Compass Diversified Holdings (CODI) 2008 Q2 法說會逐字稿

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

Thank you, Teresa, and welcome to the Compass Diversified Holdings second-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 second-quarter press release, including financial tables, is available on the Company's website at www.compassdiversifiedholdings.com. In addition, management will file the Form 10-Q for the quarter ended June 30, 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 Safe Harbor statement.

During this conference call, we may make certain forward-looking statements, including statements with regard to future performance of CODI. Words such as believe, expects, projects, 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 materially from those projected in the forward-looking statements. Some of these factors are enumerated in the Risk Factors discussion in the Form 10-K filed with CODI with the SEC for the year ended December 31, 2007, and other filings with the SEC.

In particular, the domestic and global economic environment has a significant impact on certain subsidiary companies, including our largest, CBS Personnel Holdings. The condition of the economy also impacts, to varying degrees, each of the other subsidiary business. Furthermore, we are uncertain as to our ability to consummate acquisitions which are accretive to shareholders, either in 2008 or beyond. 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 Joe Massoud.

Good morning. Thanks, Jeffrey, and I see we have a pretty full call here, so welcome, all, to our 2008 second-quarter earning conference call.

During today's call, we will provide an update on our operating results and a review of our businesses for the second quarter and first half of 2008. But before that, I would like to offer some general comments on CODI's performance, recap our two recent divestitures, provide some guidance as to our expectations for 2008 cash flow, make a brief commentary on our valuation, and provide some thoughts on the current middle-market acquisition environment.

The last three months have been an exciting period for CODI, which included some significant activity on the divestiture front. Currently, Compass Diversified Holdings owns six niche leading middle-market businesses that, as a whole, performed extremely well during the first half of 2008.

Overall, we experienced significant organic cash flow in the second quarter, notwithstanding softness in the economy. In the second quarter, we increased cash available for distribution and reinvestment, which we will refer to as cash flow or CAD, by approximately 48% to $13.9 million compared to $9.4 million for the year-ago quarter. For the trailing 12-month period, CODI increased cash flow to $54.3 million, or approximately $1.72 per share. To give you a sense, the year-ago number for the period ended June 30, 2007, would have been $1.52 per share. So there's some significant growth there.

While many companies are showing declining cash flows across the board in the market, we offer our shareholders a rare opportunity to participate in the growth of our overall mix of businesses. Our strong cash flow levels thus far this year and our expectations for the remainder of the year give us a high level of confidence in our ability to pay and grow our distributions over time, as well as to reinvest our significant excess cash flow into the growth of our business.

As most of you know, our model involves acquiring businesses in cooperation with the management of those companies and working with them to grow the cash flows of their businesses. From time to time, when our Board and management believe it maximizes the returns to our shareholders, we may also sell our interest in some of these businesses.

Two recent examples of the strength of this value creation model were the June sales of Silvue Technologies Group and Aeroglide Holdings. In each instance, the sale was at a valuation that was extremely favorable to our shareholders. As a result of these sales, CODI booked gains totaling approximately $72.3 million or $2.29 per share.

To recap, we also sold Aeroglide -- we sold Aeroglide to Buhler Holding AG of Switzerland for a total enterprise value of $95 million on June 24. After payment to minority shareholders and payment of all transaction expenses, we received approximately $85.6 million. The sale price was approximately 8.5 times trailing EBITDA, which was substantially higher than the multiple we paid when we acquired the business.

And as previously announced and discussed, on June 25 we also closed the sale of Silvue to Mitsui Chemicals of Japan for a total enterprise value, coincidentally, also of $95 million. Silvue was sold for approximately 12 times trailing EBITDA, which also represented a significant uptick in multiple.

The sales of these companies demonstrate our proven ability to successfully manage the lifecycles of middle-market businesses. Including the sale of Crosman in 2007, CODI has realized more than $105 million in gains on the divestiture of businesses for its shareholders since its May 2006 IPO.

Now, turning to gudidance, for the full year we expect CODI to produce between $51 million and $56 million of cash flow in 2008, which is quite similar to our current trailing 12-month results. Also, please note that this guidance assumes we retain the substantial cash on our balance sheet and assumes no additional deployment of this capital capacity prior to the end of the year. Needless to say, for those of you who follow the Company closely, should we consummate an aquisition, we would expect it to be immediately accretive to 2008 cash flow in a meaningful way.

From a valuation perspective, we believe we're currently trading at an extremely attractive valuation, both on the basis of multiple of cash flow generated for our shareholders and on the sum of valuations of our underlying businesses. Based upon the midpoint of our 2008 estimated cash flow, our Company currently trades at only approximately 7 times cash flow, which we think is an excellent valuation, particularly given that our calculation of cash flow excludes the gains we've generated on the sale of our businesses and is net of cash tax payments and maintenance capital expenditures. So it's really for us the measure of sustainable cash flow generated for our shareholders and either returned to them or reinvested on their behalf in the growth of their business.

