Compass Diversified Holdings Q3 2008 Earnings Call Transcript

Nov. 10, 2008 5:16 PM ETCompass Diversified (CODI)
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Compass Diversified Holdings (NYSE:CODI) Q3 2008 Earnings Call November 10, 2008 9:00 AM ET


Joseph Massoud – Chief Executive Officer

James Bottiglieri – Chief Financial Officer

Pat – Unidentified Corporate Participant

Tyler Wilson – IGB Group


Lawrence Solow – CJS Securities

Greg Mason – Stifel Nicolaus & Company, Inc.

John Rogers – Janney Montgomery

Jon Arfstrom – RBC Capital Markets

Henry Coffey – Sterne Agee


Welcome to Compass Diversified Holdings 2008 third quarter conference call. (Operator Instructions) At this time I'd like to turn the conference over to Tyler Wilson of the IGB Group for introductions and the reading of the Safe Harbor Statement.

Tyler Wilson

Thank you and welcome to Compass Diversified Holdings third 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 Q2 press release including the financial payables is available on the company's website at In addition management will file the Form 10-Q for the quarter ended September 30, 2008 with the SEC later today. Please note throughout this call we will refer to Compass Diversified Holdings as CODI or the company.

Now allow me to read the Safe Harbor Statement. During the conference call we may make certain forward-looking statements including statements with regard to future performance of CODI. Words such as believe, expect, project 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, 2007 and other filings with the Securities and Exchange Commission.

In particular the domestic and global 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 2008 or beyond. CODI undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

At this time I would like to turn the call over to Joe Massoud for his opening remarks.

Joseph Massoud

Welcome to our third quarter 2008 earnings conference call. We'll start today's call by offering some general comments on CODI's performance during the third quarter and trailing 12-month period as it relates to our cash flow available for distribution and reinvestment or cash flow and our distribution increase. I will then give some insight into how CODI's unique business model has positioned the company to continue to both generate sizeable cash flows and see growth opportunities in this challenging environment. After that I'll turn the call over to Jim to discuss our operating results and review our portfolio businesses for the third quarter and nine months ended September 30, 2008.

During the three and 12-month period ended September 30, 2008, we once again posted solid results and increased our distribution while positioning the company for strong operating performance through economically difficult times. During the quarter we increased cash available for distribution reinvestment which we refer to as cash flow or CAD by approximately 22.5% to $15.7 million from $12.8 million for the year ago quarter.

For the trailing 12-month period, CODI increased cash flow by approximately 48.8% to $57.1 million from $38.4 million in the year ago period. Drawing upon our growing and sizable cash flows on October 14, 2008 we announced that our board of directors declared a 5% increase in our third quarter distribution to $0.34 per share. The third increase in our distribution since the company's IPO in May 2006.

The ongoing ability of our diverse portfolio subsidiary companies to consistently generate stable cash flows in excess of our distribution levels has enabled us to successfully expand our quarterly distribution by approximately 30% and declare cumulative distributions over approximately $3.28 per share since going public. Notably, we have increased our quarterly distribution at a time when many other companies are looking to reduce or suspend or eliminate their dividends as a result of the successful application of our unique and different business model and our strong financial position.

Let me take a moment to talk about the current economic environment and why we believe CODI is well positioned over the long-term. While near-term macroeconomic conditions are challenging and will impact certain subsidiary businesses more than others, our overall portfolio remains strong and will continue to generate cash flow that will allow us to both pay sizeable distribution to our shareholders as well as reinvest in our business.

In addition, it is important to note that several of our subsidiary businesses continue to perform well in this environment and have very god prospects for the coming year. To date we have had a strong 2008 on a combined basis. We still expect to meet our guidance of $51 million to $56 million in cash flow available for distribution reinvestment, albeit at the low end of the range. We monetized two of our subsidiaries in a very timely fashion selling Aeroglide and Silvue in June for an approximate average of over 10 times cash flow.

As a result of these sales as well as our equity and debt offerings in 2007, we just find ourselves flush with cash and prepared to make attractive acquisitions at a time when others are making announcements regarding their liquidity crunch. We know what has interested investors today is not 2008; it's our expectations for 2009.

Our operational expectations, which to us are perhaps the most important, are that each of the six of our businesses will outperform their competitors and that they will prudently manage costs without cutting the ability to capitalize on revenue opportunities with which they are presented. Specifically, we expect that three of our companies, Anodyne Medical Device, Advanced Circuits and Fox Shox will show growth in cash flow in 2009 as compared to 2008.

For the other three, HALO, American Furniture and CBS Personnel we expect the economy to cause the cash flows of each of these businesses to decline. In the case of HALO and American Furniture we expect these declines to be somewhat muted. In the case of CBS while we expect the company to continue to outperform its peers, the nature of the staffing industry leads us to believe the declines in cash flow will be more sharp.

Later on the call Jim will expand upon how we believe the current market will affect each of our individual businesses. On a combined basis if you assume that we reinvest our cash in hand without even taking into account the accretive use of our revolver to make acquisitions we'd expect the capital to exceed our distribution substantially next year. In fact, even if we were simply to use our cash on hand next year to retire long-term debt for the full year we expert our cash flows to exceed our distribution even in the face of a very difficult economic environment.

However, if we assume we chose to retain the cash in our balance sheet and do not find acquisition opportunities to meet our strict acquisition valuation and diligence criteria for the full year, it is likely that in a continued recession we will fall just short of creating operating cash flow as we measure it an amount equal to our distribution. However, we fully expect to continue paying the distribution and it's very important that no one misconstrues my methods here. In fact, I would reiterate that it's our board of director's goal to over time to continue to increase our distribution and there is nothing that I've said here that changes that outlook or our view whatsoever.

We are one of the only entities I know that does not include gains from sale of businesses in their cash flow available for distribution reinvestment. We have had over $3.00 per share of such gains since our IPO in May 2006 with an absolute number over $100 million. We don't include any of that in Cap.

We are now sitting on a substantial amount of cash plus availability under a revolver totaling over $400 million with no real maturities until 2012. From our point of view we couldn't be more financially solid. We believe we are poised to make attractive and accretive acquisitions in the coming year or two.

In 2007 we had two businesses that created cash flow in the first half of the year that we monetized in significant gains, and from which we continue to hold cash prudently in order to reinvest at the most opportune time. This should not be interpreted or construed as a negative for the business or for the prospect of distributions and distribution growth in the future. If anything we're hoping investors will see that this is in fact an execution against our predefined strategy.

At the risk of reiterating concepts with which most of you are familiar we'd now like to take some time to reinforce a few key points of our unique business model as it relates to our ability to build and produce strong results and grow in this difficult environment.

First and foremost, we acquire businesses that are niche market leaders with a reason to exist. When we acquire them we underwrite them as best we can to worse case economic scenarios. For cyclical businesses this means declines which in some cases are significant in near-term cash flows, but critical to our analysis is also whether these businesses have the management and capabilities to strengthen their core businesses through downturns and to emerge stronger. This typically means growing overall market share by using their strength as well as CODI's financial capability to capitalize on less committed or less financial capable competitors.

