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Executives

David Burke – Investor Relations, The IBG Group

James Bottiglieri – Chief Financial Officer

Elias Sabo – Partner, Compass Group Management

Alan Offenberg – Chief Executive Officer

Analysts

Larry Solow – CJS Securities

Vernon Plack – BB&T Capital Markets

Troy Ward – Stifel Nicolaus

J.T. Rogers – Janney Capital Markets.

Compass Diversified Holdings (CODI) Q2 2012 Earnings Call August 8, 2012 9:00 AM ET

Operator

Good morning and welcome to Compass Diversified Holdings 2012 Second Quarter Conference Call. Today's call is being recorded. All lines have been placed on mute. (Operator instructions)

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

David Burke

Thank you, and welcome to Compass Diversified Holdings second quarter 2012 conference call. Representing the Company today are Alan Offenberg, CEO; Jim Bottiglieri, CFO; and Elias Sabo, a Founding Partner of Compass Group Management. Before we begin the call, I would like to point out that the Q2 press release including the financial tables is available on the Company's website 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 statements 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.

Alan Offenberg

Good morning. Thank you all for your time and welcome to our second quarter 2012 earnings conference call. We are pleased by our strong consolidated results for the second quarter of 2012, which exceeded our expectations. While Jim will discuss our second-quarter financials in more detail, I would like to note that CODI generated cash flow of $23.3 million for the three months ended June 30, 2012, an increase of 26.6% from the year earlier period. Our notable performance reflects the leadership position and comparative financial strength of our niche businesses.

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

Based on the strong performance across our diverse family of niche market leaders, we paid a distribution of $0.36 per share, representing a coverage ratio of cash flow to distributions paid of 1.34 times for the second quarter, and a current yield of approximately 10%. Since going public, CODI has paid cumulative distributions of approximately $8.16 per share. We remain focused on taking advantage of organic and acquisition related growth opportunities, while maintaining our commitment to provide consistent cash distributions to our shareholders.

During the quarter, we took three meaningful steps to enhance our balance sheet. First, we sold our HALO subsidiary for net proceeds of $66 million. Second, we issued an additional 30 million of term loans, which carry only minimal amortization payments through the end of 2017. Third, we reduced the pricing on our expanded term loans by 1.25%.

These moves have strengthened our balance sheet and provided us with approximately $285 million in total liquidity at the end of the second quarter, positioning us well to capitalize on additional platform and add-on acquisitions. As we have in the past, we will maintain our disciplined approach by acquiring companies that have a real reason to exist at favorable valuations and terms. We will also continue to reinvest in our current subsidiaries to drive future performance.

Before I turn the call over to Elias for an overview of our subsidiaries, I would like to provide some commentary regarding our thoughts about our current group of subsidiaries. We have four leading branded product businesses, consisting of CamelBak, ERGObaby, FOX, and Liberty that represent approximately two-thirds of our subsidiary EBITDA.

These four companies are rapidly growing as evidenced by combined revenue and EBITDA growth of approximately 15% and 20% respectively for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. EBITDA margins also expanded from approximately 19.1% for the six months ended June 30, 2011, to approximately 19.9% for the six months ended June 30, 2012, for these four subsidiaries on a combined basis. All references to combined revenue and EBITDA growth and EBITDA margin are prepared on a pro forma basis, as if we acquired CamelBak on January 1, 2011.

The remaining approximate one third of our subsidiary EBITDA is generated within our niche industrial businesses. These four businesses, which consist of advanced circuits, Advanced Circuits, American Furniture, Arnold, and Tridien when combined produce steady predictable financial performance characterized by high free cash flows. For the six months ended June 30, 2012, these businesses produced a combined 14.7% EBITDA margin, which was equal to the performance for the six months ended June 30, 2011. Combined revenues and EBITDA declined by approximately 4% for the same six month comparison.

All references to combine revenue and EBITDA and EBITDA margin are prepared on a pro forma basis as if we acquired Arnold on January 1, 2011. We believe that the mix of our current group of subsidiaries is very strong, and perhaps as solid of the grouping of subsidiaries that we have had since we became a public entity.

