Compass Diversified Holdings (CODI) 2010 Q3 法說會逐字稿

Good morning, and welcome to the Compass Diversified Holdings 2010 third-quarter earnings conference call. I will note that 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 David Burke of IGB Group for introductions and the reading of the Safe Harbor statement.

Thank you and welcome to Compass Diversified Holdings third-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 Q3 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 allow me to read the following Safe Harbor statement. During this conference call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI. Words such as believes, expects, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions.

Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated into risk factor discussion on Form 10-K, as filed with the Securities and Exchange Commission for the year ended December 31, 2009, as well as in 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.

Good morning. Thank you all for your time and welcome to our third quarter 2010 earnings conference call. We are very pleased by our strong operating performance for the third quarter, which exceeded our expectations.

CODI generated cash flow of $23.8 million for the three months ended September 30, 2010, which is more than double the prior-year period amount. We were able to achieve these results based on strengthening revenue trends and greater operating leverage across our family of businesses.

As we've noted before, we believe our subsidiaries are reaping the benefits of their leadership positions within their respective market niches, as well as our financial strength, having in many cases significantly increased market share relative to the competition during the economic downturn, or grown through expansion into adjacent markets.

Our Q3 results were also positively impacted by our 2010 acquisitions, including the add-on of Circuit Express into Advanced Circuits, as well as our two new platform businesses, Liberty Safe and ERGObaby. We are pleased with the early performance of each of these businesses.

Before I turn the call over to Jim to give some specifics on the financials, let me now make some general comments on each of our companies.

Advanced Circuits exceeded our expectations in the third quarter as demand for our core quick-turn and prototype production services continues to be strong. Highlighting our performance, revenue increased 74% in Q3 compared to the same period last year. Following the strategic add-on acquisition of Circuit Express in March, we further expanded our customer base and utilized our operating capacity more effectively. We believe our number one market position in the quick-turn manufacturing niche bodes well for ATI's future prospects and booking levels in this business remain considerably higher as compared to a year ago.

Next, American Furniture. This Company performed below our expectations during the third quarter. Despite our success in expanding penetration levels among certain large existing customers and adding a number of new customer accounts over the past year, our business continued to be negatively affected by the soft furniture retail environment. Accordingly, and due to the fact that we cannot clearly foresee a change in the furniture retail outlook, we recorded an impairment charge in Q3 related to our ownership of this business. Importantly, this is a non-cash charge and does have no impact on our Company's cash flow or in the way we operate the business.

With our backing, AFM continues to be among the most financially healthy furniture manufacturers in the country. It continues to serve its customers in the exact same way it always has, and in fact, has grown its market share with a number of its large customers and is ready to continue to grow through both customer and product line expansion.

AFM provides customers with high-quality and high-value products and expects to benefit over the long term from the expected continued consolidation in this industry. We remain focused on leveraging AFM's leading role in the promotional furniture niche and profitably increasing market share among both new and existing accounts, as we have in the past.

At Fox Racing Shox, we posted our fourth consecutive quarter of double-digit revenue growth. We continue to benefit from our strong market share in our core premium mountain bike business, as well as from increased penetration in new verticals, including power sports, off-road and military. Fox's leading reputation for high-performance suspension products positions the Company well for the future, as demand among market enthusiasts remains strong.

At HALO, the Company met our expectations in Q3 by reporting strong top-line growth for the third consecutive quarter, as overall spending on marketing-related products improved. With revenues strengthening, we've also gained operating leverage. Going forward, we remained focused on continuing to consolidate the industry through adding new reps and additional accretive add-on acquisitions.

At Liberty Safe, this business performed in line with our expectations for the third quarter. Revenue improved on a sequential basis as we continue to restock inventory as planned for a major customer and will complete this process by the end of 2010. We remain very excited by Liberty's strong growth potential as we seek to capitalize on the demand among enthusiasts, as well as the increasing awareness of the need for this product.

Moving to Staffmark, this business exceeded our expectations, as Q3 revenue increased 40% compared to last year. We continue to take advantage of a strong recovery in the temporary employee market and increased market share. In addition, Staffmark's significant operating leverage is directly attributable to our aggressive cost controls implemented throughout 2009.

Going forward, we expect Staffmark and the staffing industry as a whole to continue to benefit from the overall trend of employers using the recent economic downturn to restructure their labor force, with a greater focus on contract labor in order to maximize operating flexibility.

At Tridien Medical, formerly Anodyne, we reported Q3 results consistent with our expectations. Tridien's performance for the quarter reflects increasing demand for the Company's products. We continue to invest in new product development to further our position as the number one provider of medical support services.

Finally, we also realized notable contributions in the quarter from our newest platform company. On September 16, we acquired ERGObaby, a premier designer, marketer and distributor of baby-wearing products and accessories. This platform acquisition, our second to date in 2010, along with Liberty Safe, increases our current subsidiaries to eight.

Based in Hawaii, ERGObaby offers a wide range of wearable baby carriers and related products that are sold through more than 800 retailers and web shops in the US and internationally in approximately 20 countries. ERGObaby is a very strong addition to our family of niche-leading businesses due to its attractive industry positioning, passionate and loyal customer base and stability of core product demand with a potential for future growth.

The company's leading reputation for product innovation and superior quality have led to numerous awards from popular trade publications, including Parenting Magazine, Pregnancy Magazine and others. In addition, we believe favorable market trends, such as the increasing number of births worldwide and the rising popularity of child mobility and transport products, will continue to drive demand over the long term.

