Compass Diversified Holdings (CODI) 2009 Q4 法說會逐字稿

Good morning and welcome to Compass Diversified Holding's fourth quarter 2009 conference call. Today's call is being recorded. All lines have been placed on mute. (Operator Instructions) At this time, I would like to turn the conference over to [Michael Simini] of the [ITB Group] for introductions and and the reading of of the Safe Harbor Statement.

Welcome, everyone, to the Compass Diversified Holdings fourth 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 Q4 press release including the financial tables is available on the Company's website at www.compassdiversifiedholdings.com. 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 statement.

During this conference call, we may make certain forward-looking statements including statements with regard to future performance of CODI. Words such as believe, expect, project, 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. Some of these factors are enumerated in the risk factor discussion in the form 10-K which is expected to be filed later today with the Securities and Exchange Commission for the year ended December 31, 2009, as well as 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 2010 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.

Thanks, Mike, and welcome, everyone, to our fourth quarter 2009 earnings conference call. I will begin today's call by offering some general comments on CODI's performance during the fourth quarter, full year 2009, as well as an overview of how we have tried to position ourselves to the future. After that, I'll turn it over to Jim to discuss our financial results on a subsidiary by subsidiary basis. Thank you all for your time.

We're very pleased to report strong results for the fourth quarter which significantly exceeded our expectations. While Jim will discuss our Q4 results in more detail, I would like to note that CODI generated cash flow of $17.9 million for the three months ended December 31, 2009, or $0.49 per share, an increase in cash flow of approximately 60% from the year earlier period. Over the past year and a half, we focused our efforts on exploiting the economic downturn by capitalizing on the leadership positions of each of our niche businesses and our comparative financial strength to increase market share relative to the competition. These organic and external growth efforts combined with aggressive cost controls by our subsidiary management teams enabled CODI to finish 2009 with strengthening revenue trends and greater operating leverage, positioning our Company extremely well for 2010 and beyond.

We have long felt there is nothing like a good economic downturn to help a leading company with a reason to exist. Quite simply, good times allow most companies to maintain market share. It's true that a rising tide lifts all boats. However, it takes a good storm to see which vessels are the most seaworthy, and in business, those companies that are the healthiest are able to differentiate themselves based on the quality of their balance sheet, as well as their product or service. Difficult times test reason to exist. I believe we're going to look back on 2009 fondly at CODI, as a year in which each of our businesses made important strides for the future. It was also a year in which we did not manage our businesses for quarterly or annual cash flow, but for the intrinsic value of our businesses and for the long term benefit of our owners.

I will now provide a brief overview of certain key areas of focus at each of our subsidiaries over the past year. At Advanced Circuits, we focused on expanding our market share in our core quick turn and prototype business. We did this through both organic marketing efforts and through acquisition. We're pleased to report that despite our revenue decline if that business, as a result of our efficient operating model and high value service to our customers, we were able to maintain our growth and operating margins. 2009 was also a year in which Advanced Circuits was also able to successfully grow its young assembly business. Advanced Circuits is off to a good start in the first quarter, and we believe 2010 will be a very good year.

At American Furniture we made important additions to our internal and external sales forces, allowing us to penetrate new major accounts. Additionally, we continued to work on finding the optimal mix of internal and third party carriers within our transportation department. We looked for and found higher quality and less expensive raw material sources, both domestically and in Asia, and most significantly, we continue to provide extremely high quality and high value furniture resulting in increasing SKU counts and floor space at virtually all of our major customers. At Anodyne, we focused on new product development and licensing which we believe will drive sales in 2010 and beyond. We also successfully reduced raw materials pricing early in 2009 to substantially improve the efficiency of our operations in our Corona, California facility, and significantly reduced SG&A through the realignment of certain management functions.

At Fox, management continues to expend great efforts on expanding our presence outside our core mountain bike business. These efforts targeted at new vertical markets, included commercial, military, and powered off road vehicles resulted in double digit revenue growth in fourth quarter. By successfully leveraging the strong brand recognition of Fox as the premier provider of the off-road suspension, we expect continued growth in this business as bookings for 2010 are well ahead 2009 levels at this point of the year.

At Halo, we focused on raising our efforts in the area of new representative recruitment, as well as continuing to provide industry leading support to our existing reps, allowing them to support their customers effectively in turm. We also made a number of small tuck-in acquisitions on attractive terms to build on our role as the leading consolidator in the industry.

Finally, at staffmark, where we posted sequential revenue growth for the third consecutive quarter and where revenues increased materially year-over-year in the months of December 2009, and January and February 2010, we are excited to see that this most recent downturn is playing out as previous ones have. As we've said before, the staffing industry represents an early cycle business, and as companies began to add human resources cautiously, we expect the industry to be a major beneficiary. Beyond this, however, we also expect to see long-term benefits from the continued desire and need of American companies to maximize their operating flexibility.

We believe many of Staffmark's existing and potential customers will use their work force contraction to optimize their mix of permanent and contract workers to a level that makes more sense from a business management point of view. A task which is difficult to achieve during periods of healthy business activity. And while it was painful for Staffmark and other large staffing companies, there's no doubt that the industry proved its value adds to its customers over the past 18 months. A final note on Staffmark, the Company's profitability is in no small measure also contributable to management teams cost containment efforts. In 2009, we were able to eliminate approximately $40 million of full year run rate SG&A costs and we are hopeful that at least some of these savings will stick as the business grows back to it's historical revenue levels.

As of December 31, 2009, we had $168.5 million in total liquidity, which is comprised of $31.5 million of cash on hand and $137 million available under our $340 million revolving credit facility. In terms of debt currently outstanding, we had only $76.5 outstanding as of quarter end, with no material maturities until 2013. Our considerable financial flexibility provides us with a distinct advantage as we continue to remain dedicated to capitalizing on favorable platform and add-on acquisitions. While we continue to be excited by the current acquisition environment, we remain disciplined in our approach, and intend to reward shareholders for their patience by entering into transactions that are highly accretive to Cap. Currently we are in active discussions with a number of target companies and continue to perform due diligence to insure they are niche market leaders with strong reasons to exist. We anticipate completing one or two new platform acquisitions in 2010, as well as a number of add ons. With those introductory comments complete, I would like to turn the call over to Jim Bottiglieri to add his comments on our fourth quarter financial results.

