Compass Diversified Holdings (CODI) 2012 Q2 法說會逐字稿

Good morning, and welcome to the Compass Diversified Holdings 2012 second-quarter conference call.

Today's call is being recorded. All lines have been placed on mute. (Operator Instructions).

At this time, I'd like to turn the conference over to David Burke of The IGB Group for introductions and the reading of the Safe Harbor Statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified Holdings' second-quarter 2012 conference call.

Representing the Company today are Alan Offenberg, CEO; Jim Bottiglieri, CFO; and Elias Sabo, a founding partner of Compass Group Management.

Before we begin the call, I would like to point out that the Q2 press release, including the financial tables, is available on the Company's website www.compassdiversifiedholdings.com. The Company also filed its Form 10-Q with the SEC last night.

Please note that, throughout this call, we will refer to Compass Diversified Holdings as CODI, or the Company.

Now allow me to read the following Safe Harbor Statement. During this conference call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI. Words such as believes, expects, projects, and future, or similar expressions, are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements and some of these factors are enumerated in the Risk Factors section in the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2011, as well as in other SEC filings. In particular, the domestic and global economic environment has a significant impact on a subsidiary company. CODI undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

At this time, I would like to turn the call over to Alan Offenberg.

Good morning. Thank you all for your time and welcome to our second-quarter 2012 earnings conference call.

We are pleased by our strong consolidated results for the second quarter of 2012, which exceeded our expectations. While Jim will discuss our second-quarter financials in more detail, I'd like to note that CODI generated cash flow of $23.3 million for the three months ended June 30, 2012, an increase of 26.6% from the year-earlier period.

Our notable performance reflects the leadership position and comparative financial strength of our niche businesses. We continue to capitalize on opportunities to increase the relative market share and expand into adjacent markets. Our results for the quarter were also positively impacted by our newest subsidiaries, Arnold Magnetic and CamelBak, both of which we acquired less than a year ago.

Based on the strong performance across our diverse family of niche market leaders, we paid a distribution of $0.36 per share, representing a coverage ratio of cash flow to distributions paid of 1.34 times for the second quarter, and a current yield of approximately 10%. Since going public, CODI has paid cumulative distributions of approximately $8.16 per share.

We remain focused on taking advantage of organic and acquisition related growth opportunities while maintaining our commitment to provide consistent cash distributions to our shareholders. During the quarter, we took three meaningful steps to enhance our balance sheet. First, we sold our HALO subsidiary for net proceeds of $66 million. Second, we issued an additional $30 million of term loans, which carry only minimal amortization payments through the end of 2017. Third, we reduced the pricing on our expanded term loans by 1.25%. These moves have strengthened our balance sheet and provided us with approximately $285 million in total liquidity at the end of the second quarter, positioning us well to capitalize on additional platform and add-on acquisitions. As we have in the past, we will maintain our disciplined approach by acquiring companies that have a real reason to exist at favorable valuations and terms. We will also continue to reinvest in our current subsidiaries to drive future performance.

Before I turn the call over to Elias for an overview of our subsidiaries, I'd like to provide some commentary regarding our thoughts about our current group of subsidiaries. We have four leading branded product businesses consisting of CamelBak, ERGObaby, Fox and Liberty that represent approximately two-thirds of our subsidiary EBITDA. These four companies are rapidly growing, as evidenced by combined revenue and EBITDA growth of approximately 15% and 20%, respectively, for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011.

EBITDA margins also expanded from approximately 19.1% for the six months ended June 30, 2011 to approximately 19.9% for the six months ended June 30, 2012 for these four subsidiaries on a combined basis. All references to combined revenue and EBITDA growth and EBITDA margin are prepared on a pro forma basis as if we acquired CamelBak on January 1, 2011.

The remaining approximate one-third of our subsidiary EBITDA is generated within our niche industrial businesses. These four businesses, which consist of Advanced Circuits, American Furniture, Arnold, and Tridien, when combined, produce steady, predictable financial performance characterized by high free cash flow. For the six months ended June 30, 2012, these businesses produced a combined 14.7% EBITDA margin, which was equal to the performance for the six months ended June 30, 2011. Combined revenues in EBITDA declined by approximately 4% for the same six-month comparison. All references to combined revenue and EBITDA and EBITDA margin are prepared on a pro forma basis as if we acquired Arnold on January 1, 2011.

We believe that the mix of our current group of subsidiaries is very strong and perhaps as solid of a grouping of subsidiaries that we have had since we became a public entity.

I will now turn the call over to Elias to review these subsidiaries on an individual basis.

