Compass Diversified Holdings (CODI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. All lines have been placed on mute. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to introduce your host for today's conference call, Mr. David Burke of IGB Group, for introduction and reading of the Safe Harbor statement. You may begin, sir.

Thank you and welcome to Compass Diversified Holdings' second-quarter 2011 conference call. Representing the Company today are Alan Offenberg, CEO, and Jim Bottiglieri, CFO.

Before we begin I would like to point out that the Q2 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 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 in the Risk Factors discussion in the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2010, 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 Alan Offenberg.

Good morning. Thank you all for your time and welcome to our second-quarter 2011 earnings conference call. We are pleased by our strong consolidated results for the second quarter of 2011, which met our expectations. While Jim will discuss our Q2 financials in more detail, I would like to note that CODI generated cash flow of $18.4 million for the three months ended June 30, 2011, an increase of 24.3% from the year earlier period.

Our subsidiary businesses continue to focus on gaining market share in their respective industries by capitalizing on their relative operating and financial strength. In addition, our results for the quarter were positively impacted by the acquisition and performance of our newest company, ERGObaby, which we acquired in September 2010.

Before I turn the call over to Jim to give some specifics on the financials, I would make to like to make some general comments on each of our subsidiaries. Advanced Circuits posted another strong quarter in terms of both revenue and profitability that met our expectations. We continue to expand our number-one market position in the quick-turn manufacturing niche here, as well as take advantage of both revenue and profit synergies resulting from the add-on acquisition of Circuit Express in March of 2010.

American Furniture performed below our expectations during the second quarter, as this business continues to be adversely affected by the soft retail environment in the furniture industry. We continue to aggressively manage overhead and are focused on reducing AFM's overall cost structure and working capital requirements. We believe the proactive measures that we are taking to preserve the company's financial health will enhance AFM's ability to emerge from the current downturn as a stronger company over the long term.

ERGObaby exceeded our expectations in the second quarter. Revenue increased approximately 37% on a pro forma basis compared to the year earlier period, as we continue to make important strides extending the company's product line and expanding distribution channels.

The enhanced infrastructure that we have established since acquiring this business last fall, combined with ERGObaby's leading brand for high-quality baby wear and products and accessories, bodes well for future performance. Going forward, we expect continued growth in this business as we capitalize on the favorable market trends and further expand customer penetration levels in the US and internationally.

Turning to Fox Racing Shox, revenues for the second quarter increased over 32%, exceeding our expectations. We continue to expand our leadership position in our core premium mountain bike business and increase penetration levels in new verticals, particularly powered sports and off-road. As we remain focused on leveraging Fox's strong brand recognition at the premier provider of off-road suspension and on strengthening the company's production capabilities, we would note that it is unlikely that the company will replicate this sort of year-over-year performance for the coming two quarters, since the strong first-half performance was partially due to the changes in the timing of purchases made by our OEMs.

HALO met our expectations in Q2 by reporting another quarter of double-digit revenue growth as overall spending on marketing-related products continued to improve. Going forward, we will maintain our focus on adding new reps and increasing our customer count through additional add-on acquisitions to further our role as a leading consolidator in the industry.

At Liberty Safe, business exceeded our expectations in the second quarter. Highlighting our performance, revenue increased approximately 37% in Q2 compared to the same period last year due to the increasing demand for the company's niche leading products. We attribute this growth to both an increase in brand building and product promotion, as well as the successful partnering with several of our key customers to increase demand at their stores.

Liberty's profitability also improved based on resulting operating efficiencies. Backlog remains strong as we continue to expand our leadership position for the premium home and gun safes.

Moving to Staffmark, revenue stabilized in the second quarter following a steady upward trend over the past year and a half. During the quarter, we experienced a temporary disruption in the US automotive supply industry stemming from the Japanese earthquake earlier this year. We remain focused on new customer acquisition opportunities as well as optimizing overall profitability.

During the second quarter, Staffmark filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of common stock. Please note that as this company remains in registration, we are unable to take questions on Staffmark during this call.

