Clarus Corp 10-Q

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, including, without limitation, the impact of inflation; disruption and volatility in the global currency, capital and credit markets; the financial strength of retail economies and the Company’s customers; the Company’s ability to implement its business strategy; the ability of the Company to execute and integrate acquisitions; the Company’s exposure to product liability or product warranty claims and other loss contingencies, including, without limitation, recalls and liability claims relating to our avalanche beacon transceivers; disruptions and other impacts to the Company’s business, as a result of an outbreak of disease or similar public health threat, such as 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, increased focus on sustainability issues as a result of global climate change; regulatory or market responses to global climate change; 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 and products, including without limitation, through social media or in connection with brand damaging events and/or public perception; the potential impact of the Consumer Products Safety Commission’s investigation related to the Company’s reporting obligations under the Consumer Product Safety Act in connection with the Company’s recall of certain models of its avalanche transceivers on our business, results of operations, and financial condition; 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; the impact of political unrest, natural disasters or other crises, terrorist acts, acts of war and/or military operations; 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; our ability to obtain additional capital and funding on acceptable terms to meet our financial obligations as well as to support our business operations and growth strategy; and any material differences in the actual financial results of the Company’s past and future acquisitions, including the impact of acquisitions and any recognition of impairment or other charges relating to any such acquisitions 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 29 Table of Contents CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) ​ 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, Clarus is a global leading designer, developer, manufacturer and distributor of best-in-class outdoor equipment and lifestyle products focused on the outdoor enthusiast markets. 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®, Rhino-Rack®, MAXTRAX®, and TRED Outdoors® 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. Our iconic brands are rooted in performance-defining technologies that enable our customers to have their best days outdoors. We have a long history of technical innovation and product development, backed by an extensive patent portfolio that continues to evolve and advance our markets. We focus on enhancing our customers’ performance in the most critical moments. Our commitment to quality, rigorous safety, and ultimately best-in-class design is evidenced by outstanding industry recognition, as we have received numerous product awards across our portfolio of brands. Each of our brands represents a unique customer value proposition. Supported by six decades of proven innovation, Black Diamond is an established global leader in high-performance, activity-based climbing, skiing, and technical mountain sports equipment. The brand is synonymous with premium performance, safety and reliability. Founded in 1992, our Rhino-Rack brand is a globally-recognized designer and distributor of highly-engineered automotive roof racks and accessories to enhance the outdoor enthusiast’s overlanding experience. Founded in 2005, our MAXTRAX brand offers high-quality overlanding and off-road vehicle recovery and extraction tracks for the overland and off-road market. Similarly, TRED, founded in 2012, is a trusted brand for key retailers and distributors in the overlanding and off-road vehicle recovery market. 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 December 1, 2021, the Company completed the acquisition of Australia-based MaxTrax Australia Pty Ltd (“MAXTRAX”). On October 9, 2023, the Company completed the acquisition of Australia-based TRED Outdoors Pty Ltd. (“TRED”). On February 29, 2024, the Company completed the sale of all of the equity associated with the Company’s Precision Sport segment, which is comprised of the Company’s subsidiaries Sierra and Barnes Bullets – Mona, LLC (“Barnes”), pursuant to a Purchase and Sale Agreement dated as of December 29, 2023 (the “Precision Sport Purchase Agreement”). Under the terms of the Precision Sport Purchase Agreement, the Company received approximately $175,674 in cash subject to customary working capital adjustments, for all of the equity associated with the Company’s Precision Sport segment. The activities of the Precision Sport segment have been segregated and reported as discontinued operations for all periods presented. See Note 3 to our condensed consolidated financial statements for financial information regarding discontinued operations. 