COMPASS DIVERSIFIED HOLDINGS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q) | MarketScreener (2023)

This Item 2 contains forward-looking statements. Forward-looking statements inthis Quarterly Report on Form 10-Q are subject to a number of risks anduncertainties, some of which are beyond our control. Our actual results,performance, prospects or opportunities could differ materially from thoseexpressed in or implied by the forward-looking statements. Additional risks ofwhich we are not currently aware or which we currently deem immaterial couldalso cause our actual results to differ, including those discussed in thesection entitled "Forward-Looking Statements" included elsewhere in thisQuarterly Report on Form 10-Q as well as those risk factors discussed in thesection entitled "Risk Factors" in our Annual Report on Form 10-K for the yearended December 31, 2021 and in the section entitled "Risk Factors" in Part II,Item 1A of this Quarterly Report on Form 10-Q.

Overview

Compass Diversified Holdings ("Holdings", or the "Trust") was incorporated inDelaware on November 18, 2005. Compass Group Diversified Holdings LLC (the"LLC") was also formed on November 18, 2005. Holdings and the LLC (collectively,the "Company") were formed to acquire and manage a group of small andmiddle-market businesses headquartered in North America. The LLC is theoperating entity and is a controlling owner of ten businesses, or operatingsegments, at June 30, 2022. The segments are as follows: 5.11 Acquisition Corp.("5.11"), Boa Holdings Inc. ("BOA"), The Ergo Baby Carrier, Inc. ("Ergobaby"),Lugano Holdings, Inc., Inc. ("Lugano Diamonds" or "Lugano"), Marucci Sports, LLC("Marucci" or "Marucci Sports"), Velocity Outdoor, Inc. ("Velocity Outdoor" or"Velocity"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), FFICompass, Inc. ("Altor Solutions" or "Altor" (formerly "Foam Fabricators")), AMTAcquisition Corporation ("Arnold"), and The Sterno Group, LLC ("Sterno"). AtDecember 31, 2021 and June 30, 2022, Advanced Circuits has been classified asheld-for-sale. Refer to Note C - "Discontinued Operations" and Note Q-"Subsequent Events" for further discussion of Advanced Circuits.

We acquired our existing businesses (segments) that we own at June 30, 2022 asfollows: Ownership Interest - June 30, 2022 Business Acquisition Date Primary Diluted Advanced Circuits (1) May 16, 2006 71.8% 67.6% Ergobaby September 16, 2010 81.6% 72.8% Arnold March 5, 2012 98.0% 85.5% Sterno October 10, 2014 99.4% 90.8% 5.11 August 31, 2016 97.7% 88.2% Velocity Outdoor June 2, 2017 99.4% 87.7% Altor Solutions February 15, 2018 100.0% 91.2% Marucci Sports April 20, 2020 91.1% 82.0% BOA October 16, 2020 91.8% 83.3% Lugano September 3, 2021 59.9% 55.4%

(1) On October 13, 2021, the LLC, as the representative of the holders of stockand options of Advanced Circuits, entered into a definitive plan of merger tosell all of the outstanding securities of Advanced Circuits. Advanced Circuitshas been classified as held for sale at June 30, 2022. Subsequent to the end ofthe quarter, in July 2022, the plan of merger was terminated and AdvancedCircuits will be reclassified to continuing operations beginning in the quarterended September 30, 2022.

We categorize the businesses we own into two separate groups of businesses:(i) branded consumer businesses, and (ii) niche industrial businesses. Brandedconsumer businesses are characterized as those businesses that we believecapitalize on a valuable brand name in their respective market sector. Webelieve that our branded consumer businesses are leaders in their particularproduct category. Niche industrial businesses are characterized as thosebusinesses that focus on manufacturing and selling particular products andindustrial services within a specific market sector. We believe that our nicheindustrial businesses are leaders in their specific market sector.

