Compass Diversified Holdings (CODI) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Compass Diversified Holdings 2013 first-quarter conference call. Today's call is being recorded. All 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 reading of the Safe Harbor statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified Holding's first-quarter 2013 conference call. Representing the Company today are Alan Offenberg, CEO; Jim Bottiglieri, CFO; and Elias Sabo, a founding partner of Compass Group management. Before we begin, I would like to point out that the Q1 press release, including the financial tables, is available on the Company's website at www.compassdiversifiedholdings.com. The Company also filed its Form 10-Q 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 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. 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, 2012, as well as in other SEC filings. In particular, domestic and global economic environment has a significant impact on our subsidiary companies. CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

At this time, I would like to turn the call over to Alan Offenberg.

Good morning. Thank you all for your time, and welcome to our first-quarter 2013 earnings conference call. We are pleased to report strong first-quarter results that exceeded management's expectations. For the three months ended March 31, 2013, CODI generated cash flow available for distribution and reinvested, which we refer to as cash flow, of $20.8 million or $0.43 per share, an increase of more than 25% from the year-earlier period. Our results are primarily due to the combined revenue and earnings growth of our leading branded products businesses consisting of CamelBak, ERGObaby, Fox and Liberty.

These four companies, which represent approximately two-thirds of our subsidiary EBITDA, continue to achieve notable success by capitalizing on their market leadership, and comparative financial strength, to increase market share relative to the competition, and create significant operating leverage. During the quarter, we also benefited from the full inclusion of operating results from our newest subsidiary, Arnold Magnetic, which we acquired in March of 2012, and from the relative stability in the performance of our three additional niche industrial businesses Advanced Circuits, American Furniture, and Tridien.

Based on the continued application of our business model, we paid a cash distribution of $0.36 per share for the first quarter, representing a coverage ratio of cash flow to distributions paid of approximately 1.2 times for the quarter, and a current yield of approximately 8.5%. Since going public in May of 2006, CODI has payed cumulative distributions of approximately $9.24 per share. Our focus remains on leveraging CODI's balance sheet strength to drive future performance, and to provide attractive distributions.

Last month, we took proactive measures to further strengthen our financial position. Specifically, we expanded the size of our term loan facility by $30 million to $281.9 million, and lowered the interest rate by 125 basis points. In addition, we lowered the interest rate for our revolving credit facility by 50 basis points. While Jim will discuss our amendment in more detail, I'd like to note that our liquidity stands currently at approximately $275 million, positioning CODI well to continue to invest in high-return organic-growth initiatives while pursuing platform and add-on acquisitions, without having to rely on third-party financing.

Currently the M&A environment for middle-market businesses remains quiet. A continuing trend from the end of 2012 as economic uncertainty has persisted, along with relatively low business and consumer confidence levels. Although the timing of any acquisition can be difficult to predict, we remain cautiously optimistic that we will be able to complete at least one platform acquisition in 2013. We expect a modest increase in M&A activity going forward, given the continued strength in the overall equity and debt markets, as well as the stabilizing economic outlook, which should eventually provide for more high-quality deal flow as we strive to enhance our sourcing efforts. We appreciate the patience of our shareholders as we remain true to our disciplined approach in creating long-term value by acquiring companies with a real reason to exist, under favorable terms and valuations that are accretive to cash flow.

I'll now turn the call over to Elias to review our current group of subsidiaries in more detail.

Thank you, Alan. I will begin by reviewing our branded businesses. As Alan mentioned, we continue to post strong growth across our branded businesses, which produced combined revenue and EBITDA growth of approximately 19% and 33% respectively for the first quarter of 2013, over the year-earlier period. EBITDA margins also expanded to 21.2% for the quarter ended March 31, 2013, from 18.9% for the quarter ended March 31, 2012, for these four subsidiaries on a combined basis. All of our branded businesses grew revenues and EBITDA in the first quarter, the majority by double digits, led by Liberty which increased revenue approximately 41% over the year-earlier period. This business posted a record quarter in Q1, as we continue to experience robust demand for the company's premium home and gun safe. In addition to the positive topline trends, our ongoing efforts at Liberty to increase operating efficiencies contributed to a substantial increase in EBITDA, more than 87%.

