Compass Diversified Holdings (CODI) 2008 Q1 法說會逐字稿

Good morning, and welcome to Compass Diversified Holdings' 2008 first-quarter conference call. Today's call is being recorded. (OPERATOR INSTRUCTIONS). At this time, I would like to turn the conference over to Nicholas Rust of the KCSA Strategic Communications for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

Thank you, Audra, and good morning. Welcome to Compass Diversified Holdings' first-quarter 2008 conference call. Representing the Company today are Joe Massoud, CEO and Jim Bottiglieri, CFO.

Before we begin, I would like to point out that the Q1 press release including the financial tables is available at www.CompassDiversifiedHoldings.com. In addition, management expects to file the Form 10-Q for the quarter ended March 31, 2008 with the SEC later today.

Please note that throughout this presentation, 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 will make statements that contain certain forward-looking statements including statements that regard the future performance of the Company and each of its businesses. 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 inherent uncertainties in projecting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements. Some of these factors are enumerated in the Risk Factors discussion in Form 10-K followed by the Company with the Securities and Exchange Commission for the year ended December 31, 2007 and other filings with the Securities and Exchange Commission. The Company 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 now like to turn the call over to Joe Massoud for his opening remarks.

Thank you, Nick. Welcome to our 2008 first-quarter earnings conference call. During today's call, we would like to provide an update on our operating results for the first quarter on a business by business basis. Before that, I would like to make an overview about our Company's performance as well as discuss briefly our recent announcement on Silvue.

Currently, Compass Diversified Holdings owns eight niche-leading middle market businesses that, as a whole, performed extremely well in the first quarter of 2008. These results are even more impressive as they were achieved during what is considered the softest seasonal quarter of the year for many of our subsidiaries. CODI experienced significant cash flow growth in the first quarter and we expect to show cash flow growth for the full year 2008, notwithstanding any softness in the economy.

Two of our eight companies, CBS and American Furniture, are likely to be impacted negatively in the short term by the economy. In both cases, however, we have good reason at this point to believe that this cycle will produce a natural shakeout in smaller and less well capitalized and committed competitors, which will ultimately make those businesses substantially stronger and more profitable. As a management team, we went through a similar cycle with cyclical businesses earlier this decade, and in each case, our companies emerged with greater market share and higher levels of cash flow.

In addition, we expect, as with the last recession, to take advantage of opportunities to make add-on acquisitions at extremely favorable valuations and terms. I will add that we believe our current financing structure is perfectly suited for this environment.

The even better news is that we expect five of our seven remaining businesses to grow in 2008, and expect to grow to more than make up for any decline in cash flow at the two more cyclical businesses. As evidence of this in the first quarter, we increased cash available for distribution reinvestment, which we'll refer to as CAD or cash flow for this call, to $9.9 million as compared to $6.4 million for the year-ago quarter. For the trailing 12-month period, CODI increased cash flow to $49.8 million, or approximately $1.64 per share, which represents a coverage ratio of approximately 1.3 times on the forward distributions paid through April 25, 2008. During this 12-month period, the excess of cash flow over shareholder distributions was also almost $10 million. The overall health of each of our companies and their ability to generate consistent operating income growth serves as a key driver for further cash flow growth as well as a substantial opportunity to make cash flow accretive platform and add-on acquisitions in the current environment.

Let me note that unlike many yield vehicles that some of you may follow, which are rumored or reported to have reduced their distributions or are considering doing so, we continue to maintain the goal of steadily increasing our distributions over time and believe we'll be able to meet that goal. In addition, we have no liquidity concerns whatsoever with our earliest material maturities occurring in late 2012, and we remain under-levered with a debt to EBITDA ratio of under 2 times.

Let me take a moment now to provide an overview of our recent announcement regarding Silvue. On May 9, 2008, we announced that we had entered into a definitive agreement to sell the business to Mitsui Chemicals Japan for a total enterprise value of $95 million. We believe this represents a very attractive multiple for our shareholders, and we expect to redeploy the receipts from this transaction at significantly more attractive multiples. This divestiture accomplishes a number of things for us, including allowing us to access even more additional capital capacity beyond the over $200 million we already had available under our debt facility for a deployment in a very attractive environment. And it serves as further evidence and triangulation of the substantial embedded value in the family of companies within CODI, that is, in our view, currently underappreciated by the market.

