incurred as a result of our purchase.

(c) Represents management fees that would have been payable to the Manager during the three-months ended March 31, 2012.

(d) Represents an increase in amortization of intangible assets totaling $0.6 million in the three months ended March 31, 2012. These adjustments are the result of and were derived from the purchase price allocation in connection with our acquisition.

### Three months ended March 31, 2013 compared to the pro forma three months ended March 31, 2012

#### Net sales

Net sales for the three months ended March 31, 2013 were approximately $30.4 million, a decrease of $4.2 million, or 12.1%, compared to the same period in 2012. The decrease in net sales is a result of decreased sales in the PMAG ($1.7 million), Flexmag ($0.8 million) and Rolled Products ($1.7 million) product sectors. PMAG sales represented approximately 78.0% of net sales for the three months ended March 31, 2013 compared to 73.5% for the same period in 2012. The decrease in PMAG sales during the three-months ended March 31, 2013 compared to the same period in 2012 is principally attributable to lower reprographic application sales, a component of PMAG. The decrease in Rolled Products sales is attributable to market softness in the U.S. defense market and the European energy market.

International sales were $14.9 million during the three months ended March 31, 2013 compared to $15.5 million during the same period in 2012, a decrease of $0.6 million or 3.9%.

#### Cost of sales

Cost of sales for the three months ended March 31, 2013 were approximately $23.5 million compared to approximately $26.3 million in the same period of 2012. The decrease of $2.8 million is due principally to the corresponding decrease in sales. Gross profit as a percentage of sales decreased from 24.0% for the quarter ended March 31, 2012 to 22.7% in the quarter ended March 31, 2013. The decrease is attributable to decreased margins in the Flexmag and Rolled Products sectors due to unfavorable customer / product sales mixes, offset in part by an increase in margins at its PMAG product sector. The increase in margins in the PMAG sector are due to a more favorable customer/product sales mix, due in part to the decrease in reprographic application sales during the three-months ended March 31, 2013 compared to the same period in 2012.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended March 31, 2013 decreased to approximately $4.3 million or 14.1% of net sales compared to $4.4 million or 12.8% of net sales for the same period in 2012.

#### Income from operations

Income from operations for the three months ended March 31, 2013 was approximately $1.6 million, a decrease of $1.3 million when compared to the same period in 2012, based on the factors described above.

### CamelBak

### Overview

CamelBak, headquartered in Petaluma, California, is a premier designer and manufacturer of personal hydration products for outdoor, recreation and military applications. CamelBak offers a broad range of recreational and military personal hydration systems (“Hydration Systems”), reusable water bottles (“Bottles”), specialty military gloves (“Gloves”) and performance accessories (“Accessories”).

As the leading supplier of hydration products to specialty outdoor, cycling and military retailers, CamelBak maintains the leading market share position in recreational markets for hands-free hydration packs and the leading market share position for reusable water bottles in specialty channels. CamelBak is also the dominant supplier of hydration systems to the military, with a leading market share in post-issue hydration systems. Over its more than 20-year history, CamelBak has developed a reputation as the preferred supplier for the hydration needs of the most demanding athletes and soldiers. Across its markets, CamelBak is respected for its innovation, leadership and authenticity.

On August 24, 2011, we made loans to and purchased a controlling interest in CamelBak for approximately $258.6 million, representing 90% of the equity in CamelBak.

### Results of Operations

The table below summarizes the income from operations data for CamelBak for the three month periods ended March 31, 2013 and March 31, 2012.

*(in thousands)*

|  | Three months ended March 31, 2013 | March 31, 2012 |
| --- | ---: | ---: |
| Net sales | $42,755 | $40,189 |
| Cost of sales | 23,136 | 22,014 |
| Gross profit | 19,619 | 18,175 |
| Selling, general and administrative expense | 8,278 | 8,528 |
| Fees to manager | 125 | 125 |
| Amortization of intangibles | 2,278 | 2,378 |
| Income from operations | $8,938 | $7,144 |

29

### Three months ended March 31, 2013 compared to the three months ended March 31, 2012

#### Net sales

Net sales for the three months ended March 31, 2013 were approximately $42.8 million, an increase of $2.6 million, or 6.4%, compared to the same period in 2012. The increase in gross sales is a result of increased sales in Hydration Systems ($2.2 million), Bottles ($1.7 million) and Accessories ($0.5 million), offset in part by a decrease in sales in Gloves ($1.7 million). The increased sales during the three months ended March 31, 2013 compared to the same period in 2012 is attributable to the continued success of “Antidote”, CamelBak’s reservoir for the recreational Hydration Systems line, introduced in 2010, the expansion of offerings in Bottles, such as eddyTM, and the Podium line of insulated bottles, and the continued expansion in its customer base, including new and existing customers, for all product lines. In addition, CamelBak began providing Hydration Systems as a subcontractor as part of the United States Marine Corps pack program beginning at the end of 2011 which accounted for a substantial portion of Hydration Systems sales during the fiscal quarter’s ending March 31, 2013 and 2012. The Marine Corps contract was substantially completed during the quarter ending March 31, 2013. The decrease in Glove sales in the three-months ended March 31, 2013 compared to the same period in 2012 is principally due to continuing decreased demand from the U.S. Military.

Sales of Hydration Systems and Bottles represented approximately 88% of gross sales for the three months ended March 31, 2013 compared to 84% for the same period in 2012. Military sales were approximately 36% of gross sales for the three months ended March 31, 2013 compared to 35% for the same period in 2012. International sales were approximately 21% of gross sales for the three months ended March 31, 2013 compared to 20% for the same period in 2012.

