Compass Diversified Holdings (CODI) 2010 Q1 法說會逐字稿

Good morning, and welcome to Compass Diversified Holdings 2010 first-quarter 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 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 first-quarter 2010 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 Q1 press release including the financial tables is available on the Company's website at www.compassdiversifiedholdings.com. The Company also expects to file its Form 10-Q with the SEC later 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 statement. During this conference call, we may make certain forward-looking statements including statements with regard to the future performance of CODI. Words such as believes, 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.

And some of these factors are enumerated in the risk factor discussion in the Form 10-K filed 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. 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 first-quarter 2010 earnings conference call. As an overview, let me say that we are very pleased by our strong start to 2010. Our first-quarter results materially exceeded our expectations.

CODI generated cash flow of $11.3 million for the three months ended March 31, 2010 as compared to a negative $400,000 for the corresponding prior year quarter. Based on this first-quarter performance and keeping in mind that our first quarter is typically our weakest due to the seasonality of a couple of our businesses, we are on track to achieve significant year-over-year growth and cash flow for 2010 even before taking into account the accretive effect of recent or future acquisitions.

The strengthen in performance was broad-based for us across every single one of our subsidiaries and we believe that our focus on market share gains during the downturn with each of our management teams has begun to pay real dividends at a number of our companies.

Let me now make some general comments on each of our subsidiaries and then I'll turn the call over to Jim to discuss our specific financial results.

At Advanced Circuits, demand accelerated, leading to strong performance in Q1. Booking and shipment levels continued to increase and are considerably higher as compared to a year ago. Margins remain healthy.

In March, we also announced very exciting for us add-on acquisition of Circuit Express and began the integration of that company. This add-on primarily focuses on Quickturn Manufacturing of prototype and low volume quantities of rigid circuit boards, but in this case primarily for aerospace and defense related customers.

This acquisition expands our leadership position in the Quickturn space by expanding ACI's capabilities to include more advanced products. We have already begun to see important synergies as ACI is able to accept and manufacture orders at Circuit Express that it has historically had to outsource and the companies are performing very well together. It is short period of time, but we are pleased with the outcome so far.

Next, American Furniture performed in line with our expectations during the first quarter. We have taken advantage of our expanded relationships with existing customers and have added new large customers as well as we told you over the previous quarters and the results showed in the first quarter.

At Anodyne, the Company launched a corporate rebranding campaign highlighted by the introduction of a new name, Tridien Medical, which is how we will refer to the business probably in future quarters. This reflects its diverse platform of leading medical support services. The Company has experienced considerable growth since its inception in 2006 and continued to benefit in Q1 from the strengthened demand for its products as well as an improved cost structure.

At Fox, revenue increased 63% in Q1 year-over-year, well ahead of our expectations. We continue to make important strides expanding our presence outside our core mountain bike business and penetrating new vertical markets including commercial, military, power sports, and off-road. During the first quarter, we signed an important new military contract and by successfully leveraging Fox's strong brand recognition, bookings for 2010 are up dramatically from 2009 levels at this point in the year, which we think bodes well for the rest of the year.

In terms of Halo, the business also exceeded our expectations in Q1 by reporting double-digit revenue growth. We continue to add new reps and pursue strategic add-on acquisitions to further our role as a leading consolidator in the industry. And additionally, we believe we will achieve substantial operating leverage as order counts improve and revenues continue to grow.

Finally, Staffmark continues its strong market recovery. Revenue rose each month year-over-year in Q1, resulting in an increase of over 33% for this business. In addition, this business posted sequential revenue that was nearly flat as compared to Q4. For those of you who follow the space, you know that's a very positive indicator since Q4 is typically a seasonally high quarter.

As we've said before, we expect to benefit from a gradual long-term shift in overall workforce composition as employers seek greater flexibility provided by staffing firms such as Staffmark. We had always explained and theorized that this would be an early cycle company that suffered the downturn a little earlier than most companies, certainly in our family of businesses, and we expected and have seen that it has come out more quickly and early as well. We're very excited about that and expect this Company to perform very well over the remainder of the year.

As we maintained our focus on the operations of our existing subsidiaries, we also acquired a new platform business about which we are very excited. On April 1, we announced the platform acquisition of Liberty Safe, a leading designer, manufacturer, and marketer of premium home and gun safes in North America, increasing our current number of subsidiaries to seven.

Based in Payson, Utah, which is right outside Provo, Liberty produces a wide range of home and gun safe models that are marketed under the Liberty brand as well as other well-established licensed and private label brands. In addition to strong distribution channels and various sporting goods, farm and fleet, and home improvement retailers, Liberty has the largest independent dealer network in the industry.

Consistent with our core philosophy, Liberty Safe is a niche industry leader. It is manned by a successful, experienced and incentivized management team and has a history of stable cash flows and benefits from favorable macro tailwinds. Going forward, we expect to capitalize on the strong demand growth from shooting sports enthusiasts and benefit from increased awareness of the need for safe storage of firearms.

Additionally, we believe there is a largely untapped market for premium home safes that we hope to exploit.

From a valuation point of view, our valuation represented under 6 times the EBITDA the Company is currently expected to generate and is $0.10 to $0.15 accretive to our owners out of the box on a full year basis. We are excited about the attractive terms of the acquisition of Liberty as well as its growth potential. We are very pleased to have added Liberty to the family of companies creating cash flow for our owners.

