UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
o | 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 | 0-51937 | 57-6218917 | ||
(State or other jurisdiction of | (Commission file number) | (I.R.S. employer | ||
incorporation or organization) | identification number) |
COMPASS GROUP DIVERSIFIED HOLDINGS LLC
(Exact name of registrant as specified in its charter)
Delaware | 0-51938 | 20-3812051 | ||
(State or other jurisdiction of | (Commission file number) | (I.R.S. employer | ||
incorporation or organization) | 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)
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.
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act
Large accelerated filero | Accelerated filerþ | Non-accelerated filero | Smaller Reporting Companyo | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
As of November 1, 2009, there were 36,625,000 shares of
Compass Diversified Holdings outstanding.
Compass Diversified Holdings outstanding.
COMPASS DIVERSIFIED HOLDINGS
QUARTERLY REPORT ON FORM 10-Q
For the period ended September 30, 2009
For the period ended September 30, 2009
TABLE OF CONTENTS
2
NOTE TO READER
In reading this Quarterly Report on Form 10-Q, references to:
• | the “Trust” and “Holdings” refer to Compass Diversified Holdings; | ||
• | “businesses” refer to, collectively, the businesses controlled by the Company; | ||
• | the “Company” refer to Compass Group Diversified Holdings LLC; | ||
• | the “Manager” refer to Compass Group Management LLC (“CGM”); | ||
• | the “initial businesses” refer to, collectively, CBS Personnel Holdings, Inc. (doing business as Staffmark) (“Staffmark”), Crosman Acquisition Corporation, Compass AC Holdings, Inc. and Silvue Technologies Group, Inc.; | ||
• | the “2008 acquisitions” refer to, collectively, the acquisitions of Fox Factory Inc. and Staffmark Investment LLC; | ||
• | the “2008 dispositions” refer to, collectively, the sales of Aeroglide Corporation and Silvue Technologies Group, Inc.; | ||
• | the “Trust Agreement” refer to the amended and restated Trust Agreement of the Trust dated as of April 25, 2007; | ||
• | the “Credit Agreement” refer to the Credit Agreement with a group of lenders led by Madison Capital, LLC which provides for a Revolving Credit Facility and a Term Loan Facility; | ||
• | the “Revolving Credit Facility” refer to the $340 million Revolving Credit Facility provided by the Credit Agreement that matures in December 2012; | ||
• | the “Term Loan Facility” refer to the $76.5 million Term Loan Facility, as of September 30, 2009, provided by the Credit Agreement that matures in December 2013; | ||
• | the “LLC Agreement” refer to the second amended and restated operating agreement of the Company dated as of January 9, 2007; and | ||
• | “we”, “us” and “our” refer to the Trust, the Company and the businesses together. |
3
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 any future acquisitions; | ||
• | our ability to remove CGM and CGM’s right to resign; | ||
• | our organizational structure, which may limit our ability to meet our dividend and distribution policy; | ||
• | our ability to service and comply with the terms of our indebtedness; | ||
• | our cash flow available for distribution and reinvestment and our ability to make distributions in the future to our shareholders; | ||
• | our ability to pay the management fee, profit allocation when due and to pay the put price if and when due; | ||
• | our ability to make and finance future acquisitions; | ||
• | our ability to implement our acquisition and management strategies; | ||
• | the regulatory environment in which our businesses operate; | ||
• | trends in the industries in which our businesses operate; | ||
• | changes in general economic or business conditions or economic or demographic trends in the United States and other countries in which we have a presence, including changes in interest rates and inflation; | ||
• | environmental risks affecting the business or operations of our businesses; | ||
• | our and CGM’s ability to retain or replace qualified employees of our businesses and CGM; | ||
• | costs and effects of legal and administrative proceedings, settlements, investigations and claims; and | ||
• | extraordinary or force majeure events affecting the business or operations of our businesses. |
Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. These forward-looking statements are made as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise, except as required by law.
4
PART I
FINANCIAL INFORMATION
ITEM 1. — FINANCIAL STATEMENTS
Compass Diversified Holdings
Condensed Consolidated Balance Sheets
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(in thousands) | (unaudited) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 46,997 | $ | 97,473 | ||||
Accounts receivable, less allowances of $5,599 at September 30, 2009 and $4,824 at December 31, 2008 | 159,539 | 164,035 | ||||||
Inventories | 53,583 | 50,909 | ||||||
Prepaid expenses and other current assets | 27,459 | 22,784 | ||||||
Total current assets | 287,578 | 335,201 | ||||||
Property, plant and equipment, net | 26,353 | 30,763 | ||||||
Goodwill | 288,272 | 339,095 | ||||||
Intangible assets, net | 222,987 | 249,489 | ||||||
Deferred debt issuance costs, less accumulated amortization of $4,660 at September 30, 2009 and $3,317 at December 31, 2008 | 5,774 | 8,251 | ||||||
Other non-current assets | 19,712 | 21,537 | ||||||
Total assets | $ | 850,676 | $ | 984,336 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 39,632 | $ | 48,699 | ||||
Accrued expenses | 64,877 | 57,109 | ||||||
Due to related party | 3,118 | 604 | ||||||
Current portion, long-term debt | 2,500 | 2,000 | ||||||
Current portion of workers’ compensation liability | 36,208 | 26,916 | ||||||
Other current liabilities | 2,667 | 4,042 | ||||||
Total current liabilities | 149,002 | 139,370 | ||||||
Supplemental put obligation | 4,893 | 13,411 | ||||||
Deferred income taxes | 59,529 | 86,138 | ||||||
Long-term debt | 74,500 | 151,000 | ||||||
Workers’ compensation liability | 36,154 | 40,852 | ||||||
Other non-current liabilities | 7,127 | 9,687 | ||||||
Total liabilities | 331,205 | 440,458 | ||||||
Stockholders’ equity | ||||||||
Trust shares, no par value, 500,000 authorized; 36,625 issued and outstanding at September 30, 2009; 31,525 issued and outstanding at December 31, 2008 | 485,790 | 443,705 | ||||||
Accumulated other comprehensive loss | (2,349 | ) | (5,242 | ) | ||||
Accumulated earnings (deficit) | (32,495 | ) | 25,984 | |||||
Total stockholders’ equity attributable to Holdings | 450,946 | 464,447 | ||||||
Noncontrolling interest (See Note B) | 68,525 | 79,431 | ||||||
Total stockholders’ equity | 519,471 | 543,878 | ||||||
Total liabilities and stockholders’ equity | $ | 850,676 | $ | 984,336 | ||||
See notes to condensed consolidated financial statements.
5
Compass Diversified Holdings
Condensed Consolidated Statements of Operations
(unaudited)
Three months Ended September 30, | Nine months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Net sales | $ | 130,955 | $ | 147,956 | $ | 361,045 | $ | 391,838 | ||||||||
Service revenues | 193,284 | 265,645 | 525,636 | 771,808 | ||||||||||||
Total revenues | 324,239 | 413,601 | 886,681 | 1,163,646 | ||||||||||||
Cost of sales | 89,544 | 101,310 | 248,617 | 268,632 | ||||||||||||
Cost of services | 163,631 | 221,296 | 445,225 | 641,350 | ||||||||||||
Gross profit | 71,064 | 90,995 | 192,839 | 253,664 | ||||||||||||
Operating expenses: | ||||||||||||||||
Staffing expense | 17,665 | 25,872 | 56,144 | 78,412 | ||||||||||||
Selling, general and administrative expense | 36,099 | 42,597 | 108,093 | 121,121 | ||||||||||||
Supplemental put expense (reversal) | (101 | ) | (765 | ) | (8,518 | ) | 5,829 | |||||||||
Management fees | 3,331 | 3,758 | 9,825 | 10,953 | ||||||||||||
Amortization expense | 6,168 | 6,171 | 18,614 | 18,432 | ||||||||||||
Impairment expense | — | — | 59,800 | — | ||||||||||||
Operating income (loss) | 7,902 | 13,362 | (51,119 | ) | 18,917 | |||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 34 | 559 | 111 | 1,140 | ||||||||||||
Interest expense | (2,681 | ) | (4,199 | ) | (8,918 | ) | (13,545 | ) | ||||||||
Amortization of debt issuance costs | (433 | ) | (491 | ) | (1,343 | ) | (1,473 | ) | ||||||||
Loss on debt repayment | — | — | (3,652 | ) | — | |||||||||||
Other income (expense), net | 96 | 48 | (594 | ) | 405 | |||||||||||
Income (loss) from continuing operations before income taxes | 4,918 | 9,279 | (65,515 | ) | 5,444 | |||||||||||
Income tax expense (benefit) | 2,130 | 3,067 | (25,920 | ) | 3,622 | |||||||||||
Income (loss) from continuing operations | 2,788 | 6,212 | (39,595 | ) | 1,822 | |||||||||||
Income from discontinued operations, net of income tax | — | — | — | 4,607 | ||||||||||||
Gain on sale of discontinued operations, net of income tax | — | 636 | — | 72,932 | ||||||||||||
Net income (loss) | 2,788 | 6,848 | (39,595 | ) | 79,361 | |||||||||||
Net income (loss) attributable to noncontrolling interest | 687 | 1,590 | (15,005 | ) | 2,295 | |||||||||||
Net income (loss) attributable to Holdings | $ | 2,101 | $ | 5,258 | $ | (24,590 | ) | $ | 77,066 | |||||||
Amounts attributable to Holdings: | ||||||||||||||||
Income (loss) from continuing operations | $ | 2,101 | $ | 4,622 | $ | (24,590 | ) | $ | (473 | ) | ||||||
Discontinued operations, net of income tax | — | 636 | — | 77,539 | ||||||||||||
Net income (loss) attributable to Holdings | $ | 2,101 | $ | 5,258 | $ | (24,590 | ) | $ | 77,066 | |||||||
Basic and fully diluted net income (loss) per share attributable to Holdings: | ||||||||||||||||
Continuing operations | $ | 0.06 | $ | 0.15 | $ | (0.73 | ) | $ | (0.02 | ) | ||||||
Discontinued operations | — | 0.02 | — | 2.46 | ||||||||||||
Basic and fully diluted net income (loss) per share attributable to Holdings | $ | 0.06 | $ | 0.17 | $ | (0.73 | ) | $ | 2.44 | |||||||
Weighted average number of shares of trust stock outstanding — basic and fully diluted | 36,625 | 31,525 | 33,655 | 31,525 | ||||||||||||
Cash distributions declared per share | $ | 0.34 | $ | 0.34 | $ | 1.02 | $ | 0.99 | ||||||||
See notes to condensed consolidated financial statements.
6
Compass Diversified Holdings
Condensed Consolidated Statement of Stockholders’ Equity
(unaudited)
Total | ||||||||||||||||||||||||||||
Accumulated | Stockholders’ | |||||||||||||||||||||||||||
Accumulated | Other | Equity | Non- | Total | ||||||||||||||||||||||||
Number of | Earnings | Comprehensive | Attributable | Controlling | Stockholders’ | |||||||||||||||||||||||
(in thousands) | Shares | Amount | (Deficit) | Loss | to Holdings | Interest | Equity | |||||||||||||||||||||
Balance — December 31, 2008 | 31,525 | $ | 443,705 | $ | 25,984 | $ | (5,242 | ) | $ | 464,447 | $ | 79,431 | $ | 543,878 | ||||||||||||||
Net loss | — | — | (24,590 | ) | — | (24,590 | ) | (15,005 | ) | (39,595 | ) | |||||||||||||||||
Other comprehensive income — cash flow hedge | — | — | — | 2,893 | 2,893 | — | 2,893 | |||||||||||||||||||||
Comprehensive income (loss) | — | — | (24,590 | ) | 2,893 | (21,697 | ) | (15,005 | ) | (36,702 | ) | |||||||||||||||||
Issuance of Trust shares, net of offering costs | 5,100 | 42,085 | — | — | 42,085 | — | 42,085 | |||||||||||||||||||||
Option activity attributable to noncontrolling interest | — | — | — | — | — | 1,649 | 1,649 | |||||||||||||||||||||
Contribution of noncontrolling interest related to Staffmark recapitalization (see Note O) | — | — | — | — | — | 4,859 | 4,859 | |||||||||||||||||||||
Contribution from noncontrolling interest holders | — | — | — | — | — | 591 | 591 | |||||||||||||||||||||
Redemption of noncontrolling interest holders | — | — | — | — | — | (3,000 | ) | (3,000 | ) | |||||||||||||||||||
Distributions paid | — | — | (33,889 | ) | — | (33,889 | ) | — | (33,889 | ) | ||||||||||||||||||
Balance — September 30, 2009 | 36,625 | $ | 485,790 | $ | (32,495 | ) | $ | (2,349 | ) | $ | 450,946 | $ | 68,525 | $ | 519,471 | |||||||||||||
See notes to condensed consolidated financial statements.
