Compass Diversified (CODI) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Compass Diversified Holdings 2012 Fourth Quarter Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Nick Rust 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 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, I would like to point out that the Q4 press release, including the financial tables, is available on the company's website at www.compassdiversifiedholdings.com. 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, 2012, 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 statement, 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 2012 earnings conference call. We're pleased by our strong operating performance for the fourth quarter and full year 2012. CODI generated cash flow available for distribution and reinvestment, which we refer to as cash flow, of $14.9 million for the 3 months ended December 31, 2012, an increase of 38.6% from the year-earlier period. For the year, cash flow increased 12.6% to $77.7 million. Our positive results are attributable to a number of factors, including the ongoing ability of our subsidiaries to achieve relative market share growth, while in some cases expanding into new adjacent markets, the success of our subsidiary management teams to maintain an efficient operating platform and notable contributions from recently acquired platform and add-on businesses. During 2012, CODI also maintained an eye towards the future. Our capital expenditures totaled approximately $18.5 million as we seek to maximize the intrinsic value of our niche market leaders. We believe the significant investments we have made in our existing subsidiary businesses over the past 2 years considerably enhanced our long-term prospects. Before I turn the call over to Elias for an overview of our subsidiaries, I'd like to provide some commentary regarding our current group of subsidiaries. Our 4 leading branded product businesses consisting of CamelBak, ERGObaby, Fox and Liberty continue to serve as the main driver of our results. These 4 companies, which represent approximately 2/3 of our subsidiary EBITDA, achieved increases in combined revenue and EBITDA of approximately 18% and 24%, respectively, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. EBITDA margins also expanded to 19.3% for the year ended December 31, 2012, from 18.3% for the year ended December 31, 2011, for these 4 subsidiaries on a combined basis. I note that all references to combined revenue and EBITDA growth and EBITDA margin for our leading branded product businesses were prepared on a pro forma basis as if we acquired CamelBak on January 1, 2011. In terms of our niche industrial businesses consisting of Advanced Circuits, AFM, Arnold and Tridien, we continue to generate predictable and strong free cash flow. For the year ended December 31, 2012, these 4 businesses, which represent approximately 1/3 of our subsidiary EBITDA, had combined revenue and EBITDA declines of approximately 4.5% and 1%, respectively, for the same 12-month comparison. Of note, however, they produced a combined 14.5% EBITDA margin, an improvement compared to 13.9% for the year ended December 31, 2011. All references to combined revenue and EBITDA, as well as EBITDA margin, for our niche industrial businesses were prepared on a pro forma basis as if we acquired Arnold on January 1, 2011. As previously announced, we paid cash distribution for the fourth quarter of $0.36 per share, representing a current yield of approximately 9%. Our distribution for the full year 2012 totaling $1.44 per share represents a coverage ratio of cash flow to distributions paid of more than 1.1x for the year. Since going public in May of 2006, CODI has generated cash flow in excess of cumulative distributions paid of approximately $8.88 per share. We remain focused on growth through high-return organic initiatives and through accretive acquisitions. We plan to continue to invest in R&D, management talent, operating capabilities and marketing at our current subsidiaries. We also intend to utilize our disciplined approach in acquiring companies with a real reason to exist under favorable valuations and terms as we have consistently done in the past. While we are cautiously optimistic that we will complete at least one platform acquisition in 2013, we remain patient and will only enter into transactions that meet our strict criteria. I will now turn the call over to Elias to review our current group of subsidiaries in more detail.

