Compass Diversified Holdings (CODI) 2009 Q3 法說會逐字稿

Good day and welcome everyone to the Compass Diversified Holdings 2009 third quarter conference call. Today's call is being recorded. (Operator Instructions)

At this time I would like to turn the conference over to Michael Cimini of the IGB Group for introductions and the reading of the Safe Harbor Statement. Please go ahead, sir.

Thank you and welcome to Compass Diversified Holdings third 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 that the third quarter earnings press release including the financial payroll is available on the Company's website at www.CompassDiversifiedHoldings.com. In addition, management has filed the Form 10-Q for the quarter ended September 30th, 2009 with the SEC earlier today.

Please note that throughout this call, we will refer to Compass Diversified Holdings as CODI or the Company. Now I will read the following Safe Harbor Statements. During this conference call, we may make certain forward-looking statements including statements with regard to the future performance of CODI. Words such as believe, expect, projects, and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements and some of these factors are enumerated in the risk factor discussion in the Form 10K filed by CODI with the SEC for the year-ended December 31st, 2008, as well as in other SEC filings.

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.

At this time, I would like to turn the call over to Joe Massoud.

Thank you, Michael, and welcome everyone to our third quarter 2009 earnings conference call. We appreciate your time. I will begin today's call by offering some general comments on CODI's performance during the third quarter as well as an overview of how we've positioned ourselves for the future. After that I'll turn the call over to Jim Bottiglieri to discuss our financial results on a subsidiary by subsidiary basis.

Overall we're very pleased with our third quarter performance as each of our subsidiary companies continue to effectively manage costs while a number of them made significant strides towards strengthening their top line and we believe increasing their relative market shares within their respective industries. As a result we generated quarterly cash flow in the third quarter in excess of our expectations. Since the first signs of the current downturn we've maintained that the current environment is actually an opportunity for each of our Companies creating room for them to use their market positions and our balance sheet strength to emerge as stronger and more valuable companies going forward. With that said let me now briefly review the steps each of our six subsidiaries are taking to strengthen their long term positions and cash flow generation capabilities.

I'll go through our Companies alphabetically beginning with Advanced Circuits. At ACI, we've recently experienced strong demand for our core quick-turn printed circuit board manufacturing and we're pleased to report that booking levels are considerably higher as compared to earlier in the year. In terms of positioning the Company we continue to aggressively market our core quick-turn and prototype PCB manufacturing services and have more effectively utilized our operating capacity with the acquisition of Circuit Board Express in the second quarter.

Going forward we'll seek to further consolidate the industry through acquisitions and expand our current number one market share position in this niche. In addition ACI has continued to grow its assembly business in this downturn and management has effectively managed its cost of goods sold and operating costs across the business leading to steady gross profit and EBITDA margins on a year-over-year basis -- notwithstanding the decline in sales. We're very excited about ACI's resilience in this market and its relative strengthen in its core market.

Turning to American Furniture we're very pleased with the Company's revenue performance and are excited about our ability to increase market share through both expanding relationships through existing customers and adding new customers. Specifically we've increased both our penetration within our core top 10 customers and added new and potentially large customers in the department store and big box segments. We believe the success of these efforts not only reflects the superior product and value offered by AFM but also our financial stability, particularly when dealing with large customers. While we continue to provide quality products in a timely manner, many AFM competitors have experienced capital constraints and have not been able to serve customers due to the difficult credit market. On the cost side we believe the efforts we've made to improve our overall cost of goods sold particularly in terms of material sourcing and transportation cost management will position us for increased profitability during and after the current downturn.

Turning to Anodyne we're again happy about top line performance this quarter. Also particularly excited about the Company's ability to improve its bottom line profitability in this environment. Over the past year, we have worked with existing management to strengthen our team in the finance and operating functions ultimately leading to a vastly improved ability to manage both cost of goods sold and SG&A expenses reflecting itself in improved cash flow on a year-over-year basis. We continue to maintain our relationships with the leading customers in our industry and believe our improved cost structure will allow us to achieve even greater profitability in the future.

Regarding Fox, we remain focused on utilizing our significant brand recognition to expand our presence outside of our core mountain bike segment. Consistent with this strategy we are pleased with the growth of our power sports business on a year-over-year bases as well as our initial forays into other segments such as commercial trucking and military applications. Our biggest difficulty of Fox is prioritization among the many growth opportunities we believe exist, as a result of the Company's decades long track record of innovation and product quality. The Company's also grown more efficient over the past year, both in terms of materials procurement and production. Once again, we believe the key management addition in the finance and operations area have produced significant returns.

As for Halo, this business continues to be affected by the economy. We and subsidiary management remain aggressive in our efforts to optimize Halo's cost structure. We believe the current infrastructure will allow us substantial operating leverage when we emerge from the downturn. In addition we continue to pursue add-on acquisitions which allow us to effectively utilize our existing transaction processing capacity. Over the long term we believe Halo will continue to benefit from the positive macro trends in which promotional products represent a growing percentage of Company's total marketing budgets.

Last but certainly not least, at Staffmark, we've made substantial progress increasing operational efficiencies in this business. Specifically SG&A expenses have been reduced by approximately $35 million over the past nine months on a year-over-year bases. We expect to continue to benefit from our cost reduction efforts going forward and are confident that when the Company returns to the same revenue levels they had prior to the downtown its overhead expenses will be substantially lower.

At the same time we're excited by the growth prospects for Staffmark and believe there is an opportunity to attract new customers that have not traditionally used our services. We believe that as with past downturns many employers will use the current environment to restructure and optimize their labor force in a way that is not possible in a healthy economy. This optimization has frequently lead to an introduction of contract labor into workforces where it was not present before or an increase in the percentage of contract labor used. We expect this dynamic to benefit most companies in our industry.

