Compass Diversified Holdings (CODI) 2008 Q4 法說會逐字稿

Good morning and welcome to the Compass Diversified Holdings 2008 fourth quarter conference call. Today's call is being recorded. (Operator Instructions). At this time I would like to turn the conference over to IR consultant Tyler Wilson with the IGB Group for introductions and the reading of the Safe Harbor statement.

Welcome to Compass Diversified Holdings' fourth 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 Q4 press release, including financial tables, is available on the Company's website at www.CompassDiversifiedHoldings.com. In addition, management expects to file the Form 10-K for the year ended December 31, 2008 with the SEC later today.

Please note that throughout this call we will refer to Compass Diversified Holdings as CODI or The Company. Now allow me to read the following Safe Harbor statement.

During this conference call we may make certain forward-looking statements, including statements with regard to the future performance of CODI. Words such as believes, expects, projects and future or similar expressions are intended to identify forward-looking statements.

These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from the projected forward-looking statements, and some of these factors are enumerated in the risk factor discussion on the Form 10-K filed by the CODI with the Securities and Exchange Commission for the year ended December 31, 2008, and other filings with the SEC.

In particular, the domestic and global economic environment has a significant impact on our subsidiary company. Furthermore, we are uncertain as to the ability to consummate acquisitions which are accretive to shareholders, either in 2009 or beyond. CODI undertakes no obligation to publicly update or revise 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 for his opening remarks.

Good morning everyone. Welcome to our fourth quarter 2008 earnings conference call. Thank you for your time.

We will start today's call by offering some general comments on CODI's performance during the fourth quarter and the year ended December 31, 2008, as well as our distribution policy going forward in this environment. We will also discuss our liquidity position, review the limited leverage that we have, and provide some detail on the proactive measures we have taken in this environment to further enhance our financial flexibility and improve cash flow for our shareholders.

Finally, before turning the call over to Jim to discuss our operating results and review our portfolio businesses for the fourth quarter and 12 months ended December 31, 2008, I will preview our expectations for 2009 for our current subsidiaries and acquisition opportunities.

In 2008 Compass Diversified Holdings achieved strong results in a challenging environment, further demonstrating the successful implementation of our business model, which is predicated upon owning niche leading businesses in diverse industries.

During this year we accomplished important objectives related to, first, generating strong cash flow at our subsidiaries in line with our expectations and those expectations that we communicated with our shareholders. Second, paying sizable distributions to our shareholders. And third, strengthening our Company's prospects for our operating in a difficult economic climate.

Turning specifically to our results, during the fourth quarter we generated cash available for distribution and reinvestment, which we will refer to as cash flow or CAD, of $11.2 million. And for the year CODI increased cash flow by approximately 9.1% to $50.6 million from $46.3 million in the year ago period. Very importantly, this fell within the guidance that we had provided to everyone much earlier in the year.

Drawing upon a portion of our sizable cash flows, we announced on January 9, 2009 that our Board of Directors declared a fourth quarter distribution of $0.34 per share, the second $0.34 distribution since the Company announced a 5% increase in October of 2008. The ongoing ability of our diverse portfolio of subsidiary companies to continue to generate stable cash flows has enabled us to pay distributions of $1.33 for 2008 and cumulative distributions of approximately $3.28 per share since going public in May of 2006.

With regard to the outlook for distributions, our distribution policy remains unchanged. Our Board declares distributions to shareholders on a quarterly basis based upon its valuation of the normalized cash flow generation power of our Company. In the past this is has not amounted to full payout of our cash flow and has resulted in approximately $28.5 million of excess of our cash flows over distributions paid for the period through December 31, 2008.

In addition to that we have generated approximately $109 million of realized gains from monetization of subsidiaries, an amount that has not only tremendously improved our liquidity, but that we're never even included in the calculation of CAD or cash flow.

As we look forward as a result of the impact of the economy, as well as of our timely sales of Aeroglide and Silvue, which has resulted in substantial repayment of debt and our holding significant cash balances in anticipation of a better buying environment, we expect to earn less cash flow in 2009 than our full year distributions would be at the current level. This is a reiteration of what we said three months ago on our last call.

However, as we said then, and we continue to reinforce, we have always sought to provide a steady stream of distributions based on our Company's normalized cash flow generation level. We have positioned ourselves very well to do this.

We have approximately $78 million of term debt currently outstanding due in 2013. We also have no outstanding borrowings on our $340 million acquisition and working capital revolver. In terms of our built-in cushion, we have never been an entity to pay out substantially all or more than all of operating cash flow in the good years. As a result, and as mentioned earlier, looking forward even given a soft environment through 2009 we will have earned significantly more cash flow since our 2006 IPO than required to pay distributions at current levels. Again, this excludes the full effect, or really any of the effect of $109 million in realized gains.

Importantly, as a result of our considerable financial strength and extremely low leverage levels and distant maturities, paying distributions that are in excess of our trough earnings level will have no effect on our ability to operate our subsidiaries, stay within our debt covenants, or grow the Company, either organically or through acquisitions. Based on our current view of our subsidiaries' performance in this economy, our distribution policy remains unchanged.

I would now like to take a few moments to review how we view our business in the current challenging environment. When you receive our 2008 annual report you'll see that the theme is threefold, leading companies, solid financial structure and transparency. In this regard I would ask you to keep the following factors in mind. First, our cash flows are derived from a diverse portfolio of leading companies across a number of industries. This portfolio approach reduces the impact of the cyclicality that any one of our individual businesses has on the overall Company.