7
Compass Diversified Holdings
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine months Ended September 30, | ||||||||
(in thousands) | 2009 | 2008 | ||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (39,595 | ) | $ | 79,361 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Gain on sale of 2008 dispositions | — | (72,932 | ) | |||||
Depreciation expense | 6,375 | 6,968 | ||||||
Amortization expense | 18,614 | 19,612 | ||||||
Impairment expense | 59,800 | — | ||||||
Amortization of debt issuance costs | 1,343 | 1,445 | ||||||
Supplemental put expense (reversal) | (8,518 | ) | 5,829 | |||||
Noncontrolling interests related to discontinued operations | — | 549 | ||||||
Noncontrolling stockholder charges | 1,378 | 1,943 | ||||||
Deferred taxes | (28,107 | ) | (7,010 | ) | ||||
Loss on debt repayment | 3,652 | — | ||||||
Other | (254 | ) | 296 | |||||
Changes in operating assets and liabilities, net of acquisition: | ||||||||
Decrease (increase) in accounts receivable | 6,054 | (310 | ) | |||||
Decrease (increase) in inventories | (2,413 | ) | 93 | |||||
Increase in prepaid expenses and other current assets | (2,757 | ) | (8,672 | ) | ||||
Increase in accounts payable and accrued expenses | 5,862 | 13,631 | ||||||
Payment of supplemental put obligation | — | (14,947 | ) | |||||
Net cash provided by operating activities | 21,434 | 25,856 | ||||||
Cash flows from investing activities: | ||||||||
Acquisition of businesses, net of cash acquired | (1,435 | ) | (173,561 | ) | ||||
Purchases of property and equipment | (2,365 | ) | (8,587 | ) | ||||
Proceeds from 2008 dispositions | — | 153,439 | ||||||
Other investing activities | 185 | (328 | ) | |||||
Net cash used in investing activities | (3,615 | ) | (29,037 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from the issuance of Trust shares, net | 42,085 | — | ||||||
Borrowings under Credit Agreement | 2,000 | 80,000 | ||||||
Repayments under Credit Agreement | (78,000 | ) | (77,032 | ) | ||||
Distributions paid | (33,889 | ) | (30,736 | ) | ||||
Swap termination fee | (2,517 | ) | — | |||||
Net proceeds provided by noncontrolling interest | 2,450 | 423 | ||||||
Debt issuance costs | — | (551 | ) | |||||
Other | (424 | ) | 1,475 | |||||
Net cash used in financing activities | (68,295 | ) | (26,421 | ) | ||||
Foreign currency adjustment | — | (80 | ) | |||||
Net decrease in cash and cash equivalents | (50,476 | ) | (29,682 | ) | ||||
Cash and cash equivalents — beginning of period | 97,473 | 119,358 | ||||||
Cash and cash equivalents — end of period | $ | 46,997 | $ | 89,676 | ||||
See notes to condensed consolidated financial statements.
8
Compass Diversified Holdings
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2009
September 30, 2009
Note A — Organization and business operations
Compass Diversified Holdings, a Delaware statutory trust (“Holdings”), was organized in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the “Company”), was also formed on November 18, 2005. Compass Group Management LLC, a Delaware limited liability company (“CGM” or the “Manager”), was the sole owner of 100% of the Interests of the Company as defined in the Company’s operating agreement, dated as of November 18, 2005, which were subsequently reclassified as the “Allocation Interests” pursuant to the Company’s amended and restated operating agreement, dated as of April 25, 2006 (as amended and restated, the “LLC Agreement”).
Note B — Presentation and principles of consolidation
The condensed consolidated financial statements for the three-month and nine-month periods ended September 30, 2009 and September 30, 2008, 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. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. G.A.A.P.”) and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K as amended for the year ended December 31, 2008. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.
Changes in basis of presentation
The 2008 financial information has been recast so that the basis of presentation is consistent with that of the 2009 financial information. This recast reflects (i) the financial condition and results of operations of Aeroglide Holdings, Inc. (“Aeroglide”) and Silvue Technologies Group, Inc. (“Silvue”) as discontinued operations for all periods presented; and (ii) the adoption of new guidance on accounting for noncontrolling interests issued by the Financial Accounting Standards Board (“FASB”).
Seasonality
Earnings of certain of the Company’s business segments are seasonal in nature. Earnings from AFM Holdings Corporation (“AFM” or “American Furniture”) are typically highest in the months of January through April of each year, coinciding with homeowners’ tax refunds. Earnings from CBS Personnel Holdings, Inc. (doing business as Staffmark) (“Staffmark”) are typically lower in the first quarter of each year than in other quarters due to reduced seasonal demand for temporary staffing services and to lower gross margins during that period associated with the front-end loading of certain payroll taxes and other payments associated with payroll paid to our employees. Earnings from HALO Lee Wayne LLC (“HALO”) are typically highest in the months of September through December of each year primarily as the result of calendar sales and holiday promotions. HALO generates approximately two-thirds of its operating income in the months of September through December.
Goodwill
The Company completed its 2008 annual goodwill impairment testing as of April 30, 2008 in accordance with guidelines issued by FASB. During the quarter ended March 31, 2009, the Company changed the date of its annual goodwill impairment testing to March 31 in order to move the impairment testing to a fiscal quarter ending date when data necessary to perform the annual testing is more readily available and more robust. The Company believes that the resulting change in accounting principle related to the annual testing date did not delay, accelerate, or avoid an impairment charge. The Company determined that the change in accounting principle related to the annual testing date is preferable under the circumstances and does not result in adjustments to the Company’s financial statements when applied retrospectively. Please refer to Note G for the results of the Company’s 2009 annual impairment testing.
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.
9
Note C —Recent accounting pronouncements
In March 2009, the FASB issued additional authoritative guidance on business combinations, specifically, for the initial recognition and measurement, subsequent measurement, and disclosures of assets and liabilities arising from contingencies in a business combination as well as for pre-existing contingent consideration assumed as part of the business combination. This guidance is effective for the Company January 1, 2009.
In April 2009, the FASB amended authoritative guidance on disclosures about the fair value of financial instruments, which is effective for the Company June 30, 2009. The amended guidance requires a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, the guidance requires an entity to disclose either in the body or the accompanying notes of its summarized financial information the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. The adoption of this guidance did not have a significant impact on the Company’s Condensed Consolidated Financial Statements.
In May 2009, the FASB issued authoritative guidance on subsequent events, which is effective for the Company June 30, 2009. This guidance addresses the disclosure of events that occur after the balance sheet date, but before financial statements are issued or available to be issued. The adoption of this guidance did not have a significant impact on the Company’s Condensed Consolidated Financial Statements.
In June 2009, the FASB issued amendments to authoritative guidance on consolidation of variable interest entities, which will be effective for the Company January 1, 2010. The amended guidance revises factors that should be considered by a reporting entity when determining whether an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This guidance also includes revised financial statement disclosures regarding the reporting entity’s involvement and risk exposure. The Company does not expect the adoption of this guidance will have a significant impact on the Company’s Condensed Consolidated Financial Statements.
In June 2009, the FASB issuedThe FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles(the “FASB Codification”), which is effective for the Company July 1, 2009. The FASB Codification does not alter current U.S. GAAP, but rather integrates existing accounting standards with other authoritative guidance. Under the FASB Codification there is a single source of authoritative U.S. GAAP for nongovernmental entities and this has superseded all other previously issued non-SEC accounting and reporting guidance. The adoption of the FASB Codification did not have any impact on the Company’s Condensed Consolidated Financial Statements.
In August 2009, the FASB amended authoritative guidance for determining the fair value of liabilities, which will be effective for the Company October 1, 2009. The amended guidance reiterates that the fair value measurement of a liability (1) should be based on the assumption that the liability was transferred to a market participant on the measurement date and (2) should include the risk of nonperformance. In addition, the guidance establishes a hierarchy for determining the fair value of liabilities. Specifically, an entity must first determine whether a quoted price, from an active market, is available for identical liabilities before utilizing an alternative valuation technique. The Company does not expect the adoption of this guidance will have a significant impact on the Company’s Condensed Consolidated Financial Statements.
In September 2009, the Emerging Issues Task Force reached a consensus related to revenue arrangements with multiple deliverables. The consensus will be issued by the FASB as an update to authoritative guidance for revenue recognition and will be effective for the Company January 1, 2011. The updated guidance will revise how the estimated selling price of each deliverable in a multiple element arrangement is determined when the deliverables do not have stand-alone value. In addition, the revised guidance will require additional disclosures about the methods and assumptions used to evaluate multiple element arrangements and to identify the significant deliverables within those arrangements. The Company is currently evaluating whether or not the adoption of this guidance will have a significant impact on the Company’s Condensed Consolidated Financial Statements.
Note D — Discontinued operations
2008 Dispositions
On June 24, 2008, the Company sold its majority owned subsidiary, Aeroglide, for a total enterprise value of $95.0 million. In addition, on June 25, 2008, the Company sold its majority owned subsidiary, Silvue, for a total enterprise value of $95.0 million. Summarized operating results for the 2008 dispositions were as follows (in thousands):
10
Aeroglide | Silvue | |||||||
For the Period | For the Period | |||||||
January 1, 2008 | January 1, 2008 | |||||||
through Disposition | through Disposition | |||||||
Net sales | $ | 34,294 | $ | 11,465 | ||||
Operating income | 5,041 | 2,416 | ||||||
Other expense | (11 | ) | (83 | ) | ||||
Provision for income taxes | 1,274 | 933 | ||||||
Noncontrolling interest | 239 | 310 | ||||||
Income from discontinued operations (1) | $ | 3,517 | $ | 1,090 | ||||
(1) | For Aeroglide, the results above for the period January 1, 2008 through dispostion exclude $1.6 million of intercompany interest expense. For Silvue, the results above for the period January 1, 2008 through dispostion exclude $0.6 million, of intercompany interest expense. |
Note E — Business segment data
At September 30, 2009, the Company had six reportable business segments. Each business segment represents an acquisition. The Company’s reportable 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:
• | Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”), an electronic components manufacturing company, is a provider of prototype and quick-turn printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers mainly in North America. ACI is headquartered in Aurora, Colorado. | ||
• | AFM is a leading domestic manufacturer of upholstered furniture for the promotional segment of the marketplace. AFM offers a broad product line of stationary and motion furniture, including sofas, loveseats, sectionals, recliners and complementary products, sold primarily at retail price points ranging between $199 and $999. 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. | ||
• | Anodyne Medical Device, Inc. (“Anodyne” or “AMD”), a medical support surfaces company, is a manufacturer of patient positioning devices primarily used for the prevention and treatment of pressure wounds experienced by patients with limited or no mobility. Anodyne is headquartered in Coral Springs, Florida and its products are sold primarily in North America. | ||
• | Fox Factory Holding Corp. (“Fox”) is a designer, manufacturer and marketer of high end suspension products for mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles. Fox acts as both a tier one supplier to leading action sport original equipment manufacturers and provides after-market products to retailers and distributors. Fox is headquartered in Watsonville, California and its products are sold worldwide. | ||
• | HALO, operating under the brand names of HALO and Lee Wayne, serves as a one-stop shop for over 40,000 customers providing design, sourcing, and management and fulfillment services across all categories of its customer promotional product needs. HALO has established itself as a leader in the promotional products and marketing industry through its focus on service through its approximately 1,000 account executives. HALO is headquartered in Sterling, Illinois. | ||
• | CBS Personnel Holdings, Inc. (doing business as Staffmark) (“Staffmark”), a human resources outsourcing firm, is a provider of temporary staffing services in the United States. Staffmark serves approximately 6,500 corporate and small business clients. Staffmark also offers employee leasing services, permanent staffing and temporary-to-permanent placement services. Staffmark is headquartered in Cincinnati, Ohio. |
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The tabular information that follows shows data of reportable segments reconciled to amounts reflected in the consolidated financial statements. The operations of each of the businesses are included in consolidated operating results as of their date of acquisition. Revenues from geographic locations outside the United States were not material for each reportable segment, except Fox, in each of the periods presented below. Fox recorded net sales to locations outside the United States of $26.0 million and $60.3 million for the three- and nine—month periods ended September 30, 2009, respectively, and $31.1 million and $71.1 million for the three- and nine—month periods ended September 30, 2008. There were no significant inter-segment transactions.
Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business. Segment profit excludes acquisition related amounts and charges not pushed down to the segments, which are reflected in Corporate and other.