#### Cost of sales

Cost of sales for the three months ended March 31, 2013 were approximately $23.1 million compared to approximately $22.0 million in the same period of 2012. The increase of $1.1 million is due principally to the corresponding increase in sales. Gross profit as a percentage of sales increased to 45.9% for the quarter ended March 31, 2013 compared to 45.2% in the quarter ended March 31, 2012. The increase is attributable to: (i) a favorable sales mix in Bottles and Hydration Systems during this year’s first quarter compared to last year’s quarter, and (ii) the decrease in Glove sales, which carries a lower gross profit margin than CamelBak’s other product sectors.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended March 31, 2013 decreased to approximately $8.3 million or 19.4% of net sales compared to $8.5 million or 21.2% of net sales for the same period of 2012.

#### Income from operations

Income from operations for the three months ended March 31, 2013 was approximately $8.9 million, an increase of $1.8 million when compared to the same period in 2012, based on the factors described above.

### Ergobaby

### Overview

Ergobaby, with headquarters in Los Angeles, California, is a premier designer, marketer and distributor of baby-wearing products, stroller travel systems and accessories. Ergobaby offers a broad range of wearable baby carriers, stroller travel systems and related products that are sold through more than 600 retailers and web shops in the United States and internationally in approximately 50 countries.

On September 16, 2010, we made loans to and purchased a controlling interest in Ergobaby for approximately $85.2 million, representing approximately 84% of the equity in Ergobaby.

On November 18, 2011, Ergobaby acquired Orbit Baby. Orbit Baby produces and markets a premium line of stroller travel systems. Orbit Baby’s high-quality products include car seats, strollers and bassinets that are interchangeable using a patented hub ring.

Both brands are well regarded in the infant and juvenile industry which has led to numerous awards and accolades from consumer surveys and publications.

### Results of Operations

The table below summarizes the income from operations data for Ergobaby for the three month periods ended March 31, 2013 and March 31, 2012.

*(in thousands)*

|  | Three-months ended March 31, 2013 | March 31, 2012 |
| --- | ---: | ---: |
| Net sales | $16,207 | $13,681 |
| Cost of sales | 6,048 | 5,715 |
| Gross profit | 10,159 | 7,966 |
| Selling, general and administrative expense | 6,577 | 5,414 |
| Fees to manager | 125 | 125 |
| Amortization of intangibles | 743 | 778 |
| Income from operations | $2,714 | $1,649 |

### Three-months ended March 31, 2013 compared to the three-months ended March 31, 2012

#### Net sales

Net sales for the three months ended March 31, 2013 were $16.2 million, an increase of $2.5 million or 18.5% compared to the same period in 2012. During the three-months ended March 31, 2013 international sales were approximately $9.1 million, representing an increase of $0.9 million over the corresponding period in 2012. International baby carrier and accessory sales increased by approximately $2.0 million, offset in part by a decrease in international stroller sales totaling approximately $1.1 million. International stroller sales were negatively impacted during the first quarter of 2013 by the timing of shipments to distributors. Domestic sales were $7.1 million in the first quarter of 2013 reflecting an increase of $1.6 million over the corresponding period in 2012. The increase in domestic sales in the first quarter of 2013 compared to 2012 is primarily attributable to increased sales of baby carriers and accessories to national retail accounts. Baby carriers and accessories represented 82.1% of gross sales in the three-months ended March 31, 2013 compared to 74.4% in the same period in 2012.

#### Cost of sales

Cost of sales for the three months ended March 31, 2013 were approximately $6.0 million compared to $5.7 million in the same period of 2012. The increase of $0.3 million is principally due to the increase in sales in 2013 compared to the same period in 2012. Gross profit as a percentage of sales was 62.7% for the quarter ended March 31, 2013 compared to 58.2% for the same period in 2012. The 4.5% increase is primarily attributable to $0.6 million in amortization expense reflected in cost of sales in the first quarter of 2012 resulting from an inventory fair value step-up as part of the purchase price allocation in connection with the acquisition of Orbit Baby in November 2011. Excluding the inventory step-up amortization charges reflected in 2012, gross profit as a percentage of sales was 62.4% in the 2012 period.

#### Selling, general and administrative expenses

Selling, general and administrative expense for the three months ended March 31, 2013 increased to approximately $6.6 million or 40.6% of net sales compared $5.4 million or 39.6% of net sales for the same period of 2012. The $1.2 million increase is primarily attributable to increases in employee related costs due to increased headcount to support business growth.

#### Income from operations

Income from operations for the three months ended March 31, 2013 increased $1.1 million, to $2.7 million, as compared to $1.6 million the same period of 2012, based on the factors described above.

### Fox Factory

### Overview

Fox, headquartered in Scotts Valley, California, is a branded action sports company that designs, manufactures and markets high-performance suspension products for mountain bikes and power sports, which include: snowmobiles, motorcycles, all-terrain vehicles (ATVs), and other off-road vehicles.

Fox’s products are recognized by manufacturers and consumers as being among the most technically advanced suspension products currently available in the marketplace in their respective product categories. Fox’s technical success is demonstrated by its large number of award winning performances by professional athletes who use its suspension products. As a result, Fox’s suspension components are incorporated by original equipment manufacturer (“OEM”) customers on their high-performance models in the mountain bike and powered vehicle product categories. We believe OEMs seek to capitalize on the strength of Fox’s brand to maintain and expand their own sales and margins. In the Aftermarket channel, consumers seeking higher performance select Fox’s suspension components to enhance their existing equipment.

Fox sells to more than 150 OEM and 2,300 retail dealers and distributors across its market product categories worldwide. In each of the years 2012 and 2011, approximately 80% of Fox’s sales were to OEM customers. The remaining sales were to Aftermarket customers.

We purchased a controlling interest in Fox in January 2008.

### Results of Operations

The table below summarizes the income from operations data for Fox for the three-month periods ended March 31, 2013 and March 31, 2012.