At ERGObaby, we posted another strong quarter in terms of both revenue and profitability, each of which increased approximately 19% as compared to the year-earlier period. We continue to leverage ERGObaby's superior brand for child mobility and transport products, and expand customer penetration levels in both the US and internationally.

At Fox, revenues and EBITDA grew by approximately 20% and 38% respectively, even though the first quarter has historically been the company's weakest quarter due to seasonality factors. Finally, at CamelBak, revenues and EBITDA increased by 6% and 21% respectively. During the first quarter, we fulfilled our contract with the US Marine Corps to supply a new hydration system for use in training and combat operations. We also benefited from changes in the timing of certain product deliveries ahead of schedule, which we expect will reduce our performance in the second quarter. Going forward, we will maintain our focus on expanding CamelBak's leading product platform and strengthening its global distribution network.

Next, I will turn to our niche industrial businesses, which posted results in-line with our expectations as they continue to generate predictable and strong free cash flow. Revenue, on a combined basis, for the first quarter of 2013 was essentially flat, and EBITDA declined approximately 7%. Please note that all references to combined revenue and EBITDA for our niche industrial businesses were prepared on a pro forma basis as if we acquired Arnold by January 1, 2012. Advanced Circuits delivered year-over-year revenue growth of approximately 12% in the first quarter, due to the add-on acquisition of Universal Circuits.

While demand for the Company's core quick term production services remains stable, we continue to experience softness in our defense and aeronautical business. Our newest subsidiary Arnold Magnetic posted first quarter results consistent with our expectations. Revenue and EBITDA declined year-over-year by approximately 12% and 18% respectively. This is primarily a result of an unusually strong first quarter in 2012, however EBITDA increased sequentially by approximately 8% from the fourth quarter of 2012. We are pleased with the progress this business has achieved since acquiring it just over a year ago, and remain excited by Arnold's future prospects in the specialty and rare earth magnetic industry.

At Tridien, this business performed slightly ahead of our expectations in Q1. Revenue increased year over year by more than 10%, while EBITDA declined by approximately 9%, as anticipated. On a sequential basis, EBITDA for the first quarter increased approximately 10% from the fourth quarter of 2012. We continue to invest in R&D and remain on track to launch new innovative products by the end of 2013 in order to further strengthen Tridien's diverse platform of leading medical support services. And lastly, AFM met our expectations in the first quarter as both revenue and EBITDA increased year-over-year.

The improvement in operations reflect the proactive measures we have taken at AFM, including reducing the Company's cost structure and working capital requirements in light of the challenging retail environment in the furniture industry. We are confident this business is well-positioned to benefit from an eventual recovery in the overall economy and housing market, and we expect AFM to generate, at a minimum, breakeven cash flow in 2013. I would now like to turn the call over to Jim Bottiglieri to add his comments on our financial results.

Thank you, Elias. Today, I will discuss our consolidated financial results for the quarter ended March 31, 2013. I will limit my comments largely to the overall results for our Company, since the individual subsidiary results are detailed in our form 10-Q for the quarter that was filed last night. On a consolidated basis, revenue for the quarter ended March 31, 2013 was $241.6 million as compared to $195.3 million for the prior-year period. This increase was attributable to the full inclusion of our Arnold Magnetics subsidiary, which we acquired in March 2012, and double-digit revenue increases at ERGObaby, Fox and Liberty.

Net income for the quarter was $3.6 million as compared to net income of $0.9 million in the year-earlier period. The year-over-year increase reflects double-digit growth in each of net sales, gross profit and operating income. During the first quarter of 2013, we recorded a non-cash supplemental accrual expense of $6.4 million, based on a periodic review of current cash flow generation levels of CODI subsidiaries, and anticipated market multiples for those businesses in the event that they were to be sold in the current environment. Reflecting the increase in value of our subsidiaries.

