(in thousands, except per share amounts)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
Please note that in this Quarterly Report on Form 10-Q Clarus Corporation (which
may be referred to as the "Company," "Clarus," "we," "our" or "us") may use
words such as "appears," "anticipates," "believes," "plans," "expects,"
"intends," "future" and similar expressions which constitute forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are made
based on our expectations and beliefs concerning future events impacting the
Company and therefore involve a number of risks and uncertainties. We caution
that forward-looking statements are not guarantees and that actual results could
differ materially from those expressed or implied in the forward-looking
statements.
Potential risks and uncertainties that could cause the actual results of
operations or financial condition of the Company to differ materially from those
expressed or implied by forward-looking statements in this Quarterly Report on
Form 10-Q include, but are not limited to, the overall level of consumer demand
on our products; general economic conditions and other factors affecting
consumer confidence, preferences, and behavior; disruption and volatility in the
global currency, capital, and credit markets; the financial strength of the
Company's customers; the Company's ability to implement its business strategy;
the ability of the Company to execute and integrate acquisitions; changes in
governmental regulation, legislation or public opinion relating to the
manufacture and sale of bullets and ammunition, and the possession and use of
firearms and ammunition by our customers; the Company's exposure to product
liability or product warranty claims and other loss contingencies; disruptions
and other impacts to the Company's business, as a result of the COVID-19 global
pandemic and government actions and restrictive measures implemented in
response; stability of the Company's manufacturing facilities and suppliers, as
well as consumer demand for our products, in light of disease epidemics and
health-related concerns such as the COVID-19 global pandemic; the impact that
global climate change trends may have on the Company and its suppliers and
customers; the Company's ability to protect patents, trademarks and other
intellectual property rights; any breaches of, or interruptions in, our
information systems; the ability of our information technology systems or
information security systems to operate effectively, including as a result of
security breaches, viruses, hackers, malware, natural disasters, vendor business
interruptions or other causes; our ability to properly maintain, protect, repair
or upgrade our information technology systems or information security systems,
or problems with our transitioning to upgraded or replacement systems; the
impact of adverse publicity about the Company and/or its brands, including
without limitation, through social media or in connection with brand damaging
events and/or public perception; fluctuations in the price, availability and
quality of raw materials and contracted products as well as foreign currency
fluctuations; ongoing disruptions and delays in the shipping and transportation
of our products due to port congestion, container ship availability and/or other
logistical challenges; our ability to utilize our net operating loss
carryforwards; changes in tax laws and liabilities, tariffs, legal, regulatory,
political and economic risks; the Company's ability to maintain a quarterly
dividend; and any material differences in the actual financial results of the
Rhino-Rack acquisition as compared with expectations, including the impact of
the acquisition on the Company's future earnings per share. More information on
potential factors that could affect the Company's financial results is included
from time to time in the Company's public reports filed with the Securities and
Exchange Commission, including the Company's Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. All
forward-looking statements included in this Quarterly Report on Form 10-Q are
based upon information available to the Company as of the date of this Quarterly
Report on Form 10-Q, and speak only as of the date hereof. We assume no
obligation to update any forward-looking statements to reflect events or
circumstances after the date of this Quarterly Report on Form 10-Q.
Overview
Headquartered in Salt Lake City, Utah, we are a global leading designer,
developer, manufacturer and distributor of best-in-class outdoor equipment and
lifestyle products focused on the outdoor and consumer enthusiast markets. Our
mission is to identify, acquire and grow outdoor "super fan" brands through our
unique "innovate and accelerate" strategy. We define a "super fan" brand as a
brand that creates the world's pre-eminent, performance-defining product that
the best-in-class user cannot live without. Each of our brands has a long
history of continuous product innovation for core and everyday users alike. The
Company's products are principally sold globally under the Black Diamond®,
Sierra®, Barnes® and Rhino-Rack® brand names through outdoor specialty and
online retailers, our own websites, distributors and original equipment
manufacturers. Our portfolio of iconic brands is well-positioned for
sustainable, long-term growth underpinned by powerful industry trends across the
outdoor and adventure sport end markets.
Through our Black Diamond, PIEPS, and SKINourishment brands, we offer a broad
range of products including: high-performance, activity-based apparel (such as
shells, insulation, midlayers, pants and logowear); rock-climbing footwear and
equipment (such as carabiners, protection devices, harnesses, belay devices,
helmets, and ice-climbing gear); technical backpacks and high-end day packs;
trekking poles; headlamps and lanterns; gloves and mittens; and skincare and
other sport-enhancing products. We also offer advanced skis, ski poles, ski
skins, and snow safety products, including avalanche airbag systems, avalanche
transceivers, shovels, and probes. Through our Sierra and Barnes brands, we
manufacture a wide range of high-performance bullets and ammunition for both
rifles and
26
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
pistols that are used for precision target shooting, hunting and military and
law enforcement purposes. Rhino-Rack is a leading manufacturer of
highly-engineered automotive roof racks, trays, mounting systems, luggage boxes,
carriers and accessories with leading market share in Australia and New Zealand
and a growing presence in the United States.
