Compass Diversified Holdings - Quarter Report: 2012 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2012

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

For the transition period from to

COMPASS DIVERSIFIED HOLDINGS

(Exact name of registrant as specified in its charter)

Delaware

001-34927

57-6218917

(State or other jurisdiction of

incorporation or organization)

(Commission file number)

(I.R.S. employer

identification number)

COMPASS GROUP DIVERSIFIED HOLDINGS LLC

(Exact name of registrant as specified in its charter)

Delaware

001-34926

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 x No ¨

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 x No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 1, 2012, there were 48,300,000 shares of Compass Diversified Holdings outstanding.

COMPASS DIVERSIFIED HOLDINGS

QUARTERLY REPORT ON FORM 10-Q

For the period ended June 30, 2012

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, 2012 (unaudited) and December 31, 2011		5
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 (unaudited)		6
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011 (unaudited)		7
	Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2012 (unaudited)		8
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)		9
	Notes to Condensed Consolidated Financial Statements (unaudited)		10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		56

Item 4.	Controls and Procedures		56

Part II	Other Information
Item 1.	Legal Proceedings		57
Item 1A.	Risk Factors		57
Item 6.	Exhibits		58
Signatures			59
Exhibit Index			61

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, Staffmark Holdings, Inc. (“Staffmark”), Crosman Acquisition Corporation, Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”) and Silvue Technologies Group, Inc.;

•

the “2010 acquisitions” refer to, collectively, the acquisitions of (i) Gable 5, Inc. and, indirectly, Liberty Safe and Security Products, Inc. (“Liberty Safe” or “Liberty”) and (ii) The ERGO Baby Carrier, Inc. (“ERGObaby”);

•

the “2011 acquisition” refer to the acquisition of CamelBak Products, LLC (“CamelBak”);

•

the “2012 acquisition” refer to the acquisition of Arnold Magnetic Technologies Holdings Corporation (“Arnold” or “Arnold Magnetics”);

•

the “Trust Agreement” refer to the amended and restated Trust Agreement of the Trust dated as of November 1, 2010;

•

the “Credit Facility” refer to a credit agreement (as amended) with a group of lenders led by Toronto Dominion (Texas) LLC, as agent, which provides for the Revolving Credit Facility and the Term Loan Facility;

•

the “Revolving Credit Facility” refer to the $290 million Revolving Credit Facility provided by the Credit Facility that matures in October 2016;

•

the “Term Loan Facility” refer to the $253.8 million Term Loan Facility, as of June 30, 2012, provided by the Credit Facility that matures in October 2017;

•

the “LLC Agreement” refer to the third amended and restated operating agreement of the Company dated as of November 1, 2010; 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 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 on Form 10-Q. 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

Condensed Consolidated Balance Sheets


(in thousands)	June 30, 2012			December 31, 2011
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	16,017		$	131,973
Accounts receivable, less allowances of $3,587 at June 30, 2012 and $2,420 at December 31, 2011		118,449			69,114
Inventories		139,162			96,312
Prepaid expenses and other current assets		27,898			22,758
Current assets of discontinued operations		—			40,064

Total current assets		301,526			360,221
Property, plant and equipment, net		64,612			43,579
Goodwill		259,248			205,567
Intangible assets, net		355,787			328,070
Deferred debt issuance costs, less accumulated amortization of $1,068 at June 30, 2012 and $227 at December 31, 2011		9,241			6,942
Other non-current assets		13,810			13,889
Non-current assets of discontinued operations		—			71,638

Total assets	$	1,004,224		$	1,029,906

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	74,383		$	36,612
Accrued expenses		46,128			36,386
Due to related party		4,000			4,239
Current portion of supplemental put obligation		4,500			13,675
Current portion, long-term debt		2,550			2,250
Other current liabilities		1,571			1,694
Current liabilities of discontinued operations		—			23,306

Total current liabilities		133,132			118,162
Supplemental put obligation		32,676			35,814
Deferred income taxes		66,239			49,088
Long-term debt, less original issue discount		263,062			214,000
Other non-current liabilities		6,464			2,875
Non-current liabilities of discontinued operations		—			13,489

Total liabilities		501,573			433,428

Stockholders’ equity
Trust shares, no par value, 500,000 authorized; 48,300 shares issued and outstanding at June 30, 2012 and December 31, 2011		648,036			658,361
Accumulated other comprehensive loss		(787	)		—
Accumulated deficit		(197,275	)		(160,852	)

Total stockholders’ equity attributable to Holdings		449,974			497,509
Noncontrolling interest		52,677			95,257
Noncontrolling interest of discontinued operations		—			3,712

Total stockholders’ equity		502,651			596,478

Total liabilities and stockholders’ equity	$	1,004,224		$	1,029,906

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statements of Operations

(unaudited)


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
(in thousands, except per share data)
Net sales	$	230,016		$	133,144		$	425,343		$	277,784
Cost of sales		157,115			92,045			290,755			193,331

Gross profit		72,901			41,099			134,588			84,453

Operating expenses:
Selling, general and administrative expense		39,901			23,294			80,334			46,952
Supplemental put expense		2,902			1,667			1,362			4,895
Management fees		4,333			3,496			8,865			6,915
Amortization expense		7,764			4,719			14,940			9,434
Impairment expense		—			—			—			7,700

Operating income		18,001			7,923			29,087			8,557

Other income (expense):
Interest income		10			—			43			2
Interest expense		(7,707	)		(1,869	)		(13,736	)		(3,949	)
Amortization of debt issuance costs		(485	)		(542	)		(841	)		(1,001	)
Other expense, net		(128	)		13			(396	)		—

Income from continuing operations before income taxes		9,691			5,525			14,157			3,609
Provision for income taxes		5,659			2,923			9,758			6,290

Income (loss) from continuing operations		4,032			2,602			4,399			(2,681	)
Income (loss) from discontinued operations, net of income tax		(1,690	)		5,664			(1,168	)		4,380
Loss on sale of discontinued operations, net of income tax		(130	)		—			(130	)		—

Net income		2,212			8,266			3,101			1,699
Less: Income from continuing operations attributable to noncontrolling interest		2,361			1,096			4,037			2,056
Less: Income (loss) from discontinued operations attributable to noncontrolling interest		(225	)		792			(226	)		239

Net income (loss) attributable to Holdings	$	76		$	6,378		$	(710	)	$	(596	)

Amounts attributable to Holdings:
Income (loss) from continuing operations	$	1,671		$	1,506		$	362		$	(4,737	)
Income (loss) from discontinued operations, net of income tax		(1,465	)		4,872			(942	)		4,141
Loss on sale of discontinued operations, net of income tax		(130	)		—			(130	)		—

Net income (loss) attributable to Holdings	$	76		$	6,378		$	(710	)	$	(596	)

Basic and fully diluted income (loss) per share attributable to Holdings
Continuing operations	$	0.03		$	0.03		$	0.01		$	(0.10	)
Discontinued operations		(0.03	)		0.11			(0.02	)		0.09

	$	0.00		$	0.14		$	(0.01	)	$	(0.01	)

Weighted average number of shares of trust stock outstanding — basic and fully diluted		48,300			46,725			48,300			46,725

Cash distributions declared per share (refer to Note L)	$	0.36		$	0.36		$	0.72		$	0.72

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)


	Three months ended June 30,					Six months ended June 30,
	2012			2011		2012			2011
(in thousands)
Net income	$	2,212		$	8,266	$	3,101		$	1,699
Other comprehensive loss, net of tax
Foreign currency translation adjustment		(817	)		—		(787	)		—

Total comprehensive income, net of tax	$	1,395		$	8,266	$	2,314		$	1,699

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statement of Stockholders’ Equity

(unaudited)


(in thousands)	Number of Shares		Amount			Accumulated Deficit			Accumulated Other Comprehensive Income			Stockholders’ Equity Attributable to Holdings			Non- Controlling Interest			Non- Controlling Interest of Disc. Ops.			Total Stockholders’ Equity
Balance — January 1, 2012		48,300	$	658,361		$	(160,852	)	$	—		$	497,509		$	95,257		$	3,712		$	596,478
Net income (loss)		—		—			(710	)		—			(710	)		4,037			(226	)		3,101
Other comprehensive loss — foreign currency translation		—		—			—			(787	)		(787	)		—			—			(787	)
Proceeds received from Arnold noncontrolling shareholders		—		—			—			—			—			1,713			—			1,713
Proceeds received from noncontrolling shareholders		—		—			—			—			—			2,916			—			2,916
Distribution to noncontrolling shareholders related to the Fox recapitalization (refer to Note F)		—		(8,544	)		—			—			(8,544	)		(6,794	)		—			(15,338	)
Accretion — CamelBak preferred stock		—		—			(937	)		—			(937	)		937			—			—
Redemption of noncontrolling interest holders		—		(1,781	)		—			—			(1,781	)		315			—			(1,466	)
Redemption of CamelBak preferred stock		—		—			—			—			—			(48,022	)		—			(48,022	)
Option activity attributable to noncontrolling shareholders		—		—			—			—			—			2,318			—			2,318
HALO disposition		—		—			—			—			—			—			(3,486	)		(3,486	)
Distributions paid		—		—			(34,776	)		—			(34,776	)		—						(34,776	)

Balance — June 30, 2012		48,300	$	648,036		$	(197,275	)	$	(787	)	$	449,974		$	52,677		$	—		$	502,651

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statements of Cash Flows

(unaudited)


	Six months ended June 30,
(in thousands)	2012			2011
Cash flows from operating activities:
Net income	$	3,101		$	1,699
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense		6,890			4,791
Amortization expense		19,553			16,009
Impairment expense		—			7,700
Amortization of debt issuance costs and original issue discount		2,432			1,001
Supplemental put expense		1,362			4,895
Unrealized loss on interest rate swap		1,593			—
Noncontrolling stockholder charges and other		2,332			1,215
Deferred taxes		(489	)		(1,926	)
Other		845			87
Changes in operating assets and liabilities, net of acquisition:
(Increase) decrease in accounts receivable		(21,560	)		1,627
Increase in inventories		(26,423	)		(11,282	)
Increase in prepaid expenses and other current assets		(3,441	)		(3,305	)
Increase in accounts payable and accrued expenses		22,509			25,973
Payment of supplemental put liability		(13,675	)		—

Net cash provided by (used in) operating activities		(4,971	)		48,484

Cash flows from investing activities:
Acquisitions, net of cash acquired		(125,390	)		—
Purchases of property and equipment		(6,944	)		(11,367	)
Proceeds released from escrow related to Staffmark sale		5,045			—
Proceeds related to HALO sale		66,142			—
Purchase of Fox common stock		(13,234	)		—
Other investing activities		1,082			150

Net cash used in investing activities		(73,299	)		(11,217	)

Cash flows from financing activities:
Borrowings under Credit Facility		147,500			43,000
Repayments under Credit Facility		(99,729	)		(51,000	)
Redemption of CamelBak preferred stock		(48,022	)		—
Distributions paid		(34,776	)		(32,708	)
Net proceeds provided by noncontrolling interest		11,833			—
Net proceeds paid to noncontrolling shareholders related to Fox		(16,289	)		—
Debt issuance costs		(3,154	)		(593	)
Excess tax benefit on stock-based compensation, and other		5,147			(261	)

Net cash used in financing activities		(37,490	)		(41,562	)

Foreign currency impact on cash		(593	)		—
Net decrease in cash and cash equivalents		(116,353	)		(4,295	)
Cash and cash equivalents — beginning of period		132,370			13,536

Cash and cash equivalents — end of period	$	16,017		$	9,241

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Notes to Condensed Consolidated Financial Statements (unaudited)

June 30, 2012

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”).

The Company is a controlling owner of eight businesses, or operating segments, at June 30, 2012. The operating segments are as follows: Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”), American Furniture Manufacturing, Inc. (“AFM” or “American Furniture”), Arnold Magnetic Technologies Holdings Corporation (“Arnold” or “Arnold Magnetics”) CamelBak Products, LLC (“CamelBak”), The ERGO Baby Carrier, Inc. (“ERGObaby”), Fox Factory, Inc. (“Fox”), Liberty Safe and Security Products, Inc. (“Liberty Safe” or “Liberty”), and Tridien Medical, Inc. (“Tridien”). Refer to Note F for further discussion of the operating segments.

Note B — Presentation and principles of consolidation

The condensed consolidated financial statements for the three and six month periods ended June 30, 2012 and June 30, 2011, 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. GAAP”) 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, 2011.

Seasonality

Earnings of certain of the Company’s 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 as this corresponds with warmer weather in the Northern Hemisphere and an increase in hydration related activities.

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.

Reclassifications

Certain amounts in the historical condensed consolidated financial statements have been reclassified to conform to the current period presentation. American Furniture implemented a revised standard costing system during 2011 which required American Furniture to reclassify certain costs between cost of sales and selling, general and administrative expenses. The change in format consists of reclassifying the trucking fleet expenses from selling, general and administrative expenses into cost of sales, as well as reclassifying certain manufacturing related expenses including rent, insurance, utilities and workers’ compensation from selling, general and administrative costs to cost of sales. Management believes that the format of reporting cost of sales going forward together with the revised standard costing system and the revaluation of standard costs will allow management to more timely react to changes in supply costs, product demand and overall price structure going forward which in turn should eliminate the accumulation of lower margin product and allow for more advantageous product procurement and the proper utilization of available assets. The reclassification from selling, general and administrative expense to cost of sales during the three and six months ended June 30, 2011 was $1.6 million and $3.1 million, respectively. This reclassification lowered the historical gross profit recorded in these periods but had no net impact on operating income (loss) or net income (loss). In addition, this reclassification had no impact on the financial position or cash flows during these periods.

Discontinued Operations

On May 1, 2012, the Company sold its majority owned subsidiary, HALO. As a result, the results of operations for the periods from January 1, 2012 through the date of sale, April 1, 2012 through the date of sale, and the three and six months ended June 30, 2011, respectively, have been reclassified to exclude discontinued operations in accordance with accounting guidelines. In addition, HALO’s assets and liabilities have been reclassified as discontinued operations as of December 31, 2011. Refer to Note E for additional information.

Note C — Recent accounting pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued amended guidance for performing indefinite-lived intangible impairment tests, which will be effective for us January 1, 2013. It allows the Company to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary. The Company does not expect the adoption of the amended guidance will have a significant impact on the condensed consolidated financial statements.

In September 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance for performing goodwill impairment tests, which was effective for the Company beginning January 1, 2012. The guidance amended the two-step goodwill impairment test by permitting an entity to first assess qualitative factors in determining whether the fair value of a reporting unit is less than its carrying amount. The adoption of the amended guidance did not have a significant impact on the condensed consolidated financial statements.

In June 2011, the FASB issued amended guidance for presenting comprehensive income, which was effective for the Company beginning January 1, 2012. The amended guidance eliminated the option to present other comprehensive income and its components in the statement of stockholders’ equity. The Company elected to present the items of net income and other comprehensive income in two separate, but consecutive statements. The adoption of the amended guidance did not have a significant impact on the condensed consolidated financial statements.

In May 2011, the FASB issued amended guidance for measuring fair value and required disclosure information about such measures, which was effective for the Company beginning January 1, 2012, and applied prospectively. The amended guidance requires an entity to disclose all transfers between Level 1 and Level 2 of the fair value hierarchy as well as provide quantitative and qualitative disclosures related to Level 3 fair value measurements. Additionally, the amended guidance requires an entity to disclose the fair value hierarchy level which was used to determine the fair value of financial instruments that are not measured at fair value, but for which fair value information must be disclosed. The Company does not expect the adoption of the amended guidance to have a significant impact on the condensed consolidated financial statements.

