Compass Diversified (CODI) Q2 2012 Earnings Report, Transcript and Summary

Good morning and welcome to Compass Diversified Holdings 2012 Second Quarter Conference Call. Today's call is being recorded. All lines have been placed on mute. (Operator instructions) At this time, I'd like to turn the conference over to David Burke of the IBG Group, for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified Holdings second quarter 2012 conference call. Representing the Company today are Alan Offenberg, CEO; Jim Bottiglieri, CFO; and Elias Sabo, a Founding Partner of Compass Group Management. Before we begin the call, I would like to point out that the Q2 press release including the financial tables is available on the Company's website at www.compassdiversifiedholdings.com. The Company also filed its Form 10-Q with the SEC last night. Please note that throughout this call we will refer to Compass Diversified Holdings as CODI or the Company. Now allow me to read the following Safe Harbor statement. During this conference call, we may make certain forward-looking statements including statements with regard to the future performance of CODI. Words such as believes, expects, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on 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, the domestic and global economic environment has a significant impact on our subsidiary companies. CODI undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. At this time, I would like to turn the call over to Alan Offenberg.

Good morning. Thank you all for your time and welcome to our second quarter 2012 earnings conference call. We are pleased by our strong consolidated results for the second quarter of 2012, which exceeded our expectations. While Jim will discuss our second-quarter financials in more detail, I would like to note that CODI generated cash flow of $23.3 million for the three months ended June 30, 2012, an increase of 26.6% from the year earlier period. Our notable performance reflects the leadership position and comparative financial strength of our niche businesses. We continue to capitalize on opportunities to increase the relative market share and expand into adjacent markets. Our results for the quarter were also positively impacted by our newest subsidiaries, Arnold Magnetic and CamelBak, both of which we acquired less than a year ago. Based on the strong performance across our diverse family of niche market leaders, we paid a distribution of $0.36 per share, representing a coverage ratio of cash flow to distributions paid of 1.34 times for the second quarter, and a current yield of approximately 10%. Since going public, CODI has paid cumulative distributions of approximately $8.16 per share. We remain focused on taking advantage of organic and acquisition related growth opportunities, while maintaining our commitment to provide consistent cash distributions to our shareholders. During the quarter, we took three meaningful steps to enhance our balance sheet. First, we sold our HALO subsidiary for net proceeds of $66 million. Second, we issued an additional 30 million of term loans, which carry only minimal amortization payments through the end of 2017. Third, we reduced the pricing on our expanded term loans by 1.25%. These moves have strengthened our balance sheet and provided us with approximately $285 million in total liquidity at the end of the second quarter,…

Thank you, Alan. I will begin by reviewing our branded businesses. As Alan mentioned, our branded businesses have performed exceptionally well in 2012, producing combined revenue and EBITDA growth of approximately 15% and 20% respectively for the six-month period ending June 30, 2012, compared to June 30, 2011. The rate of growth accelerated sequentially in the second quarter of 2012 with year-over-year revenue and EBITDA growth of approximately 18% and 29% respectively, compared to year-over-year revenue and EBITDA growth of approximately 13% and 9% respectively in the first quarter. All four branded product businesses grew in the second quarter led by a 32% year-over-year revenue advance at our FOX subsidiary. FOX continues to exceed our expectation and showed growth in its core mountain biking, power sports and off-road division. As we have mentioned on previous calls, FOX continues to invest heavily in its infrastructure in order to support this growth. We also experienced rapid year-over-year growth of 21% at Liberty Safe, as overall demand for safes continues to grow. Like with FOX, we continue to invest in the infrastructure required to support such growth. These investments yielded positive results in the quarter as we experienced steady increases in profitability as the quarter progressed. ERGObaby grew revenues 19% year-over-year, predominantly as a result of the inclusion of Orbit Baby in the 2012 results. We remain focused on investing in the ERGObaby brand and positioning the company for accelerated growth in revenues and profitability. And finally, our CamelBak subsidiary posted an extraordinary 30% year-over-year growth in EBITDA as margins expanded based on a favorable mix of revenues. We continue to maintain our focus on increasing consumer penetration rates for CamelBak’s superior portfolio of personal hydration systems. Next I will turn to our niche industrial businesses, which showed modest year-over-year second quarter revenue…

