Compass Diversified (CODI) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Compass Diversified Holdings' 2012 Third Quarter Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would 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 the Compass Diversified Holdings Third 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, I would like to point out that the Q3 press release, including the financial tables, is available on the company's website at 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 factor discussion 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 our subsidiary companies. 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 third quarter 2012 earnings conference call. We are pleased to report third quarter results that were consistent with management's expectations. For the 3 months ended September 30, 2012, CODI generated cash flow available for distribution and reinvestment, which we refer to as cash flow, of $22.8 million. Based on our performance, we paid a cash distribution of $0.36 per share, representing a coverage ratio of cash flow to distributions paid of more than 1.3x for the third quarter and a current yield of approximately 10%. Since going public, CODI has paid cumulative distributions of approximately $8.52 per share. Overall, we continue to benefit from the operational and financial strength of our current group of subsidiaries, particularly within our leading branded product businesses, consisting of CamelBak, ERGObaby, Fox and Liberty. These 4 businesses, which represent approximately 2/3 of our total subsidiary EBITDA, have achieved combined revenue and EBITDA growth of approximately 15% and 20%, respectively, for the 9 months ended September 30, 2012, as compared to the 9 months ended September 30, 2011. EBITDA margins also expanded on a combined basis to approximately 20.2% for the 9 months ended September 30, 2012, from approximately 19.4% for the 9 months ended September 30, 2011, for these 4 subsidiaries. I note that all references to our combined revenue and EBITDA growth and EBITDA margin for our leading branded product businesses were prepared on a pro forma basis as if we acquired CamelBak on January 1, 2011. In terms of our niche industrial businesses consisting of Advanced Circuits, AFM, Arnold and Tridien, we continued to generate predictable and strong free cash flow. For the 9 months ended September 30, 2012, these 4 businesses, which represent approximately 1/3 of our subsidiary EBITDA, had combined revenues and EBITDA decline of approximately 4% and 1%, respectively for the same 9-month comparison. However, they produced a combined 14.7% EBITDA margin, an improvement as compared to 14.2% for the 9 months ended September 30, 2011. All references to combined revenue and EBITDA growth -- and EBITDA margin for our niche industrial businesses were prepared on a pro forma basis as if we acquired Arnold on January 1, 2011. Going forward, we remain well positioned to drive future performance by leveraging our unique business model and balance sheet strength. With substantial liquidity totaling more than $275 million, we plan to continue to invest in high-return organic growth initiatives and pursue additional platform and add-on acquisitions. As we have in the past, we will maintain our disciplined approach by acquiring companies with a real reason to exist under favorable terms and valuations that are accretive to cash flow. I will now turn the call over to Elias to review our current group of subsidiaries in more detail.

