Compass Diversified Holdings (CODI) 2009 Q1 法說會逐字稿

Good morning and welcome to the Compass Diversified Holdings' 2009 first quarter conference call. Today's call is being recorded. (OPERATOR INSTRUCTIONS.)

At this time, I would like to turn the conference over to Mr. Tyler Wilson with the IGB Group for introductions and the reading of the Safe Harbor statement.

Thank you, and welcome to Compass Diversified Holdings' first quarter 2009 conference call. Representing the Company today are Joe Massoud, CEO, and Jim Bottiglieri, CFO.

Before we begin, I would like to point out the Q1 press release, including financial tables, is available on the Company's website at www.compassdiversifiedholdings.com. In addition, management expects to file Form 10-Q for the quarter ended March 31st, 2009 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 forward certain -- certain forward-looking statements including statements with regard to the future performance of the CODI. Word 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 those projected in forward-looking statements, and some of these factors are enumerated in the risk factor discussion on Form 10-K filed by CODI with the SEC for the year ended December 31st, 2008 and other filings with the SEC.

In particular, the domestic and global economic environment has a significant impact on our subsidiary companies. Furthermore, we are uncertain as to our ability to consummate acquisitions which are accretive to shareholders either in 2009 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.

As this time, I would like to turn the call over to Joe Massoud for his opening remarks.

Thank you, Tyler, and thank you all for your time this morning. Welcome to our first quarter 2009 earnings conference call.

We will begin today's call by offering some general comments on CODI's performance during the first quarter as well as the steps we have taken to position the Company favorably in the current environment. After that, I'll turn the call over to Jim Bottiglieri, our CFO, to discuss our operating results on a subsidiary-by-subsidiary basis as well as certain one-time noncash items that we incurred during the quarter. And then, at the end, we'll take whatever questions you may have.

In the first quarter of 2009, CODI's diverse family of businesses performed consistently with the expectations we enumerated on our last call, generating cash flow available for distribution and reinvestment, which we refer to as CAD or cash flow, that was just below breakeven at a loss of $400,000 or approximately a negative $0.01 per share.

Please recall that the first quarter has always historically been our weakest quarter due to cash flow generation seasonality issues at a number of our subsidiaries. For the trailing 12 month period, we generated cash flow of $40.3 million. This excludes any gains that we have realized from the sale of businesses in June of 2008.

During the past quarter, each of our Companies continued to take actions to both manage costs in the current environment and, more importantly, position themselves well to emerge from this downturn as even stronger, more dominant Companies in their respective niche markets. And we are extremely happy with the family of Companies we own, and we expect to emerge from the downturn, whenever that ultimately occurs, having used this opportunity to create substantial value for our shareholders.

Drawing upon the long-term strength of our businesses in our business model, we announced on April 9th that our Board of Directors had declared a first quarter distribution of $0.34 per share. This brings cumulative distributions to shareholders to approximately $3.62 per share since going public in May of 2006.

And as stated in our last call, our distribution policy remains unchanged. Our Board continues to declare distributions to shareholders based on its evaluation of CODI's normalized cash flow generation power. This has not amounted to full payout of our CAD in past quarters and years, and has resulted in approximately $17.4 million of excess of our cash flows over our distribution paid to date, including this last one.

In addition, we have generated realized gains of approximately $109 million, or approximately $4.08 per share, from the timely sales of subsidiaries. We've never included these gains in our calculation of CAD, but the tangible impact of these successful monetizations can be seen in our outstanding liquidity position and our current ability to make accretive add on and platform acquisitions on behalf of our shareholders.

Going forward, assuming no material acquisition activity, we continue to expect to earn significantly less CAD in 2009 than our full year distribution. However, given the factors noted above and the fact that paying this distribution will have no impact on our ability to grow our current subsidiaries organically or consummate future acquisitions, we remain in a position to continue paying distributions at the current rate to our shareholders.

To add some data to my comment on liquidity, as of quarter-end, we had outstanding only $77.5 million of term debt which has no significant maturities until 2013, as well as $32.4 million in excess cash on hand and considerable availability under our $340 million revolving acquisition and working capital credit facility due late 2012, which has no borrowings outstanding.

This liquidity is a direct result of the cash flow generation of our subsidiaries as well as our timely decision to sell Aeroglide and Silvue for an average of over ten times cash flow for a gain of $73.4 million in June of 2008, as we sensed at that time that a potentially softening economy as well as seemingly high market multiples.

While we held this cash on our balance sheet for a while, many of you will recall that in February of 2009 we made the decision to repay $75 million of debt under our term loan facility from cash on our balance sheet. The debt repayment provided substantial savings to CODI in net interest expense, and translated into a meaningful reduction in management fees paid by the Company to its manager.

As background, we had previously intended to acquire a new platform business with this cash on hand, but the terms to our debt agreement required us to utilize these proceeds for such an acquisition by the end of June of 2009 or to repay the debt. Given what we continued to see in the economic environment and the uncertainty of target company cash flows, we decided to take the disciplined and conservative approach and just repay the debt several months in advance in order to reduce net interest expense.

We repaid this debt as soon as we reached the point where we were confident that, given our expanded diligence periods for potential new platform acquisitions, this capital would have been repaid at the end of June anyway.

I would now like to review the important steps we've taken to position the Company well in the current environment, and why we continue to be very pleased with our subsidiaries' prospects going forward.

CODI management works in conjunction with our subsidiaries' strong management teams, and has taken decisive action during the slowdown to, number one, reduce cost of goods at a number of our subsidiaries. This includes efforts on negotiating materials costs as well as procuring additional sources of product. Some specific examples include foam acquisition at both Anodyne and American Furniture, and laminates and copper at Advanced Circuits, for example.

Two, manage SG&A costs to increase operational efficiency. Substantial efforts along these lines have been taken at all of our subsidiaries with particularly notable progress being made at Staffmark, Halo, and American Furniture.

Three, push down on hourly and salaried compensation expense. Again, this is an effort that each of our Companies has pursued with great success.