Finally, at Tridien Medical we reported Q2 results in line with our expectations. Demand for Tridien's core products remains steady, and we are focused on investing in new product development to expand the company's platform of support service technologies.

Based on the strong results across our diverse family of businesses and future prospects, we paid a cash distribution of $0.36 per share for the second quarter, representing a coverage ratio of cash flow to distribution paid of 1.1 for the quarter and a current yield of more than 11%. Since going public in May of 2006, CODI has paid cumulative distributions of approximately $6.72 per share.

With a flexible balance sheet we remain well positioned to provide attractive distributions and capitalize on accretive acquisition opportunities. As we have in the past, we will maintain our disciplined approach by acquiring companies that have a real reason to exist at favorable valuations and terms.

One additional introductory comment I would like to make is that we continue to manage our businesses fairly defensively. With recent economic news coupled with the recent securities market environment, we are all aware of the volatility in the overall economy. While our outlook remains more favorable than it did in 2009, the economy clearly has an effect on the cash flow generation of our businesses; and we will do our best to manage these businesses prudently through this environment on behalf of our shareholders, just as we did in and around 2009.

To repeat a concept we have espoused in the past, it is often these environments that reward strong companies in niche industries, as they are able to grow at the expense of their competitors. We saw this in 2009, and we hope to take advantage of any similar opportunity if presented going forward. 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 quarter and six months ended June 30, 2011, including a review of the operating results of each of our eight subsidiaries. On a consolidated basis, revenue for the quarter ended June 30, 2011, increased to $428.1 million as compared to $404.3 million for the prior-year period.

Net income for the quarter was $8.3 million as compared to a net loss of $0.7 million for the quarter ended June 30, 2010. During the quarter ended June 30, 2011, CODI recorded higher operating income as well as lower income tax expense due to the timing of an effective rate adjustment for Staffmark that was recorded in the year earlier period.

Now, turning to our subsidiary results, beginning with Advanced Circuits. For the quarter ended June 30, 2011, Advanced Circuits' revenue increased to $20 million compared to $19.4 million for the prior-year period, mainly due to higher quick-turn and assembly sales. During the second quarter of 2011, sales attributable to Circuit Express, which we refer to it as ACI-Tempe, were approximately $4.9 million as compared to $5.2 million in the year earlier period due to softer economic conditions, particularly in military applications, which is a significant component of ACI-Tempe's business.

Income from operations for the quarter were $6.8 million as compared to $6.3 million for the same period in 2010. This increase in operating profit is largely due to slightly higher sales volumes.

For the six-month period ended June 30, 2011, Advanced Circuits' revenue increased approximately 19% to $40.3 million compared to $33.9 million for the prior period of 2010, which was primarily due to the strong demand in each of our product offerings. During the period, sales attributable to ACI-Tempe were $10 million as compared to $6.2 million in the prior-year period of 2010. As a reminder, we acquired Circuit Express on March 11, 2010.

Income from operations was $13.9 million compared to $7.2 million for the prior period in 2010. This increase is primarily due to the operating profit generated from the increased sales volume as well as for the 2010 recording of $3.8 million in non-cash stock compensation expense.

Now I would like to turn to American Furniture Manufacturing, or AFM. For the quarter ended June 30, 2011, AFM's revenues decreased to $23.5 million as compared to $33.3 million of revenue in the prior-year quarter. AFM reported a loss from operations of $1.6 million as compared to operating income of $1.2 million in the second quarter of 2010. As mentioned, this business continues to be adversely affected by the soft retail environment in the furniture industry.

For the six-month period ended June 30, 2011, revenue was $59.4 million compared to $77.3 million in the year-earlier period. The loss from operations was $9.6 million versus operating income of $3.9 million for the prior-year period. Loss from operations for the six months ended June 30, 2011, includes a non-cash impairment expense of $7.7 million recorded during the first quarter.

