Compass Diversified Holdings (CODI) 2013 Q3 法說會逐字稿

Good morning and welcome to the Compass Diversified Holdings Third Quarter 2013 Earnings Conference Call. Today's call is being recorded. All lines have been placed on mute. (Operator Instructions)

At this time, I would like to turn the conference over to Mike Cimini 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 third 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'd like to point out that the Q3 press release, including the financial tables is available on the Company's website at www.compassdiversifiedholdings.com. The Company also 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 material basis from those projected in these forward-looking statements and some of these factors are enumerated in the risk factor 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, the domestic and global economic environment has a significant impact on our subsidiary companies. CODI undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

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

Good morning. Thank you all for your time. And welcome to our third quarter 2013 earnings conference call. We're pleased to report third-quarter results that were consistent with management's expectations. For the three months ended September 30, 2013, CODI generated cash flow available for distribution and reinvestment, which we refer to as cash flow or CAD of $19.4 million.

Our diverse family of leading middle market businesses continues to focus on increasing market share in their respective industries and expanding into adjacent markets by taking advantage of their relative operating and financial strengths. For the nine months ended September 30, 2013, our branded products business consisting of CamelBak, Ergobaby, Fox and Liberty achieved both revenue and EBITDA growth on a combined basis of approximately 13% as compared to the nine months ended September 30 of 2012.

These four businesses also reported a combined EBITDA margin for the nine months ended September 30, 2013 of approximately 20.2%, which is the same as compared to the nine months ended September 30, 2012. Please note that Fox's results will continue to be consolidated with the results of our other subsidiaries until our ownership percentage drops below controlling interest.

In terms of our niche industrial businesses consisting of Advanced Circuits, AFM, Arnold and Tridien, we continue to generate predictable and strong free cash flow. For the nine months ended September 30, 2013, these four businesses posted combined revenue growth of approximately 4% although EBITDA declined slightly by approximately 1% as compared to the corresponding period in the previous year.

In addition, they produced a lower combined EBITDA margin of 14% as compared to 14.7% for the nine months ended September 30, 2012. All references to combined revenue and EBITDA and EBITDA margin for niche industrial businesses were prepared on a pro forma basis as if we acquired Arnold on January 1, 2012.

During the third quarter our Fox subsidiary completed its initial public offering. The offering priced at $15 per share and the Company's shares now trade on the NASDAQ Global Select Market under the symbol FOXF. This IPO represents a major milestone for our Company as Fox is the first subsidiary in CODI's history to go public.

In connection with the offering, CODI sold an aggregate of approximately 5.8 million shares of Fox's common stock generating net proceeds from equity of approximately $80.9 million while maintaining an approximate 54% ownership interest in Fox. In addition, Fox repaid in full the outstanding balance of approximately $61.5 million under their previous credit facility with CODI.

Based on both our debt and equity interest in Fox, CODI generated total proceeds of approximately $142.4 million from this IPO. As a reminder, CODI acquired a controlling interest in Fox back in January of 2008 for approximately $80 million. While we are very pleased with this transaction, it is important to note that we still maintain the potential for additional upside due to our continued ownership in Fox.

We believe the successful IPO by Fox demonstrates the considerable strength of CODI's business model and highlights our ability to unlock significant value for our owners.

For the third quarter, we paid a cash distribution of $0.36 per share, increasing the cumulative distribution paid to approximately $9.96 per share since going public in May of 2006. While we expect our cash flow per share to be reduced to a level below our current distribution per share as a result of Fox's IPO, our Board made the decision to maintain CODI's current level of cash distribution given the significant proceeds generated from this transaction. Since our own IPO, we have realized gains of more than $270 million from the monetization of our interest in CODI's subsidiaries, including Fox which are not included in our calculation of CAD.

Before I turn the call over to Elias to review the results of our current group of subsidiaries for the third quarter, I would like to note that Jim Bottiglieri recently announced his retirement as CODI's CFO effective November 30.

