Clarus Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Unless noted, financial amounts below are in U.S. dollars and millions; the filing presents most financial statements in thousands.
Business context
Clarus designs, manufactures and distributes outdoor equipment and lifestyle products, principally through Black Diamond, PIEPS, SKINourishment and Sierra. Its two reportable segments are Black Diamond (outdoor products and skincare) and Sierra (bullets and ammunition). The company sells in more than 50 countries; approximately 47% of FY2019 sales were international. REI represented approximately 14% of sales.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Sales | $229.4 | $212.1 | +8.2% |
| Gross profit / margin | $80.3 / 35.0% | $74.0 / 34.9% | +8.6% profit |
| Operating income | $11.4 | $8.2 | +$3.3 |
| Income before tax | $10.0 | $6.5 | +$3.5 |
| Income tax benefit | $9.0 | $0.8 | Benefit increased |
| Net income / diluted EPS | $19.0 / $0.61 | $7.3 / $0.24 | Net income +160% |
| Operating cash flow | $9.5 | $11.4 | Down $1.9 |
| Capital expenditures | $4.1 | $3.4 | Up $0.8 |
| Cash at year-end | $1.7 | $2.5 | Down $0.8 |
| Revolving debt at year-end | $22.7 | $22.1 | Up $0.6 |
- Sales growth reflected higher volumes in climb, mountain and ski products, partly offset by lower sport-product sales and a $2.6 million adverse foreign-exchange effect.
- Gross margin improved slightly, primarily from a favorable mix of higher-margin products. SG&A rose 5.4% to $68.7 million, reflecting investment in research and development, marketing, direct-to-consumer activities and logistics.
- The $9.0 million tax benefit included a $13.5 million release of valuation allowances and a $0.4 million stock-compensation tax benefit. Net income and the 90.1% effective tax benefit rate therefore reflect a material tax item, rather than operating performance alone.
- Working capital remained substantial: current assets were $120.9 million and current liabilities $24.6 million at year-end. Inventories were $73.4 million, up from $64.9 million.
- The company reported $5.4 million of free cash flow, defined as operating cash flow less capital expenditures. The MD&A contains an inconsistent description of FY2018 free cash flow; the comparative figures imply positive $8.0 million ($11.4 million operating cash flow less $3.4 million capital expenditures).
- FY2019 segment sales were $199.9 million for Black Diamond, up from $176.7 million, and $29.5 million for Sierra, down from $35.4 million. Segment operating income was $15.6 million and $4.0 million, respectively; these figures exclude certain corporate and other expenses.
Fourth-quarter results
For Q4 2019, sales were $61.0 million versus $57.3 million in Q4 2018; operating income was $4.2 million versus $3.8 million; and net income was $12.4 million versus $3.5 million. Diluted EPS was $0.40 versus $0.12. The quarter’s net income includes the unusually large FY2019 tax benefit; quarterly results are unaudited and the filing cautions they are not indicative of future periods.
Debt, outlook and material risks
- In May 2019, Clarus entered a JPMorgan revolving credit agreement with a $60 million revolver and a $40 million term-loan facility available to be drawn through May 3, 2020. At year-end, $22.7 million was drawn on the revolver and none on the term loan. The revolver matures May 3, 2024; the year-end interest rate was 3.3125%. The debt is secured, includes leverage and fixed-charge coverage covenants, and restricts dividends in specified circumstances. Clarus reported covenant compliance at year-end.
- Management said cash from operations and the existing revolver were expected to cover liquidity needs for at least the next 12 months. No quantified sales or earnings guidance is provided. The stated strategy is profitable organic growth and selective acquisitions, with NOLs intended to support shareholder value.
- Key disclosed risks include seasonality and weather, discretionary consumer demand, customer concentration and lack of long-term customer contracts, competition, foreign exchange and tariffs, raw-material and supplier disruption, product liability and recall exposure, and regulatory or public-opinion changes affecting ammunition. The company specifically noted the emerging coronavirus outbreak and possible disruption to suppliers and manufacturers in China; the potential financial impact was not yet known.
- U.S. federal NOLs were $131.6 million and research and experimentation credits were $4.3 million at year-end. Their use is subject to future taxable income and potential Section 382 ownership-change limits. The company retained a $28.6 million valuation allowance against deferred tax assets.
- Legal proceedings were described as ordinary-course matters; management did not expect currently known matters to have a material adverse effect, but possible losses above accruals could not be reasonably estimated. No pending product-liability claims were identified as material.
Most important facts for investors to verify
- How much of reported earnings growth is sustainable operating improvement versus the $13.5 million valuation-allowance release and other tax effects.
- Whether cash conversion and inventory management improve, given operating cash flow declined while inventory increased; reconcile the filing’s inconsistent FY2018 free-cash-flow wording.
- Whether Sierra’s sales and segment operating income stabilize after their FY2019 declines, and whether Black Diamond’s growth continues.
- Available borrowing capacity, covenant headroom, the term-loan availability status after May 3, 2020, and the effect of debt restrictions on dividends and acquisitions.
- Exposure to REI and to supplier, tariff, currency and coronavirus-related disruption, as well as the assumptions supporting NOL utilization and deferred tax assets.