Thank you, Alan. I will begin by reviewing our branded businesses. As Alan mentioned, we continue to post strong growth across our branded businesses, which produced combined revenue and EBITDA growth of approximately 28% and 47%, respectively, for the fourth quarter of 2012 over the year-earlier period. All of our branded product businesses grew revenues and EBITDA by double digits in the fourth quarter, led by ERGObaby, which increased revenue approximately 69% over the year-earlier period. This business benefited from the full quarter inclusion of Orbit Baby, which was acquired in November 2011, as well as from strong international sales. ERGObaby had also made important strides increasing profitability with EBITDA more than doubling for the second consecutive quarter. At Fox, we posted another strong quarter as the businesses -- business continues to perform at a high level across all of its markets. Revenues in EBITDA grew by approximately 20% and 27%, respectively, producing operating leverage despite making significant investments in order to strengthen the company's operational capability. At Liberty, we delivered revenue and EBITDA growth of approximately 14% and 28%, respectively, as demand for the company's premium home and gun safes remains strong. Sales continue to expand at a brisk pace given favorable macro conditions, as well as our marketing initiatives and brand-building effort. Thus far, in 2013, booking levels remain strong and exceeds the 2012 booking levels at the same time last year. Finally, at CamelBak, revenues and EBITDA increased by 37% and 54%, respectively. As we have mentioned on previous calls, the company supplied throughout 2012 a new hydration system for the U.S. Marine Corps to use in training and combat operations. We expect this contract to be fulfilled during the current first quarter. Next, I will turn to our niche industrial businesses, where overall steady results were consistent with our expectation. While fourth quarter revenue on a combined basis declined by approximately 6%, fourth quarter EBITDA was flat as compared to the year-earlier period. Advanced Circuits produced year-over-year revenue growth of approximately 14% in the fourth quarter due to the add-on acquisition of Universal Circuits, partially offset by the ongoing softness in our defense and aeronautical business. Demand for our core PCB production services remained stable. Our newest subsidiary, Arnold Magnetic, performed slightly below our expectations for the fourth quarter, with revenue and EBITDA declining approximately 15% and 26%, respectively. Despite the weakness in fourth quarter -- in the fourth quarter, we remain excited about Arnold's attractive growth prospects and plan to drive future performance by leveraging the company's superior reputation for providing engineered magnetic solutions across a wide range of specialty applications and end markets. At Tridien, we reported Q4 results consistent with our expectation, as revenue increased year-over-year by approximately 3% and EBITDA declined by approximately 22% as anticipated. While demand for the company's core products remained stable, we continue to invest heavily in R&D in an effort to bring new, innovative products to market by the end of 2013. And lastly, AFM achieved near breakeven cash flow for the fourth quarter, in line with our expectations. We continue to actively manage the company's overhead and working capital requirements during a challenging retail environment in the furniture industry and expect to benefit from an eventual recovery in the overall economy and the housing market. Based on our ongoing efforts, we expect AFM to generate at a minimum breakeven cash flow in 2013. 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 consolidated financial results for the quarter and year ended December 31, 2012. On a consolidated basis, revenue for the quarter ended December 31, 2012, was $218.2 million as compared to $160.2 million for the prior-year period. This increase was attributable to the inclusion of Arnold Magnetic subsidiary, which we acquired in March 2012 and for strong growth across our 4 branded product businesses. Revenue for the year ended December 31, 2012, climbed to $884.7 million from $606.6 million for the year ended December 31, 2011. The year-over-year increase was primarily due to the full inclusion of the results from our CamelBak subsidiary, which we acquired in August 2011, the double-digit revenue increases at ERGObaby, Fox and Liberty, as well as the inclusion of Arnold. The net loss for the quarter was $5.2 million as compared to net income of $58.6 million in the year-earlier period, which included an $88.6 million gain from the October 2011 sale of our Staffmark subsidiary, partially offset by a $20.1 million noncash impairment charge for our American Furniture Manufacturing subsidiary. During the fourth quarter of 2012, we reported an approximately $3.9 million higher noncash supplemental put expense in the current quarter as compared to the year-earlier period. This expense is based on the periodic review of current cash flow generation levels of CODI subsidiaries, as well as anticipated market multiples for those businesses in the event that they were to be sold in the current environment and reflects the increase in value of our subsidiaries. For the year ended December 31, 2012, we reported net income of $4.3 million as compared to net income of $72.8 million for the prior-year period, which included the aforementioned gain on the sale of Staffmark. Cash flow for the quarter ended December 31, 2012, was $14.9 million as compared to $10.7 million for the prior-year period. This year-over-year increase of 38.6% was due to the inclusion of Arnold and the strong performance in our branded product businesses as was mentioned before. Partially offsetting these factors, cash flow for the fourth quarter of 2012 excluded the seasonally strong results from both Staffmark and HALO, which were sold in October 2011 and May 2012, respectively. For the year ended December 31, 2012, we reported cash flow of $77.7 million as compared to $69.0 million for the year ended December 31, 2011, representing an increase of 12.6%. Now turning to our balance sheet. We had approximately $18.2 million in cash and cash equivalents and net working capital of $153.9 million as of December 31, 2012. We also had approximately $252.5 million outstanding under our term debt facility and $24 million of borrowings outstanding under our $290 million revolving credit facility as of December 31, 2012, with no significant debt maturities until October of 2016. We have borrowing availability of approximately $264 million under our revolving credit facility at December 31, 2012. During the fourth quarter of 2012, we incurred 3.7 -- maintenance capital expenditures, which was essentially flat as compared to the year-earlier period. For the full year 2012, we incurred maintenance capital expenditures of $11 million as compared with maintenance capital expenditures of $11.2 million for the year ended December 31, 2011. For the current year, we anticipate maintenance capital expenditures of between $11 million and $13 million as we remain focused on investing in the long-term health of our business. We also incurred approximately $5.4 million of growth capital expenditures during the fourth quarter, a notable increase compared to $3 million in the prior-year period. For the full year 2012, we incurred approximately $7.5 million of growth capital expenditures as compared to growth capital expenditures of $10.7 million for the year ended December 31, 2011. The fiscal 2012 growth capital amount includes approximately $4.1 million of capital expenditures for the expansion of the Advanced Circuits Aurora facility. For 2013, we expect to incur growth capital expenditures of between $7 million and $9 million, largely for growth initiatives at our CamelBak, Fox and Liberty subsidiaries. I will now turn the call back to Alan.