Thank you, Joe. Today I will discuss our financial results for the quarter and full year ended December 31, 2009, including a review of the operating results of each of our subsidiary companies and a brief mention of some of the factors affecting even of our businesses. On a consolidated basis, revenue for the quarter and year ended December 31, 2009, was $362.1 million, and approximately $1.25 billion respectively. The net loss for the quarter and year was $0.1 million and $39.6 million respectively. As a reminder, this loss was largely the result of the impact from recording during the first quarter of 2009 a $59.8 million noncash impairment expense for the companies Staffmark subsidiary which was partially offset by the associated tax benefit of $22.5 million and by the $12.7 million for the minority shareholders portion of this impairment expense. Now turning to results of each of our individual businesses beginning with Advanced Circuits.

Foe the quarter ended December 31, 2009, advanced circuit's revenue was $12.2 million compared to $12.7 million with the quarter ended December 31, 2008. The decrease in sales is mainly attributable to lower circuit board production resulting from the economic slowdown, partially offset by the continued growth in our assembly business, which launched in 2007. Despite the (inaudible) decrease if sales, income from operations for the fourth quarter increased to $4.7 million compared to $3.8 million for the same period in 2008, largely due to a lower accrual for loan forgiveness incentives for achieving (inaudible) targets that were previously granted to Advanced Circuits management team. With the 12 months ended December 31, 2009, Advanced Circuits revenue was $46.5 million, compared to $55.4 million for the prior period of 2008, of which $4.7 million of the decline was due to lower long run of contract and production sales stemming from the overall economic downturn. Income from operations was $16.3 million compared to $17.7 million for the prior period of 2008. Operating income decreased due to lower sales volume, partially offset by lower loans forgiveness accruals and for lower other SG&A expenses.

We are pleased Advanced Circuits reported sequential sales growth of 4.9% from Q3 2009, as demand for our quick turn and prototype PCB manufacturing services remained strong. Based on bookings for the fourth quarter of 2009, and year-to-date, we expect Advanced Circuits to generate increased sales in 2010 compared to 2009 as we continue to maintain healthy margins in this business. We also seek to further consolidate the industry in a disciplined manner. Building upon the successful add on acquisition of Circuit Board Express in early 2009, we intend to capitalize on additional growth opportunities that expand our customer base and strengthen our leadership position in our core markets.

Now I would like to turn to American Furniture Manufacturing, or AFM. For the quarter ended December 31, 2009, afm's revenue increased to 7.2% to $33.3 million, compared to $31.1 million in the prior year quarter, due to strong stationary product sales, which increased approximately $2.9 million in the quarter. Operating income for the fourth quarter of 2009 increased to $1.1 million, compared to near break-even for the same period last year. This increase is attributable to the increase in revenues and from increased efficiencies realized in the manufacturing process following the fire in February of 2008.

For the 12 months ended December 31, 2009, revenue rose 8.4% to $142 million, compared to $130.9 million in the year ago period. Operating income increased to $6.5 million from $5.1 million for the 12 months ended December 31, 2008. Notably, we recognized approximately $3 million less business interruption insurance proceeds for the 12 months ended December 31, 2009, compared to the 12 months ended December 31, 2008. In 2009, AFM increased it's market share during a very difficult economic and retail environment. by capitalizing on a strong (inaudible) financial structure and providing quality products in a timely manner which successfully expanded our relationship with existing customers and added new large customers. Going forward, we expect to further expand customer penetration levels and strengthen our leading presence in the promotional furniture niche as market conditions improve. While the industry remains very competitive, we also expect to increase AFM's future profitability based on our ongoing efforts to enhance operating efficiencies, particularly relating to material sourcing and transportation ports management. Moving on to Anodyne Medical Device, for the quarter ended December 31, 2009, revenue climbed 10.2% to $14.6 million, compared to $13.2 million for the same period last year. This increase was mainly attributable to sales from the Company's non-powerred product offerings. The Company's income from operations for the fourth quarter increased to $2.4 million from $0.9 million for the same period in 2008, due to the higher sales, as well as greater operating efficiencies relating to lowering manufacturing, overhead, labor and raw material costs.

Revenue was essentially flat year-over-year as we reported revenue of $54.1 for the 12 months ended December 31, 2009, compared to $54.2 million for the same period last year. Our topline performance for 2009 was affected by lower sale of power products as a result of reduced capital spending among healthcare institutions, offset by new product rollouts. Income from operations increased to $7.4 million compared to $4.2 million for the same period in 2008, primarily due to our improved cost structure in this business. Anodyne reported strong revenue and profits for the fourth quarter and full year 2009, despite difficult macroeconomic conditions, highlighting our position as a leading provider of medical support services. We continue to benefit from our new product offerings and believe there is a potential for a modest increase in power product sales in 2010 as hospital purchasing levels have begun to stabilize. We also will continue to invest in R&D to further strengthen our diverse platform of leading product technologies.

Turning to Fox Racing Shox, revenue rose 13.4% to $34.6 million for the quarter ended December 31, 2009 compared to $30.6 million in the prior year period. The increase in revenue is primarily a result of greater sales in our core mountain bike market, as well as for off-road vehicle sales. Income from operations increased to $4.8 million during the fourth quarter of 2009, compared to $1.3 million for the quarter ended December 31, 2008, primarily due to corresponding increase of sales, as well as due to lower SG&A expenses.

For the 12 months ended December 31, 2009, revenue was $121.5 million, compared to $131.7 million in the prior year period, due to lower sales from original equipment manufacturers. Income from operations for the full year of 2009 was $10.7 million, which is the same for the prior year period, notwithstanding the decline in sales as we benefited from a more efficient cost structure in terms of material procurement and production savings. Our dramatic improvement in Fox for the fourth quarter reflects managements ongoing success in leveraging our brand equity and penetrating new markets. We continue to grow our off-road business driven by our partnership with Ford on the this F-150 Raptor, as well as for new military customers, and remain focused on gaining greater traction in our other verticals. Going forward, we intent to extend our infrastructure in support of our high return growth initiatives as we continue to take advantage of the strong demand among market enthusiasts.

