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Compass Diversified Holdings (NYSE:CODI)

Q1 2008 Earnings Call

May 12, 2008 9:00 am ET

Executives

Nicholas Rust - KCSA Strategic Communications

I. Joseph Massoud – Chief Executive Officer

James J. Bottiglieri - Chief Financial Officer

Analysts

Lawrence Solow – CJS Securities

Vernon C. Plack – BB&T Capital Markets

Henry Coffey – Ferris, Baker Watts Incorporated

Robert J. Dodd – Morgan Keegan & Co., Inc.

Ephram Fields - Ferris Capital Management

Operator

Welcome to Compass Diversified 2008 first quarter conference call. (Operator Instructions) At this time I would like to turn the call over to Nicholas Rust of KCSA Strategic Communications for introductions and the reading of the Safe Harbor statement.

Nicholas Rust

Welcome to Compass Diversified Holdings first 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 the Q1 Press Release is available at www.compassdiversifiedholdings.com. In addition management expects to file Form 10-Q for the quarter ended March 31, 2008, with the SEC later today.

Please note that throughout this presentation we will refer to Compass Diversified Holdings as “CODI” or “the company.”

Now let allow me to read the following Safe Harbor statement. During this conference call we will make statements that contain certain forward-looking statements, including statements with regards to the future performance of the company and each of its businesses. Words such as believe, expect, project, and future, and 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.

Some of these factors are numerated in the Risk Factors discussed in Form 10-K filed by the company with the Securities and Exchange Commission for the year ended December 31, 2007, and other filings with the Securities and Exchange Commission. The company 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 Joe Massoud for opening remarks.

I. Joseph Massoud

During today’s call we would like to provide an update on our operating results for the first quarter on a business-by-business basis. Before that I would like to make an overview about our company’s performance as well as discuss our recent announcement on Silvue.

Currently Compass Diversified Holdings owns eight niche-leading, middle market businesses that as a whole performed extremely well in the first quarter of 2008. These results are even more impressive as they were achieved during what is considered the softest seasonal quarter of the year for many of our subsidiaries. CODI experienced significant cash flow growth in the first quarter and we expect to show cash flow growth for the full year 2008, notwithstanding any softness in the economy.

Two of our companies, CBS and American Furniture, are likely to be impacted negatively in the short term by the economy. In both cases, however, we have good reason at this point to believe that this cycle will produce a natural shakeout in smaller and less well-capitalized competitors, which will ultimately make those businesses substantially stronger and more profitable.

As a management team we went through a similar cycle with cyclical businesses earlier in this decade and in each case our companies emerged with greater market share and higher levels of cash flow. In addition, we expect, as with the last recession, to take advantage of opportunities to make add-on acquisitions at extremely favorable valuations and terms. I will add that we believe our current financing structure is perfectly suited for this environment.

The even better news is that we expect five or our seven remaining businesses to grow in 2008 and expect the growth to more than make up for any decline in cash flow at the two more cyclical businesses. As evidence to this, in the first quarter we increased cash available for distribution and reinvestment, which we will refer to as “CAD” or “cash flow” for this call, to $9.9 million as compared to $6.4 million for the year-ago quarter.

For the trailing 12-month period CODI increased cash flow to $49.8 million, or approximately $1.64 per share, which represents a coverage ratio of approximately 1.3x on the four distributions paid through April 25, 2008. During the 12-month period the excess of cash flow over shareholder distributions was also almost $10 million.

The overall health of each of our companies and their ability to generate consistent operating income growth serves as a key driver for further cash flow growth, as well as substantial opportunity to make cash-flow-accretive-platform and add-on acquisitions in the current environment.

Let me note that unlike many yield vehicles that some of you may follow that have reported to reduce their distributions or are considering doing so, we continue to maintain the goal of steadily increasing our distributions over time and believe we will be able to meet that goal. In addition, we have no liquidity concerns whatsoever with our earliest material maturities occurring in late 2012 and we remain under-levered with a debt to EBITDA ratio of under 2x.

Let me take a moment now to provide an overview of our recent announcement regarding Silvue. On May 9, 2008, we announced that we had entered into a definitive agreement to sell the business to Mitsui Chemicals of Japan for a total enterprise value of $95 million. We believe this represents a very attractive multiple for our shareholders and we expect to redeploy the receipts from this transaction at significantly more attractive multiples.