A disaggregation of the Company’s consolidated revenue and other financial data for the three- and nine—month periods ended September 30, 2009 and 2008 is presented below (in thousands):
Three-months Ended September 30, | Nine-months Ended September 30, | |||||||||||||||
Net sales of business segments | 2009 | 2008 | 2009 | 2008 | ||||||||||||
ACI | $ | 11,593 | $ | 14,163 | $ | 34,356 | $ | 42,741 | ||||||||
American Furniture | 33,039 | 31,386 | 108,623 | 99,827 | ||||||||||||
Anodyne | 13,868 | 16,510 | 39,479 | 40,954 | ||||||||||||
Fox | 36,910 | 43,326 | 86,870 | 101,178 | ||||||||||||
Halo | 35,545 | 42,571 | 91,717 | 107,138 | ||||||||||||
Staffmark | 193,284 | 265,645 | 525,636 | 771,808 | ||||||||||||
Total | 324,239 | 413,601 | 886,681 | 1,163,646 | ||||||||||||
Reconciliation of segment revenues to consolidated revenues: | ||||||||||||||||
Corporate and other | — | — | — | — | ||||||||||||
Total consolidated revenues | $ | 324,239 | $ | 413,601 | $ | 886,681 | $ | 1,163,646 | ||||||||
Three-months Ended September 30, | Nine-months Ended September 30, | |||||||||||||||
Profit (loss) of business segments(1) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
ACI | $ | 3,576 | $ | 4,630 | $ | 11,600 | $ | 13,868 | ||||||||
American Furniture | 1,220 | 227 | 5,379 | 5,153 | ||||||||||||
Anodyne | 2,108 | 1,733 | 4,979 | 3,288 | ||||||||||||
Fox | 4,731 | 6,413 | 5,907 | 9,375 | ||||||||||||
Halo | 722 | 1,285 | (1,395 | ) | 1,039 | |||||||||||
Staffmark (2) | 1,001 | 4,779 | (58,929 | ) | 10,534 | |||||||||||
Total | 13,358 | 19,067 | (32,459 | ) | 43,257 | |||||||||||
Reconciliation of segment profit (loss) to consolidated income (loss) from continuing operations before income taxes: | ||||||||||||||||
Interest expense, net | (2,647 | ) | (3,640 | ) | (8,807 | ) | (12,405 | ) | ||||||||
Other income (expense) | 96 | 48 | (594 | ) | 405 | |||||||||||
Corporate and other (3) | (5,889 | ) | (6,196 | ) | (23,655 | ) | (25,813 | ) | ||||||||
Total consolidated income (loss) from continuing operations before income taxes | $ | 4,918 | $ | 9,279 | $ | (65,515 | ) | $ | 5,444 | |||||||
(1) | Segment profit (loss) represents operating income (loss). | |
(2) | Includes $50.0 million of goodwill impairment during the nine months ended September 30, 2009. See Note G. | |
(3) | Corporate and other consists of charges at the corporate level and purchase accounting adjustments not “pushed down” to the segment. In addition, Corporate includes $9.8 million of Staffmark’s intangible asset impairment during the nine months ended September 30, 2009, not “pushed down” to the segment. See Note G. |
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Accounts Receivable | Accounts Receivable | |||||||
September 30, | December 31, | |||||||
Accounts receivable and allowances | 2009 | 2008 | ||||||
ACI | $ | 2,709 | $ | 3,131 | ||||
American Furniture | 12,653 | 11,149 | ||||||
Anodyne | 7,816 | 6,919 | ||||||
Fox | 17,357 | 10,201 | ||||||
Halo | 22,107 | 29,358 | ||||||
Staffmark | 102,496 | 108,101 | ||||||
Total | 165,138 | 168,859 | ||||||
Reconciliation of segment data to consolidated totals: | ||||||||
Corporate and other | — | — | ||||||
Total | 165,138 | 168,859 | ||||||
Allowance for doubtful accounts | (5,599 | ) | (4,824 | ) | ||||
Total consolidated net accounts receivable | $ | 159,539 | $ | 164,035 | ||||
Depreciation and | Depreciation and | |||||||||||||||||||||||||||||||
Identifiable | Identifiable | Amortization Expense | Amortization Expense | |||||||||||||||||||||||||||||
Goodwill | Goodwill | Assets | Assets | for the Three-months | for the Nine-months | |||||||||||||||||||||||||||
Goodwill and identifiable | September 30, | December 31, | September 30, | December 31, | Ended September 30, | Ended September 30, | ||||||||||||||||||||||||||
assets of business segments | 2009 | 2008 | 2009(1) | 2008(1) | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||
ACI | $ | 50,717 | $ | 50,659 | $ | 18,280 | $ | 20,309 | $ | 958 | $ | 942 | $ | 2,848 | $ | 2,768 | ||||||||||||||||
American Furniture | 41,435 | 41,435 | 63,723 | 67,752 | 913 | 928 | 2,873 | 2,789 | ||||||||||||||||||||||||
Anodyne | 19,555 | 22,747 | 20,767 | 23,784 | 654 | 684 | 2,011 | 2,037 | ||||||||||||||||||||||||
Fox | 31,372 | 31,372 | 78,846 | 83,246 | 1,627 | 1,620 | 4,876 | 5,138 | ||||||||||||||||||||||||
Halo | 39,303 | 40,184 | 49,100 | 46,291 | 845 | 796 | 2,539 | 2,271 | ||||||||||||||||||||||||
Staffmark | 89,715 | 139,715 | 85,176 | 84,947 | 1,940 | 2,161 | 5,960 | 6,039 | ||||||||||||||||||||||||
Total | 272,097 | 326,112 | 315,892 | 326,329 | 6,937 | 7,131 | 21,107 | 21,042 | ||||||||||||||||||||||||
Reconciliation of segment data to consolidated total: | ||||||||||||||||||||||||||||||||
Corporate and other identifiable assets | — | — | 86,973 | 154,877 | 1,293 | 1,194 | 3,882 | 3,585 | ||||||||||||||||||||||||
Amortization of debt issuance costs | — | — | — | — | 433 | 491 | 1,343 | 1,473 | ||||||||||||||||||||||||
Goodwill carried at Corporate level(2) | 16,175 | 12,983 | — | — | — | — | — | — | ||||||||||||||||||||||||
Total | $ | 288,272 | $ | 339,095 | $ | 402,865 | $ | 481,206 | $ | 8,663 | $ | 8,816 | $ | 26,332 | $ | 26,100 | ||||||||||||||||
(1) | Does not include accounts receivable balances per schedule above. | |
(2) | 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. |
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Note F — Property, plant and equipment and inventory
Property, plant and equipment is comprised of the following at September 30, 2009 and December 31, 2008(in thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Machinery, equipment and software | $ | 26,768 | $ | 26,024 | ||||
Office furniture and equipment | 10,183 | 10,501 | ||||||
Leasehold improvements | 6,290 | 6,030 | ||||||
43,241 | 42,555 | |||||||
Less: accumulated depreciation | (16,888 | ) | (11,792 | ) | ||||
Total | $ | 26,353 | $ | 30,763 | ||||
Depreciation expense was $2.1 million and $6.4 million for the three and nine months ended September 30, 2009, respectively, and $2.2 million and $6.2 million for the three and nine months ended September 30, 2008, respectively.
Inventory is comprised of the following at September 30, 2009 and December 31, 2008(in thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Raw materials and supplies | $ | 38,257 | $ | 34,405 | ||||
Finished goods | 16,620 | 17,571 | ||||||
Less: obsolescence reserve | (1,294 | ) | (1,067 | ) | ||||
Total | $ | 53,583 | $ | 50,909 | ||||
Note G — Goodwill and other intangible assets
Goodwill impairment
The Company completed its 2009 annual goodwill impairment testing in accordance with guidelines issued by the FASB as of March 31, 2009. This annual impairment test involved a two-step process. The first step of the impairment test involved comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill.
The Company determined fair values for each of its reporting units using both the income and market approach. For purposes of the income approach, fair value was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used its internal forecasts to estimate future cash flows and included an estimate of long-term future growth rates based on its most recent views of the long-term outlook for each business. Actual results may differ from those assumed in the forecasts. Discount rates were derived by applying market derived inputs and analyzing published rates for industries comparable to the Company’s reporting units. The Company used discount rates that are commensurate with the risks and uncertainty inherent in the financial markets generally and in the internally developed forecasts. Discount rates used in these reporting unit valuations ranged from approximately 15% to 16%. Valuations using the market approach reflect prices and other relevant observable information generated by market transactions involving businesses comparable to the Company’s reporting units. The Company assesses the valuation methodology under the market approach based upon the relevance and availability of data at the time of performing the valuation and weighs the methodologies appropriately.
Based on the results of the annual impairment tests performed as of March 31, 2009, an indication of impairment existed at the Company’s Staffmark reporting unit. In each of the other businesses (reporting units) the result of the annual goodwill impairment test indicated that the fair value of the business exceeded its carrying value. Based on the results of the second step of the impairment test, the Company estimated that the carrying value of the Staffmark goodwill exceeded its fair value by approximately $50.0 million. As a result of this shortfall, the Company recorded a $50.0 million pretax goodwill impairment charge to impairment expense on the Condensed Consolidated Statement of Operations during the nine months ended September 30, 2009. The carrying amount of Staffmark exceeded its fair value due to the recent and projected significant decrease in revenue and operating profit at Staffmark resulting from the negative impact on temporary staffing and permanent placement revenues due to the depressed macroeconomic conditions and downward employment trends. The results of the annual impairment tests performed as of April 30, 2008 indicated that the fair values of the reporting units (businesses) exceeded their carrying values and, therefore, goodwill was not impaired. Accordingly, there were no charges for goodwill impairment in the nine months ended September 30, 2008.
Estimating the fair value of reporting units involves the use of estimates and significant judgments that are based on a number of factors including actual operating results, future business plans, economic projections and market data. Actual results may
14
differ from forecasted results. While no impairment was indicated in the Company’s step one goodwill impairment tests in the reporting units other than Staffmark, if current economic conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates described above could change in future periods for each of the Company’s reporting units.
The goodwill impairment charge does not have any adverse effect on the covenant calculations or compliance under the Company’s Credit Agreement.
A reconciliation of the change in the carrying value of goodwill for the nine months ended September 30, 2009 and the year ended December 31, 2008, is as follows(in thousands):
Balance at January 1, 2008 | $ | 218,817 | ||
Acquisition of businesses | 117,031 | |||
Acquired goodwill in connection with Anodyne CEO promissory note | 3,191 | |||
Adjustment to purchase accounting | 56 | |||
Balance at December 31, 2008 | 339,095 | |||
Impairment at the Staffmark business segment | (50,000 | ) | ||
Acquisition of businesses (1) | 1,009 | |||
Adjustment to purchase accounting | (1,832 | ) | ||
Balance at September 30, 2009 | $ | 288,272 | ||
(1) | The Company’s HALO and ACI business segments each acquired one add-on acquisition during the nine months ended September 30, 2009. |
Other intangible assets
In connection with the annual goodwill impairment testing, we tested other indefinite-lived intangible assets at our Staffmark reporting unit. As a result of this analysis we determined that the carrying value exceeded the fair value of the CBS Personnel trade name (an indefinite-lived asset), based principally on the phase-out of the CBS Personnel trade name and rebranding of the reporting unit to Staffmark beginning in February 2009. The fair value of the CBS Personnel trade name was determined by applying the income approach to forecasted revenues at the Staffmark reporting unit. The result of this analysis indicated that the carrying value of the trade name ($10.6 million) exceeded its fair value ($0.8 million) by approximately $9.8 million. Therefore, an impairment charge of $9.8 million was recorded to impairment expense on the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2009. The remaining balance ($0.8 million) of the CBS Personnel trade name is being amortized over 2.75 years.
Other intangible assets subject to amortization are comprised of the following at September 30, 2009 and December 31, 2008(in thousands):
Weighted | ||||||||||||
September 30, | December 31, | Average | ||||||||||
2009 | 2008 | Useful Lives | ||||||||||
Customer relationships | $ | 189,391 | $ | 187,669 | 12 | |||||||
Technology | 37,959 | 37,959 | 8 | |||||||||
Trade names, subject to amortization | 25,300 | 24,500 | 12 | |||||||||
Licensing and non-compete agreements | 4,461 | 4,416 | 3 | |||||||||
Distributor relations and backlog | 1,380 | 1,380 | 4 | |||||||||
258,491 | 255,924 | |||||||||||
Accumulated amortization customer relations | (44,615 | ) | (32,287 | ) | ||||||||
Accumulated amortization technology | (10,117 | ) | (6,388 | ) | ||||||||
Accumulated amortization trade names, subject to amortization | (2,901 | ) | (1,531 | ) | ||||||||
Accumulated amortization licensing and non-compete agreements | (3,448 | ) | (2,369 | ) | ||||||||
Accumulated amortization distributor relations and backlog | (755 | ) | (630 | ) | ||||||||
Total accumulated amortization | (61,836 | ) | (43,205 | ) | ||||||||
Trade names, not subject to amortization (1) | 26,332 | 36,770 | ||||||||||
Total | $ | 222,987 | $ | 249,489 | ||||||||
(1) | As discussed above, the Company’s CBS Personnel trade name was impaired during the nine months ended September 30, 2009. As a result, the Company recorded an impairment charge of $9.8 million during the nine months ended September 30, 2009. |
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Amortization expense was $6.2 million and $18.6 million for the three and nine months ended September 30, 2009, respectively, and $6.2 million and $18.4 million for the three and nine months ended September 30, 2008, respectively.
Note H — Debt
At September 30, 2009, the Company had $76.5 million outstanding of its Term Loan Facility under its Credit Agreement. The Credit Agreement provides for a Revolving Credit Facility totaling $340 million which matures in December 2012 and a Term Loan Facility totaling $76.5 million which matures in December 2013. The Term Loan Facility requires quarterly payments of $0.5 million with a final payment of the outstanding principal balance due on December 7, 2013. The Credit Agreement permits the Company to increase the amount available under the Revolving Credit Facility by up to $10 million and the Term Loan Facility by up to $145 million, subject to certain restrictions and Lender approval. This option to increase both the Revolving Credit Facility and the Term Loan Facility expires on December 7, 2009. The fair value of the Term Loan Facility as of September 30, 2009 was approximately $67.9 million, and was calculated based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities.
The Company had $0.5 million in outstanding borrowings under its Revolving Credit Facility at September 30, 2009. The Company had approximately $155.9 million in borrowing base availability under its Revolving Credit Facility at September 30, 2009. Letters of credit outstanding at September 30, 2009 totaled approximately $66.2 million. At September 30, 2009, the Company was in compliance with all covenants.
On January 22, 2008, the Company entered into a three-year interest rate swap (“Swap”) agreement with a bank, fixing the rate of $140 million of Term Loan debt at 7.35% on a like amount of variable rate Term Loan Facility borrowings.
On February 18, 2009, the Company reduced its debt and repaid at par, from cash on its balance sheet, $75.0 million of debt under its Term Loan Facility due in December of 2013. In connection with the repayment, the Company also terminated $70.0 million of its $140.0 million interest rate swap at a cost of approximately $2.5 million. The Company reclassified this amount from accumulated other comprehensive loss into earnings during the first quarter of 2009. In addition, the Company expensed $1.1 million of capitalized debt issuance costs in the first quarter of 2009 in connection with the debt repayment. Both of these amounts are included in Loss on debt repayment in the Condensed Consolidated Statement of Operations. The remaining portion of the Swap is designated as a cash flow hedge and is anticipated to be highly effective.
Note I — Fair value measurement
The Company adopted the fair value guidelines issued by the FASB as of January 1, 2008. These guidelines establish a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the assets and liabilities carried at fair values measured on a recurring basis as of September 30, 2009 and December 31, 2008 (in thousands):
Fair Value Measurements at Sept. 30, 2009 | ||||||||||||||||
Carrying | ||||||||||||||||
Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Derivative liability — interest rate swap | $ | 2,349 | $ | — | $ | 2,349 | $ | — | ||||||||
Supplemental put obligation | 4,893 | — | — | 4,893 | ||||||||||||
Stock option of minority shareholder(1) | 200 | — | — | 200 |
(1) | Represents a former employee’s option to purchase additional common stock in Anodyne. |
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Fair Value Measurements at December 31, 2008 | ||||||||||||||||
Carrying | ||||||||||||||||
Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Derivative liability — interest rate swap | $ | 5,242 | $ | — | $ | 5,242 | $ | — | ||||||||
Supplemental put obligation | 13,411 | — | — | 13,411 | ||||||||||||
Stock option of minority shareholder | 200 | — | 200 | — |
A reconciliation of the change in the carrying value of our level 3, supplemental put liability from January 1, 2009 through September 30, 2009 and from January 1, 2008 through September 30, 2008 is as follows (in thousands):
2009 | 2008 | |||||||
Balance at January 1 | $ | 13,411 | $ | 21,976 | ||||
Supplemental put expense (reversal) | (8,159 | ) | 2,318 | |||||
Balance at April 1 | 5,252 | 24,294 | ||||||
Supplemental put expense (reversal) | (258 | ) | 4,276 | |||||
Balance at June 30 | 4,994 | 28,570 | ||||||
Payment of supplemental put liability | — | (14,947 | ) | |||||
Supplemental put expense (reversal) | (101 | ) | (765 | ) | ||||
Balance at September 30 | $ | 4,893 | $ | 12,858 | ||||
Valuation Techniques
The Company’s derivative instrument consists of an over-the-counter (OTC) interest rate swap contract which is not traded on a public exchange. The fair value of the Company’s interest rate swap contract was determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The stock 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 its interest rate swap contract as Level 2 and the stock option of the noncontrolling shareholder as Level 3.