We also believe based on anecdotal evidence and overall customer counts we are gaining market share in our key markets. We're very pleased with the Company's sequential growth from the first quarter to the second and now into the third and believe that demand for Company services is firming. We are optimistic about the prospect for year-over-year growth in 2010. We agree with most industry analysts that staffing should be early cycle in that employers will hire back contract labor first as they will want to maintain their flexibility in case business strengthening trends turn out to be temporary and believe the combination of our cost cuts with our growth in customer base will give a substantial upside operating leverage at the point that temporary employment begins to strengthen.

In summary we currently expect each of our subsidiaries to meet or exceed our targets for 2009. Furthermore based on our performance for the third quarter and nine months a year combined with our improved prospect for the future, we expect to exceed CODI's previously stated guidance for the full year 2009. And to achieve year-over-year growth in cash flow for 2010 that's material excluding the impact of any acquisitions.

While Jim will discuss our Q3 results in more detail I'd like to note CODI generated cash flow of $11.7 million for the three months ended September 30, 2009 or $0.32 per share. We also paid a third quarter distribution of $0.34 per share increasing the cumulative dividend paid to shareholder to $4 -- to approximately $4.30 per share since going public in May of 2006. As we've stated in the past our Board declares distributions to shareholders based upon its evaluation of CODI's normalized cash flow generation power. While distribution has exceeded cash flow this year it is important to note we have earned substantially in excess over distribution paid in aggregate since our IPO. These earnings including gains of approximately $109 million from the monetization of our interest in three subsidiaries since our IPO have also contributed significantly to our very healthy liquidity position.

Commenting further on our financial strength, we had $203 million in total liquidity as of September 30th, 2009, which is comprised of $47 million in cash on hand and $156 million available under our $340 million revolving credit facility. In terms of debt currently outstanding, we're pleased to report we had only $77 million as of quarter end with no material maturities until 2013. So net debt was approximately $30 million when you take the $77 million against the $47 million in cash.

We expect to use our financial strength to consummate acquisitions which in this environment should be highly accretive. We remain excited about this environment. However it's equally important to note we've continued to be patient and disciplined in our approach to acquisitions and we thank our shareholders for their support of this approach. While there are a variety of acquisitions we could have made that would have been accretive in the short term, we remain committed to acquiring companies in defensible market niches with a real reason to exist over the long term at attractive values and at attractive terms for our shareholders. In the long run this is the only way we know how to build value for our shareholders and our current success and ability to continue to generate strong cash flows despite this current economic environment has been predicated on this approach in the past. Going forward we hope to complete one or two new platform acquisitions that meet our strict criteria over the next nine to 12 months. Our intent is for these acquisitions to be highly accretive and additive to the growth in cash flow we expect to see from our existing businesses in 2010.

With those introductory comments complete I'd like to turn the call over to Jim Bottiglieri to add his comments on our third quarter financial results.

Thank you, Joe. Today I will discuss our financial results for the quarter and nine months ended September 30, 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 the businesses. On a consolidated basis revenue for the quarter and nine months ended September 30, 2009, was $324.2 million and $886.7 million respectively. Net income attributable to the Company for the quarter was $2.1 million or $0.06 per share. For the nine months ended September 30, 2009, we recorded a net loss of $24.6 million or a loss of $0.73 per share. As a reminder during the first quarter of 2009 we recorded a $59.8 million non-cash impairment expense for the Company's Staffmark subsidiary, partially offset by the associated tax benefit of $22.5 million and additional $12.7 million for the minority shareholder portion of this impairment expense and an $8.2 supplemental put expense reversal.

Now turning to results of each of our individual businesses beginning with Advanced Circuits. For the quarter ended September 30, 2009, Advanced Circuits revenue was $11.6 million compared to $14.2 million for the quarter ended September 30, 2008. The decrease in sales is attributable to lower sales volume resulting from the economic slowdown. Income from operations for the third quarter was $3.6 million compared to $4.6 million for the same period in 2008, due to a corresponding decrease in sales partially offset by lower selling, general and administrative expenses. For the nine months ended September 30, 2009, Advanced Circuits revenue was $34.4 million compared to $42.7 million for the prior period in 2008 of which $4.3 million of the decline was due to lower long run and subcontracted production sales stemming from the overall economic slowdown.

Income from operations was $11.6 million compared to $13.9 million for the prior period of 2008. Operating income decreased due to lower sales volume, partially offset by lower loan forgiveness and for lower other SG&A expenses. We're pleased with Advanced Circuits' performance during the third quarter as demand for our kick turn production services has improved. In addition margins have remained steady in this business despite the downturn which highlights our leading market position for prototyping quick turn PCBs. Going forward we'll maintain our focus on pursuing additional add-on acquisitions to further expand our customer list while successfully controlling cost.

Now I'd like to turn the call over to American Furniture Manufacturing or AFM. For the quarter ended September 30, 2009, AFMs revenues increased to $33 million compared to $31.4 million in the prior year quarter due to strong stationary product sales which increased approximately $3 million in the quarter. Operating income for the third quarter 2009 increased to $1.2 million compared to operating income of $0.2 million for same period last year. The increase was attributed to increased efficiencies realized in the manufacturing process following the fire in February of 2008.

