Compass Diversified Holdings (CODI) 2011 Q4 法說會逐字稿

Good morning, and welcome to the Compass Diversified Holdings 2011 fourth quarter conference call. Today's call is being recorded. All participant lines have been placed on mute. (Operator Instructions) At this time, I'd like to turn the conference over to Mr. 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 2011 conference call. Representing the Company today are Alan Offenberg, CEO; Jim Bottiglieri, CFO; and Elias Sabo, Founding Partner of Compass Group Management. 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 filed its Form 10-K with the SEC last night. 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, 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 factor discussion on the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2011, 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 statement, 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 and full year 2011 earnings conference call. During the fourth quarter and full year 2011, we continued to benefit from the leadership position of our niche businesses, comparative financial strength, and the maintenance of efficient cost structures. In addition to generating cash available for distribution in reinvestment or CAD of $69 million for the year, the Company also accomplished several important strategic initiatives that have served to significantly strengthen our future prospects.

Specifically, we refinanced our debt, which extended maturities out to 2016, and increased our total debt capacity by approximately $100 million. With no significant maturities until 2016 and over $400 million of liquidity, we find ourselves more attractively positioned than ever to pursue accretive platform and add-on acquisitions. Second, we maintained our disciplined approach in acquiring our new platform business, CamelBak, and for an add-on business to ERGObaby subsidiary, Orbit Baby. Third, we sold Staffmark at an attractive valuation, materially reducing our future earnings volatility and further strengthening our Company's balance sheet.

Finally, we significantly increased the amount of capital expenditures in our subsidiary companies in order to enhance their long-term growth prospects and to take advantage of favorable tax rules enacted for 2011 and, to a lesser extent, 2012. While Elias and Jim will provide more details with respect to each of these four important initiatives, we believe our efforts have combined to significantly enhance CODI's ability to deliver superior shareholder returns over the long term. While these strategic initiatives had an adverse impact on fourth quarter financial results. Due primarily to losing EBITDA contribution from Staffmark's strongest quarter, the incurrence of additional interest expense, and the increasing of capital expenditures. We enter 2012 with the financial flexibility to take advantage of opportunities that will enhance long-term shareholder value.

Beginning 2012 with a strong balance sheet and significant liquidity, we are pleased to announce this past Tuesday the acquisition of Arnold Magnetic Technologies. Arnold is a leading global manufacturer of engineered magnetic solutions for a wide range of specialty applications in end markets, including energy, medical, aerospace and defense, oil and gas exploration, general industrial, and automotive. Based in Rochester, New York, with manufacturing facilities in the US, the UK, Switzerland, and China. The Company produces engineered magnetic assemblies, in addition to high-performance permanent magnets, flexible magnets, and precision oil products that are mission-critical in motors, generators, sensors, and other systems and components.

Arnold's long-standing operating history of more than 100 years has enabled the Company to build a superior reputation in the specialty and rare earth magnetic industry, with more than 2,000 clients worldwide. Arnold represents an ideal addition to our family of businesses due to its market leadership, stable cash flow, diversified customer base, proven management, and strong future prospects. We plan to leverage Arnold's advanced engineering and product development capabilities and capitalize on the positive macro trends, including increasing demand from high-growth sectors such as alternative energy to accelerate the Company's growth potential.

In terms of valuation, we paid approximately 7 times current EBITDA for this acquisition, which will be immediately accretive to CAD. This attractive platform acquisition represents our fourth in the past two years, increasing the current number of businesses we own to nine. Going forward, we will maintain our focus on utilizing CODI's significant access to capital in order to take advantage of additional acquisitions under favorable valuations and terms, as we have in the past, while reinvesting in our current subsidiaries. By continuing to invest in R&D, management talent, operating capabilities, and brand building, we expect to strengthen the performance of our niche-leading businesses over the long-term. For 2012, we expect to achieve modest year-over-year growth in CAD, excluding the impact of any additional acquisitions or dispositions.

I would like to now turn the call over to Elias for an overview on each of our subsidiaries.

Thank you, Alan. I will begin by reviewing our Companies alphabetically, beginning with Advanced Circuits. At ACI, we posted another strong quarter in 2004 and in full year 2011, in terms of both revenue and profitability. Demand for our core PCB production services remains positive as we continue to focus on expanding our leadership position in the quick-turn manufacturing niche. We also made important strides growing our assembly business during the year. We expect Advanced Circuits to achieve similar results in 2012, as growth in our core quick-turn and assembly businesses is expected to be offset by a decline in revenue generated from defense revenue.

American Furniture performed below our expectations in Q4, as this business continues to be adversely affected by the soft retail environment in the furniture industry. During the fourth quarter, we recorded an inventory obsolescence reserve of $1.7 million, reflecting our decision to discontinue a number of SKUs. Despite the challenging market conditions, we believe the proactive measures we have taken to date, including reducing the Company's cost structure and working capital requirements, positions AFM well to generate positive cash flow in 2012.

Turning to CamelBak, which we acquired in August of 2011. This business performed in line with our expectations during the seasonally lower fourth quarter, generating fourth quarter EBITDA at about the same level as in 2010. We remain excited by the growth prospects at our new platform Company. CamelBak is a niche industry leader with a strong history of stable cash flow. We continue to work closely with Management in order to expand CamelBak's leading platform of personal hydration products and strengthen its global distribution network.