Note D — Acquisition of business

Acquisition of Arnold Magnetics

On March 5, 2012, AMT Acquisition Corp. (“Arnold Acquisition”), a subsidiary of the Company, entered into a stock purchase agreement with Arnold Magnetic Technologies, LLC, and Arnold Magnetics pursuant to which Arnold Acquisition acquired all of the issued and outstanding equity of Arnold Magnetics.

Based in Rochester, NY with an operating history of more than 100 years, Arnold is a leading global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including energy, medical, aerospace and defense, consumer electronics, general industrial and automotive. From its nine manufacturing facilities located in the United States, the United Kingdom, Switzerland and China, the company produces high performance permanent magnets, flexible magnets and precision foil products that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, the company has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide.

The Company made loans to and purchased a 96.6% controlling interest in Arnold on a primary and fully diluted basis. The purchase price, including proceeds from noncontrolling interests, was approximately $130.5 million (excluding acquisition-related costs). Acquisition related costs were approximately $4.4 million and were recorded to selling, general and administrative expense during the six months ended June 30, 2012. The Company funded the acquisition through available cash on its balance sheet and a draw of $25 million on its Revolving Credit Facility. Arnold’s management and certain other investors invested in the transaction alongside the Company collectively representing 3.4% initial noncontrolling interest on a primary and fully diluted basis. CGM acted as an advisor to the Company in the transaction and received fees and expense payments totaling approximately $1.2 million.

The results of operations of Arnold have been included in the consolidated results of operations from the date of acquisition. Arnold’s results of operations are reported as a separate operating segment.

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 of Acquisition Date
Arnold
(in thousands)
*Assets:*
Cash	$	6,965
Accounts receivable, net (1)		18,728
Inventory (2)		20,550
Other current assets		3,391
Property, plant and equipment (3)		20,805
Intangible assets		41,700
Goodwill (4)		53,341
Other assets		6,478

Total assets	$	171,958

*Liabilities and noncontrolling interests:*
Current liabilities	$	24,374
Other liabilities		100,317
Noncontrolling interest (5)		1,713

Total liabilities and noncontrolling interest	$	126,404

Net assets acquired	$	45,554
Noncontrolling interest		1,713
Intercompany loans to businesses		85,500

	$	132,767

(1)	Includes $19.1 million of gross contractual accounts receivable, of which $0.4 million was not expected to be collected. The fair value of accounts receivable approximated book value acquired.

(2)	Includes $3.0 million of inventory fair value step up. This balance was fully amortized during the six months ended June 30, 2012.

(3)	Includes $13.8 million of property, plant and equipment fair value step up.

(4)	Goodwill is not deductible for tax purposes.

(5)	Fair value of noncontrolling interest approximates book value.

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


Intangible assets	Amount		Estimated Useful Life
Customer relationships	$	22,770	15
Technology		11,790	10
Technology		1,260	7
Other		90	less than one year
Trade name		5,370	10
Trade name		420	5

	$	41,700

Joint Venture

Arnold Magnetics is a 50% partner in a China rare earth mine-to-magnet joint venture. Arnold Magnetics accounts for its activity in the joint venture utilizing the equity method of accounting. Gains and losses from the joint venture are not material for the six months ended June 30, 2012.

Unaudited pro-forma information

The following unaudited pro-forma data for the three and six months ended June 30, 2012 and 2011 gives effect to the acquisition of Arnold Magnetics, as described above, as if the acquisition had been completed as of January 1, 2011. 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 transaction 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,
(in thousands)	2012		2011
Net sales	$	448,592	$	344,662
Operating income		33,443		12,844
Net income		6,502		3,425
Net income attributable to Holdings		2,691		1,130
Basic and diluted net income attributable to Holdings	$	0.06	$	0.02

Other acquisition

On May 23, 2012, the Company’s subsidiary, Advanced Circuits, completed the acquisition of Universal Circuits, Inc. (“Universal Circuits”), a manufacturer of printed circuit boards, for approximately $2.8 million. The manufacturing facility is located in Maple Grove, Minnesota. This acquisition expands ACI’s capabilities and provides immediate access to manufacturing capabilities of more advanced higher tech PCBs.

The following is a preliminary summary of the assets and liabilities recorded in connection with this acquisition, pending finalization of the valuation efforts:


*Assets:*
Accounts receivable	$	2,267
Inventory		784
Property, plant and equipment		906
Goodwill		147
Intangible asset, non-compete		9
Intangible asset, customer relationships		284

Total assets	$	4,397
*Liabilities:*
Accounts payable and accrued expenses	$	2,282
Note payable		812

Total liabilities	$	3,094

Note E — Discontinued operations

On May 1, 2012, the Company sold its majority owned subsidiary HALO, to Candlelight Investment Holdings, Inc., for a total enterprise value of $76.5 million. The transaction is subject to customary escrow requirements and adjustment for certain changes in the working capital of HALO. The HALO purchase agreement contains customary representations, warranties, covenants and indemnification provisions.

At the closing, the Company received approximately $66.4 million in cash in respect of its debt and equity interests in HALO and for the payment of accrued interest and fees after payments to non-controlling shareholders and payment of all transaction expenses. The Company also expects to receive approximately $0.6 million of proceeds held in escrow pending resolution of the matters for which these funds are being withheld. In addition, the Company expects to receive a tax refund of approximately $1.1 million from the recording of transaction expenses incurred in connection with the transaction. The Company recognized a loss of $0.1 million for the three and six months ended June 30, 2012 as a result of the sale of HALO. The net proceeds were used to repay outstanding debt under the Company’s revolving credit facility.

Summarized operating results for HALO for the three and six months ended June 30, 2012 and 2011 through the date of disposition were as follows (in thousands):


	For the period Apr. 1, 2012 through disposition			Three months ended June 30, 2011		For the period Jan. 1, 2012 through disposition			Six months ended June 30, 2011
Net sales	$	14,177		$	39,296	$	51,253		$	71,982

Operating income (loss)		(2,680	)		2,883		(2,141	)		2,430
Income (loss) from continuing operations before income taxes		(2,680	)		2,942		(2,141	)		2,486
Provision (benefit) for income taxes		(990	)		528		(973	)		250

Income (loss) from discontinued operations (1)	$	(1,690	)	$	2,414	$	(1,168	)	$	2,236

⁽¹⁾	The results for the periods from April 1, 2012 through disposition, January 1, 2012 through disposition, the three months ended June 30, 2011, and the six months ended June 30, 2011, exclude $0.2 million, $0.7 million, $0.6 million and $1.1 million of intercompany interest expense, respectively.

Income from discontinued operations for the three and six months ended June 30, 2011 on the condensed consolidated income statements also include $3.3 million and $2.1 million, respectively, of income from discontinued operations related to the Staffmark sale in October 2011.

The following table presents summary balance sheet information of HALO as of December 31, 2011 (in thousands):


	December 31, 2011
Assets:
Cash	$	397
Accounts receivable, net		30,275
Inventories		4,709
Prepaid expenses and other current assets		4,683

Current assets of discontinued operations	$	40,064

Property, plant and equipment, net		1,656
Goodwill		39,773
Intangible assets, net		30,034
Other non-current assets		175

Non-current assets of discontinued operations	$	71,638

Liabilities:
Accounts payable		14,014
Accrued expenses and other current liabilities		9,292

Current liabilities of discontinued operations	$	23,306

Deferred income taxes		13,396
Other non-current liabilities		93

Non-current liabilities of discontinued operations	$	13,489

Noncontrolling interest of discontinued operations	$	3,712

Note F — Operating segment data

At June 30, 2012, the Company had eight reportable operating segments. Each operating segment represents a platform 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:

•

Advanced Circuits, 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.

•

American Furniture 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 $1,399. 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.

•

Arnold Magnetics is a leading global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including energy, medical, aerospace and defense, consumer electronics, general industrial and automotive. Arnold Magnetics produces high performance permanent magnets, flexible magnets and precision foil products that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, the company has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide. Arnold Magnetics is headquartered in Rochester, New York.

•

CamelBak is a designer and manufacturer of personal hydration products for outdoor, recreation and military use. CamelBak offers a complete line of technical hydration packs, reusable BPA-free water bottles, performance hydration accessories, specialized military gloves and performance accessories. Through its global distribution network, CamelBak products are available in more than 50 countries worldwide. CamelBak is headquartered in Petaluma, California.

•

ERGObaby is a premier designer, marketer and distributor of babywearing products and accessories. ERGObaby’s reputation for product innovation, reliability and safety has led to numerous awards and accolades from consumer surveys and publications. ERGObaby offers a broad range of wearable baby carriers and related products that are sold through more than 900 retailers and web shops in the United States and internationally. ERGObaby is headquartered in Los Angeles, California.

•

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 Scotts Valley, California and its products are sold worldwide.

•

Liberty Safe is a designer, manufacturer and marketer of premium home and gun safes in North America. From it’s over 204,000 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.

•

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 for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The operations of each of the operating segments are included in consolidated operating results as of their date of acquisition.

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 certain charges from the acquisitions of the Company’s initial businesses not pushed down to the segments which are reflected in the Corporate and other line item. A disaggregation of the Company’s consolidated revenue and other financial data for the three and six months ended June 30, 2012 and 2011 is presented below (in thousands):


*Net sales of operating segments*	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
ACI	$	21,204	$	20,020	$	40,649	$	40,313
American Furniture		21,345		23,477		51,631		59,417
Arnold Magnetics		32,539		—		43,836		—
CamelBak		44,279		—		84,468		—
ERGObaby		13,344		11,186		27,025		22,657
Fox		60,719		45,895		106,391		88,775
Liberty		22,464		18,622		43,615		38,825
Tridien		14,122		13,944		27,728		27,797

Total		230,016		133,144		425,343		277,784
Reconciliation of segment revenues to consolidated revenues:
Corporate and other		—		—		—		—

Total consolidated revenues	$	230,016	$	133,144	$	425,343	$	277,784

International Revenues

Revenues from geographic locations outside the United States were not material for any operating segment, except Fox, ERGObaby CamelBak, and Arnold in each of the periods presented. Fox recorded net sales to locations outside the United States,

principally Europe and Asia, of $36.2 million and $30.4 million for the three months ended June 30, 2012 and 2011, respectively, and $63.5 million and $58.3 million for the six months ended June 30, 2012 and 2011, respectively. ERGObaby recorded net sales to locations outside the United States of $7.3 million and $7.2 million for the three months ended June 30, 2012 and 2011, respectively, and $15.5 million and $15.1 million for the six months ended June 30, 2012 and 2011, respectively. CamelBak recorded net sales to locations outside the United States of $7.0 million and $15.1 milllion for the three and six months ended June 30, 2012. Arnold Magnetics recorded net sales to locations outside the United States of $19.0 million for the three months ended June 30, 2012. There were no significant inter-segment transactions.


*Profit (loss) of operating segments (1)*	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
ACI	$	5,920		$	6,805		$	12,076		$	13,887
American Furniture (2)		(740	)		(1,597	)		(451	)		(9,595	)
Arnold Magnetics (3)		855			—			(3,826	)		—
CamelBak		8,876			—			16,020			—
ERGObaby		2,016			2,201			3,665			4,585
Fox		6,855			4,602			11,146			9,626
Liberty		1,642			1,017			2,217			1,913
Tridien		1,032			1,099			1,924			2,342

Total		26,456			14,127			42,771			22,758
Reconciliation of segment profit to consolidated income from continuing operations before income taxes:
Interest expense, net		(7,697	)		(1,869	)		(13,693	)		(3,947	)
Other income, net		(128	)		13			(396	)		—
Corporate and other (4)		(8,940	)		(6,746	)		(14,525	)		(15,202	)

Total consolidated income from continuing operations before income taxes	$	9,691		$	5,525		$	14,157		$	3,609

(1)	Segment profit (loss) represents operating income (loss).

(2)	Includes $7.7 million of goodwill and intangible asset impairment charges during the six months ended June 30, 2011.

(3)	Includes acquisition-related costs in connection with the acquisition of Arnold expensed in accordance with acquisition accounting.

(4)	Includes fair value adjustments related to the supplemental put liability.


*Accounts receivable*	Accounts Receivable June 30, 2012			Accounts Receivable December 31, 2011
ACI	$	7,775		$	5,102
American Furniture		6,931			10,306
Arnold Magnetics		20,099			—
CamelBak		28,604			17,111
ERGObaby		6,015			2,867
Fox		35,004			18,635
Liberty		12,917			13,331
Tridien		4,691			4,182

Total		122,036			71,534
Reconciliation of segment to consolidated totals:
Corporate and other		—			—

Total		122,036			71,534
Allowance for doubtful accounts		(3,587	)		(2,420	)

Total consolidated net accounts receivable	$	118,449		$	69,114


	Goodwill June 30, 2012		Goodwill Dec. 31, 2011		Identifiable Assets June 30, 2012 (1)		Identifiable Assets Dec. 31, 2011 (1)
*Goodwill and identifiable assets of operating segments*
ACI	$	57,762	$	57,615	$	27,047	$	26,329
American Furniture		—		—		22,924		20,306
Arnold Magnetics		53,341		—		93,090		—
CamelBak		5,546		5,546		234,588		239,905
ERGObaby		41,664		41,471		71,136		74,457
Fox		31,372		31,372		104,120		80,392
Liberty		32,684		32,684		39,281		40,064
Tridien		19,555		19,555		19,368		19,139

Total		241,924		188,243		611,554		500,592
Reconciliation of segment to consolidated total:
Corporate and other identifiable assets (2)		—		—		14,973		142,931
Goodwill carried at Corporate level (3)		17,324		17,324		—		—

Total	$	259,248	$	205,567	$	626,527	$	643,523

(1)	Does not include accounts receivable balances per schedule above.

(2)	Corporate assets were reduced during the six months ended June 30, 2012 primarily as a result of the cash at December 31, 2011 used to fund the acquisition of Arnold Magnetics.

(3)	Represents goodwill resulting from purchase accounting adjustments not “pushed down” to the segments. This amount is allocated back to the respective segments for purposes of goodwill impairment testing.

Other segment information

Repurchase of CamelBak preferred stock

On March 6, 2012, CamelBak redeemed its 11% convertible preferred stock for $45.3 million plus accrued dividends of $2.7 million, from an affiliate of CGI Magyar Holdings, LLC ($47.7 million), the Company’s largest shareholder, and noncontrolling shareholders ($0.3 million). The Company funded the redemption with its cash through intercompany debt and an equity contribution from the Company of $19.2 million and $25.9 million, respectively. In addition, noncontrolling shareholders of CamelBak invested $2.9 million of equity in order for the Company and noncontrolling shareholders to maintain existing ownership percentages of CamelBak common stock of 89.9% and 10.1%, respectively.

Recapitalization of Fox

On June 18, 2012, the Company entered into an amendment (the “Amendment”) to the inter-company loan agreement with Fox (the “Loan Agreement”). The Loan Agreement was amended to (i) provide for term loan borrowings of $60 million and an increase to the revolving loan commitment of $2.0 million and to permit the proceeds thereof to fund cash distributions totaling $67.0 million by Fox to the Company and to its non-controlling shareholders, (ii) extend the maturity dates of the term loans under the Loan Agreement, and (iii) modify borrowing rates under the Loan Agreement. Our share of the cash distribution was approximately $50.7 million with approximately $16.3 million being distributed to Fox’s non-controlling shareholders. All other material terms and conditions of the Loan Agreement were unchanged.

The table below summarizes the stockholders’ equity impact as a result of the transaction.