In response to the opportunities we are seeing in the acquisition marketplace, we took active measures to maintain a strong balance sheet by completing a $5.3 million primary share offering in April that generated net proceeds of about $75 million, underscoring our short-term and long-term view on the acquisition market and our prospects for growth there. This offering effectively reloads our acquisition debt facility and ensures that we remain in a position to be an all cash buyer of add-on and new platform businesses.

We believe that the current environment for acquisitions is attractive and that the current credit markets are still tight, giving us a substantial competitive advantage of the potential acquirer. We believe buyers that have cash now are in a strong position and we are one of those buyers and intend to continue to be.

With those introductory comments complete, I would like to turn the call over to Jim Bottiglieri, to add his comments on our first-quarter results.

Thank you, Joe. Today I will discuss our financial results for the quarter ended March 31, 2010, including a review of the six subsidiaries that contributed to our Q1 results and also provide a brief mention of some of the factors affecting these businesses.

On a consolidated basis, revenue for the quarter ended March 31, 2010 was $353.6 million as compared to $274.9 million for the prior year period. The net loss for the quarter was $15.3 million, which compared to a net loss of $42.2 million in the year earlier period.

During the first quarter of 2010, CODI recorded a non-cash supplemental put accrual expense of $14.4 million based on the periodic review of current cash flow generation levels of the subsidiaries as well as anticipated market multiples for those businesses in the event that they were to be sold in the current environment.

During the first quarter of 2009, CODI recorded a $59.8 million non-cash impairment expense for the Company's Staffmark subsidiary, partially offset by an associated text benefit of $22.5 million. As previously announced, we paid a cash distribution of $0.34 per share for the first quarter, increasing the cumulative distributions paid to our shareholders by more than $4.97 per share since going initially public.

Now turning to our subsidiary results, beginning with Advanced Circuits. For the quarter ended March 31, 2010, Advanced Circuits revenue increased 20.8% to $14.5 million compared to $12 million in the prior year period. This increase is largely attributable to higher long lead production and from approximately $1.1 million in net sales from the March 2000 acquisition of Circuit Express.

Income from operations for the quarter was $0.9 million compared to $3.6 billion for the same period in 2009. The decrease is primarily due to a $3.8 million non-cash stock compensation expense recorded during the quarter as well as for $0.3 million of direct costs incurred in acquiring Circuit Express.

Advanced Circuits strong performance during the first quarter reflects the ongoing demand for a quick turn and prototype PCB manufacturing services. With the acquisition of Circuit Express, as Joe mentioned earlier on the call, we have further extended our customer base and strengthened our number one market position in the Quickturn Manufacturing niche.

As we continue to integrate our latest add-on acquisition into our existing infrastructure, we expect to utilize our operating capacity more effectively and to increase future profitability.

Now I would like to turn the call over to American Furniture Manufacturing or AFM. For the quarter ended March 31, 2010, AFM reported revenue of $44 million, an increase of 6% compared to $41.5 million in the prior year quarter due to strong stationary product sales.

Operating income for the quarter was $2.7 million compared to $2.2 million in the first quarter 2009. This increase is mainly attributable to the corresponding increase in sales. AFM continues to benefit from its success in expanding customer penetration levels among the new and existing accounts as the retail environment has shown signs of improvement.

As we further our position as a leader in promotional furniture, we continue to utilize more third-party carriers within our transportation department and source materials overseas consistent with our ongoing efforts to drive greater operating efficiencies and profit.

Moving onto Anodyne Medical Device, now known as Tridien Medical, for the quarter ended March 31, 2010, revenue climbed 32% to $15.3 million compared to $11.6 million for the same period last year as a result of higher sales in the Company's nonpower product offerings. Income from operations for the first quarter was $2.2 million compared to $1.1 million for the same period in 2009 due to higher sales and lower manufacturing overhead.

We are very pleased by Tridien's strong topline performance in the first quarter. In addition to the Company's positive year-over-year results, revenue increased 5% on a sequential basis from Q4 as recent trends in capital spending among healthcare institutions are beginning to improve.

Going forward, we will maintain our focus on controlling costs and developing new innovative products to further strengthen our position as the number one provider of medical support services.

Turning to Fox Racing Shox, revenue rose 62.8% to $32.7 million for the quarter ended March 31, 2010, compared to $20.1 million in the prior year period. This significant increase was largely attributable to increased sales in the mountain biking sector as well as for increased sales in the power vehicle sector, including our partnership with Ford on the F-150 Raptor.

Income from operations was $2.9 million during the first quarter compared to a loss of $0.9 million for the quarter ended March 31, 2009 due to the stronger sales and greater manufacturing efficiencies.

Fox is off to a very strong start in 2010 posting double-digit revenue growth for the second consecutive quarter in Q1. We continue to gain market share in our core mounting bike business and penetrate new vertical markets including military, power sports, and off-road by leveraging our strong brand recognition.

Based on ongoing efforts, booking levels for 2010 remain well ahead of 2009 levels at this point of the year. We are confident that Fox's leading reputation for high performance essential products will drive long-term growth as demand among market enthusiasts remains strong.

On the cost side, we continue to benefit from a more efficient cost structure in terms of material, procurement and production. We remain focused on strategically expanding our infrastructure in support of our considerable growth.

Moving onto Halo, for the quarter ended March 31, 2010, the Company's revenues increased 11.2% to $29.7 million compared to $26.7 million in the same period last year due to higher sales from existing customers as well as sales from new accounts resulting from recent tuck-in acquisitions.

Loss from operations for the three-month period narrowed to $0.8 million as compared to a loss of $2.1 million in the first quarter of 2009. We are pleased by Halo's first-quarter performance, which exceeded our expectations during this seasonally low operating quarter. Halo's leadership position in the promotional products industry combined with its superior customer service has enabled the Company to produce solid results throughout the downturn.

