UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

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

COMPASS DIVERSIFIED HOLDINGS

(Exact name of registrant as specified in its charter)

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

COMPASS GROUP DIVERSIFIED HOLDINGS LLC

(Exact name of registrant as specified in its charter)

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

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

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

Yes þ No o

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

Yes o No o

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

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

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

Yes o No þ

As of May 1, 2011, there were 46,725,000 shares of Compass Diversified Holdings outstanding.

 

 

COMPASS DIVERSIFIED HOLDINGS

QUARTERLY REPORT ON FORM 10-Q
For the period ended March 31, 2011

TABLE OF CONTENTS

		Page
		Number
Forward-looking Statements			4
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010			5
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (unaudited)			6
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2011 (unaudited)			7
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)			8
Notes to Condensed Consolidated Financial Statements (unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			41
Part II Other Information
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 6. Exhibits			43
Signatures			44
Exhibit Index			46
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

NOTE TO READER

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

	•		the “Trust” and “Holdings” refer to Compass Diversified Holdings;
	•		“businesses”, “operating segments”, “subsidiaries” and “reporting units” refer to, collectively, the businesses controlled by the Company;
	•		the “Company” refer to Compass Group Diversified Holdings LLC;
	•		the “Manager” refer to Compass Group Management LLC (“CGM”);
	•		the “initial businesses” refer to, collectively, Staffmark Holdings, Inc. (“Staffmark”), Crosman Acquisition Corporation, Compass AC Holdings, Inc. and Silvue Technologies Group, Inc.;
	•		the “2010 acquisitions” refer to, collectively, the acquisitions of Liberty Safe and Security Products, LLC and ERGObaby Carrier, Inc.;
	•		the “Trust Agreement” refer to the amended and restated Trust Agreement of the Trust dated as of December 21, 2007;
	•		the “Credit Agreement” refer to the Credit Agreement with a group of lenders led by Madison Capital, LLC which provides for a Revolving Credit Facility and a Term Loan Facility;
	•		the “Revolving Credit Facility” refer to the $340 million Revolving Credit Facility provided by the Credit Agreement that matures in December 2012;
	•		the “Term Loan Facility” refer to the $73.5 million Term Loan Facility, as of March 31, 2011, provided by the Credit Agreement that matures in December 2013;
	•		the “LLC Agreement” refer to the second amended and restated operating agreement of the Company dated as of January 9, 2007; and
	•		“we”, “us” and “our” refer to the Trust, the Company and the businesses together.

FORWARD-LOOKING STATEMENTS

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

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

     Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ.

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

PART I
FINANCIAL INFORMATION

ITEM 1.		— FINANCIAL STATEMENTS

Compass Diversified Holdings

		March 31,				December 31,
(in thousands)		2011				2010
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	17,120			$	13,536
Accounts receivable, less allowances of $4,554 at March 31, 2011 and $5,481 at December 31, 2010			204,237				208,487
Inventories			77,831				77,412
Prepaid expenses and other current assets			29,343				33,904
Total current assets			328,531				333,339
Property, plant and equipment, net			35,407				33,484
Goodwill			319,766				325,851
Intangible assets, net			260,099				269,672
Deferred debt issuance costs, less accumulated amortization of $7,341 at March 31, 2011 and $6,882 at December 31, 2010			3,389				3,822
Other non-current assets			23,861				17,873
Total assets		$	971,053			$	984,041
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	53,199			$	53,197
Accrued expenses			95,412				74,302
Due to related party			3,380				2,692
Distribution payable			16,821				—
Current portion of supplemental put obligation			6,300				—
Current portion, long-term debt			2,000				2,000
Current portion of workers’ compensation liability			17,943				18,170
Other current liabilities			689				1,043
Total current liabilities			195,744				151,404
Supplemental put obligation			41,526				44,598
Deferred income taxes			73,606				74,457
Long-term debt			78,500				94,000
Workers’ compensation liability			40,902				40,588
Other non-current liabilities			2,534				3,084
Total liabilities			432,812				408,131
Stockholders’ equity
Trust shares, no par value, 500,000 authorized; 46,725 shares issued and outstanding at March 31, 2011 and December 31, 2010			638,759				638,763
Accumulated other comprehensive loss			—				(143	)
Accumulated deficit			(190,232	)			(150,550	)
Total stockholders’ equity attributable to Holdings			448,527				488,070
Noncontrolling interest			89,714				87,840
Total stockholders’ equity			538,241				575,910
Total liabilities and stockholders’ equity		$	971,053			$	984,041

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

		Three months ended March 31,
(in thousands, except per share data)		2011				2010
Net sales		$	177,326			$	136,218
Service revenues			246,799				217,401
Total revenues			424,125				353,619
Cost of sales			119,687				94,067
Cost of services			214,850				188,526
Gross profit			89,588				71,026
Operating expenses:
Staffing expense			22,115				19,607
Selling, general and administrative expense			46,397				42,381
Supplemental put expense			3,228				14,426
Management fees			3,843				3,664
Amortization expense			7,702				6,123
Impairment expense			7,700				—
Operating loss			(1,397	)			(15,175	)
Other income (expense):
Interest income			2				15
Interest expense			(2,539	)			(2,701	)
Amortization of debt issuance costs			(459	)			(418	)
Other income (expense), net			246				180
Loss before income taxes			(4,147	)			(18,099	)
Provision (benefit) for income taxes			2,420				(2,812	)
Net loss			(6,567	)			(15,287	)
Net income attributable to noncontrolling interest			407				682
Net loss attributable to Holdings		$	(6,974	)		$	(15,969	)
Basic and fully diluted loss per share attributable to Holdings
		$	(0.15	)		$	(0.44	)
Weighted average number of shares of trust stock outstanding — basic and fully diluted			46,725				36,625
Cash distributions declared per share		$	0.36			$	0.34

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statement of Stockholders’ Equity
(unaudited)

