Compass Diversified Holdings Q4 2008 Earnings Call Transcript

Mar.20.09 | About: Compass Diversified (CODI)

Compass Diversified Holdings (NYSE:CODI)

Q4 2008 Earnings Call Transcript

March 13, 2009 9:00 am ET

Executives

Tyler Wilson – IR Consultant, IGB Group

Joe Massoud – CEO

Jim Bottiglieri – CFO

Analysts

Lawrence Solow – CJS Securities

Greg Mason – Stifel Nicolaus

Henry Coffey – Sterne Agee

Robert Dodd – Morgan Keegan

Vernon Plack – BB&T Capital Markets

Jon Arfstrom – RBC Capital Markets

Operator

Good morning and welcome to Compass Diversified Holdings 2008 fourth quarter conference call. (Operator instructions) At this time, I'd like to turn the conference over to IR consultant, Tyler Wilson, with the IGB Group for introductions and the reading of the Safe Harbor Statement. Please go ahead sir.

Tyler Wilson

Thank you, and welcome to Compass Diversified Holdings fourth quarter 2008 conference call. Representing the company today are Joe Massoud, CEO; and Jim Bottiglieri, CFO. Before we begin, I would like to point out that the Q4 press release including the financial tables is available on the company's website at www.compassdiversifiedholdings.com. In addition, management expects to file the Form 10-K for the year ended December 31, 2008 with the SEC later today. Please note that throughout this call we will refer to Compass Diversified Holdings as CODI or the company.

Now allow me to read the following Safe Harbor Statement. During this conference call, we may make certain forward-looking statements including statements with regard to future performance of CODI. Words such as believe, expect, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially 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 filed by CODI with the Securities and Exchange Commission for the year ended December 31, 2008 and other filings with the SEC.

In particular, the domestic and global economic environment has a significant impact on our subsidiary companies. Furthermore, we are uncertain as to the ability to consummate acquisitions, which are accretive to shareholders either in 2009 or beyond. CODI undertakes no obligation to publicly update or revise 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 Joe Massoud for his opening remarks.

Joe Massoud

Thanks Tyler. Good morning everyone. Welcome to our fourth quarter 2008 earnings conference call. Thank you for your time. We'll start today's call by offering some general comments on CODI's performance during the fourth quarter and the year ended December 31, 2008, as well as our distribution policy going forward in this environment. We will also discuss our liquidity position, review the limited leverage that we have, and provide some detail on the pro active measures we have taken in this environment to further enhance our financial flexibility and improve cash flow for our shareholders.

Finally, before turning the call over to Jim to discuss our operating results and review our portfolio businesses for the fourth quarter and 12 months ended December 31, 2008,2008, I will preview our expectations for 2009 for our current subsidiaries and acquisition opportunities.

In 2008, Compass Diversified Holdings achieved strong results in a challenging environment, further demonstrating the successful implementation of our business model, which is predicated upon owning niche leading businesses in diverse industries.

During this year, we accomplished important objectives related to first, generating strong cash flow in our subsidiaries in line with our expectations, and those expectations we communicated with our shareholders; second, paying sizeable distribution to shareholders; and third, strengthening our company's prospects for operating in a difficult economic climate.

Turning specifically to our results, during the fourth quarter, we generated cash available for distribution reinvestment, which we refer to as cash flow or CAD of $11.2 million, and for the year CODI increased cash flow by approximately 9.1% to $50.6 million from $46.3 million in the year ago period. Very importantly, this fell within the guidance that we had provided to everyone much earlier in the year.

Drawing upon a portion of our sizeable cash flows, we announced on January 9, 2009 that our Board of Directors declared a fourth-quarter distribution of $0.34 per share, the second $0.34 distribution since the company announced a 5% increase in October 2008. The ongoing ability of our diverse portfolio of subsidiary companies to continue to generate stable cash flows has enabled us to pay distributions of $1.33 for 2008, and cumulative distributions of approximately $3.28 per share since going public in May of 2006.

With regard to the outlook for distributions, our distribution policy remains unchanged. Our Board declares distributions to shareholders on a quarterly basis, based upon its evaluation of the normalized cash flow generation power of our company. In the past, this has not amounted to full payout of our cash flow, and has resulted in approximately $28.5 million of excess of our cash flows over distribution phase, for the period through December 31, 2008.

In addition to that, we have generated approximately $109 million of realized gains from monetization of subsidiaries, an amount that is not only tremendously improved our liquidity, but that we have never even included in the calculation of CAD or cash flow. As we look forward, as a result of the impact of the economy, as well as of our timely sales of Aeroglide and Silvue, which has resulted in substantial repayment of debt, and are holding significant cash balances in anticipation of a better buying environment.

We expect to earn less cash flow in 2009 than our full-year distributions would be at the current level. This is a reiteration of what we said three months ago on our last call. However, as we said then and we continue to reinforce, we have always sought to produce a steady stream of distributions placed on our companies normalized cash flow generation level. We position ourselves very well to do this. We have approximately $78 million of term debt currently outstanding due in 2013. We also have no outstanding borrowings on our $340 million acquisition of working capital revolver. And in terms of built-in cushion, we have never been an entity to pay out substantially all or more than of all of our operating cash flows in the good years.

As a result, and as mentioned earlier, looking forward even given a soft environment through 2009, we would have earned significantly more cash flows since our 2006 IPO than required to pay distributions at current levels. Again, this excludes the full effect or really any of the effect of the $109 million in realized gains.

Importantly, as a result of our considerable financial strength and extremely low leverage levels and distant maturities, paying distributions that are in excess of our trough earnings level will have no effect on our ability to operate our subsidiaries, stay within our debt covenants or grow the company, either organically or through acquisitions.

Based on our current view of our subsidiaries performance in this economy, our distribution policy remains unchanged.

I would now like to take a few moments to review how we view our business in the current challenging environment. When you receive our 2008 annual report, you will see that the theme is threefold; leading companies, solid financial structure, and transparency.

In this regard, I would ask you to keep the following factors in mind.