Thanks, Jim. Again, we are pleased with performance of the fourth quarter and full year 2012 across our family of niche leading businesses, which demonstrates the strength of CODI's business model and remain excited by our future prospects. We will maintain our focus on leveraging CODI's balance sheet strength to take advantage of both organic and acquisition-related growth opportunities that create significant value on behalf of our owners. For 2013, we expect to achieve modest year-over-year growth in CAD, excluding the impact of any acquisitions or dispositions. 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] Our first question comes from the line of Larry Solow from CJS Securities.

Alan, just quickly on following up. I know you guys don't give formal guidance. But looking out to '13, obviously, your branded businesses have been really driving a lot of the growth the last couple of years. Do you expect sort of to be flat sort of -- or flat to slightly up across the board? Or do you think branded still driving more of that upside? And then the second part of the question is sort of just the current read on your businesses. Are things sort of, from last quarter to this quarter, sort of flattish? Or you still will be hearing some -- anecdotally, the economy seems to be improving a little bit. What are you guys seeing out there?

Larry, let me start off, we did mention previously about CamelBak, the Marine contract coming to an exploration. So obviously, that's got a fairly big impact for us for 2013 compared to 2012. That said, we still believe that the combined branded businesses will be up over last year. As Alan mentioned, we do expect an increase in cash flow or CAD for the full year of 2013 over 2012.

And Larry, I'd say that, with the clarification that Jim just made on CamelBak, that we believe that all of our -- each of our branded businesses are poised for continued strong performance heading into 2013. And with respect to the niche industrial businesses, I think the branded businesses certainly had a higher growth profile than our niche industrial businesses. And I think that's evident in something that we've discussed in the past. With that said, I think that we're feeling very comfortable about the group as a whole, the niche industrial businesses heading into 2013. I do not expect that group to grow nearly as strongly as the branded product businesses. But I think that's also just reflective of the nature of the businesses and the groups, I should say, and the growth profile attached to each group.

Okay. Could you just -- a little quick follow-up. Could you just maybe give us a little more color on Arnold, which seems to be sort of the -- one of the sort of sore thumbs?