Thank you, Alan. I will begin by reviewing our branded businesses. As Alan mentioned, our branded businesses have performed exceptionally well in 2012, producing combined revenue and EBITDA growth of approximately 15% and 20%, respectively, for the six-month period ending June 30, 2012, compared to June 30, 2011. The rate of growth accelerated sequentially in the second quarter of 2012 with year-over-year revenue and EBITDA growth of approximately 18% and 29%, respectively, compared to year-over-year revenue and EBITDA growth of approximately 13% and 9%, respectively, in the first quarter.

All four branded products businesses grew in the second quarter, led by a 32% year-over-year revenue advance at our Fox subsidiary. Fox continues to exceed our expectations and showed growth in its core mountain biking, power sports, and off-road divisions. As we have mentioned on previous calls, Fox continues to invest heavily in its infrastructure in order to support this growth.

We also experienced rapid year-over-year growth of 21% at Liberty Safe, as overall demand for safes continues to grow. Like with Fox, we continue to invest in the infrastructure required to support such growth. These investments yielded positive results in the quarter as we experienced steady increases in profitability as the quarter progressed.

ERGObaby grew revenues 19% year-over-year, predominantly as a result of the inclusion of Orbit Baby in the 2012 results. We remain focused on investing in the ERGObaby brand and positioning the Company for accelerated growth in revenues and profitability.

And finally, our CamelBak subsidiary posted an extraordinary 30% year-over-year growth in EBITDA as margins expanded based on a favorable mix of revenue. We continue to maintain our focus on increasing consumer penetration rates for CamelBak's superior portfolio of personal hydration systems.

Next, I will turn to our niche industrial businesses, which showed modest year-over-year second-quarter revenue and EBITDA declines of approximately 3%. These results met our expectations and were slightly better than the first-quarter results where revenues and EBITDA declined by approximately 4%.

Advanced Circuits produced 6% year-over-year revenue growth in the second quarter, due to the inclusion of its most recent acquisition, Universal Circuits, in the 2012 results. Advanced Circuits continues to see steady demand for its core quick-turn business, but lower revenues and margin pressures in the defense business. We expect these conditions to remain in place for the remainder of 2012.

Our newest subsidiary, Arnold Magnetic, produced 6% lower revenues, but yielded higher EBITDA margins and flat EBITDA to 2011, primarily as a result of the favorable business mix to higher margin products. We remain very excited about the prospects for Arnold solutions across the wide variety of specialty applications and diverse end markets.

Tridien met our expectations in the quarter and produced slightly higher year-over-year revenues and slightly lower EBITDA. To reiterate what we have previously stated, we expect Tridien to produce lower EBITDA margins in 2012, as we invest heavily in new product introductions, with the revenue contribution from those new products not materializing until mid-2013. Positive demographic trends continue to provide a tail-wind for future growth and give us confidence to temporarily reduce EBITDA margins while we invest in this business.

And lastly, AFM performed below expectations in the quarter, as the Company continues to face an adverse market for promotionally priced furniture. Although we do not expect conditions to improve in the near term, the business through the first half of 2012 has been basically breakeven in self financing. We continue to position the company to succeed when the market for promotionally priced furniture rebounds by having a leaner, more efficient cost structure.

I would now like to turn the call over to Jim Bottiglieri to add his comments on our financial results.

Thank you, Elias. Today, I will discuss our financial results for the quarter ended June 30, 2012, including a review of the operating results of each of our current subsidiaries.

On a consolidated basis, revenue for the quarter ended June 30, 2012 increased to $230.0 million as compared to $133.1 million for the prior-year period, primarily due to the inclusion of CamelBak and Arnold revenue, since these businesses were acquired after June 30, 2011. Net income for the quarter was $2.2 million as compared to net income of $8.3 million in the year-earlier period.

During the second quarter of 2012, CODI recorded a loss from discontinued operations of $1.7 million, consisting primarily of transaction related costs from the sale of HALO. We also recorded higher interest expense for the second quarter of 2012, as compared to the prior-year period, due to the large part to higher average debt balances, amortization of original issue of discount, and changes in the fair value of interest rate swaps.

Cash flow for the quarter ended June 30, 2012 was $23.3 million as compared to $18.4 million for the prior-year period, an increase of 26.6%. This improvement was largely due to the inclusions of results from CamelBak and Arnold Magnetic, partially offset by the exclusion of results from Staffmark, which we sold in October of 2011. In addition, results from HALO were only partially reflected in the second quarter due to the sale of business, as Alan mentioned earlier.

Now turning to our subsidiary results, beginning with Advanced Circuits, for the quarter ended June 30, 2012, Advanced Circuits revenue increased to $21.2 million, compared to $20 million in the prior-year period, mainly due to inclusion of sales and acquisition of Universal Circuits completed in May of 2012. Income from operations for the quarter was $5.9 million, as compared to $6.8 million for the same period in 2011, as a result of promotional pricing largely to customers served out of our ACI Tempe, Arizona, facility and for transaction expenses related to the tuck-in acquisition of Universal Circuits in May of 2012.

