Compass Diversified Holdings (CODI) 2010 Q4 法說會逐字稿

Good morning and welcome to the Compass Diversified Holdings 2010 fourth quarter and year-end conference call. Today's call is being recorded. (Operator Instructions) At this time, I would like to turn the conference over to David Burke 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' fourth quarter 2010 conference call. Representing the Company today are Alan Offenberg, Interim CEO, and Jim Bottiglieri, CFO.

Before we begin, I would like to point out that the Q4 press release, including the financial tables, is available on the Company's website at www.compassdiversifiedholdings.com. The Company also expects to file its Form 10-K 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 future performance of CODI. Words such as believe, expect, project, and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factors discussion in the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31st, 2009, as well as in other SEC filings. In particular, 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 Alan Offenberg.

Good morning. Thank you all for your time, and welcome to our fourth quarter 2010 earnings conference call.

We are very pleased by our strong operating performance for the fourth quarter and full year of 2010. CODI generated cash flow of $21.4 million for the three months ended December 31st, 2010, an increase of approximately 19% from the year earlier period. For the year, cash flow increased approximately 93% to $71.3 million. Our results are attributable to a number of factors, including an improvement in the overall economic climate, efforts made by our subsidiaries during prior years to achieve relative market share growth, the ability of our subsidiary management teams to maintain an efficient cost structure during a period of strengthening revenue trends, and the accretive acquisition of two new platform businesses, as well as one significant add-on acquisition.

Before I turn the call over to Jim to give some specifics on the financials, I would like to make some general comments on recent events and on each of our subsidiaries. On February 17, we announced that Joe Massoud, who many of you know, requested and was granted by our Board a leave of absence to allow him to focus on an informal regulatory inquiry unrelated to the Company. While we do not expect or intend to comment further on this event, there are a couple things I want to emphasize. First, our Board has confirmed that this inquiry is personal in nature and unrelated to CODI, its operations, its subsidiaries, or its securities. Second, in our view, this leave of absence has no impact on the strategy or operations of CODI, our subsidiary Companies, or their prospects. Third, while the length of this leave is currently undetermined, Joe continues to be readily available to us and to our subsidiary management teams as needed and will continue to add value during his leave.

I have been appointed interim CEO in Joe's absence and am honored to be fulfilling this duty for our owners and other stakeholders. Along with Elias Sabo, Joe and I have been working together from the beginning, as we call it, since 1998. We have a team of 27 outstanding professionals at the management company who share common fundamental beliefs on the acquisition and management of businesses with a reason to exist, as well as on the stewardship of capital on behalf of our owners. You should not expect any changes in philosophy or strategy during Joe's leave of absence.

This morning, we announced an increase in our distribution from $0.34 per share per quarter to $0.36 per share per quarter, for an annual rate of $1.44. This is an increase of approximately 6%. In the recent past, we have discussed our confidence in our distributions, as well as the possibility of an increase at some point in the near future, and we are pleased to now be implementing this increase. As you all know, our Board sets our distributions on a quarterly basis and makes its decisions based on its view of the performance of our subsidiary over an extended period of time. As a result of this long-term view, as well as the substantial excess cash flow over distributions that we have earned over time, we never decreased our distribution during the 2008 and 2009 period, nor at any point during our existence, and have been able to provide stable distributions to ours shareholders. Since our May 2006 IPO, distributions to date, including this first quarter distribution, totals approximately $6.36 per share.

As we look back on 2010, we are extremely pleased with the performance of our Companies and attribute much of this success to the Company building that we undertook in the years prior, including during the severe economic downturn. For 2011, we are excited about our subsidiaries' prospects, not just with regard to current performance, but also with regard to our opportunity as the Company builds. We believe that managing middle-market, niche leading businesses is not about maximizing short-term cash flows but about maximizing long-term intrinsic value, and we are proud to have a successful track record in doing so. In 2011, at a number of our Companies, we expect to invest in management talent, operating capacity and capabilities, and brand building. We anticipate that the long-term payoffs from these investments will be significant, long-lasting, and profitable for our owners.

Now onto the Companies. Advanced Circuits exceeded our expectations in the fourth quarter, with booking and shipping levels that were considerably higher compared to the previous year, leading to a 68% increase in revenue. Our ability to gain market share through both organic marketing efforts, as well as the strategic add-on acquisition of Circuit Express in March 2010; which expanded our presence in the aerospace and defense market and strengthened our number one market position in the quick-turn manufacturing niche. Going forward, we will seek opportunities to further consolidate the industry. Based on bookings for the fourth quarter of 2010 and year-to-date, we expect Advanced Circuit to generate a modest sales increase in 2011 as we continue to maintain healthy margins in this business.