In addition, the fact of each of our companies is a niche market leader means that this environment presents opportunities for our businesses to emerge stronger and larger players in their markets.

In underwriting and diligence in each of these businesses, downside economic environments were considered thoroughly. For each the potential to outperform their competitors and gain market share during a downturn was a clear positive factor in our decision to acquire these businesses. As well-capitalized leaders in their markets, with strong management teams and defined reasons to exist, each of our businesses continues to outperform competitors in their respective markets. We have been here before and it has worked well for us.

During the last downturn as we managed a number of cyclical businesses, including CBS Staffmark, we found a great deal of success in strategically investing in our business is at the same time that many competitors were cutting not only that fat, but also muscle. Thus our investors emerged winners to an even greater magnitude as market conditions began to improve.

Second, our subsidiaries benefit significantly from CODI's solid financial structure, which gives our portfolio company's parent level funding, bypassing the banks that most that their middle market competitors currently use. Given the difficult financing market, we believe that having such a structure gives our subsidiaries a distinct competitive advantage in terms of providing timely and ample product to their customers, taking advantage of supplier payment terms, and pursuing small but highly accretive tuck-in acquisitions.

As an example of the latter, just yesterday Halo acquired a small add-on acquisition at extremely accretive and attractive terms.

We are spending a considerable amount of time with our subsidiary management teams considering cost-cutting initiatives, sales expansion opportunities, and preparing ourselves for a variety of economic contingencies. We're confident in the ability of each of our companies to emerge from this recession as even stronger players than they were going in.

Third, it is precisely in markets and times as these that we believe our shareholders appreciate our extraordinarily transparent structure. Unlike many other companies, we have always been and will continue to be forthright on the performance of each of our companies and our overall strategies. We receive a lot of positive comments from our shareholders and our analysts on this, and we're appreciative that you are appreciative of this part of our strategy.

With regard to our recent deleveraging, while our business model positions the Company to manage the downturn, we continue to take proactive measures to further enhance our financial flexibility, reduce costs and help our subsidiaries enhance their position.

Specifically in June of 2008, sensing that valuations were at a high level and that the coming economic environment was potentially soft, you'll recall that we opportunistically monetized two of our subsidiaries in a timely fashion, selling Aeroglide and Silvue for an approximate average of over 10 times cash flow, and for a total gain of over $70 million.

We primarily utilized the capital from these sales to enhance our liquidity by repaying debt and holding on to cash. It is important to note that we did not then rush to redeploy the capital into new businesses, rather we remained very disciplined and cautious, and are now happy to have made this decision. As a result of this decision, our shareholders own a company with diverse drivers of cash flow that is substantially underleveraged and has ample liquidity to thrive and take advantage of the current environment.

More recently in February of 2009 we used $75 million of cash on our balance sheet to repay debt at par under our term loan facility due in December of 2013, bringing our total debt outstanding down to approximately $78 million. Even after this repayment, we still have substantial available capital and in an extremely healthy liquidity position with other $20 million in cash, an untapped $340 million revolving credit facility, and again, no significant debt maturities until 2013.

While we initially hoped to acquire a new platform business with this $75 million in cash, we decided to remain patient and disciplined in the face of the current economic environment, extending our diligence period for potential acquisitions in order to more properly assess the true cash flow generation levels of target companies.

The debt repayment provides substantial savings to the Company in inet interest expense, and translates into a meaningful reduction in management fees paid by the Company to its manager.

Having taken these proactive measures to better position CODI going forward, I would now like to review what we are seeing in 2009 for both our subsidiaries and acquisition opportunities.

In terms of our subsidiaries we believe that the economy will impact each of our businesses, but to a varying degrees. Specifically, we believe that three of our subsidiaries, Anodyne Medical Device, Advanced Circuits and Fox Racing Shox, have either enough revenue momentum, are pursuing sufficient cost-cutting initiatives, or both, to largely offset the impact of the economy on their cash flow generation capabilities.

With regard to Halo and American Furniture Manufacturing, we expect the economy to have a greater impact, although in the case of Halo, recent and planned add-on acquisitions and active account representative recruitment efforts are helping to mitigate the impact of the economy. While in the case of American Furniture, recent market share gains, additions of new customers, and as well as a continued drop-down effect within the furniture industry, are providing some tailwinds that are also helping to offset.

In terms of CBS Personnel Holdings, first, let me tell you that we are excited to say that as of February 27 the Company is using a Companywide unified brand-name of Staffmark, which we will now use going forward as well.

Second, in terms of the economy, there will clearly be a significant negative impact on cash flow in 2009. You'll note from our fourth quarter numbers prepared on a pro forma basis to include the Staffmark acquisition as if it was completed at the beginning of 2007, the revenue declined by approximately 21% as compared to the prior year. This rate of decline has unfortunately accelerated in the fourth quarter, as it has for each of our large competitors who we're able to track.

This business is subject to a significant amount of operating leverage, as you might expect. So if the current trend of revenues were to continue, while we believe the company will still perform at a cash flow positive level, it will certainly produce substantially less cash flow than in 2008.

Let me just correct something I just said, by the way. It went down 21% for the fourth quarter versus last year. And the acceleration that we see is actually in the first quarter of '09 as compared to the first quarter of 2008.

To continue where I was, our management team at Staffmark is outstanding. We think best in class in their industry, and is experienced and adapt at managing through downturns. Their skills are being challenged at this time, but they are meeting those challenges and have taken numerous efforts to rightsize the business, while maintaining the posture of selling through the downturn that served us so well into and out of the last downturn.