Thank you Elias. Today, I will discuss our financial results for the quarter ended June 30, 2012 including a review of the operating results of each of our current subsidiaries. On a consolidated basis, revenue for the quarter ended June 30, 2012 increased to $230.0 million as compared to $133.1 million for the prior year period, primarily due to the inclusion of CamelBak and Arnold revenues, since these businesses were acquired after June 30, 2011. Net income for the quarter was $2.2 million as compared to net income of $8.2 million in the year earlier period. During the second quarter of 2012, CODI recorded loss from discontinued operations of $1.7 million, consisting primarily of transaction related costs from the sale of HALO. We also recorded higher interest expense for the second quarter of 2012 as compared to the prior year period due in large part to higher average debt balances, amortization of original issue discount and changes in the fair value of interest rate swaps. Cash flow for the quarter ended June 30, 2012, was $23.3 million, compared to $18.4 million in the prior year period, an increase of 26.6%. This improvement was largely due to the inclusions of results from CamelBak and Arnold Magnetic, partially offset by the exclusion of results from Staffmark, which we sold in October 2011. In addition results from HALO were only partially reflected in the second quarter due to the sale of this business, as Alan mentioned earlier. Now turning to our subsidiary results beginning with Advanced Circuits. For the quarter ended June 30, 2012, Advanced Circuits revenue increased to $21.2 million compared to $20 million in the prior year period mainly due to inclusion of sales and acquisition of Universal Circuits completed in May of 2012. Income from operations for the quarter was…

Thanks Jim. We are pleased by our strong results in the second quarter and first half of 2012, which demonstrates the strength of CODI’s unique business model, as well as the leadership position of our niche businesses. Based on our performance, combined with our future prospects, we are well positioned to earn cash flow in excess of our anticipated distributions for 2012. We remain focused on leveraging our balance sheet strength to invest in high-return organic growth initiatives, while pursuing accretive acquisitions that create significant value for our owners. 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.

Thank you. (Operator instructions) We will go first to Larry Solow with CJS Securities. Larry Solow – CJS Securities: Hi, good morning.

Good morning Larry. Larry Solow – CJS Securities: A couple of quick sort of global ones, the first one is it sounds like things are – I guess last we spoke you were seeing some modest improvement in your businesses, and looking at these results, maybe you could just sort of put like – it sounds like your businesses are improving, but if you can give sort of a global view of what you are seeing out there in terms of the economy and all, and are you guys sort of just going against the grain or how is it, you know, how do you see things?

Well, as you mentioned, we are very pleased by the performance of our subsidiaries, and think that from what we are seeing I think there is a sense that things are pretty steady right now in the economy. There are certainly pockets as you look throughout our portfolio, where there seems to be greater strength, in other pockets where the strength is not as strong. And here is certainly cautious optimism across all of our group of subsidiaries. It is hard for me to comment Larry about – you made a comment about going against the grain, you know, I don’t really want to talk about the performance of our subsidiaries relative to a universe of other companies, we are not entirely sure of you know how you are looking at those, but I would say with respect to our businesses, you know, as we mentioned, they performed well, we remain optimistic about their performance over the balance of the year, and we think that they are all very well positioned, but with respect to the global economy there are concerns as you hear about and read about everyday that we certainly will share, but through the first half of this year I think that on balance we remain cautious about them, but very pleased about our businesses and their ability to perform solidly across – sorry, over the balance of 2012. As you get beyond that, Larry, we are cautiously optimistic, but the global economy is very difficult to predict and the impact that the global economy could have on any or all of our subsidiaries is also difficult to predict, but we feel very confident about how we’re positioned and how we’re set up for future performance. Larry Solow – CJS Securities: I know if I heard correctly, it sounds like things are actually – have gotten better through the quarter, at least at your core businesses, and even in some of the smaller ones, is that fair to say?

I think that our businesses by and large did perform very solidly in the second quarter. I think that there are few of them that did exceed expectations, and we knew that certainly right within our expectations. So, I don’t hesitate to use the word improve as you just did, but I would say that by and large the performance is within our expectations, and in a couple of cases certainly beyond our expectations, but you know, we are pleased with their performance and hope that they can continue to perform in the way that they did in the second quarter. Larry Solow – CJS Securities: Fair enough. Can you just comment specifically just on ERGObaby, obviously revenues were strong, some of that of course was acquisition enhanced, or maybe permanent [also], but just talk about the profit outlook, I know you guys have been investing heavily there, and so…

Sure. Elias will take that question for you Larry. Larry Solow – CJS Securities: Thanks.