At the same time, however, and one of the reason we're structured the way we are and capitalized the way we are is that we're cognizant of the importance of giving our subsidiaries the necessary resources to grow in this environment. We believe this economic environment will fundamentally define who will be a winner over the next decade in each of these market niches. And one of the advantages to CODI's low leverage and unique structure is it enables the Company to continue to invest in growth efforts at our subsidiaries while their smaller and less well-capitalized competitors are shrinking or pulling out of markets.

Efforts to see through the recession are particularly important for us at many of our Companies, including Halo where we continue to actively recruit new sales reps and pursue tuck-in acquisition, Advanced Circuits where we're seeking to utilize substantial operating efficiencies and capacities to partner with smaller competitors in a way that creates win-win situations for us and them, Fox, where we continue to pursue substantial opportunities in non-core markets including military and power sports, American Furniture where we've recently added representatives who bring us the potential ability to serve new and important customers.

These efforts are meaningful, and while in the current environment they don't produce the same immediate financial outputs as the actions we have taken on the cost reduction side, in our opinion, from a long-term point of view, they're even more vital for our value creation.

Overall, we remain pleased with the resiliency of our subsidiaries and confident that each is well positioned to draw upon its financial and operational resources to come out of this cycle as a stronger, more valuable business.

With regard to potential acquisitions, as I mentioned, we have over $32 million of cash on our balance sheet and substantial availability under our acquisition working capital revolver. We're beginning to see the green shoots, as the word seems to be, the common one these days, of increased transaction flow, and are hopeful that as comparisons get easier in the next several months, we'll start to see cash flow generation stability off of which we will confident to buy.

I would like to note that our ability to draw on our $340 million revolver is somewhat constrained by our subsidiary company EBITDA. As you'll see in our 10-K, as of March 31st, 2009, our availability was approximately $185 million. Despite these limitations, we believe we're currently in a good position to pursue, and are pursuing, one or possibly two attractive and highly accretive new platform acquisition candidates over the coming six to 12 months.

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

Thank you, Joe.

Today, I will discuss our financial results for the quarter ended March 31st, 2009, including a review of the operating results of each of our subsidiary companies and a brief mention of some of the factors affecting each of these businesses.

On a consolidated basis, revenue for the quarter ended March 31st, 2009 was $274.9 million. The Company recorded a net loss for the quarter ended March 31st, 2009 of approximately $27.3 million as compared to a net loss of approximately $0.8 million for the quarter ended March 31st, 2008.

The increase in the net loss largely resulted from the recording of a $59.8 million noncash impairment expense for the Company's Staffmark subsidiary, partially offset by the associated tax benefit of $22.5 million for this impairment, $12.7 million for the minority shareholder's portion of this impairment expense, and further reduced by an $8.2 million supplemental put reversal.

As background for these one-time noncash charges, in the first quarter of 2009 the Company conducted its annual impairment test of goodwill and other intangible assets, which is required under GAAP. As a result, we took an impairment charge on our ownership of Staffmark reflecting a GAAP-based decrease in our holding value for that entity. However, as Joe noted, our favorable opinion of Staffmark's long-term outlook and value, as well as the subsidiary's ability to strengthen its competitive position, remain intact.

Our periodic supplemental put accrual -- or substantial reversal was driven by the current cash flow generation levels of our subsidiaries as well as by the anticipated market multiples for those businesses, were they to be sold in the current environment. Its estimated total liability as of March 31st, 2009 was less than that of -- as calculated as of December 31st, 2008, resulting in a noncash reduction in the supplemental put expense.

Now, I'll turn to results of each of our individual businesses, beginning with Advanced Circuits. For the quarter ended March 31st, 2009, Advanced Circuits' revenue was $12 million compared to $14.3 million for the quarter ended March 31st, 2008 due to a decline in both long run and quick turn and prototype production sales. The decline was the result of the overall economic slowdown, which has impacted our customers across the board.

Income from operations for the first quarter was $3.6 million compared to $4.8 million for the same period in 2008. Operating income decreased principally due to the lower sales during the quarter.

Overall, we are pleased with management's efforts during this quarter. We continue to focus on our small assembly business, which grew and partially offset declines in the PPC manufacturing revenue.

In addition, the Company focused on improving its margins through cost management. In 2009, we anticipate that net sales will remain at somewhat lower levels, and this has been confirmed by what we've seen so -- thus far in the second quarter. However, we continue adding to our customer list, which not only partially offsets the impact of the economy but also positions us very well for the future.

Just as importantly, we are finally seeing the impacts of our efforts over the past year to develop relationships with smaller PCB shops which we expect will soon lead to accretive acquisitions or some other kind of partnering with those entities.

Now, I'd like to turn to American Furniture Manufacturing or AFM. For the quarter ended March 31st, 2009, AFM's revenues increased to $41.5 million compared to $37.2 million in the prior year quarter, showing a very strong performance in this challenging environment. The company recorded operating income of $2.2 million for the first quarter of 2009 compared to $3.7 million for the first quarter of 2008. This decrease in operating income was due to higher cost of sales as well as well as the higher selling general and administrative expenses.

The company is undertaking a series of initiatives to reduce its material costs as well as its SG&A. In many cases, the impact of these initiatives was not fully realized in the first quarter.

From a sales point of view, in the first quarter of 2009 AFM benefitted from increased stationary product sales of $4.8 million. The company's rebound since February of last year when a fire negatively disrupted sales is a testament to the significant progress AFM has made in its promotionally priced furniture niche.

AFM is a dominant player in this niche, and we are confident that it is using this downturn to gain market share. The company's growth in sales and outperformance of budget in this area also confirms this notion. In addition, this strong performance is also a result of the retail dropdown effect that is occurring to a great extent in the furniture market whereby retail sales at the bottom end of the pricing pyramid substantially outperform those at the higher end.