For each of our businesses that we own today and for each of the businesses that we owned in 2000 to 2002 for example I can emphatically say we believe this is true and we are confident. Warren Buffet often speaks of a mote around strong businesses and you've all heard me repeatedly talk about reason to exist. It's times like these where reason to exist becomes even more critical.

Second, it's important to keep in mind that our cash flows are derived from a diverse portfolio of leading businesses across a number of industries. This industry diversification reduces the impact of the cyclicality of some of our individual businesses half in our overall portfolio and ensures stability in the cash flows for which we distribute our quarterly dividends.

Furthermore, we control all of these businesses and we control the boards. That means we work with management to manage their destiny. We're not along for the ride like a lender is waiting for a current majority shareholder to make adjustments and may or may not make sense. We control these businesses. We know how to manage through a recession. We've done it successfully before.

Third, I'd like to highlight that CODI's experienced management team is actively involved. Again to reiterate the concept, we found that collaboration with management is invaluable during downturns in particularly. Having managed middle market businesses through the last recession we believe we can help several of our subsidiaries benefit from this environment. We're using this difficult time to both prudently invest in select areas of our portfolio companies such as sales and marketing, while we seek operational efficiencies. We look at this period as a time to strengthen the businesses. We’re confident that with a successful execution of the strategy we help our subsidiaries outperform their peers and gain market share.

Fourth, we have a unique financing structure which gives our portfolio companies parent level funding bypassing the banks that most of their middle market competitors currently use. In the current economic environment we believe that having such a structure is particularly compelling for subsidiaries as it offers an access to capital at a time when such access is scarce.

Fifth, with almost $90 million in cash a $340 million revolving credit facility and no significant debt maturities until 2012, we have substantial available capital and extremely healthy liquidity position. We intend to utilize this considerable financial flexibility to both internally grow our investment portfolio and actively pursue new platform business opportunities that meet our strict valuation and diligence requirements.

Our requirements are extraordinarily strict. Without naming specific names I think there has been a notion over the last decade that a company can overpay for businesses and if you have enough businesses it somehow works its way out in the end. That turns out not to be true and I think we're learning that on a daily basis.

Every business must be valued individually and thought of in terms of its individual valuation. Overvaluing and overpaying never works, especially in a period of recession when you find that the earnings across your portfolio go down. Our diligence in valuation and in conducting our due diligence process have paid off for us for the last 10, 11 years and I expect it'll continue to do that for our shareholders.

We now find ourselves in an excellent position to capitalize on our conservativism in this extremely attractive environment resulting from the current credit crunch. We continue to actively look for opportunities and as valuations continue to come down we're poised to purchase additional businesses at prices that further enhance the long-term value of CODI for our shareholders.

This is the best time to be CODI from my point of view. I'd like to highlight that we continue to be a buyer of choice for sellers and we represent as a result of both our committed financing structure and our certainty to close transactions.

Finally, I'd like to point something out that again you've heard me say over and over but perhaps it makes more sense now in a recession period than it did two years ago in the quote/unquote good times. Unlike financial buyers or private equity firms, we have no time constraints on our acquisition of our ownership of businesses. We like to own healthy and growing businesses and all else being equal think it's better return on risk to continue to own a business and monetize and acquire new business.

This flexibility enables us to manage the lifecycles of our middle market businesses, enhances our ability to create long-term value for our shareholders and means we're not looking at our businesses now with a panic mode saying how are we going to exit these businesses in the next 12 or 18 months?

It's interesting that some of the best buying opportunities we're seeing right now are from financial sellers who are seeking exits due to artificial time constraints. With those introductory comments compete, and I apologize that they were longer than they usually are, I'd like to turn the call over the Jim Bottiglieri to discuss our third quarter financial results.

James Bottiglieri

Today I will discuss our financial results for the quarter and nine months ended September 30, 2008, including a review of the operating results of each of our subsidiary companies and a brief mention of some of the factors compacting each of our businesses.

On a consolidated basis, revenue for the quarter and nine months ended September 30, 2008 was $413.6 million and approximately $1.2 billion respectively. Net income for the quarter was $5.3 million or $0.17 per share. For the nine months ended September 30, 2008, net income was approximately $77.1 million or $2.44 per share.

Turing to the results of our individual business beginning with Advanced Circuits, for the quarter ended September 30, 2008, Advanced Circuits revenue increased to $14.2 million compared to $13 million for the quarter ended September 30, 2007 largely due to the increase sales of quick-turn production. Income from operations for the third quarter was $4.6 million compared to $4.2 million for the same period in 2007. The increase in operating income was largely due to the operating profit generated from the increase in sales during the quarter.

For the nine months ended September 30, 2008, Advanced Circuits revenue increased to $42.7 million compared to $39.1 million for the prior period of 2007 largely due to increased sales of quick-turn production and prototype PCBs.

Income from operations increased to $13.9 million compared to $13.4 million for the prior period of 2007. Operating income increased due to the operating profit generated from the increase in sales during the quarter, for the nine months, partially offset by the recording in fiscal 2007 of lower non-cash charges for loan forgiveness arrangements provided to Advanced Circuits management of approximately $1.2 million.

We are pleased with Advanced Circuits' performance during the quarter and nine-month period. Looking to remain strong in quite the economic conditions we remain cautiously optimistic about its prospects going forward in 2009.

We continue to see growth in both our core prototype and quick-turn circuit board production businesses as well as in its new much smaller assembly business. While we understand the negativity around the more common long run circuit board production business, our experience shows us first that the prototype and quick turn market is not as cyclical, and second, the weakness in board markets creates opportunities for us in our core prototype and quick-turn businesses as competitors leave the market or abandon U.S. manufacturing capabilities.

Now I'd like to turn to American Furniture Manufacturing, or AFM, for the quarter ended September 30, 2008 AFM's revenue decreased to $31.4 million compared to $32.6 million in the prior year quarter. Operating income was $0.2 million compared to $1.9 million for the third quarter of 2007. For the nine months ended September 30, 2008, revenue decreased to $99.8 million compared to $121.2 million in the first nine months of 2007. Operating income was $5.2 million compared to $9.8 million for the nine months of 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 a weakening economy, partially offset by the expected business interruption proceeds recognized. I would like to highlight that in November the rebuilding of AFM's 1.2 million square foot facility and corporate offices was completed and the facility is now back in operation.

A definite for the company's operating strengths during this rebuilding period, it's interesting to note that AFM's sales decline with its top 10 customers has been approximately 1% for the year-to-date, and under 10% for its top 50 customers. This is a result of the company's decision to focus on servicing its largest customers in the period and reducing manufacturing capacity, and while even on the face of this, AFM's total revenue declines would indicate that it is outperforming similar competitors, it declined more substantially in 2008.

Our results for our top customers are truly remarkable and prove that we are gaining square footage with our most important accounts. While sales will continue to be impacted by market conditions in the near term, we believe AFM will continue to benefit from the medium to long term from the difficulties facing many of its smaller competitors, and to continue to gain market share in this downturn, competing it seems, as Joe mentioned earlier, and discuss some macro cyclical businesses.