First, our cash flows are derived from a diverse portfolio of leading companies across a number of industries. This portfolio approach reduces the impact of cyclicality that any one of our individual businesses have on the overall company. In addition to the fact that each of our companies is a niche market leader, means that this environment presents opportunities for our businesses to emerge stronger and larger payers in their market.

In underwriting and diligence in each of these businesses, downside economic environments were considered thoroughly. For each, the potential to outperform their competitors and gain market share during a downturn was a clear positive factor in our decision to acquire these businesses. As well capitalized leaders in their markets with strong management teams and defined reasons to exist, each of our businesses continue to outperform competitors in their respective markets. We have been here before and it is worthwhile for us.

During the last downturn, as we managed a number of cyclical businesses, including CBS Staffmark, we found a great deal of success in strategically investing in our businesses at the same time that many competitors were cutting out not only fat but also muscle. Thus our investors emerged winners to an even greater magnitude as market conditions began to improve.

Second, our subsidiaries benefit significantly from CODI’s solid financial structure, which gives our portfolio of companies parent level funding, bypassing the banks that most of their middle market competitors currently use. Given the difficult financing market, we believe that having such a structure gives our subsidiaries a distinct competitive advantage in terms of providing timely and ample products to their customers, taking advantage of supplier payment terms, and pursuing small but highly accretive tuck in acquisitions. As an example of the latter, just yesterday HALO acquired a small add-on acquisition at extremely accretive and attractive terms.

We're spending a considerable amount of time with our subsidiary management teams considering cost-cutting initiatives, sales expansion opportunities, and preparing ourselves for a variety of economic contingencies. We are confident in the ability in each of our companies to emerge from this recession as even stronger payers than they were going in.

Third, it is precisely in markets in times like these that we believe our shareholders appreciate our extraordinarily transparent structure. Unlike many other companies, we have always been and will continue to be forthright on the performance on each of our companies and our overall strategy. We receive a lot of positive comments from our shareholders and our analysts on this, and we are appreciative that – you are appreciative of this part of our strategy.

With regard to our recent deleveraging, while our business model positions the company to manage the downturn, we continue to take proactive measures to further enhance our financial flexibility, reduce costs, and help of subsidiaries enhance their position.

Specifically, in June of 2008, sensing that valuations were at a high level and that the coming economic environment was potentially soft, you will recall that we opportunistically monetized two of our subsidiaries in a timely fashion, selling Aeroglide and Silvue for an approximate average of over 10 times cash flow and for a total gain of over $70 million. We primarily utilized the capital from these sales to enhance our liquidity by repaying debt and holding on to cash.

It is important to note that we didn't rush to redeploy the capital in the new businesses; rather we remained very disciplined and cautious, and are now happy to have made this decision. As a result of this decision, our shareholders own a company with diverse drivers of cash flow that is substantially underleveraged and has ample liquidity to thrive and to take advantage of the current environment.

More recently in February of 2009, we used $75 million of cash on our balance sheet to repay debt at par under our term loan facility due in December 2013, bringing our total debt outstanding down to approximately $78 million. Even after this repayment, we still have substantial available capital in an extremely healthy liquidity position with over $20 million in cash, and an untapped $340 million revolver credit facility and again no significant debt maturities until 2013.

While we initially hoped to acquire a new platform of business with this $75 million in cash, we decided to remain patient and disciplined in the face of the current economic environment, extending our diligence period for potential acquisitions in order to more properly assess the true cash flow generation level of target companies. The debt repayment provides substantial savings to the company and net interest expense, and translates into a meaningful reduction in management fees paid by the company to its manager.

Haven taken these proactive measures to better position CODI going forward, I would now like to review what we are seeing in 2009 for both our subsidiaries and acquisition opportunities. In terms of our subsidiaries, we believe that the economic will impact each of our businesses, but to a varying degree. Specifically, we believe that three of our subsidiaries; Anodyne Medical Device, Advanced Circuits, and Fox Racing Shox have either enough revenue momentum, or pursuing sufficient cost-cutting initiatives or both to largely offset the impact of the economy on their cash flow generation capabilities.

With regard to HALO and American Furniture Manufacturing, we expect the economy to have a greater impact, although in the case of HALO recent and planned add-on acquisitions, and active account representative recruitment efforts are helping to mitigate the impact of the economy, while in the case of American Furniture recent market share gains, additions of new customers and as well as the continued drop down effect within the furniture industry are providing some tailwinds that are also helping the offset.

In terms of CBS Personnel Holdings, first let me tell you that we are excited to say as of February 27 the companies is using a companywide unified brand-name Staffmark, which we will now use going forward as well. Second, in terms of the economy, there will clearly be a significant negative impact on cash flow in 2009. You will know from our fourth-quarter numbers, prepared on a pro forma basis to include the Staffmark acquisition, which was completed at the beginning of 2007, the revenue declined by approximately 21% as compared to the prior year.

This rate of decline has unfortunately accelerated in the fourth quarter as it has for each of large competitors, who we are able to track. This business is subject to a significant amount of operating leverage as you might expect. So if the current trend of revenues were to continue, while we believe the company will still perform at a cash flow positive level, it will certainly produce substantially less cash flow than in 2008.

Let me just correct something I just said by the way, it went down 21% for the fourth quarter versus last year, and the acceleration that we see is actually in the first quarter of ‘09 as compared to the first quarter of 2008.

To continue where I was, our management team at Staffmark is outstanding. We think best-in-class in their industry and has experienced and adept at managing through downturns. Those skills are being challenged at this time, but they are meeting those challenges and have taken numerous efforts to right-size the business, while maintaining the posture of selling through the downturn that served us so well into and out of the last downturn.

In terms of new acquisitions, with our significant financial flexibility, we remain poised to take advantage of opportunities that this environment may present. We continue to look for opportunities and as valuations come down and the earnings begin to stabilize, we believe we will be in a position to make acquisitions at prices that enhance the long-term value of CODI for our shareholders.

As I mentioned earlier, we also continue to actively pursue small tuck in acquisitions for our subsidiaries, and as recently as yesterday completed another such example. As a result of our considerable financial capacity and flexibility, we believe we are a buyer of choice for sellers and their representatives.