This was part of the core theory of our acquisition of this business, and it appears to be playing out as expected. We do not expect a sharp rebound in the overall furniture sales in 2009. AFM is prudently managing costs in material, labor, and overhead. We continue to believe that AFM will be able to take advantage of its superior of financial strength and relative operating efficiency as compared to many of its smaller competitors, strengthening its position in this market and hopefully position itself for strong growth when the economy begins to recover in a meaningful way.

Further positioning ourselves for such growth, we are excited to have been able to retain the services of a number of new sales representatives who we expect will be able to open doors to a number of new and important customers, thus providing accelerating effect as we come out of the recession.

Moving to Anodyne Medical Device, for the quarter ended March 31st, 2009, revenue was $11.6 million compared to $11.5 million for the same period last year. We achieved this growth despite overall weakness in the healthcare institution spending as a result of both the disposable nature of this -- of the products being supplied and the continued macro trends towards increased spending on products addressing the treatment of decubitus ulcers.

Anodyne lowered the cost of sales for the quarter by decreasing manufacturing overhead and labor cost. The company's income from operations increased to $1.1 million from $0.5 million for the same period in 2008 due to the higher sales, lower material prices, and annual savings of more than $1.2 million from synergies at the manager level.

Anodyne's solid performance in both net sales and operating income exceeded our expectations in the first quarter of 2009. We are highly pleased with Anodyne's results, and maintain that the company's unique offering of a platform that serves acute care and long term care and home health care from a sole source will lead to continued growth over time, albeit slow for the time being from the softness in the healthcare end markets.

Staffmark. Turning to Staffmark, formerly CVS Personnel, for the quarter ended March 31st, 2009, the company reported revenue of $163 million compared to $267.1 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 1st, 2008.

The reduction is the result of decreased demand for staffing services, as Staffmark's clients were deeply impacted by weaker economic conditions. We expect this trend to continue throughout 2009.

In response to this environment, during the quarter the company cut overhead costs, consolidated facilities, and closed unprofitable branches to help reduce the impact of the unfavorable economic circumstances on the company's bottom line.

Income from operations decreased to a negative $58.5 million for the first quarter of 2009 compared to $0.7 million for the first quarter of 2008, due principally to the previously discussed impairment charge and from the impact of the decreased sales.

During the quarter, we incurred approximately $1.7 million in transition and integration expenses related to the Staffmark acquisition, which were partially offset by lower costs from the achievement of planned synergies.

As an update, in April 2009, we were encouraged to see flat, in some cases improving, week-over-week results at Staffmark. While the results are still substantially lower than the prior year, these declines appear to be slowing. Weekly results appear at this point to have bottomed out, but it is still too early to declare victory.

Turing to Fox Racing Shox, for the quarter ended March 31st, 2009, the company's revenue was $20.1 million compared to $23.4 million in the prior year period. The decrease in revenues is the result of lower net sales to original equipment manufacturers. Loss from operations was $0.9 million during the first quarter of 2009 compared to a loss of $0.2 million for the quarter ended March 31st, 2008, attributable to the decline in sales.

In reviewing Fox's quarter-over-quarter performance, it is important to note that the first quarter is typically not a leading indicator of how the business will perform as the prior year models are sold during this time. Year-to-date, we have had some weakness in sales in bike OEM orders, which we attributed to a dramatic decline in inventory throughout the entire bike supply chain.

Coupled with anecdotal information from our channel checks, we believe that the inventory excess is beginning to be resolved and that the end demand in the high-end mountain bike category is holding up well.

Despite this weakness in bike OEM sales, Fox sales have been, and we expect will continue to be, aided by the company's strong brand recognition and our efforts over the past year to enter into new verticals. We expect further penetration later in 2009 and beyond, including military and power sports applications, as well as partnering with Ford in our patented internal bypass shock, which will go into the -- onto the F-150 Raptor.

We are excited by our ability to open doors in these new markets and by the acceptance of our brand across these related enthusiast lines.

Moving on to Halo, for the quarter ended March 31st, 2009, the company's revenues decreased to $26.7 million compared to $28.8 million for the same period last year, principally due to lower spending in advertising and merchandising by our corporate customers. The reduction in net sales was offset by $6.8 million in net sales to accounts acquired in April 2008, November 2008, and March 2009 acquisitions.

With significant sales from the company's add-on acquisitions and its focus on account representative recruitment positions, the company is able to withstand distress in its promotional business. Loss from operations was approximately $2.1 million versus $0.8 million for the prior year comparable period due primarily to lower net sales and slightly higher overhead costs from acquisitions made after March 31s, 2008.

Even so, the first quarter results are typically significantly lower than in the third and fourth quarters, where we expect to see more than three-fourths of Halo's EBITDA. May and June are core months for Halo orders, so we will be able to better predict the annual performance at that time.

Going forward, we believe that the trend of reduced spending on marketing related products is likely to persist throughout 2009. But, its impact on Halo will continue to be partially offset by tuck-in and highly accretive acquisitions as well as our aggressive recruitment of new sales representatives.

We are pleased with the performance of the company's growth efforts to date. We can grow the overall number of customers significantly, which will not only help to offset near-term declines but also position us well for growth in the near -- as the economy rebounds.

From a outlook point of view, we saw a dramatic decline in the rate of year-over-year bookings in January and February. But, in March and April, while still lower than the prior year, there has been a steady and meaningful improvement. Our management team remains cautious in navigating this environment and is continuously evaluating its infrastructure needs and further cost savings opportunities.

Turning to the balance sheet, as Joe had mentioned, we have $32.4 million in cash and cash equivalents, and had net working capital of $106 million as of March 31st, 2009.

I will now turn the call back over to Joe.

Thank you, Jim.

Again, our Company is continuing to perform in line with our expectations in this challenging environment. It is important to note that when we acquired each of our subsidiaries, we took into account the impact of severe economic downturns on financial and operational results as part of our underwriting and diligence process, also structuring our balance sheet with that in mind. This is part of our whole reason to exist philosophy.

With that said, we are not complacent and remain focused on improving each of our subsidiary businesses by continuing to, one, aggressively pursue expense reduction and cost savings while at the same time, two, using the current economic downturn to take advantage of less well capitalized competitors, and, three, going through disciplined pursuit of highly accretive acquisition opportunities.

