Compass Diversified Holdings - Quarter Report: 2010 June (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMPASS DIVERSIFIED HOLDINGS

Delaware		0-51937		57-6218917
(State or other jurisdiction of		(Commission file number)		(I.R.S. employer
incorporation or organization)				identification number)

COMPASS GROUP DIVERSIFIED HOLDINGS LLC

Delaware		0-51938		20-3812051
(State or other jurisdiction of incorporation or organization)		(Commission file number)		(I.R.S. employer identification number)

Sixty One Wilton Road
Second Floor
Westport, CT 06880
(203) 221-1703
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller Reporting Company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of August 1, 2010, there were 41,875,000 shares of
Compass Diversified Holdings outstanding.

 

 

COMPASS DIVERSIFIED HOLDINGS

QUARTERLY REPORT ON FORM 10-Q
For the period ended June 30, 2010

TABLE OF CONTENTS

		Page
		Number
Forward-looking Statements		4
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009		5
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009 (unaudited)		6
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2010 (unaudited)		7
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)		8
Notes to Condensed Consolidated Financial Statements (unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		41
Item 4. Controls and Procedures		41
Part II Other Information
Item 1. Legal Proceedings		42
Item 1A. Risk Factors		42
Item 6. Exhibits		43
Signatures		44
Exhibit Index		46
EX-31.1
EX-31.2
EX-31.2
EX-32.2

NOTE TO READER

In reading this Quarterly Report on Form 10-Q, references to:

	•		the “Trust” and “Holdings” refer to Compass Diversified Holdings;
	•		“businesses”, “operating segments”, “subsidiaries” and “reporting units” refer to, collectively, the businesses controlled by the Company;
	•		the “Company” refer to Compass Group Diversified Holdings LLC;
	•		the “Manager” refer to Compass Group Management LLC (“CGM”);
	•		the “initial businesses” refer to, collectively, CBS Personnel Holdings, Inc. (doing business as Staffmark) (“Staffmark”), Crosman Acquisition Corporation, Compass AC Holdings, Inc. and Silvue Technologies Group, Inc.;
	•		“Tridien Medical” refers to Anodyne Medical Device, Inc. doing business and known as Tridien Medical.
	•		the “Trust Agreement” refer to the amended and restated Trust Agreement of the Trust dated as of December 21, 2007;
	•		the “Credit Agreement” refer to the Credit Agreement with a group of lenders led by Madison Capital, LLC which provides for a Revolving Credit Facility and a Term Loan Facility;
	•		the “Revolving Credit Facility” refer to the $340 million Revolving Credit Facility provided by the Credit Agreement that matures in December 2012;
	•		the “Term Loan Facility” refer to the $75.0 million Term Loan Facility, as of June 30, 2010, provided by the Credit Agreement that matures in December 2013;
	•		the “LLC Agreement” refer to the second amended and restated operating agreement of the Company dated as of January 9, 2007; and
	•		“we”, “us” and “our” refer to the Trust, the Company and the businesses together.

FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q, contains both historical and forward-looking statements. We may, in some cases, use words such as “project,” “predict,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these 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, including, among other things:

	•		our ability to successfully operate our businesses on a combined basis, and to effectively integrate and improve future acquisitions;
	•		our ability to remove CGM and CGM’s right to resign;
	•		our organizational structure, which may limit our ability to meet our dividend and distribution policy;
	•		our ability to service and comply with the terms of our indebtedness;
	•		our cash flow available for distribution and reinvestment and our ability to make distributions in the future to our shareholders;
	•		our ability to pay the management fee, profit allocation when due and to pay the supplemental put price if and when due;
	•		our ability to make and finance future acquisitions;
	•		our ability to implement our acquisition and management strategies;
	•		the regulatory environment in which our businesses operate;
	•		trends in the industries in which our businesses operate;
	•		changes in general economic or business conditions or economic or demographic trends in the United States and other countries in which we have a presence, including changes in interest rates and inflation;
	•		environmental risks affecting the business or operations of our businesses;
	•		our and CGM’s ability to retain or replace qualified employees of our businesses and CGM;
	•		costs and effects of legal and administrative proceedings, settlements, investigations and claims; and
	•		extraordinary or force majeure events affecting the business or operations of our businesses.

     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.

     In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. These forward-looking statements are made as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise, except as required by law.

PART I
FINANCIAL INFORMATION

ITEM 1. — FINANCIAL STATEMENTS

Compass Diversified Holdings

		June 30,				December 31,
		2010				2009
(in thousands)		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	15,112			$	31,495
Accounts receivable, less allowances of $5,688 at June 30, 2010 and $5,409 at December 31, 2009			196,745				165,550
Inventories			79,260				51,727
Prepaid expenses and other current assets			36,743				26,255
Total current assets			327,860				275,027
Property, plant and equipment, net			32,000				25,502
Goodwill			328,227				288,028
Intangible assets, net			239,619				216,365
Deferred debt issuance costs, less accumulated amortization of $5,929 at June 30, 2010 and $5,093 at December 31, 2009			4,637				5,326
Other non-current assets			17,439				20,764
Total assets		$	949,782			$	831,012
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	53,005			$	45,089
Accrued expenses			82,912				54,306
Due to related party			3,350				3,300
Revolver credit borrowings			13,200				500
Current portion, long-term debt			2,000				2,000
Current portion of workers’ compensation liability			19,827				22,126
Other current liabilities			2,556				2,566
Total current liabilities			176,850				129,887
Supplemental put obligation			29,073				12,082
Deferred income taxes			76,470				60,397
Long-term debt			73,000				74,000
Workers’ compensation liability			37,463				38,913
Other non-current liabilities			3,836				7,667
Total liabilities			396,692				322,946
Stockholders’ equity
Trust shares, no par value, 500,000 authorized; 41,875 shares issued and outstanding at June 30, 2010 and 36,625 shares issued and outstanding at December 31, 2009			560,819				485,790
Accumulated other comprehensive loss			(1,104	)			(2,001	)
Accumulated deficit			(90,747	)			(46,628	)
Total stockholders’ equity attributable to Holdings			468,968				437,161
Noncontrolling interest			84,122				70,905
Total stockholders’ equity			553,090				508,066
Total liabilities and stockholders’ equity		$	949,782			$	831,012

