Business Overview and History

Compass Diversified Holdings (CODI) is a unique and diversified conglomerate that owns and manages a portfolio of leading middle-market businesses across various industries. The company's strategy of acquiring and actively managing niche market leaders has allowed it to create substantial long-term value for shareholders.

Compass Diversified Holdings was incorporated in Delaware in November 2005 with the goal of acquiring and managing a group of small and middle-market businesses headquartered in North America. The company employs a disciplined approach to identify, acquire, and grow its subsidiary businesses, which operate in a diverse range of industries, including branded consumer products, industrial manufacturing, and specialty retail.

CODI made its first acquisition in September 2010 when it acquired Ergobaby, a designer and distributor of baby carriers and related products. The company continued to expand its portfolio with the acquisition of Arnold Magnetic Technologies, a global manufacturer of engineered magnetic solutions, in March 2012. In October 2014, CODI further diversified its holdings by acquiring Sterno, a manufacturer of portable food warming systems.

The company's growth continued with the acquisition of 5.11, a leading provider of tactical apparel and gear, in August 2016. This was followed by the acquisition of Velocity Outdoor, a manufacturer of archery products and hunting accessories, in June 2017. In February 2018, CODI expanded its industrial segment with the acquisition of Altor Solutions, a designer and manufacturer of protective foam solutions.

Throughout its history, CODI has faced challenges, including the need to improve financial processes and controls at its subsidiary businesses after acquisition. The company's internal audit team has worked closely with the subsidiaries to systematically review and enhance their financial controls, positioning the businesses for future growth. In 2021, CODI further diversified its portfolio by acquiring Lugano Diamonds, a high-end jewelry designer and manufacturer, and PrimaLoft, a provider of synthetic insulation materials.

Today, CODI owns ten diverse operating segments across its branded consumer and industrial businesses. The company classifies these subsidiaries into two main groups: Branded Consumer businesses and Industrial businesses.

The Branded Consumer segment includes businesses that leverage valuable brand names in their respective market sectors, such as 5.11, BOA, Ergobaby, Lugano Diamonds, PrimaLoft, and The Honey Pot Co. These businesses are generally leaders in their product categories and have demonstrated strong growth potential. In contrast, the Industrial segment includes businesses that focus on manufacturing and selling specialized products and services within particular market niches, such as Altor Solutions, Arnold, and Sterno.

CODI's strategy is to actively manage its subsidiary businesses, providing them with strategic and operational support to drive organic growth and improve operational efficiency. The company works closely with the management teams of its subsidiaries to ensure they have the necessary resources, talent, and strategies in place to capitalize on market opportunities and enhance long-term value.

Financial Performance and Ratios

Over the past three years, CODI has delivered solid financial performance, with consistent revenue growth and improving profitability. In the latest fiscal year (2023), the company reported annual revenue of $2.06 billion, up from $1.72 billion in the prior year. Net income for the year was $246.29 million, compared to $36.39 million in the previous year. Operating cash flow for 2023 was $78.08 million, with free cash flow of $22.30 million.

In the most recent quarter (Q3 2024), CODI reported revenue of $582.62 million, up 11.8% year-over-year. Net income for the quarter was $31.46 million. However, operating cash flow was negative at -$29.23 million, with free cash flow also negative at -$44.82 million.

The company's financial ratios demonstrate its strong financial position. As of the latest quarter, CODI had a current ratio of 4.22 and a quick ratio of 1.62, indicating a robust ability to meet its short-term obligations. The company's debt-to-equity ratio was 1.44, suggesting a prudent capital structure. Additionally, CODI's return on equity was 10.55%, reflecting its ability to generate strong returns for its shareholders.

Liquidity

CODI maintains a strong liquidity position, which supports its ability to pursue growth opportunities and manage its existing portfolio. As of September 30, 2024, the company had cash and cash equivalents of $71.95 million. Additionally, CODI had $486.60 million available under its 2022 Revolving Credit Facility. This combination of cash on hand and available credit provides ample financial flexibility to fund operations, make strategic investments, and pursue acquisitions when attractive opportunities arise.

Recent Developments and Outlook

In the most recent quarter, CODI reported consolidated net sales of $582.6 million, representing an 11.8% increase year-over-year. The company's adjusted EBITDA for the quarter was $114 million, a 28% increase compared to the same period in the prior year and a new quarterly record. This strong performance was driven by continued growth in the Branded Consumer segment, particularly at Lugano Diamonds, BOA, PrimaLoft, and The Honey Pot Co.