To evaluate the success of our ownership of Silvue, one can compare the $95 million in enterprise value at the current divestiture to the $44 million in total enterprise value paid by us at the time of our IPO just two years ago in May 2006. Over the period of our ownership, we have successfully worked with management to broaden its geographic and product reach, delve more deeply into existing customer relationships and significantly upgrade and expand its manufacturing capabilities. Clearly, the investment of capital and effort into Silvue has paid off for CODI's shareholders.

This is the second divestiture for CODI since going public. The first, equally successful exit, was in early 2007 and was the sale of Crosman Acquisition Corporation to Wachovia Capital Partners. As a reminder, in that transaction, the enterprise value at the time of the divestiture was approximately $140 million as compared to a CODI purchase price of approximately $80 million less than one year earlier.

In terms of acquisition opportunities, we continue to see a number of attractive opportunities for additional platform and add-on acquisitions at valuations that would be immediately accretive to CAD. The key for us in evaluating potential acquisition opportunities remains our continued focus on five basic criteria.

A, targets must be profitable businesses that are leaders in their specific industry niche. B, the target business must have solid reason to exist or fundamental competitive advantages that are difficult to replicate and which are evidenced by selling prices, gross profit margins, or operating margins that are favorable in comparison to others in their industry. C, we must understand the fundamentals of the target business, which must not be susceptible to technological change or obsolescence. D, existing management of the target business must be motivated and have a strong track record of success. And E, the acquisition must represent a valuation and terms that are attractive to our shareholders. Adherent to these tenants in the past has allowed us to perform well in and out of economic cycles and continued adherence going forward will serve to ensure that the success continues.

With those introductory comments complete, I would like to turn the call over to Jim Bottiglieri to discuss our first-quarter financial results.

Thank you, Jim. Today, I will review our financial results for the quarter ended March 31, 2008, including a review of the operating results of each of our subsidiary companies and a brief mention of some of the catalysts impacting each of our businesses.

On a consolidated basis, revenue for the quarter ended March 31, 2008, was approximately $373 million. The net loss for the quarter was $0.8 million or $0.03 per share. The Company also recorded a non-cash expense of $2.3 million in the first quarter, attributable to its supplemental put obligation, which is a non-cash expense, and which we describe in more detail on our 12/31/07 10-K.

Turning to the results of each of our businesses, starting with Advanced Circuits, for the quarter ended March 31, 2008, Advanced Circuits revenue increased to $14.3 million compared to $13.1 million for the quarter ended March 31, 2007 largely due to increased sales and prototypes and Quickturn production.

Income from operations for the first quarter was $4.8 million compared to $5.1 million for the same period in 2007. The decrease in operating income was largely due to the recording in fiscal 2007 of lower non-cash charges for loan forgiveness arrangements provided to Advanced Circuits management of approximately $1.2 million. Excluding the impact of this loan forgiveness, operating profit would have increased by approximately $0.9 million, which resulted from the operating profit generated from the increase in sales.

ACI continues to perform well. Growth has occurred both in its core prototype and Quickturn circuit board production businesses as well as its newer and much smaller assembly business.

Aeroglide. For the quarter ended March 31, 2008, Aeroglide's revenue increased to $16.2 million compared to $15.8 million for the same period last year, principally due to increased machinery sales. Income from operations for the quarter ended March 31, 2008 was $2 million compared to income from operations of $1.5 million for the same period in 2007.

The increase was largely attributable to decreased amortization $0.4 million due to higher amortization for the intangible backlog asset recognized in connection with our purchase of Aeroglide in February 2007, and which was fully amortized prior to the start of fiscal 2008, and partially from the increased operating profit generated from the increase in sales.

As a backlog-driven business, Aeroglide has experienced strong sales and maintains a healthy pipeline of orders for the next six months. If products' markets are strong, particularly in food-related and if sales both domestically and internationally are robust.

American Furniture Manufacturing -- for the quarter ended March 31, 2008, revenue decreased to $37.2 million compared to $53 million in the prior-year quarter. Operating income was $3.7 million compared to $5.2 million for the first quarter of 2007. This decrease was due to lower sales resulting from a combination of the fire at its facility in February of 2008, and from the weakening economy. Approximately $3.5 million of the operating income recorded for the quarter was a result of accruing expected reimbursements for the business interruption and from other types of insurance for the loss sustained by the fire. Since the fire, we have carefully reviewed the situation and believe that this event will not materially impact American Furniture's ability to produce cash flow in the medium to long term. AFM and its entire management team has demonstrated resolve in returning AFM to near full production capacity and is currently in the process of rebuilding its plant in Mississippi in the fire sustained in February. This business is performing well now and will benefit in the medium to long term from the difficulties facing many of its smaller competitors.