With those somewhat lengthy introductory comments complete, for which I apologize, I would like to turn the call over to Jim Bottiglieri to discuss our fourth quarter financial results.

Jim Bottiglieri

Thank you Joe. Today I will discuss our financial results for the quarter and 12 months ended December 31, 2008, including a review of the operating results of each of our subsidiary companies, and a brief mention of some of the catalysts impacting each of our businesses. I will then mention the impact of seasonality on our business and discuss our balance sheet.

On a consolidated basis, revenue for the quarter and year ended December 31, 2008 was $374.8 million and $1.54 billion respectively. Net income for the quarter was $1.2 million or $0.04 per share. For the year ended December 31, 2008, net income was approximately $78.3 million or $2.48 per share.

Now turning to the results in each of our individual business beginning with Advanced Circuits, for the quarter ended December 31, 2008, Advanced Circuits’ revenue was $12.7 million compared to $13.2 million for the quarter ended December 31, 2007 due to the decline in long-run production sales resulting from lower demand as a result of the economy. Income from operations for the fourth quarter was $3.8 million compared to $3.7 million for the same period in 2007.

For the year ended December 31, 2008, Advanced Circuits’ revenue increased to $55.4 million compared to $52.3 million for the prior period of 2007, largely due to increased sales in quick-turn production, prototype PCBs, and assembly sales.

Income from operations increased to $17.7 million compared to $17.1 million for the prior period of 2007. Operating income increased due to the operating profit generated from the increase in sales during the year, partially offset by the recording in fiscal 2007 of lower non-cash charges for loan forgiveness arrangements provided to Advanced Circuits management of approximately $1.3 million.

We are very pleased with Advanced Circuits' performance during 2008. Bookings remained solid and we expect sales in 2009 to be only slightly down from 2008. Specifically, we expect reduced demand as a result of the economic conditions to be partially offset by increase in our customer account as competitors leave the market. We believe, the weakness in the broad circuit board market may create industry consolidation opportunities for the company in its core prototype and quick-turn business.

Now I'd like to turn to American Furniture Manufacturing, or AFM, for the quarter ended December 31, 2008 AFM's revenues decreased to $31.1 million compared to $35.5 million in the prior year quarter. The company was near breakeven for the fourth quarter of 2008 compared to operating income was $2.1 million for the fourth quarter of 2007. For the year ended December 31, 2008, revenue decreased to $138.9 million compared to a pro forma $156.6 million in 2007. Operating income was $5.1 million compared to a pro forma $11.8 million for 2007.

This decrease in operating income was due to lower sales resulting from a combination of the fire at the facility in February 2008 and from the weakening economy, partially offset by the expected business interruption insurance proceeds recognized. In 2008, AFM continued to gain market share and we expect this trend to continue into 2009. The subsidiary’s revenue trends continue to indicate that it is outperforming its industry competitors as the company has benefited from substantial presence in low-end furniture business.

While 2009 will be a challenging year for AFM, we are confident that the company will benefit in the long term from the challenges that this slowdown has created for its competitors. That said, we are by no means complacent in this environment and continue to work hard to control costs and offset some of the impact of any decline in sales. It is important to highlight that we took into account the effect of economic cyclicality when we purchased this business. Once the economy begins to rebound, given the steps we have taken to grow AFM’s market shares, we are excited about AFM’s growth prospects.

Moving on to Anodyne Medical Device, for the quarter ended December 31, 2008, revenue was $13.2 million compared to $14.7 million for the same period of last year. The decrease was due to lower demand as a result of the weakening economy, partially offset by sales from new product rollouts. Income from operations decreased to $0.9 million compared to $1.1 million for the same period in 2007. The decrease in operating income was largely due to the lower sales.

For the year ended December 31, 2008, Anodyne's revenues increased to $54.2 million compared to $44.2 million for the same period last year, largely due to sales from new product rollouts and from the inclusion of sales from its acquisition of Prima-Tech, which occurred in June of 2007. Income from operations increased to $4.2 million compared to $2.9 million for the same period in 2007. The increase in operating income is mostly largely due to the increase in sales.

Anodyne maintained strong performance in the 3 and 12-month periods ended December 31, 2008. Going into 2009, we continue to focus on improving the company’s margins. Further, we believe that our roll-out of new products and the full-year impact of products rolled out in 2008 will largely offset declines in sales as a result of the current macroeconomic conditions.

Staffmark, turning to Staffmark, formerly CBS Personnel, for the quarter ended December 31, 2008, the company reported revenue of $234.5 million compared to $297.0 million for the same period last year, which was prepared on a pro forma basis to include the acquisition of Staffmark, as it was completed on January 1, 2007.

The reduction is primarily the result of decreased demand for staffing services as Staffmark’s clients were affected by weaker economic conditions. We expect this trend to continue through at least the first three quarters of 2009, however, we expect the company will be cash flow positive at a minimum with potential upside in 2009 as management’s digs in and continues to right-size the business.

We believe that Staffmark continues to gain market shares in the markets in which it operates. I would also like to highlight that this is similar to what we experienced in 2000 to 2002 period, when our market share gains lead to significant increase in account service and placements as we emerged from the recession.

Income from operation decreased to $6.2 million for the fourth quarter of 2008, compared to a pro forma $9.4 million for the fourth quarter of 2007, due principally to the decrease in sales. During the quarter, we incurred approximately $2.6 million in transition and integration expenses related to the Staffmark acquisition, which were offset by lower cost to the achievement of plan synergies.

For the year ended December 31, 2008, Staffmark reported revenue of $1.037 billion compared to $1.153 billion for the same period last year. This year-over-year results have also have been done on a pro forma basis, which reflects reduced demand for staffing services as clients were affected by weaker economic conditions. It is important to note that our percentage decrease in revenue was less than the decrease reported by many of Staffmark’s publically traded peers, whose operations we continue to follow closely.