Turning now to ERGObaby, which we acquired on September 16, 2010. For the quarter ended June 30, 2011, revenue climbed approximately 37% to $11.2 million compared to $8.2 million in the prior-year period, which was prepared on a pro forma basis as if we had acquired ERGObaby on January 1, 2010. This increase reflects strong product sales in international markets and the addition of new distributors.

The company reported income from operations of approximately $2.4 million for the second quarter of 2011 as compared to pro forma income from operations of the same amount in the same period last year. SG&A expenses for the second quarter of 2011 include approximately $1 million in costs related to the company's expansion initiative as well as $0.4 million accrual related to the earnout provision associated with ERGObaby's former owner.

For the six-month period ended June 30, 2011, revenue increased approximately 44% to $22.7 million compared to $15.8 million in the prior year, which was prepared on a pro forma basis. Income from operations for the six months ended June 30, 2011, was $5 million as compared to pro forma income from operations of $4.8 million in the year-earlier period.

Turning to Fox Racing Shox, revenue rose approximately 32% to $45.9 million for the quarter ended June 30, 2011, compared to $34.7 million in the prior-year period. This increase was due to greater sales in our core mountain biking sector and from higher sales on power vehicles including our partnership with manufacturers in the growing side-by-side ATV market and from increased sales with Ford. Income from operations climbed approximately 53% to $4.6 million for the second quarter compared to operating income of $3 million for the quarter ended June 30, 2010, despite higher SG&A expenses to support the company's continued sales growth.

For the six months ended June 30, 2011, revenue climbed approximately 32% to $88.8 million compared to $67.4 million in the prior-year period due to increased sales in our mountain biking sector as well as in the power vehicles sector. Income from operations for the first half of 2011 increased to $9.6 million compared to $5.9 million for the prior-year period as a result of the strong increase in net sales.

Moving on to HALO Branded Solutions, for the quarter ended June 30, 2011, the company's revenues rose approximately 11% to $39.3 million compared to $35.3 million for the same period last year. The increase was due to higher sales from existing customers as well as from the improvement of new account representatives.

Income from operations for the three-month period ending June 30, 2011, was $2.9 million compared to income from operations of $0.2 million for the second quarter of 2010. During the second quarter of 2011, SG&A expense was reduced by approximately $1.6 million due to settlement proceeds resulting from a claim surrounding a prior acquisition. As a reminder, based on the seasonality in this business, HALO typically generates the majority of its annual EBITDA during the third and fourth quarters.

For the six months ended June 30, 2011, HALO's revenue was $72 million compared to $65 million for the same period last year, an increase of approximately 11%. Income from operations was $2.4 million versus a loss of $0.5 million for the prior-year period.

Turning to Liberty Safe, which we acquired on March 31, 2010. For the quarter ended June 30, 2011, revenue increased approximately 37% to $18.6 million compared to $13.6 million in the prior-year period.

This increase is primarily due to higher national or non-dealer sales as well as for increased dealer sales. The company reported operating income of $1 million for the second quarter of 2011 as compared to a loss of $0.2 million in the same period last year, which reflected the higher level of sales achieved in 2011.

For the six-month period ended June 30, 2011, Liberty increased revenue 31.5% to $38.8 million compared to $29.5 million in the prior-year period, which was prepared on a pro forma basis as if we had acquired Liberty Safe on January 1, 2010. The increase in net sales was due to higher non-dealer sales and to a lesser extent increased dealer sales. Income from operations for the six months ended June 30, 2011, was $1.9 million compared to a pro forma operating income of $1.4 million for the prior-year period.

Moving on to Staffmark, for the quarter ended June 30, 2011, revenue of $255.6 million was essentially flat as compared to $251.4 million for the same period last year. The company's income from operations was $5 million for the second quarter of 2011 as compared to $6.2 million for the previous year period.

As discussed earlier, by Alan, the supply chain disruption adversely affected revenues in the second quarter of 2011. However, we expect to recover a substantial portion of this business in the second half of the year.

For the six months ended June 30, 2011, revenue was $502.4 million compared to $468.8 billion, an increase of approximately 7%. Income from operations was $4.7 million as compared to income from operations of $5.4 million in the year-earlier period.