In addition, it is important to note that we continue to work to control costs to help out offset some of the impact of any decline in sales. Until we emerge from the current economic softness, we expect this company to produce cash flows at the levels expected when we acquired this business. That said, once the economy begins to pick up, given the steps we have taken to grow the company's market share, we are excited about AFM's prospects of significant growth.

Moving on to Anodyne Medical Device, for the quarter ended September 30, 2008, revenue increased to $16.5 million compared to $11 million for the same period of last year, largely due to sales from new product rollouts, with the remaining increase due principally to increased sales with existing products to new and existing customers. Income from operations increased to $1.7 million compared to $1.1 million for the same period in 2007. Increase in operating income is largely due to the increase in sales.

For the nine months ended September 30, 2008, Anodyne's revenues increased to $41 million compared to $29.5 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 $3.3 million compared to $1.8 million for the same period in 2007. The increase in operating income is mostly largely due to the increase in sales.

Anodyne maintains strong performance in the previous nine-month period ended September 30, 2008. Further, we continue to experience a strong ramp up in the sales of new products and remain optimistic about the company's prospects going forward into 2009.

Turning to CBS Personnel, for the quarter ended September 30, 2008, the company reported revenue of $255.6 million compared to $290.1 million for the same period last year. The period on a pro forma basis include the acquisition of Staffmark, as it was complete on January 1, 2007.

The reduction is primarily the result of decreased demand for staffing services as CBS clients were affected by weaker economic conditions. We expect this trend to continue into 2009 as the economy continues to soften. It is important to note that our percentage decrease in revenues is once again less than the decrease supported by CBS's publically traded peers, whose operations we continue to follow closely.

We believe this relative stress is evidence that CBS is gaining market share in the market from which it operates, further affirming the portfolio of the company's operation model. Moreover, this industry out performance is similar to what we saw in 2000 to 2002 period. During this period our market share had gained, less specific increase in account service and placements that's emerged from its reception.

Income from operation decreased to $4.8 million for the third quarter of 2008, compared to $10.1 million for the third quarter of 2007, due principally to the decrease of sales. During the quarter we incurred approximately $1.4 million in transition and integration expenses related to the Staffmark acquisition, which were offset by a lower cost to the achievement of plan synergies.

For the nine months ended September 30, 2008, CBS Personnel reported revenues of $800.2 million compared to $856.1 million for the same period last year. The year-over-year nine month results has also been down on a pro forma basis, which reflects reduced demand for staffing services as clients were affected by weaker economic conditions. That said, similar to the three-month period, we are encouraged that this percentage decrease appears to be less than the decrease reported by most of CBS's publically traded peers.

Income from operations decreased to $9.9 million for the nine months of 2008 compared to $22.2 million for the nine months of 2007. During the nine-month period, we incurred approximately $4.8 million in transition and integration expenses related to the Staffmark acquisition, which were offset by lower costs in achieving the plan synergies. We expect to incur total transition and integration expenses of somewhere between $7 million to $9 million, and we believe that these costs would be offset by the delay of cost savings derived from the combined entries going forward.

We expect declines as CBS's operating cash flow in 2009 as employment levels continue to decline in the near term, and in the longer term, we are exited about to see combined CBS staff platforms and are happy to have made the Staffmark acquisition, which led to tremendous cost synergies that I just mentioned.

Turning to Fox Shox, the quarter ended September 30, 2008 the company's revenue was $43.3 million compared to $33.1 million in the prior year period. The increase from revenue is attributable to increased sales in Fox's bicycle and power sports divisions, as well growth in the after market sales from service revenue. Income from operations was $6.4 million during the third quarter of 2008 compared to $2.9 million for the quarter ended September 30, 2007.

For the nine months ended September 30, 2008, revenue was $101.2 million compared to $75.7 million the prior year period. The increase in revenue is attributable to increased sales in our bicycle and power sports division, as well as growth in aftermarket sales of service revenues. Income from operations was $9.4 million during the first nine months of 2008 compared to $2.7 million for the prior year period due to the increase in sales.

We are very pleased with Fox's substantial growth during the quarter and nine-month period, and are optimistic about the company's prospects going forward into 2009, as we expect to continue to achieve both top line and bottom line growth. In terms of top line growth, the company has a number of opportunities outside of its core non-biking sector, which will begin to materialize over the course of 2009. In addition, we expect many of the operational initiatives that we've been working on to improve cash flow margins in 2009 as compared to 2008.

Moving on to HALO, for the quarter ended September 30, 2008, the company's revenues increased to $42.6 million compared to $36.6 million for the same period last year, principally due to acquisitions made since September 30, 2007.

Income from operations was approximately $1.3 million versus $1.9 million for the prior comparable period, as the increased operating profits from higher sales was offset by $21 million of higher amortization expense, associated with amortization and tangibles establishing connection of acquisitions made by HALO, and for $0.2 million of the integration costs incurred related to the Goldman acquisition and for an unfavorable sales mixture in the quarter ended September 30, 2008.

For nine months ended September 30, 2008, HALO's revenues increased to $107.1 million, compared to $92.5 million for the same period last year, principally due to increased sales from acquisitions made throughout 2008. Operating income was approximately $1 million for the current period versus $1.2 million for the prior year period, as the operating process and the increased sales was offset by $0.2 million of higher amortization expense, by $0.6 million of integration costs related to that Goldman acquisition.

I will also highlight that this business experience is the large majority of the cash flow in the fourth quarter of the year. HALO performed as expected, given the current economic conditions. That said we believe the softening economy may have an impact on HALO as a result in 2009. We hope to maintain cash flows at the 2008 levels through the combination of small tuck in and highly accretive acquisitions and through the recruitment of additional account representatives.

The HALO management team also continues to be diligent in guidance with this infrastructure and will seek cost savings wherever possible.

Turning now to the balance sheet, we have $89.7 million in cash and cash equivalents and have net working capital of $203.3 million as of September 30, 2008. Subject to borrow on base restrictions at September 30, 2008, CODI had availability of over $280 million under its revolving credit facility, available to use to fund acquisitions and working capital requirements.

I will now turn the call back to Joe.

Joseph Massoud

Before opening the call for questions I’d like to do a couple of things, through the magic of technology I’ve been told by email here that Bloomberg I guess is reporting that we did $0.17 of net income versus $0.42 analysts expectations. Without commenting on what the analysts expectations were, because the analysts I’m sure are on the line and know what their own expectations were, my belief is that that might have be a CAD per share number, and in fact we did $15.7 million of CAD for the quarter on something like 31 million shares. I’ve also been told by Jim that I should avoid talking about CAD per share but I don’t think that math is very hard to do.

And as you know we do not manage our business from net income, in fact when we acquire businesses, we very specifically try to structure as much amortization in these transactions as possible. Because typically it spills over into the tax shield that we’re able to create, which creates a cash flow benefit for our shareholders.

We are very focused on cash flow and multiples of cash flow. So that’s something most of you probably already know, but it’s been pointed to out to me and I think it bears clarification. So we’ll open the call here in a second. But I’d like to once again reiterate my satisfaction with our strong performance during the third quarter.

With successful application our business model has enabled CODI to perform well in this economically difficult time as we generate substantial cash flow and increased our distribution while positioning the company for future growth.