From a sum-of-the-parts prospective, we are somewhat unusual in our transparent and full disclosure approach to providing financial information to our shareholders. We have decided to provide our stakeholders with information on a quarterly basis on each of our subsidiary companies, allowing for an analysis of the value of those businesses.

A quick-and-dirty analysis of how we conservatively view the businesses could be done in the following way. Based on our June 30, 2008, financials, which we are releasing today, we have $485.4 million of book value or $15.40 per share. In addition, as part of calculating our supplemental put obligation, we make a quarterly estimate of the gain that would be produced if we were to sell each of our businesses. As of June 30, 2008, this obligation was $13.6 million, implying an embedded gain of $67.8 million or an additional $2.15 per share, totaling $17.55 per share.

I would also like to point out that we have now sold three businesses since our initial public offering in May 2006, two of the initial subsidiary companies and one that we acquired after being public. In each case, the valuation actually achieved upon sale was substantially in excess of the valuation used to estimate the supplemental put obligation in prior periods. We have now achieved over $105 million in realized gains for our shareholders in two short years. I say this only to lend some validation and credibility to the valuations we and our outside service providers have arrived at for the existing subsidiary companies and which we believe have the potential to be conservative.

Finally, from a yield point of view, on the strength of our subsidiary company cash flows, we declared a distribution of $0.325 per share during the quarter, which at current prices gives us an annualized cash flow yield of almost 11%.

As a reminder, we have increased our distributions to shareholders by approximately 24% in two short years that we have been public. However, we are not a company whose goal is to distribute all or more than all of our cash flow. Our goal is to create shareholder value through a combination of distribution of cash to our shareholders and reinvestment in our businesses on their behalf.

In terms of acquisition opportunities, we believe the current environment remains very fertile. We are a buyer of choice for sellers and their representatives as a result of our committed financing structure and our certainty to close. With the proceeds from the recent two divestitures, we have ample capital capacity, including approximately $100 million in cash and almost $300 million available under our revolving credit facility, for deployment in an attractive environment. We also have no significant debt maturities until 2012.

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

Thank you, Joe. Today I will review our financial results for the quarter and six months ended June 30, 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 the businesses.

On a consolidated basis, revenues for the quarter and six months ended June 30, 2008, were $398.9 million and $750.0 million, respectively. Net income for the quarter was $72.6 million or $2.30 per share. Net income for the quarter includes a gain on the sale of Silvue and Aeroglide of approximately $72.3 million.

For the six months ended June 30, 2008, net income was approximately $71.8 million or $2.28 per share. The Company also recorded a noncash expense of $4.3 million in the second quarter, attributable to its supplemental put obligation, which is a noncash expense, and which we describe in more detailed in our 12/31/2007 10-K.

Now turning to the results of each of our individual businesses, Advanced Circuits -- for the quarter ended June 30, 2008, Advanced Circuits' revenue increased to $14.3 million compared to $13 million for the quarter ended June 30, 2007, largely due to increased sales of prototypes and quick-turn productions.

Income from operations for the second quarter was $4.5 million compared to $4.1 million for the same period in 2007. The increase in operating income was largely due to the operating profit generated from the increase in sales during the quarter.

For the six months ended June 30, 2008, Advanced Circuits' revenue increased to $28.6 million compared to $26.1 million for the prior period of 2007, largely due to increased sales of prototype and quick-turn production. Income from operations was $9.2 million for both periods.

Operating income remained flat as the operating profit generated from the increase in sales was offset by the recording in fiscal 2007 of lower noncash charges for loan forgiveness arrangements provided to Advanced Circuits' management of approximately $1.2 million.

This business continues to perform well. Growth has occurred both in its core prototype and quick-turn circuitboard production businesses, as well as in its newer and much smaller assembly business. As this leading niche market company grows, it continues to increase its operating efficiency, which in turn leads to opportunities to gain even more customers. We are excited by the Advanced Circuits prospects for the remainder of the year.

American Furniture Manufacturing -- for the quarter ended June 30, 2008, revenues decreased to $31.3 million compared to $35.6 million in the prior-year quarter. Operating income was $1.2 million compared to $2.6 million for the second quarter of 2007.

For the six months ended June 30, 2008, revenue decreased to $68.4 million compared to $88.5 million for the first six months of 2007. Operating income was $4.9 million compared to $7.8 million for the first half of 2007. This decrease was due to lower sales resulting from a combination of a fire at a facility in February 2008 and from a weakening economy.

Approximately $4.1 million of the operating income recorded in the first half of 2008 was a result of accruing expected reimbursements for business interruption and from other types of insurance for the loss sustained by the fire. Since this fire, we have carefully reviewed the situation and continue to believe that this event will not materially impact American Furniture's ability to produce cash flow in the medium to long term. AFM's 1.2 million-square-foot facility is on track to be fully operational by November of 2008.