Now on to Tridien Medical. For the quarter ended June 30, 2011, revenue decreased by 17% to $13.9 million as compared to $16.8 million for the same period last year. During the second quarter of last year we experienced higher than normal sales as a result of nonrecurring sales recorded to a customer that was previously supplied by another vendor. Income from operations for the second quarter was $1.1 million compared to $3.4 million in the same period of 2010 as we continue to experience pricing pressure from customers and to invest in new product development.

For the six-month period ended June 30, 2011, revenue was $27.8 million compared to $32.1 million in the same period last year. Income from operations was $2.3 million compared to $5.6 million compared for the same period in 2010.

Turning now to our balance sheet, we had $9.2 million of cash and cash equivalents and had net working capital of $152.0 million as of June 30, 2011. We also had $73 million outstanding under our term debt facility and $15 million outstanding under our revolving borrowing facility with no material maturities until late 2012. We had borrowing availability of approximately $234 million under our revolving credit facility as of June 30, 2011.

During the second quarter of 2011 we incurred approximately $2.9 million of maintenance capital expenditures. We anticipate incurring maintenance capital expenditures of between $10 million to $12 million the full year 2011 as we remain committed to ensuring the long-term health of our business.

This estimate includes a level of expenditures that would have otherwise been incurred in 2012 to take advantage of the 100% bonus tax accretion incentive available in 2011. We also incurred approximately $4 million of growth capital expenditures which were largely spent at Liberty Safe to increase production capabilities.

I will now turn the call back over to Alan.

Thanks, Jim. We are very pleased with our results for the second quarter and first half of 2011. We remain focused on utilizing our financial strength to take advantage of favorable acquisitions that are accretive to cash flow, while reinvesting in our current family of niche market leaders to drive future performance. We also intend to provide our owners with attractive cash distributions as we have consistently done in the past.

I would 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.

(Operator Instructions) Larry Solow, CJS Securities.

Hi, good morning, guys. Wondering if you can maybe just give a little color. Obviously it is sort of a crazy situation, and discounting the last couple weeks, but just what you guys are seeing at some of your businesses. It sounded like at least some of your consumer-oriented businesses are actually doing pretty well, with the exception of AFM.

I realize that some of them may have been helped by timing a little bit, and that slowdown could be timing related. But any significant changes you are seeing? Or is it still sort of cautious optimism out there? Would you (multiple speakers)?

Larry, I think cautious optimism is exactly the right phrase in how we feel. I think that demand for the products across our companies, with the exception that you noted, remains solid as we explained in the opening remarks. I think that we are again cautiously optimistic that that remains the case, and time will tell.

It is an interesting environment over these last couple of weeks, so it is hard to take that out of the equation as we evaluate the businesses. But there is nothing unusual that we saw through the second quarter.

So I understand that you'd probably prefer some greater insight than that; but I would say we remain cautiously optimistic. Demand through the first half of the year was either in line or ahead of our expectations, and we remain cautiously optimistic.

Okay. And the ERGObaby, I guess you had excellent sales growth; and I imagine a lot of the profit was offset by some increased expenses. Right? But I think some of those were one-time, too, in nature. Is that correct?

Yes, we spent considerable amounts at ERGObaby building our management infrastructure, which is now largely complete. So they will be one-time but ongoing, right?

Exactly.

But I think your take on that is exactly correct.

Then just lastly, any color you can provide -- again I know it is a pretty fluid situation out there, but what is going on in the acquisition environment? I know prices have had to come up, and probably less -- a lot more auctions and whatnot. So any color on that?

Sure, I think that the market as we discussed in our first-quarter call -- again I will try to take the last week or two out of the equation when answering this question. But the market does remain strong.

Multiples continue to creep up. The availability of debt financing has been robust. The appetite by both private equity firms and corporate acquirers remains strong. A lot of cash out there to deploy.

So I would say that the market dynamics haven't really changed over the quarter. I would say that absent the last couple of weeks, I would suggest it may have even gotten a bit more robust than we saw in the first quarter. But again marginally; I would say it remains mostly consistent with what we saw in the first quarter.