Moving on to Halo, for the quarter ended December 31, 2009, the Company's revenues decreased 9.6% to $47.6 million compared to $52.7 million for the same period last year. The reduction in net sales is principally due to lower spending in advertising and merchandising by corporate customers. Income from operations remained flat at $4.2 million both periods despite the lower revenues due to lower general administrative expenses. For the 12 months ended December 31, 2009, Halo's revenue was $139.3 million compared to $159.8 million for the same period last year. Income from operations was $2.8 million, versus $5.3 million for the prior year period, which is primarily a result of the lower net sales.

While Halo continues to be affected by the economy, the Company's performance is consistent with or slightly better than the overall industry. We continue to pursue market enhancing initiatives, and believe our current infrastructure will create significant operating leverage once we emerge from the downturn. Additionally we continue to pursue add on acquisitions that will enable us to utilize our existing capacity more effectively. Over the long term, we believe Halo will continue to benefit from positive macro trends in which promotional products represent an increasing percentage of Company's total marketing budgets.

Turning to Staffmark, formerly CBS Personnel, for the quarter ended December 31, 2009, the Company's revenues decreased by 6.3% to $219.7 million, compared to $234.5 million for the same period last year. The year-over-year reduction is primarily the result of decreased demand for staffing services, as Staffmark clients were impacted by weaker economic conditions. Income from operations was $3.3 million for the fourth quarter 2009, compared to $6.2 million for the fourth quarter of 2008, due principally to lower sales (inaudible) set by approximately $8 million in reduced SG&A expenses.

For the 12 months ended December 31, 2009, revenue was $745.3 million, compared to over $1 billion for the previous year, 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 $55.6 million which includes a previously discussed impairment charge as compared to income from operations of $68.1 million in the year earlier period. Based on managements aggressive cost reductions programs, SG&A expenses for the 12 months ended December 31, 2009 decreased $43.1 million compared to the same period a year ago.

For the third consecutive quarter, Staffmark posted significant sequential revenue growth. As we continue to improve the top line, we believe our lean operating structure positions Staffmark well to deliver rapid earnings growth as the economy recovers. I will now turn the call back over to Joe.

Again, we're pleased by our strong finish in 2009. We look forward to the year ahead. The considerable progress we've achieved is testament to the strong performance by our subsidiary to teams and our unique business model with parent-level financing that's at a very strong liquidity level right now. As we continue to increase profitability and strength in the relative market share for our leading niche businesses, we expect to grow our cash flow in 2010. During this time, we'll remain prudent in our approach to pursuing add on and platform acquisitions for the benefit of our shareholders, while maintaining our commitment to distribute our distributions. This that said, I'd like to thank everyone again for joining us on today's call. We'll be happy to take any questions you may have. Operator, please open the lines.

(Operator Instructions) We'll take our first question from Larry Solow with CJS Securities.

Good morning.

Good morning, Larry.

Joe, you mentioned in your prepared comments you expect 2010 CAD per share to be up substantially over 2009, and Jim, going through the companies, certainly you mentioned Advanced Circuits bookings are up and you expect sales to grow. Can you give more color as to if you had too rank where you see the most upside in 2010 versus 2009 and any more specifics? I assume Staffmark is probably a leader in the turn around.

Staffmark is clearly a leader because of the operating leverage. I think that Anodyne has shown growth already and was not as affected by the economy, and so while we expect some growth there, that's not going to have the kind of upside leverage that you see in the Staffmark. I think Halo we expect to be late cycle. So while there's upside leverage associated with some acquisitions, that's not one that we think is a dramatic driver. I think AFM performed extraordinarily well through the downturn, and while we expect some growth there, that's not going to be a big driver, and so then that leaves you with three, Staffmark, Advanced, and Fox. Staffmark clearly has the most operating leverage, and then we think the other two businesses will show dynamic growth.

If I had to suggest which might have the most growth work maybe it's Fox because of the sort of imbedded growth seeds that were planted over 2009, and because of some trends that we're seeing in the first quarter, but that business has shown an ability to have quarters that are up and down, or less up, so I don't want to book everything we're seeing in the first quarter yet, but I would suggest that those three businesses, Staffmark, Advanced, and Fox, probably have the most potential year-over-year growth. And while I would suggest that we expect year-over-year growth and cash flow contribution from all six businesses, but if I had to sort of segregate them like that, and I'm sure I'll now receive calls from three of our CEOs the next 45 minutes, or maybe from all six, but I think they've all got good prospects, but I think some has to do with the nature and operating leverage and where they fall in the cycle. Halo, to me, has dramatic operating leverage and upside. In my mind, though, I feel like that's potentially an area that's a little later cycle and so maybe that's a story in the back half of the year, depending on how in the year plays out, which is fine, because it's a back-half of the year kind of company anyway, but its just too early to call that.

Right. And aren't corporate budgets sort of set mid-to-late year any how, so maybe Halo would catch on just in time for their Q4?

All of our budgets are set and I think without any dramatic rebound in the economy, we expect to see some growth in Halo, and we believe that will occur. I think that if we had some real economic rebound that gave them sort of turbo at the end of the year, they would dramatically exceed their budget.

In terms of Staffmark, you mentioned the $40 million cuts you've taken out, and I think in the past, you've thrown out a sort of $10 million to $15 million number of cuts that you think are more structural in nature and sustainable. Is that a low ball number with some upside to it, the $10 million to $15 million?

Yes, if think that's still right. A couple of things happened simultaneously for the Company, which is it integrated the Staffmark-CBS merger, and it reduced costs in response to the economy, so it's hard to tease out, that continues to be our feeling. It's what the actual savings associated with consolidation of certain functions were that are real corporate and overhead and not branch related. That continues to be our estimate of what the sticky part of the savings ought to be.