While it's hard to say we are excited about the current environment, we're very confident that our capital structure and business model will allow us to grow through this downturn and that our existing businesses will emerge from this downturn even stronger and more valuable than they entered.

With that said, I'd like to thank everyone for joining us on today's call, and to take any questions you may have. Operator, please open the phone lines for questions.

Thank you. (OPERATOR INSTRUCTIONS.) And we'll take our first question from Larry Solow with CJS Securities.

Hi. Good morning.

Morning, Larry.

It sounds like, Joe, from some of Jim's comments and your comments, that you're seeing some stabilization and some improvement in trends and even some improvement from the last time you had your Q4 call. Is that a fair statement?

Yes. So, let's describe the definition of the word stabilization, right? I think in -- we're seeing, certainly, declines. And we could talk about each business by business. But, in general, declines versus prior year continue. We're certainly seeing the rate of decline, especially most recently in many of our businesses, decrease. And week-over-week order activity at places like Halo, slight improvements in week-over-week activity at CBS. But, they're still substantially lower than last year. So, I want to make sure we kind of understand our nomenclature.

So, yes, actually, at a number of our subsidiaries we feel like it's gotten -- we hope it's gotten as bad as it's going to get. That's not to say that, given how strong 2008 was for really all our companies, that we won't continue to see year-over-year softness.

Right.

You with me?

Absolutely.

Okay. Now, I just want to make -- because, I mean, I think that the word has a lot of connotations. I want to make clear that we're not -- I don't want to mislead anyone.

No. No, absolutely. And then, my second question, and one that I generally ask quarterly, is just on the acquisition front, I know it's kind of unprecedented times and there has been a reluctance for a seller with a business where he doesn't need to sell to sell, and I know kind of your pipeline out there of stuff has maybe been --.

Well, so again, in the last month and a half, we're actually seeing more -- not only more interest from potential sellers, in some cases people we had talked to before where transactions that they thought they had have fallen apart, but more realistic expectations.

Having said that, the reason we haven't done anything since we sort of put all the cash on our balance sheet since last -- June '08, I would say 70% falls on us and 30% falls on the market. There are at least three situations in that period that we -- and now I'm telling you it's four, that we walked away from because of the fundamental instability in earnings trends. And it was our view, and continues to be, that while we're happy to buy -- we like to buy on trough earnings, and we're actually happy to have the trough go on for a long time. We're never going to value a business based on the belief that it's going to hockey stick up the moment we buy it.

But, it's important to know that you've got some stability. And I would suggest that until the end of this -- just looking at the global -- or the domestic economy in general, it's going to be a few more months before you start looking at year-over-year numbers and saying, oh, okay. That's a single digit decline, or maybe not even a decline. And I can actually -- I can look at their backlog of their business and project it over the end of '09 and beginning '08. They might actually be flat year-over-year. Mind you, flat year-over-year when comparing to the fourth quarter of '08 is no great shakes, right? But, at least now you've got a kind of a baseline that you feel like you can value off of and grow off of.

So, one, we're seeing some more impetus in terms of sellers with realistic expectations, two, we think we're approaching the day where we might have a little more courage to go out and actually buy off of numbers that are the run rate numbers in the market. And finally, we think that this -- we know that this patience hasn't negatively impacted us. I think back in September, there were people saying, "Aren't you worried that the credit markets are going to come back?" And we weren't that worried about it then and, I have to be honest with you, still aren't that worried about it.

Like, we don't see that in six months from now we'll have looked back and said, "Oh, we missed the great window." But, I do think the next six to 12 months are going to be very interesting times for us, and I think that sort of the perfect storm is ebbing a little bit and creating what could be a very interesting acquisition environment for us.

Got it. And just a last question on your covenants, and I guess it's based on a trailing EBITDA and a sliding type scale so you have less availability as of now.

Right.

As you kind of -- as you roundtrip some better quarters last year and kind of get into some down -- a little down quarter this year, does that -- is there a chance that that availability comes down a little bit more?

It's definitely going to come back down. I mean, in our view, without getting into kind of what our expectations for this year, we don't see that. We don't expect that's going to come down to the point where we don't have enough dry powder for at least one substantial acquisition for us.

But, if it's sitting at 180 now, could that come down further? Yes. Again, it's not going to disappear and it's not going to eliminate our ability to do one and maybe a couple acquisitions. But, the math of that is clearly that that is impacted by EBITDA.

Got you. Okay, great. Thanks.

And we'll take our next question from Vernon Plack with BB&T Capital Markets.

Thanks very much. And Jim, I did not catch the operating income number for Halo for the first quarter of '09 and '08. Could you repeat that, please?

Sure.

I think I've got it right here. Do you want it right here? No, it starts with operating expense.

Halo had a loss of $2.1 million for this year.

Okay.

Versus $0.8 million last year.

$0.8 million loss last year.

Loss last year.

Okay. Thanks very much. And Joe, just wanted to talk to you a little bit about, I guess for lack of a better word, portfolio diversification in terms of how you're putting together your overall business, and obviously Staffmark is a big piece of that. And as you look at additional acquisitions, can I assume that you -- there's a deliberate intention on your part to focus on those businesses hopefully that will also diversify your portfolio in a way that sort of moves you away from the --?

I mean, first of all, let's put this into context. At most, Staffmark ever provided 30% or 35% of the Company's cash flow. And, Vern, I mean, I know you know this, but people -- as other people look at this and go, "Oh, look at the revenue." That's a very different business with a gross revenue model that's skewed from a revenue point of view.

So, we never thought that we were kind of over weighted there. And by definition, because of what's happening with the numbers from a cash flow point of view, obviously the contribution is a lot lower this year. But, we've always looked at it -- if you look at it, ATI last year doing $21 million, $24 million of EBITDA. You look at Fox, 19 or whatever the number was, as compared to a CBS that did 35. I mean, from our point of view -- and then you've got three other businesses, and AFM contributed 13.