																		Total
														Accumulated				Stockholders’
														Other				Equity				Non-				Total
		Number of								Accumulated				Comprehensive				Attributable				Controlling				Stockholders’
(in thousands)		Shares				Amount				Deficit				Loss				to Holdings				Interest				Equity
Balance — January 1, 2011			46,725			$	638,763			$	(150,550	)		$	(143	)		$	488,070			$	87,840			$	575,910
Net loss			—				—				(6,974	)			—				(6,974	)			407				(6,567	)
Other comprehensive income — cash flow hedge gain			—				—				—				143				143				—				143
Comprehensive income (loss)			—				—				(6,974	)			143				(6,831	)			407				(6,424	)
Offering costs from the issuance of Trust Shares in 2010			—				(4	)			—				—				(4	)			—				(4	)
Option activity attributable to noncontrolling interest holders			—				—				—				—				—				1,467				1,467
Distributions declared and unpaid			—				—				(16,821	)			—				(16,821	)			—				(16,821	)
Distributions paid			—				—				(15,887	)			—				(15,887	)			—				(15,887	)
Balance — March 31, 2011			46,725			$	638,759			$	(190,232	)		$	—			$	448,527			$	89,714			$	538,241

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

		Three months ended March 31,
(in thousands)		2011				2010
Cash flows from operating activities:
Net loss		$	(6,567	)		$	(15,287	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense			2,427				1,882
Amortization expense			7,887				6,123
Impairment expense			7,700				—
Amortization of debt issuance costs			459				418
Supplemental put expense			3,228				14,426
Noncontrolling stockholder charges and other			852				4,370
Deferred taxes			(993	)			(2,121	)
Other			292				(210	)
Changes in operating assets and liabilities, net of acquisition:
Decrease in accounts receivable			5,041				310
Increase in inventories			(654	)			(49	)
Increase in prepaid expenses and other current assets			(3,302	)			(724	)
Increase in accounts payable and accrued expenses			23,388				7,241
Net cash provided by operating activities			39,758				16,379
Cash flows from investing activities:
Acquisitions, net of cash acquired			—				(83,708	)
Purchases of property and equipment			(4,565	)			(964	)
Other investing activities			62				14
Net cash used in investing activities			(4,503	)			(84,658	)
Cash flows from financing activities:
Borrowings under Credit Agreement			—				71,500
Repayments under Credit Agreement			(15,500	)			(2,000	)
Distributions paid			(15,887	)			(12,452	)
Net proceeds provided by noncontrolling interest			—				2,085
Debt issuance costs			—				(155	)
Other			(284	)			(50	)
Net cash provided by (used in) financing activities			(31,671	)			58,928
Net increase (decrease) in cash and cash equivalents			3,584				(9,351	)
Cash and cash equivalents — beginning of period			13,536				31,495
Cash and cash equivalents — end of period		$	17,120			$	22,144
Supplemental cash flow disclosure of financing activities:
Dividends declared but not yet paid		$	16,821			$	—

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Note A — Organization and business operations

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

The Company is a controlling owner of eight businesses, or operating segments, at March 31, 2011. The operating segments are as follows: Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”), AFM Holdings Corporation (“AFM” or “American Furniture”), The ERGO Baby Carrier, Inc. (“ERGObaby”), Fox Factory, Inc. (“Fox”), HALO Lee Wayne LLC (“HALO”), Liberty Safe and Security Products, LLC (“Liberty Safe” or “Liberty”), Staffmark Holdings, Inc. (“Staffmark”), and Tridien Medical (“Tridien”). Refer to Note D for further discussion of the operating segments.

Note B — Presentation and principles of consolidation

The condensed consolidated financial statements for the three-month periods ended March 31, 2011 and March 31, 2010, are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Seasonality

Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from AFM are typically highest in the months of January through April of each year, coinciding with homeowners’ tax refunds. Earnings from 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 associated with payroll paid to its employees. Earnings 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. Revenue and earnings from Fox are typically highest in the third quarter, coinciding with the delivery of product for the new bike year.

Consolidation

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

Note C —Recent accounting pronouncements

In January 2010, the FASB issued amended guidance to enhance disclosure requirements related to fair value measurements. The amended guidance for Level 1 and Level 2 fair value measurements was effective for the Company January 1, 2010. The amended guidance for Level 3 fair value measurements was effective for the Company January 1, 2011. The guidance requires disclosures of amounts and reasons for transfers in and out of Level 1 and Level 2 recurring fair value measurements as well as additional information related to activities in the reconciliation of Level 3 fair value measurements. The guidance expanded the disclosures related to the level of disaggregation of assets and liabilities and information about inputs and valuation techniques. The adoption of this amended guidance did not have a significant impact on the condensed consolidated financial statements.

In December 2010, the FASB issued amended guidance for performing goodwill impairment tests, which was effective for the Company January 1, 2011. The amended guidance requires reporting units with zero or negative carrying amounts to be

assessed to determine if it is more likely than not that goodwill impairment exists. As part of this assessment, entities should consider all qualitative factors that could impact the carrying value. The adoption of this amended guidance did not have a significant impact on the condensed consolidated financial statements.

Note D — Operating segment data

At March 31, 2011, the Company had eight reportable operating segments. Each operating segment represents an acquisition. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:

	•		Advanced Circuits, an electronic components manufacturing company, is a provider of prototype, quick-turn and production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers mainly in North America. ACI is headquartered in Aurora, Colorado.
	•		American Furniture is a leading domestic manufacturer of upholstered furniture for the promotional segment of the marketplace. AFM offers a broad product line of stationary and motion furniture, including sofas, loveseats, sectionals, recliners and complementary products, sold primarily at retail price points ranging between $199 and $1,399. AFM is a low-cost manufacturer and is able to ship any product in its line within 48 hours of receiving an order. AFM is headquartered in Ecru, Mississippi and its products are sold in the United States.
	•		ERGObaby is a premier designer, marketer and distributor of babywearing products and accessories. ERGObaby’s reputation for product innovation, reliability and safety has led to numerous awards and accolades from consumer surveys and publications. ERGObaby offers a broad range of wearable baby carriers and related products that are sold through more than 900 retailers and web shops in the United States and internationally. ERGObaby is headquartered in Pukalani, Hawaii.
	•		Fox is a designer, manufacturer and marketer of high end suspension products for mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles. Fox acts as both a tier one supplier to leading action sport original equipment manufacturers and provides after-market products to retailers and distributors. Fox is headquartered in Watsonville, California and its products are sold worldwide.
	•		HALO serves as a one-stop shop for approximately 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 870 account executives. HALO is headquartered in Sterling, Illinois.
	•		Liberty Safe is a designer, manufacturer and marketer of premium home and gun safes in North America. From its over 200,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.
	•		Staffmark, a national provider of contingent workforce solutions that serves the temporary staffing needs of employers throughout the United States, provides a full spectrum of light industrial and clerical staffing solutions. Staffmark is headquartered in Cincinnati, Ohio.
	•		Tridien is a leading designer and manufacturer of powered and non-powered medical therapeutic support surfaces and patient positioning devices serving the acute care, long-term care and home health care markets. Tridien is headquartered in Coral Springs, Florida and its products are sold primarily in North America.