*(in thousands)*

|  | Three-months ended March 31, 2013 | March 31, 2012 |
| --- | ---: | ---: |
| Net sales | $54,879 | $45,672 |
| Cost of sales | 39,164 | 32,572 |
| Gross profit | 15,715 | 13,100 |
| Selling, general and administrative expense | 8,187 | 7,380 |
| Fees to manager | 125 | 125 |
| Amortization of intangibles | 1,341 | 1,304 |
| Income from operations | $6,062 | $4,291 |

### Three months ended March 31, 2013 compared to the three months ended March 31, 2012

#### Net sales

Net sales for the three months ended March 31, 2013 increased approximately $9.2 million, or 20.2%, compared to the corresponding period in 2012. Sales growth was primarily driven by sales to OEMs, which increased $7.7 million to $43.7 million during the three months ended March 31, 2013 compared to $36.0 million for the same period in 2012. The increase in net sales to OEMs is largely driven by increased spec with our customers. The remaining increase in sales totaling $1.5 million reflects increased sales to Aftermarket customers in the three-months ended March 31, 2013 compared to the same period in 2012. The increase in sales to Aftermarket customers is due to higher end user demand for our products.

#### Cost of sales

Cost of sales for the three months ended March 31, 2013 increased approximately $6.6 million, or 20.2%, compared to the corresponding period in 2012. The increase in cost of sales is primarily due to increased net sales. Gross profit as a percentage of sales was approximately 28.6% for the three months ended March 31, 2013 compared to 28.7% for the same period in 2012.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended March 31, 2013 increased $0.8 million to approximately $8.2 million or 14.9% of net sales compared to $7.4 million or 16.2% of net sales for the same period of 2012. The increase is primarily attributable to increases in employee related costs required to support top line growth.

#### Income from operations

Income from operations for the three months ended March 31, 2013 increased approximately $1.8 million, to $6.1 million, when compared to the corresponding period in 2012, principally as a result of the increase in net sales and other factors, as described above.

### Liberty Safe

### Overview

Based in Payson, Utah and founded in 1988, Liberty Safe is the premier designer, manufacturer and marketer of home and gun safes in North America. From its over 204,000 square foot manufacturing facility, Liberty Safe produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Products are marketed under the Liberty brand, as well as a portfolio of licensed and private label brands, including Remington, Cabela’s and John Deere. Liberty Safe’s products are the market share leader and are sold through an independent dealer network (“Dealer sales”) in addition to various sporting goods, farm & fleet, and home improvement retail outlets (“Non-Dealer sales”). Liberty has the largest independent dealer network in the industry.

Historically, approximately 60% of Liberty Safe’s net sales are Non-Dealer sales and 40% are Dealer sales.

We purchased a controlling interest in Liberty Safe in March 2010.

### Results of Operations

The table below summarizes the income from operations data for Liberty Safe for the three-month periods ended March 31, 2013 and March 31, 2012.

*(in thousands)*

|  | Three-months ended March 31, 2013 | March 31, 2012 |
| --- | ---: | ---: |
| Net sales | $29,732 | $21,151 |
| Cost of services | 22,099 | 16,105 |
| Gross profit | 7,633 | 5,046 |
| Selling, general and administrative expense | 3,421 | 3,052 |
| Fees to manager | 125 | 125 |
| Amortization of intangibles | 1,230 | 1,294 |
| Income from operations | $2,857 | $575 |

### Three months ended March 31, 2013 compared to the three months ended March 31, 2012

#### Net sales

Net sales for the quarter ended March 31, 2013 increased approximately $8.6 million or 40.6% compared to the corresponding quarter ended March 31, 2012. Non-Dealer sales were approximately $18.2 million in the three months ended March 31, 2013 compared to $12.6 million for the three months ended March 31, 2012 representing an increase of $5.6 million or 44.4 %. Dealer sales totaled approximately $11.5 million in the three months ended March 31, 2013 compared to $8.6 million in the same period in 2012, representing an increase of $2.9 million or 33.7%. The increase in Non-Dealer sales in the three-months ended March 31, 2013 is due in large part to increased sales to Liberty’s two largest Non-Dealer accounts in connection with their expansion of new stores. Liberty is the sole provider of safes to these two accounts. In addition, the significant increase in net sales at both the Dealer and Non-Dealer level is the result of (i) strong demand for Liberty branded product by many gun owners due to increased gun and ammunition sales resulting from potential challenges by Federal and state government to the second amendment, and (ii) increased availability of import safes and safes manufactured in-house, on Liberty’s new production line.

#### Cost of sales

Cost of sales for the quarter ended March 31, 2013 increased approximately $6.0 million when compared to the same period in 2012. Gross profit as a percentage of net sales totaled approximately 25.7% and 23.9% of net sales for the quarters ended March 31, 2013 and March 31, 2012, respectively. The increase in gross profit as a percentage of sales during the three-months ended March 31, 2013 compared to the same period in 2012 is principally attributable to Dealer and Non-Dealer price increases enacted during the first quarter of 2013, manufacturing efficiencies and a favorable product sales mix.

#### Selling, general and administrative expense

Selling, general and administrative expense for the quarter ended March 31, 2013, increased approximately $0.4 million compared to the same period in 2012. This increase is principally the result of increases in the following costs: (i) commission for the increase in sales, and compensation expense, of $0.1 million, (ii) co-op advertising and national advertising totaling $0.2 million, and (iii) other miscellaneous costs of $0.1 million, including depreciation, travel, legal, and other costs.

#### Income from operations

Income from operations increased $2.3 million during the three-months ended March 31, 2013 compared to the same period in 2012, principally as a result of the increase in net sales and other factors, as described above.

### Tridien

### Overview

Tridien Medical, headquartered in Coral Springs, Florida, is a leading designer and manufacturer of powered and non-powered medical therapeutic support services and patient positioning devices serving the acute care, long-term care and home health care markets. Tridien is one of the nation’s leading designers and manufacturers of specialty therapeutic support surfaces with manufacturing operations in multiple locations to better serve a national customer base.

Tridien, together with its subsidiary companies, provides customers the opportunity to source leading surface technologies from the designer and manufacturer.