American Furniture performed below our expectations during the fourth quarter. This business continues to be adversely affected by the soft furniture retail environment, which deteriorated further in Q4. While we remain focused on expanding penetration levels among new and existing accounts by leveraging AFM's leadership role in the promotional furniture niche and its strong parent-level financing structure, we expect 2011 to continue to be impacted by the soft furniture retail environment.

ERGObaby, our newest platform Company, exceeded our financial expectations in the fourth quarter. More importantly, we have also made significant strides in building ERGObaby's infrastructure since acquiring this business in September 2010. Specifically, we recently appointed Tim Bruer as the new CEO and named Karin Frost, the founder of ERGObaby, as Chief Design Officer. We also expect to add a new Chief Financial Officer in the current quarter and a new Chief Marketing Officer in the near future. We are excited by ERGObaby's future prospects as we take advantage of the worldwide demand for child mobility and transport products.

At Fox Racing Shox, we posted our fifth consecutive quarter of double-digit revenue growth. We continue to maintain our market share and core mountain bike business and increase penetration levels in new vertical markets, including military, power sports, and off-road vehicles by leveraging Fox's strong brand recognition. As this business experienced robust growth during 2010, we would expect revenues to stabilize in 2011, with the Company focusing on the evaluation and optimization of our manufacturing capabilities and capacity, both domestically and abroad.

At HALO, the Company met our expectations in Q4 by reporting strong top-line growth for the fourth consecutive quarter. HALO's leadership position in the promotional products industry and extensive customer relationships has enabled the Company to deliver improved results for the quarter and full year. Going forward, we expect further improvement in this business, as companies continue to increase spending on marketing-related products. We will also pursue add-on acquisitions that will allow us to utilize our existing capacity more effectively.

At Liberty Safe, performance was in line with our expectations for the fourth quarter. Revenue was nearly flat in Q4, despite the reduction of inventory by a major customer, as we explained on previous earnings calls. We look forward to growth next year for this niche leader of premium home and gun safes, and bookings for 2011 are ahead of 2010 levels at this point. We will also seek to improve Liberty's profitability by taking active measures to improve our efficiency by investing in manufacturing technology.

Moving to Staffmark. This business exceeded our expectations. We continue to capitalize on the strong temporary employee market recovery and gain market share. In addition to Staffmark's strong top-line performance, our operating leverage and cost containment efforts in 2009 led to a dramatic increase in profitability during Q4 and full-year 2010. Demand for the Company's services remains strong, and we expect Staffmark to continue to benefit from the growing trend among employers to restructure their workforce following the recent economic downturn by increasing the share of contract labor, as a percentage of the total labor force.

We also recently announced the promotion of Lesa Francis to CEO. Lesa was promoted to President of the Company over a year ago, in anticipation of Fred Kohnke's retirement. We are thankful for Fred's decade of commitment and strong performance with Staffmark, and we look forward to working with Lesa going forward.

Finally, in Tridien Medical, we reported Q4 results below our expectations. While the demand for the Company's core products remains relatively stable, we intend to increase our investment in R&D during 2011 to further strengthen our diverse platform of leading medical support surfaces. Following the launch of a rebranding campaign last year to take full advantage of our operating synergies, we introduced a new management team during Q4 led by CEO Vince Constantino. Vince has significant executive experience, having previously served as Tridien's CFO, and we are pleased to promote him to his new leadership role with the Company. We have also hired a new CFO to replace Vince and are making other strategic additions to Tridien's senior management team.

Based on the strong results across our diverse family of businesses, we've paid a cash distribution of $0.34 per share for the fourth quarter, representing a coverage ratio of cash flow generated during the quarter to distributions paid of approximately 1.35 times. We remain committed to providing sizable cap distributions to our owners while also reinvesting in our current subsidiaries and seeking new platform business opportunities. The significant growth we experienced in 2010, both through organic measures and accretive acquisitions, underscores the need to further invest in R&D, strengthen our production capabilities, and increase our marketing efforts, as I just discussed, to ensure the long-term health of our businesses. With total available liquidity in excess of $250 million as of December 31st, 2010, we remain well-positioned to invest in high return for organic growth initiatives and pursue acquisitions of companies with a real reason to exist at favorable valuations and terms, as we have consistently done in the past.