For the six-month period ended June 30, 2012, Advanced Circuits revenue of $40.6 million was essentially flat as compared to $40.3 million in the prior-year period. Income from operations for the six months ended June 30, 2012 was $12.1 million, as compared to $13.9 million for the same period in 2011, which was due to the promotional pricing and the acquisition costs for Universal Circuits.

Now, I would like to turn to American Furniture Manufacturing, or AFM. For the quarter ended June 30, 2012, AFM's revenues decreased to $21.3 million as compared to $23.5 million of revenue in the prior-year quarter, as this business continues to be adversely affected by the challenging environment in the promotional furniture market. AFM narrowed its operating loss to $0.7 million in the second quarter of 2012, as compared to loss from operations of $1.6 million in the second quarter of 2011, largely due to lower amortization expenses.

For the six-month period ended June 30, 2012, AFM's revenue decreased to $51.6 million as compared to $59.4 million of revenue in the prior-year period. AFM reported an operating loss of $0.5 million, as compared to a loss from operations in the prior-year period of $9.6 million, which included a non-cash impairment charge of $7.7 million.

Turning now to our newest company, Arnold Magnetics, which we acquired on March 5, 2012. For the quarter ended June 30, 2012, the Company reported revenue of $32.5 million, compared to $34.6 million in the prior-year period, which was prepared on a pro forma basis as if we had acquired Arnold on January 1, 2011. This decrease was primarily due to lower reprographic application sales, partially offset by higher international sales.

The Company had pro forma income from operations of $2.5 million for the second quarter of 2012, as compared to pro forma income from operations of $2.7 million for the second quarter of 2011.

For the six-month period ended June 30, 2012, Arnold reported revenue of $67.1 million, compared to $66.9 million in the prior-year period, also prepared on a pro forma basis. The Company had pro forma income from operations of $5.5 million, as compared to pro forma operating income of $4.9 million in the same period last year. This increase was primarily due to a more favorable sales mix led by permanent magnets.

Turning now to CamelBak, which we acquired on August 24, 2011, for the quarter ended June 30, 2012, revenue increased slightly to $44.3 million as compared to $43.7 million in the prior-year period, which was prepared on a pro forma basis as if we had acquired CamelBak on January 1, 2011. Income from operations climbed significantly to $8.9 million for the second quarter of 2012, compared to a pro forma $6.6 million in the same period last year, primarily as a result of a more favorable sales mix led by hydration products.

For the six-month period ended June 30, 2012, revenue increased approximately 11% to $84.5 million, compared to $76.4 million in the prior-year period, also prepared on a pro forma basis. This increase is attributable to higher sales in hydration systems and bottles and the continued expansion in CamelBak's customer base across this leading product platform. CamelBak began providing hydration systems as a subcontractor as part of the United States Marine Corps pack program beginning at the end of 2011, which contributed to the increase in hydration sales in 2012, compared to 2011 for the first six months of the year. CamelBak anticipates fulfillment of this contract by the first quarter of 2013.

Income from operations climbed approximately 50% to $16 million for the six months ended June 30, 2012, compared to a pro forma $10.7 million in the year earlier period due to higher sales volume as well as due to favorable sales mix.

Moving to ERGObaby, for the quarter ended June 30, 2012, revenue increased approximately 19% to $13.3 million, compared to $11.2 million in the prior-year period, primarily due to sales from the add-on acquisition of Orbit Baby in November 2011. Income from operations for the second quarter of 2012 was $2.0 million, as compared to pro forma $2.4 million in the same period last year.

SG&A expenses for the second quarter of 2012 included approximately $1.2 million in overhead associated with the acquisition of Orbit Baby.

For the six-month period ended June 30, 2012, revenue increased 19% to $27.0 million, compared to $22.7 million in the prior-year period, primarily due to sales from Orbit Baby, partially offset by lower international sales due to the timing of deliveries.

Income from operations for the six months ended June 30, 2012 was $3.7 million, as compared to a pro forma of $5.0 million in the prior-year period in 2011.

SG&A expenses for the first half of 2012 included $2.5 million related to Orbit Baby.

Turning to Fox, revenue increased approximately 32% to $60.7 million for the quarter ended June 30, 2012, compared to $45.9 million in the prior-year period. During the second quarter 2012, we recorded higher sales to original equipment manufacturers of approximately $12.3 million. The Company reported operating income of $6.9 million for the quarter ended June 30, 2012, as compared to $4.6 million in the prior-year period, representing an increase of approximately 50% due to the strong increase in net sales.

For the six-month period ended June 30, 2012, revenue increased approximately 20% to $126.4 million compared to $80.8 million in the prior-year period as a result of higher sales to original equipment manufacturers.