Since going public in May of 2006 we’ve acquired nine businesses and sold three businesses for a gain of more than $105 million. In addition we consistently have grown in cash flow as agreed to an increase in our quarterly distribution, of 30% since inception, per share.

We’re very confident about this distribution and we continue to maintain a view that we would like to consistently grow that over time for shareholders. We’re pleased with the considerable success we’ve had in growing our distribution. We’d like to highlight the fact that we continue to generate cash flows in excess of those distributions.

Going forward we intend to continue to draw upon our sizable operating cash flows as well as substantial gain from the opportunistic monetization of subsidiaries to reinvest in our company and provide shareholders with growing cash flows and distributions over long term.

Most importantly from day one we’ve always promised, all of our owners a high level of communication and transparency. We try very hard to tell you what we’re doing and to do what we’re telling you. We look at our relationship with our owners as a long-term one built on trust and credibility, where trust and credibility can then only in turn come from confidence and communication.

We’re doing exactly what we said we would do for the past two and a half years. We’re working with the management of our subsidiaries to build strong niche leading businesses. We’re monetizing them opportunistically to make sense when we believe the conditions are right and we’re redeploying capital in an extraordinarily patient, diligent and methodical fashion on your behalf.

Thank you. I will be happy to take any questions you may have.

Question-and-Answer Session


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

Larry Solow – CJS Securities

Just, I believe it's $0.50 CAD per share for your information, any how quickly Joe, on the acquisitions, last quarter you kind of mentioned, that you’ve seen valuations creep down a little bit. And I imagine perhaps they’ve come down a little more. And you had said your target zone has widened. Can you maybe elaborate a little bit on that?

Joseph Massoud

I’m going to ramble; there’s a lot of factors going on. Number one, clearly valuations have gone down and they continue to go down and that happens for a couple of reasons. Number one, lack of buyers in the market because they can’t find outside financing. And number two to be honest with you, just kind of a general stock market malaise.

From our point of view while we’re unhappy about our IRAs and everything like everyone else, the more the stock market declines, the more, these are all comps, that in the good times private companies look at and say we’ll look our public comps trade at 10 times, how can you be offering six or six and a half times?

Well if the public comps trade down, that becomes a less effective argument. Also as owners of businesses if they’re individuals see their own personal ort of accounts go down as they trend towards retirement. They start thinking about let’s pull some chips off the table.

The market also has an impact on corporate sellers; there are people out there who have liquidity crunches, who want to sell their businesses. So we absolutely 100% continue to see valuations decline and are aggressively looking at businesses in that way.

But I would say that there are not as many businesses for sale now as there were in the go go days. Because people – it’s like a house, people who can afford to hold onto their businesses, are waiting for a better day. With every week and month that passes, I think it’s becoming clear that the better day is probably not December ’08.

And so we are starting to see more flow pick up and we’re starting to see it in more rational places. And one of the things we’re also seeing is a lot of transactions that didn’t get done, sort of reverting back to us because we have financing capacity.

So our mantra internally is that this is not a time for a few ordinary opportunities that this is a time to pursue extraordinary opportunities. And that’s how we’re looking at businesses. I will also tell you we’re being very methodic on our diligence. You know if a normal transaction were to take, and we would have like to close in 45 days, that’s while we can do that, that’s not the way we’re looking at businesses now.

Because I think everyone is worried about falling knives in every business and the answer is one has to – this timing, this environment, gives us he luxury to be more patient and long in our diligence process. No one is going to walk away from the only buyer with financing because that’s only buyer says they needed three or four months as opposed to 45 days.

So we’re trying to be very methodical in understanding these businesses because nothing is unimpacted. Nothing, right even the defensive businesses. And we could go – you know these businesses better than I, Larry, because you cover a whole range of them. But in my view there are no businesses that are unimpacted by this economy. There are some that are more defensive but I think it’s naive to say that any of them are totally unimpacted.

So we continue to see valuations drop. We are more even as a favored buyer than we were three months ago, and having said that we’re being extraordinarily diligent and careful with this cash. We don’t see ’09 getting a lot better, I mean to be totally, and I’m talking about, I have no idea what the stock market will do, but in terms of for sellers we don’t see ’09 getting better and there being this sort of influx of ready buyers and debt capital. So we kind of think our window is going to be open for a little while here.

Larry Solow – CJS Securities

And then appreciate the guidance you gave on looking at it ’09, but just so we all kind of know why CBS will be down and American Furniture and HALO but can you maybe discuss your three that you think are going to be up, Anodyne, Advanced Circuits and Fox. And have you seen any, I don't know, maybe the credit crunch impact on these guys at all, or the hospital funding impacting Anodyne in particular? Do you see any of that?

Joseph Massoud

Let me try to pull that apart in a minute and if you want more detail on any of these, I may hand the ball off. But let us start, I guess in alphabetical is how we always do this. So in Anodyne haven’t seen it yet, in terms of the credit crunch affecting hospital buys. In fact the product that we’ve been in development with our major customers – remember our hospitals, our customers tend to be the Strikers and the [Hilron’s] and the Covidien’s of the world, who then turn round and service the hospital.

Actually we see that our contracts and our product development with those customers are growing and coming to fruition over the course of ’08 as we expected. And even just those contracts that are in place, with those company’s current projections would imply a reasonably fair amount of growth into next year.

We also see some products that will start to kick in next year and this is really kind of groundwork that we’ve been laying for the last couple of years. Having said all of that, I return to what I said, of course even the medical industry will be somewhat impacted, because hospitals are raising less money, municipal budgets have been cut.

So we think our growth will be more muted or less significant than it would have been in a growth economy. Having said that, given the contracts that are in place and current projections, from our major customers, we still believe there’s a lot of room here and that this business will grow going forward.

So haven’t seen it yet, are very, and every one of our businesses I have to tell you that we’ve gone through a reasonably thorough process of thinking about how do you manage your receivables in this business. And some of you said about credit crunch I don’t know if you were thinking about receivables specifically, but that’s an implication that impacts every one of our businesses.

So in every one of these businesses we updated, upgraded our receivables and collections policies and we’re trying to stay on top of that. So that’s Anodyne. Moving on to I guess the next alphabetically would be ACI, Anodyne before I guess I got it wrong, right, okay forgive me for my alphabetization skills are not good. ACI, Advanced Circuits, here Advanced Circuits has always been a business of multiple dynamics to us. There is no doubt that long run circuit board production is, has declined and will continue to decline in 2009 and anyone who looks at the publically traded emerges to that conclusion.

There's also no doubt that our numbers continue to perform well in '08. And even if you look into current months, while the rate of growth on a year-over-year sequential basis has slowed, it's still growth.

So, how's that possible? Number one, the impact on the quick turn prototype business which is what we're in, is far lower. So, if you actually look nation-wide what did the quick turn and prototype circuit board manufacturing done it's actually up significantly year-over-year, and in recent months it's sort of flattened out.

So, even the segment that we're in has been protected versus the long run, which has really impacted by sort of consumer and corporate buying patterns which are down. As opposed to R&D where you have corporations are actually trying to R&D they're way into spurring consumer interests. What can we produce here that might make this company want to upgrade its [blades] or that makes this person want to buy a new Blu-ray DVD machine, or something.