This will be his last conference call with our Company and I would like to take this opportunity to thank Jim for his many significant contributions. As the CFO since our inception in 2005, Jim is responsible for building and maintaining a highly effective and transparent finance operation that will continue to serve our Company well going forward. We wish him all the best in his upcoming retirement and are pleased that Jim will remain a member of CODI's Board of Directors.

Ryan Faulkingham has been promoted to CFO upon Jim's retirement and he has been working closely with Jim to ensure a smooth transition. Ryan is a CPA with approximately 15 years of experience in finance and auditing. He joined CODI approximately five years ago as Director of Financial Reporting and is an ideal fit to succeed Jim as we remain committed to leveraging our strong financial foundation and taking advantage of attractive organic and acquisition-related growth opportunities.

Ryan's promotion is well deserved and demonstrates the depth of our accomplished team which is one of CODI's greatest strengths.

With that I will now turn the call over to Elias.

Thank you, Alan. I will begin by reviewing our branded businesses. During the third quarter, our branded products businesses produced both revenue and EBITDA growth on a combined basis of approximately 12% and 10% respectively over the year-earlier period. The combined EBITDA margin declined slightly to 20.4% for the quarter ended September 30, 2013 from 20.8% for the quarter ended September 30, 2012 for these four subsidiaries on a combined basis.

Liberty delivered another record performance in the third quarter with revenue and EBITDA increasing 51% and 49% respectively. This business has now expanded both revenue and profitability in each of the past three quarters as we continue to capitalize on the robust demand for the Company's premium gun and home [safe], while further enhancing Liberty's scalable infrastructure.

At Fox, this business posted another strong quarter, posting double-digit revenue and EBITDA growth in Q3. As Alan mentioned earlier, Fox successfully completed its IPO during the third quarter and trades under the ticker symbol FOXF.

At Ergobaby, revenues and EBITDA declined approximately 9% and 20% respectively in the third quarter due principally to the timing of international shipments in the back half of 2012. In 2013, the timing of shipments has been much more evenly distributed throughout the year. This has resulted in Ergobaby continuing to deliver strong year-over-year comparisons with year-to-date revenue and EBITDA up approximately 9% and 7% respectively.

Finally at CamelBak, this business was impacted by the fulfillment of a contract with the US Marine Corps completed in the first quarter of 2013. In addition, demand for certain of the Company's personal hydration systems continues to slowly recover following the unfavorable weather conditions experienced in many of the Company's markets during the second quarter of 2013. While Q3 revenue and EBITDA declined approximately 5% and 20% respectively, we remain excited by the Company's strong growth potential as we 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 we are pleased to have produced combined revenue growth of approximately 7% during the third quarter of 2013 as compared to the year-earlier period. EBITDA on a combined basis, however, declined approximately 2% over the year-earlier period and the combined EBITDA margin declined to 13.5% for the quarter ended September 30, 2013 from 14.8% for the quarter ended September 30, 2012.

Advanced circuits posted revenue for the quarter that was essentially flat as compared to the year-earlier period as demand for the Company's core quick-turn production services remained stable. While we seek opportunities to further strengthen our leadership position in the quick-turn manufacturing niche and consolidate the industry, ACI continues to experience softness in its defense and aeronautical business.

Our newest subsidiary, Arnold Magnetic, exceeded our expectations in the third quarter with EBITDA increasing approximately 15%, representing the second consecutive quarter this business has delivered double-digit EBITDA growth on a year-over-year basis. Revenue in the quarter also increased, albeit slightly reflecting our ongoing efforts to capitalize on the Company's superior reputation for providing engineered magnetic solutions across a wide range of specialty applications and end markets.

At Tridien, revenue increased year-over-year by approximately 6% and EBITDA declined by approximately 34%. Consistent with our efforts to strengthen Tridien's future growth potential, we continue to invest heavily in R&D and remain on track to bring new innovative products to market in early 2014. And lastly, AFM increased revenue year-over-year by 27%, exceeding our expectations.