The tabular information that follows shows data of each of the operating segments reconciled to amounts reflected in the condensed consolidated financial statements. The operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. Revenues from geographic locations outside the United States were not material for any operating segment, except Fox and ERGObaby, in each of the periods presented below. Fox recorded net sales to locations outside the United States, principally Europe and Asia, of $27.9 million and $21.4 million for the three months ended March 31, 2011 and 2010, respectively. Of the Asian sales, sales to Taiwan totaled $8.6 million and $8.1 million for the three months ended March 31, 2011 and 2010, respectively. ERGObaby recorded net sales to locations outside the United States of $8.1 million for the three months ended March 31, 2011. 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 certain charges from the acquisitions of the Company’s initial businesses 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 months ended March 31, 2011 and 2010 is presented below (in thousands):

Net sales of operating segments

		Three Months Ended March 31,
		2011				2010
ACI		$	20,293			$	14,484
American Furniture			35,940				43,980
ERGObaby			11,471				—
Fox			42,880				32,732
Halo			32,686				29,704
Liberty			20,203				—
Staffmark			246,799				217,402
Tridien			13,853				15,317
Total			424,125				353,619
Reconciliation of segment revenues to consolidated revenues:
Corporate and other			—				—
Total consolidated revenues		$	424,125			$	353,619

Profit (loss) of operating segments ⁽¹⁾

		Three Months Ended March 31,
		2011				2010
ACI		$	7,082			$	944
American Furniture (2)			(7,998	)			2,713
ERGObaby			2,384				—
Fox			5,024				2,862
Halo			(451	)			(775	)
Liberty			896				(1,450	)
Staffmark			(336	)			(832	)
Tridien			1,243				2,234
Total			7,844				5,696
Reconciliation of segment profit to consolidated loss before income taxes:
Interest expense, net			(2,537	)			(2,686	)
Other income			246				180
Corporate and other (3)			(9,700	)			(21,289	)
Total consolidated loss before income taxes		$	(4,147	)		$	(18,099	)

		Accounts				Accounts
		Receivable				Receivable
		March 31, 2011				December 31, 2010
Accounts receivable
ACI		$	5,815			$	5,694
American Furniture			16,007				13,543
ERGObaby			4,911				3,273
Fox			15,871				17,482
Halo			20,740				29,761
Liberty			12,378				9,720
Staffmark			126,735				128,491
Tridien			6,334				6,004
Total			208,791				213,968
Reconciliation of segment to consolidated totals:
Corporate and other			—				—
Total			208,791				213,968
Allowance for doubtful accounts			(4,554	)			(5,481	)
Total consolidated net accounts receivable		$	204,237			$	208,487

																		Depreciation and
										Identifiable								Amortization Expense
		Goodwill				Goodwill				Assets				Identifiable				for the Three Months
		Mar. 31,				Dec. 31,				Mar. 31,				Assets				Ended Mar. 31,
		2011				2010				2011(1)				Dec. 31, 2010(1)				2011				2010
Goodwill and identifiable assets of operating segments
ACI		$	57,615			$	57,615			$	28,851			$	28,919			$	1,102			$	905
American Furniture (3)			—				5,900				53,813				60,067				771				776
ERGObaby			33,397				33,397				58,554				59,248				684				—
Fox			31,372				31,372				86,030				82,295				1,625				1,526
Halo			39,252				39,252				44,466				41,304				812				840
Liberty			32,685				32,870				37,946				40,917				1,612				—
Staffmark			89,715				89,715				76,304				77,830				1,883				1,895
Tridien			19,555				19,555				18,844				18,774				581				608
Total			303,591				309,676				404,808				409,354				9,070				6,550
Reconciliation of segment to consolidated total:
Corporate and other identifiable assets			—				—				42,242				40,349				1,244				1,455
Amortization of debt issuance costs			—				—				—				—				459				418
Goodwill carried at Corporate level (2)			16,175				16,175				—				—				—				—
Total		$	319,766			$	325,851			$	447,050			$	449,703			$	10,773			$	8,423

Other segment

Staffmark

On April 12, 2011, Staffmark filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of Staffmark’s common stock. The Company currently owns approximately 68.5% of Staffmark’s common stock, on a fully diluted basis.

ERGObaby

In connection with the acquisition of ERGObaby in September 2010, the Company recorded contingent consideration of $0.2 million during 2010, its then fair value. The contingent consideration relates to the $2.0 million additional cash payment the sellers would be entitled to in the event ERGObaby’s net sales, as determined on a consolidated basis in accordance with U.S. GAAP, for the fiscal year ending December 31, 2011 are equal to or greater than a contractually agreed upon fixed amount. If the sellers do not reach this sales goal for the fiscal year ended December 31, 2011, the sellers would not be entitled to any payment. During the three months ended March 31, 2011, the Company recorded an increase in the fair value of the contingent consideration of $0.5 million associated with the increased probability of obtaining the contractually agreed upon sales goal for 2011. Refer to Note H for valuation techniques applied to the contingent consideration liability.

Note E — Property, plant and equipment and inventory

Property, plant and equipment is comprised of the following at March 31, 2011 and December 31, 2010 (in thousands):

		March 31,				December 31,
		2011				2010
Machinery, equipment and software		$	43,408			$	42,421
Office furniture and equipment			3,544				2,812
Leasehold improvements			11,688				9,551
			58,640				54,784
Less: accumulated depreciation			(23,233	)			(21,300	)
Total		$	35,407			$	33,484

Depreciation expense was $2.4 million and $1.9 million for the three months ended March 31, 2011 and 2010, respectively.