Recapitalization proceeds to existing shareholders	$	(13,252	)
Shares purchased from noncontrolling holders		(10,969	)
Recapitalization proceeds to option holders		(3,037	)
Shares purchased by noncontrolling holders		7,204
Tax benefit on options		4,716

	$	(15,338	)

Note G — Property, plant and equipment and inventory

Property, plant and equipment is comprised of the following at June 30, 2012 and December 31, 2011 (in thousands):


	June 30, 2012			December 31, 2011
Machinery and equipment	$	73,704		$	49,340
Office furniture, computers and software		5,557			4,030
Leasehold improvements		10,706			9,541
Buildings and land		376			—

		90,343			62,911
Less: accumulated depreciation		(25,731	)		(19,332	)

Total	$	64,612		$	43,579

Depreciation expense was $3.8 million and $2.4 million for the three months ended June 30, 2012 and 2011, respectively, and $6.9 million and $4.8 million for the six months ended June 30, 2012 and 2011, respectively.

Inventory is comprised of the following at June 30, 2012 and December 31, 2011 (in thousands):


	June 30, 2012			December 31, 2011
Raw materials and supplies	$	93,719		$	53,659
Finished goods		53,968			48,596
Less: obsolescence reserve		(8,525	)		(5,943	)

Total	$	139,162		$	96,312

Note H — Goodwill and other intangible assets

Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Indefinite lived intangible assets, representing trademarks and trade names, are not amortized until their useful life is determined to no longer be indefinite. Goodwill and indefinite lived intangible assets are tested for impairment annually as of March 31 of each year, unless a triggering event occurs, by comparing the fair value of each reporting unit to its carrying value.

2012 Annual goodwill impairment testing

The Company is required to perform impairment reviews of goodwill balances at each of its reporting units at least annually and more frequently in certain circumstances. Each of the Company’s businesses represents a reporting unit, except at Arnold, which comprises three reporting units. Each of the reporting units is subject to impairment review at March 31, 2012, which represents the annual date for impairment testing, with the exception of American Furniture. The entire balance of American Furniture’s goodwill was impaired in 2011.

The FASB issued an Accounting Standards Update 2011-08 (“ASU”) in September 2011 that permits companies to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If a company concludes that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount it is not required to perform the two-step impairment test for that reporting unit. This ASU is effective for fiscal years beginning after December 15, 2011. At March 31, 2012 the Company elected to use the qualitative assessment alternative to test goodwill for impairment for each of the reporting units that maintain a goodwill carrying value.

As prescribed by the ASU, factors to consider when making the qualitative assessment prior to performing Step 1 of the goodwill impairment test are as follows:

•

Macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets;

•

Industry and market considerations such as deterioration in the environment in which an entity operates, an increased competitive environment, a decline (both absolute and relative to its peers) in market-dependent multiples or metrics, a change in the market for an entity’s products or services, or a regulatory or political development;

•

Cost factor, such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;

•

Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;

•

Other relevant entity-specific events such as litigation, contemplation of bankruptcy, or changes in management, key personnel, strategy, or customers;

•

Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or a recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit; and

•

Sustained decrease (both absolute and relative to its peers) in share price, if applicable.

In addition to considering the above factors the Company performed the following procedures as of March 31, 2012 for each of the reporting units;

•

Compared and assessed trailing twelve month (“TTM”) net sales as of March 31, 2012 to TTM net sales as of March 31, 2011:

•

Compared and assessed TTM operating income as of March 31, 2012 to TTM operating income as of March 31, 2011;

•

Compared and assessed TTM Adjusted EBITDA as of March 31, 2012 to Adjusted EBITDA as of March 31, 2011;

•

Compared and assessed Adjusted EBITDA for the year-ended December 31, 2011 to budget;

•

Compared and assessed Adjusted EBITDA for the three-months ended March 31, 2012 to budget;

•

Compared the fair value of each of the reporting units to its carrying amount using the same metrics as those used in determining the value of the supplemental put as of March 31, 2012 and concluded that in each case the fair value of the reporting unit was in excess of its carrying amount; and

•

Performed a market capitalization reconciliation for the Company and determined that the public market capitalization was significantly in excess of the fair value of the Company’s consolidated equity (as derived from the aforementioned supplemental put analysis).

Based on the qualitative assessment as outlined the Company believes that it is more likely than not that the fair value of each of our reporting units is not less than its carrying amount at March 31, 2012. These results may change as a result of finalization of this analysis during the three months ended September 30, 2012.

2011 Annual goodwill impairment testing

The Company conducted its annual goodwill impairment testing as of March 31, 2011. At each of the reporting units tested, the units’ fair value exceeded carrying value with the exception of American Furniture. The carrying amount of American Furniture exceeded its fair value due to the significant decrease in revenue and operating profit at American Furniture resulting from the negative impact on the promotional furniture market due to the significant decline in the U.S. housing market, high unemployment rates and aggressive pricing employed by its competitors. As a result of the carrying amount of goodwill exceeding its fair value, the Company recorded a $5.9 million impairment charge during the three months ended March 31, 2011 which represented the remaining balance of goodwill on American Furniture’s balance sheet.

The carrying amount of American Furniture exceeded its fair value at March 31, 2011 by a significant amount due primarily to the significant decrease in revenue and operating profit together with management’s revised outlook on near term operating results. Further, the results of this analysis indicated that the carrying value of American Furniture’s trade name exceeded its fair value by approximately $1.8 million. The fair value of the American Furniture trade name was determined by applying the relief from royalty technique to forecasted revenues at the American Furniture reporting unit.

Other than the qualitative goodwill impairment review discussed above, the estimates employed and judgment used in determining critical accounting estimates have not changed significantly from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission.

A reconciliation of the change in the carrying value of goodwill for the six months ended June 30, 2012 and the year ended December 31, 2011, is as follows (in thousands):


	Six months ended June 30, 2012			Year ended December 31, 2011
Beginning balance:
Goodwill	$	247,002		$	233,568
Accumulated impairment losses		(41,435	)		(35,535	)

		205,567			198,033

Impairment losses		—			(5,900	)
Acquisition of businesses (1)		53,488			13,620
Adjustment to purchase accounting		193			(186	)

Total adjustments		53,681			7,534

Ending balance:
Goodwill		300,683			247,002
Accumulated impairment losses		(41,435	)		(41,435	)

	$	259,248		$	205,567

⁽¹⁾	Relates to the purchase of Arnold Magnetics and Universal Circuits in 2012 and CamelBak and Orbit Baby in 2011.

Other intangible assets

2012 Annual indefinite lived impairment testing

The Company is in the process of completing its 2012 annual impairment testing on indefinite lived intangible assets as of March 31, 2012. Preliminary results indicate there is no impairment; however results may change as a result of finalization of this analysis during the three months ended September 30, 2012.

Other intangible assets are comprised of the following at June 30, 2012 and December 31, 2011 (in thousands):


	June 30, 2012			December 31, 2011			Weighted Average Useful Lives
Customer relationships	$	191,759		$	169,105		12
Technology and patents		89,464			75,679		8
Trade names, subject to amortization		7,595			1,305		10
Licensing and non-compete agreements		7,726			7,417		4
Distributor relations and other		606			516		5

		297,150			254,022

Accumulated amortization customer relationships		(40,111	)		(32,182	)
Accumulated amortization technology and patents		(28,345	)		(23,188	)
Accumulated amortization trade names, subject to amortization		(518	)		(143	)
Accumulated amortization licensing and non-compete agreements		(4,303	)		(2,917	)
Accumulated amortization distributor relations and other		(516	)		(452	)

Total accumulated amortization		(73,793	)		(58,882	)
Trade names, not subject to amortization		132,430			132,930

Total intangibles, net	$	355,787		$	328,070

Amortization expense related to intangible assets was $7.8 million and $4.7 million for the three months ended June 30, 2012 and 2011, respectively, and $14.9 million and $9.4 million for the six months ended June 30, 2012 and 2011, respectively. Estimated charges to amortization expense of intangible assets over the next years, is as follows, (in thousands):


July 1, 2012 through Dec. 31, 2012	$	15,169
2013		29,002
2014		28,428
2015		24,881
2016		18,634

	$	116,114

Note I — Debt

On October 27, 2011, the Company obtained a $515 million credit facility, with an optional $135 million increase, from a group of lenders led by Toronto Dominion (Texas) LLC. The Credit Facility provides for (i) a Revolving Credit Facility of

$290 million due in October 2016, and (ii) a $225 million Term Loan Facility due in October 2017. The Term Loan Facility was issued at an original issuance discount of 96% and requires quarterly payments of approximately $0.56 million commencing March 31, 2012. The Credit Facility is secured by a first priority lien on all the assets of the Company, including, but not limited to, the capital stock of the businesses, loan receivables from the Company’s businesses, cash and other assets.

On April 2, 2012, the Company exercised its option for an incremental term loan in the amount of $30 million. The incremental term loan was issued at 99% of par value and increased the term loans outstanding under the Credit Facility from approximately $224.4 million to approximately $254.4 million. The quarterly amortization payments increased to approximately $0.64 million as a result of this incremental term loan. In addition, the Company amended its Credit Facility to reduce the margin on its LIBOR Loans from 6.00% to 5.00% and on its Base Rate Loans from 5.00% to 4.00% and reduce the LIBOR floor from 1.50% to 1.25%. All other terms of the Credit Facility remained unchanged. The Company paid an amendment fee in connection with this amendment of approximately $2.2 million, and incurred additional fees and expenses of approximately $0.6 million in the aggregate. Net proceeds from this incremental term loan were used to reduce the Revolving Credit Facility.

The Company had $19.5 million in outstanding borrowings under its Revolving Credit Facility at June 30, 2012. Borrowing base availability under our Revolving Credit Facility was approximately $269 million at June 30, 2012. Letters of credit outstanding at June 30, 2012 totaled approximately $1.7 million. At June 30, 2012, the Company was in compliance with all covenants.

The following table provides the Company’s debt holdings at June 30, 2012 and December 31, 2011 (in thousands):


	June 30, 2012			December 31, 2011
Revolving Credit Facility	$	19,500		$	—
Term Loan Facility		253,800			225,000
Original issue discount		(7,688	)		(8,750	)

Total debt	$	265,612		$	216,250

Less: Current portion, term loan facilities		(2,550	)		(2,250	)

Long term debt	$	263,062		$	214,000

Note J — Derivative instruments and hedging activities

The Credit Facility requires the Company to hedge the interest on fifty percent of the outstanding debt under the Term Loan Facility. The Company purchased the following derivatives on October 31, 2011:

•

A two-year interest rate cap with a notional amount of $200 million effective December 31, 2011 through December 31, 2013. The agreement caps the three-month LIBOR rate at 2.5% in exchange for a fixed payment of $0.3 million. At June 30, 2012 this interest rate cap had a fair value of $0.01 million and is reflected in other current assets on the consolidated balance sheet. The difference between the fixed payment and its change in mark-to-market value is reflected as a component of interest expense; and

•

A three-year interest rate swap with a notional amount of $200 million effective December 31, 2013 through December 31, 2016. The agreement requires the Company 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 June 30, 2012, this interest rate swap had a fair value loss of $3.4 million and is reflected in other non-current liabilities with its change in mark-to-market value reflected as a component of interest expense.

The Company did not elect hedge accounting for the above derivative transactions associated with the Credit Facility and as a result, periodic mark-to market changes in fair value are reflected in the consolidated statement of income.

Note K — Fair value measurement

The following table provides the assets and liabilities carried at fair value measured on a recurring basis at June 30, 2012 and December 31, 2011 (in thousands):


	Fair Value Measurements at June 30, 2012
	Carrying Value		Level 1		Level 2		Level 3
Assets:
Interest rate cap	$	11	$	—	$	11	$	—
Liabilities:
Supplemental put obligation	$	37,176	$	—	$	—	$	37,176
Call option of noncontrolling shareholder (1)		25		—		—		25
Put option of noncontrolling shareholders (2)		50		—		—		50
Interest rate swap		3,414		—		3,414		—

⁽¹⁾	Represents a noncontrolling shareholder’s call option to purchase additional common stock in Tridien.

⁽²⁾	Represents put options issued to noncontrolling shareholders in connection with the Liberty acquisition.


	Fair Value Measurements at December 31, 2011
	Carrying Value		Level 1		Level 2		Level 3
Assets:
Interest rate cap	$	166	$	—	$	166	$	—
Liabilities:
Supplemental put obligation	$	49,489	$	—	$	—	$	49,489
Call option of noncontrolling shareholder		25		—		—		25
Put option of noncontrolling shareholders		50		—		—		50
Interest rate swap		1,822		—		1,822		—

A reconciliation of the change in the carrying value of our level 3 supplemental put liability from January 1, 2012 through June 30, 2012 and from January 1, 2011 through June 30, 2011 is as follows (in thousands):


	2012			2011
Balance at January 1	$	49,489		$	44,598
Supplemental put expense (reversal)		(1,540	)		3,228
Payment of supplemental put liability		(13,675	)		—

Balance at March 31	$	34,274		$	47,826
Supplemental put expense		2,902			1,667

Balance at June 30	$	37,176		$	49,493

Valuation Techniques

Supplemental put:

The Company and CGM entered into a Supplemental Put Agreement in 2006, which requires the Company to acquire the Allocation Interests owned by CGM upon termination of the Master Services Agreement. Essentially, the put right granted to CGM requires the Company to acquire CGM’s Allocation Interests in the Company at a price based on 20% of the company’s profits upon clearance of a 7% annualized hurdle rate. Each fiscal quarter the Company estimates the fair value of this potential liability associated with the Supplemental Put Agreement. Any change in the potential liability is accrued currently as a non-cash adjustment to earnings. The change in the supplemental put liability during the six months ended June 30, 2012, was primarily related to a payment of approximately $13.7 million to CGM due to the profit allocation payment related to the sale of Staffmark.

Options of noncontrolling shareholders:

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 primary inputs associated with this valuation utilizing a Black-Scholes model are volatility of 30%, an estimated term of 5 years and a discount rate of 45%.

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. The primary inputs associated with this valuation utilizing a Black-Scholes model are volatility of 44%, an estimated term of 5 years and the fact that the underlying price equaled the exercise price at the time of issuance.

Interest rate cap — asset:

The Company’s derivative instrument at June 30, 2012 consisted of an over-the-counter (OTC) interest rate cap 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 were readily available in public markets or could be derived from information available in publicly quoted markets. As such, the Company categorized the cap as Level 2. Refer to Note J.

Interest rate swap — liability:

The Company’s derivative instrument at June 30, 2012 consisted 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 were readily available in public markets or could be derived from information available in publicly quoted markets. As such, the Company categorized the swap as Level 2. Refer to Note J.

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 30, 2012, the Company paid a distribution of $0.36 per share to holders of record as of January 23, 2012. This distribution was declared on January 5, 2012.

•

On April 30, 2012, the Company paid a distribution of $0.36 per share to holders of record as of April 24, 2012. This distribution was declared on April 10, 2012.

•

On July 31, 2012, the Company paid a distribution of $0.36 per share to holders of record as of July 24, 2012. This distribution was declared on July 10, 2012.

