CODI · Read the filing

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 $100 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:

◦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-

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 2022 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 formation

On 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, 2022, we purchased twenty-three 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, 2022 (in thousands):

Acquisitions

Ownership Interest - December 31, 2022

Business Acquisition Date CODI Purchase Price Primary Diluted

(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.

(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.

Dispositions

(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 cash receipts from

our businesses are generally lowest in the first quarter, and strongest in the third and fourth quarter, of each fiscal year. These earnings and cash receipts, net of any non-controlling interest in these businesses, are available to:

•meet capital expenditure requirements, management fees and corporate overhead charges;

•support working capital needs of our businesses and corporate overhead; and

•be distributed by the Trust to shareholders.

2022 Highlights and Recent Events

Acquisition of PrimaLoft

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

PrimaLoft, Inc. is a branded, advanced material technology company based in Latham, New York and is a leader in the research and innovative development of high-performance material solutions, specializing in insulations and fabrics. PrimaLoft® insulation was originally developed for the U.S. Army as a water-resistant, synthetic alternative to down. Since 1983, a heritage of proven & tested technologies has built trust across the textile industry, with more than 950 global brands using PrimaLoft products in outdoor, lifestyle, home furnishings, work wear, hunting and military applications. With its Relentlessly ResponsibleTM mission, PrimaLoft strives to balance innovation, performance and sustainability in the pursuit of a better future.

2022 Credit Facility

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

Advanced Circuits

Termination of Merger Agreement - On October 13, 2021, the LLC, as the Sellers Representative of the holders of stock and options of Advanced Circuits, a majority owned subsidiary of the LLC, entered into a definitive Agreement and Plan of Merger (the "AC Agreement") with Tempo Automation, Inc. (“AC Buyer”), Aspen Acquisition Sub, Inc. (“AC Merger Sub”) and Advanced Circuits, pursuant to which AC Buyer would 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”). The AC Merger was conditioned on, among other things, the closing of a business combination between AC Buyer and a publicly traded special purpose acquisition company (a “SPAC”). In connection with the AC Merger, AC Buyer announced its entry into a definitive merger agreement for a business combination (the “SPAC Transaction”) with a SPAC, ACE Convergence Acquisition Corp. (“ACE”). The AC Agreement also provided that the AC Agreement could be terminated in the event closing of the AC Merger did not occur prior to January 27, 2022 (the "End Date"). Advanced Circuits was initially classified as held for sale in the consolidated financial statements as of December 31, 2021.

Due to a delay in closing the SPAC Transaction, the AC Merger did not close on or before the End Date. Because of the delay in closing the SPAC Transaction, on July 29, 2022, the LLC and Advanced Circuits provided the notice of termination of the AC Agreement to AC Buyer. No termination penalties were incurred by either party in connection with the termination of the AC Agreement. The termination of the AC Agreement occurred in the third quarter of 2022 and, in accordance with applicable accounting guidance, Advanced Circuits was reclassified to continuing operations beginning in the quarter ended September 30, 2022.

Subsequent Sale - On January 10, 2023, the LLC, solely in its capacity as the representative of the holders of stock and options of Compass AC Holdings, Inc. (“Advanced Circuits”), a majority owned subsidiary of the LLC, entered into a definitive Agreement and Plan of Merger with APCT Inc. (“ACI Purchaser”), Circuit Merger Sub, Inc. (“ACI Merger Sub”) and Advanced Circuits, pursuant to which ACI Purchaser agreed to 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 ACI Merger Sub with and into Advanced Circuits, with Advanced Circuits surviving the merger and becoming a wholly owned subsidiary of ACI Purchaser (the “ACI Merger”). The ACI Merger was completed on February 14, 2023. The sale price of Advanced Circuits was based on an enterprise value of $220 million, subject to certain adjustments based on matters such as the working capital and cash and debt balances of Advanced Circuits at the time of the closing. After the allocation of the sales price to Advanced Circuits non-controlling equity holders and the payment of transaction expenses, CODI received approximately $170 million of total proceeds at closing.

Common shares - For the 2022 fiscal year we declared distributions to our common shareholders totaling $1.00 per share.

Preferred shares - For the 2022 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.

2023 Outlook and Significant Trends

Macroeconomic Trends

We continue to experience 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 that we have implemented in 2022. However, there has been, and we expect there could continue to be, a difference between the timing of when these pricing and other actions impact our results of operations and when the impact of cost inflation occurs. We expect changing market conditions and continued inflationary pressures to impact consumer spending, particularly for discretionary items purchased by low and middle income consumers. With price pressures unlikely to abate and expected changes in monetary policies, we expect consumer spending to be negatively impacted during 2023. We expect continued uncertainty in our business and the global economy due to inflation, changes in consumer spending patterns, and global supply chain disruptions. Accordingly, our liquidity and financial results could be impacted in ways that we are not able to predict today.

Global Supply Chain Trends

We continued to experience disruption in the global supply chain due to overall macroeconomic conditions, volatility in demand and the lingering effect of COVID-19 that led to transportation delays and U.S. port congestion during 2022. While these disruptions and delays have begun to moderate, we expect these disruptions to continue to have a negative impact on several of our subsidiary businesses. During 2022, several of our businesses relied on expensive air freight to import goods to meet customer demand and while most of the transportation costs have normalized during the back half of the year, other aspects of the supply chain have not normalized as we enter 2023. We are seeing the availability of raw materials, components and finished goods impacted by the supply chain challenges which has led to shortages of certain materials and led to pressure on revenue growth. In addition, the closure of certain Asian manufacturing facilities as a result of local government quarantine efforts has impacted our ability to import products timely. We took numerous actions during 2022 to build capacity as well as increase our supply chain related resources, including increasing inventory levels and investing in automated systems to increase production efficiency. Further, in the U.S., the surge in demand along with COVID-19 related labor shortages and rising hourly labor wages, are creating labor shortages and higher labor costs. We expect these cost trends to continue through 2023.

COVID-19 Update

While we expect the effect of COVID-19 on our businesses to moderate, there is still uncertainty around the

continued spread of COVID-19 and new variants of the virus around the world. 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 its effect on labor or other macroeconomic factors, its severity and duration, the continued availability and effectiveness of vaccines and actions taken by third parties or by government authorities in response, including restrictions, laws or regulations, or other responses.

Business Outlook

The Company anticipates that the areas of focus for 2023, which are generally applicable to each of our businesses, include:

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

•Raising prices, when appropriate, 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.

Results of Operations

The following discussion reflects a comparison of the historical results of operations of our consolidated business for the years ended December 31, 2022, 2021 and 2020, 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 PrimaLoft in July 2022, 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, 2022, 2021 and 2020, 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, 2022, 2021 and 2020, where all years presented include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. For the 2022 acquisition of PrimaLoft, the pro forma results of operations have been prepared as if we purchased this business on January 1, 2021. 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, 2020. 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 Holdings

Year Ended December 31,

Impairment expense 20,552 — —

Loss on debt extinguishment (534) (33,305) —

Year ended December 31, 2022 compared to the Year ended December 31, 2021

Net revenues

Net revenues for the year ended December 31, 2022 increased by approximately $331.9 million or 17.2% compared to the corresponding period in 2021. Our Lugano business, which we acquired in September 2021, contributed $147.5 million in incremental net revenue in 2022, and PrimaLoft, which we acquired in July 2022, contributed $24.7 million. During the year ended December 31, 2022 compared to 2021, we also saw significant increases in net sales at 5.11 ($41.3 million increase), BOA ($43.5 million increase), Marucci ($47.2 million increase), Arnold ($13.9 million

increase), and Altor Solutions ($81.1 million increase), partially offset by a decrease in net revenue at Velocity Outdoor ($38.2 million decrease) and Sterno ($23.0 million decrease). Add-on acquisitions at Marucci (Lizard Skins in October 2021), Altor (Plymouth Foam in October 2021) and Arnold (Ramco Motors in March 2021) contributed to the growth in revenue at these businesses in the current year. On a consolidated level, our subsidiary businesses were able to increase revenue in 2022 as compared to the prior year as a result of acquisitions and continued strong performance despite increasing economic uncertainty and inflationary pressure during the back half of the year. We expect 2023 results of operations will continue to be impacted by reduced demand and discretionary consumer spending in certain of our branded consumer and niche industrial businesses. 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 additional principal payments on those loans. However, on a consolidated basis these items will be eliminated.