I'll now turn the call over to Elias to overview these subsidiaries on an individual basis.

Elias Sabo

Thank you, Alan. I will begin by reviewing our branded businesses. As Alan mentioned, our branded businesses have performed exceptionally well in 2012, producing combined revenue and EBITDA growth of approximately 15% and 20% respectively for the six-month period ending June 30, 2012, compared to June 30, 2011.

The rate of growth accelerated sequentially in the second quarter of 2012 with year-over-year revenue and EBITDA growth of approximately 18% and 29% respectively, compared to year-over-year revenue and EBITDA growth of approximately 13% and 9% respectively in the first quarter. All four branded product businesses grew in the second quarter led by a 32% year-over-year revenue advance at our FOX subsidiary.

FOX continues to exceed our expectation and showed growth in its core mountain biking, power sports and off-road division. As we have mentioned on previous calls, FOX continues to invest heavily in its infrastructure in order to support this growth. We also experienced rapid year-over-year growth of 21% at Liberty Safe, as overall demand for safes continues to grow.

Like with FOX, we continue to invest in the infrastructure required to support such growth. These investments yielded positive results in the quarter as we experienced steady increases in profitability as the quarter progressed.

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

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

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

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

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

Tridien met our expectations in the quarter, and produced slightly higher year-over-year revenues and slightly lower EBITDA. To reiterate what we have previously stated, we expect Tridien to produce lower EBITDA margins in 2012 as we invest heavily in new product introductions, with the revenue contribution from those new products not materializing until mid-2013.

Positive demographic trends continued to provide a tailwind for future growth, and give us confidence to temporarily reduce EBITDA margins, while we invest in this business. And lastly, AFM performed below expectations in the quarter as the company continues to face an adverse market for promotionally priced furniture. Although we do not expect conditions to improve in the near term, the business through the first half of 2012 has been basically breakeven and self financing.

We continue to position the company to succeed when the market for promotionally priced furniture rebounds by having a linear, more efficient cost structure.

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

James Bottiglieri

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

On a consolidated basis, revenue for the quarter ended June 30, 2012 increased to $230.0 million as compared to $133.1 million for the prior year period, primarily due to the inclusion of CamelBak and Arnold revenues, since these businesses were acquired after June 30, 2011.

Net income for the quarter was $2.2 million as compared to net income of $8.2 million in the year earlier period. During the second quarter of 2012, CODI recorded loss from discontinued operations of $1.7 million, consisting primarily of transaction related costs from the sale of HALO. We also recorded higher interest expense for the second quarter of 2012 as compared to the prior year period due in large part to higher average debt balances, amortization of original issue discount and changes in the fair value of interest rate swaps.

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

Now turning to our subsidiary results beginning with Advanced Circuits. For the quarter ended June 30, 2012, Advanced Circuits revenue increased to $21.2 million compared to $20 million in the prior year period mainly due to inclusion of sales and acquisition of Universal Circuits completed in May of 2012.

Income from operations for the quarter was $5.9 million as compared to $6.8 million for the same period in 2011 as a result of promotional pricing largely for customers served out of our ACI Tempe, Arizona facility and for transaction expenses related to the tuck-in acquisition of Universal Circuits in May of 2012.

For the six-month period ended June 30, 2012 Advanced Circuits’ revenue while $40.6 million was essentially flat as compared to $40.3 million in the prior year period.

Income from operations for the six months ended June 30, 2012 was $12.1 million as compared to $13.9 million for the same period in 2011,which was due to the promotional pricing and the acquisition costs of Universal Circuits.

Now, I would like to turn to American Furniture Manufacturing or AFM. For the quarter ended June 30, 2012, AFM's revenues decreased to $21.3 million as compared to $23.5 million of revenue in the prior year quarter as this business continues to be adversely affected by the challenging environment in the promotional furniture market. AFM

narrowed its operating loss to $0.7 million in the second quarter of 2012 as compared to loss from operations of $1.6 million in the second quarter of 2011, largely due to lower amortization expense.

