Compass Diversified (CODI) Q4 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to the Compass Diversified Holdings 2011 Fourth Quarter Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Mr. David Burke of the IGB Group for introductions and the reading of the Safe Harbor Statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified Holdings Fourth Quarter 2011 Conference Call. Representing the company today are Alan Offenberg, CEO; Jim Bottiglieri, CFO; Elias Sabo, founding partner of Compass Group Management. Before we begin, I would like to point out that the Q4 press release, including the financial table, is available on the company's website at www.compassdiversifiedholdings.com. The company also filed its Form 10-K with the SEC last night. Please note that throughout this call, we will refer to Compass Diversified Holdings as CODI or the company. Now allow me to read the following Safe Harbor statement. During this conference call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI. Words such as believes, expects, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussion in the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2011, as well as in other SEC filings. In particular, domestic and global economic environment has a significant impact on our subsidiary companies. CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. At this time, I would like to turn the call over to Alan Offenberg.

Good morning. Thank you all for your time and welcome to our fourth quarter and full year 2011 earnings conference call. During the fourth quarter and full year 2011, we continued to benefit from the leadership position of our niche businesses, their comparative financial strength and the maintenance of efficient cost structures. In addition to generating cash available for distribution and reinvestment, or CAD, of $69 million for the year, the company also accomplished several important strategic initiatives that have served to significantly strengthen our future prospects. Specifically, we refinanced our debt which extended our maturities out to 2016 and increased our total debt capacity by approximately $100 million. With no significant maturities until 2016 and over $400 million of liquidity, we find ourselves more attractively positioned than ever to pursue accretive platform and add-on acquisitions. Second, we maintained our disciplined approach in acquiring our new platform business, CamelBak, and for an add-on business to our ERGObaby subsidiary, Orbit Baby. Third, we sold Staffmark at an attractive valuation, materially reducing our future earnings volatility and further strengthening our company's balance sheet. And finally, we significantly increased the amount of capital expenditures in our subsidiary companies in order to enhance their long-term growth prospects and to take advantage of favorable tax rules enacted for 2011, and to a lesser extent, 2012. While Elias and Jim will provide more details with respect to each of these 4 important initiatives, we believe our efforts have combined to significantly enhance CODI's ability to deliver superior shareholder returns over the long term. While these strategic initiatives had an adverse impact on our fourth quarter financial results due primarily to losing EBITDA contribution from Staffmark's strongest quarter, the incurrence of additional interest expense and the increasing of capital expenditures, we entered 2012 with the financial flexibility to take advantage of opportunities that will enhance long-term shareholder value. Beginning 2012 with a strong balance sheet and significant liquidity, we were pleased to announce this past Tuesday the acquisition of Arnold Magnetic Technologies. Arnold is the leading global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end markets, including energy, medical, aerospace and defense, oil and gas exploration, general industrial and automotive. Based in Rochester, New York, with manufacturing facilities in the U.S., the U.K., Switzerland, and China, the company produces engineered magnetic assemblies in addition to high-performance permanent magnets, flexible magnets and precision foil products that are mission-critical in motors, generators, sensors and other systems and components. Arnold's long-standing operating history of more than 100 years has enabled the company to build a superior reputation in the specialty and rare earth magnetic industry with more than 2,000 clients worldwide. Arnold represents an ideal addition to our family of businesses due to its market leadership, stable cash flow, diversified customer base, proven management and strong future prospects. We plan to leverage Arnold's advanced engineering and product development capabilities and capitalize on the positive macro trends, including increasing demand from high-growth sectors such as alternative energy to accelerate the company's growth potential. In terms of valuation, we paid approximately 7x current EBITDA for this acquisition, which will be immediately accretive to CAD. This attractive platform acquisition represents our fourth in the past 2 years, increasing the current number of businesses we own to 9. Going forward, we will maintain our focus on utilizing CODI's significant access to capital in order to take advantage of additional acquisitions under favorable valuations and terms, as we have in the past, while reinvesting in our current subsidiaries. By continuing to invest in R&D, management talent, operating capabilities and brand building, we expect to strengthen the performance of our niche-leading businesses over the long term. For 2012, we expect to achieve modest year-over-year growth in CAD, excluding the impact of any additional acquisitions or dispositions. I'd like to now turn the call over to Elias for an overview on each our subsidiaries.