This divestiture accomplishes a number of things for us, including not only allowing us to access even more additional capital capacity beyond the over $200 million we already had available under our debt facility for deployment in a very attractive environment and it serves as further evidence in triangulation of the substantial embedded value in the family of companies within CODI, that is in our view, currently under-appreciated by the market.

To evaluate the success or ownership of Silvue, one can compare the $95 million in enterprise value at the current divestiture to the $44 million in total enterprise value paid by us at the time of our IPO, just two years ago in May 2006.

Over the period of our ownership we have successfully worked with management to broaden its geographic and product reach, delve more deeply into existing customer relationships, and significantly upgrade and expand its manufacturing capabilities. Clearly the investment of capital and effort into Silvue has paid off for CODI shareholders.

This is the second divestiture for CODI since going public. The first equally successful exit was in early 2007 and was for sale the sale of Crosman Acquisition Corporation to Wachovia Capital Partners. As a reminder, in that transaction the enterprise value at the time of the divestiture was approximately $140 million, as compared to a CODI purchase price of approximately $80 million less than one year earlier.

In terms of acquisition opportunities, we continue to see a number of attractive opportunities for additional platform and add-on acquisitions, evaluations that would be immediately creative to CAD.

The key for us in valuing potential acquisition opportunities remains our continued focus on five basic criteria: a) targets must be profitable businesses that are leaders in their specific industry niche; b) the target business must have solid reason to exist or fundamental competitive advantages that are difficult to replicate and which are evidenced by selling prices, gross profit margins, or operating margins that are favorable in comparison to others in their industry; c) we must understand the fundamentals of the target business which must not be susceptible to technological change or obsolescence; d) exiting management of the target business must be motivated and have a strong track record of success; and e) the acquisition must represent a valuation and terms that are attractive to our shareholders.

Adherence to these tenets in the past has allowed us to perform well in and out of economic cycles and continued adherence going forward will serve to ensure that the success continues.

With those introductory comments complete, I would like to turn the call over to Jim Bottiglieri to discuss our first quarter financial results.

James J. Bottiglieri

Today I will review our financial results for the quarter ended March 31, 2008, including a review of the operating results of each of our subsidiary companies and a brief mention of some of the canvas and patents of each of our businesses.

On a consolidated basis revenue for the quarter ended March 31, 2008, was approximately $373 million. The net loss for the quarter was $0.8 million, or $0.03 per share. The company also recorded a non-cash expense of $2.3 million in the first quarter attributable to supplemental put obligations, which is a non-cash expense and which we describe in more detail on our December 31, 2007, 10-K.

Turning to the results of each of our businesses, starting with Advanced Circuits, for the quarter ended March 31, 2008, Advanced Circuits revenues increased to $14.3 million compared to $13.1 million for the quarter ended March 31, 2007, largely due to increased sales in prototype and quick turn productions.

Income from operations for the first quarter was $4.8 million compared to $5.1 million for the same period in 2007. The decrease in operating income was largely due to recording in fiscal 2007 of lower, non-cash charges for loan forgiveness arrangements provided to Advanced Circuits management and were approximately $1.2 million.

Excluding the impact of this loan forgiveness, operating profit would have increased by approximately $0.9 million, which resulted from the operating profits generated from the increase in sales.

ACI continues to perform well. Growth as occurred both in its prototype and quick turn circuit board production businesses, as well as its newer and much smaller assembly business.

Aeroglide, for the quarter ended March 31, 2008, Aeroglide’s revenue increased to $16.2 million compared to $15.8 million for the same period last year principally due to increased machinery sales.

The income from operations for the quarter ended March 31, 2008, was $2 million compared to income from operations of $1.5 million for the same period in 2007. The increase is largely attributable to decreased amortization of $0.4 million due to higher amortization for the intangible backlog assets recognized in connection with our purchase of Aeroglide in February 2007 and which was fully amortized prior to the start of fiscal 2008, and partially from the increased operating profit generated from the increase in sales.

As a backlog-driven business, Aeroglide has experienced strong sales and retains a healthy pipeline of orders for the next six months. Its product markets are strong, particularly in food-related and its sales, both nationally and internationally, are robust.