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

Turning now to our newest company, Arnold Magnetic, which we acquired on March 5, 2012. For the quarter ended June 30, 2012, the Company reported revenues of $32.5 million compared to $34.6 million in the prior year period, which was compared on a pro forma basis as if we acquired Arnold on January 1, 2011. This decrease was primarily due to lower reprographic applications sales, partially offset by higher international sales. The Company had pro forma income from operations of $2.5 million for the second quarter of 2012 as compared to pro forma income from operations of $2.7 million for the second quarter of 2011.

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

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

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

CamelBak anticipates fulfillment of this contract by the first quarter of 2013. Income from operations climbed approximately 50% to $16 million for the six months ended June 30, 2012 compared to a pro forma $10.7 million in year-over-year period due to higher sales volumes, as well as due to favorable sales mix.

Moving to ERGObaby for the quarter ended June 30, 2012 revenue increased approximately 19% to $13.3 million compared to $11.2 million in prior year period, primarily due to sales from the add-on acquisition of Orbit Baby in November 2011.

Income from operations for the second quarter of 2012 was $2.0 million as compared to pro forma $2.4 million in the same period of last year. SG&A expenses for the second quarter of 2012 included approximately $1.2 million of overhead associated with the acquisition of Orbit Baby.

For the six month period ended June 30, 2012, revenue increased 19% to $27.0 million compared to $22.7 million in the prior year period primarily due to sales from Orbit Baby, partially offset by lower international sales due to the timing of deliveries. Income from operations for the six months ended June 30, 2012 was $3.7 million as compared to a pro forma $5.0 million in the prior year period in 2011. SG&A expenses for the first half of 2012 included $2.5 million related to Orbit Baby.

Turning to FOX, revenue increased approximately 32% to $60.7 million for the quarter ended June 30, 2012 compared to $45.9 million in the prior year period. During the second quarter of 2012, we recorded higher sales to original equipment manufacturers of approximately $12.3 million. The company reported operating income of $6.9 million for the quarter ended June 30, 2012, as compared to $44.6 million in the prior year period, representing an increase of approximately 50% due to the strong increase in net sales.

For the six-month period ended June 30, 2012 revenue increased approximately 20% to [$106.4 million] compared to $88.8 million in the prior year period as a result of higher sales to original equipment manufacturers.

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

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

For the six-month period ended June 30, 2012 revenue increased approximately 12% to $43.6 million compared to $38.8 million in the prior year period due to higher dealer and non-dealer sales. Income from operations for the six months ended June 30, 2012 was $2.2 million as compared to operating income of $1.9 million in the same period of 2011.

For the six months ended June 30, 2012 operating results were impacted by costs associated with the implementation of a [new light and safe] production line to meet the strong demand for Liberty's niche leading products.

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

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

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

During the second quarter, we made the strategic decision to sell HALO and used the total proceeds from the sale of approximately $66.4 million to repay outstanding debt under our revolving credit facility. We also exercised an option under our credit agreement, on April 2, 2012, to expand the size of our Term Loan Facility by $30 million, increasing CODI's aggregate outstanding borrowings under this facility to $254.4 million immediately after this borrowing.

The net proceeds of the incremental borrowings were also used to reduce the balance under the revolver. Concurrent with this increased term loan borrowing, we lowered the interest rate on our term loan facility by 1.25%. Under the terms of the amended pricing, amounts borrowed will bear interest at LIBOR plus a margin of 5%, as compared to the previous margin of 6%, and the LIBOR floor was reduced to 1.25% from 1.5%. All other terms of the credit agreement remain unchanged.

We appreciate the support of our lending groups in amending our term loan facility, which enhances CODI’s financial flexibility and lowers the company’s future interest expense.

During the second quarter of 2012, we incurred $2.7 million of maintenance capital expenditures that's compared to $2.9 million in the year earlier period. For the full year 2012, we anticipate maintenance capital expenditures of between $10 million and $13 million as we continue to invest in the long-term performance of our current subsidiaries. We also incurred approximately $0.6 million of growth capital expenditures during the second quarter that were largely spent on Liberty Safe to increase production capabilities.

For 2012, we expect to incur growth capital expenditures of between $5 million and $7 million largely for completing Liberty's production capacity and for growth initiatives at Arnold.