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, Alan.

Today I will discuss our financial results for the three and 12 months ended December 31st, 2010, including a review of the operating results on each of our eight subsidiaries. On a consolidated basis, revenue for the quarter and year ended December 31st, 2010, was $438.9 million and approximately $1.66 billion, respectively. Net income for the quarter was $0.7 million, and we reported a net loss of $44.8 million for the year ended December 31st, 2010. Largely driven by two significant categories of non-cash charges, a $38.8 million for American Furniture Manufacturing subsidiary, and charges related to an increase in our supplemental Put holding $32.5 million in 2010.

Now turning to our subsidiary results, beginning with Advanced Circuits. For the quarter ended December 31st, 2010, Advanced Circuits' revenue increased approximately 68% to $20.4 million, compared to $12.2 million in the prior year period. This increase is largely from approximately $4.4 million in net sales from the March 2010 acquisition of Circuit Express, increased long-lead production, and from a significant increase in assembly sales of $1.2 million. Income from operations for the quarter rose approximately 42% to $6.7 million, compared to $4.7 million for the same period in 2009. This increase in operating profit is primarily due to the increased sales volume. For the year ended December 31st, 2010, Advanced Circuits' revenue increased approximately 60% to $74.5 million, compared to $46.5 million for the prior year period of 2009, of which $15.8 million was attributable to sales from Circuit Express. Income from operations was $20.4 million, compared to $16.3 million for the year earlier period in 2009, due to higher sales, partially offset by costs associated with operating Circuit Express, and from the recording of a $3.8 million non-cash stock compensation expense in 2010.

Now I'd like to turn to American Furniture Manufacturing, or AFM. For the quarter ended December 31st, 2010, AFM's revenues decreased approximately 18% to $27.5 million, as compared to $33.3 million of revenue in the prior year quarter. Income from operations was $1.7 million, as compared to operating income of $1.1 million in the fourth quarter 2009. This increase in operating income is due to a reversal of $3.6 million from the non-cash impairment expense originally recorded in the third quarter of 2010, offset by the impact of the lower revenues generated in the current quarter. For the year ended December 31st, 2010, revenue declined to $136.9 million, compared to $142 million in the year earlier period. Loss from operations was $37.1 million versus operating income of $6.5 million for the prior year ended December 31st, 2009, which also included $1.5 million of business interruption insurance, while the results for 2010 include the previously mentioned $38.8 million impairment charge. As mentioned earlier on the call, this business continues to be adversely affected by the soft retail environment and the overall furniture industry, which deteriorated further in the fourth quarter.

Turning now to ERGObaby, which we acquired on September 6th, 2010. For the quarter ended December 31st, 2010, revenue was $10.8 million, compared to $6.5 million in the prior year period, which was prepared on a pro forma basis as if we acquired ERGObaby on January 1st, 2009. This increase reflects strong product sales in the US and international market. The Company reported an operating loss of $0.4 million in the fourth quarter of 2010, as compared to pro forma operating income of $1.6 million in the same period last year, which is mainly due to $3.2 million of higher amortization expense. For the year ended December 31st, 2010, revenue was $34.5 million on a pro forma basis, compared to $22.8 million in the prior year, also prepared on a pro forma basis. This increase was attributable to higher sales in the both US and international markets. Pro forma income from operations for the 12 months ended December 31st, 2010, was $9.4 million, compared to $6.5 million in the year earlier period, primarily due to the significant increase in net sales.

Turning to Fox Racing Shox. Revenue rose approximately 22% to $42.2 million for the quarter ended December 31st, 2010, compared to $34.6 million in the prior year period. This increase was largely attributable to higher sales in powered vehicles, as well as greater sales in our core mountain bike sector. Income from operations was $3.3 million during the fourth quarter, compared to income of $4.8 million for the quarter ended December 31st, 2009, mainly due to higher SG&A expenses as a result of increased R&D spending, severances paid in the quarter, and for IT investments made. For the year ended December 31st, 2010, revenue climbed 41% to under $71 million, compared to under $21.5 million in the prior year period, again due to the strong performance in mountain biking and penetration of new verticals. Income from operations increased to $19.6 million, compared to $10.7 million from the prior year period, as a result of the strong increase in net sales.