No, that's nine.

Nine. I don't think any -- yes, the -- so, we've never thought about it that much.

Now, are we looking at businesses as diversified? Yes, I mean, we like our platforms in each of these industries and are looking to do add-on acquisitions. I mean, you might look at our acquisition of ESCO under Halo or of Adnog or Goldman Promotions, all three of those, which we think we did at something like three times EBITDA or less, is increasing concentration. But, in reality, they're sort of very accretive acquisitions that are tuck-ins.

So, each of our businesses it still looking to add on. I suspect our next major platform will not be in -- our next major acquisition will not be in a business that we currently -- a same business line we currently own. But, the way we think about the world is we like branded, enthusiast driven recreational products. In the time you've known us, we've had a couple businesses that have done pretty well, Crosman and Fox.

If we acquired another business in that space, on the one hand you could say, well, that's not diversified because the same things that impact consumer spending in general impact them all. On the other hand, we'd say, look, it's a different niche with different dynamics. And certainly Crosman and Fox couldn't be more different in terms of who the customers are who buy the product.

So, again, I'm not trying to weasel out of the question. Are we considering large staffing acquisitions now? No. But, we really like our platform. And we own, we believe, the largest light industrial and clerical nonpublic staffing company in the country. We believe we own the one that has the best or one of the best management teams. We think we're phenomenally leveraged to the upside. We're extraordinarily happy to have done the Staffmark acquisition because of the way it positions us from a geographic footprint point of view and because of the operational efficiencies we squeezed out.

So, we're very excited that we did the Staffmark transaction. Even when we did that transaction, I think we thought that was the last one for a while while kind of we put the two businesses and consolidated them. This downturn probably reemphasizes that, at least in the near term.

Is that -- have I gotten at your question, Vern?

Oh, absolutely. You answered the question in terms of where you think your next major acquisition will be. And I bring it up also. We've talked a little bit about this before, but just in terms of how the investment community perceives Compass and the importance of diversification. I just wanted to get some thoughts on that. So, thank you.

And we'll take our next question from Robert Dodd with Morgan Keegan.

Hi, guys. A couple questions about Fox Factory and American Furniture. I mean, on Fox, you'd previously been talking about that with the pipeline in new business, new products that was coming on in the back half of the year. You'd given some pointers that that might be a business that's up year-over-year this year even in this economic environment. Do you still feel comfortable about that?

Yes, I feel comfortable that if you took non-bike for '09 and compare it to non-bike for '08, that that number will be up year-over-year.

Am I excited that Ford pushed back the F-150 production cycle? Not particularly. The power sports sales and non-bike areas are impacted just like everything else.

But, I mean, I guess I'll ask Elias. Would you just let me just confirm with our operating partner who manages the business? Elias, would you agree that non-bike '09 revs, we currently expect them to be better than non-bike '08 revs?

Yes, for sure.

Got it. On American Furniture, obviously a good quarter. What are you seeing out there from competitors maybe feeling some pressure, maybe even -- maybe you guys are a little higher end than --?

I don't think we're higher end than many, to be honest with you. And we try not to be, which -- that's -- I'm sure we're higher end than some. But, in general, it's promotional furniture.

Yes, we clearly have seen a couple competitors cease to operate. Unfortunately, we've seen other competitors do what struggling competitors do, which is price extraordinarily aggressively to try to fill their shop. And that's had some margin impact, particularly since the sort of rate of decline of raw materials, it's occurring and will continue to occur. But, these things aren't sort of binary. You don't turn on and off the materials cost switch.

But, we think the competitive environment is improving for us. And what we really like is we've seen sales representatives who formerly have worked for competitors, who are concerned about their competitors' ability to serve their customers, defensively respond by approaching us to become our reps. And that's really exciting. Now, why would a sales rep do that? I mean, if you think about these customers, part of what makes AFM attractive, and some of our competitors maybe, is the ability to supply a lot of inventory on a moments notice, right?

If -- and I'm just throwing out names here of some customers. I have no idea if they're running -- if Company ABC, Furniture Company ABC decides they want to run a Memorial Day recliner promotion, they might tell us like today, and it might involve thousands of recliners shipped to different distribution facilities. So, the ability to hold finished goods inventory is really critical.

And if you have a weaker balance sheet because you're over-levered, one of the things you start doing is sort of managing your balance sheet by bringing down your inventory. And if you're a sales rep, all you know is that you have this chance to make a big sale to Company ABC in a certain type of recliner or end unit or stationary sofa. And suddenly, through no fault of your own, the company that you've been repping for five years doesn't seem to be able to execute against that. And you don't want to -- I mean, you want to feed your family. So, while you're loyal to your old company, what you really want to do is work for someone who can provide the product.

And Alan, do you want to comment further on that?

No, Joe, I don't have any further comments.

Okay.

So, I don't want to sort of call out any specific competitors. It's not what we do. We think it's a good environment for us. We're really excited and are willing to spend money to have the ability to serve new customers. Even though that might be not managing to the last penny in this environment, we have no doubt that going forward having these customers is going to be better than not having them.

All right. Got it. Yes, one last one on Anodyne. Could you give us any kind of idea of what your breakdown of kind of end customers -- I'm thinking about nursing homes right now, if you've got any material exposure there, because the Medicare reimbursement numbers there.

I don't think we're going to discuss customer by customer who we sell to because they're all sort of -- many of them are large public companies. But, suffice it to say that the business is substantially a hospital business. We serve other end markets including some nursing homes, some long-term care facilities. But, the business is -- Elias, I'll turn to you again, 90% hospitals? 80%?

Yes, I would say probably 75% to 80% hospital. And of that, kind of a third of it is, at this point, disposable. And the remaining is more on the capital equipment side.

Okay. Got it. Thank you.

We'll go next to John Rogers with Janney Montgomery Scott.

Good morning.

Morning, John.

Got a few questions. On ACI --.

Yes.