American Furniture Manufacturing, for the quarter ended March 31, 2008, revenue decreased to $37.2 million compared to $53 million in the prior year quarter. Operating income was $3.7 million compared to $5.2 million for the first quarter of 2007. This decrease was due to lower sales resulting from a combination of the fire at it’s facility in February 2008 and from a weakening economy.

Approximately $3.5 million of the operating income recorded for the quarter was the result of accruing expected reimbursements with business interruption and from other types of insurance for the loss sustained by the fire. Since the fire we have carefully reviewed the situation and believe that this event will not materially impact American Furniture’s ability to produce cash flow in the medium-to-long term.

AFM and it’s entire management team has demonstrated a resolve in returning AFM to near full production capacity and is currently in the process of rebuilding its plant in Mississippi from the fire sustained in February. This business is performing well now and will benefit in the medium-to-long term from the difficulties facing many of the smaller competitors.

Anodyne Medical Device, for the quarter ended March 31, 2008, Anodyne’s revenues increased $11.5 million compared to $9.4 million for the same period last year, largely due to sales in new product roll out and from the portion of its sales from its acquisition of Prima Tech, which occurred in May 2007.

Income from operations increased to $0.5 million compared to $0.3 million for the same period in 2007. The increase in operating income was largely due to the increase in sales.

Anodyne continues to experience a strong ramp up in sales of new products that rolled out in 2007. It is now recognized as a market leader by both its product end users and its direct customers.

CBS Personnel, for the quarter ended March 31, 2008, CBS Personnel reported revenue of $236 million compared to $135.4 million for the same period last year. The 2008 revenue includes revenues of approximately $110 million from the sale of its Staffmark, which was acquisitioned by CBS on January 21, 2008.

Revenues on a pro forma basis would have been down by approximately 4% due to the impact of a weakening economy. We believe that this percentage decrease is less than the decrease reported by most of the company’s publicly traded peers and further that this is evidence that CBS is gaining market share in the market in which it operates and is further affirmation that CBS is [inaudible] operations model.

Income from operations decreased from $3.4 million for the first quarter of 2007 to $1.4 million for the first quarter of fiscal 2008. The impact of a positive operating profit generated from the acquisition of Staffmark was partially offset by lower profits percentage of 16.7% realized for 2008 as compared to 17.7% realized in fiscal in 2007, resulting from higher workman compensation costs and a shift of the mix of revenues raised with the Staffmark acquisition.

Expenses of approximately $1.6 million related specifically to Staffmark and $0.8 million of higher amortization expense largely attributable to the amortization recorded for the acquisition of Staffmark also contributed to this decrease in operating income.

We acquired Staffmark on January 21, 2008. We are currently moving forward with efforts to integrate these operations into CBS personnel and are ahead or on target for our goals associated with that situation. In addition, we are pleased to note that CBS continues to perform as favorable as compared to other companies.

CBS management is well seasoned in integrating acquisitions and experienced and skilled at managing through economic cycles. We are confident in their ability to perform once again.

Halo Branded Solutions. For the quarter ended March 31, 2008, Halo’s revenues increased to $28.8 million compared to $23.4 million for the same period last year, principally due to the acquisitions made since December 31, 2007, and from increased sales to existing customers.

The loss from operations was approximately $28 million for both periods as the operating profits from increased sales was offset by $.4 million of higher amortization expenses associated with amortization of [inaudible], establishing connections from our [inaudible] payroll in February 2007.

On April 24, Halo completed the acquisition of Goldman Promotions. We expect this acquisition to be accredited for 2008 and going forward. As you will recall, this business experiences a large majority of its cash flow in the fourth quarter of the year.

Silvue Technologies Group, for the quarter ended March 31, 2008, revenue was $5.5 million for both periods. Income from operations was approximately $1.3 million in the first quarter of 2008 compared to $1.5 million for the same period in 2007. The decrease in operating income was largely due to increased selling, general, and administrative expenses and for increased research and development expenses as the company continues to invest in its infrastructure with the hope of developing new product applications.

Now, I will discuss the operations of our new subsidiary company, Fox Factory, which we acquired earlier this year. For the quarter ended March 31, 2008, revenue was $23.4 million compared to $15.9 million in the prior year period. The increase in revenue was attributable to the increased sales within our [inaudible] division. The loss from operations was $0.2 million during the first quarter of 2008 compared to a profit of $0.1 million for the quarter ended March 31, 2007.