Moving onto Halo Branded Solutions. For the quarter ended December 31st, 2010, the Company's revenue rose approximately 13% to $53.8 million, compared to $47.6 million for the same period last year. The increase was primarily due to $1.5 million in sales attributable to acquisitions made since 2009 and from increased promotional spending in 2010 compared to 2009. Income from operations for the three month period ended December 31st, 2010, remained essentially flat at $4.1 million, compared to $4.2 million for the fourth quarter of 2009. SG&A expenses increased, not only as a result of increased revenue, but from an approximate $0.6 million increase in the incentive bonus accrual. For the year ended December 31st, 2010, HALO's revenues increased approximately 15% to $159.9 million from $139.3 million, for the same period last year. Income from operations was $4.9 million versus income of $2.8 million for the prior year period. The increase in sales and resulting increase in income from operations was primarily due to increased promotional spending by our customers and from the recruitment of new account sales reps.

Turning to Liberty Safe, which we acquired on March 31st, 2010. For the quarter ended December 31st, 2010, revenue was $16.9 million, compared to $17.2 million in the prior year period, which was prepared on a pro forma basis as if we acquired Liberty Safe on January 1st, 2009. The Company reported operating income of $0.4 million for the fourth quarter of 2010, as compared to pro forma operating income of $1.4 million in the same period last year, largely as a result of higher amortization expense and increased advertising in 2010. For the year ended December 31st, 2010, Liberty reported revenues of $64.9 million on a pro forma basis, compared to $73.8 million in the prior year period. The decrease in net sales was the result of expected more normalized deal sales following an unusually strong 2009, driven by the anticipation of stricter gun laws by the new federal administration and the previously discussed reduction of held inventory by a major customer, which is essentially complete at this stage. Pro forma income from operations for the 12 months was $2.7 million, compared to $5.9 million for the prior year period. The decrease was larger due to the reduced sales.

Moving on to Staffmark. For the quarter ended December 31st, 2010, revenue increased approximately 19% to $262.4 million, compared to $217 -- excuse me, compared to $219.7 million for the same period last year, due to continued strong demand for temporary staffing services. The Company's income of operations was $9.2 million for the fourth quarter 2010, as compared to $3.3 million for the previous year period. The significant operating leverage achieved in the business during the fourth quarter was partially offset by a $2.1 million legal settlement reached by the Company in connection with a potential class-action lawsuit in California. For the year ended December 31st, 2010, revenue was approximately $1 billion, compared to $745.3 million, an increase of approximately 35%. Income from operations was $25.2 million, as compared to a loss from operations of $55.6 million in the year earlier period. The increase in operating income in 2010 was driven by the growth in sales, as well as due to the recording during 2009 of a $50 million non-cash impairment expense for the Company's Staffmark subsidiary.

Now on to Tridien Medical. For the quarter ended December 31st, 2010, revenue was essentially flat at $14.3 million, as compared to $14.6 million for the same period last year. Income from operations for the fourth quarter was $0.2 million, compared to $2.4 million in the same period of 2009, as we experienced pricing pressure from customers. We recorded a $0.6 million increase in the warranty accrual, that was largely for revenues recorded in previous quarters, as well as for higher SG&A expenses in connection with senior management changes and for increased R&D spending during the quarter. For the year ended December 31st, 2010, revenue increased approximately 13% to $61.1 million, compared to $54.1 million for the same period of last year. Income from operations increased to $8 million, compared to $7.4 million for the same period in 2009, due largely to the higher sales.

Turning now to the balance sheet. We have $13.5 million in cash and cash equivalents and have networking capital of $181.9 million as of December 31st, 2010. We also have $74 million outstanding under our term debt facility and $22 million outstanding under our $340 million revolving credit facility as of December 31st, 2010, with no material maturities until late 2012. We have availability of approximately $248 million under our involving credit facility as of December 31st, 2010. In December of 2010, we completed a public offering of 4.85 million trust shares, highlighting the ongoing support CODI has received from the capital markets. CODI raised approximately $78 million of net proceeds from this offering, of which $70 million was used to repay debt under our involving credit facility. We incurred approximately $2.4 million and $7.1 million of maintenance capital expenditures during the fourth quarter of 2010 and full-year 2010, respectively.

For 2011, we anticipate incurring maintenance capital expenditures in the $9 million to $10 million range, as we remain committed to investing in the future performance of our growing number of subsidiaries. These expenditures include the completion of the PeopleSoft solution at Staffmark. We also anticipate spending a similar amount for growth capital expenditures to increase manufacturing capabilities.