Income from operations increased to $11.1 million for the six months ended June 30, 2012, compared to $9.6 million in the prior-year period, due to higher sales volumes, partially offset by increased SG&A expenses to support the Company's continued growth.

Turning to Liberty Safe, revenue for the quarter ended June 30, 2012 increased approximately 21% to $22.5 million, compared to $18.6 million in the prior-year period. This increase is due to higher sales across all distribution channels. The Company reported operating income of $1.6 million for the second quarter of 2012, as compared to operating income of $1.0 million in the same period of last year, which reflects a higher level of sales achieved in 2012.

For the six-month period ended June 30, 2012, revenue increased approximately 12% to $43.6 million, compared to $38.8 million in the prior-year period, due to higher dealer and non-dealers sales. Income from operations for the six months ended June 30, 2012 was $2.2 million, as compared to operating income of $1.9 million in the same period of 2011. For the six months ended June 30, 2012, operating results were impacted by costs associated with the implementation of a new light safe production line to meet the strong demand for Liberty's niche leading products.

Now on to Tridien Medical, for the quarter ended June 30, 2012, revenue increased slightly to $14.1 million, as compared to $13.9 million for the same period last year, due to higher sales of nonpowered products. Income from operations for the second quarter was $1.0 million, as compared to $1.1 million in the same period of 2011.

For the six-month period ended June 30, 2012, revenue of $27.7 million was essentially flat as compared to $27.8 million for the same period of last year. The Company reported operating income for the six months ended June 30, 2012 of $1.9 million, as compared to $2.3 million in the same period in 2011, as a result of investment in new product developments.

Turning now to the balance sheet. We had $16 million in cash and cash equivalents, and had net working capital of $168.4 million as of June 30, 2012. We also had $253.8 million outstanding on our term debt facility and $19.5 million of borrowings outstanding under our $290 million revolving credit facility as of June 30, 2012 with no significant debt maturities until October 2016. We had borrowing availability of approximately $269 million under our revolving credit facility at June 30, 2012.

During the second quarter, we made the strategic decision to sell HALO and use the total proceeds from the sale of approximately $56.4 million to repay outstanding debt under our revolving credit facility. We also exercised an option under our credit agreement on April 2, 2012 to expand the size of our term loan facility by $30 million, increasing CODI's accurate outstanding borrowings on this facility to $254.4 million immediately after this borrowing. The net proceeds of the income of the borrowings were also used to reduce the balance under the revolver.

Concurrent with this increased term loan borrowing, we lowered the interest rate on our term loan facility by 1.25%. Under the terms of the amended pricing, amounts borrowed bear interest debt LIBOR plus the margin of 5% as compared to the previous margin of 6%. And the LIBOR core was reduced from -- reduced to 1.25% from 1.5%. All other terms of the credit agreement remain unchanged. We appreciate the support of our lending group in amending our term loan facility, which enhances CODI's financial flexibility and lowers the Company's future interest expense.

During the second quarter of 2012, we incurred $2.7 million of maintenance capital expenditures as compared to $2.9 million in the year earlier period. For the full year 2012, we anticipate maintenance capital expenditures of between $10 million and $13 million as we continue to invest in the long-term performance of our current subsidiaries.

We also incurred approximately $0.6 million of growth capital expenditures during the second quarter that were largely spent at Liberty Safe to increase production capabilities. For 2012, we expect to incur growth capital expenditures of between $5 million and $7 million, largely for completing Liberty's production capacity and for growth initiatives at Arnold. I'll now turn the call back to Alan.

Thanks, Jim. We are pleased by our strong results in the second quarter and first half of 2012, which demonstrates the strength of CODI's unique business model, as well as the leadership position of our niche businesses. Based on our performance, combined with our future prospects, we are well-positioned to earn cash flow in excess of our anticipated distributions for 2012. We remain focused on leveraging our balance sheet strength to invest in high return organic growth initiatives while pursuing accretive acquisitions that create significant value for our owners.

I'd like to thank everyone again for joining us on today's call. We'll be happy to take any questions you may have. Operator, please open the phone lines.

(Operator Instructions). Larry Solow, CJS Securities.

Hi. Good morning. A couple of quick sort of global ones. The first one, it sounds like things are -- I guess, last we spoke, you were seeing some improvement in your businesses in looking at these results. Maybe you could just sort of put like -- it sounds like your businesses are improving, but if you can give us sort of a global view of what you're seeing out there in terms of the economy and all, and are you guys sort of just going against the grain or how do you see things?

Well, as you mentioned, we're very pleased by the performance of our subsidiaries and think that -- from what we are seeing, I think there is a sense that things are pretty steady right now in the economy. There are certainly pockets, as you look throughout our portfolio, where there seems to be greater strength, and other pockets where the strength is not as strong. And there is certainly cautious optimism across all of our group of subsidiaries.