During the first quarter of 2012, we reversed approximately $1.5 million of the non-cash supplemental (inaudible) accrual, and expensed approximately $4.3 million of transaction costs related to the acquisition of Arnolds. Cash flow for the quarter ended March 31, 2013 was $20.8 million as compared to $16.6 million for the prior-year period. This year-over-year increase of approximately 25.2% was due to the full inclusion of Arnolds, and the strong performance in our branded product businesses, as was mentioned before. Partially offsetting these factors, cash flow for the first quarter of 2013, excluded the operating results from HALO, which we sold in May of 2012.

Turning now to our balance sheet. We had approximately $16.5 million in cash and cash equivalents, and had net working capital of $152.9 million as of March 31, 2013. We also had approximately $251.9 million outstanding under our term debt facility, and $27 million of borrowings outstanding under our $290 million revolving credit facility as of March 31, 2013, with no significant debt maturities until 2017. We had borrowing availability of approximately $261 million under our revolving credit facility as of March 31, 2013. On April 3, we exercised an option under our credit agreement, dated as of October 27, 2011, to increase the term loan facility by $30 million, increasing CODI's aggregate outstanding borrowings under the six-year facility to approximately $281.9 million.

We utilized the net proceeds from the incremental term loan, which was issued at par value, to repay borrowings under our revolver. As a result, there were no borrowings outstanding under the revolving credit facility at closing. We have $15 million outstanding under our revolving credit facility as of today. Concurrent with this increased borrowing, we amended the pricing terms of our term loan facility. Under the terms of the amendment, amounts borrowed now bear interest at either LIBOR plus a margin of 4%, as compared to a previous LIBOR margin of 5%, or base rate plus a margin of 3%, as compared to the previous base rate margin of 4%. In addition to the LIBOR floor was reduced to 1% from 1.25%.

We also amended the pricing terms of our revolving credit facility. Under the terms of the amendment, amounts borrowed now bear interest based on a leverage ratio, defined in the credit agreement, at either LIBOR plus a margin ranging from 2.5% to 3.5%, as compared to the previous margin that ranged from 3% to 4%, or at a base rate margin plus a margin ranging from 1.5% to 2.5%, as compared to the previous margin that ranged from 2% to 3%. In addition, the unused fees for the revolving credit facility was reduced to 75 basis points from 1% if leverage is lower than a defined ratio. And, in addition maturity date for the revolver was extended to April 2017, while the terms of the credit agreement remained unchanged.

We are pleased to have capitalized on favorable credit market conditions for the second time over the past year. By amending both our credit facilities under favorable terms, we have enhanced CODI's financial flexibility, and reduced the Company's borrowing [cluster]. We appreciate the continued support of our lending group, which we believe underscores our strong growth potential. During the first quarter of 2013, we incurred $2.3 million of maintenance capital expenditures, as compared to maintenance capital expenditures of $2.6 million for the quarter ended March 31, 2012.

For the full-year 2013, we anticipate maintenance capital expenditures of between $11 million and $13 million, as we remain focused on investing on the long-term health of our companies. We also incurred approximately $1 million of gross capital expenditures during the first quarter. An increase compared to the gross capital expenditures of $0.8 million in the prior-year period. For the current year, we expect to incur gross capital expenditures between $7 million and $9 million, largely for our initiatives at CamelBak, Fox and Liberty subsidiaries. I will now turn the call back over to Alan.

Thanks, Jim. We are pleased by our strong start to 2013. The notable performance across our family of leading middle-market businesses, combined with our substantial liquidity, bodes well for CODI's future prospects as we remain on track to achieve solid year-over-year growth [on tap] for 2013, excluding the impact of any acquisitions or dispositions. We plan to continue to capitalize on both organic and acquisition related growth opportunities that create significant value for our owners, while providing a steady stream of cash distributions as we have consistently done throughout our seven-year history as a public company.