We plan to increase availability of the product to potential customers, both in the US and abroad, and to expand the Company's product offerings by leveraging ERGObaby's strong brand recognition.

As we seek to build upon the Company's historical growth, we recently appointed Tim Bruer as the new CEO. Tim is a seasoned executive with approximately 20 years' experience in consumer goods. He succeeds Karin Frost, the founder of ERGObaby, and an industry pioneer, who will remain with the company as Chief Design Officer, as planned, so that she can focus more on her passion for new product design and development. In terms of valuation, we paid approximately 7 times EBITDA for this acquisition, which was immediately accretive to CAD.

Going forward, with substantial liquidity, we remain well positioned to grow, both through organic measures at our existing subsidiaries and through additional acquisitions on behalf of our shareholders.

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

Thank you, Joe. Today, I will discuss our financial results for the quarter and nine months ended September 30, 2010, including a review of the operating results of each of our eight subsidiaries.

On a consolidated basis, revenue for the quarter ended September 30, 2010 increased more than 42% to approximately $461 million from approximately $324 million for the prior-year period. The net loss for the quarter ended September 30, 2010 was $29.4 million as compared to net income of $2.8 million for the quarter ended September 30, 2009. As Joe mentioned, during the third quarter of 2010, CODI recorded a $42.4 million non-cash impairment charge for the Company's American Furniture Manufacturing subsidiary.

As previously announced, we also paid a cash distribution of $0.34 per share for the third quarter and earned a coverage ratio of cash flow to distributions paid of more than 1.67 for the quarter. This distribution increases the cumulative distributions paid to shareholders to more than $5.65 per share since our IPO back in May of 2006.

Now, turning to our subsidiary results, beginning with Advanced Circuits. For the quarter ended September 30, 2010, Advanced Circuits' revenue increased approximately 74% to $20.2 million compared to $11.6 million in the prior-year period. This increase is attributable to the strong global demand for our quick-turn and prototype products and from approximately $5.2 million in net sales from our March 2000 (sic -- see press release) acquisition of Circuit Express.

Income from operations for the quarter climbed approximately 82% to $6.5 million compared to $3.6 million for the same period in 2009. This increase is primarily due to the operating profit generated from the increased sales volumes.

For the nine-month period ended September 30, 2010, Advanced Circuits' revenue increased approximately 57% to $54 million compared to approximately $34 million for the prior-year period of 2009, of which $11.4 million of the increase was due to sales from the acquisition of Circuit Express.

Income from operations was $13.7 million compared to $11.6 million for the prior-year period in 2009 due to higher sales, which were partially offset by costs associated with operating Circuit Express and for the recording of a $3.8 million non-cash stock compensation expense in 2010.

Now I would like to turn to American Furniture Manufacturing, or AFM. For the quarter ended September 30, 2010, AFM's revenue of $32.1 million was a slight decline compared to the $33 million of revenue in the prior-year quarter. The loss from operations was $42.7 million compared to operating income of $1.2 million in the third quarter of 2009.

As mentioned earlier, the loss from operations is largely attributable to the non-cash impairment charge of $42.4 million, reflecting a decline in our estimate of the current fair value of this business. This decline is primarily due to a soft retail environment in the overall furniture industry, which has negatively impacted AFM.

For the nine months ended September 30, 2010, revenue increased slightly to $109.4 million compared to $108.6 million in the year-earlier period. The loss from operations was $38.8 million versus operating income of $5.4 million for the prior nine-month period ended September 30, 2009, which included $1.5 million of business interruption insurance in 2009.

Turning now to our newest company, ERGObaby, which we acquired on September 16, 2010. For the nine-month period ended September 30, 2010, revenue was $23.7 million compared to $16.3 million in the prior-year period, which were both prepared on a pro forma basis as if we had acquired ERGObaby on January 1, 2009. This increase is attributable to higher sales in both the US and abroad.

The Company had pro forma income from operations of $6.5 million for the nine months ended September 30, 2010 as compared to operating income of $5 million in the same period last year, primarily due to the significant increase in net sales.

Turning to Fox Racing Shox, revenue rose approximately 66% to $61.4 million for the quarter ended September 30, 2010 compared to $36.9 million in the prior-year period. This increase was largely attributable to higher sales in our mountain bike and power vehicles sector, which includes our partnership with Polaris and Ford.

Income from operations more than doubled to $10.4 million during the third quarter compared to income of $4.7 million for the quarter ended September 30, 2009, largely due to the operating profit generated from the increased sales.

For the nine months ended September 30, 2010, revenue climbed approximately 48% to $128.7 million compared to $86.9 million in the prior-year period, due to strong performance across both our mountain biking sector as well as in the power vehicle sector. Income from operations increased to $16.3 million compared to $5.9 million for the prior-year period.

Moving onto Halo Branded Solutions, for the quarter ended September 30, 2010, the Company's revenue rose approximately 16% to $41.1 million compared to $35.5 million for the same period last year, due to higher sales from existing customers and from $1.8 million in sales attributable to acquisitions made since September 30, 2009. Income from operations for the three-month period ended September 30, 2010 increased by approximately 85% to $1.3 million compared to $0.7 million in the third quarter of 2009.