I'll now turn the call back to Alan.

Alan Offenberg

Thanks Jim. We are pleased by our strong results in the second quarter and first half of 2012, which demonstrates the strength of CODI’s unique business model, as well as the leadership position of our niche businesses. Based on our performance, combined with our future prospects, we are well positioned to earn cash flow in excess of our anticipated distributions for 2012.

We remain focused on leveraging our balance sheet strength to invest in high-return organic growth initiatives, while pursuing accretive acquisitions that create significant value for our owners. I 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.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will go first to Larry Solow with CJS Securities.

Larry Solow – CJS Securities

Hi, good morning.

Alan Offenberg

Good morning Larry.

Larry Solow – CJS Securities

A couple of quick sort of global ones, the first one is it sounds like things are – I guess last we spoke you were seeing some modest improvement in your businesses, and looking at these results, maybe you could just sort of put like – it sounds like your businesses are improving, but if you can give sort of a global view of what you are seeing out there in terms of the economy and all, and are you guys sort of just going against the grain or how is it, you know, how do you see things?

Alan Offenberg

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

It is hard for me to comment Larry about – you made a comment about going against the grain, you know, I don’t really want to talk about the performance of our subsidiaries relative to a universe of other companies, we are not entirely sure of you know how you are looking at those, but I would say with respect to our businesses, you know, as we mentioned, they performed well, we remain optimistic about their performance over the balance of the year, and we think that they are all very well positioned, but with respect to the global economy there are concerns as you hear about and read about everyday that we certainly will share, but through the first half of this year I think that on balance we remain cautious about them, but very pleased about our businesses and their ability to perform solidly across – sorry, over the balance of 2012.

As you get beyond that, Larry, we are cautiously optimistic, but the global economy is very difficult to predict and the impact that the global economy could have on any or all of our subsidiaries is also difficult to predict, but we feel very confident about how we’re positioned and how we’re set up for future performance.

Larry Solow – CJS Securities

I know if I heard correctly, it sounds like things are actually – have gotten better through the quarter, at least at your core businesses, and even in some of the smaller ones, is that fair to say?

Alan Offenberg

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

Larry Solow – CJS Securities

Fair enough. Can you just comment specifically just on ERGObaby, obviously revenues were strong, some of that of course was acquisition enhanced, or maybe permanent [also], but just talk about the profit outlook, I know you guys have been investing heavily there, and so…

Alan Offenberg

Sure. Elias will take that question for you Larry.

Larry Solow – CJS Securities

Thanks.

Elias Sabo

Yes, Larry. So in the second quarter as we mentioned a big portion of the revenue growth was attributable to the acquisition we made of Orbit Baby, and we have talked a lot about the investments that we are making predominantly in building infrastructure because this was a relatively young company when it was acquired, and now focused more on marketing to raise brand awareness.

You know, we feel that the company is positioned for profit growth to accelerate in the back half of 2012 and into 2013. A lot of it is based on sales leverage that we expect to get, timing of shipments to some of our international distributors can influence a little bit between quarter-to-quarter how growth looks, but you know, on the full-year basis we feel very confident in the growth profile of both the ERGObaby and Orbit Baby brands, and the leverage that they will produce in terms of profit on a going forward basis.

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

Larry Solow – CJS Securities

Great, and just lastly if I may, just any comments, commentary on the acquisition environment, deal flow, transaction prices, quality of deals, or…

Alan Offenberg

Sure. Deal flow remains solid. I think that it is probably over the last month or so, maybe even six weeks, probably picked up a little bit, the quality is pretty solid. You know, it is Larry we look at a lot of things, right. So there is certainly far more opportunities that we are less compelled by and more compelled by – deal flow is solid. There are definitely good quality opportunities out there that we’re seeing.

Prices are high. There seems to be a robust environment right now in the middle market M&A activity, and we are like we have in the past always going to do our best to sort out and find not only great opportunities, but at valuations that we think makes sense for our shareholders. But the market is pretty robust, prices are high, there is certainly a lot of capital out there to be deployed both by corporations and financial investors, and the lending market in support of high-quality transactions is also very solid. So it is a good market right now, but a competitive market with prices that are pretty robust.

