Business Overview and History

Compass Diversified Holdings (CODI) and Compass Group Diversified Holdings LLC were both formed in November 2005 with the mission of acquiring and actively managing a group of small to middle-market businesses headquartered in North America. The company's strategy has been to identify and acquire niche market leaders with sustainable competitive advantages, strong cash flow characteristics, and opportunities for growth.

Over the years, CODI has successfully built a diversified portfolio of companies across two primary business segments: Branded Consumer and Industrial. The company's acquisition approach is unique, as it not only provides capital but also actively partners with management teams to drive growth and innovation.

CODI's Branded Consumer businesses include well-known names such as Ergobaby, acquired in September 2010; 5.11, acquired in August 2016; BOA, acquired in October 2020; Lugano Diamonds, acquired in September 2021; and PrimaLoft, acquired in July 2022. These businesses are leaders in their respective product categories and capitalize on valuable brand names.

The Industrial segment is comprised of companies like Arnold, acquired in March 2012; Sterno, acquired in October 2014; and Altor Solutions, acquired in February 2018. These businesses focus on manufacturing and selling products and services within specific market sectors.

Throughout its history, CODI has faced challenges such as navigating dynamic macroeconomic environments, including inflationary pressures and higher interest rates, which have impacted consumer spending. The company has also dealt with supply chain disruptions and changing market conditions that have affected some of its industrial businesses. Despite these challenges, CODI has continued to execute on its strategy of owning and actively managing innovative, middle-market companies with strong competitive positions in their markets.

Financial Performance and Outlook

CODI's financial performance has been impressive, with the company delivering strong results despite the dynamic macroeconomic environment. In the third quarter of 2024, the company reported consolidated net sales of $582.6 million, representing an 11.8% year-over-year increase. On a pro forma basis, excluding the impact of acquisitions, sales grew 6.6% in the quarter.

The company's branded consumer businesses were the primary driver of growth, with Lugano, BOA, PrimaLoft, and The Honey Pot Co. all delivering double-digit revenue increases. While the industrial segment faced some headwinds, with Altor Solutions experiencing challenges, Arnold continued to perform well.

CODI's adjusted EBITDA in the third quarter was $114 million, a 28% increase compared to the same period in 2023. This impressive performance, coupled with the company's focus on operational excellence and strategic investments, prompted CODI to raise its full-year 2024 guidance. The company now expects consolidated pro forma subsidiary adjusted EBITDA to be between $510 million and $525 million, up from the prior range of $500 million to $515 million.

Financials

CODI's financial position remains strong, with a total leverage ratio of 3.68 as of September 30, 2024. The company has ample liquidity, with $71.9 million in cash and $480 million available on its revolving credit facility. This financial flexibility allows CODI to fund the growth of its subsidiaries, pursue strategic acquisitions, and opportunistically repurchase its own shares.

In the third quarter, CODI raised over $17 million through its at-the-market preferred stock offering program, further strengthening its capital structure and lowering its long-term cost of capital. The company also announced a new $100 million share repurchase program, underscoring its confidence in the intrinsic value of its business and its continued growth prospects.

For the third quarter of 2024, CODI reported revenue of $582,623,000, representing an 11.8% year-over-year increase. Net income for the quarter was $22,064,000. Operating cash flow (OCF) for the quarter was negative $29,227,000, while free cash flow (FCF) was negative $44,815,000. The increase in revenue was driven by growth across the company's branded consumer businesses, including Lugano, BOA, PrimaLoft, and The Honey Pot Co. This was partially offset by the divestiture of Crosman from Velocity Outdoor and more modest growth in the industrial businesses.

Liquidity

CODI's financial position remains strong, with a total leverage ratio of 3.68 as of September 30, 2024. The company has ample liquidity, with $71.9 million in cash and $486.6 million available on its 2022 Revolving Credit Facility as of September 30, 2024. This financial flexibility allows CODI to fund the growth of its subsidiaries, pursue strategic acquisitions, and opportunistically repurchase its own shares. The company's current ratio stands at 4.22, while its quick ratio is 1.62, indicating a strong ability to meet short-term obligations.

Diversified Portfolio and Synergistic Acquisitions

CODI's diversified portfolio of businesses, spanning both branded consumer and industrial sectors, provides the company with valuable insights into the broader economic landscape. The company's proprietary "CODI Momentum Index," which tracks data from its subsidiaries, indicated a stable outlook for the fourth quarter of 2024 and into 2025.