Note M — Warranties

The Company’s CamelBak, ERGObaby, Fox, Liberty and Tridien operating segments estimate their 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, 2012 and the year ended December 31, 2011 is as follows (in thousands):


	Six Months Ended June 30, 2012			Year Ended December 31, 2011
Warranty liability:
Beginning balance	$	4,311		$	3,237
Accrual		2,112			3,556
Warranty payments		(1,678	)		(2,769	)
Other		—			287

Ending balance	$	4,745		$	4,311

Note N — Noncontrolling interest

Noncontrolling interest represents the portion of the Company’s majority-owned subsidiary’s net income (loss) and equity that is owned by noncontrolling shareholders. The following tables reflect the Company’s ownership percentage of its majority owned operating segments and related noncontrolling interest balances as of June 30, 2012 and December 31, 2011:


	% Ownership (1)				% Ownership (1)
	June 30, 2012				December 31, 2011
	Primary		Fully Diluted		Primary		Fully Diluted
ACI		69.6		69.4		69.6		69.4
American Furniture		99.9		99.9		99.9		99.9
Arnold Magnetics		96.7		87.6		n/a		n/a
CamelBak		89.9		76.7		89.9		76.7
ERGObaby		81.1		74.6		81.1		74.6
FOX		75.7		71.1		78.0		67.9
Liberty		96.2		87.6		96.2		87.6
Tridien		73.9		60.0		73.9		60.0


	Noncontrolling Interest Balances
(in thousands)	June 30, 2012		December 31, 2011
ACI	$	6,344	$	4,475
American Furniture		154		46
Arnold Magnetics		1,534		—
CamelBak		11,522		54,729
ERGObaby		10,485		10,233
FOX		10,046		13,661
Liberty		1,565		1,436
Tridien		10,927		10,577
CGM		100		100

	$	52,677	$	95,257

Recapitalization of Fox

As discussed in Note F, on June 18, 2012, the Company recapitalized its Fox subsidiary. As a result of this recapitalization, the Company’s ownership was 75.7% on a primary basis and 71.1% on a fully diluted basis as of June 30, 2012.

Note O — Income taxes

Each fiscal quarter the Company estimates its annual effective tax rate and applies that rate to its interim pre-tax earnings. In this regard, the Company reflects the tax impact of certain unusual or infrequently occurring items and 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 in 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.

The reconciliation between the Federal Statutory Rate and the effective income tax rate for the three and six months ended June 30, 2012 and 2011 are as follows:


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
United States Federal Statutory Rate		35.0	%		35.0	%		35.0	%		35.0	%
Foreign and State income taxes (net of Federal benefits)		10.3			5.3			11.4			20.4
Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders (1)		19.3			20.1			18.4			75.8
Impact of subsidiary employee stock options		(7.4	)		4.7			(5.1	)		4.4
Domestic production activities deduction		(1.0	)		(7.0	)		(3.5	)		(21.3	)
Non-deductible acquisition costs		1.1			—			10.7			—
Impairment expense		—			—			—			57.2
Non-recognition of NOL carryforwards at AFM		3.6			—			4.0			—
Other		(2.5	)		(5.2	)		(2.0	)		2.8

Effective income tax rate		58.4	%		52.9	%		68.9	%		174.3	%

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

Note P — Defined Benefit Plan

In connection with the acquisition of Arnold, the Company has a defined benefit plan covering substantially all of Arnold’s employees at its Lupfig, Switzerland location. The benefits are based on years of service and the employees’ highest average compensation during the specific period.

The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated balance sheets at June 30, 2012.


	Date of acquisition through June 30, 2012
Change in benefit obligation:
Benefit obligation, acquisition date	$	15,662
Service cost		150
Interest cost		107
Actuarial loss		—
Transfer of employee contributions		127
Benefits paid		123
Foreign currency translation		(752	)
Retirees		(730	)

Benefit obligation, June 30		14,687

Change in plan assets:
Fair value of assets, acquisition date	$	14,325
Actual return on plan assets		2
Company contribution		151
Employee contributions and transfer		127
Benefits paid		123
Foreign currency translation		(688	)
Retirees		(730	)

Fair value of assets, June 30		13,310

Funded Status	$	(1,377	)

The unfunded liability of $1.4 million is recognized in the consolidated balance sheet within other non-current liabilities at June 30, 2012. The net actuarial loss recognized in cumulative other comprehensive loss was $0.8 million at June 30, 2012.

Net periodic benefit cost consists of the following at June 30, 2012:


	Date of acquisition through June 30, 2012
Service cost	$	150
Interest cost		107
Expected return on plan assets		(36	)

Net periodic benefit cost	$	221

Assumptions used to determine the benefit obligations and components of the net periodic benefit cost at June 30, 2012:


	June 30, 2012
Discount rate		2.25	%
Expected return on plan assets		2.50	%
Rate of compensation increase		1.00	%

The Company considers the historical level of long-term returns and the current level of expected long-term returns for the plan assets, as well as the current and expected allocation of assets when developing its expected long-term rate of return on assets assumption. The assumptions used for the plan are based upon customary rates and practices for the location of the Company.

Cash Flow Data: The Company, for the remainder of 2012, per the terms of the agreement, will be contributing to the plan approximately $0.3 million.

The following presents the benefit payments which are expected to be paid for the plan:


July 1, 2012 through June 30, 2013	$	569
July 1, 2013 through June 30, 2014		1,015
July 1, 2014 through June 30, 2015		1,185
July 1, 2015 through June 30, 2016		596
July 1, 2016 through June 30, 2017		640
July 1, 2017 and thereafter		4,731

Plan Assets: Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market risk and providing adequate liquidity to meet immediate and future benefit payment requirements.

The assets of the plan are reinsured in their entirety with Swiss Life Ltd. (“Swiss Life”) within the framework of the corresponding contracts with Swiss Life Collective BVG Foundation and Swiss Life Complementary Foundation. The assets are guaranteed by the insurance company and pooled with the assets of other participating employers. The breakdown of the allocation of assets in Swiss Life’s group life portfolio is as follows at the date of acquisition:


	Acquisition Date Allocation
Certificates of deposit and cash and cash equivalents		78	%
Fixed income bonds and securities		7	%
Mutual funds		1	%
Private equity and hedge funds		1	%
Real estate		11	%
Equity and other investments		2	%

		100	%

As the plan assets are pooled with assets of other participating employers and are not separable, the fair values of the pension plan assets at June 30, 2012 were considered Level 3.

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 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 9, 2012.

Overview

Compass Diversified Holdings, a Delaware statutory trust, was formed 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;

•

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 whom 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 tight credit environment, and is highly unusual in the marketplace for acquisitions in which we operate.

2012 First Half Highlights

Acquisition of Arnold Magnetics

On March 5, 2012, we purchased a 96.6% controlling interest (on a primary and fully diluted basis) in Arnold Magnetics, with headquarters in Rochester, NY. Arnold Magnetics has an operating history of more than 100 years and is a leading global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including energy, medical, aerospace and defense, consumer electronics, general industrial and automotive. From its nine manufacturing facilities located in the United States, the United Kingdom, Switzerland and China, the company produces high performance permanent magnets, flexible magnets and precision foil products that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold Magnetics has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide.

The purchase price, including proceeds from non-controlling interests, was approximately $130.5 million (excluding acquisition-related costs) and was based on a total enterprise value of $124.2 million and included approximately $6.3 million in cash and working capital. Acquisition related costs were approximately $4.4 million. We funded the acquisition through available cash on hand and a draw of $25 million on our Revolving Credit Facility. Arnold’s management and certain other investors invested in the transaction alongside us, collectively representing approximately 3.4% in initial non-controlling interest on a primary and fully diluted basis. CGM acted as an advisor to the Company in the transaction and received fees and expense payments totaling approximately $1.2 million.

Preferred Stock Redemption

On March 6, 2012, we redeemed CamelBak’s 11% convertible preferred stock for $45.3 million plus accrued dividends of $2.7 million, from an affiliate of CGI Magyar Holdings LLC, CODI’s largest shareholder. The redemption was funded with available cash on hand.

Debt Re-pricing

On April 2, 2012, we exercised our option for an incremental term loan in the amount of $30 million. The incremental term loan was issued at 99% of par value and increased the term loans outstanding under the Credit Facility from approximately $224.4 million to approximately $254.4 million. In addition, in connection with the option we reduced the margin on Term Loan Facility LIBOR Loans from 6.00% to 5.00%, Base Rate Loans from 5.00% to 4.00% and reduced the LIBOR floor from 1.50% to 1.25%. We paid an amendment fee of approximately $2.2 million, and incurred additional fees and expenses of approximately $0.6 million. Net proceeds from this incremental term loan were used to reduce outstanding loans on the Revolving Credit Facility.

Sale of HALO

On May 1, 2012, we sold all of the issued and outstanding capital stock of HALO to Candlelight Investment Holdings, Inc. The total enterprise value received for HALO was $76.5 million.

At the closing, we received approximately $66.4 million in cash in respect of our debt and equity interests in HALO and for the payment of accrued interest and fees after payments to non-controlling shareholders and payment of all transaction expenses. The net proceeds were used to repay outstanding debt under our Revolving Credit Facility. Our proceeds from the disposition approximate our carrying value of HALO.

The transaction is subject to typical escrow requirements and adjustments for certain changes in the working capital of HALO. The HALO purchase agreement contains customary representations, warranties, covenants and indemnification provisions.

Outlook

Net sales during the first quarter of 2012 increased at six of our nine businesses when compared to the first quarter of 2011. 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 second quarter of 2012 at the seasonally adjusted annualized rate of 1.5%, compared to 2.2% in the second quarter of 2011. The decreased rate of growth is an indication that consumer spending is slowing down. Each of our businesses are impacted by the overall economic environment including both consumer spending and increasing commodity and fuel costs. Additionally, American Furniture Manufacturing Inc. (“AFM” or “American Furniture”) is also significantly affected by continued tight credit markets and the depressed housing market which is evident in the significant decrease in quarter over quarter sales and operating profit in the second quarter of 2012.

We believe that the continued tight credit environment may continue to benefit our acquisition model as we do not rely on separate third-party financing as a component to closing.

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	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

In the following results of operations, we provide (i) actual consolidated results of operations for the three and six months ended June 30, 2012 and 2011, 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 and six-months ended June 30, 2012 and 2011 which include relevant pro-forma adjustments to historical results of operations and explanations, where appropriate, for the 2012 acquisition and 2011 acquisition.

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


	Three months ended June 30, 2012		Three months ended June 30, 2011		Six months ended June 30, 2012		Six months ended June 30, 2011
(in thousands)
Net sales	$	230,016	$	133,144	$	425,343	$	277,784
Cost of sales		157,115		92,045		290,755		193,331

Gross profit		72,901		41,099		134,588		84,453
Selling, general and administrative expense		39,901		23,294		80,334		46,952
Fees to manager		4,333		3,496		8,865		6,915
Supplemental put expense		2,902		1,667		1,362		4,895
Amortization of intangibles		7,764		4,719		14,940		9,434
Impairment expense		—		—		—		7,700

Income from operations	$	18,001	$	7,923	$	29,087	$	8,557

Net sales

On a consolidated basis, net sales increased $96.9 million and $147.6 million during the three and six month periods ended June 30, 2012, respectively, compared to the same periods in 2011. These increases for both the three and six month periods are due principally to increased revenues (and in the case of Arnold Magnetics and CamelBak, incremental revenues) at each of our operating segments with the exception of American Furniture and Tridien Medical Inc. (“Tridien”). We realized revenues totaling approximately $76.8 million and $128.3 million in the three and six months ended June 30, 2012 at Arnold Magnetics and CamelBak, which we acquired in March 2012 and August 2011, respectively. Refer to Results of Operations – Our Businesses for a more detailed analysis of net sales for each 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 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 businesses. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and, in some cases, 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 $65.1 million and $97.4 million during the three and six month periods ended June 30, 2012, respectively, compared to the same periods in 2011. These increases are due almost entirely to the corresponding increase in net sales. Gross profit as a percentage of net sales totaled approximately 31.7% and 30.9% of net sales for the three month periods ended June 30, 2012 and 2011, respectively. Gross profit as a percentage of net sales totaled approximately 31.6% and 30.4% of net sales for the six month periods ended June 30, 2012 and 2011, respectively. The increase in gross profit percentage for both the three and six months ended June 30, 2012 compared to the same period in 2011 is principally attributable to the inclusion of CamelBak results of operations in both periods of 2012. CamelBak profit margin during the first half of 2012 was approximately 46.3%. Refer to Results of Operations - Our Businesses for a more detailed analysis of cost of sales for each business segment.

Selling, general and administrative expense

On a consolidated basis, selling, general and administrative expense increased approximately $16.6 million and $33.4 million in the three and six month periods ended June 30, 2012, respectively, compared to the same periods in 2011. The majority of these increases are due principally to increases in costs directly tied to sales, such as commissions and direct customer support services, and selling, general and administrative costs at Arnold Magnetics and CamelBak during 2012. Refer to Results of Operations – Our Businesses for a more detailed analysis of selling, general and administrative expense by segment.

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 June 30, 2012 and 2011, we incurred approximately $4.3 million and $3.5 million, respectively, in expense for these fees. For the six months ended June 30, 2012 and 2011 we incurred approximately $8.9 million and $6.9 million, respectively, in expense for these fees. The increase in management fees for the three and six months ended June 30, 2012 is due principally to the increase in consolidated adjusted net assets as of June 30, 2012 compared to the same period of 2011, in connection with the CamelBak acquisition in August 2011 and the Arnold Magnetics acquisition in March 2012, offset in part by the decrease in consolidated adjusted net assets in connection with the sales of Staffmark and HALO.

Supplemental put expense

Concurrent with the IPO, 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 it upon termination of the Management Services Agreement. We accrue for the supplemental put expense on a quarterly basis. For the three and six months ended June 30, 2012, we incurred approximately $2.9 million and $1.4 million, respectively, in expense compared to $1.7 million and $4.9 million for the corresponding periods in 2011. The change in supplemental put expense in all periods presented is attributable to the increase or decrease in the fair value of our businesses during each of those periods.

Impairment expense

We incurred an impairment charge in the first quarter of 2011 totaling $7.7 million, which is reflected in the operating results for the six months ended June 30, 2011, at our American Furniture business segment, based on our annual goodwill impairment analysis. The portion of the impairment charge that was attributable to impaired goodwill at American Furniture was $5.9 million. The remaining $1.8 million charge reflected a write down of the unamortized balance of American Furniture’s intangible asset, its trade name. The write downs were necessary based on the further deterioration of the promotional furniture market. As of June 30, 2012, the balance of goodwill carried at American Furniture is zero.

We have completed our annual impairment analysis of goodwill as of March 31, 2012 and there was no indication of goodwill impairment at any of our reporting units.

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- and six-month periods ending June 30, 2012 and June 30, 2011 on a stand-alone basis. The results of operations for the 2011 and 2012 acquisitions include appropriate pro-forma adjustments and explanations for those businesses acquired in 2011 and 2012 (CamelBak and Arnold). We believe this is the most meaningful comparison of the operating results for each of our business segments. The following results of operations of 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. Collectively, prototype and quick-turn PCBs represent over 60% of Advanced Circuits’ gross revenues. Prototype and quick-turn PCBs typically command higher margins than volume production PCBs given that customers require high 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.

While global demand for PCBs has remained strong in recent years, industry wide domestic production has declined over 50% since 2000. In contrast, Advanced Circuits’ revenues increased steadily through 2008 (2009 saw a slight reduction) and increased again in 2011 and into the first and second quarter of 2012 as its customers’ prototype and quick-turn PCB requirements, such as small quantity orders and rapid turnaround, are less able to be met by low cost volume manufacturers in Asia and elsewhere. Advanced Circuits’ management anticipates that demand for its prototype and quick-turn printed circuit boards will remain strong and anticipates that demand will be impacted less by current economic conditions than by its longer lead time production business, which is driven more by consumer purchasing patterns and capital investments by businesses.