Yes, sure. I think that Arnold is -- if you think about Arnold's business in the context of its 3 business segments, PMAG, Permanent Magnet, FlexMag and Rolled Products, the PMAG business has really been pretty solid. And that's the primary business of the -- the driver of the Arnold business. And that business has been the best performing of the divisions, which always gives us a great degree of comfort with respect to Arnold. But that business is one that, for the year, essentially performed in line with the prior year despite a slowdown in -- temporary slowdown in business with one of its larger customers. So excluding that phenomenon, the division actually performed perhaps even slightly ahead of the prior year. So we're very comfortable with that segment of its business and think that based on its quoting activity or for its pipeline, so to speak, as well as its bookings so far in 2013 relative to the fourth quarter, we feel pretty good about Arnold's ability to perform. But going to the other segments of the business, the FlexMag business really was disrupted by a situation that it had with one of its largest customers. That disruption is now something that has been resolved and business with that customer is expected. It has resumed and is expected to achieve levels consistent with that of the past. So that business, we think, is poised to rebound in 2013 relative to 2012. The division that struggled the most in 2012 would be the Rolled Products division, which is a more specialized product, which -- it's not a function of losing market share in that group but it has some customers' businesses -- business with the company in that segment just came to an end where they had some failures within their ability to replace that business with new business. And we've made some leadership changes at that division that are in place now and we think will allow the company to do some more outward-facing activities, marketing for new business and securing new business. Now that's not necessarily something we expect to reflect itself in the company's performance in the immediate term. But we certainly believe that over the long term, renewed focus on that segment of the business with a new leader heading it is something that should position that business for better performance going forward. So we're certainly not pleased with the fourth quarter performance of the business as it was described today. But we have not really seen any diminished enthusiasm from our perspective on the ability for this business to perform in 2013 and beyond.

Larry, I will just add that perhaps it might be our lumpiest business. So for -- on a quarter-to-quarter basis, you are going to get a lot of fluctuations. So on a pro forma basis, if you looked at the full year 2013 EBITDA compared to the full year 2012, it was down but it was only slightly down.

Our next question comes from the line of Bo Ladyman from Raymond James.

Supplemental put expense was up a good bit in Q4. Could you give us a little more color on how much of that move was valuation improvement versus your companies exceeding your expectation?

That's an interesting question. I actually think it's a fairly combination of our companies performing quite well where cash flow is going up. There is some EBITDA multiple increases. But I would basically classify that as a combination of both.

Yes, and probably though, if you had to break it out, certainly a combination but probably driven, I would guess...

More by cash flow, yes.

By our increase in performance at the individual subsidiaries.

Right.

Okay. Good deal. That's helpful. Have to ask about the impact of the sequester, potential impact from that on your companies. Are you seeing anything? Are you worried about anything there?

Well, we're certainly concerned about it. It has a more direct impact on a couple of our subsidiaries. I would say that our -- the subsidiary companies that touch either Department of Defense spending, in particular, would be most notably Advanced Circuits, and to a lesser extent, CamelBak and perhaps on magnetic in a small array but certainly it's impacted there. I think that we can get -- if you like to be more granular on how it impacts each of those companies specifically, we certainly can do that. But I would say that you were obviously concerned about it. It will have -- it'll impact each of those businesses to a certain degree. We certainly aren't going to predict or have no ability to predict how it really plays out. But it's certainly something that gives each of those businesses a little bit of pause as it relates to a certain segment of their business. Not the majority of their business, I should point out, but a piece of their business that's still relevant. And so we're hopeful that it gets sorted out. And I think that we are confident that all of our subsidiaries are positioned well in those lines of businesses such that when the situation is resolved, they'll all be well positioned to resume their activities, particularly with respect to defense spending.

Right. If it were delayed in getting worked out, would there be any particular -- could you give us an idea of timing on when we could see an impact in the financials?