This business is performing well now and will benefit in the medium to long term from the difficulties facing many of its smaller competitors. We are confident that AFM is outperforming most of its industry competitors, signaling market share growth. We have both added numerous accounts and increased floorspace at existing accounts as our less well-capitalized competitors face difficulties. We are excited about AFM's prospects as we begin to emerge from the current economic softness over the next year or two. In the meantime, we expect the Company to produce cash flows at levels expected when we acquired this business.

Anodyne Medical Device -- for the quarter ended June 30, 2008, Anodyne's revenues increased to $13 million compared to $9.1 million for the same period last year, largely due to sales from new product rollouts. Income from operations increased to $1.1 million compared to $0.4 million for the same period in 2007. The increase in operating income is largely due to the increase in sales.

For the six months ended June 30, 2008, Anodyne's revenues increased to $24.4 million compared to $18.5 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 June of 2007.

Income from operations increased to $1.6 million compared to $0.7 million for the same period in 2007. This increase in operating income is largely due to the increase in sales. Anodyne continues to experience a strong ramp-up in its sales of new products introduced in 2007, and we expect it to show strong growth in operating results for the full fiscal 2008 period.

CBS Personnel -- for the quarter ended June 30, 2008, CBS Personnel reported revenue of $270.2 million compared to $142.9 million for the same period last year. The 2008 revenue includes $141.7 million of sales from Staffmark, which was acquired on January 21, 2008.

Revenue on a pro forma basis would have been down by approximately 6% due to the impact of the weakening economy. This decrease was less than that reported by the Company's publicly traded peers who have filed for their US operations. We believe that this is evidence that CBS is gaining market share in the markets in which it operates and further affirms CBS's dense operating model.

This outperformance is similar to what we saw in the 2000 to 2002 period, when our market share gains led to a dramatic increase in account service and placements as we emerged from the recession.

Income from operations decreased to $4.3 million for the second quarter of 2008 compared to $4.9 million for the second quarter of 2007. The impact to the operating profit generated from sales as a result of the acquisition of Staffmark was offset by expenses of approximately $1.8 million related to the integration of Staffmark and for $1 million of higher amortization expense, largely attributable to amortization recorded for the acquisition of Staffmark.

A lower gross profit margins of 17.3% compared to 18.3% in the first quarter of 2007 also contributed to the decrease in operating income as the Company experienced higher workman's compensation costs due to the Staffmark acquisition.

For the six months ended June 30, 2008, CBS Personnel's reported revenue of $506.2 million compared to $278.3 million for the same period of last year. The 2008 revenues include revenues of $251.9 million from Staffmark, which was acquired on January 21, 2008.

Revenues on a pro forma basis would have been down by approximately 5%, due to the impact of a weakening economy. As I just mentioned, we are encouraged that this percentage decrease appears to be less than the decrease reported by most of the Company's publicly traded peers.

Income from operations decreased to $5.8 million for the first half of 2007 (sic) compared to $8.4 million for the first half of 2007. The impact of positive operating profit generated from sales related to the acquisition of Staffmark was offset by expenses of approximately $3.4 million related to the integration of Staffmark and by $1.8 million of higher amortization expense, largely attributable to amortization reported for the acquisition of Staffmark.

A lower gross profit margin of 17% compared to 18% for the first six months of 2007 also contributed to the decrease in operating profit, due to higher workman's compensation costs and a shift in the mix of revenue from the Staffmark acquisition.

Fox Racing Shox -- for the quarter ended June 30, 2008, revenue was $34.4 million compared to $26.7 million in the prior-year period. The increase in revenue is attributable to increased sales in Fox's bicycle and power sports divisions. Income from operations was $3.2 million during the first quarter of 2008 compared to $1.7 million for the quarter ended June 30, 2007.

For the six months ended June 30, 2008, revenue was $57.9 million compared to $42.7 million in the prior year's period. The increase in revenue is attributable to increased sales in our bicycle and power sports divisions. Income from operations was $3 million during the first half of 2008 compared to $0.1 million for the prior-year period, due to the increased operating profits and the decrease in sales.

Needless to say, we're very excited about Fox's growth over the first six months and optimistic about the remainder of 2008 as well. This performance both reaffirms our decision to acquire this business earlier this year as well as supports many of the initiatives we immediately began to undertake with management to help them strategically manage their growth.

HALO Branded Solutions -- for the quarter ended June 30, 2008, HALO's revenue increased to $35.8 million compared to $32.4 million for the same period of last year, principally due to acquisitions made since December 31, 2006. Income from operations was approximately $0.5 million versus $0.6 million for the prior comparable period as an increased operating profit from higher sales was offset by $0.1 million of higher amortization expense associated with the amortization of intangibles established in connection with the acquisitions made by HALO.

For the six months ended June 30, 2008, HALO's revenues increased to $64.6 million compared to $55.9 million for the same period of last year, principally due to $6.7 million of sales from acquisitions made since December 31, 2006, and from increased sales to existing customers. The loss from operations was approximately $0.2 million for the current period versus $0.7 million for the prior-year period as the operating profit from the increased sales was only partially offset by $0.1 million of higher amortization expense associated with amortization of intangibles.

