2021
Annual Report
35%As of December 31, 2021, our majority-owned subsidiaries consisted of six branded consumer businesses and four niche industrial businesses. Our controlling interests in all of our subsidiaries gives us an active role in their management and enables us to focus on core areas that translate into the highest value creation for our shareholders. We are business builders rather than asset traders. Our core principles — which have differentiated our business for nearly 16 years — have never been more relevant or produced stronger results for shareholders.~$546MConsolidated Subsidiary EBITDA Guidance for 2022:2021 Consolidated Revenue growth of:2021 Highlights2021 Aggregate Transactions:$400M - $420MCompass Diversified Holdings (“CODI”) offers shareholders a unique opportunity to own a diverse group of leading middle market businesses in the niche-industrial and branded-consumer sectors.PLATFORM ACQUISITIONLugano DiamondsADD-ON ACQUISITIONSLizard Skins - MarucciRamco - Arnold Plymouth Foam - Altor SolutionsSALELiberty Safe Table of Contents1Letter to Shareholders20CODI Information5Subsidiary Review7Our Companies17CODI Governance 1 COMPASS DIVERSIFIED Letter to ShareholdersDear Fellow ShareholdersIn 2021, we delivered both outstanding financial results and value beyond our financials in one of the most unprecedented and uncertain periods our market has ever experienced. Notwithstanding the expected easier comparable results as we emerged from 2020’s pandemic-related shutdowns, we were still able to produce four consecutive quarters of record results leading to the best year in our history, and we couldn’t be prouder of our subsidiary management teams and employees. In fact, our results reflect the dedication and hard work of our now more than 4,000 talented people at Compass Diversified (CODI) and across our 10 subsidiaries who are focused on creating value that matters for all our stakeholders despite the ongoing and sometimes extreme challenges of the COVID-19 pandemic. We continue to offer investors a unique opportunity to own a collection of diverse businesses across the consumer and industrial segments of the U.S. economy. In 2021, we generated over $1.8 billion in revenue and more than $117 million in adjusted earnings1 and expect to produce consolidated subsidiary adjusted EBITDA of between $400 million and $420 million in 2022 despite all of the headwinds in the marketplace. Results like this don’t just happen. They are intentional and made possible by the qualities that make CODI unique. Let us list them here as we continue to believe they are underappreciated by the market.What Differentiates CODI?• Permanent Capital is Strategic Capital. Our permanent capital structure and long-term philosophy allow us to deploy capital patiently, withstand shorter-term market distortions and economic crises, and act swiftly when others are sidelined. We are business builders, not asset traders. • Owning Uncorrelated Assets Drives a Lower Cost of Capital. As we’ve scaled our business over the last 25 years and increased earnings and cash flow on a diverse set of subsidiaries, we’ve been able to consistently reduce our cost of capital, driving share price returns and deepening our economic and competitive moat. To do the type of high-quality transactions our shareholders expect, we must have a low cost of capital, and we do. • Clear Alignment with Investors. Since we finance all our acquisitions at the CODI level versus third party financing at the subsidiary level, we bear the risk alongside our shareholders. When we do well, our shareholders do well. The opposite holds true too; The performance compensation our management team receives via profit allocation payments is designed to reward long term value creation not short-term profits resulting from prior year losses, to further enhance our alignment.These traits underscore every aspect of our company and set the tone for what has been a remarkable few years evidenced by the transformation of our group of subsidiaries. 1Reconciliations of non-GAAP measures are provided in the annual report, attached hereto, and in our fourth quarter 2021 earnings press release. 2021 ANNUAL REPORT 2 Patient Capital Deployment Ultimately, the quality, competitive positioning and extraordinary management teams of our current subsidiaries demonstrate how our strategy to patiently deploy capital continues to define our strong financial performance. This is evidenced by our acquisitions made of Marucci and BOA in 2020, which have both performed at an extraordinary high level in 2021. In 2021, we further evidenced this with several significant transactions.At the platform level, we acquired Lugano Diamonds and Jewelry, a designer, manufacturer and marketer of ultra-high-end, one-of-a-kind jewelry. Lugano has a disruptive business model that brings significant value to its customers, and we believe builds on our transformation to accelerate the collective growth potential of CODI.Throughout the year, we also built on our long track record of being business builders. Our permanent capital advantage allows us to invest in the future of our subsidiaries and in 2021 we consummated three add-on acquisitions: Ramco into Arnold Technologies, Lizard Skins into Marucci Sports and Plymouth Foam into Altor Solutions. We have now completed 31 add-on transactions for our subsidiaries since our inception. In 2021, we also sold Liberty Safe and announced the potential sale of Advanced Circuits. At Liberty Safe, we made transformative investments during our 11 years of ownership that resulted in a solid gain for our shareholders. While the Advanced Circuits transaction has not yet closed, it is important to highlight how our unique permanent capital structure allowed us the time and flexibility to take a long-term approach to value creation, investing in operations and capabilities of the company over our more than 15-year ownership period.The net effect of these transactions has caused a dramatic acceleration in our core growth rate, as our most recent acquisitions have demonstrated solid double-digit growth rates.2021 Financial Performance – A Record YearOur record 2021 financial results continue to underscore how CODI’s differentiated model performs across economic cycles. Our permanent capital structure enabled us to take advantage of exciting opportunities in the market and drive double-digit year-over-year revenue and adjusted EBITDA growth. In 2021, we:• Grew consolidated revenue by 35% to $1.8 billion;• Increased net income significantly to $126.8 million compared to $27.2 million in 2020, mainly due to the gain from the Liberty Safe sale; and• Increased adjusted earnings1 over 100% to $117.7 million driven by the 2020 acquisitions of BOA and Marucci, the 2021 acquisition of Lugano Diamonds, as well as strong performance in our other branded consumer companies. Adjusted earnings is a new non-GAAP measure we introduced in 2021 as we believe it will allow investors to better assess our operating performance and more easily see the true earnings power of our model.On a pro forma adjusted basis, management estimates that our current group of subsidiaries grew adjusted earnings by 1% in 2020, notwithstanding the onset of the Covid-19 pandemic. This highlights the advantages of owning a broadly diversified group of uncorrelated subsidiaries. Over the two-year period ending December 31, 2021, which we believe eliminates the distortive effects of the pandemic, our current group of subsidiaries generated a compounded annual growth rate of 16%, demonstrating the acceleration of our core growth rate. 1Reconciliations of non-GAAP measures are provided in the annual report, attached hereto, and in our fourth quarter 2021 earnings press release. 3 COMPASS DIVERSIFIED Substantial Liquidity, Low Cost of CapitalMoving to the balance sheet, the results were equally impressive. As of December 31st, we had $157.1 million in cash, approximately $600 million available on our revolver and our leverage was 2.96x. We have substantial liquidity and the ability to upsize our revolver capacity by an additional $250 million. In 2021, we refinanced our entire debt package, redeeming our old bonds due 2026 and reissuing new 8-year bonds for $1 billion at 5.25% due 2029, and in November, we issued 10-year bonds for $300 million at 5.00% due 2032. To put this refinancing into perspective, in December 2011 we estimate our cost of debt capital was approximately 8.8% with a tenure on our debt of five-and-a-half years. Today, we’ve taken our cost of debt capital down roughly 40% to approximately 5.2%, yet the tenure has been extended to nine-and-a-half years. So, an extraordinary outcome that enhances our ability to acquire strong companies when the time is right.Beyond Financial Performance At the corporate level, we achieved a major milestone that furthered our pursuit of a lower cost of capital. Effective September 1, 2021, Compass Diversified Holdings (the “Trust”) elected to be taxed as an association taxable as a corporation for U.S. federal income tax purposes. This critical change removes certain administrative requirements for shareholders, and we believe helps expand our long-term shareholder base and improves the likelihood of our stock’s inclusion within indices. In addition, Trust shareholders subject to tax rules regarding “unrelated business taxable income” (or “UBTI”) will no longer be allocated UBTI from the Trust. We have already seen a strong uptick in volume and welcomed a number of new shareholders.As we all know today, the letters “ESG” get thrown around a lot. But we at CODI can truly say it defines our standing as a good corporate citizen. By using ESG as a framework, it provides us with the ability to create and sustain long-term value in a rapidly changing world and allows us to manage the risks and opportunities associated with these changes. Our mission is to deliver superior shareholder returns while mitigating risk and conducting our business in a socially responsible and ethical manner. Below are the pillars of our ESG strategy:Attracting, retaining, and developing the best professionals. Our people are our greatest asset. Throughout the year, we invested in our talented, capable, and experienced team members, and our employees have strong emotional and financial investment toward success.We outsource our management to Compass Group Management (CGM) and strongly believe this creates a better alignment of economic incentives to our shareholders. As important, it allows us to attract and retain the best talent available in the marketplace. In fact, over the last five years, we’ve had 95% retention of our employees at CGM. And with diversity such an important component of our effective governance, we’re proud to report that over 40% of CGM’s employees are women. CGM also had seven internal promotions in 2021, four of which were awarded to women.We recognize that we need to continue to enhance our ESG initiatives and have taken that next step in hiring Zoe Koskinas as our head of ESG. She relocated from Australia to the U.S. in early January 2022 and, for the past decade, has been running programs in Australia and Europe for companies at the leading edge of ESG. Sustainably Investing. CODI prides itself on being business builders. We take a long-term approach to supporting the companies we acquire and commit significant capital to facilitate our subsidiaries’ growth initiatives. In fact, since inception, CODI has invested roughly $700 million in add-on acquisitions to subsidiary companies, we have committed over $94 million in growth capital expenditures to current subsidiaries through 2021, and in 2022 we expect to invest between $40 million and $50 million in growth capital expenditures to current subsidiaries. These efforts enable opportunities for our employees, vendors and local communities to flourish. 2021 ANNUAL REPORT 4 Elias J. Sabo Chief Executive Officer Compass Diversified Holdings, LLCRyan J. Faulkingham Chief Financial Officer Compass Diversified Holdings, LLCMoving CODI ForwardHaving reported such a strong year with transformative initiatives across our company, the natural question is, “where do we go from here?” The answer is simple. CODI’s permanent capital structure offers shareholders the unique opportunity to benefit from our ability to drive value while leveraging our sector expertise to build businesses for the long term. We pride ourselves on being true partners to our subsidiaries as we bring the financial flexibility and scale of our strong balance sheet. This enables us to invest in the future of our subsidiaries regardless of the environment.In fact, identifying platform and subsidiary add-on acquisitions that will benefit from our ability to invest in all business cycles to promote long-term growth is the core pillar of our sustainable approach.Furthermore, we will continue to take the necessary steps at a corporate level to lower our cost of capital and strengthen our capital structure, making us even more competitive. This is how we turn our permanent capital advantage into long-term shareholder value creation.At our December investor day, we grounded these competitive advantages in a longer-term goal that has us generating $1 billion of consolidated subsidiary adjusted EBITDA in the next five-to-seven years. While CODI’s competitive advantage in the market is the engine that propels us toward this goal, we have three main growth vectors that support it. First, we’ve repositioned our business and accelerated the core earnings growth rate. Second, we will continue to allocate capital towards platform and add-on acquisitions that can further accelerate the growth in both earnings and cash flow to CODI. Third, we’ve announced our anticipated entrance into the healthcare vertical. While we’ve already highlighted the benefits of our diversification, we believe healthcare is an end market that will further diversify our business and reduce financial volatility. Healthcare has great macro tailwinds. We know demographic changes continue to favor healthcare consumption and it is an acyclical end market. Healthcare consumption is not predicated on economic activity, either positive or negative. We believe these factors will benefit CODI with additional earnings growth, continue to reduce volatility through diversification, and ultimately will lower our cost of capital towards our long-term goal of becoming an investment-grade rated company.As we enter 2022, market conditions are changing rapidly. The Federal Reserve has already began reducing monetary accommodation and raising interest rates. We are grappling with inflationary pressures, stemming from the effects of previously unseen levels of supply chain disruptions and a tight labor market with rising wages and high levels of turnover. The stock market has experienced an increase in volatility, and stock prices have fallen. With that being the case, we would like to point out that private market valuations move more slowly and methodically. There remains an abundance of equity and debt available to pursue M&A activity, and asset prices remain elevated. CODI remains well positioned to succeed in these market conditions as evidenced by our successful series of transactions over the past few years. The strong culture we have built at CODI has been central to our ability to deliver for our shareholders, and our consistent results are possible because of the dedicated employees who contribute to our culture each day. We could not be prouder of how our employees have come together over these last two challenging years to support each other and deliver extraordinary results for shareholders. Due to these efforts, we believe CODI is better positioned than ever for continued value creation.Very Truly Yours, 5 COMPASS DIVERSIFIED 5 COMPASS DIVERSIFIED industry: Branded Consumerpurchase price: $408Macquisition date: August 2016headquarters: Irvine, CAvisit: 511tactical.comindustry: Branded Consumerpurchase price: $150Macquisition date: June 2017headquarters: Bloomfield, NYvisit: velocity-outdoor.comindustry: Branded Consumerpurchase price: $85Macquisition date: September 2010headquarters: Los Angeles, CAvisit: ergobaby.comindustry: Branded Consumerpurchase price: $256Macquisition date: September 2021headquarters: Newport Beach, CAvisit: luganodiamonds.comindustry: Branded Consumerpurchase price: $200Macquisition date: April 2020headquarters: Baton Rouge, LAvisit: maruccisports.comindustry: Branded Consumerpurchase price: $454Macquisition date: October 2020headquarters: Denver, COvisit: boafit.comSubsidiary Review 2021 ANNUAL REPORT 6 2021 ANNUAL REPORT 6 industry: Niche Industrialpurchase price: $160Macquisition date: October 2014headquarters: Corona, CAvisit: sternopro.comindustry: Niche Industrialpurchase price: $253Macquisition date: February 2018headquarters: Scottsdale, AZvisit: altorsolutions.comindustry: Niche Industrialpurchase price: $129Macquisition date: March 2012headquarters: Rochester, NYvisit: arnoldmagnetics.comindustry: Niche Industrialpurchase price: $81Macquisition date: May 2006headquarters: Aurora, COvisit: 4pcb.comDiversified Holdings in Niche Middle-Market BusinessesDemocratized PublicMarket Access 7 COMPASS DIVERSIFIED Headquartered in Irvine, CA, and founded in 2003, 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 and gear designed to enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide.visit 511tactical.com7 COMPASS DIVERSIFIED Headquartered in East Bloomfield, NY, Velocity Outdoor is 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.visit velocity-outdoor.com 2021 ANNUAL REPORT 8 9 COMPASS DIVERSIFIED Headquartered in Los Angeles, California, and founded in 2003, Ergobaby is dedicated to building a global community of confident parents with smart, ergonomic solutions that enable and encourage bonding between parents and babies. Ergobaby offers a broad range of award-winning baby carriers, strollers, swaddlers, nursing pillows, and related products that fit into families’ daily lives seamlessly, comfortably and safely. Ergobaby sells its Ergobaby and Baby Tula branded products in the United States and throughout the world.visit ergobaby.com9 COMPASS DIVERSIFIED Headquartered in Newport Beach, CA, and founded in 2004, Lugano is a leading designer, manufacturer, and retailer of high-end jewelry. Lugano utilizes an extensive network of suppliers to procure high-quality diamonds and rare gemstones. Often taking inspiration directly from the stone, Lugano designs and creates one-of-a-kind jewelry that it sells to a broad base of clients. 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 communities.visit luganodiamonds.com 2021 ANNUAL REPORT 10 Moti FerderCEO, Lugano Diamonds 11 COMPASS DIVERSIFIED Headquartered in Baton Rouge, LA, and founded in 2009, Marucci Sports is a leading manufacturer and distributor of baseball and softball equipment under the Marucci, Victus and Lizard Skins brands. Marucci’s product portfolio includes wood and metal bats, apparel and accessories, batting and fielding gloves, and bags and protective gear. Today, Marucci and Victus are the top two most-used bats among Big League players.visit maruccisports.com11 COMPASS DIVERSIFIED Headquartered in Denver, Colorado, 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 products across snow sports, cycling, hiking/trekking, golf, running, court sports, workwear, medical bracing, and prosthetics. The system consists of three integral parts: a micro-adjustable dial, super-strong lightweight laces, and low friction lace guides. Each unique configuration is engineered for fast, effortless, precision fit, and is backed by The BOA Guarantee.visit boafit.com 2021 ANNUAL REPORT 12 13 COMPASS DIVERSIFIED Headquartered in Corona, CA, the Sterno Group is the parent company of Sterno Products, Sterno Home and Rimports. Sterno is a leading manufacturer and marketer of portable food warming products and creative table lighting solutions for the hospitality and consumer industries, flameless candles and house and garden lighting for the home décor market, and wickless candle products used for home décor and fragrance systems. visit sternopro.com13 COMPASS DIVERSIFIED Headquartered in Scottsdale, AZ, Altor Solutions is a dynamic,
engineering-driven company whose goal is to design and produce
superior products that help customers solve their needs for
Packaging, Insulation and Componentry (PIC). The company
offers a wide range of materials from traditional plastics to
organic and plant-based options. Founded in 1957, the company
operates 17 state-of-the-art facilities across North America
specializing in the production and assembly of key components
utilized in protective packaging, OEM componentry and
temperature-controlled containers.
visit altorsolutions.com
James
Hughes
CEO, Altor Solutions
2021 ANNUAL REPORT 14
15 COMPASS DIVERSIFIED Headquartered in Rochester, New York, Arnold Magnetic Technologies 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 its products, technologies, and manufacturing presence to meet the demands of current and emerging markets. Arnold produces high performance permanent magnets (PMAG), precision foil products (Precision 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 its customers worldwide.visit arnoldmagnetics.com15 COMPASS DIVERSIFIED Headquartered in Aurora, Colorado, and founded in 1989, Advanced Circuits is the preeminent North American manufacturer of small-run, quick-turn and volume production rigid printed circuit boards, or “PCBs”, throughout the United States. PCBs are a vital component of virtually all electronic products. The small-run and quick-turn portions of the PCB industry are characterized by customers requiring high levels of responsiveness, technical support and timely delivery.visit 4pcb.com 2021 ANNUAL REPORT 16 On October 13, 2021, we, 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 December 31, 2021. 17 COMPASS DIVERSIFIED C. Sean Day has served as chairman of the board since April 2006. Mr. Day was president of Seagin International from 1999 to 2022. He was the chairman of our Manager’s predecessor from 1999 to 2006. Previously, Mr. Day was with Navios Corporation, and Citicorp Venture Capital. Mr. Day currently serves on the board of directors of Kirby Corporation (NYSE:KEX). Mr. Day served on the boards of directors of Teekay GP L.L.C., the general partner of Teekay LNG Partners L.P. (NYSE: TGP) from 2004 to 2022, Teekay Tankers Ltd. (NYSE: TNK) from 2007 to 2013, Teekay LNG LLC, from 2004 to 2015, Teekay Offshore Partners L.P. (NYSE:TOO) from 2006 to 2017 and Teekay Corporation (NYSE:TK) from 1999 to 2017. Mr. Day is a graduate of the University of Capetown and Oxford University.Elias J. Sabo has served as Chief Executive Officer of the Company and as a director since May 2018. Mr. Sabo is one of the founding partners of our Manager and has been instrumental in guiding the organization’s strategic growth since 1998. As a member of the Investment Committee, he plays a critical role in identifying and evaluating transaction opportunities applying the investment principles established by the Company. Mr. Sabo also directs the financing activities of the Company. Mr. Sabo currently serves as a director and as chairman of the board of the Company’s Advanced Circuits, Inc. subsidiary. He previously served as a director and as the chairman of the board of Fox Factory Holding Corp. (NASDAQ: FOXF), a former CODI subsidiary from 2007 to 2017. Previously, Mr. Sabo was with CIBC Oppenheimer, Boundary Partners and Colony Capital. Mr. Sabo is a graduate of Rensselaer Polytechnic Institute.James J. Bottiglieri has served as a director of the Company since December 2005. Mr. Bottiglieri was the Company’s chief financial officer and an executive vice president of the Company’s Manager from 2005 to 2013. Previously, Mr. Bottiglieri was the senior vice president and controller of WebMD Health Corp. Prior to that, Mr. Bottiglieri was with Star Gas Corporation and a predecessor firm to KPMG LLP. Mr. Bottiglieri also serves on the board of directors and as chairman of the audit committee of Horizon Technology Finance Corporation (NASDAQ: HRZN). Mr. Bottiglieri is a graduate of Pace University.Gordon M. Burns has served as a director of the Company since May 2008. Mr. Burns has been a private investor since 1998. Previously, he was responsible for investment banking at UBS Securities and before that was a managing director at Salomon Brothers Inc. Mr. Burns served on the board of directors of Aztar Corporation (NYSE:AZR), from 1998 through 2007. Mr. Burns is a graduate of Yale University and the Harvard Business School.Harold S. Edwards has served as a director of the Company since April 2006. Mr. Edwards has been the president and chief executive officer of Limoneira Company (NASDAQ: LMNR), since 2003. Previously, Mr. Edwards was the president of Puritan Medical Products, a division of Airgas Inc. Prior to that, Mr. Edwards held management positions with Fisher Scientific International, Inc., Cargill, Inc., Agribrands International and the Ralston Purina Company. Mr. Edwards is currently a member of the board of directors of Limoneira Company. Mr. Edwards served on the boards of directors of Calavo Growers, Inc. (NASDAQ:CVGW) from 2005 to 2022 and Inventure Foods, Inc. (NASDAQ:SNAK) from 2014 to 2017. Mr. Edwards is a graduate of Lewis and Clark College and The Thunderbird School of Global Management at Arizona State University.Board of DirectorsCODI Governance17 COMPASS DIVERSIFIED 2021 ANNUAL REPORT 18 Larry L. Enterline has served as a director of the Company since July 2019 and as the Independent Lead Director of the board of directors since October 2021. Mr. Enterline has been the chief executive officer of Vulcan Holdings Inc., a private investment holding and consulting services company he founded, since 2010. He has been the executive chairman of Greentech Environmental, an air purification systems provider since August 2021. Previously, Mr. Enterline was the chief executive officer of Fox Factory Holding Corp. (NASDAQ: FOXF), a former subsidiary of the Company, from 2011 through 2019. Prior to that, Mr. Enterline was chief executive officer of COMSYS IT Partners Inc., an IT staffing and solutions company. Mr. Enterline served in various management roles earlier in his career, including Senior Vice President of Worldwide Sales and Service Organization at Scientific-Atlanta Inc., a Georgia-based manufacturer of cable television, telecommunications and broadband equipment. Mr. Enterline has served on the board of directors of Greentech Environmental since 2021. He served on the board of directors of Fox Factory Holding Corp. from 2013 through 2021 and as its executive chairman from 2019 through 2021. Mr. Enterline is a graduate of Case Western Reserve University and the Monte Ahuja College of Business at Cleveland State University.Sarah G. McCoy has served as a director of the Company since January 2017. Ms. McCoy has been the executive chairperson for Sea to Summit, an adventure equipment manufacturer headquartered in Australia from November 2020 to present. She also has been the executive chairperson for Helinox, a manufacturer of portable outdoor furniture, from 2017 to present. Previously, Ms. McCoy was the president and chief executive officer of CamelBak Products, LLC, a former subsidiary of the Company, from 2006 through 2016. Prior to that, Ms. McCoy was a co-founder of Silver Steep Partners, a leading investment banking firm catering exclusively to companies in the outdoor and active lifestyle industries. Before Silver Steep, Ms. McCoy served as president of Sierra Designs and Ultimate Direction and as vice president at The North Face. Ms. McCoy serves on the boards of directors of The Outdoor Foundation, a nonprofit foundation established by Outdoor Industry Association to inspire and grow future generations of outdoor enthusiasts, Sea to Summit, and Helinox. Ms. McCoy served on the board of directors of Zumiez Inc. (NASDAQ:ZUMZ) from 2010 through 2021. Ms. McCoy is a graduate of Dartmouth College.Alexander S. Bhathal has served as a director of the Company since January 2022. Mr. Bhathal is executive chairman of Revitate, building upon the legacy and success of the RAJ Capital family investment office he founded in 2006. Since 2013, Mr. Bhathal has also been the co-owner and executive director of Sacramento Basketball Holdings, which owns the Sacramento Kings franchise of the National Basketball Association. Previously, Mr. Bhathal served as the chief executive officer of RAJ Swim, a company which designs, manufactures, and markets designer and private label swimwear under nationally recognized brands. He serves as an operating partner for Rx3 Growth Partners and serves on the board of directors of Mark IV Capital and Aspyr Holdings. Mr. Bhathal is a graduate of the University of California Los Angeles and the USC Marshall School of Business at the University of Southern California. Mr. Bhathal is currently completing the Presidents Program in Leadership at Harvard Business School. 19 COMPASS DIVERSIFIED CommitteesThe Company’s operating agreement gives our Board the authority to delegate its powers to committees appointed by the Board. All of our standing committees are comprised solely of independent directors. We have three standing committees - the audit committee, the compensation committee and the nominating and corporate governance committee.The Audit Committee is comprised entirely of independent directors who meet the independence requirements of the New York Stock Exchange and includes at least one “audit committee financial expert,” as required by applicable SEC regulations. The audit committee is responsible for, among other things: • retaining and overseeing our independent accountants; • assisting the Company’s Board of Directors in its oversight of the integrity of our financial statements, the qualifications, independence and performance of our independent auditors and our compliance with legal and regulatory requirements; • reviewing and approving the plan and scope of the internal and external audit; • pre-approving any non-audit services provided by our independent auditors; • approving the fees to be paid to our independent auditors; • reviewing with our chief executive officer and chief financial officer and independent auditors the adequacy and effectiveness of our internal controls;• reviewing and approving the calculation of the profit allocation payments made to the Allocation Member; • preparing the audit committee report to be filed with the SEC; • reviewing hedging transactions; and • reviewing and assessing annually the audit committee’s performance and the adequacy of its charter. Messrs. Bottiglieri, Edwards, and Enterline serve on our audit committee and the Board has determined that Mr. Bottiglieri qualifies as an audit committee financial expert as defined by the SEC. Mr. Bottiglieri is the chairman of our audit committee.The Compensation Committee is comprised entirely of independent directors who meet the independence requirements of the New York Stock Exchange. The responsibilities of the compensation committee include, among other things:• reviewing our Manager’s performance of its obligations under the management services agreement; • reviewing the remuneration of our Manager and approving the remuneration paid to our Manager as reimbursement for; • the compensation paid by our Manager to our chief financial officer and the chief financial officer’s staff; • determining the compensation of our independent directors; • granting rights to indemnification and reimbursement of expenses to the Manager and any seconded individuals; and • making recommendations to the Board regarding equity-based and incentive compensation plans, policies and programs. Messrs. Edwards, Bhathal, and Burns serve on our compensation committee. Mr. Edwards is the chairman of our compensation committee.The Nominating & Corporate Governance Committee is comprised entirely of independent directors who meet the independence requirements of the New York Stock Exchange. The nominating and corporate governance committee is responsible for, among other things: • recommending the number of directors to comprise the Board and recommending candidates for membership on each committee of the Board; • identifying and evaluating individuals qualified to become members of the Board, other than the Allocation Member’s appointed director and his or her alternate, and soliciting recommendations for director nominees from the chairman and chief executive officer of the Company; • recommending to the Board the candidates for filling vacancies that may occur between annual shareholders’ meetings, other than the Allocation Member’s appointed director; • reviewing independent director compensation and Board processes, self-evaluations and policies; • monitoring the performance of the Board and its individual members; • reviewing and approving related party transactions, including transactions with the Manager and its affiliates; • overseeing compliance with our code of ethics, anti-corruption policy, and conduct by our officers and directors; and • monitoring developments in the law and practice of corporate governance. Messrs. Burns, Bottiglieri, and Enterline serve on our nominating and corporate governance committee. Mr. Burns is the chairman of our nominating and corporate governance committee. 2021 ANNUAL REPORT 20 CODI InformationTrading Our stock trades on the NYSE under the symbol “CODI”. During fiscal year 2021, the highest and lowest trading prices per share were $19.44 and $32.83, respectively. On March 28, 2022, we had 69,450,318 shares outstanding that were held by approximately 46,000 beneficial holders.Distributions Our Board of Directors declared distributions of $2.32 per share for the year ended December 31, 2021, which included a one-time special dividend of $0.88 per share. The declaration and payment of any distribution is subject to a decision by our Board of Directors. In making such a decision, our Board will take into account such matters as general business conditions, our specific financial condition, results of operations and capital requirements, as well as any other factors that it deems relevant.Tax Reporting Effective September 1, 2021 CODI elected to be treated as an association taxable as a corporation for U.S. federal income tax purposes. Prior to this election CODI was taxed as a publicly traded partnership for U.S. federal income tax purposes. For the period ending August 31, 2021, CODI issued a final Schedule K-1 to shareholders who held shares during the period in which CODI was taxable as a partnership. We endeavor to provide this tax information as early as possible and made the information available for our shareholders on February 21, 2022. Tax information has been both mailed to shareholders and made available on our website. Beginning September 1, 2021, shareholders will no longer be allocated pass through income or receive a Schedule K-1. As a result, tax-exempt shareholders will no longer be allocated any “unrelated business taxable income” (or “UBTI”). Moreover, distributions will now be treated as corporate dividends to the extent paid from CODI’s earnings and profits and reported to shareholders on Form 1099-DIV, which may be obtained from your broker.Website CODI’s website is www.compassdiversified.com. On our website, shareholders can find our press releases, documents filed with the SEC, investor events, and tax reporting, as well as information on our corporate governance policies and procedures, subsidiary companies, and Board of Directors. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-K ☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2021 or☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 001-34927 Compass Diversified Holdings (Exact name of registrant as specified in its charter)Delaware 57-6218917(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)Commission File Number: 001-34926 Compass Group Diversified Holdings LLC(Exact name of registrant as specified in its charter) Delaware 20-3812051(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)301 Riverside Avenue, Second Floor Westport,CT06880(Address of principal executive office)(Zip Code)(203) 221-1703 (Registrants’ telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of Each ClassTrading Symbol(s) Name of Each Exchange on Which RegisteredShares representing beneficial interests in Compass Diversified Holdings (“common shares”)CODI New York Stock ExchangeSeries A Preferred Shares representing beneficial interests in Compass Diversified HoldingsCODI PR ANew York Stock ExchangeSeries B Preferred Shares representing beneficial interests in Compass Diversified HoldingsCODI PR BNew York Stock ExchangeSeries C Preferred Shares representing beneficial interests in Compass Diversified HoldingsCODI PR CNew York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrants are collectively a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨Indicate by check mark if the registrants are collectively not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þIndicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No ¨Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit such files). Yes þ No ¨Indicate by check mark whether the registrants are collectively a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filerþAccelerated filer¨Non-accelerated filer¨Smaller reporting company☐Emerging growth company☐If an emerging growth company, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þIndicate by check mark whether the registrants are collectively a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No þThe aggregate market value of the outstanding common shares of trust stock held by non-affiliates of Compass Diversified Holdings at June 30, 2021 was $1,395,132,407 based on the closing price on the New York Stock Exchange on that date. For purposes of the foregoing calculation only, all directors and officers of the registrant have been deemed affiliates. There were 69,450,318 common shares of trust stock without par value outstanding at February 18, 2022.Documents Incorporated by ReferenceCertain information in the registrant’s definitive proxy statement to be filed with the Commission relating to the registrant’s 2022 Annual Meeting of Shareholders is incorporated by reference into Part III. Table of ContentsPagePART IItem 1.Business6Item 1A.Risk Factors63Item 1B.Unresolved Staff Comments75Item 2.Properties75Item 3.Legal Proceedings78Item 4.Mine Safety Disclosures78PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities79Item 6.[Reserved]80Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations81Item 7A.Quantitative and Qualitative Disclosures about Market Risk126Item 8.Financial Statements and Supplementary Data127Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure128Item 9A.Controls and Procedures129Item 9B.Other Information129PART IIIItem 10.Directors, Executive Officers and Corporate Governance130Item 11.Executive Compensation130Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters130Item 13.Certain Relationships and Related Transactions and Director Independence130Item 14.Principal Accountant Fees and Services130PART IVItem 15.Exhibits and Financial Statement Schedules131Item 16.Form 10-K Summary135 In reading this Annual Report on Form 10-K, references to:
NOTE TO READER
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the “Trust” and “Holdings” refer to Compass Diversified Holdings;
the “LLC” refer to Compass Group Diversified Holdings LLC;
the "Company" refer to Compass Diversified Holdings and Compass Group Diversified Holdings LLC,
collectively;
“businesses”, “operating segments”, “subsidiaries” and “reporting units” all refer to, collectively, the
businesses controlled by the Company;
the “Manager” refer to Compass Group Management LLC (“CGM”);
the "Trust Agreement" refer to the Third Amended and Restated Trust Agreement of the Trust dated as of
August 3, 2021;
the "2021 Credit Facility" refer to the second amended and restated credit agreement entered into on March
23, 2021 among the Company, the Lenders from time to time party thereto (the "Lenders"), Bank of
America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents
party thereto;
the "2021 Revolving Credit Facility" refers to the $600 million in revolving loans, swing line loans and letters
of credit provided by the 2021 Credit Facility that matures in 2026;
the "2018 Credit Facility" refer to the amended and restated credit agreement entered into on April 18, 2018
among the Company, the Lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto, which
was subsequently amended and restated by the 2021 Credit Facility;
the "2018 Revolving Credit Facility" refers to the $600 million in revolving loans, swing line loans and letters
of credit provided by the 2018 Credit Facility;
the "2018 Term Loan" refer to the $500 million term loan provided by the 2018 Credit Facility;
the "LLC Agreement" refer to the Sixth Amended and Restated Operating Agreement of the Company dated
as of August 3, 2021, as further amended; and
"we," "us" and "our" refer to the Trust, the Company and the businesses together.
Statement Regarding Forward-Looking Disclosure
This Annual Report on Form 10-K, including, but not limited to, the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking
statements. We may, in some cases, use words such as "project," "predict," "believe," "anticipate," "plan," "expect,"
"estimate," "intend," "should," "would," "could," "potentially," "may," or other words that convey uncertainty of future
events or outcomes to identify these forward-looking statements. All statements other than statements of historical
or current fact are “forward-looking statements” for purposes of federal and state securities laws. Forward looking
statements include, among other things, (i) statements as to our future performance or liquidity, such as
expectations for our results of operation, net income, adjusted EBITDA, and ability to make quarterly distributions
and (ii) our plans, strategies and objectives for future operations, including our business outlook and planned capital
expenditures. Forward-looking statements in this Annual Report on Form 10-K are subject to a number of risks and
uncertainties, some of which are beyond our control, including, among other things:
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the adverse impact on the U.S. and global economy, including the markets in which we operate, of the novel
coronavirus, which causes the Coronavirus disease 2019 (COVID-19), and the impact in the near, medium
and long-term on our business, results of operations, financial position, liquidity or cash flows;
disruption in the global supply chain, labor shortages and high labor costs;
difficulties and delays in integrating, or business disruptions following, acquisitions or an inability to fully
realize cost savings and other benefit related thereto;
our ability to successfully operate our businesses on a combined basis, and to effectively integrate and
improve future acquisitions;
our ability to remove CGM and CGM’s right to resign;
our organizational structure, which may limit our ability to meet our dividend and distribution policy;
our ability to service and comply with the terms of our indebtedness;
our cash flow available for distribution and reinvestment and our ability to make distributions in the future to
our shareholders;
our ability to pay the management fee and profit allocation if and when due;
our ability to make and finance future acquisitions;
our ability to implement our acquisition and management strategies;
the legal and regulatory environment in which our businesses operate;
trends in the industries in which our businesses operate;
changes in general economic, political or business conditions or economic, political or demographic trends
in the United States and other countries in which we have a presence, including changes in interest rates
and inflation;
risks associated with possible disruption in operations or the economy generally due to terrorism or natural
disaster or social, civil or political unrest;
environmental risks affecting the business or operations of our businesses;
our and CGM’s ability to retain or replace qualified employees of our businesses and CGM;
the impact of the tax reclassifications of the Trust;
costs and effects of legal and administrative proceedings, settlements, investigations and claims; and
extraordinary or force majeure events affecting the business or operations of our businesses.
Our actual results, performance, prospects or opportunities could differ materially from those expressed in or
implied by the forward-looking statements. A description of some of the risks that could cause our actual results to
differ appears under the section “Risk Factors”. Additional risks of which we are not currently aware or which we
currently deem immaterial could also cause our actual results to differ.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking
statements. The forward-looking events discussed in this Annual Report on Form 10-K may not occur. These
forward-looking statements are made as of the date of this Annual Report. We undertake no obligation to publicly
update or revise any forward-looking statements to reflect subsequent events or circumstances, whether as a result
of new information, future events or otherwise, except as required by law.
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ITEM 1. BUSINESS
PART I
Compass Diversified Holdings, a Delaware statutory trust (“Holdings”, or the “Trust”), was incorporated in Delaware
on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the “LLC”),
was also formed on November 18, 2005. The Trust 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 Trust is
the sole owner of 100% of the Trust Interests, as defined in our LLC Agreement, of the LLC. Pursuant to the LLC
Agreement, the Trust owns an identical number of Trust Interests in the LLC as exist for the number of outstanding
shares of the Trust.
The Trust was previously treated as a partnership for U.S. federal income tax purposes but elected, effective
September 1, 2021, to be taxed as an association taxable as a corporation. Following this tax election, Trust
shareholders should generally only be subject to taxation from holding Trust shares in connection with disposition of
Trust shares and receipt of taxable dividends from the Trust. Trust shareholders subject to tax rules regarding
“unrelated business taxable income” (or “UBTI”) will no longer be allocated UBTI from the Trust.
The LLC is the operating entity with a board of directors whose corporate governance responsibilities are similar to
that of a Delaware corporation. The LLC’s board of directors oversees the management of the Company and our
businesses and the performance of Compass Group Management LLC (“CGM” or our “Manager”). Certain persons
who are employees and partners of our Manager receive a profit allocation as beneficial owners of 57.8% through
Sostratus LLC of the Allocation Interests in us, as defined in our LLC Agreement.
Overview
We acquire controlling interests in and actively manage businesses that we believe (i) operate in industries with
long-term macroeconomic growth opportunities, (ii) have positive and stable cash flows, (iii) face minimal threats of
technological or competitive obsolescence, and (iv) have strong management teams largely in place. We offer
investors a unique opportunity to own a diverse group of leading middle-market businesses in the niche-industrial
and branded-consumer sectors.
Our disciplined approach to our target markets provides opportunities to methodically purchase attractive
businesses at values that are accretive to our shareholders. For sellers of businesses, our unique financial structure
allows us to acquire businesses efficiently with little or no third party financing contingencies and, following
acquisition, to provide our businesses with substantial access to growth capital. In addition, our permanent capital
model and ample liquidity allows us to acquire businesses at any point across economic cycles, ensuring that we
are able to act quickly when the opportunity presents itself to do so and that we’re not paralyzed when markets are
volatile.
We believe that private company operators and corporate parents looking to sell their business units may consider
us an attractive purchaser because of our ability to:
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provide ongoing strategic and financial support for their businesses, including professionalization of our
subsidiaries at scale;
• maintain a long-term outlook as to the ownership of those businesses;
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sustainably invest in growth capital and/or add-on acquisitions where appropriate; and
consummate transactions efficiently without being dependent on third-party transaction financing.
In particular, we believe that our outlook on length of ownership and active management on our part may alleviate
the concern that many private company operators and parent companies may have with regard to their businesses
going through multiple sale processes in a short period of time. We believe this outlook enhances our ability to
develop a comprehensive strategy to grow the earnings and cash flows of each of our businesses.
Finally, it has been our experience, that our ability to acquire businesses without the cumbersome delays and
conditions typical of third party transactional financing is appealing to sellers of businesses who are interested in
confidentiality, speed and certainty to close.
We believe our management team’s strong relationships with industry executives, accountants, attorneys, business
brokers, commercial and investment bankers, and other potential sources of acquisition opportunities offer us
substantial opportunities to assess small to middle market businesses available for acquisition. In addition, the
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flexibility, creativity, experience and expertise of our management team in structuring transactions allows us to
consider non-traditional and complex transactions tailored to fit a specific acquisition target.
In terms of the businesses in which we have a controlling interest as of December 31, 2021, we believe that these
businesses have strong management teams, operate in strong markets with defensible market niches and
environmental, social and governance ("ESG") tailwinds, and maintain long-standing customer relationships.
We categorize the businesses we own into two separate groups (i) branded consumer businesses and, (ii) niche
industrial businesses. Branded consumer businesses are 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 categories. Niche industrial businesses are those businesses that focus on manufacturing
and selling products and industrial services within a specific market sector. We believe that our niche industrial
businesses are leaders in their specific market sectors.
The following is a brief summary of the businesses in which we own a controlling interest at December 31, 2021:
Branded Consumer Businesses
5.11
5.11 ABR Corp. ("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. We made loans to and purchased a controlling interest in 5.11 for
approximately $408.2 million in August 2016. We currently own 97.6% of the outstanding stock of 5.11 on a primary
basis and 88.4% on a fully diluted basis.
BOA
BOA Holdings Inc. ("BOA") 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 headwear and medical bracing. The system consists of three integral parts: a micro-adjustable
dial, high-tensile lightweight laces, and low friction lace guides creating a superior alternative to laces, buckles,
Velcro, and other traditional closure mechanisms. Each unique BOA configuration is engineered for fast, effortless,
precision fit, 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. We made loans to, and acquired a controlling interest in,
BOA on October 16, 2020 for approximately $454.3 million. We currently own 91.8% of the outstanding stock of
BOA on a primary basis and 83.8% on a fully diluted basis.
Ergobaby
Ergobaby Carrier, Inc. (“Ergobaby”), headquartered in Torrance, California, is dedicated to building a global
community of confident parents with smart, ergonomic solutions that enable and encourage bonding between
parents and babies. Ergobaby offers a broad range of award-winning baby carriers, strollers, swaddlers, nursing
pillows, and related products that fit into families’ daily lives seamlessly, comfortably and safely. We made loans to,
and purchased a controlling interest in, Ergobaby on September 16, 2010 for approximately $85.2 million. We
currently own 81.7% of the outstanding stock of Ergobaby on a primary basis and 72.7% on a fully diluted basis.
Lugano
Lugano Diamonds & Jewelry, Inc. ("Lugano Diamonds" or "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. We made loans to, and purchased a controlling interest in, Lugano on
September 3, 2021 for approximately $263.3 million. We currently own 59.9% of the outstanding stock of Lugano
on a primary basis and 58.1% on a fully diluted basis.
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Marucci Sports
Marucci Sports, LLC ("Marucci Sports" or "Marucci") is a leading designer, manufacturer, and marketer of premium
wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and off-field
apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also
develops and licenses franchises for sports training facilities. We made loans to, and purchased a controlling
interest in, Marucci Sports on April 20, 2020 for approximately $198.9 million. Marucci is headquartered in Baton
Rouge, Louisiana. We currently own 91.1% of the outstanding stock of Marucci Sports on a primary basis and
82.8% on a fully diluted basis.
Velocity Outdoor
Velocity Outdoor Inc. ("Velocity Outdoor" or "Velocity") is 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 crossbows and the Pioneer Airbow,
consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft
products. We made loans to, and purchased a controlling interest in, Velocity Outdoor on June 2, 2017 for
approximately $150.4 million. In September 2018, Velocity acquired Ravin Crossbows, LLC ("Ravin" or "Ravin
Crossbows"), a manufacturer and innovator of crossbows and accessories. Ravin primarily focuses on the higher-
end segment of the crossbow market and has developed significant intellectual property related to the advancement
of crossbow technology. Velocity Outdoor is headquartered in Bloomfield, New York. We currently own 99.3% of the
outstanding stock of Velocity Outdoor on a primary basis and 87.6% on a fully diluted basis.
Niche Industrial Businesses
Advanced Circuits
Compass AC Holdings, Inc. (“Advanced Circuits” or “ACI”), headquartered in Aurora, Colorado, is a provider of
small-run, quick-turn and volume production rigid printed circuit boards, or “PCBs”, throughout the United States.
PCBs are a vital component of virtually all electronic products. The small-run and quick-turn portions of the PCB
industry are characterized by customers requiring high levels of responsiveness, technical support and timely
delivery. We made loans to, and purchased a controlling interest in, Advanced Circuits, on May 16, 2006 for
approximately $81.0 million.
On October 13, 2021, the Company, 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 December 31, 2021. Refer to Note D - Discontinued Operations for
additional information.
Altor Solutions
FFI Compass, Inc. ("Altor Solutions" or "Altor") (formerly "Foam Fabricators"), headquartered in Scottsdale,
Arizona, is a designer and manufacturer of custom molded protective foam solutions and OEM components made
from expanded polystyrene (EPS) and other expanded polymers. Altor provides products to a variety of end-
markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products
and others. Altor’s molded foam solutions offer shock and vibration protection, surface protection, temperature
control, resistance to water absorption and vapor transmission and other protective properties critical for shipping
small, delicate items, heavy equipment or temperature-sensitive goods. Altor operates 16 molding and fabricating
facilities across North America, creating a geographic footprint of strategically located manufacturing plants to
efficiently serve national customer accounts. We acquired Altor on February 15, 2018 for a purchase price of
approximately $253.4 million. We currently own 100.0% of the outstanding stock of Altor on a primary basis and
91.2% on a fully diluted basis.
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Arnold
AMT Acquisition Corp. ("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 its products, technologies, and manufacturing
presence to meet the demands of current and emerging markets. Arnold produces high performance permanent
magnets (PMAG), turnkey electric motors ("Ramco"), precision foil products (Precision 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 its customers worldwide. Arnold is
the largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems.
Arnold is headquartered in Rochester, New York. We made loans to, and purchased a controlling interest in, Arnold
on March 5, 2012 for approximately $128.8 million. We currently own 98.0% of the outstanding stock of Arnold on a
primary basis and 85.5% on a fully diluted basis.
Sterno
The Sterno Group LLC ("Sterno"), headquartered in Corona, California, is the parent company of Sterno Products,
LLC ("Sterno Products") and Rimports, LLC. Sterno is a leading manufacturer and marketer of portable food
warming fuels for the hospitality and consumer markets, flameless candles and house and garden lighting for the
home decor market, and wickless candle products used for home decor and fragrance systems. We made loans to,
and purchased all of the equity interests in, Sterno on October 10, 2014 for approximately $160.0 million. Sterno
offers a broad range of wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax
candles, catering equipment and lamps through their Sterno Products division. In February 2018, Sterno acquired
Rimports Inc. ("Rimports"), which is a manufacturer and distributor of branded and private label scented wax cubes
and warmer products used for home decor and fragrance systems. We currently own 100.0% of the outstanding
stock of Sterno on a primary basis and 87.1% on a fully diluted basis.
Our businesses also represent our operating segments. See “Our Businesses” and “Note F – Operating Segment
Data” to our Consolidated Financial Statements for further discussion of our businesses as our operating segments,
including information related to geographies.
2021 Distributions
Common shares - For the 2021 fiscal year we declared distributions to our common shareholders totaling $2.21 per
share, inclusive of our special cash distribution of $0.88 per share in connection with our tax reclassification.
Preferred shares - For the 2021 fiscal year we declared distributions to our preferred shareholders totaling $1.8125
per share on our Series A Preferred Shares, $1.96875 per share on our Series B Preferred Shares and $1.96875
per share on our Series C Preferred Shares.
Tax Reporting
On August 3, 2021, the shareholders of CODI approved amendments to the Second Amended and Restated Trust
Agreement of the Trust and the Fifth Amended and Restated Operating Agreement of the Company to allow the
Company’s Board of Directors (the “Board”) to cause the Trust to elect to be treated as a corporation for U.S. federal
income tax purposes (the “tax reclassification”) and, at its discretion in the future, cause the Trust to be converted to
a corporation. Following the shareholder vote, the Board resolved to cause the Trust to elect to be treated as a
corporation for U.S. federal income tax purposes. The Trust was taxed as a partnership for U.S. federal income tax
purposes since January 1, 2007 and until the tax reclassification became effective on September 1, 2021.
The Trust will be treated as a corporation for any taxable period beginning on or after the tax reclassification.
Income, gain, loss, deduction and credit from the Trust will no longer be passed through to the Trust shareholders.
The Trust will issue its final Schedule K-1s for the taxable period beginning January 1, 2021 and ending August 31,
2021, the last day on which the Trust was treated as a partnership for U.S. federal income tax purposes. Thereafter
the Trust will stop issuing annual Form 1065, Schedule K-1s and Trust shareholders will no longer be subject to
current taxation on the Trust’s earnings. Trust shareholders subject to rules regarding “unrelated business taxable
income” (or “UBTI”) will no longer be allocated UBTI from the Trust.
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The Trust will be required to file Form 1120, U.S. Corporation Income Tax Return on an annual basis and for all
taxable periods beginning on or after the tax reclassification. In addition, distribution with respect to Trust shares
(including Trust preferred shares) will now be reported on Form 1099-DIV, instead of on Schedule K-1.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file reports with the Securities and Exchange Commission (the "SEC" or the "Commission"), including Forms
S-1 and S-3 under the Securities Act of 1933, as amended (the "Securities Act"), and Forms 10-K, 10-Q, and 8-K
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which include exhibits, schedules
and amendments to those reports, as well as other filings required by the SEC. The SEC maintains an Internet site
that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC at http://www.sec.gov. In addition, copies of such reports, and amendments thereto, are
available free of charge through our website at http://www.ir.compassequity.com as soon as reasonably practicable
after such documents are electronically filed with, or furnished to, the SEC.
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Organizational Structure (1)1)The percentage holdings shown in respect to the trust reflect the ownership of the Trust common shares as of December 31, 2021.2)Path Spirit Limited is the ultimate controlling person of CGI Holdings Maygar LLC. CGI Maygar Holdings, LLC owns approximately 12.0% of the Trust common shares and is our single largest holder. Our non-affiliated holders of common shares own approximately 85.1% of the Trust common shares. The remaining 2.9% of Trust common shares are owned by our Directors and Officers. Mr. Sabo, our Chief Executive Officer, is not a director, officer or member of CGI Maygar Holdings, LLC or any of its affiliates.3)57.8% beneficially owned by certain persons who are employees and partners of our Manager. C. Sean Day, the Chairman of our Board of Directors, and the former founding partners of the Manager, are non-managing members.4)Mr. Sabo is a partner of this entity. The Manager owns less than 1.0% of the common shares of the Trust.5) The Allocation Interests, which carry the right to receive a profit allocation, represent less than 0.1% equity interest in the Company.6)On October 13, 2021, we entered into an agreement - subject to closing conditions - to sell ACI. ACI has been classified as held-for-sale at December 31, 2021.Our ManagerOur Manager, CGM, has been engaged to manage the day-to-day operations and affairs of the Company and to execute our strategy, as discussed below. Collectively, our management team has extensive experience in acquiring and managing small and middle market businesses. We believe our Manager is unique in the marketplace in terms of the success and experience of its employees in acquiring and managing diverse businesses of the size and general nature of our businesses. We believe this experience will provide us with an advantage in executing our overall strategy. Our management team devotes substantially all of its time to the affairs of the Company.11 We have entered into a management services agreement, (the “Management Services Agreement” or “MSA”)
pursuant to which our Manager manages the day-to-day operations and affairs of the Company and oversees the
management and operations of our businesses. We pay our Manager a quarterly management fee for the services
it performs on our behalf. In addition, certain persons who are employees and partners of our Manager receive a
profit allocation with respect to its Allocation Interests in us. All of the Allocation Interests in us are owned by
Sostratus LLC. Payment of profit allocations to Sostratus LLC can occur for each of our subsidiaries during the 30-
day period following the fifth anniversary of the date upon which we acquired a controlling interest in that business
(a "Holding Event") to the extent contribution based profit has been earned and upon the sale of a subsidiary from
which there is a realizable gain (a "Sale Event"). See Part III, Item 13 “Certain Relationships and Related
Transactions, and Director Independence” for further descriptions of the management fees and profit allocations.
The Company’s Chief Executive Officer and Chief Financial Officer are employees of our Manager and have been
seconded to us. Neither the Trust nor the LLC has any other employees. Although our Chief Executive Officer and
Chief Financial Officer are employees of our Manager, they report directly to the LLC’s board of directors. The
management fee paid to our Manager covers all expenses related to the services performed by our Manager,
including the compensation of our Chief Executive Officer and other personnel providing services to us. The LLC
reimburses our Manager for the compensation and related costs and expenses of our Chief Financial Officer and
his staff, who dedicate substantially all of their time to the affairs of the Company.
See Part III, Item 13, “Certain Relationships and Related Party Transactions, and Director Independence.”
Market Opportunity
We acquire and actively manage small and middle market businesses. We characterize small to middle market
businesses as those that generate annual cash flows of up to $100 million per year. We believe that the acquisition
market for these businesses is highly fragmented and often provides opportunities to purchase at more attractive
prices and achieve better outcomes for our shareholders. We believe this is driven by the following factors:
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third-party financing for these acquisitions is often less available or terms are less favorable for the
borrower;
sellers of these businesses frequently consider non-economic factors, such as legacy or the effect of the
sale on their employees;
these businesses are more likely to be sold outside of an auction process or as part of a limited process;
and
"add-on" acquisitions can often be completed at attractive multiples of cash flow.
Frequently, opportunities exist to support and augment existing management at such businesses and improve the
performance of these businesses upon their acquisition through active management. We are business builders
rather than asset traders. In the past, our management team has acquired businesses that were owned by
entrepreneurs or large corporate parents. In these cases, our management team has frequently found opportunities
to profitably invest in areas of the acquired businesses beyond levels that existed at the time of acquisition. In
addition, our management team has frequently found that processes such as financial reporting and management
information systems of acquired businesses may be improved, leading to improvements in reporting and operations
and ultimately earnings and cash flow. Finally, our management team often acts as a business development arm for
our businesses to pursue organic or external growth strategies that may not have been pursued by their previous
owners.
Our Strategy
CODI’s permanent capital structure enables us to invest in people, processes, culture, and growth opportunities that
drive transformational change. We have two primary strategies that we use to support long-term value creation.
First, we focus on growing the earnings and cash flow from our acquired businesses and help them professionalize
at scale. We believe that the scale and scope of our businesses give us a diverse base of cash flow upon which to
further build. Second, we identify, perform due diligence on, negotiate and consummate additional platform
acquisitions of small to middle market businesses in attractive industry sectors in accordance with acquisition
criteria established by the board of directors.
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Management Strategy
Our management strategy involves the proactive financial and operational management of the businesses we own
in order to increase cash flows and shareholder value. Our Manager actively oversees and supports the
management teams of each of our businesses by, among other things:
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recruiting and retaining talented managers to operate our businesses using structured incentive
compensation programs, including non-controlling equity ownership, tailored to each business;
regularly monitoring financial and operational performance, instilling consistent financial discipline, and
supporting management in the development and implementation of information systems to effectively
achieve these goals;
identifying and aligning with external policy and performance tailwinds such as those influenced by growing
climate, health, and social justice concerns (and similar environmental, social and governance ("ESG")
drivers);
assisting management in their analysis and pursuit of prudent organic growth strategies;
identifying and working with management to execute attractive external growth and acquisition
opportunities;
assisting management in controlling and right-sizing overhead costs;
nurturing an internal culture of transparency, alignment, accountability and governance, including regular
reporting;
professionalizing our subsidiaries at scale; and
forming strong subsidiary level boards of directors to supplement management in their development and
implementation of strategic goals and objectives.
Specifically, while our businesses have different growth opportunities and potential rates of growth, we expect our
Manager to 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;
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investing in product research and development for new products, processes or services for customers;
improving and expanding existing sales and marketing programs;
pursuing reductions in operating costs through improved operational efficiency or outsourcing of certain
processes and products; and
consolidating or improving management of certain overhead functions.
Our businesses typically acquire and integrate complementary businesses. We believe that complementary add-on
acquisitions improve our overall financial and operational performance by allowing us to:
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leverage manufacturing and distribution operations;
leverage branding and marketing programs, as well as customer relationships;
add experienced management or management expertise;
increase market share and penetrate new markets; and
realize cost synergies by allocating the corporate overhead expenses of our businesses across a larger
number of businesses and by implementing and coordinating improved management practices.
Acquisition Strategy
Our acquisition strategy is to acquire businesses that we expect to produce stable and growing earnings and cash
flow. In this respect, we expect to make platform acquisitions in industries other than those in which our businesses
currently operate if we believe an acquisition presents an attractive opportunity. We believe that attractive
opportunities will continue to present themselves, as private sector owners seek to monetize their interests in long-
standing and privately-held businesses and large corporate parents seek to dispose of their “non-core” operations.
Our ideal acquisition candidate has the following characteristics:
is a leading branded consumer or niche industrial company headquartered in North America;
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operates in an industry with favorable long-term macroeconomic trends;
has a strong management team, either currently in place or previously identified, and meaningful incentives;
has low technological and/or product obsolescence risk; and
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• maintains a diversified customer and supplier base.
We benefit from our Manager’s ability to identify potential diverse acquisition opportunities in a variety of industries.
In addition, we rely upon our management team’s experience and expertise in researching and valuing prospective
target businesses, as well as negotiating the ultimate acquisition of such target businesses. In particular, because
there may be a lack of information available about these target businesses, which may make it more difficult to
understand or appropriately value such target businesses, on our behalf, our Manager:
engages in a substantial level of internal and third-party due diligence;
critically evaluates the target management team;
identifies and assesses any financial and operational strengths and weaknesses of the target business;
analyzes comparable businesses to assess financial and operational performances relative to industry
competitors;
actively researches and evaluates information on the relevant industry; and
thoroughly negotiates appropriate terms and conditions of any acquisition.
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The process of acquiring new businesses is both time-consuming and complex. Our management team historically
has taken from two to twenty-four months to perform due diligence, negotiate and close acquisitions. Although our
management team is at various stages of evaluating several transactions at any given time, there may be periods of
time during which our management team does not recommend any new acquisitions to us. Even if an acquisition is
recommended by our management team, our board of directors may not approve it.
A component of our acquisition financing strategy that we utilize in acquiring the businesses we own and manage is
to provide both equity capital and debt capital, raised at the parent company level largely through our existing credit
facility. We believe, and it has been our experience, that having the ability to finance our acquisitions with capital
resources raised by us, rather than negotiating separate third-party financing, provides us with an advantage in
successfully acquiring attractive businesses by minimizing delay and closing conditions that are often related to
acquisition-specific financings. In addition, our strategy of providing this intercompany debt financing within the
capital structure of the businesses we acquire and manage allows us the ability to distribute cash to the parent
company through monthly interest payments and amortization of principle on these intercompany loans.
Upon acquisition of a new business, we rely on our Manager’s experience and expertise to work efficiently and
effectively with the management of the new business to jointly develop and execute a successful business plan.
Strategic Advantages
Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe
we are well-positioned to acquire additional businesses. Our management team has strong relationships with
business brokers, investment and commercial bankers, accountants, attorneys and other potential sources of
acquisition opportunities. In addition, our management team has a successful track record of acquiring and
managing small-to-middle market businesses in various industries. In negotiating these acquisitions, we believe our
management team has been able to successfully navigate complex situations surrounding acquisitions, including
corporate spin-offs, transitions of family-owned businesses, management buy-outs and reorganizations.
Our management team has a large network that we estimate to be approximately 2,000 deal intermediaries who we
expect to expose us to potential acquisitions. Through this network, as well as our management team’s proprietary
transaction sourcing efforts, we have a substantial pipeline of potential acquisition targets. Our management team
also has a well-established network of contacts, including professional managers, attorneys, accountants and other
third-party consultants and advisors, who may be available to assist us in the performance of due diligence and the
negotiation of acquisitions, as well as the management and operation of our acquired businesses.
Finally, because we intend to fund acquisitions through the utilization of our 2021 Revolving Credit Facility, we
expect to minimize the delays and closing conditions typically associated with transaction specific financing, as is
typically the case in such acquisitions. We believe this advantage can be a powerful one, especially in a tight credit
environment, and is highly unusual in the marketplace for acquisitions in which we operate.
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Valuation and Due Diligence
When evaluating businesses or assets for acquisition, our management team performs rigorous due diligence and a
financial evaluations process including an evaluation of the operations of the target business and the outlook for its
industry. While valuation of a business is a subjective process, we define valuations under a variety of analyses,
including:
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discounted cash flow analyses;
evaluation of trading values of comparable companies;
expected value matrices; and
examination of comparable recent transactions.
One outcome of this process is a projection of the expected cash flows from the target business. A further outcome
is an understanding of the types and levels of risk associated with those projections. While future performance and
projections are always uncertain, we believe that with detailed due diligence, future cash flows will be better
estimated and the prospects for operating the business in the future better evaluated. To assist us in identifying
material risks and validating key assumptions in our financial and operational analysis, in addition to our own
analysis, we engage third-party experts to review key risk areas, including legal, tax, regulatory, accounting,
insurance and environmental. We also engage technical, operational or industry consultants, as necessary.
A further critical component of the evaluation of potential target businesses is the assessment of the capability of the
existing management team, including recent performance, expertise, experience, culture and incentives to perform.
Where necessary, and consistent with our management strategy, we actively seek to augment, supplement or
replace existing members of management who we believe are not likely to execute our business plan for the target
business. Similarly, we analyze and evaluate the financial and operational information systems of target businesses
and, where necessary, we enhance and improve those existing systems that are deemed to be inadequate or
insufficient to support our business plan for the target business.
Environmental, Social and Governance Practices
In the last few years, companies, investors and policymakers have focused more attention on - and have made
investments in - companies that are considered leaders in ESG practices. Another way to think about ESG practices
is to consider them, collectively, to be long-term performance factors designed to enable real owners to oversee
their investments and balance the needs of important stakeholders in doing so. That same concept is mirrored in
Compass Diversified’s business model: by bringing the virtues of a diverse set of middle market businesses that are
typically privately held to public markets - including to individual investors who would not otherwise have access -
we are helping to democratize market access while preserving professional oversight protections.
Our long-term, do-good-by-doing-well, real owners approach is reflected in the companies we acquire and manage,
which, among them, provide products and services that support:
education programs;
• medical and first responder needs;
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e-commerce and technology providers.
outdoor health and recreational pursuits; and
In addition, a number of our businesses have created robust recycling and responsible sourcing programs, strong
human capital management and diversity, equity and inclusion ("DEI") programs. We believe each of these creates
long-term financial sustainability as well as making our shared world a better place.
Our long-term responsible approach is also reflected in how we manage ourselves. We have been and remain
committed to being a responsible partner to our subsidiaries and are proud stewards of corporate citizenship.
Financing
We incur third party debt financing almost entirely at the Company level, which we use, in combination with our
equity capital, to provide debt financing to each of our businesses and to acquire additional businesses. We believe
this financing structure is beneficial to the financial and operational activities of each of our businesses by aligning
our interests as both equity holders of, and lenders to, our businesses, in a manner that we believe is more efficient
than each of our businesses borrowing from third-party lenders.
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Debt Financing
2021 Credit Facility
On March 23, 2021, we entered into a Second Amended and Restated Credit Agreement to amend and restate the
2018 Credit Facility. The 2021 Credit Facility provides for revolving loans, swing line loans and letters of credit up to
a maximum aggregate amount of $600 million and also permits the Company, prior to the applicable maturity date,
to increase the revolving loan commitment and/or obtain term loans in an aggregate amount of up to $250 million,
subject to certain restrictions and conditions. All amounts outstanding under the 2021 Revolving Credit Facility will
become due on March 23, 2026, which is the maturity date of loans advanced under the 2021 Revolving Credit
Facility.
The 2021 Credit Facility provides for letters of credit under the 2021 Revolving Credit Facility in an aggregate face
amount not to exceed $100 million outstanding at any time, as well as swing line loans of up to $25 million
outstanding at one time. At no time may the (i) aggregate principal amount of all amounts outstanding under the
2021 Revolving Credit Facility, plus (ii) the aggregate amount of all outstanding letters of credit and swing line loans,
exceed the borrowing availability under the 2021 Credit Facility. At December 31, 2021, we had outstanding letters
of credit totaling approximately $1.0 million. The borrowing availability under the 2021 Revolving Credit Facility at
December 31, 2021 was approximately $599.0 million.
The 2021 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and
loans to, its consolidated subsidiaries. (See "Note I - Debt" to the consolidated financial statements for more detail
regarding our 2021 Credit Facility).
Senior Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our
5.000% Notes due 2032 (the "2032 Notes") offered pursuant to a private offering to qualified institutional buyers in
accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the
Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032
Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2032 Notes bear
interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is
payable in cash on July 15th and January 15th of each year. The 2032 Notes are general unsecured obligations of
the Company and are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes was used
to repay debt outstanding under the 2021 Credit Facility.
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our
5.250% Notes due 2029 (the "2029 Notes") offered pursuant to a private offering to qualified institutional buyers in
accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the
Securities Act. The 2029 Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes
Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2029 Notes bear interest at
the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on
April 15th and October 15th of each year. The 2029 Notes are general unsecured obligations of the Company and
are not guaranteed by our subsidiaries.
The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in
connection with our entry into the 2021 Credit Facility, as described above, and to redeem our 8.000% Senior Notes
due 2026 (the “2026 Notes”).
Equity Financing
Trust Common Shares
The Trust is authorized to issue 500,000,000 Trust common shares and the Company is authorized to issue a
corresponding number of LLC interests. The Company will, at all times have an equal amount of LLC interests
outstanding as Trust shares. At December 31, 2021, there were 68.7 million Trust common shares outstanding.
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Common Share Offering
On September 7, 2021, we filed a prospectus supplement pursuant to which we may, but we have no obligation to,
issue and sell up to $500 million shares of the common shares of the Trust in amounts and at times to be
determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time,
including, market conditions, the trading price of Trust common shares and determinations by us regarding
appropriate sources of funding. In connection with this offering, we entered into an At Market Issuance Sales
Agreement with B. Riley Securities, Inc. (“B. Riley”) and Goldman Sachs & Co. LLC (“Goldman”) pursuant to which
we may sell common shares of the Trust having an aggregate offering price of up to $500 million, from time to time
through B. Riley and Goldman, acting as sales agents and/or principals. We sold 3,837,885 Trust common shares
during the year ended December 31, 2021 and received net proceeds of approximately $115.1 million. We incurred
approximately $2.1 million in commissions payable to the Sales Agents during the year ended December 31, 2021.
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 million Trust preferred shares and the Company is authorized to
issue a corresponding number of Trust Interests. We issued 4,000,000 7.250% Series A Preferred Shares in 2017,
4,000,000 7.875% Series B Preferred Shares in 2018 and 4,600,000 7.875% Series C Preferred Shares in 2019.
We intend to finance future acquisitions through our 2021 Revolving Credit Facility, cash on hand and, if necessary,
additional equity and debt financings. We believe, and it has been our experience, that having the ability to finance
our acquisitions with the capital resources raised by us, rather than negotiating separate third party financing
specifically related to the acquisition of individual businesses, provides us with an advantage in acquiring attractive
businesses by minimizing delay and closing conditions that are often related to acquisition-specific financings. In
this respect, we believe that in the future, we may need to pursue additional debt or equity financings, or offer equity
in Holdings or target businesses to the sellers of such target businesses, in order to fund multiple future
acquisitions.
Our Businesses
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.
The following table represents the percentage of net revenue and operating income each of our businesses
contributed to our consolidated results since the date of acquisition for the years ended December 31, 2021, 2020
and 2019, and the total assets of each of our businesses as a percentage of the consolidated total as of
December 31, 2021 and 2020.
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Net RevenueOperating Income (1)Total AssetsYear ended December 31,Year ended December 31,Year ended December 31,20212020201920212020201920212020Branded Consumer:5.11 24.2 % 29.5 % 30.8 % 19.9 % 30.5 % 30.6 % 16.4 % 20.7 %BOA 9.0 % 1.9 %n/a 17.1 % (1.0) %n/a 17.1 % 21.8 %Ergobaby 5.1 % 5.5 % 7.1 % 4.6 % 5.3 % 14.2 % 5.2 % 6.6 %Lugano 2.9 %n/an/a 5.0 %n/an/a 11.3 %n/aMarucci Sports 6.4 % 3.2 %n/a 8.3 % (4.3) %n/a 9.1 % 8.6 %Velocity Outdoor 14.7 % 15.9 % 11.7 % 20.0 % 25.2 % (37.1) % 9.3 % 10.7 % 62.2 % 55.9 % 49.6 % 74.9 % 55.6 % 7.8 % 68.3 % 68.4 %Niche Industrial:Arnold Magnetics 7.6 % 7.3 % 9.5 % 6.0 % 2.1 % 11.4 % 5.3 % 4.8 %Altor Solutions 9.8 % 9.6 % 9.6 9.1 % 16.1 % 19.5 11.0 % 11.4 %Sterno 20.4 % 27.2 % 31.3 % 10.0 % 26.1 % 61.3 % 12.0 % 15.4 % 37.8 % 44.1 % 50.4 % 25.1 % 44.4 % 92.2 % 28.3 % 31.6 %Corporate — — — — — — 3.4 % (0.1) % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %(1) Operating income (loss) reflected is as a percentage of the total contributed by the businesses and does not include expenses incurred at the corporate level.Branded Consumer Businesses5.11 Overview5.11 is a global lifestyle brand and innovator of purpose-built technical apparel, footwear and gear for a passionate and loyal group of consumers. 5.11 is a brand of choice for those who demand uncompromising functionality, durability, style and comfort of their gear. 5.11's brand authenticity stems from decades of collaboration with elite first responders and military professionals around the world, innovating to solve their greatest needs in the most mission-critical settings, where failure is not an option. Today, 5.11 continues to design and innovate for these professionals with the added purpose of delivering that unique functional expertise to everyday consumers. Management believes 5.11's large and growing community of everyday consumers associate with the 5.11 brand heritage and authenticity and values 5.11's high-quality product design and functionality.Headquartered in Irvine, California, 5.11 operates sales offices and distribution centers globally. 5.11 products are widely distributed in uniform stores, military exchanges, outdoor retail stores, its own retail stores and through e-commerce channels, including 511tactical.com.History of 5.115.11's heritage dates back to the 1970’s when 5.11 pants were originally designed by Royal Robbins for elite rock climbers. These climbers wanted durable yet flexible and comfortable pants as they scaled the most extreme rock walls in Yosemite National Park. In the early 1990’s, the same 5.11 pant was adopted by the F.B.I. National Academy and became standard training issue because of its superior design and performance. Trusted by law enforcement and military professionals ever since, 5.11's innovative products have formed the cornerstone of the brand. 5.11 is an outfitter of choice for our heroes who require rugged, functional, durable, and technically-advanced products capable of withstanding harsh conditions without sacrificing comfort. Consumers’ needs and aspirations fuel 5.11's product innovation engine. 5.11 leveraged this foundation to expand their product expertise to a significantly larger market of underserved lifestyle-oriented consumers who identify with 5.11's brand positioning, appreciate their superior designs and share the "Always Be Ready" ("ABR") mindset. We acquired a majority interest in 5.11 on August 31, 2016.18 Industry
5.11 participates in the global professional and consumer soft goods market for tactical gear and apparel; the
addressable global soft goods market was estimated by management to be approximately $79 billion. 5.11 products
are designed for use in a wide variety of activities, from professional to recreational and outdoor and indoor, and can
be used all year long. As a result, the markets and consumers 5.11 serves are broad and deep.
Products, Customers and Distribution
Products
Product innovation is at the core of 5.11’s heritage and identity. Since its inception, 5.11 has continuously developed
and introduced innovative apparel, footwear and gear that are highly functional, technically-advanced and expertly
designed setting the industry standard in each product category. 5.11’s product portfolio consists of technical
apparel, footwear and gear designed with patented materials and functional features to their customers from head-
to-toe. 5.11’s purpose-built products are durable, functional and comfortable. 5.11 serves a community of
consumers inspired to live a life bigger than themselves and aligned with the “Always Be Ready” mindset. 5.11
offers a portfolio of head-to-toe purpose-built gear with patented functional features for both professional and
recreational use. 5.11 focuses their product offering across three categories: apparel, footwear and gear. Leveraging
in-field testing and design feedback from professional collaborations and in-house design and engineering
expertise, 5.11 is able to create high quality products in each of its core segments. Innovating around the material
and functional needs of professionals, 5.11 then broadens the application of their technical functionality into a range
of consumer products within each category. This evolution of 5.11’s product lines creates tremendous leverage for
their purpose-built functionality, allowing 5.11 to benefit from their growing and broad crossover appeal. 5.11’s
innovations have not been limited to just apparel and textiles, as 5.11 has also proven their abilities within their
footwear and gear categories.