It's hard for me to comment, Larry, about -- you made a comment about going against the grain. I don't really want to talk about the performance of our subsidiaries relative to a universe of other companies who are not entirely --

Right.

-- sure of how you are looking at those. But I would say, with respect to our businesses, as we mentioned, they performed well, we remain optimistic about their performance over the balance of the year, and we think that they're all very well-positioned.

But with respect that global economy, there are concerns, as you hear about and read about every day, that we certainly share, but through the first half of this year, I think that, on balance, we remain cautious about them, but very pleased about our businesses and their ability to perform solidly across -- sorry, over the balance of 2012. As you get beyond that, Larry, we're cautiously optimistic, but the global economy is very difficult to predict and the impact of the global economy could have on any or all of our subsidiaries is also difficult to predict. But we feel very confident about how we are positioned and how we are set up for future performance.

And if I hear correctly, it sounds like things actually have gotten better through the quarter, at least at your core businesses and even in some of the smaller ones. Is that fair to say?

I think that our businesses, by and large, did perform very solidly in the second quarter. I think that there are a few of them that did exceed expectations and a few that certainly were right within our expectations. So, I don't hesitate to use the word "improve", as you just did, but I would say that, by and large, the performance is within our expectations, and in a couple of cases, certainly beyond our expectations. But we are pleased with their performance and hope that they can continue to perform in the way that they did in the second quarter.

Fair enough. Can you just comment specifically just on ERGObaby? Obviously, revenues were strong. Some of that, of course, was acquisition enhanced or maybe primarily most of it. But just talk about the profit outlook and I know you guys have been investing heavily there and so --

Sure. Elias will take that question for you, Larry.

Thanks.

Yes, Larry, so in the second quarter, as we mentioned, a big portion of the revenue growth was attributable to the acquisition we made of Orbit Baby. And when the -- we have talked a lot about the investments that we're making, predominantly in building infrastructure because this was a relatively young company when it was acquired, and now focus more on marketing to raise brand awareness. We feel that the Company is positioned for profit growth to accelerate in the back half of 2012 and into 2013. A lot of it is going to be based on sales leverage that we expect to get. Timing of shipments to some of our international distributors can influence a little bit between quarter to quarter how growth looks, but on the full-year basis, we feel very confident in the growth profile of both the ERGObaby and orbit baby brands, and the leverage that they'll produce in terms of profit on a going forward basis.

Now, it's not to say that we're not going to continue to increase our investment in marketing. We think this is a high-growth business. It has a lot of market share opportunity to take, so we will expect to continue a pretty aggressive growth in marketing expenditures. But we would expect to see leverage starting to come out of some of those investments with sales growth and EBITDA to start to really pick up as the back half of the year materializes.

Great. And just lastly, if I may, just any comments, commentary on the acquisition environment? Deal flow, transaction prices, quality of deals or actual deals?

Sure. Deal flow remains solid. I think that it's probably over the last month or so, maybe even six weeks, probably picked up a little bit. The quality is pretty solid. You know, Larry, we look at a lot of things, right? So there's certainly far more opportunities that we are less compelled by that and more compelled by. But the deal flow is solid. There are definitely good quality opportunities out there that we are seeing. Prices are high. There seems to be a robust environment right now in the middle market M&A activity, and we are, like we have in the past, always going to do our best to sort out and find not only great opportunities, but at valuations that we think makes sense for our shareholders. But the market is pretty robust. Prices are high. There's certainly a lot of capital out there to be deployed, both by corporations and financial investors, and the lending market in support of high-quality transactions is also very solid. So, it's a good market right now, but a competitive market with prices that are pretty robust.

Great. Thanks a lot, guys.

Sure. Thank you.

Vernon Plack, BB&T Capital Markets.

Thanks very much. And you talk about seasonality of some of your companies and, in particular, you always mention, Alan, at Fox, Q3 is usually the highest and Liberty Q2 is usually the lowest. Now, given very strong results out of both of those companies, so I'm curious in terms of whether or not we can expect that type of seasonality. In other words, Fox to have an even stronger Q3. I'm just curious if anything was pulled forward? As well as with liberty. Can we expect them to have a pretty good year from here and just some thoughts on that?

Yes, sure. I'll take Liberty and I'll let Elias comment on Fox. With respect to Liberty, their demand for their products just remains really strong. And we would expect that demand to remain strong over the balance of the year. And so, you're right. I think that, with liberty, we may perhaps not find ourselves with some of the similar patterns as we've seen in the past. The summer months typically have represented periods where it is a bit slower and, right now, demand definitely looks as though it will remain strong through the summer months and throughout the balance of the year. So, the demand for Liberty's products are strong and, as we've mentioned, we've invested heavily in additional production. We've added employees at Liberty Safe to assist in the production in terms of adding increased shifts to meet that demand, and we expect that to stay solid throughout the balance of the year.