In terms of new acquisitions, with our significant financial flexibility, we remain poised to take advantage of opportunities that this environment may present. We continue to look for opportunities, and as valuations come down and the earnings begin to stabilize, we believe we will be in position to make acquisitions at prices that enhance the long-term value of CODI for our shareholders.

As I mentioned earlier, we also continue to actively pursue small tuck-in acquisitions for our subsidiaries, and as recently as yesterday completed another such example. As a result of our considerable financial capacity and flexibility we believe we are buyer of choice for sellers and their representatives.

With those somewhat lengthy introductory comments complete, for which I apologize, I would like to turn the call over to Jim Bottiglieri to discuss our fourth quarter financial results.

Today I will discuss our financial results for the quarter and 12 months ended December 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. I will then mention the impact of seasonality on our business and discuss our balance sheet.

On a consolidated basis revenue for the quarter ended and year ended December 31, 2008 was $374.8 million and $1.54 billion, respectively. Net income for the quarter was $1.2 million or $0.004 per share. For the year ended December 31, 2008, net income was approximately $78.3 million or $2.48 per share.

Now I will turn to results in each of our individual businesses, beginning with Advanced Circuits. For the quarter ended December 31, 2008 Advanced Circuits revenue was $12.7 million compared to $13.2 million for the quarter ended December 31, 2007 due to a decline in long-run production sales resulting from lower demand as a result of the economy. Income from operations for the fourth quarter was $3.8 million compared to $3.7 million for the same period in 2007.

For the year ended December 31, 2008 Advanced Circuits' revenue increased to $55.4 million compared to $52.3 million for the prior period of 2007, largely due to increased sales in quick turn production, prototype PCBs and assembly sales. Income from operations increased to $17.7 million compared to $17.1 million for the prior period of 2007.

Operating income increased due to operating profit generated from the increase in sales during the year, partially offset by the recording in fiscal 2007 of lower non-cash charges for loan forgiveness arrangements provided to Advanced Circuits management of approximately $1.3 million.

We're very pleased with Advanced Circuits' performance during 2008. Bookings remain solid, and we expect sales in 2009 to be only slightly down from 2008. Specifically we expect reduced demand as a result of the economic conditions to be partial offset by the increase in our customer count as competitors leave the market.

We believe the weakness in the broad circuit board market may create industry consolidation opportunities for the company in its core prototyping and quick turn business.

Now I would like to turn to American Furniture Manufacturing, or AFM. For the quarter ended December 31, 2008 AFM's revenues decreased to $31.1 million compared to $35.5 million in the prior year quarter. The company was near breakeven for the fourth quarter of 2008, compared to operating income of $2.1 million for the fourth quarter of 2007. For the year ended December 31, 2008 revenue decreased to [$138.9] million compared to a pro forma $156.6 million in 2007.

Operating income was $5.1 million compared to a pro forma $11.8 million for 2007. This decrease in operating income was due to lower sales resulting from a combination of the fire at the facility in February 2008 and from the weakening economy, partially offset by the expected business interruption insurance proceeds recognized.

In 2008 AFM continued to gain market share, and we expect this trend to continue into 2009. The subsidiary's revenue trends continue to indicate that it is outperforming its industry competitors, as the company has benefited from substantial presence in low end furniture niche. From 2009 -- while 2009 will be a challenging year for AFM, we are confident the company will benefit in the long-term from the challenges that this slowdown has created for its competitors.

That said, we are by no means complacent in this environment, and continue to work hard to control costs to offset some of the impact of any decline in sales. It is important to highlight that we took into account the effect of economic cyclicality when we purchased this business. Once the economy begins to rebound, given the steps we have taken to grow AFM's marketshares, we are excited about AFM's growth prospects.

Moving on to Anodyne Medical Device, for the quarter ended December 31, 2008 revenue was $13.2 million compared to $14.7 million for the same period of last year. The decrease was due to lower demand as a result of the weakening economy, partially offset by sales from new product rollouts.

Income from operations decreased to $0.9 million compared to $1.1 million for the same period in 2007. The decrease in operating income is largely due to lower sales.

For the year ended December 31, 2008 Anodyne's revenues increased to $54.2 million compared to $44.2 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 $4.2 million compared to $2.9 million for the same period in 2007. The increase in operating income is also largely due to the increase in sales.

Anodyne maintained stronger performance in the three and twelve-month periods ended December 31, 2008. Going into 2009 we continue to focus on improving the company's margins. Further we believe that our rollout of new product and the full year impact of products rolled out in 2008 will largely offset declines in sales that are a result of the current macroeconomic conditions.

Staffmark. Turning to Staffmark, formally CBS Personnel, for the quarter ended December 31, 2008 the company reported revenue of $234.5 million compared to $297.0 million for the same period last year, which was prepared on a pro forma basis to include the acquisition of Staffmark as if it was completed on January 1, 2007.

The reduction is primarily the result of decreased demand for staffing services as Staffmark's clients were affected by weaker economic conditions. We expect this trend to continue through at least the first three quarters of 2009. However, we expect the company will be cash flow positive at the minimum, with potential upside in 2009, as management digs in and continues to rightsize the business.

We believe that Staffmark continues to gain market shares in the markets in which it operates. I would also like to highlight that this is similar to what we experienced in the 2000 to 2002 period, when our market share gains led to a significant increase in accounts serviced and placements as we emerged from the recession.