Anodyne Medical Device. For the quarter ended March 31, 2008, Anodyne's revenues increased to $11.5 million compared to $9.4 million for the same period last year, largely due to sales from new product rollouts and from the inclusion of sales from its acquisition of PrimaTech, which occurred in May, 2007.

Income from operations increased to $0.5 million compared to $0.3 million for the same period in 2007. The increase in operating income is largely due to an increase in sales. Anodyne continues to experience the strong ramp-up of sales of new products that have rolled out in 2007. It is now recognized as a marked leader by both its product end-users and its direct customers.

CBS Personnel -- for the quarter ended March 31, 2008, CBS Personnel reported revenue of $236 million compared to $135.4 million for the same period last year. The 2008 revenue includes revenues of approximately $110 million from the sales of Staffmark since its acquisition by CBS on January 21, 2008. Revenues on a pro forma basis would have been down by approximately 4% due to the impact of a weakening economy. We believe that this percentage decrease is less than the decrease reported by most of the company's publicly traded peers, and further believe that this is evidence that CBS is gaining market share in the markets in which it operates and its further affirmation of CBS's debt operations model.

Income from operations decreased from $3.4 million for the first quarter of 2007 to $1.4 million for the first quarter of fiscal 2008. The impact of the positive operating profit generated from the acquisition of Staffmark was partially offset by lower gross profit percentage of $16.7 million realized for 2008 as compared to $17.7 million realized in the fiscal 2007, resulting from higher workmen's' compensation costs and a shift in the mix of revenues related to the Staffmark acquisition.

Expenses of approximately $1.6 million related to the integration of Staffmark and $8.0 million of higher amortization expense largely attributable to amortization recorded for the acquisition of Staffmark also contributed to the decrease in operating income.

As you know, we acquired Staffmark on January 21, 2008. We're currently moving forward with efforts to integrate these operations into CBS Personnel and are ahead or on target for our goals associated with this integration. In addition, we are pleased to note that CBS continues to perform its [favorable] comparable public company.

CBS's management is well seasoned at integrating acquisitions and experienced and skilled at managing through economic cycles. We are confident in their ability to perform once again.

Halo Branded Solutions. For the quarter ended March 31, 2008, HALO's revenues increased to $28.8 million compared to $23.4 million for the same period last year, principally due to the acquisitions made since December 31, 2007 and from increased sales to existing customers. The loss from operations was approximately $0.8 million for both periods as the operating profit from the increased sales was offset by $0.4 million of higher amortization expense associated with amortization of intangibles established in connection with our purchase of HALO in February of 2007.

On April 24th, HALO completed the acquisition of Goldman Promotions. We expect this acquisition to be accretive to 2008 and going forward. As you will recall, this business experiences a large majority of its cash flow in the fourth quarter of the year.

Silvue Technologies Group. For the fourth quarter ended March 31, 2008, revenue was $5.5 million for both periods. Income from operations was approximately $1.3 million in the first quarter of 2008 compared to $1.5 million for the same period in 2007. The decrease in operating income was largely due to increased selling, general and administrative expenses and for increased research and development expenses as the Company continues to invest in the infrastructure with the hope of developing new product applications.

Now, I will discuss operations of our new subsidiary company, Fox Factory, which we acquired earlier this year. For the quarter ended March 31, 2008, revenue was $23.4 million compared to $15.9 million in the prior-year period. The increase of revenue was attributable to increased sales within our bicycle division. The loss from operations was $0.2 million during the first quarter of 2008 compared to a profit of $0.1 million for the quarter ended March 31, 2007, as the operating profit from the increase in sales was offset by higher amortization expenses of approximately $1.6 million recorded in connection with the acquisition of Fox. Results for 2008 for Fox Factory only represent the operating performance since we acquired the business on January 4, 2008.

This is the first quarter of our ownership, and as we expected, it experienced significant growth. We're looking forward to a successful launch of the Company's new product line for 2008 and 2009 in May and expect the business to continue to grow throughout the year.