Inventory is comprised of the following at March 31, 2011 and December 31, 2010 (in thousands):

		March 31,				December 31,
		2011				2010
Raw materials and supplies		$	51,414			$	47,444
Finished goods			28,366				31,830
Less: obsolescence reserve			(1,949	)			(1,862	)
Total		$	77,831			$	77,412

Note F — Goodwill and other intangible assets

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

2011 Annual goodwill impairment testing

The Company conducted its annual goodwill impairment testing as of March 31, 2011. At each of the reporting units tested, the units’ fair value exceeded carrying value with the exception of American Furniture. The carrying amount of American Furniture exceeded its fair value due to the significant decrease in revenue and operating profit at American Furniture resulting from the negative impact on the promotional furniture market due to the significant decline in the U.S. housing market, high unemployment rates and aggressive pricing employed by its competitors. As a result of the carrying amount of goodwill exceeding its fair value, the Company recorded a $5.9 million impairment charge as of March 31, 2011 which represented the remaining balance of goodwill on American Furniture’s balance sheet. The Company recorded a goodwill impairment charge totaling $35.5 million in the third quarter of 2010.

The carrying amount of American Furniture exceeded its fair value at March 31, 2011 by a significant amount due primarily to the significant decrease in revenue and operating profit together with management’s revised outlook on near term operating results. Further, the preliminary results of this analysis indicated that the carrying value of American Furniture’s

trade name exceeded its fair value by approximately $1.8 million. The fair value of the American Furniture trade name was determined by applying the relief from royalty technique to forecasted revenues at the American Furniture reporting unit.

The impairment charge related to the American Furniture reporting unit reflects the preliminary result from the impairment analysis performed and is subject to finalization of certain fair value estimates being performed with the assistance of an outside independent valuation specialist, and may be adjusted when all aspects of the analysis are completed. The Company expects to finalize the goodwill impairment analysis during the second quarter of fiscal 2011. Any adjustments to the estimate of impairment as a result of completion of this evaluation are currently expected to be recorded in the condensed consolidated financial statements in the second quarter of fiscal 2011.

Of the remaining seven reporting units as of March 31, 2011 the fair value of one of the reporting units was not substantially in excess of its carrying value. Information from the preliminary step-one impairment test for this reporting unit is as follows:

Reporting Unit		Percentage fair value of goodwill exceeds carrying value				Carrying value of goodwill @ March 31, 2011
HALO			9.7	%		$39.2 million

A one percent increase in the discount rate, from 13% to 14%, would have impacted the fair value of HALO by approximately $5.0 million and would have required the Company to perform a step-two analysis that may have resulted in an impairment charge for HALO as of March 31, 2011. Factors that could potentially trigger a subsequent interim impairment review in the future and possible impairment loss at the HALO reporting unit include significant underperformance relative to future operating results or significant negative industry or economic trends.

The estimates employed and judgment used in determining critical accounting estimates have not changed significantly from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report on Form 10-K, for the year ended December 31, 2010, as filed with the SEC.

2010 Annual goodwill impairment testing

The Company completed its 2010 annual goodwill impairment testing as of March 31, 2010. For each reporting unit, the analysis indicated that the fair value of the reporting unit exceeded its carrying value and as a result the carrying value of goodwill was not impaired.

A reconciliation of the change in the carrying value of goodwill for the three months ended March 31, 2011 and the year ended December 31, 2010, is as follows (in thousands):

		Three months				Year ended
		ended March 31,				December 31,
		2011				2010
Beginning balance:
Goodwill		$	411,386			$	338,028
Accumulated impairment losses			(85,535	)			(50,000	)
			325,851				288,028
Impairment losses			(5,900	)			(35,535	)
Acquisition of businesses (1)			—				73,492
Adjustment to purchase accounting			(185	)			(134	)
Total adjustments			(6,085	)			37,823
Ending balance:
Goodwill			411,201				411,386
Accumulated impairment losses			(91,435	)			(85,535	)
		$	319,766			$	325,851

Other intangible assets

Other intangible assets are comprised of the following at March 31, 2011 and December 31, 2010 (in thousands):

		March 31,				December 31,				Weighted Average
		2011				2010				Useful Lives
Customer relationships		$	231,623			$	231,783				12
Technology			44,879				44,879				8
Trade names, subject to amortization			26,080				26,080				12
Licensing and non-compete agreements			10,048				10,048				4
Distributor relations and other			985				896				4
			313,615				313,686
Accumulated amortization customer relationships			(73,648	)			(68,304	)
Accumulated amortization technology			(17,989	)			(16,663	)
Accumulated amortization trade names, subject to amortization			(5,464	)			(4,963	)
Accumulated amortization licensing and non-compete agreements			(6,100	)			(5,640	)
Accumulated amortization distributor relations and other			(645	)			(574	)
Total accumulated amortization			(103,846	)			(96,144	)
Trade names, not subject to amortization			50,330				52,130
Total intangibles, net		$	260,099			$	269,672

Amortization expense related to intangible assets was $7.9 million and $6.1 million for the three months ended March 31, 2011 and 2010, respectively.

Note G — Debt

The Credit Agreement at March 31, 2011 provides for a Revolving Credit Facility totaling $340 million, subject to borrowing base restrictions, which matures in December 2012, and a Term Loan Facility with a balance of $73.5 million at March 31, 2011, 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 carrying value of the Term Loan Facility as of March 31, 2011 approximated fair value, 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 $7.0 million in outstanding borrowings under its Revolving Credit Facility at March 31, 2011. The Company had approximately $253.6 million in borrowing base availability under its Revolving Credit Facility at March 31, 2011. Letters of credit outstanding at March 31, 2011 totaled approximately $68.9 million. At March 31, 2011, the Company was in compliance with all covenants.

