Clarus Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial amounts are in thousands of dollars except per-share amounts. Clarus sells outdoor equipment and apparel through Black Diamond, PIEPS and SKINourishment, and bullets and ammunition through Sierra.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $64,491 | $60,203 | $148,060 | $168,415 |
| Gross profit / margin | $21,669 / 33.6% | $20,557 / 34.1% | $50,817 / 34.3% | $58,605 / 34.8% |
| Operating income (loss) | $1,555 | $4,077 | $(1,590) | $7,253 |
| Net income (loss) | $1,183 | $3,492 | $(1,524) | $6,585 |
| Diluted EPS | $0.04 | $0.11 | $(0.05) | $0.21 |
| Operating cash flow | Not reported separately | Not reported separately | $21,048 | $5,635 |
Q3 sales rose 7.1%, driven mainly by higher sport-product sales, while international sales fell 5.1%. Domestic sales increased 20.5%. For the nine-month period, sales declined 12.1%, with lower demand for climb, mountain and ski products; sport sales partly offset that weakness. Sierra’s Q3 sales were $15,127, up from $6,451, while Black Diamond segment sales were $49,364, down from $53,752.
Q3 operating income and net income fell despite higher sales. SG&A increased 13.6% to $18,674, including a $3,526 increase in stock compensation; transaction costs were $1,440 versus $37. Nine-month SG&A decreased 1.3% to $50,537, reflecting cost reductions partly offset by higher stock compensation. The nine-month operating loss included $1,870 of transaction costs. Interest expense was $232 for Q3 and $800 for nine months; other income was $449 and $324, respectively.
Cash, debt and liquidity
- At September 30, cash was $17,027, compared with $1,703 at December 31, 2019. Current assets were $129,582 and current liabilities $33,646.
- Total debt was $41,062: $21,066 under the revolving facility, $19,000 under the term loan and $996 under foreign credit facilities. The balance sheet classifies $4,000 as current. The company reported approximately $38,900 of revolving availability and compliance with its debt covenants.
- Nine-month operating cash flow was $21,048; capital expenditures were $3,606, producing reported free cash flow of $17,442. Inventory fell to $64,897 from $73,432.
- Investing cash outflow was $33,779, including a $30,500 Barnes acquisition deposit. Financing cash inflow was $27,956, including $20,000 of term-loan borrowing and $11,151 net proceeds from a registered stock offering; proceeds were used to pay down the revolver.
- Stockholders’ equity was $195,287 at September 30, 2020. Shares outstanding were 31,051 thousand at quarter-end; 31,063,094 shares were reported outstanding as of November 4, 2020.
Material changes, outlook and risks
- COVID-19: Management said pandemic-related demand weakness in Black Diamond’s climb, mountain and ski categories reduced sales and profitability through Q3. Supply-chain and logistics disruption affected gross margin; nine-month margin was also pressured by foreign currency and tariffs. Management expected sequential improvement after Q2, which it viewed as the most affected quarter, but said future impacts remained uncertain.
- Mitigation and liquidity: Actions included cost reductions, workforce reductions and furloughs, production adjustments, postponed nonessential capital spending, and suspension of cash dividends and share repurchases. The board reinstated the $0.025 quarterly cash dividend on October 19, 2020, with payment scheduled for November 20. Management believed cash from operations and the revolving facility would cover liquidity needs for at least 12 months, while warning that prolonged disruption could affect liquidity, covenant compliance and asset values.
- Barnes acquisition: Sierra completed its $30,500 purchase of Barnes brand assets on October 2, 2020, after quarter-end. The acquisition accounting and third-party valuations were incomplete; Barnes results were expected to be included in Sierra beginning in the quarter ending December 31, 2020. The filing recorded the deposit as a long-term asset at September 30.
- Other notable items: The company issued $11,151 net proceeds of common stock in a registered direct offering to existing stockholders. Q3 stock compensation included a $3,314 immediately vested award to the Executive Chairman. The company reported ordinary-course legal matters and stated that potential losses in excess of accrued amounts were reasonably possible but not reasonably estimable. It identified cyber incidents and adverse publicity as additional risks.
Key investor verification points
- Track whether Black Diamond demand, international sales and supply-chain costs recover, and whether Sierra’s strong sales continue.
- Review the completed Barnes purchase accounting, acquired liabilities, valuation and subsequent operating contribution.
- Monitor debt balances, covenant headroom, liquidity and the ability to maintain the reinstated dividend amid ongoing pandemic uncertainty.
- Assess the effect of elevated stock-based compensation, transaction costs and share issuance on future earnings and per-share results.
- Follow developments in the company’s legal contingencies, cybersecurity exposure and valuation allowances on deferred tax assets and net operating losses.