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The following is an overview of each of our businesses:

Branded Consumer

5.11 - 5.11 is a leading provider of purpose-built technical apparel and gearfor law enforcement, firefighters, EMS, and military special operations as wellas outdoor and adventure enthusiasts. 5.11 is a brand known for innovation andauthenticity, and works directly with end users to create purpose-built apparel,footwear and gear designed to enhance the safety, accuracy, speed andperformance of tactical professionals and enthusiasts worldwide. Headquarteredin Irvine, California, 5.11 operates sales offices and distribution centersglobally, and 5.11 products are widely distributed in uniform stores, militaryexchanges, outdoor retail stores, its own retail stores and on 511tactical.com.

BOA - BOA Technology, creator of the revolutionary, award-winning, patented BOAFit System, partners with market-leading brands to make the best gear evenbetter. Delivering fit solutions purpose-built for performance, the BOA FitSystem is featured in footwear across snow sports, cycling, outdoor, athletic,workwear as well as performance headwear and medical bracing. The systemconsists of three integral parts: a micro-adjustable dial, high-tensilelightweight laces, and low friction lace guides combined with uniqueconfiguration applications, which together create a superior alternative tolaces, buckles, hook and loop (Velcro), and other traditional closure and fitsystems. Each configuration is designed and engineered to deliver superior fitand performance, and is backed by The BOA Lifetime Guarantee. BOA isheadquartered in Denver, Colorado and has offices in Austria, Greater China,South Korea, and Japan.

Ergobaby - Headquartered in Torrance, California, is a designer, marketer anddistributor of wearable baby carriers and accessories, blankets and swaddlers,nursing pillows, strollers and related products. Ergobaby primarily sells itsErgobaby and Baby Tula branded products through brick-and-mortar retailers,national chain stores, online retailers, its own websites and distributors andderives more than half of its sales from outside the United States.

Lugano - Lugano is a leading designer, manufacturer and marketer of high-end,one-of-a-kind jewelry sought after by some of the world's most discerningclientele. Lugano conducts sales via its own retail salons as well as pop-upshowrooms at Lugano-hosted or sponsored events in partnership with influentialorganizations in the equestrian, art and philanthropic community. Lugano isheadquartered in Newport Beach, California.

Marucci Sports - Founded in 2009 and headquartered in Baton Rouge, Louisiana,Marucci is a leading designer, manufacturer, and marketer of premium wood andmetal baseball bats, fielding gloves, batting gloves, bags, grips, protectivegear, sunglasses, on and off-field apparel, and other baseball and softballequipment used by professional and amateur athletes. Marucci also developsretail and sports training facilities, both as a corporate owned entity as wellas licensing these facilities as franchises. Marucci products are availablethrough owned websites, their team sales organization, Big Box Retailers, andthird party e-commerce & resellers.

Velocity Outdoor - A leading designer, manufacturer, and marketer of airguns,archery products, laser aiming devices and related accessories, Velocity Outdooroffers its products under the highly recognizable Crosman, Benjamin, LaserMax,Ravin and CenterPoint brands that are available through national retail chains,mass merchants, dealer and distributor networks. The airgun product categoryconsists of air rifles, air pistols and a range of accessories includingtargets, holsters and cases. Velocity Outdoor's other primary product categoriesare archery, with products including CenterPoint and Ravin crossbows,consumables, which includes steel and plastic BBs, lead pellets and CO2cartridges, lasers for firearms, and airsoft products. Velocity Outdoor isheadquartered in Bloomfield, New York.

Niche Industrial

Altor Solutions - Founded in 1957 and headquartered in Scottsdale, Arizona,Altor Solutions is a designer and manufacturer of custom molded protective foamsolutions and original equipment manufacturer (OEM) components made fromexpanded polystyrene (EPS) and expanded polypropylene (EPP). Altor operates 16molding and fabricating facilities across North America and provides products toa variety of end-markets, including appliances and electronics, pharmaceuticals,health and wellness, automotive, building products and others.