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) We will take our first question from Larry Solow with CJS securities.

Just a few quickies. Sounds like a pretty good quarter. The CamelBak was probably mostly timing related, but clearly a couple of the other, all your other branded businesses did pretty good. Is it fair to say that you are more positive today than you were a couple months ago? Your Q4 call wasn't too long ago, so.

Look, Larry, I think it goes without saying that we're extremely pleased with the performance of all of those businesses in the first quarter, and we remain optimistic that they are well-positioned and poised to have strong 2013s. So, I don't know if it's necessarily something I would classify as more optimistic than I was a quarter ago, versus having one quarter into the year and having that good performance just feeling better about that year, given that (multiple speakers) behind us. So, I think we were very optimistic about their prospects at the end of last year, and remain so, and just with the first quarter performance it only enhances our outlook for those businesses in 2013.

Okay. And I realize Fox did some [tickle] which is really not going to cover up the ball for several quarters in a row. Seasonally slow quarter, but pretty good growth and rapid growth the last few years, and, inevitably it has to slow a little bit. But, the good growth in a seasonally slower quarter, is it skewed by the seasonality, or is it truly an as-is quarter? That good?

I'll let Elias comment with more detail, but obviously Fox had a great quarter. They've been a extremely strong performer for several years now, and we think that they are just really well-positioned. But with respect to your specific question, I'll let Elias comment on Fox more specifically.

Yes, Larry, Q1 is one of our seasonally weakest periods. Q4 and Q1 are typically the two slower periods, driven largely by bike, which is Q2 and Q3, when we're launching the new model year and why we get such a boost in those periods. I would say that Q1, if you just look at the percentages, was extremely strong in terms of topline, and we were able to generate good bottom line leverage on top of that as well. As we stand today, I'd say it was a good first quarter, and there's nothing that would suggest that Fox's first quarter is out of line with where the Company thinks it will be for the year, so. So I would say, it was positive first quarter, and it has been a great last two years, so it continues just to execute extremely well.

Yes, absolutely. Okay, just one on Arnold. I realize that some of the quarterly year-over-year down on a pro forma basis maybe was a little bit exacerbated by timing, but what is your outlook? If I had to pick out a sore thumb or a business that's at least not beat expectations since you acquired it. What's your outlook there on what's hampering the business, and where we stand going forward?

Yes, well I think Arnold, first and foremost, we remain really excited about Arnold's not only current performance, but it's future prospects. As we've mentioned on previous calls, Arnold can be a somewhat lumpy business, particularly as compared to other businesses within our subsidiary group. Arnold's first quarter really was interesting in that they comped to an extraordinarily strong first quarter in the prior year. So they did suffer a little bit in that the last year's first quarter, in the context of a lumpy business, was just a phenomenal quarter for them.

So this first quarter performance was really in line with our expectations, and more specifically, if you were to look at the Arnold individual lines of business, again their largest subsidiary being PMAG, followed by Flexmag, and then Rolled Products. What you saw last year was the Rolled Products business having an exceptional performance, whereas I think as we've also mentioned on previous calls, the Rolled Products business is undergoing a period of weakness, and we've taken steps to address that business. We've got new leadership in place there, which we're very excited about, and again, think that is a segment of the business that will come around over a period of time.

But, if you really peel back the business, what you will find is PMAG performing at, or even above, prior-year levels. You've got Flexmag down slightly, but poised to regain some business that was lost last year. Again, on prior calls, I think we mentioned a customer that they have lost that they've now gotten back, as well as just gaining traction in their business generally. And the Rolled Products business is the one that's struggling a little bit, but we're very comfortable that we, in management at Arnold, are taking the appropriate steps to remedy the challenges of that business has encountered over the last year.