Turning to the balance sheet, we had $14 million in cash and cash equivalents and had net working capital of $65.2 million as of March 31, 2008. Subject to borrowing base restrictions at March 31, 2008, CODI had over $200 million in revolving loans available to be used to fund acquisitions and working capital requirements.

I'll now turn the call back over to Joe.

Thank you, Joe. Let me reiterate emphatically my overall satisfaction with our operating results for the first three months of 2008. We have always said the most important factor in the performance of our business long term is the performance of the underlying subsidiaries. And in this regard, we are very pleased. Despite cyclicality in some of our businesses and challenging market conditions, each of our businesses performed well, and we had significant growth in cash flows at our Company for this quarter over last year, and we are confident in their performance for the remainder of the year.

I would like to conclude by sharing an interesting observation that one of our shareholders had about our Company, which is that we are a fairly unusual investment vehicle in that we are a growth company, a value stock, and a high-income stock all at once. Growth, having shown substantial growth quarter-over-quarter comparable cash flow growth for each quarter of our existence for which there even was a comparable quarter; value, now trading at approximately 7 to 8 times cash flow and an even lower multiple of EBITDA; and high income, yielding over 10% to our shareholders in cash distribution while covering that yield by over 30%. In short, CODI provides the ability to own growing niche market leaders with predictable cash flows and an exceptional value, all while collecting a strong yield along the way.

Thank you for your time and we would love to answer any questions you may have. Operator, please open the phone lines for questions.

(OPERATOR INSTRUCTIONS). Larry Solow, CJS Securities.

Joe, could you just briefly discuss your CAD coverage of 1.3? Is that a firm number? And, just looking out not -- looking at your crystal ball a little bit, I would assume you are, without actually giving perfect -- exact guidance --

Yes, the 1.3 CAD coverage is an actual trailing CAD number divided by the actual distributions provided over that trailing period.

Right. Is that a target you kind of look at? Because then assuming that --

Let me make a couple of comments to that. One is, we are emphatically trying not to be in the business of crystal balling. Having said that, it's not a target in that it's not sort of a Board goal to be at 1.3 times. We don't drive off of that. We believe that 1.3 was a good place to be given potential softness in the economy. We always wanted a cushion, and quite honestly, we wanted some built-in room for growth. I think we both created a cushion and some built-in room for growth.

I would say if we didn't increase our distribution this year, we would expect our coverage to be at least that number. And I told you we expected our cash flow to grow this year. So by definition, if there was no increase in distribution, the coverage would mathematically grow if that expectation was correct. But we also have a stated goal of increasing our distributions steadily over time. So I don't know what the denominator is going to look like, so I don't know where it's going to come out. But that, to us, is a healthy level. I don't know in the long term that it needs to be that high. I think it could probably be lower. But a lot of it depends on mix in the business and point in the business cycle. And that's really an evaluation our Board looks at on a quarter-by-quarter basis, Larry.

Right. So if we were to assume that the business kind of does grow in line with your expectations, is at least a good likelihood that you will increase the CAD even at some point later in the year?

If the businesses perform as we expect them to perform this year, I think it's fair to say that it's a good likelihood that would occur.

Right. And then just on Silvue, you certainly got a good price and double and again in two years, which is great. Was there any other motivation behind your sale? Clearly maybe you --

When you say double, too, let's just sort of put it in a normal context of how people look at investments, right? Our investment had two components, a debt component and an equity component. The debt component earned what you would think it would earn, kind of 10% to 11% over time. The equity component produced something like -- not something like -- it produced in excess of an 85% internal rate of return. So first of all, when you say doubling, because people talk about doubling a lot, typically they are talking about doubling their equity. In this particular case, our specific equity investment in this company went more than 4 times if you look at it sort of on a preferred redemption basis, which is something we completed quickly after the IPO.

To answer your question specifically, I think this sale and Elias, I'm going to ask you to chip in if you got additional comments here, but to me, this sale really is a win-win-win all around when I look at us, and I look at Mitsui and I look at the Company, for us. I think we have worked with management to bring the Company a long way and this sale is certainly representative of that. We got a very good multiple. You track the numbers -- you know it looks like almost 12 times trailing EBITDA.

For Mitsui, I think this is a great company for them to build, and I think they have the broad reach to build the company even further. And I think for management, this is a great home for a great long-term home for the company, where they can use some of the technology to develop. Elias, would you --?