Apparel - Apparel represents 5.11’s largest product category at 66%, 65% and 67%, respectively, of net sales for
the years ending December 31, 2021, 2020 and 2019. Within this category, 5.11 offers a broad assortment of men’s
and women’s pants, shorts, shirts, outerwear, polos, and base layers. Apparel is offered in a variety of styles and fits
intended to enhance comfort, durability, and utility. 5.11 has historically designed and developed innovative
“families” of products around proprietary fabrics that 5.11 has created to meet the needs of its consumers. These
product “families” typically start with a purpose-built pant and then expand into other products.
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Pants - for many consumers, 5.11 technical purpose-built pants are the gateway into the 5.11 brand. 5.11
offers a wide range of pants to tackle any mission in a broad range of waist sizes and in seams for men and
women. The fit, proprietary or patented fabrics and purpose-built designs deliver high levels of comfort,
utility and durability. Among the most popular pants today are Stryke, Taclite, Apex, Fast-Tac and Defender-
Flex, which have price ranges from $55.00 to $85.00. 5.11 offers five distinct pant lines, which anchor five
different apparel families. The top selling pants include Taclite, which is built with a lighter and stronger
fabric to outperform 5.11's original canvas pant, Stryke, which uses our patented FlexTac fabric, Apex,
which leverages 5.11's Flex-Tac technology, and 5.11's highly durable FastTac all with stain and water-
resistant properties, and Defender-Flex, 5.11’s performance denim.
Shirts, T-shirts and Polos – 5.11 tops are feature rich just like their pants. Patented document pockets, pen
pockets, venting for heat, stain resistant, easy care and snag resistance are among some of these key
features. Many of the shirts fabrics are lighter versions of 5.11’s patented or proprietary fabrics used in their
best-selling pants. Taclite shirts $55.00 to $60.00, Stryke shirts $75.00 to $80.00 and Fast-Tac $45.00 to
$50.00 are among this product category as examples. These shirts can be used as uniforms and/or casual
wear. 5.11's polos are also well known for their comfort, durability and utility. 5.11 offers them in a range of
proprietary fabrics that are highly fade resistant, and among some of the most popular styles are
Performance Polo, Professional Polo and Utility Polo, which have price ranges from $30.00 to $45.00.
• Outerwear - 5.11 offers a wide range of outerwear solutions for on and off the job. Outerwear used on the
job offer features not commonly found in lifestyle outerwear such as blood borne pathogen resistance or
large areas of reflective materials. Technical system jackets, hard and soft shell as well as fleece pieces are
designed to work individually or as a system. Features include innovations such as quick access side
zippers and conceal pockets. 5.11 also offers technical survival outerwear systems engineered specifically
for missions in extreme conditions. Products include base layers and briefs, pullovers, softshell jackets,
wind pants, rain pants and jackets made of advanced fabrics.
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Gear - Gear represented 24%, 25% and 23%, respectively, of 2021, 2020 and 2019 net sales, which includes multi-
use backpacks, cases, load-bearing equipment, range bags, duffels, field knives, watches and gloves. 5.11 bags,
pouches, and packs provide reliable, multifunctional storage options designed to excel in a wide range of
operational and recreational settings. The bag offering meets the critical needs of emergency medical, public safety,
and military professionals in the field, outdoor adventure enthusiasts going off the grid, and anyone who needs to
maximize space and convenience packing for a weekend getaway. The recently introduce patented Hexgrid® and
Gear Set™ system enhance modularity capabilities. Allowing users to have different sets per mission specific needs
and attached pouches in 8 directions vs just up or down like the other systems. 5.11 also offers a wide assortment
of complementary accessories including belts, hats, flashlights, gloves, watches, knives and patches.
Footwear - Footwear represented 10% of net revenue in each of the years ending 2021, 2020 and 2019 and
includes a full line of functional boots, low-profile tactical shoes, trainers, and socks. First embraced by 5.11
professional customers through their field boots, 5.11 has developed and tested footwear that stands up to extreme
temperatures and weather conditions. 5.11 has evolved into the current lineup of trainers, casual sneakers and
oxfords that afford 5.11's consumers the same level of comfort, protection, durability and style they expect from
5.11. 5.11 trainers feature All Terrain Load Assistance System (A.T.L.A.S.) technology, which is built to help 5.11's
consumers undergo the most strenuous of workouts. The 5.11 A/T Trainer adds comfort and substantially increased
agility, flexibility, and durability to cross training, functional fitness and heavy workouts.
Customers and Distribution Channels
Management believes the brand’s empowering message, innovative product quality, and technically advanced
designs appeal to a broad and growing consumer base. Based on the cross-over appeal of its products, 5.11
consumers fall into two core groups, professional “Prosumers” and “Everyday Consumers.” The 5.11 community
was initially built by Prosumers, which consists of groups such as U.S. military personnel, law enforcement, first
responders, and frontline workers, who require unwavering durability and reliability, but also value the design and
comfort of the 5.11 products, providing the versatility to wear its products both on and off duty. Over time, 5.11 has
expanded its reach into functionally focused Everyday Consumers, who, management believes, are inspired by
Prosumers to live a life bigger than themselves and share the always be ready "ABR" mindset. 5.11 products
resonate with a diverse group of Prosumers and Consumers, laying the foundation for continued expansion of a
loyal and engaged consumer base into the future.
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Everyday Consumers: A blend of active, challenge-seeking and achievement-oriented gear consumers who
thrive on fitness and adventure. Inspired by 5.11’s Prosumers to live a life bigger than themselves with the
“Always Be Ready” mindset, these Everyday Consumers engage in a range of activities from fitness and
training, to outdoor experiences such as hunting, hiking and overlanding, and purchase 5.11 products for
everyday casual use. They prioritize maintaining high performance and, we believe, recognize that the
functional superiority of 5.11 products aligns with their own achievement-oriented goals. They also
appreciate the aesthetic and functional design of 5.11 products, which can take them from the comfort of
their home to a favorite nearby hike, as well as 5.11 apparel, footwear and gear, which are as dynamic as
they are. We believe the Everyday Consumers align with 5.11 products’ price points and superior value
proposition.
Prosumers: Includes everyone from the most elite U.S. military and law enforcement special forces units on
the planet to everyday heroes including first responders, frontline workers, and other professionals, both on
duty in mission-critical situations and off-duty. Prosumers are devoted to service, on and off-the-clock, and
5.11 endeavors to match their dedication and commitment as it produces superior technical products for
every aspect of their lives. 5.11’s unique combination of durability, functional excellence, and comfort allows
Prosumers to turn to 5.11 seamlessly across a variety of use-cases, whether on-duty, training, spending a
weekend overlanding, backpacking, or camping. Many of the Prosumers are never fully off-duty, making the
ability to serve them comfortably and reliably in all aspects of their lives a top priority. 5.11 enables them to
“Always Be Ready” to meet any challenges that cross their path.
The strength of the 5.11 business model is the ability to serve the consumer however they prefer to engage while
simultaneously reinforcing the 5.11 brand’s premium association and authenticity. Rather than taking the traditional
channel approach to the business which management believes limits 5.11's potential, 5.11 enters a trade area with
the right mix of owned stores, Consumer Wholesale, Professional Wholesale, eCommerce and marketplaces. By
approaching trade areas in this manner, 5.11 shares inventory between stores and eCommerce and optimizes
speed and efficiency with logistics that meet consumers’ needs wherever they prefer to shop, rather than directing
them into a particular channel. This principle of product accessibility and experiential shopping drives brand building
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and organic lead generation. Though each channel is able to function profitability on an individual basis, the value
derived from these channels working in concert is a unique competitive strength 5.11 employs in every market in
which it operates.
Direct to Consumer - 5.11’s DTC channel is comprised of its digital platform, 511tactical.com, its growing network
of retail stores as well as its third-party marketplace partners. 5.11 has significantly expanded its DTC mix in the
past five years, with DTC now comprising 43%, 39% and 32% of net sales for the years ended December 31, 2021,
2020 and 2019, respectively. 5.11’s website has grown significantly and drives a significant portion of its online
sales. 5.11 also operates 87 company owned retail stores in 27 states, with plans to grow its footprint further. Both
the online and company owned retail stores enable 5.11 to maintain direct relationships with consumers, influence
the brand experience and better understand shopping preferences and behavior.
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eCommerce. 5.11 has grown its ecommerce substantially in the last few years, which has been enabled by
continued investment in digital infrastructure capabilities, enhanced consumer experience through
increased customization and curation, and a growing global supply chain. Since 2017, 5.11 has invested
over $35 million in capabilities to further its eCommerce infrastructure, including a scalable, ERP system
and new locations that enable more cost effective and timely delivery for its eCommerce orders.
Retail. Since 2011, 5.11 has grown to 87 branded and owned retail locations around the U.S. as of
December 31, 2021. Its locations provide an opportunity for 5.11 to showcase its diverse product
assortment. Retail also provides an opportunity to further engage with consumers through the ABR mindset,
with in-person, local community events and educational opportunities that elevate the experiential retail
experience.
Third-party marketplaces. 5.11’s third-party marketplace partners, such as Amazon, are invaluable tools for
its omnichannel presence. The collaboration with the some of the largest retailers brings 5.11 increased
opportunity from sales and revenue to increased marketing opportunities and brand awareness. Yet at the
same time, 5.11 is strategic about protecting its 5.11 brand and delivering a consistent consumer
experience in the third-party marketplace.
Wholesale - The Wholesale channel is comprised of Professional Wholesale, Consumer Wholesale and
International business. Wholesale sales were 57%, 61% and 68% of net sales for the years ended December 31,
2021, 2020 and 2019, respectively. The Professional Wholesale channel specializes in demand creation for formal
procurement through specification of 5.11 on government contracts around the world. The Consumer Wholesale
channel is comprised of dealers, outdoor specialty retailers, and military exchanges, serving predominantly
Everyday Consumers. The International business includes retail locations and International eCommerce sites.
International products are currently distributed in over 120 countries across the globe, but management believes
there is significant opportunity for continued International expansion.
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Professional Wholesale. The Professional Wholesale channel consists of Prosumer sales relationships, and
is comprised of dealers and resellers of 5.11 technical apparel, footwear and gear through governmental
departments and agencies, including their retail front and eCommerce services that cater to Prosumers that
need additional services, such as tailoring of their uniforms, in a one-stop-shop experience. Requirements
of outfitting entire agencies or departments necessitates carrying numerous, often infrequently used, sizes
and colors of a given product. In addition, 5.11’s years of handling these types of customized orders has
resulted in 5.11 having a dedicated team with specialized expertise, a skillset that is unique in the industry.
We believe 5.11’s significant investment in inventory provides a competitive advantage versus smaller less
well capitalized competitors that carry low levels of inventory.
Consumer Wholesale. The Consumer Wholesale channel consists of Everyday Consumer sales
relationships, and is comprised of third-party retailers and their eCommerce sites. 5.11 consumers can find
its products at well-known big box sports, outdoor specialty retailers and military exchanges, in addition to
third-party online only retailers who focus on product sales in similar apparel, footwear and gear categories
as we do. Shop-in-shop concepts at key retailers who also attract the 5.11 customer base gives consumers
a tactile experience with 5.11 products, by which they can feel, try on, and compare 5.11 product offerings.
Additionally, 5.11 gains online traction from discussion boards and forums that bring professional and
everyday enthusiasts together to discuss 5.11 products and the category in general. Both avenues serve as
catalysts to attract new customers and keep long time consumers loyal to the 5.11 brand.
International. In addition to domestic whitespace, management believes there is opportunity to expand
internationally as International only represented 18% of net sales in 2021. While 5.11 products are currently
distributed in 120 countries across the globe, 5.11 has limited penetration in many of these countries with
limited distribution in certain countries and certain dealers only carrying select styles. As such, management
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believes there is significant opportunity for continued international expansion and plan to expand in EMEA,
Mexico, Asia, Australia, and Canada, and will leverage third-party logistics facilities in Europe and China as
well as 5.11’s owned warehouse in Australia to drive this. 5.11 sees additional opportunities to further
expand internationally and plan to methodically continue the expansion of its business.
No individual customer represented greater than 10% of 5.11’s net revenues in 2021. At December 31, 2021 and
2020, 5.11 had approximately $40.7 million and $21.8 million, respectively, in firm backlog.
Market Opportunities
5.11 products are designed for use in a wide variety of activities, from professional to recreational and outdoor and
indoor, and can be used all year long. As a result, the markets and consumers 5.11 serves are broad and deep. The
market opportunity is both significant and supported by the demand of 5.11’s innovative products providing an
opportunity for future, profitable growth. As a category-defining brand, management believes its innovative products
serving Everyday Consumers and Prosumers will continue to expand its addressable market.
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U.S. Everyday Consumer Opportunity. 5.11 products address a large and broad Everyday Consumer base
consisting of individuals from all walks of life. Everyday Consumers include small business owners,
teachers, lawyers, farmers, homemakers and others, who enjoy wearing 5.11 during work, after work and
on their weekend adventures. Management believes the Everyday Consumers are multi-generational,
though skewing younger. These younger consumers are representative of an expanding, technically-
focused consumer base looking for performance in every aspect of their daily lives. 5.11 caters to Everyday
Consumers across all regions of the U.S., though management believes Everyday Consumers are located
primarily in urban and suburban locations.
U.S. Prosumer Opportunity. 5.11’s premium product offering addresses a large Prosumer base, including
first responders, military personnel, on and off-duty public servants, non-active military and other
functionally focused professionals such as contractors, utility workers, hospital professionals and others
using 5.11 for professional applications. Management believes Prosumers are multi-generational, though
primarily middle-aged males. Similar to our Everyday Consumers, 5.11 caters to Prosumers across all
regions of the U.S. and believes Prosumers are located primarily in urban and rural locations. The
Prosumer market is a stable, recurring source of demand for our products. Management believes that
Prosumer demand is resilient through economic cycles as Prosumers continue to depend on 5.11 products
regardless of the economic environment.
International Opportunity. In addition to the domestic whitespace opportunity, management believes there is
opportunity to expand to a large global market, as International only represented 18% of net sales in 2021.
5.11 products are currently distributed in 120 countries across the globe with our market entry point being
the Professional Wholesale Channel. Most countries outside the US are under-penetrated with limited
distribution and select dealers only carrying a portion of available styles. As such, management believes
there is significant opportunity for continued international expansion and plan to expand in EMEA, Mexico,
Asia, Australia, and Canada. 5.11’s approach will be to build out each region uniquely based on the size of
the opportunity and the complexity of conducting business in a particular country. This approach currently
utilizes a mixture of Professional and Consumer wholesale channels, distributors, wholesale partner stores,
third party ecommerce sites as well as owned ecommerce websites and retail stores. To build this business
5.11 plans to leverage its third-party logistics facilities in Europe and China as well as its owned warehouses
in Australia and the US for supply chain logistics. 5.11 sees additional opportunities to further expand
internationally and plan to methodically continue the expansion of its business.
Business Strategies
Increase Brand Awareness and Grow the Passionate 5.11 Community - 5.11 has proven the profitability of its
core product offerings and broad geographic relevance, while demonstrating clear brand authenticity and versatility.
Though 5.11 is a brand and industry leader in the tactical and functional fitness communities, management believes
it still has substantial room to grow through continuing to broaden its brand awareness. 5.11 has a large, growing
community of deeply loyal consumers who share an authentic connection to the brand. 5.11 brand awareness is
driven largely by its authentic association with public safety and the military, who rely on 5.11 gear for performance
both on-duty and off-duty. To increase brand awareness, 5.11 designs and executes a variety of dynamic, high
impact marketing strategies to engage existing consumers and reach new consumers, both domestically in the U.S.
and internationally.
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5.11’s innovative brand and marketing strategy has been able to deliver significant brand awareness growth with
relatively low marketing spend to date. The reason this has been so successful is due to the outsized returns from
5.11’s positive, community-driven word-of-mouth, stemming from consumers who share an emotional connection to
5.11. While 5.11’s marketing competencies extend well beyond traditional and digital media; 5.11 is a leader in
content development and influencer marketing. 5.11 has built a community with major brand ambassadors and
brand partners. 5.11 also partners with other leading brands across categories, such as Spartan in fitness and
Ubisoft’s Ghost Recon in gaming. These strategic partnerships reinforce 5.11’s authentic and premium branding
while simultaneously engaging a broad and passionate customer base of potential 5.11 consumers. Through its
deep relationships, history of mutually beneficial partnerships, community, and social events such as “ABR
Academies,” as well as its recognized leadership position, management believes 5.11 has become a partner of
choice for influencers worldwide, leading to a significant competitive advantage. These marketing efforts deliver
authentic, aspirational experiences and exclusive content that drive loyalty and engagement. 5.11 pairs this
emotional brand marketing with sophisticated, data-driven performance marketing to further drive profitable
customer acquisition, retention and high lifetime value. Through investment in these marketing strategies, 5.11
intends to drive passionate 5.11 connections within its community.
Continued Execution of Integrated Omnichannel Platform to Drive Disciplined Growth - Management believes
5.11 has built a solid omnichannel distribution strategy, comprised of a rapidly growing DTC channel, which includes
its owned retail locations, proprietary website, and third-party marketplace partners like Amazon, and a recurring
Wholesale channel, which encompasses our Professional Wholesale, Consumer Wholesale, and International
business. Rather than taking the traditional channel approach to the business which management believes limits
5.11's potential, 5.11 enters trade areas with a tailored DTC and wholesale strategy for that market. To best serve its
consumers’ needs and to profitably accelerate growth, 5.11 continues to make investments in its omnichannel
distribution strategy. To increase connectivity and reach a larger quantum of consumers, 5.11 is accelerating digital
growth through the utilization of data analytics, targeted digital tactics and integrated marketing campaigns. In
parallel, 5.11 continues to improve its website functionality as measured through strong site traffic, conversion and
average order value. 5.11’s digital growth is complemented by the potential to expand its retail footprint. Currently,
5.11 has 87 physical stores, which represents an increase of 83 since 2015. Ultimately, the expansion of both
channels presents an accessible near-term opportunity to accelerate growth and better serve evolving consumer
preferences.
Leverage Innovation Capabilities to Continue Developing New Products - At its core, 5.11 is an innovator that
prides itself on making purpose-built technical apparel, footwear and gear for all of life’s most demanding missions.
Throughout its history, 5.11 developed a diverse product portfolio that has helped grow its brand to be an industry
leader in both its Wholesale and DTC businesses. Through its product innovation, 5.11 developed brand affinity,
built on the foundation of its strong professional business. By serving its Prosumer, 5.11 increased demand in its
Everyday Consumer segment, creating a large whitespace for growth. Moving forward, 5.11 is looking to grow share
of its consumers’ wardrobe with a continued focus on everyday and weekend wear. In order to accelerate growth
and meet consumer preferences, 5.11 plans to continue its consumer product innovation and expand its lifestyle
product offering and other ancillary categories. 5.11 built a foundation of infrastructure and processes that allows it
to have shorter lead time on product and design. 5.11 will continue to refine this in order to accelerate growth and
take market share in the consumer business through an expanded product portfolio. Management believes that
continued product innovation for 5.11's Prosumers drives brand loyalty with its Everyday Consumers. 5.11’s efforts
to tailor products for its Prosumers drives innovation and credibility, which in turn yields superior functionality and
appeal to Everyday Consumers. As 5.11 continues to scale, its broader consumer base allows it to reinvest
resources back into its technical and functional expertise, further driving continued innovation for its professional
consumers.
Disciplined International Expansion - International represents 18% of net sales in 2021 and management
believes 5.11 has a large opportunity to expand this business. Management believes Prosumers internationally view
U.S. first responders, military and public servants as being among the best in the world, and want the same apparel,
footwear and gear that they use both on and off duty. 5.11’s international strategy parallels the success it has
enjoyed in the US by seeding the market through the Prosumer channels, which creates brand awareness and
Everyday Consumer demand.
Currently 5.11 products are distributed in over 120 countries across the globe. 5.11 leverages its proven playbook to
invest in the largest, most successful international regions to grow its business. This strategy starts with the
Professional Wholesale channel which establishes a profitable recurring revenue stream. As that grows, 5.11 builds
a Consumer Wholesale channel and finally a DTC business is established in the most mature markets. While the
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strategic approach is consistent, each region is uniquely built based on the size of the opportunity and the
complexity of conducting business in a particular country. Management believes there is a significant opportunity to
continue 5.11's international expansion with a focus on EMEA, Mexico, Asia, Australia and Canada. 5.11’s ability to
supply the same superior apparel, footwear and equipment to global markets allows it to expand its already
profitable international business to Everyday Consumers living by the ABR mindset around the world.
Competitive Strengths
Authentic Global Lifestyle Brand with Passionate Following - Since inception, 5.11 has been a trusted brand by
military, law enforcement, public safety, first responders and frontline workers and other service professionals
around the world. No matter the mission or how demanding the environment, management believes 5.11 makes the
apparel, footwear and gear of choice for professionals both on and off duty. This loyalty and trust, proven over
decades from when the FBI Academy first adopted 5.11 pants in 1992, is a powerful tool. This stamp of approval
from the elite professional community creates a brand halo effect that propels the Everyday Consumer business,
allowing 5.11 to appeal to a broad range of consumers who embrace an active lifestyle, and who also appreciate
5.11 products’ superior technical performance for everyday use.
5.11’s loyal consumers act as brand advocates, proudly wearing branded 5.11 gear and displaying 5.11 banners,
decals and patches. Management believes that 5.11's brand advocacy through social media or by word-of-mouth,
coupled with its varied marketing efforts, has extended its appeal to the broader community. As 5.11 has expanded
its product lines, and broadened its marketing messaging, it has cultivated an increasingly diverse audience of both
men and women living throughout the United States and, increasingly, in international markets. Management
believes 5.11's loyal customers, alongside its heritage of authenticity and high-quality product performance create
such a strong connection to the 5.11 brand.
Deep Knowledge of Our Consumers Drives Our Product Development and Marketing - Management believe
much of the 5.11 brand success is accredited to the loyalty of 5.11's consumers. 5.11 continuously strives to
understand their evolving needs. Utilizing consumer insights through proprietary research, data, and analytics, 5.11
informs its product design and development teams to meet the demands and expectations of its loyal consumers.
Having innovated closely with its Prosumers since 2003, 5.11 has a deep understanding and appreciation for the
tactical issues they deal with daily. Seeing itself as problem-solvers first-and-foremost, 5.11 designs products that
provide solutions to the obstacles they encounter while on duty, enhancing the daily regimens of its professional
end-users. 5.11 consumers are passionate about their work and activities, and 5.11 matches that passion as it
continuously strives to build functional, durable, and comfortable products. Not only is this insight helpful in product
design and development, but also in outbound marketing efforts, both domestically and internationally. 5.11 supports
and builds its brand through a fully integrated, high-impact marketing strategy which includes innovative and
exclusive content, digital and social media, dedicated weekly Podcast, community-outreach, television and movie
product placement and integrations, sponsorships, and local store activations and events that foster consumer
engagement.
Purpose-Built, Innovation-Led and High-Quality Product Offering - 5.11’s DNA is readiness. 5.11 addresses the
needs of elite professionals around the world, outfitting them with the top-quality gear and equipment necessary to
complete their missions. From this powerful foundation, 5.11 develops products to both address the specific needs
of these professionals and have broad appeal. The process for development starts with a rigorous analysis of the
most important functional qualities for 5.11 Prosumers. 5.11 then engages with the broader community, along with
industry and trade professionals, to help find specific voids in the market worth targeting. 5.11 uses this data and
insights to develop head-to-toe assortments to serve its consumers holistically whether they are at the office,
exercising, experiencing the outdoors, or simply embracing the ABR lifestyle in their daily lives.
5.11 delivers a comprehensive lineup that enables its customer to enjoy high-quality functionality without having to
sacrifice lifestyle, comfort, or style. Management believes 5.11's ability to deliver this balance is a deep competitive
advantage that is unrivaled and where most of its competitors have proven to be unsuccessful.
Integrated Omnichannel Distribution Strategy - The foundation of 5.11's business model is to continue to
strengthen its ability to serve the Everyday Consumer and Prosumer however they prefer to engage and purchase
with 5.11, while simultaneously reinforcing 5.11's brand’s association and authenticity. Rather than taking the
traditional channel approach to the business which management believes limits 5.11's potential, 5.11 enters trade
areas with a tailored DTC and wholesale strategy for that market. By approaching trade areas in this manner, we
believe 5.11 is able to share inventory between our stores and eCommerce, which allowed for 29% of eCommerce
orders to be fulfilled out of store locations in late 2020, following the implementation of 5.11's Buy Online Ship From
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Store functions. This optimizes speed and efficiency with logistics that truly meet 5.11's Prosumers’ and Everyday
Consumers’ needs wherever they prefer to shop, rather than directing them into a particular channel. We believe
this principle of product accessibility and adopting to consumers’ shopping choices drives brand building and
organic lead generation. Though each channel is able to function profitability on an individual basis, the value 5.11
derives from its channels working in concert is a competitive strength.
Scalable Infrastructure and High-Performance Team to Support Growth - 5.11 has invested approximately $70
million in capital expenditures in the last five years to not only improve operating and fulfillment performance in its
current growth phase, but also as a foundation to support continued future growth. 5.11’s investment has included
implementing a variety of strategic and operational improvements, including hiring experienced senior executives,
expanding its company owned retail stores, executing merchandising improvements, enhancing distribution and
supply chain capabilities and implementing data-driven digital marketing campaigns. 5.11’s current infrastructure
allows it to fulfill orders accurately and effectively across all channels, including making certain shipments direct
from the source to bypass distribution centers, while still providing buffer capacity capabilities to support future
expansion.
Competition
5.11 competes in the global marketplace for purpose-built technical apparel, footwear and gear. Management
believes 5.11 has competitive advantages through its global omnichannel business model, which is comprised of a
rapidly growing DTC channel and recurring Wholesale channel. 5.11 competes against activewear, outdoor and
specialty apparel brands such as Nike, Under Armour, The North Face, Patagonia, Lululemon, Arc’teryx, Carhartt,
Propper and Fecheimer Brothers. 5.11 competes with footwear brands such as Timberland, Bates and Danner, and
with gear and bag brands such as Camelbak, Osprey and YETI. 5.11 also competes with specialty retailers such as
REI, Dick’s Sporting Goods and Galls.
Suppliers
5.11 has built a supply chain that is optimized for its business, through which 5.11 controls the design, development
and fulfillment of its products.
Sourcing and Manufacturing
5.11 does not own or operate any manufacturing facilities. Instead, it chooses to contract with third-party suppliers
for materials (fabric and trims) and manufacturers for finished goods. 5.11 partners with high-quality vendors and
retains complete control of all intellectual property associated with its products. 5.11 product design, technical
design and development teams work directly with its vendors to incorporate innovative materials that meet the high-
quality product standards demanded by its customers. 5.11’s primary product specifications include characteristics
like durability, protection, functionality, and comfort. 5.11 collaborates with leading fabric suppliers to develop fabrics
that it ultimately trademarks for brand recognition whenever possible.
The materials used in 5.11 products are developed in partnership between its material vendors and its design,
product development and sourcing teams, then sourced by its manufacturers from a limited number of pre-approved
suppliers. To enhance efficiency and profitability, 5.11 recently adopted 3D design capabilities for virtual prototyping
allowing it to make better and quicker decisions prior to creating physical prototypes. Additionally, 5.11 recently
partnered with one of our apparel manufacturers to create a development center with dedicated resources to
facilitate rapid prototyping.
All 5.11 products are manufactured by third-parties. 5.11 works with a group of 60+ vendors, 15 of which produced
approximately 80% of its products in fiscal year 2021 and 2020. During the year ended December 31, 2021,
approximately 44% of 5.11 products at cost were produced in Bangladesh, approximately 36% in Vietnam, and the
remainder in China, Cambodia, Taiwan, Philippines, Indonesia, Africa, Central America and the United States. 5.11
does not have any long-term agreements requiring it to use any manufacturer, and no manufacturer is required to
produce its products in the long term. 5.11 purchases from suppliers on a purchase order basis informed by
capacity forecasts. 5.11 measures supplier performance through various performance indicators and partner closely
with them to continually improve efficiency, cost, and quality. Management believes that 5.11's principal
manufacturers have the additional capacity to accommodate future growth.
As a company devoted to the needs of public safety and mission-oriented professionals, 5.11 has developed secure
relationships with a number of its vendors and take great care to ensure that they share its commitment to quality
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and ethics. Under its supplier agreements, suppliers must follow 5.11’s established product design specifications
and quality assurance programs to meet specified standards. To ensure vendor reliability and quality, 5.11 has
established a sourcing office in Hong Kong, which employs approximately 59 individuals whose primary functions
include vendor management, commercialization, product development, production planning, vendor compliance,
and quality assurance.
5.11 requires its vendors to comply with its Vendor Code of Conduct relating to working conditions as well as certain
environmental, employment and sourcing practices. 5.11 requires all vendors to contractually commit to upholding
these standards. Additionally, in alignment with its values, 5.11 encourages its manufacturers to be certified through
the Worldwide Responsible Accredited Production (WRAP) program, which is an independent organization
dedicated to promoting safe, lawful, humane and ethical manufacturing. Once a vendor is part of 5.11’s production
network, its in-house production team work together with third-party inspectors to closely monitor each partner’s
compliance with applicable laws and standards on an ongoing basis.
5.11 regularly sources new suppliers and manufacturers to support its ongoing growth and carefully evaluates all
new suppliers and manufacturers to ensure they share its standards for quality and integrity. To mitigate supplier
concentration risk, 5.11 commercializes its top key items at multiple factories to ensure it can balance geographic
risks as well as respond quickly to spikes in business. 5.11 also continuously seeks out additional suppliers and
manufacturers to enable contingency plans that minimize disruptions, as well as support its future growth.
Distribution
5.11 leases and operates a distribution facility in Manteca, California to support its fulfillment needs across the
Americas (North, Central & South). Additionally, 5.11 operates a small distribution facility in New South Wales,
Australia to serve the Australia and New Zealand markets. 5.11 utilizes global third-party logistics providers to fulfill
customer orders in EMEA and Asia-Pacific, which are located in Sweden and China, respectively. These third-party
logistics providers manage all various distribution activities in their regional markets, including product receiving,
storing, limited product inspection activities, and outbound shipping.
Intellectual Property
To establish and protect its proprietary rights, 5.11 relies on a combination of trademark (including trade dress),
patent, design, copyright and trade secret laws, as well as contractual restrictions in license agreements,
confidentiality and non-disclosure agreements and other contracts. 5.11’s intellectual property is an important
component of its business, and management believes that 5.11's know-how and continuing innovation are important
to developing and maintaining its competitive position. Management also believes having distinctive marks that are
readily identifiable on 5.11's products is an important factor in continuing to build its brand and distinguish its
products. 5.11 considers the 5.11 name and logo trademarks, together with 58 issued and pending patents and 374
registered trademarks, both in the United States and internationally, to be among its most valuable intellectual
property assets.
Regulatory Environment
In the United States and the other jurisdictions in which 5.11 operates, it is subject to labor and employment laws,
laws governing advertising, safety regulations and other laws, including consumer protection regulations that apply
to the promotion and sale of merchandise and the operation of fulfillment centers and privacy, data security and
data protection laws and regulations, such as the California Consumer Privacy Act, in the United States, the EU
General Data Protection Regulation 2016/679 ("GDPR") in the European Economic Area and Switzerland, the U.K.
GDPR and the United Kingdom Data Protection Act 2018 in the United Kingdom, and the Brazilian General Data
Protection Law in Brazil, the ePrivacy Directive and national implementing and supplementing laws in the European
Economic Area. Privacy and security laws, regulations, and other obligations are constantly evolving, may conflict
with each other to complicate compliance efforts, and can result in investigations, proceedings, or actions that lead
to significant civil and/or criminal penalties and restrictions on data processing. 5.11 products sold outside of the
United States may be subject to tariffs, treaties and various trade agreements, as well as laws affecting the
importation of consumer goods. 5.11 monitors changes in these laws and management believes that 5.11 is in
material compliance with applicable laws. Failure to comply with these laws, where applicable, can result in the
imposition of significant civil and/or criminal penalties and private litigation. A portion of sales generated by its
International business is derived from sales to foreign government agencies, and management believes 5.11 is in
material compliance with related applicable laws.
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Human Capital
Mission-Driven, Innovative and Supportive Culture – From the beginning, 5.11’s company culture has always been
focused on serving those who serve—military, law enforcement officers, public safety and first responders and
frontline workers from around the world. The passion for serving these top professionals inspires 5.11 to extend
serving its consumers into their everyday lives, to be prepared for whatever life throws their way. 5.11’s teams
embrace its ABR mindset, and its core values allow 5.11 to attract passionate and motivated employees who are
driven to succeed and share the vision of becoming “an iconic global brand rooted in innovating purpose-built gear
for the most demanding missions while inspiring the world to always be ready.”
5.11’s work environment is open and collaborative, spanning a global organization from its headquarters in Irvine,
CA and offices in Hong Kong, Mexico, Sweden and Australia, to its distribution center in Manteca, CA, and to its
U.S. retail stores. Its employees around the world are 5.11’s most valuable and important brand ambassadors. Their
commitment to 5.11 and its mission, and their knowledge and passion for 5.11 products allows 5.11 to execute its
company strategy and strengthens its brand loyalty. Additionally, 5.11 store employees are critical to 5.11’s success
and often represent members of its communities, with many of them retired military, law enforcement officers and
first responders.
5.11 prides itself in its ability to work directly with top professionals around the world, innovating to solve their
greatest needs in the most mission-critical settings. 5.11 maintains a global footprint, with employees working in
thirty-three states and eighteen countries. At December 31, 2021, 5.11 had 861 full-time employees and 185 part-
time employees. 5.11 strives to create a welcoming and caring environment across the entire organization and
celebrate the passion its team members bring forward in serving its consumers. 5.11 believes it has created a
company culture focused on attracting, retaining, and developing talent, which enables it to exceed consumers’
expectations and meet its growth objectives. 5.11 prioritizes building a diverse, inclusive, equitable and supportive
team that is driven by creativity and purposeful innovation.
BOA
Overview
BOA, 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
headwear and medical bracing. The system consists of three integral parts: a micro-adjustable dial, high-tensile
lightweight laces, and low friction lace guides creating a superior alternative to laces, buckles, Velcro, and other
traditional closure mechanisms. Each unique BOA configuration is engineered for fast, effortless, precision fit, 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.
History of BOA
BOA was founded in 2001 by Gary Hammerslag, a snowboarder, surfer, and entrepreneur. Gary moved to
Steamboat, Colorado in the mid-90’s after successfully selling his previous company, which created innovative
catheter solutions that improved angioplasty procedure speed and effectiveness. After arriving in Steamboat and
frequently snowboarding, Gary envisioned a possibility to dramatically improve the fit and performance of
snowboard boots by applying elements of his learnings in the medical device field. Gary developed a fit system as
an alternative to traditional laces for snowboard boots and partnered with K2 and Vans to launch the first BOA-
equipped snowboard boots to consumers in the winter of 2001. After a successful launch, BOA became widely
adopted on snowboard boots.
BOA’s next phase of growth was largely in the outdoor sporting and recreation markets. In 2005, BOA expanded its
focus to hiking and trail-related footwear, followed by cycling and golf in 2006 and hunting and fishing in 2007, at
which point BOA surpassed 1 million users worldwide. From 2008 to 2011, having gained credibility in consumer
markets, BOA introduced products for the workwear footwear market as well as products for the medical bracing
market. In 2013, the company entered the running and training footwear market.
In 2019, BOA launched its state-of-the-art Performance Fit Lab ("PFL") to quantitatively measure the impact of BOA-
equipped footwear on athletic performance. The PFL is used to advance performance footwear fit technology by
testing, refining, and improving footwear products in collaboration with the company’s major brand partners and
serves as a catalyst for innovation. In 2021, BOA surpassed 25 million users worldwide.
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We purchased a majority interest in BOA on October 16, 2020.
Industry
BOA participates broadly in the global footwear market, representing approximately 10 billion pairs of shoes sold
annually. BOA’s addressable market is identified based on product type, price lane, and geography. BOA targets the
premium segment, where applicable price lanes tend to be at the upper end of each category. With respect to
product type, the overall market is segmented into various subcategories, of which BOA primarily targets footwear
for active performance sports, outdoor applications, and kids. Based on target footwear categories and applicable
price lanes, management estimates BOA’s addressable market to be approximately 750 million pairs of shoes sold
annually. Management estimates the company has approximately 3-4% share within its addressable market.
Products, Customers and Distribution Channels
Products
The BOA Fit System consists of a durable lace, which is guided by low-friction guides and attached to a dial that is
typically mounted on the footwear heel, tongue or eye-stay for micro-adjustability to enhance performance fit. BOA’s
current product portfolio has four platforms, H, L, M, and S-Series, which vary in cost, weight, tension, and use
case. Each dial design can be customized with over 220 colors allowing the product to fit cohesively with each
brand partners’ specific designs and colorways.
All platforms share the distinctive characteristics that differentiate BOA from competing offerings: micro-adjustability
to achieve the perfect fit, measurable performance benefits validated by the company’s testing lab, durability and
quality proven in extensive field testing, a lifetime guarantee on the end-product’s dial and laces, and the distinctive
BOA sound heard when turning the dial.
Each platform is designed and engineered to address the specific performance fit needs of the end user by use
case. Factors such as size and shape of dial, level of torque, internal mechanics, and weight vary amongst
platforms, and each platform is further segmented into product collections that differ in aesthetic, optimal placement
on the shoe, and cost. Within each product collection, dial designs and materials differ to accommodate preferences
of the end user and retail price points of the end product.
Customers and Distribution Channels
BOA has approximately 300 global brand partners, including leading footwear companies such as Adidas,
Specialized, Shimano, Fizik, ASICS, Burton, La Sportiva, K2, Vans and FootJoy who feature BOA systems across a
variety of sporting and professional industries including snow sports, cycling, outdoor, athletic, workwear and
medical. BOA typically sells directly to the manufacturing partner responsible for final assembly of the brand
partner’s product. BOA works with 470+ brand partner factories with limited revenue concentration. Most brand
partner factories are located in Asia, primarily in China and Vietnam, and are in relatively close proximity to BOA’s
supply chain.
Rather than being solely an OEM part supplier, BOA maintains highly collaborative relationships with its brand
partners to actively co-develop innovative, performance-driven footwear, helmets and bracing. BOA contributes
substantial design and testing resources to ensure its system is used in a way that maximizes performance based
on dial placement and configuration. The BOA system is not simply a “lace replacement” or plug and play option,
but rather a solution that must be integrated into each product model through a 6-18 month development cycle to
create a system that works specifically with a product’s unique structural design. This process allows BOA to ensure
brand image consistency, end product quality and the best performance fit.
Footwear, headwear, and medical bracing products featuring BOA systems are primarily sold through brick-and-
mortar sporting goods retailers, specialty sport retailers, online retailers, or brand partners’ owned retail and online
channels. According to management’s estimates, end consumption is geographically diverse, with approximately
15-20% of products consumed in North America, 30-35% in Europe, and 45-50% in Asia.
No individual customer or brand partner factory represented greater than 8% of BOA’s net revenues in 2021. At
December 31, 2021 and 2020, BOA had approximately $31.7 million and $15.2 million in order backlog,
respectively.
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Business Strategies and Competitive Strengths
Business Strategies
Continued Share Growth in Established Categories - BOA has established a strong presence in certain core
categories in Northern Europe, Korea, Japan, and the United States where BOA has proven efficacy and
established strong brand partner relationships. In these core categories, BOA is focused on building a community to
cross market to and is actively working to reimagine product solutions to deliver the best product to consumers.
Going forward, BOA intends to leverage its brand partner relationships to expand penetration and capture additional
share in growing markets such as workwear in North America and Asia, outdoor in markets outside of Korea, and
golf in North America. BOA has developed region and category specific products to better cater to the individual
dynamics of each market including products that deliver a better price/value proposition, new product configurations
for region specific trends and performance fit messaging to increase consumer awareness and adoption. Through
its reputation in the marketplace, athlete endorsements and deep relationships with leading brand partners, the
company is focused on delivering the performance benefits of the BOA system across an expanding set of sporting
categories and geographies.
Expand into Pioneering Categories - BOA has identified several adjacent segments including alpine skiing, trail
running, and court sports such as tennis, badminton and basketball which management believes are well suited to
benefit from the performance fit that BOA provides. BOA is actively working with leading brand partners to develop
sport-specific footwear configurations that can benefit from the advantages of the BOA system. By leveraging BOA’s
brand equity and proven solutions, the company believes there is significant whitespace to increase penetration in
these early adoption segments.
Competitive Strengths
Culture of Innovation and New Product Development - Management believes that there is significant opportunity
to continue advancing product offerings through its commitment to innovation. Product development and innovation
are divided amongst (i) BOA’s internal innovation and evolution of its fit systems and platforms, refining and
improving on the aesthetics, durability, user experience, and price/value, (ii) the design and engineering
collaboration that BOA engages in with its brand partners for project and application-specific needs, and (iii) BOA’s
advanced research through its PFL, which is transforming markets through innovative performance fit solutions that
are scientifically tested and validated.
Deep Collaborative Partnerships – BOA has deep partnerships with the premier brands in every segment they
compete within. They collaborate throughout the entire product lifecycle process, including product strategy, design
and development, factory operational/service support, retail education, consumer warranty support, and marketing/
demand creation. BOA has a high partner retention rate due to the depth and value of the relationships.
Premium Brand Position - BOA is focused on continuing to build awareness around its aspirational, global brand
through content leadership, athlete endorsements, paid media, brand partner affiliations, and other business. BOA
primarily increases awareness through direct-to-consumer marketing and co-marketing with its established brand
partner relationships. In 2019, BOA launched its “Pioneer Program,” an athletic sponsorship platform. BOA
leverages athlete endorsements to further establish its positioning as a performance fit leader as well as drive
cross-segment brand awareness. The company recently launched its “Dialed in” Campaign, which showcases
pioneers performing at their peak both physically and mentally. BOA also relies on its trusted brand partners to
increase BOA brand awareness. The company focuses its efforts on collaborating with brand partners who are
innovative market leaders that meet BOA’s brand standards and align with BOA’s positioning as a high-
performance, premium brand.
Technology Leader with Robust Patent Portfolio – BOA is a leader in performance fit innovation and has built a
diverse global portfolio of issued and pending utility and design patents, creating barriers to entry. Throughout
BOA’s history, the company has continually innovated on dial attributes including quick release, durability,
manufacturing ease, and micro adjustability, in addition to integrated lace and lace guide designs and configurations
critical to imparting precision fit and reduced friction. BOA’s engineering and technical expertise enables the
development and production of performance fit solutions, allowing their brand partners to offer performance
enhancing technology and product differentiation.
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Competition
BOA’s competition can be segmented into three categories: established footwear brands that maintain their own
proprietary technology for particular market segments, lower-quality subscale BOA imitators, and non-mechanical
lace alternatives (bungies, buckles, plastic lace locks, Velcro, and webbing). Management estimates that BOA is
20+ times the size of its next closest direct competitor.
Research and Development
BOA’s approach to new product development is a multi-stage, cross-functional process. For each new product
introduction, BOA works closely with brand partners to identify or develop the best suited BOA solution, its optimal
placement on the shoe (or other application), color and design specifications, and cost targets. On existing
products, BOA is committed to continuous innovation, including key improvements such as lower installation costs
for brand partner factories, thinner and sleeker product profiles for improved aesthetics, in field warranty rate
reduction to 0.5%, improved user experience, and the broadening of the platform suite to address key opportunities
in alpine skiing, basketball, and outdoor.
As part of BOA’s innovation strategy around improving fit, the company has invested in a state-of-the-art PFL to
quantitatively measure the impact of the BOA system on end products. In partnership with the University of Denver,
the PFL is testing a significant number of products to evaluate a) Agility & Speed, b) Power & Precision, and c)
Endurance & Health. By addressing these global performance attributes rather than segment-by-segment specific
needs, PFL findings will be relevant and applicable across BOA’s product lines. The results of these studies help
further validate BOA’s value proposition, strengthening the company’s position as a fit and performance leader.
Moreover, the PFL serves as a platform to test and refine new product offerings ahead of launch.
Suppliers
BOA maintains a longstanding deep relationship with a sole supplier for plastic injected parts (dial units and lace
guides), representing approximately 70% of total purchases. The vendor is based in China with multiple facilities.
Furthermore, the vendor has supplied the company since 2001 and has continuously invested in its tools and
infrastructure to maintain quality standards and keep up with demand. BOA owns all its injection molds. Lastly, the
vendor is also a minority shareholder in BOA and is committed to supporting its growth. The remainder of BOA’s
purchases are for steel and steel coated lace, textile laces and guides, monofilament lace and webbing, which are
sourced from China, Korea, Europe, and the U.S. Management believes its manufacturing partners have sufficient
capacity to accommodate future growth.
Intellectual Property
BOA has built a diverse global portfolio of 233 issued and pending utility and design patents. The company has
created 37 patent “families” with intellectual property covering its core technology (dials, guides, laces), as well as
strategic configurations and component installation methods. BOA maintains 10 Trademarks in 40+ countries.
Seasonality
Due to the diversity of sporting segments BOA participates in, there is no significant seasonality to the business,
though BOA typically has higher sales in the fourth quarter, reflecting higher cycling and golf sales in preparation for
the spring retail season, as well as higher sales in the second quarter each year due to purchasing trends in the
snow sports product group.
Environmental, Social and Governance
As a forward-looking company, BOA is working towards making a sustainable impact throughout the world,
minimizing their imprint on the environment, and diversifying the Outdoor and STEM industries. BOA has set bold
goals to dramatically reduce the use of virgin fossil fuel-based plastics, overall manufacturing waste, and materially
increase use of sustainable energy. The company has already made progress in all three areas and will be formally
distributing its environmental and community impact report in the second quarter of 2022. In the last year, BOA has
increased their budget and invested in three new roles to focus on these efforts. The company has formed
partnerships with organizations in every region that are focused on providing more access and opportunities to
under-represented populations and protecting the environment. Through these programs, BOA is working to create
purposeful connections to their employees, partners, and consumers – bringing their mission, values, and products
to the hearts and minds of their audience.
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Human Capital
BOA strives to be an inclusive global team that trusts and cares for each other, their partners, the community, and
the environment. Since their launch in Steamboat, CO in 2001, BOA has maintained a strong and healthy company
culture that is rooted in a passion for the outdoors and the various industries that encompass their product offering.
As the team has expanded over the last 20 years, BOA has placed an emphasis on creating a diverse and inclusive
workplace with the goal of representing their global communities. BOA employees are located in four countries and
the United States. As of December 31, 2021, BOA had 241 full-time employees and 4 part-time employees. 131
employees are located in the United States and 114 work outside of the United States in Austria, Greater China,
Japan, and South Korea.
BOA is focused on both attracting new talent and growing talent from within the organization - providing learning
and development opportunities, placing an emphasis on independent career plans, and building a team of leaders,
managers, and staff that represents their mission, vision, and values. BOA maintains a high retention rate of their
employees and believes the company's relationship with its employees is connected and transparent.
Ergobaby
Overview
Ergobaby is dedicated to building a global community of confident parents with smart, ergonomic solutions that
enable and encourage bonding between parents and babies. Ergobaby offers a broad range of award-winning baby
carriers, blankets and swaddlers, nursing pillows, strollers, and related products that fit into families’ daily lives
seamlessly, comfortably and safely. Ergobaby is headquartered in Torrance, California.
History of Ergobaby
Ergobaby was founded in 2003 by Karin Frost, who designed her first baby carrier following the birth of her son. The
baby carrier product line has since expanded into 3-position and 4-position carriers, with multiple style variations. In
its second year of operations, Ergobaby sold 10,500 baby carriers and today sells over 1 million a year. In order to
support the rapid growth, in 2007, Ergobaby made a strategic decision to establish an operating subsidiary
(“EBEU”) in Hamburg, Germany.
In 2014, Ergobaby launched the Ergobaby Four-Position 360 Baby Carrier which expanded on Ergobaby’s
leadership in the baby carrier category by offering an ergonomic, outward forward facing position for the baby and
comfort for the parent. The Ergobaby 360 Carrier won the 2014 JPMA Innovation award in the baby carrier category.
In 2016, Ergobaby launched the 3-Position Adapt Baby Carrier that is geared for newborns to toddlers (7lbs-45lbs)
and offers some unique parent comfort features including lumbar support and crossable shoulder straps, as well as
the benefit of being an all-in-one carrier with no need for an infant insert accessory (for babies 7-12lbs.). Also in
2016, Ergobaby acquired membership interests of New Baby Tula LLC (“Baby Tula”). Baby Tula designs, markets
and distributes premium baby carriers and accessories and focuses its efforts on both the ergonomics and fashion
of its products. In 2017, Ergobaby launched the All Position, All-in-One Omni 360 Baby Carrier that is geared for
newborns to toddlers (7lbs-45lbs) and includes all of Ergobaby’s parent & baby comfort features from the 360 and
Adapt Baby Carriers, as well as the same consumer benefit of no infant insert accessory needed.
In 2018, Ergobaby entered into the stroller category with 2 new models. The first product launched was a full-size
option called the 180 Reversible Stroller. This was followed later in the year by a premium compact option, the
Metro Compact City Stroller. In 2019, Ergobaby launched the Embrace Baby Carrier which is geared for newborns
(7lbs-25lbs) and merges the coziness of a soft wrap carrier with the simplicity and comfort of a structured carrier. In
2020, Ergobaby launched Everlove, a first of its kind carrier buyback, restoration, and resell program to extend the
lifecycle of our carriers for a more sustainable future. In 2021, Ergobaby launched the multiple award winning
Aerloom, the first-of-its-kind, FORMAKNIT™ baby carrier made to move, stretch and fit parents' daily life. This
carrier has a seamless knit design and 87% of the knit is made with recycled plastic bottles.
We purchased a majority interest in Ergobaby on September 16, 2010.
Industry
Ergobaby competes in the large and expanding infant and juvenile products industry. The industry exhibits little
seasonality and is somewhat insulated from overall economic trends, as parents view spending on children as
largely non-discretionary in nature. Consequently, parents spend consistently on their children, particularly on
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durable items, such as car seats, strollers, baby carriers, and related items that are viewed as necessities. Further,
an emotional component is often a factor in parents’ purchasing decisions, as parents’ desire to purchase the best
and safest products for their children. On average, households spent between 11 - 27% of their before-tax income
on a child. Similar patterns are seen in other countries around the world.
Demand drivers fueling the growing spending on infant and juvenile products include favorable demographic trends,
such as (i) a high percentage of first time births; (ii) an increasing age of first time mothers and a large percentage
of working mothers with increased disposable income; and (iii) an increasing percentage of single child households
and two-family households.
In purchases of baby durables, parents often seek well-known and trusted brands that offer a sense of comfort
regarding a product’s reliability and safety. As a result, brand name, comfort and safety certifications can serve as a
barrier to entry for competition in the market, as well as allow well-known brands such as Ergobaby and Baby Tula
to compete in a growing premium segment.
Products, Customers and Distribution Channels
Products
Baby Carriers - Ergobaby has two main baby carrier product lines: baby carriers and related carrier accessories,
sold under both the Ergobaby and Tula brands. Ergobaby’s baby carrier designs support a natural, ergonomic ("M"
shaped) sitting position for babies, eliminating compression of the spine and hips that can be caused by
unsupported suspension. The baby carrier also distributes the baby’s weight evenly between parents’ hips and
shoulders and alleviates physical stress for the parent. Both Ergobaby’s 3-Position and 4-Position baby carriers
have been recognized by the International Hip Dysplasia Institute as being “hip healthy”. Additional accessories are
provided to complement the baby carriers including the popular Infant Insert.
Within the Ergobaby Baby Carrier product line, Ergo sells 3-Position and 4-Position baby carriers in a variety of style
and color variations and Baby Tula sells 3-Position and 4-Position fashion-oriented baby carriers. Baby Carrier sales
represented approximately 90%, 89% and 88%, of net sales in 2021, 2020, and 2019, respectively.
Within the baby carrier accessories category, the Infant Insert is the largest sales component of the accessory
category but has seen declining sales as customer move to newborn ready carriers. Accessory sales represented
approximately 3.2% in 2021, 5.4% in 2020 and 6.1% in 2019, of net sales.
Ergobaby’s core Baby Carrier product offerings with average retail prices are summarized below:
Ergo
•
•
Tula
•
•
9 styles of baby carriers - $80 - $220
2 styles of Infant Inserts - $35
8 styles of baby carriers - $79 - $1,000
1 style of Infant Inserts - $20
Customers and Distribution Channels
Ergobaby primarily sells its products through brick-and-mortar retailers, national chain stores, online retailers and
distributors. In Europe, Ergobaby products are sold through its German based subsidiary, which services brick-and-
mortar retailers and online retailers in Germany and France; it’s United Kingdom based subsidiary; and its Tula
subsidiary in Poland; as well as a network of distributors located in Sweden, Norway, Spain, Denmark, Italy, Turkey,
Russia and the Ukraine. Customers in Canada are predominately serviced by Ergobaby’s Canadian subsidiary.
Sales to customers outside of the U.S., Canadian and European markets are predominantly serviced through
distributors granted rights, though not necessarily exclusive, to sell within a specific geographic region.
Ergobaby had approximately $14.3 million and $11.5 million in firm backlog orders at December 31, 2021 and 2020,
respectively. Two individual customers accounted for approximately 25% of Ergobaby's gross sales in 2021 and
2020. No other single customer represented more than 10% of Ergobaby’s gross sales in 2021 or 2020.
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Business Strategies and Competitive Strengths
Business Strategies
Increase Penetration of Current U.S. Distribution Channels - Ergobaby continues to benefit from steady
expansion of the market for wearable baby carriers and related accessories in the U.S. and internationally. Going
forward, Ergobaby will continue to leverage and expand the awareness of its outstanding brands (both Ergobaby
and Baby Tula) in order to capture additional market share in the U.S., as parents increasingly recognize the
enhanced mobility, convenience, and the ability to remain close to the child that all Ergobaby carriers enable.
Ergobaby currently markets its products to consumers in the U.S. through brick-and-mortar retailers, national chain
stores, online retailers, and directly through Ergobaby.com and Babytula.com websites.
International Market Expansion - Testimony to the global strength of its lifestyle brand, Ergobaby has historically
derived approximately 60% of its sales from international markets. Like it has in the U.S., Ergobaby can continue to
leverage the Ergo and Tula brand equity in the international markets it currently serves to aggressively drive future
growth, as well as expand its international presence into new regions. The market for Ergobaby’s products abroad
continues to grow rapidly, in part due to the fact that in many parts of Europe and Asia, the concept of baby wearing
is a culturally entrenched form of infant and child transport.
New Product Development - Management believes Ergobaby has an opportunity to leverage its unique, authentic
lifestyle brands and expand its product line. Since its founding in 2003, Ergobaby has successfully introduced new
carrier products to maintain innovation, uniqueness, and freshness within its baby carrier and travel system product
lines and has become the baby carrier industry leader with the Omni 360 baby carrier. In addition to expanding into
new product carriers like swaddling and nursing pillows, in 2018, Ergobaby entered the stroller category by
introducing a new premium compact stroller (Metro Compact City Stroller) and a full-size stroller (180 Reversible
Stroller).
Competitive Strengths
Ergobaby innovation - Ergobaby Carriers are known for their unsurpassed comfort. Ergobaby’s superior design
results in improved comfort for both parent and baby. Parents are comfortable because baby’s weight is evenly
distributed between the hips and shoulders while baby sits ergonomically in a natural ("M" shaped) sitting position.
The concept of baby carrying has increased in popularity in the U.S. as parents recognize the emotional and
functional benefits of carrying their baby. Consumers continually cite the comfort, design, and convenient “hands
free” mobility the Ergobaby carrier offers as key purchasing criteria. Ergobaby is also recognized as an industry
leader in innovation. With the launch of the Ergo 4-Position 360 Carrier in 2014, the launch of the 3-Position ADAPT
carrier in 2016, the launch of the All Position Omni 360 carrier in 2017, the launch of the Embrace carrier in 2019,
and the launch of the Aerloom carrier in 2021. Ergobaby continues to innovate in the baby carrier segment on a
regular basis.
Baby Tula Community - Tula enjoys an active and enthusiastic community who are vocal advocates for the brand.
The Tula community acts as both an avid source of feedback on new product launches, which influence future
product and patterns, as well as brand influencers to the broader new parenting community.
Competition
The infant and juvenile products market is fragmented, with a few larger manufacturers and marketers with
portfolios of brands and a multitude of smaller, private companies with relatively targeted product offerings.
Within the infant and juvenile products market, Ergobaby’s baby carriers primarily compete with companies that
market wearable baby carriers. Within the wearable baby carrier market, several distinct segments exist, including
(i) slings and wraps; (ii) soft-structured baby carriers; and (iii) hard frame baby carriers.
The primary global competitors in this segment are BabyBjorn, Infantino, and Chicco. In geographies globally,
Ergobaby also competes with companies that have developed wearable carriers, such as Infantino, Manduca,
Cybex, Nuna, Stokke, Boppy, and Pognae. Within the soft-structured baby carrier segment, Ergobaby benefits from
strong distribution, good word of mouth, and the functionality of the design.
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Suppliers
During 2021, Ergobaby sourced its Ergo carrier and carrier accessory products from Vietnam and India, and
manufactured its stroller systems and accessory products in China. Baby Tula products predominantly were
produced from factories in India and Poland and were also produced in its own facility located in Poland. In 2009,
Ergobaby partnered with a manufacturer located in India, and in 2012, Ergobaby began sourcing carriers and
accessories from a manufacturing facility in Vietnam. More than 50% of Ergobaby’s carriers and accessories came
from Vietnam in 2021. Baby Tula sourced its carrier, accessories and blanket products from Poland, Vietnam and
India, with purchases from these locations accounted for approximately 14% of total Ergobaby purchases.
Management believes its manufacturing partners have the additional capacity to accommodate Ergobaby’s
projected growth.
Intellectual Property
Ergobaby maintains and defends a U.S. and international patent portfolio on some of its various products, including
its 3-position and 4-position carriers. Currently, it has 81 patents (including allowances) and 33 patents pending in
the U.S. and other countries. Ergobaby also depends on brand name recognition and premium product offering to
differentiate itself from competition.
Human Capital
Ergobaby is a global organization headquartered in Torrance, California, with offices in Hamburg, London, Paris and
Bialystok, and distribution and retail partnerships in more than 75 countries. As of December 31, 2021, Ergobaby
had 183 employees globally. Ergobaby’s people are its most valuable asset and the organization is proud to be
recognized as one of LA’s Best Places to Work 2021. Ergobaby strives to create a culture of trust with diversity of
thought to drive innovation, create products and be a resource that helps to empower families everywhere. The
collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, and unique
capabilities of Ergobaby employees is evident in its positive culture and highly recognized brand. The company’s
corporate responsibility and diversity and inclusion efforts are employee led, driven by the belief that supporting a
global society that is resilient, empathetic, anti-racist, and inclusive starts with having a community where all people
can thrive, starting from within the company itself.
Lugano
Overview
Lugano is a leading designer, manufacturer, and retailer of high-end jewelry. Lugano utilizes an extensive network of
suppliers to procure high-quality diamonds and rare gemstones. Often taking inspiration directly from the stone,
Lugano designs and creates one-of-a-kind jewelry that it sells to a broad base of clients. 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 communities. Lugano is headquartered in Newport
Beach, California.
History of Lugano
Lugano was founded in 2004 by husband-and-wife team Moti and Idit Ferder. The company’s chosen name,
“Lugano” was inspired by the picturesque Lake Lugano of southern Switzerland, a one-of-a-kind “gemstone of
nature” surrounded by the Lugano Prealps mountains.
Lugano opened its first retail salon in 2005 in Newport Beach, California as an appointment only showroom. This
salon, located in Orange County’s high-end Fashion Island shopping district, grew rapidly, and served as a critical
proof of concept for the Lugano’s bespoke retail strategy. In the subsequent years, Lugano opened three more retail
salons with its trademark high-touch sales approach to expand the Lugano’s geographic footprint in key destinations
frequented by its target clientele.
In 2008, Lugano started an equestrian division focused on the Southeastern United States to complement its retail
sales strategy. Today, Lugano sponsors many key equestrian events and is a long-standing supporter of equestrian-
related causes.
Throughout its history, Lugano has also focused on building strong relationships with influential social and
philanthropic organizations in the local communities surrounding its retail salons. In Aspen, Colorado Lugano
frequently hosts private dinners and events in collaboration with organizations like the Aspen Institute or the Aspen
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Museum of Art. Lugano’s event-based marketing strategy enables Lugano to regularly meet prospective clients and
reconnect with repeat clients.
In 2020, Lugano expanded its production capabilities by building an in-house workshop to provide increased
production efficiencies and improve control over its high-end gemstone inventory. Today, Lugano’s unique go-to-
market strategy, one-of-a-kind designs, vertical integration and carefully cultivated network of clientele serve as
critical differentiators among the retailer’s competitors in the high-end jewelry market.
We purchased a majority interest in Lugano on September 3, 2021.
Sales and Distribution
Products
Lugano designs, manufactures, and retails high-end jewelry including unique rings, necklaces, earrings, bracelets
and brooches that range in price from under $1,000 to well over seven figures, with an average price of
approximately $115,000 per piece. Lugano’s designers start with a rare stone as inspiration and craft jewelry that
highlights the beauty and perceived value of the stone. As a result, Lugano’s pieces are often seen as one-of-a-kind
works of art, creating a highly desirable niche in the broader jewelry marketplace. Competitors’ products are
typically high volume or collection-based jewelry lines that are inherently less unique or exclusive – traits highly
valued by Lugano’s clientele.
Customers
Lugano’s client base generally consists of sophisticated, high-net-worth individuals who value long-standing
relationships and a personalized sales approach over one-time purchases and the high-pressure sales tactics used
by other jewelry competitors. A typical Lugano client is community and relationship-driven and seeks unique
products with emotional significance. The purchasers or recipients of Lugano pieces are predominantly women and
often leaders in their respective communities. Lugano’s clients can range in age from 25 to over 80 and come from
all over the nation, with most based in California, followed by Florida, New York, Texas, and Colorado, reflecting the
company’s current retail salon footprint, along with limited international clientele.
Lugano’s retail revenue is diversified with no customer representing greater than 10% of total revenue in 2021.
Management also believes its client relationships are significantly stickier than those of other jewelry retailers.
Lugano enjoys a growing percentage of repeat business year-over-year, with repeat customers contributing an
increasing percentage of revenue. Beyond its retail business, Lugano also sells loose diamonds via its wholesale
division representing approximately 12% of Lugano’s revenue in 2021.
Distribution
Lugano goes to market via four retail salons in Newport Beach, CA, Palm Beach, FL, Aspen, CO and Ocala, FL, all
strategically located in wealthy regions near popular vacation and up-scale shopping destinations frequented by
Lugano’s target clientele. In a salon, Lugano aims for an elegant and private ambience to facilitate its high-touch
sales approach. Salons are carefully laid out, enabling Lugano to host private dinners, parties, or other social
events. Unlike other jewelers that highlight their jewelry with long, rectangular counters that separate the customer
from the salesperson, Lugano decorates its salons with curved tables and couches designed to facilitate comfort,
relationship-building, and ease of conversation. Lugano also markets and sells jewelry via pop-up showrooms at
Lugano-hosted or sponsored events or in the homes of its clients.
Market Trends, Business Strategies and Competition
Market Trends
Lugano competes broadly in the personal luxury goods market, a portion of the overall global luxury market.
According to Bain & Company, after years of consistent growth, the personal luxury goods market experienced a
brief contraction in 2020. However, since then, the personal luxury goods market grew by 29% to hit $320 billion,
increasing the size of the market by 1% versus 2019 levels. Bain & Company estimates that the personal luxury
goods market could reach $408-$430 billion by 2025 with a sustained growth of 6-8% annually.
Lugano currently has very low penetration (<1%) within its target market of high-net-worth individuals. Lugano’s
addressable client base has been steadily increasing for over a decade and increased by nearly 10% in 2019 to an
estimated 290,000 individuals worldwide, mirroring the growth seen in their combined net worth, which increased to
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over $35 trillion. As a result, management believes there is significant runway for additional growth by expanding
brand awareness and household penetration.
Business Strategies
Lugano believes it is well-positioned to emerge as a leading domestic and international luxury brand. Lugano’s key
growth opportunities include expanding its geographic footprint across target markets, domestically and
internationally, growing the number of events it hosts, and branching into activities beyond equestrian sports that
similarly attract wealthy participants.
Competition
The luxury jewelry market is highly fragmented with the leading six to seven companies accounting for
approximately 20% of the market. LVMH, with brands like Tiffany, Bvlgari and Chaumet; Richemont with brands like
Cartier and Van Cleef & Arpels; Graff Diamonds; and Harry Winston lead the market. These competitors often utilize
a traditional retail model focused on foot traffic and tourism, are typically collection-based, and do not exclusively
focus on the high-end segment of the jewelry market. The remaining portion of the market consists of national retail
brands and small or midsize players that operate regionally or in an online-only format.
Competitive Strengths
Sourcing, Design and Production Capabilities
A deep network of international vendors enables the company to source rare and difficult-to-find stones. These
stones are then combined with the world-class capabilities of Lugano designers who create sought-after
masterpieces that cater to the company’s target clientele. Lugano’s in-house production workshop or close network
of captive workshops provide increased production efficiencies, improved control over its inventory and better speed
to market.
High-touch Retail Model
Lugano’s one-of-a-kind inventory requires a unique and high-touch sales strategy which the company has cultivated
over its nearly 20-year history. The company’s retail experience is carefully curated, emphasizing both exclusivity
and elegance, both critical to the sale of Lugano jewelry.
Event-based Marketing Strategy
Lugano sponsors over one hundred events each year, enabling the company to meet prospective clients and
reconnect with existing clients that have become loyal and repeat purchasers. In each market that Lugano enters,
management takes great care to establish itself as part of the local community and become a focal point for its
clients’ lifestyles and activities. Through its efforts, Lugano invests in relationships which build brand value and
customer loyalty. Lugano-sponsored events are often a client’s gateway into the Lugano community (management
estimates over 60% of clients are initially contacted at Lugano-sponsored events). Once a part of the Lugano
community, customers tend to view jewelry purchases from Lugano as recurring events and often increase the size
of their purchase from their previous transaction.
Sourcing and Availability of Materials
Lugano sources diamonds and precious gemstones from a variety of vendors and wholesalers. Generally, Lugano
sources polished diamonds and gemstones that are crafted into a Lugano-designed piece. From time to time,
Lugano also opportunistically acquires finished jewelry with a high resale value from its global network of vendors.
Most of Lugano’s diamonds are sourced from domestic wholesalers. By not purchasing raw stones directly from
mines, Lugano limits conflict diamond exposure. Lugano ensures all its diamond vendors adhere to the Kimberly
Process Certification Scheme to prevent conflict diamonds from entering its supply chain.
Lugano’s vendor base is diversified with no vendor making up more than 10% of total purchases and the top 10
vendors making up less than 50% of all purchases. Lugano maintains decade-long and trusted relationships with its
top vendors.
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Seasonality
While individual retail salons experience some seasonality (e.g., winter in Aspen, summer in Newport Beach), these
patterns offset one another at the company-level. Additionally, due to the variety of events Lugano hosts all-year-
round, there is no significant seasonality in the business.
Human Capital
As of December 31, 2021, Lugano employed a non-union labor force of 54 full-time employees. 25 employees work
in sales and marketing, 12 work in design & production, 9 work in operations, 4 work in accounting and 4 work in
corporate. Lugano intends to continue to grow its headcount and build out its middle management as it executes on
its growth strategy of new salon openings, increased event-based marketing, and international expansion.
Management believes Lugano's relationship with its employees is good.
Marucci Sports
Overview
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, protective gear,
sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur
athletes. Marucci also develops and licenses franchises for sports training facilities. Marucci products are available
through owned websites, their team sales organization, Big Box Retailers, and third-party e-commerce and
resellers. In 2017, Marucci acquired Victus Sports, a King of Prussia, Pennsylvania based complementary baseball
equipment manufacturer and distributor. Marucci has vertically integrated wood bat manufacturing and has built
long-standing relationships with international suppliers who manufacture the remainder of their product lines.
Marucci is an established brand commanding strong market share across product categories. Marucci’s mission is
to “honor the game” and brands itself as such with simplistic imagery and to-the-point marketing campaigns.
Victus is a more recent entrant to the baseball equipment market but garners similar wood bat usage as Marucci.
The brand is widely recognized for its edgy designs and big attitude. Victus’ mission, in contrast to Marucci’s, is to
embrace the evolution of the game and to salute the next generation of players who set out to change it.
History of Marucci Sports
Marucci Sports was founded in 2009 by a team including two former professional baseball players. Marucci
released its first metal bat, the Marucci CAT5, in 2009. In 2013, Marucci released batting gloves and launched its
first series of fielding gloves, the Founders’ Series. Marucci was able to leverage its brand power to expand into the
baseball apparel and accessories market as well. In 2018, Marucci acquired Carpenter Trade to expand the quality
and technology of its fielding glove offering and change the current consumer expectations for a truly customized
fielding glove. Victus’ product offering expanded into metal bats in 2019 with the launch of its Vandal line and
recently expanded with the launch of the NOX. In 2019 Marucci also acquired two timber mills and a wood drying
facility, securing vertical manufacturing capabilities within its wood bat product category and ensuring access to the
best wood in the game. In 2021, Marucci acquired Lizard Skins, a designer and seller of branded grip products,
protective equipment, bags and apparel for use in baseball, cycling, hockey, Esports and lacrosse. Marucci believes
that the acquisition of Lizard Skins will allow it to build on its leading position in diamond sports while simultaneously
developing the company’s presence in new sports markets such as hockey and cycling.
Today, Marucci is a designer, manufacturer, and marketer of premium Marucci and Victus-branded baseball and
softball equipment including wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear,
sunglasses, on and off-field apparel, and other baseball and softball equipment. All of these products are sold
around the world in retail stores, online and through its corporate owned and franchised training facilities.
We acquired a majority interest in Marucci on April 20, 2020.
Industry
Marucci Sports primarily competes primarily in the domestic baseball equipment market which includes wood bats,
metal bats, fielding gloves, cleats, protective and other gear, and uniforms/ team apparel of which management
estimates constitutes approximately $1.3 billion of annual retail revenue. Marucci Sports also competes within the
greater global baseball equipment market which management estimates constitutes approximately $2.2 billion of
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annual retail revenue. Marucci’s product offering targets primarily the premium equipment price point more often
used in competitive club and travel leagues, for which participation rates are generally more stable.
The industry is generally considered to be a stable sector with growth rates in the low single digits. Baseball
equipment is largely sold through national retailers. Independent resellers and online platforms also sell baseball
equipment while the balance is purchased directly from the manufacturer.
Products, Customers and Distribution Channels
Products
Marucci designs, manufactures, and markets six categories of products: (i) metal bats, (ii) wood bats, (iii) apparel &
accessories, (iv) batting gloves, (v) fielding gloves, and (vi) bags & protective equipment. Marucci’s product strategy
encompasses producing high quality products recognized by consumers for their performance, craftsmanship, and
value, and building on a rich history to introduce innovative new products.
Metal Bats - Metal bats have historically represented Marucci’s largest product category by revenue. The metal
bats are priced at the premium end of the market, with average retail prices ranging from $219.99 to $549.99.
Marucci produces metal bats for all ages, from college to tee ball, with a focus on elite high school players. The CAT
series is the flagship metal bat product from Marucci. Marucci also offers a lower price point model, the F5. Victus’
first metal offering, the Vandal, was first launched in 2019, and is priced similarly to the CAT series. Victus later
introduced its first two-piece bat in the NOX. Metal bats used in youth and elite travel leagues are subject to strict
regulations limiting spring and exit velocity. The company has historically followed a two-year product release cycle,
and Marucci metal bats have notable staying power with their customer base as prior year models remain in
production.
Wood Bats - Marucci’s wood bats are built with quality, precision, and customization. Marucci prides itself in making
every pro-bound bat a “game bat”. Marucci offers two types of wood bats: ash and maple. Ash is a soft, open grain
wood. Maple bats are a much harder, closed grain wood and constitute a large majority of the company’s wood bat
sales. The wide variety of selection and price points offer professional-level quality and cuts to amateur players as
well. Innovative customization options further drive engagement.