In addition, the EBITDA loss narrowed substantially year-over-year achieving near break-even cash flow in the third quarter. We continue to actively manage the Company's overhead and working capital requirements during a challenging retail environment in the furniture industry and expect to benefit from an eventual recovery in the overall economy and housing markets. Based on our ongoing efforts, 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 September 30, 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 with the SEC yesterday.

On a consolidated basis, revenue for the quarter ended September 30, 2013 was $265.5 million as compared to $241.2 million for the prior-year period. This increase was attributable to double-digit revenue increases at Liberty, Fox and at AFM.

Net income for the quarter was $78.3 million as compared to net income of $6.4 million in the year-earlier period. CODI reversed approximately $61.3 million of supplemental put expense in connection with the termination of the Supple Put Agreement on July 1, 2013. As a result of the supplemental put termination, CODI will no longer be accruing any supplemental put expense in its financial statements.

Cash flow for the quarter ended September 30, 2013 was $19.4 million as compared to $22.8 million for the prior-year period. Cash flow for the third quarter of 2013 reflects strong year-over-year growth in our Liberty and Arnold Magnetic businesses offset by the impact on cash flow from the IPO of Fox.

Subsequent to the IPO which was completed on August 13, 2013, Fox generated cash flow of approximately $7.3 million which was excluded from CODI's calculation of CAD for the quarter ended September 30, 2013. Although we recognize the cash flow generated by Fox on a pro rata basis for the quarter ended September 30, 2013, Fox will no longer be included in our calculation of CAD going forward.

The nine-month period ended September 30, 2013 cash flow increased slightly to $63.7 million as compared to $62.8 million for the nine months ended September 30, 2012.

Turning now to our balance sheet, we had approximately $151.2 million in cash and cash equivalents and had net working capital of $290.9 million as of September 30, 2013. We also have approximately $280.5 million outstanding under our term debt facility and no borrowings outstanding under our revolving credit facility as of September 30, 2013 with no significant debt maturities until late 2017.

We have borrowing availability of approximately $318 million under our revolving credit facility at September 30, 2013.

During the third quarter, we exercised an option under our credit agreement to expand our revolving credit facility by $30 million, increasing the total amount available under the facility to $320 million subject to a borrowing base restrictions. We intend to utilize the incremental borrowing capacity under our revolver to fund future growth opportunities and to provide for working capital and general corporate purposes.

We also generated debt and equity proceeds in the quarter totaling approximately $142.4 million from the Fox IPO while maintaining an approximately 54% ownership in Fox as Alan had mentioned earlier.

Under Generally Accepted Accounting Principles or GAAP, we reported Fox on a consolidated basis for the third quarter due to our majority ownership position and therefore did not recognize the gain on the sales of business. Instead, we increased stockholders' equity by approximately [$72 million] on our balance sheet as of September 30, 2013.

This amount would have been recorded as a gain from the sales of our businesses on our income statement had it been either a full divestiture or [if itself] results in a CODI's ownership percentage dropping below a controlling interest.

During the third quarter of 2013, we incurred $4.4 million of maintenance capital expenditures and increase was compared to the maintenance capital expenditures of $2 million for the quarter ended September 30, 2012.

For the full-year 2013, we anticipate maintenance capital expenditures coming in between $11 million and $13 million as we continue to invest in the long-term performance of our subsidiaries. We also incurred approximately $1.2 million of growth capital expenditures during the third quarter as compared to growth capital expenditures of $700,000 in the prior-year period.

For the current year, we expect to incur growth capital expenditures of between $6 million and $8 million largely for our initiatives at CamelBak and Liberty subsidiaries.

On a final note, I'd like to take the opportunity to thank the entire CODI family as well as the members of the investment community for providing me a highly-rewarding experience over the past eight years while serving as CODI's CFO. I look forward to continue to support Ryan, an outstanding choice to lead CODI's finance department, as he officially takes over the CFO reins at the end of the month.