And then beyond that we continue to see smaller players in this industry just disappear, and the number of the, the actual number of circuit board manufacturers in the U.S. has declined by over 10% in just the last six or nine months. And that's really good news for us we think. We know where the largest quick turn and prototype manufacturer. We also think we're the most efficient. It's hard to find that data but we know we're able to price competitively and still our EBITDA margins in the business are almost 40% or a little over 40%, so, that leads us to the conclusion that we're if not the most efficient, pretty efficient at doing this.

And so that's a positive dynamic for us the shrinkage of the number of producers and they continue to move offshore. So, you've always got this kind of negative and the positive. And then we've also got some new business concepts here, like our assembly, our circuit board assembly while a small portion of our business is definitely a growth portion of our business, and next year we'll do half a million of EBITDA, Jim.

James Bottiglieri


Joseph Massoud

And so that's another kind of huge number but that's a positive factor. So we feel like ACI is going to certainly curtail – understand that this business since 2004 when we've been involved with it has grown to something like 14 million to 25 million of EBITDA. That’s a pretty good four-year growth pattern for a business in the circuit board industry.

There is no chance organically this business will continue that growth rate in '09. We think there's an extraordinarily high level, a high chance that it will grow in '09 but not at that pace. So, then Fox you know Fox is interesting, no doubt that there are some people out there who would have otherwise gotten that high end mountain bike, that are going to slow that down or not upgrade.

But what we're seeing in terms of actual real time data is that the slowdown is not as significant as you would think in other luxury goods, which is consistent with our view on enthusiast products. At one point we owned the largest bee bee gun manufacturer in the world and it has a very similar dynamic in terms of enthusiasts do what enthusiasts do.

There's no doubt that in Europe and in Asia, particularly in Europe, that this is a growing sport and not withstand the impact of the economy, but the shift from road biking to mountain biking even in small increments has provided a huge amount of growth in mountain biking. There's also no doubt that if you look at the largest four or five OEM manufacturers that at their high end that we are strapped on a higher portion of those bicycles than we have been historically.

And then the final is there is also a lot of – Ford just announced in their Ford F150, not Striker.

James Bottiglieri


Joseph Massoud

Raptor, thank you. I'm not a F150 driver but on the Raptor that they're coming out with a partnership with Fox that's going to be, in addition to being a good promotion, it's going to be a reasonably hopefully decent number of units for us.

We continue our work in other non-mountain bike segments. Our work with the U.S. and foreign military continues, so there's a lot of positive – it’s funny for us, and funny and interesting and thought provoking that among our businesses we certainly have a business like CBS where you have conflicting views like this is the time to really capitalize on.

Competitors are going out of business, at the same time because of decline revenue gap sort of control your costs, and then you look at Fox and the real issue with fox is kind of which of these opportunities – Bob Fox built a great business and we hope that we're being very good ongoing stewards of that business and it has grown from 11 tor12 million EBITDA to this year it'll do, I don’t know what we're saying, but 18 plus, probably 18 plus, plus.

And that's because there's some very exciting things going on there. And then the final thing I'll say about Fox is there's still some significant operating initiatives that our team and I think that our side, our team that's managing this business is to be highly commended and we've begun to take some very interesting and serious costs out of this business, that won't reflect themselves for a full year until '09. And interestingly we've been able to do that while also strengthening the core fundamental business there.

Meaning that if you go seek second supply or second and third suppliers for your key components two things happen, number one is you're likely to get some cost efficiency but, number two, you're also likely to be able to exact product that's more timely delivered. You might be able to get improvements in service. You might even get some improvement in the product, some improvement sort of coordination and design.

So there's a lot of positive things going on at Fox, none of which is to deny the notion that there are certainly people who would have otherwise upgraded their mountain bikes or acquired new high-end mountain bikes at this impact, with this economy impact. That month end can only be a fact, but we think the momentum in the business clearly points to kind of charging right through that dynamic.

Larry Solow – CJS Securities

Just one quick follow up one quick question for Jim, not a follow up, there was, you said working capital, I know you guys kind of balance it off because it's usually seasonal and it usually comes back kind of close to even for the year, but last two quarters kind of total over $30 million in a change in operating assets. Is there any concern there or is that just a –

James Bottiglieri

Actually I think the big defining move was when we paid the cross allocation for the manager. That's just a little bit unusual but it's a working capital that's from the gain on our sales and management is entitled to its profit allocation paid in the quarter.

Larry Solow – CJS Securities

Okay, so you expect that in the long run to basically balance out.

James Bottiglieri

I think it's going to be close, to be even for the year.


Your next call comes from the line of Greg Mason – Stifel Nicolaus & Company, Inc.

Greg Mason – Stifel Nicolaus & Company, Inc.

First could you talk about your credit facility, is there anything in there that could prevent you from accessing your unused credit line, or anything that, covenants that, was anything to be pulled there

Joseph Massoud

The thing, the answer to number one is number two, which is the thing that would keep us from accessing it is going through a covenant, a covenant violation. There are no covenants right now, we can go through them one by one if you want to.

There are no covenants that will really, within any distance to and if you think about it we've got sort of $50 million or $70 million of net debt, puts a little less well less than one time EBITDA 0.7 times EBITDA is something. That I think opens a letter of credit, okay so there's one times EBITDA something and that tends to be the most constrictive.

So, no some people said what about bank funding? We've tested the line and drawn it and paid it back there's actually no examples to our knowledge of banks that have remained in business that remain solvent that have failed to fund. But we've also tested the notion if one of our banks were to go insolvent does that have any impact to – it would clearly reduce the total availability because there's a $20 million chunk that's no longer available, but it has no impact on the commitment of the other lenders to fund.

We've met with personally six, five to six of our lenders in the last month and have talked to many more and our view actually is that they seem to think that this is an interesting credit among their certainly diverse credits and would like to see us use it more, and draw more and we actually just recently added a new lender that couldn’t get in when we initially closed the deal November and added a $15 million kind of additional piece to it, two months ago.

James Bottiglieri

August, which was three months ago.

Joseph Massoud

So, no the thing that impacts our ability to draw on it would be getting through a covenant and the way we would do that, which we don’t intend to do, is to overpay for a business in such a dramatic fashion that it would turn that equation upside down. Now, that's that would be mismanagement of the business, but that's not how we think about the world as you know.

Greg Mason – Stifel Nicolaus & Company, Inc.

And then on HALO one of the reasons for the sales decline was an unfavorable sales mixture. Could you talk a little bit about that and your thoughts on holiday sales as we approach the big fourth quarter in this business?

Joseph Massoud

Yes one of our, okay let me so again two question, what happened was in this business is that one of the reasons the company was flat or grew a little bit basically is because we didn’t add on acquisition that was extraordinarily accretive. The business that we acquired though had on balance lower margins than the base business. Pat, are there other comments you would make on the kind of market trend in HALO?


No, I'd just say it's a couple of the customers are larger customers and we've had some bigger purchases from larger customers relative to other periods which are slightly less, slightly lower gross margins.