Thank you, Alan. I will begin by reviewing our branded businesses. As Alan mentioned, we continued to post strong growth across our branded businesses, which produced combined revenue and EBITDA growth of approximately 14% and 19% respectively, for the third quarter of 2012 as compared to the year-earlier period. Nearly all of our branded business -- branded product businesses grew in the third quarter, led by an approximate 73% year-over-year revenue growth at ERGObaby. This business continues to benefit from the strategic add-on acquisition of Orbit Baby and an expanding international presence. In addition, ERGObaby has achieved notable progress towards increasing profitability, with EBITDA more than doubling in the third quarter. We also experienced strong growth at Fox, which expanded revenue by an approximate 18% in Q3. Once again, this business performed well across all 3 market segments: mountain bikes, powered sports and off-road vehicles. EBITDA in the quarter increased over 10% even as we continue to invest in operational improvements in support of our ability to meet the ongoing demand for the company's high-performance suspension products. At Liberty, we posted another strong quarter in terms of both revenue and profitability. We continued to take advantage of the company's leadership position for premium home and gun safes, as well as favorable macro trends while increasing operating efficiencies, which contributed to an approximate 24% increase in EBITDA in the quarter. Liberty's booking levels for the remainder of 2012 and into 2013 remain strong. And at CamelBak, Q3 results were in line with our expectations as EBITDA was comparable to the same period last year. The company's recent agreement with the U.S. Marine Corps to supply a new hydration system for use in training and combat operations continues to perform well. CamelBak anticipates fulfillment of this contract during the first quarter of 2013. We remain focused on leveraging CamelBak's premier reputation for providing innovative personal hydration products and increasing consumer penetration levels worldwide. Next, I will turn to our niche industrial businesses, where overall steady results met our expectations. While third quarter revenue on a combined basis decline by approximately 5%, third quarter 2012 EBITDA grew by approximately 6% on a quarter-over-quarter comparison. Advanced Circuits produced year-over-year revenue growth of more than 13% in the third quarter, primarily due to the inclusion of its most recent add-on acquisition of Universal Circuits in the 2012 results. While demand for the company's core quick-turn production services remained stable, we continued to experience a temporary slowdown in the defense and aeronautical business. Our newest subsidiary, Arnold Magnetic, met our expectations in the third quarter. Revenue declined year-over-year, however. EBITDA increased approximately 12%, primarily as a result of a more favorable sales mix consisting of higher-margin products. EBITDA margins also increased to 13.3%. We remain excited by Arnold's future prospect as we maintain our focus on leveraging the company's leadership position in the specialty and rare earth magnetic industry. Tridien performed in line with expectations in the third quarter. Revenue was essentially flat year-over-year while EBITDA was lower by approximately 23% as anticipated, primarily due to increased investments in R&D. We expect to launch new innovative products by the end of 2013 in an effort to further expand Tridien's diverse platform of leading medical support services and strengthen the company's ability to provide superior customer service. And lastly, AFM performed slightly ahead of our expectations in the quarter as the EBITDA loss narrowed substantially year-over-year. We lowered selling, general and administrative expenses in the quarter by approximately 20%, consistent with our focus on aggressively controlling costs during a challenging retail environment in the furniture industry. We believe our restructuring efforts position AFM well to emerge from the current downturn as a stronger company. 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 and 9-month period ended September 30, 2012. I will limit my comments largely to the overall results for our company since the individual subsidiaries are also detailed in our Form 10-Q for the quarter that was filed last night. On a consolidated basis, revenue for the quarter ended September 30, 2012, increased to $241.2 million as compared to $168.7 million for the prior year period, primarily due to the inclusion of our CamelBak and Arnold subsidiaries. Net income for the quarter was $6.4 million as compared to net income of $12.5 million in the year earlier period. During the quarter -- during the third quarter of 2012, we recorded higher interest expense of approximately $3.8 million as compared to the prior year period due in large part to a higher average debt balance, amortization of original issue discount and changes in the fair value of interest rate swaps. We also recorded an approximate $3.8 million higher noncash supplemental put accrual in the current quarter as compared to the year earlier period. This accrual was based on a periodic review of our current cash flow generation level of CODI subsidiaries as well as anticipated market multiples for those businesses in the event they would be sold in the current environment. Cash flow for the quarter ended September 30, 2012, was $22.8 million as compared to $25.5 million for the prior year period. This year-over-year decline was due to the exclusion of the seasonally strong results from Staffmark, which we sold in October 2011, and from the exclusion of HALO's results, which was sold in May 2012, partially offset by the full inclusion results from CamelBak, which we acquired in August 2011, and from Arnold Magnetic, which we acquired in March 2012. For the 9-month period ended September 30, 2012, we reported cash flow of $62.8 million as compared to $58.3 million for the 9 months ended September 30, 2011, which represented an increase of 7.8%. Turning now to the balance sheet, we had approximately $20 million in cash and cash equivalents and net working capital of $168.1 million as of September 30, 2012. We also had approximately $253.2 million outstanding under our term debt facility and $19 million of borrowings outstanding under our $290 million revolving credit facility as of September 30, 2012, with no significant debt maturities until October of 2016. We have borrowing availability of approximately $269 million under our revolving credit facility at September 30, 2012. During the third quarter of 2012, we incurred $2 million of maintenance capital expenditures as compared to $2.3 million in the year earlier period. For the full year 2012, we anticipate maintenance capital expenditures of between $10 million and $11 million as we continue to invest in the long-term performance of our current subsidiaries. We also incurred approximately $0.7 million of growth capital expenditures during the third quarter as compared to $1.4 million in the prior year period. For 2012, we expect to incur growth capital expenditures of between $4 million and $5 million largely from increasing production capabilities at Liberty and for growth initiatives at Arnold. I will now turn the call back over to Alan.

Thank you, Jim. The strong performance of our diversed family of niche market leaders during the third quarter and 9 months ended September 30, 2012, combined with our balance sheet strength, positions CODI well for the future. We remain focused on utilizing our significant access to capital to take advantage of both organic and acquisition-related growth opportunities that create considerable value over the long term. For the fourth quarter of 2012, we expect to report slightly higher cash flow than the corresponding prior year quarter, largely due to our expectation of generating higher EBITDA in the fourth quarter of 2012 as compared to the EBITDA generated during the fourth quarter of 2011. EBITDA is expected to be higher even despite the loss of over $7 million of EBITDA from HALO and Staffmark generated during the 2011 fourth quarter. The combination of our expectations for the fourth quarter of 2012 with the cash flow generated during the 9 months ended September 30, 2012, will allow us to remain on track to earn cash flow in excess of our anticipated distributions. I would 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] We'll take our first question from Vernon Plack with BB&T Capital Markets. Vernon C. Plack - BB&T Capital Markets, Research Division: I was looking for a little more color in terms of how you're feeling about the acquisition market. It's been 8 months since Arnold. I know you have plenty of capital -- and probably maybe interested more in terms of what you don't like that you're seeing. So just some color on the environment would be helpful.

Yes, sure. Great. Our activity has slowed in terms of the transactions or opportunities that we've been looking at over the last few months. And I think that there -- based on feedback we've got from others in the industry as well, I think there has been a general slowdown in M&A activity. We have seen some opportunities that have been interesting to us. But we believe, due to the lack of good opportunities that the ones that are strong or attracting quite a crowd. There's plenty of leverage to support those transactions. And as a result, we've see multiples for good opportunities continue to be quite high. So Vernon, I believe that it's really a combination of a lack of good opportunities as well as the availability of capital chasing those opportunities, which is making it a bit of a tough environment right now. We've seen plenty of transaction opportunities or platform acquisition opportunities but the quality is low and the number of opportunities is also low. And there's nothing that we've seen or heard that would lead us to believe that there will be a real increase between now and the end of the year. We're hopeful that -- we're hopeful that at the beginning of the next year, activity begins to ramp up again or opportunities begin to ramp up again. But I can also assure you that we've talked internally about being even more proactive about sourcing new platform opportunities that we have in the past. It's something that we always pay attention to and try to do. But perhaps, we can ramp those efforts up as well, and that's something that we continue to evaluate internally. Vernon C. Plack - BB&T Capital Markets, Research Division: Okay. So, it's thought is that maybe perhaps on the sourcing side, there could be some additional efforts spent on that area?