You know it's -- I think it's really hard to do that only because, let's just say, they work it out this afternoon. While I think, for example, Advanced Circuits would be poised to gain business associated with that resolution, when orders come in or when certain things are developed that would result in orders, it's -- again, it's just impossible for us to predict. So I really prefer not to try to make a prediction that I have no ability to make.

Right. I understand that. Liberty. There were increased regulation discussions in Q4. Did you see any impact to Q4? You mentioned strong bookings in Q1 thus far. Is any of that, do you think, related to the regulation discussions?

Yes, I think it's -- there's -- it's absolutely related. I don't think it's the sole determinant, but it's undoubtedly related. I think that with the change -- or sorry, not the change, but with the President getting a second term, coupled with the unfortunate tragedies that occurred across the country, the shootings, all of those -- and then the resulting talk on greater gun legislation, are all factors that when taken collectively have an impact on Liberty's business. It drives the gun enthusiasts to the market to purchase more guns, particularly guns that they think they may not have an opportunity to purchase going forward. And gun sales certainly are a leading indicator of demand for Liberty Safe. In addition, I think Liberty's continued marketing efforts that they've been engaging in for quite some time now continue to drive demand for the product. But these other factors just increased the awareness of the product and really raised the profile, I think, on both gun safety, as well as those that are looking to acquire guns, needing additional storage to secure those guns.

Did you see any capacity issues in Q4 in that business?

Yes, we did. I mean, Liberty has been working diligently in its factory. You may be aware that we did add capacity to the facility in a not-too-distant past. And they are working very hard to keep up with demand, and it's been a challenge for Liberty although I think they're doing an incredible job of producing more safes than they ever have in the past and in delivering to their customers on as timely a basis as possible. So yes, but the capacity constraints are there and it's probably something that the company will continue to battle through for the near future.

[Operator Instructions] Our next question is from the line of Troy Ward from KBW. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: On Tridien, just -- can you talk about when you expect the R&D expenditures to -- I think we saw through the majority of 2012. Will that lead to new products in '13? And will it be early enough to make a difference on the revenue line?

Yes, Troy, I mean, we expect some of the products to be launching in 2013. In fact, some have in the first quarter. And so we would expect to see some momentum building from those efforts. In terms of the R&D expenses, we don't expect them to taper off anytime soon. In fact, we expect we're going to maintain a commitment to bringing out new innovative products and continuing to drive a pipeline for long-term future performance out of this business. But we would expect that 2013 will have positive impact from new product introduction and that it should be starting relatively early in the year. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then in the 10-K, in the Tridien section, it talked about polyurethane foam. And it said you expect this to increase during fiscal 2012. Did that -- was that supposed to say 2013? I mean, what are you expecting the foam prices to do here in the near term?

Yes, I think in the near term, and it's probably, I think, a question that is there to consider in the context of AFM as well. But I think that we'll probably expect them to stay in the neighborhood of where they're at today with -- I think if there's -- looking forward, I would say there's probably more likelihood that prices rise in that raw material than decline. So again, it's a little bit hard to predict. But I think that we would expect them to stay relatively consistent and perhaps rise a little bit. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then one more on Tridien. It's said in the fourth quarter, you purchased some stock from a minority shareholder from the old Anodyne group for $1.9 million. What percentage of the overall company was that?

Elias, do you remember?

Roughly.

3%, 4%? About 4% to 5%. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: And did that change any of your valuation inside the supplemental put for that segment?

No, it did not. There were some circumstances behind that purchase that we didn't consider represented value for the business. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then quickly on to Arnold. You talked about the PMAG being roughly in line with expectations in 2012. As I recall, that's 70%, 75% of the overall business. So as we think about -- you said Rolled didn't kind of come up to standards. You made some leadership change. With that only being 10% of the business, how should we look at kind of the run rate that kept falling, quite honestly, and then Q4 was lower than we expected? How should we look at 2013 versus what Arnold did in the fourth quarter?