For the nine months ended September 30, 2010, Halo's revenues increased to approximately $106 million from approximately $92 million in the same period last year, mainly due to increased promotional spending in 2010 compared to 2009. Income from operations was $0.8 million versus a loss of $1.4 million for the prior-year period.

Liberty Safe, which was acquired on March 31, 2010. For the quarter ended September 30, 2010, revenue was $18.5 million compared to $21 million for the prior-year period, which was prepared on a pro forma basis as if we had acquired Liberty Safe on January 1, 2009. This decrease reflects more normalized dealer sales following an unusually strong 2009 third quarter in anticipation of stricter gun laws by the new federal administration.

The Company reported operating income of $0.4 million for the third quarter of 2010 as compared to pro forma operating income of $2.1 million for the same period last year as a result of the lower sales.

For the nine months ended September 30, 2010, Liberty reported revenue of $48 million on a pro forma basis compared to $56.6 million in the prior-year period. Pro forma income from operations for the nine months was $1.9 million compared to $4.9 million for the prior-year period.

Moving on to Staffmark, for the quarter ended September 30, 2010, revenue increased approximately 40% to $271.3 million compared to $193.3 million for the same period last year, due to strengthening demand for temporary staffing services. The Company's income from operations was $10.6 million for the third quarter of 2010 as compared to $1 million for the previous-year period.

For the nine months ended September 30, 2010, revenue was approximately $740 million compared to approximately $526 million, an increase of approximately 41%. Income from operations was $16 million as compared to a loss from operations of $58.9 million in the year-earlier period, which also included a non-cash impairment expense of $50 million, as well as $2.8 million for integration expenses related to our 2000 (sic -- see press release) acquisition of Staffmark by CBS Personnel.

Now on to Tridien Medical, formerly known as Anodyne Medical Device. For the quarter ended September 30, 2010, revenue increased approximately 6% to approximately $15 million compared to approximately $14 million for the same period last year as a result of increased demand for powered and positioning products.

Income from operations for the third quarter remained relatively flat at $2.2 million compared to the same period in 2009, as we continued to invest in increased spending in new product development.

For the nine months ended September 30, 2010, revenue increased approximately 19% to $46.8 million compared to $39.5 million for the same period last year. Income from operations increased to $7.8 million compared to $5 million for the same period in 2009.

Turning now to the balance sheet, we have $24.5 million in cash and cash equivalents and had net working capital of approximately $184 million as of September 30, 2010. We also had $74.5 million outstanding on our term debt facility and $101.3 million outstanding under our $340 million revolving credit facility as of September 30, 2010, with no significant maturities until 2012. We had availability of approximately $173 million under our revolving credit facility at September 30, 2010.

During the quarter, we incurred approximately $2.5 million of maintenance capital expenditures and remain on track to incur maintenance capital expenditures of approximately $8 million for the year.

I will now turn the call back over to Joe.

Thank you, Jim. To wrap up and move on to questions, let me repeat that we are very pleased by the strong performance of our family of businesses in the third quarter. We think that this performance is evidence of the strength of our business model generally, as well as the respective competitive market positioning of each of our companies specifically.

I would like to thank everyone again for their time and for joining us on today's call, and we will be happy to take any questions you might have. Operator, please open the phone lines.

Thank you, Mr. Massoud. (Operator Instructions) CJS Securities, Larry Solow.

Joe, I would love to hear you just expand a little bit on just the recent acquisition of ERGObaby and where you see the -- obviously, the business has grown a lot as a small entrepreneurial business. Do you see more upside as you expand distribution, or is it more in manufacturing efficiencies? Where do you see that and do you think this business will continue to grow? It looks like there is a lot of potential growth out there.

My answer to your question is yes on all those fronts. But I think it is -- Karin Frost, first of all, is an incredibly intelligent, sophisticated businesswoman who created a dynamic product and grew it to an incredible level, really with sort of a limited management team around her. And so for us, this is an ideal situation, taking a company from kind of a spectacular entrepreneurial business to, hopefully, a spectacular professionally-managed business.

We think -- in the short term, let me just note -- because I know you're looking at the growth year-over-year. It is not possible -- it's like a law of large numbers thing -- that the company can continue to grow at the same rate that it has grown out in the past year.

And from a cash flow point of view, we've been cautioning people to assume that we are going to reinvest most of the cash flow resulting from growth in the immediate term in the next year, maybe year and a half, into growing the business again. You should expect that there will be revenue growth, but you should expect that the cash flow growth driven by that will be reinvested back in the business through infrastructure growth.

So let me just start with that overview, because I want to make sure people don't extrapolate out and say, this is how cash flow will grow. Because I don't think that is how you build companies for the long term.

For us, this is a business -- in the words of Warren Buffett, don't own a business for 15 minutes if you're not willing to own it for 15 years. And this is a company that we should own for a long time and work with the management team to grow.

So in answer specifically to where we see growth, the company gets great reviews from people who access it -- or the brand and the product from people who have it. Interestingly, one of the first goals we have is to make sure it is available to more customers. So that is a distribution mission. That is true in the US. It is certainly true abroad, in some very logical markets in Europe, where we are maybe underpenetrated, but as well as Asia, Middle East, all sorts of things.

So I think our first mission in the kind of first year is to build out the management team. We are very excited about having added a very strong CEO as the beginning of that, and we are recruiting for other positions.