With respect to Fox, Elias will provide some commentary for you there.

Yes, with respect to Fox, Q2 was really an extraordinary quarter. I mean, the 32% revenue growth was well in excess of what we had expected from the business. And it's really a function of all of the business lines performing very well right now. As I mentioned, power sports, off-road, and the core mountain biking businesses all performed very well.

We did have a little bit of an acceleration of orders that came in mostly from some of the European partners that pushed up their order timing, and so there was a slight pull forward of some business into the second quarter, but I would say that was relatively modest. We expect still to see a ramp from Q2 into Q3 where Q3 will be our strongest quarter, as it historically has been.

I would caution you that, you know, kind of some of the revenue growth -- the absolute percentage of revenue growth we saw in Q2 is likely not sustainable at that level. But, yes, we would expect Q3 to experience a ramp up from here and then, you know, traditional Q4 seasonal slowdown that we have.

Okay. Great. And I noticed that you talk in the Q about a re-capitalization of Fox. Can you tell me a little bit about that?

Yes. So we -- during the quarter, as you know, there is inter-company debt that is lent down below to Fox and the Company did a leverage recapitalization in order to get some more leverage down. The Company has performed so well, it's repaid so much debt over its life with Compass, that we found that its balance was extraordinarily low. On top of that, as you guys all know, EBITDA has tripled over the course of the last few years, so from a leverage ratio, we were very, very low and we felt that it was time to put some debt down below. So, that was the essence of doing the leverage recap there.

And, Vernon, that's consistent with what we've done with other subsidiaries in the past and will continue to do going forward to the extent they find themselves in a similar position as Fox.

Okay. Great. Thanks very much.

(Operator Instructions). Troy Ward, Stifel Nicolaus.

Great. Thank you. Can you just comment -- repeat some of the commentary you gave on CamelBak, something about an inclusion of a Marine program at the end of 2011? Kind of give us kind of what the impact of that has been on current revenues and what was the life of that relationship?

Sure. As Jim mentioned, I believe, in his comments, CamelBak secured a contract with the Marine Corps for hydration packs toward the end of 2011, which they've been delivering on through the first half of this year, which we expect to complete that contract in the first quarter of 2013.

Jim, do you want to comment on the numbers or --?

It's roughly $10 million of additional revenue for the first six months.

For the first six months, you said?

Yes.

Okay. And then can we go back to Larry, I think, started a question on ERGO with regard to the acquisition of Orbit. Can you speak to how organic growth at ERGO, excluding Orbit, has been? We're actually expecting to see a little bit more from that after the acquisition. So, can you speak to kind of how that segment has done without the acquisition?

Just to make sure we heard the question correctly, you wanted some commentary about organic growth at ERGO, excluding Orbit?

That's correct.

And so revenue was virtually flat without the Orbit Baby acquisition, although there was some timing issue in international sales and, Elias, do you want to add anything to that?

Yes, no, that would -- you know, the timing, because we do so much business internationally, one of the issues we had at the end of the second quarter was there was some product that actually didn't get picked up by the freight forwarder until two days after the end of the quarter. We look at the business based on what our bookings are internationally and what our weekly sell-throughs are in the domestic business. And both of those indicators are that the business is tracking up consistent with our expectations, but the timing of shipments internationally can move around a little bit. We did come off of a very strong first quarter in 2011 that actually had some pushback from shipments of Q4 2010, so a little bit of the comparisons on the international business are making it a little bit more difficult. But I do think, from our standpoint, looking at the bookings numbers, the sell-through data, which I think is a truer number that will smooth out any of the vagrancies of timing of shipment, we are seeing pretty strong growth here in this business. We would expect, in Q3, some of those in shipments to catch up that have gotten pushed out and for year-to-date things to look a little bit more in line with what our and I think your expectations are.

And can you comment again on what were the expenses related to Orbit Baby in this quarter, and do we expect any more going forward?

Yes, so the expenses that were called out are the normal line SG&A expenses that we have. That business has a number of different functions that it performs. Part of it is consolidated in, but from new product and some of the logistics, supply chain, some of those things are functions in marketing and sales that are still needed. And we would expect those to be a stable level of expenses and actually growing as we continue to invest behind that.

We have a very, very favorable outlook for Orbit. We think this is a really great product that has, today, low awareness, but that's why we think some marketing expenditure behind this will really accelerate our sales growth. So I would suggest that this is a business where we do expect to put more investment in, but we think that will be more than paid for by revenue and gross profit growth.

Okay. And what about transaction related expenses? Was there any of that in this quarter that will go away?

No.

Okay. And then the last one on Advanced Circuits. You did a small tuck-in acquisition in the quarter, like a Minnesota-based company that focused on military, more aerospace. That's the second kind of that focused business you've done. Are you making a conscious effort to move into that space or are you think there's attractively priced assets Can you give us some color on your thoughts on AC?