Larry Solow – CJS Securities

Great. Thanks a lot guys.

Alan Offenberg

Sure. Thank you.

Operator

We will go next to Vernon Plack with BB&T Capital Markets.

Vernon Plack – BB&T Capital Markets

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

Alan Offenberg

Yes, sure, I will take Liberty and I will let Elias comment on FOX. With respect to Liberty, their demand for their products should remain fairly strong, and we would expect that demand to remain strong over the balance of the year. And so, you are right, I think that with Liberty we may perhaps not find ourselves with some of the similar patterns as we have seen in the past.

The summer months typically have represented periods where it is a bit slower, and right now demand definitely looks as though it will remain strong through the summer months and throughout the balance of the year. So the demand for Liberty’s products are strong, and as we mentioned, we have invested heavily in additional production. We added employees at Liberty Safe to assist in the production in terms of adding increased shifts to meet that demand, and we expect that to stay solid throughout the balance of the year.

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

Elias Sabo

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

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

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

Vernon Plack – BB&T Capital Markets

Okay, great. And I notice that you talk in the Q about a recapitalization of FOX, can you tell me a little bit about that?

Elias Sabo

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

Alan Offenberg

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

Vernon Plack – BB&T Capital Markets

Okay, great. Thanks very much.

Operator

(Operator instructions) We’ll go next to Troy Ward with Stifel Nicolaus.

Troy Ward – Stifel Nicolaus

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

Alan Offenberg

Sure. As Jim mentioned I believe in his comments you know, CamelBak secured a contract with the Marine Corps for hydration pack towards the end of 2011, which they have been delivering on through the first half of this year, which we expect to complete that contract in the first quarter of 2013. Jim, do you want to comment on the numbers or --

James Bottiglieri

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

Troy Ward – Stifel Nicolaus

For the first six months you said?

Alan Offenberg

Yes.

Troy Ward – Stifel Nicolaus

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

Alan Offenberg

I just – just to make sure we heard the question correctly, you wanted some commentary about organic growth at ERGO, excluding Orbit.

Troy Ward – Stifel Nicolaus

That's correct.

Alan Offenberg

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

Elias Sabo

Yes, no that would, you know, the timing because we do so much business internationally, one of the issues we had at the end of the second quarter was there were some products that actually didn’t get picked up by the freight forwarder until two days after the end of the quarter. You know, we look at the business based on what our bookings are internationally, and what our weekly sell-throughs are in the domestic business, and both of those indicators are that the business is tracking up consistent with our expectations but, you know, the timing of shipments internationally can, you know, move around a little bit.

We did come off of a very strong first quarter in 2011 that actually had some, you know, some pushback from shipments of Q4 ’10. So a little bit of comparisons on the international business are making it a little bit more difficult but I do think you know, from our standpoint looking at the booking numbers the sell-through data, which I think is a truer number that will smooth out kind of any of the vagrancies of, you know, kind of timing of shipments.

We are seeing pretty strong growth here in this business and you know, we would expect in Q3 some of those shipments to catch up that had gotten pushed out and for year-to-date things to look a little bit more in line with what our and I think your expectations are.

Troy Ward – Stifel Nicolaus

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

Alan Offenberg

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

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

Troy Ward – Stifel Nicolaus

Okay, and what about transaction related expenses, was there any of that in this quarter that will go away?

Alan Offenberg

No.

Troy Ward – Stifel Nicolaus

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

Alan Offenberg

Yes, so to your question a little bit of both, the assets are very attractively priced today in that sector, and we think there is, you know, from a long-term investment standpoint this is just really a great time to be a buyer. There is not a lot of competing bids out there, and you know, with what's happening in the defense space and we all know that with sequestration on you know, the horizon starting next year there is a lot of uncertainty.

So we think if you will take a you know, intermediate to longer term view this is one of the you know, better investment times that we could envision for investing in that part of the space. It is also part of our strategy and the strategy really involves around you know, becoming, you know, being able to serve a broader set of what is going to stay here in the United States and as we look at the circuit board business, there is really two components that are [does and have stayed] in the US space, and have good long term growth fundamentals.