Income from operations decreased to $6.2 million for the fourth quarter of 2008 compared to pro forma $9.4 million for the fourth quarter of 2007, due principally to the decrease in sales. During the quarter we incurred a approximately $2.6 million in transition and integration expenses related to the Staffmark acquisition, which were offset by lower costs from the achievement of planned synergies.

For the year ended December 31, 2008 Staffmark reported revenue of $1.037 billion compared to $1.153 billion for the same period last year. Its year-over-year results are also presented on a pro forma basis, which reflects reduced demand for staffing services, as clients were affected by weaker economic conditions.

It is important to note that our percentage decrease in revenue was less than the decrease reported by many of Staffmark's publicly traded peers whose operations we continue to follow closely.

Income from operations decreased to $16.1 million in 2008 compared to $31.6 million for 2007. During the year we incurred approximately $7.4 million in transition integration expenses related to the Staffmark acquisition, which were largely offset by lower costs from achievement of planned synergies.

In the longer term we are very excited about the combined CBS Staffmark platform, and are happy to have made the Staffmark acquisition, which led to the tremendous cost synergies I just mentioned.

We are also very excited about the implementation of the unified brand across the company, which is a multimonth effort involving management, employees and customers.

Turning to Fox Racing Shox, for the quarter ended December 31, 2008 the company's revenues were $30.6 million compared to a pro forma $30 million in the prior year period. The increase in revenues is attributable to increased sales at Fox's OEM bicycle and power sports divisions, as well as a growth in aftermarket sales of service revenue. Income from operations was $1.3 million during the fourth quarter of 2008, compared to a loss of $0.3 million for the quarter ended December 31, 2007.

For the year ended December 31, 2008 revenue was $131.7 million compared to a pro forma $105.7 million in the prior year period. The increase in revenue was attributable to increased sales in our OEM bicycle and power sports divisions, as well as growth in the aftermarket sales and service revenue. Income from operations was $10.7 million in 2008 compared to $2.4 million for the prior year period, largely due to the increased sales.

We are very pleased with Fox's growth during the quarter and year. A number of opportunities outside the company's mountain biking sector, include military and well-publicized partnership with Ford on the F-150 Raptor should also continue to materialize over the course of 2009. We believe these opportunities will mostly offset potential declines in sales as a result of a slowing economy in 2009. In addition, we expect many of the operational initiatives that we have been working on to improve cash flow margins will begin to materialize in 2009.

Moving onto Halo, for the quarter ended December 31, 2008 the company's revenues increased to $52.7 million compared to $51.9 million for the same period last year, principally due to acquisitions made since December 31, 2007.

Income from operations was approximately $4.3 million versus $5.1 million for the prior comparable period, as the increased operating profit from higher sales was offset by higher selling, general and administrative expenses incurred as a result of increasing the number of sales account representatives and from integration cost for Halo's 2008 acquisitions.

For the year ended December 31, 2008 Halo's revenues increased to $159.8 million compared to a pro forma $144.3 million for the same period last year, principally due to increased sales from acquisitions made throughout 2008.

Operating income was approximately $5.3 million for the current year period versus $5.7 million for the prior year period, as operating profits from the increased sales was offset by $0.2 million of higher amortization expense and $0.9 million of integration costs related to acquisitions.

While we are were to increase Halo's top line in 2008, the softening economy will clearly have an impact on the subsidiary's result in 2009. We expect the combination of highly accretive tuck-in acquisitions and the recruitment of additional account representatives to mostly offset declines in marketing spend by our customers as a result of the weakening economy.

In this challenging market I would like to reiterate that Halo's management team also continues to be diligent in evaluating its infrastructure, and will seek cost savings wherever possible.

Seasonality. As previously disclosed, the results of several of our businesses are subject to the impact of seasonality. The first quarter is historically our weakest quarter, as several of our businesses, such as Fox Shox and Halo, experience lower sales in the beginning of year, while companies like Staffmark incur a higher payroll tax expense as employees reach the maximum wage base for certain state taxes largely in this quarter. Accordingly, we expect CODI to have a small CAD loss in the first quarter of 2009.

Now turning to the balance sheet. We had approximately $97.5 million in cash and cash equivalents, and had net working capital of approximately $195.8 million at December 31, 2008. Subject to borrowing base restrictions, at December 31, 2008 CODI had availability of approximately $340 million under its revolving credit facility, available to be used to fund acquisitions and working capital requirements.

I will now turn the call back to Joe.

Thanks, Jim. And thanks to you and your team for your hard work in 2008. I would like to once again reiterate my satisfaction with our strong performance for the quarter and for the year.

During 2008 we remained committed to creating shareholder value. Throughout the year we remained disciplined in identifying and valuing businesses, waiting patiently for valuations to come down and markets to stabilize before deploying our capital. Working closely with the management teams of our subsidiary companies to help them grow their cash flow, achieving a 9.1% cash flow increase over 2007 in any challenging environment.

Monetizing our stakes in subsidiaries were we believe doing so would maximize returns, opportunistically selling two of our businesses for a combined gain of over $73 million in June of 2008, and bringing our total gain since our IPO in 2006 to $109 million.

And managing our balance sheet conservatively in anticipation of a difficult economic environment, producing for our shareholders a Company with diverse cash flow drivers, a very low level of debt obligations, and no significant maturities until 2013.