Second mission is to increase distribution across the product. Third mission is to understand exactly how our customers think about our product, because the driver of the adjacent products, which I think is where you were going when you said additional products, is to understand from a database point of view exactly how your customers think about your current products and what things they'd like to see from you. So over the next couple years, I think it is expansion, distribution and additional products.

The second half of your question, operational efficiency, is clearly -- it is clearly also an issue that we hope to address in the very near term. Again, a lot of credit goes to Karin and her management team to be able to distribute this product in 20 countries with such a young business. But that clearly involves logistical complications and production methods and sourcing issues that we have to think through with her.

So I think it is a both manufacturing efficiency and increased revenue growth. But I would say that of the two -- there's never thing such as low-hanging fruit, I think. Of the two, we clearly think that making the product available to more of the right types of customers should be a more direct impact kind of activity over the next 12 to 18 months.

So I think the company has got a lot of growth on it. I think over the next five to seven years, knock on wood, our owners will be very happy to have owned this business. I would caution that we expect to reinvest the majority of increased cash flow into the growth of the business, and that is kind of how these companies grow from a cash flow point of view. It is a step function. They have dramatic growth, and then they kind of flatten out as you reinvest, reinvest, reinvest. And then hopefully, if you do a good job, that pays off and you kind of get another dramatic growth in cash flow. Sorry for the long answer, Larry.

That's (multiple speakers). I appreciate the color. It's great.

And then on Fox, obviously a phenomenal quarter. Is there anything unusually in there that might have -- I mean, $60 million in sales is almost double sequentially. Anything --?

I wouldn't say there is anything unusual, except to say that is not a pattern that can continue either. The business can be kind of lumpy, where you can have one quarter that reflects more sales than a quarter before or a quarter after. I think we had a very good year in terms of specced out product with our customers. I think we've had some good non-bike exposure.

I don't think there is anything I would highlight as being particularly unusual in the quarter, except to say, though, that is not what next quarter is going to look like and the quarter after that. But it is part of a very good year compared to last year.

Got you. Looking at just on the furniture at AFM, obviously, it is more of a macro thing than probably anything else. But anywhere to look at what the competitors are doing? Do you think you guys are still outperforming in this environment or sort of performing in line?

The best way to look at it is to pull together a subsection of furniture comps and see how the revenues look. We are up year-to-date like $1 million on $180 million, so call it flat. The revenue comps are down 6% to 8% year-over-year, but the more interesting thing was what happened last year, where the revenue comps were down 40%, and we were actually up a little bit.

So I think it has outperformed -- you have to divide the industry. I think the promotional section is still outperforming the industry as a whole. And then within the promotional, we feel pretty confident because we serve the largest promotional suppliers and we know we are growing SKU space. We feel pretty confident we are doing well within that.

Having said that, it is a very tough environment, and some of the drop-down effect that occurred, one of the things that we are seeing is that last year there was kind of -- people were able to -- retailers were able to sell product by promoting, and so there were substantial promotions that kind of buoyed the promotional space.

This year, the feedback we are getting is despite the promotions that the retailers are doing, the people who wanted to buy furniture, by and large, bought it and it is just a soft environment. But all we can do is continue to try to take market share and position ourselves. And I think the Company -- the management team down there has done a spectacular job of positioning itself for the industry rebound.

And just a quick follow-up. Would the write-down of the asset, would that impact the tax shield at all going forward, or would have nothing to do with it?

No, there is no step-up.

No, there's no impact --

There was no -- this Company was not done with a 338(h)(10) step-up, so you don't sort of have that same issue. And even then, there wouldn't have been a cash issue. There would have been a deferred tax issue in that case. But in this case, that is not applicable.

Got it. Okay, great. Thanks, guys.

Vernon Plack, BB&T Capital Markets.

Jim, I just wanted you to clarify your comments on CapEx. I think the number was $2.5 million in the third quarter. And is that (multiple speakers)--?

That is correct, $2.5 million. I'm expecting somewhere around $8 million for the year.

Okay. And I think it was $1.2 million in Q2 and $1 million in Q1 (multiple speakers). Is there just some seasonality there in terms of that number?

Well, we are implementing -- the biggest items, we are implementing [People's] Software at our Staffmark subsidiary. A lot of that expenditures are going to hit in the fourth quarter.

Okay. And Joe, as far as the dividend policy goes, I know that you declare a dividend on a quarterly basis, but in terms of reviewing where that is set, what can we expect in terms of -- that this is something you look at on a quarterly basis to adjust (multiple speakers)?

Yes. No, we look at it and talk about our distributions on a quarterly basis. I think we were pretty clear last quarter that people shouldn't be expecting an increase kind of any time in the immediate term.

We feel like we've done a great job of creating substantially excess cash flow since we've been public over our distribution. We think there is a lot of interesting opportunities out there right now. We plan on reinvesting in our Company, reinvesting in businesses.

Having said all of that, the way the Company is performing, and if it continues to perform like that next year, I think it is reasonable for investors to see that we would continue to think about that quarter to quarter and maybe at some point next year, think about bumping that.

But for now, we really feel like it is a good, healthy dividend we pay to our shareholders. When we talk to our shareholders, they say we are excited about Liberty, we are excited about Circuit Express, we are excited about ERGObaby. You're a creating a lot of excess cash flow. Go out and continue to build the Company.