Tridien develops products both independently and in partnership with large distribution intermediaries. Medical distribution companies then sell or rent the therapeutic support surfaces, sometimes in conjunction with bed frames and accessories to one of three end markets: (i) acute care, (ii) long term care and (iii) home health care. The level of sophistication largely varies for each product, as some patients require simple foam mattress beds (“non-powered” support surfaces) while others may require electronically controlled, low air loss, lateral rotation, pulmonary therapy or alternating pressure surfaces (“powered” support surfaces). The design, engineering and manufacturing of all products are completed in-house (with the exception of PrimaTech products, which are manufactured in Taiwan) and are FDA compliant.

We purchased a controlling interest in Tridien in August 2006.

### Results of Operations

The table below summarizes the income from operations data for Tridien for the three-month periods ended March 31, 2013 and March 31, 2012.

*(in thousands)*

|  | Three-months ended March 31, 2013 | March 31, 2012 |
| --- | ---: | ---: |
| Net sales | $15,041 | $13,606 |
| Cost of sales | 11,557 | 10,199 |
| Gross profit | 3,484 | 3,407 |
| Selling, general and administrative expense | 2,324 | 2,106 |
| Fees to manager | 87 | 87 |
| Amortization of intangibles | 319 | 322 |
| Income from operations | $754 | $892 |

34

### Three months ended March 31, 2013 compared to the three months ended March 31, 2012

#### Net sales

Net sales for the three months ended March 31, 2013 were approximately $15.0 million compared to approximately $13.6 million for the same period in 2012, an increase of $1.4 million or 10.5%. Sales of non-powered products (including patient positioning devices) totaled $11.9 million during the three months ended March 31, 2013 representing an increase of $0.8 million compared to the same period in 2012. Sales of powered products totaled $3.1 million during the three months ended March 31, 2013 representing an increase of $0.6 million compared to the same period in 2012. These increases are the result of new product sales during the first quarter of 2013.

#### Cost of sales

Cost of sales increased approximately $1.4 million for the three months ended March 31, 2013 compared to the same period in 2012. Gross profit as a percentage of sales was 23.2% for the three months ended March 31, 2013 compared to 25.0% in the corresponding period in 2012. The decrease in gross profit as a percentage of sales was primarily due to increased warranty costs and operational inefficiencies resulting from an unfavorable product mix during the three months ended March 31, 2013 compared to the same period in 2012.

#### Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended March 31, 2013 increased $0.2 million compared to the same period in 2012.

#### Income from operations

Income from operations decreased approximately $0.1 million to $0.8 million for the three months ended March 31, 2013 compared to the same period in 2012 based on those factors described above.

### Liquidity and Capital Resources

For the three-months ended March 31, 2013, on a consolidated basis, cash flows provided by operating activities totaled approximately $20.1 million, which represents a $24.9 million increase compared to the three-month period ended March 31, 2012 cash used in operations of $4.8 million. This increase is principally the result of the cash used to pay the profit allocation to CGM related to the sale of our former subsidiary, Staffmark in October 2011 ($13.7 million) in the three months ended March 31, 2012 together with the increase in net income of our businesses for the three-months ended March 31, 2013 compared to 2012 ($7.8 million).

Cash flows used in investing activities for the three-months ended March 31, 2013 totaled approximately $3.2 million, which reflects capital expenditures during the period, compared to $123.1 million of cash flows used in the same period of 2012, which reflects the use of cash to purchase Arnold ($123.6 million) and capital expenditures ($3.4 million) offset in part by proceeds received from the sale of Staffmark ($5.0 million).

Cash flows used in financing activities during the three-months ended March 31, 2013 totaled approximately $18.1 million, principally reflecting; (i) distributions paid to shareholders during the quarter totaling approximately $17.4 million; (ii) the non-controlling interest portion of the Tridien preferred stock redemption ($3.1 million), offset in part by net borrowings under our Credit Facility ($2.4 million) compared to cash flows provided by financing activities totaling approximately $17.9 million during the three-months ended March 31, 2012, which reflects; (i) distributions paid to shareholders during the quarter ($17.4 million); (ii) repayments of preferred stock and accumulated interest at our CamelBak subsidiary ($48.0 million); offset by (iii) borrowings on our Revolving Credit Facility ($80.0 million) and proceeds from non-controlling shareholders ($4.6 million).

At March 31, 2013 we had approximately $16.5 million of cash and cash equivalents on hand. The majority of our cash is in non-interest bearing checking accounts or invested in short-term money market accounts and is maintained in accordance with the Company’s investment policy, which identifies allowable investments and specifies credit quality standards.

As of March 31, 2013, we had the following outstanding loans due from each of our businesses:

- Advanced Circuits – $98.9 million;
- American Furniture – $16.0 million;
- Arnold Magnetics – $80.9 million;
- CamelBak – $128.6 million;
- Ergobaby – $51.9 million;
- Fox – $52.9 million;
- Liberty – $36.3 million; and
- Tridien – $18.1 million.

Each loan to our businesses has a scheduled maturity and each business is entitled to repay all or a portion of the principal amount of the outstanding loans, without penalty, prior to maturity.

Our primary source of cash is from the receipt of interest and principal on the outstanding loans to our businesses. Accordingly, we are dependent upon the earnings of and cash flow from these businesses, which are available for (i) operating expenses; (ii) payment of principal and interest under our Credit Facility; (iii) payments to CGM due pursuant to the Management Services Agreement, the LLC Agreement, and the Supplemental Put Agreement; (iv) cash distributions to our shareholders; and (v) investments in future acquisitions. Payments made under (iii) above are required to be paid before distributions to shareholders and may be significant and exceed the funds held by us, which may require us to dispose of assets or incur debt to fund such expenditures.

We recognized a non-cash charge to earnings of approximately $6.4 million during the three months ended March 31, 2013 in order to reflect an increase in our estimated liability in connection with the Supplemental Put Agreement between us and CGM. A liability of approximately $58.0 million is reflected in our condensed consolidated balance sheet, which represents our estimated liability for this obligation at March 31, 2013.