Fielding Gloves - Marucci offers a growing set of fielding gloves across eight product series: Capitol, Cypress,
Ascension, Oxbow, Acadia, Caddo, Magnolia (softball), and Palmetto (softball). Marucci has a complete line of
gloves to meet the needs of every position player at every age and skill level. Marucci offers gloves across the
pricing spectrum. Marucci acquired Carpenter Trade in 2018, along with their C-Mod technology which provides a
unique fit. The C-Mod technology uses a size-specific, ergonomically shaped fit system that creates a more form
fitting hand stall for greater control, leverage and responsiveness when fielding. The tailored-fit technology is
available in straight or shift.
Apparel & Accessories - Marucci offers a full suite of apparel and accessory offerings that is rapidly expanding.
The current product portfolio includes on-field and off-field apparel, sunglasses, hats, grips, and more. Most sales of
these products are sold direct-to-team in custom apparel packages including baseball pants, jerseys, practice shirts,
and more. Marucci has in-house screen-printing operations allowing for customization of various pieces of apparel.
The acquisition of Lizard Skins in October 2021 further enhanced the company’s accessory offering. Lizard Skins is
the top manufacturer and marketer of grips used in baseball, cycling, hockey, lacrosse, gaming, and various other
sports.
Batting Gloves - All Marucci batting gloves are designed to meet professional standards of comfort, durability and
performance while also appealing to users of all levels. Marucci has four lines of batting gloves: Pittards’ Reserve,
Signature, Quest, and Code while Victus has one, the Debut. Marucci also offers limited production customized
batting gloves. Marucci’s batting gloves span the pricing spectrum.
Bags & Protective Gear - Marucci offers an extensive line of bags and protective gear including bat packs, bat
quivers, helmets, shin and elbow guards, catchers gear, and more allowing Marucci to cater to nearly all its
customers playing needs.
Customers and Distribution Channels
Marucci sells its products through several channels including Big Box Retailers; Direct-to-Consumer ("DTC"), Direct-
to-Team ("DTT"), the company's experiential Clubhouse retail stores and other Owned Channels; and third-party e-
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commerce and resellers. Marucci’s top 5 customers accounted for 57.7% of 2021 of net sales.
Business Strategies and Competitive Strengths
Business Strategies
Continued Innovation in Existing Product Categories - Marucci plans to continue to build on its successful
history of bringing new, innovative, highly anticipated products to market through leveraging its stringent new
product development process, and external and internal manufacturing capabilities. The company has near-term
new product launches and existing product updates planned across all categories that will further drive innovation,
strengthening our competitive positioning.
Further Penetration of Existing Customer Accounts - Marucci has identified opportunities to leverage its existing
relationships with retailers to drive expanded SKU offerings across categories, especially in apparel. Additionally,
management believes the company can continue to improve Victus product adoption with existing channel partners.
An approximately $150 million fielding glove market represents a significant growth opportunity for Marucci. Fielding
gloves are the second largest hard goods market in baseball / softball. Marucci plans to leverage its brand strength
and innovation to capture share in this high margin category. The acquisition of Carpenter Trade in 2018 has
allowed Marucci to offer a highly customized glove that serves as a key differentiator in fielding gloves.
Victus Category and Product Expansion - Victus has strong penetration in the majors and key affiliations with top
players. The brand released its first metal bat in 2019, the one-piece Victus Vandal BBCOR bat and later launched
its first two-piece bat, the NOX. Metal bats sales are expected to meaningfully contribute to Victus’ overall sales in
the future. Victus’ key affiliates and player advocacy has driven a halo effect across other categories. Growth in
lifestyle and fan apparel represents a significant opportunity for Victus to leverage its brand.
Lizard Skin Expansion – With the acquisition of Lizard Skins in October 2021, Marucci plans to expand its
distribution of the company’s key grip product which are used in various sports including baseball, softball, cycling
hockey and lacrosse. Additionally, Marucci sees opportunity to expand its grip offering into gaming and other similar
applications, as well as batting gloves.
International Market Expansion - International sales currently represent a small portion of total sales. Natural
expansion opportunities exist in baseball markets abroad such as Japan, South Korea, Taiwan, Canada, and Latin
America. Marucci has achieved profitable growth in Asia by leveraging its premium brands and accessing markets
through proven team dealers and distributors. In late 2021, Marucci launched a Japan-based sales office.
Further Penetration of Softball Market - Marucci’s plans to leverage its brand strength in baseball to further
penetrate the softball market. Marucci is driving brand awareness and growth in the softball market from the ground
up through grassroots marketing efforts, social media influencers, leveraging its partnerships with colleges and
affiliated Marucci club teams, as well the recently launched softball mobile tour, to get in front of players of all ages.
Marucci has dedicated employees who focus on softball expansion and have experience in the category as former
collegiate athletes and coaches.
Expansion of the Direct-to-Team Sales Channel - The Direct-to-Team sales channel, launched in 2014, allows
Marucci to sell its equipment and apparel directly to thousands of players. Marucci currently has 29 Founders’ Club
organizations, representing 15,000 players. The Founders’ Club is an elite alliance of some of the nation’s premier
amateur baseball programs selected by Marucci for their dedication to excellence on and off the field, reputation as
a positive influence in their community, and commitment to growing their organization.
Marucci’s proprietary online platform for this channel, “Locker Room”, is ideal for any group that requires individual
processing and purchasing. There is potential opportunity to leverage Locker Room capabilities across other team
sports as the total market size for U.S. Team Sports Uniforms is approximately $1.3 billion. Marucci feels the DTT
strategy is still in its early stages of growth.
Industry Consolidation - With a well-developed global supply chain, external and internal manufacturing
capabilities, sophisticated management systems infrastructure, and extensive network of relevant relationships,
Marucci is a platform for consolidation within both the baseball and softball equipment and apparel spaces.
Management has identified a pipeline of potential acquisition targets that would help Marucci strengthen and
expand its product offering and address new market segments.
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Competitive Strengths
Originally founded to focus on baseball and softball, Marucci has a unique strength with its authentic knowledge and
experience of these sports. Whether leading the Company’s strategy, cutting and sanding wood bats, or shipping
product, the Marucci team consists largely of former players or coaches of the game itself. This same strategy
extends to any category or market the company participates in so that the product is truly designed by the player for
the player.
Product Development – the product development cycle varies by product with bats taking approximately 16
months to reach distribution and batting gloves requiring approximately 9 months. New product development at
Marucci occurs in six successive stages: (1) Identify Market Opportunity – search for player needs via internal
leads, supplier partners, or on-the ground feedback from players in their network, (2) Cross Functional Ideation –
host ongoing dialogue with sourcing partners to identify next-gen technology, (3) Product Development – have
sourcing partners begin preliminary testing runs once viable new products are identified, (4) Production and
Validation – continue rigorous prototyping and product validation on the field and in the Marucci performance lab
where Big League and amateur players test and provide feedback, (5) Marketing – engage in-house marketing
team to drive product naming, rollout, branding, and marketing stories to expand awareness, and (6) Product
Rollout and Distribution – finalize the marketing story, conduct sales presentations, and provide samples to
representatives and finally receiving orders from channel partners and beginning full production.
Leading Brands with Professional Halo – Both Marucci and Victus products are preferred by Big League players
(#1 and #2 bat brands in the Big Leagues, respectively), and Lizard Skins is the grip tape of choice for many top
athletes at both the professional and amateur levels. Marucci’s leading share of use among the top players at the
top levels of baseball underlies the aspirational nature of the brand and creates a “halo effect” for its broader
product lines, giving the brands credibility and permission to play in adjacent product categories, customer
demographics, and geographic markets.
Vertical Integration – Marucci owns its own wood mills, giving the company greater control over the availability and
quality of the supply of wood billets used to produce its wood bats. Marucci’s original value proposition to
professional players was to guarantee that each bat delivered would meet the most stringent standards demanded
for in-game use. As product tolerances continue to tighten and supply chain complexity creates operational
challenges for many competitors, Marucci’s ability to ensure both product quality and availability is a unique
competitive advantage.
Competition
Marucci competes with offerings from multiple large baseball equipment manufacturers, including Easton (under the
Easton and Rawlings brands) and Wilson Sporting Goods Company (under the Wilson, DeMarini, Louisville
Slugger, and Evoshield brands), and numerous smaller wood bat specific brands including Old Hickory, Chandler
Bats, Tucci, Dove Tail, Sam Bat, and D-Bat. Key determinants in consumer purchasing decisions include product
performance, quality, and brand loyalty.
Suppliers
Marucci leverages a combination of sourcing and in-house manufacturing. Metal bats, apparel, batting gloves,
fielding gloves, bags, and other accessories are sourced from an international network of primarily Asian
manufacturing partners, while wood bats are manufactured domestically at the company’s Baton Rouge (Marucci)
and King of Prussia (Victus) facilities. In 2019, the company acquired two timber mills, effectively consolidating its
wood bat supply chain to improve quality and production efficiency and ensuring continued access to the best wood
in the game.
Intellectual Property
Marucci maintains 47 trademarks in the U.S., 41 of which are registered and 6 of which are pending registration.
Marucci also has 1 issued patent. Management considers its trademarked brand names, preeminent name
recognition, ability to design innovative products, and technical and marketing expertise to be its primary
competitive advantages.
Regulatory Environment
Baseball and softball equipment, outside of bats, enjoys a largely restriction free Federal/Local government
regulatory framework. Metal bats used in youth and elite travel leagues are subject to strict regulations limiting
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spring and exit velocity determined by self-regulatory associations connected to the sport. There are three key
regulatory groups associated with baseball: USA Baseball, United States Specialty Sports Association (“USSSA”),
and Bat-Ball Coefficient of Restitution (“BBCOR”). Each have their own method for measuring bat performance.
BBCOR is the standard currently governing adult baseball bats used in High School and Collegiate play while USA
and USSSA govern youth leagues. There are also regulatory bodies specific to softball including Amateur Softball
Association (ASA) and Independent Softball Association, among others. Wood bats used in professional baseball
are subject to league-specific regulations. We believe all of our products adhere to established regulations
Seasonality
Marucci typically has higher sales in the first quarter each year, ahead of the primary baseball season. However,
management expects seasonality to smooth as baseball becomes an increasingly year-round sport.
Human Capital
Marucci had 322 employees at December 31, 2021, 256 full-time and 66 part-time employees, all located in the
United States. Additionally, Marucci works with a third party Employer of Record in Japan to deploy its strategies in
Asia and currently has 5 full-time employees. Marucci's labor force is non-union. Management believes that Marucci
has a good relationship with its employees.
Velocity Outdoor
Overview
Velocity Outdoor, headquartered in Bloomfield, New York, is 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. Airguns historically represent Velocity
Outdoor's largest product category. 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 crossbows and the Pioneer Airbow, consumables, which includes steel and
plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products. In September 2018, Velocity
acquired Ravin Crossbows, a manufacturer and innovator of crossbows and accessories. Ravin primarily focuses
on the higher-end segment of the crossbow market and has developed significant intellectual property related to the
advancement of crossbow technology.
We acquired a majority interest in Velocity Outdoor on June 2, 2017.
History of Velocity Outdoor
Velocity was founded in 1923 as Crosman Rifle Company and was one of the first manufacturers of recreational
airguns in the United States. Velocity Outdoor acquired Visible Impact Target Company in 1991 and Benjamin
Sheridan Corporation in 1992. Benjamin was, and continues to be, a dominant U.S. producer of high-end pneumatic
and CO2 powered airguns while Sheridan was one of the world’s foremost manufacturers of high-quality paintball
markers. In 2007, Velocity expanded its offerings outside the traditional airgun category with the debut of its new
optics division, Centerpoint Precision Optics. In 2008, Velocity diversified further by adding Crosman Archery to its
list of branded products and introduced two new hunting crossbows in addition to youth archery products. In 2016,
Velocity debuted its Centerpoint line of crossbows and the Benjamin Pioneer Airbow, the first ever mass-produced
air powered archery device and with the 2018 acquisition of Ravin Crossbows, Velocity expanded their archery
product line into the higher-end segment of the crossbow market.
Today, Velocity Outdoor is an international designer, manufacturer and marketer of Crosman and Benjamin airguns
including related ammunition and accessories, archery products including the Ravin and Centerpoint crossbows,
airsoft rifles, pistols, and ammunition, laser aiming devices, and precision optics.
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Industry
Velocity Outdoor primarily competes within the airgun and archery sub-segments of the broader outdoor
recreational products industry, which together management estimates constitute approximately $1.1 billion of annual
manufacturer revenue. Both categories share certain common characteristics, including consumer demand for
innovation, similar sales channels, and unique regulatory frameworks.
The airgun industry is estimated by management to constitute approximately $275 million of annual manufacturer
revenue, including consumables and excluding accessories. With a history stretching back over a century, the
industry is generally considered to be a mature sector, with stable growth rates in the low single digits. Airgun
products are largely sold through big box specialty sporting goods retailers, mass merchants and online retailers,
each accounting for roughly 22%, 21% and 26% of purchases, respectively. The remainder moves through Dealers
and Distributors. Airguns are less seasonal than archery because there is no defined hunting season, although
sales spike somewhat around holidays.
The archery equipment market is estimated by management to constitute approximately $770 million of annual
manufacturers sales, of which $500-$550 million is attributable to bows and $200-$250 million is attributable to
related archery consumables. Vertical and compound bows, and crossbows each comprise about half of the
category sales, with crossbows gaining share in recent years. Independent archery Dealer’s account for 38% and
big box specialty sporting goods retailers account for approximately 33% of consumer purchases. Distributors, mass
merchants, and online retailers make up the remainder of consumer sales.
Products, Customers and Distribution Channels
Products
Velocity designs, manufacturers and markets five categories of products: (i) airguns, (ii) archery products, (iii)
consumables, or pellets, BBs and CO2 cartridges, (iv) optics, and (v) airsoft. Velocity's product strategy
encompasses producing high quality, feature-rich products recognized by consumers for their craftsmanship and
value, and building on a rich history to introduce innovative new products.
Airguns - Airguns has historically represented Velocity's largest product category. The airgun product line consists
of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity's airguns are
designed to be multi-purpose, multi-occasion products, for use in recreational plinking and target shooting, pest
control, and hunting. Velocity offers a “good, better, best” array of airguns under the Crosman and Benjamin brands.
The Crosman brand is known for high value at an accessible price, where the Benjamin brand is typically
associated with premium products falling within the mid- to high-price point. Additionally, Velocity rounds out its
offering with mid-level products produced under an exclusive licensing agreement with Remington for its
Remington, Marlin, DPMS, and Bushmaster brands.
Archery Products - Velocity re-entered the archery market in 2016 with a product line anchored by the Centerpoint
crossbow and the first-of-its-kind Pioneer Airbow. Centerpoint has grown rapidly since it was launched to become
the second largest player in the crossbow category. The Centerpoint Sniper 370 is the top-selling SKU in the
crossbow market, with more than twice the volume of its nearest competitor. Centerpoint acquired market share by
offering features like an aluminum frame, higher shooting velocity, integrated string stops, a 4x32mm scope and
shoulder sling at very competitive retail prices.
Concurrent with the launch of the Centerpoint line of crossbows, Velocity also introduced the Pioneer Airbow. The
Pioneer Airbow created a new sportsman category as the first ever mass-produced air-powered archery device,
effectively bridging the gap between airguns and archery. Velocity acquired Ravin Crossbows in 2018, further
expanding its product line in the archery market. Ravin Crossbows is a leading designer, manufacturer and
innovator of crossbows and accessories. Ravin primarily focuses on the higher-end segment of the crossbow
market and has developed significant intellectual property related to the advancement of crossbow technology.
Consumables - Velocity's consumables segment consists of steel and plastic BBs, various styles of lead pellets,
and single-use CO2 cartridges used to power airguns. BBs are typically used for plinking, training, or target
shooting at a more affordable cost, while different pellet styles are designed either for accuracy, maximum
penetration, or a combination of the two. Velocity is the world’s largest provider and only domestic manufacturer of
CO2 cartridges, having first introduced the use of C02 as an airgun propellant in 1961. Consumables are produced
under the Crosman, Benjamin, and Copperhead brand names.
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Optics - Launched in 2006, Velocity's line of optics products offers high-performance, value-priced optics under the
Centerpoint brand. The scopes, sights, binoculars, lights, and lasers are marketed for traditional firearms, in addition
to select airgun and crossbow offerings. In 2017, Velocity added to their optics product line with the acquisition of
the commercial division of LaserMax. LaserMax is a global leader in hardened and miniaturized laser systems,
offering a comprehensive line of premium laser sights for home defense, personal protection and training use.
LaserMax’s commercial business provides laser sighting solutions and tactical lights to the firearm original
equipment manufacturers ("OEM") and retail channels. Management believes that the addition of the LaserMax
products enables Velocity to reach a wider range of new customers across retail channels.
Airsoft - Airsoft guns are a class of air, CO2, gas, or electric-powered guns that are typically made from high-impact
plastics and are engineered with recreation in mind to fire safe, plastic BBs quickly and accurately. Airsoft products
are most often used for recreational purposes by a younger demographic and a strong user base amongst military
and law enforcement customers. Velocity offers a broad portfolio of airsoft rifles and pistols under its owned
Crosman Elite and Game Face brands, as well as the licensed U.S. Marines brand.
Distribution Channels
Velocity's products are sold through over 900 customers across a mix of sales channels, including mass merchants,
national retailers, distributors/dealers/regional chains, international distributors, and e-commerce. Over the last 5
years, management has successfully diversified both its sales channel composition and customer mix.
Velocity sells its products through nearly all major domestic mass merchants and sporting goods retailers currently
selling airguns and has established a strong e-commerce platform to allow for flexibility in a changing retail
environment. The company has been selling to many of its customers for over 20 years, maintaining close
relationships with key purchasing personnel through high-touch customer service. Velocity is one of the only players
in the sportsman category offering category management services, product assortment, and SKU optimization
feedback typical of larger multinational consumer products companies. This data-sharing has resulted in higher
retailer sell-through and margin enhancement, more accurate sales forecasting, and a 98% fulfillment rate, all of
which are key components in maintaining status as a vendor of choice.
Velocity maintains an internal sales team responsible for covering the vast majority of its customer relationships, or
approximately 90% of total sales. Furthermore, Velocity supplements its in-house team with four independent sales
representative organizations, providing coverage for approximate 375 additional customers across their respective
geographic territories. International sales efforts are handled by Velocity-employed account executives who work
through local distributors in order to ensure that products conform to local regulatory standards.
Customers
Velocity sells its products through nearly all major domestic mass merchants and sporting goods retailers and has
established a strong e-commerce platform to allow for flexibility in a changing retail environment. The three largest
customers represented 35.8% of gross sales in 2021 and represented the major sales channels; mass merchant, e-
commerce, and regional retail.
Velocity had approximately $26.6 million and $39.0 million in firm backlog orders at December 31, 2021 and 2020,
respectively.
Business Strategies and Competitive Conditions
Business Strategies
Continued Innovation in Existing Product Categories - Velocity plans to continue to build on its successful
history of bringing new, technically superior products to market through leveraging its stringent new product
development process, internal manufacturing capabilities, and a flexible supply chain. The company has near-term
new product launches and existing product updates planned across all categories, including the highlights below.
•
Airguns - Building on the Silencing Barrel Device (SBD) technology, Velocity is introducing a line of
multi-shot break-barrel models that feature a 10-shot clip that advances automatically. Velocity is
also enjoying success with its recent introduction of fast shooting full-auto BB guns under the
Crosman brand. In addition, Velocity continues to be the world’s largest producer of BB, pellets
and CO2 powerlets.
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•
Archery - Following the successful 2016 launch of the CenterPoint crossbow line, Velocity
continues to offer the best value proposition in the industry. Recently CenterPoint has introduced
new crossbow models at higher price points to segments of the market and Ravin continues to
introduce models that lead the industry in innovation and performance. Ravin recently introduced
its new electric cocking/de-cocking model that shoots at 500 feet per second.
• Optics - In addition to the launch of three CenterPoint Spectrum First Focal Plane series of scopes,
the company recently released CenterPoint optics to include range finding binoculars and scope
adapters. Additionally, following the launch of the grip activated GripSense lasers in 2017,
Lasermax has introduced a universal rail mounted laser featuring the same activation technology.
•
Airsoft - Airsoft guns are a class of air, CO2, gas, or electric-powered guns that are typically made
from high-impact plastics and are engineered with recreation in mind to fire safe, plastic BBs quickly
and accurately. Airsoft products are most often used for recreational purposes by a younger
demographic and a strong user base amongst military and law enforcement customers. Velocity
offers a broad portfolio of airsoft rifles and pistols under its owned Game Face brand.
Expand into Adjacent Product Categories - Management believes that the company can leverage in-house
manufacturing and sourcing partners to develop products in new categories that utilize Velocity's existing distribution
network and brand strength.
Further Penetration of Existing Customer Accounts - Management has identified several strategies for further
penetrating its existing customer accounts. First, Velocity has identified opportunities to leverage its existing
relationships with retailers to drive expanded SKU offerings across categories. Additionally, management believes
the company can expand the CenterPoint brand into the dealer network due to the acquisition of Ravin.
Furthermore, management believes that the company is well positioned to grow as its brick-and-mortar customers
adapt to a changing retail landscape. Velocity believes it can leverage its structured analytical sales approach and
new marketing initiatives to assist retailers with enhancing their online sales, similar to the strategies it already
employs working with pure e-commerce customers like Amazon and Pyramyd Air.
Consolidation Platform - With a well-developed global supply chain, refined manufacturing capabilities,
sophisticated management systems infrastructure, and extensive network of relevant relationships, Velocity sees
itself as a platform for consolidation within both the broader outdoor recreational goods space and the archery
space specifically. Management has identified a pipeline of potential acquisition targets that would help Velocity
strengthen and expand its product offering and address new market segments.
International Growth - Velocity is exploring opportunities to grow international sales and increase market share by
pursuing new international distributor relationships. Management has recently focused its efforts on key markets
within Latin America. However, with a more fulsome archery product line in development, the Company believes it is
well positioned to expand into key international bowhunting markets such as Europe, Australia, New Zealand, and
South Africa.
Competitive Strengths
Innovation and Engineering Capabilities with Strong IP - Velocity is a consumer-focused organization with a
deep understanding of our consumers. In addition, Velocity employs and retains engineers who are the most
accomplished in our markets which, combined with an innovative culture, have created significantly differentiated,
demonstrably superior products with strong intellectual property protection.
Leading Consumer Brands with Branding and Marketing Capabilities to Drive Consumer Awareness,
Affinity and Engagement. Velocity owns a portfolio of premium, iconic brands that are leaders in consumer
awareness and affinity. These include brands with a long, rich heritage such as Crosman and Benjamin airguns with
99 and 138 year histories, respectively, as well as the fast growing, super premium, and market disruptive brand like
Ravin.
Broad Coverage of Consumer Segments and Price Points. Velocity’s portfolio of brands and product lines
provides broad coverage of consumer segments and allows the business to position products with a combination of
features and retail prices that appeal to all consumers in the category from recreational to avid.
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Balanced Manufactured vs. Outsourced Production Model. Velocity retains high quality in-house product
manufacturing capabilities while also outsourcing a balanced portion of its product line to vendors in low-cost
manufacturing regions. This strategy is aligned with the broad portfolio of brands and product lines and reduces
supply chain risk.
Diverse Customer Base. Velocity employs channel strategies that align with each brands market positioning. A
brand’s channel strategy may favor independent specialty dealers and in other cases a significant presence in large
chain retailers in best to maximize sales and profitability. Taken as a whole, this approach yields a broad and
diverse customer base, limiting the reliance on any one customer while reaching all levels and types of consumers.
Competitive Conditions
Airguns - Velocity's airgun line competes with offerings from several airgun manufacturers, including Daisy Outdoor
Products, Gamo Outdoor USA (which acquired Daisy in July 2016 but remains separately branded), and Germany-
based Umarex. The market for airguns is relatively concentrated, led by Crosman, Daisy, Gamo, and Umarex,
according to Sports OneSource data. Key determinants in consumer purchasing decisions include product
performance, quality, and brand loyalty.
Archery - The archery market competes within a “good, better, best” spectrum. Velocity's CenterPoint product line,
as a value-for-price, entry to mid-level brand, tends to lie between the “good” and “better” segments, competing with
Barnett Outdoors, Killer Instinct, and PSE Technologies, among others. Consumers tend to make purchasing
decisions based on brand awareness, reliability, customer service, and pricing. Although CenterPoint is a recent
entry into the archery market, the brand has been able to outpace more established brands on the reliability, pricing,
and service aspects to win market share. The Ravin product line has a higher price point and falls within the "best"
segment for crossbows, competing with the higher end Tenpoint crossbows. Ravin entered the market in 2017 and
management believes has since become the number one selling brand as measured by retail dollars.
Suppliers and Manufacturing
Suppliers
Velocity’s supply chain has both a domestic and foreign sourced component, where sourcing decisions are based
on manufacturing expertise, cost, lead time, demand requirements as well as other factors. Finished goods
manufacturing is balanced between domestic and offshore, largely from the Asia Pacific region. In addition to a well-
seasoned supply chain team in the United States, Velocity Outdoor employs an Asian based Supply Chain team to
support current sourced product and future growth. In general, raw materials utilized in Velocity’s products include
steel, lead, plastics, and corrugated materials. There is ample capacity throughout the value-chain to fully support
growth objectives.
Manufacturing
Velocity's product manufacturing is based on a dual strategy of in-house manufacturing and strategic alliances with
select sub-contractors and vendors. Velocity conducts its domestic manufacturing operations in two locations. The
first is a 225,000 square foot facility on a company-owned 49-acre campus located in East Bloomfield, New York,
approximately 30 miles southeast of Rochester. The second is an 85,000 square foot leased facility in Superior,
Wisconsin. In addition, the company utilizes approximately 144,000 square feet of leased warehouse space in
nearby Farmington, New York, five miles from the East Bloomfield facility.
Intellectual Property
Velocity Outdoor currently holds a global portfolio of more than 100 registered trademarks and a global patent
portfolio of more than 50 issued patents with many more pending. Management considers its patent holdings,
trademarked brand names, preeminent name recognition, ability to design innovative products, and technical and
marketing expertise to be its primary competitive advantages.
Regulatory Environment
Airguns - Airguns enjoy a relatively unrestrictive federal regulatory framework, with most regulations determined at
the state level. Although there are no federal laws regulating their transfer, possession or use, non-powder guns are
subject to oversight from the Consumer Product Safety Commission (“CSPC”). Therefore, airguns are subject to
generalized statutory limitations involving “substantial product hazard” and articles that pose a substantial risk of
injury to children, though the CSPC has not adopted specific mandatory regulations in this area. Federal law
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prevents states from prohibiting the sale of airguns but allows for state-by-state restrictions on sales of airguns to
minors. Thirteen states have imposed such restrictions. Historically, there have not been attempts to grandfather
the regulation of airguns into that of traditional powdered firearms, as legislative efforts have largely focused on
responding to and refining the existing regulatory framework for each respective category rather than overhauling
the coordination or transfer of enforcement duties across agencies.
Archery - Crossbow hunting restrictions have become less stringent over the last several years. Since 2006, 12
states, including populous hunting states like Wisconsin, Pennsylvania, and North Carolina, have legalized
crossbow hunting, while many others moved to relax restrictions through the opening of limited seasons or creation
of exceptions to hunting restrictions for those with disabilities. Today, only Oregon classifies crossbows as illegal but
there is currently a proposal to allow crossbows during the all-weapon deer season in the eastern half of the state.
Nearly 90% of all hunting permits are filed in states that currently allow crossbow hunting for at least part of the
season. Although continued deregulation is expected, it likely will not be the largest driver for the crossbow category
moving forward. Participation levels have steadily increased within the states. This will continue to be the main
driver behind market growth moving forward.
Seasonality
Velocity typically has higher sales in the third and fourth quarter each year, reflecting the hunting and holiday
seasons, respectively.
Human Capital
Velocity had 383 employees on December 31, 2021, 349 full-time employees and 34 part-time employees, with 382
employees located within the United States. Velocity’s labor force is non-union. Management believes that Velocity
has a good relationship with its employees.
Niche Industrial Businesses
Altor Solutions
Overview
Altor Solutions, headquartered in Scottsdale, Arizona, is a designer and manufacturer of custom molded protective
foam solutions and OEM components made from expanded polystyrene (EPS) and other expanded polymers. Altor
provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and
wellness, grocery, automotive, building products and others. Altor's molded foam solutions offer shock and vibration
protection, surface protection, temperature control, resistance to water absorption and vapor transmission and other
protective properties critical for shipping small, delicate items, heavy equipment or temperature-sensitive goods.
Altor operates 16 molding and fabricating facilities across North America, creating a geographic footprint of
strategically located manufacturing plants to efficiently serve national customer accounts.
History of Altor Solutions
Altor Solutions was founded in 1957 and began its operations as a single plant in St. Louis, MO, dedicated to the
manufacture of rigid foam plastics. Through the years, Altor expanded its geographic footprint, adding additional
molding plants to its operation, as well as growing through acquisitions. Altor also opened two greenfield plants in
Mexico to better serve their multinational manufacturing customers.
In July 2020, Altor acquired the assets of Polyfoam, a Massachusetts-based manufacturer of protective and
temperature-sensitive packaging solutions for the medical, pharmaceutical, grocery and food industries, among
others. In October 2021, Altor acquired Plymouth Foam, a designer and manufacturer of custom protective
packaging solutions and componentry. Today, Altor operates out of its corporate headquarters in Scottsdale, Arizona
and 16 manufacturing facilities across North America.
We purchased Altor on February 15, 2018.
Industry
Altor competes in the broadly defined global protective packaging market which we estimate was approximately $30
billion in 2021, with foam materials making up the largest component of this market. On the basis of product type,
this market is segmented into rigid protective, flexible protective, and foam protective applications. Altor primarily
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competes in the North American foam protective packaging market which includes expanded polyurethane foams,
loose fills, foam in place polyurethane, and molded foams products. Producers of molded foam products generally
fall into two categories: block molders and shape molders. Block molders manufacture large blocks of EPS foam
that are typically used as insulation in building products such as walls, roofs and floors and are closely tied to the
construction market. Shape molders, such as Altor, manufacture customized molded foam solutions for protective
packaging applications, insulated shipping containers and internal parts and components for OEMs. Products made
of EPS foam have broad applications across various end markets due to a unique combination of performance
characteristics. The superior cushioning and barrier properties paired with insulating and hydrophobic properties
make it an ideal material for protective packaging of heavy or valuable goods as well as insulated shipping
containers for temperature and moisture sensitive products.
Products, Customers and Distribution Channels
Products
Altor Solutions designs and manufactures a broad array of custom molded protective foam solutions and OEM
components serving various end markets. Altor's molded foam products are predominately made of expandable
polystyrene (EPS), which is a rigid, closed-cell foam. EPS is comprised of polystyrene, a thermoplastic derived from
the styrene monomer and benzene, and an added expansion agent, usually pentane. The final shape mold finished
product is 98% air and is created in a low-pressure press which heats EPS beads that expand and fill a customer-
specific mold. Altor also uses other moldable materials including expandable polypropylene (EPP) and expandable
polyethylene (EPE) depending on project and customer requirements. EPS foam is an environmentally friendly
material that is fully recyclable, uses less energy to produce, generates fewer emissions and has less environmental
impact than most competitive material options.
Altor Solutions’ custom-engineered molded foam products fall into four major categories: protective packaging,
insulated shipping containers, OEM parts and componentry and fabricated foam. These products are used across a
variety of end markets including consumer electronics, appliances, temperature-sensitive pharmaceuticals and food,
automotive, home and office furnishings and building products among others.
Protective Packaging - Altor Solutions creates custom molded corner pads, edge pads, “clear-view” packages and
other protective foam packaging solutions for durable goods such as large and counter-top appliances, furniture,
consumer electronics and military applications. Molded foam is an ideal protective packaging choice because it can
be shaped into almost any form at tight tolerances and provides lightweight yet strong cushioning during product
shipment.
Insulated Shipping Containers - Transporting healthcare and pharmaceutical products requires complex logistical
processes, specific equipment, storage facilities and special handling procedures to maintain product integrity.
These requirements make EPS foam an ideal material to be used in insulated shipping containers due to its thermal
insulation, water impermeability and shock absorbing properties. Similar to its uses in the healthcare industry, Altor
manufactures insulated shipping containers for online grocers and meal delivery services to transport prepared
meals and perishable food and beverage products that must be shipped in a temperature-controlled environment.
OEM Parts and Componentry - Altor Solutions manufactures a variety of internal components used by OEMs as
replacements for injection molded plastic or sheet metal parts across various end-markets. Compared to traditional
plastic parts, foam offers vibration protection, insulation benefits, lower tooling costs and shorter lead times. Altor
offers thin-wall molded air ducts and other internal components for household appliances such as refrigerators and
air conditioners. In the automotive sector, Altor manufactures foam door panels, trunk liners, bumper components,
instrument panels, center consoles, side pillars, seat components and head rests. Foam is increasingly being used
in new vehicle designs because it offers equivalent impact strength and toughness to traditional chassis materials
with 10 to 40% less weight. Altor also makes products used in personal watercraft flotation and seating parts as well
as recreational vehicle roof panels and core laminates that go underneath aluminum outer skins. Lastly, Altor
produces building products for the construction market including insulated concrete forms. Insulated concrete forms
are hollow sections of molded foam that construction crews stack into the shape of the walls of a building and fill
with concrete to create the permanent structure.
Fabricated Foam - Altor Solutions also uses a variety of methods including die cutting, saw cutting, hot wire slicing
and pressure cutting to create fabricated foam shapes as opposed to molded shapes. These products do not
require tooling or dies so there is less upfront costs for the customer and are usually best suited for medium to low
volume projects. Fabricated foam products represent a small portion of Altor overall net sales.
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Customers and Distribution ChannelsAltor Solutions maintains a broad base of over 300 customers across a wide variety of end-markets, including appliances, pharmaceuticals, food and beverage, consumer electronics, automotive, furniture, building products and logistics. Altor's products are sold primarily direct to the customer or through third-party packaging distributors. Altor has maintained long-standing relationships with its top customers, often averaging ten or more years. Altor's three largest customers comprised approximately 34%, 43%, and 44% of net sales in the years ended December 31, 2021, 2020 and 2019, respectively. Altor Solutions often maintains resin cost pass-through provisions with its contracted customers, allowing it to pass-through material resin price changes - resin constitutes its primary raw material cost.The following table sets forth Altor's customer breakdown by sector for the fiscal years ended December 31, 2021, 2020 and 2019:Year ended December 31,202120202019Appliance 37.1 % 33.5 % 39.0 %Insulated shipping containers 35.6 % 38.5 % 32.4 %Protective packaging 10.1 % 12.3 % 8.3 %Construction 5.3 % 1.0 % 1.9 %Office furniture 4.6 % 4.6 % 4.9 %Automotive 3.5 % 2.7 % 4.0 %Other 3.8 % 7.4 % 9.5 % 100 % 100 % 100 %Business Strategies and Competitive StrengthsBusiness StrategiesDefend Market Position - As a leading supplier of custom molded foam solutions, management believes Altor enjoys strong brand awareness and a reputation for superior quality and service in the industry. In a market characterized by fragmented competition, Altor will continue to focus on providing a best in class suite of products and capabilities. Remain Committed to Customers - Functional and error-free products are key considerations for its customers and Altor has maintained a disciplined approach to ensure its products meet the highest standard of quality. Utilizing a balanced scorecard, Altor has achieved a 99.0% 1st piece acceptance rate, less than 2 complaints per 1000 shipments and a less than 0.05% rejection rate. As a result of this strong quality assurance, Altor has had little customer attrition. Pursue Selective Acquisitions - Altor Solutions views acquisitions as a potentially attractive means to expand its national footprint or broaden its current product offering. Management will continue to seek tuck-in acquisitions of regional foam molders and other packaging suppliers where sales and operational efficiencies can be realized, and to diversify into packaging products other than molded foam.Competitive StrengthsNational Scale and Proximity to Customers - Altor Solutions maintains a national footprint of 16 manufacturing locations across North America. Facilities are strategically located near customers’ production locations enabling Altor to be one of only a few foam molders capable of serving large national accounts. Due to foam’s high volume-to-weight ratio, foam manufacturers generally confine product shipments to a 300-mile radius in which shipping costs are economically viable. Thus, Altor is uniquely positioned to provide multi-facility support to its largest customers who often have multiple manufacturing or distribution locations. Engineering and Design Capabilities - Altor Solutions has five coordinated design and testing centers with experienced packaging and mechanical engineers that work closely with customers to support packaging design needs. Engineering services include optimizing molds to meet customer needs and address complex design 48 requirements, identifying pre-manufacturing challenges, solving post-manufacturing issues, improving packaging
processes and laboratory testing final designs. Early customer involvement and collaboration to develop packaging
solutions has resulted in increased project win rates and better visibility into product development pipelines.
Barriers to Entry
•
• High Customer Switching Costs - The operational risk and disruption associated with switching existing
molds to operate on a competitor’s press makes shifting or splitting business between different shape
molders difficult and infrequent. In general, most customers pay for their own molds, which are custom built
for a specific molders’ presses. The financial cost of retooling is estimated to be $5,000 - $25,000 per mold,
making it cost prohibitive to change molders on existing projects.
Favorable Cost-to-value Proposition - The high cost of failure, relatively low proportionate cost of foam to
the final product being protected, and a sometimes lengthy testing and qualification process represent
significant barriers to customers changing solution providers or packaging material choices.
Equipment and Processing Infrastructure - Altor's existing base of production equipment has a significant
estimated replacement cost. Management estimates the cost of opening a new shape molding facility at
approximately $5 million, excluding real estate, and it must meet stringent environmental standards. A new
entrant could require as much as 1-2 years of lead time to match the process performance requirements,
customization of equipment and material formulations necessary to effectively compete in the molded foam
industry. Moreover, Altor has a strong preventive maintenance program and in-house equipment division
that is responsible for repairing and rebuilding presses. This allows Altor to significantly extend the average
useful life of its machinery and reduce the ongoing capital investment requirements, creating an advantage
over competitors.
•
Suppliers and Manufacturing
The primary raw materials that are used in production are plastic resins, such as expandable polystyrene (EPS),
expandable polypropylene (EPP) and expandable polyethylene (EPE). In addition to plastic resins, Altor also
purchases fabricating material including blocks of EPE and EPP foam, polyethylene and urethane, as well as other
packaging materials including corrugate, boxes, paperboard, tape and plastic film. Altor purchases its materials from
a combination of domestic and foreign suppliers and has maintained strong relationships with key resin suppliers for
over 30 years. Adequate amounts of all raw materials have been available in the past, and Altor's management
believes this will continue in the foreseeable future.
Altor maintains 16 manufacturing facilities across North America with 15 located in the U.S. and two in Mexico, as
well as one non-manufacturing corporate headquarters. Given the high volume, low density nature of foam, Altor's
manufacturing facilities are strategically located near its largest customers’ production locations to minimize freight
and logistics costs. Altor's geographic footprint covers a large portion of the continental U.S. and Mexico. Each plant
has a warehouse space for raw materials, supplies and finished goods. Several plants also use third-party
warehousing to store excess inventory. Altor uses common carriers to deliver finished product and in certain cases,
some customers pick up directly from the plants.
Regulatory Environment
Altor's manufacturing operations and facilities are subject to federal, state and local environmental and occupational
health and safety laws and regulations. These include laws and regulations governing air emissions, wastewater
discharge and the storage and handling of chemicals and hazardous materials.
Human Capital
As of December 31, 2021, Altor employed 789 full-time employees. None of Altor's’ U.S.-based employees are
subject to collective bargaining agreements. Under Mexican Federal Labor Law, 111 employees at the two Mexican
manufacturing facilities are unionized. Altor believes its relationship with its employees is good.
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Arnold
Overview
Headquartered in Rochester, New York, 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 its products, technologies,
and manufacturing presence to meet the demands of current and emerging markets. Arnold has expanded globally
and built strong relationships with its customers worldwide. As a result, Arnold provides its customers with new and
innovative materials and solutions that empowers them to develop next generation technologies. Arnold is the
largest and, we believe, the most technically advanced U.S. manufacturer of engineered magnetic systems. Arnold
is one of two domestic producers to design, engineer and manufacture rare earth magnetic solutions. Arnold serves
customers and generates revenues via four business units:
•
•
•
•
PMAG - Permanent Magnets and Assemblies Group- Arnold’s high performance permanent magnets have
a wide variety of applications, mainly used for rotating electrical machinery such as motor and generators.
Industries served include aerospace and defense, energy exploration, industrial, motorsport and medical.
Electric Motors - Low-to-mid volume AC induction, Switched Reluctance, and Brushless DC stators, rotors,
and rotor shaft assemblies. Finished motors range from under 1kW through 500kW for aerospace and
defense, industrial, energy, hybrid electric platforms and energy exploration.
Precision Thin Metals - Produces thin and ultra-thin alloys that improve the power density electrical
systems such as motors, generators, and transformers along with thin foils for other applications such as
electromagnetic shielding, lightweight structures, and implantable structures. Industries served include
aerospace and defense, industrial, energy exploration, and medical.
Flexmag™ - High quality flexible magnetic sheet and strip, Flexmag products not only are magnetic but
their processing capabilities allow for loading of a variety of materials into their flexible sheet products.
Industries served include advertising specialties, industrial, medical, and automotive.
Arnold operates 11 manufacturing facilities worldwide but functions as one company and one team. The facilities are
split under the four business units shown above along with prototyping and advanced technology development
through its Technology Center.
History of Arnold
Arnold was founded in 1895 as the Arnold Electric Power Station Company. Arnold began producing AlNiCo
permanent magnets in its Marengo, Illinois facility in the mid-1930s. In 1946, Allegheny Ludlum Steel Corporation
(Allegheny) purchased Arnold, and over the next few years began production of several additional magnetic product
lines under license agreement with the Western Electric Company. In 1970, Arnold acquired Ogallala Electronics,
which manufactured high power coils and electromagnets.
SPS Technologies (SPS), at the time a publicly traded company, purchased Arnold Engineering Company from
Allegheny in 1986. Under SPS, Arnold made a series of acquisitions and partnerships to expand its portfolio and
geographic reach. In 2003, Precision Castparts, also a publicly traded company, acquired SPS. In January 2005,
Audax, a Boston-based private equity firm acquired Arnold from Precision Castparts.
In February 2007, Arnold Magnetic Technologies completed the acquisition of Precision Magnetics, which expanded
its geographic footprint to include operations in Sheffield, England and Lupfig, Switzerland. In addition, Arnold’s
Lupfig, Switzerland operation is a joint venture partner with a Chinese rare earth producer. The joint venture
manufactures RECOMA® Samarium Cobalt blocks for select markets.
In 2016, Arnold developed and launched the world’s strongest Samarium Cobalt magnet grade, RECOMA 35E, that
enables significant opportunity for increased performance in smaller packages, and at higher temperatures, with no
trade off in stability.
Through 2018 and 2019, Arnold deployed more advanced material from its PTM group such as Arnon 2 and 4
gauge electrical steels along with advanced performance molypermalloy metals. Advancements from the PMAG
group during this same timeframe were targeted at magnet retention in high performance applications. The result of
this hard work was the development of Carbon Fiber sleeving capabilities at its Sheffield UK facility. Lastly, Flexmag
also introduced customized highly loaded composite materials for a variety of applications. In 2021, Arnold acquired
Ramco Electric Motors, Inc. ("Ramco"), a provider of custom electric motor solutions for general industrial,
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aerospace and defense and oil and gas end markets. Ramco's complementary product portfolio will allow Arnold to
offer more comprehensive, turn-key solutions to their customers.
We purchased a majority interest in Arnold on March 5, 2012.
Industry
Permanent Magnets - There exists a broad range of permanent magnets which include Rare Earth Magnets and
magnets made from specialty magnetic alloys. Magnets produced from these materials may be sliced, ground,
coated and magnetized to customer requirements. Those industry players with the broadest portfolio of these
magnets, such as Arnold, maintain a significant competitive advantage over competitors as they are able to offer
one-stop shop capabilities to customers. Management believes that being a manufacturer of these magnets, subject
to patent rights, is another critical market advantage.
Magnetic Assemblies- Arnold offers complex, customized value added magnetic assemblies. These assemblies are
used in devices such as motors, generators, beam focusing arrays, sensors, and solenoid actuators. Magnetic
assembly production capabilities
fabrication, machining,
encapsulation or sleeving, balancing, and field mapping.
include machined metal components, magnet
Electric Motors – There exists a global demand for electric motors. Arnold is a manufacturer for low-to-mid volume
AC induction, Switched Reluctance, and Brushless DC stators, rotors, and rotor shaft assemblies. Arnold works with
companies of all sizes: from small businesses and medium-sized companies all the way to Fortune 500s. The
industry exists wherever electrical energy needs conversion to mechanical use.
Precision Strip and Foil - Precision rolled thin metal foil products are manufactured from a wide range of materials
for use in applications such as transformers, motor laminations, lightweight structures, shielding, and composite
structures. They have the unique processing capability to roll foils as thin as 2.5 microns while providing critical heat
treatment maintaining competitive material properties. Once completed the product is coated if necessary and is slit
to the application width.
Flexible Magnets - Flexible magnet products span the range of applications from advertising (refrigerator magnets
and displays) to medical applications (needle counters) to sealing and holding applications (door gaskets). Other
applications include Electromagnetic or Radio Frequency Shielding for high end electronics.
Products, Customers and Distribution Channels
Products
Permanent Magnets and Assemblies Group - Arnold’s Permanent Magnets and Assemblies Group (PMAG)
segment is a leading global manufacturer of precision magnetic assemblies and high-performance magnets. The
segment’s products include tight tolerance assemblies consisting of many dozens of components and employing
RECOMA® SmCo, Neo, and AlNiCo magnets. These products are sold to a wide range of industries including
aerospace and defense, motorsport/ automotive, oil and gas, medical, general industrial, energy and reprographics.
Arnold has established a reputation in the magnetic industry as the engineering solutions provider, assisting
customers to ensure their critical assemblies meet expectations.
PMAG is Arnold’s largest business unit representing approximately 67% of Arnold sales on an annualized basis
(including Reprographics) with a global footprint including manufacturing facilities in the U.S., U.K., Switzerland, and
China.
PMAG—Products and Applications:
• High precision magnetic rotors for use in electric motors and generators. Typically used in demanding
applications such as aerospace and defense, oil and gas exploration, energy recovery systems, power
dense medical equipment, and under the hood automotive
Sealed pump couplings
Beam focusing assemblies such as traveling wave tubes
•
•
• Oil & Gas exploration tools as well as pipeline inspection and down hole power generation
•
Linear positioning Hall effect sensor systems
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Rare Earth Magnets
•
Samarium Cobalt (SmCo) - SmCo magnets are typically used in critical applications that require corrosion
resistance or high temperature stability, such as motors, generators, actuators and sensors. Arnold markets
its SmCo magnets under the trade name of RECOMA ®, and is DFARS (Defense Federal Acquisition
Regulation) compliant.
• Neodymium (Neo) - Neo magnets offer the highest magnetic energy level of any material in the market.
Applications include motors and generators, magnetic resonance imaging, magnetic inspection systems,
sensors and loudspeakers.
Other Permanent Magnet Types
• AlNiCo - The AlNiCo family of magnets remains a preferred material for many mission critical applications.
Its favorable linear temperature characteristics, high magnetic flux density and good corrosion resistance
are ideally suited for use in applications requiring magnetic stability. This material is manufactured by
Arnold in the United States, making it a DFARS compliant material.
• Hard Ferrite - Hard ferrite (ceramic) magnets were developed as a low cost alternative to metallic magnets
(steel and AlNiCo). Although they exhibit lower energy when compared to other materials available today
and are relatively brittle, ferrite magnets have gained acceptance due to their low price per magnetic output.
•
Injection Molded - Injection molded magnets are a composite of various types of resin and magnetic
powders. The physical and magnetic properties of the product depend on the raw materials, but are
generally lower in magnetic strength and resemble plastics in their physical properties. However, a major
benefit of the injection molding process is that magnet material can be injection or over-molded, eliminating
subsequent manufacturing steps.
Electric Motors
Arnold manufactures electric motors and related components for use in industrial, military, and aerospace
applications and represents approximately 13% of Arnold sales on an annualized basis. Arnold Electric Motor
division is a trusted partner, supplying high-quality, electrical components and assemblies to many well-known
brands in the industrial and aerospace industries. Arnold's competent, trained staff are committed to engineering
solutions together with its customers and ensuring their satisfaction. Arnold is registered with ITAR and maintains
ISO 9001 and AS9100D quality certifications.
Electric Motors—Products and Applications:
•
Stator Manufacturing
◦
◦
◦
◦
AC & DC Stators
Stator Core Construction
Stator Construction
Varnishing
• Rotor Manufacturing
◦
AC Induction
◦ DC Permeant
◦
Switched Reluctance
• Rotor & Shaft Assembly
In House Machine Shop
◦
◦ Rotor Balancing
• Motor Assembly
◦ Complete Motor Assembly
•
Applications for electric motors span all industries. Arnold is a trusted supplier for technologies such as
hybrid and electric transportation motors, aerospace and defense power generation, HVAC fan motors,
marine propulsions and stabilization technologies, vertical lift motors and many others.
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Precision Thin Metals
Arnold’s precision thin metals segment manufactures precision thin strip and foil products from an array of materials
and represents approximately 8% of Arnold sales on an annualized basis. The Precision Thin Metals segment
serves the aerospace and defense, power transmission, alternative energy (hybrids, wind, battery, solar), medical,
security, and general industrial end-markets. With top-of-the-line equipment and superior engineering, Precision
Thin Metals has developed unique processing capabilities that allow it to produce foils and strip with precision and
quality that are unmatched in the industry (down to 1/10th thickness of a human hair). In addition, the segment’s
facility is capable of increasing production from current levels with its existing equipment and is, we believe, well-
positioned to realize future growth.
Precision Thin Metals - Products and Applications:
Electrical steels for hybrid propulsion systems, electric motors, and micro turbines
Electromagnetic and Radio Frequency Shielding
Lightweight structures for aerospace applications
Irradiation windows
Batteries
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• Military countermeasures
Flexmag
Arnold is one of two North American manufacturers of flexible rubber magnets for specialty advertising, medical,
and reprographic applications. Flexmag represented approximately 11% of Arnold sales on an annualized basis. It
primarily sells its products to specialty advertisers and original equipment manufacturers. With highly automated
manufacturing processes, Flexmag can accommodate customers required short lead times. Flexmag benefits from
a loyal customer base and significant barriers to entry in the industry. Flexmag’s success is driven by superior
customer service, and proprietary formulations offering enhanced product performance.
Flexmag - Products and Applications:
Extruded and calendared flexible rubber magnets with optional laminated printable substrates
Electromagnetic and Radio Frequency Shielding
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• Retail displays
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Theft detection/ security
Seals and enclosures
Signage for various advertising and promotions
Existing End-Markets and Geographies
Aerospace and Defense - In the aerospace and defense sector, Arnold is selling electric motor components,
magnets, magnetic assemblies and ultra-thin foil solutions. Specifically, in the aerospace industry, Arnold’s
assemblies have been designed into products, which enables Arnold to benefit from the market growth and a
healthy flow of business based on current airframe orders. Through its OEM customers, many new commercial
aircraft placed in service contain assemblies produced by Arnold. Arnold’s sales to large aerospace and defense
manufacturers includes magnetic assemblies used in applications such as motors and generators, actuators, trigger
mechanisms, and guidance systems, as well as magnets for these and other uses. In addition, it sells its ultra-thin
foil for use in military countermeasures, lightweight structures, brazing alloys, and motor laminations.
General Industrial - Within the industrial sector, Arnold provides electric motors, magnet assemblies as well as
magnets for custom made motor systems. These include stepper motors, pick and place robotic systems, and new
designs that are increasingly being required by regulation to meet energy efficiency standards. An example is a
motor utilizing Arnold’s bonded magnets for use in commercial refrigeration systems. Arnold also produces
magnetic couplings for seal-less pumps used in chemical and oil & gas applications that allow chemical companies
to meet environmental requirements.
Motorsport / Automotive - Arnold produces high performance motor components and sub-assemblies for motorsport
and automotive applications, such as the Kinetic Energy Recovery System, which includes a composite sleeved
RECOMA® SmCo magnet rotor for a high speed, high power system and Electric Turbo Chargers that operate at
greater than 100,000 RPM. Further emerging magnetic applications include electric traction drives, regenerative
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braking systems, starter generators, and electric turbo charging. As much of this technology utilizes magnetic systems, Arnold expects to benefit from this trend.Oil and Gas - Arnold currently provides magnets and precision assemblies for use in oil and gas exploration and production, applications which typically require exceptional collaboration and co-development with its customers. Arnold supplies products used in applications such as electric submersible pumps, oil well shutoff valves, down-hole logging while drilling tooling, and a down-hole magnetic transfer coupling. Other applications for which Arnold is actively involved include pipeline inspection, wireless tomography tools, and chip collection.Medical - Within the medical sector, Arnold provides magnetic assemblies, magnets, flexible magnets, and ultrathin foils. Its magnet assemblies and magnets are critical parts of motor systems for dental instruments as well as saws and grinders. Magnet assemblies are also provided for skin expansion systems, shunt valves, and position sensors. Its Precision Thin Metals business unit provides precision titanium used for implantable devices. Energy - Arnold’s Precision Thin Metals segment supplies grain-oriented silicon steel produced with proprietary methods for use in transformers and inductors. These cores allow for the production of very efficient transformers and inductors while minimizing size. In addition, Arnold’s magnet solutions can be found in advanced automatic circuit re-closer solutions that substantially reduce the stress on system components on the grid. Arnold’s solutions are also present in new power storage systems. The permanent magnet bearings used in new designs improve the efficiency of the flywheel energy storage system.Customers and Distribution ChannelsArnold’s focus on customer service and product quality has resulted in a broad base of customers in a variety of end markets. Products are used in applications such as aerospace and defense, motorsport / automotive, oil and gas, medical, general industrial, energy, reprographics, and advertising specialties.The following table sets forth management’s estimate of Arnold’s approximate customer breakdown by industry sector for the fiscal years ended December 31, 2021, 2020 and 2019:Customer DistributionIndustry Sector202120202019Aerospace and Defense 38 % 36 % 36 %General Industrial 29 % 26 % 24 %Motorsport/ automotive 14 % 11 % 11 %Advertising specialties 5 % 8 % 10 %Oil and Gas 4 % 4 % 5 %Energy 3 % 3 % 4 %Medical 2 % 3 % 4 %Reprographic 2 % 3 % 2 %All Other Sectors Combined 3 % 6 % 4 %Total 100 % 100 % 100 %Arnold has a large and diverse, blue-chip customer base. Sales to Arnold’s top ten customers were 35% for the year ended December 31, 2021, 24% for the year ended December 31, 2020, and 26% of total sales for the year ended December 31, 2019. In 2021, one customer represented approximately 14% of Arnold's net revenues, with no other individual customer representing more than 10% of Arnold's net revenues. No individual customer represented greater that 10% of Arnold’s net revenues in 2020 or 2019.Arnold had firm backlog orders totaling approximately $62.6 million and $65.8 million, respectively, at December 31, 2021 and 2020.Business Strategies and Competitive StrengthsBusiness StrategiesEngineering and Product Development - Arnold’s engineers work closely with the customer to provide system solutions, representing a significant competitive advantage. Arnold’s engineering expertise is leveraged with state-of-the-art technology across the various business units located in North America, Europe and Asia Pacific. Arnold’s 54 engineers work with customers on a global basis to optimize designs, guide material choices, and create magnetic
models resulting in Arnold’s products being specified into customer designs.
Arnold has a talented and experienced engineering staff of design and application experts, quality personnel and
technicians. Included in this team are engineers with backgrounds in materials science, physics, and metallurgical
engineering. Other members of the team bring backgrounds in ceramics, mechanical engineering, chemical
engineering and electrical engineering.
Arnold continues to be an industry leader with regard to new product formulations and innovations. As evidence of
this, Arnold currently relies on a deep portfolio of “trade secrets” and proprietary intellectual property. Arnold
continuously endeavors to introduce electromagnetic solutions that exceed the performance of current offerings and
meet customer design specifications.
Growth in Arnold’s business is primarily focused in three areas:
• Growing market share in existing end-markets and geographies, with a focus on aerospace and defense,
niche industrial systems, and oil and gas;
Vertical integration through new products and technologies; and
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• Completing opportunistic acquisitions and partnerships to reduce product introduction and market
penetration time.
Competitive Landscape
The specialty magnetic systems industry is highly fragmented, creating a competitive landscape with a variety of
magnetic component manufacturers. However, few have the breadth of capabilities that Arnold possesses.
Manufacturers compete on the basis of technical innovation, co-development capabilities, time-to-market, quality,
geographic reach and total cost of ownership. Industry competitors relevant to Arnold’s served markets range from
large multinational manufacturers to small, regional participants. Given these dynamics, we believe the industry will
likely favor players that are able to achieve vertical integration and a diversification of offerings across a breadth of
products along with magnet engineering and design expertise. The focus will be engineering solutions together with
its customers.
Barriers to Entry
• Low Substitution Risk – Arnold’s solutions are typically specified into its customers’ program designs
through a co-development and qualification process that often takes 6-18 months. Arnold’s customers are
typically contractors and component manufacturers whose products are integrated into end-customers’
applications. The high cost of failure, relatively low proportionate cost of magnets to the final product,
sometimes lengthy testing and qualification process, and substantial upfront co-engineering investment
required, represent significant barriers to customers changing solution providers such as Arnold.
• Equipment and Processing – Arnold’s existing base of production equipment has a significant estimated
replacement cost. A new entrant could require as much as 2-3 years of lead time to match the process
performance requirements, customization of equipment and material formulations necessary to effectively
compete in the specialty magnet industry. Further, given the program nature of a majority Arnold’s sales,
management estimates that it could take 5-10 years to build a sufficient book of business and base of
institutional knowledge to generate positive cash flow out of a new manufacturing plant.
Competition
Management believes the following companies represent Arnold’s top competitors:
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Vacuumschmelze Gruner
• Dexter Magnetic Technologies
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• Magnum Magnetics Corporation
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Electron Energy Corp
Thomas & Skinner
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Suppliers and Manufacturing
Raw materials utilized by Arnold include neodymium, samarium, dysprosium, nickel and cobalt, stainless steel
shafts, Inconel sleeves, adhesives, laminates, aluminum extrusions and binders. Although Arnold considers its
relationships with vendors to be strong, Arnold’s management team also maintains a variety of alternative sources
of comparable quality, quantity and price. The management team therefore believes that it is not dependent upon
any single vendor to meet its sourcing needs. Arnold is generally able to pass through material costs to its
customers and believes that in the event of significant price increases by vendors that it could pass the increases to
its customers.
Arnold has a wide variety of manufacturing capabilities. For permanent magnets and assemblies our magnets are
produced and fabricated utilizing personnel, skills, tools, and specific machinery to convert raw materials into
finished magnet and then integration of those magnets and machines components into devices or sub-assemblies.
Orders are all built to specific customer needs and distributed directly from our manufacturing facilities located
worldwide.
Research and Development
Arnold has a core research and development team with extensive industry experience located at its Technology
Center. In addition to the Technology Center, a large number of other Arnold staff members assigned to the
business units contribute to the research and development effort at various stages. Product development also
includes collaborating with customers and field testing. This feedback helps ensure products will meet Arnold’s
demanding standards of excellence as well as the constantly changing needs of end users. Arnold’s research and
development activities are supported by state-of-the-art engineering software design tools, integrated manufacturing
facilities and a performance testing center equipped to ensure product safety, durability and superior performance.
Intellectual Property
Arnold currently relies on a deep portfolio of “trade secrets” and proprietary intellectual property.
Patents
Arnold currently has 2 patents in force in the United States and 1 patent in force in Japan. Arnold also has a patent
application pending in Europe.
Trademarks
Arnold currently has 86 trademarks, 12 of which are in the U.S. The most notable trademarked items are the
following: “RECOMA”, “PLASTIFORM”, “FLEXMAG” & “ARNOLD”. Application dates for various trademarks date
back to as early as 1960.
Regulatory Environment
Arnold’s domestic manufacturing and assembly operations and its facilities are subject to evolving Federal, state
and local environmental and occupational health and safety laws and regulations. These include laws and
regulations governing air emissions, wastewater discharge and the storage and handling of chemicals and
hazardous substances. Arnold’s foreign manufacturing and assembly operations are also subject to local
environmental and occupational health and safety laws and regulations. New requirements, more stringent
application of existing requirements, or discovery of previously unknown environmental conditions could result in
material environmental expenditures in the future.
Arnold is a major producer of both Samarium Cobalt permanent magnets under its brand name RECOMA® and
Alnico (in both cast and sintered forms). Both materials from Arnold meet the current Berry Amendment or Defense
Federal Acquisition Regulations Systems (DFARS) requirements per clause 252.225.7014 further described under
10 U.S.C. 2533b. This provision covers the protection of strategic materials critical to national security. These
magnet types are considered “specialty metals” under these regulations.
Human Capital
Arnold is led by a capable management team of industry veterans that possess a balanced combination of industry
experience and operational expertise. Arnold employed approximately 686 hourly and salaried employees located
throughout North America, Europe and Asia at December 31, 2021. Arnold’s employees are compensated at levels
commensurate with industry standards, based on their respective position and job grade.
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Arnold’s workforce is non-union except for approximately 63 hourly employees at its Marengo, Illinois facilities,
which are represented by the International Association of Machinists (IAM). Arnold enjoys good labor relations with
its employees and union and has a three year contract in place with the IAM, which will expire in June 2022.
Sterno
Overview
The Sterno Group LLC ("Sterno"), headquartered in Corona, California, is the parent company of Sterno Products,
LLC ("Sterno Products") and Rimports, LLC ("Rimports"). Sterno operates via two product divisions:
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Sterno Products - Sterno Products offers a broad range of wick and gel chafing fuels, liquid and traditional
wax candles, butane stoves and accessories, and catering equipment and lamps for restaurants, hotel and
home entertainment uses, selling both Sterno Brand and private label. As a leading supplier of canned heat
to foodservice distributors and foodservice group purchasing organizations, Sterno is always pursuing end-
user solutions and innovations to strengthen its position in the marketplace.
Rimports - Rimports is a manufacturer and distributor of branded and private label wickless candle
products used for home decor and fragrance systems under the ScentSationals, AmbiEscents, Oak & Rye,
Estate and Ador brands. The company offers unique lines of wickless candle products including ceramic
wax warmers, scented wax cubes and essential oil and diffusers. Rimports also sells flameless candles,
lanterns, and outdoor lighting. Sterno acquired Rimports in February 2018. In 2021, Sterno integrated the
product lines of Sterno Home Inc. ("Sterno Home") with Rimports. Previously, Sterno Home was a separate
product division of Sterno whose product offerings included flameless candles, traditional house and garden
lighting including path lights, spotlights, and security lights.
History of Sterno
Sterno’s history dates back to 1893 when S. Sternau & Co. began making chafing dishes and coffee percolators in
Tenafly, New Jersey. In 1914, S. Sternau & Co. introduced “canned heat” with the launch of its gelled ethanol
product under the “Sterno” brand. Since then, the Sternau and Sterno names have been the most well-known
names in portable food warming fuel. In 1917, S. Sternau & Co. was renamed The Sterno Corporation. During
World War I, Sterno portable stoves were promoted as an essential gift for soldiers going to fight in the trenches of
Europe. Sterno stoves heated water and rations, sterilized surgical instruments, and provided light and warmth in
bunkers and foxholes. During World War II, Sterno produced ethanol and methanol chafing fuels under contract with
the U.S. military. Sterno's production facilities were moved from New Jersey to Texarkana, Texas in the early 1980s.
In 2012, Sterno merged with the Candle Lamp Company, LLC ("CandleLamp"). CandleLamp, founded in Riverside,
California in 1978, focused initially on the liquid wax candle market. Over the next several decades, CandleLamp
began to supply chafing fuel in addition to lighting products.
In 2016, Sterno expanded their product offering with the acquisition of Northern International Inc. ("Sterno Home").
The success in the outdoor lighting of an innovative use of LED technology evolved into the development of
patented flameless candle product line. In February 2018, Sterno acquired Rimports, a manufacturer and distributor
of branded and private label wickless candle products used for home decor and fragrance systems. Rimports offers
unique lines of wickless candle products including ceramic wax warmers, scented wax cubes and essential oil and
diffusers.
Today, Sterno operates out of its corporate headquarters in Corona, California, two manufacturing facilities in
Texarkana, Texas and Memphis, Tennessee, and the Rimports facility in Provo, Utah.
We purchased Sterno on October 10, 2014.
Industry
Sterno Products competes in the broadly defined U.S. foodservice industry where historically restaurant, catering
and hospitality sales have accounted for approximately 60% - 70% of the market with the remainder comprised of
the travel and leisure, education and healthcare related sales. The Sterno Products product offerings focus on safe,
portable fire solutions for cooking and warming, as well as tabletop lighting décor.
Rimports operates in the broad North American home decor space (retail) which is heavily correlated to general
consumer spending. Flameless and reusable wax products have seen increased adoption by younger consumers
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who prioritize economical and environmentally friendly products. Within the home decor space, Rimports competes
in the U.S. candle space and the U.S. home fragrance space, and, with the integration of Sterno Home, has added
the flameless candles, lanterns and outdoor lighting industry. Management believes that a rise in demand from high-
income households and businesses will bolster growth, with consumers spending more money on the cocooning
trend and specifically on beautifying their indoor and outdoor home, changing out trendy accent items more
frequently and investing in more spacious and comfortable outdoor spaces with many equivalent amenities of their
indoor spaces.
Sterno is a “full-line” supplier offering a broad array of portable chafing fuels, table lighting, outdoor lighting
products, wickless candles and fragrance products with approximately 4000 SKUs serving the foodservice and retail
markets. Sterno originally focused on chafing fuel (“canned heat”) products and later expanded its offerings to
include table ambiance products such as liquid wax, wax candles and votive lamps, as well as outdoor lighting with
the acquisition of Sterno Home in 2016, and wax cubes and warmer products through its acquisition of Rimports.
Sterno’s products fall into six major categories: canned heat, catering equipment and butane products, table
lighting, flameless candles and outdoor lighting, wickless candle and fragrance products.
Products, Customers and Distribution Channels
Products
Canned Heat - The canned heat product line is composed of various chafing fuels packaged in small, portable
cans. The portable warming (canned heat) line is composed of wick-based and gel-based chafing fuels packaged in
steel cans. These products are used by foodservice professionals in a variety of food serving and holding
applications and are designed to keep food products at an optimal food-safe serving temperature of 140-165
Fahrenheit. The canned heat product line is composed of two subcategories: wick chafing fuel and gel chafing fuel.
The subcategories are distinguished based on the type of chafing fuel being used; the four primary chafing fuels are
diethylene glycol (“DEG”), propylene glycol, ethanol and methanol. Each fuel contains unique characteristics and
properties that allow the Company to offer a broad array of configurations to suit varying user requirements.
• Wick Chafing Fuel - The wick chafing fuel line (“Wick”) is composed of either DEG or propylene glycol
chafing fuel. DEG and propylene glycol chafing fuels with advance wick technology have higher heat output
than alternatives such as ethanol and methanol. The liquid Wick products feature a variety of wick types
and burn times to meet the specific needs of the user. Wick fuels are clean burning, biodegradable,
nonflammable if spilled (will not ignite without a wick) and the can stays cool to the touch when lit.
• Gel Chafing Fuel - The gel chafing fuel line (“Gel”) is composed of either gelled ethanol or gelled methanol
chafing fuel. Ethanol chafing fuel has a higher heat output than methanol fuel; both ethanol and methanol
fuels have lower heat output than some DEG and propylene glycol products. The Gel product line tends to
have shorter burn times than the Wick product.
For an environmentally preferred chafing fuel, the Company offers a patented line of “Green” chafing fuels featuring
USDA Certified Biobased Product formulas that are also endorsed by the Green Restaurant Association. The
“Green Heat” and “Green Wick” products perform similar to the Wick and Gel chafing fuels, but are made from
renewable resources that are biodegradable and more environmentally friendly.
Catering Equipment - Catering equipment products are designed to provide a complete commercial catering
solution whether indoor or outdoor. Products include chafing dish frames and lids, wind guards and buffet sets.
Butane - Sterno produces a full line of professional quality portable butane stoves, ideal for action stations, made-
to-order omelet lines, tableside and off-site cooking, outdoor events and more. Products also include select butane
accessories for special culinary applications such as the culinary torch. Sterno butane fuel comes with an additional
safety feature called Countersink Release Vent (CRV) Technology.
Table Lighting - Sterno sells a variety of items designed to enhance lighting and ambiance at meal settings which
are critical to a customer’s experience. Products include liquid wax, traditional hard wax and flameless electronic
candles, as well as votive lamps, shaded lamps and accent lamps.
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Flameless Candles and Outdoor Lighting - Sterno offers a wide selection of lighting for your home, garden, patio
and yard with over 1000 SKU's available in our retail markets. All of Sterno's products are powered by one of the
following - 1) Solar - solar panel with rechargeable power source - usually a rechargeable battery; 2) Battery -
battery operated; 3) Plug-in - plugs directly into a regular wall socket either with 2 or 3 prong plug and with or
without included and attached transformer; 4) Low Voltage - part of a set which includes a stand-alone transformer.
Fixtures connect through a stand-alone wire via clip connectors; 5) Line Voltage - hardwired into a home's electrical
circuitry, or 6) Rechargeable - product is recharged when empty usually through a plug in wire and an onboard
rechargeable power source.
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Flameless Candles - The flameless candle product line is made up of various types and sizes of candles
with all of them sharing the one main attribute: their glow is powered by an artificial power source, most
often battery. This makes them inherently safer than traditional candles as there is no flame or even heat
generated to cause any type of accidents. Although pillar type candles are the most common shape, Sterno
also designs and manufactures votives, tealights, tapers as well as specialty molded candles. Sterno
candles stand out from the competition as they are the only manufacturer that offers the patented black
wick. Sterno also developed its unique algorithm-based light circuit which gives the candle a naturally
random flicker and glow.
Landscape Lighting - Landscape lighting is lighting that promotes and accentuates elements of a
consumer’s home, yard or garden so its beauty can be enjoyed both in daytime and nighttime. Another
benefit of landscape lighting is added safety as it is easier to navigate around a home at night when it is
reasonably well-lit. Landscape lighting was originally most commonly powered through a low voltage setup
but as solar technologies have rapidly developed, many of these fixtures can achieve their lighting purposes
with only a solar panel for power generation. Consumers with higher and more consistent lighting
requirements most often opt for low voltage kits using wire and transformers to light their fixtures. Solar
powered fixtures are advantageous for those consumers looking for cheaper and quicker to set up lighting
solutions even if it often means less lumens and light. Another notable technology has been the
development of LED lighting. LED’s more efficient power generation technology has allowed for
advantageous fixture designs and a higher level of power generation which were not easy or as cost
effective to achieve as with legacy lighting technologies such as incandescent or halogen. LEDs also last
longer and are generally more robust than older technologies.
• Décor Lighting - Décor lighting has similar functions to landscape lighting but is usually less about safety
and functionality and more about accenting an area of the outside home with ornamentation of some sort.
With a décor piece, the light the piece gives off and the item itself together become elements of beauty in
the setting. Because these items are very trend driven, consumers are more apt to switch them out more
often therefore increasing repeat purchase potential and other recurrent sales opportunities for Sterno.
Some of the most common categories of décor lighting are lanterns and baskets and string lighting.
Wickless Candle and Fragrance Products
• WaxWarmers and Scented Wax Cubes - The wax and wax warmer line is composed of a large variety of
fragrance and warmer design choices for consumers. The wax cubes are long-lasting and consistently
release strong fragrance. The consumer likes the product because the scented wax cubes are an impulse
item ($2~ price range) and this product makes it easy and quick for the customer to change fragrance. The
flameless feature is a plus in that it is very safe. The proprietary formula and world-class fragrances add to
the high quality of the domestically-made products. Ongoing research ensures consumer loyalty, superior
quality, and well-rounded fragrance programs. The wax warmers are made up of quality materials including
wood, metal, ceramic, and glass.