For the nine months ended September 30, 2009, revenue increased to $108.6 million compared to $99.8 million for the year earlier period. Operating income increased to $5.4 million from $5.2 million for the nine months ended September 30, 2008. Notably we recognized approximately $3 million of decreased business interruption insurance for the nine months ended September 30, 2008, compared to nine months ended September 30, 2009. As Joe mentioned earlier on the call, AFM continues to increase sales with new and existing customers by taking advantage of our parent level financing structure.

Additionally we believe AFM's efficient low cost production model combined with its ability to meet customer short-term time bodes well for this business to further expand customer penetration levels going forward as market conditions improved. On the cost side we continue to pursue additional cost reduction opportunities. For example, we have increased the sourcing materials from abroad, consistent with our objective to improve cost of goods sold and to strengthen our leading presence in the promotional furniture niche.

Moving on to Anodyne Medical Device for the quarter ended September 30, 2009, revenue was $13.9 million compared to $16.5 million for the same period last year. This decrease was mainly attributable to lower sales of power products as a result of reduced capital spending among healthcare institutions, partially offset by sales from the Company's new product offerings which totaled $1.4 million in the third quarter. The Company's income from operations for the third quarter increased to $2.1 million from $1.7 million to the same period in 2008 due to lower manufacturing overhead labor and raw material cost. For the nine months ended September 30, 2009, revenue totaled $39.5 million compared to $41 million for the same period last year. This decrease was attributable to lower sales of power products partially offset by new product rollouts.

Income from operations increased to $5 million compared to $3.3 million for the same period in 2008. The increase in operating income is also primarily due to greater operating efficiencies. We're encouraged by the ongoing customer acceptance for Anodyne's new product offerings. In addition margins increased in the third quarter despite the year-over-year decline in revenue which reflects the superior job by Anodyne's management team in controlling cost. Looking ahead we intend to utilize Anodyne's strong platform and position as the number one provider of medical support services to drive strong growth over the long term.

Turning to Fox Racing Shox, for the quarter ended September 30, 2009 the Company's revenue was $36.9 million compared to $43.3 million in the prior year period. The decrease in revenue is primarily a result of lower net sales to original equipment manufacturers. Income from operations was $4.7 million during the quarter -- third quarter of 2009 compared to $6.4 million for the quarter ended September 30, 2008. This decrease was mainly attributable to the corresponding decline in sales.

For the nine months ended September 30, 2009, revenue was $86.9 million compared to $101.2 million in the prior year period. Income from operations was $5.9 million compared to $9.4 million for the prior year period. By successfully leveraging our strong brand at Fox we begin to gain traction in new verticals including off road vehicles following our partnership with Ford on the F-150 Raptor. Consistent with our strategy to penetrate new markets we've expanded our infrastructure in this business and continue to invest in R&D. Over the longer term we believe Fox's leading reputation for high performance suspension products offers significant and attractive growth opportunities as demand among market enthusiasts remains strong.

Moving on to Halo, for the quarter ended September 30, 2009, the Company's revenue was $35.5 million compared to $42.6 million for the same period last year. The reduction in net sales is principally due to lower spending and advertising and merchandising by corporate customers, partially offset by $2.7 million in net sales through accounts acquired since September 30, 2008. Income from operations was $0.7 million versus $1.3 million for the prior year period which is primarily a result of the lower net sales.

For the nine months ended September 30, 2009, Halo's revenues was $91.7 million compared to $107.1 million for the same period last year. Loss from operations was $1.4 million versus income from operations of $1 million for the prior year period. Throughout the downturn we have worked closely with management to reexamine Halo's cost structure and believe that the infrastructure currently in place allows us to both operate in as an efficient manner as possible during the economic slowdown while maintaining the core assets required to maximize the benefit experienced in any economic recovery.

We continue to maintain longstanding relationships with our customers by serving as a one stop shop to meet their promotional needs while providing high quality service. Based on our cost restructuring efforts combined to our past success capitalizing on accretive add-on acquisitions, which we continue to pursue, we expect to fully benefit from increased spending on marketing related products in line with the improvement in the overall economy.

Turning to Staffmark, formerly CBS Personnel, for the quarter ended September 30, 2009 the Company reported revenue of $193.3 million compared to $265.6 million for the same period last year. The reduction is primarily the result of decreased demand for staffing services as Staffmark's clients were impacted by weaker economic conditions. The income from operations was $1 million for the third quarter of 2009 compared to $4.8 million for the third quarter of 2008 due principally to lower sales partially offset by $10.8 million in reduced SG&A expenses stemming from management's cost reduction programs.

For the nine months ended September 30, 2009, revenue was $525.6 million compared to $802.9 million which was prepared on a pro forma basis to include the acquisition of Staffmark as if it was completed on January 1, 2008. The loss from operations was $58.9 million which includes the previously discussed impairment charge as compared to income from operations of $9.9 million in the year earlier period. Of note, SG&A expenses for the nine months ended September 30, 2009 decreased $35.3 million compared to the same period a year ago.

For the second consecutive quarter, Staffmark posted significant sequential revenue growth positioning the Company to exceed our original expectations for 2009. We remain focused on maintaining our sales force and serving our core markets which are geographically concentrated. We believe Staffmark and the entire staffing industry in general act as a leading indicator of the overall economy. As a result, we expect the performance in this business to strengthen considerably as market conditions improve them.

Balance sheet -- turning to the balance sheet we had $47 million in cash and cash equivalents on hand and had networking capital of $138.6 million as of September 30, 2009. Subject to borrowing base restrictions, at September 30, 2009, CODI had $340 million on this revolving credit facility to be used to fund acquisitions and working capital requirements.

I will now turn the call back over to Joe.