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

On March 11, 2011, Advanced Circuits acquired 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. On May 23, 2012 Advanced Circuits acquired Universal Circuits for approximately $2.8 million. Universal Circuits supplies PCBs to major military, aerospace, and medical original equipment manufacturers and contract manufacturers. UCI’s Minnesota facility meets certain Department of Defense clearance requirements and is noted for custom and advanced technologies that include a wide range of copper thicknesses and the capability to deal with conformal shapes and unique materials as well as large formats. For the three and six-months ended June 30, 2012 the consolidated results of operations of Advanced Circuits includes net sales and gross profit of Universal Circuits aggregating $1.4 million and $0.2 million, respectively.

Results of Operations

The table below summarizes the income from operations data for Advanced Circuits for the three and six month periods ended June 30, 2012 and June 30, 2011.


	Three months ended				Six months ended
(in thousands)	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011

Net sales	$	21,204	$	20,020	$	40,649	$	40,313
Cost of sales		10,520		8,914		19,731		17,842

Gross profit		10,684		11,106		20,918		22,471
Selling, general and administrative expense		3,877		3,419		7,074		6,821
Fees to manager		125		125		250		250
Amortization of intangibles		762		757		1,518		1,513

Income from operations	$	5,920	$	6,805	$	12,076	$	13,887

Three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Net sales

Net sales for the three months ended June 30, 2012 increased approximately $1.2 million or 5.9%, over the corresponding three month period ended June 30, 2011. The increase in net sales is the result of an increase in gross sales of prototype PCBs ($1.3 million) and assembly revenue ($0.7 million) during the three months ended June 30, 2012 compared to the same period of 2011, offset in part by a decrease in sales of quick-turn production and long-lead time PCBs ($0.3 million) and an increase in promotion and discount charges ($0.5 million). The increase in sales of prototype production PCBs is largely due to sales during the second quarter of 2012 attributable to Universal Circuits. Sales from quick-turn and prototype PCBs represented approximately 64% of net sales during the three months ended June 30, 2012 and 2011.

Cost of sales

Cost of sales for the three months ended June 30, 2012 increased approximately $1.6 million from the comparable period in 2011 principally resulting from the increase in sales. Gross profit as a percentage of sales decreased during the three months ended June 30, 2012 (50.4% at June 30, 2012 as compared to 55.5% at June 30, 2011). This decrease in margin is the result of: (i) the promotional pricing in long-lead PCB sales during the three months ended June 30, 2012 noted above, (ii) sales attributable to Universal Circuits, and (iii) a larger proportion of assembly sales during the three months ended June 30, 2012, each of which carry lower margins.

Selling, general and administrative expense

Selling, general and administrative expense increased approximately $0.5 million during the three months ended June 30, 2012 compared to the same period in 2011 due principally to acquisition related costs in connection with the acquisition of Universal Circuits totaling approximately $0.4 million.

Income from operations

Operating income for the three months ended June 30, 2012 was approximately $5.9 million compared to $6.8 million earned in the same period in 2011, a decrease of approximately $0.9 million, principally as a result of those factors described above.

Six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Net sales

Net sales for the six months ended June 30, 2012 increased approximately $0.3 million or 0.8%, over the corresponding six month period ended June 30, 2011. The increase in net sales is a result of an increase in gross sales of prototype and quick-turn production PCBs ($1.9 million) and assembly revenue ($1.4 million) during the six months ended June 30, 2012 compared to the same period of 2011, offset in part by a decrease in sales of long-lead time PCBs ($1.3 million) and an increase in promotion and discount charges ($1.6 million). The decrease in long-lead time sales during the six months ended June 30, 2012 and the increase in promotion and discount charges in 2012 compared to the same period of 2011 are principally the result of discounting and price promotions incurred during 2012 in response to competitor’s pricing in the long-lead sector. The increase in sales of quick-turn and prototype production PCBs are largely due to sales during the second quarter of 2012 attributable to Universal Circuits. Sales of quick-turn and prototype PCBs represented approximately 64% of net sales in 2012 compared to 63% in 2011.

Cost of sales

Cost of sales for the six months ended June 30, 2012 increased approximately $1.9 million from the comparable period in 2011 due principally to the increase in sales. Gross profit as a percentage of sales decreased during the six months ended June 30, 2012 (51.5% at June 30, 2012 as compared to 55.7% at June 30, 2011). This decrease in margin is the result of: (i) the promotional pricing in long-lead PCB sales during the six months ended June 30, 2012 noted above, (ii) sales attributable to Universal Circuits, and (iii) a larger proportion of assembly sales during the six months ended June 30, 2012, each which carry lower margins

Selling, general and administrative expense

Selling, general and administrative expense increased approximately $0.3 million during the six months ended June 30, 2012 compared to the same period in 2011 due principally to acquisition related costs in connection with the acquisition of Universal Circuits of approximately $0.4 million.

Income from operations

Operating income for the six months ended June 30, 2012 was approximately $12.1 million compared to $13.9 million earned in the same period in 2011, a decrease of approximately $1.8 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 any product in its line to over 800 customers within 48 hours of receiving an order.

American Furniture implemented a revised standard costing system in the year 2011 which required American Furniture to reclassify certain costs between cost of sales and selling, general and administrative expenses. The change in format consisted of reclassifying the trucking fleet expenses from selling, general and administrative expenses into cost of sales as well as re-classifying certain manufacturing related expenses including rent, insurance, utilities and workers’ compensation from selling, general and administrative costs to cost of sales. Management believes that the format of reporting cost of sales going forward together with the revised standard costing system and the revaluation of standard costs will allow management to timely react to changes in supply costs, product demand and overall price structure which in turn should eliminate the accumulation of lower margin product, allow for more advantageous product procurement and allow for proper utilization of available assets. The reclassification from selling, general and administrative expense to cost of sales during the three and six months ended June 30, 2011 was $1.6 million and $3.1 million, respectively.

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 and rugs. American Furniture’s products are manufactured from common components and offer proven select fabric options, providing manufacturing efficiency and resulting in limited design risk or inventory obsolescence.

Results of Operations

The table below summarizes loss from operations data for American Furniture for the three and six month periods ended June 30, 2012 and June 30, 2011.


	Three months ended						Six months ended
(in thousands)	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011

Net sales	$	21,345		$	23,477		$	51,631		$	59,417
Cost of sales		20,356			21,911			48,013			54,747

Gross profit		989			1,566			3,618			4,670
Selling, general and administrative expense		1,716			2,617			4,043			5,348
Fees to manager		—			—			—			125
Amortization of intangibles		13			546			26			1,092
Impairment expense		—			—			—			7,700

Loss from operations	$	(740	)	$	(1,597	)	$	(451	)	$	(9,595	)

Three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Net sales

Net sales for the three months ended June 30, 2012 decreased approximately $2.1 million, or 9.1% over the corresponding three months ended June 30, 2011. Stationary product net sales decreased approximately $0.5 million, recliner product sales decreased approximately $1.1 million, and motion product sales decreased approximately $0.2 million. Sales of other products and a reduction in fuel surcharges totaling $0.3 million were responsible for the remaining decrease in net sales during the three months ended June 30, 2012 compared to 2011. The decrease in net sales in all categories is the result of a continuing soft retail environment and attendant increased competition in pricing in the promotional furniture category during the second quarter of 2012. We expect net sales will be lower during the second half of fiscal 2012 compared to the six-months ended June 30, 2012 and the comparable second half of fiscal 2011 due to the consistent trend of net sales being stronger in the first half of each fiscal year among other factors.

Cost of sales

Cost of sales decreased approximately $1.5 million in the three months ended June 30, 2012 compared to the same period of 2011 and is due primarily to the corresponding decrease in sales. Gross profit as a percentage of sales was 4.6% in the three months ended June 30, 2012 compared to 6.7% in the same period of 2011. The decrease in gross profit as a percentage of sales of approximately 2.1% during the three months ended June 30, 2012 is principally attributable to increases in overhead absorption rates on finished goods and increased freight costs during the current quarter due to the decrease in production volume.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2012, decreased approximately $0.9 million compared to the same period of 2011. This decrease is primarily due to decreased costs of bad debt expense (0.3 million), advertising and marketing costs ($0.2 million) and administrative salaries and benefits ($0.4 million) during the three months ended June 30, 2012 compared to the same period of 2011.

Loss from operations

Loss from operations totaled approximately $0.7 million for the three months ended June 30, 2012 compared to a loss from operations of approximately $1.6 million in the three months ended June 30, 2011, principally due to those factors described above.

Six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Net sales

Net sales for the six months ended June 30, 2012 decreased approximately $7.8 million, or 13.1%, over the corresponding six months ended June 30, 2011. Stationary product net sales decreased approximately $6.8 million, and motion product sales decreased approximately $0.7 million during the six months ended June 30, 2012 compared to the same period of 2011. Recliner sales were flat. Sales of other products ($0.6 million) and a reduction in fuel surcharges ($0.8 million) were responsible for the remaining decrease in net sales during the six months ended June 30, 2012 compared to 2011. The decrease in net sales in all categories is the result the continuing soft current retail environment and increased competition in pricing in the promotional furniture category during the first half of 2012. We expect net sales will lower during the second half of fiscal 2012 compared to the six-months ended June 30, 2012 and the comparable second half of fiscal 2011 due to the consistent trend of net sales being stronger in the first half of each fiscal year among other factors.

Cost of sales

Cost of sales decreased approximately $6.7 million in the six months ended June 30, 2012 compared to the same period of 2011 and is due primarily to the corresponding decrease in sales. Gross profit as a percentage of sales was 7.0% in the six months ended June 30, 2012 compared to 7.9% in 2011. The decrease in gross profit as a percentage of sales of approximately 0.9% during the six months ended June 30, 2012 is principally attributable to increases in overhead absorption rates on finished goods and increased freight costs during the first half of 2012 due to the decrease in production volume.

Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2012, decreased approximately $1.3 million compared to the same period of 2011. This decrease is primarily due to decreased costs of advertising and marketing ($0.4 million) and administrative salaries and benefits ($0.6 million) during the six months ended June 30, 2012 compared to the same period of 2011.

Impairment expense

American Furniture incurred an impairment charge to its goodwill ($5.9 million) and unamortized trade name ($1.8 million), aggregating $7.7 million, during the six months ended June 30, 2011. This impairment charge eliminated the remaining balance of goodwill. The $1.8 million impairment charge to American Furniture’s trade name is in addition to $3.3 million in impairment charges to its trade name expensed in 2010. There were no impairment charges for American Furniture during the comparable 2012 period and only $0.5 million in intangible assets are currently on its balance sheet. The impairment charges resulted from the annual analysis of goodwill and were necessary based on the further deterioration of the promotional furniture market.

Loss from operations

Loss from operations totaled approximately $0.5 million for the six months ended June 30, 2012 compared to a loss from operations of approximately $9.6 million in the six months ended June 30, 2011, principally due 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.

Arnold Magnetics is also a 50% partner in a China rare earth mine-to-magnet joint venture. Arnold Magnetics accounts for its activity in the joint venture utilizing the equity method of accounting. Gains and losses from the joint venture are not material during the three and six months ended June 30, 2012.

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.

Pro-forma Results of Operations


	Three months ended				Six months ended
(in thousands)	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
	(Pro-forma)		(Pro-forma)		(Pro-forma)		(Pro-forma)
Net sales	$	32,539	$	34,555	$	67,085	$	66,878
Cost of sales (a)		25,141		26,939		51,403		52,129

Gross profit		7,398		7,616		15,682		14,749
Selling, general and administrative expense (b)		3,902		3,962		8,329		7,944
Fees to manager (c)		125		125		250		250
Amortization of intangibles (d)		822		822		1,644		1,644

Income from operations	$	2,549	$	2,707	$	5,459	$	4,911

Pro-forma results of operations of Arnold Magnetics for the three and six months ended June 30, 2012 and 2011 include the following pro-forma adjustments, applied to historical results as if we acquired Arnold Magnetics on January 1, 2011:

(a)	Cost of sales for the three and six months ended June 30, 2011 does not include $1.6 million and $3.2 million, respectively, 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 costs were reduced by approximately $12.1 million in the six-months ended June 30, 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 in each period presented.

(d)

Represents an increase in amortization of intangible assets totaling $0.6 million in the three month period ended June 30, 2011 and $0.5 million and $1.2 million in the six months ended June 30, 2012 and 2011, respectively. These adjustments are the result of and were derived from the purchase price allocation in connection with our acquisition.

Pro forma three months ended June 30, 2012 compared to the pro forma three months ended June 30, 2011.

Net sales

Net sales for the three months ended June 30, 2012 were approximately $32.5 million, a decrease of $2.0 million, or 5.8%, compared to the same period in 2011. The decrease in net sales is a result of decreased sales in the PMAG ($1.3 million), Flexmag ($0.4 million) and Rolled product ($0.3 million) sectors. PMAG sales represented approximately 72.9% of net sales

for the three months ended June 30, 2012 compared to 72.5% for the same period in 2011. The decrease in sales is principally attributable to a decrease in reprographic application sales, a component of PMAG, during the three-months ended June 30, 2012 compared to the same period in 2011.

International sales were $19.0 million during the three months ended June 30, 2012 compared to $16.1 million during the same period in 2011, an increase of $2.9 million or 18%.

Cost of sales

Cost of sales for the three months ended June 30, 2012 were approximately $25.1 million compared to approximately $26.9 million in the same period of 2011. The decrease of $1.9 million is due principally to the corresponding decrease in sales. Gross profit as a percentage of sales increased from 22.0% for the quarter ended June 30, 2011 to 22.7% in the quarter ended June 30, 2012. The increase is attributable to increased margins in the PMAG sector due to a more favorable customer/product sales mix, due in part to a decrease in reprographic application sales during the three months ended June 30, 2012 compared to the same period in 2011, offset in part by a decrease in margins at its Rolled product sector due to unfavorable customer/product sales mix.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2012 was approximately $3.9 million or 12.0% of net sales essentially flat as compared to $4.0 million or 11.5% of net sales for the same period in 2011.

Income from operations

Income from operations was approximately $2.5 million during the three months ended June 30, 2012 and $2.7 million in the three months ended June 30, 2011.

Pro forma six months ended June 30, 2012 compared to the pro forma six months ended June 30, 2011.

Net sales

Net sales for the six months ended June 30, 2012 were approximately $67.1 million, an increase of $0.2 million, or 0.3%, compared to the same period in 2011. The increase in net sales is a result of increased sales in the PMAG product sector ($0.9 million), offset in part by a decrease in sales in the Flexmag and Rolled Products sectors. PMAG sales represented approximately 73.2% of net sales for the six months ended June 30, 2012 compared to 72.1% for the same period in 2011. The increase in PMAG sales during the six months ended June 30, 2012 compared to the same period in 2011 is principally attributable to increased sales initiatives in certain market sectors, offset in part by lower reprographic application sales in 2012 compared to 2011.

International sales were $30.2 million during each of the six month periods ended June 30, 2012 and 2011.

Cost of sales

Cost of sales for the six months ended June 30, 2012 were approximately $51.4 million compared to approximately $52.1 million in the same period of 2011. The decrease of $0.7 million is due principally to the corresponding decrease in sales. Gross profit as a percentage of sales increased from 22.1% for the six months ended June 30, 2011 to 23.4% in the quarter ended June 30, 2012. The increase is attributable to increased margins in the PMAG sector due to a more favorable customer/product sales mix, due in part to a decrease in reprographic application sales during the three months ended June 30, 2012 compared to the same period in 2011, offset in part by a decrease in margins at its Rolled Product sector due to unfavorable customer/product sales mix.

Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2012 increased to approximately $8.3 million or 12.4% of net sales compared to $7.9 million or 11.9% of net sales for the same period in 2011. The $0.4 million increase in selling, general and administrative expenses incurred during the six months ended June 30, 2012 compared to the same period in 2011 is attributable to increases in personnel costs and benefits and third party services to support growth initiatives.