Joseph Massoud

And then the second question is fourth quarter, well we feel pretty good about the fourth quarter. Good meaning we think it's going to look like we expected it to look like and now the real question becomes, and a lot of this is funded and budgeted early in the year. So now the question for us is what's '09 going to look like? Interestingly '09 still looks okay but it's hard not to be cautious and defensive so we feel okay about the fourth quarter in terms of don't think it's going to be a big growth quarter but think it's going to come in line with our general expectations.

Greg Mason – Stifel Nicolaus & Company, Inc.

Okay, and could you also talk about in Anodyne, the strong revenue growth over last year from new products? What kind of expectations do you have going forward? Should we see similar robust growth or?

Joseph Massoud

No, not next year. I would say that you would hope for, you know our view on this business is that over a multi-year period, three years or something there's no reason why revenues in this business shouldn't grown at 15 to 20% annualized. That would be kind of a broad view. Having said that, I do think that there are wins in the economy as I was commenting earlier to Larry. Everything's affected.

I don't know that we really hit that number next year from a revenue growth and it's hard to kind of deal with your question, [John], because there's a lot of new programs and what happens is that some new programs replace other new programs, so some of those '08 programs will actually decline into '09 because we're redeveloping kind of the next gen that will then replace the '08s so it's hard to kind of group all those together.

But the – and so we expect growth but not at that rate for next year but over the kind of the multi-year period there should certainly be well into the double digits, just given the dynamics that are happening in the industry. If we can outperform the industry, which we think we have the management team to do, it could be better, right? But what's happening in the industry with the Medicare and Medicaid now really honing in more on the treatment of cubitus ulcers and the need for hospitals to kind of proactively address that issue, and the best treatment for that being the use of these dynamic mattresses, it's a very good macro tailwind behind this business. But I don't think that wind will be unaffected by the economy.

Greg Mason – Stifel Nicolaus & Company, Inc.

And one last question, when you talked about CBS's decline versus its peers was relatively favorable, can you kind of give to us what you view as the peer numbers were?

Joseph Massoud

So again I don't know and if you have something to interrupt here with, Pat – Pat's out in California that's why I keep throwing it over to him, please do – but the last we tracked this for the six months we were ahead of our peers and the three primary peers we track, and you've got to look at the U.S. numbers, right, because it can skew you if you look at the global numbers. We've looked at Manpower, we've looked at Kelly and Adecco, Pat, or who's the universe here that we took a look at?


Mostly Manpower and Kelly and I'd say on Manpower you have to look at kind of system-wide revenue and include their franchise businesses.

Joseph Massoud

Okay. So franchise, and the reason we look at Manpower and Kelly is you have a pretty broad clerical – you have a pretty good clerical and light industrial mix. If you look at us versus True Blue or Labor Rating or something we're going to look great, but that's probably unfair because that business is very heavy industrial. If you look at us versus the financial guy we're going to look good there, too.

So the truest kind of mixed comps that we think are easy to track are those two and I don't know that we've seen the nine month numbers yet for both, although there have been sort of analyst estimates of what that looks like and if the analysts are close then we may have on the nine month continued this trend of relative outperformance.


Your next question comes from John Rogers – Janney Montgomery.

John Rogers – Janney Montgomery

Just got a few questions on the different businesses, in ACI are you still planning on building out, adding the addition to that facility in Denver or are you going to hold off on that?

John Massoud

Yes, we're planning on it but yes, we're going to hold off on it. So it's not imminent.

John Rogers – Janney Montgomery

Not imminent. Okay, so will that depend on how the market does?

John Massoud

No, it depends on the growth rate of the business. The business had pretty good growth model here, right, which is they have some components of long-run business that when there's a lot of prototyping they kind of shift the long-run business to subcontractors and then whenever the prototypes slow they just take some more of the long-run in. And so they're really, still have probably 30 – if you think of the true capacity being how much quick turn, which is really behind margin stuff they want, they've probably still got 30% ish type X of capacity. With our view that this business was going to grow in the double digits and could grow, it clearly made sense to be thinking about in '09 addition of capacity.

The good news is that the land is available. We have plans drawn. We've communicated with the municipalities about it so it's not really that long and difficult a project. I would say for now those are on hold. But for example if we were to acquire the customer list of a couple small businesses that had quite a bit of quick turn but we thought we could do pretty efficiently, there's no reason why this wouldn't sort of turn on again reasonably quickly, so, but there's no groundbreaking ceremony that anyone's being invited to right now.

John Rogers – Janney Montgomery

See any opportunity in terms of declining raw material cost? I know the margins are pretty high but with oil rising potentially falling?

John Massoud

Yes, and for that business it's oil rise and copper, right?

John Rogers – Janney Montgomery


John Massoud

The other big component. And for Fox it's aluminum. I mean every one of these businesses have an input. You know, it's, yes. We see opportunities. Yes, every single one of our businesses, I mean we know on Anodyne and American Furniture it's foam, which is a byproduct of polyfoam which is itself an oil-based product. So every one of these business the leaders have been packed to go out and as aggressively try to get reductions out of our suppliers who are aggressive in getting the increases.

And I would say that in two or three of our businesses those reductions have started to come. We've seen a few percent decrease in the cost of polyfoam at American Furniture and Anodyne already. We're kind of starting to chip away on some of the cost components at Fox and ATI.

It's not as fast as you'd like, right? It doesn't move like the futures market. It's not down, copper's not down 40% because that's where the market is because our suppliers in turn are processing that copper and they've got to get the reduction from their suppliers, so it's absolutely a core focus. It's absolutely a core focus for a number of our businesses, particularly those four and we've seen some but not as much as we'd like.

John Rogers – Janney Montgomery

Okay. Do have some kind of idea of what kind of margin pickup you can look for from declining raw materials?

John Massoud

It varies business by business. It varies business by business and the truth is, okay, because I don't, going back to the last thing I said I my talk about wanting to be very clear and transparent. The truth is, in most of these businesses, okay, at AFM, when we go back and get a 5% reduction in foam the blunt truth is at this point in the cycle when we're fortunate to expand our shelf space with Bob's or Babcock or Big Lots or something like that, right? What's probably happening is they're coming out going, we know you're getting a reduction in foam, how's that impact our pricing and especially if you want to gain floor space?

So I would not say that for any of these businesses, ACI might be the exception because we have 8,000 little customers there, I'm not sure that you should go into a period of declining sales volumes and think that this reduction will do anything but maybe offset margin declines that you'd otherwise get because you're pushing less units through a plant or because you're getting pushed.

There are two businesses where I hope that, you know, three businesses where I hope that dynamic may be slightly better. I think Advanced Circuits could see a slight uptick due to reduction in some of its costs in that percent range or something. I think Fox, through some of the things we're doing could see some margin increase, again, maybe a couple 3% range there and then potentially at Anodyne, but I'm less optimistic at Anodyne again because our large customers, our customers tend to be large customers.

So if you want to play at those two companies and play around about that, that's okay, but I wouldn't – I don't want to overemphasize that. We're trying to – in some cases you may use your cost efficiencies to try to grow market share and AFM is a great example. We will emerge from this downturn, in my opinion, a much stronger, larger, higher EBITDA company.