As the operating profit from the increase in sales was offset by higher amortization expenses of approximately $1.6 million recorded in connection with the acquisition of Fox. Results for 2008 for Fox Factory only represent the operating performances reported on January 24, 2008.

This is the first quarter of our ownership and as we expected, it experienced significant growth. We are looking forward to a successful launch of the company’s new product line for 2008-2009 in May and expect the business to continue to grow throughout the year.

Turning to the balance sheet, we had $14 million in cash and cash equivalents and net worth in capital of $65.2 million as of March 31, 2008.

Subject to borrow and base restrictions at March 31, 2008, CODI has over $200 million in revolving loans that are to be used to fund acquisitions and working capital requirements.

I. Joseph Massoud

Let me reiterate emphatically my overall satisfaction with our operating results for the first three months of 2008. We have always said the most important factor in the performance of our business long term is performance of the underlying subsidiaries, and in this regard we are very pleased.

Despite cyclicality in some of our businesses and challenging market conditions, each of our businesses performed well and we had significant growth in cash flows at our company for this quarter over last year and we’re confident in their performance for the remainder of the year.

I would like to conclude by sharing an interesting observation that one of our shareholders had about our company, which is that we are a fairly unusual investment vehicle in that we are a growth company, a value stock, and a high-income stock all at once. We have shown substantial quarter-over-quarter comparable cash flow growth for each quarter of our existence for which there even was a comparable quarter, value, now trading at approximate 7x-8x cash flow and a even lower multiple of EBITDA and high income, yielding over 10% to our shareholders and cash distributions, while covering that yield by over 30%.

In short, CODI provides the ability to own growing niche market leaders with predictable cash flows at an exceptional value, all while collecting a strong yield along the way.

Thank you for your time and we would love to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Larry Solow - CJS Securities.

Lawrence Solow – CJS Securities

Joe, could you briefly discuss your CAD coverage of 1.3x. Is that a firm number? Just looking out with your crystal ball a little bit, I assume you’re, without actually giving exact guidance.

I. Joseph Massoud

That 1.3x CAD coverage is an actual trailing CAD but number divided by the actual distributions provided over that trailing period.

Let me give you a couple of comments. One is we are emphatically trying not to be in the business of crystal balling. Having said that, it’s not a target in that it’s not a board goal to be at 1.3x. We don’t drive off of that. We believe that 1.3x was a good place to be given potential softness in the economy. We always wanted a cushion and quite honestly, we wanted some built in room for growth. I think we’ve both created a cushion and some built in room for growth.

I would say if we didn’t increase our distribution this year we would expect our coverage to be at least that number. And I told you we expected our cash flow to grow this year, so by definition if there was no increase in distribution the coverage would mathematically grow if that expectation was correct. But we also have a state goal of increasing our distributions steadily over time so; I don’t know what the denominator is going to look like so I don’t know where it’s going to come out.

But that is a healthy level. I don’t know that in the long term that it needs to be that high. I think it could probably be lower. But a lot of it depends on the mix in the business and point in the business cycle and that’s really an evaluation our Board looks at on a quarter-by-quarter basis, Larry.

Lawrence Solow – CJS Securities

So we would assume that if the business does grow in line with your expectations it is a good likelihood that you will increase the guide at some point later in the year?

I. Joseph Massoud

If the businesses perform as we expect them to perform this year, I think it’s fair to say that it’s a good likelihood that that will occur.

Lawrence Solow – CJS Securities

And Silvue, you got a good price and gain in two years, which is great. Was there any other motivation behind your s?

I. Joseph Massoud

Our investment had two components, a debt component and an equity component. The debt component earned what you would think it would earn 1% over time. The equity component produced in excess of an 85% internal rate of return.

So, first of all, when you say doubling, because people talk about doubling a lot, typically they’re talking about doubling their equity. In this particular case our specific equity investment is comping more that 4x if you look at it on a preferred redemption basis, which is something we completed quickly after the IPO.