We remain focused on adding new reps and increasing our customer count through additional add-on acquisitions, as we have in the past. Additionally based on considerable improvements we have made to Halo's infrastructure, we expect to generate significant operating leverage as spending on market-related products improves along with the overall economy.

Now onto Staffmark. For the quarter ended March 31, 2010, revenue increased 33.4% to $217.4 million compared to $163 million for the same period last year due to increasing demand for temporary staffing services. The Company's loss from operations was $0.8 million for the first quarter of 2010 as compared to a loss of $58.5 for the previous year period, which did include a $50 million impairment charge.

Cash flow from Staffmark are typically lower in the first quarter each year than in other quarters due to reduced seasonal demand for temporary staffing services and to lower gross profit margins during the period associated with the front-end loading of certain taxes, (inaudible) payments associated with payroll paid to employees.

(inaudible) performance in Q1 was well above management's expectations as signs of a global economic recovery led to an increase in demand for the Company's services. We continue to gain market share in our core markets and benefit from the significant cost containment measures that were implemented last year.

Turning now to the balance sheets, we had $22.1 million in cash and cash equivalents and networking capital of $77.6 million as of March 31, 2010. We also had $75.5 million outstanding under our term debt facility and $70.5 million outstanding under our revolving credit facility as of March 31, 2010, with no material maturities until 2013.

In April 2010, we completed a public offering of 6.575 million trust shares representing a primary offering of 5.25 million trust shares by CODI and a secondary offering of 1.325 million trust shares by a selling shareholder.

CODI raised approximately $75 million of the net proceeds from its portion of the offering that were primarily used to repay $70 million of outstanding borrowings under our revolving credit facility. CODI did not receive any proceeds from the secondary offering.

We incurred approximately $1 million of maintenance capital expenditures during the first quarter of 2010. Staffmark is in the beginning stages of implementing a new ERP software solution. Including these steps, Staffmark's software expenditures we expect CODI to incur maintenance capital expenditures of approximately $8 million for the year.

On a pro forma basis, CODI's availability under its revolving credit facility was approximately $200 million as of March 31, 2010, which reflects the increased availability from the subsequent $70 million repayment of the revolving credit facility debt in April.

I will now turn the call back over to Joe.

Thanks, Jim. Again, we are pleased by our strong start to 2010 and hope our fellow owners in the Company will be equally pleased. The strong performance in our family of niche leading businesses in both the difficult economic environment in 2009 and the improved environment in the first quarter 2010 bodes well for our companies' future prospects, we think.

We plan to continue to create value for our owners by capitalizing on our strong capital structure to take advantage of both organic and external growth opportunities.

With that said, I would like to thank everyone again for joining us on today's call. I know time is precious, particularly in the markets these days, and we would be happy to take any questions you may have.

Operator, please open the phone lines for questions.

Robert Dodd, Morgan Keegan.

Just capital question again and then a couple questions about Liberty. On the capital side, Jim, that pro forma 200 that includes the proceeds from the equity offering paying down the debt. Does that include the pro forma effect of the Liberty EBITDA on availability?

It does.

Okay, got it. And then can you -- I think I might've missed it. What's the cash pro forma after any extra proceeds or just the pro forma cash for the offering, the Liberty payment, etc. I [realized] most of that one.

Well, we had $22.1 million of cash at March 31. We raised $75 million with the equity proceeds but used $70 million to repay term -- revolving credit debt. So that left $5 million extra cash, so pro forma cash was about $27 million (multiple speakers)

Perfect, and just two quick questions, one quick and one slightly longer question on Liberty. What is the seasonality Liberty business? I mean is there a lot of it in -- is it second quarter or third quarter concentrated or is it (inaudible) revised around Christmas?

We'll turn the call over to Alan and I will come back to answer that question. Sorry about that, Alan.

The seasonality is pretty limited. So I wouldn't describe the business as seasonal.

Right, got it. Then the other question on Liberty, what -- obviously you bought that platform acquisition with a plan to grow it. Is that the plan just to focus on gun safety, just growing that? Are there rollout opportunities there? Is it to expand the distribution? Any more color you can give us on the expansion plans for that business?

Yes, we think there are some organic growth opportunities for Liberty to pursue. We believe there's an opportunity to expand their manufacturing capacity here in the United States and produce smaller states that they are currently importing from China, which we believe would allow them to better manage their working capital and provide better customer service to their customers.

In addition, we believe that there is an opportunity to better penetrate the home safe market for the non-gun owners, which the Company has had some success in, but we believe it has further potential for the Company and its an area that we are excited to pursue.

So I do think the focus will be on organic growth opportunities. However, we are always in the market to make acquisitions to the extent that makes sense for the Company and there is an appropriate target. So we will really be looking at all avenues of growth for the Company.

Great. Thanks, guys.

Henry Coffey, Sterne, Agee.

Good morning, everyone. I was wondering if we could talk about Liberty a little bit more. Is the strategy somewhat similar to what you did with Crosman, where you could in essence create a branded product that shows up in Office Depot -- maybe it's manufactured third party --

I don't think that's a bad analogy. It's an interesting (inaudible) because I think what you're saying is take sort of the core BB gun which might have been bought in one location and if you can expand into Soft Air, which is something that maybe you can (inaudible) actually a little bit more broad consumer base. That's a pretty good analogy, actually. The hope is that we make home safes more attractive to people who own homes that are worth $0.5 million or more and probably should be storing their documents or cash or something in something fireproof and they tend not to have that now.