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

		Three months ended June 30,								Six months ended June 30,
(in thousands, except per share data)		2010				2009				2010				2009
Net sales		$	152,969			$	118,178			$	289,187			$	230,090
Service revenues			251,353				169,350				468,754				332,352
Total revenues			404,322				287,528				757,941				562,442
Cost of sales			103,456				80,396				197,523				159,073
Cost of services			215,174				142,966				403,700				281,594
Gross profit			85,692				64,166				156,718				121,775
Operating expenses:
Staffing expense			20,300				17,539				39,907				38,479
Selling, general and administrative expense			42,555				34,239				84,936				71,994
Supplemental put expense (reversal)			2,565				(258	)			16,991				(8,417	)
Management fees			3,709				3,422				7,373				6,494
Amortization expense			7,477				6,250				13,600				12,446
Impairment expense			—				—				—				59,800
Operating income (loss)			9,086				2,974				(6,089	)			(59,021	)
Other income (expense):
Interest income			2				16				17				77
Interest expense			(2,860	)			(2,695	)			(5,561	)			(6,237	)
Amortization of debt issuance costs			(418	)			(440	)			(836	)			(910	)
Loss on debt extinguishment			—				—				—				(3,652	)
Other income (expense), net			211				(611	)			391				(690	)
Income (loss) before income taxes			6,021				(756	)			(12,078	)			(70,433	)
Provision (benefit) for income taxes			6,764				(606	)			3,952				(28,050	)
Net loss			(743	)			(150	)			(16,030	)			(42,383	)
Net income (loss) attributable to noncontrolling interest			717				(777	)			1,399				(15,692	)
Net income (loss) attributable to Holdings		$	(1,460	)		$	627			$	(17,429	)		$	(26,691	)
Basic and fully diluted income (loss) per share attributable to Holdings		$	(0.04	)		$	0.02			$	(0.45	)		$	(0.83	)
Weighted average number of shares of trust stock outstanding — basic and fully diluted			40,998				32,758				38,824				32,145
Cash distributions declared per share		$	0.34			$	0.34			$	0.68			$	0.68

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statement of Stockholders’ Equity

																		Total
														Accumulated				Stockholders’
														Other				Equity				Non-				Total
		Number of								Accumulated				Comprehensive				Attributable				Controlling				Stockholders’
(in thousands)		Shares				Amount				Deficit				Loss				to Holdings				Interest				Equity
Balance — December 31, 2009			36,625			$	485,790			$	(46,628	)		$	(2,001	)		$	437,161			$	70,905			$	508,066
Net loss			—				—				(17,429	)			—				(17,429	)			1,399				(16,030	)
Other comprehensive income — cash flow hedge gain			—				—				—				897				897				—				897
Comprehensive loss			—				—				(17,429	)			897				(16,532	)			1,399				(15,133	)
Issuance of Trust shares, net of offering costs			5,250				75,029				—				—				75,029				—				75,029
Contributions from noncontrolling interest holders			—				—				—				—				—				2,085				2,085
Option activity attributable to noncontrolling interest holders			—				—				—				—				—				5,039				5,039
Noncontrolling interest impact of ACI loan forgiveness (see Note N)			—				—				—				—				—				4,694				4,694
Distributions paid			—				—				(26,690	)			—				(26,690	)			—				(26,690	)
Balance — June 30, 2010			41,875			$	560,819			$	(90,747	)		$	(1,104	)		$	468,968			$	84,122			$	553,090

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statements of Cash Flows
(unaudited)

		Six months ended June 30,
(in thousands)		2010				2009
Cash flows from operating activities:
Net loss		$	(16,030	)		$	(42,383	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense			4,130				4,313
Amortization expense			13,600				12,446
Impairment expense			—				59,800
Amortization of debt issuance costs			836				910
Loss on debt extinguishment			—				3,652
Supplemental put expense (reversal)			16,991				(8,417	)
Noncontrolling stockholder charges and other			7,441				460
Deferred taxes			(2,062	)			(26,489	)
Other			(160	)			(221	)
Changes in operating assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable			(18,184	)			25,518
Increase in inventories			(19,307	)			(4,209	)
Increase in prepaid expenses and other current assets			(3,812	)			(2,594	)
Increase (decrease) in accounts payable and accrued expenses			24,126				(6,014	)
Net cash provided by operating activities			7,569				16,772
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired			(83,721	)			(1,713	)
Purchases of property and equipment			(2,218	)			(1,787	)
Other investing activities			37				188
Net cash used in investing activities			(85,902	)			(3,312	)
Cash flows from financing activities:
Proceeds from the issuance of Trust shares, net			75,029				42,138
Borrowings under Credit Agreement			89,200				2,000
Repayments under Credit Agreement			(77,500	)			(77,500	)
Distributions paid			(26,690	)			(21,437	)
Swap termination fee			—				(2,517	)
Net proceeds provided by noncontrolling interest			2,085				4,908
Debt issuance costs			(155	)			—
Other			(19	)			(373	)
Net cash provided by (used in) financing activities			61,950				(52,781	)
Net decrease in cash and cash equivalents			(16,383	)			(39,321	)
Cash and cash equivalents — beginning of period			31,495				97,473
Cash and cash equivalents — end of period		$	15,112			$	58,152