And if I look at your consolidation numbers, which I know sometimes can be a little bit dangerous, but I see your gross profit actually dropped like almost 200 (inaudible) year-over-year, and I know Staffmark has lower gross margin, but they were also down in sales year-over-year. Was there anything else in there?

I don't even think about the business like that.

No but I'm just --

Every one of the companies. I would say AFM is a lower gross profit margin company than some of the others, so that had growth. That's a tricky --

Yes.

But I'm happy to talk about margin trends at each of the businesses, which is how we think about it.

The only reason I ask, I'm not privy to the quarter yet, so as soon as the K comes out, I'm sure that will probably iron itself out any how. Just last question. Sounds like you talked about acquisitions. I know you've been talking about it for --

One of other thing that being pointed out to me here by Ken Terry is while the mix of Staffmark revenues is down, the Staffmark gross martin itself declined this year and that continues to be our largest business pushing the consolidated number. I'd have the run the numbers to think about that versus the mix but my guess is that that has a deleterious effect on the consolidated number.

So the mix is down and the GP but you still haven't seen a little more profit on the operating line for Staffmark itself?

Right.

In terms of acquisitions, we've heard for the last few quarters that you're looking at a lot of stuff, and you're very diligent. Anything that you could add, anything trend wise?

Larry, don't get cranky with us. This has been our story from the very beginning.

No, I'm not giving up on you.

The Company is to be honored for the performance of its existing subsidiaries, which has been extraordinary this year. We believe it's a good environment for acquiring businesses. We are deeper in diligence now and closer than we have been at any point when we have this call and made this comment, but I will continue to say that it doesn't mean we're going to close transactions. Our owners of our business should own them for the existing businesses.

Acquisitions that we can make with our balance sheet that are intelligent or accretive are upside, and hopefully will provide growth, but our first goal is to steward and own these businesses or manage them in a way that we think every one of our owners would have wanted to, and so I understand that when we raise capital, we had an expectation that there were acquisitions that were sooner. I understand that some people may be disappointed with that. We still think it's a great environment, and I fully believe that by 2010, everyone will be very satisfied with our activity on that front, but we really want everyone to kind of focus on what we consider to be pretty good performance by all of our six of our businesses.

Got it. They were a lot.

We'll move to our next question from Vernon Plack with BB&T Capital Markets.

Thanks, Joe. I had a question about the pricing of deals that you're looking at right now, and obviously these are deals that have not been closed, and may or may not be closed, but are you looking for buy these businesses -- are these four times cash flow businesses? Six times? Really the question is about pricing.

Yes, I know. Vernon, first of all, thanks for listening in. We've never really been able to buy new platform businesses that were good companies with a reason to exist at four times. And I know people sort of toss that out there, but those businesses tend to have, in our experience, issues with management and we don't think they're necessarily businesses we want to own. We have had success in acquiring businesses at five, six, seven times at new platforms, so let me start with that, and we're looking at the middle of that range, by and large right now. But for really good companies, and hopefully off of earnings that have some room to grow.

From an add-on perspective, that's where we've had some success in acquiring businesses at multiples that look more like--well, for small ad ons, sometimes even at three types, but you know at four or five times, and that's driver by two things. Sometimes it's because of synergies, and! sometimes just because those companies are smaller and our management teams are able to ferret out opportunities that aren't as widely marketed, but once you talk about a business that you can build around, a real platform, meaning a company that has $10, $12, $15, $20 million in cash flow, it's reasonably hard to find those kinds of transactions below five, six multiple of cash flow. So the things we're looking at are a range between five and seven, generally in the middle for platforms, and we're certainly trying to have some meaningful add ons this year at the low end of that range, and slightly even below that at four to five times. We've had some good experience with that, and think this will be a good year for that. Does that help?

That helping very much, thanks. And Jim, a question about of the availability on the revolver, I know that in the press release, you mention $137 million, and if you could reap mind me, the amount of availability is based on trailing EBITDA?

That's correct. It's a trailing 12-month EBITDA.

So we should expect assuming EBITDA goes up, that number should go up? It seems like you have some room there before you hit the top end.

That is correct. There are obviously some other modifications, cash on hand also helps availability, so whenever you use cash on hand, that also reduces it, but normally, given the EBITDA increase, that would help increase the availability.

Okay. And Jim could you also remind me of the amount of excess CAD that's not been paid out yet?

I don't have that number readily available, but it's probably in the vicinity of about $20 million.

Yes, and there hasn't been a dollar of the $109 million in gain distributed. So if you think about sort of the excess CAD, because everyone defines CAD a little differently. We don't up include gain in there, so theres about $20 million of how we think of CAD, plus another $109 million of gain.

You mentioned that CAD is expected to increase in 2010. I know you don't give forecasts, per se, but would you expect CAD to exceed your current dividend per share?

Without an acquisition, that it unlikely. I think we'll go a long way to closing the gap. We have some upside opportunities that might make it. I think it will be close, but unlikely as it is I think that any minor acquisition activity, and this goes to Larry's point about how patient everyone has been, I think will send that number higher and insure that we are covering.

Okay. All right. Great. Thanks very much.

Sure.

We'll move to our next question from Henry Coffey with Sterne Agee.

Good morning.

Hey, Henry.

I'm just as cranky as everybody else, Joe, I don't think I want to go through 2008 and 2009, but I'm glad we all learned a lot from it -- ever again. When you're looking at your businesses today, and you are looking back at the kind of 2008, 2009 period, can you give us some sense in terms of what you've learned about the businesses in terms of their cyclicality or lacy of cyclicality? More in terms of what you were surprised by than anything else.

That's a good , they're all good questions. That's a different question. Yes, sure, I'll just go through them and just give you and high thoughts on areas that surprised us. I think there were actually upside surprises. Are you interested in upside and downside surprises, or looking for just the downside is surprised?

Well, both, you know.