Cost of revenues

On a consolidated basis, cost of revenues increased approximately $191.2 million during the year ended December 31, 2022, compared to the corresponding period in 2021, primarily as a result of the increase in net revenues. Our Lugano business contributed $72.7 million of the increase in cost of revenues for the year ended December 31, 2022 and our PrimaLoft business contributed $11.0 million of the increase in cost of revenues for 2022. We also saw notable increases in cost of revenues at 5.11 ($19.5 million increase), BOA ($17.7 million increase), Marucci ($28.0 million increase), Altor ($66.9 million increase), and Arnold ($9.0 million increase) that correspond to the revenue increases noted above. We also saw a decrease in cost of revenues at Velocity ($15.7 million decrease) and Sterno ($18.4 million decrease) that corresponded to the decrease in revenue noted above. Gross profit as a percentage of net revenues was approximately 40.1% in the year ended December 31, 2022 compared to 39.7% in the year ended December 31, 2021. The increase in gross profit as a percentage of net sales in the year ended December 31, 2022 as compared to the year ended December 31, 2021 is primarily attributable to the acquisition of Lugano in September 2021 and the implementation of price increases at most of our subsidiary businesses in excess of rising costs. Most of our subsidiary businesses continue to experience increased material, labor and transportation costs. The gross margins at both our branded consumer businesses and our niche industrial businesses have been impacted by global supply chain constraints and inflation that is leading to pressure on revenue and costs. 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 $79.2 million during the year ended December 31, 2022, compared to the corresponding period in 2021. A portion of the increase in the year ended December 31, 2022 is due to our Lugano acquisition in September 2021 ($28.0 million of the increase) and our PrimaLoft acquisition in July 2022 ($17.5 million of the increase, of which $5.7 million was attributable to acquisition costs). We also saw increases in selling, general and administrative expenses at Marucci and Altor related to the add-on acquisitions that occurred in the fourth quarter of 2021, as well as increased investment in marketing and headcount at several of our subsidiary businesses with increased revenues. Refer to "Results of Operations - Business Segments" for a more detailed analysis of selling, general and administrative expense by subsidiary business segment. At the corporate level, general and administrative expense was $16.3 million in 2022 and $17.3 million in 2021. Corporate level general and administrative expense during 2021 included non-recurring professional fees associated with our election for the Trust to be treated as a corporation for U.S. federal income tax purposes.

Management fees

the MSA for a period through June 30, 2023 to receive a 1% annual management fee related to PrimaLoft, rather than the 2% called for under the MSA, which resulted in a lower management fee paid in the third quarter of 2022 than would have normally been due. CGM also had 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 in the first half of 2021 than would have normally been due. In the first quarter of 2021, the LLC 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 had entered into a waiver of the MSA at March 31, 2022 and June 30, 2022 to exclude the cash balances held at the LLC from the calculation of the management fee.

Amortization expense

Amortization expense for the year ended December 31, 2022 increased $14.0 million to $94.4 million as compared to the prior year, primarily as a result of the amortization expense associated with the intangibles that were recognized in conjunction with the purchase price allocation for Lugano, which was acquired in September 2021, and PrimaLoft, which was acquired in July 2022.

Impairment expense

Ergobaby performed an interim impairment test of their goodwill during the period ended December 31, 2022 as a result of operating results that were below historical and forecast amounts. The impairment test resulted in Ergobaby recording impairment expense of $20.6 million in the year ended December 31, 2022.

Interest expense

We recorded interest expense totaling $83.5 million for the year ended December 31, 2022 compared to $58.8 million for the comparable period in 2021, an increase of $24.7 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 million of 8.000% 2026 Senior Notes and issued $1000 million of 5.250% 2029 Senior Notes in March of 2021, and issued $300 million of 5.000% 2032 Senior Notes in November 2021, and higher amounts outstanding on our revolving credit facility in the current year, as well as the interest expense associated with our new $400 million 2022 Term Loan that we entered into in July 2022 in connection with our acquisition of PrimaLoft. Current year interest expense also reflects the higher interest rate environment applicable to the amounts outstanding under our credit facility. While the actual timing and extent of the future increases in interest rates remains unknown, higher long-term interest rates are expected to increase interest expense on the debt outstanding under our 2022 Credit Facility.

Provision for income taxes

We had income tax expense of $45.0 million with an effective income tax rate of 51.7% during the year ended December 31, 2022 compared to income tax expense of $21.8 million with an effective income tax rate of 31.9% during the same period in 2021. Our net income from continuing operations before income taxes for the year ended December 31, 2022 increased $18.9 million as compared to income from continuing operations before taxes for the year ended December 31, 2021 ($87.1 million in 2022 compared to $68.1 million in 2021). Our income tax provision increased by $23.3 million in 2022 as compared to 2021. Our income from continuing operations before taxes in 2021 included a $33.3 million loss on debt extinguishment that we recognized associated with the repayment of our $600 million 2026 Senior Notes. The loss on debt extinguishment was incurred at the Trust, which at the time was taxed as a partnership for income tax purposes and did not impact the income tax provision in the prior year. 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.

In the current year, our provision was driven by the acquisitions of Lugano in September 2021, and an increase in earnings at several of our subsidiary businesses during the year, particularly 5.11, BOA and Marucci, as well as the reversal of a $12.1 million tax benefit recognized in the prior year as a result of the accounting treatment of Advanced Circuits as held-for-sale at December 31, 2021. This benefit reversed in the third quarter of 2022 when Advanced Circuits no longer qualified as held-for-sale. The Company's effective tax rate fluctuates based on, among other factors, where income is earned, the level of income relative to tax attributes and the loss incurred at the Trust related to corporate overhead and management fees incurred. 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.

Year ended December 31, 2021 compared to the Year ended December 31, 2020

Net revenues

Net revenues for the year ended December 31, 2021 increased by approximately $484.5 million or 33.5% 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 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.

Cost of revenues

On a consolidated basis, cost of revenues increased approximately $251.3 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. Gross profit as a percentage of net revenues was approximately 39.7% in year ended December 31, 2021 compared to 36.9% 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 40.0% and 37.1%, 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.

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 $47.5 million in management fees as compared to $34.2 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 $18.4 million to $80.3 million as compared to the prior year, primarily as a result of the acquisitions of Marucci in April 2020 and 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 $1,000.0 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 $21.8 million with an effective income tax rate of 31.9% during the year ended December 31, 2021 compared to income tax expense of $13.6 million with an effective income tax rate of 50.1% during the same period in 2020. Our net income from continuing operations before income taxes for the year ended December 31, 2021 increased $41.0 million as compared to income from continuing operations before taxes for the year ended December 31, 2020 ($68.1 million in 2021 compared to $27.2 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, 2022 and 2021 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.