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 2010

Note A — Organization and business operations

Compass Diversified Holdings, a Delaware statutory trust (“Holdings”), was organized in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the “Company”), was also formed on November 18, 2005. Compass Group Management LLC, a Delaware limited liability company (“CGM” or the “Manager”), was the sole owner of 100% of the Interests of the Company as defined in the Company’s operating agreement, dated as of November 18, 2005, which were subsequently reclassified as the “Allocation Interests” pursuant to the Company’s amended and restated operating agreement, dated as of April 25, 2006 (as amended and restated, the “LLC Agreement”).

Note B — Presentation and principles of consolidation

The condensed consolidated financial statements for the three-month and six-month periods ended June 30, 2010 and June 30, 2009, are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. G.A.A.P.”) and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Seasonality

Earnings of certain of the Company’s operating segments are seasonal. Earnings from AFM Holdings Corporation (“AFM” or “American Furniture”) are typically highest in the months of January through April of each year, coinciding with homeowners’ tax refunds. Earnings from CBS Personnel Holdings, Inc. (“Staffmark”) are typically lower in the first quarter of each year than in other quarters due to reduced seasonal demand for temporary staffing services and to lower gross margins during that period associated with the front-end loading of certain payroll taxes and other payments associated with payroll paid to our employees. Earnings from HALO Lee Wayne LLC (“HALO”) are typically highest in the months of September through December of each year primarily as the result of calendar sales and holiday promotions. HALO generates over two-thirds of its operating income in the months of September through December.

Consolidation

The condensed consolidated financial statements include the accounts of Holdings and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Note C —Recent accounting pronouncements

In March 2010, the Emerging Issues Task Force (“EITF”) reached a consensus related to guidance when applying the milestone method of revenue recognition. The consensus was issued by the Financial Accounting Standards Board (“FASB”) as an update to authoritative guidance for revenue recognition and will be effective beginning on January 1, 2011. The amended guidance provides criteria for identifying those deliverables in an arrangement that meet the definition of a milestone. In addition, the amended guidance includes enhanced quantitative and qualitative disclosure about the arrangements when an entity recognizes revenue using the milestone method. The Company does not expect the adoption of this guidance will have a significant impact on the condensed consolidated financial statements.

In February 2010, the FASB issued amended guidance for subsequent events, which was effective for the Company in February 2010. In accordance with the revised guidance, an SEC filer no longer will be required to disclose the date through which subsequent events have been evaluated in issued and revised financial statements. The adoption of the revised guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In January 2010, the FASB issued amended guidance to enhance disclosure requirements related to fair value measurements. The amended guidance for Level 1 and Level 2 fair value measurements was effective for the Company on January 1, 2010.

The amended guidance for Level 3 fair value measurements will be effective for the Company January 1, 2011. The guidance requires disclosures of amounts and reasons for transfers in and out of Level 1 and Level 2 recurring fair value measurements as well as additional information related to activities in the reconciliation of Level 3 fair value measurements. The guidance expanded the disclosures related to the level of disaggregation of assets and liabilities and information about inputs and valuation techniques. The adoption of the guidance for Level 1 and Level 2 fair value measurements did not have a material impact on the Company’s condensed consolidated financial statements. The Company does not expect the adoption of the guidance related to Level 3 fair value measurements will have a significant impact on the condensed consolidated financial statements.

In January 2010, the FASB issued amended authoritative guidance related to consolidations when there is a decrease in ownership. The guidance was effective for the Company on January 1, 2010. Specifically, the amendment clarifies the scope of the existing guidance and increases the disclosure requirements when a subsidiary is deconsolidated or when a group of assets is de-recognized. The adoption of the amended guidance did not have a significant impact on the Company’s condensed consolidated financial statements.

Note D — Acquisition of businesses

Acquisition of Liberty Safe and Security Products, Inc.

On March 31, 2010, Liberty Safe Holding Corporation (“Liberty Holding”), a subsidiary of the Company, entered into a stock purchase agreement with Liberty Safe and Security Products, LLC (“Liberty Safe” or “Liberty”) and certain management stockholders pursuant to which Liberty Holding acquired all of the issued and outstanding capital stock of Liberty Safe. 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 200,000 square foot manufacturing facility, Liberty 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.

The Company made loans to and purchased a controlling interest in Liberty for approximately $69.6 million (excluding acquisition-related costs), representing approximately 96% of the outstanding common stock of Liberty on a primary basis and approximately 88% of the outstanding common stock of Liberty on a fully diluted basis. Liberty’s management and certain other investors invested in the transaction alongside the Company collectively representing approximately 4% initial noncontrolling interest on a primary basis and approximately 12% on a fully diluted basis. In addition, the Company issued put options to certain noncontrolling shareholders providing them an option to sell their ownership in the future at the then fair value (see Note I for further discussion). Acquisition-related costs were approximately $1.5 million and were recorded in selling, general and administrative expense on the accompanying condensed consolidated statement of operations. CGM acted as an advisor to the Company in the transaction and received fees and expense payments totaling approximately $0.7 million.