The current portion of the supplemental put liability of $5.6 million represents an accrual for the contribution-based profit allocation that will be paid to our Manager during the second quarter of 2013. This accrual represents the contribution-based profit for the fifth anniversary date of the acquisition of Fox and reduces the overall supplemental put liability when paid. The Manager can elect to receive the positive contribution-based profit allocation payment for each of our business acquisitions during the 30-day period following each fifth anniversary of the date upon which we acquired a controlling interest in that business.

The following table provides the contribution-based profit (loss) for each of the businesses we control at March 31, 2013 and the respective quarter end in which each five year anniversary occurs, reconciled to the total supplemental put liability:

*(in thousands)*

|  | Contribution- based profit allocation accrual at March 31, 2013 | Quarter End of Fifth Anniversary |
| --- | ---: | --- |
| Advanced Circuits | $3,059 | June 30, 2016 |
| American Furniture | (13,980) | September 30, 2017 |
| Arnold Magnetics | (1,210) | March 31, 2017 |
| CamelBak | (165) | September 30, 2016 |
| Ergobaby | 842 | September 30, 2015 |
| FOX | 5,603 | March 31, 2013 |
| Liberty | 286 | March 31, 2015 |
| Tridien | (497) | September 30, 2016 |
| Total contribution-based profit portion | $(6,062) |  |
| Estimated gain on sale portion | 64,056 |  |
| Total supplemental put liability | $57,994 |  |

We believe that we currently have sufficient liquidity and resources to meet our existing obligations, including quarterly distributions to our shareholders, as approved by our Board of Directors, over the next twelve months. The quarterly distribution for the three months ended March 31, 2013 was paid on April 30, 2013 and was $17.4 million.

On March 31, 2013, our Credit Facility provided for a Revolving Credit Facility totaling $290 million which matures in October 2016 and a Term Loan Facility totaling $225 million, which matures in October 2017.

On April 3, 2013, we exercised an option to increase the Term Loan Facility by $30.0 million. 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 4.00% with a LIBOR floor of 1.00% and borrowings under the Revolving Credit Facility now bear interest at LIBOR plus 1.50% – 2.50%. In addition the amendment provided 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 and expenses of approximately $1.9 million in connection with this Amendment.

The Term Loan Facility requires quarterly payments of $0.7 million with a final payment of the outstanding principal balance due in October 2017.

At March 31, 2013, we had $27.0 million in outstanding borrowings under the Revolving Credit Facility.

We had approximately $261 million in borrowing base availability under this facility at March 31, 2013. Letters of Credit totaling $1.8 million were outstanding at March 31, 2013. We currently have no exposure to failed financial institutions.

The following table reflects required and actual financial ratios as of March 31, 2013 included as part of the affirmative covenants in our Credit Agreement:

|  |  |  |
| --- | --- | --- |
| Description of Required Covenant Ratio | Covenant Ratio Requirement | Actual Ratio |
| Fixed Charge Coverage Ratio | greater than or equal to 1.5:1.0 | 2.94:1.0 |
| Total Debt to EBITDA Ratio | less than or equal to 3.5:1.0 | 1.79:1.0 |

We intend to use the availability under our Credit Facility and cash on hand to pursue acquisitions of additional businesses to the extent permitted under our Credit Facility, to fund distributions and to provide for other working capital needs. We have considered the impact of recent market instability and credit availability in assessing the adequacy of our liquidity and capital resources.

The Credit Facility requires us to hedge the interest on $126 million of outstanding debt under the Term Loan Facility. We entered into the following derivative transactions on October 31, 2011:

- On October 31, 2011, we purchased a two-year interest rate cap (“Cap”) with a notional amount of $200 million effective December 31, 2011 through December 31, 2013. The agreement caps three-month LIBOR at 2.5% in exchange for a fixed payment of $0.3 million. At March 31, 2013 this Cap had a fair value of $0.0 million.
- On October 31, 2011, we purchased a three-year interest rate swap (“Swap”) with a notional amount of $200 million effective January 1, 2014 through December 31, 2016. The agreement requires us to pay interest on the notional amount at the rate of 2.49% in exchange for the three-month LIBOR rate, with a floor of 1.5%. At March 31, 2013, this Swap had a fair value of negative $4.0 million and is reflected as a component of other non-current liabilities ($3.6 million) with the remaining balance included as a component of current liabilities.

#### Interest Expense

We incurred interest expense totaling $5.3 million for the three months ended March 31, 2013 compared to $6.0 million for the same period in 2012. The components of interest expense are as follows (in thousands):

|  | Three months ended March 31, 2013 | 2012 |
| --- | ---: | ---: |
| Interest on credit facilities | $4,290 | $4,495 |
| Unused fee on revolving credit facility | 645 | 660 |
| Amortization of original issued discount | 360 | 375 |
| Unrealized (gains) losses on interest rate derivatives | (3) | 468 |
| Letter of credit fees | 26 | 26 |
| Other | 23 | 5 |
| Interest expense | $5,341 | $6,029 |
| Average daily balance of debt outstanding | $282,520 | $250,757 |
| Effective interest rate | 7.6% | 9.6% |

#### Income Taxes

We incurred income tax expense of $7.7 million with an effective income tax rate of 68% during the three-months ended March 31, 2013 compared to $4.1 million with an effective income tax rate of 91.8% during the same period in 2012. A portion of the acquisition costs expensed during the three months ended March 31, 2012 in connection with the acquisition of Arnold are not tax deductible, and losses incurred at the corporate level, which is an LLC, are not tax deductible as those costs are passed through to the shareholders. For the three-months ended March 31, 2012, these two items accounted for 31.5% and 16.4%, respectively, of the increased effective tax rate compared to the Federal statutory rate at March 31, 2012. Non-deductible costs incurred at the corporate level increased the effective income tax rate by 21.2% during the three months ended March 31, 2013. State and foreign income taxes (net of the Federal benefit) accounts for the majority of the remaining increase in our effective income tax rates in both periods.