Clarus, incorporated in Delaware in 1991, acquired Black Diamond Equipment, Ltd.
("Black Diamond Equipment") in May 2010 and changed its name to Black Diamond,
Inc. in January 2011. In October 2012, we acquired PIEPS Holding GmbH and its
subsidiaries (collectively, "PIEPS").
On August 14, 2017, the Company changed its name from Black Diamond, Inc. to
Clarus Corporation and its stock ticker symbol from "BDE" to "CLAR" on the
NASDAQ stock exchange. On August 21, 2017, the Company acquired Sierra Bullets,
L.L.C. ("Sierra"). On November 6, 2018, the Company acquired the assets of
SKINourishment, Inc. ("SKINourishment").
On October 2, 2020, the Company completed the acquisition of certain assets and
liabilities constituting the Barnes business ("Barnes").
On July 1, 2021, the Company completed the acquisition of Australia-based
Rhino-Rack Holdings Pty Ltd ("Rhino-Rack").
On August 6, 2018, the Company announced that its Board of Directors approved
the initiation of a quarterly cash dividend program of $0.025 per share of the
Company's common stock (the "Quarterly Cash Dividend") or $0.10 per share on an
annualized basis. The declaration and payment of future Quarterly Cash
Dividends is subject to the discretion of and approval of the Company's Board of
Directors. On May 1, 2020, the Company announced that, in light of the
operational impact of the COVID-19 pandemic, its Board of Directors temporarily
replaced its Quarterly Cash Dividend with a stock dividend (the "Quarterly Stock
Dividend"). On October 19, 2020, the Company announced that its Board of
Directors approved the reinstatement of its Quarterly Cash Dividend. On October
29, 2021, the Company announced that its Board of Directors approved the payment
on November 19, 2021 of the Quarterly Cash Dividend of $0.025 to the record
holders of shares of the Company's common stock as of the close of business on
November 8, 2021.
Impact of COVID-19
The global outbreak of COVID-19 was declared a global pandemic by the World
Health Organization and a national emergency by each of the U.S., European, and
Australian governments in March 2020, with governments world-wide implementing
safety measures restricting travel and requiring citizen lockdowns and
self-confinements for quarantining purposes. This has negatively affected the
U.S., European, Australian and global economies, disrupted global supply chains,
and resulted in significant transport restrictions and disruption of financial
markets. The impact of this global pandemic has created significant uncertainty
in the global economy and has affected our business, employees, retail and
distribution partners, suppliers, and customers.
We experienced a decline in retail demand within our Black Diamond segment
beginning in the second half of March 2020 through December 2020, which
negatively impacted our sales and profitability during this period. This
continued during the nine months ended September 30, 2021, although to a lesser
extent, as certain countries began to ease restrictions. During the third
quarter of 2021, the Australian government instituted a mandatory lockdown for
its citizens. This caused a decline in retail demand and a disruption in
operations within our Rhino-Rack segment, which negatively impacted our sales
and profitability for the third quarter of 2021. We expect a continued impact on
the Company's sales and profitability in future periods. The duration of these
trends and the magnitude of such impacts cannot be precisely estimated at this
time, as they are affected by a number of factors (some of which are outside
management's control), including those presented in Part I, Item 1A. Risk
Factors of our Annual Report on Form 10-K for the year ended December 31, 2020.
Since the beginning of the pandemic, we have mitigated some of the negative
impacts to our operating results by taking significant actions to improve our
current operating results and liquidity position, including drawing on the
credit facility, temporarily suspending share repurchases, temporarily
suspending cash dividends, postponing non-essential capital expenditures,
reducing operating costs, modulating production in line with demand, and
substantially reducing discretionary spending. As the impact of the COVID-19
pandemic on the economy and our operations evolves, we will continue to assess
the impact on the Company and respond accordingly.