One is the core quick turn business that we do in Aurora, a lot of that is based on you know, very short run of product, very small order size, quick time. So that necessitates being here and not having to you know, come through customs, and then the second is the defense side of the business, which is mandated to stay here given the sensitivity around the defense projects, and a lot of the you know, research support that we do.

So we actually feel that this is positioning the company for the you know, we're already in the one very strong you know, area for outlook, which is the core quick turn. We think defense long term has that same profile and, you know, when combined – and given now the investment you know, window which is, you know, I think very strong from a long-term dynamic as I said.

We feel this is you know, pretty good time to be making investments in that arena. So I would caution everybody that you know, part of the reason that is such a good investment opportunity today in the near term is that the outlook you know, kind of for the very near term future for the defense side is not robust.

You know, we’ve done a great job of being able to operate this business and our management team just did a phenomenal job of being able to drive maximum profitability out of it, but I think you know, near the very immediate term revenue outlook on defense is it is going to be subdued, but for long-term we think this is just a you know, a great place to be investing assets.

Troy Ward – Stifel Nicolaus

Great. Thanks guys.

Operator

We’ll go next to J.T. Rogers with Janney Capital Markets.

J.T. Rogers – Janney Capital Markets

Good morning everybody.

Alan Offenberg

Good morning.

J.T. Rogers – Janney Capital Markets

Another question on ACI, it seems like there has been a consolidation of the larger domestic PCB manufacturers. I was wondering if you could comment on any impact that's having on demand or the competitive dynamics of the printed circuit board manufacturing.

Alan Offenberg

Yes, so it is a good point. You know, one of our largest competitors, DDi was bought by Viasystems recently, and so we are seeing a continued move towards consolidation of the larger guys. You know, J.T. I think this is part of a bigger trend that's actually occurring in the marketplace. You know, when we first made the investment in Advanced Circuits, there is something like a little over 500 more jobs in the United States today that number is you know, contracted by about you know, 35% to 40%.

So there has been a consolidation that's occurred because there was excess capacity and I think that continues to happen especially in an environment where revenue growth is not as visible. One of the opportunities in doing consolidations is being able to take capacity off-line and enhance profitability in that way. So you know, we see that as a trend in the industry. In terms of how that is affecting the competitiveness of the industry I would say, you know, in the near term that can create some distortions in terms of you know, kind of pricing in the marketplace.

We did experience and, as Jim mentioned, you know, at our Tempe facility, which is our more defense oriented facility we experienced some major price competition and we actually had some price discounting that occurred and that was you know, the predominant reason for the revenue and, you know, profit declines out of that segment of the business.

You know, on a longer-term basis I think this is you know, extremely positive. Anytime we can get capacity to rationalize in an industry and be more aligned with demand, you know, it bodes well for the long-term health of the industry and pricing on the pricing side. So, you know, we think that this is good. It did create a little bit of short term disruption you know, I think that the lower defense work that’s coming out is also creating you know, significant imbalance in the market today between supply and demand.

But we would again remain very confident especially given the consolidation and the removal capacity from the industry that when, you know, the industry bounces back both on the defense and in the quick turn business that, you know, on a reduced supply basis that actually will bode very well in terms of you know, revenue pricing and profitability.

J.T. Rogers – Janney Capital Markets

Okay, great. And that certainly makes sense from a longer term perspective, in terms of the short term is it the destruction you're talking about, is it just aggressive pricing by your competitors?

Alan Offenberg

Yes, that's – we're seeing our competitors really you know, kind of move pricing down and to be competitive we are you know, having to do the same.

J.T. Rogers – Janney Capital Markets

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

Alan Offenberg

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

Specifically with respect to FOX, I think look, you know, the orders that continue to come in are very strong and Europe does represent a pretty big outlet for both our product directly to European OEs as well as some of the global OEs that are selling their product into Europe, and has a pretty large percentage of our mountain biking business. So with respect to mountain biking you know, we continue to do checks.