Thanks, Jim. Before we open the call for questions I'd like to thank you for your support and express my satisfaction with the impact that we and our subsidiary management teams have had on the results of our Companies over the course of this difficult year. As I mentioned earlier we expect to exceed our cash flow expectations for 2009 and to have growth in this cash flow even before any further platform acquisitions in 2010.

With that said I'd like to thank everyone again for their time and we would be happy to take any questions you may have. Operator, please open the lines for questions.

Thank you, Mr. Massoud. (Operator Instructions) We'll go first to Larry Solow of CJS Securities.

Hi, good afternoon guys. Just to generalize it on a broad brush, I know it's not that easy but looking out at your six holdings would you say most of the improvement this quarter or just sequentially through the year has been improvement on underlying business trends or is it more just seasonality and I realize that Staffmark does look like it's certainly trending better, just for underlying demand but just how about the other five segments?

Yes, I think from Q2 to Q3 we think it's improvement of underlying business trends and within that I'd include both top line and if you include the category of underlying business trends to include cost control and cost reductions, then that's clear. The first quarter is our combined lowest cash flow quarter so if you look from first to third, it's clearly a combination there.

And then just on Staffmark, it looks like hard to call it a turnaround but I'm sure you saw the unemployment data and there was the one bright spot the first time in the last two years it's been that temp hiring actually was positive and it sounds like it's reflected in your numbers although that was October numbers but seems like things are certainly improving on the revenue side. Is that $35 million of cost cutting in SG&A, is that -- I imagine some of that is just related to the economy and some of it will come back or is that all permanent?

It's some and some. I think sequentially, clearly the business has gotten stronger, from the second quarter, from the first quarter to the second and second to the third and we keep track pretty actively as seasonally adjusted numbers and if our seasonal adjusted low would have been end of first quarter, beginning of second quarter we're in a much better place now -- double digits better -- than we would have been on a seasonally adjusted basis say in early April. So I think that we clearly agree with the data that's out there and are seeing same dynamics.

In terms of how much of the cost cuts -- it's really it's hard to line up and say this is a permanent cost cut and this isn't. We feel confident that if we returned to the pro forma revenue levels of the business in 2007 -- so if you added up Staffmark and CBS at the time we feel confident we've taken $10 million to $15 million of cost out of that just by eliminating redundant functionality. Now, how much of the additional annualized literally $30 million to $40 million of additional cost reduction is permanent -- I wouldn't say the bulk of that but I think there's a component of it. We would be disappointed if at the same revenue level our cost structure were not lower by the number I just said was a reduction because of redundancy plus a material number. I can't speculate what that additional permanent reduction would be but even if you just look at the reduction that comes from even if you look at the reduction that comes from the Staffmark and CBS overlap, we feel like that number is $10 million or $15 million. I'm not sitting with my partner Elias Sabo who is responsible for this but if you have additional commentary on that Elias, let me know.

No, Joe, I think you've hit on it pretty well.

Okay, and then just lastly, just on the acquisition environment, any anecdotal or improvement that you could note?

I think, okay. So on the acquisition environment, I think that it's clearly an improvement in opportunities out there. I think we remain an unusual buyer because we have all cash. I would say we've had a couple situations in the last three or four months that we were -- that become consummated transactions for one reason or another. We remain confident.

I know that there was this impression that we would -- on part of some and maybe a belief on our part -- that something was going to be forthcoming around this time period or the next couple months. I don't think that's going to happen now. I will tell you that we continue to be confident about the opportunities that are out there but it's reasonably -- we aren't a Company that buys 10 companies a year and there's a flow. It can be a little hit and miss and from our point of view while we have available capital, it's not an infinite amount of capital and we want to be sure about the diligence and the valuation and terms around what we've done.

And this whole defensibility reason to exist, they play it out and that's why a business like Advanced Circuits while you'd broadly say it's a circuit board company -- if you look at how that Company performed compared to every other circuit board company we know of that's publicly traded there's a huge variance in performance so making sure we find the right opportunity on behalf of our shareholders is extremely critical, and we're not going to close on a transaction unless we feel that it meets all the specific strict criteria that we've always had.

Right. And then just one housekeeping question -- on your maintenance cap, maybe for Jim -- has fallen to about the $0.5 million level the last couple quarters. It was $2 million a quarter last year. Is there some, a certain sustainable level I imagine somewhere in between those two?

Well, part of it is a controlled effort to reduce capital spending but I would expect the fourth quarter to increase from what the level we've experienced in the third quarter.

Okay, fair enough. Thanks a lot.

There's not an instance in that because we ask this question all the time. There's no effort here to cut back on capital expenditures that are required to know -- there's no effort to not look at add-on acquisitions. There's not one instance of one of our companies where we felt like there was an important CapEx that was needed for the business where we've cut back on that. But we are absolutely open for capital expenditures from our subsidiaries.

That's why I ask, because it's maintenance capital and I imagine it's only maintenance by definition is maintenance, I'm sure you can control it to some extent but there's only so much you can do there I imagine.

Yes, and I think in the past we've included maintenance capital expenditures in some of our companies have actually increased productivity so maybe they weren't actually maintenance. Maybe we've had to loosen the definition of what that maintenance is in the first place but we feel -- there's not an instance where we've cut back in capital expenditures where we feel there's something delayed that's just around the corner that we are going to have to spend sooner or later thing.

Got it, okay, great. Thanks a lot.

We'll take our next question from Vernon Plack of BB&T Capital Markets.

Thanks very much. Joe, given the outlook for the staffing industry in addition to given the scale you have with Staffmark, what's your thoughts on perhaps expanding that line of business?