As you will recall, this business experiences the large majority of its cash flows in the fourth quarter of the year.

Turning now to our balance sheet, we had $100.2 million in cash and cash equivalents and had net working capital of $204.9 million as of June 30, 2008. Subject to borrowing base restrictions, at June 30, 2008, CODI had over $300 million in revolving loans available to be used to fund acquisitions and working capital requirements.

I will now turn the call back over to Joe.

Thanks, Jim. Before opening the call for questions, I would like to reiterate my overall satisfaction with our performance for the year to date. In the face of a challenging economic environment, our businesses have performed well and demonstrated substantial cash flow growth, which we believe demonstrates the strengths of each of our individual businesses, as well as our model for working with the management teams of those businesses.

We believe our stock price remains considerably undervalued based both on a multiple of our cash flow and a calculation of the sum of our parts. Our stock value had begun to approach an appropriate valuation in the wake of our follow-on offering last summer, only to be tossed in the current of negative expectations for financial companies since last August, which we believe is a dramatic misclassification, given the vast differences between our business model and those of the other finance companies, including the business development companies.

During a cyclical downturn in the economy, we maintain that experience is invaluable. The lessons we learned in acquiring and managing middle-market businesses with great success during the last recession in 2000 and 2002 give us a great deal of confidence as we approach the remainder of 2008 and beyond.

As a management team, we've been together working with the management teams of subsidiaries to successfully execute our model for over a decade. Since entering the public markets in May of 2006, we have acquired nine businesses; sold three businesses for a gain of more than $105 million; substantially increased our cash flows and cash flows per share, leading to an increase in our quarterly cash distribution of 24% since inception; and we currently operate six market-leading companies whose performance in the present economic environment is outstanding and who are poised for continued growth.

Thank you for your time, and we will be happy to take any questions you may have. Teresa, please open the phone lines for questions.

(Operator Instructions). Larry Solow, CJS Securities.

Your midpoint of your guidance and your CAD over the last 12 months implies a coverage of your distribution of about 1.3 times. Is that kind of a comfort level? And if you were to achieve an aquisition that's soon to be accrective, would this -- can you expect this to increase?

Yes, I mean, first of all, when you say, is that a comfort level? I actually think of 1.3 times in this point in the cycle is more than comfortable from a coverage point of view. At this point, the decision that our Board is making regularly is kind of the mix of distribution to shareholders versus reinvestment in the business. I don't think there's a comfort of continuation of distribution concern at all.

Yes, I think that over time, as we acquire businesses or even as the cash flows of these businesses grow organically, I think that you would expect these distributions to increase. I'd just caution you from thinking that there is some kind of a 1.3 magic ratio, because there isn't. And I also don't think that an acquisition is required for us to consider increasing our distribution.

Right. And then could you remind us what you actually paid for Aeroglide and Silvue? Do you have those numbers? Do you have the multiple?

Yes, Aeroglide looked like about just under $60 million all in, and it represented about 7 times. Elias, let me ask you to comment on Silvue, because that's a little more complicated, given the multiple classes of equity that went in there, but what was the TEV there?

Yes, the TEV was $44 million, Joe, and it was about roughly 7 -- a little over 7 times trailing EBITDA at the time of acquisition.

Jon Arfstrom, RBC Capital Markets.

Nice job. A question for you on HALO. Especially when I look at the AFM numbers and the CBS numbers, obviously a little bit of slowing from the economy and the economic environment in general, I guess. And at what point do you begin to see the orderbook for HALO start to build for the end of the year? And do you have any type of look into how the Company is doing so far this year, given the environment?

Yes, I think the point is, now, and -- first of all, let me comment on -- clearly, CBS shows the impact of the economy. Clearly, American Furniture does as well, although I would caution you that the American Furniture numbers get better as the year goes on, because you don't have the sort of three-week period that you're out of business because you have the fire. And the American Furniture numbers are actually a little bit harder to analyze and to kind of -- I would argue that the business is doing substantially better from a performance point of view than just kind of the six-month to six-month comps would do, because we certainly think of the fire as being an extraordinary event.

I was going to ask about --

But let me talk about the HALO. We should start seeing it now. Our view on HALO is that the business will be likely flat year over year, but there's clearly the impact of -- flat to slightly up, but there was clearly the impact of this Goldman acquisition that we made, which is a small add-on that we did. And so kind of year over year cash flow for that business might be down in the 10% to 15%, excluding Goldman. But then Goldman, which is a very low-price acquisition, would make it flat to slightly up. And again, Elias, would you like to add any color to that?

No, Joe, I would concur with those thoughts.