So that is how we are thinking about a distribution policy. But it is a conversation -- certainly every quarter, the Board looks at it. We understand that's an important part of overall shareholder return, and we will continue to revisit that every quarter.

Okay, great. And just a question on Liberty. I know that in terms of the growth opportunities, there has been some thought that perhaps you could expand with some lower price points, some new products. Could you give us a little more color there in terms of what is going on with Liberty?

Yes, I mean, at Liberty, we continue to work with our primary big-box customers to think about how to expand the home safe market and also how to expand sort of the lower-end gun safe market. We have a good foreign supplier, but we also manufacture in the US, and we're trying to figure out how to optimize exactly that kind of mix of product.

We think this is a good growth area over the next 12 months. And I'll just tell you, we are having very active conversations with each of our big-base customers to think about how to get this product out there more effectively.

Okay.

I think the other thing I would note is -- and I think this goes both to our high-end and lower-end products -- the Company has been more proactive in its advertising, both of its brand and of the category in general. And that is something we are going to continue to focus on with the Company, which we hope will drive kind of the lower end of our market a little bit more.

Okay, that's great. Thanks very much.

Stifel Nicolaus, Troy Ward.

To start off, one of the things that I think would be very helpful is if we had this information on the portfolio level before the market opened, or at least before this call so we could ask a little bit more in-depth questions.

Turning to Staffmark, can you talk about -- first of all, can you give us those numbers again, top line and operating income? And then talk about how much operating leverage you feel like you have going forward, and if these gains can continue in a quarter-over-quarter basis.

I don't think these full-year gains can continue on a quarter-over-quarter basis, because it has been pretty spectacular and the comparisons get more difficult. Having said that, the gains continue to be well into the double digits, and we think -- go ahead, Jim.

Let me give him the numbers. For the quarter, revenue rose 40% to $271 million as compared to $193 million. The income from operations was $10.6 million versus $1 million in the comparable quarter.

So if you look at the fourth quarter, it is going to be a very healthy growth, but it's not going to be 40%. The fourth-quarter comp gets more difficult, because last year it started firming a little bit. But there continues to be sequential growth and we're excited about it.

In terms of operating leverage, I think this past quarter we saw as good cash flow margins as we can remember seeing. And some of it is part of the cost-cutting. You think about how to make your business more efficient, there are certain elements of the cost cuts that we made that are going to be permanent.

And the other thing I would remind you is shortly -- one of the reasons we did the Staffmark merger was that we felt like there was a lot of cost overlap. We never really had a healthy environment to show how efficient the business could run post that overlap to kind of immediately after that, we hit a downturn in the market.

So I think it -- we hope that our margin or our cash flow producing ability, as the environment stays healthy or gets healthier, will even exceed our expectations. We really have never gotten a chance to show what a good machine this Company can be post that Staffmark merger in a good environment.

So yes, I think there is going to continue to be operating leverage, but I would caution you that the comps quarter-over-quarter are not going to look as good, because you are coming against a stronger comp set.

Great. And then over to Fox, can you give us just a little more color? I heard the previous caller's questions. But revenue up that sharply, are you building inventory with maybe some of your power sports with Polaris or Ford? Is there anything to account for that revenue number?

I'm going to say we don't think there is anything specific. It's impossible to know what exactly our customers are doing. But I'm going to ask Elias and see if he has additional commentary as to why this quarter in particular was so strong.

Troy, the third quarter historically has been our strongest quarter in the mountain biking segment. And as you guys know, that still represents a majority of our revenue. So from a seasonality standpoint, we would have expected this quarter to be strong.

I think there was probably more strength than what we anticipated. As Joe had mentioned, part of that is the result of some improving spec. I also think relative to 2009 and when we look at the kind of big growth rate that we experienced in 2009 there was still an inventory depletion that was going on throughout the channel. Now whether 2010 had some restocking in it, I think that is potentially a question as we go into 2011. But clearly, the comps are being favored by the depletion that was going on in 2009, and Q3, in particular, the seasonality.

Beyond that, we are experiencing growth in power sports and in off-road and military, just as we get on a lot of new platforms across all of those categories. And in specific, our project with Ford continues to go exceedingly well from a revenue standpoint.

And so I think across all of those fronts, we are really seeing growth on all cylinders. But nothing that I would say would be an unusually large build in inventory, at least that has been brought to our attention by our customers at this point.

Okay, Troy?

Yes, great. That's all. Thank you.

Robert Dodd, Morgan Keegan.

Obviously, a very good quarter on the margin side, as well as the top line. As you've mentioned on the call, and it's has been a theme this year, you've really leaned out these businesses in terms of taking out cost.

When we look forward to next year, can you give us some more color? You've mentioned reinvesting, but can you give us a bit more color of how much investment for growth at CODI is going to come from organically expanding your businesses in terms of investing OpEx versus platform acquisitions? What are your thoughts on that for the next 18 to (multiple speakers)?

Company by company, I think Advanced Circuits continues to take market share, and that business is a largely variable-cost business that has maintained its margins very well. And we think that business is going to continue to grow.

I think AFM, the margins are probably going to be flat year-over-year. And I think there is a lot of built-in operating efficiency there if we could get some revenue growth, but we are not -- honestly, we are not really projecting that right now, and that is dependent on the macro environment. So we think that business is kind of going to keep trying to grow market share of its customers and pause itself and prepare itself for a better day.