Next is ERGObaby, which met our expectations in the fourth quarter and exceeded our expectations for full year 2011. During 2011, we made the decision to significantly increase the Company's SG&A investment in order to strengthen the Management team, expand domestic and international distribution, expand the Company's product offering, and invest in marketing efforts to strengthen ERGObaby's brand awareness. While these investments caused profitability to temporarily decline in 2011, we expect to realize the benefit of these investments in 2012 and beyond.

During the fourth quarter, we completed the add-on acquisition of Orbit Baby for a total purchase price of $17.5 million. Orbit Baby produces and markets a premium line of stroller travel systems. Orbit Baby's complementary product line includes car seats, strollers, and bassinets that are easily interchangeable. With this accretive transaction, we have extended our product platform and expanded ERGObaby's global presence in the baby durables market. We have already begun to integrate our operations and expect to realize important synergies over both the near and long term.

Turning to Fox Racing Shox, the Company exceeded our expectations in Q4 and for the full year 2011, generating revenue gains of 12% and 16%, respectively. Our ongoing success in leveraging Fox's leading reputation for high-performance suspension products has enabled the Company to gain market share in our core premium mountain bike business and increase penetration levels in new verticals, particularly powered sports. Since acquiring Fox in January 2008, the Company has almost doubled revenue. As a result of the rapid growth in revenues, we made significant investments during 2011 in our operational capabilities of the Company. Coming into 2012, we plan to accelerate our capital expenditures in order to position the Company for enhanced profitability and to further enable revenue growth.

As for HALO, this business also exceeded our expectations in Q4 and full year 2011 by posting year-over-year revenue growth for the eighth consecutive quarter. We continue to benefit from our role as the leading consolidator in the promotional products industry and consummated a small tuck-in acquisition in the fourth quarter. HALO continues to benefit from the overall improvement in spending on marketing-related products, which we expect to continue into 2012.

At Liberty Safe, this business exceeded our expectations. Highlighting our performance, revenue increased approximately 28% in Q4 compared to the year-earlier period. Demand for the Company's niche-leading products remains strong as we continue to expand leadership position for premium home gun safes. Our ability to strengthen Liberty's brand and take advantage of the favorable macro trends bodes well for future performance. Booking levels for 2012 are slightly ahead of 2011 levels at this point.

Moving to Tridien Medical, we reported Q4 results consistent with our expectations, as demand for the Company's core products remains relatively stable. For 2012, we expect revenues to remain stable. However, we are planning for a substantial increase in the Company's SG&A expenses, as we increase our R&D and investment in developing the next generation of support surface and related technology. Although these actions are expected to be dilutive to 2012 earnings, we expect to realize the benefits of these investments in 2013 and beyond.

Finally, as we announced on October 17, we sold Staffmark to a strategic buyer for a total enterprise value of $295 million. CODI received approximately $217 million of total proceeds at closing from this highly profitable and opportunistic transaction. Consistent with our philosophy of maximizing value for our owners, we recorded a gain from this sale of $88.6 million in the fourth quarter of 2011. The sale had an adverse impact on our fourth quarter 2011 CAD, as we did not fully benefit from the contribution of Staffmark's strongest quarter. Staffmark generated approximately $12 million of EBITDA during the fourth quarter of 2010, versus approximately $2 million for the portion of the fourth quarter in 2011 that we owned the business. Including Staffmark, CODI has realized approximately $198 million in gains since 2007.

As a reminder, while these gains are not included in our calculation of CAD, our successful monetizations are reflected in our substantial liquidity position that provides CODI with a distinct advantage as an all-cash buyer of new businesses. I would now like turn the call over to Jim Bottiglieri to add his comments on our financial results.

Thank you, Elias. Today I will discuss our financial results for the quarter and 12 months ended December 31, 2011, including a review of the operating results of each of our subsidiaries. On a consolidated basis, revenue for the quarter and year ended December 31, 2011, was $215.5 million and approximately $777.5 million, respectively. Net income for the quarter was $58.6 million, which includes the $88.6 million gain on the sale of Staffmark, as Elias mentioned earlier, partially offset by a $20.1 million non-cash impairment charge for American Furniture Manufacturing subsidiary.

This charge reflected declines in the estimated current fair market value for this subsidiary, due to the continued soft retail environment in the promotional furniture market. For the year ended December 31, 2011, we reported net income of $72.8 million. For the fourth quarter, we paid a cash distribution of $0.36 per share, representing a current yield of approximately 10%. Since going public in May of 2006, CODI has paid cumulative distributions of approximately $7.44 per share.

Now turning to our subsidiary results, beginning with Advanced Circuits. For the quarter ended December 31, 2011, Advanced Circuits revenue was $18.6 million, compared to $20.4 million in the prior year period, mainly due to lower long lease sales. Income from operations for the quarter was $6.1 million, as compared to $6.7 million for the same period in 2010, as a result of lower sales. For the year ended December 31, 2011, Advanced Circuits revenue increased approximately 5% to $78.5 million, compared to $74.5 million for the prior period of 2010, which was primarily due to higher sales in our core quick-turn and assembly business.