I will say that the logical line extensions in Crosman were probably somewhat broader at the offset than in Liberty, but there's a number of things Liberty are looking at, including for example military gun safes for military, for bases and things. So I think it's a decent analogy, but I wouldn't overstretch it.

Henry, the only other thing I would add to Joe's comments is that Liberty right now is the number one brand, we believe, in the industry. So it is a branded product and a brand however that we think again with expanded distribution and better marketing to additional consumer channels we think can be expanded primarily using its largely -- its existing product line.

It's got great channel penetration in the gun distributors and in sporting goods so that we are hoping to capitalize on that, but I think it's really important just to remember sort of cake and icing, right? None of this ever happened. We believe the business as acquired at its valuation is a phenomenally interesting one for the owners of the business to have.

And a little bit of a comment on Robert's question as well, we think the business has very good kind of mid to high digits growth based upon increasing gun ownership penetration, increasing trends towards safe gun storage or what we perceive and what many people perceive to be safe gun storage. And it's really -- that's the driver of the decision to acquire and the thesis behind the business and the management team and its core reason to exist.

If none of that other stuff ever happens, we think this is a really exciting company to own. If the other stuff happens, then this will become sort of super exciting. But again, just to kind of keep in mind what our kind of core philosophy is here and why this is an interesting business particularly at the terms and valuation under which we acquired it.

I see the analogy. We are familiar with the product. On the offer liquidity side, is there a point in the evolution of the Company where we will see an incremental increase in real leverage or is this more of a use debt, buy a company, integrate the company, pay down debt either through cash flow or equity issuance? How does your thought process there evolve as the capital markets kind of soften up?

Yes, the business should be longer-term more levered than it is now. That is clear. Right? The business is underlevered now. It's been underlevered for the last couple of years sort of -- not sort of -- really on purpose, by design. It has served us well in the downturn and right now, it's left without sort of being defensive about the downturn than sort of being coiled to strike.

So my view is that over the next kind of year, year and half, you want to see leverage increase in the business with additional acquisitions of businesses if we are able to consummate them. So that's kind of the view. (multiple speakers)

Acquisitions without a follow-on equity offering to delver or --? What's the thought process?

It depends on how many acquisitions and the size. I'm not going to say we are never going to do -- or we're not going to do another follow-on equity offering. Our current plan is to consummate acquisitions out of our debt facility, but it really depends on what we see. But that would be the concept as to how we would relever the business.

Well, congratulations on a great quarter and getting through this business cycle in pretty good shape.

Larry Solow, CJS Securities.

Good morning. Joe, I know you don't like to give concrete guidance, but just based on Q1'a cash available for distribution and realizing it is some seasonality in it, how do you look at it versus your full-year distribution? And do you think that these numbers could kind of be in pretty close to [in-line] with one another?

We feel pretty good we are going to -- even with the dilution of -- even with the dilution associated with the offering that we are going to be in good shape.

Right, because realizing the dilution from the offer will (multiple speakers)

Even with that, we think we are going to be in pretty decent shape to be covering or very near covering our distribution and with any sort of upside in any of our companies or maybe another acquisition, we would be well beyond that.

But we feel pretty good about that. And if we fall a little short, which I'm not expecting right now, it doesn't really put the distribution at risk, so --

Got it, got it. Just a couple of thoughts. Did you give the availability -- I know you said $70 million on the revolver, the $340 million.

On a pro forma basis, Larry, it would be $200 million, pro forma being reflecting the $70 million of revolving debt that was repaid in April.

Got it. So $200 million total and you have $70 million outstanding on that, you're saying?

No, after that we only had about $0.5 million outstanding (inaudible).

Got you, got you, and is it fair to say (multiple speakers)

With the $70 million of term debt, that's not what you are referring to, or is it? The term debt doesn't affect the (multiple speakers) There's almost no debt on the revolver.

There's $75 million of term debt outstanding.

Got it, right, because the revolver has basically been paid off from the offering.

That's right.

I know, Joe, on the last call you had sort of looked out, looking out over the year, you thought your two best areas of upside or two of them at least were Fox and Staffmark. It sound like those two shined in this quarter along with ACI. Is that a fair statement?

I think what happened was -- yes, that's a fair statement, but I think there is sort of added cyclical impact. Anodyne performed really well last year, right? So -- and I don't want to say it was unaffected. It was clearly affected by the downturn, but kind of powered through it, so you are growing off of a different -- you're growing off a different base. I could make almost the same comment on American Furniture, which performed pretty well. And we feel pretty good about Halo too.

So I don't want to say they are all whatever. From a cash flow -- if you did the EBITDA analysis, the three year-over-year EBITDA increases would clearly have been driven by those three companies that you mentioned.

Got it, and then the $8 million you expect in maintenance capital for the year, how much of that is going to be for this ERP? Do you have an approximate number for that?

Somewhere in the vicinity of between $2 million to $3 million.

Okay, so essentially we're running a little bit over $1 million a quarter ex the ERP expense?

Yes, we're going to be about $5 million for the year, $5 or $6 million for the year (multiple speakers).

Is that ERP going to take -- is it going to be a multiyear investment or is there going to be completed?

It's going to cross over next year, be finished next year.

Okay, and then the $4 million in non-controlling stockholder notes and other -- I guess -- I imagine most of that came from this stock comp for ACI, the $3.8 million?

That is all entirely ACI.

And was that -- I know that's much higher than usual. Is that -- what was the --?