Yes, Larry. So in the second quarter as we mentioned a big portion of the revenue growth was attributable to the acquisition we made of Orbit Baby, and we have talked a lot about the investments that we are making predominantly in building infrastructure because this was a relatively young company when it was acquired, and now focused more on marketing to raise brand awareness. You know, we feel that the company is positioned for profit growth to accelerate in the back half of 2012 and into 2013. A lot of it is based on sales leverage that we expect to get, timing of shipments to some of our international distributors can influence a little bit between quarter-to-quarter how growth looks, but you know, on the full-year basis we feel very confident in the growth profile of both the ERGObaby and Orbit Baby brands, and the leverage that they will produce in terms of profit on a going forward basis. Now it is not to say that we are not going to continue to increase our investment in marketing. We think this is a high-growth business that has a lot of market share opportunity to take so. We will expect to continue a pretty aggressive growth in marketing expenditures, but we would expect to see leverage starting to come on some of those investments with sales growth and EBITDA to start to really pick up as the back half of the year materializes. Larry Solow – CJS Securities: Great, and just lastly if I may, just any comments, commentary on the acquisition environment, deal flow, transaction prices, quality of deals, or…

Sure. Deal flow remains solid. I think that it is probably over the last month or so, maybe even six weeks, probably picked up a little bit, the quality is pretty solid. You know, it is Larry we look at a lot of things, right. So there is certainly far more opportunities that we are less compelled by and more compelled by – deal flow is solid. There are definitely good quality opportunities out there that we’re seeing. Prices are high. There seems to be a robust environment right now in the middle market M&A activity, and we are like we have in the past always going to do our best to sort out and find not only great opportunities, but at valuations that we think makes sense for our shareholders. But the market is pretty robust, prices are high, there is certainly a lot of capital out there to be deployed both by corporations and financial investors, and the lending market in support of high-quality transactions is also very solid. So it is a good market right now, but a competitive market with prices that are pretty robust. Larry Solow – CJS Securities: Great. Thanks a lot guys.

Sure. Thank you.

We will go next to Vernon Plack with BB&T Capital Markets. Vernon Plack – BB&T Capital Markets : Thanks very much, and you know, you talk about seasonality of some of your companies, and in particular you always mention Alan that FOX the Q3 is usually the highest and Liberty Q2 is usually the lowest, now given very strong results at both of those companies, I’m curious in terms of whether or not we can expect that type of seasonality, in other words FOX to have an even stronger Q3, I’m just curious if anything was pulled forward, as well as with Liberty, can we expect them to have a pretty good year from here, and just some thoughts on that?

Yes, sure, I will take Liberty and I will let Elias comment on FOX. With respect to Liberty, their demand for their products should remain fairly strong, and we would expect that demand to remain strong over the balance of the year. And so, you are right, I think that with Liberty we may perhaps not find ourselves with some of the similar patterns as we have seen in the past. The summer months typically have represented periods where it is a bit slower, and right now demand definitely looks as though it will remain strong through the summer months and throughout the balance of the year. So the demand for Liberty’s products are strong, and as we mentioned, we have invested heavily in additional production. We added employees at Liberty Safe to assist in the production in terms of adding increased shifts to meet that demand, and we expect that to stay solid throughout the balance of the year. With respect to FOX, Elias will provide some commentary for you there.

Yes, Vernon, with respect to FOX, Q2 is really an extraordinary quarter. I mean, 32% revenue growth was well in excess of what we had expected from the business, and it is really a function of all of the business lines performing very well right now. As I mentioned, power sports, off-road, and the core mountain biking businesses all performed very well. We did have a little bit of an acceleration of orders that came in mostly from some of the European partners that pushed up their order timing, and so there was a slight pull forward of some business into the second quarter, but I would say that was relatively modest. We expect still to see a ramp from Q2 into Q3, where Q3 will be our strongest quarter as it historically has been. I would caution you that kind of some of the revenue growth, the absolute percentage of revenue growth we saw in Q2 is likely not sustainable at that level, but yes, we would expect Q3 to experience a ramp up from here, and then you know, traditional Q4 seasonal slowdown as we had. Vernon Plack – BB&T Capital Markets: Okay, great. And I notice that you talk in the Q about a recapitalization of FOX, can you tell me a little bit about that?

Yes, so we during the quarter as you know there is intercompany debt that is linked down below to FOX, and the company did a leverage recapitalization in order to get some more leverage, now the company has performed so well, it has repaid so much debt over its life with Compass that we found that its debt balance was extraordinarily low. On top of that as you guys all know EBIDTA has you know, tripled over the course of the last few years. So from a leverage ratio we were very, very low and we felt that it was time to put some debt down below. So that was the essence of doing the leverage recapitalization.