I think ERGObaby, you will probably see overall margins from a EBITDA point of view decline because of the investment that we are going to make on the SG&A side. I think there is a lot of revenue growth, but I think in the short term, we are going to make some investments in SG&A.

Fox, I think -- you know, we continue to invest -- spend in R&D, but I think the business is operating at a good operating leverage point, and could even -- if we had a little more growth could probably drive its margins some more. But again, we're not expecting -- we're expecting growth, but not kind of spectacular growth, because we want to see exactly how this inventory story plays out.

HALO, I think, has got a lot of operating leverage, and I think we expect next year the revenues will be stronger, as companies feel better about spending money. And 2010 looks better than 2009 and they build their promotional budget. And that is a company that has got a lot of fixed costs, actually, so I think that business is coiled to perform better.

Liberty Safe, I think there is some operating leverage there, but I would expect margins to be what they are. Staffmark, I think we are operating at a very high level of efficiency now. I would expect that to continue, and if we had revenue growth, might even improve a little bit.

And then Tridien's interesting. I think Tridien, we are going to go back and reinvest some money in R&D again. And we have some interesting opportunities with a couple customers that might cause us to kind of retrench and spend some money out front. So Tridien, you could see some small EBITDA margin decline, depending on kind of how that business evolved next year, with some revenue growth.

A little bit like ERGObaby, but obviously not the same step function, but where we take revenues and reinvest it in the future growth of the business. So that might be a business where you take a step back in margin before you take a step forward.

So is that helpful? Because it is obviously varies --

Incredibly helpful, yes. Thanks, Jim.

J.T. Rogers, Janney Montgomery Scott.

I had a question on the Liberty Safe business. It looks that has improved on a sequential basis. How is the private label issue going with the large customer?

J.T., we -- after a series of opportunities to work with that customer, we think that issue is resolved. We think that sales with that customer will return to a normalized level in the next three to four months, early next year.

But we certainly have figured out strategically how we want to -- how that customer wants to approach the market, which is in a -- I think that they -- I think there is a renewed agreement between us and our customer that the Liberty brand name is an important driver of business. And we are excited and we continue to be their supplier, both in the private label and on the branded side, and it is a great customer for us. And so we think that the issue is again, knock on wood, resolved.

Great. On Staffmark, that business is performing very well. I think you all touched on this before. But do you have a sense at what point or what needs to happen to get to the 4.5%, 5% EBITDA margins for full year in that business?

Elias, do you want to comment on that?

Yes, sure. I think to get back to that kind of margin -- I mean, we've really pared as many costs out as we can. As you know, J.T., there is some seasonality in terms of our margin, largely due to payroll taxes that start to fall off as we meet our state unemployment cap later in the year. And so I think it is a correct observation to see that our margin in Q3 and as we proceed through the year is higher than what it would be on an annualized basis.

Really, the way back that we see is kind of a mix. Part will be due to more perm placement and direct hire. That component of the business has really fallen off dramatically, and is just now starting to come back and contribute. And the second part will be the margins in the temporary business and the markups that we are able to charge broadly in the marketplace starting to pick back up.

In 2009, given the massive reduction in demand that took place and really the quickness with which it happened, especially in late 2008 and Q4 of 2008, that demand reduction really drove margins to, I think, unsustainably low levels. And we are seeing the beginning signs of an environment that may be more stable now. And I think over time, the way to get back to kind of that 4.5% EBITDA margin will be to have some type of price lift throughout the marketplace.

But I think given what we've done in terms of leaning out the organization, it is unlikely that is going to come anymore from expense cutting. And in fact, probably where we are today, given leverage on our operating expenses, is probably about as good as we could get. Maybe we'll get a little bit better, but I would caution you not to think there is kind of unlimited operating leverage to go to bring us back to those levels.

Do you have a sense or is there any talk in the market about raising the prices on that temp staffing? Temp staffing has grown, I think, 11 of the last 12 months.

Yes, I think there is a -- a couple things have happened. We have had some competitors who I think were price hawks, suffered some financial instability, which we consider to an unexpected and positive outcome. We -- so I think that's going to be helpful to margins.

And I think, yes, the industry -- I don't know what the industry does, but from what we see, people are starting to think about it. But at the end of the day, look, unemployment is what it is, and it is a supply/demand equation and there is still plenty of labor out there, so I think a substantial price --.

I would say that we are doing a better job of selling our value in an effort to maintain our margins than what we did a year ago, but I think we are still a couple quarters and an improving employment outlook away from really getting material price increases. And from our point of view, we don't see that. We are not assuming that improved employment outlook is going to happen anytime soon, so we don't think about the business as being one where we are going to get substantial price increases. I mean, on a selective basis, we are trying to sell service that increases our margin, but by and large, that is not how we are thinking about the next few quarters.

Okay, great. And then just one last question. On ACI, it looks like margins might have dropped on a sequential basis. Just wondering what do you see the contributors to that being.

We have a growing assembly business that is a lower margin business, and so it is a mix issue. It is really as simple as that. On each of the separate lines of business, the margins remained strong, as they have been historically. But the assembly outgrowth outpaced the production.

Okay. Thanks a lot.

Jim Stone, PSK Advisors.

Nice quarter. Could you give us a feeling on that write-down on American Furniture, how that relates to the total assets of the Company? I'm trying to get a better understanding of what actually prompted the size of the cutdown.