I think if you look on it on a full year basis, you probably ought to be thinking about it flat. And if you look at the fourth quarter solely, we would expect the run rate higher than we did in the fourth quarter. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then I'm not sure how correlated this is, but there's a very large public player out there called Molycorp. They did a Neo acquisition and they're taking an impairment. Neo was a rare earth magnet play for Molycorp. They're taking an impairment on that. Are you seeing some of the same pressures that have been talked about with the Molycorp impairment?

Yes, I think there are -- the key differentiator between us and Molycorp, as I understand it and I'm not a Molycorp expert, but I believe that they are a supplier of rare earth materials whereas Arnold is an actual manufacturer and processor of these materials. And that the fluctuations in rare earths prices are more of a pass-through for Arnold whereas those fluctuations, I think, are more of a business risk to Molycorp. So I don't think it's necessarily a direct comparison that gives us -- we don't have concerns based on what Molycorp has done relative to our business, primarily for the reasons that I just described. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: And then just one last point of clarification there. So I know the Molycorp, and again, I'm just kind of reading this from the outside. I don't follow the company. But they did the acquisition of Neo, I think, in '07, '08, '09, somewhere, I think in '09 maybe, when I think valuations were a bit higher. Can you remind us in 2012, when you made the Arnold acquisition, kind of how that came to be, where did you source it and do you feel like, from a valuation perspective, maybe they had come down a little bit compared to some of the rare earth stuff that was selling in '09?

Yes, just to remind you, we were approached by an intermediary to consider the Arnold transaction. We were approached directly and, to our knowledge, it was a limited process and where others were also asked to consider the opportunity. The company had, in fact, tried to go to the market for a sale prior to our becoming involved in a more broad process, but for a variety of reasons, that process didn't occur. So we were brought in to it directly. I think that our purchase price is one that we feel very comfortable with given Arnold's performance in 2012. And sorry, I -- there was a component of your question that asked about is it valuations in 2009 relative to when we bought the company? Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Right. When you decided to make the Arnold acquisition, as you did your due diligence, some kind of where these should be valued, are values coming down or...

Yes. No, I -- again, I think the Arnold business model is not as -- it's not determined by kind of fluctuations in rare earth prices. So I don't think that we saw -- I think Arnold would have sold for comfortable -- sorry, comparable cash flow multiples in 2009 or in 2012, depending on how a buyer may look at it, independent of whatever fluctuations, spike, declines, et cetera, that there may have been in rare earths prices. I just think that Arnold, as a processor, does not see its business value rise or decline dramatically with those raw material price fluctuations.

Our next question is from the line of J.T. Rogers from Janney Capital.

First of all, just on Tridien, I was wondering what you are -- what kind of trends you're hearing from your customers. I think there's mixed commentary from competitors and customers about end demand for capital equipment for hospitals and long-term care facilities.

Yes, I mean, I think that's probably a fair assessment, J.T. I think the -- there's a lot of uncertainty right now, as you know with the implementation of the Affordable Care Act. And so I think the CapEx end of the part of the health care spending is probably being impacted somewhat. We do see the business as maintaining kind of stable to slightly up demand. So it's not been affecting us although part of that is being impacted by the new products that are coming out into the marketplace that is giving some positive momentum. I would say that longer term, we view the increased usage of the health care system as more participants come in as being a great driver of just long-term demand, long-term usage of these products and the need for more of these products now. But in the near term, I think your assessment that the kind of CapEx side of the equation is kind of mixed is a fair point.

Okay. And then just looking at your products, do you guys have an assessment yet of what percentage will be impacted by the medical device tax?

Yes. We do have that. We think that, in many instances, that's a cost that's getting passed on to our customers. So we think the profitability impact will be relatively low.

Okay. Great. Then looking at Fox, I think on the last call, the 2013 mountain bike models were just hitting the floor. I was wondering if you guys have a sense of what the sell-through of the 2013 models have been and just what's your general outlook there.