Thank you, Alan. I'll begin by reviewing our companies alphabetically, beginning with Advanced Circuits. At ACI, we posted another strong quarter in 2004 and in full year 2011 in terms of both revenue and profitability. Demand for our core PCB production services remains positive as we continue to focus on expanding our leadership position in the quick-turn manufacturing niche. We also made important strides growing our assembly business during the year. We expect Advanced Circuits to achieve similar results in 2012 as growth in our core quick-turn and assembly businesses is expected to be offset by a decline in revenue generated from defense revenues. American Furniture performed below our expectations in Q4 as this business continued to be adversely affected by the soft retail environment in the furniture industry. During the fourth quarter, we recorded an inventory obsolescence reserve of $1.7 million, reflecting our decision to discontinue a number of SKUs. Despite the challenging market conditions, we believe the proactive measures we have taken to date, including reducing the company's cost structure and working capital requirement, positioned AFM well to generate positive cash flow in 2012. Turning to CamelBak, which we acquired in August of 2011. This business performed in line with our expectations during the seasonally lower fourth quarter, generating fourth quarter EBITDA at about the same level as in 2010. We remain excited by the growth prospects at our new platform company. CamelBak is the niche industry leader with a strong history of stable cash flow. We continue to work closely with management in order to expand CamelBak's leading platform of personal hydration products and to strengthen its global distribution network. Next is ERGObaby, which met our expectations in the fourth quarter and exceeded our expectations for full year 2011. During 2011, we made the decision to significantly increase the company's SG&A investment in order to strengthen the management team, expand domestic and international distribution, expand the company's product offering and invest in marketing efforts to strengthen ERGObaby's brand awareness. While these investments caused profitability to temporarily decline in 2011, we expect to realize the benefits of these investments in 2012 and beyond. During the fourth quarter, we completed the add-on acquisition of Orbit Baby for a total purchase price of $17.5 million. Orbit Baby produces and markets a premium line of stroller travel systems. Orbit Baby's complementary, product line includes car seats, strollers and basinets that are easily interchangeable. With this accretive transaction, we have extended our product platform and expanded ERGObaby's global presence in the baby durables market. We have already begun to integrate our operations and expect to realize important synergies over both the near and long term. Turning to Fox Racing Shox. The company exceeded our expectations in Q4 and for the full year 2011, generating revenue gains of 12% and 16% respectively. Our ongoing success in leveraging Fox's leading reputation for high-performance suspension products has enabled the company to gain market share on our core premium mountain bike business and increase penetration levels in new verticals, particularly Powersports. Since acquiring Fox in January 2008, the company has almost doubled revenue. As a result of the rapid growth in revenues, we made significant investments during 2011 and our operational capabilities of the company. Coming into 2012, we plan to accelerate our capital expenditures in order to position the company for enhanced profitability and to further enable revenue growth. As for HALO. This business also exceeded our expectations in Q4 and full year 2011 by posting year-over-year revenue growth for the eighth consecutive quarter. We continue to benefit from our role as the leading consolidator in the promotional products industry and consummated a small tuck-in acquisition in the fourth quarter. HALO continues to benefit from the overall improvement in spending on marketing-related products, which we expect to continue into 2012. At Liberty Safe. This business exceeded our expectations. Highlighting our performance, revenue increased approximately 28% in Q4 compared to the year-earlier period. Demand for the company's niche-leading products remains strong as we continue to expand our leadership position for premium home gun safes. Our ability to strengthen Liberty's brand and take advantage of the favorable macro trend bodes well for future performance. Booking levels for 2012 are slightly ahead of 2011 levels at this point. Moving to Tridien Medical. We reported Q4 results consistent with our expectations as demand for the company's core products remained relatively stable . For 2012, we expect revenues to remain stable. However, we are planning for a substantial increase in the company's SG&A expenses as we increase our R&D and investment in developing the next-generation of support service and related technology. Although these actions are expected to be dilutive to 2012 earnings, we expect to realize the benefits of these investments in 2013 and beyond. And finally, as we announced on October 17, we sold Staffmark to a strategic buyer for a total enterprise value of $295 million. CODI received approximately $217 million of total proceeds at closing from this highly profitable and opportunistic transaction. Consistent with our philosophy of maximizing value for our owners, we recorded a gain from this sale of $88.6 million in the fourth quarter of 2011. The sale had an adverse impact on our fourth quarter 2011 CAD as we did not fully benefit from the contribution of Staffmark's strongest quarter. Staffmark generated approximately $12 million of EBITDA during the fourth quarter of 2010 versus approximately $2 million for the portion of the fourth quarter in 2011 that we owned the business. Including Staffmark, CODI has realized approximately $198 million in gains since 2007. As a reminder, while these gains are not included in our calculation of CAD, our successful monetizations are reflected in our substantial liquidity position that provides CODI with a distinct advantage as an all-cash buyer of new businesses. I would now like to turn the call over to Jim Bottiglieri to add his comments on our financial results.