Yes, I would agree completely, Joe, with your thoughts.

All right. But anyway, so I think actually -- there was no other decision except for this was the right time to do for this phase in the development of Silvue as a company and for this phase of CODI.

Right, right. Again, I think it's a good deal. I just -- just to play Devil's advocate, have you -- since the business was generating cash flow, I thought maybe you could have held on and kind of swing for the fences with an opportunity in the electronics market, which, that's really what I was kind of getting at.

Clearly one of the reasons for the multiple we got is there is a platform for that opportunity to occur. If a buyer didn't perceive that there was a great opportunity for growth, they wouldn't pay this kind of multiple in general.

Right. Okay.

I would warrant to say that they may have more success hitting those home runs potentially because of who they are than we would have, but we believe that this time this was a very good multiple on very interesting future opportunities that might occur.

Right. Okay. That's fair enough. And then just looking at the two probably most economic sensitive subsidiaries, AMF (sic) and CBS. It looks like CBS actually down only 4% pro forma. It's actually not so bad. It seems to be hanging in there. Do these kind of things -- would you expect it to get worse? Is it kind of a temporary staffing, more of a leading indicator, a lagging indicator? Is it that the seasonality in the first quarter maybe lessened the impact of the --?

Larry, that's a lot of questions, right? What I heard was -- I don't know if you want to comment here on AFM or not. But on CBS, I heard that it looks like it's hanging pretty good. What's my comment on that. Do we think it's going to get better or worse? And I heard is the industry generally leading or lagging it?

Yes, you can touch on CBS first.

Yes, okay. Yes, actually 4% decline, if you look at the broad -- and I won't speak to their numbers because they are easily found -- but we do track them, we think the industry looks like anything like 6% to 10% down, depending on who you are looking at and what the industry is, so we're pretty happy.

And to be a little smug about it, we're not totally surprised. This is what it looked like in the last downturn, and it is sort of an outcome of our operating model there. And our management team is -- I would stack them up against any management team in this industry bar none. So our management is good. They've been through this before and they know how to manage through these cycles. So what I would say, we're pleased -- I guess in a way we're pleased, because it means we are picking up market share. We are, in fact, tracking our customer gains. I can tell you we have a pretty decent number of net customer gains over the last couple quarters. You're never happy to be down; but yes, no, I think it was a good quarter for this company when you consider the fact that this industry was designed to be cyclical. If our numbers aren't down, then we are actually not serving our customer in a sort of paradoxical way.

Our customers employ people on a contract basis so that when the economy is soft, they can be nimble. We [assist] the system in their nimbleness and that's why they reward us by hiring those people back; and in general, hiring back an even greater percentage of their workforce is contract laborers when they come out. So yes, I agree. Not so bad.

For the rest of the year, I don't know. I wouldn't be surprised if it got a little worse though. Not dramatically, but if you were in the mid to high -- not high meaning like 10% -- but mid-ish to highest single digits, if I had to swag down, that wouldn't surprise me. But I would continue to think that we will run ahead of the national comps. So then the third question, I am going to answer and it's going to sound a little bit like I'm having some contradiction here because yes, the industry does tend to lead the economic downturn, and so I think a natural outcome would be well then, shouldn't you have had a sharper decline and shouldn't you be bouncing back?

I don't know if any of us know whether the economy is bouncing back or not, but in general, certainly, people think it leads the industry. That might portend good things for CBS because we might come out quicker. But we are internally cautioning ourselves that it could get a little worse.

Got it. Okay, got it. And then AMF (sic), on AMF (sic) was that -- I know that the fire impacted the entire business. And clearly you made up some of that with your reimbursement. Were those revenues, does that revenue not flow through the line? Is that why it looks a little worse on a top-line basis?

No, the insurance reimbursement does not go through revenue, so those --

Right, exactly. Okay. So that's why the impact looks like it's actually worse than it really was?

Right.

Net of the fire. Okay, great. Thanks, guys. I appreciate it.

Vernon Plack, BB&T Capital Markets.

Thanks very much. Joe, do you have an expected closing date on Silvue?

You know, I think we said in the press release that it is a mid-September date, September --

September 19.

September 19 was the drop dead date. I think the buyer and the management and us would all like it to be sooner rather than later. Unfortunately, it is, to some extent, out of our hands. You have a global company buying a albeit much smaller, but still global company, which means we have governmental approvals in at least three and maybe four jurisdictions that we have to get. And so some of it is out of our hands.