So we're starting to see it now. Same-store will be down, because it is cyclical, although not as deeply cyclical as -- I'm not even sure it's cyclical. It's impacted by marketing spend, which is clearly going to be down. But it's not the same kind of effect that you see in staffing or furniture, but particularly staffing, of course, where the business tends to lead in and out of cycles pretty consistently.

And then on American Furniture, Jim, did you say that -- I was writing so fast, but what did you say the insurance coverage was on the operating income number for the first six months?

We recorded $4.1 million of operating income related to insurance, which is a combination of business interruption insurance plus other types of insurance.

Okay, and how much of your, what you would say normalized operating income without the fire was covered by insurance? Was it all of it?

I would say all.

All. Let me just make clear what's going on with the insurance. There's kind of two components. There's the regular component, which is the building and the inventory, and then there's kind of business interruption. The majority of the claim is kind of the regular stuff, and actually we have received to date --

$18.5 million.

$18.5 million, and I think we think -- you know, it's still the third and fourth inning, but we think we're doing pretty well on the insurance claim, and our consultants feel pretty good about it. So the majority of that 4.1 that you see in there is sort of not disputable and in question or subject to loss. A good bit of that I think is replacement of the inventory and more property related.

That's right.

So is it fair to look at that $4.9 million and say that is apples to apples, had nothing happened?

Yes, although I think we are being conservative, conservative in our recording of business interruption insurance.

Okay, good. And then on CBS, Joe, your comment -- I believe you used the word leading indicator, and I guess this is more of a -- it's a question on CBS and also on the economy in general. Just give us an idea of what you're seeing out of CBS. Is there any hope for the economy, and give us a general overview of what you (multiple speakers)

I'm going to pass on that and let the much better-looking guys on CNBC do that. We're down -- if you want to talk about the economy, you can talk about what the industry is doing. We're down on the order of like 6% in the first six months. And you can track the public comps probably better than we can, but they look like they're down 8% to 10%. So are we happy that we're outperforming, and do we think we're gaining market share? Yes, but point being that this market is slowed down right now.

Second half of the year we don't think is going to be better than the first half of the year from a year-over-year comparable. It might be a little worse. So that doesn't give us -- that would sort of be a gloomy picture, but I've got to tell you, it's a little unusual, because Advanced Circiuts is doing very well. Fox is doing very, very well. Knock on wood on both those counts. HALO is hanging in there. Anodyne is doing very well.

So what we actually see is a little bit of a mixed story. And I've got to tell you, we have this week of kind of seven or eight Board meetings, where we go through with every company, and we keep asking them what they see in the economy. And I personally emerge with a little bit muddled view.

Certain pockets, like in Fox, we believe it's driven by enthusiast purchases. And to date, those enthusiasts appear to continue to be making their purchases and the business is growing dramatically. The R&D spend -- our business is up in Advanced Circuits, but interestingly, the entire printed circuitboard business in the United States is up a little bit, not as much as ours. Now, some of that might be a dollar effect. Maybe some of these circuitboard companies are more competitive than they historically have been. But there is a sector that doesn't seem to be as beat up.

So I think it's a little bit difficult to see the picture. Jim, do you have any -- ?

No, same as you.

Yes. So I wish I could tell you more. But the way we are planning, and this isn't necessarily an expectation, but the way we are planning for CBS, just so you know, is that '09 won't be a lot better than '08. Like, I mean, we are kind of hunkered -- we don't expect kind of a big recovery in that business. The management team there is very good at this.

This is nothing like the '02 recession from a staffing point of view. And they really very successfully navigated through that, added hundreds of net customers through that period. Our philosophy at CBS, sell through these downturns, to use this opportunity to motivate our salespeople to pick up customers who may be left behind from smaller competitors who are not operating, or larger competitors who abandoned some of our markets where we have a lot of density.

And kind of out the back end, and there will be a back end, whether that's '09 or '10 or whenever, out the back end, we've found that our customer counts have been significantly higher, and we already see encouraging signs in this downturn of increasing gross customer counts.

And with each of these, that's the way we feel you manage a cyclical, and we're doing the same thing with American Furniture. We're very focused on shelf space there, and we feel like we're -- we know we are adding customer accounts and we are adding effective shelf space. People will return. That market will return. And the key is, on the other side of the recession, do you have more shelf space and more customers than you had going in.

Managing a cyclical is very different than managing a medical device company. Managing a cyclical is all about kind of pouncing, not being obsessed with your quarter-over-quarter numbers, but pouncing on opportunity and weaker competitors when the downturn hits. And that's one of the beauties of buying cyclicals, is that if you buy a strong competitor and you capitalize it well, you know, in and out of cycles, it has dramatic growth prospects.

And then just one follow-up on that. You touched on it in a couple of spots. But at CBS, would you entertain something like Staffmark again, or, given the size of CBS relative to the rest of your businesses, would you prefer to allocate capital in another industry?