I will now turn the call back to Alan.

Thank you, Jim. To close, I'd like to add some commentary on the M&A environment. Currently acquisition activity among middle market businesses remains modest. Valuation levels for healthy companies are relatively high due to the continued availability of the low-cost debt capital combined with the prevalence of strategic and financial buyers actively seeking to deploy their capital. We remain cautiously optimistic that deal flow for higher-quality companies will increase going forward.

As we have stated in the past, the timing of any acquisition can be difficult to predict. We appreciate the patience of our shareholders and will remain disciplined in our approach to acquiring companies that have a real reason to exist under favorable terms and valuations.

I would like to thank everyone again for joining us on today's call. We'll be happy to take any questions you may have. Operator, please open the phone lines.

(Operator Instructions) Larry Solow, CJS Securities.

Good afternoon -- good morning excuse me. It's been a long day already. I wonder if you guys could maybe just discuss on the quarterly performance looks a little flat or even slightly down if we exclude Fox year-over-year. Is that just timing related and specifically Ergobaby had a nice drop and -- or Advanced Circuits as well? Thanks.

I think, Larry, it really does go company by company. I think you referenced Ergo which in the remarks we noted some timing associated with some orders. With Advanced Circuits, it just continues to be a tough environment in one -- primary segment of their business being the aerospace and defense. Conversely, Liberty had a great quarter. Arnold had a great quarter. CamelBak's quarter was a little bit off relative to what we see in prior.

So I think it's hard to characterize it in total, rather I do think that it's more appropriate to consider it on a company-by-company basis and the individual factors that impacted that company in the quarter. Some of which were related to business conditions, others were just related to what I would call normal fluctuations that can occur quarter to quarter.

I mean it does sound -- in the release and your prepared comments the numbers were sort of in line with your expectations. Is it fair to say that, again just excluding Fox, which has been obviously [it didn't recover off] the dollar growth, but outside of Fox your businesses in general as you look out into 2014 and without giving the actual guidance, I mean do you see them still in growth mode, is it sort of a flat environment? And again I realize it's hard to put them all together into one, but if you can now just give us sort of a (multiple speakers)?

Yes, sure. Larry, as you know, I don't think I can really tell you what we are thinking about on a company by company basis for 2014. But I will say that we're really pleased with the performance of the companies. We've commented on our outlook for the balance of this year which really hasn't changed. We think all of our companies are going to continue to perform in line with what we communicated with you in the past in the context of 2013.

And I think that there are, again on a company by company basis, when you just look at 2013, we have a composition of companies, some of which have higher-growth profiles than others. And I think that -- I don't think the nature of the growth profile of any of our subsidiaries has changed is one way that I would look at it.

So I think that many of them continue to invest -- all of them, I should say, really continue to invest in their future and in their growth, and we continue to work with them to pursue growth initiatives, both organic and acquisition-related. And so I think it's early for us to give you an outlook on 2014. But I am very confident in telling you that take the growth profile of our companies, you have changed and that they all remain extremely well positioned to continue to capitalize on future opportunities and build their businesses and build their cash flow.

Okay, fair enough. (inaudible) Then Jim just best of luck to you. It's been great working with you and congratulations to Ryan. Thanks.

Thank you.

[Ben Oshe], Raymond James.

Hi, guys. Good morning. Just looking at Tridien here [and it continues to be a miss] on the R&D or the EBITDA decline due to that, do you have sort of annual numbers on what R&D you'd expect to be going forward, percentage of revenue maybe?

Yes, we'll look at we've been talking about in the past and then I'll ask Elias to maybe add some comments. But this is a year where Tridien invested heavily in R&D beyond what they've done traditionally. And so I don't anticipate that this year's level of R&D would be the level of R&D that we would anticipate going forward.

I'll ask Elias, I would expect probably future R&D to be more consistent with historical levels of R&D as opposed to this year's. But, Elias, anything you'd add to that?