The Company’s Manager, CGM is the owner of 100% of the Allocation Interests in the Company. Concurrent with our initial public offering in 2006 (“IPO”), CGM and the Company entered into a Supplemental Put Agreement, which requires the Company to acquire these Allocation Interests upon termination of the Management Services Agreement. Essentially, the put rights granted to CGM require us to acquire CGM’s Allocation Interests in the Company at a price based on a percentage of the increase in fair value in the Company’s businesses over its original basis in those businesses. Each fiscal quarter the Company estimates the fair value of its businesses using a discounted future cash flow model for the purpose of determining the potential liability associated with the Supplemental Put Agreement. The Company uses the following key assumptions in measuring the fair value of the supplemental put: (i) financial and market data of publicly traded companies deemed to be comparable to each of the Company’s businesses and (ii) financial and market data of comparable merged, sold or acquired companies. Any change in the potential liability is accrued currently as an adjustment to earnings. The implementation of fair value guidelines issued by the FASB did not result in any material changes to the models or processes used to value this liability.
During the first quarter of 2009, the inputs utilized in connection with the fair value analysis of the Stock option of a noncontrolling shareholder were no longer available in publicly quoted markets. As a result, the inputs were unobservable and the fair value was moved from the Level 2 column to the Level 3 column of the table above. The following table details the change in the Company’s Level 3 liabilities(in thousands):
Balance at January 1, 2009 | $ | — | ||
Transfer in from Level 2 | 200 | |||
Balance at September 30, 2009 | $ | 200 | ||
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The following table provides the assets and liabilities carried at fair value measured on a non-recurring basis as of September 30, 2009 (in thousands):
Fair Value Measurements at Sept. 30, 2009 | Gains/(losses) | |||||||||||||||||||||||||||||||
Carrying | Three months Ended Sept. 30, | Nine months Ended Sept. 30, | ||||||||||||||||||||||||||||||
Value | Level 1 | Level 2 | Level 3 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Goodwill(1) | $ | 88,640 | $ | — | $ | — | $ | 88,640 | $ | — | $ | — | $ | (50,000 | ) | $ | — |
(1) | Represents the fair value of goodwill at the Staffmark business segment, including a $1.1 million reduction in goodwill allocated from the corporate level, subsequent to the goodwill impairment charge recognized during the first quarter of 2009. See Note G for further discussion regarding impairment and valuation techniques applied. |
Note J — Derivative instruments and hedging activities
On January 22, 2008, the Company entered into a three-year interest rate swap (“Swap”) agreement with a bank, fixing the rate of $140 million at 7.35% on a like amount of variable rate Term Loan Facility borrowings. The Swap is designated as a cash flow hedge and is anticipated to be highly effective.
The Company’s objective for entering into the Swap is to manage the interest rate exposure on its Term Loan Facility by fixing its interest rate at 7.35% and avoiding the potential variability of interest rate fluctuations. The Swap is designated as a cash flow hedge, accordingly, changes in the fair value of the swap are recorded in stockholders’ equity as a component of accumulated other comprehensive loss. For the three and nine months ended September 30, 2009, the Company recorded a $0.1 million loss and a $0.4 million gain to accumulated other comprehensive loss, respectively. For the three and nine months ended September 30, 2008, the Company recorded a $0.8 million loss and a $0.4 million gain to accumulated other comprehensive loss, respectively.
On February 18, 2009, the Company terminated a portion of its Swap in connection with the repayment of $75.0 million of the Term Loan Facility. In connection with the termination, the Company reclassified $2.5 million from accumulated other comprehensive loss into earnings. This reclassification is included in Loss on debt repayment in the Condensed Consolidated Results of Operations.
The following table provides the fair value of the Company’s cash flow hedge as well as its location on the balance sheet as of September 30, 2009 and December 31, 2008(in thousands):
September 30, | December 31, | Balance Sheet | ||||||||
2009 | 2008 | Location | ||||||||
Liability | ||||||||||
Cash flow hedge current | $ | 1,631 | $ | 2,691 | Other current liabilities | |||||
Cash flow hedge non-current | 718 | 2,551 | Other non-current liabilities | |||||||
Total | $ | 2,349 | $ | 5,242 | ||||||
Note K — Comprehensive income (loss)
The following table sets forth the computation of comprehensive income (loss) for the three and nine months ended September 30, 2009 and 2008(in thousands):
Three-months Ended | Nine-months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (loss) attributable to Holdings | $ | 2,101 | $ | 5,258 | $ | (24,590 | ) | $ | 77,066 | |||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gain (loss) on cash flow hedge | (19 | ) | (814 | ) | 376 | 426 | ||||||||||
Reclassification adjustment for cash flow hedge | ||||||||||||||||
losses realized in net income (loss) | — | — | 2,517 | — | ||||||||||||
Total other comprehensive income (loss) | (19 | ) | (814 | ) | 2,893 | 426 | ||||||||||
Total comprehensive income (loss) | $ | 2,082 | $ | 4,444 | $ | (21,697 | ) | $ | 77,492 | |||||||
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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.
• | On January 30, 2009, the Company paid a distribution of $0.34 per share to holders of record as of January 23, 2009. | ||
• | On April 30, 2009, the Company paid a distribution of $0.34 per share to holders of record as of April 23, 2009. | ||
• | On July 30, 2009, the Company paid a distribution of $0.34 per share to holders of record as of July 24, 2009. | ||
• | On October 29, 2009, the Company paid a distribution of $0.34 per share to holders of record as of October 23, 2009. |
In connection with the adoption of FASB’s noncontrolling interest guidelines, on January 1, 2009, the Company reclassified noncontrolling interest to stockholders’ equity. This reclassification was applied prospectively with the exception of presentation and disclosure requirements which were applied retrospectively for all periods presented.
On June 9, 2009, the Company completed a secondary offering of 5,100,000 Trust shares at an offering price of $8.85 per share. The net proceeds to the Company, after deducting underwriter’s discount and offering costs totaled approximately $42.1 million. The Company plans to use the proceeds for general corporate purposes.
Note M — Warranties
The Company’s Fox and Anodyne business segments estimate the 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 nine months ended September 30, 2009 and the year ended December 31, 2008 is as follows (in thousands):
Nine Months | Year Ended | |||||||
Ended September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Beginning balance | $ | 1,541 | $ | 1,023 | ||||
Accrual | 1,306 | 2,050 | ||||||
Warranty payments | (1,242 | ) | (1,532 | ) | ||||
Ending balance | $ | 1,605 | $ | 1,541 | ||||
Note N — Commitments and contingencies
In the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that their outcome will have a material adverse effect on the Company’s consolidated financial position or results of operations.
Note O — Noncontrolling interest
In April 2009, the Company amended the Staffmark intercompany credit agreement which, among other things, recapitalized a portion of Staffmark’s long-term debt by exchanging $35.0 million of debt for Staffmark common stock. As a result of this transaction, the Company’s ownership percentage of the outstanding stock of Staffmark increased to 75.7% on a primary basis and 73.3% on a fully diluted basis, and the noncontrolling interest in Staffmark decreased from 33.7% to 24.3%. In
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addition, as a result of the exchange the Company received cash from a noncontrolling shareholder and recorded an increase to noncontrolling interest of $4.9 million. The receipt of the noncontrolling shareholder contribution is included in Changes in noncontrolling interest on the Company’s Condensed Consolidated Statement of Cash Flows.
In September 2009, Anodyne redeemed outstanding shares of Anodyne stock from a noncontrolling interest holder of Anodyne for $3.0 million. As a result of this transaction, the Company’s ownership percentage of the outstanding stock of Anodyne increased to 74.4% on a primary basis and 66.1% on a fully diluted basis, and the noncontrolling interest in Anodyne decreased from 33.0% to 25.6%.
Note P — Subsequent events
The Company has evaluated subsequent events through the filing of this Form 10-Q on November 9, 2009, and determined there have not been any events that have occurred that would require adjustments to the unaudited Condensed Consolidated Financial Statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This item 2 contains forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the sections entitled “Forward-Looking Statements” and “Risk Factors” included elsewhere in this Quarterly Report as well as those risk factors discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K.
Overview
Compass Diversified Holdings, a Delaware statutory trust, was organized in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company, was also formed on November 18, 2005. In accordance with the Trust Agreement, the Trust is sole owner of 100% of the Trust Interests (as defined in the LLC Agreement) of the Company and, pursuant to the LLC Agreement, the Company has outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Manager is the sole owner of the Allocation Interests of the Company. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. We characterize small to middle market businesses as those that generate annual cash flows of up to $60 million. We focus on companies of this size because of our belief that these companies are often more able to achieve growth rates above those of their relevant industries and are also frequently more susceptible to efforts to improve earnings and cash flow.
In pursuing new acquisitions, we seek businesses with the following characteristics:
• | North American base of operations; | |
• | stable and growing earnings and cash flow; | |
• | maintains a significant market share in defensible industry niche (i.e., has a “reason to exist”); | |
• | solid and proven management team with meaningful incentives; | |
• | low technological and/or product obsolescence risk; and | |
• | a diversified customer and supplier base. |
Our management team’s strategy for our subsidiaries involves:
• | utilizing structured incentive compensation programs tailored to each business to attract, recruit and retain talented managers to operate our businesses; | |
• | regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals; | |
• | assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue and cost related); | |
• | identifying and working with management to execute attractive external growth and acquisition opportunities; and | |
• | forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives. |
Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are positioned to acquire additional attractive businesses. Our management team has a large network of nearly 2,000 deal intermediaries to whom it actively markets and who we expect to expose us to potential acquisitions. Through this network, as well as our management team’s active proprietary transaction sourcing efforts, we typically have a substantial pipeline of potential acquisition targets. In
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consummating transactions, our management team has, in the past, been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned businesses, management buy-outs and reorganizations. We believe the flexibility, creativity, experience and expertise of our management team in structuring transactions provides us with a strategic advantage by allowing us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.
In addition, because we intend to fund acquisitions through the utilization of our Revolving Credit Facility, we do not expect to be subject to delays in or conditions by closing acquisitions that would be typically associated with transaction specific financing, as is typically the case in such acquisitions. We believe this advantage is a powerful one, especially in the current stagnant credit environment, and is highly unusual in the marketplace for acquisitions in which we operate.
We have not acquired any new businesses in 2009 and deal flow activity has been slow compared to prior years. We are beginning to see a recent uptick in deal flow activity compared to the beginning of 2009 even though deal flow is significantly below activity experienced in prior years.
Areas for focus in 2009
The areas of focus for 2009, which are generally applicable to each of our businesses, include:
• | Taking advantage, where possible, of the current economic downturn by growing market share in each of our market niche leading companies at the expense of less well capitalized competitors; | |
• | Achieving sales growth, technological excellence and manufacturing capability through global expansion; | |
• | Continuing to grow through disciplined, strategic acquisitions and rigorous integration processes; | |
• | Aggressively pursuing expense reduction and cost savings through contraction in discretionary spending and capital expenditures, and reductions in workforce and production levels in response to lower production volume; | |
• | Driving free cash flow through increased net income and effective working capital management enabling continued investment in our businesses, strategic acquisitions, and enabling us to return value to our shareholders; and | |
• | Sharply curtailing costs to help counteract the current global economic downturn. |
We do not know when overall economic conditions will improve meaningfully, but we believe we are well positioned to fully participate in a market recovery when it occurs. In the meantime, we continue our aggressive efforts to maximize liquidity and reduce costs and will take additional actions as market conditions warrant.
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 noncontrolling 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. |
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Results of Operations
We were formed on November 18, 2005 and acquired our existing businesses (segments) as follows:
May 16, 2006 | August 1, 2006 | February 28, 2007 | August 31, 2007 | January 4, 2008 | ||||
Advanced Circuits Staffmark | Anodyne | HALO | American Furniture | Fox |
Consolidated Results of Operations — Compass Diversified Holdings and Compass Group Diversified Holdings LLC
Pro-forma | ||||||||||||||||
Three months | Three months | Nine months | Nine months | |||||||||||||
ended | ended | ended | ended | |||||||||||||
(in thousands) | Sept. 30, 2009 | Sept. 30, 2008 | Sept. 30, 2009 | Sept. 30, 2008 | ||||||||||||
Net sales | $ | 324,239 | $ | 413,601 | $ | 886,681 | $ | 1,163,646 | ||||||||
Cost of sales | 253,175 | 322,606 | 693,842 | 909,982 | ||||||||||||
Gross profit | 71,064 | 90,995 | 192,839 | 253,664 | ||||||||||||
Staffing, selling, general and administrative expense | 53,764 | 68,469 | 164,237 | 199,533 | ||||||||||||
Fees to manager | 3,331 | 3,758 | 9,825 | 10,953 | ||||||||||||
Supplemental put expense | (101 | ) | (765 | ) | (8,518 | ) | 5,829 | |||||||||
Amortization of intangibles | 6,168 | 6,171 | 18,614 | 18,432 | ||||||||||||
Impairment expense | — | — | 59,800 | — | ||||||||||||
Income (loss) from operations | $ | 7,902 | $ | 13,362 | $ | (51,119 | ) | $ | 18,917 | |||||||
Net sales
On a consolidated basis, net sales decreased $89.4 million and $277.0 million in the three and nine month periods ended September 30, 2009 compared to the same periods in 2008. These decreases for both the three and nine month periods in 2009 are due principally to decreased revenues at Staffmark, Advanced Circuits, Anodyne, Fox and Halo business segments offset in part by increased net sales at American Furniture. Revenues, on a proforma basis, at Staffmark decreased $72.4 million and $277.2 million during the three and nine month periods ended September 30, 2009 compared to the same periods in 2008. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of net sales by operating 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 companies. Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of those loans and, in 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 decreased approximately $69.4 million and $216.1 million in the three and nine month periods ended September 30, 2009, respectively. These decreases are due almost entirely to the corresponding decrease in net sales. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of cost of sales by operating segment.