The following table provides the Company’s debt holdings at March 31, 2011 and December 31, 2010 (in thousands):

		March 31,				December 31,
		2011				2010
Revolving credit facility		$	7,000			$	22,000
Term loan facility			73,500				74,000
Total debt		$	80,500			$	96,000
Less: Current portion, term loan facility			(2,000	)			(2,000	)
Less: Current portion, revolving credit facility			—				—
Long term debt		$	78,500			$	94,000

Note H — Fair value measurement

The following table provides the assets and liabilities carried at fair value measured on a recurring basis at March 31, 2011 and December 31, 2010 (in thousands):

		Fair Value Measurements at March 31, 2011
		Carrying
Liabilities:		Value				Level 1				Level 2				Level 3
Supplemental put obligation (including current portion)		$	47,826			$	—			$	—			$	47,826
Call option of noncontrolling shareholder (1)			600				—				—				600
Put option of noncontrolling shareholders (2)			50				—				—				50
Contingent consideration related to ERGObaby acquisition (3)			677				—				—				677

		Fair Value Measurements at December 31, 2010
		Carrying
Liabilities:		Value				Level 1				Level 2				Level 3
Derivative liability — interest rate swap		$	143			$	—			$	143			$	—
Supplemental put obligation			44,598				—				—				44,598
Call option of noncontrolling shareholder			1,200				—				—				1,200
Put option of noncontrolling shareholders			50				—				—				50
Contingent consideration related to ERGObaby acquisition			177				—				—				177

A reconciliation of the change in the carrying value of our level 3 supplemental put liability (including current portion) from January 1, 2011 through March 31, 2011 and from January 1, 2010 through March 31, 2010 is as follows (in thousands):

		2011				2010
Balance at January 1		$	44,598			$	12,082
Supplemental put expense			3,228				14,426
Balance at March 31		$	47,826			$	26,508

A reconciliation of the change in the carrying value of our level 3 call option of a noncontrolling shareholder from January 1, 2011 through March 31, 2011 is as follows (in thousands):

		2011
Balance at January 1		$	1,200
Fair Value adjustment to Call option			(600	)
Balance at March 31		$	600

A reconciliation of the change in the carrying value of our level 3 contingent consideration liability at ERGObaby from January 1, 2011 through March 31, 2011 is as follows (in thousands):

		2011
Balance at January 1		$	177
Fair Value adjustment to contingent consideration liability			500
Balance at March 31		$	677

Valuation Techniques

Interest rate swap:

The Company’s derivative instrument consisted of an over-the-counter (OTC) interest rate swap contract which was not traded on a public exchange. The fair value of the Company’s interest rate swap contract was determined based on inputs that were readily available in public markets or could be derived from information available in publicly quoted markets. The swap expired in January 2011. See Note I.

Supplemental put:

The Company and CGM entered into a Supplemental Put Agreement, which requires the Company to acquire the Allocation Interests owned by CGM upon termination of the Management Services Agreement. Essentially, the put right granted to CGM requires the Company to acquire CGM’s Allocation Interests in the Company at a price based on 20% of the company’s profits upon clearance of a 7% annualized hurdle rate. Each fiscal quarter the Company estimates the fair value of this potential liability associated with the Supplemental Put Agreement. Any change in the potential liability is accrued currently as a non-cash adjustment to earnings. The increase in the supplemental put liability during the three months ended March 31, 2011, was primarily related to increases in the estimated values of the Advanced Circuits and Fox operating segments.

Options of noncontrolling shareholders:

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

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

Contingent consideration:

The fair value of this contingent consideration liability for ERGObaby was valued assuming a percentage probability of achieving the agreed upon sales goal, discounted to present value utilizing a discounted cash flow model.

The following table provides the assets and liabilities carried at fair value measured on a non-recurring basis as of March 31, 2011 (in thousands):

																		Gains/(losses)
		Fair Value Measurements at Mar. 31, 2011																Three months ended
		Carrying																Mar. 31,
Assets:		Value				Level 1				Level 2				Level 3				2011				2010
Goodwill (1)		$	—			$	—			$	—			$	—			$	(5,900	)		$	—
Trade name (2)			1,200				—				—				1,200				(1,800	)		$	—

Note I — Derivative instruments and hedging activities

On January 22, 2008, the Company entered into a three-year interest rate swap (“Swap”) agreement with a bank, fixing the rate of its Term Loan Facility borrowings at 7.35%. The Swap was designated as a cash flow hedge and expired in January 2011.

The Company’s objective for entering into the Swap was to manage the interest rate exposure on a portion of its Term Loan Facility by fixing its interest rate at 7.35% and avoiding the potential variability of interest rate fluctuations. For the three months ended March 31, 2011 and 2010, the Company recorded a $0.1 million gain and $0.3 million gain, respectively, to accumulated other comprehensive loss, which reflects that portion of comprehensive income (loss) reclassified to net income (loss).

Note J — Comprehensive loss

The following table sets forth the computation of comprehensive loss for the three months ended March 31, 2011 and 2010 (in thousands):

		Three months ended
		March 31,
		2011				2010
Net loss attributable to Holdings		$	(6,974	)		$	(15,969	)
Other comprehensive income:
Unrealized gain on cash flow hedge			143				319
Total other comprehensive income			143				319
Total comprehensive loss		$	(6,831	)		$	(15,650	)

Note K — Stockholder’s equity

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

     Distributions:

	•		On January 28, 2011, the Company paid a distribution of $0.34 per share to holders of record as of January 21, 2011.
	•		On March 8, 2011, the Company declared a distribution of $0.36 per share and paid it on April 12, 2011 to holders of record as of March 29, 2011.

Note L — Warranties

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

A reconciliation of the change in the carrying value of the Company’s warranty liability for the three months ended March 31, 2011 and the year ended December 31, 2010 is as follows (in thousands):

		March 31,				December 31,
		2011				2010
Beginning balance		$	3,237			$	1,529
Accrual			605				2,872
Warranty payments			(461	)			(1,726	)
Other (1)			—				562
Ending balance		$	3,381			$	3,237

Note M — Noncontrolling interest

Noncontrolling interest represents the portion of the Company’s majority-owned subsidiary’s net income and equity that is owned by noncontrolling shareholders.