The components of income tax expense as a percentage of income from continuing operations before income taxes for the three months ended March 31, 2013 and 2012 are as follows:

|  | Three months ended March 31, 2013 | 2012 |
| --- | ---: | ---: |
| United States Federal Statutory Rate | 35.0% | 35.0% |
| Foreign and State income taxes (net of Federal benefits) | 12.2 | 15.6 |
| Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders (1) | 21.2 | 16.4 |
| Impact of subsidiary employee stock options | 1.0 | 1.9 |
| Domestic production activities deduction | (2.5) | (9.2) |
| Non-deductible acquisition costs | — | 31.5 |
| Non-recognition of NOL carry forwards at subsidiaries | (2.0) | 4.9 |
| Other | 3.1 | (4.3) |
| Effective income tax rate | 68.0% | 91.8% |

(1) The effective income tax rate for all periods includes a significant loss at the Company‘s parent which is taxed as a partnership.

### Reconciliation of Non-GAAP Financial Measures

U.S. GAAP refers to generally accepted accounting principles in the United States. From time to time we may publicly disclose certain “non-GAAP” financial measures in the course of our investor presentations, earnings releases, earnings conference calls or other venues. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented.

Non-GAAP financial measures are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These measures are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.

The tables below reconcile the most directly comparable GAAP financial measures to Earnings before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”), Adjusted EBITDA, and Cash Flow Available for Distribution and Reinvestment (“CAD”).

#### Reconciliation of Net income (Loss) to EBITDA and Adjusted EBITDA

**EBITDA –** EBITDA is calculated as income (loss) from continuing operations before interest expense, income tax expense (benefit), depreciation expense and amortization expense. Amortization expenses consist of amortization of intangibles and debt charges, including debt issuance costs, discounts, etc.

**Adjusted EBITDA –** Adjusted EBITDA is calculated utilizing the same calculation as described above in arriving at EBITDA further adjusted by; (i) non-controlling stockholder compensation, which generally consists of non-cash stock option expense; (ii) successful acquisition costs, which consist of transaction costs (legal, accounting , due diligences, etc.,) incurred in connection with the successful acquisition of a business expensed during the period in compliance with ASC 805; (iii) increases or decreases in supplemental put charges, which reflect the estimated potential liability due to our Manager that requires us to acquire their Allocation Interests in the Company at a price based on a percentage of the fair value in our businesses over their original basis plus a hurdle rate (essentially, when the fair value of our businesses increase we will incur additional supplemental put charges and vice versa when the fair value of our businesses decrease); (iv) management fees, which reflect fees due quarterly to our Manager in connection with our Management Services Agreement (“MSA’); (v) impairment charges, which reflect write downs to goodwill or other intangible assets and (vi) gains or losses recorded in connection with the sale of fixed assets.

We believe that EBITDA and Adjusted EBITDA provide useful information to investors and reflect important financial measures as they exclude the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near term operations. When compared to income (loss) from continuing operations these financial measures are limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated with impairments. This presentation also allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition.

We believe these measurements are also useful in measuring our ability to service debt and other payment obligations. EBITDA and Adjusted EBITDA are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.

The following table reconciles EBITDA and Adjusted EBITDA to net income (loss), which we consider to be the most comparable GAAP financial measure *(in thousands):*

### Adjusted EBITDA

### Three months ended March 31, 2013

|  | Consolidated | Corporate | Advanced Circuits | American Furniture | Arnold Magnetics | CamelBak | Ergobaby | Fox | Liberty | Tridien | Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| **Net income (loss)** | $3,626 | $(6,902) | $2,136 | $94 | $(453) | $3,004 | $699 | $3,552 | $1,150 | $346 | $3,626 |
| Adjusted for: |  |  |  |  |  |  |  |  |  |  |  |
| Provision (benefit) for income taxes | 7,699 | (26) | 1,686 | — | 132 | 3,104 | 462 | 1,588 | 578 | 175 | 7,699 |
| Interest expense, net | 5,339 | 5,315 | — | 4 | (1) | — | 19 | 2 | — | — | 5,339 |
| Intercompany interest | — | (10,796) | 1,948 | 449 | 1,834 | 3,001 | 1,454 | 840 | 1,067 | 203 | — |
| Depreciation and amortization | 12,087 | (131) | 1,344 | 78 | 2,073 | 3,338 | 997 | 1,993 | 1,813 | 582 | 12,087 |
| **EBITDA** | 28,751 | (12,540) | 7,114 | 625 | 3,585 | 12,447 | 3,631 | 7,975 | 4,608 | 1,306 | 28,751 |
| (Gain) loss on sale of fixed assets | 16 | — | — | (6) | (2) | 14 | — | (7) | — | 17 | 16 |
| Non-controlling shareholder compensation | 1,301 | — | 6 | — | 35 | 236 | 201 | 700 | 100 | 23 | 1,301 |
| Supplemental put expense | 6,396 | 6,396 | — | — | — | — | — | — | — | — | 6,396 |
| Management fees | 4,316 | 3,478 | 125 | — | 125 | 125 | 125 | 125 | 125 | 88 | 4,316 |
| **Adjusted EBITDA** | $40,780 | $(2,666) | $7,245 | $619 | $3,743 | $12,822 | $3,957 | $8,793 | $4,833 | $1,434 | $40,780 |