In addition to organic growth initiatives, CODI remains focused on strategic acquisitions that align with its long-term vision. In January 2024, the company completed the acquisition of The Honey Pot Co., a leading better-for-you feminine care brand, further strengthening its branded consumer portfolio. More recently, in October 2024, CODI's subsidiary Altor Solutions acquired Lifoam Industries, a manufacturer of temperature-controlled packaging solutions, to expand its capabilities and support faster growth.

These acquisitions demonstrate CODI's ability to identify and integrate synergistic businesses that can benefit from the company's active management approach and access to capital. As the M&A environment shows signs of improvement, CODI is well-positioned to continue capitalizing on attractive middle-market opportunities.

Branded Consumer Businesses Performance

5.11, a leading provider of purpose-built technical apparel and gear, reported net sales of $139.22 million in Q3 2024, an increase of 3.0% compared to the prior year period. Gross profit for 5.11 was $74.72 million, representing a gross margin of 53.7%, with segment operating income of $14.94 million.

BOA, creator of the revolutionary BOA Fit System, saw net sales of $45.61 million in Q3 2024, a 22.3% increase year-over-year. Gross profit was $28.67 million, with a 62.9% gross margin and segment operating income of $10.36 million.

Ergobaby reported net sales of $21.75 million in Q3 2024, a 6.3% decrease compared to the prior year. Gross profit was $13.82 million, with a 63.5% gross margin and segment operating income of $0.94 million.

Lugano Diamonds delivered strong results with net sales of $118.58 million in Q3 2024, a 50.6% increase year-over-year. Gross profit was $72.06 million, representing a 60.8% gross margin, and segment operating income reached $47.98 million.

PrimaLoft reported net sales of $13.69 million in Q3 2024, with gross profit of $8.65 million and a 63.2% gross margin. Segment operating income was $2.04 million.

The Honey Pot Co., a recent acquisition, reported net sales of $31.55 million in Q3 2024, with gross profit of $16.90 million and a 53.6% gross margin. Segment operating income was $2.82 million.

Velocity Outdoor saw net sales decrease to $28.81 million in Q3 2024, primarily due to the divestiture of the Crosman airgun division. Gross profit was $8.86 million, with a 30.8% gross margin and segment operating income of $1.49 million.

Industrial Businesses Performance

Altor Solutions reported net sales of $52.13 million in Q3 2024, a 12.0% decrease compared to the prior year. Gross profit was $16.08 million, with a 30.8% gross margin and segment operating income of $6.00 million.

Arnold saw net sales increase to $46.10 million in Q3 2024, a 10.2% growth year-over-year. Gross profit was $13.70 million, with a 29.7% gross margin and segment operating income of $5.42 million.

Sterno reported net sales of $85.19 million in Q3 2024, a 6.2% increase compared to the prior year. Gross profit was $21.12 million, with a 24.8% gross margin and segment operating income of $6.97 million.

Guidance and Future Outlook

Based on the strong performance in Q3 2024 and the momentum across its businesses, 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, inclusive of the Honeypot acquisition. This increase is primarily driven by the branded consumer vertical, which is expected to deliver adjusted EBITDA between $390 million and $400 million.

For the industrial vertical, adjusted EBITDA is now expected to be between $120 million and $125 million for the full year 2024. 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.

Risks and Challenges

While CODI has demonstrated resilience in the face of macroeconomic headwinds, the company is not immune to the potential risks and challenges that come with managing a diversified portfolio of businesses. These include:

1. Exposure to global supply chain disruptions and inflationary pressures that could impact the performance of its subsidiaries. 2. Integration and execution risks associated with future acquisitions, which could strain resources or fail to deliver expected synergies. 3. Potential regulatory changes or tariffs that could affect CODI's international operations and the import/export activities of its subsidiaries. 4. Reliance on the continued performance and growth of its branded consumer businesses, which account for a significant portion of the company's overall revenue and profitability.

CODI's management team is actively monitoring these risks and implementing strategies to mitigate their potential impact on the company's operations and financial results.

Conclusion

Compass Diversified Holdings has established itself as a unique and innovative conglomerate, leveraging its active management approach and strategic capital allocation to create value for shareholders. The company's diverse portfolio of leading middle-market businesses, combined with its financial flexibility and disciplined acquisition strategy, position CODI for continued success in the years ahead.

As CODI navigates the dynamic macroeconomic environment, its focus on identifying and empowering disruptive, high-growth companies should enable the company to capitalize on attractive opportunities and drive long-term shareholder returns. The recent strong performance across its branded consumer businesses and the strategic acquisitions made in 2024 demonstrate CODI's ability to execute its growth strategy effectively. With raised guidance for 2024 and a positive outlook for its diverse portfolio of businesses, CODI appears well-positioned to continue delivering value to its shareholders in the coming years.