This Item 2 contains forward-looking statements. Forward-looking statements in
this Quarterly Report on Form 10-Q are subject to a number of risks and
uncertainties, some of which are beyond our control. Our actual results,
performance, prospects or opportunities could differ materially from those
expressed in or implied by the forward-looking statements. Additional risks of
which we are not currently aware or which we currently deem immaterial could
also cause our actual results to differ, including those discussed in the
section entitled "Forward-Looking Statements" included elsewhere in this
Quarterly Report on Form 10-Q as well as those risk factors discussed in the
section entitled "Risk Factors" in our Annual Report on Form 10-K for the year
ended 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 in
Delaware 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 and
middle-market businesses headquartered in North America. The LLC is the
operating entity and is a controlling owner of nine businesses, or operating
segments, at March 31, 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"), FFI Compass, Inc. ("Altor Solutions" or "Altor" (formerly "Foam
Fabricators")), AMT Acquisition Corporation ("Arnold"), and The Sterno Group,
LLC ("Sterno"). At December 31, 2021 and March 31, 2022, Advanced Circuits has
been classified as held-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 March 31, 2022 as
follows:
Ownership Interest - March 31, 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% 88.4%
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% 82.8%
BOA October 16, 2020 91.8% 83.2%
Lugano September 3, 2021 59.9% 56.2%
(1) On October 13, 2021, the LLC, as the representative of the holders of stock
and options of Advanced Circuits, entered into a definitive plan of merger to
sell all of the outstanding securities of Advanced Circuits. Advanced Circuits
has been classified as held for sale at March 31, 2022.
We categorize the businesses we own into two separate groups of businesses:
(i) branded consumer businesses, and (ii) niche industrial businesses. Branded
consumer businesses are characterized as those businesses that we believe
capitalize on a valuable brand name in their respective market sector. We
believe that our branded consumer businesses are leaders in their particular
product category. Niche industrial businesses are characterized as those
businesses that focus on manufacturing and selling particular products and
industrial services within a specific market sector. We believe that our niche
industrial businesses are leaders in their specific market sector.
37
--------------------------------------------------------------------------------
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 gear
for law enforcement, firefighters, EMS, and military special operations as well
as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and
authenticity, and works directly with end users to create purpose-built apparel,
footwear and gear designed to enhance the safety, accuracy, speed and
performance of tactical professionals and enthusiasts worldwide. Headquartered
in Irvine, California, 5.11 operates sales offices and distribution centers
globally, and 5.11 products are widely distributed in uniform stores, military
exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
BOA - BOA Technology, creator of the revolutionary, award-winning, patented BOA
Fit System, partners with market-leading brands to make the best gear even
better. Delivering fit solutions purpose-built for performance, the BOA Fit
System is featured in footwear across snow sports, cycling, hiking/trekking,
golf, running, court sports, workwear as well as performance headwear and
medical bracing. The system consists of three integral parts: a micro-adjustable
dial, high-tensile lightweight laces, and low friction lace guides combined with
unique configuration applications, which together create a superior alternative
to laces, buckles, hook and loop (Velcro), and other traditional closure and fit
systems. Each configuration is designed and engineered to deliver superior fit
and performance, and is backed by The BOA Lifetime Guarantee. BOA is
headquartered in Denver, Colorado and has offices in Austria, Greater China,
South Korea, and Japan.
Ergobaby - Headquartered in Torrance, California, is a designer, marketer and
distributor of wearable baby carriers and accessories, blankets and swaddlers,
nursing pillows, strollers and related products. Ergobaby primarily sells its
Ergobaby and Baby Tula branded products through brick-and-mortar retailers,
national chain stores, online retailers, its own websites and distributors and
derives 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 discerning
clientele. Lugano conducts sales via its own retail salons as well as pop-up
showrooms at Lugano-hosted or sponsored events in partnership with influential
organizations in the equestrian, art and philanthropic community. Lugano is
headquartered 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 and
metal baseball bats, fielding gloves, batting gloves, bags, grips, protective
gear, sunglasses, on and off-field apparel, and other baseball and softball
equipment used by professional and amateur athletes. Marucci also develops
retail and sports training facilities, both as a corporate owned entity as well
as licensing these facilities as franchises. Marucci products are available
through owned websites, their team sales organization, Big Box Retailers, and
third party e-commerce & resellers.