### Adjusted EBITDA

### Three months ended March 31, 2012

|  | Consolidated | Corporate | Advanced Circuits | American Furniture | Arnold Magnetics | CamelBak | Ergobaby | Fox | Liberty | Tridien | Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| **Net income (loss)** | $889 | $(2,133) | $3,135 | $(177) | $(4,644) | $1,989 | $(49) | $2,639 | $(377) | $506 | $889 |
| Adjusted for: |  |  |  |  |  |  |  |  |  |  |  |
| Provision (benefit) for income taxes | 4,099 | (22) | 1,625 | — | (646) | 1,663 | (31) | 1,373 | (206) | 343 | 4,099 |
| Interest expense, net | 5,996 | 5,972 | — | 4 | (1) | — | 19 | 2 | — | — | 5,996 |
| Intercompany interest | — | (8,341) | 1,305 | 429 | 578 | 3,162 | 1,604 | 181 | 1,049 | 33 | — |
| Depreciation and amortization | 12,620 | (131) | 1,312 | 121 | 2,138 | 3,407 | 1,523 | 1,764 | 1,911 | 575 | 12,620 |
| **EBITDA** | 23,604 | (4,655) | 7,377 | 377 | (2,575) | 10,221 | 3,066 | 5,959 | 2,377 | 1,457 | 23,604 |
| Income from discontinued operations | (522) | (522) | — | — | — | — | — | — | — | — | (522) |
| (Gain) loss on sale of fixed assets | 6 | — | — | (4) | — | — | — | — | 10 | — | 6 |
| Non-controlling shareholder compensation | 791 | 6 | — | 54 | — | 225 | 111 | 303 | 68 | 24 | 791 |
| Acquisition expenses | 4,325 | 100 | — | — | 4,225 | — | — | — | — | — | 4,325 |
| Supplemental put expense (reversal) | (1,540) | (1,540) | — | — | — | — | — | — | — | — | (1,540) |
| Management fees | 4,532 | 3,819 | 125 | — | — | 125 | 125 | 125 | 125 | 88 | 4,532 |
| **Adjusted EBITDA (a)(b)** | $31,196 | $(2,792) | $7,502 | $427 | $1,650 | $10,571 | $3,302 | $6,387 | $2,580 | $1,569 | $31,196 |

***(a)*** As a result of the sale of our HALO subsidiary in May 2012, Adjusted EBITDA does not include EBITDA from HALO for the period January 1, 2012 through March 31, 2012 of $1.5 million.

***(b)*** Adjusted EBITDA at our Arnold Magnetic subsidiary reflects results of operations from our acquisition date of March 5, 2012 through March 31, 2012.

#### Reconciliation of net income to CAD

CAD is a non-GAAP measure that we believe provides additional, useful information to evaluate our ability to make anticipated quarterly distributions. CAD is not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.

The following table reconciles cash receipts and payments that are not reflected on our income statement to net income (loss) and cash flows provided by (used in) operating activities, which we consider the most directly comparable GAAP financial measures in order to provide an additional measure of management’s estimate of CAD.

*(in thousands)*

|  | Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 |
| --- | ---: | ---: |
| Net income | $3,626 | $889 |
| Adjustment to reconcile net income to cash provided by (used in)operating activities: |  |  |
| Depreciation and amortization | 11,611 | 13,090 |
| Supplemental put expense (reversal) | 6,396 | (1,540) |
| Amortization of debt issuance costs and original issue discount | 845 | 731 |
| Noncontrolling stockholders charges | 1,301 | 791 |
| Unrealized (gain) loss on interest rate and foreign currency hedges | (385) | 345 |
| Deferred taxes | (857) | (49) |
| Other | (71) | 830 |
| Changes in operating assets and liabilities | (2,340) | (19,893) |
| Net cash provided by (used in) operating activities | 20,126 | (4,806) |
| Plus: |  |  |
| Unused fee on revolving credit facility (1) | 645 | 660 |
| Successful acquisition expense (2) | — | 4,325 |
| Changes in operating assets and liabilities | 2,340 | 19,893 |
| Other | 71 | — |
| Less: |  |  |
| Other | — | 830 |
| Maintenance capital expenditures: (3) |  |  |
| Compass Group Diversified Holdings LLC | — | — |
| Advanced Circuits | 209 | 44 |
| American Furniture | 113 | 22 |
| Arnold | 488 | 111 |
| CamelBak | 212 | 271 |
| Ergobaby | 334 | 61 |
| Fox | 853 | 1,313 |
| Halo (divested May 2012) | — | 289 |
| Liberty | 76 | 133 |
| Tridien | 61 | 350 |
| **Estimated cash flow available for distribution and reinvestment** | $20,836 | $16,648 |
| Distribution paid in April 2013/2012 | $(17,388) | $(17,388) |

(1) Represents the commitment fees on the unused portion of our Revolving Credit Facility.

(2) Represents successful acquisition transaction costs.

(3) Represents maintenance capital expenditures that were funded from operating cash flow and excludes growth capital expenditures of approximately $1.0 million and $0.8 million incurred during the three months ended March 31, 2013 and 2012, respectively

Earnings of certain of our operating segments are seasonal in nature. Earnings from AFM are typically highest in the months of January through April of each year, coinciding with homeowners’ tax refunds. Revenue and earnings from Fox are typically highest in the third quarter, coinciding with the delivery of product for the new bike year. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Earnings from CamelBak are typically higher in the spring and summer months than other months as this corresponds with warmer weather in the Northern Hemisphere and an increase in hydration related activities.

### Related Party Transactions and Certain Transactions Involving our Businesses

#### Tridien Preferred Stock Redemption

On February 7, 2013, Tridien redeemed 175,000 shares of its Redeemable Preferred Stock at a redemption price of $100 per share, aggregating $17.5 million. We received $14.4 million of the redemption payout and non-controlling shareholders of Tridien received the remaining $3.1 million. In connection with this redemption, Tridien amended its inter-company loan agreement (the “Loan Agreement”). The Loan Agreement was amended to (i) provide for additional term loan borrowings of $16.5 million and reduce the revolving loan commitment to $4.0 million, (ii) to permit the proceeds from the additional term loans and an additional advance under the revolving loan commitment to fund the preferred stock redemption, (iii) extend the maturity dates of the term loans and revolving loan commitment under the Loan Agreement, (iv) provide for annual amortization of $500,000 in respect of such additional term loan borrowings constituting Term A Loans, and (v) modify borrowing rates under the Loan Agreement. All other material terms and conditions of the Loan Agreement were unchanged.

### Contractual Obligations and Off-Balance Sheet Arrangements

We have no special purpose entities or off balance sheet arrangements, other than operating leases entered into in the ordinary course of business.