I don't want to be too facetious about it. I'll give you a downside surprise. I think we've been surprised that Anodyne and AFM, that despite declines in oil pricing and no demand on the phone suppliers that we were not able to improve our gross profit margin even further than we did despite beating on the phone providers. It's been surprising to us that we weren't able to achieve more material improvements in gross profit margin. Having said that, they both achieved some improvements but that I would say is a negative surprise.

And is that because of the restrictive --

Yes, there's unlimited number of suppliers in the industry, even though it's petroleum driven, it's a secondary indirect petroleum product, there's a limited number of suppliers in the industry, and they effectively restrained capacity or the market is not as efficient and reflective of the sort of initial petroleum prices as we would have expected. Having said that, we were very excited for example in Anodyne, we were pleasantly surprised by the strength of the brand name and the product that drove sales in our foam business despite no growth in our power business. We were very pleasantly surprised that our customers look at us and want to maintain their relationships with us, and even if they're not buying the highest end product, continue to buy the less high margin product. I think at AFM we heard from a long time and believed that a downturn would result in consolidation where our customers wanted to buy from fewer suppliers, and that actually occurred. So I think we were pleasantly surprised at AFM with our ability to grow business.

You know, I think the downturn at Staffmark was deeper than we ever expected. I think when we modeled down turns, we said oh what's a really bad scenario, let's talk about 15% year-over-year revenue declines, and as you know, the number got to 30. Not just for us, but for the industry as a whole, high 20s. So we weren't surprised by the operating leverage in the business, we know the operative leverage in the business and saw it in 2001, and 2002, but the magnitude of the depth was a surprise to us, and it made us kind of respond faster than we would have thought. I don't want to say we weren't surprised a lot, because the business is around for a specific reason. I mean we torture these companies pretty hard when we're underwriting them and buying them for downside. So the biggest surprise would have been the magnitude of the decline but by and large, the companies performed like we expected, like we thought advance would far outperform the circuit board industry, and it did. And if anything, we're surprised it was able to maintain its margins at the level it was.

So, I know I'm being a little rambley for you, but I'm trying to look at each of the businesses here and their numbers, and Fox I would say that we were pleasantly surprised that we have so much opportunity in sectors here that we weren't in even just a couple of years ago. So there weren't a lot of surprises. It was really the depth in certain places more than anything else. But otherwise, the companies performed kind of like we expected them to, and there's a reason we haven't had a lot of management turnover, because our management teams, by and large performed well, and I know you guys comp these to the industry comps. I think if you look at every single one of these six businesses, they comp pretty well to the industries that they're in, and that's a good thing.

I know you gave out that list of where you saw the growth. It was Fox, Staffmark, and the third one was Advanced?

Yes, I just segregated them into more magnitude and less magnitude. And these aren't percentages. Partially this is absolute size, where I just happened to name for you, not by coincidence, the three largest businesses from an EBITDA point of view, so in a rebound, one would expect that from a magnitude point of view that you would get the same kind of outcome.

And then in terms of acquisitions, obviously something we like to torture you about all the time, has something changed today versus during 2008, 2009, where you're looking at businesses, and you're either more willing to permit capital, more encouraged by what you're seeing, seeing a better selection of businesses, or is the equation about the same as it's been?

We're always willing to commit capital and we want to commit capital. It is the latter two. I think for one is numbers have stabilized. You may remember in former conference calls one of our issues were we kind of didn't know where the bottom was, so it was hard to buy a business without knowing how far it would fall. It's possible we're in a head fake and we'll get a further bottom, but we don't think so. We are not sure of the shape of the recovery, but we do believe that we can look at the last 12 months and say okay, if we can underwrite a business off of that, that's okay.

So, on the one hand, we have gained a little more confidence about where the bottom is. The second is I think sellers are more realistic in terms of valuation, and I think time is on our side. There's a number of sellers who need liquidity, whether it's as a corporate seller, or in some cases, it's banked that are over levered and private equity deals that are looking for some liquidity, we're pushing processes forward. So I think there are more quality companies in the market, there's a more realistic expectation as to valuation and from our point of view, there's more confidence.

Just a last question, just hoping to utilize your perspective on things. It looks like the credit markets are repairing. Are the borrowing markets or the lending markets improving? Are you getting --

Yes, actually, I hope they don't repair too quickly, right, because one of our things is our ability to close. We continue to see our ability to close as a big advantage, and we're told that, so in the middle markets, I don't see them repairing that quickly. I know there's anecdotes about it, but I think there's less liquidity out there and less capital available from the banks, just from shear number. I think the total number of middle market lenders a shrunk from 100 and change to 30 and change. So while the people that are out there might start lending again, there are a lot of people who are big players who are not actively in business anymore. I think the secondary credit markets from what I read, you read more about this than I do, Henry, so I think those have improved, but we don't so a flood of capital coming back into acquisitions of these businesses, and we certainly don't see their being enough confidence that it hurts us when we go into a situation and say here is a big advantage for us, we can write a check. That still seems to resonate pretty well with sellers and their agents.

Thank you.

Thank you.

(Operator Instructions) We'll take our next question from Robert Dodd with Morgan Keegan.

Hi, guys. Just a couple of questions about kind of the more general outlook. Looking at Staffmark and the staffing industry as a whole, I mean have you seen any change in competition over the competitive environment over the last, you know, maybe too short period, but couple of months in terms of maybe more opportunistic, you know, guys trying to get in, maybe getting more aggressive on pricing.

That played out last year, as people's volumes went down. There was a material impact on margins in the business that we need to start adding jobs on a sequential basis as an economy before we start recovering that margin. I do think the Company has been more competitive in terms of pricing over the last year or 18 months, I wouldn't say anything specifically in the last couple of months.

There are a couple of players out there that have been more aggressive price players. Fortunately those companies haven't been that profitable, and in a couple of cases are running into some real debt issues, and we see them being slightly less aggressive recently. No, there's nothing in the last couple of months, but clearly the last 12 or 18 months have been bad margin news, and while we see our revenues growing, that bad margin news won't reverse itself, it's flattening out now, so I think it will stabilize. I don't think it will continue to decline in margins, but I don't think that will reverse itself until we start seeing job growth, but then it will start reducing effort. It's not too different from the last downturn but as long as there's plenty of people available, it's really hard to command more pricing.