Are you seeing -- do you just have some more detail on what you are seeing in the market right now? Some of your competitors are expecting larger year-over-year declines in 2Q. Are you seeing the same thing, or is your business holding up?

Yes, this is business where we're not seeing sort of improvement in the decline rate. I don't know that we think it's going to be dramatically larger. I know what you're talking about with some of the competitors. Kind of -- we haven't run the same magnitude of declines that they ran in the first quarter, nor do we expect to. And actually, our customer number hasn't declined. In fact, we're adding new customers, which is something that's exciting for us.

But, I think the first quarter -- we don't currently think that the first quarter rate of decline and revenues is an anomaly. No idea when it's going to come back, but this is not a business where the rate of decline has decreased.

Having said that, this is an enormously efficient cash flow machine. You'll see it did $5 million in EBITDA, and -- well, you'll calculate that it did $5 million in EBITDA in the -- for the first year or for the first quarter. So, they've managed their production efficiencies extraordinarily well.

You might remember it has a pretty defensive model, and that we've always sort of shipped out of our facility production that wasn't quick turn or that we didn't need to do ourselves. And so, we've always sort of had more business than we actually technically had the internal capacity to. And what that allows us to do is kind of defensively respond by pulling in some of that business to keep the machine as full as possible. So, that's why you'll see that the EBITDA margins didn't decline despite the lower revs.

But, in direct answer to your question, we have not yet seen in this business the kind of turn in the rate of decline. And we look for that and we continue to figure out new ways to generate business.

I mean, one of the more exciting things we're working on now is a partnership with a reasonably sized small competitor where we would basically buy the customer list and bring it in-house. And we're pretty excited about that. And we think that those are the kinds of -- because, from our point of view, that -- I don't want to say it goes right to the bottom line because obviously there are costs associated with it. But, it's pretty close to going to the bottom line.

So, I think we're using this opportunity to be a consolidator of the business. And I would expect that our revenue decline will temper significantly, but that will occur because of these sort of consolidations and acquisitions that we're doing. From a pure -- from pure same store point of view, we haven't seen that turn yet.

Okay, great. When would those consolidation -- when do you expect those consolidations to start?

I don't know. We might have five on the table now, and we certainly have one that we're hopeful is a Q2 event. Yes, and when they happen, they happen kind of quickly because you've got a competitor that's decided they either don't want to or can't be in business a whole lot longer, and you're trying to sort of pull it together. So, those evolve as quickly as any acquisition opportunities I've seen in any business in my life.

Okay, great. And then, on Anodyne, gross there was, I think, really impressive given the slowdown in hospital capital spend. Could you give more detail on where that strength came from and are you seeing any benefit from one of your customers --?

Yes, our capital -- I'm sorry. Have I seen any benefit in what, JT?

One of your customers is consolidating their --.

Yes, right.

Number of suppliers.

Yes. Only have two questions. The growth has largely been on the disposable side. The capital spend clearly impacted us as well as anyone else, although we understand from our customers that of the capital spend that the hospitals are making, more of its focused on sort of -- there's an increasing percentage spent on preventative types of treatments. The decubitus ulcer area continues to be one where the government and the payers are pushing hospitals on. So, we think we've survived that relatively well. But, I think some of the marketing and sales efforts we've made on the disposable side have helped us here.

So, our growth hasn't been on the capital equipment side, although the decline there hasn't been anything like what you're seeing in the -- and will the MD&A have a little bit more on that in the 10-Q?

It basically says --.

It basically says that, yes.

Institutional spending.

And then, it's hard to say. The situation you're talking about with the consolidation of the suppliers, I don't know that we got any specific business where they said, "Here, you will replace our former supplier in this in this area." But, we know that our share of business with that supplier has not gone down, and we feel like we have sort of a good outlook on this year on what they'll be buying for us.

So, it's not as clear as a yes or no answer. I guess we'd say we hope so and we think so and we're still clearly an important supplier to them. And we've had numerous meetings at the most senior levels possible. But, it's not like someone was removed and we were put in.

Great. And then, on Fox --.

Yes, I'm really asking Elias. Any more color on either one of those questions that you'd add?

No, I think you categorized it well, Joe.

Great. And then, on Fox, I know you took a lot of costs out of the business over the last year. Why did we see the drop in EBITDA? Is it just a (multiple speakers)?

Yes. I mean, core sales is focused on -- the business has got a highly engineered product and we've got someone -- if you hear that background noise, I apologize.

The business is a highly engineered product. And so, our ability to sort of move among suppliers and kind of reduce our manufacturing costs, I don't think it's -- we're not as nimble there are you would be if you had a kind of commodity cost product.

Where we have been successful is improving our operating efficiency, and we've talked about it. Now, having said all of that, the efforts to kind of have R&D in new market areas, that we've hired a new -- a very good new CFO and a new COO there. We've made a number of efforts to build the business and grow it that I think will pay off long term that, I think at the end of the day, had an impact on our EBITDA margin. I also think the lower volumes have made us slightly less efficient. We would expect, over the course of the year, for the EBITDA margins to sort of come back to more normalized levels.

Jim, is there anything you'd add there?

I don't think so.

No? Fine. Okay. I keep doing that. I keep thinking you will add something.

But, the -- so, that's the answer on that. But, we've made a lot of investment in what would be line itemed as SG&A here, but what really are sort of critical senior management positions, which is not unusual for us, right? We buy extraordinarily good companies and try to help them reach an even better place. And one of the things that these good companies have is a phenomenal brand and a phenomenal product.

But, sometimes at the most senior level, they're not built out from a management point of view to really capitalize on their growth potential. And I think of numerous cases where that's happened, Silvue being the company that we sold most recently where we worked with management to expand its sales into different areas. And that involved kind of an investment in the personnel of the company.

Okay, thanks. And then, I guess last question. The raw material cost savings you talked about and the SG&A cost savings you talked about, are these already fully present in first quarter or could you see potential --?

Oh, no, no, no. I mean, company by -- I would say they're almost never present in the full quarter on either of those. And in some cases, it's about negotiated contract declines where, over time, our pricing is coming down.