Yes, so 2013 is on the floor. It is selling. It kind of goes in late in 2012. The 2013 model year does. And then it starts selling through now. So still a little bit early to get a great read on what the inventory and the system looks like. From all that we're hearing right now, sell-throughs are actually pretty strong. And what we're hearing from the channel is that inventories look good. And as we go into our next model year, we're well in advance just given the build cycle. We're already thinking about 2014 to a large degree. But we're hearing that '13 model year is doing pretty well. 2012 sold out pretty well and the inventories were relatively lean, which made for a good year coming into '13. So everything right now looks like it's steady enough for the overall industry. And Fox continues to do great and execute in all of its markets as we've talked about earlier on the call. So we feel pretty good about where we sit today. We don't think there's any kind of excess inventory in the channel for this time that would give us any concern.

Okay. Great. And then just one last question on AFM. A variety of things potentially pressuring that business, at least in the first and second quarters. And there's talk that the lower end consumer is being pressured by payroll tax hikes, gas prices and potentially later, tax refunds. I was wondering if you're seeing any of that in AFM's results so far, or if there's any sort of contingency plans for a slowdown maybe in the beginning of this year.

Yes, I think that all of the factors that you described are impacting the segment of the consumer base that you've referenced. And it's impossible for those things not to have an impact on the ultimate purchaser of a piece of furniture produced by American Furniture. I think that with respect to what we're seeing this year, I guess, the delayed tax returns has been very well -publicized. And industry-wide, we are hearing the furniture industry talking about tax season certainly having been delayed and getting a later start than it has in years past. From, again, industry perspective, it looks as though the last 7 to 10 days perhaps might represent an inflection point where the industry is now saying tax season appears to have started. So it didn't get started later. And I think American Furniture would agree with that industry comment. I think that how long tax season lasts, the increase in the tax that you said, does someone get their tax return and reserve that against a lower paycheck for the year, hard to really know. And so I think that in the coming months, we'll really figure that out. And with tax season specifically we'll probably know that within the coming, I should say, month. Regarding American Furniture specifically, I think that we made the statement in our opening remarks that we believe that the company will produce, at a minimum, breakeven cash flow. Based on what we've seen in the company's performance to date, we obviously feel comfortable continuing to make that statement. And the company is in line with our expectations. I don't think we have necessarily a plan B at this stage, but I think that as opposed to calling it a plan B, if, in fact, there is a reduction in demand, simply state it, we would produce less furniture, control the cost that we need to control. I don't think that we've done anything at the company with respect to our preparation for tax season that will hurt us going forward to the extent tax season isn't as robust as we may have originally hoped. But so far, we're feeling very good about American Furniture in 2013 and are hopeful, as I'm sure many in the furniture industry are, that tax season has not only started but will be solid for the coming month, 1.5 months, hopefully. But until it happens, we just won't know.

Our next question is from the line of Vernon Plack of BB&T Capital Markets. Vernon C. Plack - BB&T Capital Markets, Research Division: Alan, was looking for a little more color on the acquisition -- on the M&A environment. And I believe you said that you're confident that you'll -- that perhaps you'll add one portfolio company in '13. And interested not only in maybe some additional color but just in terms of how you're looking at it today. Are you looking at -- I'm sure you're looking at both new platforms and add-ons but I think a little more color will be helpful.

Sure. Just to -- I'm saying this with a big smile on my face, Vernon. I believe that I said cautiously optimistic as opposed to confident. We are, as you know, always trying to stay as active as we can in developing new opportunities, both on the platform side, as well as the add-on side, for the subsidiary companies where that makes sense. The market, I think I mentioned on previous phone calls or prior quarter's call and perhaps the one even prior to that, is that the market has been a little bit slow. And at the start to 2013, in terms of what we would consider to be high-quality deal flow, did not get out of the gates nearly as quickly as we would've hoped that it would. I think that in the last week or 2, we started to see some activity in things that are interesting to us, which is great. But it's not a market right now that I would say is overflowing with great opportunities. Based on the conversation that we have within the communities in which we seek deal flow, there is cautious optimism based on the amount of activity that's going on behind-the-scenes that over the course of 2013, that transaction opportunities ought to present themselves in a more rapid pace than they have so far at the start of the year. So that's really the case for our cautious optimism. We certainly aren't going to waver from our disciplined approach that we've taken since being a public company and even as part of our predecessor entity. But we are, again, cautiously optimistic that in that environment, we ought to be able to generate a new platform opportunity. Just like many things we talked about today, it is entirely impossible to predict. But we are striving for that this year and believe that we are poised to make that happen. But the timing of it is very difficult to predict. And so we'll just keep working hard to make it happen.