The following tables reflect the Company’s ownership percentage of its majority owned operating segments and related noncontrolling interest balances as of March 31, 2011 and December 31, 2010:

		% Ownership								% Ownership
		March 31, 2011								December 31, 2010
		Primary				Fully Diluted				Primary				Fully Diluted
ACI			69.6				69.4				69.6				69.4
American Furniture			99.9				91.4				99.9				91.4
ERGObaby			83.9				79.9				83.9				79.9
FOX			75.7				68.1				75.7				68.1
HALO			88.7				72.8				88.7				72.8
Liberty			96.2				87.7				96.2				87.7
Staffmark			76.2				68.5				76.2				68.5
Tridien			73.9				61.8				73.9				61.8

		Noncontrolling Interest Balances
		March 31,				December 31,
(in thousands)		2011				2010
ACI		$	2,326			$	2,326
American Furniture			(109	)			(163	)
ERGObaby			7,265				7,087
FOX			14,248				13,373
HALO			3,128				3,211
Liberty			1,214				1,156
Staffmark			51,560				50,962
Tridien			9,982				9,788
CGM			100				100
		$	89,714			$	87,840

Note N — Income taxes

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

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

Our effective income tax rate (benefit) for the three months ended March 31, 2011 and 2010 was 58.4% and (15.5)%, respectively. The effective income tax rate for the three months ended March 31, 2011 includes a significant loss at the Company’s parent, which is taxed as a partnership, and is due largely to interest expense and to the expense associated with the supplemental put.

The reconciliation between the Federal Statutory Rate and the effective income tax rate for the three months ended March 31, 2011 and 2010 are as follows:

		Three months ended March 31,
		2011				2010
United States Federal Statutory Rate			(35.0	%)			(35.0	%)
Foreign and State income taxes (net of Federal benefits)			8.9				0.4
Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders			27.8				32.3
Credit utilization			(25.5	)			(5.8	)
Quarterly effective tax rate adjustment			23.0				(13.1	)
Impairment expense			49.8				—
Other			9.4				5.7
Effective income tax rate			58.4	%			(15.5	%)

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” included elsewhere in this Quarterly Report as well as those risk factors discussed in the section entitled “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2010.

Overview

Compass Diversified Holdings, a Delaware statutory trust, was incorporated in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability company, was also formed on November 18, 2005. In accordance with the Trust Agreement, the Trust is sole owner of 100% of the Trust Interests (as defined in the LLC Agreement) of the Company and, pursuant to the LLC Agreement, the Company has outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Manager is the sole owner of the Allocation Interests of the Company. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.

The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. We characterize small to middle market businesses as those that generate annual cash flows of up to $60 million. We focus on companies of this size because of our belief that these companies are often more able to achieve growth rates above those of their relevant industries and are also frequently more susceptible to efforts to improve earnings and cash flow.

In pursuing new acquisitions, we seek businesses with the following characteristics:

•

North American base of operations;

•

stable and growing earnings and cash flow;

•

maintains a significant market share in defensible industry niche (i.e., has a “reason to exist”);

•

solid and proven management team with meaningful incentives;

•

low technological and/or product obsolescence risk; and

•

a diversified customer and supplier base.

Our management team’s strategy for our businesses involves:

•

utilizing structured incentive compensation programs tailored to each business to attract, recruit and retain talented managers to operate our businesses;

•

regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;

•

assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue and cost related);

•

identifying and working with management to execute attractive external growth and acquisition opportunities; and

•

forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.

We are dependent on the earnings of, and cash receipts from our businesses to meet our corporate overhead and management fee expenses and to pay distributions. These earnings and distributions, net of any minority interests in these businesses, are generally available:

	•		First, to meet capital expenditure requirements, management fees and corporate overhead expenses;
	•		Second, to fund distributions from the businesses to the Company; and
	•		Third, to be distributed by the Trust to shareholders.

2011 Highlights

Increase in quarterly distribution

On March 29, 2011 we declared a first quarter distribution of $0.36 per share payable April 12, 2011, which represented an increase of $0.02 per share.

Staffmark preliminary prospectus filing

On April 12, 2011, Staffmark Holdings, Inc. (“Staffmark”) filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of Staffmark’s common stock. We currently own approximately 68.5% of Staffmark’s common stock, on a fully diluted basis.

Outlook

Sales and operating income during the first quarter of 2011 increased at six of our eight businesses when compared to the first quarter of 2010. The estimate of gross domestic product (“GDP”), a measure of the total production of goods and services, increased during the first quarter of 2011 at the seasonally adjusted annualized rate of 1.8%, compared to 3.1% in the four quarter of 2010. Although this marks the seventh consecutive sequential quarterly increase in the GDP following four consecutive quarterly decreases the decreased rate of growth is an indication that consumer spending has slowed down. Each of our businesses is impacted by the overall economic environment including both consumer spending and increasing commodity and fuel costs. Additionally, American Furniture is also significantly affected by continued tight credit markets and the depressed housing market which is evident in the significant decrease in quarter over quarter sales and operating profit in the first quarter of 2011.

We believe that we will experience sustained modest top-line growth in each of our businesses, with the exception of American Furniture and Tridien, through the remainder of fiscal 2011, although we cannot accurately predict the impact that rising commodity costs, such as steel, cotton and fuel will have on our gross profit margins if current market conditions continue to exist and we are not able to successfully raise prices to offset the cost increases.

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

Results of Operations

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

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

September 16, 2010
ERGObaby

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

		Three months				Three months
		ended				ended
(in thousands)		March 31, 2011				March 31, 2010
Net sales		$	424,125			$	353,619
Cost of sales			334,537				282,593
Gross profit			89,588				71,026
Staffing, selling, general and administrative expense			68,512				61,988
Fees to Manager			3,843				3,664
Supplemental put expense			3,228				14,426
Amortization of intangibles			7,702				6,123
Impairment expense			7,700				—
Operating loss		$	(1,397	)		$	(15,175	)

Net sales

On a consolidated basis, net sales for the first quarter of 2011 increased by approximately $70.5 million or 19.9% when compared to last year’s first quarter. Net sales during the three-months ended March 31, 2011 attributable to the 2010 acquisitions were $31.7 million. Increased revenues at Staffmark and Fox during the three-month period ended March 31, 2011 compared to the same period in 2010 is responsible for the majority of the remaining increase in net sales during the current quarter. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of net sales by business segment.

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

Cost of sales

On a consolidated basis, cost of sales increased approximately $51.9 million during the three month period ended March 31, 2011 compared to the corresponding period in 2010. This increase is due almost entirely to the corresponding increase in net sales referred to above. Gross profit as a percentage of sales increased approximately 100 basis points to approximately 21.1% during the first quarter of 2011 compared to 20.1% in 2010. Gross profit as a percentage of sales for the 2010 acquisitions are higher than the average margin of our other businesses which helped increase the 2011 average gross profit margin. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of cost of sales by business segment.