There was a granting of new options. There was a termination of a loan program where we loan the money when we originally acquired the business to buy stock. They partially met the terms of the loan forgiveness. We kind of resolved that issue with them and in return granted options based on current value of the business to kind of give them a lot of -- or some equity upside going forward. Does that give you enough information?

That number -- it's basically -- mostly one time. It's not --?

That's not a recurring number.

No, that's just the one time. All the options vested, so we had to expense it immediately, Larry.

Got it, got it. And then just for clarity, the acquisition, the successful acquisition expense, obviously you guys are constantly looking at acquisitions. If something was not successful, would you not be able to take a credit for it or how does that work?

That's basically the accounting change with 142(R), where basically those acquisition costs in the past would have been capitalized as part of the purchase price for successful acquisitions, but basically to keep it on a similar type basis. Those costs were largely -- it was about $1.5 million for Liberty and about $300,000 for Advanced Circuits, the Circuit Express acquisition.

Those are just the costs that would normally have been capitalized as part of the acquisition cost. That ramps -- (multiple speakers) they just get expensed. As historically they have been done that way.

Got it, okay. Great. Thanks a lot.

Greg Mason, Stifel Nicolaus.

Thanks, this is Troy. Jim, can you repeat real quickly the cash flow, the operating cash flow numbers for Staffmark? And then, Joe, could you kind of give us an update on where you think that can go this year considering the strength you saw in Q1?

So Staffmark for the three months had a loss of $0.8 million of operating income and last year that was $58.5 million but that $58.5 million included a $50 million impairment charge -- non-impairment charge, that was $8.5 million. It was $0.8 million negative compared to negative $8.5 million.

I'm going to ask my partner, Elias Sabo, to comment on kind of -- I'm not sure we can tell you where we think it will go for the year, but just kind of how we're feeling about Staffmark for the rest of the year.

Thanks, Joe. I think we feel pretty good right now based on the trends we have seen in Q1 and early so far in April from a revenue standpoint. As Jim had identified, we get some seasonal -- seasonally higher expenses in Q1 for our state unemployment costs. Those unemployment costs did rise year-over-year and I think that was just broadly a lot of the unemployment funds are getting depleted. So we feel very good right now about the trends in the business.

We think there's a lot of operating leverage based on the amount of capacity that remained in this business throughout 2009. As we told you last year, we did carve back a lot on our expenses and we rationalized a lot of our footprint. That being said, we kept most of it in place at least regionally where we operate. We did have a lot of management capacity within the field, and so we expect to see a lot of increasing leverage here as the year goes on.

One of the things that we are very encouraged by is the revenues between Q4 and Q1, which historically would dip greater than 10%. This year it was flat and so we think that bodes well for future revenue growth. Now all of this is conditioned on the economy continuing to stay strong and continuing to grow and not go back into a second recession. But from where we stand today I would say we think that revenue growth should continue to accelerate from what we saw in Q1 and we would expect some pretty considerable operating leverage to fall to the bottom line, especially seasonally as some of those state unemployment costs start to come down and we see our gross margin start to tick up as a result of some of that unemployment cost rolling off.

And I think, Troy, just to add to that -- Elias can give a little more specificity since I just asked you not be specific -- I think we would be disappointed if we doubled last year's EBITDA and a tripling wouldn't be out of question. It's going to be a material increase.

Wow, great, and then, Joe, can you talk a little bit about the current environment? Obviously you were very patient in adding your next acquisition which would end up being Liberty. Can you tell us what if anything has changed to finally get you over that finish line between sellers and buyers?

We found a company at the valuation that we liked that actually held up to diligence. I mean, we are working a couple things that are interesting now. Every transaction has its own nature. I very specifically talked about sort of Liberty. We may pay a little more than we paid for Liberty for a company that we feel very confident about its growth prospects going forward or feel like they are more dynamic. So every business has its kind of own dynamic. I think that seller expectations have settled. The bid/ask gap is coming together.

And then one of the things that we repeated was a lot over last year was we are not going to buy a company that's kind of a falling knife because as it's very hard for us to know where the bottom is and we are okay paying X multiple times the bottom if we know it's the bottom.

And I think the visibility you are finally seeing year-over-year numbers that are flat to up and you are getting some better sense of kind of where it's going. So I think it's kind of two things. I think seller expectations have come in a little bit as time has gone on, but not a whole lot. That's an element.

And then I would say that the visibility and confidence, and then I think there's sometimes the situations you just keep grinding and grinding and grinding at the same situation for a long period of time and it finally works for you. So there's no magic to it.

I will tell you when we did our follow-on last year, we thought we were much closer on a couple things. We wouldn't have done the follow-on if we didn't think that. So sometimes diligence doesn't work out as you'd like, quite frequently diligence doesn't work out as you'd like.

So there's nothing -- but in terms of the macro, I think it is a slightly better environment and I think as Alan was saying, probably too quietly for you to hear, there's more visibility.

Thanks, guys.

Jack Feiler, Palisade Capital.

It's actually Bernie Picchi asking the question and Jack is here in the office. A question for you regarding first of all the adjustments. Just on the Staffmark, you took this I guess an $8 million charge and I just wonder what that was related to? And then also, a big swing from last year on the supplemental put expense. If you could explain those two things. Then I have one other question for you.

Let me take the supplemental put expense and then I'm going to let -- take the harder question, the $8 million charge, because I'm not sure what that was. Maybe we just miscommunicated it.

The supplemental put expenses are really a determination by us and third parties as to what happens if the businesses were to be liquidated for fair value at any moment and our contract with the company was terminated, and we basically earned into our incentive allocation.