Yes, so to your question, a little bit of both. The assets are very attractively priced today in that sector and we think there is, from a long-term investment standpoint, this is just really a great time to be a buyer. There's not a lot of competing bids out there and with what's happening in the defense space, and we all know that with sequestration on the horizon starting next year, there's a lot of uncertainty. So, we think, if you take a intermediate to longer term view, this is one of the better investment times that we could envision for investing in that part of the space. It is also part of our strategy, and the strategy really involves around becoming -- being able to serve a broader set of what is going to stay here in the United States.

And as we look at the circuit board business, there's really two components that are -- that have been and stayed in the United States and have good long-term growth fundamentals. One is the core quick-turn business that we do in Aurora. A lot of that is based on short, very short run of product, very small order size quick time, so that necessitates being here and not having to come through customs. And then the second is the defense side of the business which is mandated to stay here, given the sensitivity around the defense projects and a lot of the research support that we do.

So, we actually feel that is positioning the Company for the -- we are already in the one very strong area for outlook which is the core quick-turn. We think defense, long-term, has that same profile and when combined and given now the investment window, which is I think very strong from a long-term dynamic, as I said, we feel this is a pretty good time to be making investments in that arena.

But I would caution everybody that part of the reason that it's such a good investment opportunity today and in the near term is that the outlook kind of for the very near-term future for the defense side is not robust. We've done a great job of being able to operate this business and our management team just does a phenomenal job of being able to drive maximum profitability out of it. But I think the near, the very immediate term revenue outlook on defense is going to be subdued, but for long-term, we think this is just a great place to be investing assets.

Great. Thanks, guys.

J.T. Rogers, Janney Capital Markets.

Good morning, everybody. I have another question on ACI. It seems like there's been a consolidation of the larger domestic PCB manufacturers. I was wondering if you could comment on any impact that is having on demand or the competitive dynamics of other printed circuit board manufacturing?

Yes, so it's a good point. One of our largest competitors, DDI, was bought by Viasystems recently, and so we are seeing a continued move towards consolidation of the larger guys. You know, J.T., I think this is part of a bigger trend that is actually occurring in the marketplace.

When we first made the investment in Advanced Circuits, there are something like a little over 500 board shops in the United States. Today, that number is contracted by about 35% to 40%. So there's been a consolidation that occurred because there was excess capacity. And I think that continues to happen, especially in an environment where revenue growth is not as visible. One of the opportunities in doing consolidations is being able to take capacity off line and enhance profitability in that way. So we see that as a trend in the industry.

In terms of how that is affecting the competitiveness of the industry, I'd say, in the near term, that can create some distortions in terms of pricing in the marketplace. We did experience, and as Jim mentioned, in our Tempe facility, which is our more defense oriented facility, we experienced some major price competition and we actually had some price discounting that occurred. And that was the predominant reason for the revenue and profit decline out of that segment of the business.

On a longer-term basis, I think this is extremely positive. Anytime we can get capacity to rationalize in an industry and be more aligned with demand, it bodes well for the long-term health of the industry and pricing -- on the pricing side. So we think that this is good. It did create a little bit of short-term disruption. I think that the lower defense work that's coming out is also creating significant imbalance in the market today between supply and demand. But we, again, remain very confident, especially given the consolidation and the removal of capacity from the industry, that when the industry bounces back, both on the defense and in the quick-turn business, that, on a reduced supply basis, that actually will bode very well in terms of revenue, pricing, and profitability.

Okay. Great. And that certainly makes sense on a longer-term perspective. In terms of the short-term, is it -- the destruction you were talking about, is it more aggressive pricing by your competitors?

Yes, we are seeing our competitors really moved pricing down and, to be competitive, we are having to do the same.

Okay. Great. And then I guess switching gears a little bit to Fox. I was wondering. I mean, obviously, you had a very strong second quarter. Are you all concerned at all about trend? I mean, Europe is a large source of demand for Fox. Are you worried about any of the trends that are going on overseas? I mean, obviously, the spring, from everything I saw, seemed like it was very strong in terms of mountain bike demand, but I think, back in 2008, the bicycle OEMs kept ordering Fox product right up through November, before really scaling back once they saw that demand was falling off. Are you all concerned at all or preparing for a slowdown at Fox, potentially, on the mountain bike side?

Yes, so it's a great question. And I would -- you know, the first part is, are we concerned with what's going on in Europe and just the macroeconomy? And the answer is across the whole portfolio, yes, we constantly are managing and kind of making sure, monitoring that our businesses are in tune with the uncertainty that I think is just embedded for everybody right now.