Income from operations decreased to $16.1 million in 2008 compared to $31.6 million for 2007. During the year, we incurred approximately $7.4 million in transition and integration expenses related to the Staffmark acquisition, which were largely offset by lower costs in achieving the plan synergies. In the longer term, we are very exited about to see combined CBS-Staffmark platforms, and are happy to have made the Staffmark acquisition, which led to tremendous cost synergies I just mentioned. We are also very excited about the implementation of unified grant across the company, which is a multi-month effort involving management, employees, and customers.

Turning to Fox Racing Shox, for the quarter ended December 31, 2008 the company's revenues were $30.6 million compared to a pro forma $30 million in the prior year period. The increase in revenue is attributable to increased sales in Fox's OEM bicycle and power sports divisions, as well as the growth in after-market sales and service revenue. Income from operations was $1.3 million during the fourth quarter of 2008 compared to a loss of $0.3 million for the quarter ended December 31, 2007.

For the year ended December 31, 2008, revenue was $131.7 million compared to a pro forma $105.7 million in the prior year period. The increase in revenue was attributable to increased sales in our OEM bicycle and power sports division, as well as growth in aftermarket sales and service revenue. Income from operations was $10.7 million in 2008 compared to $2.4 million for the prior year period largely due to the increased sales.

We are very pleased with Fox's growth during the quarter and year. A number of opportunities outside the company's non-biking sector, including military and well-publicized partnership with Ford on the F150 Raptor, should also continue to materialize over the course of 2009. We believe these opportunities will mostly offset potential declines in sales as a result of the slowing economy in 2009.

In addition, we expect many of the operational initiatives that we've been working on to improve cash flow margins to begin to materialize in 2009.

Moving on to HALO, for the quarter ended December 31, 2008, the company's revenues increased to $52.7 million compared to $51.9 million for the same period last year, principally due to acquisitions made since December 31, 2007.

Income from operations was approximately $4.3 million versus $5.1 million for the prior comparable period, as the increased operating profits from higher sales was offset by higher selling, general and administrative expenses incurred as a result of the increase in

number of sales account representatives, and from integration costs for HALO’s 2008 acquisitions.

For the year ended December 31, 2008, HALO's revenues increased to $159.8 million, compared to a pro forma $144.3 million for the same period last year, principally due to increased sales from acquisitions made throughout 2008. Operating income was approximately $5.3 million for the current year period versus $5.7 million for the prior year period, as the operating process and the increased sales was offset by $0.2 million of higher amortization expense, and $0.9 million of integration costs related to acquisitions.

While we were able to increase HALO’s top line in 2008, the softening economy will clearly have an impact on this subsidiary’s results in 2009. We expect the combination of highly accretive tuck in acquisitions, and the recruitment of additional account representatives to mostly offset declines in marketing spend by our customers as a result of the weakening economy. In this challenging market, I would like to reiterate that HALO’s management team also continues to be diligent in evaluating its infrastructure, and will seek cost savings wherever possible.

Seasonality, as previously disclosed, the results of several of our businesses are subject to the impact of seasonality. The first-quarter is historically our weakest quarter as several of our businesses such as Fox Shox and HALO experienced lower sales in the beginning of the year, while companies like Staffmark incurred a higher payroll tax expense as employees reached the maximum wage phase for certain state taxes largely in this quarter.

Accordingly, we expect CODI to have a small CAD loss in the first quarter of 2009.

Now turning to the balance sheet, we had approximately $97.5 million in cash and cash equivalents, and had net working capital of approximately $195.8 million at December 31, 2008. Subject to borrowing base restrictions at December 31, 2008, CODI had availability of approximately $340 million under its revolving credit facility, available to be used to fund acquisitions and working capital requirements.

I will now turn the call back to Joe.

Joe Massoud

Thanks Jim, and thanks for you and your team for your hard work in 2008.

I like to once again reiterate my satisfaction with our strong performance for the quarter and for a year. During 2008, we remain committed to creating shareholder value. Throughout the year, we remained disciplined in identifying and valuing businesses, waiting patiently for valuations to come down and markets to stabilize before deploying our capital, working closely with the management teams of our subsidiary companies to help them grow their cash flow, achieving a 9.1% cash flow increase over 2007 in a challenging environment, monetizing our stakes in the subsidiaries where will be doing so to maximize return, opportunistically selling two of our businesses for a combined gain of over $73 million in June of 2008, and bringing our total gain since our IPO in 2006 to $109 million, and managing our balance sheet conservatively in anticipation of the difficult economic environment producing for our shareholders a company with diverse cash flow drivers and very low level of debt obligations, and no significant majorities until 2013.

We believe that our owners benefit from one, the ability of market niche leading companies to take advantage of the current economic environment; two, the solid financial structure we have created, which has yielded a very low leverage level, and significant financial flexibility for its subsidiaries; and three, the transparency we provide, allowing shareholders to have an educated understanding of the performance of our company and our subsidiaries.

With that said I would like to thank everyone for your time and for joining us in today's call, and to take any questions you may have.

Operator, please open the phone line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will take our first question from Larry Solow with CJS Securities.

Lawrence Solow – CJS Securities

Hi good morning. Could you maybe just give a little more color just on, you know, the acquisition environment, and then I understand that this kind – there's probably a good amount of reluctancy for good business owners to sell in this environment, just looking around maybe they think that they are going to get shortchanged and do you see, you know, potential for deals happening, and it is just that your due diligence understandably is taking longer or you know, is it kind of at the crossroads, where it is even difficult to, you know, come to terms with pricing.

Joe Massoud

My temptation is to say yes, and move on to the next question. I think you've actually highlighted most of the major factors Larry. I think you correctly and intuitively have hypothesized that owners of private businesses, who don't absolutely have to sell or not sellers right now, even if they had intended to sell. And so, I think there is a – there continues to be a reasonably large bid/ask gap between those who want to sell their businesses based on you know, reasonably recent earnings level and buyers, who want to price off you know, what normalized level would seem like there might be not a size they used to be.

So I think there is a lack of those, but from our point of view as well I think in at least two, maybe three situations in a way, you know, we are pretty far down the path and seeing an acceleration of decline is a little unnerving. You know, the benefit that we have in doing diligence, unlike people buying public companies is that we are looking at day-to-day, week-by-week, month-to-month numbers, and I think we've been very cautious in buying into a situation where we don't know where the bottom is. We are perfectly happy buying a company that's below mid-cycle earnings, but we'd like to have a firm confidence in what that trough earnings level looks like.