So, we are really excited about Arnold's. We think that they are positioned this year to perform in line with their performance that they achieved last year. Again, quarter to quarter, there could be some fluctuations in the context of it being lumpy, but the sequential growth that the company demonstrated in the first quarter, versus the fourth quarter of 2012, is very encouraging. And we are hopeful that Arnold will continue to perform in line with our expectations.

Great, thanks so much. That was very helpful.

Vernon Plack with BB&T Capital Markets.

Thanks very much. Jim, I wanted to make sure that I understood what you were saying as it relates to the revolver. Now you paid the revolver off. What was the number that -- how much do you have outstanding on the revolver today?

As of today we have $15 million.

Fifteen? 15?

15. We borrowed to fund our quarterly distribution, which is timing of cash flows.

Okay. And can I assume then if you have $15 million outstanding, do you have $275 million in availability on the revolver right now?

Approximately. There's some letters open. That's a good approximate, yes.

Approximately $275 million, all right. I was looking at the queue. Did Tridien take on some debt, intercompany debt, for a particular reason?

Yes we did. Tridien had no intercompany debt, and we did a recap where we redeemed some internal preferred stock that was owned by us and some minority holders. And basically recap -- why it's intercompany debt, I think it was $17 million of intercompany debt we did.

Yes, okay, great. And Alan, just a question about, I was hoping for a little more information just in terms of the pipeline. You mentioned that there is a possibility that you may be adding a platform acquisition in '13. Curious in terms of what you're seeing out there right now? I know that things have been slow across capital markets in terms of opportunities, and just was trying to get a better sense for the fact that you are cautiously optimistic?

Emphasis on the word cautiously. Yes, we are seeing, as you mentioned, we're seeing exactly what you said, which is a relatively quiet period with respect to high-quality opportunities for M&A in the middle market. We've seen some opportunities, more recently, that I think are in line with the types of opportunities we are interested in pursuing. And based on conversations we have with various participants in this industry, be it intermediaries or people that have access to sellers, and how they are thinking about their businesses, there seems to be an overriding sense of cautious optimism about an increased level of activity.

We believe that combining that with our sourcing efforts, which I believe are as good as they've ever been, we're just hopeful that we will be able to uncover an opportunity that make senses for CODI to pursue. We haven't historically been specific about the pipeline, so I don't think I'm going to go there in great detail. But, I do think it's fair to say that over the last month or so, we are starting to review some opportunities that are potentially exciting for us. But again, very early stage, Vernon. So it's one of those things where we could talk in three weeks, and I could tell you that none of those things are interesting to us at that time.

So, I don't want to leave you with anything other than, based on the macro factors that we just discussed here, we are cautiously optimistic that we will be able to achieve something. But beyond that, it's always hard to predict, and time will tell. But, I can promise you that we are out there every day looking for those opportunities and hope that we will be successful in finding one and consummating that type of acquisition.

Well thanks, that provides clarification for me, and just one follow-up. I'm curious in terms of the opportunities that you're seeing, are these attractive opportunities that are just too expensive, or are you just not seeing, perhaps, a whole lot of really attractive opportunities at any price?

Yes, I think that what I'm referring to right now is it's hard to comment about price, because we're not really at a stage yet where I can tell you that we are missing out on things that have been just quote unquote too expensive for us. That has happened at times during the year. And it's a great market, I mean given the availability of debt and equity capital out there, it is a market that can see premium valuations for premium assets. But, I would characterize my comments more in the context of a low volume of high-quality opportunities as opposed to a great many opportunities that we're just not getting too because of price considerations.

Okay that's very helpful. Thank you.

Greg Mason with KBW.

Great, good morning guys. Excellent quarter. First, on CamelBak. Can you talk to us about the potential drop-off from the expiration of the Marine hydration contract? What should we be thinking about next quarter with that now being out of the numbers? The impact from that.

Q1 probably had an impact of somewhere between $2 million and $2.5 million of EBITDA, included in Q1 for the Marine contract.

Okay, great.

On a trailing 12-month basis it was probably close to somewhere between $9 million and $11 million of EBITDA.