Okay. Got it. And then on Fox, can you give us an update on the status of that active project, and then also your military initiatives. Obviously you've been working on those for a while, hiring, et cetera.

I'm going to make a commentary, and then panel-wise please jump in. My two partners in California may jump in with additional comments. Raptor has gone extremely well. Ford is happy with it. They're talking to us about the ongoing productions. It's not a high volume commercial vehicle. The raptor isn't the core F-150. It's sort of the highest end vehicle you would acquire if you had specialized off road needs, sort of more their show piece. So it's a profitable piece of business for us, but as much as anything, it's a piece to demonstrate the qualifications of what we can do, and it's some amount of cash flow, but it's never going to be an EBITDA contributor in the millions of dollars. In terms of military, you know, we're bidding on on a fairly large amount, been sort of prequalify for fairly large amount of military business, both US and Western European.

If any of that comes through in an even near material way, that could have a significant impact on the Company, but there's nothing right now. We're working on a constant stream of military projects that are additive to the Company's EBITDA, but that aren't Company changers, but the good news is that we've added a new person to work on the marketing on our side. We've kind of refocused our people in San Diego to be able to do more in R&D on the military side. That's an opportunity that over the next two to five years could become a game changer for the business, but not at current size. Do you want to ad anything to that?

No, Joe, I think that summarizes it pretty well.

Okay. Okay. Thank you.

All right.

We'll take our next question from Greg Mason with Stifel Nicolaus.

On AFM, you talked about improving efficiencies in 2009 and lowering raw material costs, and I believe Jim mentioned that you expect more of that in 2010. Can you just talk about how you can continue to increase efficiencies not only at AFM, but across the board going forward, given the dramatic cuts you made in 2009?

Yes, the big issue there is, if you look at full year, there's two of them. One is the continued use of imported cut and sew kits, which has significantly reduced our labor component in the product, and that was a shift over the course of 2009, and so full year 2010 versus 2009, there will be a pretty material -- no pun intended -- pretty material difference there. The other thing is we're thinking about specialized components, or parts of our product line, not major parts, but specialized parts of it that we may be sourcing more directly from Asia, particularly as we expand our presence, or begin to have a presence on the West Coast. So both those things combine have had produced a budget that is a better gross profit margin in 10, and this management team is very good and tends to hit their gross profit margin. Actually most of ours do.

So, we have confidence around that, but the primary difference is our continued shift to cut and sew kits, so we're able to do that, and working with Asian sources on certain parts of our product line.

And can you talk just for your businesses overall, as revenues pick up, you know, one of the things that people have been talking about, expecting significant bottom line improvements, but do we need to be concerned that as revenues go up, costs will have to continue to rise and maybe that isn't as impactful to the bottom line? How do you --

Well, as a broad commitment, there's always been a myth of operating leverage, right? For some reason, when companies go down, they're never able to cult the expenses and then as they go up, you never get as much operating leverage as you would own hope. That's a commentary in general on people's optimism. But its company by company. I think in Staffmark, there's a lot of operating leverage, and you can see it in the fourth quarter and you'll see it in the first quarter, and as revenues go up, you have a hugely outside impact on the bottom line. But that's a high operating leverage business. You take another business like Advanced Circuits.

It's been very is good at sort of downsizing not just as cost of goods sold but its SG&A, I think you probably don't get a big uplift in gross profit margin, from increased revenue, just because of that specific business model. The same would be true at AFM and Anodyne, and maybe even at Fox. Staffmark and Halo are the two businesses that have the most operating leverage that you would expect the outsized growth. And as a general core, Greg, if you would look at a business that was able to maintain its margins means it has tight steps on it's cost management, and did a pretty good job on the managing on the way down, probably not going to get a lot of improvement on the way up. If you look at a business that lost a lot of operating profit as compared to its revenue decline, you better get on the way back up, or otherwise that's a poorly managed business. So, again, that's a general comment.

Thank you. And Halo, can you remind us how many new sales people you added in 2009, and what are your expectations for acquisitions there in 2010?

Yes, what's the number of reps we added in 2009?

Right around 40, 45.

Okay. We added a new gentleman early last year, I think, who that's part of his focus, is to work on rep recruitment. Not only did we add 45, but this year's freshman class, which means in their first year, have substantially outperformed historic freshmen classes on a per person basis. One thing is bodies and another is productive bodies. That's a good number that we would hope to replicate on an annual basis, but just as importantly, we would hope they're just as productive. So we're pleased with that number and we're pleased with the production of sort of the freshman production, if you will.

Great. Thank you very much, guys.

And we'll take our next question from John Rogers with Janney Montgomery Scott.

Good morning.

Hi, JJ.

I have a couple of questions. First on Staffmark, I expected better margins given the growth you saw sequentially. I think year over year, a look at incremental margins of 20%, but if you look on a sequential basis when we're up to that $26 million, that the incremental margin was only 9%. Is there something in there? Is the fourth quarter, is that less --

That's a revenue mix thing between quarters. Elias do you want to comment on that?

Yes, sure, Joe. I think in the fourth quarter, there's going to be a little bit of additional G&A that was added, although that's not going to account for a lot of it. I just think that, you know, one of the things, and you'll see this as the K comes out, is there has been some margin compression in the business from a gross margin standpoint. So the incremental amount of EBITDA that's going to get dropped is clearly going to be lower in the margin environment that we're currently in. But other than that, we added a little bit of SG&A, not a lot. There were a lot of things that were that far out of whack, and so therefore, it wouldn't be representative of kind of normal sequential incremental margin growth.

Okay. Great. And then the margin compression you saw on the gross margin, what was that? Was that competition?

Yes. A lot of that happened really in the beginning half of 2009. As the industry kind of hit it steps, a lot of companies came back to their suppliers of temp labor and were seeking price concessions, and so companies were getting those concessions.