I think it's something that we consider, perhaps. I think that we do a really good job on the sourcing side, and I think that we, as a firm, market ourselves and our capabilities very -- not only in a good way but in a consistent way, and that we're always out there trying to meet new people and source opportunities and provide good service and responsiveness to the people that show us opportunities. So I don't want to imply at all that I'm disappointed with our efforts in that area. However, I do think, like anything else, there's always room to consider new alternatives or to enhance the way you do things. And so that's really more what I'm referring to. If it's an environment where our traditional methods aren't yielding, what we're -- what we've traditionally gotten used to seeing from those efforts, then perhaps it's time to think about ways to tweak those efforts. Vernon C. Plack - BB&T Capital Markets, Research Division: Okay. Well, that's helpful. And just shifting gears. In terms of the thoughts on dividend policy, the dividend is -- I think the last time you increased the dividend was the first quarter of '11. I would suspect that from a policy standpoint, is the thought still to keep the dividend at a level where it's covered by cash flow, covered by CAD for at about a 1.3 multiple?

Just as a reminder, our distribution policy is set by our Board of Directors. But I would tell you that since being a public company, we have taken what we believe to be a conservative approach to those distributions relative to our cash flow. And I don't think that philosophy will be altered at all. I think we continue to believe that a conservative approach is the right approach to take. And just to give you a little bit more guidance, we do not have any intention in the short term to increase our level of distribution.

We will take our next question from Larry Solow with CJS Securities.

I wonder if you could just -- my usual question, just sort of give us a read -- you guys have a pretty good -- just read on the economy, what your clients, your customers are saying -- seeing, what you're seeing. And obviously, a lot of your businesses are continuing to do very well. So just curious of what you're seeing out there, and what the general pulse is.

Yes, Larry, I think that it's probably quite similar to what we discussed last quarter. As you mentioned, many of our companies and certainly as a whole, our group of subsidiaries continue to do quite well. I think there are pockets where there is greater strength than others. I think that they're certainly optimistic as they were, but also cautious as they were with respect to the future. The -- obviously, the branded product businesses have performed really well. We think that the strength of those brands plus the nature of enthusiast customers really leads those types of businesses to do well, despite some challenging economic times because the consumers of those products prioritize those purchases in the course of how they allocate their expenditures. Our other businesses are staying really solid. I think that we do have a couple of businesses that touch the military in a couple of different ways and in what's going on currently, politically, with respect to the Department of Defense, certainly has an impact to varying degrees on some of those businesses. So where there are some pockets of softness, I think often times that can be traced to the companies that touch some of that segment of the economy. And I think that with American Furniture -- although we are very pleased with the way it's improved, I think that when you look at the end customer of that product, the person who's buying the $300 sofa, we still believe that, that end of the consumer spectrum is still really struggling in this economy. And I think that's reflected in the sales of promotionally-priced furniture. Although, there does seem to be some stabilization there. So I think that not a lot has really changed. I think with respect to -- with respect to Europe, again, I think some of our companies have continued to have really good success there, where some others, while not having problems, have seen some softening of their businesses there. So that's really on a company-by-company basis. So I don't really have, based on our group of subsidiary companies, a macro read on markets outside of the United States.

Right, right. Well, I guess with the exception of Fox, but they're, like, doing very well in Europe, right? So...

Fox is doing very, very well in Europe. Exactly.

Right. Hit and knock the cover off the ball. Just some tickler on Fox, is there -- I guess, it's a combination of both just growth and more -- are you guys getting into more brands? Is that fair to say? More...

I think I'll let -- Elias will comment on detail. But growth and getting greater spec with our customer has certainly helped Fox. And Elias, I'll turn it to you to add greater color there.

Yes, Larry, I mean, the businesses, it's depending on which division that we're in. Our mountain biking division really benefited from increased spec position with OEs. A lot of that came out of Europe, where we've increased our spec position there. So we're very pleased with that. Beyond that, our power sports business is doing extremely well. The Side by Side category, which is an area that we had a very early focus when that category was first developing, has really blossomed. There's a number of vehicles from a number of different OEMs that have been launched. We're on a majority of the high-end vehicles. I remember the nature of our product is that we go on the highest end of the vehicles in different categories. And our product in the off-road business is continuing to do very well, both in terms of our OE relationship with Ford, as well as our aftermarket. So we're really clicking up this year across all of our product lines with growth. And as you see, we continue to invest heavily in the business for the operational improvements and the infrastructure that's needed for this company to kind of maintain the growth rates that it's been on. So we're very excited about the things that Fox has been able to achieve here in 2012.

And just one more question, if I may just follow up, just on Fox. So as you get more design wins and more specs, is there a phenomenon where they may be an upfront buy-in? And I realize there's some seasonality in Q3. And I expect Q4 to drop. But in the last couple of years, your design and wins and specs have really expanded. I mean, is it possible this growth inevitably has to slow down, and maybe there's more buy-in upfront or not necessarily?