The COVID-19 pandemic has significantly impacted the global supply chain, with
restrictions and limitations on related activities causing disruption and delay,
along with increased raw material, storage, and shipping costs. These
disruptions and delays have strained domestic and international supply chains,
which have affected and could continue to negatively affect the flow or
availability of certain products. Furthermore, significantly increased demand
from online sales channels, including our website, has impacted our logistical
operations, including our fulfillment and shipping functions, which has resulted
in periodic delays in the delivery of our products. The further spread of
COVID-19, and the requirements to take action to help limit the spread of the
illness, could impact our ability to carry out our business as usual and may
materially adversely impact global economic conditions, our business, results of
operations, cash flows, and financial condition. For example, travel
restrictions imposed as a result of the COVID-19 pandemic negatively impacted
27
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
certain of our product development initiatives, as we were unable to visit
certain third-party manufacturers to review processes and procedures for new
products and product enhancements. The extent of the impact of COVID-19 on our
business and financial results will depend on future developments, including the
duration and severity of the outbreak (including the severity and transmission
rates of new variants of the coronavirus) within the markets in which we and our
manufacturers and suppliers operate, the timing, distribution, and efficacy of
vaccines and other treatments, the related impact on consumer confidence and
spending, and the effect of governmental regulations imposed in response to the
pandemic, all of which are highly uncertain and ever-changing. While we have
experienced an increase in demand for our products due to the impact that the
COVID-19 pandemic has had on consumer behaviors, including due to various
stay-at-home orders and restrictions on dining options and restaurant closures,
this increased demand may not be sustained following the pandemic, or if
economic conditions worsen, which would negatively impact consumer spending.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act
("CARES Act") was signed into law. The CARES Act established a program with
provisions to allow U.S. companies to defer the employer's portion of social
security taxes between March 27, 2020 and December 31, 2020 and pay such taxes
in two installments in 2021 and 2022. As permitted by the CARES Act, we have
deferred payment of the employer's portion of social security payroll tax
payments.
Critical Accounting Policies and Use of Estimates
Management's discussion of our financial condition and results of operations is
based on the condensed consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP"). The preparation of the condensed consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent liabilities at the date
of the condensed consolidated financial statements. Estimates also affect the
reported amounts of revenues and expenses during the reporting periods. We
continually evaluate our estimates and assumptions including those related to
derivatives, revenue recognition, income taxes and valuation of long-lived
assets, goodwill and other intangible assets. We base our estimates on
historical experience and other assumptions that are believed to be reasonable
under the circumstances. Actual results could differ from these estimates.
There have been no significant changes to our critical accounting policies as
described in our Annual Report on Form 10-K for the year ended December 31,
2020.
Accounting Pronouncements Issued Not Yet Adopted
See "Accounting Pronouncements Not Yet Adopted" in Note 1 of the unaudited
condensed consolidated financial statements.
?
28
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Results of Operations
Condensed Consolidated Three Months Ended September 30, 2021 Compared to
Condensed Consolidated Three Months Ended September 30, 2020
The following presents a discussion of condensed consolidated operations for the
three months ended September 30, 2021, compared with the condensed consolidated
three months ended September 30, 2020.
Three Months Ended
September 30, 2021 September 30, 2020
Sales
Domestic sales $ 61,259 $ 34,686
International sales 47,712 29,805
Total sales 108,971 64,491
Cost of goods sold 69,792 42,822
Gross profit 39,179 21,669
Operating expenses
Selling, general and administrative 31,314 18,674
Transaction costs 8,147 1,440
Total operating expenses 39,461 20,114
Operating (loss) income (282) 1,555
Other (expense) income
Interest expense, net (1,476) (232)
Other, net 338 449
Total other (expense) income, net (1,138) 217
(Loss) income before income tax (1,420) 1,772
Income tax (benefit) expense (5,950) 589
Net income $ 4,530 $ 1,183
Sales
Consolidated sales increased $44,480, or 69.0%, to $108,971, during the three
months ended September 30, 2021, compared to consolidated sales of $64,491
during the three months ended September 30, 2020. The increase in sales was
attributable to the increase in the quantity of new and existing climb,
mountain, and ski products sold during the period of $8,665. Additionally, there
was an increase in the quantity of new and existing sport products sold by
Sierra of $2,028 and the inclusion of Barnes, which contributed $13,162. The
increase was also driven by the inclusion of adventure products sold by
Rhino-Rack of $19,625. We experienced an increase in sales of $1,000 due to the
weakening of the U.S. dollar against foreign currencies during the three months
ended September 30, 2021, compared to the prior period.
Consolidated domestic sales increased $26,573, or 76.6%, to $61,259 during the
three months ended September 30, 2021, compared to consolidated domestic sales
of $34,686 during the three months ended September 30, 2020. The increase in
sales was attributable to the increase in the quantity of new and existing
climb, mountain, and ski products sold during the period of $4,820.
Additionally, there was an increase in the quantity of new and existing sport
products sold by Sierra of $2,496 and the inclusion of Barnes, which contributed
$12,134. The remaining increase was driven by the inclusion of adventure
products sold by Rhino-Rack of $7,123.
Consolidated international sales increased $17,907, or 60.1%, to $47,712 during
the three months ended September 30, 2021, compared to consolidated
international sales of $29,805 during the three months ended September 30, 2020.