I'm only chuckling because everyone either wants more staffing or less staffing.

Our thoughts are actually reasonably unchanged which is for the right contiguous or logical market expansion, we are interested an acquisition. I don't think we're looking to double the size of this business again. Where we stand now we're a top 10 provider. We have all these exit optionality we wanted to have when we acquired Staffmark, that was one of the goals was to get to a certain scale.

Another goal was to get to a scale where we could operate a very robust platform efficiently and that's what you see from these $10 million or $15 million of cost savings that were pretty quick for us. So we're not really actively out there looking for a large add-on but for the right size add-on, the right geographic market or the right product niche, we're definitely open. Interestingly I think the valuations for the large add-ons are I think at this point most people expect that's markets coming back. If you look at the public market valuation for these staffing companies they're quite robust. The markets are priced so I don't think there's necessarily a cheap value play out there necessarily either for the large player.

So my answer is we're interested ones of a certain size -- if there was a big one that was the right value we wouldn't walk away from it but we're not out hunting for that.

And you talked about Advanced Circuits and of course the attractiveness of that business as well as the uniqueness of that Company within its industry. How repeatable of an event is that? You mentioned that you were looking for add-ons there.

Yes, I don't think it's serially repeatable. I don't think there's five or six of them a year, which I think we had hoped that maybe there would be but I think there was a couple, three a year. And I think as we broaden our thoughts as to what we are good at which is specialty manufacturing, there might be certain types of products or certain types of customers that make sense for us to look at, which are very akin to our quick turn and prototype specialty so I think we will be acquirers in this business, and there might even be an opportunity to acquire someone, we're not really unique. We're unusual. We're the largest by a stretch in our space, but there might be opportunities to consolidate that space with a larger acquisition as well and that's something we've been working on for a little while -- for a couple years but so again I don't think -- I think it's repeatable but I don't think it's serially repeatable once a month or once every couple months.

Okay, thanks.

Our next question comes from Troy Ward of Stifel Nicolaus.

Great, thank you. Could you comment quickly, Joe, on the liquidity outstanding, the borrowing base fell from 185 last quarter to about 155. Can you remind us what that calculation is? Is it trailing EBITDA?

It is trailing EBITDA, so the third quarter EBITDA this year was lower than the third quarter EBITDA last year so that's the resulting reduction.

Any expectation as do you see the Q4 fairly large EBITDA last year roll off going into this year what the borrowing base will be at the end of the year?

We really haven't done that calculation, that's a little bit of a guidance I'd prefer to stay away from right now but I think it will be down but not sure it will be down dramatically.

Troy one other thing to think about -- I don't know where you're thinking about this -- if you're thinking about total acquisition availability you should remember you also get pro forma credit in the calculation for any EBITDA that you're buying so it becomes a circular calculation -- if you've got X availability but then that bought Y EBITDA and you multiply that again, so it's just to keep that in mind.

That's a good point, thanks. And then in the 10-Q in the liquidity section you actually added a line in there about you had potential to increase both the term and the revolver and that expires on December 7th of this year. Is that new or is that just an added disclosure?

No, that was in our 10-K. We just happened to pick it up for this quarter.

Yes, and that's going to expire because we're not limited right now by total dollars and again, well I don't want to say definitively that's going to expire but I don't see the events that would occur between now and December that would cause us to go out and do that.

Following up on that Joe, in past quarters and conversations, it sounded like you were fairly close at different points to maybe getting a transaction. Could you give us a little color on what happened, what's out there in the market, what's the seller expectation or something else that caused these to fall through?

I can't give you a lot of color because we're under confidentiality clearly. There's a situation in which at the end of the day we were unable to close with the speed that the seller wanted us to because we couldn't complete our ordinary which I guess is a thorough but our ordinary thorough diligence process in time and that was disappointing to us. There have been some other situations that we've walked away from on diligence as well where the numbers haven't been exactly where we expected them to be. So that's really all the color I can give you Troy.

And then just a couple questions on the business segments. In the Staffmark -- integration expense has been coming down each quarter. Can you tell us how much of that's left and when do you expect it to be completed?

Yes, I think it's going to be very little integration costs in the fourth quarter. It would be a few hundred thousand dollars.

And then on Halo, Jim, you mentioned quickly about some organic declines or growth. What was Halo excluding any of the acquisitions year-over-year? And you said that number I just didn't catch it.

You talking about for the quarter or for the year?

Year-over-year, yes, quarterly over last years quarter. How much of it was acquisition related?

Quarter-over-quarter excluding effective acquisitions it was approximately a 23% decline.

And now that we're here in November and obviously Halo is a large seasonal business with calendars, can you give any commentary on what the calendar sales look like in November?

I'd say not significantly off of previous years.

Down less than that.

Yes, down less than the remainder of the business as a whole, something probably in single digits.

So the calendar sales are more sticky then?

That's correct.

And then lastly on American Furniture, your top line sales number was better than our expectations, positively and can you -- I don't think there's a lot of inventory in that business Joe but can you speak to whether or not there's any inventory build ups that's helping any of that sales as we head into -- .

There is inventory in the business and so the inventory build up does go with the increase in sales because if you take new orders from a large customer, one of the reasons we compete pretty effectively with for example, (inaudible) is we're willing to deliver and have product at a customer within a couple weeks if they have a big recliner sale for Labor Day that's something we can provide, 30,000 to 40,000 recliners for us. So there is a build up and there has been inventory build up as well associated with our operating cost efforts because one of the things we've done is move to a little bit more cut and sew which is where you import flat pre-cut fabric from overseas and that's substantially less expensive than doing the work domestically, so Jim, do we have or give commentary on specific levels of inventory build up? Alan, do you want to comment on that?