To give you one example on American Furniture, we have an inventory of foam. We know we're buying foam. And we stock a lot of it because of what I told you, one of our advantages was being able to deliver it pretty quickly. But, foam and fabric and cut and sew kits are all things that are -- that sometimes come from overseas on a delayed basis. And so, we actually have a pretty good sense of what we'll be paying for the next, say, six months. And we know the number is lower than what we're paying now. And I could sort of replicate that for each of our businesses.

From an SG&A point of view, I can tell you that I think our management teams are thinking at least weekly and maybe daily as to what are the right levels. And I think at this point, we've kind of cut to the places that we want to cut to, but in many cases those occurred over the course of the first quarter. So, I would not say at all that they're even remotely priced into the first quarter results.

Okay, great. Thanks a lot.

We go next to Troy Ward with Stifel Nicolaus.

Great. Thanks. Many of my questions have been answered. But, I'd just like to get a little additional color on with the potential covenants with your debt facility, and I know you said that your ability to draw is hampered in some ways because of the trailing 12 month EBITDA. Can you speak to if you do an acquisition, and let's say you pulled out $100 million, can you speak to what are the covenants related to your performance once you already have something drawn down?

Really, it has nothing to do with that company. There are no covenants associated with that company. So, basically you'd look at the total company -- subsidiary company EBITDA. So, you can break out sort of the parent company expenses. And you'd say on pro forma basis for what these guys earned, what's the new level of debt, and is that number roughly, just to broadly speak, 3.5 times debt to EBITDA?

That's kind of the -- Jim, what other things would you add to that?

Well, that's right. There's two covenants. One's in availability that Joe was speaking about to basically draw down the debt. Then, there's maintenance covenants.

So, the availability is basically 2.5 times EBITDA. And then, the leverage test where it's 3.5 times. Or, then there's some interest and fixed charge covenants. We're in pretty good shape on those -- on the actual financial covenants.

I mean, I'll be happy to walk you through the numbers. But, I think it's important because I don't want people on this call to be alarmed. If we spent $100 million and bought a company that had trailing EBITDA of -- divide that by 5 or 6. So, $16 million to $20 million, and added that to our current EBITDA and then put that on top of our debt, you're talking about a net debt number that would be in the 140 range, because we have like 40 of net debt now. So, the 140 in our current EBITDA where existing business is trailing is probably --.

85.

85. And so, if you add 16 that we buy, the 16 plus the 85 gets you to 101. So, the math behind that would be 140 divided by 101 is 1.4 times.

So, I -- just to make that -- and you can go through whatever iterations you want because clearly our EBITDA will decline over the course of the year. There is not an iteration where we think that covenant is problematic. But, do your own iterations.

But, that's -- to give you a sense of how dramatic our delevering was when we did it, that's kind of how the math would play out there.

Yes, that makes sense. Thanks. And my other questions have already been addressed. Thanks, Joe.

Sure.

(OPERATOR INSTRUCTIONS.) We go next to Will Hamilton with SMH Capital.

Good morning.

Morning, Will.

CBS. Jim, did you say that was $58.7 million net loss, or EBIT loss?

That's the operating loss, and that includes the impairment charge of $50 million in there.

So, actually, if you strip that out, it was about $1 million profit?

No, no, no, no.

50.

50.

50 is the impairment, so that's minus 8.7 is what would be left, more or less.

Oh, 50.

That's correct.

Okay. Thanks for that. And then, AFM, I was wondering if you could give us a sense how much the fire impacted Q2 last year. I know it's mainly probably impacted Q1, but I think there was still some --.

Yes. No, it impacted --.

The implication of business interruption.

Yes. I mean, from a rev point of view or from an EBITDA point of view or --?

From a rev, say, or both.

This is going to sound absurd, but we're trying real hard not to think about the fire anymore. It's behind us. We're moving forward.

No, I mean, seriously. So, I don't know if we did that analysis.

It's Will, right? Will, it's very subjective. And it's very difficult to measure. I know in the second quarter, and, Jim, you might have to give me the exact number. But, I believe in the second quarter there was in excess of $4 million, I believe, of business interruption booked in that quarter.

I would say probably 2.5.

2.5, okay. So, just to give you a sense of how much BI was booked there. On the revenue side, it's really tough to tell. I mean, I think that -- we believe that for the year, there was probably at least $20 million of revenue.

I would say a bit more.

Maybe more, but I'm trying to be conservative, of revenue associated with --.

So, maybe (inaudible) of that would have been in quarter.

So, I would say a third of that.

Yes.

Well, in the first quarter, I would say. I would then ratably apply that to the businesses' normal operating (multiple speakers).

Here's why that's really tough. Here's why that's really tough, right, because when we went to multiple facilities, the Company immediately went into serve the top customers best mode. And the reason why we were able to emerge from last year down less than 10% with our top ten customers and growing with three of them is because they were really impressed with the fact that within four weeks after we had a devastating fire, we were serving them again.

But, who falls off are sort of this -- literally hundreds of small customers that have one-off shops that buy from us and place orders, and those are people we might have been turning away. And I have to tell you it was not a focus of ours at the time, given all the stuff that was going on, because remember we were also trying to close the annual books at the time and had lost all our data.

I mean, it was -- you don't need to hear about our problems. But, in any case, it wasn't a focus of ours at the time to kind of track every little missed opportunity, and if we had quoted that opportunity, would we have gotten it or not. Who knows? So, there's not a lot of data out there to -- I would say your better angle, if you're trying to project second quarter, is to think about the first quarter. And in general, our second quarter involves tax season, and usually it --.

In the first quarter.

Oh, first quarter's when we would -- so, (multiple speakers).

Historically, revenues have looked about 30% or so in the first quarter.

Okay.

And probably down to 25-ish percent of the annual total has been --.

In the second quarter.

In the second quarter.

Okay.

And so, that's been the historical trend.

But, on the other hand -- but, we also have momentum. Do we -- I guess we hope second quarter revenues look like first quarter.