It's almost -- we wouldn't entertain something the size of Staffmark now, not necessarily because of the capital allocation, but because there's a sort of heavy integration going on right now. And I don't know if anyone from CBS is on the call, but I'm sure they are sitting there nodding their head if they are. There's a lot of work involved. You've got a systems integration. You've got branch mergers in 30-plus locations.

So I think right now, there's sort of a lot of -- there's a lot on the plate to handle. I also think there's legitimacy -- at our current size and with our current mix, I don't think we would elect to acquire a business in that same industry of that magnitude because of what it does to the overall mix, which is not to say that if we were to look out nine months from now and if we've been successful doing a couple of other acquisitions, and we had an interesting opportunity that we wouldn't go after it.

But I'd hesitate to put any kind of hard-and-firm boxes around it, because this is the time when you see opportunity. And it's entirely -- and the reason we've been pretty good at this over the last decade is when opportunity knocks, you have to be ready to open the door or capitalized to do that. So I don't want to say we would never do it, because I don't know what the universe of possibilities are. But we're not actively out seeking additional large acquisitions for CBS right now.

Robert Dodd, Morgan Keegan.

Congratulations. Coming back to the economic issue, but from the other end here, kind of looking at Fox Factory, which did very well, I would have thought somewhat more discretionary item, and even AMEX is pointing to your more high-income consumers pulling back a little bit as well. So could you give us an idea of where that stands, and where, particularly, it is in the new product rollout cycle?

That's a broad question. I'm going to ask, actually, Elias to give some -- on the component of rollout cycle, I'm going to ask Elias to make some comments on that.

Let me make a couple comments. Fox's improving performance is driven both by topline and operational improvements that we have been working out with management. So there's kind of two components to the growth. What I hear you talking about is the topline side of the business. We don't see, either from our OEM customers or from our own checking of sell-through into the retail base, a decline in this market. In fact, we believe that within mountain biking, the shift towards high-income or high-cost or more expensive mountain bikes continues. It's a growth sport in Europe, so that's been an additive factor for us. And in addition, we believe we have a higher percentage of high-end mountain bikes broadly defined that carry our suspension products now, say, than a year ago.

So there's kind of multiple things going on there, which is, within biking, mountain biking is growing compared to road biking. Within biking, growth in mountain biking is particularly strong in Europe. Within mountain biking, the dollar per unit spend we think is increasing. And then within the high end, we think that our penetration has grown. But this is a business that -- we're nervous about all our businesses. So this is a business we sweat, and we say, let's look at the data. And management there consistently checks the sell-through data to try to understand what's going on. And as far as we can tell, the sell-through is strong.

Elias, do you want to comment on where we are product cycle development, and how that would impact us over the rest of the year?

Yes, we're constantly bringing new products to market, and we rolled out a number of new products for the 2009 model years that started shipping in April and May. Most of those products, though, are just evolutions of product that we have in the marketplace today. And so I would say the majority of growth that we've experienced, concurring with Joe, is due to Europe being considerably stronger this year.

In addition, we did have some pretty significant -- there were some price increases that went through, both in Europe and domestically, that helped carry revenues. And we believe that we took additional spec with a lot of the OEMs on some of the new 2009 model year products. So that was really the combination. There's no one single new product that we rolled out, though, that would account for the majority of the growth.

And then if I could just toss in one more on Anodyne, again, it did slightly better than I was looking for. Is there any change in terms of a pickup in buying patterns and penetration with the product into the end markets? Are you gaining share with that product?

I think there's -- I think we continue to work on successfully developing contracts in our largest three or four customers, who are the primary players in their end markets from a distribution point of view. I don't think there's really a change. I actually think, knock on wood, this year is pretty much coming in as we expected.

There's sort of -- obviously, there's mix shifts. We have higher sales to one particular customer than another than we expected, and it kind of offsets. But by and large, I think this year, it's a little better than our internal budgeting. I don't remember what you projected. It's a little better than our internal budget, but by and large, it is hitting our expectations for growth here. So I don't think there is anything particularly dynamic.

The market -- there continues to be an increased demand for more dynamic support services and higher-end support services, and that's something we're enjoying. That's something that's been prodded along by the insurance industry, as I think you and I have discussed, Robert. So, no, I don't think there's anything going on here at Anodyne that is any different than what we expected going into the year.

Vernon Plack, BB&T Capital Markets.

Joe, my first question is for you, and that is, given the cash that you have on your balance sheet, just curious in terms of other than keeping that for an acquisition, any thoughts to either paying down your facility or repurchasing stock?

Well, let me answer the question on the facilities. So we did, as part of proceeds from the sales of Aeroglide and Silvue, we did pay down $65 million of our revolver and borrowings outstanding. That brought them down to zero at June 30. We do have a -- the only other debt that's outstanding is our term debt. Obviously, we look at that as long-term capital, and so we chose not to pay that down at this point in time. But I will let Joe talk about the --

Yes, the share repurchase one, that's a great question and one that we spend a lot of time talking about with our Board. And there's clearly, at some price, obviously, it's a no-brainer and you do it.