Arnold - Arnold serves a variety of markets including aerospace and defense,general industrial, motorsport/ automotive, oil and gas, medical, energy,reprographics and advertising specialties. Over the course of more than 100years, Arnold has successfully evolved and adapted our products, technologies,and manufacturing presence to meet the demands of current and emerging markets.Arnold engineers solutions for and produces high performance permanent magnets(PMAG), stators, rotors and full electric motors ("Ramco"), precision foilproducts (Precision

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Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission criticalin motors, generators, sensors and other systems and components. Arnold hasexpanded globally and built strong relationships with our customers worldwide.Arnold is the largest and, we believe, the most technically advanced U.S.designer and manufacturer of engineered magnetic systems. Arnold isheadquartered in Rochester, New York.

Sterno - Sterno, headquartered in Corona, California, is the parent company ofSterno LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and RimportsInc. ("Rimports"). Sterno is a leading manufacturer and marketer of portablefood warming systems, creative indoor and outdoor lighting, and home fragrancesolutions for the consumer markets. Sterno offers a broad range of wick and gelchafing systems, butane stoves and accessories, liquid and traditional waxcandles, catering equipment and lamps through Sterno Products, flameless candlesand outdoor lighting products through Sterno Home, and scented wax cubes andwarmer products used for home decor and fragrance systems through Rimports.During 2021, Sterno made the strategic decision to incorporate the product linesof Sterno Home into Rimports.

While our businesses have different growth opportunities and potential rates ofgrowth, we work with the management teams of each of our businesses to increasethe value of, and cash generated by, each business through various initiatives,including making selective capital investments to expand geographic reach,increase capacity or reduce manufacturing costs of our businesses; improving andexpanding existing sales and marketing programs; and assisting in theacquisition and integration of complementary businesses.

Significant Trends Impacting Our Businesses

COVID-19 Update

The continued spread of COVID-19 and new variants of the virus around the worldcontinue to present significant risks to our business. The economic and healthconditions in the United States and across most of the globe have continued tochange since the beginning of the pandemic and the ultimate impact of COVID-19on our business is dependent on future developments, including the duration ofthe pandemic, the emergence of variants of the virus and the related length ofits impact on the global economy, which are highly uncertain and difficult toaccurately predict. The public health situation, global response measures andcorresponding impacts on various markets remain fluid and uncertain. The healthof our team and various stakeholders is our highest priority, and we have takenmultiple steps to provide support and a safe work environment. The Companyanticipates that COVID-19 will continue to impact the results of operations,including a potential decrease in gross margins, operating income and AdjustedEBITDA at certain of our businesses during 2022.

The following are two significant trends resulting from the COVID-19 pandemicthat we anticipate may negatively impact our operating performance in 2022:

Global Supply Chain Trends

The disruption in the global supply chain due to transportation delays and U.S.port congestion have continued in the first half of 2022 and are expected tocontinue to place constraints on several of our businesses. Surges in demand,shifts in shopping patterns related to COVID-19, and the resurgence of COVID-19variants in manufacturing hubs, as well as other factors, have continued tostrain the global supply chain network, which has resulted in carrier-imposedcapacity restrictions, carrier delays, and longer lead times. U.S. ports thathave been unable to keep pace with unprecedented inbound container volume, whichhas led to shipping and unloading backlogs, and ports in Asia have been subjectto intermittent closures due to the impact of COVID-19 variants. Due to thebacklog at the ports and other supply chain disruptions, most of our businessesare experiencing shortages in materials and products, and significant increasesin freight costs. Several of our companies are relying on expensive air freightto import goods to meet customer demand. We are also seeing the availability ofraw materials, components and finished goods impacted by the supply chainchallenges which has led to shortages of certain materials and led to pressureon revenue growth. In addition, the closure of certain Asian manufacturingfacilities as a result of local government quarantine efforts has impacted ourability to import products timely. Further, in the U.S., the surge in demandalong with COVID-19 related labor shortages and rising hourly labor wages, arecreating labor shortages and higher labor costs. We expect these cost trends tocontinue through 2022.