30 Table of Contents CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) ​ 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 April 30, 2024, the Company announced that its Board of Directors approved the payment on May 20, 2024 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 May 10, 2024. Restructuring Starting in 2023, the Company began incurring expenses to facilitate long-term sustainable growth through cost reduction actions, consisting of employee reductions, facility rationalization and contract termination costs. During the three months ended March 31, 2024 and 2023, the Company incurred $370 and $0, respectively, of restructuring charges related to these actions. The Company has incurred $3,593 of cumulative restructuring charges since the commencement of restructuring actions in 2023. The Company accrues for restructuring costs when they are probable and reasonably estimable. These costs include severance costs, exit costs, and other restructuring costs and are included in Restructuring charges in the condensed consolidated statements of comprehensive income. Severance costs primarily consist of severance benefits through payroll continuation, conditional separation costs and employer tax liabilities, while exit costs primarily consist of lease exit and contract termination costs. Other costs consist primarily of costs related to the discontinuance of certain product lines and are distinguishable and directly attributable to the Company’s restructuring initiative and not a result of external market factors associated with the ongoing business. We estimate that we will continue to incur restructuring costs related to employee-related costs and facility exit costs during the year 2024; however, the Company cannot estimate the total amount expected to be incurred as cost reduction actions continue to be evaluated. The Company anticipates completing these restructuring activities in 2024. Critical Accounting Policies and Use of Estimates Management’s discussion of our financial condition and results of operations is based on the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. Our critical accounting policies that require the use of estimates and assumptions were discussed in detail in our Annual Report on Form 10-K for the year ended December 31, 2023. 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, 2023. Accounting Pronouncements Issued Not Yet Adopted None ​ 31 Table of Contents CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) ​ Results of Operations Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 The following presents a discussion of operations for the three months ended March 31, 2024, compared with the three months ended March 31, 2023. ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ March 31, 2024 March 31, 2023 ​ ​ ​ ​ ​ ​ Sales ​ ​ ​ ​ ​ Domestic sales $ 28,284 ​ $ 24,197 International sales ​ 41,027 ​ ​ 46,081 Total sales ​ 69,311 ​ ​ 70,278 ​ ​ ​ ​ ​ ​ Cost of goods sold ​ 44,460 ​ ​ 44,770 Gross profit ​ 24,851 ​ ​ 25,508 ​ ​ ​ ​ ​ ​ Operating expenses ​ ​ ​ ​ ​ Selling, general and administrative ​ 28,215 ​ ​ 29,354 Restructuring charges ​ 370 ​ ​ - Transaction costs ​ 38 ​ ​ 37 Contingent consideration benefit ​ - ​ ​ (1,565) Legal costs and regulatory matter expenses ​ 3,002 ​ ​ 128 ​ ​ ​ ​ ​ ​ Total operating expenses ​ 31,625 ​ ​ 27,954 ​ ​ ​ ​ ​ ​ Operating loss ​ (6,774) ​ ​ (2,446) ​ ​ ​ ​ ​ ​ Other (expense) income ​ ​ ​ ​ ​ Interest income, net ​ 370 ​ ​ 5 Other, net ​ (909) ​ ​ 76 ​ ​ ​ ​ ​ ​ Total other (expense) income, net ​ (539) ​ ​ 81 ​ ​ ​ ​ ​ ​ Loss before income tax ​ (7,313) ​ ​ (2,365) Income tax benefit ​ (851) ​ ​ (334) Loss from continuing operations ​ (6,462) ​ ​ (2,031) ​ ​ ​ ​ ​ ​ Discontinued operations, net of tax ​ 28,346 ​ ​ 3,629 ​ ​ ​ ​ ​ ​ Net income $ 21,884 ​ $ 1,598 ​ Sales Total sales decreased $967, or 1.4%, to $69,311 during the three months ended March 31, 2024, compared to total sales of $70,278 during the three months ended March 31, 2023. The decrease in sales was primarily attributable to a decrease in sales at the Outdoor segment of $5,753, partially offset by an increase in sales at the Adventure segment of $4,787. 32 Table of Contents CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) ​ Sales in the Adventure segment were reduced by $661 due to foreign exchange impact from the strengthening of the U.S. dollar against the Australian dollar during the three months ended March 31, 2024, compared to the prior period. Sales in the Outdoor segment increased by $296 due to foreign exchange impact from the weakening of the U.S. dollar primarily against the euro during the three months ended March 31, 2024, compared to the prior period. Sales in the Outdoor segment decreased due to weakness in our European and IGD markets. This weakness was partially offset by growth in the North American wholesale channel. Sales in the Adventure segment increased due to higher demand from OEM customers and the impact of the TRED Outdoors acquisition. Domestic sales increased $4,087, or 16.9%, to $28,284 during the three months ended March 31, 2024, compared to domestic sales of $24,197 during the three months ended March 31, 2023. The increase in sales was attributable to increases at the Outdoor and Adventure segments of $2,064, and $2,023 respectively. International sales decreased $5,054, or 11.0%, to $41,027 during the three months ended March 31, 2024, compared to international sales of $46,081 during the three months ended March 31, 2023. The decrease in sales was primarily attributable to a decrease in sales at the Outdoor segment of $7,817, partially offset by an increase in sales at the Adventure segment of $2,763. Cost of Goods Sold Cost of goods sold decreased $310, or 0.7%, to $44,460 during the three months ended March 31, 2024, compared