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Essential Oils and Diffusers - The 100% Pure Essential Oil lines and brands consists of Peppermint,
Lavender, Lemon, Eucalyptus, Sweet Orange, Grapefruit, Tea tree, Cinnamon, etc. Customers are attracted
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to high quality, 100 percent pure oil products with no additives or fillers. Attractively designed diffusers appeal to consumers in the Aromatherapy Home Fragrance section.•ScentCharms - ScentCharms is Rimports’ newest product category. With various interchangeable high-quality fragrance oils and plug-in designs, consumers enjoy a personalized experience. The product is designed to be no spill, no mess, clutter-free, and long-lasting.•Aromatherapy Products - The aromatherapy line consists of room sprays, liquid hand soaps, foaming hand soaps, hand sanitizers, body lotions, and body scrubs, etc. The five unique fragrance combinations - lavender and chamomile, eucalyptus and rosemary, orange and vanilla, lemon and grapefruit, and peppermint and geranium - are made with 100 percent pure essential oils.Customers and Distribution ChannelsSterno's products are sold primarily through the foodservice and consumer retail channels. Sterno’s product distribution network is comprised of long-standing, entrenched relationships with a diversified set of customers. Sterno’s top ten customers comprised approximately 71%, 73%, and 73% of gross sales in the years ended December 31, 2021, 2020 and 2019, respectively. •Foodservice - The foodservice channel consists of multiple layers of distribution comprised of broadline distributors, equipment and supply dealers and cash and carry dealers. Within the foodservice channel, Sterno’s products are predominantly used in the restaurant, lodging/hospitality and catering markets. •Retail - The retail channel consists of club stores, mass merchants, specialty retailers, grocers and national and regional DIY stores. The Company’s retail products are used in home, camping and emergency applications. The Company’s retail products appeal to a wide variety of consumers, from home entertainers to recreational campers and extreme outdoorsmen. Online retail sales are also an important channel for Sterno Home and Rimports. With an online dynamic, it is also much easier to showcase how Sterno Home’s and Rimport's products look in actual dark use conditions, directly addressing their primary merchandising challenge. The following table sets forth Sterno’s gross revenue by product for the fiscal years ended December 31, 2021, 2020 and 2019:Year ended December 31,Gross sales by product (1)202120202019Wickless Candle Products 40 % 40 % 28 %Flameless Candle and Outdoor Lighting 13 % 16 % 20 %Canned Heat 21 % 11 % 29 %Diffusers and Essential Oils 6 % 9 % 5 %Table Lighting 3 % 2 % 5 %Other 17 % 22 % 13 % 100 % 100 % 100 %(1) As a percentage of gross sales, exclusive of sale discounts.Sterno had approximately $29.9 million and $39.5 million in firm backlog orders at December 31, 2021 and 2020, respectively.Business Strategies and Competitive StrengthsBusiness StrategiesDefend Leading Market Position - As a leading supplier of canned fuels, flameless candles and outdoor lighting, wickless candles and fragrance products, Sterno’s places great value delivering unmatched customer service and product selection. In a market characterized by fragmented categories and competition, Sterno will continue to focus on providing the best in class service to its customers. Sterno Products has been the recipient of numerous vendor awards for its high degree of customer service.60 Pursue Selective Acquisitions - Sterno views acquisitions as a potentially attractive means to expand its product
offerings in the foodservice and retail channels as well as enter new international markets.
Expand Retail Distribution - Sterno’s management believes that there is an opportunity to leverage the iconic
nature of the “Sterno Products” brand to expand its retail product offering and to expand distribution into additional
retailers.
Create Innovative Products - Having innovative design, marketing, and production teams enables Rimports to
expand into new fragrance systems markets, as it has done with Essential Oil Diffusers and ScentCharms
(Decorative Liquid plug-in fragrance units). Rimports will continue to focus on providing the best quality products
and low prices to retailers and end-users.
Competitive Strengths
Leading Brand Recognition & Market Share - Sterno Products is the market share leader in the canned chafing
fuel market. Management believes Sterno Products enjoys outstanding brand awareness and a reputation for
superior quality and performance with distributors, caterers, hotels and other end users. Sterno Home offers a wide
variety of products to a cross section of North American retail and its diversity gives us a unique standing in this
marketplace. Most of Sterno Home's competitors specialize in one aspect of fulfilling the market. They either only
sell to a few retailers or only actively develop few or even only one category of product. This exposes them to major
financial challenges when they lose that account or when that product is beat out by a competitor or starts to wane
in the marketplace. Rimports is a leader in fragrance systems, particularly the wickless candle market, and is
growing its market share in the essential oils and diffusers and plug-in liquid fragrance markets. Rimports offers a
large variety of products to retailers in North America, Canada, China, and the United Kingdom.
Low Cost versus Alternatives - Sterno Product's customers are typically caterers, hotels or restaurants who utilize
canned chafing fuel to maintain prepared food at a safe and enjoyable serving temperature. The risk of ruining a
dining experience and the low proportionate cost of canned chafing fuel relative to the cost of a catered event
represent significant barriers to customers switching out of Sterno’s canned chafing fuel products. Additionally,
management believes that there is no other technology available today that offers the portability, reliability and low
cost of the Sterno canned chafing fuel products. Rimports’ ultimate consumers seek high quality products in the
Home Fragrance section. This high value strength ensures consumer loyalty and satisfaction.
Suppliers and Manufacturing
Sterno's product manufacturing is based on a dual strategy of in-house manufacturing and strategic alliances with
select vendors. Sterno operates an efficient, low-cost supply chain, sourcing materials and employing contract
manufacturers from across the Asia-Pacific region and the U.S.
Sterno Products' primary raw materials are Diethylene glycol, ethanol, liquid paraffin and steel cans for which it
receives multiple shipments per month. Sterno Products purchases its materials from a combination of domestic
and foreign suppliers.
Rimports sources raw materials from and outsources manufacturing processes to companies in the U.S. and China.
Raw materials include wax, fragrances, and color dye for waxes; essential oils; wood, metal, ceramic, and glass for
warmers and diffusers; and packaging supplies. Products are shipped to retailers from outsourced manufacturing
warehouses and Rimports’ two Utah warehouses. The Sterno Home product lines are sources entirely from China.
Intellectual Property
Sterno relies upon a combination of trademarks and patents in order to secure and protect its intellectual property
rights. Sterno currently owns approximately 269 registered trademarks and 74 patents globally, and has 28
applications for patents pending.
Regulatory Environment
Sterno is proactive regarding regulatory issues and management believes that it is in compliance with all relevant
regulations. Sterno maintains adequate product liability insurance coverage. Management believes that Sterno is in
compliance, in all material respects, with applicable environmental and occupational health and safety laws and
regulations.
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Seasonality
Sterno typically has higher sales in the second and fourth quarter of each year, reflecting the outdoor summer
season and the holiday season. Rimports typically has higher sales in the third and fourth quarter of each year,
reflecting the holiday season.
Human Capital
At December 31, 2021, Sterno had 549 employees within its three product divisions - 259 employees at Sterno
Products, 34 employees at Sterno Home and 256 employees at Rimports. Sterno Products operates out of four
locations in the United States, with a majority of their employees located at production facilities in Memphis,
Tennessee and Texarkana, Texas. Rimports employees primarily operate out of Rimports' facilities in Provo, Utah.
Sterno believes that its relationship with its employees is good.
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ITEM 1A. RISK FACTORS
Our business, operations and financial condition are subject to various risks and uncertainties. The following
discussion of risk factors should be read in conjunction with the Management’s Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) section and the consolidated financial statements and related notes.
In addition to the factors affecting our specific operating segments identified in connection with the descriptions of
these segments and the financial results of the operations of these operating segments elsewhere in this report, the
most significant factors affecting our operations include the following:
Risks Related to Our Business and Structure
The global outbreak of the novel coronavirus, or COVID-19, caused severe disruptions in the U.S. and
global economies, including supply chain disruptions, and has impacted, and may continue to adversely
impact our performance and results of operations.
The COVID-19 pandemic has adversely impacted global commercial activity and contributed to significant volatility
in the equity and debt markets. The COVID-19 pandemic and restrictive measures taken during the course of the
pandemic to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, or the
re-introduction of business shutdowns, cancellations of events and restrictions on travel, significant reductions in
demand for certain goods and services, reductions in business activity and financial transactions, supply chain
interruptions, labor shortages, increased inflationary pressure and overall economic and financial market instability
both globally and in the United States. Many states, including those in which we operate, have issued orders
requiring the closure of, or certain restrictions on the operation of certain businesses. Such actions and effects
remain ongoing and the ultimate duration and severity of the COVID-19 pandemic, including COVID-19 variants,
such as the recent Delta and Omicron variants, remain uncertain. Recurring COVID-19 outbreaks caused by
different virus variants continue to lead to the re-introduction of certain restrictions in certain states in the United
States and globally. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global
economies may continue to experience a recession, and our business and operations, as well as the business and
operations of our subsidiaries, could be materially adversely affected by a prolonged recession in the U.S. and other
major markets.
The COVID-19 pandemic is having a particularly adverse impact on industries in which certain of our subsidiaries
operate, including the foodservice and hospitality industries in which Sterno operates. As a result of the COVID-19
pandemic and other factors, supply chains worldwide have been, and continue to be, interrupted, slowed or
rendered inoperable, which have also adversely impacted certain of our subsidiaries operating results.
Relatedly, costly litigation could increase in connection with merger and acquisition transactions, as parties to such
transactions explore ways to avoid transactions by the assertion of claims of force majeure, material adverse
change in the condition of target investments, and/or fraudulent misrepresentation. COVID-19 also continues to
present a significant threat to our employees’ well-being and morale. Our key employees or executive officers may
become sick or otherwise unable to perform their duties for an extended period of time and we may experience a
potential loss of productivity, and extended period of remote working by our employees may increase operational
risks, including technology availability and heightened cybersecurity risk.
These and other factors relating to or arising from the outbreak could have a material adverse effect on the
Company’s business, results of operations, and cash flows. Even after COVID-19 has subsided, we may continue
to experience materially adverse impacts to our business as a result of the virus's global economic impact and any
economic impact that has occurred or may occur in the future.
The COVID-19 pandemic is continuing as of the filing date of this Annual Report on Form 10-K, and its extended
duration may have further adverse impacts on our business. In addition to the foregoing, COVID-19 has
exacerbated and may continue to exacerbate, many of the other risks described in this Annual Report on Form 10-
K.
Our future success is dependent on the employees of our Manager and the management teams of our
businesses, the loss of any of whom could materially adversely affect our financial condition, business and
results of operations.
Our future success depends, to a significant extent, on the continued services of the employees of our Manager,
most of whom have worked together for a number of years. Our Manager does not have an employment agreement
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with our Chief Executive Officer and, in any event, employment agreements may not prevent our Manager’s
employees from leaving or from competing with us in the future.
The future success of our businesses also depends on their respective management teams because we operate
our businesses on a stand-alone basis, primarily relying on existing management teams for management of their
day-to-day operations. Consequently, their operational success, as well as the success of our internal growth
strategy, will be dependent on the continued efforts of the management teams of the businesses. The loss of
services of one or more members of our management team or the management team at one of our businesses
could materially adversely affect our financial condition, business and results of operations.
We face risks with respect to the evaluation and management of future platform or add-on acquisitions.
A component of our strategy is to continue to acquire additional platform subsidiaries, as well as add-on businesses
for our existing businesses. Generally, because such acquisition targets are held privately, we may experience
difficulty in evaluating potential target businesses as the information concerning these businesses is not publicly
available. In addition, we and our subsidiary companies may have difficulty effectively managing or integrating
acquisitions. We may experience greater than expected costs or difficulties relating to such acquisition, in which
case, we might not achieve the anticipated returns from any particular acquisition, which may have a material
adverse effect on our financial condition, business and results of operations.
We may not be able to successfully fund future acquisitions of new businesses due to the lack of
availability of debt or equity financing at the Company level on acceptable terms, which could impede the
implementation of our acquisition strategy and materially adversely impact our financial condition,
business and results of operations.
In order to make future acquisitions, we intend to raise capital primarily through debt financing at the Company
level, additional equity offerings, the sale of stock or assets of our businesses, and by offering equity in the Trust or
our businesses to the sellers of target businesses or by undertaking a combination of any of the above. Since the
timing and size of acquisitions cannot be readily predicted, we may need to be able to obtain funding on short notice
to benefit fully from attractive acquisition opportunities. Such funding may not be available on acceptable terms. In
addition, the level of our indebtedness may impact our ability to borrow at the Company level. Another source of
capital for us may be the sale of additional shares, subject to market conditions and investor demand for the shares
at prices that we consider to be in the interests of our shareholders. These risks may materially adversely affect our
ability to pursue our acquisition strategy successfully and materially adversely affect our financial condition,
business and results of operations.
Under the Trust Agreement, the Company’s board of directors will have the power to cause the Trust to be
converted to a corporation in the future at its sole discretion in ways with which you may disagree.
The Trust Agreement authorizes the Company, acting through the its board of directors and without further
shareholder approval, to cause the Trust to be converted to a corporation (the “Conversion”). As a shareholder of
the Trust, you may disagree with the terms of the Conversion that might be implemented by the Company’s board of
directors in the future, and you may disagree with the board’s determination that the terms of the Conversion are not
materially adverse to you as a shareholder or that they are in the best interests of the Trust and its shareholders.
Your recourse, if you disagree, will be limited because our Trust Agreement gives broad authority and discretion to
the Company’s board of directors to implement the Conversion as long as the board determines that it will be in the
best interests of the Trust and its shareholders to do so.
The Company’s board of directors has full authority and discretion over the distributions of the Company,
other than the profit allocation, and it may decide to reduce or eliminate distributions at any time, which
may materially adversely affect the market price for our shares.
The Company’s board of directors has full authority and discretion to determine whether or not a distribution by the
Company should be declared and paid to the Trust and in turn, subject to U.S. federal income taxes and applicable
state and local taxes, to our shareholders, as well as the amount and timing of any distribution. In addition, the
management fee and profit allocation will be payment obligations of the Company and, as a result, will be paid,
along with other Company obligations, prior to the payment of distributions to our shareholders. The Company’s
board of directors may, based on their review of our financial condition and results of operations and pending
acquisitions or our tax structure, determine to reduce or eliminate distributions, which may have a material adverse
effect on the market price of our shares.
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We rely entirely on receipts from our businesses to make distributions to our shareholders.
The Trust’s sole asset is its interest in the LLC, which holds controlling interests in our businesses. Therefore, we
are dependent upon the ability of our businesses to generate earnings and cash flow and distribute them to us in
the form of interest and principal payments on indebtedness and, from time to time, dividends on equity to enable
us, first, to satisfy our financial and tax obligations and second to make distributions to our shareholders. This ability
may be subject to limitations under laws of the jurisdictions in which they are incorporated or organized. If, as a
consequence of these various restrictions, we are unable to generate sufficient receipts from our businesses, we
may not be able to declare, or may have to delay or cancel payment of, distributions to our shareholders.
We do not own 100% of our businesses. While we receive cash payments from our businesses which are in the
form of interest payments, debt repayment and dividends, if any dividends were to be paid by our businesses, they
would be shared pro rata with the minority shareholders of our businesses and the amounts of dividends made to
minority shareholders would not be available to us for any purpose, including Company debt service or distributions
to our shareholders. Any proceeds from the sale of a business will be allocated among us and the non-controlling
shareholders of the business that is sold.
The Company’s board of directors has the power to change the terms of our shares in its sole discretion in
ways with which you may disagree.
As an owner of our shares, you may disagree with changes made to the terms of our shares, and you may disagree
with the Company’s board of directors’ decision that the changes made to the terms of the shares are not materially
adverse to you as a shareholder or that they do not alter the characterization of the Trust. Your recourse, if you
disagree, will be limited because our Trust Agreement gives broad authority and discretion to our board of directors.
In addition, we may change the nature of the shares to be issued to raise additional equity and remain a fixed-
investment trust for tax purposes.
Certain provisions of the LLC Agreement of the Company and the Trust Agreement make it difficult for third
parties to acquire control of the Trust and the LLC and could deprive you of the opportunity to obtain a
takeover premium for your shares.
The LLC Agreement of the LLC and the Trust Agreement of the Trust contain a number of provisions that could
make it more difficult for a third party to acquire, or may discourage a third party from acquiring, control of the Trust
and the Company. These provisions include, among others:
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restrictions on the LLC’s ability to enter into certain transactions with our major shareholders, with the
exception of our Manager, modeled on the limitation contained in Section 203 of the Delaware General
Corporation Law, or DGCL;
allowing only the LLC’s board of directors to fill newly created directorships, for those directors who are
elected by our shareholders, and allowing only our Manager, as holder of a portion of the Allocation
Interests, to fill vacancies with respect to the class of directors appointed by our Manager;
requiring that directors elected by our shareholders be removed, with or without cause, only by a vote of
85% of our shareholders;
requiring advance notice for nominations of candidates for election to the Company’s board of directors or
for proposing matters that can be acted upon by our shareholders at a shareholders’ meeting;
having a substantial number of additional authorized but unissued shares that may be issued without
shareholder action;
providing the Company’s board of directors with certain authority to amend the LLC Agreement and the
Trust Agreement, subject to certain voting and consent rights of the holders of trust interests and Allocation
Interests; and
limitations regarding calling special meetings and written consents of our shareholders.
These provisions, as well as other provisions in the LLC Agreement and Trust Agreement may delay, defer or
prevent a transaction or a change in control that might otherwise result in you obtaining a takeover premium for your
shares.
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We may have conflicts of interest with the noncontrolling shareholders of our businesses.
The boards of directors of our respective businesses have fiduciary duties to all their shareholders, including the
Company and noncontrolling shareholders. As a result, they may make decisions that are in the best interests of
their shareholders generally, but which are not necessarily in the best interest of the Company or our shareholders.
In dealings with the Company, the directors of our businesses may have conflicts of interest and decisions may
have to be made without the participation of directors appointed by the Company, and such decisions may be
different from those that we would make.
Our financing arrangements expose us to additional risks associated with leverage and inhibits our
operating flexibility and reduces earnings and cash available for distributions to our shareholders.
At December 31, 2021, we had approximately $1,300 million of consolidated debt outstanding. This level of
consolidated debt could have important consequences, such as (i) limiting our ability to obtain additional financing to
fund our potential growth; (ii) increasing the cost of future borrowings; (iii) limiting our ability to use operating cash
flow in our other areas of our business because of cash requirements to service our debt; and (iv) increasing our
vulnerability to adverse economic conditions. Our financing arrangements subject the Company to certain
customary affirmative and restrictive covenants. If we violate any of these covenants, our lender may accelerate the
maturity of any debt outstanding under our 2021 Credit Facility. Our ability to meet our debt service obligations may
be affected by events beyond our control and will depend primarily upon cash produced by our businesses. Any
failure to comply with the terms of our indebtedness could materially adversely affect us.
Changes in interest rates could materially adversely affect us.
Our 2021 Credit Facility bears interest at floating rates which will generally change as interest rates change. We
bear the risk that the rates we are charged by our lender will increase faster than the earnings and cash flow of our
businesses, which could reduce profitability, adversely affect our ability to service our debt, cause us to breach
covenants contained in our 2021 Revolving Credit Facility and reduce earnings and cash available for distribution,
any of which could materially adversely affect us.
We may engage in a business transaction with one or more target businesses that have relationships with
our officers, our directors, or our Manager, which may create potential conflicts of interest.
We may decide to acquire one or more businesses with which our officers, our directors, or our Manager have a
relationship. Potential conflicts of interest may exist with respect to a particular acquisition, and, as a result, the
terms of the acquisition of a target business may not be as advantageous to our shareholders as it would have been
absent any conflicts of interest.
CGI Maygar Holdings LLC may exercise significant influence over the Company.
CGI Maygar Holdings LLC owns approximately 8.3 million or approximately 12.0% of our common shares and may
have significant influence over the election of directors in the future.
If, in the future, we cease to control and operate our businesses, we may be deemed to be an investment
company under the Investment Company Act of 1940, as amended.
Under the terms of the LLC Agreement, we have the latitude to make investments in businesses that we will not
operate or control. If we make significant investments in businesses that we do not operate or control or cease to
operate and control our businesses, we may be deemed to be an investment company under the Investment
Company Act of 1940, as amended, or the Investment Company Act. If we were deemed to be an investment
company, we would either have to register as an investment company under the Investment Company Act, obtain
exemptive relief from the SEC or modify our investments or organizational structure or our contract rights to fall
outside the definition of an investment company. Registering as an investment company could, among other things,
materially adversely affect our financial condition, business and results of operations, materially limit our ability to
borrow funds or engage in other transactions involving leverage and require us to add directors who are
independent of us or our Manager and otherwise will subject us to additional regulation that will be costly and time-
consuming.
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Certain of our businesses are dependent on a limited number of customers to derive a large portion of their
revenue, and the loss of one of these customers may adversely affect the financial condition, business and
results of operations of these businesses.
Our Marucci, Velocity, Altor and Sterno businesses derive a significant amount of revenue from a concentrated
number of retailers, distributors or manufacturers. Any negative change involving these retailers, distributors or
manufacturers, including industry consolidation, store closings, reduction in purchasing levels or bankruptcies, could
negatively impact the sales of these businesses and may have a material adverse effect on the results of
operations, financial condition and cash flows of these businesses.
Our businesses do not have and may not have long-term contracts with their customers and clients and the
loss of customers and clients could materially adversely affect their financial condition, business and
results of operations.
Our businesses are and may be, based primarily upon individual orders and sales with their customers and clients.
Our businesses historically have not entered into long-term supply contracts with their customers and clients. As
such, their customers and clients could cease using their services or buying their products from them at any time
and for any reason. The fact that they do not enter into long-term contracts with their customers and clients means
that they have no recourse in the event a customer or client no longer wants to use their services or purchase
products from them. If a significant number of their customers or clients elect not to use their services or purchase
their products, it could materially adversely affect their financial condition, business and results of operations.
Risks Related to Taxation
The Trust will be subject to U.S. corporate income taxes which reduces the earnings and cash available for
distributions to holders of Trust common shares in respect of such investments and could adversely affect
the value of Trust common shareholders’ investment.
Effective September 1, 2021, the Trust elected to be treated as a corporation for U.S. federal income tax purposes
(the “Election”). The Trust will now incur entity level U.S. federal corporate income taxes and applicable state and
local taxes that it would not otherwise incur if it were still treated as a partnership for U.S. tax purposes. In addition,
before the tax reclassification, income from the Trust was passed through to holders of its preferred shares, which
resulted in less income being passed through from the Trust to holders of its common shares and effectively
reduced each common shareholder’s allocable share of the Trust’s income; however, after the tax reclassification,
no income will pass through to any shareholders, but the Trust will not be able to claim a tax deduction for
distributions in respect of the preferred shares. Therefore, the amount of cash available for distributions to holders
of Trust common shares could be reduced and their investment could be adversely affected.
Following the tax reclassification, determinations, declarations, and payments of distributions to holders of Trust
common shares will continue to be at the sole discretion of the Company’s board of directors. Historically, our
distribution policy has been to make regular distributions on outstanding common shares, and we expect to continue
this policy of regular distributions. However, because the Trust will incur entity level income taxes following the tax
reclassification, we reduced our previous annual distribution from $1.44 per Trust common share per year to
approximately $1.00 per common share per year. Our distribution policy may be changed at any time at the
discretion of the Company’s board of directors.
Future changes to tax laws are uncertain and may result in the Trust paying corporate income tax at rates
higher than expected or result in the Trust failing to realize the anticipated benefits of the Election.
Recent proposals for tax reform include proposals to raise corporate income tax rates and capital gains tax rates.
Future changes to tax laws are uncertain, but any such changes could cause the Trust to fail to realize the
anticipated benefits of the Election. If corporate income tax rates are raised, the anticipated advantages of being
treated as a corporation for U.S. tax purposes would be diminished. In addition, any general changes to tax laws,
such as changes to limitations on the deductibility of interest, could result in the Trust or its shareholders paying tax
at rates higher than anticipated.
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We may fail to realize the anticipated benefits of the Election or those benefits may take longer to realize
than expected or not offset the costs of the Election, which could have a material and adverse impact on
the trading price of our securities.
We believe that the Election will, among other things, make it easier for both institutional and retail investors to own
shares of the Trust, expand our investor base and drive greater value for all of our shareholders over time. The level
of investor interest in the shares of the Trust, however, may not meet our expectations. The Election did not result in
the Trust’s immediate inclusion in certain stock market indices, such as the Russell indices, and may not result in
inclusion at all. Inclusion in such indices may not result in an increased demand for the Trust’s securities, we may
not have greater access to capital and our profile with rating agencies may not improve. Consequently, we may fail
to realize the anticipated benefits of the Election or those benefits may take longer to realize than we expect. In
addition, there can be no assurance that the anticipated benefits of the Election will offset its costs, which could be
greater than we expect, particularly if there is an increase in the U.S. federal corporate income tax rate. Our failure
to achieve the anticipated benefits of the Election at all or in a timely manner, or a failure of any benefits realized to
offset their costs, could have a material and adverse impact on the trading price of our securities.
Risks Related to the Preferred Shares
Distributions on the Series A Preferred Shares are discretionary and non-cumulative.
Distributions on the Series A Preferred Shares are discretionary and non-cumulative. Holders of the Series A
Preferred Shares will only receive distributions of the Series A Preferred Shares when, as and if declared by the
board of directors of the Company. Consequently, if the board of directors of the Company does not authorize and
declare a distribution for a distribution period, holders of the Series A Preferred Shares would not be entitled to
receive any distribution for such distribution period, and such unpaid distribution will not be payable in such
distribution period or in later distribution periods. We will have no obligation to pay distributions for a distribution
period if the board of directors of the Company does not declare such distribution before the scheduled record date
for such period, whether or not distributions are declared or paid for any subsequent distribution period with respect
to the Series A Preferred Shares, or any other preferred shares we may issue or our common shares. This may
result in holders of the Series A Preferred Shares not receiving the full amount of distributions that they expect to
receive, or any distributions, and may make it more difficult to resell Series A Preferred Shares or to do so at a price
that the holder finds attractive.
The board of directors of the Company may, in its sole discretion, determine to suspend distributions on the Series A
Preferred Shares, which may have a material adverse effect on the market price of the Series A Preferred Shares.
There can be no assurances that our operations will generate sufficient cash flows to enable us to pay distributions
on the Series A Preferred Shares. Our financial and operating performance is subject to prevailing economic and
industry conditions and to financial, business and other factors, some of which are beyond our control.
The Series A, Series B and Series C Preferred Shares are equity securities and are subordinated to our
existing and future indebtedness.
The Series A, Series B and Series C Preferred Shares are our equity interests and do not constitute indebtedness.
This means that the Series A, Series B and Series C Preferred Shares rank junior to all of our indebtedness and to
other non-equity claims on us and our assets available to satisfy claims on us, including claims in our liquidation. In
addition, the rights allocated to the Company’s allocation interests may reduce the amount available for distribution
by the Trust upon its liquidation, dissolution or winding up. Further, the Series A, Series B and Series C Preferred
Shares place no restrictions on our business or operations or on our ability to incur indebtedness or engage in any
transactions, subject only to the limited voting rights.
Risks Relating to Our Manager
Our Chief Executive Officer, directors, Manager and management team may allocate some of their time to
other businesses, thereby causing conflicts of interest in their determination as to how much time to devote
to our affairs, which may materially adversely affect our operations.
Only our Chief Financial Officer, Mr. Ryan Faulkingham, devotes substantially all of his time to our affairs. Our Chief
Executive Officer, directors, Manager and members of our management team may engage in other business
activities. This may result in a conflict of interest in allocating their time between our operations and our
management and operations of other businesses. Conflicts of interest that arise over the allocation of time may not
always be resolved in our favor and may materially adversely affect our operations. See Part III, Item 13. "Certain
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Relationships and Related Transactions, and Director Independence" for the potential conflicts of interest of which
you should be aware.
Our Manager and its affiliates, including members of our management team, may engage in activities that
compete with us or our businesses.
Neither our management team nor our Manager is expressly prohibited from investing in or managing other entities,
including those that are in the same or similar line of business as our businesses. In this regard, the Management
Services Agreement and the obligation to provide management services will not create a mutually exclusive
relationship between our Manager and its affiliates, on the one hand, and the Company, on the other.
Our Manager need not present an acquisition or disposition opportunity to us if our Manager determines on
its own that such acquisition or disposition opportunity does not meet the Company’s acquisition or
disposition criteria.
Our Manager will review any acquisition or disposition opportunity presented to the Manager to determine if it
satisfies the Company’s acquisition or disposition criteria, as established by the Company’s board of directors from
time to time. If our Manager determines, in its sole discretion, that an opportunity fits our criteria, our Manager will
refer the opportunity to the Company’s board of directors for its authorization and approval prior to the
consummation thereof; opportunities that our Manager determines do not fit our criteria do not need to be presented
to the Company’s board of directors for consideration. If such an opportunity is ultimately profitable, we will have not
participated in such opportunity. Upon a determination by the Company’s board of directors not to promptly pursue
an opportunity presented to it by our Manager in whole or in part, our Manager will be unrestricted in its ability to
pursue such opportunity, or any part that we do not promptly pursue, on its own or refer such opportunity to other
entities, including its affiliates.
We cannot remove our Manager solely for poor performance, which could limit our ability to improve our
performance and could materially adversely affect the market price of our shares.
Under the terms of the Management Services Agreement, our Manager cannot be removed as a result of under-
performance. Instead, the Company’s board of directors can only remove our Manager in certain limited
circumstances or upon a vote by the majority of the Company’s board of directors and the majority of our
shareholders to terminate the Management Services Agreement. This limitation could materially adversely affect the
market price of our shares.
Our Manager can resign on 180 days’ notice and we may not be able to find a suitable replacement within
that time, resulting in a disruption in our operations that could materially adversely affect our financial
condition, business and results of operations as well as the market price of our shares.
Our Manager has the right, under the management services agreement, to resign at any time on 180 days’ written
notice, whether we have found a replacement or not. If our Manager resigns, we may not be able to contract with a
new manager or hire internal management with similar expertise and ability to provide the same or equivalent
services on acceptable terms within 90 days, or at all, in which case our operations are likely to experience a
disruption, our financial condition, business and results of operations as well as our ability to pay distributions are
likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our
internal management, acquisition activities and supervision of our businesses is likely to suffer if we are unable to
identify and reach an agreement with a single institution or group of executives having the expertise possessed by
our Manager and its affiliates. Even if we are able to retain comparable management, whether internal or external,
the integration of such management and their lack of familiarity with our businesses may result in additional costs
and time delays that could materially adversely affect our financial condition, business and results of operations.
We must pay our Manager the management fee regardless of our performance.
Our Manager is entitled to receive a management fee that is based on our adjusted consolidated net assets, as
defined in the management services agreement, regardless of the performance of our businesses. The calculation
of the management fee is unrelated to the Company’s net income. As a result, the management fee may incentivize
our Manager to increase the amount of our assets. For example, the acquisition of additional assets or the
incurrence of third party debt could be prioritized rather than increasing the performance of our businesses.
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We cannot determine the amount of the management fee that will be paid over time with any certainty.
The management fee paid to CGM for the year ended December 31, 2021 was $46.9 million. The management fee
is calculated by reference to the Company’s adjusted net assets, which will be impacted by the acquisition or
disposition of businesses, which can be significantly influenced by our Manager, as well as the performance of our
businesses and other businesses we may acquire in the future. Changes in adjusted net assets and in the resulting
management fee could be significant, resulting in a material adverse effect on the Company’s results of operations.
In addition, if the performance of the Company declines, assuming adjusted net assets remains the same,
management fees will increase as a percentage of the Company’s net income.
We cannot determine the amount of profit allocation that will be paid over time with any certainty.
We cannot determine the amount of profit allocation that will be paid over time with any certainty. Such
determination would be dependent on the potential sale proceeds received for any of our businesses and the
performance of the Company and its businesses over a multi-year period of time, among other factors that cannot
be predicted with certainty at this time. Such factors may have a significant impact on the amount of any profit
allocation to be paid. Likewise, such determination would be dependent on whether certain hurdles were surpassed
giving rise to a payment of profit allocation. Any amounts paid in respect of the profit allocation are unrelated to the
management fee earned for performance of services under the management services agreement.
The fees to be paid to our Manager pursuant to the Management Services Agreement, the offsetting
Management Services Agreements and integration services agreements and the profit allocation to be paid
to certain persons who are employees and partners of our Manager, as holders of the Allocation Interests,
pursuant to the LLC Agreement may significantly reduce the amount of earnings and cash available for
distribution to our shareholders.
Under the Management Services Agreement, the Company will be obligated to pay a management fee to and,
subject to certain conditions, reimburse the costs and out-of-pocket expenses of our Manager incurred on behalf of
the Company in connection with the provision of services to the Company. Similarly, our businesses will be
obligated to pay fees to and reimburse the costs and expenses of our Manager pursuant to any offsetting
Management Services Agreements entered into between our Manager and one of our businesses, or any
integration services agreements to which such businesses are a party. In addition, Sostratus LLC, as holder of the
Allocation Interests, will be entitled to receive profit allocations. While it is difficult to quantify with any certainty the
actual amount of any such payments in the future, we do expect that such amounts could be substantial. See the
section entitled Part 3, Item 13. “Certain Relationships and Related Transactions, and Director Independence” for
more information about these payment obligations of the Company. The management fee and profit allocation will
be payment obligations of the Company and, as a result, will be paid, along with other Company obligations, prior to
the payment of distributions to shareholders. As a result, the payment of these amounts may significantly reduce the
amount of earnings and cash available for distribution to our shareholders.
Our Manager’s influence on conducting our operations, including on our conducting of transactions, gives
it the ability to increase its fees, which may reduce the amount of earnings and cash available for
distribution to our shareholders.
Under the terms of the Management Services Agreement, our Manager is paid a management fee calculated as a
percentage of the Company’s adjusted net assets for certain items and is unrelated to net income or any other
performance base or measure. Our Manager controls and may advise us to consummate transactions, incur third
party debt or conduct our operations in a manner that, in our Manager’s reasonable discretion, are necessary to the
future growth of our businesses and are in the best interests of our shareholders. These transactions, however, may
increase the amount of fees paid to our Manager. Our Manager’s ability to increase its fees, through the influence it
has over our operations, may increase the compensation paid by our Manager. Our Manager’s ability to influence
the management fee paid to it by us could reduce the amount of earnings and cash available for distribution to our
shareholders.
Fees paid by the Company and our businesses pursuant to integration services agreements do not offset
fees payable under the Management Services Agreement and will be in addition to the management fee
payable by the Company under the Management Services Agreement.
The Management Services Agreement provides that our businesses may enter into integration services agreements
with our Manager pursuant to which our businesses will pay fees to our Manager for services provided by our
Manager relating to the integration of a business’s financial reporting, computer systems and decision making and
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management processes into our operations following an acquisition of such business. See Part III, Item 13. “Certain
Relationships and Related Transactions, and Director Independence” for more information about these agreements.
Unlike fees paid under the offsetting Management Services Agreements, fees that are paid pursuant to such
integration services agreements will not reduce the management fee payable by the Company. Therefore, such fees
will be in excess of the management fee payable by the Company.
The fees to be paid to our Manager pursuant to these integration service agreements will be paid prior to any
principal, interest or dividend payments to be paid to the Company by our businesses, which will reduce the amount
of earnings and cash available for distributions to shareholders.
Our profit allocation may induce our Manager to make suboptimal decisions regarding our operations.
Sostratus LLC, as holder of our Allocation Interests, will receive a profit allocation based on ongoing cash flows and
capital gains in excess of a hurdle rate. Certain persons who are employees and partners of our Manager are
owners of Sostratus LLC. In this respect, a calculation and payment of profit allocation may be triggered upon the
sale of one of our businesses. As a result, our Manager may be incentivized to recommend the sale of one or more
of our businesses to the Company’s board of directors at a time that may not be optimal for our shareholders.
The obligations to pay the management fee and profit allocation may cause the Company to liquidate
assets or incur debt.
If we do not have sufficient liquid assets to pay the management fee and profit allocation when such payments are
due, we may be required to liquidate assets or incur debt in order to make such payments. This circumstance could
materially adversely affect our liquidity and ability to make distributions to our shareholders.
General Risk Factors
We could be negatively impacted by cybersecurity attacks.
We, and our businesses, use a variety of information technology systems in the ordinary course of business, which
are potentially vulnerable to unauthorized access, computer viruses and cybersecurity attacks, including
cybersecurity attacks to our information technology infrastructure and attempts by others to gain access to our
proprietary or sensitive information, and ranging from individual attempts to advanced persistent threats. The risk of
a security breach or disruption, particularly through cyber-attacks or cyber intrusions, including by computer
hackers, nation-state affiliated actors, and cyber terrorists, has generally increased as the number, intensity and
sophistication of attempted attacks and intrusions from around the world have increased. The procedures and
controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent cybersecurity
incidents. The results of these incidents could include misstated financial data, theft of trade secrets or other
intellectual property, liability for disclosure of confidential customer, supplier or employee information, increased
costs arising from the implementation of additional security protective measures, litigation and reputational damage,
which could materially adversely affect our financial condition, business and results of operations. Any remedial
costs or other liabilities related to cybersecurity incidents may not be fully insured or indemnified by other means.
In addition, cybersecurity has become a top priority for global lawmakers and regulators, and some jurisdictions
have proposed or enacted laws requiring companies to notify regulators and individuals of data security breaches
involving certain types of personal data. If we fail to comply with the relevant and increasing complex laws and
regulations, we could suffer financial losses, a disruption of our business, liability to investors, regulatory
intervention or reputational damage.
Impairment of our goodwill, indefinite-lived intangible assets or other long-lived assets could result in
significant charges that would adversely impact our future operating results.
A significant portion of our long-term assets are comprised of intangible assets, including goodwill and indefinite
lived intangible assets recorded as a result of past acquisitions. We assess the potential impairment of goodwill and
indefinite lived intangible assets on an annual basis, as well as whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. If our analysis indicates that an individual asset’s carrying
value exceeds its fair market value, we will record a loss equal to the excess of the individual asset’s carrying value
over its fair value. The impairment testing steps require significant amounts of judgment and subjectivity.
Factors that could trigger impairment include the following:
•
•
significant under performance relative to historical or projected future operating results;
significant changes in the manner of or use of the acquired assets or the strategy for our overall business;
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•
•
•
•
significant negative industry or economic trends;
significant decline in our stock price for a sustained period;
changes in our organization or management reporting structure could result in additional reporting units,
which may require alternative methods of estimating fair values or greater desegregation or aggregation in
our analysis by reporting unit; and
a decline in our market capitalization below net book value.
As of December 31, 2021, we had identified indefinite lived intangible assets with a carrying value in our financial
statements of $57.0 million, and goodwill of $815.4 million.
Our businesses are subject to unplanned business interruptions which may adversely affect our
performance.
Operational interruptions and unplanned events at one or more of our production facilities, such as explosions, fires,
inclement weather, natural disasters, accidents, transportation interruptions and supply could cause substantial
losses in our production capacity. Furthermore, because customers may be dependent on planned deliveries from
us, customers that have to reschedule their own operations due to our delivery delays may be able to pursue
financial claims against us, and we may incur costs to correct such problems in addition to any liability resulting from
such claims. Such interruptions may also harm our reputation among actual and potential customers, potentially
resulting in a loss of business. To the extent these losses are not covered by insurance, our financial position,
results of operations and cash flows may be adversely affected by such events.
Our businesses could experience fluctuations in the costs and availability of raw materials, components or
whole goods which could result in significant disruptions to supply chains, production disruptions and
increased costs for our businesses.
Our businesses require access to various raw materials, components and whole goods to manufacture and
distribute products. Changes in the availability and price of raw materials, components and whole goods, which can
fluctuate significantly as a result of economic volatility, regulatory instability or change in import tariffs or trade
agreements, can significantly increase the costs of production and distribution, which could have a material negative
effect on the profitability of the businesses.
We could be adversely affected if we experience shortages of components from our suppliers or if
disruptions in the supply chain lead to parts shortages for our customers.
A portion of our annual cost of sales is driven by the purchase of goods. We select our suppliers based on total
value (including price, delivery and quality), taking into consideration their production capacities and financial
condition, and we expect that they will be able to support our needs. However, there is no assurance that adverse
financial conditions, including bankruptcies of our suppliers, reduced levels of production, natural disasters, staffing
shortages, supply chain issues or other problems experienced by our suppliers will not result in shortages or delays
in their supply of components to us. For example, the COVID-19 pandemic has resulted in labor shortages and
supply chain disruptions. Any significant production disruption could have a material impact on our operations,
operating results and financial condition. If we were to experience a significant or prolonged shortage of critical
components from our suppliers, we may be unable to meet our production schedules for some of our key products
and to ship such products to our customers in a timely fashion, which would adversely affect our sales, profitability
and customer relations.
Our businesses rely and may rely on their intellectual property and licenses to use others’ intellectual
property, for competitive advantage. If our businesses are unable to protect their intellectual property, are
unable to obtain or retain licenses to use other’s intellectual property, or if they infringe upon or are alleged
to have infringed upon others’ intellectual property, it could have a material adverse effect on their financial
condition, business and results of operations.
Each business's success depends in part on their, or licenses to use others’, brand names, proprietary technology
and manufacturing techniques. These businesses rely on a combination of patents, trademarks, copyrights, trade
secrets, confidentiality procedures and contractual provisions to protect their intellectual property rights. The steps
they have taken to protect their intellectual property rights may not prevent third parties from using their intellectual
property and other proprietary information without their authorization or independently developing intellectual
property and other proprietary information that is similar. In addition, the laws of foreign countries may not protect
our businesses’ intellectual property rights effectively or to the same extent as the laws of the United States.
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Stopping unauthorized use of their proprietary information and intellectual property, and defending claims that they
have made unauthorized use of others’ proprietary information or intellectual property, may be difficult, time-
consuming and costly. The use of their intellectual property and other proprietary information by others, and the use
by others of their intellectual property and proprietary information, could reduce or eliminate any competitive
advantage they have developed, cause them to lose sales or otherwise harm their business.
Our businesses may become involved in legal proceedings and claims in the future either to protect their intellectual
property or to defend allegations that they have infringed upon others’ intellectual property rights. These claims and
any resulting litigation could subject them to significant liability for damages and invalidate their property rights. In
addition, these lawsuits, regardless of their merits, could be time consuming and expensive to resolve and could
divert management’s time and attention. The costs associated with any of these actions could be substantial and
could have a material adverse effect on their financial condition, business and results of operations.
Our businesses are and may be subject to federal, state and foreign environmental laws and regulations
that expose them to potential financial liability. Complying with applicable environmental laws requires
significant resources, and if our businesses fail to comply, they could be subject to substantial liability.
Some of the facilities and operations of our businesses are and may be subject to a variety of federal, state and
foreign environmental laws and regulations including laws and regulations pertaining to the handling, storage and
transportation of raw materials, products and wastes, which require and will continue to require significant
expenditures to remain in compliance with such laws and regulations currently in place and in the future.
Compliance with current and future environmental laws is a major consideration for our businesses as any material
violations of these laws can lead to substantial liability, revocations of discharge permits, fines or penalties. Because
some of our businesses use hazardous materials and generate hazardous wastes in their operations, they may be
subject to potential financial liability for costs associated with the investigation and remediation of their own sites, or
sites at which they have arranged for the disposal of hazardous wastes, if such sites become contaminated. Even if
they fully comply with applicable environmental laws and are not directly at fault for the contamination, our
businesses may still be liable. Our businesses may also be held liable for damages caused by environmental and
other conditions that existed prior to our acquisition the assets, business or operations involved, whether or not such
damages are subject to indemnification from a prior owner. Costs associated with these risks could have a material
adverse effect on our financial condition, business and results of operations.
Defects in the products provided by our companies could result in financial or other damages to their
customers, which could result in reduced demand for our companies’ products and/or liability claims
against our companies.
As manufacturers and distributors of consumer products, certain of our companies are subject to various laws, rules
and regulations, which may empower governmental agencies and authorities to exclude from the market products
that are found to be unsafe or hazardous. Under certain circumstances, a governmental authority could require our
companies to repurchase or recall one or more of their products. Additionally, laws regulating certain consumer
products exist in some cities and states, as well as in other countries in which they sell their products, where more
restrictive laws and regulations exist or may be adopted in the future. Any repurchase or recall of such products
could be costly and could damage the reputation of our companies. If any of our companies were required to
remove, or voluntarily remove, their products from the market, their reputation may be tarnished and they may have
large quantities of finished products that they cannot sell. Additionally, our companies may be subject to regulatory
actions that could harm their reputations, adversely impact the values of their brands and/or increase the cost of
production.
Our companies also face exposure to product liability claims in the event that one of their products is alleged to
have resulted in property damage, bodily injury or other adverse effects. Defects in products could result in
customer dissatisfaction or a reduction in, or cancellation of, future purchases or liability claims against our
companies. If these defects occur frequently, our reputation may be impaired permanently. Defects in products
could also result in financial or other damages to customers, for which our companies may be asked or required to
compensate their customers, in the form of substantial monetary judgments or otherwise. There can be no
assurance that rapidly changing safety standards will not render unsaleable products that complied with previously-
applicable safety standards. As a result, these types of claims could have a material adverse effect on our
businesses, results of operations and financial condition.
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Our businesses are subject to certain risks associated with their foreign operations or business they
conduct in foreign jurisdictions.
Some of our businesses have and may have operations or conduct business outside the United States. Certain
risks are inherent in operating or conducting business in foreign jurisdictions, including exposure to local economic
conditions; difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
longer payment cycles for foreign customers; adverse currency exchange controls; exposure to risks associated
with changes in foreign exchange rates; potential adverse changes in political environments; actual or threatened
geopolitical conflict; withholding taxes and restrictions on the withdrawal of foreign investments and earnings; export
and import restrictions; difficulties in enforcing intellectual property rights; and required compliance with a variety of
foreign laws and regulations. These risks individually and collectively have the potential to negatively impact our
financial condition, business and results of operations.
The success of our branded consumer businesses depends on our ability to maintain the value and
reputation of the brand.
The name of our branded consumer businesses is integral to those businesses. Maintaining, promoting, and
positioning our branded consumer businesses will depend, in part, on the success of marketing and merchandising
efforts and the ability to provide a consistent, high quality products and services. Our branded consumer businesses
rely on social media, as one of their marketing strategies, to have a positive impact on both brand value and
reputation. The brand and reputation of our branded consumer businesses could be adversely affected if those
subsidiaries fail to achieve their objectives, if their public image was to be tarnished by negative publicity, which
could be amplified by social media, or if they fail to deliver innovative and high quality products. The reputation of
our branded consumer businesses could also be impacted by adverse publicity, whether or not valid, regarding
allegations that we or our subsidiaries, or persons associated with us or our subsidiaries or formerly associated with
us or our subsidiaries, have violated applicable laws or regulations, including but not limited to those related to
safety, employment, discrimination, harassment, whistle-blowing, privacy, corporate citizenship or improper
business practices. Additionally, while our branded consumer businesses devote effort and resources to protecting
their intellectual property, if these efforts are not successful the value of those brands may be harmed. Any harm to
the brand or reputation of our subsidiaries could have a material adverse effect on our financial condition.
Risks Specific to Our Subsidiaries
Risks Related to Arnold
Arnold's operations and the prior operations of predecessor companies expose it to the risk of material
environmental liabilities, which could have a negative effect on its financial condition or results of
operations.
Arnold may be subject to potential liabilities related to the remediation of environmental hazards and to claims of
personal injuries or property damages that may be caused by hazardous substance releases and exposures, mainly
because of past operations and the operations of predecessor companies. Arnold continues to incur remedial
response and voluntary clean-up costs for site contamination, for which we may not be fully indemnified, and are a
party to lawsuits and claims associated with environmental and safety matters, including past production of products
containing hazardous materials. Arnold also may become party to various legal proceedings relating to alleged
impacts from pollutants released into the environment. Various federal, state, local and foreign governments
regulate the discharge of materials into the environment and can impose substantial fines and criminal sanctions for
violations. In addition, changes in laws, regulations and enforcement of policies, the discovery of previously
unknown contamination or information related to individual sites, the establishment of stricter state or federal toxicity
standards with respect to certain contaminants, or the imposition of new clean-up requirements or remedial
techniques could require Arnold to incur additional costs in the future that would have a negative effect on its
financial condition or results of operations.
Risks Related to Sterno
Sterno's products operate at high temperatures and use flammable fuels, each of which could subject our
business to product liability claims.
Sterno products expose it to potential product liability claims typical of fuel based heating products. The fuels
Sterno uses in its products are flammable and may be toxic if ingested. Although Sterno products have
comprehensive labeling and it follows government and third party based standards and protocols, it cannot
74
guarantee there will not be accidents due to misuse or otherwise. Accidents involving Sterno products may have an adverse effect on its reputation and reduce demand for its products. In addition, Sterno may be held responsible for damages beyond its insurance coverage and there can be no guarantee that it will be able to procure adequate insurance coverage in the future. Risks Related to Velocity OutdoorVelocity’s products are subject to product safety and liability lawsuits, which could materially adversely affect its financial condition, business and results of operations.As a manufacturer of recreational airguns and archery products, Velocity is involved in various litigation matters that occur in the ordinary course of business. Although Velocity provides information regarding safety procedures and warnings with all of its product packaging, not all users of its products will observe all proper safety practices. Failure to observe proper safety practices may result in injuries that give rise to product liability and personal injury claims and lawsuits, as well as claims for breach of contract, loss of profits and consequential damages.If any unresolved lawsuits or claims are determined adversely, they could have a material adverse effect on Velocity, its financial condition, business and results of operations. As more of Velocity’s products are sold to and used by its consumers, the likelihood of product liability claims being made against it increases. In addition, the running of statutes of limitations in the United States for personal injuries to minor children may be suspended during the child’s legal minority. Therefore, it is possible that accidents resulting in injuries to minors may not give rise to lawsuits until a number of years later.There is a risk that Velocity's product liability insurance may not be sufficient to cover all liabilities incurred in connection with such claims and the financial consequences of these claims and lawsuits will have a material adverse effect on its business, financial condition, liquidity and results of operations. ITEM 1B. UNRESOLVED STAFF COMMENTSNONEITEM 2. PROPERTIESThe following is a summary as of December 31, 2021 of the physical properties owned or leased by our businesses that we consider materially important to those businesses.5.11 5.11 is headquartered in Irvine, California and leases offices and warehouse space in locations worldwide. The summary below outlines 5.11's primary leased offices and warehouse space.LocationSquare FeetUseIrvine, CA 21,807 OfficeManteca, CA 400,000 WarehouseSeattle, WA 11,340 OfficeBankstown, Australia 10,387 OfficeKowloon Bay, Hong Kong 17,759 OfficeIn addition, at December 31, 2021, 5.11 leased space for 87 retail stores, ranging in size from 3,250 square feet to 10,000 square feet.BOABOA is headquartered in Denver, Colorado and leases offices and warehouse space in locations worldwide. The summary below outlines BOA's primary leased offices and warehouse space.75 LocationSquare FeetUseDenver, CO 88,000 OfficeMondsee, Austria 15,714 OfficeHong Kong, China 20,000 Office/WarehouseErgobabyErgobaby is headquartered in Torrance, California and leases office and warehouse locations worldwide. The summary below outlines Ergobaby's primary leased office and warehouse space.LocationSquare FeetUseTorrance, CA 4,595 CorporateLos Angeles, CA 16,378 CorporateCarson, CA 5,000 WarehouseBialystok, Poland 9,688 WarehouseLuganoLugano is headquartered in Newport Beach, California. The summary below outlines Lugano's primary leased office space and retail locations.LocationSquare FeetUseNewport Beach, CA 17,792 Corporate office and Retail salonPalm Beach, FL 2,155 Retail salonAspen, CO 1,463 Retail salonLane Ocala, FL 2,014 Retail salonMarucci SportsMarucci is headquartered in Baton Rouge, Louisiana. The summary below outlines Marucci's primary leased office and manufacturing space.LocationSquare FeetUseBaton Rouge, LA 73,900 Office/Distribution CenterKing of Prussia, PA 22,500 ManufacturingPunxsutawney, PA 15,000 ManufacturingWinnfield, PA 14,330 ManufacturingLafayette, LA 12,192 Retail StoreAmerican Fort, UT 22,500 Distribution CenterArnoldArnold is headquartered in Rochester, New York and has eleven manufacturing facilities. Arnold owns the Ogallala, NE and the Greenville, OH locations. All other locations are leased. The summary below outlines Arnold's primary property locations.LocationSquare FeetUseMarengo, IL 94,220 Office/WarehouseMarietta, OH 81,000 Office/WarehouseMarengo, IL 55,200 Office/WarehouseNorfolk, NE 109,000 Office/WarehouseRochester, NY 73,000 Office/WarehouseOgallala, NE 25,000 Office/WarehouseGreenville, OH 70,908 Office/Warehouse76 Sheffield, England 25,000 Office/WarehouseLupfig, Switzerland 52,937 Office/WarehouseGuangdong Province, China 113,302 Office/WarehouseAltor SolutionsAltor is headquartered in Scottsdale, Arizona and operates 17 molding and fabricating facilities across North America. Altor owns the New Albany, IN, Bloomsburg, PA and El Dorado Springs, MO locations. All other locations are leased. The summary below outlines Altor's primary property locations. LocationSquare FeetUseScottsdale, Arizona 7,000 CorporateAnderson, South Carolina 133,250 Manufacturing/WarehouseCompton, California 44,000 Manufacturing/WarehouseErie, Pennsylvania 35,772 Manufacturing/WarehouseFort Madison, Iowa 114,000 Manufacturing/WarehouseJackson, Tennessee 55,000 Manufacturing/WarehouseJefferson, Georgia 60,000 Manufacturing/WarehouseKeller, Texas 131,073 Manufacturing/WarehouseModesto, California 79,000 Manufacturing/WarehouseEl Dorado Springs, Missouri 38,000 Manufacturing/WarehouseNew Albany, Indiana 65,000 Manufacturing/WarehouseBloomsburg, Pennsylvania 54,000 Manufacturing/WarehouseNorthbridge, MA 380,000 Manufacturing/WarehousePlymouth, WI 248,000 Manufacturing/WarehouseGnadenhutten, OH 98,200 Manufacturing/WarehouseTijuana, Mexico 60,000 Manufacturing/WarehouseQueretaro, Mexico 100,000 Manufacturing/WarehouseSterno Sterno is headquartered in Corona, California. Sterno owns manufacturing and production facilities in Memphis, Tennessee and Texarkana, Texas. All other properties are leased. The summary below outlines Sterno's primary property locations.LocationSquare FeetUseCorona, CA 12,330 Corporate OfficeMemphis, TN 228,316 ManufacturingTexarkana, TX 337,700 ManufacturingDelta, Canada 45,000 WarehouseLa Porte, IN 20,000 OfficeToronto, Canada 13,867 OfficeVancouver, Canada 50,372 OfficeVancouver, Canada 33,711 WarehouseMississauga, Canada 100,000 WarehouseProvo, UT 171,361 Office/WarehouseSpanish Fork, UT 530,014 WarehouseCalgary, Canada 28,748 Office/Warehouse77 Velocity Outdoor
Velocity Outdoor is headquartered in Bloomfield, New York. Velocity owns a 225,000 square foot manufacturing
facility in Bloomfield, New York that also holds their corporate offices, and leases a 144,000 square foot finished
goods warehouse in Farmington, New York. Velocity's Ravin subsidiary operates an 80,000 square foot
manufacturing facility in Superior, Wisconsin.
Corporate
Our corporate offices are located in Westport, Connecticut and Costa Mesa, California, where we utilize space
provided by our Manager.
We believe that our properties and the terms of their leases at each of our businesses are sufficient to meet our
present needs and we do not anticipate any difficulty in securing additional space, as needed, on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are involved in various claims and legal proceedings. While the ultimate
resolution of these matters has yet to be determined, we do not believe that their outcome will have a material
adverse effect on our financial position or results of operations.
Arnold
Our Arnold subsidiary was named as co-defendant, together with 300 West LLC (“300 West”), in a suit filed in the
Twenty-Second Judicial Circuit, McHenry County, Illinois, Chancery Division (Case No. 13CH1046) in 2013 by the
State of Illinois (the “Marengo Litigation”). Arnold leases a site in Marengo, McHenry County, Illinois (the “Site”) from
300 West. Since 2008, Arnold and 300 West have been a part of the Illinois Remediation Program with respect to
the Site. In the Marengo Litigation, the State of Illinois claimed that 300 West and Arnold discharged Chlorinated
VOCs into the groundwater on-Site, which has since migrated off-Site into private drinking wells. The State of Illinois
sought injunctive relief and civil penalties. In June of 2016, the parties entered into a consent order (as amended
and restated up and through the date hereof, the “Consent Order”). 300 West, at its expense, connected residents
whose drinking water was impacted by the alleged release to the City of Marengo’s public water supply, as required
by the Consent Order. The Consent Order also requires Arnold and 300 West to submit to the Illinois Environmental
Protection Agency (IEPA) a comprehensive plan detailing steps to be taken by 300 West and Arnold to remediate
on- and off-site soil and groundwater contamination. Remediation efforts are ongoing. The Consent Order also
requires the ultimate settlement of any stipulated and civil penalties related to the Marengo Litigation. In May of
2021, the McHenry County State’s Attorney joined the Marengo Litigation as a plaintiff.
Certain damages incurred by Arnold in connection with the Marengo Litigation are subject to indemnification
pursuant to the Stock Purchase Agreement, among SPS Technologies, LLC (“SPS”), SPS Technologies Limited
(“SPS Ltd.”), Precision Castparts Corp. (collectively with SPS and SPS Ltd., the “SPS Entities”), Arnold and Audax
Private Equity Fund, L.P., dated December 20, 2004, and prior consents to indemnification given by the SPS
Entities. Arnold has cooperated with the governmental agencies in the Marengo Litigation investigations and
proceedings, as well as the obligations agreed to pursuant to the Consent Order. CODI does not believe that the
outcome of the Marengo Litigation will have a material adverse effect on its financial position or results of
operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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PART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket InformationOur common shares of Trust stock has traded on the New York Stock Exchange (the “NYSE”) under the symbol “CODI”. Common Stock HoldersOn December 31, 2021 there were 14 registered holders of our common stock. The number of registered holders includes banks and brokers who act as nominees, each of whom may represent more than one shareholder.COMPARATIVE PERFORMANCE OF SHARES OF TRUST COMMON STOCKThe performance graph shown below compares the change in cumulative total shareholder return on common shares of Trust stock with the NYSE Composite Index and the NYSE Financial Sector Index for the previous five years, through the year ended December 31, 2021. The graph sets the beginning value of common shares of Trust stock and the indices at $100, and assumes that all quarterly dividends were reinvested at the time of payment. This graph does not forecast future performance of common shares of Trust stock.Compass Diversified HoldingsNYSE Composite IndexNYSE Financial Sector IndexDecember 31, 2016December 31, 2017December 31, 2018December 31, 2019December 31, 2020December 31, 20210255075100125150175200225250275300Year ended December 31,Data201620172018201920202021Compass Diversified Holdings$ 100.00 $ 102.78 $ 82.16 $ 178.31 $ 150.68 $ 258.61 NYSE Composite Index$ 100.00 $ 118.73 $ 108.10 $ 135.68 $ 145.16 $ 175.18 NYSE Financial Sector Index$ 100.00 $ 121.23 $ 105.31 $ 135.16 $ 132.21 $ 165.77 79 Distributions
During the year ended December 31, 2021, we declared and paid cash distributions of $2.21 to holders of record of
our common shares, including a special distribution to shareholders in August 2021. On August 3, 2021, in order to
offset a portion of the tax liability to the shareholders as a result of the election to cause the Trust to be treated as a
corporation for U.S. federal income tax purposes, the Company's board of directors declared a special cash
distribution on the Trust’s common shares of $0.88 per common share. For the years 2020 and 2019, we declared
and paid cash distributions of $1.44 per share to holders of record of our common shares. Following the tax
reclassification, the Company’s board reduced our anticipated annual distribution from the current $1.44 per Trust
common share per year to approximately $1.00 per common share per year. The Company’s board of directors has
full authority and discretion to determine whether or not a distribution by the Company should be declared and paid
to the Trust and in turn to our shareholders, as well as the amount and timing of any distribution. The Company’s
board of directors may, based on their review of our financial condition and results of operations and any future
changes to our tax structure, determine to modify future distributions.
Recent Sales of Unregistered Securities
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our
5.250% 2029 Notes (the "2029 Notes") offered pursuant to a private offering to qualified institutional buyers in
accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the
Securities Act. The Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes
Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at the
rate of 5.250% per annum and will mature on April 15, 2029. Interest on the Notes is payable in cash on April 15th
and October 15th of each year. The 2029 Notes are general unsecured obligations of the Company and are not
guaranteed by our subsidiaries.
The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in
connection with entering into the 2021 Credit Facility and to redeem our 8.000% Senior Notes due 2026 (the “2026
Notes”).
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our
5.000% 2032 Notes (the "2032 Notes") offered pursuant to a private offering to qualified institutional buyers in
accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the
Securities Act. The Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes
Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes bear interest at the
rate of 5.000% per annum and will mature on January 15, 2032. Interest on the Notes is payable in cash on July
15th and January 15th of each year. The 2032 Notes are general unsecured obligations of the Company and are
not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes was used to repay debt
outstanding under the 2021 Credit Facility.
Purchases of Equity Securities by Issuer and Affiliated Purchasers
None.
ITEM 6. [Reserved]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Item 7 contains forward-looking statements. Forward-looking statements in this Annual Report on
Form 10-K 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
sections entitled “Forward-Looking Statements” and “Risk Factors” included elsewhere in this Annual
Report.
Overview
Compass Diversified Holdings, a Delaware statutory trust, was incorporated in Delaware on November 18, 2005.
Compass Group Diversified Holdings LLC, a Delaware limited liability Company, was also formed on November 18,
2005. In accordance with the Third Amended and Restated Trust Agreement, dated as of August 3, 2021 (as
amended and restated, the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in
the Company's Sixth Amended and Restated Operating Agreement, dated as of August 3, 2021 (as amended and
restated, the "LLC Agreement") of the Company and, pursuant to the LLC Agreement, the Company has
outstanding the identical number of Trust Interests as the number of outstanding shares of the Trust. Sostratus LLC
owns all of our Allocation Interests. The Company is the operating entity with a board of directors and other
corporate governance responsibilities, similar to that of a Delaware corporation.
The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses
headquartered in North America. We characterize small and middle market businesses as those that generate
annual cash flows of up to $75 million. We focus on companies of this size because we believe that these
companies are more able to achieve growth rates above those of their relevant industries and are also frequently
more amenable to efforts to improve earnings and cash flow.
In pursuing new acquisitions, we seek businesses with the following characteristics:
•
•
North American base of operations;
stable and growing earnings and cash flow;
• maintains a significant market share in defensible industry niche (i.e., has a “reason to exist”);
•
•
•
solid and proven management team with meaningful incentives;
low technological and/or product obsolescence risk; and
a diversified customer and supplier base.
Our management team’s strategy for our subsidiaries involves:
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utilizing structured incentive compensation programs tailored to each business in order to attract, recruit
and retain talented managers to operate our businesses;
regularly monitoring financial and operational performance, instilling consistent financial discipline, and
supporting management in the development and implementation of information systems to effectively
achieve these goals;
assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both
revenue and cost related);
identifying and working with management to execute attractive external growth and acquisition
opportunities; and
forming strong subsidiary level boards of directors, including independent directors, to supplement
management in their development and implementation of strategic goals and objectives.
Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe
we are well positioned to acquire additional attractive businesses. Our management team has a large network of
deal intermediaries to whom it actively markets and who we expect to expose us to potential acquisitions. Through
this network, as well as our management team’s active proprietary transaction sourcing efforts, we typically have a
substantial pipeline of potential acquisition targets. In consummating transactions, our management team has, in
the past, been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-
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offs, transitions of family-owned businesses, management buy-outs and reorganizations. We believe the flexibility, creativity, experience and expertise of our management team in structuring transactions provides us with a strategic advantage by allowing us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.In addition, because we intend to fund acquisitions through the utilization of our 2021 Revolving Credit Facility, we do not expect to be subject to delays in or conditions by closing acquisitions that would be typically associated with transaction specific financing, as is typically the case in such acquisitions. We believe this advantage is a powerful one and is highly unusual in the marketplace for acquisitions in which we operate.Initial public offering and Company formationOn May 16, 2006, we completed our initial public offering of 13,500,000 shares of the Trust (the “IPO”). Subsequent to the IPO the Company’s board of directors engaged our Manager to externally manage the day-to-day operations and affairs of the Company, oversee the management and operations of the businesses and to perform those services customarily performed by executive officers of a public company.From May 16, 2006 through December 31, 2021, we purchased twenty-two businesses (each of our businesses is treated as a separate operating segment) and disposed of eleven businesses. The tables below reflect summarized information relating to our acquisitions and dispositions from the date of our IPO through December 31, 2021 (in thousands):AcquisitionsOwnership Interest - December 31, 2021BusinessAcquisition DateCODI Purchase PricePrimaryDilutedCBS Holdings (Staffmark) (1)May 16, 2006$ 183,200 N/aN/aCrosman (2)May 16, 2006$ 72,600 N/aN/aAdvanced Circuits (3)May 16, 2006$ 81,000 71.8%67.6%SilvueMay 16, 2006$ 36,000 N/aN/aTridien (3)August 1, 2006$ 31,000 N/aN/aAeroglideFebruary 28, 2007$ 58,200 N/aN/aHaloFebruary 28, 2007$ 62,300 N/aN/aAmerican FurnitureAugust 31, 2007$ 97,000 N/aN/aFOX (4)January 4, 2008$ 80,400 N/aN/aLiberty Safe (3)March 31, 2010$ 70,200 59.9%58.1%Ergobaby (3)September 16, 2010$ 85,200 81.7%72.7%CamelBakAugust 24, 2011$ 251,400 N/aN/aArnold MagneticsMarch 5, 2012$ 128,800 98%85.5%Clean Earth (3)August 7, 2014$ 251,400 N/aN/aSterno (3) (5)October 10, 2014$ 314,400 100.0%87.1%Manitoba Harvest (3)July 10, 2015$ 102,700 N/aN/a5.11 August 31, 2016$ 408,200 97.6%88.4%Velocity Outdoor (2) (3)June 2, 2017$ 150,400 99.3%87.6%Altor Solutions (3)February 15, 2018$ 253,400 100.0%91.2%Maruccci Sports (3)April 20, 2020$ 198,900 91.1%82.8%BOAOctober 16, 2020$ 454,300 91.8%83.8%LuganoSeptember 3, 2021$ 263,300 59.9%58.1%(1) The total purchase price for CBS Holdings includes the acquisition of Staffmark Investment LLC in January 2008 for a purchase price of $128.6 million. The Company renamed its CBS Personnel business Staffmark subsequent to the acquisition. 82 (2) Velocity Outdoor (formerly "Crosman Corp.") was purchased by the Company in May 2006 and subsequently sold in January 2007. We reacquired Velocity Outdoor in June 2017. (3) The total purchase price does not reflect add-on acquisitions made by our businesses subsequent to their purchase by CODI unless indicated.(4) FOX completed an IPO of its common stock in August 2013 in which we sold a 22% interest in FOX, reducing our ownership interest to 53%.9. In July 2014, FOX completed a secondary offering in which we sold a 12% interest in FOX, reducing our ownership interest to 41% and resulting in the deconsolidation of FOX from our financial results. We subsequently sold our remaining shares of FOX and now hold no ownership interest in FOX. We recognized total net proceeds from the sale of our FOX shares of approximately $465.1 million.(5) The total purchase price of Sterno includes the acquisition of Rimports in February 2018 for a purchase price of $154.4 million.DispositionsBusinessDate of DispositionSale PriceCODI Proceeds from Disposition (1)Gain (loss) recognized (2)CrosmanJanuary 5, 2007$ 143,000 $ 109,600 $ 35,800 AeroglideJune 24, 2008$ 95,000 $ 78,500 $ 33,700 SilvueJune 25, 2008$ 95,000 $ 63,600 $ 39,600 StaffmarkOctober 17, 2011$ 295,000 $ 216,000 $ 88,500 HaloMay 1, 2012$ 76,500 $ 66,500 $ (300) CamelBakAugust 3, 2015$ 412,500 $ 367,800 $ 158,300 American FurnitureOctober 5, 2015$ 24,100 $ 23,500 $ (14,100) TridienSeptember 21, 2016$ 25,000 $ 22,700 $ 1,700 FOX**$ 526,600 $ 428,700 Manitoba Harvest (3)February 28, 2019$ 294,300 $ 219,700 $ 121,700 Clean EarthJune 28, 2019$ 625,000 $ 551,900 $ 209,300 LibertyAugust 3, 2021$ 147,500 $ 128,000 $ 72,800 (1) CODI portion of the net proceeds from disposition includes debt and equity proceeds and reflects the accounting for the redemption of the sold business's minority shareholders and transaction expenses.(2) Gain (loss) recognized on sale of our businesses is calculated by deducting our total invested capital from the net sale proceeds received.(3) Sale price of Manitoba Harvest was C$370 million. Translation to USD is as of the date of sale. * We made loans to and purchased a controlling interest in FOX on January 4, 2008, for approximately $80.4 million. In August 2013, FOX completed an initial public offering of its common stock. As a result of the initial public offering, our ownership interest in FOX was reduced to approximately 53.9%. No gain was reflected as a result of the sale of our FOX shares in the initial public offering because our majority classification of FOX did not change. FOX used a portion of their net proceeds received from the sale of their shares as well as proceeds from a new external FOX credit facility to repay $61.5 million in outstanding indebtedness to us under their existing credit facility with us. In July 2014, through a secondary offering, our ownership in FOX was lowered from approximately 54% to approximately 41%, and as a result we deconsolidated FOX as of July 10, 2014. In March and August 2016, through two more secondary offerings and a share repurchase by FOX, our ownership in the outstanding common stock of FOX was further lowered to approximately 23% as of September 30, 2016. In November 2016, through another secondary offering, our ownership in the outstanding common stock of FOX was further lowered to approximately 14%. On March 13, 2017, FOX closed on a secondary public offering of 5,108,718 shares of FOX common stock held by CODI, which represented CODI's remaining investment in FOX. We recognized total net proceeds from the sales of our FOX shares of approximately $465.1 million, plus proceeds from the repayment of the FOX credit facility of $61.5 million upon completion of their initial public offering, and a total gain of $428.7 million.We are dependent on the earnings of, and cash receipts from, the businesses that we own in order to meet our corporate overhead and management fee expenses and to pay distributions. The earnings and distributions of our 83 businesses are generally lowest in the first quarter, and strongest in the third and fourth quarter, of each fiscal year.
These earnings and distributions, net of any non-controlling interest in these businesses, are available to:
• meet capital expenditure requirements, management fees and corporate overhead charges;
•
•
fund distributions from the businesses to the Company; and
be distributed by the Trust to shareholders.
2021 Highlights and Recent Events
Trust Tax Reclassification
On August 3, 2021, the shareholders of CODI approved amendments to the Second Amended and Restated Trust
Agreement of the Trust and the Fifth Amended and Restated Operating Agreement of the Company to allow the
Company’s Board of Directors (the “Board”) to cause the Trust to elect to be treated as a corporation for U.S. federal
income tax purposes (the “tax reclassification”) and, at its discretion in the future, cause the Trust to be converted to
a corporation. Following the shareholder vote, the Board resolved to cause the Trust to elect to be treated as a
corporation for U.S. federal income tax purposes. Such election became effective September 1, 2021, prior to which
the Trust had been taxed as a partnership for U.S. federal income tax purposes since January 1, 2007.
The tax reclassification resulted in a taxable gain to the Trust for U.S. federal income tax purposes of approximately
$328 million, which gain was allocated and passed through to the Trust’s common shareholders of record as of the
close of business on August 31, 2021. This taxable gain created current tax liability for those shareholders and will
be reported on the Trust’s final 2021 Schedule K-1. Consequently, the Trust paid a special distribution of $0.88
cents per share on September 7, 2021 to Trust common shareholders of record as of the close of business on
August 31, 2021 that was intended to partially cover the taxable income incurred by those shareholders.
Following the tax reclassification, determinations, declarations, and payments of distributions to holders of Trust
common shares will continue to be at the sole discretion of the Board. Historically, our distribution policy has been to
make regular distributions on outstanding common shares. Because the Trust will incur entity level income taxes
following the tax reclassification, we reduced our anticipated annual distribution from the current $1.44 per Trust
common share per year to $1.00 per Trust common share per year. Our distribution policy may be changed at any
time at the discretion of the Board.
We will issue final Schedule K-1s with respect to our final taxable period as a partnership beginning January 1, 2021
and ending August 31, 2021, the last day on which the Trust was treated as a partnership for U.S. federal income
tax purposes. Thereafter, items of income, gain loss, and deduction will not flow through to Trust shareholders and
the Trust will no longer issue Schedule K-1s. Common shareholders will no longer be allocated taxable income as a
result of their investment in the Trust and shareholders subject to rules regarding “unrelated business taxable
income” (or “UBTI”) will no longer be allocated UBTI.