The increase in sales was primarily attributable to the increase in the quantity
of new and existing climb, mountain, and ski products of $3,845 and the
inclusion of Barnes,
29
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
which contributed $1,028. The increase was also driven by the inclusion of
adventure products sold by Rhino-Rack of $12,502. We experienced an increase in
sales of $1,000 due to the weakening of the U.S. dollar against foreign
currencies during the three months ended September 30, 2021 compared to the
prior period. The increase was partially offset by a decrease in the quantity of
new and existing sport products sold by Sierra of $468.
Cost of Goods Sold
Consolidated cost of goods sold increased $26,970 or 63.0%, to $69,792 during
the three months ended September 30, 2021, compared to consolidated cost of
goods sold of $42,822 during the three months ended September 30, 2020. The
increase in cost of goods sold was primarily attributable to an increase in the
number of units sold.
Gross Profit
Consolidated gross profit increased $17,510 or 80.8%, to $39,179 during the
three months ended September 30, 2021, compared to consolidated gross profit of
$21,669 during the three months ended September 30, 2020. Consolidated gross
margin was 36.0% during the three months ended September 30, 2021, compared to a
consolidated gross margin of 33.6% during the three months ended September 30,
2020. Consolidated gross margin during the three months ended September 30,
2021, increased compared to the prior year due to a favorable product mix in
higher margin products and the favorable impacts related to foreign currency.
Gross margin also benefited from the inclusion of Barnes and Rhino-Rack.
However, the benefit from Rhino-Rack was offset by a decrease in gross margin of
2.8% due to the sale of Rhino-Rack inventory that was recorded at its fair value
in purchase accounting during the three months ended September 30, 2021.
Selling, General and Administrative
Consolidated selling, general, and administrative expenses increased $12,640, or
67.7%, to $31,314 during the three months ended September 30, 2021, compared to
consolidated selling, general and administrative expenses of $18,674 during the
three months ended September 30, 2020. The increase in selling, general and
administrative expenses is due to the inclusion of Barnes and Rhino-Rack, which
contributed $1,678 and $7,722, respectively. The remaining increase was
attributable to the Company's investments in the brand related activities of
sales, direct-to-consumer, marketing, and warehousing and logistics, focused on
supporting its strategic initiatives around expanding distribution, elevating
brand awareness and being easier to do business with. The increase was partially
offset by a decrease of stock compensation of $1,140 during the three months
ended September 30, 2021 compared to the prior year.
Transaction Costs
Consolidated transaction expense increased to $8,147 during the three months
ended September 30, 2021, compared to consolidated transaction costs of $1,440
during the three months ended September 30, 2020, which consisted of expenses
related to the Company's various acquisition efforts.
Interest Expense, net
Consolidated interest expense, net increased to $1,476 during the three months
ended September 30, 2021, compared to consolidated interest expense, net of $232
during the three months ended September 30, 2020. The increase in interest
expense recognized during the three months ended September 30, 2021 was
primarily associated with the increase in average outstanding debt amounts
during the period compared to the prior year and the recording of certain debt
issuance costs.
Other, net
Consolidated other, net income changed by $111, or 24.7%, to $338 during the
three months ended September 30, 2021, compared to consolidated other, net
income of $449 during the three months ended September 30, 2020. The decrease in
other, net, was primarily attributable to a decrease in remeasurement gains
recognized on the Company's foreign denominated accounts receivable and accounts
payable. The decrease was partially offset by changes on mark-to-market
adjustments on non-hedged foreign currency contracts.
Income Taxes
Consolidated income tax changed by $6,539, or 1,110.2%, to a benefit of $5,950
during the three months ended September 30, 2021, compared to income tax expense
of $589 during the same period in 2020. Our effective income tax rate was a
benefit of 419.0% for the three months ended September 30, 2021, and differed
compared to the statutory tax rates due to a release of a partial valuation
allowance of the deferred tax assets. This release is primarily due to a change
in accounting method which increased taxable income and the ability
30
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
to utilize NOLs (defined below). For the three months ended September 30, 2020,
our effective income tax rate was an expense of 33.2% and was higher compared to
the statutory tax rates due to permanent book to tax differences primarily
related to incentive stock options.
Condensed Consolidated Nine Months Ended September 30, 2021 Compared to
Condensed Consolidated Nine Months Ended September 30, 2020
The following presents a discussion of condensed consolidated operations for the
nine months ended September 30, 2021, compared with the condensed consolidated
nine months ended September 30, 2020.