Yes, we don't give out specific numbers in terms of R&D percentage of revenues, but just in general we have spoken about the increased emphasis on new product development and launches and how that's going to be meaningful for the Company going forward and in terms of kind of getting some of these new products out into the market.

One, I think in general, in 2013, there has really been a couple of things that have been happening. First, we have significantly increased our spend as we bring out new products. Second, we have been launching and in in-launch mode on some products. And I think it's reflected in relatively strong revenue growth that we've experienced thus far this year and in the quarter.

And the launch of certain of those products just has a lower profitable profile during the launch phase. I mean, these things are a relatively complex to assemble and build. And as a result of that as most manufacturing companies when they come up the curve on launching a new product, there is some excess costs that get incurred during that period. So I think it's a little broader in 2013. I think it's both the R&D expenses which are very heavy. We've been investing in the infrastructure for this business to really move forward. It's also been some launch, initial launch quantities of some products that has started to drive sales, but the profitability on those products is lower while were in the launch phase. And so we think we set up pretty well for 2014. But it's really those two factors that have contributed to kind of a EBITDA margin degradation we've seen.

Thank you. And just for CamelBak, could you talk a little bit about the headwinds with weather and the government budget, maybe which was more sort of a headwind?

Yes, I think that for CamelBak as well as if you are to do a little research and take a look at outdoor oriented retail over the course this year, it's just been a tough year and the weather which is never something I'd like to have to point to when commenting on a business' performance. But it's just the reality in this case.

It was very difficult, it was cold and wet in many parts of the country and it really impacted the business. I would say that that was a headwind that is hard to do anything about. I think the Company did everything it could to position with good products in the marketplace and continued innovation. But that was just (technical difficulty) in particular in this spring season as it relates to CamelBak's business.

The government budget and the defense impact, I think is certainly an addition for CamelBak as well as we commented on in the past. Their packs and related products are sold primarily on base, military base retail. So they're not necessarily subject to Department of Defense budget spending other than some of these one-time products that CamelBak will get from time to time.

But with reduction in troop activity that was anticipated even when we made our initial investment in CamelBak that reduced level of deployment certainly impacts the sales of CamelBak products at the base level retail. So they are both headwinds.

I would say though with respect to this specific year while -- as we entered it, we're obviously expecting impacts of sequestration and expecting impacts let's say with troop reduction that the more unforeseen headwind was the weather. And so that probably had a bigger impact, at least relative to our expectations on the business more so than the other only because it was not something that we could have anticipated or predicted as we headed into 2013.

Okay. Thanks, guys. I appreciate it.

Thank you.

Troy Ward, KBW.

Great. Thank you and good morning.

Good morning.

Real quick -- couple of questions. First regarding the supplemental put, we do understand that because of changes in the regulatory requirements you can't use this kind of as your tracking mechanism for the management's carry on the portfolio, but this is something we find very useful because it really provided us kind of an insight into movements of fair value of the portfolio. Will this be something that you're permitted to continue to communicate to us in the filings despite not being able to use it as an expense mechanism?

Troy, we actually work with the SEC on the accounting for the termination of supplemental put and basically got their concurrence on our accounting treatment. As part of that the accounting obviously was completed as of July 1. And this -- basically the disclosures are no longer permitted under that -- as part of the termination process. We will try to work with the SEC, but, see, we can provide that in some different pattern [of our different areas] outside of our financial statements, but as of right now I'm not sure that we'll be able to do it.

Okay, great. Thanks for that. And then on the specific -- a few questions on businesses here. With Arnold, I think the 10-Q provided 75% of the sales from the third quarter came from the [PMAG] division, which is about $24 million of the $32 million of sales. What were the sales kind of roughly for the Flex and Rolled product divisions?

Let us just to make sure we give you an accurate answer here. Give us just one second.

Okay. You can come back to that. Alan, I'll move onto one on kind of the acquisition environment.