The Trust will be required to file Form 1120, U.S. Corporation Income Tax Return on an annual basis and for all
taxable periods beginning on or after the tax reclassification. In addition, distribution with respect to Trust shares
(including Trust preferred shares) will now be treated as corporate distributions and reported on Form 1099-DIV,
instead of on Schedule K-1. Distributions from the Trust will be taxable as dividends to the extent the Trust has
positive earnings and profits, as determined for U.S. federal income tax purposes. Dividends from the Trust with
respect to Trust shares should be eligible for preferential tax treatment as “qualified dividends” to the extent the
Trust shareholders receiving such dividends meet certain holding period requirements.
The foregoing description addresses only certain U.S. federal income tax consequences of the tax reclassification
applicable to shareholders generally. We do not provide tax advice and nothing herein should be considered as
such. Each shareholder should consult its tax advisor concerning the particular U.S. federal income, U.S. federal
estate or gift, state, local, foreign and other tax consequences of the tax reclassification and holding Trust shares.
Acquisition of Lugano Diamonds
On September 3, 2021, the Company, through its newly formed acquisition subsidiaries, Lugano Holding, Inc., a
Delaware corporation (“Lugano Holdings”), and Lugano Buyer, Inc., a Delaware corporation (“Lugano Buyer”) and a
wholly-owned subsidiary of Lugano Holdings, acquired the issued and outstanding shares of stock of Lugano
Diamonds and Jewelry Inc. ("Lugano") other than certain rollover shares described below (the “Lugano
Transaction”). The Lugano Transaction was effectuated pursuant to a Stock Purchase Agreement (the “Lugano
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Purchase Agreement”), also dated September 3, 2021, by and among Lugano Buyer, the sellers named therein
(“Lugano Sellers”) and Mordechai Haim Ferder in his individual capacity and as initial representative of the Sellers.
Based in Newport Beach, California and founded in 2004, Lugano makes one-of-a-kind jewelry for some of the
world’s most discerning clientele. In addition to its product offerings, Lugano frequently partners with local, influential
organizations to host and sponsor more than 100 equestrian, social and charity events throughout the year.
The Company made loans to, and purchased a 60% equity interest in, Lugano. The purchase price, including
proceeds from noncontrolling shareholders and net of transaction costs, was $263.3 million. The selling
shareholders invested in the transaction along with the Company, representing 40% initial noncontrolling interest on
both a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the
enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority
holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to
the Company in the acquisition and will continue to provide integration services during the first year of the
Company's ownership of Lugano. CGM will receive integration service fees of $2.3 million payable quarterly over a
twelve month period as services are rendered which payments began in the quarter ended December 31, 2021. The
Company incurred $1.8 million of transaction costs in conjunction with the Lugano acquisition, which was included
in selling, general and administrative expense in the consolidated statements of operations during the third quarter
of 2021. The Company funded the acquisition with cash on hand and a $120 million draw on its 2021 Revolving
Credit Facility.
2021 Credit Facility
On March 23, 2021, we entered into a Second Amended and Restated Credit Agreement (the "2021 Credit Facility")
to amend and restate the 2018 Credit Facility. The 2021 Credit Facility provides for revolving loans, swing line loans
and letters of credit (the "2021 Revolving Credit Facility") up to a maximum aggregate amount of $600 million and
also permits the Company, prior to the applicable maturity date, to increase the revolving loan commitment and/or
obtain term loans in an aggregate amount of up to $250 million, subject to certain restrictions and conditions. All
amounts outstanding under the 2021 Revolving Credit Facility will become due on March 23, 2026, which is the
maturity date of loans advanced under the 2021 Revolving Credit Facility.
Senior Notes Issuance
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our
5.250% Notes due 2029 (the "2029 Notes") offered pursuant to a private offering to qualified institutional buyers in
accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the
Securities Act. The 2029 Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes
Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2029 Notes bear interest at
the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on
April 15th and October 15th of each year. The 2029 Notes are general unsecured obligations of the Company and
are not guaranteed by our subsidiaries.
The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in
connection with our entry into the 2021 Credit Facility and to redeem our 2026 Notes.
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our
5.000% Notes due 2032 (the "2032 Notes") offered pursuant to a private offering to qualified institutional buyers in
accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the
Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032
Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes bear interest
at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the Notes is payable in cash on
January 15th and July 15th of each year. The 2032 Notes are general unsecured obligations of the Company and
are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes was used to repay debt
outstanding under the 2021 Revolving Credit Facility.
Common Share Offering
On September 7, 2021, we filed a prospectus supplement pursuant to which we may, but we have no obligation to,
issue and sell up to $500 million shares of the common shares of the Trust in amounts and at times to be
determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time,
including, market conditions, the trading price of Trust common shares and determinations by us regarding
appropriate sources of funding. In connection with this offering, we entered into an At Market Issuance Sales
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Agreement with B. Riley Securities, Inc. (“B. Riley”) and Goldman Sachs & Co. LLC (“Goldman” and, together with
B. Riley, the “Sales Agents”) pursuant to which we may sell common shares of the Trust having an aggregate
offering price of up to $500 million, from time to time through B. Riley and Goldman, acting as sales agents and/or
principals. We sold 3,387,385 Trust common shares during the year ended December 31, 2021 and received net
proceeds of approximately $115.1 million. We incurred approximately $2.1 million in commissions payable to the
Sales Agents during the year ended December 31, 2021.
Disposition of Liberty Safe
On July 16, 2021, the Company, as majority stockholder of Liberty Safe Holding Corporation (“Liberty”) and as
Sellers Representative, entered into a definitive Stock Purchase Agreement (the “Liberty Purchase Agreement”) with
Independence Buyer, Inc. (“Liberty Buyer”), Liberty and the other holders of stock and options of Liberty to sell to
Liberty Buyer all of the issued and outstanding securities of Liberty, the parent company of the operating entity,
Liberty Safe and Security Products, Inc. On August 3, 2021, Liberty Buyer completed the acquisition of Liberty
pursuant to the Liberty Purchase Agreement, as amended. The sale price of Liberty was based on an aggregate
total enterprise value of $147.5 million, and is subject to customary adjustments. After the allocation of the sale
proceeds to Liberty's non-controlling shareholders, the repayment of intercompany loans to the Company (including
accrued interest) of $26.5 million, and the payment of transaction expenses of approximately $4.5 million, the
Company received approximately $128.0 million of total proceeds from the sale at closing. The Company
recognized a gain on the sale of Liberty of $72.8 million during the year ended December 31, 2021.
Sale of Advanced Circuits
On October 13, 2021, the Company, as the representative (the “Sellers Representative”) of the holders (the “AC
Sellers”) of stock and options of Compass AC Holdings, Inc. (“Advanced Circuits”), a majority owned subsidiary of
the Company, 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 (the “SPAC Transaction”) 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
Company 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 Company’s outstanding loans to Advanced Circuits and its equity interests in Advanced Circuits.
The closing of the transaction is expected to occur in the second quarter of 2022, however, there can be no
assurances that all of the conditions to closing, which include the closing of the SPAC transaction, will be satisfied.
Common shares - For the 2021 fiscal year we declared distributions to our common shareholders totaling $2.21
per share, inclusive of our special cash distribution of $0.88 per share in connection with our tax reclassification.
Preferred shares - For the 2021 fiscal year we declared distributions to our preferred shareholders totaling $1.8125
per share on our Series A Preferred Shares and $1.96875 on our Series B Preferred Shares and $1.96875 on our
Series C Preferred Shares.
2021 Outlook and Significant Trends
COVID-19 Update
In March 2020, the World Health Organization categorized COVID-19 as a pandemic. 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
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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 COVID-19 that we anticipate may negatively impact our
operating performance in 2022:
Global Supply Chain
The disruption in the global supply chain due to transportation delays and U.S. port congestion are expected to
continue in 2022 and continue to place constraints on several of our businesses. Surges in demand and shifts in
shopping patterns related to COVID-19, 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. The situation has been further exacerbated by COVID-19 protocols at many port locations.
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 a lack of COVID-19 vaccines, local government quarantine efforts and electricity shortages
have impacted our ability to import products timely. Further, in the U.S., the surge in demand along with COVID-19
related government stimulus and rising hourly labor wages, are creating labor shortages and higher labor costs. We
expect these cost trends to continue in 2022.
Inflationary Cost Environment
During 2021, we 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
2021, 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. In December 2021, the Consumer Price Index
increased approximately 7% year-over-year. and 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:
•
•
•
•
•
•
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Achieving 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 grow through disciplined, strategic acquisitions and rigorous integration processes; and
Driving free cash flow through increased net income and effective working capital management, enabling
continued investment in our businesses.
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Results of OperationsThe following discussion reflects a comparison of the historical results of operations of our consolidated business for the years ended December 31, 2021, 2020 and 2019, 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. We acquired Lugano Diamonds in September 2021, BOA in October 2020 and Marucci Sports in April 2020. In the following results of operations, we provide (i) our actual Consolidated Results of Operations for the years ended December 31, 2021, 2020 and 2019, which includes the historical results of operations of each of our businesses (operating segments) from the date of acquisition in accordance with generally accepted accounting principles in the United States ("GAAP" or "US GAAP") and (ii) comparative historical components of the results of operations for each of our businesses on a stand-alone basis (“Results of Operations – Our Businesses”), for each of the years ended December 31, 2021, 2020 and 2019, where all years presented include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. For the 2021 acquisition of Lugano Diamonds, the pro forma results of operations have been prepared as if we purchased this business on January 1, 2020. For the 2020 acquisitions of Marucci Sports and BOA, the pro forma results of operations have been prepared as if we purchased these businesses on January 1, 2019. We believe this presentation enhances the discussion and provides a more meaningful comparison of operating results. The following operating results of our businesses are not necessarily indicative of the results to be expected for a full year, going forward.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."Consolidated Results of Operations — Compass Diversified HoldingsYear Ended December 31, 202120202019Net revenues$ 1,841,668 $ 1,359,566 $ 1,263,298 Cost of revenues 1,115,711 864,601 806,366 Gross profit 725,957 494,965 456,932 Selling, general and administrative expense 459,204 344,418 308,402 Management fees 46,943 33,749 36,030 Amortization of intangible assets 80,307 61,682 53,629 Asset impairment expense — — 32,881 Operating income 139,503 55,116 25,990 Interest expense, net (58,839) (45,769) (58,218) Amortization of debt issuance costs (2,979) (2,454) (3,314) Loss on debt extinguishment (33,305) — (12,319) Other income (expense) (1,184) (2,459) (12,239) Income (loss) from continuing operations before income taxes 43,196 4,434 (60,100) Provision (benefit) for income taxes 18,337 10,175 9,914 Income (loss) from continuing operations$ 24,859 $ (5,741) $ (70,014) Year ended December 31, 2021 compared to the Year ended December 31, 2020 Net revenuesNet revenues for the year ended December 31, 2021 increased by approximately $482.1 million or 35.5% compared to the corresponding period in 2020. Our Marucci business, which we acquired in April 2020, contributed $74.7 million in incremental net revenue during the year ended December 31, 2021, and our BOA business, which we acquired in October 2020, contributed $139.9 million in incremental revenue in 2021. Our Lugano business, which we acquired in September 2021, had $54.4 million in revenue during the period of our ownership. During the year ended December 31, 2021 as compared to the year ended December 31, 2020, we saw notable sales increases at 5.11 ($43.9 million increase), and Velocity ($54.4 million increase) as a result of an increased consumer focus on 88 outdoor related brands. Our Altor Solutions business also saw an increase in net revenues of $50.2 million, primarily
as a result of add-on acquisitions that occurred in July 2020 and October 2020. We also saw notable increases in
net revenue in 2021 as compared to 2020 at several of our other business which saw increased sales compared to
the prior year, which was negatively impacted by the COVID-19 pandemic. These increases in net revenue occurred
at Ergobaby ($18.9 million increase), Arnold ($41.0 million increase, which was partially attributable to an add-on
acquisition in March 2021) and Sterno ($5.1 million increase). Refer to "Results of Operations - Our Businesses" for
a more detailed analysis of net revenue by business segment.
We do not generate any revenues apart from those generated by the businesses we own. We may generate interest
income on the investment of available funds, but expect such earnings to be minimal. Our investment in our
businesses is typically in the form of loans from the Company to such businesses, as well as equity interests in
those businesses. Cash flows coming to the Trust and the Company are the result of interest payments on those
loans, amortization of those loans and, in some cases, dividends on our equity ownership. However, on a
consolidated basis these items will be eliminated.
Cost of revenues
On a consolidated basis, cost of revenues increased approximately $251.1 million during the year ended
December 31, 2021, compared to the corresponding period in 2020, primarily as a result of the increase in net
revenues. Our Marucci and BOA businesses contributed $84.7 million of the increase, and our Lugano business
had $30.2 million in cost of revenues in 2021. Gross profit as a percentage of net revenues was approximately
39.4% in year ended December 31, 2021 compared to 36.4% in 2020. We recognized $5.9 million in expense
related to the amortization of the inventory step-up resulting from our purchase price allocation of Marucci Sports
and BOA and Altor's acquisition of Polyfoam during the year ended December 31, 2020, and $2.8 million in expense
related to the inventory step-up resulting from our purchase price allocation for Lugano during the year-ended
December 31, 2021. Excluding the effect of the amortization of inventory step-up, gross profit as a percentage of
net revenues was 39.7% and 36.8%, respectively, for 2021 and 2020. The increase in gross profit percentage in
2021 as compared to 2020 was primarily related to the increase in net revenue at our branded consumer
businesses, which have higher gross margins than our niche industrial businesses. The gross margins at our niche
industrial businesses have been impacted by global supply chain constraints and increased costs of materials and
components. The impact from these factors has been mostly offset by gains in operating efficiencies and price
increases to our customers. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of gross
profit by business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $114.8 million during the year
ended December 31, 2021, compared to the corresponding period in 2020. $20.2 million of the increase is
attributable to our Marucci business, which was acquired in April 2020, and $38.9 million of the increase is
attributable to BOA, which was acquired in October 2020. $12.0 million of the increase is attributable to Lugano,
including $1.8 million in transaction costs related to the acquisition of Lugano in the current year. We also saw an
increase in selling, general and administrative expense at several of our subsidiaries versus the prior year as
spending on variable expenses was reduced in the prior year in response to the impact of the COVID-19 pandemic,
with the current year spend reflecting more normal levels of selling, general and administrative spend. Refer to
"Results of Operations - Our Businesses" for a more detailed analysis of selling, general and administrative
expense by business segment. At the corporate level, general and administrative expense increased from $14.2
million in 2020 to $17.3 million in 2021. The increase in corporate general and administrative expense during 2021
is primarily due to increased professional fees associated with our election for the Trust to be treated as a
corporation for U.S. federal income tax purposes, and an increase in variable spending that had been reduced in
the prior year as a result of the COVID-19 pandemic.
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Fees to manager
Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0%
annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the
year ended December 31, 2021, we incurred approximately $46.9 million in management fees as compared to
$33.7 million in fees in the year ended December 31, 2020. The increase in management fees is primarily
attributable to our acquisition of Marucci in April 2020, BOA in October 2020 and Lugano in September 2021, offset
by our sale of Liberty in August 2021. CGM has entered into a waiver of the MSA for a period through December 31,
2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which
resulted in a lower management fee paid during 2021 than would have normally been due. In the first quarter of
2021, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the
management fee related to the amount of the cash proceeds deposited with the Trustee that was in excess of the
amount payable related to the 2026 Notes at March 31, 2021. Additionally, CGM has entered into a waiver of the
MSA at December 31, 2021 to exclude the cash balances held at the LLC from the calculation of the management
fee. In the first quarter of 2020, as a proactive measure to provide the Company with additional liquidity in light of
the onset of the COVID-19 pandemic, the Company drew $200 million down on the 2018 Revolving Credit Facility.
The Company and CGM entered a waiver agreement whereby CGM agreed to waive the portion of the
management fee attributable to cash balances at March 31, 2020 which reduced the amount of management fee
that would have been paid in the first quarter of 2020. Additionally, as a result of an expected decline in earnings
and cash flows in the second quarter of 2020 in light of the COVID-19 pandemic, CGM agreed to waive 50% of the
management fee calculated at June 30, 2020.
Amortization expense
Amortization expense for the year ended December 31, 2021 increased $18.6 million to $80.3 million as compared
to the prior year, primarily as a result of the acquisitions of Marucci in April 2020, BOA in October 2020 and Lugano
in September 2021.
Interest Expense
We recorded interest expense totaling $58.8 million for the year ended December 31, 2021 compared to $45.8
million for the comparable period in 2020, an increase of $13.1 million. The increase in interest expense in the
current year reflects the higher amount outstanding on our senior notes during the current year after we redeemed
$600.0 million of our 8.000% 2026 Senior Notes and issued $1000.0 million of 5.250% 2029 Notes in March of
2021, and issued an additional $300.0 million of 5.000% Senior Notes due in 2032 in November 2021. We also had
an increase in the average amount outstanding under our Revolving Credit Facility during 2021 compared to the
prior year. The average amount outstanding on our Revolving Credit Facility in 2021 was approximately $125.2
million, while the average amount outstanding during 2020 was $101.4 million.
Income Taxes
We had income tax expense of $18.3 million with an effective income tax rate of 42.5% during the year ended
December 31, 2021 compared to income tax expense of $10.2 million with an effective income tax rate of 229.5%
during the same period in 2020. Our net income from continuing operations before income taxes for the year ended
December 31, 2021 increased $38.8 million as compared to income from continuing operations before taxes for the
year ended December 31, 2020 ($43.2 million in 2021 compared to $4.4 million in 2020). Our income tax provision
increased by $8.2 million in 2021 as compared to 2020. The tax provision reflects the effect of state and local taxes,
foreign taxes and the related allocation of income at our subsidiaries, in addition to the effect of the losses at our
parent company. The effective tax rate for the years ended December 31, 2021 and 2020 includes a loss at our
parent company, which was previously taxed as a partnership.
On September 1, 2021, the Trust elected to “check-the-box” to have the Trust treated as a corporation for U.S.
federal income tax purposes. The Trust recorded a deferred tax benefit of $12.1 million at December 31, 2021 to
reflect the effect of the classification of ACI as held-for-sale.
Year ended December 31, 2020 compared to the Year ended December 31, 2019
Net revenues
Net revenues for the year ended December 31, 2020 increased by approximately $96.3 million or 7.6% compared to
the corresponding period in 2019. During the year ended December 31, 2020 as compared to the year ended
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December 31, 2019, we saw notable sales increases at 5.11 ($12.5 million increase) and Velocity ($68.2 million
increase) as a result of an increased consumer focus on outdoor related brands. Our Altor business also saw an
increase in net revenues of $8.6 million as a result of an add-on acquisition that occurred in July 2020. Our Marucci
business, which we acquired in April 2020, had net sales of $43.4 million during our ownership period in 2020, and
our BOA business, which we acquired in October 2020, had net sales of $25.3 million during our period of
ownership. These increases in net revenue were partially offset by decreases in net revenue in 2020 as compared
to 2019 at our other businesses, primarily as a result of the effects of the COVID-19 pandemic, notably Ergobaby
($15.3 million decrease), Arnold ($21.0 million decrease) and Sterno ($25.5 million decrease). Refer to "Results of
Operations - Our Businesses" for a more detailed analysis of net revenue by business segment.
We do not generate any revenues apart from those generated by the businesses we own. We may generate interest
income on the investment of available funds, but expect such earnings to be minimal. Our investment in our
businesses is typically in the form of loans from the Company to such businesses, as well as equity interests in
those businesses. Cash flows coming to the Trust and the Company are the result of interest payments on those
loans, amortization of those loans and, in some cases, dividends on our equity ownership. However, on a
consolidated basis these items will be eliminated.
Cost of revenues
On a consolidated basis, cost of revenues increased approximately $58.2 million during the year ended December
31, 2020, compared to the corresponding period in 2019, primarily as a result of the increase in net revenues.
Gross profit as a percentage of net revenues was approximately 36.4% in year ended December 31, 2020
compared to 36.2% in 2019. We recognized $5.9 million in expense related to the amortization of the inventory
step-up resulting from our purchase price allocation of Marucci Sports and BOA and Altor's acquisition of Polyfoam
during the year ended December 31, 2020. Excluding the effect of the amortization of inventory step-up, gross
profit as a percentage of net revenues was 36.8%. Refer to "Results of Operations - Our Businesses" for a more
detailed analysis of gross profit by business segment.
Selling, general and administrative expense
Consolidated selling, general and administrative expense increased approximately $36.0 million during the year
ended December 31, 2020, compared to the corresponding period in 2019. The increase in selling, general and
administrative expense primarily relates to the acquisition of Marucci Sports in April 2020 and BOA in October 2020.
In addition to the incremental selling, general and administrative expense incurred by these businesses subsequent
to their acquisition, we incurred $4.8 million in acquisition costs and $2.1 million in integration related fees from
these acquisitions in 2020. Refer to "Results of Operations - Our Businesses" for a more detailed analysis of
selling, general and administrative expense by business segment. At the corporate level, general and administrative
expense decreased from $14.9 million in 2019 to $14.2 million in 2020, primarily due to decreased travel costs,
partially offset by costs associated with an unsuccessful acquisition.
Fees to manager
Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0%
annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis.
Concurrent with the September 2019 sale of Clean Earth, CGM agreed to waive the management fee on cash
balances held at the Company, commencing with the quarter ended September 30, 2019 and continuing until the
quarter during which the Company next borrowed under the 2018 Revolving Credit Facility. In March 2020, as a
proactive measure to provide the Company with additional cash liquidity in light of the COVID-19 pandemic, the
Company elected to draw down $200 million on our 2018 Revolving Credit Facility. The Company and CGM entered
into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash
balances held at the Company as of March 31, 2020. Additionally, as a result of an expected decline in earnings and
cash flows in the second quarter of 2020, CGM agreed to waive 50% of the management fee calculated at June 30,
2020 that was paid in July 2020. Further, for the third quarter of 2020, the Company and CGM entered into a waiver
agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held
at the Company as of September 30, 2020. The result of these waivers was a decrease in the management fee
during the year ended December 31, 2020 as compared to the prior year, despite the addition of the Marucci
business in April 2020. CGM has also entered into a waiver of the MSA for a period through December 31, 2021 to
receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which reduced
the management fee paid for the fourth quarter of 2020.
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Amortization expense
Amortization expense for the year ended December 31, 2020 increased $8.1 million to $61.7 million as compared to
the prior year, primarily as a result of the acquisitions of Marucci in April 2020 and BOA in October 2020.
Impairment expense
Velocity Outdoor performed an interim impairment test of their goodwill during the quarter ended September 30,
2019 as a result of operating results below forecasts in the current period as well as a re-forecast of the Velocity
business in which planned earnings and revenue fell below the forecasts of prior periods. The impairment test
resulted in Velocity Outdoor recording impairment expense of $32.9 million in the prior year ended December 31,
2019.
Interest Expense
We recorded interest expense totaling $45.8 million for the year ended December 31, 2020 compared to $58.2
million for the comparable period in 2019, a decrease of $12.4 million. The decrease in interest expense for the year
ended December 31, 2020 reflects the repayment of our 2018 Term Loan during 2019 using a portion of the
proceeds from the sale of Clean Earth and proceeds from the issuance of preferred shares, offset by an increase in
interest expense related to our issuance of an additional $200 million of our 8.000% Senior Notes in May 2020.
Income Taxes
We had income tax expense of $10.2 million with an effective income tax rate of 229.5% during the year ended
December 31, 2020 compared to income tax expense of $9.9 million with an effective income tax rate of 16.5%
during the same period in 2019. The effective tax rate for the years ended December 31, 2020 and 2019 includes a
loss at our parent company, which was previously taxed as a partnership. Although we had income from continuing
operations before income taxes for the year ended December 31, 2020 as compared to a loss from continuing
operations for the year ended December 31, 2019 ($4.4 million income in 2020 compared to a $60.1 million loss in
2019), our income tax provision increased by only $0.3 million in 2020 as compared to 2019. The tax provision
reflects the effect of state and local taxes, foreign taxes and the related allocation of income at our subsidiaries, in
addition to effect of the losses at our parent company. The effective income tax rate in the prior year also reflects the
effect of the impairment expense recognized at Velocity and the utilization of tax credits.
Results of Operations — Our Businesses
We categorize the businesses we own into two separate groups of businesses (i) branded consumer businesses,
and (ii) niche industrial businesses. Branded consumer businesses are characterized as those businesses that we
believe capitalize on a valuable brand name in their respective market sector. We believe that our branded
consumer businesses are leaders in their particular category. Niche industrial businesses are characterized as
those businesses that focus on manufacturing and selling particular products or services within a specific market
sector. We believe that our niche industrial businesses are leaders in their specific market sector.
Branded Consumer Businesses
5.11
Overview
5.11 is a leading provider of purpose-built technical apparel and gear for law enforcement, firefighters, EMS, and
military special operations as well as outdoor and adventure enthusiasts. 5.11 is a brand known for innovation and
authenticity and works directly with end users to create purpose-built apparel, footwear and gear designed to
enhance the safety, accuracy, speed and performance of tactical professionals and enthusiasts worldwide. 5.11
operates sales offices and distribution centers globally, and 5.11 products are widely distributed in uniform stores,
military exchanges, outdoor retail stores, its own retail stores and on 511tactical.com.
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Results of OperationsYear ended December 31,(in thousands)202120202019Net sales$ 444,963 100.0 %$ 401,106 100.0 %$ 388,645 100.0 %Gross profit $ 235,288 52.9 %$ 202,245 50.4 %$ 191,594 49.3 %Selling, general and administrative expense$ 186,090 41.8 %$ 162,386 40.5 %$ 159,441 41.0 %Operating income $ 39,374 8.8 %$ 30,087 7.5 %$ 22,408 5.8 %Year ended December 31, 2021 compared to the Year ended December 31, 2020Net salesNet sales for the year ended December 31, 2021 were $445.0 million, an increase of $43.9 million, or 10.9%, compared to the same period in 2020. This increase is due primarily to direct-to-consumer growth of $35.0 million, up 22% from the prior year comparable period. Retail sales grew largely due to fifteen new retail store openings since December 2020 (bringing the total store count to eighty-seven as of December 31, 2021) as well as positive growth in same-store sales for the year ended December 31, 2021 as compared to the same period last year which was negatively impacted by the effects of the COVID-19 pandemic. Net sales were also positively impacted by wholesale sales growth of $18.6 million, up 8% from the prior year which was negatively impacted by the effects of the COVID-19 pandemic. The increase in sales from direct-to-consumer and wholesale was partially offset by a decrease of $8.4 million in sales in our direct to agency business (DTA) as we fulfilled a large contract in 2020 which did not repeat in 2021.Gross profitGross profit as a percentage of net sales increased from 50.4% in the year ended December 31, 2020 to 52.9% in the year ended December 31, 2021. Growth in gross margin was driven by channel mix as direct-to-consumer sales, which realize a higher gross margin than wholesale sales, grew versus the prior period. The growth in gross profit percentage for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was partially offset by increases in inbound ocean and air freight as logistic challenges caused by the COVID-19 pandemic increased supply chain costs. Selling, general and administrative expenseSelling, general and administrative expenses for the year ended December 31, 2021 increased to $186.1 million or 41.8% of net sales compared to $162.4 million or 40.5% of net sales for the year ended December 31, 2020. The increase in selling, general and administrative expense for the year ended December 31, 2021 as compared to the prior year comparable period was driven by the costs associated with additional retail stores (eighty-seven open in 2021 versus seventy-three open in 2020 during the comparable period), as well as additional sales and marketing spend to drive digital sales. For the year ended December 31, 2020, management significantly reduced variable expenses, including payroll, bonus, travel and entertainment, and sales and marketing, as a response to decreased sales from the effects of the COVID-19 pandemic. While management continues to control and reduce variable expenses, payroll and bonus for fiscal 2021 increased in correlation with the increase in net sales. Income from operationsIncome from operations for the year ended December 31, 2021 was $39.4 million, an increase of $9.3 million when compared to the same period in 2020, based on the factors described above. Year ended December 31, 2020 compared to the Year ended December 31, 2019Net salesNet sales for the year ended December 31, 2020 were $401.1 million, an increase of $12.5 million, or 3.2%, compared to the same period in 2019. This increase is due primarily to growth in e-commerce and retail sales growth of $30.2 million, or 31.2%, driven by growing demand in direct-to-consumer channels, specifically digital. Retail sales grew largely through twelve new retail store openings since December 2019 (bringing the total store count to seventy-three as of December 31, 2020) as well as the full-year impact of the sixteen stores opened in 93 2019. The increase in net sales for the year ended December 31, 2020 were further increased by Direct-to-Agency (“DTA”) contracts fulfilled in 2020. The increase in net sales for the year ended December 31, 2020 as compared to the prior year was offset by the effects of the COVID-19 pandemic on store traffic in our wholesale channels and our own retail stores.Gross ProfitGross profit as a percentage of net sales increased from 49.3% in the year ended December 31, 2019 to 50.4% in the year ended December 31, 2020. Growth in gross margin was driven by channel mix as direct-to-consumer sales, which realize a higher gross margin than wholesale sales, grew versus the prior period. The growth in gross profit for the year ended December 31, 2020 as compared to the year ended December 31, 2019 was partially offset by additional inventory reserves and duty drawback accrual (increase in cost of goods sold) for audited duty drawback claims.Selling, general and administrative expenseSelling, general and administrative expenses for the year ended December 31, 2020 increased to $162.4 million or 40.5% of net sales compared to $159.4 million or 41.0% of net sales for the year ended December 31, 2019. The decrease in selling, general and administrative expense as a percentage of net sales was driven by management’s decision to reduce variable expenses, including travel and entertainment, sales and marketing, and payroll as a response to decreased sales from the effects of the COVID-19 pandemic. The decrease was partially offset by an increase in marketing spend to drive demand in the growing direct to consumer channels and by the costs associated with additional retail stores (seventy-three open in 2020 versus sixty-one open in 2019 during the comparable period). Income from operationsIncome from operations for the year ended December 31, 2020 was $30.1 million, an increase of $7.7 million when compared to the same period in 2019, based on the factors described above. BOA OverviewBOA, creator of the revolutionary, award-winning, patented BOA Fit System, partners with market-leading brands to make the best gear even better. Delivering fit solutions purpose-built for performance, the BOA Fit System is featured in footwear across snow sports, cycling, hiking/trekking, golf, running, court sports, workwear as well as headwear and medical bracing. The system consists of three integral parts: a micro-adjustable dial, high-tensile lightweight laces, and low friction lace guides creating a superior alternative to laces, buckles, Velcro, and other traditional closure mechanisms. Each unique BOA configuration is engineered for fast, effortless, precision fit, and is backed by The BOA Lifetime Guarantee. BOA is headquartered in Denver, Colorado and has offices in Austria, Greater China, South Korea, and Japan.Results of OperationsIn the following results of operations, we provide comparative pro forma results of operations for BOA for the years ended December 31, 2020 and 2019 as if we had acquired the business on January 1, 2019. The results of operations that follow include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. The operating results for BOA have been included in the consolidated results of operation from the date of acquisition, October 16, 2020.Year ended December 31,202120202019(in thousands)Pro formaPro formaNet sales$ 165,150 100.0 %$ 106,365 100.0 %$ 106,276 100.0 %Gross profit$ 100,976 61.1 %$ 62,840 59.1 %$ 61,647 58.0 %Selling, general and administrative expense$ 50,591 30.6 %$ 40,845 38.4 %$ 39,153 36.8 %Income from operations$ 33,976 20.6 %$ 5,750 5.4 %$ 6,254 5.9 %94 Pro forma financial information for BOA for the year ended December 31, 2020 and December 31, 2019 includes pre-acquisition results
of operations for the period from January 1, 2020 through October 16, 2020, the acquisition date of BOA, and January 1, 2019 through
December 31, 2019, for comparative purposes. The historical results of BOA have been adjusted to reflect the purchase accounting
adjustments recorded in connection with the acquisition. Pro forma results of operations include the following pro forma adjustments as if
we had acquired BOA January 1, 2019:
•
•
•
Depreciation expense associated with the increase in depreciable lives of capital assets of $0.1 million for the year ended
December 31, 2019.
Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation for BOA
of $11.9 million for the year ended December 31, 2020, and $15.0 million for the year ended December 31, 2019.
Management fees that would have been payable to the Manager during each period.
Year ended December 31, 2021 compared to the Pro forma Year ended December 31, 2020
Net sales
Net sales for the year ended December 31, 2021 were $165.2 million, an increase of $58.8 million or 55.3% when
compared to net sales of $106.4 million for the year ended December 31, 2020. This increase is due to underlying
category and BOA momentum within key markets including Snow Sports, Cycling, Athletic, Outdoor & Workwear.
The three factors primarily impacting growth rates were market share gains in key categories, consumer
participation increases as well as accelerated production ordering by BOA’s customers due to longer lead times
resulting from overall global supply chain constraints.
Gross profit
Gross profit as a percentage of net sales was 61.1% for the year ended December 31, 2021 compared to 59.1% for
the same period in 2020. The cost of sales for the year ended December 31, 2020 includes $1.5 million related to
the amortization of inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of
the inventory step-up, the gross profit as a percentage of net sales for the year ended December 31, 2020 was
60.5%. The increase in gross profit as a percentage of net sales during the current year is attributable primarily to
product mix.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2021 was $50.6 million, an increase
of $9.7 million as compared to selling, general and administrative expense of $40.8 million for the year ended
December 31, 2020. Selling general and administrative expense in the current year includes $3.3 million in
integration services fees paid to CGM. The remainder of the increase in selling, general, and administrative
expense is due to increased employee costs related to BOA's bonus plan, incremental headcount and marketing
investments. Selling, general and administrative expense for the year ended December 31, 2020 included $2.5
million in transaction costs related to the acquisition of BOA, and $1.1 million in integration services fees paid to
CGM.
Income from operations
Income from operations was $34.0 million for the year ended December 31, 2021 as compared to $5.8 million in
income from operations in the year ended December 31, 2020, an increase of $28.2 million based on the factors
noted above.
Pro forma Year ended December 31, 2020 compared to the Pro forma Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were $106.4 million, an increase of $0.1 million or 0.1% when
compared to net sales of $106.3 million for the year ended December 31, 2019.
Gross profit
Gross profit as a percentage of net sales was 59.1% for the year ended December 31, 2020 compared to 58.0% for
the same period in 2019. The cost of sales for the year ended December 31, 2020 includes $1.5 million related to
the amortization of inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of
the inventory step-up, the gross profit as a percentage of net sales for the year ended December 31, 2020 was
60.5%. The increase in gross profit as a percentage of net sales during the current year is attributable primarily to
product mix.
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Selling, general and administrative expenseSelling, general and administrative expense for the year ended December 31, 2020 was $40.8 million, an increase of $1.7 million as compared to selling, general and administrative expense of $39.2 million for the year ended December 31, 2019. Selling, general and administrative expense for the year ended December 31, 2020 included $2.5 million in transaction costs related to the acquisition of BOA, and $1.1 million in integration services fees paid to CGM. Excluding these nonrecurring costs, selling, general and administrative expense for the year ended December 31, 2020 was approximately $37.2 million, a decrease of $2.0 million compared to the year ended December 31, 2019. This decrease was primarily attributable to a reduction in marketing activity and a reduced level of travel during 2020.Income from operationsIncome from operations was $5.8 million for the year ended December 31, 2020 as compared to $6.3 million in income from operations in the year ended December 31, 2019, a decrease of $0.5 million based on the factors noted above.ErgobabyOverviewErgobaby, headquartered in Torrance, California, is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, strollers, and related products. Ergobaby primarily sells its Ergobaby and Baby Tula branded products through brick-and-mortar retailers, national chain stores, online retailers, its own websites and distributors and derives more than half of its sales from outside of the United States.Results of OperationsYear ended December 31,(in thousands)202120202019Net sales$ 93,631 100.0 %$ 74,728 100.0 %$ 89,995 100.0 %Gross profit$ 61,139 65.3 %$ 49,295 66.0 %$ 57,081 63.4 %Selling, general and administrative expense$ 43,923 46.9 %$ 36,281 48.6 %$ 38,867 43.2 %Income from operations$ 9,087 9.7 %$ 5,194 7.0 %$ 10,404 11.6 %Year ended December 31, 2021 compared to the Year ended December 31, 2020Net salesNet sales for the year ended December 31, 2021 were $93.6 million, an increase of $18.9 million or 25.3% compared to the same period in 2020. During the year ended December 31, 2021, international sales were approximately $60.3 million, representing an increase of $12.2 million over the corresponding period in 2020 primarily as a result of increased sales to APAC and EMEA distributors as well as increased sales in EMEA direct territories through key accounts and e-commerce channels. Domestic sales were $33.3 million during the year ended December 31, 2021, reflecting an increase of $6.6 million compared to the corresponding period in 2020. The increase in domestic sales was primarily attributable to strong e-commerce sales across both the Ergo and Tula brands as well as increased key accounts sales.Gross profitGross profit as a percentage of net sales was 65.3% for the year ended December 31, 2021 compared to 66.0% for the same period in 2020. The decrease in gross profit as a percentage of net sales was primarily due to increased inbound freight as a result of continued supply chain shortages. This more than offset favorable shifts in the mix of sales channels and mix of products sold during the year ended December 31, 2021.Selling, general and administrative expenseSelling, general and administrative expense for the year ended December 31, 2021 increased to approximately $43.9 million or 46.9% of net sales compared to $36.3 million or 48.6% of net sales for the same period of 2020. 96 The increase in selling, general and administrative expense for the year ended December 31, 2021 as compared to
the year ended December 31, 2020 is a result of increases in variable expenses tied to sales (primarily outbound
freight), marketing expenses related to multiple new product launches, as well as increased payroll expenses.
Income from operations
Income from operations for the year ended December 31, 2021 increased $3.9 million, to $9.1 million, compared to
$5.2 million for the same period of 2020, primarily as a result of the factors described above.
Year ended December 31, 2020 compared to the Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were $74.7 million, a decrease of $15.3 million or 17.0%
compared to the same period in 2019. During the year ended December 31, 2020, international sales were
approximately $48.1 million, representing a decrease of $13.9 million over the corresponding period in 2019
primarily as a result of reduced sales volume at Ergobaby's Asia-Pacific and EMEA distributors as a result of the
COVID-19 pandemic. Domestic sales were $26.7 million during the year ended December 31, 2020, reflecting a
decrease of $1.4 million compared to the corresponding period in 2019. The decrease in domestic sales was driven
by the Tula brand, primarily in the specialty account channel.
Gross Profit
Gross profit as a percentage of net sales was 66.0% for the year ended December 31, 2020 compared to 63.4% for
the same period in 2019. The increase in gross profit as a percentage of net sales was due to the mix of sales
channels, mix of products sold, as well as reduced freight costs and warranty expense during the year ended
December 31, 2020.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2020 decreased to approximately
$36.3 million or 48.6% of net sales compared to $38.9 million or 43.2% of net sales for the same period of 2019.
The decrease in selling, general and administrative expense for the year ended December 31, 2020 as compared to
the year ended December 31, 2019 is a result of decreases in variable expenses in response to the COVID-19
pandemic and non-recurring expenses in the prior year.
Income from operations
Income from operations for the year ended December 31, 2020 decreased $5.2 million, to $5.2 million, compared to
$10.4 million for the same period of 2019, primarily as a result of the factors described above.
Lugano
Overview
Lugano is a leading designer, manufacturer and marketer of high-end, one-of-a-kind jewelry sought after by some of
the world’s most discerning clientele. Lugano conducts sales via its own retail salons as well as pop-up showrooms
at Lugano-hosted or sponsored events in partnership with influential organizations in the equestrian, art and
philanthropic community. Lugano is headquartered in Newport Beach, California.
Results of Operations
In the following results of operations, we provide comparative pro forma results of operations for Lugano for the
years ended December 31, 2021 and 2020 as if we had acquired the business on January 1, 2020. The results of
operations that follow include relevant pro-forma adjustments for pre-acquisition periods and explanations where
applicable. The operating results for Lugano have been included in the consolidated results of operation from the
date of acquisition, September 3, 2021.
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Year ended December 31,(in thousands)20212020Pro formaPro formaNet sales$ 125,105 100.0 %$ 67,221 100.0 %Gross profit$ 58,778 47.0 %$ 33,194 49.4 %Selling, general and administrative expense$ 23,846 19.1 %$ 12,642 18.8 %Income from operations$ 29,165 23.3 %$ 14,826 22.1 %Pro forma financial information for Lugano for the year ended December 31, 2021 and December 31, 2020 includes pre-acquisition results of operations for the period from January 1, 2021 through September 3, 2021, the acquisition date of Lugano, and January 1, 2020 through December 31, 2020, for comparative purposes. The historical results of Lugano have been adjusted to reflect the purchase accounting adjustments recorded in connection with the acquisition. Pro forma results of operations include the following pro forma adjustments as if we had acquired Lugano January 1, 2020:•Depreciation expense associated with the increase in depreciable lives of capital assets of $0.3 million and $0.6 million, for the years ended December 31, 2021 and 2020, respectively.•Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation for Lugano of $5.0 million for the years ended December 31, 2021 and 2020.•Management fees that would have been payable to the Manager during each period.Pro forma Year ended December 31, 2021 compared to the Pro forma Year ended December 31, 2020Net salesNet sales for the year ended December 31, 2021 increased approximately $57.9 million or 86.1%, to $125.1 million, compared to the corresponding year ended December 31, 2020. Lugano sells high-end jewelry primarily through retail salons in California, Florida and Colorado, and via pop-up showrooms at multiple equestrian, social and charitable functions each year. The effects of the COVID-19 pandemic in the prior year severely impacted both the operations of the retail salons and the number of events attended by Lugano which led to reduced net sales as compared to the current year. Gross profitGross profit as a percentage of net sales totaled approximately 47.0% in the year ended December 31, 2021 compared to 49.4% in the year ended December 31, 2020. Lugano has an extensive network of suppliers through which they procure high quality diamonds and gemstones, which make up a significant percentage of the cost of sales. The uniqueness of the Lugano jewelry can lead to fluctuations in margins from period to period based on what designs are sold during the period. In the current period, Lugano recorded $2.8 million in amortization to cost of goods sold related to the amortization of inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the year ended December 31, 2021 was 53.0%.Selling, general and administrative expenseSelling, general and administrative expense for the year ended December 31, 2021 increased to approximately $23.8 million or 19.1% of net sales compared to $12.6 million or 18.8% of net sales for the same period of 2020. The effects of the COVID-19 pandemic in the prior year led to a reduction in variable costs, particularly marketing spend, in the year ended December 31, 2021. The selling, general and administrative expense in the current year reflects a more normalized level of spending.Income from operationsIncome from operations increased $14.3 million during the year ended December 31, 2021 to $29.2 million compared to income from operations of $14.8 million during the same period in 2020, principally as a result of the increase in sales and gross profit in 2021, as described above.98 Marucci SportsOverviewFounded in 2009 and headquartered in Baton Rouge, Louisiana, Marucci is a leading designer, manufacturer, and marketer of premium wood and metal baseball bats, fielding gloves, batting gloves, bags, grips, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also develops and licenses franchises for sports training facilities. Marucci products are available through owned websites, their team sales organization, Big Box Retailers, and third party e-commerce & resellers.Results of OperationsIn the following results of operations, we provide comparative pro forma results of operations for Marucci for the years ended December 31, 2020 and 2019 as if we had acquired the business on January 1, 2019. The results of operations that follows include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. The operating results for Marucci have been included in the consolidated results of operation from the date of acquisition, April, 20, 2020.Year ended December 31,202120202019(in thousands)Pro formaPro formaNet sales$ 118,166 100.0 %$ 65,942 100.0 %$ 66,524 100.0 %Gross profit$ 64,377 54.5 %$ 33,774 51.2 %$ 35,834 53.9 %Selling, general and administrative expense$ 40,825 34.5 %$ 30,458 46.2 %$ 30,927 46.5 %Income (loss) from operations$ 16,419 13.9 %$ (3,898) (5.9) %$ (604) (0.9) %Pro forma financial information for Marucci for the year ended December 31, 2020 and December 31, 2019 includes pre-acquisition results of operations for the period from January 1, 2020 through April 20, 2020, the acquisition date of Marucci, and January 1, 2019 through December 31, 2019, for comparative purposes. The historical results of Marucci have been adjusted to reflect the purchase accounting adjustments recorded in connection with the acquisition. Pro forma results of operations include the following pro forma adjustments as if we had acquired Marucci January 1, 2019:•Depreciation expense associated with the increase in depreciable lives of capital assets of $0.2 million for the year ended December 31, 2020, and $0.8 million for the year ended December 31, 2019.•Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation for Marucci of $1.2 million for the year ended December 31, 2020, and $4.1 million for the year ended December 31, 2019.•Management fees that would have been payable to the Manager during each period.Year ended December 31, 2021 compared to the Pro forma Year ended December 31, 2020Net sales Net sales for the year ended December 31, 2021 were $118.2 million, an increase of $52.2 million as compared to net sales of $65.9 million for the year ended December 31, 2020. The increase in net sales was primarily due to increased customer demand and market share in many of Marucci's key product lines including aluminum and wood bats, batting gloves, and bags. The increased sales from these products occurred in both retail and direct channels. In the prior year, the shutdown of professional and youth baseball and softball in March as a response to the COVID-19 pandemic led to a significant drop off in demand for product through the first half of 2020, with demand beginning to pick up during the back half of 2020 after the resumption of professional and youth sports.Gross profit Gross profit for the year ended December 31, 2021 increased $30.6 million as compared to the year ended December 31, 2020. Gross profit as a percentage of sales was 54.5% for the year ended December 31, 2021 as compared to 51.2% for the year ended December 31, 2020. The cost of sales for the year ended December 31, 2020 includes $4.3 million related to the amortization of inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the year ended December 31, 2020 was 57.7%. During the current year, Marucci's facilities in Baton Rouge were damaged by floodwaters, which resulted in the write-off of $1.8 million in inventory, negatively impacting the gross profit in 2021 and resulting in a decrease versus adjusted gross profit percentage from 2020. Gross profit as a 99 percentage of net sales during the year ended December 31, 2021 was also impacted by various factors including a
shift of product mix in favor of higher margin products, mainly its aluminum bats, and channel mix, with increased
sales through Marucci's higher margin direct-to-consumer and e-commerce channels, as well as increased freight
costs.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2021 was $40.8 million, or 34.5% of
net sales compared to $30.5 million, or 46.2% of net sales for the year ended December 31, 2020. The increase in
selling, general and administrative expense correlates to the increase in net sales, with increases in credit card
expenses, royalties, commissions, business development fees, and other variable expenses.
Income (loss) from operations
Income from operations for the year ended December 31, 2021 was $16.4 million compared to loss from operations
of $3.9 million for the same period in 2020, primarily as a result of the factors noted above.
Pro forma Year ended December 31, 2020 compared to the Pro forma Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were $65.9 million, a decrease of $0.6 million as compared to net
sales of $66.5 million for the year ended December 31, 2019. During 2020, Marucci was affected by the economic
slowdown resulting from the COVID-19 pandemic with baseball and softball seasons postponed in the spring and
early summer throughout much of the United States. Marucci's “brick and mortar” retail partners were forced to
close as a result of the pandemic thus Marucci did not receive fill-in orders during this period. As a result, sales of
aluminum and wood bats were significantly less in the first and second quarter of 2020 when compared to the same
period last year. Additionally, Major League Baseball postponed the beginning of their season eliminating the need
for wood bats to be purchased for the professional season. During June 2020, Marucci began to see demand pick
up as the baseball and softball seasons began and in August 2020, the company launched its CAT9 line of
aluminum and composite bats. With the success of this launch, the demand pickup continued through the
remainder of 2020.
Gross profit
Gross profit for the year ended December 31, 2020 decreased $2.1 million as compared to the year ended
December 31, 2019. Gross profit as a percentage of sales was 51.2% for the year ended December 31, 2020 as
compared to 53.9% for the year ended December 31, 2019. The cost of sales for the year ended December 31,
2020 includes $4.3 million related to the amortization of inventory step-up resulting from the acquisition purchase
price allocation. Excluding the effect of the inventory step-up, the gross profit as a percentage of net sales for the
year ended December 31, 2020 was 57.7%. The increase in gross profit as a percentage of net sales was
attributable to an increase in retail sales price of Marucci's aluminum bats, specifically the CAT9, increased e-
commerce sales resulting from the closure of retail brick and mortar stores at various times during 2020, and
greater operating efficiencies resulting from Marucci's consolidation of its wood mills during the latter part of 2019.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2020 was $30.5 million, or 46.2% of
net sales compared to $30.9 million, or 46.5% of net sales for the year ended December 31, 2019. Selling, general
and administrative expense for the year ended December 31, 2020 includes $2.0 million in acquisition related costs
that were expensed at the close of the Marucci acquisition, and $1.0 million in integration service fees paid to CGM.
Excluding the effect of the acquisition costs and integration service fees, selling, general and administrative
expense for the year ended December 30, 2020 was $27.5 million, with the decrease in expense attributable to
reductions in travel and entertainment as a result of the COVID-19 pandemic, a reduction in royalty fees related to
the acquisition in 2019 of a technology used with Marucci's aluminum bats, and a decrease in commission expense
due to bringing the Marucci's sales team in-house.
Loss from operations
Loss from operations for the year ended December 31, 2020 was $3.9 million compared to loss from operations of
$0.6 million for the same period in 2019, primarily as a result of the factors noted above.
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Velocity OutdoorOverviewVelocity Outdoor is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin and Centerpoint brands that are available through national retail chains, mass merchants, dealer and distributor networks. The airgun product category consists of air rifles, air pistols and a range of accessories including targets, holsters and cases. Velocity Outdoor's other primary product categories are archery, with products including Centerpoint and Ravin crossbows, consumables, which includes steel and plastic BBs, lead pellets and CO2 cartridges, lasers for firearms, and airsoft products. Results of OperationsYear ended December 31,(in thousands)202120202019Net sales$ 270,426 100.0 %$ 215,996 100.0 %$ 147,842 100.0 %Gross profit $ 85,147 31.5 %$ 66,819 30.9 %$ 40,660 27.5 %Selling, general and administrative expense $ 35,790 13.2 %$ 32,263 14.9 %$ 25,295 17.1 %Impairment expense$ — — %$ — — %$ 32,881 22.2 %Income (loss) from operations$ 39,725 14.7 %$ 24,925 11.5 %$ (27,138) (18.4) %Year ended December 31, 2021 compared to the Year ended December 31, 2020Net salesNet sales for the year ended December 31, 2021 were $270.4 million compared to net sales of $216.0 million for the year ended December 31, 2020, an increase of $54.4 million or 25.2%. The increase in net sales during the year ended December 31, 2021 is attributable to launching innovative new products, new branding initiatives, along with an increase in consumer participation in Velocity categories.Gross profitGross profit as a percentage of net sales was 31.5% for the year ended December 31, 2021 as compared to 30.9% in the year December 31, 2020. The increase in gross profit as a percentage of net sales was primarily attributable to the impact of new, feature rich, higher margin products across Airgun and Archery divisions..Selling general and administrative expenseSelling, general and administrative expense for the year ended December 31, 2021 was $35.8 million, or 13.2% of net sales compared to $32.3 million, or 14.9% of net sales, for the year ended December 31, 2020. The increase in selling, general and administrative expense is primarily related to volume driven expenses that correlate to the increase in sales, as well as additional investments in branding and marketing initiatives. Income from operationsIncome from operations for the year ended December 31, 2021 was $39.7 million, an increase of $14.8 million when compared to income from operations of $24.9 million for the comparable period in 2020. The increase in operating income in the year ended December 31, 2021 reflects the factors noted above.Year ended December 31, 2020 compared to the Year ended December 31, 2019Net salesNet sales for the year ended December 31, 2020 were $216.0 million compared to net sales of $147.8 million for the year ended December 31, 2019, an increase of $68.2 million or 46.1%. The increase in net sales during the year ended December 31, 2020 is due to a significant increase in customer demand that we have experienced in the current year reflecting consumer focus on outdoor branded products, as well as the introduction of several new products during 2020.101 Gross ProfitGross profit as a percentage of net sales was 30.9% for the year ended December 31, 2020 as compared to 27.5% in the year December 31, 2019. The increase in gross profit as a percentage of net sales was primarily attributable to product and customer mix.Selling general and administrative expenseSelling, general and administrative expense for the year ended December 31, 2020 was $32.3 million, or 14.9% of net sales compared to $25.3 million, or 17.1% of net sales, for the year ended December 31, 2019. The increase in selling, general and administrative expense is primarily related to volume driven expenses that correlate to the increase in sales, as well as additional investments in marketing. Income (loss) income from operationsIncome from operations for the year ended December 31, 2020 was $24.9 million, an increase of $52.1 million when compared to loss from operations of $27.1 million for the comparable period in 2019. Velocity recognized impairment expense of $32.9 million in 2019 after determining that interim impairment testing was necessary in the prior year. The increase in operating income in the year ended December 31, 2020 reflects the factors noted above, and the effect of the impairment expense on the operating income in 2019. Niche Industrial BusinessesAltor SolutionsOverviewFounded in 1957 and headquartered in Scottsdale, Arizona, Altor Solutions is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer (OEM) components made from expanded polystyrene (EPS) and expanded polypropylene (EPP). Altor operates 16 molding and fabricating facilities across North America and provides products to a variety of end-markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building products and others.Results of OperationsYear ended December 31,202120202019(in thousands)Net sales$ 180,217 100.0 %$ 130,046 100.0 %$ 121,424 100.0 %Gross profit$ 43,759 24.3 %$ 39,435 30.3 %$ 34,418 28.3 %Selling, general and administrative expense $ 17,068 9.5 %$ 14,423 11.1 %$ 11,143 9.2 %Income from operations$ 17,962 10.0 %$ 15,939 12.3 %$ 14,292 11.8 %Year ended December 31, 2021 compared to the Year ended December 31, 2020Net salesNet sales for the year ended December 31, 2021 were $180.2 million, an increase of $50.2 million, or 38.6%, compared to the year ended December 31, 2020. The increase in net sales during the year was primarily due to the acquisition of Polyfoam in July 2020, the acquisition of Plymouth Foam in October 2021, the continued recovery from the effects of the COVID-19 pandemic experienced in the prior year, organic growth and contractual increases in selling prices during the current year. Gross profitGross profit as a percentage of net sales was 24.3% and 30.3%, respectively, for the years ended December 31, 2021 and 2020. The decrease in gross profit as a percentage of net sales in the year ended December 31, 2021 was primarily due to increases in the price of Altor's primary raw material, EPS, during 2021, margin dilution due to the acquisition of Polyfoam and Plymouth Foam, which have historically had lower margins than the legacy 102 business, and increased operating expenses, including labor, utilities and supplies.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2021 was $17.1 million as compared
to $14.4 million for the year ended December 31, 2020, an increase of $2.6 million. The increase in selling, general
and administrative expense for the year ended December 31, 2021 is primarily attributable to the acquisition of
Polyfoam in the third quarter of 2020 and Plymouth Foam in the fourth quarter of 2021, and increased information
technology and professional fees incurred during the current year.
Income from operations
Income from operations was $18.0 million for the year ended December 31, 2021 as compared to $15.9 million for
the year ended December 31, 2020, an increase of $2.0 million based on the factors noted above.
Year ended December 31, 2020 compared to the Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were $130.0 million, an increase of $8.6 million, or 7.1%,
compared to the year ended December 31, 2019. The increase in net sales during the year was primarily due to the
acquisition of Polyfoam in July 2020, partially offset by a slow-down in the appliance and automotive customer
sectors, as well as a general slow-down across other customer segments in April and May, as a result of the effect
of the COVID-19 pandemic on our customers' operations. While most of our customer sectors saw improved
performance beginning in June, the appliance and automotive sectors continued to see a slowdown in sales through
the end of the second quarter. During the latter half of 2020, appliance sales continued to trend lower versus the
prior year due to lower demand and supply chain and labor constraints resulting from the COVID-19 pandemic.
Gross profit
Gross profit as a percentage of net sales was 30.3% and 28.3%, respectively, for the years ended December 31,
2020 and 2019. The increase in gross profit as a percentage of net sales in the year ended December 31, 2020 was
primarily due to the decreasing price of expanded polystyrene ("EPS") resin. A majority of Altor's products are made
with EPS resin, an oil and natural gas derived polymer with an added expansion agent, therefore raw material costs
will fluctuate based on the price of oil and natural gas.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2020 was $14.4 million as compared
to $11.1 million for the year ended December 31, 2019, an increase of $3.3 million. The increase in selling, general
and administrative expense for the year ended December 31, 2020 is primarily attributable to the acquisition of
Polyfoam in the third quarter of 2020 and an increase in performance based compensation versus the prior year.
Income from operations
Income from operations was $15.9 million for the year ended December 31, 2020 as compared to $14.3 million for
the year ended December 31, 2019, an increase of $1.6 million based on the factors noted above.
Arnold
Overview
Arnold serves a variety of markets including aerospace and defense, general industrial, motorsport/ automotive, oil
and gas, medical, energy, reprographics and advertising specialties. Over the course of more than 100 years,
Arnold has successfully evolved and adapted our products, technologies, and manufacturing presence to meet the
demands of current and emerging markets. Arnold produces high performance permanent magnets (PMAG),
turnkey electric motors ("Ramco"), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets
(Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Arnold has
expanded globally and built strong relationships with our customers worldwide. Arnold is the largest and, we
believe,
is
headquartered in Rochester, New York.
technically advanced U.S. manufacturer of engineered magnetic systems. Arnold
the most
103
Results of OperationsYear ended December 31,(in thousands)202120202019Net sales$ 139,941 100.0 %$ 98,990 100.0 %$ 119,948 100.0 %Gross profit$ 39,463 28.2 %$ 23,529 23.8 %$ 31,180 26.0 %Selling, general and administrative expense$ 22,751 16.3 %$ 17,692 17.9 %$ 19,050 15.9 %Income from operations$ 11,988 8.6 %$ 2,096 2.1 %$ 8,361 7.0 %Year ended December 31, 2021 compared to the Year ended December 31, 2020Net salesNet sales for the year ended December 31, 2021 were approximately $139.9 million, an increase of $41.0 million compared to the same period in 2020. The increase in net sales is primarily a result of increased demand in defense and industrial markets driven in part by the acquisition of Ramco Electric Motors, Inc. ("Ramco") in March 2021. International sales were $43.0 million and $37.9 million for the years ended December 31, 2021 and 2020, respectively, an increase of $5.1 million. Gross profitGross profit was $39.5 million for the year ended December 31, 2021 as compared to $23.5 million for the same period in 2020. Gross profit as a percentage of net sales increased to 28.2% in 2021 from 23.8% in 2020, principally due to increased volume, favorable product mix and improvements in operating efficiencies.Selling, general and administrative expenseSelling, general and administrative expense in the year ended December 31, 2021 was $22.8 million as compared to approximately $17.7 million for the year ended December 31, 2020. The increase in selling, general and administrative expense was due to higher staffing related costs, acquisition costs, recruiting costs and increased information technology costs. Selling, general and administrative expense represented 16.3% of net sales for the year ended December 31, 2021 as compared to 17.9% for the same period in 2020. The decrease in selling, general and administrative expense as a percentage of net sales was due to overall higher sales volume as compared to the prior year.Income from operationsArnold had income from operations of approximately $12.0 million for the year ended December 31, 2021, as compared to income from operations of $2.1 million for the year ended December 31, 2020, an increase of $9.9 million year over year based on the factors stated above.Year ended December 31, 2020 compared to the Year ended December 31, 2019Net salesNet sales for the year ended December 31, 2020 were approximately $99.0 million, a decrease of $21.0 million compared to the same period in 2019. The decrease in net sales is primarily a result of softness in the commercial aerospace, oil and gas and advertising specialty markets caused by the global COVID-19 pandemic. International sales were $37.9 million and $47.4 million for the years ended December 31, 2020 and 2019, respectively, a decrease of $9.5 million. Gross ProfitGross profit was $23.5 million for the year ended December 31, 2020 as compared to $31.2 million for the same period in 2019. Gross profit as a percentage of net sales decreased to 23.8% in 2020 from 26.0% in 2019, principally due to the lower volume in the markets as noted above, partially offset by improved operating efficiencies. 104 Selling, general and administrative expenseSelling, general and administrative expense in the year ended December 31, 2020 was $17.7 million as compared to approximately $19.1 million for the year ended December 31, 2019. The decrease in selling, general and administrative expense was due to lower staffing related costs and lower travel and meeting expenses. Selling, general and administrative expense represented 17.9% of net sales for the year ended December 31, 2020 as compared to 15.9% for the same period in 2019. The increase in selling, general and administrative expense as a percentage of net sales was due to overall lower sales volume. Income from operationsArnold had income from operations of approximately $2.1 million for the year ended December 31, 2020, as compared to income from operations of $8.4 million for the year ended December 31, 2019, a decrease of $6.3 million year over year based on the factors stated above.Sterno OverviewSterno, headquartered in Corona, California, is the parent company of Sterno LLC ("Sterno Products"), Sterno Home Inc. ("Sterno Home"), and Rimports Inc. ("Rimports"). Sterno is a leading manufacturer and marketer of portable food warming systems, creative indoor and outdoor lighting, and home fragrance solutions for the consumer markets. Sterno offers a broad range of wick and gel chafing systems, butane stoves and accessories, liquid and traditional wax candles, catering equipment and lamps through Sterno Products, flameless candles and outdoor lighting products through Sterno Home, and scented wax cubes and warmer products used for home decor and fragrance systems through Rimports. During 2021, Sterno made the strategic decision to incorporate the product lines of Sterno Home into Rimports.Results of Operations Year ended December 31,(in thousands)202120202019Net sales$ 375,127 100.0 %$ 369,981 100.0 %$ 395,444 100.0 %Gross profit$ 72,010 19.2 %$ 78,203 21.1 %$ 101,999 25.8 %Selling, general and administrative expense$ 32,856 8.8 %$ 34,919 9.4 %$ 39,740 10.0 %Income from operations$ 19,877 5.3 %$ 25,772 7.0 %$ 44,810 11.3 %Year ended December 31, 2021 compared to the Year ended December 31, 2020Net salesNet sales for the year ended December 31, 2021 were approximately $375.1 million, an increase of $5.1 million or 1.4% compared to net sales for the year ended December 31, 2020. The increase in net sales reflects an increase in sales at both Sterno Products and Rimports as compared to the prior year. Sterno Products began to see a return of demand in the food service and hospitality industries in the latter half of 2021, while Rimports has continued to see strong consumer demand for their products at the retail level.Gross profitGross profit as a percentage of net sales decreased from 21.1% for the year ended December 31, 2020 to 19.2% for the same period ended December 31, 2021. The decrease in gross profit as a percentage of net sales during 2021 as compared to 2020 was attributable to sales mix, additional inventory reserves recorded in 2021 due to product rationalization as Sterno Home integrated with Rimports, and increases in distribution costs, wages and raw materials.105 Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2021 was approximately $32.9 million
as compared to $34.9 million in the year ended December 31, 2020, a decrease of $2.1 million or 5.9%, reflecting
lower salaries, commissions, and various cost savings initiatives implemented to address the effects of decreased
demand from COVID-19. Selling, general and administrative expense represented 8.8% of net sales for the year
ended December 31, 2021 and 9.4% for the year ended December 31, 2020.
Income from operations
Income from operations for the year ended December 31, 2021 was approximately $19.9 million, a decrease of $5.9
million when compared to the same period in 2020, based on the factors noted above.
Year ended December 31, 2020 compared to the Year ended December 31, 2019
Net sales
Net sales for the year ended December 31, 2020 were approximately $370.0 million, a decrease of $25.5 million or
6.4% compared to net sales for the year ended December 31, 2019. The net sales variance reflects a decrease in
sales at Sterno Products and Sterno Home as a result of the effect of COVID-19 on the food service and retail
industries beginning in the latter half of March, partially offset by favorable sales volume at Rimports of wax and
essential oils during 2020. The food service industry continues to be negatively impacted by the COVID-19
pandemic in 2021.
Gross Profit
Gross profit as a percentage of net sales decreased from 25.8% for the year ended December 31, 2019 to 21.1%
for the same period ended December 31, 2020. The decrease in gross profit as a percentage of net sales during
2020 as compared to 2019 was attributable to product mix, with lower margin sales in 2020, as well as higher freight
and tariff costs.
Selling, general and administrative expense
Selling, general and administrative expense for the year ended December 31, 2020 was approximately $34.9 million
as compared to $39.7 million in the year ended December 31, 2019, a decrease of $4.8 million or 12.1%, reflecting
lower salaries, commissions, and various cost savings initiatives implemented to address the effects of decreased
demand from COVID-19.
Income from operations
Income from operations for the year ended December 31, 2020 was approximately $25.8 million, a decrease of
$19.0 million when compared to the same period in 2019, based on the factors noted above.
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Liquidity and Capital ResourcesWe generate cash primarily from the operations of our subsidiaries, and we have the ability to borrow under our 2021 Credit Facility to fund our operating, investing and financing activities. In 2021, we filed a prospectus supplement pursuant to which we may, but we have no obligation to, issue and sell up to $500 million shares of the common shares of the Trust in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions, the trading price of Trust common shares and determinations by us regarding appropriate sources of funding. Our principal uses of cash are operating expenses, payment of management fees, capital expenditures, working capital needs, debt service, dividends on our common and preferred Trust shares, and strategic growth initiatives, including acquisitions. We had total available cash and cash equivalents of $157.1 million and $60.0 million as of December 31, 2021 and 2020, respectively.Our liquidity requirements primarily relate to our debt service requirements, payments of our common and preferred share distributions, management fees paid to our Manager, working capital needs and purchase commitments at our subsidiaries. As of December 31, 2021, we had $1000.0 million of indebtedness associated with our 5.250% 2029 Notes, and $300 million of indebtedness associated with our 5.000% 2032 Notes. There are no required quarterly principal payments on our 2029 Notes or 2032 Notes. Long-term debt liquidity requirements consist of the payment in full of our Notes upon their respective maturity dates.The following table summarizes our cash activity for the years presented:Year ended December 31,(in thousands)202120202019Cash provided by operating activities$ 134,051 $ 148,625 $ 84,562 Cash (used in) provided by investing activities (317,496) (700,834) 743,126 Cash provided by (used in) financing activities 273,206 521,725 (779,522) Effect of exchange rates on cash and cash equivalents 228 914 (1,178) Increase (decrease) in cash and cash equivalents$ 89,989 $ (29,570) $ 46,988 Cash Flow from Operating Activities2021Cash flows provided by operating activities totaled approximately $134.1 million for December 31, 2021, which represents a decrease of $14.6 million compared to cash flow from operating activities of $148.6 million for the year ended December 31, 2020. The decrease in cash flows in 2021 is primarily attributable to an increase in cash used for working capital. Cash used in operating activities for working capital for the year ended December 31, 2021 was $81.0 million, as compared to cash provided by operating activities for working capital of $2.4 million for the year ended December 31, 2020. We typically have a higher usage of cash for working capital in the first half of the year as most of our companies will build up inventories after the fourth quarter. In the current year, several of our businesses had higher inventory levels than normal given significantly longer lead times due to supply chain issues, which led to higher than normal levels of inventory at December 31, 2021. In the prior year, the COVID-19 pandemic led our businesses to implement a variety of steps to conserve cash and increase liquidity given the uncertainty in the economy, resulting in a lower usage of cash for working capital. The increase in cash used in operating activities for working capital also reflects the acquisition of Marucci Sports and BOA in the second and fourth quarter, respectively, of the prior year, and Lugano in the third quarter of the current year. We expect that Lugano will use cash to build inventory over the next twelve months to support its anticipated sales growth.2020Cash flows provided by operating activities totaled approximately $148.6 million for December 31, 2020, which represents an increase of $64.1 million compared to cash flow from operating activities of $84.6 million for the year ended December 31, 2019. The increase in cash flows in 2020 is attributable to an increase in income from continuing operations in the year ended December 31, 2020, driven by strong performance at our 5.11, Liberty and Velocity businesses, and an increase in cash provided by working capital. In the prior year, the Company incurred interest expense related to the 2018 Term Loan, which we paid off in the third and fourth quarter of 2019 using the proceeds from the sale of Clean Earth and our Series C Preferred Share Offering. The payoff of the 2018 Term 107 Loan, partially offset by the increase in interest expense related to $200 million in our 8% Senior Notes issued in
May 2020, resulted in a decrease in our interest expense in the current year as compared to 2019 by approximately
$12.4 million. In the prior year, we also recognized a loss of $10.2 million related to the sale of common shares
received as part of the consideration for the sale of Manitoba Harvest. Cash provided by operating activities for
working capital for the year ended December 31, 2020 was $3.3 million as compared to cash used in operating
activities for working capital of $15.2 million for the year ended December 31, 2019. The increase in cash provided
by working capital in the current year primarily reflects steps our businesses have taken to maintain liquidity in the
current economy.
2019
Cash flows provided by operating activities totaled approximately $84.6 million for the year ended December 31,
2019, which represents a decrease of $29.9 million compared to cash flow from operating activities of $114.5 million
for the year ended December 31, 2018. The decrease in cash provide by operating activities is primarily due to the
effect of cash flows from discontinued operations and reflects the timing of the sale of Manitoba Harvest and Clean
Earth in fiscal year 2019. Cash used in operating activities of discontinued operations in the year ended December
31, 2019 was $10.1 million while cash provided by operating activities of discontinued operations was $42.6 million
in year ended December 31, 2018. Fiscal year 2018 reflects a full year of operations of our discontinued operations
while 2019 reflects the effect of the sales of Manitoba Harvest in February 2019 and Clean Earth in June 2019.
Cash used in operating activities for working capital for the year ended December 31, 2019 was $15.2 million as
compared to cash used for working capital of $7.7 million for the year ended December 31, 2018. The increase in
cash used for working capital purposes in the current year primarily reflects the effect of our acquisitions that
occurred in February 2018 which resulted in an increase in cash needed to fund working capital, particularly at
Rimports.
Cash Flow from Investing Activities
2021
Cash flows used in investing activities totaled approximately $317.5 million for the year ended December 31, 2021,
compared to $700.8 million used in investing activities during the year ended December 31, 2020. Investing
activities in the current year reflect our acquisition of Lugano in September 2021, plus add-on acquisitions at Arnold
(Ramco Electric Motors), Altor Solutions (Plymouth Foam) and Marucci (Lizard Skins) ($404.3 million), while
investing activities in the prior year reflect our acquisition of Marucci in April 2020, BOA in October 2020 and an add-
on acquisition by Altor Solutions in July 2020 ($667.1 million). The cash flows used in investing activities in the
current year was offset by the proceeds received from our sale of Liberty Safe in August 2021 ($101.0 million in
proceeds).
Our spending on capital expenditures increased $11.1 million during the year ended December 31, 2021 as
compared to the year ended December 31, 2020, with $39.9 million in capital expenditures in 2021 and $28.8
million in capital expenditures in 2020. The additional capital expenditures reflects our acquisitions of Marucci in the
second quarter of 2020 and BOA in the fourth quarter of 2020, as well as an increase in expenditures in the current
year after reduced spending in 2020 as our businesses limited spending during the early stages of the COVID-19
pandemic. We expect capital expenditures for fiscal year 2022 to be approximately $70 million to $80 million.
2020
Cash flows used in investing activities totaled approximately $700.8 million for the year ended December 31, 2020,
compared to $743.1 million provided by investing activities during the year ended December 31, 2019. Cash
provided by investing activities in the prior year primarily related to the proceeds received from the sale of our
Manitoba Harvest and Clean Earth businesses, while investing activities in the current year reflect our acquisition of
Marucci in April 2020, BOA in October 2020 and an add-on acquisition by Altor Solutions in July 2020 ($667.1
million). Capital expenditures in the year ended December 31, 2020 decreased $4.1 million compared to the year
ended December 31, 2019, which reflects a reduction in our capital spending in the current year in response to the
anticipated effect of the COVID-19 pandemic on our cash flows.
2019
Cash flows provided by investing activities totaled approximately $743.1 million for the year ended December 31,
2019, compared to $604.1 million used in investing activities during the year ended December 31, 2018. Cash flows
from Clean Earth and Manitoba Harvest, which are reflected as discontinued operations, totaled $279.2 million in
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fiscal year 2019 and reflects the effect of the sale transactions. Cash provided by investing activities in the current
year primarily relates to the proceeds received from the sales of Clean Earth and Manitoba. In the year ended
December 31, 2018, we had a platform acquisition in the first quarter, Altor, and several add-on acquisitions at our
subsidiaries. Sterno acquired Rimports in February 2018, and our Velocity Outdoor subsidiary acquired Ravin in
September 2018. The total cash paid for these acquisitions during 2018 was $495.1 million. Capital expenditures in
the year ended December 31, 2019 decreased $6.1 million, due primarily to expenditures at our 5.11 business
related to investments in various infrastructure and systems projects in 2018 that were nonrecurring in 2019.
