Overview of Subsidiary Businesses

Compass Diversified (the Company) owns and manages a diverse group of subsidiary businesses across two main segments - Branded Consumer and Industrial. The Branded Consumer segment includes 5.11, BOA, Ergobaby, Lugano, PrimaLoft, The Honey Pot Co., and Velocity Outdoor. The Industrial segment includes Altor Solutions, Arnold, and Sterno.

The subsidiary businesses operate in a variety of industries, from tactical apparel and gear to high-end jewelry to engineered solutions for aerospace and defense. Many of the businesses are market leaders in their respective niches, known for innovation, quality, and strong customer relationships.

Financial Performance

For the first nine months of 2024, Compass Diversified reported consolidated net revenues of $1.65 billion, up 10.6% from the same period in 2023. This growth was driven by strong performance in several of the Branded Consumer businesses, particularly Lugano, BOA, and The Honey Pot Co. The Industrial segment saw more mixed results, with Altor Solutions and Sterno experiencing declines in net revenue.

Gross profit as a percentage of net revenue increased to 47.0% in the first nine months of 2024, up from 43.4% in the prior year period. This improvement was primarily due to the higher-margin Branded Consumer businesses making up a larger portion of overall revenue. The Branded Consumer segment had a gross margin of 55.5% compared to 28.1% for the Industrial segment.

Selling, general, and administrative (SG&A) expenses increased $64.0 million or 16.1% year-over-year, as the Company invested in marketing, headcount, and infrastructure to support growth, particularly at the Branded Consumer businesses. SG&A as a percentage of net revenue was 27.9% in the first nine months of 2024 compared to 26.6% in the prior year period.

Operating income for the first nine months of 2024 was $170.2 million, up 81.0% from $94.0 million in the same period of 2023. This increase was driven by the higher gross margins and revenue growth, partially offset by the rise in SG&A expenses.

Net income from continuing operations for the first nine months of 2024 was $20.2 million, compared to a net loss of $2.3 million in the prior year period. The improvement was due to the higher operating income, partially offset by interest expense, impairment charges, and income taxes.

Segment Performance Highlights

Branded Consumer Segment

• 5.11 saw a 0.4% increase in net revenue for the first nine months of 2024, with growth in international and direct-to-agency sales offsetting declines in direct-to-consumer. Gross margin improved to 53.7% from 52.7% in the prior year period.
• BOA reported a 25.8% increase in net revenue, driven by strong demand across its key industries. Gross margin expanded to 62.3% from 59.6% due to manufacturing leverage and favorable product mix.
• Lugano had an exceptional performance, with net revenue up 57.7% and gross margin increasing to 59.7% from 55.7% as the business expanded its retail footprint and benefited from pricing power on high-end jewelry.
• The Honey Pot Co., acquired in January 2024, contributed $75.9 million in net revenue in the post-acquisition period. However, gross margin declined to 49.8% from 57.9% in the prior year due to channel mix shifts and higher fixed costs.

Industrial Segment

• Altor Solutions saw net revenue decline 13.1% due to softness in the food delivery and cold chain markets. Gross margin was relatively stable at 30.0%.
• Arnold reported a 6.9% increase in net revenue, driven by stronger demand in aerospace, defense, and energy markets. Gross margin dipped slightly to 29.1% from 29.8%.
• Sterno’s net revenue declined 2.6%, as consumer discretionary spending was impacted by inflation. However, gross margin improved to 26.3% from 24.3% due to favorable cost trends.

Strengths and Weaknesses

The Company’s key strengths include:

• Diversified portfolio of market-leading businesses across attractive end markets
• Strong brand equity and customer loyalty at many of the Branded Consumer subsidiaries
• Ability to drive operational improvements and cost savings through active management
• Successful track record of acquiring and integrating complementary businesses

Weaknesses and challenges include:

• Exposure to macroeconomic headwinds impacting consumer spending and inflation
• Integration and performance risks associated with recent and future acquisitions
• Reliance on intercompany debt and cash flows from subsidiaries to service corporate obligations
• Potential for goodwill and intangible asset impairments at underperforming businesses

Outlook and Strategic Priorities

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

The Company’s key strategic priorities for 2024 and beyond include:

• Driving organic sales growth through new product development, distribution expansion, and international expansion
• Improving operational efficiency and cash flow generation to enable continued investment
• Selectively raising prices to offset rising input costs and preserve margins
• Gaining market share by leveraging the scale and resources of the platform
• Pursuing strategic acquisitions that complement the existing portfolio
• Maintaining a disciplined approach to capital allocation and balance sheet management

Overall, Compass Diversified appears to be a well-managed, diversified holding company with a portfolio of strong subsidiary businesses. While near-term macroeconomic headwinds present challenges, the Company’s strategic focus on market leadership, operational excellence, and disciplined capital allocation should enable it to continue delivering value for shareholders over the long term.