So I think we're all speeding as quickly as possible. We gave you the drop dead date. I would venture it's going to be in August, but that -- but now I'm just really [slagging]. It could be within 30 to 45 days if these governmental approvals occur quickly, and it might stretch out to the drop dead date.

Sure. Sure. And you talk in the --

Vernon, there is always the chance that we get to the drop dead date and we're one week away from something and it extends even beyond that -- we make a mutual agreement to do it. I mean --

I understand.

(multiple speakers) our hands.

You talk in your earnings release this morning about the attractive opportunities that are out there in the current marketplace. I'm trying to get a sense for the level of confidence that you have at least at this point in terms of -- and also given the capacity that you have to add additional portfolio companies. Should we expect you to -- are you confident that you will have several acquisitions this year?

You know, Vernon, I'm going to try to repeat the mantra that I -- and I don't mean to badger you, but that I've said on every call and every investor meeting we're in. We are focused on and confident of the performance of our existing companies. We will not set for ourselves or for our investors goals on the number of acquisitions we do in a given time period because, I think once you set that goal then you feel you've got to meet it, then that makes you stretch where you shouldn't stretch.

So number one, the number of transactions that we complete is entirely dependent on the number of attractive opportunities we see and the number of, it could be zero and it could be three or four in the next 12 months. I don't think it's bigger than three or four. I'm confident that we're going to see a number of interesting add-on opportunities, and I'm also confident that we're seeing a number of -- that we are seeing a number of interesting new platform opportunities. So if I had to guess, I would say in the next six to 12 months, you will see one to two new platform acquisitions and one to three new add-on acquisitions. But again, it's not -- we will not -- 12 months from now if we haven't done any of that, and the Company's cash flow is up 15% to 20%, I'm going to get on the phone and tell you it's been a great month 12 months.

Sure. Okay. Thank you.

Henry Coffey, Ferris, Baker Watts.

Jim, AFM (sic), can you tell me how the insurance proceeds actually, in terms of dollars, how they work through the numbers?

Most of it went through the balance sheet since we're replacing inventory on fixed assets. So basically it's just sitting on the balance sheet as receivables and we're leaving those assets at those amounts.

However, about $3.5 million actually went through operating income. Part of it up -- about $1 million up in cost of goods sold and about $2.5 million in SG&A expense.

So you -- and that's it. You realized the full insurance --

No, no, no. We -- basically the biggest part to still be recognized is the business interruption insurance. We recorded basically the receivables that we expect for the property insurance, which was largely the fixed assets in inventory. But the business interruption insurance, which is the loss of operating income that you would have received, that would be recorded throughout -- over the course of the remainder of the year.

For example, our April profit is going to be down. We will set up a business interruption insurance accrual for the loss profit from April for not having the factory yet at full capacity.

But the March results reflect about $3.5 million.

That's correct. And again, our fire happened on February 10, so it impacted the results of February and March.

So sort of in theory, if you were to earn $2 million a month going forward, but you only earned $1 million, then business interruption covers the gap?

In theory, that's correct.

And just to let you know, so far the insurance companies -- and I'm probably jinxing us -- have been perfectly fine to work with.

And we received already $8 million.

And we've already received $8 million, which we're told is reasonably early in the receipt cycle. We have an insurance adviser, who we think is spectacular. Our CFO down at the Company is doing a great job. Our partners here at Compass are all over this.

Having said that, in our own mind, we've assumed that our business interruption and recovery will be something short of every dollar, just because we're trying to make sure we -- you know, and as we think about increases, when I say to you we think there is a decent chance we'll increase our distribution going forward, it's with the assumption and knowledge in mind that we may not receive every last dollar there.

Good. And in terms of where you stand capital structure wise and debt capacity, what's the size of your additional line of credit, which I assume you're not tapping into much of that, and what about the accordion feature in your --

Okay, so we have drawn about $60 million today on a revolver line of --?

$325 million.

$325 million. You're never going to get to the $325 million number. So whatever it is, extra cushion you need there, that gives you a sense of our current availability. And then if we are able to close Silvue as we expect, we would use that to repay that line and hold onto the excess cash, assuming that between now and whenever it closes, we have not deployed additional capital.