Staffing, selling, general and administrative expense

On a consolidated basis, staffing, selling, general and administrative expense increased approximately $6.5 million during the three month period ended March 31, 2011 compared to the corresponding period in 2010. This increase is due principally to: (i) increases in costs directly tied to sales such as commissions and direct customer support services; (ii) increases in selling general and administrative expenses attributable to the 2010 acquisitions totaling $5.4 million during the first quarter of 2011, offset in part by non-cash stock compensation expense incurred at Advanced Circuits totaling approximately $3.8 million in the first quarter of 2010 with no like-kind charge incurred during the most recent quarter. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of staffing, selling, general and administrative expense by business segment. At the corporate level, staffing, selling, general and administrative expense decreased $0.2 million during the three months ended March 31, 2011 compared to the same period in 2010.

Fees to manager

Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the three-months ended March 31, 2011 we incurred approximately $3.8 million in expense for these fees compared to $3.7 million for the corresponding period in 2010.

Supplemental put expense

Concurrent with the 2006 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. This charge represents the estimated increase/decrease in the value of our businesses over our basis in those businesses together with the increase/decrease in the contribution portion of the profit allocation that our

Manager would be entitled to if the Management Services Agreement were terminated. During the three months ended March 31, 2011, we incurred approximately $3.2 million in supplemental put expense based on higher overall valuations attributed to our subsidiaries compared to valuations determined as of December 31, 2010. During the three months ended March 31, 2010, we incurred approximately $14.4 million in supplemental put expense based on higher overall valuations attributed to our subsidiaries compared to valuations determined as of December 31, 2009. The change in supplemental put expense in the three months ended March 31, 2011 and March 31, 2010 is attributable to the increase in the fair value of our businesses.

Impairment expense

We incurred an impairment charge in the first quarter of 2011 totaling $7.7 million at our American Furniture business segment based on our preliminary analysis of step one of our annual goodwill impairment analysis. The portion of the impairment charge that was attributable to impaired goodwill at American Furniture was $5.9 million. The remaining $1.8 million charge reflected a write down of the unamortized balance of American Furniture’s intangible asset, its trade name. The write downs were necessary based on the further deterioration of the promotional furniture market.

We have completed our preliminary annual impairment analysis of goodwill as of March 31, 2011 and there is no indication of goodwill impairment at any of our other reporting units at this time.

Results of Operations — Our Businesses

The following discussion reflects a comparison of the historical results of operations of each of our businesses for the three-month periods ending March 31, 2011 and March 31, 2010 on a stand-alone basis. The results of operations for the 2010 acquisitions include appropriate pro-forma adjustments and explanations. We believe this is the most meaningful comparison of the operating results for each of our business segments. The following results of operations of our businesses are not necessarily indicative of the results to be expected for a full year.

Advanced Circuits

Overview

Advanced Circuits is a provider of prototype, quick-turn and volume production PCBs to customers throughout the United States. Collectively, prototype and quick-turn PCBs represent over 60% of Advanced Circuits’ gross revenues. Prototype and quick-turn PCBs typically command higher margins than volume production PCBs given that customers require high levels of responsiveness, technical support and timely delivery of prototype and quick-turn PCBs and are willing to pay a premium for them. Advanced Circuits is able to meet its customers’ demands by manufacturing custom PCBs in as little as 24 hours, while maintaining over 98.0% error-free production rates and real-time customer service and product tracking 24 hours per day.

While global demand for PCBs has remained strong in recent years, industry wide domestic production has declined over 50% since 2000. In contrast, Advanced Circuits’ revenues increased steadily through 2008 (2009 saw a slight reduction) and increased again in 2010 and into the first quarter of 2011 as its customers’ prototype and quick-turn PCB requirements, such as small quantity orders and rapid turnaround, are less able to be met by low cost volume manufacturers in Asia and elsewhere. Advanced Circuits’ management anticipates that demand for its prototype and quick-turn printed circuit boards will remain strong and anticipates that demand will be impacted less by current economic conditions than by its longer lead time production business, which is driven more by consumer purchasing patterns and capital investments by businesses.

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

On March 11, 2010, Advanced Circuits acquired Circuit Express based in Tempe, Arizona for approximately $16.1 million. Circuit Express focuses on quick-turn manufacturing of prototype and low-volume quantities of rigid PCBs primarily for aerospace and defense related customers. In the following discussion of results of operations we may refer to Circuits Express as ACI-Tempe.

Results of Operations

The table below summarizes the income from operations data for Advanced Circuits for the three-month periods ended March 31, 2011 and March 31, 2010.

		Three-months ended
(in thousands)		March 31, 2011				March 31, 2010
Net sales		$	20,293			$	14,484
Cost of sales			8,928				6,217
Gross profit			11,365				8,267
Selling, general and administrative expense			3,401				6,604
Fees to manager			125				126
Amortization of intangibles			757				593
Income from operations		$	7,082			$	944

Three months ended March 31, 2011 compared to the three months ended March 31, 2010.

Net sales

Net sales for the three months ended March 31, 2011 increased approximately $5.8 million or 40.1% over the corresponding three month period ended March 31, 2010. The increase in net sales is a result of increased gross sales in long-lead time PCBs ($1.8 million), quick-turn production and prototype PCBs ($3.3 million) and assembly revenue ($0.5 million). Sales from quick-turn and prototype PCBs represented approximately 62% of net sales in 2011 compared to 63% in 2010. Net sales attributable to ACI-Tempe were approximately $5.1 million in the quarter ended March 31, 2011 compared to $1.1 in the same period in 2010. Results of operations for ACI-Tempe for the first quarter of 2010 only included twenty days of operations.

Cost of sales

Cost of sales for the three months ended March 31, 2011 increased approximately $2.7 million from the comparable period in 2010. This increase is principally due to the corresponding increase in sales. Gross profit as a percentage of sales decreased during the three months ended March 31, 2011 (56.0% at March 31, 2011 as compared to 57.1% at March 31, 2010) largely as a result of the lower margins earned on the larger proportion of ACI-Tempe sales during the quarter.