Okay, great, Alan. Thanks.

Greg Mason, Stifel Nicolaus.

Great, good morning, gentlemen. On Fox, Alan, you commented that the performance you have seen in the first half wasn't replicable in the second half. Were you referring to the growth rate or the absolute numbers in that business?

It was more the quarter-over-quarter comparison for the second half of the year.

Okay. If I remember correctly, last year in the third quarter you had a very robust quarter in Fox. Can you talk about are you -- would you expect similar results again this year? Or should we be actually expecting a decline from the robust quarter in --?

Elias, could you comment on that?

Yes, I mean I think what we have experienced at Fox a little bit so far this year has been somewhat of a shifting of the order patterns by some of our OEs. A lot of that just depends on how some of the sellthrough is occurring.

At this point, we still expect Q3 to be our seasonally strongest quarter and consistent with what we experienced last year. But, as Alan had mentioned in his opening remarks, where we had been seeing 30% type year-over-year growth rates, you shouldn't expect to see that off of a seasonally strong Q3 of last year; but I think more in line and consistent with what we experienced last year.

Great, thank you. Alan, can you just talk about American Furniture Manufacturing over the long run? I know you are discussing some continued expense savings here.

But given that this business continues to be weak, and I believe that the second quarter is typically the strongest quarter because of the tax rebate sales typically, and we had negative operating earnings again -- is there any thoughts to ultimately shuttering this business? Or longer term, what are you going to do with this?.

Yes, well, I think that -- just one point of clarification. You are correct about the tax season impact on this business; but it is typically reflected more so in the first quarter than in the second quarter.

That being said this was not a particularly strong tax season. One could argue that there was very minimal impact associated with tax season this year.

Our belief is that this is a business that is viable long-term. We are trying our hardest, along with the management team there, to position the business to not only get through this period but to be a stronger company on the other side. The intellectual exercise you just described on -- would you ever consider moving away from this business? I appreciate your question.

I think our focus, though, is first and foremost on doing what we can to fix this business. This has got an excellent team. It has a history of profitability. The environment that this company is in is, in our opinion -- and in the opinion of the management team that has a long history operating in the furniture industry -- if not the worst, one of the worst environments for a promotionally priced furniture company.

With that as a backdrop and with the current state of the economy, particularly the impact that the current economy has on the consumer of these products, we believe that there is a strong future for this company. We are going to do our best to position the company to achieve that long-term success, all the while making sure that we don't lose sight of the company's performance. And if this company's performance does not improve over a period of time, particularly at a time when the economy shows signs of hopefully doing better in the future, when the consumer shows signs of being more active in the future -- at that point if the company continues to underperform then I think we will undoubtedly have questions to ask ourselves.

But at this time, considering all the macro factors affecting the company, we believe that the right course of action on behalf of our shareholders is to make the business as lean and mean as it can be, and get through this tough period, and come out on the other side a stronger company.

Great, thank you. Then one final question for Jim. Jim, you mentioned lower taxes this quarter. Could you give us any kind of guidance on what we should be expecting for taxes for the full year? Is there any seasonality in that tax expense?

There is seasonality in that, and obviously that is one of the tougher calculations to get through. I don't have a firm estimate, but I would basically look at -- whatever you are projecting for increased EBITDA over the last year, I would basically just take that as an effective rate; call it 35%; and just add that to whatever your cash tax number was last year to come up with an estimate.

Otherwise I have to go through a detailed calculation to provide some kind of guidance on EBITDA. So I would rather stay away from that question right now.

Seasonality, I think we could probably look at last year's seasonality and get the same type (multiple speakers) projection?

Yes.

Okay, great. Thanks, Jim.

(Operator Instructions) Robert Dodd, Morgan Keegan.

Hey, guys. Hopefully I am coming through okay. If I can just go back to American Furniture again for a moment -- and thanks for the color. But we are looking at the third successive quarter of accelerating declines. Is there any color on -- have you lost any distribution relationships? Or is this purely a same-store sales issue?