Liberty’s results of operations are reported as a separate operating segment. There were no results of operations of Liberty recorded during the three months ended March 31, 2010 since the acquisition occurred on the last day of the first quarter. However, the $1.5 million acquisition-related costs discussed above were recorded in the Liberty operating segment in the first quarter and are reflected in the condensed consolidated results of operations for the six months ended June 30, 2010.

The table below includes the provisional recording of assets and liabilities assumed as of the acquisition date. The amounts recorded for inventory, property, plant and equipment, intangible assets and goodwill are preliminary pending finalization of valuation efforts.

		Amounts
		Recognized as
Liberty		of Acquisition
(in thousands)		Date
Assets:
Cash		$	2,438
Accounts receivable, net (1)			10,109
Inventory			7,435
Other current assets			927
Property, plant and equipment			5,991
Intangible assets			27,756
Goodwill (2)			33,075
Other assets			1,935
Total assets		$	89,666
Liabilities:
Current liabilities		$	7,125
Other liabilities			55,884
Noncontrolling interest			1,085
Total liabilities and noncontrolling interest		$	64,094
Costs of net assets acquired		$	25,572
Loans to businesses			44,059
		$	69,631

The intangible assets preliminarily recorded in connection with the Liberty acquisition are as follows (in thousands):

						Estimated
Intangible assets		Amount				Useful Life
Customer relationships		$	13,590			5
Technology			6,690			7
License agreements			3,300			3
Trade name			3,020			Indefinite
Non-compete agreements			640			5
Training documents			516			2
		$	27,756

Acquisition of Circuit Express, Inc.

On March 11, 2010, the Company’s subsidiary, Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”), completed the acquisition of Circuit Express, Inc. (“Circuit Express”), a manufacturer of rigid printed circuit boards primarily for aerospace and defense related customers, for approximately $16.1 million. The acquisition included three facilities, totaling 35,000 square feet of production space, in Tempe, Arizona. Goodwill of $6.9 million was recorded in connection with this acquisition and is not tax deductible. In addition to goodwill, ACI recorded $7.6 million related to customer relationships with an estimated useful life of 9 years, $0.8 million related to a trade name with an estimated useful life of 10 years and $0.3 million related to a non-compete agreement with an estimated useful life of 5 years. Further, ACI recorded approximately $2.4 million in property, plant and equipment, approximately $1.7 million in gross accounts receivable and approximately $0.2 million in other working capital items.

This acquisition expands ACI’s capabilities and provides immediate access to manufacturing capabilities of more advanced higher tech PCBs, as well as the ability to provide manufacturing services to the U.S. military and defense related accounts.

Other acquisition

On February 25, 2010, the Company’s HALO operating segment completed an acquisition of Relay Gear, Inc. for approximately $0.5 million. In connection with this acquisition, goodwill and intangible assets were recorded. The

intangible assets primarily relate to customer relationships with an estimated useful life of 15 years. This acquisition was not material to the Company’s balance sheet, results of operations or cash flows.

Unaudited Pro Forma Information

The following unaudited pro forma data for the six months ended June 30, 2010 and 2009 gives effect to the acquisitions of Liberty and Circuit Express, as described above, as if the acquisitions had been completed as of January 1, 2009. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transactions had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period.

		Six months ended June 30,
		2010				2009
(in thousands)
Net sales		$	776,788			$	606,123
Operating loss			(3,996	)			(55,661	)
Net loss			(15,440	)			(41,726	)

Note E – Operating segment data

At June 30, 2010, the Company had seven reportable operating segments. Each operating segment represents an acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:

•

ACI, an electronic components manufacturing company, is a provider of prototype, quick-turn and production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers mainly in North America. ACI is headquartered in Aurora, Colorado.

•

AFM is a leading domestic manufacturer of upholstered furniture for the promotional segment of the marketplace. AFM 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 $699. AFM is a low-cost manufacturer and is able to ship any product in its line within 48 hours of receiving an order. AFM is headquartered in Ecru, Mississippi and its products are sold in the United States.

•

Fox Factory, Inc. (“Fox”) is a designer, manufacturer and marketer of high end suspension products for mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles. Fox acts as both a tier one supplier to leading action sport original equipment manufacturers and provides after-market products to retailers and distributors. Fox is headquartered in Watsonville, California and its products are sold worldwide.

•

HALO serves as a one-stop shop for over 35,000 customers providing design, sourcing, and management and fulfillment services across all categories of its customer promotional product needs. HALO has established itself as a leader in the promotional products and marketing industry through its focus on service through its approximately 700 account executives. HALO is headquartered in Sterling, Illinois.

•

Liberty Safe is a designer, manufacturer and marketer of premium home and gun safes in North America. From it’s over 200,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.

•

Staffmark, a human resources outsourcing firm, is a provider of temporary staffing services in the United States. Staffmark serves approximately 6,400 corporate and small business clients. Staffmark also offers employee leasing services, permanent staffing and temporary-to-permanent placement services. Staffmark is headquartered in Cincinnati, Ohio.

•

Tridien Medical (“Tridien”) is a leading designer and manufacturer of powered and non-powered medical therapeutic support surfaces and patient positioning devices serving the acute care, long-term care and home health care markets. Tridien is headquartered in Coral Springs, Florida and its products are sold primarily in North America.