And in the current environment, you know, it's hard to know exactly what that is for a lot of companies. I mean, until you at least some year-over-year improvement in the comparison levels, we think it makes sense to be cautious. I mean we are on a call, you know, 2 to 3 quarters ago, and I think it was – I can’t remember who asked the question, they said, you know, you need to redeploy your capital and we said well, no we don't really need to do that.

We need to be very cautious and careful in how we redeploy our shareholder capital, and so it's a combination of both those things that you said. There is, you know, an unwillingness on the part of private sellers, although I think that's beginning to turn. I think the longer that this down market kind of continues, it sort of is a little bit of reality. We still think there are distressed sellers out there, whether it’s large corporates or it's actually financial buyers who are, you know, have fun cycle issues or family sellers who have you know, state planning and transitional issues.

So there are sellers out there, but it's fewer and we want to be patient. I will tell you that we definitively think time is on our side. What do I mean by that? We can afford to wait we think for later in this year and even into early next year because we don't, you know, the fear involved with waiting might be over, but suddenly the competitive market would heat up.

It's our view that the absence of aggressive credit capital is probably going to continue for some time like there might be lenders who come back into the market but the valuations that were existent quite recently because of very aggressive lending policies, we think it's not about to return any time soon. So we think from a risk return point of view the kind of benefit of seeing how, you know, this economy really is maturing and, you know, developing is a bigger positive than warning about you better buy now, before there is an influx of capital from the debt markets driving valuations up, if that makes sense Larry.

Lawrence Solow – CJS Securities

It's helpful. And then it seems like CBS certainly – or Staffmark is you know, the trends of accelerated on the downside, but would you say that your other businesses, you know you are seeing any stabilization or you know, any more color in what you've seen maybe in changes since your Q3 call?

Joe Massoud

It's a very good question with a lot of – with a textured answer because what we are seeing on a company by company basis is quarters that are quite strong, the weeks that are strong, they give a lot of optimism followed by weeks that are not as strong followed by another week that is strong. So looking through kind of the actual granularity that we have to try to answer that question broadly, I would say that a number of our companies have seen some stabilization in their cash flow result. I think, you know, Advanced Circuits is in a pretty stable spot, Fox is in a pretty stable spot, interesting American Furniture is in a pretty stable spot for last several months, albeit at a lower level than we would have liked, but in terms of stabilization, stabilizing a little bit.

Anodyne and HALO have definitely firmed up. So other than CBS, I think that if I would exclude the fact that on a week-to-week basis the results have been more erratic than we would have liked and that we historically have seen, I think they've all reached a stabilization level, albeit in some cases lower than you know, former stabilization levels, but I can’t you know, no one is able to predict what this economy is going to look like, and so I don't have a lot of confidence saying it would stabilize, that's it, we've hit bottom. I'm not sure that's true, but in terms of Q3 versus Q4, we have seen some stabilization if you will, albeit at softer levels.

Lawrence Solow – CJS Securities

Okay, good. Thanks. It was helpful.

Operator

We'll take our next question from Greg Mason with Stifel Nicolaus.

Greg Mason – Stifel Nicolaus

Hi, good morning. Can you talk a little bit about the 75 million turmoil that you’ve repaid. Are you able to redraw that down later on?

Jim Bottiglieri

No, and so that's why we held on to the cash, if back in June of ’08 that worked like a revolver. We clearly would have – because $75 million earning a percent or two versus paying seven is you know, 6% on $75 million. That's $4.5 million of cash flow that we “lost for our shareholders,” which is not good. Right? And so we held on to it because we firmly believe not anticipating how much deterioration there would be in the economy, and how cautious we would get. We believe we are going to redeploy that capital.

Now, rather than sort of keep our heads in the stand and keep holding on to it, at some point in February, we repaid it but that was definitely sort of a use it or lose it kind of chunk of cash that we finally decided, we were going to pay debt down with it, but that is – the reason we didn't pay its sooner was because the revolving piece, we'd already paid to zero with our sales. We can’t get anymore flush or liquid on the revolver side.

So the way to get more liquid on the term side with holding the cash is an offset, but in the end you know, that valuable cash to our shareholders, we felt like we still had sufficient liquidity. We anticipated continuing to be cautious in the near term from an acquisition point of view, and it was, you know, a decision that had definitely positive arguments on both sides, but we felt like it was time to repay the debt and, you know, reduce that burn if you will.

Greg Mason – Stifel Nicolaus

If I remember correctly if you hadn't have redeployed the $75 million from your exits in June, by June 2009 it was required to pay down anyway?

Jim Bottiglieri

Yes, exactly at the end of June. So the analysis was in the next four months that we believe we would do an acquisition and given the length of our diligence, we felt like it was nearly impossible if that was going to occur, not impossible but nearly impossible and rather than waiting until June. That had a couple of effects. Well, it basically had the effect of accelerating that reduction of burn.

Greg Mason – Stifel Nicolaus

I was kind of surprised to hear that you expect a small CAD loss in the first quarter of 2009. Can you talk to us about what the drivers are, and how do we distinguish between – these numbers just reflect the weak first-quarter versus this is actual deterioration in the earnings even beyond our expectations in the first quarter.

Jim Bottiglieri

Let us take a look at ’08. If you look at the first quarter of ’08, I don't have the numbers right in front of me, but I think you will see that CAD in ’08 was marginally positive.

Joe Massoud

It also included Aeroglide and Silvue.

Jim Bottiglieri

And included Aeroglide and Silvue. So, if we take out Aeroglide and Silvue it might have been almost breakeven CAD, in a year that we ended up producing $1.60 change, whatever, you know, whatever $50 million divided by (inaudible) and a quarter of million shares. So it is, I think actually looking at the trends from past years, will help you distinguish that. The CAD loss is not, I would say that even going into this year, four or five months ago we were talking about our first quarter CAD that was going to be breakevenish.

Greg Mason – Stifel Nicolaus

Smallest number.