Some of that is because we're using our size and bigness to negotiate aggressively with our suppliers which we're then turning around and using those cost advantages to expand our market share and compete effectively against our smaller customers because we don't want to be the 30% supplier to our top 10 or 15 customers. We want to be the 40% supplier. That's a long-winded answer but it's a kind of complicated issue.

John Rogers – Janney Montgomery

And so I guess from that question, pricing is holding up at ACI?

Joseph Massoud

Pricing is holding up just fine at ACI.

John Rogers – Janney Montgomery

How does it look, book-to-bill look right now say in October versus last October and last quarter?

Joseph Massoud


John Rogers – Janney Montgomery


Joseph Massoud

Pat, do you want to comment on that?


Yes, I mean I'd say our backlog is at, you know this is a quick turn business so backlog is never, is long, has some of the longer leads reference that. Backlog's at relatively high levels by any historic measure.

John Rogers – Janney Montgomery

Then you talked about foam prices at Anodyne. At CBS you touched on receivables, do you have any more detail on how sort of your customers are reporting and their credit quality?

Joseph Massoud

CBS, knock on wood, and Jim and Ken, let me know if you – CBS has been through this, well, they've been through this many times but under our ownership went through a pretty serious staffing reception [inaudible] and there were very few people hiring and so our credit policies have always been extraordinarily conservative. Actually two years ago we terminated one of our top ten customers and we were worried about their receivables and we're very aggressive on it. So we don't see any – we don't see a material lengthening of the receivables at this point.

We haven't had any big one go under at this point. The good news is there's no lead time, right, and our customers need our people so it's a pretty interesting negotiation and where we said we need to be paid in the next week, then they don't pay us, then we call them and say we're giving you two more days or we're not sending humans. Now all of a sudden you've got a plant, even if the company's struggling a little bit, you've got 100 people over at the plant that represent 100 out of their 250-person workforce, it's a pretty interesting dynamic.

How are you going to replace 100 qualified people who've been on the job for six or nine months in a couple days? And do they pay 100%? No, but then they start making progress payments and you work your way through. You know what? They have big operations in Ohio, Indiana, Kentucky as well as in Arkansas, Texas, Tennessee and a number of others states. We get that those economies are weak and while we don't necessarily have a lot of direct auto exposure, those economies have auto exposure.

So yes, we get it. We're monitoring it and I personally would be shocked if we didn't have some receivable issues with some size account in '09, and the issue is making sure that we monitor it to not exceed our reserved, which we've been very conservative in accounting for and have tended to over reserve to date.

And to make sure it's not the big customers and to be very aggressive about it. But it's not realistic to think that our customers don't look at an extra – look at us as being, financing their business effectively for an extra couple days.

John Rogers – Janney Montgomery

What was the pro forma decline at CBS?

John Massoud

Revenue side, or?

John Rogers – Janney Montgomery

On revenues.

John Massoud

Nine months? The nine month was like 810 to 850, right? 803 to – it was 856 down to 803. That's the nine-month number and so that's got to be, I think it's like 7%. Let me just run that number. Yes, it's a little under 7%, and then the three-month number was 290 down to 265, which, let me run the number again.

Jim Bottiglieri


Joseph Massoud

More like 8%, I mean so it accelerated slightly.

Jim Bottiglieri

Kelly was 9.6.

Joseph Massoud

Yes, and Kelly was 9.6 and I've got to tell you, it's not going to get better in the fourth quarter. Fourth quarter is a strong quarter and it will still be a strong quarter but you're looking at year-over-year sequential declines; it's not getting better.

John Rogers – Janney Montgomery

Where is breakeven in the segment?

Joseph Massoud

Breakeven for our business, given our cost take out?

John Rogers – Janney Montgomery


Joseph Massoud

Four, $500 million revenue. No, it's more than that, right? It's hard to say. I mean, because you go into some major dramatic reductions. I mean we never – in the '02 recession we went down in EBITDA I think a one point by 40%. It didn't get below that and that was pretty ugly. What we are – our density helps us a lot. And in fact if you look at the operating income declines, which I encourage you to do for the comps, we tend to actually dramatically outperform those because we're so dense in tight markets that we can actually take out a higher percentage of costs versus revenues because we still serve those markets.

We have 14 offices from the Cincinnati area or something by way example, and I'm not sure that's the exact number. You can potentially, if you need to, have reductions in that office account while still serving the customers and I think we’re the most dense business that we’re aware of but I don’t think, we, it’s not something that’s even in our scope. As we kind of play out our biggest potential downturn, we’re not thinking about that kind of a decline. I mean we’re thinking about declines in EBITDA that are in the 30% to 40% range. And that’s with dramatic scenarios in our mind.

So many of our customers now, for us, we do a lot of vendor on premise. For so many of our customers we are not the excess labor. I would be more worried about that if I was a True Blue Labor Ready where it’s really through to the topping labor.

In our company many of our customers we provide the kind of core workforce. So unless you’re thinking the entire business is going away, the reductions just happened to us kind of parallel. And most of our customers we’re not just the extra few, but were the core clerical and light industrial workforce. So I can’t actually answer that number but I can tell you that that is not, that’s not in our calculus and we’re as bearish as anyone I know on the economy.

John Rogers – Janney Montgomery

In Fox where is the growth coming from? Are you still seeing it, is it still Europe where you’re seeing the most strength?

Joe Massoud

Yes again I think there is a couple of things, I think there is growth in Europe, there’s also growth in the U.S. on the mountain bike side, from increased percentage of our customers specing our bike and there’s also I’d say it’s an equal component of growth in Europe and growth in specing.

And I would say then in addition to the mountain bike growth we expect next year there will be an equal amount of non-mountain bike growth. And then all those things on revenue side, we think there’s probably a upwards of $2 million in opportunity, as you, not just opportunity but reflection on a full year basis of some of the operating initiatives that this company has undertaken within the last year.

So I think it's top and bottom line, so it’s margined, it’s EBITDA margin and it’s revenues and then the revenue side it’s a number of factors. And Pat would you add anything there?


No that is it.


Moving onto John Arfstrom – RBC Capital Markets

John Arfstrom – RBC Capital Markets

Most of my questions have been answered. But can you talk a little bit about how you would weigh an add on acquisition versus an entirely new platform acquisition, given the environment?

Joseph Massoud

Very interesting question in any environment, well the add ons tend to be smaller, not always like Staffmark more but they tend to be smaller and so they tend to be at extraordinarily compelling multiples. And even if you take a big one like a Staffmark and you think about the synergy that we took in, even in this environment, it turned out to be a pretty compelling multiple.

So the add ons are always interesting. If you find the right add on, which is one that shares, not sounding too consultingish right, but it’s got to share your basic capabilities or your customers, and so they are ones that you can grow effectively.

Those are always interesting. So I don’t want to say those are more interesting because we tend not to look at one group to the exclusion of others, but the right add ons make a lot of sense. You know Goldman Promotions at HALO we paid about $7 million for, we think it’s driving about $2 of EBITDA at the bottom line, so that’s an interesting multiple. Even in this environment, it is a very interesting multiple when you think about what it should do and in a better environment it becomes more interesting.