Yes, Henry, when we say there's over $200 million before Silvue, basically what it is, is a $325 million facility, less $60 million outstanding and then unless some letter of credits are that basically go against your availability, that gives you approximately over $200 million.

And you also have capacity to tap into the churn debt market, right?

Yes, well, we have capacity and we have that existing, and I think let's -- I'm not sure today any borrower -- I think we would have as good a shot as any because I think I can say confidently our borrowers are pretty happy with this facility, and it's -- we are underleveraged and it's performing very well.

I don't know that anyone could thank today that if you went back and asked for more term debt, that you would find the additional lenders to fill that shoe. But as soon as -- that fund will come out again, and that capacity is available. But we're not -- we are planning that the fund, that fund won't come out for a while and don't need it to come out. I think we are -- I don't want to say we are unique among some of the yield vehicles out there, but maybe we are somewhat unusual in that we are not dependent at all at this point on additional capacity in the credit market because we are loaded and ready to go and Silvue kind of makes us more loaded.

But if a $290 million acquisition showed up, and I may be -- assuming you had the money from Silvue and you have the money from your bank line, you would be able to tap into that? Or would you have to go back to the bank group and negotiate?

We would have to find additional -- it wouldn't be about the negotiation. We would probably --

(multiple speakers) might have to use the line of credit.

No, you would have to get -- right now, our interest rate on that is I think 3.75% over LIBOR? Some of the banks would think that is a low interest rate. So whether we were able to get a decent rate on it -- whether investors would be interested in issuing new debt at that same rate would be a question.

But I think you are saying what happens when we run out, right? If we ran out tomorrow, I'm not 100% -- I mean if we somehow magically acquired three more businesses tomorrow and deployed all of this capital, I don't know that raising additional debt would be a snap; because while our facility provides for it, you've got to find additional lenders who actually want to stick their toe in the water.

Not I'll tell you what, we've had these conversations with our lenders, and they think we can find it, and there are actually new names out there who aren't in our current debt facility who we're exchanging messages with who seem like they are interested. So it may be possible. What I'm telling you is it's not lined up today. The capacity we have today is the remaining capacity on our revolver and the capacity created by the sale of Silvue.

But you can draw that $200 million, right?

Yes. If you're asking if we could draw that, no, absolutely. There's no contingencies, there's no -- just whether we are in default, and we are several miles away from being anywhere near default, so.

That's what I was really asking. That $200 million is locked and loaded and ready to go.

I thought you wanted us to have even more. No, I mean what's out there is totally available, Henry, and easy to draw.

Very good, thank you. Great quarter.

Robert Dodd, Morgan Keegan.

On -- just coming back to this acquisition opportunity market, not really pipeline, but what are the multiples looking like out there? I've been listening to some of the calls for some of your, as you call them, other yield competitors; they're talking about midmarket multiples in the buyout market that still haven't come down, they are still averaging 8.5. Now I know you have a different approach to how you go about that market, but have you not seen multiple compression yet? Or can you just give us some color on that?

I think there's a wide range. I think there's plenty of equity out there. I think there's a wide range, and I think that there are -- it would be really hard for me to say our multiples are getting compressed if we just got 12 times for Silvue. So I think that there's a wide range.

I will tell you that we find there's an increasing number of transactions, and I would put the Fox, point to Fox as a business, and you can see I'm not adjusting that the rest of the year will continue at the same pace as the first quarter for Fox, but suffice it to say it is a growth company that is performing very well. and there's a business that we bought it -- on an effective cash-flow basis under 8 times on a tax effective all-in basis that would have drawn, we think, a multiple, probably a couple multiples higher. But certainty to close was extraordinarily important for the seller, and we were able to wield that.

I can tell you that where certainty to close is not a big factor, yes, there are people out there willing to pay. Where certainty to close is a big factor, and that's a percentage of the transactions, not a small percentage at all, where you have the seller that looked -- I don't want to say the difference between 7 and 8.5 or 7 and 9 is irrelevant, but where certainty to close is a big deal, I think we are extraordinarily competitive right now.

And I think that those multiples are back in line. We find ourselves competitive on a greater percentage because the advantage we have is more potent now, I would say, than it is in a hyper aggressive market.

But Robert, look, again, for us, a good year would be one in which we made two or three acquisitions, right? We're not booking a lot of loans.