Jim Bottiglieri

Yes, so that's a hugely, you know, that the big component that is the cyclical effect. I'm not sure if that gives you enough specifics. I’d encourage you, I guess to go back and look at how our CAD first-quarter is compared to full-year CAD in ’08 for example, and try to exclude Aeroglide and Silvue, if you can.

Greg Mason – Stifel Nicolaus

Okay. Can you talk a little bit about, you know, the further information on CBS and just your expectations, if you're willing to give them on, you know, how much more downside is in that business based on what you experienced last recession?

Jim Bottiglieri

This recession and last recession are different. We feel confident, because we are hearing it from our customers that as they, you know, there's been a lot of people laid off a lot of workers both – a lot of companies have laid off you know, both contract labors but also a lot of permanent staffing. We already are seeing, don’t take false hope out of this, but we already seeing situations where customers have laid off permanent workers, and then backfilled because they kind of cut a little too deep with contract laborers.

It is our clear expectation that the temporary sector will lead out of the economy, it always had, it almost seems like it has to happen more at this time because the total job cuts have been so deep, people aren’t sure how confident to be as sort of the economy strengthens, they hire back contracting temp labor, every downturn since the temp industry has been tracked back in the early 70s has led to an increased percentage of contract labor force, the total labor force out of the recession before, because companies realize how much easier it is to manage the workforce on the contract side and the permanent side.

So my overall commentary is we really feel like the debts of this downturn from an employment point of view is actually going to be a tremendous kind of nitrous oxide booster to the industry on the way up. I don't know when the way up is, and so I can’t give you a lot of clarity on based upon our experience and whether that looks like the end of ‘09 in anticipation of an ‘10 comeback or whether that's mid ‘10 and anticipation of ‘11 economic comeback.

I just – it is impossible to predict. We feel like the declines on a year-over-year basis will start to with the comparables are going to get easier right. We know the fourth quarter ’08 was pretty bad, and so we are pretty confident the fourth quarter ‘09 will not be as down versus ‘08 as for example first-quarter ‘09 is.

So the numbers from a comparison point of view are going to get better, but it is impossible to have any real clarity when you see jobs, reports and say you know, minus 650, minus 700 continually coming out. It is impossible to have real clarity. What I will try about this management team though, is having gone through the last downcycle with them, and what they are very good at is managing the business and rightsizing.

And I think we have six phenomenal teams, but more than any of our teams, the team at CBS is good at this, and capable of this, and knows how to cut, you know, fat without cutting muscle, selling through the downturn, gaining market share and there is not a – and there are some very good management teams in the staffing space. There's not a management team out there as a public company that I would rather have than the Staffmark management team right now, and they are very good at rightsizing the business and you know, I don't want to – I don't think we want to disclose exactly how much it costs, they’ve taken out the business today, but it is a highly material number.

Unidentified Analyst

This is Troy [ph]. Can you just add a little bit of color, I think on the Anodyne, the Advanced Circuits?

Jim Bottiglieri

Is this some sort of a tag team thing you guys have going on out there.

Unidentified Analyst

Yes that's kind of what we do. On Anodyne, the Advanced Circuits, and Fox, I think you mentioned that you know, based on the momentum they are carried into this slowdown, and also on cost-cutting, that they will be able to stay with some, you know, stay with some momentum going forward. Can you put a little color around what cost-cutting measures they are doing and how much that may impact their business?

Jim Bottiglieri

It is varied for each of them. Suffice to say that in each of those three businesses, there are some very aggressive and proactive measures taken on the cost of goods side. You know, Anodyne is a large acquirer of phone, and phone prices have started to come down. You probably know that Fox is a large acquirer of raw materials, including things like aluminum and steel, primarily aluminum. You may know that, you know, Advanced Circuits, you know, as far as laminates and copper and things like that.

So there is some cost of good measures that we are taking and then there is also some, I would call overhead management and in a couple of those cases, specifically there is some operational efficiency measures. I think I'd rather not go into specifically what those are, but I would say that those will, you know, largely impact the gross profit line, because in each of those businesses as opposed to sort of the SG&A line, although there is some SG&A things going on in Anodyne for example that will be pretty helpful.

So there is a mix of things going on and each of those three businesses, I want to emphasize too, and particularly in Fox and in Anodyne, there are also revenue drivers that have a lot of momentum that should be helpful to us in the coming year meeting new product introductions and things like that.

Greg Mason – Stifel Nicolaus

Great, thanks guys.

Operator

We'll take our next question from Henry Coffey with Sterne Agee. And Mr. Coffey your line is open. Please go ahead sir.

Henry Coffey – Sterne Agee

Good morning everyone. Can you hear me now?

Joe Massoud

Yes, good morning.

Henry Coffey – Sterne Agee

Is there any way you can sort of summarize all your remarks and turn that into some sense of where CAD ends up for the full year, or is it too early to get into that?

Joe Massoud

It's probably too early to get into that. It's going to be lower – if we don't acquire anything it's going to be lower than our distribution level, which I think we have said repeatedly. It's probably too early to get into that. We really in this environment, I don't think want to be in the business of giving guidance. I think that if you go through it and listen to what we said about each of the companies, we've tried to give people a reasonable basis for trying to model each of the companies and coming up with their own number, which I know you –

Henry Coffey – Sterne Agee

And the annualized cost savings from paying off the debt in February that's about $4 million a year?

Jim Bottiglieri

It is a little more than that Henry, because we also saving the management fees on top of it. So I would say it's about $5 million to $5.5 million.

Henry Coffey – Sterne Agee

And then it's at least for the last 10 months, correct?

Jim Bottiglieri

That will be mostly for the last 10 months, it is part of February as well.

Henry Coffey – Sterne Agee

Yes, and then I guess your inactivity on the acquisition front, I guess it's sort of a commentary on what you probably see going on with the businesses in some of these larger rig [ph] BDCs. Is there a lot of – with the stress there having. Are there are a lot of businesses out there for sale or –

Joe Massoud

You know, let’s separate. First off, when you say activity. I'm looking at a room full of people, I don't think if any.

Henry Coffey – Sterne Agee

(inaudible).