Income from operations

Income from operations for the six months ended June 30, 2012 was approximately $5.5 million, an increase of $0.6 million when compared to the same period in 2011, 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.


	Three months ended				Six months ended
(in thousands)	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
			(Pro-forma)				(Pro-forma)
Net sales	$	44,279	$	43,743	$	84,468	$	76,376
Cost of sales (a)		23,335		26,556		45,350		45,254

Gross profit		20,944		17,187		39,118		31,122
Selling, general and administrative expense		9,565		8,053		18,092		15,373
Fees to manager (b)		125		125		250		250
Amortization of intangibles (c)		2,378		2,378		4,756		4,756

Income from operations	$	8,876	$	6,631	$	16,020	$	10,743

Pro-forma results of operations of CamelBak for the three and six months ended June 30, 2011 includes the following pro-forma adjustments, applied to historical results as if we acquired CamelBak on January 1, 2011:

(a)

Cost of sales for the three and six months ended June 30, 2011 does not include $1.6 million and $6.1 million of amortization expense associated with the inventory fair value step-up recorded in August 2011, as a result of and derived from the purchase price allocation in connection with our purchase.

(b)	Represents management fees that would have been payable to the Manager in 2011.

(c)	An increase in amortization of intangible assets totaling $2.2 million and $4.3 million in the three and six months ended June 30, 2011. This adjustment is the result of and was derived from the purchase price allocation in connection with our acquisition of CamelBak.

Three months ended June 30, 2012 compared to the pro forma three months ended June 30, 2011.

Net sales

Net sales for the three months ended June 30, 2012 were approximately $44.3 million, an increase of $0.5 million, or 1.2%, compared to the same period in 2011. The increase in gross sales is a result of increased sales in Hydration Systems ($3.0 million) and Bottles ($2.6 million) offset in part by a decrease in sales in Gloves ($3.2 million) and Accessories ($0.1 million). The increased sales during the three months ended June 30, 2012 compared to the same period in 2011 is attributable to the continued success of “Antidote”, CamelBak’s new reservoir for the recreational Hydration Systems line, introduced in 2011, the expansion of offerings in Bottles such as the introduction of eddyTM, and the continued expansion in its customer base, including new and existing customers, for all product lines. The decrease in Glove sales is due to decreased demand from the U.S. military, resulting in part from a drawdown of U.S. combat troops. Sales of Hydration Systems and Bottles represented approximately 83% of gross sales for the three months ended June 30, 2012 compared to 75% for the same period in 2011. Military sales represented approximately 39% of gross sales for the three months ended June 30, 2012 compared to 42% for the same period in 2011. International sales represented approximately 15% of gross sales for the three months ended June 30, 2012 compared to 20% for the same period in 2011.

Cost of sales

Cost of sales for the three months ended June 30, 2012 were approximately $23.3 million compared to approximately $26.6 million in the same period of 2011. Gross profit as a percentage of sales increased to 47.3% for the quarter ended June 30, 2012 compared to 39.3% in the quarter ended June 30, 2011. The increase is attributable to: a favorable sales mix during the quarter ended June 30, 2012 compared to last year’s quarter, and the decrease in Glove sales as a percentage of total sales. Gloves carry a lower gross profit margin than CamelBak’s other product lines.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2012 increased to approximately $9.6 million or 21.6% of net sales compared to $8.1 million or 18.4% of net sales for the same period of 2011. The $1.5 million increase in selling, general and administrative expenses incurred during the three months ended June 30, 2012 compared to the same period in 2011 is attributable to; (i) increases in sales commissions ($0.3 million); and (ii) increases in compensation expense ($0.7 million) due in part to costs associated with CamelBak’s deferred compensation plan, with the balance of the increase due principally to increased infrastructure costs, including personnel costs and benefits, and general overhead necessary to support expansion in connection with growth initiatives.

Income from operations

Income from operations for the three months ended June 30, 2012 was approximately $8.9 million, an increase of $2.2 million when compared to the same period in 2011, principally based on the factors described above.

Six months ended June 30, 2012 compared to the pro forma six months ended June 30, 2011.

Net sales

Net sales for the six months ended June 30, 2012 were approximately $84.5 million, an increase of $8.1 million, or 10.6%, compared to the same period in 2011. The increase in gross sales is a result of increased sales in Hydration Systems ($10.2 million) and Bottles ($4.8 million) offset in part by a decrease in sales in Gloves ($5.3 million) and Accessories ($0.1 million). The increased sales during the six months ended June 30, 2012 compared to the same period in 2011 is attributable to the continued success of “Antidote”, CamelBak’s new reservoir for the recreational Hydration Systems line, introduced in 2011, the expansion of offerings in Bottles, such as the introduction of eddyTM, and the continued expansion in its customer base, including new and existing customers, for all product lines. 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 contributed to the increase in Hydration sales in the first six months of 2012 compared to 2011. CamelBak anticipates fulfillment of this contract by the first quarter of 2013. The decrease in Glove sales is due to decreased demand from the U.S. military, resulting in part from a drawdown of U.S. combat troops. Sales of Hydration Systems and Bottles represented approximately 84% of gross sales for the six months ended June 30, 2012 compared to 74% for the same period in 2011. Military sales represented approximately 37% of gross sales for the six months ended June 30, 2012 compared to 41% for the same period in 2011. International sales represented approximately 18% of gross sales for the six months ended June 30, 2012 compared to 21% for the same period in 2011.

Cost of sales

Cost of sales for the six months ended June 30, 2012 were approximately $45.4 million compared to approximately $45.3 million in the same period of 2011. Gross profit as a percentage of sales increased to 46.3% for the six months ended June 30, 2012 compared to 40.7% for the same period in 2011. The increase is attributable to: a favorable sales mix during the six months ended June 30, 2012 compared to last year, and the decrease in Glove sales as a percentage of total sales. Gloves carry a lower gross profit margin than CamelBak’s other product lines.

Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2012 increased to approximately $18.1 million or 21.4% of net sales compared to $15.4 million or 20.1% of net sales for the same period of 2011. The $2.7 million increase in selling, general and administrative expenses incurred during the six months ended June 30, 2012 compared to the same period in 2011 is attributable to; (i) increases in sales commissions ($0.7 million); (ii) increases in marketing costs ($0.2 million), (iii) increases in rent and professional fees ($0.4 million) and (iv) increases in compensation expense ($1.1 million) due in part to costs associated with CamelBak’s deferred compensation plan. The balance of the increase is due principally to increased infrastructure costs including personnel costs and benefits, and general overhead necessary to support expansion in connection with growth initiatives.

Income from operations

Income from operations for the six months ended June 30, 2012 was approximately $16.0 million, an increase of $5.3 million when compared to the same period in 2011, 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 and accessories. ERGObaby offers a broad range of wearable baby carriers and related products that are sold through more than 900 retailers and web shops in the United States and internationally in approximately 50 countries. ERGObaby’s product lines include baby carriers (organic and standard), accessories and Orbit Baby’s travel systems.

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. ERGObaby’s reputation for product innovation, reliability and safety has led to numerous awards and accolades from consumer surveys and publications, including Parenting Magazine, Pregnancy Magazine and Wired Magazine.

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. The results of operations for ERGObaby for the three and six months ended June 30, 2011 do not include Orbit Baby operating results.

Results of Operations

The table below summarizes the pro-forma income from operations data for ERGObaby for the three and six-month periods ended June 30, 2012 and June 30, 2011.


	Three-months ended				Six-months ended
(in thousands)	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
			(Pro-forma)				(Pro-forma)
Net sales	$	13,344	$	11,186	$	27,025	$	22,657
Cost of sales (a)		4,827		3,854		10,542		8,025

Gross profit		8,517		7,332		16,483		14,632
Selling, general and administrative expense		5,604		4,354		11,018		8,481
Fees to manager		125		125		250		250
Amortization of intangibles		772		429		1,550		858

Income from operations	$	2,016	$	2,424	$	3,665	$	5,043

Pro-forma results of operations of ERGObaby for the three and six-month periods ended June 30, 2011 include the following pro-forma adjustments applied to historical results:

(a)

Cost of sales for the three and six months ended June 30, 2011 does not include $0.2 million and $0.5 million, respectively, of amortization expense associated with the inventory fair value step-up recorded in 2011 as a result of and derived from the purchase price allocation in connection with our purchase.

Three months ended June 30, 2012 compared to the pro-forma three months ended June 30, 2011.

Net sales

Net sales for the three months ended June 30, 2012 were $13.3 million, an increase of $2.2 million or 19.3% compared to the same period in 2011. The increase is primarily attributable to Orbit Baby sales of $2.1 million. Domestic sales were approximately $6.1 million in the three months ended June 30, 2012 compared to approximately $4.0 million in the same

period for 2011. The increase is primarily attributable to Orbit Baby sales of $1.9 million in the 2012 period. International sales were approximately $7.3 million in the three months ended June 30, 2012 compared to $7.2 million in 2011, an increase of $0.1 million or 1.0%. Orbit Baby’s International sales were $0.2 million during the three months ended June 30, 2012. Excluding Orbit Baby sales of $2.1 million in the three months ended June 30, 2012, baby carriers represented 88.8 % of net sales in the quarter ended June 30, 2012 and 2011.

Cost of sales

Cost of sales for the three months ended June 30, 2012 were approximately $4.8 million compared to $3.9 million in the same period of 2011. The increase of $0.9 million is due principally to the increase in sales in the same period. Gross profit as a percentage of sales decreased from 65.6% for the quarter ended June 30, 2011 to 63.8% in 2012. The 1.8% decrease is primarily attributable to lower margin Orbit Baby product sales in the June 30, 2012 period, offset in part by a lower percentage of organic baby carriers sold in 2012 compared to 2011. Organic baby carriers are standard baby carriers made with organic cotton and generate a lower gross profit margin than standard carriers.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2012 increased to approximately $5.6 million or 42.0% of net sales compared to $4.4 million or 38.9% of net sales for the same period of 2011. The increase of $1.2 million is primarily attributable to the selling, general and administrative expenses of Orbit Baby.

Amortization of intangibles

Amortization expense increased $0.3 million in the three months ended June 30, 2012 compared to the same period in 2011 as a result of amortizing those intangible assets acquired as part of the purchase of Orbit Baby.

Income from operations

Income from operations for the three months ended June 30, 2012 was $2.0 million compared to $2.4 million in the same period of 2011. The $0.4 million reduction was due principally to an increase in the amortization of intangibles totaling $0.3 million due to the Orbit Baby acquisition.

Six-months ended June 30, 2012 compared to the pro forma six-months ended June 30, 2011.

Net sales

Net sales for the six months ended June 30, 2012 were $27.0 million, an increase of $4.4 million or 19.3% compared to the same period in 2011. The increase is primarily attributable to Orbit Baby sales of $5.6 million during the three months ended June 30, 2012, offset in part by a decrease of $1.5 million in International sales of ERGObaby. Domestic sales were approximately $11.5 million in the six months ended June 30, 2012 compared to approximately $7.3 million in the same period for 2011. The increase of $4.2 million or 56.8% is primarily attributable to Orbit Baby sales of $3.9 million in the 2012 period. International sales were approximately $15.5 million in the six months ended June 30, 2012 compared to $15.3 million in 2011, an increase of $0.2 million or 1.3%. Orbit Baby’s International sales were $1.7 million in the 2012 period offset in part by a decrease in International sales for ERGObaby of $1.5 million. This decrease in international sales in the six months ended June 30, 2012 compared to the same period in 2011 is attributable to the timing of deliveries to international distributors. Excluding Orbit Baby sales of $5.6 million, baby carriers represented 88.6% of sales in the six months ended June 30, 2012 compared to 88.9% during the same period of 2012.

Cost of sales

Cost of sales for the six months ended June 30, 2012 were approximately $10.5 million compared to $8.0 million in the same period of 2011. The increase of $2.5 million is due principally to the increase in sales in the same period. Gross profit as a percentage of sales decreased from 64.6% for the six months ended June 30, 2011 to 61.0% in 2012. The 3.6% decrease is primarily attributable to lower margin Orbit Baby product sales in the June 30, 2012 period, offset in part by a lower percentage of organic baby carriers sold in 2012 compared to 2011. Organic baby carriers are standard baby carriers made with organic cotton and generate a lower gross profit margin than standard carriers.

Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2012 increased to approximately $11.0 million or 40.8% of net sales compared to $8.5 million or 37.4% of net sales for the same period of 2011. The increase of $2.5 million is primarily attributable to the selling, general and administrative expenses of Orbit Baby.

Amortization of intangibles

Amortization expense increased $0.7 million in the six months ended June 30, 2012 compared to the same period in 2011 as a result of amortizing those intangible assets acquired as part of the purchase of Orbit Baby.

Income from operations

Income from operations for the six months ended June 30, 2012 decreased approximately $1.4 million to $3.7 million compared to the same period in 2011 due principally to an increase in the amortization of intangibles of $0.7 million due to the Orbit Baby acquisition and 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. Fox’s technical success is demonstrated by its dominance of award winning performances by professional athletes across its suspension products. As a result, Fox’s suspension components are incorporated by original equipment manufacturers (“OEM”) on their high-performance models at the top of their product lines in the mountain bike and powered vehicle sector. OEMs capitalize on the strength of Fox’s brand to maintain and expand their own sales and margins. In the Aftermarket segment, customers seeking higher performance select Fox’s suspension components to enhance their existing equipment.

Fox sells to more than 160 OEM and 7,600 Aftermarket customers across its market segments. In each of the years 2011, 2010 and 2009, approximately 80%, 78% and 76% of net sales were to OEM customers. The remaining net sales were to Aftermarket customers.

Results of Operations

The table below summarizes the income from operations data for Fox Factory for the three and six month periods ended June 30, 2012 and June 30, 2011.


	Three months ended				Six months ended
(in thousands)	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011

Net sales	$	60,719	$	45,895	$	106,391	$	88,775
Cost of sales		44,275		33,068		76,846		62,971

Gross profit		16,444		12,827		29,545		25,804
Selling, general and administrative expense		8,135		6,796		15,516		13,320
Fees to manager		125		125		250		250
Amortization of intangibles		1,329		1,304		2,633		2,608

Income from operations	$	6,855	$	4,602	$	11,146	$	9,626

Three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Net sales

Net sales for the three months ended June 30, 2012 increased approximately $14.8 million, or 32.3%, compared to the corresponding period in 2011. Sales growth was driven by sales to OEM which increased $12.3 million to $47.3 million during the three months ended June 30, 2012 compared to $35.0 million for the same period in 2011. The increase in net sales is largely driven by increased spec with our customers and to a lesser degree by increased demand for carryover product. The remaining increase in net sales reflects increased sales to Aftermarket customers in the current quarter.

Cost of sales

Cost of sales for the three months ended June 30, 2012 increased approximately $11.2 million, or 33.9%, compared to the corresponding period in 2011. The increase in cost of sales is primarily due to increased net sales during the three months ended June 30, 2012 compared to the same period of 2011. Gross profit as a percentage of sales was approximately 27.1% for the three months ended June 30, 2012 compared to 27.9% for the same period in 2011. The 0.8% decrease in gross profit as a percentage of sales during 2012 is largely attributable to the increased overhead costs associated with consolidating our Watsonville operations, increased costs associated with expanding our Taiwanese operations and increased expedited freight costs resulting from the significant increase in orders during the second quarter of 2012.

