Clarus Corporation — Q3 2021 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Clarus sells outdoor equipment and apparel under Black Diamond and related brands, ammunition under Sierra and Barnes, and automotive racks under Rhino-Rack. Rhino-Rack was acquired July 1, 2021; its results are included from that date.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $109.0 million | $64.5 million | $257.6 million | $148.1 million |
| Gross profit / margin | $39.2 million / 36.0% | $21.7 million / 33.6% | $94.3 million / 36.6% | $50.8 million / 34.3% |
| Operating income (loss) | $(0.3) million | $1.6 million | $12.1 million | $(1.6) million |
| Net income (loss) | $4.5 million | $1.2 million | $12.0 million | $(1.5) million |
| Diluted EPS | $0.13 | $0.04 | $0.35 | $(0.05) |
Cash flow and liquidity: Nine-month operating cash flow was $(17.1) million, versus $21.0 million provided a year earlier. Capital expenditures were $5.6 million, making company-defined free cash flow $(22.7) million versus $17.4 million. Management attributed the operating cash outflow mainly to a $52.2 million increase in net operating assets, including receivables and inventory. Cash was $10.2 million at quarter-end, down from $17.8 million at December 31, 2020.
Debt: Long-term debt, including current maturities, was $190.0 million at September 30, 2021, compared with $34.6 million at year-end 2020. The company had drawn $65.4 million of its $100 million revolver and had $123.4 million outstanding under its term loan. The credit agreement matures May 2024; the company reported covenant compliance at quarter-end. Available revolver capacity was approximately $34.6 million before the subsequent equity offering.
Other balance-sheet metrics: Total assets were $571.7 million, versus $280.7 million at year-end 2020. Inventory increased to $118.7 million from $68.4 million. Goodwill was $108.2 million and indefinite-lived intangibles were $117.0 million, principally reflecting Rhino-Rack.
Material changes and drivers
- Q3 sales grew 69.0%; nine-month sales grew 74.0%. Growth included Rhino-Rack sales of $19.6 million in the nine-month period, Barnes contributions, higher Sierra sales, and increased Black Diamond product volumes. Q3 included $13.2 million of Barnes sales and $19.6 million of Rhino-Rack sales.
- Gross margin improved year over year, which management attributed to favorable product mix, currency effects, and acquired businesses. Purchase-accounting inventory step-ups reduced margin by 2.8 percentage points in Q3 and 1.3 points for the nine-month period.
- Q3 operating expenses included $8.1 million of transaction costs, primarily acquisition-related, versus $1.4 million a year earlier. Nine-month transaction costs were $9.3 million versus $1.9 million.
- Q3 net income exceeded pretax results because of a $6.0 million income tax benefit. The nine-month tax benefit was $6.2 million, largely reflecting release of a valuation allowance after a tax accounting-method change. The resulting effective tax rates were unusually high and are not representative of statutory rates.
- Nine-month other expense was $4.3 million, compared with $0.3 million of other income in 2020; the filing cites mark-to-market changes on non-hedged currency contracts, including Rhino-Rack acquisition-related contracts. The related contracts produced a $4.3 million loss in the nine-month period.
Acquisition, outlook, and risks
Clarus acquired Rhino-Rack for approximately $202.0 million, comprising $143.1 million cash, $55.3 million of Clarus shares, and estimated contingent consideration. Rhino-Rack contributed $19.6 million of revenue and $5.5 million of net income from acquisition through September 30. Its purchase-price allocation remained preliminary. The contingent payment may reach approximately $7.5 million if future sales thresholds are met.
No formal financial guidance is provided in the filing. Management said it expects liquidity needs for at least the next 12 months to be covered by operating cash flow and the existing revolver, while continuing to monitor pandemic-related effects. The filing describes continuing COVID-19 effects, including Australian lockdown-related demand and operating disruption, global supply-chain delays, and higher raw-material, storage, and shipping costs. Management warned that these conditions may continue to affect sales, profitability, cash flow, liquidity, and covenant capacity; the duration and magnitude are uncertain.
Other disclosed risks include acquisition integration and execution, consumer demand, foreign-exchange exposure, product liability and warranty claims, ammunition-related regulation, and use of tax-loss carryforwards. The company reported ordinary-course legal disputes and possible losses exceeding accrued amounts that could not be reasonably estimated. Management reported effective disclosure controls, but excluded Barnes and Rhino-Rack from its internal-control effectiveness assessment while integration and evaluation continued.
Subsequent event: Clarus completed an October/November 2021 common-stock offering, including the underwriters’ option, with approximately $80.3 million of net proceeds before expenses. It intended to use about $65 million to repay revolver borrowings, with the remainder for general corporate purposes, capital expenditures, and potential acquisitions.
Investor verification points
- Confirm the completed offering proceeds, actual revolver repayment, and resulting debt and share count after September 30.
- Monitor working-capital needs, inventory levels, operating cash flow, and the ability to fund operations and acquisitions.
- Assess Rhino-Rack integration, final purchase-price allocation, contingent consideration, and performance against acquisition expectations.
- Evaluate whether supply-chain constraints, shipping costs, and COVID-related demand or operating disruptions persist.
- Review the sustainability of margins and earnings excluding acquisition costs, purchase-accounting inventory effects, currency impacts, and the unusual tax benefit.
- Track debt covenant headroom and the company’s ability to service and repay borrowings through the May 2024 maturity.