Nine Months Ended
September 30, 2021 September 30, 2020
Sales
Domestic sales $ 160,708 $ 83,493
International sales 96,903 64,567
Total sales 257,611 148,060
Cost of goods sold 163,361 97,243
Gross profit 94,250 50,817
Operating expenses
Selling, general and administrative 72,903 50,537
Transaction costs 9,272 1,870
Total operating expenses 82,175 52,407
Operating income (loss) 12,075 (1,590)
Other expense
Interest expense, net (1,926) (800)
Other, net (4,263) 324
Total other expense, net (6,189) (476)
Income (loss) before income tax 5,886 (2,066)
Income tax benefit (6,161) (542)
Net income (loss) $ 12,047 $ (1,524)
Sales
Consolidated sales increased $109,551, or 74.0%, to $257,611, during the nine
months ended September 30, 2021, compared to consolidated sales of $148,060
during the nine months ended September 30, 2020. The increase in sales was
attributable to the increase in the quantity of new and existing climb,
mountain, and ski products sold during the period of $37,083. Additionally,
there was an increase in the quantity of new and existing sport products sold by
Sierra of $16,254 and the inclusion of Barnes, which contributed $33,316. The
increase was also driven by the inclusion of adventure products sold by
Rhino-Rack of $19,625. We experienced an increase in sales of $3,273 due to the
weakening of the U.S. dollar against foreign currencies during the nine months
ended September 30, 2021, compared to the prior period.
Consolidated domestic sales increased $77,215, or 92.5%, to $160,708 during the
nine months ended September 30, 2021, compared to consolidated domestic sales of
$83,493 during the nine months ended September 30, 2020. The increase in sales
was attributable to the increase in the quantity of new and existing climb,
mountain, and ski products sold during the period of $21,384. Additionally,
there was an increase in the quantity of new and existing sport products sold by
Sierra of $17,861 and the inclusion of Barnes, which contributed $30,847. The
remaining increase was driven by the inclusion of adventure products sold by
Rhino-Rack of $7,123.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Consolidated international sales increased $32,336, or 50.1%, to $96,903 during
the nine months ended September 30, 2021, compared to consolidated international
sales of $64,567 during the nine months ended September 30, 2020. The increase
in sales was primarily attributable to the increase in the quantity of new and
existing climb, mountain, and ski products of $15,699 and the inclusion of
Barnes, which contributed $2,469. The increase was also driven by the inclusion
of adventure products sold by Rhino-Rack of $12,502. We experienced an increase
in sales of $3,273 due to the weakening of the U.S. dollar against foreign
currencies during the nine months ended September 30, 2021 compared to the prior
period. The increase was partially offset by a decrease in the quantity of new
and existing sport products sold by Sierra of $1,607.
Cost of Goods Sold
Consolidated cost of goods sold increased $66,118 or 68.0%, to $163,361 during
the nine months ended September 30, 2021, compared to consolidated cost of goods
sold of $97,243 during the nine months ended September 30, 2020. The increase in
cost of goods sold was primarily attributable to an increase in the number of
units sold.
Gross Profit
Consolidated gross profit increased $43,433 or 85.5%, to $94,250 during the nine
months ended September 30, 2021, compared to consolidated gross profit of
$50,817 during the nine months ended September 30, 2020. Consolidated gross
margin was 36.6% during the nine months ended September 30, 2021, compared to a
consolidated gross margin of 34.3% during the nine months ended September 30,
2020. Consolidated gross margin during the nine months ended September 30, 2021,
increased compared to the prior year due to a favorable product mix in higher
margin products and the favorable impacts related to foreign currency. Gross
margin also benefited from the inclusion of Barnes and Rhino-Rack; however, this
benefit was offset by a decrease in gross margin of 1.3% due to the sale of
Barnes and Rhino-Rack inventory that was recorded at its fair value in purchase
accounting during the year ended December 31, 2020 and three months ended
September 30, 2021, respectively.
Selling, General and Administrative
Consolidated selling, general, and administrative expenses increased $22,366, or
44.3%, to $72,903 during the nine months ended September 30, 2021, compared to
consolidated selling, general and administrative expenses of $50,537 during the
nine months ended September 30, 2020. The increase in selling, general and
administrative expenses is due to the inclusion of Barnes and Rhino-Rack, which
contributed $5,008 and $7,722, respectively, and an increase of stock
compensation of $981 during the nine months ended September 30, 2021 compared to
the prior year. The remaining increase was attributable to the Company's
investments in the brand related activities of sales, direct-to-consumer,
marketing, and warehousing and logistics, focused on supporting its strategic
initiatives around expanding distribution, elevating brand awareness and being
easier to do business with.
Transaction Costs
Consolidated transaction expense increased to $9,272 during the nine months
ended September 30, 2021, compared to consolidated transaction costs of $1,870
during the nine months ended September 30, 2020, which consisted of expenses
related to the Company's various acquisition efforts.