Yes.

Historically your purchase multiples have been between maybe five, six times. However, given your obvious success with growth companies like Fox and the branded segment, is there an expectation that in the current environment or maybe even for a long time going forward, the six and seven multiples on quality growth companies just isn't going to exit? How do you think about that compared to the current market environment?

Yes. Your point is an interesting one in the context of valuations in the current environment. I think that if we were to go back and look at our companies that we've acquired since inception, I think you might be giving us too much credit. I think our average multiple might be a little bit higher than that that you referenced here. But that being said, we certainly historically have been able to acquire high-quality companies at valuations whether it's six to seven-ish times and some are a little lower, some we reached up higher too.

And I think that right now I do not expect that we would be able to acquire a company in this environment of the [size] and quality that we would like and that our shareholders have become accustomed to for six times cash flow. It's just not I think realistic to expect that. I think we have, in our experience, both as a public company and prior to being a public company, have grown to appreciate that while maintaining a value orientation, which I believe is core to our structure and core to how we operate our business, I think that we believe that there are companies that we would certainly pay more for whether that's seven, eight even nine times cash flow for a company that had the type of characteristics that make it worth that that still can, in my mind and the mind of our team here, represent compelling values.

So, Troy, I think you are correct in assuming that acquisitions of the types of companies we seek, particularly in this environment, are very unlikely to occur at a multiple that looks like six times and far more likely to occur at a multiple that looks like eight times.

Yes. That's helpful. Thank you. And then on Liberty, you referenced the non-dealer sales were up strong in the quarter attributable to two large accounts. In the past and even in the 10-Q, you mentioned Cabela's by name, and I assume that that's one of the two accounts. Can you tell us what the other large customer is just so we can get a feel for maybe how the expansion of that franchise can impact Liberty?

Troy, I think that it's -- I'd prefer not to be talking about Company's customers by name. I think that it's fair to say that Liberty is extremely active in the non-dealer market with a variety of growing and national retailers that focus on the outdoor, [swimming], sporting and shooting enthusiast and I think that there is a list of those companies that are pretty evident, and I think that it's fair to say that Liberty is doing business with the ones you would expect them to do business with. I think that the -- what I would say is one of the things that really distinguishes Liberty in that marketplace is their ability to not only provide a full suite of products to these retailers at a variety of price points but to also really work with them in managing the category and truly adding value with respect to inventory, assortment, replenishment, promotions, marketing and really helping these retailers learn how to optimize their footprint and sale of safes to their customers.

So I think that -- I'm sorry that I prefer not to answer that question as directly as you would like, but I hope that gives you some guidance. The other thing I'd say about these retailers is that many of them are growing. They are growing aggressively in terms of new store openings and they look to Liberty to be their ongoing supplier to support the Company's growth, which is completely consistent with our investment in Liberty's manufacturing infrastructure.

So I think that I'm very pleased with Liberty's partnership with some important non-dealers as well as dealers to support their growth and be able to provide them products going forward. So hopefully that gives you some color if not (inaudible).

That's fine, I understand. And then one last kind of further on Liberty, as you think about the very rapid growth you've seen over the last, definitely 2013 but even in the end of 2012, obviously there has been some events -- tragic events that have brought the focus on guns and that has helped sales to the fact that -- fearful of legislation that impacts the ability for people to buy new guns.

But also I know Liberty started doing some much more aggressive marketing during 2013. So how would you view this strength in Liberty kind of thinking about external factors outside the Company but also internal factors and how that can propel growth going forward?

This is something we talk about a lot when we consider Liberty and talk with the Liberty management team about it. It's very hard to peel back the impact of the marketing from the impact of the events and try to quantify the impact of both.