The tabular information that follows shows data of operating segments reconciled to amounts reflected in the condensed consolidated financial statements. The operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. Revenues from geographic locations outside the United States were not material for each operating segment, except Fox, in each of the years presented below. Fox recorded net sales to locations outside the United States, principally Asia, of $21.0 million for the three months ended June 30, 2010 and 2009, respectively, and $42.4 million and $34.4 million for the six months ended June 30, 2010 and 2009, respectively. There were no significant inter-segment transactions.

Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business. Segment profit excludes acquisition related charges not pushed down to the segments which are reflected in Corporate and other.

A disaggregation of the Company’s consolidated revenue and other financial data for the three and six months ended June 30, 2010 and 2009, respectively, is presented below (in thousands):

Net sales of operating segments

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
ACI		$	19,382			$	10,775			$	33,866			$	22,763
American Furniture			33,308				34,080				77,288				75,584
Fox			34,658				29,855				67,390				49,960
Halo			35,277				29,461				64,981				56,172
Liberty			13,579				—				13,579				—
Staffmark			251,354				169,350				468,756				332,352
Tridien			16,764				14,007				32,081				25,611
Total			404,322				287,528				757,941				562,442
Reconciliation of segment revenues to consolidated revenues:
Corporate and other			—				—				—				—
Total consolidated revenues		$	404,322			$	287,528			$	757,941			$	562,442

Profit of operating segments ⁽¹⁾

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
ACI		$	6,258			$	4,400			$	7,202			$	8,024
American Furniture			1,185				1,957				3,898				4,159
Fox			3,014				2,025				5,876				1,176
Halo			238				(65	)			(537	)			(2,117	)
Liberty (2)			(169	)			—				(1,619	)			—
Staffmark(3)			6,243				(1,459	)			5,411				(59,930	)
Tridien			3,402				1,727				5,636				2,871
Total			20,171				8,585				25,867				(45,817	)
Reconciliation of segment profit to consolidated
income (loss) before income taxes:
Interest expense, net			(2,858	)			(2,679	)			(5,544	)			(6,160	)
Other income (expense)			211				(611	)			391				(690	)
Corporate and other (4)			(11,503	)			(6,051	)			(32,792	)			(17,766	)
Total consolidated income (loss) before income taxes
		$	6,021			$	(756	)		$	(12,078	)		$	(70,433	)

		Accounts				Accounts
		Receivable				Receivable
		June 30, 2010				December 31, 2009
Accounts receivable
ACI		$	5,436			$	2,762
American Furniture			13,055				12,032
Fox			17,860				15,590
Halo			21,629				25,103
Liberty			7,901				—
Staffmark			129,288				106,394
Tridien			7,264				9,078
Total			202,433				170,959
Reconciliation of segment to consolidated totals:
Corporate and other			—				—
Total			202,433				170,959
Allowance for doubtful accounts			(5,688	)			(5,409	)
Total consolidated net accounts receivable		$	196,745			$	165,550

																		Depreciation and								Depreciation and
																		Amortization Expense								Amortization Expense
						Goodwill				Identifiable				Identifiable				for the Three Months								for the Six Months
		Goodwill				Dec. 31,				Assets				Assets				Ended June 30,								Ended June 30,
		June 30, 2010				2009				June 30, 2010(1)				Dec. 31, 2009(1)				2010				2009				2010				2009
Goodwill and identifiable assets of operating segments
ACI		$	57,655			$	50,716			$	31,011			$	19,252			$	1,146			$	947			$	2,051			$	1,890
American Furniture			41,435				41,435				65,918				63,123				788				971				1,564				1,960
Fox			31,372				31,372				84,338				73,714				1,534				1,601				3,060				3,249
Halo			39,252				39,060				46,090				43,647				787				839				1,627				1,694
Liberty			33,068				—				44,945				—				1,605				—				1,605				—
Staffmark			89,715				89,715				82,672				85,230				1,871				1,992				3,766				4,020
Tridien			19,555				19,555				20,569				20,584				620				691				1,228				1,357
Total			312,052				271,853				375,543				305,550				8,351				7,041				14,901				14,170
Reconciliation of segment to consolidated total:
Corporate and other identifiable assets			—				—				49,267				71,884				1,374				1,318				2,829				2,589
Amortization of debt issuance costs			—				—				—				—				418				440				836				910
Goodwill carried at Corporate level (2)			16,175				16,175				—				—				—				—				—				—
Total		$	328,227			$	288,028			$	424,810			$	377,434			$	10,143			$	8,799			$	18,566			$	17,669

Note F – Property, plant and equipment and inventory

Property, plant and equipment is comprised of the following at June 30, 2010 and December 31, 2009 (in thousands):

		June 30,				December 31,
		2010				2009
Machinery, equipment and software		$	29,675			$	23,842
Office furniture and equipment			12,052				8,837
Leasehold improvements			7,426				6,182
			49,153				38,861
Less: accumulated depreciation			(17,153	)			(13,359	)
Total		$	32,000			$	25,502

Depreciation expense was $2.2 million and $4.1 million for the three and six months ended June 30, 2010, respectively, and $2.1 million and $4.3 million for the three and six months ended June 30, 2009, respectively.

Inventory is comprised of the following at June 30, 2010 and December 31, 2009 (in thousands):

		June 30,				December 31,
		2010				2009
Raw materials and supplies		$	54,748			$	34,764
Finished goods			25,922				18,003
Less: obsolescence reserve			(1,410	)			(1,040	)
Total		$	79,260			$	51,727

Note G — Goodwill and other intangible assets

Goodwill

The Company completed its analysis of the 2010 annual goodwill impairment testing in accordance with guidelines issued by the FASB as of March 31, 2010. For each reporting unit, the analysis indicates that the fair value of the reporting unit exceeded its carrying value and as a result the carrying value of goodwill was not impaired.