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

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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. We recently announced our desire to acquire businesses in the healthcare sector, with a focus on outsourced pharma, medical manufacturing services and provider services. We have not yet acquired a business in the healthcare 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.

Results of Operations

Year ended December 31,

Year ended December 31, 2022 compared to the Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 were $486.2 million, an increase of $41.3 million, or 9.3%, compared to the same period in 2021. This increase is due primarily to direct-to-consumer growth of $19.6 million, up 10% from the prior year comparable period. Retail sales grew largely due to store count growth, as well as positive growth in same-store sales for the year ended December 31, 2022, as compared to the same period last year. Net sales were also positively impacted by a $19.4 million, or 23.6%, increase in international sales due to strong demand, and a $7.2 million, or 5%, increase in domestic wholesale sales growth following the fulfillment of backorders and strong demand.

Gross profit

Gross profit as a percentage of net sales was 52.9% in both the years ended December 31, 2022 and December 31, 2021. Gross profit percentage was favorably impacted by price increases, customer mix and product mix, all of which were offset by increased inbound ocean freight charges during the period due to logistic challenges during the year.

Selling, general and administrative expense

Selling, general and administrative expenses for the year ended December 31, 2022 increased to $203.7 million or 41.9% of net sales compared to $186.1 million or 41.8% of net sales for the year ended December 31, 2021. The increase in selling, general and administrative expense for the year ended December 31, 2022 was driven by the costs associated with additional retail stores, increased sales and marketing spend to drive digital sales, and increased travel and entertainment spend coming out of the COVID-19 pandemic. These increases were partially offset by a decrease in bonus related expenses, outside service expenses, variable marketplace expenses and stock-based compensation.

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Segment operating income

Segment operating income for the year ended December 31, 2022 was $43.5 million, an increase of $4.2 million when compared to the same period in 2021, based on the factors described above.

Year ended December 31, 2021 compared to the Year ended December 31, 2020

Net sales

Net 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 profit

Gross 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 expense

Selling, 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.

Segment operating income

Segment operating income 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.

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, outdoor, athletic, workwear as well as performance headwear and medical bracing. The system consists of three integral parts: a micro-adjustable dial, high-tensile lightweight laces, and low friction lace guides creating a superior alternative to laces, buckles, Velcro, and other traditional closure mechanisms. Each unique BOA configuration is designed with brand partners to deliver superior fit and performance for athletes, is engineered to perform in the toughest conditions 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.

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Results of Operations

In the following results of operations, we provide comparative pro forma results of operations for BOA for the year ended December 31, 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 BOA have been included in the consolidated results of operation from the date of acquisition, October 16, 2020.

Year ended December 31,

(in thousands) Pro forma

Pro forma financial information for BOA for the year ended December 31, 2020 includes pre-acquisition results of operations for the period from January 1, 2020 through October 16, 2020, the acquisition date of BOA, 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, 2020:

•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.

•Management fees that would have been payable to the Manager during the period.

Year ended December 31, 2022 compared to the Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 were $208.7 million, an increase of $43.5 million or 26.4% when compared to net sales of $165.2 million for the year ended December 31, 2021. The increase was reflected across key industries including Snow Sports, Outdoor, Athletic and Workwear. The three factors impacting their growth rates were market share gains, increased consumer participation 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 60.7% for the year ended December 31, 2022 compared to 61.1% for the same period in 2021. The decrease in gross profit as a percentage of net sales during the current year is attributable primarily to increased depreciation expense related to investments in production tooling.

Selling, general and administrative expense

Selling, general and administrative expense for the year ended December 31, 2022 was $52.3 million, or 25.0% of net sales, compared to $50.6 million, or 30.6% of net sales for the year ended December 31, 2021. The increase in selling, general and administrative expense of $1.7 million in the current year is due to increased employee costs related to BOA's bonus plan, incremental headcount and marketing investments. Selling general and administrative expense in the year ended December 31, 2021 included $3.3 million in integration services fees paid to CGM that did not recur in the current year.

Segment operating income

Segment operating income was $57.8 million for the year ended December 31, 2022 as compared to $34.0 million in segment operating income in the year ended December 31, 2021, an increase of $23.8 million based on the factors noted above.

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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.

Segment operating income

Segment operating income was $34.0 million for the year ended December 31, 2021 as compared to $5.8 million in segment operating income in the year ended December 31, 2020, an increase of $28.2 million based on the factors noted above.

Ergobaby

Overview

Ergobaby, headquartered in Torrance, California, is a designer, marketer and distributor of wearable baby carriers and accessories, blankets and swaddlers, nursing pillows, strollers, bouncers 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 Operations

Year ended December 31,

Impairment expense $ 20,552 23.2 % $ — — % $ — — %

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Year ended December 31, 2022 compared to the Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 were $88.4 million, a decrease of $5.2 million or 5.5% compared to the same period in 2021. During the year ended December 31, 2022, international sales were approximately $56.2 million, representing a decrease of $4.1 million over the corresponding period in 2021 primarily as a result of slower Asia-Pacific distributor sales from continued travel restrictions in the region. The economic slowdown in the United Kingdom also contributed to the decrease. Domestic sales were $32.2 million during the year ended December 31, 2022, reflecting a decrease of $1.1 million compared to the corresponding period in 2021. The decrease in domestic sales was primarily attributable to lower Tula e-commerce sales versus the prior year.

Gross profit

Gross profit as a percentage of net sales was 61.5% for the year ended December 31, 2022 compared to 65.3% for the same period in 2021. The decrease in gross profit as a percentage of sales was due to channel mix shifts, increased material costs, increased inbound freight (including air freight) as a result of supply chain shortages, as well as the impact of fluctuations in foreign currency exchange rates in the European Union.

Selling, general and administrative expense

Selling, general and administrative expense for the year ended December 31, 2022 decreased to approximately $42.7 million or 48.3% of net sales compared to $43.9 million or 46.9% of net sales for the same period of 2021. The decrease in selling, general and administrative expense for the year ended December 31, 2022 as compared to the year ended December 31, 2021 is due to favorable payroll expenses.

Impairment expense

Segment operating income (loss)

Segment operating income for the year ended December 31, 2022 decreased $25.9 million, to a loss from operations of $16.8 million, compared to operating income of $9.1 million for the same period of 2021. Ergo recognized impairment expense of $20.6 million in 2022 after determining that interim impairment testing was necessary.

Year ended December 31, 2021 compared to the Year ended December 31, 2020

Net sales

Net 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 Profit

Gross 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.

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Selling, general and administrative expense

Selling, 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. 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.

Segment operating income

Segment operating income 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.

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.

Year ended December 31,

Pro forma Pro forma

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.

Year ended December 31, 2022 compared to the Pro forma Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 increased approximately $76.4 million or 61.1%, to $201.5 million, compared to the corresponding year ended December 31, 2021. Lugano sells high-end jewelry primarily through retail salons in California, Florida, Texas and Colorado, and via pop-up showrooms at multiple equestrian, social and charitable functions each year. The sales in the first half of the prior year were still impacted by the effects of the COVID-19 pandemic which limited the number of events attended by Lugano and led to reduced net sales as compared to the current year. In the current year, Lugano has experienced an increase in sales as it has invested in building out its sales, marketing and event staff and increased the number of events it has attended.