Staffing, selling, general and administrative expense
On a consolidated basis, staffing, selling, general and administrative expense decreased approximately $14.7 million and $35.3 million in the three and nine month periods ended September 30, 2009, respectively. These decreases are largely due to cost cutting measures enacted at the operating segment level in response to the softening economy and its negative impact on sales and operating income. Additionally, costs directly tied to sales, such as commission expense, declined as a direct result of the decrease in net sales. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of staffing, selling, general and administrative expense by operating segment. At the corporate level, selling, general and administrative costs decreased approximately $0.7 million and $0.6 million in the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. This decrease is principally the result of lower costs for professional fees being incurred in 2009 in connection with Sarbanes Oxley compliance.
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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 September 30, 2009 and 2008 we incurred approximately $3.3 million and $3.8 million, respectively, in expense for these fees. For the nine-months ended September 30, 2009 and 2008 we incurred approximately $9.8 million and $11.0 million, respectively, in expense for these fees. The decrease in management fees for the nine months ended September 30, 2009 is due principally to the decrease in consolidated adjusted net assets as of September 30, 2009 resulting from the $75.0 million pay down of our Term Loan Facility with available cash in February 2009 and the $59.8 million impairment charge in 2009.
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 them upon termination of the Management Services Agreement. We reversed approximately $0.1 million and $8.5 million in non-cash charges during the three and nine months ended September 30, 2009, respectively, based on lower valuations attributed to some of our subsidiaries compared to valuations determined at the beginning of the respective period. The decrease in supplemental put expense in both the three and nine months ended September 30, 2009 compared to the same periods in 2008 is attributable to the decrease in the fair value of our businesses during 2009.
Impairment expense
Based on the results of our annual impairment tests performed as of March 31, 2009 an indication of impairment existed at the Staffmark reporting unit. In each of our other businesses (reporting units) the result of the annual goodwill impairment test indicated that the fair value of the business exceeded its carrying value. Based on the results of the second step of the impairment test at Staffmark, we estimated that the carrying value of Staffmark goodwill exceeded its fair value by approximately $50.0 million. As a result of this shortfall, we recorded a $50.0 million pretax goodwill impairment charge for the nine months ended September 30, 2009. The results of the annual impairment tests performed as of April 30, 2008 indicated that the fair values of the reporting units (businesses) exceeded their carrying values and, therefore, goodwill was not impaired. Accordingly, there were no charges for goodwill impairment in the nine months ended September 30, 2008.
In connection with the annual goodwill impairment we tested other indefinite-lived intangible assets at our Staffmark reporting unit. As a result of this analysis we determined that the carrying value exceeded the fair value of the CBS Personnel trade name, based principally on the discontinuance of the CBS Personnel trade name and rebranding of the reporting units business to Staffmark beginning in February 2009. During the nine months ended September 30, 2009, we recorded an asset impairment charge of approximately $9.8 million at the corporate level to decrease the carrying value of the CBS personnel trade name to its fair value.
Results of Operations — Our Businesses
The following discussion reflects a comparison of the historical and, where appropriate, pro-forma results of operations for each of our businesses for the three and nine month periods ending September 30, 2009 and September 30, 2008, which we believe is the most meaningful comparison in explaining the comparative financial performance of each of our businesses. The following results of operations are not necessarily indicative of the results to be expected for the full year going forward.
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 approximately two-thirds of Advanced Circuits’ gross revenues. Prototype and quick-turn PCBs typically command higher margins than volume production given that customers require high levels of responsiveness, technical support and timely delivery with respect to 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 rate 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 have remained strong in spite of lagging sales, 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 despite lagging sales in 2009 resulting from the global economic softening.
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Results of Operations
The table below summarizes the income from operations data for Advanced Circuits for the three and nine month periods ended September 30, 2009 and September 30, 2008.
Three-months ended | Nine-months ended | |||||||||||||||
(in thousands) | Sept. 30, 2009 | Sept. 30, 2008 | Sept. 30, 2009 | Sept. 30, 2008 | ||||||||||||
Net sales | $ | 11,593 | $ | 14,163 | $ | 34,356 | $ | 42,741 | ||||||||
Cost of sales | 5,007 | 5,993 | 14,661 | 18,161 | ||||||||||||
Gross profit | 6,586 | 8,170 | 19,695 | 24,580 | ||||||||||||
Selling, general and administrative expense | 2,210 | 2,750 | 5,711 | 8,372 | ||||||||||||
Fees to manager | 125 | 125 | 375 | 375 | ||||||||||||
Amortization of intangibles | 675 | 665 | 2,009 | 1,965 | ||||||||||||
Income from operations | $ | 3,576 | $ | 4,630 | $ | 11,600 | $ | 13,868 | ||||||||
Three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Net sales
Net sales for the three months ended September 30, 2009 decreased approximately $2.6 million or 18.1% over the corresponding three month period ended September 30, 2008. Decreased sales from long-lead time and sub-contract PCBs ($0.5 million), quick-turn production ($1.4 million) and prototype PCBs ($0.9 million) are responsible for this decrease. These decreases are the result of the overall economic slowdown in the economy and we expect that net sales for the remainder of fiscal 2009 will track lower than comparable periods in 2008. Sales from quick-turn and prototype PCB’s represented approximately 64.4% of gross sales in the three months ended September 30, 2009 compared to 68.0% in the same period of 2008. This decrease in the percent of gross sales in 2009 is due in large part to additional long-lead sales attributable to ACI’s add-on acquisition in the second quarter of 2009.
Cost of sales
Cost of sales for the three months ended September 30, 2009 decreased approximately $1.0 million. This decrease is principally due to the corresponding decrease in net sales. Gross profit as a percentage of sales decreased slightly to 56.8% during the three months ended September 30, 2009 compared to 57.7% during the three months ended September 30, 2008, as a result of a greater proportion of sales being derived from long-lead and subcontract activity which carry lower margins.
Selling, general and administrative expense
Selling, general and administrative expense decreased $0.5 million during the three months ended September 30, 2009 compared to the same period in 2008. This decrease is due principally to the decrease in costs during the three months ended September 30, 2009 compared to the same period in 2008 in connection with management loan forgiveness ($0.1 million) and decreases in direct labor costs and employee retention programs due principally to lower sales volume in 2009.
Income from operations
Income from operations for the three months ended September 30, 2009 was approximately $3.6 million, a decrease of $1.0 million over the same period in 2008 primarily as a result of those factors described above.
Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.
Net sales
Net sales for the nine months ended September 30, 2009 were approximately $34.4 million compared to approximately $42.7 million for the same period in 2008, a decrease of approximately $8.4 million or 19.6%. Decreased sales from long-lead time and sub-contract PCBs ($4.3 million), quick-turn production ($2.3 million) and prototype PCBs ($2.7 million) are principally responsible for this decrease. These decreases are the result of the overall economic slowdown in the economy and we expect that net sales for the remainder of fiscal 2009 will track lower than comparable periods in 2008. These decreases were offset in part by an increase in assembly sales ($0.8 million). Sales from quick-turn and prototype PCBs represented approximately 67.1% of gross sales in the nine months ended September 30, 2009 compared to 65.7% in the same period of 2008. This increase in the percent of net sales is due to the fact that these sales are impacted less by the overall economic slowdown than long-lead and subcontract sales whose end user is often the retail market.
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Cost of sales
Cost of sales for the nine months ended September 30, 2009 was approximately $14.7 million compared to approximately $18.2 million for the same period in 2008, a decrease of approximately $3.5 million or 19.3%. The decrease in cost of sales is almost entirely due to the decrease in sales. Gross profit as a percentage of sales was consistent during the nine months ended September 30, 2009 when compared to the same period in 2008 (57.3% at September 30, 2009 vs. 57.5% at September 30, 2008). Manufacturing inefficiencies resulting from the decreased volume in 2009 and an unfavorable sales mix were offset by slight decreases in raw material costs associated with commodity items such as glass, copper and gold, and a favorable sales mix in 2009.
Selling, general and administrative expense
Selling, general and administrative expense decreased approximately $2.7 million in the nine months ended September 30, 2009 compared to the same period in 2008 largely, as a result of lower loan forgiveness charges of $1.4 million including the reversal of previously accrued charges. Not taking into account the 2009 lower loan forgiveness costs, selling, general and administrative costs decreased approximately $1.3 million during the nine month period ended September 30, 2009 compared to the same period in 2008 due to decreases in direct labor costs and employee retention programs due principally to the lower sales.
Income from operations
Income from operations was approximately $11.6 million for the nine months ended September 30, 2009 compared to $13.9 million for the same period in 2008, a decrease of $2.3 million based on the 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 $999. American Furniture is a low-cost manufacturer and is able to ship any product in its line within 48 hours of receiving an order.
American Furniture’s products are adapted from established designs in the following categories: (i) motion and recliner; (ii) stationary; (iii) occasional chair and (iv) accent tables. 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 the income from operations data for American Furniture for the three and nine month periods ended September 30, 2009 and September 30, 2008.
Three-months ended | Nine-months ended | |||||||||||||||
(in thousands) | Sept. 30, 2009 | Sept. 30, 2008 | Sept. 30, 2009 | Sept. 30, 2008 | ||||||||||||
Net sales | $ | 33,039 | $ | 31,386 | $ | 108,623 | $ | 99,827 | ||||||||
Cost of sales | 26,761 | 25,290 | 87,072 | 79,026 | ||||||||||||
Gross profit | 6,278 | 6,096 | 21,551 | 20,801 | ||||||||||||
Selling, general and administrative expense | 4,262 | 5,011 | 13,659 | 13,073 | ||||||||||||
Fees to manager | 125 | 125 | 375 | 375 | ||||||||||||
Amortization of intangibles | 671 | 733 | 2,138 | 2,200 | ||||||||||||
Income from operations | $ | 1,220 | $ | 227 | $ | 5,379 | $ | 5,153 | ||||||||
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Three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Net sales
Net sales for the three months ended September 30, 2009 increased approximately $1.7 million or 5.3% compared to the corresponding three months ended September 30, 2008. Stationary product sales increased approximately $3.0 million which was offset in part by a decrease in motion and recliner sales totaling approximately $0.9 million and occasional and accent sales of $0.4 million. The increase in net sales of stationary product is principally due to the inability to ship product in 2008 as a result of the lack of product resulting from the fire that destroyed the finished goods warehouse and most of the manufacturing facilities in February 2008. The decrease in net sales of motion and recliner product in 2009 is the result of the continuing soft retail environment in those more expensive retail categories. Stationary product represented 68% of net sales in the third quarter of 2009 compared to 60% in 2008.
Cost of sales
Cost of sales increased approximately $1.5 million in the three months ended September 30, 2009 compared to the same period of 2008 and is principally due to the corresponding increase in sales. Gross profit as a percentage of sales was 19.0% in the three months ended September 30, 2009 compared to 19.4% in the corresponding period in 2008. The decrease in gross profit as a percent of sales of 0.4% for the three months ended September 30, 2009 is attributable to an increase in third-party shipping cost ($0.9 million) offset in part by labor efficiencies achieved due to the increased volume and the new building and, incremental business interruption proceeds recorded in the three months ended September 30, 2009 ($0.2 million). During the quarter ended September 30, 2009 management estimates that it utilized third-party carriers for approximately 70% of its customer shipments compared to approximately 50% in the quarter ended September 30, 2008.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2009 decreased approximately $0.7 million compared to the same period in 2008. This decrease is largely a product of the business interruption insurance proceeds recorded during 2008 totaling approximately $0.3 million (none was recorded in selling, general and administrative expense in 2009), offset by a reduction in in-house shipping costs totaling $1.1 million in 2009 as a larger percentage of customer shipments were carried by third-party carriers during the three months ended September 30, 2009 compared to 2008.
Income from operations
Income from operations increased approximately $1.0 million to $1.2 million for the three months ended September 30, 2009 compared to $0.2 million in the three months ended September 30, 2008 due principally to the increase in net sales and to other factors as described above.
Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.
Net sales
Net sales for the nine months ended September 30, 2009 increased $8.8 million or 8.8% compared to the corresponding nine months ended September 30, 2008. Stationary product sales increased $13.8 million in the 2009 period and motion and recliner product sales decreased approximately $2.3 million and occasional and accent sales decreased approximately $1.7 million. The increase in net sales of stationary product is principally due to our inability to ship product in 2008 as a result of the lack of product resulting from the fire that destroyed the finished goods warehouse and most of the manufacturing facilities in February 2008. The decrease in net sales of motion and recliner product is the result of the continuing soft retail environment in those more expensive retail categories. Stationary product represented 68% of net sales in the first nine months of 2009 compared to 60% in the same period of 2008.