Our relationships remain intact. I think this is an overall market condition issue. You are just not as strong a market for the sale of promotionally priced upholstered furniture. That market is very, very soft, as we mentioned in our opening remarks.

So I do not attribute this to any major loss of relationship, nor do I attribute it to any particular competitor. I think that we are maintaining our market position, but that the market remains challenging.

I think that what we -- we continue to focus on trying to develop new relationships, develop new products, enhance profitability via both those measures as well as via examination of our cost structure. But I don't believe there is anything to specifically reference as it relates to either distribution or competition that is impacting this company.

Secondly on Liberty, almost the reverse problem by the sound of it. You mentioned you have spent a considerable amount of CapEx on expanding capacity. Is this on spec capacity, or has the sales team there been adding (technical difficulty) distribution (technical difficulty)?

Yes, Robert, I apologize. I am having a bit of a hard time hearing you. I think that the increased capacity planned for Liberty Safe is both -- really captures both of the aspects that you just described.

There are, we believe, existing outlets that will utilize a considerable amount of this production. Plus we also believe that it will enhance our ability to pursue new outlets for the distribution of our products. Again you were going in and out; if that did not answer your question, please let me know and I will try to do a better job.

That was great. I am sorry for the bad phone line.

No problem.

Vernon Plack, BB&T Capital Markets.

Could you repeat what you said about maintenance CapEx for 2011? Was that $10 million to $12 million? And I thought there was some commentary after that.

Yes, that is $10 million to $12 million. The commentary was that we are pulling a little forward with the 2010 maintenance capital expenditures that we would normally have incurred in 2012, just to take advantage of the IRS rule where you are allowed to do 100% bonus depreciation in 2011. Next year that drops down to 50% bonus depreciation.

So to just take advantage of some cash flow incentives there were, we decided to move some of those expenditures into 2011 that would have normally been done in 2012.

Yes, just to reiterate, these are expenditures that were planned and projects that we believe can be placed obviously in service in 2011. So as Jim mentioned, it is really just a pull forward of existing plans as opposed to the creation of new plans just because this incentive exists.

Okay, great. On the supplemental --

Whatever we spend this year will reduce our normal expenditures in 2012. So, if we pull forward -- give you the number, say it is $2 million. We pull that forward; next year's 2012 maintenance capital expenditures will be $2 million less.

Okay, okay, great. On the supplemental put, I know on the income statement it was $1.7 million. The difference in the balance sheet over the quarters was about $0.7 million. So can I assume that you paid out around $1 million?

No, we haven't paid it out. If you look at the balance sheet, it includes a current portion and a long-term portion.

Right.

So between those two, the change went up by $1.7 million, just the current portion increased by the difference. That hasn't been paid, but it's expected to be paid during the third quarter.

Okay, all right. Okay, thanks.

J.T. Rogers, Janney Montgomery Scott.

Hey, good morning. Just want to follow on something you were saying earlier about the cautious optimism for the rest of the year. You didn't see anything in the first half that was outside of expectations. But is there anything that is occurring right now in some of your businesses where you are seeing more day-to-day orders, like ACI, where maybe you are seeing a falloff in demand? Or the reverse?

Again, I would say, and we could answer your specific question; I will have Elias talk to you about Advanced Circuits in just a moment. But I think that in a broad context I would say that I would reiterate the comments that I made earlier.

I think that there are -- company to company there will be some variations. And Elias, if you want to comment on Advanced Circuits that would be great.

Yes, J.T., we have seen Advanced Circuits has been relatively consistent through July and early in August so far. We haven't really seen our companies experience any type of material change from this recent stock market turmoil.

Although I would caution to everybody on the phone that this is very recent that this has happened. So I think if there was to be spillover from this it probably would be felt later on and not quite so immediate.

But in Q3 we had -- throughout I would say Q2 there was, as you would imagine, the businesses -- the growth profiles were decelerating a little bit from some pretty strong levels. You saw Q1 and Q2 for most of the companies had pretty strong growth. I think naturally those levels are decelerating as the comps get a little bit tougher.

