Clarus Corporation — Q2 2022 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022. Amounts below are in millions of dollars unless otherwise noted. Clarus designs, manufactures and distributes outdoor, precision shooting and adventure products, including Black Diamond, Sierra, Barnes, Rhino-Rack and MAXTRAX. Results include Rhino-Rack, acquired July 2021, and MAXTRAX, acquired December 2021.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $114.9 | $73.3 | $228.2 | $148.6 |
| Gross profit / margin | $43.7 / 38.0% | $28.0 / 38.2% | $87.9 / 38.5% | $55.1 / 37.0% |
| Operating income | $7.8 | $6.7 | $15.9 | $12.4 |
| Net income | $3.8 | $1.8 | $9.1 | $7.5 |
| Diluted EPS | $0.09 | $0.06 | $0.23 | $0.23 |
- Q2 revenue rose 56.8%; management attributed $27.1 million to Rhino-Rack and MAXTRAX, with higher unit sales in precision sport and outdoor products partly offset by $1.4 million of unfavorable currency effects. First-half revenue rose 53.5%, including $55.8 million from the acquired businesses.
- First-half gross margin improved 1.5 percentage points, reflecting favorable product mix and the acquired businesses, partly offset by foreign exchange and a $0.3 million MAXTRAX purchase-accounting inventory charge. Q2 margin declined 0.2 percentage points as freight and currency effects offset mix benefits.
- First-half SG&A increased to $69.6 million from $41.6 million, driven by acquisitions, higher stock compensation, corporate costs and investment in retail and direct-to-consumer initiatives.
- Q2 interest expense was $1.7 million versus $0.2 million; first-half interest expense was $2.8 million versus $0.5 million, principally reflecting higher debt and debt issuance costs. First-half tax expense was $2.6 million, versus a $0.2 million benefit in 2021.
Segments
Q2 revenue was $52.6 million in Outdoor, $35.2 million in Precision Sport and $27.1 million in Adventure. Segment operating income was $1.5 million, $12.2 million and $0.6 million, respectively. For the first half, revenue was $104.1 million, $68.3 million and $55.8 million, respectively; segment operating income was $3.4 million, $24.0 million and $2.8 million.
Cash flow, debt and liquidity
- Cash was $13.9 million at June 30, down from $19.5 million at year-end. Current assets were $250.9 million and current liabilities $69.2 million.
- First-half operating cash flow was negative $6.3 million, compared with positive $0.4 million in 2021. Higher operating assets, particularly inventory and receivables, drove the working-capital use. Capital expenditures were $4.1 million; free cash flow, as defined by the company, was negative $10.3 million versus negative $2.9 million.
- Total debt was $149.6 million, including $25.5 million drawn on the revolving facility and $123.4 million of term loans. The company reported $274.5 million of remaining revolving capacity and compliance with its debt covenants.
- The April 2022 amended credit agreement provides a $300 million secured revolver and $125 million term loan, matures April 2027 and allows up to $175 million of additional, currently uncommitted facilities. Debt is secured by specified assets and subject to leverage and fixed-charge covenants and restrictions on certain dividends and other payments. Management said cash from operations and existing facilities should cover liquidity needs for at least 12 months.
Outlook, risks and unusual items
- The filing gives no quantified revenue or earnings guidance. Management expects ongoing COVID-related supply-chain disruption, shipping delays and higher raw-material, storage and freight costs to continue affecting sales and profitability; timing and magnitude are uncertain.
- Foreign currency translation reduced Q2 comprehensive income by $17.0 million, resulting in a comprehensive loss of $13.2 million despite net income of $3.8 million. First-half foreign currency translation loss was $11.6 million.
- MAXTRAX met the 2022 sales threshold for contingent consideration; approximately $2.1 million was paid in cash after quarter-end. The Rhino-Rack threshold was not met for the measurement period. Fair-value changes in contingent consideration are based on significant unobservable inputs.
- Management cited risks including consumer demand, acquisition integration, supply and logistics disruptions, currency and raw-material volatility, product liability and warranty exposure, firearms-related regulation, and information-system and cybersecurity risks. It reported no material changes to the prior annual report’s risk factors.
- Ordinary-course legal matters were not expected to have a material adverse effect, but the company disclosed a reasonable possibility of losses above recorded accruals that it could not reasonably estimate. No pending product-liability claims were believed to be material in aggregate.
- The company reported effective disclosure controls. It continued integrating acquired-company financial controls and excluded Rhino-Rack and MAXTRAX from its internal-control effectiveness assessment.
Most important facts for investors to verify
- How much revenue and profit growth is organic versus attributable to Rhino-Rack and MAXTRAX, and whether acquired businesses meet expectations.
- Whether inventory and receivables convert to cash, given negative operating cash flow and the increase in inventory to $153.1 million from $129.4 million at year-end.
- Debt, borrowing costs and covenant headroom under the secured credit agreement, particularly as interest rates and working-capital needs change.
- Whether freight, supply-chain and foreign-exchange pressures persist and how they affect gross margins.
- The eventual cash and share consideration for acquisitions, contingent consideration estimates, and the realization and potential limitations of tax assets, including $39.5 million of federal NOLs reported as expiring in 2022.