Yes. You know what? Jim, while you look at the specific, I think maybe we will talk about the whole goodwill of the entire business or something and what this number reflected. Do you have that in front of you, Jim, for the whole business?

Do you want to look at that while I give an answer of what -- what prompted the size of the write-down was that we were holding on our books at a valuation that was higher and driven by cash flow that the Company earned before two events. One is we had a fire that basically burned down the business in February 2008.

And then in addition, we have the sort of retail softness in the furniture industry as a whole, and housing starts, and you know the whole story. And the business had been held at a higher value, based on higher cash flow. We've now operated at roughly this cash flow level for the last two or three years, and we felt like for our shareholders A, it is required by GAAP, but even for us, we usually review it at the end of the year.

We felt like as soon as we could, we should give our shareholders a sense that given this cash flow level that the Company is producing, that the value that we were holding the business at was unrealistic. If the business was sold today, it would not realize the value that we were holding the Company at. So that is what drove the $45 million impairment -- or $42 million impairment.

I have to tell you, it actually has no impact on the Company at all from an operating point of view. It doesn't change their availability, their access to capital, the way they pursue customers, the way they price things. It doesn't change the cash flow of the business, because this was an intangible asset that we had on our books. Still important to do, but it really -- this was really a parent-level decision, and the guys and gals at American Furniture, I think, are basically 100% unimpacted by this decision for the most part.

But Jim, do you want to answer maybe the more specifics on that?

Well, the total assets of the business was about $85 million.

That's AFM, but I think he is thinking of CODI as a whole.

Oh, the whole CODI?

Yes. Is that right, sir? Were you asking about what that was relative -- that was a 50% write-down effectively, relative to American Furniture. But relative to the whole business --

No, I was talking relative to American Furniture.

It was a 50% write-down in value, which is approximately how much less cash flow the business earns today than it did several years ago, before the fire and the downturn.

Essentially then, you are using a multiple times current cash flow?

In my mind, that's what I'm doing. I think if I asked Jim and Ryan and Ken and the team here, the GAAP process involves a triangulation of valuation processes, including a comparison to publicly-traded multiples, a discounted cash flow analysis. I think there is a number of ways that GAAP goes about it.

In my mind, the way I triangulated this, it seems like a reasonable and correct outcome is based on what you just said.

The number is -- I gave you the number after the write-down. The numbers pre-write-down was about $125 million.

Okay, and then --

So it's a 5% write-down in value, sorry.

I assume that over time, you're expecting a considerable increase in cash flow out of the Company.

Yes, that's the hope. But honestly, given the retail environment, we couldn't see that was going to happen in the next -- quarter two, three or four. We won't write the value back up; per GAAP convention, once you write it down, you kind of hold it there. But if we didn't expect that, we would be thinking about other alternatives.

But we definitely expect that. And again, our best operating metric that gives us some confidence here is market share at our biggest retailers, and those retailers who are dominant in our space in the industry. So that is why we are hopeful.

Okay. And what I am also trying to understand then is the Company seemed to have been doing reasonably well despite the recession. What do you think was the issue that caused the reduction?

It is still doing just as well. To put that in context, before the fire and then the huge downturn, the business had -- I don't know -- $17 million in cash flow or something like that -- some number -- $16 million, $17 million of cash flow. And then the fire happened and the downturn happened and it dropped down into the $8 million or $9 million level. And then it defied the rest of the industry last year and actually grew. And then this year, it is kind of flat to down a little.

So I think compared to the industry, we continue to think it is doing reasonably well. It is just that in revisiting the valuation that has been held steady really for several years now, we kept -- we had believed that the return in cash flow would be sooner than it occurred, and so as we thought about projection, it hadn't triggered this decision to take this impairment.

But now, it just seems like you are waiting and you are waiting and you are waiting, and who knows what the retail environment is going to look like. So to be clear, as we think about the business, we think it is performing pretty well. And the most important thing, which we talked about with Staffmark last year ad nauseam, as you probably remember, was market share, market share, market share.

Right? You can't control the macro. What you can control is your own Company's competitive positioning relative to the other businesses, and so we feel okay about that.

I understand. I am just trying to understand what caused the write-down and why such a large write-down. And you've answered (multiple speakers).

Two answers. It was a decision that the return wasn't coming anytime soon, and so we should just look ourselves in the mirror and say, the retail environment could be soft for another year, two, three, who knows.

And then the second thing was, why so large. Honestly, we didn't want to cut our shareholders or cut the environment with 1000 nicks. And we thought about that. It was a smaller impairment and then --.

And so from our point of view, once you've decided that the business is worth less, take the whole -- bite the (multiple speakers).

I understand and I agree with you on that. That's not the issue. I just didn't know what was behind it, and that is what I was probing for.

The other thing, which we've chatted about before, is the net asset value per share, which, at least in my first reading of the announcement, I didn't see it listed there. But it definitely was (technical difficulty) share increase seems to be in a downtrend.

We don't really report net asset value per share. We don't do NAV per share, nor have we ever done that. We can solve -- that is usually equity-basis accounting type companies, like REITs or business development companies.

We report consolidated financials and allow our shareholders to kind of make an estimate of what they think the businesses are worth. And a number of our analysts do that as well.

But so, no, I am not exactly sure I know what you are referring to, because we don't really report an NAV per share.

Okay. Thank you very much. Keep up the good work.