Interest Expense, net
Consolidated interest expense, net increased to $1,926 during the nine months
ended September 30, 2021, compared to consolidated interest expense, net of $800
during the nine months ended September 30, 2020. The increase in interest
expense recognized during the nine months ended September 30, 2021 was primarily
associated with the increase in average outstanding debt amounts during the
period compared to the prior year and the recording of certain debt issuance
costs.
Other, net
Consolidated other, net expense changed $4,587, or 1,415.7%, to $4,263 during
the nine months ended September 30, 2021, compared to consolidated other, net
income of $324 during the nine months ended September 30, 2020. The change in
other, net, was primarily attributable to changes on mark-to-market adjustments
on non-hedged foreign currency contracts, including contracts associated with
the purchase price of Rhino-Rack, as well as a decrease in remeasurement losses
recognized on the Company's foreign denominated accounts receivable and accounts
payable.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
Income Taxes
Consolidated income tax benefit increased $5,619, or 1,036.7%, to a benefit of
$6,161 during the nine months ended September 30, 2021, compared to income tax
benefit of $542 during the same period in 2020. Our effective income tax rate
was a benefit of 104.7% for the nine months ended September 30, 2021, differed
compared to the statutory tax rates due to a release of a partial valuation
allowance of the deferred tax assets. This release is primarily due to a change
in accounting method which increased taxable income and the ability to utilize
NOLs (defined below). For the nine months ended September 30, 2020, our
effective income tax rate was a benefit of 26.2% and was higher compared to the
statutory tax rates due to permanent book to tax differences primarily related
to incentive stock options.
Liquidity and Capital Resources
Condensed Consolidated Nine Months Ended September 30, 2021 Compared to
Condensed Consolidated Nine Months Ended September 30, 2020
Our primary ongoing funding requirements are for working capital, expansion of
our operations (both organically and through acquisitions) and general corporate
needs, as well as investing activities associated with the expansion into new
product categories. We plan to fund these activities through a combination of
our future operating cash flows and revolving credit facility which had
approximately $34,600 available to borrow at September 30, 2021. We believe that
our liquidity requirements for at least the next 12 months will be adequately
covered by cash provided by operations and our existing revolving credit
facility. However, as the impact of the COVID-19 pandemic on the economy and our
operations evolves, we will continue to assess our liquidity needs. The COVID-19
pandemic has negatively affected the U.S., European, Australian and global
economies, disrupted global supply chains, and resulted in significant travel
and transport restrictions and disruption of financial markets. An extended
period of global supply chain and economic disruption could materially affect
our business, results of operations, ability to meet debt covenants, access to
sources of liquidity and financial condition. Given the economic uncertainty as
a result of the pandemic, we have taken actions to improve our current liquidity
position, including drawing on the credit facility, suspending share repurchases
and cash dividends, postponing nonessential capital expenditures, reducing
operating costs, modulating production in line with demand, initiating workforce
reductions and furloughs, and substantially reducing discretionary spending.
Further, the Company and certain of its direct and indirect subsidiaries (each,
a "Loan Party" and, collectively, the "Loan Parties") entered into Amendment No.
3 ("Amendment No. 3") to that certain Credit Agreement, dated May 3, 2019, as
amended by Amendment No. 1 dated May 28, 2019 and Amendment No. 2 dated November
12, 2020, with JPMorgan Chase Bank, N.A., as administrative agent, and the
lenders from time to time party thereto (collectively, the "Credit Agreement").
The Credit Agreement increased the aggregate amount of the term loan facility
thereunder to $125,000 and increased the maximum amount of the revolving loan
facility thereunder to $100,000. The term loan facility was fully borrowed at
the closing of Amendment No. 3 on July 1, 2021. The Company is required to repay
the term loan through quarterly payments of $1,563 each beginning with
September 30, 2021, increasing to $3,125 beginning September 30, 2022, and any
remaining obligations will be repaid in full on the maturity date of the Credit
Agreement of May 3, 2024. Amendment No. 3 also removed the previously agreed
upon ability of the Company to issue debt securities that may be convertible
into equity interests of the Company in an aggregate principal amount of up to
$125,000 and also increased the maximum consolidated total leverage ratio
permitted under the Credit Agreement to 4.25:1.00.
Subsequent to the balance sheet date, the Company entered into an underwriting
agreement relating to the public offer and sale of 2,750 shares of the Company's
common stock as well as a 30-day option to purchase up to 413 additional shares
of common stock. The closing of the offering of 2,750 shares of common stock as
well as the 413 additional shares of common stock occurred on October 29, 2021
and November 2, 2021, respectively. The net proceeds to the Company from the
offering were approximately $80,264 before expenses and after deducting the
applicable underwriting discounts and commissions. The Company intends to use a
portion of the net proceeds of the offering for the repayment in full of
approximately $65,000 in aggregate principal amount under the revolving loan
facility available pursuant to the Credit Agreement and the remaining portion of
the net proceeds from the offering for general corporate purposes, including
capital expenditures and potential acquisitions.