From our point of view, given our liquidity and our capacity and the opportunities we are seeing now, the best long-term impact for our shareholders is to continue to put our heads down and acquire businesses that we think are interesting and to work with management to grow them. Again, our cash flow per share was up like 12% this year among a set of businesses, at least one or two of which are reasonably cyclical, and so we think the model works very well.

We've talked to our shareholders about this, at least our largest shareholders, and by and large, their view is let's not manage for what the stock price looks like next week. Let's manage for growing the Company and building it over time. And from our point of view, as we emerge, when we look back a couple years from now and evey beyond, using this capital to capitalize on the current buying environment is going to have been a good decision, we think.

But is it on the table? It's always on the table. We manage this money for our shareholders, and we're trying to make sure that -- and we're pretty significant shareholders ourselves, so we're trying to make sure that the stock value moves.

You follow the BDCs, so you know as well as us, if you were to chart against some of these finance companies, our like pretty much moves not as steeply downward as theirs, but our stock price kind of floated along. We find ourselves now, two years out from our IPO, basically flat, if you include our distributions and where our share price is. But it was a year ago that the stock was trading at $18 and seemed to have a lot of momentum behind it, and then some of these financials got hit.

So we are trying -- we're not going to let the sort of misclassification of our stock, which I think is clearly what has happened here, by the market dictate our decision-making. We're trading at 7 times cash flow. Our shareholders can see what we're doing. They see how the businesses are growing. And by and large, as I say, the largest of them think we should keep doing our job. So that's kind of how we look at that. But it comes up a lot.

That implies to me that you are fairly confident you are going to put some of the cash to work within the next 12 months.

Yes. That's a fair -- whether we do or not I don't know, but you're saying am I confident? The answer is yes.

Looking at second-quarter results, I know Aeroglide and Silvue were sold outside of the realization of that gain in the financials. Did the revenue or their operating income show up anywhere in the financials on a partial basis for either of those companies during the second quarter?

They show up as discontinued operations. But when you look at our 10-Q, we've broken it out in enough detail where you will be able to see the operating income for the three- and six-month periods for both companies.

Okay. And just --

And the operating results were strong for both of those periods.

Okay, thank you. Just one other question as it relates to very good results for most of the portfolio of companies. American Furniture, my question there is, you had the extraordinary event. Also, just curious in terms of -- I believe there is some seasonality there, and I think -- isn't the back half of the year typically less than the first half of the year?

Alan, do you want to comment on that?

Yes, the back half of the year is -- the first quarter is typically the strongest. The second and third quarters slow down, and the fourth quarter begins to pick back up. So yes, the first half of the year is typically on the top line stronger than the second half of the year, which made the timing of the fire, actually -- it's never, obviously, good timing to have a fire like they had. But in the context of their business, having it in February this year was the worst possible timing, because it eliminated their finished goods and the finished goods warehouse at a time where they are shipping and selling the most furniture.

Is there a big difference between the second quarter and the third quarter, typically?

I'm sorry, can you please repeat the question? I couldn't hear you. It went in and out.

Is there a meaningful difference -- you talk about the seasonality. Typically, and I know typical is a very broad word, but trying to get a sense for where revenue is going to be for the rest of the year, since I have it down from both the third and the fourth quarter from where it is today.

Yes, the third quarter, I believe, is typically their softest period in the year. And I think, historically, that's been probably in the 20% or so of revenue range, where the third quarter -- sorry, the fourth quarter picks back up, where it's closer to probably 25% or 30% of revenue.

(Operator Instructions). Henry Coffey, Sterne, Agee.

Obviously, I congratulate you on a great quarter. As you start to look at the staffing business, where are you in the integration process? And I guess the most compelling question is, what are you going to do next with the money? Have you actually sat down and started coming up with a target list, or is it really just (multiple speakers)?

Okay, so let me just -- okay, so two questions. Was there a third, Henry? I don't want --

No, just the two.

The integration is actually going pretty well, which doesn't mean you'd see it all in the '08 numbers necessarily. But let's say from an operational point of view, we feel like we're hitting all our targets, potentially ahead of target in some areas. There are some costs, one-time costs associated with pulling off the integration. But I would say, all in all, people feel pretty good.

Most importantly, we're really happy with the key senior executive team. If you look at the top 20 people, and you combine the strong people who are at CBS with the many people that we've integrated from Staffmark, we're really excited, actually, and we're really excited about our geographic coverage. We are excited about our ability to sell business in certain geographic markets where we already had a relationship with a customer in one geographic market and now we're trying to extend it. So we actually think the integration is going very well, and we are really happy to have done the transaction.

Financially, sort of take or put aside the qualitative stuff, from a quantitative point of view, our view that this integration would on a full-year basis create $7 million to $10 million of synergies, we feel pretty good about it. And we feel good about it at the highest end of that range. So the integration is going well.