Long-term contractual obligations, except for our long-term debt obligations, are generally not recognized in our consolidated balance sheet. Non-cancelable purchase obligations are obligations we incur during the normal course of business, based on projected needs.

The table below summarizes the payment schedule of our contractual obligations at March 31, 2013:

|  | Total | Less than 1 Year | 1 -3 Years | 3 -5 Years | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Long-term debt obligations (a) | $376,246 | $24,582 | $48,544 | $303,120 | $— |
| Operating lease obligations (b) | 62,719 | 12,018 | 21,854 | 12,357 | 16,490 |
| Purchase obligations (c) | 230,790 | 155,525 | 38,844 | 36,421 | — |
| Supplemental put obligation (d) | 9,790 | 5,603 | 1,128 | 3,059 | — |
| Total | $679,545 | $197,728 | $110,370 | $354,957 | $16,490 |

(a) Reflects commitment fees and letter of credit fees under our Revolving Credit Facility and amounts due, together with interest on our Term Loan Facility.

(b) Reflects various operating leases for office space, manufacturing facilities and equipment from third parties with various lease terms running from one to fourteen years.

(c) Reflects non-cancelable commitments as of March 31, 2013, including: (i) shareholder distributions of $69.6 million; (ii) management fees of $18.0 million per year over the next five years, and (iii) other obligations including amounts due under employment agreements. Distributions to our shareholders are approved by our Board of Directors each quarter. The amount ultimately approved as future quarterly distributions may differ from the amount included in this schedule.

(d) The supplemental put obligation represents the estimated long term liability, accrued as if our management services agreement with CGM had been terminated. This agreement has not been terminated and there is no basis upon which to determine a date in the future, if any, that the estimated gain on sale portion will be paid. The Manager can elect to receive the positive contribution-based profit allocation payment for each of our business acquisitions during the 30-day period following each fifth anniversary of the date upon which we acquired a controlling interest in that business. See Liquidity and capital resources.

### Critical Accounting Estimates

The preparation of our financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates under different assumptions and judgments and uncertainties, and potentially could result in materially different results under different conditions. These critical accounting estimates are reviewed periodically by our independent auditors and the audit committee of our board of directors.

Except as set forth below, our critical accounting estimates have not changed materially from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the year ended December 31, 2012, as filed with the SEC.

#### 2013 Annual goodwill impairment testing

Goodwill represents the excess amount of the purchase price over the fair value of the assets acquired. We are required to perform impairment reviews of goodwill balances at each of our Reporting Units (“RU”) at least annually and more frequently in certain circumstances. Each of our businesses represents a RU and Arnold is comprised of three RUs. Each of our RU is subject to impairment review at March 31, 2013, which represents our annual date for impairment testing with the exception of American Furniture. The balance of American Furniture’s goodwill was completely written off in 2011.

The Financial Accounting Standards Board issued an accounting Standards Update 2011-08 (“2011 ASU”) in September 2011 that permits companies to make a qualitative assessment of whether it is more likely than not that a RU fair value is less than it carrying amount before applying the two-step goodwill impairment test. If a company concludes that it is not more likely than not that the fair value of a RU is less than its carrying amount it is not required to perform the two-step impairment test for that RU. This 2011 ASU is effective for fiscal years beginning after December 15, 2011. At March 31, 2013, we have elected to use the qualitative assessment alternative to test goodwill for impairment for each of our RU that maintains a goodwill carrying value. We are currently in the process of evaluating the qualitative factors of each RU to determine that the fair value of a RU exceeds its carrying value (step 0). To date, we have determined that the three RUs at Arnold will require further quantitative testing (step 1) because we could not conclude that the fair value of the RUs exceeds their carrying value based on qualitative factors.

#### 2013 Annual indefinite-lived impairment testing

The Financial Accounting Standards Board issued an accounting Standards Update 2012 (“2012 ASU”) in September 2011 that permits companies to make a qualitative assessment of whether it is more likely than not that an indefinite-live intangible asset, other than goodwill, is impaired. This ASU is effective for fiscal years beginning after December 15, 2012.

The optional qualitative assessment permits an entity to consider events and circumstances that could affect the fair value of the indefinite-lived intangible asset and avoid the quantitative test if the entity is able to support a conclusion that the indefinite-lived intangible asset is not impaired. Our indefinite-lived intangible assets consist of trade names with a carrying value of approximately $132.5 million. At March 31, 2013, we elected to use the qualitative assessment alternative to test our indefinite-lived intangible assets for impairment. We are currently in the process of evaluating the qualitative factors of each trade name to determine that the fair value exceeds its carrying value (step 0).

### Recent Accounting Pronouncements

Refer to footnote C to our condensed consolidated financial statements.

## Market risk

As filed, 638 characters.

There have been no material changes to our market risk since December 31, 2012. For a discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

At March 31, 2013, we have several derivative instruments in the form of forward contracts and options that hedge the value of the Eurodollar. The nominal value of these instruments total approximately $7.8 million. Mark-to-market gains aggregating approximately $0.3 million were recognized during the three-months ended March 31, 2013.

## Controls and procedures

As filed, 638 characters.

As required by Exchange Act Rule 13a-15(b), Holdings’ Regular Trustees and the Company’s management, including the Chief Executive Officer and Chief Financial Officer of the Company, conducted an evaluation of the effectiveness of Holdings’ and the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of March 31, 2013. Based on that evaluation, the Holdings’ Regular Trustees and the Chief Executive Officer and Chief Financial Officer of the Company concluded that Holdings’ and the Company’s disclosure controls and procedures were effective as of March 31, 2013.

### PART II

### OTHER INFORMATION

## Risk factors

As filed, 312 characters.

There have been no material changes in those risk factors and other uncertainties associated with the Company and Holdings discussed in the section entitled “Risk Factors” disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 7, 2013.

Filed May 7, 2013.
Source: SEC EDGAR, the filing index for accession 0001193125-13-204397. Last ingested by Listed: Nov 4, 2026, 17:19 ET. No prices; not investment advice.