COMPASS DIVERSIFIED HOLDINGS QUARTERLY REPORT ON FORM 10-Q For the period ended September 30, 2024

Overview of Subsidiary Businesses

Compass Diversified (the Company) owns and manages a diverse group of subsidiary businesses across two main segments - Branded Consumer and Industrial. The Branded Consumer segment includes 5.11 (tactical apparel and gear), BOA (fit systems), Ergobaby (baby carriers), Lugano (luxury jewelry), PrimaLoft (synthetic insulation), and The Honey Pot Co. (feminine care). The Industrial segment includes Altor Solutions (protective foam), Arnold (engineered solutions), and Sterno (portable food warming).

The Company actively manages each subsidiary to increase their value and cash generation through initiatives like capital investments, sales and marketing programs, and strategic acquisitions. The subsidiary businesses have varying growth opportunities and potential rates of growth.

Significant Trends Impacting the Businesses

The macroeconomic environment remains dynamic, with inflationary pressures and higher interest rates impacting consumer spending, particularly for discretionary items. The Company expects uncertainty around market conditions, inflation, and interest rates to continue affecting consumer spending for the rest of 2024.

Several consumer brands experienced decreased revenues in 2023 due to higher than expected inventory levels as supply chains normalized. Freight costs also increased, particularly ocean freight, due to factors like the anticipated port strike, geopolitical conflicts, and higher fuel costs.

Business Outlook and Strategic Priorities

The Company’s key areas of focus for 2024 include:

• Pursuing sales growth through new product development, distribution expansion, customer acquisition, and international expansion
• Driving free cash flow through increased net income and effective working capital management
• Raising prices to offset rising input costs and preserve margins
• Taking market share from less well-capitalized competitors
• Striving for excellence in supply chain, manufacturing, and technology
• Continuing cost savings initiatives in lower margin areas
• Growing through disciplined, strategic acquisitions and rigorous integration

Recent Events

In April 2024, Velocity Outdoor sold its Crosman airgun division for $63 million, recording a $24.2 million loss on the sale.

In January 2024, the Company acquired The Honey Pot Co., a leading feminine care brand, for $380 million. The acquisition was funded with cash on hand.

Consolidated Financial Results

For the three months ended September 30, 2024, consolidated net revenues increased 11.8% to $582.6 million, driven by growth in businesses like Lugano, BOA, and The Honey Pot Co., offset by declines at Velocity and Altor. Gross profit margin improved to 47.1% from 43.2% in the prior year period.

Selling, general and administrative expenses increased $25.8 million, primarily due to higher marketing, compensation, and fulfillment costs at the consumer brands. Amortization expense also increased $2.8 million due to the Honey Pot Co. acquisition.

Interest expense was relatively flat at $27.4 million. The Company recorded a $0.4 million gain on the final settlement related to the Crosman sale.

For the nine months ended September 30, 2024, consolidated net revenues increased 10.6% to $1.65 billion. Gross profit margin improved to 47.0% from 43.4% in the prior year period.

Selling, general and administrative expenses increased $64.0 million, again driven by the consumer brands. Amortization expense increased $8.6 million. The Company recorded $8.2 million in goodwill impairment at the Velocity reporting unit.

Segment Performance

Branded Consumer Businesses

5.11: Net sales increased 3.0% in Q3 2024 and 0.4% in the first nine months, driven by international and direct-to-agency growth, offset by lower direct-to-consumer sales. Gross margin improved to 53.7% in Q3 2024.

BOA: Net sales increased 22.3% in Q3 2024 and 25.8% in the first nine months, reflecting improved end market inventory levels and market share gains. Gross margin expanded to 62.9% in Q3 2024.

Ergobaby: Net sales declined 6.3% in Q3 2024 and 0.4% in the first nine months, primarily due to lower international distributor sales. Gross margin was 63.5% in Q3 2024.

Lugano: Net sales surged 50.6% in Q3 2024 and 57.7% in the first nine months, driven by strong same-store sales growth, new store openings, and increased marketing and events. Gross margin expanded to 60.8% in Q3 2024.

PrimaLoft: Net sales increased 25.1% in Q3 2024 and 6.8% in the first nine months as inventory levels in the retail market normalized. Gross margin was 63.2% in Q3 2024.

The Honey Pot Co. (acquired in January 2024): Net sales were $31.5 million in Q3 2024 and $86.6 million in the first nine months on a pro forma basis. Gross margin was 53.6% in Q3 2024.

Velocity Outdoor: Net sales declined 47.1% in Q3 2024 and 38.7% in the first nine months due to the Crosman divestiture. The remaining archery and hunting apparel businesses saw an 8.4% sales decline in Q3 2024.

Industrial Businesses

Altor Solutions: Net sales decreased 12.0% in Q3 2024 and 13.1% in the first nine months, primarily due to softness in the food delivery and cold chain markets. Gross margin was 30.8% in Q3 2024.

Arnold: Net sales increased 10.3% in Q3 2024 and 7.0% in the first nine months, driven by stronger demand in aerospace, defense, and energy markets. Gross margin improved to 29.7% in Q3 2024.

Sterno: Net sales increased 6.2% in Q3 2024 but declined 2.6% in the first nine months, reflecting changes in consumer discretionary spending. Gross margin expanded to 24.8% in Q3 2024.

Liquidity and Capital Resources

The Company had $71.9 million in cash and cash equivalents as of September 30, 2024, down from $450.4 million at the end of 2023 due to the Honey Pot Co. acquisition. The Company has $486.6 million in available borrowing capacity under its revolving credit facility.

Cash used in operating activities was $77.6 million in the first nine months of 2024, compared to cash provided of $57.0 million in the prior year period. The increase in cash usage was primarily due to higher working capital needs, especially at Lugano to support its growth.

Investing activities used $352.3 million in the first nine months, reflecting the Honey Pot Co. acquisition, offset by proceeds from the Crosman sale. Capital expenditures decreased $4.0 million year-over-year.

Financing activities provided $50.9 million, including $35.0 million from the Company’s at-the-market equity offering programs and $41.7 million in equity investment related to the Honey Pot Co. acquisition, offset by debt repayments and distributions.

The Company has $1.78 billion in total debt outstanding, including $1.0 billion in 5.25% Senior Notes due 2029 and $300 million in 5.0% Senior Notes due 2032. The Company was in compliance with all debt covenants as of September 30, 2024.

Analysis and Outlook

Compass Diversified continues to execute on its strategy of owning and actively managing a diverse portfolio of niche market-leading businesses. The Company’s consolidated financial performance in 2024 has been solid, with double-digit revenue growth and margin expansion.

The Branded Consumer segment has been a particular area of strength, with businesses like Lugano, BOA, and The Honey Pot Co. driving strong sales and profitability. These higher-margin consumer brands have helped offset some of the challenges in the Industrial segment, where Altor Solutions has faced softening demand.

Looking ahead, the Company’s focus on new product development, geographic expansion, and strategic acquisitions should support continued growth. However, the uncertain macroeconomic environment, with persistent inflation and interest rate hikes, could pressure consumer spending and create headwinds for some of the Company’s businesses.

Maintaining a balanced portfolio, disciplined capital allocation, and operational excellence will be critical as Compass Diversified navigates the current environment. The Company’s strong liquidity position and access to capital provide flexibility to invest in its subsidiaries and pursue strategic opportunities.

Overall, Compass Diversified appears well-positioned to continue creating value for shareholders through the active management of its diverse collection of niche market leaders.