Thank you, Elias. Today, I will discuss our financial results for the quarter and 12 months ended December 31, 2011, including a review of the operating results of each of our subsidiaries. On a consolidated basis, revenue for the quarter and year ended December 31, 2011, was $215.5 million and approximately $775.5 million, respectively. Net income for the quarter was $58.6 million, which includes the $88.6 million gain on the sale of Staffmark, as Elias mentioned earlier, partially offset by a $20.1 million non-cash impairment charge of our American Furniture Manufacturing subsidiary. This charge reflects the decline in the estimated current fair market value of the subsidiary due to the continued soft retail environment in the promotional furniture market. For the year ended December 31, 2011, we reported net income of $72.8 million. For the fourth quarter, we paid a cash distribution of $0.36 per share, representing a current yield of approximately 10%. Since going public in May 2006, CODI has paid cumulative distributions of approximately $7.44 per share. Now turning to our subsidiary results, beginning with Advanced Circuits. For the quarter ended December 31, 2011, Advanced Circuits revenue was $18.6 million compared to $20.4 million in the prior-year period, mainly due to lower long lead sales. Income from operations for the quarter was $6.1 million as compared to $6.7 million in the same period in 2010 as a result of lower sales. For the year ended December 31, 2011, Advanced Circuits revenue increased approximately 5% to $78.5 million compared to $74.4 million for the prior period of 2010, which was primarily due to higher sales in our core quick-turn and assembly business. During the period, sales attributed to ACI-Tempe, which we acquired in March 2010, were $18.9 million as compared to $15.8 million in the prior-year period in 2010. Income from operations increased approximately 30% to $26.6 million compared to $20.4 million for the prior-year full period. This increase was primarily due to operating profit generated from the higher sales volumes, as well as for a 2010 recording of a $3.8 million in non-cash stock compensation expense. Now I'd like to turn to American Furniture Manufacturing, or AFM. For the quarter ended December 31, 2011, AFM's revenues decreased to $22.2 million as compared to $27.5 million of revenues in the prior-year quarter as this business continues to be adversely affected by the challenging environment in the promotional furniture market. AFM reported loss from operations of $23.1 million, which includes the previously mentioned $20.1 million impairment charge, as compared to operating income of $1.7 million in the fourth quarter of 2010. For the year ended December 31, 2011, the revenue was $105.3 million compared to $136.9 million in the year-earlier period. Loss from operations was $35.2 million versus an operating loss of $37.1 million the prior-year period. For the year ended December 31, 2011, and for December 31, 2010, we recorded a non-cash impairment charge weighted to ownership of AFM totaling $27.8 million and $38.8 million respectively. Turning now to CamelBak, which we acquired on August 24, 2011. For the quarter ended December 31, 2011, revenue was $26.6 million compared to $31.4 million in the prior-year period, which was prepared on a pro forma basis as if we acquired CamelBak in January 1, 2010. This decrease is attributable to lower military sales following the of drawdown of U.S. troops overseas, largely in the sale of gloves. The company had pro forma operating income of $1.3 million for the fourth quarter of 2011 as compared to pro forma operating income of $28 million in the same period last year. For the year ended December 31, CamelBak reported revenue of $141.3 million on a pro forma basis compared to $122.2 million in the prior-year period, also compared on a pro forma basis. Pro forma income from operations for the year ended December 31, 2011, was $18 million compared to pro forma income of $13.4 million for the prior-year period due to the operating income generated from the higher sales. Moving to ERGObaby which we acquired on September 16, 2010. For the quarter ended December 31, 2011, revenue of $141.3 million on a pro forma basis -- excuse me, we reported on December 31, 2011, that revenue increased slightly to $10.9 million compared to $10.8 million in prior period, which was prepared on a pro forma basis as if we acquired ERGObaby in January 1, 2010. The company reported pro forma income from operations of $28 million for the fourth quarter of 2011 as compared to pro forma income from operations of $2.9 million in the same period last year. SG&A expenses for the fourth quarter of 2011 included approximately $1.5 million in non-recurring costs related to onetime marketing expenses and for the diligence associated with the acquisition of Orbit Baby in November 2011. For the year ended December 31, 2011, revenue increased approximately 28% to $44.3 million compared to $34.5 million in the prior-year period which was prepared on a pro forma basis. Pro forma income from operations for the year ended December 31, 2011, was $8.4 million as compared to pro forma income from operations of $9.4 million in the year-earlier period. SG&A expenses for 2011 increased by approximately $6 million year-over-year, mainly due to significant investments related to ERGObaby's expansion initiatives during our first field of operations since acquiring this business. Turning to Fox Racing Shox. Revenue increased 12% to $47.3 million for the quarter ended December 31 compared to $42.2 million in the prior-year period. During the fourth quarter of 2011, we recorded higher sales in core mountain biking sector as well as in our power vehicle sector. Income from operations was $2.9 million for the quarter ended December 31, 2011, compared to income of $3.3 million for the year-earlier period, primarily as a result of higher SG&A expenses to support the company's continued sales growth. For the year ended December 31, 2011, revenue climbed approximately 16% to $197.7 million compared to $171 million in the prior-year period due to increased sales in our mountain biking sector as well as in the powered vehicle sector. Income from operations for 2011 increased approximately 15% to $22.6 million compared to $19.6 million for the prior-year period, mainly due to the strong increase in net sales. Moving on to HALO Branded Solutions. For the quarter ended December 31, 2011, the company's revenue rose to $55.3 million compared to $53.8 million for the same period last year, largely due to sales from the acquisition of Logos Your Way in October. Income from operations for both the 3-month period ended December 31, 2011, and 2010 was approximately $4.1 million. For the year ended December 31, 2011, HALO's revenue were $170.9 million compared to $159.9 million in the prior-year period, an increase of approximately 7%. Income from operations was $9 million versus income of $4.9 million for the prior-year period. During the year ended December 31, 2011, SG&A expenses were reduced by approximately $1.8 million due to proceeds from a legal settlement. Turning to Liberty Safe which we acquired on March 31, 2010. For the quarter ended December 31, 2011, revenue increased approximately 28% to $21.6 million compared to $16.9 million in the prior-year period. This increase is due to higher sales across all distribution channels. The company reported operating income of $1 million for the fourth quarter of 2011 as compared to pro forma operating income of $0.9 million in the same period last year. For the year ended December 31, 2011, Liberty increased revenue by approximately 27% to $82.2 million compared to $64.9 million in the prior-year period, which was prepared on a pro forma basis as if we acquired Liberty Safe on January 1, 2010. The increase was due to higher sales across all distribution channels. Income from operations for the year ended December 31, 2011, was $4.3 million compared to pro forma operating income of $2.7 million for the prior-year period. Now onto Tridien Medical. For the quarter ended December 31, 2011, revenue was $12.9 million compared to $14.3 million for the same period last year. Despite the lower revenues, income from operations for the fourth quarter increased to $1 million as compared to $0.2 million in the same period of 2010. This increase is primarily due to lower selling, general and administrative expenses largely due to the separation costs in connection with senior management changes that occurred in the of fourth quarter of 2010. For the year ended December 31, 2011, revenue was $55.9 million compared to $61.1 million for the same period last year. Income from operations was $5 million compared to $8 million for the same period in 2010 due to pricing pressures from customers and investments in new product development. Turning now to the balance sheet. We had $132.4 million in cash and cash equivalents and net working capital of $242.1 million as of December 31, 2011. We also had $225 million outstanding under our -- on our term debt facility and no borrowings outstanding under our revolving credit facility as of December 31, 2011. We had borrowing availability of approximately $287 million under our revolving credit facility as of December 31, 2011. As a reminder, we signed a credit agreement on October 27 for revolving credit facility totaling $290 million and a term loan facility in the amount of $225 million. The 2 facilities combine for $515 million in new term -- new debt financing and replace our previously revolving credit facility and term loan facility. With this agreement, we have improved our mix debt to equity within our capital structure and extend to our debt maturities into October 2016, in case of our revolver, and October 2017 for the new term loan. The issuance of the $25 million of term debt is used to repay the then existing $72.5 million of term debt with the excess proceeds largely responsible for the significant cash balance we had at December 31, 2011. This did have a negative impact on our fourth quarter 2011 CAD as an additional interest expense was dilutive and remained dilutive until our Arnold acquisition in 2012, which is largely funded with this cash. During the fourth quarter of 2011, we incurred approximately $3.7 million of maintenance capital expenditures, an increase of 53% compared to $2.41 million in the year-earlier period. For the full year 2011, we incurred maintenance capital expenditures of $11.2 million, which included levels of expenditures that would have otherwise been incurred in 2012, to take advantage of the 100% bonus tax appreciations incentives available in 2011. This compares to maintenance capital expenditures of $7.1 million for the year ended December 31, 2010. For the current year, including Arnold, we anticipate maintenance capital expenditures between $10 million and $13 million as we remain focused on investing in the long-term performance of our subsidiaries. We also incurred approximately $3 million of growth capital expenditures during the fourth quarter that were largely spent at Liberty Safe to increase production capabilities. For the full year 2011, we incurred approximately $10.6 million of growth capital expenditures. For 2012, including Arnold, we expect to incur gross capital expenditures of between $5 million and $7 million, largely for completing Liberty's production capacity and the growth initiatives at Arnold. I will now turn the call back to Alan.