I think I can say without any hesitation or reservation that Liberty's marketing efforts had absolutely been effective in promoting both the brand as well as the category. However, I think that the external events, which led to discussions about gun legislation and led to incredible levels of gun purchasing activity are undoubtedly largely responsible for the enormous growth that we've seen in Liberty. And that's not to discount the impact of the marketing. But if you were to ask me which do I think had a greater impact on these very recent results, it would be hard not to attribute it more to the external events than the marketing.

I do think the marketing, however, will be a real difference maker for Liberty in the context of its business going forward, particularly due to the inevitable, I think, slowdown in some gun purchasing activity relative to recent levels. And so I think that Liberty is certainly poised to be a long-term grower, but I do think as I believe I mentioned in the past that it's very difficult to anticipate Liberty will just simply be able to maintain this level of performance because I do think that the permitting data that we track associated with people registering the purchase of firearms, when you combine the month to the prior-year month, has seen some declines over the last several months, although this most recent month was a positive.

But it just gives us a little pause as we look at expectations for Liberty going forward. I think it would be our expectation that the Company would see some pullback from this level, but that their marketing efforts would be a buffer against a pullback that takes it back to levels of performance seen by the Company many years ago as more consumers are aware of the need and benefits of the safe as well as their familiarity in the distribution of the Liberty brand.

One thing to note that Liberty's margins are impacted adversely by the imported products that they have had to bring in to supplement their domestically manufactured product as demand reached the current levels.

If in fact Liberty were to pull back a little bit and reduce its level of imported products, it should be a margin enhancer for Liberty. So there are some interesting dynamics that will unfold with Liberty going forward. But we're very pleased with where the company is positioned. We're thrilled with the record level performance that they're achieving. The management and the employees are doing an incredible job to manage through this period of extraordinary demand and are building the company to be able to support continued growth. But I do think that Liberty in the more near term is probably going to face some headwinds relative to the performance that we expect to see throughout 2013.

That's very helpful. Thank you, Alan.

Troy, you were looking for the absolute numbers for Arnold for the quarter. Is that your question was for the different segments of the business?

Right. Just to understand how kind of Flex and the Rolled segment are doing?

In total, the business did $32.3 million of revenue, which PMAG was $23.9 million Flex was $6.6 million and Rolled products was $1.8 million for the quarter.

Thanks. Great. That's exactly what I was hoping to see. Thank you very much and Jim best of luck in retirement. It's has been great to work with you over the past five or six years.

I appreciate that. Thank you.

Vernon Plack, BB&T Capital Markets.

Thanks. Just one question, most of my questions have been answered, but on Advanced Circuits I know some maintenance CapEx went up a lot, could you help me understand why?

Yes. Elias will comment on that, Vernon.

Yes, so Vernon it's really just a timing issue. Our first and second quarters we had relatively low maintenance CapEx and it was budgeted for the year. We look at Advanced Circuits now given the size of the business with three facilities around the US as having kind of a $2 million to $3 million maintenance CapEx spend a year. So I think this is consistent with that. It was just truly timing where it came into the third quarter with a big maintenance CapEx spike. But I don't think anybody should draw that this is an annualized level of maintenance CapEx.

I think for the profitability of the business it still runs incredibly efficiently in terms of capital utilization. And so we're very pleased with the business still but that would be the reason for the Q3, and I think it will normalize. And when you look at it on kind of an annual basis, it will be consistent with what our expectations are.

Vernon, that was also consistent with our expectations. Even in the previous quarter we thought that maintenance capital expenditures will come in between $11 million of $13 million and we anticipated those expenditures and that's why we still believe this is going to come in in the -- between $11 million and $13 million.

Okay, great. And that's it from me. Thank you as well, Jim, for the support and congratulations on your retirement.

Thanks. Appreciate that.

J.T. Rogers, Janney Capital Markets.

Good morning, guys. I have a question on AFM, saw a big sequential increase in sales there, yet a decline in gross margins. I know margins were up year over year, but just given the changes you've made there to your distribution, just wondering why we saw that sequential decline.