to cost of goods sold of $44,770 during the three months ended March 31, 2023. Gross Profit Gross profit decreased $657, or 2.6%, to $24,851 during the three months ended March 31, 2024, compared to gross profit of $25,508 during the three months ended March 31, 2023. Gross margin was 35.9% during the three months ended March 31, 2024, compared to a gross margin of 36.3% during the three months ended March 31, 2023. Gross margin during the three months ended March 31, 2024, decreased compared to the prior year due to promotional pricing at the Outdoor segment, the increase in PFAS related inventory reserves, as well as unfavorable overall foreign currency exchange movement. Selling, General and Administrative Selling, general, and administrative expenses decreased $1,139, or 3.9%, to $28,215 during the three months ended March 31, 2024, compared to selling, general and administrative expenses of $29,354 during the three months ended March 31, 2023. The decrease was primarily due to expense reduction initiatives in the Outdoor segment to manage costs, as well as lower intangible amortization, and stock compensation expenses. The decrease was partially offset by higher investment in marketing initiatives in the Adventure segment. Restructuring Charges Restructuring charges increased to $370 during the three months ended March 31, 2024, compared to restructuring charges of $0 during the three months ended March 31, 2023. The restructuring charges incurred during the three months ended March 31, 2024 relate to benefits provided to employees who were or will be terminated due to the Company’s reduction-in-force as part of its continued realignment of resources within the organization of $358 and lease exit and contract termination costs of $12. 33 Table of Contents CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) ​ Transaction Costs Transaction costs increased to $38 during the three months ended March 31, 2024, compared to transaction costs of $37 during the three months ended March 31, 2023, which consisted of expenses related to the Company’s various acquisition efforts. Contingent Consideration Benefit Contingent consideration benefit decreased to $0 during the three months ended March 31, 2024, compared to a contingent consideration benefit of $1,565 during the three months ended March 31, 2023, which consisted of changes in the estimated fair value of contingent consideration liabilities associated with our acquisition of MAXTRAX in 2021. Legal Costs and Regulatory Matter Expenses Legal costs and regulatory matter expenses increased to $3,002 during the three months ended March 31, 2024, compared to legal costs and regulatory matter expenses of $128 during the three months ended March 31, 2023. The increase in legal costs and regulatory matter expenses recognized during the three months ended March 31, 2024 reflects the Company’s accrued liability for the outstanding regulatory matter with the United States Consumer Product Safety Commission. Interest Income, net Interest income, net increased to $370 during the three months ended March 31, 2024, compared to interest income, net of $5 during the three months ended March 31, 2023. The increase in interest income recognized during the three months ended March 31, 2024, was due to interest income on higher cash balances. Other, net Other, net, changed by $985, or 1,296.1%, to ($909) during the three months ended March 31, 2024, compared to other, net of $76 during the three months ended March 31, 2023. The change in other, net, was primarily attributable to an increase in remeasurement losses recognized on the Company’s foreign denominated accounts receivable and accounts payable. The change was partially offset by gains in mark-to-market adjustments on non-hedged foreign currency contracts during the three months ended March 31, 2024. Income Taxes Income tax benefit changed by $517, or 154.8%, to $851 during the three months ended March 31, 2024, compared to a benefit of $334 during the same period in 2023. Our effective income tax rate was 11.6% for the three months ended March 31, 2024, and differed compared to the statutory tax rates primarily due to the impact of stock compensation, research and experimentation expenditures and credits, and discrete stock option shortfalls. For the three months ended March 31, 2023, our effective income tax rate was 14.1% and differed compared to the statutory tax rates due to the impact of stock compensation, research and experimentation expenditures and credits, and discrete stock option windfall benefits. Discontinued Operations Net income from discontinued operations increased $24,717, to $28,346 during the three months ended March 31, 2024, compared to net income from discontinued operations of $3,629 during the three months ended March 31, 2023. The increase in net income from discontinued operations was primarily attributable to the pre-tax gain on the sale of the Precision Sport segment of $40,585. The increase was partially offset by an increase in income tax expense, a decrease in sales and gross profit at the Precision Sport segment of $6,471 and the recording of transaction costs of $3,440 related to the sale of the Precision Sport segment. 