Overview of the Company’s Financial Performance

Compass Diversified Holdings (the “Company”) is a diversified holding company that owns and manages a portfolio of leading middle-market businesses. The Company reported its financial results for the three and six months ended June 30, 2024.

Consolidated net revenues for the three months ended June 30, 2024 increased by 11.4% to $542.6 million compared to the same period in 2023. This was driven by strong performance in several of the Company’s branded consumer businesses, including BOA (+42.1% increase in net sales) and Lugano (+63.0% increase in net sales). The Honey Pot Co., which was acquired in January 2024, contributed $24.2 million in net revenues in the second quarter. However, the Company saw decreases in net revenue at Velocity Outdoor (-50.6% decrease) and Altor Solutions (-14.2% decrease).

For the six months ended June 30, 2024, consolidated net revenues increased 9.9% to $1.07 billion compared to the first half of 2023. Similar to the quarterly results, the increase was led by the branded consumer businesses, particularly BOA (+27.5% increase) and Lugano (+62.1% increase). The Honey Pot Co. contributed $44.3 million in net revenues post-acquisition.

Profitability and Margins

Consolidated gross profit as a percentage of net revenues was 47.8% in the second quarter of 2024, up from 44.5% in the same period of 2023. The increase was driven by the higher-margin branded consumer businesses, which had gross margins of 56.7% compared to 53.1% a year earlier. The industrial businesses saw a slight decrease in gross margins from 29.3% to 28.1%.

For the six-month period, consolidated gross profit margin improved to 47.0% from 43.4% in the first half of 2023, again reflecting the stronger performance of the branded consumer segment.

Selling, general and administrative (SG&A) expenses increased $17.7 million in the second quarter and $38.1 million in the first half of 2024 compared to the prior year periods. This was primarily due to higher marketing, personnel, and fulfillment costs at the consumer brands, as well as $3.5 million in transaction costs related to the acquisition of The Honey Pot Co.

Operating income for the three months ended June 30, 2024 was $61.3 million, up from $42.1 million a year earlier. For the six-month period, operating income increased to $99.9 million from $76.7 million. The improvement was driven by the higher gross profit, partially offset by the increase in SG&A expenses.

Segment Performance

The Company’s branded consumer businesses, which include 5.11, BOA, Ergobaby, Lugano, PrimaLoft, and The Honey Pot Co., generally performed well in the first half of 2024. BOA and Lugano saw particularly strong revenue and profit growth, while 5.11 and Ergobaby maintained solid profitability. The Honey Pot Co. experienced a decline in gross margins due to channel mix shifts and higher fixed costs.

The industrial businesses, comprising Altor Solutions, Arnold, and Sterno, had a more mixed performance. Altor Solutions saw a decline in revenue and profitability due to softness in its end markets. Arnold’s revenue grew but margins contracted. Sterno was able to improve its gross margin, though revenue declined.

The Velocity Outdoor segment, which includes the recently divested Crosman airgun business, saw a significant drop in revenue and profitability. This was primarily due to the Crosman divestiture, as well as softness in the overall hunting and fishing market for the remaining product categories.

Liquidity and Capital Resources

As of June 30, 2024, the Company had $68.4 million in cash and cash equivalents, down from $450.5 million at the end of 2023. This decrease was largely due to the $380 million acquisition of The Honey Pot Co. in January 2024, which was funded with cash on hand.

The Company has a $600 million revolving credit facility, of which $54 million was outstanding as of June 30, 2024. It also has $1.3 billion in senior notes outstanding. Total debt at the end of the second quarter was $1.72 billion.

Cash flow from operations was negative $48.4 million in the first half of 2024, compared to positive $37.2 million in the same period of 2023. This was driven by a larger working capital build, particularly at the Lugano business as it continues to expand.

Investing activities used $336.1 million of cash in the first six months of 2024, primarily for the Honey Pot Co. acquisition. In the prior year period, investing activities provided $117.8 million, reflecting the sale of the Advanced Circuits business.

Financing activities provided $3.4 million of cash in the first half of 2024, compared to using $149.6 million in the prior year period. The current year included $14.3 million in equity issuances and $41.7 million in equity contributions related to the Honey Pot Co. acquisition, offset by debt repayments and distributions.

Outlook and Strategic Priorities

Looking ahead, the Company expects the macroeconomic environment to remain dynamic, with continued inflationary pressures and higher interest rates impacting consumer spending, particularly for discretionary items. However, the Company believes its diversified business model and focus on niche market-leading companies position it well to navigate these challenges.

The Company’s key areas of focus for 2024 include:

• Driving sales growth through new product development, distribution expansion, and international expansion
• Improving free cash flow through increased profitability and effective working capital management
• Raising prices to offset rising input costs and preserve margins
• Gaining market share at the expense of less well-capitalized competitors
• Continuing to pursue operational excellence and cost savings initiatives
• Growing through disciplined, strategic acquisitions

The Company remains committed to its strategy of owning and managing a diversified portfolio of leading middle-market businesses. Through a combination of organic initiatives and selective acquisitions, the Company aims to create long-term value for its shareholders.

Analysis and Conclusion

Compass Diversified Holdings delivered a solid financial performance in the first half of 2024, with strong growth in its branded consumer segment offsetting some challenges in the industrial and outdoor recreation businesses. The acquisition of The Honey Pot Co. in January 2024 added a new high-growth, higher-margin brand to the portfolio.

The Company’s ability to maintain profitability and cash flow despite macroeconomic headwinds demonstrates the benefits of its diversified business model. The branded consumer brands, in particular, have shown resilience and the ability to expand margins. However, the industrial and outdoor segments remain exposed to softening demand in certain end markets.

Looking ahead, the Company’s strategic priorities of driving organic growth, improving operational efficiency, and pursuing accretive acquisitions appear well-aligned with the current environment. The Company’s solid liquidity position and access to capital should enable it to continue executing on its growth strategy.

Overall, Compass Diversified Holdings’ first-half 2024 results indicate that the Company is navigating the complex macroeconomic landscape effectively and positioning itself for continued success. The diversified portfolio, focus on market-leading businesses, and disciplined approach to capital allocation suggest the Company is well-equipped to create value for shareholders over the long term.