Joe Massoud

I think we've actually been very active in turning over a lot of stones and persisting ourselves extremely well. I think when we feel like it's firming up at the end of this year or late this year, whenever that happens or early next year. I think you're going to see, I won’t say a flurry of activity, but I think we will be very well positioned to move on some pretty interesting opportunity.

So let me just, the inactivity may be – there haven't been sort of actual acquisitions consummated, but you know, shareholders should know that we are actually, you know, all the 25 of us at the parent level are working our tails off, and I think positioning ourselves really well.

Now in terms of how it relates to the BDCs, Henry, I don't how may times you have heard me say, I don’t really pay attention to what the BDCs are doing. So, I'm not sure I can really comment on what's going on there. I think what's happening at the BDCs is that they are liquidating certain of their positions to try to pay down over a levered situation. So we have actually seen by opportunities from the BDCs, one in particular it sold a lot of companies, and I don't know what to say, that doesn't sound too derogatory, but we haven't seen many companies that they are selling that we have any interest in buying.

We don't think many of those company and maybe that is why they ended up where they ended up, but we don't think many of those companies out have a real, what we would call, a reason to exist. We think that they were dramatically overpaid for in the first place and the evaluations continue, their expectations continue to be too high. So, we’ll look at situations emerging from BDC, but so far nothing has really come across that we think fits in our family of companies, and I apologize it that sounds a little arrogant, but I think the results speak for themselves a little bit.

Henry Coffey – Sterne Agee

Thank you.

Operator

We'll take our next question from Robert Dodd with Morgan Keegan.

Robert Dodd – Morgan Keegan

Hi guys. Two questions. First coming back to the CAD for Q1, if I look at the op income, at least ex-intangible amortization for Q1 last year, it looks like Aeroglide and Silvue accounted to maybe 40% of CAD, you know, the difference between breakeven and 30. So, you know, can you give us some more clarity on what I'm missing there in terms of –

Jim Bottiglieri

I think CAD was $0.30 in the first quarter last year, and you're saying that you think Aeroglide and Silvue accounted for $0.12 of it.

Robert Dodd – Morgan Keegan

That's what the numbers look like.

Joe Massoud

No, I just want to make sure I understand the question.

Robert Dodd – Morgan Keegan

Yes. That's the question.

Joe Massoud

I'm not sure of a couple of things on that. Fox had an unusually strong, if I recall, first-quarter last year in terms of how it seasonally came out, and two weeks back Fox and not the front-end loaded this year as it was last year, and then in terms of the remainder, you know, directionally I’m surprised it's the magnitude that you're talking about. Jim, are there other factors?

Jim Bottiglieri

HALO was also a larger size, so it is a little bit more of a loss in the first quarter, and then there is impact from CBS being down.

Robert Dodd – Morgan Keegan

All right.

Joe Massoud

Yes, Dodd, yes, that's right. No, that wouldn't have had much of an impact and we got the business interruption insurance. And we are just discussing whether it the apt time, But HALO is larger and so that, you know, you get sort of more backendedness. You lose the $0.12 associated with Silvue and Aeroglide by roughly $0.12. If you say, I am not sure how the amortization kind of feedback into the number exactly without looking at it, and then you've got the impact of you know, the economy. I mean, we said it's like – we think CBS will comp later in the year more flatly or less downly. I know that's not a word than it is last year. I mean first-quarter ‘08 CBS was a tremendously good quarter.

Robert Dodd – Morgan Keegan

Yes.

Joe Massoud

And that's why we suggested the decline in ‘09 is accelerated, but I would tell you we think that's true from most of the industry, and from what we've seen from the industry association information and things it's not atypical.

Robert Dodd – Morgan Keegan

Right, got it. Next question, sort of you know, here looking at add-ons, you know, you mentioned you closed one on HALO. I mean, is the environment tough enough out there, why on you just essentially letting these competitive businesses fail and you know, feeling that customers for free, rather than buying them.

Joe Massoud

Well, there's two answers. There is a rep recruitment effort, okay, which I don’t know if it is as brutal as. It is an effort in which we try to work with representatives to suggest that they are more able to achieve their financial goals, and their business goals within the HALO umbrella than they are alone.

If you want to put that as crudely a thing, you're going to fail on your own, you should come and work for us. You know, that – one could look at like that, but at the end of the day they have relationships right. But the notion of let them fail and the customers will find their way to us, I think doesn't fully appreciate the nature of the personal relationship that the reps have.

So what you actually want to do is bring the reps underneath you. In terms of the acquisitions, the acquisitions are – you are saying, why pay anything. Understand that the acquisitions that we are doing are enormously accretive done at you know, three times this kinds of cash flow. They are producing 3 to 4 times, and in that case it is because you're requiring many reps at once as well as a fairly large book of business, and in some cases a little bit of an established brand name.

And those businesses that we are applying aren’t on the brink of failing at all. The businesses that we are acquiring are ones that are cash flow positive, where you have owners that are ready to transition. As a lot of people who started these businesses kind of post-World War II, and there is kind of a generational transition going on with some of these promotional businesses where the larger guys were able to provide a bigger infrastructure for their representatives more of a technology infrastructure, are capitalizing over time and I think there were smaller sellers, as you say, you know, if you can’t beat them, join them.

So that's the kind of “larger businesses” like the one we just required yesterday. In terms of the reps, a lot of those guys did work for themselves, and we like not to think about it as their business is failing more that they are bringing a book of business that they built, and synergistically bringing it into kind of a federal home.

Robert Dodd – Morgan Keegan

Got it. Thanks guys.

Operator

(Operator instructions) We'll take our next question from Vernon Plack with BB&T Capital Markets.

Vernon Plack – BB&T Capital Markets

Thanks very much. I'm trying to get a sense Joe for a little bit more of a sense for efficiencies, ways in which you can improve your company, since specifically looking at staffing and SG&A, for the last three quarters that number has been relatively consistent somewhere in the neighborhood of $69 million a quarter. Can we expect changes to that number?

Joe Massoud

Yes.