To represent what we try to do is give our shareholders, give our owners, a sense at any moment in time they need to know kind of what the business is worth to them. So they need to know kind of what would be owed to the manager if the whole thing were to -- if the board were for some reason to terminate us or something. So that's what that represents.

More specifically, the supplemental put expense, it's kind of a -- it's a little bit of -- it's backwards, right, in terms of thinking about the earnings of the Company. Because as a supplement put expense gets booked, it's because there's a belief that the companies that we own are worth more.

So in this particular (technical difficulty), the number was $14 million. It means that the powers that be, whoever those third parties are in cooperation with our financial staff, basically estimated that over the quarter the businesses are worth -- help me do my math -- but $72 million, I think; more than they were worth at December.

It's really -- it's an attempt to kind of take a swag. Last year we took money out of our supplemental put expense, basically kind of reduced the expense, but really what it meant was the estimate that over the course of the downturn last year, the businesses could be sold for less than today.

So what that is is a quarterly booking into a liability of what our estimate is for what the share of the business would be owed to the management team if the businesses were sold. So that's a good -- I guess it's a good thing because it means that the businesses are growing in value.

We try to sort of value them as conservatively as we can and have a history. I think in each of the three businesses that we have sold our total supplemental put expense if you added them up is probably a good $40 million or $50 million less than what the businesses were sold for ultimately the gain. Is that fair, Jim?

That's correct.

No, I get it, so the more successful you are to the bigger the charge? I get it.

Your question about the $8 billion. Were you referring to the last year's reversal?

Well, actually just looking actually just at the source of uses of fund statement, the cash flow statement. You have an impairment expense of $8.4 million. I thought that all came from Staffmark, but I may be mistaken about that so -- I'm sorry, that's depreciation at $8.4 million. Sorry about that. Ignore that question.

One final question is you guys are getting bigger now. You've got $500 million in market cap value. I'm sure that the ideal would be for you to tap the high-yield market and I wonder at what point you think you can tap the high-yield market rather than relying on bank line of credit?

Well, I guess I will answer that but then if you don't mind I will address the premise as well because it's something we talk about a lot. I think we can tap it now. I think our EBITDA level is sufficiently high that we can tap it now.

I think the high-yield market would say to us, well, you are underlevered. What are you using the proceeds for? Because I think there's a sort of notion that there's a minimum high-yield offering of a couple hundred million dollars to make it like sort of a good, liquid offering. So for the time being, we have extra cash which we can sit on I suppose. But I think we could tap it now. We've been rated since the -- our IPO. We have bankers coming and talking to us reasonably consistently about how we should be issuing high-yield bonds. So I think we should do it.

The premise is an interesting one because the primary advantage I suppose -- or there are a couple, but one is that we would extend the maturity, which is a very good advantage, although we don't really have any maturities now until the end of 2012, 2013. So I am not saying that that is the end of the world far away. Obviously time flies, but it's nothing imminent. And then there's kind of a covenant advantage. But we really haven't had covenant problems.

It would probably be more expensive than our current debt. We are not sure that we could have the same sort of revolver flexibility in association with the high yield that we have with our current term debt, which is to say kind of a pretty big revolver that allows us to draw and repay as we make acquisitions.

We would have to restructure that at the same time as we did the high-yield facility and so that I'm not sure the current market would actually give us the same revolver that we got in a couple years ago. Markets come and go in terms of expansion.

So it's interesting, I would say we could tap it now. It's definitely on the radar as a financing alternative and strategy. It's not as clear to us that it is the no-brainer answer as it first appears for a variety of reasons.

What about converts? Do you view that as a possibility?

We have looked at that as well. It's not really an interesting possibility at this point to us because we are under levered. We would just raise the debt if we could. I'm not sure we'd want to create that dilution for our shareholders. We also don't think -- we think the Company is worth a little more than it's trading at. That's our opinion, obviously.

So is that a forward looking statement, Mike, or whatever? But no, that's on the [board] too but how big a convert offering and would it actually be tradable? But all these things are very interesting and we would be happy to -- if you want to send us some information that you've got on that and you want to talk to us about it or to have our banker talk to us, but believe me, we have plenty of ideas flying at us and we think we are capably analyzing the financing alternatives.

Okay, thanks very much.

Jason Arnold, RBC Capital.

Good morning, guys. One question on the icing on the cake comment you had made earlier in looking at Liberty. Do you guys see opportunities to utilize distribution channels from one portfolio company for another? I am kind of thinking specifically along the lines of utilizing your relationship with Costco and distributing American Furniture products to add another channel for a brand like Liberty?

Okay, so that's a really interesting one. You sort of hit a very good example. So we are selling into them from American Furniture. I can tell you that it's a very different buyer universe and it wouldn't be fair to say that one made the introduction to the other.

What I can tell you is we try to learn -- we have one of our Board members at American Furniture is a guy who was in our portfolio who spent a lot of time working with Costco in the past and we are learning a lot from that. So we try to cross fertilize as much as possible. Because of the way these companies frequently work, particularly the buyers, you've got this kind of -- or the big boxes -- you've got this kind of buyer mentality where each buyer has their own kind of fee (inaudible) and it becomes a little hard sometimes to do as much cross-fertilization as you'd like.

I would like to think that we do a good job of learning though and using relationships and network. Henry had mentioned earlier Crosman. Well, as you can imagine, Crosman and Liberty sell into many of the same kind of outlets, so we feel like we've got some kind of historic relationships that at least allow us to do some good diligence in acquiring the business. It's something we are constantly thinking about.