Thank you, Jim. Overall, we are pleased by the performance across our family of niche market leaders in 2011 and remain excited by our future prospects. We will continue to leverage our unique business model and balance sheet strength to take advantage of both organic and acquisition-related growth opportunities that create enduring value for our owners. In addition, we remain committed to providing our owners with attractive distributions. CODI has established a strong track record in delivering a steady stream of distributions throughout its history as a public company, and we remain well positioned to continue this tradition in 2012. I would like to thank everyone again for joining us on today's call. We'll be happy to take any questions you may have. Operator, please open the phone lines.

[Operator Instructions] We'll go first to Larry Solow with CJS Securities.

Just a quick clarification. I know it's not an exact guidance you're giving now, but the sort of slight -- the growth in CAD year-over-year, does that -- that would include Arnold?

Yes, it does.

Right. And sort of a just a barometer check. It sounds like from where we left off, when you guys from last quarter, things sound sort of -- your outlook maybe a little bit different on a company-by-company basis, but in general, your outlook is sort of the same, a little better, a little worse. How's sort of the environment out there?

I think that probably compared to the last time we talked, things seem to be a bit more stable in the markets right now in terms of the general economic conditions. So I would say, I believe the last time we spoke, we probably referred to ourselves as cautiously optimistic about 2012. I think that we'll probably, due to our conservative nature, maintain that same stance. Although, when I try to think back to our last call, I would say that I probably feel a bit more confident about where we are at right now versus the last time we spoke, Larry.

Okay, good. And just in particular, Fox had some pretty strong revenue growth. And you mentioned some investments in SG&A and then you also mentioned, in your prior comments, some capital expenditure investment looking out into '12. Can you maybe sort of discuss a couple of items, probably 2 separate items, one is more operating and one to the CapEx and one is next year as well? But if you can maybe just give a little more color to that? And do you expect the business, Fox, to grow year-over-year with that all said?

Larry, just to make sure I heard -- your question, was specific to Fox?

Correct.

Okay, that's great. Elias will take that question.