To answer your question specifically, I think this sale is a win-win all the way around. When I look at us and I look at Mitsui and I look at the company, for us, I think we’ve managed to bring the company a long way and this sale is certainly representative of that. We’ve got a very good multiple. You’ve tracked the numbers; it looks like almost 12x trailing EBITDA.

For Mitsui, I think this is a great company for them to build and I think they have the broad reach to build the company even further. And I think for management this is a great long-term home for the company where they can use some of the technology that’s developed.

But anyway, I think actually there was no other decision except for this was the right time for this phase in the development in Silvue as a company and for this phase of CODI.

Lawrence Solow – CJS Securities

I think it’s a good deal. I just thought since the business was generating a cash flow I thought maybe you could have held on and swing through the fences with the opportunity, that’s really what I was getting.

I. Joseph Massoud

Clearly one of the reasons from the multiple we got is there is a platform for that opportunity to occur. If a buyer didn’t perceive that there was a great opportunity for growth, they wouldn’t pay this multiple. I would warrant to say that they may have more success hitting those home runs, potentially, because of who they are, than we would have. But we believe at this time that this is a very good multiple on very interesting future opportunities that might occur.

Lawrence Solow – CJS Securities

In just looking at the two probably most economic-sensitive subsidiaries, AMS and CBS, it looks like CBS was actually down 4% pro forma is actually not so bad. It seems to be hanging in there. Is the temporary staffing more of a leading indicator, a lagging indicator, the seasonality in the first quarter may be less than the imp?

I. Joseph Massoud

Larry, that’s a lot of questions. What I heard was, I don’t know if you want a commentary on AFM or not, but on CBS I heard that it looks like its hanging pretty well, what’s my comment on that? Do you think it’s going to get better or worse? And I heard is the industry generally leading or lagging?

CBS, actually 4% decline, if you look at the broad, and I won’t speak to their numbers because they’re easily found, but if you track them we think the industry looks anything like 6%-10% down, depending on who you’re looking at. We’re pretty happy, and to be a little smug about it, we’re not totally surprised. This is what it looked like in the last down turn and it is an outcome of our operating model there.

And our management team, I would stack them up against any management team in this industry, bar none. So our management is good, they’ve been through this before and they know how to manage through these cycles. So when I say we’re pleased, in a way we’re pleased because we’re picking up market share, we are in fact tracking our customer gains. I can tell you we have a pretty decent number of net customer gains over the last couple of quarters.

You are never happy to be down, but I think it was a good quarter for this company when you consider the fact that this industry is designed to be cyclical. If our numbers aren’t down, then we’re actually not servicing our customer, in a paradoxical way. Our customers employ people on a contract basis so that when the economy is soft they can be nimble. We assist with their nimbleness and that’s why they reward us by hiring those people back and in general even hiring back an even greater percentage of their work force as contract labor when they come out. So, yes, I agree, not so bad.

The rest of the year I don’t know. I wouldn’t be surprised if it got a little worse, though. Not dramatically but if you were in the mid-to-high, not high meaning like 10%, but mid-to-high single digits and I had to swag down, that wouldn’t surprise me, but I would continue to think that we will run ahead of the national comps.

So the third question is going to sound a little bit like I’m having some contradiction here. Because, yes, the industry does tend to lead the economic down turn and so I think a natural outcome would be shouldn’t you have a sharper decline and shouldn’t you be bouncing back. I don’t know if any of us know whether the economy is bouncing back or not, but in general, certainly people think it leads the industry. That might portend good things for CBS because we might come out quicker, but we are internally cautioning ourselves that it could get a little worse.

Lawrence Solow – CJS Securities

And then AMF, the fire impacted the entire business. Clearly you made up some of that with your reimbursement. Was that revenue not flow through the line, is that why it looks a little worse on a top-line basis?

James J. Bottiglieri

No, the insurance reimbursement does not go through revenue.

Lawrence Solow – CJS Securities

So that’s why the impact looks like it was actually worse than it really was.

James J. Bottiglieri

Yes.

Operator

Your next question comes from Vernon Place - BB&T Capital Markets.

Vernon C. Plack – BB&T Capital Markets

Jim, do you have an expected closing date on Silvue?