And Vernon that is consistent with what we've done with other subsidiaries in the past, and we’ll continue to do going forward to the extent they find themselves in a similar position as FOX. Vernon Plack – BB&T Capital Markets: Okay, great. Thanks very much.

(Operator instructions) We’ll go next to Troy Ward with Stifel Nicolaus. Troy Ward – Stifel Nicolaus: Great. Thank you. Can you just comment repeat some of the commentary you gave on CamelBak, about an inclusion of a Marine program at the end of 2011. Can you give us kind of what the impact of that has been on current revenues and what was the life of that relationship?

Sure. As Jim mentioned I believe in his comments you know, CamelBak secured a contract with the Marine Corps for hydration pack towards the end of 2011, which they have been delivering on through the first half of this year, which we expect to complete that contract in the first quarter of 2013. Jim, do you want to comment on the numbers or --

It's roughly $10 million of additional revenue for the first six months. Troy Ward – Stifel Nicolaus: For the first six months you said?

Yes. Troy Ward – Stifel Nicolaus: Okay. And then can we go back to Larry, I think started a question on ERGO with regard to the acquisition of Orbit. Can you speak to how organic growth at ERGO excluding Orbit has been, we're actually expecting to see a little bit more from that after the acquisition. So can you speak to kind of how that segment has done without the acquisition?

I just – just to make sure we heard the question correctly, you wanted some commentary about organic growth at ERGO, excluding Orbit. Troy Ward – Stifel Nicolaus: That's correct.

So revenue was flat without the Orbit Baby acquisition, although there was some timing issue in international sales and Elias you want to anything to that?

Yes, no that would, you know, the timing because we do so much business internationally, one of the issues we had at the end of the second quarter was there were some products that actually didn’t get picked up by the freight forwarder until two days after the end of the quarter. You know, we look at the business based on what our bookings are internationally, and what our weekly sell-throughs are in the domestic business, and both of those indicators are that the business is tracking up consistent with our expectations but, you know, the timing of shipments internationally can, you know, move around a little bit. We did come off of a very strong first quarter in 2011 that actually had some, you know, some pushback from shipments of Q4 ’10. So a little bit of comparisons on the international business are making it a little bit more difficult but I do think you know, from our standpoint looking at the booking numbers the sell-through data, which I think is a truer number that will smooth out kind of any of the vagrancies of, you know, kind of timing of shipments. We are seeing pretty strong growth here in this business and you know, we would expect in Q3 some of those shipments to catch up that had gotten pushed out and for year-to-date things to look a little bit more in line with what our and I think your expectations are. Troy Ward – Stifel Nicolaus: And can you comment again on what were the expenses related to Orbit, maybe in this quarter and do you expect any more going forward?

Yes, so the expenses that were called out are the normal line SG&A expenses that we have. You know, that business has a number of different functions performed, part of it is consolidated in but you know, from new product and some of the logistics supply chain, some of those things, you know, are functions in marketing and sales that are still needed and we would expect those to, you know, be a stable level of expenses than actually growing as we continue to you know, invest behind that. We have, you know, a very, very favorable outlook for Orbit. We think this is a you know, really great product that has today low awareness, but that's why we think you know, some marketing expenditures behind us will really accelerate our sales growth. So you know, I would suggest that, you know, this is a business where we do expect to put more investment in but we think that you know, we’ll be more than paid for by revenue and gross profit growth. Troy Ward – Stifel Nicolaus: Okay, and what about transaction related expenses, was there any of that in this quarter that will go away?

No. Troy Ward – Stifel Nicolaus: Okay. And then the last one on Advanced Circuits, you did a small tuck-in acquisition in the quarter like a Minnesota-based company that focuses on military, more aerospace. And that’s the second kind of that focus business you’ve done, are you making any conscious effort to move into that space or you just think that as attractively priced assets. Can you just give us some color on your thoughts on AC?