Cost of sales
Cost of sales increased approximately $8.0 million in the nine months ended September 30, 2009 compared to the same period of 2008 due principally to the corresponding increase in sales. Gross profit as a percentage of sales was 19.8% in the nine months ended September 30, 2009 compared to 20.8% in the corresponding period in 2008. The reduction of gross profit as a percent of sales of 1.0% in 2009 is attributable to increases in 2009 for : (i) raw material costs ($1.0 million), (ii) third-party shipping costs ($2.0 million) offset in part by (i) labor efficiencies achieved due to the increased volume and the new building and (ii) incremental business interruption proceeds ($0.2 million). During 2009, management estimates that it utilized third-party carriers for approximately 70% of its customer shipments compared to approximately 50% in 2008.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2009 increased approximately $0.6 million compared to the same period of 2008. This increase is largely a product of the business interruption insurance proceeds recorded during 2008 totaling approximately $3.1 million (none was recorded in selling, general and administrative expense in 2009), offset by a reduction in in-house shipping costs totaling $2.9 million in 2009 and increases in advertising, marketing and commission expense totaling $0.6 million in 2009.
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Income from operations
Income from operations increased approximately $0.2 million to $5.4 million for the nine months ended September 30, 2009 compared to $5.2 million for the nine months ended September 30, 2008 primarily due to the increase in sales and other factors as described above.
Anodyne Medical Device
Overview
Anodyne, with operations headquartered in Coral Springs, Florida, 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.
The Anodyne group of companies includes SenTech Medical Systems (“SenTech”), AMF Support Surfaces (“AMF”), PrimaTech Medical Systems (“PrimaTech”) and Anatomic Concepts (“Anatomic”). Anodyne’s consolidation of these companies marks the medical support surface industry’s first opportunity to source all therapeutic surface technologies from a single fully integrated supplier.
Anodyne develops products both independently and in partnership with large distribution intermediaries. Medical distribution companies then sell or rent the Anodyne portfolio of products to one of three end markets: (i) hospitals, (ii) long term care facilities and (iii) home health care organizations. The level of sophistication largely varies for each product, as some customers require simple foam surfaces (“non-powered”) while others may require electronically controlled, low air loss, lateral rotation, pulmonary therapy or alternating pressure surfaces (“powered”). 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 Food and Drug Administration (“FDA”) compliant.
Results of Operations
The table below summarizes the income from operations data for Anodyne for the three and nine month periods ended September 30, 2009 and September 30, 2008.
Three-months ended | Nine-months ended | |||||||||||||||
(in thousands) | Sept. 30, 2009 | Sept. 30, 2008 | Sept. 30, 2009 | Sept. 30, 2008 | ||||||||||||
Net sales | $ | 13,868 | $ | 16,510 | $ | 39,479 | $ | 40,954 | ||||||||
Cost of sales | 9,657 | 12,650 | 27,836 | 30,573 | ||||||||||||
Gross profit | 4,211 | 3,860 | 11,643 | 10,381 | ||||||||||||
Selling, general and administrative expense | 1,644 | 1,670 | 5,289 | 5,718 | ||||||||||||
Fees to manager | 88 | 87 | 263 | 263 | ||||||||||||
Amortization of intangibles | 371 | 370 | 1,112 | 1,112 | ||||||||||||
Income from operations | $ | 2,108 | $ | 1,733 | $ | 4,979 | $ | 3,288 | ||||||||
Three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Net sales
Net sales for the three months ended September 30, 2009 decreased approximately $2.6 million or 16.0% over the corresponding three months ended September 30, 2008. Sales of non-powered products totaled $11.2 million during the three-months ended September 30, 2009 a decrease of $0.1 million compared to the same period in 2008. Non-powered sales attributable to new product offerings were $1.4 million in the quarter ended September 30, 2009. Sales of powered products totaled $2.6 million during the three months ended September 30, 2009, a $2.5 million decrease when compared to the same period in 2008. The significant decrease in powered sales in 2009 reflects the substantial cutbacks in healthcare institutional spending during the period, particularly in higher priced, more capital intensive products. We believe that these purchasing levels have stabilized and will remain at these lower levels through fiscal 2009.
Cost of sales
Cost of sales decreased approximately $3.0 million in the three months ended September 30, 2009 compared to the same period of 2008, primarily due to the decline in third quarter sales. Gross profit as a percentage of sales was 30.4% in the three months ended
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September 30, 2009 compared to 23.4% in the corresponding period in 2008. The increase in gross profit as a percentage of sales of 7.0% in 2009 is principally due to (i) a favorable sales mix in 2009, (ii) lower raw material costs in 2009 compared to 2008, (iii) labor and material manufacturing efficiencies realized in 2009, particularly as it related to some new product sales in 2008, and (iv) a reduction in manufacturing overhead.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2009 decreased slightly compared to the same period in 2008. Savings resulting from a reduction in costs associated with the elimination of the Hollywood Capital management services agreement of approximately $0.1 million during the three months ended September 30, 2009 were offset by higher product development costs.
Income from operations
Income from operations increased approximately $0.4 million to $2.1 million for the three months ended September 30, 2009 compared to $1.7 million during the three months ended September 30, 2008, due principally to those factors described above.
Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.
Net sales
Net sales for the nine months ended September 30, 2009 decreased approximately $1.5 million or 3.6% over the corresponding nine months ended September 30, 2008. Sales of non-powered products totaled $30.5 million during the nine-months ended September 30, 2009 an increase of $4.5 million compared to the same period in 2008. Non-powered sales attributable to new product offerings were $4.5 million for the nine-months ended September 30, 2009. Sales of powered products totaled $9.0 million during the nine-months ended September 30, 2009, a $6.0 million decrease when compared to the same period in 2008. The significant decrease in powered sales in 2009 reflects the substantial cutbacks in healthcare institutional spending during the period, particularly in higher priced, more capital intensive products. We believe that these purchasing levels have stabilized and will remain at these lower levels through fiscal 2009.
Cost of sales
Cost of sales decreased approximately $2.7 million in the nine months ended September 30, 2009 compared to the same period of 2008, primarily due to the decrease in net sales. Gross profit as a percentage of sales was 29.5% in the nine months ended September 30, 2009 compared to 25.3% in the corresponding period in 2008. The increase in gross profit as a percentage of sales of 4.2% in 2009 is principally due to (i) a favorable sales mix in 2009, (ii) lower raw material costs coupled with higher selling prices in 2009, (iii) labor and material manufacturing efficiencies realized in 2009, particularly as it related to some new product sales in 2008 and (iv) reductions in manufacturing overhead.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2009 decreased approximately $0.4 million compared to the same period of 2008. This decrease is principally the result of a reduction in costs ($0.6 million) associated with the Hollywood Capital management services agreement incurred in 2008. This agreement was terminated in October 2008. These savings were offset in part by higher new product development costs.
Income from operations
Income from operations for the nine months ended September 30, 2009 increased approximately $1.7 million to $5.0 million compared to $3.3 million in the corresponding period in 2008, due principally to those factors described above.
Fox Factory
Overview
Founded in 1974 and headquartered in Watsonville, 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 both acts as a tier one supplier to leading action sport original equipment manufacturers (OEM) and provides aftermarket products to retailers and distributors. Fox’s products are recognized as the industry’s performance leaders by retailers and end-users alike.
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Results of Operations
The table below summarizes the income from operations data for Fox Factory for the three and nine month periods ended September 30, 2009 and September 30, 2008.
Three-months ended | Nine-months ended | |||||||||||||||
(in thousands) | Sept. 30, 2009 | Sept. 30, 2008 | Sept. 30, 2009 | Sept. 30, 2008 | ||||||||||||
Net sales | $ | 36,910 | $ | 43,326 | $ | 86,870 | $ | 101,178 | ||||||||
Cost of sales | 26,264 | 30,631 | 62,523 | 73,468 | ||||||||||||
Gross profit | 10,646 | 12,695 | 24,347 | 27,710 | ||||||||||||
Selling, general and administrative expense | 4,486 | 4,853 | 14,152 | 13,768 | ||||||||||||
Fees to manager | 125 | 125 | 375 | 371 | ||||||||||||
Amortization of intangibles | 1,304 | 1,304 | 3,913 | 4,196 | ||||||||||||
Income from operations | $ | 4,731 | $ | 6,413 | $ | 5,907 | $ | 9,375 | ||||||||
Three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Net sales
Net sales for the three months ended September 30, 2009 decreased $6.4 million or 14.8% compared to the corresponding three month period ended September 30, 2008. The decrease in net sales are a result of decreases in sales to OEMs totaling $4.4 million, coupled with a decrease in aftermarket and service revenues totaling $2.0 million. The decrease in sales is attributable to the continued weak economic conditions and credit tightening in 2009. OEM sales represented 80.7% and 78.9% of net sales during the three months ended September 30, 2009 and September 30, 2008, respectively.
Cost of sales
Cost of sales for the three months ended September 30, 2009 decreased $4.4 million or 14.3% compared to the corresponding period in 2008. The decrease in cost of sales is primarily attributable to the decrease in net sales for the same period. Gross profit as a percentage of sales decreased during the three months ended September 30, 2009 (28.8% at September 30, 2009 vs. 29.3% at September 30, 2008) largely due to an unfavorable sales mix, in that a larger proportion of sales in the three months ended September 30, 2009 were OEM sales which typically earn lower margins, and to a lesser extent less than optimal manufacturing efficiencies realized during the 2009 quarter due to the lower volume.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2009 decreased $0.4 million compared to the corresponding period in 2008. This decrease is largely the result of decreased bonus cost and marketing expense totaling approximately $0.2 million and other factors.
Income from operations
Income from operations for the three months ended September 30, 2009 decreased approximately $1.7 million to $4.7 million compared to $6.4 million in the corresponding period in 2008 based principally on the decrease in net sales and other factors described above.
Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.
Net sales
Net sales for the nine months ended September 30, 2009 decreased $14.3 million or 14.1% compared to the corresponding period in 2008. The decrease in net sales was driven by reduced sales to OEM’s, which decreased by $11.9 million or 15.6%, and reduced aftermarket sales, which decreased $2.4 million. The decrease in sales is attributable to the continuing weak economic conditions and credit tightening in 2009. OEM sales represented 74.9% and 75.8% of net sales during the nine months ended September 30, 2009 and 2008, respectively.
Cost of sales
Cost of sales for the nine months ended September 30, 2009 decreased $10.9 million or 14.9% compared to the corresponding period in 2008. The decrease in cost of sales is primarily attributable to the decrease in net sales for the same period. Gross profit as
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a percentage of sales increased during the nine months ended September 30, 2009 (28.0% at September 30, 2009 vs. 27.4% at September 30, 2008) due to a favorable sales mix as a larger proportion of our sales were in the aftermarket category which typically carry higher margins than OEMs, and to a lesser extent a reduction in expedited freight costs due to more efficient procurement procedures in 2009 compared to 2008.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2009 increased $0.4 million compared to the corresponding period in 2008. This increase is primarily the result of increases in engineering and sales costs.
Amortization of intangibles
Amortization expense for the nine months ended September 30, 2009 decreased $0.3 million compared to the corresponding period in 2008. The decrease is attributable to an intangible asset recorded as part of the initial purchase price allocation in 2008 that was fully amortized during the nine months ended September 30, 2008.
Income from operations
Income from operations for the nine months ended September 30, 2009 decreased approximately $3.5 million to $5.9 million compared to $9.4 million in the same period in 2008 based principally on the decrease in net sales and other factors described above.
Halo
Overview
Operating under the brand names of HALO and Lee Wayne, headquartered in Sterling, Illinois, HALO is an independent provider of customized drop-ship promotional products in the U.S. Through an extensive group of dedicated sales professionals, HALO serves as a one-stop shop for over 40,000 customers throughout the U.S. HALO is involved in the design, sourcing, management and fulfillment of promotional products across several product categories, including apparel, calendars, writing instruments, drink ware and office accessories. HALO’s sales professionals work with customers and vendors to develop the most effective means of communicating a logo or marketing message to a target audience. Approximately 90% of Halo’s products sold are drop shipped, resulting in minimal inventory risk. HALO has established itself as a leader in the promotional products and marketing industry through its focus on service through its approximately 1,000 account executives.
Distribution of promotional products is seasonal. Typically, HALO expects to realize approximately 45% of its sales and 70% of its operating income in the months of September through December, due principally to calendar sales and corporate holiday promotions.
Results of Operations
The table below summarizes the income from operations data for HALO for the three and nine month periods ended September 30, 2009 and September 30, 2008:
Three-months ended | Nine-months ended | |||||||||||||||
(in thousands) | Sept. 30, 2009 | Sept. 30, 2008 | Sept. 30, 2009 | Sept. 30, 2008 | ||||||||||||
Net sales | $ | 35,545 | $ | 42,571 | $ | 91,717 | $ | 107,138 | ||||||||
Cost of sales | 21,859 | 26,751 | 56,537 | 67,416 | ||||||||||||
Gross profit | 13,686 | 15,820 | 35,180 | 39,722 | ||||||||||||
Selling, general and administrative expense | 12,202 | 13,799 | 34,291 | 36,562 | ||||||||||||
Fees to manager | 125 | 125 | 375 | 375 | ||||||||||||
Amortization of intangibles | 637 | 611 | 1,909 | 1,746 | ||||||||||||
Income (loss) from operations | $ | 722 | $ | 1,285 | $ | (1,395 | ) | $ | 1,039 | |||||||
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Three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Net sales
Net sales for the three months ended September 30, 2009 decreased approximately $7.0 million or 16.5% from the corresponding three months ended September 30, 2008. Net sales attributable to acquisitions made since July 1, 2008 accounted for approximately $2.7 million in net sales during the three months ended September 30, 2009. Sales to existing accounts decreased approximately $9.7 million or 22.8% during the three months ended September 30, 2009 compared to the same period in 2008. This significant decrease in sales is attributable to a reduction in advertising and merchandising spending by Halo’s corporate customers in response to the impact of the current economic conditions. The decrease is being experienced across all product lines and customer types and we expect that sales will continue to lag significantly behind 2008 results through the remainder of the 2009 fiscal year.