James J. Bottiglieri

I think we said in the press release a mid-September date, September 19 was the drop-dead date. I think the buyer and the management and we would all like it to be sooner rather than later, but unfortunately it’s to an extent out of our hands. You have a global company buying a, albeit it much smaller, but still a global company which means we have governmental approvals in at least three, and maybe four, jurisdictions that we have to get. And some of it is out of our hands. So I think we’re all speeding it as quickly as possible. We gave you the drop-dead date. I would venture it’s going to be in August. Now I’m really swaggering. It could be within 30-45 days if these governmental approvals occur quickly and it might stretch out to the drop-deal d.

I. Joseph Massoud

Vernon, there’s always the chance that we get to the drop-dead date and we’re one week away from something and it extends beyond that we make a mutual agreement to do it.

Vernon C. Plack – BB&T Capital Markets

You talked in your earnings release this morning about the attractive opportunities that are out there in the current marketplace. I’m trying to get a sense for a level of confidence you have, at least at this point, in terms of, and also given the capacity that you have to add additional portfolio companies. Are you confident that you will have several acquisitions this y?

I. Joseph Massoud

Vernon, I’m going to try to repeat the mantra that I’ve said on every call and every investor meeting we’re in. We are focused on and confident of the performance of our existing companies. We will not set for ourselves or for our investors goals on number of acquisitions we do in a given time period because I think once you set that goal then you feel you have to meet it, then that makes you stretch where you shouldn’t stretch.

So, number one, the number of transactions that we complete is entirely dependent on the number of attractive opportunities we see and the number could be zero and it could be three or four, in the next twelve months. I don’t think it’s bigger than three or four.

I am confident that we are going to see a number of interesting add-on opportunities and I am also confident that we are going to see a number of interesting new platform opportunities, so if I had to guess, I would say in the next six to twelve months you will see one to two new platform acquisitions, and one to three new add-on acquisitions. But again, it’s not, twelve months from now if we haven’t done any of that, and the company’s cash flow is up 15%-20%, I am going to get on the phone and tell you it’s been a great twelve months.

Operator

Your next question comes from Harry Coffey - Ferris, Baker Watts.

Henry Coffey – Ferris, Baker Watts Incorporated

Jim, AFM, can you tell me how the insurance proceeds, in terms of dollars, how they worked through the numbers?

James J. Bottiglieri

Most of it went through the balance sheet since we’re replacing inventory and fixed assets. So basically it’s sitting on the balance sheet as receivables. However, about $3.5 million actually went through operating income. About $1 million in cost of goods sold and about $2.5 million in SG&A expense.

Henry Coffey – Ferris, Baker Watts Incorporated

And that’s it. You realized the full insurance?

James J. Bottiglieri

No. Basically the biggest part is still recognized as a business interruption insurance. We recorded basically receivables that we expect from the property insurance which is largely the fixed assets and inventory. But the business interruption insurance, which is the loss of operating profit you would have received, that will be recorded over the course of the remainder of the year. For example, our April profit is going to be down, we insert that business interruption insurance accrual for the lost profit from April for not having the factory yet at full capacity.

Henry Coffey – Ferris, Baker Watts Incorporated

But the March results reflect about $3.5 million.

James J. Bottiglieri

That’s correct. And again, that fire happened on February 10. It impacted the results of February and March.

Henry Coffey – Ferris, Baker Watts Incorporated

So in theory if you were to earn $2 million a month going forward but you only earned $1 million, then this interruption covers the gap?

James J. Bottiglieri

In theory that’s correct.

I. Joseph Massoud

So far the insurance companies have been perfectly fine to work with. We’ve already received $8 million, which we’re told is reasonably early in the receive cycle. We have an insurance advisor who we think is spectacular. Our CFO down at the company is doing a great job. Our partners here at Compass are all over this.

Having said that, in our own mind, we have assumed that our business interruption recovery will be something of every dollar. When I say to you we think there’s a decent chance we think we’ll increase our distribution going forward, it’s with the assumption and knowledge and mind that we may not receive every last dollar there.

Henry Coffey – Ferris, Baker Watts Incorporated

And in terms of where you stand capital structure wise and debt capacity, what’s the size of your additional line of credit, which I assume you’re not tapping into much of that, and what about the accordion feature in your ..