We don't really -- we don't -- the process here isn't one of kind of our, now that we've found love, what are we going to do with it? It's not a matter of, here's this cash, and how do we go out and redeploy it? I think that we've been -- there are a number of opportunities we've been evaluating for quite some time that kind of come to a head. And we believe that someone asked -- it might have been Vernon -- am I confident that it will happen over the next 12 months? Absolutely. And there are things we're working on that we're pretty excited about that hopefully will come sooner than 12 months.

So it's not a matter of sitting around and, okay, now what do we do? It's a matter of -- because we never got to the point where we didn't have capital. And that was all kind of philosophically where we were. It's why we did the follow-on offering last year. If we hadn't sold Aeroglide and Silvue, we'd still be pursuing interesting opportunities right now. From our point of view, these were two great multiples on businesses that basically just bought us a lot more time before we have to think about either pulling back our acquisition activity or raising additional debt or equity capital.

So from our point of view, I don't know what to say. We don't --we of course care about the stock price, but we don't care about it from the point of view of needing to raise capital. That's not really -- right now, raising capital is not a consideration. Managing our businesses through an economic downturn is consideration number one. Pursuing potentially interesting opportunities where we are the only show in town, in a lot of cases, with committed financing is focus number two.

Well, your mailbox is probably pretty stuffed with people trying to sell you companies every morning. If you were to start to aggregate --

Our mailbox is always stuffed. What's interesting is that our mailbox is always stuffed with those people. I actually think the mailbox has kind of skinnied out a little bit. In other words, if you've got a company and you don't need to sell it now, it's like a home. Why would you?

But what I will say is, where there are opportunities, people are selling companies -- in some cases, it's private equity firms -- because they're trying to create IRRs to raise another fund or they're trying to create liquidity or they are coming to the end of their own funds. In some cases, it's family businesses. In some cases, it's large corporates that are having trouble in their core businesses and are trying to raise money to pay down debt.

In those cases, where you have a seller that wants to sell, what I will tell you is our hit rate's a lot higher. Like in the past, where our valuation might have been, oh, okay, that's interesting, thanks for talking to us, right now, we say, well, here's the valuation, and by the way, here's the check behind it 60 days from now. That's a pretty interesting conversation starter.

So it's a better list. What do, actually, values look like compared to where we were, say, this time last year?

So, you know, the issue -- that's a question we get a lot. And the problem is, every company is so different that it's hard to say. In general, I would say the valuations have come down a little. I wouldn't say valuations have come down a lot. But what I will say is that we are, at our fairly conservative valuation, I think from day one we have known each other, Henry, we have always said valuation is critical for us and we will not overpay for a business. Right? We're not guys that are going to pay 14 times for a gem of a business. And that might make someone a lot of money, but that's not our model.

What I will say is our valuations that we think are appropriate, given our financing, the strike zone is broadened. We're now more interesting to people. So I'd hesitate -- there are certainly still companies out there where people are overpaying. There's a lot of equity capital. I don't want to make it seem like valuations have fallen off a cliff. I think our target zone has widened a little bit.

Larry Solow, CJS Securities.

Just a couple of follow-ups. Joe, you said your -- on CBS-Staffmark, your expectations for '09 are more similar to '08, but would you expect with the integration that you would, assuming revenue or performance is generally flat in the industry, your integration would lead to better performance year over year?

Yes, I think that's a fair assumption, but I will say this. The first quarter, which I know is not the biggest quarter in the staffing industry, the first -- my guess is that the first quarter '09 from a revenue point of view versus first quarter 2008 will be soft, not just for us, for the industry, right? The comparable -- the comparison quarters won't actually reach flat maybe until second or third quarter.

So in general, would I hope that EBITDA was up on a -- or cash flow was up on a total basis because of the impact of synergies? Absolutely. But I want to make sure that -- I don't necessarily think that '09 revenues are going to be flat to '08 revenues, because I think you've sort of still got maybe another quarter of bad comparison. Elias, what are -- you might have better thoughts on this.

No, Joe, I would concur with that. I think there will be some more synergies that we hadn't achieved in the first quarter that will impact '09's cash flow positively. But given where the Q2 trends were broadly in the staffing industry and just the seeming deterioration in the US economy throughout the first half of the year, if one thought that the economy was going to stay relatively weak over the next six to nine months, it's likely that Q1 will be a little softer next year in revenue generation than it was in '08.

Okay, great. We look forward to seeing you guys tomorrow at our conference. Thanks.

Cool. Yes, we look forward to it as well.

And Mr. Massoud, at this time, I would like to turn the conference back over to you for any additional or closing remarks.

Well, I just want to thank you all for your time, and tell you from our point of view, we're pretty happy with the second quarter. We're pretty happy with what we're seeing. We think the model is performing as it should. We're going to continue to work to make sure that the underlying performance, which I think has been very strong, translates into share price for all of you. And we are excited about the future. We expect to have a good call here three months from now.

And that does conclude today's conference. Thank you for your participation. You may disconnect at this time.