I will now turn the call back over to Alan.

Thanks, Jim.

Again, we are pleased by our operating performance for the fourth quarter and full-year 2010. Our results demonstrate the strength of CODI's business model, as well as the leadership position of our niche businesses. We will continue to leverage our strong balance sheet to take advantage of both organic and external growth opportunities, to create long-term value for our owners while providing attractive cash distributions. I'd like to thank everyone again for joining us on today's call. We will be happy to take any questions you may have.

Operator, please open the phone lines.

Thank you. (Operator Instructions) And we will take our first question from Larry Solow with CJS Securities.

Good morning, guys. Alan, maybe just one quickie on Joe. I know -- without getting into the specifics, because I know you can't do that. Hopefully -- I wish him the best, and hopefully his leave is temporary. But I think the one concern that I am hearing from some of the investors we talk to is not so much on the everyday operations but more just the impact on your acquisition abilities. I mean, I think I kind of know the answer to that, but maybe if you can just sort of review your standard process and how this could be impacted, you know, without Joe there on an everyday basis.

Sure, Larry. As I mentioned earlier, there will be no change to our strategy or our operation while Joe is on leave. We've got an extremely talented group of 27 people here working on this every day, as we have in the past. I think we've talked about before, you know, Joe's responsibilities did not really lie, at all, in the day-to-day generation of transaction opportunities or transaction evaluation. That really falls more so to me, Elias, and other partners here at the Compass Group, like Dave Swanson, and Pat Maciariello, and people that perhaps have not had as much -- a view in the public eye but who are here doing the work, day in and day out. Our view of flow is strong, as we speak, and there has really been no impact and we do not anticipate any impact in our ability to identify , underwrite, acquire, and manage subsidiaries, so we do not expect any change whatsoever. And again, that was not really a point of focus for Joe while he was here, so there should be no disruption to that going forward.

Okay. Great. And then, obviously, realizing you just raised some additional cash, fits your business model, out there looking for acquisitions. I'm not trying to corner you into a timeline, but is it reasonable to expect that we would see an acquisition in 2011, barring any -- obviously, you're very -- do a lot of due diligence, but do you expect to do something in 2011? Is that reasonable?

I think, as we've said in the past, it's always our hope to complete acquisitions of subsidiary companies that demonstrate the characteristics, which we've discussed on every call and in our opening remarks today. So it would certainly be our hope to do that in 2011, and we are working hard to make that happen.

Okay. And then just a couple questions on specifics. Obviously, Staffmark is now your biggest business. So, just looking at that one, obviously, you know you can't continue 30% red top-line growth, and I think everybody sort of expected a deceleration on a sequential basis, but the fact that sales actually came down sequentially -- usually Q4 is sort of, at least to my knowledge, kind of the strongest quarter of the year. Anything more to look beyond that? Do you expect at least some top-line growth as you look out into 2011?

You know, Larry, I am going to let my partner, Elias Sabo, who is on the call, answer that, as he works with Staffmark on a day-to-day basis.

Great.

Yes, Larry. I think -- if you look at Q4 sequentially from Q3, just a couple of things. There was less days for us to actually bill in Q4. As you know, there is more holidays that fall in Q4, and so that has some effect on the business. You know, in terms of kind of whether we see growth continuing in the business, there's nothing at this point. There's clearly, and I think this is well documented in the trends that BLS is showing, as well as with the other staffing companies are saying. There is clearly decelerating trends in terms of growth, as you mentioned. It's hard to maintain 30%-type growth kind of year-over-year, but there is nothing that leads us not to believe that this business is in a kind of reasonable growth mode at this point.

Obviously, you know, we are tied to the economy, but where we stand right now, you have seen a lot of the jobless data and other information that's coming out right now. You know, it bodes pretty well, at least kind of in the near term in what our early visibility is into 2011, for continued growth in the business, so I wouldn't read anything into the sequential fourth-quarter data. You know, it came in, in line with what our expectations, or a little bit better than our expectations. If there was any kind of small degradation quarter-to-quarter, it was really based on just less billing days, more so than anything else.

Got it. Great. That's very helpful. The $2.1 million or whatever was charged, is that, I guess, on an operating business -- if you don't pull it out, it would've been in the SG&A numbers?

That's right, Larry. And there was no tax -- cash tax benefit for that as well.