It doesn't occur -- because of our current set of businesses, it doesn't occur very frequently but what we are trying to do is use our learning. So whether it's kind of how do you satisfy a Walmart as a vendor/manager and can we bring one CEO into another environment to kind of go through lessons learned in the last five years when we did a good job and we screwed up and got chastised by Walmart? And what have we learned of those things?

So it's more information sharing than it necessarily is kind of using strength and channel to push it in.

Okay, great. Thank you for the color.

Vernon Plack, BB&T Capital Markets.

Jim, just had a quick question about the impact on operating income from the costs associated with the Circuit Express acquisition. What was that number?

It was $280,000 acquisition cost.

Okay, great. Thanks very much.

(Operator Instructions) Robert Dodd, Morgan Keegan.

Just a couple of follow-ups. How much -- when we start looking at Anodyne, maybe Halo and definitely Fox, how much of the revenue growth in Q1 do you think was simply a function of pent-up demand from last year? Obviously I'm not thinking Fox is going to be up 60 (multiple speakers)

Let me just look at the numbers here so I can -- Elias, open your line to jump in, you and Pat, if there's something I am saying wrong. I will take a shot at this. Clearly -- and I don't know if it was inventory filling, there's a lot of theories. Fox is up quarter-over-quarter far more than you should expect for the rest of the year. We expect growth over the rest of the year, but 60% is not going to happen. It's not a sustainable, realistic amount.

Do we even ever take a flag, Elias and Pat, as to what component of that was --? We think double-digit revenue growth is fair an achievable. Is that --?

We don't really take a swag, Joe, but what I would say is to consider that last Q1 was an inventory depletion period. So I think when you look at Q1 especially for Fox because of the amount of inventory reduction that was happening, it's going to be exaggerated off of a lower base. We should have had more sales last year and demand was much stronger than what OE demand was given that inventory depletion.

What that number was I think it's a little bit hard to categorize and I would also say Q1 probably has a little bit of inventory rebuild and maybe some pent-up demand in it, although it's probably not as much of a contributing factor to the extraordinary growth as the inventory depletion that really shrank the denominator from last year.

So I think you can't expect, as you said, to see 60% growth and that Q1 is probably a little bit stronger than what we would expect from a seasonal standpoint. But all that being said, we see Q2 starting off reasonably strong right now in terms of what our bookings and what our sales are and where our backlog is. So we feel pretty good that Q1 isn't so extraordinarily high that it's distorting kind of the seasonal picture for the remainder of the year.

And kind of the same question for Anodyne, was this -- you know, you said healthcare CapEx was improving. Was that people sitting on their hands waiting on healthcare reform and now they are spending or --?

Well, I think little bit different. We had a relatively good year in 2009. Revenues were roughly flat with 2008 and I think in most businesses that would have been considered pretty strong, although as we had been saying, this sector of the healthcare space should be growing as a result of some Medicare changes that were incurred in October of '08 as well as just the general demographic changes.

So clearly in '09, there was some reduced spend from what was normal. We think that had as much to do with the lack of capital available rather than maybe some of the economics or even the legislative overhang that you are referring to within healthcare. I think that these institutions do need to spend to upgrade their facilities for the patient needs and on capital and clearly in this case that means more therapeutic support systems and more advanced systems that Tridien is a leader in developing.

I think what we saw over the course of 2009 was generally healthcare institutions starting to spend a little bit. And Q1 was relatively weak from what we would have anticipated, but it really started to strengthen as the year went on.

I would mention also that we believe we've taken some market share in Tridien and one of the reasons for that is one of our large customers ended up partnering with another large distributor and they gained access to that salesforce and we are seeing that customer. I'm trying to not give specifics on it, but we are seeing that customer grow pretty materially.

I think we had about some pretty significant revenue growth both in Q4 and in Q1 as a result of this new partnership. That has really been pretty strong for us and I think part of our story is market share gains at Tridien.

And then, Robert, for Halo, I think Halo is more of an annualizable notion.

Okay, got it. Thank you. One last one, if I can. Kind of on this cross-selling, cross-marketing theme, your military exposure seems to be stepping up, maybe advanced obviously with Circuit Express you got a bit of exposure directly or indirectly. Fox, you said you've signed a deal. On Liberty, you even mentioned it. Has there been any thought to bringing in quote unquote a specialist like an ex-General (multiple speakers) or something (multiple speakers)?

Its company by company and again the military buying channels are broad and somewhat unrelated. So let me start by saying Liberty, there is no current sales, no placement. It's a concept. It's a theory. We've had some preliminary discussions, nothing for a while there. So we put that sort of on the -- that's not even like icing. That's sort of like the top of the candle. So let's put that on the side for Liberty.

On Fox, we absolutely have brought in professionals who are familiar with that channel and it's sort of a couple different things. It's working with them on design. There is actual selling the product and contract bidding, so that's an area that we have strengthened and are looking to continue strengthening and think it's a potentially interesting area for us.

What was the third? Where else do we do military? You know, it's an interesting thing. It's very different buying channels from the people who are doing sort of the high-technology side of the business. This is our perception currently. Now, we've only owned Circuit Express for a month or a month and a half, could tell you that we've learned, that there is some sort of crossover. But our current perception is that the contractors who are procuring prototypes, circuit boards from Advanced Circuits now are different than kind of first-line defense contract bidders that we are working with the [play] suspension products, but entirely possible that the capacity -- Pat, do you want to add anything to that?