But there was nothing early on -- and specifically at Advanced Circuits where we see the booking levels on a daily basis -- that gave us any reason other than to maintain a, as Alan said, cautious optimism going into the balance of the year. But again, we can't really tell you yet what any effects from this current stock market turmoil will be just because it is too early.

Okay, great. Then sort of shifting gears, on HALO, results continue to be very, very strong there. My understanding is that budgets for advertising are made the year before, and we are really seeing the benefit of increased optimism in the end of '10.

I was wondering, is that holding true? Do you expect even with potential -- with recent uncertainty, that business to be strong?

Yes, I think, J.T., your point is exactly right. That is budgets generally get set September, October, November of the prior year, and marketing budgets are typically carried through after they have been set, barring some type of catastrophic event that takes place in the economy.

We have been saying that this is a later-cycle stock participant because of that. And as companies' earnings power really had increased through 2010 we expected to see some benefit in 2011 as marketing budgets were opened up. That in fact has happened and continues to play out to our expectations.

So as of right now there is nothing that is deviating from that and the business as you have seen has performed well in the first half. And we would expect for that in the second half, again with the one caveat that, if there is spillover from the current market turmoil, we just haven't seen that yet and it is too early to anticipate or start to speak to that as of now.

Okay, great. Thanks. That's helpful. On Fox, just wondering if you all could break out the growth in the mountain bike segment and if you have a sense as to what kind of inventory the OEMs have. And if you see that -- what your outlook is for the mountain bike segment, the core mountain bike segment at Fox.

Alan, I don't think we typically disclose that.

I was just going to say we were -- I was just chatting with Jim. I don't believe -- I am trying to determine if we typically break it out by segment in that manner. I don't believe that we have done that typically, although we are figuring that out as we speak.

You're just talking about the overall increase?

In mountain bike.

In mountain bike. Even just roughly, is it low single digits?

We don't break it out by the overall segment. We break it out between OEMs and -- but OEM sales increased by 22.6%; and that is in the MD&A discussion that is going to be filed later on this afternoon.

Okay, great. Is there any concern as to the levels of inventories at the OEMs? My understanding was they had -- this grew, had strong growth throughout the downturn; but the mountain bike market had sort of overfilled their channels going into the last recession.

If we do see a downturn do you have a sense as to what the inventory levels are out there for mountain bikes?

Yes, J.T., so far what we are seeing, what we are hearing -- and this is again going to be anecdotal right? Because there is nothing published that is going to say -- here is what the independent dealer chain inventory levels are.

What we have heard is that inventories in the supply chain are rational right now. That there hasn't been an overstocking. Now, that being said we have also heard that there has been some earlier orders than usual, especially out of the larger OEs, because capacity was available and they didn't want to get into a capacity crunch situation where they were late delivering the model year.

It is one of the reasons why we saw Q1 and Q2 be quite extraordinary in terms of our growth rates. But in terms of -- that hasn't left the system overly stocked right now. Our understanding is it is pretty well-balanced today, and so we wouldn't expect to see any kind of major change to replenish inventory if they were low.

I would say it feels like it is pretty good. One of the things, too, is your question I think about here -- we have experienced significant growth in our power sports business and in our off-road business.

It is -- as Jim and Alan have said, we don't give specifics as to the differential on growth rates between the business lines. But we are growing at a far greater rate in those business lines, partly because they are clearly less penetrated by us. We have much more opportunity. Those sports are growing very rapidly, and our market share increases are pretty great.

So we are coming off with a relatively low base. The percentages increases therefore are extremely high, and materially higher than what they are in the mountain biking segment.

Okay, great. Thanks a lot. Just one last question on Tridien. Just want to get a sense as to what the demand is from hospitals for support services. Then are you seeing any increases in the price of foam?

Yes, so, the demand continues to remain strong. I would say in the hospital system the trend we have seen over the last 24 months is continuing, which is there is a greater emphasis on prevention and on some of the lower price-point items. The higher price-point items are much more on the therapeutic side.