Got it. Because when I calculate my EBITDA, it's significantly lower, but obviously, it's probably --

2.1 is reducing it --

Exactly, exactly. I know you guys don't provide annual guidance, and I'm not asking for that, but any -- sometimes you guys give a little more color. Obviously, you have a decent amount of -- it sounds like some headwinds in terms of well, certainly, dilution in the shares, and looks like you're going to be spending some more money, at least on a cash flow basis. Offset by looks -- it's nice that you increase your dividend today. Is that just sort of indicative of -- long-term that the Company is very solid, or anything more you could add in terms of what you expect in 2011?

Yes. Larry, as you said, we don't give guidance, but as we sat on the call, obviously we are investing for the long-term. But we are -- we believe businesses are operating fundamentally strong. But we are putting some either increased R&D expenditures or maintenance capital expenditures that perhaps will impact results. But for the long-term benefit of the Company.

Got it. Last question. Impact of higher material costs. Obviously Staffmark not impacted, but I imagine most of your other business' are seeing some of that impact.

Yes, without a doubt. Each company is experiencing it at different degrees, and each company has different levels of success in passing along those increases to their customers, so it is -- certainly, they are all facing -- they are all trying to implement, whether it is price increases or raw material surcharges to the extent possible. On a company-by-company basis, I think there'll be varying degrees of success.

Okay. Great. Thanks a lot.

We will now take our next question from Greg Mason with Stifel Nicolaus.

Great. Thank you, guys. Can you talk a little bit about ERGObaby and really kind of the growth potential there you see in that business, as you continue to build up not only US sales but International sales? Can you give us kind of any kind of quantifications of what your expectations are for that business?

Well, quantification, I think, is difficult to provide for you. However, I will say ERGObaby has tremendous growth opportunities, both domestically and abroad. The company has been able to achieve a tremendous level of success, driven by the strength of a very strong entrepreneur founder, and as we now work with the company to build its management infrastructure, primary goal of that infrastructure is to develop further distribution channels. Again, both domestically and abroad.

We think that there is a -- driven by the demand for these products, driven by ERGO's incredible brand name within the industry, a passionate customer base, we think that there is real growth potential for this company going forward. It did require us to make the investments that we discussed on this call, but going forward, we certainly view it as a growth company, both domestically and abroad. But quantifying it is something that we really can't do.

And about Staffmark. The $2.1 million legal settlement in California, is there a potential that, that could occur in other states and that there could be more of these issues? Can you talk about what that issue was?

Yes. We don't expect it to bleed over into other states. We are not disclosing what the actual issue was, but the potential action that was brought against us is specific to California. It has to do with some laws that California has implemented that are outside and extremely more tight than what the Department of Labor broadly goes by. The other states all use the Department of Labor code. California has decided to deviate from that.

What I would also mention is that the other Staffing companies in the market have had similar types of cases brought against them. And by and large, most have been settled prior, so this isn't something specific to Staffmark or the way that we are operating currently in the marketplace. This is something, really, that is more a function of California and a pretty difficult set of rules that are much more onerous for employers than what the DLL has. So, we don't have a belief that this will in any way permeate into other states. You know, it's something that we decided to put behind us, but we think the liability definitely has been quarantined.

Okay, great. And on Liberty Safe, now that the inventory reduction from that large client is over, you said bookings are ahead of last year. Can you give us a sense of magnitude, maybe not a specific percentage, but kind of magnitude of where you think sales can go now that ,that inventory reduction is over?

Again, giving you -- quantifying that answer is not something that we can do for you. However, I am very comfortable in telling you that the issue with that customer has been resolved. As we said, the bookings are ahead so far first quarter year-over-year, and we are, you know, very pleased with the momentum that they have regained with that customer, as well as with demand for their products throughout both their dealer channel and non-dealer channel. So it's a good start, but quantifying it, again, is that something that we are prepared to do at this time.

Then one final question. Not only are you guys in the market for acquisitions, but over time, you look to dispose some of your assets. That typically is a combination of pricing in the market, as well as the life that you've -- how long you have owned these businesses and how much value you've added. As you look at your current portfolio, do you see opportunities for successful exits from your investments, and is it more of factor of growing the businesses further, or market environment?

I think it's really a combination of both. I mean, we always will consider opportunities to divest the subsidiary if appropriate, and that is a decision that we will make, you know, as we evaluate a business' prospects to see where we are at with respect to the goals we have set for that company, if we've achieved those goals and don't think there is more that we can do and perhaps another partner may be able to do something with those companies. That could be a good time. The market environment certainly has an impact on when we choose to make a decision to sell a sub.