At September 30, 2021, we had total cash of $10,170, compared to a cash balance
of $17,789 at December 31, 2020, which was substantially controlled by the
Company's U.S. entities. At September 30, 2021, the Company had $4,888 of the
$10,170 in cash held by foreign entities, of which $2,995 is considered
permanently reinvested.
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
The following presents a discussion of cash flows for the condensed consolidated
nine months ended September 30, 2021 compared with the condensed consolidated
nine months ended September 30, 2020.
Nine Months Ended
September September
30, 2021 30, 2020
Net cash (used in) provided by operating activities $ (17,101) $ 21,048
Net cash used in investing activities
(141,181) (33,779)
Net cash provided by financing activities 151,041 27,956
Effect of foreign exchange rates on cash (378) 99
Change in cash (7,619) 15,324
Cash, beginning of year 17,789 1,703
Cash, end of period $ 10,170 $ 17,027Net Cash From Operating Activities
Consolidated net cash used in operating activities was $17,101 during the nine
months ended September 30, 2021, compared to consolidated net cash provided by
operating activities of $21,048 during the nine months ended September 30, 2020.
The change in net cash used in operating activities during 2021 is primarily due
to an increase in net operating assets, or non-cash working capital, of $52,207,
partially offset by an increase in net income during the nine months ended
September 30, 2021, compared to the same period in 2020.
Free cash flow, defined as net cash (used in) provided by operating activities
less capital expenditures, of ($22,680) was used during the nine months ended
September 30, 2021 compared to $17,442 generated during the same period in 2020.
The Company believes that the non-GAAP measure, free cash flow, provides an
understanding of the capital required by the Company to expand its asset base. A
reconciliation of free cash flows to comparable GAAP financial measures is set
forth below:
Nine Months Ended
September September 30,
30, 2021 2020
Net cash (used in) provided by operating activities $ (17,101) $ 21,048
Purchase of property and equipment
(5,579) (3,606)
Free cash flow $ (22,680) $ 17,442Net Cash From Investing Activities
Consolidated net cash used in investing activities was $141,181 during the nine
months ended September 30, 2021, compared to $33,779 during the nine months
ended September 30, 2020. The increase in cash used during the nine months ended
September 30, 2021 is due to the acquisition of Rhino-Rack and an increase in
purchases of property and equipment, compared to the same period in 2020.
Net Cash From Financing Activities
Consolidated net cash provided by financing activities was $151,041 during the
nine months ended September 30, 2021, compared to net cash provided of $27,956
during the nine months ended September 30, 2020. The increase in cash used
during the nine months ended September 30, 2021 compared to the same period in
2020 was primarily due to the net proceeds to the revolving line of credit and
draws of the term loan under Amendment No.3 described below. Cash provided by
financing activities during the nine months ended September 30, 2020 was
primarily due to the proceeds of $20,000 borrowed under the term loan and net
proceeds from the sale of common stock, offset by net repayment to the revolving
line of credit.
Net Operating Loss
As of December 31, 2020, the Company had net operating loss carryforwards
("NOLs") and research and experimentation credit for U.S. federal income tax
purposes of $120,309 and $1,889, respectively. The Company believes its U.S.
Federal NOLs will substantially offset its future U.S. Federal income taxes
until expiration. The majority of the Company's pre-tax income is currently
earned and expected to be earned in the U.S., or taxed in the U.S. as Subpart F
income and will be offset with the NOLs. $120,309 of net operating
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
losses available to offset taxable income does not expire until 2022 or later,
subject to compliance with Section 382 of the Internal Revenue Code of 1986, as
amended.
As of December 31, 2020, the Company's gross deferred tax asset was $40,538. The
Company has recorded a valuation allowance of $22,348, resulting in a net
deferred tax asset of $18,190, before deferred tax liabilities of $8,304. The
Company has provided a valuation allowance against a portion of the net deferred
tax assets as of December 31, 2020, because the ultimate realization of those
assets does not meet the more-likely-than-not criteria. The majority of the
Company's deferred tax assets consist of net operating loss carryforwards for
federal tax purposes. If a change in control were to occur, these could be
limited under Section 382 of the Internal Revenue Code of 1986 ("Code"), as
amended.
Credit Agreement
On May 3, 2019, the Company, Borrowers and the other loan parties party thereto
entered into the Credit Agreement for borrowings of up to $60,000 under a
revolving credit facility (including up to $5,000 for letters of credit), and
borrowings of up to $40,000 under a term loan facility that is available to be
drawn until May 3, 2020. The Credit Agreement also permits the Borrowers,
subject to certain requirements, to arrange with lenders for an aggregate of up
to $50,000 of additional revolving and/or term loan commitments (both of which
are currently uncommitted), for potential aggregate revolving and term loan
commitments under the Credit Agreement of up to $150,000. The Credit Agreement
matures on May 3, 2024.