Yes. So Larry, the -- in particular, and as I think everyone that's followed the company knows, we've had some pretty rapid growth over the last few years, and we've really stepped up some of the investment in SG&A. And that was one of the reasons that you didn't see the revenue growth translate into EBITDA growth as we have historically been able to realize. Now that said going forward, we do believe that we're set up for kind of some modest growth coming into the year. I mean, a lot of this is going to be based on Europe to be honest with you. About 50% of mountain biking sales are sold in Europe if you look globally where most mountain biking is -- how it's distributed. And so if Europe continues to show signs of stability, which I think we're all starting to see right now, I think that bodes well for Fox as Fox has continued to be very strong in taking market share with additional stock and also expanding in some of the other categories. The big caveat clearly is going to be whether Europe holds up and if Europe goes into a steeper decline that I think any consumer product would follow naturally. And so in terms of SG&A investment, really, it's just getting further strength from a management's side and investing in some of the operational capabilities that had lagged a little bit the growth, given how rapid the growth had accelerated over years. And we believe making some of these investments now will really yield significant results in terms of operating profitability later in the year in 2012 and as we come into 2013 and beyond. In terms of CapEx, I would say, last year, we stepped up our CapEx investment in the fourth quarter for Fox. We would anticipate that number looking somewhere like $4 million to $5 million coming into 2012. Again, a lot of automation. We're consolidating some of our footprint into some more efficient space that we're trying to come back into one building here from our operating. And in addition to that, we have an initiative to get some production moved over to Taiwan, predominantly to be closer to some of our big bike customers. And so those initiatives are ongoing. They will require a little bit of capital. We would expect that capital to be spent in the first couple of quarters mostly, with a little bit trickling on into third and fourth quarter. So we'd guide you to say, look at fourth quarter or first quarter and second quarter of 2012 as being kind of bigger investment periods both in capital and in SG&A with expected benefit to be realized after all of those investments are put in place kind of into the back half and into next year, into 2013.

Great. If I -- just one last question. Just on Arnold, can you maybe just discuss sort of historically its growth rates and where you see the industry growing and where you think Arnold can grow going out over the next few years?

Yes. Arnold has been -- one of the things we're really attracted to about Arnold was its history of steady operating performance and growth as they've incorporated their products into new end markets and new applications. And so it's been a very solid performer even through the economic downturn that we all experienced over the last few years. I think going forward, we see this as a company that can continue to grow steadily and solidly in the future. I think that we've made some references to higher growth end markets and potential for new products and new applications. And I think that while we believe that, that is something that the company will continue to pursue and pursue successfully, I think it's critical to understand that our fundamental thesis was not based on achieving what I'll call some of that upside. And so what we really like about this business, obviously, is its niche market leadership, its great cash flow-generating characteristics, strong management team, solid performance through various economic cycles, and we think that the company is very well positioned to continue that. But we really also believe that there's potential for growth beyond what they've done historically, if in fact they're able to make further inroads into some of these newer end markets or in fact some of these other end markets grow even beyond our expectations.

[Operator Instructions] We'll go next to Troy Ward with Stifel, Nicolaus.

Just a follow up on Larry's question there on Arnold. Can you speak to 2 other points? First of all, how did you source that transaction? Where did you derive that from? And then also, is there any seasonality in that business that we should be modeling?

With respect to the sourcing, Arnold was a company that had gone through to the market for sale on a process some time ago and that process was never consummated. And through one of our relationships in the banking community, we were contacted directly about taking a look at Arnold and getting to know the company and getting to know the management team kind of outside of what I'll call a broad process. So there was an advisor involved but we -- and we assume a select few others were invited to get to know the company. And that's -- so that's how it was introduced to us. Jim, do you comment on seasonality?

Yes. We don't see a lot of seasonality in the business, so it's pretty -- you've got obviously some impact within different business segments. But overall, there's not a lot of seasonality.

Okay. And then moving onto to some of your historical segments. HALO, you did mention in the fourth quarter, you did another did another tuck-in acquisition at HALO. Can you speak to kind of -- do you continue to see that happen? I know you've done a lot of them. I don't know if you consider that a roll-up but you've done a lot of kind of mom-and-pop type of acquisitions there. Do you think that will continue? And what's the organic growth rate at HALO x these acquisitions?

Well, I'll start with the first part of the question. The tuck-in acquisition is a model that HALO has employed consistently under our ownership and one that we would anticipate they will always continue to pursue and evaluate. Given HALO's tremendous infrastructure, these add-on acquisitions are typically quite accretive and pay -- we end up getting some very good effective multiples with respect to these tuck-in acquisitions. So I think that that's a strategy that has been an employed and will continue to be employed. Elias or Jim, I don't know if either of you want to comment on the organic growth. I don't know if we've measured that.

I think, it's a little hard to say on the organic growth, the business has some cyclicality associated with it. And so over our ownership, you'd really have to be able to somehow tease out what the cyclicality has been versus the organic growth. From a bigger picture, you said the marketing spend on promotional product and where do we expect the industry to go going forward, most people and most industry experts suggest that this is a mid-single-digit growth category with the Internet growing slightly faster than the traditional space. And so the traditional space will be kind of low-single digits and the Internet kind of levers that up to mid-single digits. And so I guess, that would be kind of a proxy for what somebody could consider organic growth in the space to be. We believe that we're a exceptionally managed business and that we attract recruits, which is your primary method of growing, that we are a very good place to attract recruits, so we have no reason to believe that we will not meet or exceed what the industry growth rates would be. But to go back and try to tease out historically growth, let's say, from 2010 to 2011 where there may have been a little bit more of a stronger cyclical rebound in marketing spend, what was due to organic and what was due to cyclicality, I think that's a really tough question. So I think looking at it in a broader context is probably more appropriate.

Okay. When you talk about kind of an Internet platform versus the traditional platform, I'm assuming HALO falls in the latter category, traditional. Do they have any inroads or is there any piece of their business that you'd consider the Internet side of the business?