Well, so is -- I think the buy-in upfront, that's not really an issue. We don't have a lot of loading of an inventory channel that you then have a big -- because these are mostly model year type of products and that's why you see the seasonality. I will say with respect to -- from a long-term growth trend, this company has grown phenomenally under our ownership. And part of that has been some pretty substantial spec wins that we've had within each of the categories. Now over time, as the market position -- as we start to become more and more saturated within the market, the ability to gain spec becomes less on a relative basis. So it's our challenge to find new markets and new opportunities, where we can continue to have accelerated growth. And what I would point you to is the bike business, which we had a very big effort going from a shock to then bringing out and creating a market-dominant position in forks, at the price points that we play in. As we started to get saturation there, we had a great emphasis on power sports. And the category of Side by Side was a small but now burgeoning category that we found is an opportunity to expand our product portfolio into adjacent categories. So that will be -- it's a question of -- I think it's a good one. As our spec position rises, it becomes more difficult to take ever-increasing spec, right, because you already have a lot of market share. But that's why we focus so heavily on new product introductions in the new areas that can benefit from the type of suspension product and technology that we have.

[Operator Instructions] We'll take our next question from Troy Ward with Stifel. Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division: To follow up on Vernon's question with regard to the current environment, can you speak a little bit to maybe what you're seeing kind of size-related as we think of our models in 2013? Is there any differential in what you're seeing based on the size of opportunities? Is there less competition maybe in the smaller deals or do you think -- what do you think a new deal would look like into '13?

Yes, Troy, I think that the types of opportunities that we're looking at are pretty consistent relative to what we've seen in the past. Traditionally, and currently, on small the side we'd probably considered companies with $10 million of free cash flow, going up to -- upwards of $35 million or so of free cash flow. And I think that we've seen opportunities across that spectrum throughout the quarter. And I think that we have not seen a lack of competition on the smaller end of that spectrum. I think you need to get smaller than that to really start to see an area that has less capital attracted to it. And in our experience, once you get below that level of free cash flow, we then start to -- although, look at some very interesting and high-quality companies. Often times, those are companies that lack the infrastructure necessary to really be a CODI subsidiary. And so I think that we'll continue to look at $10 million of free cash flow as a very soft line in terms of the small size of the opportunities. The larger companies are certainly competitive, but there's so many middle-market firms, and you can define that as you know so many different ways, that it's hard to really say that a $50-million-free-cash-flow company has different level of competition than a $25-million-free-cash-flow. I think within that universe, the companies all attract decent attention, particularly if they're of the quality that we're looking for. Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division: Great. That's good color. And then based on your comments last quarter, we were expecting to see a nice quarter in the second half out of ERGObaby. But clearly -- they still beat our revenue and EBITDA expectations by quite a bit. Can you provide us just a little bit more color on kind of what's leading to that strength? Is that low-hanging fruit since the Orbit Baby acquisition and will some of that start to flatline? Kind of what should we expect from ERGO going forward?

Troy, Elias will take that question.

Sure. Well, we are obviously, pleased with ERGObaby's results and I think at the end of -- in the conference call last quarter, we had talked about how ERGObaby was shaping up now. They had a really good third quarter. What I would caution everybody against in reading into ERGObaby's numbers is that timing of international shipments can sway the numbers in any particular quarter. And in the third quarter, we had a significant amount of international shipments that hit. And some of those were shipments that could have gone in the second quarter and came in, in the third quarter. And so we knew that we had some distortions in the numbers in Q2 that were making the numbers look a little bit lower than they should be. But that -- for the 9-month period, we would feel much better, and it would show us a truer reflection. In terms of just the overall business, I would say the business continues to grow. We've expanded distribution here, domestically. We're expanding the number of distributors that we have internationally on the ERGObaby side and on the Orbit Baby side. And both of the brands continue to have a lot of momentum. The Orbit Baby brand, in particular, is doing extremely well. There is a lot of demand for the product right now. We feel very good about some of the products that are not only the market but some of the recently announced products that we've brought to market, our new Double Helix Stroller, which is doing phenomenally well in its initial orders. And so the overall business continues to perform well and grow. Now I would tell you that Q4 is not going to have the kind of growth rates that Q3 had because the timing of shipments will start to normalize back out. But we believe that this is a double-digit -- on an annualized and normalized basis, without having the kind of peculiarities of shipments falling in one quarter or the other, we feel very good that this is, kind of a good double-digit growth business as we continue to take a lot of market share and predominantly have international distribution that is growing very rapidly. So we feel very good about the dynamic that currently exists for this company and how the brands are perceived, both here in the U.S. and more so even internationally, where the brands are just perceived as extremely strong, luxury must-have kind of brands. Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division: That's great color. And then on Arnold, can you just kind of give us maybe a little more background on maybe what we're seeing there and kind of what we should expect? Is there any seasonality in that business? How should we be thinking about this business going forward?