During the period, sales attributive to ACI-Tempe, which we acquired in March of 2010, were $18.9 million, as compared to $15.8 million in the prior year period in 2010. Income from operations increased approximately 30% to $26.6 million, compared to $20.4 million for the prior year full period. This increase was primarily due to operating profit generated from the higher sales volume, as well as for the 2010 recording of a $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 December 31, 2011, AFM's revenues decreased to $22.2 million, as compared to $27.5 million of revenues in the prior year quarter, as this business continues to be adversely affected by the challenging environment in the promotional furniture market. AFM reported a loss from operations of $23.1 million, which includes the previously mentioned $20.1 million impairment charge, as compared to operating income of $1.7 million in the fourth quarter of 2010.

For the year ended December 31, 2011, revenue was $105.3 million, compared to $136.9 million in the year earlier period. Loss from operations was $35.2 million, versus an operating loss of $37.1 million for the prior year period. For the year ended December 31, 2011, and for December 31, 2010, we recorded a non-cash impairment charge related to ownership of AFM totaling $27.8 million and $38.8 million, respectively.

Turning now to CamelBak, which we acquired on August 24, 2011. For the quarter ended December 31, 2011, revenue was $26.6 million, compared to $31.4 million in the prior year period, which was prepared on a pro forma basis, as if we acquired CamelBak on January 1, 2010. This decrease is attributable to lower military sales following a drawdown of US troops overseas, largely in the sale of gloves.

The Company had pro forma operating income of $1.3 million for the fourth quarter of 2011, as compared to pro forma operating income of $28 million in the same period last year. For the year ended December 31, CamelBak reported revenue of $141.3 million on a pro forma basis, compared to $122.2 million in the prior year period, also prepared on a pro forma basis. Pro forma income from operations for the year ended December 31, 2011, was $18 million, compared to pro forma income of $13.4 million for the prior year period, due to the operating income generated from the higher sales.

Moving to ERGObaby, which we acquired on September 16, 2010. For the quarter ended December 31, 2011, revenue of $141.3 million on a pro forma basis -- excuse me, for the quarter ended December 31, 2011, revenue increased slightly to $10.9 million, compared to $10.8 million in the prior year period, which was prepared on a pro forma basis as if we acquired ERGO on January 1, 2010. The Company reported pro forma income from operations of $28 million for the fourth quarter of 2011, as compared to pro forma income from operations of $2.9 million in the same period of last year.

SG&A expenses for the fourth quarter of 2011 included approximately $1.5 million in non-recurring costs related to one-time marketing expenses and for the diligence associated with the acquisition of Orbit Baby in November of 2011. For the year ended December 31, 2011, revenue increased approximately 28% to $44.3 million, compared to $34.5 million in the prior year period, which was prepared on a pro forma basis. Pro forma income from operations for the year ended December 31, 2011, was $8.4 million, as compared to pro forma income from operations of $9.4 million in the year earlier period. SG&A expenses for 2011 increased by approximately $6 million year-over-year, mainly due to significant investments related to ERGObaby's expansion initiatives during our first period of operations since acquiring this business.

Turning to Fox Racing Shox, revenue increased 12% to $47.3 million for the quarter ended December 31, compared to $42.2 million in the prior year period. During the fourth quarter of 2011, we recorded higher sales in core mountain biking sector, as well as in our powered vehicle sector. Income from operations was $2.9 million for the quarter ended December 31, 2011, compared to income of $3.3 million for the year earlier period. Primarily as a result of higher SG&A expenses to support the company's continued sales growth.

For the year ended December 31, 2011, revenue climbed approximately 16% to $197.7 million, compared to $171 million in the prior year period. Due to increased sales in our mountain biking sector, as well as in the powered vehicle sector. Income from operations for 2011 increased approximately 15% to $22.6 million, compared to $19.6 million for the prior year period, mainly due to the strong increase in net sales.

Moving on to Halo Branded Solutions. For the quarter ended December 31, 2011, the Company's revenue rose to $55.3 million, compared to $53.8 million for the same period last year, largely due to sales from the acquisition of Logos Your Way in October. Income from operations for both the 3-month periods ended December 31, 2011 and 2010 was approximately $4.1 million. For the year ended December 31, 2011, HALO's revenue were $170.9 million, compared to $159.9 million in the prior year period, an increase of approximately 7%. Income from operations was $9 million, versus income of $4.9 million for the prior year period. During the year ended December 31, 2011, SG&A expenses were reduced by approximately $1.8 million, due to proceeds from a legal settlement.

Turning to Liberty Safe, which we acquired on March 31, 2010. For the quarter ended December 31, 2011, revenue increased approximately 28% to $21.6 million, compared to $16.9 million in the prior year period. This increase was due to higher sales across all distribution channels. The Company reported operating income of $1 million for the fourth quarter of 2011, as compared to pro forma operating income of $0.9 million in the same period last year.

For the year ended December 31, 2011, Liberty increased revenue by approximately 27% to $82.2 million, compared to $64.9 million in the prior year period, which was prepared on a pro forma basis, as if we acquired Liberty Safe on January 1, 2010. The increase was due to higher sales across all distribution channel. Income from operations for the year ended December 31, 2011, was $4.3 million, compared to pro forma operating income of $2.7 million for the prior year period.