Yes. So we do have both components. And the Internet has been an area that we've been thoughtfully working on here for the last kind of year 1.5 years. It's a little bit more sensitive, obviously, because we are traditional and we have an established rep network. And so what we're not looking to do is just become an Internet-only center. Instead, what we're doing is integrating an Internet capability with our reps and not trying to be competitive to our reps with our Internet but to use that as a tool to gain new customers where they're very price-sensitive, low-margin customers to be able to have an avenue to get into them, again, without infringing on the reps. So yes, we do have that. It is live now that you can go on and order. And it has been live for about 6 months. And we are now starting to dump some additional investment into search engine optimization and getting more the marketing initiative around that. But we view this as a complementary and enabling tool to the business that we have and we think it's really kind of in the established network that we have. It's the right way to go going forward, to work with our reps rather than to work against them.

So what -- it sounds like to me that it is -- the majority of the business is in the slower growth traditional. You're starting to get in some Internet. As I think of CODI's competitive advantages, what do they bring to the table to your underlying portfolio of companies, it wouldn't seem -- it would seem like that HALO's not as well positioned and probably is never going to be an Internet-only company. So what are you going to do for HALO going forward? And what's your eventual exit strategy with HALO?

I think that with respect to the HALO, I think that the company is in fact unique to its industry. It has scale beyond those of virtually all of its competitors and its infrastructure and ability to manage large clients, I think, is unrivaled and our fulfillment services are also unrivaled. I would say that, I think that, as Elias referenced, we are migrating towards incorporating an Internet strategy, but we are fundamentally, at this point, a business that is focused on the non-Internet channel. And I think that we are in fact working with the company to help position it as it enters new markets. So I think we'll continue to do what we've been doing, which is growing the business, making acquisitions, penetrating new channels by embracing technology. And I think we will absolutely continue to do those things, and hopefully, build the business going forward as we have in the past. We're very pleased with the company's results over the last 8 quarters as we talked about in the opening remarks. And so I think the company is poised to continue to do well, to grow its business, to gain new customers and to also modernize its distribution or complement its distribution by utilizing modern technology as Elias has described. I don't believe that we expect -- comment specifically on an exit strategy for any of our companies, but like all of our companies, I think HALO's market position, its management, its track record of success ultimately make it interesting to industry buyers as well as financial buyers. But I think I could say that about every one of our subsidiary companies.

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

And while we're on the subject of HALO, I'm a little curious. I'm just trying to understand the business a little bit more. I noticed that if you look in the product category over the past couple of years, there's been some fairly meaningful shifts in terms of the mix. Apparel, for example, has increased 50% over the last 2 years, roughly 50%, whereas, office accessories, I think, have declined almost 50%. So is there a mix shift there? Again, I'm just trying to understand what's happening within the business.

Vernon, Elias and Pat Maciariello are going to take a shot at that one, although, I do think that with companies -- HALO's customers, I should say, as they consider their marketing spend and what they want to use to promote their companies, I think that there are just perhaps changes in attitude in terms of what products interests them. But I'll let Elias or Pat either disagree. I don't know that there's any specific reason to explain the shifts that you're describing, but I'll turn it over to Elias.

Yes, and Vernon, I think that's exactly right. I mean, HALO, remember, serves the rep network. And by and large, that's kind of the customer that we view us having and we spend a lot of our focus and effort on getting new reps, whether it's through recruiting or through acquisition and what their customers -- what the end customer buys really can be driven by a lot of things or can be really cool products that come out one year that they want to invest in, in terms of their marketing spend, and other years, they can go back to traditional clothing. I think those things can bounce around in terms of the types of product that will ultimately be sold. Remember, HALO has thousands and thousands and thousands of products that in any given year that shift -- that can that can really shift around. And so the mix, I think, is less relevant to look at to be honest with you. I think the questions on kind of the rep network and kind of modes of distribution are probably better. As a follow-up to the last question that we had, one thing that should be of note is a lot of HALO's customer reps actually are on the Internet and they do their distribution through the Internet. So we are really the back engine for the reps, a lot of them that are Internet reps, we're the back engine for them as well. And we do more processing work to a large degree. And that's really our area of differentiation. It's based around the service that we have and the ability to incorporate technology on a real scale basis that none of these guys would be able to do on their own. But I think with respect to end mix of products, you can expect that to move around pretty dramatically. In some years, you may have companies, like a pen manufacturer that wants to do a promotion, and the next year they may not want to go forward with that. That will cause some variability in what the end mix is going to be. So it's just not really a -- something that I would think is relevant.

Okay, good enough. Looking at Arnold, that's a fairly unique business, and I know that it's a -- at least, I'm looking at it as a new platform company. You may have talked about this, but I'm just curious in terms of how you add to a platform like that, not knowing a whole lot about that business.

Yes, I think as we've talked about in the past, so each platform will have different opportunities for addition. Some will be natural candidates to make acquisitions, others will be more naturally focused on organic growth opportunities. And we view Arnold as actually being natural to pursue both. And we think that there is obvious organic growth opportunities as well as the potential for acquisitions. So I think that our strategy with the management team of Arnold will be to pursue all of those initiatives going forward.

