Overview of Compass Diversified Holdings

Compass Diversified Holdings (the “Company”) is an investment holding company that owns and manages a diverse portfolio of middle-market businesses. The Company was formed in 2006 and has since acquired 24 businesses and divested 14 others.

The Company categorizes its businesses into two main groups - branded consumer businesses and industrial businesses. Branded consumer businesses are those that capitalize on a valuable brand name, while industrial businesses focus on manufacturing and selling specific products or services.

Some of the Company’s key branded consumer businesses include 5.11, BOA, Lugano, PrimaLoft, and The Honey Pot Co. Industrial businesses include Altor Solutions, Arnold, and Sterno. The Company aims to acquire market-leading companies in niche industries and work with their management teams to drive growth and profitability.

2024 Highlights and Recent Events

In 2024, the Company made several notable moves:

• Acquired The Honey Pot Co., a leading “better-for-you” feminine care brand, for $380 million.
• Sold its Ergobaby subsidiary for $99.1 million, recording a $6.1 million gain.
• Sold the Crosman airgun division of its Velocity Outdoor business, recording a $24.2 million loss.
• Declared $1.00 per share in distributions to common shareholders and $1.8125-$1.96875 per share in distributions to preferred shareholders.

Financial Performance

The Company’s consolidated net revenues increased 11.9% in 2024 to $2.20 billion, driven by strong performance in businesses like Lugano, BOA, and The Honey Pot Co. Gross profit margin improved to 45.5% from 42.4% in the prior year, reflecting a favorable product mix.

Selling, general and administrative expenses increased 17.0% to $587.5 million, primarily due to higher costs at Lugano, Arnold, and The Honey Pot Co. related to growth initiatives. Management fees paid to the external manager also rose to $74.8 million.

Amortization expense increased $11.4 million to $99.8 million, largely from the intangible assets recognized with the Honey Pot Co. acquisition. The Company also recorded $8.2 million in impairment charges related to its Velocity Outdoor business.

Net income from continuing operations was $42.3 million in 2024, compared to a loss of $44.8 million in 2023. The effective tax rate was 53.7% in 2024 versus (102.0)% in 2023, driven by limitations on net operating loss carryforwards and the loss on the Crosman sale.

Segment Performance

The Company’s branded consumer businesses generally performed well in 2024:

• 5.11’s revenue was flat year-over-year, with gross margin declining slightly to 51.3% due to higher inventory reserves. Operating income decreased 16.9%.
• BOA saw a 22.5% revenue increase and a 270 basis point improvement in gross margin to 62.5%, driving a 72.9% jump in operating income.
• Lugano’s revenue surged 52.7% as it expanded its retail footprint, leading to a 83.6% increase in operating income.
• PrimaLoft’s revenue grew 10.7%, but it recorded a $57.8 million goodwill impairment in 2023, resulting in an operating loss.
• The Honey Pot Co. contributed $104.6 million in revenue and $0.1 million in operating income post-acquisition.

The industrial businesses had a more mixed performance:

• Altor Solutions’ revenue was relatively flat, but operating income declined 37.1% due to lower gross margins.
• Arnold’s revenue increased 3.1%, but operating income fell 65.0% due to higher costs related to facility relocations.
• Sterno’s revenue dipped 1.7%, but operating income rose 26.5% on improved gross margins.

Liquidity and Capital Resources

The Company had $59.7 million in cash and cash equivalents as of December 31, 2024. It generated $67.6 million in negative cash flow from operations in 2024, primarily due to increased working capital needs.

Investing activities used $422.5 million of cash, mainly for the Honey Pot Co. acquisition and an add-on acquisition at Altor. Financing activities provided $100.6 million, including $122.6 million from equity issuances offset by debt repayments and distributions.

As of year-end 2024, the Company had $1.0 billion in 5.250% Senior Notes due 2029, $300 million in 5.000% Senior Notes due 2032, and $375 million outstanding on its 2022 Term Loan. It also had $110 million drawn on its $500 million 2022 Revolving Credit Facility. The Company’s leverage ratios remained within required covenants.

Outlook and Trends

The Company expects continued uncertainty around macroeconomic conditions, including inflation, interest rates, and supply chain challenges. It anticipates its businesses will focus on driving sales growth, preserving margins, gaining market share, and pursuing strategic acquisitions.

The Company sees opportunities to expand its branded consumer businesses through new product development, distribution growth, and international expansion. Its industrial businesses will likely emphasize operational excellence, cost savings, and selective acquisitions.

Overall, the Company believes its diversified portfolio of market-leading businesses positions it well to navigate the current environment and continue creating value for shareholders.

Analysis

Compass Diversified Holdings delivered a solid financial performance in 2024, with revenue growth, margin expansion, and a return to profitability. The Company’s strategy of owning a diverse set of niche market leaders appears to be paying off, as several of its branded consumer businesses like Lugano, BOA, and The Honey Pot Co. reported strong results.

However, the Company also faced some challenges, including the impairment charge at PrimaLoft and the loss on the Crosman divestiture. The industrial businesses were more mixed, with Altor and Arnold struggling to maintain profitability amid higher costs.

The Company’s liquidity position remains solid, with ample availability under its credit facility to fund future acquisitions and investments. The recent amendment to increase the term loan capacity provides additional financial flexibility.

Looking ahead, the Company’s focus on sales growth, margin preservation, and strategic M&A seems well-aligned with the current market environment. Its ability to navigate macroeconomic headwinds and drive consistent performance across its portfolio will be key to its continued success.

Overall, Compass Diversified Holdings appears to be executing well on its strategy of building a diversified holding company of leading middle-market businesses. While challenges remain, the Company’s diversification, financial strength, and experienced management team position it well for the future.