34 Table of Contents CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) ​ Liquidity and Capital Resources Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 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 in the various brands. We plan to fund these activities through a combination of our future operating cash flows and cash on hand. Upon the closing of the sale of the Precision Sport segment, the Company terminated and settled all outstanding borrowings on our revolving credit facility and term debt under the Restated Credit Agreement. We believe that our liquidity requirements and contractual obligations for at least the next 12 months will be adequately covered by cash provided by operations and cash on hand. Additionally, long-term contractual obligations are also currently expected to be funded from cash from operations and cash on hand. At March 31, 2024, we had total cash of $47,484, compared to total cash of $11,324 at December 31, 2023. At March 31, 2024, the Company had $6,796 of the $47,484 in cash held by foreign entities, of which $5,546 is considered permanently reinvested. The following presents a discussion of cash flows for the condensed consolidated three months ended March 31, 2024 compared with the condensed consolidated three months ended March 31, 2023. ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ March 31, 2024 March 31, 2023 ​ ​ ​ ​ ​ ​ Net cash (used in) provided by operating activities $ (16,361) ​ $ 3,199 Net cash provided by (used in) investing activities ​ 173,608 ​ ​ (1,383) Net cash used in financing activities ​ (120,848) ​ ​ (3,138) Effect of foreign exchange rates on cash ​ (239) ​ ​ (429) Change in cash ​ 36,160 ​ ​ (1,751) Cash, beginning of year ​ 11,324 ​ ​ 12,061 Cash, end of period $ 47,484 ​ $ 10,310 ​ Net Cash From Operating Activities Net cash used in operating activities was $16,361 during the three months ended March 31, 2024, compared to net cash provided by operating activities of $3,199 during the three months ended March 31, 2023. The change in net cash (used in) provided by operating activities during 2024 is primarily due to the gain on sale of $40,585 related to the disposition of the Precision Sport segment and an increase in cash outflows related to working capital of $6,554. These were partially offset by an increase in net income and a decrease in contingent consideration benefit during the three months ended March 31, 2024, compared to the same period in 2023. 35 Table of Contents CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) ​ Free cash flow, defined as net cash (used in) provided by operating activities less capital expenditures, of ($18,258) was used during the three months ended March 31, 2024 compared to $1,728 generated during the same period in 2023. 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 the nearest comparable GAAP financial measure is set forth below: ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ March 31, 2024 March 31, 2023 ​ ​ ​ ​ ​ ​ Net cash (used in) provided by operating activities $ (16,361) ​ $ 3,199 Purchase of property and equipment ​ (1,897) ​ ​ (1,471) Free cash flow $ (18,258) ​ $ 1,728 ​ Net Cash From Investing Activities Net cash provided by investing activities was $173,608 during the three months ended March 31, 2024, compared to net cash used in investing activities of $1,383 during the three months ended March 31, 2023. The increase in cash provided during the three months ended March 31, 2024 is primarily due to the cash received related to the disposition of the Precision Sport segment, compared to the same period in 2023. Net Cash From Financing Activities Net cash used in financing activities was $120,848 during the three months ended March 31, 2024, compared to net cash used in financing activities of $3,138 during the three months ended March 31, 2023. The change in net cash used in financing activities during the three months ended March 31, 2024, compared to the same period in 2023 was primarily due to the settlement of all outstanding borrowings on our revolving credit facility and term debt under the Restated Credit Agreement. Net Operating Loss As of December 31, 2023, the Company had net operating loss carryforwards (“NOLs”) and research and experimentation credit for U.S. federal income tax purposes of $7,699 and $2,997, respectively. The Company believes its U.S. Federal NOLs will offset a portion of its future U.S. Federal income taxes. The Company has $7,699 of NOLs, of which, $0 expire on December 31, 2024. These NOLs are subject to compliance with Section 382 of the Internal Revenue Code of 1986, as amended. As of December 31, 2023, the Company’s gross deferred tax asset was $39,893. The Company has recorded a valuation allowance of $714, resulting in a net deferred tax asset of $39,179, before deferred tax liabilities of $34,434. The Company has provided a valuation allowance against a portion of the net deferred tax assets as of December 31, 2023, because the ultimate realization of those assets does not meet the more-likely-than-not criteria. Part 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 Upon the closing of the sale of the Precision Sport segment on February 29, 2024, the Company terminated and settled all outstanding borrowings on our revolving credit facility and term debt under the Restated Credit Agreement. 36 Table of Contents CLARUS CORPORATION MANAGEMENT DISCUSSION AND ANALYSIS (in thousands, except per share amounts) ​ 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. ​ ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has not been any material change in the market risk disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2023.