I would also say on new business that's being won, it's at lower margins than historically, where we had been, so, yes, as the competitive pressures were very intense in 2009, in first quarter and second quarter, as Joe alluded to, that began to wane at the back half of the year, put we don't see the competitive pressures easing up such that margins are going to be able to start recovering yet, and we think that we really need to see more labor market growth and a bringing down of the unemployment rate until you're going to see gross margins start to recover from some of the negative impact of early 2009.

Great. I guess on the upside, what's the benefit from margin expansion? Where are normalized gross margins? How much upside would you see from --

You know, I think for purposes of the next couple of years, I think that's very hard to predict, and, you know, as we think about it, we think about revenue expansion, flat gross margins, and then operating leverage because you're not expending your SG&A at the same rate as your revenue expansion. I don't know what the upside is, and honestly, I don't see an environment in the next 12 months that would lead to gross margin growth, so I don't really even want to guess at that.

If we were to see a big recovery in the next 12 months, is there additional benefit from placement services? I think that's a small part of the business.

If you start seeing the economy go up, perm revenues would go up. You know, what's the Delta, Elias, if you don't have this off hand, it's not a big deal, but any idea what the Delta was between sort of perm placement revenues a couple of years ago versus last year? Yes. I mean, if you look at perm and direct hires, which are going to be the extremely high margin part of the business, that was something that has gone down by three or four percentage points on a percent of revenue. So, it can have a pretty material impact. Right now, we're seeing direct hires and perm placement be pretty much at the lowest we've ever experienced, even lower than the last down cycle, so clearly there has been some gross margin degradation as a result of that.

So, if we do start to see a little bit of the direct hire and perm placement, that industry or that side of the industry start to pick up, clearly there would be some margin upside, and if we thought there was in a more normalized environment two to three percentage point increase as a percentage of revenue from where we currently are, that's probably reasonable, I think we're right now about 1% of revenues, and our perm and direct hire, that's not unreasonable to think that that could go up by two or three percentage points in a more normalized environment.

Okay. Great. What if we see an economy that turns sideways, staffing has been adding a number of employees, you look at the BLS numbers. Do you expect staffing to continue to add, or does that roll off later in the year?

I do. Well, I don't know. I expect it to add in the short term, because I do think there's been an inventory dynamic across a lot of inventories where there's been a decline in the inventory chain and we're seeing demand driving company production. I think that those companies are cautious about adding people, and that they would add contract labors to fill that gap. I think the economy sideways as you see, I don't see those personnel being replaced by permanent workers, so I think you could see a situation for the rest of the year where you have kind of flat to very anemic total labor growth, and yet you could see contract labor out perform.

At this point, a very high percentage of the on-the-margin workers that are being hired, we think are contract laborers, which isn't different than the fact on the margin the percentage of people who got laid off were contract labors. So I think even if the economy is kind of sideways, I think you'll certainly see year-over-year growth, because people have stopped letting people go. So the year-over-year growth for the industry, I don't want to say it's bad, but I would expect year-over-year that there should be growth for each of the four quarters, and certainly for each of the first three quarters, even if the economy is side ways as you put it.

Okay. Great. Switching gears a little bit. ACI, one of your competitors, I guess has closed two facilities on the West Coast. Is that an opportunity for you to gain market share, or have you already seen it, or have they just consolidated that work in other facilities?

First of all, the consolidation is sometimes exaggerated, because we're focused on a certain portion of the business, right, which is the quick turn and prototype, but there's no doubt that our customer count has increased over the course of the year from something that look liked 8,000 something north of 10,000. So it's hard to tell exactly where those customers come from, but certainly some of it should be as a result of the fact that there are competitors going out of business, so we're seeing some of that, and we continue to think we'll see more of it. The data is really tricky in the circuit board production business.

There's a lot of industry associations that do the best that they can but its hard to find. As near as we can tell, we've performed both in the decline and in the recent upswing something in the order of 10 percentage points or better better than the industry. I think that's market share growth. And it's very aggressive marketing. We haven't let up on our marketing expenditure at all in this down turn. And we've done a small acquisition. As you know, we're looking very hard at other acquisitions, including something that are a lot more sizable than what we've done in the past. And so, you know, we think we're going to keep growing market share here.

Okay. So so if I heard you correctly, you've added customers in that business, but I guess we're seeing sales down. Will the size of their orders grow? Could you see outsized growth since you've gained customers, or does the revenue growth come from adding additional customers?

Oh, are the per customer order is definitely down. And I would say, you know, if you look across the industry, they it would have said it was down last year in the, you know, 30% plus range. I think our customer growth made that number lower, and our hope is that as per customer growth, we think there will be touch per customer growth, and we think the fact that we've added new customers will turbo charge that for next year, so I think that you're going to be see growth along both lines.

Okay. Great.

Am I getting your question?

Yes, that's it. And then just two more questions. On Anodyne, in 2009, there was a tailwind from one of your customers dropping one of their suppliers. Do you see any growth beyond that in that business?

I don't know. Elias, do you want to take a shot at that, and then I'll give some thoughts on that, too.

Yes, I guess is the question do we see growth kind of perspectively at Anodyne, I think the industry is one that continues to be impacted by favorable demographics. You have an aging of the population, and you have rising obesity trends, both of which are good for services. There's been rulings out of CNS which are beneficial to the industry in terms of payment once a patient develops a bedsore, so there's a lot of tailwinds behind the industry. In 2009, the business sort of segregated, and as Joe had mentioned, and the higher cost powered segment performed, you know, not as well as some of the lower price point. And we would expect that there is some pent-up demand for some of those products. And over time, and now it's hard to say when this will actually, you know, feed into sales, but over time, as, you know, donations come back to hospitals, to build an additional wing, or as capital budgets start to be opened up because financing starts to get a little bit better, we would expect that this industry should, you know, at least resume back to its normal growth and potentially even exceed that to make up for some of the lower demand in 2009.

So, I think there's nothing in our opinion today that has changed in terms of the vibrance of the market, or the opportunity that we're going after, and we believe that Anodyne is positioned extremely well, vis a vis its competitors in the market, to continue to maintain or take market share, and so we don't see it lagging that industry growth.