A reconciliation of the change in the carrying value of goodwill for the six months ended June 30, 2010 and the year ended December 31, 2009, is as follows (in thousands):

		Six months				Year ended
		ended June 30,				December 31,
		2010				2009
Beginning balance:
Goodwill		$	338,028			$	339,095
Accumulated impairment losses			(50,000	)			—
			288,028				339,095
Impairment losses			—				(50,000	)
Acquisition of businesses (1)			40,180				1,009
Adjustment to purchase accounting			19				(2,076	)
Total adjustments			40,199				(51,067	)
Ending balance:
Goodwill			378,227				338,028
Accumulated impairment losses			(50,000	)			(50,000	)
		$	328,227			$	288,028

Other intangible assets

Other intangible assets are comprised of the following at June 30, 2010 and December 31, 2009 (in thousands):

										Weighted
		June 30,				December 31,				Average
		2010				2009				Useful Lives
Customer relationships		$	210,383			$	188,773				11
Technology			44,649				37,959				8
Trade names, subject to amortization			26,080				25,300				12
Licensing and non-compete agreements			8,688				4,451				3
Distributor relations and other			1,896				1,380				4
			291,696				257,863
Accumulated amortization customer relationships			(57,874	)			(48,677	)
Accumulated amortization technology			(14,004	)			(11,360	)
Accumulated amortization trade names, subject to amortization			(4,371	)			(3,383	)
Accumulated amortization licensing and non-compete agreements			(4,235	)			(3,613	)
Accumulated amortization distributor relations and other			(945	)			(797	)
Total accumulated amortization			(81,429	)			(67,830	)
Trade names, not subject to amortization			29,352				26,332
Total intangibles, net		$	239,619			$	216,365

Amortization expense was $7.5 million and $13.6 million for the three and six months ended June 30, 2010, respectively, and $6.3 million and $12.4 million for the three and six months ended June 30, 2009, respectively.

Note H — Debt

The Credit Agreement at June 30, 2010 provides for a Revolving Credit Facility totaling $340 million, which matures in December 2012, and a Term Loan Facility with a balance of $75.0 million at June 30, 2010, which matures in December 2013. The Term Loan Facility requires quarterly payments of $0.5 million with a final payment of the outstanding principal balance due on December 7, 2013. The fair value of the Term Loan Facility as of June 30, 2010 was approximately $71.4 million, and was calculated based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities.

The Company had $13.2 million in outstanding borrowings under its Revolving Credit Facility at June 30, 2010. The Company had approximately $198.2 million in borrowing base availability under its Revolving Credit Facility at June 30, 2010. Letters of credit outstanding at June 30, 2010 totaled approximately $67.7 million. At June 30, 2010, the Company was in compliance with all covenants.

Note I — Fair value measurement

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2010 and December 31, 2009 (in thousands):

		Fair Value Measurements at June 30, 2010
		Carrying
		Value				Level 1				Level 2				Level 3
Liabilities:
Derivative liability – interest rate swap		$	1,104			$	—			$	1,104			$	—
Supplemental put obligation			29,073				—				—				29,073
Call option of noncontrolling shareholder (1)			2,550				—				—				2,550
Put option of noncontrolling shareholders (2)			50				—				—				50

		Fair Value Measurements at December 31, 2009
		Carrying
		Value				Level 1				Level 2				Level 3
Liabilities:
Derivative liability – interest rate swap		$	2,001			$	—			$	2,001			$	—
Supplemental put obligation			12,082				—				—				12,082
Call option of noncontrolling shareholder			200				—				—				200

A reconciliation of the change in the carrying value of our level 3 supplemental put liability from January 1, 2010 through June 30, 2010 and from January 1, 2009 through June 30, 2009 is as follows (in thousands):

		2010				2009
Balance at January 1		$	12,082			$	13,411
Supplemental put expense (reversal)			14,426				(8,159	)
Balance at March 31			26,508				5,252
Supplemental put expense (reversal)			2,565				(258	)
Balance at June 30		$	29,073			$	4,994

A reconciliation of the change in the carrying value of our level 3 call option of a noncontrolling shareholder from January 1, 2010 through June 30, 2010 is as follows (in thousands):

		2010
Balance at January 1		$	200
Fair Value adjustment to Call option			—
Balance at March 31			200
Fair Value adjustment to Call option (1)			2,350
Balance at June 30		$	2,550

Valuation techniques

The Company’s derivative instrument consists of an over-the-counter (OTC) interest rate swap contract which is not traded on a public exchange. The fair value of the Company’s interest rate swap contract was determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. As such, the Company categorized its interest rate swap contract as Level 2.

The call option of the noncontrolling shareholder was determined based on inputs that were not readily available in public markets or able to be derived from information available in publicly quoted markets. As such, the Company categorized the call option of the noncontrolling shareholder as Level 3.

The put options of noncontrolling shareholders were determined based on inputs that were not readily available in public markets or able to be derived from information available in publicly quoted markets. As such, the Company categorized the put options of the noncontrolling shareholders as Level 3.