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Inflationary Cost Environment

We continue to experienced inflationary cost increases in our materials, laborand transportation costs. We expect that these inflationary cost increases willcontinue but will be partially mitigated by pricing actions implemented in theprior year, as well as those that we have implemented in 2022. In 2022, weexpect changing market conditions and continued inflationary pressures to impactconsumer spending. With price pressures unlikely to abate and expected changesin monetary policies, consumer spending may be negatively impacted in 2022.

Business Outlook

The Company anticipates that the areas of focus for 2022, which are generallyapplicable to each of our businesses, include:

•Pursuing sales growth through a combination of new product development,increasing distribution, new customer acquisitions and international expansion;

•Raising prices on our goods due to rising input costs to preserve operatingmargins,

•Taking market share, where possible, in each of our niche market leadingcompanies, generally at the expense of less well capitalized competitors;

•Striving for excellence in supply chain management, manufacturing andtechnological capabilities;

•Continuing to pursue expense reduction and cost savings in lower marginbusiness lines or in response to lower production volume;

•Continuing to pursue growth through disciplined, strategic acquisitions andrigorous integration processes; and

•Working to drive free cash flow through increased net income and effectiveworking capital management, enabling continued investment in our businesses.

Recent Events

Advanced Circuits Merger Agreement

On October 13, 2021, the LLC, as the Sellers Representative of the holders ofstock and options of Advanced Circuits, a majority owned subsidiary of the LLC,entered into a definitive Agreement and Plan of Merger (the "AC Agreement") withTempo Automation, Inc. ("AC Buyer"), Aspen Acquisition Sub, Inc. ("AC MergerSub") and Advanced Circuits, pursuant to which AC Buyer would acquire all of theissued and outstanding securities of Advanced Circuits, the parent company ofthe operating entity, Advanced Circuits, Inc., through a merger of AC Merger Subwith and into Advanced Circuits, with Advanced Circuits surviving the merger andbecoming a wholly owned subsidiary of AC Buyer (the "AC Merger"). The AC Mergerwas conditioned on, among other things, the closing of a business combinationbetween AC Buyer and a publicly traded special purpose acquisition company (a"SPAC"). In connection with the AC Merger, AC Buyer announced its entry into adefinitive merger agreement for a business combination (the "SPAC Transaction")with a SPAC, ACE Convergence Acquisition Corp. ("ACE"). The AC Agreement alsoprovided that the AC Agreement could be terminated in the event closing of theAC Merger did not occur prior to January 27, 2022 (the "End Date").

A description of the Merger Agreement was included in the Current Report on Form8-K filed by the Company on October 14, 2021. Due to a delay in closing the SPACTransaction, the AC Merger did not close on or before the End Date. Because ofthe delay in closing the SPAC Transaction, on July 29, 2022, the LLC andAdvanced Circuits provided the notice of termination of the AC Agreement to ACBuyer. No termination penalties were incurred by either party in connection withthe termination of the AC Agreement. The termination of the AC Agreementoccurred in the third quarter of 2022 and, in accordance with applicableaccounting guidance, Advanced Circuits will be reclassified to continuingoperations beginning in the quarter ended September 30, 2022.

Acquisition of PrimaLoft

On July 12, 2022, the LLC, through its newly formed acquisition subsidiary,Relentless Intermediate, Inc. ("PrimaLoft Buyer"), acquired PrimaLoftTechnologies Holdings, Inc. ("PrimaLoft") pursuant to a Stock Purchase Agreement(the "PrimaLoft Purchase Agreement"), dated June 4, 2022, by and betweenPrimaLoft Buyer and VP PrimaLoft Holdings, LLC ("Seller"). The total purchaseprice, including proceeds from noncontrolling shareholders, was approximately$530 million, before working capital and other customary adjustments. TheCompany funded the acquisition through a draw on its revolving credit facilityand a draw in full on its new $400 million term loan facility.