Okay. And one last question about the American Furniture. I know that you talked about -- the goal, I think, is for the company to generate positive cash flow in 2012. And just curious if maybe you could have any more comment in terms of what the longer term strategy is there. I know it's been a struggle here over the last several of years and...

Sure.

Is it fixed to the point where you think you could ride this out or what are you thinking?

Yes. I think companies can always improve, right? So I don't want to suggest that AFM, or any one of our subsidiaries for that matter, is perfect and doesn't need to work towards improving. With that said, American Furniture took some really meaningful actions in 2011 to better position itself. It outsourced some functions that were non-core operations like its trucking operations, as well as its fray mill, which will save a lot of costs to the company. It significantly reduced its SKU count to allow it to become -- to get back to some more efficient manufacturing. It reduces inventory meaningfully in conjunction with the reduction in SKUs. The company consolidated completely under one roof. It had, had a few facilities in and around its corporate headquarters and primary manufacturing location. Those locations were completely out of -- under one roof which will further improve our operating efficiencies. And I think we've introduced some great new products which had been very well received by the company. So I would say that our hope, Vernon, is that the company, which, as we said, we think is well positioned for positive cash flow this year, has budgeted positive cash flow this year, and the early start to this year has the company achieving its budget, which we're really excited about. And I think that, so I think you used the word fixed, I absolutely have a tremendous level of comfort with American right now and the actions that it's taken to position itself for profitable operations this year. I think -- and I'm hopeful that without any further improvements, it would be absolutely capable of achieving the budgeted results based on what we see right now. However, I think American continues to work really hard to make further improvements in its sourcing capabilities, in its merchandising efforts, and really, in its -- in the way it does business and in trying to kind of get further and further efficiencies from its operations. And so we are very hopeful that the company will achieve its budget this year and think that it's firmly on track to do so albeit very early in the year. And I think that, hopefully, if the economy continues to stabilize and perhaps even show some strength, that the company can take steps forward from this level of performance in the future years. So I think that, as we sit here today, we remain supportive of American Furniture. Very pleased with the very difficult efforts that they undertook in 2011 to position the company and are really hoping that the company is poised, not only to achieve breakeven results this year, but to get back on track and generate even higher levels of cash flow in the future as it has in the past.

We'll go next Bo Ladyman with Morgan Keegan.

Quick question. With Staffmark's back end results in Q4 was seasonally very strong. That's not, obviously, not in the results anymore. You made a couple of acquisitions recently. Going forward, where would you expect peak results to be in a given year? Is that moving now more to Q3? Any comment on that would be helpful.

Yes. I think it's the back end of the year, but I do expect the Q4 results will also improve as the level of capital expenditures we anticipate in Q4 next year should drop off. CamelBak has a weaker fourth quarter as opposed to -- compared to third quarter, so the combination is largely in the last half of the year but stronger than the first half of the year.

Okay. That's good. And then CamelBak, you mentioned in your comments the drawdown and it's been sending impacting results. Could you differentiate a little bit in Q4 how much of that is normal seasonality and how much of that is defense related? And what should you specifically be expecting for that business next year?

Yes. I would attribute more of the result to seasonality than to troop drawdown. And I'm sorry, the second part of your question, could you please repeat it?

Expectations for next year. Defense, would defense be -- the drawdown in defense expect to continue? Is that -- how meaningful of an impact is that looking into next year?

We're very positive on this business. From our results on a pro forma basis, we did approximately $31 million of EBITDA last year. We would expect that number to be up over that level.

Right. And I think that if I'm not mistaken in our comments about the defense side of the business, we referenced specifically the glove business. And the glove business is just a bit lumpier than other segments of CamelBak's business. So I think that -- to be fair in our comments, I think it was something that we had to mention. But as Jim said, going forward, even with the potential for further withdrawal of troops, we do not expect that to have a negative impact on the company's results this year versus last year, as Jim said, in total. And as Jim said, we remain very optimistic about CamelBak for 2012 relative to 2011.

We'll go next to Troy Ward with Stifel Nicolaus.

I had a couple of more questions on other segments here. On Advanced Circuits, looking at the 10-K, you get new customers per month and that number's fallen, I think, for the second consecutive year, as well as orders per day, that is down. Can you speak to what's causing those trends and if that's just a business change? Or what do we think is going on there with respect to what you expect in 2012?

Yes. So Troy, it was a -- it's a great observation in the orders per day. We have seen a little bit of softness in our orders per day coming into 2011, really, and kind of the back half of '10 and carrying over into '11. We think it's more of an industry thing and it's not specific to the company. I could tell you everything that we follow and looking at our comps and looking at what the industry is doing would suggest that the PCB manufacturing industry actually had a relatively tough year in 2011, and we think that Advanced Circuits performed extremely well. And so it's going to be based on economic activity, I think, 2011, notwithstanding that nice bounce back in the stock market, was still a relatively low GDP growth period. And we really are in need of new business formation where people are creating new products and we have a lot more R&D. And I think in 2011, we just didn't see that. So I think the industry in general slowed down. Coming into 2012, we see the numbers pretty stable to 2011. We're not seeing any great pickup at this point. What we do know is that a lot of our competitors, from what we're hearing just in chatter in the industry, seem to be struggling out there, and kind of we're holding our own here last year and into this year. We feel that's against the backdrop of people that are finding weakness, especially in kind of our core quick-turn business. Now obviously, we talked a little bit, and I think everybody knows on the defense side of the business, the cuts that are coming in 2013 have created a tremendous cloud of uncertainty. And so the prime contractors that we would normally work with are not making as many investments in new projects today, and that's causing the quick-turn more R&D type defense stuff to really slow down quite dramatically. So we expect that in 2012 to continue until there's more clarity on spend. Even if it's at a reduced level in 2013, we think that it will at least create more of certainty for some of the primes to able to start to invest back in new project development. But 2012 is expected to be a slower demand period for kind of that quick-turn defense. But in the core PCB business, we see that as kind of a flattish kind of order trends right now. And on the assembly piece, that's still something that we're making investments in. And it's a relatively new business line for us. Quick-turn assembly continues to grow. So on balance, kind of puts us at a flattish type of expectation.