I. Joseph Massoud

We’ve drawn about $60 million today on a revolving line of $325 million. You’re never going to get to the $325 million number. So whatever it is extra cushion you need there, that gives you a sense of our current availability. And then if we are able to close Silvue as we expect we would use that to repay that line and hold on to the excess cash, assuming that between now and whenever it closes we have not deployed additional capital.

James J. Bottiglieri

Henry, when we say it’s over $200 million before Silvue, it’s basically the $325 million facility less $60 million outstanding and then less some letter of credits that go against your availability, they give you approximately over $200 million.

Henry Coffey – Ferris, Baker Watts Incorporated

And you also have capacity to top into the churn debt market, right?

I. Joseph Massoud

Yes, we have capacity and we have that existing. I’m not sure today any borrower, I think we would have as good a shot as any because I think I can say confidently our borrowers are pretty happy with this facility and we’re under-levered and performing very well. I don’t know that anyone could bank today that if you went back and asked for more term debt that you would find the additional lenders to fill that shoe.

But that sun will come out again and that capacity is available. But we are planning that that sun won’t come out for a while, until we need it to come out. And I think we’re, I won’t say we’re unique among some of the vehicles out there, but maybe we’re somewhat unusual in that we’re not dependent at all on this point on additional capacity from the credit market because we’re loaded and ready to go and Silvue makes us more loaded.

Henry Coffey – Ferris, Baker Watts Incorporated

If a $290 million acquisition showed up and assuming you have the money from Silvue and you have the money from your bank line, you would be able to tap into that or would you have to go back to the bank group and negotiate?

I. Joseph Massoud

We would have to find additional.

Henry Coffey – Ferris, Baker Watts Incorporated

You would have to use the line of credit.

James J. Bottiglieri

Right now our interest rate on that is 3.75% over LIBOR. Some of the banks would think that’s a low interest rate, so whether investors would be interested in issuing new debt at that same rate would be a quest.

I. Joseph Massoud

I think you’re saying what happens when we run out. If we ran out tomorrow, I’m not 100%, if we somehow managed to acquire three more businesses tomorrow and deployed all this capital, I don’t know that raising additional debt would be a snap because while our facility provides for it, you’ve got to find additional lenders who actually want to stick their toe in the water.

We’ve had these conversations with our lenders and they think we could find it. And there are actually new names out there that aren’t in our current debt facility who we’re exchanging messages with who seem like they’re interested. So it may be possible, what I’m telling you is it’s not lined up today.

The capacity we have today is your remaining capacity on the revolver and the capacity created by the sale of Silvue.

Henry Coffey – Ferris, Baker Watts Incorporated

But you can draw that $200 million, right?

I. Joseph Massoud

Absolutely. There’s no contingencies. It’s just whether we’re in default. We’re several miles from being anywhere near a default.

Henry Coffey – Ferris, Baker Watts Incorporated

That’s what I was really asking.

I. Joseph Massoud

I thought you were asking about even more. What’s out there is totally available and easy to draw it.

Operator

Your next question comes from Robert Dodd - Morgan Keegan.

Robert J. Dodd – Morgan Keegan & Co., Inc.

Just coming back to this acquisition opportunity market, what are the multiples looking like out there? I’ve been listening to other calls. They’re talking still averaging 8.5%-9%. I know you have a different approach to how you go about that market, but have you not seen multiple compression yet or can you just give us some color on t?

I. Joseph Massoud

I think it’s a wide range book. I think there’s plenty of equity out there and I think there’s a wide range and I think that there are, it would really be hard for me to say on multiples. I think that there’s a wide range. I will tell you that we find there’s an increasing number of transactions that I would put to Fox. Point to Fox as a business and you can see that I’m suggesting that the rest of the year will continue at the same pace as the first quarter for Fox, but suffice it say that it is a growth company that is performing very well.

And there is a business that we bought on an effective cash flow basis under 8x on a tax effective all end basis that would have drawn, we think, a multiple probably a couple multiples higher. But certainty-to-close was extraordinarily important for the seller and where we were able to wheel that. I can tell you that where certainty-to-close is not a big factor, there are people that are out there that are willing to pay. Where certainty-to-close is a bit factor, where you have the seller, I don’t want to say the difference between 7.5 and 8 or 7 and 9 is irrelevant, but certainly it closes a big deal. I think we’re extraordinarily competitive right now. And I think those multiples are back in line, we find ourselves competitive on a greater percentage because the advantage we have is more potent now, I would say, than it is in a hyper-aggressive market.