No, there's not really any seasonality to Arnold. I think what you're seeing there is, if you think about Arnold's primary businesses, which include really the core businesses, the permanent magnets business, within permanent magnets, there's a subset of that business called Reprographics which is a mature, lower-margin business that is probably not a business that has either a long horizon to it. But it's one that continues to generate cash flow for the company. Then they also have FlexMag and Rolled Products. I think what you're seeing is that the permanent magnet business, which again, is the core of the business, doing pretty well across all segments both geographically and by end market. That business is a higher margin business, which is why when talk about the mix shift leading to improved EBITDA margins despite lower revenues, that's what we're referring to, is the strength that they're seeing within the permanent magnet business. They have seen some softness in both FlexMag and Rolled Products that has contributed to the revenue decrease this year. And what we're -- and so the company is really performing in many ways in line with expectations. The quarter was a little bit softer than we would like. But we believe that, that is not attributable really to any type of broader economic concern. The company spends a lot of time working on new applications, soliciting new customers, getting on new projects and sometimes, while there's not seasonality, there can be some lumpiness associated as to when they get a new customer. And so they do their best to work on things and project when that might happen. But in the normal course of business, something that you might hope to land in the second quarter that's then going to give you a 2 years' worth of revenue and cash flow, that might not happen until the fourth quarter. So right now we're seeing, as we learn more about this business and live with this business as a new CODI subsidiary, we're learning a bit more about that type of flow within the normal course of its business. And I think that the business is performing in line with our expectations. We think that it's -- I would think that the fourth quarter is going to be -- look probably a lot like the third quarter that we're not anticipating any type of growth, general stability in the business. We would think over the next 3 months and heading into -- it's a little early for us to really give you a read on 2013. But I can say that we expect the company to finish up the year right in line with how we underwrote the business upon our acquisition of it. Is that sufficient or is there something else you'd like me to expand upon? Troy L. Ward - Stifel, Nicolaus & Co., Inc., Research Division: No, that's very good color. And then one last topic. I guess current events, you talked a little bit about kind of maybe the expected continued softness in Advanced Circuits and CamelBak related to their military side or how much impact that may have. A little more color on that? And then just real quickly, did any of the recent storm on the East Coast, will that affect any of your businesses in the fourth quarter?

Yes, I'll take the CamelBak side and the military, and I'll let Elias comment on the Advanced Circuits side and the military. Right now as you know, and we talked about in our results, CamelBak has the Marine Corps contract, which within CamelBak's military business -- predominantly, they sell not through a contracted military program. In this case, it was through a program. And that contract should be completed by -- during the first quarter of 2013. So that's really a piece of business that is not a recurring piece of business. And so the elimination of that contract will certainly have an impact on CamelBak. We hope and we expect it to be offset by other initiatives at the company but in and of itself will certainly be a piece of business that goes away. In addition to that, the sale of products to -- gloves sales, which they sell to the military -- excuse me, are down really in conjunction with troop deployment levels. And they also sell on the bases their hydration systems not as a issued piece of equipment but that the service men and women would buy on their own on their bases at the stores there. And those sales continue to be strong. But again, with deployment levels coming down, we expect those to be a bit softer than they've been in the past. So that the good news for CamelBak is that it's not quite -- in fact, it's predominantly not driven by Department of Defense budget or the passing of a budget or an impact associated with sequestration. But the troop levels certainly, have an impact on CamelBak. And their ability to land specific programs with the military, like the Marine Corps contract, could certainly be impacted to the extent that the Department of Defense budgets remain influx. So I think that going forward in 2013 and with the Marine Corps contract going away, there will be a void there for the CamelBak business. But in the broader context, when you take away that one-time piece of business and look at the CamelBak base business, including what I'll call their ongoing military business, it's -- we feel very strongly that CamelBak will be poised for a very solid year next year. Although, it may not be at the level of performance that we've seen in 2012 due to the elimination of this specific piece of business. I'll let Elias comment on Advanced Circuits and the military.

Yes, with respect to Advanced Circuits, I think it's -- we're seeing a subdued level of activity within the defense side. Nothing's really changed throughout the course of the year. I think if we go back to the last couple of conference calls, we said that the defense and aeronautical side of our business is really seeing reduced demand. Our end customers, which are the customers that contract with the Department of Defense, are seeing reduced demand for their products, both for new innovation of products because of the uncertainty, as well as in some of the platforms that we're on. That business is just being reduced. So if I roll forward to this quarter, again, [ph] there really nothing has changed. There's still the uncertainty as to what will happen with sequestration. I think that there's a hope from some people that maybe there'll be compromises and that business will come back. But that's uncertain. That's based on what the politicians do. Our view right now and what we see in the immediate term is levels of activity for the defense business consistent with what we've seen over the past couple of quarters, which is mostly at a reduced rate from what we've seen in historical years. Longer-term, we still believe that positioning within defense, and the circuit board industry is a good strategy, especially as more of the defense budget will need to be going towards technology, we think longer-term to become smarter. But in the near term, I would say the visibility is very, very hard to predict. And as far as 2013, we don't really have a great view. What we would say right now is we would expect 2013 to look somewhat similar to 2012 on the defense side. Maybe sequestration will push it down a little bit for us. But there's nothing right now that would suggest that there's -- the outlook has changed markedly over the last, call it 90 days since we spoke last. I think it's kind of stayed very much the same.

And then finally, you'd asked about the storm and the impact that the storm may have had on our subsidiaries. I'm not aware of any material impact that the storm has had on our subsidiaries. Off the top of my head, I can think of American Furniture does have customers in the Northeast. So it's possible that some of those customers had seen their businesses impacted over the last couple of weeks by the storm. But I don't believe that even if that is the case that, that would have a material impact on American Furniture.

We'll take our next question from Robert Dodd with Raymond James. Robert M. Ladyman - Morgan Keegan & Company, Inc., Research Division: This is Bob Ladyman for Robert. To follow up on the acquisition market, you did mention things are pricey. Are any valuations in any of your subsidiaries' end markets particularly attractive right now to sell into? Any thoughts on your philosophy there too would be helpful.