Yes, so to your question a little bit of both, the assets are very attractively priced today in that sector, and we think there is, you know, from a long-term investment standpoint this is just really a great time to be a buyer. There is not a lot of competing bids out there, and you know, with what's happening in the defense space and we all know that with sequestration on you know, the horizon starting next year there is a lot of uncertainty. So we think if you will take a you know, intermediate to longer term view this is one of the you know, better investment times that we could envision for investing in that part of the space. It is also part of our strategy and the strategy really involves around you know, becoming, you know, being able to serve a broader set of what is going to stay here in the United States and as we look at the circuit board business, there is really two components that are [does and have stayed] in the US space, and have good long term growth fundamentals. One is the core quick turn business that we do in Aurora, a lot of that is based on you know, very short run of product, very small order size, quick time. So that necessitates being here and not having to you know, come through customs, and then the second is the defense side of the business, which is mandated to stay here given the sensitivity around the defense projects, and a lot of the you know, research support that we do. So we actually feel that this is positioning the company for the you know, we're already in the one very strong you know, area for outlook, which is the core quick turn. We think defense long term has that same profile and, you know, when combined – and given now the investment you know, window which is, you know, I think very strong from a long-term dynamic as I said. We feel this is you know, pretty good time to be making investments in that arena. So I would caution everybody that you know, part of the reason that is such a good investment opportunity today in the near term is that the outlook you know, kind of for the very near term future for the defense side is not robust. You know, we’ve done a great job of being able to operate this business and our management team just did a phenomenal job of being able to drive maximum profitability out of it, but I think you know, near the very immediate term revenue outlook on defense is it is going to be subdued, but for long-term we think this is just a you know, a great place to be investing assets. Troy Ward – Stifel Nicolaus: Great. Thanks guys.

We’ll go next to J.T. Rogers with Janney Capital Markets. J.T. Rogers – Janney Capital Markets: Good morning everybody.

Good morning. J.T. Rogers – Janney Capital Markets: Another question on ACI, it seems like there has been a consolidation of the larger domestic PCB manufacturers. I was wondering if you could comment on any impact that's having on demand or the competitive dynamics of the printed circuit board manufacturing.

Yes, so it is a good point. You know, one of our largest competitors, DDi was bought by Viasystems recently, and so we are seeing a continued move towards consolidation of the larger guys. You know, J.T. I think this is part of a bigger trend that's actually occurring in the marketplace. You know, when we first made the investment in Advanced Circuits, there is something like a little over 500 more jobs in the United States today that number is you know, contracted by about you know, 35% to 40%. So there has been a consolidation that's occurred because there was excess capacity and I think that continues to happen especially in an environment where revenue growth is not as visible. One of the opportunities in doing consolidations is being able to take capacity off-line and enhance profitability in that way. So you know, we see that as a trend in the industry. In terms of how that is affecting the competitiveness of the industry I would say, you know, in the near term that can create some distortions in terms of you know, kind of pricing in the marketplace. We did experience and, as Jim mentioned, you know, at our Tempe facility, which is our more defense oriented facility we experienced some major price competition and we actually had some price discounting that occurred and that was you know, the predominant reason for the revenue and, you know, profit declines out of that segment of the business. You know, on a longer-term basis I think this is you know, extremely positive. Anytime we can get capacity to rationalize in an industry and be more aligned with demand, you know, it bodes well for the long-term health of the industry and pricing on the pricing side. So, you know, we think that this is good. It did create a little bit of short term disruption you know, I think that the lower defense work that’s coming out is also creating you know, significant imbalance in the market today between supply and demand. But we would again remain very confident especially given the consolidation and the removal capacity from the industry that when, you know, the industry bounces back both on the defense and in the quick turn business that, you know, on a reduced supply basis that actually will bode very well in terms of you know, revenue pricing and profitability. J.T. Rogers – Janney Capital Markets: Okay, great. And that certainly makes sense from a longer term perspective, in terms of the short term is it the destruction you're talking about, is it just aggressive pricing by your competitors?

Yes, that's – we're seeing our competitors really you know, kind of move pricing down and to be competitive we are you know, having to do the same. J.T. Rogers – Janney Capital Markets: Okay, great. And then I guess switching gears a little bit to FOX I was wondering, I mean, obviously you had a very strong second-quarter, are you all concerned at all about trend, I mean, Europe is a large source of demand for FOX. Are you all worried about any trends that are going on overseas, I mean obviously the spring from everything, it all seemed like it was very strong in terms of mountain bike demand, but, you know, I think back in 2008 the bicycle OEMs you know, kept ordering FOX products, you know, right up through November before you know, really scaling back once they saw the you know, the demand was falling off. Are you all concerned at all or preparing for a slow down at FOX potentially on the mountain bike side?