And moving over to ERGObaby. Also in the 10-K, you gave some brick-and-mortar store counts. And those went up big from 720 up to 900. And then you made -- in there, the comment is representing over 2,000 retail doors. Can you just educate me on what that means? I'm not familiar with what that is from the consumer side.

Yes. So if we had a -- for example, if we were selling to BRU, which we do sell to now, that may be 225 doors that we sell to. So the actual number of retailers may only go up by one, but the number of doors went up by 230. So the more that we go into the mass channel, the more that we're going to open up a lot of doors with only opening up a limited number of retailers by definition. And we now -- you can see our product at target.com and we're opening up more of the, what I would call the specialty mass with BRU and we're being thoughtful about how to still preserve kind of our core specialty base but supplement that with more doors which helps with brand awareness, helps just getting distribution where customers are able to get product today by going into the mass market. And that's been a real big initiative when I talked about the expansion both internationally and domestic. In our distribution capability, one of the real large initiatives was to expand to all parts of the U.S. where, if there were people that were looking -- consumers looking for this product, they would be able to see it, but also to just get greater brand awareness by having more store placements.

Okay. And then last question on Orbit Baby. Can you talk about -- first of all, was there any revenue from Orbit Baby in the fourth quarter? And what are your expectations? What will Orbit Baby add in 2012? And is there any seasonality in their business?

So we had about $700,000 of revenue in the fourth quarter that was contributed from Orbit. It is not a seasonal business. And in fact, there's not a lot of seasonability in -- seasonality, I should say, in juvenile products. These products are predominantly purchased when a baby is -- especially for a Durable, kind of 3 to 6 months prior to the baby's arrival. So it's something that doesn't lend to a lot of seasonality. Now that said, we would expect Orbit Baby to contribute kind of more than $10 million of revenues next year. It is a relatively young brand that was started in 2004, but like ERGObaby, really has a very high-profile following, a lot of celebrity usage, has a lot of the similar characteristics to ERGO and that's why we thought this was a tremendous strategic opportunity. It also is kind of in the core durable transportation area that we think is a natural extension for ERGO. So it's a relatively early brand. It's a -- as such, we're investing in continuing to build out distribution. A lot of the things we're doing with ERGObaby will now be folded in with Orbit as well, filling out the product, being able to get greater distribution, so a lot of investment coming in 2012 and less contribution in terms of operating profit from the revenues than what you would see from some of our more mature businesses or even from ERGO. But it's something that we think is really right for further investment to accelerate revenue growth into the future and then drive significant profitability.

Okay. And then one final one. On the military side of the business, you talked about Advanced Circuits, for different reasons, the military side is weak now. Maybe it's going to pick up once there's some clarity. At CamelBak, you said because of the troops drawdowns -- and I know CamelBak, it's not a military-issued product, it's more the military personnel going out and buying your product. Talk about Fox's military, what are you seeing on their side? I know that Fox also has some military sales as well.

So we actually had -- Fox's military sales was extremely small in 2011. I want to say it was probably about 2% of our book of business, so it wasn't really material. We look at Fox as having all upside, frankly, from military spend. Now whether that will come to fruition in 2012 or not, it's a little bit hard to tell. I believe that we are better positioned today in order to gain military specs than we ever have been. We have more primes that are we are on their vehicles. And if you walk around the show, it's kind of significant, like 4x or 5x more vehicles that we're actually specked into. Now the big question becomes is the government actually procuring new vehicles in any type of quantity given the amount of reduced defense spend that they're contemplating? That's a real tricky question, and I don't know when that will happen. I will say that a lot of our equipment that is kind of in Afghanistan and Iraq today will either need to be retrofitted, which we think could be, and again, I'll use the word could because it's always subject to having to go through and win that procurement, but we think we're pretty positioned well for that. If that stuff comes home, we think we could be in a good position for a retrofit. And if it doesn't come home at some point, you just have to replace that equipment that was left in the field, otherwise, you're just short equipment. So we think that Fox will and is positioned to do well in the military business. Again, I mean, I think there's so much uncertainty. I can tell you, we're not counting on anything for 2012. But if it was to happen, we'd be very excited. We think this is a long-term business venture that has significant upside potential with a pretty good probability of getting something. I just can't tell you when.

And that is all the time we have for questions today. I'd like to turn things back over to Alan Offenberg for closing comments.

Thank you. On behalf of the team at CODI, we really appreciate you taking the time to join us on the call today. We are thankful for your support, and we look forward to speaking with you next quarter. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We'd like to thank you, all, for your participation.