On November 12, 2020, the Borrowers entered into Amendment No. 2 of the Credit
Agreement. Amendment No. 2 increased the maximum consolidated total leverage
ratio permitted under the Credit Agreement to 4.00:1.00 from 3.00:1.00. In
addition, Amendment No. 2 permits, among other things, the issuance by the
Company of debt securities, that may be convertible into equity interests of the
Company, in an aggregate principal amount of up to $125,000, and eliminates the
requirement that the proceeds therefrom be used to prepay any revolving loans or
term loans under the Credit Agreement.
On July 1, 2021, the Borrowers entered into Amendment No. 3 of the Credit
Agreement. Amendment No. 3 increased the aggregate amount of the term loan
facility thereunder to $125,000 and increased the maximum amount of the
revolving loan facility thereunder to $100,000. The term loan facility was fully
borrowed at the closing of Amendment No. 3 on July 1, 2021 in connection with
the Rhino-Rack Acquisition. The Credit Agreement continues to permit the
Borrowers, subject to certain requirements, to arrange with lenders for an
aggregate of up to $50,000 of additional revolving and/or term loan commitments
(both of which are currently uncommitted), for potential aggregate revolving and
term loan commitments under the Credit Agreement of up to $275,000.
Amendment No. 3 provides for additional subsidiaries of the Company to guarantee
and provide collateral for the loans under the Credit Agreement, including
certain of its newly formed or newly acquired Australian subsidiaries in
connection with the Rhino-Rack Acquisition. Amendment No. 3 also removed the
previously agreed upon ability of the Company to issue debt securities that may
be convertible into equity interests of the Company in an aggregate principal
amount of up to $125,000 and also increased the maximum consolidated total
leverage ratio permitted under the Credit Agreement to 4.25:1.00. Amendment No.
3 did not change the maturity date which remains May 3, 2024.
The Borrowers may elect to have the revolving and term loans under the Credit
Agreement bear interest at an alternate base rate or a Term Benchmark rate plus
an applicable rate. The applicable rate for these borrowings will range from
0.50% to 1.625% per annum, in the case of alternate base rate borrowings, and
1.50% to 2.625% per annum, in the case of Term Benchmark borrowings. The
applicable rate was initially 0.875% per annum, in the case of alternate base
rate borrowings, and 1.875% per annum, in the case of Term Benchmark borrowings;
however, it may be adjusted from time to time based upon the level of the
Company's consolidated total leverage ratio. The Credit Agreement also requires
the Borrowers to pay a commitment fee on the unused portion of the revolving and
term loan commitments. Such commitment fee will range between 0.15% and 0.30%
per annum, and is also based upon the level of the Company's consolidated total
leverage ratio.
All obligations under the Credit Agreement are secured by 100% of our domestic,
and 65% of our foreign, subsidiary equity interests, as well as accounts
receivable, inventory, intellectual property and certain other assets owned by
the Company. The Credit Agreement contains restrictions on the Company's ability
to pay dividends or make distributions or other restricted payments if certain
conditions in the Credit Agreement are not fulfilled. The Credit Agreement
includes customary affirmative and negative covenants, including financial
covenants relating to the Company's consolidated total leverage ratio and fixed
charge coverage ratio. The Company was in compliance with the debt covenants set
forth in the Credit Agreement as of September 30, 2021.
As of September 30, 2021, the Company had drawn approximately $65,412 of the
$100,000 revolving loan commitment that was available for borrowing under the
Credit Agreement, and $123,437 outstanding under the term loan commitment. As of
September 30, 2021, the interest rate for each loan was 1.6250%. On April 30,
2020, the Company borrowed $20,000 under the term loan facility and
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CLARUS CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS
(in thousands, except per share amounts)
used the proceeds to pay down amounts outstanding under the revolving portion of
the Credit Agreement. On July 1, 2021, the term loan facility was fully borrowed
at the closing of Amendment No. 3. The Company is required to repay the term
loan through quarterly payments of $1,563 each beginning with September 30,
2021, increasing to $3,125 beginning September 30, 2022, and any remaining
obligations will be repaid in full on the maturity date of the Credit Agreement
of May 3, 2024.
Off-Balance Sheet Arrangements
We do not engage in any transactions or have relationships or other arrangements
with unconsolidated entities. These include special purpose and similar entities
or other off-balance sheet arrangements. We also do not engage in energy,
weather or other commodity-based contracts.
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CLARUS CORPORATION 