Yes, I believe that the quarter-over-quarter or at least in the third quarter anyway, the net increase in inventory associated with the transition to more cut and sew kits is approximately $3 million.

Okay, great. Thanks guys.

(Operator Instructions) We'll go next to Robert Dodd of Morgan Keegan.

Hi, guys. Just two questions for me. One on ACI, you mentioned you were seeing something of an uptick in demand. Could you give us some more color on that? Is that the R&D related stuff that could then turn into--

Well we've seen an increase in orders per day and to say where it's coming from specifically, do you have a color on that? It's such a broad customer base of 8,000 to10,000, we haven't seen any one specific customer increase. Do you want me to theorize if this is a precursor to the return of the economy -- I think we would love to do that but I can't tell you that we can tell you specifically where that's come from.

With some of it we think it's clearly a market share increase as well where we're getting customers we didn't have before because there are a number of small guys falling out so it's hard to tell how much of that is industry organic and how much of that is taking market share.

Okay, got it. And the second one, on the reverse of the acquisition outlook for you guys are you seeing now some of these things are starting -- appear to be starting to turn the corner -- do you expect or are you seeing more interest in strategic buys looking to buy your asset?

There's clearly at least one circumstance where we have a strategic buyer that's poking around. We are not actively marketing any of these businesses. We think these businesses all have room to run. As with Aeroglide, that was the business we just bought 14 months earlier and we were approached by a strategic and we said here is the number it will take. And in retrospect it ended up being like 10 times what turns out to probably have been a recently high level of cash flow for the business given what's happened to the economy so I think we were fortunate and smart to have sold it.

We always will listen but I wouldn't say we've seen a lot of poking around but we've seen at least one circumstance of poking around but we're not actively and even in that situation absent the number that can't be walked away from, we're not looking to sell.

Okay, got it. Thank you.

We'll take our next question from Jim Stone of PSK Advisors.

Good afternoon, gentlemen. Could you tell us what your dividend policy is looking like and what it would take to get a dividend increase next year, and then second could you possibly share with us your thinking about the probability we will get an increase next year.

Okay, so the dividend policy, two different questions -- the dividend policy is the Board decides on a quarterly basis, we're not regulatory constricted like an MLP or REIT or something to pay out a certain amount of cash flow. The Board has historically said it's based upon its view on normalized cash flow assuming that there's always going to be some amount of cushion to reinvest in the business. The Board is pretty comfortable right now given our historic cash flow and these businesses are cyclical and they go up and down. Some of them are more cyclical than others but through the cycle, we're happy with our policy and how we've paid our dividend, we're happy, I should keep saying distribution by the way, it's not legally a dividend, it's a distribution, so that's what the policy is. It's a Board decision and right now we're pretty comfortable where we are.

I don't want to say it's impossible that we increase our distribution next year. The factors that would lead up to it would be a combination of probably more than one accretive acquisition and some strengthening in the core business, and I don't think that's impossible. A lot of it depends on your economic outlook but if we had even a reasonably strong recovery that impacted our businesses such that we returned to the cash flow levels that we were seeing in these businesses a year and a half ago and we consummated a couple acquisitions, I think we would begin to consider it towards the end of next year.

But I think for now we are into getting on some safe footing and we're probably rebuild -- the piggy bank is still pretty large if you think about having put in coins in the piggy bank during the good days still $100 million in the piggy bank but it's come down because we have paid out more than we've earned this year and I think we would probably be about taking some of that excess and putting it back in the piggy bank and I think we're probably not going to be totally comfortable with the first return of the economy like everyone else, like the dynamic I described in temporary staffing -- I think we'll want to make sure this is a real recovery. Like we'll want to see two, three quarters of strengthening before we say yes, we really believe what we've got here so I don't think that's very likely, although not impossible.

Okay. I appreciate your candor and the response.

Thank you.

Our next question comes from [John Sites] of Sterne, Agee.

Good afternoon, everyone. I apologize, I got on the call a little bit late but it sounds like from the tone of some other questions you may have already addressed this -- but I was just wondering given the recent sales of a couple of BDC portfolios, how do you see those sales and valuations impacting your results going forward or the yield in your portfolio going forward?

I don't think they have much impact and those are portfolios of loans that were bought at some value to be honest with you I haven't spent a lot of time thinking about whether the valuations they were bought at were good ones or not good ones. I guess to the extent that it means that the credit markets are returning full bore which isn't the conclusion that I draw at all but I guess that would be not good news for us. We have a pretty unusual advantage in our ability to have cash and we believe that's going to continue to be an advantage particularly in the size of Company that we acquire for at least the next nine or 12 months, maybe longer. I think there's an interesting stat, Alan, do you remember about how many lenders there were feeding this market and how many there are now? I think the number is literally is from 130 to 40 or something like that.

I'd say its down 60% to 70%.

The recently -- I don't want to say permanent, medium term reduction -- in the amount of people making capital available in this space which for us is an advantage, so we don't actually think much about the sale of those BDC portfolios and again, those are portfolios of loans and they were acquired to become part of larger loan portfolios, so I think it shouldn't have an impact. I don't know. We really believe our business should be valued on the strength of the cash flow production of our existing businesses as well as some what's the cumulative value of those businesses, so we'll see, John, but I think we don't think it should have much impact.

Great, thanks.

We'll take our next question from John Rogers of Janney Montgomery Scott.

Good afternoon.

Hi, John.

A question portfolio wide. What impact are you seeing from rising commodity costs? Are there going to be any feed throughs into higher raw material prices in the fourth quarter?