Okay. And then for ERGObaby in the queue, you talked about international stroller sales were down essentially due to inventory timing. Should we expect that to come back, and is that a meaningful part of the business?

Well, as you know with international distributors because they do make rather large orders it can be somewhat lumpy. And a lot of times what we're looking at is the sell through of the product to gauge health of the business, which sometimes doesn't match up 100% in a quarter with the shipments we make to the international distributors. I would say, with respect to the stroller side of the business, today it represents a 20%, roughly, of the overall business stroller and related accessories. And we remain very confident in the business. It's a very strong, recognized brand, both domestically and internationally. We feel good about not only the products we have, but new products that we will be launching, as well. So, there's nothing right now with that side of the business that gives us any kind of pause.

Okay, great. And then a couple final questions on CAD, cash flow. It looks like you've hit the five-year anniversary on Fox and you're going to get a $5.6 million performance fee payment. How does that impact the CAD number in the second quarter when that gets paid?

It doesn't. It's not a component of our cash flow generation number.

Okay.

Nor is the realized gains from the sale of businesses.

Got it. Okay, great. Also did the Tridien, essentially recap, impact the cash flow CAD number this quarter at all?

It really doesn't. I mean, obviously, the transaction acts as a tax shelter in that there's some interest expense now generated at the Tridien level that should reduce cash income taxes. Outside of that it has really no real impact on CAD.

Okay. Great. Thanks guys.

(Operator Instructions)

Bo Ladyman with Raymond James.

Hey, thank you guys, I appreciate you taking my questions. On Liberty, a very good quarter out of Liberty. Was there some one-time inventory pushed out the door there, or is this level a pretty good go-forward base to go on?

There was no one-time inventory pushed out. I think that, obviously, with a record quarter that corresponds with what I would say unprecedented demand for their products. And so relative to what's happening right now in the market that Liberty serves, I think that what you're seeing in the first quarter is a good representation of actual demand and performance. I think that, to be fair when we think about Liberty, and we think about its history and its future, right now recent current events, as well as the political environment are undoubtedly factors driving demand for Liberty's products. Historically, by that I mean over the last year or so, they've also done an incredible job of marketing their product and their brand, and driving additional demand even beyond that.

So, it's hard to know when this business will settle into something that isn't as current events driven but more is driven by the business, its branding, and, what I'll call a more consistent normalized level of demand. We don't see anything changing right now in the current environment. So, I don't make those comments to caution you in the very near term. However, as you think about Liberty longer term, that's something that we think about, the Company's management thinks about. But, for right now and for the near term, we think that the first quarter is really representative of the current state of the business as it will exist this calendar year.

So booking levels there have remained quite strong?

Yes, they have.

Okay, wonderful. And then, one on the sequester, something it was touched on last quarter. From other companies we've heard that it really was a nonevent. Is that the same for you? Are you seeing any impact to particularly your defense exposed companies?

I would say that, at a consolidated level, it hasn't been material, so to speak. However, at the individual company level, there have been some businesses that have, and continue, to feel an impact from the sequester. I would say most notably our subsidiary Advanced Circuits, in their defense and aerospace related segment of their business, has seen some softness, as we talked about last quarter, that we attribute to the sequester. But on balance, beyond that it's hard to point to any of our other subsidiaries where it's as pronounced as it is there.

But, as you can see with Advanced Circuits performance, even with that softness associated with the sequester, their performance continues to be extremely solid. And so it's a situation there where we don't think we've lost any business, it's just a function of having that business ramp back up. We will certainly think we will be the beneficiaries of that. So it hasn't been a complete nonevent, but on a consolidated basis it hasn't been a material negative impact to us.

Jim or Elias would you add anything to that?

The only thing I would add, Alan, is we started experiencing, at Advanced Circuits, a lot of the talk of the sequester pushing down orders, really as early as Q3 of last year and into Q4. There's been no additional stress since the sequester went into effect, but I think what a lot of companies did experience, that are doing work in the defense industry, was in anticipation of that, just a real slow down. And that's just now held steady, but there's no further degradation since implementation of the sequester.