However, it's really a combination of everything. And so it's not as though one sole factor will determine the appropriate time. I mean, the beauty of our structure and our business model is that we can own our subsidiaries for as long as it makes sense to own, and there's no pressure for us based on a market environment or a condition, you know, to make a decision that is suboptimal. So our challenge, as it has been from day one, is to try to optimize that decision-making process, taking all the factors you've described into consideration.

And you are hopeful of making an acquisition this year. Is there any likelihood of dispositions this year?

Again, it is similar to making an acquisition. It's not something that we can really predict or comment on. Again, as I said, it's something that we will evaluate over time, as we always have and consistent with our past practices.

Great. Thank you, guys.

(Operator Instructions) We will now hear from Vernon Plack with BB&T Capital Markets.

Thank you very much. Alan, I would like to hear some comments on pricing evaluation that you are seeing in the marketplace. I know that you are evaluating some opportunities right now. I'm just curious in terms of where pricing is on these deals versus, say, a year ago.

Yes. You know, I think that pricing has probably crept up a little bit. We have seen some lenders in the marketplace increasing their comfort with respect to higher leverage multiples which can, in fact, and typically does, in fact, drive up pricing on transactions. I wouldn't say we are back to the most robust years, you know, earlier in 2006, 2007. However, it has certainly ticked up, I would say, over the last year. I think that we are still comfortable in finding companies that meet our targeted criteria at prices that are consistent with our past practices, and so I think that while it is a little bit higher, it is still not an environment where we are concerned about our ability to find opportunities at good values.

And I think we've talked for at least -- the thought is, is that a good multiple for you is -- or an acceptable multiple, depending obviously on the company and growth prospects and a lot of things, is around six times cash flow.

I think that, that is certainly a multiple that we are very comfortable with. I would say, though, that as we have done in the past, six to seven times, maybe even a little bit higher, depending on the quality of the asset --

Vernon, we've also had some of the transactions restructured with that tax advantage of 338 that might make the multiple higher. But those tax advantages actually reduce the purchase price by almost a full multiple. I would say our sweet spot is somewhere between six to seven and a half times.

And Vernon, those opportunities exist in this market.

Sure, sure. And I'm curious. Is AFM experiencing the typical seasonality the first part of the year? Tax season is usually viewed as the strongest for AFM. Are they experiencing that again this year?

Unfortunately, the tax season is not as strong this year as it has been in years past. There has been, as you may be aware, some delay in processing of tax returns due what would be a typical customer for American Furniture. But even with that, I would say that it is not as strong as they have had in years past. We think that is just reflective of an industry at retail that just remains under significant pressure.

Right. And that pressure continues, so it would not be unreasonable for us to expect Q1 of this year to be below Q1 of last year.

That is reasonable.

Okay. Jim, I wasn't sure that I caught -- you mentioned, I think, the operating income for AFM the last quarter was $1.7 million, and there was an impact from a reversal from Q3, is that right?

Vernon, we recorded our good-will impairment estimate as of September 30, which we just had -- we didn't have the full information. We just estimated at that point in time. When we finalized our step two of the good-will impairment, we reduced that charge by $3.6 million that got reversed out in the fourth quarter. So that had the benefit of increasing operating income by $3.6 million.

Okay. So operating income was decreased by $3.6 million in the fourth quarter?

That's increased. Ending operating income in the fourth quarter had the benefit of that $3.6 million reversal. If it wasn't for that $3.6 million reversal, operating income would have been that much lower by $3.6 million.

Right, right. Looking at the dividend as it is compared to cash available for distribution, I know that outside of -- I guess it was 2009 - - you sort of, 2009. The number in the last quarter, I think, was about one -- or for the year, I think it was about -- the coverage was about 1.3 times. Is that a reasonable expectation? I know the goal is probably to keep it at least above one. Is there a target? I'm just curious. We talked about capital expenditures, as well. I'm just trying to get a sense for how much --

Obviously, this is a quarterly Board decision. The Board looks at a number of items. Sometimes they will choose mentioned (inaudible-two voices) are considered. But I would say, over the long run, 1.3 times is a somewhat reasonable expectation.

Okay. All right. That's great. Thanks very much.

Sure.

Our next question will come from John Rogers with Janney Montgomery Scott.

Good morning.

Hi Scott.