Yes. In particular AFM interestingly we think not as much as Anodyne at least not in the immediate term but AFM will have increase in its foam product cost. We know after pushing back from March until November we got a good reduction in the first quarter, pretty material reduction like double digits and then since then the foam producers have been pushing back on the industry and we think we just took something in the order of a 4% foam increase. So I do think there will be some but it's not -- the efforts that we've made across the portfolio to reduce the cost of goods sold I think are not -- nowhere near being unwound, if you know what I mean. I think we've done a great job across the business places like Fox, places like Anodyne, like AFM, to try to respond to the reduction in raw materials cost from late '08, early '09 by trying to source more effectively and so we don't see that unwinding yet.

Long term, it's really all about timing. Our companies are well positioned and the good news is we tend to be successful at recouping these cost increases. That's part of the reason to exist, right? If you're a Fox or if your an ATI and you have some cost pressures your market position allows you to be compensated but there's frequently a timeline. The good news is the time lag is on the other way. There are certainly situations where we've had some cost reductions and we've tried to lag on the price reductions so it's a long term gain. Over time we think we can balance the two. Specific answer to your question is the only one that I can point to specifically is AFM and the fourth quarter and it's not a debilitating increase.

Okay, I guess staying on the AFM, I guess you added some customers that you attributed to the trade down trend. Will you keep those customers do you think in recovery?

I do. I actually think that in a couple cases I'm thinking of and we are not at liberty to talk about who they are but I think they've been pleasantly surprised and so have we as to how much product has moved in this level of furniture and I can't imagine that they would give up the profitability associated with that. I also think we pleasantly surprised a couple of customers in our ability to ship direct to home. A couple of these situations for us, are internet situations where people are buying direct from the internet and we've made the effort to learn how to do that -- and it's tricky -- we're packaging difference, you need white glove delivery versus truckload capability delivery, and I think we pleasantly surprised people in some cases including ourselves in our ability to do that effectively.

Okay, and then you said rather than doing truckload delivery, do you attribute the changes in your cost to switching to a direct to home delivery?

No no no, so the direct to home is like really I'm glad you asked that follow-up question. I'm talking about less than 2% of our sales on an overall basis. I'm talking about some of the incremental growth has been in areas where we've just learned to do this and that's one of the reasons why I think our larger customers will continue to be customers. So let me be clear about that.

The business is a 98% to 99% delivery to distribution centers or store businesses, probably always will be maybe won't always be 98% -- but always overwhelmingly and certainly in our view will always be over 90% for as long as we have the foresight to see. So no, the reduction in costs is then a couple things. Number one I'd say three things. Number one, working on cost of goods sold, things like foam. Number two is thinking about how we source fabric and in some cases going to more cut and sew kits which is what I was describing the dynamic earlier importing cut and sew kits.

And number three is we have had a focus on transportation but in a different way than I think what you were inferring there -- which is in our full truckload deliveries, we've had a pretty strong effort internally as between our team and the subsidiary team to think about where it makes sense to operate our own trucking lines and where it makes sense to use third party truckers and have had a pretty substantial shift to third party trucking from when we acquired the business and that continues, that was probably worth $500,000 or $600,000, Alan?

In that range.

So that was pretty material for us thinking about use of third party so there has been a transportation improvement but not involving the direct to home thing.

Okay, great. And then switching gears, on Anodyne, looks like it's held up pretty well in prior quarters is attributed to they were largely, the products you were selling were largely consumable, reversed this quarter. Is that due to a mix issue with the third quarter whereas more power last year -- more power products last year?

Well, we think the mix really has to do with the budgets of the hospitals. I think that the capital spend has gone down and I think we're pleased with the growth that we've seen. What really happened though is that the growth in the power division was not quite as rapid as we had expected nor as we would theorize would occur in an environment where hospital capital budgets were stronger.

Okay, and it seems like the hospital capital budgets have been pretty weak all year. Is the reason why it's just hitting in the third quarter?

Yes, one thing that you're looking at is in the quarter to quarter comparison, we had an unusually large 2008 third quarter and that was primarily attributable to some new products that we have launched at the end of Q2 2008 to one of our largest customers and just getting some of that product into the market with the initial launch gave us a exaggerated boost in the third quarter of 2008. If you look at the third quarter of 2009, it's consistent with the first and second quarters of this year, and we think it's more reflective of where the business is just running at this point, so I think it was a tough comparison due to some unusual circumstances that existed last year, but in general, third quarter showed no disproportionately bigger downtick on a normalized basis than what we had seen in Q1 or Q2 in any of the divisions. We continue to see the same trend where the powered business is, a little bit softer than the reactive business --which is the static side -- and the consumable side of the business continues to be up considerably.

Okay. I guess on Fox, do you have any idea how much mountain bike inventory is out in the channel? I think last year around this time OEMs were still pretty positive that they weren't going to see demand fall off and then it did. Is there any risk that you're going to lag a general economic--

Well we actually think it's the reverse, which is we believe there was a big mountain bike inventory that impacted the business early in the year and we think it's coming down to normalized levels. There was actually an article, the CEO of [Shrem] was discussing the same in the last few days -- but at least confirmed from a couple different places -- we believe inventories have returned to normalized levels but that in fact the last couple quarters are clearly the effect of exaggerated inventories. I think our OEMs, we talked about this on our call last year, our OEMs have the potential to be overly bullish and I think that's what happened.

What about the new customer wins in this segment? Are you seeing any business coming from that?

Mountain bikes?