J.T. I think that AFM really has made some positive strides and I think that big component of the furniture industry are material costs. And I think that there have been some modest increases in material costs that has impacted margins. But I also think in the quarter, perhaps more importantly, I believe that they have -- J.T. --

Jim, I was talking on a sequential basis, went from 7.1% gross margins in 2Q to --?

In addition, the Company is introducing a lot of new products and as part of that there are some mix issues in the quarter associated with the Company selling some of their older products as they transition to the new which results in a little bit of pressure on gross margin as well.

So we would expect those margin trends to improve as the Company has successful new product introductions going forward. But I think that's -- I don't think J.T. that it's representative of any meaningful shift in the business or something that would impact our outlook on the 2013 financial performance for AFM, rather I think it's just a, I don't want to call it a timing issue, but more of a mix issue associated with where they were in the context of their year as well as the new product introductions.

Okay, that's helpful. Have you guys seen any change? Obviously, it was a big year-over-year growth, any change in terms of end market demand, any sense that you guys are -- any sense of that?

Yes, I think at a macro level, I would say it's fairly consistent with what we've seen recently. At a more Company-specific level, I think the management team has done a great job with the new product introductions, the penetration of some additional customers, particularly new, what I will call, mid-tier furniture retailers, so getting a broader distribution and a bigger piece of the pie relative to what they have had historically.

However, I wouldn't say we are in a phase right now where there is a tangible or notable expansion within the pie itself. So very pleased with AFM's performance, but at this point don't really have any visibility towards an improvement in end market demand at a macro level.

Hopefully that will occur going forward, but I think as we've talked about previously, the consumer that purchases ultimately a piece of AFM furniture is a consumer with less disposable income and a consumer that is still struggling with high levels unemployment, with high levels of personal debt, high gas prices, things of that nature. And I think that while there has been obvious, at a minimum, steadying and perhaps beyond that an improvement in the economy for many, I don't think that that has completely found its way to the consumer that ultimately buys a piece of American Furniture.

So until that happens, I think that the end markets are expected to stay fairly steady and that American is doing all it can to improve the slice of that market. Hopefully and eventually, I am sure there will be a return to a growing demand for their products, but it's impossible for me to predict when we think that's going to occur.

[That's sort of] understandable. That's helpful. Just one other question on Ergobaby, we also saw some compression on gross margins there. I think in the Q, they discussed some sales discounts on baby carriers. I was just wondering what's driving those sales discounts given that we're sort of what I assume is early in the -- still in the growth changes of Ergobaby in expanding their end markets?

Sure. Elias will address that for you J.T.

J.T., there was a couple of things that caused discounts in the quarter. First, we changed our packaging worldwide and in doing so we had some of the older packaging that we needed and cleaned out a lot of that inventory. In doing so, we offered some discounts on the product. So it has nothing to do with kind of longer term kind of demand or needing to stimulate hit demand, it was truly just changeover in packaging on the carrier side.

In terms of the stroller business, there was also some weakness there as we gave some discounts and will be continuing. And that was really due to when we've announced this that we are coming out with our next generation stroller, which is G3 travel system, and with the G2 phasing out in advance of the G3, we're working through that inventory in the channel, that's also putting a little bit of pressure as you could imagine on sales of the existing travel system as we get ready to launch the new one in the coming year.

So it's really just managing some of the transition to both packaging on the carrier and to the new product line on the travel system. But I would say, all remains very healthy in that business and we are continued to be very excited about the growth prospects for Ergo this year and as we look out kind of next year and into the future. The brand remains healthy enough that we don't need to give discounts in order to stimulate demand.

All right, great. Thanks a lot. And, Jim, I'd just like to echo everyone else. Really enjoyed working with you over the past five years and wish you the best of luck in the future.

Thank you.

And at this time there are no further questions. I would like to turn the call back over to the Company for any additional or closing remarks.

Want to thank all of you for your continued support. We appreciate it very much and we look forward to speaking to you next quarter. Thanks.

And that will conclude today's call. We thank you for your participation.