Specifically, with respect to Fox, I mean, look, the orders that continue to come in are very strong and Europe does represent a pretty big outlet for both our product directly to European OEs as well as to some of the global OEs that are selling their product into Europe. And it has a pretty large percentage of our mountain biking business.

So, with respect to mountain biking, we continue to do checks. We talk with the OEs. Clearly, they are doing their channel checks and they feel that they're not in an over-inventoried position. And I think that's really kind of the crux of your question, is are they building up so much industry and is the sell-through not going to materialize such that there is going to be a whipsaw on the kind of the end of -- the tail end of the model year so that they bleed out? They're not saying that to us yet.

To a large degree, the growth that we are experiencing is, as I said, in the other divisions, is all power sports and off-road, but the growth that we've experienced in the mountain biking segment is predominantly by getting more spec and by delivering more product with a higher ASP, more technology, than it is a lot of market growth. So unlike before, like in 2008 when there was a lot of unit growth that was going on in the market, absence of spec change, and then that created a little bit of an inventory overhang, we're not seeing the same dynamics go along this time. I think this is more a story of Fox's execution has been extraordinarily good. The product is very well received, both by the OE and that's being pulled through by customer demand, and it's those increases that are carrying us. But it would be, I think, naive of me to say that we aren't concerned with what we hear about in Europe, and the fact that it could have an overhang on the Fox business in the future. There's just no evidence of it today, but that's not to say that it won't happen. But we're not seeing it yet.

Okay. Great. That's great detail. Thank you. And then just one last question, just I was wondering if you had a little bit more detail on the ERGObaby sell-through that you're seeing. I know that you referenced, on an organic growth basis, that it's been weak because of timing of orders. So I'm just wondering what the underlying sell-through is that is giving you confidence that that business should start picking up?

Yes, we don't give -- we do provide kind of what the data is on our kind of the bookings data, but I would tell you is it's predominantly the international shipments that can ship around from period to period. We did have a significant amount that went into Q3. We think our international, from what we're seeing, business is growing organically at a double-digit pace, so we feel pretty good about that. And that domestic business is growing as well. So given that the timing of shipments can shift a little bit, we would expect that, in Q3, some of this will be caught up and you'll see the numbers start to normalize.

Okay. Great. Because I just -- looking back over the last three quarters and backing out sales of Orbit Baby, it seems like organic revenue growth is negative 5%. That leads me to think that that would -- the third quarter should be very strong for ERGObaby.

We would expect from what we have right now in order for third quarter to be pretty strong. I mean, we've got expanded distribution here in the United States. We are pleased with adding Babies R Us as a distributor. We are pleased with adding Target most recently in the third quarter as a retail partner of ours. We've also expanded what our European and international distribution is and our international distributors have been increasing their orders. So some of this is absolutely timing related that you're looking at. This is a business that absolutely is growing in both unit volume and in pricing, and so we would expect the third quarter, as you had mentioned, to kind of right some of the trends in terms of the negative comparisons that you're seeing. This is a business that absolutely is experiencing growth.

Okay. Great. Thanks a lot.

Vernon Plack, BB&T Capital Markets.

Thanks. And, again, on Advanced Circuits, it looks like the operating margin this quarter was several hundred basis points below what we've seen for the past several quarters. So, we can assume that, going forward, you think at least in the near to intermediate term that we're looking at an operating margin probably in the high 20s% rather than in the low 30s%?

Yes, the operating margin is actually going to decline, Vernon, partly because of the newest acquisition. There's really two things that drove operating margin in the second quarter. One would be the discounting that we talked about on price in the defense business. That, unfortunately, falls right to the bottom line, as you can imagine.

Sure.

And then the second component is the Universal Circuits business is today a much lower margin business. That company is operating well below what its capacity is and I think we have a lot of opportunities over the long-term. And as we kind of implement our strategy here of being a consolidator in that space, we will be able to really work on capacity absorption. But in the near term, that's going to be a far lower margin contributor and it will blend down the entire business.

If you look, though, product kind of -- unit by -- I would say, product category by product category, the core quick-turn business, which drives the majority of profitability in this, call it, 85% of the profitability, the margins there are remaining intact. There is no degradation in margin there. But as we move into what is a lower margin business today on the defense side, and especially when you acquire some guys that may have a far lower margin profile and it's our job to really work on how to get that up, it's going to have the effect of margin degradation across the whole portfolio.

Okay. That makes sense. And just one last question. As it relates to Arnold, it looks like the fully diluted ownership went from 96.6% down to 87.6%. Is there a reason behind that?

Yes, it was attributable to option grants.

Okay. All right. Very helpful. Thanks.

And with no further questions in the queue, I'd now like to turn the call back to Alan Offenberg for any additional or closing remarks.

Well, thank you all again for joining us today. We appreciate it, and we look forward to speaking with you again next quarter.

That does conclude today's conference. We thank you for your participation.