Now on to Tridien Medical. For the quarter ended December 31, 2011, revenue was $12.9 million, compared to $14.3 million for the same period last year. Despite the lower revenues, income from operations for the fourth quarter increased to $1 million, as compared to $0.2 million in the same period of 2010. This increase is primarily due to lower selling and general administrative expenses. Largely due to the separation costs in connection with Senior Management changes that occurred in the fourth quarter of 2010. For the year ended December 31, 2011, revenue was $55.9 million, compared to $61.1 million for the same period last year. Income from operations was $5 million, compared to $8 million for the same period in 2010, due to pricing pressures from customers and investments in new product development.

Turning now to the balance sheet, we had $132.4 million in cash and cash equivalents and net working capital of $242.1 million as of December 31, 2011. We also had $225 million outstanding on our term debt facility and no borrowings outstanding under our revolving credit facility as of December 31, 2011. We had borrowing availability of approximately $287 million under our revolving credit facility as of December 31, 2011. As a reminder, we signed a credit agreement on October 27 for a revolving credit facility holding $290 million and a term loan facility in the amount of $225 million.

The two facilities combined for $515 million in new term debt financing replaced our previously revolving credit facility and term loan facility. With this agreement, we have improved our mix of debt to equity within our capital structure and extended our debt maturities into October 2016 in case of our revolver and October 2017 with the new term loan. The issuance of the $225 million of term debt was used to repay the then existing $72.5 million of term debt, with the excess proceeds largely responsible for the [significant] cash balance we had at December 31, 2011. This did have a negative impact on our fourth quarter 2011 CAD, as an additional interest expense was dilutive and remains dilutive onto our Arnold acquisition in 2012, which was largely funded with this cash.

During the fourth quarter of 2011, we incurred approximately $3.7 million of maintenance capital expenditures, an increase of 53% compared to $2.41 million in the year earlier period. For the full year 2011, we incurred maintenance capital expenditures of $11.2 million, which included a level of expenditures that would have otherwise been incurred in 2012 to take advantage of the 100% bonus tax appreciation incentives available in 2011. This compares to maintenance capital expenditures of $7.1 million for the year ended December 31, 2010.

For the current year, including Arnold, we anticipate maintenance capital expenditures between $10 million and $13 million, as we remain focused on investing in the long-term performance of our subsidiaries. We also incurred approximately $3 million of growth capital expenditures during the fourth quarter that were largely spent at Liberty Safe to increase production capabilities. For the full year 2011, we incurred approximately $10.6 million of growth capital expenditures. For 2012, including Arnold, we expect to incur growth capital expenditures of between $5 million and $7 million, largely for completing Liberty's production capacity and to growth initiatives at Arnold. I will now turn the call back to Alan.

Thank you, Jim. Overall, we are pleased by the performance across our family of niche market leaders in 2011 and remain excited by our future prospects. We will continue to leverage our unique business model and balance sheet strength to take advantage of both organic and acquisition-related growth opportunities that create enduring value for our owners. In addition, we remain committed to providing our owners with attractive distributions.

CODI has established a strong track record in delivering a steady stream of distribution throughout its history as a public Company, and we remain well-positioned to continue this tradition in 2012. 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.

Thank you. (Operator Instructions). We will go first to Larry Solow with CJS Securities

Good morning. A quick clarification, and I know it's not an exact items you're giving any out, but the slight growth in CAD year over year, does that -- that would include Arnold?

Yes, it does.

Okay. Sort of, just a barometer check, it sounded like from where we left off when you guys from last quarter, things sound sort of -- your outlook may be a little bit different on a company-by-company basis, but in general, your outlook is sort of the same? A little better, a little worse, how is the environment out there?

I think that probably compared to the last time we talked, things seem to be a bit more stable in the markets right now, in terms of the general economic conditions. I would say -- I believe last time we spoke, we probably referred to ourselves as cautiously optimistic about 2012. I think that we will probably, due to our conservative nature, maintain that same stance, although when I try to think back to our last call, I would say that I probably feel a bit more confident about where we are at right now versus the last time we spoke, Larry.

Okay, good. And just in particular, Fox, you had some pretty strong revenue growth, and you mentioned some investments in SG&A, and then you also mentioned in your prior comments some capital expenditure investments looking out into '12. Can you maybe discuss a couple -- probably two separate items, one's more operating, and one's in the CapEx ones next year as well -- but if you can maybe just give a little more color to that, and do you expect the business Fox to grow year over year, with that all said?

Larry, to make sure I heard you, your question was specific to Fox?

Correct.

That's great. Elias will take that question.

Larry, in particular, and as I think everybody that has followed the Company knows, we have had some pretty rapid growth over the last few years. We have really stepped up some of the investment in SG&A, and that was one of the reasons that you did not see the revenue growth translate into EBITDA growth, as we have historically been able to realize. That said, going forward, we do believe that we are set up for some modest growth coming into the year. A lot of this is going to be based on Europe, to be honest with you. About 50% of mountain biking sales are sold in Europe, if you look globally, where most mountain biking is -- how it's distributed. So, if Europe continues to show signs of stability, which I think we are all starting to see right now, I think that bodes well for Fox, as Fox has continued to be very strong in taking market share with additional spec and also expanding into some of the other categories. The big caveat clearly is going to be whether Europe holds up, and if Europe goes into a steeper decline, then I think in any consumer product would follow naturally.