So I guess on balance you do, 50 little add ons if you could, but there’s not that many of them that make sense. I mean we’re really not – we’re not big on the kind of build the disjointed company just to get it big, kind of philosophy. So we look at both, but your add ons are always interesting because they come with interesting multiples.

Now I’ll tell you the platform again it depends on industry, there are industries out there where A, you can buy at a good multiple and you think this is a good time to be entering this industry and building and maybe because it’s a platform for further add ons. So it really is case by case. But we tend not to ever constrain our CEOs from looking at add ons because they know that they better have pretty compelling economics to pass our screen and then it’s hard to turn those down.

John Arfstrom – RBC Capital Markets

Just it seems to me that in this type of environment that an add on would be much more attractive, given the ability to take out cost and perhaps price it a little bit and that’s what I was trying to get at.

Joseph Massoud

Yes you’re right, I mean some of them have more cost take out than others. And yes, that’s probably a fair comment.

John Arfstrom – RBC Capital Markets

And then just in terms of new platform acquisitions, do you have a tendency to wait and see how things would turn out at this point in time? You know is it full steam ahead, my guess is that pricing will soften further. And the question is really is it status quo for the next?

Joseph Massoud

How much is it going to soften?

John Arfstrom – RBC Capital Markets

Yes I mean that’s the question.

Joseph Massoud

I agree with you, I think we’re major brake accelerator right now. We are full steam ahead because this is the time and it would be silly to look back in 18 months and not have acquired any businesses.

But as I was saying in my comments, we’re spending more time looking at each one, and we’ve unfortunately walked away from a couple of situations in diligence where we’re very excited because maybe the growth prospects weren’t exactly what we thought, or the company wasn’t as resistant as we thought it would be.

So yes I think we’re feeling pretty patient. Our mantra again is not ordinary opportunities but extraordinary opportunities. Having said that I think there is a couple of things we’re looking at now, that one might qualify as being somewhat extraordinary.

So compared to what they recently traded for, compared to their long-term growth prospects. And we’re trying not to walk away from businesses just because ’09 is going to be a little ugly for them, or even ’09 and ’10.

So it’s a very tricky balance, but you’ve seen I mean you’ve seen I mean, John, you've seen we've been patient so far for '08. I think there’s a number of people who said wow, you’re still going to be buying things in ’08. And I said we even have those commentaries I think in our first call of the year and we said it might actually get quote unquote better if you look back at the transcript. I think we said it might get better then we laughed. It depends on who you are, what better is and what worse is, but it might even get better for us. So I think that’s happened and sort of is continuing to happen.


Your next question comes from Henry Coffey – Sterne Agee.

Henry Coffey – Sterne Agee

Joe, you made some comments early on about your dividend prospects and expected CAD coverage. I was wondering if you could revisit that and give us a sense of –

Joseph Massoud

I’ll tell you what I said, and you guys all do your own analysis, but I want to be very clear about this, because there’s a lot of things that go in it. First of all our dividend prospect, our distribution prospects are very good. There are no scenarios that we can envision including sort of worst, worst case in which we would reduce our distribution. We’ve earned, everyone else includes gain in what they consider their cash flow distribution. We’ve never done that and we’ve earned over $3.00 of gain since our beginning.

If you even look at excluding gains, we’ve earned like an extra year and a half’s worth of distribution in just the two and a half years we’ve been in that we haven’t distributed. So all of those things, let me start out with the preface that our goal in this business is to continue to increase our distribution over time.

We knew what the environment looked like when we increased by 5%. Were we trying to send a signal to the market; 100% we were trying to send a signal to the market so we feel very good about our distribution.

What I said about coverage was that as people look at our businesses, it’s kind of complicated, right because we’re not lenders with basically a portfolio that churns and grows and we don’t need to raise capital to put more in our portfolio. We have businesses and from time to time, we exit them.

And so when we sold Aeroglide and Silvue for a big number which was over 10 times, we knew that we would reinvest them at what amounted to a diluted multiple in the interim. Meaning as you earn 2% on your cash, it almost doesn’t matter what you get paid for your businesses. That’s going to be an immediately diluted use of cash.

However from a long-term point of view, if you can sell businesses at 10 to 11 times and enter into an environment where you’re buying similar risk businesses for five or six times, that’s going to make sense.

So we’re in a period of time now after monetization and pre-deployment in which the absence of those two businesses and our holding onto cash, has a dilutive effect on our cash flow. So I was trying to point out, that if we were to continue to sit on cash and be patient as John had suggested because things were getting better, there’s a chance that the removal of those two businesses plus the flat slightly down of our remaining businesses will mean that we either just barely make our match our distribution, or are actually slightly below our distribution levels.

None of which are facts that haven’t been heavily considered by our board of directors in making the distribution and none of which really bear into our thinking about distributions which is kind of what is the long term earning potential. And to try to expand on that, what I tried to do was give a couple of examples. And say if you assume we re-invested even just the cash the $89 million, so just forget the $300 million that’s sitting on the line. If you invested just the cash at some multiple, you pick the number, you’ll find that the accretion means that we substantially earn over our distribution.

And in fact to further make the point what I tried to say was, if we just gave up and said there are no acquisitions out there, which I’m not saying, that's not on the line here, but if were to do that, and just pay down debt, the long-term debt with our $90 million, the accretion associated with not earning 1.5% or 2% of our cash, we’re paying down our debt at the rate of what now about 7.5%. That alone would get us to the point where we were earning in excess of our distribution.

So I’m trying to, we’re trying to be very transparent and very clear, and I don’t want people to be surprised when what’s very logical actually happens, which is the fact that we sold Aeroglide and Silvue and are sitting here hoarding cash means that the actual CAD per share number goes down next year because that’s how the math works.

And so what we’re trying to get that out there because we don’t want anyone to be surprised. If our business is performing worse, then we expect it and we’ll tell you. But we do expect that the impact of our having cash instead of these two businesses, if we don’t redeploy that cash by the end of the year, which I – don’t' look like we’re going to, is going to be diluted. So does that make sense?

Henry Coffey – Sterne Agee

The other thing is can you give us, I’ve heard you talk through this before, basically you got your worst case scenario you put it out on the table and you said we can afford to increase the dividend here a little bit. The other thing is I know you can’t put too much out on the table but as you start to look around, what sort of businesses are catching your attention?

Joseph Massoud

If every, it’s a risk return so if I were to tell you that we had a business that was in the healthcare related field, you’d say oh you must be looking at defensive. But I can also tell you we’re looking at a pretty interesting capital equipment business that is having some declines in cash flow, but we think we can get our arms around what the base level of cash flow will be. And we think it’s a tremendous market share leader that has real room for growth. So it’s individual and it’s opportunistic and each one is a different risk return dynamic.


And there are no further questions at this time. Mr. [Wilson] I will turn the call back over to you for any closing remarks.

Joe Massoud

It’s Joe, I'll close. Again, thank you all for your time. I know time is always money but I know especially pressure from markets like this and I know this call went on a little longer than usual. We can’t be more excited to be managing capital on your behalf.

We’re doing our best. We think the model is working out here over the last couple of years. And we think it’s a real exciting time, so we appreciate your questions and your time and we look forward working with all of you guys as owners and analysts and whatever for the next several years. Thanks, bye.

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