Vernon Plack – BB&T Capital Markets

And if I could sum up your thoughts, you sort of, I think you segmented your companies really into three different buckets. If I could summarize, and I would appreciate if the company, if I'm correct in this assumption, but looking at cash flow for ‘09 compared to ’07, would it be safe to say that Anodyne, Advanced Circuits, and Fox’s cash flow will probably be roughly neutral, HALO, AFM cash flow will be down and CBS cash flow will be down a lot.

Joe Massoud

Yes, with one caveat. That middle category, I think particularly in the HALO side has the chance to drift up towards neutral a little bit, depending on our opportunity to acquire some things, and I think what you're probably thinking when you think about the furniture industry, you probably think AFM is down more than we think it's going to be.

We think there is an impact where we think it is, probably it is not going to look like it is on the other public companies. So, but otherwise I would more or less – and the three that you say are flat. Do I think there is some room for, you know, one of them or something to drop a little below flat. You know, in this environment, you know may be, but that's probably a fair characterization. How do we characterize that one?

Vernon Plack – BB&T Capital Markets

Down a lot.

Joe Massoud

Yes. That's okay.

Vernon Plack – BB&T Capital Markets

And you were talking about ‘08 as opposed to ’07, right.

Jim Bottiglieri

I'm looking –

Joe Massoud

’09 versus ’08.

Jim Bottiglieri

’09 versus ’08.

Joe Massoud

(inaudible).

Vernon Plack – BB&T Capital Markets

Just wondered why you segmented them to those three buckets, and that's why I was trying to –

Joe Massoud

You know, that's – I think it's an accurate interpretation what you've done there.

Vernon Plack – BB&T Capital Markets

One other question Jim. Could you tell me again what the revenue for Fox was for the year, fourth quarter was $30.6 million?

Jim Bottiglieri

It was at $30.6 million.

Vernon Plack – BB&T Capital Markets

Thanks very much.

Jim Bottiglieri

Thank you.

Operator

We'll take our next question from Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom – RBC Capital Markets

Thanks, good morning.

Joe Massoud

Good morning.

Jon Arfstrom – RBC Capital Markets

Hi Jim, can you give me those transition cost numbers again for Staffmark?

Joe Massoud

For the quarter it was $2.6 million, and for the full year it was $7.4 million.

Jon Arfstrom – RBC Capital Markets

Okay, and would you consider those one-time, most of them or all of it, one-time in nature?

Joe Massoud

I would say all of it is one-time in nature.

Jon Arfstrom – RBC Capital Markets

Okay. So you're looking at about $8.8 million if you exclude that for Q4 net income?

Joe Massoud

What is get is operating income so –

Jon Arfstrom – RBC Capital Markets

Yes, right, operating income. Okay, great. And that do you have any type of comparison for Staffmark from what Q3 operating income would look like. The CBS number close enough or do you have any closer comparable?

Joe Massoud

Could you pick that Jim.

Jon Arfstrom – RBC Capital Markets

No, just give us an idea of what the Staffmark numbers would look like, the operating income numbers in Q3 and Q2.

Jim Bottiglieri

Well, you've got the reported numbers that we did last year, which includes Staffmark, but obviously we are saying that those numbers are going to be down.

Jon Arfstrom – RBC Capital Markets

Say for ’09.

Joe Massoud

’09 right.

Jim Bottiglieri

No, no, ‘08.

Jon Arfstrom – RBC Capital Markets

I think that is the way you are looking at the numbers. Are you saying – or can you tell us what the Q2 and Q3 numbers were –

Jim Bottiglieri

I don’t know.

Jon Arfstrom – RBC Capital Markets

In ’08, including Staffmark, which is what we are shown.

Jim Bottiglieri

Those are all reported numbers, so we've got those. I just don't have them in front of me Jon.

Jon Arfstrom – RBC Capital Markets

Okay, okay.

Joe Massoud

If you want, we can try to clarify what’s out there if you want to give a call back, if there is something that we presented in a, you know, less than clear fashion. We'll try to clear that up.

Jon Arfstrom – RBC Capital Markets

No I’m just looking for the quarterly CAD in ’08. Okay, and then what is the drop-down effect, you talked about that in the furniture industry?

Joe Massoud

You know, the Wal-Mart effect. I mean the notion is that and we’ve this with some customers who have come to us to put in lines of products that are less expensive in the minds that they currently offer. The drop-down effect is just that if you normally shop at; pick a store in this economy more. Some of those people drift down to the next store and then those drift down to the store below, and at some point there is kind of a baseline level, and people also call that a Wal-Mart effect. We definitely are seeing that in the furniture industry. If you stratosphere or (inaudible).

Jim Bottiglieri

If you create layers of the furniture retailers or manufacturers based on price points. It is pretty clear actually that the guys with the higher price points have suffered a greater decline than, for example, people in mid price points, all of which were great declines in AFM.

You know, our – I thought I will give you an example, for our top 10 customers for Q4 ’08, we actually had revenue increase, which means we are gaining market share there, and our top 10 customers are people who serve that low-end market. And so what I meant by the drop-down effect was the tendency of buyers in this kind of an economy to seek a lower-price product than they otherwise would have.

Jon Arfstrom – RBC Capital Markets

Okay, all right. That's all. Thank you.

Operator

It appears there are no further questions at this time. Mr. Massoud, I'd like to turn the conference back over to you for any additional or closing remarks.

Joe Massoud

No. My closing remark again is that thank you all for your time, and to say we feel pretty good about how ‘08 shaped up, and most of all we just re-emphasize, we are really excited about the six businesses we own, and as we look out a couple of years and through this kind of valley in the economy, we think our businesses all have incredibly good reasons to exist, and even the ones that are more cyclical than others in this market are in fact doing what we would hope they would do, which is starting to gain market share and traction.

And we feel like the model is playing in and out of the cycles exactly the way it has for us in the past, in exactly the way we wanted it to. This cycle may be a little deeper or longer than any of us expected but the models are working the way we expected it to. So thank you for following the company. Thank you for being shareholders, and we'll continue to work as hard as we possibly can for all of you. Thanks.

Operator

That does conclude today's conference call. We thank you for your participation. You may disconnect at any time.

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