So, in terms of SG&A investment, it really is just getting further strength from the management side and investing in some of the operational capabilities that had lagged a little bit, the growth, given how rapid the growth had accelerated over years, and we believe making some of these investments now will really yield significant results in terms of operating profitability later in the year in 2012 and as we come into 2013 and beyond. In terms of CapEx, I would say last year we stepped up our CapEx investment in the fourth quarter for Fox. We would anticipate that number looking somewhere like $4 million to $5 million coming into 2012. Again, a lot of automation, we're consolidating some of our footprint into some more efficient space that we are trying to come back into, into one building here from our operating. And in addition to that, we have an initiative to get some production moved over to Taiwan, predominantly to be closer to some of our big bike customers.

And so those initiatives are ongoing that will acquire a little bit of capital. We would expect that capital to be spent in the first couple of quarters, mostly, with a little bit trickling on into third and fourth quarter. So we would guide you to say look at fourth quarter, first quarter, and second quarter of 2012 as being bigger investment periods, both in capital and in SG&A, with expected benefit to be realized after all of those investments are put in place, kind of in the back half and into next year, into 2013.

If I may one last question, just on Arnold, can you maybe just discuss sort of historically its growth rates and where you see the industry growing and where you think Arnold can grow, going out over the next few years?

Arnold has been -- one of the things we were really attracted to about Arnold was its history of steady operating performance and growth as they have incorporated their products into new end markets and new applications. So it has been a very solid performer, even through the economic downturn that we all experienced over the last few years. I think that going forward, we see this as a company that can continue to grow steadily and solidly in the future. I think that we have made some references to higher growth end markets and potential for new product and new applications. And I think that while we believe that that is something that the company will continue to pursue and pursue successfully, I think it's critical to understand that our fundamental thesis was not based on achieving what I will call some of that upside. So, what we really like about this business, obviously, is its niche market leadership, its great capital generating characteristics, strong management team, solid performance through various economic cycles, and we think that the company is very well positioned to continue that. But we really also believe that there is potential for growth beyond what they have done historically if, in fact, they are able to make further inroads into some of these newer end markets or if, in fact, some of these other end markets grow even beyond our expectations.

Right. Thanks a lot.

My pleasure.

(Operator Instructions). We will go next to Troy Ward with Stifel Nicolaus

Great. Thank you. A follow-up on Larry's question there on Arnold, can you speak to two other points? First of all, how did you source that transaction? Where did you derive that from? And then also, was there any seasonality in that business that we should be modeling?

With respect to the sourcing, Arnold was a company that had gone to the market for sale on a process some time ago, and that process was never consummated. And through one of our relationships in the banking community, we were contacted directly about taking a look at Arnold and getting to know the company and getting to know the management team, kind of outside of what I will call a broad process. So there was an adviser involved, but -- and we assume a select few others were invited to get to know the company, and that's how it was introduced to us. Jim, do you want to comment on seasonality?

We don't see a lot of seasonality in the business, so it's pretty -- obviously, there's some impact within the different business segments, but overall, there's not a lot of seasonality.

Okay. Moving on to some of your historical segments, HALO, you did mention in the fourth quarter you did another tuck-in acquisition at HALO. Can you speak to -- do you continue to see that happen? I know you have done a lot of them. I don't know if you consider that a roll-up, but you have done a lot of mom-and-pop type of acquisitions there. Do you think that will continue? And what is the organic growth rate at HALO, ex these acquisitions?

I will start with the first part of the question. The tuck-in acquisition model is a model that HALO has employed consistently under our ownership and one that we would anticipate they will always continue to pursue and evaluate, given HALO's tremendous infrastructure. These add-on acquisitions are typically quite accretive and pay -- we end up getting some very good effective multiples with respect to these tuck-in acquisitions. I think that that is a strategy that has been employed and will continue to be employed.

Elias or Jim, I don't know if either of you want to comment on the organic growth. I don't know that we have measured that.

Alan, it's a little hard to say on the organic growth. The business had some cyclicality associated with it, and so over our ownership, you would really have to be able to somehow tease out what the cyclicality has been versus what the organic growth. From a bigger picture, if you said the marketing spend on promotional product and where do we expect the industry to go going forward, most people and most industry experts suggest that this is a mid single-digit growth category, with the Internet growing slightly faster than the traditional space. So the traditional space would be kind of low single digits and the Internet kind of levers that up to mid single digits.

So I guess that would be kind of a proxy for what somebody could consider organic growth in the space to be. We believe we are a exceptionally managed business and that we attract recruits, which is your primary method of growing, that we are a very good place to attract recruits. So we have no reason to believe that we will not meet or exceed what the industry growth rates would be. But to go back and try to tease out historically growth, let's say from 2010 to 2011, where there may have been a little bit more of a stronger cyclical rebound in marketing spend, what was due to organic and what was due to cyclicality, I think that is a really a tough question. So I think looking at it in a broader context is probably more appropriate.

When you talk about an Internet platform versus a traditional platform, I'm assuming HALO falls in the latter category, traditional. Do they have any inroads, or is there any piece of their business you would consider the Internet side of the business?