CGM is the owner of 100% of the Allocation Interests in the Company. Concurrent with our initial public offering in 2006 (“IPO”), CGM and the Company entered into a Supplemental Put Agreement, which requires the Company to acquire these Allocation Interests upon termination of the Management Services Agreement. Essentially, the put rights granted to CGM require us to acquire CGM’s Allocation Interests in the Company at a price based on a percentage of the increase in fair value in the Company’s businesses over its original basis in those businesses. Each fiscal quarter the Company estimates the fair value of its businesses for the purpose of determining the potential liability associated with the Supplemental Put Agreement. The Company uses the following key assumptions in measuring the fair value of the supplemental put: (i) financial and market data of publicly traded companies deemed to be comparable to each of the Company’s businesses and (ii) financial and market data of comparable merged, sold or acquired companies. Any change in the potential liability is accrued currently as an adjustment to earnings.

Note J — Derivative instruments and hedging activities

On January 22, 2008, the Company entered into a three-year interest rate swap (“Swap”) agreement with a bank, fixing the rate of its Term Loan Facility borrowings at 7.35%. The Swap is designated as a cash flow hedge and is anticipated to be highly effective.

The Company’s objective for entering into the Swap is to manage the interest rate exposure on a portion of its Term Loan Facility by fixing its interest rate at 7.35% and avoiding the potential variability of interest rate fluctuations. The Swap is designated as a cash flow hedge with changes in the fair value of the Swap recorded in stockholders’ equity as a component of accumulated other comprehensive loss as the Swap is completely effective. For the three and six months ended June 30, 2010, the Company recorded a $0.6 million gain and $0.9 million gain, respectively, to accumulated other comprehensive loss, which reflects that portion of comprehensive loss reclassified to net loss during the three and six months ended June 30, 2010. For the three and six months ended June 30, 2009, the Company recorded a $0.3 million gain and a $0.4 million gain to accumulated other comprehensive loss.

The following table provides the fair value of the Company’s cash flow hedge, as well as its location on the balance sheet as of June 30, 2010 and December 31, 2009 (in thousands):

		June 30,				December 31,				Balance Sheet
		2010				2009				Location
Liability
Cash flow hedge current		$	1,104			$	1,620			Other current liabilities
Cash flow hedge non-current			—				381			Other non-current liabilities
Total		$	1,104			$	2,001

Note K – Comprehensive income (loss)

The following table sets forth the computation of comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009 (in thousands):

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income (loss) attributable to Holdings		$	(1,460	)		$	627			$	(17,429	)		$	(26,691	)
Other comprehensive income:
Unrealized gain on cash flow hedge			578				266				897				395
Reclassification adjustment for cash flow hedge
losses realized in net loss			—				—				—				2,517
Total other comprehensive income			578				266				897				2,912
Total comprehensive income (loss)		$	(882	)		$	893			$	(16,532	)		$	(23,779	)

Note L — Stockholder’s equity

The Trust is authorized to issue 500,000,000 Trust shares and the Company is authorized to issue a corresponding number of LLC interests. The Company will at all times have the identical number of LLC interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each Trust share is entitled to one vote per share on any matter with respect to which members of the Company are entitled to vote.

Distributions:

	•		On January 28, 2010, the Company paid a distribution of $0.34 per share to holders of record as of January 22, 2010.
	•		On April 30, 2010, the Company paid a distribution of $0.34 per share to holders of record as of April 23, 2010.
	•		On July 30, 2010, the Company paid a distribution of $0.34 per share to holders of record as of July 23, 2010.

Common stock offering

On April 13, 2010, the Company completed an offering of 5,250,000 Trust shares (including the underwriter’s over-allotment completed April 23, 2010) at an offering price of $15.10 per share. The net proceeds to the Company, after deducting underwriter’s discount and offering costs totaled approximately $75.0 million. The Company used $70 million of the proceeds to pay down its Revolving Credit Facility.

Note M – Warranties

The Company’s Fox, Liberty and Tridien operating segments estimate the Company’s exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty liability quarterly and adjusts the amount as necessary.

A reconciliation of the change in the carrying value of the Company’s warranty liability for the six months ended June 30, 2010 and the year ended December 31, 2009 is as follows (in thousands):

		June 30, 2010				December 31, 2009
Warranty liability:
Beginning balance		$	1,529			$	1,577
Accrual			1,014				1,451
Warranty payments			(704	)			(1,499	)
Other (1)			315				—
Ending balance		$	2,154			$	1,529

Note N – Noncontrolling interest

Advanced Circuits

On January 12, 2010, in connection with a 2009 loan forgiveness arrangement, a portion of the outstanding loan was repaid with Class A common stock of Advanced Circuits valued at $47.50 per share ($4.75 million). The effect of this transaction lowered the noncontrolling interest ownership percentage from approximately 30% to 25%.

During the first quarter of 2010, certain members of ACI management were granted 0.1 million stock options in ACI common stock. These options were fully vested on grant date and as a result the Company recorded a $3.8 million non-cash expense during the six months ended June 30, 2010 to selling, general and administrative expense on the condensed consolidated statement of operations.

Note O – Income tax

Each fiscal quarter the Company estimates its annual effective tax rate and applies that rate to its interim earnings. In this regard the Company reflects the tax impact of certain unusual or infrequently occurring items, the effects of changes in tax laws or rates, in the interim period in which they occur.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, the projected operating income for the year, projections of the proportion of income earned and taxed in other jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, as additional information is obtained or as the tax environment changes.

Our effective income tax rate (benefit) for the three and six months ended June 30, 2010 was 112.3% and 32.7%, respectively, compared with (80.1%) and (39.8%) for the comparable three and six months ended June 30, 2009. The effective income tax rate for the three and six months ended June 30, 2010 includes a discrete benefit from tax credits earned by Staffmark during the first quarter of 2010 together with a significant loss at the Company’s parent, which is taxed as a partnership, and is due largely to the expense associated with the supplemental put (see Note I).