Okay. Great. Ask there better margin with that product, the higher priced product?

Yes.

And is it materially higher?

Yes.

Yes, it's typically more proprietary technologies, and when I say technologies plural, it encompasses a number of different parts of our IP, and as a result, we can typically extract some significantly higher margin points from it.

Okay. Great. Just one last question. On Fox it sounds like you're pretty positive on the way that the business is shaping up for 2010, but you may have tempered your expectations. In the best case scenario, how does Fox perform?

That's a really hard one. I think that mountain bike sales would return to the levels that they were at a couple of years ago, and maybe even show some growth, resulting from the fact that we have higher spec with some of our customers, and I think you would get solid double-digit growth in our non-mountain bike case, and I think thats as good a sort of optimal case as we can talk about. I think you can start filtering in a big military win or something like that, but I I don't think that's in the realm A) I done think it's a 2010 event, and B) I think it's very hard to say. So I think you can take look at how we performed historically on the mountain bike side and say maybe there's some growth there from where we were, and then I think you can say there's even better growth in the non-mountain bike side, and that would be an outcome that we were really pleased with.

Okay. Great. Thanks a lot.

And we'll take a follow-up question from Henry Coffey with Sterne Agee.

Thank you very much. I've been going through the press release, and I know you don't like to talk about CAD per share, because your accountants have a heart attack, but it looks like you had CAD of about $0.49 this quarter versus $0.35, and I'm going through the numbers, the EBITDA was about $0.10 per share higher, and when you get into the CAD number, there were two big swing factors. One was positive gains on the operating asset side, in other words you used less working capital, and then --

Henry, that's not a CAD item for us.

Oh, I see. I'm sorry, yes, that's right. It's reversed. Sorry.

Capital expenditures was probably part of the answer, too.

So net working capital was reversed, so that doesn't have an effect on the numbers, and then there was also a swing in deferred taxes?

Well, we were able to recover the carry back for Staffmark that lowered income taxes, but it was definitely an income tax impact. There was also lower interest expense, because we paid off interests.

But I did sort of a back of the envelope calculation of EBITDA, and am I correct in saying that on a year-over-year basis, we did see a positive improvement there?

From an EBITDA point of view on a consolidated basis for the quarter? Let me look at my sheet here. Hang on one second. It's just about flat. It's just about the same, because you had a pretty material decline at Staffmark from an EBITDA basis. Advance was close to flat. Halo was close to flat. Anodyne was up, $1.5 millions. AFM was up $800,000, and Fox was up about $3 million, so it's just about flat.

And so the sort of the gain in year-over-year is more tied to --

I'm sorry.

We the positive growth in year-over-year CAD in the fourth quarter was more tied to kind of below the line items?

Lower income tax expense, low interest expense, and slightly lower CapEx.

Thank you very much.

And we'll take our final question of the day, follow up question from Larry Solow with CJS Securities.

So just to follow up, that adjusted EBITDA number wars around $22 million or so, was that about right?

That's right. That's exactly right.

Okay. Dozen just on American Furniture Manufacturing, you actually had a pretty good year this year, revenues were up about 8%, and it sounds like you're laying the ground work for the future with increasing SKUs, and increased floor space, so as the economy starts to recover more, assuming it eventually does, do you see this as more leverage for the future, or do you see some of the higher priced furniture manufacturers --

Well actually pretty enthused about the future. We think that the new customers that were in, we generally represent a new price point for those customers, in the case of Costco, it's a new delivery method for us to go direct to the customer, for example, and we don't think that those customers, given the success that we've had with a couple of our new customers, we don't see them when the economy recovering deciding they're not going to serve that price point anymore. In terms of SKU expansion at our largest customers, I think we would have to give them inferior product at a higher price for them to sort of unwind it, because the products we're supplying them are selling very well, and floor space is everything in a consumer product, whether its toothpaste or whether its furniture, and once you get the floor space, if you can perform, it's reasonably hard to move, particularly if you're a major supplier across many SKUs as we are. So we see this being very positive long-term development for us.

The sales people that we've added both internal and external, I think they're extraordinarily happy to be with our Company and not where they were before. They're making good money representing our product, so I don't foresee them deciding to go rep someone else. So, again, we think these are good long-term improvements. In terms of leverage, I think you really just meant will we gross sales. In terms of leverage, if you mean operating leverage, because these guys have been so effective at cutting their cost, I don't think this a is a high operating leverage business per se, so we look for margins to be reasonably stable.

Got you. Then last question, just on the gross profit line, the cost of goods across your segments, it sounds like from your comments you think that you're procurement efforts, you still have some more tailwinds on those --

It's a company by company slog, and it's something every company has to do, but I think AFM, since that's what we were just talking about, has made good efforts on cut and sew, but a lot of thats been played out in 2009 and we see foam prices starting to pick up versus last year by a few percent. That would be an impactor on Anodyne as well. I think Fox has done a good job of multiple sourcing, but on the other hand Fox is all about absolutely superior components made of superior materials, and there's sometimes not as much room to move from a pricing point there as there would be on another product that maybe is a little less quality sensitive. CBS, our biggest Company, we have already described their gross profit margin dynamic.

So I don't see 2010 as being a big gross profit improvement year, but I will tell you, the guys who are stewards in these companies flog this out day to day, week to week, month to month. You know, Advanced Circuits, woe be to any supplier to have to dial with our management team there. Those guys are very good at what they do, but, you know, it is what it is.

Got you. Okay. Great, thanks.

And we have no furniture questions in our queue. I would like to turn the call back over to our presenters for any closing or additional remarks.

Well, we appreciate all of your time. We appreciate the shareholders support. 2009 was an interesting year. I do believe we're going to look back on it fondly though, because I think our Company has made a lot of efforts, and what guided us in to 2009 was trying to manage these businesses like we think everyone one of our share holders would have, and that's what we're going to try to do in 2010, also, so we look forward to your continued interest in how we're doing and we'll keep working for are you. Thanks.

That does conclude today's call. Thank you for your participation.