Clarus Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in millions of dollars unless stated otherwise. Clarus designs, manufactures and sells outdoor, precision shooting and adventure products under brands including Black Diamond, Sierra, Barnes, Rhino-Rack and MAXTRAX. Results include Rhino-Rack and MAXTRAX, acquired in 2021; their inclusion affects comparisons with 2021.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $115.7 | $109.0 | $343.9 | $257.6 |
| Gross profit / margin | $39.4 / 34.1% | $39.2 / 36.0% | $127.4 / 37.0% | $94.3 / 36.6% |
| Operating income (loss) | $6.1 | $(0.3) | $22.0 | $12.1 |
| Net income | $2.8 | $4.5 | $11.8 | $12.0 |
| Diluted EPS | $0.07 | $0.13 | $0.30 | $0.35 |
| Operating cash flow | Not separately presented | Not separately presented | $(17.7) | $(17.1) |
| Free cash flow* | Not separately presented | Not separately presented | $(24.0) | $(22.7) |
*Company-defined as operating cash flow less capital expenditures.
- Sales and segments: Q3 sales increased 6.2%; international sales rose 26.1% while domestic sales fell 9.3%. For the first nine months, sales grew 33.5%, with acquisition contribution and growth across Precision Sport and Outdoor. Nine-month segment operating income was $34.0 for Precision Sport, $9.2 for Outdoor and a $1.0 loss for Adventure. Adventure posted a $3.7 segment operating loss in Q3.
- Margins and expenses: Q3 gross margin fell 1.9 percentage points, as higher freight and unfavorable currency effects offset mix improvements. Nine-month margin improved 0.4 points, partly reflecting higher-margin products and acquired businesses. Nine-month SG&A rose 39.9% to $102.0, partly due to acquisitions, higher stock compensation and investment in retail and direct-to-consumer initiatives. Transaction costs declined substantially from 2021.
- Profit and taxes: Q3 operating results improved from a small loss to income, but net income fell, in part because Q3 2021 included a $6.0 tax benefit. Nine-month net income was roughly flat despite higher operating income, with higher interest expense and a $2.5 tax expense versus a $6.2 tax benefit in 2021.
- Cash and working capital: Cash declined to $10.4 from $19.5 at year-end 2021. Operating cash use reflected working-capital investment, including higher receivables and inventory. Inventory increased to $155.2 from $129.4. Investing cash use was $5.8, mainly capital expenditures; financing provided $15.3.
Balance sheet, debt and liquidity
- At September 30, 2022, total assets were $627.9 and stockholders’ equity was $363.1. Total debt, net of issuance costs, was $167.2, including $44.7 drawn on the revolver and $121.9 in term loans.
- The secured credit agreement provides a $300 million revolving facility and a $125 million term loan, matures April 18, 2027, and includes financial covenants. The company reported approximately $110 million available to borrow and compliance with debt covenants at quarter-end. Interest rates on the revolver and term loan were approximately 5.0%.
- Management said cash from operations and existing credit availability were expected to cover liquidity needs and contractual obligations for at least the next 12 months. The agreement restricts dividends and other payments under specified conditions.
Outlook, risks and unusual items
- Management reduced sales projections for the remainder of 2022 and forecasts for 2023 and beyond in the Adventure reporting unit amid a weakening global economy, higher inflation and interest rates. A quantitative impairment test found goodwill fair value exceeded carrying value by about 11% and indefinite-lived intangibles by about 14%; no impairment was recorded. Further forecast or market deterioration could lead to impairment charges.
- Management cited continuing supply-chain, freight, raw-material, storage and shipping pressures, as well as currency fluctuations and uncertain consumer demand. The company also identified acquisition integration and execution, product liability and warranty exposure, and risks affecting its ammunition business among relevant uncertainties.
- Q3 included $0.1 of contingent-consideration expense. MAXTRAX met the 2022 sales threshold for contingent consideration; the company reported a cash payment during the quarter. The 2022 Rhino-Rack threshold was not met.
- The company repurchased 527,277 shares for approximately $7.2 million in Q3. In August it replaced a repurchase program with a new authorization of up to $50 million. A quarterly dividend of $0.025 per share was approved for payment in November 2022.
- Clarus filed a September 2022 lawsuit seeking disgorgement of profits from stock and derivative transactions allegedly violating Section 16(b). The filing says ordinary-course legal matters are not currently expected to have a material adverse effect, but possible losses above accrued amounts cannot be reasonably estimated.
- Management reported disclosure controls were effective. MAXTRAX was excluded from the internal-control assessment while integration continued.
Most important facts to verify
- Whether Adventure sales, margins and forecasts stabilize, and whether the impairment-test headroom remains sufficient.
- Whether operating cash flow improves as receivables and inventory convert to cash; note the filing’s MD&A states operating cash use as $17.476 million in one passage, while the cash-flow statement and other MD&A table report $17.746 million.
- The basis for management’s stated approximately $110 million of revolver availability and ongoing covenant headroom.
- How acquisition integration, freight and currency effects, and contingent-consideration payments affect future earnings and liquidity.
- Developments in the company’s litigation and whether any contingencies become estimable or material.