Selling, general and administrative expense

Selling, general and administrative expense increased approximately $1.3 million during the three months ended June 30, 2012 compared to the same period in 2011. This increase is primarily the result of increases in payroll costs, principally associated with new hires to support company growth during the three months ended June 30, 2012 compared to the same period in 2011, and costs incurred in connection with a debt recapitalization ($0.8 million) which occurred during June 2012 (see – “Related Party Transactions and Certain Transactions Involving our Businesses”).

Income from operations

Income from operations for the three months ended June 30, 2012 increased approximately $2.3 million to $6.9 million compared to the corresponding period in 2011, based principally on the increase in net sales, offset in part by the increases in selling, general and administrative costs, all as described above.

Six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Net sales

Net sales for the six months ended June 30, 2012 increased approximately $17.6 million, or 19.8%, compared to the corresponding period in 2011. Sales growth was driven by sales to OEM which increased $14.3 million to $83.3 million during the six months ended June 30, 2012 compared to $69 million for the same period in 2011. The increase in net sales is largely driven by increased spec with our customers and to a lesser degree by increased demand for carryover product. The remaining increase in net sales reflects increased sales to Aftermarket customers in 2012 compared to 2011.

Cost of sales

Cost of sales for the six months ended June 30, 2012 increased approximately $13.9 million, or 22.0%, compared to the corresponding period in 2011. The increase in cost of sales is primarily due to increased net sales during 2012. Gross profit as a percentage of sales was approximately 27.8% for the six months ended June 30, 2012 compared to 29.1% for the same period in 2011. The 1.3% decrease in gross profit as a percentage of sales during 2012 is largely attributable to the increased overhead costs associated with consolidating our Watsonville operations, the increased costs associated with expanding our Taiwanese operations and increased expedited freight costs resulting from the significant increase in orders during 2012.

Selling, general and administrative expense

Selling, general and administrative expense increased approximately $2.2 million during the six months ended June 30, 2012 compared to the same period in 2011. This increase is primarily the result of increases in payroll costs, principally associated with new hires to support company growth and rent expense during the six months ended June 30, 2012 compared to the same period in 2011, and costs incurred in connection with a debt recapitalization ($0.8 million) which occurred during June 2012 (see – “Related Party Transactions and Certain Transactions Involving our Businesses”).

Income from operations

Income from operations for the six months ended June 30, 2012 increased approximately $1.5 million to $11.1 million compared to the corresponding period in 2011, based principally on the increase in net sales, offset in part by the increases in selling, general and administrative costs, all 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 200,000 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 ranging from an entry level product to good, better and best products. 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 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.

On March 31, 2010 we made loans to and purchased a controlling interest in Liberty Safe for approximately $70.2 million, representing 96.2% of the equity in Liberty Safe.

Results of Operations

The table below summarizes the results of operations for Liberty Safe for the three and six months ended June 30, 2012 and June 30, 2011.


	Three months ended				Six months ended
(in thousands)	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011

Net sales	$	22,464	$	18,622	$	43,615	$	38,825
Cost of sales		16,708		13,756		32,812		28,931

Gross profit		5,756		4,866		10,803		9,894
Selling, general and administrative expense		2,760		2,430		5,812		5,142
Fees to manager		125		125		250		250
Amortization of intangibles		1,229		1,294		2,524		2,589

Income from operations	$	1,642	$	1,017	$	2,217	$	1,913

Three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Net sales

Net sales for the three months ended June 30, 2012 increased approximately $3.8 million, or 20.6%, over the corresponding three months ended June 30, 2011. Non-Dealer sales were approximately $13.1 million in the three months ended June 30, 2012 compared to $10.4 million in the same period in 2011 representing an increase of $2.7 million or 26.0%. Dealer sales totaled approximately $9.4 million in the three months ended June 30, 2012 compared to $8.2 million in the same period in 2011 representing an increase of $1.2 million or 14.6%. The increase in Non-Dealer sales in 2012 is due in large part to increased sales in the sporting goods channel. Liberty began domestic production in the first quarter of 2012 for product that was previously being imported. A majority of the domestic production that was previously imported is reflected in non-dealer sales. Management believes that the increased sales at the Dealer and Non-Dealer level are also due to sales generated by its national advertising campaign in conjunction with those accounts that maintain consistent Liberty Safe product advertising at the local level.

Cost of sales

Cost of sales for the three months ended June 30, 2012 increased approximately $3.0 million. The increase in cost of sales is primarily attributable to the increase in net sales for the same period. Gross profit as a percentage of net sales totaled approximately 25.6% and 26.1% of net sales for the three month periods ended June 30, 2012 and June 30, 2011, respectively. The decrease in gross profit as a percentage of sales for the three months ended June 30, 2012 compared to 2011 is attributable to manufacturing variances associated with the increase in production lines to meet strong customer demand, offset in part by a Dealer price increase during the second quarter of 2012.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2012, increased approximately $0.3 million compared to the same period in 2011. This increase is largely the result of increased direct commission expense and co-op advertising, both related to the significant increase in sales.

Income from operations

Income from operations was approximately $1.6 million for the three months ended June 30, 2012, representing an increase of $0.6 million compared to the same period in 2011. The improved operating results are principally due to the factors described above, particularly the increase in net sales.

Six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Net sales

Net sales for the six months ended June 30, 2012 increased approximately $4.8 million, or 12.3%, over the corresponding six months ended June 30, 2011. Non-Dealer sales were approximately $25.7 million in the six months ended June 30, 2012 compared to $23.0 million in the same period in 2011, representing an increase of $2.7 million or 11.7%. Dealer sales totaled approximately $17.9 million in the six months ended June 30, 2012 compared to $15.8 million in the same period in 2011, representing an increase of $2.1 million or 13.6%. The increase in Non-Dealer sales in 2012 is due in large part to increased sales in the sporting goods channel. Liberty began domestic production in the first quarter of 2012 for product that was previously being imported. A majority of the domestic production that was previously imported is reflected in Non-Dealer sales. Management believes that the increased sales at the Dealer and Non-Dealer level are also due to sales generated by its national advertising campaign in conjunction with those accounts that maintain consistent Liberty Safe product advertising at the local level.

Cost of sales

Cost of sales for the six months ended June 30, 2012 increased approximately $3.9 million. The increase in cost of sales is primarily attributable to the increase in net sales for the same period. Gross profit as a percentage of net sales totaled approximately 24.8% and 25.5% of net sales for the six month periods ended June 30, 2012 and June 30, 2011, respectively. The decrease in gross profit as a percentage of sales for the six months ended June 30, 2012 compared to 2011 is attributable to manufacturing variances associated with the increase in production lines to meet strong customer demand, offset in part by a Dealer price increase during the second quarter of 2012.

Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2012, increased approximately $0.7 million compared to the same period in 2011. This increase is principally the result of increases in the following costs to support the significant increase in sales: (i) commission expense ($0.1 million), (ii) co-op advertising ($0.2 million) and the ongoing national ad campaign being conducted by Liberty Safe ($0.2 million) and (iii) costs associated with increased headcount ($0.2 million) to support the increase in net sales.

Income from operations

Income from operations was approximately $2.2 million for the six months ended June 30, 2012 representing an increase of $0.3 million compared to the same period in 2011, which reflected operating income of $1.9 million. The improved operating results are principally due to the factors described above, particularly the increase in net sales.

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 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.

Results of Operations

The table below summarizes the income from operations data for Tridien for the three and six month periods ended June 30, 2012 and June 30, 2011.


	Three months ended				Six months ended
(in thousands)	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011

Net sales	$	14,122	$	13,944	$	27,728	$	27,797
Cost of sales		10,501		10,322		20,701		20,365

Gross profit		3,621		3,622		7,027		7,432
Selling, general and administrative expense		2,171		2,106		4,276		4,256
Fees to manager		88		88		175		175
Amortization of intangibles		330		329		652		659

Income from operations	$	1,032	$	1,099	$	1,924	$	2,342

Three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Net sales

Net sales for the three months ended June 30, 2012 increased approximately $0.2 million or 1.3% over the corresponding three months ended June 30, 2011. Net sales of non-powered support surfaces and patient positioning devices totaled $11.8 million in 2012 compared to $11.2 million during the same period in 2011, an increase of $0.6 million or 4.9%. Net sales of powered products totaled $2.3 million during the three months ended June 30, 2012 compared to $2.7 million in 2011, a decrease of $0.4 million or 13.8%, largely due to delivery timing issues.

Cost of sales

Cost of sales increased approximately $0.2 million in the three months ended June 30, 2012 compared to the same period of 2011 primarily as a result of the increase in sales. Gross profit as a percentage of sales was 25.6% in the three months ended June 30, 2012 compared to 26.0% in the corresponding period in 2011. The decrease in gross profit as a percentage of sales in the three months ended June 30, 2012 compared to the same period of 2011 is due to an unfavorable sales mix with a greater proportion of sales of non-powered support surfaces in the 2012 period.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2012 increased approximately $0.1 million compared to the same period of 2011.

Income from operations

Income from operations decreased approximately $0.1 million to $1.0 million for the three months ended June 30, 2012 compared to $1.1 million in the three months ended June 30, 2011.

Six months ended June 30, 2012 compared to the six months ended June 30, 2011.

Net sales

Net sales for the six months ended June 30, 2012 decreased approximately $0.1 million or 0.2% compared to the corresponding six months ended June 30, 2011. Net sales of non-powered support surfaces and patient positioning devices totaled $22.8 million in 2012 compared to $22.5 million during the same period in 2011, an increase of $0.3 million or 1.4%. Net sales of powered products totaled $4.9 million during the six months ended June 30, 2012 compared to $5.3 million in 2011, a decrease of $0.4 million or 7.4% , largely due to delivery timing issues.

Cost of sales

Cost of sales increased approximately $0.3 million in the six months ended June 30, 2011 compared to the same period of 2011 primarily as a result of the costs related to the new Midwest manufacturing and distribution facility. Gross profit as a percentage of sales was 25.3% in the six months ended June 30, 2012 compared to 26.7% in the corresponding period in 2011. In addition to the costs associated with our new manufacturing and distribution facility, the decrease in gross profit as a percentage of sales in the six months ended June 30, 2012 compared to the same period of 2011 is due to an unfavorable sales mix with a greater proportion of sales of non-powered support surfaces in the 2012 period

Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2012 was flat compared to the same period of 2011, ending at $4.3 million.

Income from operations

Income from operations decreased approximately $0.4 million to $1.9 million for the six months ended June 30, 2012 compared to $2.3 million in the six months ended June 30, 2011, due principally to those factors described above.

Liquidity and Capital Resources

For the six months ended June 30, 2012, on a consolidated basis, cash flows used in operating activities totaled approximately $5.0 million, which represents a $53.5 million decrease in cash provided by operations compared to the six months ended June 30, 2011. This decrease is the result of (i) operating cash generated at Staffmark in 2011 ($25.1 million) not applicable to 2012, (ii) the pay down of the supplemental put liability to our Manager in 2012 ($13.7 million) with the remaining change due principally to increased working capital investment at our businesses experiencing substantial growth.

For the six months ended June 30, 2012, on a consolidated basis, cash flows used in investing activities totaled approximately $73.3 million, which reflects the acquisition of Arnold Magnetics ($124.1 million), further investment in existing portfolio companies ($13.2 million) and capital expenditures ($6.9 million) offset in part by proceeds from the sale of Halo ($66.1 million), and Staffmark ($5.0 million).

For the six months ended June 30, 2012, on a consolidated basis, cash flows used in financing activities totaled approximately $37.5 million, principally reflecting distributions paid to shareholders of CODI during the year ($34.8 million) and non-controlling shareholders ($16.3 million), the cost of redemption of preferred stock and accumulated interest at Camelback ($48.0 million) offset in part by net borrowings on our Credit Facility ($47.8 million) and the sale of stock to non-controlling shareholders ($11.8 million).

At June 30, 2012, we had approximately $16.0 million of cash and cash equivalents on hand. The majority of our cash is 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 June 30, 2012, we had the following outstanding loans due from each of our businesses:

•

Advanced Circuits — $60.6 million;

•

American Furniture — $10.7 million;

•

Arnold Magnetics — $83.0 million;

•

CamelBak — $149.5 million;

•

ERGObaby — $58.8 million;

•

Fox — $82.4 million;

•

Liberty — $39.1 million; and

•

Tridien — $0.4 million.

Each loan to our businesses has a scheduled maturity date and each business is entitled to repay all or a portion of the principal amount of the outstanding loans, without penalty, prior to maturity. We are required to fund, in the form of an additional equity investment, any shortfall in the difference between Adjusted EBITDA and Fixed Charges as defined in American Furniture’s credit agreement with us. Per the Maintenance Agreement the shortfall that we are required to fund, AFM is in turn required to pay down on its term debt with us. The amount of the shortfall at June 30, 2012 is approximately $0.9 million.

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 $1.4 million during the six months ended June 30, 2012 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 $37.2 million is reflected in our condensed consolidated balance sheet, which represents our estimated liability for this obligation at June 30, 2012. During the six months ended June 30, 2012, we paid CGM $13.7 million in connection with the profit allocation earned on the sale of Staffmark.

The current portion of the supplemental put liability of $4.5 million represents an accrual for the contribution-based profit allocation that will be paid to our Manager during the first quarter of 2013. This accrual primarily represents the contribution-based profit for the fifth anniversary date of Fox and reduces the overall supplemental put liability when paid.

The following table provides the contribution-based profit for each of the businesses we control at June 30, 2012 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 June 30, 2012			Quarter End of Fifth Anniversary Date of Acquisition

Advanced Circuits	$	1,790		June 30, 2016
American Furniture		(13,577	)	September 30, 2012
Arnold Magnetics		(1,284	)	March 31, 2017
CamelBak		(937	)	September 30, 2016
ERGObaby		267		September 30, 2015
FOX		4,243		March 31, 2013
Liberty		(140	)	March 31, 2015
Tridien		(321	)	September 30, 2016

Total contribution-based profit portion	$	(9,959	)
Profit allocation due for HALO sale		278
Estimated gain on sale portion		46,857

Total supplemental put liability	$	37,176

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 June 30, 2012 was paid on July 31, 2012 and was $17.4 million.

Our Credit Facility provides for the Revolving Credit Facility totaling $290 million which matures in October 2016 and a Term Loan Facility totaling $254 million, which matures in October 2017.

On April 2, 2012, we exercised an option with our Lender to increase the Term Loan Facility by $30 million. In connection with the increase, we amended the pricing of the Term Loan Facility wherein borrowings under the facility now bear interest at LIBOR plus 5% with a floor of 1.25%. We incurred an amendment fee of approximately $2.2 million.

The Term Loan Facility requires quarterly payments of $0.6 million which commenced March 31, 2012, with a final payment of the outstanding principal balance due in October 2017.

At June 30, 2012, we had $19.5 million in outstanding borrowings under the Revolving Credit Facility.

We had approximately $269 million in borrowing base availability under this facility at June 30, 2012. Letters of credit totaling $1.7 million were outstanding at June 30, 2012. We currently have no exposure to failed financial institutions.

The following table reflects required and actual financial ratios as of June 30, 2012 included as part of the affirmative covenants in our Credit Facility:


Description of Required Covenant Ratio	Covenant Ratio Requirement	Actual Ratio
Fixed Charge Coverage Ratio	greater than or equal to 1.5:1.0		2.47:1.0
Total Debt to EBITDA Ratio	less than or equal to 3.5:1.0		2.01:1.0

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.

