Clarus Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 12, 2018. Unless noted, amounts are in U.S. dollars. The filing reports annual results and selected fourth-quarter data; it does not provide formal forward guidance.
Business context
Clarus develops and sells outdoor equipment and lifestyle products under Black Diamond and PIEPS, and high-performance bullets under Sierra. It acquired Sierra on August 21, 2017, for approximately $79.0 million, and changed its name from Black Diamond, Inc. to Clarus Corporation in August. The company operates Black Diamond and Sierra segments. FY2017 results include Sierra only from the acquisition date; pro forma figures show results as if the acquisition had occurred at the start of 2016.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Sales | $170.7 million | $148.2 million |
| Gross profit / margin | $53.8 million / 31.5% | $43.7 million / 29.5% |
| Operating loss | $4.8 million | $6.0 million |
| Net loss | $0.7 million | $9.0 million |
| Operating cash flow | $(8.9) million | $4.8 million |
| Free cash flow* | $(11.8) million | $2.2 million |
*Company-defined non-GAAP measure: operating cash flow less capital expenditures.
- Sales increased 15.2%. Sierra contributed $10.4 million; the company attributed the remaining increase principally to higher unit sales of climb, mountain and ski products, plus $1.7 million from favorable currency movements.
- Gross margin improved with product mix, channel distribution and lower costs following the transfer of manufacturing from China to the U.S. Sierra’s inventory fair-value step-up reduced FY2017 gross margin by 1.2 percentage points.
- SG&A rose 12.7% to $56.3 million, reflecting Sierra, brand investment, and higher stock compensation. Operating expenses included $2.1 million of transaction costs, including a $1.0 million fee to an entity owned by Executive Chairman Warren Kanders.
- The $5.1 million income tax benefit included a $6.1 million discrete net benefit from the Tax Cuts and Jobs Act. Reported net loss improved from FY2016, but the company remained loss-making from operations.
- Cash fell to $1.9 million from $94.7 million. Investing cash use was $82.0 million, principally the $79.2 million Sierra purchase; operating cash use was $8.9 million, driven in part by an increase in operating assets.
- At year-end, current assets were $99.4 million and current liabilities $19.8 million. Debt was $20.8 million, drawn on a $40.0 million revolving facility maturing in 2022; availability is subject to borrowing-base limits and covenants. The company said operating cash flow and the facility should cover liquidity needs for at least 12 months.
Changes and unusual items
- Black Diamond segment sales were $160.3 million and segment operating income was $4.2 million. Sierra contributed $10.4 million of sales and had a $0.3 million segment operating loss for its post-acquisition period.
- FY2017 quarterly sales were $41.6 million, $30.7 million, $45.8 million and $52.7 million. Fourth-quarter net income was $6.0 million, versus a $1.4 million net loss in fourth-quarter 2016; full-year results also included the Tax Act benefit described above.
- The company repaid its 5% senior subordinated notes in February 2017, lowering net interest expense year over year. The Sierra acquisition was funded in part with the revolving credit facility.
- Pro forma FY2017 sales were $191.2 million and net income $6.6 million; pro forma FY2016 sales were $182.2 million and net loss $1.7 million. These unaudited illustrative figures are not forecasts or necessarily indicative of actual results.
Outlook, risks and contingencies
Management’s stated strategy is to pursue organic growth through product development, marketing and wider distribution, and to seek acquisitions of branded businesses with durable margins and cash flow. It also aims to use substantial tax-loss carryforwards to support shareholder value. No specific revenue, earnings or cash-flow guidance is provided.
- Key operating risks include seasonal demand and weather, consumer spending, competition, demand forecasting and inventory management, customer concentration (REI represented approximately 14% of continuing-operations sales), and reliance on third-party manufacturers and international suppliers.
- Other material risks include product liability and recall exposure (the company does not carry product recall insurance), foreign-exchange and raw-material cost volatility, Sierra-related regulation and public sentiment concerning ammunition, acquisition integration, and the revolving facility’s covenants and variable interest rate.
- Federal NOL carryforwards were $156.6 million at year-end, subject to expiration and potential Section 382 ownership-change limitations. Deferred tax assets had a $45.8 million valuation allowance; Tax Act accounting remained provisional in certain areas.
- Management said pending legal matters were not expected to materially affect the company, while noting possible losses above recorded accruals could not then be reasonably estimated. No pending product-liability claim was identified as materially adverse.
- Management and the auditor reported effective internal control over financial reporting; however, Sierra was excluded from the 2017 assessment and auditor testing while the company reviewed integration controls. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether Sierra meets the acquisition’s expected contribution to margins, profitability and cash flow, and how final purchase-accounting or working-capital adjustments affect reported results.
- Cash conversion and working-capital needs, given negative operating cash flow, low year-end cash and substantial purchase obligations.
- Revolver availability, covenant headroom, borrowing costs and debt repayment capacity as the facility’s borrowing limit steps down.
- The sustainability of operating performance excluding the Tax Act benefit, acquisition-related costs and inventory step-up effects.
- Usability of NOLs, remaining valuation allowance and any Section 382 or state-tax consequences; the filing notes unresolved provisional Tax Act positions.
- Integration of Sierra’s financial controls and the implications of its exclusion from the 2017 internal-control assessment.