Clarus Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. All dollar amounts below are in millions unless otherwise noted.
Business context
Clarus designs, manufactures and distributes outdoor equipment and apparel through Black Diamond, PIEPS and SKINourishment, and bullets and ammunition through Sierra and Barnes. In October 2020, Clarus acquired the Barnes business for $30.5 million. Its two reportable segments are Black Diamond and Sierra.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Sales | $224.0 | $229.4 | -2.4% |
| Gross profit / margin | $77.8 / 34.7% | $80.3 / 35.0% | Profit -3.1%; margin -0.3 percentage points |
| Operating income / margin | $3.9 / 1.8% | $11.4 / 5.0% | -65.6% |
| Net income | $5.5 | $19.0 | -70.8% |
| Diluted EPS | $0.18 | $0.61 | |
| Operating cash flow | $29.4 | $9.5 | |
| Capital expenditures | $5.4 | $4.1 | |
| Free cash flow (company-defined) | $24.0 | $5.4 |
Revenue fell as COVID-19-related demand weakness reduced Black Diamond climb, mountain and ski sales. Increased Sierra sport sales and Barnes’ post-acquisition contribution partly offset the decline. Domestic sales rose 8.6% to $132.2 million, while international sales fell 14.8% to $91.8 million. Black Diamond segment sales declined to $171.2 million from $199.9 million, and segment operating income fell to $5.9 million from $15.6 million. Sierra sales increased to $52.8 million from $29.5 million, and segment operating income rose to $12.9 million from $4.0 million.
Net income included a $2.0 million income tax benefit on $3.6 million of pretax income; the reported effective tax rate was a 54.7% benefit. The tax result reflects valuation-allowance changes and other discrete items, so reported earnings were not driven solely by operating performance.
At year-end, cash was $17.8 million, current assets $142.1 million and current liabilities $39.6 million. Total debt was $34.6 million: $15.6 million under the revolver, $18.0 million under the term loan and $1.0 million under foreign credit facilities. The company reported approximately $44.4 million available to borrow under its revolving facility and was in compliance with debt covenants. Total liabilities were $76.1 million and stockholders’ equity was $204.6 million.
Fourth-quarter results
Fourth-quarter sales were $75.9 million, compared with $61.0 million in Q4 2019. Operating income was $5.5 million versus $4.2 million. Net income was $7.1 million versus $12.4 million, with diluted EPS of $0.22 versus $0.40. The filing does not give a clear standalone explanation for the year-over-year Q4 net-income decline; annual results show that tax benefits were an important factor in earnings comparisons.
Material changes and unusual items
- Barnes added $6.6 million of sales and $0.9 million of net income from its October 2 acquisition date through year-end. The acquisition added $8.6 million of goodwill and $13.1 million of identifiable intangible assets. Purchase-accounting inventory charges reduced 2020 gross margin by 0.2 percentage points.
- Operating cash flow increased substantially, supported in part by an $11.0 million inventory reduction and other working-capital movements. Investing cash outflow rose to $35.6 million, primarily because of the Barnes purchase.
- Financing included a $20.0 million term-loan draw and $11.2 million net proceeds from a registered direct stock offering; proceeds from the offering were used to repay revolver borrowings. The company also repaid debt and paid $1.5 million in cash dividends.
- In response to COVID-19, Clarus reduced costs and discretionary spending, adjusted production, postponed nonessential capital expenditure, and temporarily replaced cash dividends with stock dividends. It resumed approval of a cash dividend in January 2021.
- No goodwill or indefinite-lived intangible impairment was recorded in 2020. The auditor issued unqualified opinions on the financial statements and internal controls; however, Barnes was excluded from management’s internal-control assessment and the auditor’s internal-control audit.
Outlook, risks and contingencies
Management expects COVID-19 to continue affecting sales and profitability but gave no quantified financial guidance. It said the duration and magnitude of the impact could not be estimated clearly. Management believed operating cash flow and the existing revolver would cover liquidity needs for at least 12 months, while cautioning that extended economic or supply-chain disruption could affect liquidity, covenant compliance and asset valuations.
Key risks include changing consumer demand and seasonality, supply-chain and raw-material disruption, international and currency exposure, customer concentration, product liability and recall exposure, and acquisition integration. Additional risks include regulation or public-opinion changes affecting ammunition, potential Section 382 limits on use of tax attributes, and debt covenants that restrict financial flexibility. The company reported ordinary-course legal matters and a reasonable possibility of losses above accruals, but said the possible excess could not currently be reasonably estimated. It reported no pending product-liability claims it believed would have a material aggregate effect.
Important facts for investors to verify
- Whether Black Diamond demand and international sales recover, and whether Sierra’s elevated sport demand is sustainable.
- Barnes’ ongoing contribution to revenue, margins and cash flow, alongside integration progress and purchase-accounting effects.
- The sustainability of operating cash flow and free cash flow, given the contribution from working-capital movements.
- Debt balances, borrowing availability, covenant headroom and the terms governing dividends and any potential debt issuance.
- Realizability and Section 382 limitations of $120.3 million in federal NOLs; the company recorded a $22.3 million deferred-tax valuation allowance.
- Valuation assumptions for Barnes intangible assets and the status of Barnes internal-control integration.
- Potential legal or product-liability exposure beyond recorded accruals, which the filing says cannot currently be reasonably estimated.