Cost of sales
Cost of sales for the three months ended September 30, 2009 decreased approximately $4.9 million. The decrease in cost of sales is primarily attributable to the decrease in net sales for the same period. Gross profit as a percentage of net sales totaled approximately 38.5% and 37.2% of net sales for the three-month periods ended September 30, 2009 and September 30, 2008, respectively. The increase in gross profit as a percentage of sales is attributable to a favorable sales mix and increases in supplier rebates during the quarter ended September 30, 2009, reflecting the continued focus of the sales force to maintain profit margins in the face of a challenging economy.
Selling, general and administrative expense
Selling, general and administrative expense for the three months ended September 30, 2009, decreased approximately $1.6 million compared to the same period in 2008. This decrease is largely the result of decreased direct commission expense as a result of the decline in net sales ($1.1 million) and decreases in staffing costs and associated benefits ($0.3 million) resulting from management’s effort to align these costs with the reduction in sales volume.
Income from operations
Income from operations decreased $0.6 million in the three months ended September 30, 2009 to $0.7 million compared to $1.3 million in the three months ended September 30, 2008, based on the factors described above, particularly the decline in net sales.
Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.
Net sales
Net sales for the nine months ended September 30, 2009 decreased approximately $15.4 million or 14.4% compared to the corresponding period in 2008. Net sales attributable to acquisitions made since January 1, 2008 accounted for approximately $9.2 million in net sales during the nine months ended September 30, 2009 while sales to existing customers decreased $24.6 million or 26.2% during this same period. This significant decrease in sales is attributable to a reduction in advertising and merchandising spending by Halo’s corporate customers in response to the impact of current economic conditions. The decrease is being experienced across all product lines and customer types and we expect that sales will continue to lag significantly behind 2008 results through the remainder of the fiscal year.
Cost of sales
Cost of sales for the nine months ended September 30, 2009 decreased approximately $10.9 million compared to the same period in 2008. The decrease in cost of sales is primarily attributable to the decrease in net sales for the same period. Gross profit as a percentage of net sales totaled approximately 38.4% and 37.1% of net sales for the nine month periods ended September 30, 2009 and September 30, 2008, respectively. The increase in gross profit as a percentage of sales in 2009 is attributable to a favorable sales mix coupled with greater supplier rebates during 2009, which reflects the continued focus of the sales force to maintain profit margins in the face of a challenging economy. In addition, a more favorable freight structure implemented during the nine months ended September 30, 2009 also contributed to the increased profit margins.
Selling, general and administrative expense
Selling, general and administrative expense for the nine months ended September 30, 2009 decreased approximately $2.3 million. This decrease is largely the result of decreased direct commission expense as a result of the decline in net sales ($2.6 million) offset in part by increased health insurance costs.
Amortization of intangibles
Amortization expense increased approximately $0.2 million in the nine months ended September 30, 2009 compared to the same period in 2008. This increase is due to additional amortization costs in 2009 resulting from recent acquisitions.
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Income (loss) from operations
Loss from operations was approximately $1.4 million during the nine months ended September 30, 2009 compared to income from operations of $1.0 million during the nine months ended September 30, 2008. This decrease totaling $2.4 million is principally the result of the decline in net sales and other factors described above.
Staffmark
Overview
Staffmark (formerly known as CBS Personnel), a provider of temporary staffing services in the United States, provides a wide range of human resources services, including temporary staffing services, employee leasing services, and permanent staffing and temporary-to-permanent placement services. Staffmark serves over 6,500 corporate and small business clients and during an average week places over 31,000 employees in a broad range of industries, including manufacturing, transportation, retail, distribution, warehousing, automotive supply, and construction, industrial, healthcare and financial sectors.
Staffmark’s business strategy includes maximizing production in existing offices, increasing the number of offices within a market when conditions warrant, and expanding organically into contiguous markets where it can benefit from shared management and administrative expenses. Staffmark typically enters into new markets through acquisition. In keeping with these strategies, effective January 21, 2008, CBS Personnel acquired all of the ongoing equity interests of Staffmark Investment LLC and its subsidiaries. This acquisition gave Staffmark a presence in Arkansas, Tennessee, Colorado, Oklahoma, and Arizona, while significantly increasing its presence in California, Texas, the Carolinas, New York and the New England area. While no specific acquisitions are currently contemplated at this time, Staffmark continues to view acquisitions as an attractive means to enter new geographic markets.
Fiscal 2008 was a very difficult year for the temporary staffing industry. The already-weak economic conditions and employment trends in the U.S., present at the start of 2008, continued to worsen as the year progressed and have continued into 2009. We have recently experienced improvements in weekly revenues.
According to the U.S. Bureau of Labor Statistics, since the recession began in December 2007, 7.2 million jobs have been lost. From May 2009 through September 2009, job losses have averaged 307,000 per month, compared with losses averaging 645,000 per month from November 2008 through April 2009.
Results of Operations
The table below summarizes the income from operations data for Staffmark for the three month periods ended September 30, 2009 and September 30, 2008 and income from operations data for the nine-month period ended September 30, 2009 and the pro forma income from operations data for the nine month period ended September 30, 2008, prepared as if Staffmark was acquired on January 1, 2008. CBS personnel acquired Staffmark on January 21, 2008.
Three-months ended | Nine-months ended | |||||||||||||||
(in thousands) | Sept. 30, 2009 | Sept. 30, 2008 | Sept. 30, 2009 | Sept. 30, 2008 | ||||||||||||
(pro forma) | ||||||||||||||||
Service revenues | $ | 193,284 | $ | 265,645 | $ | 525,636 | $ | 802,881 | ||||||||
Cost of services | 163,631 | 221,296 | 445,224 | 667,845 | ||||||||||||
Gross profit | 29,653 | 44,349 | 80,412 | 135,036 | ||||||||||||
Staffing, selling, general and administrative expense | 27,200 | 37,967 | 85,042 | 120,324 | ||||||||||||
Fees to manager | 239 | 314 | 659 | 982 | ||||||||||||
Amortization of intangibles | 1,213 | 1,289 | 3,640 | 3,866 | ||||||||||||
Impairment expense | — | — | 50,000 | — | ||||||||||||
Income (loss) from operations | $ | 1,001 | $ | 4,779 | $ | (58,929 | ) | $ | 9,864 | |||||||
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Three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Revenues
Revenues for the three months ended September 30, 2009 decreased $72.4 million or 27.2% compared to the corresponding three months ended September 30, 2008. This reduction in revenues reflects reduced demand for temporary staffing services (primarily clerical and light industrial) as a result of the significant downturn in the economy and its impact on temporary staffing. Approximately $1.8 million of the decrease is related to lower revenues for permanent staffing services as clients were affected by weaker economic conditions. We have experienced improvement in weekly revenues over the course of the quarter ended September 30, 2009. However, until we witness sustained temporary staffing job creation and signs of a strengthening global economy, we expect to continue to experience depressed revenues, through fiscal 2009.
Cost of services
Direct cost of service revenues for the three months ended September 30, 2009 decreased approximately $57.7 million compared to the same period in 2008. This decrease is principally the direct result of the decrease in service revenues. Gross profit as a percentage of revenues was approximately 15.3% and 16.7% for the three-month periods ended September 30, 2009 and September 30, 2008, respectively. The majority of the 1.4% decrease in gross margin is attributable to reduced permanent staffing services, which carries a significantly higher profit margin than temporary staffing services. Additionally, we continue to be negatively impacted by downward pricing pressure based on client demand brought on by current economic conditions.
Staffing, selling, general and administrative expense
Staffing, selling, general and administrative expense for the three months ended September 30, 2009, decreased approximately $10.8 million compared with the same period in 2008. Management has continued to take measures to reduce overhead costs, consolidate facilities and close unprofitable branches in order to mitigate the negative impact that the current economic environment is having on top-line revenues. This cost reduction program will continue through fiscal 2009. Additionally, we incurred approximately $1.4 million in one-time, non-recurring expenses in the three months ended September 30, 2008 related to the integration of the Staffmark acquisition. In the same period in 2009, we incurred only $0.2 million in non-recurring costs.
Income from operations
Income from operations decreased approximately $3.8 million to $1.0 million for the three months ended September 30, 2009 compared to $4.8 million in the three months ended September 30, 2008 based on the significant decline in revenues and other factors described above.
Nine months ended September 30, 2009 compared to the pro forma nine months ended September 30, 2008.
Revenues
Revenues for the nine months ended September 30, 2009 decreased approximately $277.2 million or 34.5% compared to the corresponding nine months ended September 30, 2008. This reduction in revenues reflects reduced demand for temporary staffing services (primarily clerical and light industrial) as a result of the significant downturn in the economy. Approximately $6.4 million of the decrease is related to declining revenues for permanent staffing services as clients were negatively affected by weaker economic conditions. Based on current economic conditions, we expect to continue to experience depressed revenues, through fiscal 2009.
Cost of services
Direct cost of service revenues for the nine months ended September 30, 2009 decreased approximately $222.6 million compared to the same period in 2008. This decrease is principally the direct result of the decrease in service revenues. Gross profit as a percentage of revenues was approximately 15.3% and 16.8% for the nine-month periods ended September 30, 2009 and September 30, 2008, respectively. The majority of the 1.5% decrease in gross margin is the result of reduced permanent staffing services, which carries a significantly higher profit margin than temporary staffing services. In addition, we continue to be impacted by downward pricing pressure based on client demand brought on by current economic conditions.
Staffing, selling, general and administrative expense
Staffing, selling, general and administrative expense for the nine months ended September 30, 2009 decreased approximately $35.3 million compared to the same period in 2008. Management has taken measures to reduce overhead costs, consolidate facilities and close unprofitable branches in order to mitigate the negative impact that the current weak economic environment is having on top-line revenues. This cost reduction program will continue through the remainder of fiscal 2009. We incurred approximately $2.0 million and approximately $4.8 million in costs during the nine-month periods ended September 30, 2009 and September 30, 2008, respectively, for one-time, non-recurring expenses related to the integration of the Staffmark and CBS Personnel operations and the restructuring of the organization.
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Impairment expense
Based on the results of our annual goodwill impairment test performed as of March 31, 2009, an indication of goodwill impairment existed. Based on the results of the second step of the goodwill impairment test, we calculated that the carrying amount of goodwill exceeded its fair value by approximately $50.0 million. Therefore, we recorded a $50.0 million pretax goodwill impairment charge during the nine-month period ended September 30, 2009. The carrying amount of goodwill exceeded the fair value due to the recent and projected significant decrease in revenue and operating profit at Staffmark resulting from the negative impact on temporary staffing and permanent placement revenues due to the depressed macroeconomic conditions and downward employment trends.
Income (loss) from operations
Income (loss) from operations decreased approximately $68.8 million to a loss from operations of $58.9 million for the nine months ended September 30, 2009 compared to income from operations of approximately $9.9 million for the nine months ended September 30, 2008 primarily related to the goodwill impairment charge and the significant decline in revenues, coupled with other factors described above.
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Liquidity and Capital Resources
For the nine months ended September 30, 2009, on a consolidated basis, cash flows provided by operating activities totaled approximately $21.4 million, which represents a $4.4 million decrease in cash flows provided by operating activities compared to the nine-month period ended September 30, 2008 and is principally the result of the reduction in sales and operating profits of our businesses. Consolidated net income (loss), adjusted for non-cash activity decreased approximately $21.4 million for the nine months ended September 30, 2009 compared to the same period in 2008. This decrease was offset in part by cash flows provided by net positive changes to operating assets and liabilities of $17.0 million during these same periods. The decline in consolidated net sales, production levels and operating profit, due principally to the current depressed economic environment, all contributed to these negative variances.
Cash flows used in investing activities totaled approximately $3.6 million for the nine months ended September 30, 2009, which reflects approximately $2.4 million in capital expenditures and $1.4 million in add-on acquisition costs at Advanced Circuits and Halo, offset in part by proceeds from asset sales totaling approximately $0.2 million.
Cash flows used in financing activities totaled approximately $68.3 million for the nine months ended September 30, 2009, principally reflecting: (i) distributions paid to shareholders during the year totaling approximately $33.9 million; (ii) scheduled amortization of our Term Loan Facility of $1.5 million; and (iii) repayment of our Term Loan Facility of $75.0 million together with $2.5 million in cancellation fees paid for terminating that portion of an interest rate swap connected to the Term Loan Facility repaid. These cash outflows were offset in part by net proceeds from our June 2009 stock offering totaling $42.1 million and net proceeds received from non-controlling shareholders totaling $2.5 million during 2009.
At September 30, 2009 we had approximately $47.0 million of cash and cash equivalents on hand. The majority of our cash is invested in short-term U.S. government securities and corporate debt securities and is maintained in accordance with the Company’s investment policy, which identifies allowable investments and specifies credit quality standards. The primary objective of our investment activities is the preservation of principal and minimizing risk. We do not hold any investments for trading purposes.
We had the following outstanding loans due from each of our businesses at September 30, 2009:
• | Advanced Circuits — $51.4 million; | |
• | American Furniture — $70.4 million; | |
• | Anodyne — $17.9 million; | |
• | Staffmark — $67.5 million; | |
• | Fox Factory — $50.5 million; and | |
• | HALO — $48.1 million. |
Each loan has a scheduled maturity and each business is entitled to repay all or a portion of the principal amount of the outstanding loans, without penalty, prior to maturity.
In April 2009 we amended the Staffmark inter-company credit agreement which, among other things, recapitalized a portion of Staffmark’s long-term debt by exchanging $35.0 million of the debt for common stock in Staffmark. A noncontrolling shareholder participated in this exchange. As a result of this transaction we currently own 75.6% of the outstanding common stock of Staffmark on a primary basis and 73.3% on a fully diluted basis.
In September 2009 Anodyne redeemed outstanding shares of Anodyne stock from a noncontrolling shareholder for approximately $3.0 million. After this transaction our ownership of Anodyne increased to 74.4% on a primary basis and 66.1% on a fully diluted basis.
Our primary source of cash is from the receipt of interest and principal on our 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 Agreement; (iii) payments to CGM due or potentially 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.