But, Robert, look, again. For us, a good year would be one in which we made two or three acquisitions. We’re not booking a lot of loans. This year we’ve already acquired Staffmark, which is a fantastic deal for us. Fox, I think is a fantastic deal for us. Goldman Promotions is an excellent add-on for Halo. So, if we had a budget I would tell you that we sit here way ahead of budget.

It’s a very strange market out there. And I’ve heard those calls, too, where they say the multiples are coming down. I think overall the multiples are coming down a little, but I do think it’s a fair comment that you’re still able to get, if you can find the right buyer for the right opportunity, then I think the multiples are also firm, because there’s this funny cap out there. But it’s a strange market.

Now our model is to try to stay out of the crazy, fully, widely shot auctions. We aren’t always able to do that, but we’re trying to exploit our advantages wherever we can. And I think Fox, our team on the West Coast did a great job in driving home to a seller that we were the right home for his company because of certain equivalents and because of the ability to work with the company to grow it over potentially an intermediate to longer period of time.

So we’re trying to use what we’ve got and it seems to be working.

Robert J. Dodd – Morgan Keegan & Co., Inc.

On American Furniture, are you seeing any rebound in demand from customers speculating on what tax incentive checks are going to get spent?

I. Joseph Massoud

I’m hearing a lot of theories. I can’t tell you we’re seeing it. I’m not even those checks have been mailed. That’s a theory that the industry hopes is going to occur. I have also heard they’ll just get sucked into the gas pumps, counter-theory. We would love that, we’re not counting on it. On a margin it must help somebody. Someone is going to make a purchase that might be furniture that they otherwise wouldn’t be able to afford to. We’re not looking for that to be a big bailout.

I will tell you that we think compared to our comparables, and it’s hard because we’re so much bigger than anyone else in this promotional space, but we can look at the end promotional customers and assume that however they’re doing the retail, there’s no comment to how the industry is doing, we feel like we’re outperforming our competitors on that basis and we think that’s a good sign because we’re starting and we’re hearing rumors and people have equipment for sale and things, we think there will be a number of these smaller ones that might not exist in the same form 12-18 months from now and that could be a good dynamic for us, and was a good dynamic for the company in the last recession.

Robert J. Dodd – Morgan Keegan & Co., Inc.

Silvue, are you going to start recognizing that as a discontinued op? And when are you going to mark the supplemental put?

James J. Bottiglieri

Actually, we will recognize that on our next public filings, the next 10-Q we will report that as a discontinued operation. And the supplemental put, basically at March 31. We used the valuation we achieved to value the supplemental p

I. Joseph Massoud

Your balance sheet is fully burdened as of the thing you got this morning for the supplemental put for that value.

Robert J. Dodd – Morgan Keegan & Co., Inc.

On Goldman, is it a very similar business to Halo? Are you just adding on, expanding the footprint or could you give us a little more color on the add?

I. Joseph Massoud

We’re not giving a whole lot of color on that. Our policy has been in general in going forward is on the very material acquisition to give you a lot of information and on the small ones just to not give a whole lot. But in this case, they are in the same business; it’s a very nice blend. The management team at Goldman is very good and we think this is very consistent with acquisitions that Halo has made in the past. So it’s not any departure of strategy or business line or geography.

Operator

Your last question comes from Ephram Fields - Ferris Capital Management.

Ephram Fields - Ferris Capital Management

The Staffmark integration expense that you took what was the income statement impact? Was that $1.6 million?

James J. Bottiglieri

That’s correct.

Ephram Fields - Ferris Capital Management

So your operating income for this quarter of $4 million, that’s after that?

James J. Bottiglieri

That’s correct.

Ephram Fields - Ferris Capital Management

Was there anything else besides that $1.6 million item that was non-recurring that becomes embedded in these numbers?

James J. Bottiglieri

No.

Operator

There are no further questions.

I. Joseph Massoud

In closing, again, we are pleased. We’re excited about how the companies are performing. I think the economy is in an uncertain spot but I think our companies are performing very well and I think we’re well planned for the broad range of exigencies here and we look forward to continue operating this business on your behalf. Thank you for your time and we will talk to you again next quarter.

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