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Gross profit

Gross profit as a percentage of net sales totaled approximately 48.9% in the year ended December 31, 2022 compared to 47.0% in the year ended December 31, 2021. 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 year, Lugano recorded $5.5 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales for the year ended December 31, 2022 was 51.7%. In the prior 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 49.2%.

Selling, general and administrative expense

Selling, general and administrative expense for the year ended December 31, 2022 increased to approximately $40.0 million or 19.8% of net sales compared to $23.8 million or 19.1% of net sales for the same period of 2021. Lugano has significantly increased its head count in the last year as it invests in additional professionals to support its growth, and has expanded its investment in advertising and marketing spend during the current year.

Segment operating income

Segment operating income increased $23.9 million during the year ended December 31, 2022 to $53.0 million compared to segment operating income of $29.2 million during the same period in 2021, principally as a result of the increase in sales and gross profit in 2022, as described above.

Pro Forma 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 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 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 profit

Gross 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 49.2%.

Selling, general and administrative expense

Selling, 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, 2020. The selling, general and administrative expense in the current year reflects a more normalized level of spending.

Segment operating income

Segment operating income increased $14.3 million during the year ended December 31, 2021 to $29.2 million compared to segment operating income 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.

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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, 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 and resellers.

Results of Operations

In the following results of operations, we provide comparative pro forma results of operations for Marucci for the year ended December 31, 2020 as if we had acquired the business on January 1, 2020. 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,

(in thousands) Pro forma

Pro forma financial information for Marucci for the year ended December 31, 2020 includes pre-acquisition results of operations for the period from January 1, 2020 through April 20, 2020, the acquisition date of Marucci, 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, 2020:

•Depreciation expense associated with the increase in depreciable lives of capital assets of $0.2 million for the year ended December 31, 2020.

•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.

•Management fees that would have been payable to the Manager during each period.

Year ended December 31, 2022 compared to the Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 were $165.4 million, an increase of $47.2 million as compared to net sales of $118.2 million for the year ended December 31, 2021. The increase in net sales was due to Marucci's acquisition of Lizard Skins in the fourth quarter of 2021, as well as increased customer demand and market share in many of Marucci's key product lines, including aluminum and wood bats, and batting gloves.

Gross profit

Gross profit for the year ended December 31, 2022 increased $19.3 million as compared to the year ended December 31, 2021. Gross profit as a percentage of sales was 50.6% for the year ended December 31, 2022 as compared to 54.5% for the year ended December 31, 2021. The decrease in gross profit as a percentage of net sales during the year ended December 31, 2022 as compared to the year ended December 31, 2021, was primarily due to increased freight costs during the first half of 2022, as delays in Marucci's supply chain coupled with demand exceeding the company's forecast led to increased use of air freight to meet increased demand from Marucci's customer base.

Selling, general and administrative expense

Selling, general and administrative expense for the year ended December 31, 2022 was $52.3 million, or 31.6% of net sales compared to $40.8 million, or 34.5% of net sales for the year ended December 31, 2021. The increase in selling, general and administrative expense for the year ended December 31, 2022 correlates to the increase in net

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sales, including the Lizards Skins acquisition, with increases in credit card expenses, royalties, commissions, business development fees, and other variable expenses. Marucci has also incurred additional professional fees, personnel costs and marketing expenses in 2022 related to investments supporting growth.

Segment operating income

Segment operating income for the year ended December 31, 2022 was $21.1 million compared to segment operating income of $16.4 million for the same period in 2021, primarily as a result of the factors noted above.

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 $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 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.

Segment operating income (loss)

Segment operating income for the year ended December 31, 2021 was $16.4 million compared to segment operating loss of $3.9 million for the same period in 2020, primarily as a result of the factors noted above.

PrimaLoft

Overview

PrimaLoft Technologies is a leading provider of branded, high-performance synthetic insulation and materials used primarily in consumer outerwear and accessories. The portfolio of PrimaLoft synthetic insulations offers products that can both mimic natural down aesthetics and provide the freedom to design garments ranging from stylish puffers to lightweight performance apparel. PrimaLoft insulations also offer superior economics to the brand partner and enable better sustainability characteristics through the use of recycled, low-carbon inputs. PrimaLoft is headquartered in Latham, New York.

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Results of Operations

In the following results of operations, we provide comparative pro forma results of operations for PrimaLoft for the years ended December 31, 2022 and 2021 as if we had acquired the business on January 1, 2021. The results of operations that follow include relevant pro-forma adjustments for pre-acquisition periods and explanations where applicable. The operating results for PrimaLoft have been included in the consolidated results of operation from the date of acquisition, July 12, 2022.

Year ended December 31,

(in thousands) Pro forma Pro forma

Segment operating income (loss) $ (1,877) (2.3) % $ 1,031 1.6 %

Pro forma results of operations include the following pro form adjustments as if we had acquired PrimaLoft January 1, 2021:

• Amortization expense associated with the intangible assets recorded in connection with the purchase price allocation of PrimaLoft of an additional $6.4 million and $11.8 million, respectively, for the years ended December 31, 2022 and 2021.

• Management fees of $1.0 million that would have been payable to the Manager during each period.

Pro forma Year ended December 31, 2022 compared to the Pro forma Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 were $79.9 million, an increase of $14.0 million as compared to net sales of $65.9 million for the year ended December 31, 2021. The increase in net sales during the year ended December 31, 2022 was a result of gain in market share with brand partners from down and synthetic alternatives, and also strong growth within the outdoor market.

Gross profit

Gross profit for the year ended December 31, 2022 increased $7.4 million as compared to the year ended December 31, 2021. Gross profit as a percentage of net sales for the year ended December 31, 2022 was 59.4%, as compared to gross profit as a percentage of sales of 60.9% for the year ended December 31, 2021. In the current year, PrimaLoft recorded $0.6 million in amortization of the inventory step-up resulting from the acquisition purchase price allocation. Excluding the effect of the step-up amortization, the gross profit as a percentage of net sales for the year ended December 31, 2022 was 60.2%. Gross profit as a percentage of sales decreased year over year primarily due to an increase in input costs ahead of price increases.

Selling general and administrative expense

Selling, general and administrative expense for the year ended December 31, 2022 was $27.6 million, or 34.5% of net sales compared to $17.3 million, or 26.3% of net sales for the year ended December 31, 2021. Selling, general and administrative expense in the current year includes $5.8 million of transaction costs related to the Company's acquisition of PrimaLoft, and $2.4 million in integration services fees.

Segment operating income (loss)

Segment operating loss for the year ended December 31, 2022 was $1.9 million, a decrease of $2.9 million when compared to segment operating income of $1.0 million for the same period in 2021, primarily as a result of the factors noted above.

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Velocity Outdoor

Overview

Velocity Outdoor is a leading designer, manufacturer, and marketer of airguns, archery products, laser aiming devices, hunting apparel and related accessories. Velocity Outdoor offers its products under the highly recognizable Crosman, Benjamin, LaserMax, Ravin, CenterPoint and King's Camo 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. The apparel category offers high-performance, feature rich hunting and casual apparel of uncompromised quality utilizing King’s own proprietary camo patterns.

Results of Operations

Year ended December 31,

Year ended December 31, 2022 compared to the Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 were $232.2 million compared to net sales of $270.4 million for the year ended December 31, 2021, a decrease of $38.2 million or 14.1%. The decrease in net sales during the year ended December 31, 2022 is primarily due to inflationary pressures impacting demand for lower-priced Airgun and Archery products partially offset by the impact of the King's Camo acquisition.