The reconciliation between the Federal Statutory Rate and the effective income tax rate for the three and six months ended June 30, 2010 and June 30, 2009 are as follows:

		Three months ended June 30,								Six months ended June 30,
		2010				2009				2010				2009
United States Federal Statutory Rate			35.0	%			(35.0	%)			(35.0	%)			(35.0	%)
State income taxes (net of Federal benefits)			7.9				16.6				4.5				(0.6	)
Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders			34.2				(9.4	)			65.5				(1.8	)
Credit utilization			(9.7	)			(42.3	)			(10.5	)			(1.0	)
Non-deductible acquisition costs			—				—				4.2				—
Quarterly effective tax rate adjustment			46.4	(1)			—				3.4				—
Other			(1.5	)			(10.0	)			0.6				(1.4	)
Effective income tax rate			112.3	%			(80.1	%)			32.7	%			(39.8	%)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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” and “Risk Factors” 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.

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 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 subsidiaries 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.

Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are positioned to acquire additional attractive businesses. Our management team has a large network of approximately 2,000

deal intermediaries to whom it actively markets and who we expect to expose us to potential acquisitions. Through this network, as well as our management team’s active proprietary transaction sourcing efforts, we typically have a substantial pipeline of potential acquisition targets. In consummating transactions, our management team has, in the past, been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned businesses, management buy-outs and reorganizations. We believe the flexibility, creativity, experience and expertise of our management team in structuring transactions provides us with a strategic advantage by allowing us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.

In addition, because we intend to fund acquisitions through the utilization of our Revolving Credit Facility, we do not expect to be subject to delays in or conditions by closing acquisitions that would be typically associated with transaction specific financing, as is typically the case in such acquisitions. We believe this advantage is a powerful one, especially in the current stagnant credit environment, and is highly unusual in the marketplace for acquisitions in which we operate.

We have begun to see a recent uptick in deal flow activity compared to fiscal 2009 even though deal flow is below activity experienced in years prior to 2009.

2010 Highlights

Acquisitions

On March 31, 2010, we purchased a controlling interest in Liberty Safe and Security Products, Inc. (“Liberty” or “Liberty Safe”), with headquarters in Payson, Utah. Liberty is a premier designer, manufacturer and marketer of home and gun safes in North America. Liberty manufactures and sells a wide range of home and gun safes in a broad assortment of sizes, features and styles which are sold in various sporting goods, farm and fleet and home improvement retailers. We made loans to and purchased a controlling interest in Liberty for approximately $69.6 million, representing approximately 88% of the equity in Liberty on a fully diluted basis. We incurred approximately $1.5 million in transaction costs in addition to the purchase price.

On March 11, 2010, our majority owned subsidiary Advanced Circuits acquired Circuit Express, Inc. (“Circuit Express”), based in Tempe, Arizona for approximately $16.1 million. Circuit Express focuses on quick-turn manufacturing of prototype and low-volume quantities of rigid PCBs primarily for aerospace and defense related customers. We incurred approximately $0.3 million in transaction costs in addition to the purchase price.

Common stock offering

On April 13, 2010, we completed a public offering of 5,250,000 Trust shares (including the underwriter’s over-allotment completed April 23, 2010) at an offering price of $15.10 per share. The net proceeds to us, after deducting underwriter’s discount and offering costs, totaled approximately $75.0 million. We used $70.0 million of the proceeds to pay down our Revolving Credit Facility.

Outlook

Sales and operating income during the first half of 2010 increased at each of our businesses, with the exception of Liberty Safe, when compared to the first six months of 2009 and seasonally adjusted fourth quarter of 2009. These results are consistent with the increase in the overall economy. Gross domestic product (“GDP”), a measure of the total production of goods and services, increased during the first two quarters of 2010. This marks the fourth sequential quarterly increase in the GDP following four consecutive decreases. We are cautiously optimistic and believe that we will experience continued growth in sales and operating income at each of our businesses, with the possible exception of Liberty Safe, through the remainder of 2010. In addition, although we believe the economy will rebound in 2010 relative to 2009, we also believe that credit will remain scarce, which may benefit our acquisition model, as we do not rely on separate third-party financing as a component to closing on our acquisitions.

We are dependent on the earnings of, and cash receipts from, the businesses that we own 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, will be 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.

Results of Operations

We were formed on November 18, 2005 and acquired our existing businesses (segments) as follows:

May 16, 2006		August 1, 2006		February 28, 2007		August 31, 2007		January 4, 2008		March 31, 2010
Advanced Circuits		Tridien		HALO		American Furniture		Fox		Liberty Safe
Staffmark

Consolidated Results of Operations — Compass Diversified Holdings and Compass Group Diversified Holdings LLC

		Three months				Three months				Six months				Six months
		ended				ended				ended				ended
		June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009
(in thousands)						Pro-forma(1)				Pro-forma(1)				Pro-forma(1)
Net sales		$	404,322			$	305,079			$	773,874			$	598,044
Cost of sales			318,630				235,353				612,349				466,880
Gross profit			85,692				69,726				161,525				131,164
Staffing, selling, general and administrative expense			62,855				54,042				125,215				114,589
Fees to manager			3,709				3,547				7,498				6,744
Supplemental put expense (reversal)			2,565				(258	)			16,991				(8,417	)
Amortization of intangibles			7,477				7,540				14,890				15,026
Impairment expense			—				—				—				59,800
Income (loss) from operations		$	9,086			$	4,855			$	(3,069	)		$	(56,578	)