We believe that our owners benefit from, one, the ability of market niche leading companies to take advantage of the current economic environment. Two, the solid financial structure we have created which has yielded a very low leverage level and significant financial flexibility for our subsidiaries. And three, the transparency we provide, allowing shareholders to have an educated understanding of the performance of our Company and our subsidiaries.

With that said, I would like to thank everyone for your time for joining us in today's call. And to take any questions you may have. Operator, please open the phoneline for questions.

(Operator Instructions). Larry Solow, CJS Securities.

Can you maybe just give a little more color just on the acquisition of Anodyne? I understand it is kind of -- there is probably a good amount of reluctancy for good business owners to sell in this environment. Just looking around, maybe they think they are going to get shortchanged. Do you see potential for deals happening, and it is just that your due diligence understandably is taking longer, or is it at a crossroads where it is even difficult to come to terms on pricing?

My temptation is to say, yes, and move on to the next question. I think you have actually highlighted most of the major factors. I think you correctly and intuitively have hypothesized that owners of private businesses who don't absolutely has to sell are not sellers right now, even if they had intended to sell.

So I think there is a -- there continues to be a reasonably large bid/ask gap between those who want to sell their businesses based on reasonably reason earnings levels, and buyers who want to price off of what normalized levels that seem like they might be not as high as they used to be. So I think there is a lack of those.

But from our point of view as well, I think in at least two, maybe three, situations in '08 we were pretty far down the path, and seeing an acceleration of decline is a little unnerving. The benefit that we have in doing diligence, unlike people buying public companies, is we're looking at day to day, week by week, month to month numbers. And I think we have been very cautious in buying into a situation where we don't know where the bottom is.

We're presently happy buying a company that is below mid cycle earnings, but we would like to have a firm confidence in what that trough earnings level looks like. And in the current environment it is hard to know exactly what that is for a lot of companies.

Until you get some year-over-year improvement in the comparison levels, we think it makes sense to be cautious. We were on a call two, three quarters ago, and I think it was -- I can't remember who asked the question -- they said, you need to redeploy your capital. And we said, well, no, we don't really need to do that. We need to be very cautious and careful in how we redeploy our shareholder capital.

So it is a combination of both those things that you said. There is an unwillingness on the part of private sellers, although I think that is beginning to turn. I think the longer that this downmarket continues, it sort of is a little bit of reality.

We still think there are distressed sellers out there, whether it is large corporate or it is actually financial buyers who have fund cycles issues, or family sellers who have estate planning and transitional issues. There are sellers out there, but it is fewer and we want to be patient.

I will tell you this. We definitively think time is on our side. What do I mean by that? We can afford to wait, we think, until later in this year and even into early next year, because we don't -- this fear involved with waiting might be, oh, but suddenly the competitive market will heat up. It is our view that the absence of aggressive credit capital is probably going to continue for some time. Like there might be lenders who come back into the market, but the valuations that were existent quite recently, because of very aggressive lending policies, we think it is not about to return anytime soon.

So we think from a risk/return point of view the kind of benefit of seeing how this economy really is maturing and developing is a bigger positive than worrying about, you better buy now because before there is an influx of capital from the debt markets driving valuations up, if that makes sense.

That is helpful. Then it seems like CBS certainly, or Staffmark, the trends have accelerated on the downside. But would you say at your other businesses you're seeing any stabilization, or any more color on what you have seen maybe in changes since your Q3 call?

It is a very good question with a lot of -- with a textured answer. Because what we are seeing on a company by company basis is quarters that are quite strong, or weeks that are strong, that give a lot of optimism, followed by weeks that are not as strong, followed by a week that is strong.

So looking through the actual granularity that we have to try to answer the question broadly, I would say that a number of our companies have seen some stabilization in their cash flow results. I think Advanced Circuits is in a pretty stable spot. Fox it is a day pretty stable spot.

Interesting, American Furniture is in a pretty stable spot for the last several months, albeit at a lower level than we would have liked, but in terms of stabilization, stabilizing a little bit.

Anodyne and Halo have definitely firmed up. So other than CBS, I think that if I were to exclude the fact that on a week to week basis the results have been more erratic than we would have liked, and that we have historically have seen, I think they have all reached a stabilization level, albeit in some cases lower than former stabilization levels.

But I can't -- no one is able to predict what this economy is going to look like, and so I don't have a lot of confidence saying, oh, it has stabilized. That is it, we have hit bottom. I'm not sure that is true. But in terms of Q3 versus Q4, we have seen some stabilization, if you will, albeit at softer levels.

Greg Mason, Stifel Nicolaus.

Can you talk a little bit about the $75 million term loan that you have repaid. Are you able to redraw that down later on?

No. And so that is why we held on to the cash. If back in June of '08 that had worked like a revolver, we clearly would have -- because $75 million earning 1% or 2% versus saying 7% -- 6% on $75 million, that was $4.5 million of cash flow that we "lost" for our shareholders, which is not good. Right?

So we held on to it because we firmly believed, not anticipating how much deterioration there would be in the economy and how cautious we would get, we believed we were going to redeploy that capital.

Now, rather than sort of keep our heads in the sand and keep holding onto it, at some point in February we repaid it. But that was definitely sort of a use it or lose it kind of chunk of cash, that we finally decided we were going to pay debt down with it. But the reason we didn't pay it sooner was because the revolving piece, we had already paid to zero with our sales. We can't get any more flush or liquid on the revolver side.