We'd be very pleased, okay?

Okay.

I mean, again, the historical pattern has been --.

Oh, the historical pattern would be a little in the second quarter. Okay.

And the second quarter revenues should be expected to be below the first quarter revenues.

All right.

A lot of input there, Will. I hope that was helpful.

Nice discussion, at least. Lastly, just a question on the balance sheet. I was wondering why the minority interest expense -- or not expense but the minority interest is now being included in the shareholder equity whereas I think in the past it was largely excluded from that.

Well, there was a new accounting standard, FAS-160 that was implemented -- that became effective on January 1st where basically that was one of the requirements that non-controlling interests are now recorded as part of shareholders' equity.

All right. Thanks.

And we go next to Henry Coffey with Stern Agee.

Good morning, everyone. Just completely shifting the focus, within -- as you look for new opportunities either to deploy capital directly or to invest in businesses that do, within the sort hodgepodge of stimulus programs, what really strikes out as the next logical opportunity, whether it's something in financial services or a secondary industry?

Good question. Look, again, we don't target specific industries because, to be clear, we've logged water infrastructure forever and those -- that's why those companies trade at 10 to 15 times cash flow and sometimes more because everyone else has figured that out, too.

So, for us, it's really a relative valuation kind of question. We were having a conversation the other day where we talked about sort of infrastructure related to the energy industry. Now, do you I think long-term we'll continue to consume energy in this country and we'll have to make ourselves at least somewhat more self-sufficient? Sure. And are there infrastructure plays where you're not betting on a specific technology? We hope so. And then, there are natural areas where we've had good success.

Food-based capital equipment is an area that we visited twice at CPM, which is before you knew us, and then at Aeroglide. And we visited it with good success and it's an interesting business. And especially if you find a company with a lot of recurring parts, it could be a good time to buy it because the new capital equipment orders will be way down. And if you can value the business largely on its recurring parts flow and you have the patience and the capital structure to chill out and wait until the demand occurs, then that's a good place to be.

We like the -- we've had good experience thinking about real core brand names and enthusiast products again. And the reason we've had good experience there is it turns out that people fall in love with names and they're willing to think about those names in other areas. And those companies tend to still be small and owned entrepreneurially and not yet quite professionally managed. Or, professionally managed, but not to, say, their maximum optimization. And we've had good experience taking brands and sort of expanding them into other non-core areas. So, those are going -- and that's going to be a place that'll have been impacted because the economy is down and people are spending less.

So, we're going to stick with the areas that we've -- that we know. And my thought is that when the economy comes back with some impetus from the stimulus package, depending on who you talk to that'll either be negligible or great, and probably somewhere in between, it will probably impact all the sectors and we really just sort of need to stay focused on the sectors that we're pretty good at. But, we will consider how the impact of the stimulus package will affect each of these companies.

We've looked at a company that we -- that many years ago, it was an engineering company for building bridges, largely in New York State. Great company. In the end, couldn't come to agreement on valuation. If we knew then what we know now and realized what the spending on the sort of federal highway transportation program would be, which we knew it would be greater but I don't think we realized there was going to be this sort of new stimulus package, it probably would have made all the sense in the world to acquire. And I hope the guy who owns the business is doing phenomenally well, because we liked him a lot. Very nice guy.

But -- so, yes, we try to think about how these things are going to impact us. You don't always know. And for us, the answer is to make sure we pay the right price on a business we understand. If you pay the right price in a business you understand, you probably won't be the very best opportunity. But, you're going to get pretty good ones that, over time, have done pretty well for us.

Thank you.

And we go next to Stan [Quasnick], private investor.

Yes. Hello, Joe?

Yes, good morning. How are you?

I'm doing fine, Joe. Yes, I like --.

Mr. Quasnick? Am I saying that right?

What's that? Quasnick, yes.

Good morning, Mr. Quasnick.

Yes. Well, you call me Stan, Joe.

Okay.

Anyway, Joe, I was wondering, being that I know for a fact that a lot of the big order makers are having -- the dealerships are having a hard time getting parts from their suppliers. Is Fox going to be able to fill any of that void?

It's a pretty interesting question. The guy who we hired as the COO is a -- formerly from the auto industry and he's phenomenal, John Maples. I think what we're trying to -- we're a high-end suspension manufacturer. It's what we're good at. It's not sort of the shocks that would go on my car or your car or even a normal truck.

Right. Yes, I understand that, Joe.

Our first impetus here is with this Ford F-150 Raptor, which is kind of a high performance vehicle.

Are we actively pursuing other opportunities in the truck industry? Absolutely. Do I think that in the immediate term, like in the next year or two, we're going to be able to take advantage of the fact -- some of these auto parts manufacturers to go into the auto industry? I don't think so, to be blunt, because we don't have a product that's sort of specced down for that and priced at that level.

Having said that, the good news is a lot of those people are also the companies that we compete with in alternate applications in power sports and other off-road. And while I don't wish them their demise, I do think that we will have benefits kind of outside the core auto industry because some of our competitors are having issues driven by their exposure to the auto industry. Does that make sense?

Yes, it does, Joe. Yes, thank you very much. I was just wondering on that point, if you'd be able to help.

Yes.

They're having such a hard time there.

All right, Stan. Thanks for listening in.

Yes. Okay. Bye-bye.

And there are no more questions at this time. I would like to turn the conference back over to Mr. Joe Massoud for any additional or closing comments.

No. Again, I just want to thank you for your time. I know earnings season and people are busy and jobs report this morning and everything. And so, we really appreciate your interest in the Company.

If you were sitting where we were sitting, I think you'd feel pretty good about the prospects that this six businesses have and how they're performing versus their competitors and how they're going to emerge from this downturn. We have no proprietary insight on when this downturn is going to end. It will end. These companies will be stronger on the way out. And we're working as hard as we can to both maximize their cash flow during this downturn but also to position them for the go forward.

So, thanks for your time and have a great day.

This does conclude today's conference, and we thank you for your participation.