Yes. So we do have both components, and the Internet has been an area that we have been thoughtfully working on here for the last 1.5 years. It's a little bit more sensitive, obviously, because we are traditional and we have established rep network. And so what we are not looking to do is just become an Internet-only center. Instead, what we are doing is integrating an Internet capability with our reps and not trying to be competitive to our reps with our Internet but use that as a tool to gain new customers, where they are very price-sensitive, low-margin customers to be able to have an avenue to get into them again without infringing on the routes.

So, yes. We do have that. It is live now that you can go on and order, and it has been live for about six months. And we are now starting to dump some additional investment into search engine optimization and getting more of the market initiative around that. But we view this as a complementary and enabling tool to the business that we have, and we think it is really in the established network that we have, it is the right way to go going forward, to work with our reps rather than to work against them.

It sounds like to me that the majority of the business is in the slower growth traditional. You are starting to get into some Internet. As I think of CODI's competitive advantages, what do they bring to the table, to your underlying portfolio companies, it wouldn't seem -- it would seem like that your -- that HALO is not as well-positioned and probably is never going to be an Internet-only company. So what are you going to do for HALO going forward, and what is your eventual exit strategy with HALO?

I think that with respect to HALO, I think that the company is in fact unique to its industry. It has scale beyond those of virtually all of its competitors, and its infrastructure and ability to manage large clients I think is unrivaled, and their fulfillment services are also unrivaled. I would say that I think that, as Elias referenced, we are migrating towards incorporating an Internet strategy. But we are fundamentally at this point a business that is focused on the non-Internet channel. And I think that we are, in fact, working with the company to help position it as it enters new market. So I think we will continue to do what we have been doing, which is growing the business, making acquisitions, penetrating new channels by embracing technology, and I think we will absolutely continue to do those things and, hopefully, build the business going forward, as we have in the past.

We are very pleased with the company's results over the last eight quarters, as we talked about in the opening remarks. And so I think the company is poised to continue to do well, to grow its business, to gain new customers, and to also modernize its distribution or complement its distribution by utilizing modern technology, as Elias has described. I don't believe that we comment specifically on an exit strategy for any of our companies, but like all of our companies, I think HALO's market position, its management, its track record of success, would ultimately make it interesting to industry buyers as well as financial buyers. But I think I could say that about every one of our subsidiary companies.

Great. Thanks, guys.

We will take our next question from Vernon Plack with BB&T Capital Markets.

Thanks. While we are on the subject of HALO, I'm a little curious, I'm trying to understand the business a little bit more. I notice that if you look at the product category, over the past couple years there has been some fairly meaningful shifts in terms of the mix. Apparel, for example, has increased 50% over the last two years, roughly 50%, whereas office accessories, I think, have declined almost 50%. So is there a mix shift there? Again, I'm trying to understand what's happening within the business.

Vernon, Elias and Pat Maciariello are going to take a shot at that one, although I do think that with companies -- HALO's customers, I should say, as they consider their marketing spend and what they want to use to promote their companies, I think that there are just perhaps changes in attitudes in terms of what products interest them. But I will let Elias or Pat disagree. I don't know that there's any specific reason to explain the shifts that you are describing. But I'll turn it over to Elias.

Vernon, I think that's exactly right. HALO, remember, serves the rep network, and by and large, that's kind of the customer that we view us having. And we spend a lot of our focus and effort on getting new reps, whether it's through recruiting or through acquisition. And what their customers -- what the end customer buys really can be driven by a lot of things. There can be really cool products that come out one year that they want to invest in, in terms of their marketing spend. In other years, they can go back to traditional clothing. I think those things can bounce around in terms of the types of products that will ultimately be sold. Remember, HALO has thousands and thousands and thousands of products that, in any given year, that shift -- that can really shift around. And so the mix, I think, is less relevant to look at, to be honest with you.

I think the questions on the rep network and the modes of distribution are probably better as a follow-up to the last question that we had. One thing that should be of note is a lot of HALO's customer reps actually are on the Internet, and they do their distribution through the Internet. So we are really the back engine for the reps. A lot of them that are Internet reps, we are the back engine for them as well. We do more processing work to a large degree, and that's really our area of differentiation is based around the service that we have and the ability to incorporate technology on a real scale basis that none of these guys would be able to do on their own.

But I think with respect to end mix of product, you can expect that to move around pretty dramatically. In some years, you may have companies like a pen manufacturer that wants to do a promotion, and the next year they may not want to go forward with that. That will cause some variability in what the end mix is going to be, so it's just not really something that I would think is relevant.

Okay. Fair enough. Looking at Arnold, that is a fairly unique business. And I know that it's a -- at least I'm looking at as a new platform company. You may have talked about this, but I'm curious in terms of how you add to a platform like that, not knowing a whole lot about that business.

I think, as we have talked about in the past, each platform will have different opportunities for addition. Some will be natural candidates to make acquisitions. Others will be more naturally focused on organic growth opportunities. And we view Arnold as actually being natural to pursue both. We think that there is obvious organic growth opportunities, as well as the potential for acquisitions. So I think that our strategy with the management team of Arnold will be to pursue all of those initiatives going forward.