Gross profit

Gross profit as a percentage of net sales was 27.0% for the year ended December 31, 2022 as compared to 31.5% in the year December 31, 2021. The decrease in gross profit as a percentage of net sales was primarily attributable to product mix as Velocity sold more legacy products with lower margins versus new models at higher margins along with increased supply chain costs.

Selling general and administrative expense

Selling, general and administrative expense for the year ended December 31, 2022 was $33.9 million, or 14.6% of net sales compared to $35.8 million, or 13.2% of net sales, for the year ended December 31, 2021. The increase in selling, general and administrative expense is primarily driven by the decrease in net sales as spending on selling, general and administrative expense was down year-over-year driven by volume related expenses.We continue to invest in consumer marketing at Velocity.

Segment operating income

Segment operating income for the year ended December 31, 2022 was $19.0 million, a decrease of $20.8 million when compared to segment operating income of $39.7 million for the comparable period in 2021. The decrease in segment operating income in the year ended December 31, 2022 reflects the factors noted above.

Year ended December 31, 2021 compared to the Year ended December 31, 2020

Net sales

Net 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

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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 Profit

Gross 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 expense

Selling, 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.

Segment operating income

Segment operating income for the year ended December 31, 2021 was $39.7 million, an increase of $14.8 million when compared to segment operating income of $24.9 million for the comparable period in 2020. The increase in segment operating income in the year ended December 31, 2021 reflects the factors noted above.

Niche Industrial Businesses

Advanced Circuits

Overview

Advanced Circuits is a provider of small-run, quick-turn and volume production (including assembly) PCBs to customers throughout the United States. Historically, small-run and quick-turn PCBs have represented approximately 50% to 54% of Advanced Circuits’ gross revenues. Small-run and quick-turn PCBs typically command higher margins than volume production PCBs given that customers require high levels of responsiveness, technical support and timely delivery of small-run and quick-turn PCBs and are willing to pay a premium for them. Advanced Circuits is able to meet its customers’ demands by manufacturing custom PCBs in as little as 24 hours, while maintaining over 98.0% error-free production rates and real-time customer service and product tracking 24 hours per day. On February 14, 2023, we sold our interest in Advanced Circuits. Refer to Note S - Subsequent Events, for a description of the transaction. Advanced Circuits is included in continuing operations in the consolidated financial statements for the year ended December 31, 2022.

Results of Operations

Year ended December 31,

Year ended December 31, 2022 compared to the Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 were $89.5 million, a decrease of approximately $1.0 million or 1.1% compared to the year ended December 31, 2021. The decrease in net sales for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was due primarily to decreased sales in the Quick-Turn Production and Subcontract product lines.

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Gross profit

Gross profit as a percentage of net sales increased during the year ended December 31, 2022 compared to the corresponding period in 2021 (45.9% at December 31, 2022 compared to 45.4% at December 31, 2021) primarily as a result of sales mix.

Selling, general and administrative expense

Selling, general and administrative expense was approximately $16.9 million in the year ended December 31, 2022 and $15.3 million in the year ended December 31, 2021. Selling, general and administrative expense represented 18.9% of net sales for the year ended December 31, 2022 and 16.9% of net sales in the corresponding period in 2021. The selling, general and administrative expense in the current year included $0.9 million in transaction costs associated with a potential divestiture of Advanced Circuits that was terminated during the third quarter.

Segment operating income

Segment operating income for the year ended December 31, 2022 was $23.6 million as compared to $25.2 million the year ended December 31, 2021, a decrease of $1.6 million based on the factors noted above.

Year ended December 31, 2021 compared to the Year ended December 31, 2020

Net sales

Net sales for the year ended December 31, 2021 were $90.5 million, an increase of approximately $2.4 million or 2.7% compared to the year ended December 31, 2020. The increase in net sales for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was due primarily to increased sales in the Quick-Turn Production, Volume Production,and Subcontract product lines.

Gross profit

Gross profit as a percentage of net sales increased during the year ended December 31, 2021 compared to the corresponding period in 2020 (45.4% at December 31, 2021 compared to 44.1% at December 31, 2020) primarily as a result of sales mix.

Selling, general and administrative expense

Selling, general and administrative expense was approximately $15.3 million in the year ended December 31, 2021 and $15.2 million in the year ended December 31, 2020. Selling, general and administrative expense represented 16.9% of net sales for the year ended December 31, 2021 and 17.3% of net sales in the corresponding period in 2020.

Segment operating income

Segment operating income for the year ended December 31, 2021 was $25.2 million as compared to $22.9 million the year ended December 31, 2020, an increase of $2.3 million based on the factors noted above.

Altor Solutions

Overview

Founded in 1957 and headquartered in Scottsdale, Arizona, Altor Solutions is a designer and manufacturer of custom molded protective foam solutions and original equipment manufacturer (OEM) components made from expanded polystyrene (EPS) and expanded polypropylene (EPP). Altor operates 18 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.

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Results of Operations

Year ended December 31,

Year ended December 31, 2022 compared to the Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 were $261.3 million, an increase of $81.1 million, or 45.0%, compared to the year ended December 31, 2021. The increase in net sales during the year was primarily due to the acquisition of Plymouth Foam in October 2021, organic growth in Altor's appliance and cold chain customer sectors, and contractual and general increases in selling prices during the latter half of 2021 and the first half of 2022. Plymouth Foam sales for the year ended December 31, 2022 were $64.2 million.

Gross profit

Gross profit as a percentage of net sales was 22.2% and 24.3%, respectively, for the years ended December 31, 2022 and 2021. The decrease in gross profit as a percentage of net sales in the year ended December 31, 2022 was primarily due to increases in the price of Altor's primary raw material, expanded polystyrene ("EPS"), and increased operating costs, particularly labor. We expect gross profit as a percentage of net sales to improve in the near to intermediate term as we have contractual price increases planned and we expect raw material input costs to stabilize.

Selling, general and administrative expense

Selling, general and administrative expense for the year ended December 31, 2022 was $23.0 million as compared to $17.1 million for the year ended December 31, 2021, an increase of $6.0 million. The increase in selling, general and administrative expense for the year ended December 31, 2022 is primarily attributable to the acquisition of Plymouth Foam in the fourth quarter of 2021.

Segment operating income

Segment operating income was $24.6 million for the year ended December 31, 2022 as compared to $18.0 million for the year ended December 31, 2021, an increase of $6.6 million based on the factors noted above.

Year ended December 31, 2021 compared to the Year ended December 31, 2020

Net sales

Net 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 year ended December 31, 2021.

Gross profit

Gross 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 business, and increased operating expenses, including labor, utilities and supplies.

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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 year ended December 31, 2021.

Segment operating income

Segment operating income 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.

Arnold

Overview

Arnold serves a variety of markets including aerospace and defense, general industrial, motorsport/ transportation, 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 engineers solutions for and produces high performance permanent magnets (PMAG), stators, rotors and full electric motors ("Ramco"), precision foil products (Precision Thin Metals or "PTM"), and flexible magnets (FlexmagTM) 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 customers and leading systems-integrators worldwide with a focus on North America, Europe, and Asia. Arnold has built a preferred rare earth supply chain and has leading rare earth and other permanent magnet production capabilities. Arnold is the largest and, we believe, the most technically advanced U.S. solutions provider and manufacturer of engineered magnetic systems.