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We reversed non-cash charges to earnings of approximately $8.5 million during the nine-months ended September 30, 2009 in order to recognize a reduction in our estimated liability in connection with the Supplemental Put Agreement between us and CGM. A non-current liability of approximately $4.9 million is reflected in our Condensed Consolidated Balance Sheet, which represents our estimated liability for this obligation at September 30, 2009.
We believe that we currently have sufficient liquidity and capital resources to meet our existing obligations, including quarterly distributions to our shareholders, as periodically approved by our Board of Directors over the next twelve months. We have considered the impact of recent market instability and credit availability in assessing the adequacy of our liquidity and capital resources.
Our Credit Agreement provides for a Revolving Credit Facility totaling $340 million which matures in December 2012 and a Term Loan Facility totaling $76.5 million, which matures in December 2013. At September 30, 2009 we had outstanding borrowings of $0.5 million under the Revolving Credit Facility portion of our Credit Agreement. At September 30, 2009 we had $76.5 million outstanding under the Term Loan Facility portion of our Credit Agreement after repaying $75.0 million of the outstanding Term Loan Facility on February 23, 2009, and quarterly amortizations. The Term Loan Facility requires quarterly payments of $0.5 million, which commenced March 31, 2008, with a final payment of the outstanding principal balance due on December 7, 2013. The Credit Agreement permits us to increase the amount available under the Revolving Credit Facility by up to $10 million and the Term Loan Facility by up to $145 million, subject to certain restrictions and Lender approval. This option to increase both the Revolving Credit Facility and the Term Loan Facility expires on December 7, 2009.
On January 22, 2008 we entered into a three-year interest rate swap agreement with a bank, fixing the rate of $140 million at 7.35% on a like amount of variable rate Term Loan Facility borrowings. The interest rate swap was intended to mitigate the impact of fluctuations in interest rates and effectively converts $140 million of our floating-rate Term Loan Facility Debt to a fixed- rate basis for a period of three years. In February 2009 we repaid $75.0 million of our Term Loan Facility and as a result terminated $70 million of the outstanding interest rate swap. In connection with this debt repayment we reclassified $2.5 million from accumulated other comprehensive loss into current period earnings and expensed $1.2 million of capitalized debt issuance costs.
On June 9, 2009 we completed a public offering of 5.1 million Trust shares at $8.85 per share raising $45.1 million in gross proceeds ($42.1 million in net proceeds).
We had approximately $155.9 million in borrowing base availability under our Revolving Credit Facility at September 30, 2009. Letters of credit totaling $66.2 million were outstanding at September 30, 2009.
We intend to use the availability under our Credit Agreement and cash on hand to pursue acquisitions of additional businesses to the extent permitted under our Credit Agreement, to fund distributions, acquire new businesses and to provide for other working capital needs.
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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 cash flow available for distribution and reinvestment (“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.
Nine months | Nine months | |||||||
ended | ended | |||||||
Sept. 30, 2009 | Sept. 30, 2008 | |||||||
(in thousands) | (unaudited) | (unaudited) | ||||||
Net income (loss) | $ | (39,595 | ) | $ | 79,361 | |||
Adjustment to reconcile net income (loss) to cash provided by operating activities | ||||||||
Gain on sale of businesses | — | (72,932 | ) | |||||
Depreciation and amortization | 24,989 | 26,552 | ||||||
Supplemental put expense (reversal) | (8,518 | ) | 5,829 | |||||
Noncontrolling interest and stockholder charges | 1,378 | 2,492 | ||||||
Impairment expense | 59,800 | — | ||||||
Deferred taxes | (28,107 | ) | (7,010 | ) | ||||
Amortization of debt issuance costs | 1,343 | 1,473 | ||||||
Loss on debt repayment | 3,652 | — | ||||||
Other | (254 | ) | 296 | |||||
Changes in operating assets and liabilities | 6,746 | (10,205 | ) | |||||
Net cash provided by operating activities | 21,434 | 25,856 | ||||||
Add (deduct): | ||||||||
Unused fee on revolving credit facility (1) | 2,581 | 2,255 | ||||||
Staffmark integration and restructuring expenses | 4,022 | 6,476 | ||||||
Changes in operating assets and liabilities | (6,746 | ) | 10,205 | |||||
Less: | ||||||||
Maintenance capital expenditures(2) | ||||||||
Advanced Circuits | 159 | 1,002 | ||||||
Aeroglide | — | 210 | ||||||
American Furniture | 488 | 173 | ||||||
Anodyne | 395 | 1,220 | ||||||
Staffmark | 400 | 1,196 | ||||||
Fox | 334 | 1,185 | ||||||
Halo | 405 | 410 | ||||||
Estimated cash flow available for distribution and reinvestment | $ | 19,110 | $ | 39,396 | ||||
Distribution paid — April of 2009 and 2008 | $ | 10,719 | $ | 10,246 | ||||
Distribution paid — July of 2009 and 2008 | 12,452 | 10,246 | ||||||
Distribution paid — October of 2009 and 2008 | 12,452 | 10,719 | ||||||
$ | 35,623 | $ | 31,211 | |||||
(1) | Represents the commitment fee on the unused portion of the Revolving Credit Facility. | |
(2) | Represents maintenance capital expenditures that were funded from operating cash flow and excludes approximately $3.2 million of growth capital expenditures for the nine months ended September 30, 2008. The 2008 growth capital expenditures consists of $1.6 million for the new Silvue corporate office facility and $1.6 million related to Staffmark. |
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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. Cash flows from Staffmark are typically lower in the first quarter of each year than in other quarters due to: (i) reduced seasonal demand for temporary staffing services and (ii) lower gross margins earned during that period due to the front-end loading of certain payroll taxes and other costs associated with payroll paid to our employees. Cash flows from HALO are typically highest in the months of September through December of each year primarily as the result of calendar sales and holiday promotions. HALO generates approximately two-thirds of its operating income in the months of September through December.
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 September 30, 2009:
More than | ||||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
Long-term debt obligations (a) | $ | 110,676 | $ | 10,543 | $ | 20,819 | $ | 79,315 | $ | — | ||||||||||
Capital lease obligations | 1,288 | 485 | 425 | 378 | — | |||||||||||||||
Operating lease obligations (b) | 47,184 | 12,214 | 15,671 | 8,065 | 11,235 | |||||||||||||||
Purchase obligations (c) | 140,514 | 84,118 | 29,736 | 26,659 | — | |||||||||||||||
Supplemental put obligation (d) | 4,893 | — | — | — | — | |||||||||||||||
$ | 304,555 | $ | 107,360 | $ | 66,651 | $ | 114,417 | $ | 11,235 | |||||||||||
(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 September 30, 2009, including: (i) shareholder distributions of $49.8 million, (ii) management fees of $13.3 million per year over the next five years, (iii) commitment fees under our Revolving Credit Facility, and (iv) other obligations, including amounts due under employment agreements. | |
(d) | The supplemental put obligation represents the long-term portion of an estimated 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 this amount will be paid. |
The table does not include the long-term portion of the actuarially developed reserve for workers compensation, included as a component of long-term liabilities, which does not provide for annual estimated payments beyond one year.
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.
Goodwill and indefinite-lived, intangible assets
Goodwill represents the excess of the purchase price over the fair value of the assets acquired. Trade names are considered to be indefinite-lived intangibles. Goodwill and trade names are not amortized, however we are required to perform impairment reviews at least annually and more frequently in certain circumstances.
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The goodwill impairment test is a two-step process, which requires management to make judgments in determining certain assumptions used in the calculation. The first step of the process consists of estimating the fair value of each of our reporting units based on a discounted cash flow model using revenue and profit forecasts and comparing those estimated fair values with the carrying values, which include allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of a reporting unit’s “implied fair value” of goodwill requires the allocation of the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is then compared to its corresponding carrying value. The impairment test for trademarks requires the determination of the fair value of such assets. If the fair value of the trademark is less than its carrying value, an impairment loss will be recognized in an amount equal to the difference. We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill and/or intangible assets. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, and material adverse effects in relationships with significant customers.
Goodwill impairment
We completed our annual goodwill impairment testing in accordance with guidelines issued by the FASB as of March 31, 2009. This annual impairment test involved a two-step process. The first step of the impairment test involved comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company determined the fair value of its reporting units utilizing a combination of the income approach methodology of valuation that includes the discounted cash flow method and market comparison to comparable peer companies. Each of our reporting units passed the impairment testing, with the exception of Staffmark. The carrying amount of Staffmark exceeded its fair value due to the recent and projected, significant decrease in revenue and operating profit at Staffmark resulting from the negative impact on temporary staffing and permanent placement revenues due to macroeconomic conditions and downward employment trends. As such, we performed the second step of the goodwill impairment test in accordance with the aforementioned guidance in order to determine the amount of impairment loss. The second step of the goodwill impairment test involved comparing the implied fair value of Staffmark’s goodwill with the carrying value of that goodwill. This comparison resulted in a goodwill impairment charge of approximately $50.0 million, which was recorded in impairment expense on the condensed consolidated statement of operations.
The goodwill impairment analysis involves calculating the implied fair value of the reporting unit’s goodwill by allocating the fair value of Staffmark to all assets and liabilities other than goodwill (including both recognized and unrecognized intangible assets) and comparing the residual amount to the carrying value of goodwill. The goodwill impairment charge did not have any adverse effect on the covenant calculations or compliance under our Credit Agreement.
Impairment of the CBS Personnel trade name
In connection with the annual goodwill impairment testing, we tested other indefinite-lived intangible assets at our Staffmark reporting unit. As a result of this analysis we determined that the carrying value exceeded the fair value of the CBS Personnel trade name (an indefinite-lived asset), based principally on the discontinuance of the CBS Personnel trade name and rebranding of the reporting unit to Staffmark in February 2009. The fair value of the CBS Personnel trade name was determined by applying the relief from royalty technique to forecasted revenues at the Staffmark reporting unit. The result of this analysis indicated that the carrying value of the trade name ($10.6 million) exceeded its fair value ($0.8 million) by approximately $9.8 million. Therefore, an impairment charge of $9.8 million is recorded in impairment expense on the condensed consolidated statement of operations for the nine months ended September 30, 2009. The remaining balance ($0.8 million) of the CBS Personnel trade name is being amortized over 2.75 years.
Recent Accounting Pronouncements
In March 2009, the FASB issued additional authoritative guidance on business combinations, specifically, for the initial recognition and measurement, subsequent measurement, and disclosures of assets and liabilities arising from contingencies in a business combination as well as for pre-existing contingent consideration assumed as part of the business combination. This guidance is effective for us January 1, 2009.
In April 2009, the FASB amended authoritative guidance on disclosures about the fair value of financial instruments, which is effective for us June 30, 2009. The amended guidance requires a publicly traded company to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, the guidance requires an entity to disclose either in the body or the accompanying notes of its summarized financial information the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or
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not recognized in the statement of financial position. The adoption of this guidance did not have a significant impact on our Condensed Consolidated Financial Statements.
In May 2009, the FASB issued authoritative guidance on subsequent events, which is effective for us June 30, 2009. This guidance addresses the disclosure of events that occur after the balance sheet date, but before financial statements are issued or available to be issued. The adoption of this guidance did not have a significant impact on our Condensed Consolidated Financial Statements.
In June 2009, the FASB issued amendments to authoritative guidance on consolidation of variable interest entities, which will be effective for us January 1, 2010. The amended guidance revises factors that should be considered by a reporting entity when determining whether an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This guidance also includes revised financial statement disclosures regarding the reporting entity’s involvement and risk exposure. We do not expect the adoption of this guidance will have a significant impact on our Condensed Consolidated Financial Statements.
In June 2009, the FASB issuedThe FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles(the “FASB Codification”), which is effective for us July 1, 2009. The FASB Codification does not alter current U.S. GAAP, but rather integrates existing accounting standards with other authoritative guidance. Under the FASB Codification there is a single source of authoritative U.S. GAAP for nongovernmental entities and this has superseded all other previously issued non-SEC accounting and reporting guidance. The adoption of the FASB Codification did not have any impact on our Condensed Consolidated Financial Statements.
In August 2009, the FASB amended authoritative guidance for determining the fair value of liabilities, which will be effective for us October 1, 2009. The amended guidance reiterates that the fair value measurement of a liability (1) should be based on the assumption that the liability was transferred to a market participant on the measurement date and (2) should include the risk of nonperformance. In addition, the guidance establishes a hierarchy for determining the fair value of liabilities. Specifically, an entity must first determine whether a quoted price, from an active market, is available for identical liabilities before utilizing an alternative valuation technique. We do not expect the adoption of this guidance will have a significant impact on our Condensed Consolidated Financial Statements.
In September 2009, the Emerging Issues Task Force reached a consensus related to revenue arrangements with multiple deliverables. The consensus will be issued by the FASB as an update to authoritative guidance for revenue recognition and will be effective for us January 1, 2011. The updated guidance will revise how the estimated selling price of each deliverable in a multiple element arrangement is determined when the deliverables do not have stand-alone value. In addition, the revised guidance will require additional disclosures about the methods and assumptions used to evaluate multiple element arrangements and to identify the significant deliverables within those arrangements. We do not expect the adoption of this guidance will have a significant impact on our Condensed Consolidated Financial Statements.
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ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk required by this item are incorporated by reference to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2008 and have not materially changed since that report was filed.
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 September 30, 2009. 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 September 30, 2009.
In connection with the evaluation required by Exchange Act Rule 13a-15(d), Holding’s 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 third quarter of 2009 that have materially affected, or are reasonably likely to materially affect, Holdings’ and the Company’s internal control over financial reporting.
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PART II
OTHER INFORMATION
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings associated with the Company’s and Holdings’ business together with legal proceedings for the initial businesses have not changed materially from those disclosed in Part I, Item 3 of our 2008 Annual Report on Form 10-K as amended as filed with the SEC on April 9, 2009.
ITEM 1A. RISK FACTORS
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 2008 Annual Report on Form 10-K as amended as filed with the SEC on April 9, 2009.
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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 |
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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: November 9, 2009
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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: November 9, 2009
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EXHIBIT INDEX
Exhibit | ||
No. | 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 |
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