Our next question comes from the line of Tim Jenkins from AGC Capital.

I just wanted to better understand the private equity environment that you're seeing out there, the competition and so forth.

Sure. Well, as many of you know, we do compete with private equity firms in the acquisition of new subsidiary companies. I think it's very much consistent with what I just described, but I'll add a couple of comments there. I think the transaction, the environment right now for transactions is a little bit slow. I don't think there's a lot of activity at the moment. But again, based on looking at the last week or 2, which I recognize is a very short period of time, we may be seeing a slight increase in activity. And so I have -- I'm certain that, that is reflective of the private equity buyer community as well. The one thing I'll -- or a couple of things, I should say, that I'll add is, as it has been for the last several years, based on all of the industry data available to us, the private equity firms continue to have a lot of available capital to deploy. There are funds that are approaching the end of their investment period, which may push them to deploy capital and the debt markets also remain strong in support of a private equity firm's buyout transaction. So I think that results in a market that, as we've discussed in the past, leads to solid valuations for high-quality opportunities. So I think that's market that we'll find ourselves in for the time being. I don't see that changing. So hopefully, that addresses your concerns. I would summarize it as limited deal flow at the moment although hopefully increasing and some signs of it increasing are actually taking place from our perspective. Lots of available capital from the private equity firms to deploy, supported by a robust debt market.

And then just the last statement. I know you probably addressed Arnold Magnetic to some extent. But just stepping back, when you think about the long-term growth sort of organic growth opportunity, could you maybe frame that for me? Is it something in the very long term you think could grow sort of constant single digits? Or how should someone think of that in the context of cyclicality?

Yes, I think that when we acquired Arnold, we looked at it over the long term as a mid-single-digit grower with the ability -- with some outperformance in the success of some initiatives to approach mid- to higher single digits. But I think that as a base case scenario, we would consider Arnold to be a mid-single-digit grower over the long term.

Our next question is a follow-up from the line of Troy Ward of KBW. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Just a follow-up from Vernon's conversation. So when you identify a company, what's your typical due diligence time frame? So how long does it take from when you identify or foreseen opportunity til it closes?

Well, I'd break that down into a couple of stages because I think that when we first see a company, there's a period of getting to know that company and provided that process goes well, you'll ultimately sign a letter of intent to acquire that company subject to what I'll call the formal due diligence process. Whereas the -- from getting to know them up to letter of intent certainly involves a lot of due diligence. But in terms of our retention of the typical third parties that help us in the spending of that capital, that typically would happen largely after we enter a letter of intent. So from letter of intent to closing, which is oftentimes a market-driven time period, I would say 45 to 60 days would be pretty typical. We had situations where that has been a longer period of time. But I would say in this market right now, 45 to 60 days in terms of closing from letter of intent to closing. Between first meeting and letter of intent can really depend on the process. I mean, we tried to generate some opportunities that are internally generated, which could involve cold calling someone, getting to know them, spending a lot of time with them where you -- it might be over a year before you even can contemplate trying to propose something that would result in a letter of intent. In other more structured processes, led by an investment banker, for example, you may receive information on a transaction, get a management meeting, do some preliminary due diligence and work towards submitting a letter of intent. That could be a 45-day process in and of itself. Maybe a little bit longer, perhaps even a little bit shorter to the extent someone's got some time constraints. So I know that that's a lot of different data points but does, at least, frame it for you? Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Yes, it does. And so based on the kind of the tone of your commentary, I can assume that maybe you don't currently have a letter -- you're not currently under a letter of intent with anybody?

We normally don't disclose that, but that is a true statement.

Thank you. And ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.