Results of Operations

Year ended December 31,

Year ended December 31, 2022 compared to the Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 were approximately $153.8 million, an increase of $13.9 million compared to the same period in 2021. The increase in net sales is primarily a result of increased demand in several markets including industrial and transportation, driven in part by the acquisition of Ramco Electric Motors, Inc. in March 2021. International sales were $47.9 million and $43.0 million for the years ended December 31, 2022 and 2021, respectively, an increase of $4.9 million.

Gross profit

Gross profit was $44.4 million for the year ended December 31, 2022 as compared to $39.5 million for the same period in 2021. Gross profit as a percentage of net sales increased to 28.9% in 2022 from 28.2% in 2021, principally due to increased volume, favorable product mix and improvements in operating efficiencies.

Selling, general and administrative expense

Selling, general and administrative expense in the year ended December 31, 2022 was $24.4 million as compared to approximately $22.8 million for the year ended December 31, 2021. The increase in selling general and administrative expense was due primarily to increased staffing related costs driven in part by the acquisition of Ramco Electric Motors, Inc. in March 2021, and increased travel and commission expenses. Selling, general and

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administrative expense represented 15.8% of net sales for the year ended December 31, 2022 as compared to 16.3% for the same period in 2021. 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.

Segment operating income

Arnold had segment operating income of approximately $16.7 million for the year ended December 31, 2022, as compared to segment operating income of $12.0 million for the year ended December 31, 2021, an increase of $4.7 million year over year based on the factors stated above.

Year ended December 31, 2021 compared to the Year ended December 31, 2020

Net sales

Net 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 Profit

Gross 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 expense

Selling, 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.

Segment operating income

Arnold had segment operating income of approximately $12.0 million for the year ended December 31, 2021, as compared to segment operating income 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.

Sterno

Overview

Sterno, headquartered in Corona, California, is the parent company of Sterno, LLC ("Sterno Products"), 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, scented wax cubes, warmer products, outdoor lighting and essential oils used for home decor and fragrance systems, through Rimports. In 2022, Sterno completed the product line integration of Sterno Home Inc. (“Sterno Home”) with Rimports. Previously, Sterno Home was a separate product division of Sterno whose product offerings include flameless candles, traditional house and garden lighting including path lights, spotlights, and security lights.

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Results of Operations

Year ended December 31,

Year ended December 31, 2022 compared to the Year ended December 31, 2021

Net sales

Net sales for the year ended December 31, 2022 were approximately $352.2 million, a decrease of $23.0 million or 6.1% compared to net sales for the year ended December 31, 2021. The net sales variance reflects softer sales at Rimports due to change in discretionary consumer buying behaviors due to inflation pressures, partially offset by stronger sales at Sterno as compared to the prior year with increased business travel and conventions.

Gross profit

Gross profit was $67.4 million for the year ended December 31, 2022 as compared to $72.0 million for the same period in 2021. The decrease in gross profit during 2022 as compared to 2021 was primarily attributable to the decrease in sales volume at Rimports, and increases in raw material costs and freight driven by inflation. Gross profit as a percentage of net sales decreased from 19.2% for the year ended December 31, 2021 to 19.1% for the same period ended December 31, 2022.

Selling, general and administrative expense

Selling, general and administrative expense for the year ended December 31, 2022 was approximately $30.6 million as compared to $32.9 million in the year ended December 31, 2021, a decrease of $2.3 million or 6.9%, reflecting lower salaries and commissions. Selling, general and administrative expense represented 8.7% of net sales for the year ended December 31, 2022 and 8.8% for the year ended December 31, 2021.

Segment operating income

Segment operating income for the year ended December 31, 2022 was approximately $19.8 million, a decrease of $0.1 million when compared to the same period in 2021, based on the factors noted above as well as a decrease in amortization expense year over year due to the full amortization of certain intangible assets in the prior year.

Year ended December 31, 2021 compared to the Year ended December 31, 2020

Net sales

Net 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 Profit

Gross 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.

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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.

Segment operating income

Segment operating income 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.

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Liquidity and Capital Resources

We generate cash primarily from the operations of our subsidiaries, and we have the ability to borrow under our 2022 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 $61.3 million and $160.7 million as of December 31, 2022 and 2021, respectively.

As of December 31, 2022, we had $1,000 million of indebtedness associated with our 5.250% 2029 Notes, $300 million of indebtedness associated with our 5.000% 2032 Notes, $395 million outstanding on our 2022 Term Loan, and $155 million outstanding on our 2022 Revolving Credit Facility. Only our 2022 Term Loan has required principal payments. Long-term debt liquidity requirements consist of the payment in full of our Notes upon their respective maturity dates, amounts outstanding under our 2022 Revolving Credit Facility upon its maturity date, and principal payments under our 2022 Term Loan. The 2022 Term Loan requires quarterly payments ranging from $2.5 million to $7.5 million, commencing September 30, 2022, with a final payment of all remaining principal and interest due on July 12, 2027, which is the 2022 Term Loan’s maturity date. At December 31, 2022, approximately 30% of our outstanding debt was subject to interest rate changes.

The following table summarizes our cash activity for the years presented:

Year ended December 31,

Effect of exchange rates on cash and cash equivalents (1,331) 228 914

Increase (decrease) in cash and cash equivalents $ (99,462) $ 89,989 $ (29,570)

Cash Flow from Operating Activities

2022

Cash flows used in operating activities totaled approximately $28.3 million for the year ended December 31, 2022, which represents a decrease of $162.3 million compared to cash flow provided by operating activities of $134.1 million for the year ended December 31, 2021. The decrease in cash flows in 2022 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, 2022 was $252.4 million, as compared to cash used in operating activities for working capital of $83.8 million for the year ended December 31, 2021. 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; however, in the current year, several of our subsidiary businesses substantially increased inventory levels to combat supply chain issues given longer lead times, resulting in higher cash outflows throughout the year. The increase in cash used in operating activities for working capital in 2022 also reflects the acquisition of Lugano in the third quarter of the prior year. Lugano has used significant cash to build inventory to support its sales growth strategy (approximately $89.8 million in cash used for inventory purchases in 2022).

2021

Cash flows provided by operating activities totaled approximately $134.1 million for the year ended December 31, 2021, which represented 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 was 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

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the first half of the year as most of our companies will build up inventories after the fourth quarter. In 2021, several of our businesses had higher inventory levels than normal given significantly longer lead times due to supply chain issues, which led to higher levels of inventory at December 31, 2021. In 2020, 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 reflected the acquisitions of Marucci Sports and BOA in the second and fourth quarter, respectively, of 2020, and Lugano in the third quarter of 2021.

2020

Cash flows provided by operating activities totaled approximately $148.6 million for December 31, 2020, which represented 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 was 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 2019, 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 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 2020 as compared to 2019 by approximately $12.4 million. In 2019, 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 2020 primarily reflects steps our businesses took to maintain liquidity in the economic climate in 2020.

Cash Flow from Investing Activities

2022

Cash flows used in investing activities totaled approximately $626.7 million for the year ended December 31, 2022, compared to $317.5 million used in investing activities during the year ended December 31, 2021. Investing activities in the current year reflect our acquisition of PrimaLoft in the third quarter of 2022, and a small add-on acquisition at our Velocity business. The total amount of cash used for acquisitions in 2022 totaled $570.5 million. Investing activities in the prior year reflected our acquisition of Lugano in September 2021, plus add-on acquisitions at Arnold (Ramco Electric Motors), Altor Solutions (Plymouth Foam) and Marucci (Lizard Skins) for total cash used in acquisitions of $404.3 million. The cash flows used in investing activities in the prior 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 $23.7 million during the year ended December 31, 2022 as compared to the year ended December 31, 2021, with $64.3 million in capital expenditures in 2022 and $40.6 million in capital expenditures in 2021. The increase in capital expenditures is primarily to support the retail store growth at both 5.11 and Lugano. We expect capital expenditures for fiscal year 2023 to be approximately $70 million to $80 million.