Velocity Outdoor - A leading designer, manufacturer, and marketer of airguns,
archery products, laser aiming devices and related accessories, Velocity Outdoor
offers 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 category
consists of air rifles, air pistols and a range of accessories including
targets, holsters and cases. Velocity Outdoor's other primary product categories
are archery, with products including CenterPoint and Ravin crossbows,
consumables, which includes steel and plastic BBs, lead pellets and CO2
cartridges, lasers for firearms, and airsoft products. Velocity Outdoor is
headquartered 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 foam
solutions and original equipment manufacturer (OEM) components made from
expanded polystyrene (EPS) and expanded polypropylene (EPP). Altor operates 16
molding and fabricating facilities across North America and provides products to
a 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 100
years, 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 foil
products (Precision
38
--------------------------------------------------------------------------------
Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical
in motors, generators, sensors and other systems and components. Arnold has
expanded 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 is
headquartered in Rochester, New York.
Sterno - Sterno, headquartered in Corona, California, is the parent company of
Sterno LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and Rimports
Inc. ("Rimports"). Sterno is a leading manufacturer and marketer of portable
food warming systems, creative indoor and outdoor lighting, and home fragrance
solutions for the consumer markets. Sterno offers a broad range of wick and gel
chafing systems, butane stoves and accessories, liquid and traditional wax
candles, catering equipment and lamps through Sterno Products, flameless candles
and outdoor lighting products through Sterno Home, and scented wax cubes and
warmer products used for home decor and fragrance systems through Rimports.
During 2021, Sterno made the strategic decision to incorporate the product lines
of Sterno Home into Rimports.
While our businesses have different growth opportunities and potential rates of
growth, we work with the management teams of each of our businesses to increase
the 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 and
expanding existing sales and marketing programs; and assisting in the
acquisition 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 world
continue to present significant risks to our business. The economic and health
conditions in the United States and across most of the globe have continued to
change since the beginning of the pandemic and the ultimate impact of COVID-19
on our business is dependent on future developments, including the duration of
the pandemic, the emergence of variants of the virus and the related length of
its impact on the global economy, which are highly uncertain and difficult to
accurately predict. The public health situation, global response measures and
corresponding impacts on various markets remain fluid and uncertain. The health
of our team and various stakeholders is our highest priority, and we have taken
multiple steps to provide support and a safe work environment. The Company
anticipates that COVID-19 will continue to impact the results of operations,
including a potential decrease in gross margins, operating income and Adjusted
EBITDA at certain of our businesses during 2022.
The following are two significant trends resulting from the COVID-19 pandemic
that 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 quarter of 2022 and are expected to
continue to place constraints on several of our businesses. Surges in demand,
shifts in shopping patterns related to COVID-19, and the resurgence of COVID-19
variants in manufacturing hubs, as well as other factors, have continued to
strain the global supply chain network, which has resulted in carrier-imposed
capacity restrictions, carrier delays, and longer lead times. U.S. ports that
have been unable to keep pace with unprecedented inbound container volume, which
has led to shipping and unloading backlogs, and ports in Asia have been subject
to intermittent closures due to the impact of COVID-19 variants. Due to the
backlog at the ports and other supply chain disruptions, most of our businesses
are experiencing shortages in materials and products, and significant increases
in freight costs. Many of our companies are relying on expensive air freight to
import goods to meet customer demand. We are also seeing the availability of raw
materials, components and finished goods impacted by the supply chain challenges
which has led to shortages of certain materials and led to pressure on revenue
growth. In addition, the closure of certain Asian manufacturing facilities as a
result of local government quarantine efforts has impacted our ability to import
products timely. Further, in the U.S., the surge in demand along with COVID-19
related labor shortages and rising hourly labor wages, are creating labor
shortages and higher labor costs. We expect these cost trends to continue
through 2022.
39
--------------------------------------------------------------------------------
Inflationary Cost Environment
We continue to experienced inflationary cost increases in our materials, labor
and transportation costs. We expect that these inflationary cost increases will
continue but will be partially mitigated by pricing actions implemented in the
prior year, as well as those that we plan to implement in 2022. In 2022, we
expect changing market conditions and continued inflationary pressures to impact
consumer spending. With price pressures unlikely to abate and expected changes
in monetary policies, consumer spending may be negatively impacted in 2022.