One last question about American Furniture. I know that you talked about -- the goal, I think, is for the company to generate positive cash flow in 2012. Just curious if maybe you could have any more comments in terms of what the longer-term strategy is there. I know it's been a struggle here over the last several years, and is it fixed to the point where you think you can ride this out, or what are you thinking?

I think companies can always improve. I don't want to suggest that AFM or any one of our other subsidiaries, for that matter, is perfect and doesn't need to work towards improving. That said, American Furniture took some really meaningful actions in 2011 to better position itself. It outsourced some functions that were non-core to its operations, like its trucking operations, as well as its frame mill, which will save a lot of costs to the company. It significantly reduced its SKU count to allow it to become -- to get back to some more efficient manufacturing. It reduced its inventory meaningfully in conjunction with the reduction in SKUs. The company consolidated completely under one roof. It had had a few facilities in and around its corporate headquarters and primary manufacturing location. Those locations were completely out of under one roof, which will further improve our operating efficiencies. And I think we have introduced some great new products which have been very well received by the company.

So I would say that our hope, Vernon, is that the company, which, as we said, we think is well-positioned for positive cash flow this year, has budgeted positive cash flow this year, and the early start to this year has the company achieving its budget, which we are really excited about. And I think that -- so I think you used the word fixed. I absolutely have a tremendous level of comfort with American right now and the actions that it has taken to position itself for profitable operations this year. I am hopeful that without any further improvements, it would be absolutely capable of achieving the budgeted result, based on what we see right now. However, I think American continues to work really hard to make further improvements in its sourcing capabilities and its merchandising efforts and really in its -- in the way it does business and trying to get further and further efficiencies from its operations.

So, we are very hopeful that the company will achieve its budget this year and think that is firmly on track to do so, albeit very early in the year. And I think that, hopefully, if the economy continues to stabilize and perhaps even show some strength, that the company can take steps forward from this level of performance in the future years. So I think that as we sit here today, we remain supportive of American Furniture, very pleased with the very difficult efforts that they undertook in 2011 to position the company, and are really hoping that the company is poised not only to achieve breakeven results this year but to get back on track and generate even higher levels of cash flow in the future, as it has in the past.

Okay. That's all very helpful. Thank you.

We will go next to Bo Ladyman with Morgan Keegan.

Hi, guys. A quick question. With Staffmark back in results, Q4 was seasonally very strong. Obviously, that's not in end results any more. You made a couple acquisitions recently. Going forward, where would you expect peak results to be in a given year? Is that moving now more to Q3? Any color on that would be helpful. Thank you.

I think it is the back end of the year. But do I expect that Q4 results will also improve, as the level of capital expenditures we anticipate in Q4 next year should drop off. CamelBak is a weaker fourth quarter as compared to third quarter, so the combination is largely in the last half of the year. It's stronger than the first half of the year.

Okay. That's good. And then CamelBak, you mentioned in your comments the drawdown impacting results. Can you differentiate a little bit in Q4 how much of that is normal seasonality and how much of that is defense related and what you would specifically be expecting for that business next year?

I would attribute more of the result to seasonality than to troop drawdown. And I'm sorry, the second part of your question. Could you please repeat it?

Expectations for next year. Defense --would the drawdown in defense do you expect to continue? Is that -- how meaningful of an impact is that, looking into next year?

We are very positive on this business. From our results on a pro forma basis, we did approximately $31 million of EBITDA last year. We would expect that number to be up over that level.

Right. And I think that, if I'm not mistaken in our comments about the defense side of the business, we referenced specifically the glove business. And the glove business is a bit lumpier than other segments of CamelBak's business, so I think that, to be fair in our comments, I think it was something that we had to mention. But as Jim said, going forward, even with the potential for further withdrawal of troops, we do not expect that to have a negative impact on the company's results this year versus last year, as Jim said, in total. As Jim said, we remain very optimistic about CamelBak for 2012, relative to 2011.

Okay. That's helpful. Thank you.

We will go next to Troy Ward with Stifel Nicolaus

Great. Thanks. Just had a couple more questions on the other segments here. On Advanced Circuits, looking at the 10-K, you give new customers per month, and that number has fallen, I think, for the second consecutive year, as well as orders per day. That is down. Can you speak to what is causing those trends and if that's just a business change, or what do we think is going on there with respect to what you expect in 2012?

Troy, it's a great observation in orders per day. We have seen a little bit of softness in our orders per day coming into 2011, really in kind of the back half of '10 and carrying over into '11. We think it's more of an industry thing, and it's not specific to the company. I can tell you everything that we follow and looking at our comps and looking at what the industry is doing would suggest that.

The PCB manufacturing industry actually had a relatively tough year in 2011, and we think that Advanced Circuits performed extremely well. So it's going to be based on economic activity, I think, 2011, notwithstanding a nice bounce back in the stock market, was still a relatively low GDP growth period. And we really are in need of new business formation, where people are creating new product and we have a lot more R&D. And I think in 2011, we just didn't see that. So I think the industry in general slowed down.