Well, I would say that in our very humble opinion, all of our subsidiaries are outstanding. So that when I referenced that the market for premium assets is attractive, I would suggest that all of our companies should they ever enter that market, would be viewed as attractive assets. However, I think that there are obviously, markets and buyers that I think would be interested in any of our companies. I say that more seriously than I was prior-- in my previous comments. But our philosophy remains consistent, which is we work with all of our subsidiaries. We intend to own them direct, and we work with them to build them over the long term. And at times, there may be opportunities for us to divest at those subsidiaries. But it's not really what we focus more on a day-to-day basis on building them and growing them and working with the management teams to optimize them. So I don't think our philosophy on what we do with respect to our subsidiaries has changed. That being said, again, I think if you look throughout the group of subsidiaries, there are some that have certainly grown substantially under our ownership. They have tremendous financial profiles. They're run by outstanding management teams. And so we think there is a lot of embedded value within our group of subsidiaries. Robert M. Ladyman - Morgan Keegan & Company, Inc., Research Division: Okay. That's helpful. I appreciate that. On ERGObaby, you mentioned ramping up your distribution network, both domestically and internationally. I know you mentioned adding Babies "R" Us and Target in the last quarter conference call. Is there a ramp-up time when you add those distributional relationships? Is it a step up? Any color there?

Yes. So typically, I would say we've been -- Babies "R" Us, just to clarify, was added back in 2011, and there has been an additional ramp of that. And when you-- there is an initial sell-in to these customers. But then there's -- the product starts to turn a little bit more rapidly as you get on the shelves, and you get more SKUs and better merchandising because a lot of the challenge, as we all know we thought the mass merchants, making sure that the merchandising is planogrammed and that you're -- that is beyond just the initial sell-in that can help support some of us. So Babies "R" Us actually occurred about a year ago, and we've been seeing that distribution broaden out throughout the Babies "R" Us channel, over the course of the last year. Target's distribution started in the beginning of the year and is gaining momentum and we're working on different merchandising plans in some of their A stores. So that -- there's no sell-in that's occurring with either Babies "R" Us or with Target that we experienced in the third quarter. So that's not a function. There is a -- that's not a function of the growth that we saw in the third quarter. So we feel very good about having the expanded distribution, and what we'll see now and what we've talked about a lot is as our distribution has really become much more filled out, we have a great kind of a lot of touch points with both specialty and now a combination of specialty and mass, here domestically, we've been ramping up our marketing efforts, and there's a lot more advertising that we are doing. We are really focusing very strongly on raising brand awareness that will help to facilitate increased turns of those products through the distribution that we've now secured. So it's kind of the -- the answer to your question is, I don't think there's anything unique in the third quarter that you need to look at in terms of sell-in where we're filling a supply chain. Robert M. Ladyman - Morgan Keegan & Company, Inc., Research Division: Okay. Okay. Good deal. And then on Liberty, was there any impact to Q3 or are you seeing any impact in Q4 from the election?

With Liberty, we've just seen strong demand for their products really throughout the year. And we expect that to continue throughout the balance of 2012. And historically, at least qualitatively. There has always been -- actually, I should say quantitatively. At the last election cycle, there was certainly a spike in the company's performance that after the election, we saw a little bit of softening. But over the last couple of years, we've seen that demand build back up and stay really strong. We really attribute it to the company's brand-building efforts and marketing efforts and new product development efforts and its ability to service its customers in a way that other competitors cannot. In addition, its investment in manufacturing here in the United States has allowed them to really produce a terrific product, we believe unrivaled by any other domestic manufacturer. And we think that periods of uncertainty or concern certainly, or generally have been good to this type of business. But we believe that Liberty's strength and its performance goes beyond that and really gets to the efforts that I just described by the management team. So we're optimistic about Liberty's future.

We'll take our next question from J.T. Rogers with Janney Capital Markets.

I had a quick question on what you guys are seeing at Fox. You mentioned that there are some end markets there you're looking to potentially expanding into. I was wondering if you can talk about maybe what those markets might be.

Well, I mean, we're like -- we -- liked I said we are always looking at new end markets to expand in both off-road and in power sports. And so I would say broadly those categories are the areas where we'll see more expansion in terms of new product development. For the -- and then as you all know, we've talked about the military business is one that we have a small business there today but an increased focus and we think a great opportunity. Although given everything that's going on in the military, we think that's something that it may take a longer given the current environment to be able to secure a win there. I think we also have -- I think we've talked about this -- but we launched a new adjustable seatpost for the mountain biking business within the mountain biking segment. And so that's a product that's out there. It's called the D.O.S.S. seatpost, D-O-S-S, and you can find that online, and reviews. It's a great product, and we're very excited about that. So there's a lot -- there's focus on a lot of different areas. And to go category by category I think would probably be a little bit too granular, but suffice it to say, there's a lot of different activities, whether it be kind of in circle racing or other types of things where there are on-road type of activities, where the need for high-performance suspension is evident and is an unmet need today. And so those are categories where we look at the technology platform that we have and we say, okay, can we create a product that would address an unmet need in the market today? And that's really the evaluation we go through. And then it's about getting kind of a grassroots effort within that category. Getting an influence or whether it's an influence or customer, or if it's kind of a racing enthusiast, getting somebody who's going to be riding on it, starting to win on our suspension products because it's a step change type function and performance improvement. And so that's an ongoing type of activity. And when I referenced earlier, if we were sitting here 5 years ago talking about the Side by Side category, it's a perfect example of how Fox is able to identify areas where there's a current opportunity because there's an unmet suspension technology need within a category. And as we're able to meet that need, if we're right about the category and its popularity and growth, then it becomes a huge opportunity for us. Five years ago, we would have had very little sales within that category. Today, if you go to any of the dealers, you'll see on their top end models, Fox is prominently displayed. So we feel very good about that. And that's how we think broadly about bringing products to new markets. But to get into the particulars of the markets we focus on right now, I think we'd would probably be a little bit too granular. And some of them that we focus on are going to succeed; some aren't. That's the nature of developing new products and new markets.