On Staffmark, I've heard some of your competitors talking about improved pricing power in the Staffing market. Are you seeing that of Staffmark?

You know, we are starting to see some improved pricing power, and what I would say is, kind of evidence of the -- as you know, one of the big costs that we incur is State Unemployment costs. Given the high levels of National Unemployment, you know, we are finding that states need to recover unemployment right now, and so they are raising the unemployment rates. We actually had a complete recovery of our State Unemployment costs this year that we had identified were going up, prior to, so I think the market was more accommodative to that in 2011 than it was in 2010.

In terms of broad kind of price movements up, I would say the market is still not there yet, but the direction is definitely positive at this point. I think, depending on the kind of, you know, buyers that you have out there in the large account space, it still is pretty tight. And as you get into the medium and small users, we are starting to see a little bit more kind of willingness to accept slightly higher prices. So the trend of declining margins has abated, pretty much completely. We are seeing some moderate improvement in pricing, but I wouldn't get ahead of ourselves yet in terms of pricing. I think there needs to be continued tightening in the labor market prior to any kind of broad-based pricing movements.

Okay. Thanks. Just another question. Touching back on increasing raw material costs, specifically foam for Tridien. I think you said earlier, you are getting pricing pressure from your customers at Tridien. Is that an inability to push pricing through, or is that pressure on total pricing?

So, it's a combination. Clearly, the primary input there is foam. Foam has -- it's tied relatively closely with oil and some of it the derivatives of oil. And so as those prices are going up, there is some inability to pass through those -- all of those cost increases. At the same time, there are some general price pressures in the marketplace. You know, I think the, just in general, there is price pressure throughout virtually every segment, and the Health Care segment isn't immune to that. So the short answer to your question is we are getting it a little from both sides. We kind of look at it, net-net, as a foam -- as a spread over what our foam costs are, and that spread is clearly starting to narrow, you know, a little bit from where it was, call it six to nine months ago.

Do you all have any insight as to the new purchase -- capital equipment purchases by hospitals or the end markets? Do you see that recovering? I think that this used to be looked at as a high-growth business, potentially 20% plus compound annual growth on the top line. Wondering if that comes back, or if you have tempered that growth outlook.

Yes, so I would say the -- our view, in terms of the growth of the business, is that it still has a lot of tailwind, given the demographic changes that are going on and the increase -- you know, long-term increased usage of these products throughout the entire Health Care system. Whether that is at the Acute Care, or all the way down to Home Health. So, our long-term view is not diminished.

As we identified and talked about, some of the more sophisticated mattresses that hospitals were purchasing for therapeutic use started to be delayed. Those purchases in 2009, partly because of a restriction of capital to fund their CapEx needs and some pressures that they were seeing. That is starting to abate slowly, so we would expect, you know, kind of that business to start to revert back to normal. The piece of our business that is kind of the lower price point business, that business has stayed relatively robust. In 2010, you know, we experienced some very good tail winds behind that business. We would expect going forward some of the more sophisticated mattresses in the higher price points, that market to start to pick up. I think as credit has started to flow again to these institutions, you know, it really supports continued investment in the therapeutic needs for these services.

Great. Thanks a lot.

And we will now take a follow-up question from Vernon Plack.

Thanks very much. Looking at the supplemental put for the quarter, it was, I think, a little over $13 million. That implies that you -- I believe that implies that you believe the value of your portfolio actually increased during the quarter. I'm just looking for a little color on that. Perhaps maybe what attributed to that increase, just big picture.

Sure, Vernon. The biggest increase was attributable to Staffmark --

Staffmark. Okay.

Which was a significant portion of that increase. That's largely based off the valuation that the public comps are receiving.

Okay, okay. Any other meaningful impact there?

I think all the -- mostly all the companies went up a little bit, but Staffmark was the large majority of it.

I would imagine that AFM probably went down some.

We actually recorded AFM as the impairment as of September 30. So the biggest part of the decrease was as of September 30.

Okay. All right. Thanks very much.

With no questions remaining, I'd like to turn the call back over to Alan Offenberg for any closing comments.

I just want to thank everybody for participating on the call today. We are really excited to have had the opportunity to tell you about our results in 2010, which we think were outstanding. Very excited about the future for our business, and we are very pleased to be able to increase our distribution by 6% this morning. We look forward to communicating with you next quarter, and thank you all again for participating on today's call.

Ladies and gentlemen, that does conclude today's conference call. And we thank you for your participation.