Well not just mountain bikes but just I know you talked about putting shocks on -- it ran the gamut -- using it for the military.

Yes, do you want to talk a little bit about our -- some of the non-mountain bike activities?

Yes, we've done reasonably well in our non-mountain biking segment which is our power sports and commercial off road segment. I think Joe referred to the fact the Raptor is now being delivered -- the Ford Raptor -- that product launch has been very successful. We've gotten a lot of good publicity as well on that product launch so that's starting to hit our numbers as the first of the trucks roll on to the show rooms. In addition we've been very successful in broadening our category within the power sports side, be it on the side by sides which are becoming an increasingly popular vehicle among enthusiasts on the off road side of the business.

We also are now and we had mentioned on a watercraft for the first time, that product is out there so overall, the powered sports business lines that were in from ATV side by side, snowmobile, watercraft, off road trucking, all of those from industry standpoints are down considerably. We've been able to increase our speck position with new products from OEs sufficient enough such that our powered sports division is up year-over-year so we are getting pretty nice traction in that division. And based on new products introductions that we're coming out with and increased exposures that we continue to gain, we believe this is a real good growth avenue for us in the future.

We've also hired a new manager for our military business which is one of the segments that we've been focused on and it's really a complicated enough business that while we have some wins on a one off basis from special forces uses or whatever, we continue to think it's a business with a lot of upside for us that needs to be approached in a much more systematic planful way and so the first step for us is hiring the right person to run the business which we now think we've done and we're excited about opportunities there as well.

Okay, great. And just one last question. On staffing, are there any industries that you're seeing an uptick in or particular strength and are there any end markets where if they were to pick up, you all would really benefit?

Well, we're in the Midwest so while we don't have a lot of auto customers per se, clearly I think we were early among the staffing companies in seeing the downturn because our markets are impacted by the auto markets and so clearly -- I think it's true for all of the large guys. I think cash for clunkers has been a benefit in the meantime as you've had the restocking that's helped the auto companies and that trickles down into the economies. I'd love to wish for that industry to strengthen quickly. I'm not sure I really feel that.

We've seen actually some strength among call center customers, we've really been focusing on where our areas -- so we can get growth that are non-traditional for us so we've seen strengthening there. I think our logistics business has always been strong and continues to be strong so we're very focused on that side of the business but there aren't specific pockets to which I would attribute the growth. I think American companies were very appropriately aggressive in reducing their costs in this downturn and while I don't want to say they cut too far, I think they cut pretty far and I think any growth going forward -- we all know that there are productivity issues or people working less than 40 hours a week so they should work 40 hours a week first and we all understand the notion of why employment might be lagging the economy. I will tell you we have a firm conviction that when employment starts to grow, the contract labor is going to be at the very beginning of that and we very much believe that this is an opportunity for companies to lean and restructure their employment base. And the analogy or the story that we talk about is we saw this in the last downturn, right? We've owned this business since 1999 -- or the predecessor to this business -- and it's very hard when you run a plant with 400 people to terminate 70 or 80 or 150 people with the reason being that we're going to go to contract labor and in a good economy that doesn't make sense, it doesn't fly well in the community.

You've laid off 150 people to respond to the economy -- people understand -- and over next year or two as you add people back as you're being cautious or diligent or prudent and those happen to be contract labors, that becomes a way of effectively restructuring your labor force in a way that works better for you and is great for the industry. So we're of the conviction that even if employment doesn't return to historic levels which may very well be the case in the next recovery, the contract labor will actually see substantial growth in terms of its percentage of the total labor force because of the opportunity the companies have.

Great. Thanks a lot.

We'll take a follow-up from Jim Stone of PSK Advisors.

A question relative to Fox. Have you looked at turning out greener models of some of them -- that is electric vehicles?

We haven't. It's a very high -- it's an interesting question because we have looked at green opportunities generally in different places in our portfolio. The suspension products we turn out are very heavy duty suspension products, and so even on the Ford F-150, we're on the Raptor, which is not the base model Ford F-150 you buy if you went down the road. It's more a thing you might drive around your ranch if you owned a ranch or the kinds of vehicles you see in these dirt racing. So we haven't yet seen opportunities where the electric vehicles are -- if you think it's electric on road vehicles would take our suspension. Having said that, Elias, I think most of the off road stuff like the ATVs or side by side continues to not be electric but are there examples of the electrical power do you know of?

Yes, in the works there's a new electric motorcycle that's getting a little bit more I would say acceptance right now and we've been doing some work with some OEs on the electric motorcycle side. I would also just mention that the predominant sales in the category -- to the Company are to the mountain biking category. Obviously that's something that is more green and more people are using these bikes and in general just to transport themselves around town or around college campuses whatever it maybe. So I think that probably does play in a little bit to a green initiative, I'm not sure it's something we are benefiting from and so yes, there are -- but as it pertains to powered vehicles that are looking more towards green initiatives, we see that as an opportunity albeit, I think it's going to be a small opportunity for the factors Joe just referenced.

I understand but I'm just thinking of it in terms even if it's small, it adds and broadens your line.

Yes, I think it's great. I've actually written it down here and we have these weekly conversations where our people -- let's go back and discuss it. I think it's very interesting and it's clearly it's not a trend at this point. It a phenomenon and it's real so it makes sense.

That does conclude today's question and answer session. I'd like to turn the conference back over to Joe Massoud for any additional or closing remarks.

Again, we appreciate your time and we look forward to continuing to managing the business on your behalf and as we go into the holiday season here and the New Year, we wish you all health and happiness. Thanks.

That does conclude today's conference, ladies and gentlemen. Again we appreciate everyone's participation today.