We talk with the OEs, clearly they are doing their channel checks and they feel that they’re not in an over inventory position, and I think that's really, you know, kind of the crux of your question is are they building up so much inventory and is the sell through not going to materialize such that there is going to be an you know, whipsaw on the you know, kind of the end of the – at the tail end of the model year so that they bleed out.

They are not saying that to us yet, you know, to a large degree the growth that we’re experiencing is as I said, you know, in the other divisions of power sports and off road, but the growth that we have experienced in the mountain biking segment is predominantly by getting more spec, and by delivering more product with a higher AFP, and more technology then it is you know, a lot of market growth.

So, you know, unlike before like in 2008 when there was a lot of unit growth that was going on in the market, absence of spec change and then that created a little bit of an inventory overhang, we're not seeing the same dynamics go along this time. I think this is more a story of FOX’s execution has been you know, extraordinarily good, the product is very well received both by the OE and that's being pulled through by customer demand and it is those increases that are carrying us, but, you know, it would be I think naïve of me to say that we aren’t concerned with what we hear about in Europe, and the fact that it could have a you know, overhang on the FOX business in the future. There is just no evidence of it today but that's not to say that it won't happen but we're not seeing it yet.

J.T. Rogers – Janney Capital Markets

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

Alan Offenberg

Yes, we don’t you know, give – we don't provide kind of what the data is, you know, on our kind of bookings data, but what I would tell you is you know, it's predominantly the international shipments that can shift around from period to period. We did have a significant amount that went into Q3. We think our, you know, international from what we're seeing business is you know, growing organically at a double-digit pace.

So, you know, we feel pretty good about that and the domestic business is growing as well. So, you know, given that the timing of shipments can shift a little bit, you know, we would expect that in Q3 some of this will be caught up and you know, you’ll see the numbers start to normalize.

J.T. Rogers – Janney Capital Markets

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

Alan Offenberg

We would expect from what we have right now in order for the third quarter to be pretty strong. I mean, we've got expanded distribution here in the United States. We’re you know, pleased with adding Babies "R" Us as a distributor.

We are pleased with adding Target most recently in the third quarter as a retail partner of ours. We’ve also expanded what our European and international distribution is, and our international distributors have been increasing their orders. So some of this is you know, absolutely timing related that you're looking at. This is a business that absolutely is growing in both unit volume and in pricing and so we would expect third quarter as you had mentioned to you know, to kind of write some of the you know, the trends in terms of you know, the negative comparison that you are seeing. This is a business that absolutely is experiencing growth.

J.T. Rogers – Janney Capital Markets

Okay, great. Thanks a lot.

Operator

We’ll go next to Vernon Plack with BB&T Capital Markets.

Vernon Plack – BB&T Capital Markets

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

Alan Offenberg

Yes, the operating margin is actually going to decline Vernon partly because of the newest acquisition. There is really two things that drove operating margin in the second quarter. One would be the discounting that we talked about on price in the defense business. You know, that unfortunately falls right, you know, to the bottom line as you can imagine, and then the second component is the Universal Circuits business is you know, much lower margin business.

That company is operating you know, well below what its capacity is and I think we have you know, a lot of opportunities over the long term and as we you know, kind of implement our strategy here of being you know, a consolidator in that space we’ll be able to you know, really work on capacity absorption, but in the near term that's going to be a far lower margin contributor, and it will blend down the entire business. If you look the product you know, kind of at unit by – or I would say product category by product category, the core quick turn business, which drives the majority of profitability and call it 85% of the profitability, the margins there are remaining intact.

There is no degradation in margin there. But as we move into what is a lower margin business today on the defense side, and especially when you acquire some guy that may have a far lower margin profile, and it is our job to really work on how to get that up, it is going to have the effect of margin degradation across the whole portfolio.

Vernon Plack – BB&T Capital Markets

Okay. That makes sense, and just one last question, as it relates to Arnold, it looks like the fully diluted earnings went from 96.6 down to 87.6, was there a reason behind that?

Alan Offenberg

Yes, it was attributable to option grants.

Vernon Plack – BB&T Capital Markets

Okay. All right, very helpful. Thanks.

Operator

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

Alan Offenberg

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

Operator

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

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