Okay. So it just sounds like there are a lot of opportunities -- I mean, the opportunities just sort of keep growing as you continue to look at it. On the...

Yes, we have great technology at Fox and we have are the leader in suspension performance, suspension technology, and we believe that can be applicable across the number of different categories, not uniquely to the subset of categories we're currently on. And that's what creates a pretty target-rich environment for us to be able to expand.

Okay. Great. I know you guys said that most of the growth in mountain bike is coming from increased spec and higher ASPs. I'm wondering if you could comment on maybe what unit growth looks like there or if you have some sort of idea. And then generally, what OEM inventory levels and retail sell-throughs in Europe are if you guys have any clarity or feedback from your partners in Europe.

Yes. So it's -- the question you just asked is a great question. And it's very hard to tease out of our numbers what the unit growth is for the industry versus what our spec position growth has been. We know that we've grown spec pretty rapidly. And that's led to the vast majority of our games. So I look at how the business has grown. My personal view is that mountain biking is probably kind of up a little bit. But that is really just a -- there's nothing that -- there's nothing out there, there's nothing published in industry reports right now that would suggest that is the case. I do know that we continue to take market share, which is growing our business. And I know that the overall category isn't growing nearly as fast as we have. In terms so -- I wish I could give you more color on the unit growth for the industry. It's something we're always trying to get our arms around, and there's just not a lot of great data. So I would be cautious about giving you something that is just based on gut rather than actual data. In terms of what we're hearing from a sell-through standpoint, the model year that we ship right now is model year '13. And model year '13 starts hitting the dealer floors pretty much now, and was hitting the dealer floors maybe a little bit -- as early as some of the advanced shipments might've been there, kind of 30 days ago. But we're just starting to see this model year hit the floors. And we're evaluating and trying to talk to as many of our OE partners about the supply chain and how they feel about it. They're -- we're constantly and they are as well, talking to the end markets to determine how the independent bike dealers are doing, and are they getting backed up with supply? We haven't heard any concerns yet. And Europe is a huge area for us, distribution wise, and we all hear about the Europe economies and how they're coming under tremendous pressure in 2012. The natural corollary would be is that's also causing sales to slow down in that territory. We're not hearing anything that's suggesting that. Now I don't -- I want to point you to say that we're hearing that there's robust growth, either. But we're not hearing that there's a major issue that's developing. But it's also early in the 2013 spec year. I would tell you that going into the 2013 model year, we felt very good that the 2012 model year, which remember, the 2012 is going to be declining coming right there. The supply chain should be clearing out of that product coming into the new 2013 model coming in. We have heard that the supply chain broadly was very healthy in terms of their 2012 level coming in and being depleted as expected for the 2013 models to come in. So we're just not hearing anything that would give us a major concern. Now on the same hand, we're not hearing anything that would suggest that Europe is going to have roaring sales. But I think everybody's biggest concern is, could there be a major downturn because of economic calamity over there? And that's just not anything that we're hearing so far.

That certainly sounds positive given how tough things are -- could be over there. On a -- just switching gears a little bit on ERGObaby, you guys definitely executed on the growth you've been talking about over the last couple of quarters. Do you think that you're going to continue to see lumpiness in this business due to international orders? Or is this may be a one-time thing and it'll smooth at least a little bit over the next couple of quarters?

Well, I think that with our -- we believe that over time, it will smooth, partly because the growth of the business and the expansion of many distributors will help to -- because remember a big focus of ours is opening up new markets, and as you open up those markets, those distributors are -- then on our behalf going out and operating opening up retailers, right? So they're being able to really grow. A lot of what happens here is as we're opening up these new markets, we would expect to have a growing business with greater diversification. And part of that gives you more predictability and less lumpiness in your revenue base. Overtime, we believe that will occur. In the nearer term, the timing of shipments could continue to create some lumpiness. And what I would tell you is our distributors -- their -- they do a great job of kind of anticipating what their demand is and then trying to order to that. In some instances, that can -- the demand can materialize a little greater. They can find their inventory levels are a little higher or lower. And so that can cost 30, 60-day kind of shipment delays. That's a little bit beyond our capability to manage right now. So long term, I believe that we'll have much smoother type of quarters. In the near term, I do think that lumpiness could continue to exist. What I would tell you is from a management team standpoint, we will communicate kind of when there's lumpiness in the international orders, so as to make sure that everybody is aware of how this is happening. But I would foresee in the kind of 2013 year, lumpiness could exist. I don't know that it will but it could.

