Clarus Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Financial amounts below are in U.S. dollars; annual financial-statement figures are in millions unless otherwise indicated.
Business context and reporting period
Clarus develops, manufactures and distributes outdoor equipment and lifestyle products under Black Diamond, PIEPS and SKINourishment, and precision bullets under Sierra. Its two reportable segments are Black Diamond (including PIEPS and SKINourishment) and Sierra. The SKINourishment assets were acquired in November 2018; their contribution was not significant. Sierra, acquired in August 2017, contributed substantially to the year-over-year increase in 2018 sales.
Financial results and key metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Sales | $212.1 million | $170.7 million |
| Gross profit / gross margin | $74.0 million / 34.9% | $53.8 million / 31.5% |
| Operating income (loss) | $8.2 million | ($4.8 million) |
| Net income (loss) | $7.3 million | ($0.7 million) |
| Diluted EPS | $0.24 | ($0.02) |
| Operating cash flow | $11.4 million | ($8.9 million) |
| Capital expenditures | $3.4 million | $2.8 million |
| Free cash flow (company-defined) | $8.0 million | ($11.8 million) |
FY 2018 sales rose 24.3%. Sierra contributed $35.4 million of sales, including $25.0 million incremental to the prior-year comparison; growth also reflected higher volumes in climb and mountain products and $2.8 million of favorable foreign-currency effects. Gross margin improved with product mix, channel distribution and Sierra’s contribution, partly offset by a 0.5 percentage-point impact from selling Sierra inventory stepped up in purchase accounting. SG&A increased 15.7% to $65.2 million, including higher Sierra costs, investment in brand and product activity, and increased stock compensation.
FY 2018 segments: Black Diamond sales were $176.7 million and segment operating income was $11.1 million; Sierra sales were $35.4 million and segment operating income was $5.8 million. Segment operating income excludes corporate and other expenses and specified items.
Fourth quarter: Sales were $57.3 million versus $52.7 million in Q4 2017; gross profit was $20.4 million versus $17.2 million; operating income was $3.8 million versus $0.4 million; and net income was $3.5 million versus $6.0 million. Diluted EPS was $0.12 versus $0.20. Q4 2017 net income was notably higher than operating income; the filing’s quarterly table does not explain that difference in detail.
Liquidity and debt: At year-end, cash was $2.5 million, current assets $108.5 million and current liabilities $21.7 million. Total liabilities were $46.9 million and stockholders’ equity $166.2 million. Debt was $22.1 million, primarily borrowings under a new $75 million asset-based revolving facility maturing in June 2022; approximately $26 million remained available under the borrowing base at year-end. The company reported compliance with debt covenants. Cash increased $0.6 million during the year. Cash and cash equivalents held by foreign entities totaled $1.6 million, of which $0.6 million was considered permanently reinvested.
Material changes, outlook, risks and unusual items
- The company entered a new JPMorgan revolving credit agreement in June 2018, replacing its prior facility. Borrowings bear variable rates; the year-end rate was 3.8493%.
- Clarus repurchased 417,237 shares through a modified Dutch auction at $8 per share for approximately $3.3 million, and also repurchased shares under its existing program. It initiated a quarterly dividend of $0.025 per share; FY 2018 dividends totaled $1.5 million. Future dividends remain subject to board discretion and credit-agreement restrictions.
- The company recorded an income tax benefit of $0.8 million in 2018. It reported U.S. federal NOL carryforwards of $141.1 million and a $42.1 million valuation allowance against deferred tax assets; use of NOLs may be restricted by ownership-change rules and depends on future taxable income.
- Management described growth through product innovation, broader distribution and targeted acquisitions, and expects operating cash flow and the revolving facility to cover liquidity needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Principal risks include seasonality and weather, discretionary consumer demand, competition, dependence on independent manufacturers and international trade, foreign exchange and raw-material cost changes, product liability and recall exposure, customer concentration (REI represented about 12% of sales and 15% of year-end receivables), and regulatory or public-opinion changes affecting Sierra ammunition and SKINourishment skincare. The company does not carry product-recall insurance.
- Legal proceedings arise in the ordinary course. Management did not expect currently known disputes to have a material adverse effect, but disclosed possible losses above accrued amounts that could not be reasonably estimated. No pending product-liability claims were identified as materially adverse.
- The 2018 financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting. The company reported no goodwill or indefinite-lived intangible impairment for 2018.
Important facts for investors to verify
- How much of reported sales and earnings growth is attributable to Sierra versus organic growth in the established outdoor business.
- Whether gross-margin gains and positive operating cash flow persist, particularly as inventory rose to $64.9 million from $58.1 million.
- Actual borrowing availability under the asset-based facility, covenant headroom, and the effect of variable rates on interest costs.
- The expected realizability and any Section 382 limitations on the $141.1 million of federal NOLs, given the valuation allowance and ownership-change protections.
- The sustainability of the quarterly dividend and share repurchases relative to cash generation, working-capital needs and acquisition plans.
- Potential impacts of REI concentration, foreign sourcing and tariffs, product claims, and regulatory changes on ammunition and skincare products.