Compass Diversified falls after restatement for Lugano fraud

Shares of Compass Diversified (CODI) are down 98c, or 13%, to $6.40 in early Friday trading after the company disclosed that it must restate its financial statements for the fiscal years 2022 through 2024 after its Audit Committee’s internal investigation of Lugano and held a call to discuss the actions it is taking in response. On the call, CEO Elias Sabo walked through the fraud that occurred at Lugano and how it led to the decision to restate the company’s 2022, 2023 and 2024 financial results while also summarizing the key findings of the Audit Committee’s independent investigation and the remediation efforts already made and that are continuing to be made to people, processes and structure in response to the Lugano situation. “I want to begin by saying that this has been, without question, the most challenging period in CODI’s history. We recognize the impact this situation has had on our shareholders, creditors, employees, and partners,” Sabo stated on the call. In response to analyst questions, Sabo added: “I would say our first priority is to reduce leverage because I think that is good for everybody in the capital structure. And clearly, being out of compliance is with our senior debt, it makes it kind of requirement number one1. We also have kind of in working with our bondholders. When we issued this, we kind of had notionally always established and with the rating agencies that we would have a 3.5x kind of ceiling on leverage for our normal operations. And so just to be clear, we feel that is the most important thing to do is to divest assets and harvest free cash flow from our businesses to get down below that leverage level. Once we get there, I think we’ll have to assess, to be honest, what our capital allocation strategy is.”