Okay. Great. On Tridien, I think that you mentioned it in your prepared comments that new products would coming at the end of 2013. I think in the last call, it was -- you guys were looking for mid-2013. Has there been any delays there.. in new product integration?

We -- yes, Tridien is doing a good job with bringing new products to market right now. There is -- there has been a little bit of slippage in some products, although there's a pipeline of products throughout 2013. I think we've tried to be a little bit cautious here because with new product introduction, a lot has to occur prior to getting those products to market. So we've just taken a somewhat cautious approach here in the guidance that we've given. But we feel very good about the efforts of our new product introductions, and there will be -- we feel that those will materialize in 2013. But there's a chance that there could be some slippage that would cause that to be at the later part of 2013 versus the middle of 2013. Right now, it's probably a little bit too early to tell.

Okay. And then just the last question, I think, and you guys talked about it earlier, that platform acquisitions just aren't really attractive right now for $10 million plus EBITDA companies. I'm not sure if I missed this, but have you talked about the potential for add-on acquisitions? It seems like some $10 million companies, to the extent you can find them, it would be attractive to roll those into your existing platform businesses.

Completely agree with you, and we are continuously pursuing those efforts across our group of subsidiary companies to the extent it makes sense for that specifics subsidiary. So that's something that we're always focused on, be it on the smaller side or even the larger side. But we will continue with those efforts, as well as our efforts to secure new platform companies. I think that we obviously are in a great position with respect to our liquidity, but one of the things that I think you all hopefully appreciate at this point is that we're just unwilling to compromise our discipline with respect to deploying that available capital. So we're going to keep disciplined or stay disciplined in our efforts as we deploy that capital, as we always have in the past, be it for an add-on acquisition or for a new platform acquisition.

That's great. I think part of that discipline, at least from my point of view, I thought it was interesting that you guys bought UCI in the face of a defense spending slowdown. Any opportunities to expand given that you can have a much longer time view on acquisition then you can wait for these sort of near-term concerns to roll through and maybe get a good deal on a new investment?

Okay. So your -- sorry, your question is a broader question. You're just using the UCI as an example?

Well, just on ACI in particular, is there opportunities to expand that defense business?

Yes, so we're seeing a number of targets within the defense sector and it's-- and we've absorbed Universal Circuits and it's a process. I mean -- and so I think there are a lot of targets. It's an area that we do really like. And as we look at our Advanced Circuits business, as you know this is a just tremendous cash-flow-generating business. The core of the company, which is our quick-turn, creates very stable and predictable revenue with incredible margins. And so I think you properly identified that, that enabled us to take a longer time horizon on some other business areas, and defense being one that we do think today is temporarily depressed. But that creates a great buying window. And so our goal will be to continue to find opportunities within this area, and to be able to make investments. But we are pretty methodical at Advanced Circuits. We believe that after an acquisition is done, there's a lot of integration activities. And it's prudent to make sure that the acquisition that you've done has been properly integrated, that culturally, it's fitting into the operation, that we're starting to get some of the return metrics more in line with what we would expect. And that -- that takes time. And so, our management team, I give them so many kudos here for the work that they've done over the past years in running the business and integrating this acquisition. And we will continue to search for some additional acquisitions because they're so accretive here in. As you identified, our time window is much longer.

We'll take our next question from Jim Stone with PSK Advisors.

A couple of questions. One is, if you look across all of the various operating companies, roughly what percentage of the revenue is coming from out of the country?

Good question. I certainly can think about it on a subsidiary by subsidiary basis. I have not aggregated that. I'd probably prefer to run those numbers and get back to you after the call with a specific answer unless...

I'm just looking for range, I'm not looking for anything. Just a range.

I would say as a range -- I don't know. 15% to 20% probably.

Okay. That's fine. That just gives me a feel then of how much you may be subjected to whatever is happening internationally. And that's almost all European sales?

European and Asian.

Okay. And then in terms of what you've said, the market is relatively slowing up or weak, or however, you want to express it, for acquisitions. I'm wondering if that's making you rethink some of your longer-term strategies. And if so, if you could share with us any of your thoughts in that area.

Yes, I don't think we're rethinking our longer-term strategies because as we've seen over the course of our experience within any industry is there are just often pockets of time that are more active than other times better and less active. And so within that context, we have not concluded that there's been a fundamental shift that would suggest that activity would not be more robust at some point in the future. Obviously, to the extent we did reach that conclusion, we may have to reevaluate our long-term strategy. But at this point, we don't interpret the recent slowdown and the availability of good platform acquisition opportunities as anything more than a normal course of business where at times things are just slower and other times, things are a bit more robust.

I'm thinking also, there has been a fair amount of discussion, which you may or may not agree with, but long term, the U.S. is going to grow a lot slower than what it has been. And therefore, that caused some change in the thinking. And I'm wondering if that slowdown is part of your thinking or it's something you're not concerned with yet.

Oh, I think it's certainly something that we're concerned with. I think it something that we have viewed on a market by market basis and on a company by company basis. And so we're absolutely concerned with it. We evaluate it as I said, by company, by market and try to make good investment decisions based on those reviews and evaluations.

I would now like to turn the call back over to management for final remarks.

Just want to thank you, all, for joining us today. We appreciate your time and your continued support of Compass Diversified Holdings. We look forward to speaking with you again next quarter. Thank you, all. Bye.

This does conclude today's conference call. Thank you, all, for your participation.