Cash Flow from Financing Activities
2021
Cash flows provided by financing activities totaled approximately $273.2 million for the year ended December 31,
2021, as compared to cash flows used in financing activities of $521.7 million for the year ended December 31,
2020. During the first quarter of 2021, we completed an offering of $1,000.0 million of our 2029 Notes, and used the
proceeds to pay down our 2018 Revolving Credit Facility and pay off the existing 2026 Notes. In the fourth quarter
of 2021, we completed an offering of $300.0 million of our 2032 Notes, and used the proceeds to pay down our
2021 Revolving Credit Facility. Financing activities in both periods reflect the payment of our common and preferred
share distributions. In the current year, we also paid a special common share distribution of $57.1 million to our
shareholders upon the reclassification of the Trust to a corporation for income tax purposes. In September 2021, we
filed a prospectus supplement and entered into a Sales Agreement for an At The Market program pursuant to which
we may sell common shares of the Trust. We received $114.6 million in net cash proceeds from the sale of Trust
common shares under this program in the current year. During the year ended December 31, 2021, we made a
distribution to the Allocation Member of $17.3 million related to the five-year Holding Event of our Liberty, Ergobaby
and ACI business, and $16.8 million related to the Sale Event of Liberty Safe. In the prior year, we made a
distribution to the Allocation Member of $9.1 million related to the five-year Holding Event for our Sterno business.
2020
Cash flows provided by financing activities totaled approximately $521.7 million for the year ended December 31,
2020, as compared to cash flows used in financing activities of $779.5 million for the year ended December 31,
2019. Financing activities in both periods reflect the payment of our common and preferred share distributions, with
a $6.3 million increase in the preferred share distribution as a result of the issuance of our Series C Preferred
Shares in November 2019. In the prior year, we used the proceeds from our sale of Manitoba Harvest and Clean
Earth to repay amounts outstanding under our 2018 Revolving Credit Facility and 2018 Term Loan, while in the
current year, we completed a common share offering and the issuance of $200 million in additional 2026 Notes,
resulting in net proceeds of $285.9 million. We drew approximately $200 million on our 2018 Revolving Credit
Facility that was used in the financing of our Marucci acquisition, and $300 million that was used in the financing of
our BOA acquisition. A portion of the proceeds received from the issuance of the additional 2026 Notes and
common share offering was used to pay down the amount outstanding on our 2018 Revolving Credit facility
subsequent to the Marucci acquisition. During the year ended December 31, 2020, we also made a distribution to
the Allocation Member of $9.1 million related to the five year Holding Event for our Sterno business.
2019
Cash flows used by financing activities totaled approximately $779.5 million for the year ended December 31, 2019,
as compared to cash flows provided by financing activities of $500.1 million for the year ended December 31, 2018.
During 2019, we used the proceeds from our sales of Manitoba Harvest and Clean Earth as well as the proceeds
from our Series C Preferred Share offering to repay $832.3 million of the outstanding amount under our 2018 Credit
Facility, which represented all of the amount outstanding under our 2018 Term Loan, as well as the outstanding
amounts under our 2018 Revolving Credit Facility. In additional to the payment of our common and preferred share
distributions, we also made a distribution during 2019 to our Allocation Interest holders of $60.4 million related to the
sales of Manitoba Harvest and Clean Earth.
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Total Liabilities and Intercompany loans to our businessesThe following table summarizes the total liabilities and intercompany debt of our business as of December 31, 2021:(in thousands)Intercompany LoansTotal Liabilities5.11$ 164,510 $ 308,250 BOA 124,245 203,121 Ergobaby 23,177 44,247 Lugano 132,248 169,262 Marucci Sports 93,619 125,412 Velocity Outdoor 98,759 153,824 Advanced Circuits (1) 82,363 — Arnold 68,802 108,096 Altor Solutions 131,691 174,173 Sterno 207,609 288,458 $ 1,127,023 $ 1,574,843 Corporate and eliminations (1,127,023) 255,761 Liabilities held-for-sale — 29,127 Total$ — $ 1,859,731 (1) In October 2021, the Company entered into a merger agreement to sell all of the outstanding securities of Advanced Circuits. The transaction is expected to close in the second quarter of 2022 and Advanced Circuits has been presented as held-for-sale at December 31, 2021.Each loan has a scheduled maturity and each business is entitled to repay all or a portion of the principal amount of the outstanding loans, without penalty, prior to maturity. A component of our acquisition financing strategy that we utilize in acquiring the businesses we own and manage is to provide both equity capital and debt capital, raised at the parent level through our existing credit facility. Our strategy of providing intercompany debt financing within the capital structure of the businesses that we acquire and manage allows us the ability to distribute cash to the parent company through monthly interest payments and amortization of the principle on these intercompany loans. Certain of our businesses have paid down their respective intercompany debt balances through the cash flow generated by these businesses and we have recapitalized, and expect to continue to recapitalize, these businesses in the normal course of our business. The recapitalization process involves funding the intercompany debt using either cash on hand at the parent or our revolving credit facility, and serves the purpose of optimizing the capital structure at our subsidiaries and providing the noncontrolling shareholders with a distribution on their ownership interest in a cash flow positive business. In August 2021, we completed a recapitalization at 5.11 whereby the Company entered into an amendment to the intercompany loan agreement with 5.11 (the "5.11 Loan Agreement"). The 5.11 Loan Agreement was amended to provide for additional term loan borrowings of $55.0 million to fund a distribution to shareholders. The Company owned 97.7% of the outstanding shares of 5.11 on the date of the distribution and received $53.7 million. The remaining amount of the distribution went to minority shareholders. In November 2020, the Company completed a recapitalization of ACI whereby the Company entered into an amendment to the intercompany loan agreement with ACI (the "ACI Loan Agreement"). The ACI Loan Agreement was amended to (i) provide for term loan borrowings of $48.8 million to fund the repurchase of shares from an existing shareholder and to fund a distribution to shareholders, and ii) extend the maturity dates of the term loans, and termination date of the revolving loan commitment. In connection with the recapitalization, ACI repurchased 47,870 shares of ACI capital stock, and distributed $42.8 million to shareholders. The Company owned 71.8% of the outstanding shares of ACI on the date of the distribution and received $30.7 million. The remaining amount of the distribution went to minority shareholders. 110 In September 2021, BOA repurchased shares of its issued and outstanding common shares from its largest minority
shareholder for a total payment of $48.0 million, which BOA financed by borrowing under their intercompany credit
facility with the Company (the "BOA Credit Agreement"). The BOA Credit Agreement was amended to (i) provide for
additional term loan borrowings of $38.0 million, and (ii) consent to the repurchase of the shares from the minority
shareholder.
In the fourth quarter of 2021, we amended the Arnold intercompany credit agreement to increase capital
expenditure allowable under the credit agreement to account for additional growth capital expenditure opportunities,
and amended the financial covenants to reflect the increased allowable expenditure. In the fourth quarter of 2020,
we amended the Arnold intercompany credit agreement to increase the revolving credit commitment available under
the credit agreement, and amended the financial covenants to reflect the increased commitment. In the first quarter
of 2019, we amended the 5.11 intercompany credit agreement to update the definition of capital expenditures to
exclude capital expenditures made with respect to 5.11's retail stores from the calculation of the fixed charge
coverage ratio. All of our subsidiaries were in compliance with the financial covenants included within their
intercompany credit arrangements at December 31, 2021.
Our primary source of cash is from the receipt of interest and principal on our outstanding loans to our businesses.
Accordingly, we are dependent upon the earnings and cash flow of these businesses, which are available for
(i) operating expenses; (ii) payment of interest of our 2029 and 2032 Notes; (iii) payments to CGM due or potentially
due pursuant to the MSA and the LLC Agreement; (iv) cash distributions to our shareholders; and (v) investments in
future acquisitions. Payments made under (i) through (iii) above are required to be paid before distributions to
shareholders and may be significant and exceed the funds held by us, which may require us to dispose of assets or
incur debt to fund such expenditures.
We believe that we currently have sufficient liquidity and capital resources to meet our existing obligations, including
quarterly distributions to our shareholders, as approved by our board of directors, over the next twelve months.
Financing Arrangements
2021 Credit Facility
On March 23, 2021, we entered into a Second Amended and Restated Credit Agreement to amend and restate the
2018 Credit Facility. The 2021 Credit Facility provides for revolving loans, swing line loans and letters of credit up to
a maximum aggregate amount of $600 million and also permits the Company, prior to the applicable maturity date,
to increase the revolving loan commitment and/or obtain term loans in an aggregate amount of up to $250 million,
subject to certain restrictions and conditions. All amounts outstanding under the 2021 Revolving Credit Facility will
become due on March 23, 2026, which is the maturity date of loans advanced under the 2021 Revolving Credit
Facility. At December 31, 2021, we had nothing outstanding under our 2021 Revolving Credit Facility.
The 2021 Credit Facility provides for letters of credit under the 2021 Revolving Credit Facility in an aggregate face
amount not to exceed $100 million outstanding at any time, as well as swing line loans of up to $25 million
outstanding at one time. At no time may the (i) aggregate principal amount of all amounts outstanding under the
2021 Revolving Credit Facility, plus (ii) the aggregate amount of all outstanding letters of credit and swing line loans,
exceed the borrowing availability under the 2021 Credit Facility.
The 2021 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and
loans to, its consolidated subsidiaries. At December 31, 2021, we had letters of credit totaling $1.0 million
outstanding under the 2021 Revolving Credit Facility. We had approximately $599.0 million in borrowing base
availability under this facility at December 31, 2021. (See "Note I - Debt" to the consolidated financial statements for
more detail regarding our 2018 Credit Facility).
2018 Credit Facility
In April 2018, we entered into an Amended and Restated Credit Agreement (the "2018 Credit Facility") to amend
and restate our credit agreement entered into in 2014. The 2018 Credit Facility provided for (i) revolving loans,
swing line loans and letters of credit (the “2018 Revolving Credit Facility”) up to a maximum aggregate amount of
$600 million, and (ii) a $500 million term loan (the “2018 Term Loan”). The 2018 Credit Facility also permitted the
Company, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain additional
term loans in an aggregate amount of up to $250 million, subject to certain restrictions and conditions. In 2019, we
repaid the amounts due under the 2018 Term Loan. We used a portion of the proceeds from the issuance of the
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2029 Notes offering to pay all amounts outstanding under the 2018 Revolving Credit Facility in March 2021. The 2018 Credit Facility was replaced by the 2021 Credit Facility.Senior Notes2032 NotesOn November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our 5.000% Senior Notes due 2032 (the "2032 Notes") offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of November 17, 2021 (the “2032 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January 15, 2032. Interest on the 2032 Notes is payable in cash on July 15th and January 15th of each year. The 2032 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries. The proceeds from the sale of the 2032 Notes were used to repay debt outstanding under the 2021 Credit Facility.2029 NotesOn March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our 5.250% Senior Notes due 2029 (the “2029 Notes”) offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2029 Notes were issued pursuant to an indenture, dated as of March 23, 2021 (the “2029 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2029 Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029. Interest on the 2029 Notes is payable in cash on April 15th and October 15th of each year. The 2029 Notes are general unsecured obligations of the Company and are not guaranteed by our subsidiaries.The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in connection with our entry into the 2021 Credit Facility, as described above, and to redeem our 8.000% Senior Notes due 2026 (the “2026 Notes”).2026 NotesOn April 18, 2018, we consummated the issuance and sale of $400 million aggregate principal amount of our 2026 Notes offered pursuant to a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under Regulation S under the Securities Act. The 2026 Notes were issued pursuant to an indenture, dated as of April 18, 2018 (the “2026 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee. . On May 7, 2020, we consummated the issuance and sale of an additional $200 million aggregate principal amount of the 2026 Notes. The proceeds from the 2026 Notes were used to pay down the amount outstanding on the Company's then existing credit facilities and for general corporate purposes. All of the 2026 Notes were redeemed, on April 1, 2021, with proceeds from the sale of the 2020 Senior Notes.The 2029 Notes Indenture and the 2032 Notes Indenture contain several restrictive covenants including, but not limited to, limitations on the following: (i) the incurrence of additional indebtedness, (ii) restricted payments, (iii) the purchase, redemption or retirement of capital stock or subordinated debt, (iv) dividends and other payments affecting restricted subsidiaries, (v) transactions with affiliates, (vi) asset sales and mergers and consolidations, (vii) future subsidiary guarantees and (viii) incurring liens, (ix) entering into sale-leaseback transactions and (x) making certain investments, subject in each case to certain exceptions.The following table reflects required and actual financial ratios as of December 31, 2021 included as part of the affirmative covenants in our 2021 Credit Facility:Description of Required Covenant RatioCovenant Ratio RequirementActual RatioFixed Charge Coverage RatioGreater than or equal to 1.50:1.005.07:1.00Total Secured Debt to EBITDA RatioLess than or equal to 3.50:1.000.00:1.00Total Debt to EBITDA RatioLess than or equal to 5.00:1.002.96:1.00112 We intend to use the availability under our 2021 Credit Facility and cash on hand to pursue acquisitions of additional businesses, to fund distributions (if and to the extent approved by our board of directors) and to provide for other working capital needs. We believe that we currently have sufficient liquidity and capital resources, which include amounts available under our 2021 Revolving Credit Facility, to meet our existing obligations over the next twelve months.Interest ExpenseWe incurred interest expense totaling $58.8 million in the year ended December 31, 2021, as compared to $45.8 million in the year ended December 31, 2020 and $58.2 million for the year ended December 31, 2019. The components of interest expense on our outstanding debt are as follows (in thousands):Years ended December 31,202120202019Interest on credit facilities$ 2,669 $ 2,164 $ 21,996 Interest on Senior Notes 54,441 42,400 32,000 Unused fee on Revolving Credit Facility 1,598 1,386 1,851 Amortization of bond premium/ original issue discount (83) (222) — Unrealized (gain) loss on interest rate derivatives (1) — — 3,486 Other interest expense 227 294 772 Interest income (13) (253) (1,887) Interest expense, net$ 58,839 $ 45,769 $ 58,218 (1) On September 16, 2014, we purchased an interest rate swap (“Swap”) with a notional amount of $220 million effective April 1, 2016 through June 6, 2021. The agreement required us to pay interest on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. In connection with the repayment of the 2018 Term Loan in December 2019, the Company terminated the Swap with a payment of $4.9 million, the fair value of the Swap as of the date of settlement.Income TaxesOn August 3, 2021, the shareholders of CODI approved amendments to the Second Amended and Restated Trust Agreement of the Trust and the Fifth Amended and Restated Operating Agreement of the Company to allow the Company’s Board of Directors (the “Board”) to cause the Trust to elect to be treated as a corporation for U.S. federal income tax purposes (the “tax reclassification”) and, at its discretion in the future, cause the Trust to be converted to a corporation. Following the shareholder vote, the Board resolved to cause the Trust to elect to be treated as a corporation for U.S. federal income tax purposes. Such election became effective September 1, 2021, prior to which the Trust had been taxed as a partnership for U.S. federal income tax purposes since January 1, 2007. The Company was treated as a partnership prior to the Trust’s tax reclassification and it will continue to be treated as a partnership following the Trust’s tax reclassification.Each of the Company’s majority owned subsidiaries are subject to Federal, state and in some cases, foreign income taxes. We recorded an income tax provision of $18.3 million with an annual effective rate of 42.5% during the year ended December 31, 2021, an income tax provision of $10.2 million with an annual effective tax rate of 229.5% during the year ended December 31, 2020, and $9.9 million in income tax benefit with an effective tax rate of 16.5% during the year ended December 31, 2019. During the fourth quarter of 2021, the Company recorded a $12.1 million deferred tax benefit as a result of the accounting treatment of Advanced Circuits as held-for-sale at December 31, 2021.113 The components of our income tax (benefit) expense as a percentage of income from continuing operations before income taxes for the years ended December 31, 2021, 2020 and 2019 are as follows:Year ended December 31,202120202019United States Federal Statutory Rate 21.0 % 21.0 % (21.0) %State income taxes (net of Federal benefits) 4.8 34.8 3.2 Foreign income taxes 8.2 37.5 1.1 Expenses of Compass Group Diversified Holdings LLCrepresenting a pass through to shareholders (1) 29.0 137.0 20.9 Impairment expense — — 9.4 Impact of subsidiary employee stock options (0.3) 7.2 0.1 Non-deductible acquisition costs 0.6 11.5 — Non-recognition of various carryforwards at subsidiaries (2.3) (24.5) 2.0 Utilization of tax credits (5.2) 2.6 (2.6) Foreign-derived intangible income (FDII) and GILTI tax (2.4) (5.0) 2.4 Effect of classification of assets held for sale (16.8) — — Other 5.9 7.4 1.0 Effective income tax rate 42.5 % 229.5 % 16.5 %(1)The effective income tax rate for each of the years presented includes losses at the Company’s parent, which was taxed as a partnership through August 1, 2021. Effective September 1, 2021, the Company's parent is taxed as a corporation.Reconciliation of Non-GAAP Financial MeasuresFrom time to time we may publicly disclose certain “non-GAAP” financial measures in the course of our investor presentations, earnings releases, earnings conference calls or other venues. 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. GAAP or US GAAP refers to generally accepted accounting principles in the United States.Non-GAAP financial measures are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These measures are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.The tables below reconcile the most directly comparable GAAP financial measures to EBITDA, Adjusted EBITDA and Cash Flow Available for Distribution and Reinvestment (“CAD”).114 Reconciliation of Net income (loss) to EBITDA and Adjusted EBITDA
EBITDA – Earnings before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”) is calculated as net
income (loss) from continuing operations before interest expense, income tax expense (benefit), depreciation
expense and amortization expense. Amortization expenses consist of amortization of intangibles and debt charges,
including debt issuance costs, discounts, etc.
Adjusted EBITDA – Is calculated utilizing the same calculation as described above in arriving at EBITDA further
adjusted by: (i) non-controlling shareholder compensation, which generally consists of non-cash stock option
expense; (ii) successful acquisition costs, which consist of transaction costs (legal, accounting, due diligence, etc.)
incurred in connection with the successful acquisition of a business expensed during the period in compliance with
ASC 805; (iii) management fees, which reflect fees due quarterly to our Manager in connection with our MSA;
(iv) impairment charges, which reflect write downs to goodwill or other intangible assets; (v) other income or
expense, including gains or losses recorded in connection with the sale of fixed assets; (vi) changes in the fair value
of contingent consideration subsequent to initial purchase accounting, and (vii) integration service fees, which
reflect fees paid by newly acquired companies to the Manager for integration services performed during the first
year of ownership.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors and reflect important financial
measures as they exclude the effects of items which reflect the impact of long-term investment decisions, rather
than the performance of near term operations. When compared to net income (loss) these financial measures are
limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our
businesses or the non-cash charges associated with impairments. This presentation also allows investors to view
the performance of our businesses in a manner similar to the methods used by us and the management of our
businesses, provides additional insight into our operating results and provides a measure for evaluating targeted
businesses for acquisition.
We believe these measurements are also useful in measuring our ability to service debt and other payment
obligations. EBITDA and Adjusted EBITDA are not meant to be a substitute for GAAP, and may be different from or
otherwise inconsistent with non-GAAP financial measures used by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss), which we consider to be the
most comparable GAAP financial measure (in thousands):
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Adjusted EBITDAYear ended December 31, 2021Corporate5.11BOAErgobabyLuganoMarucci SportsVelocity OutdoorAltorArnoldSternoConsolidatedNet income (loss) from continuing operations$ (72,624) $ 20,152 $ 21,178 $ 5,079 $ 5,239 $ 10,232 $ 23,035 $ 7,871 $ 5,013 $ (316)$24,859 Adjusted for:Provision (benefit) for income taxes(12,119) 6,905 3,559 2,018 2,094 3,070 6,237 2,619 1,345 2,609 18,337 Interest expense, net58,639 16 — — 9 5 165 (1)6— 58,839 Intercompany interest(66,765) 11,868 8,581 1,960 2,450 3,110 7,461 7,558 5,455 18,322 — Loss on debt extinguishment33,305 — — — — — — — — — 33,305 Depreciation and amortization1,025 22,355 20,279 8,435 4,757 8,634 12,704 12,938 8,888 23,369 123,384 EBITDA(58,539) 61,296 53,597 17,492 14,549 25,051 49,602 30,985 20,707 43,984 258,724 Other (income) expense(284)125377 — 16 (119)2,573(323)8(1,189) 1,184 Non-controlling shareholder compensation— 2,428 2,194 1,693 190 1,101 1,020 1,035 38 1,242 10,941 Acquisition expenses39 — — — 1,827 971 — 444 310 — 3,591 Integration services fee— — 3,300 — 563 1,000 — — — — 4,863 Other1,132 273 — — — 1,000 (2,300) — — 995 1,100 Management fees41,505 1,000 1,000 500 188 500 500 750 500 500 46,943 Adjusted EBITDA$ (16,147) $ 65,122 $ 60,468 $ 19,685 $ 17,333 $ 29,504 $ 51,395 $ 32,891 $ 21,563 $ 45,532 $ 327,346 (1)Net income (loss) does not include income (loss) from discontinued operations for the year ended December 31, 2021.116 Adjusted EBITDAYear ended December 31, 2020Corporate5.11BOAErgobabyMarucciVelocity OutdoorAltorArnoldSternoConsolidatedNet income (loss) from continuing operations(1)$ (28,931) $ 12,356 $ (2,640) $ 725 $ (4,785) $ 11,161 $ 6,092 $ (3,539) $ 3,820 $ (5,741) Adjusted for:Provision (benefit) for income taxes— 1,808 (535)2,033(1,390) 3,560 2,554 (198)2,34310,175 Interest expense, net45,610 19 — — 7 131 — — 1 45,768 Intercompany interest(61,123) 14,085 2,043 2,405 1,843 8,915 7,084 5,730 19,018 — Depreciation and amortization838 21,483 5,589 8,199 10,203 12,781 12,722 6,805 22,510 101,130 EBITDA(43,606) 49,751 4,457 13,362 5,878 36,548 28,452 8,798 47,692 151,332 Other (income) expense— 1,420 39 — (42)931(38)9140 2,459 Non-controlling shareholder compensation— 2,489 469 1,156 634 1,549 1,028 (20)1,1668,471 Acquisition expenses— — 2,517 — 2,042 — 273 — — 4,832 Integration services fee— — 1,125 — 1,000 — — — — 2,125 Other324 — — 598 — — — — — 922 Management fees29,402 1,000 250 500 347 500 750 500 500 33,749 Adjusted EBITDA $ (13,880) $ 54,660 $ 8,857 $ 15,616 $ 9,859 $ 39,528 $ 30,465 $ 9,287 $ 49,498 $ 203,890 (1)Net income (loss) does not include income (loss) from discontinued operations for the year ended December 31, 2020.117 Adjusted EBITDAYear ended December 31, 2019Corporate5.11ErgobabyVelocity OutdoorAltorArnoldSterno ConsolidatedNet income (loss) from continuing operations(1)$ (59,914) $ 2,059 $ 4,793 $ (36,982) $ 2,883 $ 700 $ 16,447 $ (70,014) Adjusted for:Provision (benefit) for income taxes— 2,520 2,250 (2,782) 1,258 1,280 5,388 9,914 Interest expense, net57,980 (24)17242 — (1)458,218 Intercompany interest(69,649) 17,567 3,325 11,194 8,635 6,295 22,633 — Loss on debt extinguishment12,319 — — — — — — 12,319 Depreciation and amortization1,832 21,540 8,561 13,222 12,452 6,545 22,486 86,638 EBITDA(57,432) 43,662 18,946 (15,106) 25,228 14,819 66,958 97,075 (Gain) loss on sale of fixed assets91 (122)(11)952 1,247 1 (112)2,046Non-controlling shareholder compensation— 2,360 828 322 1,025 56 1,183 5,774 Impairment expense— — — 32,881 — — — 32,881 Integration services fee— — — — 281 — — 281 Adjustment to earnout provision— — — 2,022 — — — 2,022 (Gain) loss on foreign currency transaction and other10,193 — — — — — — 10,193 Management fees32,280 1,000 500 500 750 500 500 36,030 Adjusted EBITDA (2)$ (14,868) $ 46,900 $ 20,263 $ 21,571 $ 28,531 $ 15,376 $ 68,529 $ 186,302 (1)Net income (loss) does not include income (loss) from discontinued operations for the year ended December 31, 2019.118 Cash Flow Available for Distribution and Reinvestment The table below details cash receipts and payments that are not reflected on our income statement in order to provide an additional measure of management’s estimate of cash available for distribution ("CAD"). CAD is a non-GAAP measure that we believe provides additional information to our shareholders in order to enable them to evaluate our ability to make anticipated quarterly distributions. Because other entities do not necessarily calculate CAD the same way we do, our presentation of CAD may not be comparable to similarly titled measures provided by other entities. We believe that our historic and future CAD, together with our cash balances and access to cash via our debt facilities, will be sufficient to meet our anticipated distributions over the next twelve months. The table below reconciles CAD to net income and to cash flow provided by operating activities, which we consider to be the most directly comparable financial measure calculated and presented in accordance with GAAP.Year ended December 31,(in thousands)202120202019Net income $ 126,809 $ 27,197 $ 307,141 Adjustment to reconcile net income to cash provided by operating activities:Depreciation and amortization 123,574 102,752 100,462 Impairment expense — — 32,881 Gain on sale of businesses (72,770) (100) (331,013) Amortization of debt issuance costs and premium/ discount 2,896 2,232 3,773 Loss on debt extinguishment 33,305 — 12,319 Noncontrolling stockholders charges 11,454 8,995 7,993 Provision for reserves 6,268 2,809 3,556 Deferred taxes (10,468) (781) (12,876) Other 818 2,172 5,619 Changes in operating assets and liabilities (87,835) 3,349 (45,293) Net cash provided by operating activities 134,051 148,625 84,562 Plus:Unused fee on revolving credit facility 1,598 1,386 1,851 Successful acquisition expense 3,591 4,832 596 Integration services agreement (1) 4,863 2,125 281 Realized loss from foreign currency effect (2) — — 363 Earnout provision adjustment (3) — — 2,022 Loss on sale of Tilray common stock — — 10,193 Changes in operating assets and liabilities 87,835 — 45,293 Less:Changes in operating assets and liabilities — 3,349 — Payment on interest rate swap — — 675 Other (4) 2,769 2,211 3,318 Maintenance capital expenditures: (5)Compass Group Diversified Holdings LLC — — — 5.11 2,591 1,262 2,243 Advanced Circuits 671 594 4,790 Altor Solutions 2,801 2,287 1,746 Arnold 7,224 4,884 3,862 BOA 1,353 794 — Clean Earth (divested in June 2019) — — 3,495 Ergobaby 174 482 605 119 Liberty (divested in August 2021) 137 704 534 Lugano 323 — — Marucci Sports 4,972 849 — Sterno 2,680 1,377 1,831 Velocity 4,662 3,851 2,899 Preferred share distributions 24,181 23,678 15,125 Estimated cash flow available for distribution and reinvestment$ 177,400 $ 110,646 $ 104,038 Distribution paid in April 2021/2020/2019$ (23,364) $ (21,564) $ (21,564) Distribution paid in July 2021/2020/2019 (23,364) (23,364) (21,564) Distribution paid in October 2021/2020/2019 (23,742) (23,364) (21,564) Distribution paid in January 2022/2021/2020 (17,352) (23,364) (21,564) $ (87,822) $ (91,656) $ (86,256) (1)Represents fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership, payable quarterly.(2)Represents the foreign currency transaction gain or loss resulting from the Canadian dollar intercompany loans issued to Manitoba Harvest. (3)Earnout provision adjustment related to the change in estimate of contingent consideration that was recorded in the consolidated statement of operations.(4)Represents the effect on earnings of reserves for inventory and accounts receivable.(5)Represents maintenance capital expenditures that were funded from operating cash flow and excludes growth capital expenditures of approximately $14.1 million, $13.7 million and $16.4 million incurred during the years ended December 31, 2021, 2020 and 2019, respectively. On August 3, 2021, the Company's Board of Directors declared a special cash distribution on the Trust's common shares in order to offset a portion of the tax liability incurred by shareholders as a result of the tax election to cause the Trust to be treated as a corporation for U.S. federal income tax purposes. A cash distribution of $57.1 million was made on September 7, 2021 to Trust common shareholders as of the close of business on August 31, 2021. SeasonalityThe following table presents the net sales by quarter as a percentage of our annual net sales.Year Ended December 31,Quarter ended202120202019March 31st 22.2 % 21.1 % 23.2 %June 30th 23.4 % 21.1 % 23.2 %September 30th 25.2 % 26.8 % 27.0 %December 31st 29.1 % 31.0 % 26.6 %Earnings of certain of our operating segments are seasonal in nature due to various recurring events, holidays and seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and fourth quarter produce the highest net sales during our fiscal year. Related Party Transactions and Certain Transactions Involving our BusinessesWe have entered into related party transactions with our Manager, CGM including the following:•Management Services Agreement•LLC Agreement•Integration Services Agreements•Cost Reimbursement and Fees120 Management Services Agreement
We entered into the MSA with CGM effective May 16, 2006. Our Chief Executive Officer is a partner of CGM. The
MSA provides for, among other things, CGM to perform services for us in exchange for a management fee paid
quarterly and equal to 0.5% of our adjusted net assets. The management fee is required to be paid prior to the
payment of any distributions to shareholders. For the years ended December 31, 2021, 2020, and 2019, we
incurred $46.9 million, $33.7 million, and $36.0 million, respectively, in management fees to CGM.
Pursuant to the MSA, CGM is entitled to enter into off-setting management service agreements with each of our
businesses. The amount of the fee is negotiated between CGM and the operating management of each segment
and is based upon the value of the services to be provided. The fees paid directly to CGM by the segments offset on
a dollar for dollar basis the amount due to CGM by the Company under the MSA. CGM has entered into a waiver of
the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather
than the 2% called for under the MSA, which resulted in a lower management fee paid during 2021 than would have
normally been due. In the first quarter of 2021, the Company and CGM entered into a waiver agreement whereby
CGM agreed to waive the portion of the management fee related to the amount of the proceeds deposited with the
Trustee that was in excess of the amount payable related to the 2026 Notes at March 31, 2021. Additionally, CGM
has entered into a waiver of the MSA at December 31, 2021 to exclude the cash balances held at the LLC from the
calculation of the management fee.
In March 2020, as a proactive measure to provide the Company with additional cash liquidity in light of the
COVID-19 pandemic, the Company elected to draw down $200 million on our 2018 Revolving Credit Facility. The
Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the
management fee attributable to the cash balances held at the Company as of March 31, 2020. In addition, due to
the unprecedented uncertainty as a result of the COVID-19 pandemic, CGM agreed to waive 50% of the
management fee calculated at June 30, 2020 that was paid in July 2020. Further, for the third quarter of 2020, the
Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the
management fee attributable to the cash balances held at the Company as of September 30, 2020.
Concurrent with the June 2019 sale of Clean Earth (refer to Note D - Discontinued Operations) CGM agreed to
waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30,
2019 and continuing until the quarter during which the Company next borrowed under the 2018 Revolving Credit
Facility.
The Company paid CGM $0.4 million and $0.1 million, respectively, in the years ended December 31, 2021 and
2020, representing the management fee due from Arnold for the fourth quarter of 2020 and the first three quarters of
2021. At December 31, 2021, Arnold reimbursed the Company for the management fee paid on their behalf.
LLC Agreement
As distinguished from its provision of providing management services to us, pursuant to the amended MSA,
members of CGM are owners of 50.0% of the Allocation Interests in us through their ownership in Sostratus LLC.
The LLC agreement gives the holders of Allocation Interests the right to distributions pursuant to a profit allocation
formula upon the occurrence of a Sale Event or a Holding Event. The Allocation Interest Holders are entitled to
receive and as such can elect to receive the positive contribution-based profit allocation payment for each of the
business acquisitions during the 30-day period following the fifth anniversary of the date upon which we acquired a
controlling interest in that business (Holding Event) and upon the sale of the business (Sale Event). Holders
received $34.1 million, $9.1 million and $60.4 million in distributions related to Sale and Holding Events that
occurred during 2021, 2020 and 2019, respectively. Refer to "Note K - Stockholders' Equity" for a description of the
profit allocation payments.
Certain persons who are employees and partners of the Manager, including the Company’s Chief Executive Officer,
beneficially owned (through Sostratus LLC) 57.8% of the Allocation Interests at December 31, 2021, and 45% of the
Allocation Interests at December 31, 2020. Of the remaining 42.2% at December 31, 2021 and 55% at
December 31, 2020, 5.0% was held by CGI Diversified Holdings LP, 5.0% was held by the Chairman of the
Company’s Board of Directors, and the remaining Allocation Interests were held by the former founding partners of
the Manager.
Integration Services Agreements
Integration services represent fees paid by newly acquired companies to the Manager for integration services
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performed during the first year of ownership. Under the Integration Services Agreement ("ISA"), CGM provides
services for new platform acquisitions to, amongst other things, assist the management at the acquired entities in
establishing a corporate governance program, implement compliance and reporting requirements of the Sarbanes-
Oxley Act of 2002, as amended, and align the acquired entity's policies and procedures with our other subsidiaries.
Lugano, which was acquired in September 2021, entered into an ISA with CGM whereby Lugano will pay CGM an
integration services fee of $2.3 million quarterly over a twelve month period beginning in the quarter ended
December 31, 2021. BOA, which was acquired in October 2020, Marucci Sports, which was acquired in April 2020,
and Altor Solutions, which was acquired in 2018 each entered into an ISA with CGM. Each ISA was for the twelve
month period subsequent to the acquisition and was payable quarterly. BOA paid CGM a total of $4.4 million under
the ISA, beginning in the quarter ended December 31, 2020. Marucci paid CGM a total of $2.0 million in integration
services fees, beginning in the quarter ended September 30, 2020. Altor paid CGM a total of $2.3 million in
integration services fees, with $0.3 million paid in 2019.
During the years ended December 31, 2021, 2020 and 2019, CGM received $4.9 million, $2.1 million, and $0.3
million, respectively, in total integration service fees.
Cost Reimbursement and Fees
We reimbursed CGM approximately $5.4 million, $5.2 million, and $5.6 million, principally for occupancy and staffing
costs incurred by CGM on our behalf during the years ended December 31, 2021, 2020 and 2019, respectively.
The Company and its businesses have the following significant related party transactions:
5.11
Related Party Vendor Purchases - 5.11 purchases inventory from a vendor who is a related party to 5.11 through
one of the executive officers of 5.11 via the executive's 40% ownership interest in the vendor. During the years
ended December 31, 2021, 2020 and 2019, 5.11 purchased approximately $1.1 million, $2.7 million, and $4.4
million, respectively, in inventory from the vendor.
Recapitalization - In August 2021, the Company completed a recapitalization of 5.11 whereby the Company entered
into an amendment to the intercompany loan agreement with 5.11 (the "5.11 Loan Agreement"). The 5.11 Loan
Agreement was amended to provide for additional term loan borrowings of $55.0 million to fund a distribution to
shareholders. The Company owned 97.7% of the outstanding shares of 5.11 on the date of the distribution and
received $53.7 million. The remaining amount of the distribution went to minority shareholders.
BOA
Repurchase of Noncontrolling Interest - In September 2021, BOA repurchased shares of its issued and outstanding
common shares from its largest minority shareholder for a total payment of $48.0 million, which BOA financed by
borrowing under their intercompany credit facility with the Company (the "BOA Credit Agreement"). The BOA Credit
Agreement was amended to (i) provide for additional term loan borrowings of $38.0 million, and (ii) consent to the
repurchase of the shares from the minority shareholder. The transaction was accounted for in accordance with ASC
810 - Consolidation, whereby the carrying amount of the noncontrolling interest was adjusted to reflect the change
in the ownership interest in BOA that occurred as a result of the share repurchase. The difference between the fair
value of the consideration paid of $48.0 million and the amount by which the noncontrolling interest was adjusted of
$39.4 million was recognized in equity attributable to the Company.
Related Party Vendor Purchases - A contract manufacturer used by BOA as the primary supplier of molded injection
parts is a noncontrolling shareholder of BOA. During the year ended December 31, 2021 and for the period from
October 16, 2020 (date of acquisition) through December 31, 2020, BOA purchased approximately $48.3 million
and $6.7 million, respectively, in parts from this supplier.
Advanced Circuits
Recapitalization - In November 2020, the Company completed a recapitalization of ACI whereby the Company
entered into an amendment to the intercompany loan agreement with ACI (the "ACI Loan Agreement"). The ACI
Loan Agreement was amended to (i) provide for term loan borrowings of $48.8 million to fund the repurchase of
shares from an existing shareholder and to fund a distribution to shareholders, and ii) extend the maturity dates of
the term loans, and termination date of the revolving loan commitment. In connection with the recapitalization, ACI
repurchased 47,870 shares of ACI capital stock, and distributed $42.8 million to shareholders. The Company owned
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71.8% of the outstanding shares of ACI on the date of the distribution and received $30.7 million. The remaining
amount of the distribution was paid to minority shareholders.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with GAAP requires management to adopt accounting
policies and make estimates and judgments that affect the amounts reported in the financial statements and
accompanying notes. Such estimates and judgments may involve varying degrees of uncertainty. Actual results
could differ from these estimates under different assumptions and changes in other facts and circumstances, and
potentially could result in materially different results. Our critical accounting estimates are discussed below. For a
summary of our significant accounting policies, including those policies discussed below, refer to "Note B -
Summary of Significant Accounting Policies" to our consolidated financial statements.
Business Combinations
The acquisitions of our businesses are accounted for under the acquisition method of accounting. Accounting for
business combinations requires the use of estimates and assumptions in determining the fair value of assets
acquired and liabilities assumed in order to allocate the purchase price. The estimates of fair value of the assets
acquired and liabilities assumed are based upon assumptions believed to be reasonable using established valuation
methods, taking into consideration information supplied by the management of the acquired entities and other
relevant information. Determining the fair value of assets acquired and liabilities assumed requires management's
judgment and often involves the use of assumptions with respect to future cash inflows and outflows, discount rates,
royalty rates, customer attrition rates, asset lives and market multiples, among other items. The determination of fair
values requires significant judgment both by our management team and, when appropriate, valuations by
independent third-party appraisers. We amortize intangible assets, such as trademarks and customer relationships,
as well as property, plant and equipment, over their economic useful lives, unless those lives are indefinite. We
consider factors such as historical information, our plans for the asset and similar assets held by our previously
acquired businesses. The impact could result in either higher or lower amortization and/or depreciation expense.
Goodwill and Intangible Assets
Goodwill represents the excess amount of the purchase price over the fair value of the assets acquired. Our
goodwill and indefinite lived intangible assets are tested for impairment on an annual basis as of March 31st, and if
current events or circumstances require, on an interim basis. Goodwill is allocated to various reporting units, which
are generally an operating segment or one level below the operating segment. Each of our businesses represents a
reporting unit.
We use a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine
whether it is more-likely than-not that the fair value of a reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill impairment testing. The qualitative factors we
consider include, in part, the general macroeconomic environment, industry and market specific conditions for each
reporting unit, financial performance including actual versus planned results and results of relevant prior periods,
operating costs and cost impacts, as well as issues or events specific to the reporting unit. If qualitative factors are
not sufficient to determine that the fair value of a reporting unit is more likely than not to exceed its carrying value,
we will perform a quantitative test the reporting unit whereby we estimate the fair value of the reporting unit using an
income approach or market approach, or a weighting of the two methods. Under the income approach, we estimate
the fair value of our reporting unit based on the present value of future cash flows. Cash flow projections are based
on Management's estimate of revenue growth rates and operating margins and take into consideration industry and
market conditions as well as company specific economic factors. The discount rate used is based on the weighted
average cost of capital adjusted for the relevant risk associated with the business and the uncertainty associated
with the reporting unit's ability to execute on the projected cash flows. Under the market approach, we estimate fair
value based on market multiples of revenue and earnings derived from comparable public companies with operating
characteristics that are similar to the reporting unit. When market comparables are not meaningful or available, we
estimate the fair value of the reporting unit using only the income approach.
2021 Annual Impairment Testing - For our annual impairment testing at March 31, 2021, we performed a qualitative
assessment of our reporting units. The qualitative factors we consider include, in part, the general macroeconomic
environment, industry and market specific conditions for each reporting unit, financial performance including actual
versus planned results and results of relevant prior periods, operating costs and cost impacts, as well as issues or
events specific to the reporting unit. As a result of the current COVID-19 pandemic, we have considered how we
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expect COVID-19 to impact our future operating results and short and long term financial condition as part of our
qualitative assessment, including the effects on our end customers, potential short-term supply chain constraints,
and the continued restrictions imposed by government and regulatory authorities. The results of the qualitative
analysis indicated that it was more-likely-than-not that the fair value of each of our reporting units except Arnold
exceeded their carrying value. Based on our analysis, we determined that the Arnold operating segment required
quantitative testing because we could not conclude that the fair value of this reporting unit significantly exceeded the
carrying value based on qualitative factors alone.
We performed the quantitative tests of Arnold using an income approach to determine the fair value of the reporting
units. We do not believe that the market approach results in relevant data points for market multiples or data from
comparable companies since most of Arnold's competitors are privately held and do not publish data that can be
used in an income approach. In developing the prospective financial information used in the income approach, we
considered recent market conditions, taking into consideration the uncertainty associated with the COVID-19
pandemic and its economic fallout. The prospective financial information considers reporting unit specific facts and
circumstances and is our best estimate of operational results and cash flows for the Arnold reporting unit as of the
date of our impairment testing. The discount rate used in the income approach was 13.0%, and the results of the
quantitative impairment testing indicated that the fair value of the Arnold reporting unit exceeded the carrying value
by approximately 272%. The prospective financial information that is used to determine the fair values of the Arnold
reporting unit requires us to make assumptions regarding future operational results including revenue growth rates
and gross margins. If we do not achieve the forecasted revenue growth rates and gross margins, the results of the
quantitative testing could change, potentially leading to additional testing and impairment at the reporting unit that
was tested quantitatively.
2020 Annual Impairment Testing - For our annual impairment testing at March 31, 2020, we performed a qualitative
assessment of our reporting units. As part of our current year analysis, we have considered how we expect the
COVID-19 pandemic to impact our future operating results and short and long-term financial condition. In addition to
the typical qualitative factors we consider as part of the assessment, we went through a process with each of our
reporting units whereby we considered various scenarios for the remainder of the year, probability weighted for what
we consider the most likely outcome given existing facts and circumstances. This process included consideration of
the reporting unit's industry and customers, including customer liquidity, operational capacity given local government
restrictions imposed to prevent spread of the COVID-19 virus, supply chain constraints that may exist as a result of
the virus and ability of the subsidiary to reduce cash outflows. The results of the qualitative analysis indicated that it
was more-likely-than-not that the fair value of our 5.11, ACI, Arnold, Liberty and Sterno reporting units exceeded
their carrying value. Based on our analysis, we determined that our Ergobaby, Altor and Velocity operating
segments required quantitative testing because we could not conclude that the fair value of these reporting units
significantly exceeded the carrying value based on qualitative factors alone.
We performed the quantitative tests of Ergobaby, Altor and Velocity using an income approach to determine the fair
value of the reporting units. We were unable to use a market approach due to the current market conditions as a
result of the COVID-19 pandemic resulting in significant volatility and lack of available market comparables. In
developing the prospective financial information used in the income approach, we considered recent market
conditions, taking into consideration the uncertainty associated with the COVID-19 pandemic and its economic
fallout. The prospective financial information considers reporting unit specific facts and circumstances and is our
best estimate of operational results and cash flows for each reporting unit as of the date of our impairment testing.
For Ergobaby, the discount rate used in the income approach was 15.9% and the results of the quantitative
impairment testing indicated that the fair value of the Ergobaby reporting unit exceeded the carrying value by
14.0%. For Altor, the discount rate used in the income approach was 13.3%, and the results of the quantitative
impairment testing indicated that the fair value of the Altor reporting unit exceeded the carrying value by 3.8%. The
impairment test for Velocity used a discount rate of 12.8% in the income approach, and the results of the
quantitative impairment testing indicated that the fair value of the Velocity reporting unit exceeded the carrying value
by 16.4%. The prospective financial information that is used to determine the fair values of the reporting units
requires us to make assumptions regarding future operational results including revenue growth rates and gross
margins. If we do not achieve the forecasted revenue growth rates and gross margins, the results of the quantitative
testing could change, potentially leading to additional testing and impairment at the reporting units that were tested
quantitatively.
2019 Interim Impairment Testing - As a result of operating results below forecasts in the current period as well as a
re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods,
we determined that a triggering event had occurred at Velocity Outdoor in the third quarter of 2019 and performed
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an interim impairment test of goodwill as of September 30, 2019. The Company used an income approach for the
impairment test, whereby we estimate the fair value of the reporting unit based on the present value of future cash
flows. Cash flow projections are based on management's estimate of revenue growth rates and operating margins,
and take into consideration industry and market conditions as well as company specific economic factors. The
Company used a weighted average cost of capital of 12.2% in the income approach. The discount rate used was
based on the weighted average cost of capital adjusted for the relevant risk associated with business specific
characteristics and Velocity's ability to execute on the projected cash flows. Based on the results of the impairment
test, the fair value of Velocity did not exceed the carrying value, indicating that the goodwill at Velocity is impaired.
The difference between the carrying value and fair value of the Velocity business was $32.9 million, which the
Company has recorded as impairment expense in the accompanying consolidated statement of operations for the
year ended December 31, 2019.
Indefinite-lived intangible assets
We use a qualitative approach to test indefinite lived intangible assets for impairment by first assessing qualitative
factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is
impaired as a basis for determining whether it is necessary to perform quantitative impairment testing. Our
indefinite-lived intangible assets consist of trade names with a carrying value of approximately $57.0 million. The
results of the qualitative analysis of our other reporting unit's indefinite-lived intangible assets, which we completed
as of March 31, 2021, indicated that the fair value of the indefinite lived intangible assets exceeded their carrying
value.
Definite-Lived Intangible Assets
Long-lived intangible assets subject to amortization, including customer relationships, non-compete agreements,
permits and technology are amortized using the straight-line method over the estimated useful lives of the intangible
assets, which we determine based on the consideration of several factors including the period of time the asset is
expected to remain in service. We evaluate long-lived assets for potential impairment whenever events occur or
circumstances indicate that the carrying amount of the assets may not be recoverable. The carrying amount of a
long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset. If the carrying amount of a long-lived asset is not recoverable and is
greater than its fair value, the asset is impaired and an impairment loss must be recognized.
The determination of fair values and estimated useful lives requires significant judgment both by our management
team and by outside experts engaged to assist in this process. This judgment could result in either a higher or lower
value assigned to our reporting units and intangible assets. The impact could result in either higher or lower
amortization and/or the incurrence of an impairment charge.
Profit Allocation Interests
At the time of our Initial Public Offering, we issued Allocation Interests governed by our LLC agreement that entitle
the holders (the "Holders") to receive distributions pursuant to a profit allocation formula upon the occurrence of
certain events. The Holders are entitled to receive and as such can elect to receive the positive contribution based
profit allocation payment for each of the business acquisitions during the 30-day period following the fifth
anniversary of the date upon which we acquired a controlling interest in that business (a "Holding Event") and upon
the sale of that business (a "Sale Event").
Recent Accounting Pronouncements
Refer to "Note B - Summary of Significant Accounting Policies" to our consolidated financial statements for a
discussion of recent accounting pronouncements.
125
ITEM 7A. – Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
Borrowings under our 2021 Credit Facility are subject to variable interest rates and thus would expose us to interest
rate risk. As of December 31, 2021, we had no amounts outstanding under our 2021 Revolving Credit Facility.
Foreign Exchange Rate Sensitivity
We are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business at
certain of our subsidiaries, such as sales to third party customers, foreign plant operations, and purchases from
suppliers. We may also experience foreign currency exchange rate exposure as a result of the volatility and
uncertainty that may arise as a result of the United Kingdom's exit from the European Union.
Credit Risk
We are exposed to credit risk associated with cash equivalents, investments, and trade receivables. We do not
believe that our cash equivalents or investments present significant credit risks because the counterparties to the
instruments consist of major financial institutions and we manage the notional amount of contracts entered into with
any one counterparty. Our cash and cash equivalents at December 31, 2021 consists principally of (i) treasury
backed securities, (ii) insured prime money market funds, and (iii) cash balances in several non-interest bearing
checking accounts. Substantially all trade receivable balances of our businesses are unsecured. The concentration
of credit risk with respect to trade receivables is limited by the large number of customers in our customer base and
their dispersion across various industries and geographic areas. Although we have a large number of customers
who are dispersed across different industries and geographic areas, a prolonged economic downturn could increase
our exposure to credit risk on our trade receivables. We perform ongoing credit evaluations of our customers and
maintain an allowance for potential credit losses.
126
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial statement schedules referred to in the index contained on page
F-1 of this report are incorporated herein by reference.
127
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
128
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
(a) Management’s Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report.
Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that,
as of December 31, 2021, the Company’s disclosure controls and procedures were effective in recording,
processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act and in ensuring that information required to be disclosed
by the Company in such reports is accumulated and communicated to the Company’s management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussions regarding required
disclosure.
(b) Information with respect to Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our management assessed the
effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment,
our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control-Integrated Framework (2013 framework). Based on our assessment
under this framework, our management concluded that our internal control over financial reporting was effective as
of December 31, 2021.
The audited financial statements of the Company included in this annual report on Form 10-K include the results of
acquisitions from their respective dates of acquisition. Management's assessment of internal control over financial
reporting for the year ended December 31, 2021 does not include an assessment of Lugano Diamonds and Jewelry,
Inc., a majority owned subsidiary of the Company that was acquired during the year ended December 31, 2021. The
financial statements of Lugano Diamonds Inc. reflect total assets and net revenues constituting 11% and 3%,
respectively, of the related consolidated financial statement amounts as of and for the year ended December 31,
2021. Refer to "Note C - Acquisition of Businesses" for a description of the acquisition of Lugano Diamonds, Inc.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by
Grant Thornton LLP, an independent registered public accounting firm, as stated in their report that is included
herein.
(c) Information with respect to Report of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting is contained on page F-2 of this Annual Report on Form 10-K and is incorporated herein by
reference.
(d) Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter to which this Annual
Report on Form 10-K relates that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
NONE
129
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our executive officers is incorporated herein by reference to information included in the
Proxy Statement for our 2022 Annual Meeting of Shareholders.
Information with respect to our directors and the nomination process is incorporated herein by reference to
information included in the Proxy Statement for our 2022 Annual Meeting of Shareholders.
Information regarding our corporate governance, including our audit committee and code of ethics, is incorporated
herein by reference to information included in the Proxy Statement for our 2022 Annual Meeting of Shareholders.
Information regarding compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to
information included in the Proxy Statement for our 2022 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by reference to information included in
the Proxy Statement for our 2022 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners and management is incorporated herein
by reference to information included in the Proxy Statement for our 2022 Annual Meeting of Shareholders.
Securities Authorized for Issuance under Equity Compensation Plans
There are no securities currently authorized for issuance under an equity compensation plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information with respect to such contractual relationships and independence is incorporated herein by reference to
the information in the Proxy Statement for our 2022 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to principal accountant fees and services and pre-approval policies are incorporated herein
by reference to information included in the Proxy Statement for our 2022 Annual Meeting of Shareholders.
130
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
1. Financial Statements
For the Registrant, see “Index to Consolidated Financial Statements and Supplemental Financial
Data” set forth on page F-1.
2. Financial Statement Schedule
For the Registrant, see “Index to Consolidated Financial Statements and Supplemental Financial
Data” set forth on page S-1.
3. Exhibits
For the Registrant, see “Index to Exhibits” set forth below.
131
INDEX TO EXHIBITS
Exhibit
Number
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
Description
Stock and Note Purchase Agreement dated as of July 31, 2006, among Compass Group Diversified Holdings LLC,
Compass Group Investments, Inc. and Compass Medical Mattress Partners, LP (incorporated by reference to Exhibit 2.1
of the Form 8-K filed on August 1, 2006 (File No. 000-51937)).
Stock Purchase Agreement dated June 24, 2008, among Compass Group Diversified Holdings LLC and the other
shareholders party thereto, Compass Group Diversified Holdings LLC, as Sellers’ Representative, Aeroglide Holdings,
Inc. and Bühler AG (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on June 26, 2008 (File No.
000-51937)).
Stock Purchase Agreement, dated October 17, 2011, by and among Recruit Co., LTD. and RGF Staffing USA, Inc., as
Buyers, the shareholders of Staffmark Holdings, Inc., as Sellers, Staffmark Holdings, Inc. and Compass Group
Diversified Holdings LLC as Seller Representative (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on
October 18, 2011 (File No. 001-34927)).
Stock Purchase Agreement dated May 1, 2012, among Candlelight Investment Holdings, Inc., Halo Holding Corporation,
Halo Lee Wayne, LLC and each of the holders of equity interests of Halo Lee Wayne, LLC listed on Exhibit A thereto
(incorporated by reference to Exhibit 2.1 of the Form 8-K filed on May 2, 2012(File No. 001-34927)).
Stock Purchase Agreement, dated May 8, 2019, by and among (i) Calrissian Holdings, LLC; (ii) CEHI Acquisition
Corporation; (iii) Compass Group Diversified Holdings LLC; (iv) each Stockholder and Optionholder of the Company; and
(v) solely for the purposes of Section 9(r) thereof, Harsco Corporation (incorporated by reference to Exhibit 2.1 of the
Form 8-K filed on May 9, 2019 (File No. 001-34927)).
Stock Purchase Agreement by and among Compass Group Diversified Holdings LLC, Compass Group Investments,
Inc., Compass CS Partners, L.P., Compass CS II Partners, L.P., Compass Crosman Partners, L.P., Compass Advanced
Partners, L.P. and Compass Silvue Partners, LP (incorporated by reference to Exhibit 2.1 of the Form S-1 filed on April
13, 2006 (File No. 333-130326)).
Stock Purchase Agreement, dated July 16, 2021, by and among (i) Liberty Safe Holding Corporation; (ii) Independence
Buyer, Inc.; (iii); Compass Group Diversified Holdings LLC, as the Sellers Representative; and (iv) each Stockholder and
Optionholder of Liberty Safe Holding Corporation (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on July
19, 2021 (File No. 001-34927)).
Amendment to Stock Purchase Agreement, dated August 3, 2021, by and among Independence Buyer, Inc. and
Compass Group Diversified Holdings LLC, as the Sellers Representative (incorporated by reference to Exhibit 2.1 of the
Form 8-K filed on August 3, 2021 (File No. 001-34927 and Accession No. 0001345126-21-000031)).
Agreement and Plan of Merger, dated October 13, 2021, by and among (i) Tempo Automation, Inc.; (ii) Aspen Acquisition
Sub, Inc.; (iii) Compass AC Holdings, Inc.; and (iv) Compass Group Diversified Holdings LLC, as the Sellers
Representative (incorporated by reference to Exhibit 2.1 of the Form 8-K filed on October 14, 2021 (File No.
001-34927)).
Certificate of Trust of Compass Diversified Trust (incorporated by reference to Exhibit 3.1 of the Form S-1 filed on
December 14, 2005 (File No. 333-130326)).
Certificate of Amendment to Certificate of Trust of Compass Diversified Trust (incorporated by reference to Exhibit 3.1 of
the Form 8-K filed on September 13, 2007 (File No. 000-51937)).
Certificate of Formation of Compass Group Diversified Holdings LLC (incorporated by reference to Exhibit 3.3 of the
Form S-1 filed on December 14, 2005 (File No. 333-130326)).
Amended and Restated Trust Agreement of Compass Diversified Trust (incorporated by reference to Exhibit 3.5 of the
Amendment No. 4 to the Form S-1 filed on April 26, 2006 (File No. 333-130326)).
Amendment No. 1 to the Amended and Restated Trust Agreement, dated as of April 25, 2006, of Compass Diversified
Trust among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware
Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit 4.1 of the Form 8-K filed on
May 29, 2007 (File No. 000-51937)).
Second Amendment to the Amended and Restated Trust Agreement, dated as of April 25, 2006, as amended on May 23,
2007, of Compass Diversified Trust among Compass Group Diversified Holdings LLC, as Sponsor, The Bank of New
York (Delaware), as Delaware Trustee, and the Regular Trustees named therein (incorporated by reference to Exhibit 3.2
of the Form 8-K filed on September 13, 2007 (File No. 000-51937)).
Third Amendment to the Amended and Restated Trust Agreement dated as of April 25, 2006, as amended on May 25,
2007 and September 14, 2007, of Compass Diversified Holdings among Compass Group Diversified Holdings LLC, as
Sponsor, The Bank of New York (Delaware), as Delaware Trustee, and the Regular Trustees named therein
(incorporated by reference to Exhibit 4.1 of the Form 8-K filed on December 21, 2007 (File No. 000-51937)).
Fourth Amendment dated as of November 1, 2010 to the Amended and Restated Trust Agreement, as amended effective
November 1, 2010, of Compass Diversified Holdings, originally effective as of April 25, 2006, by and among Compass
Group Diversified Holdings LLC, as Sponsor, The Bank of New York (Delaware), as Delaware Trustee, and the Regular
Trustees named therein (incorporated by reference to Exhibit 3.1 of the Form 10-Q filed on November 8, 2010 (File No.
001-34927)).
Second Amended and Restated Trust Agreement of the Trust (incorporated by reference to Exhibit 3.1 of the Form 8-K
filed on December 7, 2016 (File No. 001-34927)).
132
3.10
3.11
3.12
3.13
3.14
3.15
3.16
3.17
3.18
3.19
3.20
3.21
3.22
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Third Amended and Restated Trust Agreement of the Trust (incorporated by reference to Exhibit 3.1 of the Form 8-K filed
on August 4, 2021 (File No. 001-34927)).
Second Amended and Restated Operating Agreement of Compass Group Diversified Holdings, LLC dated January 9,
2007 (incorporated by reference to Exhibit 10.2 of the Form 8-K filed on January 10, 2007 (File No. 000-51937)).
Third Amended and Restated Operating Agreement of Compass Group Diversified Holdings LLC dated November 1,
2010 (incorporated by reference to Exhibit 3.2 of the Form 10-Q filed on November 8, 2010 (File No. 001-34927)).
Fourth Amended and Restated Operating Agreement of Compass Group Diversified Holdings LLC, dated January 1,
2012 (incorporated by reference to Exhibit 3.1 of the Form 10-Q filed on May 7, 2013 (File No. 001-34927)).
Fifth Amended and Restated Operating Agreement of the Company (incorporated by reference to Exhibit 3.2 of the Form
8-K filed on December 7, 2016 (File No. 001-34927)).
Sixth Amended and Restated Operating Agreement of the Company (incorporated by reference to Exhibit 3.2 of the
Form 8-K filed on August 4, 2021 (File No. 001-34927)).
First Amendment to the Sixth Amended and Restated Operating Agreement of the Company (incorporated by reference
to Exhibit 3.1 of the Form 8-K filed on February 14, 2022 (File No. 001-34927)).
Amended and Restated Share Designation of Compass Diversified Holdings with respect to Series A Preferred Shares
(incorporated by reference to Exhibit 3.3 of the Form 8-K filed on August 4, 2021 (File No. 001-34927)).
Compass Group Diversified Holdings LLC Trust Interest Designation of Series A Trust Preferred Interests (incorporated
by reference to Exhibit 3.2 of the Form 8-K filed on June 28, 2017 (File No. 001-34927)).
Amended and Restated Share Designation of Compass Diversified Holdings with respect to Series B Preferred Shares
(incorporated by reference to Exhibit 3.4 of the Form 8-K filed on August 4, 2021 (File No. 001-34927)).
Share Designation of Compass Diversified Holdings with respect to Series B Preferred Shares (incorporated by
reference to Exhibit 3.1 of the Form 8-K filed on March 13, 2018 (File No. 001-34927)).
Amended and Restated Share Designation of Compass Diversified Holdings with respect to Series C Preferred Shares
(incorporated by reference to Exhibit 3.5 of the Form 8-K filed on August 4, 2021 (File No. 001-34927)).
Trust Interest Designation of Compass Group Diversified Holdings LLC with respect to Series C Trust Preferred Interests
(incorporated by reference to Exhibit 3.2 of the Form 8-K filed on November 20, 2019 (File No. 001-34927)).
Specimen Certificate evidencing a share of trust of Compass Diversified Holdings (incorporated by reference to Exhibit A
of Exhibit 3.1 of the Form 8-K filed on August 4, 2021 (File No. 001-34927))
Specimen LLC Interest Certificate evidencing an interest of Compass Group Diversified Holdings LLC (incorporated by
reference to Exhibit A of Exhibit 3.2 of the Form 8-K filed on August 4, 2021 (File No. 001-34927))
Form of 7.250% Series A Preferred Share Certificate (incorporated by reference to Appendix A of Exhibit 3.3 of the Form
8-K filed on August 4, 2021 (File No. 001-34927)).
Form of 7.875% Series B Fixed-to-Floating Rate Cumulative Preferred Share Certificate (incorporated by reference to
Appendix A of Exhibit 3.4 of the Form 8-K filed on August 4, 2021 (File No. 001-34927)).
Form of 7.875% Series C Cumulative Preferred Share Certificate (incorporated by reference to Appendix A of Exhibit 3.5
of the Form 8-K filed on August 4, 2021 (File No. 001-34927)).
Indenture between Compass Group Diversified Holdings LLC and U.S. Bank National Association, dated as of March 23,
2021 (incorporated by reference to Exhibit 4.1 of the Form 8-K filed on March 23, 2021 (File No. 000-34927)).
Indenture between Compass Group Diversified Holdings LLC and U.S. Bank National Association, dated as of
November 17, 2021 (incorporated by reference to Exhibit 4.1 of the Form 8-K filed on November 17, 2021 (File No.
001-34927)).
Description of Securities.
Form of Registration Rights Agreement by and among Compass Group Diversified Holdings LLC, Compass Diversified
Trust and Certain Shareholders (incorporated by reference to Exhibit 10.3 of the Amendment No. 5 to the Form S-1 filed
on May 5, 2006 (File No. 333-130326)).
Form of Supplemental Put Agreement by and between Compass Group Management LLC and Compass Group
Diversified Holdings LLC (incorporated by reference to Exhibit 10.4 of the Amendment No. 4 to the Form S-1 filed on
April 26, 2006 (File No. 333-130326)).
Form of Share Purchase Agreement by and between Compass Group Diversified Holdings LLC, Compass Diversified
Trust and CGI Diversified Holdings, LP (incorporated by reference to Exhibit 10.6 of the Amendment No. 5 to the Form
S-1 filed on May 5, 2006 (File No. 333-130326)).
Form of Share Purchase Agreement by and between Compass Group Diversified Holdings LLC, Compass Diversified
Trust and Pharos I LLC (incorporated by reference to Exhibit 10.7 of the Amendment No. 5 to the Form S-1 filed on
May 5, 2006 (File No. 333-130326)).
Registration Rights Agreement by and among Compass Group Diversified Holdings LLC, Compass Diversified Trust and
CGI Diversified Holdings, LP, dated as of April 3, 2007 (incorporated by reference to Exhibit 10.3 of the Amendment No.
1 to the Form S-1 filed on April 20, 2007 (File No. 333-141856)).
Share Purchase Agreement by and between Compass Group Diversified Holdings LLC, Compass Diversified Trust and
CGI Diversified Holdings, LP, dated as of April 3, 2007 (incorporated by reference to Exhibit 10.16 of the Amendment No.
1 to the Form S-1 filed on April 20, 2007 (File No. 333-141856)).
Subscription Agreement dated August 24, 2011, by and among Compass Group Diversified Holdings LLC, Compass
Diversified Holdings and CGI Magyar Holdings, LLC (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on
August 25, 2011(File No. 001-34927)).
Registration Rights Agreement dated August 24, 2011, by and among Compass Group Diversified Holdings LLC,
Compass Diversified Holdings and CGI Magyar Holdings, LLC (incorporated by reference to Exhibit 10.2 of the Form 8-K
filed on August 25, 2011(File No. 001-34927)).
133
10.9
10.10†
10.11
21.1*
23.1*
24.1*
31.1*
31.2*
32.1*+
32.2*+
99.1
99.2
99.3
99.4
99.5
99.6
99.7
99.8
99.9
99.10
99.11
99.12
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
Sixth Amended and Restated Management Service Agreement by and between Compass Group Diversified Holdings
LLC, and Compass Group Management LLC, dated as of September 30, 2014 and originally effective as of May 16,
2006 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on October 7, 2014 (File No. 001-34927)).
Employment Agreement dated July 11, 2013, between Compass Group Management LLC and Ryan J. Faulkingham
(incorporated by reference to Exhibit 10.1 of the Form 8-K filed on July 11, 2013 (File No. 001-34927)).
Second Amended and Restated Credit Agreement among Compass Group Diversified Holdings LLC, the financial
institutions party thereto and Bank of America, N.A., dated as of March 23, 2021 (incorporated by reference to Exhibit
10.1 of the Form 8-K filed on March 23, 2021 (File No. 001-34927).
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm with respect to the Registrant's consolidated financial
statements
Power of Attorney (included on the signature page of this Annual Report on Form 10-K)
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Registrant
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Registrant
Section 1350 Certification of Chief Executive Officer of Registrant
Section 1350 Certification of Chief Financial Officer of Registrant
Stock Purchase Agreement dated March 31, 2010 by and among Gable 5, Inc., Liberty Safe and Security Products, LLC
and Liberty Safe Holding Corporation (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on April 1, 2010
(File No. 000-51937)).
Stock Purchase Agreement dated September 16, 2010, by and among ERGO Baby Intermediate Holding Corporation,
The ERGO Baby Carrier, Inc., Karin A. Frost, in her individual capacity and as Trustee of the Revocable Trust of Karin A.
Frost dated February 22, 2008 and as Trustee of the Karin A. Frost 2009 Qualified Annuity Trust u/a/d 12/21/2009
(incorporated by reference to Exhibit 99.1 of the Form 8-K filed on September 17, 2010 (File No. 000-51937)).
Stock Purchase Agreement dated as of March 5, 2012, by and among Arnold Magnetic Technologies Holdings
Corporation, Arnold Magnetic Technologies, LLC and AMT Acquisition Corp. (incorporated by reference to Exhibit 99.1 of
the Form 8-K filed on March 6, 2012 (File No. 001-34927)).
Membership Interest Purchase Agreement dated as of October 10, 2014, by and among Candle Lamp Holdings, LLC,
Candle Lamp Company, LLC and Sternocandlelamp Holdings, Inc. (incorporated by reference to Exhibit 99.1 of the
Form 8-K filed October 14, 2014 (File No. 001-34927)).
Agreement and Plan of Merger, dated as of July 29, 2016, by and among 5.11 ABR Corp., 5.11 ABR Merger Corp., 5.11
Acquisition Corp., TA Associates Management, L.P., as the agent and attorney in fact of the holders of stock and options
in 5.11 Acquisition Corp. (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on August 1, 2016 (File No.
001-34927)).
Equity Purchase Agreement, dated June 2, 2017, by and among Bullseye Holding Company LLC, Bullseye Acquisition
Corporation, CBCP Acquisition Corp. and Wellspring Capital Partners IV, L.P. (incorporated by reference to Exhibit 99.1
of the Form 8-K filed on June 5, 2017 (File No. 001-34927)).
Stock Purchase Agreement, dated January 18, 2018, between Warren F. Florkiewicz and FFI Compass, Inc.
(incorporated by reference to Exhibit 99.1 of the Form 8-K filed on January 18, 2018 (File No. 001-34927)).
Arrangement Agreement, dated February 19, 2019, by and among FHF Holdings Ltd.; 1197879 B.C. Ltd.; Tilray, Inc.;
Compass Group Diversified Holdings LLC and each Shareholder that is, or is made pursuant to the Plan of Arrangement,
a party thereto (incorporated by reference to Exhibit 99.1 of the Form 8-K filed on February 20, 2019 (File No.
001-34927)).
Agreement and Plan of Merger, dated as of March 6, 2020, among Marucci Sports, LLC, Wheelhouse Holdings, Inc.,
Wheelhouse Holdings Merger Sub LLC and Wheelhouse 2020 LLC (incorporated by reference to Exhibit 99.1 of the
Form 8-K filed on March 9, 2020 (File No. 001-34927))
Agreement and Plan of Merger, among Reel Holding Corp., BOA Parent Inc., BOA Merger Sub Inc. and Shareholder
Representative Services LLC (incorporated by reference to Exhibit 99.3 of the Form 8-K filed on September 22, 2020
(File No. 001-34927))
First Amendment to Agreement and Plan of Merger, dated October 16, 2020, among Reel Holding Corp., BOA Parent
Inc., BOA Merger Sub Inc. and Shareholder Representative Services LLC (incorporated by reference to Exhibit 99.2 of
the Form 8-K filed on October 19, 2020 (File No. 001-34927))
Stock Purchase Agreement, dated September 3, 2021, between Lugano Buyer Inc., Mordechai Haim Ferder, as trustee
of The Haim Family Trust dated 2/24/2009, Edit Fintzi Ferder, as trustee of The RF 2021 Irrevocable Trust dated
8/30/2021, Mordechai Haim Ferder, as trustee of The TF 2021 Irrevocable Trust dated 8/30/2021, Simba IL Holdings,
LLC and Mordechai Haim Ferder in his individual capacity and as initial representative of the Sellers (incorporated by
reference to Exhibit 99.2 of the Form 8-K filed on September 7, 2021 (File No. 001-34927 and Accession No.
0001345126-21-000039)).
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL
tags are embedded within the Inline XBRL document.
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
134
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document104Cover page formatted as Inline XBRL and contained in Exhibit 101*Filed or furnished herewith.†Denotes management contracts and compensatory plans or arrangements.+ In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.ITEM 16. FORM 10-K SUMMARYNONE135 SIGNATUREPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.COMPASS GROUP DIVERSIFIED HOLDINGS LLCDate: February 24, 2022By:/s/ Elias J. SaboElias J. SaboChief Executive OfficerKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Elias J. Sabo and Ryan J. Faulkingham, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and either of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.SignatureTitleDate/s/ Elias J. SaboChief Executive OfficerFebruary 24, 2022Elias J. Sabo(Principal Executive Officer)and Director/s/ Ryan J. FaulkinghamChief Financial OfficerFebruary 24, 2022Ryan J. Faulkingham(Principal Financial and Accounting Officer)/s/ C. Sean DayDirectorFebruary 24, 2022C. Sean Day/s/ Harold S. EdwardsDirectorFebruary 24, 2022Harold S. Edwards/s/ Gordon BurnsDirectorFebruary 24, 2022Gordon Burns/s/ James J. BottiglieriDirectorFebruary 24, 2022James J. Bottiglieri/s/ Sarah G. McCoyDirectorFebruary 24, 2022Sarah G. McCoy/s/ Larry L. EnterlineDirectorFebruary 24, 2022Larry L. Enterline/s/ Alexander S. BhathalDirectorFebruary 24, 2022Alexander S. Bhathal136 SIGNATUREPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.COMPASS DIVERSIFIED HOLDINGSDate: February 24, 2022By:/s/ Ryan J. FaulkinghamRyan J. FaulkinghamRegular Trustee137 [This page intentionally left blank]
COMPASS DIVERSIFIED HOLDINGSINDEX TO CONSOLIDATED FINANCIAL STATEMENTSAND SUPPLEMENTAL FINANCIAL DATAPageHistorical Financial Statements:Report of Independent Registered Public Accounting Firm on Internal Control Over Financial ReportingF-2Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248)F-3Consolidated Balance SheetsF-5Consolidated Statements of Operations F-7Consolidated Statements of Comprehensive IncomeF-8Consolidated Statements of Stockholders’ Equity F-9Consolidated Statements of Cash FlowsF-11Notes to Consolidated Financial StatementsF-13Supplemental Financial Data:The following supplementary financial data of the registrant and its subsidiaries required to be included in Item 15(a)(2) of Form 10-K are listed below:Schedule II – Valuation and Qualifying AccountsS-1All other schedules not listed above have been omitted as not applicable or because the required information is included in the Consolidated Financial Statements or in the notes thereto.F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Compass Diversified Holdings
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Compass Diversified Holdings (a Delaware trust) and
subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in the 2013 Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31,
2021, and our report dated February 24, 2022 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of
Management on Internal Control Over Financial Reporting (“Management’s Report”). Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control
over financial reporting of Lugano Diamonds & Jewelry Inc. (“Lugano”), a majority-owned subsidiary, whose financial
statements reflect total assets and revenue constituting 11% and 3%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31, 2021. As indicated in Management’s Report, Lugano was
acquired during 2021. Management’s assertion on the effectiveness of the Company’s internal control over financial
reporting excluded internal control over financial reporting of Lugano.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Grant Thornton LLP
New York, New York
February 24, 2022
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Compass Diversified Holdings
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Compass Diversified Holdings (a Delaware
trust) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of
operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2021, and the related notes and financial statement schedule included under Item 15(a)
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on
criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”), and our report dated February 24, 2022 expressed an
unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Acquisition of Lugano Diamonds & Jewelry, Inc. (“Lugano”) – Fair Value of Intangible Assets Acquired
As described further in Note C to the financial statements, the Company completed the acquisition of Lugano on
September 3, 2021 for consideration of $265.1 million. The identifiable intangible assets acquired include a
tradename and customer relationships, which have been recorded by management at their preliminary fair values of
$49.5 million and $33.4 million, respectively. We identified the preliminary valuation of the intangible assets acquired
in the Lugano acquisition as a critical audit matter.