Yes, so it's a great question, and I would you know, the first part is are we concerned with what's going on in Europe and just the macroeconomy, I mean, the answer is across the whole portfolio, yes, we constantly are managing and, you know, kind of and making sure monitoring our businesses you know, are in tune with you know, kind of the uncertainty that I think is just embedded for everybody right now. Specifically with respect to FOX, I think look, you know, the orders that continue to come in are very strong and Europe does represent a pretty big outlet for both our product directly to European OEs as well as some of the global OEs that are selling their product into Europe, and has a pretty large percentage of our mountain biking business. So with respect to mountain biking you know, we continue to do checks. We talk with the OEs, clearly they are doing their channel checks and they feel that they’re not in an over inventory position, and I think that's really, you know, kind of the crux of your question is are they building up so much inventory and is the sell through not going to materialize such that there is going to be an you know, whipsaw on the you know, kind of the end of the – at the tail end of the model year so that they bleed out. They are not saying that to us yet, you know, to a large degree the growth that we’re experiencing is as I said, you know, in the other divisions of power sports and off road, but the growth that we have experienced in the mountain biking segment is predominantly by getting more spec, and by delivering more product with a higher…

Yes, we don’t you know, give – we don't provide kind of what the data is, you know, on our kind of bookings data, but what I would tell you is you know, it's predominantly the international shipments that can shift around from period to period. We did have a significant amount that went into Q3. We think our, you know, international from what we're seeing business is you know, growing organically at a double-digit pace. So, you know, we feel pretty good about that and the domestic business is growing as well. So, you know, given that the timing of shipments can shift a little bit, you know, we would expect that in Q3 some of this will be caught up and you know, you’ll see the numbers start to normalize. J.T. Rogers – Janney Capital Markets: Okay, great. Can I just, you know, looking back over the last three quarters and backing out sales of Orbit Baby, it seems like organic revenue growth is negative 5%, you know, that leads me to think that that would, third quarter should be very strong for ERGObaby?

We would expect from what we have right now in order for the third quarter to be pretty strong. I mean, we've got expanded distribution here in the United States. We’re you know, pleased with adding Babies "R" Us as a distributor. We are pleased with adding Target most recently in the third quarter as a retail partner of ours. We’ve also expanded what our European and international distribution is, and our international distributors have been increasing their orders. So some of this is you know, absolutely timing related that you're looking at. This is a business that absolutely is growing in both unit volume and in pricing and so we would expect third quarter as you had mentioned to you know, to kind of write some of the you know, the trends in terms of you know, the negative comparison that you are seeing. This is a business that absolutely is experiencing growth. J.T. Rogers – Janney Capital Markets: Okay, great. Thanks a lot.

We’ll go next to Vernon Plack with BB&T Capital Markets. Vernon Plack – BB&T Capital Markets : Thanks. And again on Advanced Circuits, it looks like the operating margin this quarter was several hundred basis points below what we've seen for the past several quarters. So can we assume that going forward you think at least in the near to intermediate term that we’re looking at an operating margin probably in the high 20s rather than the low 30s.

Yes, the operating margin is actually going to decline Vernon partly because of the newest acquisition. There is really two things that drove operating margin in the second quarter. One would be the discounting that we talked about on price in the defense business. You know, that unfortunately falls right, you know, to the bottom line as you can imagine, and then the second component is the Universal Circuits business is you know, much lower margin business. That company is operating you know, well below what its capacity is and I think we have you know, a lot of opportunities over the long term and as we you know, kind of implement our strategy here of being you know, a consolidator in that space we’ll be able to you know, really work on capacity absorption, but in the near term that's going to be a far lower margin contributor, and it will blend down the entire business. If you look the product you know, kind of at unit by – or I would say product category by product category, the core quick turn business, which drives the majority of profitability and call it 85% of the profitability, the margins there are remaining intact. There is no degradation in margin there. But as we move into what is a lower margin business today on the defense side, and especially when you acquire some guy that may have a far lower margin profile, and it is our job to really work on how to get that up, it is going to have the effect of margin degradation across the whole portfolio. Vernon Plack – BB&T Capital Markets : Okay. That makes sense, and just one last question, as it relates to Arnold, it looks like the fully diluted earnings went from 96.6 down to 87.6, was there a reason behind that?

Yes, it was attributable to option grants. Vernon Plack – BB&T Capital Markets : Okay. All right, very helpful. Thanks.

And with no further questions in the queue, I would now like to turn the call back to Alan Offenberg for any additional or closing remarks.

Well, thank you all again for joining us today. We appreciate it and we look forward to speaking with you again next quarter.

That does conclude today’s conference. We thank you for your participation.