Coming into 2012, we see the numbers pretty stable to 2011. We are not seeing any great pickup at this point. What we do know is that a lot of our competitors, from what we are hearing just chatter in the industry, seem to be struggling out there. And as we are holding our own here last year and into this year, we feel that is against the backdrop of people that are finding weakness, especially in kind of our core quick-turn business. Obviously, we talked a little bit, and I think everyone knows, on the defense side of the business, the cuts that are coming in 2013 have created a tremendous cloud of uncertainty. And so the prime contractors that we would normally work with are not making as many investments in new projects today, and that is causing the quick-turn, more R&D-type defense stuff to really slow down quite dramatically. So we expect that in 2012 to continue.

Until there is more clarity on spend, even if it is at a reduced level in 2013, we think that it will at least create more certainty for some of the primes to be able to start to invest back in new project development. But 2012 is expected to be a slower demand period for that quick-turn defense. But in the core PCB business, we see that as a flattish kind of order trends right now. And on the assembly piece, that is still something that we are making investments in, and it's a relatively new business line for us. Quick-turn assembly continues to grow, so on balance, puts us at a flattish type of expectation.

Moving over to ERGObaby, also in the 10-K, you give some brick-and-mortar store counts. And those went up big from 720 up to 900. Then you made in there the comment is representing over 2,000 retail doors. Can you educate me on what that means? I'm not familiar with what that is from the consumer side.

If we had a -- for example, if we were selling to BRU, which we do sell to now, that may be 225 doors that we sell to. So the actual number of retailers may only go up by 1, but the number of doors went up by 230. The more that we go into the mass channel, the more that we are going open up a lot of doors with only opening up a limited number of retailers, by definition. We now -- you can see our product at target.com, and we are opening up more of what I would call the specialty mass with BRU. And we are being thoughtful about how to still preserve our core specialty base but supplement that with more doors, which helps with brand awareness, helps just getting distribution where customers are able to get product today by going into the mass market. And that has been a real big initiative. When I talked about the expansion, both internationally and domestic, in our distribution capabilities, one of the real large initiatives was to expand to all parts of the US, where, if there were people that were looking -- consumers looking for this product, they would be able to see it, but also to just get better brand awareness by having more store placement.

Okay. Last question on Orbit Baby. Can you talk about -- first of all, was there any revenue from Orbit Baby in the fourth quarter? And what are your expectations -- what will Orbit Baby add in 2012? And is there any seasonality in their business?

We had about $700,000 of revenue in the fourth quarter that was contributed from Orbit. It is not a seasonal business, and in fact, there is not a lot of seasonality in juvenile products. These products are predominantly purchased when a baby is -- especially for a durable kind of three to six months prior to the baby's arrival. So it's something that doesn't lend to a lot of seasonality.

Now, as said, we would expect Orbit Baby to contribute more than $10 million of revenues next year. It is a relatively young brand that was started in 2004. But like ERGObaby, it really has a very high-profile following, a lot of celebrity usage, has a lot of the similar characteristics to ERGO, and that's why we thought this was a tremendous strategic opportunity. It also is kind of in the core durable transportation area that we think is a natural extension for ERGO. So it is a relatively early brand. And as such, we are investing in continuing to build out distribution. A lot of things we are doing with ERGObaby will now be folded in with Orbit as well, filling out the product, being able to get greater distribution. So a lot of investment coming in 2012 and less contribution in terms of operating profit from the revenue than what you would see from some of our more mature businesses or even from ERGO. But it is something we think is really right for further investment to accelerate revenue growth into the future and then drive significant profitability.

One final one. On the military side of the business, you talked about Advanced Circuits. For different reasons, the military side is weak now. Maybe it's going to pick up once there's some clarity. At CamelBak, you said because of troop drawdowns, and I know CamelBak, it's not a military issued product. It's more of a military personnel going out of buying your product. Talk about Fox's military. What are you seeing on their side? I know that Fox also has some military sales as well.

We actually had -- Fox's military sales was extremely small in 2011. I want to say it was probably about 2% of our book of business. So it wasn't really material. We look at Fox as having all upside, frankly, from military spend. Whether that will come to fruition in 2012 or not, it's a little bit hard to tell. I believe that we are at better positioned today in order to gain military spec than we ever have been. We have more primes that we are on their vehicles. And if you walk around the show, it's kind of significant, like four or five times more vehicles that we are actually spec-ed into.

The big question becomes, is the government actually procuring new vehicles in any type of quantity, given the amount of reduced defense spend that they are contemplating? That is a real tricky question, and I don't know when that will happen. I will say that a lot of our equipment that is in Afghanistan and Iraq today will either need to be retrofitted, which we think could be. And again, I will use the word could, because it is always subject to having to go through and win the procurement. But we think we are positioned well for that. If that stuff comes home, we think we could be in a good position for a retrofit. And if it doesn't come home at some point, you just have to replace the equipment that was left in the field. Otherwise, you are just short equipment.

So we think that Fox will and is positioned to do well in the military business. Again, I think there is so much uncertainty. I can tell you we are not counting on anything for 2012, but if it was to happen, we would be very excited. We think this is a long-term business venture that has significant upside potential with a pretty good probability of getting something. I just can't tell you when.

That's great color. Thanks, guys.

That is all the time that we have for questions today. I would like to turn things back over to Alan Offenberg for closing comments.

Thank you. On behalf of the team at CODI, we really appreciate you taking the time to join us on the call today. We are thankful for your support, and we look forward to speaking with you next quarter. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We would like to thank you all for your participation.