The principal considerations for our determination that the preliminary valuation of the acquired tradename and
customer relationships is a critical audit matter are that the determination of the preliminary fair values of such
assets required management to make significant estimates and assumptions related to forecasted revenues and
operating margins as well as the discount rates used. This required a high degree of auditor judgement and an
F-3
increased extent of effort, including professionals with specialized skill and knowledge, in auditing these
assumptions made by management.
Our audit procedures related to the preliminary valuation of the acquired tradename and customer relationships
included the following procedures, among others:
• We tested the design and operating effectiveness of controls relating to the determination of preliminary fair
values of the tradename and customer relationships, including controls over the development of
assumptions related to revenue growth rates, operating margins and discount rates, as well as the controls
around the appropriateness of the valuation models used.
• We evaluated the valuation methodologies and discount rates utilized by management with the assistance
of our valuation professionals with specialized skill and knowledge.
• We tested the forecasted revenues and operating margins by assessing the reasonableness of
management’s forecasts compared to historical results and forecasted market and industry trends.
Election to be Taxed as a Corporation
As described further in Note B and Note L to the financial statements, effective September 1, 2021, Compass
Diversified Holdings (the “Trust”) elected to be treated as a corporation for U.S. federal income tax purposes (the
“Election”), which resulted in a change in the tax reporting for the Trust and its shareholders. We identified the
Trust’s election to be taxed as a corporation for U.S. federal income tax purposes as a critical audit matter.
The principal consideration for our determination that the Trust’s election to be taxed as a corporation for U.S.
federal income tax purposes is a critical audit matter is that auditing the Election required a greater level of effort,
including the involvement of our tax professionals, to evaluate the application of the Internal Revenue Code
applicable to the transaction and the resulting tax accounting impacts to the Trust and its shareholders.
Our audit procedures related to the Election included the following procedures, among others:
• We tested the design and operating effectiveness of controls relating to management’s review of the
accounting impacts of the Election.
• With assistance from our tax professionals with specialized skill and knowledge we tested the formulaic
accuracy of the mathematical model used by management and its third-party specialist to compute book to
tax basis differences resulting from the Election in order to determine whether such calculations were made
in accordance with relevant tax laws and regulations and the resulting tax accounting impacts.
/s/ Grant Thornton LLP
We have served as the Company’s auditor since 2005.
New York, New York
February 24, 2022
F-4
(in thousands)December 31,2021December 31,2020AssetsCurrent assets:Cash and cash equivalents$ 157,125 $ 60,023 Accounts receivable, net 268,262 206,728 Inventories 562,084 350,594 Prepaid expenses and other current assets 56,575 40,381 Current assets held for sale 99,423 17,136 Current assets of discontinued operations — 33,505 Total current assets 1,143,469 708,367 Property, plant and equipment, net 178,393 153,653 Goodwill 815,405 666,507 Intangible assets, net 872,677 834,082 Other non-current assets 134,317 97,309 Non-current assets held for sale — 84,728 Non-current assets of discontinued operations — 53,872 Total assets$ 3,144,261 $ 2,598,518 COMPASS DIVERSIFIED HOLDINGSCONSOLIDATED BALANCE SHEETSF-5 Liabilities and stockholders’ equityCurrent liabilities:Accounts payable$ 120,405 $ 91,701 Accrued expenses 174,801 134,218 Deferred revenue 12,802 7,955 Due to related parties (refer to Note Q) 11,705 10,012 Other current liabilities 32,688 26,426 Current liabilities held for sale 29,127 9,169 Current liabilities of discontinued operations — 15,230 Total current liabilities 381,528 294,711 Deferred income taxes 84,344 67,836 Long-term debt 1,284,826 899,460 Other non-current liabilities 109,033 83,693 Non-current liabilities held for sale — 21,535 Non-current liabilities of discontinued operations — 11,135 Total liabilities 1,859,731 1,378,370 Commitments and contingencies (refer to Note P)Stockholders’ equityTrust preferred shares, 50,000 authorized; 12,600 shares issued and outstanding at December 31, 2021 and December 31, 2020Series A preferred shares, no par value, 4,000 shares issued and outstanding at December 31, 2021 and December 31, 2020 96,417 96,417 Series B preferred shares, no par value, 4,000 shares issued and outstanding at December 31, 2021 and December 31, 2020 96,504 96,504 Series C preferred shares, no par value, 4,600 shares issued and outstanding at December 31, 2021 and December 31, 2020 110,997 110,997 Trust common shares, no par value, 500,000 authorized; 68,738 shares issued and outstanding at December 31, 2021 and 64,900 shares issued and outstanding at December 31, 2020 1,123,193 1,008,564 Accumulated other comprehensive loss (1,028) (1,456) Accumulated deficit (314,267) (211,002) Total stockholders’ equity attributable to Holdings 1,111,816 1,100,024 Noncontrolling interest 175,328 123,463 Noncontrolling interest held for sale (2,614) (7,175) Noncontrolling interest of discontinued operations — 3,836 Total stockholders’ equity 1,284,530 1,220,148 Total liabilities and stockholders’ equity$ 3,144,261 $ 2,598,518 COMPASS DIVERSIFIED HOLDINGSCONSOLIDATED BALANCE SHEETSSee notes to consolidated financial statements.F-6 COMPASS DIVERSIFIED HOLDINGSCONSOLIDATED STATEMENTS OF OPERATIONSYear ended December 31,(in thousands, except per share data)202120202019Net revenues$ 1,841,668 $ 1,359,567 $ 1,263,298 Cost of revenues 1,115,711 864,602 806,366 Gross profit 725,957 494,965 456,932 Operating expenses:Selling, general and administrative expense 459,204 344,418 308,402 Management fees 46,943 33,749 36,030 Amortization expense 80,307 61,682 53,629 Impairment expense — — 32,881 Operating income 139,503 55,116 25,990 Other income (expense):Interest expense, net (58,839) (45,769) (58,218) Amortization of debt issuance costs (2,979) (2,454) (3,314) Loss on debt extinguishment (33,305) — (12,319) Loss on sale of securities (refer to Note D) — — (10,193) Other income (expense), net (1,184) (2,459) (2,046) Income (loss) from continuing operations before income taxes 43,196 4,434 (60,100) Provision for income taxes 18,337 10,175 9,914 Income (loss) from continuing operations 24,859 (5,741) (70,014) Income from discontinued operations, net of income tax 29,180 32,838 46,142 Gain on sale of discontinued operations, net of income tax 72,770 100 331,013 Net income 126,809 27,197 307,141 Less: Net income (loss) from continuing operations attributable to noncontrolling interest 7,740 (480) 653 Less: Net income from discontinued operations attributable to noncontrolling interest 4,517 4,897 4,623 Net income attributable to Holdings$ 114,552 $ 22,780 $ 301,865 Amounts attributable to common shares of Holdings:Loss from continuing operations$ 17,119 $ (5,261) $ (70,667) Income from discontinued operations, net of income tax 24,663 27,941 41,519 Gain on sale of discontinued operations, net of income tax 72,770 100 331,013 Net income attributable to Holdings$ 114,552 $ 22,780 $ 301,865 Basic and fully diluted income (loss) per share attributable to Holdings (refer to Note K)Continuing operations$ (0.76) $ (0.72) $ (2.54) Discontinued operations 1.49 0.38 6.18 $ 0.73 $ (0.34) $ 3.64 Weighted average number of shares outstanding - basic and fully diluted 65,362 63,151 59,900 Cash distribution declared per share (refer to Note K)$ 2.21 $ 1.44 $ 1.44 See notes to consolidated financial statements.F-7 COMPASS DIVERSIFIED HOLDINGSCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEYear ended December 31,(in thousands)202120202019Net income $ 126,809 $ 27,197 $ 307,141 Other comprehensive income (loss)Foreign currency translation adjustments(489)879599 Foreign currency amounts reclassified from accumulated other comprehensive income (loss) that increase (decrease) net income: Disposition of Manitoba Harvest— — 4,791 Pension benefit liability, net917 1,598 (547) Total comprehensive income, net of tax127,237 29,674 311,984 Less: Net income attributable to noncontrolling interests12,257 4,417 5,276 Less: Other comprehensive income (loss) attributable to noncontrolling interests38 113 (23) Total comprehensive income attributable to Holdings, net of tax$ 114,942 $ 25,144 $ 306,731 See notes to consolidated financial statements.F-8 Balance — January 1, 2019$ 96,417 $ 96,504 $ — $ 924,680 $ (249,453) $ (8,776) $ 859,372 $ 37,808 $ 22,162 $ 919,342 Net income — — — — 301,865 — 301,865 653 4,623 307,141 Total comprehensive income, net— — — — — 4,843 4,843 — — 4,843 Issuance of Trust preferred shares, net of offering costs— — 110,997 — — — 110,997 — — 110,997 Option activity attributable to noncontrolling shareholders— — — — — — — 5,782 2,211 7,993 Effect of subsidiary stock option exercise — — — — — — — — 41 41 Purchase of noncontrolling interest— — — — — — — (301)(710)(1,011) Disposition of Manitoba Harvest— — — — — — — — (10,799) (10,799) Disposition of Clean Earth— — — — — — — — (10,922) (10,922) Distributions paid - Allocation Interests (refer to Note K)— — — — (60,369) — (60,369) — — (60,369) Distributions paid - Trust preferred shares— — — — (15,125) — (15,125) — — (15,125) Distributions paid - Trust common shares— — — — (86,256) — (86,256) — — (86,256) Balance — December 31, 201996,417 96,504 110,997 924,680 (109,338) (3,933) 1,115,327 43,942 6,606 1,165,875 Net income (loss)— — — — 22,780 — 22,780 (480)4,89727,197 Total comprehensive income, net— — — — — 2,477 2,477 — — 2,477 Issuance of Trust common shares, net of offering costs— — — 83,884 — — 83,884 — — 83,884 Option activity attributable to noncontrolling shareholders— — — — — — — 8,471 524 8,995 Effect of subsidiary stock option exercise — — — — — — — 72 181 253 Purchase of noncontrolling interest— — — — (1,823) — (1,823) (1,303) (3,487) (6,613) Distributions paid to noncontrolling shareholders— — — — — — — — (12,060) (12,060) Acquisition of Marucci— — — — — — — 11,127 — 11,127 Acquisition of BOA— — — — — — — 61,634 — 61,634 Distributions paid - Allocation Interests (refer to Note K)— — — — (9,087) — (9,087) — — (9,087) Distributions paid - Trust preferred shares— — — — (23,678) — (23,678) — — (23,678) Distributions paid - Trust common shares— — — — (89,856) — (89,856) — — (89,856) Trust Preferred SharesTrust Common SharesAccumulatedDeficitAccumulated OtherComprehensiveLossStockholders’EquityAttributable toHoldingsNon-ControllingInterestNon-ControllingInterest of Disc. Ops.TotalStockholders’Equity(in thousands)Series ASeries BSeries CCOMPASS DIVERSIFIED HOLDINGSCONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITYF-9 Balance — December 31, 202096,417 96,504 110,997 1,008,564 (211,002) (1,456) 1,100,024 123,463 (3,339) 1,220,148 Net income — — — — 114,552 — 114,552 7,740 4,517 126,809 Total comprehensive income, net— — — — — 428 428 — — 428 Issuance of trust common shares— — — 114,629 — — 114,629 — — 114,629 Option activity attributable to noncontrolling shareholders— — — — — — — 10,941 513 11,454 Effect of subsidiary stock option exercise — — — — — — — 4,281 70 4,351 Purchase of noncontrolling interest— — — — (8,632) — (8,632) (42,008) — (50,640) Distributions paid to noncontrolling shareholders— — — — — — — (1,275) — (1,275) Proceeds provided by noncontrolling shareholders— — — — — — — 3,886 — 3,886 Acquisition of Lugano— — — — — — — 68,300 — 68,300 Disposition of Liberty— — — — — — — — (4,375) (4,375) Distributions paid - Allocation Interests (refer to Note K)— — — — (34,058) — (34,058) — — (34,058) Distributions paid - Trust Preferred Shares— — — — (24,181) — (24,181) — — (24,181) Distributions paid - Trust Common Shares— — — — (150,946) — (150,946) — — (150,946) Balance — December 31, 2021$ 96,417 $ 96,504 $ 110,997 $ 1,123,193 $ (314,267) $ (1,028) $ 1,111,816 $ 175,328 $ (2,614) $ 1,284,530 Trust Preferred SharesTrust Common SharesAccumulatedDeficitAccumulated OtherComprehensiveLossStockholders’EquityAttributable toHoldingsNon-ControllingInterestNon-ControllingInterest of Disc. Ops.TotalStockholders’Equity(in thousands)Series ASeries BSeries CCOMPASS DIVERSIFIED HOLDINGSCONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITYF-10 Cash flows from operating activities:Net income $ 126,809 $ 27,197 $ 307,141 Income from discontinued operations29,180 32,838 46,142 Gain on sale of discontinued operations72,770 100 331,013 Income (loss) from continuing operations24,859 (5,741) (70,014) Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation expense37,336 31,131 29,695 Amortization expense - intangibles80,307 61,682 53,629 Amortization expense - inventory step-up2,762 5,863 — Amortization of debt issuance costs and original issue discount2,896 2,232 3,773 Impairment expense— — 32,881 Loss on debt extinguishment33,305 — 12,319 Loss (gain) on interest rate derivative— — 3,500 Noncontrolling stockholder stock based compensation10,941 8,471 5,782 Provision for loss on receivables6,025 2,874 3,207 Deferred taxes(9,666) (2,228) (2,057) Other896 2,221 1,946 Changes in operating assets and liabilities, net of acquisitions:(Increase) decrease in accounts receivable(30,542) (24,591) 13,365 Increase in inventories(106,396) (29,584) (10,707) Increase in prepaid expenses and other current assets(7,479) (2,338) (7,556) Increase (decrease) in accounts payable and accrued expenses63,427 58,933 (12,488) Net cash provided by operating activities - continuing operations108,671 108,925 57,275 Net cash provided by operating activities - discontinued operations25,380 39,700 27,287 Net cash provided by operations134,051 148,625 84,562 Cash flows from investing activities:Acquisitions, net of cash acquired(404,318) (667,101) — Purchases of property and equipment(39,880) (28,812) (26,925) Proceeds from sale of businesses101,039 100 502,703 Payment of interest rate swap— — (675) Payment for termination of interest rate swap— — (4,942) Other investing activities(1,125) (3,008) 1,715 Net cash provided by (used in) investing activities - continuing operations(344,284) (698,821) 471,876 Net cash provided by (used in) investing activities - discontinued operations26,788 (2,013) 271,250 Net cash provided by (used in) investing activities(317,496) (700,834) 743,126 Year ended December 31,(in thousands)202120202019COMPASS DIVERSIFIED HOLDINGSCONSOLIDATED STATEMENTS OF CASH FLOWSF-11 Cash flows from financing activities:Proceeds from the issuance of Trust common shares, net 114,629 83,884 — Proceeds from the issuance of Trust preferred shares, net — — 110,997 Borrowings under credit facility 557,000 565,000 108,000 Repayments under credit facility (864,000) (258,000) (832,250) Issuance of Senior Notes 1,300,000 202,000 — Redemption of Senior Notes (627,688) — — Distributions paid - common shares (150,946) (89,856) (86,256) Distributions paid - preferred shares (24,181) (23,678) (15,125) Net proceeds provided by noncontrolling shareholders 8,237 253 41 Net proceeds provided by noncontrolling shareholders - acquisitions 68,300 72,761 — Purchase of noncontrolling interest (50,640) (6,613) (1,011) Distributions to noncontrolling shareholders (1,275) (12,060) — Distributions paid - Allocation Interests (34,058) (9,087) (60,369) Debt issuance costs (21,708) (3,214) — Other (464) 335 (3,549) Net cash provided by (used in) financing activities 273,206 521,725 (779,522) Foreign currency impact on cash 228 914 (1,178) Net increase (decrease) in cash and cash equivalents 89,989 (29,570) 46,988 Cash and cash equivalents — beginning of period (1) 70,744 100,314 53,326 Cash and cash equivalents — end of period $ 160,733 $ 70,744 $ 100,314 Year ended December 31,(in thousands)202120202019(1) Includes cash from discontinued operations of $10.7 million at January 1, 2021, $6.9 million at January 1, 2020 and $8.2 million at January 1, 2019.See notes to consolidated financial statements.COMPASS DIVERSIFIED HOLDINGSCONSOLIDATED STATEMENTS OF CASH FLOWSF-12 COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A — Organization and Business Operations
Compass Diversified Holdings, a Delaware statutory trust (“the Trust”), was incorporated in Delaware on
November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company (the “LLC”),
was also formed on November 18, 2005 with equity interests which were subsequently reclassified as the
“Allocation Interests”. Collectively, Compass Diversified Holdings and Compass Group Diversified Holdings, LLC are
referred to as the "Company". The Company was formed to acquire and manage a group of small and middle-
market businesses headquartered in North America. In accordance with the Third Amended and Restated Trust
Agreement, dated as of August 3, 2021 (as amended and restated, the “Trust Agreement”), the Trust is sole owner
of 100% of the Trust Interests (as defined in the Company’s Sixth Amended and Restated Operating Agreement,
dated as of August 3, 2021 (as amended and restated, the “LLC Agreement”)) of the LLC and, pursuant to the LLC
Agreement, the LLC has, outstanding, the identical number of Trust Interests as the number of outstanding common
shares of the Trust. The LLC is the operating entity with a board of directors and other corporate governance
responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of ten businesses, or operating segments at December 31, 2021. The
segments are as follows: 5.11 Acquisition Corp. ("5.11"), Boa Holdings Inc. ("BOA"), The Ergo Baby Carrier, Inc.
(“Ergobaby”), Lugano Diamonds & Jewelry, Inc. ("Lugano Diamonds" or "Lugano"), Marucci Sports, LLC ("Marucci
Sports" or "Marucci"), Velocity Outdoor, Inc. ("Velocity Outdoor" or "Velocity"), Compass AC Holdings, Inc. (“ACI” or
“Advanced Circuits”), AMT Acquisition Corporation (“Arnold”), FFI Compass, Inc. ("Altor Solutions" or "Altor")
(formerly "Foam Fabricators") and Sterno Products, LLC (“Sterno”). The segments are referred to interchangeably
as “businesses”, “operating segments” or “subsidiaries” throughout the financial statements. At December 31, 2021,
Advanced Circuits has been classified as held-for-sale. Refer to Note D - "Discontinued Operations" for further
discussion of Advanced Circuits. Refer to Note F - "Operating Segment Data" for further discussion of the operating
segments. Compass Group Management LLC, a Delaware limited liability Company (“CGM” or the “Manager”),
manages the day to day operations of the Company and oversees the management and operations of our
businesses pursuant to a management services agreement (the "Management Services Agreement" or “MSA”).
Note B — Summary of Significant Accounting Policies
Basis of presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP" or "US GAAP"). The results of operations represent
the results of operations of the Company’s acquired businesses from the date of their acquisition by the Company,
and therefore may not be indicative of the results to be expected for the full year.
Principles of consolidation
The consolidated financial statements include the accounts of the Trust and the Company, as well as the
businesses acquired as of their respective acquisition date. All significant intercompany accounts and transactions
have been eliminated in consolidation. Discontinued operating entities are reflected as discontinued operations in
the Company’s results of operations and statements of financial position.
The acquisition of businesses that the Company owns or controls more than a 50% share of the voting interest are
accounted for under the acquisition method of accounting. The amount assigned to the identifiable assets acquired
and the liabilities assumed is based on the estimated fair values as of the date of acquisition, with the remainder, if
any, recorded as goodwill.
Discontinued Operations
On October 13, 2021, the Company entered into a definitive Agreement and Plan of Merger to sell its majority
owned subsidiary, Advanced Circuits, which met the criteria to be classified as a discontinued operation as of
December 31, 2021. As a result, the Company reported the results of operations of ACI as discontinued operations
in the consolidated statements of operations for all periods presented. In addition, the assets and liabilities
associated with this business have been reclassified as held for sale in the consolidated balance sheets.
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COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company completed the sale of Liberty Safe Holding Corporation ("Liberty") during the third quarter of 2021,
the sale of Fresh Hemp Foods Ltd. ("Manitoba Harvest") during the first quarter of 2019 and the sale of Clean Earth
Holdings, Inc. ("Clean Earth") during the second quarter of 2019. The results of operations of Liberty are reported as
discontinued operations in the consolidated statements of operations for years ended December 31, 2021, 2020
and 2019. The results of operations of Manitoba Harvest and Clean Earth are reported as discontinued operations
in the consolidated statements of operations for year ended December 31, 2019. Refer to "Note D - Discontinued
Operations" for additional information. Unless otherwise indicated, the disclosures accompanying the consolidated
financial statements reflect the Company's continuing operations.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the
consolidated financial statements. These estimates are based on historical factors, management’s best knowledge
of current events and actions the Company may undertake in the future. It is possible that in 2022 actual conditions
could be better or worse than anticipated when the Company developed the estimates and assumptions, which
could materially affect the results of operations and financial position in the future. Such changes could result in
future impairment of goodwill, intangibles and long-lived assets, inventory obsolescence, establishment of valuation
allowances on deferred tax assets and increased tax liabilities, among other things. Actual results could differ from
those estimates.
Profit Allocation Interests
At the time of the Company's Initial Public Offering, the Company issued Allocation Interests governed by the LLC
agreement that entitle the holders (the "Holders") to receive distributions pursuant to a profit allocation formula upon
the occurrence of certain events. The Holders are entitled to receive and as such can elect to receive the positive
contribution based profit allocation payment for each of the business acquisitions during the 30-day period following
the fifth anniversary of the date upon which the Company acquired a controlling interest in that business (a "Holding
Event") and upon the sale of that business (a "Sale Event"). Payments of profit allocation to the Holders are
accounted for as dividends declared on Allocation Interests and recorded in stockholders' equity once they are
approved by our Board of Directors.
Revenue recognition
The Company recognizes revenue when a customer obtains control of promised goods or services. The amount of
revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange
for these goods or services, and excludes any sales incentives or taxes collected from customers which are
subsequently remitted to government authorities. Refer to "Note E - Revenue" for a detailed description of the
Company's revenue recognition policies.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash
equivalents. Certain cash account balances held in domestic financial institutions exceed FDIC insurance limits of
$250,000 per account and, as a result, there is a concentration of credit risk related to amounts in excess of the
insurance limits. We monitor the financial stability of these financial institutions and believe that we are not exposed
to any significant credit risk in cash or cash equivalents. At December 31, 2021 and 2020, the amount of cash and
cash equivalents held by our subsidiaries in foreign bank accounts was $33.9 million and $28.1 million, respectively.
Accounts receivable and allowance for doubtful accounts
Trade receivables are reported on the consolidated balance sheets at cost adjusted for any write-offs and net of an
allowance for doubtful accounts. The Company uses estimates to determine the amount of the allowance for
doubtful accounts in order to reduce accounts receivable to their estimated net realizable value. The Company
estimates the amount of the required allowance by reviewing the status of past-due receivables and analyzing
historical bad debt trends. The Company’s estimate also includes analyzing existing economic conditions. When the
Company becomes aware of circumstances that may impair a specific customer’s ability to meet its financial
obligations subsequent to the original sale, the Company will record an allowance against amounts due, and
thereby reduce the net receivable to the amount it reasonably believes will be collectible. Balances that remain
outstanding after the Company has used reasonable collection efforts are written off through a charge to the
valuation allowance and a credit to accounts receivable.
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COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories consist of raw materials, work-in-process, manufactured goods and purchased goods acquired for
resale. Inventories are stated at the lower of cost or market, determined on the first-in, first-out method. Cost
includes raw materials, direct labor, manufacturing overhead and indirect overhead. Market value is based on
current replacement cost for raw materials and supplies and on net realizable value for finished goods.
Property, plant and equipment
Property, plant and equipment is recorded at cost. The cost of major additions or betterments is capitalized, while
maintenance and repairs that do not improve or extend the useful lives of the related assets are expensed as
incurred.
Depreciation is provided principally on the straight-line method over estimated useful lives. Leasehold
improvements are amortized over the life of the lease or the life of the improvement, whichever is shorter.
The ranges of useful lives are as follows:
Buildings and improvements
Machinery and equipment
Office furniture, computers and software
Leasehold improvements
6 to 28 years
2 to 18 years
2 to 8 years
Shorter of useful life or lease term
Property, plant and equipment and other long-lived assets that have definitive lives are evaluated for impairment
when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable
(‘triggering event’). Upon the occurrence of a triggering event, the asset is reviewed to assess whether the
estimated undiscounted cash flows expected from the use of the asset plus residual value from the ultimate
disposal exceeds the carrying value of the asset. If the carrying value exceeds the estimated recoverable amounts,
the asset is written down to its fair value.
Fair value of financial instruments
The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts
receivable and accounts payable approximate their fair value due to their short term nature. The fair value of the
Company's senior notes are based on interest rates that are currently available to the Company for issuance of debt
with similar terms and remaining maturities. If measured at fair value in the financial statements, the Senior Notes
would be classified as Level 2 in the fair value hierarchy.
Business combinations
The Company allocates the amount it pays for each acquisition to the assets acquired and liabilities assumed based
on their fair values at the date of acquisition, including identifiable intangible assets which arise from a contractual or
legal right or are separable from goodwill. The Company bases the fair value of identifiable intangible assets
acquired in a business combination on detailed valuations that use information and assumptions provided by
management, which consider management’s best estimates of inputs and assumptions that a market participant
would use. The Company allocates any excess purchase price that exceeds the fair value of the net tangible and
identifiable intangible assets acquired to goodwill. The use of alternative valuation assumptions, including estimated
growth rates, cash flows, discount rates and estimated useful lives could result in different purchase price
allocations and amortization expense in current and future periods. Transaction costs associated with these
acquisitions are expensed as incurred through selling, general and administrative expense on the consolidated
statement of operations. In those circumstances where an acquisition involves a contingent consideration
arrangement, the Company recognizes a liability equal to the fair value of the contingent payments expected to be
made as of the acquisition date. The Company re-measures this liability each reporting period and records changes
in the fair value through operating income within the consolidated statements of operations.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities
assumed. The Company is required to perform impairment reviews at each of its reporting units annually and more
frequently in certain circumstances. In accordance with accounting guidelines, the Company is able to make a
F-15
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying
amount before applying the quantitative goodwill impairment test.
The first step of the process after the qualitative assessment fails is estimating the fair value of each of its reporting
units based on a discounted cash flow (“DCF”) model using revenue and profit forecast and a market approach
which compares peer data and earnings multiples. The Company then compares those estimated fair values with
the carrying values, which include allocated goodwill. If the estimated fair value is less than the carrying value, then
a goodwill impairment is recorded.
The Company cannot predict the occurrence of certain future events that might adversely affect the implied value of
goodwill and/or the fair value of intangible assets. Such events include, but are not limited to, strategic decisions
made in response to economic and competitive conditions, the impact of the economic environment on its customer
base, and material adverse effects in relationships with significant customers. The impact of over-estimating or
under-estimating the implied fair value of goodwill at any of the reporting units could have a material effect on the
results of operations and financial position. In addition, the value of the implied goodwill is subject to the volatility of
the Company’s operations which may result in significant fluctuation in the value assigned at any point in time.
Refer to "Note H - Goodwill and Intangible Assets" for the results of the annual impairment tests.
Deferred debt issuance costs
Deferred debt issuance costs represent the costs associated with the issuance of debt instruments and are
amortized over the life of the related debt instrument. Deferred debt issuance costs are presented in the
consolidated balance sheet as a deduction from the carrying value of the associated debt liability.
Product Warranty Costs
The Company recognizes warranty costs based on an estimate of the amounts required to meet future warranty
obligations. The Company accrues an estimated liability for exposure to warranty claims at the time of a product
sale based on both current and historical claim trends and warranty costs incurred. Warranty reserves are included
within "Accrued expenses" in the Company's consolidated balance sheets.
Foreign currency
Certain of the Company’s segments have operations outside the United States, and the local currency is typically
the functional currency. The financial statements are translated into U.S. dollars using exchange rates in effect at
year-end for assets and liabilities and average exchange rates during the year for results of operations. The
resulting translation gain or loss is included in stockholders' equity as other comprehensive income or loss.
Noncontrolling interest
Noncontrolling interest represents the portion of a majority-owned subsidiary’s net income that is owned by
noncontrolling shareholders. Noncontrolling interest on the balance sheet represents the portion of equity in a
consolidated subsidiary owned by noncontrolling shareholders.
Income taxes
Change in Company Tax Status Election
Effective September 1, 2021 (the "Effective Date"), the Trust elected to be treated as a corporation for U.S. federal
income tax purposes. Prior to the Effective Date, the Trust was treated as a partnership for U.S. federal income tax
purposes and the Trust’s items of income, gain, loss and deduction flowed through from the Trust to the
shareholders, and the Trust shareholders were subject to income taxes on their allocable share of the Trust’s
income and gain. After the Effective Date, the trust is taxed as a corporation and is subject to U.S. federal corporate
income tax at the Trust level, but items of income, gain, loss and deduction will not flow through to Trust
shareholders. Trust shareholders will no longer receive an IRS Schedule K-1. After the Effective Date, distributions
from the Trust will be treated as dividends to the extent the Trust has accumulated or current earnings and profits. If
the Trust does not have current or accumulated earnings and profits available for distribution, then the distribution
will be treated as a return of capital and reduce Trust shareholders’ basis in their shares.
F-16
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the Effective Date, each of the Company’s majority owned subsidiaries were treated as corporations for U.S.
federal income tax purposes. The election did not change the tax status of any Company subsidiary, and each
majority owned Company subsidiary is still treated as a corporation for U.S. federal income tax purposes.
Deferred Income Taxes
Deferred income taxes are calculated under the asset and liability method. Deferred income taxes are provided for
the differences between the basis of assets and liabilities for financial reporting and income tax purposes at the
enacted tax rates. A valuation allowance is established when necessary to reduce deferred tax assets to the amount
that is expected to more likely than not be realized. Several of the Company’s majority owned subsidiaries have
deferred tax assets recorded at December 31, 2021 which in total amount to approximately $90.4 million. This
deferred tax asset is net of $9.4 million of valuation allowance primarily associated with the realization of foreign net
operating losses, domestic tax credits and the limitation on the deduction of interest expense. These deferred tax
assets are comprised primarily of reserves not currently deductible for tax purposes. The temporary differences that
have resulted in the recording of these tax assets may be used to offset taxable income in future periods, reducing
the amount of taxes required to be paid. Realization of the deferred tax assets is dependent on generating sufficient
future taxable income at those subsidiaries with deferred tax assets. Based upon the expected future results of
operations, the Company believes it is more likely than not that those subsidiaries with deferred tax assets will
generate sufficient future taxable income to realize the benefit of existing temporary differences, although there can
be no assurance of this. The impact of not realizing these deferred tax assets would result in an increase in income
tax expense for such period when the determination was made that the assets are not realizable.
Earnings per common share
Basic and fully diluted earnings per Trust common share is computed using the two-class method which requires
companies to allocate participating securities that have rights to earnings that otherwise would have been available
only to common shareholders as a separate class of securities in calculating earnings per share. The Company has
granted Allocation Interests that contain participating rights to receive profit allocations upon the occurrence of a
Holding Event or a Sale Event, and has issued preferred shares that have rights to distributions when, and if,
declared by the Company's board of directors.
The calculation of basic and fully diluted earnings per common share is computed by dividing income available to
common shareholders by the weighted average number of Trust common shares outstanding during the period.
Earnings per common share reflects the effect of distributions that were declared and paid to the Holders and
distributions that were paid on preferred shares during the period.
The Company did not have any stock option plans or any other potentially dilutive securities outstanding during the
years ended December 31, 2021, 2020 and 2019.
Advertising costs
Advertising costs are expensed as incurred and included in selling, general and administrative expense in the
consolidated statements of operations. Advertising costs were $26.2 million, $18.0 million and $17.3 million during
the years ended December 31, 2021, 2020 and 2019, respectively.
Research and development
Research and development costs are expensed as incurred and included in selling, general and administrative
expense in the consolidated statements of operations. The Company incurred research and development expense
of $11.9 million, $3.0 million and $0.8 million during the years ended December 31, 2021, 2020 and 2019,
respectively.
Employee retirement plans
The Company and many of its segments sponsor defined contribution retirement plans, such as 401(k) plans.
Employee contributions to the plan are subject to regulatory limitations and the specific plan provisions. The
Company and its segments may match these contributions up to levels specified in the plans and may make
additional discretionary contributions as determined by management. The total employer contributions to these
plans were $3.5 million, $2.5 million and $2.1 million for the years ended December 31, 2021, 2020 and 2019,
respectively.
F-17
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s Arnold subsidiary maintains a defined benefit plan for certain of its employees which is more fully
described in "Note J - Defined Benefit Plan". Accounting guidelines require employers to recognize the overfunded
or underfunded status of defined benefit pension and postretirement plans as assets or liabilities in their
consolidated balance sheets and to recognize changes in that funded status in the year in which the changes occur
as a component of comprehensive income.
Seasonality
Earnings of certain of our operating segments are seasonal in nature due to various recurring events, holidays and
seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and
fourth quarter produce the highest net sales during our fiscal year.
Stock based compensation
The Company does not have a stock based compensation plan; however, all of the Company’s subsidiaries
maintain stock based compensation plans. During the years ended December 31, 2021, 2020 and 2019, $10.9
million, $8.5 million, and $5.8 million of stock based compensation expense was recorded to each expense category
that included related salary expense in the consolidated statements of operations. As of December 31, 2021, the
amount to be recorded for stock-based compensation expense in future years for unvested options is approximately
$28.5 million.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes. This guidance removes certain exceptions related to the approach for intraperiod tax allocation, the
methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for
outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. The guidance was
effective for fiscal years and interim periods beginning after December 15, 2020 and early adoption is permitted.
The adoption of this guidance on January 1, 2021 did not have a material impact on our consolidated financial
statements.
Note C — Acquisition of Businesses
Acquisition of Lugano Diamonds & Jewelry, Inc.
On September 3, 2021, the Company, through its newly formed acquisition subsidiaries, Lugano Holding, Inc., a
Delaware corporation (“Lugano Holdings”), and Lugano Buyer, Inc., a Delaware corporation (“Lugano Buyer”) and a
wholly-owned subsidiary of Lugano Holdings, acquired the issued and outstanding shares of stock of Lugano
Diamonds & Jewelry Inc. ("Lugano") other than certain rollover shares (the “Lugano Transaction”). The Lugano
Transaction was effectuated pursuant to a Stock Purchase Agreement (the “Lugano Purchase Agreement”), also
dated September 3, 2021, by and among Lugano Buyer, the sellers named therein (“Lugano Sellers”) and
Mordechai Haim Ferder in his individual capacity and as initial representative of the Lugano Sellers. 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.
The Company made loans to, and purchased a 60% equity interest in, Lugano. The purchase price, including
proceeds from noncontrolling shareholders and net of transaction costs, was $263.3 million. The selling
shareholders invested in the transaction along with the Company, representing 40% initial noncontrolling interest on
both a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the
enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority
holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to
the Company in the acquisition and will continue to provide integration services during the first year of the
Company's ownership of Lugano. CGM will receive integration service fees of $2.3 million payable quarterly over a
twelve month period as services are rendered which payments began in the quarter ended December 31, 2021. The
Company incurred $1.8 million of transaction costs in conjunction with the Lugano acquisition, which was included
in selling, general and administrative expense in the consolidated statements of operations during the third quarter
of 2021. The Company funded the acquisition with cash on hand and a $120 million draw on its 2021 Revolving
Credit Facility.
F-18
The results of operations of Lugano have been included in the consolidated results of operations since the date of acquisition. Lugano's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the preliminary recording of assets acquired and liabilities assumed as of the date of acquisition.(in thousands)Preliminary Purchase Price AllocationMeasurement Period AdjustmentsPreliminary Purchase Price AllocationAssets:Cash$ 1,433 $ — $ 1,433 Accounts receivable (1) 20,954 — 20,954 Inventory 85,794 12,829 98,623 Property, plant and equipment 2,743 392 3,135 Intangible assets — 82,886 82,886 Goodwill 158,780 (75,322) 83,458 Other current and noncurrent assets 4,979 4,114 9,093 Total assets$ 274,683 $ 24,899 $ 299,582 Liabilities and noncontrolling interest:Current liabilities$ 7,129 $ 58 $ 7,187 Other liabilities 99,381 755 100,136 Deferred tax liabilities — 24,086 24,086 Noncontrolling interest 68,000 — 68,000 Total liabilities and noncontrolling interest$ 174,510 $ 24,899 $ 199,409 Net assets acquired$ 100,173 $ — $ 100,173 Noncontrolling interest 68,000 — 68,000 Intercompany loans to business 99,381 (2,420) 96,961 $ 267,554 $ (2,420) $ 265,134 Acquisition considerationPurchase price$ 256,000 $ — $ 256,000 Cash acquired (estimated) 1,554 (120) 1,434 Net working capital adjustment 10,000 (2,300) 7,700 Total purchase consideration$ 267,554 $ (2,420) $ 265,134 Less: Transaction costs 1,827 — 1,827 Net purchase price$ 265,727 $ (2,420) $ 263,307 (1) The fair value of accounts receivable approximates book value acquired.The preliminary allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including the income, cost and market approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Inventory is recognized at fair value, with finished goods stated at selling price less an estimated cost to sell. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $83.5 million reflects the strategic fit of Lugano in the Company's branded consumer business and is not expected to be deductible for income tax purposes. The purchase accounting for Lugano is expected to be finalized in the first quarter of 2022.COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-19 The intangible assets recorded related to the Lugano acquisition are as follows (in thousands):Intangible AssetsFair ValueEstimated Useful LivesTradename$ 49,493 18 yearsCustomer relationships 33,393 15 years$ 82,886 The tradename was considered the primary intangible asset and was valued at $49.5 million using a multi period excess earnings method. The customer relationships were valued at $33.4 million using a multi period excess earnings method. The multi period excess earnings method assumes an asset has value to the extent that it enables its owners to earn a return in excess of the other assets utilized in the business. Acquisition of Marucci Sports, LLC On April 20, 2020, pursuant to an Agreement and Plan of Merger entered into on March 6, 2020, the Company, through a wholly-owned subsidiary, Wheelhouse Holdings Inc., a Delaware corporation (“Marucci Buyer”) and Wheelhouse Holdings Merger Sub LLC, a Delaware limited liability company and a wholly owned Subsidiary of Marucci Buyer (“Marucci Merger Sub”), completed a merger (the “Marucci Transaction”) with Marucci Sports, LLC, a Delaware limited liability company (“Marucci”). Upon the completion of the Marucci Transaction, Marucci became a wholly-owned subsidiary of Marucci Buyer and an indirect subsidiary of the Company. Headquartered in Baton Rouge, Louisiana, Marucci is a leading manufacturer and distributor of baseball and softball equipment. Founded in 2009, Marucci has a product portfolio that includes wood and metal bats, apparel and accessories, batting and fielding gloves and bags and protective gear. The Company made loans to, and purchased a 92.2% equity interest in, Marucci. The purchase price, including proceeds from noncontrolling shareholders and net of transaction costs, was $198.9 million. Marucci management and certain existing shareholders invested in the Transaction along with the Company, representing 7.8% initial noncontrolling interest on both a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and provided integration services during the first year of the Company's ownership of Marucci. CGM received integration service fees of $2.0 million payable over a twelve month period as services were rendered. The Company incurred $2.0 million of transaction costs in conjunction with the Marucci acquisition, which was included in selling, general and administrative expense in the consolidated statements of operations during the second quarter of 2020.The results of operations of Marucci have been included in the consolidated results of operations since the date of acquisition. Marucci's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the recording of assets acquired and liabilities assumed as of the date of acquisition.COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-20 Final Purchase Price Allocation(in thousands)AssetsCash$ 2,730 Accounts Receivable (1) 11,471 Inventory (2) 14,481 Property, plant and equipment (3) 10,307 Intangible assets 100,211 Goodwill 68,170 Other current and noncurrent assets 2,208 Total assets 209,578 Liabilities and noncontrolling interestCurrent liabilities 6,501 Other liabilities 43,058 Deferred tax liabilities 1,161 Noncontrolling interest 11,127 Total liabilities and noncontrolling interest 61,847 Net assets acquired 147,731 Noncontrolling interest 11,127 Intercompany loans 42,100 $ 200,958 Acquisition considerationPurchase price$ 200,000 Cash acquired 2,730 Net working capital adjustment 728 Other adjustments (2,500) Total purchase consideration$ 200,958 Less: Transaction costs 2,042 Net purchase price$ 198,916 (1) Includes $12.7 million in gross contractual accounts receivable, of which $1.2 million is not expected to be collected. The fair value of accounts receivable approximates book value acquired.(2) Includes $4.3 million in inventory basis step-up, which was charged to cost of goods sold. $3.0 million was amortized to cost of goods sold in the second quarter of 2020, and $1.3 million was charged to cost of goods sold in the third quarter of 2020.(3) Includes $2.5 million of property, plant and equipment basis step-up. The fair value of property, plant and equipment will be depreciated over the remaining useful lives of the assets.The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including the income, cost and market approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The goodwill of $68.2 million reflects the strategic fit of Marucci in the Company's branded consumer business and is expected to be deductible for income tax purposes. COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-21 The intangible assets recorded related to the Marucci acquisition are as follows (in thousands):Intangible AssetsFair ValueEstimated Useful LifeTradename$ 84,891 15 yearsCustomer relationships 11,120 15 yearsTechnology 4,200 15 years$ 100,211 The tradename was valued at $84.9 million using a multi-period excess earnings methodology. The customer relationships intangible asset was valued at $11.1 million using the distributor method, a variation of the multi-period excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business. The technology was valued at $4.2 million using a relief from royalty method.Acquisition of Boa Technology, Inc.On October 16, 2020, the Company, through its newly formed acquisition subsidiaries, BOA Holdings Inc., a Delaware corporation (“BOA Holdings”) and BOA Parent Inc., a Delaware corporation (“BOA Buyer”) and a wholly-owned subsidiary of BOA Holdings, acquired BOA Technology Inc. ("BOA"), and its subsidiaries pursuant to an Agreement and Plan of Merger (the “BOA Merger Agreement”) by and among BOA Buyer, Reel Holding Corp., a Delaware corporation (“Reel”) and the sole stockholder of Boa Technology, Inc., BOA Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of BOA Buyer (“BOA Merger Sub”) and Shareholder Representative Services LLC (in its capacity as the representative of the stockholders of Reel). Pursuant to the BOA Merger Agreement, BOA Merger Sub was merged with and into Reel (the “BOA Merger”) such that the separate existence of BOA Merger Sub ceased, and Reel survived the BOA Merger as a wholly-owned subsidiary of BOA Buyer. BOA, creators of the award-winning BOA® Fit System featured in performance footwear, action sports, outdoor and medical products worldwide, was founded in 2001 and is headquartered in Denver, Colorado. The Company made loans to, and purchased an 82% equity interest in, BOA. The purchase price, including proceeds from noncontrolling shareholders and net of transaction costs, was $454.3 million. BOA management and certain existing shareholders invested in the transaction along with the Company, representing 18% initial noncontrolling interest on both a primary and fully diluted basis. The fair value of the noncontrolling interest was determined based on the enterprise value of the acquired entity multiplied by the ratio of the number of shares acquired by the minority holders to total shares. The transaction was accounted for as a business combination. CGM acted as an advisor to the Company in the acquisition and provided integration services during the first year of the Company's ownership of BOA. CGM received integration service fees of $4.4 million payable over a twelve month period as services were rendered. The Company incurred $2.5 million of transaction costs in conjunction with the BOA acquisition, which was included in selling, general and administrative expense in the consolidated statements of operations during the fourth quarter of 2020. The Company funded the acquisition with cash on hand and a $300 million draw on its 2018 Revolving Credit Facility. The results of operations of BOA have been included in the consolidated results of operations since the date of acquisition. BOA's results of operations are reported as a separate operating segment as a branded consumer business. The table below provides the recording of assets acquired and liabilities assumed as of the date of acquisition.COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-22 Final Purchase Allocation(in thousands)Assets:Cash$ 7,677 Accounts receivable (1) 2,065 Inventory (2) 6,178 Property, plant and equipment (3) 15,431 Intangible assets 234,000 Goodwill 254,153 Other current and noncurrent assets 12,554 Total assets$ 532,058 Liabilities and noncontrolling interest:Current liabilities$ 14,008 Other liabilities 130,587 Deferred tax liabilities 49,969 Noncontrolling interest 61,534 Total liabilities and noncontrolling interest$ 256,098 Net assets acquired$ 275,960 Noncontrolling interest 61,534 Intercompany loans to business 119,349 $ 456,843 Acquisition considerationPurchase price$ 454,000 Cash acquired 7,677 Net working capital adjustment (1,970) Other adjustments (2,864) Total purchase consideration$ 456,843 Less: Transaction costs 2,517 Net purchase price$ 454,326 (1) Includes $2.1 million in gross contractual accounts receivable, of which $0.06 million is not expected to be collected. The fair value of accounts receivable approximates book value acquired.(2) Includes $1.5 million in inventory basis step-up, which was charged to cost of goods sold in the fourth quarter of 2020.(3) Includes $6.5 million of property, plant and equipment basis step-up. The fair value of property, plant and equipment will be depreciated over the remaining useful lives of the assets.The allocation of the purchase price presented above is based on management's estimate of the fair values using valuation techniques including the income, cost and market approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets and current and other liabilities are valued at historical carrying values. Property, plant and equipment is valued through a purchase price appraisal and will be depreciated on a straight-line basis over the respective remaining useful lives of the assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-23 relationships, as well as expected future synergies. The goodwill of $254.2 million reflects the strategic fit of BOA in the Company's branded consumer business and is not expected to be deductible for income tax purposes. The intangible assets recorded related to the BOA acquisition are as follows (in thousands):Intangible AssetsFair ValueEstimated Useful LivesTechnology$ 70,200 10 - 12 yearsTradename 84,300 20 yearsCustomer relationships 73,000 15 yearsIn-process Research & Development (1) 6,500 $ 234,000 (1) In-process research and development is considered indefinite lived until the underlying technology becomes viable, at which point the intangible asset will be amortized over the expected useful life.The technology was considered the primary intangible asset in the acquisition and was valued at $70.2 million using a multi-period excess earnings methodology with an assumed obsolescence factor. The tradename was valued at $84.3 million using a relief-from-royalty method. The customer relationships, which represent BOA's relationship with brand partners, were valued at $73.0 million using the distributor method, a variation of the multi-period excess earnings methodology, in which an asset is valuable to the extent it enables its owners to earn a return in excess of the required returns on the other assets utilized in the business.Unaudited pro forma informationThe following unaudited pro forma data for the year ended December 31, 2021 and 2020 gives effect to the acquisitions of Lugano, BOA and Marucci, as described above, and the dispositions of Liberty Safe and ACI, as if these transactions had been completed as of January 1, 2020. The pro forma data gives effect to historical operating results with adjustments to interest expense, amortization and depreciation expense, management fees and related tax effects. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period.Year ended(in thousands, except per share data)December 31, 2021December 31, 2020Net sales$ 1,912,726 $ 1,530,375 Gross profit$ 760,936 $ 589,332 Operating income$ 155,699 $ 68,102 Net income (loss) from continuing operations$ 37,029 $ (12,601) Net income (loss) from continuing operations attributable to Holdings $ 23,840 $ (14,040) Basic and fully diluted net loss per share from continuing operations attributable to Holdings$ (0.65) $ (0.87) COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-24 COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other acquisitions
Marucci
Lizard Skins - On October 22, 2021, Marucci Sports acquired Lizard Skins, LLC ("Lizard Skins"), an industry leading
provider of sporting goods accessories that revolve around the hand-to-grip interface, for an enterprise value of
approximately $47.0 million, excluding customary closing adjustments. The acquisition and related transaction costs
were funded through an additional term loan of $44.1 million under the Marucci inter-company credit agreement with
the Company, a draw on the existing Marucci revolving credit facility with the Company, and rollover equity from the
selling shareholders of Lizard Skins. Marucci issued 11,915 shares to the selling shareholders in exchange for the
rollover equity, which represents an ownership interest of approximately 1% in Marucci. Marucci paid approximately
$1.4 million in transaction expenses in connection with the acquisition of Lizard Skins. Lizard Skins is a designer
and seller of branded grip products, protective equipment, bags and apparel for use in baseball, cycling, hockey,
Esports and lacrosse. The acquisition of Lizard Skins will allow Marucci to build on its leading position in diamond
sports while simultaneously developing Marucci's presence in new sports markets such as hockey and cycling.
Marucci has not completed the preliminary purchase price allocation for the Lizard Skins acquisition and the excess
purchase price over net assets acquired has been recorded as goodwill of $39.7 million on a preliminary basis at
December 31, 2021.
Altor Solutions
Plymouth Foam - On October 5, 2021, Altor acquired Plymouth Foam, LLC (“Plymouth”), a manufacturer of
protective packaging and componentry, for an enterprise value of approximately $56.0 million, excluding customary
closing adjustments. The acquisition and related transaction costs were funded through an additional term loan of
$52.0 million under the Altor intercompany credit agreement and a draw on the existing Altor intercompany revolving
credit facility with the Company. Altor paid approximately $0.4 million in transaction fees in connection with the
acquisition of Plymouth. Plymouth was founded in 1978 and is based in Plymouth, Wisconsin. Plymouth supplies a
wide array of high value products, including custom protective packaging, cold chain packaging and internal
components made from expanded polystyrene and expanded polypropylene. Plymouth’s complementary product
portfolio will allow Altor to be able to further expand its business and capabilities. Altor has not finalized the
purchase price allocation for the Plymouth acquisition and has recorded a preliminary purchase price allocation,
including goodwill of $15.5 million at December 31, 2021. The purchase price for Plymouth Foam will be finalized in
the first quarter of 2022.
Polyfoam - On July 1, 2020, Altor acquired substantially all of the assets of Polyfoam Corp. ("Polyfoam"),
a Massachusetts-based manufacturer of protective and temperature-sensitive packaging solutions for the medical,
pharmaceutical, grocery and food industries, among others. Founded in 1974, Polyfoam operates two
manufacturing facilities producing highly engineered foam and injection-molded plastic solutions across a variety of
end-markets. The acquisition complements Altor's current operating footprint and provides access to a new
customer base and product offerings, including Polyfoam's significant end-market exposure to cold chain (including
seafood boxes, insulated shipping containers and grocery delivery totes). The purchase price was approximately
$12.8 million and includes a potential earnout of $1.4 million if Polyfoam achieves certain financial metrics.
Arnold
Ramco - On March 1, 2021, Arnold acquired Ramco Electric Motors, Inc. ("Ramco"), a manufacturer of stators,
rotors and full electric motors, for a purchase price of approximately $34.3 million. The acquisition and related
transaction costs were funded through an additional equity investment in Arnold by the Company of $35.5 million.
Ramco was founded in 1987 and is based in Greenville, Ohio. Ramco supplies their custom electric motor solutions
for general industrial, aerospace and defense, and oil and gas end-markets. Ramco’s complementary product
portfolio will allow Arnold to be able to offer more comprehensive, turnkey solutions to their customers. In
connection with the acquisition, Arnold recorded a purchase price allocation of $12.4 million of goodwill, which is not
expected to be deductible for income tax purposes and $12.7 million in intangible assets. The remainder of the
purchase consideration was allocated to net assets acquired. The purchase price allocation was finalized in the
fourth quarter of 2021.
F-25
Note D — Discontinued OperationsSale of Advanced CircuitsOn October 13, 2021, the Company, as the representative (the “Sellers Representative”) of the holders (the “AC Sellers”) of stock and options of Advanced Circuits, a majority owned subsidiary of the Company, 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 $70 million in common stock of a publicly traded special purpose acquisition company (“SPAC”) selected by AC Buyer to acquire AC Buyer (the “SPAC Transaction”) upon the closing of the transaction, excluding certain working capital and other adjustments. In addition, the AC Sellers may receive 2.4 million additional shares of SPAC common stock within five years, subject to SPAC stock price performance. The Company owns approximately 67% of the outstanding stock of Advanced Circuits on a fully diluted basis and expects to receive approximately 77% of the gross consideration payable under the AC Agreement. This amount is in respect of the Company’s outstanding loans to Advanced Circuits and its equity interests in Advanced Circuits. The closing of the transaction is expected to occur in the second quarter of 2022, however, there can be no assurances that all of the conditions to closing, which include the closing of the SPAC transaction, will be satisfied.The sale of Advanced Circuits met the criteria for the assets to be classified as held for sale as of December 31, 2021, and is presented as discontinued operations in the accompanying consolidated financial statements for all periods presented. Summarized results of operations of Advanced Circuits are as follows (in thousands):Year ended December 31, 2021Year ended December 31, 2020Year ended December 31, 2019Net sales$ 90,487 $ 88,075 $ 90,791 Gross profit 41,049 38,838 41,506 Operating income 25,232 22,891 25,680 Income from continuing operations before income taxes (1) 24,933 22,738 25,560 Provision for income taxes 3,419 3,431 3,896 Income from discontinued operations (1)$ 21,514 $ 19,307 $ 21,664 (1) The results of operations for the years ended December 31, 2021, 2020 and 2019, each exclude $7.2 million,$5.8 million and $6.5 million, respectively, of intercompany interest expense.COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-26 The following table presents summary balance sheet information of ACI that is presented as held for sale as of December 31, 2021 and 2020 (in thousands):December 31,2021December 31,2020AssetsCash and cash equivalents$ 3,610 $ 6,379 Accounts receivable, net 9,447 6,967 Inventories, net 3,660 3,373 Prepaid expenses and other current assets 430 417 Current assets held for sale$ 17,147 $ 17,136 Property, plant and equipment, net 8,083 9,465 Goodwill 66,668 66,668 Intangible assets, net 23 62 Other non-current assets 7,502 8,533 Non-current assets held for sale (1)$ 82,276 $ 84,728 Liabilities Accounts payable$ 3,798 $ 2,476 Accrued expenses 3,718 5,042 Due to related party 125 125 Other current liabilities 1,526 1,526 Current liabilities held for sale$ 9,167 $ 9,169 Deferred income taxes 13,419 13,890 Other non-current liabilities 6,487 7,645 Non-current liabilities held for sale (1)$ 19,906 $ 21,535 Noncontrolling interest held for sale$ (2,614) $ (7,175) (1) The closing of the transaction is expected to occur in the second quarter of 2022, and therefore all assets and liabilities have been classified as current on the consolidated balance sheet for the year ended December 31, 2021.Sale of LibertyOn July 16, 2021, the Company, as majority stockholder of Liberty Safe Holding Corporation and as Sellers Representative, entered into a definitive Stock Purchase Agreement (the “Liberty Purchase Agreement”) with Independence Buyer, Inc. (“Liberty Buyer”), Liberty and the other holders of stock and options of Liberty to sell to Liberty Buyer all of the issued and outstanding securities of Liberty, the parent company of the operating entity, Liberty Safe and Security Products, Inc.On August 3, 2021, Liberty Buyer and the Company, as Sellers Representative, entered into the Amendment to Stock Purchase Agreement (the “Liberty Amendment”) which amended the Liberty Purchase Agreement to, among other things, provide that, immediately prior to the closing, certain investors in Liberty will, instead of selling all of the shares of Liberty owned by them to Liberty Buyer, contribute a portion of such shares (the “Liberty Rollover Shares”) to an indirect parent company of Liberty Buyer in exchange for equity securities of such entity.On August 3, 2021, Liberty Buyer completed the acquisition of all the issued and outstanding securities of Liberty (other than the Liberty Rollover Shares) pursuant to the Liberty Purchase Agreement and Liberty Amendment (the “Liberty Transaction”). The sale price of Liberty was based on an aggregate total enterprise value of $147.5 million, subject to customary adjustments. After the allocation of the sale proceeds to Liberty's non-controlling shareholders, the repayment of intercompany loans to the Company (including accrued interest) of $26.5 million, and the payment of transaction expenses of approximately $4.5 million, the Company received approximately $128.0 million of total proceeds from the sale at closing. The Company recognized a gain on the sale of Liberty of $72.8 million during the year ended December 31, 2021. COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-27 Summarized results of operations of Liberty for the previous years through the date of disposition are as follows (in thousands): For the period January 1, 2021 through dispositionYear ended December 31, 2020Year ended December 31, 2019Net sales$ 75,753 $ 113,115 $ 96,164 Gross profit 20,129 28,978 21,005 Operating income 9,175 16,826 8,526 Income from continuing operations before income taxes (1) 9,174 16,819 8,509 Provision for income taxes 1,509 3,288 932 Income from discontinued operations (1)$ 7,665 $ 13,531 $ 7,577 (1) The results of operations for the periods from January 1, 2021 through disposition and the years ended December 31, 2020 and 2019, each exclude $1.7 million, $3.5 million and $4.4 million, respectively, of intercompany interest expense.The following table presents summary balance sheet information of Liberty that is presented as discontinued operations as of December 31, 2020 (in thousands):December 31,2020AssetsCash and cash equivalents$ 4,342 Accounts receivable, net 18,812 Inventories, net 9,406 Prepaid expenses and other current assets 945 Current assets of discontinued operations$ 33,505 Property, plant and equipment, net 9,551 Goodwill 32,828 Intangible assets, net 3,020 Other non-current assets 8,473 Non-current assets of discontinued operations$ 53,872 Liabilities Accounts payable$ 7,495 Accrued expenses 4,911 Due to related party 101 Other current liabilities 2,723 Current liabilities of discontinued operations$ 15,230 Deferred income taxes 1,815 Other non-current liabilities 9,320 Non-current liabilities of discontinued operations$ 11,135 Noncontrolling interest of discontinued operations$ 3,836 Sale of Clean Earth On May 8, 2019, the Company, as majority stockholder of CEHI Acquisition Corporation ("Clean Earth" or CEHI") and as Sellers’ Representative, entered into a definitive Stock Purchase Agreement (the “Clean Earth Purchase Agreement”) with Calrissian Holdings, LLC (“Clean Earth Buyer”), CEHI, the other holders of stock and options of CEHI and, as Clean Earth Buyer’s guarantor, Harsco Corporation, pursuant to which Clean Earth Buyer would acquire all of the issued and outstanding securities of CEHI, the parent company of the operating entity, Clean Earth, Inc. COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-28 On June 28, 2019, Clean Earth Buyer completed the acquisition of all of the issued and outstanding securities of CEHI pursuant to the Clean Earth Purchase Agreement. The sale price for Clean Earth was based on an aggregate total enterprise value of $625 million and is subject to customary working capital adjustments. After the allocation of the sale proceeds to Clean Earth non-controlling equity holders, the repayment of intercompany loans to the Company (including accrued interest) of $224.6 million, and the payment of transaction expenses of approximately $10.7 million, the Company received approximately $327.3 million of total proceeds at closing related to our equity interests in Clean Earth. The Company recognized a gain on the sale of Clean Earth of $209.3 million during the year ended December 31, 2019. Summarized operating results for Clean Earth for 2019 through the date of disposition were as follows (in thousands):For the period January 1, 2019 through dispositionNet sales$ 132,737 Gross profit 39,678 Operating income 6,232 Income before income taxes 5,880 Benefit for income taxes (11,607) Income from discontinued operations (1)$ 17,487 (1) The results of operations for the period from January 1, 2019 through the date of disposition, excludes $10.2 million of intercompany interest expense.Sale of Manitoba HarvestOn February 19, 2019, the Company entered into a definitive agreement with Tilray, Inc. ("Tilray") and a wholly-owned subsidiary of Tilray, 1197879 B.C. Ltd. (“Tilray Subco”), to sell to Tilray, through Tilray Subco, all of the issued and outstanding securities of our majority owned subsidiary, Manitoba Harvest for total consideration of up to C$419 million. The completion of the sale of Manitoba Harvest was subject to approval by the British Columbia Supreme Court, which occurred on February 21, 2019. The sale closed on February 28, 2019. Subject to certain customary adjustments, the shareholders of Manitoba Harvest, including the Company, received the following from Tilray as consideration for their shares of Manitoba Harvest: (i) C$150 million in cash to the holders of preferred shares of Manitoba Harvest and the holders of common shares of Manitoba Harvest (“Common Holders”) and C$127.5 million in shares of class 2 Common Stock of Tilray (“Tilray Common Stock”) to the Common Holders on the closing date of the sale (the “Closing Date Consideration”), and (ii) C$50 million in cash and C$42.5 million in Tilray Common Stock to the Common Holders on the date that was six months after the closing date of the arrangement (the “Deferred Consideration”). The sale consideration also included a potential earnout of up to C$49 million in Tilray Common Stock to the Common Holders, if Manitoba Harvest achieved certain levels of U.S. branded gross sales of edible or topical products containing broad spectrum hemp extracts or cannabidiols prior to December 31, 2019. The threshold for the earnout was not achieved and no additional amount was recorded related to sale of Manitoba Harvest at December 31, 2019.The cash portion of the Closing Date Consideration was reduced by the amount of the net indebtedness (including accrued interest) of Manitoba Harvest on the closing date of C$71.3 million ($53.7 million) and transaction expenses of approximately C$5.0 million. The Company's share of the net proceeds after accounting for the redemption of the noncontrolling shareholders and the payment of net indebtedness of Manitoba Harvest and transaction expenses was approximately $124.2 million in cash proceeds and in Tilray Common Stock. The Company recognized a gain on the sale of Manitoba Harvest of $121.7 million in the first quarter of 2019. In August 2019, the Company received the Deferred Consideration related to the sale. The Company's portion of the Deferred Consideration totaled $28.4 million in cash proceeds and $19.6 million in Tilray Common Stock. The Tilray Common Stock consideration was issued in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") and pursuant to exemptions from applicable securities laws of any state of the United States, such that any shares of Tilray Common Stock received by the Common Holders were freely tradeable. The Company sold the Tilray Common Stock received as part of the Closing Consideration during March 2019, recognizing a net loss of $5.3 million in Other income/ (expense) during COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-29 the quarter ended March 31, 2019. In August 2019, the Company sold the Tilray Common Stock received as part of the Deferred Consideration, recognizing a loss of $4.9 million in Other income/ (expense) during the quarter ended September 30, 2019. Summarized operating results for Manitoba Harvest for 2019 through the date of disposition were as follows (in thousands):For the period January 1, 2019 through dispositionNet revenues$ 10,024 Gross profit 4,874 Operating loss (1,118) Loss before income taxes (1,127) Benefit for income taxes (541) Loss from discontinued operations (1)$ (586) (1) The results of operations for the period from January 1, 2019 through the date of disposition excludes $1.0 million of intercompany interest expense.Note E - RevenuePerformance Obligations - Revenues are recognized when control of the promised goods or service is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Each product or service represents a separate performance obligation. Once the performance obligations are identified, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method. The corresponding revenues are recognized as the related performance obligations are satisfied as discussed above. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. The standalone selling price is directly observable as it is the price at which the Company sells its products separately to the customer. The Company assesses promised goods or services as performance obligations deemed immaterial at the contract level. Revenue is recognized generally upon shipment terms for products and when the service is performed for services. Shipping and handling costs - Costs associated with shipment of products to a customer are accounted for as a fulfillment cost and are included in cost of revenues. The Company accounts for shipping and handling activities performed after control of a good has been transferred to the customer as a fulfillment cost. Therefore, both revenue and costs of shipping and handling are recorded at the same time. As a result, any consideration (including freight and landing costs) related to these activities are included as a component of the overall transaction consideration and allocated to the performance obligations of the contract.Warranty - For product sales, the Company provides standard assurance-type warranties as the Company only warrants its products against defects in materials and workmanship (i.e., manufacturing flaws). Although the warranties are not required by law, the tasks performed over the warranty period are only to remediate instances when products do not meet the promised specifications. Customers do not have the option to purchase warranties separately. The Company’s warranty periods generally range from 90 days to three years depending on the nature of the product and are consistent with industry standards. The periods are reasonable to assure that products conform to specifications. The Company does not have a history of performing activities outside the scope of the standard warranty.Variable Consideration - The Company’s policy around estimating variable consideration related to sales incentives (early pay discounts, rights of return, rebates, chargebacks, and other discounts) included in certain customer contracts are recorded as a reduction in the transaction price. The Company applies the expected value method to estimate variable consideration. These estimates are based on historical experience, anticipated performance and the Company’s best judgment at the time and as a result, reflect applicable constraints. The Company includes in the transaction price an amount of variable consideration only to the extent that it is probable COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-30 that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. In certain of the Company’s arrangements related to product sales, a right of return exists, which is included in the transaction price. For these right of return arrangements, an asset (and corresponding adjustment to cost of sale) for its right to recover the products from the customers is recorded. The asset recognized is the carrying amount of the product (for example, inventory) less any expected costs to recover the products (including potential decreases in the value to the Company of the returned product). Additionally, the Company records a refund liability for the amount of consideration that it does not expect to be entitled. The amounts associated with right of return arrangements are not material to the Company's statement of position or operating results.Sales and Other Similar Taxes - The Company notes that under its contracts with customers, the customer is responsible for all sales and other similar taxes, which the Company will invoice the customer for if they are applicable. The Company excludes sales taxes and similar taxes from the measurement of transaction price.Cost to Obtain a Contract - The Company recognizes the incremental costs of obtaining a contract as an expense when incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less. Disaggregated Revenue - Revenue Streams & Timing of Revenue Recognition - The Company disaggregates revenue by strategic business unit and by geography for each strategic business unit which are categories that depict how the nature, amount and uncertainty of revenue and cash flows are affected by economic factors. This disaggregation also represents how the Company evaluates its financial performance, as well as how the Company communicates its financial performance to the investors and other users of its financial statements. Each strategic business unit represents the Company’s reportable segments and offers different products and services. The following tables provide disaggregation of revenue by reportable segment geography for the years ended December 31, 2021, 2020 and 2019 (in thousands):Year ended December 31, 20215.11BOAErgoLuganoMarucciVelocityAltorArnoldSternoTotalUnited States$ 363,017 $ 52,804 $ 33,319 $ 53,662 $ 116,277 $ 243,347 $ 154,882 $ 96,944 $ 361,586 $ 1,475,838 Canada 10,387 834 3,485 — 770 11,539 — 662 12,079 39,756 Europe 27,393 57,570 31,411 — 85 8,546 — 33,828 1,071 159,904 Asia Pacific 15,715 53,735 24,891 385 973 1,328 — 6,086 281 103,394 Other international 28,451 207 525 — 61 5,666 25,335 2,421 110 62,776 $ 444,963 $ 165,150 $ 93,631 $ 54,047 $ 118,166 $ 270,426 $ 180,217 $ 139,941 $ 375,127 $ 1,841,668 Year ended December 31, 20205.11BOAErgoMarucciVelocityAltorArnoldSternoTotalUnited States$ 319,181 $ 6,894 $ 26,653 $ 42,823 $ 194,578 $ 110,829 $ 61,112 $ 354,388 $ 1,116,458 Canada 7,192 98 3,251 136 10,124 — 296 14,793 35,890 Europe 28,239 9,783 25,679 24 7,688 — 29,190 537 101,140 Asia Pacific 15,157 8,476 17,868 444 1,028 — 4,604 96 47,673 Other international 31,337 27 1,277 15 2,578 19,217 3,788 167 58,406 $ 401,106 $ 25,278 $ 74,728 $ 43,442 $ 215,996 $ 130,046 $ 98,990 $ 369,981 $ 1,359,567 COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-31 Year ended December 31, 20195.11ErgoVelocityAltorArnoldSternoTotalUnited States$ 307,552 $ 28,028 $ 131,061 $ 101,622 72,593 $ 375,537 $ 1,016,393 Canada 8,203 3,541 6,134 — 712 15,987 34,577 Europe 29,042 27,318 6,207 — 36,711 1,412 100,690 Asia Pacific 13,933 30,197 756 — 6,019 2,385 53,290 Other international 29,915 911 3,684 19,802 3,913 123 58,348 $ 388,645 $ 89,995 $ 147,842 $ 121,424 119,948 $ 395,444 $ 1,263,298 Note F — Operating Segment DataAt December 31, 2021, the Company had nine reportable operating segments. Each operating segment represents a platform acquisition. Advanced Circuits has been classified as held for sale at December 31, 2021 and is not considered a reportable segment. The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. A description of each of the reportable segments and the types of products from which each segment derives its revenues is as follows:•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 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, 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 headwear and medical bracing. The system consists of three integral parts: a micro-adjustable dial, high-tensile lightweight laces, and low friction lace guides creating a superior alternative to laces, buckles, Velcro, and other traditional closure mechanisms. Each unique BOA configuration is engineered for fast, effortless, precision fit, 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 50% of its sales from outside of the United States.•Lugano Diamonds 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 is a leading designer, manufacturer, and marketer of premium wood and metal baseball bats, fielding gloves, batting gloves, bags, protective gear, sunglasses, on and off-field apparel, and other baseball and softball equipment used by professional and amateur athletes. Marucci also develops and licenses franchises for sports training facilities. Marucci is headquartered in Baton Rouge, Louisiana.•Velocity Outdoor is 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, Ravin, LaserMax and Centerpoint brands that are available through national retail COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-32 chains, mass merchants, dealer and distributor networks. Velocity Outdoor is headquartered in Bloomfield, New York. •Altor Solutions is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer components made from expanded polystyrene and expanded polypropylene. Altor provides products to a variety of end markets, including appliances and electronics, pharmaceuticals, health and wellness, automotive, building and other products. Altor is headquartered in Scottsdale, Arizona and operates 17 molding and fabricating facilities across North America. •Arnold is a global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including aerospace and defense, general industrial, motorsport/ automotive, oil and gas, medical, energy, reprographics and advertising specialties. Arnold produces high performance permanent magnets (PMAG), turnkey electric motors ("Ramco"), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (Flexmag™) that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide. Arnold is headquartered in Rochester, New York. •Sterno is a manufacturer and marketer of portable food warming fuel and creative table lighting solutions for the food service industry and flameless candles, outdoor lighting products, scented wax cubes and warmer products for consumers. Sterno's products include wick and gel chafing fuels, butane stoves and accessories, liquid and traditional wax candles, scented wax cubes and warmer products used for home decor and fragrance systems, catering equipment and outdoor lighting products. Sterno is headquartered in Corona, California. The tabular information that follows shows data for each of the operating segments reconciled to amounts reflected in the consolidated financial statements. The operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business. There were no significant inter-segment transactions. Summary of Operating SegmentsNet RevenuesYear ended December 31,(in thousands)2021202020195.11 $ 444,963 $ 401,106 $ 388,645 BOA 165,150 25,278 — Ergobaby 93,631 74,728 89,995 Lugano 54,047 — — Marucci 118,166 43,442 — Velocity Outdoor 270,426 215,996 147,842 Altor Solutions 180,217 130,046 121,424 Arnold 139,941 98,990 119,948 Sterno 375,127 369,981 395,444 Total 1,841,668 1,359,567 1,263,298 Reconciliation of segment revenues to consolidated revenues:Corporate and other — — — Total consolidated revenues 1,841,668 1,359,567 1,263,298 COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-33 Segment Profit (Loss) (1)Year ended December 31,(in thousands)2021202020195.11$ 39,374 $ 30,087 $ 22,408 BOA 33,976 (1,021) — Ergobaby 9,087 5,194 10,404 Lugano 9,923 — — Marucci 16,419 (4,272) — Velocity Outdoor (2) 39,725 24,925 (27,138) Altor Solutions 17,962 15,939 14,292 Arnold 11,988 2,096 8,361 Sterno 19,877 25,772 44,810 Total 198,331 98,720 73,137 Reconciliation of segment profit (loss) to consolidated income from continuing operations before income taxes:Interest expense, net (58,839) (45,769) (58,218) Other income (expense), net (1,184) (2,459) (2,046) Corporate and other (95,112) (46,058) (72,973) Total consolidated income (loss) from continuing operations before income taxes$ 43,196 $ 4,434 $ (60,100) (1)Segment profit (loss) represents operating income (loss).(2)Velocity Outdoor - Operating loss from Velocity Outdoor for the year ended December 31, 2019 includes $32.9 million in goodwill impairment. Depreciation and Amortization ExpenseYear ended December 31,(in thousands)2021202020195.11$ 22,048 $ 21,085 $ 21,131 BOA 19,999 5,515 — Ergobaby 8,405 8,169 8,531 Lugano 1,881 — — Marucci 8,513 10,109 — Velocity Outdoor 12,451 12,555 12,984 Altor Solutions 12,700 12,474 12,183 Arnold 8,728 6,710 6,459 Sterno 22,918 22,059 22,034 Total 117,643 98,676 83,322 Reconciliation of segment to consolidated total:Amortization of debt issuance costs and debt premiums/ discounts 2,896 2,232 3,773 Consolidated total$ 120,539 $ 100,908 $ 87,095 COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-34 Accounts ReceivableIdentifiable AssetsDecember 31,December 31(in thousands)202120202021 (1)2020 (1)5.11$ 50,461 $ 50,082 $ 354,666 $ 354,033 BOA 2,387 1,492 263,052 269,438 Ergobaby 11,167 5,034 86,530 91,293 Lugano 27,812 — 233,720 — Marucci 23,261 10,172 146,087 129,116 Velocity 36,017 40,126 219,545 191,180 Altor Solutions 38,457 34,088 205,631 164,800 Arnold 20,372 13,237 101,591 75,958 Sterno 72,179 70,467 244,338 251,307 Sales allowance accounts (13,851) (17,970) — — Total 268,262 206,728 1,855,160 1,527,125 Reconciliation of segment to consolidated totals:Corporate and other identifiable assets — — 106,011 8,917 Assets held for sale — — 99,423 101,864 Assets of discontinued operations — — — 87,377 Total$ 268,262 $ 206,728 $ 2,060,594 $ 1,725,283 (1) Does not include accounts receivable balances per schedule above or goodwill balances - refer to "Note H - Goodwill and Intangible Assets" for a schedule of goodwill by segment.Geographic InformationNet RevenuesRevenue attributable to Canada represented approximately 10.9% of total international revenues in 2021, 14.8% of total international revenues in 2020, and 14.0% of total international revenues in 2019. Revenue attributable to any other individual foreign country was not material in 2021, 2020 or 2019. Identifiable AssetsSeveral of the Company's operating segments have subsidiaries with assets located outside of the United States. The following table presents identifiable assets by geographic area:Identifiable AssetsDecember 31, (in thousands)20212020United States$ 1,894,754 $ 1,473,100 Canada 688 1,363 Europe 36,075 37,621 Other international 29,654 23,958 Total identifiable assets (1)$ 1,961,171 $ 1,536,042 (1) Does not include assets held for sale or assets of discontinued operations during the years ended December 31, 2021 and 2020.COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-35 Note G - Inventory and Property, Plant, and EquipmentInventoryDecember 31,(in thousands)20212020Raw materials and supplies$ 105,654 $ 75,285 Work-in-process 27,026 13,151 Finished goods 457,274 283,380 589,954 371,816 Less: obsolescence reserve (27,870) (21,222) Total$ 562,084 $ 350,594 Property, plant and equipmentDecember 31,(in thousands)20212020Machinery and equipment$ 206,919 $ 169,980 Office furniture, computers and software 52,794 45,223 Leasehold improvements 56,988 45,305 Construction in process 13,345 10,817 Buildings and land 15,340 15,713 345,386 287,038 Less: accumulated depreciation (166,993) (133,385) Total$ 178,393 $ 153,653 Depreciation expense was approximately $37.3 million, $31.1 million and $29.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. Note H — Goodwill and Intangible AssetsGoodwillAs a result of acquisitions of various businesses, the Company has significant intangible assets on its balance sheet that include goodwill and indefinite-lived intangibles. The Company’s goodwill and indefinite-lived intangibles are tested and reviewed for impairment annually as of March 31st or more frequently if facts and circumstances warrant by comparing the fair value of each reporting unit to its carrying value. Each of the Company’s businesses represent a reporting unit. A reconciliation of the change in the carrying value of goodwill by segment for the years ended December 31, 2021 and 2020 are as follows (in thousands):COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-36 Balance at January 1, 2021Acquisitions (1) Balance at December 31, 20215.11$ 92,966 $ — $ 92,966 BOA 254,153 — 254,153 Ergobaby 63,531 (2,083) 61,448 Lugano — 83,458 83,458 Marucci 68,170 39,685 107,855 Velocity Outdoor 30,079 — 30,079 Altor Solutions 75,369 15,474 90,843 Arnold 26,903 12,364 39,267 Sterno 55,336 — 55,336 Total$ 666,507 $ 148,898 $ 815,405 (1) Acquisition of businesses during the year ended December 31, 2021 includes the acquisition of Lugano by the Company, and add-on acquisitions at Altor, Arnold, and Marucci.Balance at January 1, 2020Acquisitions (1) Balance at December 31, 20205.11$ 92,966 $ — $ 92,966 BOA — 254,153 254,153 Ergobaby 61,031 2,500 63,531 Marucci — 68,170 68,170 Velocity Outdoor 30,079 — 30,079 ACI — — — Altor Solutions 72,708 2,661 75,369 Arnold 26,903 — 26,903 Sterno 55,336 — 55,336 Total$ 339,023 $ 327,484 $ 666,507 (1) Acquisition of businesses during the year ended December 31, 2020 includes the acquisitions of Marucci and BOA by the Company, and add-on acquisitions at Altor and Ergobaby.Approximately $223.3 million of goodwill is deductible for income tax purposes at December 31, 2021.2021 Annual Impairment TestingThe Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform quantitative goodwill impairment testing. We determined that the Arnold reporting unit required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on qualitative factors alone. For the reporting units that were tested only on a qualitative basis for the 2021 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded the carrying value of these reporting units.The quantitative test of Arnold was performed using an income approach to determine the fair value of the reporting unit. The discount rate used in the income approach was 13.0% and the results of the quantitative impairment testing indicated that the fair value of the Arnold reporting unit exceeded the carrying value by 272%.COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-37 2020 Annual Impairment TestingThe Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform quantitative goodwill impairment testing. We determined that the Ergobaby, Altor Solutions and Velocity reporting units required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on qualitative factors alone. For the reporting units that were tested only on a qualitative basis for the 2020 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded the carrying value of these reporting units.The quantitative tests of Ergobaby, Altor Solutions and Velocity were performed using an income approach to determine the fair value of the reporting units. For Ergobaby, the discount rate used in the income approach was 15.9% and the results of the quantitative impairment testing indicated that the fair value of the Ergobaby reporting unit exceeded the carrying value by 14.0%. For Altor, the discount rate used in the income approach was 13.3%, and the results of the quantitative impairment testing indicated that the fair value of the Altor reporting unit exceeded the carrying value by 3.8%. For Velocity, the discount rate used in the income approach was 12.8%, and the results of the quantitative impairment testing indicated that the fair value of the Velocity reporting unit exceeded the carrying value by 16.4%.2019 Interim Impairment TestingVelocity OutdoorThe Company performed interim quantitative impairment testing of Velocity Outdoor at September 30, 2019. As a result of operating results below forecasts in the current period as well as a re-forecast of the Velocity business in which planned earnings and revenue fell below the forecasts of prior periods, the Company determined that a triggering event occurred in the third quarter of 2019 and performed an interim impairment test of goodwill as of September 30, 2019. The Company used an income approach for the impairment test, whereby we estimate the fair value of the reporting unit based on the present value of future cash flows. Cash flow projections are based on management's estimate of revenue growth rates and operating margins, and take into consideration industry and market conditions as well as company specific economic factors. The Company used a weighted average cost of capital of 12.2% in the income approach. The discount rate used was based on the weighted average cost of capital adjusted for the relevant risk associated with business specific characteristics and Velocity's ability to execute on the projected cash flows. Based on the results of the impairment test, the fair value of Velocity did not exceed the carrying value, indicating that the goodwill at Velocity is impaired. The difference between the carrying value and fair value of the Velocity business was $32.9 million, which the Company has recorded as impairment expense in the accompanying consolidated statement of operations for the year December 31, 2019. 2019 Annual Impairment TestingThe Company uses a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform quantitative goodwill impairment testing. All of the Company's reporting units except Liberty were tested qualitatively at March 31, 2019. We determined that the Liberty reporting unit required additional quantitative testing because we could not conclude that the fair value of the reporting unit exceeded its carrying value based on qualitative factors alone. We used an income approach and market approach for the quantitative impairment test that was performed of the Liberty business at March 31, 2019, with equal weighting assigned to each. The discount rate used in the income approach was 14.8%. The results of the quantitative impairment testing indicated that the fair value of the Liberty reporting unit exceeded the carrying value. For the reporting units that were tested qualitatively for the 2019 annual impairment testing, the results of the qualitative analysis indicated that it is more likely than not that the fair value exceeded their carrying value.The following is a summary of the net carrying amount of goodwill at December 31, 2021 and 2020 (in thousands):December 31, 2021December 31, 2020Goodwill - gross carrying amount$ 873,150 $ 724,252 Accumulated impairment losses (57,745) (57,745) Goodwill - net carrying amount$ 815,405 $ 666,507 COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-38 Intangible AssetsIntangible assets are comprised of the following (in thousands):December 31, 2021December 31, 2020Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying AmountWeightedAverageUseful LivesCustomer relationships$ 566,805 $ (180,581) $ 386,224 $ 505,657 $ (148,599) $ 357,058 13Technology and patents 153,124 (49,898) 103,226 145,392 (25,552) 119,840 12Trade names, subject to amortization 411,100 (87,178) 323,922 357,978 (64,478) 293,500 16Non-compete agreements 4,617 (3,502) 1,115 3,378 (3,159) 219 4Other contractual intangible assets 1,960 (735) 1,225 210 (210) — 4 1,137,606 (321,894) 815,712 1,012,615 (241,998) 770,617 Trade names, not subject to amortization 56,965 — 56,965 56,965 — 56,965 In-process research and development (1) — — — 6,500 — 6,500 Total intangibles, net$ 1,194,571 $ (321,894) $ 872,677 $ 1,076,080 $ (241,998) $ 834,082 (1) In-process research and development is considered indefinite lived until the underlying technology becomes viable, at which point the intangible asset will be amortized over the expected useful life. The Company determined that the in-process research and development technology asset acquired in the BOA acquisition achieved viability in the second quarter of 2021, and will be amortized over a ten-year period.The Company’s amortization expense of intangible assets for the years ended December 31, 2021, 2020 and 2019 totaled $80.3 million, $61.7 million and $53.6 million, respectively.Estimated charges to amortization expense of intangible assets over the next five years, is as follows, (in thousands):2022$ 76,799 2023$ 75,067 2024$ 73,683 2025$ 68,566 2026$ 65,836 Note I – DebtFinancing Arrangements2021 Credit FacilityOn March 23, 2021, we entered into a Second Amended and Restated Credit Agreement (the "2021 Credit Facility") to amend and restate the 2018 Credit Facility (as previously restated and amended) among the Company, the lenders from time to time party thereto (the “Lenders”), and Bank of America, N.A., as Administrative Agent. The 2021 Credit Facility is secured by all of the assets of the Company, including all of its equity interests in, and loans to, its consolidated subsidiaries. The 2021 Credit Facility provides for revolving loans, swing line loans and letters of credit (the “2021 Revolving Credit Facility”) up to a maximum aggregate amount of $600 million and also permits the Company, prior to the applicable maturity date, to increase the revolving loan commitment and/or obtain term loans in an aggregate amount of up to $250 million, subject to certain restrictions and conditions. All amounts outstanding under the 2021 Revolving Credit Facility will become due on March 23, 2026, which is the maturity date of loans advanced under the 2021 Credit Facility. COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-39 COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2018 Credit Facility
On April 18, 2018, the Company entered into an Amended and Restated Credit Agreement (the "2018 Credit
Facility"). The 2018 Credit Facility provided for (i) revolving loans, swing line loans and letters of credit (the “2018
Revolving Credit Facility”) up to a maximum aggregate amount of $600 million, and (ii) a $500 million term loan (the
“2018 Term Loan”). The Company repaid the outstanding amounts under the 2018 Term Loan in 2019, and used a
portion of the proceeds from the issuance of the 2029 Senior Notes to repay the amount outstanding under the
