Clarus Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Dollar amounts below are in millions, except per-share data. Clarus changed its name from Black Diamond, Inc. in August 2017 and acquired Sierra Bullets on August 21, 2017. Its businesses comprise outdoor equipment and apparel (Black Diamond and PIEPS) and ammunition bullets (Sierra).
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $45.8 | $39.4 | $118.0 | $106.8 |
| Gross profit | $15.3 | $12.3 | $36.6 | $31.6 |
| Gross margin | 33.4% | 31.3% | 31.0% | 29.6% |
| Operating income (loss) | $(1.0) | $0.6 | $(5.2) | $(5.3) |
| Net income (loss) | $(1.6) | $(0.4) | $(6.7) | $(7.6) |
| Diluted loss per share | $(0.05) | $(0.01) | $(0.22) | $(0.25) |
| Operating cash flow | — | — | $(16.6) | $5.4 |
- Q3 sales rose 16.1%; nine-month sales rose 10.5%. Sierra contributed $3.5 million in both reported periods, reflecting its inclusion only after the acquisition. Management attributed the remaining growth principally to higher quantities of outdoor products sold and favorable currency effects.
- Gross margins improved year over year, which management attributed to product and channel mix, lower costs following the transfer of manufacturing from China to the U.S., and Sierra; purchase-accounting inventory charges partly offset these benefits.
- Q3 operating results included $1.9 million of Sierra acquisition transaction costs. SG&A increased 25.7% for the quarter, including higher brand investment and stock compensation. For the nine months, lower restructuring costs and interest expense, and the absence of the prior-year arbitration award income, affected comparisons.
- Nine-month free cash flow, defined by the company as operating cash flow less capital expenditures, was negative $18.5 million, versus positive $3.4 million in 2016. Working-capital investment was a major use of cash; accounts receivable and inventory rose substantially.
Financial position and liquidity
- At September 30, cash was $1.7 million, down from $94.7 million at December 31, 2016. Current assets were $106.5 million and current liabilities were $23.5 million; inventory was $67.0 million and receivables were $35.4 million.
- Long-term debt was $27.4 million, with no current portion; stockholders’ equity was $155.5 million. The debt was drawn under a $40 million revolving facility maturing August 2022. Borrowings bear interest at one-month LIBOR plus a margin based on leverage and are secured by material domestic assets, subject to financial and other covenants.
- The cash decline primarily reflected $79.2 million paid, net of cash acquired, for Sierra, along with operating cash use and other investing and financing activity. Management stated that operating cash flow and the revolving facility should cover liquidity requirements for at least the next 12 months.
Acquisition, outlook, risks and unusual items
- Clarus acquired all of Sierra for approximately $79.2 million on August 21, funded in part through the revolving facility and repatriated cash. The preliminary allocation included $18.2 million of goodwill and $34.7 million of identifiable intangible assets. Purchase accounting remains preliminary.
- Sierra contributed $3.5 million of reported sales and $0.4 million of segment operating income in the period. Pro forma results assuming the acquisition from January 1, 2016 showed nine-month 2017 sales of $138.5 million and a net loss of $1.4 million; the filing cautions these figures are illustrative, not predictive.
- A $2.5 million Sierra inventory fair-value step-up was expected to be recognized as additional cost of goods sold within six months after acquisition; $0.4 million was recognized by quarter-end, with the balance expected in Q4 2017 and Q1 2018. Acquisition-related transaction costs were $1.9 million, including a $1.0 million fee paid to Kanders & Company, whose sole stockholder is Executive Chairman Warren Kanders.
- No specific revenue or earnings guidance is provided. Management’s stated strategic aim is to acquire and grow businesses, diversify operations, and seek to use its tax attributes. Execution and Sierra integration are key uncertainties.
- Risks identified include consumer spending and economic conditions, acquisition integration and future capital redeployment, foreign exchange and raw-material exposures, manufacturing and supplier stability, product liability and warranty claims, intellectual-property protection, international-market risks, and potential limitations on use of net operating losses. NOL carryforwards were reported as approximately $172.4 million at December 31, 2016, subject to possible Section 382 limits and valuation allowances.
- The company reported ordinary-course legal matters and stated that possible losses above accrued amounts could exist, but could not be reasonably estimated. It did not believe currently known proceedings would materially affect its financial condition, results, or cash flows. No material change in previously disclosed risk factors was reported.
- Management concluded disclosure controls were effective. Sierra’s controls were excluded from the internal-control assessment; the company was still reviewing integration of Sierra’s financial reporting controls.
Important facts for investors to verify
- Final Sierra purchase-price allocation, integration progress, and realized acquisition benefits versus management’s stated expectations.
- Remaining inventory fair-value step-up charges and their effect on near-term gross margins.
- Working-capital trends and cash generation, given the sharp cash decline and negative nine-month operating cash flow.
- Revolver availability, borrowing-base limits, interest margins, covenant headroom, and compliance.
- The related-party $1.0 million acquisition fee, potential unaccrued legal losses, and the usability of tax-loss carryforwards.