Business Outlook
The Company anticipates that the areas of focus for 2022, which are generally
applicable 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 operating
margins,
•Taking market share, where possible, in each of our niche market leading
companies, generally at the expense of less well capitalized competitors;
•Striving for excellence in supply chain management, manufacturing and
technological capabilities;
•Continuing to pursue expense reduction and cost savings in lower margin
business lines or in response to lower production volume;
•Continuing to pursue growth through disciplined, strategic acquisitions and
rigorous integration processes; and
•Working to drive free cash flow through increased net income and effective
working capital management, enabling continued investment in our businesses.
Recent Events
Advanced Circuits Merger Agreement
On October 13, 2021, the LLC, as the representative of the holders (the "AC
Sellers") of stock and options of Compass AC Holdings, Inc. ("Advanced
Circuits"), a majority owned subsidiary of the LLC, entered into a definitive
Agreement and Plan of Merger (the "AC Agreement") with Tempo Automation, Inc.
("AC Buyer"), Aspen Acquisition Sub, Inc. ("AC Merger Sub") and Advanced
Circuits, pursuant to which AC Buyer will acquire all of the issued and
outstanding securities of Advanced Circuits, the parent company of the operating
entity, Advanced Circuits, Inc., through a merger of AC Merger Sub with and into
Advanced Circuits, with Advanced Circuits surviving the merger and becoming a
wholly owned subsidiary of AC Buyer (the "AC Merger"). Under the terms of the AC
Agreement, the AC Sellers will receive consideration in the amount of $310
million, composed of $240 million in cash and $70 million in common stock of a
publicly traded special purpose acquisition company ("SPAC") selected by AC
Buyer to acquire AC Buyer upon the closing of the transaction, excluding certain
working capital and other adjustments. In addition, the AC Sellers may receive
2.4 million additional shares of SPAC common stock within five years, subject to
SPAC stock price performance. The LLC owns approximately 67% of the outstanding
stock of Advanced Circuits on a fully diluted basis and expects to receive
approximately 77% of the gross consideration payable under the AC Agreement.
This amount is in respect of the LLC's outstanding loans to Advanced Circuits
and its equity interests in Advanced Circuits. The AC Merger is conditioned on,
among other things, the closing of a business combination between AC Buyer and a
SPAC. In connection with the AC Merger, AC Buyer announced its entry into a
definitive merger agreement for a business combination (the "SPAC Transaction")
with a SPAC, ACE Convergence Acquisition Corp. ("ACE"). In order to obtain
shareholder approval of the SPAC Transaction, ACE had previously scheduled and
announced an extraordinary general meeting of shareholders for May 5, 2022. On
May 2, 2022, ACE postponed the extraordinary general meeting to allow additional
time to revise and finalize its financing arrangements with respect to the SPAC
Transaction. There can be no assurances that all of the conditions to closing
the AC Merger, which include the closing of the SPAC Transaction, will be
satisfied.
Non-GAAP Financial Measures
"U.S. GAAP" or "GAAP" refer to generally accepted accounting principles in the
United States. A non-GAAP financial measure is a numerical measure of historical
or future performance, financial position or cash flow that excludes amounts, or
is subject to adjustments that effectively exclude amounts, included in the most
directly comparable measure calculated and presented in accordance with GAAP in
our financial statements, and vice versa for measures that include amounts, or
are subject to adjustments that effectively include amounts, that are excluded
from the most directly comparable measure as calculated and presented.
40
--------------------------------------------------------------------------------
See "Reconciliation of Non-GAAP Financial Measures" for further discussion of
our non-GAAP financial measures and related reconciliations.
Results of Operations
The following discussion reflects a comparison of the historical results of
operations of our consolidated business for the three months ended March 31,
2022 and March 31, 2021, and components of the results of operations as well as
those components presented as a percent of net revenues, for each of our
businesses on a stand-alone basis. For the acquisition of Lugano in September
2021, the pro forma results of operations for the Lugano business segment have
been prepared as if we purchased that business on January 1, 2021. Where
appropriate, relevant pro forma adjustments are reflected as part of the
historical operating results of Lugano. We believe this is the most meaningful
comparison for the operating results of acquired business segments. The
consolidated results of operations reflect the operating results of Lugano from
the date of acquisition. The following results of operations at each of our
businesses are not necessarily indicative of the results 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 meaningful
are denoted by "NM."
© Edgar Online, source Glimpses
COMPASS DIVERSIFIED 