I think hospitals are, frankly, trying to delay some of the replacement CapEx, J.T., just as their budgets are somewhat constrained. All that means that the same demographic trends continue today that were present two, three years ago and are expected, which is we have an older population.

There is increased litigation around these products and the liability for developing bedsores while in an institution. So hospitals need to take this seriously and make the necessary investments. As a result of that, demand broadly on a unit basis has held up reasonably well. So we don't expect to see any changes in that, but there can be some migration among price points like we have seen over the last couple of years.

In terms of foam costs, this is a pretty large cost item that we have. We are always looking and trying to leverage down our foam costs.

Input costs had really been rising over the last 18 months; and we are just now starting to see some of those input costs, predominately driven by a decrease in oil. Our two main components in the kind of foam we use are TDI and polyol. Those are a little bit more constrained globally than oil.

But generally foam prices derive from oil. So if I was anticipating, I would think that foam prices should at least -- at least the rise in foam cost should start to abate. And as a result of that, hopefully we will be able to get a little bit of leverage with our foam suppliers.

But all that said, J.T., I think a lot of that is going to be on the commodity prices. Like all of the markets have been relatively volatile, and I think it is just a little too early to start to see any follow-through that will create an actionable plan maybe to say, hey, let's go back and be pushing down on suppliers more that what we do now.

I mean, that is something we constantly are focused on. Every one of our companies is always pushing down and trying to get better supply costs. But I think the commodity follow-through from that is probably a little too early to see that manifest in raw materials.

And, J.T., with respect to Elias's comments about foam as it relates to Tridien, I would just simply echo the exact same comment as it relates to foam for American Furniture. It is probably too soon to see any type of foam price decreases, although we are hopeful that -- and certainly history would suggest that -- given the current state of the price of oil that should be a good sign towards, at a minimum, a lack of further increases. But time will tell.

Okay. Thanks for answering my questions.

Greg Mason, Stifel Nicolaus.

Great, one follow-up question on HALO and the reversal of SG&A expenses that you had this quarter. Is there going to be any carryforward of the lower SG&A expenses going forward? Or is that a one-time event?

That is a one-time event. That is just -- it was $1.6 million in the quarter and approximately $1.8 million year-to-date; and that's it.

Great, thank you. I think you may have touched on this before, but in ERGObaby, the SG&A expense is $1 million higher from expansion and $400,000 from the earnout. Any -- are those going to be both going forward fully baked in at this level for a while?

Well, the earnout is a little more difficult to estimate because it is based off of revenues. So obviously that is going to be a quarter to quarter determination.

The actual calculation is done as of the full fiscal year. So either all -- either you achieve the sales target and you pay the full earnout, which is $2 million; or sales target is isn't achieved and we reverse out what we previously recorded. So, obviously that is based off of third- and fourth-quarter demand performance.

We have done most of the hiring. Some of that was done during the quarter. So a full quarter impact will be reflected next quarter. But there was also cost such as recruiting costs and things like that that also impacted the quarter. So -- but as an overall guidance it is probably within reason that that is the level of SG&A.

Okay, great. Then one final question. Alan, you touched on the acquisition environment for new platforms. But what about for acquisitions within your current portfolio of companies outside of HALO? Anything on the horizon for your existing portfolio of companies?

Well, I would simply say to you that we remain active in the pursuit to of add-on acquisition opportunities for our existing subsidiaries, to the extent that it makes sense for each individual subsidiary. So I think that, similar to the acquisition environment for platforms, it remains an active pursuit of ours.

We see a lot of opportunities and pursue them regularly. I think it is hard for me to specifically address the on-the-horizon part of your question. But I could certainly tell you that our efforts in that area are ongoing and continuous.

Great, thank you.

I am not showing any further questions at this time. I would now like to turn the call back over to Alan Offenberg for closing remarks.

I would just like to thank everybody for joining us on the call today. We appreciate your time and attention, and we look forward to speaking with you next quarter. Thanks a lot.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.