So the way to get more liquid on the term side was to hold the cash as an offset. But in the end that is valuable cash to our shareholders. We felt like we still had sufficient liquidity. We anticipated continuing to be cautious in the near term from an acquisition point of view. And it was a decision that had definitely positive arguments on both sides, but we felt like it was time to repay the debt and reduce that burn, if you will.

If I remember correctly if you hadn't have redeployed the $75 million from your exits in June, by June 2009 it was a required paydown anyways?

Exactly, it was the end of June. So the analysis was in the next four months do we believe we would do an acquisition. And given the length of our diligence, we felt like it was nearly impossible that that was going to occur. Not impossible, but nearly impossible. And rather than waiting until June, it had a couple of effects -- well, basically had the effect of accelerating that reduction of burn.

I was kind of surprised to hear that you expect a small CAD lose in the first quarter of 2009. Can you talk to us about what the drivers are, and how do we distinguish between -- these numbers just reflect a week first quarter versus -- this is actual deterioration in the earnings even beyond our expectations in the first quarter.

Let's take a look at '08. If you look at the first quarter of '08, and I don't have the numbers right in front of me, but I think you'll see that CAD in '08 was marginally positive.

It also included Aeroglide and Silvue.

It included Aeroglide and Silvue. If you take out Aeroglide and Silvue, it might have been almost breakeven CAD in a year that we ended up producing about $1.60 change -- whatever $50 million divided by 30.25 million shares is.

So it is -- I think actually looking at -- looking at the trends from past years, will help you distinguish that. The CAD loss is not -- I would say that even going into this year, four or five months ago we were talking about a first quarter CAD that was going to be breakevenish.

A smallish number.

Yes, so that is a hugely -- the big component of that is the cyclical effect. I'm not sure if that gives you enough specifics. I would encourage you, I guess, to go back and look at how our CAD first quarter is compared to full year CAD in '08, for example. And try to exclude Aeroglide and Silvue, if you can.

Talk a little bit about the further information on CBS and just your expectations, if you're willing to give them, on how much more downside is in that business based on what you experienced last recession.

This recession and the last recession are different. We feel confident, because we're hearing it from our customers, that as they -- there has been a lot of people who have laid off a lot of workers both -- a lot of companies have laid off both contract labor, but also a lot of permanent staffing.

We are already are seeing -- and don't take false hope out of this, but we already seeing situations where customers have laid off permanent workers and then backfilled, because they cut a little too deep, with contract labor. It is our clear expectation that the temporary sector will lead out of the economy. It always has. It almost seems like it has to happen more this time, because the total job cuts have been so deep. People aren't sure how confident to be as the economy strengthens, the hire back contract and temp laborers.

Every downturn since the temp industry has been tracked back in the early '70s has led to increase percentage of contract labor force to total labor force out of the recession and before, because companies realize how much easier it is to manage their workforce on the contract side than the permanent side.

My overall commentary is, we really feel like the depth of this downturn from an employment point of view is actually going to be a tremendous kind of nitrous oxide booster to the industry on the way out. I don't know when the way out is.

I can't give you a lot of clarity based upon our experience on whether that looks like the end of '09 in anticipation of a '10 comeback, or whether that is mid '10 in anticipation of '11 economic comeback. I just -- it is impossible to predict.

We feel like the declines on a year-over-year basis will start to -- look, comparable are going to get easier. We know that fourth quarter '08 was pretty bad, and so we're pretty confident the fourth quarter '09 will not be as down versus '08, as for example first quarter '09 is.

So the numbers from a comparison point of view are going to get better. But it is impossible to have any real clarity when you see jobs reports that say minus 650, minus 700, continually coming out. It is impossible to get real clarity.

What I will tell you about this management team though, is having gone through the last downcycle with them, what they're very good at is managing the business and rightsizing.

I think we have six phenomenal teams, but more than any of our teams, the team at CBS is good at this, and cable of this, and knows how to cut fat without cutting muscle, selling through the downturn, gaining market share. And there is not -- and there are some very good management teams in the staffing space. There is not a management team out there of a public company that I would rather have than the Staffmark management team right now.

They are very good at rightsizing the business. I don't think we want to disclose exactly how much in costs they have taken out of the business to date, but it is a highly material number.

This is Troy. Can you just add a little bit of color, I think on the Anodyne, the Advanced Circuits --.

Is this some sort of a tag team thing you guys have going on out there?

Yes, that is kind of what we do. On the Anodyne Advanced Circuits and Fox, I think you mentioned that based on the momentum they have carried into this slowdown, and also on cost-cutting, that they will be able to stay with some momentum going forward. Can you put a little color around what cost-cutting measures they are doing and how much that may impact their business?

It varies for each of them. Suffice it to say that in each of those three businesses there are some very aggressive and proactive measures taken on the cost of goods side. Anodyne is a large acquirer of foam, and foam prices have started to come down. You probably know that Fox is a large acquirer of raw materials, including things like aluminum and steel, primarily aluminum. You may know that Advanced Circuits acquires laminates and copper and things like that. So there is some cost of goods measures that we're taking. And then there is also some, I would call, overhead management. And in a couple of those cases specifically there are some operational efficiency metrics.

I think I would rather not go into specifically what those are, but I would say that those will largely impact the gross profit line. Because in each of those businesses, as opposed to the SG&A line, although there are some SG&A things going on in Anodyne, for example, that will be pretty helpful, there is mixed things going on.

And each of those three businesses, I want to emphasize too, and particularly in Fox and in Anodyne, there also revenue drivers that have a lot of momentum that should be helpful to us in the coming year, meaning new product introductions and things like that.