Interest Expense

We incurred interest expense totaling $13.7 million for the six months ended June 30, 2012 compared to $3.9 million for the same period in 2011. The components of interest expense are as follows (in thousands):


	Six months ended June 30,
	2012			2011

Interest on credit facilities	$	9,023		$	2,214
Unused fee on revolving credit facility		1,320			1,542
Amortization of original issue discount		1,591			—
Realized losses on interest rate hedges		—			143
Unrealized losses on interest rate derivatives		1,593			—
Amortization of interest rate cap		155			—
Letter of credit fees		37			28
Other		17			22

Interest expense	$	13,736		$	3,949


Average daily balance of debt outstanding	$	265,318		$	98,224


Effective interest rate		10.4	%		8.0	%

Income Taxes

We incurred income tax expense of $9.8 million with an annual effective tax rate of 68.9% in the first six months of 2012 compared to $6.3 million with an effective tax rate of 174.3% during the same period in 2011. Acquisition costs expensed in the six months ended June 30, 2012 in connection with the Arnold acquisition are not tax deductible and losses incurred at the Company, which is an LLC, are not tax deductible at the corporate level as those costs are passed through to the shareholders. For the first six months of 2012, these two items accounted for 10.7% and 18.4%, respectively, of the increased effective tax rate compared to the Federal statutory rate at June 30, 2012. Goodwill impairment charges expensed in the six months ended June 30, 2011 in connection with the American Furniture write-offs are not tax deductible and losses incurred at the Company, which is an LLC, are not tax deductible at the corporate level as those costs are passed through to the shareholders. For the first six months of 2011, these two items accounted for 57.2% and 75.8%, respectively, of the increased effective tax rate compared to the Federal statutory rate at June 30, 2011. The components of income tax expense as a percentage of income from continuing operations before income taxes for the six months ended June 30, 2012 and 2011 are as follows:


	Six months ended June 30,
	2012			2011
United States Federal Statutory Rate		35.0	%		35.0	%
Foreign and State income taxes (net of Federal benefits)		11.4			20.4
Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders (1)		18.4			75.8
Impact of subsidiary employee stock options		(5.1	)		4.4
Domestic production activities deduction		(3.5	)		(21.3	)
Non-deductible acquisition costs		10.7			—
Impairment expense		—			57.2
Non-recognition of NOL carryforwards at AFM		4.0			—
Other		(2.0	)		2.8

Effective income tax rate		68.9	%		174.3	%

Reconciliation of Non-GAAP Financial Measures

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. GAAP refers to generally accepted accounting principles in the United States.

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 EBITDA, Adjusted EBITDA and Cash Flow Available for Distribution and Reinvestment (”CAD”).

Reconciliation of Net income (loss) to EBITDA and Adjusted EBITDA

EBITDA – Earnings before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”) is calculated as net income (loss) 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 – 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 increases we will incur additional supplemental put charges and vice versa when the fair value of our businesses decreases; (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 net income (loss) 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

Six months ended June 30, 2012


	Consolidated		Corporate			Advanced Circuits			American Furniture			Arnold Magnetics			CamelBak		ERGObaby		Fox		Liberty			Tridien		Consolidated
Income (loss) from continuing operations	$	4,399	$	(8,363	)	$	6,107		$	(1,372	)	$	(5,341	)	$	5,082	$	158	$	6,957	$	(56	)	$	1,227	$	4,399

Adjusted for:
Provision (benefit) for income taxes		9,758		(43	)		3,216			—			(1,098	)		4,025		103		3,031		(105	)		629		9,758
Interest expense, net		13,693		13,653			(1	)		6			(3	)		6		26		6		—			—		13,693
Intercompany interest		—		(18,421	)		2,561			795			2,481			6,608		3,193		533		2,203			47		—
Depreciation and amortization		26,047		(313	)		2,642			73			5,660			6,834		2,512		3,786		3,695			1,158		26,047

*EBITDA*		53,897		(13,487	)		14,525			(498	)		1,699			22,555		5,992		14,313		5,737			3,061		53,897

(Gain) loss on sale of fixed assets		276		—			—			66			—			—		—		250		(70	)		30		276
Non-controlling shareholder compensation		2,332		—			12			109			—			453		222		1,351		136			49		2,332
Impairment charges		—		—			—			—			—			—		—		—		—			—		—
Acquisition expenses		4,820		100			366			—			4,354			—		—		—		—			—		4,820
Supplemental put expense		1,362		1,362			—			—			—			—		—		—		—			—		1,362
Management fees		8,865		7,315			250			—			125			250		250		250		250			175		8,865

*Adjusted EBITDA (a)*	$	71,552	$	(4,710	)	$	15,153		$	(323	)	$	6,178		$	23,258	$	6,464	$	16,164	$	6,053		$	3,315	$	71,552

Adjusted EBITDA

Six months ended June 30, 2011


	Consolidated			Corporate			Advanced Circuits			American Furniture			Arnold Magnetics	CamelBak	ERGObaby		Fox		Liberty			Tridien		Consolidated
Income (loss) from continuing operations	$	(2,681	)	$	(8,249	)	$	6,926		$	(9,156	)			$	1,279	$	5,410	$	(224	)	$	1,333	$	(2,681	)

Adjusted for:
Provision (benefit) for income taxes		6,290			(39	)		3,699			(1,991	)				807		3,126		(154	)		842		6,290
Interest expense, net		3,947			3,891			(1	)		23					28		6		—			—		3,947
Intercompany interest		—			(9,818	)		3,089			1,166					2,347		919		2,151			146		—
Depreciation and amortization		13,910			124			2,413			1,911					1,523		3,362		3,377			1,200		13,910

*EBITDA*		21,466			(14,091	)		16,126			(8,047	)	Not Applicable	Not Applicable		5,984		12,823		5,150			3,521		21,466

(Gain) loss on sale of fixed assets		49			—			—			(12	)				—		60		1			—		49
Non-controlling shareholder compensation		(249	)		(1,175	)		8			108					178		455		130			47		(249	)
Impairment charges		7,700			—			—			7,700					—		—		—			—		7,700
Acquisition expenses		850			—			—			—					850		—		—			—		850
Supplemental put expense		4,895			4,895			—			—					—		—		—			—		4,895
Management fees		6,915			5,615			250			125					250		250		250			175		6,915

*Adjusted EBITDA (a)(b)*	$	41,626		$	(4,756	)	$	16,384		$	(126	)			$	7,262	$	13,588	$	5,531		$	3,743	$	41,626

(a)

As a result of the sale of our HALO subsidiary in May 2012, Adjusted EBITDA does not include EBITDA from HALO from the period January 1, 2012 through April 30, 2012 of $2.2 million and for the period of January 1, 2011 through June 30, 2011 of $4.4 million.

(b)

As a result of the sale of our Staffmark subsidiary in October 2011, Adjusted EBITDA does not include EBITDA from Staffmark from the period January 1, 2011 through June 30, 2011 of $11.1 million.

The table below details cash receipts and payments that are not reflected on our income statement in order to provide an additional measure of management’s estimate of CAD. CAD is a non-GAAP measure that we believe provides additional information to evaluate our ability to make anticipated quarterly distributions. It is not necessarily comparable with similar measures provided by other entities. We believe that CAD, together with future distributions and cash available from our businesses (net of reserves) will be sufficient to meet our anticipated distributions over the next twelve months. The table below reconciles CAD to net income and to cash flow provided by operating activities, which we consider to be the most directly comparable financial measure calculated and presented in accordance with GAAP.


(in thousands)	Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
	(unaudited)			(unaudited)
Net income	$	3 ,101		$	1,699
Adjustment to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		26,443			20,800
Impairment expense		—			7,700
Supplemental put expense		1,362			4,895
Amortization of original issue discount		1,591			—
Noncontrolling interests and noncontrolling stockholders charges		2,332			1,215
Amortization of debt issuance costs		841			1,001
Unrealized loss on interest rate swap		1,593			—
Deferred taxes		(489	)		(1,926	)
Other		845			87
Changes in operating assets and liabilities		(42,590	)		13,013

Net cash provided by (used in) operating activities		(4,971	)		48,484
Plus:
Unused fee on revolving credit facility (1)		1,320			1,542
Successful acquisition expense (2)		4,820			850
HALO sale related expenses (3)		1,976			—
Changes in operating assets and liabilities		42,590			—
Less:
Changes in operating assets and liabilities		—			13,013
Other		439			—
Maintenance capital expenditures: (4)
Compass Group Diversified Holdings LLC		—			—
Advanced Circuits		174			1,468
American Furniture		(191	)		(62	)
Arnold		723			—
CamelBak		465			—
ERGObaby		204			388
Fox		2,790			198
Halo (divested May 2012)		320			662
Liberty		284			126
Staffmark (divested October 2011)		—			1,347
Tridien		546			997

Estimated cash flow available for distribution and reinvestment	$	39,981		$	32,739


Distribution paid in April 2012/2011	$	(17,388	)	$	(16,821	)
Distribution paid in July 2011/2010		(17,388	)		(16,821	)

	$	(34,776	)	$	(33,642	)

(1)	Represents the commitment fee on the unused portion of our Prior Revolving Credit Facility and Revolving Credit Facility.

(2)	Represents successful acquisition transaction costs.

(3)	Represents transaction costs incurred related to the sale of HALO.

(4)

Represents maintenance capital expenditures that were funded from operating cash flow, net of proceeds from sales of property and equipment, and excludes growth capital expenditures of approximately $0.6 million and $4.0 million incurred during the three months ended June 30, 2012 and 2011, respectively, and $1.4 million and $6.2 million incurred during the six months ended June 30, 2012 and 2011, respectively.

Cash flows of certain of our businesses are seasonal in nature. Cash flows from American Furniture are typically highest in the months of January through April coinciding with income 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 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

Fox Debt Recapitalization

On June 18, 2012, we entered into an amendment to our inter-company loan agreement (the “Amendment”) with Fox (the “Loan Agreement”). The Loan Agreement was amended to (i) provide for term loan borrowings of $60 million and an increase to the revolving loan commitment of $2.0 million and to permit the proceeds thereof to fund cash distributions totaling $67.0 million by Fox to us and to its non-controlling shareholders, (ii) extend the maturity dates of the term loans under the Loan Agreement, and (iii) modify borrowing rates under the Loan Agreement. Our share of the cash distribution was approximately $50.7 million with approximately $16.3 million being distributed to Fox’s non-controlling shareholders. All other material terms and conditions of the Loan Agreement were unchanged. 44,028 stock options were exercised at the time of the distribution. We purchased 33,142 shares of Fox at fair value from non-controlling shareholders at the exercise date.

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 June 30, 2012:


	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Long-term debt obligations (a)	$	376,845	$	22,124	$	43,826	$	43,325	$	267,570
Capital lease obligations		339		192		147		—		—
Operating lease obligations (b)		63,923		11,726		20,755		13,468		17,974
Purchase obligations (c)		239,058		155,548		41,952		41,558		—
Supplemental put obligation (d)		6,604		4,547		—		2,057		—

Total	$	686,769	$	194,137	$	106,680	$	100,408	$	285,544

(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 June 30, 2012, including: (i) shareholder distributions of $69.6 million; (ii) management fees of $19.3 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 the 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.

2012 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, except at Arnold, which comprises three reporting units. Each of our RU are subject to impairment review at March 31, 2012, 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 (“FASB”) issued an accounting Standards Update 2011-08 (“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 reporting unit is less than its carrying amount it is not required to perform the two-step impairment test for that reporting unit. This ASU is effective for fiscal years beginning after December 15, 2011. At March 31, 2012 we elected to use the qualitative assessment alternative to test goodwill for impairment for each of our RU that maintain a goodwill carrying value.

As prescribed by the ASU, factors to consider when making the qualitative assessment prior to performing Step 1 of the goodwill impairment test are as follows:

•

Cost factor, such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;

•

Other relevant entity-specific events such as litigation, contemplation of bankruptcy, or changes in management, key personnel, strategy, or customers;

•

Events affecting a RU such as change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all or a portion, of a RU, the testing for recoverability of a significant asset group within a reporting unit, or a recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit; and

•

Sustained decrease (both absolute and relative to its peers) in share price, if applicable.

In addition to considering the above factors we performed the following procedures as of March 31, 2012 for each of our RU;

•

Compared and assessed trailing twelve month (“TTM”) net sales as of March 31, 2012 to TTM nets sales as of March 31, 2012:

•

Compared and assessed TTM operating income as of March 31, 2012 to TTM operating income as of March 31, 2011;

•

Compared and assessed TTM Adjusted EBITDA as of March 31, 2012 to Adjusted EBITDA as of March 31, 2011;

•

Compared and assessed Adjusted EBITDA for the year-ended December 31, 2011 to budget;

•

Compared and assessed Adjusted EBITDA for the three-months ended March 31, 2012 to budget;

•

Compared the fair value of each of our RU to its carrying amount using the same metrics as those used in determining the value of the supplemental put as of March, 31 2012 and concluded that in each case the fair value of the RU was in excess of its carrying amount; and

•

Performed a market capitalization reconciliation for CODI and determined that CODI’s public market cap was significantly in excess of the fair value of its consolidated equity (as derived from the aforementioned supplemental put analysis).

Based on our qualitative assessment as outlined above we believe that it is not more likely than not that the fair value of each of our RU is less than its carrying amount at March 31, 2012.

Recent Accounting Pronouncements

Refer to footnote C to our condensed consolidated financial statements.

ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk required by this item have not changed materially from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC on March 10, 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, 2011.

ITEM 4. – CONTROLS AND PROCEDURES

As required by Exchange Act Rule 13a-15(b), Holding’s 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 June 30, 2012. Based on that evaluation, the Regular Trustees of Holdings’ 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 June 30, 2012.

In the first quarter of 2012, the Company acquired Arnold Magnetics (see Note D- Acquisition of Business to our Condensed Consolidated Financial Statements), which represented 16.5% of our total assets as of June 30, 2012. The Company is in the process of fully integrating Arnold into its internal controls over financial reporting and, in reliance on interpretive guidance issued by the SEC staff, disclosure of changes in internal control over financial reporting related to Arnold has been excluded. Other than as described above, in connection with the evaluation required by Exchange Act Rule 13a-15(d), Holdings’ Regular Trustees and the Company’s management, including the Chief Executive Officer and Chief Financial Officer of the Company, concluded that no changes in Holdings’ or the Company’s internal control over financial reporting occurred during the second quarter of 2012 that have materially affected, or are reasonably likely to materially affect, Holdings’ and the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Legal proceedings associated with the Company’s and Holdings’ business together with legal proceedings for the businesses have not changed materially from those disclosed in Part I, Item 3 of our 2011 Annual Report on Form 10-K as filed with the SEC on March 10, 2012.

ITEM 1A.

RISK FACTORS

Except for the additional Risk Factor included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 9, 2012 for Arnold Magnetics, acquired on March 5, 2012, risk factors and uncertainties associated with the Company’s and Holdings’ business have not changed materially from those disclosed in Part I, Item 1A of our 2011 Annual Report on Form 10-K as filed with the SEC on March 7, 2012.

ITEM 6.

EXHIBITS


Exhibit Number		Description

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Registrant

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Registrant

32.1		Section 1350 Certification of Chief Executive Officer of Registrant

32.2		Section 1350 Certification of Chief Financial Officer of Registrant

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


COMPASS DIVERSIFIED HOLDINGS

By:		/s/ James J. Bottiglieri
		James J. Bottiglieri
		Regular Trustee

Date: August 7, 2012

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


COMPASS GROUP DIVERSIFIED HOLDINGS LLC

By:		/s/ James J. Bottiglieri
		James J. Bottiglieri
		Chief Financial Officer (Principal Financial and Accounting Officer)

Date: August 7, 2012

EXHIBIT INDEX


Exhibit Number		Description

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Registrant

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Registrant

32.1		Section 1350 Certification of Chief Executive Officer of Registrant

32.2		Section 1350 Certification of Chief Financial Officer of Registrant

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document