2018 Revolving Credit Facility in March 2021.
Senior Notes
2032 Senior Notes
On November 17, 2021, we consummated the issuance and sale of $300 million aggregate principal amount of our
5.000% Senior Notes due 2032 (the “2032 Notes” of "2032 Senior Notes") offered pursuant to a private offering to
qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under
Regulation S under the Securities Act. The 2032 Notes were issued pursuant to an indenture, dated as of
November 17, 2021 (the “2032 Notes Indenture”), between the Company and U.S. Bank National Association, as
trustee (the “Trustee”). The 2032 Notes bear interest at the rate of 5.000% per annum and will mature on January
15, 2032. Interest on the 2032 Notes is payable in cash on January 15 and July 15 of each year, beginning on July
15, 2022.
The proceeds from the sale of the 2032 Notes was used to repay a portion of our debt under the 2021 Revolving
Credit Facility.
2029 Senior Notes
On March 23, 2021, we consummated the issuance and sale of $1,000 million aggregate principal amount of our
5.250% Senior Notes due 2029 (the "2029 Notes" or "2029 Senior Notes") offered pursuant to a private offering to
qualified institutional buyers in accordance with Rule 144A under the Securities Act, and to non-U.S. persons under
Regulation S under the Securities Act. The 2029 Notes were issued pursuant to an indenture, dated as of March 23,
2021 (the “2029 Notes Indenture”), between the Company and U.S. Bank National Association, as trustee (the
"Trustee"). The 2029 Notes bear interest at the rate of 5.250% per annum and will mature on April 15, 2029.
Interest on the 2029 Notes is payable in cash on April 15th and October 15th of each year. The first interest
payment date on the 2029 Senior Notes was October 15, 2021. The 2029 Notes are general unsecured obligations
of the Company and are not guaranteed by our subsidiaries.
The 2029 Notes rank equal in right of payment with all of the Company’s existing and future senior unsecured
indebtedness, and rank senior in right of payment to all of the Company’s future subordinated indebtedness, if any.
The 2029 Notes will be effectively subordinated to the Company’s existing and future secured indebtedness, to the
extent of the value of the assets securing such indebtedness, including the indebtedness under the Company’s
credit facilities described below. The 2032 Notes Indenture and the 2029 Notes Indenture contains several
restrictive covenants including, but not limited to, limitations on the following: (i) the incurrence of additional
indebtedness, (ii) restricted payments, (iii) the purchase, redemption or retirement of capital stock or subordinated
debt, (iv) dividends and other payments affecting restricted subsidiaries, (v) transactions with affiliates, (vi) asset
sales and mergers and consolidations, (vii) future subsidiary guarantees and (viii) incurring liens, (ix) entering into
sale-leaseback transactions and (x) making certain investments, subject in each case to certain exceptions
The proceeds from the sale of the 2029 Notes was used to repay debt outstanding under the 2018 Credit Facility in
connection with our entry into the 2021 Credit Facility, as described above, and to redeem our 8.000% Senior Notes
due 2026 (the “2026 Senior Notes”).
2026 Senior Notes
Our 2026 Senior Notes bore interest at 8.000% per annum and were scheduled to mature on May 1, 2026. On
March 2, 2021, pursuant to an indenture, dated as of April 18, 2018 between the Company and U.S. Bank National
Association, as trustee ("Trustee"), the Trustee delivered redemption notices, on behalf of the Company, to holders
of the Company’s 2026 Senior Notes to redeem the 2026 Senior Notes on April 1, 2021. The principal amount of the
2026 Senior Notes redeemed was $600 million, which represented all of the outstanding principal of the 2026
Senior Notes. The 2026 Senior Notes were redeemed at 100% of their principal, plus an applicable premium, and
accrued and unpaid interest as of the redemption date. On March 23, 2021, the proceeds required for the
redemption of the 2026 Senior Notes, the applicable premium and accrued interest totaling $647.7 million was
F-40
irrevocably deposited with the Trustee and held by the Trustee until the date of redemption, April 1, 2021. The redemption of the 2026 Senior Notes resulted in a Loss on Debt Extinguishment of approximately $33.3 million, which is comprised of the premium paid for early redemption of the 2026 Senior Notes, and the expensing of the deferred financing costs and bond premium associated with the 2026 Senior Notes. The following table provides the Company’s outstanding long-term debt and effective interest rates at December 31, 2021 and December 31, 2020 (in thousands):December 31, 2021December 31, 2020Effective Interest RateAmountEffective Interest RateAmount2029 Senior Notes4.89%$ 1,000,000 N/a$ — 2032 Senior Notes5.29% 300,000 N/a — 2026 Senior NotesN/a — 7.92% 600,000 Revolving Credit FacilityN/a — 2.13% 307,000 Unamortized premiums and debt issuance costs (15,174) (7,540) Long-term debt$ 1,284,826 $ 899,460 Debt Issuance CostsDeferred debt issuance costs represent the costs associated with the issuance of the Company's financing arrangements. In connection with the 2032 Senior Notes offering in November 2021, the Company recorded $4.3 million in deferred financing costs. In addition, the Company recorded $12.0 million in deferred financing costs related to the 2029 Senior Notes offering in March 2021. The net deferred financing costs associated with the Company's 2026 Senior Notes were $7.2 million at March 31, 2021, and were expensed on April 1, 2021, the date of the redemption of the 2026 Senior Notes. In connection with entering into the 2021 Credit Facility, the Company recorded $5.4 million in deferred financing costs. The 2018 Credit Facility was categorized as a debt modification, and the Company incurred $8.4 million of debt issuance costs, $7.8 million of which were capitalized and will be amortized over the life of the related debt instrument, and $0.6 million that were expensed as costs incurred. For the year ended December 31, 2019, in connection with the repayment of the 2018 Term Loan, the Company wrote-off $12.3 million in deferred financing costs associated with the 2018 Term Loan. The write-off of the deferred financing costs and original issue discount was recorded as loss on debt extinguishment in the accompanying consolidated statement of operations. Since the Company can borrow, repay and reborrow principal under the 2021 Revolving Credit Facility, the debt issuance costs associated with the 2021 Revolving Credit Facility have been classified as other non-current assets in the accompanying consolidated balance sheet. The debt issuance costs associated with the Senior Notes are classified as a reduction of long-term debt in the accompanying consolidated balance sheets. The following table summarizes debt issuance costs at December 31, 2021 and December 31, 2020, and the balance sheet classification in each of the periods presents (in thousands): December 31,20212020Deferred debt issuance costs$ 27,784 $ 16,466 Accumulated amortization (6,021) (6,121) Deferred debt issuance costs, net$ 21,763 $ 10,345 Balance sheet classification:Other noncurrent assets$ 6,589 $ 2,805 Long-term debt 15,174 7,540 $ 21,763 $ 10,345 COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-41 CovenantsThe Company is subject to certain customary affirmative and restrictive covenants arising under the 2021 Credit Facility. The following table reflects required and actual financial ratios as of December 31, 2021 included as part of the affirmative covenants in the 2021 Credit Facility:Description of Required Covenant RatioCovenant Ratio RequirementActual RatioFixed Charge Coverage RatioGreater than or equal to 1.50: 1.005.07:1.00Total Secured Debt to EBITDA RatioLess than or equal to 3.50: 1.000.00:1.00Total Debt to EBITDA RatioLess than or equal to 5.00: 1.002.96:1.00A breach of any of these covenants will be an event of default under the 2021 Credit Facility. Upon the occurrence of an event of default under the 2021 Credit Facility, the 2021 Revolving Credit Facility may be terminated, and all outstanding loans and other obligations under the 2021 Credit Facility may become immediately due and payable and any letters of credit then outstanding may be required to be cash collateralized, and the Agent and the Lenders may exercise any rights or remedies available to them under the 2021 Credit Facility. Any such event would materially impair the Company’s ability to conduct its business. As of December 31, 2021, the Company was in compliance with all covenants as defined in the 2021 Credit Facility. Letters of creditThe 2021 Credit Facility allows for letters of credit in an aggregate face amount of up to $100 million. Letters of credit outstanding at December 31, 2021 totaled $1.0 million and at December 31, 2020 totaled $1.3 million. Interest Rate SwapIn September 2014, the Company purchased an interest rate swap (the "Swap") with a notional amount of $220 million on our outstanding debt on our Term Loan. The Swap was effective April 1, 2016 through June 6, 2021, the original termination date of the 2014 Term Loan. The agreement required the Company to pay interest on the notional amount at the rate of 2.97% in exchange for the three-month LIBOR rate. In connection with the repayment of the 2018 Term Loan in November 2019, the Company settled the Swap with a payment of $4.9 million, the fair value of the Swap as of the date of settlement. Interest expenseThe following details the components of interest expense in each of the years ended December 31, 2021, 2020 and 2019:Year ended December 31,(in thousands)202120202019Interest on credit facilities$ 2,669 $ 2,164 $ 21,996 Interest on Senior Notes 54,441 42,400 32,000 Unused fee on Revolving Credit Facility 1,598 1,386 1,851 Amortization of debt premium/ discount (83) (222) — Unrealized (gains) losses on interest rate derivatives — — 3,486 Other interest expense 227 294 772 Interest income (13) (253) (1,887) Interest expense, net$ 58,839 $ 45,769 $ 58,218 Note J – Defined Benefit PlanIn connection with the acquisition of Arnold, the Company has a defined benefit plan covering substantially all of Arnold’s employees at its Lupfig, Switzerland location. The benefits are based on years of service and the employees’ highest average compensation during the specific period. COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-42 During the year ended December 31, 2020, Arnold terminated certain employees at the Switzerland location who were participants in the defined benefit plan. The termination of the employees resulted in a decrease in the accumulated benefit obligation liability in 2020. A curtailment loss of $0.1 million and $0.4 million was recognized during the years ended December 31, 2021 and 2020, respectively. The following table sets forth the plan’s funded status and amounts recognized in the Company’s consolidated balance sheets at December 31, 2021 and 2020:December 31,(in thousands)20212020Change in benefit obligation:Benefit obligation, beginning of year$ 14,025 $ 14,854 Service cost 422 571 Interest cost 38 31 Actuarial (gain)/loss (484) (63) Plan amendment (267) (47) Employee contributions and transfer 304 356 Benefits paid 253 (153) Settlement (1,445) (1,998) Plan curtailment — (921) Foreign currency translation (535) 1,395 Benefit obligation$ 12,311 $ 14,025 Change in plan assets:Fair value of assets, beginning of period$ 10,034 $ 10,108 Actual return on plan assets 349 407 Company contribution 324 385 Employee contributions and transfer 304 356 Benefits paid 253 (153) Settlement (1,445) (1,998) Foreign currency translation (370) 929 Fair value of assets 9,449 10,034 Funded status$ (2,862) $ (3,991) The unfunded liability of $2.9 million and $4.0 million at December 31, 2021 and 2020, respectively, is recognized in the consolidated balance sheet within other non-current liabilities. Net periodic benefit cost consists of the following:Year ended December 31,(in thousands)202120202019Service cost$ 422 $ 571 $ 512 Interest cost 38 31 132 Expected return on plan assets (73) (84) (135) Amortization of unrecognized loss (12) 232 140 Effect of curtailment 111 381 — Net periodic benefit cost$ 486 $ 1,131 $ 649 COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-43 Assumptions used to determine the benefit obligations and components of the net periodic benefit cost at December 31, 2021 and 2020:December 31,20212020Discount rate 0.35 % 0.20 %Expected return on plan assets 0.80 % 0.80 %Rate of compensation increase 2.00 % 2.00 %The Company considers the historical level of long-term returns and the current level of expected long-term returns for the plan assets, as well as the current and expected allocation of assets when developing its expected long-term rate of return on assets assumption. The assumptions used for the plan are based upon customary rates and practices for the location of the Company.Arnold expects to contribute approximately $0.3 million to the defined benefit plan in 2022. The following presents the benefit payments which are expected to be paid for the plan in each year indicated (in thousands):2022$ 451 2023 460 2024 682 2025 597 2026 653 Thereafter 2,744 $ 5,587 Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market risk and providing adequate liquidity to meet immediate and future benefit payment requirements.The assets of the plan are reinsured in their entirety with Swiss Life Ltd. (“Swiss Life”) within the framework of the corresponding contracts with Swiss Life Collective BVG Foundation and Swiss Life Complementary Foundation. The assets are guaranteed by the insurance company and pooled with the assets of other participating employers. The allocation of pension plan assets by category in Swiss Life’s group life portfolio is as follows at December 31, 2021:Fixed income bonds and securities 63 %Real estate 20 %Equities and investment funds 13 %Certificates of deposit and cash and cash equivalents 2 %Other investments 2 % 100 %The plan assets are pooled with assets of other participating employers and are not separable; therefore the fair values of the pension plan assets at December 31, 2021 and 2020 were considered Level 3.Note K — Stockholders' Equity Trust Common SharesThe Trust is authorized to issue 500,000,000 Trust common shares and the LLC is authorized to issue a corresponding number of LLC interests. The Company will, at all times, have the identical number of LLC interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-44 COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trust share is entitled to one vote per share on any matter with respect to which members of the LLC are entitled to
vote.
At-The-Market Equity Offering Program
On September 7, 2021, the Company filed a prospectus supplement pursuant to which the Company may, but has
no obligation to, issue and sell up to $500 million common shares of the Trust in amounts and at times to be
determined by the Company. Actual sales will depend on a variety of factors to be determined by us from time to
time, including, market conditions, the trading price of Trust common shares and determinations by us regarding
appropriate sources of funding. The Company incurred $0.5 million in total costs related to the ATM program during
the year ended December 31, 2021.
In connection with this offering, the Company entered into an At Market Issuance Sales Agreement (the “Sales
Agreement”) with B. Riley Securities, Inc. and Goldman Sachs & Co. LLC (each a “Sales Agent” and, collectively,
the “Sales Agents”). The Sales Agreement provides that the Company may offer and sell Trust common shares from
time to time through the Sales Agents up to $500 million, in amounts and at times to be determined by the
Company. Pursuant to the Sales Agreement, the shares may be offered and sold through each Sales Agent, acting
separately, in ordinary brokers’ transactions, to or through a market maker, on or through the New York Stock
Exchange or any other market venue where the securities may be traded, in the over-the-counter market, in
privately negotiated transactions, in transactions that are deemed to be “at the market offerings” as defined in Rule
415 under the Securities Act or through a combination of any such methods of sale.
During the year ended December 31, 2021, the Company sold 3,837,885 Trust common shares under the Sales
Agreement. For the same period, the Company received total net proceeds of approximately $115.1 million from
these sales, and incurred approximately $2.1 million in commissions payable to the Sales Agents.
Secondary Offering
In May 2020, the Company completed an offering of 5,000,000 Trust common shares at a public offering price of
$17.60 per share. The net proceeds to the Company, after deducting the underwriter's discount and offering costs,
totaled approximately $83.9 million.
Trust Preferred Shares
The Trust is authorized to issue up to 50,000,000 Trust preferred shares and the Company is authorized to issue a
corresponding number of Trust Interests.
Series C Preferred Shares
On November 20, 2019, the Trust issued 4,000,000 7.875% Series C Preferred Shares (the "Series C Preferred
Shares") with a liquidation preference of $25.00 per share, and on December 2, 2019, the Trust issued 600,000 of
the Series C Preferred Shares which were sold pursuant to an option to purchase additional shares by the
underwriters. Total proceeds from the issuance of the Series C Preferred Shares were $115.0 million, or $111.0
million net of underwriters' discount and issuance costs. Distributions on the Series C Preferred Shares will be
payable quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30,
July 30, and October 30 of each year, beginning on January 30, 2020, at a rate per annum of 7.875%. Distributions
on the Series C Preferred Shares are cumulative and at December 31, 2021, $1.5 million of Series C distributions
are accumulated and unpaid. Unless full cumulative distributions on the Series C Preferred Shares have been or
contemporaneously are declared and set apart for payment of the Series C Preferred Shares for all past distribution
periods, no distribution may be declared or paid for payment on the Trust common shares. The Series C Preferred
Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as
provided for in the share designation for the Series C Preferred Shares. The Series C Preferred Shares may be
redeemed at the Company's option, in whole or in part, at any time after January 30, 2025, at a price of $25.00 per
share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding,
the redemption date. Holders of Series C Preferred Shares will have no right to require the redemption of the Series
C Preferred Shares and there is no maturity date.
If a certain tax redemption event occurs prior to January 30, 2025, the Series C Preferred Shares may be redeemed
at the Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of
such tax redemption event, at a price of $25.25 per share, plus accumulated and unpaid distributions to, but
excluding, the redemption date. If a certain fundamental change related to the Series C Preferred Shares or the
Company occurs (whether before, on or after January 30, 2025), the Company will be required to repurchase the
Series C Preferred Shares at a price of $25.25 per share, plus accumulated and unpaid distributions to, but
F-45
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
excluding, the date of purchase. If (i) a fundamental change occurs and (ii) the Company does not give notice prior
to the 31st day following the fundamental change to repurchase all the outstanding Series C Preferred Shares, the
distribution rate per annum on the Series C Preferred Shares will increase by 5.00%, beginning on the 31st day
following such fundamental change. Notwithstanding any requirement that the Company repurchase all of the
outstanding Series C Preferred Shares, the increase in the distribution rate is the sole remedy to holders in the
event the Company fails to do so, and following any such increase, the Company will be under no obligation to
repurchase any Series C Preferred Shares.
Series B Preferred Shares
On March 13, 2018, the Trust issued 4,000,000 7.875% Series B Preferred Shares (the "Series B Preferred
Shares") with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.5 million net
of underwriters' discount and issuance costs. Distributions on the Series B Preferred Shares will be payable
quarterly in arrears, when and as declared by the Company's board of directors on January 30, April 30, July 30,
and October 30 of each year, beginning on July 30, 2018, at a rate per annum of 7.875%. Distributions on the
Series B Preferred Shares are cumulative and at December 31, 2021, $1.3 million of Series B distributions are
accumulated and unpaid. Unless full cumulative distributions on the Series B Preferred Shares have been or
contemporaneously are declared and set apart for payment of the Series B Preferred Shares for all past distribution
periods, no distribution may be declared or paid for payment on the Trust common shares. The Series B Preferred
Shares are not convertible into Trust common shares and have no voting rights, except in limited circumstances as
provided for in the share designation for the Series B Preferred Shares. The Series B Preferred Shares may be
redeemed at the Company's option, in whole or in part, at any time after April 30, 2028, at a price of $25.00 per
share, plus any accumulated and unpaid distributions (thereon whether authorized or declared) to, but excluding,
the redemption date. Holders of Series B Preferred Shares will have no right to require the redemption of the Series
B Preferred Shares and there is no maturity date.
If a certain tax redemption event occurs prior to April 30, 2028, the Series B Preferred Shares may be redeemed at
the Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of
such tax redemption event, at a price of $25.25 per share, plus accumulated and unpaid distributions to, but
excluding, the redemption date. If a certain fundamental change related to the Series B Preferred Shares or the
Company occurs (whether before, on or after April 30, 2028), the Company will be required to repurchase the Series
B Preferred Shares at a price of $25.25 per share, plus accumulated and unpaid distributions to, but excluding, the
date of purchase. If (i) a fundamental change occurs and (ii) the Company does not give notice prior to the 31st day
following the fundamental change to repurchase all the outstanding Series B Preferred Shares, the distribution rate
per annum on the Series B Preferred Shares will increase by 5.00%, beginning on the 31st day following such
fundamental change. Notwithstanding any requirement that the Company repurchase all of the outstanding Series B
Preferred Shares, the increase in the distribution rate is the sole remedy to holders in the event the Company fails
to do so, and following any such increase, the Company will be under no obligation to repurchase any Series B
Preferred Shares.
Series A Preferred Shares
On June 28, 2017, the Trust issued 4,000,000 7.250% Series A Preferred Shares (the "Series A Preferred Shares")
with a liquidation preference of $25.00 per share, for gross proceeds of $100.0 million, or $96.4 million net of
underwriters' discount and issuance costs. When, and if declared by the Company's board of directors, distribution
on the Series A Preferred Shares will be payable quarterly on January 30, April 30, July 30, and October 30 of each
year, beginning on October 30, 2017, at a rate per annum of 7.250%. Distributions on the Series A Preferred
Shares are discretionary and non-cumulative. The Company has no obligation to pay distributions for a quarterly
distribution period if the board of directors does not declare the distribution before the scheduled record of date for
the period, whether or not distributions are paid for any subsequent distribution periods with respect to the Series A
Preferred Shares, or the Trust common shares. If the Company's board of directors does not declare a distribution
for the Series A Preferred Shares for a quarterly distribution period, during the remainder of that quarterly
distribution period the Company cannot declare or pay distributions on the Trust common shares. The Series A
Preferred Shares are not convertible into Trust common shares and have no voting rights, except in limited
circumstances as provided for in the share designation for the Series A Preferred Shares.
The Series A Preferred Shares may be redeemed at the Company's option, in whole or in part, at any time after July
30, 2022, at a price of $25.00 per share, plus declared and unpaid distribution to, but excluding, the redemption
date, without payment of any undeclared distributions. Holders of Series A Preferred Shares will have no right to
require the redemption of the Series A Preferred Shares and there is no maturity date.
F-46
COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If a certain tax redemption event occurs prior to July 30, 2022, the Series A Preferred Shares may be redeemed at
the Company's option, in whole but not in part, upon at least 30 days’ notice, within 60 days of the occurrence of
such tax redemption event, at a price of $25.25 per share, plus declared and unpaid distributions to, but excluding,
the redemption date, without payment of any undeclared distributions. If a certain fundamental change related to
the Series A Preferred Shares or the Company occurs (whether before, on or after July 30, 2022), the Company will
be required to repurchase the Series A Preferred Shares at a price of $25.25 per share, plus declared and unpaid
distributions to, but excluding, the date of purchase, without payment of any undeclared distributions. If (i) a
fundamental change occurs and (ii) the Company does not give notice prior to the 31st day following the
fundamental change to repurchase all the outstanding Series A Preferred Shares, the distribution rate per annum on
the Series A Preferred Shares will increase by 5.00%, beginning on the 31st day following such fundamental
change. Notwithstanding any requirement that the Company repurchase all of the outstanding Series A Preferred
Shares, the increase in the distribution rate is the sole remedy to holders in the event the Company fails to do so,
and following any such increase, the Company will be under no obligation to repurchase any Series A Preferred
Shares.
Profit Allocation Interests
The Profit Allocation Interests represent the original equity interest in the Company. The holders of the Allocation
Interests (“Holders”), through Sostratus LLC, are entitled to receive distributions pursuant to a profit allocation
formula upon the occurrence of certain events. The distributions of the profit allocation is paid upon the occurrence
of the sale of a material amount of capital stock or assets of one of the Company’s businesses (“Sale Event”) or, at
the option of the Holders, at each five year anniversary date of the acquisition of one of the Company’s businesses
(“Holding Event”). The Company records distributions of the profit allocation to the Holders upon occurrence of a
Sale Event or Holding Event as dividends declared on Allocation Interests to stockholders’ equity when they are
approved by the Company’s board of directors.
The following is a summary of the profit allocation payments made to the Allocation Interest Holders during each of
the years ended December 31, 2021, 2020 and 2019.
Year ended December 31, 2021
•
•
The fifteen-year anniversary of the acquisition of ACI occurred in May 2021 which represented a Holding
Event. The Company declared and paid a distribution to the Holders of $12.1 million in July 2021.
During the fourth quarter of 2021, the Company declared and paid a distribution to the Allocation Member of
$16.8 million related to the sale of Liberty (refer to Note D - "Discontinued Operations").
Year ended December 31, 2020
•
•
The ten-year anniversary of Liberty occurred in March 2020 which represented a Holding Event. The
Holders elected to defer the distribution of $3.3 million until after the end of 2020. The ten-year anniversary
of Ergo occurred in September 2020 which represented a Holding Event. The Holders elected to defer the
distribution of $2.0 million until after the end of 2020. The profit allocation payment of $3.3 million related to
the Liberty Holding Event and the profit allocation payment of $2.0 million related to the Ergobaby Holding
Event were both paid in January 2021.
The five-year anniversary of the acquisition of Sterno Products occurred in October 2019 which represented
a Holding Event. The Company declared and paid a distribution to the Holders of $9.1 million in February
2020.
Year ended December 31, 2019
•
•
•
During the second quarter of 2019, the Company declared and paid a distribution to the Allocation Member
of $8.0 million related to the sale of Manitoba Harvest and working capital settlements from prior Sale
Events (refer to Note D - "Discontinued Operations").
During the third quarter of 2019, the Company declared and paid a distribution to the Allocation Member of
$43.3 million related to the sale of Clean Earth (refer to Note D - "Discontinued Operations").
During the fourth quarter of 2019, the Company declared and paid a distribution to the Allocation Member of
$9.1 million related to the deferred consideration from the Manitoba Harvest sale and the working capital
settlement received from the sale of Clean Earth (refer to Note D - "Discontinued Operations").
F-47
Reconciliation of net loss available to common shares of HoldingsThe following table reconciles net income (loss) attributable to Holdings to net loss attributable to the common shares of Holdings:Year ended December 31,(in thousands)202120202019Net income (loss) from continuing operations attributable to Holdings $ 17,119 $ (5,261) $ (70,667) Less: Distributions paid - Allocation Interests 34,058 9,087 60,369 Less: Distributions paid - Preferred Shares 24,181 23,678 15,125 Less: Accrued distributions - Preferred Shares 2,869 2,869 2,315 Net loss from continuing operations attributable to common shares of Holdings$ (43,989) $ (40,895) $ (148,476) Earnings per shareBasic and diluted earnings per share for the fiscal year ended December 31, 2021, 2020 and 2019 is calculated as follows:Year ended December 31,(in thousands, except per share data)202120202019Loss from continuing operations attributable to common shares of Holdings$ (43,989) $ (40,895) $ (148,476) Less: Effect of contribution based profit—Holding Event 5,361 4,974 3,222 Loss from continuing operations attributable to common shares$ (49,350) $ (45,869) $ (151,698) Income from discontinued operations attributable to Holdings$ 97,432 $ 28,041 $ 372,532 Less: Effect of contribution based profit — 3,806 2,437 Income from discontinued operations of Holdings attributable to common shares$ 97,432 $ 24,235 $ 370,095 Basic and diluted weighted average common shares of Holdings outstanding 65,362 63,151 59,900 Basic and fully diluted income (loss) per common share attributable to HoldingsContinuing operations$ (0.76) $ (0.72) $ (2.54) Discontinued operations 1.49 0.38 6.18 $ 0.73 $ (0.34) $ 3.64 DistributionsThe following table summarizes information related to our quarterly cash distributions on our Trust common and preferred shares:PeriodCash Distribution per ShareTotal Cash DistributionsRecord DatePayment Date(in thousands)Trust Common Shares:October 1, 2021 - December 31, 2021 (1)$ 0.25 $ 17,352 January 13, 2022January 20, 2022July 1, 2021 - September 30, 2021 $ 0.36 $ 23,742 October 15, 2021October 22, 2021August 3, 2021 (2)$ 0.88 $ 57,112 August 31, 2021September 7, 2021April 1, 2021 - June 30, 2021$ 0.36 $ 23,364 July 15, 2021July 22, 2021COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-48 January 1, 2021 - March 31, 2021$ 0.36 $ 23,364 April 15, 2021April 22, 2021October 1, 2020 - December 31, 2020 $ 0.36 $ 23,364 January 15, 2020January 22, 2021July 1, 2020 - September 30, 2020$ 0.36 $ 23,364 October 15, 2020October 22, 2020April 1, 2020 - June 30, 2020$ 0.36 $ 23,364 July 16, 2020July 23, 2020January 1, 2020 - March 31, 2020$ 0.36 $ 21,564 April 16, 2020April 23, 2020October 1, 2019 - December 31, 2019 $ 0.36 $ 21,564 January 16, 2020January 23, 2020July 1, 2019 - September 30, 2019 $ 0.36 $ 21,564 October 17, 2019October 24, 2019April 1, 2019 - June 30, 2019 $ 0.36 $ 21,564 July 18, 2019July 25, 2019January 1, 2019 - March 31, 2019 $ 0.36 $ 21,564 April 18, 2019April 25, 2019Series A Preferred Shares:October 30, 2021 - January 29, 2022 (1)$ 0.453125 $ 1,813 January 15, 2022January 30, 2022July 30, 2021 - September 29, 2021 $ 0.453125 $ 1,813 October 15, 2021October 30, 2021April 30, 2021 - July 29, 2021$ 0.453125 $ 1,813 July 15, 2021July 30, 2021January 30, 2021 - April 29, 2021$ 0.453125 $ 1,813 April 15, 2021April 30, 2021October 30, 2020 - January 29, 2021 $ 0.453125 $ 1,813 January 15, 2021January 30, 2021July 30, 2020 - October 29, 2020$ 0.453125 $ 1,813 October 15, 2020October 30, 2020April 30, 2020 - July 29, 2020$ 0.453125 $ 1,813 July 15, 2020July 30, 2020January 30, 2020 - April 29, 2020$ 0.453125 $ 1,813 April 15, 2020April 30, 2020October 30, 2019 - January 29, 2020 $ 0.453125 $ 1,813 January 15, 2020January 30, 2020July 30, 2019 - October 29, 2019 $ 0.453125 $ 1,813 October 15, 2019October 30, 2019April 30, 2019 - July 29, 2019 $ 0.453125 $ 1,813 July 15, 2019July 30, 2019January 30, 2019 - April 29, 2019 $ 0.453125 $ 1,813 April 15, 2019April 30, 2019Series B Preferred Shares:October 30, 2021 - January 29, 2022 (1)$ 0.4921875 $ 1,969 January 15, 2022January 30, 2022July 30, 2021 - September 29, 2021$ 0.4921875 $ 1,969 October 15, 2021October 30, 2021April 30, 2021 - July 29, 2021$ 0.4921875 $ 1,969 July 15, 2021July 30, 2021January 30, 2021 - April 29, 2021$ 0.4921875 $ 1,969 April 15, 2021April 30, 2021October 30, 2020 - January 29, 2021 $ 0.4921875 $ 1,969 January 15, 2021January 30, 2021July 30, 2020 - October 29, 2020$ 0.4921875 $ 1,969 October 15, 2020October 30, 2020April 30, 2020 - July 29, 2020$ 0.4921875 $ 1,969 July 15, 2020July 30, 2020January 30, 2020 - April 29, 2020$ 0.4921875 $ 1,969 April 15, 2020April 30, 2020October 30, 2019 - January 29, 2020 $ 0.4921875 $ 1,969 January 15, 2020January 30, 2020July 30, 2019 - October 29, 2019 $ 0.4921875 $ 1,969 October 15, 2019October 30, 2019April 30, 2019 - July 29, 2019 $ 0.4921875 $ 1,969 July 15, 2019July 30, 2019January 30, 2019 - April 29, 2019$ 0.4921875 $ 1,969 April 15, 2019April 30, 2019Series C Preferred Shares:October 30, 2021 - January 29, 2022 (1)$ 0.4921875 $ 2,264 January 15, 2022January 30, 2022July 30, 2021 - September 29, 2021$ 0.4921875 $ 2,264 October 15, 2021October 30, 2021April 30, 2021 - July 29, 2021$ 0.4921875 $ 2,264 July 15, 2021July 30, 2021January 30, 2021 - April 29, 2021$ 0.4921875 $ 2,264 April 15, 2021April 30, 2021October 30, 2020 - January 29, 2021 $ 0.4921875 $ 2,264 January 15, 2021January 30, 2021July 30, 2020 - October 29, 2020$ 0.4921875 $ 2,264 October 15, 2020October 30, 2020April 30, 2020 - July 29, 2020$ 0.4921875 $ 2,264 July 15, 2020July 30, 2020COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-49 January 30, 2020 - April 29, 2020$ 0.4921875 $ 2,264 April 15, 2020April 30, 2020November 20, 2019 - January 29, 2020 $ 0.38281 $ 1,531 January 15, 2020January 30, 2020(1) This distribution was declared on January 3, 2022.(2) On August 3, 2021, in order to offset a portion of the tax liability to the shareholders as a result of the election to cause the Trust to be treated as a corporation for U.S. federal income tax purposes, the Company's Board of Directors declared a special cash distribution on the Trust’s common shares. A distribution of $57.1 million was made on August 31, 2021 to Trust common shareholders. The Company declared a distribution of $0.25 per share for the quarter ended December 31, 2021,which was reduced from $0.36 per share in prior periods to reflect the effect of the Trust being taxed as a corporation.Note L — Income Taxes Effective September 1, 2021, the Company’s parent (i.e., the Trust) elected to be treated as a corporation for U.S federal income tax purposes. Prior to September 1, 2021, the Company’s items of income, gain, loss and deduction flowed through to owners of the parent Trust without being subject to income taxes at the Trust level. Consequently, the Company’s earnings did not reflect a provision for income taxes except those for foreign, state, city and local income taxes incurred at the entity level. From and after September 1, 2021, the parent Trust will be subject to entity-level U.S. federal, state, and local corporate income taxes on the Company’s earnings that flow through to the Trust.Components of the Company's pretax income (loss) before taxes are as follows:Year ended December 31,(in thousands)202120202019Domestic (including U.S. exports)$ 27,799 $ 6,092 $ (72,264) Foreign subsidiaries 15,397 (1,658) 12,164 $ 43,196 $ 4,434 $ (60,100) Components of the Company’s income tax provision are as follows:Year ended December 31,(in thousands)202120202019Current taxesFederal$ 18,439 $ 5,979 $ 5,450 State 4,122 1,620 1,537 Foreign 5,234 4,804 4,984 Total current taxes 27,795 12,403 11,971 Deferred taxes:Federal (9,271) 241 (2,471) State (1,725) 294 663 Foreign 1,538 (2,763) (249) Total deferred taxes (9,458) (2,228) (2,057) Total tax provision$ 18,337 $ 10,175 $ 9,914 COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-50 The tax effects of temporary differences that have resulted in the creation of deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 are as follows:December 31,(in thousands)20212020Deferred tax assets:Tax credits$ 7,501 $ 4,431 Accounts receivable and allowances 1,769 1,964 Net operating loss carryforwards 29,979 32,271 Accrued expenses 8,061 5,431 Interest expense limitation carryforwards 2,651 2,079 Lease liabilities 28,906 21,310 Held-for-sale effect 8,601 — Other 12,339 11,768 Total deferred tax assets$ 99,807 $ 79,254 Valuation allowance (1) (9,413) (7,012) Net deferred tax assets$ 90,394 $ 72,242 Deferred tax liabilities:Intangible assets$ (123,946) $ (102,748) Property and equipment (23,966) (17,859) Repatriation of foreign earnings (38) (37) Right of use assets (26,087) (18,831) Prepaid and other expenses (701) (603) Total deferred tax liabilities$ (174,738) $ (140,078) Total net deferred tax liability$ (84,344) $ (67,836) (1)Primarily relates to the 5.11, Arnold and Ergo operating segments.For the years ending December 31, 2021 and 2020, the Company recognized approximately $174.7 million and $140.1 million, respectively in deferred tax liabilities. A significant portion of the balance in deferred tax liabilities reflects temporary differences in the basis of property and equipment and intangible assets related to the Company’s purchase accounting adjustments in connection with the acquisition of certain of its businesses. For financial accounting purposes the Company has recognized a significant increase in the fair values of the intangible assets and property and equipment in certain of the businesses it acquired. For income tax purposes the existing, pre-acquisition tax basis of the intangible assets and property and equipment is utilized. In order to reflect the increase in the financial accounting basis over the existing tax basis, a deferred tax liability was recorded. This liability will decrease in future periods as these temporary differences reverse but may be replaced by deferred tax liabilities generated as a result of future acquisitions.A valuation allowance relating to the realization of foreign net operating losses, domestic and foreign tax credits and the limitation on the deduction of interest expense of $9.4 million was provided at December 31, 2021 and a valuation allowance related to the realization of foreign net operating losses, domestic and foreign tax credits and the limitation on the deduction of interest expense of $7.0 million was provided at December 31, 2020. A valuation allowance is provided whenever it is more likely than not that some or all of deferred assets recorded may not be realized. COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-51 The reconciliation between the Federal Statutory Rate and the effective income tax rate for 2021, 2020 and 2019 are as follows:Year ended December 31,202120202019United States Federal Statutory Rate 21.0 % 21.0 % (21.0) %State income taxes (net of Federal benefits) 4.8 34.8 3.2 Foreign income taxes 8.2 37.5 1.1 Expenses of Compass Group Diversified Holdings LLC representing a pass through to shareholders (1) 29.0 137.0 20.9 Impact of subsidiary employee stock options (0.3) 7.2 0.1 Non-deductible acquisition costs 0.6 11.5 — Impairment expense — — 9.4 Non-recognition of various carryforwards at subsidiaries (2.3) (24.5) 2.0 Utilization of tax credits (5.2) 2.6 (2.6) Foreign-derived intangible income (FDII) and GILTI tax (2.4) (5.0) 2.4 Effect of classification of assets held for sale (16.8) — — Other 5.9 7.4 1.0 Effective income tax rate 42.5 % 229.5 % 16.5 %(1)The effective income tax rate for each of the years presented includes losses at the Company’s parent, which was taxed as a partnership through August 31, 2021. Beginning September 1, 2021, the Company's parent is taxed as a corporation.A reconciliation of the amount of unrecognized tax benefits for 2021, 2020 and 2019 are as follows (in thousands): Balance at January 1, 2019$ 894 Additions for current years’ tax positions 73 Additions for prior years’ tax positions 26 Reductions for prior years’ tax positions — Balance at December 31, 2019$ 993 Additions for current years’ tax positions 14 Additions for prior years’ tax positions 427 Reductions for prior years' tax positions (73) Reductions for expiration of statute of limitations (27) Balance at December 31, 2020$ 1,334 Additions for current years’ tax positions 31 Additions for prior years’ tax positions 15 Reductions for prior years' tax positions (63) Reductions for expiration of statute of limitations (63) Balance at December 31, 2021$ 1,254 Included in the unrecognized tax benefits at both December 31, 2021 and 2020 is $1.0 million of tax benefits that, if recognized, would affect the Company’s effective tax rate. The Company accrues interest and penalties related to uncertain tax positions. The amounts accrued at December 31, 2021, 2020 and 2019 are not material to the Company. Such amounts are included in the provision (benefit) for income taxes in the accompanying consolidated statements of operations. It is expected that the amount of unrecognized tax benefits will change in the next twelve months. However, we do not expect the change to have a significant impact on the consolidated results of operations or financial position.COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-52 Each of the Company’s businesses file U.S. Federal, state and foreign income tax returns in multiple jurisdictions with varying statutes of limitations. The 2016 through 2021 tax years generally remain subject to examinations by the taxing authorities.Note M — Fair Value Measurement The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2021 and 2020 (in thousands):Fair Value Measurements at December 31, 2021CarryingValueLevel 1Level 2Level 3Liabilities: Put option of noncontrolling shareholders (1)$ (151) $ — $ — $ (151) Contingent consideration - acquisition (2)$ (1,350) $ — $ — $ (1,350) Total recorded at fair value$ (1,501) $ — $ — $ (1,501) (1)Represents a put option issued to a noncontrolling shareholder in connection with the 5.11 acquisition. (2)Represents potential earn-out payable as additional purchase price consideration by Altor Solutions in connection with the acquisition of Polyfoam.Fair Value Measurements at December 31, 2020CarryingValueLevel 1Level 2Level 3Liabilities: Put option of noncontrolling shareholders (1)$ (435) $ — $ — $ (435) Contingent consideration - acquisition (2) (1,350) — — (1,350) Total recorded at fair value$ (1,785) $ — $ — $ (1,785) (1)Represents put options issued to noncontrolling shareholders in connection with the Liberty and 5.11 acquisitions. Liberty was sold on July 16, 2021.(2)Represents potential earn-out payable as additional purchase price consideration by Altor Solutions in connection with the acquisition of Polyfoam.A reconciliation of the change in the carrying value of the Company’s Level 3 fair value measurements is as follows:Year ended December 31,(in thousands)20212020Balance at January 1st$ (1,785) $ (111) Contingent consideration - Polyfoam — (1,350) Termination of put option of noncontrolling shareholder- Liberty 314 — Increase in the fair value of put option of noncontrolling shareholders - Liberty — (264) Increase in the fair value of put option of noncontrolling shareholder - 5.11 (30) (60) Balance at December 31st$ (1,501) $ (1,785) Valuation TechniquesOptions of noncontrolling shareholdersThe put options of noncontrolling shareholders were determined based on inputs that were not readily available in public markets or able to be derived from information available in publicly quoted markets. As such, the Company categorized the put options of the noncontrolling shareholders as Level 3. The primary inputs associated with this COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-53 valuation are earnings before interest, taxes amortization and depreciation times a multiple established in the shareholder put option agreement, which is used to determine a per share equity value for the shares that can be put back to the Company. An increase or decrease in these primary inputs would not have a material impact on the determination of the fair value of these put options. Contingent ConsiderationFor certain acquisition of businesses that the Company or its subsidiaries make, a portion of the acquisition price will be contingent consideration. The following is a summary of the contingent consideration arrangements entered into by the Company's subsidiaries in the prior three years and the valuation methodologies: •Altor Solutions entered into a contingent consideration arrangement in connection with their purchase of Polyfoam in July 2020. The purchase price of Polyfoam includes a potential earn-out of $1.4 million if Polyfoam achieves certain financial metrics. Senior NotesThe Company's Senior Notes consisted of the following carrying value and estimated fair value (in thousands):Fair Value Hierarchy LevelDecember 31, 2021Maturity DateRateCarrying ValueFair Value2032 Senior NotesJanuary 15, 2032 5.000 %2$ 300,000 $ 307,700 2029 Senior NotesApril 15, 2029 5.250 %2$ 1,000,000 $ 1,051,700 Nonrecurring Fair Value MeasurementsThe following table provides the assets and liabilities carried at fair value measured on a non-recurring basis as of December 31, 2019. Refer to "Note H – Goodwill and Intangible Assets", for a description of the valuation techniques used to determine fair value of the assets measured on a non-recurring basis in the table below. There were no assets and liabilities carried at fair value measured on a non-recurring basis as of December 31, 2021 and 2020.ExpenseFair Value Measurements at December 31, 2019Year ended(in thousands)CarryingValueLevel 1Level 2Level 3December 31, 2019Goodwill - Velocity Outdoor$ 30,079 — — $ 30,079 $ 32,881 COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-54 Note N — Noncontrolling InterestNoncontrolling interest represents the portion of a majority-owned subsidiary’s net income and equity that is owned by noncontrolling shareholders. The following tables reflect the Company’s percentage ownership of its businesses, as of December 31, 2021, 2020 and 2019 and related noncontrolling interest balances as of December 31, 2021 and 2020:% Ownership (1)December 31, 2021% Ownership (1)December 31, 2020% Ownership (1)December 31, 2019PrimaryFullyDilutedPrimaryFullyDilutedPrimaryFullyDiluted5.11 97.6 88.4 97.6 88.1 97.6 88.9 BOA 91.8 83.8 81.9 74.8 N/aN/aErgobaby 81.7 72.7 81.4 72.6 81.9 75.8 Lugano 59.9 58.1 N/aN/aN/aN/aMarucci 91.1 82.8 92.2 83.8 N/aN/aVelocity 99.3 87.6 99.3 88.0 99.3 93.9 Altor 100.0 91.2 100.0 91.5 100.0 91.5 Arnold 98.0 85.5 96.7 81.1 96.7 80.2 Sterno 100.0 87.1 100.0 88.5 100.0 88.5 (1)The principal difference between primary and fully diluted percentages of our operating segments is due to stock option issuances of operating segment stock to management of the respective business.Noncontrolling Interest Balances(in thousands)December 31,2021December 31,20205.11 $ 15,458 $ 14,567 BOA 30,581 61,625 Ergobaby 29,435 27,408 Lugano 70,585 — Marucci 17,175 11,386 Velocity 5,250 4,077 Altor 3,936 2,901 Arnold 1,284 1,117 Sterno 1,524 282 Allocation Interests 100 100 $ 175,328 $ 123,463 COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-55 Note O — Supplemental DataSupplemental Balance Sheet Data (in thousands): Summary of accrued expensesDecember 31,20212020Accrued payroll and fringes$ 43,270 $ 34,324 Accrued taxes 16,472 14,014 Income taxes payable 6,163 6,067 Accrued interest 13,563 8,259 Accrued rebates and discounts 10,687 5,170 Warranty payable 2,062 1,558 Accrued inventory 50,122 40,461 Other accrued expenses 32,462 24,365 Total$ 174,801 $ 134,218 Warranty liabilityYear ended December 31,20212020Beginning balance$ 1,558 $ 784 Accrual 4,257 2,821 Warranty payments (3,753) (2,696) Other (1) — 649 Ending balance$ 2,062 $ 1,558 (1) Represents warranty liabilities of acquired businesses. Supplemental Statement of Operations Data (in thousands):Other income (expense), netYear ended December 31,202120202019Foreign currency gain (loss)$ 27 $ 71 $ (67) Loss on sale of capital assets (1,458) (1,851) (1,626) Other income (expense) 247 (679) (353) $ (1,184) $ (2,459) $ (2,046) Supplemental Cash Flow Statement Data (in thousands): Year ended December 31,202120202019Interest paid$ 58,553 $ 43,730 $ 56,431 Taxes paid$ 27,371 $ 10,189 $ 15,367 InvestmentsArnold Joint VentureArnold is a 50% partner in a China rare earth mine-to-magnet joint venture. Arnold accounts for its activity in the joint venture utilizing the equity method of accounting. Gains and losses from the joint venture were not material for the years ended December 31, 2021, 2020 and 2019.COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-56 Altor SolutionsIn September 2020, Altor invested $3.6 million in Rational Packaging, LLC, a designer and manufacturer of recyclable, paperboard-based structural packaging components. The investment will be accounted for as an equity method investment. Gains and losses from the investment were not material for the years ended December 31, 2021 and 2020.Note P — Commitments and ContingenciesLeasesThe Company and its subsidiaries lease office and manufacturing facilities, computer equipment and software under various operating arrangements. Certain of the leases are subject to escalation clauses and renewal periods. The Company and its subsidiaries recognize lease expense, including predetermined fixed escalations, on a straight-line basis over the initial term of the lease including reasonably assured renewal periods from the time that the Company and its subsidiaries control the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Certain of our subsidiaries have leases that contain both fixed rent costs and variable rent costs based on achievement of certain operating metrics. The variable lease expense has not been material on a historic basis and no amount was incurred during the year ending December 31, 2021. The maturities of lease liabilities at December 31, 2021 under operating leases having an initial or remaining non-cancelable term of one year or more are as follows (in thousands):2022$ 34,887 2023 29,571 2024 25,272 2025 20,721 2026 17,413 Thereafter 37,138 Total undiscounted lease payments$ 165,002 Less: Interest 35,539 Present value of lease liabilities$ 129,463 The Company’s rent expense for the fiscal years ended December 31, 2021, 2020 and 2019 totaled $35.8 million, $27.8 million and $23.7 million, respectively.The calculated amount of the right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and discount rate used to present value the minimum lease payments. The Company's lease agreements often include one or more options to renew at the company's discretion. In general, it is not reasonably certain that lease renewals will be exercised at lease commencement and therefore lease renewals are not included in the lease term. As the discount rate is rarely determinable, the Company utilizes the incremental borrowing rate of the subsidiary entering into the lease arrangement, on a collateralized basis, over a similar term as adjusted for any country specific risk. The weighted average remaining lease terms and discount rates for all of our operating leases were as follows:Lease Term and Discount RateDecember 31, 2021December 31, 2020Weighted-average remaining lease term (years)5.895.44Weighted-average discount rate 7.41 % 7.45 %COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-57 Supplemental balance sheet information related to leases was as follows (in thousands):Line Item in the Company’s Consolidated Balance SheetDecember 31, 2021December 31, 2020Operating lease right-of-use assetsOther non-current assets$ 116,992 $ 83,662 Current portion, operating lease liabilitiesOther current liabilities$ 25,663 $ 21,228 Operating lease liabilitiesOther non-current liabilities$ 103,800 $ 68,179 Supplemental cash flow information related to leases was as follows (in thousands):Year ended December 31, 2021Year ended December 31, 2020Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases$ 37,012 $ 32,154 Right-of-use assets obtained in exchange for lease obligations: Operating leases$ 43,404 $ 10,543 Legal ProceedingsIn the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that any unfavorable outcomes will have a material adverse effect on the Company’s consolidated financial position or results of operations.Note Q — Related Party TransactionsThe Company has entered into related party transactions with its Manager, CGM, including the following:•Management Services Agreement•LLC Agreement•Integration Services Agreements•Cost Reimbursement and FeesManagement Services Agreement The Company entered into a MSA with CGM effective May 16, 2006, as amended. Our Chief Executive Officer is a partner of CGM. The MSA provides for, among other things, CGM to perform services for the Company in exchange for a management fee paid quarterly and equal to 0.5% of the Company’s adjusted net assets, as defined in the MSA. The management fee is required to be paid prior to the payment of any distributions to shareholders.Pursuant to the MSA, CGM is entitled to enter into off-setting management service agreements with each of the operating segments. The amount of the fee is negotiated between CGM and the operating management of each segment and is based upon the value of the services to be provided. The fees paid directly to CGM by the segments offset on a dollar for dollar basis the amount due CGM by the Company under the MSA. CGM has entered into a waiver of the MSA for a period through December 31, 2021 to receive a 1% annual management fee related to BOA, rather than the 2% called for under the MSA, which resulted in a lower management fee paid during 2021 than would have normally been due. In the first quarter of 2021, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee related to the amount of the proceeds deposited with the Trustee that was in excess of the amount payable related to the 2026 Senior Notes at March 31, 2021. Additionally, CGM has entered into a waiver of the MSA at December 31, 2021 to exclude the cash balances held at the LLC from the calculation of the management fee. In March 2020, as a proactive measure to provide the Company with additional cash liquidity in light of the COVID-19 pandemic, the Company elected to draw down $200 million on our 2018 Revolving Credit Facility. The Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of March 31, 2020. In addition, due to the unprecedented uncertainty as a result of the COVID-19 pandemic, CGM agreed to waive 50% of the COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-58 management fee calculated at June 30, 2020 that was paid in July 2020. Further, for the third quarter of 2020, the Company and CGM entered into a waiver agreement whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the Company as of September 30, 2020. Concurrent with the June 2019 sale of Clean Earth (refer to Note D - Discontinued Operations) CGM agreed to waive the management fee on cash balances held at the Company, commencing with the quarter ended June 30, 2019 and continuing until the quarter during which the Company next borrowed under the 2018 Revolving Credit Facility.The Company paid CGM $0.4 million and $0.1 million, respectively, in the years ended December 31, 2021 and 2020, representing the management fee due from Arnold for the fourth quarter of 2020 and the first three quarters of 2021. At December 31, 2021, Arnold reimbursed the Company for the management fee paid on their behalf. For the year ended December 31, 2021, 2020 and 2019, the Company incurred the following management fees to CGM, by entity:Year ended December 31,(in thousands)2021202020195.11$ 1,000 $ 1,000 $ 1,000 BOA 1,000 250 N/aErgobaby 500 500 500 Lugano 188 N/aN/aMarucci 500 347 N/aVelocity 500 500 500 Altor Solutions 750 750 750 Arnold 500 500 500 Sterno 500 500 500 Corporate 41,505 29,402 32,280 $ 46,943 $ 33,749 $ 36,030 Approximately $11.7 million and $10.0 million of the management fees incurred were unpaid as of December 31, 2021 and 2020, respectively, and are reflected in Due to related party on the consolidated balance sheets.LLC AgreementThe LLC agreement gives Holders the right to distributions pursuant to a profit allocation formula upon the occurrence of a Sale Event or a Holding Event. The Holders are entitled to receive and as such can elect to receive the positive contribution-based profit allocation payment for each of the business acquisitions during the 30-day period following the fifth anniversary of the date upon which we acquired a controlling interest in that business (Holding Event) and upon the sale of the business (Sale Event). Holders received $34.1 million, $9.1 million and $60.4 million in distributions related to Sale and Holding Events that occurred during 2021, 2020 and 2019, respectively. Refer to "Note K - Stockholders' Equity" for a description of the profit allocation payments. Certain persons who are employees and partners of the Manager, including the Company’s Chief Executive Officer, beneficially own (through Sostratus LLC) 57.8% of the Allocation Interests at December 31, 2021 and 45.0% at December 31, 2020. Of the remaining 42.2% at December 31, 2021 and 55.0% at December 31, 2020, 5.0% is held by CGI Diversified Holdings LP, 5.0% is held by the Chairman of the Company’s Board of Directors, and the remaining percentage of Allocation Interests are held by the former founding partners of the Manager. Integrations Services AgreementsIntegration services represent fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership. Under the Integration Services Agreement ("ISA"), CGM provides services for new platform acquisitions to, amongst other things, assist the management at the acquired entities in establishing a corporate governance program, implement compliance and reporting requirements of the Sarbanes-Oxley Act of 2002, as amended, and align the acquired entity's policies and procedures with our other subsidiaries. COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-59 COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lugano, which was acquired in September 2021, entered into an ISA with CGM whereby Lugano will pay CGM an
integration services fee of $2.3 million quarterly over a twelve month period as services are rendered, beginning in
the quarter ended December 31, 2021.
BOA, which was acquired in October 2020, Marucci Sports, which was acquired in April 2020 and Altor Solutions,
which was acquired in 2018 each entered into an ISA with CGM. Each ISA was for the twelve month period
subsequent to the acquisition and was payable quarterly. BOA paid CGM a total of $4.4 million under the ISA,
beginning in the quarter ended December 31, 2020. Marucci paid CGM a total of $2.0 million in integration services
fees, beginning in the quarter ended September 30, 2020. Altor paid CGM a total of $2.3 million in integration
services fees, with $0.3 million paid in 2019.
During the years ended December 31, 2021, 2020 and 2019, CGM received $4.9 million, $2.1 million, and $0.3
million, respectively, in total integration service fees. Integration service fees are included in selling, general and
administrative expense on the subsidiaries' statement of operations in the period in which they are incurred.
Cost Reimbursement and Fees
The Company reimbursed its Manager, CGM, approximately $5.4 million, $5.2 million, and $5.6 million, principally
for occupancy and staffing costs incurred by CGM on the Company’s behalf during the years ended December 31,
2021, 2020 and 2019, respectively.
The Company and its businesses have the following significant related party transactions:
5.11
Recapitalization - In August 2021, the Company completed a recapitalization of 5.11 whereby the Company entered
into an amendment to the intercompany loan agreement with 5.11 (the "5.11 Loan Agreement"). The 5.11 Loan
Agreement was amended to provide for additional term loan borrowings of $55.0 million to fund a distribution to
shareholders. The Company owned 97.7% of the outstanding shares of 5.11 on the date of the distribution and
received $53.7 million. The remaining amount of the distribution went to minority shareholders.
Related Party Vendor Purchases - 5.11 purchases inventory from a vendor who is a related party to 5.11 through
one of the executive officers of 5.11 via the executive's 40% ownership interest in the vendor. During the years
ended December 31, 2021, 2020 and 2019, 5.11 purchased approximately $1.1 million, $2.7 million, and $4.4
million, respectively, in inventory from the vendor.
BOA
Repurchase of Noncontrolling Interest - In September 2021, BOA repurchased shares of its issued and outstanding
common shares from its largest minority shareholder for a total payment of $48.0 million, which BOA financed by
borrowing under their intercompany credit facility with the Company (the "BOA Credit Agreement"). The BOA Credit
Agreement was amended to (i) provide for additional term loan borrowings of $38.0 million, and (ii) consent to the
repurchase of the shares from the minority shareholder. The transaction was accounted for in accordance with ASC
810 - Consolidation, whereby the carrying amount of the noncontrolling interest was adjusted to reflect the change
in the ownership interest in BOA that occurred as a result of the share repurchase. The difference between the fair
value of the consideration paid of $48.0 million and the amount by which the noncontrolling interest was adjusted of
$39.4 million was recognized in equity attributable to the Company.
Related Party Vendor Purchases - A contract manufacturer used by BOA as the primary supplier of molded injection
parts is a noncontrolling shareholder of BOA. During the year ended December 31, 2021 and for the period from
October 16, 2020 (date of acquisition) through December 31, 2020, BOA purchased approximately $48.3 million
and $6.7 million, respectively, in parts from this supplier.
Note R – Unaudited Quarterly Financial Data
The following table presents the unaudited quarterly financial data. This information has been prepared on a basis
consistent with that of the audited consolidated financial statements and all necessary material adjustments,
consisting of normal recurring accruals and adjustments, have been included to present fairly the unaudited
quarterly financial data. The quarterly results of operations for these periods are not necessarily indicative of future
results of operations. Typically, the first quarter of each fiscal year has the lower results than the remainder of the
year, representing the Company's weakest quarter due to seasonality at our businesses. The per share calculations
for each of the quarters are based on the weighted average number of shares for each period using the two class
F-60
method, which requires companies to allocate participating securities that have rights to earnings that otherwise would have been available only to common shareholders as a separate class of securities in calculating earnings per share; therefore, the sum of the quarters will not equal to the full year per share amount.(in thousands)December 31, 2021 (1)(2)September 30, 2021 (1)(3) June 30, 2021 March 31, 2021 Total revenues$ 536,612 $ 464,975 $ 431,525 $ 408,556 Gross profit 202,410 181,435 173,564 168,548 Operating income 32,973 35,069 36,352 35,109 Income (loss) from continuing operations 20,306 13,079 (21,608) 13,082 Income from discontinued operations 5,577 4,332 10,357 8,914 Gain on sale of discontinued operations, net of tax 25 72,745 — — Net income (loss) attributable to Holdings$ 22,088 $ 88,100 $ (14,630) $ 18,994 Basic and fully diluted income (loss) per share attributable to Holdings: Continuing operations$ (0.14) $ (0.19) $ (0.50) $ (0.10) Discontinued operations 0.06 1.16 0.12 0.11 Basic and fully diluted income (loss) per share attributable to Holdings$ (0.08) $ 0.97 $ (0.38) $ 0.01 (1) The quarters ended September 30, 2021 and December 31, 2021 includes the operating results from Lugano, which the Company acquired on September 3, 2021.(2) As of December 31, 2021, ACI met the criteria to be classified as held for sale, and therefore is presented as discontinued operations in all prior periods.(3) The Company sold its Liberty operating segment in the third quarter of 2021, recording a gain on sale of $72.8 million. All prior periods are presented as discontinued operations.(in thousands)December 31, 2020 (1)(2)(3) September 30, 2020 (1)(2)(3) June 30, 2020 (1)(2)(3)March 31, 2020 (2)(3) Total revenues$ 421,609 $ 364,948 $ 286,218 $ 286,792 Gross profit 155,707 135,422 100,691 103,145 Operating income (loss) 22,786 23,926 3,724 4,680 Income (loss) from continuing operations 1,141 11,235 (16,081) (2,036) Income from discontinued operations 7,639 9,568 8,715 6,916 Gain on sale of discontinued operations, net of tax — 100 — — Net income (loss) attributable to Holdings$ 8,366 $ 19,186 $ (8,437) $ 3,665 Basic and fully diluted income (loss) per share attributable to Holdings: Continuing operations$ (0.15) $ (0.03) $ (0.40) $ (0.35) Discontinued operations 0.09 0.11 0.10 0.09 Basic and fully diluted income (loss) per share attributable to Holdings$ (0.06) $ 0.08 $ (0.30) $ (0.26) (1) The quarters ended June 30, 2020, September 30, 2020 and December 31, 2020 include operating results from Marucci, which the Company acquired on April 20, 2020. The quarter ended December 31, 2020 includes the operating results from BOA, which the Company acquired on October 16, 2020.(2) As of December 31, 2021, ACI met the criteria to be classified as held for sale, and therefore is presented as discontinued operations in all prior periods.(3) The Company sold its Liberty operating segment in the third quarter of 2021. All prior periods are presented as discontinued operations.COMPASS DIVERSIFIED HOLDINGSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-61 [THIS PAGE INTENTIONALLY LEFT BLANK]
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