Okay, wonderful. And then, taking a different look at the acquisition front. Are there any of your companies, right now given the multiples in the market that you're seeing, are there any particular companies right now that you would consider selling at this point?

Historically, we haven't really commented on that. I'd say the following. We have some very attractive subsidiaries, as you know. And I think it's fair to say that from time to time we do get tapped on the shoulder, so to speak, and the people ask about what we're thinking about in the future of our subsidiaries, and what is our interest level in perhaps selling them. I think that when you look across our group of subsidiaries at the time, even in the context of some companies that have performed not only incredibly well this first quarter but over a series of quarters and even years, that we believe that there is still room for many of these companies, if not all of them, to continue to grow and create even more value for our shareholders.

And I think that when we look at our own plans, one of the things we always ask about our companies is where are they, where can they go, and do we think we can help them get there. We believe that these companies have a lot of opportunity, and really, also as a reminder, while we sell our companies from time to time, we're really structured and positioned, and acquire all of these companies, with the intention of owning them forever, and building them and having them generate cash flow. So, I think that while we will always opportunistically consider options to sell our companies if that is what's in the best interest of our shareholders, right now what we're really focused on is building our companies, acquiring additional companies, and growing our cash flow.

Okay, great. And then one more, if you could just remind me. You hit a five-year anniversary on the Fox acquisition. You are getting the performance fee. Do you have the option to receive that only for a specified time period after the five-year mark, or can you receive that at any time after the five-year mark?

Well, it's on the fifth year anniversary, than after that it's every year thereafter.

Okay. And do you happen to know, of the companies that you currently own, how much you have paid out in cash on, I think, there are three other companies that you have owned for more than five years?

I believe the only other one was Advanced Circuits. $6.5 million, somewhere around there.

Okay, wonderful. That's all for me. Thank you.

JT Rogers with Janney Capital Markets.

Hey, good morning guys. A quick question on Liberty margins. I think you guys put in a price increase, and also in the Q, talked about seeing manufacturing efficiency benefits, as well as a favorable product mix. Just wondering when in the quarter the price mix was put into place? If you can quantify what kind of benefit that has had? And then, maybe how much further we have to go in terms of manufacturing efficiencies benefiting gross margins?

The price increase was put into place in March of this year. And as you might expect, the company, given the level of demand, is adding employees, adding ships. And while their factory is run as good as any factory that I've ever seen, they certainly are actually struggling even with some inefficiencies due to getting new people ramped up. Getting things going smoothly just as they look to satisfy the demand. So, I think that they have the ability, as they adjust to serving this level of demand, to see some manufacturing efficiencies going forward.

I think at this stage, it is hard to quantify. So, I really don't want to necessarily give you a target as to where I think the margins can increase due to, purely to manufacturing efficiencies. But, the team at Liberty is doing an incredible job of running their facility at a time, as I said, of unprecedented demand and production levels that they've never seen before. So, even maintaining exactly the levels of margins that they have now, at this level of production, would be an incredible accomplishment. I believe so strongly in their capabilities that I'm comfortable making the comment that I think we could see some efficiencies going forward. But, I really don't want to commit to that as part of a set of expectations going forward for the rest of the year.

Okay, that makes sense. Would you expect, and there was a sequential decline in gross margins, would you expect the price increase to offset maybe some of the operational inefficiencies you talked about once you get a full quarter of benefit?

Yes, I think that's a fair expectation, yes.

Okay, great. And then switching gears a little bit. Tridien, looks like sales there were pretty strong on new products, I'd say are mostly powered support services. But margins got hurt on product mix. I'm just wondering what the pricing differential is between the powered support services versus nonpowered, and why, what I assume would be a more highly engineered product, would carry lower margins?