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PrimaLoft, Inc. is a branded, advanced material technology company based inLatham, New York and is a world leader in the research and innovativedevelopment of high-performance material solutions, specializing in insulationsand fabrics. PrimaLoft® insulation was originally developed for the U.S. Army asa water-resistant, synthetic alternative to down. Since 1983, a heritage ofproven & tested technologies has built trust across the textile industry, withmore than 950 global brands using PrimaLoft products in outdoor, lifestyle, homefurnishings, work wear, hunting and military applications. With its RelentlesslyResponsible™ mission, PrimaLoft strives to balance innovation, performance andsustainability in the pursuit of a better future.

2022 Credit Facility

On July 12, 2022, we entered into the Third Amended and Restated CreditAgreement to amend and restate the 2021 Credit Facility. The 2022 CreditFacility provides for revolving loans, swing line loans and letters of credit up("the 2022 Revolving Line of Credit") up to a maximum aggregate amount of$600 million ("the 2022 Revolving Loan Commitment") and a $400 million term loan(the " 2022 Term Loan"). The 2022 Term Loan requires quarterly payments rangingfrom $2.5 million to $7.5 million, commencing September 30, 2022, with a finalpayment of all remaining principal and interest due on July 12, 2027, which isthe 2022 Term Loan's maturity date. All amounts outstanding under the 2022Revolving Line of Credit will become due on July 12, 2027, which is thetermination date of the 2022 Revolving Loan Commitment. The 2022 Credit Facilityalso permits the LLC, prior to the applicable maturity date, to increase theRevolving Loan Commitment and/or obtain additional term loans in an aggregateamount of up to $250 million, subject to certain restrictions and conditions. Onthe closing date for the 2022 Credit Facility, the 2022 Term Loan was advancedin full and the initial borrowings outstanding under the 2022 Revolving Line ofCredit were $115 million. We used the initial proceeds from the 2022 CreditFacility to pay all amounts outstanding under the 2021 Credit Facility, pay feesand expenses incurred in connection with the 2022 Credit Facility and fund theacquisition of PrimaLoft.

Non-GAAP Financial Measures

"U.S. GAAP" or "GAAP" refer to generally accepted accounting principles in theUnited States. A non-GAAP financial measure is a numerical measure of historicalor future performance, financial position or cash flow that excludes amounts, oris subject to adjustments that effectively exclude amounts, included in the mostdirectly comparable measure calculated and presented in accordance with GAAP inour financial statements, and vice versa for measures that include amounts, orare subject to adjustments that effectively include amounts, that are excludedfrom the most directly comparable measure as calculated and presented.

See "Reconciliation of Non-GAAP Financial Measures" for further discussion ofour non-GAAP financial measures and related reconciliations.

Results of Operations

The following discussion reflects a comparison of the historical results ofoperations of our consolidated business for the three and six months endedJune 30, 2022 and June 30, 2021, and components of the results of operations aswell as those components presented as a percent of net revenues, for each of ourbusinesses on a stand-alone basis.

In the following results of operations, we provide (i) our actual ConsolidatedResults of Operations for the three and six months ended June 30, 2022 and 2021,which includes the historical results of operations of each of our businesses(operating segments) from the date of acquisition in accordance with generallyaccepted accounting principles in the United States ("US GAAP), and (ii)comparative historical components of the results of operations for each of ourbusinesses on a stand-alone basis for the three and six months ended June 30,2022 and 2021, where all periods presented include relevant pro formaadjustments for pre-acquisition periods and explanations where applicable. Forthe acquisition of Lugano in September 2021, the pro forma results of operationsfor the Lugano business segment have been prepared as if we purchased thatbusiness on January 1, 2021. We believe this is the most meaningful comparisonfor the operating results of acquired business segments. The following resultsof operations at each of our businesses are not necessarily indicative of theresults to be expected for a full year.

All dollar amounts in the financial tables are presented in thousands.References in the financial tables to percentage changes that are not meaningfulare denoted by "NM."

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