Henry Coffey, Sterne, Agee.

Is there any way you can summarize all your remarks and turn that into some sense of where CAD ends up for the full year, or is it too early to get into that?

It is probably too early to get into that. If we don't acquire anything it is going to be lower than our distribution level. Which I think we said repeatedly -- it is probably too early to get into that. We really, in this environment, I don't think want to be in the business of giving guidance. I think that as you go through and listen to what we have said about each of the companies, we had tried to give people a reasonable basis for trying to model each of the companies and coming up with their own number, which I know you are --.

The annualized cost savings from paying off the debt in February, that is about $4 million a year?

No, it is a little more than that, because we're also saving management fees on top of that. So I would say it is about $5 million, $5.5 million.

Then it (technical difficulty) for the last ten months, correct?

That will be mostly for the last ten months. It is part of February as well.

I guess your inactivity on an acquisition front, I guess it is sort of a commentary in what you probably see going on with the businesses in some of these larger RIC BDCs. Is there a lot of -- with the stress they're having, are there a lot of businesses out there for sale or --?

Let's separate. First of all, when you say inactivity, I'm looking at a roomful of people I don't think have been inactive. I think we have actually been very active in turning over a lot of stones and positioning ourselves extremely well. I think when we feel like it is firming up, at the end of this year, or late this year, whenever that happens, or early next year, I think you're going to see -- I won't say a flurry of activity, but I think we will be very well-positioned to move on some pretty interesting opportunities.

Let me just -- the inactivity may be either hasn't been sort of actual acquisitions consummated, but shareholders should know that we're actually -- all the 25 of us at the parent level are working our tails off, and I think positioning ourselves really well.

Now in terms of how it relates to the BDCs, Henry, I don't know how many times you have heard me say, I don't really pay attention to what the BDCs are doing. So I'm not sure I can really comment on what is going on there. I think what is happening at the BDCs is that they are liquidating certain of their positions to try to pay down overleveraged situations.

So we have actually seen buy opportunities from the BDCs. One in particular has sold a lot of companies. And I don't know what to say that doesn't sound too derogatory, but we haven't seen many companies that they're selling that we have any interest in buying.

We don't think many of those companies, and maybe that is why they ended up where they ended up -- but we don't think many of those companies have a real, what we would call, a reason to exist. We think that they were dramatically overpaid for in the first place, and that their valuations -- their expectations continue to be too high.

So we will look at situations emerging from BDCs, but so far nothing has really come across that we think fits in our family of companies. I apologize if that that sounds a little arrogant, but I think the results speak for themselves a little bit.

Robert Dodd, Morgan Keegan.

Two questions. First, going back to be CAD for Q1, if I look at the op income, at least ex intangible amortization for Q1 last year, it looks like Aeroglide and Silvue accounted for maybe 40% of CAD, not the difference between breakeven and $0.30. Can you give us some more clarity on what I am missing there in terms of --.

I think CAD was $0.30 in the first quarter last year. And you're saying that you think Aeroglide and Silvue accounted for $0.12 of it.

That is what the numbers look like.

No, no, no. That's fine. I just want to make sure I understand the question.

Yes, that's the question.

I'm not sure -- so a couple of things on that. Fox had an unusually strong, if I recall, first quarter last year in terms of how it seasonally came out. So we expect Fox to not be as front end loaded this year as it was last year. Then in terms of the remainder, you know directionally I'm surprised it is the magnitude that you're talking about. Jim, are there other factors?

Payroll is also a larger size, so it is the little bit more of a loss in the first quarter. And then there's impact from CBS being down.

Right. That is actually (inaudible). Yes, that's right. That wouldn't have had as much of an impact. We got the business interruption insurance. We are just discussing whether it is AFM.

But Halo is larger, and so that you get sort of more back ended. And if you lose the $0.12 associated with Silvue and Aeroglide -- roughly $0.12. As you say, I'm not sure how the amortization feeds back into the number exactly without looking at it. And then you have got the impact of the economy.

As we said, like we think CBS will comp later in the year more flatly, or less downly -- I know that is not a word -- than it did last year. First quarter '08 CBS was a tremendously good quarter. And that is why we suggested that the decline in '09 is accelerated. But I will tell you we think that is true for most of the industry. And from what we have seen from the Industry Association information and things, it is not atypical.

Got it. Next question is sort of -- you're looking at add-ons, you mentioned you closed one on Halo. If the environment is tough enough out there, why aren't you just essentially letting these competitive businesses fail and stealing their customers for free rather than buying them?

Well, there is two efforts. There is an account -- there is a rep recruitment effort, which I don't know if it is as brutal as -- is an effort in which we try to work with representatives to suggest that they're more able to achieve their financial goals and their business goals within the Halo umbrella than they are alone.

If you want to put that as crudely as saying, hey, you're going to fail on your own, you should come work for us, one could look at it like that. But at the end of the day, they have relationships. The notion of let them fail and the customers will find their way to us, I think doesn't fully appreciate the nature of the personal relationship that the reps have. So what you actually want to do is bring the reps underneath you.

In terms of the acquisitions, the acquisitions are -- you're saying why pay anything? Understand that the acquisitions that we're doing are enormously accretive, done at 3 timesish kinds of cash flow that are producing 3 to 4 times. And in that case it is because you are requiring many reps at once, as well as a fairly large book of business, and in some cases, a little bit of an established brand name.