The Industrial segment, while facing some headwinds, has also shown signs of stabilization, with Arnold delivering solid results and Altor Solutions making progress in adapting to changing market conditions. CODI has also been actively managing its portfolio, completing the acquisition of Lifoam in October 2024 to expand Altor's capabilities and support its growth strategy.

Looking ahead, CODI has raised its full-year 2024 guidance. The company now expects consolidated pro forma subsidiary adjusted EBITDA to be between $510 million and $525 million for the full year 2024. This includes an increase in the branded consumer vertical, which is now expected to deliver adjusted EBITDA between $390 million and $400 million. Adjusted EBITDA for the industrial vertical is now expected to be between $120 million and $125 million. On a consolidated basis, CODI expects adjusted EBITDA to be between $420 million and $435 million, inclusive of corporate costs and management fees of around $90 million. Full-year 2024 adjusted earnings are expected to be between $155 million and $165 million.

The company's confidence in its growth prospects is further demonstrated by its recently announced $100 million share repurchase program, which indicates management's belief that the current share price does not fully reflect the intrinsic value of the business.

Subsidiary Performance

CODI's portfolio of businesses demonstrated varied performance in the third quarter of 2024:

Branded Consumer Businesses:

5.11 reported net sales of $139.22 million, an increase of 3.0% compared to Q3 2023. Gross profit margin improved to 53.7% from 52.0% in the prior year.

BOA saw significant growth with net sales of $45.61 million, up 22.3% year-over-year. Gross profit margin also increased to 62.9% from 58.9%.

Ergobaby experienced a slight decline with net sales of $21.75 million, down 6.3% compared to Q3 2023. Gross profit margin decreased slightly to 63.5% from 64.8%.

Lugano Diamonds showed strong performance with net sales of $118.58 million, a 50.6% increase year-over-year. Gross profit margin improved to 60.8% from 57.7%.

PrimaLoft reported net sales of $13.69 million, with gross profit margin increasing to 63.2% from 59.8% in Q3 2023.

The Honey Pot Co. had net sales of $31.55 million with a gross profit margin of 53.6% in Q3 2024.

Velocity Outdoor saw a significant decrease in net sales to $28.81 million, down 47.1% year-over-year, primarily due to the divestiture of the Crosman airgun division in April 2024. However, gross profit margin improved to 30.8% from 29.1%.

Industrial Businesses:

Altor Solutions reported net sales of $52.13 million, a decrease of 12.0% compared to Q3 2023. Gross profit margin slightly decreased to 30.8% from 31.2%.

Arnold saw growth with net sales of $46.10 million, up 10.2% year-over-year. Gross profit margin improved to 29.7% from 28.5%.

Sterno reported net sales of $85.19 million, an increase of 6.2% compared to Q3 2023. Gross profit margin slightly improved to 24.8% from 24.6%.

Risks and Challenges

While CODI's diversified business model and active management approach have been successful, the company is not without its risks. As a conglomerate, CODI is exposed to the unique challenges faced by each of its subsidiary businesses, which can be impacted by factors such as changing market conditions, competitive pressures, and regulatory changes.

Additionally, the company's growth strategy, which includes both organic initiatives and strategic acquisitions, carries integration and execution risks. CODI must carefully manage the integration of new businesses to ensure they are aligned with the company's long-term vision and can contribute to its overall performance.

Geopolitical and macroeconomic uncertainties, such as ongoing trade tensions and the potential for economic downturns, also pose risks to CODI's operations and financial results. The company must remain vigilant in monitoring these external factors and adapting its strategies accordingly.

Conclusion

Compass Diversified Holdings is a unique and well-diversified conglomerate that has consistently demonstrated its ability to identify, acquire, and actively manage leading middle-market businesses. The company's strategic approach, coupled with its strong financial position and disciplined capital allocation, positions it for continued long-term growth and value creation. The recent strong performance across many of its subsidiaries, particularly in the Branded Consumer segment, and the raised guidance for 2024 indicate positive momentum for the company.

While CODI faces various risks and challenges, including the need to manage a diverse portfolio of businesses and navigate macroeconomic uncertainties, its proven track record and the resilience of its diversified business model make it a compelling investment opportunity for investors seeking exposure to a well-managed and diversified portfolio of niche market leaders. The company's ability to generate strong cash flows, maintain a healthy liquidity position, and deliver consistent growth across its various segments underscores its potential for long-term value creation.