Selling, general and administrative expense

Selling, general and administrative expense decreased approximately $3.2 million during the three months ended March 31, 2011 compared to the same period in 2010 due principally to non-cash stock compensation issued to management in January 2010 totaling approximately $3.8 million, and $0.3 million in direct acquisition costs incurred in acquiring ACI-Tempe in the three-months ended March 31, 2010. Ignoring these one-time 2010 charges, selling, general and administrative expense increased approximately $0.9 million during the three months ended March 31, 2011 compared to the same period in 2010. ACI-Tempe incurred $0.9 million in selling, general and administrative costs in the three-months ended March 31, 2011 compared to approximately $0.2 million reflected in ACI’s expenses in 2010, an increase of $0.7 million.

Income from operations

Operating income for the three months ended March 31, 2011 was approximately $7.1 million, an increase of approximately $6.1 million compared to $0.9 million earned in the same period in 2010, principally as a result of those factors described above.

American Furniture

Overview

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

American Furniture’s products are adapted from established designs in the following categories: (i) motion and recliner; (ii) stationary; (iii) occasional chair, and; (iv) accent tables and rugs. American Furniture’s products are manufactured from common components and offer proven select fabric options, providing manufacturing efficiency and resulting in limited design risk or inventory obsolescence.

Results of Operations

The table below summarizes the income (loss) from operations data for American Furniture for the three-month periods ended March 31, 2011 and March 31, 2010.

		Three-months ended
(in thousands)		March 31, 2011				March 31, 2010
Net sales		$	35,940			$	43,980
Cost of sales			31,290				35,946
Gross profit			4,650				8,034
Selling, general and administrative expense			4,277				4,650
Fees to manager			125				125
Amortization of intangibles			546				546
Impairment expense			7,700				—
Income (loss) from operations		$	(7,998	)		$	2,713

Three months ended March 31, 2011 compared to the three months ended March 31, 2010.

Net sales

Net sales for the three months ended March 31, 2011 decreased approximately $8.0 million, or 18.3% over the corresponding three months ended March 31, 2010. Stationary product net sales decreased approximately $4.2 million, recliner product sales decreased approximately $2.7 million, and motion product sales decreased approximately $0.8 million. Sales of other products and a reduction in fuel surcharges were responsible for the remaining decrease in net sales during the three-months ended March 31, 2011 compared to 2010. The decrease in net sales in all categories is the result of an extremely soft current retail environment and increased competition in pricing in our promotional furniture category during the first quarter of 2011. Sales to AFM’s largest customer decreased $7.0 million in the first quarter of 2011 compared to 2010. The first fiscal quarter of each year is typically AFM’s largest quarter in terms of net sales.

Cost of sales

Cost of sales decreased approximately $4.7 million in the three months ended March 31, 2011 compared to the same period of 2010 and is due primarily to the corresponding decrease in sales. Gross profit as a percentage of sales was 12.9% in the three months ended March 31, 2011 compared to 18.3% in 2010. The decrease in gross profit as a percentage of sales of approximately 5.4% during the three months ended March 31, 2011 is principally attributable to: (i) reduced selling prices during the first quarter of 2011 that were necessary based on aggressive competitor pricing; (ii) increases in overhead absorption rates on finished goods during the current quarter due to the decrease in production volume, and; (iii) raw material price increases. These increases were offset in part by a slight reduction in third-party shipping costs as a greater proportion of delivery was done in-house during the quarter ended March 31, 2011 and those costs are currently reflected in selling, general and administrative expenses.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended March 31, 2011, decreased approximately $0.4 million compared to the same period of 2010. This decrease is primarily due to decreased costs of insurance, bad debt expense and sales commissions. AFM initiated cost cutting measures during the quarter such as reducing headcount and consolidating warehouse facilities which will begin to reflect savings in subsequent quarters during fiscal 2011.

Impairment expense

American Furniture incurred an impairment charge to its goodwill ($5.9 million) and unamortized trade name ($1.8 million), aggregating $7.7 million, during the three months ended March 31, 2011. During the year ended 2010 American Furniture wrote down $35.5 million of its goodwill asset leaving a balance of $5.9 million. The impairment charge noted above eliminates the remaining balance of goodwill. The $1.8 million impairment charge to American Furniture’s trade name is on top of $3.3 million in impairment charges to its trade name expensed in 2010. The remaining intangible asset balance

attributable to trade name after the latest impairment charge is $1.2 million. There were no impairment charges for American Furniture during the comparable 2010 first quarter. The impairment charges resulted from the preliminary results from the annual step one analysis of goodwill and were necessary based on the further deterioration of the promotional furniture market.

Income (loss) from operations

Loss from operations totaled approximately $8.0 million for the three months ended March 31, 2011 compared to income from operations of approximately $2.7 million in the three months ended March 31, 2010, principally due the impairment charges and other factors described above.

ERGObaby

Overview

ERGObaby, with headquarters in Pukalani, Hawaii, is a premier designer, marketer and distributor of baby wearing products and accessories. ERGObaby offers a broad range of wearable baby carriers and related products that are sold through more than 900 retailers and web shops in the United States and internationally in approximately 20 countries. ERGObaby has two main product lines: baby carriers (organic and standard) and accessories.

On September 16, 2010 we made loans to and purchased a controlling interest in ERGObaby for approximately $85.2 million, representing 84% of the equity in ERGObaby. ERGObaby’s reputation for product innovation, reliability and safety has lead to numerous awards and accolades from consumer surveys and publications, including Parenting Magazine, Pregnancy Magazine and Wired Magazine.

Results of Operations

The table below summarizes the pro-forma income from operations data for ERGObaby for the three-month periods ended March 31, 2011 and March 31, 2010.

		Three-months ended
		March 31, 2011				March 31, 2010
(in thousands)		(pro-forma)				(pro-forma)
Net sales		$	11,471			$	7,610
Cost of services (a)			4,172				2,286
Gross profit			7,299				5,324
Selling, general and administrative expense			4,127				2,403
Fees to manager (b)			125				125
Amortization of intangibles (c)			429				429
Income from operations		$	2,618			$	2,367

Pro-forma results of operations of ERGObaby for the three-month periods ended March 31, 2011 and 2010 includes the following pro-forma adjustments applied to historical results:

     Pro forma three-month ended March 31, 2011 compared to the pro forma three-months ended March 31, 2010.

Net sales

Net sales for the three-months ended March 31, 2011 were $11.5 million, an increase of $3.9 million or 50.7% compared to the same period in 2010. Domestic sales were approximately $3.4 million in the three months ended March 31,