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 2021 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 2020 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 2021 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 2021 after reduced spending in 2020 as our businesses limited spending during the early stages of the COVID-19 pandemic.

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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 2019 primarily related to the proceeds received from the sale of our Manitoba Harvest and Clean Earth businesses, while investing activities in 2020 reflected 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 reflected a reduction in our capital spending in 2020 in response to the anticipated effect of the COVID-19 pandemic on our cash flows.

Cash Flow from Financing Activities

2022

Cash flows provided by financing activities totaled approximately $556.9 million for the year ended December 31, 2022, as compared to cash flows provided by financing activities of $273.2 million for the year ended December 31, 2021. During the year ended December 31, 2022, we entered into our 2022 Credit Facility which provides for a $400 million term loan. The net amount of cash provided by debt proceeds under our 2022 Credit Facility in 2022, including the 2022 Term Loan and draws on our revolving credit facility, was $550.0 million, which was used primarily to fund our acquisition of PrimaLoft in July 2022. Financing activities also reflect the payment of our common and preferred share distributions. Additionally, financing activities in 2022 reflects cash received from noncontrolling shareholders related to our acquisition of PrimaLoft in 2022 ($35.3 million in cash proceeds provided by noncontrolling shareholders), and paid to noncontrolling shareholders related to our recapitalization of Ergobaby in February 2022 ($11.3 million in distributions to noncontrolling shareholders at Ergobaby). 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 $83.9 million in net cash proceeds from the sale of Trust common shares under this program in 2022.

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 2021 reflect the payment of our common and preferred share distributions. In 2021 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 2021. 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.

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 2019, 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 2020, we completed a common share offering and the issuance of $200 million in additional 2026 Notes, resulting in net proceeds of $285.9 million. In 2020, 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.

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Total Liabilities and Intercompany loans to our businesses

The following table summarizes the total liabilities and intercompany debt of our business as of December 31, 2022:

(in thousands) Intercompany Loans Total Liabilities

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 February 2022, we completed a recapitalization at Ergobaby whereby the LLC entered into an amendment to the intercompany loan agreement with Ergobaby (the "Ergobaby Loan Agreement"). The Ergobaby Loan Agreement was amended to provide for additional term loan borrowings of $61.5 million to fund a distribution to shareholders. The LLC owned 81.6% of the outstanding shares of Ergobaby on the date of the distribution and received $50.2 million. The remaining amount of the distribution was paid to minority shareholders.

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.

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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 first quarter of 2022, we amended the 5.11 intercompany credit agreement to increase the capital expenditures allowable under the agreement to account for additional growth capital expenditure opportunities primarily related to retail expansion, and amended the financial covenants to reflect the increased allowable expenditure. The 5.11 credit agreement was amended again in both the third and fourth quarters to increase the amount available under the revolving credit facility, as well as to increase the capital expenditures allowable under the credit agreement.

During the first quarter of 2022, the Lugano intercompany credit agreement was amended to increase the amount available under the revolving credit facility to permit additional investment in inventory, and amended the financial covenants to reflect the increase in the revolving credit facility. We amended the Lugano intercompany credit agreement again in the second quarter of 2022 to increase the amount in available under the revolving credit facility to permit additional investment in inventory, and amended the financial covenants to reflect the increase in the revolving credit facility. During the fourth quarter of 2022, the Lugano intercompany credit agreement was amended to allow for an additional Term A Loan.

During the third quarter of 2022, we amended the Velocity intercompany credit agreement to increase the amount of the Velocity term loan to allow for the financing of an add-on acquisition. Additionally, during the third quarter of 2022, we amended the Altor credit agreement to allow for additional capital expenditures related to our Ohio plant relocation.

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.

All of our subsidiaries were in compliance with the financial covenants included within their intercompany credit arrangements at December 31, 2022.

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 and principal on our outstanding debt; (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. Each of our subsidiaries has various non-cancelable commitments in the ordinary course of business, including operating lease payments, and purchase obligations which include payments for materials and payments under employment agreements. On a consolidated basis at December 31, 2022, we had future operating lease obligations of $241.4 million and purchase obligations of $204.6 million.

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

2022 Credit Facility

On July 12, 2022, we entered into the Third Amended and Restated Credit Agreement (the "2022 Credit Facility") to amend and restate the 2021 Credit Facility. The 2022 Credit Facility provides for revolving loans, swing line loans and letters of credit up to a maximum aggregate amount of $600 million (the "2022 Revolving Credit Facility") and also permits the LLC, 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 2022 Revolving Credit Facility will become due on July 12, 2027, which is the maturity date of loans advanced under the 2022 Revolving Credit Facility. The 2022 Credit Facility also provides for a $400 million

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term loan (the “2022 Term Loan”). The 2022 Term Loan requires quarterly payments ranging from $2.5 million to $7.5 million, commencing September 30, 2022, with a final payment of all remaining principal and interest due on July 12, 2027, which is the 2022 Term Loan’s maturity date.

The 2022 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, 2022, we had letters of credit totaling $2.2 million outstanding under the 2022 Revolving Credit Facility. We had approximately $442.8 million in borrowing base availability under this facility at December 31, 2022. (See "Note I - Debt" to the consolidated financial statements for more detail regarding our 2022 Credit Facility).

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 provided for revolving loans, swing line loans and letters of credit up to a maximum aggregate amount of $600 million and also permitted the LLC, 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. The Company repaid the outstanding amounts under the 2021 credit facility in the third quarter of 2022 in connection with entering into the 2022 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 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 Notes

2032 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") 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 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”) 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”).

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2026 Notes

On 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 2029 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, 2022 included as part of the affirmative covenants in our 2022 Credit Facility:

Description of Required Covenant Ratio Covenant Ratio Requirement Actual Ratio

Fixed Charge Coverage Ratio Greater than or equal to 1.50:1.00 3.09:1.00

Total Secured Debt to EBITDA Ratio Less than or equal to 3.50:1.00 1.12:1.00

Total Debt to EBITDA Ratio Less than or equal to 5.75:1.00 3.97:1.00

We intend to use the availability under our 2022 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.

Interest Expense

We incurred interest expense totaling $83.5 million in the year ended December 31, 2022, as compared to $58.8 million in the year ended December 31, 2021 and $45.8 million for the year ended December 31, 2020.

The components of interest expense on our outstanding debt are as follows (in thousands):

Years ended December 31,

Amortization of bond premium — (83) (222)

Income Taxes

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 Company was treated as a partnership prior to the Trust’s tax reclassification and it will continue to be treated as a

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partnership following the Trust’s tax reclassification. 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. This benefit reversed in the third quarter of 2022 when Advanced Circuits no longer qualified as held-for-sale.

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 $45.0 million with an annual effective rate of 51.7% during the year ended December 31, 2022, an income tax provision of $21.8 million with an annual effective tax rate of 31.9% during the year ended December 31, 2021, and $13.6 million in income tax benefit with an effective tax rate of 50.1% during the year ended December 31, 2020.