Yes, so the powered business carries a significant premium in price. And, as you can imagine, there is a number of different SKUs in both the powered and nonpowered. So, I can't give you exact numbers, but it's typically a significant premium, and can be multiples of what it costs in the nonpowered on a per SKU unit basis. As you referenced, the margins on those products are typically better because they are highly engineered.

One of the things that I would say though, and all in caution, just like as Liberty was ramping up their production, there are some inefficiencies. And when there's new products that are being launched there's certain learning curves that you're coming up, and certain inefficiencies that occur. And you expect, generally, as you get into more of a up-the-manufacturing curve on some of these new products that those start to abate, and you get to the full margin potential on the products. And I would say that is squarely where Tridien was in the gueue in the first quarter.

Okay great. And then just one last question. On ACI, you're saying that you're seeing it's really getting no worse there. I was wondering if there's any sign of a benefit as you get into the second quarter, and maybe you're looking out to the third and fourth quarter?

Yes, we are seeing stable demand right now. I would say that the business looks very stable compared to where we were in the fourth quarter and the first quarter, and the numbers largely have flattened out here in the last six to nine months. We have not seen any deterioration, which I think is positive, because there was a lot of fear with sequester implementation whether that would push down the overall business. But it's still too early to see any meaningful pickup. Longer term, we remain highly confident in this business, and I would continue to say that this is a company that performs extremely well, and generates great cash flow.

A lot of the competitors, especially the smaller ones, are really finding it difficult to operate in this environment. And we think over the longer term, that will inure to the strong players this weak market environment now, as the industry consolidates, of which Advanced Circuits is clearly one of them. But, it's a little bit too early to see any demand growth that's starting to come back. But, I would say we're looking out into this year right now, and we think of this as flat from where we are to Q1, and then beyond that we will have to see. But, for right now everything looks very flattish.

All right. Great. Thanks for taking my questions.

Mark Hughes with SunTrust.

Anyway, to broadly characterize the end markets that you're looking at in terms of your acquisition pipeline, the types of businesses that you're looking at now. How that fits into your longer-term strategy of building up the operation?

Sure. Broadly, we remain interested in looking at companies that fit into the existing platforms that we have, meaning branded enthusiast products and niche industrial businesses. And so, we remain interested in growing our business in both of those verticals. I would say that is where we are trying to spend the bulk of our time. Again, opportunistically there are situations that we'd be pleased to take a look at as well. But, I would think building on the existing platform that we have in branded products, and niche industrial, remains our focus, and the areas that we have the most interest in pursuing.

You might have touched on this I think, but the price expectations of sellers. How do they stand now versus six months ago? Is it more reasonable expectations that has you enthused about some of these opportunities?

I think that the expectations are probably pretty similar, because in this period of time that we referenced, there's been a really bit of a lack, in our opinion, of high-quality opportunities. And so when the high-quality opportunities present themselves they tend to not only attract a crowd, but the sellers of these businesses know they have a high-quality property, so their expectations, I would say, are full.

I wouldn't say that we've encountered too many situations. I can think of one. But we haven't encountered very many situations where the expectations were extraordinary as to be unreasonable. I would say that sellers that we're seeing today are, again if you think about a range of valuations that they consider, they are probably towards the upper end of those ranges, but not in a way that makes conducting business impossible.

Then, refresh me on how you view accretion as you look at the pipeline? How quickly do you expect any incremental deals to make a positive addition to EPS?

We would expect new transactions and new acquisitions to be accretive to our cash flow immediately.

Hey, Mark, on EPS that's a little bit different, because typically these purchase prices have a lot of amortization associated with it. So from a net income point of view, there will not be a lot of accretion to EPS. But, Al is referencing cash flow or cash flow (inaudible). Right, yes.

Okay, great. Thank you very much.

It appears there are no further questions at this time. I'd like to turn the conference back to Mr. Alan Offenberg for any additional and closing remarks.

I just want to thank everybody for joining us today. We appreciate your support of CODI and we look forward to speaking with you all next quarter. Thank you.

That does conclude today's conference. We thank you for your participation.