Well, no, just keep in mind that at ACI a lot of the purchases are done by the actual engineers rather than the purchasing department that's broader and that would kind of be more broad across the Company. But actually the R&D engineers who are designing the next-generation electronics.

So not much there yet. Hopefully we will learn something and it will be again knowledge sharing, but there's a big push at Fox in the last year and a half. I would say we've infinitely increased our knowledge of how to work with the military and we hope to sort of -- I don't know if you can continue an infinite slope. I guess it's a straight line of events, as I recall. But we hope to continue a sharp learning curve there.

Okay, got it. Thanks, guys.

John Rogers, Janney Montgomery Scott.

Good morning. Just had a question on profitability at Staffmark. Can you break out sort of what the gross margin decline was there and then maybe how much of that is general sort of competitive pressure versus increases in state unemployment taxes?

Yes. Do you want to just give them the specific numbers question whatever we are disclosing? Yes, I will make it, John, and then, Elias, feel free to jump in. But I would say that most of the margin decline, the vast majority of the margin decline has been in response to competitive pressures. The industry has come under deep margin pressure because people are fighting to keep their customers and we did the same. And by and large it's one of the things that has kind of contributed to the market share gains at the large players, of which we are one. We are the ninth largest I think right now in the country or something around that.

And we believe we gain market share particularly from small players and people who left our -- or even large players left our market. We definitely -- we attempted not to sort of price at the bottom. I know that we are not a bottom fisher at all, but I would say we didn't lose important large customers over small price changes. The industry has come under pressure and there won't be really be relief in that pressure until employment levels strengthen, because it's supply/demand.

We do think that there will be some strengthening in the margin as the economy recovers, but it's entirely possible that we won't return to 6% to 7% unemployment for a long, long, long, long time. And therefore, we may not return to the absolute margin levels.

So it may end up as you are modeling at somewhere between here and there. And where I don't think anyone totally knows. Do you want to talk about the specific amounts?

Yes, one other thing. In first quarter, the unemployment tax rates really went up and we packed a lot of that on to our eventual customers.

About 80%, we think.

About 86%, but a lot of that did not happen until the end of the quarter, so at the beginning of the quarter, it was impacted and the second quarter shouldn't be as impacted by these unemployment taxes. But to give you the specific numbers, we did 13.3% gross profit in 2010 and 15% in 2009 in the first quarter.

So you are saying of that 2%, a significant component of that was --?

To failure to pass it on timely.

I didn't realize it was 200 basis points for one time period. Yes so, JC, I would say that that 200 basis points is a good, healthy bit of that unemployment tax, that you should see (multiple speakers) for the second quarter. Agree with that, Elias?

Yes, and I think, JT, specifically because you asked about margin pressures and where the competitive dynamics are, we saw through and obviously the acceleration of temporary staffings decline, really kicked in in Q4 of '08 and then accelerated in Q1 and kind of bottomed in April/May of last year. As a result of that, margins generally trend kind of three to six months later as customers are coming back and working through to ask for reductions in their markups. And generally the commercial staffing sector works on a mark up to what the pay rates are.

We saw in Q4, our markups from Q4 to Q1 stabilize and that had been after a pretty consistent trending down from call it the end of 2008 through the third quarter of 2009, steadily they had been ticking down. And so I guess if there's any optimism to take from this is that we have seen stabilization of markups, which I think means that the industry is starting to absorb some of its capacity. And there's less pressure on margins generally.

As Jim said, we didn't recover all of our state unemployment tax increases, so that disproportionately affected our Q1 results. That being said, understand that what we were able to pass through, 86%, isn't going to recover 100% of it, but even if it did, your gross margin would decline somewhat because you have $1 of cost and $1 of revenue so mathematically your gross profit dollar even if you passed 100% on would stay the same, but your margins would come down because you didn't attach your markup to it.

So I think that what you will see from here on out again barring another economic kind of turn down is gross margin stabilization. We will see seasonally margins improve and so I think from a year-over-year standpoint, we should see the delta start to really shrink because to Jim's point, we aren't going to see the SUI costs not absorbed or not passed on as quickly as it was.

As far as the outlook, as Joe said, we think we are probably still too early in the cycle to expect margins to start to expand, but some of the higher-margin work like direct hire and permanent placement should start to come back. That's generally a laggard and that can start to push margins up a little bit until we see our temporary spreads start to improve a little bit, which is a little longer term.

Okay, great. I think -- Robert Half, I guess they work in a little bit slightly different market than you do, but they are talking about permanent placement actually improving. Are you seeing that yet or is that still a ways off?

We've seen it a little and we expect that to occur again. That's their business, right? So it's a much smaller piece of our business. That reflects itself for us in time to temp to perm, so yes, we see that improving as well. I think that sort of improves behind the temporary staffing market. But that's a pretty different business. And for them it's also very industry-specific or it's very function specific. They do a lot of finance professionals, so it's not necessarily always totally correlated with ours. But yes, we are seeing improvement.

Okay, great. And I guess a last question on Fox. How big is that military contract and how big do you think it could be?

Yes, we are not disclosing a whole lot on that, but it could be $3 million, $4 million kind of number.

Okay, thanks a lot.

At this time we have no further questions. I will turn things back over to the Company for closing remarks.

Again, everyone, thank you for your time. We feel very good about the first quarter and we feel very good about the Company's prospects. We appreciate your paying attention and communicating your questions with us. Let us know if there's any way we can increase or improve our communication with you. Or otherwise we will talk to you next quarter. Thanks.

Once again, ladies and gentlemen, that concludes our conference today. Thank you all for your participation.