This year, we have already acquired Staffmark, which is a fantastic deal for us, I think; Fox I think is a fantastic deal for us; Goldman Promotions is an excellent add-on for HALO. So if we had a budget, I would tell you that we sit here way ahead of budget. So it's a very strange market out there, Robert, and I know that -- I've heard those calls too where they say the multiples aren't coming down. I think overall, multiples are coming down a little, but I do think it's a fair comment that you were still able to get -- if you can find the right buyer for the right opportunity, then I think the multiples are also firm, because there's plenty of capital out there. But it's a strange market.

Now our model, Robert, you know, is to try to stay out of the crazy, fully widely shopped auctions. We are not always able to do that, but we're trying to exploit our advantages wherever we can. I think Fox, you know, our team on the West Coast, Elias and Pat and Derek did a great job of driving home to a seller that we were the right home for his company because of certainty to close and because of the ability to work with the company to grow it over potentially an intermediate to longer period of time. So we're trying to use what we've got, and it seems to be working.

Got it. Thank you. That's helpful. On American Furniture, are you seeing any rebound in demand from customers speculating on what tax incentive checks are going to get spent on? Which would delay -- because normally it --

I'm hearing a lot of theories.

Yes.

I can't tell you we're seeing it. I'm not even sure those checks have been -- maybe they have, but I don't even know that the checks have -- they have been mailed, I think they are in the mail.

They just started.

Oh, they just started. That's a theory that the industry hopes is going to occur. I've also heard that it'll just get sucked into the gas pump counter theory. We would love that. We're not counting on that. I don't actually -- I guess on the margin it must help somebody, right? Someone is going to make a purchase that might be furniture that they otherwise wouldn't be able to afford to. We're not looking for that to be a big bailout.

I will tell you that we think that compared to our comparables, and, now it's hard because we're so much bigger than anyone else in this promotional space, but we can look at the end promotional customers, and assume that however they are doing the retailers must kind of be how the industry is doing. We feel like we are outperforming our competitors on that basis, and we think that that's a good sign because we're starting -- and we're hearing rumors and people have equipment for sale and things. We think there will be a number of these smaller guys that might not exist in the same form kind of 12 to 18 months from now, and that could be a good dynamic for us and was a good dynamic for the Company in the last recession.

Okay, I've just got two more if I can. Silvue, kind of housekeeping -- are you going to start recognizing that as a discontinued op? And when are you going to put -- mark the supplemental put to kind of the exit price?

Actually, we will recognize that on our next public filings by chance probably be the next 10-Q, June 10-Q, we'll report that as a discontinued operation. And the supplemental put basically at March 31, we used the valuation that we achieved to value the supplemental put. So that actually ran through the financials already.

Your balance sheet is fully burdened as of the thing you got this morning for the supplemental put for that value.

Great, got it. Last one, on Goldman, is it a very similar business to HALO in terms of, you are adding on because of expanding footprint, or could you give us a little bit more color on that add-on?

First of all, we're not giving a whole lot of color on that. Our policy, generally, I think going forward is on the very material or the material acquisitions, to give you a lot of information; and then on the kind of smaller ones, to not give a whole lot. But in this case, they are in the same business. It's a very nice blend. the management team at Goldman is very good, and we think this is a -- it's very consistent with things that -- with acquisitions that HALO has made in the past. So it's not any kind of departure of strategy or business line or geography.

Got it. Thank you.

(OPERATOR INSTRUCTIONS). [Sean Kelston], Clarus Capital.

Hi, it's actually Ephraim Fields for Sean today. Hey, just a quick question about the Staffmark integration expense that you took. What was the income tax -- the income statement impact? Was that $1.6 million?

Yes, that's correct. $1.6 million.

Okay, and that's -- so, your operating income for this quarter of $4 million, that's after --

That's after that --

-- that nonrecurring charge?

That's correct.

Okay. Was there anything else besides the $1.6 million item that was non-recurring that's kind of embedded in these numbers?

No.

Okay. Thanks very much.

At this time we have no further questions. I'll turn the conference back over to management for any closing remarks.

Thank you. In closing again, we are pleased. We are excited about how the companies are performing. I think the economy is in an uncertain spot, but I think our companies are performing very well, and I think we're well planned for the broad range of the exigencies here, and we look forward to continuing to operating this business on your behalf. So thank you for your time. And we will talk to you again next quarter. Thanks.

And that does conclude today's conference. Again, thank you for your participation.