And those businesses that we are acquiring aren't on the brink of failing at all. The businesses that we are requiring are ones that are cash flow positive, where you have owners that are ready to transition. There is a lot of people who started these businesses kind of post-World War II, and there is kind of a generational transition going on with some of these promotional businesses, where the larger guys who are able to provide a bigger infrastructure for their representatives, more of a technology infrastructure, are capitalizing over time.

And I think there were smaller sellers who say, if you can't beat them, join them. So that is the "larger" businesses, like the ones we just acquired yesterday.

In terms of the reps, a lot of those guys did work for themselves. And we like not to think about it as their business is failing, more that they're bringing a book of business that they have built and synergistically bringing it into a better home.

(Operator Instructions). Vernon Plack, BB&T Capital Markets.

I'm trying to get a sense, Joe, for a little bit more of a sense for efficiencies, ways in which you can improve your Company, since specifically looking at staffing and SG&A, for the last three quarters that number has been relatively consistent, somewhere in the neighborhood of $69 million a quarter. Can we expect changes to that number?

Yes.

If I could sum up your thoughts, you sort of -- I think you segmented your companies really into three different buckets. If I could summarize, and I would appreciate if you tell me if I am correct in this assumption, but looking at cash flow for '09 compared to '07, wouldn't it be safe to say that Anodyne, Advanced Circuits and Fox cash flow will probably be roughly neutral? Halo, AFM cash flow will be down, and CBS cash flow will be down a lot?

Yes, with one caveat. That middle category, I think particularly in the Halo size, has a chance to drift up towards neutral a little bit, depending on our opportunity to acquire some things. And I think what you are probably thinking when you think about the furniture industry, you probably think AFM is down more than we think it is going to be. We think there is an impact, but we think it is -- probably it is not going to look like it is on the other public companies.

But otherwise, I would more or less -- and than on the three -- in the three that you say are flat, do I think there is some room for one of them or something to drop a little below flat in this environment? Maybe. But that is probably a fair characterization. How did he characterize Staffmark?

Down (inaudible).

Down a lot.

Yes, okay.

You're talking about '08 as opposed '07, right?

I'm looking --.

'09 versus '08.

'09 versus '08.

You said '07, but that --.

I just wondered why you segmented them into those three buckets, and that is why I was --.

I think it is an accurate interpretation what you have done there.

One other question, Jim, could you tell me again what the revenue for Fox was for the fourth quarter? Was that $30.6 million?

It was $30.6 million.

Jon Arfstrom, RBC Capital Markets.

Jim, can you give me those transition cost numbers again for Staffmark?

For the quarter it was $2.6 million. And for the full year it was $7.4 million.

What you consider those one-time, most of them or all of it one-time in nature?

I would say all of it is one-time in nature.

So you're looking at about $8.8 million if you exclude that for Q4 net income?

We give operating income so --.

Right, operating income. Okay, great. Then do you have any type of comparison for Staffmark on what Q3 operating income would look like? Is the CBS number close enough or do you have any closer comparable?

Could you repeat that?

Just give us an idea of what the Staffmark numbers would look like -- the operating income numbers in Q3 and Q2.

Well, you have got the reported numbers that we did last year, which includes Staffmark. But obviously we are saying that those numbers are going to be down.

Did you say for '09?

'09, right.

No, '08.

I think '08 you're looking at the numbers. Are you saying '08 -- can you tell us what the Q2 and Q3 numbers were in '08, including Staffmark, which is what we show.

Those are reported numbers, so we have got those. I just don't have them in front of me, John.

Okay.

But if you want, we can try to clarify what is out there if you want to give a call back. If there is something that we presented in a less than clear fashion, we will try to clear that up.

No, I'm just looking for the quarterly COGS in '08. Then what is the drop-down effect? You talked about that in the furniture industry.

On our Wal-Mart effect, the notion is that -- and we have seen this with some customers who have come to us to put in lines of product that are less expensive than lines that they currently offer. The drop-down effect is just that if you normally shop at, pick a store, in this economy some of those people drift down to the next store. And those drift down to the store below. And at some point there is kind of a baseline level. And people often call that a Wal-Mart effect.

We definitely are seeing that in the furniture industry. If you stratosphere -- if you create layers of the furniture retailers or manufacturers based on price points, it is pretty clear actually that the guys at the highest price points have suffered a greater decline than, for example, people in the mid price point, all of which are greater decline that AFM.

I will give you an example. For our 10 customers for Q4 '08 we actually had revenue increase. Which means we're gaining market share there. And our top 10 customers are people who serve that low end market. So what I meant by the drop-down effect was the tendency of buyers in this kind of economy to seek a lower-priced product than they otherwise would have.

It appears there are no further questions at this time. Mr. Massoud, I would like to turn the conference back over to you for any additional or closing remarks.

My closing remark again is to thank you all for your time. To say we feel pretty good about how '08 shaped up. And most of all, to just reemphasize we're really excited about the six businesses we own. And as we look out a couple of years and through this kind of valley in the economy, we think our businesses all have incredibly good reasons to exist. And even the ones that are more cyclical than others in this market are in fact doing what we would hope they would do, which is starting to gain market share and traction.

And we feel like the model is playing out -- in and out of the cycles exactly the way it has for us in the past, and exactly the way we wanted it to. The cycle maybe a little deeper and longer than any of us expected, but the model is working the way we expected it to.

Thank you for following the Company. Thank you for being shareholders. And we will continue to work as hard as we possibly can for all of you. Thanks.

That does conclude today's conference call. We thank you for your participation. You may disconnect any time.