(Operator Instructions) Harvest Capital, [Don Destino].

Most of my questions have been answered. Just for the housekeeping. How did the ERGObaby acquisition affect working capital in the quarter? Did you pick up working capital or what was the effect on the balance sheet?

We acquired working capital as part of the acquisition, although I'm not sure -- do you guys have -- off the top of your head, are you familiar enough with that number that you can say how much we acquired at close there?

Yes, so I mean, there was (multiple speakers) I do. It was roughly sort of -- let's see -- roughly sort of $7 million.

$7 million of net working capital?

Yes.

Yes, about $7 million.

While I have you here, did you buy that in some kind of a process or was that through a proprietary channel?

No, it was a process. The company was marketed by a middle-market investment banker. We believe that the things that made us successful were, number one, I think we had a robust value because we believed in the growth of the business. Number two, I believe that Karin wanted to consummate a transaction by the end of the year, and I think the financing certainty was important to her.

Number three, I think she shared a commonality of vision -- and big kudos go to some guys that we don't mention much, but Elias and Pat and Zach on this -- because I think they really worked well with Karin, and created a good relationship with her.

As with any entrepreneurial company, valuation is -- it is always 1A, but sometimes number one is belief that you will work with them to grow the business and share a commonality of vision. Effectively, you've got a parent that is agreeing to coparent their child. And so who those coparents are is pretty important. So I think it was a combination of those three factors.

Great. Thanks a lot.

(Operator Instructions) Larry Solow.

Just a quickie. Obviously, seasonality comes into play, and usually Q4 across some of your holdings is pretty strong, particularly HALO and Staffmark. How is October looking? Anything different from the Q3 trends that you care to comment?

No, are you asking what our seasonality is sort of (multiple speakers) continue to be seasonal?

I know you get some seasonality, so some of your businesses do pick up, but (multiple speakers).

(Multiple speakers) we will obviously do a very strong fourth quarter. But as we mentioned, Fox had a very strong third quarter, so we can't replicate that.

And then Staffmark is going to do a strong fourth quarter because it's what it does, but I will caution you in terms of comps and how you think about the business. From a year-over-year point of view, that fourth quarter last year was the one where we began to see the light.

Right. And then just in terms of Staffmark, obviously, you are not going to grow 30%, 40% forever. But do you think you can still -- where we stand today, do you think you could still get double-digit growth in 2011?

Yes. I mean, I don't know. '11 is a long way out at this point. I feel better about the fourth quarter than I do about next year. But in our minds, yes, we are hopeful for double-digit growth or at least strong single-digit growth. But it is --

Larry, you know, we don't --

I know you don't like to (multiple speakers).

We try to be reasonably -- I don't know if conservative is the right word -- but we try not to be too aggressive in the way we think about our businesses. We still want to be cautiously positioned. Who knows what the new year is going to bring in terms of the economy. So yes, I think that is a reasonable way for us to think about the business, but it is not in the bag.

And then a question I've always sort of asked, but now that you mentioned the magic word economy, just being that you guys are -- you have a bunch of companies yourselves and I know you talk to a lot of people. What are you seeing out there anecdotally in the economy that you care to share?

Well, so I think it is mixed. We clearly have some areas where on the lower end, certainly, the furniture, the retail teams, a little softer. We've seen some other retail softness in some of our other businesses as well.

Having said that, R&D spend seems to continue to be strong, at least that is what we see from Advanced Circuits. I think there is a little bit of frugality tiredness. And I think one of the things that happened to Fox is you have these enthusiasts who -- they wanted to buy a new bike or upgrade what they had, and at some point, you just go do it, because the enthusiast market is strong. Ergo continues to be strong because who skimps on $30 or $40 when they are first having a baby?

So I think it is mixed. I mean, the picture that we draw is we are defensive going into next year and cautious, because it feels like it could be -- it feels like it could be softening a little bit. I don't think we are in sort of double-dip mode. But I think we think about next year as being largely flat to this year, maybe growing a little bit.

But it really varies. These companies have such different things impacting them, and we really are -- I think we are very tactical. We are very focused on market share and how we become the best in each of these markets, and then whatever the economy does, it kind of does.

Right. Okay, and then just last question and I think -- no predictions on timeline, but in terms of acquisitions, obviously you did two fairly large-sized acquisitions this year. Any reason to think that you -- obviously you have goals internally, but (multiple speakers).

Not really. I mean, we try not to have goals internally because --

Right. I know you don't put a number of how many you want to acquire in any time period. But all things being equal --

I think next year is going to be a good buying environment for us. I think it is going to continues to be a -- right now it is I think a little soft, because there were people who wanted to sell for year-end, so maybe the quote, unquote, pipeline is down a little bit.

But we continue to hopefully be good acquirers next year. But there is -- and for auction processes, there is still some equity out there. There is a market overhang. Private equity firms continue to be able to justify prices that at times are well above the prices that we think are appropriate.

So I don't -- we would love to acquire a business or two next year and grow a little bit. And we think we should be capable of doing that, but there is nothing specific on the horizon right now that we know of.

Fair enough. Thanks a lot, guys.

And there are no further questions at this time. Mr. Massoud, I will turn the conference back over to you for any additional or closing comments.

Again, I just want to thank everyone for your time. I know it is a busy time in the markets, and so we appreciate the hour you've given us here. And we will keep working hard on your behalf. Thanks.

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