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, 2022, 2021 and 2020 are as follows:

Year ended December 31,

United States Federal Statutory Rate 21.0 % 21.0 % 21.0 %

State income taxes (net of Federal benefits) 5.3 2.7 7.6

Foreign income taxes 2.7 5.3 6.1

Impairment expense 1.0 — —

Impact of subsidiary employee stock options 0.8 — 1.6

Non-deductible acquisition costs 0.6 0.4 1.9

Non-recognition of various carryforwards at subsidiaries 13.4 (2.3) (4.0)

United States tax on foreign income 0.6 (1.5) (0.8)

Dividend (net of dividend received deduction) 3.6 — —

Utilization of tax credits (9.2) (4.0) (1.1)

Effect of classification of assets held for sale 9.9 (10.7) —

Effective income tax rate 51.7 % 31.9 % 50.1 %

(1)The effective income tax rate for the years 2021 and 2020 include 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 Measures

GAAP or U.S. GAAP refer to generally accepted accounting principles in the United States. From 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.

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 intended to replace the presentation of financial results in accordance with U.S. GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies. The presentation of these non-GAAP financial measures supplements other metrics we use to internally evaluate our subsidiary businesses and facilitate the comparison of past and present operations.

The tables below reconcile the most directly comparable GAAP financial measures to Earnings before Interest, Income Taxes, Depreciation and Amortization ("EBITDA"), Adjusted EBITDA and Adjusted Earnings.

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EBITDA –EBITDA is calculated as net income (loss) from continuing operations before interest expense, income tax expense (benefit), loss on debt extinguishment, depreciation expense and amortization expense. Amortization expenses consist of amortization of intangibles and debt charges, including debt issuance costs, discounts, etc.

Adjusted EBITDA – Adjusted EBITDA is calculated utilizing the same calculation as described above in arriving at EBITDA further adjusted by: (i) non-controlling stockholder 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) impairment charges, which reflect write downs to goodwill or other intangible assets; (iv) changes in the fair value of contingent consideration subsequent to initial purchase accounting, (v) integration service fees, which reflect fees paid by newly acquired companies to the Manager for integration services performed during the first year of ownership; and (vi) items of other income or expense that are material to a subsidiary and non-recurring in nature.

Adjusted Earnings –– Adjusted earnings is calculated as net income (loss) adjusted to include the cost of the distributions to preferred shareholders, and adjusted to exclude the impact of certain costs, expenses, gains and losses and other specified items the exclusion of which management believes provides insight regarding our ongoing operating performance. Depending on the period presented, these adjusted measures exclude the impact of certain of the following items: gains (losses) and income (loss) from discontinued operations, income (loss) from noncontrolling interest, amortization expense, subsidiary stock compensation expense, acquisition-related expenses and items of other income or expense that may be material to a subsidiary and non-recurring in nature.

We believe that EBITDA, Adjusted EBITDA and Adjusted Earnings provide useful information to investors and reflect important financial measures that are used by management in the monthly analysis of our operating results and in preparation of our annual budgets. We believe that investors’ understanding of our performance is enhanced by disclosing these performance measures as this presentation allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our subsidiary businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition.

We believe that Adjusted EBITDA and Adjusted Earnings provide useful information to investors and reflects 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) and net income (loss) from continuing operations, Adjusted Earnings and Adjusted EBITDA, respectively, are each limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our subsidiary businesses or the non-cash charges associated with impairments, as well as certain cash charges. The presentation of Adjusted Earnings provides insight into our operating results and provides a measure for evaluating earnings from continuing operations available to common shareholders. EBITDA, Adjusted EBITDA and Adjusted Earnings 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.

Reconciliation of Net income (loss) from continuing operations to EBITDA and Adjusted EBITDA

The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss) from continuing operations, which we consider to be the most comparable GAAP financial measure (in thousands):

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Adjusted EBITDA

Adjusted for:

Loss on debt extinguishment 534 — — — — — — — — — — — 534

Impairment expense — — — 20,552 — — — — — — — — 20,552

Integration services fee — — — — 1,688 — 2,375 — — — — — 4,063

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Adjusted EBITDA

Adjusted for:

Loss on debt extinguishment 33,305 — — — — — — — — — 33,305

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Adjusted EBITDA

Adjusted for:

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Reconciliation of Net income (loss) to Adjusted Earnings and Adjusted EBITDA

The following table reconciles Adjusted Earnings to Net income (loss), which we consider the most comparable GAAP financial measure, and Adjusted Earnings to Adjusted EBITDA (in thousands):

Three months ended Year ended

Adjustments:

Tax effect - impairment expense — — — (3,557) (3,557)

Non-controlling interest - impairment expense — — — (3,120) (3,120)

Loss on debt extinguishment — — 534 — 534

Plus (less):

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Tax effect - impairment expense — — — 3,557 3,557

Non-controlling interest - impairment expense — — — 3,120 3,120

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Three months ended Year ended

Gain on sale of discontinued operations, net of tax — — 72,745 25 72,770

Adjustments:

Plus (less):

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Three months ended Year ended

Gain on sale of discontinued operations, net of tax — — 100 — 100

Adjustments:

Plus (less):

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Seasonality

The following table presents the net sales by quarter as a percentage of our annual net sales.

Year Ended December 31,

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 have produced the highest net sales in our fiscal year, however, due to various acquisitions in the last three years, there is generally less seasonality in our net sales on a consolidated basis than there has been historically.

Related Party Transactions and Certain Transactions Involving our Businesses

We have entered into related party transactions with our Manager, CGM including the following:

•Management Services Agreement

•LLC Agreement

•Integration Services Agreements

•Cost Reimbursement and Fees

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, 2022, 2021, and 2020, we incurred $63.6 million, $47.4 million, and $34.2 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 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 LLC under the MSA.

During 2022, CGM entered into a waiver of the MSA for the period through June 30, 2023 to receive a 1% annual management fee related to PrimaLoft, rather than the 2% called for under the MSA, which resulted in a lower management fee at September 30, 2022 and December 31, 2022 than would normally have been due. At June 30, 2022 and March 31, 2022, CGM entered into a waiver to exclude cash balances held at the LLC from the calculation of the management fee.

During 2021, CGM 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 LLC 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 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 LLC with additional cash liquidity in light of the COVID-19 pandemic, the LLC elected to draw down $200 million on our 2018 Revolving Credit Facility. The LLC 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 LLC 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 LLC and CGM entered into a waiver agreement

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whereby CGM agreed to waive the portion of the management fee attributable to the cash balances held at the LLC as of September 30, 2020.

The LLC 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 LLC 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 and $9.1 million in distributions related to Sale and Holding Events that occurred during 2021 and 2020, respectively. No allocation interest distributions were made in 2022. 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) 62.0% of the Allocation Interests at December 31, 2022 and 57.8% at December 31, 2021. Of the remaining 38.0% at December 31, 2022 and 42.2% at December 31, 2021, 5.0% is held by CGI Diversified Holdings LP, 5.0% is held by a director on the Company’s Board of Directors, and the remaining percentage of Allocation Interests are 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 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.

PrimaLoft, which was acquired in July 2022, entered into an ISA with CGM whereby PrimaLoft will pay CGM a total integration services fee of $4.8 million, payable quarterly over a twelve-month period ended June 30, 2023.

Lugano, which was acquired in September 2021, entered into an ISA with CGM whereby Lugano will pay CGM a total integration services fee of $2.3 million, payable quarterly over a twelve month period beginning in the quarter ended December 31, 2021.

BOA, which was acquired in October 2020 and Marucci Sports, which was acquired in April 2020, 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.

CODI US Equity

CODI · 10-K · period ended 2022-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CODI US Equity☆

CODI · 10-K · period ended 2022-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CODI US Equity